24January 2020 India Daily

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January 24, 2020 India 23-Jan 1-day 1-mo 3-mo Sensex 41,386 0.7 (0.2) 6.1 Nifty 12,180 0.6 (0.3) 5.2 Contents Global/Regional indices Dow Jones 29,160 (0.1) 2.3 8.8 Special Reports Nasdaq Composite 9,402 0.2 5.0 14.9 Strategy FTSE 7,508 (0.8) (1.6) 2.4 Strategy: FY2021 union budget - what the government can, will and should Nikkei 23,808 0.1 (0.1) 4.6 do Hang Seng 27,803 (0.4) (0.2) 3.8  High fiscal deficit and low economic growth - cloudy backdrop to FY2021 KOSPI 2,246 (0.9) 2.6 7.7 union budget Value traded – India  What the government can do - not much given a challenging fiscal Cash (NSE+BSE) 459 296 102 10,30 Derivatives (NSE) 34,505 10,144 situation 0  What the government will likely do - let the fiscal deficit rise further Deri. open interest 4,459 3,659 3,490  What the government should do - a long-term plan to grow revenues, contain expenditure Forex/money market

Daily Alerts Change, basis points Results 23-Jan 1-day 1-mo 3-mo Rs/US$ 71.2 1 1 29 HDFC Life Insurance: Stable and balanced 10yr govt bond, % 7.0 (1) (2) 2

 The 'balance of par' Net investment (US$ mn)  Retain positive stance 22-Jan MTD CYTD AU Small Finance Bank: Racing along FIIs 4 (75) 14,234 MFs (59) 1,006 7,439  Trends hold up in all operating metrics; a solid performance overall Top movers – 3mo basis

 Asset quality improves and growth holds up impressively despite all Change, %

challenges Best performers 23-Jan 1-day 1-mo 3-mo  Maintain SELL: current valuations adequately factor this improvement IHFL IN Equity 312 5.3 0.7 55.8 Cholamandalam: Weak performance TTMT IN Equity 188 1.5 7.4 41.1 BHARTI IN Equity 524 1.8 14.5 40.6  Core PBT up 11% yoy TGBL IN Equity 393 2.1 24.7 39.9

 Asset quality issues surface RBK IN Equity 339 0.1 1.6 34.9  Cut estimates; ADD stays Worst performers HPCL IN Equity 247 0.7 (6.0) (17.5) Tata Communications: Steady quarter ONGC IN Equity 118 1.2 (6.5) (16.3)

 Decent performance in a seasonally weak quarter IOCL IN Equity 118 4.1 (7.1) (16.2)  Metrics trending well; Street waiting inflection point in innovation services MRCO IN Equity 333 (0.4) (0.1) (15.5)  Risks - R-Jio's likely aggression in the enterprise segment and AGR dues BHEL IN Equity 43 0.0 (0.1) (15.3) PVR: A mixed bag  3QFY20 - same store footfalls down on weak regional (south) content; profitability improves  A lot to like but the stock is fairly valued; await better entry price CEAT: Muted quarter  3QFY20 results: Standalone EBITDA 4% below our estimates  We expect the company to gain market share in the PV segment  Lower our FY2020-21E EPS estimates by 2-7%; maintain REDUCE with a revised FV of Rs960

[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. Company Report Strategy INDIA INDIA January 23, 2020 BSE-30: 41,386

FY2021 union budget—what the government can, will and should do. The government’s twin tasks of (1) providing fiscal stimulus to the economy and (2) prudential fiscal management in the budget will be even harder than usual given the (1) sharp slowdown in the economy and (2) meaningful deterioration in its fiscal position. We believe the government will provide some fiscal stimulus through increased government spending and attempt to keep central GFD/GDP below 4% in FY2021.

High fiscal deficit and low economic growth—cloudy backdrop to FY2021 union budget INSIDE Likely weak economic growth in FY2021 and a high central fiscal deficit will compound the FY2021E central government’s twin challenges of (1) providing fiscal stimulus to the economy and (2) prudential GFD/GDP at 3.7%, fiscal management. We expect FY2021 central GFD/GDP at 3.7% helped by generous assumptions FY2020E at 3.8% on divestment revenues and model FY2020 GFD/GDP at 3.8% aided by lower government spending...... pg04 The government may want to boost market sentiment through a review of certain taxes (LTCG) as it will likely need the support of FDI and FPI flows to overcome the prevailing economic slowdown. FY2021E divestment What the government can do—not much given a challenging fiscal situation revenues at Rs1.1 tn ...... pg15 In our view, the government has limited scope to provide meaningful stimulus in the context of sluggish tax revenues and a weak economy. The government can increase spending to provide some impetus to growth while managing the weak fiscal situation—this can include (1) higher tax benefits FY2021E revenues to to housing to boost housing demand and supply and (2) additional spending on rural infrastructure. grow 11% and Housing is an important part of GDP (around 6.5% of GDP) and judicious fiscal stimulus to housing expenditure to grow 7% and infrastructure can boost both aggregate demand and supply...... pg24

What the government will likely do—let the fiscal deficit rise further

We would assume that the government will let central GFD/GDP slip to exceed 3.5% in both FY2020 and FY2021. It has no choice in FY2020 given sluggish tax revenues and in fact, will have to curtail expenditure in 4QFY20 to keep central GFD/GDP below 4%. It will likely provide some fiscal stimulus to the economy in FY2021 through (1) personal income tax cut and/or (2) higher spending on certain parts of the economy although there are arguments for and against personal income tax cut to boost consumption demand. We are not sure if a small personal income tax will achieve much— Sanjeev Prasad tax cuts work in unintended ways and households may simply choose to save more rather than spend in the context of weak economic growth and high inflation. Suvodeep Rakshit What the government should do—a long-term plan to grow revenues, contain expenditure

We believe the government should lay down a credible plan to achieve its medium-term growth and Anindya Bhowmik fiscal objectives. India’s central fiscal deficit has slipped too often in the past for investors to rely on the same. The government has used ad hoc funding from divestments and the RBI to meet the shortfall in revenues. The government may want to explore (1) medium-term fiscal forecasting for revenues and expenditure, (2) zero-based budgeting for expenditure, (3) review of its myriad social welfare programs and the need to replace the same with a simple income program and (4) outright privatization of PSUs given the limited scope to raise meaningful revenues without the privatization [email protected] of ‘strategic’ PSUs such as banks, defense entities and energy companies. Contact: +91 22 6218 6427

For Private Circulation Only. In the US, this document may only be distributed to QIBs (qualified institutional buyers) as defined under rule 144A of the Securities Act of 1933. This document is not for public distribution and has been furnished to you solely for your information and may not be reproduced or redistributed to any other person. The manner of circulation and distribution of this document may be restricted by law or regulation in certain countries, including the United States. Persons into whose possession this document may come are required to inform themselves of, and to observe, such restrictions. Strategy India

FY2021 UNION BUDGET: WHAT THE GOVERNMENT CAN, WILL AND SHOULD DO We expect the government to (1) follow a judicious mix of tax rationalization and spending to support the economy, (2) reiterate its commitment to ongoing economic reforms (in particular, labor laws) and (3) make an aggressive push for divestment revenues through the privatization of PSUs in the FY2021 union budget scheduled to be announced on February 1, 2020. We believe the government should present a credible set of fiscal numbers while continuing with ongoing economic reforms.

What the government can do?

We believe the government may not be in a position to do much towards a meaningful fiscal stimulus to the economy. The government’s fiscal position is quite challenged. We expect the government’s FY2021 GFD/GDP at 3.7% (see Exhibit 1), which is on the higher side versus its stated medium-term target. The government has consistently overshot its fiscal deficit target of 3% of GDP in the past few years. More pertinently, India’s consolidated fiscal deficit (including fiscal deficit of states) is closer to 7% of GDP and the government’s overall market borrowing including market borrowings of government entities is over 8% of GDP. The government’s high borrowing distorts the interest rate environment in the country and blunts the RBI’s monetary stimulus.

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India Strategy

Exhibit 1: FY2021E GFD/GDP likely to be at 3.7% Major central government budgetary items, March fiscal year-ends, 2017-21E (Rs bn)

Change (%) 2018/ 2019P/ 2020BE/ 2020E/ 2021E/ 2017 2018 2019P 2020BE 2020E 2021E 2017 2018 2019P 2019P 2020E Receipts 1. Revenue receipts (2d + 3) 13,742 14,352 15,632 19,628 18,185 18,822 4 9 26 16 4 2. Gross tax revenues (a + b ) 17,158 19,190 20,802 24,612 21,220 23,636 12 8 18 2 11 2.a. Direct taxes 8,539 10,068 11,428 13,419 11,358 12,823 18 14 17 (1) 13 2.a.1. Corporation tax 4,849 5,712 6,636 7,660 6,281 7,035 18 16 15 (5) 12 2.a.2. Income tax 3,646 4,308 4,739 5,690 5,007 5,708 18 10 20 6 14 2.a.3. Other taxes 43 48 53 69 69 80 11 12 30 30 15 2.b. Indirect taxes 8,620 9,122 9,374 11,192 9,862 10,813 6 3 19 5 10 2.b.1. Goods and Services Tax — 4,426 5,816 6,633 6,003 6,577 31 14 3 10 2.b.1.1. CGST — 2,033 4,575 5,260 4,800 5,280 125 15 5 10 2.b.1.2. IGST — 1,767 289 280 280 300 (84) (3) (3) 7 2.b.1.3. Compensation cess — 626 951 1,093 923 997 52 15 (3) 8 2.b.2. Customs duty 2,254 1,290 1,179 1,559 1,459 1,576 (43) (9) 32 24 8 2.b.2.1. Basic duties 646 808 1,045 1,429 1,349 1,457 25 29 37 29 8 2.b.2.2. Others 1,608 483 134 130 110 118 (70) (72) (4) (18) 8 2.b.3. Excise duty 3,821 2,594 2,310 3,000 2,400 2,660 (32) (11) 30 4 11 2.b.4. Service tax 2,545 812 69 — — — (68) 2.c Transfers to states, UTs, etc. 6,145 6,765 7,633 8,116 7,003 8,036 10 13 6 (8) 15 2.d Net tax revenues 11,014 12,425 13,170 16,496 14,218 15,600 13 6 25 8 10 3. Non-tax revenues 2,728 1,927 2,462 3,132 3,968 3,223 (29) 28 27 61 (19) 3.a. RBI's transfer of surplus 659 407 680 950 1,726 950 (38) 67 40 154 (45) 4. Non-debt capital receipts (a + b) 654 1,157 1,029 1,198 648 1,263 77 (11) 16 (37) 95 4.a Recovery of loans 176 156 178 148 148 163 (11) 14 (17) (17) 10 4.b Other receipts (disinvestments) 477 1,000 850 1,050 500 1,100 110 (15) 23 (41) 120 5. Total receipts (1 + 4) 14,396 15,509 16,661 20,826 18,834 20,086 8 7 25 13 7 Expenditure 6. Revenue expenditure 16,906 18,788 20,085 24,478 23,328 24,927 11 7 22 16 7 6.a. Interest payments 4,807 5,290 5,827 6,607 6,607 7,136 10 10 13 13 8 6.b. Subsidies 2,040 1,912 1,971 3,017 2,317 2,317 (6) 3 53 18 0 6.b.1. Food 1,102 1,003 1,019 1,842 1,142 1,142 (9) 2 81 12 0 6.b.2. Fertilizer 663 664 706 800 800 800 0 6 13 13 0 6.b.3. Oil 275 245 246 375 375 375 (11) 0 53 53 0 6.c. Pay, allowances and pensions 3,996 4,464 4,936 5,258 5,258 5,591 12 11 7 7 6 6.c.1.a. Pay and allowances 2,682 3,007 3,270 3,515 3,515 3,761 12 9 7 7 7 6.c.1.b. Pensions 1,314 1,457 1,666 1,743 1,743 1,830 11 14 5 5 5 6.d. Agriculture and farmers' welfare 369 374 461 1,305 1,005 1,030 1 23 183 118 3 6.e. Education 720 800 781 927 927 974 11 (2) 19 19 5 6.f. Health and family welfare 364 483 506 609 609 640 33 5 20 20 5 6.g. Rural development 951 1,086 1,118 1,175 1,375 1,513 14 3 5 23 10 6.h. Others 3,658 4,381 4,485 5,579 5,230 5,726 20 2 24 17 10 7. Capital expenditure 2,846 2,631 3,030 3,386 3,386 3,557 (8) 15 12 12 5 7. a. Defence 915 954 995 1,082 1,082 1,115 4 4 9 9 3 7. b. Railways 452 434 528 658 658 691 (4) 22 25 25 5 7. c. Roads and Highways 412 508 676 721 721 778 23 33 7 7 8 7. d. Housing and urban affairs 165 153 158 195 195 211 (7) 3 24 24 8 7. e. Others 902 582 572 729 729 762 (35) (2) 27 27 5 8. Total expenditure (6 + 7) 19,752 21,420 23,114 27,863 26,714 28,484 8 8 21 16 7 Deficit Primary deficit (PD) 549 621 627 430 1,273 1,262 13 1 (31) 103 12 Revenue deficit (RD) 3,164 4,436 4,453 4,850 5,143 6,104 40 0 9 15 5 Gross fiscal deficit (GFD) 5,356 5,911 6,454 7,038 7,880 8,398 10 9 9 22 9 Gross borrowings (dated securities) 5,830 5,880 5,710 7,100 7,738 8,169 1 (3) 24 36 6 Net market borrowing 4,082 4,507 4,227 4,731 5,369 5,988 10 (6) 12 27 12 Net market borrowing (adjusted for buyback) 3,497 4,103 4,227 4,231 5,369 5,488 17 3 0 27 3 Short-term borrowing (T-bills) 55 449 250 250 350 350 Nominal GDP at market prices 153,624 170,950 190,102 211,006 204,739 224,190 11.3 11.2 11.0 7.7 9.5 PD/GDP (%) 0.4 0.4 0.3 0.2 0.6 0.6 RD/GDP (%) 2.1 2.6 2.3 2.3 2.5 2.7 GFD/GDP (%) 3.5 3.5 3.4 3.3 3.8 3.7

Notes: (a) 'Gross tax revenues' means revenues post refunds and 'net tax revenues' means gross tax revenues minus devolution to states. (b) RBI's transfer of surplus for FY2020BE and FY2020E are our estimate. (c) Pay and allowances include pay and allowances from Ministry of Railways.

Source: Ministry of Finance, Kotak Institutional Equities estimates

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Strategy India

Nonetheless, the government can look at a few sectors for either specific fiscal (taxation) incentives and/or spending in order to support demand.

 Additional fiscal incentives for housing. The government can explore additional fiscal incentives for housing for one year to boost housing demand. The government already provides significant tax-related and mortgage interest rate-related incentives (see Exhibit 2) for homebuyers. However, it has focused on benefits for ‘affordable’ housing even though some of general tax benefits are available to any homebuyer. For example, Rs0.2 mn of tax deduction available currently on mortgage interest paid would mean that any homebuyer with a mortgage loan below Rs2 mn (value of property would be Rs2.5 mn assuming 80% LTV) below would be able to claim full tax deduction on the mortgage interest paid. On the other hand, any homebuyer looking to buy a property of Rs4.5 mn or higher would not get sufficient motivation to buy a house given the current tax benefit of Rs0.2 mn.

Exhibit 2: Various exemptions are available for individual tax-payers Fiscal benefits currently available for individual tax-payers on home purchase

Exemptions Details

Exemption can be claimed by salaried individuals towards rent paid on a rented house, which is the lesser of House rent allowance (1) total HRA received from employer, (2) rent paid less of 10% (Basic + DA) and (3) 40%/50% of salary (Basic + DA) for non-metros/metros respectively

Section 80C Deduction allowed up to Rs0.15 mn on principal repaid Home-owners can claim Rs0.2 mn deductions on interest paid on self-occupied house. For a property which is let out, deduction on entire interest rate can be claimed. Under 80EE, home-owners can claim an Interest on home loan additional Rs50,000 deductions on interest if value of property is below Rs5 mn and loan amount is below Rs3.5 mn. The union budget 2020 increased the deduction on interest paid on self-occupied for new home buyers by up to Rs0.15 mn to Rs0.35 mn for house value up to Rs4.5 mn

According to the provisions of the union budget 2019, the second self-occupied home can also be claimed Savings on notional rent as a self-occupied one instead of it being deemed to be let out on rent, thereby saving tax on notional rent If the housing loan is availed by two or more persons, they can each avail deductions on principal and Joint home loan interest under sections 24, 80C and sections 80EE Interest subsidy of 3-4% for Middle Income Group and 6.5% for Economically Weaker Section available to Credit Linked Subsidy Scheme (CLSS) homebuyers under CLSS

Source: Budget documents, Kotak Institutional Equities

We wonder if the government should overcome its inhibitions about providing benefits to medium-end or even high-end housing. It could look at (1) increasing general tax deduction on mortgage interest to Rs0.3 mn from Rs0.2 mn currently, (2) providing additional benefit of tax deduction to Rs0.3 mn for a first-time buyer from Rs0.15 mn currently and (3) increasing the value of the new home to Rs15 mn from Rs4.5 mn currently. This will cover a far larger set of houses under construction or unsold inventory and provide a one-time ‘settlement’ of unsold inventory in certain markets.

We believe that a moderate stimulus to housing could boost both aggregate demand and aggregate supply given the real estate sector’s large linkages to the rest of the economy. Housing is a large portion of household overall savings (see Exhibit 3) and household physical investment (see Exhibit 4).

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India Strategy

Exhibit 3: Household savings have declined over the past few years, primarily led by lower household physical (residential real estate) savings Savings rates as a proportion of GDP, March fiscal year-ends, 2011-18 (%)

2012 2013 2014 2015 2016 2017 2018 Household (physical + net financial savings) (a) 23.6 22.5 20.3 19.6 18.0 17.1 17.2 Household physical savings 16.3 15.1 12.9 12.5 9.9 10.8 10.6 - Savings in gold 0.4 0.4 0.3 0.4 0.3 0.3 0.2 Gross household financial savings 10.7 10.7 10.6 10.1 10.9 9.4 10.9 Financial liabilities (3.3) (3.3) (3.2) (3.0) (2.8) (3.1) (4.3) Net household financial savings 7.4 7.4 7.4 7.1 8.1 6.3 6.6 Public savings (b) 1.5 1.4 1.0 1.0 1.2 1.7 1.7 Private corporate savings (c) 9.5 10.0 10.7 11.7 11.9 11.5 11.6 Domestic savings rate (a) + (b) + (c) 34.6 33.9 32.1 32.2 31.1 30.3 30.5

Notes: (a) Gold savings is assumed to be equal to net gold imports.

Source: CEIC, Kotak Institutional Equities estimates

Exhibit 4: Investment in residential real estate has remained stagnant over FY2012-18 Components of household investments, March fiscal year-ends, 2012-18 (Rs tn)

20 Residential real estate, etc. Machinery and equipment Others Total household GFCF

0 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

Source: CEIC, Kotak Institutional Equities

Finally, we would note that additional tax incentives will not impinge on government finances immediately as the government will not pay any money directly to homebuyers. The tax benefit will be in the form of revenues forgone.

 Increased spending on rural India. The government can consider increasing spending on rural infrastructure to create jobs in the rural economy and concurrently, build rural infrastructure. This will help improve household income, which has seen a meaningful slowdown over the past few years.

We have long argued that the current slowdown in consumption (see Exhibit 5 for growth by various components of GDP) reflects a slowdown in household income growth, which in turns links to a more fundamental issue of weak job creation in the economy. The relative shift between private consumption and household savings over the past few years (see Exhibit 6) simply reflects continued high consumption by households at the expense of savings. This was unlikely to last and the recent slowdown in private consumption simply corroborates our hypothesis.

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Strategy India

Exhibit 5: Private consumption growth slumps to 5.1% in 2QFY20 Real GDP and components growth, March fiscal-year ends, 2014-20 (%)

2014 2015 2016 2017 2018 2019 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 Real GDP 6.4 7.4 8.0 8.2 7.2 6.8 7.0 6.6 5.8 5.0 4.5 Private consumption 7.3 6.4 7.9 8.2 7.4 8.1 9.8 8.1 7.2 3.1 5.1 Government consumption 0.6 7.6 7.5 5.8 15.0 9.2 10.9 6.5 13.1 8.8 15.6 Gross fixed capital formation 1.6 2.6 6.5 8.3 9.3 10.0 11.8 11.7 3.6 4.0 1.0 Inventory (35.6) 111.7 (12.8) (48.2) 21.2 4.8 4.7 4.3 1.0 2.1 (0.8) Valuables (42.7) 26.2 (1.0) (18.9) 27.4 (9.0) (0.5) 2.6 5.2 (3.4) (11.1) Exports 7.8 1.8 (5.6) 5.1 4.7 12.5 12.7 16.7 10.6 5.7 (0.4) Imports (8.1) 0.9 (5.9) 4.4 17.6 15.4 22.9 14.5 13.3 4.2 (6.9)

Source: CEIC, Kotak Institutional Equities estimates

Exhibit 6: Share of private consumption has increased as household savings rate has fallen Share of private domestic consumption expenditure and household savings in GDP, March fiscal year-ends, 2005-19 (%)

Private consumption/GDP (%, LHS) Household savings/GDP (%, RHS) 60 28 26 26 59 59 24 24 24 59 23 24 24 59 59 23 24 58 22 58 58 58 22 57 57 20 20 20 57 18 56 56 17 56 17 17 18 56 56 56 55 16 55

54 14

2005 2006 2008 2009 2011 2012 2014 2015 2017 2018 2007 2010 2013 2016 2019E

Source: CSO, CEIC, Kotak Institutional Equities

We note that the government spends large amounts of funds on various social welfare programs, most of which benefit the rural households (see Exhibit 7 for spending on various social welfare programs and infrastructure schemes over the past few years). The government has introduced several new schemes over the past few years, which have resulted in a steep increase in revenue expenditure.

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India Strategy

Exhibit 7: Large spending by the central government on rural schemes Major social welfare schemes, March fiscal year-ends, 2017-20BE (Rs bn) (sorted on descending order of FY2020BE)

2020BE/ 2017 2018 2019P 2020BE 2019RE (%) Food subsidy to FCI under National Food Security Act. 783 1,020 1,401 1,510 8 Income support scheme for farmers (PM-KISAN) 200 750 275 Mahatma Gandhi National Rural Employment Guarantee Program (NREGS) 482 550 611 600 (2) Food subsidy for decentralized procurement of foodgrains under NFSA 273 380 310 330 6 Pradhan Mantri Awas Yojna (PMAY) 210 290 264 259 (2) Pradhan Mantri Gram Sadak Yojna (PMGSY) 179 169 155 190 23 Interest subsidy for short term credit to farmers 134 148 150 180 20 Crop insurance scheme 111 107 130 140 8 Green revolution 101 112 118 126 6 Pradhan Mantri Krishi Sinchai Yojna (PMKSY) 51 74 83 97 17 National Rural Drinking Water Mission 60 71 55 82 49 Market intervention scheme and price support scheme 1 10 20 30 50 LPG connection to poor households 25 23 32 27 (15) White Revolution 13 16 24 22 (8) Total 2,424 2,968 3,552 4,343 22

Source: Budget documents, Kotak Institutional Equities

We wonder if the government should curtail revenue expenditure and focus on capital expenditure to kick-start the rural economy. We would note that real rural wages have stagnated (see Exhibit 8), which probably shows the lack of jobs in rural India. More importantly, a large section of non-agriculture households in rural India will see further erosion in real wages if food inflation was to remain on the higher side.

Exhibit 8: Real rural wage growth has turned negative in October 2019 Growth in average real rural wages, calendar year-ends, 2015-20 (%)

Real rural wages growth 6 5 4 3 2 1 0 (1) (2)

(3)

Jul-16 Jul-19 Jul-17 Jul-18

Jan-17 Jan-19 Jan-16 Jan-18

Oct-16 Oct-18 Oct-19 Oct-15 Oct-17

Apr-16 Apr-17 Apr-19 Apr-18

Source: CEIC, Kotak Institutional Equities

What the government will likely to?

We assume the government will make some effort to revive the economy while trying to present a somewhat realistic budget. However, it is not clear as to how the government will provide a fiscal stimulus, through (1) reduction in personal income tax or (2) increase in government spending. We rule out the government cutting GST rates given flagging GST revenues and corporate tax rate as the government has already reduced corporate tax rate on September 20, 2019.

We discuss the government’s options below but concede that it will have a tough time to manage its objectives.

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Strategy India

 Reduction in personal income tax rates. The government may reduce the tax rates for the lower income households and/or may increase the standard deduction limit to Rs0.5 mn from Rs0.25 mn currently. We doubt the government can implement the recommendations of the Direct Tax Code Committee, which submitted its report in August 2019 given likely severe repercussions on government revenues. The recommendations of the DTC Committee are not available publicly although newspaper articles have reported (1) retention of exemption at Rs0.25 mn and (2) widening of income tax slabs. However, it is not clear whether current exemptions will continue or not.

We present hypothetical tax slabs in Exhibit 9 and their implications for the government’s income tax revenues under the hypothetical scenarios in Exhibit 10. Our computations factor in higher consumption arising from tax savings and higher corresponding GST revenues.

Exhibit 9: We assume changes in tax slabs along with removing all exemptions as a base case for changes in income tax structure Income tax rates for individuals for FY2020 and our assumptions for a hypothetical tax framework

FY2020 Hypothetical tax slabs (base case) Hypothetical tax slabs (alternate case) Individual tax rates Up to Rs250,000 - Nil Up to Rs500,000 - Nil Up to Rs250,000 - Nil Above Rs250,000 - Rs500,000 - 5% Above Rs500,000 - Rs1,000,000 - 10% Above Rs250,000 - Rs500,000 - 5% Above Rs500,000 - Rs1,000,000 - 20% Above Rs1,000,000 - Rs2,000,000 - 20% Above Rs500,000 - Rs1,000,000 - 10% Above Rs1,000,000 - 30% Above Rs2,000,000 - Rs20,000,000 - 30% Above Rs1,000,000 - Rs2,000,000 - 20% Above Rs20,000,000 - 35% Above Rs2,000,000 - Rs20,000,000 - 30% Above Rs20,000,000 - 35% Senior citizen (60 years) Exemption limit - Rs300,000 Exemption limit - Rs550,000 Exemption limit - Rs550,000 Very senior citizen (80 years+) Exemption limit - Rs500,000 Exemption limit - Rs750,000 Exemption limit - Rs750,000 Surcharge 10% on income between Rs5 mn and Rs10 mn 10% on income between Rs5 mn and Rs10 mn 10% on income between Rs5 mn and Rs10 mn 15% on income between Rs10 mn and Rs20 mn 15% on income between Rs10 mn and Rs50 mn 15% on income between Rs10 mn and Rs50 mn 25% on income between Rs20 mn and Rs50 mn 20% on income above Rs50 mn 20% on income above Rs50 mn 37% on income above Rs50 mn Cess 4% (health and education cess) 4% (health and education cess) 4% (health and education cess) Exemptions Under Chapter VI-A (Sec 80C, 80CC, 80G, etc.) No exemptions allowed No exemptions allowed

Source: Union Budget, Kotak Institutional Equities estimates

Exhibit 10: Impact of our hypothetical tax framework can be manageable with the removal of exemptions Estimated central government revenue loss and impact of GFD based on our hypothetical tax framework

Section VI-A exemptionsNo 5% allowed slab, Section VI-A exemptionsNo 5%not slab,allowed 5% slab and 5% slab, no with No 5% slab or 5% slab and 5% slab, no with No 5% slab or surcharge surcharge surcharge surcharge surcharge surcharge surcharge surcharge Income tax revenue loss 680 912 1,024 1,255 62 296 477 711 Consumption gain 476 638 717 879 44 207 334 498 Gain in GST 55 74 83 102 5 24 39 58 Gross tax revenue loss 625 838 941 1,153 57 272 439 653 Net tax revenue loss 419 562 632 774 38 183 294 438 Nominal GDP 204,739 204,739 204,739 204,739 204,739 204,739 204,739 204,739 GFD/GDP impact (bps) 20.5 27.5 30.9 37.8 1.9 8.9 14.4 21.4

Source: Kotak Institutional Equities estimates

However, we would caution that tax cuts can work in unintended ways. (1) It is possible that households may simply increase savings rather than increase consumption, which would nullify the government’s efforts to boost aggregate demand; households may be worried about current economic conditions and possibility of higher taxes in the future. (2) The government may have to reduce its own spending if it has to keep the fiscal deficit under check; this will impact overall consumption. (3) Aggregate supply may not change much as lower tax rates may not result in more number of people seeking and finding jobs. As of now, the supply of jobs is a bigger problem.

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India Strategy

 Increased spending on various parts of the economy. The government may increase spending on certain parts of the economy, particularly on housing and rural infrastructure. The government already has several announced several fiscal (interest and taxation) benefits for housing, particularly affordable housing, and it may extend further benefits to this vital sector. The government is anyway a big contributor to overall spending on electricity, housing roads and water in rural areas.

 Pursue an aggressive privatization program. The government will aim to complete the ongoing privatization of Air India, BPCL and CCRI in FY2021. We assume Rs1.1 tn of divestment revenues in FY2021, which is meaningfully higher versus divestment revenues in the past few years (see Exhibit 11), as we expect the government to be able to successfully complete the privatizations of the abovementioned companies.

Exhibit 11: We model significantly high divestment revenues for FY2021 at Rs1.1 tn Revenue receipts from divestments, March fiscal year-ends, 2013-21E (Rs bn)

Divestment receipts (Rs bn) 1,200 1,100 1,000 1,000 850 800

600 477 500 421 377 400 294 259

200

0 2013 2014 2015 2016 2017 2018 2019P 2020E 2021E

Source: Ministry of Finance, Kotak Institutional Equities estimates

However, we are not clear about the divestment revenues for FY2020. We have modeled Rs500 bn versus the government’s FY2020BE figure of Rs1.05 tn. The government has raised only Rs200 bn so far. We doubt the government can achieve even our lower assumed amount without resorting to intra-PSU stake sales. In this context, NTPC will acquire the government’s stake in North Eastern Electric Power Company Ltd (NEEPCO; installed capacity of 1,457 MW) and THDC India Ltd (1,450 MW). NEEPCO is 100% owned by the Government of India while THDC is owned by the Government of India (75%) and Government of Uttar Pradesh (25%). NEEPCO’s FY2019 net worth was Rs63 bn and THDC’s Rs93 bn. The government may resort to more such sales in FY2020 to bolster FY2020 divestment revenues. However, forced M&A between PSUs may result in a further de-rating of multiples of the PSU stocks, which already trade at low multiples.

 Rationalization of certain market-related taxes. The government may rationalize the tax structure or tax rates for capital gains tax on debt and equities (see Exhibit 12 for current tax rates and structure) to support market sentiment while its efforts to bolster the economic bear fruits over the next few quarters. As an example, it may do away with long-term capital gains tax (LTCG) on equities or change the holding period to more than two years versus the current 12 months for application of short-term capital gains (STCG) tax or LTCG tax, as the case may be.

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Exhibit 12: The government introduced 10% long-term capital gains (LTCG) on equities and equity mutual funds in 2018 Capital gain taxation on shares, equity mutual funds and debt mutual funds

LTCG duration STCG duration LTCG tax STCG tax Stocks/Equity Gain in excess of Rs0.1 mn 15% if STT is paid, otherwise added to the income >12 months <12 months mutual funds is charged at 10% and taxed as per the individual’s income tax slab Debt mutual Added to the income and taxed as per the >36 months <36 months 20% with indexation funds individual’s income tax slab

Source: Budget documents, Kotak Institutional Equities

What the government should do?

In our view, the government should focus less on short-term fixes and focus more on the longer-term issues of investment and productivity. We doubt a small dose of fiscal stimulus in the form of personal tax cut and/or increase in government spending will do much to revive consumption demand (forget, investment demand). The same can be achieved through better articulation of the longer-term economic objectives and execution.

 Acceleration in economic reforms and execution. In our view, the government should continue with economic reforms, which will ultimately lead to better governance and greater investment confidence among investors. The central government has already cut corporate tax rate to globally-competitive levels (see Exhibit 13) on September 20, 2019 and is working on rationalizing India’s labor laws (see Exhibit 14). We are optimistic that manufacturing investment can pick up over the next 2-3 years—the cost of capital and simple and stable labor laws are more important for manufacturing and land is not that relevant as most manufacturing units will not require large amounts of land.

Exhibit 13: Corporate India will become more competitive compared with other Asian economies in the new regime Base corporate tax rate of major Asian economies, Calendar year-ends, 2019 (%)

35 30 30 30 28 25 25 25 25 24 23.2 25 22 20 20 20 20 20 17 15 15

Japan

China Korea

Taiwan

mfg)

Vietnam

Thailand

Malaysia

Sri Lanka

Indonesia

India (old)

Singapore

Cambodia

India (new

Philippines India (new) Bangladesh

Source: Deloitte, KPMG, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11

India Strategy

Exhibit 14: Government has simplified/is in the process of simplifying labor laws Changes and proposed changes to labor laws by the central government

Changes to labor laws Current provisions/comments Code on Social Security, 2019 Bill introduced in Lok Sabha Code on Social Security will merge eight existing labor laws Simplification of laws to improve compliance Seeks to establish a social security fund; use the corporate social responsibility fund to offer Social security benefit is not available for most of the unorganized sector workers medical, pension, death and disability benefits via the employee’s workers employed in unorganized sectors state insurance corporation

The bill proposes to offer gratuity to fixed term employees after one year of service on a pro-rata Currently, gratuity is provided on completion of five years of basis service Code on Wages, 2019 Enacted by Parliament The Code replaces the four laws: (a) The Payment of Wages Act, 1936, (b) The Minimum Wages Simplification of laws to improve compliance Act, 1948, (c) The Payment of Bonus Act, 1965, and (d) the Equal Remuneration Act, 1976 The central government will make wage-related decisions for employments such as railways, Jurisdictions defined for all employment generating mines, and oil fields, etc. State governments will make decisions for all other employments organizations

The central government will fix a floor wage, taking into account living standards of workers. Variable minimum wage depending on geography of Further, it may set different floor wages for different geographical areas. The minimum wages operation decided by the central or state governments must be higher than the floor wage

The Code prohibits employers from paying wages less than the minimum wages, which will be based on time, or number of pieces produced. Review and revision to be done at an interval of Protects employee interests not more than five years

The central or state government may fix the number of hours that constitute a normal working day. Employees will be entitled to overtime wage in case working hours are overshot, which Protects employee interests must be at least twice the normal rate of wages Industrial Relations Code Bill, 2019 Bill introduced in Lok Sabha Draft code amalgamates and simplifies (a) The Trade Unions Act, 1926, (b) The Industrial Simplified labor laws likely to help smaller firms scaling up Employment (Standing Orders) Act, 1946, and (c) The Industrial Disputes Act, 1947 Provision to change the threshold for number of employees employed by a firm requiring prior No need for parliamentary approval to change the law on approval for retrenchment by an executive order in a later date size of firms requiring prior approval for firing Provision to set up a two-member tribunal for important cases for speedy resolution Currently cases are heard by single member tribunal Provision for vesting of powers with the government officers for adjudication of disputes involving Faster resolution for basic disputes penalty as fines, thereby lessening the burden on the tribunal Defines fixed-term employment as a worker can be hired for any duration, three months or six Implies equal treatment of all employees in terms of months or a year depending on season and orders benefits that can be availed The Occupational Safety, Health and Working Conditions Code, 2019 Bill referred to standing committee It subsumes and replaces 13 labor laws relating to safety, health and working conditions. These laws include: (a) The Factories Act, 1948, (b) The Mines Act, 1952, (c) Dock Workers Act, 1986, Simplification of laws to improve compliance (d) The Contract Labor Act, 1970 and (e) The Inter-State Migrant Workers Act, 1979 The Code seeks to regulate health and safety conditions of workers in establishments with 10 or Protects employee interests more workers, and in all mines and docks

Work hours for different classes of establishment and employees will be notified by the central or state government. For overtime work, the worker must be paid twice the rate of daily wages. Protects employee interests Prior consent of workers is required for overtime work

Workers cannot be required to work for more than six days a week. Further, they must receive Protects employee interests one day of leave for every 20 days of work per year

Source: PIB, PRS, Kotak Institutional Equities

However, the government will have to find a way to address India’s growing infrastructure deficit as the all major inputs for infrastructure projects such as approvals, capital, contracts and land will pose significant challenges. We would note that states have a much larger role than the central government in the development of infrastructure—state entities will provide the approvals for projects and enter into contracts with private service providers. Thus, the government will have a find way to reignite the spirit of ‘cooperative federalism’ despite its recent political reversals in many states.

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Strategy India

Lastly, the government’s stretched financials will pose a cap on investment in infrastructure (see Exhibit 15). We would note that central government, state governments and local governments are responsible for funding the bulk of infrastructure projects in India. Among the four broad areas of infrastructure—electricity, mobility, telecommunications and water—the private sector can invest only in electricity generation, highways and telecommunications currently. All other areas such are in the hands of central, state and local governments or entities, in particular (1) electricity distribution and transmission in the electricity sector, (2) intra-city roads, metro systems and railways in mobility and (3) irrigation, sanitation & sewage and water supply in the water sector.

Exhibit 15: Public sector GFCF is more or less equal to India's consolidated fiscal deficit Consolidated fiscal deficit, government capex and public sector GFCF as a proportion of GDP, March fiscal year-ends, 2012-18 (%)

10 Consolidated government capex/GDP (%) Consolidated fiscal deficit/GDP (%) Public sector GFCF (%) 7.8 8 7.3 7.5 7.1 7.2 6.97.0 7.0 7.0 7.06.8 6.7 6.7 6.6

6 4.9 5.1 5.0 4.7 4.6 4.7 4.8

0 2012 2013 2014 2015 2016 2017 2018

Source: CEIC, Kotak Institutional Equities

 Credible budget numbers. We believe the government should present credible numbers for both revenues and expenditure as the government’s actual fiscal numbers have consistently missed the fiscal targets by a wide margin. The government has had to resort to advancement of revenues (interim dividends from the RBI) and postponement of expenditure (lower payment to FCI for food subsidies, for example) apart from booking one-off revenues periodically (special dividends from the RBI). It has also moved a portion of direct government spending on capital expenditure to government entities such as Indian Railways and NHAI, which has kept overall government market borrowings at inflated levels (see Exhibit 16).

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India Strategy

Exhibit 16: Central PSE borrowings have kept overall borrowings at elevated levels General government and central PSE borrowings as a proportion of GDP, March fiscal year-ends, 2000-20 (%)

Center State Central PSE Consolidated 12

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

2019RE 2020BE

Notes: (a) Central PSE borrowings includes bonds, ECB/suppliers' credit, and others.

Source: Union Budget, CEIC, Kotak Institutional Equities

 Medium-term revenue projections. It may help if the government were to prepare revenue estimates for the next 3-5 years based on a realistic assessment of economic growth and taxation revenues. This will help the government match (1) its revenues with expenditure and (2) growth in revenues with growth in expenditure rather than it having to resort to one-off revenue and expense adjustments to meet the budget fiscal deficit numbers. In our view, the government will be able to keep expenditure under check if it has a good handle on potential revenues. It is prone to increase expenditure periodically for social and/or political reasons without consideration of the means to meet the increased spending.

