INDIA DAILY

August 16, 2021 India 13-Aug 1-day 1-mo 3-mo Sensex 55,437 1.1 4.3 13.8 Nifty 16,529 1.0 3.8 12.6 Contents Global/Regional indices Dow Jones 35,515 0.0 2.4 3.3 Daily Alerts Nasdaq Composite 14,823 0.0 2.7 10.4 Results FTSE 7,219 0.4 3.0 2.5 Tata Steel: Further upside ahead Nikkei 27,977 (0.1) (0.1) (0.4) Hang Seng 26,392 (0.5) (5.8) (5.8) ONGC: Muted results KOSPI 3,171 (1.2) (3.2) 0.6

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Ashok Leyland: CV cycle recovery likely in 2HFY22 Forex/money market Indraprastha Gas: In-line results Change, basis points 13-Aug 1-day 1-mo 3-mo Bayer Cropscience: Challenging year ahead Rs/US$ 74.2 (1) (25) 82

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externalities Net investment (US$ mn) Sun TV Network: Core business weak; accounting change to support 11-Aug MTD CYTD earnings FIIs 40 6,096 23,258 (1,131 MFs 10 (6,901) Oil India: Results boosted by lower costs ) Top movers GMR Infrastructure: Second quarter of stable corporate net debt Change, %

Amara Raja Batteries: Tough road ahead Best performers 13-Aug 1-day 1-mo 3-mo Westlife Development: Ups store guidance PIEL in Equity 2,725 0.2 17.4 60.8 Dilip Buildcon: Challenging quarter TECHM in Equity 1,383 (0.2) 33.5 45.7 JUBI in Equity 3,782 1.1 22.4 34.1 Gujarat Pipavav Port: Winded, temporarily ACEM in Equity 402 0.7 9.1 30.2

TCNS Clothing Co.: 1QFY22: Muted performance CROMPTON in Equity 474 2.3 4.1 29.9 Company alerts Worst performers ARBP in Equity 761 (7.9) (20.4) (25.2) Cummins India: Harbinger of uptick in exports? LPC in Equity 977 0.1 (16.2) (19.4)

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[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. BUY Tata Steel (TATA) https://ultraviewer.et/en/own Metals & Mining AUGUST 14, 2021 load.html RESULT Sector view: Attractive

Further upside ahead. Tata’s 1QFY22 EBITDA is in line with our estimate with stronger CMP (`): 1,462 India margins offsetting the miss in Europe. Management commentary suggests that Fair Value (`): 1,750 (1) India margins at a record high in 1QFY22 could sustain in coming quarters and BSE-30: 55,437 (2) Europe margins could increase by 1-2X from 1QFY22 levels with a price reset in contracted volumes. We note that despite growth capex, Tata’s net debt/ EBITDA is likely to sustain at <1X over FY2022-24E. Strong steel prices and management guidance drive earnings and our FV upgrade to Rs1,750 (from Rs1,400). BUY for attractive valuations and a potential re-rating.

Tata Steel Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 1,462/1,750/BUY EPS (Rs) 71.2 333.4 174.7 52-week range (Rs) (high-low) 1,482-343 EPS growth (%) 25.8 368.4 (47.6) Mcap (bn) (Rs/US$) 1,761/23.8 P/E (X) 20.5 4.4 8.4 ADTV-3M (mn) (Rs/US$) 17,874/241 P/B (X) 2.4 1.6 1.4 Shareholding pattern (%) EV/EBITDA (X) 8.4 3.5 5.1 Promoters 34.4 RoE (%) 11.8 44.4 17.9 FPIs/MFs/BFIs 19.4/11.6/13.5 Div. yield (%) 1.7 2.6 1.4 Price performance (%) 1M 3M 12M Sales (Rs bn) 1,563 2,087 1,807 Absolute 19.0 24.0 253.8 EBITDA (Rs bn) 305 653 413 Rel. to BSE-30 13.9 10.1 209.1 Net profits (Rs bn) 85 406 213

1QFY22: EBITDA in-line as India operations offset weakness in Europe Tata’s 1QFY22 standalone adjusted EBITDA of Rs36,700/ton (+25% qoq) benefited from higher prices and stable costs. Europe division saw a moderate increase in EBITDA at US$89/ton (+US$65/ton in 4QFY21) led by higher costs. Management guidance suggests a moderate increase in India margins and a sharp recovery in Europe margins in 2QFY22.  India–EBITDA beat on lower costs. Standalone EBITDA of Rs99 bn (+689% yoy) led by 75% yoy higher realizations partly offset by higher costs (higher coking coal, overhead and operating leverage). Standalone sales volumes increased 28% yoy (-14% qoq) on a Covid-19 impacted base of 1QFY21. Exports formed 16% of the overall sales.  Europe–EBITDA miss on lower costs/prices to remain elevated. EBITDA of US$89/ton (US$65/ton in 4QFY21) missed our estimates (US$126/ton) led by US$43/ton qoq increase in other costs. The sequential increase in costs was due to higher maintenance expenses and one-time carbon credit cost of GBP14 mn. Management guided for a Euro 200-250/ton qoq realization increase and US$25-30/ton increase in raw material costs in 2QFY22. Accelerate deleveraging creates room for further growth capex Tata has reduced net debt by 2% qoq to Rs804 bn (-23% yoy) as of June 2021 (adjusted for export advance and hybrid securities). We estimate 18%/11% FCF yield in FY2022/23E despite growth capex and accelerated deleveraging. Tata’s expansion projects are on track with (1) 2.2 mtpa cold roll mill and 6 mtpa pellet plant to commission in 1QFY2023E and (2) 5 mtpa KPO Phase II in FY2024E. Further, a strong balance sheet and multiple brownfield expansion opportunities provide strong growth visibility. Sumangal Nevatia Risk-reward remains favorable; maintain BUY with a revised Fair Value of Rs1,750

China’s recent changes in its steel export policy and supply restrictions should keep steel Prayatn Mahajan margins elevated for longer. We increase EBITDA by 22%/11% for FY2022/23E factoring the management guidance and recent price strength. Our FV increases to Rs1,750 (from Rs1,400) as we roll over to September 2023E. Maintain BUY on attractive valuations at 5.1X EV/EBITDA FY2023E after factoring sharp moderation in margins from spot levels.

[email protected] Contact: +91 22 6218 6427

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Tata Steel Metals & Mining

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

(% chg.) 1QFY22 1QFY22E 1QFY21 4QFY21 KIE yoy qoq 2021 2020 (%chg) 2022E Net sales 533,718 520,616 254,745 499,774 3 110 7 1,562,942 1,489,717 5 2,087,092 Expenditure (375,543) (361,979) (244,943) (361,503) 4 53 4 (1,257,899) (1,311,441) (4) (1,433,632) Consumption of raw materials (200,439) (160,939) (103,796) (167,582) (554,234) (640,970) (14) (656,445) (Increase)/ decrease in stock 32,919 (20,763) (7,033) 16,421 (259) (568) 100 (15,168) 4,901 (410) — Staff Cost (56,626) (47,544) (46,788) (53,912) 19 21 5 (199,088) (191,522) 4 (192,701) Other Expenditure (151,396) (132,734) (87,325) (156,431) 14 73 (3) (489,410) (483,849) 1 (584,486) EBITDA 158,176 158,637 9,802 138,271 (0) 1,514 14 305,043 178,276 71 653,460 Other income 1,622 2,722 1,879 2,722 (40) (14) (40) 8,956 18,220 (51) 13,322 Interest (18,114) (18,663) (20,064) (18,663) (3) (10) (3) (76,067) (75,807) 0 (58,301) Depreciation (23,245) (23,924) (21,747) (23,924) (3) 7 (3) (92,336) (87,077) 6 (90,275) Pretax profits 118,438 118,772 (30,129) 98,406 (0) (493) 20 145,595 33,612 333 518,206 Extraordinaries 1,107 — (3,826) (6,341) (10,432) (49,296) (79) — Deferred tax (24,368) (25,997) (12,337) (21,355) (13,656) 46,665 (129) — Current tax 1,284 — (339) (595) (42,883) (21,136) 103 (108,166) Net income 96,461 92,775 (46,631) 70,115 4 (307) 38 78,625 9,845 699 410,040 Minority interest (8,614) — 2,356 (5,178) (6,996) 3,841 (282) (6,996) Share of profit from associates 1,223 — 150 1,504 3,273 1,880 74 3,273 PAT after minority interest 89,070 92,775 (44,126) 66,442 (4) (302) 34 74,902 15,565 381 406,318 Adjusted PAT 87,963 92,775 (40,299) 72,783 (5) (318) 21 85,334 64,861 32 406,318 Adjusted EPS (Rs) 73.4 80.9 (35.2) 60.8 71.2 56.6 333.4 Ratios EBITDA margin (%) 29.6 30.5 3.8 27.7 19.5 12.0 31.3 ETR (%) 19.5 21.9 (42.1) 22.3 38.8 (76.0) 20.9

Source: Company, Kotak Institutional Equities estimates

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

(% chg.) 1QFY22 1QFY22E 1QFY21 4QFY21 KIE yoy qoq 2021 2020 (%chg) 2022E Net sales 207,983 209,487 93,388 212,026 (1) 123 (2) 648,690 604,359 7 1,180,893 Expenditure (109,273) (115,497) (80,877) (120,148) (5) 35 (9) (431,037) (455,744) (5) (687,570) Consumption of raw materials (45,233) (37,389) (25,162) (43,759) 21 80 3 (150,147) (189,701) (292,128) Stock adjustment 10,161 — (452) 1,043 (14,641) 5,644 — Employee costs (13,783) (14,202) (13,097) (13,526) (3) 5 2 (51,988) (50,366) (54,599) Other Expenditure (60,419) (63,907) (42,166) (63,907) (5) 43 (5) (187,919) (192,260) (303,291) EBITDA 98,710 93,990 12,510 91,878 5 689 7 217,654 148,615 46 493,323 Other income 2,642 1,898 1,212 1,898 39 118 39 6,379 4,041 10,745 Interest (6,685) (8,297) (9,083) (8,297) (19) (26) (19) (33,938) (30,310) (34,239) Depreciation (9,749) (10,410) (9,693) (10,410) (6) 1 (6) (39,873) (39,201) (52,199) Pretax profits 84,918 77,181 (5,054) 75,069 10 (1,780) 13 150,221 83,146 81 417,629 Extraordinaries 4,867 — 20,589 9,493 (76) 27,731 7,294 — Tax (21,985) (19,758) (3,602) (18,626) 11 510 18 (41,885) (23,002) (108,166) Net income 67,800 57,423 11,933 65,935 18 468 3 136,066 67,438 102 309,463 Adjusted net income 67,800 57,423 11,933 65,935 18 468 3 136,066 67,438 309,463 EPS (Rs) 54.9 46.5 (7.6) 49.2 95.8 54.1 253.9 Ratios EBITDA margin (%) 47.5 44.9 13.4 43.3 33.6 24.6 41.8 ETR (%) 24.5 25.6 23.2 22.0 23.5 25.4 25.9 Per ton analysis (Rs/ton) Realizations 77,317 77,876 44,281 67,653 (1) 75 14 52,483 49,055 7 67,020 Cost 40,622 42,936 38,349 38,337 (5) 6 6 34,874 36,992 (6) 39,022 EBITDA 36,695 34,940 5,932 29,316 5 519 25 17,610 12,063 46 27,998 Steel sales (mn tons) 2.69 2.69 2.11 3.13 - 28 (14) 12.36 12.32 0 17.62

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 Metals & Mining Tata Steel

Exhibit 3: Tata Steel Europe EBITDA/ton increased 36% qoq 1QFY22 Tata Steel Europe EBITDA/ton quarterly trend, March fiscal year-ends, 1QFY20-22 (US$/ton)

% Change 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 1QFY22 1QFY22E yoy qoq 2021 2022E Tata Steel Europe Deliveries (mn tons) 2.26 2.29 2.35 2.39 1.94 2.26 2.11 2.47 2.33 2.36 20% -6% 8.82 9.65 Turnover (US$ mn) 2,037 1,972 1,941 1,871 1,477 1,776 1,906 2,338 2,629 2,792 78% 12% 7,288 9,700 Adjusted EBITDA (US$ mn) 9 23 (134) 9 (82) (61) (98) 162 207 297 -352% 28% (92) 1,519 Adjusted EBITDA/ton (US$) 4 10 (57) 4 (42) (27) (46) 65 89 126 -310% 36% (10) 157 Tata Steel Europe (Rs mn) Revenues 144,950 140,350 138,210 135,876 112,250 134,980 140,700 172,580 194,410 206,503 73% 13% 540,800 727,463 EBITDA 620 1,650 (9,560) 650 (6,260) (4,620) (7,240) 11,940 15,330 21,976 -345% 28% (6,838) 113,900

Source: Company, Kotak Institutional Equities estimates

Conference call highlights

 Demand outlook. Management expects steel demand in India to recover sharply post monsoon. The second wave of Covid-19 had impacted domestic steel demand but a strong export market is helping the company sustain high volumes. Global demand is expected to remain robust led by elevated infrastructure spending across the US, Europe and Asia.

 Price guidance. Strong domestic/export prices and improved product mix (higher autos) should result in ~ Rs3,000/ton qoq increase in realization in 2QFY22 as per management. Steel prices globally are at elevated levels and domestic prices continue to remain at a discount to import parity. Management expects that the structural policy changes by China towards reducing steel exports and initiatives towards reducing carbon emissions shall help keep regional prices elevated.

With long term contracts in place, realization in Europe is not reflecting the current buoyancy in prices. Management shared that ~60% of volumes are contracted for more than six months. It has for Euro 200-250/ton higher realization in Europe in 2QFY22.

 Cost guidance. The management expects costs to increase mainly led by coking coal. Management has guided for a US$20/10/ton qoq cost increase for coking coal and iron ore respectively.

 Capex guidance. Management has maintained its guidance of Rs100-120 bn (Rs75 bn at India) for FY2022 primarily towards completion of the ongoing capex at TSK. Work on the 6 mtpa pellet plant and 2.2 mtpa cold roll mill complex at Tata Steel Kalinganagar remains on track for completion by 1HCY22E which shall improve margins. Capex on these two projects is estimated at Rs60-70 bn and shall take 12-14 months to complete. Capex incurred in 1QFY22 stood at Rs20 bn.

 Multiple brownfield growth avenues in medium-term. Management shared that they can reach 40 mtpa steel capacity in India from current 18 mtpa through brownfield expansions (1) Jamshedpur -14 mtpa (from 10 mtpa) (2) KPO -16 mtpa (from 3 mtpa) and (3) Angul (Tata BSL) – 10 mtpa (from 5 mtpa). Given multiple brownfield opportunities, TATA would not be going for any greenfield expansion in the medium term. However, they would look for inorganic growth in the long product segment which would most likely be under its subsidiary - Tata Steel Long Products.

 Net debt declined 2% qoq. TATA’s consolidated net-debt declined 2% qoq (Rs13 bn) to Rs804 bn as on June 2021. We exclude ~Rs64 bn of export advances from our net debt calculation. Build up in working capital resulted in lower than expected net debt reduction.

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Steel Metals & Mining

 Working Capital. The severity of second wave in India and related regional restrictions impacted demand in 1QFY22. This resulted in sharp increase in working capital in India by Rs26 bn. There was a Rs40 bn working capital increase in Europe primarily due to higher regional steel prices. The Euro 227 mn payout in April 2021 for carbon credits purchased for FY2021 also inflated working capital. Management expects to reduce this working capital buildup in the coming quarters.

Exhibit 4: Tata Steel standalone, quarterly analysis of cost-structure and profitability, March fiscal year-ends, 1QFY20-22 (Rs/ton)

1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 1QFY22 Tata Steel India (Rs/ton) Realization (Rs/ ton) 53,460 50,071 44,522 48,786 44,281 45,577 53,870 67,653 77,317 Raw material cost 15,707 16,110 16,148 11,527 12,145 14,409 13,412 13,630 13,038 Employee cost 4,493 4,303 3,458 4,706 6,210 3,331 4,021 4,316 5,124 Other expenditure 20,685 18,671 15,269 20,028 19,993 14,955 16,342 20,391 22,461 Total Cost 40,885 39,084 34,875 36,261 38,349 32,694 33,775 38,337 40,622 EBITDA (Rs/ton) 12,574 10,987 9,646 12,526 5,932 12,882 20,096 29,316 36,695 Tata Steel (US$/ton) Realization (US$/ ton) 768 712 625 672 583 613 730 917 1,047 Raw material cost 226 229 227 159 160 194 182 185 177 Employee cost 65 61 49 65 82 45 54 58 69 Other expenditure 297 266 214 276 263 201 221 276 304 EBITDA/ ton 181 156 135 172 78 173 272 397 497

Source: Company, Kotak Institutional Equities estimates

Exhibit 5: Tata Steel's net debt declined 2% qoq to Rs804 bn in 1QFY22 Tata steel group quarterly net debt trend, March fiscal year-ends, 1QFY17-22 (Rs bn)

1,150 Net debt (Rs bn)

1,050

950

850 804

750

650

550

1QFY17 2QFY18 3QFY18 4QFY18 1QFY19 2QFY20 3QFY20 4QFY20 1QFY21 1QFY22 3QFY17 4QFY17 1QFY18 2QFY19 3QFY19 4QFY19 1QFY20 2QFY21 3QFY21 4QFY21 2QFY17 Note: (a) Net debt excludes export advances of Rs64 bn

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 5 Metals & Mining Tata Steel

Exhibit 6: Tata Steel BSL EBITDA increased 21% qoq on higher steel prices Tata Steel BSL EBITDA/ton quarterly trend, March fiscal year-ends, 1QFY21-22, 2020-21 (Rs mn)

% Change 1QFY22 1QFY22E 1QFY21 4QFY21 KIE yoy qoq 2021 2020 % Change Tata Steel BSL Revenues (Rs mn) 78,583 80,235 26,970 73,211 (2) 191 7 214,186 181,991 18 Costs (Rs mn) 47,645 48,179 25,450 47,549 (1) 87 — 159,680 158,963 — RM costs 32,116 32,121 15,968 31,701 (0) 101 1 107,183 103,411 4 Employee costs 1,504 1,316 1,285 1,299 14 17 16 4,653 4,013 16 Other expenses 14,025 27,421 8,198 14,549 (49) 71 (4) 47,845 51,539 (7) EBITDA (Rs mn) 30,938 32,057 1,520 25,662 (3) 1,936 21 54,506 23,028 137 Volumes (mn tons) 1.12 1.12 0.69 1.19 — 61 (6) 4.32 4.14 4 Realization (Rs/ton) 70,226 71,703 38,862 61,367 (2) 81 14 49,626 43,938 13 Cost (Rs/ton) 42,578 43,055 36,672 39,857 (1) 16 7 36,997 38,378 (4) RM costs 28,701 28,705 23,008 26,573 (0) 25 8 24,834 24,966 (1) Employee costs 1,344 1,176 1,851 1,089 14 (27) 23 1,078 969 11 Other expenses 12,534 24,505 11,813 12,196 (49) 6 3 11,085 12,443 (11) EBITDA (Rs/ton) 27,648 28,648 2,190 21,510 (3) 1,163 29 12,629 5,560 127

Source: Company, Kotak Institutional Equities estimates

Exhibit 7: Tata Steel Long Products EBITDA increased 4% qoq on higher prices Tata Steel Long Products, EBITDA/ton, March fiscal year-end, 1QFY21-22, 2020-21 (Rs mn, mn tons)

% Change 1QFY22 1QFY22E 1QFY21 4QFY21 KIE yoy qoq 2021 2020 % Change TSL Revenues (Rs mn) 16,876 29,681 6,530 15,467 (43) 158 9 47,499 34,899 36 EBITDA (Rs mn) 5,202 6,182 150 4,978 (16) 3,368 4 10,984 (79) (14,057) Volumes (mn tons) 0.34 0.34 0.12 0.34 — 191 (1) 0.81 0.51 58 Realization (Rs/ton) 49,491 87,042 55,812 45,094 (43) (11) 10 58,931 68,429 (14) Cost (Rs/ton) 34,236 68,914 54,530 30,581 (50) (37) 12 45,303 68,584 (34) EBITDA (Rs/ton) 15,255 18,129 1,282 14,514 (16) 1,090 5 13,628 (154) (8,931)

Source: Company, Kotak Institutional Equities estimates

Exhibit 8: We are factoring India margins to moderate in 9MFY22E and see upside risk Tata Steel India EBITDA/ton, March fiscal year ends, 1QFY21-9MFY22, 2023-24E (Rs/ton)

EBITDA (Rs/ton) 40,000 34,037 35,000

30,000 26,332 25,000

20,000 17,123 16,828 15,000

10,000

5,000

-

1QFY22

FY2023E FY2024E 9MFY22E

Source: Company, Kotak Institutional Equities estimates

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Steel Metals & Mining

Exhibit 9: We are factoring Europe margins to moderate significantly from FY2023E onwards and see upside risk Tata Steel Europe EBITDA/ton, March fiscal year ends, 1QFY21-9MFY22, 2023-24E (US$/ton)

EBITDA (US$/ton) 160 144 140 120 100 89 82 78 80 60 40 20

-

1QFY22

FY2023E FY2024E 9MFY22E

Source: Company, Kotak Institutional Equities estimates

Exhibit 10: Leverage reduces sharply with strong earnings Tata Steel consolidated leverage details, March fiscal year ends, 2017-24E (Rs bn, X)

2017 2018 2019 2020 2021 2022E 2023E 2024E

EBITDA (Rs bn) 170 214 294 178 305 653 413 406 Net debt (Rs bn) 745 716 949 1,048 818 536 364 191 Capex (Rs bn) 74 73 86 100 70 123 144 109 Free Cash Flows (Rs bn) (11) (41) 99 30 309 328 198 196 Net debt/ EBITDA (X) 4.4 3.3 3.2 5.9 2.7 0.8 0.9 0.5 Net debt/ Equity (X) 2.1 1.2 1.5 1.5 1.1 0.5 0.3 0.1

Source: Company, Kotak Institutional Equities estimates

Exhibit 11: TATA's EPS changes by 2.7% for every 1% change in Exhibit 12: TATA's EBITDA changes by 1.8% for 1% change in HRC prices HRC prices EPS sensitivity of TATA to HRC prices, forex rate, FY2023E (Rs/share) EBITDA sensitivity of TATA to HRC prices, forex rate, FY2023E

HRC Prices (US$/Ton) HRC Prices (US$/Ton) 174.7 520 540 560 580 600 4E+05 520 540 560 580 600 75 134 150 166 181 197 75 347,132 372,744 398,355 423,967 449,578 76 139 154 170 186 202 76 353,897 379,850 405,803 431,756 457,709 77 143 159 175 191 207 77 360,662 386,956 413,251 439,545 465,840

US$/INR 78 367,427 394,063 420,699 447,335 473,971

US$/INR 78 147 163 179 195 212 79 374,192 401,169 428,147 455,124 482,102 79 151 167 184 200 217

Source: Kotak Institutional Equities estimates Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 7 Metals & Mining Tata Steel

Exhibit 13: Tata Steel, changes in estimates, March fiscal year ends, 2022-24E

Revised estimates Old estimates Change (%) 2022E 2023E 2024E 2022E 2023E 2024E 2022E 2023E 2024E Earnings (consolidated) Units Net sales Rs mn 2,087,092 1,807,068 1,815,927 1,911,620 1,731,902 1,735,511 9 4 5 EBITDA Rs mn 653,460 413,251 405,812 537,225 373,075 361,896 22 11 12 Adj. PAT Rs mn 406,318 212,895 202,555 312,402 174,711 162,331 30 22 25 EPS Rs/share 333 175 166 256 143 133 30 22 25 Volumes India (Standalone + Bhushan) mn tons 17.6 17.8 17.8 17.8 18.2 18.2 (1) (2) (2) Europe mn tons 9.7 9.8 9.8 9.8 9.8 9.8 (2) — — TATA Steel SEA mn tons 2.5 2.5 2.5 2.5 2.5 2.5 1 1 1 Prices HRC prices - China US$/ton 675 560 560 610 530 520 11 6 8 INR Rs/US$ 75 77 77 75 75 75 — 3 3 Tata Steel India (incl. Bhushan) Net sales Rs mn 1,180,893 985,092 991,538 1,045,133 950,528 952,028 13 4 4 EBITDA Rs mn 493,323 304,909 299,643 389,219 276,809 267,332 27 10 12 EBITDA/ton Rs/ton 27,998 17,123 16,828 22,091 15,546 15,014 27 10 12 Tata Steel Europe EBITDA US$ mn 1,519 804 768 1,438 726 697 6 11 10 EBITDA/ton US$/ton 157 82 78 149 74 71 6 11 10 Tata Steel SEA EBITDA US$ mn 153 152 159 80 81 88 90 87 81 EBITDA/ton US$/ton 62 61 63 33 33 35 89 86 80

Source: Kotak Institutional Equities estimates

Exhibit 14: Tata Steel, Key assumptions, March fiscal-year ends, 2017- 24E (Rs mn)

2017 2018 2019 2020 2021 2022E 2023E 2024E Tata Steel (India) Average HRC Price (US$/ton) 435 540 545 495 545 675 560 560 Crude Steel capacity (mn tons) 12.7 12.7 18.6 18.6 18.6 18.6 18.6 23.6 Volume (mn tons) 11.0 12.2 16.3 16.5 16.7 17.6 17.8 17.8 EBITDA/ton (US$/ton) 231 286 232 170 237 373 222 219 EBITDA/ton (Rs/ton) 10,823 12,987 14,040 10,427 16,320 27,998 17,123 16,828 Europe Volume (mn tons) 9.9 10.0 9.6 9.3 8.8 9.7 9.8 9.8 EBITDA/ton (US$/ton) 71 55 83 (4) (10) 157 82 78 Tata Steel SEA Volume (mn tons) 2.6 2.5 2.4 2.4 2.2 2.5 2.5 2.5 EBITDA/ton (US$/ton) 30 24 16 27 31 62 61 63

Source: Company, Kotak Institutional Equities estimates

8 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Steel Metals & Mining

Exhibit 15: Tata Steel, valuation, September 2023E basis

EBITDA Multiple Enterprise value Net debt Equity Value Equity Value (Rs bn) (X) (Rs bn) (Rs bn) (Rs bn) (Rs/share) India 302 6.5 1,979 270 1,709 1,403 Europe 61 4.5 272 180 92 76 South East Asia 12.0 4.5 54 54 44 Total Enterprise Value 375 6.2 2,305 450 1,855 1,523 Add: KPO Phase II CWIP 210 172 Add: Value of investments (25% discount) 6 5 Add: Value of Listed Subsidiaries (25% discount) 59 50 Arrived market capitalization 2,129 1,750

Fair Value (Rs) 1,750

Source: Kotak Institutional Equities estimates

Exhibit 16: Tata Steel (consolidated), profit model, balance sheet and cash flow model, March fiscal year-ends, 2017-2024E (Rs mn)

2017 2018 2019 2020 2021 2022E 2023E 2024E Profit model (Rs mn) Net sales 1,122,994 1,227,937 1,576,690 1,489,717 1,562,942 2,087,092 1,807,068 1,815,927 EBITDA 170,078 214,332 293,833 178,276 305,043 653,460 413,251 405,812 Other income 5,275 8,811 14,206 18,220 8,956 13,322 13,358 12,932 Interest (50,722) (54,547) (76,601) (75,807) (76,067) (58,301) (55,736) (57,936) Depreciation (56,729) (57,417) (73,418) (87,077) (92,336) (90,275) (95,816) (99,643) Profit before tax 67,902 111,179 158,020 33,612 145,595 518,206 275,057 261,164 Extraordinaries (43,242) 95,991 (1,210) (49,296) (10,432) — — — Taxes (27,780) (33,905) (67,184) 25,529 (56,539) (108,166) (58,440) (54,886) Profit after tax (3,120) 173,265 89,626 9,845 78,625 410,040 216,617 206,278 Minority interest (722) (43,085) 10,962 3,841 (6,996) (6,996) (6,996) (6,996) Share in profit/(loss) of associates 77 2,391 2,247 1,880 3,273 3,273 3,273 3,273 Reported net income (3,766) 132,571 102,834 15,565 74,902 406,318 212,895 202,555 Adjusted net income 40,200 79,665 103,530 64,861 85,334 406,318 212,895 202,555 Fully diluted EPS (Rs) 41 70 90 57 71 333 175 166 Balance sheet (Rs mn) Equity 355,443 585,956 666,501 713,013 734,638 1,094,364 1,282,179 1,461,180 Deferred tax liability 100,301 105,699 124,599 92,614 92,414 92,414 92,414 92,414 Total Borrowings 850,709 944,221 1,030,733 1,186,032 955,811 915,811 875,811 835,811 Current liabilities 410,863 406,416 431,807 423,244 531,617 626,300 578,953 580,978 Minority interest 16,017 9,365 23,645 25,866 32,697 39,693 46,688 53,684 Total liabilities 1,733,332 2,097,579 2,335,824 2,504,195 2,454,872 2,876,277 2,983,741 3,131,762 Net fixed assets 885,118 903,228 1,184,510 1,280,538 1,284,545 1,257,410 1,225,618 1,189,999 Capital work in progress 157,841 166,144 186,412 194,968 190,074 250,074 330,074 375,074 Goodwill 34,947 57,821 59,909 64,969 73,207 73,207 73,207 73,207 Investments 125,367 178,995 57,382 62,852 106,819 110,093 113,366 116,640 Deferred tax assets 8,859 10,358 8,090 12,703 15,780 15,780 15,780 15,780 Cash 49,211 79,379 33,414 80,547 57,822 299,487 432,181 565,121 Other current assets 471,989 449,279 489,825 444,227 471,113 614,702 537,990 540,417 Total assets 1,733,332 2,097,579 2,335,824 2,504,195 2,454,872 2,876,277 2,983,741 3,131,762 Net debt 744,767 715,753 949,320 1,048,416 818,051 536,385 363,691 190,752 Free cash flow (Rs mn) Operating cash flow excl. working capital 142,298 180,427 226,649 203,805 248,504 545,294 354,811 350,925 Working capital changes (48,907) (92,755) 25,905 41,962 164,913 (48,906) 29,365 (402) Other income- finance costs (45,447) (45,736) (62,395) (57,587) (67,111) (44,979) (42,378) (45,004) Cash flow from operations 47,944 41,935 190,159 188,179 346,306 451,409 341,798 305,518 Capital expenditure (74,269) (72,995) (86,243) (100,123) (69,786) (123,141) (144,024) (109,024) Free cash flow (26,326) (31,059) 103,916 88,057 276,520 328,268 197,774 196,494 Ratios P/E (X) 35.3 21.0 16.2 25.8 20.5 4.4 8.4 8.8 EV/EBITDA (X) - ex investments 12.6 11.0 8.9 15.3 8.3 3.5 5.1 4.8 P/B (X) 4.0 2.9 2.5 2.3 2.4 1.6 1.4 1.2 FCF Yield (%) (0.8) (2.4) 5.9 1.8 17.7 18.4 11.1 11.0 Net debt/EBITDA (X) 4.4 3.3 3.3 6.0 2.7 0.8 0.9 0.5 RoAE (%) 10.4 16.9 16.5 9.4 11.8 44.4 17.9 14.8 RoACE (%) 7.2 8.9 10.7 4.7 9.7 22.7 11.6 10.6

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 9 SELL ONGC (ONGC) https://ultraviewer.et/en/own Oil, Gas & Consumable Fuels AUGUST 16, 2021 load.html RESULT Sector view: Attractive

Muted results. ONGC’s 1QFY22 results was below our expectations due to lower- CMP (`): 116 than-expected oil realizations and higher operating expenses; oil and gas sales volumes Fair Value (`): 110 declined further on the low base of 1QFY21. The management remained optimistic on BSE-30: 55,437 improvement in volumes trajectory in FY2022. We retain SELL with Fair Value of Rs110, noting an uninspiring production track record, weak free cash flow generation and muted return ratios. Sustained high oil and gas prices are key risks to our negative view. ONGC Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 116/110/SELL EPS (Rs) 9.8 20.1 20.3 52-week range (Rs) (high-low) 129-64 EPS growth (%) (27.3) 105.1 1.0 Mcap (bn) (Rs/US$) 1,461/19.7 P/E (X) 11.9 5.8 5.7 ADTV-3M (mn) (Rs/US$) 2,782/37 P/B (X) 0.6 0.6 0.5 Shareholding pattern (%) EV/EBITDA (X) 5.1 3.2 3.0 Promoters 60.4 RoE (%) 5.2 10.1 9.6 FPIs/MFs/BFIs 8.1/5.9/11.6 Div. yield (%) 3.1 6.7 6.8 Price performance (%) 1M 3M 12M Sales (Rs bn) 1,223 1,856 2,078 Absolute (3.6) 0.9 47.7 EBITDA (Rs bn) 437 680 718 Rel. to BSE-30 (8.6) (13.0) 3.0 Net profits (Rs bn) 123 252 255

Weak results led by lower oil realizations, lower gas volumes and higher operating costs ONGC’s revenues were 4% below our estimate at Rs230.2 bn reflecting lower-than-anticipated oil realizations; revenues increased 9% qoq as 13% qoq increase in oil realizations to US$65.6/bbl, was partly offset by a decline in oil sales volumes by -2.8% qoq (-4.8% yoy) and gas sales volumes by -4.9% qoq (-4.3% yoy). EBITDA was 6% below our estimate at Rs121.5 bn, reflecting higher-than-expected employee cost and other expenses. Standalone net income was 10% below our estimate at Rs43.4 bn (EPS of Rs3.4), as higher-than-assumed other income and lower DD&A costs were offset by an increase in tax rate to 35.8%. Consolidated net income was higher at Rs68.5 bn (EPS of Rs5.4), including—(1) Rs18 bn of net income from HPCL, (2) Rs9.2 bn of net income from OVL and (3) Rs0.9 bn of net loss from MRPL. Oil and gas sales volumes decline further on the low base of 1QFY21 Overall crude oil sales volumes declined 1.2% yoy on a low base (-3% in 1QFY21) to 5.09 mn tons reflecting a sharp 5.1% decline in production from own fields and 2.5% decline in production from JVs. Overall natural gas sales volumes declined by 3.4% yoy on a low base (- 15% in 1QFY21) to 4.09 bcm, reflecting 5.6% decline in production from own fields; production from JVs increased 32.6% on a low base. Value-added-products’ (VAP) sales volumes increased 15.3% yoy to 0.78 mn tons. OVL reported a 7% decline in crude oil production volumes to 2.08 mn tons and 11% decline in gas production volumes to 1.07 bcm. Notwithstanding, a weak start, the management has maintained its optimistic production guidance for FY2022—(1) oil production volumes to increase by 1% yoy to 22.8 mn tons, implying 3.2% growth for the remaining nine months and (2) gas production volumes to increase by 9% yoy to 24.8 bcm, implying 12.3% growth for the remaining period of FY2022. Raise estimates to reflect higher gas prices; retain SELL and FV of Rs110 Tarun Lakhotia We raise our FY2023-24E EPS by 4% on factoring higher domestic gas price of US$5/mn BTU in FY2023-24E versus US$4/mn BTU earlier given the recent sharp increase in underlying global Hemang Khanna benchmark gas prices, which is partly offset by lower oil and gas volumes; we cut our FY2022E EPS by 6% largely on factoring lower volumes. We retain our SELL rating with a FV of Rs110, based on 6X standalone EPS plus the value of investments. We recommend investors to avoid upstream PSUs given (1) uninspiring production track record despite a sustained rise in capex and operating costs and (2) limited FCF generation and deteriorating returns profile. Sustained increase in global oil and gas prices pose upside risks to our earnings estimates and Fair Value.

[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. ONGC Oil, Gas & Consumable Fuels

Exhibit 1: ONGC’s interim results, March fiscal year-ends (Rs mn)

(% chg.) 1QFY22 1QFY22E 1QFY21 4QFY21 1QFY22E 1QFY21 4QFY21 FY2022E FY2021 (% chg.) Net sales 230,216 239,158 130,113 211,889 (3.7) 76.9 8.6 990,841 681,411 45.4 Total expenditure (108,688) (109,297) (71,036) (110,654) (0.6) 53.0 (1.8) (474,442) (353,284) 34.3 Increase/(decrease) in stock in trade 294 — 1,115 1,364 — 4,264 Raw materials (a) (7,298) (7,530) (3,967) (5,525) (3.1) 84.0 32.1 (26,100) (19,807) 31.8 Staff expenditure (7,302) (6,501) (4,985) (6,307) 12.3 46.5 15.8 (27,687) (23,073) 20.0 Statutory levies (59,696) (61,636) (29,809) (54,107) (3.1) 100.3 10.3 (248,424) (164,237) 51.3 Other expenditure (34,687) (33,631) (33,391) (46,079) 3.1 3.9 (24.7) (172,232) (150,431) 14.5 EBITDA 121,528 129,860 59,077 101,235 (6.4) 105.7 20.0 516,399 328,127 57.4 Other income 5,337 4,611 4,368 31,324 15.7 22.2 (83.0) 59,795 71,425 (16.3) Interest (6,197) (6,270) (4,918) (5,688) (1.2) 26.0 9.0 (23,880) (22,145) 7.8 DD&A (53,161) (63,631) (49,492) (63,727) (16.5) 7.4 (16.6) (251,431) (227,129) 10.7 Depletion (30,780) (28,695) (28,963) (28,620) 7.3 6.3 7.5 (125,679) (117,878) 6.6 Depreciation (9,860) (12,125) (9,310) (10,040) (18.7) 5.9 (1.8) (44,997) (39,010) 15.3 Dry wells written off (5,953) (14,250) (5,679) (13,602) (58.2) 4.8 (56.2) (55,000) (46,610) 18.0 Survey expenses (5,558) (8,561) (5,590) (6,140) (35.1) (0.6) (9.5) (24,746) (17,246) 43.5 Impairment loss and others (1,010) — 50 (5,326) (1,010) (6,386) Pretax profits 67,507 64,570 9,035 63,144 4.5 647.2 6.9 300,882 150,278 100.2 Extraordinary — — — 26,132 — 13,750 Current tax (22,860) (13,216) (3,360) (8,798) (68,902) (42,008) Deferred tax (1,294) (3,334) (715) (13,139) (15,044) (9,556) Net income 43,353 48,021 4,960 67,340 (9.7) 774.1 (35.6) 216,936 112,464 92.9 Adjusted net income 43,353 48,021 4,960 47,629 (9.7) 774.1 (9.0) 216,936 103,037 110.5 Adjusted EPS (Rs) 3.4 3.8 0.4 3.8 (9.7) 774.1 (9.0) 17.2 8.2 110.5 Tax rate (%) 35.8 25.6 45.1 24.6 27.9 31.4

Volume data Subsidy loss — — — — — — Crude production ex JVs ('000 tons) 4,812 5,068 4,974 (5.1) (3.3) 20,183 Crude production - JVs ('000 tons) 582 597 577 (2.5) 0.9 2,350 Gas production ex JVs (mcm) 5,052 5,351 5,328 (5.6) (5.2) 21,872 Gas production - JVs (mcm) 257 194 256 32.5 0.4 944 Crude production ('000 tons) 5,394 5,665 5,551 (4.8) (2.8) 22,533 Gas production (mcm) 5,309 5,545 5,584 (4.3) (4.9) 22,816 Crude sales ex JVs ('000 tons) 4,357 4,321 4,443 4,472 0.8 (1.9) (2.6) 17,763 17,717 0.3 Crude sales - JVs ('000 tons) 731 711 707 748 2.8 3.4 (2.3) 3,092 2,995 3.2 Gas sales ex JVs (mcm) 3,889 4,097 4,124 4,189 (5.1) (5.7) (7.2) 16,800 16,982 (1.1) Gas sales - JVs (mcm) 201 205 112 200 (2.0) 79.5 0.5 851 712 19.6 Crude sales ('000 tons) 5,088 5,032 5,150 5,220 1.1 (1.2) (2.5) 20,855 20,712 0.7 Gas sales (mcm) 4,090 4,302 4,236 4,389 (4.9) (3.4) (6.8) 17,651 17,694 (0.2) LPG (000 tons) 229 259 277 236 (11.6) (17.3) (3.0) 1,036 1,011 2.5 Naphtha/NGL (000 tons) 244 207 218 213 17.8 11.9 14.6 963 915 5.3 C2/C3/C4 (000 tons) 292 258 161 251 13.4 81.4 16.3 1,250 1,004 24.5 SKO (000 tons) 7 6 7 8 16.7 0.0 (12.5) 32 32 — Others (000 tons) 12 19 17 18 (37.7) (29.4) (33.3) 72 66 9.1 Total VAP sales ('000 tons) 784 749 680 726 4.7 15.3 8.0 3,353 3,028 10.7

Pricing data Gross crude price realization (US$/bbl) 65.6 68.1 28.7 58.1 (3.7) 128.4 13.0 64.5 42.8 50.8 Domestic gas price (US$/mn BTU) 2.0 2.0 2.7 2.0 — (25.2) — 2.6 2.3 13.8

Notes: (a) Represents consumption of stores & spares.

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11 Oil, Gas & Consumable Fuels ONGC

Exhibit 2: ONGC’s own crude production has remained weak in recent months Daily crude production volumes from ONGC's fields, April 2012 onwards (ktoe/d)

(ktoe/d) Crude oil production 70

60

50

40

30

20

10

0

Jun-12

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Jun-19

Jun-20

Jun-21

Oct-12

Oct-13

Oct-14

Oct-15

Oct-16

Oct-17

Oct-18

Oct-19

Oct-20

Feb-13

Feb-14

Feb-15

Feb-16

Feb-17

Feb-18

Feb-19

Feb-20

Feb-21

Apr-12

Apr-13

Apr-14

Apr-15

Apr-16

Apr-17

Apr-18

Apr-19

Apr-20

Apr-21

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18

Dec-19

Dec-20

Aug-12

Aug-13

Aug-14

Aug-15

Aug-16

Aug-17

Aug-18 Aug-19 Aug-20

Source: MoPNG, Kotak Institutional Equities

Exhibit 3: ONGC’s own gas production has also remained weak in the recent months Daily gas production volumes from ONGC's fields, April 2012 onwards (mcm/d)

(mcm/d) Natural gas production 80

70

60

50

40

30

20

10

0

Jun-12

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Jun-19

Jun-20

Jun-21

Oct-12

Feb-13

Oct-13

Feb-14

Oct-14

Feb-15

Oct-15

Feb-16

Oct-16

Feb-17

Oct-17

Feb-18

Oct-18

Feb-19

Oct-19

Feb-20

Oct-20

Feb-21

Apr-12

Apr-13

Apr-14

Apr-15

Apr-16

Apr-17

Apr-18

Apr-19

Apr-20

Apr-21

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18

Dec-19

Dec-20

Aug-12

Aug-13

Aug-14

Aug-15

Aug-16

Aug-17

Aug-18 Aug-19 Aug-20

Source: MoPNG, Kotak Institutional Equities

12 KOTAK INSTITUTIONAL EQUITIES RESEARCH ONGC Oil, Gas & Consumable Fuels

Exhibit 4: OVL’s oil and gas volumes declined in 1QFY22 Production volumes of OVL, 1QFY19 onwards

1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 1QFY22 Crude oil (mn tons) Vietnam, Block 06.1 0.005 0.005 0.030 — 0.003 0.003 0.003 0.002 0.002 0.003 0.002 0.002 0.003 Sudan, GNOP 0.066 0.068 0.063 0.060 0.058 0.039 — — — — — — — Sudan, Block 5A — 0.008 0.045 0.078 0.106 0.144 0.165 0.147 0.185 0.175 0.179 0.175 0.150 Russia, Sakhalin-1 0.528 0.624 0.663 0.674 0.639 0.640 0.640 0.636 0.642 0.583 0.627 0.590 0.562 Columbia, MECL 0.139 0.135 0.106 0.178 0.166 0.168 0.165 0.173 0.154 0.144 0.173 0.194 0.172 Venezuela, Sancristobal 0.070 0.067 0.065 0.055 0.050 0.043 0.031 0.023 0.015 0.013 0.008 0.007 0.012 Venezuela, Carabobo 0.031 0.029 0.030 0.024 0.025 0.020 0.022 0.019 0.008 0.002 0.001 0.005 0.009 ACG fields 0.168 0.165 0.163 0.160 0.145 0.154 0.147 0.149 0.134 0.129 0.132 0.136 0.128 Imperial Energy 0.055 0.054 0.050 0.048 0.054 0.050 0.047 0.045 0.044 0.042 0.039 0.039 0.047 Russia, Vankor 1.055 1.060 1.049 0.976 0.935 0.894 0.853 0.810 0.728 0.714 0.698 0.671 0.689 Brazil, BC-10 0.133 0.106 0.138 0.138 0.118 0.134 0.145 0.145 0.162 0.134 0.153 0.069 0.150 Lower Zakum,UAE 0.176 0.190 0.205 0.186 0.190 0.197 0.211 0.202 0.160 0.154 0.137 0.146 0.156 Total crude oil 2.426 2.511 2.607 2.577 2.489 2.486 2.429 2.351 2.234 2.093 2.149 2.034 2.078 Natural gas (bcm) Vietnam, Block 06.1 0.368 0.333 0.376 0.473 0.501 0.492 0.437 0.418 0.430 0.348 0.269 0.274 0.290 Russia, Sakhalin-1 0.129 0.116 0.182 0.195 0.131 0.110 0.182 0.194 0.131 0.117 0.191 0.214 0.137 Brazil, BC-10 0.008 0.007 0.009 0.009 0.008 0.008 0.009 0.010 0.010 0.009 0.014 0.004 0.009 A1 & A3 Myanmar 0.206 0.063 0.177 0.251 0.263 0.263 0.277 0.253 0.245 0.217 0.259 0.250 0.232 Russia, Vankor 0.425 0.430 0.405 0.400 0.392 0.367 0.372 0.358 0.349 0.353 0.359 0.324 0.350 ACG, MECL, IEC & PIVSA 0.043 0.045 0.045 0.041 0.045 0.047 0.044 0.045 0.037 0.034 0.035 0.056 0.047 Total natural gas 1.179 0.994 1.194 1.369 1.340 1.287 1.321 1.278 1.202 1.078 1.127 1.122 1.065

Source: Company, Kotak Institutional Equities

Exhibit 5: Production and operating costs have increased over the past few years Production and operating costs per barrel, March fiscal year-ends, 2016 onwards (US$/boe)

Operating costs Production costs

(US$/bbl) 14 11.7 11.6 12 10.7 10.1 9.8 9.7 10.1 9.2 10 8.5

8

6

4

2

0

2016

2017

2018

2019

2020

2021

2022E

2023E 2024E

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 13 Oil, Gas & Consumable Fuels ONGC

Exhibit 6: Capex has remained elevated over the past few years Standalone capex per barrel versus DD&A expenses, March fiscal year-ends, 2016 onwards (US$/boe)

(US$/bbl) DD&A Capex 18 15.7 16 14.7 14.2 13.2 14 12.712.7 12.1 11.6 12.3 11.6 12.0 12 11.2 11.2 10.4 9.9 10.2 10 8.1 7.9 8

6

4

2

0

2016

2017

2018

2019

2020

2021

2022E

2023E 2024E

Source: Company, Kotak Institutional Equities estimates

Exhibit 7: Domestic gas price may rise sharply in 1HFY23E if high global gas prices sustain Domestic gas price, 2HFY15 onwards (US$/mn BTU)

(US$/mn BTU) India domestic gas price (NCV) 7

6 5.6 5.7 5.2 5 4.2 4.1 4 3.7 3.6 3.4 3.2 3.4 3.3 2.8 2.8 3 2.7 2.0 2.0 2

1

0

2HFY15

1HFY16

2HFY16

1HFY17

2HFY17

1HFY18

2HFY18

1HFY19

2HFY19

1HFY20

2HFY20

1HFY21

2HFY21

1HFY22 2HFY22E 1HFY23E

Source: PPAC, Bloomberg, Kotak Institutional Equities estimates

14 KOTAK INSTITUTIONAL EQUITIES RESEARCH ONGC Oil, Gas & Consumable Fuels

Exhibit 8: We assume higher oil realizations and domestic gas prices in FY2022-23 Key assumptions, March fiscal year-ends, 2018-24E

2018 2019 2020 2021 2022E 2023E 2024E Macro assumptions Exchange rate (Rs/US$) 64.5 69.9 70.8 74.2 75.0 76.5 78.0 Subsidy loss (Rs bn) — — — — — — — Import tariff on crude oil (%) — — — — — — — Pricing and volumes assumptions Crude price Crude price, Dated Brent (US$/bbl) 57.6 70.2 60.9 44.8 65.0 60.0 60.0 Gross realized crude price, India (US$/bbl) 57.3 70.2 60.5 44.1 66.8 61.6 61.6 Net realized crude price, India (US$/bbl) 57.3 70.2 60.5 44.1 66.8 61.6 61.6 Natural gas price Natural gas price, India (Rs/cu m) 7.6 9.9 11.9 6.9 7.9 15.2 15.5 Natural gas price, India (US$/mn BTU) 3.0 3.6 4.3 2.3 2.6 5.0 5.0 Sales volumes—Domestic fields Crude oil - own fields (mn tons) 19.7 18.5 18.0 17.7 17.8 18.0 18.2 Crude oil - JV (mn tons) 3.9 4.0 3.4 3.0 3.1 3.4 3.3 Natural gas - own fields (bcm) 18.6 19.6 18.5 17.0 16.8 18.3 19.7 Natural gas - JV (bcm) 0.9 0.9 0.9 0.7 0.9 0.8 0.7 Sales volumes—Overseas fields Crude oil (mn tons) 9.4 10.1 9.8 8.5 8.8 9.6 9.6 Natural gas (bcm) 4.8 4.7 5.2 4.5 4.5 4.9 5.0 Total sales Crude oil (mn tons) 33.0 32.6 31.1 29.2 29.7 31.1 31.0 Natural gas (bcm) 24.3 25.2 24.6 22.2 22.1 24.0 25.5 Total sales (mn toe) 54.9 55.3 53.3 49.2 49.7 52.7 54.0 Total sales (mn boe) 401 404 389 359 362 384 394 Crude oil (%) 60 59 58 59 60 59 57 Natural gas (%) 40 41 42 41 40 41 43

Source: Company, Kotak Institutional Equities estimates

Exhibit 9: ONGC's earnings are highly sensitive to oil and gas prices and exchange rate assumptions EPS sensitivity of ONGC to crude, gas price and exchange rate, March fiscal year-ends, 2022-23E 2022E 2023E Downside Base case Upside Downside Base case Upside Exchange rate Exchange rate (Rs/US$) 74.0 75.0 76.0 75.5 76.5 77.5 Net profits (Rs mn) 244,659 253,381 262,103 248,700 258,325 267,949 Earnings per share (Rs) 19.4 20.1 20.8 19.8 20.5 21.3 % upside/(downside) (3.4) 3.4 (3.7) 3.7 Average crude realization Net crude realization (US$/bbl) 65.8 66.8 67.8 60.6 61.6 62.6 Net profits (Rs mn) 244,562 253,381 262,200 248,822 258,325 267,827 Earnings per share (Rs) 19.4 20.1 20.8 19.8 20.5 21.3 % upside/(downside) (3.5) 3.5 (3.7) 3.7 Natural gas prices Natural gas price (US$/mn BTU) 2.1 2.6 3.1 4.5 5.0 5.5 Net profits (Rs mn) 239,991 253,381 266,771 244,280 258,325 272,369 Earnings per share (Rs) 19.1 20.1 21.2 19.4 20.5 21.7 % upside/(downside) (5.3) 5.3 (5.4) 5.4

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 15 Oil, Gas & Consumable Fuels ONGC

Exhibit 10: We compute fair value of ONGC at Rs110/share Fair value of ONGC, March 2023E (Rs/share)

March 2023E EPS 20.5 Less: income from investments valued separately 1.7 March 2023E EPS (adjusted) 18.8 P/E (X) 6.0 Valuation of operating business 113 EV of 16% stake in Area 1, Mozambique 9 Acquisition cost 24 Write-off of acquisition cost for Mozambique block (15) Valuation of investments 12 IOCL 8 PLNG 2 GAIL 2 Fair value 110

Source: Kotak Institutional Equities estimates

16 KOTAK INSTITUTIONAL EQUITIES RESEARCH ONGC Oil, Gas & Consumable Fuels

Exhibit 11: Combined financials of ONGC, OVL and MRPL, March fiscal year-ends, 2018-24E (Rs mn)

2018 2019 2020 2021 2022E 2023E 2024E Profit model (Rs mn) Net sales 1,557,541 2,053,357 1,781,934 1,222,722 1,855,804 2,078,375 2,150,694 EBITDA 573,182 760,518 630,337 436,554 680,259 717,501 720,191 Other income 84,521 81,363 68,371 77,260 65,959 68,573 71,076 Finance cost (41,559) (46,951) (57,563) (47,764) (53,522) (51,759) (51,128) Depreciation, depletion and amortization (285,510) (321,142) (351,259) (291,409) (327,629) (375,667) (406,223) Pretax profits 330,635 473,787 289,886 174,641 365,067 358,648 333,916 Current tax (69,194) (148,499) (102,552) (46,495) (99,252) (88,758) (83,198) Deferred tax (32,418) (22,093) 13,724 (8,520) (14,718) (14,901) (13,769) Net profits 231,504 287,287 111,909 128,956 251,096 254,989 236,949 Adjusted net profits after minority interests 223,468 296,326 169,293 123,099 252,438 255,045 236,435 Adjusted EPS (Rs) 17.4 23.6 13.5 9.8 20.1 20.3 18.8

Balance sheet (Rs mn) Equity 2,290,529 2,402,550 2,312,240 2,432,572 2,589,434 2,744,734 2,888,906 Deferred tax liability 283,946 297,288 269,869 280,663 295,381 310,282 324,051 Liability for abandonment cost 259,746 276,394 276,394 276,394 276,394 276,394 276,394 Borrowings 818,939 808,261 738,382 813,834 739,334 702,584 708,799 Other liabilities 445,286 471,397 606,300 707,860 739,229 764,493 778,725 Total liabilities and equity 4,098,446 4,255,890 4,203,185 4,511,323 4,639,771 4,798,487 4,976,876 Cash and equivalent 32,430 16,974 10,486 34,846 30,443 34,194 35,419 Current assets 699,369 816,509 908,874 991,980 962,826 997,293 1,072,177 Fixed and intangible assets 2,490,533 2,552,212 2,511,653 2,608,980 2,767,599 2,887,956 2,991,144 Goodwill 98,753 100,946 121,915 123,858 127,245 127,385 126,477 Investments 760,477 753,514 631,549 737,385 737,385 737,385 737,385 Deferred expenditure 16,884 15,735 18,708 14,274 14,274 14,274 14,274 Total assets 4,098,446 4,255,890 4,203,185 4,511,323 4,639,771 4,798,487 4,976,876

Free cash flow (Rs mn) Operating cash flow, excl. working capital 453,380 549,020 466,693 354,182 427,408 464,718 465,813 Working capital changes (3,459) (104,149) 151,459 (30,361) 60,523 (9,203) (3,066) Capital expenditure (400,224) (330,171) (407,943) (340,290) (386,172) (383,758) (389,358) Other income 62,980 49,828 42,148 45,667 65,959 68,573 71,076 Free cash flow 112,676 164,528 252,357 29,198 167,718 140,330 144,464

Ratios (%) Debt/equity 35.8 33.6 31.9 33.5 28.6 25.6 24.5 Net debt/equity 34.3 32.9 31.5 32.0 27.4 24.4 23.3 RoAE 9.0 11.0 4.6 4.9 9.1 8.6 7.6 RoACE 9.3 11.2 6.6 5.3 9.4 9.0 8.0

Key assumptions Exchange rate (Rs/US$) 64.5 69.9 70.8 74.2 75.0 76.5 78.0 Net realized crude price, India (US$/bbl) 57.3 70.2 60.5 44.1 66.8 61.6 61.6 Natural gas price, India (US$/mn BTU) 3.0 3.6 4.3 2.3 2.6 5.0 5.0 Subsidy loss (Rs bn) — — — — — — —

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 17 Oil, Gas & Consumable Fuels ONGC

Exhibit 12: Consolidated financials of ONGC, March fiscal year-ends, 2018-24E (Rs mn)

2018 2019 2020 2021 2022E 2023E 2024E Profit model (Rs mn) Net sales 3,227,058 4,213,853 4,250,014 3,605,723 3,579,705 3,900,148 4,083,952 EBITDA 659,369 854,946 611,687 566,015 745,682 798,280 812,548 Other income 74,681 81,488 85,316 93,230 75,564 77,643 79,765 Finance cost (49,990) (58,367) (69,998) (50,790) (64,314) (64,084) (66,306) Depreciation, depletion and amortization (321,597) (348,767) (356,583) (326,740) (366,697) (422,116) (455,975) Pretax profits 362,462 529,299 270,422 281,715 390,235 389,723 370,032 Extraordinary items 6,466 (15,529) (90,285) 9,188 — — — Effective tax (135,380) (209,183) (75,080) (87,662) (131,012) (122,489) (117,325) Net profits 233,548 304,587 105,057 203,241 259,223 267,233 252,706 Share of associates/minority interest (12,489) 363 10,544 10,194 (5,842) (8,909) (11,638) Adjusted net profits after minority 216,966 314,156 168,256 207,015 253,381 258,325 241,068 Adjusted EPS (Rs) 16.9 25.0 13.4 16.5 20.1 20.5 19.2

Balance sheet (Rs mn) Equity 2,040,189 2,181,408 2,069,677 2,209,810 2,365,570 2,524,065 2,673,808 Minority interest 156,060 181,062 178,128 216,158 222,000 230,909 242,547 Deferred tax liability 415,059 473,668 461,382 454,005 468,869 483,932 497,879 Borrowings 1,012,461 1,021,064 1,036,579 1,098,197 1,016,197 1,059,447 1,143,162 Other liabilities 978,580 1,099,819 1,293,215 1,454,477 1,444,354 1,514,926 1,554,637 Total liabilities and equity 4,602,349 4,957,021 5,038,981 5,432,646 5,516,990 5,813,279 6,112,033 Cash and equivalent 50,628 51,034 57,041 71,923 62,087 62,928 60,466 Fixed and intangible assets 2,118,473 2,187,779 2,149,357 2,142,935 2,757,778 2,975,312 3,121,178 Capital WIP 615,119 690,564 838,324 1,003,320 641,488 634,836 678,284 Other assets 1,144,705 1,358,453 1,487,668 1,379,053 1,193,472 1,251,287 1,336,441 Investments 673,425 669,190 506,592 835,415 862,165 888,915 915,665 Total assets 4,602,349 4,957,021 5,038,981 5,432,646 5,516,990 5,813,279 6,112,033

Free cash flow (Rs mn) Operating cash flow, excl. working capital 536,135 672,518 537,784 472,728 565,221 626,770 642,863 Working capital 2,543 (99,639) 133,674 (39,238) 175,458 12,757 (45,443) Capital expenditure (339,781) (445,542) (595,722) (425,847) (619,708) (632,998) (645,288) Other income 70,633 112,837 68,293 59,337 75,564 77,643 79,765 Free cash flow 269,530 240,173 144,029 66,980 196,535 84,171 31,897

Ratios (%) Debt/equity 53.7 51.0 54.8 55.1 47.4 46.2 47.0 Net debt/equity 51.0 48.5 51.8 51.5 44.5 43.5 44.5 RoAE 10.2 14.9 7.9 9.7 11.1 10.6 9.3 RoACE 7.7 9.3 5.2 6.0 7.5 7.4 6.7

Key assumptions Exchange rate (Rs/US$) 64.5 69.9 70.8 74.2 75.0 76.5 78.0 Net realized crude price, India (US$/bbl) 57.3 70.2 60.5 44.1 66.8 61.6 61.6 Natural gas price, India (US$/mn BTU) 3.0 3.6 4.3 2.3 2.6 5.0 5.0 Subsidy loss (Rs bn) — — — — — — —

Source: Company, Kotak Institutional Equities estimates

18 KOTAK INSTITUTIONAL EQUITIES RESEARCH BUY BPCL (BPCL) https://ultraviewer.et/en/own Oil, Gas & Consumable Fuels AUGUST 16, 2021 load.html RESULT Sector view: Attractive

Subdued performance. BPCL’s 1QFY22 results were well below our expectations due CMP (`): 455 to weaker-than-anticipated volumes across segments and lower realized refining Fair Value (`): 550 margins, which was partly offset by higher marketing margins. We retain BUY rating on BSE-30: 55,437 the stock with a Fair Value of Rs550 noting (1) expected recovery in refining margins driven by sustained improvement in global demand, (2) robust marketing margins despite elevated oil prices and (3) potential value unlocking from privatization. BPCL Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 455/550/BUY EPS (Rs) 67.4 33.8 39.9 52-week range (Rs) (high-low) 494-325 EPS growth (%) 540.8 (49.9) 18.3 Mcap (bn) (Rs/US$) 987/13.3 P/E (X) 6.7 13.5 11.4 ADTV-3M (mn) (Rs/US$) 2,854/38 P/B (X) 1.7 2.1 1.9 Shareholding pattern (%) EV/EBITDA (X) 5.5 8.4 7.3 Promoters 53.0 RoE (%) 32.2 14.1 17.4 FPIs/MFs/BFIs 12.4/16.4/6.9 Div. yield (%) 17.4 3.7 4.4 Price performance (%) 1M 3M 12M Sales (Rs bn) 2,325 2,200 2,382 Absolute 1.0 1.3 8.0 EBITDA (Rs bn) 186 129 149 Rel. to BSE-30 (4.0) (12.6) (36.7) Net profits (Rs bn) 141 71 84

Lower volumes and lower realized refining margins partly offset by higher marketing margins

BPCL’s EBITDA declined 44% qoq to Rs32.5 bn in 1QFY22 underpinned by lower volumes across refining and marketing segments and a sharp reduction in reported refining margins, which was partly offset by a healthy sequential increase in marketing margins. Reported refining margins declined sharply to US$4.1/bbl from US$6.6/bbl reflecting likely lower adventitious gains; the company has not disclosed adventitious gains for the segment. Normalized marketing margins increased by 13% qoq to Rs5,972/ton, despite broadly steady auto fuel marketing margins, reflecting healthy increase in margins for other products. Adjusted net income declined 71% qoq to Rs15.6 bn (EPS of Rs7.5) further impacted by lower other income and higher depreciation expense. Reported net income included exceptional cost of Rs0.77 bn pertaining to the remaining cost of the employee stock purchase scheme. Debt (excluding lease obligations) declined to Rs215.8 bn from Rs263.2 bn at end-FY2021.

Lack of incremental update on privatization process; volumes recovering near pre-Covid levels

In the conference call, BPCL management indicated—(1) the company does not intend to divest its stake in PLNG and IGL and is working along with the government to seek an exemption from SEBI, else a prospective bidder may be required to make an open offer; there was no major update on privatization process from the company’s side, (2) gasoline demand has recovered to 5% above pre-Covid level in July 2021, while diesel remained 8% below July 2019 level, (3) current run-rate of employee expenses are likely to sustain as the workforce has reduced to ~9,000 from ~11,000 post the implementation of voluntary retirement scheme, (4) two of the three PDPP units have been commissioned in 1QFY22, although stabilization activities will take a few months due to Covid-related constraints, (5) force majeure at the Mozambique LNG project remains in place for now and (6) planned capex stands at Rs100 bn for FY2022. Tarun Lakhotia

Fine tune estimates; retain BUY with unchanged Fair Value of Rs550 Hemang Khanna We reduce our FY2022-24 EPS estimates by 2-3% factoring (1) adventitious gains, lower crude throughput and lower marketing volumes for FY2022, (2) higher interest and depreciation expenses and (3) other minor changes. We retain BUY with an unchanged SoTP-based Fair Value of Rs550 based on 7X EV/EBITDA plus the value of investments. We expect BPCL to benefit from (1) anticipated turnaround in global refining cycle and (2) resilient domestic marketing margins, notwithstanding elevated level of global crude and product prices.

[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. Oil, Gas & Consumable Fuels BPCL

Key highlights of 1QFY22 performance

 Sharp decline in refining contribution reflecting lower throughput and realized margins. Refining contribution declined sharply qoq to Rs15.2 bn from Rs29.6 bn, reflecting (1) lower realized margins likely due to moderation in adventitious gains; the company has stopped disclosing adventitious gains separately and (2) a decline in crude throughput. Reported refining margins declined sharply to US$4.1/bbl from US$6.6/bbl in 4QFY21. Crude throughput reduced to 6.8 mn tons from 8.4 mn tons in 4QFY21.

 Modestly lower marketing contribution as lower volumes offset by higher normalized marketing margins. Inventory-adjusted implied marketing contribution declined modestly to Rs59.4 bn from Rs62.5 bn in 4QFY21 as 13% qoq increase in realized marketing margins to Rs5,972/ton was partly offset by a 14% qoq decline in volumes. BPCL reported a healthy increase in realized margins despite broadly steady auto fuel marketing margins, which implies a strong increase in margins across other products. Reported marketing contribution was impacted by lower adventitious gains of Rs8 bn versus Rs18.3 bn in the previous quarter.

 Domestic sales volumes declined 14% qoq. BPCL’s domestic petroleum volumes declined 14% qoq to 9.6 mn tons due to Covid-related impact on demand environment. Auto fuel sales volumes were 17% lower versus 1QFY20 level, with diesel and gasoline declining 19% and 14% respectively.

