Kotak Special Situations Value Investment Approach - Series II

STOCK RATIONALE September 2020 STOCKS ADDED

HOUSING DEVELOPMENT FINANCE CORPORATION LTD

HDFC is among the best-placed housing finance corporations (HFCs) in the current volatile environment – a) Its strong funding franchise as seen in its ability to raise long-term funding and access to and scale in deposits b) Vintage and underwriting expertise position it well to take market share, especially in non-individual loans. c) Strong capitalization (Tier 1 at 17%+) with potentially more capital generation from stake sale in Gruh Finance, which it could use to acquire loan portfolios and significantly accelerate core business earnings. This apart, we see significant value accruing from growth of its various financial subsidiaries that are amongst the most valuable companies within their segments. It will benefit significantly from government’s focus on housing (Housing For All by FY22). With best in class return ratios and quality of book, it will continue to command premium valuations. Its current valuation is attractive at 2.2x FY20F P/BV (adjusted for subsidiaries).

Source: Internal Research

INDOCO REMEDIES LTD

Indoco is a fully integrated, research-oriented pharma company with strong brand portfolio in domestic markets (65% of sales) across various therapeutic segments including Respiratory, Anti-Infective, Dental Care, Pain Management, Gastro-intestinal, Ophthalmic, Cardiovascular, Anti-Diabetics, Anti-Obesity, etc. On the international front (~26% of sales), Indoco has tie-ups with large generic companies like Watson (Actavis) – USA and ASPEN-South Africa having a presence in 55 countries. We believe company’s slower growth over last few years due to regulatory woes are largely behind - we expect recovery in EU, US sales to surprise markets over the next 2-years. With 3x capacity expansion in APIs operational from 1QFY21 growth is expected to ramp-up here as well. We see Indoco entering into a high growth phase over the next 2-years and with stock trading at 10x EV/EBITDA we see a favourable risk-reward.

Source: Internal Research

OBEROI REALTY LTD

Oberoi is amongst the best developers focused on high-end residential and commercial properties in ; well known for its strong execution and high-quality development skills. We believe the sector challenges are bottoming out and are confident that Oberoi with its prime location projects and superior quality developments would see a strong recovery ahead. We like the company for 1) potential to surprise on pre-sales from its new launch planned in Thane around Oct-Nov20, 2) growing rental annuity assets from Rs4.5bn to approxRs18bn over next 3-4yrs which could unlock significant value, 3) large ready to sell inventory likely to boost cash flows and 4) strong balance sheet. We believe that velocity in booking and new deals will be crucial for stock’s re-rating ahead and consider that stock attractive at 1.3x P/BV FY22.

Source: Internal Research TOP 10 STOCK HOLDING IN THE PORTFOLIO LTD WEIGHTAGE (%) MARKET PRICE: INR 772.85 6.6 MARKET CAP: INR 23,602 Cr Coromandel International (CRIN) - CRIN is a Murugappa group company, dominant player in Fertilisers (85% of revenue) and Agrochemicals (15%). We expect benefits from tailwinds like commencement of its phos-acid backward integration plant (benefit of nearly US$ 100/ton), lower raw material prices (Ammonia and Sulphur prices have crashed from yearly highs and DAP prices are following suit in the decline) and commencement of its new Mancozeb plant. Additionally, we see stronger EBITDA growth, improved ROEs with share of non-subsidy and crop protection business rising. We believe gross margins could expand going forward and drive steady earnings . The stock is trading at attractive valuations and has a potential to re-rate. Source: Internal Research KRBL LTD WEIGHTAGE (%) MARKET PRICE: INR 289.85 6.5 MARKET CAP: INR 6,770 Cr KRBL is the largest basmati rice player in the country with its India Gate brand commanding a 5-10% price premium for its product over competitors. The brand premium over unorganised players is approx. 20%. The company has 35% market share in India and 25% in Basmati exports out of the country. The company has negligible Working Capital debt and consistently generates over 25% RoCE in its core rice business. Discussions with competitors, suppliers, distributors & other stakeholders indicate that the company’s strategy & business strength are unmatched in the sector. Despite volatility in paddy prices, the company is able to maintain margins, which is indicative of the brand strength. They have launched Quinoa Seeds, Flax Seeds and Chia Seeds in the Middle East markets. These prods sell at significant (3x) premium to their Basmati rice and will add to margins. Additionally the company has a plan to grow India revenues by 50% (cumulatively) over the next three years, through a differentiated product & brand strategy. At 10x ttm PER the stock is trading at highly attractive valuations, for a leading FMCG business in its category with a robust ROCE structure. Source: Internal Research