 Expenditure management plan. The government should move to zero-based budgeting in order to manage its expenditure better. The central government’s revenue expenditure has exploded over the past few years (see Exhibit 17 for the major expenditure items of interest payments, salaries and pensions, social welfare programs and subsidies for FY2014-20BE).

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Strategy India

Exhibit 17: Sharp rise in revenue expenditure of central government Key revenue expenditure items of central government, March fiscal year-ends, 2014-20BE (Rs bn)

21,000 Interest payments Pay, allowances and pensions Social welfare programs Subsidies

18,000

15,000

12,000

9,000

6,000

3,000

0 2014 2015 2016 2017 2018 2019 2020BE

Source: Union Budget, Kotak Institutional Equities

The government may want to reassess the necessity of such heavy revenue expenditure and see if some or all of the expenditure can be collapsed to a single payment to households based on certain criteria over the next few years. From a political standpoint, many of these items are of a fixed nature and the government can do little about reducing the benefits given its political compulsions. Thus, it may be better to freeze the amounts on a per-household basis (plus some inflation-led increase) rather than leave the expenditure completely open-ended.

 Privatization program. The government should finalize a credible privatization program and take some hard decisions regarding the ownership of even ‘strategic’ companies in the future. As highlighted by us repeatedly over the past few years, the government can only raise limited amounts of funds from divestment if it is to retain majority ownership in the PSU companies.

Exhibit 18 shows that government can raise about Rs2.5 tn from the sale of its ownership above 51% in all listed central PSUs and Rs1.2 tn from sale of its ownership above 51% in non-finance PSUs. The government will likely struggle to raise even these amounts given the low appetite among investors for companies such as COAL, ONGC and PSU banks.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 15

India Strategy

Exhibit 18: Government can raise around Rs2.5 tn if it sells its holding up to 51% in all listed central PSUs List of PSUs with more than 51% government holding (sorted on mcap.)

Market Cap. Govt holding Stake sale Company (Rs bn) (US$ bn) (%) up to 51% ONGC 1,482 21 63.0 178 Coal India 1,176 16 69.3 215 NTPC 1,123 16 54.5 39 IOCL 1,120 16 51.5 6 Power Grid Corp. 1,057 15 55.4 46 BPCL 1,017 14 53.3 23 GAIL (India) 585 8 52.2 7 NMDC 407 6 72.3 87 Container Corp. 337 5 54.8 13 Hindustan Aeronautics 286 4 90.0 111 NHPC 273 4 73.3 61 Bharat Electronics 246 3 55.9 12 SAIL 208 3 75.0 50 IRCTC 159 2 87.4 58 BHEL 151 2 63.2 18 Oil India 150 2 59.6 13 SJVN 99 1 88.0 37 National Aluminium Co. 86 1 52.0 1 ITI 83 1 90.0 33 RITES 79 1 87.4 29 Neyveli Lignite Corp. 77 1 80.9 23 KIOCL 74 1 99.1 35 NBCC 66 1 65.9 10 Engineers India 64 1 52.0 1 Bharat Dynamics 56 1 87.8 20 Rail Vikas Nigam 56 1 87.8 20 Cochin Shipyard 53 1 75.2 13 Hindustan Copper 42 1 76.1 10 BEML 42 1 54.0 1 IRCON International 41 1 89.2 16 MOIL 41 1 65.7 6 MMTC 33 0 89.9 13 Mishra Dhatu Nigam 31 0 74.0 7 Rashtriya Chemicals & Fertilizers 30 0 75.0 7 Shipping Corp. 29 0 63.8 4 ITDC 27 0 87.0 10 Garden Reach Shipbuilders & Engineers 23 0 74.5 5 GMDC 21 0 74.0 5 CPCL 21 0 51.9 0 Fertilizers & Chemicals Travancore 17 0 90.0 6 National Fertilizer 14 0 74.7 3 MSTC 10 0 64.8 1 Andrew Yule & Co. 8 0 89.3 3 MTNL 7 0 56.3 0 HMT 6 0 93.7 3 Madras Fertilizers 3 0 59.5 0 State Trading Corp. 3 0 90.0 1 Scooters India 1 0 93.9 1 Hindustan Organic Chemicals 1 0 58.8 0 Bharat Immunolog 0 0 59.3 0 Punjab Communications 0 0 71.3 0 Banks/Finance State Bank of India 2,885 40 57.1 177 GIC 448 6 85.8 156 Bank of Baroda 438 6 69.2 80 Punjab National Bank 416 6 75.4 102 PFC 300 4 56.2 15 New India Assurance 270 4 85.4 93 Canara Bank 227 3 70.6 45 Bank of India 221 3 89.1 84 Union Bank 179 3 74.3 42 Corporation Bank 144 2 93.5 61 UCO Bank 139 2 92.5 58 Indian Overseas Bank 138 2 92.5 57 Central Bank of India 108 2 89.5 42 HUDCO 85 1 89.8 33 United Bank of India 82 1 96.8 38 Bank of Maharashtra 77 1 92.5 32 Oriental Bank of Commerce 74 1 87.6 27 Syndicate Bank 74 1 78.5 20 Allahabad Bank 69 1 92.0 28 Indian Bank 64 1 79.6 18 Andhra Bank 51 1 87.8 19 J&K Bank 16 0 59.2 1 Punjab & Sind Bank 14 0 80.3 4 IFCI 11 0 56.4 1 Balmer Lawrie Investment 9 0 59.7 1 Gujarat State Financial Corp. 1 0 55.1 0 Total 17,562 246 2,495 Total (excluding banks/financial PSUs) 11,020 155 1,262 Source: Capitaline, Kotak Institutional Equities

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Strategy India

Exhibit 19 shows that the government can raise Rs2.6 tn if it were to club the holdings of other government entities along with its direct ownership in PSUs to keep its ownership (direct of the government and indirect of other government entities) above 51%. However, we would strongly argue against going down this path. Investors are already quite averse to government companies and will lose whatever little interest they have in owning PSU stocks.

Exhibit 19: Government can raise around Rs2.5 tn if it were to reduce its direct and indirect holdings in non-financial central PSUs (including of LIC, other PSUs) to 51% Shareholding of major non-financial PSUs by government and government entities, September 2019 (%)

Market Cap. Ownership of various entities (%) Total Stake sale Company (Rs bn) GOI LIC PFC REC BPCL GAIL HPCL IOCL OIL ONGC Others stake (%) Entire up to 51% ONGC 1,482 63.0 9.5 2.5 7.8 82.8 1,226 471 Coal India 1,176 69.3 10.9 80.2 943 343 NTPC 1,123 54.5 10.6 65.1 731 159 IOCL 1,120 51.5 6.5 5.2 14.2 77.4 867 296 Power Grid Corp. 1,057 55.4 4.6 59.9 633 95 BPCL 1,017 53.3 5.9 59.2 602 83 GAIL (India) 585 52.2 5.2 2.4 4.8 64.6 378 79 NMDC 407 72.3 12.9 85.2 347 139 HPCL 376 — 3.7 51.1 54.8 206 14 Container Corp. 337 54.8 3.4 58.2 196 24 Hindustan Aeronautics 286 90.0 7.0 97.0 277 131 NHPC 273 73.3 7.6 2.43 1.75 85.1 233 93 Bharat Electronics 246 55.9 3.5 59.5 147 21 SAIL 208 75.0 9.6 84.6 176 70 IRCTC 159 87.4 87.4 139 58 BHEL 151 63.2 11.6 74.7 113 36 Oil India 150 59.6 12.0 2.5 2.5 4.9 81.5 123 46 SJVN 99 88.0 88.0 87 37 National Aluminium Co. 86 52.0 5.0 57.0 49 5 ITI 83 90.0 7.8 97.8 82 39 RITES 79 87.4 87.4 69 29 Neyveli Lignite Corp. 77 80.9 2.9 4.3 88.1 67 28 KIOCL 74 99.1 99.1 73 35 NBCC 66 65.9 6.5 72.5 47 14 Engineers India 64 52.0 3.5 55.5 35 3 Bharat Dynamics 56 87.8 2.2 90.0 50 22 Rail Vikas Nigam 56 87.8 1.9 89.8 50 22 Cochin Shipyard 53 75.2 75.2 40 13 Hindustan Copper 42 76.1 2.0 78.0 33 11 BEML 42 54.0 2.8 56.8 24 2 MOIL 41 65.7 7.1 1.1 73.9 30 9 MMTC 33 89.9 3.4 93.3 31 14 Mishra Dhatu Nigam 31 74.0 6.6 2.4 83.0 26 10 Rashtriya Chemicals & Fertilizers 30 75.0 2.2 77.2 23 8 Shipping Corp. 29 63.8 10.3 74.1 21 7 ITDC 27 87.0 3.2 90.3 24 10 Garden Reach Shipbuilders & Engineers 23 74.5 7.3 2.9 84.8 20 8 GMDC 21 74.0 1.6 75.6 16 5 CPCL 21 51.9 3.3 55.2 12 1 Fertilizers & Chemicals Travancore 17 90.0 90.0 15 6 National Fertilizer 14 74.7 11.3 86.0 12 5 Dredging Corp. 10 — 4.4 1.8 6.2 1 (4) Total 8,338 2,524

Source: Capitaline, BSE, NSEINFOBASE, Kotak Institutional Equities

Lastly, the government can raise meaningful amounts of funds over the next few years if it were to sell its entire stake in government companies, as can be seen in Exhibit 20. However, the government may have to overcome its reluctance to privatize the larger companies in banking, defense and energy sectors. We would note that a bulk of the value of the government’s holdings in the PSU largely comes from these sectors, which may be of ‘strategic’ importance to the government. Also, the government will have to amend the laws to privatize these companies.

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India Strategy

Exhibit 20: Government can raise around Rs11 tn if it were to sell its entire holding in listed central PSUs List of PSUs with more than 51% government holding (sorted on mcap.)

Market Cap. Govt holding Stake sale Company (Rs bn) (US$ bn) (%) Entire ONGC 1,482 21 63.0 933 Coal India 1,176 16 69.3 814 NTPC 1,123 16 54.5 612 IOCL 1,120 16 51.5 577 Power Grid Corp. 1,057 15 55.4 585 BPCL 1,017 14 53.3 542 GAIL (India) 585 8 52.2 305 NMDC 407 6 72.3 294 Container Corp. 337 5 54.8 185 Hindustan Aeronautics 286 4 90.0 257 NHPC 273 4 73.3 200 Bharat Electronics 246 3 55.9 138 SAIL 208 3 75.0 156 IRCTC 159 2 87.4 139 BHEL 151 2 63.2 96 Oil India 150 2 59.6 90 SJVN 99 1 88.0 87 National Aluminium Co. 86 1 52.0 45 ITI 83 1 90.0 75 RITES 79 1 87.4 69 Neyveli Lignite Corp. 77 1 80.9 62 KIOCL 74 1 99.1 73 NBCC 66 1 65.9 43 Engineers India 64 1 52.0 33 Bharat Dynamics 56 1 87.8 49 Rail Vikas Nigam 56 1 87.8 49 Cochin Shipyard 53 1 75.2 40 Hindustan Copper 42 1 76.1 32 BEML 42 1 54.0 22 IRCON International 41 1 89.2 37 MOIL 41 1 65.7 27 MMTC 33 0 89.9 30 Mishra Dhatu Nigam 31 0 74.0 23 Rashtriya Chemicals & Fertilizers 30 0 75.0 23 Shipping Corp. 29 0 63.8 18 ITDC 27 0 87.0 23 Garden Reach Shipbuilders & Engineers 23 0 74.5 17 GMDC 21 0 74.0 16 CPCL 21 0 51.9 11 Fertilizers & Chemicals Travancore 17 0 90.0 15 National Fertilizer 14 0 74.7 11 MSTC 10 0 64.8 6 Andrew Yule & Co. 8 0 89.3 7 MTNL 7 0 56.3 4 HMT 6 0 93.7 6 Madras Fertilizers 3 0 59.5 2 State Trading Corp. 3 0 90.0 3 Scooters India 1 0 93.9 1 Hindustan Organic Chemicals 1 0 58.8 1 Bharat Immunolog 0 0 59.3 0 Punjab Communications 0 0 71.3 0 Banks/Finance State Bank of India 2,885 40 57.1 1,648 GIC 448 6 85.8 384 Bank of Baroda 438 6 69.2 304 Punjab National Bank 416 6 75.4 314 PFC 300 4 56.2 168 New India Assurance 270 4 85.4 230 Canara Bank 227 3 70.6 161 Bank of India 221 3 89.1 197 Union Bank 179 3 74.3 133 Corporation Bank 144 2 93.5 135 UCO Bank 139 2 92.5 128 Indian Overseas Bank 138 2 92.5 128 Central Bank of India 108 2 89.5 97 HUDCO 85 1 89.8 76 United Bank of India 82 1 96.8 79 Bank of Maharashtra 77 1 92.5 72 Oriental Bank of Commerce 74 1 87.6 65 Syndicate Bank 74 1 78.5 58 Allahabad Bank 69 1 92.0 64 Indian Bank 64 1 79.6 51 Andhra Bank 51 1 87.8 44 J&K Bank 16 0 59.2 10 Punjab & Sind Bank 14 0 80.3 11 IFCI 11 0 56.4 6 Balmer Lawrie Investment 9 0 59.7 6 Gujarat State Financial Corp. 1 0 55.1 0 Total 17,562 246 11,452 Total (excluding banks/financial PSUs) 11,020 155 6,882

Source: Capitaline, Kotak Institutional Equities

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Strategy India

We have long argued that the government should simply let its ownership fall below 50% in these companies through divestment to institutional investors. Thus, these companies will become private companies, run by professional management and supervised by competent boards. It may be difficult to sell the ‘strategic’ companies to private companies given possible political and social resistance.

The government can raise another Rs600 bn by selling its minority stakes in certain private companies (see Exhibit 21). However, the sale of the government’s balance stake in Hindustan Zinc (29.5%) has run into legal hurdles with the Supreme Court having ruled that the privatization of Hindustan Zinc in 2002 should have been done after amendment to the relevant nationalization act by the parliament.

Exhibit 21: The government can raise ~Rs600 bn by selling its stake in private companies Key minority holdings of government in certain companies

Mcap. Govt holding Company (Rs bn) (%) (Rs bn) Axis Bank 2,039 5.0 101 Hindustan Zinc 882 29.5 260 ITC 2,924 7.9 232 Total 594

Source: Capitaline, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 19 India Strategy

FY2021 UNION BUDGET: FOCUSING ON GROWTH The government will be aiming to boost growth either through higher expenditure or income tax cuts though resources for the same will be challenging. After large slippage in revenue collections in FY2020, the government should provide for credible revenue estimates. We do not factor an income tax rate cut and expect the budget to focus on rural spending. We model FY2021 GFD/GDP at 3.7% with 11% growth in gross tax revenues and 7% growth in total expenditure.

FY2021 budget: Moving away from the path of fiscal consolidation We model FY2021E GFD/GDP at 3.7% (see Exhibit 22) based on gross tax revenue growth of 11%, non-tax revenues at Rs3.2 tn and divestments at Rs1.1 tn. We assume overall expenditure growth at 7% (revenue expenditure growth at 7% and capital expenditure growth at 5%). We expect a small consolidation versus FY2020E GFD/GDP of 3.8%. We assume expenditure cuts of around Rs1.1 tn against a net tax revenue shortfall of around Rs2.3 tn in FY2020, which would result in central GFD/GDP slipping by 50 bps versus FY2020BE target of 3.3%. Nonetheless, if the current trend in tax revenues was to continue through the rest of FY2020, tax collections may further disappoint (see Exhibit 23).

20 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India

Exhibit 22: FY2021E GFD/GDP likely to be at 3.7% Major central government budgetary items, March fiscal year-ends, 2017-21E (Rs bn)

Change (%) 2018/ 2019P/ 2020BE/ 2020E/ 2021E/ 2017 2018 2019P 2020BE 2020E 2021E 2017 2018 2019P 2019P 2020E Receipts 1. Revenue receipts (2d + 3) 13,742 14,352 15,632 19,628 18,185 18,822 4 9 26 16 4 2. Gross tax revenues (a + b ) 17,158 19,190 20,802 24,612 21,220 23,636 12 8 18 2 11 2.a. Direct taxes 8,539 10,068 11,428 13,419 11,358 12,823 18 14 17 (1) 13 2.a.1. Corporation tax 4,849 5,712 6,636 7,660 6,281 7,035 18 16 15 (5) 12 2.a.2. Income tax 3,646 4,308 4,739 5,690 5,007 5,708 18 10 20 6 14 2.a.3. Other taxes 43 48 53 69 69 80 11 12 30 30 15 2.b. Indirect taxes 8,620 9,122 9,374 11,192 9,862 10,813 6 3 19 5 10 2.b.1. Goods and Services Tax — 4,426 5,816 6,633 6,003 6,577 31 14 3 10 2.b.1.1. CGST — 2,033 4,575 5,260 4,800 5,280 125 15 5 10 2.b.1.2. IGST — 1,767 289 280 280 300 (84) (3) (3) 7 2.b.1.3. Compensation cess — 626 951 1,093 923 997 52 15 (3) 8 2.b.2. Customs duty 2,254 1,290 1,179 1,559 1,459 1,576 (43) (9) 32 24 8 2.b.2.1. Basic duties 646 808 1,045 1,429 1,349 1,457 25 29 37 29 8 2.b.2.2. Others 1,608 483 134 130 110 118 (70) (72) (4) (18) 8 2.b.3. Excise duty 3,821 2,594 2,310 3,000 2,400 2,660 (32) (11) 30 4 11 2.b.4. Service tax 2,545 812 69 — —— (68) 2.c Transfers to states, UTs, etc. 6,145 6,765 7,633 8,116 7,003 8,036 10 13 6 (8) 15 2.d Net tax revenues 11,014 12,425 13,170 16,496 14,218 15,600 13 6 25 8 10 3. Non-tax revenues 2,728 1,927 2,462 3,132 3,968 3,223 (29) 28 27 61 (19) 3.a. RBI's transfer of surplus 659 407 680 950 1,726 950 (38) 67 40 154 (45) 4. Non-debt capital receipts (a + b) 654 1,157 1,029 1,198 648 1,263 77 (11) 16 (37) 95 4.a Recovery of loans 176 156 178 148 148 163 (11) 14 (17) (17) 10 4.b Other receipts (disinvestments) 477 1,000 850 1,050 500 1,100 110 (15) 23 (41) 120 5. Total receipts (1 + 4) 14,396 15,509 16,661 20,826 18,834 20,086 8 7 25 13 7 Expenditure 6. Revenue expenditure 16,906 18,788 20,085 24,478 23,328 24,927 11 7 22 16 7 6.a. Interest payments 4,807 5,290 5,827 6,607 6,607 7,136 10 10 13 13 8 6.b. Subsidies 2,040 1,912 1,971 3,017 2,317 2,317 (6) 3 53 18 0 6.b.1. Food 1,102 1,003 1,019 1,842 1,142 1,142 (9) 2 81 12 0 6.b.2. Fertilizer 663 664 706 800 800 800 0 6 13 13 0 6.b.3. Oil 275 245 246 375 375 375 (11) 0 53 53 0 6.c. Pay, allowances and pensions 3,996 4,464 4,936 5,258 5,258 5,591 12 11 7 7 6 6.c.1.a. Pay and allowances 2,682 3,007 3,270 3,515 3,515 3,761 12 9 7 7 7 6.c.1.b. Pensions 1,314 1,457 1,666 1,743 1,743 1,830 11 14 5 5 5 6.d. Agriculture and farmers' welfare 369 374 461 1,305 1,005 1,030 1 23 183 118 3 6.e. Education 720 800 781 927 927 974 11 (2) 19 19 5 6.f. Health and family welfare 364 483 506 609 609 640 33 5 20 20 5 6.g. Rural development 951 1,086 1,118 1,175 1,375 1,513 14 3 5 23 10 6.h. Others 3,658 4,381 4,485 5,579 5,230 5,726 20 2 24 17 10 7. Capital expenditure 2,846 2,631 3,030 3,386 3,386 3,557 (8) 15 12 12 5 7. a. Defence 915 954 995 1,082 1,082 1,115 4 4 9 9 3 7. b. Railways 452 434 528 658 658 691 (4) 22 25 25 5 7. c. Roads and Highways 412 508 676 721 721 778 23 33 7 7 8 7. d. Housing and urban affairs 165 153 158 195 195 211 (7) 3 24 24 8 7. e. Others 902 582 572 729 729 762 (35) (2) 27 27 5 8. Total expenditure (6 + 7) 19,752 21,420 23,114 27,863 26,714 28,484 8 8 21 16 7 Deficit Primary deficit (PD) 549 621 627 430 1,273 1,262 13 1 (31) 103 12 Revenue deficit (RD) 3,164 4,436 4,453 4,850 5,143 6,104 40 0 9 15 5 Gross fiscal deficit (GFD) 5,356 5,911 6,454 7,038 7,880 8,398 10 9 9 22 9 Gross borrowings (dated securities) 5,830 5,880 5,710 7,100 7,738 8,169 1 (3) 24 36 6 Net market borrowing 4,082 4,507 4,227 4,731 5,369 5,988 10 (6) 12 27 12 Net market borrowing (adjusted for buyback) 3,497 4,103 4,227 4,231 5,369 5,488 17 3 0 27 3 Short-term borrowing (T-bills) 55 449 250 250 350 350 Nominal GDP at market prices 153,624 170,950 190,102 211,006 204,739 224,190 11.3 11.2 11.0 7.7 9.5 PD/GDP (%) 0.4 0.4 0.3 0.2 0.6 0.6 RD/GDP (%) 2.1 2.6 2.3 2.3 2.5 2.7 GFD/GDP (%) 3.5 3.5 3.4 3.3 3.8 3.7

Source: Ministry of Finance, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 21 India Strategy

Exhibit 23: Tax receipts growth has been low in FY2020 Monthly tax receipts of the Indian government, March fiscal year-ends, 2019-20 (Rs bn)

FY2020 FYTD (Apr-Nov) Chg. (%) FY2020BE Current Required Date 2020 2019 yoy Rs bn (% of BE) run rate run rate Gross tax revenues 11,741 11,647 0.8 24,612 48 1,468 3,218 Direct taxes 5,661 5,512 2.7 13,419 42 708 1,940 Corporation tax 2,886 2,913 (0.9) 7,660 38 361 1,193 Income tax 2,679 2,504 7 5,690 47 335 753 Other taxes 96 96 0.4 69 138 12 (7) Indirect taxes 6,063 6,124 (1.0) 11,192 54 758 1,282 Customs duty 759 868 (13) 1,559 49 95 200 Excise duty 1,329 1,381 (3.8) 3,000 44 166 418 Service tax 5 56 (91) 1 GST 3,969 3,819 3.9 6,633 60 496 666 CGST 3,284 2,973 10 5,260 62 410 494 IGST 60 220 (73) 280 21 7 55 Compensation cess 626 626 (0.0) 1,093 57 78 117 Net tax revenues 7,506 7,317 2.6 16,496 46 938 2,247 Non-tax revenues 2,326 1,386 68 3,132 74 291 201 Non-debt capital receipts 290 263 10 1,198 24 36 227 Total receipts 10,122 8,966 13 20,826 49 1,265 2,676 Total expenditure 18,201 16,132 13 27,863 65 2,275 2,416 Revenue expenditure 16,062 14,218 13 24,478 66 2,008 2,104 Capital expenditure 2,138 1,914 12 3,386 64 267 312 Fiscal deficit 8,078 7,166 13 7,038 115 1,010 (260)

Source: CEIC, Kotak Economics Research

Balancing between weak revenue prospects and imparting growth stimulus

The primary macro concern for the government will be the growth slowdown stemming from (1) weaker private consumption growth and (2) muted investment cycle (barring government spending). (1) Tepid demand conditions in the rural sector on the back of stagnant farm profitability and (2) weak employment situation (and income generation), especially in the construction and real estate sectors have weighed heavily on growth prospects.

The market has pinned its hopes on fiscal stimulus to reinvigorate demand as the monetary stimulus has not worked as effectively as expected. Exhibits 24-25 show the modest decline in weighted-average deposit and lending rates over the past 12 months despite the RBI cutting rates by 135 bps since early CY2019.

22 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Strategy India

Exhibit 24: Term deposit rates have been flat for the past few months but directionally rising upwards Weighted average term-deposit rates for banks (%)

Repo (month end) Commercial Banks Public Sector Banks Private Sector Banks 9.0

8.2

7.4

6.6

5.8

5.0

Feb-15 Feb-16 Feb-17 Feb-18 Feb-19

Nov-18 Nov-19 Nov-14 Nov-15 Nov-16 Nov-17

Aug-15 Aug-16 Aug-17 Aug-18 Aug-19

May-15 May-16 May-17 May-18 May-19

Source: RBI, Kotak Institutional Equities

Exhibit 25: WALR have remained steady despite fall in repo rates Weighted average lending rates (WALR) for banks (%)

Repo (month end) Outstanding WALR (SCBs) Outstanding WALR (PSUs) Outstanding WALR (private banks) 14.0

12.5

11.0

9.5

8.0

6.5

5.0

Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19

Jan-17 Jan-18 Jan-19 Jan-13 Jan-14 Jan-15 Jan-16

Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Oct-18 Oct-19

Apr-13 Apr-14 Apr-15 Apr-17 Apr-18 Apr-19 Apr-16

Source: RBI, Kotak Institutional Equities

However, the room for fiscal stimulus is limited given weak revenue prospects. Long-term growth prospects remain under a cloud with much of the focus being on the revenue expenditure (agriculture and rural development). Additionally, the central government has shifted a sizeable portion of its spending to off-budget items over the past couple of years. This has led to higher market borrowings by public sector enterprises and reliance on small savings by the central government to finance the deficit, which has resulted in significant ‘crowding out’ and stickiness in market interest rates even though the consolidated fiscal deficit (center + state) has remained steady (with the center showing some consolidation).

KOTAK INSTITUTIONAL EQUITIES RESEARCH 23

India Strategy

Revenues: disappointment on GST revenues

We expect direct taxes and GST revenues to see large slippages against FY2020 budget estimates. The government will need to revisit tax revenue assumptions, especially of GST revenues, in the FY2021 union budget In order to present a credible budget. We estimate gross tax revenues to increase by 11% along with non-debt capital receipts being driven by the government’s divestment receipts of Rs1.1 tn and non-tax revenue growth of (-)19%. Overall, we assume revenue receipts to grow 7% in FY2021.

 Corporate taxes. We budget corporate taxes to grow 12% in FY2021BE keeping in view our nominal GDP growth estimate of 9.5%. However, the growth rate will not be comparable with FY2020E, which saw corporate tax rates being revised lower. We currently expect the net profits of the Nifty-50 Index to grow 25% in FY2021, which could potentially decline to around 18% on further earnings cuts.

We believe that the government needs to incentivize smaller companies to become a part of the formal economy. Smaller companies have lost whatever tax advantage they had (on ‘reported’ basis) under the new corporate tax regime (announced on September 20, 2019). We would note that companies with turnovers below Rs4 bn had a tax rate of 25% (before surcharge and cess) versus the normal corporate tax rate of 30%. Currently, all the companies are at the same rate of 22% (basic), assuming they move to the new corporate tax regime; see Exhibit 26 for the effective tax rates of companies based on turnover under the two corporate tax regimes. The government should explore introducing a corporate tax slab of, say, 11% (half of the new corporate tax rate) or a graded tax structure (as in the case for personal income tax) for companies below a certain turnover for a certain period of time (three years or so).

Exhibit 26: Effective tax rate reduced sharply for domestic companies Effective tax rates for domestic companies (%)

Previous tax regime New tax regime Effective Effective Tax Surcharge Cess tax rate Tax Surcharge Cess tax rate Turnover/gross receipts less than Rs4 bn Taxable income less than Rs10 mn 25 0 4 26.0 22 0 4 22.9 Taxable income more than Rs10 mn 25 7 4 27.8 22 7 4 24.5 Turnover/gross receipts more than Rs4 bn Taxable income less than Rs10 mn 30 0 4 31.2 22 0 4 22.9 Taxable income more than Rs10 mn but less than Rs100 mn 30 7 4 33.4 22 7 4 24.5 Taxable income more than Rs100 mn 30 12 4 34.9 22 12 4 25.6

Source: Union Budget, Kotak Institutional Equities

 Personal income tax. We factor in 14% growth in personal income tax revenues in FY2021. We do not factor in any major personal income tax rate changes. We doubt the government can cut both personal income tax rates and government spending to balance its fiscal numbers. The former will benefit middle- and high-income households while the latter will hurt low-income households.

Based on our calculations, personal income tax collections could be lower by around Rs500 bn if the government were to implement most of the DTC panel recommendations (along with removal of various exemptions). However, without the removal of exemptions, implementing DTC panel recommendations would lead to revenue loss of around Rs1.3 tn. Further, increasing the tax exemption threshold to Rs0.5 mn and keeping other aspects unchanged will lead to revenue loss of around Rs340 bn (0.17% of GDP).

We believe the government should provide higher tax exemptions for housing (especially for the higher-end apartments) under Section 80Cfor principal payments and under Section 24 for higher interest payments.

24 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Strategy India

 GST. The GST revenue run-rate has broadly stabilized around Rs900 bn per month in FY2020. Based on the GST collections (and compliance levels) for March-November, we factor in a run-rate of around Rs400 bn of CGST for FY2020. For FY2021, we assume CGST and IGST collections at Rs5.3 tn and Rs300 bn respectively—a monthly rate of Rs440 bn for CGST. We assume compensation cess collection of Rs1 tn in FY2021.

 Non-tax revenues. We factor in Rs950 bn as surplus transfer from the RBI, lower than Rs1.73 tn in FY2020 (including one-off ECF-related transfers of Rs530 bn and assuming an interim dividend of around Rs250 bn). Overall, we expect non-tax revenues to contract by 19%. We factor in the government’s decision to defer spectrum payment charges due in FY2021-22 to extend beyond FY2022.

However, we have not assumed any revenues from the telecom sector in FY2020 or FY2021 related to AGR and SUC payments by the telecom companies, as decided by the government and upheld by the Supreme Court in a recent decision. The numbers are quite large (see Exhibit 27 for breakdown of dues by companies) and thus, can boost the government’s overall revenues meaningfully.

Exhibit 27: Government can get Rs1 tn from Bharti Airtel, Tata Teleservices and Vodafone Total AGR-related dues of telecom companies (Rs bn)

License fee SUC Operator related dues related dues Total dues Aircel 79 24 102 Bharti 217 139 356 BSNL 21 29 50 MTNL 25 6 31 Others 585 353 938 Tata Teleservices 100 38 138 Videocon 10 3 13 Vodafone Idea 283 247 530 Total 1,320 839 2,159

Source: DoT, Kotak Institutional Equities

However, we would assume that the government will defer the dues over a reasonably long period of time as most telecom companies are in no condition to pay the dues. Most have exited the business and we doubt any other player other than Bharti Airtel (R-Jio’s numbers are too small anyway) will make the payment if the government were to insist on immediate payment of the full amount. The deadline for the AGR payment is January 23, 2020.

 Divestments. We would note the divestment revenues can swing the government’s revenues and deficit numbers meaningfully. For our FY2020 estimates, we factor in a lower-than-budgeted divestment receipt given that the strategic sale of Air India, BPCL and CCRI will slip to in FY2021. To that extent, we expect the government to factor in a high divestment target at around Rs1.1 tn for FY2021. The government has multiple options to raise larger amounts from divestments of its stakes in government and private companies as we discussed in the previous section. However, it would have to overcome its political inhibitions about privatizing certain so-called ‘strategic’ companies.

Expenditure: Focusing on boosting rural sector demand

The government will have a dual aim of (1) stimulating consumption demand (through rural consumption) and (2) providing greater employment opportunities through higher capital expenditure in defense, railways, roads and rural and urban infrastructure. Rural consumers usually have a higher propensity to consume, which could be favorable for near-term consumption. We factor in expenditure growth at 7% in FY2021. However, we budget a decline of Rs1.1 tn in expenditure in FY2020 versus FY2020BE levels.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 25

India Strategy

 Revenue expenditure. The government will likely focus on rural schemes with an emphasis on employment generation and infrastructure creation. To that extent, we expect allocations to be skewed towards rural employment, rural infrastructure (roads and houses) and farm transfers among others. We pencil in 10% growth in rural development spends (MGNREGS, PMAY-Rural, and PMGSY) along with Rs750 bn in PM-KISAN scheme. Overall, we model revenue expenditure to increase by 7%.

 Capital expenditure. We assume capital expenditure growth at 5% in FY2021. We do not factor any reduction in FY2020 capital expenditure against budgeted levels. We pencil in 8% increase in roads and highways, 5% in railways along with 8% increase in urban development and 3% in defense expenditure. However, we note that a substantial portion of expenditure has shifted to the IEBR route, especially for NHAI and FCI (not all of which is related to capital expenditure though), as can be seen in Exhibit 28.

Exhibit 28: External borrowings have become as important as government budget for public capex Capex done through government budget and through EBR of central PSEs, March fiscal year-ends, 2011-20BE (Rs bn)

Central government capex Central PSE EBR 4,500 4,142 4,000

3,500 3,074 3,176 3,000 2,389 2,500 1,969 2,000 1,318 1,500 1,161 1,203 1,000 803 855

500

0 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

Notes: (a) EBR means Extra Budgetary Resources.

Source: CEIC, Kotak Institutional Equities

Interest rates: fiscal headwinds will continue

We expect gross market borrowing of around Rs8.2 tn in FY2021 against Rs7.7 tn in FY2020 (FY2020BE at Rs7.1 tn). For FY2020, the government will have to either borrow more (either through short-term or long-term borrowings) or finance through the small savings route or both. The government’s inability to achieve fiscal consolidation has induced structural problems in the overall interest rate environment. We have been highlighting the negative impact on monetary policy transmission (see Exhibit 29), banking system liquidity and overall transparency of public finances due to higher public sector borrowings as well as increasing reliance on small savings.

26 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Strategy India

Exhibit 29: Translation of repo movement to MCLR is faster than base rate SBI and HDFC base rate and MCLR versus repo rate

Repo SBI base rate SBI MCLR HDFCB Base rate HDFCB MCLR 11

Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19

Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19

Source: RBI, Kotak Institutional Equities

Even as the policy rate has been reduced by 135 bps, market interest rates have not seen a commensurate reduction in lending rates. Chances of further repo rate cuts appear dim in light of high inflation over the next few months (see Exhibit 30). We would note that spreads had narrowed marginally recently, given the Operation Twist by the RBI but it remains to be seen if the operation have further influence given that RBI has limited supply of bonds maturing in FY2021 (around Rs190 bn).

Exhibit 30: Food price inflation keeping headline inflation under check Headline and core CPI inflation (%)

CPI inflation Core CPI inflation 10

6 Mar-20: 6.2 Mar-21: 4.8

4 Mar-21: 4.7 Mar-20: 3.9 2

Jul-14 Jul-17 Jul-18 Jul-20 Jul-15 Jul-16 Jul-19

Jan-14 Jan-15 Jan-17 Jan-18 Jan-21 Jan-16 Jan-19 Jan-20

Oct-15 Oct-16 Oct-18 Oct-19 Oct-14 Oct-17 Oct-20

Apr-15 Apr-16 Apr-19 Apr-20 Apr-17 Apr-18 Apr-14

Source: CEIC, Kotak Institutional Equities estimates

A substantial portion of the increase in spreads between market rates and repo rate/G-Sec yields has been due to the public sector borrowing (center + state + PSEs), which has increased steadily over the past few years. In FY2021 too, the central PSEs will continue to borrow heavily through IEBR with certain expenditures passed on to these entities. Overall, we expect 10-year G-Sec yield to be in the range of 6.35-7% in FY2021.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 27 ADD HDFC Life Insurance (HDFCLIFE) Insurance JANUARY 23, 2020 RESULT Sector view: Attractive

Stable and balanced. HDFC Life reported 25% growth in VNB on the back of 19% APE CMP (`): 616 growth and moderate VNB expansion to 24.7% from 23.4% in 3QFY19. Its product Fair Value (`): 615 portfolio was more balanced with increase in share of par, post its newly launched BSE-30: 41,386 product, qoq reduction in non-par and 15% yoy growth in protection APE. HDFC Life’s ability to effectively toggle operating parameters to deliver strong growth remains its key strength, even as 3QFY20 VNB margin was a tad weaker. Retain positive stance, ADD with fair value of Rs615 (up from Rs605).

HDFC Life Insurance Stock data Forecasts/valuations 2020E 2021E 2022E 52-week range (Rs) (high,low) 646-344 EPS (Rs) 7.2 8.4 9.8 Mcap (bn) (Rs/US$) 1,244/17.5 EPS growth (%) 12.6 17.9 16.1 QUICK NUMBERS ADTV-3M (mn) (Rs/US$) 3,083/43 P/E (X) 86.0 73.0 62.9 Shareholding pattern (%) P/B (X) 19.8 17.9 16.0  Overall APE up 18% Promoters 71.2 BVPS (Rs) 31.1 34.5 38.5 yoy in 3QFY20; FIIs 15.9 RoE (%) 24.2 25.8 26.9 protection APE up MFs/BFIs 3.3/0.5 Div. yield (%) 0.3 0.3 0.4 Price performance (%) 1M 3M 12M NII (Rs bn) 124 148 174 15% yoy in 3QFY20 Absolute (0) 1 65 PPOP (Rs bn) 206 239 276 Rel. to BSE-30 1 (4) 44 Net profits (Rs bn) 14 17 20  VNB margins up 125 bps yoy to 24.7% The ‘balance of par’ (down 290 bps qoq)

th  Par business picks up. HDFC Life recently launched ‘Sanchay Par Advantage’, a new  13 month participating product that provides relatively higher equity allocation and immediate payouts persistency to policyholders. The share of par increased to 17% in 3QFY20 from 7.4% in 2QFY20, which is increased 460 bps likely driven by the aforesaid product. Moreover, par business has increased in direct and yoy to 88.8% (down online channels as well (up 80-130% qoq, on a low base), in addition to traditional channels 30 bps qoq) of intermediation.

 A more balanced mix. The par product has helped HDFC Life to achieve a more balanced product mix with par policies increasing to 17% of APE in 3QFY20, up from 7.4% in 1HFY20, and non-par reducing to 28.4% from peak of 51% in 1QFY20. Protection policies continue to remain around 16-17% for the past 7 quarters, likely indicating the increasing competition (on pricing and distribution payouts) in the open architecture.

