INDIA DAILY

August 13, 2018 India 10-Aug 1-day 1-mo 3-mo Sensex 37,869 (0.4) 3.6 6.6 Nifty 11,430 (0.4) 3.7 5.8 Contents Global/Regional indices Dow Jones 25,313 (0.8) 1.2 1.9 Special Reports Nasdaq Composite 7,839 (0.7) 0.2 5.9 Strategy FTSE 7,667 (1.0) 0.1 (0.7) Nikkei 22,064 (1.0) (2.4) (3.1) Strategy: Valu(b)e and valu(be)able lessons from Castrol India stock Hang Seng 28,367 (0.8) (0.6) (8.9) Daily Alerts KOSPI 2,260 (1.0) (2.2) (8.8) Value traded – India Results Cash (NSE+BSE) 382 357 335 State Bank of India: NPL reversal cycle takes shape 11,46 Derivatives (NSE) 5,540 5,864 1 Coal India: Strong performance Deri. open interest 3,883 3,632 4,148 GAIL (India): Boon from bane Hindalco Industries: Aluminum earnings improve Forex/money market

Aurobindo Pharma: Strong quarter for revenues Change, basis points DLF: Changing track 10-Aug 1-day 1-mo 3-mo Rs/US$ 69.1 4 65 144 Indraprastha Gas: Weak margins offset volume growth; limited success in CGD round 10yr govt bond, % 8.0 - (13) 8 Net investment (US$ mn) Voltas: Will margins rebound over time and market share gains sustain? 9-Aug MTD CYTD

Jindal Steel and Power: Slower road to recovery FIIs 60 214 (200) Tata Communications: Disappointing run continues MFs 2 23 11,140 Top movers Amara Raja Batteries: Weak quarter; profitability disappoints Change, %

Apollo Hospitals: Improving trends across segments Best performers 10-Aug 1-day 1-mo 3-mo Union Bank: Not yet but soon to be out of woods RCOM IN Equity 19 (3.0) 49.6 42.0 Dr Lal Pathlabs: Strong start to the year DABUR IN Equity 443 (0.7) 17.7 22.4 RIL IN Equity 1,204 (1.1) 9.5 21.7 Kaveri Seed: In-line results SBIN IN Equity 304 (4.1) 18.1 21.6

S H Kelkar and Company: Tightrope walk continues GCPL IN Equity 1,294 (0.3) (1.2) 19.9 Dhanuka Agritech: 1Q blip, expect better Worst performers JPA IN Equity 13 (7.0) (14.8) (29.0) Company alerts TTMT/A IN Equity 140 (2.3) (6.8) (28.3) HDFC Bank: Dy MD Sukthankar resigns TTMT IN Equity 250 (3.0) (5.1) (24.4) VEDL IN Equity 224 (3.0) 6.3 (22.0) Infosys: Infosys NDR takeaways AL IN Equity 128 (1.3) (3.7) (21.2)

Economy alerts Economy: IIP: Continuing to signal gradual recovery

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. INDIA Strategy India AUGUST 13, 2018 UPDATE BSE-30: 37,869

Valu(b)e and valu(be)able lessons from Castrol India stock. Investors may want to take cognizance of the flat performance of Castrol India stock over the past five years, understand the reasons for the stock’s de-rating over the past 2-3 years and see if certain expensive stocks in the branded and semi-branded categories can face a similar situation. In particular, we see two massive disruptions for branded and semi-branded products in the form of ‘standardization’ and ‘formalization’.

Castrol India: A case of price-value proposition becoming too skewed perhaps? QUICK NUMBERS

We wonder if Castrol stretched the price-value proposition too much over the past few years,  Castrol stock has de- which allowed other players in a semi-branded space to offer better price-value proposition. rated from 40-45X Castrol’s volumes have been stagnant for the past several years (see Exhibit 1 for volume data forward P/E to 20- for CY2012-17 and 1HCY18); better-quality lubes and engines may have also contributed to 25X forward P/E longer ‘drain’ times. Castrol’s realizations went up moderately over the same period despite a sharp decline in raw material (base oil) prices (see Exhibit 2), which led to a sharp increase in  Gross contribution is profitability (see Exhibit 3 for contribution/liter and EBITDA/liter). up to `88/liter in 1HCY18 from Or a case of market’s concerns about disruption from electric vehicles and terminal value? `64/liter in CY2012 The severe de-rating of Castrol stock (see Exhibit 4 for 12-month forward multiple) may reflect  Quarterly volumes the market’s concerns about eventual uptake of electric vehicles (EVs) and consequent lower usage of lubes as the share of EVs in total vehicle population (stock of vehicles) reaches a stagnant at around sizeable figure. In other words, this raises questions about the terminal value of the business in 50 mn liters over a ‘disrupted’ future. Exhibit 5 summarizes possible sources of disruption in the future (see our CY2012-1HCY18 April 12, 2018 report titled Disruption ahead on disruption across sectors for more details).

Price-value gap can close in several categories through new competition, standardization

Investors may want to review the business moats of companies in the context of their products (gap between price and value) and business models. In our view, ‘standardization’ will be a powerful disruption theme. If consumers were to have confidence about the basic quality of a product, the gap between price and value may close dramatically through (1) acceptance of new products with lower price points with similar value and/or (2) down-trading to products that may offer better price-value proposition. Semi-branded businesses (building components for example) will be first to see the disruption from ‘standardization’ of products. Private labels of organized players (e-commerce and physical) may even disrupt the stranglehold of FMCG companies, a possible outcome of ‘formalization’ of retailing in India. Sanjeev Prasad

The higher the P/E, the more one should worry about terminal value

A high P/E of a stock reflects the market’s confidence about strong growth in cash flows of the Anindya Bhowmik company for a very long period of time (and terminal value), which in turn reflects very high confidence in the business models of companies and their ability to withstand disruption (many Sunita Baldawa of which may be even unknown now). We can only marvel at the confidence of investors about certain stocks (looking at the high P/Es or P/Bs of so many stocks these days). Exhibit 6 provides a sample list while Exhibits 7-8 show the expansion in gross and EBITDA margins of automobile and consumer staple stocks over the few years.

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

Exhibit 1: Castrol’s volumes have been stagnant for the past several years Trend of quarterly sales volume of Castrol India, calendar year-ends, 2012-18 (mn liters)

Sales volumes (mn liter) 60

50

40

30

20

10

0

1QCY12

2QCY12

3QCY12

4QCY12

1QCY13

2QCY13

3QCY13

4QCY13

1QCY14

2QCY14

3QCY14

4QCY14

1QCY15

2QCY15

3QCY15

4QCY15

1QCY16

2QCY16

3QCY16

4QCY16

1QCY17

2QCY17

3QCY17

4QCY17 1QCY18 2QCY18

Source: Company, Kotak Institutional Equities

Exhibit 2: Castrol’s realizations went up moderately over CY2012-17 despite a sharp decline in raw material (base oil) prices Trend of quarterly gross realizations and raw material cost of Castrol India, calendar year-ends, 2012-18 (Rs/liter)

Gross realization (Rs/liter) Raw material cost (Rs/liter) 200

160

120

80

40

0

1QCY12

2QCY12

3QCY12

4QCY12

1QCY13

2QCY13

3QCY13

4QCY13

1QCY14

2QCY14

3QCY14

4QCY14

1QCY15

2QCY15

3QCY15

4QCY15

1QCY16

2QCY16

3QCY16

4QCY16

1QCY17

2QCY17

3QCY17

4QCY17 1QCY18 2QCY18

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 India Strategy

Exhibit 3: Profitability increased sharply over CY2012-1HCY18 Trend of quarterly gross contribution/liter and EBITDA/liter of Castrol, calendar year-ends, 2012-18 (Rs/liter)

Gross contribution/liter (Rs) EBITDA/liter (Rs) 120

80

40

0

1QCY12

2QCY12

3QCY12

4QCY12

1QCY13

2QCY13

3QCY13

4QCY13

1QCY14

2QCY14

3QCY14

4QCY14

1QCY15

2QCY15

3QCY15

4QCY15

1QCY16

2QCY16

3QCY16

4QCY16

1QCY17

2QCY17

3QCY17

4QCY17 1QCY18 2QCY18

Source: Company, Kotak Institutional Equities

Exhibit 4: Castrol stock has seen sharp de-rating over the past two years 12-month forward P/E for Castrol India (X)

CSTRL 12-month forward P/E 50 45 40 35 30 25 20 15 10 5

-

Feb-11

Feb-12

Feb-13

Feb-14

Feb-15

Feb-16

Feb-17

Feb-18

Aug-10

Aug-11

Aug-12

Aug-13

Aug-14

Aug-15

Aug-16 Aug-17 Aug-18

Source: Bloomberg, Kotak Institutional Equities estimates

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India

Exhibit 5: Long-term themes that will shape the Indian economy Key themes for the Indian market and the sectors impacted by them

Consumption Disruption

Consumer Privatization Technological Corporate de- Demographics Financialization Environment Formalization Standardization leveraging (indirect) disruption leveraging

Favorable Large FCF (steel demographics, Private banks will Technological companies) and Households to Financial savings rising income gain further share advancement will sale of assets increase debt should increase on Clean air and Shift from levels, from PSU banks Products will be lead to disruption (power) to levels for account of high higher share of unorganized to urbanization will (currently have more generic/ of business improve the consumption led real interest rate renewables in organized will lead to higher around70% share standardized models along with balance-sheet of by easy availability and growing India's energy mix gather pace penetration of in deposits & increasing distressed of retail finance financial inclusion various goods and loans); Airlines productivity companies and services their lenders

Key beneficiaries: Consumer Key beneficiaries: companies in Consumer Key beneficiaries: Key beneficiaries: Key beneficiaries: sectors with high Key beneficiaries: businesses Automobiles, Banks, NBFCs, Natural gas, share of Key beneficiaries: Adaptive Key beneficiaries: (durable and non- retail banks, insurance renewables, unorganized Private banks, businesses, private Metals, power durable), retail NBFCs, consumer companies and pollution control sector, private private airlines banks, clean sector banking, financial durables mutual funds equipment supplier banks, large real- energy companies saving companies estate developers and organized retailers

Key losers: Semi-branded Key losers: Key losers: Indirect Key losers: commodities such Automobiles Key losers: Real Building Key losers: PSU beneficiary of Automobiles, as building (IC-based), coal, estate component banks, railways asset resolution: refiners components and oil, semi-branded companies, NBFCs Corporate banks consumer businesses appliances

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 5 India Strategy

Exhibit 6: Most ‘growth’ stocks in our coverage universe trade at rich multiples 12-m forward P/E and P/B multiple of certain 'consumption' stocks in KIE universe, March fiscal year-ends, 2011-19E

12-m forward PB/PE multiple (X) Company Sector Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Current Bharat Forge Automobiles 18 16 15 19 31 24 29 35 25 Hero Motocorp Automobiles 14 16 15 17 17 17 16 20 17 Eicher Motors Automobiles 15 14 16 25 70 33 33 36 26 Maruti Suzuki Automobiles 14 15 15 17 s 19 20 32 26 Bajaj Finance Banks/NBFCs 1.6 1.4 1.5 1.9 3.5 4.2 5.6 6.5 7.7 Cholamandalam Banks/NBFCs 1.6 1.6 1.8 1.6 2.6 2.8 3.2 4.8 3.4 HDFC Bank Banks/NBFCs 3.8 3.5 3.5 3.5 3.6 3.2 3.8 4.0 3.8 Indusind Bank Banks/NBFCs 2.8 2.8 2.5 2.6 3.8 2.9 3.7 4.6 4.0 Yes Bank Banks/NBFCs 2.3 2.2 2.0 1.7 2.5 2.2 3.1 2.9 2.9 ACC Cement 21 22 14 24 23 22 39 30 24 Ambuja Cements Cement 19 20 13 21 27 26 33 31 25 Shree Cement Cement NA 29 14 21 52 39 32 37 34 UltraTech Cement Cement 14 17 15 26 28 30 32 42 31 Asian Paints Consumer Products 26 30 35 37 39 40 49 52 48 Colgate-Palmolive (India) Consumer Products 23 29 28 33 40 34 38 43 39 Dabur India Consumer Products 25 24 26 29 34 31 35 42 46 Glaxosmithkline Consumer Consumer Products 30 31 35 29 37 31 30 38 32 Hindustan Unilever Consumer Products 25 29 28 32 41 40 41 56 57 Jubilant Foodworks Consumer Products 37 49 38 39 58 53 53 77 51 Marico Consumer Products 25 26 28 24 33 35 42 49 49 Nestle India Consumer Products 35 33 36 38 42 46 63 63 60 Page Industries Consumer Products 24 26 26 35 61 45 47 75 71 United Breweries Consumer Products 47 54 58 68 74 55 55 65 56 United Spirits Consumer Products 22 14 29 56 58 68 46 79 53 ABB Industrials 25 32 35 35 86 56 44 63 44 BHEL Industrials 15 10 8 19 21 23 27 31 21 L&T Industrials 20 18 17 22 31 23 20 23 20 Siemens Industrials 35 30 22 41 69 53 47 41 32 Thermax Industrials 17 14 17 23 33 31 31 41 34 Cipla Pharmaceuticals 20 17 19 20 30 19 22 25 23 Dr Reddy's Laboratories Pharmaceuticals 23 16 16 18 25 24 22 32 22 Lupin Pharmaceuticals 19 19 21 21 32 22 20 24 26 Sun Pharmaceuticals Pharmaceuticals 22 22 23 22 30 26 21 43 29

Source: Companies, Kotak Institutional Equities estimates

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India

Exhibit 7: We model gross and EBITDA margins to stay at elevated levels for the automobile companies Gross margin and EBITDA margin of auto companies, March fiscal year-ends, 2014-21E (%)

Gross margin (%) EBITDA margin (%) 2014 2015 2016 2017 2018 2019E 2020E 2021E 2014 2015 2016 2017 2018 2019E 2020E 2021E Amara Raja Batteries 25.1 26.3 28.5 26.0 24.1 24.7 24.7 24.7 16.3 16.7 17.8 16.0 14.6 15.3 15.4 15.4 Apollo Tyres 41.8 45.4 49.7 47.7 43.4 43.1 42.7 43.5 14.0 15.1 16.9 14.0 11.1 13.1 13.9 14.6 Ashok Leyland 23.5 26.5 30.3 30.6 29.1 28.2 28.4 27.6 1.7 7.6 11.9 10.9 10.4 10.3 11.5 11.3 Bajaj Auto 30.6 29.2 31.3 31.0 29.3 27.0 27.1 26.8 21.8 19.0 21.2 20.3 19.0 17.1 17.2 17.0 Balkrishna Industries 50.5 51.3 59.8 58.3 54.1 55.1 55.7 55.5 24.2 23.9 31.5 32.0 28.9 30.2 31.2 30.9 Bharat Forge 49.0 47.3 46.5 46.9 44.7 46.5 46.8 47.6 15.3 18.9 20.7 19.6 20.6 22.2 22.4 22.0 CEAT 35.8 38.6 43.6 41.0 38.9 38.9 38.8 38.4 11.8 11.8 14.1 11.4 9.9 11.5 12.2 12.4 Eicher Motors 31.9 34.0 44.4 47.3 48.2 48.5 47.9 47.1 10.5 12.8 27.4 30.9 31.3 32.0 31.6 31.3 Exide Industries 26.9 26.9 29.5 29.1 26.6 26.7 26.7 26.6 13.7 13.2 14.8 14.3 13.5 14.6 14.7 14.8 Hero Motocorp 26.4 26.9 30.7 32.1 31.1 29.3 29.3 29.1 10.7 12.2 15.4 16.3 16.4 15.2 15.4 15.3 Mahindra & Mahindra 30.6 30.4 31.9 32.3 33.5 33.0 33.0 32.5 13.5 12.5 13.5 13.1 14.8 15.2 15.2 14.5 Maruti Suzuki 25.8 27.3 30.1 29.3 29.1 29.3 29.5 29.3 11.9 13.4 15.4 15.2 15.1 15.4 16.1 16.2 Motherson Sumi Systems 37.0 38.3 39.8 39.2 39.0 36.4 35.7 35.7 8.7 9.1 9.5 9.8 9.1 9.7 10.0 10.0 Schaeffler India 36.0 38.9 42.6 39.6 42.8 40.3 41.6 41.7 13.1 14.8 17.7 16.5 19.1 17.7 19.5 19.8 SKF 36.7 37.9 37.6 38.2 41.6 41.5 41.6 41.9 11.5 11.7 12.1 12.8 15.8 15.7 16.2 16.7 Tata Motors 38.3 39.1 40.2 38.5 36.9 38.0 38.1 38.3 15.0 14.9 14.0 12.4 11.3 12.0 13.5 13.7 Timken 38.1 40.2 40.0 40.9 41.0 42.6 42.5 42.4 9.9 14.4 15.5 15.0 13.2 16.2 16.7 16.8 TVS Motor 28.8 27.3 28.1 27.0 26.4 25.5 25.5 25.5 6.1 6.0 7.3 7.1 7.5 8.0 8.5 8.9 WABCO India 42.9 41.2 40.0 40.1 37.6 37.1 37.2 36.2 15.0 15.1 15.6 15.8 15.3 15.4 16.4 15.0

Source: Companies, Kotak Institutional Equities estimates

Exhibit 8: Significant expansion in gross and EBITDA margin for consumer staple and discretionary companies in the past few years Gross margin and EBITDA margin of consumer companies, March fiscal year-ends, 2014-21E (%)

Gross margin (%) EBITDA margin (%) 2014 2015 2016 2017 2018 2019E 2020E 2021E 2014 2015 2016 2017 2018 2019E 2020E 2021E Asian Paints 42.3 43.8 43.6 44.7 42.4 42.9 43.1 43.4 15.7 15.8 19.4 19.8 19.0 20.8 21.1 21.5 Bajaj Corp. 60.0 61.7 62.7 66.2 67.5 66.4 66.5 66.6 27.7 29.0 34.2 33.1 30.6 29.2 30.2 31.0 Britannia Industries 39.7 40.3 40.3 38.3 38.4 39.2 40.0 40.4 9.1 11.0 14.5 14.1 15.1 16.5 17.4 17.9 Colgate-Palmolive (India) 60.8 63.1 61.8 62.9 64.4 65.5 65.1 65.3 18.6 20.6 24.3 23.7 26.6 28.0 28.3 28.8 Dabur India 52.1 52.5 51.1 50.1 50.4 50.8 50.8 50.9 16.3 16.8 19.3 19.6 20.9 21.7 22.0 22.3 GlaxoSmithKline Consumer 64.3 65.2 67.5 67.5 66.8 68.3 68.5 68.6 17.9 16.9 20.3 20.9 20.5 21.9 22.3 22.5 Godrej Consumer Products 53.2 53.6 54.1 55.4 56.6 56.9 56.9 57.0 15.1 16.5 19.4 20.5 21.0 22.0 22.4 22.7 Hindustan Unilever 48.8 49.2 50.7 50.8 53.0 54.2 54.3 54.4 16.0 16.6 18.3 19.0 21.1 23.0 23.4 23.7 ITC 60.4 59.8 63.2 60.1 61.1 61.3 61.4 61.5 37.0 36.9 37.5 36.4 38.3 39.6 40.4 41.2 Jubilant Foodworks 73.9 74.8 76.2 75.6 74.6 74.1 74.0 73.9 14.4 12.2 10.8 9.3 14.6 17.9 19.6 21.0 Jyothy Laboratories 47.5 48.5 47.5 46.9 49.9 47.9 48.1 48.3 11.9 12.4 15.0 15.3 15.5 15.6 15.9 16.2 Marico 48.8 45.6 49.0 52.2 47.0 45.6 47.5 48.2 16.0 15.2 17.5 19.6 18.0 17.2 18.3 18.8 Nestle India 54.5 53.9 57.3 57.2 56.5 58.6 58.9 59.0 21.9 20.9 19.6 21.7 21.7 24.8 25.5 25.8 Page Industries 53.1 53.7 61.8 59.5 57.4 57.7 57.9 58.1 21.5 20.7 20.9 19.4 21.2 23.3 23.6 23.8 Pidilite Industries 44.9 44.9 51.8 53.0 52.5 51.4 51.9 52.4 15.7 15.9 21.9 22.4 22.1 21.9 22.8 23.6 Tata Global Beverages 52.5 52.0 45.4 47.5 45.7 45.5 45.8 46.1 9.7 9.7 9.9 11.7 12.3 12.0 12.6 13.2 Titan Company 26.3 26.5 27.5 28.3 27.5 26.8 27.3 27.4 9.6 9.6 8.3 8.7 10.2 10.8 11.4 11.6 United Breweries 59.0 59.6 56.1 53.9 53.2 52.9 52.7 52.9 14.1 13.3 14.3 13.6 16.1 16.7 16.8 17.2 United Spirits 40.8 40.8 41.3 42.9 47.5 49.1 49.6 49.7 10.0 7.4 10.7 11.4 12.5 14.7 16.1 16.9

Source: Companies, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 7 BUY State Bank of India (SBIN) Banks AUGUST 13, 2018 RESULT Coverage view: Attractive

NPL reversal cycle takes shape. SBI reported a loss for the quarter led by high Price (`): 304 provisions for investments but the key takeaway of the result would be the decline in Target price (`): 370 NPLs as the resolution cycle seems to be finally getting reflected in headline ratios. As BSE-30: 37,869 several large NPLs are seeing a change of ownership, it would not be surprising if there is an acceleration in this decline of NPLs from here. We believe that the upside is quite attractive to maintain our positive view; our top pick in PSUs (TP unchanged).

Company data and valuation summary State Bank of India Stock data Forecasts/Valuations 2018 2019E 2020E 52-week range (Rs) (high,low) 351-232 EPS (Rs) (7.3) 7.7 36.9 Market Cap. (Rs bn) 2,717.1 EPS growth (%) (155.8) 204.8 380.5 QUICK NUMBERS Shareholding pattern (%) P/E (X) (41.5) 39.6 8.2 Promoters 58.0 NII (Rs bn) 748.5 851.6 954.1  NII up 24% yoy; FIIs 12.4 Net profits (Rs bn) (65.5) 68.6 329.7 MFs 10.8 BVPS 125.7 153.0 210.4 reported loss at `49 Price performance (%) 1M 3M 12M P/B (X) 2.4 2.0 1.4 bn Absolute 15.4 22.8 2.6 ROE (%) (3.2) 3.1 13.6 Rel. to BSE-30 10.5 14.3 (14.6) Div. Yield (%) 0.0 0.1 0.1  GNPL and NNPL ratios down 20 bps Several one-offs across various segments; high investment provisions drive loss and 45 bps qoq to 10.7% and 5.3%, SBI reported a loss of `48 bn in 1QFY19 on the back of sharp increase in provisions for bad respectively; loans, investments and retirement-related expenses. Revenues grew 11% yoy despite a solid NII provision coverage growth of 24% yoy primarily on account of weak fee income growth and losses in the treasury book. The bank also made higher provisions for investment depreciation (fully accounted in (w/o) at ~70% 1QFY19) as well as made provisions for retirement/impending wage settlement cycle. NIM  Maintain BUY rating improved 30 bps qoq to 2.8% aided by recovery from NPLs. Cost-income ratio was high at with TP at `370 ~58% primarily on account of provisions for employees. Loans grew 4% yoy while deposits (unchanged) grew 6% yoy. CASA ratio was healthy at 45% and there is no negative impact of the merger.

The much-awaited recovery in NPLs has begun to take shape; coverage moves closer to 70%

After a few years, SBI saw some a healthy decline in gross NPLs as the resolution of a couple of NCLT cases took shape. Gross NPLs declined 5% yoy while net NPLs declined 11% qoq on absolute basis. Provision coverage ratio has moved to ~70% while calculated coverage is at 53%. This is important as we believe that the ability to take haircuts on loans has significantly improved. Of the overall slippages of 3% of loans, 35% came from existing accounts (LC default), 25% came from the corporate loans and the rest has come from retail and agriculture. There has been a reduction of 30% in the NCLT 1 exposure. 2QFY19 would be an important quarter, which is likely to see significant reductions in NPLs as more cases get completed. The management has guided for 2% fresh slippages and 2% credit costs for FY2019, which M B Mahesh CFA appears to be achievable and negative surprises are likely to be quite limited. Incremental risk from power sector appears to be quite limited given that 60% of the non-watch-list sector is in the public sector. Of the private sector, ~10% is BB and below portfolio indicating that the Nischint Chawathe negative surprise is likely to be low.

Maintain BUY: all conditions in place for a re-rating as NPLs on positive downward trajectory Dipanjan Ghosh

We maintain BUY rating on SBI with a TP of ₹370 (unchanged) valuing the bank at 1.3X book and 7X March 2020E EPS for RoEs in the range of ~15% in the medium term. Our broad thesis on the bank remains unchanged as it remains our preferred idea among public banks. We expect the stock to re-rate as we believe the bank has begun a positive journey on the NPL resolution cycle. This is likely to be followed by operating profit growth and recovery in RoEs.

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

Exhibit 1: SBI quarterly results March fiscal year-ends, 1QFY18 - 1QFY19 (` mn)

(% chg.) 1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 2019E 2018 (% chg.) 2020E Income earned 588,132 575,674 549,050 559,413 2 7 5 2,417,594 2,204,993 10 2,611,817 Income on advances 388,655 365,075 361,420 342,349 6 8 14 1,576,054 1,413,632 11 1,776,604 Income on investments 185,875 190,031 175,430 182,784 (2) 6 2 749,605 703,376 7 726,546 Interest on balance with RBI 13,602 20,568 12,200 34,281 (34) 11 (60) 91,935 87,985 4 108,667 Interest expense 370,148 369,330 372,990 359,670 0 (1) 3 1,566,041 1,456,456 8 1,657,739 Net interest income (NII) 217,984 206,345 176,060 199,743 6 24 9 851,552 748,537 14 954,078 Non-interest income 66,795 80,080 80,060 124,948 (17) (17) (47) 372,749 446,007 (16) 489,859 Fees, commission 49,760 53,570 48,700 84,300 (7) 2 (41) 257,564 229,968 12 283,321 Invt. income (12,640) 3,000 17,700 9,410 (521) (171) (234) 20,000 134,233 (85) 95,000 Forex income 4,270 6,279 6,670 5,460 (32) (36) (22) 26,834 24,846 8 29,517 Dividend 130 230 3,310 (43) (96) 5,382 4,485 20 6,459 Other income excl. treasury 79,435 77,080 62,360 115,538 3 27 (31) 352,749 311,773 13 394,859 Total income 284,779 286,425 256,120 324,691 (1) 11 (12) 1,224,302 1,194,544 2 1,443,937 Operating expenses 165,047 151,114 137,370 165,862 9 20 (0) 653,780 599,434 9 686,817 Staff expenses 71,414 68,133 77,240 67,612 5 (8) 6 377,739 331,787 14 388,920 Other operating expenses 25,670 82,981 60,130 24,930 (69) (57) 3 276,040 267,648 3 297,897 Pre-provision operating profit 119,731 135,312 118,750 158,829 (12) 1 (25) 570,522 595,110 (4) 757,120 Provisions and extraordinaries 192,283 210,512 89,290 280,961 (9) 115 (32) 472,492 750,392 (37) 286,060 Loan loss provisions 124,069 168,560 121,250 240,801 (26) 2 (48) 400,492 670,766 (40) 284,040 Standard assets (9,190) (852) (20,390) (8,520) 979 (55) 8 Investment depreciation 70,980 24,000 (7,550) 47,610 196 NM 49 70,000 80,876 (13) - Other provisions 6,424 18,803 (4,020) 1,070 (66) NM 500 2,000 (1,250) NM 2,020 PBT (72,551) (75,200) 29,460 (122,132) (4) (346) (41) 98,030 (155,282) NM 471,060 Less tax (23,793) (22,560) 9,400 (44,947) 5 (353) (47) 29,409 (89,808) NM 141,318 Profit after tax (48,759) (52,640) 20,060 (77,185) (7) (343) (37) 68,621 (65,475) NM 329,742 Fees to PBT (%) (69) (71) 165 (69) 263 (148) 60 Treasury income/PBT (%) 115 86 31 (51) (34) 20 Key balance sheet data (Rs bn) Advances 19,902 19,736 18,042 19,349 1 10 3 20,700 19,349 7 22,998 Deposits 27,478 27,334 26,025 27,063 1 6 2 27,106 27,063 0 29,019 Investments 10,635 10,928 9,521 10,610 (3) 12 0 9,633 10,610 (9) 9,987 Key reported ratios (%) Yield on advances 8.3 8.5 8.3 -21 bps 0 bps Cost of funds 5.4 5.6 5.4 -25 bps 0 bps Global NIM 2.5 2.4 2.5 14 bps 0 bps Cost-to-income 58.0 52.8 53.6 51.1 432 bps 687 bps CD ratio-KS 72.4 69.3 71.5 310 bps 93 bps Asset quality details Gross NPLs (Rs bn) 2,128 1,881 2,234 13 (5) 2,051 2,234 (8) 1,762 Gross NPLs (%) 10.7 10.0 10.9 72 bps -21 bps 9.1 10.7 -164 bps 7.0 Net NPLs (Rs bn) 992 1,078 1,109 (8) (10) 855 1,109 (23) 609 Net NPLs (%) 5.3 6.0 5.7 -68 bps -44 bps 4.1 5.7 -160 bps 2.6 Slippages (Rs bn) 149 301 328 (51) (55) 484 948 (49) 207 Slippages (%) 3.0 5.4 7.2 -239 bps -420 bps 2.5 6.0 -353 bps 1.0 PCR- KS (%) 53 43 50 1067 bps 299 bps 58 50 794 bps 65 Capital adequacy details (%) CAR 12.8 13.3 12.6 -48 bps 23 bps Tier I 10.7 10.7 10.4 0 bps 31 bps

Notes: (a) All quarterly numbers refer to the merged entity.

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 9 Banks State Bank of India

91% of corporate slippages from the watch-list

 Slippages dropped 360 bps qoq and 320 bps yoy to 3.2%. Calculated slippages dropped in 1QY19 on the back of decrease in slippages from the corporate book. Only 25% of the slippages were from the corporate book (worth `37 bn). Out of the total corporate slippages, ~91% of the slippages were from the watch-list. The rest of the slippages were from retail, agriculture and SME portfolios. Agriculture slippages increased primarily on the back of stress in asset quality in the states of Maharashtra and Karnataka.

 ~90% of slippages from corporate book. SBI reported `328 bn slippages of which nearly 90% came from corporate accounts and the rest was spread out from SME, agriculture and retail. Around 60% of the corporate slippages were from the pre-defined stressed loans. SBI has recognized all SDR loans as NPL. Sectoral break-up within corporate slippages was power (13%), roads (8%), iron and steel (1%) and others (78%).

 Unrecognized stress of 1.3% of loans. SBI disclosed a watch-list of `246 bn, a potential source of incremental slippages from the corporate book. This watch-list includes all corporate SMA-2 and SMA-1 accounts. Power sector is about 41%, iron and steel is 14%, textiles is 2% and others is 33% (including roads, EPC construction and others), excluding accounts under SMA-1 and SMA-2 which were previously not classified under the watch-list.

 63% coverage on NCLT accounts. SBI has `630 bn exposure to NCLT accounts in the two lists with the comfortable combined coverage ratio of 71%. These accounts comprise nearly ~30% of the outstanding gross NPL for the bank. SBI expects 52% haircut on NCLT-1 accounts. Two accounts under NCLT-1 were resolved in 1QFY19 with recoveries amounting to 73.5% and 52.3%.

 High stress recognition in key sectors. Power sector NPL is around 18% and around 6% as part of the watch-list. Adjusting for exposure to PSU entities in stress loans in power is around ~38%.

 Retail GNPL up 8 bps qoq; agri NPLs increase 35 bps qoq. The bank has delivered qoq improvement in NPL ratios in SME (9.1% NPL; down 42 bps qoq) whereas agri (11.6% NPL; up 35 bps qoq) and retail (1.3% NPL; up 8 bps qoq) portfolios have seen deterioration. Management is confident of improving asset quality in the retail segment.

 We project slippages of 2.5% in FY2019E and declining to 1.0% slippages by FY2021E. GNPL will moderate to 5.5% by FY2021E from ~11% in FY2018.

10 KOTAK INSTITUTIONAL EQUITIES RESEARCH State Bank of India Banks

Exhibit 2: SBI has net stress loans of ~6% Break-up of stress loans and provisions, 3QFY18-1QFY19

Amount outstanding Share of total gross loans 3QFY18 4QFY18 1QFY19 3QFY18 4QFY18 1QFY19 (Rs bn) (Rs bn) (Rs bn) (%) (%) (%) Gross NPL 1,991 2,234 2,128 10.3 10.9 10.7 Net NPL 1,024 1,109 992 5.3 5.4 5.0 Watchlist 505 290 246 2.6 1.4 1.2 Power 106 101 Roads and EPC 44 41 Iron and steel 35 34 Textile 27 5 Others 47 41 SMA 1 & 2 outstide the watchlist 32 23 Total stress loans 2,496 2,524 2,375 13.0 12.3 11.9 Total provision 1,026 1,184 1,187 5.3 5.8 6.0 NPL provision 968 1,126 1,136 Standard provision for stressed assets 46 46 39 Counter cyclical provision 13 13 13 Net stress loans 1,471 1,340 1,187 7.6 6.5 6.0 Provision coverage (%) 41 47 50

Source: Companies, Kotak Institutional Equities estimates

Exhibit 3: Slippages saw a dip qoq Break-up of slippages, March fiscal year-ends, 1QFY17-1QFY19 (` bn)

1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Total slippages 108 119 104 104 301 106 268 328 149 Corporate 37 69 101 78 84 45 218 290 37 Others (retail, agri, SME) 71 50 3 26 217 61 50 38 112

Source: Company, Kotak Institutional Equities

Exhibit 4: Watch-list of `246 bn (41% power) Break-up of watch-list, June 2018 % SMA 1 and 2, 23

Others, Rs47 bn Power, Rs106 bn

Textile, Rs27 bn

Iron and steel, Rs35 bn

Roads/EPC, Rs44 bn

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11 Banks State Bank of India

Exhibit 5: NPLs are high in key portfolios like mid and large corporate segment Sectoral break-up of NPLs, March fiscal year-ends, 2011-11QFY19 (%)

Gross NPLs (Rs bn) Gross NPLs (%) 2011 2012 2013 2014 2015 2016 2017 2018 1QFY19 2011 2012 2013 2014 2015 2016 2017 20181QFY19 Corporate 4 5 10 24 15 207 331 820 750 0.2 0.3 0.6 1.0 0.5 6.3 9.7 19.9 18.2 Mid-corporate 60 127 184 263 230 415 470 806 798 3.8 7.4 9.0 11.5 10.6 17.1 19.3 24.4 27.7 International 23 25 28 38 26 78 68 72 38 2.1 1.9 1.7 1.8 1.1 2.9 2.4 2.4 1.4 SME 78 119 145 155 164 170 159 257 251 6.5 7.1 7.9 8.6 9.0 7.8 7.0 9.5 9.1 Agri 45 78 101 107 107 87 75 212 218 4.8 9.0 9.3 8.9 8.9 6.9 5.5 11.2 11.6 Retail 44 42 43 30 25 25 22 67 73 2.6 2.3 2.0 1.3 0.9 0.8 0.5 1.2 1.3 Total 253 397 512 616 567 982 1,123 2,234 2,128 3.3 4.4 4.8 5.0 4.3 6.5 6.9 10.9 10.7

Notes: (a) Data from 1QFY18 onwards refer to the merged entity. (b) Gross NPL has been calculated based on outstanding NPL in each category to the reported advances. These ratios differ from those reported by the bank (exposures have been reclassified between various segments).

Source: Company, Kotak Institutional Equities

Exhibit 6: Slippages dropped to 3.2% in 1QFY19 Movement of NPLs, March fiscal year-ends, 1QFY17-1QFY19 (` bn)

1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Opening 982 1,015 1,058 1,082 1,779 1,881 1,861 1,991 2,234 Addition 108 119 104 104 301 106 268 328 149 Reductions 74 76 80 62 199 126 138 85 254 Closing Gross NPL 1,015 1,058 1,082 1,123 1,881 1,861 1,991 2,234 2,128 Provision coverage (without w/off) 43 43 43 48 43 47 49 50 53 Provision coverage (reported) 62 62 63 66 61 65 66 66 69 Fresh impairment (%) Slippages 3.0 3.3 2.9 2.6 6.4 2.2 5.3 6.8 3.2 Outstanding (%) Net NPL 4.1 4.2 4.2 3.7 6.0 5.4 5.6 5.7 5.3

Notes: (a) Data from 1QFY18 onwards refers to merged entity.

Source: Company, Kotak Institutional Equities

12 KOTAK INSTITUTIONAL EQUITIES RESEARCH State Bank of India Banks

Exhibit 7: GNPL dropped 20 bps qoq to 10.7% Gross NPLs, net NPLs and provision coverage ratio, March fiscal year-end, 2008-1QFY19 (%)

Gross NPLs (LHS) Net NPLs (RHS) Provision coverage (RHS) 12.5 65

10.0 58

7.5 51

5.0 44

2.5 37

0.0 30

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017 2018

1QFY19 Notes: (a) Data post 4QFY17 onwards refers to merged entity.

Source: Company, Kotak Institutional Equities

Exhibit 8: Detailed sector-wise exposure ad NPL ratios Break-up of SBI's NPLs across sectors, March fiscal year-ends, 2015-1QFY19

2015 2016 2017 2018 1QFY19 NPL NPL NPL NPL Total NPL NPL NPL NPL NPL NPL ratio ratio ratio ratio ratio loans (Rs bn) (%) (Rs bn) (%) (Rs bn) (%) (Rs bn) (%) (Rs bn) (Rs bn) (%) Coal and mining 11 8.9 21 15.4 19 15.0 17 19.6 79 14 17.2 Iron and steel 68 5.3 227 16.9 563 42.2 532 42.8 1,020 400 39.3 Metal and metal products 18 4.4 23 4.5 46 9.7 42 11.7 356 35 9.8 Engineering 32 7.6 56 12.6 87 23.1 120 31.5 378 116 30.6 of which electronics 11 8.1 8 6.9 4 6.4 33 49.7 71 33 46.6 Electricity 1 0.3 2 0.7 6 6.5 - - 82 - - Textiles 49 7.7 83 12.7 165 27.7 150 28.2 505 166 32.8 Cotton 27 6.7 48 13.8 114 32.2 113 31.9 335 113 33.8 Jute 2 29.5 1 10.9 0 8.1 1 12.8 5 1 12.4 Others 21 8.8 34 11.5 50 21.1 36 20.8 164 52 31.4 Sugar 3 3.2 7 6.7 7 7.9 7 9.2 69 9 12.4 Tea 0 3.6 1 13.7 2 28.5 2 23.0 12 2 15.0 Food processing 42 10.8 55 14.0 104 26.6 89 15.3 554 87 15.8 Vegetable oil and vanaspati 15 15.9 13 19.7 17 28.0 25 39.5 58 25 43.8 Tobacco/tobacco products 0 3.1 0 1.8 1 12.0 - 4.3 4 0 10.3 Paper/paper products 13 19.3 11 17.5 10 19.4 9 18.4 47 8 17.3 Rubber/rubber products 3 4.2 2 4.4 8 8.5 6 7.3 77 7 8.6 Chemicals/dyes/paints 42 5.1 50 6.3 36 5.2 38 4.2 703 45 6.5 Fertilizer 1 0.4 1 0.4 0 0.3 4 2.9 118 4 3.6 Petrochemicals 7 1.7 13 3.0 11 3.7 3 0.7 223 7 3.1 Drugs and pharmaceuticals 26 19.3 28 22.6 17 14.5 19 16.1 129 19 14.9 Others 8 6.6 9 7.3 8 4.7 12 6.4 233 15 6.4 Cement 4 4.0 7 7.6 24 21.3 11 11.7 90 11 12.2 Leather/leather products 1 3.5 1 3.2 1 4.4 3 10.2 28 3 11.8 Gems and jewelry 26 12.2 21 13.8 18 11.4 22 15.0 134 16 11.9 Construction 2 1.2 5 2.5 24 10.6 18 6.8 293 17 5.9 Petroleum 5 0.8 11 2.2 47 26.8 41 12.5 355 36 10.0 Automobile and trucks 1 0.7 2 1.4 38 24.7 36 27.4 141 37 26.3 Computer software 11 29.9 6 14.6 4 15.6 1 2.7 29 1 2.3 Infrastructure 90 3.5 150 5.1 233 8.8 582 20.8 2,778 573 20.6 Power 26 2.0 40 2.3 63 3.6 317 17.9 1,809 323 17.9 Telecom 3 0.8 6 2.0 3 1.1 86 39.6 200 84 42.2 Roads and ports 26 7.9 43 12.3 73 24.5 90 24.1 322 86 26.7 Others 34 6.3 62 9.6 95 23.2 89 20.1 447 79 17.8 Other industries 23 2.0 128 7.3 127 4.4 209 7.4 2,570 210 8.2 Total industry 459 4.8 882 8.2 1,586 14.7 1,961 17.7 10,360 1,817 17.5 Agriculture 231 8.8 203 7.0 178 6.0 212 11.3 1,881 218 11.6 Retail 53 1.8 25 0.8 17 0.5 67 1.2 5,591 73 1.3 Others 3 0.1 126 5.4 11 0.4 11 0.9 2,446 32 1.3 Total 746 4.3 1,235 6.4 1,792 9.0 2,251 10.9 20,279 2,141 10.6

Notes: (a) The above data is for the consolidated group of SBI.

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 13 Banks State Bank of India

Net advances muted at 4% yoy

 Overall loan growth (net) was muted at 4% yoy driven by low growth in the corporate book even as retail maintained robust growth. On gross basis, retail loans saw robust increase at 14% yoy. SME growth stood at 7% yoy. Overall growth in the corporate book continued to be low at 4% yoy (mid corporate loans dropped 3% yoy and top corporate loan increased 10% yoy). There was 1% yoy decline in the agriculture portfolio. The bank has moved some of its international loan exposure to its UK subsidiary which was recently formed by the bank.

 Retail segment constitutes ~28% of the loan book (up 40 bps qoq). Corporate book comprises 35% of loan book (down 100 bps qoq). The bank will look at maintaining the share of corporate book in 36-40% range based on the opportunities in the corporate segment.

 The bank remains cautious in lending to SME and the mid corporate portfolio after witnessing high levels of stress from these segments. Within retail, growth in the housing loans remains moderate at 13% yoy. Auto loans grew by 12% yoy. The growth in other retail loan picked pace, up 17% yoy.

 We are building 10% loan CAGR over FY20180-21E (growth to remain low at 7% yoy in FY2019E) in the medium term as we don’t think the growth will be sufficient to replace the repayment cycle of the loans taken in the previous capex cycle.

Exhibit 9: Loan growth flat qoq adjusted for impact of withdrawal of LoU/LoC and migration of business to UL subsidiary Credit growth, March fiscal year-ends, 2017-1QFY19 (` bn)

2017 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 YoY (%) QoQ (%) Domestic advances 16,663 16,076 16,005 16,082 17,464 17,234 7 (1) Commercial paper 602 592 541 548 585 553 (7) (5) Corporate bonds 633 578 635 664 791 803 39 2 Domestic including credit substitutes 17,898 17,246 17,182 17,294 18,840 18,591 8 (1) Overseas advances 2,862 2,791 2,919 2,998 3,020 3,243 16 7 Overall adjusted credit growth 20,760 20,036 20,101 20,291 21,860 21,833 9 (0)

Note: (a) 1QFY19 numbers hass been adjusted for impact of withdrawal of LOU/LOC and migration of business to UK subsidiaries.

Source: Company, Kotak Institutional Equities

Exhibit 10: Share of retail loans continue to inch upwards Loan growth and loan break-up, March fiscal year-ends, 2011-1QFY19 (%)

Loan growth (YoY %) Loan break-up (%) 2011 2012 2013 2014 2015 2016 2017 2018 1QFY19 2011 2012 2013 2014 2015 2016 2017 2018 1QFY19 Corporate and others 3.2 7.3 12.2 38.0 16.2 17.1 17.9 5.8 9.8 19.3 17.5 16.3 19.5 21.1 21.9 23.9 20.1 20.8 International 12.7 24.1 24.6 26.8 9.4 13.8 7.3 5.5 (4.4) 14.5 15.2 15.7 17.2 17.6 17.7 17.6 14.7 13.4 Mid-corporate 19.4 10.0 18.2 11.5 (4.7) 11.4 26.3 7.7 (2.6) 20.8 19.4 19.0 18.3 16.3 16.1 18.8 16.1 14.5 SME 22.8 41.3 8.9 (2.4) 0.9 20.0 22.0 1.6 7.2 15.8 18.9 17.1 14.4 13.6 14.4 16.3 13.2 13.8 Retail 22.2 10.8 14.9 13.3 14.6 20.0 47.2 13.5 14.1 21.7 20.4 19.4 19.1 20.4 21.7 29.6 26.7 28.1 Agriculture 21.2 (9.0) 25.8 10.7 (0.4) 4.7 52.5 (1.6) (0.5) 12.5 9.7 10.1 9.7 9.0 8.3 11.8 9.2 9.5 SME+Corporate NA NA NA NA NA NA NA 1.8 5.1 Total 18.0 18.1 20.7 15.4 7.3 13.0 7.8 25.9 5.5

Note: (a) Numbers post 4QFY17 onwards are for the merged entity.

Source: Company, Kotak Institutional Equities

14 KOTAK INSTITUTIONAL EQUITIES RESEARCH State Bank of India Banks

Exhibit 11: Other retail loans continue to ramp up rapidly Retail loans break-up, March fiscal year-ends, 1QFY17-1QFY19 (%) YoY 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 (%) Home loans 2,487 2,577 2,651 2,765 2,833 2,905 3,011 3,131 3,202 13 Share (%) 58 58 58 57 58 58 58 57 57 -55 bps Auto loans 495 515 551 576 595 619 651 664 669 12 Share (%) 11 12 12 12 12 12 12 12 12 -18 bps Other per segment loans 1,342 1,373 1,384 1,473 1,472 1,525 1,549 1,671 1,721 17 Xpress credit 601 787 31 Education 207 205 (1) Pension loan 138 175 27 Loan against FD 156 150 (4) Home top-up loans 153 211 38 Others including staff loans 217 193 (11) Total retail loans 4,325 4,465 4,587 4,814 4,900 5,048 5,210 5,466 5,591 14

Source: Company, Kotak Institutional Equities

Lower interest reversals and interest recognition from resolved NCLT account drive NIM improvement

Calculated NIM improved 20 bps qoq to 2.9% in 1QFY19. Margins improved on the back of improvement in yields in 1QFY19. Calculated yields increased 80 bps qoq to 7.7% on the back of interest recognition from one resolved account under NCLT list 1 and lower interest reversals qoq. Adjusting for the one time interest gains, NIM was up 40 bps qoq to 7.3%. Reported domestic NIM improved 30 bps qoq to 3%. There was additional benefit from cost of funds (reported) which declined 20 bps qoq to 5.2%. Incrementally margins will get support from improvement in CD ratio (~70% now), lower competition from alternative channels like CP, NCDs due to rising bond prices and lower slippages. There will, however, be marginal drag from change in loan mix towards higher share of low-yielding retail products. We forecast NIM (calculated) to improve 35 bps over FY2018-21E to 3%.

Reported CASA ratio at 45%

CASA ratio stood at 45% in 1QFY19 (up 70 bps yoy). SA growth improved to 9% yoy while CA dropped 1% yoy. The bank has benefitted from higher average balances in savings accounts post demonetization, greater traction in corporate salary packages and new current accounts. We forecast 7% CASA CAGR over FY2018-21E and stable CASA ratio of 45% in medium term.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 15 Banks State Bank of India

Exhibit 12: Credit/deposit at 68% Exhibit 13: Margins improved qoq owing to interest recognition March fiscal year-ends, 1QFY16-1QFY19 (%) from resolved NCLT account March fiscal year-ends, 1QFY16-1QFY19 (%) 85 85 4.0 81 83 82 3.7 79 79 77 78 3.4 76 71 3.2 3.2 73 3.1 3.0 3.0 3.1 2.9 72 2.9 69 2.8 68 2.8 2.7 69 69 2.8 2.7 69 2.7 2.6 65

2.5

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18 4QFY18

1QFY19

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18 4QFY18 Notes: 1QFY19 (a) Data from 1QFY17 onwards refers to merged entity. Notes: (a) Data post 4QFY17 refers to merged entity.

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

Exhibit 14: MCLR increased by ~10 bps in 1QFY19

Apr-16 May-16 Jun-16 Jul-16 Aug-16 Oct-16 Nov-16 Jan-17 Jun-17 Aug-17 Sep-17 Nov-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Overnight 8.95 8.90 8.90 8.90 8.85 8.80 8.65 7.75 7.75 7.75 7.75 7.70 7.70 7.70 7.80 7.80 7.80 7.90 7.90 7.90 One month 9.05 9.00 9.00 9.00 8.95 8.90 8.75 7.85 7.85 7.85 7.85 7.80 7.80 7.80 7.80 7.80 7.80 7.90 7.90 7.90 Three month 9.10 9.05 9.05 9.05 9.00 8.95 8.80 7.90 7.90 7.90 7.90 7.85 7.85 7.85 7.85 7.85 7.85 7.95 7.95 7.95 Six month 9.15 9.10 9.10 9.10 9.05 9.00 8.85 7.95 7.95 7.95 7.95 7.90 7.90 7.90 8.00 8.00 8.00 8.10 8.10 8.10 One year 9.20 9.15 9.15 9.15 9.10 9.05 8.90 8.00 8.00 8.00 8.00 7.95 7.95 7.95 8.15 8.15 8.15 8.25 8.25 8.25 Two years 9.30 9.25 9.25 9.25 9.20 9.15 9.00 8.10 8.10 8.10 8.10 8.05 8.05 8.05 8.25 8.25 8.25 8.35 8.35 8.35 Three years 9.35 9.30 9.30 9.30 9.25 9.20 9.05 8.15 8.15 8.15 8.15 8.10 8.10 8.10 8.35 8.35 8.35 8.45 8.45 8.45

Source: Kotak Institutional Equities , Company

Exhibit 15: SBI has increased deposit rates in the last quarter Change in term deposit rates for deposits less than `10 mn (%)

May-17 Aug-17 Sep-17 Oct-17 Nov-17 Jan-18 Mar-18 Apr-18 May-18 Jun-18 Aug-18 7-14 days 5.50 5.50 5.50 5.50 5.25 5.25 5.75 5.75 5.75 5.75 5.75 15-30days 5.50 5.50 5.50 5.50 5.25 5.25 5.75 5.75 5.75 5.75 5.75 31-45days 5.50 5.50 5.50 5.50 5.25 5.25 5.75 5.75 5.75 5.75 5.75 46 -90 days 6.50 6.50 6.50 6.50 6.25 6.25 6.25 6.25 6.25 6.25 6.25 91-120days 6.50 6.50 6.50 6.50 6.25 6.25 6.25 6.25 6.25 6.25 6.25 120-180 days 6.50 6.50 6.50 6.50 6.25 6.25 6.25 6.25 6.25 6.25 6.25 6.25- 6.25- 181-270 days 6.50 6.50 6.50 6.50 6.35 6.35 6.35-6.4 6.35-6.4 6.35 6.50 6.50 271 days-1year 6.50 6.50 6.50 6.50 6.50 6.50 6.40 6.40 6.40 6.40 6.40 1 year-2year 6.9-6.75 6.5-6.75 6.5-6.75 6.50 6.25 6.25 6.40 6.40 6.65 6.65 6.70 2 year-3year 6.25 6.25 6.25 6.25 6.00 6.00 6.50 6.60 6.65 6.65 6.70 3 years-5 years 6.25 6.25 6.25 6.25 6.00 6.00 6.50 6.70 6.70 6.70 6.80 5 years-8 years 6.25 6.25 6.25 6.25 6.00 6.00 6.50 6.75 6.75 6.75 6.85 8years-10 years 6.25 6.25 6.25 6.25 6.00 6.00 6.50 6.75 6.75 6.75 6.85

Source: Company, Kotak Institutional Equities

16 KOTAK INSTITUTIONAL EQUITIES RESEARCH State Bank of India Banks

Exhibit 16: CASA franchise remains stable CASA ratio break-up across banks, March fiscal year ends, 2008-1QFY19 (%) Current Savings 60

48

36 28.7 34.6 26.7 31.9 34.5 34.5 24 33.7 32.6 33.6 36.4 36.9 37.5

12 18.3 14.9 11.2 11.5 9.4 9.2 8.0 7.9 7.8 7.2 6.9 6.0

-

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017 2018

1QFY19 Note: (a) Data post 4QFY17 onwards refer to the merged entity.

Source: Company, Kotak Institutional Equities

Incremental provisions for gratuity liabilities and wage revision lead to elevated cost ratios

 Overall operating expenses growth was high at 20% yoy, led by 26% yoy growth in staff cost and 13% yoy rise in non-staff expenses. Bank has utilized the dispensation to spread out the impact of change in gratuity amounts over four quarters, i.e. `9 bn out of `36 bn impact has been booked in 1QFY19 and rest (`18 bn) will spread over next two quarters. Additionally the bank made provisions worth `10 bn towards arrears for wage revision effective from November 2017. Adjusting the impact of the above, employee expense growth was muted at 1% yoy.

 The bank will see the benefit of higher retirements and branch rationalization – there was 5% yoy decline in employee strength and 7% yoy decline in branches. The bank is benefitting from retirements at the higher salary levels and fresh recruitments at lower salaries. We think this would be a long term gains that they are likely to see considering the declining age of the bank’s employee base. Average age of staff at associate banks is lower than the parent bank.

 We believe that the cost growth is a sustainable advantage for the bank. The management has indicated that it would like to keep growth in physical and human infrastructure at minimum levels. Further, it would look to reduce other non-staff costs though it may not be as material as what we have seen recently. We expect 6% CAGR in operating expenses over FY2018-21E.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 17 Banks State Bank of India

Exhibit 17: Cost-to-income increased during the quarter Exhibit 18: Increase in share of retirement-related cost in Operating costs and cost-income ratio, March fiscal year-end, 1QFY19 1QFY16-1QFY19 Retirement costs and staff costs to total income, March fiscal year- Operating costs (LHS) end, 2010-1QFY19 (Rs bn) Cost-income (RHS) (%) Retirement costs to staff costs (RHS) 170 70 Staff costs to income (LHS) 40 35

136 62 58 35 28 56 102 51 51 54 54 50 30 21 49 51 49 68 45 46 46 25 14 44 42 34 38 20 7 0 30 16 26 20 16 23 18 29 27 18 26

15 -

2010

2011

2012

2013

2014

2015

2016

2017

2018

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18 4QFY18

1QFY19 1QFY19 Notes: (a) Data post 4QFY17 refers to merged entity. Notes: (a) Data post 4QFY17 refers to merged entity. Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities

Drop in treasury gains drags non-interest income

 Non-interest income dropped 17% yoy driven by decline in treasury gains (down 1.7X yoy). Growth across other categories such as miscellaneous income (up 2.7X yoy) and recovery in written-off accounts (2.4X yoy) supported overall other income. Fee income growth was muted at 2% yoy in 1QFY19.

 Within overall fee income, loan processing fees dropped 2% yoy, reflecting the pressure on corporate fees while miscellaneous fees (collections, locker, etc.) dropped 11% yoy. Cross-sell fee growth was ~31% yoy on low base.

Exhibit 19: Fee income share to other income has increased March fiscal year-ends, 1QFY17-1QFY19 (` mn) YoY 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 (%) Loan processing charges 5,610 6,640 6,910 13,320 6,540 6,370 6,270 13,600 6,410 (2) Commission on government business 7,610 7,070 6,610 7,760 7,810 7,850 8,400 10,030 9,310 19 Commission on LC/BG 8,860 8,900 10,220 10,410 4,070 4,460 6,180 6,360 5,920 45 Cross selling 1,180 2,230 2,370 3,360 2,880 3,780 4,080 5,570 3,760 31 Others 18,640 25,690 20,990 39,480 27,390 31,110 24,860 48,750 24,370 (11) Remittance, collection, transfer fees, etc 14,320 35,920 14,820 3 Locker rent, POS, CMP, etc 8,440 4,000 8,120 (4) Miscellaeneouss 4,630 8,830 1,430 (69) Net fee income 41,900 50,530 47,100 74,330 48,690 53,570 49,790 84,310 49,770 2 YoY (%) 16 6 6 13 2 -1399 bps (%) of other income 48 50 41 61 61 33 62 67 75 1369 bps

Note: 1) Treasury income in 2QFY18 had one time gain from stake sale in subsidiary thereby inflating other income.

Source: Company, Kotak Institutional Equities estimates

18 KOTAK INSTITUTIONAL EQUITIES RESEARCH State Bank of India Banks

Exhibit 20: Bancassurance business continues to ramp up in scale Fee income e from bancassurance business, March fiscal year-ends, 2011-2018 (` mn)

2011 2012 2013 2014 2015 2016 2017 2018 SBI Life 2,100 1,568 2,120 2,221 2,812 3,799 4,916 7,148 SBI general insurance 11 88 296 484 629 823 1,072 2,126 Others 99 28 30 21 8 18 11 17 Total 2,211 1,685 2,446 2,726 3,448 4,640 5,998 9,290

Source: Company, Kotak Institutional Equities

Other key highlights for the quarter

 Capital. CAR and CET-1 stood comfortable at 13.3% and 10.1%, respectively. Credit RWA to total advances dropped 1,035 bps yoy to 63.8%.

 SBI Cards. SBI Cards reported PAT improvement of 20% yoy to `1.6 bn in 1QFY19 (as per Ind-AS). It has a credit spends market share of 17%. RoE for the business was ~38% (down 440 bps yoy).

 SBI Fund Management. 1QFY19 PAT grew 33% yoy to `920 mn. AUM grew 38% yoy to `2.3 tn with market share of ~10%. Business had RoE of ~32% (down ~250 bps yoy).

 SBI Capital Markets. FY2018 PAT decreased 76% yoy to `210 mn, with RoE of 5.5%.

 SBI General Insurance. General insurance business reported 1QFY19 PAT of `3.5 bn, compared to `3.3 bn in 1QFY18. RoE dropped 70 bps yoy to 21.2%. VNB margin is strong at 17.1%.

Exhibit 21: SBI forecasts and valuation March fiscal year-ends, 2016-2021E Net int. income PAT EPS P/E ABVPS APBR RoE (Rs bn) (Rs bn) (Rs) (X) (Rs) (X) (%) 2016 569 100 13 23.8 121 1.8 7.3 2017 619 105 13 23.2 130 1.6 6.3 2018 749 (65) (7) (41.5) 126 1.7 (3.2) 2019E 852 69 8 39.6 155 1.4 3.1 2020E 954 330 37 8.2 212 1.0 13.6 2021E 1,122 470 53 5.8 276 0.8 16.7

Notes: (a) ABVPS: Reported book value of the standalone business less net NPLs at 70%. (b) Data from FY2018 is for the consolidated book. Note that the adjusted book value is reduced for revaluation reserves.

