INDIA DAILY
February 18, 2021 India 17-Feb 1-day 1-mo 3-mo Sensex 51,704 (0.8) 5.4 17.6 Nifty 15,209 (0.7) 5.4 18.1 Contents Global/Regional indices Dow Jones 31,523 0.2 2.3 5.8 Special Reports Nasdaq Composite 14,048 (0.3) 8.1 18.1 Strategy FTSE 6,732 (0.3) (0.1) 5.8 Strategy: Day 2 takeaways from Chasing Growth 2021 Nikkei 30,292 (0.6) 6.2 16.4 Hang Seng 31,085 1.1 8.8 17.7 The second day of our meeting track picked momentum as the corporate KOSPI 3,134 (0.9) 1.5 23.4 line-up burgeoned with 42 companies from across India. Before the day Value traded – India ended, 533 institutional investors from 176 funds across India, Singapore, Cash (NSE+BSE) 818 842 428 Hong Kong and London and New York met 95 senior managers in more 14,65 Derivatives (NSE) 36,608 22,758 than 1,250 meetings. 5 Daily Alerts Deri. open interest 6,264 5,532 4,320 Results Schaeffler India: Automotive segment outperforms Forex/money market Change, basis points
4QCY20 EBITDA 21% above estimates 17-Feb 1-day 1-mo 3-mo Expect 16% revenue CAGR over CY2020-23E due to strong recovery in Rs/US$ 72.7 5 (53) (171) select segments 10yr govt bond, % 6.5 1 28 28 Net investment (US$ mn) Increase our CY2021-22E EPS estimates by 7-8%; maintain SELL on 16-Feb MTD CYTD expensive valuations FIIs 304 414 23,258
Results, Change in Reco MFs (154) 1,382 (7,038) Sunteck Realty: In the price Top movers Change, % ODC and Naigaon continue to remain mainstay for sales; no sales in BKC in Best performers 17-Feb 1-day 1-mo 3-mo past one year TTMT in Equity 330 0.3 26.8 109.0
Lower rating to REDUCE with revised FV of Rs345/share TTMT/A in Equity 132 (0.9) 29.9 90.8 Company alerts VEDL in Equity 193 1.4 9.8 79.6 BOB in Equity 84 5.6 12.0 77.1 Bharti Airtel: Renewed focus MSS in Equity 227 6.4 39.8 73.9 Bharti to buyback 20% stake in DTH business for cumulative consideration Worst performers of Rs31.3 bn PLNG in Equity 240 (1.0) (7.5) (4.4) BRIT in Equity 3,364 (0.8) (6.8) (4.2) Special Committee of Directors to renew focus on digital and non-telecom DRRD in Equity 4,601 (2.0) (11.7) (3.8) businesses BIOS in Equity 419 0.3 (8.4) (2.2)
Calibrated approach in shaping up digital businesses to drive growth in the INDIGO in Equity 1,610 (0.0) (1.3) (2.0) medium term
[email protected] Contact: +91 22 6218 6427
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. INDIA Strategy FEBRUARY 18, 2021 NEW RELEASE BSE-30: 51,704
Day 2 takeaways from Chasing Growth 2021. The second day of our meeting track picked momentum as the corporate line-up burgeoned with 42 companies from across India. Before the day ended, 533 institutional investors from 176 funds across India, Singapore, Hong Kong and London and New York met 95 senior managers in more than 1,250 meetings.
Day 2 – February 17 companies at KIE’s Chasing Growth conference
1. Aditya Birla Fashion and Retail 22. ITC
2. Alembic Pharma 23. J K Cement
3. Ashok Leyland 24. JSW Steel
4. Aurobindo Pharma 25. Lupin
5. BPCL 26. Mahindra & Mahindra Financial
6. Cipla 27. Mindspace REIT
7. City Union Bank 28. Muthoot Finance
8. Coforge 29 Oberoi Realty
9. Dabur India 30. Petronet LNG
10. Dalmia Bharat 31. Prestige Estates Projects
11. Embassy Office Parks REIT 32. SBI Cards
12. Federal Bank 33. SBI Life Insurance
13. Graphite India 34. SRF
14. Grasim Industries 35. Tata Chemicals
15. Gulf Oil Lubricants 36. Tata Communications
16. Havells India 37. Tata Power
17. HCL Technologies 38. Tech Mahindra
18. Hero Motocorp 39. Titan Company
19. ICICI Prudential Life 40. Torrent Pharmaceuticals
20. IndusInd Bank 41. Varun Beverages
21. Infosys 42. Zee Entertainment Enterprises Sanjeev Prasad
[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. Strategy India
ABFRL: FEBRUARY 17, 2021
Key takeaways
ABFRL highlighted that it has taken measures (rights issue, Flipkart equity raise) to improve its net debt position, which is expected to reach Rs2.5 bn by March 2021 excluding the Sabyasachi transaction of ~Rs4 bn. 92% of sales through the retail channel were back and LTL recovered to -16% for Lifestyle brands in 3QFY21. Online sales from retail stores are also included in this 92% sales recovery. However, they only form a small part of overall sales.
Brands business (LP, VH, PE, AS) have grown to Rs45 bn (FY2020) with 11-12% EBITDA margin over the years and the company expects 12% growth rate over the next five years. Strategy has always been to extend brands as per consumer preferences so launched club wear, loungewear, denims, casuals within the existing brands. Hence, it has been able to capture shifts through various product categories. Franchisee puts capital, fixtures, brings local knowledge but the company controls inventory as they have a better grip on consumer preferences. It has moved to shorter cycles which help capitalize on fast-changing trends.
Lifestyle brands. A little less that 50% is work wear rest is other categories and so Covid impact was not harsh.
Innerwear. Innerwear business’ profitability improved due to reduction in expenses, but investments in marketing and advertisement are expected to pick up going ahead. Current profitability is temporary and the business will continue to deepen its distribution. The company believes that 75-80% of the product portfolio for innerwear is already present with it but a range around lower price points also needs to be added to the existing lines to cater to the vast set of customers.
International brands. They have shown tremendous growth for the past three years with every single store format being profitable. Young fashion. People brand was shut last year. F21 is a Rs1.6-2 bn business which was scaled down in past two years.
Ethnicwear. The company has blockbuster brands in men’s formal and casualwear. But has limited presence in the largest category of ethnic wear (10% Men, 90% Women). It wants to complete the portfolio which already has Jaypore, S&N and Sabyasachi now under its umbrella. It has recently acquired 51% stake in Sabyasachi at attractive valuations. Sabyasachi had Rs2.7 bn of topline in FY2020, 20-25% EBITDA margins, RoCE of 40-50% and has generated FCF over the past 15 years.
Flipkart investment. There is no favorable treatment from both company and Flipkart’s perspective. Flipkart has access to store inventory of 800 offline stores in Lifestyle brands and 150 stores in Pantaloons. ABFRL does not share any sales data other than the sales that happen through the platform.
Value retail. Pantaloons sees opportunity to expand further in the top 30-40 cities itself. However, the company has expanded to 30 stores of Style-up in tier II/III locations over the past two years to learn about consumer behavior and merchandize.
Focus areas. Innerwear and ethnic wear are key focus areas. Innerwear is a large market with significant part still unorganized. Jockey is in basic segment; positioning VH as aspirational, always price ~10% higher than Jockey.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 India Strategy
ALEMBIC PHARMA: FEBRUARY 17, 2021 Key takeaways:
View on US investments: While analysts and investors kept saying that US business no longer remains attractive from time to time, the company believes US always presents opportunities and it is up to players to capitalize on those, manage costs and maintain a nimble supply chain. Alembic does not want to compete aggressively on pricing and is ready to even give up shares in products where returns are too low (for instance sartans where the company gave away market share in 3Q).
Injectables: Alembic’s US injectable facility got inspected recently as there was shortage of a product which has been filed from this site. Alembic is pursuing a basket approach to injectables as that provides better entry into GPO contracts and will be sourcing APIs from outside as most of the injectable APIs are available in the market.
India business: After a period of weak growth, overall growth across products has recovered and from here on chronic will continue to grow faster than acute. Alembic’s India portfolio is also starting to get skewed towards chronic gradually.
Rhizen JV and umbralisib: Unlike other companies which have massively spent in the specialty segment, with few companies failing and a few still sustaining, Alembic’s specialty through Rhizen was a very lean cost structure company (no fancy R&D center etc). Dr Swaroop (JV partner) drives this business. Alembic has not invested much in this JV and now Rhizen has become self funded (through royalties and milestones of umbralisib) and sees a sharp increase in revenue.
4 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
ASHOK LEYLAND: FEBRUARY 17, 2021
Key takeaways
Demand is coming back strongly. The company is optimistic about recovery prospects going into FY2022E led by (1) a rebound in economic activity aided by favorable government policy resulting in higher freight demand and (2) recovery in tipper and multi-axle truck segments due to strong construction segment demand. The LCV segment continues to remain strong due to (1) a boom in e-commerce and agricultural segment and (2) new product launches to address product gaps in the portfolio. However, the company expects gradual recovery in the domestic bus segment partly aided by the 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. M&HCV inventory stood at 3,171 units as of December 2020 versus 1,853 units as of September 2020 at factory level. In the exports segment, the company highlighted that markets are opening up; however, recovery in bus segment will take time as public transport has not opened up completely. The company is expecting 20-30% yoy growth in exports segment in FY2022E.
RM headwinds persist. The company expects RM cost pressures during 4QFY21E due to a sharp run-up in steel prices; however, the company has taken price hikes of 1.5% in January 2021 to partly offset the impact of the same. Also, the company has been affected by the constraints in supply of Electronic Control Units (ECUs) owing to the non- availability of semiconductors and is closely monitoring the situation as this can have an impact on future volumes if the constraints do not ease. The company expects the situation to normalize by 2QFY22E. The company also highlighted that they have reduced fixed cost by 33% during the pandemic out of which some of the costs will come back once volume ramps up. Also, the company expects EBITDA margin to cross previous peak over the next two-three years led by (1) recovery in volumes leading to operating leverage benefits and (2) cost savings from AVTR platform and other cost-cutting initiatives.
Capex guidance. The company has given guidance for capex of Rs7-7.5 bn for FY2021E, capex will be incurred on expansion of product portfolio in the LCV segment, modular vehicle program, de-bottlenecking of plants for increase in capacity and towards electrification of the LCV portfolio. The company has done investments worth Rs2.6 bn in 3QFY21 (Rs1.5 bn in SWITCH towards electrification and Rs1.1 bn in Hinduja Leyland Finance). The company will infuse cash of Rs1.5 bn in Hinduja Leyland Finance for growth opportunities. Hinduja Leyland Finance collection efficiency stood at ~90%. Gross NPA stood at 4.3 % and net NPA stood at 2.3% as on December 2020. Capital adequacy ratio stood at 16.6% as of December 2020.
Other key points. (1) The company has picked up 26% stake in Prathama Solarconnect for Rs190 mn and plans to set up a 75 MW solar power plant over the medium term (power cost is cheaper than grip power), (2) LCV segment makes higher margin than M&HCV segment and (3) the company has made a subsidiary named Vishwa Buses and Coaches (paid-up share capital of Rs600 mn) to carry on the business of bus body and coach-building.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 5 India Strategy
BPCL: FEBRUARY 17, 2021
Key takeaways
Divestment updates. The company has completed setting up the virtual data room and is awaiting inputs from the transaction adviser and DIPAM for providing access to the same. Sale of BPCL’s stake in NRL is likely to conclude by end-4QFY21; a consortium of Oil India and Engineers India will acquire ~49% and Assam government will acquire the remaining 13.65% stake. BPCL has finalized terms for buying out OQ’s 36.62% stake in BORL for ~Rs24 bn.
Mozambique LNG project. BPCL has infused Rs6.5 bn in BPRL in FY2021 for commitments towards the Mozambique LNG project. Gas sales from the project are guided to begin from CY2024. BPCL has signed agreements for 86% of its 1 mn tons share of LNG from the project.
PDPP project at Kochi. Two out of the three units of the Propylene Derivatives Petrochemical Project (PDPP) at Kochi shall be commissioned by March 2021, and one unit will be commissioned in May 2021.
CGD updates. BPCL controls four GAs and its 100% subsidiary BGRL controls 13 GAs; capex for expanding CGD networks across the GAs is estimated at Rs83 bn spread over eight years. BPCL has recently commenced CNG sales in two GAs—Rupnagar and Rohtak.
Other details. Debt has declined from Rs418 bn as of March 31, 2020 to Rs246.7 bn as of December 31, 2020 and is not anticipated to increase materially from current levels. Capex in FY2022 is guided at Rs100 bn from ~Rs90 bn in FY2021.
6 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
CIPLA: FEBRUARY 17, 2021
Key takeaways
US sales: Albuterol continues to progress well and the company expects further market share gains in this product. Apart from albuterol, there are multiple products in the pipeline which will be launched over FY2022-23E. Within inhalers, the next large one is Advair where target action date is within 2-3 months but management does not expect approval in the first cycle. Overall the company believes it can add US$300-400 mn to US revenues over the next 3-4 years with major contribution coming from Advair, Abraxane and Rwvlimid.
India business: One India strategy is progressing very well with multiple brands switched from trade generics to brand. Consumer health business continues to do well. There is some impact on the prescription business particularly in acute and respiratory sales (primarily nebulizers), however, as things normalize, India business should return to double digit growth trajectory.
Other geographies: South Africa continues to do well and the company is looking to make further inroads in OTC. The company has also inlicensed products from Alvotech and believes these products also present a strong growth opportunity. Tender business (which has now largely moved to ARVs) remains profitable and the approach will be calibrated here. For APIs, focusing mainly on the company’s strengths in respiratory products where high demand is there.
Expenses and margins: As per management, the company has removed multiple inefficiencies in the system after Covid and this has not impacted revenues. The company believes it can sustain a major part of cost savings in FY2022 even as certain marketing and promotional expenses come back. Overall margin profile will be somewhere between FY2020 and FY2021E margins.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 7 India Strategy
CITY UNION BANK: FEBRUARY 17, 2021
Key takeaways
Asset quality is panning out as expected. The bank expects restructuring to be in the range of 5-6%, in line with earlier guidance. The bank has indicated some comfort with ECLGS utilization because these borrowers had viable business models in the pre-Covid period as determined by eligibility criteria of the scheme. The management also clarified that the bank’s provision requirements under Ind- AS norms would be lower than what it currently carries given the security underlying its loan portfolio.
Advances growth to pick up to lower double digits in FY2022E. The bank expects growth to be in high single digits in 4QFY21. While almost all sectors of the economy have opened up, it might take 1-2 quarters for credit limit utilization to reach normal levels. Utilization rates had increased beyond 100% in the immediate aftermath of Covid, fell to ~50-60% after ECLGS sanctions.
Some gold loan NBFCs have operational advantage over banks. While banks offer gold loans at generally lower rates than NBFCs, NBFCs win when it comes to operational efficiencies because (1) working hours can be longer for NBFCs, (2) processing is faster by NBFCs and customer does not need to take too much time out of his business operating hours to avail a loan. Management indicated that the return from gold loans was lower than other loans even on risk-adjusted basis for the bank.
CASA ratio is expected to improve in near term. RBI’s current account related guidelines will be largely CASA neutral for the bank and most of the adjustments have already been completed. This has resulted in some hardships to customers who have multiple banking or consortium arrangements.
NIM guidance intact at 3.9-4.2%. Management indicated that 85-90% of the floating rate book has migrated to EBLR loans. Yields would go up as the benchmark rates are hiked in line with economic recovery.
Cost-income ratio expected to be ~43-45% in FY2022E. Cost-income ratio was lower in FY2021E because of profits from appreciation in bond book. Those gains will not be available going ahead. At the same time, wage negotiation has led to ~15% hike in employee cost. That will push up costs in the near term. On the other hand, the bank shelved its strategy of adding ~50 branches every year. The management is yet to take a call on FY2022E branch additions. The management indicated that the bank is at par with the best in industry when it comes to digital adoption. The bank might not be able to eke out too much of cost savings going forward.
The recent amalgamation of LVB and DBS Bank India is likely to change competitive dynamics in the state of Tamil Nadu to some extent. However, the broader theme of other banks acquiring market share from PSU banks will continue to play out over the next few years. However, the management of City Union Bank continues to focus on maintaining profitability rather than just looking at market share metrics.
Management expects to overcome the Covid crisis without any additional capital raise in the next 12 months.
Management clarified that the bank deals with formally registered business entities in its borrower base. These are tax-paying entities and they are not part of the informal sector.
8 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
COFORGE: FEBRUARY 17, 2021
Key takeaways
Differentiation from other mid-tier companies. Coforge indicated that deep focus on certain industry verticals provides a differentiation with respect to other mid-tier companies. Coforge is adept in providing solutions combining deep domain knowledge with technology capabilities.
Travel, transportation and hospitality. The vertical has stabilized at 19-20% contribution from revenues down from 27-28% earlier. Airlines, travel technology companies and airports form a major chunk of business followed by rail transportation. Coforge is aggressively focused on gaining share in the vertical. The company has replaced other vendors for an airport client. Coforge indicated that gaining share during a downturn will provide increased benefits when recovery in spending picks up.
BFS. Coforge focuses on asset and management clients in its financial services segment. Financial services segment is larger than banking although the gap is reducing due to faster growth in banking clients. Within financial services Coforge indicated that it was earlier focused on back office but is expanding into mid office as well. In banking the company was earlier present mainly in risk and compliance space but is now expanding into the opportunity in digital legacy integration through partnerships with SaaS vendors like Pega, Apigee and Mulesoft. The company competes with other mid-tier players and Tier 1 companies but has benefited from good references from projects done earlier.
Changes under new CEO. Coforge indicated that the organization underwent a few changes under the new CEO- (1) higher focus on execution and performance management. Incentives for employees were redesigned to help achieve better performance. For example commissions paid to sales for large deals were hiked up to 3- 4X times to incentivize large deal wins. (2) Leadership team was revamped. Most direct reports to the CEO were hired in the past 3-4 years. 60% of second level of leadership was also hired in the past 3-4 years. Most of the external hires were from Tier 1 firms. (3) Sales approach was revamped. In addition the company expanded focus from CIO/CTO to business leaders within the client organization. The company has invested significantly in industry advisory groups to boost consulting capability which has helped in deal conversions. (4) Change to a verticalized organizational structure that complemented USP of deep focus in certain industry verticals from geography-wise structure in the past.
Key metrics have improved: Coforge indicated that the number of new logo additions, deal win TCV and 12 month executable order book have all significantly improved from 2-3 years back.
New ownership. Coforge indicated that the relationships between company management and the Board are amicable. Barings has a decent say in capital allocation and M&A decisions. Barings has introduced Coforge to portfolio clients but that has not led to material deal flow. Incentive mechanism for leadership team has changed considerably under Barings.
Account mining. Coforge is focused on scaling up account sizes. The company is putting structures in place to better incentivize account mining. The company has had some success in gaining share from other vendors. For example the company indicated that it had gained reasonable share in core services from a Tier 1 vendor in an account. Other vendors also had gained share from the vendor in the particular account. The company has added new logos that are fairly scalable. Coforge is also getting added to a preferred supplier list of clients. The company has recently become a preferred supplier for two banks within the top 10 banks in the US. The company is now targeting entry into top insurance logos.
Covid Impact. Coforge indicated that (1) acceptance of higher offshore mix by client and (2) change in mindset to viewing IT spends as non-discretionary from discretionary earlier are a couple of benefits of Covid to the IT services industry.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 9 India Strategy
DABUR: FEBRUARY 17, 2021
Key takeaways
Demand environment. Dabur highlighted continued demand momentum in the healthcare portfolio and gradual recovery in Discretionary/OOH segments. The foods division continues to be impacted with weakness in HORECA and CSD channels. E- commerce and GT channel continues to do well, even as the modern trade channel has witnessed gradual recovery. Management noted some consumer downtrading in e- commerce which has halted the premiumisation trend, albeit temporarily. With strong rural demand, management highlighted economizing of SKUs and higher prevalence of LUPs across categories.
Healthcare momentum to decelerate. With Covid-led concerns abating, management expects the exponential growth seen in healthcare segment over recent quarters to decelerate going forward. However, changes in consumer preferences/habits are expected to be sustainable aided by government advisory around preventive healthcare, favorable clinical trials and the company’s own initiatives. Dabur expects to supplement growth momentum with product innovation, penetration gains, distribution expansion, reopening of modern trade/CSD channels and market share gains.
New launches and category forays. Dabur reiterated the broader innovation imperative by recapping its efforts on multiple fronts (a) new launches around the power brand architecture, (b) innovation centering around ‘Naturals’ equity in HPC (Amla Aloe Vera, Pulling Oil) and Foods (Dabur Amla Juice, Vedic Suraksha Tea, Dabur Ghee), (c) aiming for a larger play in foods with entry into premium valued-added edible oils, tea, ghee, (d) cultivate e-commerce as a quick test ground for innovation (Cold Pressed Mustard, Baby Care range, Apple Cider Vinegar) with outsourced manufacturing to being with, and (e) mainstream Ayurveda with contemporary formats/SKUs, and cross-pollination from ethicals/OTC to general trade. On a steady state, Dabur expects ~3-4% revenue contribution from launches.
Augmenting distribution infrastructure. Management highlighted multiple initiatives to augment GTM on both traditional and alternate channels (a) Splitting front-end salesperson across Healthcare, Foods, HPC and Ethicals; HPC is split further into Oral care and Hair Oils, (b) rural reach expansion, (c) augmenting healthcare shelf-space and visibility drives on modern trade, (d) accelerated capability building (dedicated team, IT investments) and digital marketing for e-commerce, (e) reaching out to Ayurveda doctors to drive ethical (prescription led) and engaging better with chemist channel for OTC portfolio, and (f) increased focus on data gathering, analytics, continuous replenishment, upgraded distributor management system, automated salesperson routine etc.
Category comments. Dabur highlighted strong market share gains in the Oral care portfolio (led by Dabur Red). Naturals toothpaste constitutes ~30% of oral care category and is registering high double-digit growth rate compared to decline for white toothpaste. Dabur has ~15-16% market share in the oral care category. The management highlighted its aspiration to replicate its oral care playbook across the shampoo category focusing on the Naturals space (Vatika franchise led) and higher bottle saliency (~80% of shampoo category is in sachets format). Dabur is targeting market share gains from Reckitt Benckiser in toilet cleaner (launched Ad campaign), new formats in Air fresheners (to launch hanger gels, car fresheners), launches in underpenetrated Foods (Ready to Eat/Cook, Pickles) and possible M&A opportunities in Skin Care space.
10 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
DALMIA CEMENT: FEBRUARY 16-17, 2021
Key takeaways
Capital allocation plan and future expansion. Management is working on a plan to double its current capacity to 55-57 mtpa and expected to announce the same very soon. The company would ensure a good balance between growth and leverage. Management is also working on a capital allocation policy which will allow majority of investments only in the core cement division.
High barriers to entry in the cement industry. Management indicated that amendments to the MMDR Act have strengthened the position of incumbents. Moreover, banks are also willing to back players with a proven track record making it difficult for new players to compete for limestone. Hence management expects larger share of growth would be driven by large players and the industry would further consolidate in the coming years.
Inorganic expansion. Management remains open to inorganic opportunities but indicated very limited distress assets in the market at the moment.
Price outlook. The company indicated that prices remain stable in their key markets from average prices of 3QFY21. Management expects longer-term prices to inch up as demand remains robust and the supply pipeline is lean relative to demand growth.
Cost inflation. Management expects margins to remain under pressure with the recent increase in costs of pet coke and fuel. However, management expects to offset this through higher cement volumes from its expansion projects and cost efficiencies.
Demand outlook. Management remains confident of robust (double digit) demand in East India and improved infrastructure demand from South India. They are very bullish on demand prospects post the sharp increase in budgetary allocations towards infrastructure in the Union Budget 2021.