 Margin expansion albeit moderate. HDFC Life’s overall VNB margins have hence expanded Nischint Chawathe yoy (125 bps yoy in 3QFY20 and 260 bps yoy in 9MFY20), reflecting (1) product mix change, in favor of high-margin traditional savings policies from ULIPs, (2) some margin pressure in protection business and (3) improvement in operating leverage. VNB margins have been M B Mahesh, CFA lower for past two quarters than peak of 29.8% in 1QFY20 and 25.4% in 2QFY20, due to reduction in share of non-par policies. Dipanjan Ghosh Retain positive stance

HDFC Life remains a highly profitable life insurance company with about 20-21% operating Venkat Madasu RoEV and 20% EVOP CAGR during FY2019-22E; this is supported by VNB margins of ~26%. Its dynamic product strategy, effective execution and its distribution partnerships will continue to support superior medium-term profitability, commanding rich valuations even as near-term Ashlesh Sonje stock performance may be muted. We retain ADD with AV-based fair value of Rs615 (4.1X EV December 2021E).

[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. Insurance HDFC Life Insurance

Exhibit 1: HDFC Standard Life – quarterly summary March fiscal year-ends, 3QFY19-3QFY20 (Rs mn)

% change YoY YoY 3QFY20 3QFY19 2QFY20 3QFY19 2QFY20 9MFY20 9MFY19 (%) 2020E 2019 (%) 2021E Policyholder's account (Rs mn) Premium 80,011 69,614 75,552 15 6 220,921 188,596 17 346,449 291,860 19 405,857 First 15,430 12,523 14,527 23 6 43,223 32,712 32 58,168 50,581 15 68,639 Renewal 37,656 33,090 35,668 14 6 99,423 89,199 11 163,818 142,146 15 188,688 Single 26,925 24,000 25,357 12 6 78,275 66,685 17 118,960 99,134 20 142,752 Net premium 78,543 68,977 74,537 14 5 217,591 186,765 17 343,698 289,240 19 402,968 Commissions (I) 3,520 2,623 3,655 34 (4) 10,397 7,241 44 13,748 11,177 23 16,119 First 2,573 1,778 2,679 45 (4) 7,836 5,070 55 7,839 Renewal 605 555 635 9 (5) 1,575 1,339 18 2,137 Single 342 289 341 18 0 986 832 18 1,200 Operating expenses (II) 10,600 9,243 10,955 15 (3) 30,363 25,947 17 39,525 38,136 4 44,326 Expenses of management (I+II) 14,119 11,866 14,611 19 (3) 40,760 33,188 23 53,273 49,312 8 60,445 Other income and trf. to shareholders a/c 619 206 696 201 (11) 1,637 1,126 45 6,292 4,840 30 8,180 Provisions and service taxes 1,850 1,013 1,198 83 54 4,787 3,569 34 41,912 7,994 424 52,390 Benefits paid 58,093 29,940 42,235 94 38 136,946 92,990 47 166,386 139,889 19 199,190 Net flows 5,099 26,363 17,189 (81) (70) 36,736 58,144 (37) 88,419 98,307 (10) 99,123 Income on investments 37,326 23,849 11,351 57 229 69,191 52,718 31 119,286 90,275 32 141,751 Change in liabilities 39,965 47,995 26,411 (17) 51 97,572 103,312 (6) 188,994 175,075 8 219,006 Surplus/deficit 2,460 2,217 2,130 11 16 8,354 7,551 11 18,711 13,507 39 21,868 Appropriations Transfer to shareholders account 1,691 1,769 2,203 (4) (23) 7,397 7,310 1 15,904 12,069 32 18,588 FFA 769 447 (73) 72 NM 957 241 296 2,807 1,438 95 3,280 Shareholders account Transfer from policyholders 1,691 1,769 2,203 (4) (23) 7,397 7,310 1 15,904 12,069 32 18,588 Total income 1,130 835 1,400 35 (19) 3,518 2,449 44 5,209 4,295 21 6,197 Investment income 1,130 835 — 2,118 2,356 (10) 4,998 4,084 22 5,986 Other expenses 155 20 280 666 (45) 455 98 364 3,985 278 1,333 4,582 Any other item 30 19 56 60 (46) 188 215 (12) 3,187 PBT 2,636 2,565 3,268 3 (19) 10,272 9,446 9 17,129 12,899 33 20,203 Tax 134 109 181 23 (26) 437 318 37 2,741 131 1,992 3,232 PAT 2,502 2,456 3,087 2 (19) 9,835 9,128 8 14,388 12,768 13 16,970 Tax rate (%) 5.1 4.2 5.5 84 bps -46 bps 4.3 3.4 89 bps 16.0 1.0 1498 bps 16.0

Source: Company, Kotak Institutional Equities estimates

PAT muted at 2% yoy, net flows down 81%

HDFC Life reported PAT of Rs9.8 bn, up 2% yoy. Increase in new business strain led to decline in underwriting profits (down 11% yoy) even as existing business surplus was up 22% yoy.

The company reported 18% yoy growth in APE. However, higher commissions (up 34% yoy) and benefit payouts (up 94% yoy) coupled with 15% increase in expenses led to 81% decline in net flows.

Exhibit 2: New business strain increased in 3QFY20 PAT and solvency ratio for HDFC Standard Life, March fiscal year-ends, 2016-19, 3QFY19-3QFY20 (Rs bn)

YoY YoY YoY 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 (%) 9MFY20 9MFY19 (%) 2016 2017 2018 2019 (%) PAT 2.5 3.6 4.2 3.1 2.5 2 9.8 9.1 8 8.1 8.9 11.1 12.8 15 Underwriting profits 1.8 1.8 3.5 2.0 1.6 (11) 7.1 7.2 (1) 6.8 7.5 8.5 9.0 6 New business strain (4.5) (5.7) (4.5) (5.1) (6.1) NM (15.7) (10.8) NM (7.7) (7.1) (10.6) (16.5) 56 Existing business surplus 6.3 7.5 8.0 7.1 7.7 22 22.8 18.0 27 14.5 14.6 19.1 25.5 34 Shareholder's surplus 0.7 1.8 0.7 1.1 0.9 37 2.7 1.9 42 1.3 1.4 2.6 3.8 45 Solvency (%) 191 188 193 192 195 400 bps 195 191 400 bps 198 192 192 188 -400 bps

Source: Company, Kotak Institutional Equities

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH HDFC Life Insurance Insurance

Exhibit 3: VNB margin moderates to 24.7% from 25-30% over the past three quarters March fiscal year-ends, 2015-19, 3QFY19-3QFY20 (Rs bn)

Act vs KS 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 YoY(%) 3QFY20E (%) 9MFY20 9MFY19 YoY (%) 2015 2016 2017 2018 2019 YoY(%) APE 15.4 22.1 17.1 17.6 18.2 18 19.0 (4) 53.0 40.5 30.8 47.4 37.2 41.9 55.3 62.6 13 Savings APE 12.7 18.4 14.1 14.9 15.2 19 44.1 33.8 30.6 46.7 34.5 38.6 49.1 52.1 6 Protection APE 2.7 3.7 3.0 2.8 3.1 15 8.9 6.7 31.8 0.8 2.7 3.3 6.2 10.5 67 % of APE 17.3 16.9 17.8 15.7 16.8 -47 bps 16.7 16.6 13 bps 1.6 7.3 7.8 11.3 16.7 540 bps VNB 3.6 5.7 5.1 4.5 4.5 25 4.9 (7) 14.1 9.7 44.9 2.7 7.4 9.2 12.8 15.4 20 VNB margin (%) 23.4 25.6 29.8 25.4 24.7 124 bps 25.5 -86 bps 26.6 24.0 259 bps 5.7 19.9 22.0 23.1 24.6 141 bps EV 174.0 183.0 192.3 201.2 208.4 20 208.4 174.0 19.8 138.2 102.3 124.7 152.1 183.0 20

Source: Company

Traditional business up yoy; non-par lower than 1Q

HDFC Life reported 18% yoy growth in APE in 3QFY20 to Rs18.2 bn on the back of (1) 1.9X yoy growth in non-par savings business and (2) 15% yoy growth in protection business.

On a qoq basis, APE declined 24% for the non-par savings business, while par APE was up 21.5%. The company had moderated growth in non-par savings from 2Q onwards post recording sharp increase in 1Q. Share of non-par savings declined to 28% in 3QFY20 from 38% in 2QFY20 and 51% in 1QFY20. Management guided that the company has broadly achieved FY2020E target for this segment and non-par growth may further reduce in 4QFY20E.

Growth in the protection business was led by strong increase in group protection business (up ~30% yoy) while individual business was broadly flat yoy; this led to 15% yoy growth in overall protection APE. Increase in competition has been one of the concerns highlighted by the management for relatively muted growth in this segment. Share of protection in bancassurance channel is low at 5%, though higher than 2% in the past—this remains a concerted area of focus for the management. The company was a laggard in limited pay products and is gradually ramping up in this segment.

ULIP APE declined 35% yoy reflecting shifting focus to other products and weakness in capital markets.

The company has launched a new participating product in 3QFY20. Amid moderation in growth from non-par savings and moderate rise in protection, strong volumes in the new product will support overall APE growth in 4QFY20E. As such, share of participating policies will likely increase in the near term.

Exhibit 4: Share of non-par savings business drops further Product-wise break-up of APE, March fiscal year-ends, 2015-19, 3QFY19-3QFY20

3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 YoY (%) 9MFY20 1HFY19 YoY (%) 2015 2016 2017 2018 2019 YoY (%) Product-wise break-up of APE (Rs bn) Individual savings 11.7 17.1 13.1 12.4 13.2 12 38.7 31.3 24 28.0 34.5 35.9 46.0 48.4 5 ULIP 7.5 8.8 3.6 3.9 4.9 (35) 12.3 19.8 (38) 18.7 18.6 19.4 27.9 28.6 3 PAR 2.5 2.0 0.8 1.8 3.1 24 5.7 7.4 (22) 6.2 10.0 13.1 13.7 9.4 (32) Non-par 1.8 6.3 8.7 6.8 5.2 193 20.7 4.1 406 3.3 3.0 3.4 4.4 10.4 136 Group savings 1.0 1.3 1.0 2.5 2.0 101 5.4 2.5 117 (0.2) 2.8 2.7 3.1 3.8 23 Protection 2.7 3.7 3.0 2.8 3.1 15 8.9 6.7 32 2.0 2.7 3.3 6.2 10.5 67 Individual protection 1.2 1.2 0.7 1.0 1.2 (1) 2.9 2.7 8 3.9 Group protection 1.4 2.5 2.4 1.7 1.8 30 5.9 4.0 48 6.5 Share of total APE (%) Individual savings 76.3 77.3 76.6 70.4 72.2 -404 bps 73.0 77.2 -421 bps 93.3 92.7 85.7 83.1 77.3 -6 bps ULIP 48.4 39.6 21.0 21.9 26.6 -2176 bps 23.2 49.0 -2576 bps 62.4 50.1 46.4 50.4 45.7 -5 bps PAR 16.4 9.1 4.8 9.9 17.2 79 bps 10.8 18.2 -738 bps 20.8 26.9 31.2 24.8 15.0 -10 bps Non-par 11.5 28.6 50.8 38.5 28.4 1694 bps 39.0 10.1 2893 bps 10.9 8.1 8.0 8.0 16.6 9 bps Group savings 6.5 5.8 5.7 14.0 11.0 450 bps 10.3 6.2 408 bps (0.7) 7.6 6.5 5.6 6.0 0 bps Protection 17.3 16.9 17.8 15.7 16.8 -47 bps 16.7 16.6 13 bps 6.7 7.3 7.8 11.3 16.7 5 bps

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 5 Insurance HDFC Life Insurance

Exhibit 5: Share of non-par savings is high through bancassurance channel Channel-wise product mix based on individual APE, March fiscal year-ends, 2017-19, 1QFY20-3QFY20 (%)

2017 2018 2019 1QFY20 2QFY20 3QFY20 Bancassurance ULIP 61 64 67 31 35 42 Participating 30 26 14 5 11 17 Non-par savings 8 8 5 60 52 40 Term 1 1 2 2 2 2 Annuity — 1 2 2 2 2 Agency ULIP 26 33 26 7 9 21 Participating 57 48 40 9 25 46 Non-par savings 6 5 17 73 54 19 Term 11 11 12 8 10 12 Annuity 2 3 5 2 2 5 Direct ULIP 47 58 50 34 32 33 Participating 29 17 8 2 9 17 Non-par savings 11 9 12 29 29 15 Term 6 5 6 4 4 4 Annuity 7 11 24 31 25 28 Online ULIP 51 47 43 40 33 19 Participating 3 1 1 — 9 22 Non-par savings 1 — 15 28 26 24 Term 45 52 34 26 30 31 Annuity — — 6 6 2 1 Company ULIP 53 57 55 26 26 31 Participating 35 28 18 6 12 20 Non-par savings 8 7 15 58 51 34 Term 4 5 7 5 7 8 Annuity 1 2 5 5 3 4

Source: Company, Kotak Institutional Equities

Exhibit 6: Cost/APE dropped 240 bps qoq in 3QFY20 Quarterly summary, March fiscal year-ends, 2015-19, 3QFY19-3QFY20

YoY YoY YoY 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 (%) 9MFY20 9MFY19 (%) 2015 2016 2017 2018 2019 (%) Key financials (Rs mn) Premium 69,614 103,265 65,358 75,552 80,011 15 220,921 188,596 17 148,299 163,130 194,455 235,644 291,860 23.86 First year 12,523 17,869 13,266 14,527 15,430 23 43,223 32,712 32 36,570 47,385 50,581 7 Renewal 33,090 52,947 26,098 35,668 37,656 14 99,423 89,199 11 108,245 122,148 142,146 16 Single 24,000 32,449 25,994 25,357 26,925 12 78,275 66,685 17 49,640 66,112 99,134 50 APE 14,923 21,114 15,865 17,063 18,122 21 51,050 39,381 30 41,534 53,996 60,495 12 Commissions (I) 2,623 3,935 3,222 3,655 3,520 34 10,397 7,241 44 6,235 7,019 7,920 10,749 11,177 4 First year 1,778 2,769 2,585 2,679 2,573 45 7,836 5,070 55 6,469 8,702 7,839 (10) Renewal 555 798 335 635 605 9 1,575 1,339 18 1,377 1,550 2,137 38 Single 289 368 303 341 342 18 986 832 18 74 497 1,200 141 Operating expenses (II) 9,243 12,189 8,808 10,955 10,600 15 30,363 25,947 17 14,888 18,718 23,853 31,593 38,136 21 Expenses of management (I+II) 11,866 16,124 12,030 14,611 14,119 19 40,760 33,188 23 21,123 25,737 31,773 42,342 49,312 16 AUM (Rs bn) 1,177 1,256 1,296 1,310 1,365 16 1,365 1,177 16 671 743 917 1,066 1,256 18 Key calculated ratios (%) Cost/APE 24.7 21.8 28.7 27.7 25.3 60 bps 27 26 128 bps 21 24 24 30 bps Cost/average AUM 4.1 5.3 3.8 4.5 4.2 11 bps 4.1 3.9 20 bps 3.6 3.6 3.8 4.3 4.2 -2 bps Net commission ratio 5.5 5.3 7.7 6.9 6.3 85 bps 6.9 5.6 128 bps 5.3 6.1 5.5 -59 bps First year 14.2 15.5 19.5 18.4 16.7 247 bps 18.1 15.5 263 bps 17.7 18.4 15.5 -287 bps Renewal 1.7 1.5 1.3 1.8 1.6 -7 bps 1.6 1.5 8 bps 1.3 1.3 1.5 23 bps Single 1.2 1.1 1.2 1.3 1.3 7 bps 1.3 1.2 1 bps 0.1 0.8 1.2 46 bps

Source: Company, Kotak Institutional Equities

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH HDFC Life Insurance Insurance

Persistency has improved across most buckets

HDFC Life’s persistency has improved across most buckets on yoy basis in 3QFY20. 13th month persistency increased 460 bps yoy to 88.8% and 25th month persistency increased to 80.2% (up 160 bps yoy). On a sequential basis, persistency ratios dropped marginally in early buckets most likely due to rising surrenders from ULIPs. HDFC Life’s reported persistency ratios are higher compared to most peers across similar buckets and above the company’s assumptions. As such, HDFC Life will likely report positive operating persistency variance.

Exhibit 7: Persistency ratio improved in all buckets yoy except 49th Persistency in individual segment, March fiscal year-ends. 2018-19, 3QFY19-3QFY20 (%)

3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 YoY 9MFY20 9MFY19 YoY 2018 2019 YoY 13th month 84.2 87.1 88.8 89.3 88.8 460 bps 89.7 86.4 330 bps 87.1 87.2 10 bps 25th month 78.6 78.9 77.6 77.7 80.2 160 bps 80.0 79.8 20 bps 77.4 80.5 310 bps 37th month 68.5 71.2 71.4 74.5 71.5 300 bps 73.4 71.9 150 bps 70.9 72.0 110 bps 49th month 65.2 68.8 67.3 65.2 63.6 -160 bps 67.7 65.7 200 bps 62.2 67.7 550 bps 61st month 49.1 53.7 55.5 54.6 52.6 350 bps 54.7 50.1 460 bps 51.0 52.3 130 bps

Source: Company, Kotak Institutional Equities

Non-core channels gather pace

HDFC Life continues to focus on diversification of channel mix. The share of direct and other channels has increased to 31% of overall individual APE from 23% in FY2019. Additionally, the company remains focused on growing the agency channel; agency business was up 350 bps yoy to 15% of individual APE. Share of bancassurance continued its downward trajectory, although still dominant at 52% of individual APE (down 1,650 bps yoy/up 190 bps qoq). Number of individual agents increased to 97,691 (up 10% yoy) from 93,627 in 1QFY20 and 91,172 in FY2019.

Exhibit 8: Strong traction in non-core channels Channel-wise total individual new business premium, March fiscal year-ends, 2015-19, 3QFY19-3QFY20 (%)

3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 (change) 9MFY20 9MFY19 (change) 2015 2016 2017 2018 2019 (change) Individual agents 11 16 15 15 12 88 bps 14 11 275 bps 13 12 12 11 13 225 bps Bancassurance 67 58 56 52 57 -1038 bps 55 67 -1225 bps 73 75 72 71 64 -675 bps Direct 17 22 20 22 21 375 bps 21 17 375 bps 9 9 11 14 19 525 bps Brokers and others 4 4 9 11 10 575 bps 10 4 575 bps 5 4 5 5 4 -75 bps

Source: Company, Kotak Institutional Equities

Exhibit 9: Share of equity has dropped over the years AUM mix of HDFC Standard Life, March fiscal year-ends, 2015-19, 1QFY20-3QFY20

AUM (Rs bn) Share of total (%) 2015 2016 2017 2018 2019 1QFY20 2QFY20 3QFY20 2015 2016 2017 2018 2019 1QFY20 2QFY20 3QFY20 Equity mix Equity 322 290 376 416 477 492 485 505 48 39 41 39 38 38 37 37 Debt 349 453 541 650 778 803 825 860 52 61 59 61 62 62 63 63

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 7 Insurance HDFC Life Insurance

Exhibit 10: Change in estimates for HDFC Life March fiscal year-ends, 2020-22E (Rs bn)

New estimates Old estimates New versus old (%) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E APE 80.1 94.6 111.6 79.5 93.0 108.8 0.8 1.6 2.5 Opening EV 183.0 216.6 258.6 183.0 219.2 261.7 — (1.2) (1.2) VNB 21.0 24.6 29.0 21.1 25.0 29.0 (0.5) (1.6) — Expected return in force 14.6 17.3 20.7 14.3 17.1 20.4 2.6 1.4 1.3 Opearting variance 1.5 2.0 2.5 2.0 2.5 3.0 (25.0) (20.0) (16.7) Investment variance — 2.0 2.0 2.5 2.2 2.2 (100.0) (9.1) (9.1) Dividend payout (3.5) (4.0) (4.0) (3.7) (4.3) (4.6) NM NM NM Closing EV 216.6 258.6 308.8 219.2 261.7 311.7 (1.2) (1.2) (1.0) EVOP 37.1 43.9 52.2 37.4 44.6 52.4 (0.6) (1.5) (0.4) VNB margin (%) 26.2 26.0 26.0 26.5 26.9 26.6 -33 bps -86 bps -65 bps RoEV (%) 18.4 19.4 19.4 19.8 19.4 19.1 -138 bps -6 bps 30 bps Opearating RoEV (%) 20.3 20.3 20.2 20.4 20.3 20.0 -13 bps -7 bps 16 bps

Source: Life Insurance Council

Exhibit 11: We expect 20% operating RoEV and VNB margin of ~26% for HDFC Life Key metrics and RoEV movement, March fiscal year-ends, 2013-22E (Rs bn)

2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Comments APE 32.8 25.4 29.5 36.1 41.9 55.3 62.6 80.1 94.6 111.6 We assume 16-17% APE growth for FY2021-22E YoY (%) 17.6 (22.6) 16.1 22.4 16.1 32.0 13.2 28.0 18.0 18.0 VNB 6.0 6.6 7.4 7.4 9.2 12.8 15.4 21.0 24.6 29.0 YoY (%) 27.7 10.0 12.1 24.3 39.1 20.3 36.4 17.1 17.9 EV movement Opening EV 48.2 58.7 69.9 88.9 102.3 124.7 152.2 183.0 216.6 258.6 Methodology changes 0.6 1.6 3.5 Assumption change 0.1 1.2 1.6 VNB 6.0 6.6 7.4 7.4 9.2 12.8 15.4 21.0 24.6 29.0 Expected return in force 3.9 4.4 6.1 8.1 9.6 10.4 13.0 14.6 17.3 20.7 Unwinding at 8% Operating variance 0.6 (0.1) (0.3) 3.2 2.2 2.0 2.2 1.5 2.0 2.5 Better persistency, mortality and expenses Tax changes 1.1 EVOP 9.6 11.1 15.3 18.7 22.2 26.8 30.6 37.1 43.9 52.2 Investment variance 0.9 1.3 4.6 (3.1) 2.5 2.6 3.6 — 2.0 2.0 Dividend payout (1.2) (1.7) (2.2) (2.4) (2.0) (3.4) (3.5) (4.0) (4.0) Closing EV 58.7 69.9 88.1 102.3 124.6 152.1 183.0 216.6 258.6 308.8 Key ratios (%) VNB margins 13.2 16.4 17.4 20.5 22.0 23.1 24.6 26.2 26.0 26.0 VNB margins at ~26% RoEV 21.8 19.1 26.0 16.2 21.8 22.0 20.3 18.4 19.4 19.4 Operating RoEV 19.9 18.9 21.9 21.2 21.7 21.5 20.1 20.3 20.3 20.2

Source: Company, Kotak Institutional Equities estimates

8 KOTAK INSTITUTIONAL EQUITIES RESEARCH HDFC Life Insurance Insurance

Exhibit 12: We forecast 22% operating RoEV in 4QFY20E EV walk, March fiscal year-ends, 2015-20E (Rs bn)

1HFY15 2HFY15 1HFY16 2HFY16 1HFY17 2HFY17 1HFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 YoY (%) 4QFY20E YoY (%) 9MFY19 9MFY20 YoY (%) Opening EV 69.9 77.0 88.1 94.5 102.3 113.2 152.2 163.8 174.0 183.0 192.3 201.3 23 208.5 20 152 183.0 20.24 Methodology changes (0.4) 3.9 (0.2) 0.2 0.2 (0.2) — 0.0 VNB 2.4 5.0 3.4 4.0 3.5 5.7 6.1 3.6 5.7 5.1 4.5 4.5 25 6.9 21 10 14.1 45 Acquisition expense ovcerrun (0.8) (0.7) — 0.0 Expected return in force 3.1 3.0 4.0 4.1 4.3 5.3 7.0 3.7 2.3 3.2 3.7 3.8 3 3.9 71 11 10.7 — Operating variance (0.7) 0.4 (0.3) 0.3 0.9 1.3 1.3 0.9 0.0 0.2 0.4 0.4 (61) 0.5 2 1.0 (55) Tax changes — — 0.0 Investment variance 3.5 1.1 (0.5) (2.6) 2.2 0.3 (2.8) 2.0 4.4 0.8 0.3 (1.4) (170) 0.3 (93) (1) (0.3) NM Dividend payout (1.7) (0.2) (2.2) (3.4) 0.0 0.0 0.0 (3.5) NM — 0.0 Closing EV 77.0 88.0 94.5 100.5 113.2 123.4 164 174 183 192 201 209 20 217 18 174 209 20 EVOP 3.6 11.6 6.9 8.6 8.9 12.1 14.4 8.2 8.0 8.5 8.7 8.7 5 11.3 42 23 26 14 RoEV 20 29 15 13 21 18 15.3 24.9 20.7 20.3 18.6 14.4 -1050 bps 15.6 -507 bps 19.1 18.6 -52 bps Operating RoEV 10.3 30.1 15.7 18.2 17.4 21.4 18.9 20.0 19.5 18.6 18.0 17.2 -283 bps 21.8 222 bps 19.8 18.8 -100 bps Other details APE 10.8 18.7 13.1 23.0 14.7 27.2 25.1 15.4 22.1 17.1 17.6 18.2 18 27.2 23 41 53.0 31 YoY (%) 21.3 23.0 12.4 18.1 22.0 6.9 10.9 66 19 18.4 23 31 VNB 1.9 4.7 2.4 3.0 3.5 5.7 6.1 3.6 5.7 5.1 4.5 4.5 25 6.9 22 10 14.1 45 YoY (%) 26.3 (36.2) 45.8 90.0 27.1 20.0 13.4 104 24 25.0 22 45 VNB margins (%) 17.6 25.1 18.3 13.0 23.8 21.0 24.3 23.4 25.7 29.8 25.4 24.7 131 bps 25.5 -19 bps 24 26.6 264 bps Effective unwinding rate (%) 8.9 7.8 9.1 8.7 8.4 9.4 9.2 9.0 5.3 7.0 7.7 7.6 -148 bps 7.6 227 bps 9.4 7.8 -158 bps

Source: Company, Kotak Institutional Equities

Exhibit 13: We value HDFC Life at 4.1X EV FY2021E Calculation of appraisal value for HDFC Life, March fiscal year-ends, 2021-22E

2021E 2022E Embedded value (EV, Rs bn) 259 309 Value of new business (VNB, Rs bn) 25 29 New business multiple (NBM, X) 33.0 33.0 Structural value (SV= VNB X NBM, Rs bn) 811 956 Appraisal value (AV= EV + SV, Rs bn) 1,070 1,265 Appraisal value/ EV (X) 4.1 4.1 Appraisal value/ VNB (X) 43.5 43.6 Value of HDFC Life (Rs/ share) 534 632

Source: Company, Kotak Institutional Equities

Exhibit 14: HDFC Standard Life trades at premium to peers Valuation comparison of life insurance companies in India, March fiscal year-ends, 2018-22E (Rs bn)

Market Price cap. Embedded value (Rs bn) VNB margin (%) Price/EV (X) Price/VNB (X) Price/EVOP (X) Operating RoEV (%) (Rs) (Rs bn) 2018 2019 2020E 2021E 2022E 2018 2019 2020E 2021E 2022E 2018 2019 2020E 2021E 2022E 2018 2019 2020E 2021E 2022E 2018 2019 2020E 2021E 2022E 2018 2019 2020E 2021E 2022E HDFC Life 616 1,243 152 183 217 259 309 23 25 26 26 26 8.2 6.8 5.7 4.8 4.0 97 81 59 51 43 46 41 33 28 24 21.5 20.1 20.3 20.3 20.2 ICICI Prudential Life 508 729 188 216 246 280 322 17 17 20 22 22 3.9 3.4 3.0 2.6 2.3 57 55 44 37 33 20 19 20 17 15 22.7 20.2 17.2 17.7 17.7 Max Life 518 140 75 89 102 115 130 20 22 22 21 22 2.6 2.2 1.9 1.7 1.5 30 23 19 17 14 14 12 10 9 8 20.6 21.9 21.1 20.7 21.1 SBI Life 986 986 191 224 262 309 365 16 18 19 20 20 5.2 4.4 3.8 3.2 2.7 71 57 42 34 27 33 30 25 20 17 17.9 17.3 18.0 18.5 19.0

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 9 SELL AU Small Finance Bank (AUBANK) Banks JANUARY 23, 2020 RESULT Sector view: Attractive

Racing along. AU SFB reported ~100% yoy earnings growth on the back of ~75% yoy CMP (`): 975 operating profit growth. Despite all headwinds in business, AUM growth has been Fair Value (`): 625 strong at 37% yoy, NIM expanded qoq (10 bps), cost-income ratio saw marginal BSE-30: 41,386 improvement qoq and asset quality showed improvement. However, valuation is quite expensive and more than captures this strong execution. Maintain SELL with fair value at Rs625 (Rs550 earlier).

AU Small Finance Bank Stock data Forecasts/valuations 2020E 2021E 2022E 52-week range (Rs) (high,low) 1,008-541 EPS (Rs) 24.4 28.5 36.2 Mcap (bn) (Rs/US$) 296/4.2 EPS growth (%) 86.7 17.0 27.0 ADTV-3M (mn) (Rs/US$) 490/7 P/E (X) 40.0 34.2 26.9 QUICK NUMBERS Shareholding pattern (%) P/B (X) 6.7 5.6 4.6 Promoters 32.1 BVPS (Rs) 146.4 174.6 211.0  NII up 46% yoy; FIIs 27.4 RoE (%) 19.0 17.1 18.2 PAT up 100% yoy MFs/BFIs 12.1/3.7 Div. yield (%) 0.0 0.0 0.0 in 3QFY20 Price performance (%) 1M 3M 12M NII (Rs bn) 19 26 34 Absolute 23 40 48 PPOP (Rs bn) 12 15 19 Rel. to BSE-30 24 32 30 Net profits (Rs bn) 7 9 11  GNPL ratio down 10 bps qoq to 1.9%; Trends hold up in all operating metrics; a solid performance overall NNPL ratio down 10 bps qoq to 1.1% AU SFB reported a solid performance with improvement in all operating metrics. The bank reported ~100% yoy earnings growth on the back of ~75% yoy growth in operating profit.  Maintain SELL with Revenue growth of 47% yoy outpaced growth in operating expenses at ~30% yoy. NII grew fair value at Rs625 ~45% yoy on the back of 37% yoy AUM growth led by improving NIM qoq. Retail AUM grew (from Rs550 earlier) ~45% yoy while wholesale AUMs grew ~8% yoy. NIM (calculated) increased ~10 bps qoq to 5.4%. Core fee income growth was strong at 40% yoy. Cost-to-income ratio (adjusted) showed a significant improvement (down ~70 bps qoq to 53%). Asset quality was marginally better qoq with gross NPLs down 10 bps to 1.9% and net NPLs down 10 bps qoq to 1.0%. Slippages for the quarter were lower qoq at 2.1%. Deposits grew ~65% yoy on the back of 70% yoy growth in retail TDs while CASA growth was modest at ~25%. Consequently, CASA ratio improved marginally qoq by 100 bps to ~17% of total deposits.

Asset quality improves and growth holds up impressively despite all challenges

Heading to the quarter, there was apprehension of a possible deterioration in the bank’s asset quality along with a slowdown in loan growth reflecting the underlying trends of the economy, M B Mahesh, CFA which would have an impact on select product segments of the bank’s loan book. However, we are positively surprised that the bank has been able to report an improvement in asset Nischint Chawathe quality. The bank is likely to have a tailwind in lower cost of funds while the focus on higher- yielding vehicle finance portfolio should keep NIM at elevated levels. Our upward revision to estimates is primarily to factor these changes. Dipanjan Ghosh Maintain SELL: current valuations adequately factor this improvement

We maintain SELL rating with a revised fair value of Rs625 (from Rs550 earlier). At our FV, Venkat Madasu we are valuing the bank at 3X book and ~20X December 2021E EPS for RoEs closer to 17% in the medium term. We find valuations expensive at current levels given the higher cost of equity to reflect the risk of the businesses. There is a concentration of business, geography while Ashlesh Sonje liabilities are still in its early stages as the bank is still quite new. There is a shift in strategy on liabilities with a greater emphasis on term deposits, which is not negative outcome today. From an RoE standpoint, the bank is well-positioned for RoE expansion.

[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. AU Small Finance Bank Banks

Exhibit 1: AU SFB – quarterly summary March fiscal year-ends, 3QFY19-3QFY20 (Rs mn)

(% chg.) 3QFY20 3QFY20E 3QFY19 2QFY20 3QFY20E 3QFY19 2QFY20 9MFY20 9MFY19 (% chg.) 2020E 2019 (% chg.) 2021E Income statement (Rs mn) Interest income 11,116 10,866 7,883 10,334 2.3 41.0 7.6 31,024 20,720 49.7 43,001 29,488 45.8 56,714 Interest/Discount on Advances/Bills 8,833 8,717 6,303 8,101 1.3 40.1 9.0 24,621 16,412 50.0 33,977 23,503 44.6 45,132 Interest on Investment 1,546 1,594 739 1,557 (3.0) 109.2 (0.7) 4,535 1,833 147.4 6,366 2,741 132.2 9,526 Interest on bal. with RBI & other inter bank funds 57 51 145 46 145 359 2,658 3,245 2,056 Other Interest 681 504 696 630 35.1 (2.1) 8.1 Interest expense 6,048 6,116 4,404 5,818 (1.1) 37.3 3.9 17,484 11,166 56.6 23,923 16,066 48.9 30,285 Net interest income 5,068 4,750 3,480 4,516 6.7 45.7 12.2 13,540 9,554 41.7 19,078 13,423 42.1 26,429 Non interest income 1,612 1,377 1,059 1,508 17.1 52.2 6.9 5,229 3,315 57.8 7,045 4,620 52.5 7,996 Total income 6,681 6,127 4,539 6,024 9.0 47.2 10.9 18,769 12,869 45.9 26,123 18,043 44.8 34,425 Operating expenses 3,552 3,633 2,752 3,247 (2.2) 29.1 9.4 9,956 7,806 27.5 13,966 10,824 29.0 19,188 Employee expenses 1,871 1,996 1,512 1,821 (6.3) 23.7 2.7 5,551 4,415 25.7 7,661 6,011 27.4 10,204 Other expenses 1,681 1,637 1,240 1,425 2.7 35.6 17.9 4,404 3,391 29.9 6,305 4,813 31.0 8,984 Operating profit 3,128 2,494 1,787 2,777 25.4 75.1 12.7 8,814 5,062 74.1 12,157 7,219 68.4 15,237 Provisions 401 732 325 610 (45.2) 23.6 (34.3) 1,326 1,025 29.3 2,246 1,418 58.4 3,645 NPLs 150 288 220 240 (31.8) (37.5) PBT 2,727 1,762 1,462 2,167 54.8 86.5 25.9 7,488 4,037 85.5 9,911 5,801 70.8 11,593 Tax 825 451 509 447 83.0 62.2 84.5 1,963 1,401 40.1 2,537 1,983 27.9 2,968 Net profit 1,902 1,311 953 1,719 45.1 99.5 10.6 5,525 2,636 109.6 7,374 3,818 93.1 8,625 Tax rate (%) 30.3 25.6 34.8 20.7 466 bps -454 bps 961 bps 26.2 34.7 -849 bps 25.6 34.2 -859 bps 25.6 Key balance sheet items (Rs bn) Total deposits 239 237 147 221 0.7 62.5 7.7 239 147 62.5 266 194 37.0 398 Savings deposits 28 24 26 15.2 7.7 28 24 15.2 36 25 42.3 55 Current deposits 9 5 7 78.9 29.3 9 5 78.9 16 11 49.3 26 Term deposits 201 117 188 71.6 6.9 201 117 71.6 214 158 35.3 316 CASA ratio (%) 17.0 24.0 16.0 -700 bps 100 bps Investments 85.9 90 56.0 84.3 (4.8) 53.4 1.8 85.9 56.0 53.4 105.2 71.6 46.9 167.0 AUM 299 297 218 279 0.7 37.2 7.1 299 218 37.2 315 239 31.8 405 Retail Assets 243 175 220 38.7 10.2 243 175 38.7 254 188 35.0 331 Wholesale Assets 50 42 53 17.6 (5.9) 50 42 17.6 61 51 20.0 75 Asset quality (Rs mn) Gross NPL 5,040 4,207 5,038 19.8 0.0 5,040 4,207 19.8 5,868 4,700 24.8 7,632 Net NPL 2,681 2,626 2,829 2.1 (5.2) 2,681 2,626 2.1 2,447 2,945 (16.9) 2,615 Gross NPL (%) 1.9 2.1 2.0 -21 bps -13 bps 1.9 2.1 2.0 2.0 2.0 Net NPL (%) 1.0 1.3 1.1 -30 bps -13 bps 1.0 1.3 0.8 1.3 0.7 PCR (%) 47 38 44 922 bps 294 bps 47 38 58 37 66 Slippage 1,300 1,030 1,420 26.2 (8.5) 4,120 2,973 38.6 5,455 4,493 21.4 7,180 Slippage (%) 2.1 2.3 2.5 -18 bps -36 bps 2.4 3.0 2.3 3.4 2.3 Capital adequecy (%) CAR 19.3 19.0 17.9 30 bps 140 bps 19.0 19.3 Tier- I 16.5 15.5 14.9 100 bps 160 bps 15.5 16.0 RWA (Rs bn) 215.6 171.4 201.3 171 191 RWA/assets (including off book) 51.7 58.3 51.8 58.3 56.4 Key calculated ratios (%) Yield on AUM 12.2 12.1 12.0 12.1 23 bps 12 bps 12.1 11.6 56 bps 12.3 11.8 49 bps 12.5 Yield on investment 7.3 7.3 6.2 7.4 110 bps -14 bps 7.7 5.7 203 bps 7.2 5.4 183 bps 7.0 Cost of funds 7.6 7.7 8.0 7.8 NA NA 7.7 7.6 8 bps 7.4 7.4 3 bps 6.8 NIM 5.5 5.1 5.3 5.2 17 bps 27 bps 5.1 5.5 -38 bps 5.0 5.2 -17 bps 5.1 Cost-income 53.2 59.3 60.6 53.9 -747 bps -73 bps 53.0 60.7 -762 bps 53.5 60.0 -653 bps 55.7 CD ratio 111.3 112.0 136.2 112.0 -2485 bps -67 bps 111.3 136.2 -2485 bps 109.0 117.5 -850 bps 97.8 RoA 2.1 1.5 2.0 60 bps 7 bps 2.1 1.5 57 bps 2.0 1.5 47 bps 1.7 RoE 19.5 12.8 20.0 670 bps -56 bps 19.8 13.2 654 bps 19.0 14.0 497 bps 17.1

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11 Banks AU Small Finance Bank

Strong growth in AUM with a declining share of wholesale assets

 Strong growth in AUM at 37% yoy in 3QFY20. AU SFB reported strong growth in AUM at 37% yoy driven by continued robust traction in retail loans (up 46% yoy) while growth in wholesale assets has slowed further to ~8% yoy in 3QFY20. Weaker growth in wholesale assets was mainly driven by decline in loans to NBFCs (down 12% yoy) and a slowdown in real estate lending (up ~8% yoy/flat qoq) while growth remained strong in agri SME (up ~30% yoy/~5% qoq) and business banking (up ~45%/~7% qoq). Within retail, swifter growth in the used vehicle segment (~70% yoy) has helped deliver continued strong overall growth in vehicle finance AUM (up ~35% yoy) with new vehicles segment slowing to ~16% yoy. SBL-MSME loan book maintained strong growth rate of ~50% yoy and housing loans grew 10X yoy (~40% qoq) on a low base. Overall disbursements grew at ~20% yoy, dragged down by wholesale disbursements (down ~30% yoy) while retail asset disbursements grew at ~40% yoy. Incremental disbursement growth on the wholesale side has come from agri SME and business banking.