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 19 Banks State Bank of India

Exhibit 22: State Bank of India 1-year forward multiples Exhibit 23: SBI trading in line with peers Rolling APBR (including banking subsidiaries), August 2009 – August SBI trading premium to PSU Banks, August 2009 – August 2018 2018 3.0 1.8

2.4 1.6

1.8 1.4

1.2 1.2

1.0 0.6

0.8

0.0

Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Aug-14

Aug-15

Aug-16

Aug-17

Aug-18

Aug-03

Aug-04

Aug-05

Aug-06

Aug-07

Aug-08

Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Aug-14

Aug-15

Aug-16 Aug-17 Aug-18

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

Exhibit 24: SBI SoTP valuation based on FY2020E

Value per share SBI holding Value FY2020 FY2020 (%) (Rs mn) (Rs) Methodology adopted SBI 280 Residual income model Non banking subsidiaries and investments SBI Life 62% 438,737 57 Based on appraisal value SBI Cards 74% 72,900 9 20X FY2020E PAT SBI MF 63% 75,600 10 5% of AUM- Rs2.4 tn UTI MF 17% 13,600 2 4% of AUM- Rs2 tn SBI Caps 86% 30,300 4 10X FY2020E PAT SBI DFHI 72% 12,200 2 1X FY2020 networth Others 456,537 59 Non-bank subsidiaries 90 Total value of the bank 370

Source: Kotak Institutional Equities estimates

Exhibit 25: Key changes to estimates March fiscal year-ends, 2019-21E (%)

New estimates Old estimates % change 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E Net interest income 851,552 954,078 1,122,063 865,998 945,044 1,097,730 (1.7) 1.0 2.2 Loan growth 7.0 11.1 11.1 7.0 11.1 11.1 -1 bps 0 bps 0 bps NIM (%) 2.7 2.8 3.0 2.7 2.8 2.9 -4 bps 3 bps 11 bps Loan loss provisions 400,492 284,040 267,019 400,491 284,040 267,019 0.0 (0.0) 0.0 Other income 372,749 489,859 542,547 449,953 491,486 536,779 (17.2) (0.3) 1.1 Fee income 257,564 283,321 311,653 264,723 291,196 320,315 (2.7) (2.7) (2.7) Treasury income 20,000 95,000 100,000 90,000 95,000 100,000 (77.8) - - Operating expenses 653,780 686,817 723,514 638,568 670,625 706,298 2.4 2.4 2.4 Employee expenses 377,739 388,920 400,432 361,316 372,011 383,022 4.5 4.5 4.5 PBT 98,030 471,060 672,037 238,891 479,845 659,151 (59.0) (1.8) 2.0 Tax 29,409 141,318 201,611 71,667 143,953 197,745 (59.0) (1.8) 2.0 Net profit 68,621 329,742 470,426 167,224 335,891 461,406 (59.0) (1.8) 2.0 PBT - treasury+LLP 548,522 660,100 839,057 585,382 668,885 826,170 (6.3) (1.3) 1.6

Source: Company, Kotak Institutional Equities

20 KOTAK INSTITUTIONAL EQUITIES RESEARCH State Bank of India Banks

Exhibit 26: SBI - growth rates and key ratios March fiscal year-ends, 2016-2021E (%)

2016 2017 2018 2019E 2020E 2021E Growth rates (%) Net loan 12.6 7.3 23.2 7.0 11.1 11.1 Total Asset 10.3 19.8 27.7 2.0 8.3 11.7 Deposits 9.8 18.1 32.4 0.2 7.1 11.1 Current 12.2 9.0 24.8 1.6 8.6 12.6 Savings 13.4 27.0 33.6 0.4 7.3 11.4 Fixed 7.4 14.1 32.6 (0.2) 6.7 10.7 Net interest income 3.4 8.8 21.0 13.8 12.0 17.6 Loan loss provisions 50.7 14.7 93.0 (40.3) (29.1) (6.0) Total other income 24.7 25.9 25.8 (16.4) 31.4 10.8 Net fee income 9.4 12.9 41.3 12.0 10.0 10.0 Net capital gains 42.9 108.0 24.9 (85.1) 375.0 5.3 Net exchange gains 9.1 13.1 4.0 8.0 10.0 10.0 Operating expenses 8.0 11.2 29.0 9.1 5.1 5.3 Employee expenses 6.7 5.5 25.3 13.9 3.0 3.0 Key ratios (%) Yield on average earning assets 8.2 7.7 7.8 7.6 7.8 7.9 Yield on average loans 8.4 7.9 8.1 7.9 8.1 8.3 Yield on average investments 9.1 8.0 7.9 7.5 7.5 7.5 Average cost of funds 5.7 5.2 5.3 5.0 5.1 5.1 Interest on deposits 6.0 5.6 5.7 5.3 5.4 5.4 Difference 2.5 2.5 2.5 2.5 2.7 2.8 Net interest income/earning assets 2.8 2.7 2.6 2.7 2.8 3.0 New provisions/average net loans 2.2 2.3 3.8 2.0 1.3 1.1 Interest income/total income 66.9 63.6 62.7 69.6 66.1 67.4 Fee income to total income 17.0 16.7 19.3 21.0 19.6 18.7 Operating expenses/total income 49.1 47.8 50.2 53.4 47.6 43.5 Tax rate 27.8 29.4 57.8 30.0 30.0 30.0 Dividend payout ratio 20.3 20.1 - 2.6 1.1 1.1 Share of deposits Current 8.1 7.5 7.0 7.1 7.2 7.3 Fixed 57.4 55.4 55.5 55.3 55.1 54.9 Savings 34.5 37.1 37.5 37.6 37.7 37.8 Loans-to-deposit ratio 84.6 76.8 71.5 76.4 79.3 79.3 Equity/assets (EoY) 6.4 7.0 6.3 6.4 6.8 7.2 Asset quality trends (%) Gross NPL (%) 6.5 6.8 10.7 9.1 7.0 5.5 Net NPL (%) 3.8 3.7 5.7 4.1 2.6 1.9 Slippages (%) 4.9 2.7 6.0 2.5 1.0 1.0 Provision coverage (%, ex write-off) 43.2 48.1 50.4 58.3 65.5 68.3 Dupont analysis (%) Net interest income 2.6 2.5 2.4 2.4 2.6 2.8 Loan loss provisions 1.4 1.4 2.2 1.1 0.8 0.7 Net other income 1.3 1.4 1.4 1.1 1.3 1.3 Operating expenses 1.9 1.9 1.9 1.9 1.9 1.8 Invt. depreciation 0.0 0.0 0.3 0.2 - - (1- tax rate) 72.2 70.6 42.2 70.0 70.0 70.0 RoA 0.5 0.4 (0.2) 0.2 0.9 1.2 Average assets/average equity 15.8 14.9 15.1 15.7 15.2 14.3 RoE 7.3 6.3 (3.2) 3.1 13.6 16.7

Notes: (a) Data from FY2018 is the consolidated performance of the bank.

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 21 Banks State Bank of India

Exhibit 27: SBI –P&L and balance sheet March fiscal year-ends, 2016-2021E (` mn) 2016 2017 2018 2019E 2020E 2021E Income statement Total interest income 1,636,853 1,755,182 2,204,993 2,417,594 2,611,817 2,929,308 Loans 1,156,660 1,195,100 1,413,632 1,576,054 1,776,604 2,015,339 Investments 423,040 482,053 703,376 749,605 726,546 796,966 Total interest expense 1,068,035 1,136,585 1,456,456 1,566,041 1,657,739 1,807,245 Net interest income 568,818 618,597 748,537 851,552 954,078 1,122,063 Loan loss provisions 302,907 347,463 670,766 400,492 284,040 267,019 Net interest income (after prov.) 265,911 271,134 77,771 451,061 670,038 855,044 Other income 281,584 354,609 446,007 372,749 489,859 542,547 Net fee income 144,160 162,766 229,968 257,564 283,321 311,653 Net capital gains 51,688 107,496 134,233 20,000 95,000 100,000 Net exchange gains 21,123 23,884 24,846 26,834 29,517 32,469 Operating expenses 417,824 464,728 599,434 653,780 686,817 723,514 Employee expenses 251,138 264,893 331,787 377,739 388,920 400,432 Depreciation on investments 1,496 2,984 80,876 70,000 - - Other Provisions (9,565) 9,480 (1,250) 2,000 2,020 2,040 Pretax income 137,741 148,552 (155,282) 98,030 471,060 672,037 Tax provisions 38,234 43,711 (89,808) 29,409 141,318 201,611 Net Profit 99,507 104,841 (65,475) 68,621 329,742 470,426 % growth (24.0) 5.4 (162.5) (204.8) 380.5 42.7 PBT - Treasury + Provisions 380,890 400,983 460,876 550,522 662,120 841,097 % growth 7.9 5.3 14.9 19.5 20.3 27.0

Balance sheet Cash and bank balance 1,674,677 1,719,716 1,918,986 2,137,976 2,283,642 2,510,889 Cash 150,809 120,303 154,724 185,669 222,803 267,363 Balance with RBI 1,145,484 1,159,673 1,349,248 1,537,292 1,645,825 1,828,511 Balance with banks 31,239 69,339 16,630 16,630 16,630 16,630 Net value of investments 4,770,973 7,659,896 10,609,867 9,633,316 9,987,143 11,535,023 Govt. and other securities 3,603,989 5,752,387 8,483,958 7,507,407 7,861,234 9,409,114 Shares 43,279 54,457 105,167 105,167 105,167 105,167 Debentures and bonds 411,268 598,474 779,629 779,629 779,629 779,629 Net loans and advances 14,637,004 15,710,784 19,348,802 20,700,350 22,998,088 25,550,876 Fixed assets 103,893 429,189 399,923 339,310 279,913 221,764 Other assets 1,404,084 1,540,077 2,269,942 2,428,838 2,598,857 2,780,777 Total assets 22,590,630 27,059,663 34,547,520 35,239,789 38,147,643 42,599,329

Deposits 17,307,224 20,447,514 27,063,433 27,105,742 29,019,407 32,240,561 Current 1,398,070 1,524,211 1,901,739 1,931,818 2,097,223 2,362,256 Fixed 9,931,693 11,333,689 15,023,949 14,993,225 15,993,708 17,704,528 Savings 5,977,461 7,589,614 10,137,745 10,180,699 10,928,476 12,173,777 Borrowings and bills payable 2,426,290 3,443,605 3,887,598 4,260,244 4,686,471 5,174,083 Other liabilities 1,414,371 1,285,683 1,405,203 1,615,984 1,858,381 2,137,139 Total liabilities 21,147,886 25,176,802 32,356,234 32,981,970 35,564,259 39,551,783 Total shareholders' equity 1,442,744 1,882,861 2,191,286 2,257,819 2,583,384 3,047,546

Notes: (a) Data from FY2018 is the consolidated performance of the bank

Source: Company, Kotak Institutional Equities estimates

22 KOTAK INSTITUTIONAL EQUITIES RESEARCH ADD Coal India (COAL) Metals & Mining AUGUST 13, 2018 RESULT Coverage view: Attractive

Strong performance. Coal India reported strong earnings performance with PAT of Price (`): 276 `38 bn (+61% yoy) handsomely beating our estimates of `30 bn. The performance is Target price (`): 326 supported by 11.7% yoy growth in volumes and 9.9% yoy growth in blended BSE-30: 37,869 realizations, despite the 19% yoy growth in wage cost (1QFY18 had no wage provisions). CIL’s earnings performance over the past two years was bogged down by wage provisions without compensating for price increases. Maintain ADD rating with a target price of `326/share.

Company data and valuation summary Coal India Stock data Forecasts/Valuations 2018 2019E 2020E 52-week range (Rs) (high,low) 317-234 EPS (Rs) 11.3 26.9 27.7 Market Cap. (Rs bn) 1,713.2 EPS growth (%) (24.2) 138.2 3.0 Shareholding pattern (%) P/E (X) 24.4 10.2 9.9 Promoters 78.5 Sales (Rs bn) 823.9 947.8 1,020.3 FIIs 5.5 Net profits (Rs bn) 70.2 167.2 172.2 MFs 1.6 EBITDA (Rs bn) 77.7 216.9 234.5 Price performance (%) 1M 3M 12M EV/EBITDA (X) 18.2 6.6 6.2 Absolute (0.9) 2.5 15.5 ROE (%) 26.7 66.1 66.4 Rel. to BSE-30 (5.1) (4.6) (3.8) Div. Yield (%) 6.0 7.2 9.1

All guns blazing: double-digit growth in volumes and realizations, contained wage cost

CIL has had a strong earnings show with double-digit growth in volumes (+11.7% yoy) and realizations (+9.9% yoy) leading to 23% yoy growth in revenues. Volume growth for the quarter stood at 11.7% yoy, while blended realizations improved 9.9% yoy to `1,472/ton. The improvement in realizations is visible across raw coal realizations (+9.3% yoy) as well as e-auction realizations (+51% yoy). Earnings performance should also be seen in the context of 19% yoy growth in employee cost to `96 bn. We note the provision for employee wage revision commenced from 2QFY18. The sequential drop in employee cost (and improvement in overall earnings) should be seen in the context of one-time provision for gratuities payment of `70 bn in 4QFY18.

Other income includes the levy of evacuation charge at `50/ton. The earnings performance was also aided by all-round cost containment with a reduction in power and fuel as well as stores consumption. We would seek clarity on composite production (coal + overburden) to get a better sense of the lower cost of production.

Strong volume trends continue in July 2018 as well, case for volume upgrade

Coal India reported 8.8% yoy growth in coal dispatches at 48.3 mn tons in July 2018 with all subsidiaries reporting positive volume growth, despite a strong base of 44.3 mn tons (+6.9% yoy) in July 2017. Rising power demand and improving utilizations could keep coal volumes healthy, with YTD volume growth of 11% tracking well ahead of our estimate of 3% growth.

Improved pricing and volume profile augurs well for earnings Murtuza Arsiwalla

Coal India’s earnings, which have been plagued by (1) increase in wage revisions and (2) grade slippages for coal, will likely see an improvement in realizations on the back of an increase in Samrat Verma notified coal prices as well as evacuation charge of ₹50/ton (in December 2017). Strong e- auction realizations coupled with improved power demand, will also aid topline performance. We maintain our rating ADD with a target price of `326/share. Our positive stance is backed by continued improvement in top-line performance, and limited cost-side shocks hereon. We will review our estimates post the analyst meet.

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

Exhibit 1: Strong volume growth (+11.7% yoy) coupled with better realizations (+9.9% yoy) aided earnings performance Interim financials of Coal India Ltd, March fiscal year-ends (Rs mn)

Growth (%) 1QFY19 1QFY19E 1QFY18 4QFY18 KIE yoy qoq FY2019 FY2018 (% chg) Profit & Loss Net sales 225,978 224,498 184,043 251,087 0.7 22.8 (10.0) 923,280 817,000 13.0 Accretion in stock (11,635) (10,783) (8,817) 13,785 7.9 32.0 (184.4) (33) (16,795) Employee expense (95,982) (95,848) (80,716) (166,539) 0.1 18.9 (42.4) (363,651) (426,336) Social overhead (375) (1,142) (1,104) (2,010) (67.2) (66.1) (81.4) (5,006) (4,838) Power & Fuel (5,940) (7,426) (6,178) (6,310) (20.0) (3.8) (5.9) (30,247) (25,164) Contractual expense (31,761) (33,224) (30,980) (38,954) (4.4) 2.5 (18.5) (143,035) (127,670) OBR adjustment (8,835) 903 1,069 (24,847) (1,078.3) (926.7) (64.4) (28,379) (33,583) Consumption of stores and spares (15,739) (21,498) (14,806) (21,481) (26.8) 6.3 (26.7) (84,200) (68,296) Other (15,018) (18,836) (14,866) (20,782) (20.3) 1.0 (27.7) (76,376) (60,281) EBITDA 40,694 36,644 27,646 (16,050) 11.1 47.2 (353.5) 192,353 54,039 256.0 Depreciation (7,452) (9,315) (6,699) (9,308) (32,567) (30,664) Interest (1,103) (1,384) (1,210) (1,127) (5,297) (4,318) Other income 28,731 19,194 19,640 38,006 49.7 46.3 (24.4) 86,205 88,208 PBT 60,869 45,139 39,377 11,521 34.8 54.6 428.3 240,695 107,264 124.4 Tax (23,025) (14,896) (15,860) 1,420 (73,456) (37,067) PAT 37,843 30,243 23,517 12,942 25.1 60.9 192.4 167,239 70,198 138.2 Extraordinary — — (5) — — — Reported PAT 37,843 30,243 23,512 12,942 25.1 61.0 192.4 167,239 70,198 138.2 EPS (Rs/share) 6.1 4.9 3.8 2.1 26.5 11.1 Ratios (%) EBITDA margins (%) 18.0 16.3 15.0 (6.4) 20.8 6.6 Effective tax rate (%) 37.8 33.0 40.3 (12.3) 30.5 34.6 Operational data Production (mn tons) 137 137 119 183 (0.0) 15.2 (25.4) 602 567 6.2 Sale (mn tons) 153 153 137 159 0.0 11.7 (3.4) 599 580 3.2 Average realization (Rs/ton) 1,472 1,463 1,339 1,549 0.7 9.9 (4.9) 1,541 1,408 9.5

Source: Company, Kotak Institutional Equities estimates

Key highlights of 1QFY19 results

 Volumes grow 11.7% yoy. Coal India reported 1QFY19 sales volumes of 153 mn tons, a growth of 11.7% yoy. We currently factor 3% yoy growth for full-year FY2019, though we highlight that 11% YTD growth (upto July 2018) makes a case for upgrade in our volume estimates. We do highlight that improving power demand as well as low inventory levels at power plants pose an upside risk to volume growth targets. Further, rising prices of imported coal as well as ban on usage of petcoke for captive power plants could also see improved off-take from industrial users.

 Blended realizations improve 10% yoy. CIL reported blended realizations of `1,472/ton in 1QFY19 (+9.9% yoy) compared to `1,339/ton in 1QFY18. Further, the improvement in realizations excludes the `7.6 bn (`50/ton) accounted for evacuation facility charge under other operating income. FSA realizations improved 9.3% yoy to `1,313/ton. However, a strong 51% yoy improvement in e-auction prices to `2,399/ton was the key contributor to improved earnings performance.

24 KOTAK INSTITUTIONAL EQUITIES RESEARCH Coal India Metals & Mining

Exhibit 2: 51% yoy increase in e-auction prices help improve blended realizations for the quarter Segment-wise sales and realizations, March fiscal year-ends (mn tons, Rs/ton)

Growth (%) 1QFY19 1QFY18 4QFY18 (yoy) (qoq) FY2019 FY2018 Growth (%) Volumes (mn tons) Production 137 119 183 15.2 (25.4) 602 567 6.2 Sales 153 137 159 11.7 (3.4) 599 580 3.2 Sale mix Raw coal Volumes (mn tons) 130 107 126 21.7 3.2 485 460 5.5 Realization (Rs/ton) 1,313 1,201 1,364 9.3 (3.7) 1,389 1,257 10.6 Revenue (Rs mn) 171,160 128,700 177,360 33.0 (3.5) 674,472 578,080 16.7 E-auction Volumes (mn tons) 19 27 29 (28.8) (33.7) 99 106 (7.2) Realization (Rs/ton) 2,399 1,586 2,112 51.3 13.6 2,038 1,839 10.8 Revenue (Rs mn) 46,570 43,250 61,810 7.7 (24.7) 200,838 195,310 2.8 Beneficiated Volumes (mn tons) 3 3 3 (5.9) (18.3) 15 11 32.5 Realization (Rs/ton) 2,427 3,649 2,923 (33.5) (17.0) 3,160 3,023 4.5 Revenue (Rs mn) 6,190 9,890 9,120 (37.4) (32.1) 47,971 34,640 38.5 Total revenue 225,980 184,340 251,090 22.6 (10.0) 923,280 808,030 14.3

Source: Kotak Institutional Equities estimates

Exhibit 3: Coal India reported 8.8% yoy growth in dispatches in July 2018 Subsidiary-wise dispatch volumes, March fiscal year-ends (mn tons)

Growth (%) YTD Quarterly Jul-18 Jul-17 Jul-18 yoy mom 2019 2018 (% chg.) 1QFY19 1QFY18 (% chg.) Dispatches ECL 3.58 2.91 3.78 23.0 (5.3) 15.84 12.46 27.1 12.26 9.55 28.4 BCCL 3.01 2.49 2.83 20.9 6.4 12.09 10.29 17.5 9.08 7.80 16.4 CCL 4.86 4.84 5.30 0.4 (8.3) 22.55 20.80 8.4 17.69 15.96 10.8 NCL 8.40 7.27 7.78 15.5 8.0 32.75 29.04 12.8 24.35 21.77 11.9 WCL 3.92 3.87 4.56 1.3 (14.0) 17.53 15.01 16.8 13.61 11.14 22.2 SECL 13.05 11.93 13.71 9.4 (4.8) 53.65 49.51 8.4 40.60 37.58 8.0 MCL 11.40 11.09 11.60 2.8 (1.7) 47.09 44.45 5.9 35.69 33.36 7.0 NEC 0.03 0.03 0.04 — (25.0) 0.20 0.24 (16.7) 0.17 0.21 (19.0) CIL 48.25 44.33 49.60 8.8 (2.7) 201.70 181.70 11.0 153.45 137.37 11.7

Production ECL 3.09 2.39 3.39 29.3 (8.8) 14.09 11.26 25.1 11.00 8.87 24.0 BCCL 2.33 1.97 2.30 18.3 1.3 10.01 8.81 13.6 7.68 6.84 12.3 CCL 3.50 3.11 3.74 12.5 (6.4) 14.94 13.29 12.4 11.44 10.18 12.4 NCL 8.07 6.91 8.19 16.8 (1.5) 32.66 28.10 16.2 24.59 21.19 16.0 WCL 1.67 2.05 2.74 (18.5) (39.1) 11.31 10.17 11.2 9.64 8.12 18.7 SECL 11.73 9.95 13.15 17.9 (10.8) 51.68 41.66 24.1 39.95 31.71 26.0 MCL 10.16 10.24 11.36 (0.8) (10.6) 42.61 42.09 1.2 32.45 31.85 1.9 NEC 0.02 0.02 0.03 — (23.1) 0.14 0.08 74.1 0.12 0.06 98.4 CIL 40.57 36.64 44.90 10.7 (9.6) 177.44 155.48 14.1 136.87 118.84 15.2

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 25 Metals & Mining Coal India

Exhibit 4: Our earnings assumptions factor 3% yoy growth in volumes for FY2019 Key operational and financial assumptions, March fiscal year-ends, 2016-21E (Rs mn)

Growth (%) 2016 2017 2018 2019E 2020E 2021E 2016 2017 2018 2019E 2020E 2021E Volumes (mn tons) 534 543 580 599 628 649 9 2 7 3 5 3 Realization (Rs/ton) 1,415 1,389 1,408 1,541 1,583 1,623 (4) (2) 1 9 3 3 Revenue (Rs mn) 756,443 754,666 817,000 923,280 994,627 1,052,762 5 (0) 8 13 8 6 Employee costs (296,598) (335,143) (426,336) (363,651) (382,157) (402,440) (1) 13 27 (15) 5 5 Overburden (28,114) (26,722) (33,583) (28,379) (30,707) (33,106) (27) (5) 26 (15) 8 8 EBITDA 181,791 122,242 77,738 216,873 234,472 240,389 5 (33) (36) 179 8 3 PAT 142,329 92,678 70,198 167,239 172,220 173,344 4 (35) (24) 138 3 1

EBITDA margins 24 16 10 23 24 23 0 (33) (41) 147 0 (3) EBITDA (Rs/ton) 340 225 134 362 373 371 (4) (34) (40) 170 3 (1)

Source: Company, Kotak Institutional Equities estimates

Exhibit 5: SOTP value of Rs326/share

2020E EBITDA 234 Adj EBITDA (ex OBR adjustment) 265 PAT 172 Adjusted PAT (ex OBR adjustment and interest income) 184 EPS 28 Adj EPS (ex OBR adjustment and interest income) 30 P/E on core earnings 10 Value of core business (Rs/share) 281 Net cash (Rs bn) 263 Net cash (Rs/share) 42 Target price (Rs/share) 326 Notes: (1) Adjusted EBITDA is calculated after removing the effect OBR adjustment. (2) Adjusted PAT is calculated after removing the effect of OBR adjustment and interest income net of taxes.

Source: Kotak Institutional Equities estimates

26 KOTAK INSTITUTIONAL EQUITIES RESEARCH Coal India Metals & Mining

Exhibit 6: Profit model, balance sheet, cash model of Coal India, March fiscal year ends, 2016-21E (Rs mn)

2016 2017 2018 2019E 2020E 2021E Profit model Net sales 756,443 754,666 817,000 923,280 994,627 1,052,762 Transport and loading recovery 22,386 27,382 23,700 24,520 25,759 26,599 Total income 793,271 794,430 823,905 947,767 1,020,332 1,079,306 EBITDA 181,791 122,242 77,738 216,873 234,472 240,389 Interest income 48,042 37,306 31,633 18,278 14,245 14,870 Other Income (ex transport, interest) 10,515 18,008 32,875 43,407 43,407 43,407 Interest expense (207) (4,117) (4,318) (5,297) (5,297) (5,297) Depreciation (24,664) (29,101) (30,664) (32,567) (36,619) (39,545) Pretax profits 215,476 144,337 107,264 240,695 250,207 253,824 Tax (73,148) (51,660) (37,067) (73,456) (77,987) (80,480) Net income 142,329 92,678 70,198 167,239 172,220 173,344 Extraordinary items 415 (18) — — — — Reported profit 142,743 92,660 70,198 167,239 172,220 173,344 Earnings per share (Rs) 23 15 11 27 28 28 Balance sheet Paid-up common stock 63,164 62,074 62,074 62,074 62,074 62,074 Total shareholders' equity 338,976 245,268 198,466 220,464 211,133 202,926 Minority interest 1,048 3,459 3,625 3,625 3,625 3,625 Total borrowings 11,988 30,078 15,309 15,309 15,309 15,309 Shifting and rehab fund 31,777 38,197 43,666 43,666 43,666 43,666 Total liabilities and equity 383,788 317,002 261,065 283,064 273,733 265,525 Net fixed assets 183,608 220,900 275,774 292,861 325,640 316,939 Capital work-in progress 58,942 103,078 102,864 139,849 158,724 167,114 Investments 29,019 14,829 15,086 15,086 15,086 15,086 Cash 383,128 312,298 314,751 310,121 278,617 307,434 Current assets (excl. cash) 427,055 482,357 512,892 544,841 564,843 576,208 Current liabilities and provisions 718,408 843,787 1,013,852 1,075,170 1,126,483 1,177,245 Deferred tax asset 20,445 27,328 53,551 55,476 57,304 59,989 Misc. expenditure — — — — — — Total assets 383,788 317,002 261,065 283,064 273,733 265,525 Free cash flow Operating cash flow, excl. working capital 165,021 121,761 100,862 197,880 207,011 210,204 Working capital changes (62,730) 70,077 139,530 29,369 31,310 39,397 Capital expenditure (43,450) 162,491 (85,324) (86,638) (88,274) (39,233) Investments (885) 14,191 (258) — — — Free cash flow 57,957 368,519 154,810 140,612 150,047 210,368 Ratios Net debt/equity (%) (109) (115) (151) (134) (125) (144) Return on equity (%) 38 32 32 80 80 84 Book value per share (Rs) 54 40 32 36 34 33 ROCE (%) 39 34 39 89 89 93

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 27 BUY GAIL (India) (GAIL) Energy AUGUST 13, 2018 RESULT Coverage view: Attractive Boon from bane. GAIL’s 1QFY19 results were well above our expectations, boosted by Price (`): 363 robust performance of the gas marketing and petrochemical businesses, both benefiting from relatively low-cost US LNG. We raise estimates by 4-5%, even while assuming Target price (`): 440 moderation of current LNG arbitrage. We reiterate BUY with a revised TP of `440 (`410 BSE-30: 37,869 earlier), expecting benefits from (1) higher regulated tariffs, (2) favorable crude and LNG prices and (3) inclusion of gas under GST, a major positive. Company data and valuation summary GAIL (India) Stock data Forecasts/Valuations 2018 2019E 2020E 52-week range (Rs) (high,low) 392-267 EPS (Rs) 20.4 26.1 28.7 Market Cap. (Rs bn) 818.5 EPS growth (%) 21.8 27.8 10.0 Shareholding pattern (%) P/E (X) 17.8 13.9 12.6 Promoters 53.6 Sales (Rs bn) 537.4 750.0 823.6 FIIs 18.0 Net profits (Rs bn) 46.0 58.9 64.7 MFs 12.2 EBITDA (Rs bn) 76.4 99.2 108.3 Price performance (%) 1M 3M 12M EV/EBITDA (X) 11.1 8.7 8.0 Absolute (0.3) 6.8 32.6 ROE (%) 11.7 14.0 14.1 Rel. to BSE-30 (4.6) (0.6) 10.4 Div. Yield (%) 2.0 2.3 2.6

Results boosted by strong gas marketing and petchem profits amid favorable US LNG prices GAIL reported a 29% jump in EBITDA to `22.4 bn in 1QFY19 driven by (1) higher contribution from gas marketing reflecting higher-than-expected margins on the US LNG volumes and (2) improvement in petchem profitability amid higher realizations and lower input gas cost. Adjusted net income increased by 45% yoy to `12.6 bn (EPS of `5.6), 23% above our estimate.  Steady gas transmission EBIT. Gas transmission revenues increased by 3% qoq to `13.1 bn, led by a 1% sequential increase in volumes to 107 mcm/d and blended tariffs to `1.35/scm. EBIT declined 1% qoq to `7 bn, reflecting modestly higher operating costs and depreciation.  Sharply higher gas marketing EBIT post ramp-up of US LNG supply. Gas marketing EBIT increased sharply to `5.5 bn as compared to a quarterly run-rate of ~`3 bn, reflecting higher margins for US LNG volumes. Higher margins reflect a combination of (1) mark-ups on GAIL’s well-hedged overseas LNG placement and (2) positive arbitrage between US LNG and crude-linked contracts amid rising oil prices. Gas sales increased to 97.2 mcm/d.  Robust improvement in petchem EBIT. Petchem EBIT increased sharply to `2.1 bn, well above our expectations, with a 13% qoq decline in volumes to 166 ktons more than offset by a 13% qoq increase in realizations to `97/kg and sequential decline in input LNG prices. The company attributed lower volumes to the unplanned diversion of gas to fertilizer units and higher profitability to a reduction in discount on its realizations for PATA II volumes.  Expected sequential decline in LPG/LHC EBIT. LPG/LHC segment EBIT declined 19% qoq to `5.3 bn (flat yoy), amid 8% lower realizations and a 3% fall in volumes to 314 ktons. Favorable crude/LNG prices, higher regulated tariffs and inclusion of gas in GST augurs well Elevated spot crude/LNG prices in the near term may continue to boost profits for GAIL’s LNG portfolio. The imminent upward revision in regulated tariffs for GAIL’s key pipelines and adoption of unified tariffs will structurally improve contribution from gas transmission business. The potential inclusion of gas under GST will enhance profitability for the LPG, petchem and transmission segments by removal of irrecoverable state VAT on input gas, which may Tarun Lakhotia incrementally contribute ~Rs2.4 (+8%) to GAIL’s FY2020E EPS. Raise estimates by 4-5%; reiterate BUY with the stock trading at 12X core-business EPS Akshay Bhor We raise EPS to `26.1 (+4%) in FY2019E and `28.7 (+5%) in FY2020E factoring in (1) higher petchem contribution, (2) higher gas marketing margins and (3) other minor changes. Our reverse valuation exercise implies that the stock is trading at attractive 12X core-business EPS on an FY2019 basis, adjusted for the value of investments—our FY2019 EPS does not include any material increase in regulated tariffs or any benefits from the inclusion of gas under GST.

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

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

(% chg.) yoy 1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 FY2019E FY2018 (% chg.) Sales 172,986 153,621 114,069 155,111 12.6 51.7 11.5 749,978 537,419 39.6 Total expenditure (150,550) (135,059) (96,675) (138,158) 11.5 55.7 9.0 (650,761) (461,016) 41.2 (Increase)/decrease in stock 4,664 — 1,940 509 — 341 Purchase (130,223) (107,177) (78,684) (111,471) 21.5 65.5 16.8 (536,993) (367,586) 46.1 Raw material (9,621) (12,490) (7,334) (10,533) (23.0) 31.2 (8.7) (51,560) (37,124) 38.9 Staff cost (3,795) (3,909) (3,653) (3,527) (2.9) 3.9 7.6 (15,637) (14,614) 7.0 Other expenditure (11,575) (11,483) (8,943) (13,135) 0.8 29.4 (11.9) (46,572) (42,033) 10.8 EBITDA 22,436 18,562 17,394 16,953 20.9 29.0 32.3 99,217 76,403 29.9 Other income 1,196 1,525 1,158 2,756 (21.6) 3.3 (56.6) 10,172 9,870 3.1 Interest (441) (805) (1,014) (333) (45.2) (56.5) 32.4 (3,548) (2,751) 29.0 Depreciation (3,789) (3,633) (3,451) (3,608) 4.3 9.8 5.0 (16,348) (14,151) 15.5 Pretax profits 19,403 15,649 14,088 15,767 24.0 37.7 23.1 89,494 69,371 29.0 Current tax (4,945) (4,458) (3,392) (3,579) (26,896) (16,333) Deferred tax (1,865) (956) (2,039) (2,256) (3,733) (7,066) Extraordinaries — — 1,600 277 — 213 Net income 12,593 10,234 10,256 10,209 23.0 22.8 23.3 58,865 46,184 27.5 Adjusted net income 12,593 10,234 8,657 9,932 23.0 45.5 26.8 58,865 45,971 28.0 Adjusted EPS (Rs) 5.6 4.5 3.8 4.4 26.1 20.4 Other comprehensive income (6,716) (8,534) (5,111) 0 (3,366) Total comprehensive income 5,877 1,723 5,099 0 42,818 Tax rate (%) 35.1 34.6 34.6 37.0 34.2 33.7

Volume and realizations data Gas sales (mcm/d) 97.2 89.7 78.4 89.2 8.3 23.9 8.9 99.0 85.0 16.5 Gas transmission (mcm/d) 107.0 107.2 99.9 106.1 (0.2) 7.1 0.8 111.0 105.2 5.5 LPG transported ('000 tons) 901 931 890 982 (3.2) 1.2 (8.2) 3,725 3,721 0.1 LPG production ('000 tons) 225 230 238 237 (2.2) (5.5) (5.1) 995 989 0.6 LPG sales ('000 tons) 227 230 239 237 (1.3) (5.0) (4.2) 995 989 0.6 Other liquids production ('000 tons) 85 76 56 87 12.2 51.8 (2.3) 312 289 7.8 Other liquids sales ('000 tons) 87 76 54 87 14.9 61.1 0.0 312 287 8.5 Polymers production ('000 tons) 173 188 121 175 (7.7) 43.0 (1.1) 738 666 10.8 Polymers sales ('000 tons) 166 188 131 191 (11.5) 26.7 (13.1) 738 673 9.7 Subsidy payment — — — — — — Implied gas transmission tariffs (Rs/scm) 1.35 1.30 1.26 1.33 3.5 7.1 1.4 1.39 1.32 5.9 Implied petchem realizations, net (Rs/kg) 97.2 93.7 89.5 85.8 3.7 8.6 13.3 100.6 87.0 15.6 Segment revenues Transmission services (1) Natural gas 13,115 11,427 12,682 14.8 3.4 50,545 (2) LPG 1,410 1,364 1,515 3.4 (6.9) 5,648 Natural gas marketing 140,347 85,206 121,280 64.7 15.7 410,958 Petrochemicals 16,134 13,418 16,385 20.2 (1.5) 58,555 LPG and liquid hydrocarbons 10,725 9,881 12,069 8.5 (11.1) 43,298 Other segments 2,292 1,544 3,009 48.5 (23.8) 8,305 Total revenues 184,023 122,840 166,940 49.8 10.2 577,309 Less: Inter-segment revenue 11,037 7,132 11,829 38,250 Sales/Income from operations 172,986 115,708 155,111 49.5 11.5 539,059 Segment EBIT Transmission services (1) Natural gas 7,028 6,797 7,135 3.4 (1.5) 30,009 (2) LPG 654 774 676 (15.5) (3.3) 2,726 Natural gas marketing 5,513 3,365 1,583 63.9 248.3 12,561 Petrochemicals 2,078 473 366 339.4 467.7 2,667 LPG and liquid hydrocarbons 5,301 5,314 6,570 (0.2) (19.3) 23,043 Other segments 847 723 795 3,482 Total EBIT 21,421 17,445 17,125 22.8 25.1 74,487 Less: Interest 441 1,014 333 2,751 Less: Other unallocable exp (net) 1,578 744 748 2,152 Total PBT 19,403 15,687 16,044 23.7 20.9 69,584 Capital employed Transmission services (1) Natural gas 232,995 232,430 211,287 (2) LPG 8,751 8,202 8,600 Petrochemicals 94,059 94,541 93,538 LPG and liquid hydrocarbons 7,439 7,093 7,635 Other segments 16,109 17,266 15,830 Unallocable 49,806 23,680 66,392 Total 409,158 383,212 403,281

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 29 Energy GAIL (India)

Exhibit 2: US LNG prices have turned favorable as compared to spot LNG and crude-linked contracts in the recent months 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 contracted LNG Gorgon contracted LNG US LNG Fuel oil 14

12

10

8

6

4

2

0

Jul-17

Jul-18

Jan-18

Jun-17

Jun-18

Oct-17

Feb-18

Apr-17

Sep-17

Apr-18

Dec-17

Nov-17

Mar-18

Aug-17 May-17 May-18

Source: Reuters, Bloomberg, Kotak Institutional Equities estimates

Exhibit 3: GAIL has submitted unified tariff of `57/mn BTU for its major interconnected pipelines versus `37/mn BTU charged currently Details of GAIL's interconnected cross-country pipeline network, March fiscal year-end, 2018

Volumes (mcm/d) Utilization Tariffs Capex Length Capacity 2018 (%) (Rs/mn BTU) (Rs bn) (km) GAIL's inter-connected network HVJ-GREP-DVPL 53 36 68 25 36 4,659 DVPL-II-VDPL up-gradation 54 30 55 54 92 1,119 Dahej-Dabhol 20 14 70 24 25 875 Dadri-Bawana-Nangal 23 5 24 14 27 835 Chainsa-Hissar 9 1 11 8 13 265 Dabhol-Bengaluru 16 1 8 41 29 1,097 Blended metrics of inter-connected network (a) 143 81 56 37 JHBDPL (under construction) 16 — — 116 78 2,540

Notes: (a) Excluding secondary pipelines of Dadri-Bawana-Nangal and Chainsa-Hissar to prevent double counting.

Source: Company, Kotak Institutional Equities

30 KOTAK INSTITUTIONAL EQUITIES RESEARCH GAIL (India) Energy

Exhibit 4: We see 8% upside to GAIL's FY2020E EPS from inclusion of gas under GST Potential benefit to GAIL from inclusion of gas under GST (Rs bn)

Estimated VAT paid on gas for petchem/LPG production segment RM cost for LPG and petchem segments 55.3 RM cost pertaining to gas/LNG purchased in Gujarat (@75%) 41.5 Estimated VAT paid on input gas, irrecoverable currently (A) 5.4 Estimated VAT on gas for internal fuel consumption Cost of domestic gas used as fuel and internal consumption 20.7 Estimated VAT paid on input gas, irrecoverable currently (B) 2.7 Cumulative direct benefit from inclusion of gas under GST Savings from removal of currently irrecoverable VAT (A+B) 8.1 Net savings on PAT 5.4 Net gains on EPS (Rs) 2.4 Base-case FY2019E EPS (Rs) 28.7 Potential upside to FY2020E EPS (%) 8.3

Source: Company, Kotak Institutional Equities estimates

Exhibit 5: Our reverse valuation exercise suggests that the stock is trading at 12X core-business EPS Reverse valuation exercise for GAIL, March fiscal year-end, 2019E

No. of shares Stock price Valuation Fair value Fair value (# mn) (Rs/share) (X) (Rs bn) (Rs/share) Current stock price 363 Market value of investments ONGC 308 169 0.8 42 Petronet LNG 188 230 0.8 34 IGL 158 303 0.8 38 MGL 32 949 0.8 24 China Gas 150 264 0.8 32 GAIL Gas 627 50 0.8 25 Other investments 0.8 35 Total investments 231 102 Implied value of core business 261 FY2019E EPS 26 Core-business EPS, excluding other income 22 Implied P/E on core business (X) 11.6 Commodity business EPS 9 Valuation of commodity business @11X EPS 102 Utility business EPS 13 Implied P/E on utility business (X) 12.0

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 31 Energy GAIL (India)

Exhibit 6: We value GAIL stock at Rs440 per share Sum-of-the-parts valuation of GAIL, March 2020E 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 50.6 8.0 405 179 Natural gas marketing 15.3 6.5 99 44 LPG transportation 3.2 6.5 21 9 Total utility businesses 69.1 525 233 Commodity LPG production 25.1 6.5 163 72 Petrochemicals 14.1 6.5 92 41 Total commodity businesses 39.2 255 113 Investments ONGC 62 0.8 49 22 Others 261 0.8 209 93 Investments 323 258 115 Total enterprise value 460 Net debt/(cash) 43 19 Equity value 441

Source: Kotak Institutional Equities estimates

Exhibit 7: We expect gradual improvement in operating performance across key segments Key assumptions behind GAIL model, March fiscal year-ends, 2014-21E

2014 2015 2016 2017 2018 2019E 2020E 2021E Volumes Natural gas (mcm/d) Transmission 96 92 92 100 105 111 118 126 Sales 79 72 74 81 85 99 106 111 LPG/LHC ('000 tons) Transmission 3,145 3,094 2,819 3,363 3,721 3,725 3,750 3,775 Sales 1,307 1,277 1,085 1,082 1,276 1,307 1,343 1,379 Petrochemicals ('000 tons) Polyethylene 445 441 334 578 673 738 813 855 Prices/Margins Natural gas (Rs/scm) Blended transmission tariffs 1.17 1.00 1.13 1.26 1.32 1.39 1.59 1.75 Blended marketing margins 0.55 0.21 0.52 0.45 0.40 0.45 0.40 0.40 LPG LPG price (US$/ton) 910 745 452 415 502 582 560 551 Transmission charges (Rs/kg) 1.3 1.4 1.7 1.5 1.5 1.6 1.6 1.6 Other assumptions Polyethylene, HDPE (US$/ton) 1,585 1,540 1,390 1,275 1,175 1,300 1,269 1,241 Import tariff, Polyethylene 7.4% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% Import tariff, LPG 0% 0% 0% 0% 0% 0% 0% 0% Exchange rate (Rs/US$) 60.5 61.1 65.5 67.1 64.5 68.7 69.5 70.0 Subsidy losses (Rs mn) 19,000 10,000 — — — — — —

Source: Company, Kotak Institutional Equities estimates

32 KOTAK INSTITUTIONAL EQUITIES RESEARCH GAIL (India) Energy

Exhibit 8: Gas transportation segment to drive growth Segment breakdown of GAIL's EBITDA, March fiscal year-ends, 2014-21E (Rs mn)

2014 2015 2016 2017 2018 2019E 2020E 2021E EBITDA Gas transportation 25,371 19,647 25,384 31,702 37,352 41,472 51,422 62,097 LPG transportation 2,619 2,886 3,106 3,087 3,241 3,243 3,206 3,248 Gas marketing 15,803 5,609 13,950 13,486 12,561 16,378 15,555 16,221 LPG production 29,994 29,662 7,848 12,926 23,506 27,404 25,486 24,218 Petrochemicals 15,326 2,092 (4,438) 8,920 6,865 12,118 14,284 14,981 Others 3,064 (220) (892) (7,315) (7,121) (1,399) (1,659) (2,501) Subsidy loss (19,000) (10,000) — — — — — — Total 73,176 49,676 44,957 62,807 76,403 99,217 108,294 118,265

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 33 Energy GAIL (India)

Exhibit 9: Profit model, balance sheet, cash model of GAIL, March fiscal year-ends, 2014-21E (Rs mn)

2014 2015 2016 2017 2018 2019E 2020E 2021E Profit model (Rs mn) Net sales 575,079 571,913 516,875 481,489 537,419 749,978 823,595 883,757 EBITDA 67,059 51,520 42,463 65,584 76,403 99,217 108,294 118,265 Other income 8,985 8,609 8,916 10,063 9,870 10,172 11,016 12,171 Interest (3,662) (3,613) (7,999) (4,794) (2,751) (3,548) (3,566) (3,593) Depreciation (11,809) (9,807) (13,098) (13,968) (14,151) (16,348) (17,788) (19,712) Pretax profits 60,574 46,708 30,282 56,886 69,371 89,494 97,957 107,131 Current tax (17,607) (4,578) (1,355) (13,345) (16,333) (26,896) (28,354) (29,361) Deferred tax (2,663) (7,874) (7,001) (5,734) (7,066) (3,733) (4,865) (6,873) Net profits 43,753 30,392 22,264 35,029 46,184 58,865 64,738 70,897 Adjusted net profits 41,395 33,133 22,019 37,807 46,043 58,865 64,738 70,897 Adjusted EPS (Rs) 18.4 14.7 9.8 16.8 20.4 26.1 28.7 31.4

Balance sheet (Rs mn) Total equity 270,723 291,195 350,946 381,494 403,281 439,076 478,029 520,428 Deferred taxation liability 25,664 33,087 40,714 46,559 46,309 50,042 54,907 61,781 Total borrowings 102,680 116,601 80,601 50,630 57,356 55,356 58,356 56,356 Current liabilities 99,046 88,049 85,714 84,017 73,875 87,761 93,993 98,844 Total liabilities and equity 498,113 528,932 557,974 562,700 580,822 632,235 685,286 737,409 Cash 26,510 11,416 17,939 13,419 25,294 11,481 12,873 17,143 Other current assets 118,822 153,095 142,704 138,523 112,959 133,348 141,172 147,366 Total fixed assets 311,751 321,197 311,484 315,662 343,038 387,876 431,710 473,369 Investments 41,030 43,224 85,847 95,096 99,531 99,531 99,531 99,531 Total assets 498,113 528,932 557,974 562,700 580,822 632,235 685,286 737,409

Free cash flow (Rs mn) Operating cash flow, excl. working capital 46,367 36,551 34,594 52,698 55,979 67,591 75,186 84,114 Working capital changes (8,171) (19,567) (2,326) (1,939) 4,973 (6,502) (1,592) (1,343) Capital expenditure (38,550) (18,676) (12,138) (16,947) (41,460) (60,003) (60,433) (60,173) Investments (4,084) (540) 4,500 (4,173) (4,434) — — — Other income 6,291 6,522 6,541 8,164 9,870 10,172 11,016 12,171 Free cash flow 1,854 4,290 31,172 37,804 24,928 11,257 24,176 34,769

Ratios (%) Debt/equity 34.6 36.0 20.6 11.8 12.8 11.3 10.9 9.7 Net debt/equity 25.7 32.4 16.0 8.7 7.1 9.0 8.5 6.7 ROAE (%) 15.6 9.8 6.2 8.5 10.5 12.5 12.7 12.7 ROACE (%) 11.6 8.5 6.1 8.6 9.7 11.6 11.8 11.9

Key assumptions Gas transmission volumes (mcm/d) 96 92 92 100 105 111 118 126 Petrochemical sales volumes ('000 tons) 496 482 334 578 673 738 813 855 LPG/LHC sales volumes ('000 tons) 1,307 1,277 1,085 1,082 1,276 1,307 1,343 1,379 LPG transmission volumes ('000 tons) 3,145 3,094 2,819 3,363 3,721 3,725 3,750 3,775 Subsidy losses (Rs mn) 19,000 10,000 — — — — — —

Source: Company, Kotak Institutional Equities estimates

34 KOTAK INSTITUTIONAL EQUITIES RESEARCH BUY Hindalco Industries (HNDL) Metals & Mining AUGUST 13, 2018 RESULT Coverage view: Attractive Aluminum earnings improve. Hindalco’s India EBITDA increased 15% qoq to `18.5 bn Price (`): 223 (+28% yoy), broadly in line with our estimate. The earnings improvement was led by a 24% qoq increase in aluminum EBITDA/ton to US$760, led by higher prices, flat costs, Target price (`): 305 gains on lower INR/US$ rate and lesser drag from unfavorable hedges. Our positive view BSE-30: 37,869 on the stock is underpinned by falling global inventories and improving fundamentals— the stock trades at <5 FY2020E EBITDA even on assuming subdued aluminum prices.

Company data and valuation summary Hindalco Industries Stock data Forecasts/Valuations 2018 2019E 2020E 52-week range (Rs) (high,low) 284-192 EPS (Rs) 21.9 27.4 31.1 Market Cap. (Rs bn) 500.0 EPS growth (%) 155.4 25.1 13.6 Shareholding pattern (%) P/E (X) 10.2 8.1 7.2 Promoters 34.7 Sales (Rs bn) 1,151.7 1,277.4 1,317.3 FIIs 34.9 Net profits (Rs bn) 48.7 61.0 69.3 MFs 11.1 EBITDA (Rs bn) 139.2 159.4 168.5 Price performance (%) 1M 3M 12M EV/EBITDA (X) 6.4 5.4 4.7 Absolute (2.8) (7.7) (6.4) ROE (%) 9.7 10.6 10.8 Rel. to BSE-30 (7.0) (14.1) (22.1) Div. Yield (%) 0.5 0.5 0.5

1QFY19 earnings-broadly in line; strong improvement in aluminum Hindalco’s India EBITDA (including Utkal) increased 15% qoq to `18.5 bn (+28% yoy) and was broadly in line with our estimate. The earnings improvement was led by (1) increase in aluminum EBITDA by 21% qoq to `15.3 bn (+31% yoy), and (2) marginal increase in copper EBITDA to `3.4 bn (+4% yoy, +2% qoq) due to a maintenance shutdown. We note that standalone EBITDA of `13.2 bn (+15% yoy, +5% qoq) was lower than our estimate of `15.5 bn largely due to higher transfer prices at Utkal alumina. Accordingly, EBITDA for Utkal Alumina increased by 51% qoq to `5.2 bn (+79% yoy), per our estimate. The increase in aluminum earnings was despite a 7% qoq decline in sales volumes to 300,000 tons (flat yoy) due to material stuck in port and lower sales booked at the end of the quarter due to adoption of the Ind-AS revenue recognition standard. We estimate aluminum EBITDA/ton improved by 24% qoq to US$760 led by (1) improvement in aluminum prices by 3% qoq, (2) steady production costs (in INR terms), (3) lower INR/US$ rate (-4% qoq which aids revenues), and (4) marginal relief from hedging losses when compared to the last quarter. The net income including Utkal increased 19% qoq to `7.3 bn (+101% yoy).

Aluminum production costs to remain steady; downstream operations to aid margins The management expects aluminum production costs to see an increase of 3-4% qoq in 2QFY19, led by higher coal costs and furnace oil prices. However, increased sales volumes should aid earnings from 2Q—we note that sales volumes for copper also declined by 24% qoq to 82,000 tons due to maintenance shutdown, besides lower aluminum sales. The improvement in downstream products will aid earnings as well—copper rod production increased by 24,000 tons qoq to 61,000 tons in 1QFY19, led by the commissioning of another copper rod plant-3 in 4QFY18. The company plans to sell 250,000-270,000 tons of copper rods Abhishek Poddar in FY2019E, up from 150,000 tons in FY2018. This will also help EBITDA as incremental sales will be directed in domestic markets versus exports where realization is higher by close to US$200/ton. Samrat Verma We maintain our BUY rating with unchanged TP of `305 Our positive view on the stock is led by improving aluminum fundamentals from widening deficit in aluminum markets outside, falling inventories and the expectation of restricted output growth in China. We maintain our BUY rating with an unchanged TP of `305. The stock is inexpensive at <5X FY2020E EBITDA even on assumed subdued aluminum prices.

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

Exhibit 1: Hindalco’s India EBITDA (including Utkal Alumina) improved 15% qoq to Rs18.5 bn aided by higher aluminum earnings Interim results of Hindalco (standalone), March fiscal year-ends (Rs mn)

(% chg.) 1QFY19 1QFY19E 1QFY18 4QFY18 KIE yoy qoq FY2019E FY2018 (% chg.) Net sales 105,932 110,439 97,700 116,811 (4) 8 (9) 475,396 427,980 11 Total expenditure (92,679) (94,906) (86,223) (104,235) (2) 7 (11) (419,040) (376,740) 11 Stock adjustment 5,605 (4,058) 2,404 (4,457) — 4,192 Raw materials (65,712) (60,271) (58,273) (66,196) (283,045) (254,127) Employee cost (4,691) (4,384) (4,384) (4,815) (20,395) (18,947) Power and fuel cost (15,058) (13,961) (14,852) (15,333) (66,470) (60,001) Other costs (12,823) (12,231) (11,118) (13,433) (49,131) (47,858) EBITDA 13,253 15,533 11,477 12,576 (15) 15 5 56,356 51,241 10 Other income 1,055 2,059 2,563 2,049 6,505 9,478 (31) Interest (4,108) (4,419) (4,878) (4,464) (16,234) (19,005) (15) Depreciation (4,043) (4,621) (3,792) (4,598) (15,875) (16,173) (2) Pretax profits 6,157 8,552 5,371 5,563 (28) 15 11 30,753 25,540 20 Extraordinaries — — (1,044) — — (3,252) Tax (2,022) (2,908) (1,431) (1,794) (10,456) (7,923) Net income 4,135 5,644 2,896 3,770 (27) 43 10 20,297 14,365 41 Adjusted net income 4,135 5,644 3,940 3,770 (27) 5 10 20,297 16,461 23 Ratios ETR (%) 32.8 34.0 33.1 32.2 34.0 31.0 Adjusted EPS (Rest) 1.9 2.5 1.8 1.7 9.1 7.4 23.3 Operation details ('000 tons) Alumina production (tons) 695 — 724 711 (4) (2) 2,881 2,881 — Aluminium metal (tons) 323 323 321 321 0 1 1 1,291 1,291 — Copper cathode (tons) 81 86 109 104 (6) (26) (22) 410 410 — EBITDA (US$/ton) Aluminium 503 572 454 446 (12) 11 13 479 446 8 Copper 610 550 476 473 11 28 29 597 582 2 Segmental EBITDA (Rs mn) Aluminium 10,111 12,356 8,750 9,204 (18) 16 10 40,385 37,080 9 Copper 3,352 3,177 3,223 3,291 5 4 2 15,971 15,387 4 Segmental EBITDA (%) Aluminium 19.2 22.4 18.6 17.8 17.3 17.9 (3.0) Copper 7.1 6.5 6.3 5.7 6.6 7.0 (5.5) Total India EBITDA (Rs mn) Utkal EBITDA (Rs mn) 5,199 3,794 2,910 3,446 79 51 13,457 10,836 24 Total India EBITDA (Rs mn) 18,452 19,327 14,387 16,022 (5) 28 15 69,813 62,076 12

Note: (1) The standalone net-income increased by 10% qoq to Rs4.1 bn (+5% yoy), but was lower than our estimate of Rs5.6 bn due to higher profitability shown at Utkal, which is wholly-owned subsidiary.

Source: Company, Kotak Institutional Equities estimates

Changes in our estimate

Exhibit 9 highlights key changes in our estimates.

We raise our Novelis EBITDA estimate by 1% to US$1.28 bn, US$1.33 bn and US$1.36 bn for FY2019E, FY2020E and FY2021E on improved metal spreads and better earnings performance in Asia region. This results in a 1% increase in our consolidated EBITDA estimate to `159 bn, `168 bn and `175 bn for FY2019E, FY2020E and FY2021E.

Our EPS estimate increases by 1% to `27.4, `31.1 and `34.2 for FY2019E, FY2020E and FY2021E.

We estimate consolidated adjusted EBITDA for 1QFY19 at 40.6 bn and EPS at `6.5.

36 KOTAK INSTITUTIONAL EQUITIES RESEARCH Hindalco Industries Metals & Mining

Exhibit 2 : Hindalco's India EBITDA increased 15% qoq aided by improved profitability for aluminum operations Hindalco's India EBITDA for different operations, 3QFY17 - 1QFY19 (Rs mn)

Change (%) 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 yoy qoq Utkal alumina 1,400 2,650 2,910 2,010 2,470 3,446 5,199 79 51 Standalone aluminum 8,758 9,181 8,750 9,566 9,402 9,204 10,111 16 10 Copper 3,295 4,967 3,223 4,666 4,206 3,291 3,352 4 2 India EBITDA (Rs mn) 13,252 16,122 14,387 15,909 15,587 16,022 18,452 28 15 Aluminum production (tons) 320,000 317,000 321,000 326,000 323,000 321,000 323,000 1 1 Copper production (tons) 94,000 111,000 109,000 96,000 101,000 104,000 81,000 (26) (22) LME aluminum prices (US$/ton) 1,710 1,853 1,905 2,010 2,104 2,159 2,209 16 2

Source: Company, Kotak Institutional Equities estimates

Utkal EBITDA increases to `5.2 bn on higher alumina transfer price

Utkal Alumina EBITDA increased by 51% qoq to `5.2 bn in 1QFY19, as per our estimate. The improvement was led by the higher transfer pricing of alumina to standalone operations (Mahan and Aditya smelters). The company’s alumina transfer price increased to US$527/ton from US$445/ton in 4QFY18. We note that the company changed its policy for transfer pricing from Q-1 (essentially at benchmark prices of previous quarter) to M-1 (essentially at benchmark prices of previous quarter). This led to earnings at Utkal beating our estimate and lower standalone earnings.

Net debt increases to `420 bn led by forex translation impact

Hindalco’s consolidated net-debt increased to `420 bn in June 2019 from `393 bn in March 2018 due to forex impact—the 4% decline in INR/US$ rate led to higher debt in Rupee terms for Novelis debt (close to US$3.6 bn of net-debt). The company stated that net- debt/EBIDTA declined to 2.57X from 2.67X in March 2018.

Hindalco’s net-debt/EBITDA was 2.8X in March 2018 (trailing) as the company’s balance has de-levered by close to `150 bn in the past two years. Post the Aleris acquisition, we expect the pro-forma consolidated net-debt/EBITDA to increase initially to 3.7X based on FY2018 financials due to the acquisition, and then decline to 3.1X/2.5X over FY2020E (Exhibit 6).

We highlight that HNDL continues to earn strong FCF due to its low-cost operations even on LME aluminum price assumption of US$2,075-2,150/ton.

Other highlights from the results

 Copper—EBIDTA improves despite shutdown. Copper volumes declined 26% yoy to 81,000 tons (-22% qoq) due to a maintenance shutdown. Despite lower volumes, the copper EBITDA increased 2% qoq to `3.35 bn (+4% yoy) aided by improved profitability from by-products including DAP and sulphuric acid.

 Aluminum production cost to increase by 3% in 2Q. As per the management, the company’s aluminum production cost was flat qoq in 1QFY19 but they expect cost to increase by 3-4% qoq in 2QFY19 due to the increase in coal, furnace oil costs. There was some relief in the fixed costs in 1QFY19—the management highlighted that for SG&A costs, 4Q tends to have highest charge and 1Q the lowest. The company’s coal sourcing mix includes 15% coal from captive mines, 60% from linkage and balance from e- auctions.

 Aluminum hedged for rest of FY2019E. The hedging loss for the quarter was `1.8 bn compared to `1.98 bn in 4QFY19. In FY2019E, the balance hedge positions in aluminum are (1) about 27-28% of the balance aluminum volumes at the average prices of `1,40,000/ton—this includes impact of INR/US$ hedge as well, and (2) about 11% of its volumes US$2,274/ton—this is only a commodity hedge (has not hedged INR/US$ rate).

KOTAK INSTITUTIONAL EQUITIES RESEARCH 37 Metals & Mining Hindalco Industries

We note that the management had earlier highlighted that its hedging policy is also to cover their cost base. They want to keep the hedging quantity at an even keel and do not want to speculate on prices by increasing the hedges significantly.

 Value-added product volumes to improve. The company commissioned a continuous cast rod plant-3 in 4QFY18, which increases capacity by 200 ktpa which should aid improvement in FY2019E volumes by close to 90,000 -100,000 tons. As per the management, an additional US$200/ton of EBITDA is earned on the conversion of copper cathode to rods.

 Capex guidance for India. The company expects FY2019E capex for India at `15 bn (from `11 bn in FY2018)—this includes sustenance capex of `8-9 bn and balance `6 bn towards downstream capacity expansion, Utkal alumina expansion. Capex at Novelis will be close to US$450 mn.