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

(% chg.) 1QFY22 1QY22E 1QFY21 4QFY21 1QY22E 1QFY21 4QFY21 FY2022E FY2021 (% chg.) Net sales 709,213 763,337 387,851 768,823 (7.1) 82.9 (7.8) 2,199,515 2,325,451 (5.4) Increase/(decrease) in stock 4,757 — (4,273) 27,899 — 36,336 Raw material (268,053) (269,452) (92,385) (286,022) (0.5) 190.1 (6.3) (784,907) (711,536) 10.3 Trading purchase (363,379) (389,917) (209,565) (400,247) (6.8) 73.4 (9.2) (1,087,936) (1,278,009) (14.9) Staff cost (7,389) (9,058) (9,029) (10,605) (18.4) (18.2) (30.3) (29,957) (36,983) (19.0) Other expenses (42,622) (41,490) (33,440) (42,039) 2.7 27.5 1.4 (167,307) (149,656) 11.8 Total expenditure (676,685) (709,917) (348,692) (711,013) (4.7) 94.1 (4.8) (2,070,106) (2,139,848) (3.3) EBITDA 32,527 53,420 39,158 57,810 (39.1) (16.9) (43.7) 129,409 185,603 (30.3) Other income 4,517 6,174 5,933 16,640 (26.8) (23.9) (72.9) 28,697 43,445 (33.9) Interest (4,867) (3,876) (5,871) (4,776) 25.6 (17.1) 1.9 (17,036) (13,284) 28.2 Depreciation (11,446) (10,567) (9,959) (9,998) 8.3 14.9 14.5 (46,153) (39,781) 16.0 Pretax profits 20,732 45,152 29,262 59,677 (54.1) (29.1) (65.3) 94,917 175,983 (46.1) Extraordinary item (771) — — 74,013 (771) 61,507 Current tax (3,880) (11,149) (4,970) (31,748) (27,849) (51,348) Deferred tax (1,065) (500) (3,530) 17,460 3,774 4,274 Net income 15,016 33,502 20,762 119,401 (55.2) (27.7) (87.4) 70,071 190,417 (63.2) Adjusted net income 15,596 33,502 20,762 53,299 (53.4) (24.9) (70.7) 70,645 141,101 (49.9) Adjusted EPS (Rs) 7.5 16.0 9.9 25.5 33.8 67.4 Tax rate (%) 24.8 25.8 29.0 10.7 25.6 19.8

Volume data Crude throughput (mn tons) 6.8 6.9 5.1 8.4 (0.9) 33.1 (18.5) 28.5 26.4 7.8 Domestic sales volume (mn tons) 9.6 10.3 7.5 11.2 (6.8) 27.9 (13.8) 42.4 38.7 9.3 Exports sales volume (mn tons) 0.3 0.5 0.8 0.6 (31.9) (60.8) (50.8) 2.0 2.0 (0.0) Reported refining margin (US$/bbl) 4.1 7.4 0.4 6.6 (44.3) 956.4 (38.0) 4.0 4.1 (1.0) Normalized marketing margins (Rs/ton) 5,972 5,310 8,472 5,298 12.5 (29.5) 12.7 5,779 6,677 (13.4) Adventitious gain/(loss) - marketing 8,000 19,184 10,030 18,290 8,000 42,510 Exchange gain/(loss) (467) (1,448) (566) 292 (467) 1,998

Source: Company, Kotak Institutional Equities estimates

20 KOTAK INSTITUTIONAL EQUITIES RESEARCH BPCL Oil, Gas & Consumable Fuels

Exhibit 2: BPCL's auto fuels volume growth was ahead of domestic consumption in 1QFY22 Growth in auto fuels volumes across industry, 1QFY19 onwards

(%) 40 BPCL HPCL IOCL Consumption

30

20

10

0

(10)

(20)

(30)

(40) 1QFY19 3QFY19 1QFY20 3QFY20 1QFY21 3QFY21 1QFY22

Source: Companies, PPAC, Kotak Institutional Equities estimates

Exhibit 3: Marketing margins on auto fuels have remained elevated in recent months Gross margins on diesel and gasoline, January 2019 onwards (Rs/liter)

(Rs/liter) 20 Gross marketing margin on diesel Gross marketing margin on gasoline

14.1 15

8.3 10 7.5 6.4 17.5 5.9 5.4 5.2 5.5 5.7 5.5 4.6 4.5 4.4 5.0 4.3 4.5 4.3 5.0 5 3.2 3.6 3.5 3.8 3.2 3.4 3.5 3.0 3.7 3.0 3.4 7.9 9.3 2.7 2.5 2.4 6.6 5.6 5.0 2.6 0.2 2.7 3.5 2.3 2.6 0.3 1.8 1.6 2.2 3.4 3.6 4.2 3.9 4.2 4.4 4.0 4.9 2.9 2.7 0.9 2.7 2.3 2.4 0 (0.9)(1.4)

(5)

Jul-20 Jul-19 Jul-21

Jan-19 Jan-20 Jan-21

Jun-19 Jun-20 Jun-21

Feb-19 Oct-19 Feb-20 Oct-20 Feb-21

Apr-19 Apr-21 Sep-19 Apr-20 Sep-20

Dec-19 Dec-20

Nov-19 Nov-20

Mar-19 Mar-21 Mar-20

Aug-20 Aug-19

May-19 May-20 May-21 Aug-TD

Source: Company, PPAC, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 21 Oil, Gas & Consumable Fuels BPCL

Exhibit 4: Kotak India refining margins have increased in recent weeks Petroleum/crude prices and margins, March fiscal year-ends (US$/bbl)

Quarterly average Monthly average Annual average qoq mom Weekly average 2018 2019 2020 2021 2Q21 3Q21 4Q21 1Q22 (%) Apr May Jun Jul (%) 16-Jul 23-Jul 30-Jul 6-Aug Kotak India refining margin 7.5 5.8 5.2 1.6 1.1 2.3 2.1 1.8 (15) 1.9 1.9 1.6 1.9 23 1.3 2.2 2.6 2.9 Singapore complex margin 7.2 4.9 3.3 0.5 0.0 1.2 1.8 2.1 16 2.7 2.2 1.5 2.2 46 2.7 2.9 3.2 3.5

Product prices Gasoline 70 77 71 49 47 49 67 77 14 74 76 80 85 6 86 83 86 85 Naphtha 56 65 55 43 43 44 61 66 9 62 65 70 75 6 75 74 76 75 Diesel 69 83 74 49 47 48 65 72 12 68 72 77 78 2 78 77 78 77 Kerosene 69 84 74 46 42 47 63 72 13 67 71 76 77 2 77 76 77 77 Fuel oil 53 67 54 42 40 44 56 61 8 58 59 64 66 2 66 65 66 66 LPG 43 47 38 37 30 43 50 49 (2) 44 46 54 59 9 57 57 60 60 Crude prices Dubai 56 69 61 44 42 44 60 67 12 62 66 71 73 3 74 71 73 72 Dated Brent 58 70 61 45 43 44 61 69 13 65 68 73 75 2 76 72 74 73 Arab Light 56 70 63 44 44 44 60 68 13 64 68 73 75 3 76 74 75 74 Arab Heavy 54 68 61 43 43 44 60 67 12 63 67 72 74 3 75 72 73 73 Spreads over Dubai crude Gasoline 14.6 8.4 10.1 4.6 4.9 4.8 7.7 10.4 35 11.5 10.2 9.6 12.3 28 11.8 12.0 13.0 12.9 Naphtha 0.2 (3.8) (5.4) (0.9) 0.5 (0.4) 1.0 (0.4) NM (0.4) (0.3) (0.6) 1.8 NM 1.1 2.4 3.0 2.9 Diesel 13.2 14.4 13.6 4.8 4.8 4.4 5.2 5.7 11 5.2 6.1 5.8 4.9 (16) 4.4 5.2 5.3 5.5 Kerosene 13.3 14.9 13.1 1.4 (0.2) 3.3 3.7 5.0 33 4.2 5.7 5.0 4.2 (16) 3.7 4.5 4.9 5.1 Fuel oil (3.2) (1.5) (6.9) (2.2) (2.4) (0.1) (3.4) (5.8) NM (4.0) (6.6) (6.8) (7.3) NM (8.2) (6.6) (6.8) (5.7) LPG (13.2) (22.3) (22.5) (6.7) (12.2) (1.5) (9.7) (18.0) NM (18.0) (19.4) (16.9) (14.4) NM (16.4) (14.2) (12.6) (11.7) Crude differentials Arab Light-Heavy 2.2 2.3 2.2 0.3 0.3 (0.2) 0.5 1.1 115 1.1 1.0 1.2 1.5 26 1.5 1.5 1.5 1.5 Dated Brent - Dubai 1.8 1.2 0.4 0.6 0.4 0.4 1.1 2.0 86 2.4 2.2 2.3 1.7 (29) 1.7 0.7 1.7 0.9

Source: Bloomberg, Kotak Institutional Equities estimates

Exhibit 5: Global refiners valuation summary, calendar year-ends, 2021-22E

Year Price Market cap. EV Sales P/E (X) EV/EBITDA ending 13-Aug (US$ mn) (US$ mn) (US$ mn) CY2021E CY2022E CY2021E CY2022E Europe MOL Hungarian Oil & Gas plc (HUF) Dec 2,430 6,665 8,456 13,041 5.9 6.9 3.6 3.7 Omv Ag (Eur) Dec 48 18,390 40,620 18,897 7.1 7.6 4.9 5.1 Polski Koncern Naftowy Orlen (PLN) Dec 75 8,290 13,236 22,149 7.0 8.4 4.8 4.6 India Bharat Petroleum Corp. (Rs) Mar 455 13,306 16,710 31,008 10.9 9.3 8.6 7.6 Hindustan Petroleum Corp. (Rs) Mar 255 4,879 9,669 31,278 5.6 4.8 6.6 5.5 Indian Oil Corp. (Rs) Mar 105 13,285 26,424 48,480 6.0 5.4 5.9 5.6 Reliance Industries (Rs) Mar 2,073 179,820 197,400 62,906 23.2 17.9 13.2 10.9 Japan Fuji Oil (JPY) Mar 239 170 1,023 3,251 NM 4.4 12.4 8.8 Idemitsu Kosan Co. (JPY) Mar 2,623 7,124 18,571 42,983 6.5 7.0 6.3 6.6 Tonengeneral Sekiyu KK (JPY) Dec 458 13,475 39,095 72,239 6.7 6.8 6.7 6.5 Korea S-Oil Corp. (KW) Dec 93,800 9,072 12,357 14,289 8.0 9.0 5.7 6.4 SK Innovation Co. (KW) Dec 248,500 19,740 30,809 29,008 32.7 18.7 10.0 9.1 Thailand Thai Oil plc (THB) Dec 46 2,786 7,346 7,930 12.6 12.8 11.1 10.8 US Hollyfrontier Corp. (US$) Dec 30 4,938 8,078 11,184 NM 9.5 7.7 4.9 Marathon Petroleum (US$) Dec 59 37,750 58,876 69,779 NM 19.7 8.4 6.7 Sunoco Inc (US$) Dec 37 3,682 7,258 10,710 7.3 8.9 8.9 8.5 Valero Energy Corp. (US$) Dec 66 27,085 44,082 64,912 NM 13.3 11.7 6.4 Mean 10.3 9.7 8.1 7.0 Median 7.1 8.7 8.0 6.6

Source: Bloomberg, Kotak Institutional Equities

22 KOTAK INSTITUTIONAL EQUITIES RESEARCH BPCL Oil, Gas & Consumable Fuels

Exhibit 6: Key assumptions, March fiscal year-ends, 2018-24E (Rs mn)

2018 2019 2020 2021 2022E 2023E 2024E Refining assumptions Exchange rate (Rs/US$) 64.5 69.9 70.9 74.2 75.0 77.0 78.5 Effective tariff protection (%) 2.3 2.5 2.6 2.6 2.6 2.6 2.6 Crude throughput (mn tons) 28.5 31.0 31.9 26.4 28.5 32.0 32.0 Net refining margin (US$/bbl) 6.9 4.6 2.5 4.1 4.0 4.6 5.1 Refining EBITDA (Rs bn) 65.1 39.2 5.6 26.2 27.9 42.7 52.9 Marketing assumptions Sales volume (mn tons) 43.2 45.0 45.7 40.7 44.4 48.1 49.9 Marketing margin on auto fuels (Rs/liter) 1.8 2.8 2.7 5.0 3.2 3.0 3.0 Subsidy under-recoveries (Rs bn) — — — — — — — Implied normalized marketing EBITDA (Rs50.3 bn) 85.7 85.0 114.9 93.5 106.0 108.6 Adventitious gains/(loss) 1.2 1.7 (18.3) 42.5 8.0 — —

Source: Company, Kotak Institutional Equities estimates

Exhibit 7: Sensitivity of BPCL’s earnings to refining margins and marketing margins (Rs mn)

Fiscal 2022E Fiscal 2023E Downside Base case Upside Downside Base case Upside Refining margins Refining margins (US$/bbl) 3.0 4.0 5.0 3.6 4.6 5.6 EBITDA (Rs mn) 113,725 129,409 145,093 130,618 148,725 166,831 % upside/(downside) (12.1) 12.1 (12.2) 12.2 Net profits (Rs mn) 58,881 70,645 82,409 70,136 83,602 97,068 EPS (Rs) 28.1 33.8 39.4 33.5 39.9 46.4 % upside/(downside) (16.7) 16.7 (16.1) 16.1

Marketing margins Auto fuels marketing margin (Rs/liter) 2.7 3.2 3.7 2.5 3.0 3.5 EBITDA (Rs mn) 112,489 129,409 146,329 130,741 148,725 166,709 % upside/(downside) (13.1) 13.1 (12.1) 12.1 Net profits (Rs mn) 57,954 70,645 83,336 70,228 83,602 96,977 EPS (Rs) 27.7 33.8 39.8 33.6 39.9 46.3 % upside/(downside) (18.0) 18.0 (16.0) 16.0

Source: Kotak Institutional Equities estimates

Exhibit 8: We compute fair value of Rs550 for BPCL, including imminent dividend Fair valuation of BPCL (Rs/share)

EV/EBITDA based valuation Refining and marketing business (Rs bn) March 2023E standalone EBITDA 149 EV/EBITDA (X) 7.0 EV of refining and marketing business (Rs bn) 1,041 EV of refining and marketing business (Rs) (A) 497 Investments (Rs bn) Indraprastha Gas 74 Petronet LNG 41 Oil India Ltd 2 Others 101 Value of investments (Rs bn) 218 Value of investments (Rs) (B) 104 Net debt (Rs bn) 228 Net debt (Rs) (C) 109 Dividend due (Rs) (D) 58 Total equity value (A) + (B) - (C) + (D) 551

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 23 Oil, Gas & Consumable Fuels BPCL

Exhibit 9: Profit model, balance sheet, cash model of BPCL, March fiscal year-ends, 2018-24E (Rs mn)

2018 2019 2020 2021 2022E 2023E 2024E Profit model (Rs mn) Net sales 2,363,131 2,972,751 2,843,830 2,325,451 2,199,515 2,382,382 2,519,271 EBITDA 116,689 119,643 55,585 185,603 129,409 148,725 161,486 Other income 30,109 29,836 30,813 43,445 28,697 31,047 33,397 Interest (8,333) (13,190) (21,819) (13,284) (17,036) (16,992) (15,878) Depreciation (26,485) (31,893) (37,869) (39,781) (46,153) (50,125) (56,986) Pretax profits 111,980 104,396 26,710 175,983 94,917 112,654 122,018 Extraordinary items — — 6,138 61,507 (771) — — Current tax (18,468) (20,790) (2,010) (51,348) (27,849) (32,325) (34,239) Deferred tax (14,318) (12,286) (4,007) 4,274 3,774 3,274 2,774 Adjusted net profits 79,194 71,320 20,694 141,101 70,645 83,602 90,553 Adjusted EPS (Rs) 40.3 36.3 10.5 67.4 33.8 39.9 43.3

Balance sheet (Rs mn) Total equity 341,520 367,377 332,144 545,446 459,092 500,893 546,170 Deferred taxation liability 50,924 64,245 60,001 52,970 49,197 45,923 43,149 Total borrowings 233,507 290,993 486,236 288,676 278,676 279,426 269,426 Currrent liabilities 376,274 433,658 386,309 518,953 441,865 461,177 467,763 Total liabilities and equity 1,002,225 1,156,273 1,264,690 1,406,045 1,228,830 1,287,419 1,326,508 Cash 881 954 1,158 70,535 2,874 3,021 3,965 Current assets 369,285 459,864 438,394 444,784 292,846 320,686 336,087 Total fixed assets 473,852 535,539 664,556 713,885 754,269 782,872 803,615 Investments 158,208 159,916 160,582 176,841 178,841 180,841 182,841 Total assets 1,002,225 1,156,273 1,264,690 1,406,045 1,228,830 1,287,419 1,326,508

Free cash flow (Rs mn) Operating cash flow, excl. working capital 92,074 99,718 45,230 153,262 82,217 98,178 111,139 Working capital changes (10,640) (34,022) 5,081 35,716 74,850 (8,528) (8,815) Capital expenditure (69,154) (90,568) (94,603) (60,790) (85,000) (77,500) (77,500) Investments (59) (5,699) (19,223) 50,067 (2,000) (2,000) (2,000) Other income 21,718 20,901 21,186 31,437 28,697 31,047 33,397 Free cash flow 33,938 (9,671) (42,328) 209,693 98,764 41,197 56,221

Ratios (%) Debt/equity 68.4 79.2 146.4 52.9 60.7 55.8 49.3 Net debt/equity 68.1 78.9 146.0 40.0 60.1 55.2 48.6 RoAE 21.8 17.3 6.5 38.4 12.7 15.8 15.9 RoACE 14.3 11.9 4.7 17.2 10.0 11.9 12.1

Key assumptions Crude throughput (mn tons) 28.5 31.0 31.9 26.4 28.5 32.0 32.0 Effective tariff protection (%) 2.3 2.5 2.6 2.6 2.6 2.6 2.6 Net refining margin (US$/bbl) 6.9 4.6 2.5 4.1 4.0 4.6 5.1 Sales volume (mn tons) 43.2 45.0 45.7 40.7 44.4 48.1 49.9 Marketing margin on auto fuels (Rs/liter) 1.8 2.8 2.7 5.0 3.2 3.0 3.0 Subsidy under-recoveries (Rs mn) — — — — — — — Adventitious gain/(loss) (Rs mn) 1,210 1,740 (18,330) 42,510 8,000 — —

Source: Company, Kotak Institutional Equities estimates

24 KOTAK INSTITUTIONAL EQUITIES RESEARCH ADD Grasim Industries (GRASIM) https://ultraviewer.et/en/own Construction Materials AUGUST 15, 2021 load.html RESULT Sector view: Attractive

VSF shines while chemicals bottoms. Grasim’s 1QFY22 EBITDA came in line with our CMP (`): 1,497 estimate with higher VSF prices offsetting lower volumes. VSF business continues to Fair Value (`): 1,675 benefit from strong demand led higher prices whereas chemical margins have started BSE-30: 55,437 recovering from record lows. Grasim’s VSF and chemical division would see ~30% capacity expansion over the next 6-12 months, which would drive volume growth. Standalone business is well poised to become net debt free by FY2022E with divestment of the fertilizer business. We increase our Fair Value to Rs1,675 (from Rs1,520) on roll over. Maintain ADD.

Grasim Industries Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 1,497/1,675/ADD EPS (Rs) 68.0 88.7 112.0 52-week range (Rs) (high-low) 1,610-609 EPS growth (%) (22.3) 30.4 26.3 Mcap (bn) (Rs/US$) 986/13.3 P/E (X) 22.0 16.9 13.4 ADTV-3M (mn) (Rs/US$) 2,090/28 P/B (X) 1.5 1.4 1.2 Shareholding pattern (%) EV/EBITDA (X) 9.4 7.8 6.2 Promoters 41.8 RoE (%) 7.3 8.5 9.7 FPIs/MFs/BFIs 16.3/5.5/11.3 Div. yield (%) 0.6 0.6 0.5 Price performance (%) 1M 3M 12M Sales (Rs bn) 764 860 956 Absolute (4.8) 6.3 137.5 EBITDA (Rs bn) 147 174 198 Rel. to BSE-30 (9.9) (7.6) 92.8 Net profits (Rs bn) 45 58 74

1QFY22—In-line EBITDA with higher prices offsets lower volumes

Grasim reported standalone revenues of Rs37.6 bn (+94% yoy, -14% qoq), EBITDA of Rs7.4 bn (-611% yoy, -9% qoq) and net profit of Rs4.5 bn (-311% yoy, -8% qoq), against our estimates of Rs43 bn, Rs7.2 bn and Rs3.5 bn respectively.

 VSF— Margins hit new highs but near peak. VSF volumes increased to 120 kt (+173% yoy,-24% qoq) and EBITDA/ton to Rs40,667/ton (+3% qoq) led by higher prices (+38% yoy, +7% qoq) partly offset by higher costs (-12% yoy, +9% qoq). Higher exports at 31% (11% in 4QFY21) aided volumes when domestic demand slumped due to Covid-19. However, we see headwinds to margins with rising pulp costs and moderation in VSF prices in China.

 Chemicals— EBITDA improves on higher prices. Sales volumes declined to 238 kt (+173% yoy, -24% qoq) impacted by weak demand due to Covid-19 related restrictions. EBITDA/ton increased qoq at Rs11,555/ton (+289% yoy, +67% qoq) on higher caustic soda prices. Caustic prices remain on an uptrend due to temporary supply outages. Management expects prices to directionally move up with modest improvement in demand.

Capacity expansions and divestment of non-core assets to strengthen the balance sheet

Grasim’s expansion projects would complete in phases in FY2022-23E and drive volume growth over the next two to three years. VSF capacity would increase by 31% and chemicals by 27%. Divestment of its fertilizer business for Rs26 bn by 2QFY22E would further help deleverage. We Sumangal Nevatia estimate standalone net cash of Rs8 bn in FY2022E versus net debt of Rs8 bn in FY2021.

Organic investments to reduce capital allocation concerns and holdco discount; maintain ADD Prayatn Mahajan Growing standalone business, debt free balance sheet and disciplined capital allocation should contract holdco discount (spot at 55% versus 40-45% historically). We have increased standalone EBITDA by 10%/5% for FY2022/23E on stronger VSF margins. We revise Fair Value to Rs1,675 (from Rs1,520) on higher market value of subsidiaries and roll over to September 2023E. Maintain ADD.

[email protected] Contact: +91 22 6218 6427

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

Exhibit 1: Grasim's standalone EBITDA declined 9% qoq on lower volumes offset by higher margins Quarterly results for Grasim Industries (Standalone), March fiscal year-ends, 1QFY21-22, 2020-22E (Rs mn)

Change (%) 1QFY22 1QFY22E 1QFY21 4QFY21 KIE yoy qoq 2021 2020 (% chg.) 2022 Net sales 37,627 43,034 19,436 43,943 (13) 94 (14) 123,864 160,819 (23) 164,554 Total expenditure (30,225) (35,829) (20,886) (35,834) (16) 45 (16) (108,220) (139,464) (133,493) EBITDA 7,402 7,205 (1,450) 8,109 3 (611) (9) 15,643 21,354 (27) 31,061 EBITDA (%) 19.7 16.7 (7.5) 18.5 12.6 13.3 18.9 Other income 649 692 987 692 (6) (34) (6) 5,137 5,256 (2) 4,255 Interest (581) (536) (784) (536) 8 (26) 8 (2,360) (2,379) (1) (2,789) Depreciation (2,018) (2,145) (2,126) (2,145) (6) (5) (6) (8,282) (8,135) 2 (9,192) Pre-tax profits 5,453 5,215 (3,374) 6,119 5 (262) (11) 10,139 16,097 (37) 23,335 Tax (993) (1,721) 1,260 (1,256) (42) (179) (21) (1,224) (664) 85 (7,001) Adjusted Net income 4,459 3,494 (2,114) 4,863 28 (311) (8) 8,914 15,433 (42) 16,335 Extraordinaries — — (577) (233) (810) (3,180) 15,198 Reported net profits 4,459 3,494 (2,691) 4,630 28 (266) (4) 8,105 12,253 (34) 31,533 Adjusted EPS (Rs) 6.8 5.3 (3.2) 7.4 28 (311) (8) 12.3 18.6 (34) 48.0 Segment details Revenues VSF 21,030 23,409 5,580 25,830 (10) 277 (19) 69,650 92,350 (25) 104,566 Chemicals 14,360 14,221 7,040 14,720 1 104 (2) 45,810 55,020 (17) 61,992 Others 2,237 5,405 6,816 3,393 (59) (67) (34) 8,404 13,449 (38) (2,004) Total 37,627 43,034 19,436 43,943 (13) 94 (14) 123,864 160,819 (23) 164,554 EBITDA VSF 4,880 4,905 (1,130) 6,250 (1) (532) (22) 11,870 13,390 (11) 22,513 Chemicals 2,750 1,769 410 1,850 55 571 49 5,900 10,310 (43) 11,968 Others (228) 530 (730) 9 (143) (69) (2,748) (2,127) (2,346) (9) (3,420) Total 7,402 7,205 (1,450) 8,109 3 (611) (9) 15,643 21,354 (27) 31,061 Operational details VSF Volumes (tons) 120,000 142,200 44,000 158,000 (16) 173 (24) 490,000 595,000 (18) 656,820 Realization (Rs/ton) 175,250 164,617 126,818 163,481 6 38 7 142,143 155,210 (8) 159,200 Costs (Rs/ton) 134,583 130,120 152,500 123,924 3 (12) 9 119,734 132,706 (10) 126,278 EBITDA (Rs/ton) 40,667 34,497 (25,682) 39,557 18 (258) 3 22,409 22,504 (0) 32,922 Margins (%) 23 21 (20) 24 16 14 21 Chemicals Volumes (tons) 238,000 240,300 138,000 267,000 (1) 72 (11) 900,000 991,000 (9) 1,107,200 Realization (Rs/ton) 60,336 59,181 51,014 55,131 2 18 9 50,900 55,520 (8) 55,990 Costs (Rs/ton) 48,782 51,817 48,043 48,202 (6) 2 1 44,344 45,116 (2) 45,181 EBITDA (Rs/ton) 11,555 7,363 2,971 6,929 57 289 67 6,556 10,404 (37) 10,809 Margins (%) 19 12 6 13 13 19 19

Source: Company, Kotak Institutional Equities estimates

26 KOTAK INSTITUTIONAL EQUITIES RESEARCH Grasim Industries Construction Materials

Exhibit 2: Grasim's consolidated earnings increased 61% yoy on the back of higher earnings across businesses Quarterly results for Grasim Industries (Consolidated), March fiscal year-ends, 1QFY21-22, 2020-22E (Rs mn)

Change (%) 1QFY22 1QFY21 4QFY21 yoy qoq 2021 2020 (% chg.) Net sales 199,194 136,211 243,989 46 (18) 763,978 751,407 2 Total expenditure (145,963) (103,199) (185,005) 41 (21) (616,836) (624,942) EBITDA 53,231 33,012 58,984 61 (10) 147,143 126,465 16 EBITDA (%) 26.7 24.2 24.2 19.3 16.8 Other income 2,699 3,768 1,306 (28) 107 10,520 9,688 Interest (12,664) (15,551) (13,435) (19) (6) (18,089) (22,757) Depreciation (9,906) (9,857) (10,432) 0 (5) (40,334) (40,042) Pre-tax profits 33,360 11,372 36,424 193 (8) 99,239 73,354 35 Tax (10,604) (3,239) (10,641) 227 (0) (30,222) 843 Minority interest (7,807) (3,842) (9,012) 103 (13) (26,208) (22,268) Profit from associates 1,367 226 833 1,892 5,622 Adjusted Net income 16,317 4,517 17,604 261 (7) 44,701 57,551 (22) Extraordinaries — (2,151) (621) (3,417) (14,061) Reported net profits 16,317 2,366 16,983 590 (4) 41,284 43,490 (5) EPS (adjusted) 25 7 27 261 (7) 68 88 (22)

Source: Company, Kotak Institutional Equities estimates

Changes in our estimate

We increase our standalone EBITDA by 10%/5% for FY2022/23E led by

 Increase in EBITDA of the VSF business by 15%/9% for FY2022/23E led by higher prices factoring current pricing trends.

We revise our Fair Value to Rs1,675/share (from Rs1,520/share) as we factor (1) higher earnings, (2) roll forward valuation by three months to September 2023E, (2) higher market price of subsidiaries.

VSF— Realizations improve while volumes take a hit

 VSF prices moderate on poor demand. Poor domestic demand and declining global prices due to demand moderation in China are resulting in lower VSF prices. However, as per the management, exit prices of VSF in 1QFY22 were 10% higher than 1QFY22. Management expects prices to improve as cotton prices have remained firm leading to widening of the gap between cotton and VSF prices in June 2021.

 Demand outlook. Management indicated that 1QFY22 performance was impacted by lower domestic sales volume due to Covid-19 led restrictions; partially mitigated by higher exports. Management guided for strong volumes in FY2022E as international demand remains strong.

 Volumes decline due to Covid-19 led restrictions. Covid-19 induced restrictions imposed in India during 1QFY22 impacted the sale of textile, thereby impacting local demand. VSF business advanced the Harihar plant maintenance shutdown to May-21 which impacted volumes further.

 VAP. Share of VAP remained stable qoq at 26% in 1QFY22.

 Exports. As domestic demand remained muted in 1QFY22, share of exports increased to 31% of overall sales (11% in 4QFY21). Management has guided for exports to be in the range of 10-15% in FY2022E.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 27 Construction Materials Grasim Industries

 Spreads to moderate in near term. Management expects spreads to moderate in 2QFY22 with a decline in realizations and lag in impact of higher costs but expects it to be partially offset by higher volumes as sectors open up.

 Chinese demand moderates impacting prices. Deceleration in pipeline restocking and seasonal factors resulted in lower VSF demand in China and lower prices. Moderation in Chinese domestic is reflected in inventory days increasing from 13 days in 4QFY21 to 24 days in 1QFY22. This resulted in CU at Chinese plants declining from 84% in 4QFY21 to 69% in 1QFY22. China VSF prices moderated to ~12,871 RMB/ton in Jun-2021 from ~15,805 RMB/ton in March-2021 and are stable at current levels.

 Limited impact of removal of anti-dumping duties. Management indicated that there was a limited impact of the recent removal of anti-dumping duties on VSF imported into India. Import parity is just one of the several factors like domestic demand, cotton prices, value addition that determine prices. Current demand for VSF will keep prices elevated and will not result in dumping.

Chemicals—Prices bottom out while demand improves

 Prices continue to inch up. International caustic soda prices improved sequentially led by temporary supply disruptions/maintenance activities and modest improvement in demand. However, domestically weak demand from textile, organic chemicals and excess supply situation kept the rise in domestic caustic soda prices subdued. Management expects prices to inch up gradually once excess supply is absorbed as demand picks up momentum globally.

 Volumes decline sequentially. Volumes declined sequentially due to moderation in demand from most of the consuming industries such as textiles, paper and other end user industries due to Covid related lockdowns. The demand for Chlorine value-added products remained subdued in 1QFY22 due to demand impact from the MSME sector.

 Chlorine consumption in VAPs remains high. Chlorine consumption in VAPs remained stable qoq at 28%. EBITDA from Chlorine derivatives in 1QFY22 was impacted partially due to lower sales volume and weak realization and increase in input cost in selected products.

 Costs begin to increase. The prices of key inputs like power and salt increased sequentially with improved demand for end products.

 Advanced materials business witnessed a strong demand and pricing environment globally and in India with demand driven by wind and auto segments comprising of passenger vehicles.

Capex guidance

 The company highlighted its long term focus of increasing the share of value-added mix to 40% in both the VSF and Chemicals business.

 The total approved capex for FY2022 stood at Rs26 bn. The capex incurred in 1QFY22 stood at Rs3.8 bn.

. VSF Business

a) The company has allocated Rs14 bn toward the completion of its brownfield expansion in VSF operations (including Rs4 bn towards maintenance). The company aims to commission both the lines by 2Q/3QFY22 as majority of the work on site in terms of equipment and machinery is ready. This will increase the capacity of VSF business from 0.58 mtpa to 0.81 mtpa.

. Chemicals:

28 KOTAK INSTITUTIONAL EQUITIES RESEARCH Grasim Industries Construction Materials

a) Brownfield expansion at Vilayat of 200 TPD chlor-alkali remains on track for commissioning in FY2022-23. This will increase the overall capacity from 1.15 ktpa to 1.53 ktpa. Capital allocated for the said projects is Rs7 bn and the management expects it to complete in 24 months (FY2024E end).

b) Expansion in the epoxy business by 125 ktpa is expected to commission by FY2024E. The planned capex towards the same is Rs5 bn.

 Paints. Management is yet to firm its capex plans towards the paints business and is currently working towards acquiring land for the proposed plant locations. The company has finalized the location for the said plants and expects to complete the process of land acquisition in the next six months. The original guided capex for the project stands at Rs50 bn to be spent across three years.

 Divestment of fertilizer business. The Board of directors of the company had approved the transfer of the company’s Fertilizer business (Indo Gulf Fertilizers), on a slump sale at a consideration of Rs26.49 bn. Management expects the Fertilizer business divestment process to be completed by 2QFY22. Management also indicated that net proceeds from the divestment shall range between Rs12-16 bn after accounting for the receipt of agriculture subsidies from the Government of approx. Rs10 bn.

 Net Debt. Grasim’s standalone net debt increased 99% qoq in 1QFY22 to Rs18 bn. This was primarily due to an increase in working capital led by higher inventory in 1QFY22 on moderation in demand due to Covid-19. Leverage increased to 0.56X TTM EBITDA from 0.44X.

UTCEM 1QFY22— EBITDA outperformance on higher prices and lower costs

UTCEM’s earnings were higher than our and consensus estimates—the company reported India operations EBITDA of Rs32.6 bn (+61% yoy , -9% qoq) against our estimate of Rs28.2 bn. Volumes declined 23% qoq to 20.5 mn tons (+47% yoy) and missed our estimate (- 20% qoq). Realizations increased to Rs5,577/ton (+6% yoy, +6% qoq) on higher premium product sales and trade volumes. Costs/ton increased to Rs3,987/ton (+4% yoy, +3% qoq) due to higher energy and freight costs but was 3% lower than our estimates led by lower other expenses and material costs. EBITDA/ton increased to Rs1,590/ton (+9% yoy, +17% qoq; KIE: Rs1,287/ton).

Exhibit 3: UTCEM's India EBITDA/ton increased 17% qoq to Rs1,590/ton in 1QFY22 on higher prices Key performance metrics of UTCEM , March fiscal year-ends, 1QFY21-22, (Rs mn, mn tons)

Change (%) 1QFY22 1QFY22E 1QFY21 4QFY21 KIE yoy qoq Revenues (Rs mn) 114,500 118,509 73,460 139,470 (3) 56 (18) EBITDA (Rs mn) 32,650 28,224 20,260 36,050 16 61 (9) PAT (Rs mn) 16,820 15,210 9,340 17,840 11 80 (6) Volumes (mn tons) 20.5 21.9 13.9 26.6 (6) 47 (23) Realizations (Rs/ton) 5,577 5,402 5,270 5,245 3 6 6 EBITDA/ton (Rs/ton) 1,590 1,287 1,453 1,356 24 9 17

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 29 Construction Materials Grasim Industries

Exhibit 4: VSF margins increased 3% qoq on higher prices and lower costs VSF business – quarterly realizations and margins, March fiscal year-ends, 1QFY17-22 (Rs/ton, %)

Average realization (Rs/ton) - LHS EBIT margin (%) - RHS 200,000 30

180,000 20 10 160,000 0 140,000 (10) 120,000 (20) 100,000 (30) 80,000 (40)

60,000 (50)

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21 1QFY22

Source: Company, Kotak Institutional Equities estimates

Exhibit 5: Chemicals business margins increased 67% qoq on higher prices Chemical business – quarterly realizations and margins, March fiscal year-ends, 1QFY17-22E (Rs/ton, %)

Average realization (Rs/ton) - LHS EBIT margin (%) - RHS 80,000 30 70,000 60,000 20 50,000 40,000 10 30,000 20,000 0 10,000

- (10)

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21 4QFY21 1QFY22

Source: Company, Kotak Institutional Equities estimates

Exhibit 6: Grasim’s (standalone) balance sheet strength can support paints investments Leverage details for Grasim (standalone), March fiscal year ends, 2017-24E (Rs bn, X)

2017 2018 2019 2020 2021 2022E 2023E 2024E Standalone operations EBITDA (Rs bn) 21.5 30.8 40.7 21.4 15.6 31.1 41.3 44.7 Net-debt (Rs bn) (18.5) 5.8 3.0 30.7 8.7 (8.2) (23.9) (42.7) Net-debt/EBITDA (X) (0.9) 0.2 0.1 1.4 0.6 (0.3) (0.6) (1.0)

Source: Kotak Institutional Equities estimates

30 KOTAK INSTITUTIONAL EQUITIES RESEARCH Grasim Industries Construction Materials

Exhibit 7: Grasim Industries, changes in estimates, March fiscal year ends, FY2022E-2024E

Revised estimate Previous estimate Change (%) 2022E 2023E 2024E 2022E 2023E 2024E 2022E 2023E 2024E Consolidated Revenues 860,012 956,095 1,030,133 857,211 953,987 1,029,148 0 0 0 EBITDA 173,523 198,167 213,947 170,722 196,058 212,962 2 1 0 PAT 73,468 73,604 83,199 71,508 72,128 82,510 3 2 1 EPS 88.7 112.0 126.6 85.7 109.8 125.6 3 2 1 Standalone Revenues 164,554 193,645 203,281 161,753 191,536 202,297 2 1 0 EBITDA 31,061 41,283 44,671 28,260 39,175 43,687 10 5 2 PAT 16,335 23,928 25,997 14,374 22,452 25,308 14 7 3 EPS 24.9 36.4 39.6 21.9 34.2 38.5 14 7 3 VSF Volumes (K tons) 657 753 781 657 753 781 0 0 0 Realisation (Rs/kg) 159 162 166 155 160 164 3 2 1 Cost (Rs/kg) 126 128 129 126 128 129 0 0 0 EBITDA (Rs/kg) 33 34 36 29 31 35 15 9 4 Chemical Volumes (K tons) 1,107 1,348 1,384 1,107 1,348 1,384 0 0 0 Realisation (Rs/kg) 56 59 60 56 59 60 0 0 0 Cost (Rs/kg) 45 45 46 45 45 46 0 0 0 EBITDA (Rs/kg) 11 13 14 11 13 14 0 0 0

Source: Kotak Institutional Equities estimates

Exhibit 8: Grasim Industries, key assumptions, March fiscal year-ends, 2018-24E (Rs mn)

Growth yoy (%) Business 2018 2019 2020 2021 2022E 2023E 2024E 2019 2020 2021 2022E 2023E 2024E VSF Volumes (K tons) 527 587 595 490 657 753 781 11 1 (18) 34 15 4 Realisation (Rs/kg) 159 176 155 142 159 162 166 11 (12) (8) 12 2 2 Cost (Rs/kg) 129 142 134 120 126 128 129 11 (6) (11) 5 2 1 EBITDA (Rs/kg) 30 33 21 22 33 34 36 11 (37) 7 47 4 6 EBITDA (Rs bn) 16 20 13 11 22 26 28 23 (36) (12) 97 19 10 Chemical Volumes (K tons) 886 1,003 991 900 1,107 1,348 1,384 13 (1) (9) 23 22 3 Realisation (Rs/kg) 56 64 56 51 56 59 60 14 (13) (8) 10 5 2 Cost (Rs/kg) 42 46 45 44 45 45 46 10 (2) (2) 2 0 2 EBITDA (Rs/kg) 15 18 10 7 11 13 14 24 (43) (37) 65 24 1 EBITDA (Rs bn) 13 18 10 6 12 18 19 41 (44) (43) 103 51 4 Other Standalone EBITDA (Rs bn) 1.9 2.8 (1.5) (1.2) (2.5) (2.5) (2.4) 51 (152) (15) 105 (3) (3) Standalone EBITDA (Rs bn) 31 41 21 16 31 41 45 32 (48) (27) 99 33 8 Net Debt (Rs bn) 5.8 3.0 30.7 8.7 (8.2) (23.9) (42.7) (48) 916 (72) (194) 192 79 Net Debt/EBITDA 0.2 0.1 1.4 0.6 (0.3) (0.6) (1.0)

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 31 Construction Materials Grasim Industries

Exhibit 9: Grasim Industries, valuation details, September 2023E financials (Rs/share)

Multiple EBITDA Ownership Value Basis (X) (Rs bn) (%) (Rs bn) (Rs/share) Value of standalone entity VSF / VFY EV/EBITDA 6.0 26 100 158 240 Chemicals EV/EBITDA 6.0 18 100 108 164 Other business EV/EBITDA 6.0 -2 100 (13) (20) Standalone net Debt 100 29 44 Value of standalone business 281 428 Value of investments (CMP (50% discount) Price (Rs/share) Ultratech CMP (45% discount) 7,460 57 678 1,033 Aditya Birla Capital Ltd CMP (45% discount) 135 61 97 148 Idea Cellular CMP (45% discount) 6 12 11 17 Aditya Birla Fashions FV (45% discount) 200 11 10 15 Hindalco Industries FV (45% discount) 440 4 21 32 Larsen & Toubro FV (45% discount) 1,660 0 1 2 Value of investments 818 1,247 Total 1,099 1,675

Source: Kotak Institutional Equities estimates

32 KOTAK INSTITUTIONAL EQUITIES RESEARCH Grasim Industries Construction Materials

Exhibit 10: Grasim Industries, profit model, balance sheet and cash flow model (standalone), March fiscal year-ends, 2017-2024E (Rs mn)

2017 2018 2019 2020 2021 2022E 2023E 2024E Profit model (Rs mn) Net sales 103,457 157,858 205,504 160,819 123,864 164,554 193,645 203,281 EBITDA 21,548 30,775 40,712 21,354 15,643 31,061 41,283 44,671 Other income 4,739 4,640 5,680 5,256 5,137 4,255 4,420 4,420 Interest (576) (1,281) (1,991) (2,379) (2,360) (2,789) (2,029) (1,589) Depreciaiton (4,461) (6,277) (7,604) (8,135) (8,282) (9,192) (9,492) (10,364) Profit before tax 21,249 27,857 36,797 16,097 10,139 23,335 34,182 37,138 Current tax (5,287) (7,105) (9,771) (2,355) (1,266) (4,667) (6,836) (7,428) Deferred tax (363) (997) 1,807 1,691 42 (2,334) (3,418) (3,714) Adjusted PAT 15,600 19,755 28,833 15,433 8,914 16,335 23,928 25,997 Balance sheet (Rs mn) Equity 162,310 447,898 419,591 376,916 429,479 454,705 473,847 494,644 Borrowings 7,010 25,825 33,108 49,198 40,111 29,111 21,111 18,111 Current liabilities 22,562 44,660 45,779 53,933 54,983 69,625 79,310 81,879 Deferred tax 6,630 18,350 18,789 14,052 17,339 19,673 23,091 26,805 Other Non Current liabilities — 443 673 1,692 5,090 1,670 1,670 1,670 Total liabilities 198,511 537,175 517,940 495,789 547,002 574,784 599,029 623,109 Fixed assets 54,909 119,939 120,799 138,865 153,260 156,846 162,354 166,990 Investments 89,964 355,466 311,276 275,421 336,398 336,398 336,398 336,398 Cash 527 419 425 790 1,327 7,171 14,887 30,681 Other current assets 2,683 9,342 9,416 8,754 9,077 12,059 14,191 14,897 Current Assets 29,223 52,010 64,233 55,847 34,910 50,280 59,169 62,114 Intangible Assets — — 11,791 16,113 12,030 12,030 12,030 12,030 Total assets 177,307 537,175 517,940 495,789 547,002 574,784 599,029 623,109 Net debt (18,450) 5,812 3,024 30,704 8,664 (8,180) (23,896) (42,691) Free cash flow (Rs mn) Operating cash flow excl. working capital 16,261 23,670 30,941 19,000 14,377 26,394 34,447 37,244 Working capital changes 2,802 (2,797) (10,735) 12,611 9,350 (3,710) (1,336) (1,081) Other income-finance costs 4,163 3,359 3,689 2,877 2,777 1,466 2,391 2,831 Cash flow from operations 23,226 24,232 23,895 34,488 26,504 24,150 35,502 38,994 Capital expenditure (4,325) (10,689) (20,384) (26,696) (11,830) (26,000) (15,000) (15,000) Free cash flow 18,901 13,544 3,512 7,793 14,674 (1,850) 20,502 23,994 Ratios Net debt/EBIITDA (0.9) 0.2 0.1 1.4 0.6 (0.3) (0.6) (1.0) Book value (Rs/share) 672 873 883 862 997 1,099 1,204 1,323

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 33 Construction Materials Grasim Industries

Exhibit 11: Grasim Industries, profit model, balance sheet and cash flow model (consolidated), March fiscal year-ends, 2017-2024E (Rs mn)

2017 2018 2019 2020 2021 2022E 2023E 2024E Profit model (Rs mn) Net sales 360,684 558,935 772,003 751,407 763,978 860,012 956,095 1,030,133 EBITDA 73,851 100,229 125,763 126,465 147,143 173,523 198,167 213,947 Other income 9,478 8,606 8,277 9,688 10,520 12,801 18,731 26,208 Interest (7,024) (13,640) (20,099) (22,757) (18,089) (15,018) (13,208) (12,768) Depreciaiton (18,076) (27,244) (35,714) (40,042) (40,334) (42,284) (43,624) (44,757) Profit before tax 58,229 67,951 78,228 73,354 99,239 129,022 160,065 182,630 Current tax (13,460) (17,883) (23,239) (15,672) (19,594) (26,981) (34,022) (39,317) Deferred tax (3,607) (2,548) (948) 16,515 (10,628) (14,017) (16,912) (18,975) Net profit before minority 41,162 47,520 54,041 74,197 69,017 88,024 109,131 124,338 Share of profit of associates 1,294 (7,274) 291 5,622 1,892 1,200 1,200 1,200 Minority Interest (10,783) (10,090) (10,518) (22,268) (26,208) (30,954) (36,727) (42,339) Adjusted PAT 31,673 30,156 43,814 57,551 44,701 58,270 73,604 83,199 Earnings per share (Rs) 67.8 45.9 66.7 87.6 68.0 88.7 112.0 126.6 Balance sheet (Rs mn) Equity 313,868 573,619 580,195 566,323 654,941 722,102 790,921 868,920 Borrowings 92,130 613,134 750,646 708,470 625,253 588,383 580,383 577,383 Minority Interest 97,019 263,369 305,026 343,354 370,675 401,629 438,356 480,695 Deferred tax liability 35,388 56,177 88,428 69,790 84,567 98,583 115,496 134,471 Current liabilities 89,271 436,219 303,869 342,703 413,869 420,238 451,651 475,109 Other Non Current Liabilities - 352,882 383,575 412,550 521,259 521,259 521,259 521,259 Total liabilities 627,676 2,295,400 2,411,739 2,443,190 2,670,563 2,752,195 2,898,066 3,057,837 Fixed assets 330,893 1,184,462 1,442,311 1,112,866 1,124,240 1,152,335 1,154,332 1,155,197 Investments 50,694 210,802 156,014 127,448 174,303 175,503 176,703 177,903 Current investments 91,310 71,216 60,130 114,943 175,707 127,359 127,359 127,359 Cash 23,070 13,161 19,082 38,037 49,656 90,133 206,724 346,300 Other current assets 101,765 612,992 360,968 361,474 349,222 391,370 417,453 435,582 Goodwill 29,944 161,918 314,609 317,966 312,402 312,402 312,402 312,402 Deferred Tax Asset — — — 1,376 2,054 15,198 15,198 15,198 Other Non current assets — 40,850 58,626 369,082 482,978 487,895 487,895 487,896 Total assets 627,676 2,295,400 2,411,739 2,443,190 2,670,563 2,752,195 2,898,066 3,057,837 Net debt (22,250) 528,757 671,434 555,490 399,889 370,891 246,300 103,724 Free cash flow (Rs mn) Operating cash flow excl. working capital 60,391 82,346 102,525 110,793 127,549 146,542 164,145 174,629 Working capital changes 16,579 (164,278) (140,683) 37,367 (27,547) (35,779) 5,331 5,328 Other income-finance cost 2,454 (5,034) (11,822) (13,069) (7,569) (2,217) 5,522 13,440 Cash flow from operations 79,424 (86,966) (49,980) 135,092 92,432 108,546 174,998 193,397 Capital expenditure (20,738) (274,166) (40,088) (49,822) (35,527) (56,000) (40,000) (40,000) Free cash flow 58,686 (361,132) (90,068) 85,269 56,905 52,546 134,998 153,397 Ratios P/B 2.2 1.7 1.7 1.7 1.5 1.4 1.2 1.1 P/E 22.1 32.6 22.4 17.1 22.0 16.9 13.4 11.8 EV/EBITDA 9.16 15.09 13.16 12.17 9.40 7.81 6.21 5.08 FCF Yield (%) 9 (37) (8) 10 9 5 13 15 Net debt/EBITDA (0.3) 5.3 5.3 4.4 2.7 2.1 1.2 0.5 Book value (Rs/share) 672 873 883 862 997 1,099 1,204 1,323 RoAE (%) 10.8 6.0 2.9 7.6 6.8 10.7 9.7 10.0 RoACE (%) 11.5 7.2 5.4 7.5 6.4 7.6 8.8 9.4 CRoCI (%) 14.5 12.7 12.8 18.2 17.1 19.2 20.0 20.9

Source: Company, Kotak Institutional Equities estimates

34 KOTAK INSTITUTIONAL EQUITIES RESEARCH ADD Apollo Hospitals (APHS) https://ultraviewer.et/en/own Health Care Services AUGUST 16, 2021 load.html RESULT Sector view: Attractive

Going from strength to strength. APHS’ 1QFY22 revenues and EBITDA were 8% and CMP (`): 4,064 4% ahead of our estimates with all segments growing at a robust pace qoq aided by Fair Value (`): 4,400 Covid/vaccination benefits. While traditional verticals remain on a strong footing, APHS BSE-30: 55,437 is also executing well on the digital front with 24/7 witnessing strong traction. 24/7 has already enhanced its brand visibility through robust marketing and with the impending fund raise in HealthCo, we believe APHS can better compete with other e-health players and accelerate its digital journey. ADD. Apollo Hospitals Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 4,064/4,400/ADD EPS (Rs) 6.2 51.9 67.6 52-week range (Rs) (high-low) 4,225-1,585 EPS growth (%) (66.2) 731.0 30.4 Mcap (bn) (Rs/US$) 585/7.9 P/E (X) 651.3 78.4 60.1 ADTV-3M (mn) (Rs/US$) 2,591/35 P/B (X) 12.7 11.6 10.4 Shareholding pattern (%) EV/EBITDA (X) 52.1 30.2 25.7 Promoters 29.8 RoE (%) 2.3 15.4 18.2 FPIs/MFs/BFIs 54.6/5.9/3.2 Div. yield (%) 0.1 0.5 0.7 Price performance (%) 1M 3M 12M Sales (Rs bn) 106 150 160 Absolute 8.4 27.1 135.6 EBITDA (Rs bn) 11 20 23 Rel. to BSE-30 3.3 13.3 90.9 Net profits (Rs bn) 1 7 10

Strong performance across verticals APHS reported 31% qoq increase in revenues (8% ahead of our estimates) with healthcare segment growing at a robust pace of 26% qoq. All segments benefitted from the impact of Covid, with vaccinations (Rs1.9 bn revenue contribution), RT-PCR tests and Covid patients driving growth. Mature hospitals grew 20% qoq, in line with our estimates while new hospitals surprised positively growing 40% qoq (+27% vs KIE). Pharmacy segment reported 18% yoy growth, though adjusted for pharmacy front-end transaction, growth was at 43% yoy. AHLL segment reported 47% qoq growth (+31% vs KIE) primarily led by diagnostics segment which benefitted from high Covid cases in the quarter. Consolidated EBITDA of Rs5.2 bn (post Ind-AS) grew 26% qoq (+4% vs KIE). Healthcare segment reported 20.3% EBITDA margins (-190 bps vs KIE) with vaccine contribution driving lower margins even as new hospitals reported robust 16.8% margins. Pharmacy and AHLL margins also improved sequentially while spend on 24/7 increased to Rs370 mn (versus Rs250 mn in 4QFY21) with spend likely to inch upward over the coming quarters. Consolidated net debt increased Rs6 bn qoq to Rs17 bn reflecting high inventory for pharmacy and vaccines.

24/7 witnessing strong traction; fund raise to aid promotional activities APHS continues to move from strength to strength and is executing well on leveraging its large and widespread existing infrastructure to create a strong digital ecosystem. The platform now has ~2mn weekly active users with 4-5k teleconsulting per day and >10k e-pharmacy orders per day with management guiding for US$50-60 mn revenue from the platform in FY2022. APHS has guided for completion of fund-raise in HealthCo (pharmacy+24/7 business) within the next

2 months, which will help accelerate Apollo’s digital journey. Apollo has demonstrated a track Kumar Gaurav record of creating new verticals in the past and while the market remains competitive, we believe additional funds will help Apollo aggressively expand its customer base without impacting core healthcare business profitability. Samitinjoy Basak

Revise Fair Value to Rs4,400 (from Rs3,400), ADD We are impressed by APHS’ execution across segments and raise our FY2022-24E EBITDA estimates by 6-7% led by higher growth in pharmacy and AHLL business. We also raise our multiple across businesses (SoTP table below) and ascribe US$300 mn valuation to the 24/7 platform. 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. Health Care Services Apollo Hospitals

Exhibit 1: APHS 4QFY21 pre-IndAS EBITDA was in line with estimates APHS interim results, March fiscal year-ends (Rs mn)

% chg. 1QFY22 1QFY22E 1QFY21 4QFY21 1QFY22E 1QFY21 4QFY21 FY2022E FY2021 yoy (%) Total revenues 37,602 34,773 21,715 28,680 8 73 31 149,897 105,600 41.9 COGS (20,620) (18,548) (12,175) (14,750) 11 69 40 (82,095) (56,842) 44.4 Gross profit 16,983 16,225 9,540 13,929 5 78 22 67,802 48,758 39.1 Employee expenses (4,435) (4,311) (4,486) (3,884) 3 (1) 14 (18,411) (16,010) 15.0 Other expenses (7,349) (6,934) (4,699) (5,927) 6 56 24 (29,767) (21,374) 39.3 EBITDA 5,199 4,979 355 4,118 4 1,365 26 19,624 11,374 72.5 EBITDA (Ind-AS adjusted) 4,776 4,578 (427) 3,718 4 (1,218) 28 17,990 9,123 97.2 Depreciation (1,406) (1,395) (1,602) (1,385) 1 (12) 2 (7,233) (5,731) 26.2 EBIT 3,793 3,584 (1,247) 2,734 6 (404) 39 12,390 5,643 119.6 Other income 246 205 77 205 20 219 20 401 450 Interest expense (947) (1,015) (1,274) (986) (7) (26) (4) (3,529) (4,492) Share of JVs (42) 180 (226) 171 (124) (25) 8 Exceptional item 2,941 - - 252 - 607 PBT 5,992 2,954 (2,670) 2,376 103 (324) 152 9,238 2,215 Tax (986) (738) 408 (677) (2,331) (847) Net profit 5,007 2,215 (2,262) 1,699 6,906 1,368 Minority interest (114) (30) 181 (20) 550 136 PAT 4,893 2,185 (2,082) 1,679 124 (335) 191 7,456 1,504 395.9 Margin (%) Gross profit (%) 45.2 46.7 43.9 48.6 45.2 46.2 Employee expenses (%) (11.8) (12.4) (20.7) (13.5) (12.3) (15.2) Other expenses (%) (19.5) (19.9) (21.6) (20.7) (19.9) (20.2) EBITDA margin (%) 13.8 14.3 1.6 14.4 13.1 10.8 EBITDA margin (pre-IndAS) (%) 12.7 13.2 (2.0) 13.0 12.0 8.6 EBIT margin (%) 10.1 10.3 (5.7) 9.5 8.3 5.3 Segmental revenues (estimates without vaccines) Healthcare 19,392 16,157 7,899 15,388 20 145 26 83,668 50,022 67.3 SAP 15,120 14,965 12,791 11,187 1 18 35 56,002 48,760 14.9 24/7 - - - NA - - AHLL 3,090 2,350 1,024 2,105 31 202 47 10,227 6,818 50.0 Revenues 37,602 33,473 21,714 28,680 12 73 31 149,897 105,600 41.9 Segmental EBITDA (post Ind-AS) Healthcare 3,936 3,588 (838) 3,254 10 (570) 21 15,630 6,925 125.7 SAP 1,153 1,122 1,220 811 3 (5) 42 4,390 3,932 11.7 24/7 (370) (350) (252) (2,000) (252) AHLL 479 423 (27) 305 NM NM NM 1,604 768 NM EBITDA 5,198 4,783 355 4,118 9 1,364 26 19,624 11,373 72.5 Segmental EBITDA margins (%) Healthcare 20.3 22.2 (10.6) 21.1 18.7 13.8 ` SAP 7.6 7.5 9.5 7.2 7.8 8.1 24/7 AHLL 15.5 18.0 (2.6) 14.5 15.7 11.3 EBITDA margin 13.8 14.3 1.6 14.4 13.1 10.8 Healthcare revenues Mature 12,682 12,716 5,430 10,597 (0) 133.6 19.7 56,816 34,682 63.8 New 6,710 5,269 2,469 4,790 27.3 171.8 40.1 26,852 15,340 75.0 Total 19,392 17,985 7,899 15,387 7.8 145.5 26.0 83,668 50,022 67.3 Healthcare EBITDA (post Ind-AS) Mature 2,806 2,798 (552) 2,552 0.3 (608.3) 10.0 New 1,130 790 (285) 702 43.0 (496) 61.0 Total 3,936 3,588 (837) 3,254 9.7 (570.3) 21.0 Healthcare margins (post Ind-AS) (%) Existing 22.1 22.0 (10.2) 24.1 - - New 16.8 15.0 (11.5) 14.7 - - Total 20.3 19.9 (10.6) 21.1 - -

Source: Company, Kotak Institutional Equities estimates

36 KOTAK INSTITUTIONAL EQUITIES RESEARCH Apollo Hospitals Health Care Services

Monetization of digital platform imminent

During the previous quarter, APHS announced reorganization of its omni-channel digital healthcare business through combining (1) Apollo 24/7, (2) its back-end offline pharmacy division, (3) 26% stake in the front-end business and (4) Apollo 24/7, Apollo Pharmacy and private label brands into a single entity Apollo HealthCo. The reorganization sets the stage for value unlocking from the digital healthcare platform in which APHS will look to raise capital to aggressively expand its footprint across the country. As per management, APHS is looking to retain 80% stake in the newly formed entity Apollo HealthCo with the transaction likely to be announced within two months.

Exhibit 2: Reorganization of digital business Exhibit 3: Ambitious guidance for HealthCo entity

Offline pharmacy (combined) FY2021 revenues (Rs mn) 56,103 Growth guidance 18-20% FY2026 revenues (Rs mn) 139,602 24/7 guidance Registered users (mn) 10 FY2026 user base (mn) 100 Apollo HealthCo FY2026 revenues (Rs mn) 187,500 Implied revenue guidance for 24/7 (Rs mn) 47,898 Implied revenue guidance for 24/7 (US$ mn) 647 FY2022E 24/7 run rate (US$ mn) 50

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

Ambitious guidance though competitive intensity remain elevated

APHS is guiding for an ambitious revenue target of US$2.5 bn for this entity in five years with bulk of the revenues coming from existing front+back end pharmacy business. Existing revenues for this entity is ~US$760 mn with management guiding for an 18-20% growth in the existing pharmacy segment. This implies Apollo 24/7 reaching a revenue base of ~US$650 mn in five years which is a high ask rate and will require over 50,000 tele- consultations per day (versus 4-5k per day currently) along with over 70,000 e-pharmacy orders per day (~10-15k orders per day currently)

We expect competitive intensity to remain elevated as existing players (1mg, Pharmeasy), and large conglomerates (Reliance, Amazon) will aim to grab a share of the e-health pie. Given the opportunity size, we see opportunity for multiple players to exist in the market over the next 3-4 years before consolidation begins. We believe customer acquisitions costs will remain high in the initial years as large conglomerates and startups with deep pockets fight for market share. Financials of e-health companies indicate high customer acquisition costs. After raising capital in this entity, we expect APHS to aggressively invest in this segment in-order to compete with other players which could elongate breakeven timelines versus management’s guidance of breaking even in 3-4 years.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 37 Health Care Services Apollo Hospitals

Exhibit 4: We expect Apollo HealthCo to reach US$1.8bn revenues by FY2026E Apollo HealthCo revenues, March fiscal year-ends, 2022-2026E (Rs mn)

2022E 2023E 2024E 2025E 2026E Apollo HealthCo Existing pharmacy (combined revenues) 70,002 81,524 92,694 106,598 122,587 24/7 Teleconsulting per day 4,500 8,000 14,000 17,500 21,875 Revenues (Rs mn) 986 1,752 3,066 3,833 4,791 E-Pharmacy order per day 12,000 18,000 25,000 28,000 35,000 Revenues (Rs mn) 2628 3942 5475 6,132 7,665 24/7 revenues 3,614 5,694 8,541 9,965 12,456 Apollo HealthCo revenues (Rs mn) 73,616 87,218 101,235 116,562 135,043 Apollo HealthCo revenues (US$ mn) 995 1,179 1,368 1,575 1,825

Source: Company, Kotak Institutional Equities estimates

Exhibit 5: We expect E-health market to reach US$7.7 bn by FY2025E India’s e-health market, March fiscal year-ends, 2020-2025E (Rs mn)

US$ bn 2020 2021E 2022E 2023E 2024E 2025E E-consulting Physicians 1,108,419 1,141,672 1,175,922 1,211,199 1,247,535 1,284,961 Availability (%) 70 70 70 70 70 70 Consultations per day 15 15 15 15 15 15 Number of annual consultations (mn) 3,142 3,237 3,334 3,434 3,537 3,643 Private hospitals/clinics market share (%) 70 70 70 70 70 70 Revenue per consultation (Rs) 437 450 464 478 492 507 Market size (Rs bn) 961 1,020 1,082 1,148 1,218 1,292 Market size (US$ bn) 13 14 14 15 16 17 Shift to virtual consultation (%) 2 4 5 8 10 Virtual consultation GMV (US$ bn) 0.3 0.6 0.8 1.3 1.7 E-pharmacy Indian pharma market (US$ bn) 21 21 23 25 27 29 Acute (%) 45 44 43 43 42 41 Chronic and semi chronic (%) 55 56 57 57 58 59 Addressable market for acute (%) 25 28 30 32 35 40 Addressable market for chronic (%) 75 75 75 75 75 75 Addressable market for acute (US$ bn) 2 3 3 3 4 5 Addressable market for chronic (US$ bn) 9 9 10 11 12 13 Addressable market for e-pharmacies (US$ bn) 11 12 13 14 16 18 Online penetration for acute (%) 0 2 8 10 15 20 Online penetration for chronic (%) 5 8 15 20 25 30 E-pharmacy GMV (US$ bn) 0.4 0.8 1.7 2.5 3.5 4.8 E-diagnostics India diagnostics market (Rs bn) 648 661 793 872 960 1,056 Pathology market (Rs bn) 389 397 476 523 576 633

Source: Kotak Institutional Equities estimates

38 KOTAK INSTITUTIONAL EQUITIES RESEARCH Apollo Hospitals Health Care Services

Exhibit 6: 1mg and Pharmeasy valuations

Registered Valuation (US$ users (mn) GMV (US$ mn) mn) Tata 1mg 14 120 240 Pharmeasy 15 1,350 4,000 B2B 950 B2C 400

Source: Media reports, Kotak Institutional Equities estimates

AHLL is making rapid strides in diagnostics

Over the past several years, APHS has been trying to diversify its offerings, particularly in the retail space through AHLL with the aim of enhancing its geographical units, enhancing brand visibility and using retail segment as a funnel for hospitals. The unit witnessed limited success, especially on clinics and day-care fronts given various units operating at sub-scale, with unabsorbed costs dragging margins. After enhanced focus on cost optimization, integration of purchasing with APHS group and rationalization of doctor fees/revenue share, AHLL turned around EBITDA positive in FY2020.

With the pandemic enhancing APHS brand and willingness of customers to pay for quality care, we believe AHLL has now achieved a critical mass, especially in diagnostics and clinics; both of which are now annualizing revenues of ~Rs4 bn (including Covid benefits). While we see diagnostics revenues moderating with decline in Covid testing, with strong industry tailwinds and pick-up in home collection, we expect diagnostics segment (ex-Covid) to reach Rs4-4.5 bn revenues by FY2024 with operating leverage benefits driving profitability. AHLL has already pivoted to a franchisee based expansion model versus company owned network model, and we expect AHLL’s diagnostics arm to rapidly expand its network presence in South and East markets.

Exhibit 7: Various sub-units within AHLL have now reached decent scale AHLL revenues and EBITDA, March fiscal year-ends, 1QFY18-4QFY21 (Rs mn)

1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 1QFY21 Revenues Diagnostics 142 164 174 180 188 241 249 245 267 327 316 275 200 493 495 495 1,040 Primary care 411 439 393 407 443 513 518 524 531 616 593 532 189 356 426 602 825 Specialty care 586 647 685 709 776 843 862 913 939 1,008 1,068 968 409 591 723 1,104 789 Corporate - - - 5 ------Intra group (79) (98) (101) (75) (90) (115) (115) (108) (115) (135) (124) (102) (40) (104) (111) (97) (159) Total revenues 1,060 1,152 1,151 1,226 1,317 1,482 1,514 1,574 1,622 1,816 1,853 1,673 758 1,336 1,533 2,104 2,495 EBITDA Diagnostics (32) (38) (29) (19) (35) (27) (34) (27) (3) 23 20 (1) (26) 103 91 51 268 Primary care (15) (22) (46) (99) (25) 10 (20) (21) 18 18 22 28 (58) 11 23 78 99 Specialty care (188) (141) (128) (195) (95) (68) (57) 13 (2) 39 77 33 (57) 3 77 80 11 Corporate (41) (39) (53) (66) (43) (53) (57) (62) (61) (55) (63) (77) (50) (68) (80) (83) (78) Intra group 1 1 5 (2) 1 1 - 1 1 - - 1 Total EBITDA (275) (239) (251) (381) (197) (137) (168) (96) (47) 25 56 (16) (191) 49 111 126 300 PAT Diagnostics (38) (43) (36) (30) (43) (38) (43) (42) (16) 11 8 (13) (39) 67 56 47 251 Primary care (49) (55) (72) (93) (53) (28) (57) (94) (21) 26 (12) 4 (84) (23) (6) 37 58 Specialty care (250) (219) (213) (332) (210) (172) (169) (105) (137) (76) (36) (99) (160) (92) (31) (55) (104) Corporate (42) (46) (48) (44) (52) (56) (63) (63) (46) (129) (75) (104) (65) (60) (66) (137) (73) Intra group ------Total PAT (379) (363) (369) (499) (358) (294) (332) (304) (220) (168) (115) (212) (348) (108) (47) (108) 132

Source: Company, Kotak Institutional Equities estimates

Mature units well positioned; new units ramp-up faster than expected

KOTAK INSTITUTIONAL EQUITIES RESEARCH 39 Health Care Services Apollo Hospitals

APHS’s hospital segment is witnessing a strong recovery with a steady decline in Covid cases, reduction in beds reserved for Covid and subsequent pick-up in elective surgeries driving normalization since June. While footfalls in large hospitals remain below pre-Covid levels, driven by the impact from the international segment and weaker recovery in outpatient footfalls, we expect revenues in mature units to normalize by 2QFY22. APHS has also gained market share in core clusters through strengthening of offerings across multiple therapy areas and we expect continued improvement in case mix across mature clusters to continue over FY2022-23.