 Slight moderation in AUM growth over medium term. We forecast ~30% CAGR in AUM over FY2020-22E as effect of low base gradually fades off. We expect retail loans to continue to grow at ~33% over FY2020-22E and wholesale asset growth to revive to ~20%.

Exhibit 2: AUM growth strong at 37% yoy in 3QFY20 Exhibit 3: Disbursements up 20% yoy in 3QFY20 Assets under management, March fiscal year-ends, 3QFY18-3QFY20 Disbursements, March fiscal year-ends, 3QFY18-3QFY20

(Rs bn) AUM (LHS) YoY (RHS) (%) (Rs bn) Disbursements (LHS) YoY (RHS) (%) 60 100 300 100 91

240 80 48 80 64 62 63 65 56 180 51 60 36 60 44 38 37 40 120 40 24 40 20 15 21 60 20 12 20

108 123 134 160 177 202 218 242 256 279 299 15 25 26 42 29 41 40 50 40 47 49

0 0 0 0

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

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

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

12 KOTAK INSTITUTIONAL EQUITIES RESEARCH AU Small Finance Bank Banks

Exhibit 4: Share of wholesale assets has been declining over the past three quarters Segment-wise AUM growth and mix, March fiscal year-ends, 1QFY19-3QFY20

1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 YoY (%) AUM (Rs bn) Wheels 77.1 85.5 93.5 102.2 108.1 114.3 124.1 33 SBL-MSME 56.6 62.3 69.3 78.7 85.1 95.3 104.7 51 Home loans 0.0 0.1 0.4 1.2 2.1 3.3 4.6 1,055 GL+CD+PL 0.4 0.5 0.5 0.6 0.8 1.3 1.9 271 OD against FD 1.1 5.1 3.0 5.5 5.2 6.4 7.7 155 Total Retail Assets 135.2 153.5 166.7 188.1 201.2 220.5 243.0 46 REG 7.5 7.2 7.6 8.0 8.0 8.2 8.2 8 BB 4.7 5.5 6.6 8.1 8.1 9.0 9.6 45 Agri SME 7.7 7.7 8.6 9.9 10.0 10.7 11.3 31 NBFC 18.2 26.0 23.6 25.1 25.8 25.1 20.9 (12) Total SMC assets 38.0 46.5 46.4 51.1 51.9 53.0 49.9 8 Treasury lending 4.3 2.3 4.6 3.3 3.0 5.3 5.8 26 Total AUM 177.5 202.2 217.7 242.5 256.1 278.8 298.7 37 AUM mix (%) Wheels 43 42 43 42 42 41 42 -142 bps SBL-MSME 32 31 32 32 33 34 35 324 bps Home loans 0 0 0 0 1 1 2 136 bps GL+CD+PL 0 0 0 0 0 0 1 40 bps OD against FD 1 3 1 2 2 2 3 119 bps Total Retail Assets 76 76 77 78 79 79 81 477 bps REG 4 4 4 3 3 3 3 -76 bps BB 3 3 3 3 3 3 3 18 bps Agri SME 4 4 4 4 4 4 4 -18 bps NBFC 10 13 11 10 10 9 7 -385 bps Total SMC assets 21 23 21 21 20 19 17 -460 bps Treasury lending 2 1 2 1 1 2 2 -17 bps Total AUM 100 100 100 100 100 100 100

Source: Company, Kotak Institutional Equities

Exhibit 5: AUM growth to be stable at ~30% over FY2020-21E AUM and AUM growth, March fiscal year-ends, 2015-22E

(Rs bn) AUM (LHS) YoY (RHS) (%) 525 75

420 60 51.2 47.7 49.4

315 45

30.6 31.6 28.4 28.6 210 30

105 15

56 82 107 160 242 319 410 527 0 0 2015 2016 2017 2018 2019 2020E 2021E 2022E

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 13 Banks AU Small Finance Bank

Asset quality improves led by retail loans

Despite concerns over the macroeconomic environment, asset quality has improved across all segments except loans to NBFCs in 3QFY20, particularly in the core vehicle finance and small business loans segment. Gross NPL ratio and net NPL ratio improved ~10 bps qoq to 1.9% and 1.1%, respectively. Both vehicle finance and small business loan portfolios witnessed a ~20 bps qoq decline in GNPL ratio to 2.1%. Wholesale book witnessed marginal deterioration (up ~10 bps qoq to 1.7%). This was led by a single NBFC account operating in the real estate space. The bank has an exposure on Rs0.5 bn to this account and a fixed deposit of Rs3.6 bn, which can be utilized for scheduled repayment. Slippages were lower qoq at ~2.1% of loans. No signs of stress are visible in the retail portfolio with 30-dpd at normal levels of ~11%. We have seen a sharp slowdown in the overall macro- environment and we would probably be a little more cautious and still build a slightly elevated credit cost to cushion against any unexpected negative surprises.

Exhibit 6: Asset quality stable; coverage continues to improve Exhibit 7: Credit costs under control Asset quality metrics, March fiscal year-ends, 3QFY18-3QFY20 (%) Credit cost and slippages, March fiscal year-ends, 3QFY18-3QFY20 (%) GNPL (LHS) NNPL (LHS) PCR (RHS) 3.0 60 Slippage (LHS) Credit cost (RHS) 4.5 1.2 1.0 2.4 54 0.9 1.0 3.6 0.8 0.8 47 0.7 1.8 48 0.7 0.8 44 2.7 0.6 0.6 40 0.5 1.2 42 0.6 37 37 38 38 37 1.8 3.2 3.0 0.4 34.4 1.4 3.0 0.6 1.9 1.3 1.3 1.3 1.3 1.3 1.1 36 2.5 2.5 2.5 1.0 2.3 2.1 0.9 1.9 2.8 2.0 2.2 2.0 2.1 2.0 2.1 2.0 1.9 0.2 0.0 30

0.0 -

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

3QFY19

3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities

14 KOTAK INSTITUTIONAL EQUITIES RESEARCH AU Small Finance Bank Banks

Exhibit 8: Stable asset quality going ahead Exhibit 9: Credit costs of ~1% over FY2020-21E Asset quality metrics, March fiscal year-ends, 2016-22E (%) Slippages and credit cost, March fiscal year-ends, 2016-22E (%)

GNPL (LHS) NNPL (LHS) PCR (RHS) Slippages (LHS) Credit cost (RHS) 3.0 3.5 4.0 84 74 66 2.4 70 2.8 3.2 58 1.8 1.8 56 2.1 2.4 40 37 37 35 42 1.2 1.4 1.6 2.0 1.0 1.0 1.0 1.0 2.0 2.0 2.0 1.9 28 0.8 0.7 0.7 0.6 0.7 0.6 0.8 14 1.0 1.9 3.1 3.4 2.3 2.3 2.3 0.4 1.2 1.3 1.3 0.8 0.7 0.5 0.0 0.0

0.0 0

2016 2017 2018 2019

2020E 2021E 2022E

2016 2018 2019 2017

2021E 2022E 2020E

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

Exhibit 10: Improvement in retail asset quality qoq Exhibit 11: Steady improvement in both vehicle and MSME loans Segment-wise GNPL ratio, March fiscal year-ends, 1QFY19-3QFY20 Segment-wise GNPL ratio - retail, March fiscal year-ends, 1QFY19- (%) 1QFY20 (%)

Retail GNPL Wholesale GNPL Vehicle Secured business - MSME 3.0 3.0

2.4 2.4

1.8 1.8

1.2 1.2 2.4 2.5 2.5 2.2 2.2 2.2 2.3 2.2 2.3 2.3 2.3 2.0 2.1 2.1 2.1 2.1 1.6 1.6 1.7 1.4 0.6 0.6

0.0 0.0 1QFY19 4QFY19 1QFY20 2QFY20 3QFY20 1QFY19 4QFY19 1QFY20 2QFY20 3QFY20

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

Margin expansion led by lower cost of funds

NIM (calculated) improved by ~30 bps qoq to 5.5% driven by lower cost of funds while yields held up sequentially. AUM IRR (reported) was stable qoq at 14.7% while cost of funds declined by ~20 bps to 7.6%. Disbursement yields, which remain higher at ~15.3%, will help prop up NIM going forward along with any benefit from lower cost of funds. We believe that the near-term outlook on NIM has turned favorable from here given the shift in asset book towards higher-yielding retail loans within which the share of the higher-yielding assets (used vehicles) have increased. On the other hand, we expect cost of funds to show a decline as incremental cost of funds continues to reduce. However, we forecast calculated NIM to decline by 30 bps over FY2020-22E to 4.9% (5.2% in FY2020E) as we believe that the asset book composition would eventually shift towards slightly more lower-yielding assets.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 15 Banks AU Small Finance Bank

Exhibit 12: Yields and NIMs to decline over the medium term Yield, cost of funds and NIM, March fiscal year-ends, 2014-22E (%)

Yield on advances (LHS) Cost of funds (LHS) Spread (RHS) NIM (RHS) 25 25 20.8 20.6 20.0 20 20 16.5

15 12.9 15 12.3 12.2 11.8 11.7 11.0 11.3 10.9 10.1 10 10 6.9 5.4 5.2 5.3 12.5 4.9 5 11.3 10.3 5 8.3 7.3 7.4 7.4 6.8 6.6 23.2 20.3 19.7 13.5 9.5 12.2 12.5 12.7 12.8 0 0 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E

Source: Company, Kotak Institutional Equities estimates

Robust growth in the liability franchise

AU reported 60% yoy growth in deposits on the back of 26% yoy growth in CASA and 91% growth in term deposits. Savings deposit growth revived in 3QFY20 (up ~7% qoq/12% yoy) post a muted 2QFY20, mainly led by bulk SA, while current accounts also witnessed a sharp jump (up ~30% qoq). Retail SA growth remains modest (up 11% yoy/3% qoq). Retail TDs remain the mainstay for deposit growth for the bank, with yoy growth at 1.7X (up 12% qoq). Retail TDs and CASA now account for 44% of the total deposits (up ~170 bps qoq). CASA ratio also improved ~100 bps qoq to 17%. We forecast deposits to grow by ~44% CAGR over FY2019-22E.

Exhibit 13: Deposit growth at 60% yoy Exhibit 14: Term deposits dominate funding mix Deposits, March fiscal year-ends, 3QFY19-3QFY20 Funding mix, March fiscal year-ends, 3QFY19-3QFY20 (%)

CA SA TD Borrowings (Rs bn) Deposits (LHS) YoY (RHS) (X) 100 250 15 31 31 28 27 11.3 80 41 38 38 200 12 49 66 60 79 150 9 90 5.5 40 56 57 61 62 100 6 46 49 50 37 3.0 21 50 1.5 3 20 1.0 0.7 0.6 14 8 20 37 79 100 129 147 194 198 221 239 4 11 11 11 12 10 9 9 8 9 5 5

0 0 0 1 1 2 3 2 2 2 4 3 2 3

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

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

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

16 KOTAK INSTITUTIONAL EQUITIES RESEARCH AU Small Finance Bank Banks

Exhibit 15: Increasing share of deposits in the borrowing mix Borrowing mix, March fiscal year-ends, 2017-3QFY20 (%) Deposits NCD Refinance from FIs CPs Loans from banks and NBFCs Tier-II bonds Other borrowings 3 3 100 5 2 2 2 3 3 1 1 0 5 1 18 19 80 19 20 20 23 3 7 6 5 4 60 20 21

40 69 69 72 73 50 51 20

0 2017 2018 2019 1QFY20 2QFY20 3QFY20

Source: Company, Kotak Institutional Equities

Operating leverage continues to drive earnings growth

Growth in operating expenses at ~30% remained well below revenue growth of ~50%, leading to solid operating profit growth of 75% yoy. Cost-to-income ratio was at ~53% in 3QFY20 (down ~700 bps yoy/~70 bps qoq) despite strong branch addition during the quarter. AU added 68 branches (net) in 3QFY20 (88 in 9MFY20) compared to ~100 branches over FY2018 and FY2019. Employee addition was also strong (up ~22% yoy) as the bank expands deeper into existing geographies in addition. We forecast ~32% CAGR in operating expenses over FY2019-22E and cost-to-income ratio to inch up from current levels to ~56% as investments would be required to support continued strong growth over the medium term.

Exhibit 16: Opex/assets to remain stable at current levels Exhibit 17: Opex growth to be higher than current levels Cost ratios, March fiscal year-ends, 2015-22E Branches and operating expenses, March fiscal year-ends, 2015-22E

Cost-income (LHS) Cost-average assets (RHS) Branches (LHS) Operating expenses yoy (RHS) 65 12.5 (#) (%) 1,000 150

52 10.0 113 800 120

39 7.5 600 90 4.9 5.3 63 4.4 4.4 26 4.2 5.0 3.7 3.7 3.5 400 44 60 35 39 37 29 30 13 2.5 200 30

36.6 40.9 32.8 56.7 60.0 53.5 55.7 56.2 231 291 301 377 408 508 608 708

0 0.0 0 -

2015 2016 2017

2017 2015 2016

2018E 2019E 2020E 2021E 2022E

2019E 2020E 2021E 2022E 2018E

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH 17 Banks AU Small Finance Bank

Other key highlights of the quarter

 Non-interest income up 52% yoy. Non-interest income witnessed robust growth of ~52% yoy driven by strong traction on all line-items. Commission and exchange income was up ~36% yoy, general banking fees were up ~50% yoy. PSLC fees were particularly strong at Rs250 mn (up ~110% yoy) compared to ~Rs100-120 mn over the past 7-8 quarters. PSLC fees, fees from loan processing charges, sale of third-party products and liability fees will drive non-interest income going ahead.

 Capital position comfortable. Capital position is comfortable with CAR at 19.7% and tier-1 ratio at 16.7%.

Exhibit 18: Comfortable capital position with CAR at 19.7% Exhibit 19: RWA growth has lagged loan growth Capital adequacy ratios, March fiscal year-ends, 2015-3QFY20 (%) Capital adequacy ratios, March fiscal year-ends, 2015-3QFY20 (%)

CAR Tier-I RWA YoY (LHS) AUM YoY (RHS) 25 100 65

20 49 80 48 52 44 38 37 15 60 39 31 23.2 25 10 19.3 19.5 19.3 40 26 17.3 16.9 17.9 56 48 5 20 38 13 32 25 30 26 15.8 13.5 21.1 18.4 16.5 14.9 16.5

0 0 0

2015 2017 2018 2016

2017 2018 2015 2016

1QFY20 2QFY20 3QFY20

2QFY20 3QFY20 1QFY20

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

Exhibit 20: Summary of estimate changes Estimate changes for AU Small Finance Bank, March fiscal year-ends, 2020E-22E

New estimates (Rs mn) Old estimates (Rs mn) Old versus new (%) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E AUM growth (%) 32 28 29 33 29 30 -139 bps -56 bps -139 bps Net interest income 19,078 26,429 34,152 19,256 25,180 32,596 (1) 5 5 NIM (%) 5.2 5.3 4.9 5.2 5.0 4.7 0 bps 27 bps 18 bps Other income 7,045 7,996 10,122 6,050 7,418 9,186 16 8 10 Total income 26,123 34,425 44,274 25,306 32,598 41,782 3 6 6 Operating expenses 13,966 19,188 24,872 13,966 18,441 23,727 (0) 4 5 Employee expenses 7,661 10,204 13,025 7,661 9,814 12,359 (0) 4 5 Other expenses 6,305 8,984 11,847 6,305 8,626 11,368 0 4 4 Loan loss provisions 2,246 3,645 4,685 2,257 3,691 4,789 (0) (1) (2) PBT 9,911 11,593 14,717 9,083 10,466 13,267 9 11 11 PAT 7,374 8,625 10,950 6,758 7,787 9,871 9 11 11 YoY (%) 93 17 27 77 15 27 1613 bps 197 bps -5 bps PBT-treasury+provisions 8,716 11,073 14,172 7,888 9,246 12,022 10 20 18 EPS (Rs) 24.4 28.5 36.2 22 26 33 9 11 11

Source: Kotak Institutional Equities estimates

18 KOTAK INSTITUTIONAL EQUITIES RESEARCH AU Small Finance Bank Banks

Exhibit 21: AU is trading at 5.4X one year-forward book Rolling one-year forward PER and PBR, March fiscal year-ends, July 2018-July 2019 (X)

Rolling PER (X) (LHS) Rolling PBR (X) (RHS) 60 9

52 8

44 7

36 6

28 5

20 4

Jul-18 Jul-19

Jan-19 Jan-18 Jan-20

Oct-18 Oct-19 Apr-19 Apr-18

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 19 Banks AU Small Finance Bank

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

2017 2018 2019 2020E 2021E 2022E Key growth rates (%) Interest income 26 38 67 46 32 35 Interest on loans (10) 13 132 47 34 33 Interest on securitised loans 91 110 (50) 5 18 (30) Interest expenses 26 67 94 49 27 39 NII 27 20 43 42 39 29 Other income (52) 19 52 14 27 Fee income 71 20 90 30 30 Treasury income (94) 6 199 (56) 5 Operating expenses 39 113 44 29 37 30 Employee expenses 22 120 41 27 33 28 Loan loss provisions 122 33 10 58 62 29 PBT 254 (61) 31 71 17 27 Taxes 189 (53) 31 28 17 27 PAT 288 (64) 31 93 17 27 PBT-treasury 45 (13) 33 61 27 28 PBT-treasury+provisions 54 (5) 27 61 34 28 Key calculated ratios (%) Yield on loans 13.5 9.5 12.2 12.5 12.7 12.8 Yield on investment 0.8 4.9 5.4 7.2 7.0 7.0 Yield on average earning assets 16.5 12.9 11.8 11.7 11.3 10.9 Interest on deposits — 3.9 7.7 7.6 6.8 6.7 Cost of funds 8.3 7.3 7.4 7.4 6.8 6.6 Spread 8.2 5.6 4.5 4.3 4.5 4.3 NIM 10.1 6.9 5.4 5.2 5.3 4.9 Credit cost 1.0 1.0 0.7 0.8 1.0 1.0 Interest income/ total income 49 71 74 73 77 77 Non-interest income/ total income 6.2 12.6 11.2 14.7 14.5 14.6 Cost-to-income 33 57 60 53 56 56 Cost-to-average assets 4.4 5.3 4.2 3.7 3.7 3.5 Asset quality ratios (%) GNPL (Rs mn) 1,245 2,697 4,700 5,868 7,632 9,578 GNPL ratio 1.8 2.0 2.0 2.0 2.0 1.9 NNPL (Rs mn) 805 1,693 2,945 2,447 2,615 2,512 NNPL 1.2 1.3 1.3 0.8 0.7 0.5 RoE tree (%) NII 9.8 6.6 5.2 5.1 4.8 4.5 Other income 10.1 2.7 1.8 1.6 1.4 1.3 Total income 19.8 9.3 7.0 6.7 6.3 5.7 Operating expesnes 4.4 5.3 4.2 3.7 3.6 3.3 Employee expenses 2.4 3.0 2.3 2.0 1.9 1.7 PPOP 15.4 4.0 2.8 3.0 2.7 2.4 PBT 14.2 3.1 2.3 2.4 2.0 1.8 (1- tax rate) 0.7 0.7 0.7 0.7 0.7 0.7 RoA 10.2 2.0 1.5 1.8 1.5 1.3 Average assets/ equity 5.4 6.7 9.5 9.8 10.5 12.4 RoE 54.9 13.7 14.0 17.4 15.4 16.3

Source: Company, Kotak Institutional Equities estimates

20 KOTAK INSTITUTIONAL EQUITIES RESEARCH AU Small Finance Bank Banks

Exhibit 23: AU SFB – key financials March fiscal year-ends, 2017-22E (%)

2017 2018 2019 2020E 2021E 2022E Income statement (Rs mn) Interest income 12,800 17,670 29,488 43,001 56,714 76,299 Interest on loans 8,368 9,475 21,973 32,368 43,238 57,518 Interest on securitised loans 1,441 3,030 1,530 1,610 1,894 1,326 Interest on investment 90 1,285 2,741 6,366 9,526 15,052 Others 2,901 3,880 3,245 2,658 2,056 2,403 Interest expenses 4,963 8,267 16,066 23,923 30,285 42,146 Interest on deposits — 1,557 10,518 17,375 22,498 32,510 Others 4,963 6,710 5,547 6,548 7,787 9,636 NII 7,837 9,403 13,423 19,078 26,429 34,152 Other income 8,100 3,881 4,620 7,045 7,996 10,122 Fee income 981 1,679 2,015 3,828 4,976 6,469 Treasury income 6,759 376 400 1,195 520 545 Others 360 1,826 2,206 2,022 2,500 3,108 Total income 15,937 13,283 18,043 26,123 34,425 44,274 Operating expenses 3,528 7,526 10,824 13,966 19,188 24,872 Employee expenses 1,928 4,249 6,011 7,661 10,204 13,025 Others 1,601 3,277 4,813 6,305 8,984 11,847 PPOP 12,408 5,757 7,219 12,157 15,237 19,402 Provisions and contigencies 975 1,326 1,418 2,246 3,645 4,685 PBT 11,433 4,432 5,801 9,911 11,593 14,717 Taxes 3,214 1,513 1,983 2,537 2,968 3,768 PAT 8,220 2,919 3,818 7,374 8,625 10,950 Tax rate (%) 28 34 34 26 26 26 PBT-treasury 4,675 4,056 5,401 8,716 11,073 14,172 PBT-treasury+provisions 5,650 5,381 6,819 10,962 14,717 18,857

Balance sheet (Rs mn) Cash and bank balance 6,250 17,612 17,402 21,978 29,412 39,240 Investment 21,503 30,506 71,617 105,206 166,972 263,085 Net loans and adavnces 65,509 133,121 228,187 289,910 389,408 512,788 Fixed assets 2,758 3,861 4,470 7,842 9,872 12,062 Other assets 1,792 3,227 4,552 5,007 5,508 6,058 Net assets 97,812 188,328 326,228 429,943 601,173 833,235 Deposits 79,233 194,224 266,011 397,970 579,281 Current 3,920 10,820 16,149 26,150 40,960 Fixed 57,893 158,324 214,182 316,450 454,830 Savings 17,420 25,080 35,680 55,369 83,491 Borrowings and bills payable 71,214 76,935 86,134 100,840 128,069 163,768 Other liabilities 6,722 9,348 14,241 17,089 20,507 24,609 Total liabilities 77,936 165,516 294,599 383,941 546,545 767,657 Share capital 2,843 2,857 2,924 3,025 3,025 3,025 Reserves and surplus 17,033 19,955 28,705 42,978 51,603 62,552 Shareholder' equity 19,876 22,812 31,629 46,003 54,627 65,577

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 21 ADD Cholamandalam (CIFC) Diversified Financials JANUARY 23, 2020 RESULT Sector view: Neutral

Weak performance. Chola’s 3Q performance was marred by (1) 5% yoy disbursements CMP (`): 324 decline in vehicle finance and home equity segments and (2) rise in gross stage-3 loans Fair Value (`): 340 by 36 bps qoq to 3.54%. This was offset by 35 bps qoq expansion in calculated NIM BSE-30: 41,386 (on balance sheet loans) to 6.5% and higher assignment income (up 160% yoy, flat qoq). We reduce estimates to reflect lower growth and higher credit costs; retain ADD and fair value of Rs340 as we roll over to December 2021E.

Cholamandalam Stock data Forecasts/valuations 2020E 2021E 2022E 52-week range (Rs) (high,low) 335-218 EPS (Rs) 17.9 22.0 25.8 Mcap (bn) (Rs/US$) 253/3.6 EPS growth (%) 17.8 23.0 17.4 ADTV-3M (mn) (Rs/US$) 515/7 P/E (X) 18.1 14.7 12.5 QUICK NUMBERS Shareholding pattern (%) P/B (X) 3.5 2.9 2.4 Promoters 52.9 BVPS (Rs) 91.7 110.8 133.0  Core PBT up 11% FIIs 18.0 RoE (%) 20.6 21.1 20.7 yoy MFs/BFIs 17.1/1.4 Div. yield (%) 0.6 0.7 0.9 Price performance (%) 1M 3M 12M NII (Rs bn) 36 41 47  Disbursements Absolute 6 12 41 PPOP (Rs bn) 25 28 33 Rel. to BSE-30 7 6 23 Net profits (Rs bn) 14 17 20 down 2% yoy

 Gross stage-3 ratio Core PBT up 11% yoy up 36 bps qoq to Chola’s core PBT growth was low at 11% yoy in 3QFY20. While growth in NII was strong at 3.54% 21% yoy, high operating expenses (up 34% yoy) and credit cost (up 41% yoy) dampened core earnings. PAT growth of 28% yoy was supported by (1) lower tax rate and (2) high assignment income booked during the quarter (Rs825 mn versus Rs310 mn in 3QFY19).

Chola has not released its investor presentation this quarter, nor commented on its results. We have hence analyzed these results based on information available in the exchange filings and press release. We have made some estimates to calculate select ratios.

Asset quality issues surface

Chola reported gross stage-3 ratio of 3.54% in 3QFY20, up 36 bps qoq. A back-of-the-envelope calculation suggests that gross stage-3 loans on absolute basis increased ~17-19% qoq/25- 30% yoy. This may likely be from the vehicle finance business, as the overall recoveries in home equity have been strong for past few quarters. Amid macroeconomic slowdown and weak freight rates, collections in CVs were likely tepid during October and November 2019. Credit Nischint Chawathe cost increased ~10 bps yoy/25 bps qoq to 0.9%. Overall coverage on gross stage-3 loans decreased 140 bps qoq to 33%. M B Mahesh, CFA Cut estimates; ADD stays

We are revising our estimates for Chola by 1-3%. While growth will likely remain muted and Dipanjan Ghosh provisions rise, we expect NIM to inch up a bit. Post the revision, we expect the company to deliver 13% and 19% yoy growth in core PBT in FY2021E and FY2022E on the back of 12% growth in FY2020E. With RoA of 2.2-2.4% and high leverage (asset/equity) ratio of 8-9X, Chola Venkat Madasu will likely deliver 20-21% medium-term RoE. The company has proposed to raise equity capital; this is not factored in our estimates. We will revisit our view after we discuss Chola’s proposed business strategy to recoup from deterioration in its 3Q performance, with its management. Ashlesh Sonje

[email protected] Contact: +91 22 6218 6427

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

Business slows down significantly

Chola’s vehicle finance disbursements were muted with 5% yoy decline and 2% qoq growth during 3QFY20, reflecting industry-wide slowdown. Slowdown was most likely in the CV segment with weak traction in HCV and CE segments, as reflected in the preceding quarter. Additionally, disbursements in the home equity segment declined ~5% yoy/15% qoq. Notably, disbursements had increased at a strong pace over the past few quarters in this segment (up 17% yoy in 1HFY20); in this backdrop, the reason for slowdown in 3Q is unclear. Overall AUM growth slowed down to ~20% yoy from 24-31% yoy growth observed since 1QFY19. Slowdown is in line with trends observed across other vehicle financiers.

NIM expansion provides comfort

Calculated NIM expansion (on balance sheet loans) of ~15 bps yoy/35 bps qoq to ~6.5% helped Chola offset the impact of higher provisions and lower loan growth. Qoq NIM expansion likely reflects rise in yields on the back of change in product mix towards high- yielding segment and impact of hike in lending rate over the past few quarters. It also appears that re-pricing down of bank loans (due in 3QFY20), has been partially reflected in its NIM. Market sources suggest good appetite for Chola’s instruments in debt markets though the company is a bit cautious on accessing this avenue in light of expected volatility in the market.

Operating expenses ratio inches up

Operating expenses increased by 34% yoy in 3QFY20 on the back of its investment in business expansion, IT-related expenses and most likely increase in focus on collections. Cost-to-average AUM ratio increased ~26 bps yoy/8 bps qoq to 2.8%. The company has added 48 branches (net) during 3QFY20 compared to 34 in FY2019.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 23 Diversified Financials Cholamandalam

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

Ind-AS Ind-AS Ind-AS Ind-AS (% chg.) Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS 3QFY20 3QFY20E 3QFY19 2QFY20 3QFY20E 3QFY19 2QFY20 9MFY20 9MFY19 (% chg.) 2020E 2019 (% chg.) 2021E Operating income 22,749 22,279 18,261 21,970 2 25 4 65,013 51,069 27 87,032 69,920 24 96,050 Interest income 21,177 20,840 17,139 20,412 2 24 4 60,699 47,955 27 81,464 65,653 24 90,129 Assignment income 825 750 310 845 10 (2) 2,142 739 190 2,600 867 200 2,730 Fee income 526 538 472 508 (2) 11 4 1,512 1,316 15 2,065 1,863 11 2,131 Net gain on fair value change 28 50 142 19 (44) (80) 49 99 358 (72) 120 633 (81) 200 Sale of services 193 100 199 187 93 (3) 3 563 701 (20) 783 904 (13) 861 Interest expense 11,924 11,869 9,508 11,769 0 25 1 34,563 26,023 33 45,942 35,887 28 49,494 NII 9,253 8,971 7,631 8,643 3 21 7 26,135 21,931 19 35,522 29,765 19 40,635 Net operating income 10,825 10,410 8,753 10,200 4 24 6 30,450 25,046 22 41,089 34,032 21 46,556 Other income 0 1 1 1 (60) (64) (20) 1 4 (66) 10 7 49 10 Total income 10,825 10,411 8,754 10,201 4 24 6 30,451 25,050 22 41,099 34,039 21 46,566 Operating expenses 4,244 4,025 3,158 4,016 5 34 6 11,760 8,875 33 16,157 12,696 27 18,457 Employee expense 1,771 1,750 1,417 1,721 1 25 3 4,951 4,172 19 6,969 5,906 18 7,666 Depreciation expense 314 200 151 262 57 108 20 809 405 100 1,100 555 98 1,238 Other expenses 2,159 2,075 1,591 2,033 4 36 6 6,001 4,299 40 8,088 6,235 30 9,554 PPOP 6,581 6,386 5,596 6,185 3 18 6 18,691 16,174 16 24,942 21,344 17 28,109 Provisions and write-offs 1,360 1,053 961 952 29 41 43 3,407 2,556 33 4,393 3,112 41 5,006 PBT 5,221 5,333 4,635 5,233 (2) 13 (0) 15,284 13,618 12 20,549 18,232 13 23,103 Tax 1,336 1,365 1,591 2,163 (2) (16) (38) 5,187 4,675 11 6,576 6,370 3 5,914 PAT 3,885 3,967 3,044 3,070 (2) 28 27 10,097 8,943 13 13,973 11,862 18 17,189 Tax rate (%) 26 26 34 41 -1 bps -875 bps -1575 bps 34 34 -39 bps 32 35 -294 bps 26 Core PBT 5,728 5,586 5,144 5,321 3 11 8 16,450 15,077 9 22,222 19,844 12 25,179 Asset quality Gross stage-3 (Rs bn) 21.4 16.5 18.0 493 bps 338 bps 21.4 16.5 493 bps 19.2 14.4 481 bps 21.5 Gross stage-3 (%) 3.5 3.3 3.2 24 bps 36 bps 3.5 3.3 24 bps 3.3 2.7 57 bps 3.1 ECL coverage on stage-3 (%) 33.0 35.0 34.4 -195 bps -144 bps 33.0 35.0 -195 bps 36.0 37.9 -194 bps 36.0 Segmental data (Rs mn) Loans under management 604,773 610,669 503,930 592,920 (1.0) 20 2 604,773 503,930 20 623,421 542,790 15 725,149 Vehicle finance 445,890 453,544 375,080 439,010 19 2 445,890 375,080 19 456,892 405,880 13 512,826 Home equity 130,000 131,071 111,860 126,120 16 3 130,000 111,860 16 135,042 116,260 16 163,309 Business loans 28,883 26,053 16,990 27,790 70 4 28,883 16,990 70 31,487 20,650 52 49,013 Disbursements 74,750 82,821 76,440 73,810 (2) 1 234,290 215,573 9 330,900 304,510 9 379,344 Vehicle finance 59,490 63,923 62,770 57,960 (5) 3 186,850 176,000 6 262,070 249,590 5 293,518 Home equity 9,080 11,257 9,540 10,640 (5) (15) 30,730 28,030 10 45,660 38,370 19 55,706 Business loans 6,180 7,641 4,130 5,210 50 19 16,710 11,543 45 23,170 16,550 40 30,121 Key calculated ratios (%) NII/loans on balance sheet 6.5 6.3 6.4 6.2 15 bps 34 bps 6.3 6.4 6.4 6.3 9 bps 6.4 Cost-to-income 39.2 38.7 36.1 39.4 55 bps 313 bps -16 bps 38.6 35.4 39.3 37.3 202 bps 39.6 Cost-to-average AUM 2.8 2.7 2.6 2.8 16 bps 26 bps 8 bps 2.7 2.5 2.8 2.6 16 bps 2.7 Credit cost (% of AUM) 0.9 0.7 0.8 0.7 21 bps 12 bps 26 bps 0.8 0.7 0.8 0.6 11 bps 0.7 Key parameters (#) Branches 1,073 891 1,025 20.4 4.7 1,073 891 1,100 900 22.2 1,150

Notes: (1) We have estimated select key financial data points, viz. AUM data for business loans (comprising about 5% of overall AUMs) and loan outside balance sheet as the same was not reported by the company in 3QFY20.

Source: Company, Kotak Institutional Equities estimates

24 KOTAK INSTITUTIONAL EQUITIES RESEARCH Cholamandalam Diversified Financials

Exhibit 2: AUMs increased ~20% yoy in 3QFY20 AUM break-up, March fiscal year-ends, 3QFY18-3QFY20

Vehicle finance (LHS) Home equity (LHS) (Rs bn) (%) Business loans (LHS) YoY (RHS) 650 40 29 24 28 520 21 32 17 121 126 130 15 116 31 15 112 14 30 107 29 390 12 104 24 10126 98 26 27 24 20 260 19 16

130 8

280 314 335 355 375 406 430 439 446 0 - 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20

Notes: (1) The company has not disclosed AUM of business for 3QFY20; the same is based on our estimates.

