INDIA DAILY

November 3, 2020 India 2-Nov 1-day 1-mo 3-mo Sensex 39,758 0.4 2.7 7.6 Nifty 11,669 0.2 2.2 7.1 Contents Global/Regional indices Dow Jones 26,925 1.6 (2.7) 1.0 Daily Alerts Nasdaq Composite 10,958 0.4 (1.1) 0.5 Results FTSE 5,655 1.4 (4.2) (6.3) HDFC: Business trends improving, moratorium book to be monitored Nikkei 23,295 1.4 1.2 5.0 Hang Seng 24,460 1.5 4.3 0.0 NTPC: Strong showing continues KOSPI 2,332 1.4 0.2 3.6

IOCL: Weak results Value traded – India Embassy Office Parks REIT: Holding-up Cash (NSE+BSE) 580 554 594 11,45 Derivatives (NSE) 15,196 42,555 Whirlpool: 2QFY21 fares better than expected 6 Jindal Steel and Power: Steel continues to shine Deri. open interest 3,512 5,320 3,036 Zee Entertainment Enterprises: Slow progress

City Union Bank: Need to bite into the promise Forex/money market Change, basis points Escorts: Strong performance, margins to sustain 2-Nov 1-day 1-mo 3-mo

Shriram City Union Finance: Improvements continue Rs/US$ 74.5 (2) 128 (71) Results, Change in Reco 10yr govt bond, % 6.2 1 (20) 6 Bandhan Bank: Recovering gradually Net investment (US$ mn) 29-Oct MTD CYTD Just Dial: Core business on a weak trajectory FIIs (190) - 6,546

Mahindra Logistics: Swift recovery, swifter price move MFs (181) - 1,058 Company alerts Top movers Change, % Cummins India: The India ecosystem: a boon more than a bane Best performers 2-Nov 1-day 1-mo 3-mo

Sector alerts AL IN Equity 82 3.6 7.3 65.9 Automobiles & Components: Festive season to be the key JSTL IN Equity 309 0.1 9.7 40.3 TTMT/A IN Equity 55 (1.1) (11.4) 38.1

HAVL IN Equity 782 7.4 17.3 33.7

APHS IN Equity 2,069 (2.4) (1.0) 31.4

Worst performers

EDEL IN Equity 53 (4.9) (9.6) (31.6)

IHFL IN Equity 140 0.2 (10.4) (23.2)

BHEL IN Equity 28 (0.5) (5.9) (23.1)

VEDL IN Equity 95 (1.1) (31.1) (17.9)

BPCL IN Equity 346 (2.3) (2.0) (17.1)

[email protected] Contact: +91 22 6218 6427

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. ADD HDFC (HDFC) https://ultraviewer.et/en/own Diversified Financials NOVEMBER 02, 2020 load.html RESULT Sector view: Attractive

Business trends improving, moratorium book to be monitored. Strong liability-side CMP (`): 2,041 re-pricing and improvement in business momentum during September were key positives in Fair Value (`): 2,240 HDFC’s 2Q performance. Collection efficiency in September was strong (96% in individual business) and on expected lines although the performance of its moratorium book was a tad BSE-30: 39,758 weak and may need to be monitored over the next few months. Overall business outlook remains positive with improvement in real estate sales and NIM support. Retain ADD with FV of Rs2,240 (up from Rs2,075). HDFC Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 2,041/2,240/ADD EPS (Rs) 61.3 67.7 81.5 52-week range (Rs) (high-low) 2,500-1,473 EPS growth (%) (40.3) 10.3 20.4 Mcap (bn) (Rs/US$) 3,665/49.3 P/E (X) 33.3 30.2 25.0 QUICK NUMBERS ADTV-3M (bn) (Rs/US$) 9.1/0.2 P/B (X) 3.4 3.1 2.9 Shareholding pattern (%) BVPS 606.5 650.5 703.5  Core PBT up 27% Promoters 0.0 RoE (%) 11.0 10.8 12.0 yoy FPIs/MFs/BFIs 70.2/9.4/8.7 Div. yield (%) 1.1 1.2 1.4 Price performance (%) 1M 3M 12M NII (Rs bn) 143 149 168  AUM up 10% yoy; Absolute 14.0 14.5 (4.1) PPOP (Rs bn) 162 175 198 Rel. to BSE-30 10.9 8.3 (3.1) Net profits (Rs bn) 110 121 146 individual AUM up 9% yoy

Business trends displaying signs of improvement  136 bps yoy/28 bps HDFC reported 11% yoy disbursements growth in September followed by 35% yoy growth (22% qoq expansion in adjusting for festive seasonality) in October 2020, significantly improving from previous months; NIM (calculated) to the company had reported 5% yoy decline for 2QFY20. Sharp increase in real estate sales 2.69% (which likely reflects pent-up sales, price cuts, lower interest rates, lower registration charges, etc.) coupled with low home loan rates offered by HDFC (~7% for new loans) has supported business; while it still remains unclear if real estate sales will remain strong, we continue to build in moderate growth in the near term. HDFC has seen massive tailwinds from the funding side. While fall in interest rates is not fully passed on to existing borrowers (the company recently cut rates by 40 bps for existing borrowers), lockdown-related challenges reduced balance transfer applications. We expect NIM compression in 2HFY21 even as funding-side tailwinds continue. Moratorium book collections weak in September Among positive topline momentum, HDFC’s collections were a tad below expectations. The overall collection efficiency in the individual business was 96.3% in September 2020; 99.5% in case of customers who had not opted for moratorium. Thus, collections in the individual moratorium book will be low at about 81%; this compares to the non-prime vehicle finance Nischint Chawathe NBFCs (that have reported ~85-90% collections). However, HDFC’s moratorium book is much smaller (17% in last quarter) as compared to 75-90% for NBFCs. HDFC’s individual home loans M B Mahesh, CFA are finely priced and have demonstrated extremely low credit costs; in this backdrop, marginal rise in credit costs/delinquencies may be considered a negative. It’s still early days though to Dipanjan Ghosh read any trend. HDFC’s long track-record provides a longer rope. Retain ADD; FV Rs2,240 Abhijeet Sakhare We are revising our estimates by -3% to -1%. We expect HDFC to deliver 17-18% medium- term core RoE, up from near-term estimates of 14-15%; a revival in the real estate cycle will likely drive the upside; low leverage will constrain. At our SoTP-based FV of Rs2,240 for HDFC Ashlesh Sonje (up from Rs2,075, reflecting rollover to September 2022E and increase in value of subsidiaries), we value HDFC’s mortgage business at 2.1X core book using RGM; we ration Rs50 bn of recent capital raise to be infused in subsidiaries and add back Rs49 bn of MTM hit on Bandhan reflected in OCI to FY2020 net worth.

[email protected] Contact: +91 22 6218 6427

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

Exhibit 1: HDFC - quarterly data Mach fiscal year-ends, 2QFY20-2QFY21 (Rs mn)

Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS (% chg.) 2QFY21 2QFY21E 2QFY20 1QFY21 2QFY21E 2QFY20 1QFY21 1HFY21 1HFY20 (% chg.) 2021E 2020 (% chg.) 2022E Operating income 117,280 117,924 134,874 130,177 (1) (13) (10) 247,456 264,777 (7) 504,005 587,646 (14) 554,251 Interest income 110,020 112,026 107,809 111,524 (2) 2 (1) 221,543 215,620 3 469,672 437,493 7 511,254 Dividend income 3,230 3,230 10,738 2,982 (70) 8 6,212 10,749 (42) 6,212 10,807 (43) 15,000 Rental income 198 200 176 162 (1) 12 22 360 310 16 650 704 (8) 500 Fee and commission income 588 500 465 322 18 27 82 911 825 10 1,831 1,928 (5) 2,106 Net gain/loss on fair value change 1,660 (32) (3,223) 940 NM NM 77 2,600 (3,674) NM 3,000 91,190 (97) 4,000 Profit on sale of investment (6) 0 16,271 12,412 (100) 12,406 35,213 (65) 13,000 35,238 (63) 5,000 Profit on sale of investment properties 0 0 (1) 0 NM 0 134 (100) 500 351 42 500 Assignment income 1,590 2,000 2,639 1,834 (20) (40) (13) 3,425 5,601 (39) 9,139 9,935 (8) 15,891 Interest expense 73,991 78,171 78,307 78,171 (5) (6) (5) 152,162 155,700 (2) 326,438 310,014 5 362,685 NII 36,028 33,855 29,502 33,353 6 22 8 69,382 59,920 16 143,235 127,480 12 148,569 Net operating income 43,289 39,754 56,567 52,006 9 (23) (17) 95,295 109,078 (13) 177,567 277,632 (36) 191,566 Other income 47 50 67 16 (5) (29) 194 64 125 (49) 244 244 - 244 Total income 43,336 39,804 56,634 52,022 9 (23) (17) 95,358 109,203 (13) 177,812 277,876 (36) 191,810 Operating expenses 3,658 4,000 3,789 3,964 (9) (3) (8) 7,622 7,607 0 15,449 14,980 3 16,549 Employee expenses 1,811 1,449 1,604 25 13 3,415 3,003 14 6,101 5,929 3 6,662 Depreciation expenses 360 333 346 8 4 706 625 13 1,551 1,477 5 1,629 Establishment expenses 76 74 133 2 (43) 209 258 (19) 484 404 20 579 Other expenses 1,412 1,933 1,881 (27) (25) 3,292 3,720 (12) 7,313 7,169 2 7,678 PPOP 39,678 35,804 52,845 48,058 11 (25) (17) 87,736 101,596 (14) 162,363 262,897 (38) 175,261 Provisions 4,360 5,000 7,541 11,990 (13) (42) (64) 16,350 16,441 (1) 26,928 59,131 (54) 25,823 PBT 35,318 30,804 45,304 36,068 15 (22) (2) 71,386 85,155 (16) 135,435 203,766 (34) 149,438 Tax 6,617 6,161 5,689 5,553 7 16 19 12,170 13,509 (10) 25,733 25,813 (0) 28,393 PAT 28,701 24,643 39,615 30,515 16 (28) (6) 59,216 71,646 (17) 109,702 177,953 (38) 121,045 Tax rate (%) 19 20 13 15 -127 bps 618 bps 334 bps 17 16 118 bps 19 13 633 bps 19 Core PBT 33,660 30,646 26,459 29,904 10 27 13 63,564 53,653 18 131,974 115,734 14 136,406 Other details AUM (Rs bn) 5,403 5,489 4,901 5,316 (2) 10 2 5,403 4,901 10 5,710 5,168 10 6,393 Gross NPL ratio (%) 1.8 1.3 1.9 48 bps -6 bps 2.8 2.0 81 bps 3.0 Individual 0.8 0.7 0.9 11 bps -8 bps 1.0 Non-individual 4.2 2.9 4.1 132 bps 9 bps 4.7 CAR (%) 20.7 19.6 17.3 110 bps 340 bps 17.7 Tier I (%) 19.5 18.1 16.2 140 bps 330 bps 16.6 Key calculated ratios (%) Core yields 9.0 9.1 9.8 9.2 -7 bps -78 bps -25 bps 9.14 9.86 -73 bps 9.3 9.7 -38 bps 9.2 Cost of borrowings 6.9 7.2 8.2 7.3 -26 bps -127 bps -41 bps 7.2 8.3 -101 bps 7.4 7.9 -49 bps 7.4 Spread 2.0 1.9 1.6 1.9 19 bps 49 bps 15 bps 1.9 1.6 29 bps 1.9 1.8 12 bps 1.7 Core NIM 2.7 2.4 2.3 2.4 26 bps 36 bps 28 bps 2.6 2.4 17 bps 2.4 2.4 -4 bps 2.3 Cost-to-income 8.4 10.0 6.7 7.6 -161 bps 175 bps 82 bps 8.0 7.0 103 bps 8.7 5.4 330 bps 8.6 Cost-to-average AUM 0.3 0.3 0.3 0.3 -2 bps -4 bps -3 bps 0.3 0.3 -3 bps 0.3 0.3 -2 bps 0.3 Credit cost (% of AUM) 0.3 0.4 0.6 0.9 -4 bps -30 bps -59 bps 0.6 0.7 -7 bps 0.5 1.2 -71 bps 0.4 Balance sheet (Rs bn) Loans 4,751 4,786 4,267 4,657 (1) 11 2 4,751 4,267 11 4,962 4,509 10 5,551 Individuals 3,390 3,072 3,285 10 3 3,390 3,072 10 3,523 3,259 8 4,274 Corporate bodies 1,291 1,122 1,300 15 (1) 1,291 1,122 15 Others 70 73 72 (5) (3) 70 73 (5) Loan book calculations Loan on balance sheet 4,751 4,786 4,267 4,657 (1) 11 2 4,751 4,267 11 4,962 4,509 10 5,551 Loans outside balance sheet 651 703 633 659 (7) 3 (1) 651 633 3 747 659 13 842 Loans under management 5,403 5,489 4,901 5,316 (2) 10 2 5,403 4,901 10 5,710 5,168 10 6,393 Individual loans 4,040 3,994 3,699 3,941 1 9 3 4,040 3,699 9 4,271 4,028 6 5,116 Other loans 1,363 1,494 1,202 1,374 (9) 13 (1) 1,363 1,202 13 1,439 1,140 26 1,277

Notes: (1) We have assumed ESOP expenses worth Rs40 mn in 4QFY20 for calculation of core PBT.

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Subsidiaries contribute ~58% to HDFC’s SoTP HDFC SoTP, March fiscal year-ends, September 2022E

Value of HDFC's holding companies Value per Business/ subsidiaries (%) (Rsmn) share (Rs) Comments HDFC 959 Based on residual growth model; 2X book. Value of subsidiaries and associates 1,227 HDFC Bank 21.2 7,154,815 762 KIE's FV (3X book); 10% holding-company discount. HDFC AMC 52.7 415,163 110 KIE's FV (26.6X PAT), 10% holding-company discount. HDFC Life 50.1 1,241,968 313 KIE's FV (3.75X EV); 10% holding-company discount. HDFC ERGO 50.5 156,697 40 35X FY2020 PAT; 10% holding-company discount. Reflecting upside to CMP from BV; 10% holding- Bandhan Bank 9.9 48,311 2 company discount Equity investments 53 Others 100 95,000 53 Total value per share 2,239

Source: Company, Kotak Institutional Equities estimates

Diversified Financials HDFC

Exhibit 3: HDFC trades at 1.6X one-year rolling forward core PBR HDFC one-year rolling forward core PBR, March fiscal year-ends, November 2004-November 2020 (X)

Rolling core PBR (RHS) 10

8

6

4

2

0

Nov-04

Nov-05

Nov-06

Nov-07

Nov-08

Nov-09

Nov-10

Nov-11

Nov-12

Nov-13

Nov-14

Nov-15

Nov-16

Nov-17

Nov-18

Nov-19 Nov-20

Source: Company, Kotak Institutional Equities estimates

Exhibit 4: HDFC’s core valuation is 1.7X FY2022E core book Valuation table for HDFC, March fiscal year-ends, 2017-2023E

Profit after PE on core P/B on core tax EPS EPS core P/E operations BVPS BVPS Core P/B operations RoE Core RoE Year (Rs mn) (Rs) (Rs) (X) (X) (Rs) (Rs) (X) (X) (%) (%) 2017 78,742 50 38 41 20.3 265 207 7.7 3.7 20.4 21.4 2018 99,770 60 28 34 26.9 389 331 5.2 2.3 18.6 13.3 2019 98,118 57 42 36 18.1 449 341 4.5 2.2 13.8 12.4 2020 178,049 103 45 20 16.9 526 353 3.9 2.2 21.1 13.0 2021E 109,702 61 57 33 13.4 607 411 3.4 1.9 11.0 15.1 2022E 121,045 68 56 30 13.6 650 455 3.1 1.7 10.8 12.9 2023E 145,788 81 68 25 11.2 703 508 2.9 1.5 12.0 14.1

Source: Company, Kotak Institutional Equities estimates

Core PBT strong

PAT declined 28% yoy to Rs28.7 bn due to one-off gains from stake sale in 2QFY20. Adjusted for Rs16.2 bn of one-off gains in 2QFY20, PAT was up 28% yoy on the back of strong 27% yoy growth in core PBT and 42% yoy decline in provisions.

Core PBT (PBT before capital gains, dividend income, fair value change, one-time loan assignment gains, other income, ESOP expenses and provisions) was up 27% yoy on the back of strong 22% yoy growth in NII and marginal 3% yoy decline in expenses. Strong growth in NII was interplay of (1) 10% yoy (1.6% qoq) growth in AUM to Rs5.4 tn and (2) 36 bps yoy/28 bps qoq expansion in NIM (calculated) to 2.69%.

Gradual revival in disbursements and lower disbursements in 1H supported AUM growth. AUM was up 10% yoy; it has however slowed down a bit since 1Q from normalized levels of 13-15% prior to that. On a qoq basis, AUM was up 2%.

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH HDFC Diversified Financials

NIM (calculated) up 36 bps yoy/28 bps qoq to 2.69%. NIM expansion was driven by (1) steep decline in cost of funds to 6.9% (down 125 bps yoy/40 bps qoq), (2) lower liquidity buffers (Rs225 bn in 2QFY21 compared to Rs320 bn in 1QFY21; not clear if this was sustained throughout the quarter) and (3) recent capital infusion. Contraction in yields on the of gradual decline in retail home loan rates however continued to drag margins; calculated yields declined ~80 bps yoy/25 bps qoq to 9%.

Operating expenses declined 3% yoy despite gradual pick up in volumes. While employee expenses increased 25% yoy; other expenses declined 27% yoy. Cost-to average AUM declined 4 bps yoy/3 bps qoq to 27 bps.