New units (including Proton) are operating well-above pre-Covid levels benefitting from strong recovery in Tier-2 units. Pre-Covid, multiple Tier-2 units were operating at sub-par profitability impacted by a lack of brand presence across these cities, poor payor mix and sub-optimal cost structures. We believe large chains including Apollo have benefitted from improvement in brand visibility across these cities and expect footfalls across these units to sustain. Cost rationalization has also helped improve profitability (~Rs1-1 bn savings in costs to be sustained) and with revenues ramping up well, new units have now reached 16% margins in 1QFY22. We expect new units to gradually reach ~18% margins over the two years. Proton unit is also seeing strong traction with revenues now annualizing Rs1.6 bn. We expect Proton unit to reach Rs2 bn by FY2023 led by pick-up in international segment with ~40% EBITDA margins. Overall, we see EBITDA contribution from new units increasing to ~20% of hospitals EBITDA by FY2023 (versus 8% in FY2020) with RoCEs reaching 12% (- 2% in FY2020).

Exhibit 8: Our EBITDA revision reflects strong traction in pharmacy and AHLL verticals Earnings revision, March fiscal year-ends, FY2022-23E (Rs mn)

New estimates Old estimates Change (%) 2022E 2023E 2024E 2022E 2023E 2024E 2022E 2023E 2024E Sales 149,897 159,825 181,226 144,637 153,652 174,186 3.6 4.0 4.0 EBITDA 19,624 22,721 27,890 18,431 21,527 26,382 6.5 5.5 5.7 EBITDA (Ind-AS adjusted) 17,990 21,006 26,089 16,798 19,812 24,581 7.1 6.0 6.1 PAT 7,456 9,722 13,621 6,564 8,828 12,492 13.6 10.1 9.0 EPS 52 68 95 46 61 87 13.6 10.1 9.0 EBITDA margin (%) 13.1 14.2 15.4 12.7 14.0 15.1 Sales Healthcare 83,668 82,333 92,958 83,668 82,333 92,958 - - - Pharmacy 56,002 65,220 74,155 52,106 60,683 68,996 7.5 7.5 7.5 24/7 NA NA NA NA NA NA AHLL 10,227 12,272 14,113 8,863 10,636 12,231 15.4 15.4 15.4 Total 149,897 159,825 181,226 144,637 153,652 174,186 3.6 4.0 4.0 EBITDA Healthcare 15,630 16,912 19,349 15,630 16,912 19,349 - - - Pharmacy 4,390 5,270 6,266 3,697 4,376 5,057 18.7 20.4 23.9 24/7 (2,000) (1,500) 0 (2,000) (1,500) - AHLL 1,604 2,039 2,276 1,104 1,739 1,976 45.3 17.3 15.2 Total 19,624 22,721 27,890 18,431 21,527 26,382 6.5 5.5 5.7 EBITDA (Ind-AS adjusted) Healthcare 14,750 15,988 18,379 14,750 15,988 18,379 - - - Pharmacy 4,340 5,218 6,210 3,647 4,324 5,002 19.0 20.7 24.2 24/7 (2,000) (1,500) 0 (2,000) (1,500) - AHLL 900 1,300 1,500 400 1,000 1,200 NM NM NM Total 17,990 21,006 26,089 16,798 19,812 24,581 7.1 6.0 6.1 EBITDA margin (%) Healthcare 18.7 20.5 20.8 18.7 20.5 20.8 Pharmacy 7.8 8.1 8.4 7.1 7.2 7.3 24/7 NA NA NA NA NA NA AHLL 15.7 16.6 16.1 12.5 16.3 16.2 Total 13.1 14.2 15.4 12.7 14.0 15.1 EBITDA margin (Ind-AS adjusted) (%) Healthcare 17.6 19.4 19.8 17.6 19.4 19.8 Pharmacy 7.8 8.0 8.4 7.0 7.1 7.3 24/7 NA NA NA NA NA NA AHLL 8.8 10.6 10.6 4.5 9.4 9.8 Total 12.0 13.1 14.4 11.6 12.9 14.1

Source: Company, Kotak Institutional Equities estimates

40 KOTAK INSTITUTIONAL EQUITIES RESEARCH Apollo Hospitals Health Care Services

Exhibit 9: We revise our Fair Value to Rs4,400 based on March 2023E SoTP valuation SoTP valuation, September 2023E, March fiscal year-ends (Rs mn)

Sep-23 pre IndAS EBITDA Valuation (Rs Stake EBITDA (Rs mn) Multiple (X) mn) Healthcare 100 17,183 22 384,910 Pharmacy distribution 100 5,714 30 171,421 Pharmacy front end 26 1,132 30 8,663 AHLL 70 1,400 30 29,792 Indraprastha 22 1,605 EV (base business) 596,391 Sales multiple Stake March-24 sales (X) 24/7 100 8,541 3 25,623 Net debt (12,091) Equity value 634,105 Number of shares 144 Valuation/share (Rs) 4,410

Source: Company, Kotak Institutional Equities estimates

Exhibit 10: We expect complete recovery in FY2022, EBITDA in FY2022-23E boosted by consolidation of JVs/vaccinations APHS segmental break-up, March fiscal year-ends, FY2015-23E (Rs mn)

2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Revenues Hospitals 32,250 37,033 41,363 45,157 51,426 57,297 50,022 83,668 82,333 92,958 Standalone pharmacy 17,726 23,220 28,745 32,689 38,860 48,206 48,760 56,002 65,220 74,155 24/7 NA NA NA NA AHLL 1,074 1,894 2,441 4,589 5,888 6,964 6,818 10,227 12,272 14,113 Total 51,785 62,147 72,549 82,435 96,174 112,467 105,600 149,897 159,825 181,226 EBITDA (pre Ind-AS) Hospitals 7,049 7,236 7,122 7,599 9,204 9,970 6,087 14,750 15,988 18,379 Standalone pharmacy 580 803 1,233 1,479 2,031 2,893 3,189 4,340 5,218 6,210 24/7 (252) (2,000) (1,500) - AHLL (292) (1,162) (1,069) (1,146) (599) 18 98 900 1,300 1,500 Total 7,347 6,877 7,286 7,932 10,636 12,881 9,122 17,990 21,006 26,089 EBITDA margin % (pre-IndAS) Hospitals 21.9 19.5 17.2 16.8 17.9 17.4 12.2 17.6 19.4 19.8 Standalone pharmacy 3.3 3.5 4.3 4.5 5.2 6.0 6.5 7.8 8.0 8.4 24/7 NA NA NA NA AHLL (27.2) (61.4) (43.8) (25.0) (10.2) 0.3 1.4 8.8 10.6 10.6 Total 14.2 11.1 10.0 9.6 11.1 11.5 8.6 12.0 13.1 14.4 EBITDA (post-Ind-AS) Hospitals 7,049 7,236 7,122 7,599 9,204 10,750 6,925 15,630 16,912 19,349 Standalone pharmacy 580 803 1,233 1,479 2,031 4,452 3,932 4,390 5,270 6,266 24/7 NA NA NA NA AHLL (292) (1,162) (1,069) (1,146) (599) 671 768 1,604 2,039 2,276 Total 7,347 6,877 7,286 7,932 10,636 15,873 11,625 21,624 24,221 27,890 EBITDA margin % (post-Ind-AS) Hospitals 21.9 19.5 17.2 16.8 17.9 18.8 13.8 18.7 20.5 20.8 Standalone pharmacy 3.3 3.5 4.3 4.5 5.2 9.2 8.1 7.8 8.1 8.4 24/7 NA NA NA NA AHLL (27.2) (61.4) (43.8) (25.0) (10.2) 9.6 11.3 15.7 16.6 16.1 Total 14.2 11.1 10.0 9.6 11.1 14.1 11.0 14.4 15.2 15.4 Contribution (%) Hospitals 62.3 59.6 57.0 54.8 53.5 50.9 47.4 55.8 51.5 51.3 Standalone pharmacy 34.2 37.4 39.6 39.7 40.4 42.9 46.2 37.4 40.8 40.9 24/7 NA NA NA NA AHLL 2.1 3.0 3.4 5.6 6.1 6.2 6.5 6.8 7.7 7.8 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 41 Health Care Services Apollo Hospitals

Exhibit 11: We expect pre Ind-AS EBITDA CAGR of 17% over FY2020-23E Apollo Hospitals consolidated income statement, balance sheet and cash flow, march fiscal year-ends, FY2013-23E (Rs mn)

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Profit model (Rs mn) Net sales 31,475 37,687 43,842 51,785 62,147 72,549 82,435 96,174 112,468 105,600 149,897 159,825 181,226 EBITDA 5,131 6,082 6,724 7,347 6,878 7,286 7,932 10,637 15,873 11,374 19,624 22,721 27,890 EBITDA (pre Ind-AS) 5,131 6,082 6,724 7,347 6,878 7,286 7,932 10,637 12,881 9,122 17,990 21,006 26,089 Other income 259 319 215 368 450 225 322 314 270 450 401 373 387 Interest and finance charges (891) (1,033) (1,194) (1,179) (1,800) (2,574) (2,951) (3,270) (5,328) (4,492) (3,529) (3,192) (2,856) Depreciation (1,239) (1,423) (1,678) (2,117) (2,638) (3,140) (3,590) (3,955) (6,197) (5,731) (7,233) (7,702) (8,009) Extraordinary 0 45 0 135 159 0 0 0 1,983 607 0 0 0 Pre-tax profits 3,260 3,991 4,067 4,554 3,049 1,797 1,712 3,725 6,601 2,207 9,263 12,199 17,412 Income tax 1,150 1,050 1,018 1,300 969 910 1,119 1,734 2,252 847 2,331 3,071 4,383 Minority interest and associates 83 103 118 145 284 1,323 581 369 200 144 525 593 591 Adjusted net profits 2,193 2,998 3,167 3,504 2,204 2,210 1,174 2,360 2,566 897 7,456 9,722 13,621 Earnings per share (Rs) 16.6 21.5 22.8 25.2 15.8 15.9 8.4 17.0 18.4 6.2 51.9 67.6 94.7 Balance sheet (Rs mn) Total equity 25,068 27,468 29,767 31,702 33,200 36,714 32,515 33,334 33,394 46,026 50,500 56,333 64,505 Deferred tax liability 1,551 2,295 3,291 4,020 2,586 2,481 2,595 3,149 2,941 2,605 2,605 2,605 2,605 Total borrowings 8,167 12,179 13,444 19,923 26,327 30,487 34,251 36,713 36,266 24,947 19,947 14,947 9,947 Other liabilities 7,740 6,197 6,607 8,227 11,484 11,484 16,768 18,635 40,782 40,591 42,740 45,011 48,252 Total liabilities and equity 42,526 48,139 53,108 63,871 73,597 81,165 86,128 91,832 113,384 114,169 115,791 118,896 125,308 Cash 2,368 3,201 2,741 3,773 4,605 6,391 4,172 3,470 4,668 17,222 12,466 15,260 22,038 Current assets 12,311 12,232 15,491 19,580 20,697 21,787 23,590 25,712 25,880 26,615 30,776 34,288 37,433 Total fixed assets 22,205 27,440 31,660 37,412 45,590 49,968 54,777 57,968 76,617 70,069 72,285 69,084 65,574 Total assets 42,526 48,139 53,108 63,872 73,597 81,165 86,128 91,832 113,384 114,169 115,791 118,895 125,308 Free cash flow (Rs mn) Operating cash flow, excl. working capital 4,743 5,326 5,874 6,308 6,548 6,459 7,441 9,507 13,532 13,456 17,817 20,243 24,098 Working capital (873) (899) (2,140) (1,608) (2,317) (703) (2,071) (458) (1,638) (721) (3,001) (2,234) (900) Capital expenditure / divesment (3,945) (6,602) (6,119) (8,681) (8,311) (7,364) (6,214) (6,789) (2,293) 2,474 (8,450) (3,500) (3,500) Interest expense / lease payment (891) (1,033) (1,204) (1,176) (1,685) (2,675) (3,178) (3,620) (5,642) (5,549) (3,541) (3,198) (2,859) Free cash flow (966) (3,207) (3,589) (5,157) (5,764) (4,283) (4,022) (1,360) 3,959 9,660 2,825 11,311 16,839 Ratios (%) Debt/equity 0.3 0.4 0.5 0.6 0.8 0.8 1.1 1.1 1.1 0.5 0.4 0.3 0.2 Net debt/equity 0.2 0.2 0.3 0.5 0.6 0.6 0.9 1.0 0.9 0.2 0.1 (0.0) (0.2) RoE 10.0 11.4 11.1 11.4 6.8 6.3 3.4 7.2 7.7 2.3 15.4 18.2 22.5 RoCE (post-tax) 8.2 9.4 9.3 7.8 5.3 3.4 2.4 5.4 9.8 5.5 13.6 17.0 23.8

Source: Company, Kotak Institutional Equities estimates

42 KOTAK INSTITUTIONAL EQUITIES RESEARCH REDUCE Hero Motocorp (HMCL) https://ultraviewer.et/en/own Automobiles & Components AUGUST 13, 2021 load.html RESULT Sector view: Cautious

Market share gains in EV segment essential for re-rating. Hero Motocorp reported CMP (`): 2,772 EBITDA of Rs5.1 bn (-58% qoq), which was 18% below our estimate due to lower- Fair Value (`): 2,900 than-expected gross margin and lower ASPs. We expect the company to maintain its BSE-30: 55,437 profitability going into FY2022E led by (1) a cost savings program and (2) calibrated price hikes despite challenging demand conditions. We maintain REDUCE rating on the stock with an unchanged FV of Rs2,900. Stock is trading at 13.2X FY2023E standalone EPS.

Hero Motocorp Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 2,772/2,900/REDUCE EPS (Rs) 148.4 191.6 210.5 52-week range (Rs) (high-low) 3,616-2,731 EPS growth (%) (6.8) 29.1 9.9 Mcap (bn) (Rs/US$) 554/7.5 P/E (X) 18.7 14.5 13.2 ADTV-3M (mn) (Rs/US$) 2,034/27 P/B (X) 3.6 3.3 3.0 Shareholding pattern (%) EV/EBITDA (X) 11.1 8.8 7.7 Promoters 34.8 RoE (%) 20.2 24.0 23.9 FPIs/MFs/BFIs 37.2/4.7/11.7 Div. yield (%) 3.4 4.1 4.6 Price performance (%) 1M 3M 12M Sales (Rs bn) 308 360 397 Absolute (4.2) (2.0) (0.8) EBITDA (Rs bn) 40 50 55 Rel. to BSE-30 (9.3) (15.9) (45.5) Net profits (Rs bn) 30 38 42

1QFY22 performance – EBITDA 18% below our estimates

Hero Motocorp reported EBITDA of Rs5.1 bn (-58% qoq) in 1QFY22, which was 18% below our estimate. Volume grew by 82% yoy in 1QFY22 due to a low base while ASPs increased by 1.6% yoy driven by (1) BS-VI transition and (2) price increases taken in 2HFY21. Gross profit per vehicle declined to Rs14,714 in 1QFY22 from Rs16,364 in 4QFY21 due to RM headwinds (partly offset by LEAP savings). EBITDA per vehicle also declined to Rs5,025 per vehicle in 1QFY22 from Rs7,716 per vehicle in 4QFY21 due to negative operating leverage. Net profit came in at Rs3.65 bn (-58% qoq), which was 11% below our estimate.

First electric vehicle from Hero Motocorp will be launched before March 2022 with a fixed battery. Semiconductor shortage has not impacted the company.

Maintain estimates and REDUCE rating

The company has done well to maintain its profitability despite challenging demand conditions led by (1) a cost savings program and (2) calibrated prices hikes. Given the steep increase in cost of ownership for two-wheelers, we expect domestic demand to remain under pressure in the near-term. However, we expect the company to clock in EBITDA per vehicle of Rs7,652 in FY2023E from Rs6,940 in FY2021 led by (1) operating leverage benefits (expect sales recovery from 2HFY21 onwards) and (2) cost savings. The company is focusing on higher growth segments such as scooters (working on improving its brand perception), premium motorcycle (will be launching newer products and co-developing products with Harley Davidson), exports 2W segment (entering newer geographies and launching relevant products) and EV segment (will be launching product next year under its own banner as well as with JV partner Gogoro). Hitesh Goel However, the company will have to gain market share in these segments on a sustainable basis for a multiple re-rating, which we are not building currently in our assumptions. Maintain REDUCE rating with unchanged FV of Rs2,900 on fair valuations. Stock is trading at 13.2X Rishi Vora FY2023E standalone EPS.

[email protected] Contact: +91 22 6218 6427

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

Key takeaways from the conference call

 Growth prospects remain strong over the medium-term – The company remains optimistic on the medium-term growth prospects led by (1) gradual recovery of economy as demand in certain sector picks up, (2) higher spends by government, (3) strong rural demand and (4) lower financing rate. 90% of dealerships are now open and retails have reached 80% of pre-Covid levels.

 In FY2021, RM inflation was around 600-700 bps and in order to offset the impact of the same, the company took price hikes of 400 bps and 200-300 bps of cost savings from LEAP II program (60-70% of the cost savings came from composition change in precious metals). The company expects further 400 bps RM inflation in FY2022 on a yoy basis. However, the company expects to maintain margins led by cost savings from LEAP II program (+200 bps yoy) and price hikes of 200 bps in FY2022. Took average price increase of Rs1,200 per vehicle in July 2021.

 Harley Davidson partnership – Hero will manufacture, co-develop and distribute Harley Davidson branded bikes in the Indian market. The company has appointed 15 dealers and distribution has started for the same. In terms of co-developing products, the company has not specified the models which are likely to be launched or a timeline for the launches. We believe it will take a few years before they can get a brand new product in the market.

 Gogoro JV – Hero has entered into a joint venture with Gogoro to primarily bring the latter’s battery swapping network to India. The company will disclose further details going forward. The company is also independently developing the EV product with a fixed battery system and the company will be launching products next year under its own banner as well as with the JV.

 Export segment will be one of the focus areas for the company. Over the past few years, the company has addressed product gaps in key markets of LATAM and Africa. The company remains optimistic about growth prospects in regions such as Mexico, Colombia (improved market share to 6% from 4%), African region and Bangladesh.

 Net ASPs declined by 3.2% qoq despite price increases taken in this quarter, which could be due to an inferior product mix and lower contribution from spares segment. Xpulse has been doing well (especially in Southern region) and the company expects to gain market share in the premium motorcycle segment. The company also expects its scooter portfolio to do well led by Maestro Edge, Destini and Pleasure +. The company highlighted that Pleasure+ has been very-well accepted pan-India, which augurs well for the company.

 In consolidated financials, share of associates reported a loss of Rs1.36 bn in 1QFY22 versus Rs465.6 mn in FY2021 due to (1) higher losses in Ather Energy due to new launches and (2) higher provisions related to Hero Fincorp (GNPAs have gone up due to Covid). During FY2021, the company invested Rs1.9 bn in Hero Fincorp, Rs1.7 bn in Ather Energy and Rs142 mn in HMCL Netherlands B.V.

 Other key points: (1) The company has gained 190 bps qoq market share in the domestic motorcycle market and 110 bps qoq in domestic scooter market in 1QFY22, (2) spares revenues stood at Rs4.55 bn (8% of revenues) in 1QFY22 versus Rs10.5 bn in 4QFY21 (12% of revenues), (3) financing mix stood at 41% in 1QFY22 versus 48% in 4QFY21 (Hero Fincorp share was 41%) and (4) Capex is estimated to be Rs7.5 bn to Rs10 bn annually.

44 KOTAK INSTITUTIONAL EQUITIES RESEARCH Hero Motocorp Automobiles & Components

Exhibit 1: 1QFY22 EBITDA was 18% below our estimates driven by lower-than-expected ASPs and gross margins Hero MotoCorp interim results, March fiscal year-ends (Rs mn)

(% chg.) 1QFY22 1QFY22E 1QFY21 4QFY21 1QFY22E 1QFY21 4QFY21 FY2022E FY2021 Yoy chg (%) FY2023E FY2022E Yoy chg (%) Volumes (units) 1,024,507 1,024,507 563,426 1,569,751 81.8 (34.7) 6,448,529 5,786,374 11.4 6,981,801 6,448,529 8.3 Net realisations (Rs/vehicle) 53,558 55,887 52,741 55,333 (4.2) 1.6 (3.2) 55,870 53,230 5.0 56,880 55,870 1.8 Net sales 54,871 57,256 29,715 86,860 (4.2) 84.7 (36.8) 360,281 308,006 17.0 397,127 360,281 10.2 Inc/dec in stock 1,695 — (2,225) 2,448 — 1,435 — — Raw materials (41,491) (40,366) (18,715) (63,621) (1.4) 90.1 (34.9) (254,717) (219,058) 16.3 (281,297) (254,717) Staff costs (4,357) (4,500) (3,824) (4,884) (3.2) 13.9 (10.8) (20,506) (18,987) 8.0 (22,197) (20,506) Other expenses (5,570) (6,084) (3,872) (8,691) (8.5) 43.8 (35.9) (36,512) (31,203) 17.0 (40,297) (36,512) Total expenses (49,722) (50,950) (28,635) (74,748) (2.4) 73.6 (33.5) (311,735) (267,814) 16.4 (343,791) (311,735) EBITDA 5,148 6,307 1,081 12,112 (18.4) 376.5 (57.5) 48,546 40,192 20.8 53,336 48,546 9.9 Other income 1,386 900 1,485 874 54.0 (6.6) 58.6 6,495 5,799 12.0 6,999 6,495 Interest expense (net) (61) (63) (63) (63) (100) (218) (50) (100) Depreciation expense (1,630) (1,650) (1,708) (1,631) (1.2) (4.6) (0.1) (7,366) (6,769) (7,716) (7,366) Exceptional expense — — — — — — — — Profit before tax 4,844 5,494 795 11,291 (11.8) 509.3 (57.1) 47,575 39,004 22.0 52,569 47,575 10.5 Tax expense (1,189) (1,373) (182) (2,642) (13.4) 554.1 (55.0) (11,894) (9,362) 27.0 (13,247) (11,894) Reported PAT 3,654 4,120 613 8,650 (11.3) 496.1 (57.8) 35,681 29,642 20.4 39,321 35,681 Adj. net profit 3,654 4,120 613 8,650 (11.3) 496.1 (57.8) 35,681 29,642 20.4 39,321 35,681 10.2 Adj. EPS 18.3 20.6 3.1 43.3 (11.3) 496.1 (57.8) 178.6 148.4 20.4 196.9 178.6 10.2 Ratios (%) Raw material cost to net sales 72.5 70.5 70.5 70.4 70.7 70.7 70.8 70.7 Staff cost to net sales 7.9 7.9 12.9 5.6 5.7 6.2 5.6 5.7 Other expenses to net sales 10.2 10.6 13.0 10.0 10.1 10.1 10.1 10.1 EBITDA margin (%) 9.4 11.0 3.6 13.9 13.5 13.0 13.4 13.5 No of shares 199.8 199.8 199.8 199.8 199.8 199.8 199.8 199.8 Tax rate (%) 24.6 25.0 22.9 23.4 25.0 24.0 25.2 25.0 Gross profit per vehicle (Rs/unit) 14,714 16,487 15,576 16,364 (10.8) (5.5) (10.1) 16,370 15,620 16,590 16,370 EBITDA per vehicle (Rs/unit) 5,025 6,156 1,918 7,716 (18.4) 162.0 (34.9) 7,528 6,946 7,639 7,528 Volume break up (units) Economy 224,136 154,432 405,674 45.1 (44.7) Executive 646,663 343,650 944,873 88.2 (31.6) Premium 8,455 1,286 21,364 (60.4) Domestic motorcycle 879,254 499,368 1,371,911 76.1 (35.9) 5,672,041 5,156,401 10.0 6,127,664 5,672,041 8.0 Domestic scooters 61,453 39,131 126,076 57.0 (51.3) 496,673 443,458 12.0 546,340 496,673 10.0 Exports 83,800 24,927 71,764 236.2 16.8 279,815 186,515 50.0 307,797 279,815 10.0 Total volumes 1,024,507 563,426 1,569,751 81.8 (34.7) 6,448,529 5,786,374 11.4 6,981,801 6,448,529 8.3 Volume mix (%) Economy 21.9 27.4 25.8 Executive 63.1 61.0 60.2 Premium 0.8 0.2 1.4 Domestic motorcycle 85.8 88.6 87.4 88.0 89.1 87.8 88.0 Domestic scooters 6.0 6.9 8.0 7.7 7.7 7.8 7.7 Exports 8.2 4.4 4.6 4.3 3.2 4.4 4.3 Total volumes 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 45 Automobiles & Components Hero Motocorp

Exhibit 2: EBITDA per vehicle stood at Rs5,025 per vehicle (-35% qoq) in 1QFY22 Hero Motocorp’s quarterly EBITDA per vehicle, March fiscal year-ends, 2016-2022 (Rs per unit)

9,000

7,716

7,507

7,661 7,326

8,000 6,847

7,196

7,048

6,461

7,115

6,910

6,510

6,991

6,957

6,775

6,743

6,141

6,543

6,690 6,332 6,332

7,000 6,283

6,003 5,904

6,000

5,025 5,025 4,945 5,000 4,000

3,000 1,918 2,000 1,000

-

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21 4QFY21 1QFY22

Source: Company, Kotak Institutional Equities

Exhibit 3: Hero’s market share in the scooter segment increased by 110 bps on qoq basis in 1QFY22 Market share across two-wheeler segments, March fiscal year-ends, 4QFY18-4QFY21 (%)

1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 1QFY22 Economy bike Bajaj Auto 31.8 37.2 37.4 33.8 33.4 32.4 36.1 25.7 30.9 28.7 26.7 29.3 34.8 Hero Motocorp 58.1 52.7 53.1 60.3 60.6 61.9 59.0 69.3 61.7 64.2 65.2 64.1 55.8 Executive bike Bajaj Auto 3.0 2.1 1.7 1.2 1.1 0.6 0.3 0.0 — — — — — Hero Motocorp 71.0 72.0 72.3 73.5 69.1 68.3 72.8 75.4 79.9 70.5 73.8 68.6 76.4 HMSI 23.7 22.8 20.7 19.2 23.9 26.2 22.8 22.7 16.7 27.8 23.5 29.3 21.6 Premium bike Bajaj Auto 28.3 30.0 33.1 38.5 36.7 35.7 37.9 39.4 49.3 38.7 41.4 37.2 41.0 Hero Motocorp 1.2 1.5 1.9 0.9 1.3 2.5 1.9 0.2 0.6 4.5 3.0 2.6 1.7 HMSI 16.0 14.9 11.6 8.6 12.8 13.9 8.5 8.2 6.9 13.2 10.5 12.1 8.4 Royal Enfield 25.5 24.2 25.8 24.5 22.4 22.9 27.1 27.3 24.9 18.0 21.7 23.4 21.3 Total bike segment Bajaj Auto 16.3 18.6 20.4 20.0 18.4 17.9 20.0 17.8 20.7 17.5 18.5 17.3 19.6 Hero Motocorp 51.3 50.4 49.8 51.4 50.9 51.4 51.8 54.6 55.4 52.3 52.1 48.6 50.5 HMSI 15.8 14.4 12.2 11.0 14.7 15.7 12.5 12.0 9.6 16.6 13.6 17.8 12.9 Scooter segment HMSI 61.2 55.3 51.2 50.4 56.4 58.0 55.9 60.2 50.1 53.2 50.8 52.4 45.0 Hero Motocorp 10.4 10.4 11.1 11.2 7.3 9.1 7.6 4.6 11.5 9.5 10.6 9.2 10.3 TVS 15.1 19.1 21.5 18.7 18.6 20.9 19.7 14.0 23.7 19.2 21.0 20.5 21.0

Source: SIAM, Kotak Institutional Equities

46 KOTAK INSTITUTIONAL EQUITIES RESEARCH Hero Motocorp Automobiles & Components

Exhibit 4: We value HMCL at Rs2,900 per share Valuation of HMCL, March fiscal year-ends, 2023E (Rs per share)

Value per share (Rs) Comments Standalone business 2,844 Based on DCF valuation Stake in Ather Energy and Hero FinCorp 68 Total value per share 2,912 KIE fair value 2,900 Implied multiple of standalone business based on March 2023E EPS 14.4

Source: Company, Kotak Institutional Equities estimates

Exhibit 5: We value HMCL standalone business at Rs2,842 per share based on DCF methodology DCF analysis of HMCL standalone business, March fiscal year-ends, 2019-36E (Rs per share)

CAGR (%) 2019 2020 2021 2022E 2023E 2024E 2025E 2036E 2020-2036E Domestic volumes (mn units) 7.6 6.2 5.6 6.2 6.7 7.2 7.9 14.4 5.4 Export volumes (mn unit) 0.2 0.2 0.2 0.3 0.3 0.3 0.3 2.0 16.3 Total volumes (mn units) 7.8 6.4 5.8 6.4 7.0 7.5 8.2 16.4 6.0 Net revenue 336,505 288,361 308,006 360,281 397,127 433,394 479,307 1,097,007 8.7 EBIT 43,281 31,400 33,424 41,180 45,620 48,105 52,724 98,731 7.4 EBIT (1-tax) 27,022 21,996 25,001 30,803 33,941 35,790 39,226 73,456 Depreciation/amortisation 6,020 8,180 6,769 7,366 7,716 8,066 8,353 15,089 (Increase)/decrease in working capital (19,189) 12,027 10,700 (10,241) 752 (321) 34 (1,007) Capital expenditure (9,179) (13,586) (5,141) (9,000) (7,000) (7,000) (11,478) (18,373) 1.9 Free cash flows 4,674 28,617 37,329 18,927 35,409 36,535 36,135 69,165 5.7 Discounted cash flow 18,927 31,616 29,126 25,720 14,152

WACC used (%) 12.0 Terminal growth rate (%) 2.0 Capitalization rate (%) 10.0 Cash flow in terminal year 14,152 Terminal value 144,355 Sum of free cash flows till terminal year 316,026 EV 460,381 Net cash 107,568 Equity value 567,949 Equity value per share 2,844

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 47 Automobiles & Components Hero Motocorp

Exhibit 6: We expect Hero Motocorp’s volumes to grow at 9% CAGR over 2021-24E Hero MotoCorp volumes estimates, March fiscal year-ends, 2013-24E (mn units, %)

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Motorcycles 5,499,245 5,538,291 5,799,695 5,735,854 5,834,260 6,677,207 7,080,787 5,990,349 5,328,364 5,932,939 6,414,651 6,933,563 Domestic 5,362,730 5,425,118 5,679,634 5,603,136 5,693,681 6,499,051 6,893,602 5,828,782 5,156,401 5,672,041 6,127,664 6,617,877 < 125 cc 5,165,222 5,278,537 5,553,921 5,497,840 5,595,382 6,427,773 6,849,749 5,788,661 5,071,887 5,579,076 6,025,402 6,507,434 > 125 cc 197,508 146,581 125,713 105,296 98,299 71,278 43,853 40,121 84,514 92,965 102,262 110,443 Exports 136,515 113,173 120,061 132,718 140,579 178,156 187,185 161,567 171,963 260,898 286,987 315,686 < 125 cc 122,015 99,946 95,364 101,039 119,532 139,786 153,714 125,178 106,702 176,058 193,664 213,031 > 125 cc 14,500 13,227 24,697 31,679 21,047 38,370 33,471 36,389 65,261 84,839 93,323 102,656 Scooters 574,336 707,604 832,008 896,298 829,786 909,986 739,958 419,370 458,010 515,591 567,150 612,522 Domestic 549,808 690,079 752,052 818,777 789,974 883,667 719,087 402,676 443,458 496,673 546,340 590,047 Exports 24,528 17,525 79,956 77,521 39,812 26,319 20,871 16,694 14,552 18,918 20,809 22,474 Total 2-wheelers 6,073,581 6,245,895 6,631,703 6,632,152 6,664,046 7,587,193 7,820,745 6,409,719 5,786,374 6,448,529 6,981,801 7,546,084 Growth (yoy %) Motorcycles (4.9) 0.7 4.7 (1.1) 1.7 14.4 6.0 (15.4) (11.1) 11.3 8.1 8.1 Domestic (5.1) 1.2 4.7 (1.3) 1.6 14.1 6.1 (15.4) (11.5) 10.0 8.0 8.0 < 125 cc (2.9) 2.2 5.2 (1.0) 1.8 14.9 6.6 (13.0) (13.0) 10.0 8.0 8.0 > 125 cc (40.3) (25.8) (14.2) (16.2) (6.6) (27.5) (38.5) (10.0) (10.0) 10.0 10.0 8.0 Exports 6.2 (17.1) 6.1 10.5 5.9 26.7 5.1 (13.7) 6.4 51.7 10.0 10.0 < 125 cc 6.7 (18.1) (4.6) 6.0 18.3 16.9 10.0 (20.0) (20.0) 65.0 10.0 10.0 > 125 cc 1.8 (8.8) 86.7 28.3 (33.6) 82.3 (12.8) (20.0) (20.0) 30.0 10.0 10.0 Scooters 26.1 23.2 17.6 7.7 (7.4) 9.7 (18.7) (43.3) 9.2 12.6 10.0 8.0 Domestic 31.5 25.5 9.0 8.9 (3.5) 11.9 (18.6) (45.0) (45.0) 12.0 10.0 8.0 Exports (34.3) (28.6) 356.2 (3.0) (48.6) (33.9) (20.7) (40.0) (40.0) 30.0 10.0 8.0 Total 2-wheelers (2.6) 2.8 6.2 0.0 0.5 13.9 3.1 (18.0) (9.7) 11.4 8.3 8.1

Source: Company, Kotak Institutional Equities estimates

Exhibit 7: We expect Hero Motocorp’s adjusted EPS to grow at 15% CAGR over 2021-24E Hero MotoCorp profit model, balance sheet and cash flow model, March fiscal year-ends, 2012-24E (Rs mn)

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Profit model (Rs mn) Net sales 235,790 237,681 252,755 275,853 284,427 285,071 322,352 336,505 288,361 308,006 360,281 397,127 433,394 EBITDA 27,984 24,002 27,129 33,568 44,550 46,414 52,849 49,301 39,580 40,192 48,546 53,336 56,171 Other income 3,646 3,984 4,464 4,735 4,224 5,158 5,211 6,913 7,783 5,799 6,495 6,999 7,709 Interest (213) (119) (118) (111) (49) (61) (63) (86) (220) (218) (100) (50) — Depreciation (2,769) (2,575) (2,802) (3,354) (4,376) (4,927) (5,556) (6,020) (8,180) (6,769) (7,366) (7,716) (8,066) Profit before tax 28,648 25,292 28,673 34,839 44,349 46,585 52,442 50,107 38,963 39,004 47,575 52,569 55,815 Current tax (5,251) (4,869) (9,966) (9,432) (9,609) (10,821) (14,470) (16,010) (10,841) (9,249) (11,894) (13,247) (14,065) Deferred tax 385 759 2,384 — (3,138) (1,993) (999) (248) 1,437 (113) — — — Net profit 23,782 21,182 21,091 25,407 30,844 33,771 36,974 33,849 31,794 29,642 35,681 39,321 41,749 Earnings per share (Rs) 119.1 106.1 105.6 127.2 154.5 169.1 185.1 169.5 159.2 148.4 178.6 196.9 209.0 Balance sheet (Rs mn) Equity 42,898 50,062 55,999 65,413 88,344 101,113 117,689 128,571 141,364 151,984 166,257 181,985 198,685 Deferred tax liability 2,083 1,324 (1,060) (735) 2,225 4,143 5,117 5,365 3,928 4,041 4,041 4,041 4,041 Total Borrowings — — — — — — — — — — — — — Current liabilities 43,794 42,008 44,730 39,490 34,936 41,686 44,583 42,476 42,201 65,585 52,454 56,515 60,917 Total liabilities 98,889 96,417 99,913 104,482 125,505 146,943 167,388 176,412 187,493 221,610 222,752 242,541 263,642 Net fixed assets 38,244 31,331 30,974 36,252 41,898 48,606 49,729 51,604 60,438 60,203 61,837 61,121 60,055 Investments 39,643 36,238 40,888 31,541 45,810 58,899 75,252 59,686 82,227 104,997 83,361 93,361 101,361 Cash 768 1,810 1,175 1,593 1,314 1,367 1,413 1,365 2,419 2,572 26,604 33,801 43,245 Other current assets 20,235 27,037 26,877 35,096 36,484 38,070 40,993 63,757 42,410 53,840 50,950 54,259 58,981 Total assets 98,889 96,417 99,913 104,482 125,505 146,943 167,388 176,412 187,493 221,610 222,752 242,541 263,642 Free cash flow (Rs mn) Operating cash flow excl. working capital 30,504 26,777 29,089 25,859 34,719 36,287 38,208 28,979 42,074 31,027 36,652 40,088 42,106 Working capital changes (6,906) (7,872) 545 (3,359) 3,772 3,993 1,601 (19,189) 12,027 10,700 (10,241) 752 (321) Net financial income 3,433 3,865 4,346 4,624 4,175 5,098 5,149 6,827 7,563 5,580 6,395 6,949 7,709 Cash flow from operations 27,031 22,769 33,980 27,124 42,667 45,378 44,957 16,617 61,664 47,307 32,805 47,790 49,494 Capital expenditure (5,034) (6,004) (9,328) (11,530) (14,604) (11,491) (7,992) (9,179) (13,586) (5,141) (9,000) (7,000) (7,000) Free cash flow 21,997 16,765 24,652 15,595 28,063 33,887 36,965 7,438 48,078 42,166 23,805 40,790 42,494 Ratios Gross profit per vehicle (Rs/unit) 10,100 10,489 11,280 11,809 13,771 14,210 13,708 13,212 14,258 15,620 16,370 16,590 16,338 EBITDA per vehicle (Rs/unit) 4,488 3,952 4,343 5,062 6,717 6,965 6,966 6,304 6,175 6,946 7,528 7,639 7,444 Gross margin (%) 26.4 26.9 27.9 28.3 32.1 33.4 32.2 30.6 31.1 28.9 29.3 29.2 28.4 EBITDA margin (%) 11.9 10.1 10.7 12.2 15.7 16.3 16.4 14.7 13.7 13.0 13.5 13.4 13.0 PAT margin (%) 10.1 8.9 8.3 8.6 11.1 11.8 11.5 10.1 12.6 9.6 9.9 9.9 9.6 Book Value (Rs/share) 225 257 275 324 454 527 615 671 727 781 853 931 1,015 RoAE (%) 61.8 44.0 39.7 39.9 40.7 34.5 32.4 26.4 26.0 19.7 21.9 22.1 21.5

Source: Company, Kotak Institutional Equities estimates

48 KOTAK INSTITUTIONAL EQUITIES RESEARCH REDUCE Aurobindo Pharma (ARBP) https://ultraviewer.et/en/own Pharmaceuticals AUGUST 16, 2021 load.html RESULT Sector view: Attractive

Capital allocation concerns back to the fore. ARBP’s revenues and EBITDA were 8% CMP (`): 761 below our estimates led by US$29 mn qoq decline in the US business primarily due to a Fair Value (`): 790 decline in the oral segment. After turning net cash in FY2021, recent capital allocation BSE-30: 55,437 decisions, particularly Chronos acquisition has brought capital allocation concerns back into focus and will act as an overhang. Progress across other fronts including biosimilars/complex injectables also remain slow. Revise Fair Value to Rs790 to bake in capital allocation concerns. REDUCE. Aurobindo Pharma Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 761/790/REDUCE EPS (Rs) 55.0 57.8 62.6 52-week range (Rs) (high-low) 1,064-738 EPS growth (%) 13.1 5.0 8.3 Mcap (bn) (Rs/US$) 447/6.1 P/E (X) 13.8 13.2 12.2 ADTV-3M (mn) (Rs/US$) 2,065/28 P/B (X) 2.0 1.8 1.6 Shareholding pattern (%) EV/EBITDA (X) 8.2 7.8 6.9 Promoters 51.9 RoE (%) 14.7 13.7 13.2 FPIs/MFs/BFIs 24.4/8.8/3.2 Div. yield (%) 0.5 1.2 1.4 Price performance (%) 1M 3M 12M Sales (Rs bn) 248 249 262 Absolute (20.4) (25.2)) (13.6) EBITDA (Rs bn) 53 56 61 Rel. to BSE-30 (25.5) (39.0)) (58.3) Net profits (Rs bn) 32 34 37 US decline drives underperformance ARBP’s 1QFY22 revenues were 8% below our estimates. YoY numbers (particularly US) are not comparable due to Natrol divestment in 3QFY21. US business at US$364 mn declined US$29 mn qoq (-US$31 mn below our estimates) led by a decline in both orals and injectables business. Oral segment declined US$26 mn qoq, while injectables at US$62mn declined US$6 mn qoq reflecting incremental competition in ertapenem. EU business grew 20% yoy, on a low base, largely in line with our estimates. ARV segment registered a sharp 40% qoq decline affected by higher stocking by agencies during 4QFY21. Emerging markets grew 14% yoy, while API business remained relatively stable yoy and qoq. Gross margins declined 140 bps qoq (-150 bps versus KIE) reflecting a decline in US revenues. Employee expenses were well controlled (+2% qoq) while other expenses and R&D declined sharply by 11% and 22% qoq. EBITDA of Rs12 bn (-5% qoq) missed our estimate by 8% despite sharply lower costs led by lower-than-expected US revenues. Higher other income and a slightly lower tax rate contained PAT miss to 6%. Chronos acquisition brings capital allocation back in focus ARBP started FY2022 on a weak note with a sharp decline in the US business driving underperformance. The company also announced acquisition of (1) 51% stake in Chronos (animal health focused company, US$13 mn annualized sales) for US$57 mn and (2) multiple ANDAs and brands, primarily in OTC space for a consideration of US$104 mn. While management has (1) justified Chronos acquisition as a way of diversifying into fast growing animal health segment with guidance of US$100 mn revenues from this unit in three years (2) clarified that the acquisition is not a related party transaction technically, we believe the deal will add to investors’ concerns around ARBP’s capital allocation given the potential overlap Kumar Gaurav between directors of Chronos and erstwhile Citron. Seven observations post the Unit-1 inspection (already under OAI) will also add to overhangs. On the business front, progress across complex segments (biosimilars, complex injectables) remains relatively slow with Samitinjoy Basak meaningful contribution from these likely only by FY2024. Cut EPS estimates by 3-4%, REDUCE After a weak 1Q, we cut our EPS estimates by 3-4% for FY2022-24E led by downward revision in our US estimates. Given the high US base, we already had our concerns on US growth and the recent capital allocation decision drives our lower target multiple. Revise Fair Value to Rs790 (from Rs930) based on 13X FY2023E EPS. REDUCE

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

Exhibit 1: Aurobindo Pharma - 1QFY22 interim results March fiscal year-ends (Rs mn)

(% chg.) 1QFY22 1QFY22E 1QFY21 4QFY21 1QFY22E 1QFY21 4QFY21 FY2022E FY2021 (% chg.) Sales 57,020 61,802 59,248 60,015 (7.7) (3.8) (5.0) 248,753 247,746 0.4 Raw material (23,662) (24,721) (24,074) (24,071) (4.3) (1.7) (1.7) (100,586) (99,025) 1.6 Employee expenses (8,699) (8,971) (8,880) (8,544) (3.0) (2.0) 1.8 (35,880) (35,350) 1.5 R&D expenses (3,580) (4,600) (2,545) (4,570) (22.2) 40.7 (21.7) (15,423) (14,122) 9.2 Other expenses (8,984) (10,386) (11,175) (10,083) (13.5) (19.6) (10.9) (41,365) (46,416) (10.9) EBITDA 12,094 13,124 12,574 12,747 (7.8) (3.8) (5.1) 55,999 53,334 5.0 Other income/FX losses 1,009 620 1,036 697 2,100 3,255 Interest (129) (170) (211) (182) (161) (745) Depreciation (2,797) (2,650) (2,555) (2,660) (12,815) (10,554) Exceptional 0 0 0 7 0 28,146 Pretax profits 10,177 10,924 10,844 10,609 (6.8) (6.1) (4.1) 45,124 73,436 (38.6) Pretax profits - adjusted 10,177 10,924 10,844 10,602 (6.8) (6.1) (4.0) 45,124 45,290 (0.4) Tax (2,477) (2,731) (3,037) (2,597) (11,281) (20,098) Minority interest - 4 (1) 4 10 10 Net income (adjusted) 7,700 8,197 7,806 8,011 (6.1) (1.4) (3.9) 33,853 32,245 5.0 Adjusted EPS (Rs) 13.1 14.0 13.4 13.7 (6.1) (1.7) (3.9) 57.8 55.0 5.0 Tax rate (%) 24.3 25.0 28.0 24.5 25.0 27.4 Segment wise sales US 26,812 29,151 31,071 28,560 (8.0) (13.7) (6.1) 119,011 123,245 (3.4) US ($ mn) 364 395 412 393 (7.8) (11.7) (7.4) 1,608 1,666 Orals 256 284 275 282 (9.8) (6.9) (9.1) 1,143 1,115 Injectables 62 67 51 68 (7.6) 22.1 (8.8) 265 250 Spectrum 28 27 26 26 2.5 8.3 7.9 112 103 Natrol - - 51 1 88 148 OTC 18 17 10 17 7.1 76.7 7.8 50 EU 15,829 15,992 13,222 15,526 (1.0) 19.7 2.0 66,669 60,608 10.0 ARV 2,964 4,950 4,255 4,912 (40.1) (30.3) (39.7) 16,393 18,628 (12.0) Emerging markets 3,293 3,829 2,896 3,057 (14.0) 13.7 7.7 15,242 14,379 6.0 API 8,119 7,880 7,802 7,943 3.0 4.1 2.2 31,439 30,859 1.9 Total 57,020 61,802 59,248 60,015 (7.7) (3.8) (5.0) 248,753 247,746 0.4 % margin Gross margin 58.5 60.0 59.4 59.9 59.6 60.0 Staff cost 15.3 14.5 15.0 14.2 14.4 14.3 R&D expenses 6.3 7.4 4.3 7.6 6.2 5.7 Other expenditure 15.8 16.8 18.9 16.8 16.6 18.7 EBITDA 21.2 21.2 21.2 21.2 22.5 21.5

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Aurobindo Pharma – changes to estimates March fiscal year-ends, 2022-24E

New estimates Old estimates Changes (%) 2022E 2023E 2024E 2022E 2023E 2024E 2022E 2023E 2024E Sales 248,753 262,007 278,070 256,252 274,205 289,905 (2.9) (4.4) (4.1) Gross profits 148,167 157,763 167,861 155,324 166,891 176,694 (4.6) (5.5) (5.0) EBITDA 55,999 60,743 65,043 56,298 61,874 65,523 (0.5) (1.8) (0.7) PBT 45,124 48,877 52,088 46,469 51,055 53,614 (2.9) (4.3) (2.8) PAT 33,853 36,668 39,076 34,862 38,301 40,221 (2.9) (4.3) (2.8) EPS (Rs) 57.8 62.6 66.7 59.5 65.4 68.7 (2.9) (4.3) (2.8)

Source: Company, Kotak Institutional Equities estimates

50 KOTAK INSTITUTIONAL EQUITIES RESEARCH Aurobindo Pharma Pharmaceuticals

Exhibit 3: Aurobindo Pharma - US sales summary March fiscal year ends, 2015-23E, (Rs mn)

2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E US consolidated sales (US$ mn) 776 945 1,020 1,154 1,299 1,622 1,666 1,608 1,664 1,747 Base + other launches + third party 596 643 667 687 741 881 957 960 956 952 Key non-sterile products 83 111 100 181 168 152 158 170 181 201 Injectables 67 96 148 155 210 277 250 265 303 349 OTC/Natrol 30 95 105 130 180 211 198 88 96 101 Spectrum 101 103 112 108 108 YoY growth (%) US 38 22 8 13 13 25 3 (3) 3 5 Base + other launches + third party 60.3 7.9 3.6 3.1 7.7 18.9 8.6 0.3 (0.4) (0.4) Key non-sterile products 3.4 34.0 (9.4) 80.5 (7.3) (9.7) 3.9 7.8 6.5 11.2 Injectables 55.8 42.6 55.0 4.9 35.3 31.8 (9.7) 6.1 14.1 15.2 OTC/Natrol 216.7 10.0 24.4 38.5 17.1 (6.1) (55.8) 10.0 5.0 Spectrum 2.3 8.8 (3.8) 0.0 % of US sales Base + other launches + third party 77 68 65 60 57 54 57 60 57 55 Key non-sterile products 11 12 10 16 13 9 9 11 11 12 Injectables 9 10 15 13 16 17 15 17 18 20 OTC/Natrol 4 10 10 11 14 13 12 5 6 6 Spectrum 6 6 7 7 6

Source: Company, Kotak Institutional Equities estimates

Exhibit 4: Aurobindo Pharma – ANDA’s pending approval by facility # of ANDA's

Site Details Final approval Tentative approval Under review Total Unit III Oral formulations 113 9 5 127 Unit IV Injectables and opthalmics 89 0 38 127 Unit VIB Cephalosporins oral 11 0 1 12 Unit VII (SEZ) Oral formulations 135 13 21 169 Unit X Oral formulations 24 3 57 84 Unit XII Penicillin oral and injectables 20 0 0 20 Aurolife USA Orals and topicals 26 1 11 38 Auronext Penem injectables 2 0 0 2 Eugia Oral and injectable formulations 16 3 22 41 APL Healthcare Oral formulations 8 0 16 24 Others 3 0 2 5 Total 451 29 174 654

Source: Company

KOTAK INSTITUTIONAL EQUITIES RESEARCH 51 Pharmaceuticals Aurobindo Pharma

Exhibit 5: Aurobindo Pharma – revenues by segments March fiscal-year-ends, 2015-24E (Rs mn)

2015 2016 2017 2018 2019 2020E 2021 2022E 2023E 2024E Formulations 93,744 112,789 120,453 135,332 161,571 200,128 216,860 217,314 229,974 245,429 US 46,474 61,450 68,272 74,421 90,307 114,833 123,245 119,011 123,152 129,263 EU 31,947 32,708 32,771 43,544 49,602 59,222 60,608 66,669 73,336 80,669 RoW 5,684 6,856 7,556 8,971 11,937 13,555 14,379 15,242 16,766 18,443 ARV's 9,639 11,775 11,854 8,396 9,725 12,518 18,628 16,393 16,720 17,055 API's 27,062 27,795 30,420 29,622 34,030 30,838 30,859 31,439 32,032 32,640 Dossier income 77 120 24 80 35 80 28 30 30 30 Total sales 121,205 138,961 150,899 164,998 195,636 230,985 247,746 248,753 262,007 278,070 YoY growth (%) Formulations 67.9 20.3 6.8 12.4 19.4 23.9 8.4 0.2 5.8 6.7 US 36.6 32.2 11.1 9.0 21.3 27.2 7.3 (3.4) 3.5 5.0 EU 264.7 2.4 0.2 32.9 13.9 19.4 2.3 10.0 10.0 10.0 RoW 22.7 20.6 10.2 18.7 33.1 13.6 6.1 6.0 10.0 10.0 ARV's 14.7 22.2 0.7 (29.2) 15.8 28.7 48.8 (12.0) 2.0 2.0 API's (5.5) 2.7 9.4 (2.6) 14.9 (9.4) 0.1 1.9 1.9 1.9 Dossier income NM NM NM NM NM NM NM NM NM NM Total sales 49.6 14.6 8.6 9.3 18.6 18.1 7.3 0.4 5.3 6.1 % of sales Formulations 77.3 81.2 79.8 82.0 82.6 86.6 87.5 87.4 87.8 88.3 US 38.3 44.2 45.2 45.1 46.2 49.7 49.7 47.8 47.0 46.5 EU 26.4 23.5 21.7 26.4 25.4 25.6 24.5 26.8 28.0 29.0 RoW 4.7 4.9 5.0 5.4 6.1 5.9 5.8 6.1 6.4 6.6 ARV's 8.0 8.5 7.9 5.1 5.0 5.4 7.5 6.6 6.4 6.1 API's 22.3 20.0 20.2 18.0 17.4 13.4 12.5 12.6 12.2 11.7 Dossier income 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total 100 100 100 100 100 100 100 100 100 100

Source: Company

52 KOTAK INSTITUTIONAL EQUITIES RESEARCH Aurobindo Pharma Pharmaceuticals

Exhibit 6: Aurobindo Pharma – profit and loss, balance sheet, cash flow model March fiscal year-ends, 2015-24E (Rs mn)

2015 2016 2017 2018 2019 2020 2021E 2022E 2023E 2024E Net revenues 121,205 138,961 150,899 164,998 195,636 230,985 247,746 248,753 262,007 278,070 Gross profit 66,149 77,386 86,556 97,471 108,509 133,633 148,722 148,167 157,763 167,861 Staff costs (13,023) (15,508) (17,678) (21,308) (25,849) (32,192) (35,350) (35,880) (38,392) (41,080) R&D expenses (3,601) (4,770) (5,430) (6,662) (8,716) (9,580) (14,122) (15,423) (15,720) (16,684) Other expenses (23,889) (25,051) (29,106) (31,615) (34,425) (43,218) (45,916) (40,865) (42,908) (45,054) EBITDA 25,636 32,056 34,343 37,885 39,519 48,643 53,334 55,999 60,743 65,043 Depreciation & amortisation (3,326) (3,926) (4,276) (5,580) (6,680) (9,667) (10,554) (12,815) (13,935) (15,055) EBIT 22,310 28,130 30,067 32,306 32,840 38,976 42,780 43,184 46,808 49,988 Net Interest (843) (927) (667) (777) (1,627) (1,598) (745) (161) (131) (101) Other income 808 682 538 1,020 1,157 862 2,773 2,500 2,500 2,500 Exceptional items (incl FX gains/losses) (596) (660) 621 0 (1,483) (658) 29,182 0 0 0 Profit before tax 21,679 27,225 30,608 32,579 31,794 37,692 45,290 45,124 48,877 52,088 Tax & deferred Tax (5,966) (7,444) (7,596) (8,183) (7,269) (9,135) (20,098) (11,281) (12,219) (13,022) Less: minority interest 45 39 5 3 2 15 10 10 10 10 Net income (adjusted) 15,758 19,820 22,655 24,111 24,802 28,507 32,245 33,853 36,668 39,076 EPS (Rs) (adjusted) 27.0 33.9 38.8 41.3 42.5 48.7 55.0 57.8 62.6 66.7 Balance sheet Equity 51,817 71,163 93,740 116,822 138,924 168,105 219,290 247,895 278,266 309,786 Total borrowings 38,636 47,020 33,641 44,825 67,532 54,223 49,711 8,027 6,527 5,027 Other liabilities 38,692 38,811 35,113 49,404 58,089 66,935 69,539 70,653 73,148 75,960 Total liabilities 129,145 156,993 162,494 211,052 264,544 289,263 338,540 326,575 357,941 390,773 Net fixed assets 41,253 52,635 62,919 81,037 101,433 113,824 124,351 137,474 137,539 136,484 Investments 1 1 2,459 3,115 3,602 4,096 4,312 4,312 4,312 4,312 Cash 4,888 8,344 5,135 12,616 19,572 28,422 56,341 11,445 31,376 55,669 Other current assets 83,003 96,013 91,982 114,283 139,937 142,922 153,536 173,343 184,714 194,307 Total assets 129,145 156,993 162,494 211,052 264,544 289,263 338,540 326,575 357,941 390,773 Cashflow statement Operating profit before working capital 25,741 32,337 34,413 37,762 39,021 60,470 56,810 58,949 63,822 68,153 Tax paid (4,956) (7,358) (7,737) (6,986) (7,698) (7,298) (12,853) (11,281) (12,219) (13,022) Change in working capital (8,417) (7,383) 6,110 (11,231) (15,103) (11,240) (10,668) (19,694) (9,875) (7,781) Capital expenditure (7,683) (15,682) (16,942) (13,229) (14,257) (13,828) (14,379) (14,000) (14,000) (14,000) Free cash flow 4,685 1,914 15,844 6,316 1,964 28,104 18,910 13,974 27,728 33,350 Margins and ratios Gross profit margin (%) 54.6 55.7 57.4 59.1 55.5 57.9 60.0 59.6 60.2 60.4 EBITDA margin (%) 21.2 23.1 22.8 23.0 20.2 21.1 21.5 22.5 23.2 23.4 Tax rate (%) 27.5 27.3 26.0 26.0 22.0 24.4 27.0 25.0 25.0 25.0 RoAE (%) 35.2 32.2 27.9 23.2 18.5 18.4 16.6 14.5 13.9 13.3 RoACE (%) 20.5 20.9 19.2 17.4 15.1 15.5 15.4 14.2 14.1 14.6

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 53 REDUCE Ashok Leyland (AL) https://ultraviewer.et/en/own Automobiles & Components AUGUST 13, 2021 load.html RESULT Sector view: Cautious

CV cycle recovery likely in 2HFY22. Ashok Leyland reported 1QFY22 EBITDA loss of CMP (`): 130 Rs1.4 bn, which was higher than our estimate due to higher-than-expected staff costs Fair Value (`): 125 and other expenses. We expect a gradual recovery in the CV cycle due to the pandemic BSE-30: 55,437 but believe most of the potential upside in volumes is priced in at this juncture. Maintain REDUCE with an unchanged Fair Value of Rs125.

Ashok Leyland Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 130/125/REDUCE EPS (Rs) (1.0) 1.6 5.9 52-week range (Rs) (high-low) 143-52 EPS growth (%) (184.6) 256.2 265.4 Mcap (bn) (Rs/US$) 383/5.2 P/E (X) (126.5) 81.0 22.2 ADTV-3M (mn) (Rs/US$) 2,463/33 P/B (X) 5.5 5.3 4.6 Shareholding pattern (%) EV/EBITDA (X) 77.3 25.2 12.3 Promoters 51.1 RoE (%) (4.2) 6.6 22.1 FPIs/MFs/BFIs 18.8/9.7/6.8 Div. yield (%) 0.5 0.5 1.8 Price performance (%) 1M 3M 12M Sales (Rs bn) 153 244 337 Absolute 2.6 14.9 113.3 EBITDA (Rs bn) 5 16 33 Rel. to BSE-30 (2.5) 1.0 68.6 Net profits (Rs bn) (3) 5 17

1QFY22 results- EBITDA loss was higher than our estimate

Ashok Leyland reported 1QFY22 EBITDA loss of Rs1.4 bn, which was higher than our estimate largely due to higher staff costs and other expenses. Revenues increased by 353% yoy due to a low base led by 366% yoy increase in volumes. Net realizations increased by 4% qoq due to higher non-MHCV share in revenues (48% of revenues in 1QFY22 versus 35% in 4QFY21) and 2% price hike taken in the quarter. Gross margin improved by 280 bps qoq largely driven by an increase in share in non-MHCV revenues (LCVs, spare parts, engines and defense), which has a higher gross margin than the MHCV business. Very low volumes in the quarter led to negative operating leverage in the quarter. The company indicated that enquiries are picking up especially from large fleet operators as they are getting financing at very attractive rates, while the small fleet truck owners are facing issues in getting financing. Adjusted PAT loss came in at Rs2.8 bn, which was partly offset by tax gain of Rs1 bn.

The company expects recovery in truck cycle by 2HFY22, certain segments like tipper (used in mining), which form 28% of industry volumes is seeing good pick-up. The company will launch new models in LCV segment to address product gaps and is quite confident of increasing market share in this segment. The company is also focusing on EV business and has set up a separate subsidiary called ‘Switch’.

Maintain REDUCE rating on fair valuations

Overall, we believe the CV cycle has bottomed out and we expect volumes to bounce back from 2HFY22E onwards led by (1) a revival in road freight demand supported by stable freight rates, (2) strong replacement demand aided by favourable government policy and (3) a lower base. However, because of the pandemic, we expect the recovery to be gradual versus our earlier Hitesh Goel expectations of a sharp recovery in the CV cycle. Maintain REDUCE on fair valuation with unchanged FV of Rs125. We value standalone business at 16X June 2023E EPS. Rishi Vora

[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. Ashok Leyland Automobiles & Components

Takeaways from conference call

 The company is optimistic about recovery prospects going into 2HFY22E led by a rebound in economic activity aided by favorable government policy. The LCV segment is likely to remain strong due to (1) a boom in e-commerce demand, (2) strong rural economy and (3) new product launches to address the product gaps in the portfolio and the company remains optimistic about the growth prospects of the LCV segment. The company expects gradually recovery in the domestic bus segment partly aided by a government scheme of Rs180 bn to support augmentation of public bus transport services, which will enable deployment of innovative PPP models to enable private players to finance, acquire, operate, maintain over 20,000 buses. Also, the company expects the STUs to replenish the old bus fleet with the new BS-VI range. The company also highlighted that export is a big opportunity and the company has tied-up with large 6-7 strategic distributors in MENA and African regions. Also, the company has been affected by the constraints in supply of Electronic Control Units (ECUs) owing to the non-availability of Semi- Conductors and is closely monitoring the situation. We expect RM headwinds to persist in 2QFY22 due to a steep increase in steel prices; however the company expects to partly mitigate its impact with price hikes and cost-cutting initiatives.

 The company has given guidance for capex of Rs7.5 bn for FY2022E, capex will be incurred on expansion of product portfolio in LCV segment, modular vehicle program, de- bottlenecking of plants for increase in capacity and towards electrification of LCV portfolio. The company continues to focus on cost reduction initiatives by relooking at every cost item related to distribution, pricing, material, manufacturing, IT, contracting and other overheads. The company will continue to focus on further savings in FY2022E under project Reset. Under project Reset, the company will focus on (1) pricing, (2) network profitability, (3) supply chain de-bottlenecking, (4) material cost reduction and (5) other manufacturing overheads.

 The company has done investments worth Rs3.7 bn in FY2021 (mainly in SWITCH towards electrification and Hinduja Leyland Finance). The company may incur investments of Rs2-2.5 bn mainly for Hinduja Leyland Finance in FY2022.