Source: Company, Kotak Institutional Equities

Exhibit 3: Disbursements down 2% yoy Disbursements break-up, March fiscal year-ends, 3QFY18-3QFY20

Vehicle finance (LHS) Home equity (LHS) (Rs bn) Others (LHS) YoY (RHS) (%) 100 60 55 54 10.0 10.6 80 45 7.7 45 10.3 7.2 8.3 11.0 10.4 12.4 8.1 7.6 7.1 9.5 10.6 60 8.0 9.4 9.1 9.1 30 26 22 40 15 13 11 7 20 - (2) 56.1 68.2 57.1 56.1 62.8 73.6 69.4 58.0 59.5 0 (15) 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 25 Diversified Financials Cholamandalam

Exhibit 4: Moderation in growth is lower compared to major peers Growth across vehicle financiers, March fiscal year-ends, 3QFY19-3QFY20 (%)

2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 Disbursement growth (%)- yoy Chola 26 13 11 22 7 (2) Magma 34 10 16 12 (54) NA MMFS 43 24 (1) 3 (10) NA STFC 12 (29) (20) (14) (5) NA AUM growth (%)- yoy Chola 31 29 26 27 24 20 Magma 5 5 8 9 (0) NA MMFS 26 30 27 22 22 NA STFC 21 14 9 6 4 NA AUM growth (%)- qoq Chola 5 6 8 6 3 2 Magma 4 (1) 4 2 (5) NA MMFS 1 6 6 6 2 NA STFC 4 (1) 1 2 2 NA

Source: Company, Kotak Institutional Equities

Exhibit 5: We expect ECL coverage to increase to 2.6% by FY2022E NPL and provisions, March fiscal year-end, 2018-22E (Rs mn)

2018 2019 2020E 2021E 2022E Loan book 430,780 535,390 590,001 685,713 810,857 Stage 3 loans 14,760 14,390 19,201 21,537 25,465 ECL (stage 1-3 provisions) 8,620 9,300 11,193 13,200 15,922 ECL/AUM (%) 2.0 1.7 1.9 1.9 2.0 Stage 1-2 provisions (%) 0.9 0.7 0.8 0.8 0.9 Stage 1-2 provisions 3,550 3,840 4,281 5,446 6,754 Stage 3 provisions 5,070 5,460 6,912 7,753 9,167 Stage 3 coverage (%) 34 38 36 36 36 Stage 1-2 provisions/ECL (%) 41 41 38 41 42

Source: Company, Kotak Institutional Equities estimates

26 KOTAK INSTITUTIONAL EQUITIES RESEARCH Cholamandalam Diversified Financials

Exhibit 6: Cost ratios inched up in 3QFY20 Cost ratios, March fiscal year-ends, 3QFY18-3QFY20 (%)

Cost to income (LHS) Cost to average AUM (RHS) 45 4.0 42.5

42 42.3 3.6 40.1 39.4 39.2 3.3 39 3.2 37.1 3.2 36.1 35.4 36 34.7 2.8 2.9 2.8 2.8 33 2.6 2.6 2.4 2.5 2.5

30 2.0

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

Source: Company, Kotak Institutional Equities

Exhibit 7: Cholamandalam trading at 3X one-year forward book One-year forward rolling PER and PBR (X), March fiscal year-ends, January 2015-January 2020 (X)

Rolling PER (LHS) Rolling PBR (RHS) 30 4.5

24 3.6

18 2.7

12 1.8

6 0.9

0 0.0

Jul-18 Jul-19 Jul-15 Jul-16 Jul-17

Jan-15 Jan-16 Jan-17 Jan-19 Jan-20 Jan-18

Source: Company, Bloomberg, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 27 Diversified Financials Cholamandalam

Exhibit 8: Change in estimates Old and new estimates, March fiscal year-ends, 2020-22E (Rs mn)

New estimates Old estimates Change in estimates (%) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E NII 35,522 40,635 46,901 35,402 41,633 48,909 0.3 (2.4) (4.1) AUM (Rs bn) 623 725 857 642 761 905 (2.9) (4.7) (5.3) YoY (%) 15 16 18 18 19 19 -342 bps -219 bps -71 bps NIM 6.02 6.10 6.27 5.91 6.01 6.19 11 bps 9 bps 8 bps Provisions 4,393 5,006 5,972 4,237 4,894 5,814 3.7 2.3 2.7 Other income 5,578 5,932 6,559 5,423 5,817 6,648 2.9 2.0 (1.3) Assignment income 2,600 2,730 2,867 1,734 2,046 2,414 49.9 33.4 18.7 Operating expenses 16,157 18,457 20,356 16,157 19,170 21,738 - (3.7) (6.4) PBT 20,549 23,103 27,132 20,431 23,385 28,005 0.6 (1.2) (3.1) Tax 6,576 5,914 6,946 6,538 5,987 7,169 0.6 (1.2) (3.1) PAT 13,973 17,189 20,186 13,893 17,399 20,836 0.6 (1.2) (3.1) Core PBT 22,222 25,179 30,038 22,234 25,733 30,904 (0.1) (2.2) (2.8)

Source: Company, Kotak Institutional Equities estimates

28 KOTAK INSTITUTIONAL EQUITIES RESEARCH Cholamandalam Diversified Financials

Exhibit 9: Cholamandalam – key financial ratios and growth rates March fiscal year-ends, 2018-22E (%)

Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS 2018 2019 2020E 2021E 2022E Growth in key P&L items (%) Operating income NA 27.6 24.5 10.4 15.5 Interest income NA 25.4 24.1 10.6 15.8 Assignment income NA NA 199.9 5.0 5.0 Interest expense NA 34.9 28.0 7.7 16.2 Net interest income NA 15.5 19.3 14.4 15.4 Net operational income NA 20.7 20.7 13.3 14.8 Total income NA 20.7 20.7 13.3 14.8 Operating expense NA 13.8 27.3 14.2 10.3 PPOP NA 25.2 16.9 12.7 17.8 Provisions NA 2.5 41.2 13.9 19.3 PBT NA 30.1 12.7 12.4 17.4 Tax NA 31.9 3.2 (10.1) 17.4 PAT NA 29.2 17.8 23.0 17.4 Core PBT NA 17.1 12.0 13.3 19.3 Growth in key balance sheet items (%) Loans 27.5 24.5 12.1 16.2 18.3 Investment NA 0.0 5.0 5.0 20.0 Net assets 43.5 30.2 8.8 16.2 18.3 Borrowings 58.3 31.9 7.6 15.9 18.3 Total liabilities 47.6 31.4 7.5 15.7 18.1 Total shareholder funds 18.2 21.1 19.7 20.3 19.8 Key ratios (%) Yield on loans 13.9 13.8 14.6 14.1 14.0 Cost of borrowings 8.5 8.1 8.8 8.4 8.4 NIM (% of on-balance sheet loans) 6.8 6.3 6.4 6.4 6.3 Cost-to-income 39.5 37.3 39.3 39.6 38.1 Cost-to-average AUM 2.9 2.6 2.8 2.7 2.6 Credit cost (% of AUM) 0.8 0.6 0.8 0.7 0.8 Asset quality details Gross stage-3 (Rs mn) 14,760.0 14,390.0 19,201.4 21,536.9 25,464.5 Gross stage 3 (%) 3.4 2.7 3.3 3.1 3.1 ECL coverage on stage 3 (%) 34.3 37.9 36.0 36.0 36.0 ECL coverage on stage 1 and 2 (%) 0.9 0.7 0.8 0.8 0.9 Overall ECL coverage (%) 2.0 1.7 1.9 1.9 2.0 Dupont analysis (percentage of average assets and off-balance sheet exposure)-% Net interest income 6.7 5.7 5.7 5.7 5.6 Total income 7.4 6.6 6.6 6.5 6.4 Operating expenses 2.9 2.4 2.6 2.6 2.4 Provisions 0.8 0.6 0.7 0.7 0.7 (1- tax rate) 0.7 0.7 0.7 0.7 0.7 RoA 2.4 2.3 2.2 2.4 2.4 Average assets and off-balance sheet assets/average equity 8.1 9.2 9.2 8.7 8.6 19.5 21.0 20.6 21.1 20.7 RoE

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 29 Diversified Financials Cholamandalam

Exhibit 10: Cholamandalam – income statement and balance sheet March fiscal year-ends, 2018-22E (Rs mn)

Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS 2018 2019 2020E 2021E 2022E Income statement (Rs mn) Operating income 54,792 69,920 87,032 96,050 110,939 Interest income 52,358 65,653 81,464 90,129 104,390 Fee and commission income 1,537 1,863 2,065 2,131 2,535 Assignment income — 867 2,600 2,730 2,867 Other operational income 897 1,537 903 1,061 1,147 Interest expenses 26,593 35,887 45,942 49,494 57,489 Net interest income 25,765 29,765 35,522 40,635 46,901 Net operational income 28,199 34,032 41,089 46,556 53,450 Other income 4 7 10 10 10 Net total income 28,203 34,039 41,099 46,566 53,460 Loan loss & write-off provisions 3,037 3,112 4,393 5,006 5,972 Operating expenses 11,153 12,696 16,157 18,457 20,356 Employee expenses 5,368 5,906 6,969 7,666 8,586 Other expenses 5,785 6,790 9,188 10,792 11,770 PBT 14,014 18,232 20,549 23,103 27,132 Tax 4,831 6,370 6,576 5,914 6,946 PAT 9,183 11,862 13,973 17,189 20,186 Core PBT 16,952 19,844 22,222 25,179 30,038 Balance sheet (Rs mn) Net loans 422,532 526,223 590,001 685,713 810,857 Net investments 729 729 766 804 965 Cash & bank balance 8,880 36,749 23,887 29,380 35,257 Fixed and other assets 8,756 10,563 10,308 10,583 12,368 Total assets 440,897 574,263 624,961 726,480 859,446 Total borrowings 383,303 505,674 544,054 630,445 745,640 Other liabilities 6,612 6,832 6,975 7,127 7,310 Total liabilities 389,916 512,506 551,029 637,571 752,949 Shareholder equity 50,982 61,757 73,932 88,909 106,497 Share capital 1,564 1,564 1,564 1,564 1,564 Reserves and surplus 49,417 60,193 72,368 87,345 104,933 Loan book break-up Loans on balance sheet 422,532 526,223 590,001 685,713 810,857 Loans outside balance sheet 6,708 16,567 33,420 39,436 46,534 Loans under management 429,240 542,790 623,421 725,149 857,391

Source: Company, Kotak Institutional Equities estimates

30 KOTAK INSTITUTIONAL EQUITIES RESEARCH ADD Tata Communications (TCOM) Telecommunication Services JANUARY 23, 2020 RESULT Sector view: Cautious

Steady quarter. TCOM reported a solid quarter with 19% yoy adjusted EBITDA CMP (`): 454 growth. Operating metrics, by and large, are trending in the direction guided by the Fair Value (`): 500 management. Voice segment performance was the only disappointment in the 3Q BSE-30: 41,386 print; this segment is immaterial to the SoTP, however. We raise our FY2020-22E EBITDA forecasts by 3-4% and fair value to Rs500 (from Rs400). We continue to bake in Rs16 bn (Rs53/share) potential AGR-related liability into our SoTP. Retain ADD.

Tata Communications Stock data Forecasts/valuations 2020E 2021E 2022E 52-week range (Rs) (high,low) 465-245 EPS (Rs) 11.0 14.0 17.9 Mcap (bn) (Rs/US$) 130/1.9 EPS growth (%) 206.9 26.5 28.0 ADTV-3M (mn) (Rs/US$) 97/1 P/E (X) 41.1 32.5 25.4 Shareholding pattern (%) P/B (X) 246.2 29.4 13.8 Promoters 75.0 EV/EBITDA (X) 7.2 6.6 5.9 FIIs 18.2 RoE (%) (487.2) 161.6 74.1 MFs/BFIs 0.1/1.5 Div. yield (%) 1.7 1.7 1.7 Price performance (%) 1M 3M 12M Sales (Rs bn) 168 173 183 Absolute 18 26 45 EBITDA (Rs bn) 30 32 35 Rel. to BSE-30 18 19 26 Net profits (Rs bn) 3 4 5

Decent performance in a seasonally weak quarter

TCOM reported a decent earnings print in a seasonally weak quarter. On an LFL, adjusted for Ind-AS 116 impact, basis – (1) revenues were down 1% qoq to Rs42.3 bn, 1.7% above our estimate, (2) EBITDA at Rs7.53 bn was down 1.7% qoq but up 19% yoy, 4% above our estimate of Rs7.25 bn. EBITDA margins stood at 17.8%, down 10 bps qoq. Sharp fall in voice margins was largely offset by robust performance of data business. For 9MFY20, TCOM’s EBITDA has grown a solid 23% yoy.

Metrics trending well; Street waiting inflection point in innovation services

Barring the disappointing EBITDA print in the voice segment, other segments did fairly well this quarter. Comforting trends include the robust margins (35%+) of traditional data sustaining along with upward moving EBITDA trend of growth services segment. TCTSL also delivered a decent performance on an adjusted basis while TCPSL delivered a revenue uptick despite continued rationalization of ATM network. The Street remains concerned on the potential and timing of revenue ramp-up in the innovation services segment. Operating metrics in the services segment showed encouraging trends and we believe revenue ramp-up and EBITDA improvement should begin in the next few quarters.

Risks – R-Jio’s likely aggression in the enterprise segment and AGR dues

Besides the increasing wait for the inflection point in innovations services segments, two other factors concerning the Street are – (1) Jio’s entry in the enterprise segment and (2) adverse outcome on DoT’s AGR demands. On Jio’s aggression, we draw comfort from three factors – (1) Jio’s benign pricing of its FTTH offerings, (2) the rather small overall pie, current and potential, Rohit Chordia in enterprise data to call for an aggressive approach from Jio and (3) Jio’s recent focus on deleveraging indicating its incremental focus on profitability. On the AGR-related liability, we believe an adverse outcome (worst-case payout of Rs66.3 bn) can definitely have an impact Aniket Sethi on the stock. We continue to build Rs16 bn (Rs53/share) potential liability explicitly in our SoTP.

Our fair value goes up to Rs500/share from Rs400/share on account of (1) around 4% increase in our EBITDA forecasts and (2) rollover. Retain ADD.

[email protected] Contact: +91 22 6218 6427

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

Segmental results

 Voice segment. EBITDA declined 43% qoq and 41% yoy to Rs450 mn with revenues falling 7.4% qoq. Volumes declined 6.8% yoy while net realization per minute fell sharply by 26%. Fall in net realizations to a six-quarter low and below 20p/min was surprising. We note that the company has been focused on net realization management in the segment for the past several quarters even if the same comes at the expense of volumes.

 Traditional data. Topline declined 1.2% qoq largely due to seasonality. However, margin print of above 35% continued to provide comfort on management’s confidence of sustaining healthy margins in the segment (guidance had been raised a couple of quarters back).

 Growth services. Revenue growth of 0.6% qoq was weak on account of seasonality. Margin expansion trajectory sustained with 3Q margins at 6.5%. EBITDA rose 82% qoq to US$7.2 mn; yoy swing was material. We note that this segment had broken even at the EBITDA level only in 4QFY19.

 Innovation services. Even as heavy EBITDA losses (US$20 mn) sustained, progress on operating metrics in each of the sub-segments (IoT India, MOVE, security and NetFoundry) continues to be encouraging. Sign-ups and pilots need to start translating into revenues for a positive EBITDA delta here. This is still a wait and watch even as the company is confident of a sharp ramp-up in the revenues in the next few quarters. We will wait for evidence before baking a material EBITDA inflection in this segment in our model.

 TCPSL reported a marginal uptick in revenues (on a qoq basis) despite continued rationalization of ATM network.

 While TCTSL reported a weak performance on a headline basis, adjusted performance was in line with recent trends. The segment was impacted by one-time costs of Rs620 mn.

Other result highlights and takeaways from the earnings call

 Management is upbeat about its IZO platform and InstaCC. These solutions are at the heart of customer experience transformation and the company is seeing robust growth in the funnel for these services. InstaCC is a global cloud-based platform for contact centers. A large customer has recently gone live on this platform.

 On the weak voice segment margins, management highlighted that the company benefitted from profitable destination mix in the past few quarters; the mix deteriorated sharply in 3QFY20. In the long term, the management expects margins to be in the range of 6.5-7%.

 Management expects to start reporting improved performance in the TCTSL business from 1HFY21E.

 Management expects capex to stay in the range of US$200-225 mn.

32 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Communications Telecommunication Services

Exhibit 1: Key changes to TCOM earnings model, March fiscal year-ends, 2020-22E (Rs mn)

Revised Earlier Change (%) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E Revenues (Rs mn) 168,095 172,648 182,678 167,688 172,169 182,305 0.2 0.3 0.2 EBITDA (Rs mn) 30,310 32,439 35,066 29,267 31,067 33,697 3.6 4.4 4.1 EBITDA margin (%) 18.0 18.8 19.2 17.5 18.0 18.5 Recurring PAT (Rs mn) 3,148 3,982 5,095 1,028 2,573 4,967 EPS (Rs/share) 11.0 14.0 17.9 3.6 9.0 17.4

Source: Kotak Institutional Equities

Exhibit 2: Our sum-of-the-parts fair value for TCOM is Rs500/share

Voice business Mar-2022E EBITDA (Rs bn) 2.1 EV/EBITDA (x) 3.5 Enterprise value (Rs bn) 7 Data business Mar-2022E EBITDA (including rental income) (Rs bn) 33.0 EV/EBITDA (x) 6.8 Enterprise value (Rs bn) 223 Others Value of 26% stake in DC business sold to STT (Rs bn) 13 Total EV (Rs bn) 242 Consolidated net debt (Rs bn) 84 Less: Potential DOT liability (Rs bn) 16 Net equity value (Rs bn) 143 Equity value per share (Rs/share) 501

Source: Kotak Institutional Equities estimates

Exhibit 3: TCOM - 3QFY20 review, Ind-AS, March fiscal year-ends (Rs mn)

With AS 116 LFL With AS 116 LFL Change (%) Deviation 3QFY19 2QFY20 2QFY20 3QFY20 3QFY20 qoq yoy 3QFY20E % Revenues 39,215 42,728 42,728 42,287 42,287 (1.0) 7.8 41,589 1.7 Total expenditure (32,889) (34,391) (35,071) (34,059) (34,759.1) (0.9) 5.7 (34,342) 1.2 EBITDA 6,326 8,337 7,657 8,228 7,528 (1.7) 19.0 7,247 3.9 Depreciation and amortization (5,235) (5,583) (5,054) (5,605) (5,076) 0.4 (3.0) (5,100) (0.5) EBIT 1,091 2,754 2,604 2,623 2,453 (5.8) 124.8 2,147 14.2 Other income 192 95 95 140 140 125 Interest expense (1,040) (1,157) (1,045) (1,161) (1,049) (1,075) Pre-tax profits 243 1,692 1,654 1,602 1,543 (6.7) 535.7 1,197 Tax (incl. deferred tax) (667) (1,107) (1,107) (406) (406) (1,077) Net income pre exceptionals (425) 585 547 1,196 1,138 120 Exceptional items 2,100 (59) (59) (620) (620) — PAT after exceptional items 1,676 526 488 576 518 120 Minority int. share of loss (5) (4) (4) (3) (3) (6) Share in loss of associates 63 18 18 13 13 20 Reported net income 1,733 540 502 585 527 134 Margins (%) EBITDA 16.1 19.5 17.9 19.5 17.8 17.4 EBIT 2.8 6.4 6.1 6.2 5.8 5.2 PBT 0.6 4.0 3.9 3.8 3.6 2.9 PAT (pre exceptionals and MI) (1.1) 1.4 1.3 2.8 2.7 0.3

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 33 Telecommunication Services Tata Communications

Exhibit 4: TCOM: key operating and financial metrics

Change (%) Quarter-ending Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 qoq (%) yoy (%) Gross Revenue by Segment (%) Global Voice Solutions 24.1 21.2 21.4 20.5 19.1 Global Data Services 75.9 78.8 78.6 79.5 80.9 Global Voice Solutions (Rs mn) Gross revenues 9,436 9,008 8,903 8,741 8,090 (7.4) (14.3) Net revenues 1,480 1,643 1,478 1,493 1,030 (31.0) (30.4) EBITDA 759 966 866 790 450 (43.0) (40.7) EBIT 667 867 797 715 380 (46.9) (43.0) EBITDA margin (%) 8.0 10.7 9.7 9.0 5.6 EBIT margin (%) 7.1 9.6 9.0 8.2 4.7 Volumes (bn mins) Total 7.0 6.7 6.4 5.9 5.5 (6.8) (21.4) ILD 6.4 6.3 6.1 5.8 5.4 (6.9) (15.6) NLD 0.6 0.4 0.3 0.1 0.1 — (83.3) Net realization per min (Rs/min) 0.211 0.245 0.231 0.253 0.187 (26.0) (11.4) EBITDA per min (Rs/min) 0.108 0.144 0.135 0.134 0.082 (38.9) (24.5) Operating costs per min (Rs/min) 0.103 0.101 0.096 0.119 0.105 (11.5) 2.4 Global Data Solutions (Rs mn) Gross revenues 29,779 33,427 32,784 33,986 34,200 0.6 14.8 Net revenues 18,670 22,645 21,808 22,186 21,980 (0.9) 17.7 EBITDA 5,567 5,887 6,690 6,867 7,078 3.1 27.1 EBIT 2,524 399 1,238 1,356 1,548 EBITDA margin (%) 18.7 17.6 20.4 20.2 20.7 EBIT margin (%) 8.5 1.2 3.8 4.0 4.5 GR by segment (%) Service Provider / Carrier 42.0 40.0 38.0 39.0 38.0 Enterprise 58.0 60.0 62.0 61.0 62.0 GR by service line (%) Traditional services 64.8 62.4 63.1 63.6 63.1 Growth services 22.5 24.6 24.0 23.4 23.7 Subsidiaries 11.7 12.0 11.9 12.0 12.1 GR by geography (%) India 52.0 53.0 52.0 54.0 53.0 Rest of the world 48.0 47.0 48.0 46.0 47.0

TCPSL Gross Revenue (Rs mn) 895 844 889 850 870 2.4 (2.8) Total ATMs managed 13,062 12,772 12,399 12,362 12,278 (0.7) (6.0) Managed ATMs 5,003 4,562 4,076 4,011 3,993 (0.4) (20.2) White label ATMs 8,059 8,210 8,323 8,351 8,285 (0.8) 2.8 Total POS managed 12,790 9,183 8,365 5,823 5,791 (0.5) (54.7) Traditional services (US$ mn) Revenues 251.2 296.2 297.1 306.9 303.2 (1.2) 20.7 EBITDA 90.1 92.6 107.6 109.0 107.0 (1.8) 18.8 Growth services (US$ mn) Revenues 101.4 110.8 110.3 109.6 110.3 0.6 8.7 EBITDA (4.5) 6.0 3.0 3.9 7.2 Innovation services (US$ mn) Revenues 2.4 6.1 2.7 3.2 3.7 EBITDA (16.3) (20.9) (19.4) (21.3) (20.8) Debt profile Core business (US$ mn) Gross debt 1,450 1,441 1,386 1,406 1,418 0.9 (2.2) Foreign Currency Loans 1,383 1,354 1,313 1,359 1,369 0.8 (1.0) Rupee Loans 67 87 73 47 49 4.3 (26.8) Cash and cash equivalent 163 209 138 144 159 10.6 (2.3) Net debt 1,287 1,232 1,248 1,262 1,257 (0.4) (2.3) INR/USD (closing) 69.83 69.22 69.00 70.79 71.32 0.8 2.1 Net debt (Rs mn) 89,871 85,273 86,112 89,331 89,650 0.4 (0.2)

Source: Company, Kotak Institutional Equities

34 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Communications Telecommunication Services

Exhibit 5: TCOM - forecasts and underlying assumptions, March fiscal year-ends, 2017-22E (Rs bn)

` 2017 2018 2019 2020E 2021E 2022E Profit and loss statement Revenues 176,197 166,508 161,770 168,095 172,648 182,678 EBITDA 24,059 22,914 25,349 30,310 32,439 35,066 EBIT 5,401 3,851 4,673 9,925 11,408 13,397 PBT 5,332 4,211 1,310 6,175 7,754 9,896 Recurring PAT 2,993 469 (2,946) 3,148 3,982 5,095 Reported PAT 12,329 (3,286) (824) 2,404 3,982 5,095 Recurring EPS (Rs/share) 10.5 1.6 (10.3) 11.0 14.0 17.9 Balance sheet Total Equity 16,103 5,038 (1,761) 583 4,460 9,408 Borrowings 92,460 89,530 106,677 106,677 103,677 100,677 Other liabilities 102,461 101,460 95,211 96,785 97,445 100,478 Total equity and liabilities 211,023 196,028 200,128 204,045 205,582 210,563 Net fixed assets 116,794 113,169 115,645 112,909 110,007 107,519 Net intangibles — — 863 863 863 863 Cash and equivalents 18,786 14,823 15,713 18,528 19,383 22,030 Other assets 75,443 68,037 67,908 71,745 75,329 80,151 Total assets 211,023 196,028 200,128 204,045 205,582 210,563

Note: (1) Reported PAT for FY2017 includes discontinued operations.

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 35 REDUCE PVR (PVRL) Media JANUARY 24, 2020 RESULT Sector view: Attractive

A mixed bag. PVR reported 10% yoy growth in EBITDA led by 1% growth in footfalls CMP (`): 1,900 (same store footfalls declined 6%), 6% growth in net ticket price, 11% growth in F&B Fair Value (`): 1,850 spends per head and 9% growth in advertising. Muted footfall growth despite 10% BSE-30: 41,386 growth in screens was on account of weak regional content (South). Profitability was a notch better than expectations led by cost savings. We like the story but the stock is fairly valued. REDUCE with FV of Rs1,850, implying 11X FY2020E EV/EBITDA.

PVR Stock data Forecasts/valuations 2020E 2021E 2022E 52-week range (Rs) (high,low) 1,959-1,345 EPS (Rs) 43.0 59.8 69.1 Mcap (bn) (Rs/US$) 98/1.4 EPS growth (%) (0.3) 39.3 15.4 ADTV-3M (mn) (Rs/US$) 711/10 P/E (X) 44.2 31.7 27.5 Shareholding pattern (%) P/B (X) 5.0 4.4 3.9 Promoters 19.6 EV/EBITDA (X) 15.2 13.1 11.3 FIIs 46.6 RoE (%) 13.9 14.8 15.0 MFs/BFIs 11.1/0.1 Div. yield (%) 0.2 0.3 0.4 Price performance (%) 1M 3M 12M Sales (Rs bn) 37 42 47 Absolute 4 7 18 EBITDA (Rs bn) 7 8 9 Rel. to BSE-30 5 1 3 Net profits (Rs bn) 2 3 4 3QFY20—same store footfalls down on weak regional (south) content; profitability improves

Below discussion is on underlying financials (Exhibit 1), like-for-like excluding Ind AS 116.

 Footfalls. Footfalls grew 1% yoy to 25.9 mn (KIE 26.3 mn); same store (SS) footfalls declined 6% yoy. Flattish footfalls despite 10% screen growth were due to a weak movie line-up and box office collections of Southern regional films; SPI circuit reported 12% decline in footfalls. Contribution of regional films was down to 23% of sales from 34% in the base quarter.

 Average ticket price (ATP) and F&B spends. Gross ATP was down 2% yoy to Rs210 due to GST rate cut to 18% from 28% (Jan 2019). ATP net of GST increased 6% yoy. F&B spends per head (SPH) was up 11% yoy to Rs100 driving 13% increase in F&B sales. F&B gross margin at 72.1% was down 240 bps yoy.

 Ad revenue growth. Ad revenues grew 9% yoy (KIE 9%). On same store basis, ad revenues grew 2% yoy. While ad revenue growth is muted on absolute basis, it is far better than other mediums (Print and TV industry ad spends declined 8-10% in the December quarter). The management expects weakness in ad growth to continue in the near term.

 Profitability. EBITDA margin at 19.7% was ahead of our estimate (KIE 17.9%) owing to better than estimated cost management. Increase in employee, rent and other expense was contained at 11-13% yoy despite 10% growth in screens. We note that yoy inflation in costs in 3QFY20 was much lower than that witnessed in 1HFY20.

 Screen openings. PVR opened 21 screens in 3Q taking total count to 821. It has opened 63 screens (58 net of 5 closures) in 9MFY20 and expects 90-100 screen openings in FY2020E. The management expects 75-100 screen openings in FY2021E. A lot to like but the stock is fairly valued; await better entry price

We like PVR for its (1) thought leadership, (2) premium location presence and branding, (3) Jaykumar Doshi leadership in monetization and profitability, and (4) execution track record. There is a lot to like but valuations (11.5X EV/EBITDA and 27X PE on FY2022E financials, excluding Ind-AS 116) do not offer much upside over the next 6-12 months. Further, FY2020 has been a solid year from content standpoint and sets high base for FY2021. We value PVR at 11X FY2022E EV/EBITDA. Further re-rating calls for improvement in return ratios and FCF generation. We tweak estimates to factor in slightly better profitability and revise fair value to Rs1,850 (from Rs1,825).

[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. PVR Media

Smart increase in ticket prices

Select data points suggest that PVR smartly plays with pricing to better monetize good content (please refer to Exhibit 3). For instance (1) ‘Bala’ (2019) and ‘Badhaai Ho’ (2018) are two comparable movies (in terms of genre and production value) having the same lead actor (Ayushmann Khurrana) released on a regular non-festive weekend. We note that PVR’s average ticket price (net) for ‘Bala’ (2019) was 28% higher than ‘Badhaai Ho’ (2018) suggesting that the company smartly monetized on the growing popularity of the actor, (2) Likewise, PVR managed to push about 7% price increase for ‘Good Newwz’ (2019) over ‘Simmba’ (2018) despite a high base, (3) gross ATP growth trajectory has improved (negative 1% range over the past two quarters after negative 6-7% in 1HCY19). We note that the company refrained from taking price increases just after a GST rate cut (Jan 2019).

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

% chg. 3QFY20 2QFY19E 3QFY19 2QFY20 KIE yoy qoq 9MFY20 9MFY19 % chg. FY2020E FY2019 % chg. Total revenues 9,163 9,254 8,438 9,718 (1) 9 (6) 27,687 22,512 23 36,992 30,947 20 Ticket sales 4,528 4,691 4,254 4,921 (3) 6 (8) 14,016 11,843 18 19,131 16,354 17 F&B sales 2,440 2,465 2,167 2,697 (1) 13 (10) 7,741 6,148 26 10,596 8,584 23 Advertising 1,220 1,218 1,117 938 0 9 30 3,073 2,647 16 4,000 3,535 13 Convenience fees 475 430 450 457 10 6 4 1,338 890 50 1,561 1,304 20 Other operating revenues 500 450 450 706 11 11 (29) 1,519 985 54 1,704 1,171 46 Total expenditure (7,355) (7,601) (6,788) (7,788) (3) 8 (6) (22,360) (18,291) 22 (30,026) (24,992) 20 Film hire costs (1,927) (2,006) (1,850) (1,980) (4) 4 (3) (5,899) (5,164) 14 (8,140) (7,019) 16 F&B consumption (682) (666) (658) (728) 2 4 (6) (2,125) (1,709) 24 (2,882) (2,387) 21 Employee expenses (1,060) (1,060) (957) (1,049) — 11 1 (3,166) (2,469) 28 (4,248) (3,373) 26 Rent (1,467) (1,520) (1,300) (1,481) (3) 13 (1) (4,244) (3,666) 16 (5,971) (5,059) 18 Other expenses (3,686) (3,870) (3,323) (4,031) (5) 11 (9) (6,926) (5,285) 31 (8,785) (7,154) 23 EBITDA 1,808 1,653 1,650 1,930 9 10 (6) 5,327 4,220 26 6,966 5,955 17 EBITDA Margin (%) 19.7 17.9 19.6 19.9 19.2 18.7 18.8 19.2 Other income 76 100 135 76 (24) (44) (0) 218 214 2 300 240 25 Finance costs (392) (374) (379) (390) 5 3 0 (1,197) (885) 35 (1,420) (1,280) 11 Depreciation (563) (620) (514) (598) (9) 9 (6) (1,711) (1,364) 25 (2,462) (1,913) 29 Exceptional items — — — — — — - - Pretax profits 929 759 893 1,018 22 4 (9) 2,638 2,186 21 3,384 3,002 13 Taxes (339) (251) (337) (357) (942) (832) 13 (1,184) (991) 20 Net profit before minorities 590 509 555 661 1,696 1,354 25 2,200 2,011 9 Minority interest (1) (2) (36) (2) (3) (51) — — Net profit 589 507 519 660 16 14 (11) 1,693 1,303 30 2,200 2,011 9 EPS (Rs/share) 11.5 9.9 11.1 13.7 16 4 (16) 34.4 27.9 23 43.9 43.1 2

Key operational metrics Screens (#) 821 821 748 800 0 10 3 821 748 843 763 Footfalls (mn) 25.9 26.3 25.7 29.3 (1) 1 (12) 82.2 71.8 14 110.1 99.3 11 Average ticket price (ATP) (Rs) 210 214 212 201 (2) (1) 4 205 212 (3) 205 207 (1) F&B spends per head (SPH) (Rs) 100 101 90 99 (1) 11 1 100 91 11 101 91 11 Ad rev/screen (annualized) (Rs mn) 6.0 6.0 6.1 4.7 0 (2) 27 5.2 5.2 (0) 4.7 4.6 2 Film hire costs as % of ticket sales 42.6 42.8 43.5 40.2 42.1 43.6 42.6 42.9 (1) F&B COGS as % F&B sales 27.9 27.0 30.3 27.0 27.5 27.8 27.2 27.8 (2) Occupancy (%) 34.6 34.6 35.6 37.8 36.7 35.4 36.0 36.2 (1)

Comparable properties (same store) growth (%) Footfalls (6.0) 10.0 6.0 (2.0) 7.0 Average ticket price (ATP) (2.0) 6.0 (0.3) (1.0) 3.0 F&B spends per head (SPH) 11.0 (2.0) 12.0 11.0 1.0 Ad revenues 2.0 10.0 5.0 3.0 8.0

Notes: (a) Above financials are like-for-like excluding Ind AS 116.

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 37 Media PVR

Exhibit 2: Revised earnings estimates of PVR, FY2020E-22E (Rs mn)

Revised Previous Change (%) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E Ticket sales (net) 19,131 21,747 24,342 19,131 21,747 24,342 - - - F&B sales 10,596 12,274 14,001 10,596 12,274 14,001 - - - Ad revenues 4,000 4,633 5,186 4,000 4,633 5,186 - - - Convenience fees 1,561 1,663 1,773 1,561 1,663 1,773 - - - Other operating income 1,704 1,850 2,008 1,904 2,070 2,250 (10.5) (10.6) (10.8) Total revenues 36,992 42,168 47,311 37,192 42,388 47,553 (0.5) (0.5) (0.5) Film hire charges (8,140) (9,275) (10,382) (8,140) (9,275) (10,382) - - - F&B consumption (2,882) (3,314) (3,766) (2,882) (3,314) (3,766) - - - Employee costs (4,248) (4,930) (5,572) (4,248) (4,930) (5,572) - - - Rent (5,971) (6,865) (7,761) (5,971) (6,865) (7,761) - - - Other operating costs (8,785) (9,681) (10,554) (9,104) (10,024) (10,927) (3.5) (3.4) (3.4) Total operating costs (30,026) (34,065) (38,035) (30,345) (34,408) (38,408) (1.1) (1.0) (1.0) EBITDA 6,966 8,103 9,276 6,847 7,980 9,144 1.7 1.5 1.4 PAT 2,200 3,063 3,536 2,122 2,982 3,449 3.7 2.7 2.5 EPS (Rs/share) 43.9 59.8 69.1 42.4 58.3 67.4 3.7 2.7 2.5

Key assumptions EBITDA margin (%) 18.8 19.2 19.6 18.4 18.8 19.2 Screen additions (#) 80 80 80 80 80 80 - - - Footfalls (mn) 110 119 127 110 119 127 - - - ATP gross (Rs) 205 215 225 205 215 225 - - - SPH gross (Rs) 101 108 116 101 108 116 - - - Ad revenue growth (%) 13 16 12 13 16 12 Occupancy (%) 36.0 36.0 36.0 36.0 36.0 36.0 F&B revenue growth (%) 23.4 15.8 14.1 23.4 15.8 14.1 F&B gross margin (%) 72.8 73.0 73.1 72.8 73.0 73.1 F&B gross profit (Rs mn) 7,714 8,960 10,235 7,714 8,960 10,235 - - -

Source: Company, Kotak Institutional Equities estimates

Exhibit 3: Top 5 movies' on PVR's circuit in December 2019 and December 2018 quarters

Top 5 Movies– 3QFY20 Top 5 Movies– 3QFY19

Release date Movie Footfalls (mn) NBOC (Rs mn) ATP (net) Release date Movie Footfalls (mn) NBOC (Rs mn) ATP (net) ATP change (%) 2-Oct-19 War 2.6 526 202 29-Nov-18 2.0 (a) 3.5 549 156 30 7-Nov-19 Bala 1.4 317 227 18-Oct-18 Badhaai Ho 2.4 429 176 28 2-Oct-19 Joker 1.7 265 156 5-Oct-18 Andhadhun 1.4 238 167 (7) Diwali release Housefull 4 1.8 344 191 Diwali release Thugs Of Hindostan 1.1 227 201 (5) 27-Dec-19 Good Newwz 1.0 242 242 28-Dec-18 Simmba 0.9 210 226 7 Total 8.5 1,693 199 9.5 1,653 175 14

Notes: (a) Primarily regional movie; ATP suppressed partly due ticket price cap in Tamil Nadu

Source: Companies, Kotak Institutional Equities

38 KOTAK INSTITUTIONAL EQUITIES RESEARCH PVR Media

Exhibit 4: SPI's EBITDA tracking well in line with that promised at the time of acquisition, despite weak content performance in 9MFY20 Key financials and operating metrics of SPI cinemas

Source: Company

Exhibit 5: Footfalls grew 1% yoy (overall) and declined 6% yoy for comparable properties (same store basis) Trends in PVR's footfalls, March fiscal year-ends (mn)

Footfalls (LHS, mn) Growth (RHS, yoy %) 29 30 28 27 50 26 26 25 23 23 40 21 21 19 19 19 20 19 18 18 19 30 17 17 15 15 20

10 10

5 0

0 (10)

3QFY16 4QFY16 3QFY17 4QFY17 4QFY18 1QFY19 4QFY19 1QFY20 2QFY16 1QFY17 2QFY17 1QFY18 2QFY18 3QFY18 2QFY19 3QFY19 2QFY20 3QFY20 1QFY16

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 39 Media PVR

Exhibit 6: ATP (gross) decline of 1% yoy was due to GST rate cut to 18% from 28% starting Jan 2020 Trends in PVR's average ticket price (ATP), March fiscal year-ends

ATP (LHS, Rs) Growth (RHS, yoy %) 240 15

214 217 220 212 209 212 210 10 204 206 203 200 202 199 201 200 195 195 5 187 190 183 182 180 0

160 (5)

140 (10)

1QFY16 4QFY16 1QFY17 4QFY17 3QFY18 2QFY19 3QFY19 2QFY20 3QFY16 2QFY17 3QFY17 1QFY18 2QFY18 4QFY18 1QFY19 4QFY19 1QFY20 3QFY20 2QFY16

Source: Company, Kotak Institutional Equities

Exhibit 7: SPH was up 11% yoy on overall basis as well as for comparable properties (same store basis) Trends in PVR's F&B spends per head (SPH), March fiscal year-ends

SPH (LHS, Rs) Growth (RHS, yoy %) 99 100 100 94 25 92 91 90 91 87 87 88 90 84 20 82 78 78 80 15 74 74 73 68 70 10

60 5

50 0

40 (5)

2QFY16 4QFY16 1QFY18 3QFY18 1QFY19 3QFY19 1QFY20 3QFY20 3QFY16 1QFY17 2QFY17 3QFY17 4QFY17 2QFY18 4QFY18 2QFY19 4QFY19 2QFY20 1QFY16

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

40 KOTAK INSTITUTIONAL EQUITIES RESEARCH PVR Media

Exhibit 8: Ad revenues grew 9% yoy; it was up 2% yoy for comparable properties (same store basis) Trends in PVR's ad revenues, March fiscal year-ends

Ad revenues (LHS, Rs mn) Growth (RHS, yoy %) 1,250 50

1,000 35 37 40 31 27 29 29 28 750 30 22 19 18 500 16 16 20 13 13 13 10 11 9 250 6 10

0 0

4QFY16 1QFY17 2QFY17 2QFY18 3QFY18 4QFY18 1QFY20 2QFY20 2QFY16 3QFY16 3QFY17 4QFY17 1QFY18 1QFY19 2QFY19 3QFY19 4QFY19 3QFY20 1QFY16

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 41 Media PVR

Exhibit 9: Net box office collections (NBOC) of key movies, March fiscal year-ends

FY2017 FY2018 FY2019 FY2020E NBOC NBOC NBOC NBOC Movie (Rs mn) Movie (Rs mn) Movie (Rs mn) Movie (Rs mn) The Jungle Book (All) 1,802 Bahubali 2 (Hindi) 5,058 Avengers : Infinity War 2,227 Avengers : Endgame 3,700 Fan (Shah Rukh Khan) 835 The Fate Of The Furious 831 Raazi 1,205 Student of the Year 2 750 Housefull 3 1,068 Half Girlfriend 557 Race 3 1,676 De De Pyaar De 1,200 Baaghi 743 Hindi Medium 633 Veere Di Wedding 859 Bharat 1,700 Udta Punjab 573 Tubelight 1,170 Jurassic W:Fallen Kingdom 800 Kesari 460 Hits Captain America : Civil War 541 Sanju (first 2 days) 735 Kalank 900 1Q Sairat 800 Baaghi 2 1,132 Godzilla 300 Aladdin 500

