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[email protected] Contact: +91 22 6218 6427
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. ADD Titan Company (TTAN) https://ultraviewer.et/en/own Retailing FEBRUARY 11, 2021 load.html RESULT Sector view: Attractive
Growth and profitability trending well. Titan’s 3Q print was decent- (1) Jewelry CMP (`): 1,563 sales were up 16% yoy and EBIT margin recovered to 12% (still down 100 bps on yoy Fair Value (`): 1,625 basis largely due to product mix), (2) watches and eyewear segments (88%/93% sales BSE-30: 51,309 recovery) reported impressive margin expansion. Overall, Jewelry sales growth, mix and margin recovery are on track and there is potential for acceleration in share gains as Titan emerges stronger relative to the competition in the post-Covid world. We maintain estimates and DCF-based FV of Rs1,625. ADD. Titan Company Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 1,563/1,625/ADD EPS (Rs) 10.1 23.3 29.2 52-week range (Rs) (high-low) 1,621-720 EPS growth (%) (40.2) 132.1 25.3 Mcap (bn) (Rs/US$) 1,388/19.1 P/E (X) 155.5 67.0 53.5 ADTV-3M (mn) (Rs/US$) 3,845/53 P/B (X) 19.0 15.7 12.9 Shareholding pattern (%) EV/EBITDA (X) 84.4 42.8 34.6 Promoters 52.9 RoE (%) 12.8 25.7 26.5 FPIs/MFs/BFIs 18.0/4.6/5.7 Div. yield (%) 0.2 0.4 0.5 Price performance (%) 1M 3M 12M Sales (Rs bn) 205 273 318 Absolute 0.9 19.7 24.3 EBITDA (Rs bn) 16 32 40 Rel. to BSE-30 (4.0) 1.0 (0.7) Net profits (Rs bn) 9 21 26
3QFY21 – Decent topline/profitability print; strong margin delivery in watches/eyewear
Titan’s 3QFY21 topline performance was per quarter-end sales update – (1) jewelry revenue grew 16% yoy (excluding bullion sale of Rs3.4 bn), (2) watches declined 12% yoy, and (3) eyewear declined 7% yoy. Jewelry EBIT margin stood at 12.0% (underlying, adjusted for bullion sales), down 100 bps yoy. Watches and eyewear segment EBIT margin stood at 10.3% and 18.1%, respectively. EBITDA stood at Rs8.6 bn, grew 17% yoy. A&P spends were down 39% yoy and employee cost was down 21% yoy. Other income grew 88% yoy, benefiting from Rs60 mn of rental negotiations. PBT/PAT both grew 18% yoy, in line with our estimates. TTAN has taken Rs1.37 bn provision in Favre Leuba subsidiary. Ineffective cash-flow hedge resulted in Rs510 mn loss in 3Q (included in other expenses; negligible EBIT level impact as the loss is balanced by gains on low-cost gold through P&L).
We expect jewelry margins to recovery as mix normalizes
Titan management indicated continued improvement in jewelry segment— retail sales were up 28% yoy in Jan 2021 and studded share improved to 39% (versus 43% in Jan 2020). We note that jewelry EBIT margin at 12% was down about 100 bps yoy led by about 200-250 decline in gross margin largely pertaining to higher gold coin sales and lower studded share. The management indicated that it has broadly managed to retain making charges as % of sales over the past 12-15 months even as gold prices have surged 35-40% (essentially implying that Jaykumar Doshi similar inflation in making margin/grammage largely absorbed by customers). Titan is not witnessing any competitive pressure on making charges. As a part of the ‘war on waste’ Sushruta Mishra program, Titan has aggressively worked on (1) improving vendor partner efficiencies to lower production cost, (2) savings in diamond procurement, and (3) product re-engineering to reduce weight of product. Given this, we believe that Titan’s jewelry margin would fully recover as the Aniket Sethi mix normalizes. Titan management also highlighted continued efforts to improve profitability in watches/eyewear. Per Titan about 50% of cost reduction is sustainable.
We tweak estimates and maintain DCF-based FV of Rs1,625
We tweak FY2021-23E estimates and maintain DCF-based FV of Rs1,625. We model 15.6% [email protected] revenue CAGR in jewelry segment and 20 bps decline in EBIT margin over FY2020-22E 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. Titan Company Retailing
Conference call takeaways
Jewelry segment revenue grew 16% yoy (adjusted for bullion sale of Rs3.4 bn; reported revenue grew 22% yoy). Retail sales grew 13% yoy largely driven by higher ticket size (store footfalls declined 3% yoy). Management highlighted continued growth momentum in Jan-2021 month with 28% yoy retail sales growth. Revenue growth was aided by significant recovery in studded segment, strong wedding jewelry sales and higher coin/plain gold sales (investment demand). Company highlighted pick-up in footfalls (especially in metros), along with improved demand in sub-Rs0.1 mn ticket size segment. Wedding jewelry grew 10% yoy in 3Q on the back of higher share of wedding-related spend shifting towards jewelry and some pent-up wedding demand from 1H. The company expects wedding jewelry growth momentum to sustain in the coming months. Studded jewelry registered 9% yoy in 3Q. With start of activations, Studded growth has accelerated to 16% yoy in Jan-2021 month (39% studded share). GHS enrolments were impacted by lesser store footfalls (-3% yoy in 3Q), even as sequential improvement continues with 13% yoy growth in store footfalls in Jan-2021 month. TTAN noted good traction on online/remote-selling efforts with 7.5% sales contribution in 3Q (2-3% online contribution).
Jewelry segment margin performance. EBIT margin stood at 12.0% (adjusted for bullion sales) – down 100 bps yoy. EBIT margin was impacted by higher coin sales (lower margin), and lower studded share (26% in Dec-2020 compared to 29% in Dec-2019 quarter), partially offset by cost reduction efforts. TTAN noted steady competitive intensity with stable making charge (as % of sale value). TTAN also booked Rs510 mn of loss due to ineffective hedge during the quarter, on account of higher than estimated sales. Losses due to ineffective hedges get balanced out in inventory gains, resulting in negligible net impact on EBIT margins. Management highlighted progress on cost reduction efforts with – (1) vendor partner efficiencies to lower production cost, (2) savings in diamond procurement, and (3) product re-engineering to reduce weight.
Watches segment revenue declined 12% yoy aided by strong traction in e-commerce channel (+30% yoy) and gifting even as continued weakness in trade channels and large- format stores dragged on overall performance (Analog watches declined 10% yoy). TTAN noted that these channels continue to see sequential m/m improvement in footfalls and ticket sizes. Franchise stores in small-towns and high-streets performed relatively better compared to Mall stores. Segment EBIT margin stood at 10.3% (+200 bps yoy) aided by cost control efforts despite negative operating leverage. TTAN has launched TRAQ range of high-performance sports watch, which has received encouraging initial consumer reviews.
Eyewear segment revenue declined 7% yoy. Segment EBIT margin stood at 18.1% registering sharp improvement aided by better product mix, lower discounts, reduction in material consumption and cost control efforts (higher in-house manufacturing, closure of non-profitable stores). Management expects sustained profitability improvement in eyewear segment with double-digit EBIT margin targeted in FY2023E.
Other businesses comprising of fragrances, Taneira and accessories witnessed 77% yoy revenue recovery in 3Q. TTAN continues to scale up Taneira with store network expansion (14 stores in six cities now), new collections (launched EIRA range of stitched Kurtas) and online/remote-selling scale up (listed on Myntra and Nykaa Fashion). To drive customer trials, the company has launched Taneira temporary pop-up stores (12 temporary pop-up stores in 3Q) with plans to conduct 75 such events in FY2022E.
Subsidiary performance. Caratlane registered 33% yoy revenue growth during the quarter led by strong festive demand, improved offline retail sentiment and continued online momentum. Caratlane registered EBIT of Rs210 mn in 3Q. TEAL (Engineering and Automation business) declined 31% yoy impacted by weakness in Aerospace business.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 Retailing Titan Company
Others. (1) TTAN has taken Rs1.37 bn provision on Favre Leuba investment, considering the Covid-led business impact. (2) Wearable watches contribute 5% of watches revenue. (3) Gold on Loan accounted for 56% of inventory value as of Dec-2020 end. (4) TTAN has also decided to exercise its put option on 8th Dec-2020 in the Montblanc JV and would be divesting its stake during Mar-2021 quarter.
Exhibit 1: TTAN - Interim results (standalone), March fiscal year-ends (Rs mn)
(% chg.) 3QFY21 3QFY21E 3QFY20 2QFY21 KIE Est yoy qoq 9MFY21 9MFY20 (% chg.) FY2021E FY2020 (% chg.) Net operating revenue 72,870 72,388 62,062 43,180 1 17 69 134,670 155,809 (14) 195,681 200,096 (2) Material cost (56,930) (56,248) (46,627) (29,870) 1 22 91 (101,580) (114,140) (11) (148,226) (145,118) 2 Gross Profit 15,940 16,141 15,435 13,310 (1) 3 20 33,090 41,669 (21) 47,455 54,978 (14) Gross Margin (%) 21.9 22.3 24.9 30.8 -43 bps -300 bps -895 bps 24.6 26.7 -218 bps 24.3 27.5 -323 bps Employee cost (2,260) (2,637) (2,851) (2,120) (14) (21) 7 (6,600) (7,961) (17) (9,459) (10,401) (9) Advertising and promotion (860) (1,200) (1,412) (510) (28) (39) 69 (1,530) (4,007) (62) (2,676) (4,767) (44) Other expenditure (4,240) (4,007) (3,816) (7,740) 6 11 (45) (15,900) (11,560) 38 (19,793) (15,633) 27 Total expenditure (64,290) (64,091) (54,706) (40,240) 0 18 60 (125,610) (137,668) (9) (180,154) (175,919) 2 EBITDA 8,580 8,297 7,356 2,940 3 17 NM 9,060 18,141 (50) 15,527 24,177 (36) OPM (%) 11.8 11.5 11.9 6.8 31 bps -8 bps 496 bps 6.7 11.6 -492 bps 7.9 12.1 -415 bps Other income 370 350 197 710 6 88 (48) 1,470 1,063 38 2,131 1,464 46 Interest (460) (400) (405) (440) 15 14 5 (1,360) (1,115) 22 (2,042) (1,495) 37 Depreciation (840) (840) (777) (830) — 8 1 (2,490) (2,195) 13 (3,356) (3,097) 8 Pretax profits 7,650 7,407 6,371 2,380 3 20 NM 6,680 15,893 (58) 12,260 21,050 (42) Tax (2,090) (1,867) (1,671) (390) 12 25 436 (1,830) (4,285) (57) (3,426) (5,873) (42) PAT 5,560 5,541 4,699 1,990 0 18 NM 4,850 11,608 (58) 8,833 15,176 (42) Extraordinary items (1,370) — — — — — — - Net profit (reported) 4,190 5,541 4,699 1,990 (24) (11) 111 4,850 11,608 (58) 8,843 15,176 (42) Recurring EPS (Rs) 6.3 6.2 5.3 2.2 0 18 179 5.5 13.1 (58) 10.0 17.1 (42) Income tax rate (%) 27.3 25.2 26.2 16.4 212 bps 108 bps 1093 bps 27.4 27.0 43 bps 27.9 27.9 4 bps Costs as a % of sales Material cost 78.1 77.7 75.1 69.2 42 bps 299 bps 894 bps 75.4 73.3 217 bps 75.7 72.5 322 bps Employee cost 3.1 3.6 4.6 4.9 -55 bps -150 bps -181 bps 4.9 5.1 -21 bps 4.8 5.2 -37 bps Advertising and promotion 1.2 1.7 2.3 1.2 -48 bps -110 bps -1 bps 1.1 2.6 -144 bps 1.4 2.4 -102 bps Other expenditure 5.8 5.5 6.1 17.9 28 bps -34 bps -1211 bps 11.8 7.4 438 bps 10.1 7.8 230 bps Segmental Results Revenue break-up (incl OI) Jewelry 65,890 65,540 54,087 38,370 1 22 72 122,090 129,839 (6) 175,959 167,382 5 Watches 5,500 5,503 6,253 4,000 (0) (12) 38 10,250 20,587 (50) 16,170 26,155 (38) Eyewear 1,240 1,226 1,333 940 1 (7) 32 2,480 4,363 (43) 3,808 5,440 (30) Others 360 420 494 230 (14) (27) 57 632 1,296 (51) 961 1,711 (44) Unallocated 250 50 92 350 400 171 (29) 690 788 (12) 934 872 7 Total 73,240 72,738 62,259 43,890 1 18 67 136,142 156,872 (13) 197,832 201,561 (2) EBIT break-up (incl OI) Jewelry 7,520 7,472 7,013 2,850 1 7 164 9,830 15,274 (36) 16,741 20,613 (19) Watches 570 413 521 (40) 38 9 (1,525) (1,110) 2,931 (138) (462) 3,653 (113) Eyewear 220 98 (67) 90 124 (428) 144 — (161) (100) 186 (143) (230) Others (80) (100) (92) (100) (20) 13 20 (360) (375) 4 (520) (584) 11 Unallocated (1,490) (75) (600) 20 1,887 (148) 7,550 (1,690) (660) 156 (1,623) (994) 63 Total 6,740 7,807 6,776 2,820 (14) (1) 139 6,670 17,009 (61) 14,322 22,545 (36) EBIT margin (%) Jewelry 11.4 11.4 13.0 7.4 1 bps -156 bps 398 bps 8.1 11.8 -372 bps 9.5 12.3 -281 bps Watches 10.4 7.5 8.3 (1.0) 286 bps 202 bps 1136 bps (10.8) 14.2 -2507 bps (2.9) 14.0 -1683 bps Eyewear 17.7 8.0 (5.0) 9.6 974 bps 2276 bps 816 bps — (3.7) 369 bps 4.9 (2.6) 751 bps Others (22.2) (23.8) (18.6) (43.5) 160 bps -363 bps 2125 bps (57.0) (29.0) -2801 bps (54.1) (34.1) -2000 bps Total 9.2 10.7 10.9 6.4 -154 bps -169 bps 277 bps 4.9 10.8 -595 bps 7.2 11.2 -395 bps
Source: Company, Kotak Institutional Equities estimates
4 KOTAK INSTITUTIONAL EQUITIES RESEARCH Titan Company Retailing
Exhibit 2: TTAN - Key changes to earnings model, March fiscal year-ends, 2021-23E, Rs mn
FY2020-22E Revised Earlier Change (%) CAGR (%) / Change (bps) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E Revised Earlier Net revenues 204,931 272,805 318,388 200,407 271,760 317,193 2.3 0.4 0.4 13.8 13.6 Revenue growth (%) (2.7) 33.1 16.7 (4.8) 35.6 16.7 EBITDA 16,318 32,194 39,612 16,546 32,057 39,277 (1.4) 0.4 0.9 14.2 14.0 PAT 8,924 20,710 25,945 9,196 20,536 25,619 (3.0) 0.8 1.3 17.8 17.3 EPS (Rs/share) 10.1 23.3 29.2 10.4 23.1 28.9 (3.0) 0.8 1.3 17.8 17.3 EBITDA margin (%) 8.0 11.8 12.4 8.3 11.8 12.4 -30 bps 0 bps 5 bps 8 bps 7 bps
Jewellery segment Revenues 178,198 231,342 272,007 174,559 231,474 272,166 2.1 (0.1) (0.1) 15.6 15.6 Revenue growth (%) 2.9 29.8 17.6 0.8 32.6 17.6 EBITDA margin 9.4 11.6 12.2 9.1 11.5 12.1 36 bps 9 bps 9 bps -21 bps -31 bps
Source: Company, Kotak Institutional Equities
Exhibit 3: TTAN - Store wise sales growth and presence
Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Sales value growth (%) World of Titan 7 8 (3) 3 8 — 9 6 (1) 11 (7) (59) (50) (14) Tanishq 22 15 19 8 38 34 20 16 7 15 (4) (23) (4) 13 Goldplus NA NA NA NA NA NA NA NA NA NA NA NA NA NA Helios 9 37 32 25 45 16 14 8 9 23 10 (51) (34) (9) Fastrack 4 10 1 4 10 4 8 4 (7) 1 (10) (64) (50) (24) LFS-Watches 4 11 14 17 33 20 20 16 6 8 (9) (86) (66) (23) Titan Eye + 10 23 10 19 18 23 21 20 35 11 (8) (46) (35) (3) Like to Like growth (%) World of Titan 5 7 (4) 2 9 (2) 7 6 (3) 11 (9) (51) (49) (15) Tanishq 18 12 17 2 32 27 14 10 2 9 (9) (18) (9) 7 Goldplus NA NA NA NA NA NA NA NA NA NA NA NA NA NA Helios (9) 4 5 (2) 16 6 6 5 1 12 (3) (29) (30) (14) Fastrack 2 6 (6) — 6 (1) 2 1 (12) (4) (12) (58) (47) (22) LFS-Watches 1 6 11 12 26 15 16 12 1 3 (15) (84) (67) (23) Titan Eye + 3 14 1 8 8 13 14 14 28 3 (16) (44) (34) (3) No of stores (Total Presence) Zoya 2 3 3 3 3 3 3 3 3 3 4 4 4 4 Helios 62 67 70 73 72 73 76 81 86 88 92 92 96 98 World of Titan 485 481 486 496 489 491 486 488 489 492 499 505 506 499 Fastrack 166 164 166 173 173 175 172 175 180 179 183 182 180 169 Tanishq 229 240 253 263 267 277 287 299 308 321 327 333 341 351 Titan Eye 462 478 500 509 513 525 537 556 561 578 584 569 557 571 Gold Plus 7 4 — — — — — — — — — — — — Total exclusive stores 1,413 1,437 1,478 1,517 1,517 1,544 1,561 1,602 1,627 1,661 1,689 1,685 1,684 1,692 Towns 266 271 276 278 279 281 281 284 285 - Sq ft 1.8mn+ 1.9mn+ 1.9mn+ 2mn+ 2mn+ 2mn+ 2.1mn+ 2.1mn+ 2.2mn+ 2.2 mn+ 2.3 mn+ 2.4 mn+ 2.4 mn+ 2.5 mn+ Sevice Centres 716 716 730 730 730 730 730 730 653 653 653 653 653 662 International Presence Countries 32 33 33 33 33 33 33 33 31 31 31 31 31 33 No of Outlets 2,264 2,264 2,264 2,265 2,264 2,264 2,264 2,264 1,800 1,800 1,800 1,800 1,800 1,123
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 5 Retailing Titan Company
Exhibit 4: TTAN - Key segment wise performance metrics
Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Jewelry business Jewelry revenue growth (%) 57.2 40.3 9.8 13.0 5.7 28.5 36.8 21.1 13.3 (1.5) 10.6 (5.8) (55.9) 8.8 21.8 Jewelry volume growth (%) 49.0 49.0 6.0 6.0 (2.6) 24.0 20.0 15.0 6.0 (14.0) (5.0) (20.0) (81.0) (31.0) (14.0) Implied price/mix change (%) 5.5 (5.9) 3.6 6.6 8.5 3.6 14.0 5.3 6.9 14.5 16.4 17.8 131.9 57.6 41.7
Average gold price (Rs/10 gm) 27,900 27,770 27,980 29,030 29,680 28,960 30,220 31,020 30,840 35,290 36,440 39,100 44,170 48,700 48,101 Change (%) (0.7) (6.3) 0.3 4.7 6.4 4.3 8.0 6.9 3.9 21.9 20.6 26.0 43.2 38.0 32.0
Studded share (%) 23.4 37.0 25.0 36.0 25.0 35.0 25.0 36.0 25.0 38.0 27.0 37.0 18.0 26.0 26.0 Distribution Tanishq (Incl Zoya) No 221 231 243 256 262 267 277 287 299 308 321 327 333 341 351 Towns 132 140 147 159 173 167 172 178 178 199 200 204 207 210 214 Sq ft ('000s) 900 940 971 1,010 1,020 1,040 1,070 1,090 1,120 1,160 1,200 1,240 1,250 1,290 1,340 GoldPLus No 20 7 4 4 4 — — — — — — — — — — Towns 20 7 4 4 4 — — — — — — — — — — Sq ft ('000s) 49 14 8 8 8 — — — — — — — — — —
Watches business Watches revenue growth (%) 3.4 10.0 6.1 (1.7) 14.9 17.3 18.8 7.5 20.4 6.4 (2.4) 4.9 (89.5) (44.3) (12.0) Watches volume growth (%) 5.0 9.0 11.0 (1.0) 10.0 21.0 16.0 — 13.0 (1.0) (10.0) (5.0) (93.0) (48.0) (26.0) Implied price change (%) (1.5) 0.9 (4.4) (0.7) 4.4 (3.1) 2.4 7.5 6.5 7.4 8.5 10.4 49.9 7.0 18.9 Distribution World of Titan No 482 485 481 486 496 489 491 486 488 489 492 499 505 506 499 Towns 220 220 221 224 226 225 225 223 221 221 220 221 221 222 225 Sq ft ('000s) 420 418 412 411 419 410 409 403 402 402 403 408 411 410 404 Fastrack No 161 166 164 166 173 173 175 172 175 180 179 183 182 180 169 Towns 84 85 83 83 88 84 83 83 82 90 84 85 84 89 83 Sq ft ('000s) 92 94 98 92 95 95 94 90 91 93 91 92 91 89 84 Helios No 54 62 67 70 72 72 73 76 81 86 88 92 93 96 98 Towns 28 28 32 33 35 36 36 37 39 41 41 42 42 42 43 Sq ft ('000s) 54 60 64 67 68 67 67 68 70 74 75 77 78 80 82
Others Others revenue growth (%) 46.4 54.2 26.2 60.4 31.5 24.4 69.8 39.0 37.9 33.2 32.6 12.5 (88.4) (47.7) (27.1) Eyewear revenue growth (%) 2.3 5.7 2.3 (2.6) 16.4 19.3 39.7 20.0 13.1 28.5 2.9 (17.4) (79.8) (39.0) (7.0) Distribution No of outlets 457 462 478 500 509 513 525 537 556 561 578 584 569 557 571 Towns 198 204 210 218 228 221 223 223 231 228 228 229 223 223 236
Source: Company, Kotak Institutional Equities
6 KOTAK INSTITUTIONAL EQUITIES RESEARCH Titan Company Retailing
Exhibit 5: TTAN - Key assumptions driving our earnings model, March fiscal year-ends, Rs mn
2017 2018 2019 2020 2021E 2022E 2023E Jewelry business Net revenues 105,964 132,569 163,901 173,192 178,198 231,342 272,007 Rev growth yoy (%) 21 25 24 6 3 30 18 EBITDA 10,455 15,105 19,654 21,883 18,265 28,571 34,953 EBITDA growth yoy (%) 25 44 30 11 (17) 56 22 EBITDA margin (%) 9.9 11.4 12.0 12.6 10.3 12.4 12.9 Total gold sold (tonnes) 20.9 26.0 30.3 27.9 24.7 28.4 31.6 Change yoy (%) 3 24 17 (8) (12) 15 11 Average gold price (Rs/gm) 30,862 30,708 31,936 38,004 51,305 53,357 54,424 Change yoy (%) 13 (1) 4 19 35 4 2 Studded share (%) 29.6 31.1 30.0 30.5 24.0 30.0 31.0 Total # of stores 240 262 290 331 355 400 430 Revenue/store (Rs '000) 453,808 528,161 593,843 557,783 519,528 612,826 655,439 EBITDA/store (Rs '000) 44,773 60,178 71,209 70,476 53,252 75,684 84,224 Watches business Net revenues 20,611 21,315 24,475 26,217 15,990 27,175 29,949 Rev growth yoy (%) 4 3 15 7 (39) 70 10 EBITDA 2,124 2,471 3,079 4,054 — 3,533 4,043 EBITDA growth yoy (%) 9 16 25 32 14 EBITDA margin (%) 10.3 11.6 12.6 15.5 — 13.0 13.5 Watches sold (mn) 14.1 14.5 17.1 16.7 9.5 15.7 16.8 Change yoy (%) 1 3 18 (3) (43) 65 7 Others Net revenues 3,811 4,415 6,151 7,199 6,935 8,576 9,577 Rev growth yoy (%) 22 16 39 17 (4) 24 12
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 7 Retailing Titan Company
Exhibit 6: TTAN - Consolidated profit model, balance sheet and cash flows, March fiscal year-ends, 2017-23E (Rs mn)
2017 2018 2019 2020 2021E 2022E 2023E Profit model (Rs mn) Net sales 132,608 161,198 197,785 210,515 204,931 272,805 318,388 EBITDA 11,555 16,447 21,365 24,666 16,318 32,194 39,612 Other income 705 889 1,829 1,532 2,201 2,046 2,097 Interest (377) (529) (525) (1,662) (2,262) (2,084) (2,007) Depreciation (1,105) (1,314) (1,628) (3,480) (3,806) (4,114) (4,587) Pretax profits 10,777 15,492 21,041 21,057 12,450 28,042 35,115 Tax (3,099) (4,334) (6,117) (6,090) (3,486) (7,291) (9,130) PAT 7,679 11,158 14,923 14,967 8,964 20,751 25,985 Share of associate earnings (18) (28) (22) (40) (40) (40) (40) PAT after Associates 7,661 11,131 14,902 14,927 8,924 20,710 25,945 Extraordinary items (688) (112) (1,015) — — — — Net profit (reported) 6,973 11,019 13,887 14,927 8,924 20,710 25,945 Earnings per share (Rs) 8.6 12.5 16.8 16.8 10.1 23.3 29.2 Balance sheet (Rs mn) Total equity 42,587 50,881 60,842 66,732 72,992 88,376 107,219 Total borrowings — 790 401 7,229 5,000 3,000 — Deferred tax liabilities (net) (33) (329) (688) (1,528) (1,528) (1,528) (1,528) Total liabilities and equity 42,555 51,342 60,555 72,432 76,464 89,848 105,691 Net fixed assets (Incl CWIP) 10,071 11,677 12,353 13,208 12,768 13,529 14,460 Intangible assets 3,337 3,495 3,631 3,960 3,960 3,960 3,960 Investments 4,307 360 1,084 1,579 1,539 1,499 1,458 Cash 7,789 6,179 10,665 3,811 10,319 10,681 16,481 Net current assets (excl cash) 17,050 29,631 32,822 49,873 47,877 60,179 69,331 Total assets 42,555 51,342 60,555 72,432 76,464 89,848 105,691 Free cash flow (Rs mn) Operating cash flow (excl working capital) 7,965 11,857 15,465 19,241 9,452 21,506 26,791 Working capital 9,158 (12,368) (3,036) (22,715) 1,996 (12,302) (9,151) Capital expenditure (6,251) (2,993) (2,635) (3,456) (1,332) (2,728) (3,184) Free cash flow 10,872 (3,504) 9,795 (6,930) 10,117 6,476 14,456 Key assumptions, growth, % Net revenue growth 17.6 21.6 22.7 6.4 (2.7) 33.1 16.7 EBITDA growth 23.6 42.3 29.9 15.5 (33.8) 97.3 23.0 EPS growth 13.6 45.3 33.9 0.2 (40.2) 132.1 25.3 EBITDA margin (%) 8.7 10.2 10.8 11.7 8.0 11.8 12.4 Tax rate (% of PBT) 28.8 28.0 29.1 28.9 28.0 26.0 26.0 Segment revenue assumptions, growth, % Jewellery 21.5 25.1 23.6 5.7 2.9 29.8 17.6 Watches 4.4 3.4 14.8 7.1 (39.0) 70.0 10.2 Others 15.7 7.7 31.2 12.5 (15.0) 33.0 15.0 Ratios (%) ROE (%) 19.7 23.8 26.7 23.4 12.8 25.7 26.5 ROCE (%) 18.2 22.5 24.2 20.0 10.0 21.0 22.8
Source: Company, Kotak Institutional Equities estimates
8 KOTAK INSTITUTIONAL EQUITIES RESEARCH BUY Tata Steel (TATA) https://ultraviewer.et/en/own Metals & Mining FEBRUARY 11, 2021 load.html RESULT Sector view: Attractive
Deleveraging swiftly with strong spreads. Tata’s 3QFY21 earnings were in line with CMP (`): 690 our estimate (ahead of consensus) with higher than estimated India earnings offset by Fair Value (`): 875 weaker Europe margins. Both India and Europe business should see a further sequential BSE-30: 51,309 increase in steel margins in 4QFY21 given strong spot spreads. TATA reduced net debt sharply in 9MFY21 and should end FY2021E at comfortable 3X net debt/EBITDA which would allow it to start growth capex. We upgrade earnings and FV. Maintain BUY.
Tata Steel Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 690/875/BUY EPS (Rs) 84.3 92.9 92.0 52-week range (Rs) (high-low) 732-251 EPS growth (%) 139.4 10.2 (1.0) Mcap (bn) (Rs/US$) 796/11 P/E (X) 8.2 7.4 7.5 ADTV-3M (mn) (Rs/US$) 13,186/181 P/B (X) 1.0 0.9 0.8 Shareholding pattern (%) EV/EBITDA (X) 5.8 5.3 5.3 Promoters 34.4 RoE (%) 13.5 13.4 11.8 FPIs/MFs/BFIs 12.4/13.1/16.7 Div. yield (%) 2.6 2.6 2.4 Price performance (%) 1M 3M 12M Sales (Rs bn) 1,411 1,621 1,643 Absolute (3.2) 56.2 55.5 EBITDA (Rs bn) 282 300 289 Rel. to BSE-30 (8.0) 31.7 24.2 Net profits (Rs bn) 102 114 113
3QFY21: Strong EBITDA beat on higher prices in India Tata’s standalone 3QFY21 EBITDA of Rs67 bn (+103% yoy, +45% qoq), was 6% higher than our estimate (KIE: Rs63 bn) led by higher than expected prices. However Europe operations continue to report an EBITDA loss of US$98 mn or -US$46/ton against our EBITDA estimate of US$34/ton mainly due to one-off expenses. India–EBITDA beat on higher prices. Standalone EBITDA of Rs67 bn (+42% yoy) or Rs20,035/ton (+108% yoy) led by 21% yoy higher realization and 3% yoy lower costs (lower coking coal, overhead and operating leverage). Standalone sales volumes declined 2% yoy. Europe – Exceptional losses increase costs. EBITDA loss of US$46/ton increased sequentially from US$27/ton in 2QFY21. Reported numbers were impacted by (1) £37 mn reversal of wage support from the Netherlands government recognized in 2QFY21 and (2) £110 mn carbon emission provisions in 3QFY21.
Improving balance sheet to create room for growth capex With tight control on working capital and deferral of growth capex, TATA has impressively reduced net debt by 12% in 9MFY21 to Rs922 bn as on 3QFY21 (including export advances). Tata has also called the remaining contribution of partly paid up shares which would result in an inflow of Rs36 bn in 4QFY21. We estimate TATA to end FY2021E at 3X net debt/EBITDA which would allow them to start growth capex from FY2022E. The company is looking to complete the pellet plant and CRM mill in FY2022E and still evaluating the timeline to start capex for KPO Phase II 5 mtpa expansion. We estimate capex to increase from Rs55 bn in FY2021E to Rs91/141 bn in FY2022/23E mainly towards the high IRR KPO II project.
Maintain BUY, revise Fair Value to Rs875 (Rs800 earlier) Sumangal Nevatia
Steel prices in 4QFY21 are Rs6,000-7,000/ton higher and with limited cost increase, large part Prayatn Mahajan of higher prices should flow in operating profits. We have upgraded our consolidated EBITDA estimates by 20%/8% for FY2021/22E factoring higher margins in India. Our Fair Value increases to Rs875 (from Rs800/share), based on September 2022E, on higher earnings and lower debt. We maintain BUY on attractive valuations.
[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. Metals & Mining Tata Steel
Exhibit 1: Interim results of Tata Steel (consolidated), March fiscal year-ends (Rs mn)
(% chg.) 3QFY21 3QFY21E 3QFY20 2QFY21 KIE yoy qoq 9MFY21 9MFY20 (%chg) FY2021E FY2020 (%chg) Net sales 395,941 399,032 355,204 371,540 (1) 11 7 1,010,366 1,060,467 (5) 1,411,300 1,398,167 1 Expenditure (301,305) (304,590) (330,667) (310,432) (1) (9) (3) (849,568) (946,115) (10) (1,129,772) (1,223,536) (8) Consumption of raw materials (137,134) (135,423) (137,537) (121,043) (354,321) (447,443) (21) (494,417) (580,400) (15) (Increase)/ decrease in stock 8,012 (17,471) (33,561) (32,201) (146) (124) (125) (32,051) (9,752) 229 — 5,652 (100) Staff Cost (53,147) (40,006) (44,444) (42,483) 33 20 25 (141,086) (139,486) 1 (175,508) (185,336) (5) Other Expenditure (119,036) (111,690) (115,125) (114,705) 7 3 4 (322,110) (349,434) (8) (459,846) (463,453) (1) EBITDA 94,635 94,443 24,537 61,108 0 286 55 160,798 114,352 41 281,528 174,631 61 Other income 2,150 2,221 929 2,221 (3) 131 (3) 6,297 5,276 19 16,869 18,435 (8) Interest (17,779) (19,402) (19,306) (19,402) (8) (8) (8) (57,164) (56,084) 2 (80,563) (75,335) 7 Depreciation (22,748) (22,611) (20,187) (22,611) 1 13 1 (66,467) (62,166) 7 (86,707) (84,407) 3 Pretax profits 56,259 54,651 (14,026) 21,316 3 (501) 164 43,464 1,378 3,054 131,128 33,324 293 Extraordinaries (1,536) — 8,374 432 (520) 52,678 (101) — (13,191) (100) Deferred tax (2,510) (13,119) (4,247) 1,755 (13,204) (4,658) 183 (35,260) (20,845) 69 Current tax (13,207) — (1,963) (7,883) (21,356) (14,620) 46 — 22,199 (100) Net income 39,007 41,531 (11,863) 15,619 (6) (429) 150 8,384 34,777 (76) 95,868 21,487 346 Minority interest (3,110) — 1,367 (891) (1,645) 2,424 (168) 3,829 3,829 — Share of profit from associates 884 — 205 736 1,769 951 86 1,880 1,880 — PAT after minority interest 36,781 41,531 (10,291) 15,463 (11) (457) 138 8,508 38,153 (78) 101,576 27,196 274 Adjusted PAT 38,316 41,531 (18,665) 15,032 (8) (305) 155 9,028 (14,525) (162) 101,576 40,386 152 Adjusted EPS (Rs) 33.4 36.2 (16.3) 13.1 (25.6) (12.7) 88.6 35.2 Ratios EBITDA margin (%) 23.9 23.7 6.9 16.4 15.9 10.8 19.9 12.5 ETR (%) (27.9) (24.0) 44.3 (28.7) 79.5 1,399.0 (26.9) 4.1
Source: Company, Kotak Institutional Equities estimates
Exhibit 2: Interim results of Tata Steel (standalone), March fiscal year-ends (Rs mn)
(% chg.) 3QFY21 3QFY21E 3QFY20 2QFY21 KIE yoy qoq 9MFY21 9MFY20 (%chg) FY2021E FY2020 (%chg) Net sales 179,657 172,510 152,620 163,620 4 18 10 436,664 462,245 (6) 634,653 604,359 5 Expenditure (112,638) (109,373) (119,552) (117,373) 3 (6) (4) (310,889) (358,696) (13) (426,834) (455,744) (6) Consumption of raw materials (41,659) (47,912) (42,097) (39,566) (13) (1) 5 (106,387) (146,324) (151,557) (189,701) Stock adjustment (3,070) — (13,258) (12,162) (15,685) (4,157) 6,000 5,644 Employee costs (13,409) (11,957) (11,855) (11,957) 12 13 12 (38,463) (38,158) (48,891) (50,366) Other Expenditure (54,500) (49,504) (52,343) (53,688) 10 4 2 (150,354) (170,058) (204,779) (192,260) EBITDA 67,019 63,137 33,068 46,247 6 103 45 125,776 103,549 21 207,819 148,615 40 Other income 1,407 1,862 515 1,862 (24) 174 (24) 4,481 3,328 6,074 4,041 Interest (8,001) (8,557) (7,839) (8,557) (7) 2 (7) (25,641) (22,270) (34,020) (30,310) Depreciation (9,711) (10,060) (9,799) (10,060) (3) (1) (3) (29,464) (29,178) (38,833) (39,201) Pretax profits 50,715 46,382 15,945 29,492 9 218 72 75,152 55,428 36 141,040 83,146 70 Extraordinaries (2,259) — 8,202 (92) (128) 18,238 9,489 — 7,294 Tax (12,306) (11,874) (6,109) (7,351) 4 101 67 (23,259) (19,591) (35,260) (23,002) Net income 36,149 34,508 18,038 22,049 5 100 64 70,131 45,327 55 105,780 67,438 57 Adjusted net income 36,149 34,508 18,038 22,049 5 100 64 70,131 71,807 105,780 67,438 EPS (Rs) 33.5 30.1 8.6 19.3 45.3 31.3 87.8 54.1 Ratios EBITDA margin (%) 37.3 36.6 21.7 28.3 28.8 22.4 32.7 24.6 ETR (%) 25.4 25.6 25.3 25.0 24.9 30.2 25.0 25.4 Per ton analysis (Rs/ton) Realizations 53,709 51,880 44,522 45,577 4 21 18 48,282 49,133 (2) 51,514 49,055 5 EBITDA 20,035 18,988 9,646 12,882 6 108 56 13,907 11,006 26 16,868 12,063 40 Steel sales (mn tons) 3.35 3.33 3.43 3.59 1 (2) (7) 9.04 9.41 (4) 12.32 12.32 - Cost 33,674 32,893 34,875 32,694 2 (3) 3 34,375 38,127 (10) 34,646 36,992 (6)
Source: Company, Kotak Institutional Equities estimates
10 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Steel Metals & Mining
Exhibit 3: Tata Steel Europe EBITDA/ton quarterly trend, 3QFY19 - 3QFY21
% Change 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 yoy qoq FY2021 FY2020 % yoy Tata Steel Europe Deliveries (mn tons) 2.35 2.57 2.26 2.29 2.35 2.39 1.94 2.26 2.11 -10% -7% 8.83 9.29 -5% Turnover (US$ mn) 2,199 2,352 2,037 1,972 1,941 1,871 1,477 1,776 1,906 -2% 7% 6,915 7,886 -12% Adjusted EBITDA (US$ mn) 131 170 9 23 (134) 9 (82) (61) (98) -27% 61% (78) (37) 112% Adjusted EBITDA/ton (US$) 56 66 4 10 (57) 4 (42) (27) (46) -19% 73% (9) (4) 123% Tata Steel Europe (Rs mn) Revenues 158,500 165,680 144,950 140,350 138,210 135,876 112,250 134,980 140,700 2% 4% 513,082 559,005 -8% EBITDA 9,470 11,960 620 1,650 (9,560) 650 (6,260) (4,620) (7,240) -24% 57% (5,793) (2,614) 122%
Source: Company, Kotak Institutional Equities estimates
Conference call highlights
Demand outlook. Steel demand remains robust on easing of lockdown restrictions. Management expects demand to remain strong, supported by government spending on infrastructure. In Europe, demand continues to recover gradually
Price guidance. Higher domestic prices, higher international prices and improved product mix should result in at least a Rs6,000-7,000/ton sequential increase in realization in 4QFY21 as per management. Even though spot domestic prices remain marginally higher than import parity prices, management doesn’t expect the prices to correct further. As per management prices in china softened due to the Chinese new year holidays and extreme winters.