Green power. Dalmia has committed, with a roadmap, to become carbon neutral by 2040. The current share of renewable energy stands increased to 9% from 7-8% of the total energy requirement and they aim to increase this share to 30% by 2024E. Management expects considerable cost savings through these projects (Rs60-90/ton).
Product innovations. Management is working on increasing its production of PCC, which can use fly ash and slag interchangeably. This will help the company reduce costs further.
Increase sales of premium cement. Management remains focused on increasing the sale of premium products. The existing brand premium resulted in Rs20-30/bag higher cement price.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 11 India Strategy
EMBASSY: FEBRUARY 17, 2021
Key takeaways
Management highlighted that supply for Grade A office spaces has been severely constrained which will lead to strong pick up in occupancy once people start working again from offices.
Early termination of leases is a short term phenomenon driven primarily by cost reducing measure being adopted by tenants since long term planning is expected to start once the second wave of Covid-19 virus abates in the US and Europe.
The company expects to fund incremental capex of Rs23.3 bn to be incurred via debt funding.
Additionally, at the new acquired asset Embassy Tech Village, Embassy is constructing 1.1 mn sq. ft built-to-suit building for JP Morgan (100% pre-committed) expected to be commissioned by Sep 2021. 1.9 mn sq. ft of additional development is expected to be only commissioned by March 2024.
Embassy REIT has 2.7 mn sq. ft of office properties under construction of which 0.9 mn sq. ft at Embassy Techzone is likely to be commissioned by June 2022 while the remaining 1.8 mn sq. ft will likely commission towards end-FY2023E with no incremental capacity addition in the interim.
Embassy has total lease expiries of 2.2 mn sq. ft (8.6% of rentals) in FY2021E of which they have concluded releasing agreements for 0.7 mn sq. ft. at 11.4% mark-to-market gains. While 0.9 mn sq. ft of area has been exited till 3QFY21, management sees further risk for the balance 0.6 mn sq. ft (2.3% of rentals.
12 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
GRASIM: FEBRUARY 17, 2021
Key takeaways
VSF—prices continue to inch up in February as demand outstrips supply
. Prices continue to increase sharply on improved demand. Strong consumer demand coupled with higher cotton prices in China is resulting in higher VSF prices. Pulp costs also move in line with VSF prices and could soften margins in 2/3QFY22.
. Demand outlook. Management indicated that demand remains robust led by higher off-take in tier-2/3 towns and rural India. Share of domestic sales continues to increase on a mom basis. Moreover lower VSF prices compared to cotton and better profitability for the value chain has resulted in partial shift from cotton to VSF in major textile hubs of India.
. Capex remains on track for commissioning both the lines by 2Q/3QFY22 as majority of the work on site in terms of equipment and machinery is ready.
Chemicals—demand improve while prices bottom out
. Prices begin to improve marginally. Due to excess supply of caustic soda in overseas markets, caustic soda prices (CFR) continue to remain under pressure. However, in Asia caustic soda prices recovered from lows of US$239/ton to US$270/ton levels. Management expects prices to firm up based on improved demand.
. Capacity utilizations move close to pre-Covid levels on improved demand post lockdowns.
. Capex remains on track for commissioning both the lines by 2Q/3QFY22 as majority of the work on site in terms of equipment and machinery is ready.
. The management expects to commission the expansion project by 1QFY22E.
Idea Investment .With a well- defined capital allocation strategy towards existing committed organic expansion and entry into paints, management has categorically denied fresh investments into Vodafone-Idea.
Net debt. Grasim’s standalone leverage reduced to 1.25X TTM EBITDA. Management expects to maintain leverage under 3X post the expansion into paints segment.
Paints expansion. The management shall share detailed plans on this expansion in a couple of months. The company is yet to receive shareholders’ approval for the said expansion. Grasim aims to launch at a pan-India level rather than have a regional approach and hence wants to take time to formulate a market entry strategy.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 13 India Strategy
HAVELLS: FEBRUARY 17, 2021
Key takeaways
Operational performance. Core strength of Havells’ manufacturing, continuous engagement with vendors, channel partners led to better-than-expected recovery in 3QFY21. Complete normalcy in operations is expected in the next couple of months. 4QFY21 trends are similar to 3QFY21 and the demand is holding up well. B2B business has started showing improvement towards 3QFY21 end both in cables and professional lighting. LED pricing has bottomed and is quite stable for now. HAVL is seeing incremental order inflow in the infrastructure segment which is benefitting the underground cables business, though demand is still nowhere close to peak. Long-term margins of around 14-15% are achievable.
Channel partners. Havells’ has seen increased brand loyalty for larger brands during the pandemic from channel partners due to timely settlements of claims, simplified schemes (tweaked targets to get regular cash/credit in accounts of dealers). Competition has always been high in the hardware space and the company is not seeing any demand from the channel partners for higher incentives. Havells’ products are fast moving and the channel partners do not want to miss out on the opportunity to stock their products.
Price hikes. The company has taken partial price hikes but has not passed on the entire raw material price increase. It looks to pass it on in phases so as to assuage channel partners and customers. Key raw material prices are up 20-25% and a one-time price increase of this magnitude will not be easily accepted by channel partners.
Unorganized to organized share shift. The shift was massive for lighting, wires segments; fans are already highly penetrated by organized players and hence the impact of the shift wasn’t large. The company believes that organized penetration is at its peak and unorganized players will claw back market-share a bit in lighting and appliances space which are fragmented unlike switchgear, fans. Hence, a part of the growth that larger consumer durables companies witnessed in 2Q-3QFY21 was due to operational hurdles faced by the unorganized and smaller players. When they are back with normalized operations, they might claw back some of the market as the price sensitive demand continues to exist. In the longer term, the company expects to continue gaining market share from unorganized players.
Replacement demand. Replacement demand is currently a bigger driver of demand across categories. Larger part of demand for switches, ECD comes from replacement. For switchgear/MCB, a larger part of the demand is new build/construction. In lighting (B2C), large part of the demand is from replacement/LED-fication process. Demand from new build projects is not very high and most demand is from B2C lighting.
PLI scheme. Governments’ focus on local/domestic manufacturing and other steps like import restrictions on AC are positive for Havells. The company has also taken land in Andhra Pradesh, closer to the international port to set up a facility for exploring AC exports aided by the benefits from PLI scheme. It is looking both at domestic market and overseas markets. The company highlighted that >50% of the AC industry is with the Indian brands unlike the mobile market brands and hence PLI scheme will focus on domestic component manufacturing. PLI scheme will help them garner a larger share of the domestic market. Per the company, barring 2-3 components, everything can be made in India.
14 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
Wires. Havells has seen execution pick up in many projects which were stuck during pandemic. However, individual home owners and small builders are driving the demand. Havells is not seeing any fresh launches by the larger builders so it doesn’t think that the real estate space is seeing materially improved demand. Cables. Underground cables business caters to highways, building, railroads, metros whose capex plans were in the doldrums earlier. But these are witnessing incremental demand (both pent-up and due to budget announcements). Exports of cables and wires is an area they are exploring but Havells remains focused on profitability and would want decent margins for the same.
Lloyd. Price pressure in segments like LED TVs has abated. Lloyd distribution has improved and it has superior shelf space now in the larger format shops. Margins will not be impacted by the move to larger format stores. Further, e-commerce play will be smaller in the AC and durables space. Lloyd was not present in LFS stores earlier. Investment and engagement with these help in brand acceptances/visibility. Almost 35% sales are via LFR/MFR and margins have not diluted for Lloyd.
Capex plans. The company is planning Rs2.5 bn (excluding land) of total capex and Rs500-600 mn of capex for washing machines. After 2-3 years, refrigerators might also need investments.
White labeling. White labeling will continue to see increase in domestic market. Havells will not look at the domestic market for it but it can explore the same for the export market.
Strategic focus. Havells is leading the market (#1/2) in water heater category and is gaining market share. Small domestic appliances (SDA) category is the next focus area. Brown goods (like juicer, mixer-grinder, iron) were launched in 2011, but by 2015, the company felt the need to revamp distribution and sell through kitchen counter (Bartan Bhandars) so, it invested with different channel partners and revamped all SKUs altogether. It discontinued most of models and brought in new models with better aesthetics and did product laddering. It has received encouraging response from channel partners and customers as well.
New products. Personal grooming and water purifier (others category) were launched two years back and have elicited a good response. But personal grooming is a small category and Havells has achieved #3 position in the market. In water purifier category, it has developed service network. Lloyd’s refrigerators business is good margin business and the company strives to achieve 8% EBITDA margin.
Acquisition. Brand acceptability and channel commonality are two specific requirements for an acquisition. Havells does not have a specific name to look at presently.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 15 India Strategy
HERO MOTOCORP: FEBRUARY 17, 2021
Key takeaways
Growth prospects remain strong over the medium term. The company highlighted that rural demand is better than urban demand. Retail sales have been growing for the company led by strong growth in scooter and premium motorcycle segments. Also, the company remains optimistic on medium-term growth prospects led by (1) gradual recovery of economy as demand in certain sectors picks up, (2) higher spends by the government, (3) strong rural growth prospects due to lower penetration, and (4) lower financing rates. Also, the company will launch new products in the premium motorcycle segment and is looking to set up a different distribution channel for the premium segment. Dealer inventory is around 4-5 weeks for the company. The company also highlighted that export volumes have picked up and are sustaining at a monthly run-rate of 15,000-20,000 units.
Cost savings to offset RM headwinds. The company expects RM pressure to persist going into 4QFY21E. However, the company expects to maintain margins led by cost savings from the LEAP II program (benefits of 125-150 bps in 9MFY21) and price hikes if required. The company highlighted that sharp increase in ASPs can be attributed to (1) shift towards BS-VI and (2) increase in RM basket. The company has guided for EBITDA margin of 14-16% over the medium term.
Harley Davidson partnership. Hero will manufacture, co-develop and distribute Harley Davidson branded bikes in the Indian market. 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.
Other key points. (1) The company will launch EV products under its own brand as well as through Ather Energy, (2) the company will incur capex of Rs8-10 bn on an annual basis, (3) BS-VI products have higher fuel efficiency than BS-IV products and believes BS- VI is superior product offering to the customers and (4) Hero FinCorp business is back to pre-Covid levels and collection efficiency is back to pre-Covid levels as well.
16 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India
ICICI PRUDENTIAL LIFE INSURANCE: FEBRUARY 17, 2021
Key takeaways
APE volumes improve mom. Sequential improvement in APE continued in January 2021. ICICI Prudential Life is one of the few players which reported mom increase in APE in January 2021. Benign base in 4QFY21 will provide support to APE growth.
Negligible impact of change in tax benefits for high-ticket ULIPs. Management does not expect significant impact of change in tax benefits on high-ticket ULIPs (ticket size of Index-linked product can present a significant growth opportunity; final guidelines awaited. Index-linked products will likely bridge the gap between traditional guaranteed non-savings products and discretionary benefit participating policy. Index- linked products are relatively more transparent compared to traditional guaranteed non- par savings product. Guaranteed savings and insurance plan was a product which was offered by ICICI Prudential Life till a few years back, similar to index-linked products proposed by the working group. Demand for the product was quite strong. A index- linked product is akin to a floating rate loan while a traditional guaranteed savings is akin to a fixed rate loan. Management remains confident of product bouquet expansion over FY2023-24E in case the products are finally introduced. ALM remains top priority for non-par savings products. Availability of FRAs (mostly up to 10 years) enable longer tenure endowment and annuity products. ALM management remains a key focus are for growing the annuity and non-par book. The maximum policy term for the newly launched ‘Guaranteed Income for Tomorrow’ policy is 12 years and payout period is 10 years. The company has been able to provide a longer tenure due to availability of hedging instruments which minimize interest rate risk. Supply-side constraint persist in retail term insurance. Customers remain risk averse to go for medical check-ups and life insurers remain cautious on underwriting customers. Mortality trends among probable customer affected with Covid-19 is yet to be demonstrated. As such, ICICI Prudential Life is focused on maximizing sum assured in the overall protection segment compared to skewed focus on underwriting retail protection at a swift pace. Credit protect to be a function of retail loan growth and increasing attachment rates. Attachment rates for fresh home loans are ~50-60%. Increase in attachment rates can drive growth in credit protect. However, growth in credit protect will largely be a function of retail loan growth (for partner financial lending institutions). Bancassurance partnerships to pick up over medium term. The company has tied up with new bancassurance partners in FY2020-21 to grow APE at a swift pace over the medium term. IDFC First has been in operation for six months now and business has picked up at a robust pace. Business through other bancassurance partnerships is quite nascent (IIB, RBL and AU SFB) and will take at least three months to scale up. Management expects to increase wallet penetration among these bancassurance partners. Additionally, the company will focus on increasing cross-sell by offering a diverse product bouquet. As such, business growth is expected to gain traction from these new partnerships over the medium term. . The company has launched pre-approved plans for customers of ICICI Bank. Business volumes have gained significant scale though hit rate remains low for now. Persistency ratios improved in protection. 400-500 bps increase in protection persistency in 9MFY21 compared to pre-Covid levels. KOTAK INSTITUTIONAL EQUITIES RESEARCH 17 India Strategy INDUSIND BANK: FEBRUARY 17, 2021 Key takeaways We would look at FY2021 as a year in which the bank has worked through some of the critical issues that would make the balance sheet much stronger and resilient to a crisis than before. The bank has put out its fresh planning cycle (FY2020-23) building on its key themes of having scale with sustainability. The bank would work towards (1) leapfrog digital banking, (2) strengthen liabilities further, (3) scale up domains where there is expertise, (4) invest in new growth engines, and (5) have conservative and robust practices. Capital: The bank has raised Rs33 bn crores taking the tier-1 ratio to ~16%. There is a further capital infusion of Rs20 bn crores from the promoters which would take the tier-1 ratio to ~18%. With this, the issue on capital is clearly behind them. Deposit franchise: A few concentrated exposures in the government side led to a few months of challenge in FY2020. This has now been addressed where the bank has significantly improved its liability profile. CD ratio is <90%, contribution of certificate of deposits has significantly declined and the bank has improved its retail liabilities. This is reflected in the LCR ratio and the retail deposits are growing in double digits in the past few quarters. The bank is doing well on NRI deposits and affluent wealth banking business. The strength of the franchise is visible when we look at the the retail deposit engine as this book did not see any pain in FY2020. The bank has corrected its deposit rates in recent months by 50bps but the customer acquisition engine is still quite strong. The bank is rolling out new offerings to retail customers with greater focus on millennials in the mass banking segment. Bharat Money stores which focus on a different customer segment are doing quite well. The merchant acquisition engine is being utilized to build current accounts. This is both through Bharat Money and otherwise. The run-rate is likely to accelerate in FY2022. Asset quality: The bank has addressed most of the concentrated exposures it had either through write-offs or these have been fully provided. Incremental stress only remains in telecom, if any. There is a lot of discussion in the public media whether a possible transaction (fresh capital raise) of some kind is likely to happen to this company. Real estate book is holding up well while gems and jewelry have not seen any signs of stress. . Retail saw a higher impact during Covid. There was a rise in delinquency in some segments of the portfolio, higher in the unsecured loan book. The commercial vehicle book has come out well though it required a bit of hand-holding considering that the economy had completely shut down in the first few months of FY2021. The bank is less concerned on this portfolio today. . The bank has ~50bps in terms of Covid provisions. The bank believes that they would probably look to increase this buffer and be ahead-of-the-curve given that certain portfolios tend to have unexpected rise in delinquencies that is not easily identifiable. The credit cost for FY2022 is likely to show improving trends as the bank has fortified the balance sheet well and there would be some more recoveries which would cushion the impact on credit costs. . Microfinance: The bank has a very high share of sole customers and their exposure towards the stressed states is quite negligible or has reduced in recent quarters. The bank is less concerned in the recent developments in this sector. The recent act is not too painful but activity levels around elections tend to be quite high which results in customer behavior diverging from normal trends. There is likely to be more regulations to make it easier for all stakeholders to operate in this space. The RBI is working through the various issues that created differences between various types of lenders. 