Exhibit 3: Novelis’ adjusted EBITDA improved 4% qoq to US$332 mn aided by improved metal spreads Interim results of Novelis, March fiscal year-ends (US$ mn)

(% chg.) 1QFY19 1QFY19E 1QFY18 4QFY18 KIE yoy qoq FY2019E FY2018 (% chg.) Net sales 3,097 3,119 2,669 3,066 (1) 16 1 11,841 11,462 3 Expenditure (2,725) (2,805) (2,382) (2,750) (3) 14 (1) (10,577) (10,272) 3 Cost of goods sold (2,591) (2,658) (2,261) (2,603) (10,007) (9,719) SG&A (119) (131) (106) (131) (505) (489) R&D (15) (16) (15) (16) (65) (64) EBITDA 372 314 287 316 18 30 18 1,264 1,190 6 Restructuring expenses (1) (2) (1) (1) (12) (34) Reported EBITDA 371 312 286 315 19 30 18 1,252 1,156 8 Depreciation (86) (88) (90) (87) (369) (354) EBIT 285 224 196 228 27 45 25 883 802 10 Interest Expense (66) (63) (64) (63) (241) (255) Extraordinary income (loss) — — — — — 318 Affiliate income / (loss) — — — — (1) (1) Other income (expenses) (29) (2) 12 (2) 17 (9) Profit before tax 190 160 144 163 19 32 17 658 855 (23) Income tax (53) (48) (43) (54) (197) (233) Profit after tax 137 112 101 109 23 36 26 461 622 (26) Minorities — — — — — — — 5 13 Net income 137 112 101 106 23 36 29 466 635 (27) Adjusted net income 113 112 103 101 1 10 12 466 420 11 Ratios (%) Gross profit margin 16 15 15 15 155 bps 105 bps 124 bps 15 15 28 bps EBITDA (adjusted) 12 10 11 10 194 bps 126 bps 171 bps 11 10 29 bps EBITDA (reported) 12 10 11 10 197 bps 126 bps 171 bps 11 10 49 bps EBIT 9 7 7 7 201 bps 186 bps 177 bps 7 7 46 bps PBT margin 6 5 5 5 102 bps 74 bps 82 bps 6 7 -190 bps Net income 4 4 4 3 84 bps 64 bps 97 bps 4 5 -154 bps Key metrics Rolled shipments (kt) 797 803 785 805 (1) 2 (1) 3,236 3,188 1 Average realization (US$/ton) 3,886 3,883 3,400 3,809 3,659 3,595 2 Adjusted EBITDA/ton (US$/ton) 417 398 368 396 5 13 5 392 381 3 Adjusted EBITDA (US$ mn) 332 320 289 319 4 15 4 1,268 1,215 4

Source: Company, Kotak Institutional Equities estimates

38 KOTAK INSTITUTIONAL EQUITIES RESEARCH Hindalco Industries Metals & Mining

Exhibit 4: Novelis' adjusted EBITDA increase was aided by 2% volume growth and 13% yoy increase in EBITDA/ton Novelis EBITDA and EBITDA/ton by geographical segment, March fiscal year-ends, 2015-2019 (US$ mn, US$/ton)

Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 (% change) EBITDA (US$ mn) (yoy) (qoq) North America 69 90 84 96 92 93 90 105 116 124 110 122 119 3 (2) Europe 45 56 45 56 57 49 44 58 57 51 49 61 61 7 0 Asia 39 39 33 32 46 46 40 31 44 37 42 43 55 25 28 South America 59 51 76 92 73 82 81 101 72 90 106 93 97 35 4 Total 212 236 238 277 268 270 255 292 289 302 305 319 332 15 4 EBITDA/ton (US$) North America 264 336 332 387 382 369 364 390 428 459 409 447 434 1 (3) Europe 195 238 205 241 237 211 198 250 247 218 224 262 268 8 2 Asia 214 225 180 178 261 263 248 182 250 208 240 254 318 27 25 South America 628 455 618 728 753 719 675 856 673 750 764 715 795 18 11 Total 276 299 306 351 355 349 340 370 368 377 383 396 417 13 5 Shipments ('000 tons) North America 261 268 253 249 241 252 247 269 271 270 268 273 274 1 0 Europe 231 235 220 232 241 232 222 232 231 234 217 233 228 (1) (2) Asia 182 173 183 180 176 175 161 170 176 178 173 169 173 (2) 2 South America 94 112 123 127 97 114 120 118 107 120 138 130 122 14 (6) Total 768 788 779 788 755 773 750 789 785 802 796 805 797 2 (1)

Source: Company, Kotak Institutional Equities estimates

Exhibit 5: We estimate that Aleris acquisition can be earnings accretive on assuming ramp-up of Lewisport ABS facility by FY2021E Hindalco-proforma financials assuming Aleris acquisition, March fiscal year-ends (Rs bn, US$ mn)

FY2021E Existing operations Aleris Aleris Combined entity (Rs bn) (US$ mn) (Rs bn) (Rs bn) Profit model (Rs mn) Net sales 1,367 3,420 239 1,606 EBITDA 175 330 23 198 Other income 12 — — 12 Interest (31) (163) (11) (42) Depreciation (53) (120) (8) (61) Profit before tax 103.0 48 3.3 106.3 Extraordinaries — — — — Taxes (28) (14) (1) (29) Profit after tax 75.5 33 2.3 77.8 Minority interest — — — — Share in profit/(loss) of associates 1 — — 1 Reported net income 76.3 — — 78.6 Adjusted net income 76.3 — — 78.6 Fully diluted EPS (Rs) 34.2 — — 35.3 No. of shares (mn) 2,229 — — 2,229 INR:US$ rate 70.0 70.0 70.0 70.0

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 39 Metals & Mining Hindalco Industries

Exhibit 6: We expect HNDL's leverage ratio to be comfortable even on Aleris acquisition Leverage details of Hindalco, March fiscal year-ends (Rs mn)

2016 2017 2018 2019E 2020E 2021E Leverage at existing operations Net debt - consolidated 554,557 466,045 393,112 361,294 292,185 223,404 EBITDA - consolidated 88,149 124,474 139,206 159,368 168,467 175,146 Net debt/EBITDA (X) 6.3 3.7 2.8 2.3 1.7 1.3 Total equity 409,879 460,650 548,604 606,042 671,755 744,502 Debt/Equity (X) 1.4 1.0 0.7 0.6 0.4 0.3 Aleris acquisition---assumptions Aleris acquisition debt (US$ mn) 2,580 2,580 2,580 2,580 Aleris EBITDA---assumed (US$ mn) 200 250 300 330 INR:US$ 68.7 69.5 70.0 70.0 Leverage post Aleris acquisition Net debt (including Aleris acquisition) 570,435 540,604 472,785 404,004 EBITDA (including Aleris acquisition) 152,952 176,743 189,467 198,246 Net debt/EBITDA (X) 3.7 3.1 2.5 2.0

Source: Company, Kotak Institutional Equities estimates

Exhibit 7: HNDL's EPS changes by 2.5% for 1% change in prices Exhibit 8: HNDL's TP changes by 2.5% for 1% change in prices EPS sensitivity of HNDL to aluminum prices, FY2020E (Rs) Fair value sensitivity of HNDL, FY2020E (Rs/share)

LME aluminum prices (US$/ton) Fair value (Rs/share) LME aluminum prices (US$/ton) 31 1,800 1,950 2,100 2,250 2,400 305 1,800 1,950 2,100 2,250 2,400 66.5 18.0 22.4 26.8 31.2 35.7 66.5 175 217 261 304 347 68.0 19.9 24.4 29.0 33.5 38.0 68.0 195 237 283 327 371 INR: USD INR: USD 69.5 21.9 26.5 31.1 35.7 40.3 69.5 215 260 305 350 395 rate rate 71.0 23.8 28.5 33.2 37.9 42.6 71.0 234 282 327 373 419 72.5 25.7 30.5 35.3 40.1 44.9 72.5 254 303 350 396 442

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

Exhibit 9: Hindalco, change in estimates, March fiscal year ends, 2019-2021E (Rs bn)

Revised estimate Previous estimate Change (%) 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E Hindalco standalone Aluminium metal sales (mn tons) 1.29 1.29 1.29 1.29 1.29 1.29 — — — Aluminium price (all-in) (US$/ton) 2,200 2,225 2,275 2,200 2,225 2,275 — — — Net revenues (Rs bn) 475 484 498 475 484 498 — — — EBITDA (includes Utkal) (Rs bn) 70 75 78 70 75 78 — — — Novelis Shipments (tons) (inldg. Ingots) 3,236 3,284 3,334 3,236 3,284 3,334 — — — Net revenues (Rs bn) 814 845 879 814 845 879 — — — EBITDA (Rs bn) 87 91 94 86 90 93 1 1 1 Adjusted EBITDA* (Rs bn) 88 92 95 87 91 94 1 1 1 Adjusted EBITDA* (US$ mn) 1,280 1,329 1,361 1,268 1,316 1,348 1 1 1 Consolidated Net revenues (Rs bn) 1,277 1,317 1,367 1,277 1,317 1,367 — — — EBITDA (Rs bn) 159 168 175 158 168 174 1 1 1 PAT (Rs bn) 61 69 76 60 69 76 1 1 1 EPS (Rs) 27.4 31.1 34.2 27.1 30.8 33.9 1 1 1 INR:USD 68.7 69.5 70.0 68.7 69.5 70.0 — — —

Source: Kotak Institutional Equities estimates

40 KOTAK INSTITUTIONAL EQUITIES RESEARCH Hindalco Industries Metals & Mining

Exhibit 10: Hindalco Industries, Key assumptions, March fiscal-year ends, 2016-2021E (Rs mn)

2016 2017 2018 2019E 2020E 2021E Aluminium Aluminium all-in price (US$/ton) 1,719 1,789 2,167 2,200 2,225 2,275 Metal sales volume (tons) 1,138,600 1,266,000 1,290,775 1,291,000 1,291,000 1,291,000 Blended realization (Rs/ton) 126,660 136,062 153,418 169,760 174,691 179,901 Alumina sales volume (tons) 368,880 309,280 325,000 325,000 325,000 325,000 Standalone EBITDA (and Utkal) (Rs mn) 40,599 54,855 62,058 69,813 74,512 78,409 Novelis Average realization (US$/ton) 3,161 3,127 3,595 3,659 3,700 3,766 Conversion premium (US$/ton) 1,567 1,439 1,553 1,584 1,600 1,616 Shipments ('000 tons) 3,123 3,067 3,188 3,236 3,284 3,334 Adjusted EBITDA/ton (US$/ton) 253 354 381 396 405 408 Adjusted EBITDA (US$ mn) 791 1,085 1,215 1,280 1,329 1,361 EBITDA (Rs mn) 44,752 73,542 76,719 87,759 92,168 94,956 Adjusted EBITDA (Rs mn) 51,752 72,804 78,331 88,002 92,385 95,278 Copper Copper cathode volumes (tons) 388,000 368,000 408,420 408,420 408,420 418,420

Source: Company, Kotak Institutional Equities estimates

Exhibit 11: Hindalco Industries, Valuation, March 2020E basis (Rs mn)

Multiple Value (Rs mn) (X) (Rs mn) (Rs/share) Hindalco EBITDA 74,512 6 438,877 197 Novelis EBITDA 91,334 6 544,349 244 Total Enterprise Value 165,846 6 983,226 441 Add: Listed investments 30,570 14 Less: Net debt (292,185) (292,185) (131) Aleris acquisiiton: Aleris (EV based on US$330 mn EBITDA) 137,610 62 Net-debt (179,310) (81) Arrived market capitalization 305 Target price (Rs) 305

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 41 Metals & Mining Hindalco Industries

Exhibit 12: Hindalco (consolidated), Profit model, balance sheet and cash flow model, March fiscal year-ends, 2016 - 2021E (Rs mn)

2016 2017 2018 2019E 2020E 2021E Profit model (Rs mn) Net sales 987,589 1,001,838 1,151,717 1,277,398 1,317,291 1,366,930 EBITDA 88,149 124,474 139,206 159,368 168,467 175,146 Other income 11,888 11,110 11,046 9,141 10,055 11,597 Interest (51,338) (57,424) (39,107) (35,760) (33,671) (30,943) Depreciation (45,074) (44,688) (46,065) (48,312) (51,370) (52,806) Profit before tax 3,624 33,472 65,080 84,437 93,480 102,994 Extraordinaries (7,371) (71) 17,742 — — — Taxes (6,114) (18,399) (20,742) (24,290) (25,058) (27,537) Profit after tax (8,730) 19,074 62,080 60,148 68,422 75,457 Minority interest 4,508 174 1 344 348 350 Share in profit/(loss) of associates 1,715 (251) (1,251) 500 500 500 Reported net income (2,507) 18,997 60,829 60,991 69,270 76,307 Adjusted net income 2,652 19,069 48,742 60,991 69,270 76,307 Fully diluted EPS (Rs) 1.3 8.6 21.9 27.4 31.1 34.2 Balance sheet (Rs mn) Equity 406,066 460,588 548,517 606,299 672,359 745,457 Deferred tax liability 29,376 28,666 37,766 43,916 51,120 51,120 Total Borrowings 675,519 638,175 512,724 491,752 459,520 425,232 Current liabilities 305,093 337,614 377,477 402,193 404,658 408,945 Minority interest 3,813 62 86 — — — Total liabilities 1,419,866 1,465,104 1,476,571 1,544,161 1,587,658 1,630,754 Net fixed assets 679,377 675,518 672,590 694,736 697,591 692,285 Capital work in progress 42,138 18,139 20,629 16,000 16,000 16,000 Goodwill 177,353 171,350 178,294 178,294 178,294 178,294 Investments 124,378 151,569 107,813 108,313 108,813 109,313 Cash 44,073 82,612 80,578 91,423 128,301 162,794 Other current assets 352,548 365,918 416,667 455,137 458,054 471,113 Minority interest — — — 257 605 955 Total assets 1,419,867 1,465,105 1,476,571 1,544,161 1,587,658 1,630,754 Free cash flow (Rs mn) Operating cash flow excl. working capital 31,731 64,390 113,032 114,610 126,996 128,263 Working capital changes 41,083 6,691 (10,886) (13,754) (452) (8,773) Capital expenditure (42,452) (29,376) (37,019) (65,829) (54,225) (47,500) Free cash flow 30,362 41,705 65,127 35,027 72,319 71,990 Ratios EBITDA margin (%) 8.9 12.4 12.1 12.5 12.8 12.8 EBIT margin (%) 4.4 8.0 8.1 8.7 8.9 8.9 Debt/equity (X) 1.7 1.4 0.9 0.8 0.7 0.6 Net debt/equity (X) 1.4 1.0 0.7 0.6 0.4 0.3 Net debt/EBITDA (X) 6.3 3.7 2.8 2.3 1.7 1.3 RoAE (%) 0.7 4.4 9.7 10.6 10.8 10.8 RoACE (%) 4.9 5.9 6.7 7.8 8.0 8.0

Source: Company, Kotak Institutional Equities estimates

42 KOTAK INSTITUTIONAL EQUITIES RESEARCH ADD Aurobindo Pharma (ARBP) Pharmaceuticals AUGUST 13, 2018 RESULT Coverage view: Neutral Strong quarter for revenues. ARBP’s 1QFY19 revenues were ~3% ahead of estimates, Price (`): 610 with US growing US$10 mn qoq and EU growth at 30%. One-off provisions of `0.9-1.0 bn constricted gross margins by 364 bps qoq, however, adjusting for the provisions, gross Target price (`): 640 margins and EBITDA were in line with estimates. ARBP is well poised to gain market BSE-30: 37,869 share in US orals and continues to benefit from a strong FY2019 launch schedule for orals, injectables and OTC. ADD

Company data and valuation summary Aurobindo Pharma Stock data Forecasts/Valuations 2018 2019E 2020E 52-week range (Rs) (high,low) 809-527 EPS (Rs) 41.8 39.9 47.9 Market Cap. (Rs bn) 357.5 EPS growth (%) 6.0 (4.5) 20.1 Shareholding pattern (%) P/E (X) 14.6 15.3 12.7 Promoters 51.9 Sales (Rs bn) 165.0 185.3 206.1 FIIs 18.0 Net profits (Rs bn) 24.4 23.3 28.0 MFs 15.1 EBITDA (Rs bn) 37.9 38.2 44.7 Price performance (%) 1M 3M 12M EV/EBITDA (X) 10.2 10.3 8.6 Absolute (1.2) 2.7 (11.0) ROE (%) 23.2 18.4 17.3 Rel. to BSE-30 (5.4) (4.4) (25.9) Div. Yield (%) 0.7 0.8 1.0

Strong on revenues; one-off provisions impact profitability ARBP’s 4QFY18 revenues increased 16% yoy, ~3% ahead of our estimates, driven by 30% yoy growth in the EU (+18% versus KIE) and RoW markets (+32% yoy, +15% versus KIE). Its US business generated revenues of US$282 mn, growing US$10 mn qoq, US$13 mn lower than our estimates, though, adjusting for Ertapenem launch (booked in 2QFY19), the miss was lower at US$8 mn. Oral formulations grew US$5-7 mn qoq while Natrol contributed to the balance, with Injectables disappointing marginally with flat revenues (US$36 mn). ARV segment continued to slide, declining 36% yoy (+6% versus KIE). However, gross margins disappointed, declining 364bps (-440bps versus KIE), due to `0.9-1 bn of one-off provisioning for past product recalls and shelf stock movements, adjusting for which, gross margins were in line with our estimates. Despite 11% lower R&D, EBITDA missed by 11% due to the gross margin miss, though, adjusted for provisions, EBITDA and PAT were in line with our estimates. ARBP generated negative US$33 mn FCF, due to US$70 mn capex and US$63 mn working capital, with 50% of working capital investments in finished goods inventory to prepare for upcoming US$100 mn new buying orders (NBO) that are likely to come up in FY2019. Consequently, net debt increased to US$570 mn, with the management guiding for US$100 mn reduction in net debt in FY2019, excluding Apotex acquisition. Strong pipeline for FY2019 positions ARBP for growth The steady US injectables performance was encouraging in the backdrop of discontinuation of the bag line in 4QFY18. We forecast US injectables to grow to US$202 mn in FY2019 from US$155 mn in FY2018, which implies a significant improvement from 2QFY19. This is largely driven by our expectations of a steady base business and contributions from ertapenem (launched) and vancomycin (2HFY19). Notably, our estimates do not include cyclophosphamide RTU (1HFY19 approval), which we believe can be a sizeable (>US$25 mn annualized), long- tailed opportunity. We expect omeprazole OTC (launched in June 2018), Welchol (2QFY19), Chirag Talati, CFA Prevacid ODT (1HFY19) and Toprol-XL (1HFY19) to help maintain the momentum in US launches. We believe ARBP is also well positioned to gain volumes in the US where the management expects US$100 mn worth of NBO’s in FY2019 and is well placed to capitalize on Kumar Gaurav any disruptions in US orals (e.g. valsartan). Valuations comforting - ADD We cut our FY2019 EPS by ~7% to take into account 1QFY19 one-offs, though, we raise our FY2020/21E EPS by 4% and 9% respectively. ARBP trades at 12.5X FY2020E EPS and 8X FY2020E EV/EBITDA. ADD.

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

Exhibit 1: Aurobindo Pharma - 1QFY19 interim results March fiscal year-ends (` mn)

(% chg.) 1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 FY2019E FY2018 (% chg.) Sales 42,503 41,190 36,788 40,491 3.2 15.5 5.0 185,328 164,998 12.3 Raw material (19,073) (16,672) (14,978) (16,695) 14.4 27.3 14.2 (80,452) (67,527) 19.1 Employee expenses (5,961) (5,950) (4,902) (5,813) 0.2 21.6 2.6 (23,629) (21,308) 10.9 R&D expenses (1,690) (1,900) (1,623) (1,866) (11.1) 4.1 (9.4) (7,876) (6,662) 18.2 Other expenses (7,987) (7,826) (7,369) (8,577) 2.1 8.4 (6.9) (35,712) (31,615) 13.0 EBITDA 7,792 8,842 8,416 8,040 (11.9) (7.4) (3.1) 38,158 37,885 0.7 Other income/FX losses (244) 300 144 438 (500) 1,011 Interest (295) (220) (169) (247) (1,311) (777) Depreciation (1,545) (1,590) (1,312) (1,566) (6,512) (5,580) Pretax profits 5,711 7,332 7,093 6,671 (22.1) (19.5) (14.4) 29,885 32,571 (8.2) Tax (1,155) (1,760) (1,910) (1,224) (6,575) (8,183) Minority interest 1 — 2 (3) 3 3 Net income 4,557 5,573 5,185 5,444 (18.2) (12.1) (16.3) 23,263 24,391 (4.6) Net income - adjusted 4,557 5,573 5,185 5,444 (18.2) (12.1) (16.3) 23,263 25,055 (7.2) Adjusted EPS (Rs) 7.8 9.5 8.9 9.3 (18.2) (12.1) (16.3) 39.8 43 (7.1) Tax rate (%) 20.2 24.0 26.9 18.3 22.0 25.1 Segment wise sales US 18,894 19,799 16,949 17,388 (4.6) 11.5 8.7 84,330 74,422 13.3 EU 11,991 10,094 9,176 11,516 18.8 30.7 4.1 53,298 43,543 22.4 ARV 1,556 1,468 2,446 1,486 6.0 (36.4) 4.7 7,067 8,396 (15.8) Emerging markets 2,565 2,230 1,939 2,096 15.0 32.3 22.4 10,092 8,971 12.5 API 7,480 7,000 6,251 7,996 6.9 19.7 (6.5) 28,141 29,623 (5.0) Total 42,503 41,190 36,788 40,491 3.2 15.5 5.0 185,328 164,998 12.3 % margin Gross margin 55.1 59.5 59.3 58.8 56.6 59.1 Staff cost 14.0 14.4 13.3 14.4 12.8 12.9 R&D expenses 4.0 4.6 4.4 4.6 4.3 4.0 Other expenditure 18.8 20.2 20.0 21.2 19.3 19.2 EBITDA 18.3 21.5 22.9 19.9 20.6 23.0

Source: Company, Kotak Institutional Equities estimates

Aurobindo Pharma - changes to estimates March fiscal year-ends, 2019-21E, (` mn)

New estimates Old estimates Changes (%) 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E Sales 185,328 206,081 220,362 181,274 197,283 209,025 2.2 4.5 5.4 Gross profits 104,876 119,932 130,889 103,924 112,904 119,478 0.9 6.2 9.6 EBITDA 38,158 44,712 50,170 39,115 42,424 45,816 (2.4) 5.4 9.5 PBT 31,646 37,270 41,978 32,854 35,434 38,164 (3.7) 5.2 10.0 PAT 23,313 28,000 31,671 24,972 26,933 29,008 (6.6) 4.0 9.2 EPS 39.9 47.9 54.2 42.8 46.1 49.7 (6.7) 4.0 9.1

Source: Kotak Institutional Equities estimates

44 KOTAK INSTITUTIONAL EQUITIES RESEARCH Aurobindo Pharma Pharmaceuticals

Exhibit 3: Key oral launch pipeline for ARBP Y-Axis: brand sales (US$ mn), X-Axis: Year of launch (March fiscal year-end, 2016-19)

FY2016 FY2017 FY2018 FY2019 ≥FY2020

>US$1,000 mn Abilify Nexium Pulmicort Respules Atripla Truvada Restasis Pulmicort Respules Onglyza Kombiglyze Xarelto

US$500 - US$1,000 mn Renvela Viread

US$250 - US$500 mn Nuvigil Nexium OTC Metoprolol-XL Ampyra Omeprazole OTC Mucinex-DM Bupropion SR/XL Solodyn Fortamet ER Effient Norvir

US$100 - US$250 mn Valcyte Celecoxib Epzicom Prevacid-ODT Livalo Hyrdomorphone Atorvastatin Carbamezapine/ER Omeprazole Reyataz Oxymorphone Renagel Stalevo

High > US$25 mn revenues in first 12 months of launch Medium US$10 - 25 mn revenues in first 12 months of launch Low < US$10 mn revenues in first 12 months of launch

Source: Kotak Institutional Equities estimates, Company

Exhibit 4: Key sterile launch pipeline for ARBP Y-Axis: brand sales (US$ mn), X-Axis: Year of launch (March fiscal year-end, 2016-19)

FY2016 FY2017 FY2018 FY2019 ≥FY2020

US$250 - US$500 mn Bivaliridun Ertapenem Iron Sucrose Cyclophosphamide RTU

US$100 - US$250 mn Eptifibatide Glycopyrrolate Vit-K1 Triamcinolone Fondaparinux Vancomycin Enoxaparin Doripenem Acular LS Vancomycin RTU Zyvox bag Isoproterenol Neostigmine Tygacil

High > US$25 mn revenues in first 12 months of launch Medium US$10 - 25 mn revenues in first 12 months of launch Low < US$10 mn revenues in first 12 months of launch

Source: Kotak Institutional Equities estimates, Company

KOTAK INSTITUTIONAL EQUITIES RESEARCH 45 Pharmaceuticals Aurobindo Pharma

Exhibit 5: ARBP’s filing rate still strong at 23 ANDA’s in FY2018 ANDA filings rate, March fiscal year-ends, 1QFY16-1QFY19 (# of ANDA’s)

1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Approvals ANDA approvals - during the period 8 13 16 23 20 17 22 16 17 2 20 10 13 Cumulative ANDA approvals 201 214 228 251 269 284 303 314 329 334 354 361 376 Filings ANDA filed - during the period 3 3 5 11 5 9 9 8 13 21 2 11 7 Cumulative ANDAs filed 379 382 387 398 403 412 421 429 442 463 465 476 487 Pending ANDA - pending approval 178 168 159 147 134 128 118 115 113 129 111 115 112

Source: Company, Kotak Institutional Equities

Aurobindo Pharma - US sales summary March fiscal year ends, 2014-21E, (` mn)

2014 2015 2016 2017 2018 2019E 2020E 2021E US consolidated sales (US$ mn) 564 774 946 997 1,119 1,213 1,257 1,301 Base + other launches 374 454 477 458 458 462 465 468 Key oral products 80 83 111 132 220 238 227 242 Injectables 43 67 96 148 155 202 260 288 OTC/Natrol 0 30 95 105 130 160 168 176 Controlled substances 7 55 77 69 66 71 65 62 Third party 60 85 90 86 90 81 73 65 YoY growth (%) US 74 37 22 5 12 8 4 3 Base + other launches 94.9 21.5 5.1 (4.2) 0.0 0.9 0.7 0.6 Key oral products 3.4 34.0 19.2 66.4 8.2 (4.7) 6.9 Injectables 126.3 55.8 42.6 55.0 4.9 30.2 28.8 10.4 OTC/Natrol 216.7 10.0 24.4 23.1 5.0 5.0 Controlled substances NM 39.6 (10.2) (4.3) 7.2 (8.6) (4.8) Third party 41.7 5.9 (5.0) 5.0 (10.0) (10.0) (10.0) % of US sales Base + other launches 66 59 50 46 41 38 37 36 Key oral products 14 11 12 13 20 20 18 19 Injectables 8 9 10 15 14 17 21 22 OTC/Natrol 0 4 10 10 12 13 13 14 Controlled substances 1 7 8 7 6 6 5 5 Third party 11 11 10 9 8 7 6 5

Source: Company, Kotak Institutional Equities estimates

46 KOTAK INSTITUTIONAL EQUITIES RESEARCH Aurobindo Pharma Pharmaceuticals

Exhibit 6: Aurobindo Pharma – profit and loss, balance sheet, cash flow model March fiscal year-ends, 2013-21E (` mn)

2013 2014 2015 2016 2017 2018 2019E 2020E 2021E Net revenues 58,553 80,998 121,205 138,961 150,899 164,998 185,328 206,081 220,362 Gross profit 28,646 44,938 66,149 77,386 86,556 97,471 104,876 119,932 130,889 Staff costs (6,633) (8,024) (13,023) (15,508) (17,678) (21,308) (23,629) (26,791) (28,934) R&D expenses (2,335) (2,717) (3,601) (4,770) (5,430) (6,662) (7,876) (9,274) (9,916) Other expenses (13,121) (12,860) (23,889) (25,051) (29,106) (31,615) (35,212) (39,155) (41,869) EBITDA 6,557 21,337 25,636 32,056 34,343 37,885 38,158 44,712 50,170 Depreciation & amortisation (2,487) (3,125) (3,326) (3,926) (4,276) (5,580) (6,512) (7,442) (8,192) EBIT 4,069 18,211 22,310 28,130 30,067 32,306 31,646 37,270 41,978 Net Interest (1,313) (1,071) (843) (927) (667) (777) (1,311) (1,481) (1,358) Other income 285 216 808 682 538 1,020 1,000 1,000 1,000 Exceptional items (includes FX gains/losses) (1,636) (2,031) (596) (660) 621 — (1,500) — — Profit before tax 1,406 15,325 21,679 27,225 30,608 32,579 29,885 36,839 41,669 Tax & deferred Tax (827) (3,635) (5,966) (7,444) (7,596) (8,183) (6,575) (8,841) (10,001) Less: minority interest (4) 38 45 39 5 3 3 3 3 Net income 575 11,729 15,758 19,820 23,017 24,399 23,313 28,000 31,671 EPS (Rs) 1.0 20.1 27.0 33.9 39.4 41.8 39.9 47.9 54.2 Balance sheet Equity 26,168 37,758 51,817 71,163 93,740 116,822 137,108 161,475 188,787 Total borrowings 33,844 36,339 38,636 47,020 33,641 44,825 42,325 38,813 37,313 Other liabilities 12,767 20,801 38,692 38,811 35,113 49,404 56,100 59,677 61,438 Total liabilities 72,778 94,898 129,145 156,993 162,494 211,052 235,534 259,966 287,538 Net fixed assets 28,574 30,314 41,253 52,635 62,919 81,037 92,654 95,212 97,019 Investments 222 198 1 1 2,459 3,115 3,115 3,115 3,115 Cash 2,085 1,786 4,888 8,344 5,135 12,616 2,236 9,996 25,019 Other current assets 41,897 62,601 83,003 96,013 91,982 114,283 137,529 151,643 162,385 Total assets 72,778 94,898 129,145 156,993 162,494 211,052 235,534 259,966 287,539 Cashflow statement Operating profit before working capital 8,157 20,476 25,741 32,337 34,413 37,505 36,400 44,284 49,864 Tax paid (1,192) (3,440) (4,956) (7,358) (7,737) (8,183) (6,575) (8,841) (10,001) Change in working capital (4,216) (10,574) (8,417) (7,383) 6,110 (11,621) (16,549) (10,538) (8,981) Capital expenditure (2,733) (3,905) (7,683) (15,682) (16,942) (12,115) (12,060) (10,000) (10,000) Free cash flow 16 2,558 4,685 1,914 15,844 5,587 1,216 14,905 20,882 Margins and ratios Gross profit margin (%) 48.9 55.5 54.6 55.7 57.4 59.1 56.6 58.2 59.4 EBITDA margin (%) 11.2 26.3 21.2 23.1 22.8 23.0 20.6 21.7 22.8 Tax rate (%) 58.8 23.7 27.5 27.3 26.0 26.0 22.0 24.0 24.0 RoAE (%) 2.3 36.7 35.2 32.2 27.9 23.2 18.4 18.8 18.1 RoACE (%) 7.6 28.0 28.3 28.8 25.9 23.6 19.2 20.3 21.5

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 47 RS DLF (DLFU) Real Estate AUGUST 13, 2018 RESULT Coverage view: Neutral

Changing track. DLF reported sales of Rs6 bn, marking the third straight quarter of Price (`): 197 healthy sales, with collections of Rs8.1 bn during 1QFY19, even as land payments led to Target price (`): - a cash outflow of Rs7.2 bn. The lease property business (DCCDL) is maintaining BSE-30: 37,869 consistent net income of Rs10 bn. The change of strategy to sell completed units will likely lead to a period of consolidation, as the current inventory is sold and depleted and new inventory will take a period of 4-5 years to build. Our rating on DLF remains suspended as associated company is engaged in an advisory role to the company.

Company data and valuation summary DLF Stock data Forecasts/Valuations 2018 2019E 2020E 52-week range (Rs) (high,low) 274-153 EPS (Rs) 20.5 5.3 23.9 Market Cap. (Rs bn) 350.7 EPS growth (%) 427.2 (74.4) 354.6 Shareholding pattern (%) P/E (X) 9.6 37.4 8.2 Promoters 74.9 Sales (Rs bn) 67.1 57.2 112.2 FIIs 16.2 Net profits (Rs bn) 36.6 9.4 42.6 MFs 2.0 EBITDA (Rs bn) 15.8 9.7 55.4 Price performance (%) 1M 3M 12M EV/EBITDA (X) 29.6 52.7 9.2 Absolute 1.1 (8.0) 19.4 ROE (%) 12.2 2.6 11.3 Rel. to BSE-30 (3.2) (14.4) (0.6) Div. Yield (%) 1.0 1.0 1.0

Cash flows—breaking even on an operational basis, new investments lead to increase in debt

DLF net cash inflow during the quarter was at Rs9.4 bn comprising cash inflows of Rs8.1 bn from residential sales and Rs1.3 bn from DLF’s own annuity portfolio. Operational cash outflow of Rs9.7 bn comprised Rs3.9 bn towards construction expenses, Rs2.2 bn towards finance cost and the balance towards taxes and corporate overheads. However, capex payments towards land acquisition led to capex of Rs7.5 bn. Management highlighted that acquisition of HSIDC and MRC land parcels were strategic due to proximity to extant land parcels and the company is not getting into land acquisition mode. DLF is in fact looking to rope in financial partners for balance land payments.

The management highlighted outstanding receivables of Rs30 bn (for sales made) against which construction costs of Rs20 bn are yet to be incurred and inventory of Rs135 bn that will likely support cash flows over the next few years. DLF currently has net debt of Rs71.2 bn and is targeting to become a zero debt company through equity infusion from the promoters (Rs22.5 bn) and potential equity raise through a QIP of 173 mn shares.

Sales metrics remain healthy for third straight quarter

DLF had net sales of Rs6 bn during the quarter, in line with the company’s guidance to achieve fresh sales of Rs20-22 bn during/for FY2019. As per management, DLF’s phase 5 projects Camillia and Crest contributed Rs4.5 bn to the total sales. DLF currently has Rs135 bn of unsold inventory—Rs60 bn in DLF Phase 5, Rs40 bn in rest of Gurgaon and Rs35 bn in the rest of India. The company intends to sell this inventory over the next 5-6 years even while developing new Murtuza Arsiwalla inventory in a time frame/span of 3-4 years. Annuity income (ex-DCCDL) was at Rs1.35 bn in 1QFY19. Of the ongoing Chennai SEZ projects, 0.43 mn sq. ft has been handed over to DAPL while the remaining 1.1 mn sq.ft is to be developed by 4QFY19. DLF currently has 6 mn sq. ft Samrat Verma under construction.

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

DCCDL—steady rentals, completion of projects will further boost annuities

DCCDL (jointly held by DLF and GIC) reported revenues of Rs9.8 bn, EBITDA of Rs6.8 bn and PAT of Rs3.6 bn in 1QFY19. The company leased 0.14 mn sq. ft during the quarter. DCCDL has an additional area of 3.7 mn sq. ft is currently under construction. DCCDL currently has net debt of Rs162 bn.

Impact of Ind-AS 115—revenue reversal of Rs140 bn

DLF has adopted Ind-AS 115 and moved to a project completion method of accounting, resulting in a reversal of revenues of Rs140 bn with a reversal of net worth of Rs54 bn. Essentially, revenue recognition of the last 2-3 years has been reversed during the quarter and will likely accrue over the next two years as these projects get completed and are handed over to buyers. Accordingly, forecasted earnings over the next 2-3 years cannot be compared to the earnings trajectory over the last 2-3 years. Our earnings model now reflects the change resulting in change in estimates for FY2019 and FY2020 to Rs5.3 (from Rs6.5) and Rs22.5 (from Rs3.9).

Exhibit 1: Consolidated group debt (including DCCDL increased by Rs8 bn in 1QFY19 due to investments in HSIIDC and MSR DLF: Movement of debt, March fiscal year-ends, 1QFY17-1QFY19 (Rs bn)

3QFY18 4QFY18 1QFY19 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 Total DLF DCCDL DLF DCCDL DLF DCCDL Opening gross debt 256.2 262.1 272.2 278.2 296.4 294.1 ——— 124 166 95 169 (less) Repayment during the quarter (7.7) (6.8) (6.5) (15.8) (8.8) (9.9) ——— (37.3) (2.0) (5.6) (2.0) (add) New loans 13.6 16.9 12.4 34.0 6.5 10.3 ——— 8 6 2 1 Gross debt at the end of the quarter 262.1 272.2 278.2 296.4 294.1 294.5 293.0 —— 95 169 91 168 (less) Equity shown as debt /JV co debt (0.0) (0.0) (0.0) (0.0) (0.0) ———————— (less) Ind-AS impact (3.6) (3.9) (3.5) (4.4) (4.5) (4.0) 3.7 ——— 0.1 1.0 0.1 Gross debt 258.4 268.3 274.7 292.0 289.6 290.5 289.4 123.8 165.6 94.5 169.3 92.3 167.9 (less) cash in hand (37.2) (36.9) (30.7) (41.0) (30.6) (22.5) (73.5) (68.6) (4.9) (32.3) (6.7) (21.1) (6.3) Net debt 221.2 231.4 244.0 251.0 259.0 268.0 215.9 55.1 160.7 62.3 162.6 71.2 161.6 Increase /(Decrease) 10.2 12.6 7.0 8.0 9.0 (52.1) 7.1 1.9 9.0 (1.0)

Source: Company, Kotak Institutional Equities

Exhibit 2: Net sales have shown an improvement over subdued performance in recent time Quarterly sales (gross and net) for DLF, March fiscal year-ends, 1QFY16-1QFY19 (Rs bn)

Gross sales Net sales

12 11 10 10

8 8 6 6 6 5 4 4 4 3 3 2 2 (1) (1) -

(2) 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 49 Real Estate DLF

Exhibit 3: Change of accounting to project completion method make comparison of earnings with estimates difficult DLF: 1QFY19 results snapshot, March fiscal year-ends (Rs mn)

change (%) 1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 FY2019E FY2018 chg (%) Net sales 15,074 26,044 20,477 13,777 (42) (26) 9 92,174 67,068 37 Cost of goods sold (9,453) (20,835) (8,636) (11,362) (55) 9 (17) (40,156) (31,023) 29 Employee costs (786) (812) (783) (779) (3) 0 1 (3,646) (3,436) 6 Other expenses (1,749) (1,984) (2,027) (1,774) (12) (14) (1) (9,135) (8,834) 3 EBITDA 3,086 2,413 9,031 (138) 28 (66) (2330) 39,237 23,774 65 Other income 1,503 1,611 1,635 4,683 (7) (8) (68) 5,642 9,569 (41) Interest costs (4,975) (5,458) (7,827) (5,169) (9) (36) (4) (21,833) (29,507) (26) Depreciation (564) (628) (1,449) (623) (10) (61) (9) (6,512) (5,335) 22 PBT (950) (2,062) 1,391 (1,248) (54) (168) (24) 16,534 (1,499) (1,203) Excecptional — — — — — 85,693 Taxes 260 (250) (179) (334) (204) (245) (178) (4,960) (43,230) (89) PAT (691) (2,312) 1,212 (1,582) (70) (157) (56) 11,574 40,964 (72) Minority interest — — (17) (45) — (27) Share of profit from associates2,415 2,200 (122) 2,055 10 (2078) 18 — 1,618 Net income 1,724 (112) 1,073 428 (1637) 61 303 11,574 42,555 (73) EPS (Rs/share) 1.0 (0.1) 0.6 0.2 - 23.9 Key ratios EBITDA margin (%) 20.5 9.3 44.1 (1.0) 42.6 35.4 PAT margin (%) (4.6) (8.9) 5.9 (11.5) 12.6 61.1 Effective tax rate (%) 27.3 (12.1) 12.9 (26.8) 30.0 51.3

Source: Company, Kotak Institutional Equities estimates

Exhibit 4: DLF is expecting DCCDL EBITDA to be over Rs50 bn in the next 5-6 years DCCDL: 1QFY19 results snapshot, March fiscal year-ends (Rs mn)

change (%) 1QFY19 1QFY18 4QFY18 1QFY18 4QFY18 FY2018 Net sales 9,870 10,360 9,700 (5) 2 38,430 Operating costs (3,070) (3,760) (3,600) (18) (15) (13,280) EBITDA 6,800 6,600 6,100 3 11 25,150 Other income 2,400 2,280 2,740 5 (12) 10,100 Interest costs (4,000) (4,180) (3,940) (4) 2 16,830 Depreciation (1,050) (1,030) (1,050) 2 0 4,170 PBT 4,150 3,670 3,850 13 8 56,250 Excecptional — — — 2,380 Taxes (520) (490) (620) 6 (16) (2,380) PAT 3,630 3,180 3,230 14 12 56,250 Extra-ordinary — — — — Consolidated PAT 3,630 3,050 3,230 14,220 EPS 2.0 0.4 1.8 6.7 Key ratios EBITDA margin (%) 68.9 63.7 62.9 65.4 PAT margin (%) 36.8 30.7 33.3 146.4 Effective tax rate (%) 12.5 13.4 16.1 4.1

Source: Company, Kotak Institutional Equities

50 KOTAK INSTITUTIONAL EQUITIES RESEARCH DLF Real Estate

Exhibit 5: DCCDL currently has occupancy levels of 82% from completed projects DCCDL: Leasable area and area leased, as on 1QFY19 (mn sq. ft)

As on 3QFY18 As on 4QFY18 As on 1QFY19 Area Area leased Leased (%) Area Area leased Leased (%) Area Area leased Leased (%) DCCDL DLF Cyber city, Gurgaon 10.56 10.07 95.4 10.56 10.18 96.4 10.56 10.15 96.1 DAL (SEZs) 13.42 12.53 93.4 13.42 12.55 93.5 13.42 12.56 93.6 Malls (Delhi) 0.77 0.76 98.6 0.77 0.77 99.5 0.77 0.77 99.7 Malls (Chandigarh) 0.19 0.17 88.4 0.19 0.16 83.8 0.19 0.16 82.2 Gurgaon GE Plastics (U/C) 2.50 1.19 47.5 2.50 1.22 48.6 2.59 1.32 50.9 DAL (SEZ) Chennai (U/C) 1.62 0.63 39.0 1.62 0.74 45.8 1.62 0.75 46.1 Chandigarh / Kolkata 1.94 1.55 79.9 1.94 1.57 81.0 1.94 1.62 83.7 Total 31.00 26.90 86.8 31.00 27.18 87.7 33.22 27.32 82.2

Source: Company, Kotak Institutional Equities

Exhibit 6: DCCDL retains gross debt and expects to adjust payables from DLF (Rs83 bn) Balance sheet: DLF (2QFY18-1QFY19), DCCDL (3QFY18), March fiscal year-ends (Rs mn)

2QFY18 3QFY18 4QFY18 1QFY19 Consol. Pre- DLF DCCDL DLF DLF transaction (consol.) (consol.) (consol.) (consol.) Remarks Share Capital 247,072 352,950 74,490 353,104 301,500 Minority interest 1,212 580 — 488 480 Long-term debt 230,338 75,360 155,100 62,389 57,370 For DCCDL, entire external gross debt shifted Other non-current financial liabilities 20,110 11,860 20,310 12,732 12,820 Other non-current liabilities 6,485 6,700 4,640 26,991 1,840 Non-current liabilities 256,933 93,920 180,050 102,112 72,030 Short-term debt 29,721 91,980 8,020 88,080 87,240 For DLF, includes payables to DCCDL Trade payables 12,449 11,740 2,080 12,175 11,990 Other financial liabilities 41,530 51,460 10,760 38,652 46,560 For DLF, DCCDL, includes third party bank debt Other current liabilities 40,878 42,490 4,100 31,951 141,060 For DLF, includes some advances from DCCDL Current liabilities 124,578 197,670 24,960 170,858 286,850 Equity and liabilities 629,795 645,120 279,500 626,562 660,860 Property, plant and equipment (a) 16,010 8,450 15,489 74,360 CWIP 1,373 - Investment property (a) 237,860 56,000 147,310 53,607 - Annuity assets in DCCDL Goodwill and intangible assets 11,772 11,730 700 11,727 11,710 Investments accounted for under equity method 10,349 193,540 — 197,206 200,360 For DLF, DCCDL now accounted as equity method Deferred tax assets 47,883 — 10,080 20,717 22,380 For DLF, adjusted for Def. liabilities from DCCDL deal Other non-current assets 39,725 32,140 18,810 31,896 33,000 Non-current assets 347,590 309,420 185,350 332,015 341,810 Inventories 203,529 206,260 80 197,529 245,330 No build-and-sale properties in DCCDL Financial assets: Investments 1,527 1,580 — 9,996 10,250 Financial assets: Trade receivables 16,679 22,200 1,660 12,858 9,000 For DLF, receivables from sales done in 3QFY18 Financial assets: Cash and bank balances/other balances 22,597 68,600 5,060 22,779 11,190 For DLF, increase due to Rs90 bn of promoter infusion Financial assets: Loans 8,878 13,150 85,690 12,980 16,280 Other current assets 28,996 23,910 1,660 38,406 26,990 Current assets 282,206 335,700 94,150 294,547 319,040 Assets 629,795 645,120 279,500 626,562 660,850

Notes: (a) DLF: Approximate numbers from managemnet for for 3QFY18.

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 51 Real Estate DLF

Exhibit 7: DLF (Consolidated), Financial summary, March fiscal year ends, 2016-2021E (Rs mn)

2016 2017 2018 2019E 2020E 2021E Profit model Net sales 99,256 82,212 67,070 57,236 112,218 87,213 EBITDA 39,972 34,333 15,840 9,701 55,360 29,062 Other income 6,714 7,193 9,570 5,642 5,659 5,672 Interest (26,798) (29,798) (29,510) (13,564) (12,725) (12,164) Depreciation (7,659) (5,725) (5,340) (2,762) (2,951) (3,177) Pre-tax profits 12,229 6,003 (9,440) (983) 45,343 19,393 Tax (5,642) (2,293) (43,230) 295 (13,603) (5,818) Deferred taxation — — — — — — Net income 6,587 3,710 (52,670) (688) 31,740 13,575 Share of profit from associates 1,618 10,060 10,861 11,570 Extraordinary items (1,967) 4,293 87,650 — — — Adjusted net income 3,320 6,942 36,598 9,372 42,601 25,145 Earnings per share (Rs) 1.7 4.0 20.5 5.3 23.9 14.1 Balance sheet Total equity 240,691 245,728 353,104 358,290 396,705 417,664 Minority interests 1,261 1,239 488 488 488 488 Non-current liabilities 226,659 257,532 102,112 145,061 138,166 131,996 Current liabilities 148,694 138,809 170,858 166,671 136,947 121,288 Total liabilities and equity 617,305 643,308 626,562 670,510 672,306 671,435 Non-current assets Net fixed assets 268,491 258,421 82,196 119,991 125,229 131,885 Other non-current assets and advances 85,619 84,236 51,499 63,125 63,125 63,125 Current assets 261,366 299,049 284,552 279,079 275,637 268,111 Investments 1,829 1,603 208,316 208,316 208,316 208,316 Total assets 617,305 643,308 626,562 670,510 672,306 671,435 Ratios (%) Debt/equity 96 109 43 42 36 33 Net debt/equity 82 92 36 54 49 44 RoE (%) 1.1 2.9 11.7 2.5 11.3 6.2 RoCE (%) 3.3 3.5 17.7 1.4 6.1 3.3 Book value per share (Rs) 135 138 198 201 222 234

Source: Company, Kotak Institutional Equities estimates

52 KOTAK INSTITUTIONAL EQUITIES RESEARCH SELL Indraprastha Gas (IGL) Energy AUGUST 13, 2018 RESULT Coverage view: Attractive

Weak margins offset volume growth; limited success in CGD round. IGL reported Price (`): 300 modest 3-5% increase in EBITDA and adjusted net income, as robust 13% growth in Target price (`): 240 volumes was offset by weaker unit margins. IGL has won only one CGD licence area out BSE-30: 37,869 of its 11 bids; results for two are still pending. The rise in participation and now success of oil PSUs and private companies in the recent CGD bidding round, raise concerns of competition for the existing players in the long run. Reiterate SELL with a TP of `240.

Company data and valuation summary Indraprastha Gas Stock data Forecasts/Valuations 2018 2019E 2020E 52-week range (Rs) (high,low) 345-232 EPS (Rs) 10.3 12.0 13.5 Market Cap. (Rs bn) 209.7 EPS growth (%) 19.0 16.4 12.3 Shareholding pattern (%) P/E (X) 29.1 25.0 22.2 Promoters 45.0 Sales (Rs bn) 45.9 55.7 61.4 FIIs 21.3 Net profits (Rs bn) 7.2 8.4 9.4 MFs 9.0 EBITDA (Rs bn) 11.1 12.6 13.8 Price performance (%) 1M 3M 12M EV/EBITDA (X) 18.3 15.9 14.0 Absolute 14.0 14.1 23.4 ROE (%) 22.4 22.1 21.5 Rel. to BSE-30 9.1 6.2 2.7 Div. Yield (%) 0.7 0.8 1.0

3-5% increase in EBITDA and net income despite robust 13% growth in volumes IGL’s adjusted EBITDA and net income were 4-5% below our estimates at `2.95 bn and `1.76 bn, respectively, as modestly higher-than-expected 13% growth in volumes to 5.5 mcm/d was offset by weaker unit EBITDA margins at `5.8/scm.  13% growth in volumes led by 29% growth in industrial and commercial PNG. IGL’s overall volume growth remained robust at 13% in 1QFY19 driven by sharp 29% yoy jump in the industrial/commercial PNG consumption, which is benefiting from favorable policy- related developments. CNG volumes grew 10% yoy to 273 mn kgs, slower than the overall growth; we expect the growth in CNG consumption to moderate gradually given slower vehicles addition. Overall PNG volumes grew 18% yoy to 129 mscm, including 13% increase in residential off-take and 10% increase in supply to other CGDs.  Unit margins remain sequentially steady at `5.8/scm. Gross margins reduced 4% qoq to ₹10.8/scm from ₹11.2/scm in 4QFY18 despite likely higher margins on CNG, price of which was hiked adequately to offset increase in domestic gas price; higher share of industrial PNG may have impacted margins partly. Unit EBITDA increased 2% qoq to ₹5.8/scm from `5.7/scm a quarter ago, helped by expectedly lower costs and operating leverage.  Higher contribution of `190 mn from associates. IGL’s share of net income from CUGL and MNGL was at ₹190 mn in 1QFY19 as compared to `180 mn in 1QFY18.

Limited success of IGL and its JVs in the recent CGD bidding round raises concerns IGL has won only one licence area out of its 11 bids in the recent CGD bidding round; results for two of its bids are still pending. IGL’s JV, MNGL has won three licence areas out of its five bids, while CUGL lost the only bid it made. In our view, the rise in participation and now Tarun Lakhotia success of downstream oil PSUs and private companies in the recent CGD bidding round, raise concerns of possible competition for the existing players in extant geographical areas as well in the long run. It may be enabled by the finalization of regulatory framework for CGD tariffs by Akshay Bhor PNGRB and declaration of such tariffs for third-party usage in the existing areas subsequently.

Fine tune estimates; retain SELL with DCF-based TP of `240 We reduce IGL’s consolidated EPS estimates by modest 1% to ₹12 in FY2019 and ₹13.5 in FY2020, factoring in minor changes in volumes and margins. Our DCF-based TP remains unchanged at `240. We retain SELL noting expensive valuations at 25X FY2019E EPS, which leave no margin of safety against any disappointment on volumes growth and/or unit margins.

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

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

(% chg.) yoy 1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 FY2019E FY2018 (% chg.) Net sales 12,874 13,121 10,492 12,169 (1.9) 22.7 5.8 55,676 45,761 21.7 Total expenditure (9,924) (10,047) (7,619) (9,416) (1.2) 30.2 5.4 (43,120) (34,688) 24.3 Raw material (7,418) (7,481) (5,486) (6,770) (0.9) 35.2 9.6 (31,751) (24,914) 27.4 Staff cost (311) (289) (251) (277) 7.7 23.9 12.4 (1,220) (1,061) 15.0 Other expenditure (2,195) (2,277) (1,882) (2,369) (3.6) 16.6 (7.3) (10,149) (8,713) 16.5 EBITDA 2,951 3,074 2,873 2,754 (4.0) 2.7 7.1 12,556 11,073 13.4 Other income 262 245 179 267 7.1 46.8 (1.8) 1,318 1,021 29.0 Finance cost (6) (5) (4) (6) (15) (17) Depreciation (473) (480) (439) (470) (1.5) 7.7 0.5 (1,983) (1,813) 9.4 Pre-tax profits 2,735 2,834 2,609 2,545 (3.5) 4.8 7.5 11,876 10,265 15.7 Extraordinary income — — (100) 160 — 60 Tax (976) (992) (897) (957) (4,145) (3,617) Net income 1,759 1,842 1,613 1,747 (4.5) 9.1 0.7 7,731 6,708 15.3 Adjusted net income 1,759 1,842 1,677 1,644 (4.5) 4.9 7.0 7,731 6,669 15.9 EPS (Rs) 2.5 2.6 2.4 2.3 (4.5) 4.9 7.0 11.0 9.6 15.3 Other comprehensive income (1) (3) 6 Total comprehensive income 1,758 1,674 1,650 Tax rate (%) 35.7 35.0 35.7 35.4 34.9 35.0

Income from associates Net income of CUGL and MNGL 380 360 340 5.6 11.8 1,668 1,450 15.0 IGL's share 190 180 170 5.6 11.8 834 725 15.0

Other details Volume (mscm) 505 497 446 482 1.6 13.2 4.8 2,095 1,891 10.8 CNG (mn kgs.) 273 269 248 256 1.4 10.1 6.6 1,101 1,018 8.2 PNG (mscm) 129 126 109 124 2.6 18.3 4.0 567 479 18.4 Industrial/commercial 58 45 53 28.9 9.4 250 204 22.5 Domestic PNG 27 24 31 12.5 (12.9) 126 109 16.0 Natural gas 44 40 40 10.0 10.0 191 166 15.0 Net realization (Rs/scm) 25.5 26.4 23.5 25.2 (3.4) 8.4 1.0 26.6 24.2 9.8 Raw material cost (Rs/scm) 14.7 15.0 12.3 14.0 (2.4) 19.4 4.6 15.2 13.2 15.0 Gross margin (Rs/scm) 10.8 11.3 11.2 11.2 (4.7) (3.7) (3.5) 11.4 11.0 3.6 Other operating costs (Rs/scm) 5.0 5.2 4.8 5.5 (3.8) 3.8 (9.6) 5.4 5.2 5.0 Operating profit (Rs/scm) 5.8 6.2 6.4 5.7 (5.5) (9.3) 2.3 6.0 5.9 2.4

Source: Company, Kotak Institutional Equities estimates

54 KOTAK INSTITUTIONAL EQUITIES RESEARCH Indraprastha Gas Energy

Exhibit 2: IGL has won one area, while MNGL has three areas in the recent bidding round Status of bids by IGL and its JVs

State Geographical area Status IGL Haryana Bhiwani, Charkhi Dadri and Mahendragarh Unsuccessful Haryana Hisar Pending Haryana Jhajjar Pending Haryana Nuh and Palwal Unsuccessful Punjab SAS Nagar district (Except areas already authorized), Patiala and Sangrur Unsuccessful Punjab Ludhiana (except area already authorized), Barnala and Moga Unsuccessful Rajasthan Alwar (Other than Bhiwadi) and Jaipur Unsuccessful Tamil Nadu Coimbatore District Unsuccessful Uttar Pradesh Bulandshahr (Except areas already authorized), Aligarh and Hathras Unsuccessful Uttar Pradesh Meerut (Except areas already authorized), Muzaffarnagar and Shamali Awarded Uttarakhand Dehradun District Unsuccessful MNGL Karnataka Ramanagara Awarded Maharashtra Valsad, Dhule and Nashik Awarded Maharashtra Sindhudurg Awarded Maharashtra Ahmednagar and Aurangabad Unsuccessful Maharashtra Sangli and Satara Unsuccessful CUGL Uttar Pradesh Auraiya, Kanpur Dehat and Etawah Unsuccessful

Source: PNGRB, Kotak Institutional Equities

Exhibit 3: Private players and downstream oil PSUs have dominated the recent CGD bidding round Summary of results of recent CGD round as on August 10, 2018

Entity GAs won (#) Adani Gas Limited 13 Bharat Gas Resources Limited 11 Consortium of AG&P LNG Marketing Pte Ltd. & Atlantic Gulf & Pacific company of Manila 2 Consortium of Assam Gas Company Limited, Oil India Limited and GAIL Gas Limited 2 Essel Gas Company Limited 1 GAIL Gas Limited 4 Green Gas Limited 2 Gujarat Gas Limited 1 Hindustan Petroleum Corporation Limited 1 Indian Oil Corporation Limited 7 IndianOil-Adani Gas Private Limited 9 Indraprastha Gas Limited 1 IRM Energy Private Limited 1 Maharashtra Natural Gas Limited 3 Megha Engineering & Infrastructures Limited 3 Consortium of Think Gas Investments PTE Limited & Think Gas Distribution Pvt. Limited 4 Torrent Gas Private Limited 9 Tripura Natural Gas Company Limited 2 Unison Enviro Private Limited 2 Total 78

Source: Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 55 Energy Indraprastha Gas

Exhibit 4: We assume strong volume growth and steady per-unit margins Key assumptions for IGL, March fiscal year-ends, 2014-21E

2014 2015 2016 2017 2018 2019E 2020E 2021E Sales volume (mn scm) CNG 1,028 1,073 1,123 1,269 1,412 1,528 1,645 1,764 PNG 356 330 342 406 479 567 659 743 Domestic 68 70 86 94 109 126 146 166 Commercial/Industrial 288 158 160 174 204 250 294 330 Other CGD companies 102 96 138 166 191 220 247 Total volumes 1,384 1,404 1,465 1,675 1,891 2,095 2,305 2,507 CNG (mn kgs) 774 805 834 921 1,018 1,101 1,186 1,272 Average daily volumes (mcm/d) 3.8 3.8 4.0 4.6 5.2 5.7 6.3 6.9 Growth in volumes (%) 3.4 1.4 4.4 14.3 12.9 10.8 10.0 8.8

Operating metrics (Rs/scm) Gross margin 9.0 9.5 9.6 10.3 11.1 11.4 11.5 11.6 Operating cost 3.3 3.9 4.3 4.6 5.2 5.4 5.5 5.6 Operating profit 5.7 5.7 5.3 5.8 5.9 6.0 6.0 6.0

Source: Company, Kotak Institutional Equities estimates

Exhibit 5: We value IGL stock at `240 using DCF methodology Calculation of equity value using discounted cash flow analysis (` mn)

2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E EBITDA 12,556 13,824 14,993 16,221 17,289 18,407 19,388 20,377 21,462 22,325 Adjusted tax expense (3,217) (3,557) (3,865) (4,201) (4,488) (4,793) (5,049) (5,308) (5,600) (5,813) Change in working capital 1,063 821 935 1,045 1,206 1,249 1,128 778 709 761 Operating cash flow 10,402 11,089 12,063 13,065 14,008 14,864 15,467 15,847 16,571 17,273 Capital expenditure (4,675) (4,425) (4,175) (3,675) (3,442) (3,498) (3,539) (3,564) (3,573) (3,755) Free cash flow 5,727 6,664 7,888 9,390 10,566 11,366 11,928 12,283 12,998 13,518 Discounted cash flow-now 5,327 5,557 5,899 6,299 6,356 6,131 5,770 5,329 5,058 4,716 Discounted cash flow-1 year forward 6,198 6,578 7,023 7,087 6,838 6,434 5,942 5,639 5,260 Discounted cash flow-2 year forward 7,337 7,830 7,902 7,624 7,176 6,625 6,288 5,865

Now +1-year +2-years Discount rate (%) 11.5% 11.5% 11.5% Total PV of free cash flow 56,442 61,903 67,217 Terminal value assumption Growth in perpetuity 4.0% 4.0% 4.0% Sensitivity of 12-month fair value to WACC and perpetual growth FCF in 2028E 13,518 13,518 13,518 Perpetual growth (%) Exit FCF multiple (X) 13.9 13.9 13.9 241 2.0% 3.0% 4.0% 5.0% 6.0% Exit EV/EBITDA multiple (X) 8.7 8.7 8.7 10.5% 240 253 270 292 325 Terminal value 187,444 187,444 187,444 11.0% 230 240 255 273 299 PV of terminal value 65,394 65,394 65,394 11.5% 220 230 241 257 278 Value of extant CGD business 121,835 127,296 132,611 12.0% 212 220 230 243 260 Value of 50% stake in CUGL and MNGL 16,675 19,176 21,573 WACC(%) 12.5% 204 211 220 231 245 Net debt (14,476) (19,367) (25,039) Equity value 152,986 165,839 179,223 Shares outstanding (mn) 700 700 700 Fair value of IGL (Rs), including dividends 221 241 264

Source: Kotak Institutional Equities estimates

56 KOTAK INSTITUTIONAL EQUITIES RESEARCH Indraprastha Gas Energy

Exhibit 6: Profit model, balance sheet, cash model March fiscal year-ends, 2012-21E (` mn)

2014 2015 2016 2017 2018 2019E 2020E 2021E Profit model (Rs mn) Net sales 39,222 36,810 36,858 38,148 45,921 55,676 61,362 68,430 EBITDA 7,824 7,930 7,747 9,638 11,133 12,556 13,824 14,993 Other income 211 345 299 652 1,021 1,318 1,708 2,159 Finance cost (441) (298) (99) (12) (17) (15) (15) (15) Depreciation (2,195) (1,487) (1,563) (1,671) (1,813) (1,983) (2,207) (2,420) Pretax profits 5,398 6,490 6,385 8,607 10,325 11,876 13,310 14,718 Current tax (1,676) (1,795) (1,812) (2,735) (3,169) (3,672) (4,147) (4,614) Deferred tax (119) (318) (382) (161) (448) (473) (498) (523) Net profits including associates 3,603 4,481 4,641 6,063 7,217 8,398 9,432 10,444 EPS including associates (Rs) 5.1 6.4 6.6 8.7 10.3 12.0 13.5 14.9

Balance sheet (Rs mn) Total equity 17,632 20,981 25,164 29,266 35,129 40,767 46,824 52,946 Deferred taxation liability 963 1,272 1,650 1,806 2,253 2,726 3,224 3,747 Borrowings 3,525 1,453 — — — — — — Customer deposits 3,104 3,681 4,252 4,826 5,577 6,327 7,077 7,827 Currrent liabilities 3,297 3,348 2,746 4,963 6,323 7,660 8,590 10,055 Total liabilities and equity 28,520 30,735 33,813 40,861 49,282 57,480 65,714 74,575 Cash 2,514 2,315 4,538 6,086 5,580 10,471 16,143 22,820 Current assets 3,257 3,413 3,822 3,316 4,044 4,660 5,004 5,432 Total fixed assets 21,576 22,099 22,861 24,689 28,181 30,873 33,090 34,846 Investments 1,174 2,909 2,592 6,770 11,477 11,477 11,477 11,477 Total assets 28,520 30,735 33,813 40,861 49,282 57,480 65,714 74,575

Free cash flow (Rs mn) Operating cash flow, excl. working capital 5,729 5,927 5,833 7,018 7,947 8,869 9,662 10,365 Working capital 297 411 603 2,446 2,093 1,472 1,335 1,788 Capital expenditure (2,481) (2,145) (2,321) (2,709) (5,175) (4,675) (4,425) (4,175) Free cash flow 3,544 4,194 4,115 6,755 4,865 5,666 6,572 7,977 Investments 252 (1,733) 317 (9,004) (4,707) — — — Other income 168 313 257 573 1,021 1,318 1,708 2,159

Ratios (%) Net debt/equity 5.7 (4.1) (18.0) (20.8) (15.9) (25.7) (34.5) (43.1) RoAE 21.0 21.4 17.1 19.7 19.6 19.1 18.5 18.0 RoACE 16.2 17.4 14.6 17.1 17.0 16.7 16.2 15.8 Adjusted CRoCI 20.1 18.2 18.6 23.3 22.8 21.2 19.8 18.7

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 57 SELL Voltas (VOLT) Industrials AUGUST 13, 2018 RESULT Coverage view: Neutral Will margins rebound over time and market share gains sustain? Unlike in the Price (`): 621 past, current share gains in the room AC business for Voltas have taken place (1) in a contracting market and (2) at the cost of margin. Voltas would likely have to Target price (`): 530 maintain its UCP margin in the current range of 11-12% to retain its market share. BSE-30: 37,869 Such margin would further weaken in FY2019 given large build-up in UCP segment assets. The surprise support from EMP 1QFY19 would unlikely continue given declining order backlog and normalizing margin. We cut estimates by 2-7%; retain `530 SoTP on roll-forward.