 Other key points: (1) Channel inventory remains at normalized levels, (2) discounts remain at higher levels in the M&HCV segment, (3) fleet utilization improved in July 2021 from May 2021 levels, (4) overall collection efficiency for Hinduja Leyland Finance stood at 85-90% in July 2021. Hinduja Leyland Finance GNPA stood 4%, NNPA stood at 2% and RoE came in at 12%. The company took a provision of Rs2 bn during FY2021, (5) all the ICDs have been repaid by the group companies as of March 2021 and (6) the company has carved out a separate ESG committee, which will be headed by an independent director.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 55 Automobiles & Components Ashok Leyland

Exhibit 1: 1QFY22 EBITDA loss was higher than our estimates Interim results, March fiscal year-ends (Rs mn)

(% chg.) 1QFY22 1QFY22 1QFY21 4QFY21 1QFY22 1QFY21 4QFY21 FY2022E FY2021 Yoy chg (%) LCV total 8,937 8,937 2,793 17,783 220.0 (49.7) 77,470 48,908 58.4 Domestic bus 513 513 30 1,968 1,610.0 (73.9) 3,812 2,723 40.0 MHCV (<16 ton) 1,602 1,602 283 5,875 466.1 (72.7) 20,788 12,228 70.0 MHCV (>16 ton) 5,745 5,745 410 16,011 1,301.2 (64.1) 46,638 31,092 50.0 MHCV exports 981 981 298 2,214 229.2 (55.7) 6,917 5,764 20.0 Volumes (units) 17,778 17,778 3,814 43,851 366.1 (59.5) 155,624 100,715 54.5 Net realization (Rs) 1,659,911 1,679,647 1,706,529 1,596,427 (1.2) (2.7) 4.0 1,568,058 1,519,282 3.2 Net sales 29,510 29,861 6,509 70,005 (1.2) 353.4 (57.8) 244,028 153,015 59.5 Increase/decrease in stock 2,579 — (180) 1,477 4,295 4,623 Raw materials (24,451) (23,441) (3,994) (55,311) (6.7) 424.0 (59.4) (192,163) (118,656) 61.9 Staff costs (4,243) (3,800) (3,542) (4,016) 11.7 19.8 5.7 (16,363) (15,839) 3.3 Other expenses (4,795) (3,800) (2,125) (6,813) 26.2 125.7 (29.6) (23,467) (17,791) 31.9 Total expenses (30,911) (31,041) (9,841) (64,663) (0.4) 214.1 (52.2) (227,697) (147,663) 54.2 EBITDA (1,401) (1,180) (3,332) 5,342 (58.0) (126.2) 16,331 5,351 205.2 Other income 134 380 256 380 (64.7) (47.7) (64.7) 827 1,195 (30.8) Interest expense (707) (820) (768) (771) (13.7) (7.9) (8.2) (2,767) (3,068) (9.8) Depreciation expense (1,835) (2,185) (1,637) (2,185) (16.0) 12.1 (16.0) (8,093) (7,477) 8.2 Profit before tax before exceptional (3,809) (3,805) (5,481) 2,766 0.1 6,299 (3,999) Exceptional income/(expense) (17) — (17) 374 — (121) Pretax profits (3,826) (3,805) (5,498) 3,139 6,299 (4,119) Tax expense 1,003 — 1,610 (728) (1,587) 983 Profit after tax (2,823) (3,805) (3,888) 2,412 4,711 (3,136) Adjusted PAT (2,810) (3,805) (3,875) 2,132 (26.1) 4,711 (3,016) Adjusted EPS (Rs) (1.0) (1.3) (1.3) 0.7 (26.1) 1.6 (1.0) Raw material cost as % of net sales 74.1 78.5 64.1 76.9 77.0 74.5 Staff cost as % of net sales 14.4 12.7 54.4 5.7 6.7 10.4 Other expenses as % of net sales 16.2 12.7 32.6 9.7 9.6 11.6 Gross margin (%) 25.9 21.5 35.9 23.1 23.0 25.5 EBITDA margin (%) (4.7) (4.0) (51.2) 7.6 6.7 3.5 No. of shares 2,926 2,926 2,926 2,926 2,936 2,936 Tax rate (%) 26.2 — 29.3 23.2 25.2 23.9 Gross profit per vehicle (Rs/vehicle) 429,598 388,694 612,008 368,772 10.5 (29.8) 16.5 360,870 387,047 EBITDA per vehicle (Rs/vehicle) (78,805) (71,438) (873,728) 121,813 10.3 (91.0) (164.7) 104,937 53,134

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Ashok Leyland has lost 210 bps market share qoq in the MHCV segment in 1QFY22 Domestic MHCV segmental quarterly market share of Ashok Leyland, March fiscal year-ends, 2018-21 (%)

4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 1QFY22 Passenger carriers 7.5-12 MT 22.2 20.6 22.9 22.4 19.6 22.5 19.4 19.5 18.9 0.7 20.8 23.7 15.8 35.9 12-16.2 MT 58.8 70.8 58.4 48.4 65.7 67.3 62.3 64.6 58.8 31.8 31.8 31.8 31.8 31.8 Goods carriers 7.5-12 MT 20.5 22.0 24.5 19.4 24.1 24.3 18.1 17.7 16.7 6.3 13.5 12.0 9.8 10.1 12-16.2 MT 36.7 37.5 41.0 36.7 41.3 54.8 34.6 27.7 32.4 22.4 26.5 27.1 23.1 16.2 16.2-25 MT 35.1 30.0 33.6 32.8 35.2 29.3 28.5 26.3 28.0 15.7 36.7 40.8 64.8 78.7 >25 MT 20.7 15.5 22.6 23.8 26.8 33.8 16.6 19.5 26.0 15.9 32.7 34.0 36.0 30.8 Tractor trailers 18.5-40 MT 41.0 19.9 29.4 28.3 53.3 59.6 60.8 49.3 55.2 — — — — 36.9 >40 MT 60.8 47.4 56.0 57.9 61.1 16.9 53.4 41.6 39.4 16.6 33.5 26.2 31.6 25.5 Overall market share 35.2 30.2 35.1 32.0 37.0 34.1 30.4 30.3 31.3 15.6 28.0 28.1 28.6 26.5

Source: SIAM data, Kotak Institutional Equities

56 KOTAK INSTITUTIONAL EQUITIES RESEARCH Ashok Leyland Automobiles & Components

Exhibit 3: Volume mix of tractor trailer segment declined on qoq basis in 1QFY22; exports mix was also higher qoq in 1QFY22 MHCV volume mix of Ashok Leyland across segments, March fiscal year-ends, 2018-21 (%)

4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 1QFY22 Passenger carriers 7.5-12 MT 3.0 4.2 2.4 1.9 2.8 5.1 3.8 3.6 4.5 0.1 0.8 1.0 1.2 2.3 >12 MT 7.0 9.6 7.9 8.0 9.1 10.8 17.1 27.7 23.3 2.7 2.5 2.3 6.4 3.5 Goods carriers 7.5-12 MT 9.3 11.0 12.5 11.7 12.8 12.4 13.4 12.9 10.7 3.6 8.3 6.7 5.0 3.8 12-16.2 MT 9.0 9.8 10.6 13.1 11.4 17.2 13.7 10.6 9.9 21.8 15.5 18.6 17.5 14.3 16.2-25 MT 14.5 16.4 17.3 21.2 17.4 18.3 13.9 15.1 15.1 12.7 17.4 12.9 10.4 12.9 >25 MT 13.2 10.1 12.5 15.8 13.9 24.0 7.5 7.3 8.6 25.2 39.3 40.1 41.5 42.9 Tractor trailers 18.5-40 MT 3.8 1.7 2.5 1.9 3.5 4.3 4.6 2.6 4.2 — — — — 1.2 >40 MT 33.2 24.9 27.2 20.2 23.5 2.9 13.0 10.0 12.7 3.6 4.4 5.7 9.5 8.0 Total domestic 93.0 87.6 92.8 93.8 94.3 94.8 87.1 89.7 89.1 69.8 88.2 87.3 91.5 88.9 Exports 7.0 12.4 7.2 6.2 5.7 5.2 12.9 10.3 10.9 30.2 11.8 12.7 8.5 11.1 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: SIAM data, Kotak Institutional Equities

Exhibit 4: We estimate Ashok Leyland’s volumes to rise by 36% CAGR over FY2021-24E Ashok Leyland volume assumptions, March fiscal year-ends, 2012-24E (units)

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Buses 20,638 18,643 14,951 13,151 19,586 17,725 13,708 16,323 18,141 2,723 3,812 5,337 5,871 Trucks 61,252 51,909 36,876 53,291 79,223 84,588 102,826 115,613 53,267 43,320 67,426 109,405 124,861 LCV 398 360 — — — — — — — — — — — Dost 7,383 34,794 27,283 25,117 28,512 30,951 42,063 53,129 44,912 46,671 74,674 97,076 111,637 Domestic volumes 89,671 105,706 79,110 91,559 127,321 133,264 158,597 185,065 116,320 92,714 145,911 211,818 242,369 Buses 5,207 4,857 4,377 7,571 6,135 4,877 6,512 3,548 4,952 2,832 3,398 4,078 4,690 Trucks 6,944 3,594 4,100 3,670 4,811 6,102 8,386 7,374 2,234 2,932 3,518 4,222 4,644 LCV 774 425 75 1,330 2,091 823 1,285 1,379 1,734 2,237 2,796 3,356 3,758 Export volumes 12,925 8,876 8,552 12,571 13,037 11,802 16,183 12,301 8,920 8,001 9,713 11,656 13,092 Buses 25,845 23,500 19,328 20,722 25,721 22,602 20,220 19,871 23,093 5,555 7,211 9,415 10,561 Trucks 68,196 55,503 40,976 56,961 84,034 90,690 111,212 122,987 55,501 46,252 70,944 113,628 129,505 LCV 1,172 785 75 1,330 2,091 823 1,285 1,379 1,734 2,237 2,796 3,356 3,758 Dost 7,383 34,794 27,283 25,117 28,512 30,951 42,063 53,129 44,912 46,671 74,674 97,076 111,637 Total volumes 102,596 114,582 87,662 104,130 140,358 145,066 174,780 197,366 125,240 100,715 155,624 223,474 255,461 Growth (% yoy) Buses 1.0 (9.7) (19.8) (12.0) 48.9 (9.5) (22.7) 6.0 (17.8) (90.0) 40.0 40.0 10.0 Trucks (2.5) (15.3) (29.0) 44.5 48.7 6.8 21.6 12.4 (53.9) (18.7) 55.6 62.3 14.1 LCV (43.2) (9.5) — — — — — — — — — — — Dost — — (21.6) (7.9) 13.5 8.6 35.9 26.3 (15.5) 3.9 60.0 30.0 15.0 Domestic volumes 6.8 17.9 (25.2) 15.7 39.1 4.7 19.0 16.7 (37.1) (20.3) 57.4 45.2 14.4 Buses 8.3 (6.7) (9.9) 73.0 (19.0) (20.5) 33.5 (50.0) 32.0 (45.0) 20.0 20.0 15.0 Trucks 31.4 (48.2) 14.1 (10.5) 31.1 26.8 37.4 (15.0) (66.1) (20.0) 20.0 20.0 10.0 LCV 372.0 (45.1) (82.4) 1,673.3 57.2 (60.6) 56.1 (20.0) — — 25.0 20.0 12.0 Export volumes 26.0 (31.3) (3.7) 47.0 3.7 (9.5) 37.1 (24.0) (27.5) (10.3) 21.4 20.0 12.3 Buses 2.4 (9.1) (17.8) 7.2 24.1 (12.1) (10.5) (1.7) 16.2 (75.9) 29.8 30.6 12.2 Trucks 0.1 (18.6) (26.2) 39.0 47.5 7.9 22.6 10.6 (54.9) (16.7) 53.4 60.2 14.0 LCV 35.5 (33.0) (90.4) 1,673.3 57.2 (60.6) 56.1 7.3 25.7 29.0 25.0 20.0 12.0 Dost — — (21.6) (7.9) 13.5 8.6 35.9 26.3 (15.5) 3.9 60.0 30.0 15.0 Total volumes 8.9 11.7 (23.5) 18.8 34.8 3.4 20.5 12.9 (36.5) (19.6) 54.5 43.6 14.3

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 57 Automobiles & Components Ashok Leyland

Exhibit 5: We estimate Ashok Leyland’s EBITDA to rise by 96% CAGR over FY2021-24E Profit and loss, balance sheet and cash flow statement, March fiscal year-ends, 2013-24E (Rs mn)

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Profit model Volumes 114,582 87,662 104,130 140,358 145,066 174,780 197,366 125,240 100,715 155,624 223,474 255,461 Net sales 124,812 99,434 135,622 189,373 201,401 263,564 290,550 174,675 153,015 244,028 337,237 384,334 EBITDA 8,765 1,666 10,266 22,546 22,026 29,635 31,357 11,737 5,351 16,331 32,545 40,453 Other income 291 492 982 1,176 1,363 1,966 1,099 1,233 1,195 827 1,015 1,148 Interest (3,436) (4,356) (3,673) (2,476) (1,554) (1,473) (704) (1,095) (3,068) (2,767) (1,960) (960) Depreciation (3,808) (3,770) (4,163) (4,879) (5,179) (5,985) (6,210) (6,698) (7,477) (8,093) (8,586) (9,137) Prior period items/ extraordinary items 2,896 5,057 1,009 (8,102) (3,354) (285) (575) (1,558) (121) — — — Profit before tax 4,707 (912) 4,422 8,266 13,301 23,858 24,968 3,619 (4,119) 6,299 23,013 31,505 Current tax — — (39) (4,220) (3,137) (6,773) (3,782) (717) — (1,587) (5,799) (7,939) Deferred tax (370) 1,206 (1,035) (149) 2,067 92 (1,354) (507) 983 — — — Net profit 4,337 294 3,348 4,045 10,164 17,086 21,186 2,395 (4,119) 4,711 17,214 23,566 Adjusted profit 1,442 (4,763) 2,584 9,938 14,579 17,462 20,407 3,564 (3,016) 4,711 17,214 23,566 Earnings per share (Rs) 0.5 (1.6) 0.9 3.4 5.0 6.0 7.0 1.2 (1.0) 1.6 5.9 8.0 Balance sheet Equity 44,551 44,479 51,187 54,071 61,261 72,455 83,324 72,640 69,772 72,599 82,927 97,067 Deferred tax liability 5,274 4,068 5,103 3,291 1,269 2,986 2,497 2,648 1,666 1,666 1,666 1,666 Total Borrowings 43,554 46,903 33,497 24,150 21,448 6,126 6,324 32,814 39,163 30,000 19,000 5,000 Current liabilities 37,588 32,630 43,328 46,225 56,422 91,797 90,099 55,794 73,899 79,624 100,336 111,627 Total liabilities 130,967 128,080 133,115 127,737 140,400 173,364 182,244 163,896 184,499 183,889 203,928 215,359 Net fixed assets 59,708 58,414 53,757 48,678 51,767 59,706 62,721 69,913 69,723 68,631 66,045 65,408 Investments 23,376 27,897 26,488 19,804 28,789 56,067 26,365 27,196 30,687 30,481 32,481 34,481 Cash 139 117 7,513 15,627 9,120 10,422 13,736 13,225 8,230 1,503 1,472 1,257 Other current assets 46,861 39,612 42,080 29,280 38,992 27,608 52,895 24,957 49,953 57,368 78,026 88,308 Miscellaneous expenditure 882 2,040 3,277 14,347 11,734 19,562 26,527 28,605 25,906 25,906 25,906 25,906 Total assets 130,967 128,080 133,115 127,737 140,400 173,364 182,244 163,896 184,499 183,889 203,928 215,359 Free cash flow Operating cash flow (excluding working capital) 7,768 1,396 6,811 18,624 23,740 26,745 26,014 11,167 6,270 14,744 26,745 32,514 Working capital (485) 4,168 6,948 (1,795) (2,192) 29,689 (29,638) (1,756) (6,058) (1,690) 54 1,010 Capital Expenditure (11,410) (3,029) (170) 992 (7,109) (17,295) (10,837) (17,968) (11,343) (9,000) (8,000) (10,500) Free cash flow (7,488) (1,774) 9,943 15,831 13,574 38,219 (14,751) (8,896) (13,254) 2,114 17,854 23,212 Ratios Gross margin (%) 26.9 23.5 26.5 30.3 30.6 30.1 28.8 29.2 25.5 23.0 24.6 24.9 EBITDA margin (%) 7.0 1.7 7.6 11.9 10.9 11.2 10.8 6.7 3.5 6.7 9.7 10.5 PAT margin (%) 3.5 0.3 2.5 2.1 6.1 6.5 6.8 1.4 (2.1) 1.9 5.1 6.1 Average selling price per vehicle (Rs/vehicle) 1,089,281 1,134,292 1,302,428 1,349,214 1,388,342 1,507,976 1,472,136 1,394,720 1,519,282 1,568,058 1,509,065 1,504,472 Gross profit per vehicle (Rs/vehicle) 293,071 267,029 345,430 409,128 425,099 453,445 424,358 407,084 387,047 360,870 371,903 374,259 EBITDA per vehicle (Rs/vehicle) 76,493 19,001 98,590 160,635 151,835 169,557 158,879 93,712 53,134 104,937 145,630 158,353 Debt/equity (X) 0.9 1.0 0.6 0.6 0.4 0.1 0.1 0.7 0.9 0.6 0.3 0.1 Net debt/equity (X) 0.9 1.0 0.5 0.2 0.2 (0.1) (0.1) 0.4 0.7 0.6 0.3 0.1 Book Value , excluding revaluation reserve (Rs/share) 17.0 16.6 19.2 19.6 21.4 25.8 29.2 25.6 24.3 25.3 28.8 33.6 RoAE (%) 9.0 0.6 6.4 6.9 20.4 24.9 24.6 3.0 (4.3) 6.5 21.7 25.7 RoACE (%) 8.3 4.1 6.5 7.4 19.6 27.2 32.0 4.5 (1.0) 8.3 23.9 31.2

Source: Company, Kotak Institutional Equities estimates

58 KOTAK INSTITUTIONAL EQUITIES RESEARCH ADD Indraprastha Gas (IGL) https://ultraviewer.et/en/own Gas Utilities AUGUST 16, 2021 load.html RESULT Sector view: Attractive

In-line results. IGL’s performance was broadly in line with our expectations in 1QFY22 CMP (`): 535 as modestly lower-than-anticipated volumes were partly offset by higher unit margins. Fair Value (`): 585 We retain ADD rating with a DCF-based Fair Value of Rs585 (Rs575 earlier). We expect BSE-30: 55,437 IGL to benefit from healthy growth in volumes, underpinned by robust CNG vehicle additions and we see limited risk to unit margins from an expected sharp increase in domestic gas prices given significant price differential versus liquid auto fuels. Indraprastha Gas Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 535/585/ADD EPS (Rs) 16.8 21.1 26.2 52-week range (Rs) (high-low) 595-364 EPS growth (%) 0.4 26.0 24.0 Mcap (bn) (Rs/US$) 375/5.1 P/E (X) 31.9 25.3 20.4 ADTV-3M (mn) (Rs/US$) 1,655/22 P/B (X) 6.4 5.4 4.7 Shareholding pattern (%) EV/EBITDA (X) 24.5 18.7 14.8 Promoters 45.0 RoE (%) 21.4 23.2 24.6 FPIs/MFs/BFIs 23.8/6.4/9.4 Div. yield (%) 0.7 0.9 1.3 Price performance (%) 1M 3M 12M Sales (Rs bn) 49 64 97 Absolute (5.5) 3.5 36.0 EBITDA (Rs bn) 15 19 24 Rel. to BSE-30 (10.6) (10.4) (8.7) Net profits (Rs bn) 12 15 18

Expectedly subdued results due to Covid-related impact on volumes

IGL’s EBITDA was marginally below our estimate at Rs3.8 bn in 1QFY22, declining 23% qoq underpinned by a 22% qoq decline in volumes to 5.3 mcm/d and 2% moderation in unit margins. Net income was a modest 2% below our estimate at Rs2.4 bn (EPS of Rs3.5), declining 26% qoq. Income from associates, CUGL and MNGL, declined 24% qoq to Rs337 mn.

 Covid-impacted volumes. Overall volumes declined 22% qoq to 5.3 mcm/d in 1QFY22 after recovering to pre-Covid levels of 6.8 mcm/d in the preceding quarter. CNG volumes declined 24% and overall PNG volumes declined 14% reflecting the impact of restrictions in Delhi and NCR region. Volumes declined 17% qoq for the I&C segment, 2% for domestic PNG and 19% for other CGD entities in Gurugram and Faridabad. Overall volumes nearly doubled yoy from the Covid-impacted low base of 1QFY21.

 Improvement in gross margins offset by negative operating leverage. Unit gross margins increased by 6% qoq to Rs14.4/scm boosted by (1) modestly higher CNG and domestic PNG margins post price hikes undertaken in March 2021 and (2) higher I&C PNG margins due to moderation in LNG prices. However, higher gross margins were offset by negative operating leverage, resulting in unit EBITDA remaining sequentially steady at Rs7.9/scm versus Rs8/scm in the previous quarter.

Retain ADD with a revised Fair Value of Rs585; limited risk from higher domestic gas prices

We broadly retain our FY2022-24 EPS estimates and maintain ADD rating on the stock with a revised Fair Value of Rs585 (Rs575 earlier) on rollover of our DCF model. We expect IGL to deliver a healthy growth in volumes as the situation normalizes underpinned by a meaningful Tarun Lakhotia pickup in pace of CNG vehicle additions given the significant pricing advantage of CNG over liquid auto fuels; we seek comfort from a large estimated addition of 135k CNG vehicles during Hemang Khanna FY2021 despite Covid-related challenges. Our calculations suggest that IGL will have to raise CNG price by ~Rs5-6/kg to fully pass on the expected increase in domestic gas price in the upcoming revision from October 1—the quantum is large; however, it may not be difficult to manage given the recent sharp inflation in prices of liquid auto fuels.

[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. Gas Utilities Indraprastha Gas

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

(% chg.) 1QFY22 1QFY22E 1QFY21 4QFY21 1QFY22E 1QFY21 4QFY21 FY2022E FY2021 (% chg.) Net sales 12,574 12,866 6,386 15,506 (2.3) 96.9 (18.9) 64,132 49,408 29.8 Total expenditure (8,765) (9,022) (5,551) (10,589) (2.8) 57.9 (17.2) (44,946) (34,578) 30.0 Raw material (5,620) (5,780) (2,991) (7,139) (2.8) 87.9 (21.3) (30,545) (22,295) 37.0 Staff cost (374) (397) (314) (343) (5.9) 19.1 9.1 (1,669) (1,344) 24.2 Other expenditure (2,771) (2,845) (2,246) (3,107) (2.6) 23.4 (10.8) (12,732) (10,939) 16.4 EBITDA 3,809 3,844 834 4,918 (0.9) 356.4 (22.6) 19,186 14,830 29.4 Other income 298 334 306 280 (10.8) (2.6) 6.6 2,136 1,502 42.2 Finance cost (29) (36) (24) (36) (119) (113) Depreciation (778) (802) (682) (761) (3.0) 14.1 2.2 (3,209) (2,904) 10.5 Pre-tax profits 3,299 3,341 435 4,400 (1.2) 658.0 (25.0) 17,994 13,315 35.1 Extraordinary income — — — — — — Tax (857) (859) (117) (1,090) (4,625) (3,258) Net income 2,443 2,482 318 3,310 (1.6) 667.2 (26.2) 13,369 10,057 32.9 Adjusted net income 2,443 2,482 318 3,310 (1.6) 667.2 (26.2) 13,369 10,057 32.9 Adjusted EPS (Rs) 3.5 3.5 0.5 4.7 (1.6) 667.2 (26.2) 19.1 14.4 32.9 Income from associates 337 350 60 442 (3.8) 461.0 (23.8) 1,762 1,259 40.0 Tax rate (%) 26.0 25.7 26.9 24.8 25.7 24.5

Other details Volume (mcm/d) 5.3 5.4 2.7 6.8 (2.4) 95.9 (22.1) 6.5 5.3 23.0 Volume (mscm) 484 496 247 614 (2.4) 95.9 (21.2) 2,390 1,944 23.0 CNG (mn kgs.) 233 236 105 307 (1.4) 121.6 (24.3) 1,208 956 26.4 PNG (mscm) 152 159 101 176 (4.6) 50.5 (13.6) 675 587 14.9 Industrial/commercial 74 77 41 89 (3.9) 80.6 (16.8) 321 285 12.5 Domestic PNG 44 46 43 45 (5.2) 2.1 (2.5) 194 169 15.0 Natural gas 34 36 17 42 (5.4) 100.4 (18.9) 160 133 20.0 Net realization (Rs/scm) 26.0 25.9 25.9 25.3 0.2 0.5 2.9 26.8 25.4 5.6 Raw material cost (Rs/scm) 11.6 11.7 12.1 11.6 (0.3) (4.1) (0.1) 12.8 11.5 11.4 Gross margin (Rs/scm) 14.4 14.3 13.7 13.6 0.6 4.6 5.5 14.1 13.9 0.7 Other operating costs (Rs/scm) 6.5 6.5 10.4 5.6 (0.6) (37.3) 15.7 6.0 6.3 (4.7) Operating profit (Rs/scm) 7.9 7.8 3.4 8.0 1.6 133.0 (1.7) 8.0 7.6 5.2

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Volumes increased sharply on a low base in 1QFY22 Growth in CNG and PNG volumes, 1QFY13 onwards (%)

(%) Overall CNG sales PNG sales 125

100

75

50

25

0

(25)

(50)

(75)

4QFY13 1QFY14 2QFY14 3QFY16 4QFY16 1QFY17 2QFY17 3QFY19 4QFY19 1QFY20 2QFY20 2QFY13 3QFY13 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 1QFY22 1QFY13

Source: Company, Kotak Institutional Equities

60 KOTAK INSTITUTIONAL EQUITIES RESEARCH Indraprastha Gas Gas Utilities

Exhibit 3: Meaningful additions to LGVs and cars/taxis during FY2021 despite Covid-related challenges IGL’s estimate of CNG vehicles additions versus CNG volume growth, FY2011 onwards

('000) (%) 150 Auto/LGV Cars/Taxi Buses CNG volume growth (%) 20

1 16 130 12 2 110 59 8 2 90 3 4 102 77 0 70 1 (4) 82 2 69 1 50 (8) 41 54 1 76 34 38 48 (12) 30 39 36 37 (16) 10 20 21 18 18 17 12 10 (20) (0) (0) (0) 2 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 (10) (24)

Source: Company, Kotak Institutional Equities

Exhibit 4: IGL's gross margins on CNG and domestic PNG have remained elevated in recent months Estimated gross margins on CNG and domestic PNG for IGL, April 2018 onwards (Rs/scm)

(Rs/scm) CNG Domestic PNG 21

20

19

18

17

16

15

14

13

12

Jun-18

Jun-19

Jun-20

Jun-21

Oct-18

Feb-19

Oct-19

Feb-20

Oct-20

Feb-21

Apr-18

Apr-19

Apr-20

Apr-21

Dec-18

Dec-19

Dec-20

Aug-18

Aug-19 Aug-20 Aug-21

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 61 Gas Utilities Indraprastha Gas

Exhibit 5: Discount of CNG to liquid auto fuels has increased significantly in the current year Competitiveness of CNG versus other auto fuels in Mumbai, March fiscal year-ends, 2016 onwards

2016 2017 2018 2019 2020 2021 Current Fuel prices in Delhi CNG (Rs/kg) 37.5 36.6 38.8 44.1 44.3 43.4 44.3 Petrol (Rs/liter) 61.9 65.9 68.8 75.4 72.7 80.8 101.8 Diesel (Rs/liter) 47.1 54.5 58.3 68.2 65.8 73.6 89.9 CNG discount to petrol (%) 39.3 44.4 43.6 41.6 39.1 46.4 56.5 CNG discount to diesel (%) 20.3 32.8 33.4 35.4 32.7 41.1 50.7 Fuel costs (Rs/km) CNG 2.1 2.0 2.2 2.4 2.5 2.4 2.5 Petrol 5.2 5.5 5.7 6.3 6.1 6.7 8.5 Diesel 3.1 3.6 3.9 4.5 4.4 4.9 6.0 CNG discount to petrol (%) 59.6 62.9 62.4 61.0 59.4 64.2 71.0 CNG discount to diesel (%) 33.6 44.0 44.5 46.2 43.9 50.9 58.9

Source: Company, Kotak Institutional Equities estimates

Exhibit 6: Volumes to recover during FY2022; margins to remain elevated Key assumptions for IGL, March fiscal year-ends, 2018-24E

2018 2019 2020 2021 2022E 2023E 2024E Sales volume (mn scm) CNG 1,412 1,602 1,738 1,357 1,716 2,121 2,343 PNG 479 553 619 587 675 771 861 Domestic 109 120 141 169 194 219 244 Commercial/Industrial 204 252 298 285 321 369 424 Other CGD companies 166 181 180 133 160 184 193 Total volumes 1,891 2,155 2,357 1,944 2,390 2,892 3,204 CNG (mn kgs) 1,018 1,148 1,234 956 1,208 1,494 1,650 Average daily volumes (mcm/d) 5.2 5.9 6.4 5.3 6.5 7.9 8.8 Growth in volumes (%) 12.9 14.0 9.4 (17.5) 23.0 21.0 10.8

Operating metrics (Rs/scm) Gross margin 11.1 11.0 11.9 13.9 14.1 14.2 14.3 Operating cost 5.2 5.2 5.5 6.3 6.0 5.9 6.0 Operating profit 5.9 5.8 6.4 7.6 8.0 8.2 8.3

Source: Company, Kotak Institutional Equities estimates

62 KOTAK INSTITUTIONAL EQUITIES RESEARCH Indraprastha Gas Gas Utilities

Exhibit 7: IGL stock is trading at 23X 12-month forward EPS 12-month forward P/E for IGL (X)

(X) 12-month forward P/E for IGL (X) 35

30

25

20

15

10

5

-

Oct-11

Oct-12

Oct-13

Oct-14

Oct-15

Oct-16

Oct-17

Oct-18

Oct-19

Oct-20

Apr-11

Apr-12

Apr-13

Apr-14

Apr-15

Apr-16

Apr-17

Apr-18

Apr-19

Apr-20 Apr-21

Source: Bloomberg, Kotak Institutional Equities estimates

Exhibit 8: We value IGL stock at Rs585 using DCF methodology Calculation of equity value using discounted cash flow analysis (Rs mn)

2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E Assumptions Volumes (mcm/d) 6.5 7.9 8.8 9.6 10.4 11.2 11.9 12.6 13.3 13.9 Growth (%) 23.0 21.0 10.8 9.6 8.5 7.4 6.5 5.8 5.1 4.8 Unit margins (Rs/scm) 8.0 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 9.0 DCF model EBITDA 19,186 23,748 26,604 29,645 32,418 35,235 37,811 40,652 43,200 45,812 Adjusted tax expense (3,828) (4,861) (5,433) (6,088) (6,727) (7,392) (7,996) (8,670) (9,272) (9,892) Change in working capital 2,196 4,235 2,083 2,530 2,507 1,833 1,826 1,772 1,722 1,704 Operating cash flow 17,553 23,123 23,254 26,087 28,198 29,675 31,640 33,753 35,650 37,624 Capital expenditure (10,250) (14,500) (14,500) (10,250) (8,298) (8,325) (8,272) (8,132) (7,901) (7,578) Free cash flow 7,303 8,623 8,754 15,837 19,901 21,350 23,369 25,621 27,749 30,045 Discounted cash flow-now 6,874 7,311 6,685 10,896 12,335 11,922 11,752 11,608 11,326 11,048 Discounted cash flow-1 year forward 8,115 7,423 12,095 13,692 13,233 13,049 12,885 12,572 12,264 Discounted cash flow-2 year forward 8,239 13,429 15,198 14,689 14,484 14,307 13,955 13,613

Now +1-year +2-years Discount rate (%) 11.0% 11.0% 11.0% Total PV of free cash flow 101,758 116,928 132,971 Terminal value assumption Growth in perpetuity 5.0% 5.0% 5.0% Sensitivity of 12-month fair value to WACC and perpetual growth FCF in terminal year 30,045 31,548 33,125 Perpetual growth (%) Exit FCF multiple (X) 17.5 17.5 17.5 585 3.0% 4.0% 5.0% 6.0% 7.0% Exit EV/EBITDA multiple (X) 11.5 12.1 12.7 10.0% 564 614 683 787 961 Terminal value 525,796 552,086 579,690 10.5% 532 573 630 711 839 PV of terminal value 193,347 203,014 213,165 11.0% 504 539 585 650 747 Value of extant CGD business 295,105 319,943 346,136 11.5% 480 509 548 600 676 Value of 50% stake in CUGL and MNGL 44,058 53,971 60,717 WACC(%) 12.0% 458 483 516 559 619 Net debt (27,000) (32,460) (37,900) Equity value 366,163 406,373 444,754 Shares outstanding (mn) 700 700 700 Fair value of IGL (Rs), including dividends 523 585 647

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 63 Gas Utilities Indraprastha Gas

Exhibit 9: Profit model, balance sheet, cash model March fiscal year-ends, 2018-24E (Rs mn)

2018 2019 2020 2021 2022E 2023E 2024E Profit model (Rs mn) Net sales 45,921 57,648 64,853 49,408 64,132 96,530 108,660 EBITDA 11,144 12,570 15,196 14,830 19,186 23,748 26,604 Other income 1,021 1,462 1,564 1,502 2,136 2,543 2,890 Finance cost (17) (21) (81) (113) (119) (125) (131) Depreciation (1,813) (2,011) (2,523) (2,904) (3,209) (3,835) (4,568) Pretax profits 10,335 12,000 14,157 13,315 17,994 22,331 24,795 Extraordinary items — — 817 — — — — Current tax (3,169) (3,703) (3,345) (2,955) (4,347) (5,482) (6,142) Deferred tax (448) (430) (263) (303) (278) (253) (228) Adjusted net profits including associates 7,217 8,421 11,673 11,726 14,779 18,323 20,368 Adjusted EPS including associates (Rs) 10.3 12.0 16.7 16.8 21.1 26.2 29.1

Balance sheet (Rs mn) Total equity 35,129 41,299 50,624 58,719 68,745 80,362 92,338 Deferred tax liability 2,253 2,678 2,119 2,422 2,700 2,954 3,182 Borrowings — — — — — — — Customer deposits 5,447 6,493 7,716 9,266 10,740 12,225 13,648 Currrent liabilities 6,453 9,024 11,264 15,468 17,017 21,717 23,107 Total liabilities and equity 49,282 59,493 71,723 85,874 99,202 117,257 132,275 Cash 5,580 6,071 21,799 11,323 16,783 22,223 26,579 Current assets 4,044 4,433 5,226 4,615 5,442 7,391 8,121 Total fixed assets 28,181 33,549 42,116 51,678 58,719 69,384 79,316 Investments 11,477 15,440 2,581 18,258 18,258 18,258 18,258 Total assets 49,282 59,493 71,723 85,874 99,202 117,257 132,275

Free cash flow (Rs mn) Operating cash flow, excl. working capital 7,952 8,901 11,887 11,987 14,720 18,141 20,331 Working capital 841 2,671 1,720 3,473 2,196 4,235 2,083 Capital expenditure (4,699) (6,807) (9,632) (8,829) (10,250) (14,500) (14,500) Other income 959 490 452 1,349 2,136 2,543 2,890 Free cash flow 5,053 5,254 4,427 7,979 8,802 10,419 10,805

Ratios (%) Net debt/equity (15.9) (14.7) (43.1) (19.3) (24.4) (27.7) (28.8) RoAE 19.6 19.3 23.5 17.7 20.2 21.4 20.6 RoACE 17.1 16.9 19.1 15.5 17.6 18.8 18.1 Adjusted CRoCI 22.9 21.6 23.7 19.9 21.0 21.5 20.4

Source: Company, Kotak Institutional Equities estimates

64 KOTAK INSTITUTIONAL EQUITIES RESEARCH SELL Bayer Cropscience (BYRCS) https://ultraviewer.et/en/own Fertilizers & Agricultural Chemicals AUGUST 14, 2021 load.html RESULT Sector view: Cautious

Challenging year ahead. BYRCS’ 1QFY22 was better than we expected, recording a CMP (`): 6,091 flat EBITDA on a yoy basis. Better agrochemical sales masked weaker seeds performance. Fair Value (`): 4,700 We cut our earnings by 7%/7% for FY2022/2023 reflecting gross margin pressure. Our BSE-30: 55,437 FV implies 27X FY2023 EPS, higher than other peers, reflecting R&D prowess of BYRCS in a volatile and industry. Bayer Cropscience Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 6,091/4,700/SELL EPS (Rs) 129.9 148.3 171.8 52-week range (Rs) (high-low) 6,601-4,922 EPS growth (%) 0.5 14.1 15.9 Mcap (bn) (Rs/US$) 274/3.7 P/E (X) 46.9 41.1 35.5 ADTV-3M (mn) (Rs/US$) 154/2 P/B (X) 10.7 8.9 7.4 Shareholding pattern (%) EV/EBITDA (X) 32.2 29.5 24.9 Promoters 71.4 RoE (%) 22.8 23.6 22.7 FPIs/MFs/BFIs 2.9/9.5/2.9 Div. yield (%) 0.4 0.5 0.6 Price performance (%) 1M 3M 12M Sales (Rs bn) 43 48 53 Absolute 7.1 11.0 0.6 EBITDA (Rs bn) 8 9 10 Rel. to BSE-30 2.0 (2.9) (44.2) Net profits (Rs bn) 6 7 8

Stable performance in a challenging quarter

BYRCS’s 1QFY22 results were ahead of our estimates. Revenue grew 15% yoy and was 15% ahead of our estimates. However, increased raw material costs and possibly lower contribution of high margin seeds to overall sales led to 290 bps yoy drop in gross margin to 44.5% in 1QFY22 versus our expectation of 44.0%. Other expenses saw a sharp jump of 24% yoy led by higher logistical costs and normalization of costs versus last year. This led to flat EBITDA on a yoy basis and 13% above our estimates. This was a good performance from BYRCS considering that (1) corn sales are still impacted due to suppressed prices, (2) lower monsoon and sowing versus last year and (3) a very high base in 1QFY21 (61% yoy EBITDA growth in 1QFY21). BYRCS has reported 26% CAGR EBITDA growth over 1QFY20.

One step forward, one step back

In its AGM earlier this week, BYRCS noted that the top five products account for 50% of revenue and comprise of Dekalb (Corn seeds), Laudis (ag-chem), Roundup (Glyphosate herbicide), Nativo (ag-chem fungicide), Solomon (ag-chem, imidcloropid). BYRCS has gone through the worst in the past few years with pricing pressure/higher competition on key products like Confidor, Regent and Fame in agrochemicals as well as Hybrid rice seeds Arize and AI exports to group entities; all of these used to be top revenue contributors earlier. FY2022 is going to be impacted by pressure on higher margin seeds business similar to FY2021. Synergy benefits from Monsanto on margins are already in the base but largely offset by gross margin pressure over FY2020-FY2022E. Recently launched wheat herbicide is promising and can turn out to be a blockbuster.

Steady defensive name; not much valuation comfort in our DCF-based model Ritesh Gupta

BYRCS’ product pipeline is promising with molecules like Tetranilliprole (insecticide) and newly launched wheat herbicide Pyroxasulfone. We don’t see any catalysts for the seeds portfolio to Prasenjit Bhuiya start delivering this year. Glyphosate, on other hand, has seen strong pricing benefits and may come down gradually. Our 15 year DCF builds 10% revenue CAGR, 128 days of working capital and 150 bps of margin expansion leading to FV of Rs4,700 implying 27X FY2023 EPS. We like BYRCS’ product pipeline and strong farmer engagement but believe current valuations do not factor in the volatility associated with monsoon and domestic agrochemicals.

[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. Fertilizers & Agricultural Chemicals Bayer Cropscience

Exhibit 1: BYRCS’ 1QFY22 results were ahead of our expectations led by new launches in crop protection and product liquidation Interim reported results of Bayer Cropscience, March fiscal year-ends (Rs mn)

Change (%) 2 yr CAGR 1QFY22 1QFY22E 1QFY21 4QFY21 1QFY22E 1QFY21 4QFY21 1QFY20 Growth (%) FY2021 FY2020 YoY(%) FY2022E Sales 14,159 12,278 12,278 7,337 15.3 15.3 93.0 9,504 22.1 42,613 36,094 18% 47,788 Raw material cost (7,862) (6,876) (6,466) (4,066) 14.3 21.6 93.4 (4,777) 28.3 (24,459) (19,098) 28% (28,052) Employee cost (1,070) (985) (938) (967) 8.6 14.1 10.7 (964) 5.4 (3,622) (3,616) 0% (3,876) Other expenses (2,004) (1,570) (1,621) (1,477) 27.6 23.6 35.7 (1,745) 7.2 (6,415) (6,116) 5% (7,051) EBITDA 3,223 2,847 3,253 827 13.2 (0.9) 289.7 2,018 26.4 8,117 7,264 12% 8,810 Other income 148 165 149 159 (10.3) (0.7) (6.9) 186 (10.8) 638 660 -3% 800 Depreciation and amortization (146) (225) (237) (216) (35.1) (38.4) (32.4) (140) 2.1 (735) (653) 13% (801) Interest cost (25) (40) (27) (35) (37.5) (7.4) (28.6) (29) (7.2) (126) (138) -9% (135) Profit before tax 3,200 2,747 3,138 735 16.5 2.0 335.4 2,035 25.4 7,894 7,133 11% 8,674 Extraordinaries — — (12) 63 — (1,221) (1,302) — Income tax (663) (659) (609) (179) (424) (1,742) (1,086) 60% (2,017) Net income 2,537 2,088 2,517 619 21.5 0.8 309.9 1,611 25.5 4,931 4,745 4% 6,657 Adjusted net income 2,537 2,088 2,527 571 21.5 0.4 344.0 1,611 25.5 5,883 5,849 1% 6,657 Adjusted EPS (Rs) 56.5 46.5 56.3 12.7 21.5 0.4 344.0 34.5 28.0 131.0 129.3 1% 148.3 Key ratios (%) Gross margins 44.5 44.0 47.3 44.6 47 bps (286)bps (11)bps 49.7 (526)bps 42.6 47.1 (449)bps 41.3 EBITDA margins 22.8 23.2 26.5 11.3 (43)bps (373)bps 1,149 bps 21.2 153 bps 19.0 20.1 (108)bps 18.4 Tax rate 20.7 24.0 19.4 24.4 20.8 22.1 15.2 23.3

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: BYRCS’ 1QFY22 performance has been better than most of its peers Performance of domestic agri-chem segment for key companies, 1QFY19 onwards (Rs mn)

Quarterly Annual 5-year CAGR 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 1QFY22 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2016-21 Revenues Bayer CropScience 8,318 12,339 7,751 2,522 9,504 13,463 8,540 4,587 12,278 13,816 9,182 7,337 14,159 27,690 28,028 27,099 30,930 36,094 42,613 9.0 Dhanuka 2,130 3,834 2,168 1,927 2,190 4,020 2,715 2,276 3,738 4,424 2,957 2,755 3,638 8,310 8,816 9,626 10,058 11,201 13,874 10.8 GAVL (a) 1,913 2,048 1,082 452 2,093 2,002 912 670 2,082 1,763 1,035 935 2,405 3,826 4,661 5,142 5,495 5,677 5,815 8.7 PI Industries (a) 2,914 3,209 1,657 1,945 2,535 2,824 2,054 1,720 4,460 3,590 2,600 1,910 3,870 8,528 8,971 8,220 9,724 9,000 12,550 8.0 Rallis (b) 3,524 6,132 4,171 3,387 6,232 7,488 5,332 3,463 6,627 7,250 5,705 4,713 7,405 12,880 14,005 14,984 17,215 22,514 24,294 13.5 UPL (a) 12,480 10,770 4,860 5,070 11,930 11,950 7,500 6,900 15,110 14,090 9,060 8,510 19,140 26,859 29,615 31,890 33,180 38,280 46,770 11.7 Growth (%) Bayer CropScience 19.2 0.2 61.6 (16.0) 14.3 9.1 10.2 81.9 29.2 2.6 7.5 60.0 15.3 (25.6) 1.2 (3.3) 14.1 16.7 18.1 Dhanuka 2.4 10.2 (2.1) 4.1 2.8 4.9 25.2 18.1 70.7 10.0 8.9 21.1 (2.7) 5.2 6.1 9.2 4.5 11.4 23.9 GAVL (a) 32.0 (23.4) 9.4 (2.2) (15.7) 48.2 (0.5) (11.9) 13.5 39.6 15.5 14.1 21.8 10.3 6.9 3.3 2.4 PI Industries (a) 13.8 24.0 9.0 4.0 (13.0) (12.0) 24.0 (11.6) 75.9 27.1 26.6 11.0 (13.2) 6.8 5.2 (8.4) 18.3 (7.4) 39.4 Rallis (b) 44.7 11.8 16.8 (3.0) 76.8 22.1 27.8 2.2 6.3 (3.2) 7.0 36.1 11.7 (15.2) 8.7 7.0 14.9 30.8 7.9 UPL (a) 11.6 8.0 (20.8) 10.2 (4.4) 11.0 54.3 36.1 26.7 17.9 20.8 23.3 26.7 2.4 10.3 7.7 4.0 15.4 22.2 Gross margins (%) Bayer CropScience 52.6 41.8 45.9 64.8 49.7 42.1 46.0 58.3 47.3 38.7 40.6 44.6 44.5 42.8 41.3 40.9 47.6 47.1 42.6 Dhanuka 35.2 40.2 36.6 42.0 34.1 35.0 35.1 42.8 34.3 38.0 37.1 42.9 33.7 39.1 43.4 41.6 38.7 36.5 37.8 PI Industries (a) 46.6 42.9 46.6 45.7 44.8 42.4 46.6 46.8 42.0 44.1 46.9 42.1 43.8 45.8 47.1 50.7 45.2 45.5 43.7 Rallis (b) 33.4 41.1 39.2 43.2 37.4 36.1 37.9 43.5 39.7 38.1 38.5 41.4 38.8 42.8 42.2 41.1 39.5 38.0 39.3 UPL (c) 55.5 55.9 54.8 41.7 46.8 50.6 50.2 43.9 54.7 49.6 54.9 45.9 100.0 52.3 53.0 54.6 53.4 48.1 51.6 EBITDA margins (%) Bayer CropScience 27.6 19.5 10.7 (36.7) 21.2 22.7 18.8 12.7 26.5 21.5 11.5 11.3 22.8 15.7 14.8 15.1 14.9 20.1 19.0 Dhanuka 7.4 19.7 9.9 17.1 9.1 18.3 12.6 20.1 17.5 20.1 17.0 23.4 16.8 17.1 19.3 17.3 14.5 15.5 19.4 PI Industries (a) 19.5 NA NA NA NA NA NA NA NA NA NA NA NA 20.6 24.3 21.7 NA NA NA Rallis (b) 5.1 21.1 6.5 1.1 15.3 15.9 10.3 (2.9) 19.4 16.1 10.5 3.8 16.4 16.0 16.8 15.0 10.3 11.5 13.3 UPL (c) 19.3 18.5 19.1 15.1 16.7 18.5 23.6 17.1 23.4 18.6 24.1 20.7 20.8 17.6 18.8 19.0 18.4 18.7 21.6 Notes: (a) Data pertains to domestic agri business segment (b) Includes revenue from exports and seeds business (c) Data pertains to global operations

Source: Company, Kotak Institutional Equities

66 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bayer Cropscience Fertilizers & Agricultural Chemicals

Exhibit 3: BYRCS is trading at a premium to other pure play domestic agrochemicals players Comparative valuation of domestic ag-chem companies, March fiscal year-ends

MCap P/E (X) EV/EBITDA (X) RoE (%) CAGR FY2021-24 (%) (US$ mn) Rating FV (Rs) CMP (Rs) Upside (%) FY2022 FY2023 FY2022 FY2023 FY2022 FY2023 Revenue EBITDA EPS UPL 8,018 SELL 760 779 (2) 15.7 13.4 8.2 7.0 19.7 19.9 8.5 12.8 22.7 PI Industries 6,419 ADD 3,350 3,142 7 50.6 39.0 33.6 24.8 16.4 18.3 28.0 33.8 29.1 Bayer CropSc 3,686 SELL 4,700 6,091 (23) 41.1 35.5 29.5 24.9 23.6 22.7 11.3 13.3 17.6 Godrej Agrovet 1,694 SELL 525 655 (20) 31.5 27.7 19.4 17.0 15.5 16.1 14.5 17.5 16.5 Rallis 769 REDUCE 300 294 2 20.4 17.7 17.3 14.9 16.5 16.7 13.1 15.3 17.6 Dhanuka 564 SELL 795 900 (12) 20.7 18.7 15.0 13.5 23.8 22.6 11.4 11.1 9.0

Source: Kotak Institutional Equities estimates, Bloomberg

We cut our EBITDA estimates to reflect margin pressure

We keep our revenue estimates unchanged, but cut FY2022/23 EBITDA estimates by 7%/6% to reflect pressure on gross margin and higher other expenses. Gross margin pressure is led by a lower contribution of higher margin corn seeds due to suppressed corn prices, increased raw material prices and higher sales of glyphosates. We also increase other expenses to reflect higher logistical costs and normalization of costs like travelling and advertisements. We use DCF to value the company and arrive at a FV of Rs4,700 from Rs4,600 earlier, primarily led by the roll forward of our model.

Exhibit 4: We cut our estimates primarily to reflect gross margin pressure and higher logistical costs Change in estimates

New estimates Old estimates Change in estimates FY2022E FY2023E FY2022E FY2023E FY2022E FY2023E Revenue 47,788 53,078 47,788 53,078 0% 0% EBITDA 8,810 10,225 9,433 10,916 -7% -6% EBITDA margin (%) 18% 19% 20% 21% PAT 6,657 7,714 7,135 8,241 -7% -6% EPS (Rs) 148 172 159 184 -7% -7%

Source: Kotak Institutional Equities estimates

Exhibit 5: BYRCS is trading at 32X consensus one-year forward price to earnings Bayer Cropscience’s consensus one year forward price to earnings multiple

50

45

40

35

30

25

20

15

10

Jul-20 Jul-21

Jan-20 Jan-21

Jun-20 Jun-21

Oct-20 Feb-20 Feb-21

Apr-20 Sep-20 Apr-21

Dec-20

Nov-20

Mar-20 Mar-21

Aug-20 Aug-21 May-21 May-20

Source: Bloomberg, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 67 Fertilizers & Agricultural Chemicals Bayer Cropscience

Exhibit 6: We arrive at a DCF based fair value of Rs4,700/share DCF-based valuation of Bayer Cropscience, March fiscal year-ends, 2023-37E (Rs mn)

2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2032E 2037E Net revenues 53,078 58,804 64,685 71,153 78,269 86,096 94,705 104,176 114,593 126,053 203,009 EBIT 9,340 10,824 11,971 13,240 14,642 16,192 17,906 19,801 21,896 24,211 38,993 EBIT margin (%) 17.6 18.4 18.5 18.6 18.7 18.8 18.9 19.0 19.1 19.2 19.2 EBIT*(1-tax rate) 7,115 8,258 9,133 10,101 11,170 12,353 13,661 15,106 16,704 18,471 29,747 Tax 2,225 2,567 2,839 3,139 3,472 3,839 4,246 4,695 5,192 5,741 9,245 Depreciation / amortisation 885 978 1,076 1,184 1,302 1,413 1,533 1,664 1,805 1,958 2,499 Working capital outlay (1,698) (1,888) (1,347) (1,482) (1,630) (1,793) (1,972) (2,169) (2,386) (2,625) (4,228) Capital expenditure (550) (605) (704) (902) (992) (1,091) (1,200) (1,320) (1,452) (1,598) (2,573) Free cash flows 5,752 6,743 8,158 8,901 9,851 10,882 12,021 13,280 14,670 16,206 25,446 Year for discounting 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 15.0 Discounted cash flow 5,182 5,473 5,965 5,863 5,846 5,818 5,790 5,762 5,735 5,708 5,318 Key assumptions NPV calculation WACC (%) 11.0 NPV of free cash flow 84,490 Terminal growth rate (%) 6.0 Terminal value 112,748 Capitalization rate (%) 5.0 Enterprise value 197,238 Terminal value calculation Net debt (13,924) Cash flow in terminal year 25,446 Equity value 211,162 Terminal value 539,454 Shares o/s (# mn) 45 Discounted terminal value 112,748 NPV /share (Rs) 4,700

Source: Kotak Institutional Equities estimates

68 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bayer Cropscience Fertilizers & Agricultural Chemicals

Exhibit 7: Profit and loss model, balance sheet and cashflow statement, March fiscal year-ends,2017-24E

2017 2018 2019 2020 2021E 2022E 2023E 2024E Profit model (Rs mn) Sales 28,028 27,099 31,673 36,094 42,613 47,788 53,078 58,804 EBITDA 4,136 4,094 4,811 7,264 8,117 8,810 10,225 11,803 Other income 701 388 531 660 638 800 922 1,006 Interest (69) (113) (104) (138) (126) (135) (146) (157) Depreciation (289) (331) (438) (653) (735) (801) (885) (978) Profit before tax 4,479 4,038 4,800 7,133 7,894 8,674 10,116 11,674 Extraordinary items — — — (1,302) (1,221) — — — Tax expenses (1,569) (1,037) (1,429) (1,086) (1,742) (2,017) (2,403) (2,772) Reported PAT 2,910 3,001 3,371 4,745 4,931 6,657 7,714 8,901 Adjusted PAT 2,910 3,001 3,371 5,805 5,883 6,657 7,714 8,901 Adjusted EPS (Rs) 82 87 78 129 131 148 172 198 Balance sheet (Rs mn) Equity 20,567 17,783 22,394 25,725 25,503 30,829 37,000 44,121 Borrowings — — — 15 — — — — Long-term liabilities 20 156 1 138 141 141 141 141 Current liabilities and provisions 7,667 7,409 13,097 12,479 16,749 17,787 19,649 21,662 Total liabilities 28,254 25,348 35,492 38,357 42,393 48,757 56,790 65,923 Net fixed assets 3,354 3,403 4,565 4,939 4,710 4,408 4,073 3,699 Investments/other long-term assets 307 302 398 575 479 479 479 479 Cash and cash equivalent 8,887 4,178 5,820 10,710 12,095 13,924 18,732 24,338 Current assets 15,706 17,465 24,709 22,133 25,109 29,946 33,506 37,407 Total assets 28,254 25,348 35,492 38,357 42,393 48,757 56,790 65,923 Free cash flow (Rs mn) Operating cash flow 3,082 3,462 3,426 6,378 6,941 6,794 7,822 9,030 Working capital change (1,509) (2,248) 902 281 (74) (3,799) (1,698) (1,888) Capital expenditure (net) (493) (419) (4,505) (279) (312) (500) (550) (605) Free cash flow 1,080 795 (177) 6,380 6,555 2,495 5,575 6,537 Ratios (%) EBITDA margin 14.8 15.1 15.2 20.1 19.0 18.4 19.3 20.1 Net debt/equity (X) (0.4) (0.2) (0.3) (0.4) (0.5) (0.5) (0.5) (0.6) Book value (Rs/share) 581 518 521 573 568 687 824 983 Adjusted RoAE 14.1 16.9 15.1 22.6 23.1 21.6 20.8 20.2 Adjusted RoACE 19.5 20.0 17.8 36.8 42.1 35.4 38.0 40.7

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 69 BUY Cummins India (KKC) https://ultraviewer.et/en/own Capital Goods AUGUST 13, 2021 load.html RESULT Sector view: Attractive

Riding on ability to outgrow market and favorable externalities. Outperformance CMP (`): 976 in 1Q results suggests strong recovery in exports and the ability to pass on RM cost Fair Value (`): 1,080 increases. A combination of favorable externalities, new product introductions and BSE-30: 55,437 deepening presence in distribution will drive steady mid-double-digit revenue growth for CIL. Faith shown by parent in India capabilities bodes well for acceleration in exports business over time. We retain estimates and increase FV to Rs1,080.

Cummins India Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 976/1,080/BUY EPS (Rs) 22.9 31.1 40.0 52-week range (Rs) (high-low) 989-414 EPS growth (%) (10.2) 35.7 28.8 Mcap (bn) (Rs/US$) 271/3.7 P/E (X) 42.6 31.4 24.4 ADTV-3M (mn) (Rs/US$) 1,364/18 P/B (X) 6.1 5.5 5.0 Shareholding pattern (%) EV/EBITDA (X) 44.5 29.9 22.1 Promoters 51.0 RoE (%) 14.8 18.6 21.7 FPIs/MFs/BFIs 10.9/15.8/9.3 Div. yield (%) 1.4 1.7 2.3 Price performance (%) 1M 3M 12M Sales (Rs bn) 43 58 69 Absolute 13.2 17.1 123.4 EBITDA (Rs bn) 6 8 11 Rel. to BSE-30 8.1 3.3 78.7 Net profits (Rs bn) 6 9 11

Favorable externalities across product segments to drive profitable growth The strong interest of global OEMs in the construction and compressor segments in setting up export capacities in India is a harbinger of good times for CIL’s industrial portfolio as it fuels the growth momentum that CIL is seeing in related domestic business. This trend is also catching the eye of the global parent and opening up prospects for direct captive exports of industrial engines. Another positive externality highlighted by CIL is of consolidation of supply chain and thus addition of OEM account for incumbents such as CIL. The impetus on governments to curb the impact of emissions on the environment would enhance reliance on technology, a positive for CIL. Lastly, the passing of the US$1 tn infrastructure budget in the US would also open up the export market for CIL. North America accounts for a modest sub-5% share of CIL’s exports, which CIL expects to grow to 10-15% share over time.

New product introductions and deepening presence in distribution to drive outperformance Beyond the growth in end markets, CIL shared impetus to outgrow the same through new product introductions. These are well spread across the four key product segments and across key kVA ranges. Specifically, CIL is bullish about its deepening presence in the distribution business. Within this segment, CIL shared several low-hanging fruits in aftermarket, services and product/parts business. The starting point for the deepening presence is challenging with CIL lacking a basic online presence for select offerings for its customers.

Confidence shown by global parent bodes well for accelerating growth in exports over time The recent launch of QSK60 G3 product for data center and large infrastructure applications makes India only the second location after UK to manufacture the engine. The fact that China continues to import the product in spite of a higher domestic market for the product versus Aditya Mongia China reflects the confidence of the global parent in India in terms of local supply chain, low cost and presence of control. This bodes well for India’s prospects to become a manufacturing Teena Virmani hub for Cummins over time.

1Q results reflects strength in exports and pricing; we increase FV to Rs1,080 from Rs1,050 Cummins reported a 11% beat in standalone EBITDA on the back of marginal 2% beat on revenues and qoq improvement in gross margin. We broadly retain estimates and increase FV to Rs1,080 on roll-forward.

[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. Cummins India Capital Goods

Exhibit 1: 1Q results were ahead of our estimates on better-than-expected export revenues Cummins – 1QFY22 standalone results – key numbers (Rs mn)

% change % change 1QFY22 1QFY22E 1QFY21 4QFY21 vs est. yoy qoq FY2022E FY2021 yoy Sales 11,845 11,615 4,982 12,465 2 138 (5) 57,666 43,292 33 Expenses (10,357) (10,279) (4,953) (10,790) 1 109 (4) (49,178) (37,497) 31 Stock 861 — (109) 476 (892) 81 — 186 Raw material (8,629) (7,652) (2,819) (8,806) 206 (2) (37,377) (27,792) Employee (1,349) (1,371) (1,150) (1,336) 17 1 (5,556) (4,926) Other Exp (1,240) (1,256) (876) (1,124) 41 10 (6,245) (4,965) EBITDA 1,488 1,336 29 1,675 11 5,031 (11) 8,487 5,795 46 Other income 549 1,038 1,022 1,116 3,973 3,702 Interest (18) (2) (43) (33) (162) (162) Depreciation (309) (318) (303) (306) (1,271) (1,255) PBT 1,710 2,055 705 2,452 (17) 143 (30) 11,028 8,080 36 Tax (403) (486) (179) (595) (2,605) (1,901) Net profit 1,307 1,568 526 1,857 (17) 149 (30) 8,422 6,179 36 Extraordinary items 1,059 — — — 1,059 - RPAT 2,366 1,568 526 1,857 51 350 27 9,481 6,179 53 Recurring EPS (RS) 4.7 5.7 1.9 6.7 (17) 149 (30) 30.4 22.3 36 Key ratios (%) Raw material/Sales 65.6 65.9 58.8 66.8 64.8 63.8 Employee exp./Sales 11.4 11.8 23.1 10.7 9.6 11.4 Other exp./Sales 10.5 10.8 17.6 9.0 10.8 11.5 EBITDA margin 12.6 11.5 0.6 13.4 14.7 13.4 PBT Margin 14.4 17.7 14.1 19.7 19.1 18.7 Tax rate 23.6 23.7 25.4 24.3 23.6 23.5 PAT margin 11.0 13.5 10.5 14.9 14.6 14.3 Segmental revenues % change % change 1QFY22 1QFY22E 1QFY21 4QFY21 vs est. yoy qoq FY2022E FY2021 yoy Power Generation 3,510 3,024 960 3,550 16 266 (1) 16,532 11,320 46 Industrial 2,180 2,480 800 2,680 (12) 173 (19) 11,004 7,740 42 Distribution 3,000 3,020 1,830 3,370 (1) 64 (11) 13,823 12,020 15 Exports 3,080 2,898 1,260 2,500 6 144 23 15,501 11,480 35 Total 11,671 11,422 4,841 12,309 2 141 (5) 56,889 42,561 34

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 71 Capital Goods Cummins India

Exhibit 2: Exports registered a healthy qoq growth and power generation revenues were largely flat on a qoq basis Trajectory of Cummins' segmental sales, March fiscal year-ends, 1QFY14-1QFY22

(Rs bn) (Rs bn) Power generation Industrials 3.0 5 2.8 2.7 2.7 4.3 4.2 2.5 2.6 4.1 2.4 2.5 2.5 4.03.93.93.9 2.5 4 3.7 3.6 3.6 2.1 2.2 3.4 3.43.43.5 3.4 3.5 2.02.0 2.1 3.2 3.3 3.3 3.2 3.3 1.9 2.0 3.0 2.9 2.92.9 2.0 1.8 2.7 2.8 1.7 1.7 1.7 1.7 1.7 3 2.6 2.7 2.6 1.5 1.5 1.6 2.4 2.3 1.4 1.5 1.2 1.31.3 1.1 1.2 1.2 2 1.0 1.0 0.8 1.0 1 0.5

0 0.0

1QFY14

3QFY14

1QFY15

3QFY15

1QFY16

3QFY16

1QFY17

3QFY17

1QFY18

3QFY18

1QFY19

3QFY19

1QFY20

3QFY20

1QFY21

3QFY21

1QFY22

1QFY14

3QFY14

1QFY15

3QFY15

1QFY16

3QFY16

1QFY17

3QFY17

1QFY18

3QFY18

1QFY19

3QFY19

1QFY20

3QFY20

1QFY21

3QFY21 1QFY22

(Rs bn) (Rs bn) Exports Distribution 6 4.5 4.1 5.3 4.8 4.0 3.6 3.7 5 4.6 3.4 3.53.5 3.5 3.4 4.4 4.54.5 4.44.54.4 3.5 3.3 3.2 3.3 3.3 3.2 4.1 4.2 3.0 3.9 3.9 3.9 3.9 4.0 2.8 2.9 4 3.7 3.7 3.7 3.7 3.0 2.6 2.6 2.6 2.7 2.5 3.4 3.3 3.33.33.4 2.4 2.42.4 2.52.4 2.4 2.5 3.0 3.0 3.1 2.5 2.3 2.2 2.8 2.0 2.1 3 2.7 2.6 1.8 2.5 2.0 1.5 2 1.3 1.0 1 0.5

0.0 0

1QFY14

3QFY14

1QFY15

3QFY15

1QFY16

3QFY16

1QFY17

3QFY17

1QFY18

3QFY18

1QFY19

3QFY19

1QFY20

3QFY20

1QFY21

3QFY21

1QFY22

1QFY14

3QFY14

1QFY15

3QFY15

1QFY16

3QFY16

1QFY17

3QFY17

1QFY18

3QFY18

1QFY19

3QFY19

1QFY20

3QFY20

1QFY21 3QFY21 1QFY22

Source: Company, Kotak Institutional Equities

Exhibit 3: Gross margin decline yoy was driven by higher commodity prices but has improved qoq Impact of raw material cost and currency on margin, March fiscal year-ends, 1QFY13-2QFY22 to date

Raw material to sales (RHS, %) Pig iron index (LHS, X) Inverse currency index (LHS, X)

(X) (%) 170 70 150 68 66 130 64 110 62

90 60

67

66

66

66

65

65

65

65

65

65

65 65

64 58

64

64

64

63

63

63

63 63

70 63

62

62

62

62

62

61

61

61 61

61 56 50 59 54

30 52

2QFY14 3QFY14 4QFY14 2QFY15 3QFY15 4QFY15 1QFY16 3QFY16 4QFY16 1QFY17 4QFY17 1QFY18 2QFY18 4QFY18 1QFY19 2QFY19 3QFY19 1QFY20 2QFY20 3QFY20 2QFY21 3QFY21 4QFY21 1QFY15 2QFY16 2QFY17 3QFY17 3QFY18 4QFY19 4QFY20 1QFY21 1QFY22 1QFY14

Source: Company, Bloomberg, Kotak Institutional Equities

72 KOTAK INSTITUTIONAL EQUITIES RESEARCH Cummins India Capital Goods

Exhibit 4: Both key parts of exports portfolio grew yoy Breakup of Cummins India's exports, March fiscal year-ends, 1QFY21 and 1QFY22

Export sales breakup in 1QFY22 (Rs3.1 bn) Export sales breakup in 1QFY21 (Rs1.12 bn)

Non-HHP, 1,159 , 41% HHP, 550 , HHP, 1,701 49% Non-HHP, , 59% 570 , 51%

Source: Company, Kotak Institutional Equities

Exhibit 5: We expect powergen revenues to grow at a CAGR of 14% over FY2020-24 Breakup of powergen revenues of Cummins India, March fiscal year-ends, 2011-24E (Rs bn)

<160 kVa 160-380 kVA 450-625 kVa 750 kVA 28

24 14% CAGR 24.0 20.9 20 15.8 16.5 16 14.3

12

8

4

0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 73 Capital Goods Cummins India

Exhibit 6: We expect industrial revenues to reach grow at a CAGR of 9% during FY2020-24 Breakup of industrial revenues of Cummins India, March fiscal year-ends, 2011-24E (Rs bn)

Compressor Construction Mining Locomotives Rest smaller 16 16% CAGR 14 12.2 12 11.0 9.8 10 9.4

8

6

4

2

0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E

Source: Company, Kotak Institutional Equities estimates

Exhibit 7: We expect export revenues to cross FY2019 levels in FY2023 Breakup of export revenues of Cummins India, March fiscal year-ends, 2011-24E (Rs bn)

LHP Mid-range Heavy Duty HHP Spares/others 25

19.4 20 16.6 15.5 15 12.9

10

5

0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E

Source: Company, Kotak Institutional Equities estimates

74 KOTAK INSTITUTIONAL EQUITIES RESEARCH Cummins India Capital Goods

Exhibit 8: Cummins India’s key export markets of Middle East and Africa are dependent on oil price which has started moving up in the past few months Trend in price of Brent crude, December calendar year-ends, May-2013 – Aug-2021 (US$/bbl)

Crude Brent (US$/bbl) 140

120

100

80

60

40

20

- Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 Jul-20 Jul-21

Source: Bloomberg, Kotak Institutional Equities

Exhibit 9: Change in estimates for Cummins India, March fiscal year-ends, 2019-24E (Rs mn)

New estimates Old estimates % revision 2019 2020 2021 2022E 2023E 2024E 2022E 2023E 2024E 2022E 2023E 2024E Revenues 56,590 51,577 43,292 57,666 69,268 78,768 57,666 69,268 78,768 — — — Power generation 16,000 14,350 11,320 16,532 20,893 24,027 16,532 20,893 24,027 — — — Industrials 9,500 9,750 7,740 11,004 12,236 13,487 11,004 12,236 13,487 — — — Distribution 13,500 13,400 12,020 13,823 15,896 17,804 13,823 15,896 17,804 — — — Exports 16,500 12,890 11,480 15,501 19,388 22,542 15,501 19,388 22,542 — — — EBITDA 8,641 5,863 5,795 8,487 11,345 13,022 8,438 11,292 12,964 1 0 0 EBITDA margin (%) 15.3 11.4 13.4 14.7 16.4 16.5 14.6 16.3 16.5 8 bps 7 bps 7 bps Other income 2,928 3,315 3,702 3,973 4,349 4,970 4,153 4,607 5,125 (4) (6) (3) Interest (162) (203) (162) (162) (162) (162) (8) (8) (8) 1,928 1,928 1,928 Depreciation (1,103) (1,187) (1,255) (1,271) (1,243) (1,214) (1,271) (1,243) (1,214) — — — PBT 10,303 7,789 8,080 11,028 14,289 16,617 11,312 14,648 16,867 (3) (2) (1) Tax rate (%) 29.9 16.7 23.5 23.6 23.8 23.9 23.7 23.8 23.9 -4 bps 2 bps 3 bps PAT 7,226 6,293 6,179 9,481 10,884 12,645 8,635 11,161 12,842 10 (2) (2) Adjusted PAT 7,306 7,072 6,350 8,617 11,099 12,882 8,839 11,386 13,090 (3) (3) (2) EPS (Rs) 26.4 25.5 22.9 31.1 40.0 46.5 31.9 41.1 47.2 (3) (3) (2) Growth (%) Revenues 11 (9) (16) 33 20 14 33 20 14 Power generation 18 (10) (21) 46 26 15 46 26 15 Industrials 23 3 (21) 42 11 10 42 11 10 Distribution 11 (1) (10) 15 15 12 15 15 12 Exports 5 (22) (11) 35 25 16 35 25 16 EBITDA 18 (32) (1) 46 34 15 46 34 15 PAT 8 (3) (10) 36 29 16 39 29 15

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 75 Capital Goods Cummins India

Exhibit 10: Standalone balance sheet, profit model and cash flow statement of Cummins, March fiscal year-ends, 2010-24E (Rs mn)

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Profit model Net revenue 41,172 46,012 39,767 44,058 47,088 50,773 50,825 56,590 51,577 43,292 57,666 69,268 78,768 Total operating costs (34,200) (37,545) (32,799) (36,708) (39,337) (42,755) (43,501) (47,949) (45,715) (37,497) (49,178) (57,923) (65,746) EBITDA 6,972 8,467 6,967 7,351 7,751 8,018 7,325 8,641 5,863 5,795 8,487 11,345 13,022 Other operational income 651 922 776 847 1,212 1,192 1,307 1,333 961 732 776 823 874 Other income 1,233 1,949 1,777 2,040 2,259 2,080 2,285 2,928 3,315 3,702 3,973 4,349 4,970 PBDIT 8,206 10,416 8,744 9,390 10,010 10,098 9,609 11,569 9,178 9,497 12,461 15,694 17,992 Financial charges (54) (46) (42) (45) (96) (168) (148) (162) (203) (162) (162) (162) (162) Depreciation (420) (473) (528) (797) (810) (848) (938) (1,103) (1,187) (1,255) (1,271) (1,243) (1,214) Pre-tax profit 7,732 9,897 8,175 8,548 9,104 9,082 8,523 10,303 7,789 8,080 11,028 14,289 16,617 Taxation (2,282) (2,872) (2,175) (1,515) (1,561) (1,736) (1,826) (3,078) (1,297) (1,901) (2,605) (3,405) (3,971) PAT 5,913 7,641 6,000 7,859 7,543 7,346 7,085 7,226 6,293 6,179 9,481 10,884 12,645 Adjusted PAT 5,788 7,348 5,999 6,805 7,179 7,280 6,745 7,306 7,072 6,350 8,617 11,099 12,882 Balance sheet Shareholders funds 20,432 23,867 25,652 28,865 34,813 37,422 39,861 41,305 41,750 44,068 48,818 53,609 59,182 Loan funds — — — — — 2,508 2,515 3,092 4,854 156 156 156 156 Total source of funds 20,432 23,867 25,652 28,865 34,813 39,930 42,376 44,396 46,603 44,224 48,975 53,765 59,338 Net block 4,649 4,934 9,192 12,340 12,894 12,322 12,882 12,848 12,277 11,654 11,382 11,139 11,425 Net fixed assets 6,273 8,066 12,215 14,763 18,086 16,954 13,261 14,433 13,077 12,929 12,657 12,414 12,700 Investments and goodwill 5,975 6,276 4,954 4,650 3,336 9,753 12,798 10,133 18,606 13,892 13,892 13,892 13,892 Cash balances 2,235 3,547 865 799 897 1,291 4,709 7,379 4,538 9,652 13,123 16,119 19,738 Net current assets excluding cash 5,879 6,307 8,083 9,284 12,246 11,501 11,866 13,400 11,038 8,377 10,126 12,163 13,832 Total application of funds 20,432 23,867 25,652 28,865 34,813 39,930 42,376 44,396 46,603 44,224 48,975 53,765 59,338 Cash flow statement Operating profit before working capital changes 7,404 8,826 7,525 8,006 8,579 8,951 8,537 10,202 7,455 7,683 13,520 15,694 17,992 Change in working capital (825) (883) (1,607) (1,142) 33 371 (370) (2,341) 144 1,028 (1,749) (2,037) (1,668) Tax paid (2,155) (2,657) (2,308) (1,853) (1,694) (1,867) (1,823) (2,361) (1,609) (832) (2,605) (3,405) (3,971) Cashflow from operating activites 4,425 5,286 3,611 5,012 6,918 7,456 6,344 5,500 5,990 7,879 9,165 10,251 12,353 Fixed assets (2,281) (2,148) (4,678) (3,304) (4,899) (2,315) (905) (2,734) (2,366) (1,140) (801) (1,000) (1,500) Free cash flow 2,144 3,138 (1,068) 1,708 2,019 5,141 5,440 2,767 3,623 6,738 8,364 9,251 10,853 Growth (%) Revenue growth 1.8 11.8 (13.6) 10.8 6.9 7.8 0.1 11.3 (8.9) (16.1) 33.2 20.1 13.7 EBITDA growth (8.7) 21.4 (17.7) 5.5 5.4 3.4 (8.7) 18.0 (32.2) (1.2) 46.5 33.7 14.8 Recurring PAT growth (7.5) 26.9 (18.4) 13.4 5.5 1.4 (7.3) 8.3 (3.2) (10.2) 35.7 28.8 16.1 Key ratios (%) Gross margin 35.7 37.2 39.0 38.2 37.1 35.5 35.9 36.1 34.7 36.2 35.2 36.2 36.1 EBITDA margin 16.9 18.4 17.5 16.7 16.5 15.8 14.4 15.3 11.4 13.4 14.7 16.4 16.5 PAT margin 13.2 15.3 15.1 16.0 16.0 14.5 13.2 12.8 12.6 14.3 14.6 15.7 16.1 RoE 28.3 31.7 24.2 25.8 23.7 20.3 17.3 17.8 15.6 14.4 18.1 21.3 22.4 RoCE 22.7 28.7 19.9 26.1 18.8 11.5 9.9 5.9 6.9 5.6 12.5 14.0 15.8 Debt / equity (X) 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 Adj. EPS (Rs) 20.9 26.5 21.6 24.5 25.9 26.3 24.3 26.4 25.5 22.9 31.1 40.0 46.5

Source: Company, Kotak Institutional Equities estimates

76 KOTAK INSTITUTIONAL EQUITIES RESEARCH REDUCE Sun TV Network (SUNTV) https://ultraviewer.et/en/own Media AUGUST 16, 2021 load.html RESULT Sector view: Cautious

Core business weak; accounting change to support earnings. Sun reported 35% CMP (`): 525 decline in ad revenues versus 1QFY20, 30-40% underperformance versus peers Zee and Fair Value (`): 490 Star in the South. Sun Network has lost ad market leadership in the South to Star and BSE-30: 55,437 at this rate Sun TV could also cede leadership to Star Vijay in FY2023E. Sun has lined up a few big ticket non-fiction shows to regain lost viewership across markets. Separately, the company has given up conservative accounting and aligned its movie amortization policy with peers; this accounting change would inflate profit for three years and gradually normalize thereafter. REDUCE.