18 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India Loan book: The bank is diversifying the loan book by ticket size, groups, collateral or segmentation. There is a lot of effort being made to de-risk this segment. The opportunity to lend is quite large but this is not getting fully reflected in the bank’s loan book today. At a bank level, the retail book is likely to grow faster than the corporate book . Large corporate would lag overall loan growth. All large groups have been actively reviewed and the bank is actively working to resizing its exposure to these groups. This has led to slower growth in the corporate book. The bank is working on more collateralized, short term, working capital flows and less on promoter backed/structured/take out financing. Commercial banking is likely to grow faster which includes supply chain, logistics, agriculture, mid-market loans. These exposures are not large and are usually well collateralized. Return ratios: The bank is not willing to give any guidance on the same. The bank believes it is well positioned as it has significantly covered the credit costs on the corporate side. The bank is well-ahead of the curve and hence unless there is any external shock, the bank is coming out well. The bank believes that the drivers of PPoP growth are quite healthy. However, there are pulls and pushes in different segments that they are trying to focus on. KOTAK INSTITUTIONAL EQUITIES RESEARCH 19 India Strategy JK CEMENT: FEBRUARY 17, 2021 Key takeaways Price outlook. The company indicated that prices remain stable in their key markets from average prices of 3QFY21. The company has taken some price increases (Rs5/bag) in February in some of its markets. Demand. JKCE continues to witness double-digit volumes growth in January and February. Management highlighted that growth in cement demand was much higher in non-trade segment on that back of higher government expenditure. Management expects industry volume growth of 5-6% CAGR in the medium to long term. Capacity expansion. The company has received Board approval for setting up an integrated 3.5-4 mtpa grey cement capacity in Panna, MP with a 8,000 tpd clinker unit with a cement GU and a satellite grinding unit in UP (2 mtpa) along with 22 MW of WHRS. The expected cost of this greenfield expansion project is Rs29.7 bn. Management indicated that it wants to strengthen its presence in the North and Central markets first and then look at other regions for expansion. Given limited expansions in North and Central India, management expects little impact on the regional prices. Cost guidance. Management expects fuel and freight costs to remain elevated due to higher diesel and pet coke prices. Management expects fuel costs to increase by Rs60- 80/ton of cement. However, management expects Rs100/ton of savings from 4QFY21E led by ramp up of the newly commissioned plants which will help buffer margins. Trade versus non-trade prices. The gap between trade and non-trade prices continues to narrow but remains high at Rs40-50/bag. There have not been any material reduction in discounts to dealers. White segment/putty. Volumes continue to improve sequentially on easing of lockdown restrictions and increased housing demand. Management expects margins to remain in high double digits despite entry by new competitors. Management also indicated that is has no plans to expand the white cement capacity in the near future. Premium share. Premium products take up 4-5% of the trade sales. Management wants to increase it to 10% by FY2022-end. ESG targets. JKCE is formulating a ‘ESG strategy’ detailing their vision for Co2 reduction and shall communicate the same in the coming quarters. 20 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India JSW STEEL: FEBRUARY 17, 2021 Key takeaways Demand outlook. Management remains confident of a broad-based economic recovery in FY2022. The company is working closely with several industries in developing products to facilitate import substitution. It expects higher domestic steel demand after the impetus on infrastructure growth in Union Budget. Management expects steel demand to grow by at least 10-12% yoy in FY2022. Steel prices. Management highlighted that it had taken minor price hikes in both January and February 2021. Management expects prices to remain strong post the Chinese new year. Management expects a minor impact from the recent reduction in import duties as domestic prices were at a discount to import parity. Iron ore mix and strategy. . All 9 mines in Karnataka are operationalized and are expected to cover 7 mn tons of the total requirement of ~20 mn tons at Vijaynagar. It expects to acquire the balance from merchant miners in the state. . The company has started ramping up its mines in Odisha and aims to produce iron ore at the rate of 2 mn tons per month. . Management shall aim to reduce its mining cost in the medium term by setting up a slurry pipeline to reduce the logistics costs. Management shall participate in any new iron ore mine auctions to be held in Karnataka. . Management expects domestic iron ore prices to remain stable after the recent cut in prices by NMDC. Global iron ore prices are expected to remain high in FY2022 supporting steel prices. International operations. JSTL remains hopeful on the turnaround of its international operations post the resumption of operations in 1HCY21. Management shall allocate its capital towards expansions in the domestic market. Management expects to become EBITDA positive from international operations in FY2022. Bhushan Power. The company remains committed to the Bhushan Power asset. The company awaits the final verdict of the Supreme Court. The management is confident that it shall have rights over the operational EBITDA of the company till the resolution is achieved. Project update and future expansion. . Dolvi shall get commissioned in March 2021; however, it shall take 5-6 months to stabilize the plant. Management did not provide a production run-rate for this plant for FY2022. . The company has options for Brownfield expansion at Vijaynagar (+1 mn tons) and at Dolvi (+5 mn tons). . Management continues to evaluate inorganic growth opportunities like RINL and NMDC. Target leverage. The group aims to maintain leverage under 3.75X. KOTAK INSTITUTIONAL EQUITIES RESEARCH 21 India Strategy LUPIN: FEBRUARY 17, 2021 Key takeaways US sales and inhalation portfolio: US sales will continue to see gradual uptick in sales on a quarterly basis as Lupin continues to gain market share in albuterol. While IMS weekly data in albuterol shows decline in prescriptions, as per company there has been no impact on offtake of Lupin’s albuterol. The company remains confident of achieving 20% market share in the overall albuterol market. Among other inhalation product, Lupin remains confident of launching Spiriva in FY2023 and also working on future generation products which will get commercialized after FY2024/25. Biosimilars and injectables: Lupin expects biosimilars and injectables to drive a major part of growth in the medium term. On Enbrel, market share gains in Europe have been slow while in the US, the company is set to file pegfilgrastim by 1HCY21. Ranibizumab is also in clinical trials and overall Lupin sees biosimilars to be a US$300mn business in the medium term (4-5 years). Similarly, the company is also working on various complex injectables products including peptides/depots as well as other injectables and this can also become a US$250 mn business over 4-5 years. India: Acute segment remains impacted which is hurting overall growth in the absence of Covid products, where some companies have benefitted. However, don’t see any structural changes impacting IPM growth. In-licensed portfolio now contributes to ~16- 18% of India sales and these products are growing at a fast pace. FDA warning letter/resolution: Somerset inspection was a disappointment but the outcome of Somerset does not reflect work done by the company across Indian plants. Goa/Indore have been remediated completely and just waiting for FDA to visit the facility. No clarity on timelines by the FDA as of now and don’t see desktop audit happening for such facilities. 22 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India MAHINDRA & MAHINDRA FINANCIAL SERVICES: FEBRUARY 17, 2021 Key takeaways Customer sentiment improving. Farm sentiment remains strong, infrastructure activities have picked up and freight utilization has improved. Customer sentiment continues to improve aiding growth and collection trends. Cash flows for the stressed segment of cab aggregators, hospitality, tourism, etc. have also picked up; it however remains lower than pre-Covid levels in select cases. While CV collections have improved, it remains weak for certain segments. Growth likely to inch up to pre-Covid levels in 4QFY21E. Management expects overall business volumes to inch up to pre-Covid levels in 4QFY21E. However, lower volumes in the stressed segments will continue to drag growth. As such pick-up in collections across these segments will reflect gradual improvement in volumes for these segments. The company has been cautious in select segments in 9MFY21. . The company has lost market share in PVs as the company had a high share of customers engaged in tourism, hospitality, cab aggregator, school buses, etc. where incremental sales volumes were tepid in 9MFY21. . MMFS has also witnessed marginal decline in market share in HCVs due to weakness in collections. . As a cautious stance, the company has been less aggressive in non-Mahindra segment leading to drop in market share in overall tractor segment in 9MFY21. Cost ratio to increase a bit from trough levels. Cost ratios are expected to increase from trough levels in 9MFY21. As business volumes pick up, cost ratios are expected to increase (higher variable incentives and discretionary expenses). Cost ratios are expected to however decline by 40 bps on steady state basis compared to pre-Covid levels due to structural changes (rent renegotiation, branch rationalization, etc.). Lower borrowings cost to aid NIM improvement. Incremental cost of funds is significantly lower than blended borrowing cost. Management however believes that borrowing cost has bottomed out. Replacement of high-cost old borrowings with fresh credit lines will however support NIM. Additionally, gradual decline in liquidity buffers will support NIM over the medium term. . The company might pass on a portion of the benefit of lower borrowing cost to its customers in select segments focused at driving growth (ex. used vehicles). Write-off policy tweaked from 3QFY21. MMFS has tweaked its write-off policy to quarterly write-offs from half-yearly write-off policy earlier (effective from 3QFY21). Additionally, the company has decided to incur additional provisions for write-offs in the P&L in the quarter in which the write-off is carried out. As such, coverage ratios are expected to remain at elevated levels. Focus on product diversification. The company is focused on expanding its product bouquet in the small-ticket retail financing business. This segment encompasses product classes like consumer durable and two-wheeler financing. Growth in the business will however put pressure on cost ratios due to their cost-intensive structure. MRHFL to expand into affordable housing. MRHFL will focus on expanding its outreach to the affordable housing segment (ticket size of around Rs1 mn) compared to core rural housing which is currently the business model (average ticket size of around Rs2-2 mn). Management expects asset quality to be superior in the affordable housing segment. KOTAK INSTITUTIONAL EQUITIES RESEARCH 23 India Strategy MINDSPACE: FEBRUARY 17, 2021 Key takeaways Top clients have started discussions with the company for incremental leasing which will push up occupancy. Long term planning from tenants will take some time due to a second wave of coronavirus coming back in the US and Europe. Incremental demand will see a gradual recovery with people coming back to work from offices with immediate demand for small space in the short-term since supply for new commercial assets has dried up during the pandemic. Capex spends for Mindspace REIT has been quite limited with under-construction assets of 2 mn sq. ft for an estimated cost of Rs3.5 bn. Future development of 3 mn sq. ft along with ROFO assets in Chennai and Hyderabad could provide the next leg of growth. All capex requirements will be funded via debt. Tenants are looking at a hybrid model currently where both WFH and office spaces will exist simultaneously with 60-70% of workforce continuing to work from office. With vaccination drive going on in the country, occupancy in offices is expected to go back to 20% in April, 40% in June and 60% in September. While there has been some push from tenants for renegotiation of rentals, the company has largely been able to achieve MTM gains across its assets since any relocation of the tenant would entail capex for fitouts. Early termination of rents will lead to lower NDCF than previously envisaged however lower savings in interest cost due to lower refinancing of debt would mitigate it. Supply for Grade A office spaces has been curbed to a very large extent and will lead to a jump in occupancy in next 2-3 years. Mindspace expects a few more quarters for leasing activity to get stable again and being able to achieve MTM rates for re-leasing. Mindspace saw its committed occupancy drop to 86.9% as of 3QFY21 (from 88.9% as of 2QFY21) due to an increase in early expiries to 1.6 mn sq. ft (from 0.7 mn sq. ft as of 2QFY21), in addition to area that came up for re-leasing of 1.8 mn sq. ft. Mindspace has been able to re-lease 1.1 mn sq. ft (out of 1.8 mn sq. ft) in the course of normal expiries and 0.3 mn sq. ft (out of 1.6 mn sq. ft) of area that had pre-maturely been terminated. Mindspace REIT was able to raise Rs2 bn of debt funding at a cost of 6.45%, and has been able to bring down the overall cost of debt to 7.3% (from 8.06% as of September 2020 and 9.22% as of March 2020). 24 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India MUTHOOT FINANCE: FEBRUARY 17, 2021 Key takeaways Liquidity to remain at elevated levels. The company continues to maintain high liquidity buffer to support growth potential over the next new quarters and sway through liquidity challenges, if any. AUM increased ~Rs60 bn qoq in 2QFY21 and ~Rs30 bn in 3QFY21; growth trajectory is expected to remain strong as increasing customer reach and buoyancy in gold prices sustain. However, the company will tweak liquidity buffers a bit though it will remain at elevated levels. As such, negative carry will drag NIM. Rating upgrade to support lower cost of borrowings. The company’s rating was upgraded to AA+ by CRISIL in February 2021. Management expects incremental borrowing cost to decline a bit going ahead due to improvement in credit rating. Competitive intensity has increased across different cycles. Select southern India- based banks focused on expanding gold loan business during weakness in corporate credit growth (ex. FY2008, FY2014-15, etc.). However, the potential for growing the gold industry AUM is immense due to low penetration levels. Increasing penetration, reducing information asymmetry, etc. will continue to drive growth. Muthoot is well-placed to capitalize on incremental growth in gold loan AUM. 15% AUM growth over medium term. Management sounded upbeat on 15% AUM growth in the medium term assuming less volatility in gold prices. Growth in gold loans will be a function of (1) increasing business expansion in newer geographies, (2) activating old customers and (3) increasing wallet share of pledged gold to overall gold holdings. LTV at disbursements is ~69-70%. Average LTV for December 2020 is 67%. Incremental disbursements have LTV of ~69-70%. However, increase in gold prices in 9MCY20 has led to lower average LTV on the book. Growth in Muthoot Home Finance to remain tepid in the near term. The company continues to maintain a cautious stance in growing the book at a swift pace. Asset quality has deteriorated a bit post the pandemic (pro-forma rise in gross stage 3 loans is a tad higher than most peers). As such, management expects growth to remain tepid in FY2022E and pickup from FY2023E. Belstar to report strong growth going ahead. The company is trying to revive the MFI business at a sharp pace as collection have fared well compared to initial expectations. Going slow in Muthoot Money. The company is a relatively new player in the vehicle financing space. Growth is expected to pause in FY2022E and pick up thereafter depending on collection trends post the pandemic. KOTAK INSTITUTIONAL EQUITIES RESEARCH 25 India Strategy PETRONET LNG: FEBRUARY 17, 2021 Key takeaways Dahej utilization is expected to sustain at higher levels. PLNG management ruled out any meaningful risks to the utilization of Dahej terminal in the medium term despite rising competition from upcoming new terminals and expectations of improving domestic gas supply. The company seeks comfort from (1) cost leadership in terms of brownfield expansion cost as well as recurring operating costs, (2) lower re-gasification tariffs versus new terminals, who are offering tolling capacity at ~10-20% premium, (3) superior overall pipeline connectivity and (4) more important, its long-term binding contracts and operational flexibility with multiple jetties and tanks. Improving outlook for Kochi terminal. The company indicated that the utilization of Kochi terminal is expected to increase to ~35% by 3QFY22. The progress on activities for Koottanad-Bangalore section of the pipeline has been encouraging—utilization at Kochi terminal may further increase to ~70% by FY2024 once this section gets commissioned. LNG procurement strategy. PLNG is unlikely to make an equity investment to lock in LNG volumes given surplus availability of long-term LNG sourcing contracts with attractive pricing in the global markets. The company is optimistic on procuring LNG contracts linked at a discount to JKM prices in the current market environment. Prudent capital allocation strategy. The management reaffirmed that any new capital project has to meet the internal threshold of 16% post-tax IRR for it to be approved by the Board. Investments in overseas LNG liquefaction (or regasification) capacity may remain an independent decision and will be evaluated objectively without any linkage to sourcing of LNG volumes. New opportunities. The company shared its optimism on new medium-term opportunities that are being encouraged by the government including (1) LNG-based transportation business—PLNG is facilitating setup of 12 LNG retail outlets within a year under its endeavor to expand presence across national highways over the next few years and (2) compressed biogas plants—PLNG will set up a few plants in the pilot stage and thereafter expand its presence at a larger scale seeking comfort from the government’s assurance on procurement of CBG. 26 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India PRESTIGE ESTATES: FEBRUARY 17, 2021 Key takeaways Prestige achieved highest ever quarterly sales in 3QFY21 mainly on account of launch of 7.11 mn sq. ft in the past nine months; collections were quite robust as well. Prestige has planned launches of 8-9 mn sq. ft in 1HFY22. Prestige added Jeejamata Nagar to its upcoming residential project in Mumbai. It is a slum rehabilitation project (50% share) with sales area of 2.5 mn sq. ft which would require outflow of Rs2.5 bn over the next 18 months apart from all construction expenses to be borne by Prestige. Within its commercial portfolio, Prestige will be adding three new projects (with 50% JV share) in Mumbai—BKC 1, BKC 2 and Turf View. While BKC 1 with total leasable area of 3.44 mn sq. ft will require no upfront payment, BKC II will require payments of Rs2-2.5 bn to be made over the next 12 months apart from Prestige bearing all the construction expenses. Prestige Turf View in Mahalakshmi, Mumbai will be a high rise tower with leasable area of 2.34 mn sq. ft and construction is expected to commence from 1QFY22. In order to maintain pre-sales momentum, Prestige has planned launches of 4-5 projects across cities—Prestige Smart City in Sarjapur, Bengaluru (7.8 mn sq. ft), Prestige Bougainville in Noida (2.09 mn sq. ft), Prestige Jasdan Classic in Mumbai (0.6 mn sq. ft), and Prestige Park Drive in Bengaluru (0.27 mn sq .ft). Deal with Blackstone for sale of annuity assets has only been delayed on account of delay in getting in approval from CCI and the company expects for it to be finalized by end- February 2021. The company will be looking to do a REIT for its commercial portfolio in case of fallout of this deal. For the ongoing commercial projects of 15 mn sq. ft, Rs8-9 bn has been spent and another Rs12-13bn would be required for completion by FY2023 which would give rental of Rs4 bn. The company plans to keep the residential business either debt free or minimal debt of Rs5 bn while overall debt for the company is expected to be 0.5X i.e. Rs30 bn. The company has a positive outlook on the prospects of commercial real estate in the Mumbai market with planned addition of 5.5 mn sq. ft of office space in BKC. With incremental supply reduced, the company expects to lease out the area at rentals upwards of Rs250 per sq. ft. Recovery in retail assets seems to be on track with 75% of the footfalls back. KOTAK INSTITUTIONAL EQUITIES RESEARCH 27 India Strategy SBI CARDS AND PAYMENT SERVICES: FEBRUARY 17, 2021 Key takeaways Huge run-way for growth as customers evolve. The total number of unique credit card holders in the country is ~30 mn and the share of active credit card users is about ~40% of