Company data and valuation summary Voltas Stock data Forecasts/Valuations 2018 2019E 2020E 52-week range (Rs) (high,low) 675-493 EPS (Rs) 17.3 17.4 20.6 Market Cap. (Rs bn) 205.5 EPS growth (%) 10.7 0.4 18.8 Shareholding pattern (%) P/E (X) 35.9 35.8 30.1 Promoters 30.3 Sales (Rs bn) 64.0 72.5 85.0 FIIs 19.6 Net profits (Rs bn) 5.7 5.7 6.8 MFs 19.2 EBITDA (Rs bn) 6.6 7.5 9.0 Price performance (%) 1M 3M 12M EV/EBITDA (X) 30.8 26.8 21.9 Absolute 16.3 3.2 19.4 ROE (%) 15.9 13.9 14.8 Rel. to BSE-30 11.3 (4.0) (0.6) Div. Yield (%) 0.6 0.6 0.7

UCP: Price leader turns aggressor; more downside to margin in the near term Voltas has increased its share in the MBO market for room ACs to 23.5% in 1QFY19, adding more than 100 bps gain to its room-AC market share on a yoy/qoq basis. This hints at FY2019 being the sixth year of large share gains for Voltas since 2005. On most of the past five occasions, Voltas had added share while either maintaining or improving profitability and mostly doing so in growing markets. Several sectoral factors have been pushing up costs but Voltas is being selective in increasing prices across products and geographies. The same is visible in this segment results declining by 16% over 1QFY17, negating share gains and modest market growth over this period. Large increases in segmental assets for the UCP segment should further weaken margin in FY2019, based on past similar instance for Voltas in FY2012. A second summer in parts of the country and the forthcoming festive season will help Voltas cover some ground on AC sales and bring down its large inventory levels. Strategies such as indigenization (indoor unit moulds, controllers) and increased focus on inverter SKUs will help it grow in the long term.

EMP springs a surprise, a likely one-off; Voltas-Beko launch well on schedule EMP segment had a stellar quarter with 31% topline growth at `8.6 bn and EBIT margin of 10.2%, a margin print not seen in the last eight years and much higher than the management’s threshold of 7-8%. Higher margin was led by efficient execution as well as a few projects crossing internal margin recognition threshold of 20% completion. Outstanding order backlog, however, declined 6% yoy and 9% qoq to `46 bn. The growth strategy remains on government contracts as private capex is still muted, with margin threshold of 7-8%. Aditya Mongia

We reduce estimates by 2-7%; retain `530 SoTP on roll-forward Ajinkya Bhat Voltas reported a steady operating performance with 10-13% yoy growth in revenues/EBITDA. Reduction in other income on lower support for a fair valuation of financial assets/instruments yielded flattish yoy and in-line PAT. The key miss was on UCP segment margin and the same was compensated by EMP segment margin. A large build-up in UCP segment assets, weak order inflows for the EMP segment and margin beat on EMP lead to a net 2-7% cut in our FY2019-21 estimates.

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

Analysis of 1QFY19 results

Voltas reported 1QFY19 revenues of `21.3 bn, up 10% yoy, in line with estimates. UCP segment reported flat revenues of `12 bn due to unfavorable weather, unseasonal rains and thus lower customer offtake. The segment also reported lower EBIT margin of 12.5%, down 200 bps yoy due to factors such as higher commodity prices and INR depreciation versus US$. Overall UCP market share in multi-brand outlets increased further to 23.5%.

The EMP segment, on the other hand, had a stellar quarter with 31% topline growth at `8.6 bn and EBIT margin of 10.2%, a margin print not seen in the past eight years and much higher than the management’s threshold of 7-8%. Higher margin was led by efficient execution as well as a few projects crossing internal margin recognition threshold of 20% completion. Outstanding order backlog, however, declined 6% yoy and 9% qoq to `46 bn.

Exhibit 1: Revenue growth as well as margin led by EMP segment; UCP reported flat revenue and yoy lower margin in the quarter Voltas (consolidated) - 1QFY19 results - key numbers (Rs mn)

% change 1QFY19 1QFY19E 1QFY18 4QFY18 vs est. yoy qoq FY2018 FY2017 % change FY2019E FY2018 % change Sales 21,344 21,210 19,389 20,213 0.6 10.1 5.6 63,568 59,706 6.5 71,983 63,568 13.2 Expenses (19,049) (19,112) (17,363) (17,952) 9.7 6.1 (57,430) (54,537) 5.3 (65,000) (57,430) 13.2 Stock 3,099 (605) 913 (1,054) 1,903 — (1,054) Raw material (18,725) (13,342) (15,925) (44,621) (44,261) 0.8 (51,856) (44,621) 16.2 Employee costs (1,431) (1,478) (1,434) (3.2) (0.2) (5,867) (6,184) (5.1) (6,504) (5,867) 10.9 Other expenses (1,992) (1,938) (1,507) 2.8 32.2 (5,888) (5,994) (1.8) (6,640) (5,888) 12.8 EBITDA 2,295 2,098 2,026 2,261 9.4 13.3 1.5 6,138 5,169 18.8 6,983 6,138 13.8 Other income 419 569 647 709 (26.3) (35.2) (40.9) 2,230 2,621 (14.9) 1,973 2,230 (11.5) Interest (27) (27) (35) (43) 0.8 (22.9) (37.1) (119) (160) (25.7) (108) (119) (9.1) Depreciation (59) (65) (61) (61) (8.1) (2.9) (2.1) (244) (245) (0.4) (267) (244) 9.8 Profit before tax 2,627 2,575 2,576 2,865 2.0 2.0 (8.3) 8,005 7,384 8.4 8,581 8,005 7.2 Tax (762) (747) (727) (900) 2.0 4.8 (15.3) (2,270) (2,004) 13.3 (2,488) (2,270) 9.6 Adjusted PAT 1,866 1,828 1,850 1,966 2.0 0.9 (5.1) 5,735 5,380 6.6 6,092 5,735 6.2 Extraordinary items — — 20 (14) 6 11 — 6 Reported PAT 1,866 1,828 1,870 1,952 2.0 (0.2) (4.4) 5,741 5,391 6.5 6,092 5,741 6.1 Minority interest and profit from associates (26) (69) (13) (25) (17) (217) (353) (17) PAT for equity holders 1,839 1,759 1,856 1,927 4.6 (0.9) (4.5) 5,724 5,174 10.6 5,739 5,724 0.3 Other comprehensive income 530 — 475 608 (12.8) 1,631 818 — 1,631 Total comprehensive income 2,369 1,759 2,331 2,534 34.7 1.6 (6.5) 7,355 5,993 22.7 5,739 7,355 (22.0)

Key ratios (%) RM cost/sales 73.2 71.9 74.3 71.9 70.9 72.0 71.9 Employee cost/sales 6.7 7.6 7.1 9.2 10.4 9.0 9.2 Other exp./sales 9.3 10.0 7.5 9.3 10.0 9.2 9.3 EBITDA margin 10.8 9.9 10.4 11.2 9.7 8.7 9.7 9.7 Effective tax rate 29.0 29.0 28.2 31.4 28.4 27.1 29.0 28.4 PAT margin 8.7 8.6 9.5 9.7 9.0 9.0 8.5 9.0 EPS (Rs) 5.6 5.5 5.6 5.9 17.3 15.6 17.4 17.3

Order details Order booking 4,274 12,458 12,300 (65.7) (65.3) 37,432 30,658 22.1 41,175 37,432 10.0 Order backlog 46,230 49,060 50,620 (5.8) (8.7) 50,620 43,210 17.1 57,654 50,620 13.9

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 59 Industrials Voltas

Exhibit 2: UCP growth affected by unfavorable weather, though market share was up; EMP performance led by efficient execution Voltas – 1QFY19 adjusted segmental numbers on consolidated basis (Rs mn)

% change 1QFY19 1QFY19E 1QFY18 4QFY18 vs est. yoy qoq FY2018 FY2017 % change FY2019E FY2018 % change Revenues Electromechanical Projects 8,664 7,785 6,608 8,735 11.3 31.1 (0.8) 28,452 26,550 7.2 34,141 28,452 20.0 Engg products and services 772 949 904 834 (18.7) (14.6) (7.5) 3,099 3,318 (6.6) 3,182 3,099 2.7 Unitary cooling products 11,911 12,476 11,882 10,645 (4.5) 0.2 11.9 32,026 29,846 7.3 34,661 32,026 8.2 Others — — — — — — — — Total 21,346 21,210 19,394 20,215 0.6 10.1 5.6 63,577 59,715 6.5 71,983 63,577 13.2 Less Intersegment (2) — (5) (2) (10) (9) 3.3 — (10) NM Total 21,344 21,210 19,389 20,213 0.6 10.1 5.6 63,568 59,706 6.5 71,983 63,568 13.2 EBIT Electromechanical Projects 881 506 352 665 74.1 NM 32.5 1,854 849 118.3 2,731 1,854 47.3 Engg products and services 268 285 257 249 (6.0) 4.0 7.5 992 956 3.8 1,082 992 9.1 Unitary Cooling Products 1,493 1,684 1,706 1,830 (11.4) (12.5) (18.5) 4,749 4,403 7.9 4,619 4,749 (2.7) Others — — — — — — — — Net Interest expense (27) (27) (35) (43) (119) (160) (25.7) (108) (119) (9.1) Other net unallocable income 19 127 326 141 574 1,144 (49.9) 256 574 (55.4) Total Profit before tax 2,632 2,575 2,606 2,842 2.2 1.0 (7.4) 8,049 7,192 11.9 8,581 8,049 6.6 Capital Employed Electromechanical Projects 6,647 7,436 6,977 (10.6) (4.7) 6,977 6,238 6,977 Engg products and services 684 691 679 (1.0) 0.8 679 544 679 Unitary Cooling Products 1,908 526 2,499 262.5 (23.7) 2,499 2,322 2,499 Others — — — — — — Unallocated 31,228 27,027 29,215 15.5 6.9 29,215 24,248 29,215 Total 40,467 35,679 39,370 13.4 2.8 39,370 33,351 39,370 EBIT margin (%) Electromechanical Projects 10.2 6.5 5.3 7.6 6.5 3.2 8.0 6.5 Engg products and services 34.7 30.0 28.5 29.8 32.0 28.8 34.0 32.0 Unitary Cooling Products 12.5 13.5 14.4 17.2 14.8 14.8 13.3 14.8 Total PBT margin 12.3 12.1 13.4 14.1 12.7 12.0 11.9 12.7 Notes: (1) Reported historical gross revenues for UCP segment have been adjusted for excise duty to be comparable with 1QFY19 numbers net of GST. However, the numbers are still not fully comparable due to the service tax component in historical numbers.

Source: Company, Kotak Institutional Equities estimates

Exhibit 3: Unlike past market share gain, Voltas has increased share in a declining market and at lower profitability this time Market share trajectory for Voltas' room AC business, 2005-1Q19, March fiscal year-ends (%)

Market share trajectory for Voltas' room AC business

Market share in room AC business (LHS) Yoy growth in UCP revenues (RHS) EBIT margin of UCP segment (RHS)

27.0 40

23.5 24.0 30 22.1 21.4 20.8 21.0 21.0 19.8 20 18.3 18.3 18.5 18.0 10 16.5 16.0 16.4 14.4 15.0 13.9 0 12.7 12.0 -10 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1QFY19

Notes: (1) Reported 1QFY19 gross revenues for UCP segment have been adjusted to make them comparable yoy.

Source: Company, Kotak Institutional Equities estimates

60 KOTAK INSTITUTIONAL EQUITIES RESEARCH Voltas Industrials

Exhibit 4: Voltas has not benefitted from market share gains at EBIT level Trends in key business metrics Voltas UCP segment, March fiscal year-ends

Voltas UCP segment performance 2,000 1,779 1,706 1,493 1,500 1,132

1,000

500

91 114 64 71 21.5 22.0 22.2 23.5 - 1Q16 1Q17 1Q18 1Q19 1Q16 1Q17 1Q18 1Q19 1Q16 1Q17 1Q18 1Q19 Segment assets as days of EBIT (Rs mn) Market share (%) annualized 1Q sales (Rs bn)

Source: Company, Kotak Institutional Equities

Exhibit 5: Order backlog provides visibility of ~1.3 years of revenues for the EMP segment Quarterly order backlog trend of Voltas, March fiscal year-ends, 1QFY13-1QFY19 (Rs bn)

(Rs bn) Order backlog 60 Domestic International 51 49 50 48 46 50 46 44 42 43 43 42 43 41 39 39 40 37 38 38 39 39 40 36 37 36 35 23 31 29 32 31 23 24 22 27 30 22 21 18 19 20 20 24 26 22 29 22 17 24 20 22 22 20

23 22 10 19 19 18 19 20 19 19 20 21 18 18 20 18 20 19 16 14 14 16 16 15 14 18

-

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

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 61 Industrials Voltas

Exhibit 6: Quarterly order inflow trend of Voltas, March fiscal year-ends, 1QFY13-1QFY19 (Rs bn)

(Rs bn) Order inflow 16 14 12 10 8 6 12 12 12 11 10 10 10 4 9 8 8 6 6 7 5 6 5 6 2 3 4 4 4 4 4 2 2

-

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

Source: Company, Kotak Institutional Equities

Exhibit 7: Voltas has consistently improved its market share in the room AC business Market share for Voltas in multi-brand outlets for UCP segment, March fiscal year-ends, 2005-1QFY19 (%)

25.0 23.5 22.1 20.8 21.0 21.4 19.8 18.5 20.0 17.7 18.3 18.3 16.0 16.4 13.9 14.4 15.0 12.7

10.0

5.0

-

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017 2018

1QFY19

Source: Company, Kotak Institutional Equities

62 KOTAK INSTITUTIONAL EQUITIES RESEARCH Voltas Industrials

Exhibit 8: Change in consolidated earnings estimates for Voltas, March fiscal year-ends, 2018-21E (Rs mn)

New estimates Old estimates Change (%) 2018 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E Electro-Mechanical Projects Revenues 28,452 34,141 40,311 47,530 35,935 44,700 53,334 (5) (10) (11) Yoy growth (%) 7.2 20.0 18.1 17.9 26.3 24.4 19.3 EBIT 1,854 2,731 3,225 3,802 2,336 2,906 3,467 17 11 10 EBIT margin (%) 6.5 8.0 8.0 8.0 6.5 6.5 6.5 Unitary Cooling Products Revenues 32,026 34,661 40,673 46,932 35,746 41,258 47,637 (3) (1) (1) Yoy growth (%) 7.3 8.2 17.3 15.4 11.6 15.4 15.5 EBIT 4,749 4,619 5,543 6,396 5,300 6,076 6,968 (13) (9) (8) EBIT margin (%) 14.8 13.3 13.6 13.6 14.8 14.7 14.6 Engg products and services Revenues 3,099 3,182 3,534 3,888 3,365 3,675 4,016 (5) (4) (3) Yoy growth (%) (6.6) 2.7 11.1 10.0 8.6 9.2 9.3 EBIT 992 1,082 1,202 1,322 1,077 1,176 1,286 0 2 3 EBIT margin (%) 32.0 34.0 34.0 34.0 32.0 32.0 32.0

Consolidated numbers Revenues 63,568 71,983 84,518 98,350 75,046 89,633 104,986 (4) (6) (6) Yoy growth (%) 6.2 13.2 17.3 16.3 17.9 19.3 17.0 EBITDA 6,626 7,483 8,989 10,503 7,892 9,312 10,846 (5) (3) (3) EBITDA margin (%) 10.4 10.4 10.6 10.7 10.5 10.4 10.3 Profit before tax 8,005 8,581 10,212 11,902 9,114 10,577 12,008 (6) (3) (1) Tax rate (%) 28.4 29.0 30.0 30.0 29.0 30.0 30.0 Profit after tax 5,718 5,739 6,820 8,106 6,194 7,157 8,264 (7) (5) (2) EPS (Rs) 17.3 17.3 20.6 24.5 18.7 21.6 25.0 (7) (5) (2) EPS growth (%) 10.7 0.4 18.8 18.9 8.3 15.6 15.5

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 63 Industrials Voltas

Exhibit 9: In the base case, we arrive at an SoTP target price of Rs550/share including valuation for Arcelik JV Sum-of-the-parts analysis of Voltas, March fiscal year-ends (Rs mn)

Base case 2018 2019E 2020E 2021E Sales growth (%) EMP 7 20 18 18 EPS (7) 3 11 10 UCP 7 8 17 15 EBIT (Rs mn) EMP 1,854 2,731 3,225 3,802 EPS 992 1,082 1,202 1,322 UCP 4,749 4,619 5,543 6,396 Total 7,595 8,433 9,970 11,521 EBIT margin (%) EMP 6.5 8.0 8.0 8.0 EPS 32.0 34.0 34.0 34.0 UCP 14.8 13.3 13.6 13.6 PBT (Rs mn) EMP 1,535 2,292 2,766 3,313 EPS 821 908 1,031 1,152 UCP 3,932 3,877 4,755 5,572 Other income 1,717 1,503 1,660 1,865 Total 8,005 8,581 10,212 11,902

PAT (Rs mn) EMP 1,100 1,628 1,936 2,319 EPS 589 645 722 807 UCP 2,817 2,753 3,328 3,901 Others (17) (353) (329) (226) Other income 1,230 1,067 1,162 1,306 P/E multiple (x) EMP 16 16 16 16 EPS 16 16 16 16 UCP 30 30 30 30 Other income 16 16 16 16 Mcap (Rs mn) EMP 17,593 26,040 30,983 37,104 EPS 9,416 10,318 11,550 12,904 UCP 84,498 82,580 99,846 117,018 Other income 19,684 17,074 18,591 20,888 Total 131,021 132,478 157,681 185,655 Value (Rs/share) 477 562 Value from Arcelik JV (Rs/share) 29 32 Total value (Rs/share) 506 594 Target price (Rs/share) 530 EPS exlcuding JV share (Rs/share) 17.3 18.4 21.6 25.2 P/E (at target price) 30.6 28.8 23.2 19.7

Source: Company, Kotak Institutional Equities estimates

64 KOTAK INSTITUTIONAL EQUITIES RESEARCH Voltas Industrials

Exhibit 10: We value the contribution of Voltas-Arcelik JV at Rs30/share for Voltas Estimated DCF valuation of JV between Voltas and Arcelik, March fiscal year-ends, 2019-36E (Rs mn)

2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2036E Revenue model till FY2028 based on market growth and market share in India Volumes ('000 units) Microwaves 1,600 1,648 1,697 1,748 1,801 1,855 1,910 1,968 2,027 2,087 Refrigeration Appliances 15,451 16,688 17,522 18,398 19,318 19,897 20,494 21,109 21,742 22,395 Home Laundry Appliances 8,870 9,491 9,966 10,464 10,987 11,317 11,656 12,006 12,366 12,737

Volume growth (%) Microwaves 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 Refrigeration Appliances 8.0 8.0 5.0 5.0 5.0 3.0 3.0 3.0 3.0 3.0 Home Laundry Appliances 7.0 7.0 5.0 5.0 5.0 3.0 3.0 3.0 3.0 3.0

Average selling price inflation (%) Microwaves 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 Refrigeration Appliances 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 Home Laundry Appliances 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0

Market share for Arcelik JV (%) 2.0 2.0 3.0 4.0 5.0 6.0 7.0 7.0 8.0 8.0

FCFF calculation Net revenue 5,677 6,412 10,605 15,595 21,503 27,950 35,328 38,280 47,411 51,387 80,900 Revenue growth (%) 12.9 65.4 47.0 37.9 30.0 26.4 8.4 23.9 8.4 5.0 EBIT (excl. other income) (420) (324) (102) 282 870 1,467 2,196 2,745 3,901 4,159 6,584 EBIT margin (%) (7.4) (5.1) (1.0) 1.8 4.0 5.2 6.2 7.2 8.2 8.1 8.1 Operating tax expense — — — — 287 484 725 906 1,287 1,372 2,173 NOPLAT (420) (324) (102) 282 583 983 1,471 1,839 2,614 2,786 4,411 Depreciation 420 420 420 420 420 490 630 700 840 980 1,506 Change in working capital (560) 279 49 104 364 71 81 32 100 44 42 Capital expenditure — — — (1,000) (1,000) (1,000) (3,000) — (2,000) — (1,050) Free cash flow to the firm (560) 375 367 (194) 367 543 (818) 2,572 1,554 3,810 4,910

Key assumptions and value drivers Effective tax rate (%) — — — — 33.0 33.0 33.0 33.0 33.0 33.0 33.0 Depreciation as % of gross block 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 Gross FATR (%) 0.9 1.1 1.8 2.6 3.6 3.5 3.5 3.8 3.4 3.7 3.7 NWC ex-cash as % of sales 9.9 4.4 2.2 0.8 (1.1) (1.1) (1.1) (1.1) (1.1) (1.1) (1.1)

DCF valuation Terminal growth rate (%) 4.0 WACC (%) 11.5 EV and contribution to Voltas Sum of discounted FCF 11,261 12,991 PV of terminal value 10,700 11,235 Enterprise value 21,961 24,226 Investments — — Net debt / (cash) 2,917 2,814 Equity value 19,044 21,412 Equity value attributable to Voltas (50%) 9,522 10,706 Contribution to Voltas (Rs/share) 29 32 Contribution to Voltas on Jun-2019 basis (Rs/share) 30

Notes: (1) We exclude ~25% dealer margin to calculate company revenues from retail sales estimates. (2) Instead of directly using the US$100 mn of total equity contribution envisaged by the company over the next 10 years, we arrive at required investments based on estimated sales and an eventual asset turnover ratio of 4X (in line with key peer Whirlpool India). (3) Based on the above estimates and modeling internal accruals as the first preference for incremental capex, we conclude that the JV may need an eventual equity investment of only ~US$80 mn by FY2028 as opposed to US$100 mn stated by the company.

Source: Euromonitor (market size data), Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 65 Industrials Voltas

Exhibit 11: Based on market share and EBITDA margin assumptions, the JV may exhibit a wide range of value accrual to Voltas Sensitivity analysis of Voltas-Arcelik JV based on eventual sustained market share and EBITDA margin (Rs/share)

Sensitivity analysis of Voltas-Arcelik JV Market share (%) 29.7 4.0 6.0 8.0 10.0 12.0 8.0 11.7 13.5 20.3 28.1 34.1 9.0 14.5 16.7 24.9 34.2 41.9 10.0 17.0 20.0 29.7 40.4 49.4

EBITDA EBITDA 11.0 12.2 23.2 34.3 46.5 57.1 margin (%)margin 12.0 14.2 26.4 39.0 52.6 64.5

Source: Kotak Institutional Equities estimates

Exhibit 12: Segmental estimates for Voltas, March fiscal year-ends, 2012-21E (Rs mn)

2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E Valuation BVPS (Rs) 44.7 49.2 55.0 63.6 85.0 100.0 118.1 131.2 146.8 165.3 EPS (Rs) 9.4 5.9 6.8 10.2 10.8 15.6 17.3 17.3 20.6 24.5 P/E (X) 62.8 100.6 87.6 58.0 54.8 38.0 34.3 34.2 28.8 24.2 P/B (X) 13.3 12.1 10.8 9.3 7.0 5.9 5.0 4.5 4.0 3.6 Financials Revenue 51,857 55,310 52,661 51,831 57,198 60,328 64,044 72,483 85,043 98,901 yoy growth (%) 0.2 6.7 (4.8) (1.6) 10.4 5.5 6.2 13.2 17.3 16.3 EBITDA 3,365 2,452 2,656 4,100 4,330 5,669 6,626 7,483 8,989 10,503 EBITDA margin (%) 6.5 4.4 5.0 7.9 7.6 9.4 10.3 10.3 10.6 10.6 PAT 3,125 1,950 2,239 3,381 3,582 5,163 5,718 5,739 6,820 8,106 Segmental Electromechanical projects Order inflow 25,872 26,265 25,854 24,895 28,498 30,620 37,432 41,175 49,410 56,822 yoy growth (%) (17.6) 1.5 (1.6) (3.7) 14.5 7.4 22.2 10.0 20.0 15.0 Order backlog 42,920 37,190 36,120 38,930 39,140 43,210 50,620 57,654 66,754 76,045 Revenue 31,832 31,995 26,924 22,085 28,288 26,550 28,452 34,141 40,311 47,530 yoy growth (%) 4.7 0.5 (15.8) (18.0) 28.1 (6.1) 7.2 20.0 18.1 17.9 EBIT (1,042) (491) (395) 228 550 849 1,854 2,731 3,225 3,802 EBIT margin (%) (3.3) (1.5) (1.5) 1.0 1.9 3.2 6.5 8.0 8.0 8.0 Engg products and services Revenue 4,121 4,310 4,482 3,601 3,706 3,318 3,099 3,182 3,534 3,888 yoy growth (%) (26.9) 4.6 4.0 (19.7) 2.9 (10.5) (6.6) 2.7 11.1 10.0 EBIT 687 821 1,247 1,081 1,127 956 992 1,082 1,202 1,322 EBIT margin (%) 16.7 19.0 27.8 30.0 30.4 28.8 32.0 34.0 34.0 34.0 Unitary cooling products Revenue 15,055 17,831 20,156 24,888 24,941 29,846 32,026 34,661 40,673 46,932 yoy growth (%) (1.4) 18.4 13.0 23.5 0.2 19.7 7.3 8.2 17.3 15.4 EBIT 1,298 1,727 2,519 3,491 3,381 4,403 4,749 4,619 5,543 6,396 EBIT margin (%) 8.6 9.7 12.5 14.0 13.6 14.8 14.8 13.3 13.6 13.6 Others Revenue 427 502 520 661 — — — — — — yoy growth (%) 239 17.4 3.8 27.1 — — — — — — EBIT 42 3 6 70 — — — — — — EBIT margin (%) 9.7 0.6 1.1 10.6 — — — — — —

Source: Company, Kotak Institutional Equities estimates

66 KOTAK INSTITUTIONAL EQUITIES RESEARCH Voltas Industrials

Exhibit 13: Consolidated financials of Voltas, March fiscal year-ends, 2012-21E (Rs mn)

2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E Profit model Total operating income 51,857 55,310 52,661 51,831 57,198 60,328 64,044 72,483 85,043 98,901 Total operating costs (48,493) (52,858) (50,004) (47,730) (52,868) (54,659) (57,417) (65,000) (76,054) (88,398) EBITDA 3,365 2,452 2,656 4,100 4,330 5,669 6,626 7,483 8,989 10,503 Other income 985 901 1,002 1,087 1,367 2,120 1,741 1,474 1,629 1,832 Depreciation (340) (278) (248) (280) (263) (245) (244) (267) (298) (324) EBIT 4,010 3,075 3,410 4,907 5,433 7,545 8,124 8,689 10,320 12,011 Financial charges (314) (398) (225) (233) (158) (160) (119) (108) (108) (108) Pre-tax profit 3,696 2,677 3,184 4,675 5,275 7,384 8,005 8,581 10,212 11,902 Taxation (571) (728) (941) (1,276) (1,696) (2,004) (2,270) (2,488) (3,064) (3,571) Adjusted PAT 3,125 1,950 2,243 3,398 3,580 5,380 5,735 6,092 7,148 8,332 Minority interest & Associate profits 0 — (5) (17) 2 (217) (17) (353) (329) (226) Recurring PAT 3,125 1,950 2,239 3,381 3,582 5,163 5,718 5,739 6,820 8,106 Reported PAT 1,621 2,071 2,454 3,843 3,871 5,174 5,724 5,739 6,820 8,106

Balance sheet Shareholders funds 14,778 16,256 18,193 21,021 28,111 33,066 39,052 43,392 48,549 54,679 Minority Interest 170 118 138 161 267 285 317 363 411 461 Loan funds 2,252 2,612 2,629 1,217 2,707 1,709 1,423 1,423 1,423 1,423 Total sources of funds 17,200 18,987 20,960 22,398 31,085 35,061 40,792 45,178 50,383 56,562 Net fixed assets 2,185 2,110 2,103 1,935 2,050 1,825 1,842 2,075 2,277 2,453 Investments & Goodwill 4,006 4,962 8,119 11,737 20,471 23,858 28,706 28,706 28,706 28,706 Cash balances 2,710 3,498 2,818 2,516 1,855 3,314 2,837 6,292 9,898 14,362 Net current assets excluding cash 8,056 8,195 7,681 5,862 6,398 5,866 7,361 8,059 9,455 10,996 Total applications of funds 17,200 18,987 20,960 22,398 31,085 35,061 40,792 45,178 50,383 56,562

Cash flow statement Net cashflow from operating activites (2,672) 948 2,955 3,105 2,191 4,281 3,253 3,943 4,200 5,165 Cash (used)/realized in investing activities 1,354 620 (2,847) (1,036) (3,149) (733) (1,992) 1,019 1,177 1,382 Cash (used)/realized in financing activities (270) (673) (789) (2,360) 483 (2,115) (1,814) (1,507) (1,771) (2,084) Cash generated /utilised (1,588) 895 (682) (291) (475) 1,433 (553) 3,455 3,606 4,463 Cash at beginning of year 4,109 2,521 3,407 2,725 2,174 1,699 3,132 2,837 6,292 9,898 Cash at end of year 2,521 3,407 2,725 2,434 1,699 3,132 2,579 6,292 9,898 14,362

Key ratios (%) EBITDA margin 6.5 4.4 5.0 7.9 7.6 9.4 10.3 10.3 10.6 10.6 PAT margin 6.0 3.5 4.3 6.5 6.3 8.6 8.9 7.9 8.0 8.2 RoE 22.0 12.6 13.0 17.2 14.6 16.9 15.9 13.9 14.8 15.7 RoCE 20.9 12.4 12.0 16.4 13.8 16.0 15.3 13.5 14.4 15.3 Recurring EPS (Rs) 9.4 5.9 6.8 10.2 10.8 15.6 17.3 17.3 20.6 24.5

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 67 REDUCE Jindal Steel and Power (JSP) Metals & Mining AUGUST 13, 2018 RESULT Coverage view: Attractive

Slower road to recovery. JSP lowered steel volume expectations for FY2019E as it Price (`): 204 now expects its DRI plant to start only after the Angul blast-furnace achieves 85% Target price (`): 215 utilization. We continue to rein in our expectations regarding steel volume growth given BSE-30: 37,869 the challenges around the company’s product-mix. Deleveraging and improved assets sweating make for a good story, though we expect earnings to improve only gradually given the challenges of low PPAs in the power business and demand challenges for the steel product-mix. We cut TP to Rs215 (Rs255 earlier) and maintain REDUCE.

Company data and valuation summary Jindal Steel and Power Stock data Forecasts/Valuations 2018 2019E 2020E 52-week range (Rs) (high,low) 294-112 EPS (Rs) (8.5) 8.0 18.3 Market Cap. (Rs bn) 197.0 EPS growth (%) 59.3 194.2 129.1 Shareholding pattern (%) P/E (X) (24.0) 25.4 11.1 Promoters 58.7 Sales (Rs bn) 279.7 359.1 396.9 FIIs 19.2 Net profits (Rs bn) (8.2) 8.1 18.6 MFs 6.9 EBITDA (Rs bn) 64.7 86.5 95.6 Price performance (%) 1M 3M 12M EV/EBITDA (X) 9.5 6.8 5.8 Absolute (10.3) (16.8) 65.1 ROE (%) (2.7) 2.6 5.7 Rel. to BSE-30 (14.1) (22.6) 37.5 Div. Yield (%) 0.0 0.0 0.0

Angul plant ramp-up—operating at 65% utilization, to improve to 85% by year-end JSP’s Raigarh steel plant is now operating at close to 97-98% utilization while the Angul steel plant is operating at 60-65% capacity utilization. The management now expects the Angul blast-furnace to achieve plant utilization of 85% or steel production of 270 kt – 300 kt/month gradually by end FY2019. We note that this is lower than earlier guidance of 400 kt/month by October 2018 and the expectation of 300-350 kt/month of steel production till then. The management also highlighted that it will start the DRI plant only once the Angul blast-furnace monthly production rate improves to 270-300 kt (as indicated above), later than earlier guidance of August 2018. Our earlier estimate for FY2019 steel production at 5.8 mn tons for JSP was lower than production numbers computed per earlier guidance from management. We now cut our India steel volumes estimate by 3-5% to 5.5 mn tons, 6.2 mn tons and 6.4 mn tons for FY2019E, FY2020E and FY2021E. We believe the company may struggle to increase plant utilization at some of its finishing facilities such as the Plate mill due to weak end-user demand and may resort to more intermediate product sales such as billets, etc. However, the pick-up in infrastructure activity in India will augur well for JSP’s rebar, rail-mill capacity over 1-3 years. Net-debt increases due to forex translation losses JSP’s net-debt increased to Rs427 bn in June 2018 from Rs420 bn in March 2018 largely due to forex translation losses of Rs7 bn. We note that company has close to US$2 bn of loan in overseas subsidiaries and 5% qoq decline in INR/US$ rate in June 2018 will result in such currency adjustment on debt. We expect net-debt at Rs400 bn by FY2019E end, which can decline to Rs370 bn by FY2020E, if the company limits its capex to close to Rs15 bn. The capex Abhishek Poddar for 1QFY19 was Rs5.3 bn and the company expects Rs15 bn for FY2019E, which includes residual project capex. We cut our TP to Rs215 (Rs255 earlier) and maintain REDUCE rating Samrat Verma We cut our consolidated EBITDA estimate for FY2020-2021E by 2-4% on lower volume assumptions and revise target prices to Rs215 (Rs255 earlier). We maintain our REDUCE rating on the stock. We believe JSP offers a good asset sweating and deleveraging story over next 2-3 years though we expect the improvement in earnings to gradually due to challenges around company’s end-product steel capacity and volatile long product prices.

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

Exhibit 1: JSP’s EBITDA was stead qoq at Rs21.5 bn on steady steel earnings and moderate improvement in power Interim results of Jindal Steel & Power (consolidated), March fiscal year-ends (Rs mn)

(% chg.) 1QFY19 1QFY19E 1QFY18 4QFY18 KIE yoy qoq FY2019E FY2018 (%chg) Net sales 96,024 90,228 59,364 86,923 6 62 10 357,441 279,727 28 Total expenditure (74,516) (67,921) (45,837) (65,558) 10 63 14 (269,857) (215,036) 25 Inc/(Dec) in stock 1,087 (675) 2,291 501 — — Raw materials (38,800) (30,865) (20,640) (30,713) 26 88 26 (118,726) (94,607) Staff cost (2,451) (2,600) (2,320) (2,377) (6) 6 3 (11,993) (9,557) Other expenditure (34,353) (33,781) (25,167) (32,969) 2 36 4 (139,138) (110,872) EBITDA 21,508 22,307 13,527 21,365 (4) 59 1 87,584 64,691 35 Other income 1,258 - - 5 372 29 1,171 Interest (9,729) (10,660) (9,006) (10,714) (9) 8 (9) (35,898) (38,657) (7) Depreciation (10,399) (9,695) (9,622) (9,599) 7 8 8 (42,802) (38,830) 10 Pretax profits 2,637 1,952 (5,101) 1,057 35 NM 149 9,256 (12,767) NM Exceptional item — — — 4,376 — 5,874 Tax (1,538) (1,614) 887 (944) (1,851) 2,398 Net income 1,099 338 (4,214) (4,264) 225 NM NM 7,405 (16,242) NM Share of profit from assoc. — 17 10 17 35 87 Minority Interest 709 68 334 1,166 835 2,064 Net income 1,808 423 (3,871) (3,081) 328 NM NM 8,276 (14,091) NM Adjusted net income 1,808 423 (3,871) (18) 8,276 (8,218) Ratios EBITDA margin (%) 22.4 24.7 22.8 24.6 24.5 23.1 ETR (%) 58.3 82.7 17.4 (28.4) 20.0 12.9 EPS (Rs) 1.9 0.5 (4.2) (0.0) 8.1 (8.5) Segmental revenue Iron & Steel 83,087 — 47,134 74,244 76 12 — 227,860 Power 17,590 — 18,218 17,014 (3) 3 — 68,147 Others 2,790 — 2,528 1,381 — 7,044 Segmental PBIT Iron & Steel 14,465 — 3,085 15,164 369 (5) — 31,332 Power 817 — 3,292 677 — 6,072 Others (2,084) — (1,377) (2,063) — (6,477) Segmental PBIT (%) Iron & Steel 17.4 — 6.5 20.4 — 13.8 Power 4.6 — 18.1 4.0 — 8.9

Source: Company, Kotak Institutional Equities estimates

Changes in our estimates

Exhibit 7 highlights key changes in our estimates.

We cut our India steel volume estimate by 3-5% to 5.5 mn tons, 6.2 mn tons and 6.4 mn tons for FY2019E, FY2020E and FY2021E. We also lower our PLF assumption for JPL by 1- 4% to 47%, 52% and 62% for FY2019E, FY2020E and FY2021E.

This results in changes to our consolidated EBITDA estimate for FY2019-FY2021E by (4)-1%. We raise our EBIDTA estimate by 1% for FY2019E despite lower steel volumes due to higher steel prices. However, we cut our EBITDA estimate by 2-4% to Rs91.5 bn, Rs99 bn for FY2020E, FY2021E. Our EPS estimate is cut by 15-25% to Rs13.7, Rs22.1 for FY2020E, FY2021E. Note that the impact on EPS is large due to the company’s high leverage and weak profitability.

Other highlights from the results

 Oman steel plant, higher gas sourcing can aid earnings. The Oman steel plant reported another strong quarter with EBITDA of US$68 mn in 1QFY19 (US$32 mn in 1QFY18). We note that this operation continues to benefit from the improved spread between steel prices and gas prices: higher steel prices and cheaper gas sourcing has benefitted this operation more than traditional blast-furnace operations which use coking coal, the cost of which has also risen.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 69 Metals & Mining Jindal Steel and Power

The company’s production at Oman steel plant was close to 430,000 tons in 1QFY19. The company’s profitability at Oman can now increase as it is able to source more gas (+15% over old quantity) and this will enable them to produce more metalliks (and reduce dependency on external sourcing). JSP will also be commissioning another caster plant in Oman. The additional gas sourcing will be at a marginally higher cost of US$3.5/mmbtu versus US$3/mmbtu for old gas sourcing.

 Inflation realization and raw-material cost in 1QFY19. In 1QFY19, while JSP’s EBITDA/ton was flat qoq at Rs12,900/ton, we note the strong increase in blended realization (+Rs6,700/ton to Rs56,200/ton) as well as raw-material costs (+Rs6,750/ton). The management highlighted that this increase was led (1) in part by higher steel prices as well as higher iron-ore, coal sourcing costs, and (2) in part due to sales of intermediate products such as pig-iron, granshots—this increased the cost as well as revenues by close to Rs3 bn, thereby inflating per ton realization and costs.

 DRI plant commissioning at Angul. The management highlighted that DRI production is expensive and it wants to start these operations at Angul only once they achieve the desired production rate at Angul blast furnace (85% utilization). The DRI plant will use 25-30% gas from the coke oven and close to 70% of energy will be sourced from the coal gasification plant. We note that company has two coke oven batteries operations at Angul and two more could be commissioned by March 2019.

 Steel production in 1QFY19. JSP’s steel production increased by 1% to 1.19 mn tons. As per management, production in1QFY19 could have been higher but for a shutdown of 10 days at Angul in April 2018.

Exhibit 2: JSP’s India steel volumes increased 1% qoq to 1.19 mn tons; EBITDA improved marginally on firm steel prices Interim results of Jindal Steel & Power (standalone), March fiscal year-ends (Rs mn)

(% chg.) 1QFY19 1QFY19E 1QFY18 4QFY18 KIE yoy qoq FY2019E FY2018 (%chg) Net sales 66,900 59,867 36,414 58,451 12 84 14 246,075 176,545 39 Total expenditure (51,516) (44,489) (28,918) (43,264) 16 78 19 (190,338) (136,814) 39 Inc/(Dec) in stock 1,031 — 1,613 1,143 — 2,792 Raw materials (31,363) (23,024) (15,197) (23,252) 32 123 37 (105,383) (71,166) 48 Staff cost (1,429) (1,405) (1,339) (1,241) 2 7 15 (5,672) (5,252) 8 Other expenditure (19,756) (20,060) (13,996) (19,914) (2) 41 (1) (33,631) (23,887) 41 EBITDA 15,384 15,378 7,495 15,188 0 105 1 55,737 39,731 40 Other income 1,067 — - — 30 — Interest (6,054) (6,829) (5,323) (6,864) (11) 14 (12) (21,466) (23,912) (10) Depreciation (5,767) (4,729) (4,806) (4,683) 22 20 23 (23,222) (19,097) 22 Pretax profits 4,630 3,819 (2,634) 3,641 21 NM 27 11,079 (3,278) NM Exceptional item — — — (1,943) — (3,440) Tax (1,307) (764) 857 (247) (3,324) 3,102 NM Net income 3,323 3,055 (1,777) 1,451 9 NM 129 7,755 (3,616) NM Adjusted net income 3,323 3,055 (1,777) 2,811 7,755 (176) - Ratios EBITDA margin (%) 23.0 25.7 20.6 26.0 22.7 22.5 ETR (%) 28.2 20.0 32.5 14.6 30.0 46.2 EPS (Rs) 3.4 3.3 (1.9) 1.6 3 NM 116 7.6 (0.2) Volumes (mn tons) Steel Products 1.19 1.18 0.81 1.18 1 47 1 5.52 3.76 47 Operational details (Rs/ton) Blended realizations (Rs/ton) 56,219 50,735 44,955 49,535 11 25 13 44,550 46,953 (5) EBITDA/ton (Rs/ton) 12,928 13,032 9,253 12,871 (1) 40 0 10,091 10,567 (5)

Source: Company, Kotak Institutional Equities estimates

70 KOTAK INSTITUTIONAL EQUITIES RESEARCH Jindal Steel and Power Metals & Mining

Exhibit 3: JPL’s EBITDA increased by 18% qoq to Rs3.1 bn led by higher power generation Jindal Power, Interim results, 1QFY17 - 1QFY19 (mn units, Rs mn)

(Change %) 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 yoy qoq Jindal Power Sales (Rs mn) 6,680 7,340 8,540 8,630 10,790 8,780 11,720 9,520 9,680 (10) 2 Power generation (mn units) 2,171 2,313 2,356 2,336 3,186 2,427 2,982 2,310 2,751 (14) 19 JPL realizations (Rs/unit) 3.4 3.5 4.0 4.1 3.8 4.0 4.4 4.6 3.9 4 (15) EBITDA 1,820 1,820 3,020 3,820 4,680 3,450 3,560 2,650 3,140 (33) 18 Cost/unit (Rs/unit) 2.5 2.7 2.6 2.3 2.1 2.4 3.0 3.3 2.6 24 (20) EBITDA/unit (Rs/unit) 0.9 0.9 1.4 1.8 1.6 1.6 1.3 1.3 1.3 (22) (1)

Source: Company, Kotak Institutional Equities estimates

Exhibit 4: JSP's Oman steel plant reported EBITDA of US$68 mn aided by higher steel spreads Production and EBITDA performance of Oman steel plant, 1QFY17 - 1QFY19 (US$ mn)

1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Oman Crude steel production (tons) 350,000 280,000 310,000 390,000 360,000 430,000 420,000 460,000 430,000 EBITDA (US$ mn) 34 13 21 32 32 55 63 71 68

Source: Company, Kotak Institutional Equities estimates

Exhibit 5 : JSP's steel EBITDA was steady qoq on flat volumes; company reported EBITDA/ton of Rs12,930 JSP's domestic steel sales and realizations, 1QFY17 - 1QFY19 (mn tons, Rs/ton)

(Change %) 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 yoy qoq

Revenues (Rs mn) 31,604 33,210 36,923 42,756 36,414 37,837 43,843 58,451 66,900 84 14 EBITDA (Rs mn) 6,621 5,371 7,810 9,135 7,495 7,837 9,211 15,188 15,384 105 1 Steel product sales (tons) 780,000 810,000 840,000 920,000 810,000 830,000 940,000 1,180,000 1,190,000 47 1 Blended realization (Rs/ton) 40,517 41,000 43,956 46,474 44,955 45,586 46,642 49,535 56,219 25 13 EBITDA/ton 8,488 6,630 9,298 9,929 9,253 9,442 9,799 12,871 12,928 40 0

Source: Company, Kotak Institutional Equities estimates

Exhibit 6: We expect JSP's leverage ratio to improve aided by improving EBITDA and limited capex JSP's leverage ratios, March fiscal year-ends, 2015 - 2021E, (Rs mn, X)

2016 2017 2018 2019E 2020E 2021E Equity (Rs mn) 324 301 304 317 331 354 Consolidated EBITDA (Rs mn) 34 47 65 88 91 99 Net debt (Rs mn) 458 453 420 400 370 327 Debt/Equity (X) 1.4 1.5 1.4 1.3 1.1 0.9 Net debt/EBITDA (X) 13.3 9.7 6.5 4.6 4.0 3.3

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 71 Metals & Mining Jindal Steel and Power

Exhibit 7: Jindal Steel and Power (consolidated), change in estimates, March fiscal year-ends, 2019-2021E (Rs mn)

Revised estimates Old estimates Changes (%) 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E Consolidated Net sales 357,441 387,154 413,903 359,143 396,852 419,938 (0) (2) (1) EBITDA 87,584 91,466 99,141 86,527 95,593 101,528 1 (4) (2) Adjusted PAT 8,276 13,941 22,420 8,125 18,612 26,428 2 (25) (15) Adjusted EPS (Rs) 8.1 13.7 22.1 8.0 18.3 26.0 2 (25) (15) Standalone business Steel volumes (mn tons) 5.5 6.2 6.4 5.8 6.5 6.6 (5) (5) (3) Net sales 246,075 267,928 277,984 247,262 275,325 281,360 (0) (3) (1) EBITDA 55,737 56,738 60,448 54,518 60,138 61,995 2 (6) (2) Steel EBITDA/ton (Rs) 10,091 9,214 9,394 9,410 9,246 9,372 7 (0) 0 Adjusted PAT 7,755 9,474 13,413 6,902 11,912 14,626 12 (20) (8) Jindal Power Net sales 51,950 58,360 69,532 52,466 60,662 72,190 (1) (4) (4) EBITDA 16,407 18,431 21,959 16,569 19,158 22,798 (1) (4) (4) Capacity 3,400 3,400 3,400 3,400 3,400 3,400 — — — PLF (%) 47 52 62 47 54 65 (1) (4) (4)

Source: Kotak Institutional Equities estimates

Exhibit 8: JSP, Key assumptions, March fiscal year ends, 2016-2021E (Rs mn, Rs/ton)

2016 2017 2018 2019E 2020E 2021E Standalone steel business Total steel sales (mn tons) 3.3 3.3 3.8 5.5 6.2 6.4 Revenues (Rs mn) Mild and finished steel sales 104,386 110,282 133,541 202,070 224,394 235,860 Iron ore pellets 3,824 12,375 15,025 14,651 13,290 11,411 Power 6,963 7,374 11,422 6,424 4,683 4,000 Others 20,594 12,630 15,608 22,929 25,561 26,712 Total 135,766 142,661 175,596 246,075 267,928 277,984 EBITDA (Rs mn) Steel EBITDA/ton (Rs) 7,455 8,540 10,567 10,091 9,214 9,394 Steel EBITDA (Rs mn) 24,411 28,582 39,731 55,737 56,738 60,448 Jindal Power Capacity (MW) 2,800 2,800 3,400 3,400 3,400 3,400 Units generated (mn units) 8,880 8,538 10,164 12,938 14,535 17,317 PLF (%) 39 37 37 47 52 62 Revenues (Rs mn) 30,008 31,274 40,810 51,950 58,360 69,532 EBITDA (Rs mn) 6,351 10,486 14,340 16,407 18,431 21,959

Source: Company, Kotak Institutional Equities estimates

72 KOTAK INSTITUTIONAL EQUITIES RESEARCH Jindal Steel and Power Metals & Mining

Exhibit 9: Our fair value of Rs215 is based on 6X EBITDA for steel operations and DCF for power Jindal Steel and Power, SOTP-based valuation, March 2020E basis (Rs mn)

(Rs bn) (Rs/share) Steel business Steel business EBITDA 57 Assigned multiple (X) 6 Steel business enterprise value (Includes captive power) 342 337 Less: Debt of steel business (210) (207) Steel business equity value (A) 132 130 Power business Equity value of Tamnar I and Tamnar II 103 101 Power business equity value (B) 103 101 International subsidiaries EBITDA (Shadeed) 14 Assigned multiple (X) 6 Enterprise value (Rs mn) 81 80 Less: Debt of international subsidiaries (98) (96) International business equity value (B) (17) (16) Target price (A+B+C) (Rs/share) 218 215

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 73 Metals & Mining Jindal Steel and Power

Exhibit 10: Jindal Steel & Power (consolidated), Profit model, balance sheet model, March fiscal year-ends, 2014-2020E (Rs mn)

2016 2017 2018 2019E 2020E 2021E Profit model (Rs mn) Net sales 194,687 216,555 279,727 357,441 387,154 413,903 EBITDA 34,369 46,580 64,691 87,584 91,466 99,141 Other income 1,567 100 29 372 504 555 Interest (32,536) (33,896) (38,657) (35,898) (33,452) (30,556) Depreciation (40,679) (39,490) (38,830) (42,802) (42,326) (42,414) Unusual or infrequent items (2,358) (3,723) (5,874) — — — Profit before tax (39,637) (30,429) (18,641) 9,256 16,192 26,725 Taxes 8,775 5,027 2,398 (1,851) (3,238) (5,345) Net profit (30,863) (25,402) (16,242) 7,405 12,954 21,380 Share in profit/(loss) of associates (10) 27 87 35 40 40 Minority interest 1,210 2,562 2,064 835 947 1,000 Profit after tax and minority interest (29,662) (22,813) (14,091) 8,276 13,941 22,420 Adjusted PAT (27,304) (19,090) (8,218) 8,276 13,941 22,420 Earnings per share (Rs) (29.8) (20.9) (8.5) 8.1 13.7 22.1 Balance sheet (Rs mn) Equity 324,361 300,505 303,846 317,185 331,126 353,546 Deferred tax liability 66,212 53,586 50,284 50,284 50,284 50,284 Total Borrowings 467,968 458,505 424,789 404,132 377,798 344,833 Current liabilities 64,396 86,916 108,983 123,656 125,031 130,056 Minority interest 8,998 6,467 4,403 3,568 2,621 1,621 Total liabilities 931,934 905,980 892,305 898,825 886,860 880,339 Net fixed assets 763,493 750,813 728,353 703,795 678,845 653,754 Goodwill 5,485 5,670 5,922 5,922 5,922 5,922 Investments 3,594 3,680 14,795 14,795 14,795 14,795 Cash 6,873 5,140 4,784 4,459 8,002 17,856 Other current assets 152,490 140,676 138,451 169,855 179,297 188,012 Total assets 931,934 905,980 892,305 898,826 886,860 880,339 Free cash flow (Rs mn) Operating cash flow excl. working capital (6,444) 4,647 17,438 50,242 55,320 63,834 Working capital changes 13,830 22,456 29,954 (16,730) (8,066) (3,691) Capital expenditure (39,500) (24,975) (16,371) (18,244) (17,376) (17,324) Free cash flow (32,114) 2,128 31,021 15,268 29,877 42,820 Ratios Debt/equity 1.5 1.6 1.4 1.3 1.2 1.0 Net debt/equity 1.4 1.5 1.4 1.3 1.1 0.9 RoAE (%) (11.3) (7.4) (4.8) 2.7 4.4 6.7

RoACE (%) (0.9) 0.1 1.7 4.6 5.2 6.3

Source: Company, Kotak Institutional Equities estimates

74 KOTAK INSTITUTIONAL EQUITIES RESEARCH ADD Tata Communications (TCOM) Telecom AUGUST 13, 2018 RESULT Coverage view: Cautious

Disappointing run continues. Even as TCOM’s headline EBITDA print for 1QFY19 was Price (`): 569 in line with our expectations, internals of the earnings print disappointed, especially the Target price (`): 660 sharp adverse working capital swing. The management, on its part, stuck to its 3-year BSE-30: 37,869 guidance on EBITDA construct and ROCE. The guidance looks increasingly optimistic and the ask rate keeps going up with every disappointing quarter. We cut FY2019-21E EBITDA forecasts by 7-8% and our target price to `660 (from 725). Our constructive view does reflect benefit of doubt on improved execution. ADD.

Company data and valuation summary Tata Communications Stock data Forecasts/valuations 2018 2019E 2020E 52-week range (Rs) (high-low) 754-534 EPS (Rs) 1.6 0.4 2.9 Market Cap. (Rs bn) 162.1 EPS growth (%) (84.3) (77.5) 694.2 Shareholding pattern (%) P/E (X) 345.6 1,535.7 193.4 Promoters 75 Sales (Rs bn) 166.5 157.4 159.9 FIIs 14.1 Net profits (Rs bn) 0.5 0.1 0.8 MFs 3 EBITDA (Rs bn) 22.9 23.3 26.4 Price performance (%) 1M 3M 12M EV/EBITDA (X) 10.3 11.1 9.8 Absolute (7.5) (7.1) (4.3) ROE (%) 4.5 7.8 NM Rel. to BSE-30 (11.4) (13.5) (20.3) Div. Yield (%) 0.8 0.2 0.2

1QFY19 – in-line headline but internals disappoint

Revenues were down 2.4% qoq and 9.2% yoy to `39.1 bn, 2% below expectations. Revenues were impacted partly by adoption of the Ind AS 115 revenue recognition standard; this, however, did not have a material impact on EBITDA. Underlying US$ revenue decline was sharper. EBITDA of `5.55 bn, flat both qoq and yoy, was in line with expectations. EBITDA margins stood at 14.2%, +30 bps qoq and +120 bps yoy. Margin surprise was on account of better-than-expected margin delivery in voice and traditional data service segments even as growth/innovation services and the two subsidiaries (transformation and payment services) disappointed on the EBITDA front. Net loss for the quarter stood at `585 mn, again broadly in line with our estimate.

Adverse working capital swing is key disappointment

EOP net debt increased to `88.4 bn from `75 bn at end-Mar 2018. Of the `13.4 bn swing, we believe nearly 50% was on account of adverse working capital movement and the balance on account of FC debt translation at a depreciated USDINR rate. EBITDA broadly funded the aggregate capex, cash interest and cash tax requirements. In its commentary, the management did indicate that (a) the adverse working capital swing is a reflection of the underlying shift in revenue mix towards higher-receivables data business and (b) the adverse movement will likely continue for another couple of quarters before working capital levels normalize. The data business has not been generating enough incremental EBITDA in the past few quarters to make up for the decline in the voice business. In that backdrop, the increase in working capital is ROCE dilutive at this point. We have adjusted our model to bake in the revised working capital Rohit Chordia outlook and net debt has accordingly gone up.

Cut EBITDA forecasts by 7-8% and price target to `665 (from 725). ADD stays Aniket Sethi The stock’s weak run over the past few quarters reflects increasing fatigue with the increasing gap between promise and delivery. The fatigue thus far was limited to EBITDA delivery; the working capital aspect adds to the fatigue. We have been believers in the top management’s execution prowess but we now share the fatigue. Reasonable valuations keep us positive.

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

Other result highlights and takeaways from the earnings call

 Voice segment EBITDA declined 2.5% qoq and 21% yoy. Contribution to overall EBITDA is now down to under 13%. Data segment EBITDA was flat qoq and up 3.1% yoy in INR terms at `4.86 bn.

 Traditional data services saw a modest 40 bps EBITDA margin expansion qoq and EBITDA growth of around 3.5%. Growth services EBITDA losses reduced a tad qoq but innovation service losses expanded. Combined EBITDA loss stood at US$22.1 mn versus US$24.3 mn in 4QFY18.

 TCPSL and TCTSL had poor quarters.

 Management characterized the industry demand environment as challenging, yet full of opportunities, belaboring the point of TCOM’s ongoing transformation from a ‘pure connectivity’ to a ‘digital infrastructure’ player and how this is helping the company build a strong foundation to tap growth opportunities in the future.

 Capex for the quarter was US$72 mn; this is in line with guidance of US$250-275 mn for the year.

 EOP net debt increased US$117 mn qoq to US$1.3 bn; the management attributed this to higher working capital requirements due to the ongoing change in the revenue mix and also slightly higher capex spends in the quarter.

 For its innovation business, the company is investing US$12-13 mn every quarter. Management believes that these investments are necessary to remain relevant to the client, going forward.