Sun TV Network Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 525/490/REDUCE EPS (Rs) 38.7 43.0 46.4 52-week range (Rs) (high-low) 587-381 EPS growth (%) 9.0 11.1 7.8 Mcap (bn) (Rs/US$) 208/2.8 P/E (X) 13.6 12.2 11.3 ADTV-3M (mn) (Rs/US$) 1,427/19 P/B (X) 2.9 2.6 2.4 Shareholding pattern (%) EV/EBITDA (X) 9.7 8.0 7.2 Promoters 75.0 RoE (%) 23.9 22.6 21.8 FPIs/MFs/BFIs 9.0/4.1/1.1 Div. yield (%) 1.0 3.8 4.8 Price performance (%) 1M 3M 12M Sales (Rs bn) 32 38 44 Absolute 0.8 (0.2) 29.5 EBITDA (Rs bn) 18 21 22 Rel. to BSE-30 (4.3) (14.1) (15.2) Net profits (Rs bn) 15 17 18

1QFY22— Ad revenues down 35% versus 1QFY20, significantly underperforming industry Ad revenues (incl. slot sale fees) at Rs2.46 bn were down 35% yoy (KIE -22%) versus June 2019 (normalized levels). Per our checks, aggregate ad revenues of peers Star and Zee in South were up by about 2-5% versus in 1QFY22 versus 1QFY20. Sun’s underperformance versus industry is in line with viewership share loss. Domestic subscription revenues declined 6% yoy (KIE +6%) led by 11% decline in cable (incl. digital content deals) and flattish DTH revenues. Overseas subscription revenue declined 34% yoy and is down ~50% in c/c from peak (FY2018/19). Sun has changed its movie amortization accounting policy. It now (starting 1QFY22) amortizes movie rights over four years (30%, 30%, 20% and 20%) as against full amortization of the same upfront on first telecast. This change in accounting boosted EBIT by Rs700 mn in 1QFY22 and would inflate profits for 2-3 years and gradually normalize from the fourth year. EBIT adjusted for accounting change at Rs4.6 bn was 25% below our estimate. Core broadcasting business EBITDA was down 15% yoy versus 1QFY20 on like-for-like basis. IPL (part season) contributed Rs1.24 bn to revenues and Rs462 mn to operating profit on expected lines. Net profit adjusted for accounting change stood at Rs3.4 bn (KIE Rs4.3 bn), 12% below 1QFY20 levels. Interim dividend was Rs3.75/share. Cash balance stood at Rs39 bn (Rs99/share).

Sun TV on the verge of losing ad market leadership to Star Vijay At present, four of the top five fiction shows (urban ratings) on Tamil GEC belong to Star Vijay and one to Sun TV. Star Vijay, traditionally strong in non-fiction, has strengthened its fiction slate. We note that Sun has already lost ad market leadership in the South to Star and at this rate, Star Vijay would surpass Sun TV in FY2023. Sun has lined up a few big ticket non-fiction shows (such as MasterChef in Tamil and Telugu, KBC in Telugu, etc.) to arrest viewership share decline. Jaykumar Doshi We trim revenue forecast and incorporate accounting change; maintain REDUCE (FV Rs490) We reduce ad and subscription revenue forecast and cut movie amortization cost to incorporate the new accounting policy. Net result— 1-5% increase in FY2022-24E earnings led by accounting change. We note that this accounting change boosts FY2022-24E earnings; it doesn’t impact FCF and LT earnings. We rollover and maintain REDUCE with unchanged FV of Rs490.

[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. Media Sun TV Network

Exhibit 1: : Interim standalone financials of Sun TV Network (Rs mn)

% chg. 2-year 1QFY22 1QFY22E 1QFY21 4QFY21 KIE yoy qoq 1QFY20 CAGR (%) Total revenues 8,101 9,220 6,061 7,820 (12) 34 4 10,804 Ad revenues (incl slot sales) 2,460 2,950 1,260 3,149 (17) 95 (22) 3,782 (19) Domestic subscription rev 4,150 4,700 4,420 4,280 (12) (6) (3) 3,760 5 - DTH 2,140 2,300 2,160 2,180 (7) (1) (2) 2,070 2 - Cable 2,010 2,400 2,260 2,100 (16) (11) (4) 1,690 9 International subscription rev 250 350 380 350 (29) (34) (29) 410 (22) IPL revenues 1,239 1,170 - - 2,444 (29) Others (incl. Sun Pictures) 2 50 1 41 408 Total expenditure (3,482) (4,000) (3,351) (3,118) (13) 4 12 (5,559) (21) Direct costs (programming) (1,140) (1,150) (671) (1,134) (1) 70 1 (1,414) (10) Employee costs (681) (675) (731) (670) 1 (7) 2 (735) (4) SG&A expenses (554) (550) (495) (549) 1 12 1 (442) 12 IPL expenses (777) (825) - - (1,384) (25) Depreciation expense (260) (250) (215) (280) 4 21 (7) (210) 11 Movie amortization (71) (550) (1,240) (486) (87) (94) (85) (1,375) (77) EBIT 4,619 5,220 2,710 4,702 (12) 70 (2) 5,245 (6) EBIT margin (%) 57.0 56.6 44.7 60.1 48.5 Other income 561 525 1,086 506 7 (48) 11 567 Interest expense (10) (15) (18) (172) (21) PBT 5,170 5,730 3,779 5,036 (10) 37 3 5,791 Extraordinaries - - - - - Tax provision (1,272) (1,444) (951) (537) (12) 34 137 (1,972) Minority interest — — — — — Reported PAT 3,898 4,286 2,828 4,499 (9) 38 (13) 3,819 1 Adjusted PAT 3,898 4,286 2,828 4,499 (9) 38 (13) 3,819 EPS (Rs/share) 9.9 10.9 7.2 11.4 (9) 38 (13) 9.7 1 Tax rate (%) 24.6 25.2 25.2 10.7 34.1

Core business financials (excluding IPL) Revenues 6,862 8,050 6,061 7,820 (15) 13 (12) 8,360 (9) Adjusted EBITDA (a) 4,417 5,125 2,925 4,982 (14) 51 (11) 4,395 0 EBITDA margin (%) 64.4 63.7 48.3 63.7 52.6 10.7

IPL franchise Revenues 1,239 1,170 - - 2,444 Operating costs (777) (825) - - (1,384) Operating profit 462 345 - - 1,060

Notes: (a) EBITDA of core business (excludes IPL) after deducting amortization costs associated with movies. (b) Core business and IPL frachise are in standalone financials. Radio business is in subsidiary and JV. (a) Quarterly financials are standalone whereas full year numbers are consolidated (includes radio subsidiaries).

Source: Company, Kotak Institutional Equities estimates

78 KOTAK INSTITUTIONAL EQUITIES RESEARCH Sun TV Network Media

Exhibit 2: Revised earnings estimates of Sun TV Network, FY2020-24E (Rs mn)

Revised Previous Change (%) 2022E 2023E 2024E 2022E 2023E 2024E 2022E 2023E 2024E Advertising revenues (incl. slot sale) 12,346 13,561 14,229 12,980 14,131 14,827 (5) (4) (4) Domestic subscription revenues 17,982 19,959 21,602 18,925 20,575 22,270 (5) (3) (3) - DTH subscription revenues 9,256 10,274 11,045 9,701 10,429 11,211 (5) (1) (1) - Cable subscription revenues 8,726 9,685 10,557 9,224 10,147 11,060 (5) (5) (5) Overseas subscription revenues 1,112 1,112 1,112 1,404 1,404 1,404 (21) (21) (21) Radio revenues 613 796 860 613 796 860 0 0 0 Sun Pictures (movie production) 3,500 5,000 5,000 3,500 5,000 5,000 0 0 0 Other operating revenues (incl IPL) 2,875 3,325 3,525 2,875 3,325 3,525 0 0 0 Total revenues 38,427 43,754 46,328 40,297 45,231 47,886 (5) (3) (3) Direct expenses 6,307 7,140 8,024 6,388 7,195 8,083 (1) (1) (1) Employee expenses 3,372 3,623 3,895 3,372 3,623 3,895 0 0 0 SG&A expenses 4,208 4,554 4,828 4,239 4,580 4,856 (1) (1) (1) D&A expenses (incl movie amortization) 4,860 7,310 8,210 6,860 9,860 10,360 (29) (26) (21) Total expenditure 18,747 22,628 24,958 20,859 25,259 27,195 (10) (10) (8) EBIT 19,680 21,126 21,369 19,438 19,972 20,692 1 6 3 EBIT margin (%) 51.2 48.3 46.1 48.2 44.2 43.2 PAT 16,948 18,275 18,751 16,768 17,416 18,246 1 5 3 EPS (Rs/share) 43.0 46.4 47.6 42.5 44.2 46.3 1 5 3 Key assumptions Ad revenue (incl slot sale) growth (%) 24.0 9.8 4.9 30.4 8.9 (100.0) Domestic subs revenue growth (%) 4.5 11.0 8.2 10.0 8.7 8.2 - DTH subscription revenue growth (%) 4.0 11.0 7.5 9.0 7.5 7.5 - Cable subscription revenue growth (%) 5.0 11.0 9.0 11.0 10.0 9.0 Overseas subscription revenue growth (%) (20.0) - - 1.0 - - Radio revenue growth (%) 75.0 30.0 8.0 75.0 30.0 (100.0) Movies amortization expense 3,825 6,275 7,175 5,825 8,825 9,325 (34) (29) IPL operating profit / (loss) 993 1,248 1,306 993 1,248 1,306 - -

Note: (1) Radio entity SA FM is accounted as JV whereas Kal Radio is a subsidiary under Ind-AS. We have incorporated this change.

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 79 Media Sun TV Network

Exhibit 3: BARC ratings market share, 1-Apr-18 to 30-Jul-21 (Week 14, 2018 to Week 30, 2021) (%)

1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 1QFY22 Jul-21 Tamil GEC (Urban + Rural)- Viewership share in the top 6 channels (%) Sun TV 45.5 44.2 41.5 40.2 39.6 41.1 44.2 45.8 47.0 42.1 38.4 38.3 40.7 39.9 STAR Vijay 20.7 21.5 21.8 22.7 23.5 25.7 22.6 20.8 18.1 20.8 27.0 28.0 26.0 27.9 Zee Tamil 19.6 20.9 22.7 22.1 22.5 19.6 20.3 19.1 14.7 20.9 20.9 19.7 15.9 16.1 Others 14.2 13.4 14.1 15.0 14.4 13.6 12.9 14.3 20.2 16.3 13.7 14.0 17.3 16.1 Total of top 8 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Telugu GEC (Urban + Rural)- Viewership share in the top 4 channels (%) Zee Telugu 26.8 25.1 24.8 24.9 23.6 21.1 20.9 21.8 20.0 25.4 25.2 26.7 26.6 25.7 Star Maa TV 27.8 30.1 31.9 31.0 33.4 36.3 36.6 33.8 29.8 33.2 38.1 36.8 37.8 38.9 Gemini TV (Sun) 22.4 22.0 21.6 19.6 20.5 19.9 19.6 21.2 26.2 18.2 15.2 14.8 14.0 14.7 ETV Telugu 23.0 22.8 21.8 24.5 22.5 22.7 22.8 23.2 24.1 23.1 21.6 21.7 21.5 20.7 Total of Top 4 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Kannada GEC (Urban + Rural)- Viewership share in the top 5 channels (%) Colors Kannada 33.9 33.5 32.4 31.2 28.1 23.9 24.7 19.1 16.1 19.7 23.8 24.6 23.8 24.4 Colors Super 8.0 8.9 10.7 9.2 10.2 9.6 7.4 6.4 5.2 2.7 3.1 3.4 3.8 3.3 Zee Kannada 25.0 29.2 29.6 31.3 32.1 35.9 38.1 39.5 31.3 34.4 34.0 35.6 33.0 37.4 Udaya TV (Sun) 18.8 17.0 16.1 16.7 16.9 16.9 15.6 18.2 30.8 22.7 16.9 16.1 19.5 16.1 Star Suvarna 14.4 11.3 11.1 11.7 12.7 13.7 14.3 16.8 16.6 20.4 22.1 20.3 19.8 18.7 Total of Top 5 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Malayalam GEC (Urban + Rural)- Viewership share in the top 4 channels (%) Star Asianet 52.8 52.7 49.7 46.9 43.9 46.0 49.1 49.6 33.6 43.1 49.9 52.1 45.0 49.7 Surya TV (Sun) 16.6 16.8 14.2 12.4 12.6 11.2 11.0 12.3 22.3 14.6 10.5 9.7 12.3 9.9 Mazhavil Manorama 15.5 15.8 15.0 17.3 17.8 16.0 15.3 14.4 18.5 14.3 13.7 12.5 15.7 14.8 Flowers TV 15.1 14.7 17.0 19.3 19.8 18.3 14.2 12.9 15.5 16.3 13.9 14.1 14.7 15.5 Zee Keralam 4.0 4.1 5.9 8.5 10.4 10.8 10.2 11.6 12.0 11.6 12.2 10.1 Total of Top 4 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Notes: (1) Top 5-7 channels (relevant channels) in each genre are considered for market share calculation. (2) Colors Tamil's viewership share was 4.5% in the month of March 2018 (Channel ratings were released starting March)

Source: BARC data, Kotak Institutional Equities estimates

Exhibit 4: Trends in Sun's ad revenue growth

Ad revenues incl slot sales (LHS, Rs mn) 95 4,000 100

3,500 70

23 3,000 15 19 17 40 12 8 8 13 12 7 1 (2) 6 1 3 4 2 (1)(1) 2,500 (4)(7) (6)(4) (7)(7)(4) (4) 10 (14)(17) (10) (29) 2,000 (20)

1,500 (67) (50)

1,000 (80)

2QFY14 3QFY14 2QFY15 1QFY16 2QFY16 1QFY17 2QFY17 1QFY18 4QFY18 1QFY19 4QFY19 3QFY20 4QFY20 3QFY21 4QFY14 1QFY15 3QFY15 4QFY15 3QFY16 4QFY16 3QFY17 4QFY17 2QFY18 3QFY18 2QFY19 3QFY19 1QFY20 2QFY20 1QFY21 2QFY21 4QFY21 1QFY22 1QFY14

Source: Company, Kotak Institutional Equities

80 KOTAK INSTITUTIONAL EQUITIES RESEARCH Sun TV Network Media

Exhibit 5: Consolidated financial summary of Sun TV Network, FY2014-24E (Rs mn)

2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Profit model (Rs mn) Net sales 22,236 23,954 25,698 26,457 29,630 37,825 35,199 31,769 38,427 43,754 46,328 EBIT 10,314 10,619 12,693 13,694 15,538 19,438 15,937 16,675 19,680 21,126 21,369 Other income 866 989 1,106 1,538 1,423 2,271 2,607 3,068 3,252 3,603 4,015 Interest (expense)/income (46) (23) (22) (10) (11) (17) (128) (269) (80) (80) (80) Pretax profits 11,134 11,586 13,777 15,222 16,950 21,693 18,416 19,474 22,852 24,648 25,305 Tax-cash (3,730) (3,760) (4,755) (5,203) (5,822) (7,511) (4,340) (4,158) (5,827) (6,285) (6,453) Tax-deferred 48 — — — — — — — — — — Minority interest 28 (6) (68) 288 224 137 (45) (66) (76) (88) (101) Recurring PAT 7,480 7,820 9,015 10,307 11,351 14,320 13,989 15,250 16,948 18,275 18,751 Recurring EPS (Rs) 19.0 19.8 22.9 26.2 28.8 36.3 35.5 38.7 43.0 46.4 47.6 Balance sheet (Rs mn) Total equity 30,954 33,481 35,263 40,285 46,121 54,502 56,481 70,537 79,604 88,027 94,956 Deferred Tax 260 226 176 521 763 1,056 851 0 0 0 0 Total borrowings — — — — — — — — — — — Currrent liabilities 3,082 2,262 2,765 2,941 5,832 5,612 6,936 8,878 8,417 10,187 11,238 Total capital 35,636 37,450 40,894 43,782 52,756 61,214 64,315 79,464 88,070 98,264 106,243 Cash 10,810 12,924 16,850 15,925 20,812 29,479 29,536 41,878 48,929 54,384 58,639 Current assets 11,075 12,716 14,950 11,519 15,632 16,788 19,944 23,143 22,809 25,671 27,533 Total fixed assets 7,976 7,330 4,544 7,841 7,763 7,785 7,330 7,454 6,919 6,383 5,848 Intangible assets 5,775 4,481 4,551 4,421 4,246 4,166 3,925 2,638 5,138 7,638 10,138 Total assets 35,636 37,450 40,894 43,782 52,756 62,786 65,233 79,464 88,070 98,264 106,243 Free cash flow (Rs mn) Operating cash flow, excl. WC 12,358 13,034 13,300 12,794 14,216 18,903 19,049 16,636 18,713 22,151 23,127 Working capital (WC) (710) (1,519) (254) (293) (1,221) (662) (2,492) (1,410) (127) (1,092) (811) Capital expenditure (4,305) (4,400) (3,735) (5,324) (4,357) (5,553) (6,601) (2,294) (6,825) (9,275) (10,175) Other income 773 823 938 1,089 1,423 1,021 2,217 1,532 3,252 3,603 4,015 Free cash flow 8,116 7,938 10,249 8,267 10,061 13,709 12,173 14,464 15,013 15,387 16,157 Ratios (%) Debt/equity — — — — — — — — — — — Net debt/equity (35) (39) (48) (40) (45) (54) (52) (59) (61) (62) (62) RoAE 25 24 26 27 26 28 25 24 23 22 20 RoACE 25 24 26 26 25 28 25 24 23 22 21 Ratios (%) Ad revenue (incl slot sale) growth (%) 0.1 4.8 5.6 (3.7) 9.7 7.0 (8.3) (27.2) 24.0 9.8 4.9 Domestic subs revenue growth (%) 25.9 14.5 10.5 15.7 18.9 16.9 19.3 10.1 4.5 11.0 8.2 - DTH subscription revenue growth (%) 20.2 17.3 11.3 12.2 12.3 15.2 (2.8) 7.7 4.0 11.0 7.5 - Cable subscription revenue growth (%) 41.2 8.1 8.3 24.6 33.9 20.2 60.1 12.8 5.0 11.0 9.0 Overseas subscription revenue growth (%) 21.2 8.8 5.5 7.4 7.1 8.5 (8.4) (15.2) (20.0) - - Radio revenue growth (%) 20.4 20.2 11.2 (47.7) 15.3 8.0 (10.0) (64.9) 75.0 30.0 8.0 Movies amortization expense 3,827 5,261 4,292 3,442 3,783 5,900 5,988 2,998 3,825 6,275 7,175

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 81 SELL Oil India (OINL) https://ultraviewer.et/en/own Oil, Gas & Consumable Fuels AUGUST 15, 2021 load.html RESULT Sector view: Attractive

Results boosted by lower costs. OIL’s 1QFY22 results were above our estimates due CMP (`): 166 to lower-than-expected operating expenses, depreciation and interest costs. We raise Fair Value (`): 150 our estimates factoring in an expected sharp increase in domestic gas prices in BSE-30: 55,437 upcoming revisions and lower costs. We retain SELL with a revised Fair Value of Rs150 noting an uninspiring production track record, weak free cash flow generation and muted return ratios. Sustained high oil and gas prices are key risks to our negative stance.Oil India Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 166/150/SELL EPS (Rs) 10.0 18.5 21.1 52-week range (Rs) (high-low) 177-83 EPS growth (%) (50.6) 85.1 13.8 Mcap (bn) (Rs/US$) 181/2.5 P/E (X) 16.6 9.0 7.9 ADTV-3M (mn) (Rs/US$) 235/3 P/B (X) 0.7 0.7 0.6 Shareholding pattern (%) EV/EBITDA (X) 17.3 7.4 6.7 Promoters 56.7 RoE (%) 4.3 7.5 8.1 FPIs/MFs/BFIs 7.6/5.0/14.0 Div. yield (%) 3.0 4.5 5.1 Price performance (%) 1M 3M 12M Sales (Rs bn) 86 123 134 Absolute (1.6) 27.9 75.1 EBITDA (Rs bn) 19 44 51 Rel. to BSE-30 (6.7) 14.0 30.4 Net profits (Rs bn) 11 20 23

Higher-than-expected net income due to lower costs; crude volumes remain muted OIL’s 1QFY22 revenue was marginally below our estimate at Rs30.1 bn, rising 17% qoq led by increase in oil realizations and expectedly higher volumes. EBITDA was 16% above our estimate at Rs12.4 bn, boosted by 4-6% yoy decline in employee costs and other expenses; the latter reflected a sharp decline in recurring provisions to Rs212 mn from Rs1.8 bn in 1QFY21. Reported net income of Rs5.1 bn (EPS of Rs4.7) was well above our estimate, further aided by lower-than-assumed DD&A expense, exploratory write-offs and interest cost.  Lower oil sales volumes; higher gas volumes. Crude sales volumes declined 1.5% yoy to 0.722 mn tons reflecting 0.5% decline in production to 0.748 mn tons. Gas sales volume increased 5.6% yoy to 608 mcm, a tad higher than 4.3% rise in production to 711 mcm.  Lower oil realization; steady gas realization. Net crude realization was marginally lower than our assumption at US$67.2/bbl; gas realization was steady at US$2/mn BTU.

Management remains upbeat on medium-term increase in gas production from Baghjan In 1QFY22 conference call, the management indicated—(1) an infrastructure development plan for the Baghjan field is being worked out to support an increase in its gas production to 5 mcm/d in the medium term from 1.6 mcm/d currently, (2) there has been no progress on the review of domestic gas pricing formula post the submission of the committee report to the Government in December 2020, (3) NRL reported EBITDA of Rs9.86 bn and net income of Rs6.78 bn in 1QFY22; OIL will bring down its stake in NRL to ~70% by September selling the surplus stake to the Government of Assam and (4) standalone gross debt stood at Rs137.5 bn as of end-1QFY22 and an additional ~Rs4 bn has been repaid post June 30, 2021.

Raise estimates to reflect higher gas prices and lower cost; retain SELL with revised FV of Rs150 Tarun Lakhotia We raise standalone EPS estimates by 12% in FY2022E and 30-32% in FY2023-24E factoring in (1) lower operating expenses and interest cost, (2) higher domestic gas price of US$5/mn BTU in FY2023-24E versus US$4/mn BTU earlier given the recent sharp increase in underlying global Hemang Khanna benchmark gas prices and (3) other minor changes. Our SoTP-based Fair Value increases to Rs150 (Rs125 earlier), based on 6X standalone FY2023E EPS plus the value of investments. We retain SELL rating given—(1) an uninspiring production track record despite a sustained increase in capex and operating costs and (2) limited FCF generation and deteriorating returns due to inefficient capital allocation policies. Sustained increase in global oil and gas prices pose upside risks to our earnings estimates as well as fair valuation.

[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. Oil India Oil, Gas & Consumable Fuels

Exhibit 1: OIL interim results, March fiscal year-ends (Rs mn)

(% chg.) 1QFY22 1QFY22E 1QFY21 4QFY21 1QFY22E 1QFY21 4QFY21 FY2022E FY2021 (% chg.) Net sales 30,070 30,268 17,439 25,795 (0.7) 72.4 16.6 123,248 86,184 43.0 Total expenditure (17,678) (19,549) (14,322) (21,623) (9.6) 23.4 (18.2) (79,209) (67,331) 17.6 Increase/(decrease) in stock 165 — 42 42 — 331 Purchase of stock in trade (229) (398) (380) (257) (1,254) (1,347) Staff expenditure (4,217) (4,767) (4,390) (5,064) (11.5) (3.9) (16.7) (20,034) (19,451) 3.0 Statutory levies (8,717) (8,845) (4,626) (7,419) (1.4) 88.4 17.5 (35,017) (23,040) 52.0 Other expenditure (4,680) (5,539) (4,968) (8,926) (15.5) (5.8) (47.6) (22,904) (23,824) (3.9) EBITDA 12,392 10,720 3,118 4,172 15.6 297.5 197.0 44,038 18,853 133.6 Other income 638 928 1,306 13,301 (31.2) (51.1) (95.2) 13,634 19,431 (29.8) Interest (2,221) (2,531) (1,278) (1,270) (12.3) 73.8 74.9 (8,097) (4,987) 62.4 DD&A (4,036) (5,428) (4,731) (4,100) (25.7) (14.7) (1.6) (22,627) (21,575) 4.9 Depletion (3,067) (3,425) (2,309) (3,086) (10.5) 32.8 (0.6) (12,266) (10,566) 16.1 Depreciation (908) (991) (1,276) (1,090) (8.4) (28.8) (16.6) (4,862) (4,811) 1.1 Exploratory write-offs/provision (61) (1,013) (1,146) 75 (94.0) (94.7) (180.7) (5,500) (6,198) (11.3) Pretax profits 6,774 3,688 (1,585) 12,103 83.7 NM (44.0) 26,947 11,721 129.9 Extraordinary — — (934) (701) — 7,095 Current tax (1,322) (885) (194) 12 (6,596) (1,483) Deferred tax (372) (52) 227 (2,938) (269) 83 Net income 5,079 2,750 (2,486) 8,476 84.7 NM (40.1) 20,081 17,416 15.3 Reported EPS (Rs) 4.7 2.5 (2.3) 7.8 18.5 16.1 Tax rate (%) 25.0 25.4 1.3 25.7 25.5 7.4

Volume data Subsidy loss — — — — — — Crude production ('000 tons) 748 745 752 717 0.4 (0.5) 4.3 3,010 2,964 1.6 Gas production (mcm) 711 692 682 649 2.7 4.3 9.6 2,826 2,642 7.0 Crude sales ('000 tons) 722 722 733 703 (0.0) (1.5) 2.7 2,915 2,884 1.1 Gas sales (mcm) 608 592 576 555 2.7 5.6 9.5 2,439 2,269 7.5 LPG sales (000 tons) 8 9 8 9 35 34

Pricing data (US$/bbl) Gross crude price realization 67.2 67.6 30.4 59.8 (0.6) 120.7 12.3 64.4 44.0 46.5 Subsidy discount — — — — — — Net crude price realization 67.2 67.6 30.4 59.8 (0.6) 120.7 12.3 64.4 44.0 46.5 Domestic gas price (US$/mn BTU) 2.0 2.0 2.7 2.0 (25.2) - 2.6 2.3 13.8 Segmental results Revenues Crude oil 25,402 11,996 21,557 111.8 17.8 66,594 Natural gas 2,978 3,879 2,749 (23.2) 8.3 13,349 LPG 342 263 370 30.1 (7.5) 1,164 Transportation 894 876 779 2.1 14.8 3,615 Unallocated 455 426 341 6.7 33.5 1,463 Total revenue 30,070 17,439 25,795 72.4 16.6 86,184 EBIT Crude oil 10,959 (733) 6,584 NM 66.5 8,511 Natural gas (904) 419 (2,687) NM (66.4) (2,359) LPG 194 105 121 416 Transportation (221) (197) (631) (1,526) Unallocated 167 118 (53) 69 Total 10,195 (288) 3,333 5,111 Interest 2,221 1,278 1,270 4,987 Total PBT 7,975 (1,565) 2,063 NM 286.5 124 Tax 1,694 (33) 2,926 1,400 PAT 6,280 (1,533) (863) NM NM (1,276)

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 83 Oil, Gas & Consumable Fuels Oil India

Exhibit 2: Domestic gas price may rise sharply in 1HFY23E if high global gas prices sustain Domestic gas price, 2HFY15 onwards (US$/mn BTU)

(US$/mn BTU) India domestic gas price (NCV) 7

6 5.6 5.7 5.2 5 4.2 4.1 4 3.7 3.6 3.4 3.4 3.2 3.3 3 2.8 2.8 2.7 2.0 2.0 2

1

0

2HFY15

1HFY16

2HFY16

1HFY17

2HFY17

1HFY18

2HFY18

1HFY19

2HFY19

1HFY20

2HFY20

1HFY21

2HFY21

1HFY22 2HFY22E 1HFY23E

Source: PPAC, Bloomberg, Kotak Institutional Equities estimates

Exhibit 3: Overall production and operating costs have increased steadily in recent years Production and operating costs per barrel, March fiscal year-ends, 2016-24E (US$/boe)

(US$/bbl) Operating cost Production cost 16

13.5 13.4 14.3 14 12.8 11.5 12 10.4 10.7 9.7 9.6 10

8

6

4

2

0 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E

Source: Company, Kotak Institutional Equities estimates

84 KOTAK INSTITUTIONAL EQUITIES RESEARCH Oil India Oil, Gas & Consumable Fuels

Exhibit 4: Capex has remained elevated over the past few years Standalone capex per barrel versus DD&A expenses, March fiscal year-ends, 2016-24E (US$/boe)

(US$/bbl) DD&A Capex 16 14.9 14.7 14.1 14

12 10.6 10.0 9.6 9.8 10 9.3 8.8 8.6 8.3 7.8 7.8 7.8 8 6.0 6 5.3 5.1 4.8

4

2

0 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E

Source: Company, Kotak Institutional Equities estimates

Exhibit 5: OIL's domestic reserves have not increased materially over the past few years Reserves of OIL, March fiscal year-ends, 2014-20 (mn boe)

Domestic Overseas 2014 2015 2016 2017 2018 2019 2020 2017 2018 2019 2020 1P reserves Crude oil 244 227 208 215 199 186 219 128 124 120 110 Natural gas 164 160 149 135 141 117 166 36 32 32 95 Overall 408 387 357 350 340 302 385 163 157 152 204 2P reserves Crude oil 610 608 592 578 577 547 558 294 279 268 252 Natural gas 315 293 282 256 233 230 400 52 46 46 164 Overall 924 902 874 834 810 778 959 346 325 314 416 3P reserves Crude oil 864 843 805 778 772 740 727 453 436 423 408 Natural gas 463 440 416 388 464 540 511 66 56 56 194 Overall 1,328 1,283 1,220 1,166 1,235 1,280 1,239 519 492 478 602

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 85 Oil, Gas & Consumable Fuels Oil India

Exhibit 6: We assume higher oil and gas realizations in FY2022-23 Key assumptions, March fiscal year-ends, 2018-24E

2018 2019 2020 2021 2022E 2023E 2024E Macro assumptions Exchange rate (Rs/US$) 64.5 69.9 70.8 74.2 75.0 76.5 78.0 Subsidy loss (Rs bn) — — — — — — — Import tariff on crude oil (%) — — — — — — — Crude/natural gas prices Crude price Crude price, Dated Brent (US$/bbl) 57.6 70.2 60.9 44.8 65.0 60.0 60.0 Gross realized crude price, India (US$/bbl) 55.7 68.5 60.8 44.0 64.4 59.3 59.7 Net realized crude price, India (US$/bbl) 55.7 68.5 60.8 44.0 64.4 59.3 59.7 Natural gas price Natural gas price, India (Rs/cu m) 7.6 9.9 10.8 6.9 7.9 15.2 15.5 Natural gas price, India (US$/mn BTU) 3.0 3.6 3.8 2.3 2.6 5.0 5.0 Sales volumes—Domestic fields Crude oil (mn tons) 3.3 3.2 3.1 2.9 2.9 2.9 2.9 Natural gas (bcm) 2.4 2.5 2.4 2.3 2.4 2.5 2.6 Total sales (mn toe) 5.5 5.5 5.2 4.9 5.1 5.2 5.3 Total sales (mn boe) 40 40 38 36 37 38 38 Crude oil (%) 60 59 59 59 57 57 56 Natural gas (%) 40 41 41 41 43 43 44 Source: Company, Kotak Institutional Equities estimates

Exhibit 7: OIL's earnings are highly leveraged to assumptions on oil and gas prices Earnings sensitivity of OIL to key variables

2022E 2023E Downside Base case Upside Downside Base case Upside Exchange rate Exchange rate (Rs/US$) 74.0 75.0 76.0 75.5 76.5 77.5 Net profits (Rs mn) 19,257 20,081 20,906 21,933 22,847 23,760 Earnings per share (Rs) 17.8 18.5 19.3 20.2 21.1 21.9 % upside/(downside) (4.1) 4.1 (4.0) 4.0 Average crude realization Net crude realization (US$/bbl) 63.4 64.4 65.4 58.3 59.3 60.3 Net profits (Rs mn) 19,281 20,081 20,882 22,025 22,847 23,668 Earnings per share (Rs) 17.8 18.5 19.3 20.3 21.1 21.8 % upside/(downside) (4.0) 4.0 (3.6) 3.6 Natural gas prices Natural gas price (US$/mn BTU) 2.1 2.6 3.1 4.5 5.0 5.5 Net profits (Rs mn) 17,977 20,081 22,185 20,647 22,847 25,046 Earnings per share (Rs) 16.6 18.5 20.5 19.0 21.1 23.1 % upside/(downside) (10.5) 10.5 (9.6) 9.6 Source: Kotak Institutional Equities estimates

Exhibit 8: We compute fair value of OIL India at Rs150/share Fair value of OIL, March 2023E (Rs/share)

March 2023E EPS 21.1 Less: income from investments valued separately 11.5 Add: interest on loans for Area 1, Mozambique 2.7 March 2023E EPS (adjusted) 12.2 P/E (X) 6.0 Valuation of domestic operations 73 EV of 4% stake in Area 1, Mozambique 29 Acquisition cost 73 Write-off from stake in Area 1, Mozambique (44) Value of investments 121 Numaligarh Refinery Limited 62 IOCL 34 Other equity investments 25 Fair value 151 Source: Kotak Institutional Equities estimates

86 KOTAK INSTITUTIONAL EQUITIES RESEARCH Oil India Oil, Gas & Consumable Fuels

Exhibit 9: Standalone profit model, balance sheet, cash model of OIL, March fiscal year-ends, 2018-24E (Rs mn)

2018 2019 2020 2021 2022E 2023E 2024E Profit model (Rs mn) Net sales 106,565 137,350 121,285 86,184 123,248 133,789 138,262 EBITDA 42,707 57,519 46,397 18,853 44,038 51,182 51,380 Other income 14,842 14,350 11,987 19,431 13,634 13,822 14,335 Interest (4,157) (4,795) (4,988) (4,987) (8,097) (9,475) (11,069) DD&A (14,600) (17,383) (22,064) (21,575) (22,627) (24,864) (27,464) Pretax profits 38,791 49,692 31,332 11,721 26,947 30,665 27,181 Extraordinary (1,900) (10,268) 4,907 7,095 — — — Current tax (6,484) (10,709) (7,568) (1,483) (6,596) (7,511) (6,652) Deferred tax (3,935) (2,552) (3,266) 83 (269) (307) (272) Net income 26,473 26,163 25,406 17,416 20,081 22,847 20,257 Adjusted net income 27,836 32,977 21,965 10,849 20,081 22,847 20,257 Adjusted EPS (Rs) 24.5 30.4 20.3 10.0 18.5 21.1 18.7

Balance sheet (Rs mn) Total equity 279,094 277,452 243,867 262,106 274,155 287,863 300,018 Deferred tax liability 34,390 34,127 24,929 25,279 25,548 25,855 26,127 Liability for abandonment cost 1,651 2,126 2,515 1,147 1,147 1,147 1,147 Total borrowings 75,294 74,146 88,851 157,180 148,180 166,180 183,180 Currrent liabilities 49,913 86,803 68,252 60,532 59,190 59,654 60,153 Total liabilities and equity 440,342 474,653 428,414 506,244 508,221 540,699 570,625 Cash 30,926 61,358 35,769 10,668 1,079 1,138 1,518 Current assets 52,081 59,312 60,294 79,981 83,902 86,245 87,239 Total fixed assets 129,480 133,954 148,463 151,452 175,441 201,693 226,344 Investments 227,856 220,029 183,887 264,143 247,799 251,624 255,524 Total assets 440,342 474,653 428,414 506,244 508,221 540,699 570,625

Free cash flow (Rs mn) Operating cash flow, excl. working capital 39,145 42,877 45,231 23,017 23,845 27,946 27,097 Working capital changes (11,975) 3,893 2,989 (10,368) (5,263) (1,879) (495) Capital expenditure (26,611) (24,941) (27,590) (116,297) (41,116) (44,866) (45,554) Other income 13,700 12,475 13,420 16,310 13,634 13,822 14,335 Free cash flow 14,259 34,303 34,049 (87,338) (8,901) (4,977) (4,617)

Ratios (%) Debt/equity 24.0 23.8 33.1 54.7 49.4 53.0 56.2 Net debt/equity 14.2 4.1 19.7 51.0 49.1 52.6 55.7 RoAE 8.8 10.6 7.6 3.9 6.8 7.4 6.3 RoACE 6.3 7.7 5.0 1.9 3.3 3.6 2.6

Key assumptions Exchange rate (Rs/US$) 64.5 69.9 70.8 74.2 75.0 76.5 78.0 Net realized crude price, India (US$/bbl) 55.7 68.5 60.8 44.0 64.4 59.3 59.7 Natural gas price, India (US$/mn BTU) 3.0 3.6 3.8 2.3 2.6 5.0 5.0 Subsidy loss (Rs bn) — — — — — — —

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 87 BUY GMR Infrastructure (GMRI) https://ultraviewer.et/en/own Transportation AUGUST 16, 2021 load.html RESULT Sector view: Attractive

Second quarter of stable corporate net debt. GMRI reported a modest miss in CMP (`): 28 1QFY22 results due to a weak print for the non-airports portfolio. The airport portfolio Fair Value (`): 33 reported cash profit in spite of low 33% levels of pre-Covid demand and thus corporate BSE-30: 55,437 net debt sustained qoq. We consider this as the start of a strong five-year period ahead, starting with listing of the airports business in 4QFY22. We retain estimates and will revisit after incorporating AR2021 details and the Hyderabad consultation paper. GMR Infrastructure Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 28/33/BUY EPS (Rs) (3.3) (3.1) (2.0) 52-week range (Rs) (high-low) 34-21 EPS growth (%) (9.7) 5.4 34.9 Mcap (bn) (Rs/US$) 170/2.3 P/E (X) (8.6) (9.0) (13.9) ADTV-3M (mn) (Rs/US$) 971/13 P/B (X) (9.8) (5.2) (5.0)  Shareholding pattern (%) EV/EBITDA (X) 36.0 21.2 15.8 Promoters 62.6 RoE (%) 94.6 75.3 39.7 FPIs/MFs/BFIs 23.8/1.7/3.1 Div. yield (%) 0.0 0.0 0.0 Price performance (%) 1M 3M 12M Sales (Rs bn) 62 83 103 Absolute (11.1) 12.0 30.8 EBITDA (Rs bn) 12 24 33 Rel. to BSE-30 (16.1) (1.9)) (13.9) Net profits (Rs bn) (20) (19) (14)

Weak performance of highways business drives 7% miss in EBITDA; corporate net debt flat qoq GMRI’s reported EBITDA was 7% lower than our estimate. The Rs0.3 bn miss in EBITDA weakness was largely attributable to weak performance of the highways portfolio (Rs0.2 bn). GMRI otherwise reported an otherwise broadly in line ~48% qoq drop in volumes and was still able to report modest cash profit. The net debt at a corporate level was thus flat qoq at Rs66 bn with modest support from Rs1.3 bn coming from real-estate monetization. Overall net debt levels increased qoq to Rs270 bn from Rs253 bn reflecting the healthy pace of capex in the airport vertical through the year. In terms of progress on capacity expansion at airports, Delhi is ~47% complete (versus 44% qoq), Hyderabad is 62% complete (versus 60% qoq) and Goa is 35% complete (versus 33% qoq). These projects would likely get commissioned by FY2024.

Recovery in airports likely to gather momentum as relevance of floor price cap diminishes We note meaningful improvement in domestic air volumes in the first week of August to 67% of pre-Covid levels versus ~33% levels seen in 1QFY22. The meaningful recovery is a result of the delay in an order from the Ministry of Civil Aviation to renew the price floor and caps for air travel. The effect was evident for overall air volumes for the country as airlines could attract a lot more passengers at the lower end of the pricing range, helping them better manage load factors and thus profitability as well. In its recent order, the Ministry of Civil Aviation has only partly reinstated the price caps and floors, limiting these to only the 30 day period of booking. This will enable airlines to better manage volumes at the lower end of pricing and would mark a shift away from almost non-existent levels of dynamic pricing that were prevailing in July.

Corporate debt to come down as GMRI receives full tranche one payment from Kakinada sales Aditya Mongia GMRI has received the remaining ~Rs3.6 bn of the Rs16.9 bn of first tranche payment after 1QFY22. It also highlighted strong cash generation happening in the PT Gems Indonesian entity that has helped bring down over time the related unconsolidated loan to US$250 mn or half of Teena Virmani the initial loan amount. The entity generated US$140 mn of quarterly EBITDA in 1QFY22.

We retain estimates and Rs33 FV for now; will revisit after including AR2021 details The 1Q results reaffirm healthy operating trends in the key airport business. We will revisit our estimates and FV while incorporating details of AR2021 and the GHIAL consultation paper.

[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. GMR Infrastructure Transportation

Exhibit 1: GMR’s 1QFY22 results were impacted by Covid second wave and resultant qoq decline in passenger volumes 1QFY22 results of GMR Infrastructure (consolidated), March fiscal year-ends (Rs mn)

% change 1QFY22 1QFY22E 1QFY21 4QFY21 vs est. yoy qoq FY2022E FY2021 % change Net sales 15,086 - 10,064 16,338 50 (8) 82,884 51,986 59 Other operating income 2,673 - 1,276 6,868 - 10,308 Total sales 17,759 14,205 11,341 23,205 25 57 (23) 82,884 62,294 Total expenditure (13,540) (9,657) (11,530) (14,616) 40 17 (7) (58,870) (50,405) Raw material consumed (1,683) (1,342) (3,223) - (7,559) Purchase of finished goods (4,332) (2,831) (1,726) - (9,544) Employee expenses (2,029) (1,978) (1,906) - (7,546) Revenue share to concessionaire grantors (1,179) (1,775) (2,493) - (9,311) Other expenses (4,293) (3,605) (5,221) - (16,279) EBITDA 4,219 4,547 (189) 8,589 (7) (2,328) (51) 24,014 11,889 102 Other Income 1,215 1,395 904 1,837 5,579 5,240 EBITDA (including other income) 5,434 5,942 714 10,426 (9) 661 (48) 29,593 17,129 Depreciation (2,288) (2,522) (2,631) (2,326) (10,087) (10,045) EBIT 3,146 3,420 (1,917) 8,100 (8) (264) NM 19,506 7,083 Interest (7,485) (9,292) (7,810) (7,638) (37,166) (31,722) Profit before tax (4,339) (5,871) (9,727) 462 (17,661) (24,638) Total tax expense (388) - 1,511 (401) - 2,624 RPAT (4,727) (5,871) (8,216) 61 (17,661) (27,262) Minority interest 517 130 2,105 33 519 5,725 Profit/loss of associate company 773 (332) (122) (2,262) (1,328) (3,457) Net Profit after Minority Interest & P/L Asso.Co. (3,438) (6,074) (6,234) (2,168) (18,677) (19,746) Extra-ordinary Items - (858) - (5,855) (3,433) (8,806) Adjusted Profit (3,438) (6,932) (6,234) (8,023) (15,244) (28,552)

Key ratios (%) Operating expenses & stock / sales 34.0 36.8 21.5 27.7 Employee cost / sales 11.4 17.4 8.2 12.1 Other expenses / sales 24.2 31.8 22.5 26.1 EBITDA margin 23.8 32.0 (1.7) 37.0 29.0 19.1 EBIDT Margin 30.6 6.3 44.9 35.7 27.5 PBT margin (24.4) (85.8) 2.0 (21.3) (39.6) Tax rate (8.9) 15.5 86.7 1.2 10.7 PAT margin (19.4) (55.0) (34.6) (18.4) (45.8) EPS (Rs/share) (1.8) (1.1) (3.9) (0.5) (4.7) (3.6)

Segmental revenues Airports 8,982 4,944 15,305 82 (41) Power 4,467 3,006 1,970 49 127 Roads 1,222 864 1,336 42 (8) EPC 2,683 2,235 4,099 20 (35) Others 1,013 934 1,097 8 (8) Less intersegmental (609) (642) (601) (5) 1 Total 17,759 11,341 23,205 57 (23)

Passengers (mn) Delhi 5.1 1.2 9.7 315 (47) Hyderabad 1.5 0.3 3.3 400 (55) Cebu 0.2 2.4 0.2 (92) 33 Total 6.8 3.9 13.2 73 (48)

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 89 Transportation GMR Infrastructure

Exhibit 2: Within airports, Cebu reported a sharp ~92% decline while Delhi and Hyderabad recovered yoy Delhi, Hyderabad and Cebu airport passenger traffic details, March fiscal year ends (mn pax)

Hyderabad airport Delhi airport Domestic International Domestic International 8 20

16 6

12 4

8 333% 433% 5.2 2 1.6 0.8 4 0.2 1.2 0.3 1.4 4.4 0 0.2 0 0.3 0 1 1QFY21 1QFY22 1QFY21 1QFY22

Cebu airport Delhi+Hyderabad+Cebu airport Domestic International Domestic International 4.0 28.0

3.0 2.4 21.0 -92% 2.0 0.7 14.0 79% 7.0 1.0 1.7 7.0 3.9 1.0 0.2 - 0.9 6.0 0.2 3.0 - - 1QFY21 1QFY22 1QFY21 1QFY22

Source: Company, Kotak Institutional Equities

90 KOTAK INSTITUTIONAL EQUITIES RESEARCH GMR Infrastructure Transportation

Exhibit 3: Non-aero revenues for Delhi and Hyderabad airport were up sharply 37%/119% yoy on low base of 1QFY21 Delhi and Hyderabad airport non-aero revenue segment wise, March fiscal year ends, 1QFY21,1QFY22 (%)

Delhi airport

Yoy change in key non-aero revenue line items in 1QFY22 (%) Non-aero revenue breakup of Rs3.3 bn for 1QFY22 (%) Retail (inc duty 588 Others free) 550 13% 10% 450 450 333 350 Ground Handling 7% 250 175 141 150 63 F&B 32 38 4% 50

(50) (5) Advertisement Space rentals

F&B 4% 38%

Cargo

Others

Space rentals Space Advertisement

Ground Ground Handling Cargo Passenger volumesPassenger

Retail Retail duty (inc free) 24% Totalnon-aero revenues

Hyderabad airport

Yoy change in key non-aero revenue line items in 1QFY22 (%) Non-aero revenue breakup of Rs403 mn for 1QFY22 (%) 922 950 850 Retail (inc duty free) 750 Others 14% 650 557 24% 550 469 433 450 378 350 192 250 119 150 5 50 (50)

F&B Ground Handling Others 13% Space rentals

35%

Space rentals Space

Advertisement Ground Ground Handling

Passenger volumesPassenger F&B Retail (inc duty duty free)Retail (inc 6% Advertisement

Total non-aero non-aero revenues Total 8%

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 91 Transportation GMR Infrastructure

Exhibit 4: Corporate net debt of GMR Infrastructure during the quarter Details of net debt across entities (including FCCB), March fiscal year ends (Rs bn)

Airport Energy Highways Others Corporate (Inc debt for PE exit) Total 290 300 283 277 272 273 260 265 245 251 66 250 88 75 66 110 86 5 71 30 200 111 3 106 3 0 25 25 5 26 0 22 25 23 5 25 23 150 26 2 26 23 5 26 27 27 26 26 100 27 173 157 139 149 123 132 50 110 81 93

0 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 1QFY22

Source: Company, Kotak Institutional Equities

Exhibit 5: Domestic airport passenger volumes declined in April-May, 2021 but have started turning around since last week of May, 2021 Improvement in business metrics for key assets of GMRI

Source: Company, Kotak Institutional Equities

92 KOTAK INSTITUTIONAL EQUITIES RESEARCH GMR Infrastructure Transportation

Exhibit 6: Proposed group restructuring for airport and non-airport related businesses Details of structure and shareholding after proposed demerger, March fiscal year ends (%)

Source: Company, Kotak Institutional Equities

Exhibit 7: GMRI would have ~Rs30-35 bn of corporate debt excluding FCCBs against Rs55 bn of potential deal earn-outs Break-up of net debt of GMRI (consolidated), March fiscal year-end, 2020 ( Rs bn)

After, potential conversion of FCCB (Rs20 bn) , upfront realization from Kakinada stake sale (Rs5 bn), remaining Other supports/comments proceeds from Kakinada linked to milestones (Rs10 bn) end-9MFY20 end-FY2020 end-FY2021 and sale of 30% stake in PT FY2020 debt debt debt GEMS coal mine (Rs30 bn) EBITDA (a) Cash earn outs of Rs20 bn are possible from the recent airport and land deal. Krishnagiri land parcel of 2,100 acres can also yield Rs3-4 bn over Corporate 110 86 66 32 Nil time. Rs55.7 bn of potential earn outs related to the Groupe ADP transaction would also help Existing EBITDA is more than sufficient to take care for debt servicing and Airports 110 123 157 157 27 repayment commitment We understand that the promoter is in talks with GMRI to aggregate Energy and GMRI's 30% stake in the remaining Golden PT Gems mines. Stock recently 26 27 23 - 0 others got relisted and suggests US$0.45 bn value of GMRI's stake. The Energy projects (60-70% stake with GMRI) have Rs22 bn of project claims.

Portfolio is capable of taking care of debt servicing requirements. Linear Highways 26 26 25 26 3 revenue growth over the remaining 12 years of concession period and potential settlement of Rs15-20 bn claims would support debt repayment Total 277 265 273 215 30

Notes: (a) We have added proportionate PBT of investments in the Airports (Rs 3 bn) to account for proportionate share in PAT of investments not consolidated

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 93 Transportation GMR Infrastructure

Exhibit 8: We expect FCF generation beyond current airport expansion ending FY2023 Movement of key financials metrics of GMRI (consolidated), March fiscal year-ends, 2017-27E

Free cash flow (LHS, Rs bn) (Rs bn) (X) Net debt / EBITDA (RHS, X) Pro-forma net debt / EBITDA (RHS, X) 90 25 22 60 22 20 30 15 14 - (13) 15 15 10 11 13 9 (30) 8 8 10 6 6 (60) 5 10 10 8 8 7 5 (90) 5 6 6

(120) -

2017

2018

2019

2020

2021E

2022E

2023E

2024E

2025E 2026E 2027E

Source: Company, Kotak Institutional Equities estimates

Exhibit 9: We factor in the lower 15.4% RoE and ~Rs140 base aero tariff for the next control period for the Delhi airport Key assumptions behind DCF-based valuation of GMR (consolidated)

Delhi Hyderabad Passenger CAGR (%) 2014-19 13 20 2019-24E 3 3 2019-29E 7 9 Aero yield (Rs/pax) Current 141 334 For the next control period 141 622 For the following control period 142 361 For the following control period 142 248 For the following two control periods (average) 142 234 Non-aero revenues CAGR (%) 2014-19 15 4 2019-24E 8 6 2019-29E 11 12 Duty-free spending per international pax (US$) 2019 10 6 2024 13 9 2029 20 15 Lumpy land monetization Year 2023 NA Quantum (Rs bn) 19 NA Regulated RoE (%) Current 16.0 16.0 For the next control period 15.4 16.0 For the following control period 13.9 14.0 Beyond two control periods 13.9 13.9 Cost of equity (%) 13.0 13.0

Source: Company, Kotak Institutional Equities estimates

94 KOTAK INSTITUTIONAL EQUITIES RESEARCH GMR Infrastructure Transportation

Exhibit 10: We broadly maintain our FY2023 estimates as decline in passenger volumes gets offset by higher tariff Revision in estimates, March fiscal year ends (Rs mn)

New estimates Old estimates % revision 2018 2019 2020 2021 2022E 2023E 2024E 2022E 2023E 2024E 2022E 2023E 2024E Passenger volumes for Delhi+Hyderbad (mn) Domestic 63 68 67 27 62 74 82 62 74 82 - - - Yoy growth (%) 16 8 (1) (60) 131 19 11 131 19 11 Overseas 21 23 22 4 12 22 24 12 22 24 - - - Yoy growth (%) 12 8 (4) (83) 242 83 9 242 83 9 Total 84 91 89 30 74 96 106 74 96 106 - - - Yoy growth (%) 8 (2) (66) 144 29 11 144 29 11

Key financials Revenues 87,212 73,997 83,949 62,294 82,884 102,687 110,259 82,884 102,687 110,259 - - - EBITDA 21,859 15,295 24,680 11,889 24,014 32,956 37,353 24,014 32,956 37,353 - - - EBITDA margin (%) 25.1 20.7 29.4 19.1 29.0 32.1 33.9 29.0 32.1 33.9 0 bps 0 bps 0 bps Recurring PAT (6,513) (11,662) (12,292) (22,014) (17,867) (10,467) (14,518) (17,867) (10,467) (14,518) NM NM NM Cash profit 3,771 (1,823) (1,650) (11,969) (7,780) 1,753 4,696 (7,780) 1,753 4,696

Notes: (a) The change in estimates is large for FY2021 as it builds in a low aero tariff for Hyderabad based on past true-up on account of revised aero/non-aero split of revenues. This adds on to the Covid-19 related weakness in volumes

Source: Company, Kotak Institutional Equities estimates

Exhibit 11: SoTP valuation of GMR (consolidated)

Equity Proportion Value per value Stake ate equity share Key vertical / asset Valuation method (Rs bn) (%) (Rs bn) (Rs) GMR Airports SOTP (DIAL, GHIAL, Duty free JV - DCF) 359 55 197 32.7 GMR Energy SOTP (Warora, Kamalanga and others - DCF) 17 70 12 2.0 Rajahmundry power project (SDR) DCF (23) 45 (10) (1.7) GMR Highways SOTP (individual projects DCF) 3 100 3 0.5 SIR assets Valuation at 1.5X investment 4 51-100 4 0.7 PTGEMs 16X average of FY2019/annualized 9MFY20 PAT 9 100 9 1.5 Project-level valuation of key assets 357 215 35.6 Standalone debt, other investments/L&A Investments valued at negligible 0.1X book value (17) (3.1) SoTP of GMR (consolidated) 198 32.5

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 95 Transportation GMR Infrastructure

Exhibit 12: Summary financials of GMR Infrastructure (consolidated), March fiscal year-ends, 2018-24E (Rs mn)

2017 2018 2019 2020 2021 2022E 2023E 2024E Income statement Net revenues 97,686 87,212 73,997 83,949 62,294 82,884 102,687 110,259 Total operating expenses (65,487) (65,353) (58,703) (59,269) (50,405) (58,870) (69,732) (72,907) EBITDA 32,200 21,859 15,295 24,680 11,889 24,014 32,956 37,353 Other income 4,654 5,530 7,198 8,272 5,240 5,579 8,265 9,144 Depreciation & Amortization (10,599) (10,284) (9,840) (10,643) (10,045) (10,087) (12,220) (19,214) EBIT 26,255 17,105 12,654 22,309 7,083 19,506 29,001 27,283 Interest expense (21,285) (23,163) (25,190) (35,451) (31,722) (37,166) (38,212) (41,153) PBT 4,970 (6,058) (12,536) (13,141) (24,638) (17,661) (9,211) (13,870) Tax expense (7,370) (455) 874 849 2,624 (207) (1,256) (648) Recurring PAT prior to associate income and (2,401) (6,513) (11,662) (12,292) (22,014) (17,867) (10,467) (14,518) minority interest Exceptional items and prior period items (net) (558) (319) (21,022) (6,846) (8,806) 3,433 5,493 6,867 Reported PAT prior to associate income and (2,959) (6,832) (32,684) (19,138) (30,820) (14,434) (4,973) (7,651) minority interest Associate profits (684) (4,314) (879) (2,883) (3,457) (1,328) (906) (716) Minority interest (2,103) (2,493) (2,376) (2,831) 5,725 519 (3,031) (1,036) Reported PAT (5,746) (13,639) (35,939) (24,852) (28,552) (15,244) (8,911) (9,402) Recurring PAT (5,188) (13,319) (14,917) (18,006) (19,746) (18,677) (14,404) (16,269) Recurring EPS (0.9) (2.2) (2.5) (3.0) (3.3) (3.1) (2.0) (2.3) Balance sheet Shareholders' funds 56,475 38,183 (8,201) (24,587) (17,181) (32,425) (40,224) (49,627) Conversion of Rs20 bn of Share capital 6,036 6,036 6,036 6,036 6,036 6,036 7,147 7,147 FCCB into shares at Rs18 Reserves & surplus 50,439 32,148 (14,237) (30,623) (23,217) (38,461) (47,371) (56,774) conversion price Minority interest 17,136 18,265 20,620 26,746 30,367 29,848 32,879 33,915 Debt 214,840 230,674 275,799 326,953 322,728 351,879 375,121 360,957 Total sources of funds 314,634 308,976 305,823 346,011 356,571 369,736 400,010 384,479 Net fixed assets 130,498 129,694 133,396 237,980 193,942 247,357 264,823 249,472 Net working capital (ex-cash) 1,011 (11,099) 18,702 (38,266) (1,386) 10,795 13,400 18,523 Investments 127,164 120,770 113,634 71,601 96,739 98,867 99,289 99,480 Cash and bank balances and current investments 47,450 60,184 39,801 74,079 64,133 12,717 22,497 17,003 Total application of funds 314,634 308,976 305,823 346,011 356,570 369,736 400,010 384,479 Free cash flow Operating profit before wcap. changes 35,100 20,766 18,939 25,215 16,360 29,593 41,221 46,497 Change in working capital / other adjustments 12,732 3,842 (10,864) (9,845) (16,719) (12,180) (2,606) (5,123) Net cashflow from operating activites 45,655 23,472 20,523 13,759 34 17,206 49,159 47,726 Capex (6,199) (7,148) (28,471) (29,121) (16,459) (63,502) (29,686) (3,863) Cash (used) / realised in investing activities 17,927 (10,142) (36,050) (9,896) 24,334 (65,631) (30,108) (4,054) Such requirement would largely get funded by Free cash flow (CFO + net capex) 39,455 16,325 (7,948) (15,362) (16,424) (46,296) 19,474 43,862 ~Rs90 bn of procceds Ratios from monetization of EBITDA margin (%) 33.0 25.1 20.7 29.4 19.1 29.0 32.1 33.9 airports' stake. Net debt/equity including minority interest 2.3 3.0 19.0 117.1 19.6 (131.6) (8.8) (6.9) Net debt/EBITDA 5.2 7.8 15.4 10.2 21.8 14.1 10.7 9.2 RoACE (%) 3.4 2.5 1.2 2.9 0.4 2.6 3.6 3.1 RoAIC (%) 7.1 7.1 3.2 6.8 1.0 8.0 9.6 5.7

Source: Company, Kotak Institutional Equities estimates

96 KOTAK INSTITUTIONAL EQUITIES RESEARCH GMR Infrastructure Transportation

Exhibit 13: Financial analysis for DIAL, March fiscal year-ends, 2017-2029E (Rs mn)

CAGR (%) 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2014-19 2019-29E Comments Gross revenues 56,242 36,810 32,627 39,094 24,268 34,804 48,743 53,534 60,032 67,333 75,552 84,823 95,297 (3.6) 11.3 Aero revenues 39,315 17,055 9,878 9,492 4,000 7,974 10,475 11,468 12,615 13,877 15,264 16,791 18,470 (18.8) 6.5 True-up of aero-tariff leading to sharp revenue drop. Non-aero revenues 15,285 17,988 20,909 22,046 12,782 18,993 26,585 30,383 34,898 40,100 46,095 53,002 60,961 15.4 11.3 Non-aero revenue growth led by duty-free and F&B. Income from commercial 1,642 1,767 1,839 7,556 7,486 7,838 11,682 11,682 12,519 13,356 14,193 15,030 15,867 We assume the 140 acres of monetization property development by FY2025E and then the remaining 70 acres of land to be leased at ~5 acres per Revenue share to AAI (26,348) (17,615) (15,913) (18,487) (3,381) (16,232) (22,607) (24,950) (28,135) (31,570) (35,461) (39,797) (44,662) Large 46% revenue share paid to AAI. Net revenues 29,894 19,195 16,714 20,608 20,854 18,572 26,135 28,584 31,898 35,764 40,091 45,026 50,635 (4.3) 11.7 True-up of aero-tariff leading to sharp revenue drop from FY2018. EBITDA 20,256 8,226 5,119 9,721 6,832 8,460 14,617 15,828 18,303 21,227 24,534 28,361 32,768 (16.4) 20.4 Depreciation (6,380) (6,459) (6,398) (6,263) (5,688) (5,700) (5,474) (10,271) (14,611) (13,279) (12,098) (11,094) (10,264) EBIT (incl. other income) 16,945 5,386 4,027 6,800 2,130 4,475 10,808 8,097 7,455 12,248 17,483 22,845 28,481 Interest expense (5,273) (5,792) (6,296) (6,787) (6,961) (8,124) (8,564) (12,047) (14,200) (13,500) (13,218) (12,945) (12,696) PBT 11,673 (406) (2,269) 14 (4,831) (3,649) 2,243 (3,950) (6,745) (1,252) 4,265 9,900 15,786 Tax expense (5,405) 789 1,151 118 1,657 - (574) - - - (1,092) (2,534) (4,041) Recurring PAT 6,268 382 (1,118) 131 (3,174) (3,649) 1,669 (3,950) (6,745) (1,252) 3,173 7,365 11,745 Cash profit 12,648 6,842 5,281 6,394 2,514 2,051 7,143 6,320 7,866 12,027 15,271 18,459 22,009 Cash profit remains strong

No. of passengers (mn) 58 66 69 67 22 56 74 81 89 98 108 119 130 13.4 6.5 Domestic 42 48 51 50 19 46 55 60 66 73 80 88 97 15.8 6.7 International 16 17 19 18 3 11 19 21 23 25 28 30 33 8.1 6.0 Key driver for duty-free revenues. Aero-tariff per passenger 681 260 143 141 181 142 142 142 142 142 142 142 142 True-up of aero tariff through interim and final order. % share of non-aero 27 49 64 56 53 55 55 57 58 60 61 62 64 Aero-tariff decline and ramp-up in duty-free, revenues F&B, etc. lead to a quick increase in share of non-aero revenues. Current plan is for terminal expansion and new runway. We also expect further terminal Expansion capex - - - 32,523 18,071 34,962 31,298 2,885 - - 15,454 8,634 16,815 capacity expansion in line with our passenger growth assumptions. Debt 52,620 52,491 55,647 103,152 105,195 115,479 143,803 140,615 129,855 127,289 133,118 135,064 141,327 Debt build-up in line with capex plans. Net debt to EBITDA (X) 1 3 7 6 10 12 7 6 5 3 3 2 2 RoIC gets contained by sustained capex over RoAIC (%) 13 2 (1) 3 1 3 11 4 2 4 7 11 16 the next 6-8 years Notes: (a) Net debt to EBITDA reduces meaningfully in FY2020 on account of large ~Rs19 bn of refundable security deposit collected from Bharti Realty

Source: Company, Kotak Institutional Equities estimates

Exhibit 14: Financial analysis for HIAL, March fiscal year-ends, 2017-2029E (Rs mn)

CAGR (%) (Rs mn) 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2014-19 2019-29E Comments Gross revenues 11,054 12,520 14,523 15,258 4,412 14,304 17,808 20,552 23,699 27,344 21,687 25,136 29,153 14.9 7.2 Aero revenues 8,179 9,323 10,852 11,314 2,781 11,157 13,686 15,679 17,963 20,582 13,705 15,706 18,000 20.7 5.2 True-up at GHIAL will lead to a small drop in aero revenues after an expected tariff order by FY2019. Non-aero revenues 2,875 3,197 3,671 3,859 1,631 3,147 4,122 4,873 5,736 6,762 7,981 9,430 11,154 4.0 11.8 Non-aero revenue growth led by duty-free and F&B. Concession fee (462) (530) (615) (650) (225) (566) (705) (814) (939) (1,083) (859) (995) (1,155) Concession fee expense for GHIAL is modest compared to the large revenue share paid by DIAL. Net revenues 10,592 11,991 13,907 14,608 4,187 13,738 17,103 19,738 22,761 26,261 20,828 24,141 27,999 14.9 7.2 EBITDA 8,022 8,837 9,926 9,911 531 9,203 11,582 13,968 16,731 19,959 14,240 17,255 20,517 20.4 7.5 Depreciation (2,038) (1,984) (1,390) (1,707) (1,898) (1,641) (3,982) (6,163) (5,750) (5,364) (4,998) (4,634) (4,266) EBIT (incl. other income) 7,010 8,356 9,708 9,347 67 8,620 8,162 8,008 10,981 14,594 9,269 12,648 16,251 Interest expense (2,011) (1,983) (1,982) (2,405) (2,367) (5,679) (6,046) (5,349) (4,754) (4,486) (4,255) (4,455) (5,413) PBT 5,000 6,374 7,726 6,941 (2,300) 2,941 2,116 2,659 6,227 10,108 5,015 8,192 10,838 52.3 3.4 Tax expense (1,510) (347) (399) (573) 790 (147) (106) (133) (311) (505) (1,254) (2,048) (2,710) Recurring PAT 3,490 6,027 7,328 6,368 (1,510) 2,794 2,011 2,526 5,916 9,603 3,761 6,144 8,129 68.3 1.0 Modest concession fee allows GHIAL to stay profitable Cash profit 5,528 8,011 8,718 8,075 388 4,435 5,993 8,689 11,666 14,967 8,759 10,779 12,395

No. of passengers (mn) 15 18 21 22 8 18 22 25 29 33 38 43 50 19.5 8.9 Domestic 12 15 17 18 8 16 19 22 25 29 33 38 43 22.3 9.6 International 3 4 4 4 1 2 3 4 4 5 5 6 6 10.5 5.1 Key driver for duty-free revenues. Aero-tariff per passenger 538 509 509 521 276 622 622 622 622 622 361 361 361 True-up at GHIAL expected to cause a smaller decline in aero tariffs compared to the sharp drop expected at DIAL. % share of non-aero 26.0 25.5 25.3 25.3 37.0 22.0 23.1 23.7 24.2 24.7 36.8 37.5 38.3 revenues

Expansion capex - - - 9,750 26,000 29,250 - - - - 3,000 12,500 21,000 We model terminal capacity expansion in line with our passenger growth assumptions. Debt 20,837 25,674 26,920 51,882 67,878 83,988 77,699 65,349 61,775 58,201 55,578 63,570 81,185 Debt build-up in line with capex plans. Net debt to EBITDA (X) 1.8 2.4 2.5 5.6 7.6 9.6 8.9 7.3 6.9 6.4 6.1 7.1 9.3

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 97 Disclosures SELL Amara Raja Batteries (AMRJ) https://ultraviewer.et/en/own Automobiles & Components AUGUST 15, 2021 load.html RESULT Sector view: Cautious

Tough road ahead. AMRJ reported 1QFY22 EBITDA of Rs2.5 bn, which was 6% above CMP (`): 729 our estimate due to a better-than-expected revenue print. We expect strong volume Fair Value (`): 660 growth led by recovery in automotive OEMs and industrial segments from 2HFY22E BSE-30: 55,437 onwards. We believe the company is trailing behind the global competitors in terms of investments in R&D and expertise in lithium-ion technology. With electric 2W/3W segments at the cusp of rapid adoption, we believe the road ahead for the company will be challenging. Retain SELL rating with revised FV of Rs660 (from Rs725 earlier).