that. This implies a huge runway for growth of credit cards in the country and an issuer need not compromise on portfolio quality to grow. Further, credit cards are among the most evolved products in the payments space because of their international acceptance, rewards and superior security characteristics. Credit card adoption is expected to increase as more transactions move to non-cash modes and users simultaneously graduate from debit cards to more evolved credit cards. Spends growth will be stronger after sectors like travel, hospitality and entertainment recover. Spends were sequentially higher in 3QFY21. New spends categories have emerged (like online education, pharmacy, healthcare and insurance payments). Further, there is also increased adoption of cards in the higher age groups for online transactions. Management expects that spends per card will normalize in 2HFY22E. Portfolio acquired through open market has a higher RoA. Delinquencies on portfolio acquired in open market have always been higher than banca channel. This is mainly because of the pre-approved nature of acquisitions on the banca channel. (As part of pre-approvals in Project Shikhar, the company shares a rule-based logic with its banca partner SBI. SBI uses this logic to filter borrowers in its portfolio, approaches them and directs those customers back to SBICARD only if they end up applying for a card.) Secondly, the company has the ability to perform an auto-sweep of the minimum dues from the customer’s SBI bank account. However, the RoA on open market acquisitions is higher because of higher spends and higher EMI/ revolver conversion. While the share of banca channel increased in the aftermath of Covid, the company has a medium-term target of maintaining equal share of banca and open market in incremental acquisitions. Underwriting open market credit largely based on credit bureau data. The company does not issue cards to customers without credit bureau history. Underwriting models usually look at 36 months of historical bureau data. This could be supplemented by additional pieces of information – like EPFO data, telecom data, debit card spend data – but these are not substitutes to bureau data. Even post card issuance, the company does quarterly evaluations based on bureau data pull. This can also include leveraging EPFO data to confirm employment status. Co-brand partnerships and tele-calling units are largest open market acquisition channels. These are followed by non-co-brand distribution (for example, at kiosks in malls or corporate parks). Digital sourcing (through the company’s website or partnerships with Bankbazaar, etc.) is the fourth channel for open market acquisition. The company plans to ramp up sourcing through this digital channel going forward. Yields will recover gradually. Yields were on the higher side during 1HFY21 mainly because the moratorium portfolio continued to accrue interest. Subsequently, however, yields declined because (1) part of the revolver book moved into RBI RE which has lower yields and (2) the share of transactors went up after the company invested significantly to spur spends. Going forward, the company expects yields to remain depressed for 1-2 quarters but recover after some transacting assets turn into interest bearing assets. The company has been able to maintain its margins through this period as its cost of funds has declined too. 28 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India Strong data analytics capabilities. Management indicated that the company has strong data analytic capabilities. In the aftermath of Covid, management was able to identify vulnerable segments of customers based on nature of income, employment sector, etc. Accordingly, the company had trimmed credit limits proactively for some cardholders even if they were non-delinquent. Scope for improving operating leverage. Management is of the view that there is a scope for operating leverage in the business. This would come mainly from costs related to infrastructure which won’t go up at the same rate as the portfolio/spends. Cost- income ratio was elevated in 3QFY21 due to higher collection costs, but is expected to decline as the company resolves RBI Re and other moratoria portfolio. KOTAK INSTITUTIONAL EQUITIES RESEARCH 29 India Strategy SBI LIFE INSURANCE: FEBRUARY 17, 2021 Key takeaways APE growth continues to recover. Traditional non-par savings, protection and non-par annuity continue to drive growth. ULIPs have broadly recovered to pre-Covid levels and exit run-rate should be similar to pre-Covid levels. . Individual protection growth (~35% yoy YTD) has remained strong and continues to garner strong customer interest. Credit life has revived to pre-Covid levels and the company expects overall growth in FY2021E. . Par was muted till November 2020 and gained traction from December 2020 onwards. The company continues to aggressively re-price the non-par annuity product on a regular basis. Substitution effect with other fixed income instrument continues to drive growth in this segment. Strong growth in this segment is margin accretive. Hedging instruments for annuity policies comfortable. The average age of customers who are purchasing annuity policies is 55-60 years of age. >95% of policies are ROP. The company has purchased long-term 35-40 year bonds (mostly G-Sec) where the coupon will be used to pay the annuity installments. Protection share to increase going ahead. The company expects the share of overall protection APE to increase to 18-19% from around 10% levels currently. Credit life will be a key contributor of growth. The company has tied up with new bancassurance partners, NBFCs, MFIs, etc. which has helped it to deliver better returns compared to most peers. Group protection continues to witness aggressive pricing pressure. It will however remain a key tool to acquire customer and cross-sell. Bancassurance business back to pre-Covid levels. The company intends to drive non- par products through the bancassurance channel. ULIPs are ~50-55%, par is 40-45% and par is ~5%. Bancassurance reported positive yoy growth in January 2021. . SBI continues to drive ~80% of individual protection. Individual protection from SBI is up ~5% YTD. This is expected to pick up due to strong volumes in 4QFY21E. Branch activation will inch up from trough levels (lower in 1HFY21 due to lockdown). . Credit life APE through SBI has increased ~8% yoy growth in 10MFY21. Attachment rates are ~43-44% for home loans through SBI. Management expects attachment rates to increase going ahead; the bank has 60% attachment rates in the past. . The company has tied up with new bancassurance partners (Yes Bank, UCO Bank, Indian Bank, etc.) and incremental growth will be strong (on a low base). Management expects the share of other (non-SBI bancassurance partners) bancassurance partner channel to increase to 9-10% of overall APE over time. Investment in agency business to remain high. The company will continue to invest in the agency channel. Social distancing norms led to lower volumes in 1HFY21 but it has picked up significantly from 3QFY21. As such, management expects strong growth in agency business in 4QFY21 leading to flat yoy growth in FY2021E. SBI YONO to aid growth in individual protection. Overall individual life insurance policies sourced through SBI YONO increased to 0.65 mn in 10MFY21 compared to 0.143 mn in FY2020. Overall sum assured increased to 4 mn in 10MFY21 from 2 mn in FY2020. Persistency ratios hold up well. 13th month persistency is higher than pre-Covid levels. Additionally, persistency ratios have witnessed improvement across most other buckets. 30 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India TATA COMMUNICATIONS: FEBRUARY 17, 2021 Key takeaways Changes in the organization. The CEO has brought a solution-oriented mindset in the organization as compared to the earlier focus on selling products. The offerings also include customized stitched-up solution of multiple products with defined SLAs. TCOM has strengthened its sales and solution team and added fresh talent for this purpose. Hybrid cloud environment augurs well. TCOM believes that large enterprises will migrate to a hybrid cloud environment, which will include (1) keeping the mission-critical applications and data in private cloud, (2) using application-specific cloud providers (like Office 365) and (3) migrate some of the less-critical tasks to a public cloud. Such architecture augurs well for TCOM as it gives them an opportunity to offer an integrated service to customers through its IZO Cloud offering. Sharper positioning for cloud services. TCOM has been competing with global players on cloud implementation. It has managed to launch and improve new offerings in the vertical, while partnering with leading public cloud providers. The company is able to participate in larger and more complex deals now. The cloud business is more India- focused for now but TCOM does have global capabilities in the segment. Growth profile going forward. TCOM expects its traditional data offerings to grow at 4-6% going forward, which will be a combination of double-digit growth in volumes along with moderate erosion in pricing. The growth trajectory of growth services and platforms businesses is expected to be much stronger in the medium term. Other updates. (1) Net debt is comfortable at 1.9X EBITDA. The company expects free cash flow generation to improve, which may drive further deleveraging. (2) Last-mile connectivity capex will be mostly done in India. (3) TCOM will seek approval to change the zoning of its land parcel in Delhi before monetizing it. (4) Demand for data centers is growing strongly and TCOM will be both a direct and indirect beneficiary (through its 26% stake in STT Global Data Centers India). (5) TCOM’s right-to-win is low in international geographies where cross-border connectivity is not required. KOTAK INSTITUTIONAL EQUITIES RESEARCH 31 India Strategy TATA POWER: FEBRUARY 17, 2021 Key takeaways Shareholder approval has been received for merger of Coastal Gujarat Power Ltd and Tata Power Solar with the standalone entity Odisha will have a regulated equity of Rs10 bn (TPWR owns 51%), but has an incremental capex plan of Rs55 bn towards installation of meters, feeders and improving the overall system that will increase the regulated equity by another Rs15 bn In the case of Odisha, if you miss the targeted AT&C losses you are in essence purchasing more power that will not be compensated. CESU had AT&C losses of 32% pre-Covid that spiked up to 40% during Covid related lock-downs but has averaged at 34% YTD. In December 2020 and January 2021 AT&C has come down to 25% levels. Odisha has arrears of Rs105 bn—there is an incentive of 10% for recovery of live consumers, and 20% for disconnected consumers. Anyone with a retail space is competition in the EV charging business; Tata Power has the advantage of capitalizing on the large retail landscape of the Tata Group through its presence in retail as well as consumer facing businesses. As per managements view, coal prices will remain soft in the longer term, and they could look to exit the coal business at an opportune time. Capital employed in thermal assets is currently 53%, they are looking to bring that down to 35% while PAT contribution from thermal business would be brought below 20% in about five years’ time. 32 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India TECH MAHINDRA: FEBRUARY 17, 2021 Key takeaways Telefonica deal. Tech Mahindra indicated that the recently announced engagement with Telefonica is a large deal to be executed over a period of five years. The company will help Telefonica consolidate and modernize BSS applications stack for their retail business. The modernization aspect of the deal is similar to the AT&T mega deal. The deal does not involve rebadging. TechM will be replacing other vendors. Transition phase for the deal is 2-3 months. Deal ramp up will start sometime during the next month. TechM indicated that the margin profile of the deal will be lower initially but move closer to portfolio margins over the lifetime of the deal. The margin profile evolution will be better compared to the US$1 bn AT&T deal. Earlier announced engagement with Telefonica deal was for network services business and has a different scope compared to the current deal. The company indicated that when there is a network upgrade to 5G TechM can work on parallel programs for infusing 5G in applications. Deal closures. TechM indicated that it expects high-single growth for telecom in FY2022 based on current visibility. Underlying assumption is certain level of deal closures that will ramp up to revenues in FY2022. Telefonica deal was one of them. TechM indicated that if there is higher than expected success in deal closures, then the growth assumption for telecom can change. Enterprise deal TCV. TechM indicated that current level of deal TCV can continue in enterprise business with upside potential that depends on deal conversions. Vertical-wise outlook. (1) Manufacturing- Spending in automotive R&D has not recovered fully for TechM’s client base but can recover in 1QFY22. Spending is weak in aerospace segment. TechM expects growth in manufacturing to be below company average. (2) Tech & media- media business continues to be weak but it accounts for less than 1% of revenues. Technology business is strong and will grow above company average. (3) BFSI- TechM is confident of above average growth. The company is getting invited to more large deals after the mega deal engagement with Jackson National Life Insurance. Overall TechM expects 8-10% growth for the enterprise segment in FY2022. 4QFY21 growth. TechM indicated that revenue growth in 4QFY21 will be broad based and not skewed towards any vertical. 5G outlook. TechM indicated that activity levels in 5G are picking up. Discussions with clients of 5G have increased. 5G deal pipeline has increased on yoy comparison. There have been conversions for smaller sized deals in pockets. However TechM indicated that it might take a few quarters before 5G related spending picks up in a big way. Greenfield operators such as Rakuten in Japan and Dish in the US have embraced open RAN for next gen networks. TechM believes spending can open up in a big way once some of the big brownfield operators such as AT&T, Verizon and BT embrace open RAN architecture and build 5G networks. Margin levers. (1) Margin profile of AT&T and insurance mega deals is increasing every quarter and can continue to be a margin lever. (2) Focus on efficiencies which include higher offshoring, automation and pyramid will help partially offset impact of wage hikes and normalization of costs as employees return to offices. (3) Portfolio synergies and restructuring and (4) Operating leverage from growth will also help. TechM reiterated confidence of achieving 15% EBIT margin in FY2022. The company does not expect any billion dollar deals to close in the near term; hence there is no risk to margins from a mega deal ramp up perspective. KOTAK INSTITUTIONAL EQUITIES RESEARCH 33 India Strategy More offshore. TechM noted that clients have realized in the past nine months that more work can be done offshore than previously thought possible. New deals/ projects that are being proposed and accepted have ~90% offshore mix compared to ~70% earlier. Offshore mix will change gradually over time due to higher offshore mix in incremental projects. TechM is cognizant of ensuring that realization levels do not decline due to higher offshore. The company indicated that some of the benefit from higher offshoring will have to be passed on to the client. Pricing in digital. TechM indicated that it is difficult to ask for a pricing increase for digital skills for the same resource. But if there is an addition of a new resource with digital skills in a project then TechM can get higher realization. Portfolio companies. Most of the acquisitions made in recent quarters have been onsite centric. Cost synergies have been achieved by moving the back office of acquired entities offshore. TechM is focused on getting revenue synergies through cross sell of offerings. Leadership team of acquired entities has been given larger roles in the organization in certain cases to help achieve synergies. For example CEO of Born Group heads TechM’s CMO offerings. HCI Group’s CEO heads TechM’s healthcare practice. TechM expects to do a restructuring exercise in a couple of acquired entities which includes Pininfarina which will help improve margin profile. The company is wary of acquiring broadly spread businesses such as LCC. Hiring. TechM indicated that there is scope for pyramid correction as the company ramps up fresher hiring. TechM does not foresee challenge in talent supply chain. The company has been comfortable hiring a quarter ahead of demand in the past and will continue similar practice. Attrition. TechM expects attrition rate to increase from current levels. However the company believes attrition will not increase in a dramatic fashion to impede on margin expectations. CFO transition. TechM indicated that hiring of Milind Kulkarni as CFO will help in a smooth transition. TechM does not expect any impact from CFO transition. Capital allocation. TechM indicated that the current framework policy on capital allocation will continue. Dividend route is preferred over buyback as means of cash return to shareholders. Cloud adoption opportunity. TechM indicated that there is significant opportunity in helping telecos shift applications and core network to the cloud. The mega deal with AT&T involved moving and modernizing OSS to Azure cloud. AT&T’s cloud migration is one of the largest cloud migrations in the vertical. Utilization. Utilization levels have peaked in 3QFY21. The company expects to operate in 84-85% range that is sustainable. Fresher hiring has picked pace. Lateral hiring has still not picked up to the same extent. WFH. TechM indicated that there is no rush to get back to work from office. Productivity has increased due to WFH operations. TechM indicated that the company might resort to 25-30% work from home policy post Covid normalcy with employees coming to office on rotational basis. TechM believes that connecting with people on a regular basis is a necessary aspect of the business. A benefit of WFH is that location may not be as big as a constraint as it was earlier in acquisition or retention of employees. Higher WFH allowance can also increase participation of women in the workforce. 