For Europe, spreads are likely to be much higher than 3QFY21 average led by sharp price hikes across regions. However management guided that blended realizations shall not mirror spot realizations as majority of the volumes were contracted at much lower prices.
Cost guidance. The management expects only a marginal increase in costs led by coking coal in 4QFY21 and large part of higher realization should flow into the margins.
Export advances. TATA has taken up export advances of ~Rs60 bn, which shall be adjusted against steel exports over the next 3-4 years. The export advance is interest bearing but at lower rate than debt but we continue to treat it as debt.
Capex - investing in growth in a measured way. With generation and visibility of strong operational cash flows, TATA has decided to restart work on Pellet plant and Cold Roll Mill complex at Tata Steel Kalinganagar. Expected capex on the said projects is estimated at Rs60-70 bn and shall take 12-14 months to complete. These projects would help reduce costs and increase margins. TATA would decide on KPO II expansion project in the coming quarter. Out of total capex of Rs235bn in KPO II, they have already spent Rs40-50bn and the steel plant would take ~36 months from when they start the capex.
Focus remains on deleveraging. Management continues to prioritize cash flows towards (1) deleveraging its balance sheet by US$1bn annually, (2) committed capex, (3) sustenance capex. Total capex guidance continues to remain at Rs50-55 bn for FY2021E at the consolidated level with a ~50:50 split between India: Europe. The company has spent Rs46 bn in 9MFY21, primarily towards already committed payments at Kalinganagar with respect to the pellet plant and CRM mill. Management has guided for a gross debt reduction of Rs120 bn in 4QFY21E.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 11 Metals & Mining Tata Steel
Bhushan Steel’s merger. The company has been allowed by NCLT to get shareholder approval and AGM for the same would be held in the coming months. The company remains hopeful of completing the merger in the next 6-12 months. Management has indicated that it would get tax benefit from the ~Rs150 bn of accumulated losses at Bhushan steel post the merger.
First and Final call of Tata Steel partly paid. TATA has made the first and final call of Rs461/- for the 77.6 mn outstanding partly paid-up equity share in February 2021. This will result in an infusion of Rs36 bn in 4QFY21.
Net debt declined 11% qoq. Tata Steel’s consolidated net-debt declined 11% qoq (Rs103 bn) to Rs862 bn as on December 2020 (see Exhibit 7) which is now lower March 2019 levels. However, almost Rs60 bn net debt reduction was driven by export advance which we continue to treat as debt given it is interest bearing. Given high cash levels, the management aims to reduce gross debt further by Rs120 bn in 4QFY21. Management sees net debt/EBITDA of 2.75X and debt/equity of 1:1 as a comfortable level to start capex spends.
Europe Business
. In 9MFY21, the Indian operations did not extend any cash support to TSE. The management does not expect that the Europe entity would require further cash support from the India entity in the coming quarters. FCF generated during the quarter stood at –Rs(9) bn while FCF generated in 9MFY21 stood at +Rs7 bn.
. Reported EBITDA in 3QFY21 was impacted by one-offs. Higher deliveries, favorable product mix and full benefit of improved spot steel spreads shall aid earnings in 4QFY21E.
. One time provisions.
a) The company provisioned a sum of GBP110 mn towards carbon credit costs during the quarter.
b) The company was availing wage support from both UK and Netherlands government. Given the sharp sequential recovery in revenues, TATA was no longer eligible to wage support schemes availed in 1HFY21. This led to a reversal of GBP37 mn during the quarter.
. Transformation program is expected to result in Euro700 mn cost saving over the next couple of years. Management has already started to realize the benefits from this program for about Euro200 mn.
. Company continues to be in active discussions with the UK government with regards to long-term strategic support to the UK division to ensure sustainability of the operations and is evaluating several strategies for the same.
12 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Steel Metals & Mining
Exhibit 4: Tata Steel standalone, quarterly analysis of cost-structure and profitability, 3QFY19 -3QFY21 (Rs/ton)
3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 Tata Steel India (Rs/ton) Realization (Rs/ ton) 57,824 53,434 53,460 50,071 44,522 48,786 44,281 45,577 53,709 Raw material cost 16,500 18,728 15,707 16,110 16,148 11,527 12,145 14,409 13,372 Employee cost 4,421 3,236 4,493 4,303 3,458 4,706 6,210 3,331 4,009 Other expenditure 21,586 17,656 20,685 18,671 15,269 20,028 19,993 14,955 16,293 Total Cost 42,507 39,620 40,885 39,084 34,875 36,261 38,349 32,694 33,674 EBITDA (Rs/ton) 15,318 13,814 12,574 10,987 9,646 12,526 5,932 12,882 20,035 Tata Steel (Consolidated) (US$/ton) Realization (US$/ ton) 802 758 768 712 625 672 583 613 728 Raw material cost 229 266 226 229 227 159 160 194 181 Employee cost 61 46 65 61 49 65 82 45 54 Other expenditure 299 250 297 266 214 276 263 201 221 EBITDA/ ton 212 196 181 156 135 172 78 173 271
Source: Company, Kotak Institutional Equities estimates
Exhibit 5: Tata Steel's net debt declined 11% qoq to Rs861 bn in 3QFY21 Tata steel group quarterly net debt trend, 3QFY16 - 3QFY21 (Rs bn) Net debt (Rs bn) 1,150
1,050
950 861 850
750
650
550
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21 3QFY21
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 13 Metals & Mining Tata Steel
Exhibit 6: Tata Steel BSL EBITDA/ton quarterly trend, 3QFY20 - 3QFY21
% Change 3QFY21 3QFY21E 3QFY20 2QFY21 KIE yoy qoq Tata Steel BSL Revenues (Rs mn) 58,811 63,321 50,381 55,194 (7) 17 7 Costs (Rs mn) 42,549 44,239 47,629 44,123 (4) (11) (4) RM costs 29,054 30,540 33,429 30,460 (5) (13) (5) Employee costs 1,040 1,369 1,020 1,365 (24) 2 (24) Other expenses 12,455 12,330 13,180 12,298 1 (5) 1 EBITDA (Rs mn) 16,262 19,082 2,752 11,071 (15) 491 47 Volumes (mn tons) 1.15 1.25 1.26 1.28 (8) (9) (10) Realization (Rs/ton) 51,185 50,657 39,985 43,120 1 28 19 Cost (Rs/ton) 37,032 35,391 37,801 34,471 5 (2) 7 RM costs 25,287 24,432 26,531 23,797 3 (5) 6 Employee costs 905 1,095 810 1,067 (17) 12 (15) Other expenses 10,840 9,864 10,460 9,608 10 4 13 EBITDA (Rs/ton) 14,153 15,266 2,184 8,649 (7) 548 64
Source: Company, Kotak Institutional Equities estimates
Exhibit 7: Tata Steel Long Products, EBITDA/ton quarterly trend, 3QFY20 - 3QFY21
3QFY21 3QFY20 2QFY21 %yoy %qoq TSL Revenues (Rs mn) 13,642 9,993 11,859 37 15 EBITDA (Rs mn) 4,196 349 1,836 1,104 129 Volumes (mn tons) 0.17 0.16 0.18 2 (8) Realization (Rs/ton) 82,179 61,685 65,881 33 25 Cost (Rs/ton) 56,899 59,534 55,683 (4) 2 EBITDA (Rs/ton) 25,280 2,151 10,198 1,075 148
Source: Company, Kotak Institutional Equities estimates
Exhibit 8: Spot margins are 15-20% higher than average 3QFY21 margins Tata Steel India EBITDA/ton, March fiscal year ends (Rs mn), 3QFY19-21E, 2021-23E (Rs/ton)
EBITDA (Rs/ton) 30,000 25,035 25,000 20,035 20,000 15,370 15,638 15,000 13,869
10,000
5,000
-
Spot
1QFY20 2QFY20 1QFY21 2QFY21 3QFY19 4QFY19 3QFY20 4QFY20 3QFY21
FY2021E FY2022E FY2023E
Source: Company, Kotak Institutional Equities estimates
14 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Steel Metals & Mining
Exhibit 9: Leverage ratios will improve with recovery in EBITDA aided by capacity ramp ups and increasing cost efficiencies Tata Steel consolidated leverage details, March fiscal year ends (Rs mn), 2017-23E (X)
2017 2018 2019 2020 2021E 2022E 2023E Existing EBITDA (Rs mn) 170,078 214,332 293,833 174,631 281,528 300,157 288,511 Net debt (Rs mn) 744,767 715,753 949,320 1,047,794 844,892 794,931 746,977 Net debt/ EBITDA (X) 4.4 3.3 3.2 6.0 3.0 2.6 2.6
Source: Company, Kotak Institutional Equities estimates
Exhibit 10: TATA's EPS changes by 4.5% for every 1% change in HRC Exhibit 11: TATA's EBITDA changes by 2.1% for 1% change in HRC prices prices EPS sensitivity of TATA to HRC prices, Fx rate, FY2022E (Rs/share) EBITDA sensitivity of TATA to HRC prices, Fx rate, FY2022E
HRC Prices (US$/Ton) HRC Prices (US$/Ton) 92.93 490 500 510 520 530 3E+05 490 500 510 520 530 73 71 78 85 93 100 73 263,696 275,771 287,847 299,923 311,999 74 74 82 89 97 104 74 269,519 281,761 294,002 306,244 318,485 75 275,343 287,750 300,157 312,564 324,970 75 78 85 93 101 108
US$/INR 76 281,167 293,739 306,311 318,884 331,456
US$/INR 76 81 89 97 104 112 77 286,991 299,728 312,466 325,204 337,941 77 85 93 100 108 116
Source: Kotak Institutional Equities estimates Source: Kotak Institutional Equities estimates
Exhibit 12 : Tata Steel, changes in estimates, March fiscal year ends, 2021-23E
Revised estimates Old estimates Change (%) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E Earnings (consolidated) Units Net sales Rs mn 1,411,300 1,620,634 1,643,400 1,372,620 1,589,364 1,643,400 3 2 — EBITDA Rs mn 281,528 300,157 288,511 235,561 276,908 288,511 20 8 — Adj. PAT Rs mn 101,576 113,777 112,691 61,039 95,740 112,091 66 19 1 EPS Rs/share 88.6 92.9 92.0 53.3 82.1 96.1 66 13 (4) Volumes India (Standalone + Bhushan) mn tons 16.6 17.8 18.2 16 18 18 2 — — Europe mn tons 8.8 9.8 10 9 10 10 — — — Prices HRC prices - China US$/ton 510 510 510 500 510 510 2 — — INR Rs/US$ 74.2 75.0 75 74 75 75 — — — Tata Steel India (incl. Bhushan) Net sales Rs mn 845,407 962,237 973,977 813,281 930,967 973,977 4 3 — EBITDA Rs mn 259,117 273,939 252,230 231,284 250,690 252,230 12 9 — EBITDA/ton Rs/ton 15,638 15,370 13,869.5 14,171.8 14,134.5 13,869.5 10 9 — Tata Steel Europe Net sales US$ mn 6,915 8,074 8,221 6,827 8,074 8,221 1 — — EBITDA US$ mn (78) 227 361 (66) 227 361 18 — — EBITDA/ton US$/ton (9) 23 36.8 (8) 23.1 36.8 18 — —
Net Debt Rs bn 845 795 747 952 874 835 (11) (9) (11)
Source: Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 15 Metals & Mining Tata Steel
Exhibit 13: Tata Steel, Key assumptions, March fiscal-year ends, 2017- 23E (Rs mn)
2017 2018 2019 2020 2021E 2022E 2023E Tata Steel (India) Average HRC Price (US$/ton) 435 540 545 495 510 510 510 Crude Steel capacity (mn tons) 12.7 12.7 18.6 18.6 18.6 18.6 18.6 Volume (mn tons) 11.0 12.2 16.3 16.5 16.6 17.8 18.2 EBITDA/ton (US$/ton) 161 201 181 127 169 205 185 EBITDA/ton (Rs/ton) 10,823 12,987 14,040 10,427 15,638 15,370 13,869 Europe Volume (mn tons) 10 10 10 9 9 10 10 EBITDA/ton (US$/ton) 71 55 83 (4) (9) 23 37
Source: Company, Kotak Institutional Equities estimates
Exhibit 14: Tata Steel, valuation, March fiscal year-ends, September 2022E basis
EBITDA Multiple Enterprise value Net Debt Equity Value Equity Value (Rs mn) (X) (Rs mn) (Rs mn) (Rs mn) (Rs/share) India 263,084 6.5 1,711,364 590,954 1,120,410 930 Europe 22,045 4.0 88,181 180,000 (91,819) (76) Total Enterprise Value 285,130 6.3 1,799,545 770,954 1,028,591 854 Add: 50% of KPO Phase II CWIP 25,000 20 Add: Value of investments 3,350 3 South East Asia 19,688 16 Arrived market capitalization 1,071,366 875 Fair Value (Rs) 875
Source: Kotak Institutional Equities estimates
16 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Steel Metals & Mining
Exhibit 15: Tata Steel (consolidated), profit model, balance sheet and cash flow model, March fiscal year-ends, 2017-2023E (Rs mn)
2017 2018 2019 2020 2021E 2022E 2023E Profit model (Rs mn) Net sales 1,122,994 1,227,937 1,576,690 1,398,167 1,411,300 1,620,634 1,643,400 EBITDA 170,078 214,332 293,833 174,631 281,528 300,157 288,511 Other income 5,275 8,811 14,206 18,435 16,869 17,510 17,652 Interest (50,722) (54,547) (76,601) (75,335) (80,563) (78,383) (70,983) Depreciation (56,729) (57,417) (73,418) (84,407) (86,707) (86,963) (88,328) Profit before tax 67,902 111,179 158,020 33,324 131,128 152,320 146,852 Extraordinaries (43,242) 95,991 (1,210) (13,191) — 15,000 15,000 Taxes (27,780) (33,905) (67,184) 1,354 (35,260) (44,252) (39,869) Profit after tax (3,120) 173,265 89,626 21,487 95,868 123,068 121,982 Minority interest (722) (43,085) 10,962 3,829 3,829 3,829 3,829 Share in profit/(loss) of associates 77 2,391 2,247 1,880 1,880 1,880 1,880 Reported net income (3,766) 132,571 102,834 27,196 101,576 128,777 127,691 Adjusted net income 40,200 79,665 103,530 40,386 101,576 113,777 112,691 Fully diluted EPS (Rs) 41 70 90 35 89 93 92 Balance sheet (Rs mn) Equity 355,443 585,956 666,501 713,013 793,503 900,134 1,007,634 Deferred tax liability 100,301 105,699 124,599 92,614 92,614 92,614 92,614 Total Borrowings 850,709 944,221 1,030,733 1,186,032 1,186,032 1,146,032 1,106,032 Current liabilities 410,863 406,416 431,807 436,728 458,823 512,396 513,066 Minority interest 16,017 9,365 23,645 25,866 22,037 18,208 14,379 Other Non Current Liabilities — 45,922 58,540 49,942 49,942 49,942 49,942 Total liabilities 1,733,332 2,097,579 2,335,824 2,504,195 2,602,952 2,719,326 2,783,667 Net fixed assets 885,118 903,228 1,184,510 1,195,040 1,164,094 1,138,170 1,100,881 Capital work in progress 157,841 166,144 186,412 194,968 194,968 224,968 314,968 Goodwill 34,947 57,821 59,909 64,969 64,981 64,981 64,981 Investments 125,367 178,995 57,382 62,230 65,790 67,670 69,549 Deferred tax assets 8,859 10,358 8,090 12,703 12,703 12,703 12,703 Cash 49,211 79,379 33,414 81,169 284,071 294,032 301,986 Other current assets 471,989 449,279 489,825 472,461 430,917 531,375 533,172 Total assets 1,733,332 2,097,579 2,335,824 2,504,195 2,638,179 2,754,553 2,818,894 Net Debt 744,767 715,753 949,320 1,047,794 844,892 794,931 746,977 Free cash flow (Rs mn) Operating cash flow excl. working capital 112,319 125,190 159,173 88,585 182,575 210,031 210,311 Working capital changes (48,907) (92,755) 25,905 41,962 63,640 (46,885) (1,127) Capital expenditure (74,269) (72,995) (86,243) (100,123) (55,761) (91,039) (141,039) Free cash flow (10,858) (40,560) 98,835 30,424 190,454 72,107 68,145 Ratios P/E (X) 16.7 9.9 7.6 19.6 7.8 7.4 7.5 EV/EBITDA (X) - ex investments 8.2 6.9 5.9 10.5 5.7 5.4 5.4 P/B (X) 1.9 1.4 1.2 1.1 1.0 0.9 0.8 FCF Yield (%) (1.6) (5.1) 12.5 3.8 24.1 8.5 8.1 Net debt/EBITDA (X) 4.4 3.3 3.3 6.1 3.0 2.6 2.6 RoAE (%) 11.3 13.6 15.5 5.7 12.8 12.6 11.2 RoACE (%) 7.5 8.0 10.1 4.4 8.2 8.4 7.6
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 17 SELL Eicher Motors (EIM) https://ultraviewer.et/en/own Automobiles & Components FEBRUARY 10, 2021 load.html RESULT Sector view: Cautious
Unexciting quarter. Eicher Motors reported standalone EBITDA of Rs6.6 bn (+11% CMP (`): 2,901 yoy), 9% below our estimates due to RM headwinds and higher-than-expected Fair Value (`): 2,200 employee cost. We expect swift recovery in volumes from FY2022E onwards led by BSE-30: 51,309 (1) rebound in economic activity and (2) a strong order book coupled with lean inventory. However, valuation remains expensive at CMP (27.3X FY2023E consolidated EPS). Competitive intensity in the mid-size motorcycle segment is going to increase over the medium term, which needs to be closely monitored. Maintain SELL. Eicher Motors Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 2,901/2,200/SELL EPS (Rs) 50.1 80.3 105.9 52-week range (Rs) (high-low) 3,037-1,245 EPS growth (%) (25.4) 60.2 31.9 Mcap (bn) (Rs/US$) 793/10.9 P/E (X) 57.9 36.1 27.4 ADTV-3M (mn) (Rs/US$) 4,786/66 P/B (X) 8.4 7.1 6.0 Shareholding pattern (%) EV/EBITDA (X) 40.7 28.6 22.1 Promoters 49.2 RoE (%) 15.5 21.4 23.7 FPIs/MFs/BFIs 28.2/7.0/2.6 Div. yield (%) 0.4 0.4 0.4 Price performance (%) 1M 3M 12M Sales (Rs bn) 86 110 131 Absolute 5.1 29.8 52.2 EBITDA (Rs bn) 18 24 31 Rel. to BSE-30 (0.1) 9.5 21.6 Net profits (Rs bn) 14 22 29
3QFY21 results: standalone EBITDA 9% below our estimates due to RM cost pressures
Eicher reported 3QFY21 standalone EBITDA of Rs6.6 bn (+11% yoy), 9% below our estimates due to (1) lower-than-expected gross margins and (2) higher-than-expected employee expenses. Revenues increased by 19% yoy, led by (1) 9% yoy increase in volumes and (2) 9% yoy increase in net realizations. EBITDA margin came in at 23.5% (-170 bps yoy, +70 bps qoq), 170 bps below our estimates due to (1) lower-than-expected gross margins and (2) higher-than- expected employee costs. Gross margin declined by 140 bps qoq due to RM headwinds (80-100 bps negative impact) as the company was not able to fully pass on RM inflation to the consumers. As a result, gross profit per vehicle declined by 2% yoy to Rs57,459 in 3QFY21. Staff costs increased by 26% yoy due to increments given during the quarter while other expenses declined by 11% yoy in 3QFY21. The company reported standalone net profit of Rs4.9 bn (flat yoy), 14% below our estimates due to (1) miss at EBITDA level and (2) higher- than-expected depreciation expense in 3QFY21.
VECV’s EBITDA margin improved on a yoy basis due to tighter control on costs
VECV reported revenues of Rs26.8 bn (+24% yoy) in 3QFY21 due by (1) 3% yoy increase in volumes and (2) double-digit yoy increase in ASPs owing to the BS-VI transition. The company reported EBITDA margin of 8.6% (EBITDA of Rs2.3 bn) in 3QFY21 versus 6.4% in 3QFY20.
Cut our FY2022-23E EPS estimates by 4-5%; maintain SELL on expensive valuations Hitesh Goel We have cut our FY2022-23E consolidated EPS estimates by 4-5% on lower EBITDA margin assumptions. We are building in average monthly volumes of ~64.9k units in FY2022E and Rishi Vora ~76k units in FY2023E led by (1) rebound in economy activity, (2) favorable base effect and (3) strong order backlog coupled with lower inventory levels. We expect operating leverage benefits and cost-cutting initiatives to help EBITDA per vehicle improve to Rs34,133 in FY2023E from Rs31,592 in FY2020. However, valuations continue to remain expensive at CMP. Maintain SELL with revised FV of Rs2,200 (from Rs1,920 earlier) on lower WACC assumptions of 11.5%
(from 12% earlier) and roll-over to March 2023E (from September 2022E earlier). [email protected] Contact: +91 22 6218 6427
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Eicher Motors Automobiles & Components
Exhibit 1: Standalone 2QFY21 EBITDA was 9% below our estimates due to lower-than-expected gross margins and higher-than-expected employee expense Eicher Motors interim results, March fiscal year-ends (Rs mn)
(% chg.) 3QFY21 3QFY21E 3QFY20 2QFY21 3QFY21E 3QFY20 2QFY21 9MFY21 9MFY20 Yoy (%) FY2021E FY2020 Yoy (%) Volumes (units) 199,668 199,668 182,791 150,519 9.2 32.7 407,456 532,969 (23.5) 615,163 697,582 (11.8) Net realizations (Rs/unit) 140,439 143,885 129,302 141,063 (2.4) 8.6 (0.4) 139,809 129,425 8.0 139,873 130,128 7.5 Total revenues 28,041 28,729 23,635 21,233 (2.4) 18.6 32.1 56,966 68,980 (17.4) 86,045 90,775 (5.2) Cost of materials consumed (17,344) (16,657) (11,433) (13,157) 4.1 51.7 31.8 (33,982) (36,152) (51,163) (48,754) Changes in inventories 775 — (1,493) 906 404 (1,396) — (1,104) Employee benefit expenses (2,229) (2,000) (1,776) (1,976) 11.4 25.5 12.8 (5,897) (5,600) 5.3 (8,034) (7,651) 5.0 Other expenses (2,664) (2,820) (2,981) (2,169) (5.5) (10.7) 22.8 (6,061) (8,327) (27.2) (8,744) (11,228) (22.1) Total expenses (21,461) (21,476) (17,683) (16,395) (0.1) 21.4 30.9 (45,536) (51,474) (11.5) (67,940) (68,737) (1.2) EBITDA 6,580 7,253 5,952 4,838 (9.3) 10.6 36.0 11,430 17,505 (34.7) 18,104 22,038 (17.8) Other income 1,241 1,400 1,358 998 (11.4) (8.7) 24.3 3,392 4,692 5,435 6,153 Interest costs (22) (20) (27) (18) (70) (84) (90) (109) Depreciation (1,219) (1,050) (942) (1,036) 16.1 29.3 17.6 (3,226) (2,700) (4,316) (3,779) Exceptional items — — — — — — — — Profit before tax 6,580 7,583 6,341 4,782 (13.2) 3.8 37.6 11,526 19,413 (40.6) 19,133 24,303 (21.3) Tax expense (1,696) (1,911) (1,452) (1,173) (2,910) (3,836) (4,806) (5,265) Profit after tax 4,885 5,672 4,889 3,609 (13.9) (0.1) 35.4 8,616 15,576 (44.7) 14,327 19,038 (24.7) Adjusted PAT 4,885 5,672 4,889 3,609 (13.9) (0.1) 35.4 8,616 15,576 (44.7) 14,327 19,038 (24.7) Adjusted EPS 17.9 20.8 18.0 13.3 (13.9) (0.1) 35.4 31.7 57.2 (44.7) 52.6 69.9 (24.7) Key numbers (Rs/vehicle) Gross profit per vehicle 57,459 60,462 58,587 59,676 (5.0) (1.9) (3.7) 57,400 58,975 56,704 58,655 EBITDA per vehicle 32,956 36,324 32,562 32,141 (9.3) 1.2 2.5 28,052 32,845 29,430 31,592 Ratios (%) Raw material as % of sales 59.1 58.0 54.7 57.7 58.9 54.4 59.5 54.9 Staff costs as % of sales 7.9 7.0 7.5 9.3 10.4 8.1 9.3 8.4 Other expenses as % of sales 9.5 9.8 12.6 10.2 10.6 12.1 10.2 12.4 EBITDA margin (%) 23.5 25.2 25.2 22.8 20.1 25.4 21.0 24.3 No. of shares 272.2 272.2 272.2 272.2 272.2 272.2 272.2 272.2 Tax rate (%) 25.8 25.2 22.9 24.5 25.2 19.8 25.1 21.7
Source: Company, Kotak Institutional Equities estimates
Standalone EBITDA 9% below our estimate due to RM headwinds
Eicher reported 3QFY21 standalone EBITDA of Rs6.6 bn (+11% yoy), 9% below our estimates due to (1) lower-than-expected gross margins and (2) higher-than-expected employee expenses. Revenues increased by 19% yoy, led by (1) 9% yoy increase in volumes and (2) 9% yoy increase in net realizations. Yoy increase in ASPs was primarily due to (1) cost increase due to shift towards BS-VI emission norms, (2) better product mix and (3) price hikes taken during the year. EBITDA margin came in at 23.5% (-170 bps yoy, +70 bps qoq), 170 bps below our estimates due to (1) lower-than-expected gross margins and (2) higher- than-expected employee cost. Gross margin declined by 140 bps qoq due to RM headwinds (80-100 bps negative impact) as the company was not able to fully pass on RM inflation to the consumers. The company has taken price hikes of 2-3% during the quarter; however, the company highlighted that it will not fully offset RM inflation.
Gross profit per vehicle declined by 2% yoy to Rs57,459 in 3QFY21 from Rs58,587 in 3QFY20. Staff costs increased by 26% yoy due to increments given during the quarter while other expenses declined by 11% yoy led by cost-cutting initiatives in 3QFY21. EBITDA per vehicle increased by only 1% to Rs32,956 despite double-digit revenue increase in 3QFY21. The company reported standalone net profit of Rs4.9 bn (flat yoy), 14% below our estimates due to (1) miss at EBITDA level and (2) higher-than-expected depreciation expense in 3QFY21. We expect gross profit per vehicle to remain flattish over FY2020-23E. We expect EBITDA margin to remain around 22.6% and 23.8% in FY2022E and FY2023E, respectively.
Other key highlights
The company highlighted that bookings were higher in 3QFY21 on a yoy basis aided by strong demand for Meteor 350. The company has ramped up its production from 30,000 units per month in June 2020 to 70,000 units per month in October 2020 and 75,000 units per month in December 2020. While the company has been able to stabilize their supply chain to some degree, there are still a few issues with erratic supplies, as well as increase in logistics and commodity costs. The company has taken price hikes during the past few months to mitigate RM cost pressures.
VECV reported revenues of Rs26.8 bn (+24% yoy) in 3QFY21 due by (1) 3% yoy increase in volumes and (2) double-digit yoy increase in ASPs due to BS-VI transition. The company
KOTAK INSTITUTIONAL EQUITIES RESEARCH 19 Automobiles & Components Eicher Motors
reported EBITDA margin of 8.6% (EBITDA of Rs2.3 bn) in 3QFY21 versus 6.4% in 3QFY20 due to stringent cost-reduction measures being undertaken. The company incurred net profit of Rs580 mn in 3QFY21 versus net profit of Rs300 mn in 3QFY20. The company is seeing initial signs of revival of the industry with a positive outlook for the economy going forward. The company is witnessing good demand from niche segments such as construction, mining, agriculture and e-commerce among others. The company remains positive on revival in the replacement demand that had been muted for the past two years. The company has inaugurated its manufacturing facility in Bhopal and will be producing Pro 2000 series from this plant.
The company continued to strengthen its presence in international markets. The company added 14 new stores in 3QFY21 and 25 new stores in 9MFY21. The company opened its first standalone, flagship store in Tokyo. In addition to this, 13 new exclusive stores were opened with focus on Latin American and ASEAN markets – Thailand, Argentina and Colombia. The company has added 133 small format stores in 3QFY21. The company plans to add total 500 small format stores in FY2021E. Overall retail touchpoints stood at >1,900 across India with 976 dealerships and 900 small format stores.
Other key points. (1) The company will incur capex of Rs4-5 bn in FY2021E, (2) the company has less than 2 weeks of channel inventory and (3) top-20 cities contribute 20% to the total volumes.