HDFC Limited focused on front-loading provisions, overall provision charged to P&L during the quarter declined 42% yoy. Overall ECL coverage was marginally down 5 bps qoq to 2.6% (up 88 bps yoy). The company has high coverage of 25% on stage 2 loans (up 22 bps yoy/down 6 bps qoq).

Individual disbursements bounce; non-individual AUM up 15% yoy

 Disbursements have bounced back to pre-Covid levels. Individual disbursements revived sequentially (up 3% qoq compared to 1% qoq in 1QFY20 and 2% qoq in 4QFY20). Overall individual housing loan disbursements were down 5% yoy in 2QFY21; it was lower in July and August 2020 but bounced back to 11% yoy growth in September 2020 and further jumped to 35% yoy in October 2020. Improving housing sales coupled with competitive rates on home loan due to liability side benefits continue to attract new customers (fresh loans or balance transfers).

 Non-individual loans slowdown sequentially. Non-individual AUM growth slowed down a bit (down 1% qoq compared to 2-8% qoq growth over the past three quarters). The company was aggressive in lending to better rated corporate over the past three quarters and has likely slowed down a bit.

AUM growth to remain moderate in FY2021E

 Muted AUM growth at 10% yoy in FY2021E. We expect AUM growth to remain stable at 10% yoy in FY2021E; similar to 1HFY21 (lower than 12% yoy in FY2020 and 15% yoy in FY2019). Gradual pick up in housing sales driving strong momentum in disbursements and likely higher balance transfers due to competitive retail home loan rates offered by HDFC compared to most frontline banks/HFCs/NBFCs will support AUM growth. This will however be partially offset by higher repayments in 2H compared to 1H and act as a drag. Overall lower repayment rates in FY2021E will however cushion AUMs.

. We expect individual AUM growth to remain muted at 10% yoy in FY2021E; lower than 17-19% yoy growth since FY2018-20. Lower disbursements in 1H will put pressure on AUMs; higher balance transfers and gradual pickup in disbursements. Non-individual AUM growth will be relatively higher as the company will likely focus on lending to better rated corporates; this will however put pressure on yields.

 Competition intensifies in retail segment; HDFC well placed. HDFC is well placed on the funding side with strong traction in deposits and bank borrowings. Additionally, the company has been one of the preferred debt players among debt market participants. This places the company in a sweet sport to compete with other home loan players in the market like SBI, LIC Housing Finance, ICICI Bank and Axis Bank. HDFC’s retail home loan rates for salaried customers with ticket size in the range of Rs2.5-7.5 mn broadly similar to SBI and marginally lower than other lenders. Pricing competition will put pressure on yields, BT (balance transfer) will increase as lockdown reduces.

Diversified Financials HDFC

Exhibit 5: Individual AUM slowed down further to 9% yoy Exhibit 6: Non-individual AUM growth at 13% yoy in 2QFY21 Individual AUM growth, March fiscal year-end, 2QFY11-2QFY21 (%) Non-individual AUM growth, March fiscal year-end, 2QFY11-2QFY21 (%)

25 23

20 20

17 15 14 10 11

8 5

5

0

2QFY11

4QFY11

2QFY12

4QFY12

2QFY13

4QFY13

2QFY14

4QFY14

2QFY15

4QFY15

2QFY16

4QFY16

2QFY17

4QFY17

2QFY18

4QFY18

2QFY19

4QFY19

2QFY20

4QFY20 2QFY21

2QFY12 4QFY12 2QFY13 4QFY13 2QFY14 4QFY14 2QFY15 4QFY15 2QFY16 4QFY16 2QFY17 4QFY17 2QFY18 4QFY18 2QFY11 4QFY11 2QFY19 4QFY19 2QFY20 4QFY20 2QFY21 Notes: 1) Numbers from 1QFY18 are based on Ind-AS. Notes: 1) Numbers from 1QFY18 are based on Ind-AS. Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities

Exhibit 7: We expect muted 10% yoy growth in individual AUM Exhibit 8: We expect muted growth in non-individual segment Individual AUM growth, March fiscal year-end, 2009-2023E (%) Non-individual AUM growth, March fiscal year-end, 2009-2023E (%)

(Rs bn) Individual AUM YoY (%) (%) (Rs bn) Non-individual AUM (%) 6,000 35 1,750 30

4,800 28 1,400 20

3,600 21 1,050 10

2,400 14 700 -

1,200 7 350 (10)

- - - (20)

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2009 2010

2010 2011 2012 2013 2014 2015 2019 2020 2009 2016 2017 2018

2021E 2022E 2023E

2022E 2023E 2021E

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

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH HDFC Diversified Financials

Sharp decline in funding cost drives NIM expansion

 NIM expanded in 2QFY21 on the back of lower funding cost and drop in liquidity buffers. NIM (calculated) expanded 36 bps yoy/28 bps qoq to 2.69%. NIM expansion was driven by (1) steep decline in cost of funds to 6.9% (down 125 bps yoy/40 bps qoq), (2) lower liquidity buffers (Rs225 bn in 2QFY21 compared to Rs320 bn in 1QFY21) and (3) recent capital infusion. Contraction in yields on the of gradual decline in retail home loan rates however continued to drag margins; calculated yields declined ~80 bps yoy/25 bps qoq to 9%.

 Funding cost declined across all instruments. HDFC witnessed 85-170 bps yoy decline in funding cost across all instruments (bank borrowings, bonds and deposits). Cost of debt funding which has increased sharply post IL&FS crisis to peak levels of 8.3% in 1QFY21, declined 170 bps yoy to 6.4%; the company is able to borrow incremental debt funding from primary markets at ~4.9-6.3%, depending on tenor. The company emerged as clear beneficiary post the crisis due to its strong credit rating, conservative underwriting in wholesale segment and high share of granular retail loans.

. Cost of deposits declined 85 bps yoy/35 bps qoq to 7.5%; gradual decline in interest rates on various fixed deposit products has led to drop in cost of deposits. Despite decline in rates, HDFC’s fixed deposits increased 21% yoy owing to (1) relatively higher rates compared to frontline private or PSU banks and (2) strong brand equity compared to smaller deposit taking NBFCs; retail customers have likely become more cautious post concerns related to withdrawal of deposits in Yes Bank, PMC Bank and DHFL. HDFC continues to focus on increasing share of granular sticky retail deposits in overall borrowings mix. The share of retail deposits increased 380 bps yoy to 35% of overall borrowings in 2QFY21.

. Cost of bank borrowings declined 110 bps yoy to 6.8%; down 42 bps qoq.

 NIM compression in 2HFY21E. We expect HDFC’s core NIM to decline 33 bps yoy in 2HFY21E; decline in yields due to lower retail home loan rates and increased share of lending to better rated corporate in non-individual book will be partially offset by lower borrowing cost. Overall NIM will be broadly stable at ~2.4% Intensifying pricing competition in retail home loans will however drag yields leading to NIM compression over FY2022-23E to ~2.3%. Incremental home loan rates are <7.5% translating to <9% yields on the individual home loan book; this compared with blended yields of 9.14% in 1HFY21; as such pricing pressure will drive NIM compression over medium term.

Diversified Financials HDFC

Exhibit 9: Deposits up 21% yoy Calculated rate of interest on borrowings, March fiscal year-ends, 2014-2020, 1QFY19-2QFY21 (%)

IGAAP IGAAP IGAAP IGAAP Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 YoY (%) 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 YoY (%) Total borrowings (Rs bn) 1,843 2,086 2,382 2,805 3,197 3,653 4,191 15 3,325 3,406 3,547 3,653 3,736 3,890 3,951 4,191 4,321 4,209 8 Term loans and ECBs 330 262 427 373 468 777 1,049 35 534 616 747 777 848 838 903 1,049 1,023 882 5 Bonds/debentures/CPs 948 1,163 1,208 1,567 1,816 1,820 1,819 (0) 1,797 1,846 1,752 1,820 1,751 1,829 1,795 1,819 1,864 1,844 1 Deposits 566 661 747 866 913 1,056 1,323 25 994 944 1,048 1,056 1,137 1,223 1,254 1,323 1,433 1,483 21 % share Term loans 17.9 12.6 17.9 13.3 14.6 21.3 25.0 377 bps 16.0 18.1 21.1 21.3 22.7 21.5 22.8 25.0 23.7 21.0 -59 bps Bonds/debentures/CPs 51.4 55.8 50.7 55.9 56.8 49.8 43.4 -643 bps 54.1 54.2 49.4 49.8 46.9 47.0 45.4 43.4 43.2 43.8 -321 bps Deposits 30.7 31.7 31.3 30.9 28.5 28.9 31.6 266 bps 29.9 27.7 29.5 28.9 30.4 31.4 31.7 31.6 33.2 35.2 381 bps Borrowing costs (%) 9.3 9.1 8.7 8.1 7.8 8.1 7.9 -22 bps 7.8 8.4 8.4 8.0 8.4 8.2 7.9 7.5 7.3 6.9 -127 bps Term loans (%) 8.1 8.1 8.1 8.1 5.5 8.1 7.3 -78 bps 6.5 8.8 8.6 7.7 8.4 7.9 7.5 6.7 7.3 6.8 -110 bps Bonds/debentures/CPs (%) 9.2 9.2 9.2 9.2 8.1 8.0 7.9 -12 bps 7.8 8.2 8.2 8.0 8.3 8.1 7.8 7.6 6.9 6.4 -170 bps Deposits (%) 9.7 9.7 9.7 9.7 8.2 8.3 8.3 0 bps 8.2 8.3 8.3 8.0 8.4 8.3 8.2 7.9 7.8 7.5 -86 bps

Source: Company, Kotak Institutional Equities

Exhibit 10: Cost of bond borrowings has dropped from peak levels Cost of HDFC bond yields of various maturities, March fiscal year-ends, March 2011-September 2020 (%)

10.5

9.4

8.3

7.2

6.1

5.0

Sep-11

Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17

Sep-18

Sep-19

Sep-20

Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19 Mar-20

Source: Company, Kotak Institutional Equities, Prime database

Exhibit 11: Comfortable ALM position ALM of HDFC, March fiscal year-ends, 2014-2020 (Rs bn)

Upto 1 year 1 to 5 years >5 years 2014 2015 2016 2017 2018 2019 2020 2014 2015 2016 2017 2018 2019 2020 2014 2015 2016 2017 2018 2019 2020 Assets (a) 618 648 709 736 860 1,044 1,179 1,046 1,221 1,310 1,510 2,128 2,340 2,345 594 671 869 1,117 1,029 1,253 1,718 Liabilities (b) 645 630 783 649 757 954 1,131 1,082 1,186 1,372 1,784 2,360 2,532 2,227 531 724 733 931 900 1,151 1,884 Gap (a-b, c) (27) 18 (74) 87 103 90 48 (36) 35 (62) (274) (232) (192) 118 63 (53) 136 186 129 102 (166) Gap ratio (c/b, %) (4) 3 (9) 13 14 9 4 (3) 3 (5) (15) (10) (8) 5 12 (7) 19 20 14 9 (9)

Source: Company

High coverage provides comfort

 Marginal decline in GNPLs in 2QFY21. Gross stage 3 loans were up 2% qoq while GNPLs were down 2% qoq; the difference is due to interest accruals in case of gross stage 3 loans. Directionally, GNPLs are down; down 6 bps qoq to 1.81% (1.83% without considering benefit of Supreme Court ruling). GNPLs in individual book (considering the benefit of the Supreme Court ruling) were down 6% qoq to 0.84% from 0.92%. Non- individual GNPLs were almost flat qoq at 4.1%.

 2.6% coverage on the overall book. HDFC has high coverage on the overall book at ~2.6% (down 5 bps qoq/up 90 bps yoy) compared to <150 bps for most peers providing

8 KOTAK INSTITUTIONAL EQUITIES RESEARCH HDFC Diversified Financials

cushion to near-term rise in delinquencies. The company has high coverage of 25% on stage 2 loans (up 22 bps yoy/down 6 bps qoq).

. HDFC’s policy of accelerated provisioning has led to best-in-class ECL coverage on the book and not incur pain in P&L during any particular quarter due to rise in GNPLs. Overall net worth and provisions aggregate to ~1.2X of overall non-individual (excluding LRD) AUM.

 Expect further rise in delinquencies going ahead. We expect HDFC to witness rise in delinquencies from both the individual and non-individual segment going ahead. We expect overall gross stage 3 loans to increase by 50 bps yoy in FY2021E to 2.8% and further inch up to 3% in FY2022E. Increase in repossession and improving collection will likely lead to gradual decline in gross stage 3 ratios from FY2023E onwards.

. In it 1QFY21 press release, the company highlighted that ~5% of retail customers under moratorium had faced job losses and 9% had faced business closure; this can drive up delinquencies in retail segment. The full impact of COVID-19 is yet to unfold but we expect some increase in stress from the individual home loan segment (including LAP) apart from developer loans.

. HDFC has witnessed robust asset quality in the LRD segment. However, given the rise in risks due to lockdown and slowdown in overall business momentum for most sectors, one can expect increase in slippages from the retail LRD segment.

 Credit cost to moderate a bit in 2HFY21E. We expect credit cost to moderate in 2HFY21E. While slippages will increase, the company has frontloaded a significant portion of the provisions. We expect credit cost to decline 132 bps yoy in 2HFY21E to 0.38% (down 70 bps yoy in FY2021E to 0.5%). As business environment stabilizes and collections improve, credit cost will likely moderate further to 43 bps in FY2022E and 27 bps in FY2023E.

Exhibit 12: Overall ECL coverage declined 5 bps qoq to 2.6% Asset quality, March fiscal year-ends, 2021-2023E, 2QFY19-2QFY21 (Rs bn)

QoQ YoY 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 (%) (%) 2021E 2022E 2023E Gross stage 3 50 56 57 62 67 70 103 102 104 2 55 139 167 154 Gross stage-3 (%) 1.3 1.4 1.4 1.5 1.6 1.6 2.3 2.2 2.2 -1 bps 62 bps 2.8 3.0 2.4 ECL provision stage 3 19 22 25 25 29 34 49 48 51 5 76 67 80 72 Net stage 3 31 34 32 38 38 36 54 54 53 (1) 39 72 87 81 Coverage on stage 3 loans (%) 38.7 39.8 43.5 39.8 43.2 49.0 47.6 47.5 49.0 154 bps 577 bps 48.0 48.0 47.0 Gross stage 1 and 2 3,774 3,855 4,014 4,101 4,197 4,340 4,407 4,543 4,637 2 10 4,823 5,385 6,252 Gross stage 1 3,837 3,913 4,015 4,159 4,297 4,404 3 10 4,550 5,052 5,868 Gross stage 2 177 188 182 248 247 233 (6) 28 273 333 384 Gross stage 1 and 2 (%) 98.7 98.6 98.6 98.5 98.4 98.4 97.7 97.8 97.8 1 bps -62 bps 97.2 97.0 97.6 Gross stage 1 (%) 94.2 94.0 94.2 92.2 92.5 92.9 40 bps -127 bps 91.7 91.0 91.6 Gross stage 2 (%) 4.3 4.5 4.3 5.5 5.3 4.9 -39 bps 65 bps 5.5 6.0 6.0 ECL provision on stage 1 and 2 30.7 29.7 33.8 39.9 44.2 65.0 61.0 74.4 72.2 (3) 63 65.1 72.7 93.8 ECL provision on stage 1 2.4 3.2 2.2 3.5 10.5 13.2 26 504 10.5 9.4 20.8 ECL provision on stage 2 31.4 36.8 42.0 57.5 64.0 59.1 (8) 40 54.6 63.3 73.0 Net stage 1 and 2 3,744 3,826 3,980 4,061 4,153 4,275 4,346 4,469 4,565 2 10 4,758 5,312 6,158 Net stage 1 3,835 3,910 4,013 4,155 4,286 4,391 2 9 4,540 5,042 5,847 Net stage 2 145 151 140 190 183 174 (5) 24 218 270 311 ECL provision on stage 1 and 2 (%) 0.8 0.8 0.8 1.0 1.1 1.5 1.4 1.6 1.6 -8 bps 50 bps 1.4 1.4 1.5 ECL provision on stage 1 (%) 0.1 0.1 0.1 0.1 0.2 0.3 6 bps 24 bps 0.2 0.2 0.4 ECL provision on stage 2 (%) 17.8 19.6 23.1 23.2 25.9 25.3 -60 bps 222 bps 20.0 19.0 19.0 Overall ECL coverage (%) 1.3 1.3 1.4 1.6 1.7 2.3 2.4 2.6 2.6 -5 bps 88 bps 2.7 2.7 2.6

Source: Company, Kotak Institutional Equities

Diversified Financials HDFC

Exhibit 13: Segmental GNPLs broadly flat yoy GNPL in individual and non-individual segment, March fiscal year-ends, 1QFY15-2QFY21 (%)

Individual Non-individual 5.0 4.19

4.0

3.0

2.0

0.84 1.0

0.0

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20 1QFY21 2QFY21

Source: Aavas DRHP, ICRA, Kotak Institutional Equities

Exhibit 14: HDFC has higher coverage on stage 1 and 2 loans compared to peers Asset quality details across key HFCs/NBFCs, March fiscal year-ends, 2018-2020, 1QFY21, 2QFY21

2018 2019 2020 1QFY21 2QFY21 Overall gross stage 3/GNPL (%) Aavas 0.5 0.5 0.5 0.5 0.5 Bajaj Housing NA 0.1 0.1 0.1 0.1 Can Fin Homes 0.4 0.6 0.8 0.8 0.7 HDFC 1.3 1.4 2.3 2.2 2.2 L&TFH (housing segment) 0.9 0.8 1.0 1.0 1.2 LIC Housing Finance 0.8 1.6 2.8 2.8 NA Piramal 0.3 0.9 2.4 2.5 PNB Housing Finance 0.3 0.5 2.7 2.8 2.6 Repco Home Finance 2.9 3.0 4.3 4.2 NA Stage-3 coverage Aavas 16.0 21.8 26.0 30.3 32.4 Bajaj Housing NA 35.8 38.0 38.6 37.5 Can Fin Homes 53.1 30.0 28.8 33.7 36.4 HDFC 41.8 43.5 47.5 47.5 49.0 L&TFH (housing segment) 44.0 30.0 31.0 33.0 34.0 LIC Housing Finance 67.0 49.6 43.8 44.9 NA Piramal 40.0 38.6 38.6 PNB Housing Finance 28.4 20.9 36.2 39.7 43.9 Repco Home Finance 46.6 36.1 35.8 41.2 NA Stage 1 and 2 coverage (%) Aavas 0.2 0.2 0.2 0.3 0.4 Bajaj Housing NA 0.1 0.4 0.5 0.7 HDFC 1.0 0.8 1.4 1.6 1.6 LIC Housing Finance 0.1 0.1 0.0 0.0 NA Piramal NA NA 5.0 5.0 5.1 PNB Housing Finance 0.4 0.5 1.7 1.7 1.9 Repco Home Finance 0.5 0.4 0.3 0.4 NA

Source: Company, Kotak Institutional Equities

10 KOTAK INSTITUTIONAL EQUITIES RESEARCH HDFC Diversified Financials

Other highlights

 Core cost-to-average AUM down 7 bps yoy/6 bps qoq to 24 bps. Operating expenses declined 3% yoy despite gradual pick up in volumes. While employee expenses increased 25% yoy; other expenses declined 27% yoy. Core cost-to average AUM (ratio of operating expenses excluding ESOP expenses) declined 7 bps yoy/6 bps qoq to 24 bps. Core cost-to-income ratio (ratio of operating expenses excluding ESOP expenses to total income excluding dividend income, assignment income, net gain on FV change and profit on sale of investments) declined 375 bps yoy/300 bps qoq to 8.7%. We expect core cost- to-income to decline ~150 bps yoy in 2HFY21E translating to 160 bps yoy decline in FY2021E to 9.6%.