34 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India TITAN COMPANY: FEBRUARY 17, 2021 Key takeaways Smaller players facing credit challenges. A few of the smaller jewelry players are seeing some stress in terms of bank limits, which has not increased for them commensurate to the gold price increase. Nevertheless, several players have done well in 3QFY21. Recent demand trends. Geographically, South saw the strongest growth, led by the state of Tamil Nadu. The West market (mainly Mumbai and Pune) was impacted the most. Delhi too was impacted but has largely bounced back. Working capital improvement. TTAN significantly improved cash generation in FY2021. The management indicated that the increase in share of gold exchange program led to an increase in working capital. The sale of plain gold (bullions) during Covid eased working capital. The company would continue to sell off plain gold (procured through the gold exchange program) every quarter for efficient working capital management. Growth in wedding jewelry augurs well for TTAN. Over the past few years, TTAN has shifted its focus to the increasing share of wedding jewelry over studded jewelry. Wedding jewelry demand tends to be more inelastic to the gold price movement. Margins in the wedding jewelry are better than plain gold jewelry. The company now caters to 20+ communities. It is trying to gain market share in the segment. Store expansion plans. In the jewelry business, TTAN plans to add about 35 stores to its footprint in FY2022E. The company will also expand strongly in the eyewear category while the watches business will see a calibrated approach. TTAN will not be expanding its footprint for Taneria for now. It will monitor how the profitability of the business shapes up. Perspective on what TTAN does differently. TTAN believes that the professional management approach followed by the company differentiates it from other jewelers and this is the key reason for success. The company lays key importance on sustainability and believes that every stakeholder in the chain is important and should not be ignored. Eyewear business. The eyewear segment has become profitable for TTAN on the back of several initiatives. The company has done a lot of work on the product-side (including patented offerings) along with sustainable cost optimization measures. Gold exchange program. Over the past 3-4 years, the gold exchange program has become a large part of the customer acquisition strategy for TTAN; its share had increased to 45% last year from 20% five years ago. TTAN would continue to push the gold exchange program. Margin improvement levers. TTAN enjoys multiple margin improvement levers including (1) topline growth providing operating leverage benefit, (2) change in product mix, including higher sale of wedding jewelry and studded jewelry. Other key points. (1) TTAN typically has 40-50% of new customers in a normal year. (2) The average ticket size has increased to above Rs100,000 from Rs65,000 a few years ago. This metric can come off slightly if people buy more daily-wear jewelry. (3) Recent measure of reduction in custom duty will lead to a one-time loss for TTAN. KOTAK INSTITUTIONAL EQUITIES RESEARCH 35 India Strategy TORRENT PHARMA: FEBRUARY 17, 2021 Key takeaways IPM volume growth: Market’s concern on very low volume growth in Indian Pharma market is a bit over the top. While TRP acknowledged lower volume growth, the company attributed it to (1) improving innovation with many products requiring consumption of 1 pill instead of 2-3, (2) the lack of new introductions in the market pre- FY2019 as NIs get classified in volume growth after two years and (3) multiple companies rationalizing small sized tail brands. There could be some impact from trade generics as well but TRP does not think it is meaningful. Price led growth in India: While AIOCD shows large part of TRP’s domestic growth being driven by price increase, some of it is also due to a change in the mix as the company as well as the industry continues to rationalize tail brands. Moreover, TRP’s price hike has largely been to catch up with competitors rather than increase the gap. For instance, Chymoral which is priced 15% premium to competitors had a similar pricing premium even five years ago. India restructuring exercise: The restructuring was mainly geographical in nature rather than cutting down of number of products marketed. The company realized that it does not need so many MRs across few smaller cities and don’t see this impacting sales. India growth drivers: Top 25 brands continue to grow well and are witnessing market share gains. Apart from this, focusing aggressively on launching products in diabetes space. Products such as Vilda and Remoglizlofin have seen strong initial traction and can easily be >Rs350-400 mn sized brands in two years. Other geographies: US will remain impacted as there is no visibility on when FDA will come to inspect the units even though TRP is ready for inspection and has remediated everything. So, US growth will remain muted with base erosion getting offset by launches from Levittown. On CRAMS piece, growth coming from CMO opportunities of non- Germany Europe market while India Novo fill finish business remains largely stable. 36 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India VARUN BEVERAGES: FEBRUARY 17, 2021 Key takeaways Demand environment. With pick-up in overall economic activity, VBL managed to restrict volume decline to 13% in CY2020 despite significant volume lost during peak summer months. With abating Covid-led disruption and improved mobility, sequential trends have been encouraging. VBL expects (1) low double- digit organic volume growth in India business in near-to-medium term aided by share gains in South and West, and (2) at least 8-10% organic growth in the overseas business. Favorable margin, return ratio outlook. VBL highlighted comfort on gross margin with appropriate commodity covers (Crude-linked, PET chips), along with sourcing efficiencies (tie-ups for sugar imports). The company highlighted levers for profitability improvement in Zimbabwe through backward integration (added injection molds). All business segments have broadly similar EBITDA margin, despite differences at gross margin level. Water portfolio has higher gross margin and Juices have lower gross margin. Management expects overall ROCE to inch up to 25-26% in the medium term – Nepal, Zimbabwe and Zambia are already tracking 25%+ ROCE. New product launches. VBL noted good market potential for the recently launched Mountain Dew Ice (lemon based non-synthetic fruit drink; priced at Rs30 for 600 ml pack) in India. However, it will be a slow built-up in line with capacity/brand investments. Given meaningful differences in taste preferences across different states, VBL plans to focus on markets which see good initial pick- up. Management highlighted resonance with consumer’s taste preferences as the core lever for a product’s success. The company also re-launched its dairy beverage portfolio recently. New territories. VBL doesn’t expect acquisition of any new markets over the next six months. The company laid out the critical factors for acquisition of a new market – (1) low hanging fruits on improvement in execution driving market share gains, (2) likelihood of business turnaround in the geography, and (3) financial flexibility and B/S strength. Following this playbook, management recounted volume share gains in Nepal to 44% currently (vs 6% in 1999) and from 6% to 13% in Morocco. In the domestic market, VBL has gained volume share over the past year. Key focus areas in South & West markets include product availability, distribution expansion, deployment of visi-coolers and activations. Others. (1) tax rate expected at 24-25% going forward, (2) excess cash to be used for debt repayment in CY2021E, (3) capex is expected at ~50% of depreciation, (4) deployment of ~60k visi-coolers is targeted for CY2021E. KOTAK INSTITUTIONAL EQUITIES RESEARCH 37 SELL Schaeffler India (SCHFL) https://ultraviewer.et/en/own Automobiles & Components FEBRUARY 17, 2021 load.html RESULT Sector view: Cautious Automotive segment outperforms. SCHFL reported 4QCY20 EBITDA of Rs2.3 bn, CMP (`): 5,130 21% above our estimates aided by strong recovery in the automotive segment and Fair Value (`): 4,050 cost-cutting initiatives. Long-term growth prospects for the company remain strong led BSE-30: 51,704 by the pipeline of new products, strong export growth potential and increase in content per vehicle due to stricter emission norms; however, expensive valuations remain a concern. Maintain SELL with revised FV of Rs4,050 (from Rs3,500 earlier). Schaeffler India Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 5,012/4,050/SELL EPS (Rs) 93.1 149.1 179.2 52-week range (Rs) (high-low) 5,148-3,025 EPS growth (%) (20.9) 60.1 20.2 Mcap (bn) (Rs/US$) 157/2.2 P/E (X) 53.8 33.6 28.0 ADTV-3M (mn) (Rs/US$) 89/1 P/B (X) 5.0 4.5 4.0 Shareholding pattern (%) EV/EBITDA (X) 26.9 18.2 14.9 Promoters 74.1 RoE (%) 9.5 14.1 15.1 FPIs/MFs/BFIs 4.8/12.3/2.3 Div. yield (%) 0.1 0.2 0.2 Price performance (%) 1M 3M 12M Sales (Rs bn) 38 47 54 Absolute 10.9 29.9 11.4 EBITDA (Rs bn) 5 8 9 Rel. to BSE-30 4.4 8.8 (11.8) Net profits (Rs bn) 3 5 6 4QCY20 EBITDA 21% above estimates Schaeffler India reported 4QCY20 EBITDA Rs2.3 bn (+56% yoy), 21% above our estimates due to (1) better-than-expected revenue growth and (2) strong margin performance. Revenues increased by 23% yoy (11% above estimates), led by (1) double-digit growth in the automotive segment (including aftermarket segment), (2) sequential recovery in the industrial segment (including aftermarket segment) and the export segment and (3) new product introductions. EBITDA margin came in at 18% (+380 bps yoy, +110 bps yoy), 150 bps above our estimates due to (1) a richer product mix (higher mix of automotive segment), (2) better-than-expected gross margins and (3) operating leverage benefits. Gross margin increased by 90 bps qoq possibly due to (1) a richer product mix (higher mix of automotive segment) and (2) benefit of low-cost inventory available during the start of the quarter. The company expects gross margins to come under pressure due to sharp increase in steel prices in the coming quarters. The company reported net profit of Rs1.4 bn in 4QCY20 (+68% yoy), 18% above our estimates due to outperformance at EBITDA level. Expect 16% revenue CAGR over CY2020-23E due to strong recovery in select segments We expect SCHFL to deliver 16% revenue CAGR over CY2020-23E led by (1) 12-18% CAGR in industrial and auto aftermarket segments aided by market share gains due to focus on new product introductions through localization efforts, (2) strong growth in railways and exports segments and (3) increase in bearing content amid stricter regulations in the automotive industry. Increase our CY2021-22E EPS estimates by 7-8%; maintain SELL on expensive valuations Hitesh Goel We have increased our CY2021-22E EPS estimates by 7-8% due to (1) 2% increase in revenues [email protected] estimates as recovery in industrial and automotive segments has been faster than our expectations and (2) 70-110 bps increase in our EBITDA margin assumptions due to operating leverage benefits and cost-cutting initiatives. Maintain SELL rating on expensive valuations; FV revised to Rs4,050 (from Rs3,500 earlier) based on 22X March 2023E EPS (from 22X September 2022E EPS earlier). The stock is currently trading at 28.7X CY2022E EPS estimates. [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. Schaeffler India Automobiles & Components Key takeaways from the conference call Segmental details on revenue performance in 4QCY20. Revenues increased by 23% yoy (KIE: +11% yoy), led by (1) double-digit growth in automotive segment (including aftermarket segment) and (2) marginal growth in industrial segment (including aftermarket segment) and export segment. The company highlighted that they have started exports to South East Asia and Australia; however, export growth was negatively impacted due to slowdown in Europe amid the second wave of Covid. The company expects automotive aftermarket performance to be quite strong given a slew of new product launches on the clutch segment in CY2020. In terms of mix, automotive mix stood at 48% (out of which 9-10% is automotive replacement), industrial mix stood at 42% (out of which 14-15% is industrial segment) and export mix stood at 10% as of CY2020. The company expects wind energy segment (India emerging as the export hub for global players like Siemens, GE, ZF) and railway segment (due to increase in content owing to shift towards LHB coaches for passenger trains and DFC for goods train) to continue to do well over the medium term. EBITDA margin improvement aided by better product mix and operating leverage. 4QCY20 EBITDA margin improved to 18% (+380 bps yoy, +110 bps qoq), 150 bps above our estimates due (1) better product mix (higher mix of automotive segment), (2) operating leverage benefits, (3) benefit of low-cost inventory at the beginning of quarter and (4) cost-cutting initiatives. The company highlighted that due to steep steel prices, they expect gross margins to get negatively impacted from 1QCY22E onwards. The company has taken price hikes in replacement segment to partly offset the impact of the same. Also, the company highlighted that EBITDA margin of 18% is not sustainable as they expect some of the cost to come back once the demand recovers. The company also highlighted that localization content has improved to 75.5% at the end of CY2020. Content to improve in automotive segment. The company highlighted that diesel mix in the PV segment has declined to <20-25% from 34% in CY2018. However, the company expects to increase its content per vehicle by 30% due to BS-VI norm change led by introduction of new products for clutches, damping system and engine parts. The company had a content per vehicle of EUR32 (before BS-VI transition) and the company expects to reach content per vehicle of EUR50-55 over the medium term (currently the content per vehicle is around EUR37). The company also expects diesel content per vehicle to inch up due to CAFÉ norms (higher engine part content in order to improve fuel efficiency). New order wins. The company has introduced Quick Center in India, which will provide end-to-end solution to make customized Linear Guides for machining tooling customers. Previously, the company used to import the same for Germany and lead time was higher because of it. In automotive segment, the company has been nominated for supplying DCT Dampers for one of the large automakers. Also, the company won businesses from the major automakers by offering complete basket of products for their powertrain platforms. Schaeffler TruPower range of lubricants continued to gain traction in the market. Other key points. (1) 79% of the revenues came from mobility sector and 21% of the revenues came from non-mobility sector in CY2020, (2) the company will continue to invest Rs3-3.5 bn annually over the next few years on account of capacity expansion (70- 75% of the total capex) and localization of traded goods as well as modernization of plants (25-30% of the total capex) and (3) the company has incurred capex of Rs2.4 bn in CY2020 versus Rs3.2 bn in CY2021E KOTAK INSTITUTIONAL EQUITIES RESEARCH 39 Automobiles & Components Schaeffler India Exhibit 1: 4QCY20 EBITDA was 21% above estimates led by better-than-expected revenue growth and EBITDA margin Interim results (pro forma), calendar year-ends, 2019-21E (Rs mn, %) change (%) 4QCY20 4QCY20E 4QCY19 3QCY20 4QCY20E 4QCY19 3QCY20 CY2020 CY2019 yoy (%) CY2021E CY2020 yoy (%) Net sales 12,738 11,505 10,365 11,207 10.7 22.9 13.7 37,618 43,606 (13.7) 47,409 37,618 26.0 Cost of materials consumed (4,949) (3,782) (4,058) Purchase of stock-in-trade (3,292) (1,395) (1,823) Changes in inventories 324 (1,449) (1,191) Net raw material cost (7,917) (7,363) (6,626) (7,072) 7.5 19.5 12.0 (23,331) (27,496) (15.1) (29,438) (23,331) 26.2 Employee expenses (948) (830) (803) (824) 14.3 18.1 15.2 (3,536) (3,452) (3,960) (3,536) Other expenses (1,582) (1,415) (1,466) (1,416) 11.8 7.9 11.7 (5,390) (6,323) (6,232) (5,390) Total expenses (10,447) (9,608) (8,895) (9,311) 8.7 17.4 12.2 (32,257) (37,270) (13.5) (39,630) (32,257) 22.9 EBITDA 2,291 1,897 1,470 1,896 20.8 55.9 20.8 5,361 6,336 (15.4) 7,779 5,361 45.1 Depreciation (511) (487) (425) (486) 4.9 20.3 5.2 (1,940) (1,587) (2,319) (1,940) EBIT 1,780 1,410 1,045 1,410 26.3 70.3 26.2 3,422 4,749 (28.0) 5,460 3,422 59.6 Other income 155 200 207 126 (22.5) (24.9) 22.9 603 632 803 603 Interest expense (25) (10) (11) (9) (52) (35) — (52) Profit before tax 1,910 1,600 1,241 1,527 19.4 53.9 25.1 3,972 5,346 (25.7) 6,263 3,972 57.7 Extraordinary income/(losses) — — — — — (3) — — Tax expense (494) (403) (396) (393) (1,062) (1,666) (1,603) (1,062) Profit after tax 1,416 1,197 846 1,135 18.4 67.5 24.8 2,910 3,676 (20.9) 4,660 2,910 60.1 Adjusted net profit 1,416 1,197 846 1,135 18.4 67.5 24.8 2,910 3,679 (20.9) 4,660 2,910 60.1 No. of shares 31.3 31.3 31.3 31.3 31.3 31.3 31.3 31.3 Adjusted EPS (Rs/share) 45.3 38.3 27.0 36.3 93.1 117.7 (20.9) 149.1 93.1 60.1 Tax rate (%) 25.9 25.2 31.9 25.7 26.7 31.2 25.6 26.7 As % of net revenues Raw material 62.2 64.0 63.9 63.1 62.0 63.1 62.1 62.0 Staff costs 7.4 7.2 7.8 7.3 9.4 7.9 8.4 9.4 Other expenses 12.4 12.3 14.1 12.6 14.3 14.5 13.1 14.3 EBITDA margin 18.0 16.5 14.2 16.9 14.3 14.5 16.4 14.3 EBIT margin 14.0 12.3 10.1 12.6 9.1 10.9 11.5 9.1 Source: Company, Kotak Institutional Equities estimates Exhibit 2: We have increased our CY2021-22E EPS estimates by 7-8% due to higher revenue and EBITDA margin assumptions Earnings revision table of Schaeffler India, calendar year-ends, 2020-22E (Rs mn, %) New estimates Old estimates % change 2020 2021E 2022E 2021E 2022E 2021E 2022E Net sales 37,618 47,409 53,687 46,396 52,566 2.2 2.1 EBITDA 5,361 7,779 9,222 7,290 8,488 6.7 8.6 Margin (%) 14.3 16.4 17.2 15.7 16.1 Net Profit 2,910 4,660 5,603 4,346 5,192 7.2 7.9 Standalone EPS 93.1 149.1 179.2 139.0 166.1 7.2 7.9 Source: Company, Kotak Institutional Equities estimates 40 KOTAK INSTITUTIONAL EQUITIES RESEARCH Schaeffler India Automobiles & Components Exhibit 3: We expect revenues to grow at 16% over CY2020-23E Schaeffler India segment-wise revenue break-up, calendar year-ends, 2018-23E (Rs mn, %) 2020-23E 2018 2019 2020 2021E 2022E 2023E CAGR (%) Revenues (Rs mn) Cars and trucks 17,087 14,815 13,334 17,334 19,414 20,385 15.2 Two-wheelers/Three-wheelers 4,409 4,870 4,383 5,479 6,136 6,627 14.8 Railways 2,833 3,006 1,954 2,540 3,048 3,505 21.5 Off-highway 1,355 949 806 1,008 1,109 1,175 13.4 Other industrial OEMs 3,848 4,618 3,694 4,802 5,379 5,809 16.3 Total revenues from supplies to OEMs 29,532 28,257 24,171 31,163 35,085 37,501 15.8 Automotive replacement 4,497 3,865 3,672 4,406 5,287 6,080 18.3 Industrial replacement 6,295 6,098 5,488 6,311 6,942 7,637 11.6 Total revenues from replacement market 10,792 9,963 9,160 10,717 12,230 13,717 14.4 Exports 4,642 4,723 3,785 4,920 5,658 6,507 19.8 Other operating income (includes service income) 649 664 503 609 714 840 18.6 Total revenues 45,615 43,606 37,618 47,409 53,687 58,565 15.9 Revenue mix (%) Cars and trucks 37.5 34.0 35.4 36.6 36.2 34.8 Two-wheelers/Three-wheelers 9.7 11.2 11.7 11.6 11.4 11.3 Railways 6.2 6.9 5.2 5.4 5.7 6.0 Off-highway 3.0 2.2 2.1 2.1 2.1 2.0 Other industrial OEMs 8.4 10.6 9.8 10.1 10.0 9.9 Total revenues from supplies to OEMs 64.7 64.8 64.3 65.7 65.4 64.0 Automotive replacement 9.9 8.9 9.8 9.3 9.8 10.4 Industrial replacement 13.8 14.0 14.6 13.3 12.9 13.0 Total revenues from replacement market 23.7 22.8 24.3 22.6 22.8 23.4 Exports 10.2 10.8 10.1 10.4 10.5 11.1 Other operating income (includes service income) 1.4 1.5 1.3 1.3 1.3 1.4 Total revenues 100.0 100.0 100.0 100.0 100.0 100.0 Source: Company, Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 41 Automobiles & Components Schaeffler India Exhibit 4: We expect Schaeffler India to deliver 29% EPS CAGR over CY2020-23E Schaeffler India (proforma financials), financial summary, Calendar year-ends, 2011-23E (Rs mn) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E Profit model (Rs mn) Net sales 13,086 14,467 14,024 16,322 17,244 17,963 39,331 45,615 43,606 37,618 47,409 53,687 58,565 EBITDA 2,540 2,204 1,836 2,417 3,053 2,969 6,821 7,396 6,336 5,361 7,779 9,222 10,194 Other income 309 446 459 410 562 683 596 908 632 603 803 1,003 1,253 Interest (13) (13) (8) (10) (21) (18) (102) (70) (35) (52) — — — Depreciation (226) (303) (433) (494) (655) (641) (1,382) (1,485) (1,587) (1,940) (2,319) (2,694) (3,100) Extraordinary income/(losses) — — — — — — (45) (432) (3) — — — — Profit before tax 2,610 2,335 1,854 2,324 2,938 2,993 5,888 6,317 5,343 3,972 6,263 7,531 8,346 Tax (850) (743) (636) (795) (963) (1,043) (2,003) (2,119) (1,666) (1,062) (1,603) (1,928) (2,137) Reported net profit 1,760 1,592 1,218 1,529 1,975 1,951 3,885 4,198 3,676 2,910 4,660 5,603 6,210 Adj Net profit 1,760 1,592 1,218 1,529 1,975 1,951 3,917 4,500 3,679 2,910 4,660 5,603 6,210 Earnings per share (Rs) 105.9 95.8 73.3 92.0 118.8 117.4 125.3 144.0 117.7 93.1 149.1 179.2 198.6 Balance sheet (Rs mn) Equity 7,300 8,795 9,896 11,075 12,892 14,752 23,252 27,061 29,622 31,403 34,898 39,100 43,757 Deferred tax liability 32 64 174 154 87 — — — — — — — — Other long-term liabilities 209 245 221 344 235 271 456 394 455 674 674 674 674 Total Borrowings — — — — — — 694 577 — — — — — Current liabilities 2,427 2,333 3,042 2,769 3,339 3,515 7,402 9,642 6,376 9,437 10,441 11,738 12,760 Total liabilities 9,968 11,437 13,333 14,342 16,554 18,537 31,804 37,674 36,452 41,514 46,013 51,512 57,191 Net fixed assets 2,352 3,927 4,123 3,904 3,976 4,103 7,977 8,924 10,608 11,663 12,343 12,649 13,049 Investments — 44 44 44 — — — — — — — — — Other long-term assets 1,202 759 1,770 999 1,283 1,440 1,319 2,112 3,197 2,727 2,727 2,727 2,727 Cash 2,334 1,948 2,377 3,295 4,704 6,406 8,938 8,476 8,354 12,459 15,382 19,321 23,118 Other current assets 4,081 4,759 5,020 6,101 6,591 6,588 13,570 18,161 14,293 14,666 15,560 16,815 18,297 Total assets 9,968 11,437 13,333 14,342 16,554 18,537 31,804 37,674 36,452 41,514 46,013 51,512 57,191 Free cash flow (Rs mn) Operating cash flow excl. working capital 1,727 2,091 1,546 1,910 1,897 2,049 4,874 4,910 4,866 3,977 6,176 7,294 8,057 Working capital changes (901) (725) 75 (732) (90) (121) (864) (2,528) 231 2,515 109 43 (460) Capital expenditure (1,471) (1,407) (667) (401) (575) (930) (1,344) (2,439) (3,199) (2,377) (3,000) (3,000) (3,500) Free cash flow (658) (54) 946 767 1,210 980 2,564 (127) 1,864 4,063 3,285 4,337 4,097 Ratios EBITDA margin (%) 19.4 15.2 13.1 14.8 17.7 16.5 17.3 16.2 14.5 14.3 16.4 17.2 17.4 PAT margin (%) 13.4 11.0 8.7 9.4 11.5 10.9 10.0 9.9 8.4 7.7 9.8 10.4 10.6 Net debt/equity (X) (0.3) (0.2) (0.2) (0.3) (0.4) (0.4) (0.4) (0.3) (0.3) (0.4) (0.4) (0.5) (0.5) Book value (Rs/share) 439 529 595 666 776 888 744 866 948 1,005 1,116 1,251 2,633 RoAE (%) 27.0 19.8 13.0 14.6 16.5 14.1 20.6 17.9 13.0 9.5 14.1 15.1 15.0 RoACE (%) 39.9 21.9 12.8 16.5 20.2 18.4 30.7 23.0 16.2 12.5 21.1 24.7 26.1 Source: Company, Kotak Institutional Equities estimates 42 KOTAK INSTITUTIONAL EQUITIES RESEARCH REDUCE Sunteck Realty (SRIN) https://ultraviewer.et/en/own Real Estate FEBRUARY 18, 2021 load.html RESULT, CHANGE IN RECO. Sector view: Attractive In the price. Sunteck reported strong sales for the second consecutive quarter with CMP (`): 359 sales reaching