Amara Raja Batteries Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 729/660/SELL EPS (Rs) 37.9 42.2 47.7 52-week range (Rs) (high-low) 1,026-693 EPS growth (%) (2.1) 11.4 13.1  Mcap (bn) (Rs/US$) 125/1.7 P/E (X) 19.3 17.3 15.3 ADTV-3M (mn) (Rs/US$) 1,483/20 P/B (X) 3.0 2.6 2.3 Shareholding pattern (%) EV/EBITDA (X) 11.0 9.2 8.0 Promoters 28.1 RoE (%) 16.4 16.1 16.1 FPIs/MFs/BFIs 21.3/5.9/6.7 Div. yield (%) 1.5 1.4 1.6 Price performance (%) 1M 3M 12M Sales (Rs bn) 71 83 91 Absolute (1.2) (9.2) (2.0) EBITDA (Rs bn) 11 13 14 Rel. to BSE-30 (6.2) (23.0) (46.7) Net profits (Rs bn) 6 7 8

1QFY22 EBITDA was 6% above our estimate due to better-than-expected revenue print

Amara Raja reported 1QFY22 EBITDA of Rs2.5 bn (-21% qoq), which was 6% above our estimate due to a better-than-expected revenue print. Revenue declined by 10% qoq (KIE: - 16% qoq), which was led by a lower-than-expected volume decline in automotive replacement and the industrial segment and strong growth in exports segment. EBITDA margin came in at 13.2% (-190 bps qoq), which was 10 bps below our estimate due to lower-than-expected gross margins. Gross margin deteriorated by 150 bps qoq led by RM cost pressures and the company expects the RM basket to remain at similar levels in the coming quarters. Depreciation expense increased by 11% qoq due to commissioning of the new line in Andhra Pradesh plant. Net profit came in at Rs1.2 bn (-35% qoq) which was 2% below our estimate despite a beat at EBITDA level due to higher-than-expected depreciation expense.

Cut our FY2022-24 EPS estimates by 1%; maintain SELL

We have cut our FY2022-24 EPS estimates by 1% led by higher-than-expected depreciation expense, which is partly offset by 2% increase in our revenue growth assumptions due to stronger recovery in the automotive replacement segment and in select industrial segments (UPS and telecom). Overall, we expect revenues to grow by 16% in FY2022E due to (1) 9-15% yoy growth in replacement and UPS segment and (2) 15-30% yoy growth in 2W and 4W OEM segment. We expect EBITDA margin to remain around ~15.6-15.9% in FY2022-24E led by an inferior product mix (higher mix of the OEM and industrial segment) and RM headwinds offset by operating leverage benefits. Despite the company looking for a technological partner in the lithium-ion technology space, we believe it is far behind in terms of scale and technological Hitesh Goel know-how versus the big global players. We see limited benefit for big global players to tie up with the company to jointly set up the giga factory and share technical expertise. FV revised to Rs660 (from Rs725 earlier); valuing the company at 13X September 2023E EPS (from 15X Rishi Vora March 2023E EPS). We have cut our multiple as we believe electric 2W/3W segments are at the cusp of rapid adoption, we believe the road ahead for the company will be challenging. We retain our SELL rating on the company.

98 KOTAK INSTITUTIONAL EQUITIES RESEARCH Amara Raja Batteries Automobiles & Components

Exhibit 1: EBITDA was 6% above our estimate due to better-than-expected revenue print Amara Raja interim results, March fiscal year-ends (Rs mn)

(% chg.) 1QFY22 1QFY22E 1QFY21 4QFY21 1QFY22E 1QFY21 4QFY21 FY2022E FY2021 Yoy (%) FY2023E FY2022E Yoy (%) Net sales 18,859 17,663 11,510 21,027 6.8 63.8 (10.3) 83,043 71,497 16.1 91,079 83,043 9.7 Raw materials (12,997) (12,011) (7,655) (14,183) 8.2 69.8 (8.4) (55,109) (47,447) 16.1 (60,575) (55,109) 9.9 Staff costs (1,179) (1,000) (840) (1,071) 17.9 40.4 10.0 (4,686) (4,260) 10.0 (4,968) (4,686) 6.0 Other expenses (2,184) (2,295) (1,492) (2,608) (4.8) 46.4 (16.2) (10,262) (8,633) 18.9 (11,205) (10,262) 9.2 Total expenses (16,360) (15,306) (9,986) (17,862) 6.9 63.8 (8.4) (70,057) (60,340) 16.1 (76,747) (70,057) 9.6 EBITDA 2,499 2,357 1,524 3,165 6.0 63.9 (21.1) 12,986 11,157 16.4 14,331 12,986 10.4 Depreciation (963) (900) (748) (871) 7.0 28.7 10.6 (3,912) (3,192) 22.6 (4,344) (3,912) 11.0 EBIT 1,536 1,457 776 2,295 5.4 98.0 (33.1) 9,074 7,965 13.9 9,987 9,074 10.1 Other income 166 250 88 321 (33.5) 89.1 (48.2) 713 874 1,018 713 42.8 Interest expense (32) (20) (27) (28) (60) (105) - (60) (100.0) Profit before tax 1,670 1,687 837 2,588 (1.0) 99.6 (35.5) 9,727 8,733 11.4 11,006 9,727 13.1 Tax expense (431) (425) (210) (693) 105.2 (37.8) (2,523) (2,265) (2,855) (2,523) 13.1 Profit after tax 1,239 1,262 627 1,895 (1.8) 97.7 (34.6) 7,204 6,468 11.4 8,151 7,204 13.1 EPS (Rs) 7.3 7.4 3.7 11.1 (1.8) 97.7 (34.6) 42.2 37.9 11.4 47.7 42.2 13.1 As % of net revenues Raw material cost as % of net sales 68.9 68.0 66.5 67.4 66.4 66.4 66.5 66.4 Staff cost as % of net sales 6.3 5.7 7.3 5.1 5.6 6.0 5.5 5.6 Other expenses as % of net sales 11.6 13.0 13.0 12.4 12.4 12.1 12.3 12.4 No. of shares 170.8 170.8 170.8 170.8 170.8 170.8 170.8 170.8 Tax rate (%) 25.8 25.2 25.1 26.8 25.9 25.9 25.9 25.9 EBITDA margin (%) 13.2 13.3 13.2 15.1 15.6 15.6 15.7 15.6 EBIT margin (%) 8.1 8.2 6.7 10.9 10.9 11.1 11.0 10.9

Source: Company, Kotak Institutional Equities

Exhibit 2: Higher RM cost and inferior product mix (lower mix of replacement segment) impacted GM in 1QFY22 on a qoq basis Revenue growth, gross and EBITDA margin comparison of Amara Raja and Exide, March fiscal year-ends, 1QFY19-1QFY22 (%)

1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 1QFY22 Amara Raja Revenue growth (%) 18.8 22.8 9.1 (0.9) 2.0 (3.3) 3.1 0.9 (36.6) 14.2 12.1 33.0 63.8 Gross margin (%) 28.5 30.9 32.8 34.8 32.4 35.9 35.5 36.3 33.5 34.7 33.9 32.6 31.1 EBITDA margin (%) 12.4 13.5 14.9 15.5 15.4 17.2 16.2 15.4 13.2 17.6 15.6 15.1 13.2 Exide Revenue growth (%) 31.8 15.4 9.7 5.7 0.2 (4.0) (3.4) (20.9) (44.3) 5.5 16.2 43.0 60.7 Gross margin (%) 33.6 33.1 35.1 35.1 35.5 36.2 36.2 38.2 31.2 35.0 35.9 34.4 31.5 EBITDA margin (%) 14.1 12.2 12.5 14.4 14.7 14.1 13.3 13.1 9.6 14.2 14.4 14.1 10.5

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 99 Disclosures

Exhibit 3: LME lead price has increased by 8% qoq in 1QFY22 Quarterly LME lead prices, March fiscal-year ends, 1QFY14-1QFY22

LME lead (US$/ton) USD:INR rate LME lead (Rs/ton) Qoq increase (%) 1QFY14 2,113 54.4 114,899 2QFY14 2,084 58.9 122,738 6.8 3QFY14 2,119 63.0 133,505 8.8 4QFY14 2,120 62.1 131,660 (1.4) 1QFY15 2,083 60.7 126,487 (3.9) 2QFY15 2,158 59.9 129,282 2.2 3QFY15 2,092 61.1 127,837 (1.1) 4QFY15 1,902 62.3 118,562 (7.3) 1QFY16 1,901 62.7 119,247 0.6 2QFY16 1,806 63.8 115,228 (3.4) 3QFY16 1,690 65.7 111,084 (3.6) 4QFY16 1,687 67.0 113,049 1.8 1QFY17 1,758 67.0 117,759 4.2 2QFY17 1,762 67.1 118,276 0.4 3QFY17 1,984 66.8 132,542 12.1 4QFY17 2,244 67.9 152,368 15.0 1QFY18 2,243 65.3 146,468 (3.9) 2QFY18 2,200 64.4 141,680 (3.3) 3QFY18 2,428 64.7 157,092 10.9 4QFY18 2,539 64.1 162,750 3.6 1QFY19 2,388 65.6 156,653 (3.7) 2QFY19 2,232 69.0 154,008 (1.7) 3QFY19 1,999 72.4 144,728 (6.0) 4QFY19 2,049 70.5 144,352 (0.3) 1QFY20 1,882 69.5 130,874 (9.3) 2QFY20 2,033 70.4 143,141 9.4 3QFY20 2,038 71.2 145,167 1.4 4QFY20 1,834 72.4 132,782 (8.5) 1QFY21 1,676 75.8 127,041 (4.3) 2QFY21 1,874 74.4 139,375 9.7 3QFY21 1,917 73.8 141,472 1.5 4QFY21 2,007 72.9 146,310 3.4 1QFY22 2,141 73.8 158,006 8.0

Source: Bloomberg, Kotak Institutional Equities

Exhibit 4: We have cut our FY2022-24 EPS estimates by 1% on higher depreciation expense assumptions Earnings revision table, March fiscal year-ends, 2022-24E (Rs mn, %)

New estimates Old estimates % change 2022E 2023E 2024E 2022E 2023E 2024E 2022E 2023E 2024E Amara Raja Net sales 83,043 91,079 99,222 81,736 89,500 97,504 1.6 1.8 1.8 EBITDA 12,986 14,331 15,804 12,826 14,147 15,601 1.2 1.3 1.3 Margin (%) 15.6 15.7 15.9 15.7 15.8 16.0 Net Profit 7,204 8,151 9,166 7,267 8,216 9,235 (0.9) (0.8) (0.8) EPS (Rs/share) 42.2 47.7 53.7 42.5 48.1 54.1 (0.9) (0.8) (0.8)

Source: Company, Kotak Institutional Equities estimates

100 KOTAK INSTITUTIONAL EQUITIES RESEARCH Amara Raja Batteries Automobiles & Components

Exhibit 5: We expect automotive revenues to grow by 10% CAGR over FY2021-24E aided by growth in automotive replacement segment Revenue breakdown, March fiscal year-ends, 2012-24E (Rs mn)

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Volume sold (mn units) Four-wheeler OEM 2 2 2 2 2 2 2 3 2 2 3 3 3 Yoy chg (%) 17.8 2.0 (2.0) 7.0 13.0 12.5 10.9 12.0 (18.0) (3.0) 30.0 15.0 10.0 Four-wheeler replacement 3 3 4 4 5 6 6 7 8 8 9 10 10 Yoy chg (%) 20.0 20.0 15.0 15.0 15.0 12.0 10.0 12.0 10.0 8.0 8.0 8.0 8.0 Total four-wheeler volumes 4.3 4.9 5.3 6.0 6.9 7.7 8.5 9.5 9.8 10.3 11.6 12.7 13.8 Yoy chg (%) 19.2 13.6 9.6 12.7 14.5 12.1 10.2 12.0 2.4 5.6 12.4 9.6 8.5 Two-wheeler OEM — — 1 2 2 2 3 3 3 3 4 4 4 Two-wheeler replacement 2 3 4 5 6 7 8 10 11 12 13 14 15 Yoy chg (%) 11.1 37.0 30.0 36.0 20.0 20.0 15.0 20.0 18.0 5.0 8.0 8.0 8.0 Total two-wheeler volumes 2.0 2.7 4.5 6.5 7.9 9.4 11.0 12.8 14.1 15.1 16.5 17.9 19.3 Yoy chg (%) 11.1 37.0 62.8 46.7 21.3 17.9 17.5 16.2 10.4 6.9 9.5 8.4 8.0 Total automotive volumes 6.3 7.6 9.8 12.6 14.8 17.1 19.5 22.3 23.9 25.4 28.1 30.6 33.1 Yoy chg (%) 16.5 21.1 28.8 28.2 18.0 15.2 14.2 14.4 7.0 6.4 10.6 8.9 8.2 Revenue break-up (Rs mn) Four-wheeler OEM 2,942 3,151 3,304 3,924 4,301 4,984 5,466 6,057 4,719 4,531 6,008 6,910 7,601 Four-wheeler replacement 8,528 11,053 13,346 15,348 16,768 19,156 20,355 22,777 25,055 27,059 29,808 32,193 34,768 Total four-wheeler 11,470 14,203 16,650 19,272 21,069 24,139 25,821 28,834 29,773 31,590 35,816 39,102 42,369 Two-wheeler OEM — — 489 1,026 1,244 1,435 1,774 1,860 1,537 1,750 2,053 2,259 2,439 Two-wheeler replacement 1,260 1,813 2,710 3,796 4,418 5,514 6,271 7,519 8,872 9,316 10,262 11,083 11,970 Total two-wheeler 1,260 1,813 3,199 4,822 5,662 6,949 8,045 9,379 10,410 11,066 12,316 13,342 14,409 Automotive 12,730 16,016 19,849 24,094 26,731 31,088 33,866 38,213 40,183 42,656 48,132 52,444 56,778 Yoy chg (%) 22.9 25.8 23.9 21.4 10.9 16.3 8.9 12.8 5.2 6.2 12.8 9.0 8.3

Source: Company, Kotak Institutional Equities estimates

Exhibit 6: Amara Raja plans to expand 2W automotive capacity over FY2022-23E Capacity across different segments, March fiscal year-ends, 2012-24E (mn units)

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Capacity (mn units) Four-wheeler 5.6 5.6 6.0 6.0 8.3 8.3 10.5 10.5 12.0 14.0 14.0 14.0 14.0 Two-wheeler 4.8 4.8 4.8 8.4 11.0 11.0 14.0 14.0 17.0 20.0 21.0 23.0 23.0 Medium VLRA 1.8 1.8 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 Large VLRA (mn amp hr) 900 900 1,300 1,300 1,300 1,300 1,300 1,300 1,300 1,300 1,300 1,300 1,300 Tubular batteries (home UPS) 1.0 1.1 1.3 1.3 1.7 1.7 1.7 1.7 Volume sold (mn units) Four-wheeler OEM 1.5 1.6 1.5 1.6 1.8 2.1 2.3 2.6 2.1 2.0 2.7 3.1 3.4 Four-wheeler replacement 2.8 3.3 3.8 4.4 5.0 5.6 6.2 7.0 7.6 8.3 8.9 9.6 10.4 Total four-wheeler volumes 4.3 4.9 5.3 6.0 6.9 7.7 8.5 9.5 9.8 10.3 11.6 12.7 13.8 Two-wheeler OEM — — 0.9 1.7 2.1 2.4 3.0 3.2 2.7 3.2 3.6 4.0 4.3 Two-wheeler replacement 2.0 2.7 3.6 4.8 5.8 7.0 8.0 9.6 11.4 11.9 12.9 13.9 15.0 Total two-wheeler volumes 2.0 2.7 4.5 6.5 7.9 9.4 11.0 12.8 14.1 15.1 16.5 17.9 19.3 Capacity utilization (%) Four-wheeler 76.4 86.8 88.8 100.1 83.3 93.4 80.9 90.6 81.3 73.6 82.7 90.6 98.3 Two-wheeler 41.7 57.1 93.0 77.9 72.2 85.1 78.6 91.3 83.0 75.4 78.6 77.8 84.1

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 101 Disclosures

Exhibit 7: We expect the company to deliver 12% EPS CAGR over FY2021-24E Profit model, balance sheet and cash flow statement, March fiscal year-ends, 2012-24E(Rs mn)

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Profit model (Rs mn) Net sales 29,614 34,367 42,113 46,178 53,172 60,592 67,931 68,395 71,497 83,043 91,079 99,222 EBITDA 4,515 5,603 7,018 8,230 8,499 8,832 9,518 10,986 11,157 12,986 14,331 15,804 Other income 466 455 423 459 492 664 468 551 874 713 1,018 1,324 Interest (10) (7) (2) (55) (55) (51) (70) (122) (105) (60) — — Depreciation (661) (646) (1,340) (1,407) (1,912) (2,303) (2,612) (3,007) (3,192) (3,912) (4,344) (4,752) Profit before tax 4,310 5,406 6,099 7,226 7,025 7,142 7,304 8,407 8,733 9,727 11,006 12,376 Tax expense (1,351) (1,692) (1,990) (2,310) (2,237) (2,429) (2,469) (1,799) (2,265) (2,523) (2,855) (3,210) Adjusted net profit 2,867 3,674 4,109 4,916 4,785 4,713 4,835 6,608 6,468 7,204 8,151 9,166 Earnings per share (Rs) 16.8 21.5 24.1 28.8 28.0 27.6 28.3 38.7 37.9 42.2 47.7 53.7 Balance sheet (Rs mn) Equity 10,598 13,627 16,996 21,159 25,931 29,374 33,353 36,556 42,103 47,506 53,619 60,493 Total borrowings 881 857 759 741 725 635 584 343 234 234 234 234 Deferred tax liability 195 301 368 538 815 878 959 441 407 407 407 407 Current liabilities 6,030 6,609 5,757 7,070 8,375 10,798 10,063 12,665 15,227 15,725 16,496 17,277 Total liabilities 17,705 21,394 23,881 29,508 35,846 41,686 44,959 50,006 57,971 63,872 70,756 78,411 Net fixed assets 4,618 7,679 10,304 14,749 17,324 19,296 21,275 24,778 28,540 29,128 29,284 28,532 Investments 161 161 161 200 1,467 351 205 1,562 2,805 3,005 3,205 5,205 Cash 4,108 2,946 2,222 1,503 1,709 1,113 718 845 1,758 5,639 9,859 13,962 Other current assets 8,818 10,609 11,194 13,057 15,346 20,925 22,762 22,822 24,867 26,100 28,407 30,712 Total assets 17,705 21,394 23,881 29,508 35,846 41,686 44,959 50,006 57,971 63,872 70,756 78,411 Free cash flow (Rs mn) Operating cash flow excl. working cap. changes 3,448 4,103 5,358 6,279 6,666 6,666 7,257 8,877 9,321 10,463 11,477 12,594 Working capital change (94) (1,315) (1,475) (732) (1,137) (3,450) (1,843) 2,892 (1,301) (734) (1,537) (1,524) Net financial income 456 448 421 404 437 613 398 429 768 653 1,018 1,324 Cash flow from operations 3,810 3,235 4,303 5,951 5,966 3,830 5,812 12,198 8,789 10,382 10,958 12,394 Capital expenditure (1,463) (3,731) (3,985) (4,904) (4,305) (3,853) (5,282) (6,999) (4,964) (4,500) (4,500) (4,000) Free cash flow 2,347 (495) 318 1,046 1,662 (23) 529 5,199 3,825 5,882 6,458 8,394 Ratios Gross margin (%) 32.6 33.6 34.1 37.0 34.4 32.1 31.6 35.0 33.6 33.6 33.5 33.5 EBITDA margin (%) 15.2 16.3 16.7 17.8 16.0 14.6 14.0 16.1 15.6 15.6 15.7 15.9 PAT margin (%) 9.7 10.7 9.8 10.6 9.0 7.8 7.1 9.7 9.0 8.7 8.9 9.2 Book value (Rs/share) 62.0 79.8 99.5 123.9 151.8 172.0 195.3 214.0 246.5 278.1 313.9 354.2 RoAE (%) 30.4 30.3 26.8 25.8 20.3 17.0 15.4 18.9 16.4 16.1 16.1 16.1 RoACE (%) 28.8 28.6 26.0 25.1 19.9 17.3 15.7 16.5 15.5 15.1 15.0 15.0

Source: Company, Kotak Institutional Equities estimates

102 KOTAK INSTITUTIONAL EQUITIES RESEARCH ADD Westlife Development (WLDL) https://ultraviewer.et/en/own Hotels & Restaurants AUGUST 15, 2021 load.html RESULT Sector view: Attractive

Ups store guidance. WLDL’s revenues were down 26% qoq and 32% below Jun 2019 CMP (`): 512 (normalized levels). Revenue print was 8% ahead of our estimate whereas profitability Fair Value (`): 550 was weaker on account of higher other expenses. The management has called out full BSE-30: 55,437 recovery in July 2021 (versus July 2019). WLDL management has raised guidance to 30- 40 new stores/year from 25-30 earlier. The company has stepped up marketing of fried chicken and expects it to contribute incremental sales of Rs5 mn/yr/store (10% increase in AUV). We raise FY2023-24 EBITDA estimates by 6-7% and FV to Rs550 (from Rs460).

Westlife Development Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 512/550/ADD EPS (Rs) (6.7) 0.9 6.7 52-week range (Rs) (high-low) 577-330 EPS growth (%) (2,133.2) 113.1 668.7 Mcap (bn) (Rs/US$) 80/1.1 P/E (X) (76.9) 588.2 76.5 ADTV-3M (mn) (Rs/US$) 135/2 P/B (X) 16.6 16.1 13.3 Shareholding pattern (%) EV/EBITDA (X) 169.6 34.9 21.2 Promoters 58.0 RoE (%) (19.6) 2.8 19.0 FPIs/MFs/BFIs 10.8/12.9/7.7 Div. yield (%) 0.0 0.0 0.0 Price performance (%) 1M 3M 12M Sales (Rs bn) 10 15 21 Absolute (4.7) 22.0 39.6 EBITDA (Rs bn) 0 2 4 Rel. to BSE-30 (9.8) 8.1 (5.1) Net profits (Rs bn) (1) 0 1

1QFY22— revenues ahead of estimate, margins fall short of expectations

WLDL reported revenues of Rs2.6 bn (KIE Rs2.4 bn), up/down 176%/26% yoy/qoq; revenues declined 18% on 2-year CAGR basis. Convenience channels (delivery + drive thru + on-the-go) grew 202%/33% yoy/qoq. Delivery sales and drive thru sales are at 1.5X and 2.6X versus pre- Covid levels, respectively. Gross margin at 65.4% (down 110 bps qoq) was 60 bps above our estimate. Reported EBITDA at Rs50 mn was significantly below our estimate due to higher than estimated other expenses (flat qoq despite lockdown/restrictions). Adjusted EBITDA (pre-Ind AS 116) loss stood at Rs154 mn and adjusted EBITDA margin was -5.9%. Restaurant operating margin stood at 2.9% (pre-Ind AS 116). Reported net loss stood at Rs334 mn. Store count at 305 was flat qoq; the company added 7 McCafes and 11 EoTF during the quarter. The management has indicated full recovery in sales in July 2021 versus July 2019 (normalized levels).

WLDL: Ups store guidance, expects fried chicken to boost AUV, reiterates margin guidance

WLDL has raised store opening guidance to 30-40 new stores/year from 25-30 earlier; this trend is consistent across QSRs. Unlike peers, WLDL management is not considering reducing store size or opening delco stores; the management prefers large 2,500-3,000 sq. ft stores that can garner AUV of Rs80 mn in the medium term. WLDL has roped in South India actress, Rashmika Mandanna, as a brand ambassador to promote fried chicken and it has guided incremental sales of Rs5 mn/yr/store from fried chicken. WLDL management expects revenue per store to increase to Rs60-65 mn in FY2023E (KIE Rs59.2 mn) as against about Rs52-55 mn pre-Covid and adjusted (pre-Ind AS-116) EBITDA margin of 13-15% (KIE 13.4%). Jaykumar Doshi We raise EBITDA by 6-7%; revise FV to Rs550 implying 27X Sep-23E pre-Ind AS 116 EV/EBITDA

We increase store count, raise average revenue per store and broadly maintain EBITDA margin estimate for FY2023-24E. Westlife (McDonald’s) enjoys strong brand equity in India and Sushruta Mishra operates across price points, day parts and channels through a diverse product portfolio (burgers + friend chicken + beverages + desserts) and contemporary restaurants. We expect well-balanced growth (store expansion +SSSG) with improving profitability over the next 2-3 years. WLDL’s valuation discount to peers is (1) attributable to lower store growth and (2) a step jump in royalty to 8% in FY2027E (4% now) that will likely weigh on medium term profitability.

[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. Westlife Development Hotels & Restaurants

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

(% chg) 2-year 1QFY22 1QFY22E 1QFY21 4QFY21 KIE Est yoy qoq 1QFY20 CAGR (%) SSSG 183.0 - (54.0) 10.5 6.7 Net sales 2,580 2,387 936 3,509 8 176 (26) 3,803 (18) Other operating income 10 22 1 66 (53) 878 (84) 16 Net operating revenues 2,590 2,409 937 3,575 8 176 (28) 3,819 (18) Material cost (896) (848) (406) (1,198) 6 121 (25) (1,376) (19) Gross profit 1,694 1,561 531 2,377 9 219 (29) 2,443 (17) Gross margin (%) 65.4 64.8 56.7 66.5 59 bps 869 bps -110 bps 64.0 Total expenditure (1,644) (1,445) (956) (1,910) 14 72 (14) (1,955) Staff cost (266) (422) (390) (556) (37) (32) (52) (502) (27) Other expenditure (1,378) (1,024) (566) (1,354) 35 144 2 (1,453) (3) EBITDA 50 116 (425) 467 (57) (112) (89) 488 (68) OPM (%) 1.9 4.8 (45.3) 13.1 -288 bps 4722 bps -1114 bps 12.8 Other income 65 30 184 33 117 (65) 94 30 Interest (203) (200) (215) (204) 2 (6) (0) (203) Depreciation (332) (345) (353) (342) (4) (6) (3) (332) Pretax profits (420) (399) (809) (45) 5 NA 825 (17) Tax 112 (60) 203 (19) (287) 5 Recurring net income (308) (459) (605) (65) (33) NA 377 (11) 423 Extraordinaries (26) - - - - Reported profits (334) (459) (605) (65) (27) (45) NA (11) 444 Recurring EPS (Rs/share) (2.0) (3.0) (3.9) (0.4) (33) NA 377 (0.1)

Cost as a % of Net op revenues Material cost 34.6 35.2 43.3 33.5 -60 bps -870 bps 109 bps 36.0 Staff cost 10.3 17.5 41.6 15.6 -724 bps -3135 bps -530 bps 13.2 Other expenditure 53.2 42.5 60.4 37.9 1071 bps -719 bps 1534 bps 38.0

Adjusted EBITDA (ex-Ind AS 116) (154) (579) 293 310 Adjusted EBITDA margin (%) (5.9) (61.8) 8.2 8.1 Reported Restaurant EBITDA margin (%) 9.8 (26.2) 21.3 18.1 Adjusted Restaurant EBITDA margin (%) 2.9 (43.0) 16.4 13.4

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Interim results of Westlife Development, March fiscal year-ends (Rs mn)

FY2020-23E Revised Earlier Change (%) CAGR (%) / Change (bps) 2022E 2023E 2024E 2022E 2023E 2024E 2022E 2023E 2024E Revised Earlier Revenues (Rs mn) 15,376 20,867 23,988 15,357 19,870 22,631 0.1 5.0 6.0 10.5 8.7 Gross margin (%) 65.5 66.5 67.3 65.3 66.5 67.3 20 bps 0 bps -5 bps 127 bps 127 bps Adjusted EBITDA (Rs mn) 1,612 2,805 3,487 1,778 2,632 3,269 (9.4) 6.6 6.7 26.7 24.0 Adjusted EBITDA (%) 10.5 13.4 14.5 11.6 13.2 14.4 -110 bps 19 bps 9 bps 452 bps 432 bps PAT (Rs mn) 135 1,041 1,615 199 888 1,545 (31.9) 17.2 4.5 (342.0) (329.5) EPS (Rs/share) 0.9 6.7 10.4 1.3 5.7 9.9 (31.9) 17.2 4.5 173.4 159.3

Store count EOP 333 368 403 330 360 390 0.9 2.2 3.3 Avg revenue per store (Rs mn) 47.9 59.2 61.9 48.0 57.3 60.0 (0.3) 3.4 3.2 5.8 4.6

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 105 Hotels & Restaurants Westlife Development

Exhibit 3: Comparison on select metrics of WLDL and BKIL

FY2018 FY2019 FY2020 FY2021 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 1QFY22 Revenues (Rs mn) BKIL 3,781 6,327 8,413 4,945 1,910 385 967 1,632 1,961 1,497 WLDL 11,349 14,020 15,478 9,856 3,362 937 2,094 3,250 3,575 2,590 Gross margin (%) BKIL 62.0 63.6 64.2 64.5 63.3 62.3 64.2 63.9 65.6 65.2 WLDL 62.6 63.5 65.2 64.7 65.6 56.7 63.5 65.7 66.5 65.4 Employee costs as % of sales BKIL 18.6 15.3 16.2 23.8 36.7 70.2 25.5 20.0 17.0 20.7 WLDL 15.1 14.1 14.2 18.1 15.7 41.6 18.4 13.8 15.6 10.3 Other costs as % of sales BKIL 53.9 45.9 45.5 53.2 50.3 128.3 49.1 43.8 48.3 NA WLDL 40.6 40.9 42.1 46.8 45.3 76.9 52.6 43.7 42.7 48.7 EBITDA margin (%) exlcuding impact of Ind AS 116 BKIL (10.6) 2.4 2.4 (12.5) (1.4) (136.1) (10.5) 0.2 0.2 NA WLDL 6.8 8.5 8.9 (1.8) 4.6 (61.8) (7.5) 8.2 8.2 (5.9)

Store count EoP (#) BKIL 123 181 252 125 199 248 249 270 WLDL 277 296 319 305 177 278 302 301 305 Average revenue per store (Rs mn) Quarterly annualized revenue/store on own operational stores BKIL 36.1 41.4 38.6 12.3 19.5 26.3 31.5 22.2 WLDL 42.4 48.9 50.3 31.6 21.2 30.1 43.0 47.5 34.0

Source: Company

Exhibit 4: WLDL has signed Rashmika Mandanna as brand ambassador for McSpicy fried chicken and BTS meal

Source: Company

106 KOTAK INSTITUTIONAL EQUITIES RESEARCH Westlife Development Hotels & Restaurants

Exhibit 5: Financials of Westlife Development, March fiscal year-ends, 2016-24E (Rs mn)

2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Profit model Net revenues 8,334 9,308 11,349 14,020 15,478 9,860 15,376 20,867 23,988 EBITDA 426 470 774 1,190 2,140 470 2,288 3,734 4,555 Adjusted EBITDA 426 470 774 1,190 1,381 (173) 1,612 2,805 3,487 Depreciation (577) (637) (673) (797) (1,384) (1,396) (1,487) (1,664) (1,827) Other income 97 200 178 136 130 443 195 187 303 Interest expense (150) (154) (150) (177) (808) (845) (813) (860) (864) PBT (203) (121) 129 352 79 (1,329) 183 1,397 2,167 Tax (3) — — (139) (28) 293 (48) (356) (553) Extraordinary items 234 — — — (124) 42 — — — Reported PAT 28 (121) 129 213 (73) (994) 135 1,041 1,615 Recurring PAT (206) (121) 129 213 51 (1,036) 135 1,041 1,615 Recurring EPS (diluted) (Rs) (1.3) (0.8) 0.8 1.4 0.3 (6.7) 0.9 6.7 10.4 Balance sheet Total equity 5,381 5,275 5,422 5,837 5,770 4,812 4,948 5,989 7,603 Total borrowings 1,308 1,829 1,835 2,339 1,837 2,152 2,152 1,902 1,402 Other liabilities — 3 18 225 8,072 7,870 9,116 10,181 11,165 Total equity and liabilities 6,689 7,107 7,276 8,401 15,679 14,834 16,216 18,072 20,170 Cash and cash equivalents 1,381 1,175 687 2,132 1,601 2,094 2,054 2,583 3,221 Net other current assets ex-cash (1,030) (1,091) (1,464) (1,332) (1,493) (1,849) (2,942) (3,706) (3,932) Net fixed assets 5,209 5,479 5,737 6,230 6,592 5,205 6,294 6,712 7,069 Other non-current assets 1,129 1,544 2,317 1,370 8,979 9,384 10,809 12,483 13,811 Total assets 6,689 7,107 7,276 8,401 15,679 14,834 16,216 18,072 20,170 Cash flow Operating cash flow excl. w-cap 730 536 863 1,244 1,095 538 1,564 2,449 2,935 W-cap changes 68 120 508 (122) 164 755 913 157 (120) Operating cash flow 799 657 1,371 1,121 1,259 1,292 2,477 2,605 2,815 Interest expense (net) (158) (150) (151) (177) (152) (170) (153) (144) (117) Capital expenditure (769) (907) (1,059) (1,431) (1,259) (500) (1,214) (1,479) (1,541) Free cash flow 799 657 1,371 1,121 1,259 1,292 2,477 2,605 2,815 Key metrics and ratios Revenue growth (%) 9.0 11.7 21.9 23.5 10.4 (36.3) 55.9 35.7 15.0 Gross margin (%) 60.0 60.6 62.6 63.5 65.2 64.7 65.5 66.5 67.3 EBITDA margin (%) 5.1 5.0 6.8 8.5 13.8 4.8 14.9 17.9 19.0 Adjusted EBITDA margin (%) 5.1 5.0 6.8 8.5 8.9 (1.8) 10.5 13.4 14.5 PAT margin (%) (2.5) (1.3) 1.1 1.5 0.3 (10.5) 0.9 5.0 6.7 Net debt (73) 654 1,149 207 236 57 98 (681) (1,819) Net debt/equity (X) (0.0) 0.1 0.2 0.0 0.0 0.0 0.0 (0.1) (0.2) Book value (Rs/share) 34.6 33.9 34.9 37.5 37.1 30.9 31.8 38.5 48.9 RoAE (%) (3.8) (3.8) 2.4 3.8 0.9 (19.6) 2.8 19.0 23.8 RoAIC (%) (3.0) (3.0) 1.6 6.1 7.4 (6.9) 4.4 10.4 12.5 McD restaurant count (EoP) 236 258 277 296 319 305 333 368 403 SSSG (%) 1.8 4.0 15.8 17.0 4.0 (37.1) 53.0 28.1 7.1

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 107 BUY Dilip Buildcon (DBL) https://ultraviewer.et/en/own Capital Goods AUGUST 16, 2021 load.html RESULT Sector view: Attractive

Challenging quarter. Results were impacted by lower revenues, higher commodity CMP (`): 536 prices and higher working capital. We expect easing out of working capital and Fair Value (`): 645 monetization proceeds to help meet near term equity requirements and debt reduction BSE-30: 55,437 plans. Earlier resolution on NHAI ban, further monetization of remaining assets and debt reduction are key things to watch out for. We cut estimates to bake in lower margins. Retain BUY with a revised Fair Value of Rs645 net of roll forward.

Dilip Buildcon Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 536/645/BUY EPS (Rs) 21.8 35.2 52.1 52-week range (Rs) (high-low) 720-321 EPS growth (%) (23.2) 61.3 47.8 Mcap (bn) (Rs/US$) 79/1.1 P/E (X) 24.5 15.2 10.3 ADTV-3M (mn) (Rs/US$) 269/4 P/B (X) 2.0 1.6 1.4 Shareholding pattern (%) EV/EBITDA (X) 7.6 6.5 5.5 Promoters 75.0 RoE (%) 8.5 11.6 14.2 FPIs/MFs/BFIs 10.9/5.9/0.0 Div. yield (%) 0.2 0.1 0.2 Price performance (%) 1M 3M 12M Sales (Rs bn) 92 106 124 Absolute (11.0) 0.3 52.7 EBITDA (Rs bn) 15 16 19 Rel. to BSE-30 (16.1) (13.6) 8.0 Net profits (Rs bn) 3 5 8

1QFY22 was impacted by higher fixed overheads and commodity prices.

DBL’s revenues were lower than our estimates as execution was impacted in April/May, 2021 and normalized to 85-90% in June, 2021. Margins were impacted by negative operating leverage and higher steel and cement prices which could not be fully passed through. Interest charges remained high as higher working capital requirements and investments in HAM projects postponed debt reduction via QIP proceeds. This coupled with a higher tax rate led to net profits coming below our estimates. DBL didn’t receive any inflow in the quarter but order book remains strong at Rs254 bn. Despite a weak performance, the company has retained its guidance of Rs100-105 bn of revenues, full year margins of 15-15.5% and an inflow of Rs100- 120 bn. Easing of working capital and monetization to free up funds for equity requirement

Working capital build up during the quarter was driven by higher inventory, delay in receivables and lower customer advances. Cash flow from operations thus declined during the quarter. We expect receivables to come down and payables to improve from current levels. DBL expects to complete 3 HAM projects from already sold portfolio of 5 projects. It also expects to receive Rs5.5-6 bn from Cube Highways in FY2022 on completion of construction on 3 HAM projects. Thus, we expect reduction in working capital and monetization proceeds to meet incremental equity requirements of Rs5 bn for the remaining fiscal. The company is exploring monetization of remaining assets at improved valuations as it expects to monetize them post construction completion and debt refinancing. Near-term inflows to be impacted by NHAI ban

An accident at one of its sites has resulted in NHAI banning DBL from bidding till the time a Teena Virmani designated committee decides on the issue. The committee has already submitted its report and the company expects clarity from NHAI to emerge by this month. We believe that this will impact near term order inflows from NHAI. However, DBL’s inflow was very robust in FY2021 so Aditya Mongia impact on revenues for FY2022 will be minimal. Cut FY2022/23 estimates and largely retain FY2024 estimates, retain BUY

We cut our FY2022/23 estimates by 12/11% to bake in lower margins and arrive at a revised Fair Value of Rs645 (Rs630 earlier) net of earnings cut and roll forward. Retain BUY.

[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. Dilip Buildcon Capital Goods

Exhibit 1: Results were lower than our estimates on lower execution and higher fixed and commodity costs. Quarterly standalone financials of Dilip Buildcon, March fiscal year-end, 1QFY22 (Rs mn)

% change 1QFY22 1QFY22E 1QFY21 4QFY21 vs est. yoy qoq FY2022E FY2021 % change Net sales 21,463 22,762 18,920 29,250 (6) 13 (27) 105,870 92,089 15 Total expenses (18,634) (19,462) (15,918) (24,688) (4) 17 (25) (89,991) (77,396) 16 Stock 48 — (124) 482 — 183 Operating expenses (RM and others) (17,586) (17,982) (14,944) (23,585) (2) 18 (25) (84,696) (72,982) 16 Employee cost (493) (341) (488) (433) 44 1 14 (2,223) (1,925) 15 Other expenses (603) (1,138) (363) (1,152) (47) 66 (48) (3,072) (2,672) 15 EBITDA 2,829 3,300 3,002 4,562 (14) (6) (38) 15,879 14,693 8 Other income 124 102 85 50 22 46 150 383 288 33 EBITDA (incl. other income) 2,953 3,402 3,086 4,612 (13) (4) (36) 16,262 14,981 9 Depreciation (979) (917) (1,066) (961) 7 (8) 2 (3,670) (4,071) (10) EBIT 1,974 2,485 2,020 3,651 (21) (2) (46) 12,592 10,910 15 Interest (1,490) (1,388) (1,511) (1,500) 7 (1) (1) (4,848) (5,862) (17) Profit before tax 484 1,097 510 2,150 (56) (5) (77) 7,744 5,048 53 Tax expense (214) (368) (172) (878) (2,594) (1,855) Net profit 270 730 337 1,273 (63) (20) (79) 5,150 3,193 61 Exceptional items — — — — 344 — Reported PAT 270 730 337 1,273 (63) (20) (79) 5,493 3,193 72

Key ratios (%) Operating expenses/ Sales 81.7 79.0 79.6 79.0 80.0 79.1 Employee exp./ Sales 2.3 1.5 2.6 1.5 2.1 2.1 Other exp./ Sales 2.8 5.0 1.9 3.9 2.9 2.9 EBITDA margin 13.2 14.5 15.9 15.6 15.0 16.0 PBT Margin 2.3 4.8 2.7 7.4 7.3 5.5 Tax rate 44.1 33.5 33.8 40.8 33.5 36.7 PAT Margin 1.3 3.2 1.8 4.4 4.9 3.5 EPS 1.8 17.6 2.3 9.3 35.2 23.3

Order details Order booking — — 61,276 NA 134,959 219,581 (38.5) Order backlog 254,949 172,070 274,114 48 (7.0) 304,154 274,114 11.0

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Roads segment has remained dominant segment for Dilip Buildcon. Growth in irrigation, urban development and mining to be reflected from FY2022. Quarterly segmental standalone financials of Dilip Buildcon, March fiscal year-end, 1QFY22 (Rs mn)

% change 1QFY22 1QFY22E 1QFY21 4QFY21 vs est. yoy qoq FY2022E FY2021 % change Segmental revenues Roads & Bridges 17,431 18,210 16,496 24,814 (4) 6 (30) 75,414 76,522 (1) Irrigation 828 1,366 201 1,509 (39) 312 (45) 7,883 3,889 103 Urban Development 993 1,138 138 760 (13) 620 31 5,241 2,798 87 Mining 1,926 2,049 1,956 1,958 (6) (2) (2) 17,332 7,944 118

Total 21,178 22,762 18,791 29,041 (7) 13 (27) 105,870 91,153 16

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 109 Capital Goods Dilip Buildcon

Exhibit 3: DBL’s order book of Rs254 bn has a well-diversified presence across various states in India State-wise mix of DBL’s order backlog across various states, Jun-2021 (%)

Bihar Maharashtra Tamil Nadu 4% 6% 3% Karnataka Uttarakhand 17% 4%

Gujarat 17% Uttar Pradesh 8%

Rajasthan Andhra Pradesh 5% 4% Madhya Pradesh 6% Odisha Goa 9% Jharkhand Telengana1% 11% 2%

Source: Company, Kotak Institutional Equities

Exhibit 4: Net working capital days moved up during the quarter on higher inventories and debtor days along with lower creditor days Quarterly trend in net working capital of Dilip Buildcon (standalone), March fiscal year ends, 1QFY19-1QFY22 (days of sales)

Debtor days Inventory days Creditor days Working capital days 140 117 120 107 100 100 96 92 100 87 90 89 87 85 83 82 80

126 60 114 120 100 104 104 104 106 101 104 86 91 89 40 80 82 75 69 69 66 69 66 71 59 60 56 57 63 60 59 63 53 48 49 55 51 55 50 49 20 44

- 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 1QFY22

Source: Company, Kotak Institutional Equities

110 KOTAK INSTITUTIONAL EQUITIES RESEARCH Dilip Buildcon Capital Goods

Exhibit 5: Debt to equity ratios have remained <1X over the past two years Debt to equity ratios of Dilip Buildcon, March fiscal year-ends, Dec-2016 - June-2021 (X)

Net debt/equity Equipment debt/equity Working capital debt/equity 1.6 1.4 1.4 1.4 1.4 1.3 1.3 1.2 1.1 1.1 1.2 1.2 1.1 1.0 1.0 0.9 0.9 1.0 0.9 0.9 0.9 0.9 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.7 0.7 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.4 0.5 0.5 0.4 0.4 0.4 0.4 0.3 0.3 0.3 0.2 0.2

-

Jun-2017

Jun-2018

Jun-2019

Jun-2020

Jun-2021

Sep-2017

Sep-2018

Sep-2019

Sep-2020

Dec-2016

Dec-2017

Dec-2017

Dec-2018

Dec-2019

Dec-2020

Mar-2018

Mar-2019 Mar-2020 Mar-2021

Source: Company, Kotak Institutional Equities

Exhibit 6: Early completion bonus received in past may not come in future due to change in project completion timelines from NHAI Early completion bonus details, March fiscal year ends (Rs mn)

Early completion bonus (LHS, Rs mn) % of overall sales 1,400 2.8 3.0 2.5 1,200 2.5 2.1 1,000 1.8 2.0

800 1.4 1.2 1.5 600 1.1 1,061 1,280 1.0 400 878 585 534 502 0.4 120 200 483 0.5 320 0.1 - - 2013 2014 2015 2016 2017 2018 2019 2020 2021

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 111 Capital Goods Dilip Buildcon

Exhibit 7: DBL would get some support from cash flows from Cube highways in order to fund required equity contributions in HAM projects Equity requirement for HAM projects of DBL as per the company, March fiscal year-ends, 2019-24E

Equity requirement in HAM projects Support from Shrem deal Support from Cube highways

8,000 7,312 6,945 7,000 6,000 6,000

5,000 4,319 4,141 3,890 4,000 3,450 3,306 3,000 2,708

2,000 1,244 1,000 1,000 - - 0 2019 2020 2021 2022E 2023E 2024E

Source: Company, Kotak Institutional Equities estimates

Exhibit 8: We expect DBL to end FY2023 at close to 1.4X net debt to EBITDA despite a spike up in investments in existing and new HAM projects Trends in investments and net debt/EBITDA for DBL (standalone), March fiscal year-ends, 2013-24E

Investments (LHS, Rs mn) Net debt/EBITDA (RHS, X) 18,000 16,988 4.5

16,000 4.0

14,000 12,556 3.5 11,444 11,897 12,000 10,447 3.0 10,000 2.5

8,000 2.0 5,376 5,238 6,000 4,695 1.5 4,000 2,789 2,898 1.0 1,830 2,000 952 0.5

- - 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E

Source: Company, Kotak Institutional Equities estimates

112 KOTAK INSTITUTIONAL EQUITIES RESEARCH Dilip Buildcon Capital Goods

Exhibit 9: Change in estimates for Dilip Buildcon, March fiscal year-ends, 2019-24E (Rs mn)

New estimates Old estimates % change 2019 2020 2021 2022E 2023E 2024E 2022E 2023E 2024E 2022E 2023E 2024E Net revenues 91,182 89,838 92,089 105,870 124,375 133,983 105,870 124,375 133,983 — — — Total operating expenses (75,138) (74,118) (77,396) (89,991) (105,097) (113,162) (88,933) (103,853) (113,162) EBITDA 16,044 15,720 14,693 15,879 19,278 20,821 16,937 20,522 20,821 (6) (6) — Depreciation & Amortization (3,202) (4,241) (4,071) (3,670) (3,395) (3,622) (3,670) (3,395) (3,622) EBIT 13,306 11,791 10,910 12,592 16,118 17,449 13,674 17,454 17,610 (8) (8) (1) Interest expense (5,299) (6,127) (5,862) (4,848) (4,670) (4,733) (4,841) (4,655) (4,724) PBT 8,007 5,665 5,048 7,744 11,447 12,716 8,833 12,798 12,886 (12) (11) (1) Tax expense (400) (1,505) (1,855) (2,594) (3,835) (3,255) (2,959) (4,287) (3,299) Recurring PAT 7,607 4,160 3,193 5,150 7,612 9,461 5,874 8,511 9,587 (12) (11) (1) Recurring EPS 52.0 28.4 21.8 35.2 52.1 64.7 40.2 58.2 65.6

Ratios Revenue growth (%) 17.7 (1.5) 2.5 15.0 17.5 7.7 15.0 17.5 7.7 EBITDA margin (%) 17.6 17.5 16.0 15.0 15.5 15.5 16.0 16.5 15.5 Effective tax rate (%) 5.0 26.6 36.7 33.5 33.5 25.6 33.5 33.5 25.6 PAT margin (%) 8.3 4.6 3.5 4.9 6.1 7.1 5.5 6.8 7.2

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 113 Capital Goods Dilip Buildcon

Exhibit 10: We expect execution to ramp up from most segments during FY2022 Segmental financials of Dilip Buildcon (standalone), March fiscal year-ends, 2016-24E (Rs mn)

CAGR 2020-24E 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E (%) Comments Roads and bridges Order inflow 75,665 91,358 140,514 51,496 31,608 149,315 90,000 97,200 102,060 34 NHAI ordering was very strong in FY2021 and DBL had Yoy growth (%) 49.8 20.7 53.8 (63.4) (38.6) 372.4 (39.7) 8.0 5.0 maintained 10-11% market share in the total awards. Order backlog 96,697 145,809 219,250 171,141 122,008 158,822 173,408 184,025 194,413 12 Yoy growth (%) 48.1 50.8 50.4 (21.9) (28.7) 30.2 9.2 6.1 5.6 Gross revenue 36,477 45,714 66,694 80,136 77,831 76,522 75,414 86,583 91,671 4 Yoy growth (%) 54.6 25.3 45.9 20.2 (2.9) (1.7) (1.4) 14.8 5.9 We expect execution to improve post 2QFY22 as challenges Bill-to-book ratio (%) 35.4 32.1 30.9 32.7 41.6 38.9 37.0 39.0 39.0 due to lockdown get resolved Irrigation Order inflow 2,700 — 387 5,320 8,743 41,720 11,802 13,573 14,251 13 DBL had won large sized irrigation projects; we expect these Yoy growth (%) — (100.0) NA 1,274.3 5.0 8.0 (71.7) 15.0 5.0 projects to ramp up from FY2022 Order backlog 7,055 1,648 426 5,366 13,491 46,650 50,570 51,524 51,113 40 Yoy growth (%) 4.8 (76.6) (74.2) 1,160.0 151.4 245.8 8.4 1.9 (0.8) Gross revenue 2,378 2,783 1,610 380 528 3,889 7,883 12,618 14,662 130 Yoy growth (%) 137.3 17.0 (42.2) (76.4) 38.9 636.6 102.7 60.1 16.2

Execution was weak in FY2020 and ramped up sharply from Bill-to-book ratio (%) 29.4 39.4 87.4 12.3 5.4 11.3 15.0 22.0 25.0 FY2021. New projects will start contributing from FY2022

Urban development Order inflow 1,890 — — 4,441 8,743 13,175 13,175 14,229 15,367 15 DBL has forayed into urban development projects as the Yoy growth (%) — (100.0) NA NA 5.0 120.0 12.0 8.0 8.0 next growth vertical Order backlog 2,990 2,108 1,400 4,729 19,845 28,354 36,288 44,006 51,620 27 Yoy growth (%) 9.5 (29.5) (33.6) 237.7 319.6 42.9 28.0 21.3 17.3 Gross revenue 1,558 901 315 1,112 904 2,798 5,241 6,510 7,753 71 Yoy growth (%) 23.6 (42.2) (65.1) 253.5 (18.7) 209.5 87.3 24.2 19.1 Bill-to-book ratio (%) 42.4 30.1 14.9 30.7 9.9 10.6 15.0 15.0 15.0 We expect execution period of three years Mining Order inflow 1,045 26,471 99 22,073 18,158 15,371 19,982 20,981 22,030 5 These are large contracts; company has received healthy Yoy growth (%) — 2,433.1 (99.6) (100.0) — 20.0 30.0 5.0 5.0 inflow in FY2020/FY2021 Order backlog 1,045 26,117 17,805 30,482 35,415 40,303 43,889 47,142 50,213 9 Yoy growth (%) — 2,399.3 (31.8) 71.2 16.2 13.8 8.9 7.4 6.5 Gross revenue — 1,399 8,411 9,396 10,575 7,944 16,396 17,728 18,959 16 Yoy growth (%) — NA 501.2 11.7 12.5 (24.9) 106.4 8.1 6.9 Large multi-year contract; we assume execution rate to start Bill-to-book ratio (%) — 9.8 32.1 32.6 26.7 18.4 32.6 32.6 32.6 scaling up Sum of segments Total order inflow 81,300 117,830 141,000 83,330 67,250 219,581 134,959 145,983 153,709 23 Total order backlog 107,787 175,683 238,881 211,718 190,759 274,129 304,154 326,697 347,359 Total revenues 40,413 50,797 77,030 91,024 89,838 91,153 104,934 123,439 133,047 10 Less Intersegment — — — — — — — — — Other adjustments (if any) 440 179 429 158 — 936 936 936 936 Net revenue 40,853 50,976 77,459 91,182 89,838 92,089 105,870 124,375 133,983 11

Source: Company, Kotak Institutional Equities estimates

114 KOTAK INSTITUTIONAL EQUITIES RESEARCH Dilip Buildcon Capital Goods

Exhibit 11: We arrive at a DCF-based fair value of Rs645/share for Dilip Buildcon DCF valuation of Dilip Buildcon, March fiscal year-ends, 2022-31E (Rs mn)

2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2032E 2033E Assumptions Revenues 105,870 124,375 133,983 141,396 146,377 154,868 162,970 170,947 178,968 187,143 Growth (%) 15.0 17.5 7.7 5.5 3.5 5.8 5.2 4.9 4.7 4.6 DCF model EBITDA 15,879 19,278 20,821 21,973 22,702 24,066 25,325 26,565 27,812 29,082 Adjusted tax expense (2,442) (3,177) (3,440) (3,613) (3,714) (4,982) (5,317) (5,585) (5,864) (6,158) Change in working capital (2,952) (4,912) (3,995) (1,684) (864) (3,134) (4,129) (2,102) (2,108) (2,145) Operating cash flow 10,485 11,190 13,386 16,676 18,124 15,950 15,880 18,878 19,840 20,779 Capital expenditure (1,000) (4,500) (5,000) (5,000) (5,000) (5,500) (5,500) (5,500) (5,500) (3,500) Equity contribution (7,714) (6,782) (4,967) (4,741) (4,978) (5,211) (5,430) (5,647) (5,873) (6,108) Equity divestment 5,808 1,836 11,924 7,187 4,940 5,187 5,446 5,718 5,947 6,185 Free cash flow 7,579 1,743 15,344 14,122 13,086 10,425 10,396 13,450 14,414 17,356 18,050 18,772 Discounted cash flow-now 7,100 1,432 11,056 8,926 7,255 5,070 4,434 5,031 4,730 4,996 Discounted cash flow-1 year forward 1,633 12,608 10,176 8,271 5,780 5,056 5,736 5,392 5,695 5,196 Discounted cash flow-2 year forward 14,374 11,604 9,429 6,589 5,764 6,541 6,147 6,493 5,923 5,404

Now +1-year +2-years Discount rate (%) 14.0% 14.0% 14.0% Total PV of free cash flow 60,030 65,543 78,268 Terminal value assumption Growth in perpetuity 4.0% 4.0% 4.0% Sensitivity of 12-month fair value to WACC and perpetual growth FCF in terminal year 17,356 18,050 18,772 Perpetual growth (%) Exit FCF multiple (X) 10.4 10.4 10.4 645 2.0% 3.0% 4.0% 5.0% 6.0% Exit EV/EBITDA multiple (X) 6.2 6.5 6.7 13.0% 605 642 686 742 814 Terminal value 180,503 187,723 195,232 13.5% 591 624 665 715 778 PV of terminal value 51,958 54,037 56,198 14.0% 578 608 645 690 746 Enterprise value 111,989 119,580 134,466 14.5% 566 594 628 668 719 Net debt 33,317 25,234 28,129 WACC(%) 15.0% 554 581 612 649 694 Equity value 78,672 94,346 106,337 Shares outstanding (mn) 146 146 146 Fair value of DBL (Rs) 645 727

Fiscal Year end (March 31, XXXX) Mar-22 Mar-23 Mar-24 Mar-25 Mar-26 Mar-27 Mar-28 Mar-29 Mar-30 Mar-31 Today Sep-21 Sep-21 Sep-21 Sep-21 Sep-21 Sep-21 Sep-21 Sep-21 Sep-21 Sep-21 Days left 182 547 913 1,278 1,643 2,008 2,374 2,739 3,104 3,469 Years left 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5 9.5 Discount factor at WACC 0.9 0.8 0.7 0.6 0.6 0.5 0.4 0.4 0.3 0.3

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 115 Capital Goods Dilip Buildcon

Exhibit 12: Summary financials of Dilip Buildcon (standalone), March fiscal year-ends, 2014-24E (Rs mn)

2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Income statement Net revenues 23,158 26,241 40,853 50,976 77,459 91,182 89,838 92,089 105,870 124,375 133,983 Total operating expenses (18,458) (20,586) (32,861) (41,054) (63,431) (75,138) (74,118) (77,396) (89,991) (105,097) (113,162) EBITDA 4,700 5,655 7,992 9,922 14,028 16,044 15,720 14,693 15,879 19,278 20,821 Other income 62 60 162 114 155 464 313 288 383 234 251 Depreciation & Amortization (788) (1,179) (1,835) (2,274) (2,750) (3,202) (4,241) (4,071) (3,670) (3,395) (3,622) EBIT 3,975 4,537 6,320 7,763 11,434 13,306 11,791 10,910 12,592 16,118 17,449 Interest expense (1,551) (2,587) (3,814) (4,162) (4,644) (5,299) (6,127) (5,862) (4,848) (4,670) (4,733) PBT 2,423 1,949 2,506 3,601 6,789 8,007 5,665 5,048 7,744 11,447 12,716 Tax expense (484) (491) (293) 9 (434) (400) (1,505) (1,855) (2,594) (3,835) (3,255) Cash tax paid as Minimum Alternate Tax (MAT) (511) (438) (589) (835) (128) (1,299) (1,813) (2,047) (1,549) (2,289) (2,543) Net profit 1,940 1,458 2,213 3,609 6,355 7,607 4,160 3,193 5,150 7,612 9,461 Exceptional items 3 — (5) — (152) 43 89 — 344 109 706 Reported PAT 1,943 1,458 2,208 3,609 6,203 7,650 4,249 3,193 5,493 7,721 10,167 Recurring EPS 13.3 10.0 15.1 24.7 43.5 52.0 28.4 21.8 35.2 52.1 64.7 Balance sheet Shareholders' funds 7,284 8,730 10,621 18,529 24,571 32,044 36,060 39,172 49,647 57,200 67,146 Share capital 592 1,171 1,171 1,368 1,368 1,368 1,368 1,368 1,462 1,462 1,462 Reserves & surplus 6,691 7,558 9,450 17,161 23,203 30,677 34,692 37,804 48,184 55,738 65,684 Debt 12,589 24,184 25,114 25,634 29,549 35,763 34,630 36,239 30,239 27,739 23,839 Deferred tax liabilities 268 707 775 759 1,067 171 (196) (359) (359) (359) (359) Total sources of funds 20,141 33,621 36,510 44,922 57,931 70,737 72,046 77,572 82,047 87,100 93,146 Net fixed assets 6,391 11,890 14,204 16,825 18,319 20,822 20,318 19,151 16,481 17,586 18,964 Net working capital (ex-cash) 11,251 16,600 18,349 21,844 32,623 40,031 35,512 42,533 45,485 50,396 54,391 Investments 1,830 2,789 2,898 4,695 5,376 5,238 11,444 10,447 12,556 16,988 11,897 Cash and bank balances and current investments 668 2,342 1,059 1,137 1,613 1,888 3,219 2,922 5,005 (390) 5,374 Total application of funds 20,141 33,621 36,510 44,501 57,931 70,737 72,045 77,572 82,046 87,100 93,146 Free cash flow Operating profit before wcap. changes 4,725 5,745 8,355 10,339 13,806 17,378 16,108 14,979 15,560 18,076 21,065 Change in working capital / other adjustments (3,362) (2,895) (3,498) (2,967) (8,109) (6,196) 4,371 (6,593) (2,952) (4,912) (3,995) Direct tax paid (801) (647) (589) (835) (1,504) (1,604) (1,950) (1,396) (1,549) (2,289) (2,543) Net cashflow from operating activites 563 2,203 4,268 6,537 4,192 9,579 18,529 6,990 11,060 10,874 14,527 Fixed assets (1,700) (6,682) (4,156) (4,884) (4,242) (5,704) (3,107) (2,951) (1,000) (4,500) (5,000) Free cash flow (CFO + net capex) (1,137) (4,479) 112 1,653 (50) 3,875 15,422 4,039 10,060 6,374 9,527

Growth (%) Revenue growth 13.3 55.7 24.8 52.0 17.7 (1.5) 2.5 15.0 17.5 7.7 EBITDA growth 20.3 41.3 24.1 41.4 14.4 (2.0) (6.5) 8.1 21.4 8.0 Recurring PAT growth (24.8) 51.8 63.1 76.1 19.7 (45.3) (23.2) 61.3 47.8 24.3 Key ratios EBITDA margin (%) 20.3 21.6 19.6 19.5 18.1 17.6 17.5 16.0 15.0 15.5 15.5 Net debt/equity 1.6 2.5 2.3 1.3 1.1 1.1 0.9 0.9 0.5 0.5 0.3 Book value per share (Rs) 49.8 59.7 72.6 126.7 168.0 219.1 246.6 267.9 339.5 391.2 459.2 RoAE (%) 30.7 18.2 22.9 24.8 29.5 26.9 12.2 8.5 11.6 14.2 15.2 RoACE (%) 18.2 12.6 14.9 16.7 18.2 17.4 10.8 8.1 9.2 11.0 12.4

Source: Company, Kotak Institutional Equities estimates

116 KOTAK INSTITUTIONAL EQUITIES RESEARCH BUY Gujarat Pipavav Port (GPPV) https://ultraviewer.et/en/own Transportation AUGUST 14, 2021 load.html RESULT Sector view: Attractive

Winded, temporarily. 1Q operations were impacted adversely for two weeks by cyclone CMP (`): 102 Tauktae in May 2021. Operations resumed in June and the company expects to recover Fair Value (`): 121 a significant portion of damage repair cost from insurance claims. We expect GPPV to BSE-30: 55,437 benefit from newly-added services, upgradation of its liquid berth and completion of Pipavav port electrification works . There is scope for further improvement in tariffs for GPPV as compared to peers. We cut estimates by 4% and retain BUY with FV of Rs121.