Exhibit 15: Core ROA has declined over the past few years Core ROA and core ROE, March fiscal year-ends, 2008-2023E (%)

Core ROA (LHS) Core ROE (RHS) 3.0 45 38.9 38.7

2.4 31.7 36 30.3 27.2 26.9 25.0 1.8 24.0 27 21.4 21.4

1.2 15.1 14.1 18 13.3 12.4 13.0 12.9

0.6 9

2.2 2.3 2.3 2.5 2.5 2.4 2.3 2.1 1.9 2.0 1.6 1.7 1.7 1.9 1.7 1.8

- 0

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021E

2022E 2023E

Source: Company, Kotak Institutional Equities estimates

Exhibit 16: Drop in share of high yielding non-retail loans and higher provisions have led to core ROA compression over FY2018-20 Core ROA and share of non-retail loans, March fiscal year-ends, 2009-2020 (%)

Core ROA (LHS) Non-retail loans mix (RHS)

3.0 40 34 34 34 34 31 2.4 29 29 32 27 27 27 26 22 1.8 24

1.2 16

0.6 8

2.3 2.3 2.5 2.5 2.4 2.3 2.1 1.9 2.0 1.6 1.7 1.7 - - 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Company, Kotak Institutional Equities estimates

Diversified Financials HDFC

Exhibit 17: HDFC – change in estimates March fiscal year-ends 2021E- 2023E (Rs mn)

New estimates Old estimates (% change) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E NIM (post provisions - %) 2.41 2.25 2.28 2.32 2.27 2.15 8 bps -2 bps 13 bps Loan book (Rs bn) 4,962 5,551 6,406 4,962 5,551 6,406 — — — Operating income 502,173 552,145 627,870 511,916 560,079 627,924 (1.9) (1.4) (0.0) Interest income 440,416 480,992 550,024 442,783 488,877 550,024 (0.5) (1.6) — Capital gains 13,500 5,500 5,500 13,500 5,500 5,500 — — — Interest expense 326,438 362,685 413,778 332,792 369,494 421,416 (1.9) (1.8) (1.8) Net operating income 175,736 189,460 214,092 179,125 190,585 206,508 (1.9) (0.6) 3.7 Net operating inc. excl. gains 162,236 183,960 208,592 165,625 185,085 201,008 (2.0) (0.6) 3.8 Loan loss provisions 26,928 25,823 18,409 26,928 25,823 9,030 — — 103.8 Fee income 1,831 2,106 2,317 1,639 1,884 2,073 11.8 11.8 11.8 Operating expenses 13,897 14,920 16,549 13,897 14,920 16,549 — — — Employee expenses 6,101 6,662 7,485 6,101 6,662 7,485 — — — PBT 135,435 149,438 179,985 138,631 150,341 181,535 (2.3) (0.6) (0.9) Net profit 109,702 121,045 145,788 112,291 121,777 147,043 (2.3) (0.6) (0.9) Core PBT 131,974 136,406 154,217 129,258 138,796 148,008 2.1 (1.7) 4.2 EPS (Rs) 61 68 81 63 68 82 (2.3) (0.6) (0.9) BVPS (Rs) 607 650 703 607 652 705 (0.2) (0.2) (0.2) Core EPS 57 56 68 56 56 69 2.0 (0.7) (1.0) Core BVPS 411 455 508 412 456 509 (0.2) (0.3) (0.3)

Source: Company, Kotak Institutional Equities estimates

12 KOTAK INSTITUTIONAL EQUITIES RESEARCH HDFC Diversified Financials

Exhibit 18: HDFC – key ratios and growth rates March fiscal year-ends, 2018-2023E (%)

Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS 2018 2019 2020 2021E 2022E 2023E Key growth rates (%) NII NA 18.7 11.4 12.4 3.7 12.9 Opertaing expense NA (22.0) 0.8 3.1 7.1 10.3 Core PBT NA 28.8 10.5 14.0 3.4 13.1 PAT NA (12.1) 84.5 (38.3) 10.3 20.4 Spread calculation Core yields NA 9.7 9.7 9.3 9.2 9.2 Average cost of funds NA 8.1 7.9 7.4 7.4 7.4 Spread NA 1.6 1.8 1.9 1.7 1.8 Core NIM NA 2.5 2.4 2.4 2.3 2.3 Other ratios Tax rate 24.4 25.2 12.6 19.0 19.0 19.0 Credit cost NA 0.2 1.4 0.6 0.4 0.3 Cost-to-income 11.1 9.6 5.4 8.7 8.6 8.4 Cost-to-average AUM NA 0.3 0.3 0.3 0.3 0.3 Du Pont analysis (% of assets and off-balance sheet assets) Net total income 4.2 3.3 5.0 2.8 2.7 2.8 Net interest income 2.4 2.4 2.3 2.3 2.1 2.1 Capital gains 1.4 0.3 0.6 0.2 0.1 0.1 Dividend income 0.3 0.2 0.2 0.1 0.2 0.2 Assignment income 0.1 0.2 0.2 0.1 0.2 0.2 Fee and commission income 0.0 0.0 0.0 0.0 0.0 0.0 Other income 0.0 0.1 1.7 0.1 0.1 0.1 Operating expenses 0.5 0.3 0.3 0.2 0.2 0.2 Provisions 0.5 0.2 1.1 0.4 0.4 0.2 (1- tax rate) 0.8 0.7 0.9 0.8 0.8 0.8 ROA 2.7 2.0 3.2 1.8 1.7 1.9 Average assets and off-balance sheet assets/average equity 7.8 6.7 6.6 6.3 6.2 6.5 ROE 20.9 13.5 21.1 11.0 10.8 12.0 Core ROE 12.4 13.0 15.1 12.9 14.1 14.5

Source: Company, Kotak Institutional Equities estimates

Diversified Financials HDFC

Exhibit 19: HDFC – income statement and balance sheet March fiscal year-ends, 2018-2023E (Rs mn)

Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS 2018 2019 2020 2021E 2022E 2023E Income statement Operating income 406,892 433,480 587,389 504,005 554,251 630,187 Interest income 331,331 392,790 437,493 469,672 511,254 581,519 Fee and commisison income 1,631 1,824 1,928 1,831 2,106 2,317 Assignment income 5,337 8,600 9,935 9,139 15,891 17,851 Rental income 618 651 704 650 500 500 Dividend income 10,793 11,306 10,807 6,212 15,000 16,500 Profit on sale of investment 56,090 12,124 35,238 13,000 5,000 5,000 Others 1,093 6,186 91,285 3,500 4,500 6,500 Interest expense 234,980 278,377 310,014 326,438 362,685 413,778 NII 96,351 114,413 127,480 143,235 148,569 167,741 Net operating income 171,912 155,104 277,376 177,567 191,566 216,409 Other income 183 300 244 244 244 244 Total income 172,095 155,403 277,620 177,812 191,810 216,653 Operating expense 19,049 14,866 14,980 15,449 16,549 18,259 Employee expense 13,721 7,165 5,929 6,101 6,662 7,485 Depreciation expense 492 665 1,477 1,551 1,629 1,710 Establishment expense 1,000 1,076 404 484 579 694 Other expenses 3,835 5,959 7,169 7,313 7,678 8,369 PPOP 153,046 140,538 262,640 162,363 175,261 198,394 Provisions 21,150 9,349 59,131 26,928 25,823 18,409 PBT 131,896 131,189 203,509 135,435 149,438 179,985 Tax 22,303 34,863 25,813 25,733 28,393 34,197 PAT 109,593 96,326 177,697 109,702 121,045 145,788 Core PBT 81,268 104,706 115,734 131,974 136,406 154,217 Dividend 33,518 36,150 36,373 38,396 42,366 51,026 DPS 20.0 21.0 21.0 21.5 23.7 28.5 Weighted average shares (# mn) 1675.9 1721.5 1732.0 1788.9 1788.9 1788.9 EPS 65 56 103 61 68 81 EPS (core) 28 42 45 57 56 68 BVPS 389 449 526 607 650 703 BVPS (core) 331 341 353 411 455 508 Balance sheet Net loans 3,573,809 4,007,596 4,399,433 4,962,272 5,551,213 6,405,834 Total Investments 307,167 462,404 649,444 712,433 783,676 862,043 In equity 98,196 186,235 300,012 350,012 350,012 350,012 Fixed assets owned 6,445 6,513 13,490 13,194 12,849 12,505 Other assets 101,675 111,262 178,570 168,898 167,370 167,259 Total assets 3,989,096 4,587,776 5,240,936 5,856,796 6,515,107 7,447,642 Total Borrowings 3,197,160 3,652,660 4,191,020 4,618,823 5,183,354 6,004,454 Other liabilities 139,287 161,561 139,335 153,015 168,116 184,789 Total liabilities 3,336,447 3,814,221 4,330,355 4,771,838 5,351,470 6,189,243 Share capital 3,352 3,443 3,464 3,578 3,578 3,578 Reserves 649,297 770,112 907,117 1,081,380 1,160,059 1,254,821 Shareholders fund 652,649 773,555 910,581 1,084,957 1,163,637 1,258,399

Source: Company, Kotak Institutional Equities estimates

14 KOTAK INSTITUTIONAL EQUITIES RESEARCH BUY NTPC (NTPC) https://ultraviewer.et/en/own Electric Utilities NOVEMBER 03, 2020 load.html RESULT Sector view: Attractive

Strong showing continues. NTPC continued to report healthy earnings performance CMP (`): 89 for the second consecutive quarter, with 23% yoy growth in adjusted PAT at Rs39.4 bn Fair Value (`): 125 and 21% yoy growth for 1HFY21. Earnings growth has strong visibility over the next BSE-30: 39,758 three years as 12 GW of under-construction coal-based capacities will likely be commissioned. NTPC approved buy back of Rs23 bn (2% of net worth) at a price of Rs115/share. Maintain BUY rating with revised FV of Rs125/share (from Rs130/share), noting inexpensive valuations of 0.7X P/B and 6X P/E on March 2022E earnings.

NTPC Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 89/125/BUY EPS (Rs) 12.7 15.0 16.0 52-week range (Rs) (high-low) 125-73 EPS growth (%) 14.2 18.2 6.6 Mcap (bn) (Rs/US$) 884/11.9 P/E (X) 7.0 5.9 5.6 ADTV-3M (mn) (Rs/US$) 2,810/38 P/B (X) 0.7 0.7 0.6 Shareholding pattern (%) EV/EBITDA (X) 7.8 6.0 5.1 Promoters 51.0 RoE (%) 10.7 11.7 11.5 FPIs/MFs/BFIs 11.4/20.4/14.1 Div. yield (%) 3.8 5.1 5.4 Price performance (%) 1M 3M 12M Sales (Rs bn) 1,057 1,380 1,502 Absolute 5.1 2.6 (26.5) EBITDA (Rs bn) 318 388 419 Rel. to BSE-30 2.3 (3.0) (25.8) Net profits (Rs bn) 126 149 158

Strong earnings performance continues despite rebate of Rs13.6 bn offered in 1HFY21

NTPC reported an adjusted PAT of Rs39.4 bn (+23% yoy) after excluding one-time rebate of Rs5.6 bn provided to beneficiaries on account of lower demand during the Covid-19 linked lockdown. NTPC had provided for a rebate of Rs8 bn in 1QFY21 taking total rebate offered to Rs13.6 bn in 1HFY21. NTPC reported revenues of Rs247 bn (+8.4% yoy, +5.2% qoq) (KIE: Rs247 bn) registering 8.4% yoy growth primarily led by commissioning of 3.8GW over the past one year. EBITDA at Rs72 bn (13.2% yoy, -7.3% qoq) missed our estimate of Rs78 bn on account of higher other expenses at Rs24 bn (+34% yoy) including exchange rate variation and other expenses recoverable and accounted through movement in regulatory deferral account. Higher other income and lower effective tax rate led to earnings beat at the PAT level.

Core ROE stood at 18% in 2QFY21 (+16% in FY2020) reflecting the underlying strength of the cost-plus business as regulated equity for the company increased 19% yoy to Rs635 bn. Operationally, generation for NTPC was up 10% yoy at 67.7 BU with coal-based PLF increasing to 64.3% in 2QFY21 (64.3% in 2QFY20).

Share buyback of Rs23 bn approved; commercialization of 12 GW over next three years

NTPC approved buyback of up to Rs22.75 bn (198 mn shares) at a price of Rs115/share. GOI will only tender share in the offer till its shareholding remains above 51% (GOI stake at 51.02% as of Sep 2020). NTPC plans to commercialize 4.4 GW of coal-based capacities in FY2021 even as only 660 MW has been commercialized in 1HFY21. NTPC incurred capex of Rs71 bn in 1HFY21 against planned capex of Rs210 bn in FY2021E. NTPC currently has 12 GW of capacities under Murtuza Arsiwalla construction on a standalone-basis that will likely commission over the next four years, resulting in an increase in regulated equity to Rs860 bn by FY2023E (Rs635 bn currently). Samrat Verma Maintain BUY rating with revised fair value of Rs125/share

Maintain BUY rating with revised fair value of Rs125/share (from Rs130/share), noting inexpensive valuations at 0.7X P/B and 6X on P/E on FY2022E earnings. We have revised our earnings downwards by 2.6% for FY2021E and 2.7% for FY2022E factoring lower generation and some delays in commissioning of capacities.

[email protected] Contact: +91 22 6218 6427

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

Exhibit 1: NTPC accounted for Rs13.6 bn rebate in 1HFY21 as part of extraordinary items Interim results for NTPC (Standalone), March fiscal year-ends (Rs bn)

(% Chg.) 2QFY21 2QFY21E 2QFY20 1QFY21 KIE yoy qoq 1HFY21 1HFY20 (% Chg.) 2021E 2020 (% Chg.) 2022E Net sales 247 247 228 235 (0.2) 8.4 5.2 481 470 2.5 1,057 959 10.2 241 Operating costs Cost of fuel (137) (133) (135) (124) 3.0 1.8 11.0 (261) (281) (592) (570) (144) Personnel costs (13) (13) (11) (13) 4.7 18.4 4.6 (26) (23) (49) (47) (12) Other expenses (24) (23) (18) (21) 5.3 34.4 17.9 (45) (37) (99) (89) (27) Total expenses (175) (169) (164) (157) 3.5 6.5 11.4 (332) (342) (739) (706) (184) EBITDA 72 78 63 77 (8.1) 13.2 (7.3) 149 128 16.6 318 253 25.5 58 EBITDA margin (%) 29.1 31.6 27.9 33.0 31.0 27.3 30.1 26.4 24.0 Regulatory account deferral 3 7 9 8 19 12 25 48 — Other income 13 7 9 6 19 12 26 28 13 Interest & finance charges (18) (20) (16) (21) (39) (32) (86) (68) (14) Depreciation (25) (27) (21) (25) (51) (42) (112) (86) (20) PBT 46 46 44 45 (0.2) 4.8 1.6 91 80 12.9 171 175 (2.4) 38 Provision for tax (net) (5) (11) (11) (12) (17) (22) (45) (65) (11) Net profit 41 34 33 33 18.3 24.6 24.2 73 59 25.1 126 110 14.2 27 Extraordinary (6) — — (8) (14) — (14) (9) — EPS 4.1 3.5 3.3 3.3 7 6 13 11 — EBITDA margin (%) 29.1 31.6 27.9 33.0 31.0 27.3 30.1 26.4 24.0 Tax rate (%) 11.1 25.0 25.3 27.3 19.2 27.0 26.5 37.2 28.4

Source: Company, Kotak Institutional Equities

Other highlights from the earnings call

 Outstanding receivables for NTPC continue to remain high at Rs268 bn, of which ~Rs190 bn are due for more than 45 days. While NTPC has realized Rs67.4 bn as part of first tranche released from PFC/REC, they expect to get another Rs75 bn in the second tranche, with receivables reducing Rs150-160 bn by March 2021.