Exhibit 1: Our sum-of-the-parts target price for TCOM is Rs660/share

Comments Voice business Jun-2020E EBITDA (Rs bn) 1.7 EV/EBITDA (x) 4.0 Enterprise value (Rs bn) 7 Data business Jun-2020E EBITDA (including rental income from DC) (Rs bn) 25.8 EV/EBITDA (x) 7.8 Enterprise value (Rs bn) 200 Others Surplus real estate (Rs bn) 61 50% of estimated market value of surplus land Investment in TATA Teleservices (TTSL) (Rs bn) — No value ascribed Value of 26% stake in DC business sold to STT (Rs bn) 15 Total EV (Rs bn) 283 Consolidated net debt (Rs bn) 95 Net equity value (Rs bn) 188 Equity value per share (Rs/share) 658

Source: Kotak Institutional Equities estimates

76 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Communications Telecom

Exhibit 2: TCOM - 1QFY19E review, Ind AS, March fiscal year-ends (Rs mn)

Change (%) Deviation 1QFY18 4QFY18 1QFY19 qoq yoy 1QFY19E % Revenues 43,100 40,086 39,123 (2.4) (9.2) 40,110 (2) Total expenditure (37,514) (34,531) (33,569) (2.8) (10.5) (34,578) (3) EBITDA 5,586 5,555 5,554 (0.0) (0.6) 5,531 0 Depreciation and amortization (4,447) (5,052) (4,849) (4.0) 9.0 (5,085) (5) EBIT 1,140 503 705 40.2 (38.1) 446 58 Other income 444 2,330 244 325 Interest expense (761) (910) (909) (925) Pre-tax profits 822 1,922 41 (97.9) (95.0) (154) Tax (incl. deferred tax) (461) (1,451) (641) (230) Net income pre exceptionals 362 472 (600) (384) Exceptional items — (1,621) — — PAT after exceptional items 362 (1,149) (600) (384) Minority int. share of loss (7) (5) (5) (10) Share in loss of associates (32) (55) 21 (40) Reported net income 322 (1,210) (585) (434) Margins (%) EBITDA 13.0 13.9 14.2 13.8 EBIT 2.6 1.3 1.8 1.1 PBT 1.9 4.8 0.1 (0.4) PAT (pre exceptionals and MI) 0.8 1.2 (1.5) (1.0)

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 77 Telecom Tata Communications

Exhibit 3: TCOM: key operating and financial metrics

Change (%) Quarter-ending Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 qoq (%) yoy (%) Gross Revenue by Segment (%) Global Voice Solutions 33.8 35.6 34.0 29.9 27.8 26.2 Global Data Services 62.3 64.4 66.0 70.1 72.2 73.8 Neotel 3.9 — — — — — Global Voice Solutions (Rs mn) Gross revenues 15,109 15,334 14,345 12,302 11,132 10,268 (7.8) (33.0) Net revenues 2,414 1,890 1,907 1,632 1,587 1,479 (6.8) (21.7) EBITDA 1,100 876 1,029 738 713 695 (2.5) (20.7) EBIT 905 762 904 624 581 604 4.0 (20.7) EBITDA margin (%) 7.3 5.7 7.2 6.0 6.4 6.8 EBIT margin (%) 6.0 5.0 6.3 5.1 5.2 5.9 Volumes (bn mins) Total 10.0 10.8 10.5 9.2 8.9 8.7 (2.2) (19.4) ILD 9.0 9.9 9.7 8.2 7.7 7.9 2.6 (20.2) NLD 1.0 0.9 0.8 1.0 1.2 0.8 (33.3) (11.1) Net realization per min (Rs/min) 0.241 0.175 0.182 0.177 0.178 0.170 (4.7) (2.9) EBITDA per min (Rs/min) 0.110 0.081 0.098 0.080 0.080 0.080 (0.3) (1.5) Operating costs per min (Rs/min) 0.131 0.094 0.084 0.097 0.098 0.090 (8.2) (4.0) Global Data Solutions (Rs mn) Gross revenues 27,844 27,766 27,832 28,844 28,954 28,855 (0.3) 3.9 Net revenues 19,062 19,004 19,104 19,585 19,434 19,174 (1.3) 0.9 EBITDA 3,924 4,711 4,616 5,389 4,841 4,859 0.4 3.1 EBIT (552) 378 (96) 776 (78) 101 EBITDA margin (%) 14.1 17.0 16.6 18.7 16.7 16.8 EBIT margin (%) (2.0) 1.4 (0.3) 2.7 (0.3) 0.4 GR by segment (%) Service Provider / Carrier 44.0 43.2 43.0 43.0 42.0 41.0 Enterprise 56.0 56.8 57.0 57.0 58.0 59.0 GR by service line (%) Traditional services 71.6 70.8 68.6 67.8 65.9 67.5 Growth services 16.1 17.1 19.8 20.1 21.6 20.7 Subsidiaries 12.2 12.1 11.5 12.1 12.5 11.8 GR by geography (%) India 52.0 51.1 51.0 51.0 54.0 51.0 Rest of the world 48.0 48.9 49.0 49.0 46.0 49.0

TCPSL Gross Revenue (Rs mn) 1,019 980 937 911 1,002 968 (3.4) (1.2) Total ATMs managed 18,887 17,839 16,798 16,340 16,167 15,179 (6.1) (14.9) Managed ATMs 10,780 9,444 8,682 8,023 7,732 6,915 (10.6) (26.8) White label ATMs 8,107 8,395 8,116 8,317 8,435 8,264 (2.0) (1.6) Total POS managed 10,844 15,088 15,788 15,737 14,950 14,312 (4.3) (5.1) Debt profile Core business (US$ mn) Gross debt 1,433 1,463 1,390 1,375 1,378 1,421 3.1 (2.9) Foreign Currency Loans 1,360 1,375 1,301 1,307 1,284 1,346 4.8 (2.1) Rupee Loans 73 88 89 68 94 75 (20.2) (14.8) Cash and cash equivalent 283 259 181 121 227 153 (32.6) (40.9) Net debt 1,150 1,204 1,209 1,254 1,151 1,268 10.2 5.3 INR/USD (closing) 64.89 64.68 65.30 63.83 65.17 69.74 7.0 7.8 Net debt (Rs mn) 74,628 77,869 78,945 80,046 75,016 88,433 17.9 13.6 Neotel (ZAR mn) Net debt (Rs mn) — — — — — — Consolidated net debt (Rs mn) 74,628 77,869 78,945 80,046 75,016 88,433 17.9 13.6

Source: Company, Kotak Institutional Equities

78 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Communications Telecom

Exhibit 4: TCOM - forecasts and underlying assumptions, 2017-21E, March fiscal year-ends

Rs bn 2017 2018 2019E 2020E 2021E Key financials P&L Consolidated revenues 176.2 166.5 157.4 159.9 164.6 Consolidated EBITDA 24.1 22.9 23.3 26.4 28.9 Adjusted EBITDA 25.0 24.1 23.8 26.9 29.4 EBITDA margin (%) 13.7 13.8 14.8 16.5 17.6 Adjusted EBITDA margin (%) 14.1 14.4 15.1 16.8 17.8 EBIT 5.4 3.9 3.6 5.9 7.8 Adjusted EBIT 6.4 5.1 4.1 6.4 8.3 Recurring PAT 3.0 0.5 0.1 0.8 1.9 EPS (Rs/share) 10.5 1.6 0.4 2.9 6.6 Balance sheet Shareholders' equity 16.1 5.0 (2.3) (1.6) (0.0) Gross debt 92.5 89.5 97.5 96.0 93.0 Other liabilities 102.5 101.5 86.7 86.5 87.2 Total equity and liabilities 211.0 196.0 182.0 180.9 180.2 Net fixed assets 116.8 113.2 110.7 107.9 104.8 Current assets 44.0 40.8 44.0 45.8 48.2 Strategic investments 16.3 10.6 10.5 10.5 10.5 Cash and equivalents 18.8 14.8 0.2 0.2 0.1 Other assets 15.1 16.6 16.6 16.6 16.6 Total assets 211.0 196.0 182.0 180.9 180.2 Net debt 73.7 74.7 97.3 95.9 92.9 ROCE (%) 5.4 4.5 4.1 6.3 8.3 Capex (US$ mn) 244 235 257 255 260

Key assumptions Voice segment Revenues 67.6 53.1 37.1 29.2 22.2 EBITDA 4.3 3.4 2.4 1.8 1.3 EBITDA margin (%) 6.4 6.3 6.6 6.2 6.0 Data segment Revenues 108.7 113.4 120.4 130.8 142.4 EBITDA 19.7 19.6 20.9 24.6 27.6 EBITDA margin (%) 18.2 17.2 17.3 18.8 19.4 Adjusted EBITDA 20.7 20.8 21.4 25.1 28.1 Adjusted EBITDA margin (%) 18.9 18.1 17.7 19.1 19.6

Note: (a) Financials for FY2017 reflect those of continuing operations only.

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 79 Telecom Tata Communications

Exhibit 5: Condensed consolidated financials for TCOM, March fiscal year ends, 2015-2021E (Rs mn)

2015 2016 2017 2018 2019E 2020E 2021E Profit and loss statement Revenues 199,133 205,539 176,197 166,508 157,443 159,933 164,568 EBITDA 29,941 30,978 24,059 22,914 23,321 26,386 28,916 EBIT 8,330 8,812 5,401 3,851 3,569 5,921 7,765 PBT 4,786 4,578 5,332 4,211 853 2,563 4,493 Recurring PAT 1,065 2,178 2,993 469 106 839 1,874 Reported PAT 13 250 12,329 (3,286) 106 839 1,874 Recurring EPS (Rs/share) 3.7 7.6 10.5 1.6 0.4 2.9 6.6 Balance sheet Total Equity 3,273 (4,113) 16,103 5,038 (2,250) (1,645) (42) Borrowings 130,757 143,806 92,460 89,530 97,530 96,030 93,030 Other liabilities 108,406 113,578 102,461 101,460 86,743 86,539 87,238 Total equity and liabilities 242,437 253,270 211,023 196,028 182,023 180,924 180,226 Net fixed assets 149,573 150,305 116,794 113,169 110,736 107,863 104,815 Net intangibles 3,848 2,656 — — — — — Cash and equivalents 25,096 28,383 18,786 14,823 192 178 82 Other assets 63,919 71,927 75,443 68,037 71,095 72,883 75,329 Total assets 242,437 253,270 211,023 196,028 182,023 180,924 180,226

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

Source: Company, Kotak Institutional Equities estimates

80 KOTAK INSTITUTIONAL EQUITIES RESEARCH REDUCE Amara Raja Batteries (AMRJ) Automobiles AUGUST 13, 2018 RESULT Coverage view: Neutral

Weak quarter; profitability disappoints. AMRJ reported 1QFY19 EBITDA of `2.2 bn Price (`): 825 (+14% yoy), which was 16% below our estimates due to lower-than-expected gross Target price (`): 780 margin. Revenues increased by 18% yoy and were 5% above our estimates due to BSE-30: 37,869 market share gains in home UPS segment and greater traction in e-rickshaw segment. We expect margins to improve over the next few quarters driven by recent decline in lead prices but continued weakness in industrial segments remains a concern. At 20X FY2020E EPS, valuations are expensive; REDUCE stays with an unchanged TP of `780.

Company data and valuation summary Amara Raja Batteries Stock data Forecasts/Valuations 2018 2019E 2020E 52-week range (Rs) (high,low) 903-665 EPS (Rs) 27.6 32.3 37.5 Market Cap. (Rs bn) 140.9 EPS growth (%) (1.6) 17.1 15.9 Shareholding pattern (%) P/E (X) 29.9 25.5 22.0 Promoters 52.1 Sales (Rs bn) 60.6 69.6 78.9 FIIs 19.0 Net profits (Rs bn) 4.7 5.5 6.4 MFs 9.4 EBITDA (Rs bn) 8.8 10.3 11.8 Price performance (%) 1M 3M 12M EV/EBITDA (X) 15.9 13.6 11.6 Absolute 0.5 (5.4) 3.0 ROE (%) 17.0 17.4 17.5 Rel. to BSE-30 (3.9) (12.0) (14.2) Div. Yield (%) 0.5 0.6 0.7

1QFY19 results: Margins under pressure even though revenue growth surprises positively

 AMRJ reported 1QFY19 EBITDA of `2.2 bn (+14% yoy), which was 16% below our estimates. Revenues increased by 19% to `17.8 bn and were 5% above our estimates. As per our discussions with the management, (1) four-wheeler segment revenues grew by 30% yoy due to a low base, (2) two-wheeler segment revenues were up 20% yoy, (3) home UPS and e-rickshaw battery revenues grew by 30% yoy and (2) industrial revenues were flat yoy as growth in commercial UPS was offset by decline in telecom segment. We note that for AMRJ, home UPS and e-rickshaw segments account for ~12-15% of revenues, which reflect significant market share gains. Even Exide seems to have made strong inroads in e-rickshaw segment, as per our checks – we believe that there is more room for both these companies to gain share in this segment, which is still largely dominated by unorganized players.

 EBITDA margin came in at 12.4% (down 50 bps yoy), which was 300 bps below our estimates. Gross margin declined by 280 bps qoq; as per the company, this was due to (1) a weaker mix—higher share of OEM and traded revenues and (2) increase in electrolyte prices and possibly delayed benefit of recent decline in lead prices. Lead prices have come down by around 8% over the past few months (Exhibit 3); this should aid gross margin going ahead. Employee cost and other expenses increased by 4-15% yoy leading to operating leverage benefits. AMRJ reported PAT of `1.1 bn (up 13% yoy), 23% below our estimates.

Expect 14% revenue CAGR over FY2018-21E; EBITDA margin to range in 14.5-15%

We expect AMRJ to deliver 14% revenue CAGR over FY2018-21E led by (1) double-digit revenue growth in auto segment and (2) market share gain in home UPS and e-rickshaw battery Nishit Jalan segments. We expect telecom revenues to remain flattish over FY2018-21E given industry headwinds and increase in competitive intensity. We expect EBITDA margin to range in 14.5- Hitesh Goel 15% on a full-year basis even though there will be volatility on a quarterly basis.

Lower FY2019-21E EPS estimates by 1-3%; maintain REDUCE with unchanged TP of `780

We have cut our FY2019-21E EPS estimates by 1-3% due to 30-40 bps cut in EBITDA margin assumptions; we have marginally increased our revenue estimates. Maintain REDUCE with an unchanged TP of `780, valuing the company at 20X June 2020E EPS (March 2020E EPS earlier).

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

Capacity expansion plans

The company plans to incur annual capex of `5 bn over the next two years to expand capacity for both automotive and tubular (home UPS and e-rickshaw) batteries. Following are the segment-wise plans (details in Exhibit 6).

 In four-wheeler segment, current capacity is around 10.4 mn units, which will increase to 12 mn units by end-FY2019. Additionally, the company has approved an investment of `7 bn to set up a new green field automotive battery plant with a capacity of 6.5 mn units per annum. This project will be implemented over three phases over the next few years.

 In two-wheeler segment, current capacity is around 14 mn units; this will likely increase to around 19 mn units over the next three years.

 The company has capacity of around 1 mn tubular batteries currently, which it plans to increase to 1.3 mn units by end-FY2019 and to around 1.8 mn units over the next 2-3 years. Tubular batteries are currently used in home UPS segment and going ahead the company plans to supply tubular batteries in e-rickshaw segment also compared to flat batteries currently. Market size of e-rickshaw battery is more than `10 bn currently, which can double over the next few years, as per the management.

Exhibit 1: Amara Raja’s 1QFY19 EBITDA was 16% below our estimates on lower-than-expected profitability Amara Raja interim results, March fiscal year-ends (` mn)

(% chg.) 1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 2019E 2018 Yoy (%) Net sales 17,787 16,921 14,975 15,807 5.1 18.8 12.5 69,642 60,592 14.9 Raw materials (12,719) (11,371) (10,487) (10,866) 11.8 21.3 17.0 (47,851) (41,163) Staff costs (843) (840) (808) (783) 0.3 4.3 7.6 (3,432) (3,090) Other expenses (2,023) (2,100) (1,752) (2,051) (3.7) 15.5 (1.4) (8,108) (7,507) Total expenses (15,584) (14,311) (13,046) (13,700) 8.9 19.5 13.8 (59,391) (51,759) EBITDA 2,203 2,610 1,928 2,107 (15.6) 14.2 4.5 10,251 8,832 16.1 Depreciation (630) (600) (544) (588) 4.9 15.7 7.0 (2,603) (2,303) EBIT 1,573 2,010 1,384 1,519 (21.7) 13.7 3.6 7,648 6,529 17.1 Other income 137 180 137 237 (23.8) 0.2 (42.2) 643 664 Interest expense (15) (10) (14) (13) (55) (51) Profit before tax 1,695 2,180 1,507 1,743 (22.2) 12.5 (2.7) 8,236 7,142 15.3 Tax expense (565) (719) (509) (645) (21.5) 11.1 (12.4) (2,718) (2,429) Profit after tax 1,130 1,461 999 1,098 (22.6) 13.2 2.9 5,518 4,713 17.1 EPS (Rs) 6.6 8.6 5.8 6.4 (22.6) 13.2 2.9 32.3 27.6 17.1 As % of net revenues Raw material cost as % of net sales 71.5 67.2 70.0 68.7 68.7 67.9 Staff cost as % of net sales 4.7 5.0 5.4 5.0 4.9 5.1 Other expenses as % of net sales 11.4 12.4 11.7 13.0 11.6 12.4 No. of shares 170.8 170.8 170.8 170.8 170.8 170.8 Tax rate (%) 33.3 33.0 33.8 37.0 33.0 34.0 EBITDA margin (%) 12.4 15.4 12.9 13.3 14.7 14.6 EBIT margin (%) 8.8 11.9 9.2 9.6 11.0 10.8

Source: Company, Kotak Institutional Equities estimates

82 KOTAK INSTITUTIONAL EQUITIES RESEARCH Amara Raja Batteries Automobiles

Exhibit 2: Exide has outperformed Amara Raja on revenue growth over the past four quarters Revenue growth, ross and EBITDA margin comparison of Amara Raja and Exide, March fiscal year-ends, 1QFY16-1QFY19 (%)

1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Amara Raja Revenue growth (%) 9.9 8.0 14.4 7.3 16.8 15.8 9.5 17.4 13.4 7.1 17.1 17.6 18.8 Gross margin (%) 35.1 35.6 38.2 37.7 33.8 36.1 35.0 32.0 30.0 34.0 33.1 31.3 28.5 EBITDA margin (%) 17.7 17.4 19.0 16.8 17.2 17.2 15.4 13.7 12.9 16.7 15.6 13.3 12.4 Exide Revenue growth (%) (5.3) (1.0) (1.4) 7.2 11.1 10.3 11.6 11.6 4.6 22.4 32.7 24.5 31.8 Gross margin (%) 35.8 37.8 40.3 39.2 37.6 38.8 39.5 37.4 37.1 32.6 34.5 34.8 33.6 EBITDA margin (%) 14.7 14.6 15.6 15.0 15.7 15.0 13.3 13.3 15.4 12.6 12.4 13.7 14.1

Source: Company, Kotak Institutional Equities

Exhibit 3: LME lead prices have come off over the past three months Quarterly LME lead prices (assuming 1.5 quarter lag), March fiscal-year ends, 2014-18

LME lead LME lead Qoq increase (US$/ton) USD:INR rate (Rs/ton) (%) 1QFY14 2,113 54.4 114,899 2QFY14 2,084 58.9 122,738 6.8 3QFY14 2,119 63.0 133,505 8.8 4QFY14 2,120 62.1 131,660 (1.4) 1QFY15 2,083 60.7 126,487 (3.9) 2QFY15 2,158 59.9 129,282 2.2 3QFY15 2,092 61.1 127,837 (1.1) 4QFY15 1,902 62.3 118,562 (7.3) 1QFY16 1,901 62.7 119,247 0.6 2QFY16 1,806 63.8 115,228 (3.4) 3QFY16 1,690 65.7 111,084 (3.6) 4QFY16 1,687 67.0 113,049 1.8 1QFY17 1,758 67.0 117,759 4.2 2QFY17 1,762 67.1 118,276 0.4 3QFY17 1,984 66.8 132,542 12.1 4QFY17 2,244 67.9 152,368 15.0 1QFY18 2,243 65.3 146,468 (3.9) 2QFY18 2,200 64.4 141,680 (3.3) 3QFY18 2,428 64.7 157,092 10.9 4QFY18 2,539 64.1 162,750 3.6 1QFY19 2,388 65.6 156,653 (3.7) July-August 2018 2,187 68.6 150,028 (4.2)

Source: CEA, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 83 Automobiles Amara Raja Batteries

Exhibit 4: We have cut our FY2019-21E EPS estimates by 1-3% due to 30-40 bps cut in EBITDA margin assumptions Earnings revision table, March fiscal year-ends, 2019-20E (₹ mn, %)

New estimates Old estimates % change 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E Amara Raja Net sales 69,642 78,947 89,260 68,552 77,665 87,119 1.6 1.7 2.5 EBITDA 10,251 11,818 13,407 10,458 11,979 13,456 (2.0) (1.4) (0.4) Margin (%) 14.7 15.0 15.0 15.3 15.4 15.4 Net Profit 5,518 6,398 7,325 5,713 6,600 7,430 (3.4) (3.1) (1.4) EPS (Rs/share) 32.3 37.5 42.9 33.4 38.6 43.5 (3.4) (3.1) (1.4)

Source: Company, Kotak Institutional Equities estimates

Exhibit 5: We expect revenues to grow by 14% CAGR over FY2018-21E; automotive, home UPS and e-rickshaw are key growth drivers Revenue breakdown, March fiscal year-ends, 2011-21E (` mn)

2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E Revenue (Rs mn) Four-wheeler OEM 2,378 2,942 3,151 3,304 3,924 4,301 4,962 5,398 6,142 6,878 7,704 Four-wheeler replacement 6,900 8,528 11,053 13,346 15,348 16,768 19,156 20,355 22,777 25,556 28,673 Two-wheeler OEM — — — 489 1,026 1,244 1,435 1,774 2,106 2,527 2,906 Two-wheeler replacement 1,080 1,260 1,813 2,710 3,796 4,418 5,514 6,271 7,446 8,786 10,368 Automotive 10,358 12,730 16,016 19,849 24,094 26,731 31,066 33,798 38,470 43,747 49,651 Telecom 3,853 4,600 5,520 6,624 8,611 9,472 10,041 7,482 7,040 7,040 7,040 UPS 5,085 6,000 6,900 6,210 7,142 6,784 7,191 7,212 7,835 8,618 9,480 Railways and others 1,366 1,767 1,936 2,555 3,152 3,658 4,798 5,360 5,823 6,522 7,304 Traded batteries 17 535 1,494 2,090 3,000 3,294 1,910 2,048 2,231 2,409 2,602 Home UPS/E-rickshaw 48 346 1,092 714 41 1,500 4,200 5,800 7,540 9,802 12,253 Service and scrap revenue 38 50 152 330 332 404 608 630 703 809 930 Gross revenues 20,765 26,029 33,110 38,372 46,372 51,843 59,814 62,330 69,642 78,947 89,260 Revenue mix (%) Four-wheeler OEM 11 11 10 9 8 8 8 9 9 9 9 Four-wheeler replacement 33 33 33 35 33 32 32 33 33 32 32 Two-wheeler OEM — — — 1 2 2 2 3 3 3 3 Two-wheeler replacement 5 5 5 7 8 9 9 10 11 11 12 Automotive 50 49 48 52 52 52 52 54 55 55 56 Telecom 19 18 17 17 19 18 17 12 10 9 8 UPS 24 23 21 16 15 13 12 12 11 11 11 Railways and others 7 7 6 7 7 7 8 9 8 8 8 Traded batteries 0 2 5 5 6 6 3 3 3 3 3 Home UPS/E-rickshaw 0 1 3 2 0 3 7 9 11 12 14 Service and scrap revenue 0 0 0 1 1 1 1 1 1 1 1 Gross revenues 100 100 100 100 100 100 100 100 100 100 100

Source: Company, Kotak Institutional Equities estimates

84 KOTAK INSTITUTIONAL EQUITIES RESEARCH Amara Raja Batteries Automobiles

Exhibit 6: Amara Raja plans to expand automotive and tubular battery capacities over the next three years Capacity across different segments, March fiscal year-ends, 2011-21E (mn units)

2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E Capacity (mn units) Four-wheeler 4.2 5.6 5.6 6.0 6.0 8.3 8.3 10.5 12.0 12.0 14.0 Two-wheeler 3.6 4.8 4.8 4.8 8.4 11.0 11.0 14.0 14.0 16.0 19.0 Medium VLRA 1.8 1.8 1.8 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 Large VLRA (mn amp hr) 900 900 900 1,300 1,300 1,300 1,300 1,300 1,300 1,300 1,300 Tubular batteries (home UPS) 1.0 1.0 1.3 1.3 1.8 Volume sold (mn units) Four-wheeler OEM 1.3 1.5 1.6 1.5 1.6 1.8 2.1 2.3 2.6 2.9 3.3 Four-wheeler replacement 2.3 2.8 3.3 3.8 4.4 5.0 5.6 6.2 7.0 7.6 8.4 Total four-wheeler volumes 3.6 4.3 4.9 5.3 6.0 6.9 7.7 8.5 9.6 10.6 11.7 Two-wheeler OEM — — — 0.9 1.7 2.1 2.4 3.0 3.6 4.3 4.9 Two-wheeler replacement 1.8 2.0 2.7 3.6 4.8 5.8 7.0 8.0 9.6 11.4 13.4 Total two-wheeler volumes 1.8 2.0 2.7 4.5 6.5 7.9 9.4 11.0 13.2 15.6 18.3 Capacity utilization (%) Four-wheeler 85 76 87 89 100 83 93 81 80 88 83 Two-wheeler 50 42 57 93 78 72 85 79 94 98 96

Source: Company, Kotak Institutional Equities estimates

Exhibit 7: We expect the company to deliver 16% EPS CAGR over FY2018-21E Profit model, balance sheet and cash flow statement, March fiscal year-ends, 2011-21E (` mn)

2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E Profit model (Rs mn) Net sales 17,611 23,645 29,614 34,367 42,113 46,178 53,172 60,592 69,642 78,947 89,260 EBITDA 2,546 3,396 4,515 5,603 7,018 8,230 8,499 8,832 10,251 11,818 13,407 Other income 96 280 466 455 423 459 492 664 643 784 1,008 Interest (15) (24) (10) (7) (2) (55) (55) (51) (55) (50) (50) Depreciation (417) (465) (661) (646) (1,340) (1,407) (1,912) (2,303) (2,603) (3,003) (3,433) Profit before tax 2,210 3,186 4,310 5,406 6,099 7,226 7,025 7,142 8,236 9,549 10,932 Tax expense (729) (1,036) (1,351) (1,692) (1,990) (2,310) (2,237) (2,429) (2,718) (3,151) (3,608) Adjusted net profit 1,481 2,151 2,867 3,674 4,109 4,916 4,785 4,713 5,518 6,398 7,325 Earnings per share (Rs) 8.7 12.6 16.8 21.5 24.1 28.8 28.0 27.6 32.3 37.5 42.9 Balance sheet (Rs mn) Equity 6,459 8,235 10,598 13,627 16,996 21,159 25,931 29,374 33,899 39,145 45,151 Total borrowings 1,000 855 881 857 759 741 725 635 500 500 500 Deferred tax liability 205 220 195 301 368 538 815 878 878 878 878 Current liabilities 3,495 4,206 6,030 6,609 5,757 7,070 8,375 10,798 12,170 13,616 15,214 Total liabilities 11,159 13,515 17,705 21,394 23,881 29,508 35,846 41,686 47,447 54,139 61,744 Net fixed assets 3,526 3,861 4,618 7,679 10,304 14,749 17,324 19,296 21,693 23,690 25,257 Investments 161 161 161 161 161 200 1,467 354 351 351 351 Cash 451 2,292 4,108 2,946 2,222 1,503 1,709 1,113 2,157 3,898 6,647 Other current assets 7,021 7,202 8,818 10,609 11,194 13,057 15,346 20,923 23,246 26,200 29,487 Total assets 11,159 13,515 17,705 21,394 23,881 29,508 35,846 41,686 47,447 54,139 61,743 Free cash flow (Rs mn) Operating cash flow excl. working cap. changes 1,999 2,865 3,448 4,103 5,358 6,279 6,666 6,691 7,533 8,666 9,799 Working capital change (1,138) 120 (94) (1,315) (1,475) (732) (1,137) (3,475) (951) (1,508) (1,690) Capital expenditure (667) (809) (1,463) (3,731) (3,985) (4,904) (4,305) (3,853) (5,000) (5,000) (5,000) Free cash flow 195 2,176 1,892 (943) (102) 643 1,224 (637) 1,582 2,159 3,110 Ratios Gross margin (%) 34.1 32.0 32.6 33.6 34.1 37.0 34.4 32.1 31.3 31.6 31.8 EBITDA margin (%) 14.5 14.4 15.2 16.3 16.7 17.8 16.0 14.6 14.7 15.0 15.0 PAT margin (%) 8.4 9.1 9.7 10.7 9.8 10.6 9.0 7.8 7.9 8.1 8.2 Book value (Rs/share) 37.8 48.2 62.0 79.8 99.5 123.9 151.8 172.0 198.5 229.2 264.3 RoAE (%) 24.9 29.3 30.4 30.3 26.8 25.8 20.3 17.0 17.4 17.5 17.4 RoACE (%) 21.9 26.5 28.8 28.6 26.0 25.1 19.9 17.3 17.5 17.7 17.7

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 85 ADD Apollo Hospitals (APHS) Pharmaceuticals AUGUST 13, 2018 RESULT Coverage view: Neutral Improving trends across segments. APHS reported a healthy quarter with EBITDA Price (`): 944 exceeding our estimates by 5% driven by (1) lower-than-expected losses at AHLL, and (2) recovery in margins at mature cluster (+30 bps versus KIE). Revenue growth of 9% Target price (`): 1,090 yoy in mature facilities was encouraging while Navi Mumbai breakeven (in July) capped BSE-30: 37,869 a good quarter. We note the importance of sustaining the 1QFY19 performance over the next few quarters. Moderating capex and steady growth across all segments will drive FCF generation over next three years. ADD.

Company data and valuation summary Apollo Hospitals Stock data Forecasts/Valuations 2018 2019E 2020E 52-week range (Rs) (high,low) 1,263-910 EPS (Rs) 8.4 19.7 26.9 Market Cap. (Rs bn) 131.3 EPS growth (%) (46.9) 133.5 36.7 Shareholding pattern (%) P/E (X) 111.8 47.9 35.0 Promoters 34.4 Sales (Rs bn) 82.4 93.5 106.1 FIIs 49.8 Net profits (Rs bn) 1.2 2.7 3.7 MFs 6.3 EBITDA (Rs bn) 7.9 9.4 11.0 Price performance (%) 1M 3M 12M EV/EBITDA (X) 20.5 17.2 14.5 Absolute (6.4) (7.8) (22.2) ROE (%) 3.4 8.2 10.5 Rel. to BSE-30 (10.4) (14.2) (35.3) Div. Yield (%) 0.2 0.5 0.7

Strong performance across all segments APHS registered revenue growth of 16% yoy in 1QFY19, largely in line with our estimates as growth in mature cluster (healthcare segment) recovered to 9% yoy (in line with our estimates), while the pharmacy segment continued to grow at a healthy pace of 20% yoy. 1QFY19 EBITDA of `2.3 bn was 5% ahead of our estimates driven by (1) lower-than-expected losses in AHLL segment (`60mn lower vs KIE) and (2) higher margins in mature healthcare facilities (21.3%, +30bps versus KIE). New hospitals reported EBITDA of `154 mn (in line with our estimates) with Navi Mumbai losses declining to `16 mn in 1QFY19. APHS indicated that its Navi Mumbai hospital has broken even in July. AHLL losses declined to `197 mn, versus a typical quarterly run-rate of `250-280 mn, with management guiding for EBITDA breakeven in 1HFY20. Net debt now stands at `31.2 bn post the acquisition of a 50% stake in a Lucknow hospital. Promising trends though sustainability of 1QFY19 performance remains crucial APHS’ strong operational performance in 1QFY19 across mature and new facilities was promising with (1) recovery in growth at mature centers to 9% (FY2018 growth was at 3%), (2) decline in losses in the AHLL segment and (3) Navi Mumbai facility breaking even in July, 20 months after commissioning. Performance at other new hospitals (ex-Navi Mumbai) was strong and the pharmacy business continued its healthy growth trajectory. Management remains confident of maintaining a healthy growth rate in FY2019. However, sustaining 1QFY19 performance remains crucial as our forecasts already assume 16% EBITDA growth over FY2018- 21E with the addition of `1.4-`1.5 bn of EBITDA each over the next two years, led by (1) single- digit EBITDA growth in mature centers, (2) `450-500 mn annual swing from Navi Mumbai, (3) declining losses from AHLL (`200 mn reduction each over FY2019 and FY2020), and Chirag Talati, CFA (4) growth in pharmacy and new hospitals. With its capex cycle likely to come to an end in FY2019/20, we expect meaningful free cash flow generation starting FY2020. Valuations inexpensive, ADD Kumar Gaurav Despite a strong start to the year, our estimates remain largely unchanged, as our estimates already incorporate a recovery with FY2018-21E revenue and EBITDA CAGR of 12% and 13% respectively, with FY2021 likely to improve to 12.5% (versus 7% in FY2018). APHS is trading at 14X FY2020 EBITDA (adjusted for Gleneagles share). ADD with an unchanged target price of `1,090.

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

Exhibit 1: Apollo 1QFY19 EBITDA was ahead of our estimates Apollo Hospitals consolidated interim results (Rs mn)

% chg. 1QFY19 1QFY19E 1QFY19 4QFY18 1QFY19E 1QFY19 4QFY18 FY2019E Total revenues 22,046 22,371 19,031 21,110 (1) 16 4 93,478 EBITDA 2,323 2,222 1,649 1,944 5 41 19 9,416 Depreciation (935) (800) (840) (764) 17 11 22 (3,674) EBIT 1,388 1,422 809 1,100 (2) 72 26 5,742 PAT 351 550 9 357 (36) NM (2) 2,742 Margin (%) EBITDA margin (%) 10.5 9.9 8.7 9.2 10.1 EBIT margin (%) 6.3 6.4 4.3 5.2 6.1 Segmental revenues Healthcare 11,809 11,891 10,584 11,387 (1) 12 4 49,975 SAP 8,921 9,170 7,429 8,884 (3) 20 0 38,226 AHLL 1,316 1,310 1,059 2,312 0 24 (43) 5,277 Revenues 22,046 22,371 19,072 22,583 (1) 16 (2) 93,478 Segmental EBITDA Healthcare 2,103 2,059 1,610 1,923 2 31 9 8,596 SAP 417 413 320 402 1 30 4 1,720 AHLL (197) (250) (283) (382) NM NM NM (900) EBITDA 2,323 2,222 1,647 1,943 5 41 20 9,416 Segmental EBITDA margins (%) Healthcare 17.8 17.3 15.2 16.9 17.2 SAP 4.7 4.5 4.3 4.5 4.5 AHLL (15.0) (19.1) (26.7) (16.5) (17.1) EBITDA margin 10.5 9.9 8.6 8.6 10.1 Healthcare revenues Existing 9,145 9,091 8,406 8,711 0.6 8.8 5.0 New 2,665 2,800 2,179 2,676 (4.8) 22.3 (0.4) Total 11,810 11,891 10,585 11,387 (0.7) 11.6 3.7 Healthcare EBITDA Existing 1,949 1,909 1,673 1,826 2.1 16.5 6.7 New 154 150 (62) 97 2.7 (348) 58.8 Total 2,103 2,059 1,611 1,923 2.1 30.5 9.4 Healthcare margins (%) Existing 21.3 21.0 19.9 21.0 New 5.8 5.4 (2.8) 3.6 Total 17.8 17.3 15.2 16.9

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 87 Pharmaceuticals Apollo Hospitals

Exhibit 2: AHLL EBITDA loss declined sequentially Exhibit 3: Navi Mumbai ramp-up has been solid AHLL EBITDA loss, 1QFY17-1QFY19 (Rs mn) Navi Mumbai EBITDA loss, 4QFY17-1QFY19 (Rs mn)

450 250 400 200 350 300 150 250 200 100 150 100 50 50

0 0

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

4QFY17

1QFY18

2QFY18

3QFY18 4QFY18

Source: Company Source: Company

Exhibit 4: We expect hospitals to drive consolidated EBITDA Apollo Hospitals segmental break-up, March fiscal year-ends, FY2013-21E (Rs mn)

2013 2014 2015 2016 2017 2018 2019E 2020E 2021E Revenues Hospitals 25,573 28,843 32,250 37,033 41,363 45,157 49,975 55,572 59,884 Standalone pharmacy 11,017 13,648 17,726 23,220 28,745 32,689 38,226 44,439 50,926 Munich 497 607 735 ------AHLL 601 743 1,074 1,894 2,441 4,589 5,277 6,069 6,858 Total 37,687 43,841 51,785 62,147 72,549 82,435 93,478 106,080 117,668 EBITDA Hospitals 5,876 6,478 7,049 7,236 7,122 7,599 8,596 9,670 10,480 Standalone pharmacy 293 449 580 803 1,233 1,479 1,720 2,044 2,343 Munich (1) (30) 10 ------AHLL (86) (172) (292) (1,162) (1,069) (1,146) (900) (700) (500) Total 6,082 6,725 7,347 6,877 7,286 7,932 9,416 11,014 12,322 EBITDA margin (%) Hospitals 23.0 22.5 21.9 19.5 17.2 16.8 17.2 17.4 17.5 Standalone pharmacy 2.7 3.3 3.3 3.5 4.3 4.5 4.5 4.6 4.6 Munich (0.2) (4.9) 1.4 AHLL (14.3) (23.1) (27.2) (61.4) (43.8) (25.0) (17.1) (11.5) (7.3) Total 16.1 15.3 14.2 11.1 10.0 9.6 10.1 10.4 10.5 Contribution (%) Hospitals 67.9 65.8 62.3 59.6 57.0 54.8 53.5 52.4 50.9 Standalone pharmacy 29.2 31.1 34.2 37.4 39.6 39.7 40.9 41.9 43.3 Munich 1.3 1.4 1.4 0.0 0.0 0.0 0.0 0.0 0.0 AHLL 1.6 1.7 2.1 3.0 3.4 5.6 5.6 5.7 5.8 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: Company, Kotak Institutional Equities estimates

88 KOTAK INSTITUTIONAL EQUITIES RESEARCH Apollo Hospitals Pharmaceuticals

Exhibit 5: We expect EBITDA CAGR of 16% over FY2018-21E Apollo Hospitals consolidated income statement, balance sheet and cash flow, march fiscal year-ends, FY2013-20E (Rs mn)

2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E Profit model (Rs mn) Net sales 26,054 31,475 37,687 43,842 51,785 62,147 72,549 82,435 93,478 106,080 117,668 EBITDA 4,190 5,131 6,082 6,724 7,347 6,878 7,286 7,932 9,416 11,014 12,322 Other income 187 259 319 215 368 450 225 322 223 279 279 Interest and finance charges (814) (891) (1,033) (1,194) (1,179) (1,800) (2,574) (2,951) (2,882) (2,882) (2,882) Depreciation (942) (1,239) (1,423) (1,678) (2,117) (2,638) (3,140) (3,590) (3,674) (3,880) (4,087) Extraordinary 0 0 45 0 135 159 0 0 0 0 0 Pre-tax profits 2,621 3,260 3,991 4,067 4,554 3,049 1,797 1,712 3,083 4,530 5,632 Income tax 873 1,150 1,050 1,018 1,300 969 910 1,119 863 1,268 1,577 Minority interest and associates 99 83 103 118 145 284 1,323 581 523 486 501 Adjusted net profits 1,847 2,193 2,998 3,167 3,504 2,204 2,210 1,174 2,742 3,748 4,556 Earnings per share (Rs) 14.0 16.6 21.5 22.8 25.2 15.8 15.9 8.4 19.7 26.9 32.8 Balance sheet (Rs mn) Total equity 18,989 25,068 27,468 29,767 31,702 33,200 36,714 32,515 34,456 37,109 40,334 Deferred tax liability 844 1,551 2,295 3,291 4,020 2,586 2,481 2,563 2,563 2,563 2,563 Total borrowings 9,585 8,167 12,179 13,444 19,923 26,327 30,487 36,030 36,030 36,030 36,030 Other liabilities 6,604 7,740 6,197 6,607 8,227 11,484 11,484 15,018 16,178 17,485 18,741 Total liabilities and equity 36,022 42,526 48,139 53,108 63,871 73,597 81,165 86,126 89,227 93,187 97,668 Cash 1,781 2,368 3,201 2,741 3,773 4,605 6,391 4,173 4,805 7,051 10,206 Current assets 10,317 12,311 12,232 15,491 19,580 20,697 21,787 23,015 25,157 27,401 29,465 Total fixed assets 18,905 22,205 27,440 31,660 37,412 45,590 49,968 55,432 55,758 55,227 54,490 Total assets 36,022 42,526 48,139 53,108 63,872 73,597 81,165 86,126 89,227 93,187 97,668 Free cash flow (Rs mn) Operating cash flow, excl. working capital 3,631 4,743 5,326 5,874 6,308 6,548 6,459 7,394 9,075 10,232 11,247 Working capital (1,042) (873) (899) (2,140) (1,608) (2,317) (703) 1,146 (982) (937) (808) Capital expenditure (3,335) (3,945) (6,602) (6,119) (8,681) (8,311) (7,364) (9,054) (4,000) (3,350) (3,350) Free cash flow (747) (74) (2,175) (2,385) (3,981) (4,080) (1,608) (515) 4,093 5,945 7,089 Ratios (%) Debt/equity 0.5 0.3 0.4 0.5 0.6 0.8 0.8 1.1 1.0 1.0 0.9 Net debt/equity 0.4 0.2 0.2 0.3 0.5 0.6 0.6 1.0 0.9 0.8 0.6 RoE 10.4 10.0 11.4 11.1 11.4 6.8 6.3 3.4 8.2 10.5 11.8 RoCE (post-tax) 8.1 8.2 9.4 9.3 7.8 5.3 3.4 2.3 6.3 7.8 9.0

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 89 ADD Union Bank (UNBK) Banks AUGUST 13, 2018 RESULT Coverage view: Attractive

Not yet but soon to be out of woods. Union Bank reported a marginal profit but we Price (`): 86 are not reading too much into it considering that the NPLs in the book are yet to see Target price (`): 120 the decline that we are seeing in other banks. Slippages were high at 6% of loans and BSE-30: 37,869 near-term concerns remain on the extent of dilution that could happen if infusion takes place at closer to current levels. Similar to other public banks, a recovery in NPLs can aid expansion in valuation, which drives our positive view.

Company data and valuation summary Union Bank Stock data Forecasts/Valuations 2018 2019E 2020E 52-week range (Rs) (high,low) 196-74 EPS (Rs) (44.9) 7.7 33.0 Market Cap. (Rs bn) 100.0 EPS growth (%) (656.0) 117.1 330.8 QUICK NUMBERS Shareholding pattern (%) P/E (X) (1.9) 11.2 2.6 Promoters 67.4 NII (Rs bn) 93.0 105.9 121.2  NII up 17% yoy; PAT FIIs 5.0 Net profits (Rs bn) (52.5) 9.0 38.6 MFs 8.4 BVPS 59.4 68.7 116.5 increased 11% yoy Price performance (%) 1M 3M 12M P/B (X) 1.4 1.2 0.7 Absolute 4.8 (2.3) (36.4) ROE (%) (23.7) 3.9 15.2  GNPL and NPPL Rel. to BSE-30 0.3 (9.1) (47.0) Div. Yield (%) 0.0 1.3 5.8 ratios up 27 bps qoq and 28 bps qoq to Drop in credit cost and improvement in NIM drive earnings 16% and 8.7%, respectively Earnings increased 11% yoy in 1QFY19 driven by strong NII growth at 17% yoy and drop in credit cost to 2.3% (down 16 bps yoy and 460 bps qoq), lowest in eight quarters. Sharp growth  Maintain ADD in NII was on the back of interest recognition worth `2.7 bn from one of the accounts resolved rating; TP revised to under NCLT-1. Other income dropped 15% yoy owing to high reduction in treasury gains, `120 (from `130) down 70% yoy while recoveries were high at `2 bn owing to resolution in another account under NCLT-1. Fee income maintained the momentum, up 17% yoy. Growth in operating expenses was modest at 9% yoy; employee expenses decreased 6% yoy (the company provided `0.6 bn incremental provisions for wage revision). Cost income ratio dropped 310 bps qoq to 46%. Loan growth showed revival led by robust retail loan traction and gradual increase in corporate loans. CASA ratio was flat qoq at 34%; SA up 10% yoy while CA was down 21% yoy.

Commentary a lot more positive but likely to reflect in numbers in the next few quarters

The headline gross and net NPL ratios were flat qoq at 16% and 9% of loans respectively despite the quarter seeing one of the best recovery and upgradation cycles largely led by resolution in two cases that were in the IBC process under NCLT list 1 cases. Apart from the corporate sector, we saw higher slippages in the retail and agriculture segments as well. The management highlighted that there has been some progress in the power sector, which has resulted in a few accounts that were under their internal watch-list getting resolved. SMA-2 was marginally higher at ~3% of loans and mostly comprised small-ticket loans. Union Bank would also be a M B Mahesh CFA key beneficiary as some of the large-ticket loans that are under the NCLT process get resolved.

Maintain ADD Nischint Chawathe We maintain ADD rating and value the bank at `120 (from `130 earlier). CET-1 capital at 7.5% does indicate that there is likely to be more dilution ahead putting pressure on book value per Dipanjan Ghosh share growth and remains the key risk. At our TP we see the bank trading at 1.4X book and 5X March 2020E EPS for short-term RoEs in the range of 8-10% and strong growth in earnings, primarily off a low base. Earnings growth trends are likely to be volatile in the medium term. Improvement in the pace of resolutions is likely to be the bigger trigger for all public banks, in general.

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

Exhibit 1: Union Bank of India – quarterly performance March fiscal year-ends, 1QFY18-1QFY19 (` mn)

(% chg.) 1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 2019E 2018 (% chg.) 2020E Interest income 87,008 85,056 81,530 81,121 2.3 6.7 7.3 355,849 327,480 8.7 395,465 Loans 60,115 58,864 57,377 55,487 2.1 4.8 8.3 244,882 227,730 7.5 279,559 Investments 23,522 22,759 21,477 22,034 3.4 9.5 6.8 96,610 87,800 10.0 101,094 Others 3,371 3,433 2,677 3,600 (1.8) 25.9 (6.4) 14,357 23,344 (38.5) 14,812 Interest expense 60,747 61,248 59,104 59,190 (0.8) 2.8 2.6 249,950 234,434 6.6 274,267 Net interest income 26,261 23,807 22,426 21,931 10.3 17.1 19.7 105,899 93,046 13.8 121,198 Non-int.income 12,080 9,147 14,147 14,848 32.1 (14.6) (18.6) 46,662 49,899 (6.5) 51,148 Treasury Income 1,940 267 6,520 1,320 627.5 (70.2) 47.0 4,000 12,579 (68.2) 5,500 Non-int income excl treasury 10,140 8,881 7,627 13,528 14.2 33.0 (25.0) 42,662 37,320 14.3 45,648 Total income 38,341 32,955 36,573 36,778 16.3 4.8 4.2 152,562 142,945 6.7 172,345 Op. expenses 17,453 16,971 16,007 17,884 2.8 9.0 (2.4) 71,826 67,550 6.3 80,378 Employee cost 7,702 8,398 8,213 8,154 (8.3) (6.2) (5.5) 33,864 32,552 4.0 38,402 Other cost 9,751 8,573 7,794 9,731 13.7 25.1 0.2 37,962 34,997 8.5 41,976 Operating profit 20,888 15,983 20,566 18,894 30.7 1.6 10.6 80,736 75,395 7.1 91,967 Provisions and cont. 22,291 48,177 17,037 56,679 (53.7) 30.8 (60.7) 69,402 141,807 (51.1) 41,880 Investment Depreciation 271 15,000 -590 11,200 (98.2) NM (97.6) 6,500 15,600 (58.3) -500 NPLs 17,780 32,736 18,325 54,560 (45.7) (3.0) (67.4) 62,402 125,438 (50.3) 41,880 PBT -1,403 -32,194 3,529 -37,785 NM NM NM 11,334 -66,412 NM 50,088 Tax -2,698 -6,756 2,363 -11,951 NM NM NM 2,379 -13,938 NM 11,513 Net profit 1,295 -25,438 1,166 -25,834 NM NM NM 8,955 -52,474 NM 38,574 Tax rate (%) NM NM 67 NM 21 NM 23 PBT-invt gains+ provisions 18,948 15,717 14,046 17,574 20.6 34.9 7.8 76,736 62,816 22.2 86,467 Key balance sheet items (Rs bn) Total Deposit 4,059 4,126 3,758 4,085 (1.6) 8.0 (0.6) 4,239 4,085 3.8 4,614 Savings deposits 1,155 1,048 1,142 10.2 1.1 1,185 1,142 3.8 1,290 Current deposits 226 287 251 (21.3) (10.0) 260 251 3.8 283 Term deposits 2,678 2,424 2,693 10.5 (0.5) 2,794 2,693 3.8 3,041 CASA (%) 34.0 35.5 34.1 -149 bps -8 bps 34 34 0bps 34 Gross loans 3,186 3,170 2,952 3,139 0.5 7.9 1.5 3,478 3,247 7.1 3,851 Retail loans 500 424 494 18.0 1.0 494 Investments 1,329 1,291 1,215 1,265 3.0 9.4 5.0 1,260 1,265 (0.4) 1,354 AFS 461 427 392 7.8 17.4 392 Duration (years) 3 3 5 5 HTM 866 783 873 10.5 (0.8) 873 Duration (years) 5 4 8 8 Yield management measures (%) Yield on advances 7.6 7.7 7.1 -9 bps 54 bps 7.3 7.2 11bps 7.6 Yield on investment 7.3 7.3 7.0 -6 bps 23 bps 7.7 7.4 29bps 7.7 Cost of deposit 6.0 6.3 5.9 -30 bps 10 bps 6.0 6.0 3bps 6.2 NIM 2.4 2.2 2.0 20 bps 36 bps 2.3 2.1 16bps 2.4 Cost to income 45.5 43.8 48.6 175 bps -311 bps 47.1 47.3 -18bps 46.6 Cost to average assets 1.4 1.4 1.5 1 bps -6 bps 1.4 1.4 1bps 1.5 Credit cost 2.3 2.4 6.9 -16 bps -467 1.9 4.0 -213bps 1.2 RoA 0.1 0.1 (2.1) 0.2 (1.1) 0.7 RoE 2.1 1.9 (42.8) 3.5 (21.4) 14.1 Capital adequacy details (%) CAR 11.5 12 12 -56 bps -5 bps 12 Tier I 9.0 9 9 -25 bps -8 bps 9 Tier II 2.5 3 2 -31 bps 3 bps 2 Asset quality details Gross NPLs (Rs bn) 510 373 494 36.7 3.2 515 493 4.4 484 Gross NPLs (%) 16.0 12.6 15.7 337 bps 27 bps 14.8 15.2 -38bps 12.6 Net NPLs (Rs bn) 255 208 243 22.7 4.9 240 243 (1.2) 206 Net NPLs (%) 8.7 7.5 8.4 123 bps 28 bps 7.9 8.4 -56bps 6.1 Provision coverage ratio (%) 50.0 44 51 570 bps -77 bps 53 51 263bps 57 Provision coverage ratio (tech w/o) 56.5 51 57 536 bps -67 bps Net restructured loans (Rs bn) 11 39 12 (72.1) (12.9) Net restructured loans (%) 0.3 1.3 0.4 -97 bps -6 bps Slippages (Rs bn) 47 45 100 4.5 (53.7) 116 213 46 Slippages (%) 5.9 5.9 12.8 2 bps -685 4.0 7.4 -344bps 1.5 Other key parameters (#) Branches 4,302 4,282 4,301 0.5 0.0 4,376 4,301 1.7 4,451 ATM 7,556 7,574 7,642 (0.2) (1.1) 7,642

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 91 Banks Union Bank

Slippages high at 5.9%

Gross NPL increased ~27 bps qoq to 16% primarily on account of higher slippages from the corporate book. Overall stressed assets (NNPL + standard restructured + SDR + S4A + 5/25) increased 20 bps qoq to 9.5%. The company has 12 accounts under 5/25 worth `34 bn and 3 accounts under S4A worth `1.3 bn. The SMA-2 book has increased to `102 bn from `87 bn qoq. Provision coverage ratio (calculated) dropped 70 bps qoq to 50%.

Slippages were high at 5.9% of loans in 1QFY19. Elevated slippages were driven by corporate slippages which increased to 8.9% from 7.7% yoy. SME slippages which shot up in 4QFY18 to 7%, dropped to 1.8% in 1QFY19 (lowest in the last six quarters). Retail slippages, however, increased in 1QFY19 to 3.1%. Agriculture slippages decreased 220 bps qoq to 4.6%.

Union Bank has `23.7 bn exposure in the power sector. Of this, ~22% belongs to PSUs and SEBs. Out of the remaining exposure (private sector) worth `186 bn, ~`53 bn is NPL. 8 accounts from the private sector worth ~`40 bn was upgraded in 1QFY19 to standard account. Most of these accounts belonged to SMA-1 category.

Union Bank has exposure to 10 accounts (2 accounts resolved in 1QFY19) worth `63 bn and 16 accounts (2 accounts were sold in 4QFY18) worth `45 bn for accounts under NCLT list 1 and 2, respectively. The company maintains provision coverage ratio of 63% and 69% respectively on these accounts. The cumulative provisions on these accounts are 65.7%. No additional provisions were made for these accounts in 4QFY18.

We forecast GNPL to reduce to <10% by FY2021E driven by drop in slippages to ~1.75% over FY2019-21E.

Exhibit 2: Corporate slippages high at 9% Gross NPL and net NPL ratios, March fiscal year-ends, 1QFY17-1QFY19 (%)

Gross NPLs (%) Slippages (%) 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Agriculture 5.3 5.1 5.6 5.1 8.0 6.7 6.1 6.1 6.9 2.0 1.6 0.3 2.7 6.3 3.9 2.3 6.8 4.6 MSE 8.2 8.5 9.3 8.9 9.6 10.7 11.0 12.0 12.0 2.5 3.8 1.2 2.5 3.8 4.3 2.4 7.2 1.8 Retail 2.9 3.1 3.0 3.1 2.7 2.5 2.3 2.1 2.7 2.0 2.3 0.5 3.2 1.9 1.2 1.0 2.0 3.1 Corporate/others 13.6 14.7 16.4 15.2 17.4 20.6 18.2 23.3 23.3 7.9 7.3 8.5 5.7 7.7 4.0 8.6 19.7 8.9 Overall 10.2 10.7 11.7 11.1 12.6 12.4 13.0 15.7 16.0 5.2 5.1 4.7 4.3 5.9 3.6 5.4 12.8 5.9

Source: Company, Kotak Institutional Equities

92 KOTAK INSTITUTIONAL EQUITIES RESEARCH Union Bank Banks

Exhibit 3: Overall stressed assets increased 20 bps qoq to 9.5% Movement of NPLs and restructured loans, March fiscal year-ends, 1QFY16-1QFY19

1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Movement of NPLs (Rs bn) Opening NPL 130.3 141.4 155.4 185.0 241.7 272.8 298.6 324.0 337.1 372.9 382.9 409.9 493.7 Addition of gross NPL 15.1 19.3 34.1 61.7 36.0 34.0 32.9 29.5 44.5 26.9 41.9 100.4 46.5 Reductions 4.0 5.3 4.6 4.9 4.9 8.1 7.5 5.3 8.8 16.9 14.9 16.6 30.5 Upgradations 2.4 2.1 1.9 4.0 4.9 6.7 3.6 3.9 5.4 14.0 11.9 8.1 16.2 Write off 1.6 2.7 2.6 1.0 0.0 1.5 4.0 7.2 3.4 11.1 7.9 12.3 14.3 Closing NPL 141.4 155.4 185.0 241.7 272.8 298.6 324.0 337.1 372.9 382.9 409.9 493.7 509.7 Slippages (%) 2.3 3.0 5.4 9.4 5.2 5.1 4.7 4.3 5.9 3.6 5.4 12.8 5.9 Gross NPLs (%) 5.5 6.1 7.1 8.7 10.2 10.7 11.7 11.2 12.6 12.4 13.0 15.7 16.0 Net NPLs 76.3 83.3 103.2 140.3 158.2 169.5 182.5 188.3 207.8 194.8 204.3 243.3 255.1 Net NPLs (%) 3.1 3.4 4.1 5.3 6.2 6.4 7.0 6.6 7.5 6.7 7.0 8.4 8.7 Restructured loans (Rs bn) Outstanding restructured loans (net) 141.3 139.1 136.2 85.7 72.5 56.4 56.4 57.0 38.6 52.7 37.4 12.4 10.8 Outstanding restructured loans (net) (%) 5.5 5.5 5.2 3.1 2.7 2.0 2.0 1.9 1.3 1.7 1.2 0.4 0.3 Net NPL and restr. loans (%) 8.6 8.9 9.3 8.3 8.9 8.4 9.0 8.5 8.8 8.4 8.1 8.8 9.0 Fresh impairments (%) 3.5 3.7 6.9 10.4 5.2 5.1 4.7 4.3 6.0 6.4 5.4 12.8 6.1 Other formats (Rs bn) SDR 21.2 46.8 50.3 42.8 42.3 37.2 26.6 - - `5:25 35.9 39.3 37.4 33.2 32.8 31.0 28.0 36.3 34.5 S4A - 2.8 10.8 15.4 19.4 9.5 19.2 1.2 1.3 Total 57.2 88.8 98.5 91.5 94.5 77.6 73.8 37.4 35.8 Less: Overlap 18.7 25.0 - - Total stressed loans (Rs bn) 217.6 222.5 239.4 226.0 287.9 314.7 337.3 336.7 322.2 325.1 290.4 293.0 301.6 (% of loans) 8.5 8.8 9.1 8.1 10.7 11.3 12.2 11.2 10.9 10.5 9.2 9.3 9.5

Source: Company, Kotak Institutional Equities

Exhibit 4: 66% coverage ratio on accounts under NCLT Details of NCLT accounts, March fiscal year-ends, 1QFY19 (` bn)

NCLT list 1 NCLT list 2 Total Exposure # of accounts 10 16 26 Loans outstanding 63.19 44.87 108.06 Provision held 40.07 30.96 71.03 Additional provisions required 0 0 0 PCR (%) 63.4 69.0 65.7

Note: 1) 2 accounts under list 2 were sold in 4QFY18. 2) 2 accounts under list 1 got resolved in 1QFY19.

Source: Company, Kotak Institutional Equities

Gross advances up 8% yoy

Loan growth was modest at 8% yoy. Retail loan growth maintained momentum, up 18% yoy. Within the retail portfolio, the housing loan portfolio dropped 4% yoy to `252 bn, similar to previous quarter. The share of retail loans in the overall portfolio increased to 15.7% in 1QFY19 (up 140 bps yoy). Vehicle loans saw strong growth at 15% yoy. LAP and other retail loan portfolio saw a sharp spike in growth at 2.1X yoy and 38% yoy respectively on a low base. Agriculture loans were flat yoy (on account of various debt waiver schemes). SME loans remained muted; up 8% yoy. Corporate loans revived growth to 8% yoy.

We expect loan growth to improve at ~9% CAGR over FY2018-2021E driven by modest performance in SME and agriculture loans. While retail loans will drive majority growth, corporate growth is expected to pick pace in the medium term.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 93 Banks Union Bank

Exhibit 5: Other personal loan to overall retail loans continues to rise Break-up of retail loans, March fiscal year-ends, 1QFY17-1QFY19 (` bn)

1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Retail loans (Rs mn) Home loan 212 225 225 278 235 241 247 252 254 Vehicle loans 29 31 32 33 35 37 39 40 40 Education loans 27 30 29 30 31 32 32 32 33 LAP 67 67 68 25 16 37 42 50 49 Personal loans 13 13 14 13 14 14 14 13 13 Others 7 10 9 25 80 86 89 96 110 Total 355 375 376 404 424 447 463 494 500 Share of total (%) Home loan 60 60 60 69 56 54 53 51 51 Vehicle loans 8 8 8 8 8 8 8 8 8 Education loans 8 8 8 8 7 7 7 7 7 LAP 19 18 18 6 4 8 9 10 10 Personal loans 4 3 4 3 3 3 3 3 3 Others 2 3 2 6 19 19 19 20 22

Source: Company, Kotak Institutional Equities

Exhibit 6: Loan growth shows signs of revival Exhibit 7: Asset quality has deteriorated over the last few March fiscal year-ends, 1QFY16-1QFY19 (%) quarters Gross, net NPL and provision coverage ratio, 1QFY16-1QFY19 25 Gross NPL (LHS) Net NPL (LHS) 20 (Rs bn) Prov cov (RHS) (%) 550 75

15 440 60

10 330 45

5 220 30

- 110 15

0 -

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18 1QFY19

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

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

Interest recognition from resolved account under NCLT drives NIM

Calculated NIM increased 35 bps qoq and 20 bps yoy to 2.4% on the back of rise in yield on advances. Calculated yields increased 55 bps qoq (down 9 bps yoy) driven by interest recognition worth `2.7 bn from one account under NCLT list 1. Adjusting for the same, NIM was NIM was 2.1% and yields were up 20 bps yoy to 7.3%. The improvement in yields qoq was led by lower interest reversals in the quarter. Cost of deposits increased 10 bps qoq (down 30 bps yoy) to 6%.