Exhibit 2: RE volumes increased by 9% yoy in 3QFY21 Quarterly trend of RE volumes, March fiscal year-ends, 2012-21 ('000 units, %)
('000 units) Sales volumes [LHS] Yoy change [RHS] (%) 240 100 220 80 200 180 60 160 40 140 20 120 100 - 80 (20) 60 (40) 40 20 (60)
0 (80)
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21
3QFY21
1QCY12
2QCY12
3QCY12
4QCY12
1QCY13
2QCY13
3QCY13
4QCY13
1QCY14
2QCY14
3QCY14
4QCY14
1QCY15
2QCY15
3QCY15
4QCY15 1QCY16
Source: Company, Kotak Institutional Equities
20 KOTAK INSTITUTIONAL EQUITIES RESEARCH Eicher Motors Automobiles & Components
Exhibit 3: Domestic RE volumes increased by 8% yoy in 3QFY21 Quarterly model-wise trend of RE domestic volumes, March fiscal year-ends, 2020-21 (units, %)
3QFY20 2QFY21 3QFY21 Yoy (%) QoQ (%) RE volumes modelwise (in units) Classic 350 104,008 99,152 120,665 16.0 21.7 Bullet 350 53,705 36,855 42,969 (20.0) 16.6 Thunderbird 350 9,880 — — Bullet 500 90 — — Classic 500 745 — — Thunderbird 500 228 — — Himalayan 2,188 2,287 4,282 95.7 87.2 Continental GT/650 Twin 3,475 3,112 3,918 12.7 25.9 Meteor 350 — — 15,600 Total volumes 174,319 141,406 187,434 7.5 32.6 RE volumes mix Classic 350 59.7 70.1 64.4 Bullet 350 30.8 26.1 22.9 Thunderbird 350 5.7 — — Bullet 500 0.1 — — Classic 500 0.4 — — Thunderbird 500 0.1 — — Himalayan 1.3 1.6 2.3 Continental GT/650 Twin 2.0 2.2 2.1
Source: SIAM, Kotak Institutional Equities
Exhibit 4: Consolidated 3QFY21 PAT came in 7% below our estimates due to RM cost pressures and higher-than-expected employee cost Eicher Motors consolidated interim results, March fiscal year-ends (Rs mn)
(% chg.) 3QFY21 3QFY21E 3QFY20 2QFY21 3QFY21E 3QFY20 2QFY21 9MFY21 9MFY20 Yoy (%) FY2021E FY2020 Yoy (%) Total sales 28,283 28,879 23,710 21,336 (2.1) 19.3 32.6 57,800 69,454 (16.8) 86,045 91,536 (6.0) Cost of materials consumed (16,730) (16,757) (10,964) (12,609) 52.6 32.7 (32,630) (34,482) (5.4) (51,163) (46,612) 9.8 Purchase of stock-in-trade (853) — (539) (696) 58.1 22.6 (1,806) (1,831) (2,507) Changes in inventories 1,078 — (1,397) 1,084 700 (1,207) (841) Employee benefit expenses (2,335) (2,100) (1,846) (2,075) 11.2 26.5 12.6 (6,179) (5,822) 6.1 (8,284) (7,958) 4.1 Other expenses (2,723) (2,920) (3,042) (2,329) (6.7) (10.5) 16.9 (6,417) (8,630) (25.6) (9,044) (11,815) (23.5) Total expenses (21,562) (21,776) (17,787) (16,626) (1.0) 21.2 29.7 (46,332) (51,972) (10.9) (68,490) (69,732) (1.8) EBITDA 6,720 7,103 5,923 4,711 (5.4) 13.5 42.7 11,469 17,482 (34.4) 17,554 21,804 (19.5) Other income 1,250 1,410 1,347 1,000 (11.3) (7.2) 25.1 3,393 4,001 (15.2) 5,435 5,433 0.0 Interest costs (36) (30) (43) (38) 20.0 (15.5) (5.8) (125) (134) (189) (189) Depreciation (1,229) (1,060) (952) (1,048) 15.9 29.1 17.2 (3,259) (2,726) (4,316) (3,815) Exceptional items — — — — 29.1 17.2 — — — — Profit before tax 6,706 7,423 6,275 4,624 (9.7) 6.9 45.0 11,477 18,623 (38.4) 18,484 23,232 (20.4) Tax expense (1,694) (1,900) (1,454) (1,152) (2,891) (3,849) (24.9) (4,806) (5,275) (8.9) Share of profit/(loss) of joint ventures 314 175 166 (39) 79.3 89.4 (915.1) (379) 457 (182.8) (39) 317 (112.3) Profit after tax 5,326 5,697 4,987 3,433 (6.5) 6.8 55.1 8,208 15,232 (46.1) 13,639 18,274 (25.4) Adjusted PAT 5,326 5,697 4,987 3,433 (6.5) 6.8 55.1 8,208 15,232 (46.1) 13,639 18,274 (25.4) Adjusted EPS 19.6 20.9 18.3 12.6 (6.5) 6.8 55.1 30.2 56.0 (46.1) 50.1 67.1 (25.4) Ratios (%) Raw material as % of sales 58.4 58.0 54.4 57.3 58.4 54.0 59.5 54.6 Staff costs as % of sales 8.3 7.3 7.8 9.7 10.7 8.4 9.6 8.7 Other expenses as % of sales 9.6 10.1 12.8 10.9 11.1 12.4 10.5 12.9 EBITDA margin (%) 23.8 24.6 25.0 22.1 19.8 25.2 20.4 23.8 No. of shares 272.2 272.2 272.2 272.2 272.2 272.2 272.2 272.2 Tax rate (%) 25.3 25.6 23.2 24.9 25.2 20.7 26.0 22.7
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 21 Automobiles & Components Eicher Motors
Exhibit 5: We have cut our FY2022-23E EPS estimates by 4-5% on lower EBITDA margin assumptions Earnings revision table, March fiscal year-ends, 2021-23E (Rs mn, %)
New estimates Old estimates % change 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E Royal Enfield volumes (units) 615,163 778,221 911,916 615,163 778,221 911,916 — — — Net sales 86,045 110,118 130,867 85,544 109,492 130,123 0.6 0.6 0.6 EBITDA 18,104 24,921 31,126 19,625 26,191 32,592 (7.8) (4.8) (4.5) EBITDA margin (%) 21.0 22.6 23.8 22.9 23.9 25.0 Standalone PAT 14,327 20,503 25,549 16,256 22,034 27,314 (11.9) (6.9) (6.5) Standalone EPS 52.6 75.3 93.9 59.7 80.9 100.3 (11.9) (6.9) (6.5) Share of profit from JV (39) 2,080 4,004 (39) 1,617 3,364 — 28.6 19.0 Consolidated PAT 13,639 21,844 28,814 15,568 22,912 29,939 (12.4) (4.7) (3.8) Consolidated EPS 50.2 80.4 106.1 57.3 84.4 110.2 (12.4) (4.7) (3.8)
Source: Kotak Institutional Equities estimates
Exhibit 6: We expect RE volumes to increase by 9% CAGR over FY2020-23E Eicher Motors volume assumptions, March fiscal year-ends, 2010-23E (units)
2010 2011 2012 2013 2014 2016 2017 2018 2019 2020 2021E 2022E 2023E Sales volumes (units) Standalone Two-wheelers 52,576 74,626 113,432 178,121 302,611 601,000 666,490 820,492 822,724 697,582 615,163 778,221 911,916 VECV Domestic 5-7.5 ton 4,904 6,387 5,372 5,242 5,389 8,337 8,525 11,062 11,757 8,799 7,039 11,263 15,768 7.5-12 ton 24,389 29,919 28,057 20,768 17,490 26,981 22,395 27,005 31,535 21,041 14,729 25,039 40,062 >12 ton 1,483 2,575 3,814 2,907 3,056 5,683 6,216 7,315 7,695 4,146 2,902 5,514 8,823 Buses 4,765 6,494 8,520 8,333 8,123 13,038 12,270 10,494 10,734 9,060 2,718 3,805 4,947 Exports Cargo 2,073 2,340 1,671 2,382 4,460 5,060 6,005 7,405 8,798 3,493 3,144 3,772 4,338 Buses 643 424 679 799 1,364 2,452 2,030 1,596 1,212 1,075 753 903 1,038 Volvo trucks Volvo trucks domestic 1,094 705 569 701 891 1,499 1,164 1,055 1,266 1,107 664 863 1,122 Total 39,351 48,844 48,682 41,132 40,773 63,050 58,605 65,932 72,997 48,721 31,949 51,160 76,099 Yoy change (%) Standalone Two-wheelers 1.2 41.9 52.0 57.0 69.9 98.6 10.9 23.1 0.3 (15.2) (11.8) 26.5 17.2 VECV Domestic 5-7.5 ton 59.3 30.2 (15.9) (2.4) 2.8 54.7 2.3 29.8 6.3 (25.2) (20.0) 60.0 40.0 7.5-12 ton 66.7 22.7 (6.2) (26.0) (15.8) 54.3 (17.0) 20.6 16.8 (33.3) (30.0) 70.0 60.0 >12 ton 148.0 73.6 48.1 (23.8) 5.1 86.0 9.4 17.7 5.2 (46.1) (30.0) 90.0 60.0 Buses 45.1 36.3 31.2 (2.2) (2.5) 60.5 (5.9) (14.5) 2.3 (15.6) (70.0) 40.0 30.0 Exports Cargo 1.8 12.9 (28.6) 42.5 87.2 13.5 18.7 23.3 18.8 (60.3) (10.0) 20.0 15.0 Buses 2.4 (34.1) 60.1 17.7 70.7 79.8 (17.2) (21.4) (24.1) (11.3) (30.0) 20.0 15.0 Volvo trucks Volvo trucks domestic 21.6 (35.6) (19.3) 23.2 27.1 68.2 (22.3) (9.4) 20.0 (12.6) (40.0) 30.0 30.0 Total 56.4 24.1 (0.3) (15.5) (0.9) 54.6 (7.0) 12.5 10.7 (33.3) (34.4) 60.1 48.7
Source: Kotak Institutional Equities estimates
Exhibit 7: We value Eicher Motors at Rs2,200 based on SoTP methodology Sum-of-the-parts valuation table for Eicher Motors (Rs mn)
Valuation Comments Standalone Equity value per share 2,009 Based on DCF methodology Implied multiple based on March 2023E EPS 21.4 Eicher stake in VECV Equity value per share 370 Based on DCF methodology Eicher stake in VECV (%) 54.4 Eicher equity value in VECV 201 Value of proportionate stake KIE fair value 2,200
Source: Kotak Institutional Equities estimates
22 KOTAK INSTITUTIONAL EQUITIES RESEARCH Eicher Motors Automobiles & Components
Exhibit 8: We value Eicher Motors standalone business at Rs2,009 per share Eicher Motors standalone business DCF valuation, March fiscal year-ends, 2019-36E (Rs mn)
CAGR (%) 2019 2020 2021E 2022E 2023E 2024E 2025E 2036E 2020-36E Domestic volumes (units) 801,899 658,286 579,796 732,245 856,744 817,299 881,770 2,448,143 8.6 Export volumes (units) 20,825 39,296 35,366 45,976 55,172 63,447 90,997 741,880 20.2 Total volumes (units) 822,724 697,582 615,163 778,221 911,916 880,746 972,767 3,190,023 10.0 Domestic ASPs 109,954 109,416 107,861 109,200 111,384 113,612 141,262 1.6 Export ASPs 180,545 185,961 191,540 197,286 203,205 209,301 289,722 3.0 Other operating revenue 11,299 12,429 14,914 17,897 18,971 20,109 38,174 7.9 Net revenue 97,945 90,775 82,445 102,702 122,339 122,898 139,335 598,943 12.5 EBIT 26,454 18,259 13,788 20,000 25,545 24,580 27,867 95,831 10.9 EBIT (1-tax) 15,668 12,993 10,258 14,880 19,005 18,287 20,733 71,298 11.2 Depreciation/amortisation 2,989 3,779 4,316 4,921 5,581 6,183 6,771 19,665 (Increase)/decrease in working capital (4,524) (2,404) 744 89 (626) (1,686) (1,008) 2,013 Capital expenditure (7,842) (5,544) (5,000) (6,000) (6,000) (5,000) (5,753) (15,672) 6.7 Free cash flows 6,291 8,825 10,319 13,890 17,960 17,784 20,743 77,304 14.5 Discounted cash flow 13,890 16,108 14,305 14,964 16,840
WACC used (%) 11.5 Terminal growth rate (%) 4.0 Capitalization rate (%) 7.5 Cash flow in terminal year 16,840 Sum of free cash flow 233,850 Terminal value 233,521 Enterprise value- RE 467,372 Enterprise value- VECV 54,845 Enterprise value- Eicher Motors 522,217 Net cash 79,459 Net present value-equity 601,676 NPV /share(Rs) 2,210
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 23 Automobiles & Components Eicher Motors
Exhibit 9: We estimate two-wheeler volumes to increase by 9% CAGR over FY2020-23E Eicher Motors model- wise volumes and revenues, March fiscal year-ends, 2017-23E (Rs mn)
2017 2018 2019 2020 2021E 2022E 2023E 2020-23E CAGR (%) RE volumes modelwise (in units) Bullet 350 143,833 156,709 166,243 176,348 141,078 169,294 189,609 2.4 Classic 350 416,693 555,513 523,068 399,728 359,755 449,694 539,633 10.5 Thunderbird 350 42,321 45,927 71,327 40,185 34,157 39,281 43,209 2.4 Bullet 500 9,210 6,644 2,737 786 — — — NA Classic 500 24,333 27,509 19,282 4,925 — — — NA Thunderbird 500 3,262 2,966 3,373 824 — — — NA Himalayan 10,299 5,656 10,701 15,302 10,711 12,854 14,396 (2.0) Continental GT 650/Interceptor 1,156 305 5,168 20,188 10,094 13,122 14,697 (10.0) Meteor — — — — 24,000 48,000 55,200 Exports 15,383 19,264 20,825 39,296 35,366 45,976 55,172 12.0 Total volumes 666,490 820,493 822,724 697,582 615,163 778,221 911,916 9.3 Two-wheeler revenues modelwise (in Rs mn) Bullet 350 13,515 13,698 14,531 16,649 14,025 16,998 19,228 4.9 Classic 350 45,836 56,668 55,578 44,942 42,246 53,336 64,643 12.9 Thunderbird 350 4,952 4,999 7,763 4,655 4,093 4,754 5,282 4.3 Bullet 500 1,179 791 326 99 — — — NA Classic 500 3,528 3,711 2,723 730 — — — NA Thunderbird 500 476 403 457 118 — — — NA Himalayan 1,359 695 1,314 1,986 1,433 1,737 1,965 (0.4) Continental GT 650/Interceptor 176 43 789 3,203 1,642 2,156 2,439 (8.7) Meteor — — — — 3,600 7,416 8,528 Exports 1,770 2,135 3,440 7,095 6,577 8,806 10,885 15.3 Total two-wheeler revenues 72,793 83,142 86,921 79,476 73,616 95,203 112,970 12.4
Source: Company, Kotak Institutional Equities estimates
24 KOTAK INSTITUTIONAL EQUITIES RESEARCH Eicher Motors Automobiles & Components
Exhibit 10: We estimate standalone earnings to grow at 10% CAGR over FY2020-23E Eicher Motors standalone financial summary, March fiscal year-ends, 2011-23E (Rs mn)
2011 2012 2013 2014 2016 2017 2018 2019 2020 2021E 2022E 2023E Profit model (Rs mn) Net sales 6,665 10,493 17,025 30,312 61,880 70,380 89,575 97,945 90,775 86,045 110,118 130,867 EBITDA 765 1,454 3,137 7,336 17,082 22,058 28,532 29,443 22,038 18,104 24,921 31,126 Other income 804 458 801 1,163 2,835 2,273 3,324 5,080 6,153 5,435 7,411 8,611 Interest (20) (3) (3) (17) (21) (28) (30) (30) (109) (90) — — Depreciaton (130) (172) (304) (502) (1,366) (1,533) (2,223) (2,989) (3,779) (4,316) (4,921) (5,581) Profit before tax 1,418 1,738 3,632 7,980 18,530 22,770 29,603 31,504 24,303 19,133 27,411 34,156 Current tax (178) (293) (782) (2,317) (5,247) (6,785) (9,354) (9,419) (5,488) (4,806) (6,908) (8,607) Deferred tax 6 3 (64) (74) (191) (384) — (1,366) 223 — — — Net profit 1,246 1,448 2,786 5,589 13,092 15,601 17,129 20,543 19,038 14,327 20,503 25,549 Adjusted net profit 1,246 1,448 2,786 5,589 13,092 15,601 17,129 20,543 19,038 14,327 20,503 25,549 Adjusted Diluted EPS (Rs) 4.6 5.3 10.2 20.5 48.1 57.3 74.4 76.1 69.9 52.6 75.3 93.9 Balance sheet (Rs mn) Equity 270 270 270 271 272 272 273 273 273 273 273 273 Reserves and Surplus 5,131 6,021 7,943 12,066 23,093 38,954 53,450 70,992 82,480 93,359 110,324 132,334 Deferred tax liability 39 63 126 201 408 792 1,430 2,765 2,520 2,520 2,520 2,520 Total borrowings 171 206 40 — 226 — — — — — — — Current liabilities 2,209 3,683 6,452 9,752 12,241 15,201 22,795 20,745 20,516 20,967 23,628 25,875 Total liabilities 7,819 10,242 14,832 22,289 36,239 55,218 77,947 94,774 105,790 117,120 136,745 161,002 Net fixed assets 1,276 1,980 3,132 5,599 9,442 13,484 18,305 23,206 24,968 25,651 26,730 27,149 Investments 5,180 6,494 8,564 11,886 20,691 35,417 49,855 52,848 68,330 78,330 93,330 108,330 Cash 87 35 187 431 312 128 893 7,018 190 1,129 2,104 8,069 Other current assets 1,276 1,671 2,879 4,297 5,795 6,190 8,894 11,703 12,303 12,009 14,581 17,454 Miscellaneous expenditure — 62 71 77 — — — — — — — — Total assets 7,819 10,242 14,832 22,289 36,239 55,218 77,947 94,774 105,790 117,120 136,745 161,002 Free cash flow (Rs mn) Operating cash flow excl. working capital 572 1,127 2,378 5,131 12,188 15,757 20,534 20,606 16,016 13,298 18,013 22,519 Working capital changes 272 775 1,311 1,729 2,554 1,862 4,620 (4,524) (2,404) 744 89 (626) Capital expenditure (651) (1,073) (1,388) (3,699) (5,082) (5,448) (7,435) (7,842) (5,544) (5,000) (6,000) (6,000) Free cash flow 171 827 2,298 3,144 9,639 12,143 17,706 8,226 8,060 9,043 12,102 15,892 Ratios Gross margin (%) 33.1 35.6 37.7 40.4 44.3 47.3 48.6 48.3 45.1 40.5 40.6 40.9 EBITDA margin (%) 11.5 13.9 18.4 24.2 27.6 31.3 31.9 30.1 24.3 21.0 22.6 23.8 Net debt/equity (X) (0.9) (1.0) (1.1) (1.0) (0.9) (0.9) (0.9) (0.8) (0.8) (0.8) (0.9) (0.9) RoAE (%) 24.8 24.6 37.9 53.5 72.1 48.9 42.6 32.1 23.9 15.8 19.6 20.6 Book value/share (X) 20 23 30 45 86 144 197 262 304 344 406 487 Gross profit per vehicle (Rs) 29,561 32,896 36,079 40,434 45,654 49,984 53,016 57,512 58,655 56,704 57,498 58,667 EBITDA per vehicle (Rs) 10,248 12,821 17,613 24,241 28,422 33,096 34,775 35,787 31,592 29,430 32,023 34,133
Notes: (a) FY2016 is a 15-month period as company has changed its reporting to financial year
Source: Company, Kotak Institutional Equities estimates
Exhibit 11: We estimate consolidated earnings to grow at 16% CAGR over FY2020-23E Eicher Motors consolidated income statement, March fiscal year-ends, 2011-23E (Rs mn)
2011 2012 2013 2014 2016 2017 2018 2019 2020 2021E 2022E 2023E Profit model (Rs mn) Net sales 56,775 63,899 68,098 87,383 61,735 70,334 89,650 97,971 91,536 86,045 110,118 130,867 EBITDA 5,551 5,490 7,132 11,148 16,896 21,740 28,076 29,031 21,804 17,554 24,371 30,576 Other income 1,768 1,366 953 1,074 1,781 2,273 2,801 4,434 5,433 5,435 7,411 8,611 Interest (77) (38) (79) (98) (21) (36) (53) (73) (189) (189) (189) (189) Depreciaton (640) (822) (1,300) (2,198) (1,366) (1,538) (2,233) (3,003) (3,815) (4,316) (4,921) (5,581) Profit before tax 6,602 5,997 6,706 9,926 17,290 22,439 28,591 30,389 23,232 18,484 26,672 33,417 Tax (1,628) (1,249) (1,452) (2,909) (5,389) (7,203) (9,359) (10,770) (5,275) (4,806) (6,908) (8,607) Minority Interest (1,886) (1,506) (1,314) (864) — — — — — — — — Share of profit/(loss) of joint ventures 1,479 1,435 2,566 2,584 317 (39) 2,080 4,004 Adjusted net profit 3,088 3,243 3,939 6,153 13,380 16,671 21,137 22,150 18,274 13,639 21,844 28,814 Adjusted Diluted EPS (Rs) 11.4 11.9 14.5 22.7 49.3 61.4 77.8 81.6 67.3 50.2 80.4 106.1
Notes: (a) FY2016 is a 15-month period as company has changed its reporting to financial year. (b) FY2010-16 financials are as per Indian GAAP, while FY2017-23E financials are in accordance with Ind-AS. (c) VECV financials are accounted under equity method of accounting under Ind-AS as compared to line by line consolidation method under Indian GAAP.
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 25 BUY Hindalco Industries (HNDL) https://ultraviewer.et/en/own Metals & Mining FEBRUARY 10, 2021 load.html RESULT Sector view: Attractive
Strong FCF strengthening balance sheet. HNDL’s 3QFY21 India EBITDA was in line CMP (`): 279 with our estimates benefiting from higher aluminum prices. Novelis, earlier, surprised Fair Value (`): 375 with margins higher than its guidance range with strong scrap spreads and beverage BSE-30: 51,309 can demand. Given limited capex, HNDL has deleveraged sharply in the past six months and with focus on organic growth, debt reduction should continue. Management shared that it would soon announce a capital allocation policy and focus on shareholder payouts should help re-rate the stock. Maintain BUY with a Fair Value of Rs375/share.
Hindalco Industries Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 279/375/BUY EPS (Rs) 27.5 34.1 36.1 52-week range (Rs) (high-low) 286-85 EPS growth (%) 54.5 24.1 5.9 Mcap (bn) (Rs/US$) 628/8.7 P/E (X) 10.2 8.2 7.7 ADTV-3M (mn) (Rs/US$) 4,395/60 P/B (X) 1.0 0.9 0.8 Shareholding pattern (%) EV/EBITDA (X) 6.2 5.4 4.8 Promoters 34.6 RoE (%) 10.0 11.2 10.6 FPIs/MFs/BFIs 25.7/13.8/11.3 Div. yield (%) 0.4 0.4 0.4 Price performance (%) 1M 3M 12M Sales (Rs bn) 1,302 1,446 1,499 Absolute 4.2 45.2 46.4 EBITDA (Rs bn) 185 200 208 Rel. to BSE-30 (1.0) 22.5 16.9 Net profits (Rs bn) 61 76 80
3QFY21 India—cost reduction at aluminum division offset price weakness India EBITDA of Rs15.3 bn (+22% yoy, +17% qoq) was in line with our estimate of Rs15.4 bn. Aluminum EBITDA (including Utkal) at Rs13.3 bn or EBITDA/ton of US$573/ton (+34% yoy, +17% qoq) was led by 13% qoq higher LME prices, higher VAP sales and stable costs. Management has guided that costs have bottomed and expects a ~3% qoq increase in 4QFY21E. We estimate aluminum EBITDA of US$501/509/ton in FY2022/23E versus US$501/ton in FY2021E. Copper EBITDA remained stagnant at Rs2.02 bn (-21% yoy, -3% qoq) due to planned shutdowns impacting copper volumes (-13% yoy) and lower TcRc offset by higher byproduct credits. CC rod sales at 0.65 mn tons (+12% yoy, +2% qoq) increased on improved demand post easing of lockdown restrictions.
Novelis 3QFY21: yet another quarter with record margins Novelis’ 3QFY21 shipments were at 0.93 mn tons (+17% yoy; KIE 0.91 mn tons). Adjusted EBITDA of US$501 mn (+22% yoy) or a margin of US$537/ton (+25% yoy) was much ahead of our estimate of US$490/ton. After capex of US$111 mn during the quarter, FCF of US$75 mn helped reduce net debt/EBITDA to 3.3X versus 3.8X in April 2020 post Aleris acquisition. All regions benefited from stronger can demand, higher scrap availability and sequential recovery in auto volumes whereas Asia margins were marginally impacted by logistical bottlenecks.
Capital allocation policy under works, focus on shareholder payout and organic growth to help
Management shared that it would announce a formal capital allocation policy in the coming few Sumangal Nevatia weeks. With improving cash-flows and swift deleveraging, the capital allocation policy could have guidance for shareholder payouts in future. Inorganic growth and upstream investments, in the Prayatn Mahajan past, has diluted near-term returns for HNDL. If the new capital allocation policy emphasizes on organic and downstream growth, it could help in re-rating the stock.
Deleveraging and structural growth tailwinds to drive re-rating; maintain BUY with FV of Rs375
We note that HNDL leverage has peaked in 1QFY21. We estimate net debt/EBITDA to reduce to [email protected] 2.8X/2.3X/1.8X with 9%/12%/16% FCF yield in FY2021/22/23E mainly led by Novelis. Focus on Contact: +91 22 6218 6427 organic growth, deleveraging and sustenance of strong margins at Novelis should help re-rate from current commodity multiples. We tweak our EBITDA estimates with 1-2% cuts for FY2021-23E. Maintain BUY on attractive valuations – 4.8X EV/EBITDA FY2023E with FV of Rs375.
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Hindalco Industries Metals & Mining
Exhibit 1: HNDL’s India EBITDA increased 22% yoy on the back higher volumes and higher prices Interim results of Hindalco (India operations), March fiscal year-ends (Rs mn)
(% chg.) 3QFY21 3QFY21E 3QFY20 2QFY21 KIE yoy qoq 9MFY21 9MFY20 (% chg.) FY2021E FY2020 (% chg.) Net sales 114,250 104,494 102,540 95,650 9.3 11.4 19.4 284,540 303,090 (6.1) 437,769 403,240 8.6 Total expenditure (98,900) (89,061) (89,990) (82,540) 11.0 9.9 19.8 247,160 269,244 (8.2) 384,689 348,410 10.4 Stock adjustment 3,714 (361) 9,734 9,734 (1,127.5) (61.8) (61.8) (16,866) (297) - - Raw materials (71,715) (56,177) (64,784) (64,784) 27.7 10.7 10.7 181,906 168,992 7.6 (234,399) (221,265) 5.9 Employee cost (4,297) (4,817) (4,248) (4,248) (10.8) 1.2 1.2 12,971 14,116 (8.1) (19,632) (18,588) 5.6 Power and fuel cost (14,127) (17,117) (14,234) (14,234) (17.5) (0.8) (0.8) 40,495 52,465 (22.8) (59,673) (67,640) (11.8) Other costs (12,474) (11,519) (9,009) (9,009) 8.3 38.5 38.5 28,654 33,994 (15.7) (39,878) (45,889) (13.1) EBITDA 15,350 15,433 12,550 13,110 (0.5) 22.3 17.1 37,380 33,846 10.4 53,079 54,830 (3.2) Other income 1,850 1,660 1,390 1,660 11.4 33.1 11.4 5,970 5,314 12.4 7,082 7,390 (4.2) Interest (3,800) (3,890) (4,550) (3,890) (2.3) (16.5) (2.3) (12,260) (14,280) (14.1) (16,429) (18,810) (12.7) Depreciation (4,970) (6,420) (5,110) (6,420) (22.6) (2.7) (22.6) (16,530) (15,120) 9.3 (22,207) (20,030) 10.9 Pretax profits 8,430 6,783 4,280 4,460 24.3 97.0 89.0 14,560 9,760 49.2 21,526 23,380 (7.9) Extraordinaries (680) - (170) 700 (370) (480) - (640) Tax (2,800) (2,238) (1,490) (1,890) 25.1 87.9 48.1 (5,130) (3,480) 47.4 (7,534) (13,160) (42.8) Net income 4,950 4,545 2,620 3,270 8.9 88.9 51.4 9,060 5,800 56.2 13,992 9,580 46.1 Adjusted net income 36 4,545 36 37 (99.2) (0.3) (1.4) 36 38 (3.6) 35 58 (39.5) Adjusted EPS 2.4 2.0 1.2 1.2 19.4 98.1 95.2 4.2 2.8 51.9 6.3 4.3 46.1 Aluminum Segment Volumes (tons) 315,000 319,454 328,000 303,000 (1.4) (4.0) 4.0 921,000 976,000 (5.6) 1,237,720 1,290,000 (4.1) EBITDA (including Utkal) (Rs mn) 13,330 13,728 9,990 11,030 (2.9) 33.4 20.9 32,910 25,156 30.8 45,988 36,093 27.4 Realization (US$/ton) 2277 2,244 2,341 2,139 1.5 (2.7) 6.4 2,114 2,400 (11.9) 2,244 2,373 (5.4) Cost (US$/ton) 1704 1,662 1,913 1,647 2.5 (11.0) 3.4 1,635 2,034 (19.6) 1,743 1,979 (11.9) EBITDA (US$/ton) 573 582 428 492 (1.5) 34.0 16.5 479 366 30.8 501 395 26.9 Copper Segment Volumes (tons) 73,000 75,000 84,000 75,000 (2.7) (13.1) (2.7) 206,000 248,000 (16.9) 310,000 321,000 (3.4) EBITDA (Rs mn) 2,020 1,705 2,560 2,080 18.5 (21.1) (2.9) 4,470 8,690 (48.6) 6,871 11,760 (41.6) Realization (US$/ton) 11,382 9,317 7,982 8,602 22.2 42.6 32.3 9,069 7,916 14.6 8,758 8,139 7.6 Cost (US$/ton) 11,007 9,009 7,554 8,227 22.2 45.7 33.8 8,778 7,419 18.3 8,459 7,622 11.0 EBITDA (US$/ton) 375 308 428 375 21.7 (12.4) 0.0 291 498 (41.6) 299 517 (42.2)
Source: Company, Kotak Institutional Equities estimates
Changes in our estimates
Exhibit 7 highlights key changes in our estimates.
We have reduced our EBITDA by 2%/1%/1% for FY2021/22/23E led by
2%/13%/12% cut in copper EBITDA for FY2021/22/23E factoring lower Tc/Rc’s based on CY2021 annual contracts and lower premiums.
9% cut in aluminum EBITDA for FY2021E factoring management guidance on higher 4QFY21 costs.
Our Fair Value is maintained at Rs375 at an unchanged 6.1X EV/EBITDA September 2022E.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 27 Metals & Mining Hindalco Industries
Other highlights from the results, earnings call
Aluminum business (including Utkal): strong earnings on higher prices
. EBITDA. Hindalco’s aluminum EBITDA (including Utkal) increased to Rs13.3 bn (+33% yoy and +21% qoq) but was 3% below our estimates led by lower shipments and higher costs.
. Realizations. Management expects aluminum supply-demand to remain tight due to minimal surplus in 3QCY20 and 4QCY20. Given the strong demand in China, and stimulus announcements in World-Ex China, demand for aluminum is expected to remain strong and prices are likely to remain firm.
. Capacity utilization. Aluminum production continued to decline yoy due to delay in relining of pots due to Covid-19. The management expects production run-rate to improve to a normalized level of 315,000-320,000 tons in 4QFY21 as more pots come online with return of skilled labor to plant sites.
. Higher VAP volumes. Aluminium VAP (excluding wire rods) sales volumes in 3QFY21 were at 80,000 tons (vs 63,000 tons in 2QFY21), up 30% qoq, with a sharp recovery in the domestic market. VAP sales as a percentage of total metal sales have improved to 25% in 3QFY21 vs 21% in 2QFY21.
. Cost guidance. As per the management, the input costs remained flat qoq in 3QFY21 due to low-cost coal inventory. However, as per management coal costs have bottomed out. It has guided for a 3% qoq increase in costs in 4QFY21 as all the input costs elements have hit their bottom. CP coke pitch prices were up 20% qoq and coal premiums have also inched up.
. Forward hedges. For 4QFY21, 58% of aluminum volumes are hedged at US$1,716/ton and 45% of the total currency exposure is hedged at Rs76/US$. Further, HNDL has hedged 28% of FY2022E aluminum volumes at US$1,840/ton and 18% of currency exposure is hedged at Rs78.5.
Copper—higher prices aid earnings
. Cathode production at 51,000 tons, was lower by 29% qoq mainly due to planned maintenance shutdown in one of the smelters.
. Higher EBITDA in the copper division was a result of higher CC rod sales of 65,000 tons (+12% yoy), and higher DAP (fertilizer) sales volume on the back of robust demand with good monsoons.
. Planned shutdown. The company highlighted that the facilities were ramping up swiftly post the maintenance shutdown. One more smelter was planned to go for a maintenance shutdown in 4QFY21.
Capex guidance. For FY2021, the company has maintained its India capex guidance at Rs15 bn catering primarily towards maintenance capex (Rs10 bn) and critical expansion projects (Utkal refinery expansion). Capex incurred in 9MFY21 stands at Rs11.5 bn. Management also hinted at a potential capex of Rs20 bn for FY2022E.
Utkal expansion. The Utkal expansion remains on track for completion by 1QFY22E. Management plans to continue running one of the lines of Renukoot in year one and have third party sales in 4QFY22. Utkal cost of production is expected to be half of the cost at other smelters.
Fixed-cost reduction plan. Hindalco India plans to reduce its fixed costs by Rs8-9 bn during FY2021. Management has already realized a portion of such savings in 2QFY21.
28 KOTAK INSTITUTIONAL EQUITIES RESEARCH Hindalco Industries Metals & Mining
Capital allocation policy – to be announced in a few weeks. Management is working on a detailed plan to discuss the capital allocation strategy given the improved visibility on free cash flow generation and shall come out with a detailed capital allocation plan in a few weeks. This would entail balancing between capex, deleveraging and payout to shareholders .The management indicated that their core focus for the medium term was to use the FCF generation at Novelis to repay its debt. HNDL capex shall be limited to its existing committed projects.
Net debt declines. Consolidated net debt declined to Rs538 bn in 3QFY21 from Rs623 bn in 2QFY21 on strong cash flow generation at Novelis. Leverage declined from 3.83X in 1QFY21 to 3.09X in 3QFY21. Standalone net debt stands at Rs140 bn.
Novelis. Flexing its muscle, stage set for re-rating
Sustainable margin guidance. The company has retained its sustainable margin guidance at US$480-500/ton in the medium term post its integration with Aleris assets. It has already achieved synergy benefit run-rate of US$54 mn out of the total potential synergy of US$180 mn.
Scrap spreads. Management indicated that the scrap market is tight and spreads could come under marginal pressure led by (1) logistical constraints in scrap collection due to Covid-19, (2) limited freight container availability and (3) new trade policies in China allowing for unrestrictive import of high quality aluminum scrap into China. However, the management guided that imposition of anti-dumping duties on aluminum imported into America is likely to support margins. Management remains watchful on these recent developments and does not see a material negative impact on scrap spreads.
Can demand. Management expects can demand to remain robust and grow at CAGR of 3-6% across markets up to 2025. Demand for beverage cans remains recession resistant due to higher off-premise consumption and increased preference for use of aluminum as a sustainable form of packaging. North America markets remain tight due to higher at- home consumption and increasing adoption of aluminum in new beverage types (like sparkling water, energy drinks). Volumes recovered sharper than expected in Europe. Volumes in South America increased due to higher off-premise consumption and increasing substitution from glass to aluminum. Volumes were weaker in Asia due to restrictions on tourism.
Auto demand. Management expects auto demand to remain strong post Covid-19 due to increased preference for personal transportation. Shipments in North America have recovered to pre-pandemic levels with higher demand for trucks and SUVs. Demand in Europe is yet to fully recover due to discontinuation of incentives and more stringent Covid-led lockdowns. Automotive shipments in Asia continue to see a V-shaped recovery led by higher demand for EVs and increased government spending.
Aerospace demand. The company expects aerospace demand to remain under pressure given the worldwide spread of Covid-19, leading to many end-customers delaying deliveries and lack of new orders. Management expects recovery to be prolonged. However, the impact on overall earnings should be limited due to low volume proportion of aerospace.
Specialties demand. The company highlighted that demand for specialties continues to increase sequentially. The North American building and construction market has rebounded quickly led by favorable housing fundamentals. Demand remains robust in Korea led by electronic products and container products.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 29 Metals & Mining Hindalco Industries
Exhibit 2: Novelis EBITDA/ton increased 9% qoq on higher shipments and higher prices Leverage details of Hindalco, March fiscal year-ends (Rs mn)
Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 (% change) EBITDA (US$ mn) (yoy) (qoq) North America 125 157 170 171 127 122 78 205 206 62 0 Europe 48 56 53 60 47 64 20 63 98 109 56 Asia 49 45 53 46 55 56 75 74 78 42 5 South America 100 99 96 97 116 112 76 112 129 11 15 Total 322 357 372 374 343 361 253 455 501 46 10 EBITDA/ton (US$) North America 448 534 588 598 472 457 287 559 594 26 6 Europe 233 233 238 245 210 292 94 263 387 85 48 Asia 278 230 290 260 318 304 408 416 424 33 2 South America 719 707 711 688 795 757 673 757 816 3 8 Blended EBITDA/ton 403 410 448 448 430 445 327 493 537 25 9 Shipments ('000 tons) North America 279 294 289 286 269 267 272 367 347 29 -5 Europe 206 240 223 245 224 220 212 240 253 13 5 Asia 176 196 183 177 173 184 184 178 184 6 3 South America 139 140 135 141 146 148 113 148 158 8 7 Total 800 870 830 835 797 811 774 923 933 17 1
Source: Company, Kotak Institutional Equities estimates
Exhibit 3: We expect HNDL's leverage ratio to be comfortable despite Aleris acquisition Leverage details of Hindalco, March fiscal year-ends (Rs mn)
2018 2019 2020 2021E 2022E 2023E Leverage at existing operations Net debt - consolidated 393,166 390,570 394,090 520,778 456,285 365,498 EBITDA - consolidated 139,206 154,998 143,060 184,744 200,334 208,135 Net debt/EBITDA (X) 2.8 2.5 2.8 2.8 2.3 1.8 Total equity 548,517 575,010 583,170 641,493 714,535 792,052 Debt/Equity (X) 0.7 0.7 0.7 0.8 0.6 0.5
Source: Company, Kotak Institutional Equities estimates
Exhibit 4: Aluminum EBITDA/ton is expected to remain stable led by lower costs India aluminum EBITDA/ton (Including Utkal) of Hindalco, March fiscal year-ends (Rs mn)
Aluminum EBITDA/ton (US$) 800 746 700 613 583 573 600 541 508 492 503 503 511 500 442 428 421 371 400 334 335 300 200 100
0
3QFY18 4QFY18 2QFY19 3QFY19 2QFY20 3QFY20 1QFY21 2QFY21 1QFY19 4QFY19 1QFY20 4QFY20 3QFY21
FY2021E FY2022E FY2023E
Source: Company, Kotak Institutional Equities estimates
30 KOTAK INSTITUTIONAL EQUITIES RESEARCH Hindalco Industries Metals & Mining
Exhibit 5: Copper EBITDA is expected to remain stable Copper EBITDA of Hindalco annualized, March fiscal year-ends (Rs mn), 3QFY18-21, 2021-23E
Copper EBITDA Annualised (Rs bn) 25
20 20 19 17 16 15 15 13 14 12 12 12 13 10 11 10 8 7
5 1
0
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21
3QFY21
FY2021E FY2022E FY2023E
Source: Company, Kotak Institutional Equities estimates
Exhibit 6: FCF yield remains high on strong earnings at Novelis, March fiscal-year ends, 2018-23E (Rs bn)
2018 2019 2020 2021E 2022E 2023E Capex (Rs bn) India (15) (18) (25) (15) (20) (20) Novelis (15) (41) (42) (37) (30) (30) Consolidated (30) (60) (67) (52) (50) (50) FCF (Rs bn) India 23 20 (4) 9 11 22 Novelis 23 29 27 45 56 71 Consolidated 46 49 23 53 67 93 FCF Yield (%) India 4% 3% -1% 2% 2% 4% Novelis 4% 5% 5% 8% 10% 13% Consolidated 8% 9% 4% 9% 12% 16% Net Debt (Rs bn) India 162 150 171 163 151 132 Novelis 231 241 223 358 305 234 Consolidated 393 391 394 521 456 365
EBITDA (Rs bn) India 62 62 44 52 58 61 Novelis 77 93 100 133 142 147 Consolidated 139 155 143 185 200 208
Net Debt/EBITDA (x) India 2.6 2.4 3.9 3.1 2.6 2.2 Novelis 3.0 2.6 2.2 2.7 2.1 1.6 Consolidated 2.8 2.5 2.8 2.8 2.3 1.8
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 31 Metals & Mining Hindalco Industries
Exhibit 7: Hindalco, change in estimates, March fiscal year-ends, 2021-23E
Revised estimate Previous estimate Change (%) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E Domestic Aluminum (including Utkal) Aluminium metal sales (mn tons) 1.24 1.28 1.28 1.24 1.28 1.28 — — — LME aluminum price (US$/ton) 1,740 1,775 1,800 1,740 1,775 1,800 — — — Net revenues (Rs bn) 206 216 220 206 216 220 — — — EBITDA (Rs bn) 46 48 49 50 48 49 (9) — — EBITDA (US$/ton) 501 501 509 549 501 509 (9) — — Domestic Copper Sales (mn tons) 0.31 0.38 0.40 0.31 0.38 0.40 — — — EBITDA (Rs bn) 6.9 10.9 13.0 7 12 15 (2) (13) (12) EBITDA (US$/ton) 299 387 432 304 444 489 (2) (13) (12) Novelis (includes Aleris) Shipments (tons) 3,575 3,850 3,927 3,575 3,850 3,927 — — — EBITDA (Rs bn) 133 142 147 133 142 147 — — — EBITDA (US$ mn) 1,692 1,897 1,963 1,692 1,897 1,963 — — — EBITDA (US$/ton) 473 493 500 473 493 500 — — — Consolidated Net revenues (Rs bn) 1,302 1,446 1,499 1,302 1,448 1,501 — (0) (0) EBITDA (Rs bn) 185 200 208 189 202 210 (2) (1) (1) PAT (Rs bn) 61 76 80 62 75 79 (2) 1 1 EPS (Rs) 27.5 34.1 36.1 27.9 33.7 35.7 (2) 1 1 INR:USD 74.2 75.0 75.0 74.2 75.0 75.0 — — —
Source: Company, Kotak Institutional Equities estimates
Exhibit 8: Hindalco Industries, key assumptions, March fiscal year-ends, 2016-23E (Rs mn)
2016 2017 2018 2019 2020 2021E 2022E 2023E India aluminum India aluminum volumes (000 tons) 1,139 1,266 1,281 1,300 1,290 1,238 1,276 1,276 LME aluminum prices (US$/ton) 1,594 1,689 2,042 2,050 1,750 1,740 1,775 1,800 Aluminum EBITDA (including Utkal) (Rs bn) 27 41 49 51 36 46 48 49 EBITDA/ton (Including Utkal) (US$/ton) 366 488 592 563 395 501 501 509 Implied production cost (US$/ton) 1,228 1,201 1,450 1,487 1,355 1,239 1,274 1,291 Copper India copper volumes (000 tons) 388 376 410 347 321 310 375 400 TCRC margin (cents/lb) 22 20 20 20 20 15 15 15 EBITDA (Rs bn) 15 15 15 17 12 7 11 13 EBITDA/ton (US$/ton) 578 577 582 692 517 299 387 432 Novelis Rolled product volumes (000 tons) 3,123 3,067 3,188 3,274 3,273 3,575 3,850 3,927 Adjusted EBITDA (US$ mn) 791 1,085 1,215 1,368 1,472 1,692 1,897 1,963 EBITDA/ton (US$/ton) 253 354 381 418 450 473 493 500 Adjusted EBITDA (Rs bn) 52 73 78 96 104 126 142 147 INR:US$ 65.4 67.1 64.5 70.1 70.9 74.2 75.0 75.0 Consolidated EBITDA (Rs bn) 88 124 139 155 143 185 200 208 Net Debt (Rs bn) 555 466 393 391 394 521 456 365 Net Debt/EBITDA 6.3 3.7 2.8 2.5 2.8 2.8 2.3 1.8
Source: Company, Kotak Institutional Equities estimates
32 KOTAK INSTITUTIONAL EQUITIES RESEARCH Hindalco Industries Metals & Mining
Exhibit 9: HNDL's EPS changes by 1.6% for 1% change in prices Exhibit 10: HNDL's FV changes by 0.6% for 1% change in prices EPS sensitivity of HNDL to aluminum prices, FY2022E (Rs) Fair Value sensitivity of HNDL to aluminum prices, FY2022E (Rs/share)
LME aluminum prices (US$/ton) Fair value (Rs/share) LME aluminum prices (US$/ton) 1,675 1,725 1,775 1,825 1,875 1,675 1,725 1,775 1,825 1,875 73.0 27.2 28.6 30.1 31.5 33.0 73.0 340 347 353 360 366 74.0 29.1 30.6 32.1 33.6 35.1 74.0 351 358 364 371 377 INR: USD INR: USD 75.0 31.1 32.6 34.1 35.6 37.1 75.0 362 369 375 382 389 rate rate 76.0 33.1 34.6 36.1 37.6 39.2 76.0 373 380 386 393 400 77.0 384 391 397 404 411 77.0 35.0 36.6 38.1 39.7 41.2
Source: Kotak Institutional Equities estimates Source: Kotak Institutional Equities estimates
Exhibit 11: Hindalco Industries, non-commodity based EBITDA is growing sharply with Aleris acquisition Divisional EBITDA for Hindalco, March fiscal year-ends (Rs mn)
2018 2019 2020 2021E 2022E 2023E EBITDA (Rs mn) Hindalco Novelis 78,329 95,856 104,342 125,576 142,298 147,237 Copper 15,387 16,830 11,760 6,871 10,886 12,966 Aluminum 48,906 51,329 36,093 45,988 47,942 48,724 Total 142,622 164,015 152,196 178,436 201,126 208,927
Commodity Based 34% 31% 24% 26% 24% 23% Non-Commodity Based 66% 69% 76% 74% 76% 77%
Source: Kotak Institutional Equities estimates
Exhibit 12: Hindalco Industries, valuation, September 2022E basis (Rs mn)
Multiple Value (Rs mn) (X) (Rs mn) (Rs/share) Hindalco EBITDA 60,479 5 302,394 136 Novelis EBITDA 144,767 7 1,013,372 456 Total Enterprise Value 205,246 6 1,315,766 593 Less: Net debt (410,891) (410,891) (185) Pension Deficit (71,830) (32) Arrived market capitalization 375 Fair value (Rs) 375
Source: Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 33 Metals & Mining Hindalco Industries
Exhibit 13: Hindalco (consolidated), profit model, balance sheet and cash flow model, March fiscal year-ends, 2017-23E (Rs mn)
2017 2018 2019 2020 2021E 2022E 2023E Profit model (Rs mn) Net sales 1,001,838 1,151,828 1,305,423 1,180,440 1,302,455 1,446,458 1,498,859 EBITDA 124,474 139,206 154,998 143,060 184,744 200,334 208,135 Other income 11,110 11,046 11,271 11,860 5,729 12,650 12,582 Interest (57,424) (39,107) (37,780) (41,970) (37,951) (36,804) (36,012) Depreciation (44,688) (46,065) (47,662) (51,911) (64,602) (66,887) (68,922) Profit before tax 33,472 65,080 80,826 61,039 87,919 109,293 115,783 Extraordinaries (71) 17,742 - (1,800) - - - Taxes (18,399) (20,742) (25,880) (21,570) (26,932) (33,588) (35,601) Profit after tax 19,074 62,080 54,946 37,669 60,987 75,706 80,181 Reported net income 18,997 60,829 54,946 37,669 60,987 75,706 80,181 Adjusted net income 19,069 48,742 54,946 39,469 60,987 75,706 80,181 Fully diluted EPS (Rs) 8.6 21.9 24.8 17.8 27.5 34.1 36.1 Equity 460,588 548,517 575,010 583,170 641,493 714,535 792,052 Deferred tax liability 28,666 38,672 45,260 46,710 46,710 46,710 46,710 Total Borrowings 638,140 512,778 524,040 672,570 842,368 818,401 788,401 Current liabilities 337,614 293,867 297,990 283,390 318,061 342,127 350,884 Minority interest 62 86 90 100 100 100 100 Other Long Term Liabilites - 84,353 86,090 109,340 109,340 109,340 109,340 Total liabilities 1,465,069 1,478,273 1,528,480 1,695,280 1,958,072 2,031,212 2,087,487 Net fixed assets 675,518 638,866 641,850 660,670 860,669 863,782 864,860 Capital work in progress 18,139 20,629 40,971 77,210 17,820 (2,180) (22,180) Goodwill 171,350 178,294 185,750 200,980 225,355 225,355 225,355 Investments 151,534 108,050 90,350 94,330 94,330 94,330 94,330 Cash 82,612 80,578 97,870 215,690 258,800 299,326 360,113 Other current assets 365,918 380,020 402,630 383,240 437,938 487,440 501,850 Deferred tax - 8,135 8,760 9,100 9,100 9,100 9,100 Other Non current assets - 63,701 60,299 54,060 54,060 54,060 54,060 Total assets 1,465,070 1,478,273 1,528,480 1,695,280 1,958,071 2,031,212 2,087,487 Net Debt 466,010 393,166 390,570 394,090 520,778 456,285 365,498 Free cash flow (Rs mn) Operating cash flow excl. working capital 67,720 88,235 125,070 102,010 125,590 142,593 149,104 Working capital changes 6,691 (12,716) (16,830) (11,780) (20,027) (25,436) (5,652) Capital expenditure (29,376) (29,557) (59,680) (67,070) (52,100) (50,000) (50,000) Free cash flow 45,034 45,962 48,560 23,160 53,463 67,157 93,451 Ratios P/E 30.0 11.8 10.4 14.5 9.4 7.5 7.1 P/B 2.0 1.5 1.5 1.5 1.4 1.2 1.0 EV/EBITDA 8.3 6.9 6.2 6.7 5.9 5.1 4.5 FCF Yield (%) 7.9 8.0 8.5 4.1 9.4 11.8 16.4 Net debt/equity (X) 1.0 0.7 0.7 0.7 0.8 0.6 0.5 Net debt/EBITDA (X) 3.7 2.8 2.5 2.8 2.8 2.3 1.8 RoAE (%) 4.4 9.7 9.8 6.8 10.0 11.2 10.6 RoACE (%) 5.9 6.8 7.6 6.1 6.7 6.6 6.6
Source: Company, Kotak Institutional Equities estimates
34 KOTAK INSTITUTIONAL EQUITIES RESEARCH BUY GAIL (India) (GAIL) https://ultraviewer.et/en/own Gas Utilities FEBRUARY 11, 2021 load.html RESULT Sector view: Attractive
Recovery across segments. GAIL’s 3QFY21 performance was marked by a healthy CMP (`): 134 recovery in volumes/margins across key business segments. We raise our FY2022-23 EPS Fair Value (`): 160 estimates by 8-15% factoring in higher profitability for commodity businesses BSE-30: 51,309 underpinned by a rebound in prices and margins. We retain BUY with a revised SoTP- based Fair Value of Rs160 (Rs140 earlier) noting reasonable valuations and potential upside to earnings from higher crude prices sustaining in the near term.