Rs3.5 bn in 3QFY21 (Rs2 bn in 2QFY21) augmented by both reduction in Fair Value (`): 345 stamp duty as well as launch of second tower in 4th Avenue, ODC. Collection improved BSE-30: 51,704 to its best ever value of Rs2.5 bn (+54% yoy) providing for enhanced construction spend of Rs1 bn. At CMP, Sunteck Realty appears fully priced, including credit for the new joint development agreements in Vasai and Vasind that contribute bulk of the revision in our FV to Rs345/share. Lower rating to REDUCE (from BUY). Sunteck Realty Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 359/345/REDUCE EPS (Rs) 7.8 19.3 15.3 52-week range (Rs) (high-low) 410-145 EPS growth (%) 9.2 147.8 (20.7) Mcap (bn) (Rs/US$) 53/0.8 P/E (X) 46.0 18.6 23.4 ADTV-3M (mn) (Rs/US$) 221/3 P/B (X) 1.7 1.5 1.4 Shareholding pattern (%) EV/EBITDA (X) 35.0 14.5 17.9 Promoters 67.2 RoE (%) 3.7 8.6 6.4 FPIs/MFs/BFIs 23.6/3.4/0.2 Div. yield (%) 0.3 0.3 0.3 Price performance (%) 1M 3M 12M Sales (Rs bn) 7 12 10 Absolute (3.7) 34.4 (7.6) EBITDA (Rs bn) 2 4 4 Rel. to BSE-30 (8.6) 14.3 (26.6) Net profits (Rs bn) 1 3 2 ODC and Naigaon continue to remain mainstay for sales; no sales in BKC in past one year Sunteck recognized revenues of Rs2 bn, EBITDA of Rs449 mn and PAT of Rs212 mn, with an EBITDA margin of 21.9% in 3QFY21. Sunteck adopted project-completion method in few of its projects from erstwhile percentage completion method from 2QFY21, which makes reported earnings not comparable with preceding quarters. Sunteck reported an operationally strong 3QFY21 with sales improving to Rs3.5 bn (+7% yoy, +74% qoq) on account of launch of second tower at 4th Avenue, Goregoan (ODC) which contributed to sales of Rs1.2 bn and improved traction in certain projects—Gilbird Hill, Andheri West and 1st Avenue, Goregaon (ODC). Sales mix for the quarter was—ODC (54%), Naigaon (18%) and others (28%). Collections improved 79% qoq to its best ever quarterly value of Rs2.5 bn (+54% yoy) as near completion projects in ODC contributed to 45% of collections. Collections for 3QFY21 stood at Rs2.5 bn (+54% yoy, +79% qoq) against construction spend of Rs1.1 mn (-4% yoy, +54% qoq) as the company progressed further towards completion of Naigaon projects. Net debt for the company was at Rs6.7 bn, a decline of Rs300 mn from 2QFY21 taking net debt/equity to 0.24X. Lower rating to REDUCE with revised FV of Rs345/share Sunteck is changing its sales profile from the traditional high-ticket sales in BKC, to a more affordable lower ticket size in Naigaon that now dominates its sales profile. Inclusion of Vasai and Vasind in the project portfolio further cements the shift and contributes to the bulk Murtuza Arsiwalla (Rs38/share) of revision in our FV to Rs345/share (from Rs300/share). Absences of sales at BKC (Rs57/share), and continued uncertainty on the commercial development at ODC will likely Samrat Verma weigh on stock performance. Lower rating to REDUCE (From BUY) noting full valuations after the 68% run-up in stock price over the past six months. We have made revisions to our estimates for FY2021 (-11%) and FY2022 (+5%) to factor lower sales in BKC in FY2021 and pushing back delivery of certain projects to FY2022E. [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. Real Estate Sunteck Realty Exhibit 1: Change in revenue recognition from percentage completion to project completion method makes 3QFY21 financials incomparable Quarterly results for Sunteck Realty, March fiscal year-ends, 2020 - 2021E (Rs mn) Change (%) 3QFY21 3QFY21E 3QFY20 2QFY21 3QFY21E 3QFY20 2QFY21 9MFY21 9MFY20 % chg 2021E 2020 % chg 2022E Net sales 2,048 2,232 1,939 1,427 (8) 6 44 2,035 3,093 (34) 7,493 6,078 23 11,645 Operating costs (1,599) (1,685) (1,437) (1,118) (5) 11 43 (1,624) (2,071) (22) (5,582) (4,460) 25 (7,282) EBITDA 449 547 502 310 (18) (10) 45 411 1,023 (60) 1,911 1,619 18 4,363 Other income 40 51 54 53 (22) (26) (24) 135 108 25 223 237 (6) 246 Interest costs (182) (181) (110) (190) 0 65 (4) (296) (206) 44 (750) (435) 72 (889) Depreciation (12) (13) (9) (12) (14) 24 (5) (24) (15) 64 (51) (36) 43 (53) PBT 296 403 436 161 (27) (32) 84 225 910 (75) 1,334 1,385 (4) 3,668 Taxes (84) (101) (98) (14) (17) (14) 501 (49) (257) (81) (271) (346) (22) (1,025) PAT 212 303 339 147 (30) (37) 44 176 653 (73) 1,063 1,040 2 2,643 Net comprehensive income 223 312 330 139 (28) (32) 61 169 623 1,095 1,036 2,714 EPS (Rs/share) 1.6 2.2 2.4 1.0 1.2 4.4 7.8 7.4 19.3 Key ratios EBITDA margin (%) 21.9 24.5 25.9 21.7 20.2 33.1 25.5 26.6 37.5 PAT margin (%) 10.4 13.6 17.5 10.3 8.7 21.1 14.2 17.1 22.7 Effective tax rate (%) 28.3 25.0 22.4 8.6 21.8 28.2 20.3 25.0 28.0 Source: Company, Kotak Institutional Equities estimates Operational performance across projects Affordable housing projects. Sunteck has entered into an agreement to jointly develop 50 acres of land parcel in Vasind offering development potential of 2.6 mn sq. ft with an estimated sales value of Rs12 bn. Similar to Naigaon and Vasai project, the company has signed a revenue sharing agreement (80% share) with the company responsible for construction, sales and marketing for the project with an estimated cost of Rs5.6 bn while the land owner would bear the land and approval costs for the remaining 20% share leading to net cash flows of Rs4 bn to be collected over the next four years. Earlier, Sunteck had entered into an agreement to jointly develop 50 acres of land parcel in Vasai offering development potential of 4.5 mn sq. ft with an estimated sales value of Rs50 bn. The company had signed a revenue sharing agreement (75% share) with an estimated construction cost of Rs1.25 bn while land owners would bear the land and approval costs for the remaining 20% share. The project is expected to be launched by 1HFY22. BKC. Sunteck has not sold any units in BKC in the past one year lagging far behind the company’s target of selling 2-3 units in a quarter. We note that Sunteck currently has an outstanding inventory of 0.29 mn sq. ft (39 units) in BKC, which the management hopes it will be able to liquidate over the next 3-4 years. Even though units at BKC are completed, collection period for such units averages at 12 months due to the high ticket size thus slowing the collection pace. Sunteck made no collections against prior sales in BKC in 3QFY21. Goregaon. Sunteck City in Goregaon which currently has only three phases launched saw sales of 101 units in 2QFY21. While Avenue 1 has been completed, Avenue 2 will be completed over the next three months. Sunteck launched second tower at Avenue 4 at ODC, Goregaon in 3QFY21 which witnessed the sales of Rs1.2 bn in 3QFY21. Sunteck has unsold inventory of Rs10 bn in Avenue 4 while Avenue 1 and 2 has Rs3-4 bn of inventory left. Apart from residential, Sunteck had previously set aside another 3 mn sq. ft for commercial and retail developments—a strategy it is reviewing in the post-pandemic world. Management is still in a wait-and-watch mode on the development of the additional 3 mn sq. ft of project development. 44 KOTAK INSTITUTIONAL EQUITIES RESEARCH Sunteck Realty Real Estate Naigaon. Sunteck West World in Naigaon which remained the mainstay of pre-sales in FY2020 saw sales of Rs615 mn in 3QFY21. Cash collections stood at Rs650 mn in 3QFY21. Against sales of Rs7 bn to date in Naigaon, the company has collected Rs4.3 bn. Collections at Naigaon are likely to pick up with completion of construction at seven ongoing towers. Sunteck has sold 2,248 units in Naigaon out of 2,476 units and expects to deliver the projects in 4QFY21 ahead of its RERA timeline. Sunteck launched Phase 2 (Sunteck Maxx World) at Naigaon in 4QFY20 where it made pre-sales of Rs7.1 bn till 3QFY21. Sunteck has made collections of Rs882 mn against sales of Rs7.1 bn so far with construction cost of only Rs212 mn incurred till date. Commercial portfolio. Sunteck currently has three commercial projects –Sunteck Icon and Gateway 51 at BKC, Junction and Sunteck Crest on Andheri-Kurla Road. The company has spent Rs406 mn till date on construction of commercial projects. Andheri West. Sunteck had entered into a JDA project for mixed used development in Lokhandwala, Andheri West of 1.1 mn sq. ft expected to generate revenues of Rs28 bn. The agreement required no upfront capital investment except an interest bearing refundable deposit of Rs600 mn. While the land owner is responsible for getting regulatory approvals, Sunteck will be responsible for construction, sales and marketing of the project. The project is yet to be launched as deliberations with land owners still continue. Exhibit 2: Sales for the quarter improved to Rs2.5 bn on account of new launches at Avenue Phase 4 and reduced stamp duty Sunteck’s operational performance, 3QFY20 - 3QFY21 Growth (%) 3QFY21 3QFY20 2QFY21 3QFY20 2QFY21 9MFY21 9MFY20 Growth (%) 2021E 2020 Growth (%) Sales (sq. ft) 331,485 186,900 183,259 77 81 647,242 425,438 52 947,822 1,856,671 (49) Sales (Rs mn) 3,492 3,250 2,003 7 74 6,507 6,124 6 10,697 12,203 (12) Sales (Rs/sq. ft) 10,535 17,389 10,931 (39) (4) 10,054 14,393 (30) 11,286 6,573 72 Collection (Rs mn) 2,525 1,644 1,411 54 79 4,586 5,390 (15) 7,791 6,912 13 Construction (Rs mn) 1,078 1,124 701 (4) 54 2,045 3,890 (47) 2,422 4,857 (50) Source: Company, Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 45 Real Estate Sunteck Realty Exhibit 3: No sales at BKC in the past four quarters; ODC and Naigaon continue to remain mainstay of sales for Sunteck Realty Operational data for Sunteck Realty, March fiscal year-ends, 2019 - 21 (Rs mn) Growth (%) 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 3QFY20 3QFY21 Completed projects Bandra Kurla Complex (BKC) Sales (sq. ft) 21,445 11,500 13,041 7,929 6,567 (13,000) — — — (100) NA Sales value (Rs mn) 1,113 488 810 378 340 (810) — — — (100) NA Collections (Rs mn) 669 988 220 223 253 303 — 436 — (100) (100) Cost incurred (Rs mn) — — 30 — — — — 6 13 NA 124 Realizations (Rs / sq. ft) 51,905 42,435 62,112 47,673 51,774 62,308 — — — (100) NA Under construction projects ODC, Goregaon Sales (sq. ft) 18,684 115,042 25,403 16,850 143,550 4,442 28,190 39,147 135,412 (6) 246 Sales value (Rs mn) 266 1,582 363 240 2,070 61 409 530 1,886 (9) 256 Collections (Rs mn) 518 374 599 859 677 555 290 305 1,144 69 274 Cost incurred (Rs mn) 373 1,157 366 879 431 309 57 281 453 5 61 Realizations (Rs / sq. ft) 14,237 13,752 14,276 14,249 14,420 13,733 14,512 13,549 13,926 (3) 3 Naigaon Sales (sq. ft) 262,117 145,997 121,244 37,585 — 1,437,319 95,621 40,838 119,617 NA 193 Sales value (Rs mn) 1,302 732 635 196 — 6,797 482 223 615 NA 176 Collections (Rs mn) 229 598 933 548 558 744 350 409 650 16 59 Cost incurred (Rs mn) 110 621 662 325 392 617 138 312 419 7 34 Realizations (Rs / sq. ft) 4,966 5,011 5,239 5,212 — 4,729 5,044 5,456 5,142 NA (6) Source: Company, Kotak Institutional Equities estimates Exhibit 4: Cash collections for Sunteck picked-up with increase in construction pace Sunteck’s operational performance, 3QFY14 - 3QFY21 Sales (sq. ft, LHS) Sales (Rs/sq. ft, RHS) Sales (Rs mn) Collection (Rs mn) Construction (Rs mn) 1,600,000 35,000 7,000 1,400,000 30,000 6,000 1,200,000 25,000 5,000 1,000,000 20,000 4,000 800,000 15,000 3,000 600,000 10,000 400,000 2,000 200,000 5,000 1,000 - - - 3QFY14 1QFY15 3QFY15 1QFY16 3QFY16 1QFY17 3QFY17 1QFY18 3QFY18 1QFY19 3QFY19 1QFY20 3QFY20 1QFY21 3QFY21 3QFY14 1QFY15 3QFY15 1QFY16 3QFY16 1QFY17 3QFY17 1QFY18 3QFY18 1QFY19 3QFY19 1QFY20 3QFY20 1QFY21 3QFY21 Source: Company, Kotak Institutional Equities 46 KOTAK INSTITUTIONAL EQUITIES RESEARCH Sunteck Realty Real Estate Exhibit 5: Sunteck Realty, change in estimates, March fiscal year-ends, 2021 - 2023E (Rs mn) New estimates Old estimates Change (%) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E Revenue 7,493 11,645 10,000 6,995 10,530 9,710 7.1 10.6 3.0 EBITDA 1,911 4,363 3,706 2,003 4,060 3,847 (4.6) 7.5 (3.6) PAT 1,095 2,714 2,152 1,234 2,582 2,255 (11.2) 5.1 (4.5) Source: Company, Kotak Institutional Equities Exhibit 6: Key assumptions driving our financial model, March fiscal year-ends, 2018 - 23E 2017 2018 2019 2020E 2021E 2022E 2023E Development Sales (Rs mn) 6,468 5,828 12,020 12,210 10,697 14,694 11,975 Sales (mn sq. ft) 0.31 0.26 1.41 1.86 0.95 1.02 0.99 Sales (Rs/sq. ft) 20,985 22,076 8,534 6,576 11,286 14,434 12,068 Collections (Rs mn) 5,628 5,308 6,610 7,150 7,791 23,801 16,057 Construction (Rs mn) 2,769 2,033 3,447 4,857 2,422 5,644 6,103 GCF (Rs mn) 2,859 3,275 3,162 2,293 5,368 18,157 9,954 GCF (Outstanding) 86,238 83,049 81,164 79,236 74,294 56,972 47,750 Commercial (Sunteck City) Area (mn sq. ft) 1.30 Revenue (Rs mn) 573 EBITDA (Rs mn) 459 EBITDA (%) 80 Revenue (Rs mn) 9,522 8,883 8,568 6,078 7,493 11,645 10,000 EBITDA (Rs mn) 3,481 3,720 3,780 1,619 1,911 4,363 3,706 EBITDA (%) 37 42 44 27 26 37 37 Source: Company, Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 47 Real Estate Sunteck Realty Exhibit 7: Residential portfolio accounts for 47% of the NAV of Sunteck Realty, while commercial portfolio accounts for the balance 53% SOTP value of Sunteck Realty based on March 2023E Ownership Value Inventory / Area Receivables Cost GCF Project Location Type (%) (Rs mn) (Rs/share) (%) (mn sq. ft) (Rs/sq. ft) (Rs mn) (Rs mn) (Rs mn) (Rs mn) Residential Ongoing Signature Island BKC 88 4,767 34 7 0.21 50,763 10,581 2,452 (24) 13,057 Signia Isles BKC 94 785 6 1 0.03 53,866 1,401 2,588 110 3,878 Signia Pearl BKC 94 2,390 17 4 0.10 47,118 4,694 2,000 (30) 6,723 Sunteck City Oshiwara 100 5,540 39 9 1 15,947 12,618 6,511 4,992 14,137 Sunteck World Naigaon JDA 74 1,458 10 2 0.42 5,663 2,384 9,165 3,784 5,412 Glibert Hill JDA 65 165 1 0 0.05 38,062 1,993 687 67 1,675 Signia Waterfront JV 50 12 0 0 0.05 13,541 616 700 0 1,316 Sunteck Icon JV 57 490 3 1 0.09 27,417 2,468 245 1,140 1,572 Gateway 51 JV 55 567 4 1 0.10 27,407 2,741 222 1,034 1,929 Ongoing 16,175 115 25 1.83 21,533 39,494 24,571 11,074 49,700 Upcoming Sunteck World Naigaon JDA 74 5,383 38 8 7.00 6,369 44,584 — 18,000 14,992 Sunteck City Oshiwara 100 4,192 30 6 0.77 16,686 12,860 1,485 4,966 9,379 Vasai JDA (73%) 4,428 32 7 4.50 8,100 36,450 — 13,500 22,950 Vasind JDA (79%) 800 6 1 2.50 4,000 10,000 — 5,500 4,500 Upcoming 14,803 105 23 14.77 7,034 103,894 1,485 41,966 51,821 Residential 30,978 221 48 16.6 8,635 143,388 26,056 53,040 101,521 Commercial Upcoming Sunteck City Oshiwara 100 34,000 242 52 Upcoming 34,000 242 52 Commercial 34,000 242 52 Operational 16,175 115 25 Upcoming 48,803 348 75 Total 64,978 463 100 Net cash (16,544) (118) (25) Equity Value 48,433 345 75 Notes: (a) Inventory,receivables and cost to be incurred is as of 31st March 2021. (b) In Naigaon, Sunteck is entitled to 70% of the revenues and accordingly the sales value (and rate is 70% of gross) Source: Company, Kotak Institutional Equities estimates 48 KOTAK INSTITUTIONAL EQUITIES RESEARCH Sunteck Realty Real Estate Exhibit 8: Our estimates do not factor revenue recognition at Naigaon that will likely accrue beyond FY2021E Sunteck: Profit model, balance sheet, cash flow model, March fiscal year-ends, 2018-23E (Rs mn) 2018 2019 2020 2021E 2022E 2023E Profit model Net sales 8,883 8,568 6,078 7,493 11,645 10,000 EBITDA 3,720 3,780 1,619 1,911 4,363 3,706 Other income 93 343 237 223 246 269 Interest (421) (408) (435) (750) (889) (889) Depreciation (17) (22) (36) (51) (53) (548) Pre-tax profits 3,375 3,693 1,385 1,334 3,668 2,539 Tax (1,003) (1,274) (378) (271) (1,025) (687) Deferred taxation (76) (10) — — — — Net income 2,297 2,409 1,007 1,063 2,643 1,852 Adjusted net income 2,142 2,275 1,003 1,095 2,714 2,152 Earnings per share (Rs) 15 16 7 8 19 15 Balance sheet Total equity 26,303 28,337 29,201 30,156 32,730 34,742 Non-controlling interests 775 910 — — — — Gross debt 5,680 6,346 9,217 17,089 14,089 17,089 Non-current liabilities 29 62 74 65 69 67 Current liabilities 3,776 3,572 3,482 (6,816) 638 2,961 Total liabilities and equity 36,563 39,228 41,974 40,494 47,526 54,859 Fixed assets 705 725 870 3,831 13,491 25,312 Non-current financial assets 1,709 2,776 2,964 2,911 2,945 2,940 Other non-current assets 219 241 248 248 248 248 Current assets 33,930 35,487 37,892 33,503 30,842 26,359 Total assets 36,563 39,228 41,974 40,494 47,526 54,859 Free cash flow Operating cash flow, excl. working capital 2,229 2,297 1,174 1,147 2,767 2,701 Working capital changes (4,690) (2,319) (2,376) (6,481) 10,717 6,506 Capital expenditure (0) (42) (182) (3,012) (9,713) (12,369) Free cash flow (2,461) (64) (1,384) (8,346) 3,771 (3,163) Ratios (%) Debt/equity 21.6 22.4 31.6 56.7 43.0 49.2 Net debt/equity 19.7 19.2 28.7 55.9 40.5 47.6 RoE (%) 9.7 8.3 3.5 3.7 8.6 6.4 RoCE (%) 9.3 7.9 3.5 3.5 7.2 4.9 Book value per share (Rs/share) 187 202 208 215 233 248 Source: Company, Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 49 BUY Bharti Airtel (BHARTI) https://ultraviewer.et/en/own Telecommunication Services FEBRUARY 18, 2021 load.html UPDATE Sector view: Attractive Renewed focus. Bharti’s proposal to buyback 20% stake in its DTH arm and form a CMP (`): 594 Special Committee of Directors to reorganize businesses in its endeavor to renew focus Fair Value (`): 710 on digital and non-telecom segments are steps in the right direction. We like Bharti’s BSE-30: 51,704 calibrated approach in shaping up its non-telecom digital service offerings aligned with its homes and enterprise businesses, which is perhaps under-appreciated for now but may drive significant growth in the medium term. Reiterate BUY with FV of Rs710. Bharti Airtel Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 594/710/BUY EPS (Rs) (4.6) 11.7 22.2 52-week range (Rs) (high-low) 623-362 EPS growth (%) 31.6 356.2 90.4 Mcap (bn) (Rs/US$) 3,240/44.6 P/E (X) (130.2) 50.8 26.7 ADTV-3M (mn) (Rs/US$) 11,143/153 P/B (X) 5.4 5.2 4.6 Shareholding pattern (%) EV/EBITDA (X) 9.6 7.6 6.2 Promoters 56.2 RoE (%) (3.6) 10.4 18.1 FPIs/MFs/BFIs 19.1/14.0/5.8 Div. yield (%) 1.0 1.0 1.0 Price performance (%) 1M 3M 12M Sales (Rs bn) 1,014 1,165 1,333 Absolute (1.5) 22.6 5.1 EBITDA (Rs bn) 454 574 682 Rel. to BSE-30 (6.5) 4.2 (16.5) Net profits (Rs bn) (25) 64 121 Bharti to buyback 20% stake in DTH business for cumulative consideration of Rs31.3 bn Bharti has proposed to acquire 20% stake in its DTH arm, Bharti Telemedia, from Warburgn Pincus. The cumulative consideration for this transaction is Rs31.3 bn including (1) preferential issue of 36.47 mn equity shares of Bharti at Rs600/share (Rs21.9 bn), subject to shareholders’ approval and (2) up to Rs10.4 bn in cash, which includes minor customary closing adjustments not exceeding Rs1 bn. The proposed transaction ascribes an equity value of Rs156 bn to Bharti Telemedia, which is comparable to the valuation ascribed in our SoTP valuation of Bharti. We note that Bharti had sold this 20% stake to Warburg for Rs22.6 bn FY2018 (implied value of ~Rs113 bn) for deleveraging. Bharti Telemedia will become a wholly-owned subsidiary post the transaction and Bharti will be able to achieve (1) structural flexibility – aligning shareholding of customer-facing businesses and (2) ease of implementation – allowing Bharti to offer converged solutions to customers as part of its ‘One Home’ strategy; the company has 17.9 mn Digital TV customers and 2.8 mn home broadband subscribers as of end-3QFY21. Special Committee of Directors to renew focus on digital and non-telecom businesses Bharti has also constituted a ‘Special Committee of Directors’ to consider various options for re- organization of businesses/shareholding of the company and its subsidiaries to enhance focus on digital and non-telecom businesses to enable value unlocking for stakeholders. In our recent interaction, the senior management of Bharti had reemphasized its (1) focus on home and enterprise businesses given the substantial headroom for growth and (2) strategy to shift digital services offerings to the core of its business from the periphery earlier to drive efficiencies and develop new revenues streams. The above two decisions are in line with this agenda. Calibrated approach in shaping up digital businesses to drive growth in the medium term Tarun Lakhotia We like Bharti’s calibrated approach in shaping up its non-telecom digital service offerings Aniket Sethi aligned with its homes and enterprise businesses. Airtel Digital, with 190 mn monthly active users across key assets including Thanks, Wynk and Xstream, is scaling up well and Bharti intends to develop it as a parallel entity; advertising revenues will become a key part of this business, besides subscription fees. Airtel Payments Bank has over 22 mn active users, while Mitra app is used by over 1.2 mn retailers for transactions and payments on a daily basis. Airtel IQ, Secure and Cloud are a few offerings with strong growth potential in the enterprise business segment, which may benefit from the ongoing digital transition. [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. Bharti Airtel Telecommunication Services Exhibit 1: Bharti - sum of the parts valuation based on March 2023 estimates Mar-2022 fair value derivation Mar-2023 basis India business valuation India wireless EV (Rs mn) 3,792,339 