APL APOLLO TUBES LTD WEIGHTAGE (%) MARKET PRICE: INR 2,916.90 6.0 MARKET CAP: INR 6,191 Cr APL Apollo is the market leader in structural tubes, which is largely an unorganised market. The company has increased its market share from 41% over the past 5 years. More recently, this share has further risen to nearly 50%. The company has the widest distribution reach among its peers with 25 warehouses, 650 dealers and 50,000 retailers. It will be extremely difficult for any competitor to create such a widespread distribution reach considering that each dealer/retailer has limited space available to keep inventory and would prefer to work with top brand with most SKUs and fastest service. With the new DFT technology APL Apollo will further increase its market share as it can provide customised products to clients and OEMs. The company has capacity of 2.5mT and its utilisation last year was 1.6mT. Hence volumes have room to expand materially over the next two years, coupled with EBITDA/Tonne rising from current levels of Rs 3400 by 15%-20%. Source: Internal Research

Data as on September 30, 2020 TOP 10 STOCK HOLDING IN THE PORTFOLIO PERSISTENT SYSTEMS LTD WEIGHTAGE (%) MARKET PRICE: INR 1,341.25 5.4 MARKET CAP: INR 8,049 Cr Persistent specializes in software product development and technology services. It helps enterprises to transform their business to software-driven business in North America, Europe, and Asia. Management expects to outperform industry-growth rate with double-digit revenue growth starting from 2019 supported by healthy traction in digital business. It is aggressively focusing on newer technologies such as machine learning, block chain, IoT, data and digital which should elevate its growth trajectory. We believe most of the disappointments are priced in; and think likely positive surprise on revenue growth and improved margin trajectory could significantly re-rate the stock from current valuations of 11x PE to near 15-16x over the next 1-2years. Source: Internal Research

HUHTAMAKI PPL LTD WEIGHTAGE (%) MARKET PRICE: INR 310.50 5.1 MARKET CAP: INR 2,238 Cr The company is a leading player in flexible packaging space. It has all major FMCG players as customers. They have added large capacities in Sikkim and Guwahati and those have gone onstream. The company is a play on FMCG vol growth, at significantly cheaper valuations. With company's new facilities contributing to sales in the current year, business volumes are expected to pick up. Additionally, with the impact of GST behind, contraction in margins is also likely to reverse. The stock trades at attractive valuations currently of approx. 7% OCF yield and this is likely to expand as the business rebounds. Source: Internal Research

BHARTI AIRTEL LTD WEIGHTAGE (%) MARKET PRICE: INR 420.95 4.7 MARKET CAP: INR 2,80,716 Cr We believe India mobility revenue has bottomed out and started growing, we expect profitability to improve gradually in the near term. Bharti is the second largest mobile operator in India by subscriber market share and revenue market share post the Voda-Idea merger. We see its efforts to 1) improve 4G coverage, 2) re-capitalize balance sheet through recently concluded Rights Issue and Africa IPO; has significantly improved its market positioning. We believe the company would be able to meet its interest and capex needs from recent capital raised and improving operational cash flows. The company is likely to see 1) improving ARPUs with migration to 4G, 2) potential tariff increases as key catalyst for the company ahead. Worst on financials may be behind for Bharti and the company is a good proxy for playing the data consumption boom in India. Source: Internal Research

Data as on September 30, 2020 TOP 10 STOCK HOLDING IN THE PORTFOLIO KALPATARU POWER TRANSMISSION LTD WEIGHTAGE (%) MARKET PRICE: INR 244.95 4.7 MARKET CAP: INR 4,358 Cr Kalpataru is a diversified infrastructure play predominantly in the Power transmission line projects; enjoys presence in construction and logistics through its subsidiary JMC Projects (67% stake) and Shubham (71.5% stake). KPTL’s transmission business is steady, while Railways segment offers better growth profile going ahead. On Road BOT portfolio (Cap employed of INR20b), there is an intent to divest leading to improved RoCE on consolidated basis. Shubham logistics business model (Hub and Spoke) is also re-aligned with a focus to get sustainable revenue stream of rentals. We believe consistent earnings growth of 15-20% CAGR, improvement in core/JMC execution, divestment of loss making Road BOT assets and improved profitability at Shubham should drive re-rating of the stock. Source: Internal Research