GAIL (India) Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 134/160/BUY EPS (Rs) 10.0 11.9 12.4 52-week range (Rs) (high-low) 146-65 EPS growth (%) (23.8) 18.7 4.3 Mcap (bn) (Rs/US$) 603/8.3 P/E (X) 13.3 11.2 10.8 ADTV-3M (mn) (Rs/US$) 3,287/45 P/B (X) 1.3 1.2 1.1 Shareholding pattern (%) EV/EBITDA (X) 10.6 8.3 7.6 Promoters 51.8 RoE (%) 10.0 11.1 10.9 FPIs/MFs/BFIs 15.7/10.5/9.4 Div. yield (%) 3.0 3.7 4.5 Price performance (%) 1M 3M 12M Sales (Rs bn) 548 697 799 Absolute 0.6 48.1 9.7 EBITDA (Rs bn) 63 80 85 Rel. to BSE-30 (4.3) 24.9 (12.4) Net profits (Rs bn) 45 54 56
Rebound in volumes/margins across key business segments; higher other income
EBITDA increased 43% qoq to Rs19.2 bn in 3QFY21 reflecting a healthy rebound in volumes across segments and recovery in margins for petchem and gas marketing business; EBITDA was 11% below our estimate though led by higher operating cost and persisting loss in gas marketing business, albeit sharply lower than 1HFY21. Petchem segment EBIT jumped 2.5X qoq led by sharply higher realized margins amid an increase in realizations and lower input LNG cost. Gas transmission EBIT declined 3% qoq to Rs9.9 bn despite 4% increase in volumes and 1% higher tariffs, which was offset by an increase in operating costs. LPG/LHC production EBIT increased by only 1% qoq, surprising given higher realizations, 7% higher volumes and reduction in input gas price. Gas marketing reported lower EBIT loss, showing signs of improvement amid higher crude/LNG prices. Net income was in line with our estimate at Rs14.9 bn (EPS of Rs3.3.), boosted by higher other income, lower interest cost and tax rate. In 9MFY21, EBITDA declined 36% to Rs38.8 bn and adjusted net income declined 22% to Rs29.1 bn.
Management optimistic on gas transmission and marketing segments
In 3QFY21 conference call, GAIL management indicated—(1) contracted LNG volumes for FY2022 are almost fully placed with the company expecting to earn at least a modest level of profits, (2) transmission volumes are expected to improve materially in FY2022-23 as contracted LNG volumes are placed domestically, following the ramp-up in off-take by upcoming fertilizer plants, (3) gas volumes at the under-construction Urja Ganga Project are guided to increase by 11 mcm/d during FY2022 led by off-take of gas by four fertilizer plants (Baruani, Durgapur, Gorakhpur and Sindri), refineries (Barauni, Haldia and Paradip) and several CGD areas along the Tarun Lakhotia network, (4) the company has sourced ~2 mcm/d of gas from RIL’s R-series block and (5) capex run-rate was lower at Rs37 bn in 9MFY21 versus FY2021 guidance of Rs66 bn. Hemang Khanna Raise FY2022-23 EPS estimates by 8-15%; retain BUY with revised FV of Rs160
We raise FY2022-23E EPS by 8-15% factoring in higher EBITDA for petchem and LPG/LHC production segment assuming oil price at US$50/bbl for FY2022 and higher margins for both years; increase in FY2021E EPS is higher at 25% as we account higher volumes/prices/margins for 4QFY21, higher other income and lower interest cost. We revise our SoTP-based FV to [email protected] Contact: +91 22 6218 6427 Rs160 from Rs140 earlier on higher estimates and rollover to March 2023.
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Gas Utilities GAIL (India)
3QFY21 segment performance
Recovery in gas transmission volumes offset by higher costs. Gas transmission revenues increased 5% qoq to Rs16.1 bn reflecting 4% qoq increase in volumes to 110.3 mcm/d and 1% higher realized tariffs at Rs1.59/scm. However, EBIT moderated 3% qoq to Rs9.9 bn, impacted by an increase in operating costs.
Reduction in EBIT loss from gas marketing. Gas marketing EBIT loss moderated further to Rs737 mn from Rs3.64 bn in 2QFY21 reflecting a decline in the differentials between gas-linked LNG prices versus spot LNG and crude-linked LNG prices. Gas sales volumes increased 8% qoq to 95.6 mcm/d.
Surprisingly modest increase in LPG/LHC EBIT. LPG/LHC segment EBIT increased marginally by 1% qoq to Rs2.8 bn despite (1) 7% sequential increase in volumes to 319 ktons, (2) 2% qoq increase in realizations and (3) 25% decline in input price of domestic gas; the company indicated that operating expenses were higher.
Strong performance by petchem segment. Petchem segment EBIT increased 2.5X qoq to Rs4.3 bn versus of Rs1.8 bn in 2QFY21 reflecting 3% qoq increase in volumes to 231 ktons, 11% qoq rise in realizations to Rs83.8/kg and likely decline in input LNG costs. Production increased 5% qoq to 233 ktons, highest level achieved post expansion.
9MFY21 segment performance
Lower EBIT for gas transmission. Gas transmission revenues declined 5% yoy to Rs44.2 bn reflecting 5% decline in volumes to 102.3 mcm/d and steady realized tariffs at Rs1.57/scm. EBIT declined 4% to Rs27.3 bn reflecting lower implied operating costs.
EBIT loss for gas marketing. Gas marketing reported an EBIT loss of Rs9.8 bn versus a positive EBIT of Rs15.5 bn in 9MFY20 impacted by weaker spreads amid adverse differentials of contracted LNG prices. Gas sales volumes declined 8% to 88.5 mcm/d.
Sharp decline in LPG/LHC EBIT. LPG/LHC segment EBIT declined sharply to Rs8.3 bn, reflecting 14% decline in realizations and 8% reduction in volumes to 881 ktons, which was partly offset by a reduction in domestic gas price.
Robust profits from petchem segment. Petchem business reported an EBIT of Rs4.6 bn versus EBIT loss of Rs3.2 bn in 9MFY20 reflecting 13% increase in sales volumes to 638 ktons, 2% increase in realizations and higher underlying margins.
36 KOTAK INSTITUTIONAL EQUITIES RESEARCH GAIL (India) Gas Utilities
Exhibit 1: GAIL interim results, March fiscal year-ends (Rs mn)
(% chg.) 3QFY21 3QFY21E 3QFY20 2QFY21 3QFY21E 3QFY20 2QFY21 9MFY21 9MFY20 (% chg.) FY2021E Net sales 154,543 160,804 177,673 136,427 (3.9) (13.0) 13.3 411,839 543,038 (24.2) 548,069 Total expenditure (135,348) (139,194) (156,950) (123,046) (2.8) (13.8) 10.0 (373,036) (482,238) (22.6) (485,229) (Increase)/decrease in stock (875) — 3,952 (3,086) (7,969) 1,679 — Purchase (107,504) (113,899) (133,632) (95,369) (5.6) (19.6) 12.7 (291,191) (402,328) (27.6) (382,513) Raw material (10,837) (9,763) (10,760) (10,199) 11.0 0.7 6.3 (28,741) (34,448) (16.6) (38,543) Staff cost (4,041) (4,064) (3,472) (4,083) (0.6) 16.4 (1.0) (12,102) (11,937) 1.4 (16,256) Other expenditure (12,090) (11,468) (13,038) (10,310) 5.4 (7.3) 17.3 (33,033) (35,205) (6.2) (47,917) EBITDA 19,195 21,610 20,724 13,381 (11.2) (7.4) 43.4 38,803 60,800 (36.2) 62,840 Other income 4,708 3,653 3,124 6,279 28.9 50.7 (25.0) 13,401 9,036 48.3 16,854 Interest (331) (475) (242) (274) (30.3) 37.1 20.7 (1,101) (756) 45.6 (1,450) Depreciation (4,895) (4,960) (4,890) (4,843) (1.3) 0.1 1.1 (14,321) (13,344) 7.3 (19,465) Pretax profits 18,677 19,828 18,716 14,543 (5.8) (0.2) 28.4 36,782 55,737 (34.0) 58,779 Extraordinaries — — — 960 960 (1,860) 960 Current tax (4,349) (4,799) (6,682) (2,900) (8,731) (18,520) (14,886) Deferred tax 545 (123) 472 (207) 814 667 1,195 Net income 14,873 14,907 12,507 12,397 (0.2) 18.9 20.0 29,825 36,024 (17.2) 46,047 Adjusted net income 14,873 14,907 12,507 11,629 (0.2) 18.9 27.9 29,066 37,268 (22.0) 45,307 Adjusted EPS (Rs) 3.3 3.3 2.8 2.6 6.4 8.3 10.0 Tax rate (%) 20.4 24.8 33.2 20.0 21.0 33.1 22.9
Volume and realizations data Gas sales (mcm/d) 95.6 93.0 96.0 88.6 2.8 (0.4) 7.9 88.5 95.8 (7.6) 90.9 Gas transmission (mcm/d) 110.3 110.2 110.3 106.4 0.1 0.0 3.6 102.3 108.1 (5.4) 104.9 LPG transported ('000 tons) 1,088 1,064 1,043 1,058 2.3 4.3 2.8 3,109 2,869 8.4 4,134 LPG production ('000 tons) 211 228 245 213 (7.3) (13.9) (0.9) 651 693 (6.1) 870 LPG sales ('000 tons) 213 228 245 217 (6.4) (13.1) (1.8) 652 692 (5.8) 870 Other liquids production ('000 tons) 105 80 91 78 30.9 15.4 34.6 225 270 (16.7) 316 Other liquids sales ('000 tons) 106 80 92 80 32.1 15.2 32.5 229 270 (15.2) 316 Polymers production ('000 tons) 233 211 216 221 10.7 7.9 5.4 588 579 1.6 784 Polymers sales ('000 tons) 231 211 211 224 9.7 9.5 3.1 638 564 13.1 834 Subsidy payment — — — — — — — Implied gas transmission tariffs (Rs/scm) 1.59 1.57 1.56 1.57 1.1 1.8 1.1 1.57 1.57 0.1 1.58 Implied petchem realizations, net (Rs/kg) 83.8 82.8 70.3 75.2 1.2 19.3 11.5 75.9 74.7 1.6 78.0 Segment revenues Transmission services (1) Natural gas 16,135 15,765 15,855 15,400 2.3 1.8 4.8 44,216 46,662 (5.2) 60,402 (2) LPG 1,754 1,703 1,688 1,695 2.9 3.9 3.5 4,984 4,646 7.3 6,754 Natural gas marketing 119,034 127,915 146,627 105,067 (6.9) (18.8) 13.3 318,538 452,097 (29.5) 424,202 Petrochemicals 19,366 17,432 14,828 16,847 11.1 30.6 15.0 48,430 42,147 14.9 65,028 LPG and liquid hydrocarbons 8,779 8,946 9,736 8,030 (1.9) (9.8) 9.3 24,288 30,798 (21.1) 35,473 Other segments 2,633 2,794 2,604 2,267 (5.8) 1.1 16.1 7,360 8,254 (10.8) 11,210 Total revenues 167,700 174,554 191,338 149,306 (3.9) (12.4) 12.3 447,816 584,604 (23.4) 603,069 Less: Inter-segment revenue 13,132 13,750 13,669 12,862 35,930 41,550 55,000 Sales/Income from operations 154,568 160,804 177,669 136,445 (3.9) (13.0) 13.3 411,886 543,054 (24.2) 548,069 Segment EBIT Transmission services (1) Natural gas 9,907 10,454 9,855 10,212 (5.2) 0.5 (3.0) 27,285 28,337 (3.7) 37,679 (2) LPG 931 887 935 882 5.0 (0.4) 5.6 2,629 2,364 11.2 3,574 Natural gas marketing (737) 750 4,665 (3,640) NA NA NA (9,831) 15,536 NA (8,312) Petrochemicals 4,341 2,398 (85) 1,763 81.1 NA 146.2 4,560 (3,179) NA 7,547 LPG and liquid hydrocarbons 2,827 3,917 2,964 2,802 (27.8) (4.6) 0.9 8,291 10,525 (21.2) 12,347 Other segments 1,017 935 1,214 913 8.7 (16.3) 11.4 3,099 4,492 (31.0) 2,934 Total EBIT 18,286 19,341 19,548 12,932 (5.5) (6.5) 41.4 36,031 58,076 (38.0) 55,769 Less: Interest 331 475 242 274 1,101 756 1,450 Less: Other unallocable (net) (722) 538 590 (2,846) (2,811) 1,583 (3,500) Total PBT 18,677 19,828 18,716 15,503 (5.8) (0.2) 20.5 37,742 55,737 (32.3) 57,819 Capital employed Transmission services (1) Natural gas 299,514 290,836 299,838 299,514 290,836 (2) LPG 9,563 9,525 9,488 9,563 9,525 Petrochemicals 91,198 93,539 90,852 91,198 93,539 LPG and liquid hydrocarbons 7,195 7,846 6,601 7,195 7,846 Other segments 19,855 18,055 19,337 19,855 18,055 Unallocable 47,619 40,768 28,071 47,619 40,768 Total 474,943 460,567 454,188 474,943 460,567
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 37 Gas Utilities GAIL (India)
Exhibit 2: EBIT loss for gas marketing declined sharply in 3QFY21 amid a decline in differentials between contract and spot LNG prices LNG contracts and pricing, March year-ends, 1QFY19 onwards (US$/mn BTU)
1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 Current Gas marketing EBITDA 5,510 10,450 6,750 5,880 8,610 2,540 5,240 6,310 (5,170) (3,350) (450) Gas marketing volumes (mcm/d) 97.2 96.2 96.0 98.4 96.6 94.7 96.0 97.8 81.2 88.6 95.6 Crude/gas price (US$/mn BTU) Dated Brent (US$/bbl) 68.2 72.7 73.9 59.6 69.0 61.0 60.2 61.4 29.9 41.9 41.0 60.0 Henry Hub 2.7 2.9 3.0 3.6 2.8 2.5 2.3 2.3 1.8 1.7 2.1 3.3 Spot LNG 8.0 10.4 10.7 8.0 5.1 4.5 5.7 4.3 2.4 2.7 5.9 7.2 Estimated LNG price (US$/mn BTU) RasGas 9.3 10.2 10.4 9.3 8.8 9.4 8.6 8.7 7.0 5.0 6.0 8.4 Gazprom 8.1 8.9 9.1 8.0 7.6 8.1 7.4 7.5 5.8 3.9 4.9 7.2 Gorgon 9.3 10.3 10.5 9.3 8.8 9.4 8.5 8.7 6.8 4.6 5.7 8.3 US 7.9 8.1 8.4 8.8 7.9 7.5 7.5 7.3 6.8 6.8 7.2 8.5 Pricing differentials (US$/mn BTU) US LNG over spot LNG (0.1) (2.3) (2.3) 0.8 2.8 3.0 1.8 2.9 4.3 4.0 1.2 1.3 US LNG over crude-linked LNG (1.4) (2.1) (1.9) (0.5) (0.9) (1.9) (1.1) (1.5) (0.2) 1.8 1.2 0.1 RasGas LNG over spot LNG 1.3 (0.3) (0.3) 1.3 3.8 4.9 2.9 4.4 4.5 2.3 0.1 1.2
Source: Company, Kotak Institutional Equities estimates
Exhibit 3: US LNG prices are at a premium to crude-linked contracted LNG prices Comparative price of LNG contracts, spot LNG and fuel oil in calorific equivalent terms, April 2017 onwards (US$/mn BTU)
(US$/mn BTU) Spot LNG RasGas LNG Gorgon LNG US LNG Fuel oil Propane 15
13
11
9
7
5
3
1
(1)
Jul-18
Jul-19
Jul-20
Jan-18
Jan-19
Jan-20
Jan-21
Jun-18
Jun-19
Jun-20
Feb-18
Oct-18
Feb-19
Oct-19
Feb-20
Oct-20
Feb-21
Apr-18
Sep-18
Apr-19
Sep-19
Apr-20
Sep-20
Dec-18
Dec-19
Dec-20
Nov-18
Nov-19
Nov-20
Mar-18
Mar-19
Mar-20
Mar-21
Aug-18
Aug-19
Aug-20
May-18
May-19 May-20
Source: Bloomberg, Kotak Institutional Equities estimates
38 KOTAK INSTITUTIONAL EQUITIES RESEARCH GAIL (India) Gas Utilities
Exhibit 4: Our reverse valuation exercise suggests the stock is trading at 8.9X business EPS Reverse valuation exercise for GAIL, March fiscal year-end, 2023E
No. of shares Stock price Valuation Fair value Fair value (# mn) (Rs/share) (X) (Rs bn) (Rs/share) Current stock price 134 Market value of investments IGL 158 557 0.7 61 Petronet LNG 188 241 0.7 32 China Gas 150 278 0.7 29 MGL 32 1,130 0.7 25 ONGC 308 100 0.7 22 GAIL Gas 1,127 50 0.7 39 Other investments 0.7 21 Total investments 230 51 Implied value of core business 83 FY2023E EPS 12.4 Core-business EPS, excluding other income 9.3 Implied P/E on core business (X) 8.9
Source: Company, Kotak Institutional Equities estimates
Exhibit 5: We value GAIL stock at Rs160 per share based on FY2023 estimates Sum-of-the-parts valuation of GAIL, March 2023E basis (Rs bn)
EV (Rs bn) Valuation base (Rs bn) Multiples (X) EBITDA Valuation Other EBITDA Other EV/EBITDA Other basis (Rs/share) Utility Natural gas transportation 47.0 6.5 306 68 Natural gas marketing 10.9 4.0 43 10 LPG transportation 3.9 6.5 26 6 Total utility businesses 61.8 375 83 Commodity LPG/LHC production 15.6 6.0 93 21 Petrochemicals 7.7 6.0 46 10 Total commodity businesses 23.2 139 31 Investments IGL 91 0.8 72 16 Petronet LNG 56 0.8 45 10 MGL 43 0.8 35 8 China Gas 43 0.8 34 8 ONGC 23 0.6 14 3 Others 125 0.6 75 17 Investments 381 275 61 Total enterprise value 175 Net debt/(cash) 66 15 Equity value 160
Source: Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 39 Gas Utilities GAIL (India)
Exhibit 6: We expect improvement in operating performance across key segments in FY2022-23 Key assumptions behind GAIL model, March fiscal year-ends, 2016-23E
2016 2017 2018 2019 2020 2021E 2022E 2023E Volumes Natural gas (mcm/d) Transmission 92 100 105 107 108 105 116 127 Sales 74 81 85 97 96 91 98 104 LPG/LHC ('000 tons) Transmission 2,819 3,363 3,721 3,975 3,909 4,134 4,164 4,194 Sales 1,085 1,082 1,276 1,341 1,264 1,186 1,251 1,300 Petrochemicals ('000 tons) Polyethylene 334 578 673 735 738 834 834 855 Tariffs/Margins Natural gas (Rs/scm) Blended transmission tariffs 1.13 1.26 1.32 1.47 1.57 1.58 1.44 1.46 Blended marketing margins 0.52 0.45 0.40 0.81 0.61 (0.25) 0.25 0.32 LPG LPG price (US$/ton) 452 415 528 539 388 380 427 412 Transmission charges (Rs/kg) 1.7 1.5 1.5 1.6 1.6 1.6 1.7 1.7 Other assumptions Polyethylene, HDPE (US$/ton) 1,390 1,275 1,190 1,189 877 929 980 980 Exchange rate (Rs/US$) 65.5 67.1 64.5 69.9 70.8 74.2 75.0 76.5 Subsidy losses (Rs mn) — — — — — — — —
Source: Company, Kotak Institutional Equities estimates
Exhibit 7: We expect increase in contribution from key business segments during FY2022-23E Segment breakdown of GAIL's EBITDA, March fiscal year-ends, 2016-23E (Rs mn)
2016 2017 2018 2019 2020 2021E 2022E 2023E EBITDA Gas transportation 25,384 31,702 37,137 40,894 46,590 47,755 46,612 51,198 LPG transportation 3,106 3,087 3,268 3,586 3,909 4,198 4,061 3,931 Gas marketing 13,950 13,486 12,561 28,591 21,562 (8,312) 8,836 12,125 LPG production 7,848 12,926 23,480 25,986 16,726 13,303 19,710 17,652 Petrochemicals (4,438) 8,920 6,880 8,148 2,043 12,224 8,205 8,511 Others (3,049) (7,315) (6,709) (15,180) (5,275) (6,329) (7,523) (8,388) Subsidy loss — — — — — — — — Total 42,801 62,807 76,616 92,024 85,554 62,840 79,902 85,030
Source: Company, Kotak Institutional Equities estimates
40 KOTAK INSTITUTIONAL EQUITIES RESEARCH GAIL (India) Gas Utilities
Exhibit 8: Profit model, balance sheet, cash model of GAIL, March fiscal year-ends, 2016-23E (Rs mn)
2016 2017 2018 2019 2020 2021E 2022E 2023E Profit model (Rs mn) Net sales 516,875 481,489 536,616 749,933 720,570 548,069 697,460 798,524 EBITDA 42,463 65,584 76,339 96,038 85,554 62,840 79,902 85,030 Other income 8,916 10,063 9,870 15,712 14,168 16,854 17,783 17,938 Interest (7,999) (4,794) (2,751) (1,385) (1,085) (1,450) (3,171) (3,032) Depreciation (13,098) (13,968) (14,151) (15,502) (18,360) (19,465) (22,068) (24,357) Pretax profits 30,282 56,886 69,307 94,862 80,277 58,779 72,447 75,580 Current tax (1,355) (13,345) (16,333) (24,386) (20,600) (14,886) (17,946) (18,718) Deferred tax (7,001) (5,734) (7,066) (6,205) — 1,195 (724) (756) Net profits 22,264 35,029 46,184 60,257 66,206 46,047 53,776 56,105 Adjusted net profits 22,019 37,807 46,000 62,919 59,459 45,307 53,776 56,105 Adjusted EPS (Rs) 4.9 8.4 10.2 14.0 13.2 10.0 11.9 12.4
Balance sheet (Rs mn) Total equity 350,946 381,494 403,281 440,929 439,711 467,718 498,943 527,988 Deferred taxation liability 40,714 46,559 46,309 59,477 44,972 43,777 44,502 45,257 Total borrowings 80,601 50,630 20,805 10,011 56,174 76,174 71,174 53,674 Current liabilities 85,714 84,017 110,427 133,369 144,479 130,953 142,529 150,759 Total liabilities and equity 557,974 562,700 580,822 643,786 685,336 718,622 757,148 777,678 Cash 17,939 13,419 25,294 12,147 8,039 14,754 13,248 14,163 Other current assets 142,704 138,523 112,959 133,472 163,831 147,519 158,841 170,143 Total fixed assets 311,484 315,662 343,038 402,886 438,481 481,363 510,074 518,387 Investments 85,847 95,096 99,531 95,282 74,985 74,985 74,985 74,985 Total assets 557,974 562,700 580,822 643,786 685,336 718,622 757,148 777,678
Free cash flow (Rs mn) Operating cash flow, excl. working capital 34,594 52,698 64,201 74,922 64,677 45,288 57,993 62,745 Working capital changes (2,326) (1,939) 18,864 2,425 3,073 2,786 254 (3,072) Capital expenditure (12,138) (16,947) (29,456) (59,942) (54,620) (60,172) (49,986) (32,136) Investments 4,500 (4,173) (7,632) (4,823) (32,993) — — — Other income 6,541 8,164 11,377 10,399 19,049 16,854 17,783 17,938 Free cash flow 31,172 37,804 57,354 22,981 (816) 4,756 26,045 45,476
Ratios (%) Debt/equity 20.6 11.8 4.6 2.0 11.6 14.9 13.1 9.4 Net debt/equity 16.0 8.7 (1.0) (0.4) 9.9 12.0 10.7 6.9 ROAE (%) 6.2 8.5 10.5 12.7 13.4 9.2 10.2 10.0 ROACE (%) 6.1 8.6 10.1 13.0 11.5 8.2 9.3 9.4
Key assumptions Gas transmission volumes (mcm/d) 92 100 105 107 108 105 116 127 Petrochemical sales volumes ('000 tons) 334 578 673 735 738 834 834 855 LPG/LHC sales volumes ('000 tons) 1,085 1,082 1,276 1,341 1,264 1,186 1,251 1,300 LPG transmission volumes ('000 tons) 2,819 3,363 3,721 3,975 3,909 4,134 4,164 4,194
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 41 ADD Indraprastha Gas (IGL) https://ultraviewer.et/en/own Gas Utilities FEBRUARY 11, 2021 load.html RESULT Sector view: Attractive
Robust rebound. IGL’s performance was in line with our expectations in 3QFY21 CMP (`): 557 reflecting a sharp expansion in unit margins to record-high levels and a healthy recovery Fair Value (`): 575 in volumes. We expect margins to sustain at high levels amid a benign environment and BSE-30: 51,309 volumes to continue improving led by restoration of normalcy and incremental off-take from new CNG buses to be inducted by DTC. ADD stays with a revised DCF-based FV of Rs575 from Rs500 earlier on higher long-term margins and rollover.
Indraprastha Gas Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 557/575/ADD EPS (Rs) 16.1 23.0 25.6 52-week range (Rs) (high-low) 581-284 EPS growth (%) (3.5) 42.9 11.4 Mcap (bn) (Rs/US$) 390/5.4 P/E (X) 34.6 24.2 21.8 ADTV-3M (mn) (Rs/US$) 1,887/26 P/B (X) 6.6 5.6 4.8 Shareholding pattern (%) EV/EBITDA (X) 24.6 17.5 15.5 Promoters 45.0 RoE (%) 20.6 25.0 23.8 FPIs/MFs/BFIs 21.3/7.3/11.1 Div. yield (%) 0.5 0.9 1.2 Price performance (%) 1M 3M 12M Sales (Rs bn) 50 67 84 Absolute 1.1 31.5 8.5 EBITDA (Rs bn) 15 21 23 Rel. to BSE-30 (3.9) 10.9 (13.4) Net profits (Rs bn) 11 16 18
In-line results driven by recovery in volumes and record-high unit margins
IGL’s EBITDA increased 23% qoq and 28% yoy to Rs5 bn in 3QFY21, modest 1% above our estimate, reflecting 13% qoq increase in volumes to 6.3 mcm/d (down only 6% yoy now) and further expansion in unit margins. Gross margin was up 6% qoq at Rs14.6/scm, reflecting gains from the cut in domestic gas price, which was partially offset by higher LNG prices. Unit EBITDA increased to record-high levels of Rs8.7/scm from Rs8/scm in 2QFY21. Net income increased 9% qoq and 18% yoy to Rs3.35 bn (EPS of Rs4.8) as a sharper increase in EBITDA was offset by reduced other income. Income from associates, CUGL and MNGL, jumped sharply by 60% yoy to Rs470 mn in 3QFY21. In 9MFY21, EBITDA declined 13% to Rs9.91 bn and adjusted net income declined 16% to Rs6.75 bn (EPS of Rs9.6), reflecting a sharp 26% reduction in volumes impacted by lockdown; unit EBITDA jumped 17% to Rs7.5/scm as 21% increase in gross margins to Rs14.1/scm was partially offset by negative operating leverage amid lower volumes. Income from associates, CUGL and MNGL, declined 23% yoy to Rs817 mn in 9MFY21.