States with the highest overdue amount are as follows: UP (Rs 44 bn), J&K (Rs37 bn), Karnataka (Rs30 bn), MP (Rs19 bn) and Telangana (Rs13.5 bn).

 PLF based incentive income was Rs1.4 bn in 2QFY21 (Rs420 mn in 2QFY20) and Rs2.8 bn in 1HFY21 (Rs1.6 bn in 1HFY20). During the quarter NTPC earned Rs6.6 bn as surcharge income compared to Rs6.5 bn in 2QFY20 and Rs11.3 bn in 1HFY21 (Rs8.2 bn in 1HFY20).

 NTPC commercialized only 660 MW during 1HFY21 on account of commercialization of one unit at Khargone (660 MW) still far from reaching commercialization target of 4.4 GW on standalone basis in FY2021E. NTPC plans to commercialize another 5.7 GW in FY2022E and 5 GW in FY2023E.

 Net generation for the quarter was higher at 67.7 BUs, increase of 9.8% yoy in comparison to 61.6 BUs in 2QFY20 as coal plants operated at higher PLF of 64.3%. PAF for coal-based capacities in 2QFY21 improved to 92% from 84% in 2QFY20. Coal production from Pakhri Barwadih coal mines remained at 3.2 mn tons in 1HFY21, a decline of 29% yoy from 4.5 mn tons in 1HFY20.

 Regulated equity for NTPC stands enhanced to Rs635 bn (+19% yoy) in 2QFY21 from Rs533 bn in 2QFY20 on the back of assets commercialized. We estimate regulated equity to grow at 11.6% CAGR between FY2020 and FY2023E to Rs860 bn as NTPC adds 12 GW of incremental capacity over the next three years.

 NTPC has already commissioned 1,070 MW of RE projects under EPC mode; 2,404 MW of solar projects are under implementation and another 2,088 MW under various stages of tendering.

 NTPC has incorporated a new subsidiary NTPC renewable energy to increase the push towards renewables and have 25% share of renewables in the overall generation capacity.

16 KOTAK INSTITUTIONAL EQUITIES RESEARCH NTPC Electric Utilities

 Fixed cost under-recovery stood at Rs5 bn as of September 2020 (Rs4.5 in 1HFY20) which is expected to decline to Rs2-2.5 bn by March 2021.

 Loss of generation due to grid restrictions was at 61 BUs (coal-based stations) and 12 BUs (gas-based stations) and another 110 MUs due to fuel supply constraints in 1HFY21.

 FGD equipment has been commissioned for 1.3 GW of capacity, packages awarded for 58.9 GW and tendered for 4.54 GW. NOx equipment for 19 GW has been awarded while under tendering process for another 43GW.

 Average cost of borrowing was at 6.37% in 1HFY21 as compared to 6.91% in 1HFY20.

 During 1HFY21, NTPC has received dividends of Rs5.6 bn from subsidiaries/JVs as against Rs8.4 bn in 1HFY20.

Exhibit 2: Adjusted PAT for 2QFY21 implies an RoE of 18% on regulated equity Adjustments to reported earnings of NTPC, March fiscal year-ends (Rs bn)

(% Chg.) 2QFY21 2QFY20 1QFY21 yoy qoq 2020 2019 (% Chg.) Reported PAT 24.7 32.6 24.7 (24.3) - 101.1 117.5 (14) Adjustments 14.7 (0.6) 6.7 (2,715) 120 20.6 (11.3) (282) Adjusted PAT 39.4 32.1 31.4 23 25 121.7 106.2 15 Other income (post-tax) (11) (7) (5) (22) (15) Core PAT 28.6 24.9 26.9 15 7 99.5 91.2 9 Regulated equity 635 533 629 19 1 618 540 Core RoE (%) 18 19 17 (4) 6 16 17

Source: Company, Kotak Institutional Equities

Exhibit 3: PLF for 2QFY21 improved to 64.3% on account of better demand Operational performance of NTPC, March fiscal year-ends

(% Chg.) 2QFY21 2QFY20 1QFY21 yoy qoq 1HFY21 1HFY20 (% Chg.) 2020 2019 (% Chg.) Generation (BU) 67.7 61.6 60.2 9.8 12.4 127.9 130.1 (1.7) 259.6 274.5 (5.4) Commercial generation (BU) 67.5 61.1 60.1 10.4 12.3 127.7 129.3 (1.3) 257.8 273.5 (5.7) Energy Sent Out (BU) 62.9 56.8 55.8 10.7 12.6 118.7 120.5 (1.4) 240.2 255.7 (6.1) Coal (mn tons) Domestic (mn tons) 38.3 37.7 40.2 1.6 (4.6) 78.5 80.0 (1.9) 172.0 175.1 (1.7) Imported (mn tons) 0.2 0.6 0.4 (75.8) (59.5) 0.5 1.5 (65.6) 2.8 1.1 170.5 (Chg. bps) Availability (%) Coal 91.8 84.1 95.8 775.0 (393.0) 93.8 87.6 622.5 89.7 87.1 256.0 Gas 90.2 93.3 93.3 (305.0) (304.0) 91.7 91.8 (7.5) 93.8 92.2 157.0 Hydro 110.2 110.1 109.2 16.0 105.0 109.7 110.1 (37.5) 109.0 107.9 105.0 PLF (%) Coal 64.3 64.3 58.2 1.0 605.0 61.2 69.1 (784.0) 68.2 76.7 (848.0) Gas 26.2 13.1 25.4 1,311.0 83.0 25.8 16.9 894.5 14.1 21.1 (702.0) Hydro 96.4 100.3 53.8 (385.0) 4,265.0 75.1 78.8 (374.0) 49.1 43.0 608.0 AuX (%) 6.9 7.1 7.1 (17.0) (21.8) 7.0 6.9 13.0 6.8 6.5 32.0

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 17 Electric Utilities NTPC

Exhibit 4: 800 MW of capacity was commercialized on a standalone basis during the quarter Details of installed and commercial capacity, March fiscal year-ends (MW)

Change (%) Change (GW) 2QFY21 2QFY20 1QFY21 yoy qoq yoy qoq Commercial capacity Standalone 50,355 46,525 50,355 8.2 — 3.8 — Others 11,755 8,461 11,605 38.9 1.3 3.3 0.2 Consolidated 62,110 54,986 61,960 13.0 0.2 7.1 0.2 Installed capacity Standalone 51,155 48,645 50,355 5.2 1.6 2.5 0.8 Others 11,755 8,461 11,755 38.9 — 3.3 — Consolidated 62,910 57,106 62,110 10.2 1.3 5.8 0.8

Source: Company, Kotak Institutional Equities

Exhibit 5: Outstanding debtors for NTPC continue to remain high at Rs268 bn as of Sep 2020 Trade receivables for NTPC, March fiscal year-ends (Rs bn)

Outstanding debtors (Rs bn) 350 290 300 268

250 194 200 156 150 128 100 100 78 81 76 76 84

50

-

Jun-20

Sep-16

Sep-17

Sep-18

Sep-19

Sep-20

Mar-16

Mar-17

Mar-18 Mar-19 Mar-20

Source: Company, Kotak Institutional Equities

18 KOTAK INSTITUTIONAL EQUITIES RESEARCH NTPC Electric Utilities

Exhibit 6: Current CWIP is 33% of regulated equity, that will propel growth up to FY2023E Composition of book value of NTPC, March fiscal year-ends, 2018-2023E (Rs/share)

Regulated equity CWIP Subsidiaries / JVs Others 160

140 21 11 120 4 3 27 27 27 100 13 27 18 13 12 10 80 10 20 22 28 60 24

40 83 87 73 63 51 55 20

0 2018 2019 2020 2021E 2022E 2023E

Source: Company, Kotak Institutional Equities estimates

Exhibit 7: Key assumptions behind NTPC estimates, March fiscal year-ends, 2018-23E

2018 2019 2020 2021E 2022E 2023E Assumptions Capacity addition (MW) 3,670 1,225 3,970 4,380 4,900 1,560 Commercial capacity (MW) 43,572 44,797 48,767 53,322 58,222 59,782 Regulated equity (Rs mn) 509,207 539,890 618,480 718,453 824,234 860,636 PLF-Coal (%) 78 77 68 65 80 80 PLF-Gas (%) 25 21 14 22 22 22 Average tariff (Rs/kwh) 3.38 3.46 3.59 4.16 5.13 4.08 Average fuel cost (Rs/kwh) 1.91 2.09 2.22 2.20 2.26 2.34

Source: Company, Kotak Institutional Equities estimates

Exhibit 8: Change in estimates for NTPC, March fiscal year-ends, 2021 - 23E

Revised estimates Old estimates Change (%) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E Revenues 1,056,944 1,379,748 1,501,568 1,058,528 1,374,660 1,494,838 (0.1) 0.4 0.5 EBITDA 317,781 388,082 418,540 319,365 382,994 411,810 (0.5) 1.3 1.6 Net profit 125,683 148,612 158,442 129,064 152,732 164,451 (2.6) (2.7) (3.7)

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 19 Electric Utilities NTPC

Exhibit 9: NTPC: Profit model, balance sheet, cash model, March fiscal year-ends, 2018 - 23E (Rs mn)

2018 2019 2020 2021E 2022E 2023E Profit model (Rs mn) Net sales 834,528 903,074 959,324 1,056,944 1,379,748 1,501,568 EBITDA 216,674 227,715 253,247 317,781 388,082 418,540 Other income (incl. regulatory deferral account) 23,083 56,459 76,069 51,247 43,093 40,784 Interest (39,843) (47,167) (67,820) (85,756) (92,917) (90,905) Depreciation (70,989) (72,544) (86,229) (112,224) (132,658) (140,897) Pretax profits 128,925 164,463 175,268 171,048 205,600 227,522 Tax (25,493) (53,387) (65,218) (45,365) (56,988) (69,080) Net profits 103,432 111,076 110,050 125,683 148,612 158,442 Extraordinary items — 6,423 (8,922) (13,630) — — Earnings per share (Rs) 10.5 11.2 11.1 12.7 15.0 16.0 Balance sheet (Rs mn) Total equity 1,017,778 1,074,082 1,135,694 1,214,131 1,318,160 1,429,069 Deferred taxation liability 44,945 63,395 113,365 113,365 113,365 113,365 Total borrowings 1,151,979 1,429,334 1,605,881 1,618,858 1,374,808 1,233,373 Currrent liabilities 387,233 341,967 421,734 417,652 465,069 479,770 Total liabilities and equity 2,601,936 2,908,778 3,276,675 3,364,007 3,271,403 3,255,577 Cash 39,784 21,443 22,091 32,539 (53,931) (6,203) Current assets 473,323 587,602 688,869 630,947 649,014 672,798 Total fixed assets 1,988,354 2,168,273 2,301,706 2,436,512 2,412,310 2,324,972 Investments 100,475 131,459 264,009 264,009 264,009 264,009 Total assets 2,601,936 2,908,778 3,276,675 3,364,007 3,271,403 3,255,577 Free cash flow (Rs mn) Operating cash flow, excl. NWC 174,421 190,043 187,357 224,277 281,270 299,339 Working capital (4,075) (159,546) (21,500) 53,840 29,350 (9,083) Capital expenditure (258,415) 224,589 (223,287) (247,030) (108,456) (53,559) Investments (10,951) (30,985) (132,550) (—) — — Free cash flow (99,020) 224,101 (189,979) 31,086 202,164 236,696 Key ratios Net debt/equity (%) 109 131 139 131 108 87 RoE (%) 10.4 10.6 10.0 10.7 11.7 11.5 RoCE (%) 6.2 4.9 4.5 5.9 7.1 7.7 Book value per share (Rs) 103 109 115 123 133 144

Source: Company, Kotak Institutional Equities estimates

20 KOTAK INSTITUTIONAL EQUITIES RESEARCH BUY IOCL (IOCL) https://ultraviewer.et/en/own Oil, Gas & Consumable Fuels NOVEMBER 03, 2020 load.html RESULT Sector view: Attractive Weak results. IOCL’s normalized results were below estimates due to lower realized CMP (`): 78 margins for refining and marketing, which was partly offset by higher margins for Fair Value (`): 100 petchem; however, reported results were boosted by unanticipated large adventitious gains. The OMCs’ ability to retain auto fuel margins at elevated levels has allowed them BSE-30: 39,758 to mitigate the weakness in refining and volatility in crude prices. Inexpensive valuations provide adequate margin of safety. Retain BUY with revised FV of Rs100 (Rs110 earlier).

IOCL Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 78/100/BUY EPS (Rs) 13.8 13.3 14.1 52-week range (Rs) (high-low) 143-71 EPS growth (%) 449.2 (3.6) 6.5 Mcap (bn) (Rs/US$) 737/9.9 P/E (X) 5.7 5.9 5.5 ADTV-3M (mn) (Rs/US$) 1,793/24 P/B (X) 0.7 0.7 0.6 Shareholding pattern (%) EV/EBITDA (X) 5.4 5.4 5.1 Promoters 51.5 RoE (%) 13.0 11.7 11.7 FPIs/MFs/BFIs 6.3/6.5/7.3 Div. yield (%) 7.9 7.7 8.2 Price performance (%) 1M 3M 12M Sales (Rs bn) 3,341 4,374 4,674 Absolute 5.5 (11.6) (45.2) EBITDA (Rs bn) 265 294 318 Rel. to BSE-30 2.7 (16.4) (44.6) Net profits (Rs bn) 126 122 130

Lower realized margins impact normalized results; adventitious gains boost reported numbers

Normalized EBITDA, adjusted for inventory/forex movement, was well below our estimate at Rs20.3 bn in 2QFY21, reflecting lower realized refining and marketing margins; volumes were expectedly weak across segments. Reported EBITDA jumped 71% qoq to Rs94.3 bn including unanticipated large adventitious gains of Rs74 bn. Inventory-adjusted refining margin declined to -US$1/bbl, at a discount of US$2.1/bbl to benchmark. Inventory-adjusted marketing margins declined 46% qoq to Rs2,051/ton, reflecting sharp 40% reduction in auto fuel margins and likely weaker margins for other products. Net income of Rs62.3 bn (EPS of Rs6.8) jumped 226% qoq boosted by a sharp decline in interest expense, which included a forex-related adjustment of Rs6.5 bn. Robust 1HFY21 performance amid 66% jump in marketing margins and lower interest cost

In 1HFY21, IOCL reported 32% increase in EBITDA to Rs149.3 bn and 118% increase in adjusted net income to Rs81.4 bn (EPS of Rs8.9) reflecting (1) 66% jump in realized marketing margins, (2) Rs42 bn of adventitious gains versus Rs0.6 bn of adventitious gain in 1HFY20, (3) 51% decline in interest cost and (4) 70% increase in other income, which was partly offset by (1) lower refining margins and (2) higher depreciation. Capex declined to Rs85.4 bn in 1HFY21 from Rs161.6 bn in 1HFY20, with capex for FY2021 guided at Rs260 bn. Auto fuel sales rise above Covid-19 levels in October; gross debt moderates

In the 2QFY21 conference call, the management indicated—(1) demand for auto fuels has registered a yoy growth in October 2020, with diesel rising 2% and gasoline 4%, (2) as of end- September 2020, IOCL’s inventories for products stood at 8.4 mn tons and crude oil at 9 mn tons, closing crude oil inventories were valued at US$43.7mn tons, (3) utilization for IOCL’s Tarun Lakhotia refineries have increased to ~95% in October and are likely to remain healthy amid the recovery in petroleum product demand, and (4) gross debt reduced to Rs915.1 bn as on September 30, Hemang Khanna 2020 from Rs986.1 bn a quarter ago and included lease obligations of Rs78.7 bn. Retain FY2022-23 EBITDA estimates; maintain BUY with FV of Rs100

We retain our EBITDA estimates for FY2022-23, while that for FY2021E rises 14% on incorporating reported forex and adventitious gains. We raise our EPS estimates for FY2022-23 by 3-4% and FY2021E by 49% on factoring lower interest cost. Retain BUY with a revised FV of

Rs100 (Rs110 earlier), nothing healthy dividend yield of 8% and inexpensive valuations. [email protected] Contact: +91 22 6218 6427

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Oil, Gas & Consumable Fuels IOCL

Key highlights of 2QFY21 performance

 Normalized refining margins at -US$1/bbl, well below benchmark. Inventory- adjusted refining contribution slipped to the red at –Rs32.5 bn in 2QFY21 from Rs10.7 bn in 1QFY21, led by US$5.5/bbl sequential decline in normalized margins to -US$1/bbl; crude throughput increased 8% qoq to 14 mn tons amid rising demand for petroleum products. Underlying margins were below our assumption and at a discount of US$2.1/bbl to Kotak India benchmark margins. Reported refining margin were at US$8.6/bbl including adventitious gain of US$9.7/bbl (Rs73.2 bn).

 Marketing margins declined 46% qoq to Rs2,051/ton. Inventory-adjusted implied marketing contribution declined to Rs35.3 bn in 2QFY21 from Rs63.1 bn in 1QFY21, as a sharp 46% qoq decline in realized marketing margins to Rs2,051/ton were partly offset by 5% qoq increase in volumes. Reported marketing contribution included adventitious gains of Rs0.8 bn.

 Petchem and pipelines EBITDA increased qoq. Petchem EBITDA increased to Rs12.1 bn from Rs7.3 bn in 1QFY21, driven by 13% increase in realized margin to US$226/ton and robust 50% jump in volumes to 0.72 mn tons, its highest in 14 quarters. Pipeline EBITDA increased 12% qoq to Rs12.9 bn amid a 15% increase in throughput.

 Domestic volumes declined 21% yoy, while recovering 5% qoq. IOCL’s domestic volumes declined 21% yoy, but increased 5% qoq to 16 mn tons; exports declined to 1.2 mn tons from 1.3 mn tons in 1QFY21. IOCL’s auto fuel sales volumes declined (1) 19% yoy for diesel and (2) 6% yoy for gasoline, both impacted by lower demand post Covid-19.