EBITDA (Rs mn) - adjusted for Ind-AS 421,371 EV/EBITDA (X) 9.0 India DTH EV (Rs mn) 182,451 EBITDA (Rs mn) 24,327 EV/EBITDA (X) 7.5 India others (ex-towers, including corporate overheads) EV (Rs mn) 532,743 EBITDA (Rs mn) 66,593 EV/EBITDA (X) 8.0 Indus valuation Equity value based on KIE fair valuation (Rs mn) 673,750 Bharti's shareholding (%) 41.7 EV (Rs mn) 281,156 India EV (Rs mn) 4,788,689 Net debt (Rs mn) (including lease liability and AGR provisions) 1,338,818 Equity value - India business (Rs mn) 3,449,872 Equity value - India business (Rs/share) 632 Africa business valuation Equity value based on CMP 305,795 Bharti's shareholding (%) 56 Equity value - Africa (Rs mn) 169,716 Equity value - Africa (Rs/share) 31 Total core equity value = a + b (Rs/share) 663 Source: Kotak Institutional Equities estimates Exhibit 2: We build option value to capture the possibility of industry consolidation Rs bn Rs/share Current fair value 3,620 663 Add Upside from potentially higher market share FY2023E revenue delta assuming Bharti garner's 40% of VIL's revenues 197 Incremental EBITDA at 60% incremental margin 118 EV/EBITDA (X) 9.0 Incremental EV 1,065 Incremental capex to support higher market share (300) Net equity value accretion 765 140 Ascribing one-third probability 253 46 Revised fair value 3,872 710 Source: Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 51 Telecommunication Services Bharti Airtel Exhibit 3: Key assumptions driving Bharti India wireless model, March fiscal year-ends, 2018-23E 2018 2019 2020 2021E 2022E 2023E Subscriber base ('000s) 304,192 282,640 283,667 317,967 331,967 343,967 Net adds per month ('000s) 2,545 (1,796) 86 2,858 1,167 1,000 Voice traffic (bn mins) 1,946 2,811 3,035 3,581 3,724 3,836 Change (%) 45.3 44.4 7.9 18.0 4.0 3.0 Data volumes (bn MB) 3,902 11,733 21,510 32,532 40,904 48,956 Change (%) 432.2 200.7 83.3 51.2 25.7 19.7 ARPU (Rs/sub/month) 133 118 135 155 171 195 Change (%) (24.6) (11.6) 14.6 14.4 10.5 14.0 MOU (min/sub/month) 561 798 893 992 955 946 Change (%) 32.0 42.2 11.9 11.1 (3.7) (1.0) Capex (Rs mn) Consolidated (ex-spectrum) 267,023 286,872 252,228 253,193 270,809 274,116 As % of revenues 32.3 35.5 28.8 25.0 23.2 20.6 Consolidated overall 302,023 336,872 252,228 253,193 384,707 274,116 As % of revenues 36.5 41.7 28.8 25.0 33.0 20.6 Source: Company, Kotak Institutional Equities estimates Exhibit 4: Bharti - condensed financials, Ind AS, March fiscal year-ends, 2018-23E (Rs mn) 2018 2019 2020 2021E 2022E 2023E Profit and loss statement Revenues 826,388 807,802 875,390 1,013,807 1,164,926 1,333,118 EBITDA 300,791 258,189 366,095 454,298 574,124 681,748 EBIT 108,360 44,714 89,199 157,432 258,600 341,593 PBT 29,992 (50,162) (32,731) 12,473 121,630 206,969 Recurring PAT 18,921 (25,193) (36,390) (24,882) 63,741 121,338 Recurring EPS (Rs/share) 4.7 (6.3) (6.7) (4.6) 11.7 22.2 Balance sheet Total Equity 783,483 849,480 1,021,295 788,189 840,596 952,741 Borrowings 1,141,676 1,254,283 1,176,190 1,276,495 1,440,088 1,335,088 Other liabilities 580,657 648,212 1,410,305 1,289,574 1,533,402 1,597,269 Total equity and liabilities 2,505,816 2,751,975 3,607,790 3,354,258 3,814,086 3,885,098 Net fixed assets 758,168 903,661 917,545 861,833 892,234 904,101 Net intangibles 1,211,348 1,200,996 1,158,784 1,089,842 1,128,625 1,050,719 Cash and equivalents 135,684 127,287 296,606 159,128 325,024 331,701 Other assets 400,616 520,031 1,234,855 1,243,454 1,468,203 1,598,576 Total assets 2,505,816 2,751,975 3,607,790 3,354,258 3,814,086 3,885,098 Cash flow statement Operating cash flow 276,194 234,596 181,287 485,743 471,240 459,910 Capex (257,353) (348,616) (248,568) (253,193) (384,707) (274,116) Free cash flow 18,841 (114,020) (67,281) 232,550 86,533 185,793 Key ratios Avg. RoAE (%) 1.4 0.5 NM NM 7.8 13.5 Avg. RoACE (%) 5.1 0.9 3.9 2.7 12.7 16.7 Net debt to EBITDA (x) 3.3 4.4 3.2 3.3 2.7 2.1 CRoCI (%) 10.1 8.2 11.0 10.6 13.3 14.3 Notes: (a) Pro forma estimates for FY2021, adjusted for de-consolidation of Bharti Infratel. Source: Company, Kotak Institutional Equities estimates 52 KOTAK INSTITUTIONAL EQUITIES RESEARCH Kotak Institutional Equities: Valuation summary of KIE Universe stocks 53 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 17-Feb-21 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E (US$ mn) Automobiles & Components Amara Raja Batteries SELL 902 770 (15) 154 2.1 171 37 46 51 (4) 25 11 24 19.4 17.5 13.5 10.9 9.6 3.7 3.3 2.9 16.3 17.9 17.4 1.0 1.3 1.4 13.6 Apollo Tyres REDUCE 242 210 (13) 153 2.1 638 4.6 12.9 16.7 (45) 183 29 53.1 18.7 14.5 7.4 7.0 5.7 1.4 1.3 1.2 2.8 7.1 8.7 0.6 1.1 1.1 43 Ashok Leyland ADD 132 140 6 388 5.3 2,936 (1.0) 2.7 7.5 (178) 380 179 NM 49.3 17.7 87.9 21.1 10.5 5.6 5.2 4.3 NM 10.9 27 0.0 0.6 1.7 55 Bajaj Auto BUY 4,166 4,400 6 1,205 17 289 158 191 222 (10) 21 16 26.3 21.8 18.8 20.7 16.2 13.5 5.5 5.0 4.5 22 24 25 2.3 2.7 3.2 50 Balkrishna Industries SELL 1,614 1,320 (18) 312 4.3 193 54 60 73 9 12 21 29.9 26.7 22.0 18.0 15.6 12.9 5.5 4.9 4.3 19.6 19.5 21 1.4 1.5 1.6 27 Bharat Forge SELL 638 375 (41) 297 4.1 466 (4.8) 10.6 18.6 (164) 319 76 NM 60.4 34.3 47.2 27.4 18.9 5.9 5.6 4.9 NM 9.5 15.2 0.0 0.5 0.5 28 CEAT ADD 1,637 1,500 (8) 66 0.9 40 99 107 124 59 8 16 16.5 15.2 13.1 8.4 7.6 6.7 2.0 1.8 1.6 13.1 12.7 13.1 0.7 0.7 0.7 9.9 Eicher Motors SELL 2,696 2,200 (18) 737 10.1 272 50 80 106 (25) 60 32 53.8 33.6 25.5 37.5 26.3 20.3 7.8 6.6 5.5 15.5 21 24 0.5 0.5 0.5 65 Endurance Technologies SELL 1,441 1,200 (17) 203 2.8 141 38 52 65 (7) 39 24 38 27.6 22.3 19.0 14.5 11.9 5.9 5.0 4.2 15.1 18.1 18.9 0.4 0.6 0.7 3.4 Escorts BUY 1,378 1,700 23 122 2.6 101 77 89 100 42 15 12 17.8 15.5 13.8 9.7 8.4 7.0 2.7 2.3 2.0 15.1 15.1 14.8 0.8 1.0 1.1 35 Exide Industries REDUCE 210 180 (14) 178 2.5 850 8.3 10.3 11.3 (17) 24 10 25.3 20.4 18.6 13.5 11.4 10.3 2.7 2.5 2.3 10.9 12.7 12.9 2.1 2.1 2.1 15.5 Hero Motocorp SELL 3,584 3,000 (16) 716 9.8 200 144 179 206 (10) 24 15 24.9 20.1 17.4 16.5 12.8 10.9 4.7 4.3 3.9 19.6 23 24 2.6 3.0 3.4 61 Mahindra CIE Automotive SELL 200 110 (45) 76 1.0 378 1.8 8.2 12.1 (81) 347 48 109.1 24.4 16.5 20.6 10.8 8.1 1.6 1.5 1.4 1.5 6.4 8.8 ——— 1.0 Mahindra & Mahindra BUY 915 1,000 9 1,137 15.6 1,138 33 48 55 38 45 16 27.9 19.2 16.5 17.0 13.0 11.0 2.9 2.5 2.3 10.5 14.1 14.5 0.4 0.8 0.9 77 Maruti Suzuki SELL 7,503 5,700 (24) 2,267 31.2 302 160 230 299 (15) 44 30 47 33 25 32.5 20.6 14.9 4.4 4.0 3.6 9.6 12.8 15.0 0.7 0.8 1.0 129 Motherson Sumi Systems ADD 227 200 (12) 717 9.9 3,158 3.7 8.8 10.7 (1) 139 23 62.1 25.9 21.1 14.8 7.6 6.0 5.7 4.4 3.4 9.7 19.3 18.3 0.4 0.6 0.7 45 MRF SELL 89,185 78,000 (13) 378 5.2 4 3,155 3,735 4,321 (6) 18 16 28 23.9 20.6 11.7 10.1 8.5 2.8 2.5 2.2 10.4 11.1 11.5 0.1 0.1 0.1 62 Schaeffler India SELL 5,130 4,050 (21) 160 2.2 31 93 149 179 (21) 60 20 55 34 29 27.6 18.6 15.3 5.1 4.6 4.1 9.5 14.1 15.1 ——— 1.2 SKF REDUCE 2,358 1,450 (39) 117 1.6 49 43 54 67 (26) 26 23 55 43 35 40.2 30.6 24.8 7.9 6.9 6.0 14.4 15.9 16.9 4.6 0.4 0.5 2.1 Tata Motors SELL 330 180 (45) 1,188 14.9 3,829 (8) 18 25 60 320 39 NM 18.0 13.0 6.6 4.4 3.7 2.0 1.8 1.6 NM 10.5 12.9 ——— 368 Timken SELL 1,325 830 (37) 100 1.4 75 22 36 43 (34) 65 20 61 37 31 35.2 22.7 18.8 7.3 6.2 5.3 11.1 18.1 18.4 0.1 0.1 0.1 1.1 TVS Motor SELL 619 360 (42) 294 4.0 475 11 17 21 (19) 65 22 59 36 29 23.2 17.3 14.9 7.6 6.6 5.7 13.4 19.9 21 0.7 0.7 0.9 29 Automobiles & Components Cautious 11,019 151.0 5 107 27 51.2 24.8 19.4 15.0 10.3 8.5 3.8 3.4 3.0 7.4 13.6 15.3 0.9 1.0 1.2 1,124 Banks AU Small Finance Bank SELL 1,095 720 (34) 336 4.6 304 38.7 27.4 33.7 75 (29) 23 28 40 33 ——— 6.6 5.5 4.7 23.7 14.0 14.8 ——— 14.8 Axis Bank BUY 777 675 (13) 2,381 32.7 3,060 22.7 42.2 51.3 294 85 22 34 18.4 15.1 ——— 2.5 2.3 2.0 7.5 12.2 13.3 0.4 0.8 1.0 187 Bandhan Bank ADD 348 375 8 561 7.7 1,610 15.7 20.3 24.6 (17) 30 21 22.2 17.1 14.2 ——— 3.4 2.8 2.3 15.3 16.9 17.2 ——— 68 Bank of Baroda ADD 84 80 (5) 389 5.3 4,627 7.9 17.4 20.7 572 120 18 11 4.8 4.1 ——— 0.7 0.6 0.6 5.4 11.1 12.0 1.9 4.1 4.9 56 Canara Bank REDUCE 166 115 (31) 274 3.8 1,647 10.9 9.3 18.4 150 (15) 99 15.3 17.9 9.0 ——— 0.8 0.8 0.8 3.4 2.7 5.2 ——— 64 City Union Bank REDUCE 167 160 (4) 123 1.7 737 7.8 8.0 10.5 21 2 32 21 20.9 15.8 ——— 2.4 2.2 2.0 10.4 9.8 11.9 0.8 0.9 1.1 5.9 DCB Bank BUY 115 150 30 36 0.5 310 10.6 12.2 16.3 (2) 15 33 10.8 9.4 7.1 ——— 1.1 1.0 0.9 9.9 10.4 12.5 0.9 1.1 1.4 4.2 Daily Summary India Equitas Holdings BUY 84 100 18 29 0.4 342 7.8 8.3 16.3 30 5 97 10.8 10.2 5.2 ——— 1.0 0.9 0.8 9.2 8.8 15.4 ——— 3.4 Equitas Small Finance Bank BUY 48 50 5 54 0.7 1,138 2.9 3.6 4.9 27 23 36 16.2 13.2 9.7 ——— 1.7 1.5 1.3 11.0 11.5 13.8 ——— 0.0 Federal Bank BUY 87 90 4 173 2.4 1,993 7.5 8.5 12.4 (3) 14 45 11.6 10.1 7.0 ——— 1.2 1.1 1.0 9.9 10.5 13.9 1.9 2.2 3.2 38 HDFC Bank ADD 1,587 1,550 (2) 8,740 120.1 5,483 55.4 65.2 76.4 16 18 17 29 24 21 ——— 4.5 4.0 3.5 16.6 17.2 17.6 0.7 0.8 0.9 217 ICICI Bank BUY 657 650 (1) 4,541 62.4 6,893 24.8 31.1 35.2 102 26 13 27 21.1 18.7 ——— 3.3 3.0 2.6 13.1 14.0 14.2 0.8 0.9 1.1 196 IndusInd Bank ADD 1,033 950 (8) 782 10.7 756 33.9 62.6 80.6 (47) 85 29 30 16.5 12.8 ——— 2.0 1.8 1.6 7.1 11.4 13.2 0.5 0.9 1.2 182 Karur Vysya Bank BUY 56 65 15 45 0.6 799 3.9 7.2 11.4 34 84 58 14 7.8 4.9 ——— 0.9 0.8 0.7 4.7 8.2 12.1 1.8 3.3 5.3 2.6 Punjab National Bank REDUCE 42 36 (14) 437 6.0 10,481 2.3 4.8 6.2 369 106 29 18 8.7 6.7 ——— 0.7 0.7 0.6 3.4 5.7 6.9 ——— 73 RBL Bank BUY 253 270 7 151 2.1 597 9.8 23.9 31.0 (2) 146 29 26 10.6 8.2 ——— 1.3 1.2 1.0 5.0 10.8 12.7 0.6 1.4 1.8 66 SBI Cards and Payment Services ADD 1,024 1,030 1 964 13.2 939 13.0 19.8 30.1 (2) 53 52 79 51.8 34.0 ——— 14.9 11.8 8.9 20.7 25 30 0.1 0.1 0.2 21 State Bank of India BUY 412 450 9 3,675 50.5 8,925 23.5 35.8 44.9 45 52 26 18 11.5 9.2 ——— 1.9 1.6 1.3 8.6 11.9 13.2 0.0 0.0 0.0 240 Ujjivan Financial Services BUY 242 345 42 29 0.4 121 33.6 44.2 - 25 32 (100) 7 5.5 - ——— 1.2 1.0 — 17.0 19.3 NM 1.7 2.5 0.0 3.5 KOTAK INSTITUTIONAL INSTITUTIONAL KOTAK Ujjivan Small Finance Bank ADD 36 37 4 62 0.8 1,928 (0.3) 1.6 2.9 (118) 575 85 NM 22.5 12.2 ——— 2.3 2.1 1.7 NM 9.2 14.8 0.0 0.0 0.0 1.9 Union Bank REDUCE 38 27 (29) 244 3.4 6,407 3.0 0.5 4.5 136 (83) 789 13 74.4 8.4 ——— 0.6 0.7 0.6 3.4 0.6 4.9 1.2 0.2 1.8 4.8 YES Bank SELL 16 11 (31) 398 5.5 25,055 (0.5) (0.9) (0.2) 96 (96) 74 NM NM NM ——— 1.4 1.6 1.6 NM NM NM 0.0 0.0 0.0 59 - Banks Attractive 24,424 335.7 122 37 26 25 18.5 14.8 2.1 2.0 1.8 8.4 10.5 11.9 0.5 0.7 0.8 1,509 February February 18, 2021 Source: Company, Bloomberg, Kotak Institutional Equities estimates EQUITIES RESEARCH EQUITIES KOTAK INSTITUTIONAL EQUITIES RESEARCH 53 Kotak Institutional Equities: Valuation summary of KIE Universe stocks 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 KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 17-Feb-21 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E (US$ mn) Building Products Astral Poly Technik SELL 2,059 985 (52) 310 4.3 151 24 26 32 46 10 21 86 78 65 51.4 45.7 37.8 17.1 14.5 12.4 22 20 21 0.1 0.2 0.4 7.1 DailySummary Building Products Cautious 310 4.3 46 10 21 86 78 65 51.4 45.7 37.8 17.0 14.5 12.4 19.9 18.6 19.2 0.1 0.2 0.4 7.1 Capital goods ABB SELL 1,499 1,170 (22) 318 4.4 212 8.8 21.6 27.8 (50) 146 29 171 70 54 112.8 47.4 36.2 8.8 8.1 7.3 5.2 12.1 14.3 0.3 0.4 0.5 4.1 Ashoka Buildcon BUY 114 145 27 32 0.4 281 11.9 12.0 13.1 (14) 1 9 9.6 9.6 8.7 7.7 6.5 5.5 1.1 1.0 0.9 12.2 11.2 11.2 1.7 1.7 1.8 3.2 Bharat Electronics BUY 139 140 1 339 4.7 2,437 7.4 7.9 8.1 (1) 7 3 18.9 17.6 17.1 12.0 10.8 9.9 3.1 2.8 2.6 17.0 16.6 15.7 2.0 2.1 2.2 32 BHEL SELL 40 31 (22) 139 1.9 3,482 (4.4) 2.2 3.1 (4) 149 42 NM 18.6 13.1 (8.0) 7.4 5.7 0.5 0.5 0.5 NM 2.6 3.7 (4.9) 2.2 2.7 33 Carborundum Universal ADD 521 450 (14) 99 1.4 189 15 19 22 5 23 19 34 28 24 20.4 16.2 13.5 4.8 4.3 3.9 14.7 16.3 17.3 0.8 1.0 1.2 2.4 Cochin Shipyard BUY 360 520 44 47 0.7 132 35 43 43 (27) 20 1 10.2 8.5 8.4 5.2 5.1 4.7 1.2 1.1 1.0 12.0 13.4 12.5 3.3 3.5 3.8 2.1 Cummins India BUY 791 750 (5) 219 3.0 277 25 33 38 (3) 33 16 32 24 21 32.3 22.7 19.3 5.0 4.7 4.4 16.1 20 22 1.7 2.3 2.6 16.5 Dilip Buildcon BUY 561 600 7 77 1.1 137 26 46 63 (14) 75 39 22 12.3 8.9 7.4 5.8 4.9 1.9 1.7 1.4 9.4 14.6 17.2 0.1 0.2 0.2 2.4 IRB Infrastructure BUY 107 145 36 37 0.5 351 7 10 11 (65) 45 7 15.0 10.3 9.6 6.2 5.7 4.5 0.6 0.5 0.5 3.7 5.3 5.4 3.6 1.4 2.1 1.5 - Kalpataru Power Transmission BUY 375 500 33 56 0.8 153 26 38 46 2 46 20 14.4 9.8 8.2 5.3 4.5 3.8 1.5 1.2 1.1 11.0 13.5 13.7 2.4 1.1 1.4 2.5 February 2021 18, KEC International BUY 434 410 (5) 111 1.5 257 22 29 36 1 31 24 19.5 15.0 12.1 11.0 8.7 7.2 3.4 2.8 2.3 18.7 21 21 0.6 0.7 0.9 2.6 L&T BUY 1,548 1,720 11 2,175 29.9 1,403 50 81 99 (21) 60 24 31 19.2 15.6 21.0 15.3 13.8 3.1 2.8 2.6 11.1 15.5 17.3 1.1 1.6 2.0 104 Siemens SELL 1,870 1,540 (18) 666 9.2 356 37 43 50 73 17 17 51 44 37 35.8 31.3 26.4 6.3 5.7 5.2 13.0 13.7 14.6 0.7 0.6 0.8 14.8 Thermax SELL 1,157 1,080 (7) 138 1.9 113 25 33 43 34 29 32 46 35 27 32.1 25.7 19.8 32.1 25.7 19.8 9.3 11.6 14.5 1.1 1.4 1.8 1.4 Capital goods Attractive 4,453 61.2 (15) 67 21 36 21 17.7 2.8 2.6 2.4 7.9 12.2 13.5 0.9 1.4 1.7 222 Commercial & Professional Services SIS BUY 434 460 6 64 0.9 149 23 21 25 51 (9) 19 19.0 21 17.4 12.6 11.7 10.2 3.8 3.2 2.7 22 16.7 17.0 0.3 0.2 0.3 1.6 TeamLease Services ADD 3,166 3,030 (4) 54 0.7 17 53 70 95 159 31 37 60 45 33 52.0 38.1 28.5 8.2 6.9 5.7 14.7 16.5 18.9 — — — 1.5 Commercial & Professional Services Attractive 118 1.6 66 (0) 24 27 28 22 18.9 16.7 14.1 5.0 4.2 3.6 18.2 15.4 16.2 0.1 0.1 0.2 3 Commodity Chemicals Asian Paints SELL 2,388 2,550 7 2,291 31.5 959 32 41 48 19 26 19 74 59 49 47.6 39.5 33.8 19.4 16.6 14.2 28 30 31 0.6 0.8 1.0 93 Berger Paints SELL 753 600 (20) 732 10.1 971 8 10 12 11 34 24 100 75 61 62.5 48.5 40.0 23.6 20.1 17.3 25 29 31 0.3 0.5 0.7 13.6 Kansai Nerolac REDUCE 587 610 4 317 4.4 539 10 12 15 1 21 26 59 49 38 37.9 32.1 25.7 7.7 7.0 6.4 13.6 15.1 17.3 0.5 0.7 0.9 3.4 Tata Chemicals ADD 580 540 (7) 148 2.0 255 17 33 38 (46) 94 15 34 17.4 15.1 9.3 6.7 5.8 1.1 1.1 1.0 3.4 6.3 6.9 1.0 2.0 2.3 48 Commodity Chemicals Neutral 3,487 47.9 4 33 20 73 55 46 41.0 32.8 28.0 10.8 9.8 8.8 14.9 17.8 19.2 0.6 0.8 1.0 159 Construction Materials ACC REDUCE 1,820 1,775 (2) 342 4.7 188 75 95 97 4 26 2 24 19.1 18.7 11.4 9.7 8.6 2.7 2.4 2.2 11.7 13.4 12.5 0.8 1.3 1.3 38 Ambuja Cements BUY 287 300 5 569 7.8 1,986 12 14 17 16 18 21 23 19.9 16.5 9.2 7.4 5.9 2.5 2.2 2.0 10.3 11.8 12.9 5.9 0.9 1.1 29 Dalmia Bharat BUY 1,455 1,500 3 272 3.7 187 40 48 68 189 20 41 36 30 21 10.7 9.4 7.5 2.5 2.3 2.1 7.0 8.0 10.3 — — — 3.5 Grasim Industries ADD 1,238 1,375 11 815 11.2 657 64 93 114 21 46 23 19.4 13.3 10.8 9.5 6.8 5.5 1.3 1.2 1.1 7.2 9.6 10.7 0.2 0.4 0.6 35 J K Cement ADD 2,732 2,300 (16) 211 2.9 77 87 127 140 35 47 10 32 22 19.5 15.0 11.7 11.0 5.8 4.7 3.8 20 24 22 0.4 0.4 0.4 5.6 JK Lakshmi Cement BUY 376 400 7 44 0.6 118 26 30 35 10 16 16 14.5 12.6 10.8 6.4 6.0 5.7 2.3 1.9 1.7 16.7 16.6 16.7 1.0 1.2 1.4 2.3 Orient Cement ADD 96 90 (6) 20 0.3 205 7.7 6.3 8.6 82 (18) 37 12.5 15.2 11.1 5.9 6.5 5.8 1.6 1.5 1.3 13.4 10.1 12.7 2.1 2.1 2.1 1.1 Shree Cement SELL 28,269 18,250 (35) 1,020 14.0 36 595 800 933 37 34 17 47 35 30 26.0 20.4 17.5 6.9 5.9 5.1 15.6 18.1 18.0 0.4 0.4 0.4 25 UltraTech Cement ADD 6,420 5,800 (10) 1,853 25.5 289 187 243 292 41 30 20 34 26 22 17.8 14.3 12.2 4.2 3.7 3.2 13.0 14.8 15.4 0.2 0.3 0.4 63 Construction Materials Attractive 5,146 70.7 30 32 20 29 22 18.7 13.4 10.6 8.9 3.0 2.7 2.4 10.1 11.9 12.6 0.9 0.5 0.6 203 Source: Company, Bloomberg, Kotak Institutional Equities estimates 54 KOTAK INSTITUTIONAL EQUITIES RESEARCH 54 Kotak Institutional Equities: Valuation summary of KIE Universe stocks 55 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 17-Feb-21 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E (US$ mn) Consumer Durables & Apparel Crompton Greaves Consumer SELL 396 285 (28) 248 3.4 627 8.0 9.9 11.4 1 24 15 50 40 35 37 31 26 13.7 10.8 8.6 31 30 28 0.8 0.6 0.6 13.3 Havells India SELL 1,195 820 (31) 748 10.3 626 18 21 24 49 17 18 68 58 49 46 40 34 15.1 13.1 11.4 24 24 25 0.5 0.6 0.7 45 Page Industries REDUCE 28,309 28,500 1 316 4.3 11 308 504 594 0 63 18 92 56 48 59 38 32 35.1 28.7 24.2 40 56 55 0.9 1.2 1.5 21 Polycab ADD 1,350 1,300 (4) 201 2.8 149 49 57 63 (4) 16 10 27 23 21 18 15 13 4.5 3.9 3.4 17.7 17.8 16.8 0.5 0.6 0.6 10.8 TCNS Clothing Co. REDUCE 442 390 (12) 27 0.4 66 (6.7) 11.3 15.5 (162) 269 37 NM 39 29 90 14 10.8 4.4 3.8 3.2 NM 10.4 12.2 ——— 0.4 Voltas SELL 1,032 785 (24) 342 4.7 331 15 23 28 (10) 57 24 71 45 36 62 37 30 7.4 6.6 5.9 10.8 15.5 17.1 0.4 0.6 0.7 28 Whirlpool SELL 2,418 1,930 (20) 307 4.2 127 26 48 63 (30) 85 30 93 50 38 57 35 26 11.1 10.0 9.0 12.5 21 25 0.3 0.8 1.3 5.3 Consumer Durables & Apparel Cautious 2,188 30.1 1 38 19 64 46 39 43 32 27 10.9 9.4 17.1 20 21 0.5 0.7 125 Consumer Staples Bajaj Consumer Care ADD 241 300 24 36 0.5 148 15 16 18 22 7 8 15.7 14.8 13.7 12.4 11.2 9.9 4.7 4.0 3.5 32 29 27 3.3 3.3 3.7 4.8 Britannia Industries ADD 3,364 3,875 15 810 11.1 240 79 73 86 33 (6) 17 43 46 39 32 33 29 25.6 17.5 16.2 49 45 43 3.2 2.1 2.2 42 Colgate-Palmolive (India) ADD 1,594 1,680 5 434 6.0 272 35 38 43 24 9 13 45 42 37 29.7 27.3 24.3 26.4 25.3 24.0 59 62 67 2.1 2.3 2.6 17.1 Dabur India ADD 520 555 7 919 12.6 1,767 10 11 13 13 13 14 53 47 41 44 38 33 12.6 11.5 10.4 25 26 27 1.2 1.3 1.5 27 Godrej Consumer Products ADD 721 795 10 737 10.1 1,022 16 18 21 18 12 15 45 40 35 31 27 24 8.1 7.3 6.7 19.5 19.4 20 1.0 1.3 1.6 18.3 Hindustan Unilever ADD 2,164 2,625 21 5,084 69.9 2,343 34 41 49 9 20 20 64 53 44 44 37 31 11.8 11.5 11.1 31 22 25 1.6 1.8 2.1 80 ITC BUY 218 265 22 2,679 36.8 12,318 10 12 13 (10) 19 8 21 17.7 16.4 15.2 12.5 11.4 4.2 4.0 3.9 19.1 22 24 4.6 4.8 5.2 122 Jyothy Laboratories ADD 152 170 12 56 0.8 367 6.0 6.3 7.1 28 4 14 25 24 21 17.9 17.1 15.2 4.2 4.0 3.7 17.3 16.9 18.0 2.3 2.6 3.0 1.6 Marico ADD 417 450 8 538 7.4 1,290 9.1 10.2 11.3 12 12 11 46 41 37 33 29 26 16.2 14.8 13.6 37 38 38 1.7 1.9 2.1 15.2 Nestle India REDUCE 16,741 17,150 2 1,614 22.2 96 216 257 295 6 19 15 78 65 57 50 44 38 79.9 53.0 38.2 105 98 78 1.2 0.9 1.0 36 Tata Consumer Products ADD 632 610 (4) 583 8.0 922 10 12 14 25 19 21 63 53 44 36 32 27 4.0 3.8 3.6 6.5 7.4 8.5 0.6 0.7 0.8 36 United Breweries ADD 1,264 1,375 9 334 4.6 264 4 26 33 (74) 513 28 304 50 39 88 27 22 9.3 7.9 6.7 3.1 17.2 18.8 0.1 0.5 0.7 11.8 United Spirits ADD 565 680 20 411 5.6 727 6 14 17 (48) 136 22 95 40 33 44 25 21 9.4 7.6 6.6 10.3 21 21 —— 0.9 23 Varun Beverages BUY 945 1,100 16 273 3.8 289 14 29 36 (16) 110 25 69 33 26 25 16 13 7.7 6.1 5.1 11.5 21 21 0.1 0.3 0.3 5.0 Consumer Staples Attractive 14,507 199.4 2 21 14 45 37 32 31 26 23 9.0 8.4 7.8 20 23 24 2.0 2.1 2.4 439 Diversified Financials Bajaj Finance SELL 5,705 4,000 (30) 3,438 47.3 600 77 144 191 (13) 87 33 74 40 30 ——— 9.4 7.8 6.3 13.4 21 23 0.1 0.3 0.3 276 Bajaj Finserv ADD 10,185 10,050 (1) 1,621 22.3 159 276 437 566 30 58 29 37 23 18.0 ——— 5.1 4.4 3.7 14.0 20 22 0.1 0.1 0.1 121 Cholamandalam BUY 528 540 2 433 5.9 820 24 33 35 88 35 7 22 16.2 15.2 ——— 4.6 3.7 3.1 22 24 21 0.5 0.7 0.7 38 HDFC ADD 2,805 2,750 (2) 5,050 69.4 1,789 66 73 87 (36) 11 20 43 39 32 ——— 4.6 4.3 3.9 11.7 11.5 12.8 0.8 0.9 1.1 174 HDFC AMC SELL 2,985 2,175 (27) 636 8.7 213 63 72 82 7 15 13 47 41 36 ——— 13.7 11.9 10.4 31 31 30 1.2 1.3 1.5 16.6 IIFL Wealth ADD 1,224 1,250 2 107 1.5 90 38 45 58 61 17 30 32 27 21 ——— 4.1 3.9 3.6 12.1 14.6 17.9 6.5 2.4 2.8 1.0 India Daily Summary Daily Summary India L&T Finance Holdings ADD 98 105 7 196 2.7 2,005 5 10 12 (45) 104 27 21 10.2 8.1 ——— 1.3 1.2 1.0 6.3 11.9 13.5 1.5 1.5 1.5 29 LIC Housing Finance ADD 470 430 (9) 237 3.3 505 53 71 79 12 33 12 8.8 6.6 5.9 ——— 1.4 1.2 1.1 14.0 16.5 16.1 1.9 2.5 2.8 46 Mahindra & Mahindra Financial BUY 218 195 (11) 270 3.7 1,232 8 14 18 (49) 89 25 29 15.4 12.2 ——— 1.9 1.8 1.6 7.0 11.0 12.6 0.5 1.3 1.6 31 Muthoot Finance REDUCE 1,323 1,250 (6) 531 7.3 401 90 106 112 20 17 6 14.7 12.5 11.8 ——— 3.7 3.0 2.5 28 27 23 1.4 1.6 1.7 40 Shriram City Union Finance BUY 1,485 1,500 1 98 1.3 66 145 180 193 (5) 24 7 10.3 8.3 7.7 ——— 1.3 1.1 1.0 12.5 13.9 13.3 1.2 1.8 2.0 1.2 Shriram Transport BUY 1,460 1,525 4 369 5.1 253 103 134 161 (7) 30 20 14.2 10.9 9.0 ——— 1.8 1.6 1.4 13.1 14.7 15.5 1.1 1.4 1.7 81 Diversified Financials Attractive 13,059 179.5 (10) 36 19 35 26 22 4.4 3.9 3.5 12.4 14.9 16.0 0.7 0.8 0.9 856 Source: Company, Bloomberg, Kotak Institutional Equities estimates KOTAK INSTITUTIONAL INSTITUTIONAL KOTAK - February February 18, 2021 EQUITIES RESEARCH EQUITIES KOTAK INSTITUTIONAL EQUITIES RESEARCH 55 Kotak Institutional Equities: Valuation summary of KIE Universe stocks 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 KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 17-Feb-21 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E (US$ mn) Electric Utilities CESC BUY 607 815 34 80 1.1 133 96 106 117 (3) 11 10 6.3 5.7 5.2 5.1 4.2 3.7 0.6 0.6 0.5 11.2 10.3 10.4 7.4 2.3 2.7 5.9 Daily Summary JSW Energy REDUCE 75 70 (6) 123 1.7 1,640 5.6 5.7 7.0 (11) 0 24 13.2 13.2 10.6 6.6 5.8 5.2 1.0 0.9 0.8 7.6 7.1 8.2 ——— 3.7 NHPC ADD 25 27 7 254 3.5 10,045 3.5 3.5 3.5 26 (2) 1 7.2 7.3 7.2 10.3 9.7 9.1 0.8 0.7 0.7 11.1 10.4 10.0 7.8 7.8 7.9 3.1 NTPC BUY 