Volume recovery continues in 3QFY21—CNG now only 9% lower yoy, while I&C segment up 2%
Overall volumes increased 14% qoq to 6.3 mcm/d in 3QFY21 driven by (1) encouraging 13% qoq increase in CNG volumes to 289 mn kgs, which remained only 9% lower yoy as compared to a sharp decline of 20% in 2QFY21 and 66% decline in 1QFY21, (2) strong 17% sequential rebound in I&C segment, which recorded 2% yoy growth as compared to 20% decline in 1HFY21, (3) sustained 14% yoy growth in domestic PNG volumes and (4) 15% sequential growth for sale to other CGD entities in Gurugram and Faridabad, which remained 14% lower yoy as compared to a decline of 45% in 1HFY21. In 9MFY21, overall volumes reduced 26% yoy to 4.8 mcm/d reflecting a decline of (1) 31% in CNG, (2) 12% in I&C and (3) 35% in supply to Tarun Lakhotia other CGD entities, which was partly offset by 24% growth in domestic PNG volumes. Hemang Khanna Retain ADD with a revised Fair Value of Rs575
We broadly retain our FY2021-23 EPS estimates incorporating 9MFY21 performance. We retain ADD rating, while raising Fair Value to Rs575 from Rs500 to reflect higher long-term growth assumptions and rollover of DCF model to March 2022. We expect volume trajectory to improve further and high margins to sustain amid a favorable operating environment. A recent [email protected] order of 1,000 new CNG buses by DTC, is expected to aid volumes from 2HFY22 onwards. 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. Indraprastha Gas Gas Utilities
Exhibit 1: Interim results of IGL, March fiscal year-ends (Rs mn)
(% chg.) 3QFY21 3QFY21E 3QFY20 2QFY21 3QFY21E 3QFY20 2QFY21 9MFY21 9MFY20 (% chg.) FY2021E Net sales 14,462 14,954 16,642 13,054 (3.3) (13.1) 10.8 33,902 49,327 (31.3) 50,347 Total expenditure (9,455) (10,008) (12,724) (8,983) (5.5) (25.7) 5.3 (23,989) (37,898) (36.7) (35,485) Raw material (6,069) (6,480) (9,410) (6,097) (6.4) (35.5) (0.5) (15,157) (28,532) (46.9) (22,812) Staff cost (375) (366) (437) (313) 2.2 (14.2) 19.9 (1,001) (1,167) (14.2) (1,426) Other expenditure (3,012) (3,162) (2,878) (2,574) (4.7) 4.7 17.0 (7,832) (8,200) (4.5) (11,248) EBITDA 5,007 4,946 3,918 4,071 1.2 27.8 23.0 9,912 11,429 (13.3) 14,861 Other income 259 391 508 657 (33.8) (49.0) (60.6) 1,223 1,251 (2.3) 1,766 Finance cost (31) (25) (20) (23) (77) (55) (101) Depreciation (750) (747) (641) (711) 0.5 16.9 5.5 (2,143) (1,867) 14.7 (2,906) Pre-tax profits 4,485 4,565 3,764 3,994 (1.7) 19.2 12.3 8,915 10,758 (17.1) 13,620 Extraordinary income — — — — — 817 — Tax (1,137) (1,142) (926) (915) (2,169) (2,743) (3,406) Net income 3,349 3,423 2,839 3,079 (2.2) 18.0 8.7 6,746 8,832 (23.6) 10,214 Adjusted net income 3,349 3,423 2,839 3,079 (2.2) 18.0 8.7 6,746 8,015 (15.8) 10,214 Adjusted EPS (Rs) 4.8 4.9 4.1 4.4 (2.2) 18.0 8.7 9.6 11.5 (15.8) 14.6 Income from associates 470 440 294 288 6.7 59.5 62.8 817 1,055 (22.5) 1,309 Tax rate (%) 25.3 25.0 24.6 22.9 24.3 25.5 25.0
Other details Volume (mcm/d) 6.3 6.4 6.8 5.5 (2.8) (7.5) 13.8 4.8 6.5 (25.8) 5.3 Volume (mscm) 576 586 616 506 (1.8) (6.5) 13.8 1,329 1,790 (25.8) 1,948 CNG (mn kgs.) 289 296 318 255 (2.2) (9.1) 13.3 649 943 (31.2) 960 PNG (mscm) 164 169 164 146 (3.1) 0.1 12.3 411 461 (10.8) 594 Industrial/commercial 84 86 82 72 (2.6) 2.3 16.7 197 223 (11.7) 291 Domestic PNG 41 43 36 40 (4.7) 13.6 2.5 124 100 23.9 171 Natural gas 39 40 46 34 (2.5) (14.4) 14.7 90 138 (34.6) 132 Net realization (Rs/scm) 25.1 25.5 27.0 25.8 (1.5) (7.1) (2.7) 25.5 27.6 (7.4) 25.8 Raw material cost (Rs/scm) 10.5 11.0 15.3 12.0 (4.7) (31.0) (12.6) 11.4 15.9 (28.5) 11.7 Gross margin (Rs/scm) 14.6 14.4 11.7 13.7 0.8 24.1 6.0 14.1 11.6 21.4 14.1 Other operating costs (Rs/scm) 5.9 6.0 5.4 5.7 (2.3) 9.3 3.1 6.6 5.2 27.0 6.5 Operating profit (Rs/scm) 8.7 8.4 6.4 8.0 3.1 36.7 8.0 7.5 6.4 16.8 7.6
Source: Company, Kotak Institutional Equities estimates
Exhibit 2: Volumes recovery continued for CNG in 3QFY21 Growth in CNG and PNG volumes, 1QFY13 onwards (%)
(%) Overall CNG sales PNG sales 50
30
10
(10)
(30)
(50)
(70)
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21 2QFY21 3QFY21
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 43 Gas Utilities Indraprastha Gas
Exhibit 3: IGL's gross margins on CNG and domestic PNG have increased in recent months Estimated gross margins on CNG and domestic PNG for IGL, April 2018 onwards (Rs/scm)
(Rs/scm) CNG Domestic PNG 19
18
17
16
15
14
13
12
Jun-18
Jun-19
Jun-20
Oct-18
Oct-19
Oct-20
Feb-19
Feb-20
Feb-21
Apr-18
Apr-19
Apr-20
Dec-18
Dec-19
Dec-20
Aug-18 Aug-19 Aug-20
Source: Company, Kotak Institutional Equities estimates
Exhibit 4: Discount of CNG to liquid auto fuels has increased significantly in the current year Competitiveness of CNG versus other auto fuels in Delhi, March fiscal year-ends, 2016-21YTD
2016 2017 2018 2019 2020 9MFY21 Current Fuel prices in Delhi CNG (Rs/kg) 37.5 36.6 38.8 43.1 45.7 43.0 42.7 Petrol (Rs/liter) 61.9 65.9 68.8 75.4 72.7 78.4 87.6 Diesel (Rs/liter) 47.1 54.5 58.3 68.2 65.8 72.0 77.7 CNG discount to petrol (%) 39.3 44.4 43.6 42.8 37.1 45.2 51.3 CNG discount to diesel (%) 20.3 32.8 33.4 36.8 30.5 40.3 45.1 Fuel costs (Rs/km) CNG @mileage of 18 km/kg 2.1 2.0 2.2 2.4 2.5 2.4 2.4 Petrol @mileage of 12 km/l 5.2 5.5 5.7 6.3 6.1 6.5 7.3 Diesel @mileage of 15 km/l 3.1 3.6 3.9 4.5 4.4 4.8 5.2 CNG discount to petrol (%) 59.6 62.9 62.4 61.9 58.1 63.5 67.5 CNG discount to diesel (%) 33.6 44.0 44.5 47.3 42.1 50.2 54.2
Source: Company, Kotak Institutional Equities estimates
44 KOTAK INSTITUTIONAL EQUITIES RESEARCH Indraprastha Gas Gas Utilities
Exhibit 5: We expect volumes to recover and margins to remain elevated Key assumptions for IGL, March fiscal year-ends, 2016-23E
2016 2017 2018 2019 2020 2021E 2022E 2023E Sales volume (mn scm) CNG 1,123 1,269 1,412 1,602 1,738 1,354 1,860 2,060 PNG 342 406 479 553 619 594 685 774 Domestic 86 94 109 120 141 171 208 238 Commercial/Industrial 160 174 204 252 298 291 298 343 Other CGD companies 96 138 166 181 180 132 180 193 Total volumes 1,465 1,675 1,891 2,155 2,357 1,948 2,546 2,834 CNG (mn kgs) 834 921 1,018 1,148 1,234 960 1,319 1,461 Average daily volumes (mcm/d) 4.0 4.6 5.2 5.9 6.4 5.3 7.0 7.8 Growth in volumes (%) 4.4 14.3 12.9 14.0 9.4 (17.4) 30.7 11.3
Operating metrics (Rs/scm) Gross margin 9.6 10.3 11.1 11.0 11.9 14.1 14.1 14.3 Operating cost 4.3 4.6 5.2 5.2 5.5 6.5 5.9 6.1 Operating profit 5.3 5.8 5.9 5.8 6.4 7.6 8.2 8.3
Source: Company, Kotak Institutional Equities estimates
Exhibit 6: We value IGL stock at Rs575 using DCF methodology Calculation of equity value using discounted cash flow analysis (Rs mn)
2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E Assumptions Volumes (mcm/d) 5.3 7.0 7.8 8.5 9.2 9.9 10.6 11.2 11.9 12.4 Growth (%) (17.4) 30.7 11.3 9.8 8.5 7.5 6.8 6.1 5.3 4.8 Unit margins (Rs/scm) 7.6 8.2 8.3 8.4 8.5 8.6 8.8 9.0 9.0 9.0 DCF model EBITDA 14,861 20,817 23,422 26,064 28,716 31,209 34,106 36,837 38,951 40,654 Adjusted tax expense (2,752) (4,230) (4,740) (5,284) (5,866) (6,439) (7,130) (7,783) (8,279) (8,672) Change in working capital 759 1,140 1,330 1,138 1,031 1,066 1,075 1,092 943 926 Operating cash flow 12,868 17,727 20,011 21,917 23,881 25,836 28,050 30,146 31,615 32,907 Capital expenditure (10,250) (14,500) (14,500) (12,250) (10,250) (8,449) (8,395) (8,253) (8,019) (7,691) Free cash flow 2,618 3,227 5,511 9,667 13,631 17,387 19,655 21,893 23,596 25,216 Discounted cash flow-now 2,618 2,907 4,473 7,067 8,976 10,315 10,505 10,539 10,233 9,852 Discounted cash flow-1 year forward 3,227 4,965 7,846 9,964 11,450 11,661 11,702 11,359 10,936 Discounted cash flow-2 year forward 5,511 8,709 11,063 12,709 12,944 12,989 12,612 12,139
Now +1-year +2-years Discount rate (%) 11.0% 11.0% 11.0% Total PV of free cash flow 77,486 93,552 111,337 Terminal value assumption Growth in perpetuity 6.0% 6.0% 6.0% Sensitivity of 12-month fair value to WACC and perpetual growth FCF in terminal year 25,216 26,729 28,333 Perpetual growth (%) Exit FCF multiple (X) 21.2 21.2 21.2 575 4.0% 5.0% 6.0% 7.0% 8.0% Exit EV/EBITDA multiple (X) 13.1 13.9 14.8 10.0% 540 602 694 848 1156 Terminal value 534,578 566,653 600,652 10.5% 506 556 628 742 946 PV of terminal value 208,860 221,392 234,676 11.0% 476 517 575 662 806 Value of extant CGD business 286,346 314,944 346,013 11.5% 450 485 532 600 706
WACC (%) WACC Value of 50% stake in CUGL and MNGL 53,900 61,985 68,184 12.0% 428 457 496 550 632 Net debt (21,799) (23,706) (24,754) Equity value 362,046 400,635 438,951 Shares outstanding (mn) 700 700 700 Fair value of IGL (Rs), including dividends 517 575 635
Source: Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 45 Gas Utilities Indraprastha Gas
Exhibit 7: Profit model, balance sheet, cash model March fiscal year-ends, 2016-23E (Rs mn)
2016 2017 2018 2019 2020 2021E 2022E 2023E Profit model (Rs mn) Net sales 36,858 38,148 45,921 57,648 64,853 50,347 66,817 83,752 EBITDA 7,747 9,638 11,144 12,570 15,196 14,861 20,817 23,422 Other income 299 652 1,021 1,462 1,564 1,766 2,006 2,179 Finance cost (99) (12) (17) (21) (81) (101) (106) (112) Depreciation (1,563) (1,671) (1,813) (2,011) (2,523) (2,906) (3,418) (4,092) Pretax profits 6,385 8,607 10,335 12,000 14,157 13,620 19,299 21,397 Extraordinary items — — — — 817 — — — Current tax (1,812) (2,735) (3,169) (3,703) (3,345) (3,168) (4,715) (5,267) Deferred tax (382) (161) (448) (430) (263) (238) (213) (188) Adjusted net profits including associates 4,641 6,063 7,217 8,421 11,673 11,261 16,096 17,926 Adjusted EPS including associates (Rs) 6.6 8.7 10.3 12.0 16.7 16.1 23.0 25.6
Balance sheet (Rs mn) Total equity 25,164 29,266 35,129 41,299 50,624 58,877 69,656 80,815 Deferred tax liability 1,650 1,806 2,253 2,678 2,119 2,357 2,570 2,757 Borrowings — — — — — — — — Customer deposits 4,252 4,826 5,447 6,493 7,716 8,841 10,041 11,191 Currrent liabilities 2,746 4,963 6,453 9,024 11,264 10,409 10,903 11,653 Total liabilities and equity 33,813 40,861 49,282 59,493 71,723 80,484 93,169 106,417 Cash 4,538 6,086 5,580 6,071 21,799 23,706 24,754 27,023 Current assets 3,822 3,316 4,044 4,433 5,226 4,738 5,292 5,862 Total fixed assets 22,861 24,689 28,181 33,549 42,116 49,460 60,542 70,950 Investments 2,592 6,770 11,477 15,440 2,581 2,581 2,581 2,581 Total assets 33,813 40,861 49,282 59,493 71,723 80,484 93,169 106,417
Free cash flow (Rs mn) Operating cash flow, excl. working capital 5,833 7,018 7,952 8,901 11,887 11,592 15,996 18,043 Working capital 603 2,446 841 2,671 1,720 759 1,140 1,330 Capital expenditure (2,321) (2,709) (4,699) (6,807) (9,632) (10,250) (14,500) (14,500) Free cash flow 4,115 6,755 4,095 4,764 3,975 2,100 2,635 4,873 Investments 317 (9,004) (3,430) (4,891) 3,973 — — — Other income 257 573 959 490 452 1,766 2,006 2,179
Ratios (%) Net debt/equity (18.0) (20.8) (15.9) (14.7) (43.1) (40.3) (35.5) (33.4) RoAE 17.1 19.7 19.6 19.3 23.5 17.9 21.5 20.5 RoACE 14.6 17.1 17.1 16.9 19.1 15.8 19.0 18.1 Adjusted CRoCI 18.6 23.3 22.9 21.6 23.7 20.0 22.2 20.8
Source: Company, Kotak Institutional Equities estimates
46 KOTAK INSTITUTIONAL EQUITIES RESEARCH REDUCE Page Industries (PAG) https://ultraviewer.et/en/own Consumer Durables & Apparel FEBRUARY 11, 2021 load.html RESULT Sector view: Cautious
Margins surprise. PAG reported 17%/10% topline/volume growth (2-yr CAGR at 4%/ CMP (`): 31,934 12%) partly aided by pent up demand. EBITDA margin expansion (24.4%, +690 bps Fair Value (`): 28,500 yoy; near-peak level) driven by GM improvement, operating leverage and cost control. It BSE-30: 51,309 looks like things are falling in place for PAG thanks to confluence of (1) efforts— investments in S&D and business transformation (IT upgrade for efficient production planning, assortment management at distributor/store level and thrust on kids wear), (2) externalities— Covid-led boost to athleisure and perhaps improving macro. We raise FY2022-23E EPS by 9% and FV to Rs28,500 (Rs25,200). Valuations are expensive. REDUCE. Page Industries Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 31,934/28,500/REDUCE EPS (Rs) 308.3 503.7 594.1 52-week range (Rs) (high-low) 32,206-16,187 EPS growth (%) 0.2 63.4 17.9 Mcap (bn) (Rs/US$) 357/4.9 P/E (X) 103.6 63.4 53.8 ADTV-3M (mn) (Rs/US$) 1,490/20 P/B (X) 39.6 32.4 27.3 Shareholding pattern (%) EV/EBITDA (X) 67.0 43.2 36.4 Promoters 48.3 RoE (%) 40.0 56.2 55.1 FPIs/MFs/BFIs 25.2/11.7/2.5 Div. yield (%) 0.8 1.1 1.3 Price performance (%) 1M 3M 12M Sales (Rs bn) 27 37 42 Absolute 7.0 44.6 33.5 EBITDA (Rs bn) 5 8 10 Rel. to BSE-30 1.7 22.0 6.6 Net profits (Rs bn) 3 6 7
3QFY21 – good topline performance with big beat on margins
Revenues were up 17% yoy (KIE 14%) to Rs9.3 bn. Volumes rose 10% yoy (in line) while realizations were better due to higher saliency of athleisure and outerwear sales along with full- quarter benefit of price hike taken in August. GM expanded 227 bps yoy to 55.4% mainly led by higher realizations (product mix/pricing). The management indicated that yarn prices have seen stronger-than-usual (seasonal) inflation and the new crop should ease the pressure.
Reported EBITDA rose 63% yoy and EBITDA margin expanded 690 bps yoy to 24.4% (highest print in a very long time) with continued leash on operating expenses and better absorption of factory overheads on account of strong volumes. Other expenses were down 5% yoy while staff costs were up 9% yoy. Management did highlight that these margins are not sustainable as some of the discretionary costs (A&P spends and digital transformation investments) will increase going ahead. PBT and net profit was up 77% yoy. PAG has also repaid the entire debt in the quarter. 9MFY21 roundup – revenue decline of 19% yoy, gross margins contracted 37 bps, EBITDA down 25%, PBT down 28% and PAT down 28%. 9M EPS at Rs201.7/share.
Supportive macro and several measures lend management confidence on demand sustenance
Management is confident of improved growth momentum going forward. On the demand side, management expects benefit from (1) sustenance of athleisure demand on the back of new Jaykumar Doshi trials in the past year, (2) expansion of the Jockey Junior franchise and (3) LT potential of expansion in tier 3/4 and rural areas – PAG has been piloting a rural range for some time. It has Aniket Sethi also invested in digital transformation and IT systems for stream-lining operations. The company has also focused on improving its operating cost structure. PAG is also looking for a price Sushruta Mishra increase in 1QFY22E due to higher-than-normal inflation in yarn prices. We raise FY2022-23 estimates by 9% and raise DCF-based FV to Rs28,500 (from Rs25,200)
We raise our FY2022-23E EPS by about 9% led by a stronger recovery and increase in margin assumptions. Our estimates now imply 11.7% revenue CAGR over FY2020-22E. We are now building EBITDA margins of 22.4% and 23.1% in FY2022E and FY2023E, respectively. Our FV increases to Rs28,000 (from Rs25,200). Maintain REDUCE on expensive valuations. [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. Consumer Durables & Apparel Page Industries
Conference call takeaways
Operational update. With the resumption of economic activity, most of the retail stores are now open. More than 94% of MBOs are now functional and all the EBOs have now re-opened. About 93% of the LFS stores have also re-opened. Manufacturing operations are completely normalized. Besides, working capital situation has been tightened and the company has repaid the entire debt on books. Management believes that these demand trends are sustainable and not pent-up in nature.
Strong demand for leisurewear. PAG is seeing strong pick-up in demand for outerwear categories such as lounge, active and sleepwear. The segment continues to see double- digit growth. Management has said that the lockdown has created many trials (including an innerwear customer buying leisurewear) for them and they expect this new demand to be sticky. The segment’s contribution is now inching closure to men’s innerwear.
Focus on cost rationalization. PAG continues to target operational cost efficiencies and has been pushing some discretionary costs (A&P spends (cut to half) and investments in digital transformation) till now. Management has guided for margins to normalize to close to 22% (versus 24.4% in 3QFY21) as they are looking to accelerate investments going forward.
Impact of RM inflation. Yarn prices typically see inflationary pressure in December and start to cool-off in February, when the new crop comes in. However, the increase in this year has been higher-than-usual. PAG can look at a price increase in early-FY2022E given they have already take a price increase in August 2020.
Other highlights—(1) PAG has already opened 28 EBOs for kids range and 20 more are in the pipeline. (2) PAG has been piloting a targeted range for the rural and tier 3/4 markets for some time now and are confident of good long-term potential in these markets. (3) PAG has strengthened its position in the e-commerce segment and is seeing strong growth in the channel. (4) PAG intends to add 10,000 outlets to its footprint in FY2021E; in 9MFY21, it has already managed to add 7,000 outlets.
Exhibit 1: Key changes to estimates, FY2021-23E, March fiscal year-ends
FY2020-22E Revised Earlier Change (%) CAGR (%) / Change (bps) Rs mn 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E Revised Earlier Revenues 27,265 36,725 42,193 26,603 36,023 40,919 2.5 1.9 3.1 11.7 10.6 Revenue growth (%) (7.4) 34.7 14.9 (9.7) 35.4 13.6 EBITDA 5,311 8,220 9,733 4,969 7,541 8,849 6.9 9.0 10.0 24.2 19.0 EBITDA margin (%) 19.5 22.4 23.1 18.7 20.9 21.6 430 bps 285 bps Net income 3,439 5,618 6,626 3,181 5,140 6,080 8.1 9.3 9.0 27.9 22.4 EPS (Rs/share) 308 504 594 285 461 545 8.1 9.3 9.0 27.9 22.4
Source: Kotak Institutional Equities estimates
48 KOTAK INSTITUTIONAL EQUITIES RESEARCH Page Industries Consumer Durables & Apparel
Exhibit 2: Page Industries: Interim results, March fiscal year-ends (Rs mn)
(% chg.) 3QFY21 3QFY21E 3QFY20 2QFY21 KIE Est yoy qoq 9MFY21 9MFY20 (% chg.) FY2021E FY2020 (% chg.) Net operating income 9,271 9,052 7,938 7,403 2 17 25 19,522 24,042 (19) 27,265 29,454 (7) Cost of materials (4,131) (4,073) (3,718) (3,297) 1 11 25 (8,906) (10,880) (18) (11,997) (13,108) (8) Gross profit 5,139 4,978 4,220 4,106 3 22 25 10,616 13,162 (19) 15,268 16,346 (7) Gross margin (%) 55.4 55.0 53.2 55.5 43 bps 227 bps -3 bps 54.4 54.7 -37 bps 56.0 55.5 50 bps Employee expense (1,462) (1,427) (1,346) (1,299) 2 9 13 (3,989) (3,974) 0 (5,371) (5,317) 1 Other expenditure (1,417) (1,531) (1,486) (1,153) (7) (5) 23 (3,058) (4,444) (31) (4,586) (5,703) (20) Total Expenditure (7,009) (7,031) (6,550) (5,749) (0) 7 22 (15,954) (19,297) (17) (21,954) (24,128) (9) EBITDA 2,261 2,021 1,388 1,654 12 63 37 3,568 4,745 (25) 5,311 5,326 (0) EBITDA (%) 24.4 22.3 17.5 22.3 206 bps 690 bps 205 bps 18.3 19.7 -146 bps 19.5 18.1 139 bps Depreciation (156) (162) (164) (157) (4) (5) (0) (473) (451) 5 (631) (614) 3 Interest (74) (75) (90) (75) (1) (18) (2) (226) (253) (11) (257) (339) (24) Other income 42 45 35 37 (8) 19 12 139 147 (6) 181 246 (27) PBT 2,073 1,829 1,169 1,459 13 77 42 3,008 4,188 (28) 4,603 4,620 (0) Tax expense (536) (457) (299) (350) 17 79 53 (758) (1,066) (29) (1,165) (1,188) (2) PAT 1,537 1,372 870 1,109 12 77 39 2,250 3,122 (28) 3,439 3,432 0 EO items — — — — — — — — Reported PAT 1,537 1,372 870 1,109 12 77 39 2,250 3,122 (28) 3,439 3,432 0 Income tax rate (%) 25.8 25.0 25.6 24.0 84 bps 28 bps 183 bps 25.2 25.5 -27 bps 25.3 25.7 -42 bps EPS (Rs/share) 137.8 123.0 78.0 99.4 12 77 39 201.7 279.9 (28) 308.3 307.7 0 Margins (as % of sales) Cost of materials 44.6 45.0 46.8 44.5 -44 bps -228 bps 2 bps 45.6 45.3 36 bps 44.0 44.5 -51 bps Employee cost 15.8 15.8 17.0 17.5 0 bps -120 bps -179 bps 20.4 16.5 390 bps 19.7 18.1 164 bps Other expenditure 15.3 16.9 18.7 15.6 -163 bps -345 bps -30 bps 15.7 18.5 -282 bps 16.8 19.4 -255 bps
Source: Company, Kotak Institutional Equities estimates
Exhibit 3: Key operating metrics, 1QFY19-3QFY21, March fiscal year-ends
1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 Volume (mn pieces) 50.4 41.8 44.5 36.9 49.2 45.6 43.6 30.0 15.4 39.4 47.9 Volume growth (%) 9 (2) 12 1 (2) 9 (2) (19) (69) (14) 10 Revenues (Rs mn) 8,058 6,792 7,243 5,963 8,207 7,610 7,808 5,320 2,800 7,350 9,100 Revenue growth (%) 17 10 18 (0) 2 12 8 (11) (66) (3) 17 Realisation per piece (Rs) 160 162 163 162 167 167 179 177 181 186 190 Realization growth (%) 8 12 5 (1) 4 3 10 10 9 12 6 COGS 3,672 2,913 3,169 2,213 3,752 3,410 3,718 2,228 1,478 3,297 4,131 COGS per piece (Rs) 73 70 71 60 76 75 85 74 96 84 86
Source: Company, Kotak Institutional Equities
Exhibit 4: Key assumptions, 2018-2023E, March fiscal year-ends
2018 2019 2020 2021E 2022E 2023E Key assumptions Volumes ('000 units) 164,380 173,580 168,350 145,474 189,656 207,293 Volume growth (%) 10.0 5.6 (3.0) (13.6) 30.4 9.3 Realization per piece (Rs) 153.2 161.6 171.9 184.3 191.0 200.9 Change in realization yoy (%) 8.6 5.5 6.4 7.2 3.6 5.2 Revenue growth (%) 19.8 11.8 3.3 (7.4) 34.7 14.9 Gross margin (%) 57.4 58.0 55.5 56.0 56.4 56.8 EBITDA margin (%) 21.2 21.7 18.1 19.5 22.4 23.1
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 49 Consumer Durables & Apparel Page Industries
Exhibit 5: Condensed financials, FY2018-23E, March fiscal year-ends (Rs mn)
2018 2019 2020 2021E 2022E 2023E Profit model (Rs mn) Net Sales 25,514 28,522 29,454 27,265 36,725 42,193 EBITDA 5,406 6,176 5,326 5,311 8,220 9,733 Other income 216 364 246 181 325 309 Interest (166) (163) (339) (257) (248) (271) Depreciation (280) (311) (614) (631) (767) (877) Profit before tax 5,175 6,067 4,620 4,603 7,530 8,894 Tax expense (1,705) (2,121) (1,188) (1,165) (1,913) (2,268) Exceptional items — — — — — — PAT 3,470 3,946 3,432 3,439 5,618 6,626 Recurring EPS (Rs/share) 311.1 353.8 307.7 308.3 503.7 594.1 Balance sheet (Rs mn) Equity 8,473 7,750 8,199 9,005 10,998 13,051 Total borrowings 685 848 377 26 70 70 Other long-term liabilities 241 219 1,478 1,242 1,516 1,579 Current liabilities 4,725 4,690 5,076 4,744 6,451 7,483 Total liabilites 14,124 13,506 15,129 15,017 19,035 22,183 Net fixed assets 2,965 3,079 3,298 3,339 3,588 3,858 Other LT assets 609 379 1,686 1,665 1,743 1,787 Cash and equivalents 2,849 440 1,169 629 1,060 2,008 Other current assets 7,701 9,608 8,976 9,384 12,644 14,530 Total assets 14,124 13,506 15,129 15,017 19,035 22,183 Cash flow (Rs mn) Operating cash flow 3,827 3,954 3,735 3,683 5,718 6,805 Working capital changes 701 (1,657) 1,024 (953) (1,357) (835) Capital expenditure (570) (376) (747) (409) (661) (738) Free cash flow 3,958 1,921 4,012 2,320 3,700 5,231 Ratios EBITDA margin (%) 21.2 21.7 18.1 19.5 22.4 23.1 ETR (%) 33.0 35.0 25.7 25.3 25.4 25.5 Book value (Rs/share) 760 695 735 807 986 1,170 RoAE (%) 45.9 48.6 43.0 40.0 56.2 55.1 RoACE (%) 39.9 42.5 32.9 31.0 43.8 43.0
Source: Company, Kotak Institutional Equities estimates
50 KOTAK INSTITUTIONAL EQUITIES RESEARCH BUY Mahanagar Gas (MAHGL) https://ultraviewer.et/en/own Gas Utilities FEBRUARY 10, 2021 load.html RESULT Sector view: Attractive
Robust margins, likely to sustain. MGL’s 3QFY21 results were in line with estimates CMP (`): 1,129 as record-high margins offset modestly slower-than-anticipated recovery in volumes. Fair Value (`): 1,350 We raise our above-consensus EPS estimates by 8% in FY2022-23E factoring in higher BSE-30: 51,309 margins, which we believe may sustain given (1) low price of domestic gas, (2) sharp discount of CNG versus liquid fuels and (3) lack of regulations. We raise FV to Rs1,350 from Rs1,200 and reiterate BUY noting inexpensive valuations and high FCF yield. Mahanagar Gas Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 1,129/1,350/BUY EPS (Rs) 64.1 97.7 103.7 52-week range (Rs) (high-low) 1,214-653 EPS growth (%) (14.1) 52.5 6.1 Mcap (bn) (Rs/US$) 112/1.6 P/E (X) 17.6 11.6 10.9 ADTV-3M (mn) (Rs/US$) 1,188/16 P/B (X) 3.3 2.8 2.5 Shareholding pattern (%) EV/EBITDA (X) 11.0 7.3 6.5 Promoters 32.5 RoE (%) 20.1 26.6 24.4 FPIs/MFs/BFIs 25.6/7.6/12.2 Div. yield (%) 2.2 3.5 4.1 Price performance (%) 1M 3M 12M Sales (Rs bn) 22 31 37 Absolute 1.1 32.4 (4.0) EBITDA (Rs bn) 9 14 15 Rel. to BSE-30 (3.9) 11.7 (23.4) Net profits (Rs bn) 6 10 10
Strong rebound driven by record-high margins and healthy sequential recovery in volumes MGL’s EBITDA was in line with our estimate at Rs3.17 bn (+22% yoy) in 3QFY21, as modestly slower-than-expected recovery in volumes to 2.77 mcm/d (-9% yoy) was offset by higher unit margins. Gross margins expanded 3% qoq to Rs17.7/scm, in line with our estimate, post the cut in domestic gas price in October 2020, which was partially offset by higher LNG prices. Unit EBITDA increased 7% qoq to peak level of Rs12.4/scm from Rs11.6/scm in 2QFY21 benefitting from operating leverage amid sequential recovery in volumes. Net income was 2% below our estimate at Rs2.17 bn (EPS of Rs22, +17% yoy). We expect margins to remain robust post the recent price hikes undertaken by the company to proactively pass on higher operating costs. In 9MFY21, MGL’s EBITDA declined 24% to Rs6.18 bn and adjusted net income declined 29% to Rs4.07 bn (EPS of Rs41.2), reflecting a sharp 34% reduction in volumes impacted by lockdown; unit EBITDA jumped 15% to Rs11.3/scm as 19% increase in gross margins to Rs17.3/scm was partially offset by negative operating leverage amid lower volumes. Volume recovery on track and margins may remain robust amid a benign environment In 3QFY21, overall volumes jumped 34% qoq to 2.77 mcm/d driven by (1) 48% increase in CNG volumes, which was down only 15% yoy as compared to a sharp decline of 42% in 2QFY21 and 78% in 1QFY21, (2) 13% qoq rise in I&C volumes, which was 9% lower yoy as compared to a decline of 20% in 2QFY21 and 49% decline in 1QFY21 and (3) 7% growth in domestic PNG volumes, up a healthy 24% yoy. In 9MFY21, total volumes reduced 34% yoy to 2 mcm/d reflecting a decline of 45% in CNG and 26% in I&C segment, which was partly offset by 17% growth in domestic PNG volumes. The company indicated that overall volumes have recovered back to ~2.9 mcm/d in January 2021 with CNG volumes being lower by ~9% yoy, while domestic PNG and industrial volumes increased by 15% and 7% respectively; conversions to CNG vehicles is gathering pace. MGL has increased CNG/PNG prices recently to pass on rise in operating costs and potential increase in trade discounts, which is still under negotiations Tarun Lakhotia with OMCs. In our view, unit margins may remain elevated given the large arbitrage between CNG and liquid auto fuels in Mumbai, which may allow MGL to conveniently pass on any cost inflation without impacting the economic attractiveness of CNG as a fuel for vehicles. Hemang Khanna
Raise above-consensus EPS estimates by 8%; retain BUY with a revised FV of Rs1,350 We raise our FY2022-23E EPS by 8% factoring in (1) higher unit margins at Rs12/scm and (2) other minor changes; our FY2021E EPS reduces by 2% due to lower other income. We reiterate BUY, while raising FV to Rs1,350 from Rs1,200 earlier factoring in higher margins in the medium term and rolling-forward DCF model to March 2022. We find the reward-risk balance [email protected] favorable given inexpensive valuations at 11.6X FY2022E EPS and high FCF yield at 7%. Contact: +91 22 6218 6427
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Gas Utilities Mahanagar Gas
Exhibit 1: Interim results of MGL, March fiscal year-ends (Rs mn)
(% chg.) 3QFY21 3QFY21E 3QFY20 2QFY21 3QFY21E 3QFY20 2QFY21 9MFY21 9MFY20 (% chg.) FY2021E Net sales 6,664 6,909 7,445 5,067 (3.5) (10.5) 31.5 14,349 22,856 (37.2) 21,940 Total expenditure (3,497) (3,733) (4,856) (2,857) (6.3) (28.0) 22.4 (8,171) (14,765) (44.7) (12,499) Raw material (2,144) (2,241) (3,543) (1,771) (4.3) (39.5) 21.1 (4,903) (10,810) (54.6) (7,731) Staff cost (199) (252) (192) (248) (21.0) 3.8 (19.8) (694) (627) 10.6 (899) Other expenditure (1,154) (1,240) (1,122) (838) (7.0) 2.9 37.7 (2,574) (3,328) (22.6) (3,869) EBITDA 3,167 3,176 2,589 2,210 (0.3) 22.4 43.3 6,178 8,091 (23.6) 9,441 Other income 204 241 286 184 (15.3) (28.6) 10.6 633 719 (11.9) 864 Interest (17) (19) (16) (20) (53) (44) (74) Depreciation (441) (428) (415) (425) 3.2 6.4 3.9 (1,288) (1,177) 9.4 (1,743) Pre-tax profits 2,913 2,970 2,444 1,950 (1.9) 19.2 49.4 5,470 7,588 (27.9) 8,488 Extraordinary — — — — — 567 — Tax (741) (765) (583) (507) (1,402) (1,886) (2,158) Net income 2,172 2,205 1,861 1,443 (1.5) 16.7 50.6 4,068 6,269 (35.1) 6,330 Adjusted net income 2,172 2,205 1,861 1,443 (1.5) 16.7 50.6 4,068 5,702 (28.7) 6,330 Adjusted EPS (Rs) 22.0 22.3 18.8 14.6 (1.5) 16.7 50.6 41.2 57.7 (28.7) 64.1 Tax rate (%) 25.4 25.8 23.9 26.0 25.6 24.9 25.43
Operational details Volumes (mcm/d) 2.77 2.87 3.05 2.07 (3.5) (9.2) 33.6 1.99 3.01 (33.8) 2.23 Volumes (mscm) 255 264 281 191 (3.5) (9.2) 33.6 547 827 (33.8) 816 CNG (mscm) 173 184 204 117 (5.8) (15.3) 47.6 334 604 (44.6) 519 PNG (mscm) 82 80 76 73 2.0 7.2 11.3 213 223 (4.5) 297 Industrial/commercial 35 35 38 31 (0.6) (9.0) 13.2 84 113 (25.8) 122 Domestic PNG 47 45 38 43 4.0 23.5 9.9 128 109 17.4 175 Net realization (Rs/scm) 26.1 26.2 26.5 26.6 (0.1) (1.5) (1.6) 26.2 27.6 (5.1) 26.9 CNG (Rs/scm) 24.6 26.5 25.6 25.2 (7.0) (3.6) (2.4) 24.9 26.3 (5.2) 25.6 PNG (Rs/scm) 28.7 25.4 28.5 28.2 13.1 0.9 1.8 27.8 30.6 (9.2) 28.3 Raw material cost (Rs/scm) 8.4 8.5 12.6 9.3 (0.9) (33.4) (9.4) 9.0 13.1 (31.4) 9.5 Gross margin (Rs/scm) 17.7 17.7 13.9 17.3 0.3 27.5 2.6 17.3 14.6 18.5 17.4 Other operating costs (Rs/scm) 5.3 5.7 4.7 5.7 (6.1) 13.4 (6.8) 6.0 4.8 24.9 5.8 Operating profit (Rs/scm) 12.4 12.0 9.2 11.6 3.3 34.7 7.2 11.3 9.8 15.4 11.6
Source: Company, Kotak Institutional Equities estimates
Exhibit 2: Volumes recovery continued for CNG in 3QFY21; PNG volumes driven by an increase in household consumption Growth in CNG and PNG volumes, 1QFY17 onwards (%)
(%) Overall CNG sales PNG sales 20
10
0
(10)
(20)
(30)
(40)
(50)
(60)
(70)
(80)
4QFY17 1QFY18 4QFY19 1QFY20 2QFY20 2QFY17 3QFY17 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 1QFY17
Source: Company, Kotak Institutional Equities
52 KOTAK INSTITUTIONAL EQUITIES RESEARCH Mahanagar Gas Gas Utilities
Exhibit 3: MGL's gross margins on CNG and domestic PNG have increased further in February 2021 Estimated gross margins on CNG and domestic PNG for MGL, April 2018 onwards (Rs/scm)
(Rs/scm) CNG Domestic PNG 21
20
19
18
17
16
15
14
13
12
11
Jun-20 Jun-18 Jun-19
Feb-19 Oct-19 Feb-21 Oct-18 Feb-20 Oct-20
Apr-19 Apr-20 Apr-18
Dec-20 Dec-18 Dec-19
Aug-18 Aug-20 Aug-19
Source: Company, Kotak Institutional Equities estimates
Exhibit 4: Discount of CNG to liquid auto fuels has increased significantly in the current year Competitiveness of CNG versus other auto fuels in Mumbai, March fiscal year-ends, 2016-21YTD 2016 2017 2018 2019 2020 9MFY21 Current Fuel prices in Mumbai CNG (Rs/kg) 42.5 41.2 41.8 47.5 50.9 48.3 49.4 Petrol (Rs/liter) 68.6 71.5 77.6 75.4 72.7 84.9 93.8 Diesel (Rs/liter) 53.7 60.2 62.3 68.2 65.8 75.4 84.6 CNG discount to petrol (%) 38.0 42.4 46.2 37.0 30.0 43.1 47.4 CNG discount to diesel (%) 20.8 31.6 32.9 30.4 22.6 35.9 41.6 Fuel costs (Rs/km) CNG @mileage of 18 km/kg 2.4 2.3 2.3 2.6 2.8 2.7 2.7 Petrol @mileage of 12 km/l 5.7 6.0 6.5 6.3 6.1 7.1 7.8 Diesel @mileage of 15 km/l 3.6 4.0 4.2 4.5 4.4 5.0 5.6 CNG discount to petrol (%) 58.7 61.6 64.1 58.0 53.3 62.1 64.9
CNG discount to diesel (%) 34.0 43.0 44.1 42.0 35.5 46.6 51.4
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 53 Gas Utilities Mahanagar Gas
Exhibit 5: Volumes to recover in FY2022; margins to remain elevated Key assumptions for MGL, March fiscal year-ends, 2014-23E
2014 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E Sales volume (mcm) CNG 605 645 660 693 724 791 784 519 820 873 PNG 219 225 230 244 262 286 296 297 329 351 Domestic 88 95 101 111 124 138 148 175 181 192 Commercial 53 53 55 58 62 66 66 48 66 73 Industrial 78 77 73 75 75 83 82 75 82 87 Total volumes 824 870 890 938 986 1,077 1,080 816 1,148 1,224 Average daily volumes (mcm/d) 2.3 2.4 2.4 2.6 2.7 2.9 3.0 2.2 3.1 3.4 Growth in volumes (%) 8.7 5.6 2.3 5.4 5.1 9.2 0.3 (24.5) 40.8 6.6
Operating metrics (Rs/scm) Gross margin 9.0 9.2 9.5 10.8 12.2 13.0 14.7 17.4 17.5 17.8 Operating cost 3.1 3.6 3.8 4.0 4.3 4.7 5.0 5.8 5.4 5.8 Operating profit 5.9 5.6 5.7 6.9 7.9 8.3 9.7 11.6 12.0 12.0
Source: Company, Kotak Institutional Equities estimates
Exhibit 6: We value MGL stock at Rs1,350 using DCF methodology Calculation of equity value using discounted cash flow analysis (Rs mn)
2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E Assumptions Volumes (mcm/d) 3.1 3.4 3.5 3.7 3.9 4.0 4.2 4.4 4.6 4.7 Growth (%) 40.8 6.6 5.3 4.6 4.4 4.4 4.4 4.2 4.0 3.9 Unit margins (Rs/scm) 12.0 12.0 11.9 11.8 11.7 11.6 11.5 11.4 11.2 11.0 DCF model EBITDA 13,797 14,709 15,370 15,959 16,493 17,112 17,706 18,148 18,627 19,032 Adjusted tax expense (2,935) (3,199) (3,414) (3,541) (3,653) (3,789) (3,920) (4,014) (4,116) (4,201) Change in working capital 585 655 599 591 630 667 763 629 657 691 Operating cash flow 11,446 12,166 12,555 13,009 13,469 13,990 14,549 14,763 15,168 15,522 Capital expenditure (5,606) (4,541) (4,199) (4,237) (4,195) (4,064) (3,841) (3,816) (3,752) (3,645) Free cash flow 5,841 7,625 8,356 8,772 9,274 9,925 10,708 10,947 11,416 11,877 Discounted cash flow-now 5,262 6,189 6,108 5,777 5,502 5,305 5,155 4,747 4,460 4,180 Discounted cash flow-1 year forward 6,870 6,782 6,412 6,108 5,889 5,723 5,270 4,951 4,640 Discounted cash flow-2 year forward 7,528 7,119 6,779 6,536 6,353 5,851 5,496 5,151
Now +1-year +2-years Discount rate (%) 11.0% 11.0% 11.0% Total PV of free cash flow 52,686 56,950 60,028 Terminal value assumption Growth in perpetuity 3.0% 3.0% 3.0% Sensitivity of 12-month fair value to WACC and perpetual growth FCF in terminal year 11,877 12,233 12,600 Perpetual growth (%) Exit FCF multiple (X) 12.9 12.9 12.9 1,350 1.0% 2.0% 3.0% 4.0% 5.0% Exit EV/EBITDA multiple (X) 8.0 8.3 8.5 10.0% 1340 1418 1518 1652 1839 Terminal value 152,911 157,498 162,223 10.5% 1277 1344 1429 1539 1691 PV of terminal value 53,822 55,437 57,100 11.0% 1220 1278 1350 1443 1567 Enterprise value 106,508 112,386 117,127 11.5% 1168 1219 1281 1360 1463 Net debt (13,504) (18,506) (22,663) WACC(%) 12.0% 1121 1165 1219 1287 1373 Equity value 120,012 130,892 139,791 Shares outstanding (mn) 99 99 99 Fair value of MGL, including dividends (Rs) 1,215 1,350 1,479
Source: Kotak Institutional Equities estimates
54 KOTAK INSTITUTIONAL EQUITIES RESEARCH Mahanagar Gas Gas Utilities
Exhibit 7: Profit model, balance sheet, cash model of MGL, March fiscal year-ends, 2016-23E (Rs mn)
2016 2017 2018 2019 2020 2021E 2022E 2023E Profit model (Rs mn) Net sales 20,783 20,340 22,330 28,040 29,721 21,940 31,161 36,820 EBITDA 5,093 6,441 7,801 8,985 10,528 9,441 13,797 14,709 Other income 472 527 577 777 990 864 1,132 1,376 Interest (22) (10) (1) (3) (65) (74) (78) (82) Depreciation (826) (951) (1,112) (1,259) (1,617) (1,743) (1,909) (2,164) Pretax profits 4,716 6,006 7,265 8,499 9,835 8,488 12,942 13,839 Extraordinary items — — — (129) 567 — — — Current tax (1,447) (1,895) (2,118) (2,614) (2,332) (2,047) (3,203) (3,535) Deferred tax (160) (178) (369) (291) (136) (111) (86) (61) Adjusted net profits 3,109 3,934 4,779 5,549 7,367 6,330 9,653 10,243 Adjusted EPS (Rs) 31.5 39.8 48.4 56.2 74.6 64.1 97.7 103.7
Balance sheet (Rs mn) Total equity 17,284 18,400 20,953 23,989 29,527 33,387 39,179 44,812 Deferred tax liability 1,199 1,376 1,748 2,048 1,636 1,748 1,834 1,895 Borrowings 50 27 12 18 6 — — — Customer deposits 3,191 3,880 4,432 5,179 5,817 6,213 6,744 7,190 Currrent liabilities 1,980 2,559 2,957 3,176 4,299 6,189 7,903 9,026 Total liabilities and equity 23,705 26,242 30,102 34,410 41,285 47,537 55,659 62,922 Cash 1,750 1,481 919 2,988 2,295 7,291 11,449 16,171 Current assets 2,444 2,932 3,421 3,551 3,602 3,375 3,644 3,809 Total fixed assets 15,576 17,163 18,886 21,331 24,174 25,656 29,352 31,729 Investments 3,934 4,667 6,877 6,540 11,215 11,215 11,215 11,215 Total assets 23,705 26,243 30,102 34,410 41,285 47,537 55,659 62,922
Free cash flow (Rs mn) Operating cash flow, excl. working capital 3,742 4,739 5,692 6,422 8,378 7,319 10,516 11,092 Working capital 444 724 822 418 1,374 2,512 1,976 1,404 Capital expenditure (2,154) (2,569) (2,690) (3,625) (4,349) (3,224) (5,606) (4,541) Free cash flow 2,032 2,894 3,824 3,216 5,403 6,607 6,886 7,955 Investments (167) (674) (1,794) (1,138) 3,765— — — — Other income 98 465 296 377 475 864 1,132 1,376
Ratios (%) Debt/equity 0.3 — — — — — — — Net debt/equity (9.8) (7.9) (4.3) (12.4) (7.8) (21.8) (29.2) (36.1) RoAE 18.5 20.6 22.5 22.4 27.7 19.1 25.4 23.4 RoACE 15.8 17.4 18.8 19.0 22.1 16.3 21.8 20.3 Adjusted CRoCI 21.4 25.6 26.2 24.6 26.5 20.3 24.5 22.3
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 55 BUY Aster DM Healthcare (ASTERDM) https://ultraviewer.et/en/own Health Care Services FEBRUARY 10, 2021 load.html RESULT Sector view: Attractive
GCC disappoints. ASTERDM’s 3QFY21 revenues/EBITDA were 8%/14% below our CMP (`): 149 estimates as a fresh wave of Covid infections in the UAE impacted GCC performance Fair Value (`): 220 while the India business continued its strong recovery trend. Turnaround of new units in BSE-30: 51,309 India and GCC recovery will help drive earnings over FY2022-23E even as higher cases in the UAE impacts near-term performance. Aster trades at 5.4X FY2023E EBITDA, implying the GCC business trading in deep value zone at 4X FY2023E EBITDA. BUY. Aster DM Healthcare Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 149/220/BUY EPS (Rs) 2.8 9.8 11.9 52-week range (Rs) (high-low) 182-78 EPS growth (%) (52.1) 244.9 21.1 Mcap (bn) (Rs/US$) 75/1.1 P/E (X) 52.4 15.2 12.6 ADTV-3M (mn) (Rs/US$) 50/1 P/B (X) 2.2 1.9 1.7 Shareholding pattern (%) EV/EBITDA (X) 9.1 6.3 5.4 Promoters 37.9 RoE (%) 4.3 13.6 14.5 FPIs/MFs/BFIs 10.5/6.1/1.5 Div. yield (%) 0.0 0.0 0.0 Price performance (%) 1M 3M 12M Sales (Rs bn) 88 103 112 Absolute (10.4) 10.6 (8.6) EBITDA (Rs bn) 11 16 17 Rel. to BSE-30 (14.8) (6.7)) (27.0) Net profits (Rs bn) 1 5 6
Fresh Covid wave impacts GCC footfalls; India recovering well
Aster DM’s 3QFY21 revenues declined 3% (-7% in c/c) and was 8% below our estimates. GCC footfalls were impacted by a fresh wave of Covid infections in 3QFY21 in the UAE. GCC hospitals revenues declined 3% yoy (-7% in c/c) with occupancy declining to 47% (versus 56% in 2QFY21, 61% in 3QFY20) and inpatients volumes declining 18% yoy. Clinics/pharmacy segment footfalls declined 23%/28% yoy respectively. Despite sharp volume decline, higher Covid testing in clinics restricted revenue decline to 1% yoy (-5% in c/c). Pharmacy revenues declined 15% yoy (-19% in c/c). India business fared relatively well registering 8% yoy growth on the back of strong recovery in mature units and ramp-up of new units. Consolidated EBITDA (post-Ind-AS) of Rs2.3 bn (-15% yoy) missed our estimates by 14% led by muted revenues with margins declining 200 bps yoy to 14.5% (-100 bps vs KIE). GCC hospitals margins reduced 500 bps yoy to 17.9% (-110 bps vs KIE) impacted by negative operating leverage. Pharmacy margins declined 290 bps yoy to 11.2% while higher Covid testing led to clinics margins expanding 310 bps yoy to 21.5%. India margins remained strong at 13%, -50 bps qoq even as Kerala was impacted by higher Covid cases. Consolidated net debt remained flat qoq at Rs25 bn. Higher cases to impact near-term recovery; capital allocation and pledging an overhang
After a strong 2Q where GCC posted impressive recovery, higher Covid cases impacted 3QFY21. With continued increase in cases during January and fresh restrictions imposed in the UAE, near-term performance, particularly 4Q which is the best quarter seasonally, will remain muted. Aster has undertaken strong cost-rationalization initiatives and has guided for partial sustainability of reduction in costs, which will support margins. Foray into diagnostics and pharmacy (in India), home-care (in UAE) and tele-health also creates new avenues for growth over medium to long term. However, prioritizing Cayman unit while putting India expansion (Bangalore/Chennai) on hold was a dampener. Fresh promoter pledging (10% of promoter shareholding) could also act as an overhang for the stock performance. Kumar Gaurav
Inexpensive valuations drive our BUY rating
We cut our FY2021E EBITDA by 9% to factor in weak 2H performance and tweak our FY2022- 23E estimates by 2%. Revise Fair Value to Rs220 (from Rs225 earlier). BUY.