Key highlights of 1HFY21 performance

 Normalized refining margins declined to US$1.6/bbl. Inventory-adjusted refining contribution declined to the red at -Rs21.8 bn from Rs1.9 bn in 1HFY20, led by US$1.7/bbl decline in normalized margins to US$1.6/bbl. Reported refining margin of US$3.5/bbl included US$1.9/bbl (Rs27.4 bn) of inventory gain; crude throughput declined 23% yoy to 26.9 mn tons.

 Marketing margins jumped 66% yoy. Inventory-adjusted implied marketing contribution increased to Rs98.4 bn from Rs77.7 bn in 1HFY20, led by 66% yoy increase in realized marketing margins to Rs2,918/ton, while volumes declined 25% to 31.3 mn tons impacted by the nationwide lockdown. 1HFY21 reported marketing EBITDA included Rs14.7 bn of adventitious gain on products.

 Petchem EBITDA increased, while pipelines EBITDA declined. Petchem EBITDA increased to Rs19.3 bn from Rs14.6 bn in 1HFY21, driven by 2% increase in realized margin to US$215/ton and robust 21% increase in volumes to 1.2 mn tons. Pipeline EBITDA declined 24% yoy to Rs24.4 bn amid a 26% decline in throughput.

 25% decline in domestic volumes; 26% decline in auto fuels. IOCL’s domestic volumes declined 25% yoy to 31.3 mn tons; exports increased 5% to 2.4 mn tons from 2.3 mn tons in 1HFY20. IOCL’s auto fuel sales volumes declined—(1) 28% yoy for diesel and (2) 22% yoy for gasoline.

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

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

(% chg.) 2QFY21 2QFY21E 2QFY20 1QFY21 2QFY21E 2QFY20 1QFY21 1HFY21 1HFY20 (% chg.) FY2021E Net sales 856,105 880,983 1,116,897 623,966 (3) (23) 37 1,480,071 2,425,753 (39) 3,341,330 Total expenditure (761,833) (821,498) (1,081,175) (568,843) (7) (30) 34 (1,330,677) (2,312,800) (42) (3,076,507) Increase/(Decrease) in stocks (16,369) — 60,655 (6,932) (23,301) 38,195 — Purchase of products/crude for resale (314,583) (357,471) (407,118) (228,052) (12) (23) 38 (542,634) (866,784) (37) (1,131,228) Consumption of raw materials (322,283) (358,502) (615,157) (241,352) (10) (48) 34 (563,634) (1,258,290) (55) (1,522,335) Staff cost (24,904) (22,630) (22,335) (22,040) 10 11 13 (46,944) (46,217) 2 (94,521) Other expenditure (83,696) (82,895) (97,220) (70,468) 1 (14) 19 (154,163) (179,705) (14) (328,423) EBITDA 94,272 59,484 35,722 55,123 58 164 71 149,394 112,953 32 264,823 Other income 15,374 5,907 6,481 6,422 160 137 139 21,796 12,794 70 45,062 Finance cost (2,211) (11,266) (13,083) (11,713) (80) (83) (81) (13,924) (28,173) (51) (43,005) Depreciation (24,036) (23,947) (20,975) (23,545) 0 15 2 (47,582) (41,904) 14 (96,053) Pretax profits 83,398 30,179 8,145 26,286 176 924 217 109,684 55,670 97 170,827 Prior-period/extraordinary income — — — — — 6,268 — Current tax (8,115) (8,591) 1,164 — (8,115) (8,847) (47,996) Deferred tax (13,011) 895 (3,675) (7,177) (20,188) (11,497) 3,581 Net income 62,273 22,483 5,634 19,108 177 1,005 226 81,381 41,595 96 126,412 Adjusted net income 62,273 22,483 5,634 19,108 177 1,005 226 81,381 37,386 118 126,412 Adjusted EPS (Rs) 6.8 2.4 0.6 2.0 8.9 4.0 13.8 Tax rate (%) 25.3 25.5 30.8 27.3 25.8 32.8 26.0

Key data Crude throughput (mn tons) 14.0 14.5 17.5 12.9 (3.7) (20.3) 8.0 26.9 34.8 (22.7) 61.6 Domestic sales (mn tons) 16.0 17.6 20.2 15.2 (8.7) (20.6) 5.1 31.3 41.8 (25.1) 71.9 Export sales (mn tons) 1.2 1.4 1.2 1.3 (15.7) (5.2) (6.1) 2.4 2.3 4.6 5.4 Petchem sales (mn tons) 0.7 0.5 0.5 0.5 38.5 54.8 50.0 1.2 1.0 21.1 2.4 Pipelines throughput (mn tons) 17.3 16.0 21.7 15.0 8.1 (20.5) 15.2 32.3 43.6 (26.0) 72.5 Reported refining margin (US$/bbl) 8.6 2.5 1.3 (2.0) 3.5 3.0 2.9 Normalized refining margin (US$/bbl) (1.0) 2.5 3.0 4.4 1.6 3.3 2.1 Implied marketing EBITDA margin (Rs/ton) 2,051 2,496 1,614 3,823 2,918 1,761 2,232 Adventitious gain/(loss) - marketing 760 — 3,560 13,920 14,680 6,120 14,680 Adventitious gain/(loss) - refining 73,240 — (15,340) (45,880) 27,360 (5,570) 27,360 Net over-recovery/(under-recovery) — — — — — — — Exchange gain/(loss) 6,720 11,765 (11,350) 810 7,530 (10,433) 7,530 Contribution (EBITDA + other income) Refining 40,770 (20,270) (35,230) (301) (216) 5,540 (3,680) (251) (14,157) Marketing 36,060 38,130 77,010 (5) (53) 113,070 83,780 35 187,056 Pipelines 12,920 15,870 11,500 (19) 12 24,420 32,100 (24) 54,043 Petchem 12,110 7,740 7,280 56 66 19,390 14,600 33 37,881 Others 7,790 730 990 967 687 8,780 5,220 68 45,062 Total 109,650 42,200 61,550 160 78 171,200 132,020 30 309,885

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Normalized profits were sharply below estimates led by lower realized refining and marketing margins Calculation of normalized profitability, 1QFY19 onwards (Rs bn)

1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 2QFY21E Gross contribution 249.2 208.0 126.2 223.6 189.9 155.3 177.2 148.2 147.6 202.9 165.0 Operating expenses (123.5) (140.4) (90.1) (114.8) (106.4) (119.6) (110.7) (146.0) (92.5) (108.6) (105.5) Reported EBITDA 125.8 67.6 36.1 108.8 83.5 35.7 66.5 2.1 55.1 94.3 59.5 Add: forex-related loss/(gain) 18.1 26.2 (20.8) (8.4) (0.9) 11.4 1.8 27.2 — — (11.8) Add: one-off provision/charges — 1.1 — — (6.3) — — — — — — Add: adventitious loss/(gain) (78.7) (44.1) 107.4 (26.4) (12.3) 11.8 (18.0) 71.7 32.0 (74.0) 0.0 Normalized EBITDA 65.2 50.9 122.7 74.0 64.0 58.9 50.3 101.0 87.1 20.3 47.7 Other income (net of forex gain) 5.9 10.4 4.4 10.6 6.3 6.5 5.7 17.2 5.6 8.7 5.9 Finance cost 10.3 11.9 8.5 12.4 15.1 13.1 13.1 18.5 11.7 2.2 11.3 Depreciation 17.9 18.1 18.6 20.6 20.9 21.0 21.9 23.9 23.5 24.0 23.9 Normalized PBT 42.8 31.3 100.0 51.6 34.3 31.3 21.0 75.8 57.4 2.7 18.4

Source: Company, Kotak Institutional Equities estimates

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

Exhibit 3: Normalized EBITDA for refining and marketing segments declined sharply in 2QFY21 Segment-wise performance, 1QFY19 onwards (Rs bn)

1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 Break-up of normalized EBITDA Refining EBITDA (1.0) (9.4) 72.1 (11.8) 6.8 (4.9) (13.7) 37.3 10.7 (32.5) Throughput (mn tons) 17.7 17.8 19.0 17.4 17.3 17.5 17.5 17.1 12.9 14.0 Adjusted refining margins (US$/bbl) 3.4 3.5 9.2 1.4 3.6 3.0 2.0 8.2 4.4 (1.0) Implied refining cost (US$/bbl) 3.5 4.5 2.0 2.7 2.8 3.5 3.5 4.1 2.9 3.2 Pipelines EBITDA 16.3 16.1 16.1 15.9 16.2 15.9 15.5 15.4 11.5 12.9 Throughput (mn tons) 22.9 21.4 23.1 21.2 21.9 21.7 21.0 20.8 15.0 17.3 Pipeline margins (Rs/ton) 712 754 699 749 741 730 737 741 766 747 Petchem EBITDA 16.3 15.6 9.7 10.1 6.9 7.7 7.4 4.8 7.3 12.1 Volumes (mn tons) 0.64 0.66 0.67 0.65 0.53 0.47 0.63 0.66 0.48 0.72 Petchem margins (US$/ton) 381 338 200 218 188 236 165 99 200 226 Marketing EBITDA 24.2 28.2 22.7 66.0 43.1 34.6 40.3 46.2 63.1 35.3 Marketing margins (Rs/ton) 1,059 1,305 1,050 2,914 1,899 1,614 1,719 2,082 3,823 2,051

Source: Company, Kotak Institutional Equities estimates

Exhibit 4: IOCL's adjusted refining margins were at a discount to Kotak India refining margin in 2QFY21 Refining margin performance, March fiscal year-ends, 1QFY18 onwards (US$/bbl)

(US$/bbl) IOCL's inventory-adjusted margins [LHS] Kotak India refining margin 10 9.2 8.3 8.2 7.7 7.9 8 7.4 6.9 7.2 7.1 6.9 6.7 6.6 6.8 6.8 6.1 6.4 6.1 6.1 5.7 6 5.2 5.1 4.4 4.3 4.1 4.0 4.2 4 3.3 3.4 3.5 3.6 3.0 2.0 2 1.4 0.8 1.0

0

(2) (1.0) 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21

Source: Company, Kotak Institutional Equities

24 KOTAK INSTITUTIONAL EQUITIES RESEARCH IOCL Oil, Gas & Consumable Fuels

Exhibit 5: Decline in diesel sales for IOCL were sharper than that for consumption Growth in diesel consumption versus IOCL's sales volumes, 1QFY15 onwards (%)

(%) Growth in diesel consumption Growth in IOCL's diesel sales 15

5

(5)

(15)

(25)

(35)

(45)

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21 2QFY21

Source: Company, PPAC, Kotak Institutional Equities

Exhibit 6: Decline in gasoline sales for IOCL were sharper than that for consumption Growth in gasoline consumption versus IOCL's sales, 1QFY15 onwards (%)

(%) Growth in gasoline consumption Growth in IOCL's gasoline sales 20

10

0

(10)

(20)

(30)

(40)

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21 2QFY21

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 25 Oil, Gas & Consumable Fuels IOCL

Exhibit 7: India refining margins has recovered in the recent weeks Kotak India refining margins, January 2018 onwards (US$/bbl)

(US$/bbl) Kotak India refining margin 12.0

10.0

8.0

6.0

4.0

2.0

0.0

(2.0)

(4.0)

7-Jul-19

1-Jul-20

1-Jan-18

7-Jun-20

5-Oct-20

8-Feb-20

7-Apr-18

2-Apr-19

3-Dec-18

12-Jul-18

9-Nov-18

31-Jul-19

4-Nov-19

25-Jul-20

9-Mar-19

3-Mar-20

5-Aug-18

1-May-18

25-Jan-18

20-Jan-19

15-Jan-20

18-Jun-18

13-Jun-19

18-Feb-18

16-Oct-18

13-Feb-19

11-Oct-19

29-Oct-20

22-Sep-18

26-Apr-19

17-Sep-19

20-Apr-20

11-Sep-20

27-Dec-18

22-Dec-19

28-Nov-19

14-Mar-18

27-Mar-20

29-Aug-18

24-Aug-19

18-Aug-20

25-May-18 20-May-19 14-May-20

Source: Kotak Institutional Equities estimates

Exhibit 8: Marketing margins on auto fuels remain above normative levels Gross margins on diesel and gasoline, January 2018 onwards (Rs/liter)

(Rs/liter)20 Gross marketing margin on diesel Gross marketing margin on gasoline 18 16 14.1 14 12 10 8.3 17.57.5 8 6.5 5.9 5.0 5.4 5.2 5.3 6 4.1 4.5 4.6 4.5 4.4 4.1 4.3 3.8 3.2 3.6 3.5 3.7 3.2 3.4 3.5 3.7 4 2.5 2.6 2.9 3.0 3.0 9.3 2.2 2.0 2.0 7.9 6.6 0.8 1.3 5.7 5.0 5.2 2 2.6 2.6 3.7 3.4 2.1 1.4 1.8 2.7 0.8 2.6 2.5 0.2 2.7 3.5 2.3 2.6 0.3 1.8 1.6 2.2 3.4 3.6 4.2 3.9 3.9 4.4 4.0 0

(2) (0.0)

Jul-18

Jul-19

Jul-20

Jan-18

Jan-19

Jan-20

Jun-18

Jun-19

Jun-20

Feb-18

Oct-18

Feb-19

Oct-19

Feb-20

Oct-20

Apr-18

Sep-18

Apr-19

Sep-19

Apr-20

Sep-20

Dec-18

Dec-19

Nov-18

Nov-19

Mar-18

Mar-19

Mar-20

Aug-18

Aug-19

Aug-20

May-18

May-19 May-20

Nov-20-TD

Source: Kotak Institutional Equities estimates

26 KOTAK INSTITUTIONAL EQUITIES RESEARCH IOCL Oil, Gas & Consumable Fuels

Exhibit 9: Key assumptions for IOCL, March fiscal year-ends, 2016-23E

2016 2017 2018 2019 2020 2021E 2022E 2023E Refining assumptions Exchange rate (Rs/US$) 65.4 67.1 64.5 69.9 70.8 74.2 75.0 76.5 Effective tariff protection (%) 2.0 2.1 2.0 2.1 2.3 2.3 2.3 2.3 Crude throughput (mn tons) 57.2 65.2 69.0 71.8 69.4 61.6 73.3 73.3 Net refining margin (US$/bbl) 5.1 7.8 8.5 5.4 0.1 2.9 3.6 3.9 Refining EBITDA (Rs bn) 57.6 178.2 177.1 82.5 (122.7) (14.2) 9.7 17.5 Petchem assumptions Volumes (mn tons) 2.5 2.6 2.4 2.6 2.3 2.4 2.5 2.5 Petchem EBITDA (Rs bn) 60.8 75.9 61.0 51.6 26.8 37.9 44.3 46.5 Pipeline assumptions Volumes (mn tons) 79.8 82.5 85.7 88.5 85.4 72.5 86.2 87.6 Pipeline EBITDA (Rs bn) 58.9 61.3 63.3 64.4 63.0 54.0 64.9 67.1 Marketing assumptions Sales volume (mn tons) 74.4 75.9 78.9 81.8 80.4 69.6 83.3 86.7 Marketing margin on auto fuels (Rs/liter) 1.9 1.8 1.7 2.7 2.7 3.8 3.0 3.0 Subsidy under-recoveries (Rs bn) (0.1) — — — — — — — Implied marketing EBITDA (Rs bn) 78.1 53.3 53.5 146.6 158.9 172.4 175.2 186.9

Source: Company, Kotak Institutional Equities estimates

Exhibit 10: Sensitivity of IOCL’s (standalone) earnings to refining margin and marketing margin (Rs mn)

Fiscal 2021E Fiscal 2022E Fiscal 2023E Downside Base case Upside Downside Base case Upside Refining margins Refining margins (US$/bbl) 1.9 2.9 3.9 2.6 3.6 4.6 EBITDA (Rs mn) 231,931 264,823 297,714 254,300 293,998 333,697 % upside/(downside) (12.4) 12.4 (13.5) 13.5 Net profits (Rs mn) 102,073 126,412 150,752 92,489 121,866 151,243 EPS (Rs) 11.1 13.8 16.4 10.1 13.3 16.5 % upside/(downside) (19.3) 19.3 (24.1) 24.1

Marketing margins Auto fuels margins (Rs/liter) 3.3 3.8 4.3 2.5 3.0 3.5 EBITDA (Rs mn) 238,836 264,823 290,809 262,628 293,998 325,369 % upside/(downside) (9.8) 9.8 (10.7) 10.7 Net profits (Rs mn) 107,182 126,412 145,642 98,652 121,866 145,081 EPS (Rs) 11.7 13.8 15.9 10.7 13.3 15.8 % upside/(downside) (15.2) 15.2 (19.0) 19.0

Source: Kotak Institutional Equities estimates

Exhibit 11: We compute fair value of Rs100 for IOCL Fair valuation of IOCL, March 2022E (Rs/share)

EV/EBITDA based valuation Downstream business (Rs bn) March 2022E standalone EBITDA 294 EV/EBITDA (X) 6.0 EV of downstream business (Rs bn) 1,764 EV of downstream business (Rs) (A) 192 Investments (Rs bn) ONGC 36 Petronet LNG 34 GAIL India 9 CPCL 6 Oil India 2 Value of investments (Rs bn) 87 Value of investments (Rs) (B) 9 Net debt (Rs bn) 932 Net debt (Rs) (C) 102 Total equity value (A) + (B) - (C) 100

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 27 Oil, Gas & Consumable Fuels IOCL

Exhibit 12: Consolidated profit model, balance sheet, cash model of IOCL, March fiscal year-ends, 2016-23E (Rs mn)