Yields are expected to improve going ahead as recoveries from various NCLT cases pick pace in FY2019E. There will be marginal drag on yields driven by change in loan mix towards higher share of low-yielding retail loans. We maintain a positive view on NIM driven by higher recoveries, lower cost of funds, change in loans mix to include more retail products and lower interest reversals. We forecast NIM to improve to 2.2% by FY2019E from 2.1% in FY2018.

94 KOTAK INSTITUTIONAL EQUITIES RESEARCH Union Bank Banks

CASA ratio flat qoq at 34%

Growth in total deposits was modest at 8% yoy. Muted CASA growth at 4% yoy in 1QFY19 was led by 21% yoy drop in CAA deposits. SA, however, maintained traction, up 10% yoy. We forecast 9% CAGR in CASA over FY2019-2021E and stable CASA of 34% during the same period.

Other highlights of the quarter

 Non-interest income decreased 15% yoy on the back of a steep drop in treasury gains at 70% yoy. Fee income maintained strong momentum, up 17% yoy. Recovery from written-off accounts saw a sharp rise in 1QFY19 to `21 bn (up 9.8X yoy) on the back of resolution of 1 account under NCLT list 1 (~`1.6 bn).

 Cost-income ratio improved qoq by 310 bps to 46% driven by modest growth in operating expenses at 9% yoy. While other expenses were high at 25% yoy led by continuous investment in business expansion and technology innovation, employee expenses dropped 6% yoy (this was despite accounting for incremental provisions for wage revision worth `1.6 bn).

 Capital adequacy ratio (CAR) ratio is comfortable at 11.5% with tier-1 ratio of 9%. RWA dropped by 1% yoy compared to growth in gross advances at 8% yoy.

Exhibit 8: Union Bank trading at 0.4X one-year forward book Exhibit 9: Union Bank trading at sharp discount to peers One-year forward rolling trading multiples, August 2011-August 2018 Union Bank trading premium to public banks, August 2007–August 2018 1.5 1.2 1.2 1.0 0.9 0.8

0.6 0.6

0.3 0.4

0.0

0.2

Aug-11

Aug-12

Aug-13

Aug-14

Aug-15

Aug-16 Aug-17

Aug-18

Aug-07

Aug-08

Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Aug-14

Aug-15

Aug-16

Aug-17 Aug-18

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH 95 Banks Union Bank

Exhibit 10: Change in estimates March fiscal year-end, 2019E-2021E (` mn)

New estimates (Rs mn) Old estimates (Rs mn) % change 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E Net interest income 105,899 121,198 131,083 109,080 123,769 133,121 (2.9) (2.1) (1.5) NIM (%) 2.3 2.4 2.4 2.3 2.4 2.3 -2 bps 5 bps 7 bps Loan growth (%) 6 11 11 7 11 11 -102 bps 0 bps 0 bps Loan loss provisions 62,402 41,880 35,711 62,711 42,282 36,054 (0.5) (1.0) (1.0) Other income 46,662 51,148 55,875 50,326 53,762 57,433 (7.3) (4.9) (2.7) Treasury income 4,000 5,500 7,000 8,000 8,500 9,000 (50.0) (35.3) (22.2) Operating expenses 71,826 80,378 89,857 73,325 82,078 91,765 (2.0) (2.1) (2.1) Employee expenses 33,864 38,402 43,145 35,508 40,266 45,239 (4.6) (4.6) (4.6) PBT 11,334 50,088 61,390 16,370 53,171 62,734 (30.8) (5.8) (2.1) Net profit 8,955 38,574 47,270 12,934 40,949 48,306 (30.8) (5.8) (2.1) PBT -treasury + NPL provisions 69,736 86,467 90,101 71,081 86,953 89,789 (1.9) (0.6) 0.3

Source: Kotak Institutional Equities

96 KOTAK INSTITUTIONAL EQUITIES RESEARCH Union Bank Banks

Exhibit 11: Union Bank of India: Growth rates and key ratios March fiscal year-ends, 2016-2020E (%)

2016 2017 2018 2019E 2020E 2021E Growth rates (%) Net loan 4.6 7.1 0.8 5.8 10.9 10.8 Customer assets 6.4 8.2 1.5 5.4 10.2 10.2 Investments excld. CPs and debentures (0.6) 23.4 11.2 2.2 9.0 8.8 Net fixed and leased assets 46.9 (1.2) (1.6) (0.6) 1.3 1.4 Cash and bank balance 30.8 12.1 50.6 0.9 3.8 4.0 Total Asset 6.0 11.9 7.7 4.2 9.0 9.0 Deposits 8.2 9.7 8.7 3.8 8.8 8.8 Current 41.0 (20.2) 5.5 3.8 8.8 8.8 Savings 13.4 28.3 9.7 3.8 8.8 8.8 Fixed 3.4 7.0 8.5 3.8 8.8 8.8 Net interest income (1.5) 7.1 4.5 13.8 14.4 8.2 Loan loss provisions 35.2 68.5 89.7 (50.3) (32.9) (14.7) Total other income 3.1 36.7 0.5 (6.5) 9.6 9.2 Net fee income 4.8 14.4 11.3 5.0 12.0 12.0 Net capital gains 29.0 127.9 (39.7) (68.2) 37.5 27.3 Net exchange gains 0.6 (2.6) (6.3) 5.0 10.0 10.0 Operating expenses 2.6 2.2 4.9 6.3 11.9 11.8 Employee expenses (2.3) (7.2) (5.2) 4.0 13.4 12.4 Key ratios (%) Yield on average earning assets 8.6 8.0 7.3 7.5 7.9 8.0 Yield on average loans 9.0 8.3 7.9 8.2 8.7 8.8 Yield on average investments 8.8 8.8 7.6 7.9 7.9 7.9 Average cost of funds 6.6 6.0 5.4 5.4 5.5 5.7 Interest on deposits 6.7 6.1 5.5 5.5 5.6 5.8 Difference 2.1 2.0 2.0 2.2 2.3 2.3 Net interest income/earning assets 2.2 2.2 2.1 2.3 2.4 2.4 New provisions/average net loans 1.5 2.4 4.4 2.1 1.3 1.0 Interest income/total income 75.4 75.6 71.4 71.3 72.6 72.8 Other income / total income 30.4 35.8 34.9 30.6 29.7 29.9 Operating expenses/total income 57.1 54.6 51.8 48.3 48.2 49.9 Operating profit /AWF 0.2 (0.4) (1.8) 0.2 0.9 1.0 Tax rate 23.4 (62.2) 21.0 21.0 23.0 23.0 Dividend payout ratio 9.9 - - 15.0 15.0 15.0 Current deposit 23.7 27.7 28.0 28.0 28.0 28.0 Fixed deposit 67.6 66.0 65.9 65.9 65.9 65.9 Savings deposit 23.7 27.7 28.0 28.0 28.0 28.0 Loans-to-deposit ratio 78.0 76.2 70.7 72.1 73.4 74.8 Asset quality (%) Gross NPL 8.5 10.9 15.2 14.8 12.6 10.6 Net NPL 5.2 6.6 8.4 7.9 6.1 4.0 Slippages 5.1 5.0 7.4 4.0 1.5 2.0 Provision coverage (ex write-off) 42.0 44.1 50.7 53.3 57.5 66.6 Dupont analysis (%) Net interest income 2.1 2.1 2.0 2.1 2.3 2.3 Loan loss provisions 1.0 1.6 2.7 1.3 0.8 0.6 Net other income 0.9 1.2 1.1 0.9 1.0 1.0 Operating expenses 1.6 1.5 1.5 1.5 1.5 1.6 Invt. depreciation 0.0 0.1 0.3 0.1 (0.0) (0.0) (1- tax rate) 76.6 162.2 79.0 79.0 77.0 77.0 ROA 0.3 0.1 (1.1) 0.2 0.7 0.8 Average assets/average equity 20.2 20.4 21.1 21.3 20.9 19.9 ROE 7.0 2.7 (23.7) 3.9 15.2 16.3

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 97 Banks Union Bank

Exhibit 12: Union Bank of India: financial summary March fiscal year-ends, 2016-2021E (%)

2016 2017 2018 2019E 2020E 2021E Income statement Total interest income 321,988 326,600 327,480 355,849 395,465 438,131 Loans 236,581 229,431 227,730 244,882 279,559 314,073 Investments 75,351 86,951 87,800 96,610 101,094 108,614 Cash and deposits 10,056 10,218 11,951 14,357 14,812 15,443 Total interest expense 238,857 237,566 234,434 249,950 274,267 307,047 Deposits from customers 220,774 219,991 215,562 229,339 249,744 278,116 Net interest income 83,131 89,033 93,046 105,899 121,198 131,083 Loan loss provisions 39,243 66,134 125,438 62,402 41,880 35,711 Net interest income (after prov.) 43,888 22,899 (32,392) 43,497 79,318 95,372 Other income 36,317 49,646 49,899 46,662 51,148 55,875 Net fee income 4,098 4,687 5,218 5,479 6,137 6,873 Net capital gains 9,146 20,845 12,579 4,000 5,500 7,000 Net exchange gains 9,776 9,523 8,925 9,372 10,309 11,340 Operating expenses 63,022 64,378 67,550 71,826 80,378 89,857 Employee expenses 36,993 34,342 32,552 33,864 38,402 43,145 Depreciation on investments 1,493 6,304 15,600 6,500 (500) (500) Other Provisions (1,964) (1,559) 769 500 500 500 Pretax income 17,654 3,422 (66,412) 11,334 50,088 61,390 Tax provisions 4,138 (2,130) (13,938) 2,379 11,513 14,120 Net Profit 13,516 5,552 (52,474) 8,955 38,574 47,270 % growth (24.1) (58.9) (1,045.1) (117.1) 330.8 22.5 PBT - Treasury + Provisions 47,280 53,456 62,816 76,736 86,467 90,101 % growth (7.6) 13.1 17.5 22.2 12.7 4.2

Balance sheet Cash and bank balance 292,762 328,225 494,412 498,666 517,804 538,567 Cash 11,248 10,308 12,903 13,549 14,226 14,937 Balance with RBI 144,799 154,897 197,261 200,871 219,331 239,382 Balance with banks 39,172 56,482 71,811 71,811 71,811 71,811 Net value of investments 892,083 1,121,490 1,237,801 1,259,791 1,353,731 1,454,219 Govt. and other securities 714,690 875,510 973,490 995,481 1,089,420 1,189,908 Shares 12,370 20,061 18,469 18,469 18,469 18,469 Debentures and bonds 133,534 172,217 194,536 194,536 194,536 194,536 Net loans and advances 2,673,540 2,864,666 2,887,606 3,055,478 3,387,551 3,754,649 Fixed assets 39,399 38,944 38,333 38,116 38,622 39,163 Other assets 149,175 173,720 215,908 226,703 238,038 249,940 Total assets 4,046,959 4,527,044 4,874,060 5,078,755 5,535,747 6,036,537

Deposits 3,427,200 3,758,990 4,085,016 4,239,375 4,613,876 5,020,034 Borrowings and bills payable 327,027 427,214 469,444 509,802 554,196 603,030 Other liabilities 63,820 101,078 68,633 71,226 77,518 84,342 Total liabilities 3,818,047 4,287,282 4,623,093 4,820,403 5,245,590 5,707,406 Paid-up capital 6,874 6,874 11,686 11,686 11,686 11,686 Reserves & surplus 222,038 232,888 239,282 246,666 278,470 317,446 Total shareholders' equity 228,912 239,762 250,968 258,351 290,156 329,131

Source: Company, Kotak Institutional Equities

98 KOTAK INSTITUTIONAL EQUITIES RESEARCH REDUCE Dr Lal Pathlabs (DLPL) Pharmaceuticals AUGUST 13, 2018 RESULT Coverage view: Neutral

Strong start to the year. DLPL posted robust 17% yoy growth in revenues in 1QFY19, Price (`): 926 largely in line with our estimates, with healthy EBITDA margin of 25.7%. Increased Target price (`): 900 focus on wellness/bundled packages is displaying promising trends and DLPL’s growth BSE-30: 37,869 over the next 3-5 years is likely to be dictated by execution in its non-core clusters, particularly eastern India. Rich valuations adequately price in DLPL’s growth narrative. Reiterate REDUCE; revise target price to `900 (from `865).

Company data and valuation summary Dr Lal Pathlabs Stock data Forecasts/Valuations 2018 2019E 2020E 52-week range (Rs) (high,low) 985-718 EPS (Rs) 20.5 24.3 28.7 Market Cap. (Rs bn) 77.2 EPS growth (%) 7.0 19.0 17.9 Shareholding pattern (%) P/E (X) 45.3 38.0 32.3 Promoters 57.4 Sales (Rs bn) 10.6 12.2 14.1 FIIs 13.3 Net profits (Rs bn) 1.7 2.0 2.4 MFs 10.1 EBITDA (Rs bn) 2.6 3.1 3.6 Price performance (%) 1M 3M 12M EV/EBITDA (X) 27.5 23.2 19.4 Absolute 2.6 11.6 15.9 ROE (%) 24.6 23.4 23.1 Rel. to BSE-30 (1.8) 3.9 (3.5) Div. Yield (%) 0.5 0.5 0.6

Healthy quarter, albeit in line with our estimates

Dr Lal Pathlabs’ 1QFY19 revenues of `2.9 bn were largely in line with our estimates, with revenues growing at 17% yoy. Revenue growth was primarily driven by 18% yoy increase in volumes with the key cluster of north India continuing to grow at a healthy rate. Gross margins at 78% were 50 bps below our estimates. Slightly higher employee expense in the quarter led to EBITDA missing our estimates by a modest 2%. 1QFY19 EBITDA margin at 25.7% (+170 bps qoq) was 80 bps below our estimates with EBITDA growing at 15% yoy. Other income and tax rate were largely in line, while marginally lower depreciation led to an in line PAT.

Increased focus on wellness and bundled packages encouraging

In the past 9 months, DLPL has sharpened its focus on wellness/bundled division, dedicating higher resources along with aggressively promoting its ‘SwasthaFit’ health packages and other bundled tests to provide more value for money offerings to customers. The strategy has exhibited promising initial trends with tests/patient metric moving up to 2.34 in the past two quarters versus 2.2 in 1QFY18. Contribution of wellness/bundled packages has also increased to ~10-12% of revenues versus 7-8% previously. Apart from the increasing focus on wellness and other bundled segments, DLPL’s revenue growth over the next few years is likely to be dictated by successful execution of its strategy in the east. While we expect revenue ramp-up to be gradual, we believe margins are unlikely to fall materially. DLPL has already demonstrated strong cost controls across its business with steady EBITDA margins despite no price hikes since 2016 and its strategy of increasing PSC network rather than owned labs moving forward is likely to control overheads. Chirag Talati, CFA Reiterate REDUCE; revise target price to `900

While we believe structural trends remain favorable, valuations remain rich. Our earnings Kumar Gaurav estimates for FY2019-21 remain largely unchanged. DLPL is trading at 33X and 28X FY2019E and FY2020E EPS, respectively, with limited room for upside. We reiterate REDUCE rating and revise DCF based target price to `900 (from `865, as we roll forward to June 2020E) and recommend awaiting better entry points.

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

Exhibit 1: DLPL posted revenue growth of 17% yoy in 1QFY19 Dr Lal Pathlabs, interim results, March fiscal year ends (Rs mn)

chg. (%) 1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 FY2019E Net sales 2,923 2,892 2,493 2,668 1.1 17.2 9.6 12,238 Cost of materials (642) (619) (521) (575) 3.7 23.2 11.7 (2,692) Gross profit 2,281 2,273 1,972 2,093 0.4 15.7 9.0 9,546 Employee benefit expense (494) (475) (411) (466) 4.0 20.1 6.0 (2,051) ESOP/ESPS cost — — (25) — — Fee to collection centres (365) (361) (294) (330) 1.0 24.1 10.6 (1,505) Other expenses (672) (670) (587) (657) 0.3 14.5 2.3 (2,927) EBITDA 750 767 655 640 (2.2) 14.5 17.2 3,062 Depreciation (88) (100) (69) (107) (12.0) 27.5 (17.8) (366) EBIT 662 667 586 533 (0.7) 13.0 24.2 2,696 Other income 94 90 75 89 4.4 25.3 5.6 380 Finance expense (2) (2) — (2) Profit before tax 754 755 661 620 (0.1) 14.1 21.6 3,075 Profit before tax (ex-ESOP) 754 755 686 620 (0.1) 9.9 21.6 3,075 Exceptional items — — — — Tax expense (257) (253) (216) (218) (1,027) Net profit 497 502 445 402 (0.9) 11.7 23.6 2,048 Minority interest (3) (1) (3) (1) (16) Net profit after minority 494 501 442 401 (1.4) 11.8 23.2 2,032 FD number of shares 83 83 83 83 83 FD EPS (Rs mn) 5.9 6.0 5.3 4.8 (1.4) 11.8 23.2 24.3

Gross margin (%) 78.0 78.6 79.1 78.4 78.0 EBITDA margin (%) 25.7 26.5 26.3 24.0 25.0 Staff costs to sales (%) 16.9 16.4 17.5 17.5 16.8 Collection centres fees to sales (%) 12.5 12.5 11.8 12.4 12.3 Other expenses to sales (%) 23.0 23.2 23.5 24.6 23.9 Tax rate (%) 34.1 33.5 32.7 35.2 33.4 Operational data Number of tests (mn) 9.9 — 7.9 9.0 25.3 10.1 39.5 Realizations/test (Rs) 295 — 316 297 (6.4) (0.5) 310 Number of patients (mn) 4.2 — 3.6 3.9 17.8 9.9 17.4 Realizations/patient (Rs) 691 — 694 693 (0.5) (0.3) 704 Tests/patient 2.34 — 2.20 2.34 6.4 0.2 2.3

Source: Company, Kotak Institutional Equities estimates

100 KOTAK INSTITUTIONAL EQUITIES RESEARCH Dr Lal Pathlabs Pharmaceuticals

Exhibit 2: DLPL revenue grew at a healthy pace of 17% yoy DLPL revenues and revenue growth, March fiscal year ends, 3QFY16-1QFY19 (Rs mn, %)

Net sales (LHS) Revenue growth (%) (RHS) 3,500 30

2,923 3,000 2,781 25 2,622 2,627 2,668 2,493 2,500 2,228 2,199 2,075 20 1,977 2,000 1,886 15 1,500 10 1,000

500 5

- 0 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19

Source: Company, Kotak Institutional Equities estimates

Exhibit 3: Realizations declined as proportion of bundled tests Exhibit 4: Patient volume growth was 21% in 1QFY19 increased in revenue mix Realizations/patient, number of patients,1QFY16-1QFY19 (Rs, #) Realizations/sample, number of samples,1QFY16-1QFY19 (Rs, #) Realizations/patient [LHS] (Rs) Realizations/sample [LHS] (Rs) Number of patients [RHS] (mn) 750 4.2 4.5 330 Number of samples [RHS] (mn) 11 4.0 9.9 700 3.8 3.8 3.9 320 10 3.6 4.0 9.1 9.0 650 8.7 3.3 3.2 3.2 3.5 310 8.2 9 600 2.9 3.0 7.9 2.9 2.9 550 3.0 300 7.2 7.3 7.1 8 6.6 6.7 500 290 6.3 7 682 699 692 694 693 2.5 6.2 450 662 662 650 678 685 694 688 691 320 316 280 6 306 305 310 310 306 400 2.0 300 302 299 299 297 295 350 270 5 1.5 300 260 4 250 1.0

250 3

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18 4QFY18

1QFY19

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH 101 Pharmaceuticals Dr Lal Pathlabs

Exhibit 5: We value DLPL at `900/share DCF-based valuation, March fiscal year ends, 2017-30E (Rs mn)

2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E Net sales 9,124 10,569 12,238 14,100 16,245 18,698 21,410 24,514 27,946 31,719 35,842 40,143 44,158 48,573 YoY (%) 15.3 15.8 15.8 15.2 15.2 15.1 14.5 14.5 14.0 13.5 13.0 12.0 10.0 10.0 EBITDA 2,446 2,640 3,062 3,565 4,226 4,862 5,524 6,227 7,042 7,930 8,961 10,036 11,039 12,143 Margin (%) 26.8 25.0 25.0 25.3 26.0 26.0 25.8 25.4 25.2 25.0 25.0 25.0 25.0 25.0 Depreciation 282 331 366 426 486 563 664 781 914 1,065 1,236 1,429 1,643 1,878 EBIT 2,164 2,309 2,696 3,139 3,739 4,299 4,859 5,446 6,129 6,865 7,724 8,607 9,397 10,266 Margin (%) 23.7 21.8 22.0 22.3 23.0 23.0 22.7 22.2 21.9 21.6 21.6 21.4 21.3 21.1 EBIT (1-tax) 1,502 1,555 1,833 2,083 2,487 2,880 3,256 3,649 4,106 5,148 5,793 6,455 7,048 7,699 Capex (516) (625) (400) (400) (400) (654) (749) (858) (978) (1,110) (1,254) (1,405) (1,546) (1,700) % of revenues (%) 5.7 5.9 3.3 2.8 2.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 Change in WC 21 (274) (106) (28) (32) (135) (136) (278) (189) (207) (227) (237) (221) (243) FCFF 1,289 987 1,694 2,082 2,542 2,654 3,035 3,294 3,853 4,896 5,548 6,243 6,924 7,634 Discount factor 0.8 1.8 2.8 3.8 4.8 5.8 6.8 7.8 8.8 9.8 10.8 Discounted free cash 1,926 2,119 1,994 2,056 2,011 2,120 2,428 2,480 2,515 2,514 2,498

WACC (%) 11.0 WACC (%) Terminal growth (%) 5.0 895 9.7 10.2 10.7 11.2 11.7 Discounted free cash flow 24,660 4.0 998 914 842 781 728 Terminal value 44,086 Terminal 4.5 1,059 963 882 814 755 Enterprise value 68,747 growth 5.0 1,134 1,022 929 852 787 Less: Net debt (6,014) rate (%) 5.5 1,226 1,093 986 898 824 6.0 1,342 1,181 1,054 951 867 Equity value 74,761 No. of shares 83 Equity value per share (Rs) 895

Source: Company, Kotak Institutional Equities estimates

102 KOTAK INSTITUTIONAL EQUITIES RESEARCH Dr Lal Pathlabs Pharmaceuticals

Exhibit 6: We expect DLPL to post 15% EBITDA CAGR over FY2018-21E March fiscal year ends, 2013-21E (Rs mn)

2013 2014 2015 2016 2017 2018 2019E 2020E 2021E Net revenues 4,517 5,579 6,596 7,913 9,124 10,569 12,238 14,100 16,245 Gross profit 3,544 4,403 5,204 6,184 7,153 8,309 9,546 10,998 12,671 EBITDA 977 1,386 1,560 2,097 2,365 2,640 3,062 3,565 4,226 EBITDA (ex-ESOP charges) 1,226 1,541 1,802 2,106 2,365 2,640 3,062 3,565 4,226 Depreciation & amortisation (204) (272) (282) (283) (282) (331) (366) (426) (486) EBIT 773 1,113 1,278 1,815 2,084 2,309 2,696 3,139 3,739 Net interest 29 79 119 193 249 304 380 483 543 Profit before tax 802 1,192 1,397 2,007 2,333 2,613 3,075 3,622 4,283 Tax and deferred tax (246) (389) (447) (675) (781) (895) (1,027) (1,210) (1,430) Less: minority interest (5) (7) (8) (10) (10) (10) (16) (16) (16) Net income 551 796 942 1,322 1,542 1,708 2,032 2,396 2,836 Net income (ex-ESOP) 725 901 1,107 1,328 1,542 1,708 2,032 2,396 2,836 Weighted avg. no. of shares (mn) 54.6 54.6 54.6 68.5 83.5 83.5 83.5 83.5 83.5 Fully diluted number of shares 83.5 83.5 83.5 83.5 83.5 83.5 83.5 83.5 83.5 EPS (Rs) 10.1 14.6 17.3 19.3 18.5 20.5 24.3 28.7 34.0 EPS (adjusted) (Rs) 13.3 16.5 20.3 19.4 18.5 20.5 24.3 28.7 34.0 FD EPS (adjusted) (Rs) 8.7 10.8 13.3 15.9 18.5 20.5 24.3 28.7 34.0 Balance sheet Cash & equivalents 762 1,143 1,861 2,940 3,456 4,583 6,014 7,862 10,102 Debtors 198 252 310 363 418 412 477 550 633 Other current assets 207 309 646 935 792 1,235 1,276 1,323 1,378 Current assets 1,167 1,703 2,816 4,237 4,666 6,230 7,767 9,735 12,114 Fixed assets (incl. goodwill) 1,271 1,400 1,510 1,697 1,699 2,204 2,238 2,211 2,125 Other non-current assets 252 412 427 318 536 755 755 755 755 Total assets 2,690 3,515 4,753 6,252 6,901 9,189 10,760 12,701 14,994 Short-term loans 4 9 — — — — — — — Creditors and other liabilities 887 965 1,118 915 848 1,012 1,012 1,105 1,211 Current liabilities 891 974 1,118 915 848 1,012 1,012 1,105 1,211 Secured loans — — — — — — — — — Other liabilities (incl. deferred) 163 208 202 242 73 228 228 228 228 Total liabilities 1,053 1,182 1,319 1,157 921 1,240 1,240 1,333 1,439 Equity 1,637 2,333 3,434 5,095 5,980 7,949 9,520 11,369 13,554 Total equity and liabilities 2,690 3,515 4,753 6,252 6,901 9,189 10,760 12,701 14,994 Cash flow CFO pre-WC changes 1,243 1,577 1,834 2,087 2,504 2,816 3,062 3,565 4,226 Working capital (28) (94) (321) 69 (81) 95 (106) (28) (32) Tax (334) (503) (534) (687) (706) (940) (1,027) (1,210) (1,430) Cash flow from operations 881 980 979 1,469 1,716 1,971 1,929 2,328 2,763 Capex (196) (328) (353) (441) (516) (625) (400) (400) (400) Free cash flow 685 652 626 1,027 1,200 1,346 1,529 1,928 2,363 Key ratios (%) Sales growth (% 23.5 18.2 20.0 15.3 15.8 15.8 15.2 15.2 EBITDA margin (%) 27.1 27.6 27.3 26.6 25.9 25.0 25.0 25.3 26.0 RoE (%) 44.3 38.6 32.2 26.1 25.8 21.5 21.3 21.1 20.9 RoCE (pre-tax, ex-cash) (%) 116.4 105.8 96.6 84.6 82.6 68.6 76.9 89.5 108.3 Net debt to equity (X) (0.5) (0.5) (0.5) (0.6) (0.6) (0.6) (0.6) (0.7) (0.7)

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 103 SELL Kaveri Seed (KSCL) Others AUGUST 13, 2018 RESULT Coverage view:

In-line results. Kaveri’s 1QFY19 results were broadly in line with our expectations, with Price (`): 623 revenues and EBITDA declining 1-2% yoy as a 12% decline in cotton seed revenues was Target price (`): 515 offset by 25% growth in the non-cotton seed portfolio. Kaveri’s diversification into BSE-30: 37,869 other seeds is certainly encouraging; however, policy interventions on pricing/regulations and the potential risk of technology obsolescence constrain our view. SELL stays with a revised target price of `515 (`470 earlier).

Company data and valuation summary Kaveri Seed Stock data Forecasts/Valuations 2018 2019E 2020E 52-week range (Rs) (high,low) 638-431 EPS (Rs) 32.0 34.3 34.4 Market Cap. (Rs bn) 41.2 EPS growth (%) 18.4 7.3 0.1 Shareholding pattern (%) P/E (X) 19.5 18.2 18.1 Promoters 54.8 Sales (Rs bn) 8.2 8.5 9.1 FIIs 18.3 Net profits (Rs bn) 2.1 2.3 2.3 MFs 6.9 EBITDA (Rs bn) 2.2 2.3 2.3 Price performance (%) 1M 3M 12M EV/EBITDA (X) 16.7 15.3 14.6 Absolute 11.7 26.4 17.5 ROE (%) 23.6 26.4 22.4 Rel. to BSE-30 6.9 17.7 (2.2) Div. Yield (%) 1.0 1.3 1.6

Cotton seed revenues declined 12% yoy; lower write-offs and other seeds save the day Kaveri’s results were broadly in line with our expectations for 1QFY19 amid expectedly weak acreages across key crops. Revenues were largely flat yoy at `5.82 bn, 3% below our estimate, as an expected sharp decline in the cotton seed volumes and realization was offset by higher volumes/revenues of hybrid rice and maize seeds. Reported EBITDA declined 2% yoy to `2.04 bn with margins remaining flat at 35%, partly benefiting from sharp decline in other expenses, reflecting lower write-offs. Net income increased 4% yoy to `2.11 bn (EPS of `31.9), 3% above our estimate, led by sharply higher other income. The management guided for slower revenue growth of 7% in FY2019, while maintaining optimism for FY2020.  Expected weakness in cotton seeds. Kaveri reported a 10% yoy decline in volumes to 5.9 mn packets in line with our expectations, led by (1) decline in acreages due to fear of Pink Bollworm, (2) delayed sowing due to late announcements of MSPs and delayed monsoon in certain states and (3) illegal use of herbicide tolerance seeds. Cotton seed realizations declined modestly by `13/packet, lower than the net reduction of `50/packet in price cap by the government. Kaveri’s cotton seeds volumes declined across key states except Gujarat, led by lower acreages and likely loss of market share.  Strong growth in hybrid rice; maize remains steady. Hybrid rice volumes jumped 36% yoy, benefiting from (1) introduction of new hybrid 468 and (2) doubling of business from the government. Maize volumes grew 4% yoy despite weakness in Kaveri’s key markets of Telangana, Maharashtra and North East region. Revenues from the non-cotton seed portfolio grew by a robust 25%, benefiting from new products and higher realizations. Fine tune estimates; retain SELL

We cut our FY2020-21 estimates by 1-4% factoring in (1) lower cotton seed revenues and Tarun Lakhotia (2) other minor changes; our FY2019E EPS remains unchanged. Our TP increases to `515 from `470 previously, as we ascribe 15X multiple to FY2020E EPS as compared to 13X; we have raised multiples seeking comfort on cash utilization from the recent buyback announcement. Akshay Bhor The company has proposed another buyback of ~4.5% of equity at `675/share through the tender route for a total consideration of `2 bn, the same as last year. Kaveri’s high dependence on Bt cotton seeds, which continues to be impacted by adverse policy/pricing changes and possible technology obsolescence, keeps us negative on the stock. We do see a risk of the government intervention on prices of other crop seeds, which may impact the business further.

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

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

(% chg.) 1QFY19 1QFY19E 4QFY18 1QFY18 KIE est yoy FY2019E FY2018 (% chg.) Total Income 5,819 6,024 416 5,906 (3) (1) 8,477 8,192 3 Total Expenditure (3,784) (3,921) (549) (3,837) (3) (1) (6,151) (5,974) 3 Raw materials (3,114) (3,102) (261) (3,071) 0 1 (4,344) (4,182) 4 Employee expense (117) (126) (117) (118) (8) (1) (566) (544) 4 Other expenditure (553) (693) (171) (647) (20) (15) (1,241) (1,248) (1) EBITDA 2,035 2,103 (133) 2,069 (3) (2) 2,327 2,218 5 EBITDA (%) 35.0 34.9 (32.1) 35.0 27.4 27.1 Other income 168 40 14 43 321 293 311 237 31 Depreciation (53) (63) (52) (63) (15) (15) (243) (251) (3) Interest (0.2) (1.0) (0.5) (2.4) (82) (92) (6) (6) (1) PBT 2,150 2,079 (172) 2,046 3 5 2,388 2,198 9 Exceptional items — — — — — — Tax expense (44) (42) (11) (22) 6 96 (119) (84) 42 PAT 2,106 2,037 (184) 2,024 3 4 2,269 2,114 7 Adjusted PAT 2,106 2,037 (184) 2,024 3 4 2,269 2,114 7 Adjusted EPS (Rs) 31.9 30.8 (2.8) 29.3 3 9 21.8 21.0 4 Margins (%) Gross margin 46.5 48.5 37.2 48.0 48.8 49.0 EBITDA margin 35.0 34.9 (32.1) 35.0 27.4 27.1

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Cotton seeds declined on expected lines; maize and hybrid rice registered robust growth Seed-wise performance, 1QFY16-1QFY19

1QFY16 1QFY17 1QFY18 1QFY19 Cotton Volumes (mn packets) 5.4 5.2 6.5 5.9 Increase (%) (4) 27 (10) Realization (Rs/packet) 748 634 654 641 Increase (%) (15) 3 (2) Revenue (Rs mn) 4,040 3,270 4,280 3,780 Increase (%) (19) 31 (12) Hybrid rice Volumes ('000 tons) 1.6 1.7 1.7 2.2 Increase (%) 6 — 29 Realization (Rs/'000 tons) 200 182 188 195 Increase (%) (9) 3 4 Revenue (Rs mn) 320 310 320 430 Increase (%) (3) 3 34 Maize Volumes ('000 tons) 4.4 6.6 5.4 5.6 Increase (%) 50 (18) 4 Realization (Rs/'000 tons) 116 117 126 143 Increase (%) 1 8 13 Revenue (Rs mn) 510 770 680 800 Increase (%) 51 (12) 18

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 105 Others Kaveri Seed

Exhibit 3: Kaveri’s volumes were weak across states except Gujarat and Madhya Pradesh Kaveri's cotton seed volumes by states, March fiscal year-ends (mn packets)

2015 2016 2017 2018 1QFY19 AP & Telangana 5.4 3.4 2.9 3.2 2.5 Maharashtra 1.3 1.1 1.5 2.2 1.9 Karnataka 1.3 0.5 0.4 0.7 0.5 Gujarat 0.2 0.3 0.2 0.4 0.7 Madhya Pradesh NA 0.2 0.2 0.2 0.2 Others 0.5 0.2 0.2 0.2 0.1 All India 8.6 5.6 5.4 6.9 5.9 Yoy growth (%) Andhra Pradesh (37) (15) 10 Maharashtra (16) 33 50 Karnataka (64) (7) 62 Gujarat 56 (4) 71 Madhya Pradesh NA 19 11 Others (60) 6 11 Overall (35) (3) 28

Source: Company, Kotak Institutional Equities

Exhibit 4: State-wise area under cotton in the kharif season, as on August 03, 2018 (mn hectares)

Crop Kharif 2017 Kharif 2018 Yoy (%) Andhra Pradesh 4.1 3.7 (7.7) Gujarat 26.4 25.5 (3.1) Haryana 6.6 6.7 1.4 Karnataka 4.1 3.6 (13.0) Madhya Pradesh 5.8 5.2 (9.0) Maharashtra 39.4 38.7 (1.8) Odisha 1.4 1.5 4.9 Punjab 3.9 2.8 (26.2) Rajasthan 5.0 5.0 (1.4) Tamilnadu 0.1 0.0 (24.0) Telangana 17.5 16.9 (3.5) Others 0.3 0.2 (39.3) All India 114.3 109.8 (4.0)

Source: Company, Kotak Institutional Equities

106 KOTAK INSTITUTIONAL EQUITIES RESEARCH Kaveri Seed Others

Exhibit 5: State-wise area under Maize crop in the kharif season, as on August 03, 2018 (mn hectares)

Crop Kharif 2017 Kharif 2018 Yoy (%) Andhra Pradesh 0.6 0.7 18.3 Bihar 4.0 3.6 (8.8) Chhattisgarh 2.1 2.1 1.4 Gujarath 3.0 3.0 1.3 Himachal Pradesh 2.9 2.9 (0.3) Jammu and Kashmir 2.0 2.0 (0.5) Jharkhand 2.3 2.3 (1.3) Karnataka 8.6 10.1 16.7 Madhya Pradesh 12.6 13.1 4.3 Maharashtra 7.9 7.2 (8.2) Orissa 2.1 2.0 (2.4) Punjab 1.1 1.3 9.6 Rajasthan 8.6 8.7 1.1 Telangana 4.3 4.2 (1.9) Uttar Pradesh 6.8 6.8 0.3 Others 1.2 1.2 — Total 71.4 72.5 1.6

Source: Company, Kotak Institutional Equities

Exhibit 6: Crop-wise area under acreage in the kharif season, as on August 03, 2018 (mn hectares)

Crop Kharif 2017 Kharif 2018 Yoy (%) Bajra 63.3 55.2 (12.8) Cotton 114.3 109.8 (4.0) Maize 71.4 72.5 1.6 Oilseeds 148.9 157.5 5.8 Pulses 120.3 115.6 (3.9) Rice 274.2 262.7 (4.2)

Source: Company, Kotak Institutional Equities

Exhibit 7: We assume cotton seed volumes to remain steady Key assumptions for volumes, March fiscal year-ends 2014-21E

2014 2015 2016 2017 2018 2019E 2020E 2021E Kaveri's volumes - Cotton (mn packets) 6.7 8.6 5.6 5.4 6.9 6.5 6.7 6.8 - Maize ('000 tons) 11.2 10.7 9.2 10.9 10.6 11.2 12.6 14.2 - Hybrid rice ('000 tons) 1.9 1.5 1.7 1.6 1.7 2.2 2.6 2.9 Yoy growth (%) - Cotton 64.5 28.0 (35.0) (2.7) 27.6 (6.7) 2.9 2.8 - Maize 40.0 (4.2) (14.0) 18.5 (3.0) 6.0 12.5 12.5 - Hybrid rice 50.0 (19.4) 13.3 (5.9) 3.4 35.6 14.0 13.9

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 107 Others Kaveri Seed

Exhibit 8: Consolidated financial summary for Kaveri, March fiscal year-ends, 2014-21E (Rs mn)

2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E Profit model (Rs mn) Sales 10,111 11,612 7,449 7,050 8,192 8,477 9,069 9,725 10,372 EBITDA 2,212 3,097 1,875 1,395 2,218 2,327 2,345 2,492 2,623 Other income 97 157 131 344 237 311 348 422 507 Interest (2) (2) (2) (2) (6) (6) (6) (6) (6) Depreciation (164) (149) (274) (302) (251) (243) (295) (319) (343) Profit before tax 2,143 3,103 1,729 1,435 2,198 2,388 2,392 2,590 2,781 Tax expense (52) (92) (55) (70) (84) (119) (120) (129) (139) Minority interest 2 (2) (4) (5) — — — — — Extraordinary items — (3) — (592) — — — — — PAT 2,090 3,010 1,679 778 2,114 2,269 2,272 2,460 2,642 PAT (adjusted) 1,483 2,117 1,144 748 1,387 1,439 1,414 1,496 1,567 EPS 30.3 43.6 24.3 11.3 32.0 34.3 34.4 37.2 40.0 EPS (adjusted - tax rate @ 25%) 21.5 30.7 16.6 10.8 21.0 21.8 21.4 22.6 23.7 Balance sheet (Rs mn) Equity 5,155 7,548 9,272 10,143 7,777 9,406 10,879 12,543 14,389 Total borrowings 32 14 16 46 46 46 46 46 46 Deferred tax liability/minority interest 55 66 83 79 79 79 79 79 79 Current liabilities and provisions 5,041 3,956 4,235 5,009 5,785 5,979 6,382 6,828 7,267 Total liabilites 10,283 11,584 13,607 15,278 13,688 15,511 17,387 19,496 21,783 Net fixed assets 1,553 2,225 2,212 2,342 2,429 2,536 2,591 2,622 2,629 Investments 6 2 7 24 24 24 24 24 24 Cash and cash equivalents 2,844 3,013 5,152 6,754 4,214 5,715 7,088 8,670 10,460 Other current assets and miscellaneous 5,881 6,344 6,236 6,157 7,021 7,237 7,684 8,181 8,669 Total assets 10,283 11,584 13,607 15,278 13,688 15,511 17,387 19,496 21,782 Free cash flow (Rs mn) Operating cash flow 2,159 3,006 1,837 1,326 2,128 2,201 2,220 2,357 2,478 Working capital changes (229) (1,558) 623 854 (87) (22) (45) (50) (49) Capital expenditure (255) (819) (259) (433) (338) (350) (350) (350) (350) Free cash flow 1,675 629 2,202 1,747 1,703 1,830 1,824 1,957 2,078 Ratios EBITDA margins (%) 21.9 26.7 25.2 19.8 27.1 27.4 25.9 25.6 25.3 Net debt/equity (X) (0.5) (0.4) (0.6) (0.7) (0.5) (0.6) (0.6) (0.7) (0.7) Book value (Rs/share) 75 109 134 147 118 142 165 190 218 RoAE (%) 48.6 47.4 20.0 8.0 23.6 26.4 22.4 21.0 19.6 RoACE (%) 91.4 82.9 35.6 27.0 53.5 53.5 51.0 52.7 54.2

Source: Company, Kotak Institutional Equities estimates

108 KOTAK INSTITUTIONAL EQUITIES RESEARCH BUY S H Kelkar and Company (SHKL) Consumer Products AUGUST 13, 2018 RESULT Coverage view: Cautious

Tightrope walk continues. SHK’s earnings print disappointed again, a revenue miss Price (`): 195 being the culprit this time - as the company chose to not chase low-margin revenues in Target price (`): 290 the backdrop of unprecedented RM inflation. We remain hopeful of normalized BSE-30: 37,869 earnings power being much higher than recent quarters have suggested (and the next will continue to, perhaps), even as we recognize investor fatigue reflecting in the stock. Opportunity or value trap? We believe the former. Reiterate BUY with a revised fair value target of `290/share (from 315).

Company data and valuation summary S H Kelkar Stock data Forecasts/Valuations 2018 2019E 2020E 52-week range (Rs) (high,low) 314-193 EPS (Rs) 7.4 6.9 9.9 Market Cap. (Rs bn) 28.2 EPS growth (%) 2.1 (6.2) 41.9 Shareholding pattern (%) P/E (X) 26.4 28.1 19.8 Promoters 57.1 Sales (Rs bn) 10.3 10.7 12.2 FIIs 21.1 Net profits (Rs bn) 1.1 1.0 1.4 MFs 2.0 EBITDA (Rs bn) 1.6 1.6 2.2 Price performance (%) 1M 3M 12M EV/EBITDA (X) 18.4 18.2 13.1 Absolute (9.3) (21.3) (22.7) ROE (%) 12.8 11.3 14.5 Rel. to BSE-30 (13.2) (26.8) (35.6) Div. Yield (%) 0.9 0.9 1.0

Earnings disappoint, again

Our 1QFY19 forecasts had baked in, to the best of our judgment, the company’s pre-earnings warning. The disappointment underscores several challenges: (a) the operating environment for the company, which maintains it has seen nearly three-and-a-half-years of normal RM inflation in as little as six months, and (b) drawing forecasts for the company, at this point.

Consolidated revenues grew a modest 1% yoy to `2.36 bn, 11% below our estimate. The company indicated that it chose to give up some business on the international front to improve profitability as the disruptive RM scenario continued. On the domestic front, however, the company chose to prioritize revenues over margins and saw healthy 13% yoy growth in the core domestic fragrances business even as gross margins dipped further, even sequentially. A tight rope walk, as we said.

Consolidated gross margins did see a healthy 500 bps qoq expansion to 44.1%; our estimate was 42.6%. We would, however, not read much into this as our numbers had not assumed that the company would give up revenues in the international portfolio to prioritize gross margin normalization. To be sure, gross margins were still down 392 bps yoy. Gross profits declined 8% yoy. EBITDA stood at `329 mn, down 23% yoy and nearly 30% versus 1QFY17 levels. We note that the base quarter was soft in any case. EBITDA miss was restricted to 5% as employee and other expenses came in lower than our estimate. EBITDA margin came in at Rohit Chordia 13.9%, 100 bps above our estimate but down a sharp 423 bps yoy. Recurring PAT stood at `187 mn (EPS: `1.29/share), down 30% yoy and 8% below estimates.

Jaykumar Doshi Margin normalization to drive earnings and returns; we remain positive

Even as we are a tad disappointed with the time it is taking for the company to pass RM inflation onto its customers, we continue to believe the F&F business has the pricing power to Aniket Sethi do so, with a lag. The RM situation is expected to normalize in the next few quarters and this should result in the financials reflecting the underlying margin and returns profile of the business. Even if it does not, we believe the downside may be limited from CMP. BUY.

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Consumer Products S H Kelkar and Company

Earnings model changes

Exhibit 1 depicts key changes to our earnings model. We have cut FY2019-21E revenue, EBITDA and EPS forecasts for the company by 6-7%, 9-16% and 7-16%, respectively, as we bake in the incremental RM pressure indicated by the company and the pass-through delay versus our earlier expectations. Our DCF-based fair value target stands revised down to `290/share (from 315). We reiterate our BUY rating.

Conference call highlights

 Incremental RM inflation. SHK management indicated fresh supply disruptions in a couple of its key crude-linked RM ingredients in 1QFY19. Nearly 75% of the RM basket has seen abnormal inflation in the past year.

 Pass-through only partial, as yet. Of the three waves of steep RM inflation seen in the past year or so, SHK has been able to pass on only one wave to its customers thus far. It is in discussions with the customers and expects to take more price increases through the year (unlike the normal once-a-year pricing reset cycle). The next few quarters would be a test of the company’s pricing power and determine whether the F&F industry in India is just a commodity industry or not. The F&F sector, globally, has shown signs of good pricing power. However, India could be different, given how the brand owners (FMCG names) dominate the value chain.

 On the positive side, the company characterized the underlying demand environment for domestic fragrances as buoyant, reflecting improved volume outlook for the customers.

 New wins are coming in at normalized margins; it has been easier to win new business at prices reflecting the RM cost push but challenging to push up pricing in existing contracts, as per the management.

110 KOTAK INSTITUTIONAL EQUITIES RESEARCH S H Kelkar and Company Consumer Products

Exhibit 1: Key changes to estimates (as per Ind-AS), FY2019-21E

Revised Earlier Change (%) 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E Net revenues (Rs mn) 10,743 12,241 14,270 11,473 13,125 15,264 (6.4) (6.7) (6.5) EBITDA (Rs mn) 1,626 2,240 2,657 1,953 2,470 2,922 (16.8) (9.3) (9.1) EBITDA margin (%) 15.1 18.3 18.6 17.0 18.8 19.1 Net income (Rs mn) 1,004 1,425 1,755 1,197 1,537 1,884 (16.1) (7.3) (6.8) EPS (Rs/share) 6.9 9.9 12.1 8.3 10.6 13.0 (16.1) (7.3) (6.8)

Source: Kotak Institutional Equities estimates

Exhibit 2: Interim consolidated results of SHK (as per Ind-AS), March fiscal year-ends (Rs mn)

% chg. 2-year 1QFY19 1QFY19E 1QFY18 4QFY18 KIE yoy qoq FY2019E FY2018 % chg. 1QFY17 CAGR (%) Net revenues 2,360 2,663 2,339 2,827 (11) 1 (17) 10,684 10,193 5 2,544 (4) Other operating income 4 12 4 6 (66) 5 (32) 59 34 72 14 Net operating revenues 2,364 2,675 2,343 2,833 (12) 1 (17) 10,743 10,227 5 2,559 (4) Material cost (1,322) (1,536) (1,222) (1,737) (14) 8 (24) (5,925) (5,629) 5 (1,418) Gross Profit 1,042 1,139 1,121 1,097 (9) (7) (5) 4,818 4,598 5 1,141 (4) Gross margin (%) 44.1 42.6 47.9 38.7 151 bps -377 bps 538 bps 44.8 45.0 -12 bps 44.6 Employee cost (291) (343) (302) (312) (15) (4) (7) (1,320) (1,252) 5 (283) Other expenditure (422) (451) (405) (532) (6) 4 (21) (1,872) (1,748) 7 (384) Total expenditure (2,035) (2,329) (1,929) (2,580) (13) 5 (21) (9,118) (8,629) 6 (2,085) EBITDA 329 346 414 253 (5) (21) 30 1,626 1,598 2 474 (17) EBITDA margin (%) 13.9 12.9 17.7 8.9 101 bps -376 bps 499 bps 15.1 15.6 -50 bps 18.5 Other income 40 27 51 172 49 (20) (77) 62 240 (74) 32 Interest (15) (5) (6) (16) 202 152 (5) (20) (40) — (17) Depreciation (68) (65) (58) (65) 4 16 4 (259) (238) 9 (44) Pretax profits 287 303 401 344 (5) (28) (17) 1,408 1,560 (10) 444 (20) Tax (100) (99) (133) (119) 1 (25) (16) (461) (539) (15) (169) PAT 187 204 268 225 (8) (30) (17) 947 1,021 (7) 275 (18) Extraordinary items — — — (12) (100) 57 (79) 0 Net profit (reported) 187 204 268 213 (8) (30) (12) 1,004 942 7 275 (18) EPS 1.29 1.41 1.85 1.67 (8) (30) (23) 6.9 7.2 (3) 1.90 (18) Income tax rate (%) 34.9 32.6 33.1 34.6 227 bps 173 bps 29 bps 32.7 34.6 -183 bps 38.1 Costs as a % of net operating revenues Material cost 55.9 57.4 52.1 61.3 -152 bps 376 bps -539 bps 55.2 55.0 11 bps 55.4 Employee cost 12.3 12.8 12.9 11.0 -50 bps -58 bps 130 bps 12.3 12.2 4 bps 11.1 Other expenditure 17.8 16.9 17.3 18.8 99 bps 55 bps -92 bps 17.4 17.1 33 bps 15.0

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 111 Consumer Products S H Kelkar and Company

Exhibit 3: Interim standalone results of SHK (as per Ind-AS), March fiscal year-ends (Rs mn)

% chg. 2-year CAGR 1QFY19 1QFY18 4QFY18 KIE yoy qoq 1QFY17 (%) Net revenues 1,595 1,443 1,997 (4) 10 (20) 1,578 1 Other operating income 3 2 2 (5) 4 19 3 Net operating revenues 1,597 1,446 2,000 (4) 10 (20) 1,581 1 Material cost (978) (803) (1,214) (1) 22 (19) (914) Gross Profit 619 643 785 (8) (4) (21) 668 (4) Gross margin (%) 38.8 44.5 39.3 -174 bps -573 bps -51 bps 42.2 Employee cost (181) (152) (198) (1) 19 (9) (130) Other expenditure (285) (225) (326) 10 26 (13) (189) Total expenditure (1,443) (1,180) (1,739) 1 22 (17) (1,233) EBITDA 154 266 261 (34) (42) (41) 348 (33) EBITDA margin (%) 9.6 18.4 13.0 -433 bps -878 bps -341 bps 22.0 Other income 32 34 34 52 (6) (7) 20 Interest (11) (6) (14) — 91 (20) (6) Depreciation (31) (25) (30) 2 24 2 (15) Pretax profits 144 270 251 (35) (47) (43) 347 (36) Tax (46) (90) (86) (38) (48) (46) (119) PAT 98 180 165 (34) (46) (41) 228 (35) Extraordinary items — — — — Net profit (reported) 98 180 165 (34) (46) (41) 228 (35) EPS 0.7 1.2 1.1 (34) (46) (41) 1.6 (35) Income tax rate (%) 32.2 33.3 34.3 -131 bps -115 bps -212 bps 34.3 Costs as a % of net operating revenues Material cost 61.2 55.5 60.7 173 bps 572 bps 50 bps 57.8 Employee cost 11.3 10.5 9.9 36 bps 82 bps 139 bps 8.2 Other expenditure 17.8 15.6 16.3 222 bps 222 bps 150 bps 12.0

Source: Company, Kotak Institutional Equities estimates

Exhibit 4: Net revenue breakup of SHK, March fiscal year-ends (Rs mn)

1QFY19 1QFY18 4QFY18 yoy (%) qoq (%) Net revenues (Rs mn) Fragrance 2,113 2,027 2,550 4 (17) Flavors 247 312 277 (21) (11) Total 2,360 2,339 2,827 1 (17) Segment results (Rs mn) Fragrance 295 365 327 (19) (10) Flavors 39 63 37 (39) 4 Total 333 428 364 (22) (8) Margins (%) Fragrance 14.0 18.0 12.8 Flavors 15.6 20.1 13.4 Blended 14.1 18.3 12.9

Source: Company, Kotak Institutional Equities

112 KOTAK INSTITUTIONAL EQUITIES RESEARCH S H Kelkar and Company Consumer Products

Exhibit 5: SHK: Consolidated profit & loss, balance sheet and cash flow (as per Ind AS), March fiscal year-ends, 2015-21E

IGAAP Ind-AS 2015 2016 2017 2018 2019E 2020E 2021E Profit model (Rs mn) Net operating revenues 8,355 9,249 9,805 10,251 10,743 12,241 14,270 EBITDA 1,178 1,498 1,658 1,622 1,626 2,240 2,657 Other income 246 105 116 216 62 76 84 Interest expense (185) (202) (52) (40) (20) — — Depreciation (293) (297) (194) (238) (259) (282) (310) Pretax profits 945 1,103 1,528 1,560 1,408 2,034 2,431 Tax (241) (372) (480) (506) (461) (669) (802) Minority Interest/share of profit from associates — — — 16 57 60 127 Recurring PAT 704 731 1,048 1,070 1,004 1,425 1,755 Extraordinary items — — — (129) — — — Reported net income 704 731 1,048 942 1,004 1,425 1,755 Wtd average no. of shares - FD (mn) 132 138 145 145 145 145 145 Fully diluted EPS (Rs) 5.3 5.3 7.2 7.4 6.9 9.9 12.1 Balance sheet (Rs mn) Total shareholder's equity 5,005 7,161 8,118 8,571 9,270 10,346 11,622 Preference share capital/ CCPS 92 — — — — — — Total borrowings 2,417 846 734 1,933 1,933 1,933 2,133 Deferred tax liability (50) 10 33 82 82 82 82 Minority interest — — — — — — — Total liabilities and equity 7,464 8,016 8,884 10,586 11,285 12,361 13,837 Net fixed assets incl CWIP 2,842 2,454 3,038 3,978 4,027 4,120 4,260 Investments — 354 497 1,108 1,108 1,108 2,108 Cash 759 822 555 239 470 825 278 Net current assets 3,864 4,386 4,795 5,262 5,680 6,307 7,191 Total assets 7,464 8,016 8,884 10,586 11,285 12,361 13,837 Free cash flow (Rs mn) Operating cash flow (excl working capital) 993 1,126 1,260 1,326 1,269 1,687 2,049 Working capital (375) (275) (248) (467) (419) (627) (884) Capital expenditure (218) (238) (1,008) (1,178) (308) (376) (450) Free cash flow 400 613 4 (319) 542 684 715 Key ratios (%) Sales growth 9.7 10.6 5.9 4.5 4.8 13.9 16.6 EBITDA growth (14.1) 27.2 10.7 (2.2) 0.2 37.8 18.6 PAT growth (11.0) 3.8 43.5 2.1 (6.2) 41.9 23.2 EBITDA margin 14.1 16.2 16.9 15.8 15.2 18.4 18.7 Gross margin 44.9 44.5 45.4 45.1 45.1 47.2 47.2

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 113 ADD Dhanuka Agritech (DAGRI) Others AUGUST 13, 2018 RESULT Coverage view:

1Q blip, expect better. Dhanuka started the year on a muted note with results well Price (`): 555 below estimates, led by modest growth in revenues and a sharp moderation in margins. Target price (`): 650 We see this as a temporary blip, expecting recovery in revenues growth and BSE-30: 37,869 normalization of margins post the recent pricing action by the company. We retain our ADD rating with a revised TP of `650 (`680 previously), expecting the company to benefit from the scale-up of recent product introductions underpinned by its strong distribution reach. Company data and valuation summary Dhanuka Agritech Stock data Forecasts/Valuations 2018 2019E 2020E 52-week range (Rs) (high,low) 804-508 EPS (Rs) 25.7 26.7 30.8 Market Cap. (Rs bn) 27.2 EPS growth (%) 7.7 3.9 15.4 Shareholding pattern (%) P/E (X) 21.6 20.8 18.0 Promoters 75.0 Sales (Rs bn) 9.6 10.6 11.9 FIIs 0.0 Net profits (Rs bn) 1.3 1.3 1.5 MFs 10.6 EBITDA (Rs bn) 1.7 1.7 2.0 Price performance (%) 1M 3M 12M EV/EBITDA (X) 15.8 15.2 12.4 Absolute (0.2) (6.8) (26.9) ROE (%) 21.9 19.2 19.2 Rel. to BSE-30 (4.5) (13.3) (39.1) Div. Yield (%) 1.0 1.0 1.2

5% growth in volumes offset by sharp moderation in margins Dhanuka reported 2% yoy growth in revenues to `2.13 bn in 1QFY19, 11% below our estimate and sharply below the growth registered by its domestic peers, driven by weak off- take of volumes in North and an unfavorable product mix, which is weighted towards herbicides. The company indicated that volumes grew by 5% yoy, while being offset by a decline in realizations due to an adverse pricing/product mix during 1QFY19. EBITDA margins declined sharply to 7.4% from 17% in 4QFY18 driven by (1) continued pressure from rising raw material costs and a weaker Rupee and (2) inability to pass on price hikes amid high channel inventory. EBITDA declined 35% yoy to `159 mn, sharply below our estimate. Net income remained flat yoy at `162 mn (EPS of `3.3), benefiting from higher other income and a lower tax rate at 23%.  Guidance lowered to double-digits revenue growth from 15% earlier. After the tepid performance of 1QFY19, the company now expects to deliver low double-digit growth in FY2019 backed by recovery starting in 2QFY19 and benefits from new product launches.  EBITDA margin to remain steady yoy; Udhampur excise benefits dent profitability. The company expects to maintain EBITDA margins at levels similar to FY2018, despite a weak start as the company expects to benefit from (1) arrest in raw material cost increases from China and anticipated decline during the Rabi season, (2) pricing escalations during 1QFY19 and (3) operating leverage for the remainder of FY2019. The company indicated a net impact of `60 mn from a loss of excise benefit from Udhampur facility.  Product performances encouraging; 9 (3) grape herbicide to be launched in 3QFY19. The company’s product portfolio is seeing strong traction despite the tough environment.

Sempra is expected to witness volume growth despite a weak sugarcane cycle backed by the Tarun Lakhotia introduction of a maize variant. Targa Super, D-one and Cover have shown a strong pick-up starting in June. The company has increased spends on Dhanuka Doctors and expects to reap benefits from products launched over the past two years. The company plans to launch its Akshay Bhor grape herbicide under 9 (3) registration during 3QFY19. 5% cut in estimates; ADD stays with a revised TP of `650 We cut FY2019-21E EPS estimates by 5%, factoring in (1) weak volume growth and modestly lower EBITDA margins versus earlier assumptions, (2) higher other income and (3) other minor changes. Our TP, based on 21X FY2020E EPS, reduces to `650 from `680 previously.