6,362 8,249 8,634 9,510 Ki & Ka 487 Sachin: A Billion Dreams 408 October 369 Flops Begum Jaan 186 Total 487 Total 594 Total 369 Total 0 Sultan (Salman Khan) 3,000 Toilet Ek Prem Katha 1,350 Sanju (Continued) 2,557 Mission Mangal 2,000 Kabali 2,065 Baadshaho 665 Stree 1,190 The Lion King 1,500 Rustom (Akshay Kumar) 1,221 Spider-Man: Homecoming 577 Gold 1,010 Saaho 1,500 Dishoom 646 Mubarakan 531 Sui Dhaaga 800 Chhichhore 1,500 PINK 563 Annabelle: Creation 450 Mission Impossible: Fallout 766 Super 30 1,470 Dhadak 716 Dream girl 1,350 Hits Kabir Singh (continued) 900 Batla house 870 2Q Spirder-man 750 Article 15 700 Fast & Furious: Hobbs & Shaw 700 7,495 3,573 7,038 13,240 Mohenjo Daro (Hrithik Roshan) 537 Jab Harry Met Sejal 577 Judgemental hai kya 332 Baar Baar Dekho 269 Jagga Jasoos 506 Flops Happy Bhag Jayegi 261 Shubh Mangal Saavdhan 350 Akira 258 MOM 337 Total 1,452 1,931 0 332 Dangal (Aamir Khan) 1,923 Tiger zinda hain 2,030 2.0 (Hindi version) 1,794 War 3,010 M.S. Dhoni 1,201 Golmaal Again 2,045 Thugs of Hindostan 1,350 Housefull 4 2,060 Ae Dil Hai Mushkil 1,116 Judwaa 2 1,333 Zero 872 Dabangg 3 1,400 Shivaay (Ajay Devgan) 1,006 Fukrey returns 747 Simmba (first 4 days) 970 Good Newwz (first 5 days) 940 Hits Dear Zindagi 673 Secret Superstar 596 Badhai Ho 1,298 Bala 1,170 Befikre 579 Thor: Ragnarok 569 Andhadhun 689 Pati Patni Aur Woh 800 3Q Kedarnath 649 Joker 640 Frozen 2 440 Total 6,497 7,320 7,622 10,020 Force 2 313 Tumhari Sulu 330 Panipat 330 Kahaani 2 314 Star Wars: The Last Jedi 89 Saand Ki Aankh 231 Flops Rock On 2 87 Made In China 110 Total 714 419 0 671 Dangal (Contd.) 1,823 Tiger Zinda Hai (Contd.) 1,280 Simmba (Contd.) 1,426 Tanhaji: The Unsung Warrior 2,000 Raees (SRK) 1,311 Padmaavat 2,823 URI 2,350 Baaghi 3 1,750 Kaabil (Hrithik Roshan) 927 Sonu Ke Titu Ki Sweety 1,050 Total Dhamaal 1,510 Street Dancer 3 1,500 Jolly LLB 2 (Akshay Kumar) 1,068 Raid 1,019 Gully Boy 1,235 Good Newwz (Contd.) 1,060 Badrinath Ki Dulhaniya 1,135 Padman 813 Kesari (first week) 1,040 Sooryavanshi (first 5 days) 1,000 Hits Black Panther 503 Manikarnika 908 Love Aaj Kal 2 1,000 Baaghi 2 (2 days) 450 Luka Chuppi 850 Panga 800 4Q Captain Marvel 816 Shubh Mangal Zyada Saavdhan 750 Gunjan Saxena 700 Chhapaak 350 Total 6,265 7,938 10,135 10,910 Rangoon 202 Hichki 425 The Ghazi Attack 182 Hate Story IV 201 Flops Commando 2 244 Pari 242 Total 1,184 Total 868 Total 0 Total 0

Source: Box office data, Kotak Institutional Equities

42 KOTAK INSTITUTIONAL EQUITIES RESEARCH PVR Media

Exhibit 10: Key Bollywood and Hollywood movies expected to be released in CY2020

Rel. Date Movie Cast Bollywood- key titles Jan 2020 Chhapaak Deepika Padukone Jan 2020 Tanhaji The Unsung Warrior Ajay Devgan, Saif Ali Khan, Kajol Jan 2020 Panga Kangana Ranaut Jan 2020 Street Dancer 3D Varun Dhawan, Shraddha Kapoor, Prabhu Deva, Nora Fatehi Feb 2020 Jawaani Jaaneman Saif Ali Khan, Tabu Feb 2020 Love Aaj Kal 2 Sara Ali Khan, Kartik Aaryan, Randeep Hooda Feb 2020 Shubh Mangal Zyada Saavdhan Ayushmann Khurrana Feb 2020 Bhoot: Part 1 Vicky Kaushal, Bhumi Pednekar, Ashutosh Rana, Diana Penty, Siddhanth Kapoor Mar 2020 Gunjan Saxena: The Kargil Girl Janhvi Kapoor, Angad Bedi, Vineet Kumar Singh, Pankaj Tripathi, Manav Vij Mar 2020 Angreezi Medium Kareena Kapoor, Radhika Madan, Irfan Khan, Pankaj Tripathi, Deepak Dobriyal, Manu Rishi Mar 2020 Baaghi 3 Tiger Shroff, Shraddha Kapoor, Ritesh Deshmukh Mar 2020 Sooryavanshi Akshay Kumar, Katrina Kaif Apr 2020 '83 Ranveer Singh, Deepika Padukone Apr 2020 Gulabo Sitabo Ayushmann Khurrana, Amitabh Bachchan Apr 2020 Hungama 2 Shilpa Shetty, Paresh Rawal, Pranitha Subhash May 2020 Coolie No. 1 Sara Ali Khan, Varun Dhawan May 2020 Laxmmi Bomb Akshay Kumar, Kiara Advani May 2020 Brahmastra Ranbir Kapoor, Alia Bhat May 2020 Radhe: The Most Wanted Bhai Salman Khan, Disha Patani, Randeep Hooda May 2020 Shakuntala Devi Sanya Malhotra, Vidya Balan, Jisshu Sengupta, Amit Sadh Jun 2020 Khaali Peeli Ishaan Khattar, Ananya Panday Jun 2020 Thalaivi Kangana Ranaut, Vijay Deverakonda, Priyamani, Prakash Raj, Arvind Swamy Jul 2020 Sadak 2 Pooja Bhatt, Alia Bhatt, Aditya Roy Kapoor, Sanjay Dutt, Makarand Deshpande Jul 2020 Shamshera Vaani Kapoor, Ranbir Kapoor, Sanjay Dutt, Ronit Roy Jul 2020 Bhool Bhulaiyaa 2 Kartik Aaryan, Kiara Advani Aug 2020 Jersey Shahid Kapoor, Mrunal Thakur, Pankaj Kapoor Aug 2020 Bhuj: The Pride of India Pranitha Subhash, Ajay Devgn, Sonakshi Sinha, Rana Daggubati, Sanjay Dutt, Ammy Virk, Nora Fatehi Sep 2020 Haseen Dilruba Taapsee Pannu, Vikrant Massey Sep 2020 Gangubai Kathiawadi Alia Bhatt, Vijay Raaz Oct 2020 Toofan Farhan Akhtar, Mrunal Thakur, Isha Talwar, Paresh Rawal, Rajpal Yadav, Rishi Kapoor, Vijay Raaz Oct 2020 Sardar Udham Singh Vicky Kaushal, Banita Sandhu Nov 2020 Dhaakad Kangana Ranaut Nov 2020 Prithviraj Akshay Kumar, Manushi Chhillar, Sanjay Dutt, Tara Sutaria Dec 2020 Laal Singh Chaddha Aamir Khan, Kareena Kapoor Dec 2020 Bachchan Pandey Kriti Sanon, Akshay Kumar

Hollywood (English) Jan 2020 The Grudge Lin Shaye, Andrea Riseborough Jan 2020 Underwater Kristen Stewart, Jessica Henwick, T. J. Miller Jan 2020 Dolittle Robert Downey Jr, Remi Malleck, Tom Holland, John Cena, Ralph Finnes, Antonio Baneres Jan 2020 Bad Boys for Life Will Smith, Martin Lawrence, Vanessa Hudgens Jan 2020 The Gentlemen Charlie Hunnam, Matthew McConaughey, Feb 2020 Birds of Prey Vin Diesel, Tyrese Gibson, Lucas Black, Dwayne Johnson Feb 2020 Sonic The Hedgehog Jim Carrey, James Marsden, Ben Schwartz, Neal McDonough, Adam Pally, Natasha, Frank C Turner Mar 2020 My Spy Dave Bautista, Kristen Schaal, Ken Jeong Mar 2020 Mulan Liu Yifei, Donnie Yen, Jason Scott Lee, Yoson An, Gong Li, Jet Li Apr 2020 The New Mutants Anya Taylor-Joy, Charlie Heaton, Henry Zega, Blu Hunt, Alice Braga, Antonio Banderas, Happy Anderson Apr 2020 Peter Rabbit II Domhnall Gleeson, Daisy Ridley, Rose Byrne, James Corden, Margot Robbie, David Oyelowo,Elizabeth Debicki Apr 2020 No Time to Die Danial Craig, Rami Malek, Lea Seydoux, Lashana Lynch, Ana de Armas, Naomie Harris, Ben Whishaw May 2020 Black Widow Scarlett Johansson, Florence Pugh, David Harbour, Robert Downey Jr May 2020 Scoob! Frank Welker, Zac Efron, Gina Rodriguez, Will Forte, Amanda Seyfried, Tacy Morgan, Mark Wahlberg May 2020 Fast Furious 9 Vin Diesel, John Cena, Michelle Rodriguez, Tyrese Gibson, Charlize Theron, Jordana Brewster, Ludacris May 2020 The Spongebob Movie: Sponge On The Run Tom Kenny, Keanu Reeves, Mr. Lawrence, Bill Fagerbakke, Clancy Brown, Jill Taller, Rodger Bumpass May 2020 Artemis Fowl Ferdia Shaw, Judi Dench, Lara, Josh Gad, Nonso Anozie, Tamara Smart, Miranda Raison Jun 2020 Wonder Woman 1984 Gal Gadot, Chris Pine, Kristen Wiig, Pedro Pascal, Robin Wright, Connie Nielson, Kristoffer Polaha Jun 2020 Soul Jamie Foxx, Daveed Diggs, Tina Fey, Questlove, Phylicia Rashad, John Ratzenberger Jun 2020 Top Gun: Maverick Tom Cruise, Val Kilmer, Miles Teller, Jennifer Connelly, Glen Powell Jun 2020 In The Heights Anthony Ramos, Lin-Manuel Miranda, Stephanie Beatriz, Dascha Polanco Jul 2020 Minions: The Rise of Gru Steve Carell, Pierre Coffin Jul 2020 Free Guy Ryan Reynolds, Jodie Corner, Joe Keery,Taika Waititi, Channing Tatum Jul 2020 Ghostbusters: After Life Bill Murray, Finn Wolfhard, Dan Aykoyd, Mckenna Grace, Sigourney Weaver Jul 2020 The Purge 5 Ana de la Reguera, Cassidy Freeman, Will Patton, Tenoch Huerta Sep 2020 The King's Man Ralph Fiennes, Stanley Tucci, Daniel Bruhl, Matthew Goode, Gemma Arterton Sep 2020 The Conjuring: The Devil Made Me Do It Oct 2020 Venom 2 Nov 2020 The Eternals Marvel movie: Angelina Jolie and Salma Hayek Nov 2020 Godzilla vs. Kong Nov 2020 Escape Room 2 Dec 2020 Tom And Jerry Dec 2020 The Tomorrow War

Source: Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 43 Media PVR

Exhibit 11: CY2019 was one of the best years for Bollywood from box office collection perspective Domestic Net Box Office collections (NBOC) of the top 25 Bollywood movies, Calendar year-ends, 2013-19 (Rs mn)

2013 2014 2015 2016 2017 2018 2019 NBOC Movie NBOC Movie NBOC Movie NBOC Movie NBOC Movie NBOC Movie NBOC Top-5 movies (Rs mn) (Rs mn) (Rs mn) (Rs mn) (Rs mn) (Rs mn) (Rs mn) 1 Dhoom 3 2,615 PK 3,244 Bajrangi Bhaijaan 3,165 Dangal 3,730 Baahubali 2 5,064 Sanju 3,292 War 3,054 2 Chennai Express 2,184 Kick 2,150 Prem Ratan Dhan Payo1,880 Sultan 3,001 Tiger Zinda Hain 3,280 Padmaavat 2,823 Kabir Singh 2,763 3 Krrish 3 1,985 Happy New Year 1,900 Bajirao Mastani 1,710 Rustom 1,220 Golmaal Again 2,045 Simmba 2,450 Uri 2,440 4 Yeh Jawaani Hai Deewani1,850 Bang Bang 1,485 Tanu Weds Manu Returns1,510 Airlift 1,210 Toilet: Ek Prem Katha1,350 2.0 (Hindi version) 1,792 Housefull 4 2,056 5 Bhaag Milkha Bhaag1,080 Singham Returns 1,400 Dilwale 1,439 MS Dhoni 1,202 Judwaa 2 1,333 Race 3 1,676 Bharat 1,973 6 Ram-Leela 1,054 Holiday - A Soldier 1,100Is Never OffBahubali Duty 1 (Hindi) 1,103 Ae Dil Hai Mushkil 1,115 Raees 1,311 Baaghi 2 1,582 Mission Mangal 1,927 7 Grand Masti 938 Jai Ho 1,080 ABCD 2 1,043 Housefull 3 1,071 Tubelight 1,170 Thugs of Hindostan1,320 Good Newwz 1,800 8 Aashiqui 2 780 2 States 1,018 Welcome Back 940 Shivaay 1,003 Badrinath Ki Dulhania1,135 Badhai Ho 1,294 Dabangg 3 1,550 9 Special 26 668 Ek Villain 978 Baby 790 Fan 835 Jolly LLB 2 1,069 Raazi 1,205 Kesari 1,519 10 Race 2 963 Humpty Sharma Ki Dulhaniya751 Brothers 788 Baaghi 745 Kaabil 926 Stree 1,190 Total Dhamaal 1,501 11 Satyagraha 620 Gunday 729 Gabbar Is Back 787 Kapoor & Sons 711 Fukrey returns 746 Sonu Ke Titu Ki Sweety1,050 Chhichhore 1,473 12 Raanjhanaa 589 Entertainment 630 Piku 777 Neerja 699 Baadshaho 665 Raid 1,019 Super 30 1,470 13 R... Rajkumar 581 Action Jackson 577 Drishyam 765 Dear Zindagi 672 Hindi Medium 634 Gold 1,010 Dream Girl 1,394 14 Once Upon A Time In556 MumbaaiQueen Dobaara! 570 Dil Dhadakne Do 758 Dishoom 646 Secret Superstar 596 Zero 900 Gully Boy 1,342 15 Besharam 540 Mary Kom 560 Singh Is Bliing 742 Pink 638 Jab Harry Met Sejal 577 Veere Di Wedding 859 Bala 1,110 16 Boss 530 Humshakals 555 Tamasha 672 Udta Punjab 591 Half Girlfriend 557 Padman 813 De De Pyaar De 945 17 Kai Po Che 484 Haider 500 Phantom 500 Befikre 578 Mubarakan 531 Sui Dhaaga 800 Manikarnika 908 18 Himmatwala 474 Ragini Mms 2 459 Hate Story 3 442 Mohenjo Daro 537 Jagga Jasoos 506 Satyameva Jayate 765 Luka Chuppi 885 19 Shuddh Desi Romance468 Yaariyan 369 Kis Kisko Pyaar Karoon432 Ki & Ka 508 Shubh Mangal Saavdhan419 Dhadak 716 Badla 876 20 Madras Café 417 Bhootnath Returns 355 Roy 406 Wazir 377 Sachin: A Billion Dreams408 Andhadhun 679 Batla House 850 21 Chashme Baddoor 417 Hasee Toh Phasee 352 Shaandaar 377 A Flying Jatt 354 Tumhari Sulu 342 Kedarnath 639 Kalank 800 22 Matru Ki Bijlee Ka Mandola381 Mardaani 350 Tevar 372 Ghayal Once Again 353 Bareilly Ki Barfi 340 Parmanu - The Story Of625 PokhranPati Patni Aur Who 780 23 Bullett Raja 370 Finding Fanny 276 Hamari Adhuri Kahani323 Azhar 325 Naam Shabana 340 102 Not Out 466 Student Of The Year 2657 24 Phata Poster Nikhla Hero365 Khoobsurat 247 Talvar 300 Kahaani 2 313 Mom 337 Hichki 425 Article 15 652 25 ABCD – Any Body Can351 DanceRaja Natwarlal 234 NH10 292 Force 2 313 Munna Michael 310 October 369 Mardaani 2 430 Total top 25 movies 21,260 21,869 22,314 22,747 25,992 29,759 35,155 Growth (%) 3 2 2 14 14 18

Source: Company

44 KOTAK INSTITUTIONAL EQUITIES RESEARCH PVR Media

Exhibit 12: Condensed consolidated financials for PVR, March fiscal year-ends (Rs mn), 2014-22E

2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Profit model Revenues 13,475 14,813 18,688 21,628 23,478 30,947 36,992 42,168 47,311 Ticket sales (net) 7,947 8,240 10,138 11,256 12,471 16,354 19,131 21,747 24,342 F&B sales 3,215 3,732 4,967 5,794 6,250 8,584 10,596 12,274 14,001 Ad revenues 1,511 1,771 2,145 2,518 2,969 3,535 4,000 4,633 5,186 Other operating income 803 1,071 1,437 2,060 1,788 2,474 3,266 3,513 3,781 EBITDA 2,117 2,044 3,306 3,570 4,155 5,955 6,966 8,103 9,276 Other income 113 46 283 189 177 240 300 275 225 Depreciation 944 1,168 1,252 1,384 1,537 1,913 2,462 2,718 3,152 Interest expense 795 783 839 806 837 1,280 1,420 948 908 Pretax profits 523 118 1,432 1,528 1,952 3,002 3,384 4,713 5,440 Tax 19 8 232 570 704 991 1,184 1,649 1,904 PAT before minority interest 504 110 1,200 958 1,247 2,011 2,200 3,063 3,536 Minority interest (57) (11) 5 1 0 - - - - PAT 561 121 1,194 958 1,247 2,011 2,200 3,063 3,536 Diluted earnings per share (Rs) 13.7 2.9 25.6 20.5 26.7 43.1 43.9 59.8 69.1 Balance sheet Total equity 3,993 4,092 8,695 9,650 10,754 12,395 19,304 21,999 25,110 Deferred taxation liability 4 11 93 9 6 955 955 955 955 Total borrowings 6,134 7,470 6,623 8,196 8,305 12,824 9,024 9,024 8,274 Minority interest 771 383 401 405 8 2,566 2,566 2,566 2,566 Current liabilities 2,600 2,309 3,276 3,925 4,316 7,896 7,363 8,458 9,587 Total liabilities and equity 13,533 14,288 19,108 22,257 23,488 39,090 41,666 43,856 47,147 Cash and cash equivalents 495 261 2,674 309 339 352 388 434 1,094 Other current assets 3,763 4,605 5,763 5,363 5,880 5,861 6,070 7,704 8,639 Tangible fixed assets 6,990 7,523 8,824 10,447 11,270 14,900 17,223 19,326 21,213 Goodwill and Intangibles 1,466 1,273 1,262 4,640 4,629 13,108 13,116 13,124 13,132 CWIP 806 611 570 1,056 1,017 2,208 2,208 2,208 2,208 Total assets 13,533 14,288 19,108 22,257 23,488 39,090 41,666 43,856 47,147 Free cash flow Operating cash flow, excl. working capital 2,003 2,170 3,169 3,442 3,880 5,312 6,531 7,303 8,072 Working capital changes 128 (617) 204 (246) 582 2,984 (1,492) (1,388) (506) Interest expense (net) (667) (759) 837 (617) (660) (1,041) (1,120) (673) (683) Capital expenditure (1,802) (1,940) (2,528) (3,024) (3,287) (4,362) (4,793) (4,828) (5,047) Free cash flow (337) (1,146) 1,683 (445) 516 2,894 (875) 414 1,835 Key ratios and assumptions Footfalls (mn) 59.9 59.1 69.6 75.2 76.1 99.3 110.1 119.2 127.1 Average Ticket Price (ATP) (Rs) 168 177 188 196 210 207 205 215 225 F&B spends per head (SPH) (Rs) 54 66 72 81 89 91 101 108 116 Ad revenue growth (%) 75.9 17.2 21.1 17.3 17.9 19.1 13.1 15.8 11.9 Screens (#) 421 464 516 579 625 763 843 923 1,003 EBITDA margin (%) 15.7 13.8 17.7 16.5 17.7 19.2 18.8 19.2 19.6 Net debt/equity (X) 1.4 1.8 0.5 0.8 0.7 1.0 0.4 0.4 0.3 RoAE (%) 10.8 3.0 18.7 10.4 12.2 17.4 13.9 14.8 15.0 RoACE (%) 10.3 7.8 14.4 9.1 9.2 12.4 11.1 12.0 20.0

Notes: (1) FY2020-22E estimates above are underlying financials without adoption of Ind-AS 116. (2) Adoption of Ind-AS 116 would result in about 60% increase our EBITDA estimate and about 25-30% decrease in net profit.

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 45 REDUCE CEAT (CEAT) Automobiles & Components JANUARY 23, 2020 RESULT Sector view: Neutral

Muted quarter. 3QFY20 results were muted with a 3% yoy increase in consolidated CMP (`): 1,014 revenues on the back of a 2% yoy increase in volumes. The latter was led by 8-10% Fair Value (`): 960 growth in replacement and exports segment, partly diluted by weakness in automotive BSE-30: 41,386 OEM segment. Gross margin expanded by 190 bps qoq in 3QFY20, mostly due to lower RM cost. The company will likely gain market share in PCR segment on new order wins but growth in the core two-wheeler segment will likely remain subdued. We believe current valuations are fair but weak cash flow generation and low ROE constrain a re-rating of the stock; Maintain REDUCE with FV revised to Rs960 (from Rs900 earlier).

CEAT Stock data Forecasts/valuations 2020E 2021E 2022E 52-week range (Rs) (high,low) 1,235-731 EPS (Rs) 58.5 63.3 81.5 Mcap (bn) (Rs/US$) 42/0.6 EPS growth (%) (4.9) 8.1 28.8 ADTV-3M (mn) (Rs/US$) 150/2 P/E (X) 17.3 16.0 12.4 Shareholding pattern (%) P/B (X) 1.4 1.3 1.2 Promoters 50.5 EV/EBITDA (X) 9.2 8.5 7.2 FIIs 25.0 RoE (%) 8.3 8.4 10.0 MFs/BFIs 4.8/2.3 Div. yield (%) 1.2 1.2 1.2 Price performance (%) 1M 3M 12M Sales (Rs bn) 70 76 88 Absolute 2 5 (17) EBITDA (Rs bn) 7 8 10 Rel. to BSE-30 2 (1) (27) Net profits (Rs bn) 2 3 3

3QFY20 results: Standalone EBITDA 4% below our estimates

CEAT reported 3QFY20 standalone EBITDA of Rs1.8 bn (up 30% yoy), which was 4% below our estimates due to higher-than-expected increase in employee cost and other expenses. Standalone revenues increased by 2% yoy (2% above estimates) due to a 2% yoy increase in volumes which was driven by (1) 8% yoy growth in the replacement segment, (2) 8-10% yoy growth in exports segment and (3) 8% yoy decline in the OEM segment. Standalone EBITDA margin came in at 10.6% (up 230 bps yoy and up 20 bps qoq), which was 70 bps below our estimate of 11.3%. Standalone employee cost increased by 19% qoq in 3QFY20 due to roll-out of employee bonus worth Rs200 mn. Standalone other expenses also increased by 6% qoq due to (1) one-off expense of Rs50 mn related to operational expense and (2) significant increase in freight cost. Standalone gross margin expanded by 190 bps qoq in 3QFY20 due to (1) +140 bps impact due to favorable RM prices and (2) +50 bps impact due to increase in finished goods inventory. Standalone PBT increased by 7% yoy, which was 14% below our estimates due to miss at EBITDA level and increase in depreciation expense. Depreciation expense increased by 49% possibly due to commissioning of new truck bus radial tire plant and some impact of IND-AS 116. Finance cost increased by 87% yoy in 3QYF20.

We expect the company to gain market share in the PV segment

The company continues to gain market share in the TBR segment led by a production ramp-up in new plants and in PV segment led by new order wins. The company has added two more clients (Kia Motors and MG India) to their portfolio in this quarter. From a medium-term Hitesh Goel perspective, it is imperative for CEAT to scale up its distribution network in the PV segment and subsequently improve its brand positioning in other segments. Rishi Vora Lower our FY2020-21E EPS estimates by 2-7%; maintain REDUCE with a revised FV of Rs960

We have cut our FY2020-21E EPS estimates by 2-7% due to higher depreciation expense assumptions. We have increased our FY2022E EPS assumptions by 2%. We retain our Reduce rating and revise our FV to Rs960 (from Rs900) based on 12X December 2021E EPS (rollover from September 2021 earlier).

[email protected] Contact: +91 22 6218 6427

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

Key takeaways from the conference call

 2% yoy volume increase in 3QFY20: Volumes increased by 2% yoy in 3QFY20 underpinned by (1) 8% yoy decline in automotive OEMs volumes mainly led by slowdown in M&HCV and two-wheeler segment, (2) 8% yoy volume growth in the replacement segment and (3) 8-10% yoy growth in exports segment. In terms of OEMs, (1) CV tire volumes declined by 25-30% on a yoy basis, (2) two-wheeler tire volumes declined by double-digit and (3) PCR segment volumes increased by double-digit led by market share gains and win from OEMs. The company has a strong order book with passenger vehicle OEMs for the next six months. However, growth in the PV segment was cramped by capacity constraints. In the replacement segment, all segments grew by 7-12% on a yoy basis in 3QFY20. On a 9MFY20 basis, volume growth is (1) flattish in the truck segment led by >30% growth in TBR segment offset by 15-20% decline in TBB segment, (2) flattish growth in 2W segment, (3) high single-digit growth in PV segment and (4) high single- digit growth in the exports segment. As per company, prices were stable in this quarter.

 Lower raw material cost and increase in finished goods inventory aided gross margins in 3QFY20: RM cost per kg declined by 4% yoy (-1% qoq) in 3QFY20. Standalone gross margin expanded by 190 bps on a qoq basis led by (1) 140 bps positive impact due to benign raw material prices and (2) 50 bps impact due to increase in finished goods inventory. Standalone employee cost increased by 19% qoq in 3QFY20 due to roll-out of employee bonus worth Rs200 mn. Standalone other expenses also increased by 6% qoq due to (1) one-off expense of Rs50 mn related to operational expense and (2) significant increase in freight cost.

 Capacity utilization remains low in CSTL plant: Ramp-up of production from new special tires plant in Ambernath has been below expectations due to weak sales volume. CSTL incurred EBITDA loss in 3QFY20 due to lower off-take in volumes. However, on a qoq basis, subsidiaries revenues increased by Rs200 mn and EBITDA loss came down by Rs50 mn in 3QFY20. The company highlighted that break-even in CSTL can be achieved when the plants hit 80% capacity utilization.

 Capex and capacity expansion plans: CEAT has commissioned a new truck bus radial tire plant on January 24, 2019–commercial production has commenced. The capacity of this plant is 120,000 tires per day (160-170 tons per day) and the company is currently manufacturing 60,000-70,000 tires per day which will be ramped up over the next 12-14 months. Two-wheeler tires capacity has come up in September 2019, which will also be ramped up over the next 2-3 years. Current capacity utilization is around 85-90% for the two-wheeler tire segment. The Chennai plant for PV tires will commence in mid-February 2020. Currently, the company is running on 100% capacity utilization for PV tires (240 tons per day). The company has incurred capex of Rs2.7 bn in 3QFY20. The company will incur project capex around Rs30 bn (from Rs35 bn earlier) over the next three years.

 Other key points: (1) Consolidated net debt increased to Rs18.9 bn in 3QFY20 from Rs18.4 bn in 2QFY20 and Rs15 bn in FY2019. Net debt to equity inched up to 0.65X in 3QFY20 from 0.54X in FY2019, (2) the company will decide on the corporate tax rate in the next few months, (3) the company has market share in the TBR segment of 6% in 3QFY20 versus 3-4% last year, (4) market share in the two-wheeler segment is around 27-28% and (5) the company will supply to future models of Kia Motors and MG India.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 47 Automobiles & Components CEAT

Exhibit 1: 3QFY20 consolidated EBITDA was 1% above our estimates on better-than-expected gross margin and revenue growth Interim results of CEAT, consolidated, March fiscal year-ends (Rs mn, %)

(% chg.) 3QFY20 3QFY20E 3QFY19 2QFY20 3QFY20E 3QFY19 2QFY20 9MFY20 9MFY19 Yoy (%) FY2020E FY2019 Yoy (%) Total Income 17,618 17,282 17,139 16,916 1.9 2.8 4.2 52,054 52,240 (0.4) 69,955 69,845 0.2 Total Expenditure (15,786) (15,476) (15,714) (15,212) 2.0 0.5 3.8 (46,847) (47,451) (62,913) (63,420) Raw materials (10,047) (10,196) (10,129) (9,956) (1.5) (0.8) 0.9 (30,599) (31,127) (40,825) (41,818) Employee expense (1,443) (1,238) (1,416) (1,214) 16.5 1.9 18.9 (4,000) (4,022) (5,326) (5,301) Other expenditure (4,296) (4,042) (4,169) (4,042) 6.3 3.0 6.3 (12,248) (12,302) (16,761) (16,301) EBITDA 1,832 1,806 1,426 1,704 1.4 28.5 7.5 5,207 4,789 8.7 7,042 6,425 9.6 Depreciation (705) (675) (482) (671) 4.5 46.2 5.2 (2,020) (1,419) (2,786) (1,927) Interest (380) (375) (222) (374) 1.3 71.3 1.6 (1,103) (611) (1,452) (880) Other income 36 45 40 43 (20.7) (11.2) (16.0) 198 97 284 390 PBT 783 801 762 702 (2.3) 2.7 11.5 2,282 2,855 (20.1) 3,087 4,008 (23.0) Exceptional items (3) — — (8) (17) (43) (17) (448) Tax expense (301) (208) (302) (305) 44.7 (1.2) (629) (1,114) (929) (1,251) Share of profit from joint venture 46 50 63 48 (7.2) (26.3) (3.7) 147 170 202 202 Minority interest (3) (5) (5) (3) (10) (12) (11) (11) Reported net profit 528 648 528 440 (18.5) 0.0 20.0 1,794 1,880 2,355 2,522 Adjusted net profit 530 648 528 445 (18.2) 0.4 18.9 1,805 1,910 (5.5) 2,367 2,488 (4.9) Number of shares (mn) 40 40 40 40 40 40 40 40 EPS 13.1 16.0 13.0 10.9 44.3 46.5 58.2 62.4 Adjusted EPS 13.1 16.0 13.0 11.0 (18.2) 0.4 18.9 44.6 47.2 (5.5) 58.5 61.5 (4.9) Ratios (%) RM as % of sales 57.0 59.0 59.1 58.9 58.8 59.6 58.4 59.9 Employee cost as % of sales 8.2 7.2 8.3 7.2 7.7 7.7 7.6 7.6 Other expenditure as % of sales 24.4 23.4 24.3 23.9 23.5 23.5 24.0 23.3 EBITDA (%) 10.4 10.4 8.3 10.1 10.0 9.2 10.1 9.2 Effective tax rate 38.5 26.0 39.7 43.5 27.6 39.0 30.1 31.2

Source: Company, Kotak Institutional Equities estimate

Exhibit 2: 3QFY20 EBITDA was 4% below our estimate due to higher employee cost (higher bonus payout) and higher other expenses Interim results of CEAT, standalone, March fiscal year-ends (Rs mn, %)

(% chg.) 3QFY20 3QFY20E 3QFY19 2QFY20 3QFY20E 3QFY19 2QFY20 9MFY20 9MFY19 Yoy (%) FY2020E FY2019 Yoy (%) Volumes (tons) 80,486 81,230 78,908 79,637 (0.9) 2.0 1.1 242,223 244,575 (1.0) 330,681 325,892 1.5 Total Income 17,086 16,782 16,734 16,453 1.8 2.1 3.8 50,575 51,139 (1.1) 68,102 68,313 (0.3) Total Expenditure (15,274) (14,890) (15,341) (14,745) 2.6 (0.4) 3.6 (45,448) (46,424) (61,129) (61,938) Raw materials (9,814) (9,901) (10,017) (9,756) (0.9) (2.0) 0.6 (30,045) (30,875) (40,172) (41,403) Employee expense (1,340) (1,122) (1,314) (1,122) 19.4 2.0 19.4 (3,702) (3,733) (4,920) (4,920) Other expenditure (4,120) (3,867) (4,010) (3,867) 6.5 2.7 6.5 (11,701) (11,816) (16,037) (15,615) EBITDA 1,812 1,892 1,394 1,708 (4.2) 30.0 6.0 5,127 4,715 8.7 6,973 6,375 9.4 Depreciation (648) (620) (434) (619) 4.5 49.1 4.6 (1,862) (1,284) (2,499) (1,743) Interest (301) (300) (161) (295) 0.2 87.1 1.9 (892) (438) (1,189) (645) Other income 57 100 64 171 (43.3) (11.4) (66.8) 376 229 447 553 PBT 920 1,072 863 965 (14.2) 6.7 (4.7) 2,750 3,222 (14.7) 3,731 4,540 (17.8) Exceptional items (3) — — (8) (17) (43) (17) (442) Tax expense (297) (274) (282) (298) (584) (1,067) (929) (1,209) Reported net profit 621 797 580 659 (22.2) 6.9 (5.8) 2,149 2,112 1.8 2,786 2,889 (3.6) Adjusted net profit 622 797 580 664 (22.0) 7.2 (6.4) 2,161 2,142 0.9 2,798 2,876 (2.7) Number of shares (mn) 40 40 40 40 40 40 40 40 EPS 15.3 19.7 14.3 16.3 53.1 52.2 68.9 71.4 Adjusted EPS 15.4 19.7 14.3 16.4 (22.0) 7.2 (6.4) 53.4 53.0 0.9 69.2 71.1 (2.7) Ratios (%) RM as % of sales 57.4 59.0 59.9 59.3 59.4 60.4 59.0 60.6 Employee cost as % of sales 7.8 6.7 7.9 6.8 7.3 7.3 7.2 7.2 Other expenditure as % of sales 24.1 23.0 24.0 23.5 23.1 23.1 23.5 22.9 EBITDA (%) 10.6 11.3 8.3 10.4 10.1 9.2 10.2 9.3 Effective tax rate 32.3 25.6 32.7 30.9 21.2 33.1 24.9 26.6

Source: Company, Kotak Institutional Equities estimate

48 KOTAK INSTITUTIONAL EQUITIES RESEARCH CEAT Automobiles & Components

Exhibit 3: Volumes increased by 2% yoy in 3QFY20; RM cost were down 1% qoq in 3QFY20 Trend in operating parameters for the standalone business, CEAT, March fiscal year-ends, 3QFY18-3QFY20 (tons, Rs per kg)

3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 Qoq (%) Yoy (%) Volumes (tons) 77,361 82,138 82,000 83,667 78,908 81,316 82,100 79,637 80,486 1.1 2.0 Net realizations 200.4 200.7 204.2 207.5 212.1 211.2 207.5 206.6 212.3 2.7 0.1 RM cost 117.7 122.7 125.4 126.4 126.9 129.5 127.6 122.5 121.9 (0.5) (3.9) Gross profit 82.7 78.0 78.8 81.0 85.1 81.7 79.9 84.1 90.3 7.4 6.1 Employee cost 13.6 12.9 13.4 15.7 16.7 14.6 15.1 14.1 16.7 18.2 (0.0) Other expenses 44.2 40.7 44.1 46.6 50.8 46.7 45.2 48.6 51.2 5.4 0.7 EBITDA 24.8 24.3 21.2 18.7 17.7 20.4 19.6 21.5 22.5 4.9 27.4

Source: Company, Kotak Institutional Equities estimates

Exhibit 4: International rubber prices have recovered Exhibit 5: Domestic natural rubber prices have also increased in Tokyo commodity exchange rubber futures, 2013-20 (Rs per kg) the past two months Kottayam natural rubber RSS4 prices, 2013-20 (Rs per kg) Tokyo commodity exchange rubber future contract (Rs/kg) 220 Kottayam natural rubber RSS4 prices (Rs/kg) 220 200 180 200 160 180

140 160

120 140 100 120 80 100 60 80 40

Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19

Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-13 Jan-14 Jan-15

Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19

Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-19 Jan-20 Jan-18

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

Exhibit 6: We cut our FY2020-21E consolidated EPS estimates by 2-7% on higher depreciation and interest cost assumptions Earnings revision table, CEAT, March fiscal year-ends, 2020-22E (Rs mn, %)

New estimates Old estimates Change (%) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E Standalone Net sales 68,102 73,735 84,576 68,801 74,441 86,284 (1.0) (0.9) (2.0) EBITDA 6,973 8,051 9,609 6,950 7,659 8,942 0.3 5.1 7.5 EBITDA margin (%) 10.2 10.9 11.4 10.1 10.3 10.4 Net profit 2,798 2,858 3,379 2,894 2,775 3,246 (3.3) 3.0 4.1 EPS (Rs) 69.2 70.7 83.5 71.5 68.6 80.2 (3.3) 3.0 4.1 Consolidated Net sales 69,955 76,174 87,656 70,333 76,880 89,364 (0.5) (0.9) (1.9) EBITDA 7,042 8,309 10,063 7,000 7,895 9,312 0.6 5.3 8.1 EBITDA margin (%) 10.1 10.9 11.5 10.0 10.3 10.4 Net profit 2,367 2,559 3,295 2,553 2,621 3,235 (7.3) (2.3) 1.9 EPS (Rs) 58.5 63.3 81.5 63.1 64.8 80.0 (7.3) (2.3) 1.9

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 49 Automobiles & Components CEAT

Exhibit 7: We expect the company to deliver 8% revenue CAGR in consolidated entity over FY2020-22E CEAT consolidated revenue mix, March fiscal year-ends, 2011-22E (Rs mn, %)

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E 2019-22E CAGR (%) Revenues (Rs mn) Truck & Bus (MHCV) 20,116 23,530 25,151 24,399 23,067 20,591 18,672 19,882 21,860 19,035 20,348 23,614 2.6 Two-wheeler/Three-wheeler 3,630 5,250 6,390 8,990 12,460 14,830 16,480 19,020 20,758 20,758 21,174 23,291 3.9 Passenger vehicles 1,460 2,840 3,760 4,760 5,610 6,190 7,430 8,480 9,564 9,728 11,304 13,320 11.7 LCV n/a n/a 6,771 7,426 7,140 7,044 7,356 7,456 8,198 9,449 10,120 11,871 13.1 Farm n/a n/a 3,386 4,243 3,845 3,251 3,961 4,349 4,782 5,564 6,526 7,322 15.3 Specialty and other income n/a n/a 3,356 3,730 3,292 2,644 3,119 3,803 3,885 3,566 4,263 5,158 9.9 Standalone revenues 34,988 44,720 48,815 53,548 55,414 54,551 57,017 62,130 68,313 68,102 73,735 84,576 7.4 Yoy growth (%) 9.2 9.7 3.5 (1.6) 4.5 9.0 10.0 (0.3) 8.3 14.7 Revenues of subsidiaries 1,323 1,770 1,708 1,992 2,107 285 648 704 1,532 1,853 2,439 3,080 26.2 Consolidated revenues 36,311 46,490 50,522 55,540 57,521 54,836 57,665 62,834 69,845 69,955 76,174 87,656 7.9 Yoy growth (%) 8.7 9.9 3.6 (4.7) 5.2 9.0 11.2 0.2 8.9 15.1 Standalone revenue mix (%) Truck & Bus (MHCV) 57.5 52.6 51.5 45.6 41.6 37.7 32.7 32.0 32.0 28.0 27.6 27.9 Two-wheeler/Three-wheeler 10.4 11.7 13.1 16.8 22.5 27.2 28.9 30.6 30.4 30.5 28.7 27.5 Passenger vehicles 4.2 6.4 7.7 8.9 10.1 11.3 13.0 13.6 14.0 14.3 15.3 15.7 LCV n/a n/a 13.9 13.9 12.9 12.9 12.9 12.0 12.0 13.9 13.7 14.0 Farm n/a n/a 6.9 7.9 6.9 6.0 6.9 7.0 7.0 8.2 8.9 8.7 Specialty n/a n/a 6.9 7.0 5.9 4.8 5.5 6.1 5.7 5.2 5.8 6.1 Overall revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: Company, Kotak Institutional Equities estimates