Gujarat Pipavav Port Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 102/121/BUY EPS (Rs) 4.5 6.2 7.0 52-week range (Rs) (high-low) 124-75 EPS growth (%) (25.3) 38.3 12.4 Mcap (bn) (Rs/US$) 50/0.7 P/E (X) 22.6 16.3 14.5 ADTV-3M (mn) (Rs/US$) 219/3 P/B (X) 2.4 2.5 2.5 Shareholding pattern (%) EV/EBITDA (X) 9.9 8.5 7.4 Promoters 44.0 RoE (%) 10.6 14.9 17.0 FPIs/MFs/BFIs 21.4/23.0/3.5 Div. yield (%) 4.4 6.1 6.8 Price performance (%) 1M 3M 12M Sales (Rs bn) 7 8 9 Absolute (8.4) 7.6 27.1 EBITDA (Rs bn) 4 5 6 Rel. to BSE-30 (13.4) (6.2)) (17.6) Net profits (Rs bn) 2 3 3

1QFY22 results were impacted by cyclone Tauktae

GPPV results were lower than we expected as volume decline owing to cyclone Tauktae was much higher than we estimated. Operations were disrupted for two weeks during the quarter and restoration of operations and power supply commenced in June 2021. Realizations are up 4% driven by benefits of a tariff hike from May 2021. Negative operating leverage due to lower volumes resulted in 8% yoy decline in EBITDA for the quarter. The company has booked an exceptional loss of Rs109 mn incurred on repair of damages caused by the cyclone. It expects to recover a significant portion of the total damage repair cost of US$11 mn from insurance.

Addition of new services and expansion to aid volume growth

The company added two new services with annualized volumes of 50,000 TEUs on the container side (one to Jebel Ali and one from China) which has start ramping up from July. It expects to add two more services on the international EXIM side. It expects bulk volumes to remain strong and is also expanding fertilizer warehouse by 10,000 sq m. On the liquid side, upgradation of the liquid berth for handling of VLGCs will be complete in 3-6 months and GPPV expects volumes to improve meaningfully. It had already commissioned rail siding for LPG and expects more LPG volumes to be evacuated by rail. Along with this, electrification of Surendranagar – Pipavav is complete and the company is ready to run electric engines on the electrified rail link. This will help the company benefit from the shift of volumes from road to rail.

Realization improvement to fully reflect from 2QFY22 Aditya Mongia GPPV had taken a tariff hike of 5-6% during the quarter and part benefits are reflected in realization improvement in 1QFY22. As compared to peers, GPPV tariffs are still lower by 8-

10% and it still has a scope to increase tariffs further. We expect these tariff increases coupled Teena Virmani with incremental volumes from new services and DFC to benefit GPPV in coming quarters.

Cut estimates by 4% to bake in lower volumes; retain FV at Rs121

We cut estimates by 4% for FY2024 and largely retain a Fair Value of Rs121 (Rs119 earlier) net of roll forward.

[email protected] Contact: +91 22 6218 6427

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

Exhibit 1: GPPV reported results were impacted by cyclone Tauktae and came in lower than our estimates GPPL - 1QFY22 - key numbers, March fiscal year-ends (Rs mn)

% change 1QFY22 1QFY22E 1QFY21 4QFY21 vs est. yoy qoq FY2022E FY2021 % change Net operating income 1,596 1,785 1,590 1,934 (11) 0 (17) 8,281 7,335 13 Total expenditure (717) (776) (635) (779) (8) 13 (8) (3,317) (3,095) 7 Operating expenses (290) (248) (332) 17 (13) (1,490) (1,375) 8 Employee costs (180) (163) (168) 11 7 (737) (672) 10 Admin and other exp. (247) (224) (278) 10 (11) (1,091) (1,049) 4 EBITDA 879 1,008 955 1,155 (13) (8) (24) 4,964 4,240 17 Other income 73 165 111 94 (56) (34) (23) 544 423 28 Interest expense (13) (16) (17) (15) (63) (63) Depreciation (334) (352) (331) (335) (5) 1 (0) (1,409) (1,334) 6 PBT 605 805 718 900 (25) (16) (33) 4,035 3,265 24 Tax expense (174) (203) (253) (248) (31) (30) (1,016) (1,082) NA PAT 431 602 464 652 (28) (7) (34) 3,019 2,184 38 Extraordinary items (109) — — — — — NA Reported PAT 322 602 464 652 (47) (31) (51) 3,019 2,184 38

Key ratios (%) Operating exp./sales 18.1 15.6 17.2 18.0 18.7 Employee costs/sales 11.3 10.2 8.7 8.9 9.2 Admin and other exp./sales 15.5 14.1 14.4 13.2 14.3 EBITDA margin 55.1 56.5 60.1 59.7 59.9 57.8 PBT margin 37.9 45.1 45.1 46.5 48.7 44.5 PAT margin 27.0 33.7 29.2 33.7 36.5 29.8 Effective tax rate 28.8 25.2 35.3 27.6 25.2 33.1 EPS (Rs) 0.9 1.2 1.0 1.3 6.2 4.5

Volumes Bulk ('000 tons) 660 712 419 1,029 (7) 58 (36) 3,286 3,130 5 Container ('000 TEUs) 150 177 186 195 (15) (19) (23) 793 748 6 Liquid ('000 tons) 140 181 213 162 (23) (34) (13) 728 694 5 Ro-ro ('000) 2 3 2 5 (28) — (59) 11 10 10 Total ('000 tons) 2,902 3,371 3,238 3,927 (14) (10) (26) 15,129 14,308 6

Avg. realization (Rs/ton) 550 529 491 493 4 12 12 547 513 7

Source: Company, Kotak Institutional Equities estimates

118 KOTAK INSTITUTIONAL EQUITIES RESEARCH Gujarat Pipavav Port Transportation

Exhibit 2: Container volumes declined by 19% yoy for the quarter Quarterly and annual trajectory of container volumes for Gujarat Pipavav, March fiscal year-ends

Quarterly container cargo Annual container cargo ('000 TEUs) (%) Container quarterly volumes ('LHS, 000 TEU) (%) ('000 TEUs) Container volumes ('LHS, 000 TEU) 300 60 1,000 yoy growth (RHS, %) 80

yoy growth (RHS, %) 908

903 873

50 848 793 250 793

40 800 748 60

703

695

663 661

200 30 610 600 570 40 20 150 466 10

400 321 20

100 -

192 196

(10) 200 135 0 50 (20) 0 (20)

- (30)

2006

2007

2008

2009

2010

2011

2012

2013

2016

2017

2018

2019

2020

2021

2022E

2023E

2024E

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Jun-19

Jun-20

Jun-21

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18

Dec-19 Dec-20 12MFY15

Source: Company, Kotak Institutional Equities estimates

Exhibit 3: We model a marginal improvement in realizations Average realization at Pipavav port, CY2009-FY2024E (Rs per ton)

Average realizations 600 581 564 541 547 550 524 512 507 500 477 448 456 450 423

400 364

350 319 289 300 280

250

FY2015

FY2016

FY2017

FY2018

FY2019

FY2020

FY2021

CY2009

CY2010

CY2011

CY2012

CY2013

FY2022E FY2023E FY2024E

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 119 Transportation Gujarat Pipavav Port

Exhibit 4: Key assumptions for the standalone operations of Gujarat Pipavav Port, March fiscal year-ends, 2012-24E Volume and tariff details of GPPL, March fiscal year-ends, 2012-24E

2012 2013 15M2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Volumes Container volumes (TEUs) 570,489 660,729 980,689 694,614 663,380 703,000 903,000 873,000 748,000 792,880 848,382 907,768 Yoy growth (%) (6.5) 15.8 15.7 (10.8) (4.5) 6.0 28.4 (3.3) (14.3) 6.0 7.0 7.0 Bulk volumes (tons) 3,010,500 3,106,000 4,643,675 2,478,743 2,112,078 1,820,000 2,008,000 2,331,000 3,129,977 3,286,476 3,450,800 3,623,340 Yoy growth (%) (18.2) 3.2 22.2 (28.0) (14.8) (13.8) 10.3 16.1 34.3 5.0 5.0 5.0 Liquid volumes (tons) — — 304,548 706,877 685,960 1,020,000 639,000 820,000 693,719 728,405 801,245 881,370 Yoy growth (%) — — NA 132 (3) 49 (37) 28 (12) 5 10 10 Ro/ro volumes — — — 19,644 83,607 98,000 76,000 47,000 10,158 11,174 12,291 13,520 Total volumes (mn tons) 11 12 19 13 12 13 15 15 14 15 16 17 Yoy growth (%) (10.0) 12.4 24.5 (15.9) (5.8) 5.0 20.2 0.3 (7.3) 5.7 6.7 6.7 Tariffs (blended rate) Container (Rs/TEU) 4,707 5,177 5,695 6,492 6,687 6,286 5,657 5,827 6,118 6,730 6,932 7,140 yoy increase (%) 15.0 10.0 10.0 14.0 3.0 (6.0) (10.0) 3.0 5.0 10.0 3.0 3.0 Bulk (Rs/ton) 438 460 483 483 483 435 435 478 545 562 579 596 yoy increase (%) 15.0 5.0 5.0 — — (10.0) — 10.0 14.0 3.0 3.0 3.0 Liquid (Rs/ton) — 500 500 500 508 457 411 493 508 523 544 566 yoy increase (%) — — — — 1.5 (10.0) (10.0) 20.0 3.0 3.0 4.0 4.0 Ro/ro realization — — — 3,000 3,150 3,150 3,150 3,308 3,473 3,647 3,829 4,020 Overall realization (Rs / ton) 364 423 467 504 541 510 458 478 514 547 564 581 yoy increase (%) 14.1 16.1 10.5 7.9 7.3 (5.8) (10.2) 4.4 7.4 6.6 3.0 3.0 Revenues (Rs mn) Container 2,685 3,421 5,585 4,510 4,436 4,419 5,109 5,087 4,577 5,336 5,881 6,482 Bulk 1,320 1,430 2,244 1,198 1,021 792 873 1,115 1,707 1,846 1,997 2,159 Liquid — — 152 353 348 466 263 404 352 381 436 499 Ro/ro — — — 59 263 309 239 155 35 41 47 54 Total revenues 4,005 5,224 8,729 6,524 6,597 6,529 7,043 7,377 7,348 8,281 9,105 10,013 yoy increase (%) 2.7 30.5 36.1 (8.2) 1.1 (1.0) 7.9 4.7 (0.4) 12.7 10.0 10.0

Source: Company, Kotak Institutional Equities estimates

120 KOTAK INSTITUTIONAL EQUITIES RESEARCH Gujarat Pipavav Port Transportation

Exhibit 5: We cut revenue estimates on lower container and liquid volumes Change in estimates for GPPL, March fiscal year-ends, 2018-24E

Revised estimates Previous estimates % change 2019 2020 2021 2022E 2023E 2024E 2022E 2023E 2024E 2022E 2023E 2024E Volumes Container volumes (TEUs) 903,000 873,000 748,000 792,880 848,382 907,768 837,760 896,403 959,151 (5) (5) (5) Yoy growth (%) 28.4 (3.3) (14.3) 6.0 7.0 7.0 12.0 7.0 7.0 Bulk volumes (tons) 2,008,000 2,331,000 3,129,977 3,286,476 3,450,800 3,623,340 3,286,476 3,450,800 3,623,340 — — — Yoy growth (%) 10.3 16.1 34.3 5.0 5.0 5.0 5.0 5.0 5.0 Liquid volumes (tons) 639,000 820,000 693,719 728,405 801,245 881,370 797,777 877,555 965,310 (9) (9) (9) Yoy growth (%) (37) 28 (12) 5 10 10 15 10 10 Ro/ro volumes 76,000 47,000 10,158 11,174 12,291 13,520 11,174 12,291 13,520 — — — Yoy growth (%) (22.4) (38.2) (78.4) 10.0 10.0 10.0 10.0 10.0 10.0 Total volumes (mn tons) 15 15 14 15 16 17 16 17 18 (4) (4) (4) Yoy growth (%) 20.2 0.3 (7.3) 5.7 6.7 6.7 10.6 6.7 6.7 Tariffs (blended rate) Container (Rs/TEU) 5,657 5,827 6,118 6,730 6,932 7,140 6,363 6,554 6,751 6 6 6 yoy increase (%) (10.0) 3.0 5.0 10.0 3.0 3.0 4.0 3.0 3.0 Bulk (Rs/ton) 435 478 545 562 579 596 562 579 596 — — — yoy increase (%) — 10.0 14.0 3.0 3.0 3.0 3.0 3.0 3.0 Liquid (Rs/ton) 411 493 508 523 544 566 523 544 566 — — — yoy increase (%) (10.0) 20.0 3.0 3.0 4.0 4.0 3.0 4.0 4.0 Ro/ro realization 3,150 3,308 3,473 3,647 3,829 4,020 3,647 3,829 4,020 — — — yoy increase (%) — 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 Overall realization (Rs / ton) 458 478 514 547 564 581 529 546 562 3 3 3 yoy increase (%) (10.2) 4.4 7.4 6.6 3.0 3.0 3.1 3.0 3.0 Revenues (Rs mn) Container 5,109 5,087 4,577 5,336 5,881 6,482 5,331 5,875 6,475 0 0 0 Bulk 873 1,115 1,707 1,846 1,997 2,159 1,846 1,997 2,159 — — — Liquid 263 404 352 381 436 499 418 478 546 (9) (9) (9) Ro/ro 239 155 35 41 47 54 41 47 54 — — — Total revenues 7,043 7,377 7,348 8,281 9,105 10,013 8,380 9,215 10,136 (1) (1) (1) yoy increase (%) 7.9 4.7 (0.4) 12.7 10.0 10.0 14.0 10.0 10.0 EBITDA 3,872 4,466 4,240 4,964 5,554 6,267 5,069 5,670 6,395 (2) (2) (2) EBITDA margin (%) 55.0 60.5 57.7 59.9 61.0 62.6 60.5 61.5 63.1 PBT 3,210 3,586 3,265 4,035 4,536 5,258 4,256 4,776 5,518 (5) (5) (5) Tax (1,153) (662) (1,082) (1,016) (1,142) (1,122) (1,071) (1,202) (1,187) Tax rate (%) 35.9 18.5 33.1 25.2 25.2 21.3 25.2 25.2 21.5 PAT 2,057 2,924 2,184 3,019 3,394 4,136 3,185 3,574 4,330 (5) (5) (4) EPS 4.3 6.0 4.5 6.2 7.0 8.6 6.6 7.4 9.0 (5) (5) (4)

Source: Company, Kotak Institutional Equities estimates

Exhibit 6: SoTP-based Fair Value of Rs121/share Sum-of-the-parts valuation of GPPL

Value Stake GPPL stake value Per share (Rs bn) (%) (Rs bn) (Rs) Method of valuation Pipavav port 52,476 100.0 52,476 109 One-year forward FCFE valuation Pipavav Rail Corporation Ltd (PRCL) 15,835 38.8 6,144 13 16X two'-year forward EPS Total value for GPPV 68,312 58,620 121

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 121 Transportation Gujarat Pipavav Port

Exhibit 7: GPPV trades at 5.6X FY2024E EV/EBITDA, about half the valuation multiple for ADSEZ Key numbers and valuation metrics of GPPL versus Adani Ports and SEZ, March fiscal year-ends, 2018-24E

Pipavav Port Adani Ports and SEZ (consolidated) 2019 2020 2021 2022E 2023E 2024E 2019 2020 2021 2022E 2023E 2024E Volumes Total (mn tons) 15 15 14 15 16 17 238 257 278 329 404 450 Financial summary (Rs mn) Revenues 7,020 7,353 7,335 8,281 9,105 10,013 109,254 118,731 125,496 171,948 212,385 236,987 EBIDTA 3,872 4,466 4,240 4,964 5,554 6,267 65,916 75,654 79,835 113,641 142,467 159,378 PAT 2,057 2,924 2,184 3,019 3,394 4,136 39,902 37,842 49,943 60,183 73,029 88,480 Net debt (5,337) (6,495) (7,254) (7,141) (7,890) (8,415) 212,206 221,489 304,801 300,740 262,492 196,975 Book value 20,210 20,848 20,321 20,091 19,834 19,525 245,382 256,235 306,283 410,666 475,942 555,943 Key ratios (%) Revenue growth 8.2 4.7 (0.3) 12.9 10.0 10.0 (3.5) 8.7 5.7 37.0 23.5 11.6 PAT growth 3.6 42.2 (25.3) 38.3 12.4 21.9 8.6 (5.2) 32.0 20.5 21.3 21.2 EBIDTA margin 55.1 60.7 57.8 59.9 61.0 62.6 60.3 63.7 63.6 66.1 67.1 67.3 RoE 10.2 14.2 10.6 14.9 17.0 21.0 17.8 21.8 15.2 16.8 16.5 17.1 RoCE 10.2 14.5 10.8 15.2 17.2 21.2 14.2 14.7 12.9 13.8 14.2 15.2 Per share (Rs) EPS 4.3 6.0 4.5 6.2 7.0 8.6 18.9 17.9 23.6 28.5 34.6 41.9 BVPS 41.8 43.1 42.0 41.6 41.0 40.4 116.2 121.3 145.0 194.4 225.3 263.2 Key valuation ratios at MP (X) P/E 21.1 14.8 19.9 14.4 12.8 10.5 37.3 39.3 29.8 24.7 20.4 16.8 P/B 2.1 2.1 2.1 2.2 2.2 2.2 6.1 5.8 4.9 3.6 3.1 2.7 P/Sales 8.4 8.0 8.0 7.1 6.4 5.9 13.6 12.5 11.8 8.6 7.0 6.3 EV/EBITDA 9.8 8.3 8.5 7.3 6.4 5.6 25.8 22.6 22.4 15.7 12.3 10.6 Valuation at TP (X) P/E 25.5 17.9 24.0 17.4 15.5 12.7 39.2 41.3 31.3 26.0 21.4 17.7 P/B 2.6 2.5 2.6 2.6 2.6 2.7 6.4 6.1 5.1 3.8 3.3 2.8 P/Sales 7.5 7.1 7.2 6.3 5.8 5.2 14.3 13.2 12.5 9.1 7.4 6.6 EV/EBITDA 12.2 10.3 10.7 9.1 8.0 7.0 26.9 23.6 23.4 16.4 12.8 11.0

Source: Company, Kotak Institutional Equities estimates

122 KOTAK INSTITUTIONAL EQUITIES RESEARCH Gujarat Pipavav Port Transportation

Exhibit 8: Profit, balance sheet and cash model of GPPL, CY2012 - FY2024E (Rs mn)

CY2012 CY2013 15MFY15 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022E FY2023E FY2024E Profit model Net sales 4,160 5,179 8,670 6,600 6,831 6,489 7,020 7,353 7,335 8,281 9,105 10,013 Total operating costs (2,342) (2,611) (3,656) (2,839) (2,645) (2,748) (3,149) (2,888) (3,095) (3,317) (3,552) (3,746) EBITDA 1,819 2,568 5,015 3,761 4,186 3,741 3,872 4,466 4,240 4,964 5,554 6,267 EBITDA margin (%) 43.7 49.6 57.8 57.0 61.3 57.6 55.1 60.7 57.8 59.9 61.0 62.6 Other income 154 168 401 258 354 370 470 509 423 544 544 597 Financial charges (684) (374) (262) (2) (4) (3) (4) (74) (63) (63) (63) (63) Depreciation (549) (756) (833) (964) (1,065) (1,036) (1,128) (1,314) (1,334) (1,409) (1,499) (1,543) Pre-tax profit 740 1,605 4,321 3,054 3,470 3,072 3,210 3,586 3,265 4,035 4,536 5,258 Taxation — — — (1,392) (971) (1,087) (1,153) (662) (1,082) (1,016) (1,142) (1,122) Adjusted PAT 740 1,605 4,321 1,661 2,499 1,985 2,057 2,924 2,184 3,019 3,394 4,136 EPS (Rs) 1.5 3.3 8.9 3.4 5.2 4.1 4.3 6.0 4.5 6.2 7.0 8.6 Balance sheet Shareholders' funds 12,117 14,035 17,908 19,164 20,195 20,141 20,210 20,848 20,321 20,091 19,834 19,525 Equity share capital 4,834 4,834 4,834 4,834 4,834 4,834 4,834 4,834 4,834 4,834 4,834 4,834 Reserves and surplus 7,283 9,201 13,073 14,329 15,361 15,306 15,376 16,014 15,487 15,257 15,000 14,690 Loan funds 3,207 2,819 — — — — — — — — — — Total sources of funds 15,325 16,854 17,908 19,164 20,195 20,141 20,210 20,848 20,321 20,091 19,834 19,525 Total fixed assets 14,039 14,639 14,046 17,309 17,684 17,186 16,354 15,882 15,200 14,902 14,072 13,231 Investments 830 830 830 830 830 830 830 830 830 830 830 830 Cash and bank balances 511 2,023 2,439 2,898 3,522 4,315 5,337 6,495 7,254 7,141 7,890 8,415 Net current assets excl. cash (56) (638) 593 (599) (2,258) (2,187) (1,849) (1,865) (1,956) (1,774) (1,951) (2,145) Total application of funds 15,325 16,854 17,908 19,164 20,195 20,141 20,210 20,848 20,321 20,091 19,834 19,525 Cash flow statement Cash flow from operations before WC changes 1,856 2,649 5,050 3,855 4,289 3,719 3,859 4,517 4,244 4,788 5,346 6,048 Changes in working capital 849 474 190 841 319 (70) (338) (486) 196 (182) 177 194 Income tax (83) (223) (805) (801) (588) (614) (642) (636) (599) (807) (1,142) (1,323) Cash flow from operations 2,621 2,900 4,435 3,894 4,020 3,035 2,879 3,395 3,841 3,799 4,381 4,919 Capex (1,751) (909) (1,137) (3,648) (1,430) (533) (294) (148) (448) (1,326) (669) (702) Free cash flows 870 1,991 3,298 246 2,590 2,502 2,585 3,248 3,393 2,473 3,713 4,218

Growth (%) Revenue growth 5 24 67 (24) 4 (5) 8 5 (0) 13 10 10 EBITDA growth (1) 41 95 (25) 11 (11) 4 15 (5) 17 12 13 Recurring PAT growth 30 117 169 (62) 50 (21) 4 42 (25) 38 12 22 Key ratios EBITDA margin (%) 43.7 49.6 57.8 57.0 61.3 57.6 55.1 60.7 57.8 59.9 61.0 62.6 Recurring PAT margin (%) 17.8 31.0 49.8 25.2 36.6 30.6 29.3 39.8 29.8 36.5 37.3 41.3 Effective tax rate (%) - - - 46 28 35 36 18 33 25 25 21 Net debt to equity (X) 0 0 (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) BVPS (Rs) 25 29 37 40 42 42 42 43 42 42 41 40 RoE (%) 7 12 27 9 13 10 10 14 11 15 17 21 RoCE (%) 8 12 26 9 13 10 10 14 11 15 17 21

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 123 SELL TCNS Clothing Co. (TCNSBR) https://ultraviewer.et/en/own Consumer Durables & Apparel AUGUST 15, 2021 load.html RESULT Sector view: Cautious

1QFY22: Muted performance. TCNS posted a weak quarter, with a 58%qoq Decline CMP (`): 568 in revenue, missing our estimate by 13% as the second Covid-wave lockdowns Fair Value (`): 455 impacted store operations. Weak gross margins and normalization of operating costs BSE-30: 55,437 led to an EBITDA loss of Rs234 mn. The online channel contributed to 50% of revenues in 1QFY22. Cash reserves stood at Rs1.4 bn. SELL with revised FV of Rs455 (earlier Rs440).

TCNS Clothing Co. Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 568/455/SELL EPS (Rs) (10.1) 0.4 15.3 52-week range (Rs) (high-low) 652-335 EPS growth (%) (193.7) 104.3 3,425.3 Mcap (bn) (Rs/US$) 35/0.5 P/E (X) (56.3) 1,309.7 37.2 ADTV-3M (mn) (Rs/US$) 109/1 P/B (X) 6.2 5.8 4.8 Shareholding pattern (%) EV/EBITDA (X) (481.4) 30.3 14.3 Promoters 32.3 RoE (%) (10.4) 0.5 14.1 FPIs/MFs/BFIs 19.5/1.9/0.0 Div. yield (%) 0.0 0.0 0.0 Price performance (%) 1M 3M 12M Sales (Rs bn) 6 9 13 Absolute (6.1) 11.7 64.0 EBITDA (Rs bn) 0) 1 3 Rel. to BSE-30 (11.2) (2.2) 19.3 Net profits (Rs bn) (1) 0 1

Continued Covid-led weak offline channel performance in 1QFY22

TCNS’ 1QFY22 revenues declined 58%qoq and came in 13% below expectations. This was on account of weaker sales from offline channels (EBO, LFS, MBO). Online sales witnessed some momentum and increased 154% yoy, though were sequentially flat. MBO channel sales were nil as offline demand was weak in 1QFY22 and TCNS will likely wait for better demand to commence sales to MBOs. We expect recovery in demand to pre-Covid levels only by the festive season in 3QFY22.

Gross margins impacted due to higher mix of online sales and some write-offs

TCNS’ gross margins expectedly declined 165 bps qoq to 55.8% primarily due to a higher mix of online sales channel, a conservative dormancy policy and lower sales base. Normalization of selling and distribution and other costs and negative operating leverage drove EBITDA loss of Rs234 mn vs KIE estimates of Rs88 mn loss. TCNS managed rental savings of ~Rs30 mn in 1QFY22 which were accounted below EBITDA. TCNS is renegotiating rentals with landlords and expects more concessions to be accounted for in 2QFY22.

Way forward: calibrated store expansion, cash conservation, automated inventory management

TCNS has Rs1.4 bn (vs Rs1.8 bn in 4QFY21) of cash on books currently in addition to unused bank limits. It intends to capitalize on low real estate rentals and is targeting overall store addition of 60 EBOs and 200-250 LFS in FY2022/23 each. These new stores will include both franchisee stores and company-owned stores while expanding to tier II and III markets. TCNS has already signed leases to open 40+ stores in 2Q/3Q. Further, an automated replenishment Garima Mishra system has been put in place across all brands for EBO and LFS for efficient inventory management.

Shubhangi Nigam Retain FY2022 estimates; revise FV to Rs455

We trim FY2022 revenue estimates by 5%; this however drives a larger cut in EBITDA (18% cut) and net profit (87% cut) due to a sharp negative operating leverage. We retain our FY2023/24 estimates. We roll forward to September 2023E and retain SELL with a revised FV of Rs455 (earlier Rs440) based on P/E of 27X.

[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. TCNS Clothing Co. Consumer Durables & Apparel

Exhibit 1: Consolidated quarterly financials of TCNS, March fiscal year-ends, (Rs mn)

Change (%) 2-yr CAGR Yoy growth 1QFY22 1QFY22E 1QFY21 4QFY21 KIE yoy qoq 1QFY20 (%) FY2022E FY2021 (%) Revenue from operations 938 1,079 324 2,211 (13.0) 189.4 (57.6) 2,796 (42.1) 9,252 6,355 45.6 COGS (415) (496) (160) (941) (16.4) 159.7 (55.9) (916) (32.7) (3,453) (2,724) 26.8 Gross profit 524 583 165 1,270 (10.1) 218.3 (58.8) 1,881 (47.2) 5,799 3,632 59.7 Gross margin (%) 55.8 54.0 50.7 57.5 180 bps 506 bps -165 bps 67.3 62.7 57.1 554 bps Employee cost (311) (302) (328) (319) 2.9 (5.1) (2.4) (330) (3.0) (1,228) (1,114) 10.2 ESOP expense — — — — (40) (80) (100) (20.0) Rental expense (32) (11) — — 195.6 (47) 71 17 319.8 Selling and distribution expense (256) (261) (120) (534) (1.9) 113.5 (52.1) (648) (37.2) (2,174) (1,596) 36.3 Other expenses (159) (97) (144) (188) 63.7 10.3 (15.7) (234) (17.5) (1,190) (915) 30.1 Total expenses (1,172) (1,167) (751) (1,982) 0.4 56.0 (40.9) (2,215) (27.3) (8,053) (6,431) 25.2 EBITDA (234) (88) (427) 229 165.8 nm nm 581 1,198 (76) EBITDA margin (%) (24.9) (8.2) (131.7) 10.4 20.8 13.0 (1.2) 1414 bps Finance costs (80) (98) (91) (114) (18.4) (12.7) (30.1) (92) (7.0) (326) (365) (10.6) Depreciation and amortization expense (206) (248) (252) (249) (16.6) (18.1) (17.2) (232) (5.7) (990) (919) 7.7 Other income 30 55 166 181 (45.9) (82.1) (83.6) 22 15.5 157 490 (67.9) PBT (490) (378) (604) 47 29.6 (18.9) nm 279 39 (869) Tax expense 130 — 151 (8) (14.2) (74) (10) 206 PAT (361) (378) (453) 39 (4.7) (20.4) nm 205 29 (664) EPS (5) (6) (7) 1 3 0 (10) Tax rate (%) 26 — 25 17 27 26 24 Costs (as % of revenues) COGS 44.2 46.0 49.3 42.5 -180 bps -506 bps 165 bps 32.7 1145 bps 37 43 -554 bps Employee cost 33.1 28.0 101.0 14.4 514 bps -6790 bps 1872 bps 11.8 2132 bps 13 18 -426 bps Rental expense 3.4 1.0 — — 240 bps 340 bps 340 bps 1.7 170 bps (1) (0) -50 bps Selling and distribution expense 27.2 24.2 36.9 24.2 309 bps -968 bps 309 bps 23.2 408 bps 24 25 -161 bps Other expenses 16.9 9.0 44.5 8.5 794 bps -2752 bps 841 bps 8.4 858 bps 13 14 -153 bps Operating metrics Channel-wise revenues EBO 188 310 26 774 (39.4) 623.5 (75.7) 1,174 (60.0) LFS 281 371 101 929 (24.2) 180.1 (69.7) 1,202 (51.6) MBO/wholesale — 57 13 66 (100.0) (100.0) (100.0) 112 (100.0) E-commerce 469 340 185 464 37.8 153.9 1.0 308 23.5 Total 938 1,079 324 2,233 (13.0) 189.4 (58.0) 2,796 (42.1) Brand-wise revenues W 535 593 178 1,238 (9.9) 199.9 (56.8) 1,566 (41.6) Aurelia 375 421 130 840 (10.8) 189.4 (55.3) 1,035 (39.8) Wishful 28 65 16 133 (56.5) 73.6 (78.8) 196 (62.1) Total 938 1,079 324 2,211 (13.0) 189.4 (57.6) 2,796 (42.1) Retail SSSG (%) — — — — 3

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: EBO channel impacted due to second wave of Covid lockdowns Channel-wise composition of TCNS' revenue, March fiscal year-ends

Channel-wise revenues (Rs mn) 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 1QFY22 % yoy EBO 910 1,302 1,268 1,227 1,174 1,380 1,382 986 26 389 880 774 188 (22) LFS 1,037 1,203 1,161 1,076 1,202 1,251 1,382 921 101 504 928 929 281 1 MBO 74 321 235 289 112 193 99 153 13 — 24 66 — na Online and others 346 381 322 329 308 385 428 132 185 548 547 464 469 63 Total 2,366 3,207 2,985 2,921 2,796 3,208 3,290 2,192 324 1,441 2,379 2,233 938 2 Channel-wise revenue contribution (%) EBO 38 41 42 42 42 43 42 45 8 27 37 35 20 LFS 44 38 39 37 43 39 42 42 31 35 39 42 30 MBO 3 10 8 10 4 6 3 7 4 — 1 3 — Online and others 15 12 11 11 11 12 13 6 57 38 23 21 50 Total 100 100 100 100 100 100 100 100 100 100 100 100 100

Notes: (a) The company has stopped disclosing MBO channel revenue share as a separate category from 1QFY22. Instead, it is clubbed in ‘online and others’ category. (b) For a like-to-like comparison, yoy revenue growth calculation for ‘online and others’ category is done by summing up MBO and online channel revenues of 1QFY21.

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 125 Consumer Durables & Apparel TCNS Clothing Co.

W reported a 200% yoy growth in revenues– note TCNS has a larger proportion of W EBOs, while Aurelia has a larger share of sales through LFS. Aurelia sales grew by 189% yoy, and Wishful grew by 74% yoy. However, these sales were still remarkably lower than 1QFY20 levels across categories indicating recovery will take time and is expected to happen closer to the festive season in 2QFY22.

Exhibit 3: W reported 200% yoy revenue growth on the back of weak base Brand-wise composition of TCNS' revenue, March fiscal year-ends

2-yr CAGR Brand-wise revenues (Rs mn) 2016 2017 2018 2019 2020 2021 1QFY20 1QFY21 1QFY22 Yoy (%) (%) W 3,214 4,400 4,856 6,835 6,454 3,532 1,566 178 535 200 (42) Aurelia 1,270 2,181 2,837 3,896 4,142 2,460 1,035 130 375 189 (40) Wishful 374 605 731 750 891 364 196 16 28 74 (62) Total 4,859 7,185 8,424 11,481 11,487 6,355 2,796 324 938 189 (42) Brand-wise revenue contribution (%) W 66 61 58 60 56 56 56 55 57 Aurelia 26 30 34 34 36 39 37 40 40 Wishful 8 8 9 7 8 6 7 5 3 Total 100 100 100 100 100 100 100 100 100

Source: Bloomberg, Company, Kotak Institutional Equities

Exhibit 4: Yoy revenue growth of 189% during 1Q came off an extremely weak base Revenues and yoy revenue growth of TCNS, March fiscal year-ends (Rs mn, %)

Revenues (Rs mn, LHS) Yoy revenue growth (%, RHS) (Rs mn) (%) 3,500 250 189 3,000 200 150 2,500 100 2,000 36 50 8 3 1,500 1 (27) (28) - (55) 1,000 (88) (50) 500 (100)

- (150) 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 1QFY22

Source: Company, Kotak Institutional Equities

126 KOTAK INSTITUTIONAL EQUITIES RESEARCH TCNS Clothing Co. Consumer Durables & Apparel

Exhibit 5: TCNS closed two stores in 1QFY22 EBO store count, March fiscal year-ends (#)

EBO count (#) 700 595 587 574 600 541 561 551 549

500 465 381 400 305 300

200

100

- 2016 2017 2018 2019 2020 1QFY21 2QFY21 3QFY21 4QFY21 1QFY22

Source: Company, Kotak Institutional Equities

Exhibit 6: GMs impacted due to higher proportion of online sales Quarterly gross margin trend (%)

Gross margin (%) 75

70 69.1 67.4 68.0 68.5 67.3 67.8 65.8 65 64.5 64.9 62.2 60 61.1 61.1 57.9 55.8 55 51.6 57.5 50 50.7 45

40

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21 1QFY22

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 127 Consumer Durables & Apparel TCNS Clothing Co.

Exhibit 7: TCNS’ revenues are weaker compared to multi-brand large format stores Quarterly revenue trends of apparel retailers, March fiscal year-ends

2-yr CAGR 1QFY20 1QFY21 1QFY22 (%) Revenues (Rs mn) TCNS 2,796 324 938 (42) Aditya Birla Fashion 20,655 3,200 7,962 (38) Trent 7,999 2,484 4,920 (22) Shoppers' Stop 8,540 556 2,052 (51) 4QFY19 4QFY20 4QFY21 (%) Revenues (Rs mn) TCNS 3,002 2,192 2,211 (14) Aditya Birla Fashion 19,153 18,174 17,836 (3) Trent 6,943 8,429 9,055 14

Shoppers' Stop 7,911 7,092 6,712 (8)

Source: Company, Kotak Institutional Equities

128 KOTAK INSTITUTIONAL EQUITIES RESEARCH TCNS Clothing Co. Consumer Durables & Apparel

Key takeaways from results call

 Operational update. Only 48% of stores were operational in 1QFY22. Most of the retail network was closed in Apr-May’21. As on date, most of the offline network is operational, but with multiple restrictions on working hours/days. MBO rationalization has been completed. TCNS faced a ban on non-essential items delivery in multiple states in April and May. Warehouse and production units are now functional; tracking towards full capacity utilization. Rental concessions of ~20% expected for a full year. Savings of Rs30 mn were accounted in 1QFY22 as many of the deals are in process of getting signed.

 1QFY22 highlights. Post normalization of the second Covid wave, offline sales are witnessing a consistent recovery which is evenly distributed across tiers and store types. Online sales are seeing sustained momentum on a significant base. TCNS’ own shopping website now contributes mid teen share in online sales. Recovery is expected in 2QFY22 with the onset of the festive season. EOSS began later than usual in the third week of July 2021 and is already tracking 70% of pre-Covid like-to-like sales indicating strong demand for the festive season. Also, full-price sales in EOSS have been higher than usual. Per the management, the buyer is now shifting from need-based shopping to impulse purchases.

 Online channel. Overall online revenues increased ~150% yoy; with a higher increase in sales from own website. TCNS will create an online-first product range with more 2/3 piece set offerings in prices that are within 10% of the existing range. Omni model is operational in 100 stores and is expected to cover 150-175 stores shortly. It has been launched in partnership with three major marketplaces; a few more marketplaces are to be added. Over the medium-term, online is expected to contribute to 25-30% of sales. With gradual opening of offline stores, TCNS expects some moderation in growth rates of online channel. TCNS will continue scale-up of its own website through deeper omni- offerings, personalized marketing and technology upgradation. It will expand third-party marketplace with new business models, additional channels and online first product offerings.

 Renewed focus on store expansion. TCNS is trying to lock-in the low real estate pricing opportunity and has targeted an accelerated store expansion of 60 net stores in FY2022/23. This will include upgradation of existing stores (Project Rise), entering new tier III and IV markets (Project Bharat) through a franchisee-led model. Project Rise: first set of 15 stores have been signed across key malls and high-streets, at attractive long- term leases. TCNS should be able to add 200-250 doors in LFS channel given the current flux in smaller brands. 15 Elleven pilot stores are to be opened in FY2022. Typically TCNS closes 20-25 stores each year.

 Investing in new capabilities. Per TCNS, it is trying to build capabilities in design innovation, data sciences and supply chain. Investments are being made in inventory automation, express delivery module and omni-channel capabilities. The company has also set up an integrated warehouse. Warehousing was divided across multiple locations and was running at sub-optimal levels individually. Hence, a need for consolidation to an organized setup was required to drive efficiencies. Future growth plans revolve around D2C initiatives (50% of online sales) and new product categories where a new-age warehouse will help in trying out different pilots/models with third party marketplaces.

 Gross margins. GM was 55.8% (vs 57.5% in 3QFY21). It was lower due to a skewed channel mix and a conservative dormancy policy on a lower sales base. Online GMs are also lower than the offline channel.

 Capex. Rs250-300 mn of capex spend is expected in FY2022/23. It will be used for new store expansion and ramping of digital infrastructure. Rs2.5-3 mn will be invested per

KOTAK INSTITUTIONAL EQUITIES RESEARCH 129 Consumer Durables & Apparel TCNS Clothing Co.

store. Out of total of Rs300 mn, Rs150 mn of capex can be put in place for store expansion in FY2022 and Rs50 mn for automated inventory management system.

Earnings: Cut FY2022 revenue estimates but retain FY2023 estimates

We revise down our FY2022 revenue estimates as we bake in slower-than-expected recovery in revenues. EBITDA and net profit cut in FY2022 is higher on account of negative operating leverage. We broadly retain our estimates for FY2023/24.

Exhibit 8: Sharp cut in FY2022 EPS but broadly retain FY2023 estimates Key changes to assumptions for TCNS, March fiscal year-ends

New estimates Old estimates % change 2022E 2023E 2024E 2022E 2023E 2024E 2022E 2023E 2024E Total Revenue (Rs mn) 9,252 13,223 15,305 9,736 13,228 15,311 (5.0) (0.0) (0.0) Revenue growth (%) 46 43 16 53 36 16 Gross profit (Rs mn) 5,799 8,491 9,837 6,198 8,495 9,841 (6.4) (0.0) (0.0) Gross margin (%) 62.7 64.2 64.3 63.7 64.2 64.3 EBITDA (Rs mn) 1,198 2,516 3,022 1,462 2,518 3,024 (18.0) (0.1) (0.1) EBITDA margin (%) 13.0 19.0 19.7 15.0 19.0 19.7 Adjusted EBITDA excl. ESOP 1,278 2,576 3,062 1,542 2,578 3,064 (17.1) (0.1) (0.1) expense (Rs mn) Adjusted EBITDA margin (%) 13.8 19.5 20.0 15.8 19.5 20.0 Net Profit (Rs mn) 29 1,043 1,235 224 1,049 1,247 (87.0) (0.6) (1.0) EPS (Rs) 0.4 15.3 18.0 3.3 15.4 18.2 (87.0) (0.6) (1.0) EPS growth (%) NM 3,425 18 NM 361 18

Source: Company, Kotak Institutional Equities estimates

Exhibit 9: Key assumptions for TCNS, March fiscal year-ends

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Revenues SSSG (%) 17.5 27.3 8.5 8.0 (3.4) (2.5) nm 40.0 36.0 36.0 EBO count (#) 235 305 381 465 541 599 551 606 671 736 LFS count (#) 565 794 991 1,469 1,623 1,944 2,123 2,333 2,543 2,738 Total revenues (Rs mn) 1,284 1,696 3,010 4,861 7,110 10,009 11,480 11,487 6,355 9,252 13,223 15,305 Yoy growth (%) 32 77 62 46 41 15 0 (45) 46 43 16 Costs Gross margin (%) 51.8 54.3 57.4 61.1 62.0 50.1 66.0 65.0 57.1 62.7 64.2 64.3 Employee cost as proportion of revenues (%) 13.1 13.0 11.8 32.4 21.6 12.4 12.5 13.7 19.1 14.1 10.8 10.2 Other costs as proportion of revenue (%) 26.9 28.7 28.7 29.5 29.7 22.1 38.1 35.0 39.2 35.6 34.4 34.3 EBITDA margin (%) 11.8 12.7 17.0 (0.8) 10.7 15.7 15.4 16.2 (1.2) 13.0 19.0 19.7 ESOP expense as proportion of revenue (%) — — — 18.5 10.4 2.2 1.5 0.8 1.6 0.9 0.5 0.3 Adjusted EBITDA margin (%) 11.8 12.7 17.0 17.7 21.1 17.8 16.9 17.0 0.4 13.8 19.5 20.0

Source: Company, Kotak Institutional Equities estimates

130 KOTAK INSTITUTIONAL EQUITIES RESEARCH TCNS Clothing Co. Consumer Durables & Apparel

Exhibit 10: Condensed consolidated financials of TCNS, March fiscal year-ends, 2013-24E (Rs mn)

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Profit model Revenue from operations 1,284 1,696 3,010 4,861 7,110 10,009 11,480 11,487 6,355 9,252 13,223 15,305 Gross profit 665 921 1,728 2,971 4,410 5,015 7,580 7,463 3,632 5,799 8,491 9,837 EBITDA 152 215 511 (39) 763 1,568 1,768 1,863 (76) 1,198 2,516 3,022 Adjusted EBITDA 152 215 511 860 1,499 1,784 1,943 1,951 24 1,278 2,576 3,062 Depreciation and amortisation expense (31) (40) (62) (89) (134) (167) (222) (1,032) (919) (990) (977) (1,255) EBIT 121 175 449 (128) 629 1,401 1,546 831 (995) 208 1,539 1,767 Other income 8 7 10 21 19 67 75 211 490 157 196 228 Finance costs (51) (49) (49) (29) (25) (7) (5) (382) (365) (326) (326) (326) Profit before tax 77 133 410 (136) 624 1,462 1,616 661 (869) 39 1,409 1,669 Taxation (30) (45) (147) (279) (466) (467) (302) 33 206 (10) (366) (434) Profit after tax 48 87 263 (415) 158 995 1,314 694 (664) 29 1,043 1,235 Diluted EPS (Rs/share) 0.9 1.7 5.0 (7.9) 2.6 15.6 20.6 10.8 (10.1) 0.4 15.3 18.0 Weighted average number of shares - diluted (mn) 52 53 53 53 60 64 64 64 66 67 68 69 Balance sheet Shareholders' funds 746 834 1,104 483 2,819 4,314 6,186 6,600 6,120 6,634 8,163 9,768 Total debt 308 342 398 382 86 2 — 3,620 3,304 3,620 3,620 3,620 Deferred tax liability — — — 96 — — — — — — — — Total shareholders' funds + liabilities 1,055 1,176 1,502 962 2,905 4,317 6,186 10,220 9,424 10,254 11,783 13,388 Net fixed assets 86 124 212 395 502 600 595 455 333 622 942 1,254 Inventory + debtors 1,059 1,203 1,544 2,013 2,937 3,708 4,548 5,058 4,429 4,710 5,825 6,743 Other current assets 119 171 260 408 446 735 822 861 767 785 1,158 1,340 Current liabilities + provisions 326 434 642 2,126 1,353 1,447 1,673 1,756 1,317 1,530 2,186 2,531 Total assets 1,055 1,176 1,502 962 2,905 4,317 6,186 10,220 9,424 10,254 11,783 13,388 Key ratios (%) Revenue growth 27 77 62 46 41 15 0 (45) 46 43 16 EBITDA growth 42 138 NA NA 106 13 5 (104) (1,685) 110 20 PAT growth 84 200 NA NA 530 32 (47) (196) (104) 3,485 18 Gross margin 52 54 57 61 62 50 66 65 57 63 64 64 EBITDA margin 12 13 17 (1) 11 16 15 16 (1) 13 19 20 Tax rate 39 34 36 (204) 75 32 19 26 26 26 26 26 Net debt/equity (X) 0.3 0.3 0.3 0.6 (0.0) (0.1) (0.0) 0.5 0.5 0.3 0.2 0.1 RoAE 11 27 (52) 10 28 25 11 (10) 0 14 14 RoACE 11 22 (26) 8 28 25 13 (4) 3 12 12 Cash flow 12 13 17 (1) 11 16 15 16 (1) 13 19 20 Operating profit before working capital changes 93 142 328 2,616 380 1,214 1,580 1,443 18 946 1,906 2,266 Change in working capital/ other adjustments (69) (75) (234) (212) (646) (971) (778) (475) 207 (86) (832) (755) Net finance (cost)/income (43) (42) (39) (9) (5) 61 70 (171) 125 (169) (130) (98) Capital expenditure (46) (81) (147) (271) (242) (274) (237) (315) (106) (1,278) (1,297) (1,567) Free cash flow (64) (57) (92) 2,125 (513) 29 635 483 244 (587) (353) (154)

Notes: (a) EBITDA FY2020 onwards is not comparable to previous years due to Ind-AS 116 related changes. (b) Adjusted EBITDA refers to EBITDA excluding ESOP expenses. (c) Operating profit before working capital changes above is calculated as adjusted EBITDA*(1-effective tax rate).

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 131 BUY Cummins India (KKC) https://ultraviewer.et/en/own Capital Goods AUGUST 13, 2021 load.html UPDATE Sector view: Attractive

Harbinger of uptick in exports? The launch of the QSK60 G23 engine by Cummins CMP (`): 949 India aligns with its stance of being a preferred entity for investing in products with Fair Value (`): 1,050 strong domestic demand potential (data centers in this case). It also increases India’s BSE-30: 54,844 relevance as a global manufacturing hub - India becomes the second location after UK to manufacture this engine and would potentially start substituting for related exports to China. Cummins India Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 949/1,050/BUY EPS (Rs) 22.9 31.9 41.1 52-week range (Rs) (high-low) 972-412 EPS growth (%) (10.2) 39.2 28.8 Mcap (bn) (Rs/US$) 264/3.6 P/E (X) 41.4 29.8 23.1 ADTV-3M (mn) (Rs/US$) 1,320/18 P/B (X) 6.0 5.5 5.0  Shareholding pattern (%) EV/EBITDA (X) 43.2 29.4 21.7 Promoters 51.0 RoE (%) 14.8 19.2 22.6 FPIs/MFs/BFIs 10.9/15.8/9.3 Div. yield (%) 1.5 1.8 2.4 Price performance (%) 1M 3M 12M Sales (Rs bn) 43 58 69 Absolute 10.8 13.9 124.3 EBITDA (Rs bn) 6 8 11 Rel. to BSE-30 6.0 1.3 81.4 Net profits (Rs bn) 6 9 11

#1: The launch of QSK60 G23 signals increasing relevance of data center portfolio

CIL unveiled its ‘Made in India’ - QSK60 G23: 2500-2750 kVA Diesel Generator (DG) set at its 60th Annual General Meeting. The Diesel Generator set which is an Integrated Power Solution has been launched to meet the increasing power requirements by industry segments like Data Centers and large scale infrastructure projects like Airports and Commercial Realty in India. DG sets greater than 2250kVA hitherto were imported. The India launch would shorten lead time, giving customers greater flexibility in managing project timelines.

#2: The launch aligns with CIL’s stance of being beneficiary of new products with India appeal

With the earlier QSK60 business of India and exports moving in the past to CTIL, the current decision to house the new QSK60 G23 engine in the listed entity should allay investor fears. In the past, CIL has reiterated that it would be the preferred investment vehicle for manufacturing and exporting new products with strong domestic demand.

#3: The launch potentially is a harbinger of higher exports of the node from India

With the launch, Pune would become the second location after Daventry (UK) to manufacture the QSK60 G23 engine. The tailwind of strong underlying demand for data centers would have been even stronger for China to invest in a new production line for the QSK G23 engine. China however continues to import the QSK G23 engine from Daventry (UK). Once set up, the Indian entity for the engine may get leveraged for serving such demand, boosting prospects of exports for CIL. We would aim to get more clarity from the management whether there would be any scope of internal competition for exports from India, though doubt that Cummins would house Aditya Mongia another QSK60 G23 line in CTIL for exports.

New exports can be a meaningful driver of earnings for Cummins over time Teena Virmani Our existing ahead-of-consensus estimates and/or 24X multiple have upside risks from new products from Cummins India. As highlighted in a note dated November 2, 2020, India scores over China for incremental exports on cost, delivery and control. We also note the export margin is meaningfully higher than the domestic margin for Cummins and segmental data from Perkins India reaffirms the same.

[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. Cummins India Capital Goods

Exhibit 1: China imports the QSK60 G23 engine from UK at present; India exports to China on several nodes Import of Cummins engines in China

ESP PRP Genset Model kVA kW kVA kW Engine Model Engine Origin CG250-H1 250 200 225 180 QSL9G2 USA CG275-H1 275 220 250 200 QSL9G3 USA CG330-H1 330 264 300 240 QSL9G5 USA CG500-H1 500 400 450 360 QSX15G6 USA CG550-H1 550 440 500 400 QSX15G8 USA CG550-H1 550 440 500 400 KTA19G4 USA CG700-H1 700 560 625 500 VTA28G5 India CG810-H1 810 650 750 600 QSK23G2 India CG825-H1 825 660 750 600 VTA28G6 India CG880-H1 880 704 800 640 QSK23G3 India CG1000-H1 1,000 800 910 728 QST30G3 USA CG1100-H1 1,100 880 1,000 800 QST30G4 USA CG1100-H1 1,100 880 1,000 800 KTA38G5 India CG1250-H1 1,250 1,000 1,125 900 QSK38G2 UK CG1250-H1 1,250 1,000 1,125 900 KTA38G9 India CG1375-H1 1,375 1,100 1,250 1,000 QSK38G5 UK CG1375-H1 1,375 1,100 1,250 1,000 KTA50G3 India CG1540-H1 1,540 1,232 1,400 1,120 QSK50G3 UK CG1500-H1 1,500 1,200 1,375 1,100 KTA50G8 India CG1650-H1 1,650 1,320 1,500 1,200 KTA50GS8 India CG1700-H1 1,700 1,360 1,540 1,232 QSK50G4 UK CG1825-H1 1,825 1,460 1,650 1,320 QSK50G7 UK CG2000-H1 2,000 1,600 1,875 1,500 QSK60G3 UK CG2250-H1 2,250 1,800 2,000 1,600 QSK60G4 UK CG2500-H1 2,500 2,000 2,250 1,800 QSK60-G8 UK CG2500-H1 2,500 2,000 2,250 1,800 QSK60-G21 UK CG2750-H1 2,750 2,200 2,500 2,000 QSK60-G23 UK CG2750-H1 2,750 2,200 2,500 2,000 QSK78-G18 UK CG3000-H1 3,000 2,400 2,750 2,200 QSK78-G9 UK

Source: FDK Energy, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 133 Capital Goods Cummins India

Exhibit 2: We note prospects of healthy growth in data centers from strong CY2020 levels Data center capacities in terms of IT load, calendar year-ends, 2000-23E (MW)

Year-end capacity Annual capacity additions

1,200 250 218 1,005 1,000 200 31% CAGR 800 150

600 97 447 100 400 350

207 50 36 36 28 200 122 7 50 - - 2000- 2008- 2011- 2015- 2020 2020- 2007 2010 2014 2019 2020 2023 2007 2010 2014 2019 2023E

Source: JLL research estimates, Kotak Institutional Equities

Exhibit 3: Power generation and HHP industrial applications are big opportunities within off- highway applications Global opportunity within the Cummins group within off-highway applications related to revision of emission norms over time

Source: Company, Kotak Institutional Equities

134 KOTAK INSTITUTIONAL EQUITIES RESEARCH Cummins India Capital Goods

Exhibit 4: Within the Cummins group, India is #1 in terms of manufacturing scale and a close #2 in terms of purchasing network Comparison of manufacturing hubs of Cummins group

Notes: (a) Within the Cummins group, Ichina is #3 in terms of manufacturing scale and a #1 in terms of purchasing network

Source: Company, Kotak Institutional Equities

The genset facility of Cummins China is primarily an assembly plant and thus is still dependent on JV entities for its engine supply. We deduce this by modest investments made in the setting up of the facility (refer).

Exhibit 5: Cummins does not have complete control in any of its engine facilities in China Key entities of Cummins in China

JV Details Engines Dongfeng Cummins Plant Yes 3.9, 4.5, 5.9, 6.7, 8.3, 8.9, 13L Chongqing Cummins Plant Yes 11, 14, 19, 38, 50L Xi'an Cummins Plant Yes 11L Beijing Foton Cummins Plant Yes 2.8 and 3.8L Guangxi Cummins Plant Yes 9.3 and 7L

Power Generation Wuhan Genset Plant Generator sets Wuxi Alternator Plant Stamford alternators Xiangyang Cummins Power Technologies G-drives Shanghai Cummisn Jardine Energy Solutions Imported gas power generators and power solutions

Components Shanghai Filtration Plant Filtration and coolant hanghai Fleetguard Plant Air filters, lube filters, fuel filters and water filters Xiangfan Fleetguard Plant Yes Fleetguard Wuxi Turbo Plant Yes Turbochargers Wuxi Vane Wheel Plant Yes Turbocharger vane wheel Wuhan Fuel Systems Plant Fuel system Beijing Emission Solutions Plant Aftertreatment system Cummins (Xiangfan) Machining Co Shanghai Valvoline Cummins Yes Lubricants

Distribution Business Unit Cummins Tianyuan Yes Distribution unit

Tech centers East Asia R&D Center (Wuhan) Turbo Technologies Tech Center (Wuxi) Engineering Centers Beijing Engineering Centers Xiangyang Engineering Centers Chongqing

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 135 Capital Goods Cummins India

Exhibit 6: Cummins has complete control in its engine facilities in India beyond Tata Cummins Key entities of Cummins in India

Engines Manufactures mid-range, heavy-duty and high horsepower Cummins India - plants mechanical and electronic engines for off-highway applications Cummins India MidRange electronic Engines Tata Cummins - 3 plants Yes Manufactures mid-range engines for on-highway applications Cummins Technologies India High horsepower engine plant

Power Generation Cummins India - 3 plants Manufactures gensets for domestic and exports markets

Components Cummins Turbo Technologies (CTIL) - 3 plants Manufactures turbochargers for domestic and overseas markets Cummins Generator Technologies Manufactures alternators Cummins Emissions Solutions (CTIL) -2 plants Manufactures aftertreatment systems Cummins Fuel Systems India (CTIL) Manufactures mid-range fuel injection systems Fleetguard Filters Manufactures filters Valvoline Cummins Yes Manufactures ubricants

Distribution Business Unit HHP Rebuild Center Rebuilds used engines Ship to use warehouse New and Recon Parts (CTIL) - 2 plants Remanufactures engines and parts India Parts distribution center Serves as a logistics hub Assembles, upfits, tests and paints diesel and gas engines, both Engine upfit center mechanical and electronic, of B and L series Technical Training Center For Cummins ngine and Cummins Power Generation products

Tech centers Cummins Technical Center India (CTIL) Global Analytics Center (CTIL)

Source: Company, Kotak Institutional Equities

Exhibit 7: Perkins India segment margin on exports are much ahead of its domestic margin and Cummins' overall EBITDA margin Comparison of key business metrics of Perkins India and Cummins India, March fiscal year-ends, 2017-20

Segment margin (%) 30 Exports Domestic 25 25 20 15 9 10 10 8 5 - (5) (10) (7) (7) (15) (13) (20) (17) 2017 2018 2019 2020

Source: Company, Kotak Institutional Equities

136 KOTAK INSTITUTIONAL EQUITIES RESEARCH Cummins India Capital Goods

Exhibit 8: Standalone balance sheet, profit model and cash flow statement of Cummins, March fiscal year-ends, 2010-22E (Rs mn)

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E 2024E Profit model Net revenue 41,172 46,012 39,767 44,058 47,088 50,773 50,825 56,590 51,577 45,652 59,772 69,127 77,996 Total operating costs (34,200) (37,545) (32,799) (36,708) (39,337) (42,755) (43,501) (47,949) (45,715) (39,292) (50,828) (57,840) (65,190) EBITDA 6,972 8,467 6,967 7,351 7,751 8,018 7,325 8,641 5,863 6,360 8,945 11,287 12,806 Other operational income 651 922 776 847 1,212 1,192 1,307 1,333 961 1,033 1,111 1,196 1,288 Other income 1,233 1,949 1,777 2,040 2,259 2,080 2,285 2,928 3,315 3,688 3,827 4,007 4,444 PBDIT 8,206 10,416 8,744 9,390 10,010 10,098 9,609 11,569 9,178 10,048 12,771 15,294 17,251 Financial charges (54) (46) (42) (45) (96) (168) (148) (162) (203) (247) (247) (247) (247) Depreciation (420) (473) (528) (797) (810) (848) (938) (1,103) (1,187) (1,278) (1,337) (1,334) (1,424) Pre-tax profit 7,732 9,897 8,175 8,548 9,104 9,082 8,523 10,303 7,789 8,523 11,187 13,713 15,579 Taxation (2,282) (2,872) (2,175) (1,515) (1,561) (1,736) (1,826) (3,078) (1,297) (2,045) (2,685) (3,291) (3,739) PAT 5,913 7,641 6,000 7,859 7,543 7,346 7,085 7,226 6,293 6,477 8,502 10,422 11,840 Adjusted PAT 5,788 7,348 5,999 6,805 7,179 7,280 6,745 7,306 7,072 6,797 8,965 10,931 12,400 Balance sheet Shareholders funds 20,432 23,867 25,652 28,865 34,813 37,422 39,861 41,305 41,750 43,738 46,319 49,521 61,361 Loan funds — — — — — 2,508 2,515 3,092 4,854 4,854 4,854 4,854 4,854 Total source of funds 20,432 23,867 25,652 28,865 34,813 39,930 42,376 44,396 46,603 48,592 51,172 54,375 66,215 Net block 4,649 4,934 9,192 12,340 12,894 12,322 12,882 12,848 12,277 13,215 12,878 13,882 14,675 Net fixed assets 6,273 8,066 12,215 14,763 18,086 16,954 13,261 14,433 13,077 14,015 13,678 14,682 15,475 Investments and goodwill 5,975 6,276 4,954 4,650 3,336 9,753 12,798 10,133 18,606 18,606 18,606 18,606 18,606 Cash balances 2,235 3,547 865 799 897 1,291 4,709 7,379 4,538 7,001 6,897 7,094 16,243 Net current assets excluding cash 5,879 6,307 8,083 9,284 12,246 11,501 11,866 13,400 11,038 9,770 12,791 14,793 16,691 Total application of funds 20,432 23,867 25,652 28,865 34,813 39,930 42,376 44,396 46,603 48,591 51,172 54,375 66,215 Cash flow statement Operating profit before working capital changes 7,404 8,826 7,525 8,006 8,579 8,951 8,537 10,202 7,455 9,072 11,979 14,489 16,188 Change in working capital (825) (883) (1,607) (1,142) 33 371 (370) (2,341) 144 1,268 (3,022) (2,002) (1,898) Tax paid (2,155) (2,657) (2,308) (1,853) (1,694) (1,867) (1,823) (2,361) (1,609) (2,045) (2,685) (3,291) (3,739) Cashflow from operating activites 4,425 5,286 3,611 5,012 6,918 7,456 6,344 5,500 5,990 8,294 6,273 9,196 10,551 Fixed assets (2,281) (2,148) (4,678) (3,304) (4,899) (2,315) (905) (2,734) (2,366) (2,071) (1,000) (2,339) (2,217) Free cash flow 2,144 3,138 (1,068) 1,708 2,019 5,141 5,440 2,767 3,623 6,738 7,363 9,375 10,896

Growth (%) Revenue growth 1.8 11.8 (13.6) 10.8 6.9 7.8 0.1 11.3 (8.9) (11.5) 30.9 15.7 12.8 EBITDA growth (8.7) 21.4 (17.7) 5.5 5.4 3.4 (8.7) 18.0 (32.2) 8.5 40.6 26.2 13.5 Recurring PAT growth (7.5) 26.9 (18.4) 13.4 5.5 1.4 (7.3) 8.3 (3.2) (3.9) 31.9 21.9 13.4 Key ratios (%) Gross margin 35.7 37.2 39.0 38.2 37.1 35.5 35.9 36.1 34.7 36.6 35.5 36.7 36.5 EBITDA margin 16.9 18.4 17.5 16.7 16.5 15.8 14.4 15.3 11.4 13.9 15.0 16.3 16.4 PAT margin 13.2 15.3 15.1 16.0 16.0 14.5 13.2 12.8 12.6 14.2 14.2 15.1 15.2 RoE 28.3 31.7 24.2 25.8 23.7 20.3 17.3 17.8 15.6 15.2 18.9 21.7 21.4 RoCE 22.7 28.7 19.9 26.1 18.8 11.5 9.9 5.9 6.9 1.7 5.6 9.0 10.2 Debt / equity (X) 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Adj. EPS (Rs) 20.9 26.5 21.6 24.5 25.9 26.3 24.3 26.4 25.5 24.5 32.3 39.4 44.7

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 137 CAUTIOUS Automobiles & Components India AUGUST 15, 2021 UPDATE BSE-30: 55,437

Electric revolution has begun. Ola Electric launched its first electric scooter S1 priced at Rs0.1-0.13 mn, which is similarly priced to Bajaj e-Chetak and TVS Motors iQube. Ola Electric scooter will be available in two variants- S1 and S1 pro versions. While S1 variants gets 2.9 kWhr battery whereas S1 pro gets 3.9 kWhr battery. The company has provided a lot of features in its products at a very attractive price point. Our current cost of analysis for Ola Electric S1 versus Honda Activa FI implies break-even of ~2.5 years at the current landing cost of $210 per kW-hr for batteries, which should lead to rapid adoption of electric 2Ws over the medium-term.