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

Exhibit 1: Weak 2% yoy growth in revenues and sharp decline in EBITDA margins Interim results of Dhanuka, March fiscal year-ends (Rs mn)

(% chg.) 1QFY19 1QFY19E 1QFY18 4QFY18 Est. Yoy Qoq FY2019E FY2018 (% chg.) Sales 2,130 2,392 2,080 1,851 (11) 2 15 10,637 9,626 10 Raw material cost (1,380) (1,468) (1,299) (1,016) (6) 6 36 (6,340) (5,622) 13 Employee cost (256) (257) (234) (279) (1) 9 (8) (1,240) (1,065) 16 Other expenses (335) (333) (303) (241) 1 11 39 (1,360) (1,279) 6 EBITDA 159 335 245 314 (53) (35) (50) 1,697 1,661 2 Other income/forex gain/(loss) 86 30 20 69 248 160 Interest cost (2) (2) (3) (2) (6) (9) Depreciation and amortization (31) (36) (34) (36) (131) (142) Profit before tax 211 327 228 345 (35) (7) (39) 1,808 1,670 8 Extraordinaries — — — — — — Tax (net) (49) (98) (67) (59) (497) (408) Net income 162 229 161 286 (29) 0 (43) 1,311 1,262 4 Adjusted net income 162 229 161 286 (29) 0 (43) 1,311 1,262 4 Adjusted EPS (Rs) 3.3 4.7 3.3 5.8 (29) 0 (43) 26.7 25.7 4 Key metrics (%) Gross margins 35.2 38.6 37.6 45.1 40.4 41.6 EBITDA 7.4 14.0 11.8 17.0 16.0 17.3 Effective tax rate 23.4 30.0 29.4 17.0 27.5 24.4

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 115 Others Dhanuka Agritech

Exhibit 2: Dhanuka’s revenue growth and margin performance was well below its domestic peers Quarterly performance of domestic ag-chem companies, 1QFY17 onwards (Rs mn)

1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Revenues Bayer CropScience 8,212 11,038 6,625 2,153 6,980 12,320 4,797 3,002 8,318 Dhanuka 2,003 3,124 2,118 1,571 2,080 3,480 2,215 1,851 2,130 PI Industries (a) 2,989 2,290 1,635 1,743 2,560 2,588 1,700 1,870 3,149 Rallis (b) 2,603 5,036 3,090 3,277 2,436 5,485 3,573 3,491 3,524 UPL (a) 10,602 9,090 5,583 4,340 11,180 9,970 6,140 4,600 12,480 Growth (%) Bayer CropScience 7.9 9.2 21.0 (52.1) (15.0) 11.6 (27.6) 39.4 19.2 Dhanuka 11.0 15.6 2.8 (9.9) 3.9 11.4 4.6 17.8 2.4 PI Industries (a) (3.0) (13.6) 4.1 (9.7) (14.4) 13.0 4.0 7.3 23.0 Rallis (b) 2.1 19.6 8.3 0.3 (6.4) 8.9 15.6 6.5 44.7 UPL (a) 0.5 19.3 20.9 6.7 5.5 9.7 10.0 6.0 11.6 Gross margins (%) Bayer CropScience 48.5 40.2 35.0 38.7 45.1 38.2 40.7 42.9 52.6 Dhanuka 38.8 42.4 44.6 49.7 37.6 41.0 43.3 45.1 35.2 PI Industries (a) 47.9 49.6 48.5 49.7 50.7 48.1 47.5 48.4 46.6 Rallis (b) 40.0 39.5 47.4 42.9 41.9 38.9 42.2 42.8 33.4 UPL (c) 54.4 53.0 54.0 48.1 55.8 56.1 54.5 49.0 55.5 EBITDA margins (%) Bayer CropScience 22.9 21.5 6.9 (27.0) 16.6 23.3 4.7 (5.4) 27.6 Dhanuka 14.3 22.3 18.3 20.8 11.8 21.5 15.9 17.0 7.4 PI Industries (a) 22.5 18.5 21.0 16.3 20.5 19.5 18.5 15.3 17.0 Rallis (b) 9.8 21.8 15.9 15.4 3.5 23.1 13.1 12.2 5.1 UPL (c) 19.9 17.6 19.1 21.1 20.1 19.1 19.8 21.4 20.5

Notes: (a) Data pertains to domestic agri business segment. (b) Data pertains to standalone business, which includes revenues from contract manufacturing operations. (c) Data pertains to global operations.

Source: Companies, Kotak Institutional Equities

Exhibit 3: Dhanuka has added several exclusive products in its portfolio over the past four years List of new products launched by Dhanuka

2015 2016 2017 2018 Sakura - 9(3) herbicide Cover - co-marketed insecticide Maxx-soy - 9(3) herbicide D-ONE - 9(3) insecticide Mortar - 9(3) insecticide Dhanwarsha - nutrient Conika - 9(3) fungicide Markar Super- 9(4) insecticide Sempra - 9(3) herbicide Dozo - 9(4) herbicide Fujiita - 9(3) fungicide Dumil 10% SL - 9(4) herbicide Pager - 9(4) insecticide Thiram - 9(4) fungicide Hi-Dice Super - co-marketed fungicide Godiwa Super - 9(4) fungicide Oxykill - 9(4) insecticide Goldy - 9(4) fungicide Bullon - 9(4) insecticide Godiwa - 9(4) fungicide Aashito - 9(4) insecticide Fenox - 9(4) herbicide Delight - 9(4) fungicide Domar - 9(4) insecticide Foster - 9(3) miticide Suelo - soil conditioner

Source: Company, Kotak Institutional Equities

116 KOTAK INSTITUTIONAL EQUITIES RESEARCH Dhanuka Agritech Others

Exhibit 4: Dhanuka trades at reasonable valuations, post recent sharp correction 12-months forward P/E chart, August 2013-August 2018 (X)

40 12-month forward P/E (X) Five-year average P/E (X) 35

30

25

20

15

10

5

0

Feb-14

Feb-15

Feb-16

Feb-17

Feb-18

Aug-13

Aug-14

Aug-15

Aug-16 Aug-17 Aug-18

Source: Bloomberg, Kotak Institutional Equities estimates

Exhibit 5: Dhanuka trades at reasonable valuations Peer valuations, March fiscal year-ends, 2018-20E

Price Market cap. P/E (X) EV/EBITDA (X) (LC) (US$ mn) 2018 2019E 2020E 2018 2019E 2020E Global companies BASF SE 79 82,901 12.1 12.1 11.2 6.9 7.2 6.7 Bayer AG 93 99,547 14.7 14.8 11.8 10.0 11.2 9.0 Dow DuPont 69 159,255 21.2 16.4 14.2 11.5 9.7 8.4 FMC Corp. 90 12,149 33.9 14.8 13.2 24.1 11.2 10.0 Nufarm Ltd 8 1,801 16.8 25.1 14.9 8.5 10.7 7.3 Indian companies Bayer CropScience 4,242 2,429 48.4 40.1 32.6 39.8 29.4 24.0 Dhanuka Agritech 555 395 21.6 20.8 18.0 13.9 12.1 9.3 PI Industries 772 1,543 29.0 24.6 19.4 21.4 17.5 13.7 Rallis India 200 563 23.2 19.8 16.5 14.4 13.0 11.0 UPL 637 4,700 14.8 13.0 11.6 10.2 8.8 7.5

Godrej Agrovet 625 1,740 54.2 38.8 31.1 27.9 21.5 17.4

Source: Bloomberg, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 117 Others Dhanuka Agritech

Exhibit 6: Consolidated profit model, balance sheet and cash flow statement, March fiscal year-ends, 2014-21E (Rs mn)

2014 2015 2016 2017 2018 2019E 2020E 2021E Profit model (Rs mn) Sales 7,384 7,851 8,288 8,732 9,626 10,637 11,906 13,091 EBITDA 1,206 1,317 1,398 1,690 1,661 1,697 2,018 2,245 Other income 48 61 125 152 160 248 264 321 Interest (42) (26) (11) (11) (9) (6) (6) (6) Depreciation (48) (59) (59) (148) (142) (131) (146) (166) Profit before tax 1,163 1,294 1,453 1,682 1,670 1,808 2,130 2,395 Extraordinardy items — — — — — — — — Tax expense (232) (233) (380) (488) (408) (497) (618) (718) PAT 931 1,061 1,073 1,194 1,262 1,311 1,512 1,676 EPS (adjusted) 18.6 21.2 21.5 23.9 25.7 26.7 30.8 34.2 Balance sheet (Rs mn) Equity 3,325 4,123 4,804 5,199 6,334 7,307 8,430 9,674 Total borrowings 394 161 77 79 47 47 47 47 Deferred tax liability/minority interest 36 34 83 116 133 133 133 133 Current liabilities and provisions 1,413 1,622 1,602 1,738 1,713 2,054 2,299 2,528 Total liabilites 5,168 5,940 6,566 7,131 8,228 9,541 10,909 12,383 Net fixed assets 893 1,086 1,334 1,383 1,310 1,330 1,433 1,518 Investments 10 51 432 468 895 895 895 895 Cash 23 457 511 217 1,039 1,526 2,147 2,935 Other current assets and miscellaneous 4,242 4,345 4,289 5,063 4,983 5,791 6,434 7,035 Total assets 5,168 5,940 6,567 7,131 8,227 9,542 10,910 12,383 Free cash flow (Rs mn) Operating cash flow 951 1,109 1,079 1,258 1,318 1,194 1,394 1,521 Working capital changes (659) (36) 307 (638) 58 (467) (398) (372) Capital expenditure (288) (253) (271) (193) (69) (150) (250) (250) Free cash flow 4 820 1,115 427 1,307 577 746 899 Ratios EBITDA margin (%) 16.3 16.8 16.9 19.3 17.3 16.0 17.0 17.2 Net debt/equity (X) 0.1 (0.1) (0.1) (0.0) (0.2) (0.2) (0.2) (0.3) Book value (Rs/share) 66 82 96 104 129 149 172 197 ROAE (%) 30.0 27.1 22.0 21.7 19.8 16.6 16.8 16.0 ROACE (%) 24.8 26.6 21.5 20.3 20.3 17.9 19.4 19.7

Source: Company, Kotak Institutional Equities estimates

118 KOTAK INSTITUTIONAL EQUITIES RESEARCH REDUCE HDFC Bank (HDFCB) Banks AUGUST 13, 2018 UPDATE Coverage view: Attractive

Dy MD Sukthankar resigns. HDFC Bank’s Deputy Managing Director, Mr Paresh Price (`): 2,114 Sukthankar, one of the founding members, has resigned, putting to an end to Target price (`): 2,000 speculation regarding his candidacy for the job of next MD of the bank. We don’t see BSE-30: 37,869 any near-term concerns to business given the strength of the senior management team but it does appear that the successor is most likely an external candidate. We maintain our REDUCE rating given the current valuations and preference for corporate banks.

Company data and valuation summary HDFC Bank Stock data Forecasts/Valuations 2018 2019E 2020E 52-week range (Rs) (high,low) 2,220-1,685 EPS (Rs) 67.4 78.0 93.6 Market Cap. (Rs bn) 5,648.2 EPS growth (%) 18.7 15.7 20.0 Shareholding pattern (%) P/E (X) 31.4 27.1 22.6 Promoters 20.9 NII (Rs bn) 400.9 459.1 536.2 FIIs 51.3 Net profits (Rs bn) 174.9 211.2 253.5 MFs 9.9 BVPS 403.1 530.9 600.7 Price performance (%) 1M 3M 12M P/B (X) 5.2 4.0 3.5 Absolute (1.5) 6.1 20.1 ROE (%) 17.9 16.7 16.2 Rel. to BSE-30 (5.7) (1.2) 0.0 Div. Yield (%) 0.6 0.7 0.9

A long-standing team leader calls it a day

Mr Paresh Sukthankar, Deputy Managing Director of HDFC Bank and who has been with the bank since its inception, tendered his resignation on Friday. The timing of the move comes as a bit of surprise as the board had recently inducted Mr Sanjiv Sachar who had retired as a senior partner at Egon Zehnder, one of the world’s largest executive search firms. We did believe that this was to prepare for succession planning for the position of the Managing Director, which would need to be filled by October 2020. Given his contribution to the bank and the leadership position, Mr Paresh Sukthankar was always a contender for the job but it is important to note that the management had made it clear in the past that this role would need to be filled with care and would be open to both and internal and external candidates.

Strong team gives comfort; senior management team is bound to change/hasten

HDFC Bank has arguably one of the best bench strengths. Exhibit 1 shows a 25-member team with an average age of 52 years. The team was strengthened to 25 from 15 in 2016 (Exhibit 2). Exhibit 3 shows the changes at the senior management level over the past decade. We have seen about 13 exits with over 50% of them by members who have crossed 60 years. With Mr Puri leaving in the next two years and an external candidate filling his shoes, as it now appears, it would not be too surprising if there are further changes in the team in the next few years. Mr Paresh, unlike other members, had an overview of all parts of the bank while other team members have graduated to a senior management position from specific roles. Note that all M B Mahesh CFA private banks are in a similar state of affairs with senior management changes as these organizations are now over 20 years old. Nischint Chawathe Maintain REDUCE: no change in view based on current development

We maintain our REDUCE rating with no change to our view based on the current Dipanjan Ghosh development. At our TP, we value the bank at 3.2X book (factoring the recent capital infusion) and 20X March 2020E EPS for 20% earnings CAGR for FY2019-21E and RoEs in the range of 16-17% over the same period. A gradual increase in competition in the retail space and change in product mix raise concerns over margins and asset quality in medium term. Growth remains strong, but earnings drag on the back of margin compression remains our key concern.

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

Exhibit 1: A strong senior management team should be able to handle any changes to the senior management team Senior management at HDFC Bank, March fiscal year-ends, 2018

Name Position Age Mr. Aditya Puri Managing Director 67 Mr. Paresh Sukthankar Deputy Managing Director 55 Mr. Kaizad Bharucha Executive Director 52 Mr. Abhay Aima Head – Global consumer business, private banking and distribution, direct and digital Banking and retail liabilities 55 Mr. Ashish Parthasarthy Head – Treasury 50 Ms. Ashima Bhat Head – Finance and strategy, administration, infrastructure 47 Mr. Ashok Khanna Head – Retail assets – secured loans 61 Mr. Arvind Kapil Head – Retail assets – unsecured loans 46 Mr. Bhavesh Zaveri Head – Operations and IT 52 Mr. Chakrapani Venkatachari Head – Internal audit and QIG 54 Mr. Dhiraj Relli Currently on secondment to HDFC Securities Limited (HSL) 47 Mr. Jimmy Tata Chief Risk Officer 51 Mr. Munish Mittal Head – Information Technology 49 Mr. Navin Puri Head – Retail Branch Banking 59 Mr. Neil Francisco Head – Retail Credit 56 Mr. Nitin Chugh Head – Digital Banking 46 Mr. Nirav Shah Head – Emerging Corporate Group, Infrastructure Finance and Rural Banking Group 46 Mr. Parag Rao Head – Payments Business 52 Mr. Philip Mathew Chief People Officer 55 Mr. Rakesh K. Singh Head – Investment Banking, PBG, Capital and Commodity Market 49 Mr. Rajesh Kumar R Head – Retail Policy, Debt Management and Risk Analytics 46 Mr. Ravi Narayanan Head – Retail Trade Forex & Regional Branch Banking 49 Mr. Rahul Shukla Head – Corporate Banking and Business Banking 49 Mr. Sashidhar Jagdishan Chief Financial Officer 53 Ms. Smita Bhagat Head – Government & Institutional Business / Ecommerce and Regional Branch Banking 52

Source: Company, Kotak Institutional Equities

Exhibit 2: HDFC Bank has a 25-member senior management that was strengthened in 2016 Number of senior management team members, March fiscal year-ends, 2009-18 (#)

30

25 25 25 24

18 16 16 16 16 15 15 15

12

6

0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Company, Kotak Institutional Equities

120 KOTAK INSTITUTIONAL EQUITIES RESEARCH HDFC Bank Banks

Exhibit 3: There has been a churn at the senior management level over the years Senior management at HDFC Bank, March fiscal year-ends, 2018

Name 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Age Senior management changes over the years Mr. Aditya Puri AP AP AP AP AP AP AP AP AP AP 67 Mr. Paresh Sukthankar PS PS PS PS PS PS PS PS PS PS 55 Mr. Kaizad Bharucha KB KB KB KB KB KB KB KB KB KB 52 Mr. Abhay Aima AA AA AA AA AA AA AA AA AA AA 55 Mr. Ashish Parthasarthy ASP ASP ASP ASP ASP ASP ASP ASP ASP ASP 50 Mr. Sashidhar Jagdishan SJ SJ SJ SJ SJ SJ SJ SJ SJ SJ 53 Ms. Ashima Bhat AB AB AB 47 Mr. Ashok Khanna AK AK AK 61 Mr. Arvind Kapil AKP AKP AKP 46 Mr. Bhavesh Zaveri BZ BZ BZ BZ BZ BZ BZ BZ 52 Mr. Chakrapani Venkatachari CV CV CV CV CV CV 54 Mr. Munish Mittal MM MM MM 49 Mr. Navin Puri NP NP NP NP NP NP NP NP NP NP 59 Mr. Neil Francisco NF NF 56 Mr. Nitin Chugh NC NC NC 46 Mr. Dhiraj Relli DR DR DR 47 Mr. Jimmy Tata JT JT JT JT JT JT JT JT 51 Mr. Nirav Shah NS NS NS 46 Mr. Parag Rao PR PR PR 52 Mr. Philip Mathew PM PM 55 Mr. Rakesh K. Singh RSH RSH RSH RSH 49 Mr. Rajesh Kumar R RK RK RK 46 Mr. Ravi Narayanan RN RN RN 49 Mr. Rahul Shukla RSHA 49 Ms. Smita Bhagat SB 52 Exits at the senior management and age at the time of exit Mr. Rajender Sehgal RS RS RS RS RS RS 61 Mr. Aseem Dhru AD AD 47 Mr. Deepak Maheshwari DM DM DM 61 Mr. Nitin Rao NR 48 Mr. Anil Jaggia AJ AJ AJ AJ AJ AJ AJ 53 Mr. Anil Nath AN AN AN AN 62 Mr. Rahul N. Bhagat RB RB RB RB RB RB RB 51 Mr. Harish Engineer HE HE HE HE HE 64 Mr. G. Subramanian GS GS GS GS 65 Mr. Pralay Mondal PML PML PML PML 47 Mr. Bharat Shah BS BS BS 64 Mr. Rajan Ananthanarayan RA RA RA 60

Mr. Mandeep Maitra MMA MMA 45

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 121 Banks HDFC Bank

Exhibit 4: HDFC Bank growth rates and key ratios March fiscal year-ends, 2016-2021E (%) 2016 2017 2018 2019E 2020E 2021E Growth rates (%) Net loan 27.1 19.4 18.7 21.3 17.5 17.0 Customer assets growth 28.3 23.1 21.3 19.9 16.6 16.2 Retail loans to Customer assets 47.6 48.9 51.5 51.1 51.8 52.6 Net fixed assets (20.3) 54.5 (0.5) (4.8) (6.4) (8.1) Cash and bank balance 7.1 25.8 153.0 12.7 22.7 23.9 Total Asset 25.5 16.6 23.2 17.5 15.7 15.7 Deposits 21.2 17.8 22.5 19.1 18.6 18.1 Current 20.2 30.7 3.2 22.1 18.6 18.1 Savings 22.9 7.9 33.2 18.8 19.1 18.6 Fixed 18.4 30.9 15.6 18.1 17.5 17.0 Net interest income 23.2 20.1 21.0 14.5 16.8 14.5 Loan loss provisions 30.9 33.3 54.6 (0.8) 35.1 10.3 Total other income 19.5 14.4 23.8 14.8 15.6 12.1 Net fee income 17.8 13.6 29.3 17.5 11.9 11.9 Net capital gains 25.8 55.5 (18.8) (40.5) 127.3 8.0 Net exchange gains 19.4 2.9 20.6 20.0 12.0 15.0 Operating expenses 21.4 16.0 15.2 15.2 10.4 10.1 Employee expenses 20.0 13.7 5.0 12.7 14.3 13.8 Key ratios (%) Yield on average earning assets 9.6 9.1 8.7 8.6 8.5 8.3 Yield on average loans 10.8 10.2 10.3 10.2 9.8 9.6 Yield on average investments 8.1 7.8 7.1 7.9 7.8 7.7 Average cost of funds 5.7 5.3 4.9 5.1 4.9 4.8 Interest on deposits 5.9 5.3 4.6 4.8 4.7 4.6 Difference 3.9 3.9 3.9 3.6 3.5 3.5 Net interest income/earning assets 4.4 4.4 4.4 4.1 4.1 4.0 New provisions/average net loans 0.6 0.7 0.9 0.8 0.9 0.8 Interest income/total income 72.0 72.9 72.5 72.4 72.6 73.0 Fee income to total income 20.2 19.4 20.6 21.1 20.3 19.9 Fees income to PBT 41.6 39.8 42.7 42.1 39.9 38.0 Net trading income to PBT 3.8 5.2 3.3 1.7 3.3 3.0 Exchange inc./PBT 6.6 5.7 5.7 5.8 5.5 5.3 Operating expenses/total income 44.3 43.4 41.0 41.2 39.1 37.8 Operating expenses/assets 2.6 2.5 2.4 2.3 2.1 2.0 Operating profit /AWF 2.9 2.8 2.8 2.8 2.8 2.8 Tax rate 34.0 34.3 34.5 33.5 32.5 31.5 Dividend payout ratio 19.5 19.4 19.3 19.3 19.3 19.3 Share of deposits Current 16.2 18.0 15.1 15.5 15.5 15.5 Fixed 56.8 52.0 56.5 56.4 56.6 56.9 Savings 27.1 30.1 28.4 28.1 27.9 27.6 Loans-to-deposit ratio 85.0 86.2 83.5 85.0 84.2 83.4 Equity/assets (EoY) 9.8 10.4 10.0 11.7 11.5 11.3 Asset quality trends (%) Gross NPL 0.9 1.1 1.3 1.5 1.5 1.5 Net NPL 0.3 0.3 0.4 0.6 0.6 0.6 Slippages 1.6 1.5 2.3 1.8 1.6 1.6 Provision coverage (ex writeoff) 69.9 68.7 69.8 61.6 60.1 63.1 Dupont analysis (%) Net interest income 4.1 4.1 4.2 4.0 4.0 3.9 Loan loss provisions 0.4 0.4 0.6 0.5 0.5 0.5 Net other income 1.6 1.5 1.6 1.5 1.5 1.5 Operating expenses 2.6 2.5 2.4 2.3 2.1 2.0 (1- tax rate) 66.0 65.7 65.5 66.5 67.5 68.5 ROA 1.8 1.8 1.8 1.8 1.9 1.9 Average assets/average equity 9.9 9.9 9.8 9.1 8.6 8.8 ROE 18.3 17.9 17.9 16.7 16.2 17.0

Source: Company, Kotak Institutional Equities estimates

122 KOTAK INSTITUTIONAL EQUITIES RESEARCH HDFC Bank Banks

Exhibit 5: HDFC Bank P&L and balance sheet March fiscal year-ends, 2016-2021E (` mn) 2016 2017 2018 2019E 2020E 2021E Income statement Total interest income 602,214 693,060 802,414 962,080 1,103,913 1,262,830 Loans 448,279 520,553 626,618 740,211 847,713 980,974 Investments 141,200 159,443 162,224 201,528 219,305 235,552 Cash and deposits 12,736 13,064 13,572 20,341 36,894 46,305 Total interest expense 326,299 361,667 401,465 502,998 567,712 648,911 Deposits from customers 291,783 313,315 327,713 415,381 483,620 562,038 Net interest income 275,915 331,392 400,949 459,083 536,201 613,919 Loan loss provisions 26,732 35,626 55,070 54,624 73,792 81,422 Net interest income (after prov.) 249,184 295,766 345,879 404,459 462,409 532,497 Other income 107,517 122,965 152,203 174,803 202,099 226,512 Net fee income 77,590 88,116 113,939 133,824 149,710 167,501 Net capital gains 7,317 11,380 9,243 5,500 12,500 13,500 Net exchange gains 12,277 12,634 15,235 18,282 20,476 23,547 Operating expenses 169,797 197,033 226,904 261,468 288,766 317,939 Employee expenses 57,022 64,837 68,057 76,685 87,644 99,761 Other Provisions 373 383 3,900 - - - Pretax income 186,379 221,391 266,973 317,580 375,593 440,965 Tax provisions 63,417 75,894 92,106 106,389 122,068 138,904 Net Profit 122,962 145,496 174,867 211,191 253,526 302,061 % growth 20.4 18.3 20.2 20.8 20.0 19.1 Operating profit 206,167 246,020 316,700 366,704 436,885 508,887 % growth 22.5 19.3 28.7 15.8 19.1 16.5 Balance sheet Assets Cash and bank balance 389,188 489,521 1,238,689 1,395,799 1,712,132 2,120,697 Cash 55,695 42,636 75,323 112,985 169,477 254,216 Balance with RBI 244,889 336,333 971,381 1,135,514 1,321,705 1,535,058 Balance with banks 9,205 11,795 9,539 14,308 21,462 32,193 Net value of investments 1,968,322 2,144,633 2,412,464 2,709,377 2,946,606 3,207,699 Govt. and other securities 1,576,611 1,624,187 1,883,648 2,186,500 2,423,728 2,684,821 Shares 739 1,114 1,198 1,198 1,198 1,198 Debentures and bonds 48,874 194,698 347,873 347,873 347,873 347,873 Net loans and advances 4,645,940 5,545,682 6,583,331 7,983,076 9,379,687 10,975,789 Fixed assets 23,472 36,267 36,072 34,323 32,131 29,528 Net Owned assets 23,472 36,267 36,072 34,323 32,131 29,528 Other assets 381,038 422,298 368,787 377,861 387,842 398,821 Total assets 7,407,961 8,638,402 10,639,343 12,500,436 14,458,397 16,732,534 Liabilities Deposits 5,464,242 6,436,397 7,887,706 9,395,499 11,139,565 13,153,640 Borrowings and bills payable 923,475 906,960 1,313,268 1,285,258 1,324,827 1,371,610 Other liabilities 293,466 400,422 375,419 351,977 329,999 309,394 Total liabilities 6,681,183 7,743,778 9,576,393 11,032,734 12,794,391 14,834,643 Paid-up capital 5,056 5,125 5,190 5,417 5,417 5,417 Reserves & surplus 721,721 889,498 1,057,760 1,462,284 1,658,589 1,892,474 Total shareholders' equity 726,778 894,624 1,062,950 1,467,701 1,664,006 1,897,891

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 123 ADD Infosys (INFO) Technology AUGUST 13, 2018 UPDATE Coverage view: Cautious

Infosys NDR takeaways. We hosted investor meetings for Infosys recently. Key Price (`): 1,385 takeaways about the company: (1) it is confident of achieving near-term financial Target price (`): 1,400 objectives, (2) it is making progress in strengthening lag areas like large deals and BSE-30: 37,869 digital, (3) its localization imperative is progressing far better than expected; the company has already hired over 5,000 of the planned 10,000 in the US and (4) its interventions are likely to bring down attrition rates. Infosys is progressing nicely towards its stated financial goals. Reiterate ADD rating.

Company data and valuation summary Infosys Stock data Forecasts/Valuations 2018 2019E 2020E 52-week range (Rs) (high,low) 1,394-853 EPS (Rs) 64.6 70.9 78.3 Market Cap. (Rs bn) 3,026.0 EPS growth (%) 3.0 9.7 10.4 Shareholding pattern (%) P/E (X) 21.4 19.5 17.7 Promoters 12.9 Sales (Rs bn) 705.2 804.8 885.2 FIIs 52.7 Net profits (Rs bn) 146.0 154.1 170.2 MFs 10.6 EBITDA (Rs bn) 190.1 209.9 230.5 Price performance (%) 1M 3M 12M EV/EBITDA (X) 14.9 13.4 12.0 Absolute 6.5 19.6 42.3 ROE (%) 21.8 23.0 23.5 Rel. to BSE-30 1.9 11.3 18.5 Div. Yield (%) 2.0 3.1 2.8

Management confident of achieving growth targets

We hosted the following leaders of Infosys for investor meetings in the US—(1) M.D. Ranganath—CFO, (2) Ravi Kumar—Deputy COO, (3) Jayesh Sanghrajka—Deputy CFO and (4) Sandeep Mahindroo—Financial Controller. The management reiterated its confidence in achieving near-term financial objectives i.e. revenue growth in the guided range of 6-8% and EBIT margin range of 22-24% (with a bias towards the upper end) for FY2019E. The management views a weak 1QFY19 BFS as an aberration and reiterated its confidence in returning to growth based on the ramp-up of large deals signed in the vertical recently.

Measures undertaken to catch-up in underperforming areas

The company has a made a few interventions to strengthen the narrative and positioning of the company in critical areas:

 Digital. Even as the company had developed significant competencies under its hood, awareness was low on this front on account of insufficient communication and an overbearing emphasis on the people+ software model in the past. The low key narrative under the earlier CEO is being corrected with a more overt narrative around digital competencies, enhanced disclosure of revenues from digital offerings and building of separate practice sales for digital offerings that will work closely with account managers in ensuring wider acceptance of such offerings by clients. Digital offerings of Infosys have higher gross margin, revenue per person and growth rates.

 Large deals. The company has revamped its approach to large deals and is looking to Kawaljeet Saluja strengthen large deal leadership. The company believes that deals above a certain threshold (let’s say US$200 mn) require a full stack approach wherein an entire range of offerings of application, infra and business process can be offered as a single operating cost model and Jaykumar Doshi effectively stitched together on an outcome basis for the client. The deal signed recently with John Hancock is one such example.

 Creating supply of talent for digital services. Demand for talent far exceeds supply. Infosys is aggressively hiring new talent (especially in the US), refactoring talent where required and training resources in new technologies. Infosys’ culture and emphasis on learning and training holds it in good stead.

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

Progress in localization imperative far better than expected

Infosys has hired over 5,000 locals in the US and is progressing well towards its stated target of recruitment of 10,000 people. What is particularly impressive is hiring of 1,400 fresh graduates that have gone through three months training and 70% of whom are already deployed on client projects. The company has built an effective pyramid onsite, lowered cost of operations with positive impact on customer satisfaction and created a new talent pool. The company is investing in training infrastructure in US similar to operations in Mysore.

Infosys believes this talent creation model is unique to the company and will be a competitive differentiator. The head start enjoyed by the company is on multiple fronts having put in place: (1) scale—the company has already recruited over 5,000 people onsite, (2) infrastructure with dedicated development centers and training infrastructure and (3) partnerships with colleges and universities.

Interventions made to bring attrition under control

Infosys believes that attrition is above the comfort zone and has made the following interventions which will bring it under control—(1) advanced the wage hike to April as compared to July last year, (2) ensured more promotions contingent on performance, and (3) greater differentiation in variable compensation between best performers and average performers. Infosys believes that attrition rate will decline after these interventions.

Most of the attrition is in <3-year experience band. The company is also taking a couple of steps to create and retain the relevant talent pool—(1) differentiate compensation based on outcome of tests after initial training provided by the company and (2) differentiate compensation based on the campus form which a candidate is recruited as opposed to more socialistic distribution at present.

Leapfrogged on IMS revenues

Infosys is optimistic about IMS revenues with multiple deals won for creating hybrid cloud environments, migration of application instances to cloud and a shift of workloads to the public cloud. The company believes it does have a legacy drag to deal with from asset heavy deals of the past. In a way, the company does not have to deal with legacy drag on its IMS portfolio.

Consistent capital allocation

Capital allocation is more predictable with consistent payout to investors that for now is pegged at 70% of free cash flow. In addition, the company flushed out cash through buybacks. Total cash returned to shareholders was US$3.7 bn in FY2018 and will likely be US$3.5 bn in FY2019.

Maintain positive view on the stock

We believe Infosys is taking the right steps to stabilize and accelerate revenue growth hereon. Infosys has done a reasonable job up to now of defending its share of business in large accounts (US$100 mn accounts have increased further) and accelerating deal wins (TCV in June 2018 quarter was at an eight-quarter high). We however refrain from calling out a path to double digit growth rate in FY2020E for Infosys. Our relative caution is based on the high employee churn rate. Attrition is our single biggest concern as other metrics are trending in the right direction. Infosys stock had a nice run and now offers modest upside.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 125 Technology Infosys

Exhibit 1: TCVs of deal wins (TTM) improve after a few quarters of disappointments

TTM TCVs (US$ mn) 4,600 4,205 4,200 3,907

3,800 3,48 6 3,531 3,334 3,400 3,072 2,909 2,973 3,000 2,78 8 2,8 58 2,500 2,600 2,350 2,445 2,213 2,298 2,200 1,927 1,915 1,800 1,400

1,000

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Sep-14

Sep-15

Sep-16

Sep-17

Dec-14

Dec-15

Dec-16

Dec-17

Mar-15

Mar-16 Mar-17 Mar-18

Source: Company

Exhibit 2: Infosys: Key client metrics are steady

Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Client metrics Number of active clients 1,011 1,045 1,092 1,126 1,136 1,152 1,162 1,164 1,173 1,191 1,204 1,214 New clients added in the period 82 75 89 95 78 77 71 59 72 79 73 70 Repeat business % 97.6 96.8 95.8 98.8 97.5 96.7 96.2 99.4 98.7 98.3 97.6 99.5 Million $ clients 542 555 558 574 577 591 598 606 620 630 634 627 5 Million $ clients 258 261 268 268 277 275 282 279 286 290 295 NA 10 Million $ clients 190 186 198 198 200 50 Million $ clients 50 51 52 52 54 54 56 56 55 56 57 56 75 Million $ clients 31 28 31 31 30 32 31 31 31 34 35 NA 100 Million $ clients 14 13 14 17 18 18 19 18 19 20 20 24 200 Million $ clients 6 6 6 6 6 6 6 NA NA NA NA NA 300 Million $ clients 1 1 1 1 1 1 1 NA NA NA NA NA

Source: Company, Kotak Institutional Equities

126 KOTAK INSTITUTIONAL EQUITIES RESEARCH Infosys Technology

Exhibit 3: High attrition is the single biggest concern

Quarterly annualized attrition (%) 30

26 23.0 22

18

14

10

Jun-11

Jun-12

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Sep-11

Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16 Mar-17 Mar-18

Source: Company, Kotak Institutional Equities

Exhibit 4: Leadership bench is depleted Key senior management exits at Infosys in the past 2-3 years

Date Name Designation Jun-18 Sangita Singh Executive VP ,Head of Healthcare & Lifesciences Jun-18 Nitesh Banga SVP -Global head of manufacturing and Edge products Jan-18 Rajesh K Murthy President, Head— Energy, Resources, Utilities, Communications & Services Oct-17 Pervinder Johar CEO- Edgeverve Oct-17 Abdul Razack Head- Platforms, Big Data and analytics Sep-17 Navin Budhiraja SVP - Head Architechture and Technology Sep-17 Sanjay Rajagopalan SVP - Design and research Aug-17 Dr Vishal Sikka CEO and MD Jun-17 Sandeep Dadlani President, Head of Manufacturing, Retail, CPG and logistics Jun-17 Gordon Muehl Industrial Internet business head Jan-17 David Kennedy Chief Compliance Officer Sep-16 Sanjay Purohit EVP and Global head of consulting Jul-16 Sunil Gupta Infosys Edgeverve and Finacle COO Jul-16 Vasudeva Nayak SVP - Global Head Mobility and assurance Jul-16 Samson David SVP, Global head- cloud, infrastructure and security Jul-16 Anup Uppadhayay Executive VP, Head of Strategic sales Jul-16 Manish Tandon Executive VP, Head of Healthcare, Lifesciences and Hi-Tech Jan-16 Michael Reh Head- Edgeverve and Finacle Oct-15 Rajiv Bansal CFO Oct-15 Ronald Hafner CEO/Partner, Lodestone Jul-15 Sanjay Jalona Executive VP, Head of Manufacturing and Hi-Tech

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 127 Technology Infosys

Exhibit 5: Profit model, balance sheet, cash model of Infosys, March fiscal year-ends, 2014-21E (Rs mn)

2014 2015 2016 2017 2018 2019E 2020E 2021E Profit model Revenues 501,330 533,190 624,410 684,850 705,220 804,826 885,245 968,295 EBITDA 136,340 149,010 170,780 186,050 190,100 209,914 230,484 252,046 Depreciation (13,740) (10,690) (14,590) (17,030) (18,620) (19,210) (21,035) (22,602) Other income 26,690 34,270 31,250 30,790 31,930 22,006 25,304 28,364 Pretax profits 149,291 172,591 187,441 199,811 203,411 212,710 234,754 257,810 Tax (40,620) (49,290) (52,520) (55,980) (56,740) (58,574) (64,557) (72,186) Profit after tax 108,671 123,301 134,921 143,831 146,671 154,136 170,197 185,623 Diluted earnings per share (Rs) 46.6 53.9 59.0 62.7 64.6 70.9 78.3 85.3 Balance sheet Total equity 445,300 507,360 578,260 689,820 649,230 689,835 758,245 834,253 Assets held for sale — — — — 3,240 3,240 3,240 3,240 Minority interest — — — - 10 10 10 10 Current liabilities 124,360 155,530 173,150 141,660 141,010 144,087 149,927 155,957 Total liabilities and equity 569,660 662,890 751,410 831,480 793,490 837,172 911,422 993,459 Cash 259,500 303,670 326,970 226,250 198,180 215,156 262,944 318,014 Other current assets 180,240 209,940 258,790 276,940 299,660 322,992 346,229 370,219 Deferred taxation 6,290 5,360 5,330 3,330 7,410 7,410 7,410 7,410 Goodwill 22,440 35,950 44,760 36,520 22,110 22,110 22,110 22,110 Tangible fixed assets 70,950 85,270 96,640 124,920 144,500 147,875 151,099 154,077 Investments 30,240 22,700 18,920 163,520 121,630 121,630 121,630 121,630 Total assets 569,660 662,890 751,410 831,480 793,490 837,172 911,422 993,459 Free cash flow Operating cash flow, excl. working capital 93,920 91,610 120,090 126,080 124,854 151,029 165,927 179,860 Working capital changes (2,810) (8,420) (21,460) (16,240) (1,114) (20,254) (17,398) (17,960) Capital expenditure (27,450) (22,550) (27,230) (27,600) (19,980) (22,275) (24,260) (25,580) Acquistions — (13,760) (7,470) — (600) — — — Other income 23,800 25,510 23,810 29,570 31,930 22,006 25,304 28,364 Free cash flow 87,460 72,390 87,740 111,810 135,090 130,506 149,573 164,685 Key ratios and assumptions Revenue growth (US$ terms) (%) 11.5 5.6 9.1 7.4 7.2 6.8 9.1 9.4 Re/US$ rate 60.8 61.2 65.7 67.1 64.5 68.9 69.5 69.5 EBITDA margin (%) 27.2 27.9 27.4 27.2 27.0 26.1 26.0 26.0 EBIT margin (%) 24.5 25.9 25.0 24.7 24.3 23.7 23.7 23.7 RoAE 26.3 25.9 24.9 22.7 21.9 23.0 23.5 23.3 RoIC 59.5 58.7 54.4 45.7 39.3 40.5 41.8 43.0

Source: Company, Kotak Institutional Equities

128 KOTAK INSTITUTIONAL EQUITIES RESEARCH INDIA Economy Industrial Production AUGUST 13, 2018 UPDATE BSE-30: 37,869

IIP: Continuing to signal gradual recovery. June IIP growth had support from favorable base effect (June 2017 had seen pre-GST implementation disruptions) and growth in capital goods and infrastructure/construction segments. Industrial growth has likely troughed and a phase of gradual recovery seems to be underway. On the flipside this lends strength to the RBI’s argument that the output gap has almost closed, implying that incremental demand growth without commensurate supply-side expansion could be inflationary.

June IIP growth registers a strong print supported by favorable base effect QUICK NUMBERS June IIP growth at 7% improved significantly from the May print of 3.9% (Kotak: 5%; Consensus: 5.5%) led largely by favorable base effects and some pickup in capital goods,  June IIP growth at infrastructure/construction, and consumer durables. Manufacturing sector growth was at 6.9% 7%; manufacturing compared to 3.7% in May (Exhibits 1 and 2). ‘Manufacture of computer, electronic and optical growth at 6.9% products’ has shown the highest positive growth of 44.1% followed by the automobile sector with 20.5% in ‘manufacture of motor vehicles, trailers and semi-trailers’ and 15.6% in  Capital goods ‘manufacture of other transport equipment’. On the other hand, ‘other manufacturing’ growth at 9.6%; segment has shown the highest negative growth of (-)40.2% followed by (-)31.7% in infrastructure goods ‘manufacture of tobacco products’ and (-)0.8% in ‘manufacture of textiles’. growth at 8.5%

Mining sector production grew 6.6% after 5.8% in May. Electricity production growth was at  Primary goods 8.5% against 4.2% in May (and 4.1% reported in core IIP release). Overall, industrial growth growth at 9.3%; has likely troughed and a phase of gradual recovery seems to be underway (Exhibit 3). consumer durables Capital goods, infrastructure/construction, and consumer durables pull up IIP growth growth at 13.1%

From the use-based classification side, primary goods production growth was at 9.3%, intermediate goods at 2.4% and infrastructure/construction goods at 8.5%. Consumer durables and consumer non-durables sectors’ productions growth was at 13.1% and 0.5%, respectively. Capital goods production registered a growth of 9.6% (Exhibit 4). The base effect shows in the fact that sequentially only capital goods and infrastructure/construction segments registered positive growth. There are some signs of a nascent investment cycle recovery visible through (1) marginal increase in capacity utilization levels, and (2) high frequency activity indicators such as cement production, CV sales, bitumen consumption, etc. (though some base effect remains) (Exhibits 5 and 6). The durability of these indicators will be tested through the rest of FY2019, especially as the favorable base effects gradually wane. We would also be cautious of the risks due to trade wars/export slowdown (Exhibit 7).

Growth likely to improve gradually

It is unlikely that the private sector investment cycle will see any V-shaped recovery. The recovery hinges on both (1) visibility of healthy aggregate demand over the medium to long Suvodeep Rakshit term, and (2) healthier balance sheet for borrowers and lenders. We remain cautious on the pace of this recovery and expect FY2019 GDP growth at 7.3% compared to 6.6% in FY2018 taking into account some of the early signs of stability in the high frequency indicators as well Upasna Bhardwaj as base effects from GST-led disruptions. However, the uptrend in oil prices, global growth prospects, and tighter domestic financial conditions may pose a downside risk to growth. Further, the sustenance of a recovery will also depend on the progress on twin deficits, corporate debt overhang and improvement in capacity utilization. The June IIP print will strengthen RBI’s argument that the output gap has almost closed and, hence, incremental demand increase could be inflationary.

For Private Circulation Only. India Economy

Exhibit 1: Favorable base effects supported IIP growth in June Trend in momentum, base effect, and monthly change in IIP growth (%)

Momentum Base effect Monthly change in yoy IIP growth 15

10

5

0

Jul-17

Jan-18

Jun-17

Jun-18

Oct-17

Feb-18

Apr-17

Sep-17

Apr-18

Dec-17

Nov-17

Mar-18

Aug-17 May-17 (5) May-18

(10)

(15)

Notes: (a) Momentum is mom growth while base effect is 12-m prior mom change with signs reversed.

Source: CEIC, Kotak Economics Research estimates

Exhibit 2: June IIP growth at 7% Sectoral classification of IIP growth, March fiscal year-ends, 2017-19 (%)

Mining (%) Manufacturing (%) Electricity (%) General (%) 2017 2018 2019 2017 2018 2019 2017 2018 2019 2017 2018 2019 April 6.7 3.0 4.0 4.9 2.9 5.3 14.4 5.4 2.1 6.0 3.2 4.8 May 5.7 0.3 5.8 7.7 2.6 3.7 6.1 8.3 4.2 7.3 2.9 3.9 June 10.2 0.1 6.6 7.5 (0.7) 6.9 9.8 2.1 8.5 8.0 (0.3) 7.0 July 0.9 4.5 5.3 (0.1) 2.1 6.6 4.5 1.0 August (4.3) 9.3 5.5 3.8 2.1 8.3 4.0 4.8 September (1.2) 7.6 5.8 3.8 5.1 3.4 5.0 4.1 October 1.0 (0.2) 4.8 2.0 3.0 3.2 4.2 1.8 November 8.1 1.4 4.0 10.4 9.5 3.9 5.1 8.5 December 10.8 1.2 0.6 8.7 6.4 4.4 2.4 7.3 January 8.6 0.3 2.5 8.7 5.1 7.6 3.5 7.5 February 4.6 (0.4) 0.7 8.4 1.2 4.5 1.2 6.9 March 10.1 3.1 3.3 5.7 6.2 5.9 4.4 5.3 Average 5.1 2.5 4.4 4.7 5.9 5.3 4.6 4.4

Source: CEIC, Kotak Economics Research

130 KOTAK ECONOMIC RESEARCH Economy India

Exhibit 3: Industrial growth has likely troughed Trend in core IIP and IIP growth (3MMA, %)

Core Industry growth (3MMA) IIP (3MMA) 10

8

6

4

2

0

Jun-15

Jun-16

Jun-17

Jun-18

Sep-14

Sep-15

Sep-16

Sep-17

Dec-14

Dec-15

Dec-16

Dec-17

Mar-15

Mar-16 Mar-17 Mar-18

Source: CEIC, Kotak Economics Research

Exhibit 4: Capital goods, infrastructure/construction, and consumer durables pull up IIP growth Use-based classification of IIP growth, March fiscal year-ends, 2017-19 (%)

Intermediate Infrastructure and Consumer Consumer non- Primary goods Capital goods goods construction goods durables durables 2017 2018 2019 2017 2018 2019 2017 2018 2019 2017 2018 2019 2017 2018 2019 2017 2018 2019 April 12.6 3.0 2.8 9.2 (4.8) 11.9 (0.3) 3.6 1.7 0.8 4.7 7.0 9.3 (0.7) 4.5 0.2 8.8 7.9 May 4.6 3.7 5.7 14.7 (1.6) 6.9 4.3 0.7 0.8 7.4 (0.1) 7.4 9.9 0.6 6.4 11.3 9.7 (2.1) June 8.2 (0.3) 9.3 14.8 (6.1) 9.6 6.0 (1.2) 2.4 6.6 1.0 8.5 4.5 (3.5) 13.1 11.4 4.8 0.5 July 4.2 2.2 8.8 (1.1) 2.5 (2.8) (0.9) 4.3 0.2 (2.4) 14.5 4.1 August (1.0) 7.1 0.5 7.3 4.6 (0.5) 6.5 2.7 7.3 4.3 11.3 7.2 September 2.2 6.6 (7.5) 8.7 1.8 2.1 8.7 0.5 10.3 (4.1) 12.7 10.5 October 5.2 2.4 (4.7) 3.5 4.7 0.2 7.4 5.8 1.5 (9.0) 5.6 8.2 November 5.5 3.3 5.3 5.7 5.7 6.5 3.9 13.7 6.8 3.1 3.3 23.7 December 7.4 3.8 (6.2) 13.2 2.1 7.5 5.5 6.5 (5.0) 2.1 (0.2) 16.8 January 3.8 5.9 (0.6) 12.4 3.3 5.4 2.6 7.5 (2.0) 7.6 9.6 10.7 February 0.8 3.7 (2.4) 16.6 2.3 3.4 (1.9) 13.0 (4.6) 7.5 10.4 7.4 March 5.8 3.0 9.4 (3.1) 3.1 2.5 1.1 9.1 (0.6) 6.2 7.5 14.1 Average 5.0 3.7 3.5 4.2 3.3 2.3 4.0 5.7 3.1 1.0 8.1 10.5

Source: CEIC, Kotak Economics Research

KOTAK ECONOMIC RESEARCH 131 India Economy

Exhibit 5: Capacity utilization showing some signs of pickup Trend of capacity utilization (%)

84 Capacity utilization Capacity utilization (seas. adj.)

82

80

78

76

74

72

70

Sep-09

Sep-10

Sep-11

Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17 Mar-18

Source: CEIC, RBI, Kotak Economics Research

Exhibit 6: Buoyancy visible in a few key sectors though base effect has been a significant support Key growth indicators (yoy, %)

Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Industry Credit growth (industry) (1.1) (0.3) (0.3) (0.4) (0.2) 1.0 2.1 1.1 1.0 0.7 1.0 1.4 0.9 Cement production (3.3) 1.0 0.7 0.1 (1.3) 16.9 17.7 19.6 23.0 13.5 16.5 13.0 13.2 Commercial vehicle sale 1.4 13.8 23.2 25.3 6.4 50.4 52.6 39.7 31.1 24.6 76.0 43.1 41.7 29.7 - LCV sales 6.8 18.7 19.9 25.0 10.1 42.9 37.7 58.3 37.9 31.3 43.9 26.2 40.8 32.9 - MHCV sales (6.5) 6.7 28.4 25.6 0.9 62.6 73.1 18.8 23.0 16.3 169.3 80.2 43.3 24.5 Petroleum products consumption (industrials) (10.6) (8.9) (1.3) 8.0 13.3 9.3 14.7 8.8 3.4 5.7 (0.6) 5.4 9.3 Bitumen consumption (11.6) (9.1) 0.4 3.0 (13.3) 15.5 9.5 12.0 15.2 10.3 20.3 3.5 28.6 Core infrastructure 1.0 2.9 4.4 4.7 5.1 6.9 3.8 6.2 5.4 4.5 4.6 4.3 6.7 IIP mining 0.1 4.5 9.3 7.6 (0.2) 1.4 1.2 0.3 (0.4) 3.1 4.0 5.8 6.6 IIP manufacturing (0.7) (0.1) 3.8 3.8 2.0 10.4 8.7 8.7 8.4 5.7 5.3 3.7 6.9 IIP electricity 2.1 6.6 8.3 3.4 3.2 3.9 4.4 7.6 4.5 5.9 2.1 4.2 8.5 IIP coal (6.8) 0.6 15.4 10.4 3.9 0.8 0.4 3.7 1.3 9.1 16.0 12.2 11.5 Railways freight traffic 2.5 4.0 6.1 4.9 6.8 6.6 12.3 8.7 5.9 7.5 11.8 7.5 5.5 5.7 Steel production 3.4 16.5 3.0 (0.0) 4.8 12.7 0.9 3.2 (18.8) 5.8 5.7 3.1 7.3 Services Credit growth (services) 4.7 4.9 5.0 7.0 9.4 14.0 14.7 13.2 14.2 13.8 20.7 21.9 23.3 Airport passenger traffic 20.2 12.5 15.7 16.5 20.6 16.9 17.8 19.9 24.4 28.2 26.1 16.6 18.4 Airport cargo 11.4 10.0 11.7 14.7 (0.4) 15.5 11.7 6.0 8.0 4.3 10.1 12.5 13.2 Foreign tourist arrivals 21.3 7.4 11.0 18.8 18.1 14.4 15.2 8.4 10.1 13.4 4.4 5.1 2.7 Demand Credit growth (personal loans) 14.1 15.0 15.7 16.8 16.0 17.3 18.9 20.0 20.4 17.8 19.1 18.6 17.9 Center's expenditure (net of interest payments) (20.3) 15.1 (4.1) (9.6) 1.6 39.9 25.7 (4.1) 22.8 (56.5) (6.7) 14.5 28.3 Fuel consumption (retail) 7.1 7.6 (2.1) 11.6 0.4 6.2 7.5 12.0 6.4 7.8 5.1 2.1 7.6 Passenger vehicle sales (10.9) 15.1 13.8 11.3 (0.3) 14.3 5.2 7.6 7.8 6.4 7.5 19.7 37.5 (2.7) Two wheeler sales 4.0 13.8 14.7 9.1 (2.8) 23.5 41.5 33.4 23.8 18.3 16.9 9.2 22.3 8.2 Non-oil imports 24.3 18.0 25.6 19.5 3.5 19.7 17.6 20.6 4.3 4.9 (7.2) 4.5 7.5 Notes: (a) Petroleum products consumption comprise naphtha, NGL, LDO, furnace oil, LSHS, etc. (b) Fuel consumption comprise LPG, kerosene, gasoline and diesel.

Source: CEIC, PPAC, Kotak Economics Research

132 KOTAK ECONOMIC RESEARCH Economy India

Exhibit 7: Global slowdown will affect domestic production too Trend in IIP growth (3MMA, LHS, %) and exports growth (3MMA, RHS, %)

IIP (3MMA, LHS) Exports (3MMA, RHS) 9 25 8 20 7 15 10 6 5 5 0 4 (5) 3 (10) 2 (15) 1 (20)

0 (25)

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Mar-14

Mar-15

Mar-16 Mar-17 Mar-18

Source: CEIC, RBI, Kotak Economics Research

KOTAK ECONOMIC RESEARCH 133 June 2018: Results calendar India Daily Summary Daily Summary India Mon Tue Wed Thu Fri Sat Sun

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK 13-Aug 14-Aug 15-Aug 16-Aug 17-Aug 18-Aug 19-Aug Ashoka Buildcon Brigade Enterprises Cadila Healthcare Dilip Buildcon Dew an Housing Finance GMR Infrastructure Godrej Industries Grasim Industries Oil India IDBI Oracle Financial Services Rajesh Exports Sadbhav Engineering Sun Pharmaceuticals Sunteck Realty Tata Chemicals Tata Steel

Vardhman Textiles -

20-Aug 21-Aug 22-Aug 23-Aug 24-Aug 25-Aug 26-Aug August2018 13, Magma Fincorp P&G Hygiene Gillette India

Source: NSE, Kotak Institutional Equities

134 134 KOTAK ECONOMIC RESEARCH

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

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

Company Rating 10-Aug-18 (Rs) (%) (Rs bn) (US$ bn) (mn) 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E (US$ mn) Automobiles Amara Raja Batteries REDUCE 825 780 (5.4) 141 2.0 171 28 32 37 (1.6) 17.1 15.9 29.9 25.5 22.0 15.9 13.6 11.6 4.8 4.2 3.6 17.0 17.4 17.5 0.5 0.6 0.7 5.5 Apollo Tyres BUY 264 340 28.8 151 2.2 541 13 20 25 (38.0) 46.9 25.7 19.7 13.4 10.7 11.1 8.1 6.9 1.5 1.4 1.3 8.5 11.0 12.5 1.1 1.1 1.1 11.3 Ashok Leyland BUY 128 160 25.4 374 5.4 2,926 5.4 6.2 8.9 8.0 15.3 43.2 23.7 20.6 14.4 13.7 10.5 7.6 5.2 4.5 3.7 23.7 23.4 28.4 1.9 1.5 2.1 49.1 Bajaj Auto SELL 2,630 2,500 (4.9) 761 11.1 289 140 148 161 6.0 5.4 9.0 18.8 17.8 16.3 12.6 12.2 10.8 4.0 3.6 3.2 22.9 21.2 20.7 2.3 2.2 2.5 31.8 Balkrishna Industries REDUCE 1,253 1,260 0.5 242 3.5 193 37 50 63 4.8 34.8 25.0 33.5 24.9 19.9 17.8 13.7 10.9 5.9 4.9 4.0 19.0 21.6 22.2 0.4 0.5 0.5 8.2 Bharat Forge SELL 629 600 (4.7) 293 4.3 466 16 23 27 10.1 44.4 14.6 38.9 26.9 23.5 18.7 15.3 13.4 6.3 5.4 4.6 17.2 21.5 21.0 0.7 0.8 0.9 11.3 CEAT ADD 1,401 1,500 7.1 57 0.8 40 65 99 108 (29.5) 53.7 8.3 21.6 14.1 13.0 10.5 8.9 7.7 2.2 1.9 1.7 10.4 14.4 13.8 0.8 0.7 0.7 13.7 Eicher Motors SELL 28,998 24,000 (17.2) 791 11.5 27 792 997 1,180 29.3 25.8 18.4 36.6 29.1 24.6 26.4 21.1 17.8 14.7 10.6 8.0 46.4 42.4 37.1 0.1 0.1 0.1 19.1 Escorts BUY 865 1,200 38.7 74 1.5 89 39 59 71 71.3 52.3 19.9 22.3 14.7 12.2 12.7 8.8 7.2 3.0 2.6 2.2 13.5 17.6 18.0 0.5 1.0 1.2 16.9 Exide Industries SELL 292 235 (19.4) 248 3.6 850 8 10 11 0.6 25.3 11.0 35.5 28.4 25.5 19.9 16.1 14.4 4.6 4.2 3.8 13.5 15.4 15.5 0.8 1.0 1.2 8.1 Hero Motocorp SELL 3,319 3,000 (9.6) 663 9.6 200 185 183 204 9.5 (0.9) 11.4 17.9 18.1 16.2 11.1 10.8 9.5 5.6 5.0 4.5 33.8 29.3 29.1 2.6 2.8 3.1 22.0 Mahindra CIE Automotive ADD 254 290 14.2 96 1.4 378 10 14 16 107.0 45.0 12.7 26.5 18.2 16.2 13.0 9.2 8.1 2.6 2.3 2.0 10.4 13.2 13.1 ——— 3.0 Mahindra & Mahindra BUY 945 1,085 14.8 1,175 17.1 1,138 38 45 51 22.0 18.5 14.4 24.9 21.0 18.4 16.4 13.7 11.8 3.5 3.1 2.8 15.1 15.8 16.0 0.8 1.0 1.1 32.9 Maruti Suzuki ADD 9,148 10,000 9.3 2,764 40.1 302 256 323 393 5.1 26.4 21.8 35.8 28.3 23.3 20.0 16.3 12.9 6.6 5.7 4.9 19.8 21.6 22.5 0.9 0.9 1.1 64.9 Motherson Sumi Systems SELL 301 280 (7.1) 634 9.2 2,105 8 11 14 6.1 40.0 21.5 36.9 26.3 21.7 13.9 10.5 8.6 6.4 5.5 4.6 19.0 22.4 23.1 0.7 0.9 1.1 15.1 MRF REDUCE 74,346 69,000 (7.2) 315 4.6 4 2,669 3,425 3,932 (23.9) 28.3 14.8 27.9 21.7 18.9 12.6 10.2 8.9 3.2 2.8 2.5 12.3 13.9 13.9 0.1 0.1 0.1 6.8 Schaeffler India BUY 5,335 6,000 12.5 89 1.3 17 143 156 199 22.0 9.0 27.3 37.3 34.2 26.9 21.9 20.8 15.8 5.2 4.7 4.1 15.0 14.5 16.4 0.3 0.6 0.7 0.7 SKF ADD 1,742 1,800 3.4 89 1.3 51 58 69 82 24.6 19.7 18.5 30.2 25.2 21.3 18.7 16.1 13.3 4.9 4.2 3.6 16.1 16.7 17.1 0.6 0.7 0.8 0.4 Tata Motors BUY 250 425 69.9 849 11.5 3,396 20 22 36 (28.0) 10.7 62.7 12.5 11.3 7.0 3.7 3.5 2.9 0.9 0.8 0.7 8.8 7.6 11.2 ——— 60.0 Timken SELL 715 660 (7.6) 49 0.7 68 14 19 25 (5.3) 42.3 27.5 52.8 37.1 29.1 29.4 20.5 16.4 6.9 5.9 4.9 13.9 17.1 18.5 0.1 0.1 0.1 0.4 TVS Motor SELL 532 405 (23.8) 253 3.7 475 14 16 20 18.7 13.9 23.0 38.1 33.5 27.2 23.3 18.5 15.3 8.8 7.5 6.4 25.1 24.2 25.4 0.6 0.9 1.1 14.1 WABCO India SELL 6,750 6,350 (5.9) 128 1.9 19 144 169 222 27.8 17.8 31.3 46.9 39.8 30.3 30.4 25.9 19.6 8.4 7.0 5.8 19.5 19.2 20.9 0.1 0.2 0.2 0.5 Automobiles Neutral 10,235 148 (0.9) 19.3 25.6 26.2 22.0 17.5 11.6 9.8 8.1 3.7 3.3 2.9 14.2 15.1 16.5 0.9 0.9 1.1 395.7 Banks Axis Bank ADD 616 600 (2.5) 1,581 23.0 2,567 1 18 40 (92.6) 1,577.6 122.3 573.0 34.2 15.4 ——— 3.0 2.6 2.2 0.5 7.1 14.1 0.8 0.4 1.0 57.7 Bank of Baroda NR 148 —— 392 5.7 2,652 (9) 21 26 (253.2) 323.7 26.4 (16.2) 7.2 5.7 ——— 1.6 1.3 1.0 (5.8) 12.7 14.0 ——— 34.5 Canara Bank ADD 282 300 6.3 207 3.0 733 (58) (5) 51 (406.6) 91.6 1,147.0 (4.9) (58.3) 5.6 ——— 1.8 1.7 1.0 (12.2) (1.0) 10.1 ——— 29.2 City Union Bank ADD 177 190 7.1 130 1.9 665 9 9 11 6.5 5.8 13.3 19.9 18.8 16.6 ——— 3.1 2.9 2.5 15.3 15.5 15.6 0.2 0.9 1.1 1.9 DCB Bank ADD 168 205 21.8 52 0.8 308 8 10 12 13.8 28.2 21.0 21.1 16.5 13.6 ——— 2.1 1.9 1.7 10.9 11.7 12.7 — 0.6 0.7 4.4 Equitas Holdings BUY 144 190 31.9 49 0.7 340 0.9 4.4 8.4 (80.3) 378.4 89.9 155.2 32.4 17.1 ——— 2.2 2.1 1.9 1.4 6.4 11.2 ——— 4.3 Federal Bank BUY 89 130 45.7 177 2.6 1,972 4.4 5.7 7.9 (9.3) 29.5 39.5 20.4 15.8 11.3 ——— 1.6 1.5 1.3 8.2 8.8 11.4 1.1 1.5 2.0 20.0 HDFC Bank REDUCE 2,114 2,000 (5.4) 5,648 82.0 2,595 67 78 94 18.7 15.7 20.0 31.4 27.1 22.6 ——— 5.2 4.0 3.5 17.9 16.7 16.2 0.6 0.7 0.9 86.7 ICICI Bank BUY 329 400 21.7 2,114 30.7 6,429 11 8 26 (31.1) (19.6) 209.1 31.2 38.8 12.5 ——— 2.5 2.2 1.9 6.6 5.1 14.5 0.5 0.5 1.6 93.4 India Daily Summary Daily Summary India IDFC Bank NR 43 —— 148 2.1 3,404 2.5 1.2 2.9 (16.0) (52.7) 146.7 17.2 36.4 14.7 ——— 1.0 0.9 0.9 5.7 2.6 6.3 1.2 0.6 1.4 9.4 IndusInd Bank REDUCE 1,980 1,900 (4.0) 1,189 17.3 600 60 71 87 25.3 17.5 23.6 32.9 28.0 22.7 ——— 5.2 4.2 3.6 17.1 17.6 16.8 — 0.4 0.5 30.6 J&K Bank BUY 60 100 67.5 33 0.5 557 4 7 11 111.6 82.4 63.8 16.4 9.0 5.5 ——— 0.8 0.7 0.7 3.4 5.9 9.1 — 2.2 3.6 0.4 Karur Vysya Bank ADD 104 110 6.1 76 1.1 727 5 3 13 (52.2) (32.3) 306.7 21.8 32.2 7.9 ——— 1.5 1.4 1.3 6.1 3.7 14.1 0.6 0.8 3.2 2.0 Punjab National Bank ADD 83 90 8.1 230 3.3 2,761 (44) (27) 12 (814.7) 40.4 145.3 (1.9) (3.1) 6.9 ——— 5.4 4.1 1.4 (32.5) (23.4) 10.7 — - - 39.2 RBL Bank SELL 569 475 (16.5) 240 3.5 420 15 22 29 27.3 48.1 31.5 37.6 25.4 19.3 ——— 3.7 3.3 3.0 11.5 13.3 15.5 0.4 0.6 0.8 12.4 State Bank of India BUY 304 370 21.5 2,717 39.5 8,925 (7) 8 37 (155.8) NM 380.5 NM 39.6 8.2 ——— 2.4 2.0 1.4 (3.2) 3.1 13.6 — 0.1 0.1 86.4 Ujjivan Financial Services REDUCE 353 420 18.9 43 0.6 121 1 19 28 (96.6) 3,033.9 47.3 592.1 18.9 12.8 ——— 2.5 2.2 1.9 0.4 12.1 15.8 0.1 0.5 0.8 6.5 Union Bank ADD 86 120 40.3 100 1.5 1,169 (45) 8 33 (656.0) 117.1 330.8 (1.9) 11.2 2.6 ——— 1.4 1.2 0.7 (23.7) 3.9 15.2 — 1.3 5.8 9.9 YES Bank SELL 383 335 (12.5) 883 12.8 2,303 18 20 22 25.7 8.1 9.5 20.9 19.3 17.6 ——— 3.5 3.1 2.7 17.7 16.6 15.9 0.6 0.9 0.9 56.9 Banks Attractive 16,008 232 (89.4) 822.5 144.3 295.4 32.0 13.1 2.1 1.9 1.7 0.7 6.1 13.2 0.4 0.5 0.8 585.7 KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK

Source: Company, Bloomberg, Kotak Institutional Equities estimates -

August 13, August2018 13,

KOTAK ECONOMIC RESEARCH 135

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 10-Aug-18 (Rs) (%) (Rs bn) (US$ bn) (mn) 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E (US$ mn) NBFCs Bajaj Finance SELL 2,808 2,000 (28.8) 1,623 23.6 575 43 68 90 29.2 56.6 31.9 64.7 41.3 31.3 — — — 10.3 8.4 6.8 19.7 22.4 24.0 0.1 0.2 0.3 58.3 Bajaj Finserv REDUCE 7,084 6,100 (13.9) 1,127 16.4 159 176 245 307 10.3 39.7 25.2 40.4 28.9 23.1 — — — 5.6 4.6 3.8 15.6 17.5 18.1 0.2 0.2 0.2 19.2 Bharat Financial Inclusion NA 1,204 — — 168 2.4 139 33 43 54 55.5 31.1 27.2 36.8 28.1 22.1 — — — 5.6 4.6 3.7 16.7 17.9 18.5 — — — 10.3 Cholamandalam REDUCE 1,448 1,500 3.6 226 3.3 156 62 90 110 35.5 44.8 22.1 23.2 16.1 13.1 — — — 4.6 3.7 3.0 20.6 24.5 24.3 0.4 0.7 0.9 7.8 HDFC ADD 1,974 2,075 5.1 3,337 48.5 1,676 75 56 67 52.1 (25.8) 19.0 26.2 35.3 29.7 — — — 5.2 4.5 4.1 23.9 13.8 14.5 1.0 1.1 1.3 69.5 HDFC Standard Life Insurance SELL 465 405 (12.9) 937 13.6 2,007 6 6 7 24.4 14.8 10.9 84.1 73.3 66.1 — — — 21.7 19.4 17.3 27.3 28.0 27.7 0.3 0.3 0.4 11.4 ICICI Lombard SELL 792 620 (21.7) 360 5.2 454 19 26 32 22.0 37.1 21.5 41.7 30.4 25.0 — — — 7.9 6.7 5.6 20.8 23.8 24.2 0.5 0.8 0.9 2.2 ICICI Prudential Life BUY 414 500 20.9 594 8.6 1,436 11 12 13 (3.7) 10.1 7.0 36.6 33.3 31.1 — — — 9.0 7.4 6.2 25.0 24.5 21.8 1.4 0.5 0.5 9.8 IIFL Holdings SELL 742 625 (15.7) 237 3.4 319 29 38 45 32.4 31.5 18.6 26.0 19.7 16.6 — — — 4.7 3.5 3.0 19.0 20.5 20.0 0.8 1.1 1.3 1.5 L&T Finance Holdings ADD 177 190 7.1 354 5.1 1,996 7 13 14 23.7 70.9 12.3 24.2 14.1 12.6 — — — 2.8 2.6 2.2 14.2 18.9 18.8 1.0 1.1 1.4 12.4 LIC Housing Finance BUY 548 610 11.2 277 4.0 505 44 50 58 3.2 13.8 17.5 12.6 11.0 9.4 — — — 2.1 1.7 1.5 14.5 14.3 14.4 1.2 1.4 1.7 12.7

Magma Fincorp BUY 148 200 34.8 40 0.6 237 10 12 15 1,014.5 24.6 25.8 15.3 12.3 9.7 — — — 1.5 1.5 1.3 10.2 12.9 14.1 0.5 1.2 1.5 1.6 -

Mahindra & Mahindra Financial REDUCE 492 500 1.7 304 4.4 614 15 23 28 105.0 58.4 23.2 33.9 21.4 17.4 — — — 3.5 3.1 2.8 11.3 14.3 15.8 0.8 1.3 1.6 10.7 August 13, August2018 13, Max Financial Services ADD 487 650 33.5 131 1.9 268 5 6 6 (20.4) 36.9 1.8 106.2 77.6 76.3 — — — — — — 6.5 8.3 8.0 — 0.5 0.5 4.8 Muthoot Finance ADD 413 480 16.2 165 2.4 400 43 38 40 45.6 (10.8) 4.0 9.6 10.8 10.4 — — — 2.1 1.9 1.6 24.1 18.4 16.9 2.4 2.1 2.2 4.8 PNB Housing Finance REDUCE 1,279 1,325 3.6 214 3.1 167 50 62 75 57.7 25.3 20.9 25.7 20.5 17.0 — — — 3.4 3.0 2.6 14.0 15.2 15.9 0.7 0.3 0.3 5.5

SBI Life Insurance ADD 650 785 20.8 650 9.4 1,000 12 15 18 20.8 26.0 22.9 56.4 44.7 36.4 — — — 10.1 8.5 7.1 19.4 20.6 21.3 0.3 0.4 0.4 3.8 Shriram City Union Finance ADD 1,972 2,250 14.1 130 1.9 66 101 141 174 19.6 40.4 22.7 19.6 13.9 11.4 — — — 2.5 2.2 2.0 12.5 15.8 16.9 0.9 0.9 1.1 1.3 Shriram Transport ADD 1,414 1,550 9.6 321 4.7 227 69 114 130 24.7 64.4 14.3 20.5 12.4 10.9 — — — 2.7 2.2 1.9 13.1 18.3 17.5 0.8 1.1 1.3 30.5 NBFCs Neutral 11,194 163 36.9 14.8 19.4 32.7 28.5 23.8 5.5 4.6 4.0 16.8 16.1 16.8 0.6 0.7 0.8 585.7 Cement ACC SELL 1,545 1,270 (17.8) 290 4.2 188 49 62 70 32.7 27.0 13.8 31.7 25.0 21.9 17.0 13.8 11.9 3.1 2.9 2.6 10.1 11.9 12.5 1.1 1.1 1.1 15.6 Ambuja Cements REDUCE 227 210 (7.7) 452 6.6 1,986 8 9 11 29.7 14.5 23.2 30.3 26.4 21.4 10.1 8.9 7.4 2.2 2.1 2.0 7.4 8.1 9.5 1.6 1.6 1.6 11.6 Dalmia Bharat ADD 2,661 2,900 9.0 237 3.4 89 60 98 128 55.4 62.6 30.3 44.1 27.1 20.8 13.6 10.4 8.5 3.9 3.4 2.9 9.7 13.4 15.2 0.1 0.1 0.1 4.7

Grasim Industries BUY 971 1,275 31.3 639 9.3 657 47 52 69 (30.1) 9.1 32.8 20.5 18.8 14.1 11.9 7.3 6.7 1.1 1.1 1.0 7.0 5.8 7.2 0.6 0.6 0.6 13.9

India Cements REDUCE 117 135 15.4 36 0.5 308 3 5 9 (42.5) 56.2 84.4 35.8 22.9 12.4 9.8 8.4 6.6 0.7 0.7 0.6 2.0 3.0 5.3 0.9 0.9 0.9 8.0 J K Cement ADD 768 890 16.0 54 0.8 70 43 45 79 59.3 3.7 75.4 17.7 17.1 9.8 9.8 10.1 8.3 2.7 2.4 2.0 16.2 15.0 22.3 1.0 1.0 1.0 0.6 JK Lakshmi Cement ADD 320 370 15.6 38 0.5 118 4 11 28 (35.7) 153.5 147.9 71.6 28.2 11.4 13.3 9.9 6.4 2.6 2.4 2.0 3.7 8.9 19.5 0.6 0.6 0.6 0.4 Orient Cement ADD 115 145 26.3 24 0.3 205 2 7 11 237.8 212.9 58.7 53.2 17.0 10.7 11.7 7.9 6.1 2.3 2.1 1.8 4.4 12.9 18.2 0.7 1.3 1.7 0.2 Shree Cement SELL 17,342 12,500 (27.9) 604 8.8 35 397 421 630 3.4 6.0 49.7 43.6 41.2 27.5 23.5 19.2 14.4 6.8 5.9 5.0 16.7 15.4 19.7 0.3 0.3 0.3 5.3 UltraTech Cement SELL 4,243 2,950 (30.5) 1,165 16.9 275 88 126 162 (7.8) 42.7 28.9 48.2 33.7 26.2 23.7 17.6 14.5 4.5 4.0 3.5 9.7 12.6 14.3 0.2 0.2 0.2 19.7 Cement Cautious 3,538 51 6.5 23.6 33.7 34.2 27.6 20.7 15.3 10.9 9.2 2.6 2.4 2.2 7.5 8.6 10.5 0.6 0.6 0.6 80.1

Source: Company, Bloomberg, Kotak Institutional Equities estimates

136 136 KOTAK ECONOMIC RESEARCH

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

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

Company Rating 10-Aug-18 (Rs) (%) (Rs bn) (US$ bn) (mn) 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E (US$ mn) Consumer products Asian Paints REDUCE 1,419 1,325 (6.6) 1,361 19.8 959 21 27 33 2.9 32.1 20.3 69.1 52.3 43.5 42.3 32.8 27.1 16.2 14.1 12.3 24.6 28.8 30.3 0.6 0.8 1.1 22.3 Bajaj Corp. ADD 410 470 14.6 60 0.9 148 14 15 17 (9.4) 7.8 10.3 28.7 26.6 24.1 22.6 21.3 18.1 12.3 12.4 12.3 42.8 46.3 51.2 2.9 3.2 3.4 0.4 Britannia Industries ADD 6,344 6,700 5.6 762 11.1 120 84 104 127 13.5 24.5 22.2 75.8 60.9 49.8 50.1 39.9 32.6 22.4 17.7 14.3 32.9 32.5 31.8 0.4 0.6 0.7 11.7 Coffee Day Enterprises REDUCE 260 290 11.8 55 0.8 211 3 8 10 49.1 129.9 30.0 77.6 33.8 26.0 13.3 12— 10— 2.3 2.2 2.0 3.1 6.6 8.0 — — — 0.8 Colgate-Palmolive (India) ADD 1,138 1,250 9.8 310 4.5 272 24 27 32 15.2 14.7 15.6 47.9 41.7 36.1 27.4 24.0 20.9 20.3 20.5 17.5 46.2 48.8 52.2 2.1 1.4 1.7 8.2 Dabur India REDUCE 442 390 (11.8) 781 11.3 1,762 8 9 10 7.2 17.3 12.9 56.9 48.5 43.0 48.2 40.6 35.1 13.7 13.7 11.9 25.9 28.1 29.6 1.7 0.8 1.0 14.2 GlaxoSmithKline Consumer ADD 6,741 7,300 8.3 283 4.1 42 166 199 223 6.6 19.5 12.1 40.5 33.9 30.2 28.0 23.5 20.2 8.1 7.3 6.6 21.2 22.8 23.0 1.1 1.3 1.6 2.2 Godrej Consumer Products SELL 1,294 1,100 (15.0) 882 12.8 681 21 25 29 11.5 18.8 13.7 60.6 51.0 44.9 43.0 36.2 31.4 14.1 12.0 10.4 25.2 25.4 24.8 0.5 0.7 0.7 9.5 Hindustan Unilever REDUCE 1,753 1,570 (10.4) 3,794 55.1 2,160 25 29 33 25.0 19.5 13.2 71.4 59.8 52.8 51.3 41.4 36.4 53.5 46.8 39.7 78.1 83.5 81.4 1.1 1.2 1.4 35.8 ITC ADD 305 330 8.3 3,725 54.1 12,275 9 10 11 7.8 8.2 12.3 34.2 31.6 28.1 22.5 20.4 18.1 7.3 6.8 6.4 19.4 20.4 22.2 1.7 1.9 2.2 48.8 Jubilant Foodworks BUY 1,521 1,650 8.5 201 2.9 132 15 25 35 191.7 73.6 37.5 104.5 60.2 43.8 44.7 30.2 22.8 20.7 14.9 11.4 21.7 28.9 29.5 0.1 0.1 0.2 38.6 Jyothy Laboratories ADD 222 240 8.0 81 1.2 364 4 6 7 (26.4) 27.6 16.7 50.4 39.5 33.9 30.9 26.4 22.4 7.1 6.1 5.3 14.4 16.6 16.8 0.2 0.5 0.7 1.6 Marico ADD 365 375 2.7 471 6.8 1,291 6 7 8 7.4 8.9 20.0 58.2 53.5 44.6 41.1 37.2 30.7 18.5 17.5 16.3 33.2 33.7 37.9 1.1 1.3 1.5 9.7 Nestle India ADD 10,686 11,000 2.9 1,030 15.0 96 127 171 197 21.1 34.2 15.7 84.1 62.7 54.1 46.3 35.9 31.0 30.1 27.7 25.4 36.6 46.1 49.0 0.8 1.1 1.3 8.7 Page Industries SELL 31,417 25,000 (20.4) 350 5.1 11 311 418 508 32.5 34.3 21.6 101.0 75.2 61.8 64.4 48.6 40.1 41.4 31.8 25.2 45.9 47.8 45.5 0.4 0.6 0.7 8.6 Pidilite Industries REDUCE 1,123 1,080 (3.8) 570 8.3 508 18 21 26 7.5 16.8 21.8 62.2 53.3 43.8 41.6 35.4 29.2 16.0 13.5 11.4 26.0 27.4 28.2 0.5 0.6 0.7 13.6 S H Kelkar and Company BUY 195 290 48.7 28 0.4 145 7 7 10 2.1 (6.2) 41.9 26.4 28.1 19.8 18.4 18.2 13.1 3.3 3.0 2.7 12.8 11.3 14.5 0.9 0.9 1.0 0.3 Tata Global Beverages REDUCE 234 250 7.0 147 2.1 631 7 8 9 20.7 7.7 17.0 31.8 29.5 25.2 16.7 16.2 14.2 2.1 2.0 1.9 7.0 7.0 7.9 1.1 1.3 1.5 13.6 Titan Company SELL 920 840 (8.7) 817 11.9 888 13 16 20 43.3 25.6 21.8 72.0 57.3 47.1 49.3 38.1 30.4 16.1 13.5 11.4 24.3 25.6 26.3 0.4 0.5 0.6 38.9 United Breweries SELL 1,200 1,000 (16.7) 317 4.6 264 15 19 24 71.6 29.7 23.4 80.4 62.0 50.3 35.4 29.5 25.5 11.8 10.1 8.6 15.7 17.6 18.6 0.2 0.2 0.3 11.1 United Spirits REDUCE 605 590 (2.5) 440 6.4 727 8 10 13 39.1 34.7 30.9 79.6 59.1 45.1 45.8 34.3 27.8 17.6 12.1 8.9 24.9 24.2 22.7 — — 0.3 18.1 Varun Beverages ADD 756 800 5.8 138 2.0 183 12 15 20 377.8 29.8 34.5 65.6 50.6 37.6 19.9 16.8 14.3 7.8 7.0 6.0 12.1 14.6 17.1 — — 0.1 1.6 Consumer products Cautious 16,605 241 14.5 17.6 15.9 55.0 46.8 40.3 35.9 30.3 26.0 13.5 12.2 10.9 24.6 26.2 27.1 1.0 1.1 1.3 318.3 Energy BPCL REDUCE 402 375 (6.6) 871 12.7 1,967 40 38 39 (1.5) (6.7) 3.1 10.0 10.7 10.4 8.1 7.7 7.3 2.3 2.1 1.9 24.8 20.5 19.1 5.2 3.7 3.9 31.4 Castrol India SELL 158 155 (1.8) 156 2.3 989 7 7 8 3.3 2.9 10.1 23.0 22.3 20.3 14.3 14.0 12.6 15.3 14.7 14.3 67.9 67.1 71.5 3.0 3.5 4.0 4.1 GAIL (India) BUY 363 440 21.2 818 11.9 2,255 20 26 29 21.8 27.8 10.0 17.8 13.9 12.6 11.1 8.7 8.0 2.0 1.9 1.7 11.7 14.0 14.1 2.0 2.3 2.6 22.2 GSPL SELL 200 175 (12.7) 113 1.6 564 12 11 11 34.5 (6.5) (0.5) 16.9 18.1 18.2 8.7 6.9 6.9 2.2 2.0 1.9 14.0 11.7 10.7 0.9 0.8 0.8 1.6 HPCL REDUCE 286 285 (0.4) 436 6.3 1,524 42 32 32 (3.2) (22.3) (2.2) 6.9 8.8 9.0 5.9 7.5 7.9 1.8 1.6 1.5 28.7 19.6 17.4 5.9 4.6 4.5 29.0 Indraprastha Gas SELL 300 240 (19.9) 210 3.0 700 10 12 13 19.0 16.4 12.3 29.1 25.0 22.2 18.3 15.9 14.0 6.0 5.1 4.5 22.4 22.1 21.5 0.7 0.8 1.0 11.3 IOCL REDUCE 166 160 (3.8) 1,616 23.5 9,479 21 17 18 (24.8) (17.9) 7.4 8.1 9.9 9.2 4.7 5.5 5.0 1.4 1.3 1.2 18.5 14.0 14.0 6.9 4.1 4.4 24.8 Mahanagar Gas ADD 950 965 1.6 94 1.4 99 48 56 60 21.5 16.0 7.6 19.6 16.9 15.7 11.9 9.9 9.0 4.5 3.9 3.5 24.3 24.8 23.5 2.0 2.3 2.5 5.1

ONGC ADD 169 200 18.2 2,172 31.5 12,833 17 20 20 3.1 16.8 0.3 9.7 8.3 8.3 5.2 4.0 3.8 1.0 0.9 0.9 9.9 11.2 10.6 3.9 4.0 4.1 18.8 India Daily Summary Daily Summary India Oil India SELL 214 220 3.0 242 3.5 1,135 25 24 24 22.6 (1.3) (0.7) 8.6 8.8 8.8 6.7 6.1 6.0 0.9 0.8 0.8 9.8 9.7 9.2 4.8 5.1 5.1 3.0 Petronet LNG BUY 224 280 24.8 336 4.9 1,500 14 16 18 22.1 16.7 13.1 16.2 13.8 12.2 10.7 9.3 7.8 3.5 3.0 2.7 23.3 23.3 23.2 2.0 2.5 3.3 12.6 Reliance Industries SELL 1,204 985 (18.2) 7,126 103.5 5,922 59 69 78 16.9 17.6 12.4 20.4 17.3 15.4 14.8 11.7 10.0 2.4 2.2 1.9 11.6 12.2 12.1 0.5 0.5 0.6 122.8 Energy Attractive 14,191 206 1.0 6.1 6.9 13.8 13.0 12.1 8.9 7.8 7.1 1.8 1.7 1.5 13.3 12.9 12.6 2.4 2.0 2.2 286.6

Source: Company, Bloomberg, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK

-

August 13, August2018 13,

KOTAK ECONOMIC RESEARCH 137

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 10-Aug-18 (Rs) (%) (Rs bn) (US$ bn) (mn) 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E (US$ mn) Industrials ABB SELL 1,206 1,020 (15.5) 256 3.7 212 20 26 29 12.1 30.1 14.2 60.9 46.8 41.0 33.5 27.4 24.5 7.1 6.5 5.9 12.2 14.5 15.1 0.3 0.7 0.7 1.1 BHEL REDUCE 73 78 6.8 268 3.9 3,671 2.2 2.6 5.0 62.7 16.5 95.3 33.3 28.5 14.6 8.1 7.6 4.0 0.8 0.8 0.8 2.5 2.9 5.6 2.5 2.9 5.7 10.2 Carborundum Universal SELL 348 322 (7.5) 66 1.0 189 11 14 17 22.8 25.0 21.4 30.5 24.4 20.1 16.5 13.4 10.9 4.2 3.8 3.4 14.6 16.3 17.8 0.5 1.2 1.5 0.4 CG Power and Industrial BUY 60 65 7.9 38 0.5 627 0.8 3.1 4.3 (72.2) 275.7 40.5 73.8 19.6 14.0 10.9 8.2 6.7 1.4 1.5 1.4 1.5 7.3 10.4 — — — 7.8 Crompton Greaves Consumer SELL 266 215 (19.2) 167 2.4 627 5.2 6.2 7.5 13.3 19.5 20.7 51.5 43.1 35.7 31.6 26.8 22.8 21.1 14.7 11.3 49.5 40.4 35.8 0.6 0.8 0.9 2.7 Cummins India REDUCE 653 680 4.1 181 2.6 277 24 28 32 (7.8) 16.1 13.9 27.0 23.2 20.4 23.7 20.4 16.9 4.5 4.2 3.9 17.4 18.9 20.1 2.3 2.2 2.6 4.1 Havells India SELL 674 485 (28.0) 421 6.1 625 11 14 17 16.6 26.6 20.5 60.8 48.0 39.9 38.9 30.8 25.1 11.3 9.9 8.7 19.8 22.0 23.2 0.5 0.7 0.9 13.5 Kalpataru Power Transmission BUY 364 560 54.0 56 0.8 153 18 23 32 50.6 26.0 39.1 19.9 15.8 11.3 8.4 7.0 5.5 2.1 1.9 1.6 11.0 12.5 15.2 0.5 0.5 0.5 0.7 KEC International BUY 301 410 36.0 77 1.1 257 18 21 27 51.1 16.9 29.7 16.8 14.4 11.1 9.2 8.1 6.6 3.9 3.1 2.5 25.7 24.1 25.2 0.6 0.7 1.0 3.1 L&T BUY 1,265 1,600 26.5 1,772 25.7 1,401 52 63 70 22.4 21.7 10.9 24.5 20.1 18.1 20.4 16.1 15.5 3.5 3.2 2.9 15.0 16.8 16.8 1.3 1.8 2.0 43.1 Siemens SELL 1,029 1,000 (2.8) 367 5.3 356 24 29 35 21.2 21.4 21.7 43.0 35.4 29.1 24.8 20.1 16.2 4.5 4.2 3.9 10.8 12.3 14.0 1.0 1.2 1.4 3.2

Thermax REDUCE 1,081 1,010 (6.5) 129 1.9 113 21 28 39 (3.6) 34.7 39.2 52.4 38.9 27.9 32.0 24.7 18.3 4.5 4.2 3.8 8.8 11.1 14.3 0.6 0.9 1.0 0.8 -

Voltas SELL 621 530 (14.7) 205 3.0 331 17 17 21 10.7 0.4 18.8 35.9 35.8 30.1 30.8 26.8 21.9 5.3 4.7 4.2 15.9 13.9 14.8 0.6 0.6 0.7 14.1 August 13, August2018 13, Industrials Neutral 4,003 58 19.8 21.9 20.4 31.2 25.6 21.3 20.5 16.6 14.5 3.4 3.1 2.9 10.8 12.3 13.7 1.1 1.5 1.8 104.6 Infrastructure Adani Ports and SEZ BUY 379 460 21.3 786 11.4 2,071 18 19 23 (2.1) 1.2 21.1 20.5 20.3 16.7 13.7 13.8 11.4 3.7 3.2 2.7 19.8 17.0 17.7 0.5 0.5 0.5 24.4

Ashoka Buildcon BUY 145 210 44.5 41 0.6 282 8 8 9 34.6 0.5 5.2 17.3 17.2 16.3 13.9 11.8 10.5 2.1 1.8 1.7 13.0 11.4 10.7 0.7 1.1 0.8 0.7 Container Corp. SELL 639 635 (0.7) 312 4.5 487 18 21 25 7.1 17.4 20.9 36.2 30.9 25.5 23.9 19.0 15.0 3.3 3.1 2.8 9.4 10.3 11.6 2.7 1.4 1.6 7.2 Dilip Buildcon BUY 845 1,220 44.3 116 1.7 137 46 54 69 76.5 16.1 28.0 18.2 15.7 12.3 10.1 7.4 6.1 4.7 3.6 2.8 29.5 25.9 25.4 — — — 8.8 Gateway Distriparks BUY 185 250 35.3 20 0.3 109 8 7 8 11.2 (5.8) 15.2 24.3 25.8 22.4 23.1 11.4 9.5 2.0 3.5 3.0 8.2 9.8 14.5 3.8 — 1.6 0.8 Gujarat Pipavav Port BUY 109 150 37.2 53 0.8 483 4.1 5.3 6.5 (20.6) 29.7 22.9 26.5 20.5 16.7 12.9 10.9 8.9 2.6 2.6 2.5 9.8 12.7 15.3 3.1 4.1 4.9 0.8 IRB Infrastructure BUY 193 320 65.7 68 1.0 351 23 31 33 10.8 36.8 7.1 8.6 6.3 5.8 6.9 6.6 7.0 1.2 1.0 0.9 14.5 17.6 16.3 1.2 1.6 2.1 6.3 Mahindra Logistics REDUCE 566 565 (0.1) 40 0.6 71 10 15 21 16.2 50.7 39.3 57.7 38.3 27.5 33.3 21.3 15.4 9.6 7.9 6.4 18.2 22.7 25.8 — — — 0.8 Sadbhav Engineering BUY 279 440 57.8 48 0.7 172 13 18 18 17.4 38.4 2.2 21.7 15.7 15.3 15.1 12.0 9.3 2.6 2.2 2.0 12.5 15.2 13.7 — — — 0.8

Infrastructure Attractive 1,482 22 5.9 11.0 18.8 21.4 19.3 16.2 13.2 11.9 10.1 3.2 2.8 2.5 15.1 14.8 15.3 1.1 0.8 0.9 50.5

Internet Info Edge ADD 1,480 1,425 (3.7) 180 2.6 122 23 26 33 33.3 14.9 27.5 65.8 57.2 44.9 55.4 43.4 32.8 8.5 6.8 6.1 13.4 13.2 14.3 0.4 0.6 0.6 2.6 Just Dial ADD 567 610 7.7 38 0.6 67 21 26 30 21.7 23.0 15.0 26.7 21.7 18.9 15.9 12.2 9.9 3.9 3.4 2.9 15.2 16.7 16.6 — 0.5 0.5 47.5 Internet Cautious 219 3 28.0 17.6 23.0 52.4 44.6 36.2 41.3 32.6 25.7 7.1 5.8 5.1 13.5 12.9 14.2 0.3 0.5 0.6 50.0 Media DB Corp. REDUCE 255 270 6.0 47 0.7 184 18 20 23 (14.1) 14.9 12.3 14.5 12.6 11.2 7.7 6.9 6.1 2.8 2.5 2.5 19.9 20.7 22.3 5.1 6.6 8.3 0.6 DishTV ADD 68 90 32.6 125 1.8 1,925 (0.4) 1.8 3.4 (143.0) 514.6 88.2 NM 37.1 19.7 11.2 5.8 4.6 1.9 1.8 1.7 (2.3) 5.1 8.9 — — — 7.7 Jagran Prakashan REDUCE 116 131 13.0 34 0.5 311 10 11 12 (9.3) 10.0 13.6 12.0 10.9 9.6 4.8 4.7 4.1 1.8 1.8 1.7 14.3 15.9 18.2 2.6 4.3 6.5 0.5 PVR BUY 1,316 1,360 3.3 62 0.9 47 27 38 50 25.5 41.2 32.3 49.0 34.7 26.2 16.5 13.3 11.3 5.7 5.0 4.3 12.3 15.3 17.6 0.2 0.3 0.4 10.2 Sun TV Network REDUCE 826 925 12.0 326 4.7 394 29 35 39 10.2 20.7 10.9 28.7 23.8 21.4 19.2 16.2 14.1 7.1 6.3 5.7 26.3 28.1 27.9 1.2 2.1 2.4 21.6 Zee Entertainment Enterprises ADD 517 600 16.1 496 7.2 960 15 17 20 7.8 11.3 17.0 34.4 30.9 26.4 22.3 19.2 16.2 6.6 5.8 5.1 20.3 19.9 20.6 0.5 0.9 1.1 18.0 Media Attractive 1,090 16 (1.8) 28.7 21.0 33.6 26.1 21.6 16.2 12.4 10.6 4.6 4.2 3.8 13.7 16.3 17.7 0.9 1.5 1.8 58.7 Source: Company, Bloomberg, Kotak Institutional Equities estimates

138 138 KOTAK ECONOMIC RESEARCH

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

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

Company Rating 10-Aug-18 (Rs) (%) (Rs bn) (US$ bn) (mn) 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E (US$ mn) Metals & Mining Coal India ADD 276 326 18.1 1,713 24.9 6,207 11 27 28 (24.2) 138.2 3.0 24.4 10.2 9.9 18.2 6.6 6.2 7.1 6.5 6.7 26.7 66.1 66.4 6.0 7.2 9.1 14.4 Hindalco Industries BUY 223 305 37.0 500 7.3 2,229 22 27 31 155.4 25.1 13.6 10.2 8.1 7.2 6.4 5.4 4.7 0.9 0.8 0.7 9.7 10.6 10.8 0.5 0.5 0.5 36.4 Hindustan Zinc ADD 287 290 1.1 1,212 17.6 4,225 22 22 26 9.3 3.7 14.7 13.3 12.9 11.2 8.2 7.5 6.1 3.4 2.9 2.5 27.2 24.4 24.2 2.8 2.8 2.8 8.0 Jindal Steel and Power REDUCE 204 215 5.6 197 2.9 968 (8) 8 14 59.3 195.9 68.5 (24.0) 25.0 14.8 9.5 6.8 6.2 0.6 0.7 0.6 (2.7) 2.7 4.3 — — — 30.2 JSW Steel ADD 340 350 3.0 822 11.9 2,417 27 30 27 83.9 10.2 (8.7) 12.7 11.5 12.6 8.1 7.1 7.8 2.9 2.4 2.0 24.8 22.4 17.3 1.0 1.0 1.0 20.6 National Aluminium Co. ADD 70 80 14.4 135 2.0 1,933 4 9 7 12.7 125.8 (21.1) 16.9 7.5 9.5 7.2 3.4 4.4 1.3 1.2 1.2 7.7 16.8 13.0 8.1 8.6 8.6 9.6 NMDC REDUCE 106 120 13.4 335 4.9 3,164 12 12 10 43.3 4.2 (14.3) 9.0 8.7 10.1 4.9 5.3 6.1 1.4 1.3 1.2 15.8 15.3 12.4 5.2 5.2 5.2 4.6 Tata Steel ADD 577 700 21.4 660 9.6 1,205 67 69 82 62.6 3.1 18.4 8.6 8 7.0 6.3 6.2 6.3 1.2 1.0 1.0 17.2 13.1 13.9 1.6 1.7 1.7 71.6 Vedanta BUY 224 370 65.4 832 12.1 3,717 22 32 39 9.6 49.1 19.7 10.4 6.9 5.8 5.6 4.6 3.8 1.3 1.2 1.1 12.9 18.0 19.4 3.6 4.3 5.2 51.8 Metals & Mining Attractive 6,406 93 32.3 40.0 8.5 13.6 9.7 8.9 7.6 6.0 5.6 1.9 1.7 1.6 14.3 17.9 17.8 3.4 3.8 4.4 247.1 Pharmaceutical Apollo Hospitals ADD 944 1,090 15.5 131 1.9 139 8 20 27 (46.9) 133.5 36.7 111.8 47.9 35.0 20.5 17.2 14.5 4.0 3.8 3.5 3.4 8.2 10.5 0.2 0.5 0.7 7.5 Aster DM Healthcare BUY 166 240 44.4 84 1.2 505 3 5 7 163.1 64.2 59.2 60.3 36.7 23.1 16.8 12.5 10.0 3.0 2.8 2.5 5.9 7.8 11.4 - - - 0.3 Aurobindo Pharma ADD 610 640 4.9 357 5.2 584 42 40 48 6.0 (4.5) 20.1 14.6 15.3 12.7 10.2 10.3 8.6 3.1 2.6 2.2 23.2 18.4 17.3 0.7 0.8 1.0 21.0 Biocon SELL 565 330 (41.6) 339 4.9 601 6 8 15 (39.2) 35.9 75.7 91.2 67.1 38.2 40.9 29.2 19.5 6.0 5.6 5.0 6.9 8.7 13.9 0.2 0.5 0.9 22.6 Cipla BUY 621 680 9.5 500 7.3 805 18 24 31 40.2 34.5 31.0 35.5 26.4 20.1 18.4 14.9 11.8 3.4 3.1 2.8 10.2 12.4 14.6 0.6 0.8 1.0 26.4 Dr Lal Pathlabs REDUCE 926 900 (2.8) 77 1.1 83 20 24 29 7.0 19.0 17.9 45.3 38.0 32.3 27.5 23.2 19.4 9.8 8.2 6.8 24.6 23.4 23.1 0.5 0.5 0.6 1.5 Dr Reddy's Laboratories REDUCE 2,214 2,150 (2.9) 367 5.3 166 59 89 118 (18.5) 50.2 32.8 37.5 25.0 18.8 17.3 12.6 8.9 2.9 2.6 2.4 7.8 11.1 12.6 1.1 0.6 0.8 36.5 HCG REDUCE 259 290 11.8 23 0.3 85 2 2 4 (40.0) 39.8 80.3 165.8 118.6 65.8 22.1 19.0 15.8 4.3 4.1 3.9 2.8 3.5 6.1 — — — 0.2 Laurus Labs ADD 438 500 14.1 46 0.7 106 16 16 29 (11.9) 2.4 79.9 27.6 27.0 15.0 13.6 12.5 8.7 3.1 2.8 2.4 11.9 10.9 17.1 — — — 0.5 Lupin REDUCE 809 800 (1.2) 366 5.3 450 38 27 39 (32.9) (28.9) 44.0 21.2 29.9 20.7 13.1 14.0 10.2 2.7 2.5 2.3 12.6 8.6 11.4 1.1 0.5 0.7 40.8 Narayana Hrudayalaya ADD 245 265 8.4 50 0.7 204 3 3 6 (38.1) 23.0 103.2 97.2 79.1 38.9 26.8 22.5 15.7 4.8 4.5 4.1 5.1 5.9 11.0 — — — 0.4 Sun Pharmaceuticals REDUCE 554 500 (9.7) 1,329 19.3 2,406 15 17 24 (47.5) 12.0 42.0 36.5 32.6 23.0 21.5 17.6 13.0 3.5 3.2 2.9 9.8 10.2 13.1 0.4 0.6 0.9 52.4 Torrent Pharmaceuticals NR 1,697 — — 287 4.2 169 40 47 61 (27.4) 18.0 29.6 42.4 35.9 27.7 23.3 15.7 13.4 6.2 5.5 4.8 15.1 15.3 17.2 0.9 0.6 0.8 6.7 Pharmaceuticals Neutral 3,958 57 (25.8) 11.5 36.9 33.2 29.8 21.8 18.2 15.4 11.8 3.6 3.2 2.9 10.7 10.9 13.2 0.6 0.6 0.8 216.9 Real Estate Brigade Enterprises BUY 190 340 79.4 26 0.4 136 11 9 9 (17.7) (15.1) (1.6) 17.1 20.2 20.5 10.7 11.0 10.8 1.1 1.1 1.0 7.6 5.5 5.2 1.3 1.3 1.3 0.3 DLF RS 197 — — 351 5.1 1,784 20.5 5.3 23.9 427.2 (74.4) 354.6 9.6 37.4 8.2 29.6 52.7 9.2 1.0 1.0 0.9 12.2 2.6 11.3 1.0 1.0 1.0 16.7 Godrej Properties SELL 695 400 (42.4) 159 2.3 216 10.9 13.3 15.8 13.5 22.1 19.1 64.0 52.4 44.0 (4,285.6) 309.0 161.0 6.7 4.5 4.1 11.1 10.5 9.7 — — — 2.1 Oberoi Realty BUY 484 560 15.7 176 2.6 340 13 62 44 14.0 385.4 (28.0) 38.0 7.8 10.9 28.4 10.8 13.6 2.7 1.8 1.5 7.3 27.4 15.2 0.4 0.4 0.4 2.4 Prestige Estates Projects ADD 249 315 26.6 93 1.4 375 13 10 10 24.3 (24.2) 8.4 19.8 26.2 24.1 14.2 14.7 14.8 2.0 1.9 1.7 10.3 7.3 7.5 0.6 0.6 0.6 1.1 Sobha REDUCE 531 510 (3.9) 50 0.7 95 23 23 36 37.5 2.4 51.7 23.1 22.6 14.9 13.9 13.0 10.2 1.8 2.3 2.1 8.0 9.0 14.8 1.3 1.3 1.3 1.6

Sunteck Realty REDUCE 457 330 (27.8) 67 1.0 140 15 18 20 4.8 20.2 6.9 29.9 24.9 23.3 19.1 20.7 19.2 2.4 2.2 2.0 9.7 9.4 9.2 0.3 0.2 0.2 2.0 India Daily Summary Daily Summary India Real Estate Neutral 922 13 147.2 (19.7) 68.3 17.1 21.4 12.7 25.2 23.1 12.8 1.6 1.5 1.4 9.6 7.1 10.7 0.6 0.6 0.6 26.2 Source: Company, Bloomberg, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK

-

August 13, August2018 13,

KOTAK ECONOMIC RESEARCH 139

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 10-Aug-18 (Rs) (%) (Rs bn) (US$ bn) (mn) 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E (US$ mn) Technology HCL Technologies REDUCE 966 1,025 6.1 1,345 19.5 1,409 62 70 74 5.3 12.8 5.0 15.5 13.7 13.1 10.9 9.0 8.2 3.7 3.1 2.7 24.8 24.2 21.8 0.8 0.9 3.2 30.9 Hexaware Technologies SELL 472 435 (7.8) 140 2.0 302 17 20 23 20.2 18.4 18.0 28.5 24.1 20.4 20.5 18.0 14.2 7.1 6.2 5.2 26.6 27.4 27.8 0.8 1.7 1.7 13.3 Infosys ADD 1,385 1,400 1.1 3,026 43.9 2,175 65 71 78 3.0 9.7 10.4 21.4 19.5 17.7 14.9 13.4 12.0 4.6 4.4 4.0 21.8 23.0 23.5 2.0 3.1 2.8 79.8 L&T Infotech ADD 1,707 2,000 17.2 295 4.3 175 64 83 94 13.9 30.5 13.0 26.9 20.6 18.2 23.6 15.7 13.2 7.7 6.2 5.1 31.8 33.5 30.7 1.0 1.4 1.5 4.3 Mindtree ADD 952 1,115 17.1 156 2.3 165 35 43 53 37.8 24.9 23.6 27.6 22.1 17.9 20.0 13.8 11.0 5.7 4.9 4.2 21.4 23.9 25.2 1.2 1.4 1.7 23.4 Mphasis SELL 1,156 825 (28.6) 223 3.2 193 44 53 57 14.4 20.5 7.1 26.4 21.9 20.4 19.1 16.1 14.3 4.1 4.3 3.9 14.6 18.7 19.9 1.7 1.7 2.2 11.5 TCS REDUCE 1,993 1,790 (10.2) 7,631 110.8 3,829 67 82 89 1.1 21.2 8.8 29.5 24.4 22.4 22.0 17.8 16.4 8.7 7.7 7.5 29.4 33.4 33.8 1.3 2.1 3.6 95.9 Tech Mahindra ADD 646 785 21.5 570 8.3 891 43 46 55 33.1 8.3 18.2 15.1 14.0 11.8 11.1 8.3 6.7 3.1 2.6 2.2 21.5 20.2 20.5 2.2 1.4 1.6 35.9 Wipro REDUCE 279 295 5.8 1,262 18.3 4,507 17 19 22 (3.1) 11.8 14.6 16.5 14.7 12.9 10.4 9.2 8.0 2.6 2.2 2.1 16.0 16.4 16.8 0.4 0.5 3.6 12.5 Technology Cautious 14,648 213 1.6 13.1 9.7 22.9 20.2 18.4 16.6 13.9 12.5 5.4 4.8 4.5 23.7 23.8 24.2 1.3 2.0 3.2 307.6 Telecom

Bharti Airtel ADD 370 445 20.3 1,478 21.5 3,997 5 (6) (4) (42.9) (221.5) 28.8 78.1 (64.3) (90.4) 8.3 9.6 8.1 2.1 2.2 2.3 2.8 (3.4) (2.5) 1.4 0.3 (0.2) 30.9 -

Bharti Infratel REDUCE 290 285 (1.7) 536 7.8 1,850 14 13 12 (7.4) (4.8) (8.5) 21.1 22.1 24.2 7.6 8.2 8.7 3.2 3.3 3.3 15.7 14.6 13.7 5.0 3.6 3.3 11.7 August 13, August2018 13, IDEA REDUCE 54 45 (17.2) 237 3.4 4,359 (10) (17) (17) (656.8) (75.6) (2.4) (5.7) (3.2) (3.2) 12.3 35.1 29.7 0.9 1.1 1.6 (16.0) (29.7) (41.1) — — — 16.8 Tata Communications ADD 569 660 16.1 162 2.4 285 3 0 3 (84.3) (88.7) 694.2 173 1,534.6 193.2 6.8 11.1 9.8 16.2 (70.6) (95.9) 9.0 7.8 (42.1) 2.3 1.1 1.3 4.0 Telecom Cautious 2,413 35 (94.2) (2,087.9) 5.0 667.7 (33.6) (35.4) 8.6 11.0 9.7 2.1 2.3 2.5 0.3 (6.9) (7.2) 2.2 1.0 0.6 63.5

Utilities CESC BUY 914 1,180 29.0 121 1.8 133 87 115 128 67.1 31.7 11.6 10.5 8.0 7.1 7.6 5.7 5.0 0.8 0.8 0.7 7.9 10.0 10.4 1.3 1.4 1.4 5.8 JSW Energy REDUCE 68 70 2.9 112 1.6 1,640 3.1 5.1 6.5 (19.2) 65.9 26.8 22.2 13.4 10.5 7.0 5.7 4.8 1.0 0.9 0.9 4.7 7.2 8.5 - - - 1.6 NHPC ADD 25 30 20.2 256 3.7 10,260 2.4 3.1 3.2 (17.3) 26.9 1.8 10.2 8.1 7.9 9.3 7.4 7.2 0.9 0.8 0.8 8.5 10.4 10.2 5.6 7.0 7.0 2.0 NTPC BUY 160 190 19.1 1,316 19.1 8,245 11 15 16 (7.6) 30.9 4.4 14.0 10.7 10.3 11.2 8.7 8.1 1.3 1.2 1.1 9.5 11.6 11.3 3.5 2.8 2.9 13.9 Power Grid BUY 190 250 31.4 996 14.5 5,232 16 19 21 9.6 19.3 13.6 12.1 10.1 8.9 8.5 7.2 6.6 1.8 1.6 1.5 15.8 17.1 17.5 2.8 3.3 3.7 29.7 Reliance Power SELL 33 43 28.7 94 1.4 2,805 3.5 5.1 5.2 (16.4) 45.6 2.7 9.6 6.6 6.4 7.9 6.8 6.6 0.4 0.4 0.4 4.5 6.1 5.9 — — — 3.9 Tata Power BUY 69 90 29.8 188 2.7 2,705 5.3 6.0 7.0 (9.6) 12.7 15.6 13.0 11.5 10.0 10.1 10.5 10.0 1.2 1.1 1.0 10.7 10.1 10.6 — — — 4.7 Utilities Attractive 3,081 45 (2.4) 26.8 8.6 12.7 10.0 9.2 9.4 7.8 7.2 1.2 1.1 1.1 9.7 11.4 11.4 2.9 2.9 3.1 61.7

Source: Company, Bloomberg, Kotak Institutional Equities estimates

140 140 KOTAK ECONOMIC RESEARCH

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

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

Company Rating 10-Aug-18 (Rs) (%) (Rs bn) (US$ bn) (mn) 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E (US$ mn) Others Astral Poly Technik SELL 1,103 640 (42.0) 132 1.9 120 15 19 25 20.8 30.2 28.8 75.2 57.8 44.9 42.3 31.1 24.7 13.0 10.2 8.4 18.8 19.8 20.5 0.1 0.1 0.1 1.1 Avenue Supermarts SELL 1,589 860 (45.9) 992 14.4 624 13 16 20 47.9 28.6 26.4 126.4 98.3 77.8 74.1 56.7 44.5 21.4 17.6 14.3 18.5 19.6 20.3 — — — — Bayer Cropscience REDUCE 4,234 4,100 (3.2) 167 2.4 34 88 106 130 6.4 20.5 23.1 48.4 40.1 32.6 39.8 29.4 24.0 8.2 7.1 6.1 15.7 18.9 20.0 0.4 0.5 0.6 0.5 Dhanuka Agritech ADD 555 650 17.2 27 0.4 49 26 27 31 7.7 3.9 15.4 21.6 20.8 18.0 15.8 15.2 12.4 4.3 3.7 3.2 21.9 19.2 19.2 1.0 1.0 1.2 0.2 Godrej Agrovet ADD 624 650 4.2 120 1.7 189 12 16 20 6.9 39.8 24.6 54.2 38.8 31.1 27.9 21.5 17.4 7.0 6.1 5.1 14.7 16.9 17.9 0.3 0.4 0.5 1.3 Godrej Industries RS 616 — — 207 3.0 336 15 16 20 6.8 8.9 24.2 42.3 38.8 31.3 37.5 31.7 34.6 5.7 5.1 4.4 14.4 13.9 15.1 0.3 0.3 0.3 4.6 InterGlobe Aviation BUY 1,071 1,220 13.9 412 6.0 383 61 50 83 32.1 (17.9) 65.3 17.6 21.4 13.0 10.2 12.2 7.0 5.8 4.7 3.5 42.9 24.1 31.1 0.6 0.5 0.8 21.9 Kaveri Seed SELL 623 515 (17.4) 41 0.6 66 32 34 34 18.4 7.3 0.1 19.5 18.2 18.1 16.7 15.3 14.6 5.3 4.4 3.8 23.6 26.4 22.4 1.0 1.3 1.6 5.5 PI Industries BUY 772 875 13.3 106 1.5 138 27 31 40 (20.0) 17.9 26.8 29.0 24.6 19.4 21.4 17.5 13.7 5.5 4.7 3.9 20.7 20.5 21.7 0.4 0.5 0.6 1.6 Rallis India ADD 200 220 10.2 39 0.6 195 9 10 12 (1.5) 17.2 19.4 23.2 19.8 16.5 14.4 13.0 11.0 3.3 3.0 2.7 14.6 15.8 17.1 1.7 1.8 2.0 0.8 SIS REDUCE 1,098 1,130 2.9 80 1.2 73 22 33 40 43.3 48.5 21.1 48.9 33.0 27.2 26.3 20.6 17.3 7.8 6.5 5.4 20.1 21.8 21.7 0.2 0.3 0.3 0.7 SRF BUY 1,904 2,200 15.5 109 1.6 57 80 100 132 (10.4) 23.8 32.2 23.7 19.1 14.5 15.3 11.2 8.9 3.1 2.7 2.3 13.7 15.0 17.3 0.6 0.7 0.8 12.4 Tata Chemicals ADD 673 760 13.0 171 2.5 255 51 46 52 6.5 (11.2) 13.6 13.1 14.7 13.0 7.2 6.1 5.1 1.5 1.4 1.3 13.8 10.0 10.5 3.3 2.2 2.5 7.1 TeamLease Services SELL 2,548 1,785 (29.9) 44 0.6 17 43 58 75 28.0 34.2 29.0 59.1 44.0 34.1 61.4 44.6 33.8 9.9 8.1 6.5 18.2 20.1 21.1 — — — 1.4 UPL ADD 637 660 3.7 324 4.7 507 43 49 55 20.9 14.0 12.1 14.8 13.0 11.6 10.2 8.8 7.5 3.5 2.9 2.4 26.4 24.6 22.9 1.3 1.6 1.7 22.4 Vardhman Textiles ADD 1,192 1,400 17.4 68 1.0 56 103 130 140 (8.0) 26.4 7.4 11.6 9.2 8.5 9.8 7.2 6.5 1.4 1.2 1.1 12.7 14.3 13.8 1.3 1.7 2.5 1.0 Whirlpool SELL 1,731 1,350 (22.0) 220 3.2 127 28 37 46 13.0 33.9 24.7 62.6 46.7 37.5 37.3 28.7 22.8 12.2 10.1 8.4 21.4 23.7 24.5 0.2 0.4 0.5 1.2 Others 3,261 47 16.1 8.0 26.4 31.7 29.3 23.2 20.6 18.0 14.3 5.8 5.0 4.2 18.3 16.9 18.2 0.5 0.5 0.7 83.9 KIE universe 113,255 1,644 (5.2) 25.2 27.6 27.7 22.1 17.3 12.9 11.0 9.7 3.1 2.8 2.6 11.2 12.8 14.7 1.3 1.4 1.7 KIE universe (ex-energy) 99,064 1,438 (7.1) 31.6 33.2 32.4 24.6 18.5 14.3 12.1 10.6 3.5 3.1 2.8 10.7 12.7 15.3 1.1 1.3 1.6

Notes: (a) We have used adjusted book values for banking companies. (b) 2018 means calendar year 2017, similarly for 2019 and 2020 for these particular companies. (c) Exchange rate (Rs/US$)= 68.86

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK

-

August 13, August2018 13,

KOTAK ECONOMIC RESEARCH 141 India Daily Summary - August 13, 2018 a sufficient Asof June 30, 2018 n a merger or strategic transaction any, no longer are in effect for this stock y. Such suspension is in compliance with applicable regulation(s)

Percentageof companies covered by Kotak Equities,Institutional within the specified category. Percentageof companies within each category whichfor Kotak Institutional Equities and or its affiliates has provided investment banking services within theprevious months. 12 The * above categories are defined as expectfollows: this = Buy We stock to deliver more than 15% returns theover next months; 12 Add = expectWe this stock to deliver 5-15% returns over the next months; 12 Reduce =expectWe this stock to deliver -5-+5% returns over the next months; 12 =Sell expectWe this stock to deliver less than -5% returns over the next months. 12 targetOur prices are also on a 12-month horizon Thesebasis. ratings are used illustratively to comply with applicableregulations. As of 31/03/2018 Kotak InstitutionalEquities Investment Research had investmentratings on 207 equity securities.

cluded.

fundamental outlook on the Sector.The coverage viewwill consist of one of the following

SELL 0.5% 21.9%

4.5% 25.4% +5% returns over the next 12 months. REDUCE

- 5 - 15% returns over the next 12 months. 5% returns over the next months.12 The information is not available for display is not or applicable. - -

month horizon basis. -

certain other circumstances.

ADD 31.3% 5.0% Kotak SecuritiesKotak has suspended coverage of this company.

Kotak SecuritiesKotak Research has suspended the investment and rating price target, if any,for this stock,because there is not

The information is not meaningful and is therefore ex

Kotak SecuritiesKotak does not cover this company.

The investment and rating target price, any, if have been suspended temporaril

The coverage view represents each analyst’s overall

Attractive, Neutral, Cautious. BUY nd other definitions/identifiers nd 2.0% 21.4% We expect this stock to deliver We expect this stock to deliver 5 We expect this to stock deliver < We expect this to stock deliver more than 15% returns over the next months.12

0% 20% 10% 60% 50% 40% 30% 70% Source:Kotak Institutional Equities Kotak Institutional Equities Research Equities KotakInstitutional coverage universe Distributionof ratings/investment banking relationships NA = NA AvailableNot or Applicable.Not = NM Meaningful.Not involving this company and in CS = Coverage Suspended. = NC Covered.Not = RatingRS Suspended. fundamental basis for determining an investment rating or target. The previous investment and rating price target,if and shouldnot be relied upon. Other definitions Other Coverage view. designations: ratings/identifiers Other NR = Rated.Not and/or Kotak Securities policies in circumstances when Securities Kotak or its affiliates is acting in an advisory capacity i ADD. REDUCE. SELL. Our target prices are also on a 12 Ratings a ratings of Definitions BUY.

Corporate Office Overseas Affiliates Kotak Securities Ltd. Kotak Mahindra (UK) Ltd Kotak Mahindra Inc 27 BKC, Plot No. C-27, “G Block” 8th Floor, Portsoken House 369 Lexington Avenue Bandra Kurla Complex, Bandra (E) 155-157 Minories 28th Floor, New York Mumbai 400 051, India London EC3N 1LS NY 10017, USA Tel: +91-22-43360000 Tel: +44-20-7977-6900 Tel:+1 212 600 8856 Copyright 2018 Kotak Institutional Equities (Kotak Securities Limited). All rights reserved. 1. Note that the research analysts contributing to this report may not be registered/qualified as research analysts with FINRA; and 2. Such research analysts may not be associated persons of Kotak Mahindra Inc and therefore, may not be subject to NASD Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. 3. Any U.S. recipients of the research who wish to effect transactions in any security covered by the report should do so with or through Kotak Mahindra Inc and (ii) any transactions in the securities covered by the research by U.S. recipients must be effected only through Kotak Mahindra Inc at [email protected]. This report is distributed in Singapore by Kotak Mahindra (UK) Limited (Singapore Branch) to institutional investors, accredited investors or expert investors only as defined under the Securities and Futures Act. Recipients of this analysis / report are to contact Kotak Mahindra (UK) Limited (Singapore Branch) (16 Raffles Quay, #35-02/03, Hong Leong Building, Singapore 048581) in respect of any matters arising from, or in connection with, this analysis / report. Kotak Mahindra (UK) Limited (Singapore Branch) is regulated by the Monetary Authority of Singapore. Kotak Securities Limited and its affiliates are a full-service, integrated investment banking, investment management, brokerage and financing group. We along with our affiliates are leading underwriter of securities and participants in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationships with a significant percentage of the companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. Investors should assume that Kotak Securities Limited and/or its affiliates are seeking or will seek investment banking or other business from the company or companies that are the subject of this material and that the research professionals who were involved in preparing this material may participate in the solicitation of such business. Our research professionals are paid in part based on the profitability of Kotak Securities Limited, which include earnings from investment banking and other business. Kotak Securities Limited generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. Additionally, Kotak Securities Limited generally prohibits its analysts and persons reporting to analysts from serving as an officer, director, or advisory board member of any companies that the analysts cover. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Institutional Equities Research Group of Kotak Securities Limited. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Private Client Group. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additionally, other important information regarding our relationships with the company or companies that are the subject of this material is provided herein. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. It is for the general information of clients of Kotak Securities Limited. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, clients should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Kotak Securities Limited does not provide tax advise to its clients, and all investors are strongly advised to consult with their tax advisers regarding any potential investment. Certain transactions -including those involving futures, options, and other derivatives as well as non-investment-grade securities - give rise to substantial risk and are not suitable for all investors. The material is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions expressed are our current opinions as of the date appearing on this material only. We endeavor to update on a reasonable basis the information discussed in this material, but regulatory, compliance, or other reasons may prevent us from doing so. We and our affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this material, may from time to time have "long" or "short" positions in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. Kotak Securities Limited and its non US affiliates may, to the extent permissible under applicable laws, have acted on or used this research to the extent that it relates to non US issuers, prior to or immediately following its publication. Foreign currency denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of or income derived from the investment. In addition, investors in securities such as ADRs, the value of which are influenced by foreign currencies affectively assume currency risk. In addition options involve risks and are not suitable for all investors. Please ensure that you have read and understood the current derivatives risk disclosure document before entering into any derivative transactions. Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house. Kotak Securities Limited is a corporate trading and clearing member of BSE Limited (BSE), National Stock Exchange of India Limited (NSE), MSEI a. Our businesses include stock broking, services rendered in connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management. Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Kotak Securities Limited is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old Mutual Life Insurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI). Kotak Securities Limited is registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014. We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in last five years. However SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise letters or levied minor penalty on KSL for certain operational deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has our certificate of registration been cancelled by SEBI at any point of time. We offer our research services to primarily institutional investors and their employees, directors, fund managers, advisors who are registered with us Details of Associates are available on our website i.e. www.kotak.com Research Analyst has served as an officer, director or employee of subject company(ies): No We or our associates may have received compensation from the subject company(ies) in the past 12 months. We or our associates have managed or co-managed public offering of securities for the subject company(ies) in the past 12 months. YES We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received compensation or other benefits from the subject company(ies) or third party in connection with the research report. Our associates may have financial interest in the subject company(ies). Research Analyst or his/her relative's financial interest in the subject company(ies): No Kotak Securities Limited has financial interest in the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: YES Our associates may have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report. Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No Kotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No Subject company(ies) may have been client during twelve months preceding the date of distribution of the research report. A graph of daily closing prices of securities is available at www.nseindia.com and http://economictimes.indiatimes.com/markets/stocks/stock-quotes. (Choose a company from the list on the browser and select the"three years" icon in the price chart). Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. CIN: U99999MH1994PLC134051, Telephone No.: +22 43360000, Fax No.: +22 67132430. Website: www.kotak.com / www.kotaksecurities.com. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Telephone No: 42856825. SEBI Registration No: NSE INB/INF/INE 230808130, BSE INB 010808153/INF 011133230, MSE INE 260808130/INB 260808135/INF 260808135, AMFI ARN 0164, PMS INP000000258 and Research Analyst INH000000586. NSDL/CDSL: IN-DP-NSDL-23-97. Compliance Officer Details: Mr. Manoj Agarwal. Call: 022 - 4285 8484, or Email: [email protected]. Investments in securities market are subject to market risks, read all the related documents carefully before investing. In case you require any clarification or have any concern, kindly write to us at below email ids: Level 1: For Trading related queries, contact our customer service at ‘[email protected]’ and for demat account related queries contact us at [email protected] or call us on: Toll free numbers 18002099191 / 1800222299 and 18002099292 Level 2: If you do not receive a satisfactory response at Level 1 within 3 working days, you may write to us at [email protected] or call us on 022-42858445 and if you feel you are still unheard, write to our customer service HOD at [email protected] or call us on 022-42858208. Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Name: Mr. Manoj Agarwal) at [email protected] or call on 91- (022) 4285 8484. Level 4: If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach CEO (Mr. Kamlesh Rao) at [email protected] or call on 91-(022) 4285 8301. First Cut notes published on this site are for information purposes only. They represent early notations and responses by analysts to recent events. Data in the notes may not have been verified by us and investors should not act upon any data or views in these notes. Most First Cut notes, but not necessarily all, will be followed by final research reports on the subject. There could be variance between the First cut note and the final research note on any subject, in which case the contents of the final research note would prevail. We accept no liability for the contents of the First Cut Notes. For further disclosure please view https://kie.kotak.com/kinsite/index.php