Exhibit 8: We expect EBITDA per kg to improve over FY2020-22E Volumes and ratios on per kg basis of standalone business, March fiscal year-ends, 2012-22E (Rs per kg)

2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Sales volumes (tons) 202,100 214,500 238,600 252,121 268,536 295,798 305,281 325,652 330,681 353,860 400,663 Yoy growth (%) 8.1 6.1 11.2 5.7 6.5 10.2 3.2 6.7 1.5 7.0 13.2

Key ratios (Rs per kg) Net realizations 221.3 227.6 224.4 219.8 203.1 192.8 203.5 209.8 205.9 208.4 211.1 RM cost 165.1 157.5 145.3 136.2 115.1 114.1 124.6 127.1 121.5 123.9 127.2 Gross profit 56.2 70.1 79.1 83.5 88.1 78.6 78.9 82.6 84.5 84.5 83.9 Employee cost 11.5 12.5 12.1 13.9 13.7 13.0 13.5 15.1 14.9 14.3 14.2 Other expenses 32.1 38.5 41.1 44.3 44.8 43.4 44.8 48.0 48.5 47.4 45.8 EBITDA 12.6 19.0 25.9 25.3 29.5 22.3 20.6 19.6 21.1 22.8 24.0

Source: Company, Kotak Institutional Equities estimates

50 KOTAK INSTITUTIONAL EQUITIES RESEARCH CEAT Automobiles & Components

Exhibit 9: CEAT is looking to increase capacity by 45% over the next three years Existing capacity by plant and market segment and expansion plans, March fiscal year-ends, 2018-22E (tons per day)

Tons per day (TPD) 2018 2019 2020E 2021E 2022E Comments Ambernath Specialty (new farm radial facility) 40 40 40 60 100 Assuming new capacity addition over FY2021 Total 40 40 40 60 100 Bhandup TBB (Truck Bus bias tyres) 150 150 150 150 150 Two-wheeler/three-wheeler 15 15 15 15 15 Others (LCV, Farm, etc.) 85 85 85 85 85 Total 250 250 250 250 250 Halol - I TBR (Truck Bus radial) 80 80 80 80 80 PCR 70 70 70 70 70 Total 150 150 150 150 150 Halol - II PCR 80 110 110 110 110 TBR 10 10 10 10 10 Total 90 120 120 120 120 Halol - III TBR — 100 160 200 200 Assuming new TBR capacity will come online over Total — 100 160 200 200 FY2019-21 Nagpur -I Two-wheeler/three-wheeler 120 120 120 120 120 Total 120 120 120 120 120 Nagpur -II Two-wheeler/three-wheeler — — 70 140 140 Assuming new 2W/3W capacity will come online Total — — 70 140 140 over FY2020-22 Nashik TBB (Truck Bus bias tyres) 90 90 90 90 90 Two-wheeler/three-wheeler 12 12 12 12 12 Others (LCV, Farm, etc.) 98 98 98 98 98 Total 200 200 200 200 200 Greenfiled PCR — — 75 150 240 Total — — 75 150 240 Outourced Two-wheeler/three-wheeler 200 200 200 200 200 Company might reduce sourcing from vendor with Total 200 200 200 200 200 increase in in-house production Total capacity 1,050 1,180 1,385 1,590 1,720 Two-wheeler/three-wheeler 347 347 417 487 487 PCR 150 180 255 330 420 TBR (Truck Bus radial) 90 190 250 290 290 TBB (Truck Bus bias tyres) 240 240 240 240 240 Others (LCV, Farm, Specialty, etc.) 223 223 223 243 283

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 51 Automobiles & Components CEAT

Exhibit 10: We expect standalone EBITDA to grow at 15% CAGR over FY2020-22E CEAT, standalone financial summary, March fiscal year-ends, 2012-22E (Rs mn)

2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Profit model (Rs mn) Net sales 44,720 48,815 53,548 55,414 54,551 57,017 62,130 68,313 68,102 73,735 84,576 EBITDA 2,556 4,080 6,184 6,384 7,933 6,600 6,274 6,375 6,973 8,051 9,609 Other income 200 215 205 289 461 415 568 553 447 465 473 Interest (1,922) (1,779) (1,692) (1,305) (933) (938) (865) (645) (1,189) (1,697) (2,137) Depreciation (705) (782) (826) (878) (1,068) (1,420) (1,617) (1,743) (2,499) (2,978) (3,403) Extraordinary income/(losses) (32) (277) (100) (61) (114) (133) (264) (442) (17) — — Profit before tax 98 1,457 3,772 4,429 6,278 4,523 4,097 4,098 3,714 3,841 4,542 Tax (23) (393) (1,234) (1,439) (1,826) (1,039) (1,309) (1,209) (929) (983) (1,163) Reported net profit 75 1,064 2,538 2,990 4,452 3,484 2,787 2,889 2,786 2,858 3,379 Adjusted net profit 100 1,266 2,605 3,031 4,533 3,586 2,972 2,876 2,798 2,858 3,379 Adjusted EPS (Rs) 2.9 37.0 72.5 74.9 112.1 88.7 73.5 71.1 69.2 70.7 83.5 Balance sheet (Rs mn) Equity 6,563 7,467 9,671 15,985 19,491 23,062 25,468 27,510 29,738 32,038 34,859 Deferred tax liability 224 745 1,091 1,172 1,481 1,346 1,782 2,077 2,077 2,077 2,077 Other long-term liabilities 95 134 216 285 413 613 370 414 414 414 414 Total borrowings 12,664 10,117 11,488 7,594 6,957 7,751 6,409 12,605 21,105 26,105 29,105 Current liabilities 10,339 12,099 11,311 11,327 10,584 12,661 13,663 18,012 18,231 19,345 21,258 Total liabilities 29,886 30,562 33,777 36,362 38,926 45,432 47,692 60,619 71,565 79,979 87,714 Net fixed assets 15,375 15,129 15,044 16,454 21,881 24,576 26,266 35,958 46,458 53,480 57,078 Investments 745 447 1,243 4,368 2,245 2,587 3,201 3,130 3,930 4,730 5,530 Other long-term assets 80 1,289 853 723 729 676 1,153 1,884 1,884 1,884 1,884 Cash 334 814 1,030 622 242 175 730 597 961 213 972 Other current assets 13,351 12,884 15,606 14,196 13,829 17,418 16,342 19,049 18,331 19,671 22,250 Total assets 29,885 30,561 33,777 36,362 38,925 45,432 47,692 60,619 71,565 79,979 87,714 Free cash flow (Rs mn) Operating cash flow excl. working capital 2,184 3,562 5,358 5,412 6,363 5,600 5,307 5,385 6,027 7,068 8,446 Working capital changes (1,460) 2,008 (3,806) 1,640 838 (2,205) 2,135 (57) 937 (226) (665) Capital expenditure (1,253) (630) (771) (2,633) (5,984) (3,994) (4,037) (10,622) (13,000) (10,000) (7,000) Free cash flow (529) 4,940 782 4,419 1,217 (598) 3,406 (5,294) (6,035) (3,158) 781 Ratios Gross margin (%) 25.4 30.8 35.3 38.0 43.4 40.8 38.8 39.4 41.0 40.5 39.8 EBITDA margin (%) 5.7 8.4 11.5 11.5 14.5 11.6 10.1 9.3 10.2 10.9 11.4 PAT margin (%) 0.2 2.6 4.9 5.5 8.3 6.3 4.8 4.2 4.1 3.9 4.0 Net debt/equity (X) 1.8 1.2 1.1 0.2 0.3 0.3 0.2 0.4 0.7 0.8 0.8 Book value (Rs/share) 192 218 269 395 482 570 630 680 735 792 862 RoAE (%) 1.5 18.0 30.4 23.6 25.6 16.9 12.2 10.9 9.8 9.3 10.1 RoACE (%) 8.4 13.6 19.5 18.6 21.3 14.3 10.4 9.3 7.5 7.0 7.6

Source: Company, Kotak Institutional Equities estimates

52 KOTAK INSTITUTIONAL EQUITIES RESEARCH CEAT Automobiles & Components

Exhibit 11: We expect consolidated earnings to grow at 10% earnings CAGR over FY2020-22E CEAT, consolidated financial summary, March fiscal year-ends, 2012-22E (Rs mn)

2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Profit model (Rs mn) Net sales 46,490 50,522 55,540 57,521 54,836 57,665 62,834 69,845 69,955 76,174 87,656 EBITDA 2,825 4,380 6,580 6,804 7,732 6,568 6,148 6,425 7,042 8,309 10,063 Other income 136 177 140 226 277 186 295 390 284 302 310 Interest (1,958) (1,808) (1,721) (1,319) (949) (817) (974) (880) (1,452) (1,959) (2,324) Depreciation (728) (806) (865) (934) (1,077) (1,431) (1,686) (1,927) (2,786) (3,322) (3,804) Extraordinary income/(losses) (32) (277) (100) (61) (114) (133) (340) (448) (17) — — Profit before tax 243 1,665 4,032 4,716 5,869 4,373 3,443 3,560 3,070 3,329 4,244 Tax (61) (463) (1,325) (1,577) (1,873) (1,064) (1,340) (1,251) (929) (983) (1,163) Profit from associates & minority interest (1) — 4 33 380 303 277 213 213 213 213 Reported net profit 181 1,202 2,712 3,172 4,375 3,612 2,380 2,522 2,355 2,559 3,295 Adjusted net profit 205 1,402 2,780 3,213 4,453 3,712 2,618 2,488 2,367 2,559 3,295 Adjusted EPS (Rs) 6.0 40.9 77.3 79.4 110.1 91.8 64.7 61.5 58.5 63.3 81.5 Balance sheet (Rs mn) Equity 6,778 7,856 10,286 16,823 20,547 24,150 26,061 27,661 29,458 31,459 34,196 Minority interest — — 363 327 322 292 234 238 238 238 238 Deferred tax liability 248 786 1,148 1,250 1,582 1,449 1,893 2,198 2,198 2,198 2,198 Other long-term liabilities 111 157 260 338 434 676 511 430 430 430 430 Total borrowings 12,954 10,377 11,738 7,751 6,837 9,893 9,193 14,980 23,605 30,105 33,105 Current liabilities 10,531 12,295 11,667 11,737 11,357 12,710 13,573 18,542 18,885 20,123 22,169 Total liabilities 30,622 31,470 35,462 38,224 41,079 49,169 51,464 64,049 74,814 84,553 92,336 Net fixed assets 15,837 15,786 16,247 17,883 23,311 27,788 30,192 40,124 51,838 59,516 63,711 Goodwill 205 216 227 215 — — — — — — — Investments 309 6 0 3,124 1,955 2,316 2,135 1,814 1,814 1,814 1,814 Other long-term assets 89 912 961 925 1,283 1,289 1,392 2,104 2,104 2,104 2,104 Cash 360 1,121 1,679 1,236 630 359 863 735 161 629 1,368 Other current assets 13,822 13,430 16,348 14,840 13,900 17,418 16,883 19,271 18,897 20,489 23,338 Total assets 30,621 31,470 35,461 38,224 41,079 49,169 51,464 64,049 74,814 84,553 92,336 Free cash flow (Rs mn) Operating cash flow excl. working capital 2,441 3,890 5,766 5,773 6,200 5,519 4,986 5,292 6,310 7,539 9,114 Working capital changes (1,607) 1,955 (3,800) 1,714 820 (2,174) 1,738 235 717 (354) (802) Capital expenditure (1,301) (847) (1,446) (2,999) (7,137) (5,633) (4,839) (11,073) (14,500) (11,000) (8,000) Free cash flow (467) 4,998 520 4,488 (117) (2,288) 1,885 (5,547) (7,473) (3,815) 311 Ratios Gross margin (%) 25.8 31.2 35.8 38.6 43.6 41.0 39.4 40.1 41.6 41.1 40.3 EBITDA margin (%) 6.1 8.7 11.8 11.8 14.1 11.4 9.8 9.2 10.1 10.9 11.5 PAT margin (%) 0.4 2.8 5.0 5.6 8.1 6.4 4.2 3.6 3.4 3.4 3.8 Net debt/equity (X) 1.8 1.2 1.0 0.2 0.3 0.4 0.3 0.5 0.8 0.9 0.9 Book value (Rs/share) 198 229 286 416 508 597 644 684 728 778 845 RoAE (%) 3.1 19.2 30.6 23.7 23.8 16.6 10.4 9.3 8.3 8.4 10.0 RoACE (%) 9.0 14.3 20.5 19.3 19.5 13.1 8.1 7.7 6.3 6.2 7.2

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 53 December 2019 : Results calendar India Daily Summary Daily Summary India

Mon Tue Wed Thu Fri Sat Sun KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK 20-Jan 21-Jan 22-Jan 23-Jan 24-Jan 25-Jan 26-Jan Federal Bank Havells india Asian Paints Biocon Bank of Baroda DCB Bank Hindustan Zinc HDFC AMC AU Small Finance Canara Bank Indian Bank ICICI Bank Just Dial ICICI Prudential Life Axis Bank Cholamandalam JSW Steel Kotak Mahindra Bank Polycab CEAT DB Corp. Prestige Estates Projects Zee Entertainment Enterprises Gatew ay Distriparks HDFC Life Insurance Supreme Industries IIFL Wealth PNB Housing Finance UltraTech Cement 27-Jan 28-Jan 29-Jan 30-Jan 31-Jan 1-Feb 2-Feb Dr Reddy's Laboratories Cummins India Bajaj Finance Bajaj Auto Aditya Birla Capital Amara Raja Batteries HDFC JK Lakshmi Cement Bajaj Finserv Bajaj Holding & Investment AIA Engineering Karur Vysya Bank Interglobe Aviation Mahindra & Mahindra Financial Crompton Greaves Consumer Bharat Electronics Bank of India Sobha

Torrent Pharmaceuticals Maruti Suzuki Escorts Bharti Infratel Castrol India -

United Spirits TeamLease Services Godrej Consumer Products Carborundum Universal Coromandel International January 24, 2020 IDFC First Bank Colgate-Palmolive (India) Hindustan Unilever Jubilant Foodw orks Dabur India Indian Hotels Co.

Orient Cement Equitas Holdings ITC Pidilite Industries IOCL Jubilant Life Science Quess Corp. Jagran Prakashan Kansai Nerolac SIS Laurus Labs Pow er Grid Tata Pow er LIC Housing Finance State Bank of India The Ramco Cement Marico Tech Mahindra Shriram City Union Finance Timken Tata Motors 3-Feb 4-Feb 5-Feb 6-Feb 7-Feb 8-Feb 9-Feb Dr Lal Pathlabs Adani Port and SEZ Ajanta Pharma Aditya Birla Fashion ACC J K Cement GlaxoSmithkline Pharmaceuticals Bharti Airtel Berger Paints Bata India Container Corporation Mahindra & Mahindra Godrej Properties Exide Industries Bosch Eicher Motors Emami Honeyw ell Automation Mahindra Logistics Cadila Healthcare Endurance Technologies Mahanagar Gas MRPL Punjab National Bank Cipla GlaxoSmithkline Consumer NHPC Shriram Transport REC Divi's Laboratories Gujarat Pipavav Port Voltas SRF Tata Global Beverages Godrej Agrovet Hero Motocorp Whirlpool Tata Chemicals Thermax Gujarat Gas Lupin Ujjivan Financial Services Titan Company HPCL Mphasis TVS Motor Indiabulls Housing NMDC Max Financial Services SKF Sun Pharmaceuticals Trent 10-Feb 11-Feb 12-Feb 13-Feb 14-Feb 15-Feb 16-Feb Bharat Forge BHEL ABB Apollo Hospitals Muthoot Finance Grasim Industries Info Edge Gillette India Shree Cement Motherson Sumi Systems Ipca Laboratories Lemon Tree Hotels Rajesh Exports P&G Hygiene Varroc Engineering PI Industries

Source: BSE, NSE, Kotak Institutional Equities

54 KOTAK INSTITUTIONAL EQUITIES RESEARCH 54

Kotak Institutional Equities: Valuation summary of KIE Universe stocks 55 Fair O/S ADVT

Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo Company Rating 22-Jan-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E (US$ mn) Automobiles & Components Amara Raja Batteries ADD 784 800 2 134 1.9 171 42 45 51 46.7 8.9 13.0 19 17.3 15.3 11.2 9.8 8.5 3.5 3.1 2.7 19.8 18.8 18.7 1.3 1.4 1.6 7.6 Apollo Tyres ADD 174 175 0 100 1.4 572 10.4 11.0 14.7 (27.7) 6.2 33.4 16.8 15.8 11.9 7.9 7.2 5.8 1.0 0.9 0.9 5.8 5.9 7.5 1.7 1.7 1.7 6.8 Ashok Leyland BUY 86 95 11 252 3.5 2,936 3.9 3.3 7.0 (43.7) (15.4) 110.9 21.9 25.9 12.3 13.4 13.2 7.3 2.8 2.6 2.3 13.3 10.5 20.0 1.4 1.2 2.4 24 Bajaj Auto SELL 3,076 2,925 (5) 890 12 289 171 173 208 11.3 1.5 20.4 18.0 17.8 14.8 13.7 13.3 10.3 3.7 3.3 3.0 21 19.5 21 2.2 2.3 2.7 18.0 Balkrishna Industries REDUCE 1,099 850 (23) 212 3.0 193 42 44 50 5.3 4.8 14.9 26.3 25.1 21.8 16.2 14.1 11.8 4.0 3.6 3.2 16.3 15.2 15.6 0.8 0.9 1.0 9.9 Bharat Forge SELL 503 375 (25) 234 3.3 466 17 18 24 (25.0) 9.1 32.6 30.2 27.7 20.9 16.4 15.6 12.8 4.0 3.7 3.3 13.8 13.9 16.6 1.1 1.2 1.2 11.6 CEAT REDUCE 1,000 900 (10) 40 0.6 40 63 65 80 2.7 2.6 23.5 15.8 15.4 12.5 8.9 8.3 7.2 1.4 1.3 1.2 8.9 8.5 9.8 1.2 1.2 1.2 2.1 Eicher Motors SELL 21,100 17,000 (19) 576 8.1 27 755 717 973 (7.5) (5.0) 35.8 28.0 29.4 21.7 21.2 21.0 16.2 6.6 5.6 4.7 26 21 24 0.1 —— 45 Endurance Technologies SELL 1,078 915 (15) 152 2.1 141 47 52 62 30.3 10.4 18.8 23 20.7 17.4 11.5 10.2 8.4 4.9 4.1 3.4 21 19.6 19.5 0.7 0.8 1.0 0.4 Escorts BUY 704 1,030 46 63 1.2 89 52 63 75 (4.5) 21.1 18.6 13.5 11.2 9.4 9.5 7.5 5.9 1.8 1.6 1.4 13.6 14.5 15.1 1.1 1.3 1.6 19.0 Exide Industries SELL 198 180 (9) 168 2.4 850 9.7 10.4 11.3 7.2 7.5 8.3 20.4 19.0 17.5 11.4 10.4 9.3 2.6 2.4 2.2 13.2 13.2 13.3 1.8 2.0 2.0 6.2 Hero Motocorp SELL 2,399 2,500 4 479 6.7 200 158 144 196 (6.7) (8.6) 35.3 15.2 16.6 12.3 9.0 9.8 7.0 3.3 3.1 2.8 23 19.1 24 3.3 3.0 4.1 28 Mahindra CIE Automotive ADD 170 170 0 64 0.9 378 11.9 13.5 15.9 (18.2) 14.0 17.8 14.3 12.5 10.6 7.6 6.5 5.4 1.4 1.2 1.1 10.0 10.3 10.9 ——— 1.0 Mahindra & Mahindra BUY 554 820 48 688 9.7 1,138 40 42 47 (16.0) 5.9 10.8 13.8 13.1 11.8 9.6 8.8 7.8 1.6 1.4 1.3 12.2 11.6 11.7 1.4 1.5 1.7 28 Maruti Suzuki SELL 7,136 5,800 (19) 2,156 30.3 302 202 252 319 (18.4) 24.6 26.3 35 28 22 20.3 15.3 11.5 4.3 3.9 3.5 12.7 14.4 16.3 0.7 0.9 1.1 90 Motherson Sumi Systems SELL 139 110 (21) 438 6.1 3,158 5.4 7.0 8.0 6.2 29.2 14.6 25.6 19.8 17.3 9.3 7.1 6.1 3.6 3.2 2.8 14.9 17.2 17.5 1.1 1.3 1.5 18.4 MRF SELL 67,851 54,000 (20) 288 4.0 4 2,750 3,051 3,749 3.1 10.9 22.9 25 22.2 18.1 11.4 10.0 8.1 2.4 2.2 1.9 10.2 10.3 11.4 0.1 0.1 0.1 5.7 Schaeffler India REDUCE 4,617 3,800 (18) 144 2.0 31 120 150 186 (16.8) 25.0 24.0 39 31 25 21.1 17.7 14.2 4.7 4.1 3.6 13.0 14.3 15.5 ——— 0.5 SKF REDUCE 2,183 1,950 (11) 108 1.5 49 66 79 95 0.5 20.4 19.4 33 28 23 23.9 19.8 16.0 5.5 4.8 4.1 16.7 17.4 17.8 0.6 0.7 0.8 0.5 Tata Motors BUY 186 200 8 630 8.6 3,598 (7.9) 6.3 16.0 (46.2) 179.6 154.0 NM 29.5 11.6 4.2 3.6 3.1 1.1 1.1 1.0 NM 3.8 8.8 ——— 99 Timken SELL 935 825 (12) 70 1.0 75 29 34 40 45.6 17.0 18.9 32 28 23 19.1 16.1 13.3 4.5 3.9 3.4 15.0 15.2 15.5 0.1 0.1 0.1 0.6 TVS Motor SELL 465 315 (32) 221 3.1 475 13.8 12.8 20.8 (2.4) (6.9) 62.0 34 36 22 16.0 16.3 11.7 5.8 5.2 4.6 18.3 15.2 22 1.0 0.8 1.3 11.8 Varroc Engineering BUY 489 520 6 66 0.9 135 20 32 42 (41.5) 63.6 31.5 25.1 15.3 11.6 8.3 6.4 5.1 2.0 1.8 1.6 8.0 11.7 13.6 ——— 0.4 Automobiles & Components Neutral 8,173 114.8 (12.6) 27.2 33.7 27.8 21.9 16.4 10.0 8.7 7.0 2.8 2.5 2.3 10.1 11.7 14.0 1.0 1.1 1.4 433 Banks AU Small Finance Bank SELL 887 550 (38) 269 3.8 302 22.3 25.7 32.6 71.1 15.2 26.8 40 34 27 ——— 6.1 5.2 4.4 17.5 15.8 17.0 0.0 —— 6.9 Axis Bank REDUCE 713 740 4 2,009 28.2 2,806 17.5 49 62 (3.9) 183.2 25.1 41 14.4 11.5 ——— 2.6 2.3 1.9 6.4 15.1 16.6 0.2 1.0 1.3 90 Bandhan Bank REDUCE 475 540 14 766 10.7 1,610 20.3 25.4 31.2 24.0 25.2 23.0 23.4 18.7 15.2 ——— 4.9 3.9 3.1 23.9 23 22 0.0 0.0 0.0 19.4 Bank of Baroda ADD 94 105 11 436 6.1 4,582 8.1 23.3 25 397.3 186.0 5.5 12 4.1 3.8 ——— 0.8 0.7 0.6 6.5 14.9 14.0 1.7 4.9 5.2 38 City Union Bank ADD 236 225 (5) 174 2.4 735 10.6 12.1 14.1 14.0 14.0 16.7 22 19.5 16.7 ——— 3.5 3.0 2.7 15.1 15.3 15.8 0.8 0.9 1.1 2.6

DCB Bank BUY 180 240 33 56 0.8 310 12.8 16.5 21.2 21.9 29.0 28.0 14.1 10.9 8.5 ——— 1.8 1.6 1.3 13.0 14.8 16.5 0.7 0.9 1.1 2.1 Daily Summary India Equitas Holdings BUY 103 170 64 35 0.5 342 9.2 13.2 16.0 46.1 42.6 21.6 11.2 7.8 6.5 ——— 1.3 1.1 1.0 11.9 14.8 15.5 ——— 7.0 Federal Bank BUY 94 120 28 187 2.6 1,985 8.4 9.9 12.6 33.6 18.8 26.3 11.2 9.4 7.5 ——— 1.4 1.3 1.1 12.0 12.9 14.7 2.0 2.4 3.0 15.0 HDFC Bank ADD 1,241 1,350 9 6,796 95.4 5,447 48 56 67 24.9 16.6 18.5 26 22 19 ——— 4.0 3.5 3.1 16.5 16.9 17.5 0.8 0.9 1.0 107 ICICI Bank BUY 523 575 10 3,383 47.5 6,447 18.6 31 39 291.6 69.1 23.0 28 16.6 13.5 ——— 3.1 2.7 2.3 10.6 16.2 17.5 0.7 1.2 1.5 174 IndusInd Bank ADD 1,327 1,600 21 920 12.9 712 73 104 121 34.0 42.3 15.4 18 12.7 11.0 ——— 2.6 2.2 1.9 16.6 18.1 17.9 0.8 1.1 1.2 90 Karur Vysya Bank BUY 55 80 47 44 0.6 799 3.8 7 14 44.3 96.0 82.1 14 7.3 4.0 ——— 0.8 0.8 0.7 4.7 8.7 14.6 1.7 3.6 6.5 0.6 Punjab National Bank NR 61 NR — 411 5.8 7,067 6 8 10 129.2 25.9 19.6 10 7.7 6.4 ——— 1.0 0.9 0.7 8.7 10.4 9.9 0.0 0.0 0.0 19.7 RBL Bank ADD 339 375 11 166 2.3 509 9.5 32 41 (53.3) 233.4 30.0 36 10.7 8.2 ——— 1.7 1.5 1.3 5.3 14.0 16.0 0.4 1.2 1.6 72 State Bank of India BUY 316 400 27 2,822 39.6 8,925 27 45 54 2,650.6 70.1 18.5 12 7.0 5.9 ——— 1.6 1.3 1.0 10.2 15.3 15.5 0.1 0.1 0.1 177 Ujjivan Financial Services NR 333 NR — 41 0.6 121 25.1 30 40 52.3 20.1 32.0 13 11.1 8.4 ——— 1.9 1.6 1.4 14.6 15.4 17.6 0.7 0.9 1.3 12.2 Ujjivan Small Finance Bank ADD 51 55 7 89 1.2 1,714 2 4 6 17.7 150.6 56.8 32 12.6 8.0 ——— 3.0 2.5 2.0 12.1 21 26 0.1 0.3 0.7 0.0 KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Union Bank RS 52 —— 176 2.5 3,756 (2) 11 16 87.8 662.6 35.6 NM 4.5 3.3 ——— 0.8 0.6 0.5 NM 13.6 13.5 0.0 3.3 4.5 9.5 YES Bank SELL 38 40 4 98 1.4 2,546 (11.6) (4) 10 (255.6) 64.2 351.6 NM NM 3.7 ——— 0.5 0.6 0.5 NM NM 10.2 0.0 0.0 0.0 217 Banks Attractive 19,101 268.2 201.8 75.7 23.4 22 12.4 10.0 2.0 1.6 1.4 9.0 13.2 14.3 0.5 0.9 1.1 1,087 -

January January 24, 2020 Source: Company, Bloomberg, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 55

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 23-Jan-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E (US$ mn) Building Products Astral Poly Technik SELL 1,098 680 (38) 165 2.3 150 19.5 23 26 19.0 16.8 15.3 56 48 42 31.5 27.6 23.9 10.6 8.8 7.3 21 19.9 19.1 0.1 0.1 0.1 3.1 Building Products Cautious 165 2.3 48.8 16.8 15.3 57 49 42 31.5 27.6 23.9 10.7 8.8 7.4 18.8 18.2 17.5 0.1 0.1 0.1 3.1 Capital goods ABB SELL 1,316 940 (29) 279 3.9 212 18 24 31 49.7 33.8 29.2 73 55 42 43.2 34.6 27.1 6.3 5.6 4.9 9.0 10.8 12.3 0.4 0.5 0.6 1.6 Ashoka Buildcon BUY 115 180 57 32 0.5 281 12.4 13.3 15.0 4.3 7.5 12.9 9.3 8.6 7.7 7.2 6.6 5.8 1.3 1.2 1.0 14.8 14.1 14.2 1.7 1.8 2.1 1.3 Bharat Electronics BUY 101 132 30 246 3.5 2,437 7.3 8.0 5.6 (6.2) 10.4 (30.6) 13.9 12.6 18.2 9.0 7.8 8.4 2.5 2.2 2.2 18.4 18.6 12.6 3.2 3.5 1.9 13.0 BHEL SELL 43 46 7 151 2.1 3,482 1.8 2.2 4.0 (49.8) 26.6 79.4 25 19.6 10.9 8.9 7.1 5.1 0.5 0.5 0.5 1.9 2.4 4.3 2.0 2.3 3.7 14.1 Carborundum Universal ADD 335 325 (3) 63 0.9 189 14.1 16.9 19.4 7.9 19.4 15.0 24 19.9 17.3 14.0 11.5 9.8 3.4 3.0 2.7 14.8 16.0 16.6 1.3 1.5 1.7 0.3 Cochin Shipyard BUY 404 600 49 53 0.7 132 44 48 38 21.1 7.9 (19.8) 9.1 8.4 10.5 3.8 5.2 5.0 1.4 1.3 1.2 16.5 15.9 11.6 2.7 3.0 3.3 1.3 Cummins India REDUCE 569 540 (5) 158 2.2 277 25 27 30 (6.2) 10.0 10.7 23 21 18.9 21.2 19.0 16.8 3.6 3.4 3.2 16.1 16.8 17.6 2.3 2.5 2.8 4.7 Dilip Buildcon BUY 420 645 53 57 0.8 137 39 45 54 (30.0) 15.2 19.7 10.8 9.4 7.8 5.4 4.9 4.0 1.5 1.3 1.1 15.4 15.2 15.5 0.2 0.2 0.3 1.9

IRB Infrastructure BUY 113 137 21 40 0.6 351 25 19 14 3.4 (24.0) (26.8) 4.5 6.0 8.1 7.3 7.4 7.2 0.6 0.5 0.5 13.1 9.1 6.2 2.4 2.1 1.8 2.6 -

Kalpataru Power Transmission BUY 463 625 35 72 1.0 153 35 40 50 16.2 12.3 26.6 13.1 11.7 9.2 6.1 5.1 4.1 2.0 1.7 1.5 16.2 15.8 17.3 0.8 0.9 1.2 0.7 January 24, 2020 KEC International BUY 330 322 (2) 85 1.2 257 24.0 27 31 26.6 13.2 14.4 13.8 12.2 10.6 7.8 6.8 6.0 2.9 2.4 2.0 23 21 20 0.8 0.9 1.0 1.5 L&T BUY 1,332 1,550 16 1,870 26.2 1,403 70 68 86 13.8 (3.0) 27.6 19.1 19.7 15.4 18.3 15.6 13.4 3.1 2.6 2.3 16.9 14.3 16.0 0.8 2.9 2.0 61

Sadbhav Engineering BUY 133 167 25 23 0.3 172 11.4 14.1 15.7 4.7 24.3 11.1 11.7 9.4 8.5 7.3 6.4 5.7 1.0 0.9 0.9 9.2 10.5 10.6 — — — 0.3 Siemens SELL 1,583 1,190 (25) 564 7.9 356 36 42 48 18.5 16.4 14.0 44 38 33 31.4 27.1 23.8 5.7 5.2 4.7 13.6 14.4 14.9 0.6 0.7 0.8 15.2 Thermax BUY 1,070 1,150 7 127 1.8 113 29 42 50 (20.2) 42.4 18.7 36 26 22 23.3 20.1 17.0 23.3 20.1 17.0 10.6 13.8 14.7 0.7 0.9 1.0 1.0 Capital goods Neutral 3,821 53.6 4.5 4.2 17.2 20 19.5 16.6 2.5 2.2 2.1 12.4 11.5 12.4 1.1 2.2 1.7 1,081 Commercial & Professional Services SIS REDUCE 507 870 72 74 1.0 75 37 41 48 27.5 11.9 16.0 13.8 12.3 10.6 14.9 12.7 10.9 2.5 2.1 1.8 19.9 18.8 18.5 0.7 0.7 0.8 0.3 TeamLease Services SELL 2,701 2,300 (15) 46 0.6 17 68 89 112 18.6 29.8 26.9 40 30 24 34.7 26.3 20.0 7.0 5.7 4.6 19.5 21 21 — — — 0.9 Commercial & Professional Services Cautious 120 1.7 24.7 17.3 19.6 31 26 22 18.9 15.7 13.1 5.6 4.7 3.9 18.2 17.8 17.8 0.2 0.2 0.3 1.1 Commodity Chemicals

Asian Paints REDUCE 1,776 1,825 3 1,704 23.9 959 28.9 34.2 40.5 28.5 18.2 18.3 61 52 44 39.0 33.9 29.2 16.0 14.2 12.7 27 29 31 0.8 1.0 1.2 32 Berger Paints SELL 553 410 (26) 537 7.5 971 7.6 8.5 10.0 48.5 11.9 17.3 73 65 55 46.8 41.1 35.3 18.6 16.1 13.8 28 27 27 0.5 0.6 0.7 16.1 Kansai Nerolac REDUCE 516 545 6 278 3.9 539 11.5 12.8 15.2 32.0 12.1 18.0 45 40 34 29.7 26.4 22.4 7.4 6.6 6.0 17.1 17.4 18.5 0.8 0.9 1.0 1.9 Tata Chemicals BUY 758 720 (5) 193 2.7 255 43.9 47.5 50.7 2.4 8.0 6.9 17.3 16.0 14.9 7.4 6.6 6.0 1.5 1.4 1.3 8.8 9.0 9.0 1.6 1.7 1.8 7.6 Commodity Chemicals Neutral 2,711 38.0 24.5 14.4 15.8 52 45 39 30.5 26.9 23.5 8.9 8.1 7.4 17.3 18.0 19.0 0.8 0.9 1.1 57 Construction Materials ACC REDUCE 1,548 1,500 (3) 291 4.1 188 79.9 81.4 86.0 50.1 1.9 5.7 19.4 19.0 18.0 10.0 9.7 9.0 2.5 2.3 2.1 13.6 12.6 12.2 1.3 1.3 1.4 14.7 Ambuja Cements REDUCE 214 200 (6) 424 5.9 1,986 10.9 11.9 13.1 50.5 8.9 9.5 19.5 17.9 16.4 6.9 6.2 5.2 1.8 1.6 1.5 9.3 9.4 9.5 0.7 0.7 0.7 8.6 Dalmia Bharat ADD 857 1,050 23 165 2.3 192 17.1 22.7 34.5 7.5 33.1 51.7 50 38 25 8.9 7.9 6.4 1.5 1.5 1.4 3.0 3.9 5.7 — — — 2.5 Grasim Industries ADD 809 950 17 532 7.5 657 81.4 85.4 97.3 30.1 4.9 14.0 9.9 9.5 8.3 5.3 4.1 3.1 0.9 0.8 0.7 9.2 8.9 9.3 0.9 0.9 0.9 25 J K Cement ADD 1,303 1,275 (2) 101 1.4 77 78.4 98.7 124.8 129.9 25.8 26.4 16.6 13.2 10.4 10.9 8.8 7.6 3.1 2.6 2.1 21 22 22 0.8 0.8 0.8 1.3 JK Lakshmi Cement ADD 343 350 2 40 0.6 118 22.7 24.7 28.8 460.9 8.7 17.0 15.1 13.9 11.9 6.3 5.8 5.3 2.3 2.0 1.8 16.7 15.7 15.9 0.6 0.6 0.6 0.7 Orient Cement ADD 84 95 14 17 0.2 205 4.9 7.1 7.7 113.0 42.8 9.3 16.9 11.9 10.8 7.3 6.0 5.1 1.6 1.4 1.3 9.4 12.5 12.6 2.4 2.4 2.4 0.2 Shree Cement SELL 23,100 15,200 (34) 833 11.7 36 431.6 542.9 672.6 33.5 25.8 23.9 54 43 34 22.2 19.1 16.1 6.3 5.6 4.9 13.6 13.8 15.1 0.3 0.3 0.3 8.0 UltraTech Cement SELL 4,526 3,550 (22) 1,306 18.3 289 144.3 168.2 196.6 57.7 16.6 16.9 31 27 23 14.0 12.6 11.2 3.5 3.1 2.8 11.7 12.2 12.7 0.3 0.3 0.3 32 Construction Materials Cautious 3,710 52.0 47.8 11.9 16.0 23 21 17.8 9.3 8.0 6.7 2.3 2.1 1.9 9.8 10.0 10.5 0.5 0.5 0.5 93