[email protected] Contact: +91 22 6218 6427
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Aster DM Healthcare Health Care Services
Exhibit 1: ASTERDM 3QFY21 EBITDA was below our estimates ASTERDM, interim results, March fiscal year-ends (Rs mn)
(% chg.) 3QFY21 3QFY21E 3QFY20 2QFY21 3QFY21E 3QFY20 2QFY21 9MFY21 9MFY20 % chg. FY2021E FY2020 % chg. Revenues 22,589 24,488 23,217 22,677 (8) (3) (0) 62,872 64,371 (2) 87,974 87,385 1 COGS (6,826) (7,346) (6,951) (6,866) (7) (2) (1) (19,534) (19,382) 1 (25,558) (26,355) (3) Gross profit 15,763 17,142 16,266 15,811 (8) (3) (0) 43,338 44,990 (4) 62,416 61,030 2 Employee expenses (7,142) (7,301) (7,301) (7,141) (2) (2) 0 (20,529) (21,660) (5) (27,733) (29,039) (5) Fee paid to doctors (1,752) (1,837) (1,808) (1,721) (5) (3) 2 (4,659) (5,173) (6,686) (6,991) Other expenses (3,589) (4,203) (3,306) (4,238) (15) 9 (15) (10,733) (9,620) 12 (16,905) (12,424) 36 EBITDA 3,279 3,801 3,851 2,711 (14) (15) 21 7,417 8,537 (13) 11,092 12,576 (12) Depreciation (1,573) (1,550) (1,398) (1,529) (4,649) (4,148) (6,247) (5,859) EBIT 1,706 2,251 2,453 1,182 (24) (30) 44 2,768 4,388 4,845 6,717 Other income 57 80 39 79 202 113 280 379 Finance costs (621) (750) (715) (746) (2,169) (2,476) (3,228) (3,597) Exceptional items 0 0 (184) 0 0 (184) 0 (196) Share of associates 10 10 3 10 31 (4) 0 0 PBT 1,152 1,591 1,597 526 (28) (28) 119 831 1,838 1,897 3,302 Tax (78) (159) (82) (103) (220) (154) (228) (154) Minorities/associates (150) (50) (123) (94) (188) (229) (250) (381) PAT 924 1,382 1,391 329 (33) (34) 181 424 1,455 1,419 2,768 Number of shares 500 500 505 500 500 505 500 500 EPS 1.9 2.8 2.8 0.7 (33) (33) 181 0.8 2.9 2.8 5.5 Effective tax rate (%) 7 10 5 20 26 8 12 5 As % of sales Gross profit 69.8 70.0 70.1 69.7 68.9 69.9 70.9 69.8 Employee cost 31.6 29.8 31.4 31.5 32.7 33.6 31.5 33.2 Fee paid to doctors 7.8 7.5 7.8 7.6 7.4 8.0 7.6 8.0 Other expenses 15.9 17.2 14.2 18.7 17.1 14.9 19.2 14.2 EBITDA margin 14.5 15.5 16.6 12.0 11.8 13.3 12.6 14.4 Revenues GCC hospitals 8,010 8,895 7,910 8,570 (10) 1 (7) 23,440 21,920 7 32,208 29,770 8 GCC clinics 5,360 5,478 5,430 5,380 (2) (1) (0) 14,300 14,850 (4) 19,874 20,050 (1) GCC pharmacies 5,290 6,350 6,230 5,370 (17) (15) (1) 15,480 17,070 (9) 21,759 23,720 (8) India hospitals & clinics 4,600 4,400 4,270 4,150 5 8 11 11,740 12,280 (4) 16,348 16,310 0 Elimination/corporate expenses (660) (635) (630) (790) 4 (16) (2,060) (1,760) (2,215) (2,460) Total revenues 22,600 24,488 23,210 22,680 (8) (3) (0) 62,900 64,360 (2) 87,974 87,390 1
EBITDA (post IndAS) Pre-IndAS GCC hospitals 1,430 1,687 1,810 1,270 (15) (21) 13 3,720 3,910 (5) 5,251 4,330 21 GCC clinics 1,150 1,000 1,000 660 15 15 74 1,960 2,440 (20) 3,133 2,867 9 GCC pharmacies 590 914 880 640 (35) (33) (8) 1,700 1,860 (9) 2,487 2,538 (2) India hospitals & clinics 600 688 620 560 (13) (3) 7 1,340 1,680 (20) 2,021 1,820 11 Elimination/corporate expenses (490) (489) (470) (410) 0 4 20 (1,300) (1,370) (1,800) (1,840) Total 3,280 3,801 3,840 2,720 (14) (15) 21 7,420 8,520 (13) 11,092 9,679 15
EBITDA margin (post IndAS) (%) GCC hospitals 17.9 19.0 22.9 14.8 15.9 17.8 16.3 14.5 GCC clinics 21.5 18.3 18.4 12.3 13.7 16.4 15.8 14.3 GCC pharmacies 11.2 14.4 14.1 11.9 11.0 10.9 11.4 10.7 India hospitals & clinics 13.0 15.6 14.5 13.5 11.4 13.7 12.4 11.2 Elimination/corporate expenses NM NM NM NM NM NM 0.0 0.0 Total 14.5 15.5 16.5 12.0 11.8 13.2 12.6 11.1
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 57 Health Care Services Aster DM Healthcare
Exhibit 2: We cut our FY2021 EBITDA estimates by 9% Estimates change, March fiscal year-ends, 2017-23E (Rs mn)
New estimates Old estimates Change (%) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E Revenues 87,974 102,692 111,790 88,525 105,069 112,713 (0.6) (2.3) (0.8) EBITDA 11,092 15,735 17,355 12,225 16,016 17,694 (9.3) (1.8) (1.9) PBT 1,897 6,120 7,410 2,090 5,450 6,803 PAT 1,419 4,896 5,928 1,781 4,414 5,510 EPS 2.8 9.8 11.9 3.6 8.8 11.0 EBITDA margin (%) 12.6 15.3 15.5 13.8 15.2 15.7
Source: Company, Kotak Institutional Equities estimates
Exhibit 3: Growth to be driven by improvements across all segments Revenue and EBITDA breakup, March fiscal year-ends, 2017-23E (Rs mn)
I-GAAP IndAS 2017 2018 2019 2020 2021E 2022E 2023E Revenues GCC Hospitals 18,240 20,740 26,550 29,770 32,208 37,700 38,978 Clinics 16,440 17,480 19,900 20,050 19,874 22,510 25,160 Pharmacies 17,920 17,980 21,780 23,720 21,759 24,947 28,779 GCC total 52,600 56,200 68,230 73,540 73,841 85,157 92,917 India 9,570 11,670 13,140 16,310 16,348 20,089 21,660 Total revenues 59,313 67,220 79,620 87,390 87,974 102,692 111,790 EBITDA GCC Hospitals 1,528 2,672 3,573 4,330 5,251 6,719 7,129 Clinics 1,414 2,098 3,164 2,867 3,133 4,276 4,710 Pharmacies 1,667 1,852 2,222 2,538 2,487 2,842 3,253 GCC total 4,609 6,621 8,959 9,735 10,871 13,838 15,093 India 302 1,117 1,442 1,820 2,021 2,993 3,522 Corporate expenses (1,585) (1,617) (1,760) (1,840) (1,800) (1,840) (1,932) Total EBITDA 3,326 6,128 8,631 9,679 11,092 15,735 17,355 EBITDA margin (%) GCC Hospitals 8.4 12.9 13.5 14.5 16.3 17.8 18.3 Clinics 8.6 12.0 15.9 14.3 15.8 19.0 18.7 Pharmacies 9.3 10.3 10.2 10.7 11.4 11.4 11.3 GCC total 8.8 11.8 13.1 13.2 14.7 16.2 16.2 India 3.2 9.6 11.0 11.2 12.4 14.9 16.3 Corporate expenses as % of sales (2.7) (2.4) (2.2) (2.1) (2.0) (1.8) (1.7) Consolidated 5.6 9.1 10.8 11.1 12.6 15.3 15.5
Hospitals 14 28 12 8 17 3 Clinics 6 14 1 (1) 13 12 Pharmacies 0 21 9 (8) 15 15 GCC total 7 21 8 0 15 9 India 22 13 24 0 23 8 Total revenues 13 18 10 1 17 9
Source: Company, Kotak Institutional Equities estimates
58 KOTAK INSTITUTIONAL EQUITIES RESEARCH Aster DM Healthcare Health Care Services
Exhibit 4: We expect ASTERDM to post EBITDA CAGR of 13% over FY2020-23E ASTERDM consolidated income statement, balance sheet, March fiscal year-ends, 2014-23E (Rs mn)
2014 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E Net revenues 28,711 38,758 52,499 59,313 67,212 79,627 87,385 87,974 102,692 111,790 Gross profit 18,657 26,537 36,267 40,440 46,622 55,429 61,030 62,416 72,921 78,619 EBITDA 4,508 5,060 4,456 3,326 6,128 8,631 12,576 11,092 15,735 17,355 Adjusted EBITDA 4,508 6,394 7,802 4,213 6,128 8,631 12,576 11,092 15,735 17,355 Adjusted EBITDA (pre-IndAS) 4,508 6,394 7,802 4,213 6,128 8,631 9,679 8,827 12,121 13,596 Depreciation & amortisation (1,111) (1,440) (2,430) (3,229) (2,977) (3,065) (5,859) (6,247) (6,671) (7,080) EBIT 3,397 3,620 2,026 97 3,150 5,566 6,717 4,845 9,064 10,275 Adjusted EBIT 3,397 4,954 5,372 984 3,150 5,566 6,717 4,845 9,064 10,275 Net interest (294) (558) (1,641) (3,170) (1,392) (1,446) (3,218) (2,948) (2,944) (2,864) Exceptional items — — — 5,961 1,296 (15) (196) — — — Profit before tax 3,103 3,062 384 2,888 3,055 4,105 3,302 1,897 6,120 7,410 Tax & deferred tax (267) (342) (294) (218) (261) (429) (154) (228) (673) (815) Less: minority interest (1,058) (1,393) (680) (683) (105) (345) (381) (250) (551) (667) Net income (reported) 1,778 1,327 (590) 1,987 2,689 3,331 2,768 1,419 4,896 5,928 Net income (adjusted) 2,685 3,610 3,756 (2,026) 1,392 3,346 2,964 1,419 4,896 5,928 EPS (reported) Rs. 4.5 3.4 (1.3) 4.3 5.3 6.6 5.9 2.8 9.8 11.9 Balance sheet Cash & equivalents 3,247 3,069 3,044 1,736 3,245 3,435 1,887 3,046 3,877 6,087 Debtors 6,775 8,843 13,423 12,876 15,464 20,287 23,664 25,308 28,135 30,627 Other current assets 4,267 6,095 8,589 10,112 9,981 12,445 15,405 13,990 15,361 16,209 Current assets 14,289 18,007 25,056 24,725 28,690 36,167 40,957 42,344 47,373 52,924 Fixed assets (incl. goodwill) 14,448 24,343 28,656 38,094 41,400 48,386 55,473 54,616 54,500 54,124 Other non-current assets 200 1,770 3,846 5,254 4,753 4,812 27,949 29,749 31,249 32,749 Total assets 28,937 44,120 57,558 68,073 74,842 89,364 124,378 126,710 133,122 139,797 Short-term loans 2,042 2,894 5,841 8,304 6,345 6,419 5,872 5,872 5,872 5,872 Creditors and other liabilities 5,502 9,461 13,585 13,455 15,890 20,257 29,520 28,632 30,648 31,895 Current liabilities 7,545 12,354 19,427 21,759 22,235 26,676 35,392 34,504 36,520 37,766 Long-term loans 6,814 8,013 27,364 19,272 15,779 19,657 23,845 23,845 21,845 19,845 Other liabilities (incl. deferred) 872 1,292 4,800 4,534 4,929 6,233 27,956 29,756 31,256 32,756 Total liabilities 15,231 21,659 51,591 45,566 42,942 52,566 87,193 88,105 89,621 90,368 Equity (inc. minority interest) 13,706 22,461 5,967 22,507 31,900 36,798 37,185 38,605 43,501 49,429 Total equity and liabilities 28,937 44,120 57,558 68,073 74,842 89,364 124,378 126,710 133,122 139,797 Cash flow CF from operations pre WC 5,317 7,255 8,841 5,198 7,137 10,230 14,005 6,927 10,571 11,702 Working capital (2,044) (4,900) (6,814) (1,536) (1,764) (4,221) (1,773) (1,117) (2,182) (2,094) Capex (3,627) (3,947) (7,440) (9,246) (5,171) (7,302) (7,571) (3,000) (4,000) (4,000) Interst expense (474) (799) (894) (1,744) (1,775) (1,754) (2,001) (1,932) (1,867) (1,737) FCF (828) (2,391) (6,308) (7,328) (1,572) (3,047) 2,661 879 2,522 3,872 Margins (%) EBITDA margin 15.7 16.5 14.9 7.1 9.1 10.8 14.4 12.6 15.3 15.5 EBIT margin 11.8 12.8 10.2 1.7 4.7 7.0 7.7 5.5 8.8 9.2 Ratios Net debt to equity (X) 0.4 0.3 5.1 1.1 0.6 0.6 0.7 0.7 0.5 0.4 RoE (%) 19.6 16.1 63.0 (9.0) 4.4 9.1 8.0 3.7 11.3 12.0 RoCE (%) 15.8 14.7 13.4 1.8 5.6 8.4 9.3 6.7 12.1 13.4
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 59 SELL Endurance Technologies (ENDU) https://ultraviewer.et/en/own Automobiles & Components FEBRUARY 10, 2021 load.html RESULT, CHANGE IN RECO. Sector view: Cautious
In-line quarter; valuations expensive. Endurance Technologies reported consolidated CMP (`): 1,483 EBITDA of Rs3.5 bn (+35% yoy) in 3QFY21, which was in line with our expectations. Fair Value (`): 1,200 We expect the company to outperform the domestic two-wheeler industry and EU PV BSE-30: 51,309 industry growth led by strong order wins. However, we believe the company’s strong earnings growth potential is already priced in. Downgrade to SELL on expensive valuations. FV revised to Rs1,200 (from Rs1,020 earlier).
Endurance Technologies Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 1,483/1,200/SELL EPS (Rs) 37.6 52.1 64.6 52-week range (Rs) (high-low) 1,492-562 EPS growth (%) (6.5) 38.7 24.0 Mcap (bn) (Rs/US$) 209/2.9 P/E (X) 39.5 28.5 22.9 ADTV-3M (mn) (Rs/US$) 236/3 P/B (X) 6.1 5.1 4.3 Shareholding pattern (%) EV/EBITDA (X) 19.6 14.9 12.3 Promoters 75.0 RoE (%) 15.1 18.1 18.9 FPIs/MFs/BFIs 11.6/9.1/2.8 Div. yield (%) 0.4 0.6 0.7 Price performance (%) 1M 3M 12M Sales (Rs bn) 63 80 93 Absolute 5.1 41.9 41.6 EBITDA (Rs bn) 11 13 16 Rel. to BSE-30 (0.1) 19.7 13.1 Net profits (Rs bn) 5 7 9
3QFY21 consolidated EBITDA was in line with our estimate
Endurance Technologies reported 3QFY21 consolidated EBITDA of Rs3.5 bn (+35% yoy) in 3QFY21, in line with our estimate. Consolidated net revenues increased by 24% yoy to Rs20.4 bn (6% above estimates) led by (1) 32% yoy increase in standalone operations, (2) 4% yoy decline in European business revenues (in EUR terms) and (3) positive impact of exchange fluctuations (appreciation of EUR against INR) in 3QFY21. Revenues in India business increased by 32% in 3QFY21 led by (1) >20% yoy growth with Bajaj Auto, HMSI, TVS Motors, Yamaha India, Royal Enfield & Kia Motors and (3) 28% yoy increase in aftermarket segment. Standalone EBITDA margin came in at 17% (+290 bps yoy and -100 bps qoq), 90 bps below our estimate due to RM pressures. Gross margin declined by 210 bps qoq due to a steep increase in Steel and Aluminum prices. Also, subsidiaries’ EBITDA margin declined by 220 bps yoy due to (1) negative operating leverage and (2) an inferior product mix in 3QFY21. Consolidated reported net profit came in at Rs1.9 bn (+53% yoy) in 3QFY21, which was in line with our estimate. The company incurred exceptional loss of Rs112 mn related to VRS for all eligible permanent workmen at one of its plants located in Aurangabad.
Increase our FY2022-23 consolidated EPS estimates by 7-9%; downgrade to SELL
We have increased our FY2022-23 consolidated EPS estimates by 7-9% led by (1) higher revenue growth assumptions in the standalone business and (2) 10-20 bps increase in the consolidated EBITDA margin assumptions due to cost-cutting initiatives taken up by the company. We believe the company will continue to outperform the two-wheeler industry in the domestic market and PV industry in the European market led by strong order-wins across OEMs in both Indian (due to stricter safety norms in 2W segment) and overseas market. However, we believe the current Hitesh Goel stock price captures the strong growth potential of the company over the next two-three years. The stock trades at 22.8X our FY2023E consolidated EPS, which we believe is expensive. Rishi Vora Downgrade to SELL and revise Fair Value to Rs1,200 (Rs1,020 earlier) based on 20X March 2023E EPS for standalone operations (from 20X September 2022E EPS earlier) and 12X March 2023E EPS for subsidiaries (from 12X September 2022E EPS earlier). We ascribe 20X multiple of standalone business in line with P/E multiple for Bajaj Auto due to higher 2W export volumes assumptions over the 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. Endurance Technologies Automobiles & Components
Takeaways from the conference call
India business grew by 32% yoy in 3QFY21: Revenues in India business increased 32% in 3QFY21 led by (1) >20% yoy growth with Bajaj Auto, HMSI, TVS Motors, Yamaha India, Royal Enfield & Kia Motors and (3) 28% yoy increase in the aftermarket segment. In this quarter, the company received an incentive of Rs234.2 mn from the Government of Maharashtra’s 2013 Package Scheme of Incentives. The company incurred a one-time cost to the tune of Rs112 mn related to roll-out of VRS in its Waluj plants. This will have a positive impact of >Rs47 mn from FY2022E onwards. The company has backward integrated its manufacturing by setting up an aluminum forging plant (used for inverted forks) and wire grade hoses (used for ABS).
Order-book continues to remain strong: The company won new orders worth ~Rs4 bn in 9MFY21, which will be executed by FY2023E. The company has already won new orders worth Rs5.9 bn in FY2020 mainly from TVS Motors (for two-wheeler front forks and three-wheeler brake assembly), Hyundai-Kia, Hero MotoCorp and HMSI. The company has also received quotes worth Rs12.4 bn from various OEMs in 9MFY21.
European business remained under pressure: Endurance’s Europe revenues came in at EUR59.1 mn in 3QFY21. EBITDA came in at EUR10.8 mn in 3QFY21 (EBITDA margin of 18.3%). Net profit stood at EUR4.6 mn in 3QFY21. Over the past two years, the company has won orders worth EUR120 mn for electric and hybrid car applications. In July, the company consolidated its Grugliasco foundry operations into the Chivasso plant, with an aim to further improve operational efficiency. The company has achieved cost savings of about EUR0.6 mn on an annualized basis.
Plant update: (1) Waluj plant: The company plans to increase its disc brake production capability to 675,000 units per month (+90% from existing capacity) and the capacity will come in from August 2021 onwards, (2) Vallam plant: The company has commenced its operations from October 2020 (will be supplying to Hyundai Motors, Kia Motors and Royal Enfield from this plant), (3) the company will additionally set up the capacity to produce 720,000 units annually of cylindrical die casting parts and (4) the company will increase its alloy plant production capacity to 160,000 sets per month (from 120,000 sets per month) in Chakan plant and will commence its operations from 3QFY22 onwards.