2016 2017 2018 2019 2020 2021E 2022E 2023E Profit model (Rs mn) Net sales 3,471,764 3,599,422 4,212,247 5,265,377 4,856,296 3,341,330 4,373,995 4,674,049 EBITDA 223,963 423,280 385,426 344,508 46,398 276,870 303,845 330,608 Other income 23,586 42,407 34,534 31,872 36,502 46,272 38,459 38,780 Interest (34,416) (29,913) (34,756) (47,308) (63,927) (47,489) (68,334) (73,822) Depreciation (50,923) (65,016) (74,072) (79,668) (92,343) (100,908) (108,429) (117,032) Pretax profits 162,210 370,758 311,132 249,404 (73,369) 174,745 165,542 178,534 Extraordinary items 13,643 (93,277) 28,873 (1,115) 6,268 — — — Current tax (37,479) (77,683) (76,431) (51,009) 714 (47,996) (45,649) (47,682) Deferred tax (18,532) 2,182 (41,204) (30,472) 14,660 2,225 2,534 992 Net profits 119,841 201,362 222,327 166,808 (7,643) 128,974 122,427 131,844 Adjusted net profits after minority interests 106,969 264,296 199,171 168,585 (46,547) 127,740 122,157 130,853 Adjusted earnings per share (Rs) 11.0 27.9 21.0 17.9 (5.1) 13.9 13.3 14.3

Balance sheet (Rs mn) Total equity 899,864 1,015,332 1,125,182 1,104,577 934,518 1,006,299 1,073,818 1,147,011 Deferred tax liability 68,590 68,585 122,258 159,438 114,131 111,907 109,373 108,381 Total borrowings 574,440 603,172 624,188 926,762 1,252,305 1,197,579 1,354,879 1,405,629 Currrent liabilities 760,371 1,004,906 1,062,333 1,103,724 921,548 856,852 937,111 952,668 Total liabilities and equity 2,303,265 2,691,995 2,933,961 3,294,501 3,222,502 3,172,637 3,475,181 3,613,689 Cash 5,518 1,034 901 1,011 5,929 6,598 6,028 6,177 Current assets 749,201 979,837 1,115,772 1,306,074 1,119,647 905,110 1,062,978 1,064,436 Total fixed assets 1,181,706 1,253,051 1,357,380 1,504,836 1,720,515 1,882,017 2,024,764 2,159,164 Investments 366,840 458,072 459,909 482,580 376,412 378,912 381,412 383,912 Total assets 2,303,265 2,691,995 2,933,961 3,294,501 3,222,502 3,172,637 3,475,181 3,613,689

Free cash flow (Rs mn) Operating cash flow, excl. working capital 182,457 327,660 297,003 241,536 (27,495) 177,245 188,686 207,671 Working capital changes 32,023 (71,558) (32,353) (150,549) 50,772 149,841 (77,609) 14,099 Capital expenditure (151,324) (151,507) (181,767) (247,324) (313,814) (258,270) (250,000) (250,000) Investments (16,283) (46,057) (18,696) (25,197) (8,033) (2,500) (2,500) (2,500) Other Income 22,862 29,133 29,090 30,715 36,469 46,272 38,459 38,780 Free cash flow 69,735 87,670 93,277 (150,820) (262,101) 112,589 (102,963) 8,051

Ratios (%) Debt/equity 59.3 55.6 50.0 73.3 119.4 107.1 114.5 112.0 Net debt/equity 58.7 55.6 50.0 73.2 118.9 106.5 114.0 111.5 RoAE 12.5 26.1 17.3 13.6 (4.1) 11.9 10.7 10.8 RoACE 9.2 18.1 12.7 9.8 (0.3) 7.1 7.1 7.2

Key assumptions (IOC standalone) Crude throughput (mn tons) 57.2 65.2 69.0 71.8 69.4 61.6 73.3 73.3 Effective tariff protection (%) 2.0 2.1 2.0 2.1 2.3 2.3 2.3 2.3 Net refining margin (US$/bbl) 5.0 7.8 8.5 5.6 0.1 2.9 3.6 3.9 Sales volume (mn tons) 74.4 75.9 78.9 81.8 80.4 69.6 83.3 86.7 Marketing margin on auto fuels (Rs/liter) 1.9 1.8 1.7 2.7 2.7 3.8 3.0 3.0 Subsidy under-recoveries (Rs mn) (91) — — — — — — — Adventitious gain/(loss) (Rs mn) (30,710) 35,210 9,900 9,300 (17,900) 14,680 — —

Source: Company, Kotak Institutional Equities estimates

28 KOTAK INSTITUTIONAL EQUITIES RESEARCH ADD Embassy Office Parks REIT (EMBASSY) https://ultraviewer.et/en/own Real Estate NOVEMBER 03, 2020 load.html RESULT Sector view: Attractive

Holding-up. Embassy REIT reported a spirited performance with NOI of Rs4.8 bn CMP (`): 343 (+10% yoy) despite continued losses from the hotel portfolio. Occupancy of the office Fair Value (`): 375 portfolio is holding up at 91.7% (-50 bps qoq) despite a weak industry environment. BSE-30: 39,758 Embassy will likely lower the cost of debt, with new debt raise at 6.7% that will prompt a more optimal leverage ratio. Maintain ADD rating with a revised fair value of Rs375/share (from Rs400/share).

Embassy Office Parks REIT Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 343/375/ADD EPS (Rs) 11.3 13.4 15.4 52-week range (Rs) (high-low) 512-301 EPS growth (%) 14.0 18.8 15.0 Mcap (bn) (Rs/US$) 265/3.6 P/E (X) 30.3 25.5 22.2 ADTV-3M (mn) (Rs/US$) 187/3 P/B (X) 1.2 1.3 1.4 Shareholding pattern (%) EV/EBITDA (X) 16.5 14.8 13.6 Promoters 61.6 RoE (%) 4.0 4.9 6.0 FPIs/MFs/BFIs 26.0/1.5/0.1 Div. yield (%) 6.4 7.5 8.7 Price performance (%) 1M 3M 12M Sales (Rs bn) 22 25 29 Absolute (5.4) (4.2) (18.3) EBITDA (Rs bn) 17 20 22 Rel. to BSE-30 (7.9) (9.4) (17.5) Net profits (Rs bn) 9 10 12

Resilient performance from the office segment, hospitality continues to be a drag

Embassy REIT reported resilient operating performance with revenue of Rs5.4 bn (+4% yoy, +5% qoq), NOI of Rs4.8 bn (+10% yoy, +5% qoq) and PAT of Rs2.3 bn (flat yoy, +14% qoq) in 2QFY21. Commercial business reported a better 10% yoy improvement in revenues at Rs5 bn yielding an NOI of Rs4.5 bn (+15% yoy), though consolidated performance continued to be dragged down by the hospitality segment that reported a 90% yoy decline in revenues at Rs30 mn and NOI loss of Rs94 mn in 2QFY21. Lower contribution from the hospitality segment as well as improvement in margins of the commercial business helped improve blended margins to 89% in comparison to 84% in 2QFY20.

Declining interest rate helps fund acquisition of maintenance business

After the conclusion on 2QFY21, Embassy REIT has been able to place NCDs at an interest rate of 6.7% compared to weighted average interest cost of 9.28% up to 2QFY21, and has decided to acquire the common area maintenance business for Manyata and TechZone for an EV of Rs4.7 bn, that had an EBITDA of Rs482 mn for FY2020. Low cost debt will likely help Embassy REIT increase leverage (without being yield dilutive) and accordingly improves the funding choices available to the REIT. Secondly the valuation benchmark (10X EV/EBITDA on FY2020) demonstrates that the REIT manager is conscious to make yield/NOI accretive transactions by making acquisitions at a discount to trading multiples.

Maintain ADD rating with revised fair value of Rs375/share

We view Embassy REIT as a medium risk, reasonable dividend yield (6.3% in FY2021E on CMP) Murtuza Arsiwalla investment with dividend payouts growing at 7% CAGR between FY2020 and FY2023E. We have assigned a value of Rs365 bn (from Rs376 bn) for the operational as well as under- Samrat Verma construction assets of Embassy REIT.

Our fair value estimate is revised to Rs375/share (from Rs400/share) and PAT estimates revised downwards by 14%/10% for FY2021E/2022E as we factor (1) continued losses for the hotel business and a slower ramp up in FY2022E, (2) delay in commissioning of 2.7 mn sq. ft of new office projects to FY2023E, and (3) 100 bps drop in consolidated occupancy primarily on account of lower occupancy for assets in Mumbai. Maintain ADD. [email protected] Contact: +91 22 6218 6427

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

Exhibit 1: Embassy Office Parks REIT reported NOI growth of 10% yoy in 2QFY21 Profit and loss statement for Embassy REIT, March fiscal year-ends, 2019-2022E (Rs mn)

% change 2QFY21 2QFY21E 2QFY20 1QFY21 2QFY21E 2QFY20 1QFY21 1HFY21 1HFY20 % change 2021E 2020 % change 2022E 2022E Real estate (Rental) 4,488 4,544 4,116 4,215 (1) 9 6 8,703 8,403 17,779 16,690 7 19,866 19,866 Real estate (Other) 529 500 452 524 6 17 1 1,053 904 2,088 2,050 2 2,339 2,339 Hotel (Room revenue) 15 39 162 12 (61) (91) 19 27 299 152 647 (76) 945 945 Hotel (F&B) 14 13 96 4 4 (86) 223 18 160 63 392 (84) 368 368 Hotel (Other revenue) 1 4 48 1 (66) (97) 6 3 69 19 103 (82) 154 154 Solar 355 324 333 405 10 7 (12) 760 721 1,525 1,566 (3) 1,555 1,555 Revenues 5,402 5,423 5,206 5,162 (0) 4 5 10,564 10,557 0 21,626 21,449 1 25,228 25,228 Direct expenses (588) (581) (822) (593) (1,181) (1,645) (3,353) (3,279) (3,826) (3,826) NOI 4,814 4,842 4,384 4,569 (1) 10 5 9,383 8,912 5 18,273 18,170 1 21,401 21,401 Indirect expenses (317) (383) (365) (392) (17) (13) (19) (708) (715) (1) (1,584) (1,514) 5 (1,744) (1,744) EBITDA 4,497 4,459 4,019 4,177 1 12 8 8,675 8,198 6 16,689 16,656 0 19,658 19,658 Other income 232 391 175 330 (41) 33 (30) 562 365 1,714 990 1,888 1,888 Depreciation (1,193) (1,183) (1,444) (1,179) 1 (17) 1 (2,372) (2,836) (5,636) (7,057) (5,719) (5,719) Finance costs (1,437) (1,366) (823) (1,373) 5 75 5 (2,810) (1,655) (4,605) (3,804) (5,585) (5,585) Impairment loss — — — — — — — — Profit before tax and associates 2,099 2,300 1,927 1,956 (9) 9 7 4,055 4,072 8,161 6,786 20 10,241 10,241 Profit from associates 246 256 248 245 (4) (1) 0 491 642 1,204 1,169 1,284 1,284 Profit before tax 2,345 2,556 2,175 2,202 (8) 8 6 4,546 4,715 9,365 7,955 18 11,526 11,526 Tax (19) (250) 148 (159) (92) (113) (88) (178) (172) (640) (300) (1,160) (1,160) Net profit 2,326 2,306 2,322 2,042 1 0 14 4,368 4,543 8,726 7,655 14 10,366 10,366 Margins (%) NOI 89 89 84 89 89 84 84 85 69 85 85 EBITDA 83 82 77 81 82 78 77 78 24 78 78 PAT 43 43 45 40 41 43 40 36 1,699 41 41

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Earnings performance during the quarter was dragged down by inferior performance in the hotel segment Segmental income statement for Embassy REIT, March fiscal year-ends (Rs mn)

% change 2QFY21 2QFY21E 2QFY20 1QFY21 2QFY21E 4QFY19 1QFY21 1HFY21 1HFY20 % change 2021E 2020 % change 2022E Revenues Commercial 5,016 5,044 4,567 4,739 (1) 10 6 9,755 9,305 5 19,867 18,710 6 22,205 Hospitality 30 56 311 18 (46) (90) 67 48 535 (91) 234 173 35 1,467 Others 355 324 333 405 10 7 (12) 760 721 5 1,525 1,566 (3) 1,555 Revenues 5,402 5,423 5,206 5,162 (0) 4 5 10,564 10,557 0 21,626 21,449 1 25,228 NOI Commercial 4,583 4,539 4,028 4,306 1 14 6 8,889 8,213 8 17,619 16,628 6 19,626 Hospitality (94) 11 53 (111) (945) (277) (16) (205) 39 (627) (741) 105 (806) 357 Others 326 292 303 374 12 8 (13) 700 660 6 1,395 1,437 (3) 1,419 NOI 4,814 4,842 4,384 4,569 (1) 10 5 9,383 8,912 5 18,273 18,170 1 21,401 NOI Margins Commercial 91 90 88 91 91 88 89 89 88 Hospitality (313) 20 17 (621) (428) 7 (316) 61 24 Others 92 90 91 92 92 92 91 92 91 NOI Margins 89 89 84 89 89 84 84 85 85

Source: Company, Kotak Institutional Equities estimates

30 KOTAK INSTITUTIONAL EQUITIES RESEARCH Embassy Office Parks REIT Real Estate

Exhibit 3: EOP leased 0.1 mn sq. ft in 2QFY21 with 12% re-leasing spread Leasing details for EOP REIT, March fiscal-year ends, 2016-2020

2016 2017 2018 2019 2020 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 Completed area (mn sq. ft) 22.5 23.1 24.2 24.8 26.2 24.8 24.8 24.8 24.8 26.2 26.2 Occupancy area (%) 93.4 94.7 93.5 94.3 92.8 94.3 94.7 95.1 94.5 92.2 91.7 New leases (mn sq. ft) 2.1 1.9 1.3 1.8 2.4 0.6 0.6 0.5 0.4 0.5 0.1 Re-leasing (mn sq. ft) 0.3 1.1 0.5 1.2 1.1 0.6 0.3 0.2 0.1 0.2 0.1 Re-leasing spread (%) 26.6 60.7 35.3 34.9 53.0 50.6 95.0 15.0 20.0 21.0 12.0 New leasing to existing tenant (%) 71.0 50.0 69.0 59.0 71.0 56.7 78.0 71.0 81.0 36.0

Renewals (msf) 2.3 1.6 2.9 0.9 0.6 0.2 0.1 0.1 0.1 0.3 0.1

Source: Company, Kotak Institutional Equities

Lowered distribution guidance reflects Covid-realities

Embassy REIT has lowered its NOI and NDCF guidance (originally given at time of IPO) for FY2021E to factor near-term business realities with a NOI of Rs19 bn (Rs18.5-19.5 bn range) and NDCF of Rs17 bn (Rs16.5-17.4 bn range) compared to guidance at the time of the IPO of Rs21 bn and Rs20 bn respectively. Our revised NOI estimate of Rs18.2 bn (from Rs19.5 bn) is 4% below the company guidance.

The key factors for the lowered guidance have been (1) losses in the hospitality business, (2) slower-than-expected improvement in occupancy at Embassy One, (3) exits in Pune assets that have so far not been back-filled, and (4) delay in lease-up of recently commissioned assets and longer rent-free periods for lease rentals entered into. Specifically for 2QFY21, distribution at Rs4.2 bn is flat compared to 2QFY20 owing to (1) negative working capital due to return of security deposits for exiting tenants, (2) lower distribution from Embassy Golflinks (50% ownership) as the latter was previously repaying outstanding loans to the REIT, and will only pay a share of profits going forward.

Exhibit 4: EOP REIT distributed 100% of NDCF in 2QFY21 Cash flows for Embassy REIT, March fiscal year-ends, 1QFY19 - 2QFY21 (Rs mn)

1QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 Revenue from operations 4,494 5,351 5,206 5,459 5,454 5,162 5,401 Property taxes and insurance (191) (179) (181) (180) (210) (193) (196) Direct operating expenses (486) (643) (641) (639) (605) (400) (392) NOI 3,817 4,529 4,384 4,640 4,639 4,569 4,813 Other income 466 142 300 153 697 379 389 Property management fees (68) (119) (115) (125) (127) (117) (119) Indirect operating expenses (277) (174) (180) (139) (168) (88) (111) EBITDA 3,938 4,378 4,389 4,529 5,041 4,743 4,972 Working captial adjustments (313) 857 245 187 679 117 (276) Cash taxes (618) (326) (356) (356) (343) (242) (124) Other adjustments (288) (209) (381) (177) (732) (375) (80) Cash flow from operating activities 2,719 4,700 3,897 4,183 4,645 4,243 4,492 External Debt (Interest & Principal) NA (667) (238) (258) (403) (444) (436) Other adjustments NA 117 241 105 642 322 - NDCF at SPV level NA 4,150 3,900 4,030 4,884 4,121 4,056 Distribution from SPVs to REIT NA 3,749 4,249 4,323 4,885 4,180 4,088 Distribution from Embassy Golflinks NA 480 480 480 480 480 258 REIT management fees NA (42) (61) (55) (56) (59) (55) Other inflows at REIT (net of expenses) NA (7) (6) (38) 5 (106) (62) NDCF at REIT level NA 4,180 4,662 4,710 5,314 4,495 4,229 Distribution 4,167 4,630 4,707 5,317 4,499 4,244

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 31 Real Estate Embassy Office Parks REIT

On a subsidiary-level performance analysis, the Hilton at Embassy Golf Links and Embassy One that own the hotel properties continue to be the laggard on earnings front. Embassy Quadron (Pune) saw the highest drop in revenues (-24% yoy) in 2QFY20 amongst the office assets with occupancy dropping to 75% in 2QFY21 in comparison to 91.4% in 2QFY20. Sharp drop in NDCF at Embassy Techzone should be seen in the context of additional income earned by the latter on account of penalties for early termination of lease agreement in 2QFY20.