LUX INDUSTRIES LTD WEIGHTAGE (%) MARKET PRICE: INR 1,450.55 4.3 MARKET CAP: INR 3,437 Cr Lux has a diversified presence across all categories with 52%/13%/34% revenue coming from economy/medium/premium categories. With faster growth in the premium categories (including Lyra and GenX), share of premium is expected to increase to 41% by FY22. 4 brands with >Rs2.5bn sales: Venus, Cozi, Lyra and GenX are >Rs2.5bn brands. Whilst Venus/Cozi are strong mass brands, Lyra/GenX are strong premium brands. Inferno and ONN in the medium and premium categories are also showing strong traction with FY19 revenue of Rs810mn and Rs960mn respectively. After Page, Lux is the only company to have a strong presence in womenswear (Lyra) with revenue of >Rs2.5bn in FY20. Moreover, Lyra is Lux’s fastest growing brand with 25% revenue CAGR over FY15-20; Lyra is no.1 brand for leggings in India. Including Lyra and GenX, the share of premium wear has increased from 10% in FY15 to 30% in FY20 and this is expected to increase progressively going forward. Gross margin (standalone) consequently improved from 47% in FY15 to over 50% in FY20. Considering strength of business and improving fundamentals Lux trades at attractive valuations post consolidation of Lyra and GenX. Source: Internal Research

OBEROI REALTY LTD WEIGHTAGE (%) MARKET PRICE: INR 394.20 3.9 MARKET CAP: INR 13,362 Cr Oberoi is amongst the best developers focused on high-end residential and commercial properties in Mumbai; well known for its strong execution and high-quality development skills. We believe the sector challenges are bottoming out and are confident that Oberoi with its prime location projects and superior quality developments would see a strong recovery ahead. We like the company for 1) potential to surprise on pre-sales from its new launch planned in Thane, 2) growing rental annuity assets from Rs4.5bn to approxRs18bn over next 3-4yrs which could unlock significant value, 3) large ready to sell inventory likely to boost cash flows and 4) strong balance sheet. We believe that velocity in booking and new deals will be crucial for stock’s re-rating ahead and consider that stock attractive at current valuations. Source: Internal Research

Data as on September 30, 2020 TOP 10 STOCK HOLDING IN THE PORTFOLIO LTD WEIGHTAGE (%) MARKET PRICE: INR 791.75 3.4 MARKET CAP: INR 76,530 Cr Tech Mahindra has over the years, developed a niche in telecom vertical by providing end-to-end services to telecom OEMs and entered into the enterprise solutions through its acquisition of erstwhile Satyam. Additionally, it has diversified its exposure to other verticals like BFSI, Manufacturing. Currently both, its revenue and margins cyclicality are near-trough in our view. Its margins should bottom out in 1QFY21, and revenue performance should start stabilizing by 2Q given its order book. We believe Tech M's large deal signings provide a strong platform to return to double digit revenue growth from 2021. Strength in the Telecom segment positions it well for 5G led opportunities. Valuations are at 12x FY22PE a 50% discount to larger/mid-cap IT services companies which we believe will re-rate at earnings momentum resumes. Source: Internal Research

DISCLAIMERS

The Portfolio Manager shall have the sole and absolute discretion under discretionary services offered to invest with a view to achieve the objective of investment agreed upon by client and portfolio manager in respect of the Client's account in any type of security subject to the Agreement and as stated in the Disclosure Document. Portfolio Manager reserves right to make changes in the investments and invest some or all of the Client's investment amount in such manner and in such markets as it deems fit. The current portfolio is constructed based on the current market conditions and future buy/sell decisions will be dependent on the future market events. Investments in securities are subject to market risk and there is no assurance or guarantee of the objectives of the Portfolio being achieved or safety of corpus. Past performance does not guarantee future performance. Investors must keep inmind that the aforementioned statements/presentation cannot disclose all the risks and characteristics. Investors are requested to read and understand the investment strategy, and take into consideration all the risk factors including their financial condition, suitability to risk return profile, and the like and take professional advice before investing. Opinions expressed are our current opinions as of the date appearing on this material only. We have reviewed the document though its accuracy or completeness cannot be guaranteed. Neither the company, nor any person connected with it, accepts any liability arising from the use of this document. The recipients of this material should rely on their own investigations and take their own independent professional advice. While we endeavour to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. Investors and others are cautioned that any forward - looking statements are not predictions and may be subject to change without notice. This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Persons into whose possession this document may come are required to observe this restriction. This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This document is not to 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. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients.

Data as on September 30, 2020