Other key points: (1) Net standalone cash stood at Rs486 mn at the end of December 2020 versus Rs303 mn at the end of September 2020, (2) the company will incur capex of Rs2-2.5 bn in standalone operations due to setting up of brake facility in Pantnagar plant, capex required in Vallam plant due to new order wins from Hyundai Kia and increase in capacity requirement for alloy wheels in FY2021E, (3) the company will incur capex of EUR35 mn in overseas operations in FY2021E, (4) the company sees business opportunity in alloy wheels from the medium term perspective as some OEMs were importing alloy wheels from China, (5) Indian operations mix stood at 71.8% during 9MFY21, (6) the company is actively looking for organic as well as inorganic opportunities for newer products, (7) the company expects to clock in EBITDA margin of 14.5-16% in standalone operations (excluding incentives), (8) the company supplies 15-17% to Bajaj Auto, 11-13% to Royal Enfield, 5-8% to HMSI (excluding Activa), HMCL and Yamaha of content bases on ex-factory selling prices, (9) the company has 29% market share in brake assembly and 45% market in disc brake assembly, (10) the company is engaged with HMSI and HMCL for supplies of CVT and (11) mix of proprietary share business increased by 200 bps on a yoy basis in 3QFY21.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 61 Automobiles & Components Endurance Technologies
Exhibit 1: Endurance Technologies consolidated EBITDA was broadly in line with our estimates Interim consolidated results of Endurance Technologies (Rs mn)
(% chg.) 3QFY21 3QFY21E 3QFY20 2QFY21 3QFY21E 3QFY20 2QFY21 9MFY21 9MFY20 Yoy (%) FY2021E FY2020 Yoy (%) Total Income 20,409 19,308 16,405 17,701 5.7 24.4 15.3 44,141 53,210 (17.0) 63,048 69,177 (8.9) Total Expenditure (16,887) (15,815) (13,800) (14,570) 6.8 22.4 15.9 (37,061) (44,280) (52,527) (57,869) Raw materials (11,031) (10,579) (8,765) (9,563) 4.3 25.9 15.4 (23,484) (28,688) (33,278) (37,352) Employee expense (1,825) (1,700) (1,694) (1,681) 7.4 7.8 8.6 (4,826) (5,146) (6,625) (6,773) Other expenditure (4,031) (3,537) (3,341) (3,326) 14.0 20.6 21.2 (8,751) (10,447) (12,624) (13,744) EBITDA 3,521 3,492 2,605 3,132 0.8 35.2 12.4 7,080 8,929 (20.7) 10,521 11,308 (7.0) Depreciation (1,045) (1,000) (1,000) (973) 4.5 4.5 7.3 (2,873) (2,913) (3,926) (4,143) Interest (42) (34) (43) (35) 24.9 (1.9) 21.1 (119) (150) (150) (175) Other income 58 80 119 71 (27.0) (51.0) (18.3) 238 301 420 476 PBT 2,493 2,538 1,681 2,195 (1.8) 48.3 13.6 4,327 6,168 (29.9) 6,865 7,465 (8.0) Exceptional items (112) — — — (112) — (112) — Tax expense (480) (624) (441) (524) (892) (1,581) (1,545) (1,810) Reported net profit 1,901 1,914 1,240 1,672 (0.7) 53.2 13.7 3,323 4,587 (27.6) 5,208 5,655 (7.9) Adjusted net profit 1,979 1,914 1,240 1,672 3.4 59.6 18.4 3,401 4,587 (25.8) 5,287 5,655 (6.5) Number of shares (mn) 141 141 141 141 141 141 141 141 EPS 13.5 13.6 8.8 11.9 (0.7) 53.2 13.7 23.6 32.6 37.0 40.2 Adjusted EPS 14.1 13.6 8.8 11.9 3.4 59.6 18.4 24.2 32.6 (25.8) 37.6 40.2 (6.5) Ratios (%) RM as % of sales 54.1 54.8 53.4 54.0 53.2 53.9 52.8 54.0 Employee cost as % of sales 8.9 8.8 10.3 9.5 10.9 9.7 10.5 9.8 Other expenditure as % of sales 19.8 18.3 20.4 18.8 19.8 19.6 20.0 19.9 EBITDA (%) 17.3 18.1 15.9 17.7 16.0 16.8 16.7 16.3 Effective tax rate 19.3 24.6 26.2 23.9 20.6 25.6 22.5 24.2
Source: Company, Kotak Institutional Equities estimates
Exhibit 2: Endurance Technologies standalone EBITDA was broadly in line with our estimates Interim standalone results of Endurance Technologies (Rs mn)
(% chg.) 3QFY21 3QFY21E 3QFY20 2QFY21 3QFY21E 3QFY20 2QFY21 9MFY21 9MFY20 Yoy (%) FY2021E FY2020 Yoy (%) Total Income 15,288 14,512 11,610 12,892 5.3 31.7 18.6 31,742 38,142 (16.8) 46,451 49,386 (5.9) Total Expenditure (12,688) (11,921) (9,971) (10,570) 6.4 27.2 20.0 (26,793) (32,081) (38,945) (41,963) Raw materials (9,500) (8,852) (7,227) (7,734) 7.3 31.5 22.8 (19,396) (23,503) (28,567) (30,473) Employee expense (723) (750) (730) (728) (3.6) (0.9) (0.7) (2,121) (2,223) (2,813) (2,961) Other expenditure (2,465) (2,319) (2,015) (2,108) 6.3 22.3 16.9 (5,276) (6,355) (7,565) (8,528) EBITDA 2,601 2,591 1,638 2,322 0.4 58.7 12.0 4,948 6,060 (18.3) 7,505 7,423 1.1 Depreciation (526) (550) (497) (540) (4.5) 5.7 (2.7) (1,530) (1,470) (2,050) (1,992) Interest (10) (14) (24) (14) (26.7) (57.5) (26.7) (45) (91) (60) (108) Other income 32 50 99 35 (35.3) (67.3) (7.2) 109 216 250 362 PBT 2,097 2,077 1,216 1,803 1.0 72.5 16.3 3,482 4,715 (26.1) 5,645 5,684 (0.7) Exceptional items (112) — — — (112) — (112) — Tax expense (479) (532) (313) (459) (839) (1,156) (1,423) (1,407) Reported net profit 1,505 1,545 902 1,344 (2.6) 66.9 12.0 2,531 3,558 4,110 4,277 Adjusted net profit 1,584 1,545 902 1,344 2.5 75.6 17.9 2,609 3,558 (26.7) 4,194 4,277 (1.9) Number of shares (mn) 141 141 141 141 141 141 141 141 EPS 10.7 11.0 6.4 9.6 (2.6) 66.9 12.0 18.0 25.3 29.2 30.4 Adjusted EPS 11.3 11.0 6.4 9.6 2.5 75.6 17.9 18.6 25.3 (26.7) 29.8 30.4 (1.9) Ratios (%) RM as % of sales 62.1 61.0 62.2 60.0 61.1 61.6 61.5 61.7 Employee cost as % of sales 4.7 5.2 6.3 5.6 6.7 5.8 6.1 6.0 Other expenditure as % of sales 16.1 16.0 17.4 16.4 16.6 16.7 16.3 17.3 EBITDA (%) 17.0 17.9 14.1 18.0 15.6 15.9 16.2 15.0 Effective tax rate 22.9 25.6 25.8 25.5 24.1 24.5 25.2 24.8
Source: Company, Kotak Institutional Equities estimates
62 KOTAK INSTITUTIONAL EQUITIES RESEARCH Endurance Technologies Automobiles & Components
Exhibit 3: Subsidiaries EBITDA were 2.2% above our estimates due to better-than-expected revenue growth Derived subsidiary results of Endurance Technologies (Rs mn)
(% chg.) 3QFY21 3QFY21E 3QFY20 2QFY21 3QFY21E 3QFY20 2QFY21 9MFY21 9MFY20 Yoy (%) FY2021E FY2020 Yoy (%) Total Income 5,120 4,795 4,795 4,810 6.8 6.8 6.5 12,399 15,068 (17.7) 16,597 19,791 (16.1) Total Expenditure (4,200) (3,894) (3,829) (4,000) 7.8 9.7 5.0 (10,267) (12,199) (13,582) (15,907) Raw materials (1,532) (1,726) (1,538) (1,829) (11.3) (0.4) (16.3) (4,087) (5,185) (4,711) (6,879) Employee expense (1,102) (950) (964) (953) 16.0 14.3 15.6 (2,705) (2,923) (3,812) (3,812) Other expenditure (1,566) (1,218) (1,326) (1,218) 28.6 18.1 28.6 (3,475) (4,092) (5,060) (5,216) EBITDA 921 901 967 810 2.2 (4.8) 13.7 2,132 2,869 (25.7) 3,015 3,885 (22.4) Depreciation (519) (450) (502) (433) 15.3 3.3 19.8 (1,343) (1,442) (1,876) (2,150) Interest (32) (20) (19) (21) 60.9 68.3 52.8 (74) (59) (90) (67) Other income 26 30 21 37 (13.1) 27.1 (28.8) 130 86 170 114 PBT 396 461 466 392 (14.2) (15.1) 0.9 844 1,453 (41.9) 1,219 1,781 (31.5) Exceptional items — — — — — — — — Tax expense (1) (92) (128) (65) (52) (424) (122) (403) Reported net profit 395 369 338 328 7.0 16.8 20.6 792 1,029 1,097 1,378 Adjusted net profit 395 369 338 328 7.0 16.8 20.6 792 1,029 (23.0) 1,092 1,378 (20.8) Ratios (%) RM as % of sales 29.9 36.0 32.1 38.0 33.0 34.4 28.4 34.8 Employee cost as % of sales 21.5 19.8 20.1 19.8 21.8 19.4 23.0 19.3 Other expenditure as % of sales 30.6 25.4 27.7 25.3 28.0 27.2 30.5 26.4 EBITDA (%) 18.0 18.8 20.2 16.8 17.2 19.0 18.2 19.6 Effective tax rate 0.1 20.0 27.4 16.5 6.2 29.2 10.0 22.6
Source: Company, Kotak Institutional Equities estimates
Exhibit 4: We increase FY2022-23 consolidated EPS estimates by 7-9% led by higher revenue assumptions for standalone business Earnings revision table , March fiscal year-ends, 2021-23E (Rs mn)
New estimates Old estimates Change (%) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E Standalone Net sales 46,451 60,842 69,924 44,998 59,074 67,943 3.2 3.0 2.9 EBITDA 7,505 9,899 11,352 7,101 9,446 11,206 5.7 4.8 1.3 EBITDA margin (%) 16.2 16.3 16.2 15.8 16.0 16.5 Net profit 4,189 6,148 7,398 3,958 5,771 7,214 5.8 6.5 2.6 EPS (Rs) 29.8 43.7 52.6 28.1 41.0 51.3 5.8 6.5 2.6 Consolidated Net sales 63,048 79,830 93,205 61,595 77,707 87,632 2.4 2.7 6.4 EBITDA 10,521 13,440 15,730 10,116 12,928 14,863 4.0 4.0 5.8 EBITDA margin (%) 16.7 16.8 16.9 16.4 16.6 17.0 Net profit 5,287 7,331 9,093 4,737 6,853 8,351 11.6 7.0 8.9 EPS (Rs) 37.6 52.1 64.6 33.7 48.7 59.4 11.6 7.0 8.9
Source: Company, Kotak Institutional Equities estimates
Exhibit 5: We value the company at Rs1,200/share SoTP of Endurance Technologies, March fiscal year-ends, 2022-23E (Rs)
March 2023E EPS Multiple Value (Rs) (X) (Rs/share) Standalone business 52.6 20.0 1,052 Subsidiaries 12.1 12.0 145 Equity value per share (Rs) 1,197 Fair value 1,200
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 63 Automobiles & Components Endurance Technologies
Exhibit 6: Bajaj Auto to remain the largest customer in India; greater penetration into Hero, TVS and Honda will be key growth drivers Customer-wise revenue breakdown of Endurance standalone entity, March fiscal year-ends, 2014-23E (Rs mn)
2014 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E Customer wise revenues (Rs mn) Domestic customers Bajaj Auto 20,237 21,238 21,396 20,801 22,027 28,414 26,287 21,572 26,659 30,048 Royal Enfield 1,376 2,183 3,102 4,033 5,081 5,876 4,151 3,528 4,649 5,347 Honda Motorcycle 2,000 2,000 3,054 3,970 5,716 4,859 6,074 7,683 9,066 10,154 Yamaha India 1,500 1,500 1,500 1,489 1,905 2,267 2,063 1,719 2,372 2,746 Hero — — — 714 1,270 1,903 2,075 2,169 3,628 4,063 Four-wheeler — — — — 2,919 2,919 2,335 3,185 5,822 6,520 Aftermarket - Domestic sales — — — — 1,635 1,845 2,046 2,352 2,705 3,030 Aftermarket - Exports — — — — 750 863 932 792 911 1,020 Exports - To Getrack (Magna entity) — — — — 955 1,889 1,236 989 1,186 1,305 Others 6,107 8,179 7,545 7,792 2,642 2,897 1,281 1,425 2,910 4,759 Incentives — — — — — 444 906 1,037 934 934 Domestic revenues 31,219 35,100 36,596 38,798 44,900 54,175 49,386 46,451 60,842 69,924 Revenue mix (%) Bajaj Auto 64.8 60.5 58.5 53.6 49.1 52.4 53.2 46.4 43.8 43.0 Royal Enfield 4.4 6.2 8.5 10.4 11.3 10.8 8.4 7.6 7.6 7.6 Honda Motorcycle 6.4 5.7 8.3 10.2 12.7 9.0 12.3 16.5 14.9 14.5 Yamaha India 4.8 4.3 4.1 3.8 4.2 4.2 4.2 3.7 3.9 3.9 Hero — — — 1.8 2.8 3.5 4.2 4.7 6.0 5.8 Four-wheeler — — — — 6.5 5.4 4.7 6.9 9.6 9.3 Aftermarket - Domestic sales — — — — 3.6 3.4 4.1 5.1 4.4 4.3 Aftermarket - Exports — — — — 1.7 1.6 1.9 1.7 1.5 1.5 Exports - To Getrack (Magna entity) — — — — 2.1 3.5 2.5 2.1 1.9 1.9 Others 19.6 23.3 20.6 20.1 5.9 5.3 2.6 3.1 4.8 6.8 Incentives — — — — — 0.8 1.8 2.2 1.5 1.3 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Yoy growth (%) Bajaj Auto — 4.9 0.7 (2.8) 5.9 29.0 (7.5) (17.9) 23.6 12.7 Royal Enfield — 58.6 42.1 30.0 26.0 15.6 (29.4) (15.0) 31.8 15.0 Honda Motorcycle — — 52.7 30.0 44.0 (15.0) 25.0 26.5 18.0 12.0 Yamaha India — — — (0.8) 28.0 19.0 (9.0) (16.7) 38.0 15.7 Hero — — — — 78.0 49.8 9.1 4.5 67.2 12.0 Four-wheeler — — — — — — (20.0) 36.4 82.8 12.0 Aftermarket - Domestic sales — — — — — 12.8 10.9 15.0 15.0 12.0 Aftermarket - Exports — — — — — 15.0 8.0 (15.0) 15.0 12.0 Exports - To Getrack (Magna entity) — — — — — 97.8 (34.6) (20.0) 20.0 10.0 Others — 33.9 (7.7) 3.3 (66.1) 9.6 (55.8) 11.2 104.2 63.6 Incentives — — — — — — 104.0 14.5 (9.9) — Total 12.4 4.3 6.0 15.7 20.7 (8.8) (5.9) 31.0 14.9
Source: Company, Kotak Institutional Equities estimates
64 KOTAK INSTITUTIONAL EQUITIES RESEARCH Endurance Technologies Automobiles & Components
Exhibit 7: New order wins will drive strong growth over FY2020-23E Detailed customer-wise revenue breakdown of Endurance, March fiscal year-ends, 2020-23E (Rs mn)
2020 2021E 2022E 2023E Comments Domestic customers revenue break-up Bajaj Auto 26,287 21,572 26,659 30,048 Regular business 23,990 19,692 23,751 26,648 New business wins 2,298 1,880 2,908 3,400 Order for ABS and disc brakes Royal Enfield 4,151 3,528 4,649 5,347 Regular business 3,879 3,297 3,956 4,550 New business wins 272 231 693 797 Order for disc brakes and oil seals HMSI 6,074 7,683 9,066 10,154 Regular business 3,612 3,251 3,836 4,297 New business wins 2,462 4,432 5,230 5,857 Order for front forks (Activa model) Hero MotoCorp 2,075 2,169 3,628 4,063 Regular business 467 480 780 874 New business wins 1,609 1,689 2,847 3,189 Order for shock absorbers Four-wheeler segment 2,335 3,185 5,822 6,520 Hyundai-Kia 500 1,200 3,090 3,461 Order for casting products Others 1,835 1,985 2,732 3,059 After-market segemt 2,977 3,144 3,616 4,050 Exports 1,236 989 1,186 1,305 Others 4,250 4,181 6,216 8,438 TVS Motors 100 400 1,650 1,898 Order for braking and suspension products Aluminum Forging — — 500 500 Others 4,150 3,781 4,066 6,041 Total domestic revenues 49,386 46,451 60,842 69,924
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 65 Automobiles & Components Endurance Technologies
Exhibit 8: We expect standalone EPS to grow at a CAGR of 20% led by revenue CAGR of 12% over FY2020-23E Endurance standalone financial summary, March fiscal year-ends, 2012-23E (Rs mn)
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E Profit model (Rs mn) Net sales 27,702 27,187 31,219 35,100 36,596 38,798 44,900 54,175 49,386 46,451 60,842 69,924 EBITDA 3,531 3,376 4,037 4,144 4,384 4,710 5,904 7,320 7,423 7,505 9,899 11,352 Other income 153 191 231 300 215 125 183 162 362 250 680 1,098 Interest 865 841 725 410 330 179 102 171 108 60 60 60 Depreciation 1,410 1,416 1,618 1,571 1,475 1,669 1,696 1,757 1,992 2,050 2,300 2,500 Profit before tax 1,409 1,310 1,926 2,463 2,794 2,989 4,289 5,555 5,684 5,645 8,219 9,890 Extraordinary income/(losses) 56 — — — — — 269 208 — 112 — — Tax 292 300 425 649 707 773 1,368 1,753 1,340 1,423 2,071 2,492 Reported net profit 1,060 1,010 1,500 1,814 2,086 2,215 2,716 3,579 4,277 4,110 6,148 7,398 Adjusted net profit 1,100 1,010 1,500 1,814 2,086 2,215 2,904 3,724 4,277 4,189 6,148 7,398 Adjusted EPS (Rs) 7.8 7.2 10.7 12.9 14.8 15.7 20.6 26.5 30.4 29.8 43.7 52.6 Balance sheet (Rs mn) Equity 6,759 7,308 9,926 11,577 13,497 15,631 17,923 20,800 23,168 26,439 31,358 37,276 Deferred tax liability 58 — — — — — 11 156 74 74 74 74 Other long-term liabilities 131 190 196 276 182 188 31 47 108 108 108 108 Total borrowings 7,476 7,407 5,004 3,387 2,444 2,076 1,832 2,170 1,520 — — — Current liabilities 4,715 4,167 4,316 3,556 3,874 4,607 6,259 6,414 4,960 4,821 6,004 6,751 Total liabilities 19,139 19,073 19,443 18,797 19,996 22,501 26,055 29,585 29,829 31,442 37,543 44,208 Net fixed assets 9,131 9,146 9,667 9,138 8,169 8,799 10,181 12,629 15,396 15,846 16,046 16,046 Investments 3,686 3,975 3,647 3,647 4,118 3,963 4,097 3,998 4,022 4,022 4,022 4,022 Other long-term assets 80 72 149 179 1,802 1,736 1,834 2,250 1,178 1,178 1,178 1,178 Cash 845 472 271 62 76 30 87 304 1,253 2,217 6,754 12,053 Other current assets 5,398 5,407 5,709 5,771 5,832 7,973 9,856 10,404 7,979 8,179 9,543 10,909 Total assets 19,139 19,073 19,443 18,797 19,996 22,501 26,055 29,585 29,829 31,442 37,543 44,208 Free cash flow (Rs mn) Operating cash flow excl. working capital 3,366 3,278 3,677 3,765 4,036 3,922 4,435 5,442 6,053 6,220 8,508 9,958 Working capital changes 829 (597) 215 (782) (109) (1,398) (843) (665) 228 (337) (182) (620) Capital expenditure (1,577) (1,672) (1,570) (1,550) (2,269) (2,305) (2,931) (4,163) (2,962) (2,500) (2,500) (2,500) Free cash flow 1,837 207 1,693 1,454 1,723 115 674 557 3,471 3,323 5,766 6,778 Ratios Gross margin (%) 35.1 34.3 35.2 34.8 34.9 36.1 35.8 35.0 38.3 38.5 37.5 37.0 EBITDA margin (%) 12.7 12.4 12.9 11.8 12.0 12.1 13.1 13.5 15.0 16.2 16.3 16.2 PAT margin (%) 3.8 3.7 4.8 5.2 5.7 5.7 6.0 6.6 8.7 8.8 10.1 10.6 Net debt/equity (X) 1.0 0.9 0.5 0.3 0.1 0.1 0.1 0.1 (0.0) (0.1) (0.2) (0.3) Book value (Rs/share) 48.1 52.0 70.6 82.3 96.0 111.1 127.4 147.9 164.7 188.0 222.9 265.0 RoAE (%) 15.7 13.8 15.1 15.7 15.5 14.2 15.2 17.2 18.5 15.5 19.6 19.8 RoACE (%) 17.3 14.7 17.1 16.8 18.5 16.4 18.8 20.3 21.0 20.2 27.6 31.2
Source: Company, Kotak Institutional Equities estimates
66 KOTAK INSTITUTIONAL EQUITIES RESEARCH Endurance Technologies Automobiles & Components
Exhibit 9: We expect consolidated EPS to grow at a CAGR of 17% over FY2020-23E Endurance consolidated financial summary, March fiscal year-ends, 2012-23E (Rs mn)
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E Profit model (Rs mn) Net sales 38,317 38,225 42,119 49,170 52,304 55,909 63,514 75,105 69,177 63,048 79,830 93,205 EBITDA 5,150 4,927 5,408 6,048 6,795 7,583 9,279 11,288 11,308 10,521 13,440 15,730 Other income 105 284 285 325 330 291 235 270 476 420 950 1,468 Interest 955 929 810 510 490 322 235 257 175 150 80 60 Depreciation 1,869 1,873 2,078 2,269 2,432 2,905 3,216 3,762 4,143 3,926 4,401 4,826 Profit before tax 2,431 2,408 2,805 3,594 4,203 4,646 6,062 7,539 7,465 6,865 9,909 12,312 Extraordinate loss/(income) - 80 48 — — — 269 208 — 112 — — Tax 603 632 704 1,055 1,199 1,361 1,961 2,414 1,750 1,545 2,578 3,219 Minority interest 6 3 7 16 11 — — — — — — — Reported net profit 1,822 1,693 2,045 2,524 2,994 3,285 3,833 4,917 5,716 5,208 7,331 9,093 Adjusted net profit 1,822 1,749 2,079 2,524 2,994 3,285 4,021 5,062 5,716 5,287 7,331 9,093 Adjusted EPS (Rs) 13.0 12.5 14.8 17.9 21.3 23.5 29.1 36.2 40.2 37.6 52.1 64.6 Balance sheet (Rs mn) Equity 6,097 7,357 9,805 11,418 14,498 17,293 21,729 25,647 30,060 34,430 40,531 48,145 Minorit interest 12 15 114 107 — — — — — — — — Deferred tax liability 83 44 23 14 11 8 17 161 79 79 79 79 Other long-term liabilities 176 234 237 409 388 370 96 84 118 118 118 118 Total borrowings 9,830 9,556 7,056 7,774 8,262 6,794 8,141 7,184 7,308 4,000 1,000 — Current liabilities 7,160 6,223 7,939 8,136 9,660 10,647 13,430 14,784 13,134 12,145 14,719 16,771 Total liabilities 23,358 23,428 25,175 27,858 32,819 35,112 43,413 47,860 50,699 50,771 56,447 65,113 Net fixed assets 11,365 10,960 11,470 13,635 15,433 15,420 17,620 21,289 25,698 26,772 27,372 27,546 Investments 3 82 95 10 482 327 459 361 1,660 1,660 1,660 1,660 Other long-term assets 84 79 177 253 2,349 2,244 2,641 3,383 1,889 1,889 1,889 1,889 Cash 1,466 1,502 1,194 936 1,656 2,199 5,027 5,379 6,209 4,739 7,800 13,663 Other current assets 10,440 10,805 12,238 13,023 12,899 14,923 17,665 17,448 15,242 15,710 17,726 20,355 Total assets 23,358 23,428 25,175 27,858 32,819 35,112 43,413 47,860 50,699 50,771 56,447 65,113 Free cash flow (Rs mn) Operating cash flow excl. working capital 4,916 4,560 5,284 4,981 6,595 5,933 7,439 8,678 9,576 9,284 11,812 13,979 Working capital changes 505 (1,109) 405 (847) 388 (563) (18) 305 538 (1,457) 559 (576) Capital expenditure (2,641) (2,282) (2,595) (3,554) (5,220) (4,101) (4,453) (7,138) (5,825) (5,000) (5,000) (5,000) Free cash flow 1,947 520 2,457 608 1,810 1,268 2,949 1,974 4,473 2,677 7,290 8,343 Ratios Gross margin (%) 38.3 37.2 37.4 39.6 40.5 42.3 42.4 42.1 46.0 47.2 45.5 44.2 EBITDA margin (%) 13.4 12.9 12.8 12.3 13.0 13.6 14.6 15.0 16.3 16.7 16.8 16.9 PAT margin (%) 4.8 4.4 4.9 5.1 5.7 5.9 6.2 6.6 8.2 8.3 9.2 9.8 Net debt/equity (X) 1.4 1.1 0.6 0.6 0.4 0.2 0.1 0.1 (0.0) (0.1) (0.2) (0.3) Book value (Rs/share) 43 52 70 81 103 123 154 182 214 245 288 342 RoAE (%) 29.9 23.0 20.9 22.1 20.6 19.1 18.0 19.3 18.8 15.1 18.1 18.9 RoACE (%) 17.1 14.7 16.0 14.6 15.1 15.4 17.1 19.0 18.4 16.0 20.9 24.5
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 67
December 2020: Results calendar India Daily Summary Daily Summary India
Mon Tue Wed Thu Fri Sat
KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK 8-Feb 9-Feb 10-Feb 11-Feb 12-Feb 13-Feb Aditya Birla Fashion Adani Ports & SEZ 3M India ACC Apollo Hospitals Enterprise Amara Raja Batteries Balkrishna Industries AIA Engineering ABB Ashok Leyland Bharat Forge Idea Cellular Bharat Petroleum Corp. Aster DM Healthcare Aurobindo Pharma Bosch Cochin Shipyard Rajesh Exports Godrej Consumer Products Berger Paints India Bank of India Coal India Dilip Buildcon Sunteck Realty Jagran Prakashan Endurance Technologies Bata India GIC Glenmark Pharmaceuticals NMDC Indian Overseas Bank Eicher Motors Gujarat Pipavav Port GMR Infrastructure
Sun TV Network Lemon Tree Hotel GAIL (India) HCG Godrej Industries -
Torrent Pharmaceuticals Mahanagar Gas Gujarat State Petronet ITC Grasim Industries February February 2021 11, Max Financial Services Hindalco Industries Karur Vysya Bank Hindustan Aeronautics Muthoot Finance Indraprastha Gas MRF Info Edge (India)
Tata Steel Metropolis Healthcare Natco Pharma Motherson Sumi Systems Torrent Power Mindspace REIT NHPC National Aluminium Co. Varroc Engineering Page Industries Oil India New India Assurance S H Kelkar and Company Petronet LNG Oil & Natural Gas Corp. Titan Co. Piramal Enterprises Phoenix Mills Ujjivan Financial Services Power Finance Corporation Siemens
Power Grid Sobha Prestige Estates Projects Timken India Voltas 15-Feb 16-Feb 17-Feb 18-Feb 19-Feb 20-Feb Schaeffler India Ambuja Cements Mahindra CIE Automative Varun Beverages
Source: NSE, Kotak Institutional Equities
68 KOTAK INSTITUTIONAL EQUITIES RESEARCH
68
Kotak Institutional Equities: Valuation summary of KIE Universe stocks
69
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 10-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 REDUCE 992 730 (26) 169 2.3 171 36 46 52 (7) 28 13 28 21.7 19.2 15.1 12.1 10.5 4.1 3.6 3.2 15.8 17.7 17.6 0.9 1.2 1.3 12.1 Apollo Tyres REDUCE 249 210 (16) 158 2.2 638 4.6 12.9 16.7 (45) 183 29 54.7 19.3 15.0 7.6 7.2 5.9 1.4 1.3 1.3 2.8 7.1 8.7 0.5 1.1 1.1 41 Ashok Leyland BUY 134 115 (14) 393 5.4 2,936 (0.3) 3.4 7.5 (121) 1,413 117 NM 38.8 17.9 53.4 18.5 10.6 5.5 5.0 4.2 NM 13.4 25 0.0 0.8 1.7 54 Bajaj Auto BUY 4,152 4,400 6 1,201 16 289 158 191 222 (10) 21 16 26.3 21.8 18.7 20.6 16.1 13.4 5.5 5.0 4.5 22 24 25 2.3 2.8 3.2 49 Balkrishna Industries SELL 1,648 1,320 (20) 319 4.4 193 54 60 73 9 12 21 30.6 27.3 22.5 18.4 15.9 13.2 5.7 5.0 4.4 19.6 19.5 21 1.3 1.5 1.6 27 Bharat Forge SELL 656 320 (51) 305 4.2 466 (0.2) 12.6 19.0 (102) 7,097 50 NM 51.9 34.5 60.0 25.7 19.4 5.9 5.4 4.8 NM 10.8 14.7 0.0 0.5 0.5 27 CEAT ADD 1,589 1,500 (6) 64 0.9 40 99 107 124 59 8 16 16.0 14.8 12.8 8.2 7.4 6.6 2.0 1.8 1.6 13.1 12.7 13.1 0.8 0.8 0.8 9.3 Eicher Motors SELL 2,901 2,200 (24) 793 10.9 272 50 80 106 (25) 60 32 57.9 36.2 27.4 40.7 28.6 22.1 8.4 7.1 6.0 15.5 21 24 0.4 0.4 0.4 66 Endurance Technologies SELL 1,483 1,200 (19) 209 2.9 141 38 52 65 (7) 39 24 39 28.5 22.9 19.6 14.9 12.3 6.1 5.1 4.3 15.1 18.1 18.9 0.4 0.6 0.7 3.2 Escorts BUY 1,442 1,700 18 128 2.7 101 77 89 100 42 15 12 18.6 16.2 14.4 10.3 8.9 7.5 2.8 2.5 2.1 15.1 15.1 14.8 0.8 0.9 1.0 36 Exide Industries REDUCE 215 180 (16) 182 2.5 850 8.3 10.3 11.3 (17) 24 10 25.9 20.9 19.1 13.8 11.6 10.5 2.8 2.6 2.4 10.9 12.7 12.9 2.1 2.1 2.1 15.2 Hero Motocorp SELL 3,539 3,000 (15) 707 9.7 200 144 179 206 (10) 24 15 24.6 19.8 17.2 16.2 12.6 10.7 4.7 4.3 3.9 19.6 23 24 2.6 3.0 3.5 63 Mahindra CIE Automotive SELL 166 110 (34) 63 0.9 378 1.8 8.2 12.1 (81) 347 48 90.7 20.3 13.7 17.6 9.2 6.8 1.3 1.3 1.1 1.5 6.4 8.8 — — — 0.4 Mahindra & Mahindra BUY 914 1,000 9 1,136 15.6 1,138 33 48 55 38 45 16 27.8 19.1 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 76 Maruti Suzuki SELL 7,622 5,700 (25) 2,302 31.6 302 160 230 299 (15) 44 30 48 33 25 33.2 21.0 15.2 4.5 4.1 3.6 9.6 12.8 15.0 0.7 0.8 1.0 130 Motherson Sumi Systems ADD 174 155 (11) 550 7.5 3,158 2.7 7.5 9.0 (26) 173 20 63.7 23.3 19.4 12.7 6.8 5.7 4.6 3.7 3.0 7.5 17.7 17.1 0.7 0.9 1.0 31 MRF SELL 97,008 68,000 (30) 411 5.6 4 2,441 3,281 3,947 (27) 34 20 40 29.6 24.6 14.8 12.0 10.1 3.1 2.8 2.5 8.1 10.0 10.9 0.1 0.1 0.1 53 Schaeffler India SELL 4,941 3,500 (29) 154 2.1 31 87 139 166 (26) 61 19 57 36 30 28.8 19.3 16.2 4.8 4.3 3.8 8.8 12.8 13.5 — — — 1.2 SKF REDUCE 2,388 1,450 (39) 118 1.6 49 43 54 67 (26) 26 23 56 44 36 40.7 31.0 25.2 8.0 7.0 6.0 14.4 15.9 16.9 4.5 0.4 0.5 2.0 Tata Motors SELL 329 180 (45) 1,183 14.9 3,829 (8) 18 25 60 320 39 NM 17.9 13.0 6.6 4.4 3.7 2.0 1.8 1.6 NM 10.5 12.9 — — — 344 Timken SELL 1,343 830 (38) 101 1.4 75 22 36 43 (34) 65 20 62 38 31 35.7 23.0 19.1 7.4 6.3 5.3 11.1 18.1 18.4 0.1 0.1 0.1 1.1 TVS Motor SELL 653 360 (45) 310 4.3 475 11 17 21 (19) 65 22 62 37 31 24.4 18.3 15.7 8.0 7.0 6.0 13.4 19.9 21 0.7 0.7 0.8 29 Automobiles & Components Cautious 11,016 150.8 4 107 27 51.7 25.0 19.7 15.1 10.4 8.6 3.8 3.4 3.0 7.3 13.6 15.2 0.9 1.0 1.2 1,072 Banks AU Small Finance Bank SELL 1,099 720 (34) 337 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 — — — 14.7 Axis Bank BUY 735 675 (8) 2,250 30.9 3,060 22.7 42.2 51.3 294 85 22 32 17.4 14.3 — — — 2.3 2.1 1.9 7.5 12.2 13.3 0.5 0.9 1.0 192 Bandhan Bank ADD 331 375 13 533 7.3 1,610 15.7 20.3 24.6 (17) 30 21 21.1 16.3 13.5 — — — 3.2 2.7 2.2 15.3 16.9 17.2 — — — 68 Bank of Baroda ADD 80 80 0 368 5.1 4,627 7.9 17.4 20.7 572 120 18 10 4.6 3.9 — — — 0.7 0.6 0.5 5.4 11.1 12.0 2.0 4.4 5.2 53 Canara Bank REDUCE 161 115 (28) 265 3.6 1,647 10.9 9.3 18.4 150 (15) 99 14.8 17.3 8.7 — — — 0.8 0.8 0.7 3.4 2.7 5.2 — — — 60 City Union Bank REDUCE 164 160 (2) 121 1.7 737 7.8 8.0 10.5 21 2 32 21 20.6 15.6 — — — 2.4 2.2 2.0 10.4 9.8 11.9 0.8 0.9 1.1 5.7
DCB Bank BUY 109 150 38 34 0.5 310 10.6 12.2 16.3 (2) 15 33 10.2 8.9 6.7 — — — 1.1 1.0 0.8 9.9 10.4 12.5 1.0 1.1 1.5 4.2 Daily Summary India Equitas Holdings BUY 85 100 18 29 0.4 342 7.8 8.3 16.3 30 5 97 10.8 10.3 5.2 — — — 1.0 0.9 0.8 9.2 8.8 15.4 — — — 3.4 Equitas Small Finance Bank BUY 46 50 10 52 0.7 1,138 2.9 3.6 4.9 27 23 36 15.5 12.6 9.3 — — — 1.6 1.4 1.2 11.0 11.5 13.8 — — — 0.0 Federal Bank BUY 83 90 9 165 2.3 1,993 7.5 8.5 12.4 (3) 14 45 11.1 9.7 6.7 — — — 1.1 1.0 0.9 9.9 10.5 13.9 2.0 2.3 3.3 38 HDFC Bank ADD 1,582 1,550 (2) 8,714 119.6 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 0.9 225 ICICI Bank BUY 632 650 3 4,366 59.9 6,893 24.8 31.1 35.2 102 26 13 26 20.3 18.0 — — — 3.2 2.8 2.5 13.1 14.0 14.2 0.8 1.0 1.1 199 IndusInd Bank ADD 1,023 950 (7) 775 10.6 756 33.9 62.6 80.6 (47) 85 29 30 16.3 12.7 — — — 2.0 1.8 1.6 7.1 11.4 13.2 0.5 0.9 1.2 202 Karur Vysya Bank BUY 54 65 19 44 0.6 799 4.7 6.6 9.4 61 39 43 12 8.3 5.8 — — — 0.7 0.7 0.6 5.6 7.4 10.0 2.3 3.1 4.5 2.5 Punjab National Bank REDUCE 39 36 (9) 413 5.7 10,481 2.3 4.8 6.2 369 106 29 17 8.2 6.4 — — — 0.7 0.7 0.6 3.4 5.7 6.9 — — — 66 RBL Bank BUY 243 270 11 145 2.0 597 9.8 23.9 31.0 (2) 146 29 25 10.1 7.8 — — — 1.2 1.1 1.0 5.0 10.8 12.7 0.6 1.5 1.9 67 SBI Cards and Payment Services ADD 1,024 1,030 1 963 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 22 State Bank of India BUY 392 450 15 3,501 48.1 8,925 23.5 35.8 44.9 45 52 26 17 11.0 8.7 — — — 1.8 1.5 1.3 8.6 11.9 13.2 0.1 0.1 0.1 233 Ujjivan Financial Services BUY 246 345 40 30 0.4 121 33.6 44.2 - 25 32 (100) 7 5.6 - — — — 1.2 1.0 — 17.0 19.3 NM 1.7 2.4 0.0 3.4
KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Ujjivan Small Finance Bank ADD 35 37 4 61 0.8 1,928 (0.3) 1.6 2.9 (118) 575 85 NM 22.4 12.1 — — — 2.3 2.1 1.7 NM 9.2 14.8 0.0 0.0 0.0 1.8 Union Bank REDUCE 34 27 (20) 216 3.0 6,407 3.0 0.5 4.5 136 (83) 789 11 65.7 7.4 — — — 0.5 0.6 0.5 3.4 0.6 4.9 1.3 0.2 2.0 4.5
YES Bank SELL 16 11 (33) 411 5.6 25,055 (0.5) (0.9) (0.2) 96 (96) 74 NM NM NM — — — 1.5 1.7 1.7 NM NM NM 0.0 0.0 0.0 61 -
Banks Attractive 23,793 326.6 122 37 26 25 18.1 14.4 2.1 1.9 1.7 8.4 10.5 11.9 0.5 0.7 0.8 1,526 February 2021 11,
Source: Company, Bloomberg, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 69
Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India