Exhibit 5: Embassy Manyata continues to the highest revenue contributor in the overall portfolio Asset-wise contribution to revenues in 4QFY20 (Rs mn)

Asset City Revenues (Rs mn) NOI (Rs mn) NDCF (Rs mn) 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 Embassy Manyata Bengaluru 2,176 2,181 2,306 2,463 2,690 2,043 2,050 2,158 2,324 2,549 1,999 2,130 2,140 2,289 2,245 Express Towers Mumbai 354 371 377 367 350 312 331 331 334 318 116 298 227 279 237 Embassy Quadron Pune 363 360 349 270 278 290 299 290 234 234 187 203 207 88 70 Embassy Energy Bengaluru 333 383 462 405 355 303 341 435 374 326 (31) 225 223 214 149 Embassy Oxygen Noida 334 362 327 364 352 237 280 265 300 280 141 215 279 263 194 Embassy 247 Mumbai 365 350 305 257 334 315 303 250 210 300 227 208 261 201 271 Embassy Techzone Pune 282 373 337 332 320 260 356 328 322 309 652 245 871 349 391 Embassy Qubix Pune 226 228 221 212 228 190 192 178 180 200 155 177 180 158 188 Embassy Galaxy Noida 222 225 197 206 197 162 175 155 168 172 141 75 195 155 152 Hilton at Embassy Golflinks Bengaluru 245 216 159 16 15 108 99 46 (33) (34) 107 75 65 (63) (39) FIFC Mumbai 240 256 258 261 260 219 234 239 232 231 206 175 216 189 197 Embassy One Bengaluru 66 153 135 9 22 (55) (21) (57) (77) (69) NA NA NA NA NA Revenue from operations 5,206 5,458 5,433 5,162 5,401 4,384 4,639 4,618 4,568 4,816 3,900 4,026 4,864 4,122 4,055 Embassy Golflinks Bengaluru 913 905 1,136 962 1,005 835 848 1,058 883 927 — — — — —

Source: Company, Kotak Institutional Equities

Other highlights from the results

 Contractual: Embassy has an incremental 3.4 mn sq. ft of assets that are likely to come up for contractual escalations in 2HFY21E after having achieved 12% escalations on 3.7 mn sq. ft in 1HFY21 (11% on 1.9 mn sq. ft in 2QFY21). Management sees little risk to the same as the rentals are at 32% discount to extant market rentals post escalations. Embassy REIT has another 6.4 mn sq. ft and 6.1 mn sq. ft coming up for contractual escalation in FY2022E and FY2023E respectively.

 Re-leasing: Embassy has total lease expiries of 1.9 mn sq. ft (6.6% of rentals) in FY2021E of which they have concluded releasing agreements for 0.5 mn sq. ft. at 13% mark-to- market gains. Management is confident of achieving another 0.2 mn sq. ft of renewals in 2HFY21, though sees risk for the balance 1.2 mn sq. ft (5.6% of rentals). Embassy REIT has expiries of 1.1 mn sq. ft in FY2022E and 3 mn sq. ft in FY2023E that could cumulatively contribute Rs1.1 bn of incremental rentals.

32 KOTAK INSTITUTIONAL EQUITIES RESEARCH Embassy Office Parks REIT Real Estate

Exhibit 6: Embassy has 1.3 mn sq. ft up for renewal in FY2021 with limited re-leasing premium Schedule of re-leasing for Embassy REIT, March fiscal year-ends, 2021-24E ('000 sq. ft, Rs/sq. ft per month)

In-place (Rs/sq. ft pm, LHS) Market (Rs/sq. ft, LHS) Area ('000 sq. ft, RHS) 140 3,500 121 120 2,991 3,000 103 100 95 2,500

77 78 80 69 2,000 60 60 50 1,500 1,362 1,115 1,144 40 1,000

20 500

- - 2021E 2022E 2023E 2024E

Source: Company, Kotak Institutional Equities

 Construction: Embassy commissioned two projects (1) 0.8 mn sq. ft at Embassy Manyata, and (2) 0.6 mn sq. ft at Embassy Oxygen that have 60% pre-lease commitments. Embassy REIT has another 2.7 mn sq. ft of office properties under construction that are estimated to commission towards end-FY2023E with no incremental capacity addition in the interim. Embassy has a balance capex of Rs23.4 bn to be incurred over the next few years on projects under construction.

Exhibit 7: 2.7 msf of on-campus new build pipeline under various stages of development Development status of various projects (as on Aug 2020)

Asset Status Embassy Manyata M3 M 3 Block A Sub structure works in advanced stage structural steel (Block A, 1 mn sq. ft) works in basements underway. Targeting Dec’ 22 completion Design completed excavation and pre Embassy Oxygen construction works initiated (Tower 1, 0.7 msf) Targeting Mar’ 23 completion Hudson Block Design, excavation sub structure works completed super Embassy Techzone structure work initiated Ganges Block Design excavation completed sub structure work Hudson (0.5 mn sq, ft) underway

Ganges (0.4 mn sq, ft) Targeting June 2022 completion

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 33 Real Estate Embassy Office Parks REIT

Exhibit 8: Hotel assets were closed for major part of 1HFY21 Key metrics for hotel properties, March fiscal year-ends (%, Rs/day)

1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 Occupancy (%) Hilton 70 72 68 51 11 9 Four Seasons 4 10 26 24 0 1 ADR (Rs/day) Hilton 8,880 9,229 9,514 9,490 NM NM Four Seasons 12,359 10,292 10,782 9,393 NM NM

Source: Company, Kotak Institutional Equities

Exhibit 9: 42% of gross rentals originate from top 10 tenants Top 10 tenants of Embassy REIT

Sector Rentals (%) IBM Technology 12 Cognizant Technology 9 NTT Data Technology 4 ANSR RCA 3 Cerner Healthcare 3 PwC RCA 3 Google India Technology 2 Nokia Telecom 2 JP Morgan Financial services 2 L&T Infotech Technology 2 Total 42

Source: Company, Kotak Institutional Equities

34 KOTAK INSTITUTIONAL EQUITIES RESEARCH Embassy Office Parks REIT Real Estate

Exhibit 10: Embassy Manyata has a re-leasing premium of 47% compared to overall re-leasing premium of 27% Portfolio summary for Embassy REIT

Leasable area (msf) WALE Occupancy (%) Rent (Rs psf/month) Property Completed Development Total (years) (%) In-place Market MTM (%) Embassy Manyata 11.8 3.1 14.9 7.3 97.0 61.0 91.0 49.2 Embassy Golflinks 2.7 — 2.7 8.3 98.6 116.0 148.0 27.6 Embassy One 0.3 — 0.3 8.4 5.5 156.0 147.0 (5.8) Bengaluru Sub-total 14.8 3.1 17.9 7.6 95.7 72.0 102.0 41.7 Express Towers 0.5 — 0.5 3.4 90.2 266.0 270.0 1.5 Embassy 247 1.2 — 1.2 4.0 85.6 99.0 110.0 11.1 FIFC 0.4 — 0.4 3.5 77.5 297.0 285.0 (4.0) Mumbai Sub-total 2.1 — 2.1 3.6 85.2 173.0 178.0 2.9 Embassy Techzone 2.2 3.3 5.5 5.2 90.6 49.0 48.0 (2.0) Emabassy Quadron 1.9 — 1.9 2.8 77.0 44.0 48.0 9.1 Embassy Qubix 1.5 — 1.5 4.9 99.6 40.0 48.0 20.0 Pune Sub-total 5.6 3.3 8.9 4.4 87.8 45.0 48.0 6.7 Embassy Oxygen 2.5 0.7 3.2 10.7 77.7 48.0 54.0 12.5 Embassy Galaxy 1.4 — 1.4 2.7 98.9 35.0 45.0 28.6 Noida Sub-total 3.9 0.7 4.6 8.0 85.2 43.0 50.0 16.3 Total 26.4 7.1 33.5 6.5 91.7 70.0 89.0 27.1 Four Seasons at Embassy One 230 keys — 230 keys — — — — Hilton at Embassy Golflinks 247 keys — 247 keys — — — — Hilton at Embassy Manyata (5 & 3 star) — 619 keys 619 keys — — — — — Embassy Energy 100 MW — 100 MW — — — — — 477 keys/100 1,096 Sub-total (Infrastructure assets) MW 619 keys keys/100 MW

Total

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 35 Real Estate Embassy Office Parks REIT

Exhibit 11: We factor commissioning of new assets in FY2023 and a drop in occupancy in FY2021E Key assumptions for different properties under Embassy REIT, March fiscal year-ends, 2019-2023E (Rs per sq. ft per month)

2018 2019 2020 2021E 2022E 2023E Operational metrics Real estate Leasable area (mn sq. ft) 21 22 23 23 23 24 Occupancy (%) 94 94 95 91 94 94 Area leased (msf) 20 20 22 21 22 23 In-place rent (Rs/sf) 55 60 68 69 74 77 Hotel Keys (#) 247 247 477 477 477 1,096 RevPAR (Rs/day) 5,705 6,501 3,991 875 5,429 5,574 Solar Capacity (MW) 8 100 100 100 100 100 PLF (%) 24 20 20 20 20 20 Tariff (Rs/kwh) 6 8 9 9 9 9 Financial metrics Revenue 16,118 18,771 21,449 21,626 25,228 29,101 Real estate 15,242 16,536 18,740 19,867 22,205 23,994 Hotel 728 848 1,143 234 1,467 3,521 Solar 105 1,386 1,566 1,525 1,555 1,586 NOI 13,362 15,741 18,170 18,273 21,401 24,425 Real estate 13,124 14,141 16,623 17,619 19,626 21,220 Hotel 171 263 111 (741) 357 1,762 Solar 25 1,337 1,436 1,395 1,419 1,443 EBITDA 12,059 13,597 16,656 16,689 19,658 22,393 PAT 2,569 3,653 7,655 8,726 10,366 11,926 NDCF — — 18,821 17,040 19,910 23,003

Source: Company, Kotak Institutional Equities estimates

Exhibit 12: Operational and under-construction assets are ascribed an EV of Rs382 bn Valuation of Embassy REIT based on March 2022E ( Rs mn)

Mar-22 Enterprise value 388,938 Enterprise value (attributable) 364,726 Net debt 75,210 Equity value 289,517 Equity value (Rs/unit) 375 Key assumptions WACC 11.5 Capitalization rate 8

Source: Company, Kotak Institutional Equities estimates

36 KOTAK INSTITUTIONAL EQUITIES RESEARCH Embassy Office Parks REIT Real Estate

Exhibit 13: Revision in earnings estimates for Embassy REIT, March fiscal year-ends, 2021-23E (Rs mn)

Revised Orignal Change (%) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E Net sales 21,626 25,228 29,101 23,121 26,521 31,285 (6) (5) (7) NOI 18,273 21,401 24,425 19,581 22,524 26,373 (7) (5) (7) EBITDA 16,689 19,658 22,393 17,992 20,690 24,352 (7) (5) (8) PAT (after share of profit from associates) 8,726 10,366 11,926 10,105 11,567 12,054 (14) (10) (1)

Source: Kotak Institutional Equities estimates

Exhibit 14: Embassy REIT will see a strong growth in revenues on commissioning of new assets Profit model, balance sheet and cash model for Embassy REIT, March fiscal year-ends, 2017 - 2023E (Rs mn)

2017 2018 2019 2020 2021E 2022E 2023E Profit model Net sales 14,849 16,118 18,771 21,449 21,626 25,228 29,101 EBITDA 10,793 12,059 13,597 16,656 16,689 19,658 22,393 Depreciation (3,244) (4,423) (3,563) (7,057) (5,636) (5,719) (5,970) EBIT 7,549 7,636 10,034 9,599 11,053 13,939 16,423 Interest (6,938) (6,312) (7,060) (3,804) (4,605) (5,585) (6,101) Other income 1,607 1,545 1,539 990 1,714 1,888 2,070 Pre-tax profits 2,218 2,868 4,514 6,786 8,161 10,241 12,392 Tax (1,027) (1,259) (2,012) (300) (640) (1,160) (1,824) Net income 1,191 1,609 2,502 6,486 7,522 9,082 10,568 Share of profit of associates 579 960 1,152 1,169 1,204 1,284 1,358 Adjusted net income 1,771 2,569 3,653 7,655 8,726 10,366 11,926 Earnings per share (Rs) 4.1 5.7 4.7 9.9 11.3 13.4 15.5 Balance sheet Total equity 33,960 34,789 228,945 223,178 214,864 205,320 194,244 Total borrowings 55,557 75,966 71,246 56,171 60,599 73,377 92,393 Deferred tax liability 2,360 2,520 3,363 40,407 41,673 41,673 41,673 Current liabilities 20,092 21,880 21,894 15,147 21,129 21,214 21,368 Total liabilities and equity 111,969 135,155 325,448 334,902 338,266 341,585 349,678 Net fixed assets 4,157 10,398 17,394 20,699 19,209 18,561 17,913 Investment property 62,731 66,610 69,663 194,076 188,314 187,344 194,047 CWIP 6,505 9,570 6,042 4,107 18,464 25,656 22,336 Goodwill 10,957 11,031 155,928 55,291 50,313 50,313 50,313 Current assets 21,314 29,079 67,764 24,364 25,600 23,346 28,704 Investments 6,305 8,466 8,656 36,365 36,365 36,365 36,365 Total assets 111,969 135,155 325,448 334,902 338,266 341,585 349,678 Free cash flow Operating cash flow excl. working capital 10,322 12,721 12,239 28,400 17,253 19,783 21,927 Working capital changes (455) (213) 155 (10,996) 14,725 (29) 64 Capital expenditure (7,777) (19,584) (7,328) (28,691) (5,763) (9,293) (6,705) Free cash flow 2,090 (7,076) 5,066 (11,287) 26,216 10,461 15,286 Ratios (%) Net debt/equity (X) 1.5 2.1 0.1 0.2 0.2 0.3 0.4 RoAE (%) 5.4 7.5 2.8 3.4 4.0 4.9 6.0 RoACE (%) 1.1 1.8 1.1 2.0 2.2 2.7 3.1

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 37 SELL Whirlpool (WHIRL) https://ultraviewer.et/en/own Consumer Durables & Apparel NOVEMBER 03, 2020 load.html RESULT Sector view: Cautious

2QFY21 fares better than expected. Whirlpool reported a better-than-expected 2Q CMP (`): 2,051 with yoy revenue growth of 15% versus our estimate of 10% growth. Healthy demand Fair Value (`): 1,750 for effort-saving appliances coupled with possible share gain drove the outperformance. BSE-30: 39,758 Yoy lower employee costs and other expenses led to strong margin performance. SELL on rich valuations and potential increase in competitive intensity in the medium term. DCF-based FV increases to Rs1,750 (Rs1,700 earlier) on roll forward to December 2021.

Whirlpool Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 2,051/1,750/SELL EPS (Rs) 32.9 49.0 61.0 52-week range (Rs) (high-low) 2,555-1,343 EPS growth (%) (12.4) 49.1 24.5 Mcap (bn) (Rs/US$) 261/3.5 P/E (X) 62.4 41.8 33.6 ADTV-3M (mn) (Rs/US$) 136/2 P/B (X) 9.2 8.3 7.5 Shareholding pattern (%) EV/EBITDA (X) 41.7 28.9 22.7 Promoters 75.0 RoE (%) 15.6 20.9 23.5 FPIs/MFs/BFIs 3.5/8.3/1.6 Div. yield (%) 0.5 1.0 1.5 Price performance (%) 1M 3M 12M Sales (Rs bn) 55 69 83 Absolute (6.8) (1.0) (8.3) EBITDA (Rs bn) 6 8 10 Rel. to BSE-30 (9.3) (6.4) (7.4) Net profits (Rs bn) 4 6 8

Strong demand drives healthy revenue performance

Whirlpool reported a better-than-expected quarter with revenues growing 14.8% yoy against our expectation of 10% growth. The outperformance was probably due to better sales ramp-up and market share gains over unorganized players, as has been evidenced by 2Q performance of other durable companies. Further, 2QFY21 may also have witnessed improved demand environment on account of: (1) pent-up demand due to the lockdown in 1QFY21, (2) improved product visibility and shelf space in e-commerce and modern trade channels, and (3) healthy demand for effort-saving appliances such as washing machines and dishwashers.

Tighter cost controls led to higher-than-expected EBITDA margins

Gross margin shrunk by 403 bps yoy to 37.9% possibly on account of weaker mix and discounts to promote retail off-take and provide some relief to the dealer/distributor channel, particularly at the beginning of the quarter. However, higher-than-expected revenues and lower-than-expected costs (employee expense down 2% yoy, other expenses down 4% yoy) resulted in EBITDA print of Rs1.8 bn (up 26% yoy), which was ahead of estimates. We reckon advertising expense and freight expense would have declined on a yoy basis. The company also reported sharply higher other income (up 74% qoq).

Revised FV of Rs1,750; CMP baking in healthy revenue momentum

Whirlpool’s revenue trajectory may remain decent going ahead as larger players gain share and improve their reach via organized retail channels. Further, Whirlpool’s expansion product portfolio as well as distribution makes it well-positioned across product categories it is present Garima Mishra in (barring perhaps ACs). Whirlpool’s balance sheet remains healthy and company’s working capital cycle turned negative due to strong reduction in both inventory days as well as Shubhangi Nigam receivable days compared to March 2020. Valuations at 43X FY2022E P/E capture these positives, in our view. We increase our FV to Rs1,750 (earlier Rs1,700) on account of roll forward to December 2021 from September 2021.