99 125 26 983 13.5 9,697 15 15 17 32 4 8 6.8 6.5 6.0 8.4 6.4 5.4 0.8 0.7 0.7 12.2 11.8 11.8 4.0 4.6 5.0 48 Power Grid BUY 230 240 4 1,204 16.5 5,232 24 27 28 21 9 5 9.4 8.6 8.2 7.3 6.5 6.0 1.7 1.6 1.4 19.0 19.0 18.1 5.3 5.8 6.0 36 Tata Power ADD 91 95 4 291 4.0 3,196 3.5 5.2 5.8 (20) 46 12 25.8 17.6 15.8 8.8 8.9 8.3 1.3 1.2 1.2 5.7 7.3 7.6 ——— 45 Electric Utilities Attractive 2,934 40.3 21 7 7 8.7 8.1 7.6 1.1 1.0 0.9 12.5 12.4 12.2 4.3 4.6 4.9 142 Fertilizers & Agricultural Chemicals Bayer Cropscience SELL 5,148 4,250 (17) 231 3.2 45 126 158 179 (2) 25 13 41 33 29 28 23 20 7.9 6.6 5.6 21 22 21 0.5 0.6 0.7 2.7 Dhanuka Agritech SELL 746 680 (9) 35 0.5 48 43 41 45 43 (3) 10 17.6 18.0 16.5 13.1 13.0 11.4 4.1 3.6 3.1 26 21 20 1.4 1.7 2.1 1.0 Godrej Agrovet SELL 493 455 (8) 95 1.3 192 15 18 21 29 24 15 33 27 23 19 15 13 3.9 3.5 3.1 12.2 13.7 14.2 1.0 1.3 1.5 1.4 PI Industries SELL 2,223 1,825 (18) 337 4.6 148 51 61 73 53 20 20 44 37 30 30 25 20 6.3 5.6 4.9 19.1 16.5 17.2 0.3 0.5 0.6 18.7 - Rallis India ADD 262 310 18 51 0.7 195 12 15 18 30 26 21 22.3 17.7 14.6 15.7 12.4 10.2 3.2 2.8 2.4 15.3 16.9 17.8 1.0 1.2 1.3 2.3 February 18, 2021 UPL SELL 539 430 (20) 412 5.7 765 34 39 43 46 15 10 16 13.8 12.6 8.1 7.3 6.5 2.3 2.0 1.8 15.0 15.4 15.2 1.6 1.9 2.1 78 Fertilizers & Agricultural Chemicals Cautious 1,161 16.0 38 18 13 25 21 18.8 12.4 11.0 9.7 3.7 3.3 2.9 14.8 15.4 15.3 0.9 1.1 1.3 104 Gas Utilities GAIL (India) BUY 134 160 19 606 8.3 4,510 10 12 12 (24) 19 4 13.4 11.3 10.8 10.6 8.3 7.6 1.3 1.2 1.1 10.0 11.1 10.9 3.0 3.7 4.5 48 GSPL SELL 240 200 (17) 135 1.9 564 13 12 8 (23) (11) (32) 18.1 20.3 29.9 7.8 8.4 11.1 1.8 1.7 1.6 10.6 8.7 5.6 0.8 1.0 0.8 3.6 Indraprastha Gas ADD 545 575 5 382 5.2 700 16 23 26 (4) 43 11 33.9 23.7 21.3 24.1 17.1 15.1 6.5 5.5 4.7 21 25 24 0.5 0.9 1.3 26 Mahanagar Gas BUY 1,151 1,350 17 114 1.6 99 64 98 104 (14) 52 6 18.0 11.8 11.1 11.3 7.4 6.6 3.4 2.9 2.5 20 27 24 2.2 3.4 4.1 16.7 Petronet LNG BUY 240 300 25 360 5.0 1,500 20 21 23 16 4 9 11.7 11.3 10.3 6.6 6.2 5.8 3.1 2.9 2.8 27 26 28 6.4 7.1 8.2 18.2 Gas Utilities Attractive 1,597 22.0 (12) 17 5 15.8 13.5 12.9 10.5 8.7 8.1 2.1 2.0 1.8 13.5 14.6 14.3 2.9 3.6 4.2 113 Health Care Services Apollo Hospitals ADD 3,235 2,860 (12) 465 6.4 144 5 48 65 (71) 785 36 598.5 67.6 49.7 42.4 25.6 21.4 10.2 9.4 8.4 2.0 14.4 17.8 0.1 0.6 0.8 49 Aster DM Healthcare BUY 150 220 46 75 1.0 500 2.8 9.8 11.9 (52) 245 21 52.9 15.3 12.7 9.2 6.3 5.5 2.2 2.0 1.7 4.3 13.6 14.5 ——— 0.7 Dr Lal Pathlabs SELL 2,594 1,520 (41) 216 3.0 83 33 40 43 22 23 7 78.9 64.2 59.8 49.7 40.0 37.2 18.3 15.8 13.8 25 26 25 0.6 0.7 0.8 5.7 HCG BUY 166 175 5 21 0.3 143 (8) (2) (2) 30 71 21 NM NM NM 16.3 9.3 8.1 2.5 2.5 2.6 NM NM NM ——— 0.3 Metropolis Healthcare SELL 2,008 1,510 (25) 103 1.4 51 36 41 46 20 14 11 55.7 48.8 43.9 34.8 29.1 25.8 15.8 13.2 11.0 31 30 27 0.5 0.6 0.7 3.4 Narayana Hrudayalaya BUY 462 540 17 94 1.3 204 (3.0) 9.7 12.6 (152) 421 31 NM 47.9 36.6 65.6 18.2 15.2 8.8 7.4 6.2 NM 16.8 18.4 ——— 1.9 Health Care Services Attractive 974 13.4 (47) 281 25 196.5 51.6 41.3 31.3 19.8 17.1 8.3 7.4 6.6 4.2 14.4 15.9 0.2 0.5 0.6 61 Hotels & Restaurants Jubilant Foodworks BUY 2,882 3,150 9 380 5.2 132 17 43 54 (26) 144 26 164.9 67.6 53.5 46.7 29.3 24.5 30.0 21.7 16.9 19.2 37 36 0.2 0.5 0.6 43 Lemon Tree Hotels REDUCE 43 39 (9) 34 0.5 790 (1.5) (0.4) 0.6 (1,176) 72 237 NM NM 72.3 75.8 36.2 14.1 4.8 4.7 4.4 NM NM 6.3 — (1.4) (0.1) 2.2 Hotels & Restaurants Attractive 414 5.7 (64) 386 44 380.6 78.3 54.6 49.1 30.0 22.4 21.0 16.7 13.7 5.5 21 25 0.2 0.3 0.6 45 Source: Company, Bloomberg, Kotak Institutional Equities estimates 56 KOTAK INSTITUTIONAL EQUITIES RESEARCH 56 Kotak Institutional Equities: Valuation summary of KIE Universe stocks 57 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 17-Feb-21 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E (US$ mn) Insurance HDFC Life Insurance ADD 703 705 0 1,421 19.5 2,010 7.6 9.6 11.9 18 27 24 93 73 59 — — — 18.4 16.5 14.7 21 24 26 0.3 0.3 0.4 47 ICICI Lombard SELL 1,498 1,075 (28) 681 9.4 454 33 34 38 26 3 13 45 44 39 — — — 9.1 7.9 6.8 22 19.9 18.8 0.2 0.4 0.5 17.9 ICICI Prudential Life BUY 488 560 15 701 9.6 1,436 9 11 13 16 29 16 57 44 38 — — — 8.2 7.2 6.2 15.4 17.4 17.5 0.3 0.4 0.4 18.5 Max Financial Services NR 868 — — 300 4.1 343 10 27 16 (6) 180 (40) 91 32 54 — — — — — — 13.5 38 17.5 0.1 0.9 0.4 20 SBI Life Insurance BUY 877 1,250 43 877 12.1 1,001 13 16 19 (7) 23 15 66 54 47 — — — 9.7 8.4 7.3 15.5 16.6 16.6 0.2 0.3 0.3 25 Insurance Attractive 3,980 54.7 13 33 9 67.3 50.7 47 11.3 9.1 8.5 16.7 17.9 18.1 0.2 0.3 0.3 129 Internet Software & Services Info Edge SELL 4,917 3,170 (36) 632 8.7 128.3 22 43 53 (19) 98 23 225.8 114.1 93.0 194.7 106.9 84.9 14.0 12.8 11.6 8.0 11.7 13.1 0.1 0.2 0.3 57 Just Dial SELL 664 570 (14) 41 0.6 61.8 27 30 36 (35) 9 20 24.2 22.3 18.5 16.8 15.3 12.7 3.3 2.9 2.5 13.4 13.9 14.4 — — — 13.8 Internet Software & Services Cautious 673 9.3 (25) 64 22 150.0 91.3 74.8 132.4 85.8 69.9 11.7 10.6 9.5 7.8 11.6 12.7 0.1 0.2 0.3 70 IT Services HCL Technologies ADD 943 1,120 19 2,560 35.2 2,716 50 53 58 21 7 10 19.1 17.9 16.3 12.0 10.9 9.6 4.2 3.6 3.1 25 22 20 1.1 1.4 1.4 97 Infosys BUY 1,281 1,530 19 5,458 75.0 4,250 46 52 60 17 14 15 28.1 24.7 21.5 18.6 16.4 14.3 7.4 6.6 5.8 28 28 29 2.0 2.3 2.7 170 L&T Infotech REDUCE 3,876 3,810 (2) 677 9.3 176 108 128 151 25 19 17 35.9 30.2 25.7 24.0 21.4 18.4 10.3 8.4 6.8 32 31 29 0.8 0.9 1.0 22 L&T Technology Services ADD 2,667 2,700 1 280 3.9 106 64 89 106 (18) 39 20 42.0 30.1 25.1 26.3 19.7 16.4 8.7 7.2 6.0 22 26 26 0.6 0.8 1.0 11.3 Mindtree SELL 1,677 1,410 (16) 276 3.8 165 67 76 82 74 15 7 25.2 21.9 20.5 16.2 14.6 13.3 7.2 5.8 4.9 31 29 26 1.2 1.4 1.5 24 Mphasis REDUCE 1,645 1,480 (10) 307 4.2 187 66 76 85 5 14 12 24.8 21.7 19.3 16.2 14.0 12.4 4.8 4.3 3.8 20 21 21 2.1 2.1 2.1 9.5 TCS REDUCE 3,073 3,070 (0) 11,531 158.5 3,744 89 106 119 4 19 12 34.4 28.9 25.9 23.7 20.3 18.2 12.6 10.6 9.8 38 40 40 1.0 2.1 3.1 145 Tech Mahindra BUY 981 1,135 16 854 11.7 880 52 60 68 13 16 13 19.0 16.3 14.5 11.2 9.7 8.3 3.6 3.2 2.9 19.8 21 21 2.3 2.4 2.6 62 Wipro ADD 430 465 8 2,459 33.8 5,662 19 21 23 12 13 12 23.1 20.6 18.4 15.1 13.8 12.0 4.6 3.8 3.3 19.3 19.9 19.2 0.5 1.2 1.2 89 IT Services Attractive 24,403 335.4 11 14 12 28.3 24.8 22.1 18.8 16.5 14.6 7.5 6.5 5.8 27 26 26 1.2 1.9 2.5 630 Media DB Corp. REDUCE 90 81 (10) 16 0.2 175 5.3 14.1 14.2 (66) 167 1 17.1 6.4 6.3 5.6 2.8 3.0 0.9 0.9 0.9 5.4 14.3 14.6 2.2 13.3 14.4 0.5 Jagran Prakashan REDUCE 47 37 (21) 13 0.2 281 3.9 7.3 8.4 (44) 87 NA 11.9 6.4 NA 2.9 1.9 NA 0.7 0.7 NA 5.7 10.3 11.5 4.3 10.7 10.7 0.4 PVR BUY 1,499 1,650 10 91 1.3 55 (93) 40 60 (420) 143 53 NM 37.9 24.8 (25.1) 14.3 11.1 3.9 3.6 3.2 NM 10.0 13.7 (0.6) 0.3 0.4 38 Sun TV Network REDUCE 525 465 (11) 207 2.8 394 38 40 42 7 7 5 13.9 13.0 12.4 9.8 8.8 8.4 3.5 3.3 3.2 26 26 26 4.8 5.2 5.7 27 Zee Entertainment Enterprises REDUCE 215 240 12 206 2.8 960 12 17 18 8 38 11 17.8 12.9 11.6 10.7 7.8 6.7 2.1 1.9 1.7 12.0 15.1 15.1 1.6 1.9 2.1 64 Media Cautious 533 7.3 (24) 65 11 22.8 13.8 12.5 13.3 8.1 7.2 2.4 2.3 2.1 10.8 16.5 16.9 2.6 3.4 3.8 130 Metals & Mining Hindalco Industries BUY 304 375 23 683 9.4 2,220 27 34 36 55 24 6 11.1 8.9 8.4 6.5 5.7 5.0 1.1 0.9 0.9 10.0 11.2 10.6 0.3 0.3 0.3 63 Hindustan Zinc BUY 306 335 10 1,291 17.7 4,225 19 23 24 17 23 3 16.3 13.3 12.9 10.0 7.9 7.7 4.0 4.0 4.0 22 30 31 7.0 7.5 7.8 7.0 India Daily Summary Daily Summary India Jindal Steel and Power BUY 325 380 17 332 4.6 1,020 58 36 36 863 (38) (2) 5.6 8.9 9.1 4.0 4.5 4.4 0.9 0.8 0.7 17.2 9.5 8.6 — — — 46 JSW Steel ADD 409 415 2 988 13.6 2,402 30 29 35 201 (5) 22 13.5 14.2 11.6 7.6 7.0 5.9 2.3 2.0 1.7 18.2 14.8 15.7 0.5 0.5 0.5 40 National Aluminium Co. SELL 51 35 (31) 94 1.3 1,866 3.4 3.0 3.1 362 (13) 5 14.8 16.9 16.1 6.0 6.8 7.3 1.0 0.9 0.9 6.4 5.6 5.7 0.0 3.0 3.1 16.9 NMDC REDUCE 117 110 (6) 357 4.9 2,931 19.6 14.1 8.4 34 (28) (40) 6.0 8.2 13.8 5.8 10.9 19.1 1.1 1.0 1.0 19.8 13.2 7.5 4.2 6.1 3.6 19.2 Tata Steel BUY 697 875 26 804 11.0 1,204 84 93 92 139 10 (1) 8.3 7.5 7.6 5.8 5.3 5.3 1.1 0.9 0.8 13.5 13.4 11.8 2.6 2.6 2.4 191 Vedanta REDUCE 193 180 (7) 717 9.9 3,717 24 21 26 262 (10) 24 8.1 9.1 7.3 4.3 4.0 3.5 1.4 1.3 1.2 16.3 14.7 17.4 14.5 8.8 9.1 66 Metals & Mining Attractive 5,265 72.4 124 (1) 5 10.0 10.1 9.7 6.1 5.7 5.4 1.5 1.4 1.3 15.0 13.6 13.0 4.5 4.0 3.9 449 Source: Company, Bloomberg, Kotak Institutional Equities estimates KOTAK INSTITUTIONAL INSTITUTIONAL KOTAK - February February 2021 18, EQUITIES RESEARCH EQUITIES KOTAK INSTITUTIONAL EQUITIES RESEARCH 57 Kotak Institutional Equities: Valuation summary of KIE Universe stocks 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 KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 17-Feb-21 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E (US$ mn) Oil, Gas & Consumable Fuels BPCL BUY 412 475 15 893 12.3 1,967 47 38 40 349 (19) 5 8.7 10.7 10.2 7.2 8.7 7.8 2.2 2.0 1.8 26.3 19.2 18.4 5.2 4.7 4.9 51.1 DailySummary Coal India BUY 135 185 37 833 11.5 6,163 18.6 17.1 17.8 (31) (8) 4 7.3 7.9 7.6 6.7 6.5 5.7 2.7 2.8 3.0 36.2 34.7 38.1 14.8 14.8 14.8 33.5 HPCL BUY 234 260 11 349 4.8 1,499 57 34 35 700 (40) 4 4.1 6.9 6.6 5.6 7.8 7.1 1.0 0.9 0.8 26.7 13.8 13.2 4.9 5.1 6.0 24.4 IOCL BUY 95 115 21 894 12.3 9,181 19.4 14.6 15.5 592 (25) 6 4.9 6.5 6.1 4.8 5.3 5.1 0.8 0.8 0.7 18.1 12.6 12.5 8.4 6.9 7.3 37.9 Oil India SELL 120 85 (29) 130 1.8 1,084 0.1 8.3 9.4 (100) 8,787 13 1,281.1 14.4 12.7 10.0 6.5 6.3 0.5 0.5 0.5 0.0 3.6 4.0 2.9 2.8 3.1 2.7 ONGC SELL 102 75 (27) 1,286 17.7 12,580 7.4 10.1 12.1 (45) 37 20 13.9 10.1 8.4 4.8 4.0 3.5 0.5 0.5 0.5 4.0 5.3 6.1 2.4 3.8 4.7 49.6 Reliance Industries ADD 2,083 2,050 (2) 12,347 169.7 6,032 73 85 101 10 15 20 28.4 24.6 20.5 16.8 11.2 9.1 2.5 2.2 2.0 9.2 9.7 10.3 0.3 0.4 0.4 379.8 Oil, Gas & Consumable Fuels Attractive 16,733 230.0 34 3 15 16.6 16.1 14.0 10.1 8.3 7.0 1.7 1.5 1.4 10.4 9.6 10.2 2.0 2.0 2.2 579 Pharmaceuticals Aurobindo Pharma REDUCE 922 880 (5) 540 7.4 586 56 61 65 15 8 7 16.5 15.2 14.1 10.0 8.9 7.9 2.5 2.2 1.9 15.1 14.3 13.7 0.8 1.0 1.2 44.5 Biocon SELL 419 310 (26) 502 6.9 1,202 6.2 8.8 11.1 0 42 25 67 47 38 28.7 21.2 17.3 5.2 4.8 4.3 7.7 10.1 11.4 0.5 0.7 0.9 30.6 Cipla BUY 836 950 14 674 9.3 806 32 34 50 66 8 45 26 24.3 16.8 14.6 13.7 9.5 3.7 3.3 2.9 14.2 13.6 17.0 0.7 0.8 1.2 66.7 - Divis Laboratories REDUCE 3,615 3,300 (9) 960 13.2 265 75 90 103 44 20 15 48 40.4 35.2 33.7 28.3 24.7 11.2 9.5 8.1 23.1 23.4 22.8 (0.7) (0.9) (1.0) 57.3 February 2021 18, Dr Reddy's Laboratories SELL 4,601 4,300 (7) 765 10.5 166 157 194 258 20 24 33 29 23.7 17.8 16.9 13.4 10.2 4.5 3.9 3.3 15.3 16.4 18.3 0.5 0.7 0.7 90.7 Gland Pharma REDUCE 2,359 2,200 (7) 386 5.3 163 61 76 89 22 25 17 39 31.2 26.6 27.2 22.8 19.0 6.5 5.4 4.5 16.8 17.3 16.9 — — — — Laurus Labs REDUCE 367 340 (7) 197 2.7 536 19 19 24 287 5 22 20 18.9 15.4 13.7 12.3 9.8 7.1 5.2 3.9 35.9 27.4 25.1 — — — 16.6 Lupin ADD 1,063 1,200 13 482 6.6 450 25 43 52 17 68 23 42 25 20.3 17.2 11.9 9.7 3.5 3.1 2.8 8.4 12.7 13.7 0.4 0.6 0.7 45.6 Sun Pharmaceuticals ADD 621 635 2 1,490 20.5 2,406 25 24 29 48 (2) 19 25 25 21.4 16.2 14.5 12.4 3.2 2.9 2.6 12.6 11.8 12.0 0.4 0.8 0.9 79.6 Torrent Pharmaceuticals REDUCE 2,538 2,750 8 430 5.9 169 71 84 100 24 18 19 36 30 25 17.9 16.5 14.3 7.7 6.6 5.6 21.4 21.7 22.2 1.0 1.1 1.4 17.9 Pharmaceuticals Attractive 6,426 88.3 37 14 22 30 26 21.5 17.6 15.1 12.4 4.3 3.8 3.3 14.3 14.4 15.3 0.3 0.5 0.6 450 Real Estate Brigade Enterprises BUY 282 310 10 59 0.8 204 (3.7) 14.0 19.4 (158) 480 38 NM 20.1 14.5 23.6 7.7 6.9 2.7 2.4 2.1 NM 12.7 15.6 0.9 0.9 0.9 1.1 DLF REDUCE 315 240 (24) 779 10.7 2,475 4.7 7.8 8.9 298 65 14 67 40.5 35.6 52.4 38.7 38.4 2.2 2.1 2.0 3.4 5.4 5.9 0.6 0.6 0.6 74.2 Embassy Office Parks REIT ADD 349 380 9 331 4.5 948 10 11 13 2 12 15 35 31 27 20.6 15.8 13.8 1.2 1.3 1.4 3.8 4.0 4.9 5.7 7.3 8.5 4.8 Godrej Properties SELL 1,505 810 (46) 379 5.2 252 6 14 32 (48) 156 125 269 105 47 (467) 150.3 67.7 7.7 7.1 6.2 2.9 7.1 14.2 — — — 25.4 Mindspace REIT ADD 312 340 9 185 2.5 593 14 16 18 69 10 13 21.6 19.7 17.4 17.7 14.3 12.9 1.1 1.1 1.1 9.1 5.7 6.5 2.6 6.5 7.0 2.3 Oberoi Realty ADD 571 590 3 208 2.9 364 22 28 32 13 31 13 26.6 20.3 18.0 19.6 15.5 13.9 2.2 2.0 1.8 8.7 10.4 10.6 0.4 0.4 0.4 4.6 Phoenix Mills BUY 845 960 14 145 2.0 172 5 22 33 (78) 373 47 178 38 25.6 29.5 15.6 12.3 3.0 2.8 2.5 1.9 7.6 10.3 - 0.3 0.4 2.9 Prestige Estates Projects ADD 295 315 7 118 1.6 401 5 17 27 (48) 246 59 60 17 10.9 9.7 6.9 5.5 2.2 1.9 1.7 3.7 11.8 16.4 0.5 0.5 0.5 2.5 Sobha BUY 457 480 5 43 0.6 95 11 38 54 (65) 259 43 43.4 12.1 8.4 7.6 5.1 4.3 1.8 1.6 1.4 4.1 13.8 17.4 1.5 1.5 1.5 2.5 Sunteck Realty BUY 359 300 (17) 53 0.7 140 9 18 16 23 109 (13) 41 19.5 22.4 31.3 15.6 17.4 1.7 1.5 1.4 4.1 8.2 6.7 0.3 0.3 0.3 3.0 Real Estate Attractive 2,301 31.6 54 68 27 53 32 24.9 26.8 17.9 15.3 2.1 2.0 1.9 3.9 6.4 7.8 1.4 1.9 2.1 123 Retailing Aditya Birla Fashion and Retail BUY 162 200 23 149 2.1 915 (6.1) 3.2 4.3 (226) 152 34 NM 51 38 42.5 10.6 9.2 7.1 5.8 5.0 NM 12.7 14.2 — — — 6.0 Avenue Supermarts SELL 3,188 1,885 (41) 2,065 28.4 648 18 33 43 (15) 87 28 178 96 75 117 64 50 16.9 14.3 12.0 9.9 16.2 17.6 — — — 27.4 Titan Company ADD 1,460 1,625 11 1,297 17.8 888 10 23 29 (40) 132 25 145 63 50 79 40 32 17.8 14.7 12.1 12.8 25.7 26.5 0.2 0.4 0.5 55.6 Retailing Attractive 3,511 48.3 (44) 204 27 236 78 61 93 44 36 16.2 13.6 11.4 6.9 17.5 18.7 0.1 0.2 0.2 89 Source: Company, Bloomberg, Kotak Institutional Equities estimates 58 KOTAK INSTITUTIONAL EQUITIES RESEARCH 58 Kotak Institutional Equities: Valuation summary of KIE Universe stocks 59 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 17-Feb-21 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E (US$ mn) Speciality Chemicals Castrol India BUY 126 165 31 124 1.7 989 6.0 9.0 9.8 (28) 50 8 20.8 13.9 12.9 13.4 9.2 8.4 8.8 8.2 7.6 43.0 61.0 61.2 4.4 6.4 6.8 3.5 Pidilite Industries REDUCE 1,765 1,760 (0) 897 12.3 508 22 29 35 (5) 30 23 81 62 50 55 42 34 17.4 15.0 12.8 23.1 26.0 27.5 0.4 0.6 0.7 22.6 S H Kelkar and Company BUY 122 145 19 17 0.2 141 8.9 9.1 10.2 92 2 12 13.7 13.4 11.9 9.3 7.9 7.0 1.8 1.6 1.5 14.0 12.5 12.9 1.2 1.8 2.5 1.5 SRF ADD 5,686 5,600 (2) 337 4.6 58 186 225 288 35 21 28 30.5 25.3 19.7 17.8 15.2 12.3 5.0 4.3 3.6 18.7 18.3 19.6 0.3 0.3 0.4 16.4 Speciality Chemicals Attractive 1,375 18.9 2 30 21 47 36 29.9 29.5 23.2 19.4 9.7 8.4 7.1 20.6 23.1 23.8 0.7 1.0 1.2 44 Telecommunication Services Bharti Airtel BUY 594 710 20 3,240 44.5 5,456 (4.6) 11.7 22.2 NM NM NM NM 50.8 26.7 9.6 7.6 6.2 5.4 5.2 4.6 NM 10.4 18.1 1.0 1.0 1.0 153.2 Indus Towers ADD 257 250 (3) 692 9.5 2,695 17.8 17.8 18.8 20 (0) 6 14.4 14.4 13.7 5.7 5.3 5.1 4.7 4.5 4.3 34.0 31.9 32.4 9.0 6.2 6.2 39.0 Vodafone Idea RS 12 — — 342 4.7 28,735 (8.4) (6.3) (4.5) NM NM NM NM NM NM 10.9 8.4 6.9 (1.0) (0.8) (0.6) 176.3 47.4 25.7 — — — 67 Tata Communications BUY 1,058 1,200 13 302 4.1 285 48 55 64 22 13 17 21.9 19.4 16.6 9.2 8.2 7.1 NM 22.2 10.1 NM 245 83.4 0.4 0.6 0.7 3.6 Telecommunication Services Attractive 4,575 62.9 43 73 213 NM NM 74.0 9.2 7.5 6.3 11.0 12.7 13.5 NM NM 18.3 2.1 1.7 1.7 263 Transportation Adani Ports and SEZ BUY 656 640 (2) 1,332 18.3 2,032 23 34 40 (15) 46 20 28.5 19.5 16.3 19.6 13.8 11.5 4.5 3.8 3.2 17.0 21.1 21.1 0.6 0.7 0.8 65.4 Container Corp. SELL 541 455 (16) 330 4.5 609 12 16 20 (27) 27 29 44 34 27 23.6 19.5 15.6 3.2 3.1 3.0 7.4 9.1 11.4 1.2 1.6 2.0 20.3 Gateway Distriparks BUY 167 150 (10) 21 0.3 125 5.4 4.8 7.4 29 (12) 54 30.6 34.6 22.5 9.6 9.8 8.2 1.4 1.4 1.4 4.9 4.1 6.2 1.8 1.8 1.8 0.9 GMR Infrastructure BUY 25 26 4 151 2.1 6,036 (3.7) (1.4) (0.5) (23) 63 65 NM NM NM 84.8 18.6 13.2 (3.6) (3.2) (4.1) 66.3 18.3 7.4 — — — 8.7 Gujarat Pipavav Port BUY 94 120 28 46 0.6 483 4.9 6.7 7.6 (19) 36 14 19.3 14.2 12.5 8.9 7.4 6.5 2.2 2.2 2.2 11.4 15.5 17.7 4.9 6.6 7.5 1.3 InterGlobe Aviation BUY 1,610 1,960 22 620 8.5 383 (142) 83 119 (2,095) 158 43 NM 19 13.5 NM - - - - - NM 101.1 65.0 — — — 38 Mahindra Logistics REDUCE 498 440 (12) 36 0.5 71 7.2 12.9 17.7 (20) 81 37 70 38 28 ------9.1 15.0 18.1 — — — 0.7 Transportation Attractive 2,535 34.8 (139) 663 34 NM 24 17.8 25.8 11.1 8.9 6.2 5.1 4.1 NM 21.2 22.7 0.6 0.7 0.8 135 KIE universe 158,103 2,173 34.3 29.8 19.2 30 22.9 19.2 14.2 11.6 10.0 3.3 3.0 2.7 11.2 13.1 14.1 1.3 1.4 1.7 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$)= 72.75 Source: Company, Bloomberg, Kotak Institutional Equities estimates India Daily Summary Daily Summary India KOTAK INSTITUTIONAL INSTITUTIONAL KOTAK - February February 2021 18, EQUITIES RESEARCH EQUITIES KOTAK INSTITUTIONAL EQUITIES RESEARCH 59 India Daily Summary - February 18, 2021 of of the following trategic transaction As of December 31, 2020 n a merger or s any, noare longer in effect for this stock , if, fair value , any, if for this stock,because is there notsufficient a fair valuefair . Percentage of companies covered by Kotak Institutional Equities, the specifiedwithin category. Percentage of companies each within category for which Kotak Institutional Equities and or its affiliates has provided investment banking services the previouswithin months.12 * The above categories are defined as follows: Buy = We expect this stock to deliver more returns than 15% over the next months;12 Add = We expect this stock to deliverreturns 5-15% over the next months;12 Reduce = We expect this stock to deliver returns over -5-+5% the next months;12 Sell = We expect this stock to deliver less returns overthan -5% the next months.12 Our target prices are also on a horizon 12-month basis. These ratings are used illustratively to comply with applicable regulations. As of 30/09/2020 Kotak Institutional Equities Investment Research had investment ratings on 205 equity securities. luded r r display is not or applicable. months. . The previous investment and rating SELL 3.4% 21.0% fair valuefair term volatility in stock prices related to movements in the market.Hence, a particular Ratingmay not , if, any,have been suspended temporarily.Such suspension is in compliance with applicable regulation(s) - 0.5% 14.6% fair valuefair +5% returns over the next 12 months. REDUCE - month horizon basis. 5 - - 15% returns over the next 12 5% returns over the next months.12 The information is not available fo - - ake into account short ADD 26.8% 3.9% Kotak SecuritiesKotak has suspended coverage of this company. are also on12 a Kotak SecuritiesKotak Research has suspended the investment and rating The information is not meaningful and is therefore exc Kotak SecuritiesKotak does not cover this company. The investment and rating The coverage view represents each analyst’s fundamental overall outlook on the Sector.The coverage viewwill consist of one Attractive, Neutral, Cautious. BUY 1.5% 37.6% We expect this stock to deliver We this expect stock to deliver 5 We expect this to stock deliver < We expect this to stock deliver more than 15% returns over the next months.12 Fair Value estimates 0% 20% 10% 70% 60% 50% 40% 30% Source: Kotak Institutional Equities Kotak Institutional Equities Research coverage universe coverage Research Equities Institutional Kotak Distribution of ratings/investment banking relationships and shouldnot be relied upon. = NA AvailableNot or Applicable.Not = NM Meaningful.Not and/or and/or Kotak Securities policies in circumstances when Securities Kotak or its affiliates is acting in an advisory capacity i involving this company and in certain other circumstances. CS = Coverage Suspended. = NC Covered.Not = RatingRS Suspended. fundamental basis for determining an investment rating or Other definitions Other Coverage view. designations: ratings/identifiers Other NR = Rated.Not REDUCE. SELL. Our Our Ratings System notdoes t strictly be in accordance with the Rating System all at times. Ratings other and definitions/identifiers ratings of Definitions BUY. ADD. Corporate Office Overseas Affiliates Kotak Securities Ltd. Kotak Mahindra (UK) Ltd Kotak Mahindra Inc 27 BKC, Plot No. C-27, “G Block” 8th Floor, Portsoken House 369 Lexington Avenue Bandra Kurla Complex, Bandra (E) 155-157 Minories 28th Floor, New York Mumbai 400 051, India London EC3N 1LS NY 10017, USA Tel: +91-22-43360000 Tel: +44-20-7977-6900 Tel:+1 212 600 8856 Copyright 2021 Kotak Institutional Equities (Kotak Securities Limited). All rights reserved. 1. Note that the research analysts contributing to this report may not be registered/qualified as research analysts with FINRA; and 2. Such research analysts may not be associated persons of Kotak Mahindra Inc and therefore, may not be subject to NASD Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. 3. Any U.S. recipients of the research who wish to effect transactions in any security covered by the report should do so with or through Kotak Mahindra Inc and (ii) any transactions in the securities covered by the research by U.S. recipients must be effected only through Kotak Mahindra Inc at [email protected]. This report is distributed in Singapore by Kotak Mahindra (UK) Limited (Singapore Branch) to institutional investors, accredited investors or expert investors only as defined under the Securities and Futures Act. 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