Price (Rs) Fair Value Upside Mkt cap. O/S shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) ADVT-3M
KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 10-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 2,029 985 (51) 306 4.2 151 24 26 32 46 10 21 85 77 64 50.7 45.0 37.2 16.8 14.3 12.3 22 20 21 0.1 0.2 0.4 7.4 Building Products Cautious 306 4.2 46 10 21 84 77 64 50.7 45.0 37.2 16.8 14.3 12.2 19.9 18.6 19.2 0.1 0.2 0.4 7.4 Capital goods ABB SELL 1,445 980 (32) 306 4.2 212 7.5 20.0 26.4 (57) 166 32 192 72 55 140.4 49.1 37.1 8.7 8.1 7.4 4.5 11.6 14.1 0.4 0.5 0.6 3.8 Ashoka Buildcon BUY 111 145 30 31 0.4 281 11.9 12.0 13.1 (14) 1 9 9.4 9.3 8.5 7.5 6.4 5.4 1.1 1.0 0.9 12.2 11.2 11.2 1.7 1.7 1.9 3.0 Bharat Electronics BUY 140 140 - 341 4.7 2,437 7.4 7.9 8.1 (1) 7 3 19.0 17.8 17.2 12.1 10.9 10.0 3.1 2.8 2.6 17.0 16.6 15.7 2.0 2.1 2.2 30 BHEL SELL 38 31 (19) 133 1.8 3,482 (4.4) 2.2 3.1 (4) 149 42 NM 17.7 12.5 (7.5) 7.0 5.4 0.5 0.5 0.5 NM 2.6 3.7 (5.1) 2.3 2.9 32 Carborundum Universal ADD 525 450 (14) 99 1.4 189 15 19 22 5 23 19 35 28 24 20.6 16.3 13.7 4.9 4.4 3.9 14.7 16.3 17.3 0.8 1.0 1.2 2.3 Cochin Shipyard BUY 348 520 49 46 0.6 132 35 43 43 (27) 20 1 9.9 8.2 8.1 5.0 4.9 4.5 1.1 1.0 1.0 12.0 13.4 12.5 3.4 3.6 4.0 2.0 Cummins India BUY 795 750 (6) 220 3.0 277 25 33 38 (3) 33 16 32 24 21 32.5 22.9 19.4 5.0 4.7 4.5 16.1 20 22 1.7 2.3 2.6 15.9 Dilip Buildcon BUY 485 515 6 66 0.9 137 25 45 61 (19) 83 35 19.7 10.7 7.9 6.8 5.2 4.5 1.7 1.5 1.2 8.9 14.5 16.7 0.1 0.2 0.2 2.0
IRB Infrastructure BUY 112 145 30 39 0.5 351 7 10 11 (65) 45 7 15.7 10.8 10.1 6.3 5.7 4.6 0.6 0.6 0.5 3.7 5.3 5.4 3.4 1.3 2.0 1.5
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Kalpataru Power Transmission BUY 365 475 30 54 0.7 153 25 39 43 (2) 57 12 14.7 9.4 8.4 5.3 4.4 3.8 1.4 1.1 1.0 10.4 13.5 12.9 0.9 1.2 1.4 2.5 February 2021 11, KEC International BUY 424 410 (3) 109 1.5 257 22 29 36 1 31 24 19.1 14.6 11.8 10.8 8.5 7.0 3.3 2.8 2.3 18.7 21 21 0.6 0.7 0.9 2.6 L&T BUY 1,553 1,720 11 2,181 29.9 1,403 50 81 99 (21) 60 24 31 19.3 15.6 21.0 15.4 13.8 3.1 2.9 2.6 11.1 15.5 17.3 1.1 1.6 2.0 107 Siemens SELL 1,860 1,150 (38) 662 9.1 356 35 40 41 66 13 4 53 47 45 37.9 33.3 32.2 6.4 5.9 5.4 12.7 13.1 12.6 0.5 0.6 0.6 14.6 Thermax SELL 1,134 1,080 (5) 135 1.9 113 25 33 43 34 29 32 45 35 26 31.4 25.1 19.4 31.4 25.1 19.4 9.3 11.6 14.5 1.1 1.4 1.9 1.3 Capital goods Attractive 4,425 60.7 (16) 68 20 36 21 17.9 2.8 2.6 2.4 7.8 12.1 13.3 0.9 1.4 1.7 221 Commercial & Professional Services SIS BUY 410 460 12 61 0.8 149 23 21 25 51 (9) 19 17.9 19.7 16.5 11.9 11.0 9.7 3.6 3.0 2.6 22 16.7 17.0 0.3 0.3 0.3 1.3 TeamLease Services ADD 3,419 3,030 (11) 58 0.8 17 53 70 95 159 31 37 65 49 36 56.2 41.3 31.1 8.8 7.5 6.2 14.7 16.5 18.9 — — — 1.4 Commercial & Professional Services Attractive 119 1.6 66 (0) 24 28 28 22 19.0 16.8 14.2 5.0 4.3 3.6 18.2 15.4 16.2 0.1 0.1 0.2 3 Commodity Chemicals Asian Paints SELL 2,511 2,550 2 2,408 33.1 959 32 41 48 19 26 19 78 62 52 50.0 41.5 35.6 20.4 17.4 14.9 28 30 31 0.6 0.8 1.0 90 Berger Paints SELL 763 565 (26) 741 10.2 971 7 10 12 4 40 22 108 78 64 65.8 49.2 41.3 23.6 20.0 16.8 24 28 29 0.2 0.4 0.5 11.8
Kansai Nerolac REDUCE 587 610 4 316 4.3 539 10 12 15 1 21 26 59 48 38 37.9 32.1 25.7 7.7 7.0 6.3 13.6 15.1 17.3 0.5 0.7 0.9 3.4
Tata Chemicals ADD 561 540 (4) 143 2.0 255 17 33 38 (46) 94 15 33 16.8 14.7 9.1 6.5 5.7 1.1 1.0 1.0 3.4 6.3 6.9 1.1 2.1 2.4 44 Commodity Chemicals Neutral 3,608 49.5 3 34 20 76 57 47 42.7 34.0 29.1 11.2 10.1 9.0 14.7 17.7 19.0 0.5 0.7 0.9 149 Construction Materials ACC REDUCE 1,762 1,875 6 331 4.5 188 76 91 97 5 19 7 23 19.4 18.2 10.8 9.0 7.9 2.7 2.5 2.4 12.1 13.5 13.4 2.2 2.6 2.7 36 Ambuja Cements BUY 272 300 10 540 7.4 1,986 12 14 17 16 18 21 22 18.8 15.6 8.7 7.0 5.5 2.3 2.1 1.9 10.3 11.8 12.9 6.3 1.0 1.2 29 Dalmia Bharat BUY 1,365 1,500 10 255 3.5 187 40 48 68 189 20 41 34 28 20 10.1 8.8 7.0 2.3 2.2 2.0 7.0 8.0 10.3 — — — 3.3 Grasim Industries ADD 1,231 1,100 (11) 810 11.1 657 59 83 107 13 39 29 21 14.9 11.5 9.8 7.4 5.9 1.3 1.2 1.1 6.7 8.6 10.2 0.1 0.3 0.5 35 J K Cement ADD 2,386 2,300 (4) 184 2.5 77 87 127 140 35 47 10 28 18.8 17.0 13.2 10.3 9.7 5.1 4.1 3.3 20 24 22 0.4 0.4 0.4 4.8 JK Lakshmi Cement BUY 374 400 7 44 0.6 118 26 30 35 10 16 16 14.5 12.5 10.7 6.4 6.0 5.7 2.2 1.9 1.7 16.7 16.6 16.7 1.0 1.2 1.4 2.4 Orient Cement ADD 90 90 0 18 0.3 205 7.7 6.3 8.6 82 (18) 37 11.7 14.3 10.4 5.7 6.2 5.6 1.5 1.4 1.3 13.4 10.1 12.7 2.2 2.2 2.2 1.0 Shree Cement SELL 28,270 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 6,392 5,800 (9) 1,845 25.3 289 187 243 292 41 30 20 34 26 22 17.8 14.2 12.1 4.2 3.6 3.1 13.0 14.8 15.4 0.2 0.3 0.4 62 Construction Materials Attractive 5,048 69.3 28 30 21 29 23 18.7 13.4 10.6 8.9 2.9 2.6 2.3 10.0 11.6 12.5 1.0 0.5 0.6 198
Source: Company, Bloomberg, Kotak Institutional Equities estimates
70 KOTAK INSTITUTIONAL EQUITIES RESEARCH
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Kotak Institutional Equities: Valuation summary of KIE Universe stocks
71 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 10-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 408 285 (30) 256 3.5 627 8.0 9.9 11.4 1 24 15 51 41 36 38 32 27 14.2 11.2 8.9 31 30 28 0.7 0.6 0.6 16.3 Havells India SELL 1,139 820 (28) 713 9.8 626 18 21 24 49 17 18 65 55 47 44 39 32 14.4 12.5 10.9 24 24 25 0.5 0.6 0.7 45 Page Industries REDUCE 31,934 28,500 (11) 356 4.9 11 308 504 594 0 63 18 104 63 54 67 43 36 39.6 32.4 27.3 40 56 55 0.8 1.1 1.3 20 Polycab ADD 1,302 1,300 (0) 194 2.7 149 49 57 63 (4) 16 10 26 23 21 17 15 13 4.3 3.7 3.3 17.7 17.8 16.8 0.5 0.6 0.7 10.3 TCNS Clothing Co. REDUCE 409 390 (5) 25 0.3 66 (6.7) 11.3 15.5 (162) 269 37 NM 36 26 83 13 10.0 4.1 3.5 3.0 NM 10.4 12.2 — — — 0.4 Voltas SELL 1,091 655 (40) 361 5.0 331 14 21 25 (14) 52 16 78 51 44 68 43 37 7.8 7.1 6.4 10.5 14.5 15.2 0.3 0.5 0.6 26 Whirlpool SELL 2,473 1,930 (22) 314 4.3 127 26 48 63 (30) 85 30 95 51 39 59 36 27 11.4 10.2 9.2 12.5 21 25 0.3 0.8 1.3 4.9 Consumer Durables & Apparel Cautious 2,220 30.5 0 38 18 65 47 40 44 33 28 11.0 9.6 17.0 20 21 0.5 0.7 123 Consumer Staples Bajaj Consumer Care ADD 264 300 14 39 0.5 148 15 16 18 22 7 8 17.2 16.2 15.0 13.8 12.5 11.1 5.1 4.4 3.9 32 29 27 3.0 3.0 3.4 3.1 Britannia Industries ADD 3,425 3,875 13 825 11.3 240 79 73 86 33 (6) 17 44 47 40 33 33 29 26.1 17.8 16.5 49 45 43 3.2 2.0 2.2 42 Colgate-Palmolive (India) ADD 1,582 1,680 6 430 5.9 272 35 38 43 24 9 13 45 41 37 29.5 27.1 24.1 26.2 25.1 23.9 59 62 67 2.1 2.3 2.6 17.4 Dabur India ADD 525 555 6 927 12.7 1,767 10 11 13 13 13 14 54 47 41 44 38 33 12.7 11.6 10.5 25 26 27 1.1 1.3 1.5 28 Godrej Consumer Products ADD 750 795 6 767 10.5 1,022 16 18 21 18 12 15 46 41 36 32 29 25 8.4 7.6 6.9 19.5 19.4 20 1.0 1.3 1.5 18.1 Hindustan Unilever ADD 2,236 2,625 17 5,252 72.1 2,343 34 41 49 9 20 20 66 55 46 45 38 32 12.2 11.9 11.4 31 22 25 1.5 1.7 2.1 80 ITC BUY 228 255 12 2,801 38.5 12,318 10 12 13 (10) 19 8 22 18.4 17.0 15.8 13.1 11.9 4.3 4.1 4.0 18.9 22 23 3.9 4.7 5.0 117 Jyothy Laboratories ADD 153 170 11 56 0.8 367 6.0 6.3 7.1 28 4 14 25 24 21 18.1 17.2 15.4 4.3 4.0 3.7 17.3 16.9 18.0 2.3 2.6 2.9 1.5 Marico ADD 411 450 10 531 7.3 1,290 9.1 10.2 11.3 12 12 11 45 40 36 32 28 25 15.9 14.6 13.4 37 38 38 1.7 1.9 2.1 15.6 Nestle India REDUCE 17,177 17,500 2 1,656 22.7 96 220 260 301 8 18 16 78 66 57 51 44 38 76.1 51.1 37.2 103 93 75 1.1 0.9 1.0 36 Tata Consumer Products ADD 601 610 2 554 7.6 922 10 12 14 25 19 21 60 50 42 34 30 26 3.8 3.7 3.5 6.5 7.4 8.5 0.6 0.7 0.8 34 United Breweries ADD 1,256 1,375 9 332 4.6 264 4 26 33 (74) 513 28 302 49 38 87 27 22 9.2 7.8 6.7 3.1 17.2 18.8 0.1 0.5 0.7 11.9 United Spirits ADD 573 680 19 416 5.7 727 6 14 17 (48) 136 22 97 41 33 44 25 21 9.5 7.7 6.6 10.3 21 21 — — 0.9 23 Varun Beverages BUY 891 1,100 23 257 3.5 289 11 29 36 (33) 164 25 82 31 25 24 14 12 7.0 5.8 4.8 9.0 20 21 0.1 0.3 0.3 4.6 Consumer Staples Attractive 14,844 203.8 2 21 14 46 38 33 32 26 23 9.1 8.5 8.0 19.9 22 24 1.9 2.0 2.3 431 Diversified Financials Bajaj Finance SELL 5,479 4,000 (27) 3,301 45.3 600 77 144 191 (13) 87 33 71 38 29 — — — 9.0 7.5 6.1 13.4 21 23 0.1 0.3 0.3 296 Bajaj Finserv ADD 10,235 10,050 (2) 1,629 22.4 159 276 437 566 30 58 29 37 23 18.1 — — — 5.2 4.4 3.7 14.0 20 22 0.1 0.1 0.1 124 Cholamandalam BUY 468 540 15 383 5.3 820 24 33 35 88 35 7 19.4 14.4 13.5 — — — 4.1 3.3 2.7 22 24 21 0.6 0.8 0.8 33 HDFC ADD 2,767 2,750 (1) 4,981 68.4 1,789 66 73 87 (36) 11 20 42 38 32 — — — 4.5 4.2 3.9 11.7 11.5 12.8 0.8 0.9 1.1 177 HDFC AMC SELL 2,999 2,175 (27) 639 8.8 213 63 72 82 7 15 13 48 41 37 — — — 13.8 12.0 10.4 31 31 30 1.2 1.3 1.5 16.9
IIFL Wealth ADD 1,217 1,250 3 107 1.5 90 38 45 58 61 17 30 32 27 21 — — — 4.1 3.9 3.6 12.1 14.6 17.9 6.6 2.4 2.9 1.0 India Daily Summary Daily Summary India L&T Finance Holdings ADD 91 105 16 193 2.7 2,005 5 10 12 (45) 104 27 19.3 9.5 7.5 — — — 1.2 1.1 1.0 6.3 11.9 13.5 1.6 1.6 1.6 28 LIC Housing Finance ADD 439 430 (2) 222 3.0 505 53 71 79 12 33 12 8.2 6.2 5.5 — — — 1.3 1.2 1.0 14.0 16.5 16.1 2.0 2.7 3.0 44 Mahindra & Mahindra Financial BUY 191 195 2 236 3.2 1,232 8 14 18 (49) 89 25 25 13.4 10.7 — — — 1.7 1.6 1.4 7.0 11.0 12.6 0.6 1.5 1.9 28 Muthoot Finance REDUCE 1,268 1,250 (1) 509 7.0 401 90 106 112 20 17 6 14.1 12.0 11.3 — — — 3.5 2.9 2.4 28 27 23 1.4 1.7 1.8 37 Shriram City Union Finance BUY 1,479 1,500 1 98 1.3 66 145 180 193 (5) 24 7 10.2 8.2 7.7 — — — 1.3 1.1 1.0 12.5 13.9 13.3 1.3 1.8 2.0 1.2 Shriram Transport BUY 1,428 1,525 7 361 5.0 253 103 134 161 (7) 30 20 13.9 10.6 8.8 — — — 1.7 1.5 1.3 13.1 14.7 15.5 1.1 1.4 1.7 80 Diversified Financials Attractive 12,719 174.6 (10) 36 19 34 25 21 4.3 3.8 3.4 12.4 14.9 16.0 0.7 0.8 0.9 868
Source: Company, Bloomberg, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK
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February February 2021 11,
KOTAK INSTITUTIONAL EQUITIES RESEARCH 71
Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India
Price (Rs) Fair Value Upside Mkt cap. O/S shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) ADVT-3M
KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 10-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 618 815 32 82 1.1 133 96 106 117 (3) 11 10 6.5 5.8 5.3 5.1 4.2 3.8 0.6 0.6 0.5 11.2 10.3 10.4 7.3 2.3 2.7 5.6 JSW Energy REDUCE 73 70 (4) 119 1.6 1,640 5.6 5.7 7.0 (11) 0 24 12.9 12.8 10.3 6.5 5.7 5.1 0.9 0.9 0.8 7.6 7.1 8.2 — — — 3.4 NHPC ADD 25 26 5 249 3.4 10,045 3.0 3.2 3.2 6 6 1 8.4 7.9 7.8 11.1 10.0 9.4 0.8 0.7 0.7 9.3 9.5 9.2 6.7 7.2 7.2 2.8 NTPC BUY 100 125 25 988 13.6 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 49 Power Grid BUY 210 220 5 1,101 15.1 5,232 22 26 28 8 19 8 9.7 8.1 7.5 7.0 6.3 5.7 1.6 1.4 1.3 17.0 18.6 18.3 5.1 6.1 6.6 33 Tata Power ADD 88 95 8 282 3.9 3,196 3.5 5.2 5.8 (20) 46 12 24.9 17.0 15.3 8.7 8.8 8.1 1.3 1.2 1.1 5.7 7.3 7.6 — — — 43 Electric Utilities Attractive 2,821 38.7 14 11 8 8.8 7.9 7.3 1.0 1.0 0.9 11.8 12.2 12.2 4.2 4.7 5.0 137 Fertilizers & Agricultural Chemicals Bayer Cropscience SELL 5,507 3,900 (29) 247 3.4 45 141 156 176 9 11 13 39 35 31 28 25 21 8.0 6.8 5.8 22 21 20 0.5 0.6 0.6 2.7 Dhanuka Agritech SELL 773 680 (12) 36 0.5 48 43 41 45 43 (3) 10 18.2 18.7 17.1 13.6 13.5 11.9 4.3 3.7 3.2 26 21 20 1.4 1.6 2.1 1.0 Godrej Agrovet SELL 503 455 (10) 97 1.3 192 15 18 21 29 24 15 34 27 24 19 15 13 4.0 3.6 3.2 12.2 13.7 14.2 1.0 1.3 1.5 1.3
PI Industries SELL 2,230 1,825 (18) 338 4.6 148 51 61 73 53 20 20 44 37 31 30 25 20 6.3 5.6 4.9 19.1 16.5 17.2 0.3 0.5 0.6 19.1 -
Rallis India ADD 267 310 16 52 0.7 195 12 15 18 30 26 21 22.7 18.0 14.9 16.1 12.7 10.4 3.3 2.9 2.5 15.3 16.9 17.8 1.0 1.1 1.2 2.2 February 2021 11, UPL SELL 534 430 (20) 408 5.6 765 34 39 43 46 15 10 16 13.7 12.5 8.0 7.2 6.5 2.2 2.0 1.8 15.0 15.4 15.2 1.6 1.9 2.1 77 Fertilizers & Agricultural Chemicals Cautious 1,179 16.2 40 16 13 25 22 19.2 12.5 11.1 9.8 3.8 3.3 2.9 14.9 15.3 15.3 0.9 1.1 1.3 103 Gas Utilities
GAIL (India) BUY 134 160 20 603 8.3 4,510 10 12 12 (24) 19 4 13.3 11.2 10.7 10.6 8.3 7.6 1.3 1.2 1.1 10.0 11.1 10.9 3.0 3.7 4.5 45 GSPL SELL 227 200 (12) 128 1.8 564 13 12 8 (23) (11) (32) 17.1 19.2 28.3 7.3 7.7 10.2 1.7 1.6 1.6 10.6 8.7 5.6 0.9 1.0 0.9 3.3 Indraprastha Gas ADD 557 575 3 390 5.3 700 16 23 26 (4) 43 11 34.6 24.2 21.7 24.6 17.5 15.5 6.6 5.6 4.8 21 25 24 0.5 0.9 1.2 26 Mahanagar Gas BUY 1,129 1,350 20 111 1.5 99 64 98 104 (14) 52 6 17.6 11.5 10.9 11.0 7.3 6.5 3.3 2.8 2.5 20 27 24 2.2 3.5 4.1 16.3 Petronet LNG BUY 241 300 25 361 5.0 1,500 20 22 24 11 11 11 12.3 11.1 10.0 6.7 6.2 5.7 3.1 2.9 2.8 26 27 29 6.1 7.2 8.5 18.3 Gas Utilities Attractive 1,593 21.9 (13) 19 5 16.0 13.4 12.8 10.5 8.6 8.0 2.1 2.0 1.8 13.3 14.7 14.4 2.9 3.6 4.3 109 Health Care Services Apollo Hospitals ADD 2,757 2,240 (19) 396 5.4 139 (3) 40 60 (119) 1,261 50 NM 69.6 46.2 30.7 22.6 20.4 11.6 10.5 9.1 NM 15.9 21 (0.0) 0.6 0.9 48 Aster DM Healthcare BUY 149 220 47 75 1.0 500 2.8 9.8 11.9 (52) 245 21 52.5 15.2 12.6 9.1 6.3 5.4 2.2 1.9 1.7 4.3 13.6 14.5 — — — 0.7
Dr Lal Pathlabs SELL 2,391 1,520 (36) 199 2.7 83 33 40 43 22 23 7 72.7 59.2 55.1 45.6 36.7 34.1 16.9 14.6 12.7 25 26 25 0.6 0.8 0.8 5.8 HCG BUY 153 150 (2) 19 0.3 143 (9) (2) (2) 28 73 27 NM NM NM 15.6 8.6 7.4 2.3 2.4 2.4 NM NM NM — — — 0.3 Metropolis Healthcare SELL 2,143 1,510 (30) 110 1.5 51 37 41 46 24 10 11 57.7 52.4 47.1 37.6 31.2 27.7 16.8 14.0 11.8 32 29 27 0.5 0.6 0.6 3.3 Narayana Hrudayalaya BUY 469 540 15 96 1.3 204 (3.0) 9.7 12.6 (152) 421 31 NM 48.5 37.1 66.4 18.4 15.5 8.9 7.5 6.3 NM 16.8 18.4 — — — 1.8 Health Care Services Attractive 895 12.3 (61) 371 29 240.5 51.1 39.7 27.2 18.5 16.4 8.5 7.6 6.6 3.5 14.8 16.7 0.2 0.5 0.6 60 Hotels & Restaurants Jubilant Foodworks BUY 2,781 3,150 13 367 5.0 132 17 43 54 (26) 144 26 159.2 65.2 51.7 45.0 28.2 23.6 28.9 21.0 16.3 19.2 37 36 0.2 0.5 0.6 45 Lemon Tree Hotels BUY 41 35 (15) 33 0.5 790 (1.5) (0.0) 0.7 (1,168) 99 5,898 NM NM 61.8 64.1 19.7 13.5 4.7 4.9 4.9 NM NM 7.9 — 0.9 1.3 2.2 Hotels & Restaurants Attractive 400 5.5 (64) 413 36 364.5 71.1 52.2 46.9 26.7 21.5 20.3 16.5 13.7 5.6 23 26 0.2 0.5 0.7 47
Source: Company, Bloomberg, Kotak Institutional Equities estimates
72 KOTAK INSTITUTIONAL EQUITIES RESEARCH
72
Kotak Institutional Equities: Valuation summary of KIE Universe stocks
73 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 10-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 719 705 (2) 1,453 19.9 2,010 7.6 9.6 11.9 18 27 24 95 75 61 — — — 18.8 16.9 15.0 21 24 26 0.3 0.3 0.4 47 ICICI Lombard SELL 1,500 1,075 (28) 682 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 18.0 ICICI Prudential Life BUY 476 560 18 684 9.4 1,436 9 11 13 16 29 16 55 43 37 — — — 8.0 7.0 6.1 15.4 17.4 17.5 0.3 0.4 0.5 17.5 Max Financial Services NR 777 — — 268 3.7 343 10 27 16 (6) 180 (40) 81 29 49 — — — — — — 13.5 38 17.5 0.1 1.0 0.4 17.5 SBI Life Insurance BUY 909 1,250 37 909 12.5 1,001 13 16 19 (7) 23 15 69 56 49 — — — 10.0 8.7 7.6 15.5 16.6 16.6 0.2 0.3 0.3 23 Insurance Attractive 3,996 54.9 13 33 9 67.6 50.9 47 11.3 9.1 8.5 16.7 17.9 18.1 0.2 0.3 0.3 123 Internet Software & Services Info Edge SELL 5,120 2,910 (43) 658 9.0 128.3 26 43 53 (4) 69 23 198.6 117.8 96.1 189.8 110.7 88.1 14.4 13.2 12.0 9.5 11.7 13.1 0.1 0.2 0.3 52 Just Dial SELL 642 570 (11) 40 0.5 61.8 27 30 36 (35) 9 20 23.4 21.5 17.9 15.9 14.5 11.9 3.2 2.8 2.4 13.4 13.9 14.4 — — — 13.6 Internet Software & Services Cautious 698 9.6 (17) 48 22 139.6 94.1 77.1 131.6 88.6 72.3 12.1 10.9 9.8 8.6 11.6 12.7 0.1 0.2 0.2 66 IT Services HCL Technologies ADD 960 1,120 17 2,604 35.7 2,716 50 53 58 21 7 10 19.4 18.2 16.6 12.2 11.1 9.8 4.3 3.7 3.1 25 22 20 1.1 1.4 1.4 98 Infosys BUY 1,297 1,530 18 5,523 75.8 4,250 46 52 60 17 14 15 28.5 25.0 21.8 18.9 16.6 14.4 7.5 6.6 5.9 28 28 29 2.0 2.3 2.7 173 L&T Infotech REDUCE 4,000 3,810 (5) 699 9.6 176 108 128 151 25 19 17 37.0 31.1 26.5 24.8 22.1 19.0 10.6 8.6 7.1 32 31 29 0.8 0.9 1.0 23 L&T Technology Services ADD 2,622 2,700 3 275 3.8 106 64 89 106 (18) 39 20 41.3 29.6 24.7 25.8 19.4 16.1 8.5 7.1 5.9 22 26 26 0.6 0.8 1.0 10.9 Mindtree SELL 1,727 1,410 (18) 284 3.9 165 67 76 82 74 15 7 25.9 22.6 21.1 16.7 15.0 13.8 7.4 6.0 5.0 31 29 26 1.2 1.3 1.4 25 Mphasis REDUCE 1,639 1,480 (10) 306 4.2 187 66 76 85 5 14 12 24.7 21.6 19.3 16.1 14.0 12.3 4.8 4.3 3.8 20 21 21 2.1 2.1 2.1 9.3 TCS REDUCE 3,213 3,070 (4) 12,058 165.5 3,744 89 106 119 4 19 12 35.9 30.2 27.1 24.9 21.3 19.1 13.2 11.1 10.3 38 40 40 1.0 2.0 3.0 144 Tech Mahindra BUY 975 1,135 16 849 11.7 880 52 60 68 13 16 13 18.9 16.2 14.4 11.1 9.6 8.2 3.6 3.2 2.8 19.8 21 21 2.3 2.5 2.6 61 Wipro ADD 439 465 6 2,509 34.4 5,662 19 21 23 12 13 12 23.6 21.0 18.7 15.5 14.1 12.3 4.7 3.9 3.3 19.3 19.9 19.2 0.5 1.1 1.1 84 IT Services Attractive 25,107 344.7 11 14 12 29.1 25.5 22.7 19.3 17.0 15.1 7.8 6.7 5.9 27 26 26 1.2 1.9 2.4 628 Media DB Corp. REDUCE 88 81 (8) 15 0.2 175 5.3 14.1 14.2 (66) 167 1 16.7 6.2 6.2 5.4 2.7 2.9 0.9 0.9 0.9 5.4 14.3 14.6 2.3 13.6 14.8 0.5 Jagran Prakashan REDUCE 44 37 (16) 12 0.2 281 3.9 7.3 8.4 (44) 87 NA 11.3 6.0 NA 2.7 1.7 NA 0.6 0.6 NA 5.7 10.3 11.5 4.5 11.3 11.3 0.3 PVR BUY 1,499 1,650 10 91 1.2 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 39 Sun TV Network REDUCE 526 465 (12) 207 2.8 394 38 40 42 7 7 5 13.9 13.0 12.4 9.8 8.9 8.4 3.5 3.3 3.2 26 26 26 4.8 5.2 5.7 26 Zee Entertainment Enterprises REDUCE 217 240 10 209 2.9 960 12 17 18 8 38 11 18.0 13.1 11.8 10.8 7.9 6.8 2.1 1.9 1.7 12.0 15.1 15.1 1.6 1.8 2.1 62 Media Cautious 535 7.3 (24) 65 11 22.8 13.9 12.5 13.3 8.2 7.3 2.5 2.3 2.1 10.8 16.5 16.9 2.5 3.4 3.8 128 Metals & Mining Hindalco Industries BUY 279 375 34 628 8.6 2,220 27 34 36 55 24 6 10.2 8.2 7.7 6.2 5.4 4.8 1.0 0.9 0.8 10.0 11.2 10.6 0.4 0.4 0.4 60
Hindustan Zinc BUY 299 335 12 1,262 17.3 4,225 19 23 24 17 23 3 15.9 13.0 12.6 9.8 7.7 7.5 3.9 3.9 3.9 22 30 31 7.1 7.7 7.9 6.8 India Daily Summary Daily Summary India Jindal Steel and Power BUY 311 380 22 318 4.4 1,020 58 36 36 863 (38) (2) 5.3 8.5 8.7 3.9 4.4 4.2 0.9 0.8 0.7 17.2 9.5 8.6 — — — 42 JSW Steel ADD 411 415 1 993 13.6 2,402 30 29 35 201 (5) 22 13.5 14.2 11.7 7.6 7.0 5.9 2.3 2.0 1.7 18.2 14.8 15.7 0.5 0.5 0.5 38 National Aluminium Co. SELL 49 30 (39) 92 1.3 1,866 2.4 2.0 2.9 228 (16) 43 20.2 24.1 16.9 6.7 8.6 7.7 0.9 0.9 0.8 4.4 3.6 5.0 0.0 2.1 3.0 15.9 NMDC REDUCE 117 95 (19) 359 4.9 2,931 14.0 10.3 10.0 (4) (26) (3) 8.4 11.3 11.7 8.5 19.4 (25.2) 1.2 1.1 1.1 14.5 10.1 9.3 3.0 4.4 4.3 18.9 Tata Steel BUY 690 875 27 795 10.9 1,204 84 93 92 139 10 (1) 8.2 7.4 7.5 5.8 5.3 5.3 1.0 0.9 0.8 13.5 13.4 11.8 2.6 2.6 2.4 181 Vedanta REDUCE 186 180 (3) 692 9.5 3,717 24 21 26 262 (10) 24 7.9 8.7 7.1 4.3 4.0 3.4 1.3 1.3 1.2 16.3 14.7 17.4 15.0 9.1 9.4 66 Metals & Mining Attractive 5,137 70.5 116 (0) 8 10.1 10.1 9.4 6.1 5.7 5.4 1.5 1.4 1.2 14.5 13.3 13.2 4.5 4.0 4.1 430
Source: Company, Bloomberg, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK
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February February 2021 11,
KOTAK INSTITUTIONAL EQUITIES RESEARCH 73
Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India
Price (Rs) Fair Value Upside Mkt cap. O/S shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) ADVT-3mo
KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 10-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 416 475 14 902 12.4 1,967 47 38 40 349 (19) 5 8.8 10.8 10.3 7.3 8.7 7.9 2.2 2.0 1.8 26.3 19.2 18.4 5.2 4.6 4.9 52.0 Coal India BUY 138 180 30 852 11.7 6,163 17.4 17.4 18.3 (36) 0 5 8.0 7.9 7.6 8.3 6.9 6.0 2.8 2.9 3.1 34.1 36.1 39.6 14.5 14.5 14.5 34.1 HPCL BUY 225 260 16 336 4.6 1,499 57 34 35 700 (40) 4 3.9 6.6 6.3 5.5 7.7 7.0 1.0 0.9 0.8 26.7 13.8 13.2 5.1 5.3 6.3 24.0 IOCL BUY 97 115 19 911 12.5 9,181 19.4 14.6 15.5 592 (25) 6 5.0 6.6 6.3 4.9 5.4 5.1 0.9 0.8 0.8 18.1 12.6 12.5 8.2 6.8 7.2 36.7 Oil India SELL 120 70 (42) 130 1.8 1,084 3.6 6.2 9.5 (82) 71 52 32.9 19.2 12.6 10.4 8.3 6.6 0.5 0.5 0.5 1.6 2.7 4.1 0.7 2.1 3.2 2.6 ONGC SELL 100 60 (40) 1,258 17.3 12,580 4.7 7.0 12.2 (65) 51 73 21.4 14.2 8.2 5.5 4.7 3.5 0.5 0.5 0.5 2.5 3.7 6.2 2.0 2.9 4.5 46.9 Reliance Industries ADD 1,974 2,050 4 11,702 160.6 6,032 73 85 101 10 15 20 26.9 23.4 19.5 16.0 10.7 8.6 2.3 2.1 1.9 9.2 9.7 10.3 0.4 0.4 0.4 391.8 Oil, Gas & Consumable Fuels Attractive 16,091 220.9 29 3 19 16.6 16.1 13.5 10.2 8.3 6.8 1.7 1.5 1.4 10.0 9.3 10.3 2.0 2.0 2.2 588 Pharmaceuticals Aurobindo Pharma REDUCE 968 830 (14) 567 7.8 586 59 60 63 22 1 6 16.3 16.2 15.3 9.8 9.3 8.4 2.6 2.3 2.0 15.7 14.0 13.2 0.8 0.9 1.1 46.8 Biocon SELL 408 310 (24) 490 6.7 1,202 6.2 8.8 11.1 0 42 25 66 46 37 28.0 20.6 16.8 5.1 4.6 4.2 7.7 10.1 11.4 0.5 0.8 1.0 31.0
Cipla BUY 863 950 10 696 9.6 806 32 34 50 66 8 45 27 25.2 17.3 15.1 14.1 9.9 3.8 3.4 3.0 14.2 13.6 17.0 0.7 0.8 1.1 75.3 -
Divis Laboratories REDUCE 3,750 3,300 (12) 996 13.7 265 75 90 103 44 20 15 50 41.9 36.6 35.0 29.4 25.6 11.6 9.8 8.4 23.1 23.4 22.8 (0.7) (0.8) (1.0) 64.7 February 2021 11, Dr Reddy's Laboratories SELL 4,824 4,300 (11) 802 11.0 166 157 194 258 20 24 33 31 24.9 18.7 17.7 14.0 10.7 4.7 4.1 3.4 15.3 16.4 18.3 0.5 0.7 0.7 93.9 Gland Pharma REDUCE 2,300 2,200 (4) 376 5.2 163 61 76 89 22 25 17 38 30.4 25.9 26.4 22.1 18.4 6.4 5.3 4.4 16.8 17.3 16.9 — — — — Laurus Labs REDUCE 359 340 (5) 193 2.6 536 19 19 24 287 5 22 19 18.5 15.1 13.4 12.1 9.6 7.0 5.1 3.8 35.9 27.4 25.1 — — — 17.5
Lupin ADD 1,069 1,200 12 485 6.7 450 25 43 52 17 68 23 42 25 20.4 17.3 11.9 9.7 3.5 3.2 2.8 8.4 12.7 13.7 0.4 0.6 0.7 48.8 Sun Pharmaceuticals ADD 627 635 1 1,505 20.7 2,406 25 24 29 48 (2) 19 25 26 21.6 16.3 14.7 12.5 3.2 2.9 2.6 12.6 11.8 12.0 0.4 0.8 0.9 78.0 Torrent Pharmaceuticals REDUCE 2,586 2,750 6 438 6.0 169 71 84 100 24 18 19 36 31 26 18.2 16.8 14.6 7.8 6.7 5.7 21.4 21.7 22.2 0.9 1.1 1.3 18.9 Pharmaceuticals Attractive 6,547 89.9 38 13 22 30 27 22.0 17.8 15.4 12.7 4.3 3.8 3.3 14.4 14.3 15.3 0.3 0.5 0.6 475 Real Estate Brigade Enterprises BUY 286 310 9 59 0.8 204 (3.7) 14.0 19.4 (158) 480 38 NM 20.4 14.7 23.8 7.8 7.0 2.7 2.5 2.2 NM 12.7 15.6 0.9 0.9 0.9 1.1 DLF REDUCE 311 240 (23) 771 10.6 2,475 4.7 7.8 8.9 298 65 14 66 40.1 35.2 51.8 38.3 38.0 2.2 2.1 2.0 3.4 5.4 5.9 0.6 0.6 0.6 68.9 Embassy Office Parks REIT ADD 348 375 8 330 4.5 772 11 13 15 14 19 15 31 26 23 20.4 18.1 16.5 1.2 1.3 1.4 4.0 4.9 6.0 6.3 7.4 8.6 4.7 Godrej Properties SELL 1,465 810 (45) 369 5.1 252 6 14 32 (48) 156 125 261 102 45 (456) 146.5 65.9 7.5 7.0 6.0 2.9 7.1 14.2 — — — 25.3
Mindspace REIT ADD 330 330 0 196 2.7 593 14 16 18 69 10 13 22.8 20.8 18.4 18.5 15.0 13.5 1.2 1.2 1.2 9.1 5.7 6.5 2.5 6.2 6.6 2.4 Oberoi Realty ADD 590 590 - 215 2.9 364 22 28 32 13 31 13 27.4 21.0 18.6 20.2 16.0 14.4 2.3 2.1 1.9 8.7 10.4 10.6 0.3 0.3 0.3 4.5 Phoenix Mills BUY 801 960 20 138 1.9 172 2 21 27 (93) 1,253 30 527 39 29.9 26.5 15.6 13.3 2.8 2.7 2.5 0.6 7.1 8.6 - 0.3 0.4 3.2 Prestige Estates Projects ADD 292 275 (6) 117 1.6 401 4 11 20 (58) 185 71 72 25 14.9 10.3 7.9 6.5 2.1 2.0 1.8 3.0 8.1 12.6 0.5 0.5 0.5 2.5 Sobha BUY 449 440 (2) 43 0.6 95 11 33 50 (64) 212 51 42.2 13.5 9.0 7.4 5.4 4.7 1.7 1.6 1.4 4.1 12.2 16.5 1.6 1.6 1.6 2.5 Sunteck Realty BUY 373 300 (19) 55 0.7 140 9 18 16 23 109 (13) 42 20.3 23.2 32.3 16.1 17.9 1.7 1.6 1.5 4.1 8.2 6.7 0.3 0.3 0.3 2.9 Real Estate Attractive 2,291 31.4 48 67 26 55 33 26.2 27.0 18.9 16.3 2.2 2.1 2.0 3.9 6.4 7.8 1.3 1.7 1.9 118 Retailing Aditya Birla Fashion and Retail BUY 165 200 21 148 2.0 915 (6.1) 3.2 4.3 (226) 152 34 NM 52 39 42.1 10.4 9.1 7.3 5.9 5.1 NM 12.7 14.2 — — — 6.0 Avenue Supermarts SELL 2,968 1,885 (36) 1,922 26.4 648 18 33 43 (15) 87 28 166 89 69 109 60 46 15.7 13.4 11.2 9.9 16.2 17.6 — — — 26.4 Titan Company ADD 1,563 1,625 4 1,388 19.0 888 10 23 29 (40) 132 25 156 67 53 84 43 35 19.0 15.7 12.9 12.8 25.7 26.5 0.2 0.4 0.5 52.8 Retailing Attractive 3,458 47.5 (44) 204 27 232 76 60 92 44 35 16.0 13.4 11.2 6.9 17.5 18.7 0.1 0.2 0.2 85
Source: Company, Bloomberg, Kotak Institutional Equities estimates
74 KOTAK INSTITUTIONAL EQUITIES RESEARCH
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Kotak Institutional Equities: Valuation summary of KIE Universe stocks
75
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 10-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 130 165 27 129 1.8 989 6.0 9.0 9.8 (28) 50 8 21.5 14.4 13.3 13.9 9.5 8.7 9.1 8.5 7.8 43.0 61.0 61.2 4.2 6.2 6.5 3.5 Pidilite Industries REDUCE 1,757 1,760 0 893 12.3 508 22 29 35 (5) 30 23 80 62 50 54 42 34 17.3 14.9 12.7 23.1 26.0 27.5 0.4 0.6 0.7 22.3 S H Kelkar and Company BUY 126 130 3 18 0.2 141 8.5 8.8 9.9 83 3 13 14.9 14.4 12.7 9.5 8.4 7.4 1.8 1.7 1.5 13.4 12.2 12.6 1.2 1.8 2.4 1.7 SRF ADD 5,535 5,600 1 328 4.5 58 186 225 288 35 21 28 29.7 24.6 19.2 17.3 14.8 12.0 4.8 4.2 3.5 18.7 18.3 19.6 0.3 0.3 0.4 16.4 Speciality Chemicals Attractive 1,367 18.8 2 30 21 47 36 29.7 29.3 23.1 19.3 9.6 8.3 7.1 20.5 23.1 23.8 0.7 1.1 1.2 44 Telecommunication Services Bharti Airtel BUY 590 710 20 3,219 44.2 5,456 (4.6) 11.7 22.2 NM NM NM NM 50.5 26.5 9.5 7.5 6.2 5.3 5.1 4.5 NM 10.4 18.1 1.0 1.0 1.0 145.6 Indus Towers ADD 248 250 1 667 9.2 2,695 17.8 17.8 18.8 20 (0) 6 13.9 13.9 13.2 5.5 5.1 4.9 4.5 4.4 4.2 34.0 31.9 32.4 9.3 6.5 6.5 38.6 Vodafone Idea RS 12 — — 342 4.7 28,735 (8.7) (6.8) (5.0) NM NM NM NM NM NM 11.2 8.9 7.3 (1.0) (0.7) (0.6) 167.0 47.1 26.5 — — — 63 Tata Communications BUY 1,029 1,200 17 293 4.0 285 48 55 64 21 13 17 21.3 18.9 16.2 9.0 8.0 6.9 NM 21.6 9.8 NM 245 83.4 0.4 0.6 0.7 3.1 Telecommunication Services Attractive 4,522 62.1 41 68 166 NM NM 99.9 9.2 7.5 6.3 11.6 14.1 16.0 NM NM 16.0 2.1 1.7 1.7 250 Transportation Adani Ports and SEZ BUY 577 640 11 1,172 16.1 2,032 23 34 40 (15) 46 20 25.1 17.2 14.3 17.7 12.4 10.3 4.0 3.3 2.8 17.0 21.1 21.1 0.6 0.8 0.9 55.0 Container Corp. SELL 500 455 (9) 305 4.2 609 12 16 20 (27) 27 29 41 32 25 21.7 17.9 14.3 3.0 2.9 2.7 7.4 9.1 11.4 1.3 1.7 2.2 18.5 Gateway Distriparks BUY 164 150 (9) 20 0.3 125 5.4 4.8 7.4 29 (12) 54 30.1 34.1 22.1 9.4 9.7 8.1 1.4 1.4 1.3 4.9 4.1 6.2 1.8 1.8 1.8 0.9 GMR Infrastructure BUY 26 26 (1) 159 2.2 6,036 (3.7) (1.4) (0.5) (23) 63 65 NM NM NM 86.6 18.9 13.4 (3.8) (3.4) (4.3) 66.3 18.3 7.4 — — — 8.4 Gujarat Pipavav Port BUY 97 120 24 47 0.6 483 4.8 6.3 7.3 (21) 31 15 20.3 15.4 13.4 9.2 7.9 6.9 2.3 2.3 2.3 11.2 14.7 17.0 4.6 6.1 6.9 1.2 InterGlobe Aviation BUY 1,624 1,960 21 625 8.6 383 (142) 83 119 (2,095) 158 43 NM 20 13.7 NM - - - - - NM 101.1 65.0 — — — 40 Mahindra Logistics REDUCE 495 440 (11) 35 0.5 71 7.2 12.9 17.7 (20) 81 37 69 38 28 ------9.1 15.0 18.1 — — — 0.7 Transportation Attractive 2,364 32.4 (139) 660 34 NM 22 16.6 24.3 10.4 8.4 5.7 4.7 3.8 NM 21.2 22.7 0.6 0.8 0.9 124 KIE universe 157,096 2,156 32.0 30.3 20.2 30 23.1 19.2 14.3 11.7 10.1 3.3 3.0 2.7 11.0 13.0 14.1 1.2 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$)= 72.85
Source: Company, Bloomberg, Kotak Institutional Equities estimates India Daily Summary Daily Summary India
KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK
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KOTAK INSTITUTIONAL EQUITIES RESEARCH 75 Disclosures 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
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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. Disclosures
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