Ola Electric launched electric scooter S1 at a price range of Rs0.1-0.13 mn

Ola Electric has unveiled its first electric scooter S1 on August 15, 2021 (refer Exhibit-1). The e-  scooter is available in two variants- the base model S1 (priced at Rs0.1 mn) and the premium model S1 pro (price at Rs0.13 mn). The S1 pro model gets a battery of 3.9 kWhr whereas S1 model gets a battery of 2.9 kWhr. Ola S1 will be available in five colors whereas Ola S1 pro will be available in 10 colors. Both the variants will come with 8.5 kW motor. Apart from the ‘Normal’ and ‘Sport’ riding modes which are standard across both scooters, the S1 Pro gets a ‘Hyper’ riding mode, unleashing the unrestricted accelerative prowess of the scooter which, according to the brand, propels the S1 Pro from 0-60 kmph in a staggering five seconds. The S1 has a claimed range of 121km, which is also higher than anything currently offered by the competition, while the S1 has a top-speed of 90 kmph; the S1 Pro gets an extended top-speed of 115 kmph making it the fastest electric scooter in the world, according to the company. The battery can be charged in about 6 hours with a 750W portable charger or up to 50% using an Ola Supercharger in just 18 minutes. Another in a series of pioneering features is a ‘Reverse mode’ and ‘Hill Hold’ feature, with the latter automatically detecting sloping surfaces and holding the scooter in position without the need for the rider to engage the brake, or hold the scooter in place using their feet. In addition to this, it gets a highly customizable digital, touchscreen display which allows the rider to customize riding modes, digital interfaces and sounds that are artificially-emitted from front-fascia mounted speakers, tapping into pop- cultural themes associated with electric vehicles, including sci-fi whistles while including accelerative sounds infused with tanpura notes, and bird sounds denoting its environmentally- friendly, zero-emission nature. The scooter also gets, as part of its proprietary operating system MoveOS, multiple rider profiles for individual users, which includes a Parental mode allowing authority figures in a family to set a speed limit and track the movements of the scooters. The company has claimed that the per kilometer running costs of the scooters will be roughly 1/3rd of 1/4th of that of a petrol-powered scooter. While a battery warranty period has not been revealed yet, the company highlighted that the battery life-span will outlast the average ownership period in urban centers by a considerable margin, with the brand’s proprietary battery technology making it last up to 7-8 years. Claiming 90% localization, with the exception of battery cells, which are being imported from Korea, almost all other materials, software etc. have been sourced locally.

TCO is favorable for S1 variant even after considering cost of battery replacement after 5 years Hitesh Goel

Our current cost of analysis for Ola Electric S1 versus Honda Activa FI implies break-even of ~2.5 years at the current landing cost of $210 per kW-hr for batteries (refer Exhibit-3) even after Rishi Vora considering the cost of replacing the battery after five years. Since break-even for a customer is <3 years, economics for electric scooters is favorable versus gasoline scooter in the current scenario of higher fuel prices. However, if battery prices drop to $150 per kW-hr, break-even for electric scooters will come down to ~1.2 years. However, for S1 pro model, break-even is coming around 4.4 years due to higher upfront cost owing to higher battery size as per our estimates.

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Exhibit 1: Ola Electric launched S1 at an on-road price of Rs0.1-0.13 mn Snapshot of Ola Electric S1

Source: Company, Kotak Institutional Equities

Exhibit 2: Ola Electric S1 has been equipped with battery capacity of 2.9kWhr whereas Bajaj e-Chetak is equipped with 3kWhr battery Comparison of Ola Electric S1, Bajaj e-Chetak, Ather S450 plus, TVS Motors iQube and Honda Activa FI

Ather Energy e-scooter (S450 Ola S1 Bajaj e-Chetak TVS Motors iQube Honda Activa FI Plus) Cost to consumer (Rs) 99,999 100,000 125,490 110,506 89,000 Engine Power 8.5 kW peak 4 kW peak 3.3 kW (5.4 kW peak) 4.4 kW peak 6.1 kW @ 6500 rpm Torque N/A 16 Nm 22 Nm 14 Nm 10.3 Nm @ 5500 rpm Displacement (cc) N/A N/A N/A N/A 124 Brakes Brakes front Disc Disc Disc Disc Disc Brakes rear Disc Drum Disc Drum Drum Performance Mileage 121 km/charge 85 - 95 km/charge 70 km/charge 75 km/charge 40 Kmpl Top speed (Km/h) 90 70 80 78 92 0-40 kmph (sec) 4.0 N/A 3.9 4.2 5.3 Suspension Suspension-front Mono-shock suspension Tubular single-sided suspension Telescopic fork Telescopic fork Telescopic Single-sided cast aluminium Symmetrically mounted Hydraulic twin tube shock 3-Step Adjustable Spring Loaded Suspension-rear Mono-shock suspension swingarm progressive mono-shock absorber Hydraulic Tyres Tyre size (Front) 90/90-12 90/90-12 90/90-12 90/90-12 90/90-12 Tyre size (Rear) 90/90-12 90/90-12 90/90-12 90/90-12 90/90-10 Dimensions Length*Width*Height (mm) N/A 1970*745*1145 1800*700*1250 1805*645*1140 1850*707*1170 Ground clearance (mm) N/A N/A 160 150 169 Kerb weight (kg) N/A 100 118 118 111 Battery features Battery usable capacity 2.9 kWh 3 kWh 2.4 kWh 2.25 kWh N/A Charging time (mins) 360 210 160 270 N/A 50% using an Ola Supercharger in just Fast charging time N/A up to 80% at 1 km/min N/A N/A 18 minutes. Other key features Starting Self Start Only Self Start Only Self Start Only Self Start Only Kick and Self Start Speedometer Digital Digital Digital Digital Digital Body type Metallic body Metallic body Fibre body Plastic body Metallic body Standard warranty (Years) N/A N/A 3 3 3 Standard warranty (km) N/A N/A 30,000 30,000 N/A Battery warranty (Years) N/A 3 3 3 N/A Battery warranty (km) N/A 50,000 50,000 50,000 N/A

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 139 India Automobiles & Components

Exhibit 3: At current battery cost of $210/kW-hr, break-even for Ola S1 comes around ~2.5 years Comparison of the cost of ownership of an Ola Electric S1 with Honda Activa FI

Ola S1 Honda Activa FI

Battery prices (in $ per kW-hr) 210 On road price (Rs) 144,999 89,000 Incentives 45,000 — Cost to consumer (Rs) 99,999 89,000 Battery size (Kwh) 2.9 — Electricity cost (Rs/kwh) 10.0 — Range at full charge (km) 80 — Electricity cost (Rs/km) 0.4 — Electricity cost (Rs) 18,125 — Fuel cost (Rs) — 125,000 Maintenance cost (Rs) 2,500 7,500

Replacement value of battery 45,066 —

Total cost of ownership of vehicle over 50,000 165,690 221,500 kms (Rs) Break-even (km) 25,057 Break-even (years) 2.5

Key assumptions: (1) We have assumed two-wheeler runs 10,000 kms per year (2) We have assumed fuel cost of Rs100 per litre in our calculations (3) We have taken replacement cost of battery at current market price of $210 per kW-hr

Source: Company, Kotak Institutional Equities

140 KOTAK INSTITUTIONAL EQUITIES RESEARCH Automobiles & Components India

Exhibit 4: At current battery cost of $210/kW-hr, break-even for Ola S1 Pro comes around ~4.4 years Comparison of the cost of ownership of an Ola Electric S1 Pro with Honda Activa FI

Ola S1 Pro Honda Activa FI

Battery prices (in $ per kW-hr) 210 On road price (Rs) 174,999 89,000 Incentives 45,000 — Cost to consumer (Rs) 129,999 89,000 Battery size (Kwh) 3.9 — Electricity cost (Rs/kwh) 10.0 — Range at full charge (km) 125 — Electricity cost (Rs/km) 0.3 — Electricity cost (Rs) 15,600 — Fuel cost (Rs) — 125,000 Maintenance cost (Rs) 2,500 7,500

Replacement value of battery 60,606 —

Total cost of ownership of vehicle over 50,000 208,705 221,500 kms (Rs) Break-even (km) 44,408 Break-even (years) 4.4

Key assumptions: (1) We have assumed two-wheeler runs 10,000 kms per year (2) We have assumed fuel cost of Rs100 per litre in our calculations (3) We have taken replacement cost of battery at current market price of $210 per kW-hr

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 141 Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India

KOTAK INSTITUTIONAL EQUITIES EQUITIES INSTITUTIONAL KOTAK Price (Rs) Fair Value Upside Mkt cap. O/S shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) ADVT-3M Company Rating 13-Aug-21 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E (US$ mn) Automobiles & Components Amara Raja Batteries SELL 729 660 (9) 125 1.7 171 38 42 48 (2) 11 13 19 17 15 11.0 9.2 8.0 3.0 2.6 2.3 16.4 16.1 16.1 1.5 1.4 1.6 20 Apollo Tyres ADD 225 255 13 143 1.9 638 13 15 19 57 13 27 17 15 12 6.8 6.3 5.2 1.3 1.2 1.1 7.8 8.0 9.4 1.6 1.2 1.2 17 Ashok Leyland REDUCE 130 125 (4) 382 5.2 2,936 (1) 2 6 (185) 256 265 NM 81 22 77.3 25.2 12.3 5.5 5.3 4.6 NM 6.6 22 0.5 0.5 1.8 33 Bajaj Auto BUY 3,826 4,650 22 1,107 15 289 157 183 225 (11) 16 23 24 21 17 18.0 14.9 11.7 4.4 4.1 3.7 20 20 23 3.7 2.9 3.5 26 Balkrishna Industries SELL 2,292 1,500 (35) 443 6.0 193 61 66 77 23 9 16 38 35 30 23.9 21.5 18.4 7.4 6.4 5.5 21 19.8 19.8 0.7 0.8 0.9 16 Bharat Forge SELL 820 555 (32) 382 5.1 466 (3) 20 26 (136) 847 25 NM 40 32 49.0 22.1 18.6 7.0 6.1 5.2 NM 16.3 17.6 0.2 0.4 0.4 29 CEAT ADD 1,329 1,500 13 54 0.7 40 114 92 120 82 (20) 30 12 14 11 6.8 7.1 6.0 1.6 1.5 1.3 14.9 10.7 12.7 1.4 1.3 1.7 5 Eicher Motors SELL 2,547 2,340 (8) 696 9.4 272 49 72 104 (26) 46 44 51 35 24 34.7 26.4 19.2 7.1 6.2 5.2 15.0 18.8 23 0.7 0.5 0.5 27 Endurance Technologies SELL 1,661 1,300 (22) 234 3.1 141 38 47 62 (7) 26 30 44 35 27 22.1 17.5 14.0 6.6 5.7 4.8 14.6 16.2 17.9 0.4 0.5 0.6 3

Escorts BUY 1,272 1,700 34 129 2.3 101 86 92 103 58 7 11 15 14 12 10.2 9.0 7.7 2.4 2.1 1.8 16.2 15.1 14.7 0.6 1.1 1.2 25 - RESEARCH

Exide Industries REDUCE 166 180 8 141 1.9 850 9 9 11 (10) 4 21 19 18 15 10.4 9.5 8.1 2.0 1.9 1.8 11.5 11.1 12.6 1.2 2.7 2.7 7 August2021 16, Hero Motocorp REDUCE 2,772 2,900 5 554 7.5 200 148 192 211 (7) 29 10 19 14 13 11.1 8.8 7.7 3.6 3.3 3.0 20 24 24 3.4 4.1 4.6 27 Mahindra CIE Automotive SELL 244 185 (24) 93 1.2 378 3 10 16 (70) 237 66 87 26 15 20.8 9.4 8.0 1.9 1.8 1.6 2.2 7.1 11.0 ——— 2

Mahindra & Mahindra BUY 779 1,050 35 968 13.0 1,138 29 37 52 22 26 43 27 21 15 13.5 13.1 9.6 2.5 2.3 2.0 9.4 11.2 14.4 1.1 0.7 1.0 41 Maruti Suzuki SELL 7,002 6,000 (14) 2,115 28.5 302 141 200 260 (25) 42 30 50 35 27 31.3 21.3 15.7 4.1 3.8 3.4 8.5 11.2 13.3 0.6 0.7 0.9 60 Minda Industries BUY 714 760 6 197 2.7 282 7 16 22 13 113 39 97 45 32 28.2 19.9 15.5 8.8 6.9 5.8 9.1 15.3 17.7 0.1 0.3 0.5 5 Motherson Sumi Systems ADD 221 250 13 699 9.4 3,158 3 7 11 (7) 99 55 65 33 21 17.1 10.7 7.7 5.6 4.7 3.8 9.1 15.7 20 0.7 0.7 1.0 47 MRF SELL 78,873 71,500 (9) 335 4.5 4 3,012 2,636 3,603 (10) (12) 37 26 30 22 10.0 11.0 8.5 2.5 2.3 2.1 10.0 8.0 10.0 0.2 0.1 0.1 17 Schaeffler India ADD 6,735 5,950 (12) 211 2.8 31 93 174 217 (21) 87 25 72 39 31 36.9 22.4 17.9 6.7 6.0 5.3 9.5 16.4 18.1 ——— 2 SKF SELL 2,868 2,350 (18) 142 1.9 49 60 79 96 3 32 21 48 36 30 32.6 25.6 20.9 9.1 7.5 6.2 19.0 21 21 3.8 0.4 0.5 2 Sona BLW Precision ADD 502 475 (5) 293 3.9 583 4 7 9 (3) 77 31 134 76 58 67.0 43.4 32.5 22.1 15.4 12.8 18.2 24 24 0.2 0.3 0.4 -

Tata Motors SELL 307 245 (20) 1,176 14.7 3,829 (4) 5 26 82 233 431 NM 62 12 6.1 5.1 3.8 2.1 2.1 1.8 NM 3.4 16.1 ——— 183 Timken SELL 1,552 1,180 (24) 117 1.6 75 19 32 48 (42) 66 50 82 49 33 45.8 30.2 20.8 8.7 7.6 6.4 9.8 16.6 21 0.1 0.1 0.1 2 TVS Motor SELL 553 430 (22) 263 3.5 475 13 18 23 (1) 41 29 43 31 24 18.5 14.4 11.9 6.3 5.5 4.7 15.7 19.3 21 0.5 0.8 1.1 17 Varroc Engineering ADD 309 450 46 47 0.6 135 (47) 11 34 (25,185) 125 200 NM 27 9 17.5 6.1 4.1 1.4 1.3 1.1 NM 4.8 12.6 ——— 1 Automobiles & Components Cautious 11,044 148.2 13 57 54 47 30 19 14.3 11.3 8.7 3.8 3.5 3.0 8.0 11.5 15.6 1.0 1.0 1.2 612 Banks AU Small Finance Bank SELL 1,326 850 (36) 415 5.6 312 37 30 36 69 (19) 18 35 44 37 ——— 7.2 6.2 5.4 21.9 14.1 14.4 ——— 22 Axis Bank BUY 760 860 13 2,330 31.4 3,064 22 43 53 273 100 23 35 18 14 ——— 2.4 2.2 1.9 7.1 12.3 13.5 0.0 0.8 1.0 89 Bandhan Bank ADD 293 335 14 472 6.4 1,611 14 14 29 (27) 6 101 21 20 10 ——— 3.0 2.7 2.1 13.5 12.6 22 — 0.4 0.7 27 Bank of Baroda ADD 81 95 17 419 5.6 5,178 2 14 18 36 756 28 51 6 5 ——— 0.7 0.7 0.6 1.2 9.5 11.1 0.0 3.4 4.3 62 Canara Bank REDUCE 156 150 (4) 257 3.5 1,647 16 18 20 172 13 12 10 9 8 ——— 0.7 0.7 0.6 4.6 4.8 5.1 ——— 35 City Union Bank REDUCE 150 150 (0) 111 1.5 739 8 6 9 24 (21) 44 19 24 16 ——— 2.2 2.1 1.9 10.6 7.8 10.4 1.6 0.8 1.2 5 DCB Bank BUY 92 150 63 29 0.4 376 9 8 14 (18) (7) 70 10 11 6 ——— 1.1 1.1 0.9 10.0 8.5 13.2 1.0 0.9 1.5 3 Equitas Small Finance Bank ADD 60 65 8 69 0.9 1,139 3 3 5 46 (5) 48 18 19 13 ——— 2.1 1.9 1.7 12.5 10.2 13.4 ——— 2 Federal Bank BUY 85 100 17 179 2.4 2,101 8 8 13 3 6 56 11 10 6 ——— 1.1 1.0 0.9 10.4 10.2 14.1 0.8 1.8 2.8 26 HDFC Bank ADD 1,525 1,600 5 8,437 113.6 5,513 56 63 73 18 11 16 27 24 21 ——— 4.2 3.7 3.2 16.6 15.9 16.2 0.0 0.8 1.0 136 ICICI Bank BUY 705 810 15 4,883 65.8 6,917 23 34 38 91 45 11 30 21 19 ——— 3.5 3.1 2.7 12.2 14.9 14.7 0.3 1.0 1.1 124 IndusInd Bank ADD 1,024 1,050 3 792 10.7 773 37 56 82 (42) 52 46 28 18 13 ——— 1.9 1.7 1.6 7.5 9.6 12.8 0.5 0.8 1.2 61 Karur Vysya Bank BUY 44 65 47 35 0.5 799 4 7 11 53 53 62 10 6 4 ——— 0.6 0.6 0.5 5.3 7.7 11.6 1.1 4.0 6.6 2 Punjab National Bank REDUCE 38 36 (5) 416 5.6 11,011 2 4 6 287 120 37 20 9 6 ——— 0.7 0.6 0.5 2.8 5.3 6.7 ——— 72 RBL Bank BUY 176 225 28 105 1.4 598 8 (0) 32 (15) (101) 52,213 21 NM 5 ——— 0.9 0.9 0.8 4.4 NM 14.4 0.7 (0.0) 2.8 30 SBI Cards and Payment Services ADD 1,030 1,100 7 969 13.1 941 10 18 28 (21) 69 59 98 58 37 ——— 15.4 12.3 9.4 16.9 23 29 0.1 0.1 0.1 49 State Bank of India BUY 431 550 28 3,848 51.8 8,925 23 38 50 41 67 30 19 11 9 ——— 2.1 1.8 1.5 8.4 12.7 14.7 0.9 1.4 1.6 218 Ujjivan Small Finance Bank ADD 26 31 21 44 0.6 1,728 (0) 0 2 (103) 665 596 NM 76 11 ——— 1.6 1.7 1.4 0.3 2.4 12.3 0.0 0.0 0.0 2 Union Bank REDUCE 35 34 (3) 239 3.2 6,407 5 6 8 154 30 38 8 6 4 ——— 0.5 0.5 0.5 5.0 6.0 7.7 0.0 0.0 0.0 12 YES Bank SELL 12 11 (8) 298 4.0 25,055 (1) (1) (0) 89 56 93 NM NM NM ——— 1.1 1.2 1.2 NM NM NM 0.0 0.0 0.0 24 Banks Attractive 24,349 327.9 111 50 28 27 18 14 2.1 1.9 1.7 7.8 10.6 12.2 0.3 0.9 1.1 1,000

Source: Company, Bloomberg, Kotak Institutional Equities estimates

142 142 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

143 Price (Rs) Fair Value Upside Mkt cap. O/S shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) ADVT-3M Company Rating 13-Aug-21 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E (US$ mn) Building Products Astral SELL 2,036 1,250 (39) 409 5.5 201 20 26 30 63 28 17 101 79 68 62.8 49.5 42.9 21.6 17.6 14.7 24 24 24 0.1 0.2 0.3 9 Building Products Cautious 409 5.5 63 28 17 101 79 68 62.8 49.5 42.9 21.6 17.6 14.7 21 22 22 0.1 0.2 0.3 9 Capital goods ABB BUY 1,750 1,820 4 371 5.0 212 8 19 27 (54) 135 44 216 92 64 126.4 64.0 44.0 10.3 9.6 8.7 4.8 10.8 14.3 0.3 0.3 0.4 5 Ashoka Buildcon BUY 105 165 57 29 0.4 281 15 14 15 5 (4) 10 7 8 7 6.1 5.3 4.5 1.0 0.9 0.8 14.6 12.4 12.3 0.0 2.1 2.3 4 Bharat Electronics BUY 175 195 12 425 5.7 2,437 9 9 10 15 10 2 20 18 18 11.7 11.7 10.8 3.8 3.4 3.1 19.9 19.7 18.2 2.3 2.0 2.1 38 BHEL SELL 56 30 (46) 194 2.6 3,482 (8) (4) 2 (84) 44 138 NM NM 34 (5.6) (11.6) 14.1 0.7 0.8 0.8 NM NM 2.3 0.0 0.0 1.1 70 Carborundum Universal ADD 724 730 1 137 1.8 190 15 21 26 4 39 26 48 35 28 28.1 21.1 16.8 6.4 5.7 5.0 14.3 17.4 19.4 0.6 0.8 1.0 3 Cochin Shipyard BUY 358 510 43 47 0.6 132 46 41 42 (4) (12) 3 8 9 9 3.7 3.6 4.2 1.2 1.1 1.0 15.8 12.9 12.2 3.3 3.5 3.8 3 Cummins India BUY 976 1,080 11 270 3.6 277 23 31 40 (10) 36 29 43 31 24 44.5 29.9 22.1 6.1 5.5 5.0 14.8 18.6 22 1.4 1.7 2.3 18 Dilip Buildcon BUY 536 645 20 78 1.1 146 22 35 52 (23) 61 48 25 15 10 7.6 6.5 5.5 2.0 1.6 1.4 8.5 11.6 14.2 0.2 0.1 0.2 4 IRB Infrastructure BUY 161 173 8 56 0.8 351 3 8 11 (84) 141 39 48 20 14 8.5 7.1 6.3 0.8 0.8 0.8 1.7 4.0 5.4 2.4 0.9 1.4 12 Kalpataru Power Transmission BUY 433 540 25 65 0.9 153 33 36 47 29 10 29 13 12 9 5.5 5.5 4.5 1.8 1.4 1.3 14.2 13.3 14.6 1.9 0.9 1.3 3 KEC International BUY 406 465 15 104 1.4 257 21 22 36 (2) 4 58 19 18 11 10.5 9.8 6.8 3.1 2.7 2.2 18.0 16.0 21 0.6 0.6 0.9 3 L&T BUY 1,668 1,920 15 2,343 31.6 1,405 49 61 82 (23) 25 36 34 27 20 22.6 17.7 15.3 3.7 3.5 3.3 11.3 13.1 16.9 2.2 1.5 2.0 57 Siemens SELL 2,245 1,880 (16) 799 10.8 356 32 39 47 49 24 20 71 57 47 46.8 39.1 32.6 7.8 7.1 6.5 11.5 13.1 14.4 0.4 0.5 0.6 16 Thermax SELL 1,385 1,240 (10) 165 2.2 113 23 31 40 22 36 29 60 44 34 41.9 32.7 25.3 41.9 32.7 25.3 8.3 10.6 13.1 0.5 1.1 1.4 2 Capital goods Attractive 5,085 68.5 (24) 39 45 45 33 22 3.4 3.2 3.0 7.5 9.9 13.4 1.5 1.2 1.6 237 Commercial & Professional Services SIS BUY 467 550 18 69 0.9 147 25 20 25 63 (19) 24 19 23 19 13.3 13.6 11.8 3.8 3.5 3.1 23 15.5 17.5 1.3 1.0 1.3 3 TeamLease Services ADD 4,002 4,085 2 68 0.9 17 34 85 112 68 148 32 117 47 36 66.5 43.6 32.8 10.5 8.6 6.9 9.6 20 21 — — — 2 Commercial & Professional ServicesAttractive 138 1.9 64 3 27 32 31 25 21.8 20.0 16.7 5.6 5.0 4.3 17.2 16.0 17.3 0.6 0.5 0.6 5 Commodity Chemicals Asian Paints REDUCE 2,989 2,675 (10) 2,867 38.6 959 33 35 47 20 7 34 91 85 64 58.3 55.4 43.3 22.4 20.1 17.8 27 25 30 0.6 0.7 0.9 58 Berger Paints SELL 811 640 (21) 788 10.6 971 7 9 12 9 25 32 109 87 66 66.1 54.0 42.2 23.3 20.2 17.4 24 25 28 0.3 0.4 0.6 13 Kansai Nerolac REDUCE 627 650 4 338 4.5 539 10 11 15 1 13 30 62 55 42 39.7 36.3 28.7 8.3 7.7 7.1 13.8 14.5 17.5 0.8 0.9 1.3 3 Tata Chemicals SELL 879 640 (27) 224 3.0 255 10 32 39 (68) 222 21 87 27 22 13.8 9.5 8.5 1.6 1.6 1.6 1.9 5.8 7.0 1.1 3.7 4.5 36 Commodity Chemicals Neutral 4,216 56.8 1 23 31 91 74 56 49.6 42.9 34.4 12.2 11.4 10.6 13.5 15.5 18.9 0.6 0.8 1.1 110 Construction Materials ACC ADD 2,308 2,300 (0) 433 5.8 188 75 113 126 4 50 11 31 20 18 15.1 11.0 9.5 3.4 3.0 2.7 11.7 15.8 15.6 0.6 1.2 1.4 20

Ambuja Cements REDUCE 402 375 (7) 799 10.8 1,986 13 15 18 28 15 18 30 26 22 13.8 9.9 8.3 3.5 3.2 2.8 11.3 12.7 13.5 4.5 0.7 0.9 21 Daily Summary India Dalmia Bharat ADD 1,918 2,250 17 359 4.8 187 53 61 74 277 16 20 36 31 26 13.1 11.7 10.1 2.8 2.6 2.4 8.5 8.7 9.6 — — — 6 Grasim Industries ADD 1,497 1,675 12 985 13.3 657 68 89 112 (22) 30 26 22 17 13 9.4 7.8 6.2 1.5 1.4 1.2 7.3 8.5 9.7 0.6 0.6 0.5 28 J K Cement REDUCE 3,110 2,450 (21) 240 3.2 77 94 122 137 46 30 13 33 26 23 16.6 14.4 12.6 6.4 5.2 4.3 21 23 21 0.5 0.3 0.3 3 JK Lakshmi Cement REDUCE 667 630 (5) 78 1.1 118 38 43 46 60 14 8 18 16 14 9.2 8.0 7.4 3.7 3.1 2.6 23 22 19.6 0.6 1.0 1.0 8 Orient Cement ADD 161 190 18 33 0.4 205 10 14 15 147 36 7 15 11 11 7.2 5.7 5.6 2.5 2.1 1.8 17.7 20 18.5 1.2 1.2 1.2 3 Shree Cement SELL 26,600 21,550 (19) 960 12.9 36 641 830 984 47 30 19 42 32 27 23.8 18.7 15.8 6.3 5.3 4.5 16.4 18.0 18.0 0.2 0.2 0.2 19 The Ramco Cements SELL 980 840 (14) 231 3.1 236 32 33 43 26 3 28 30 29 23 16.8 14.5 11.7 4.0 3.6 3.1 14.2 12.9 14.6 0.3 0.3 0.4 9 UltraTech Cement REDUCE 7,461 6,950 (7) 2,154 29.0 289 193 264 302 (3) 36 15 39 28 25 19.2 15.0 13.4 4.9 4.3 3.8 13.4 16.1 16.2 0.5 0.3 0.3 36 Construction Materials Attractive 6,273 84.5 7 29 18 32 25 21 14.7 11.7 10.0 3.4 3.0 2.7 10.5 12.1 12.7 1.0 0.5 0.5 154

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK

Source: Company, Bloomberg, Kotak Institutional Equities estimates

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August 16, August2021 16,

KOTAK INSTITUTIONAL EQUITIES RESEARCH 143

Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India Price (Rs) Fair Value Upside Mkt cap. O/S shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) ADVT-3M Company Rating 13-Aug-21 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E (US$ mn)

KOTAK INSTITUTIONAL EQUITIES EQUITIES INSTITUTIONAL KOTAK Consumer Durables & Apparel Crompton Greaves Consumer SELL 474 390 (18) 297 4.0 628 10 10 12 24 2 16 48 47 41 41 35 30 15.4 12.4 10.0 36 29 27 1.2 0.5 0.5 13 Havells India REDUCE 1,242 1,050 (15) 778 10.5 626 17 21 24 41 27 14 75 59 51 49 40 35 15.8 13.7 11.9 23 25 25 0.5 0.6 0.7 30 Page Industries REDUCE 31,183 30,100 (3) 348 4.7 11 305 403 530 (1) 32 32 102 77 59 65 51 40 39.3 35.8 32.6 40 48 58 0.8 1.1 1.5 13 Polycab ADD 1,900 1,950 3 283 3.8 149 59 70 78 14 18 12 32 27 24 24 19 17 6.0 5.0 4.3 20 20.0 18.9 0.4 0.4 0.5 9 TCNS Clothing Co. SELL 568 455 (20) 35 0.5 68 (10) 0 15 (194) 104 3,425 NM 1,310 37 (481) 30 14.3 6.2 5.8 4.8 NM 0.5 14.1 — — — 1 Voltas SELL 986 800 (19) 326 4.4 331 16 18 23 (8) 13 30 62 55 42 51 43 34 6.5 6.0 5.5 11.3 11.4 13.6 0.4 0.5 0.6 22 Whirlpool SELL 2,027 1,800 (11) 257 3.5 127 26 36 48 (30) 37 34 77 56 42 46 39 28 9.1 8.1 7.1 12.4 15.3 18.1 0.2 0.4 0.5 5 Consumer Durables & Apparel Cautious 2,325 31.3 6 22 22 63 52 42 44 36 30 11.1 9.7 17.5 18.8 19.9 0.6 0.6 92 Consumer Staples Bajaj Consumer Care ADD 262 325 24 39 0.5 148 15 16 17 21 4 11 17 17 15 13.4 13.1 11.3 5.1 4.7 4.2 32 29 29 3.8 4.2 4.2 4

Britannia Industries ADD 3,580 3,700 3 862 11.6 241 78 69 83 32 (11) 20 46 52 43 35 37 31 24.3 45.1 41.1 46 60 98 3.0 2.1 1.7 24 -

RESEARCH

Colgate-Palmolive (India) ADD 1,644 1,775 8 447 6.0 272 38 39 44 34 3 12 43 42 37 29.0 27.6 24.7 38.3 38.5 35.7 75 92 99 2.3 2.3 2.5 14 August 16, August2021 16, Dabur India ADD 588 630 7 1,040 14.0 1,767 10 10 12 12 8 17 61 56 48 51 45 38 13.6 13.1 11.9 24 24 26 0.8 0.9 1.1 20 Godrej Consumer Products ADD 983 1,050 7 1,005 13.5 1,023 17 18 22 25 6 18 57 54 45 42 38 32 10.7 9.5 8.6 20 18.7 19.9 0.0 1.0 1.2 27 Hindustan Unilever ADD 2,405 2,700 12 5,650 76.1 2,350 34 39 47 9 15 22 71 62 51 49 43 35 11.9 11.9 11.4 29 19.3 23 1.7 1.5 1.8 44

ITC BUY 211 275 30 2,601 35.0 12,330 11 12 13 (8) 9 13 20 18 16 15.0 13.0 11.4 4.4 4.3 4.2 21 23 25 5.1 4.9 5.3 75 Jyothy Laboratories ADD 171 190 11 63 0.8 367 6 6 7 26 (0) 22 29 29 24 19.7 20.9 17.3 4.4 4.2 4.0 16.4 15.0 17.4 2.3 2.6 2.9 3 Marico REDUCE 515 530 3 665 9.0 1,290 9 10 11 11 11 15 57 52 45 41 37 32 20.5 19.2 18.0 37 38 41 1.5 1.6 1.8 17 Nestle India ADD 18,270 18,600 2 1,761 23.7 96 216 244 295 6 13 21 85 75 62 55 48 41 87.2 65.6 50.7 106 100 92 1.1 1.0 1.2 15 Tata Consumer Products ADD 807 780 (3) 744 10.0 922 10 11 15 21 11 42 84 76 54 46 43 33 5.1 4.9 4.6 6.3 6.6 8.9 0.5 0.5 0.6 25 United Breweries ADD 1,397 1,500 7 369 5.0 264 5 14 31 (72) 212 119 307 98 45 96 50 26 10.3 9.4 8.0 3.4 10.0 19.3 0.0 0.4 1.2 28 United Spirits ADD 661 680 3 480 6.5 727 6 11 16 (45) 77 40 104 59 42 49 35 27 11.2 9.4 8.2 11.1 17.4 21 — — 0.8 21

Varun Beverages BUY 775 850 10 336 4.5 433 9 16 24 (16) 76 50 85 48 32 30 21 16 9.5 8.1 6.6 11.5 18.2 23 0.1 0.3 0.3 6

Consumer Staples Attractive 16,062 216.3 3 12 20 49 44 36 35 31 26 9.9 9.7 9.1 20 22 25 1.9 1.8 2.1 322 Diversified Financials Aavas Financiers ADD 2,590 2,600 0 203 2.7 79 37 45 57 17 22 28 70 58 45 — — — — — — 12.9 13.7 15.1 0.0 0.0 0.0 3 Aditya Birla Capital NR 117 — — 282 3.8 2,414 4 6 8 4 36 43 28 20 14 — — — — — — 7.8 9.7 12.4 48.2 53.2 60.2 7 Bajaj Finance REDUCE 6,152 5,600 (9) 3,713 50.0 602 73 113 171 (16) 54 51 84 54 36 — — — 10.0 8.6 7.1 12.8 17.0 22 0.2 0.2 0.3 139 Bajaj Finserv ADD 14,318 14,150 (1) 2,278 30.7 159 281 362 519 33 29 43 51 40 28 — — — 6.4 6.3 5.4 13.3 16.1 21 0.1 0.1 0.1 56 Cholamandalam BUY 503 650 29 413 5.6 820 18 29 34 44 55 19 27 18 15 — — — 4.6 4.0 3.2 17.1 22 22 0.4 0.6 0.7 32 Computer Age Management Services SELL 3,128 2,100 (33) 153 2.1 49 42 53 59 18 26 11 74 59 53 — — — 29.6 24.7 21.0 39 46 43 2.0 1.1 1.2 15 HDFC BUY 2,704 3,100 15 4,883 65.8 1,804 67 70 85 (35) 5 22 41 39 32 — — — 4.5 4.1 3.8 12.0 11.1 12.5 0.7 0.8 1.0 108 HDFC AMC SELL 2,939 2,350 (20) 626 8.4 213 62 70 83 5 12 19 47 42 35 — — — 13.1 11.3 9.7 30 29 29 1.2 1.3 1.6 13 IIFL Wealth ADD 1,547 1,700 10 136 1.8 89 42 54 63 75 30 18 37 29 24 — — — 4.9 5.0 4.8 12.7 17.2 20 4.5 4.5 3.1 3 L&T Finance Holdings ADD 84 115 36 208 2.8 2,469 4 7 9 (55) 84 23 22 12 10 — — — 1.1 1.0 0.9 4.8 8.9 10.0 0.0 0.7 0.7 16 LIC Housing Finance ADD 399 575 44 201 2.7 550 54 47 65 12 (13) 38 7 8 6 — — — 1.3 1.3 1.1 14.1 11.4 13.5 2.1 1.9 2.6 27 Mahindra & Mahindra Financial ADD 151 200 32 187 2.5 1,230 3 10 18 (81) 283 73 56 15 8 — — — 1.3 1.3 1.1 2.6 8.4 13.4 0.5 1.4 2.4 20 Muthoot Finance REDUCE 1,451 1,450 (0) 582 7.8 401 93 111 127 23 20 14 16 13 11 — — — 3.8 3.1 2.6 28 26 25 1.4 1.5 1.8 31 Shriram City Union Finance BUY 2,158 2,150 (0) 142 1.9 66 153 145 196 1 (5) 35 14 15 11 — — — 1.8 1.7 1.5 13.2 11.2 13.7 1.5 1.0 1.4 1 Shriram Transport BUY 1,295 1,575 22 348 4.7 269 98 102 157 (11) 4 54 13 13 8 — — — 1.6 1.4 1.2 12.6 11.5 15.1 1.4 1.2 1.8 33 Diversified Financials Attractive 14,358 193.3 (12) 23 33 39 32 24 4.5 4.1 3.6 11.7 12.9 15.1 0.6 0.6 0.8 505

Source: Company, Bloomberg, Kotak Institutional Equities estimates

144 144 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

145 Price (Rs) Fair Value Upside Mkt cap. O/S shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) ADVT-3M Company Rating 13-Aug-21 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E (US$ mn) Electric Utilities CESC BUY 781 825 6 104 1.4 133 100 115 126 2 14 10 8 7 6 5.9 4.7 4.2 0.8 0.8 0.7 12.1 11.6 11.5 5.8 1.8 2.1 9 JSW Energy SELL 238 100 (58) 392 5.3 1,640 5 6 7 (23) 17 21 49 42 35 14.6 13.3 12.6 2.7 2.5 2.4 6.1 6.2 7.0 — — — 14 NHPC ADD 27 30 13 267 3.6 10,045 3 3 4 20 (2) 10 8 8 7 8.7 8.4 6.9 0.8 0.8 0.7 10.7 9.8 10.4 6.8 7.7 8.6 3 NTPC BUY 118 125 6 1,147 15.4 9,697 16 15 16 40 (4) 8 8 8 7 9.6 6.9 5.8 1.0 0.9 0.8 13.0 11.7 11.7 4.8 3.8 4.1 27 Power Grid BUY 185 205 11 1,289 17.4 6,975 18 20 22 18 8 8 10 9 9 7.2 6.4 6.0 1.8 1.6 1.5 19.2 18.8 18.5 5.3 6.3 7.7 35 Tata Power ADD 133 145 9 424 5.7 3,196 4 5 6 (10) 21 22 33 27 22 10.1 9.3 8.9 2.0 1.9 1.7 6.6 7.2 8.1 — — — 80 Electric Utilities Attractive 3,621 48.8 23 3 9 10 10 9 1.3 1.2 1.1 12.9 12.2 12.4 4.1 4.1 4.7 168 Fertilizers & Agricultural Chemicals Bayer Cropscience SELL 6,091 4,700 (23) 274 3.7 45 130 148 172 0 14 16 47 41 35 32 29 25 10.7 8.9 7.4 23 24 23 0.4 0.5 0.6 2 Dhanuka Agritech SELL 900 795 (12) 42 0.6 48 44 43 48 49 (2) 11 20 21 19 14.9 15.0 13.5 5.4 4.6 3.9 28 24 23 0.4 1.4 1.9 4 Godrej Agrovet SELL 655 525 (20) 126 1.7 192 16 21 24 41 27 14 40 32 28 24 19 17 5.1 4.7 4.3 13.4 15.5 16.1 1.2 1.6 1.8 6 PI Industries ADD 3,142 3,350 7 477 6.4 152 50 62 81 50 25 30 63 51 39 46 34 25 8.7 7.7 6.6 18.5 16.4 18.3 0.2 0.3 0.4 19 Rallis India REDUCE 294 300 2 57 0.8 195 11 14 17 26 27 15 26 20 18 17.7 17.3 14.9 3.6 3.2 2.8 14.8 16.5 16.7 1.0 1.1 1.2 4 UPL SELL 779 760 (2) 595 8.0 765 38 50 58 62 32 17 21 16 13 9.8 8.2 7.0 3.3 2.9 2.5 16.8 19.7 19.9 1.3 1.7 2.0 65 Fertilizers & Agricultural Chemicals Cautious 1,571 21.2 47 27 18 32 25 21 15.6 13.3 11.3 5.1 4.4 3.8 16.1 17.8 18.2 0.8 1.0 1.2 99 Gas Utilities GAIL (India) BUY 148 190 28 659 8.9 4,440 11 15 15 (18) 40 (2) 14 10 10 11.0 7.4 7.2 1.4 1.3 1.2 10.6 13.9 12.6 3.4 4.0 4.4 32 GSPL SELL 350 260 (26) 197 2.7 564 16 13 9 (4) (21) (31) 21 27 39 10.6 12.8 17.4 2.6 2.4 2.3 13.0 9.4 6.0 0.6 0.7 0.6 6 Indraprastha Gas ADD 535 585 9 375 5.0 700 17 21 26 0 26 24 32 25 20 24.5 18.7 14.8 6.4 5.4 4.7 21 23 25 0.7 0.9 1.3 22 Mahanagar Gas BUY 1,141 1,350 18 113 1.5 99 63 91 104 (16) 44 15 18 13 11 11.5 7.9 6.6 3.5 3.0 2.6 20 26 25 2.0 3.2 4.1 11 Petronet LNG BUY 216 275 27 324 4.4 1,500 20 20 23 11 3 11 11 11 10 6.2 5.7 5.1 2.8 2.5 2.3 26 25 25 5.3 5.5 6.1 13 Gas Utilities Attractive 1,667 22.5 (9) 23 4 16 13 12 10.8 8.5 8.0 2.2 2.0 1.9 14.0 15.7 14.9 2.7 3.2 3.6 84 Health Care Services Apollo Hospitals ADD 4,064 4,400 8 584 7.9 144 6 52 68 (66) 731 30 651 78 60 52.1 30.2 25.7 12.7 11.6 10.4 2.3 15.4 18.2 0.1 0.5 0.7 35 Aster DM Healthcare BUY 162 200 23 81 1.1 500 3 8 11 (50) 163 36 55 21 15 9.1 7.0 5.8 2.4 2.2 1.9 4.4 11.0 13.4 — — — 2 Dr Lal Pathlabs SELL 3,820 2,000 (48) 318 4.3 83 35 49 46 29 40 (5) 109 78 82 70.7 49.7 52.3 25.6 21.7 19.0 26 30 25 0.4 0.6 0.5 20 HCG BUY 243 175 (28) 31 0.4 143 (8) (2) (2) 30 71 21 NM NM NM 23.6 13.6 11.8 3.6 3.7 3.8 NM NM NM — — — 1 Metropolis Healthcare SELL 2,680 1,925 (28) 137 1.8 51 36 44 47 21 22 7 74 61 57 46.4 36.7 35.5 19.2 16.1 13.6 30 29 26 0.4 0.5 0.5 11 Narayana Hrudayalaya ADD 498 540 8 102 1.4 204 (1) 13 16 (112) 1,890 27 NM 40 31 57.5 17.8 15.2 9.1 7.4 6.0 NM 21 21 — — — 5 Health Care Services Attractive 1,253 16.9 (39) 244 22 217 63 52 39.1 24.5 21.6 10.4 9.4 8.3 4.8 14.9 16.1 0.2 0.4 0.5 74

Hotels & Restaurants Daily Summary India Burger King SELL 170 115 (32) 65 0.9 382 (4) (1) 1 (66) 78 167 NM NM 261 625.7 40.3 24.5 9.7 10.2 9.9 NM NM 3.9 0.0 0.0 0.0 11 Jubilant Foodworks BUY 3,782 3,550 (6) 499 6.7 132 17 35 51 (26) 98 47 216 109 74 63.9 43.3 32.8 34.7 27.6 21.4 17.9 28 32 0.2 0.3 0.4 31 Lemon Tree Hotels REDUCE 40 40 0 32 0.4 790 (2) (0) 1 (1,233) 71 226 NM NM 68 82.6 39.4 13.7 3.4 3.4 3.3 NM NM 4.9 — (1.3) 0.3 2 Westlife Development ADD 512 550 7 80 1.1 156 (7) 1 7 (2,133) 113 669 NM 588 77 169.6 34.9 21.2 16.5 16.1 13.3 NM 2.8 19.0 — 0.0 0.0 2 Hotels & Restaurants Attractive 676 9.1 (173) 331 115 NM 171 79 77.0 41.5 27.3 19.3 17.4 14.8 NM 10.2 18.6 0.1 0.2 0.3 46

Source: Company, Bloomberg, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK

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August 16, August2021 16,

KOTAK INSTITUTIONAL EQUITIES RESEARCH 145

Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India Price (Rs) Fair Value Upside Mkt cap. O/S shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) ADVT-3M Company Rating 13-Aug-21 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E (US$ mn)

KOTAK INSTITUTIONAL EQUITIES EQUITIES INSTITUTIONAL KOTAK Insurance HDFC Life Insurance ADD 671 775 16 1,356 18.3 2,020 7 8 10 5 25 18 99 79 67 — — — 16.0 14.7 13.4 17.6 19.3 21 0.3 0.3 0.4 48 ICICI Lombard SELL 1,450 1,225 (16) 659 8.9 490 32 32 40 23 (2) 27 45 45 36 — — — 8.9 7.5 6.4 22 18.5 19.2 0.6 0.5 0.5 14 ICICI Prudential Life BUY 671 750 12 964 13.0 1,436 7 6 9 (10) (14) 55 100 117 75 — — — 10.6 9.9 8.9 11.5 8.7 12.4 0.3 0.0 0.0 16 Max Financial Services BUY 1,075 1,225 14 371 5.0 345 3 10 10 (72) 237 7 374 111 103 — — — — — — 2.2 4.9 5.0 0.0 0.0 0.0 17 SBI Life Insurance BUY 1,139 1,425 25 1,139 15.3 1,002 15 13 18 2 (7) 34 78 85 63 — — — 11.3 10.2 9.0 15.3 12.7 15.1 0.2 0.2 0.3 28 Insurance Attractive 4,489 60.5 2 8 29 84 78 60 10.8 9.6 8.6 12.8 12.4 14.3 0.2 0.1 0.2 122 Internet Software & Services Info Edge SELL 5,429 3,550 (35) 699 9.4 128.5 21 42 52 (21) 96 23 254 130 105 239.5 122.7 96.4 15.3 14.1 12.9 7.8 11.3 12.8 0.2 0.2 0.2 45 Just Dial ADD 957 1,130 18 60 0.8 83.5 35 25 42 (17) (27) 65 28 38 23 28.7 14.2 8.7 4.7 2.2 2.0 16.8 8.6 9.2 — — — 54 Internet Software & Services Cautious 759 10.2 (19) 54 35 155 101 75 163.9 99.8 77.4 13.0 8.8 8.1 8.4 8.7 10.8 0.2 0.2 0.2 98

IT Services -

RESEARCH

HCL Technologies ADD 1,120 1,175 5 3,038 40.9 2,714 48 51 57 18 6 12 23 22 20 14.3 13.3 11.7 4.9 4.3 3.7 24 21 20 2.0 1.8 1.8 65 August 16, August2021 16, Infosys BUY 1,712 1,775 4 7,296 98.2 4,253 46 52 60 17 14 16 38 33 28 25.3 22.3 19.2 9.5 8.5 7.6 27 27 28 1.6 1.8 2.0 129 L&T Infotech REDUCE 4,863 4,550 (6) 850 11.4 176 110 127 150 27 16 18 44 38 32 29.9 27.2 22.9 11.7 9.7 8.1 30 28 27 0.5 0.7 0.8 23 L&T Technology Services ADD 3,697 3,500 (5) 388 5.2 106 63 88 110 (19) 40 25 59 42 34 36.8 26.9 22.4 11.2 9.5 7.9 21 24 26 0.5 0.6 0.7 17

Mindtree SELL 2,921 2,150 (26) 481 6.5 165 67 86 94 76 28 9 43 34 31 27.7 23.2 21.4 11.1 9.3 7.9 30 30 27 0.7 1.2 1.3 29 Mphasis ADD 2,754 2,800 2 515 6.9 187 65 78 94 2 20 21 42 35 29 27.6 23.5 19.4 7.9 7.3 6.6 19.7 21 24 2.4 1.8 2.0 24 TCS ADD 3,463 3,500 1 12,811 172.5 3,699 89 106 121 4 19 13 39 33 29 26.4 22.3 19.8 14.6 12.3 11.3 38 41 41 1.1 1.8 2.8 100 Tech Mahindra BUY 1,383 1,425 3 1,205 16.2 880 51 64 72 11 26 12 27 22 19 16.0 13.4 11.8 4.9 4.3 3.8 19.2 21 21 2.8 1.7 1.9 52 Wipro REDUCE 616 585 (5) 3,372 45.4 5,477 19 22 24 15 15 11 32 28 25 20.7 18.1 15.6 6.3 5.2 4.5 19.5 20.0 19.0 0.3 0.8 0.8 61 IT Services Attractive 29,958 403.4 10 15 14 35 30 27 23.1 20.1 17.6 9.1 7.9 7.0 26 26 26 1.3 1.6 2.1 499 Media

PVR BUY 1,412 1,550 10 86 1.2 61 (110) (33) 45 (478) 70 239 NM NM 31 (19.3) 135.2 11.4 3.1 3.4 3.1 NM NM 10.3 (0.8) (0.2) 0.3 17

Sun TV Network REDUCE 525 490 (7) 207 2.8 394 39 43 46 9 11 8 14 12 11 9.7 8.0 7.2 2.9 2.6 2.4 24 23 22 1.0 3.8 4.8 19 Zee Entertainment Enterprises REDUCE 183 200 9 176 2.4 960 12 13 16 5 7 28 16 15 11 8.7 8.4 6.7 1.7 1.7 1.5 11.6 11.7 13.9 1.4 2.2 2.5 45 Media Cautious 469 6.3 (24) 36 35 24 17 13 13.5 10.4 7.6 2.4 2.2 2.0 10.0 12.8 15.7 0.8 2.5 3.1 81 Metals & Mining Hindalco Industries BUY 442 540 22 993 13.4 2,220 26 49 52 44 91 7 17 9 8 8.3 5.6 4.9 1.5 1.3 1.1 9.1 15.1 14.1 0.7 0.7 0.9 78 Hindustan Zinc BUY 321 370 15 1,356 18.3 4,225 19 24 23 17 29 (4) 17 13 14 10.3 7.3 7.8 4.2 4.2 4.2 22 32 31 6.6 7.6 7.3 10 Jindal Steel and Power BUY 424 540 27 433 5.8 1,020 63 74 55 3,790 18 (25) 7 6 8 4.5 3.8 4.5 1.4 1.1 1.0 20 21 13.4 — — — 71 JSW Steel REDUCE 749 665 (11) 1,811 24.4 2,417 33 79 56 227 139 (29) 23 9 13 11.6 6.3 8.0 3.9 2.9 2.4 19.1 35 19.5 0.9 1.4 1.0 92 National Aluminium Co. SELL 84 80 (4) 154 2.1 1,837 7 10 8 855 34 (15) 12 9 10 7.4 4.7 5.5 1.4 1.3 1.2 12.6 15.5 12.1 3.0 4.0 3.4 47 NMDC SELL 172 155 (10) 503 6.8 2,931 23 29 16 54 27 (44) 8 6 11 5.3 4.2 7.5 1.7 1.5 1.4 23 26 13.4 4.5 8.3 4.7 55 SAIL BUY 134 170 27 553 7.5 4,130 10 43 20 234 338 (54) 14 3 7 7.2 2.5 3.9 1.2 0.9 0.8 9.4 33 12.5 2.1 2.5 2.5 116 Tata Steel BUY 1,462 1,750 20 1,760 23.7 1,219 71 333 175 26 368 (48) 21 4 8 8.4 3.5 5.1 2.4 1.6 1.4 11.8 44 17.9 1.7 2.6 1.4 241 Vedanta REDUCE 329 285 (13) 1,222 16.5 3,717 33 43 36 406 32 (17) 10 8 9 5.7 3.8 4.1 2.0 1.7 1.6 21 24 17.9 2.9 5.5 5.3 47 Metals & Mining Attractive 8,785 118.3 159 118 (32) 14 7 10 7.8 4.4 5.5 2.2 1.8 1.6 15.2 26 15.9 2.5 3.5 2.9 756

Source: Company, Bloomberg, Kotak Institutional Equities estimates

146 146 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

147 Price (Rs) Fair Value Upside Mkt cap. O/S shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) ADVT-3mo Company Rating 13-Aug-21 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E (US$ mn) Oil, Gas & Consumable Fuels BPCL BUY 455 550 21 987 13.3 2,093 67 34 40 541 (50) 18 7 13 11 5.5 8.4 7.3 1.7 2.1 1.9 32.2 14.1 17.4 17.4 3.7 4.4 38 Coal India REDUCE 144 150 4 886 11.9 6,163 21 16 16 (24) (20) (4) 7 9 9 6.9 7.6 7.5 2.4 2.6 2.8 37.0 28.5 29.4 8.7 13.9 13.9 30 HPCL BUY 255 310 22 362 4.9 1,419 80 35 37 1,014 (56) 7 3 7 7 4.6 7.7 7.4 1.0 0.9 0.9 34.7 13.2 13.0 9.1 5.5 5.8 22 IOCL BUY 105 125 19 985 13.3 9,181 26 18 17 755 (29) (8) 4 6 6 3.9 4.4 4.6 0.9 0.8 0.8 23.2 14.7 12.7 11.5 8.8 8.2 27 Oil India SELL 166 150 (10) 180 2.4 1,084 10 19 21 (51) 85 14 17 9 8 17.3 7.4 6.7 0.7 0.7 0.6 4.3 7.5 8.1 3.0 4.5 5.1 3 ONGC SELL 116 110 (5) 1,461 19.7 12,580 10 20 20 (27) 105 1 12 6 6 5.1 3.2 3.0 0.6 0.6 0.5 5.2 10.1 9.6 3.1 6.7 6.8 37 Reliance Industries ADD 2,146 2,260 5 13,623 183.4 6,349 72 85 105 8 17 24 30 25 20 17.6 13.3 10.0 1.8 1.8 1.7 7.5 7.4 8.6 0.3 0.3 0.4 235 Oil, Gas & Consumable Fuels Attractive 18,484 248.9 58 1 11 16 15 14 9.9 8.5 7.2 1.5 1.5 1.4 9.8 9.4 9.8 2.6 2.3 2.3 392 Pharmaceuticals Aurobindo Pharma REDUCE 761 790 4 446 6.0 586 55 58 63 13 5 8 14 13 12 8.2 7.8 6.9 2.0 1.8 1.6 14.7 13.7 13.2 0.5 1.2 1.4 28 Biocon SELL 371 310 (17) 446 6.0 1,202 6 6 9 1 2 48 59 58 39 26.8 20.6 16.4 5.2 4.9 4.4 8.9 8.4 11.2 — 0.6 0.9 14 Cipla BUY 894 1,070 20 721 9.7 806 30 34 47 55 13 41 30 27 19 16.5 14.8 10.9 3.9 3.5 3.0 12.9 13.1 16.1 (0.0) 0.7 1.0 48 Divis Laboratories REDUCE 4,949 4,250 (14) 1,314 17.7 265 75 96 110 44 28 14 66 52 45 45.2 35.5 31.6 14.1 12.0 10.2 21.3 23.3 22.7 — (0.7) (0.8) 34 Dr Reddy's Laboratories SELL 4,652 4,650 (0) 774 10.4 166 156 171 246 20 9 44 30 27 19 17.3 15.8 11.0 4.5 4.0 3.4 15.2 14.7 17.9 0.5 0.7 0.7 56 Gland Pharma SELL 4,287 2,850 (34) 703 9.5 163 61 80 96 23 31 20 70 54 45 51.7 41.1 33.5 11.9 9.7 8.0 16.9 18.1 17.8 — — — 18 Laurus Labs SELL 707 445 (37) 380 5.1 536 18 21 25 284 14 18 39 34 29 25.4 21.7 18.1 14.6 10.2 7.5 37.9 30.2 26.3 (—) — — 32 Lupin BUY 977 1,220 25 443 6.0 450 27 36 51 24 33 42 36 27 19 15.7 13.1 9.3 3.2 2.9 2.6 8.8 10.6 13.4 0.6 0.6 0.8 29 Sun Pharmaceuticals ADD 778 830 7 1,867 25.1 2,406 25 27 32 47 10 17 32 29 25 21.0 17.8 15.3 4.0 3.6 3.2 12.8 13.4 13.2 0.8 0.6 0.8 55 Torrent Pharmaceuticals REDUCE 2,964 2,950 (0) 502 6.8 169 74 75 95 29 2 26 40 39 31 21.1 18.8 16.2 8.6 7.5 6.5 21.4 19.1 20.7 0.7 0.9 1.1 11 Pharmaceuticals Attractive 7,595 102.3 36 13 25 36 32 25 21.2 18.4 14.9 5.1 4.5 3.9 14.2 14.2 15.5 0.4 0.4 0.5 324 Real Estate Brigade Enterprises BUY 329 350 6 76 1.0 230 (2) (1) 13 (134) 32 1,002 NM NM 24 24.5 18.6 7.9 3.0 2.8 2.5 NM NM 10.8 0.8 0.8 0.8 3 DLF REDUCE 333 300 (10) 823 11.1 2,475 4 7 10 284 65 32 76 46 35 60.5 44.4 37.9 2.3 2.2 2.1 3.1 5.0 6.3 0.2 0.6 0.6 46 Embassy Office Parks REIT ADD 353 380 8 334 4.5 948 7 8 12 (26) 12 49 48 43 29 22.0 18.5 14.7 1.2 1.3 1.3 2.8 3.0 4.6 5.5 6.1 6.4 3 Godrej Properties SELL 1,546 900 (42) 430 5.8 278 (7) 13 30 (163) 291 133 NM 119 51 (129) 531.8 94.2 5.2 5.0 4.5 NM 4.3 9.3 — — — 18 Macrotech Developers ADD 872 970 11 390 5.3 447 13 18 16 (31) 39 (11) 69 49 56 41.4 36.7 34.8 7.5 5.0 4.5 11.0 12.7 8.5 — — — 6 Mindspace REIT ADD 295 320 9 175 2.4 593 5 14 18 (39) 170 25 57 21 17 25.0 14.5 12.2 1.1 1.0 1.0 3.3 5.0 6.2 3.3 6.6 7.2 1 Oberoi Realty ADD 687 700 2 250 3.4 364 20 29 39 8 42 36 34 24 17 26.3 21.3 11.8 2.7 2.4 2.1 8.2 10.7 13.0 - 0.3 0.3 7 Phoenix Mills BUY 864 1,040 20 149 2.0 172 3 8 30 (72) 158 286 282 109 28 36.4 26.2 13.7 3.0 3.0 2.7 1.2 2.8 10.0 0.1 0.3 0.3 3 Prestige Estates Projects ADD 339 380 12 136 1.8 401 7 14 25 (27) 105 73 48 24 14 7.8 8.2 6.1 2.0 1.8 1.6 4.7 8.0 12.1 - 0.4 0.4 5

Sobha BUY 603 520 (14) 57 0.8 95 7 38 60 (78) 465 59 91 16 10 12.6 6.7 5.1 2.4 2.1 1.8 2.6 13.9 19.2 1.2 1.2 1.2 5 Daily Summary India Sunteck Realty BUY 381 440 15 56 0.8 140 4 18 16 (46) 365 (11) 99 21 24 44.8 13.5 13.5 1.9 1.8 1.7 1.9 8.7 7.2 0.3 0.3 0.3 6 Real Estate Attractive 2,875 38.7 5 94 47 81 42 28 33.7 24.3 17.3 2.4 2.3 2.2 3.0 5.4 7.6 1.0 1.4 1.5 103 Retailing Aditya Birla Fashion and Retail BUY 207 255 23 184 2.5 938 (8) (4) 4 (277) 47 184 NM NM 58 33.5 26.2 11.9 7.2 7.8 6.9 NM NM 12.6 — — — 10 Avenue Supermarts SELL 3,595 2,000 (44) 2,328 31.4 648 17 21 39 (19) 22 90 212 174 91 132 111 61 19.1 17.2 14.5 9.4 10.4 17.2 — — — 15 Titan Company ADD 1,838 1,860 1 1,632 22.0 888 11 20 27 (35) 80 37 168 93 68 94 58 44 21.7 18.7 15.7 13.7 21.7 25.2 0.2 0.3 0.4 38 Retailing Attractive 4,144 55.8 (50) 102 96 311 154 78 102 74 46 18.6 16.7 14.1 6.0 10.9 18.1 0.1 0.1 0.2 63

Source: Company, Bloomberg, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK

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August 16, August2021 16,

KOTAK INSTITUTIONAL EQUITIES RESEARCH 147

Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India Price (Rs) Fair Value Upside Mkt cap. O/S shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) ADVT-3mo Company Rating 13-Aug-21 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E (US$ mn)

KOTAK INSTITUTIONAL EQUITIES EQUITIES INSTITUTIONAL KOTAK Speciality Chemicals Castrol India BUY 135 165 22 134 1.8 989 6 8 9 (28) 29 17 22 17 15 14.5 11.3 9.8 9.4 9.3 8.9 43.0 54.0 61.1 4.1 5.6 6.3 3 Pidilite Industries REDUCE 2,207 1,850 (16) 1,121 15.1 508 22 25 34 (3) 13 33 99 87 65 66 58 45 20.1 17.6 15.1 22.6 21.6 24.9 0.4 0.5 0.5 17 S H Kelkar and Company BUY 154 180 17 22 0.3 141 10 9 11 107 (6) 22 16 17 14 10.7 10.3 8.5 2.3 2.1 1.9 15.2 12.8 14.2 1.1 1.6 2.1 1 SRF ADD 8,857 8,500 (4) 525 7.1 59 205 281 328 49 37 17 43 32 27 25.5 19.3 16.5 7.5 6.3 5.2 20.3 21.8 21.0 0.3 0.3 0.4 20 Speciality Chemicals Attractive 1,801 24.3 7 26 22 59 47 38 37.0 29.7 24.6 12.2 10.5 8.9 20.7 22.4 23.3 0.6 0.8 0.9 42 Telecommunication Services Bharti Airtel BUY 637 700 10 3,499 47.1 5,492 (5) 8 21 NM NM NM NM 80 30 10.2 8.6 6.8 5.9 6.0 5.5 NM 7.5 19.0 - 0.9 0.9 97 Indus Towers ADD 214 235 10 575 7.7 2,695 20 20 20 10 (3) 3 10 11 11 4.8 4.4 4.2 3.6 3.4 3.2 32.8 32.5 31.2 9.4 7.5 7.5 12 Vodafone Idea RS 6 — — 181 2.4 28,735 (8) (8) (7) NM NM NM NM NM NM 10.3 9.8 8.7 (0.5) (0.3) (0.2) #### 46.5 27.8 — — — 47 Tata Communications ADD 1,427 1,550 9 407 5.5 285 47 49 60 31 6 22 31 29 24 11.8 11.1 9.7 352.2 35.9 16.7 NM 225 96.3 1.0 1.0 1.3 9

Telecommunication Services Attractive 4,662 62.8 40 41 91 NM NM NM 9.4 8.3 7.0 12.7 32.0 #### NM NM NM 1.2 1.7 1.7 166 -

RESEARCH

Transportation August 16, August2021 16, Adani Ports and SEZ REDUCE 704 740 5 1,438 19.4 2,112 20 28 35 (22) 41 21 35 25 20 21.8 15.3 11.9 4.9 3.6 3.1 15.2 16.8 16.5 0.7 0.7 0.5 181 Container Corp. SELL 666 585 (12) 406 5.5 609 10 17 20 (41) 72 15 66 38 34 36.9 24.9 17.3 4.0 3.6 3.3 6.0 9.8 10.3 0.8 - 0.6 31 Gateway Distriparks BUY 281 310 10 35 0.5 125 8 12 16 79 63 28 37 23 18 12.9 11.0 9.0 2.4 2.2 2.0 6.8 10.1 11.9 1.8 1.1 1.1 1

GMR Infrastructure BUY 28 33 16 169 2.3 6,036 (3) (3) (2) (10) 5 35 NM NM NM 36.0 21.2 15.8 (9.9) (5.2) (5.0) 94.6 75.3 39.7 — — — 13 Gujarat Pipavav Port BUY 102 121 19 49 0.7 483 5 6 7 (25) 38 12 23 16 14 9.9 8.5 7.4 2.4 2.4 2.5 10.6 14.9 17.0 4.4 6.1 6.8 3 InterGlobe Aviation BUY 1,677 2,250 34 646 8.7 383 (152) (183) 123 (2,249) (20) 167 NM NM 14 NM (205.7) 4.0 904.9 (9.8) 4.0 NM 215.6 NM — — — 16 Mahindra Logistics REDUCE 695 560 (19) 50 0.7 71 5 11 17 (43) 123 48 137 62 42 37.6 21.7 16.8 8.7 7.9 6.9 6.5 13.5 17.7 — — — 3 Transportation Attractive 2,792 37.6 (153) 50 1,073 NM NM 22 28.7 20.6 9.7 6.5 6.0 4.8 NM NM 21.3 0.6 0.5 0.5 248 KIE universe 179,862 2,421 37.2 35.1 16.7 32.5 24.0 20.6 15.6 12.3 10.9 3.5 3.2 2.9 10.9 13.4 14.1 1.2 1.4 1.6

Notes:

(a) We have used adjusted book values for banking companies. (b) 2021 means calendar year 2020, similarly for 2022 and 2023 for these particular companies. (c) Exchange rate (Rs/US$)= 74.26 Source: Company, Bloomberg, Kotak Institutional Equities estimates

148 148 KOTAK INSTITUTIONAL EQUITIES RESEARCH

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149 Economy

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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CIN: U99999MH1994PLC134051, Telephone No.: +22 43360000, Fax No.: +22 67132430. Website: www.kotak.com / www.kotaksecurities.com. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Telephone No: 42856825. SEBI Registration No. INZ000200137(Member of NSE, BSE, MSE, MCX & NCDEX). Member Id: NSE-08081; BSE-673; MSE-1024; MCX-56285; NCDEX-1262. AMFI ARN 0164, PMS INP000000258 and Research Analyst INH000000586. NSDL/CDSL: IN-DP-NSDL-23-97. Compliance Officer Details: Mr. Manoj Agarwal. Call: 022 - 4285 8484, or Email: [email protected]. Investments in securities market are subject to market risks, read all the related documents carefully before investing. 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