Source: Company, Bloomberg, Kotak Institutional Equities estimates

56 KOTAK INSTITUTIONAL EQUITIES RESEARCH 56

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

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

Company Rating 23-Jan-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E (US$ mn) Consumer Durables & Apparel Crompton Greaves Consumer SELL 259 210 (19) 162 2.3 627 7.1 8.4 9.5 19.1 18.3 13.6 37 31 27 23 20 17 11.5 9.1 7.3 35 33 30 1.0 1.0 0.0 6.2 Havells India SELL 620 520 (16) 388 5.4 625 13.2 17.1 20.4 4.8 29.4 19.8 47 36 30 30 23 19 8.2 7.3 6.4 18.5 21 22 0.7 1.0 1.2 14.1 Page Industries REDUCE 25,852 22,900 (11) 288 4.0 11 434 527 629 22.9 21.5 19.3 60 49 41 41 34 29 30.4 23.5 18.7 56 54 51 0.7 0.9 1.2 9.8 Polycab BUY 1,004 700 (30) 149 2.1 149 37 44 49 9.0 19.1 11.3 27 23 21 15 13 12 4.0 3.5 3.0 16.6 16.3 15.7 0.4 0.4 0.5 4.8 TCNS Clothing Co. ADD 585 770 32 36 0.5 65 9 12 16 (54.3) 31.7 26.0 62 47 37 15 12 10.0 5.4 4.8 4.2 9.2 10.7 11.9 1.5 2.1 2.1 0.2 Vardhman Textiles ADD 1,030 1,000 (3) 59 0.8 56 92 120 130 (28.9) 30.0 8.5 11.2 8.6 7.9 7.6 6.0 5.3 1.0 0.9 0.8 9.0 11.0 11.0 2.9 2.9 2.9 0.2 Voltas SELL 713 500 (30) 236 3.3 331 16.9 20.7 24.2 7.8 22.3 16.7 42 34 29 31 27 23 5.2 4.7 4.2 13.0 14.3 14.9 0.5 0.6 0.7 11.9 Whirlpool SELL 2,405 1,260 (48) 305 4.3 127 38 44 52 17.9 16.8 18.6 64 54 46 39 34 29 12.2 10.6 9.5 21 21 22 0.3 0.6 0.9 3.3 Consumer Durables & Apparel Cautious 1,624 22.8 2.6 23.3 41 34 29 25 21 18 6.7 5.9 16.0 17.4 17.8 0.7 0.9 50 Consumer Staples Bajaj Consumer Care BUY 235 350 49 35 0.5 148 16.0 16.4 18.4 6.5 2.2 12.6 14.7 14.3 12.7 11.4 11.1 9.7 6.6 5.9 5.2 48 43 43 4.3 4.3 4.7 0.8 Britannia Industries REDUCE 3,113 3,050 (2) 749 10.5 240 58 68 82 21.1 16.9 20.6 53 46 38 40 34 29 16.6 13.4 11.0 32 32 32 0.6 0.8 1.0 16.3 Colgate-Palmolive (India) ADD 1,489 1,700 14 405 5.7 272 32 38 44 19.2 19.5 15.0 47 39 34 29.9 25.5 22.3 26.9 25.4 23.8 59 67 72 1.7 2.0 2.3 15.1 Dabur India REDUCE 490 425 (13) 866 12.1 1,766 9.7 11.0 12.1 18.7 14.1 9.9 51 44 40 42 37 32 13.4 12.0 10.8 28 28 28 0.9 1.1 1.3 11.6 GlaxoSmithKline Consumer RS 8,866 — — 373 5.2 42 294 333 376 26 13.1 13.0 30 27 24 25 22 19 7.8 6.8 5.9 28 27 27 1.3 1.5 1.6 2.5 Godrej Consumer Products REDUCE 741 715 (4) 758 10.6 1,022 15.8 18.2 21.2 8.9 15.7 16.5 47 41 35 32 28 24 9.1 8.1 7.2 21 21 22 0.9 1.0 1.1 9.2 Hindustan Unilever REDUCE 2,057 1,850 (10) 4,453 62.4 2,160 34 41 47 20.6 20.1 14.8 61 50 44 42 36 32 48.7 38.9 31.2 87 86 79 1.2 1.3 1.5 40 ITC BUY 238 320 35 2,924 41.0 12,300 12.2 13.6 15.0 20.0 11.8 10.2 19.5 17.4 15.8 13.8 12.3 11.0 4.6 4.2 3.9 22 23 25 2.7 3.1 3.6 42 Jyothy Laboratories ADD 158 200 26 58 0.8 367 6.2 7.0 8.1 10.6 13.6 15.4 26 23 19.6 17.8 15.7 13.7 4.1 3.8 3.6 16.6 17.6 18.9 2.2 2.5 2.8 0.8 Marico ADD 333 385 16 430 6.0 1,290 8.2 9.3 10.7 13.6 13.8 14.8 41 36 31 27 24 21 13.4 12.5 11.5 34 36 38 1.7 1.9 2.1 10.0 Nestle India SELL 15,549 13,200 (15) 1,499 21.0 96 206 239 281 23.5 15.9 17.8 76 65 55 51 44 38 78.5 66.0 55.9 71 110 109 2.1 1.1 1.3 16.3 Tata Global Beverages ADD 393 335 (15) 248 3.5 631 9.0 10.5 11.6 29.0 16.5 9.9 44 37 34 25 22 20 3.2 3.1 2.9 7.6 8.4 8.8 0.8 0.9 1.1 24 United Breweries ADD 1,261 1,400 11 333 4.7 264 18.7 29.2 36.9 (12.1) 56.2 26.3 67 43 34 35 25 21 9.3 7.7 6.5 14.6 19.6 21 0.2 0.3 0.5 10.1 United Spirits REDUCE 582 650 12 423 5.9 727 13.4 16.9 21.1 41.6 26.5 25.1 44 34 28 27 23 19 9.6 6.6 5.2 26 23 21 0.3 0.4 0.5 10.3 Consumer Staples Cautious 13,795 193.4 19.9 16.3 13.8 39 34 30 28 24 21 11.1 9.8 8.7 28 29 29 1.5 1.6 1.8 211 Diversified Financials Bajaj Finance REDUCE 4,126 3,800 (8) 2,482 34.8 599 103 137 165 49 33 21 40 30 25 — — — 7.3 6.0 5.0 23 22 22 0.3 0.3 0.4 80 Bajaj Finserv BUY 9,534 10,200 7 1,517 21.3 159 309 404 489 53 31 21 31 24 19.5 — — — 4.5 3.8 3.2 17.1 17.5 17.9 0.1 0.1 0.1 32 Cholamandalam ADD 324 340 5 253 3.5 782 17.9 22.0 25.8 18 23.0 17.4 18.1 14.7 12.5 — — — 3.5 2.9 2.4 21 21 21 0.6 0.7 0.9 7.2 HDFC BUY 2,428 2,600 7 4,199 58.9 1,721 71 70 80 24.1 (1) 14.3 34 35 30 — — — 4.9 4.6 4.2 15.1 13.8 14.6 1.1 1.1 1.2 105 IIFL Wealth REDUCE 1,328 1,125 (15) 116 1.6 85 35.3 46.7 67.2 (22) 32.1 44.1 38 28 19.8 — — — 3.7 3.5 3.3 10.1 12.8 17.3 1.3 1.8 2.5 0.5

L&T Finance Holdings REDUCE 119 115 (3) 238 3.3 1,999 9 13 16 (15.7) 35 27.8 12.6 9.4 7.3 — — — 1.6 1.4 1.2 13.2 15.7 17.4 1.1 1.2 1.4 18.2 Daily Summary India LIC Housing Finance ADD 477 450 (6) 240 3.4 505 53.1 65.0 74.0 15 22.5 13.7 9.0 7.3 6.4 — — — 1.5 1.2 1.1 15.4 16.6 16.5 1.8 2.3 2.6 19.3 Mahindra & Mahindra Financial ADD 365 400 10 225 3.2 615 22.7 33.7 42.2 (10) 48.0 25.5 16.0 10.8 8.6 — — — 2.1 1.9 1.6 12.3 16.4 18.2 1.6 2.4 3.0 9.3 Muthoot Finance ADD 760 740 (3) 305 4.3 401 64 72 81 29.4 12 13.0 11.9 10.6 9.4 — — — 2.6 2.2 1.9 24 23 22 2.0 2.3 2.6 11.5 PNB Housing Finance NR 540 — — 91 1.3 169 66.9 77.6 88.6 (6) 16.0 14.2 8.1 7.0 6.1 — — — 1.1 1.0 0.9 14.1 14.6 14.8 1.4 1.6 1.8 7.4 Shriram City Union Finance BUY 1,381 1,900 38 91 1.3 66 171 197 237 14.4 15 20.4 8.1 7.0 5.8 — — — 1.3 1.2 1.0 16.5 16.4 17.1 1.6 1.8 2.2 0.2 Shriram Transport BUY 1,084 1,475 36 246 3.4 227 126.6 146.5 164.1 12 15.7 12.0 8.6 7.4 6.6 — — — 1.4 1.2 1.1 16.9 17.0 16.5 1.6 2.0 2.3 14.2 Diversified Financials Neutral 10,004 140.3 23.7 18.1 18.0 26 22 18.8 3.0 2.6 2.3 11.3 11.9 12.4 0.8 0.9 1.0 305

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

January January 24, 2020

KOTAK INSTITUTIONAL EQUITIES RESEARCH 57

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 23-Jan-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E (US$ mn) Electric Utilities CESC BUY 740 840 14 98 1.4 133 87 104 114 (3) 18.4 9.9 8.5 7.1 6.5 5.3 4.8 4.4 0.8 0.7 0.6 9.2 10.1 10.3 2.0 2.0 2.1 3.4 JSW Energy ADD 67 80 20 110 1.5 1,640 5.9 5.9 5.7 41 0 (3.8) 11.4 11.3 11.8 5.2 4.5 3.8 0.9 0.8 0.7 7.8 7.3 6.5 — — — 0.8 NHPC ADD 27 27 (1) 273 3.8 10,045 3.1 3.3 3.5 24.1 5 7.1 8.7 8.3 7.7 6.6 6.8 6.3 0.9 0.8 0.8 10.1 10.2 10.5 6.5 6.8 7.2 1.3 NTPC BUY 114 160 41 1,123 15.7 9,895 12.4 13.6 15.6 10.9 9.5 14.2 9.1 8.3 7.3 9.5 7.8 6.6 1.0 0.9 0.8 11.1 11.3 11.9 3.3 3.6 4.1 14.3 Power Grid BUY 202 235 16 1,057 14.8 5,232 21.4 23 25 13 7.3 11.1 9.4 8.8 7.9 7.2 6.9 6.4 1.6 1.5 1.3 18.0 17.4 17.4 3.7 4.0 4.4 22 Tata Power BUY 60 75 25 163 2.3 2,705 3.7 5.3 6.9 74 45 28.8 16.4 11.3 8.8 8.1 7.9 7.3 0.9 0.8 0.8 5.8 7.8 9.2 — — — 7.0 Electric Utilities Attractive 2,823 39.6 14.1 9.4 12.3 9.5 8.7 7.7 1.1 1.0 0.9 11.6 11.8 12.2 3.4 3.6 4.1 49 Fertilizers & Agricultural Chemicals Bayer Cropscience SELL 4,055 2,700 (33) 182 2.6 34 82.9 100.0 114.4 19.6 20.7 14.4 49 41 35 39 33 29 6.7 5.9 5.3 14.3 15.5 15.7 0.4 0.5 0.6 0.8 Dhanuka Agritech ADD 453 350 (23) 22 0.3 48 24.2 25.9 28.3 2.4 6.9 9.2 18.7 17.5 16.0 14.1 12.5 11.0 3.0 2.6 2.3 16.8 15.9 15.4 1.1 1.1 1.2 0.2 Godrej Agrovet SELL 555 450 (19) 107 1.5 192 12.4 17.0 20.3 8.6 37.0 19 45 33 27 23 18 16 4.7 4.2 3.8 11.1 13.7 14.6 0.6 0.8 0.9 0.7 -

PI Industries SELL 1,477 1,280 (13) 204 2.9 138 37.2 46.1 56.1 25.3 24 22 40 32 26 27 22 18 7.5 6.4 5.4 21 22 22 0.4 0.5 0.8 2.7 Rallis India ADD 232 230 (1) 45 0.6 195 10.9 12.5 14.4 29.4 14.8 14.8 21.2 18.5 16.1 14.7 12.5 10.7 3.1 2.8 2.5 15.6 16.0 16.4 1.2 1.3 1.4 1.3 January 24, 2020 UPL SELL 542 520 (4) 414 5.8 765 28.4 39.8 45.1 14.5 40.1 13.3 19 13.6 12.0 9.7 7.8 6.8 2.6 2.3 2.0 14.8 17.9 17.9 1.3 2.1 2.3 22 Fertilizers & Agricultural Chemicals Attractive 974 13.6 19.0 30.3 14.9 27 21 18.0 13.5 11.0 9.6 3.9 3.4 3.0 14.4 16.5 16.7 0.8 1.2 1.4 28

Gas Utilities GAIL (India) BUY 130 175 35 585 8.2 4,510 13.5 14.8 15.9 (3.2) 9.9 7.4 9.6 8.7 8.1 6.8 6.1 5.5 1.2 1.1 1.0 13.3 13.5 13.4 3.5 3.9 4.2 19.4 GSPL SELL 251 200 (20) 141 2.0 564 17.7 16.2 14.9 25.8 (8.6) (7.8) 14.1 15.5 16.8 6.7 7.0 7.2 2.1 1.9 1.7 16.1 12.9 10.8 1.1 1.0 1.2 1.9 Indraprastha Gas SELL 491 320 (35) 343 4.8 700 16.6 18.5 20.9 38.0 11.5 13.0 29.6 26.5 23.4 21.8 19.2 16.7 6.9 6.0 5.2 26 24 24 0.8 0.9 1.1 13.1 Mahanagar Gas ADD 1,180 1,080 (8) 117 1.6 99 74.5 78.9 81.8 32.7 5.8 3.7 15.8 15.0 14.4 10.2 9.5 9.0 4.2 3.7 3.4 29 27 25 2.3 3.0 3.5 12.0 Petronet LNG BUY 277 320 16 416 5.8 1,500 18.5 21.0 23.3 22.8 14.0 10.7 15.0 13.2 11.9 8.7 7.6 6.9 3.6 3.2 3.0 28 26 26 3.0 3.8 4.6 10.0 Gas Utilities Attractive 1,602 22.5 12.6 7.1 7.5 13.4 12.5 11.6 8.8 7.9 7.2 2.2 2.0 1.8 16.3 15.9 15.7 2.5 2.9 3.3 56 Health Care Services Apollo Hospitals ADD 1,687 1,700 1 235 3.3 139 27.2 35 49 61 27 43 61.9 48.8 34.2 16.5 16.4 14.2 6.6 6.1 5.5 11.0 13.0 17.0 0.6 0.7 1.0 16.2

Aster DM Healthcare BUY 165 240 46 83 1.2 505 6.6 9.1 10.8 (1) 38.7 18 25.0 18.0 15.2 8.3 7.2 6.3 3.0 2.6 2.3 12.8 15.6 16.0 — — — 0.8 Dr Lal Pathlabs SELL 1,637 1,060 (35) 136 1.9 83 31.8 37.5 43.2 33.5 17.6 15.2 51.4 43.7 37.9 34.1 28.6 24.6 12.1 10.1 8.5 26 25 24 0.5 0.6 0.7 2.8 HCG BUY 114 205 80 10 0.1 85 (7.1) (4.3) (3.4) (104) 39 21 NM NM NM 8.9 7.5 6.4 1.9 2.1 2.2 NM NM NM — — — 0.1 Metropolis Healthcare SELL 1,671 1,100 (34) 84 1.2 50 30.9 37.5 43.3 29.1 21.4 15 54.0 44.5 38.6 32.6 27.4 24.0 15.8 12.4 10.0 33 31 29 0.4 0.4 0.5 0.9 Narayana Hrudayalaya BUY 355 390 10 72 1.0 204 6.8 9.3 11.7 135.4 36 26 52.0 38.3 30.3 18.2 15.2 12.9 5.9 5.1 4.4 12.1 14.4 15.6 — — — 1.7 Health Care Services Attractive 621 8.7 32 32 27 51.2 38.9 30.7 16.4 14.7 12.8 6.4 5.7 5.0 12.5 14.6 16.2 0.4 0.5 0.6 22 Hotels & Restaurants Jubilant Foodworks BUY 1,794 1,600 (11) 237 3.3 132 29 40 53 19 39.9 33 62.8 44.9 33.7 23.5 19.0 15.4 18.8 14.1 10.8 30 36 36 0.4 0.6 0.9 21 Lemon Tree Hotels BUY 51 70 38 40 0.6 789 1.0 1.8 2.2 44 83 23 52.6 28.8 23.4 18.5 12.8 9.7 4.2 3.8 3.5 8.3 14.0 15.7 — 1.1 1.5 1.0 Hotels & Restaurants Attractive 277 3.9 23 48 31 60.9 41.3 31.4 22.3 17.3 13.8 12.5 10.2 8.2 20 25 26 0.3 0.7 1.0 22 Insurance HDFC Life Insurance ADD 616 615 (0) 1,243 17.4 2,009 7.2 8.4 9.8 12.6 17.9 16.1 86.0 73.0 63 — — — 19.8 17.9 16.0 24 26 27 0.3 0.3 0.4 43 ICICI Lombard SELL 1,331 825 (38) 605 8.5 454 26.8 33.4 38.9 16 25 16 49.6 39.8 34 — — — 9.7 8.2 7.0 21 22 22 0.4 0.6 0.6 11.4 ICICI Prudential Life BUY 508 610 20 729 10.2 1,436 8.2 9.0 10.3 4 9.0 15.3 61.7 56.6 49 — — — 9.3 8.2 7.3 16.1 15.5 15.7 0.3 0.3 0.3 19.0 Max Financial Services ADD 518 550 6 140 2.0 417 6.9 9.9 14.4 275 44 45 75.5 52.4 36 — — — — — — 13.7 17.9 23 0.5 0.7 1.0 15.7 SBI Life Insurance REDUCE 986 1,030 4 986 13.8 1,000 13.7 16.1 17.7 3.5 17.5 9.4 71.8 61.1 56 — — — 11.4 9.9 8.6 17.1 17.4 16.5 0.2 0.3 0.3 43 Insurance Attractive 3,703 51.9 13.5 18.8 16.2 67.3 56.7 49 11.9 10.4 9.1 17.7 18.4 18.7 0.2 0.2 0.3 132 Source: Company, Bloomberg, Kotak Institutional Equities estimates

58 KOTAK INSTITUTIONAL EQUITIES RESEARCH 58

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

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

Company Rating 23-Jan-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E (US$ mn) Internet Software & Services Info Edge SELL 2,592 2,130 (18) 318 4.5 122.0 34.3 42.2 50.7 32.7 23.2 20.1 75.6 61.4 51.1 65.8 52.7 43.5 12.1 10.6 9.3 16.9 18.4 19.4 0.3 0.4 0.5 16.3 Just Dial REDUCE 616 570 (8) 40 0.6 64.8 40.0 40.9 42.4 25.4 2.2 3.5 15.4 15.1 14.6 9.3 7.9 7.1 3.3 2.7 2.3 23 19.7 17.4 0.6 0.7 0.7 20 Internet Software & Services Attractive 357 5.0 29.8 15.2 14.4 52.8 45.8 40.0 44.8 37.8 32.9 9.3 8.1 7.0 17.6 17.6 17.5 0.4 0.4 0.5 37 IT Services HCL Technologies ADD 599 650 9 1,625 22.8 2,702 39.9 43.5 48.0 9.0 8.9 10.4 15.0 13.8 12.5 9.5 8.5 7.4 3.3 2.9 2.5 24 22 21 2.6 2.7 2.7 28 Hexaware Technologies REDUCE 344 375 9 103 1.4 302 21.5 24.5 27.7 11.4 14.0 12.8 16.0 14.0 12.4 11.7 9.9 8.4 3.8 3.3 2.9 25 25 25 2.3 2.9 2.9 3.0 Infosys ADD 784 865 10 3,340 46.8 4,256 38.7 42.5 47.3 9.3 9.9 11.3 20.3 18.4 16.6 14.1 12.3 11.1 5.3 5.0 4.6 26 28 29 2.8 3.3 3.8 123 L&T Infotech ADD 1,935 2,060 6 337 4.7 175 84.5 102.1 120.6 (2) 20.8 18.2 22.9 19.0 16.0 15.7 12.9 10.8 5.9 5.0 4.2 28 29 28 1.6 1.7 1.9 4.2 Mindtree REDUCE 901 830 (8) 148 2.1 165 38.5 55.6 63.9 (16) 44 15 23.4 16.2 14.1 12.9 9.5 8.1 4.4 3.8 3.2 19.1 25 25 3.3 1.9 2.1 9.5 Mphasis REDUCE 911 925 2 170 2.4 186 59.7 64.2 69.0 6 7.5 7.4 15.3 14.2 13.2 9.4 8.5 7.7 3.0 2.8 2.6 20 20 20 3.3 3.7 4.0 2.6 TCS REDUCE 2,193 2,020 (8) 8,231 115.4 3,752 87.1 95.1 104.3 5 9.2 9.6 25.2 23.1 21.0 18.2 16.2 14.6 8.5 7.9 7.3 35 36 36 2.8 2.8 3.1 108 Tech Mahindra ADD 769 860 12 682 9.6 880 46.1 53.8 62.3 (3.4) 16.8 15.7 16.7 14.3 12.3 10.3 8.3 7.0 3.0 2.7 2.3 18.9 19.7 20 2.1 2.4 2.7 25 Wipro REDUCE 249 265 7 1,421 19.9 5,827 17.2 18.9 20.7 14.8 10.2 9.4 14.5 13.1 12.0 9.0 7.7 6.9 2.6 2.2 2.0 17.9 18.0 17.4 0.6 0.8 3.4 11.1 IT Services Cautious 16,057 225.1 4.5 10.1 10.6 20.6 18.7 16.9 14.1 12.4 11.1 5.3 4.7 4.3 26 25 25 2.5 2.7 3.2 315 Media DB Corp. REDUCE 148 135 (9) 26 0.4 175 18.9 19.2 18.8 20.3 2.0 (2.2) 7.8 7.7 7.8 4.0 3.9 4.0 1.4 1.3 1.4 17.7 17.7 17.3 8.5 10.2 11.5 0.1 Jagran Prakashan REDUCE 70 57 (18) 21 0.3 296 8.7 9.7 10.6 (1.4) 12 NA 8.0 7.2 NA 3.5 3.3 NA 1.1 1.1 NA 13.6 15.1 16.6 12.9 12.9 12.9 0.6 PVR REDUCE 1,900 1,850 (3) 98 1.4 51 43.0 59.8 69.1 (0) 39 15 44.2 31.7 27.5 15.2 13.1 11.3 5.0 4.4 3.9 13.9 14.8 15.0 0.2 0.3 0.4 10.0 Sun TV Network REDUCE 496 510 3 196 2.7 394 37.7 41.1 43.5 4 9.0 5.9 13.2 12.1 11.4 9.3 8.3 7.5 3.1 2.7 2.4 25 24 22 2.5 3.0 3.4 14.9 Zee Entertainment Enterprises ADD 279 340 22 268 3.8 960 17.2 18.4 21.0 4.4 6.9 13.7 16.2 15.2 13.3 10.4 9.5 8.3 2.8 2.5 2.2 17.8 17.3 17.6 1.6 2.0 2.0 97 Media Attractive 608 8.5 5.2 9.4 9.4 15.4 14.1 12.9 9.5 8.6 7.7 2.8 2.5 2.3 18.1 18.0 17.8 2.4 2.8 3.0 122 Metals & Mining Hindalco Industries BUY 205 240 17 460 6.4 2,224 21.5 25.4 28.2 (13.1) 18.4 11 9.5 8.1 7.3 5.6 5.0 4.3 0.7 0.7 0.6 8.0 8.7 8.9 0.6 0.6 0.6 25 Hindustan Zinc REDUCE 209 210 1 882 12.4 4,225 16.4 16.9 18.4 (13.1) 3.3 9.0 12.8 12.4 11.3 7.9 7.7 7.0 2.9 3.2 3.5 22 24 29 9.6 9.6 9.6 2.2 Jindal Steel and Power BUY 180 210 17 184 2.6 1,016 2.7 12.8 21.3 259 367 66 65.7 14.1 8.5 6.9 5.8 4.9 0.6 0.5 0.5 0.9 3.9 6.2 — — — 55 JSW Steel REDUCE 267 260 (3) 645 9.0 2,402 9.0 20.7 26.1 (71.8) 131 25.8 29.7 12.9 10.2 9.5 7.0 5.8 1.7 1.6 1.4 6.0 12.7 14.4 1.6 1.6 1.6 29 National Aluminium Co. SELL 46 35 (24) 86 1.2 1,866 1.0 2.3 2.2 (89) 134 (3.0) 47.4 20.2 20.9 11.1 7.8 9.4 0.8 0.8 0.8 1.7 4.1 4.0 2.1 4.9 4.8 5.5 NMDC ADD 133 140 5 407 5.7 3,062 16.6 17.9 15.7 12.5 7.9 (12) 8.0 7.4 8.5 5.6 5.2 6.0 1.5 1.4 1.3 18.8 18.8 15.5 6.2 6.7 5.9 10.9 Tata Steel BUY 480 600 25 546 7.7 1,146 33.6 75.3 95.8 (63) 124 27 14.3 6.4 5.0 6.8 5.3 4.4 0.8 0.7 0.6 5.7 12.3 13.7 2.1 2.1 2.1 100 Vedanta BUY 154 180 17 573 8.0 3,717 13.2 18.8 21.3 (14) 43 13.0 11.7 8.2 7.2 5.7 5.0 4.5 0.9 0.9 0.9 7.9 11.5 13.1 11.7 11.7 11.7 31 Metals & Mining Attractive 3,781 53.0 (34.7) 46.5 14.9 13.4 9.2 8.0 6.8 5.7 5.1 1.1 1.1 1.0 8.5 11.7 12.6 5.4 5.5 5.4 49

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK -

January January 24, 2020

KOTAK INSTITUTIONAL EQUITIES RESEARCH 59

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 23-Jan-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E (US$ mn) Oil, Gas & Consumable Fuels BPCL SELL 469 420 (10) 1,017 14.3 1,967 32 39 40 (10.5) 18.9 3.8 14.5 12.2 11.7 10.4 9.0 8.6 2.3 2.2 2.0 16.8 18.6 18.0 4.0 4.3 4.4 52.4 Coal India BUY 191 285 49 1,176 16.5 6,163 27 31 31 (3) 14.3 (2.2) 6.9 6.1 6.2 6.2 5.3 5.1 4.6 4.4 4.3 65.3 74.4 69.7 13.1 13.1 13.1 19.0 HPCL SELL 247 285 15 376 5.3 1,524 31 33 32 (23.0) 7.0 (1.0) 8.1 7.6 7.6 8.2 8.0 7.9 1.2 1.1 1.1 15.8 15.6 14.3 5.0 5.3 5.3 17.9 IOCL SELL 119 130 9 1,120 15.7 9,181 13.6 15.8 15.9 (24.5) 16.1 0.8 8.8 7.6 7.5 5.7 5.3 5.3 1.0 0.9 0.9 11.2 12.4 11.9 6.0 6.5 6.6 18.7 Oil India BUY 139 210 51 150 2.1 1,084 30 27 29 (1) (9.4) 4.4 4.6 5.1 4.9 2.7 2.8 2.5 0.5 0.5 0.5 11.4 9.8 9.7 8.7 7.9 8.2 1.9 ONGC BUY 118 170 44 1,482 20.8 12,580 22 21 22 (8) (4.7) 7.4 5.4 5.7 5.3 3.1 2.9 2.6 0.6 0.6 0.5 11.1 10.0 10.0 6.4 6.6 6.8 17.0 Reliance Industries BUY 1,527 1,850 21 9,051 126.9 5,927 76 93 107 14.9 22.8 15.4 20.1 16.4 14.2 12.9 9.9 8.3 2.1 1.9 1.7 11.0 12.2 12.6 0.4 0.5 0.5 186.4 Oil, Gas & Consumable Fuels Attractive 14,372 201.5 (3.0) 12.6 8.0 12.4 11.0 10.2 8.0 6.9 6.2 1.6 1.4 1.3 12.6 13.1 12.9 2.9 3.0 3.1 313.2 Pharmaceuticals Aurobindo Pharma ADD 490 500 2 287 4.0 584 49 55 56 19.8 12 3.4 10.1 9.0 8.7 7.6 6.2 5.7 1.7 1.5 1.3 17.3 16.7 15.0 1.3 1.5 1.8 24.1 Biocon SELL 294 190 (35) 353 5.0 1,202 7.3 8.8 10.2 21 20 15.6 40 33 29 19.5 15.9 13.9 4.8 4.3 3.9 12.5 13.0 13.5 0.9 1.1 1.2 15.4

Cipla BUY 465 570 23 375 5.3 806 22.5 28 34 18.6 26 19 21 16.4 13.8 11.1 9.2 7.5 2.2 2.0 1.8 11.3 12.3 13.1 1.0 1.3 1.5 19.3 -

Dr Reddy's Laboratories REDUCE 3,038 2,600 (14) 505 7.1 166 103 145 195 3 41 34.5 30 21.0 15.6 12.2 10.7 8.0 3.1 2.7 2.4 10.4 13.0 15.3 0.7 0.8 1.1 23.9 January 24, 2020 Laurus Labs BUY 415 430 4 44 0.6 106 19.8 27.8 33 80.3 41 17 21 14.9 12.7 10.7 8.4 7.2 2.5 2.1 1.8 12.6 14.3 14.3 — — — 0.7 Lupin ADD 738 840 14 334 4.7 450 26 36 51 25.3 38 40 28 20 14.6 10.7 8.5 6.5 2.0 1.8 1.7 7.8 9.1 11.4 0.7 0.7 1.0 15.8

Sun Pharmaceuticals ADD 450 480 7 1,079 15.1 2,406 19.0 23.8 26 17.5 25 10 24 19 17.3 12.9 10.2 8.5 2.4 2.1 1.9 10.5 11.3 11.7 0.8 1.1 1.2 36.8 Torrent Pharmaceuticals BUY 2,022 1,950 (4) 342 4.8 169 55 69 85 112.1 26 24 37 29 24 16.4 14.1 12.2 6.5 5.7 4.9 17.6 19.5 20.7 1.2 1.3 1.4 6.3 Pharmaceuticals Neutral 3,320 46.5 21.1 26 17 24 19 16.0 12.0 9.9 8.2 2.6 2.4 2.1 11.2 12.6 13.1 0.9 1.1 1.2 142.4 Real Estate Brigade Enterprises BUY 230 235 2 47 0.7 204 17.7 14 16 51 (18) 10 13.0 15.8 14.4 8.8 6.8 5.5 1.9 1.7 1.6 15.6 11.4 11.5 1.1 1.1 1.1 0.4 DLF ADD 261 215 (18) 645 9.0 2,475 7.7 12.3 15.3 30 58 25 34 21.3 17.0 33.2 26.9 20.9 1.7 1.6 1.5 5.4 7.9 9.2 0.8 0.8 0.8 34.5 Embassy Office Parks REIT ADD 420 410 (2) 324 4.5 772 12.7 15.6 18.0 7,843 23 15 33 27 23 21.1 18.4 16.4 1.5 1.5 1.6 4.3 5.5 6.6 5.5 6.4 7.2 3.0 Godrej Properties SELL 1,020 700 (31) 257 3.6 252 15.8 16.3 13.0 43.1 3 (20.1) 65 63 79 50.4 64.8 282.8 5.2 4.8 4.5 10.7 7.9 5.9 — — — 3.5 Oberoi Realty ADD 555 560 1 202 2.8 364 22 48 49 (4.1) 120.7 2 25.7 11.7 11.4 17.7 9.3 8.3 2.3 1.9 1.7 9.4 18.1 15.8 0.4 0.4 0.4 2.4 Prestige Estates Projects ADD 401 330 (18) 150 2.1 375 8.4 13.2 15 (3.8) 57 15 48 30 26.5 13.2 10.8 9.6 3.4 3.1 2.8 7.2 10.5 11.0 0.4 0.4 0.4 2.5 Sobha ADD 446 515 15 42 0.6 95 39 29 32 25 (25.6) 11.7 11.5 15.4 13.8 7.3 8.9 8.9 1.7 1.6 1.4 15.5 10.5 10.8 1.6 1.6 1.6 1.3 Sunteck Realty REDUCE 391 400 2 57 0.8 140 23.6 32.3 44 45.5 37 35 17 12.1 9.0 12.2 8.6 6.3 1.7 1.5 1.3 11.1 13.5 15.7 0.3 0.3 0.3 1.3 Real Estate Neutral 1,726 24.2 42.1 44.8 15.1 32 22 19.0 20.2 16.2 14.4 2.0 1.9 1.8 6.3 8.7 9.4 1.5 1.6 1.8 49.1 Retailing Aditya Birla Fashion and Retail BUY 234 230 (2) 181 2.5 773 1.8 2.8 4.6 (57.5) 58.0 65.7 132 84 51 15.3 13.2 11.6 11.5 10.1 8.4 9.1 12.9 18.2 — — — 1.7 Avenue Supermarts SELL 1,925 1,400 (27) 1,208 16.9 626 22.0 28 36 52.1 25.9 29.8 88 69 54 55 42 33 17.0 13.7 10.9 21.7 21.9 22.7 — — — 18.3 Titan Company REDUCE 1,204 1,175 (2) 1,069 15.0 888 19.1 25 32 13.3 31.8 27.0 63 48 38 41 33 26 15.0 12.5 10.2 25.6 28.5 29.9 0.5 0.6 0.7 40.1 Retailing Cautious 2,458 34.5 18.0 30.6 30.2 77 59 45 40 32 26 15.6 12.8 10.4 20.3 21.9 23.1 0.2 0.3 0.3 60.2 Speciality Chemicals Castrol India SELL 131 130 (0) 129 1.8 989 8.0 8.5 8.8 12.1 5.7 4.3 16.3 15.4 14.8 10.9 10.5 10.0 10.1 9.2 8.4 65.1 62.8 59.7 4.4 4.6 4.8 4.4 Pidilite Industries REDUCE 1,444 1,280 (11) 734 10.3 508 24.2 28 33 36.5 15.8 17.8 60 52 44 43 38 32 15.0 12.8 10.9 27.2 26.8 27.0 0.6 0.7 0.8 12.9 S H Kelkar and Company BUY 115 145 26 16 0.2 141 5.7 7.5 8.8 (6.4) 31.7 16.2 20.1 15.3 13.1 12.0 9.7 8.6 1.9 1.8 1.7 9.4 12.1 13.1 1.7 2.4 3.0 0.1 SRF BUY 3,637 3,600 (1) 209 2.9 57 139 175 199 24.7 25.4 13.6 26.1 20.8 18.3 15.3 12.7 11.1 4.3 3.6 3.1 17.8 19.0 18.3 0.4 0.5 0.5 14.4 Speciality Chemicals Neutral 1,088 15.3 24.2 16.1 13.2 37 32 28.5 24.4 21.3 18.8 9.2 7.9 6.8 24.5 24.5 23.9 1.0 1.1 1.3 31.9 Source: Company, Bloomberg, Kotak Institutional Equities estimates

60 KOTAK INSTITUTIONAL EQUITIES RESEARCH 60

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

61 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 23-Jan-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E (US$ mn) Telecommunication Services Bharti Airtel BUY 524 570 9 2,857 40.1 5,131 (5.5) 3.7 9.7 NM NM NM NM 143.1 54.0 11.1 8.4 7.2 4.0 4.2 4.1 NM 2.9 7.7 0.8 1.1 1.1 123.3 Bharti Infratel REDUCE 242 225 (7) 448 6.3 1,850 15.8 16.4 18.8 20.5 3.6 14.8 15.3 14.8 12.9 7.7 7.1 6.2 3.2 3.1 2.9 20.4 21.2 23.4 5.1 5.2 6.0 48.7 Vodafone Idea RS 6 — — 170 2.4 28,736 (22.3) (4.0) (6.2) NM NM NM NM NM NM 20.0 9.8 9.0 0.7 1.5 (2.7) NM NM NM — — — 36 Tata Communications ADD 454 500 10 129 1.8 285 11.0 14.0 17.9 41.1 26.5 28.0 41.1 32.5 25.4 7.2 6.6 5.9 #### 29.4 13.8 NM 162 74.1 1.7 1.7 1.7 1.4 Telecommunication Services Cautious 3,604 50.5 NM 61.5 36.4 NM NM NM 11.6 8.5 7.4 3.5 4.0 4.8 NM NM NM 1.2 1.5 1.6 209.1 Transportation Adani Ports and SEZ BUY 386 475 23 784 11.0 2,032 23.4 24.1 28.0 17.1 3.1 16.1 16.5 16.0 13.8 12.8 11.1 9.6 3.1 2.7 2.3 18.9 17.8 18.0 3.9 1.1 1.3 25.0 Container Corp. SELL 553 510 (8) 337 4.7 609 17.4 21.3 27.8 6.7 22.4 30.6 32 26 20 18.4 15.3 11.9 3.2 3.0 2.8 10.2 12.0 14.7 0.3 1.7 2.2 10.9 Gateway Distriparks BUY 132 162 23 14 0.2 109 3.9 6.0 9.2 (42.8) 55.9 51.7 34.0 21.8 14.4 7.8 6.4 5.3 0.9 0.9 0.8 2.9 4.1 6.0 2.3 2.3 2.3 0.5 Gujarat Pipavav Port BUY 91 124 36 44 0.6 483 5.1 5.9 7.5 20.1 15.0 27.2 17.8 15.5 12.2 8.3 7.3 6.4 2.2 2.2 2.1 12.2 13.9 17.6 4.9 5.6 7.2 0.6 InterGlobe Aviation REDUCE 1,466 1,535 5 564 7.9 383 70.0 97.8 115.1 1,615.5 39.8 17.7 21 15 12.7 5.3 3.9 3.1 5.8 4.3 3.3 32.1 32.8 29.4 — 0.7 0.8 36 Mahindra Logistics ADD 419 398 (5) 30 0.4 71 12.1 14.9 18.3 (3.8) 23.7 22.4 35 28 23 17.2 13.7 11.2 5.3 4.6 4.0 16.3 17.6 18.7 — — — 0.2 Transportation Attractive 1,773 24.9 59.0 17.3 19.1 20 17 14.3 10.0 8.2 6.8 3.5 3.1 2.6 17.7 18.0 18.4 2.0 1.2 1.4 73 KIE universe 122,639 1719.5 11.8 32.2 17.3 24 18.1 15.4 11.5 9.8 8.6 2.7 2.5 2.2 11.5 13.6 14.4 1.6 1.7 1.9

Notes: (a) We have used adjusted book values for banking companies. (b) 2020 means calendar year 2019, similarly for 2021 and 2022 for these particular companies. (c) Exchange rate (Rs/US$)= 71.33 Source: Company, Bloomberg, Kotak Institutional Equities estimates India Daily Summary Daily Summary India KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK -

January January 24, 2020

KOTAK INSTITUTIONAL EQUITIES RESEARCH 61 India Daily Summary - January 24, 2020 of of the following , if, any, noare longer in effect for this stock As of September 30, 2019 fair value , any, if for this stock,because is there notsufficient a

fair valuefair

Percentage of companies covered by Kotak Institutional Equities, the specifiedwithin category. Percentage of companies each within category for which Kotak Institutional Equities and or its affiliates has provided investment banking services the previouswithin months.12 * The above categories are defined as follows: Buy = We expect this stock to deliver more returns than 15% over the next months;12 Add = We expect this stock to deliver returns 5-15% over the next months;12 Reduce = We expect this stock to deliver returns over -5-+5% the next months;12 Sell = We expect this stock to deliver less returns overthan -5% the next months.12 Our target prices are also on a horizon 12-month basis. These ratings are used illustratively to comply with applicable regulations. As of 30/09/2019 Kotak Institutional Equities Investment Research had investment ratings on 204 equity securities.

r r display is not or applicable. . The previous investment and rating

ecurities or its affiliates is acting in an advisory capacity in a merger or strategic transaction

fair valuefair

SELL e next months.12 1.0% 19.6%

term volatility in stock prices related to movements in the market.Hence, a particular Ratingmay not , if, any,have been suspended temporarily.Such suspension is in compliance with applicable regulation(s) - fair valuefair +5% returns over the next 12 months.

- 0.5% than 15% returns over the next months.12 21.1% month horizon basis. 5 REDUCE - - 15% returns over the next 12 months. 5% returns over th The information is not available fo - -

Cautious.

Kotak SecuritiesKotak has suspended coverage of this company. ADD 28.4% 2.5%

are also on12 a Kotak SecuritiesKotak Research has suspended theinvestment and rating

The information is not meaningful and is therefore excluded

Kotak SecuritiesKotak does not cover this company.

rdance with the Rating System all at times. The investment and rating

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

Attractive, Neutral, BUY 3.4% 30.9% 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

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

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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