[email protected] Contact: +91 22 6218 6427

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Whirlpool Consumer Durables & Apparel

Exhibit 1: Revenue growth higher than expected on better ramp-up of revenues Interim results for Whirlpool, March fiscal year-ends (Rs mn, %)

Change (%) 2QFY21 2QFY21E 2QFY20 1QFY21 KIE yoy qoq 1HFY21 1HFY20 Yoy (%) FY2021E FY2020 Yoy (%) Total Income 15,995 15,328 13,935 10,271 4.3 14.8 55.7 26,265 33,677 (22.0) 52,966 59,925 (11.6) Total Expenditure (14,183) (13,826) (12,497) (9,804) 2.6 13.5 44.7 (23,987) (29,215) (17.9) (47,839) (53,192) (10.1) Raw materials (9,937) (9,350) (8,096) (6,578) 6.3 22.7 51.1 (16,514) (20,432) (19.2) (32,260) (36,499) (11.6) Employee expense (1,502) (1,563) (1,535) (1,487) (3.9) (2.1) 1.0 (2,989) (2,997) (0.3) (6,073) (5,896) 3.0 Other expenditure (2,744) (2,912) (2,866) (1,740) (5.8) (4.3) 57.7 (4,484) (5,785) (22.5) (9,506) (10,796) (12.0) EBITDA 1,812 1,502 1,437 466 20.6 26.0 288.4 2,278 4,462 (48.9) 5,127 6,733 (23.9) EBITDA (%) 11.3 9.8 10.3 4.5 8.7 13.2 9.7 11.2 Depreciation (424) (320) (337) (284) 32.5 25.8 49.6 (708) (642) 10.2 (1,448) (1,293) 12.0 Interest (10) (75) (43) (74) (87.3) (78.1) (87.1) (83) (88) (5.6) — (199) (100.0) Other income 348 200 367 142 74.2 (5.0) 145.5 490 641 (23.5) 1,457 1,287 13.2 PBT 1,726 1,307 1,424 251 32.1 21.3 587.3 1,978 4,373 (54.8) 5,136 6,529 (21.3) Exceptional items — — — — - - — — Tax expense (440) (327) (175) (87) 34.7 151.5 408.9 (527) (1,216) (56.7) (1,389) (1,766) (21.3) PAT 1,286 980 1,249 165 31.2 3.0 680.9 1,451 3,157 (54.0) 3,747 4,763 (21.3) Adjusted PAT 1,286 980 1,249 165 31.2 3.0 680.9 1,451 3,157 (54.0) 3,747 4,763 (21.3) Number of shares (mn) 127 127 127 127 127 127 127 127 EPS 10.1 7.7 9.8 1.3 31.2 3.0 680.9 11.4 24.9 (54.0) 29.5 37.5 (21.3) Key ratios (as % of revenues) RM cost 62.1 61.0 58.1 64.0 62.9 60.7 60.9 60.9 Employee cost 9.4 10.2 11.0 14.5 11.4 8.9 11.5 9.8 Other expenditure 17.2 19.0 20.6 16.9 17.1 17.2 17.9 18.0 Effective tax rate 25.5 25.0 12.3 34.4 26.6 27.8 27.0 27.0

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: EBITDA margin improves on account of higher sales and cost controls Key operating metrics for Whirlpool, March fiscal year-ends (%)

1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 Revenue growth 15.0 37.5 18.3 24.0 12.8 1.9 26.5 7.7 19.6 17.9 4.9 (0.1) (48.0) 14.8 Gross margin 35.9 39.4 41.3 36.4 37.6 38.0 36.8 37.6 37.5 41.9 39.6 38.1 36.0 37.9 EBITDA margin 14.4 9.8 9.3 11.1 14.8 9.1 8.1 12.6 15.3 10.3 7.1 10.1 4.5 11.3 EBITDA growth 10.8 26.6 5.7 11.8 15.8 (5.1) 9.4 23.0 23.9 33.4 (8.1) (20.1) (84.6) 26.0 PAT growth 8.8 25.1 (4.1) 22.9 23.4 6.9 14.1 13.9 16.5 59.0 20.8 (16.0) (91.4) 3.0

Source: Company, Kotak Institutional Equities

Working capital cycle improves on the back of strong collections

Net working capital days have improved to negative five days from three days in March 2020. This is driven mainly by strong collections, lower inventory on books and efficient cash management. Inventory days have reduced from 73 days in March 2020 to 45 days in September 2020.

Overall, balance sheet remains healthy with nil debt and cash balances of Rs19.5 bn as of September 2020.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 39 Consumer Durables & Apparel Whirlpool

Exhibit 3: Working capital cycle improves in 2Q Standalone balance sheet of Whirlpool, March fiscal year-ends (Rs mn)

Mar 2019 Sep 2019 Mar 2020 Sep 2020 Assets Non-current assets Fixed assets 5,032 5,251 7,035 6,879 CWIP 433 1,605 441 297 Intangible assets 50 40 54 41 Investments in Joint venture 1,722 1,722 1,722 1,722 Financial assets Investments 3,458 - - - Loans 182 182 181 137 Others 123 132 1 1 Deferred tax assets (net) 344 352 375 427 Other non-current assets 1,109 695 810 911 Total non-current assets 12,453 9,979 10,620 10,415 Current assets Inventories 8,886 8,365 11,989 7,941 Financial assets Trade receivables 2,556 2,941 2,816 2,119 Investment 1,383 4,962 3,783 - Loans 26 33 67 113 Others 138 117 206 26 Other current assets 1,038 995 1,115 854 Total current assets 14,027 17,414 19,977 11,052 Cash and balances 10,610 13,047 12,840 19,485 Total assets 37,090 40,440 43,437 40,952 Equity and liabilities Equity Equity share capital 1,269 1,269 1,269 1,269 Other equity 20,158 22,593 24,200 25,053 Total equity 21,427 23,862 25,469 26,322 Non-current liabilities Trade payables 17 21 19 28 Other payables 52 170 147 146 Provisions 1,864 2,214 2,074 2,195 Government grants 56 54 51 48 Current liabilities Trade payables 12,362 12,985 14,292 10,978 Other payables 899 723 175 132 Other liabilities - - 756 652 Provisions 335 331 377 389 Government grants 6 6 6 6 Deferred revenue 73 75 72 58 Total liabilities 15,664 16,578 17,968 14,630 Total equity and liabilities 37,090 40,440 43,437 40,952 Days of sales Inventory 60 55 73 45 Receivables 17 19 17 12 Payables 84 85 87 63 Net working capital (6) (11) 3 (5)

Source: Company, Kotak Institutional Equities

FY2021 estimates raised to bake in healthy revenue run-rate

We raise our FY2021 revenue estimates as we bake in stronger-than-expected 2QFY21 performance. EBITDA increase is higher as we model lower costs. We broadly maintain our FY2022-23 estimates.

40 KOTAK INSTITUTIONAL EQUITIES RESEARCH Whirlpool Consumer Durables & Apparel

Exhibit 4: We raise our FY2021E EPS estimates by 11% Earnings revision table, March fiscal year-ends, 2021-23E (Rs mn, %)

New estimates Old estimates Change (%) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E Revenues 55,049 69,273 83,378 52,966 69,462 83,604 3.9 (0.3) (0.3) Gross profit 21,520 27,081 32,594 20,706 27,154 32,683 Gross margin (%) 39.1 39.1 39.1 39.1 39.1 39.1 EBITDA 5,711 8,150 10,281 5,127 8,201 10,343 11.4 (0.6) (0.6) EBITDA (%) 10.4 11.8 12.3 9.7 11.8 12.4 PAT 4,173 6,223 7,744 3,747 6,260 7,789 11.4 (0.6) (0.6) EPS (Rs) 32.9 49.0 61.0 29.5 49.3 61.4 11.4 (0.6) (0.6)

Source: Company, Kotak Institutional Equities estimates

Exhibit 5: We build in 12% revenue CAGR for the company over FY2020-23E Key assumptions for Whirlpool’s financial projections, March fiscal year-ends, 2012-23E (Rs mn)

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E 2020-23E CAGR (%) Volumes (mn units) 2.7 2.7 2.5 2.8 3.0 3.3 4.1 4.4 4.9 4.5 5.5 6.4 9.7 Realization (Rs) 9,721 10,253 11,151 11,901 11,508 11,771 11,928 12,225 12,469 12,220 12,709 12,963 1.3 Net revenues 26,579 27,727 28,346 32,938 34,399 39,408 48,319 53,977 59,925 55,049 69,273 83,378 11.6 EBITDA 2,231 2,220 2,115 3,313 3,835 4,888 5,600 6,422 6,733 5,711 8,150 10,281 15.2 EBITDA margin (%) 8.4 8.0 7.5 10.1 11.1 12.4 11.6 11.9 11.2 10.4 11.8 12.3 Depreciation 497 603 638 681 769 875 1,015 1,113 1,293 1,448 1,588 1,794 11.5 Other income 123 205 280 380 553 730 867 1,047 1,287 1,457 1,968 2,129 18.3 Tax rate (%) 31.8 28.7 29.4 30.0 32.6 33.7 35.2 35.0 27.0 27.0 27.0 27.0 PAT 1,237 1,278 1,229 2,105 2,400 3,105 3,507 4,070 4,763 4,173 6,223 7,744 17.6

Source: Company, Kotak Institutional Equities estimates

x

Exhibit 6: Our DCF-based SoTP increases to Rs1,750 on roll forward DCF valuation of Whirlpool, March fiscal year-ends, 2018-40E (Rs mn)

2018 2019 2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2035E 2040E Net revenue 48,319 53,977 59,925 55,049 69,273 83,378 96,951 111,746 125,379 140,675 156,403 173,889 193,330 293,337 401,886 EBIT 4,585 5,309 5,440 4,263 6,562 8,487 9,986 11,686 12,963 14,557 16,553 18,894 21,039 33,096 45,343 EBIT margin (%) 9.5 9.8 9.1 7.7 9.5 10.2 10.3 10.5 10.3 10.3 10.6 10.9 10.9 11.3 11.3 Tax expense (1,612) (1,859) (1,472) (1,153) (1,775) (2,296) (2,701) (3,161) (3,506) (3,938) (4,477) (5,111) (5,691) (8,952) (12,265) EBIT* (1-tax rate) 2,973 3,449 3,969 3,110 4,787 6,192 7,285 8,525 9,457 10,620 12,075 13,784 15,348 24,144 33,078 Depreciation 1,015 1,113 1,293 1,448 1,588 1,794 2,000 2,206 2,433 2,681 2,928 3,176 3,444 4,312 4,999 Change in working capital 12 390 (1,246) 1,627 255 246 227 244 210 234 231 254 280 425 582 Capital expenditure (1,561) (1,669) (3,346) (301) (2,500) (2,500) (2,500) (2,500) (3,000) (3,000) (3,000) (3,000) (3,500) (5,000) (5,000) Free cash flows 2,438 3,283 670 5,884 4,130 5,731 7,013 8,475 9,101 10,535 12,235 14,214 15,572 23,880 33,659 Discounted cash flow - 4,019 5,002 5,489 5,950 5,730 5,949 6,196 6,456 6,344 5,645 4,617

WACC (%) 11.5 NPV calculation Terminal growth rate 6.0 Sum of free cash flow 106,638 Date 31-Dec-21 Terminal value 88,976 Terminal value calculation Enterprise value 195,614 Cash flow in terminal year 33,659 Net debt/(cash) (24,002) Terminal value 648,696 Equity value 219,616 Discounted terminal value 88,976 Add: value of stake in Elica JV 2,437 Shares o/s (mn) 127 Equity value per share (Rs) 1,750

Source: Company, Kotak Institutional Equities estimates

x

KOTAK INSTITUTIONAL EQUITIES RESEARCH 41 Consumer Durables & Apparel Whirlpool

Exhibit 7: We expect Whirlpool to deliver 36% EPS CAGR over FY2021-23E Summary financials of Whirlpool, March fiscal year-ends, 2012-23E (Rs mn)

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E Profit model (Rs mn) Sales 26,579 27,727 28,346 32,938 34,399 39,408 48,319 53,977 59,925 55,049 69,273 83,378 EBITDA 2,231 2,220 2,115 3,313 3,835 4,888 5,600 6,422 6,733 5,711 8,150 10,281 Other income 123 205 280 380 545 730 867 1,047 1,287 1,457 1,968 2,129 Interest (44) (30) (14) (6) (52) (59) (44) (91) (199) — — — Depreciation (497) (603) (638) (681) (769) (875) (1,015) (1,113) (1,293) (1,448) (1,588) (1,794) Profit before tax 1,813 1,792 1,742 3,005 3,559 4,685 5,408 6,265 6,529 5,720 8,530 10,616 Tax expense (576) (514) (513) (900) (1,159) (1,580) (1,902) (2,194) (1,766) (1,547) (2,307) (2,871) PAT 1,237 1,278 1,229 2,105 2,400 3,105 3,507 4,070 4,763 4,173 6,223 7,744 EPS 9.8 10.1 9.7 16.6 18.9 24.5 27.6 32.1 37.5 32.9 49.0 61.0 Balance sheet (Rs mn) Equity 4,902 6,175 7,400 9,158 11,657 14,831 17,963 21,427 25,469 28,139 31,375 34,473 Total borrowings — — — — — — — — — — — — Deferred tax liability 213 249 213 24 30 — — — — — — — Current liabilities and provisions 6,758 7,421 8,077 9,307 10,826 13,931 14,295 15,664 17,968 16,596 20,015 23,414 Total liabilites 11,872 13,845 15,691 18,489 22,512 28,761 32,258 37,090 43,437 44,735 51,390 57,887 Net fixed assets 3,837 4,149 4,245 3,959 4,029 4,274 4,790 5,515 7,530 6,383 7,296 8,002 Investments 0 0 0 0 0 0 0 1,722 1,722 1,722 1,722 1,722 Cash & cash equivalent 859 1,550 2,918 5,357 8,563 10,590 9,819 11,993 16,623 22,068 24,647 27,284 Other current assets 7,177 8,146 8,528 9,173 9,921 13,898 17,650 17,860 17,561 14,561 17,726 20,879 Total assets 11,872 13,845 15,691 18,488 22,512 28,761 32,258 37,090 43,437 44,735 51,390 57,887 Free cash flow (Rs mn) Operating cash flow 1,840 1,882 1,759 2,434 2,840 3,304 3,822 3,835 5,203 4,164 5,843 7,410 Working capital changes 247 (465) 267 559 636 520 12 390 (1,246) 1,627 255 246 Capital expenditure (1,184) (841) (864) (849) (792) (1,122) (1,561) (1,669) (3,346) (301) (2,500) (2,500) Free cash flow 903 576 1,162 2,144 2,683 2,702 2,272 2,556 611 5,490 3,598 5,156 Ratios EBITDA margin (%) 8.4 8.0 7.5 10.1 11.1 12.4 11.6 11.9 11.2 10.4 11.8 12.3 Net debt/equity (X) (0.2) (0.3) (0.4) (0.6) (0.7) (0.7) (0.5) (0.6) (0.7) (0.8) (0.8) (0.8) Book value (Rs/share) 38.6 48.7 58.3 72.2 91.9 116.9 141.6 168.9 200.7 221.8 247.3 271.7 RoAE (%) 27.1 23.1 18.1 25.4 23.1 23.4 21.4 20.7 20.3 15.6 20.9 23.5

Source: Company, Kotak Institutional Equities estimates

42 KOTAK INSTITUTIONAL EQUITIES RESEARCH BUY Jindal Steel and Power (JSP) https://ultraviewer.et/en/own Metals & Mining NOVEMBER 02, 2020 load.html RESULT Sector view: Attractive

Steel continues to shine. JSP reported yet another record high EBITDA in 2QFY21 led CMP (`): 191 by strong steel volumes and higher spreads. Steel volumes grew by 32% yoy even as Fair Value (`): 285 Sarda iron ore and operating leverage aided margins. JSP has deconsolidated the Oman BSE-30: 39,758 assets from its financials and expects the divestment to conclude in 3QFY21. Net debt reduced sharply led by internal accrual and Oman divestment and deleveraging should continue with ~25% average FCF yield over FY2021-23E. Maintain BUY. Jindal Steel and Power Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 191/285/BUY EPS (Rs) 23.8 23.6 23.8 52-week range (Rs) (high-low) 239-62 EPS growth (%) 410.9 (0.7) 0.7 Mcap (bn) (Rs/US$) 195/2.7 P/E (X) 8.0 8.1 8.0 ADTV-3M (mn) (Rs/US$) 2,722/37 P/B (X) 0.6 0.5 0.5 Shareholding pattern (%) EV/EBITDA (X) 4.8 4.3 4.0 Promoters 60.5 RoE (%) 7.4 6.9 6.5 FPIs/MFs/BFIs 12.0/9.8/3.7 Div. yield (%) 0.0 0.0 0.0 Price performance (%) 1M 3M 12M Sales (Rs bn) 352 381 396 Absolute 0.3 3.2 54.7 EBITDA (Rs bn) 96 94 90 Rel. to BSE-30 (2.4) (2.4) 56.3 Net profits (Rs bn) 24 24 24

2QFY21—strong margins with higher prices and muted costs JSP’s consolidated adjusted EBITDA (Ex-Oman) of Rs27 bn (+78% yoy, +23% qoq) was in line with our estimates. Steel sales volume increased to 1.93 mn tons (+32% yoy, +24% qoq) primarily due to higher exports and ramp-up at Angul. Blended steel realizations at Rs40,722/ton were lower by 10% yoy but more than offset by lower costs at Rs28,106/ton (-23% yoy, -2% qoq) primarily due to the usage of SMPL iron ore (zero cost) and weak thermal coal prices. EBITDA/ton at Rs12,615/ton (+47% yoy, +15% qoq) was ahead of our estimate of Rs12,250/ton. JPL’s EBITDA of Rs3 bn (+1% yoy, -18% qoq) was below our estimates mainly led by Rs1 bn of provisional surcharge. Power generation increased by 21% yoy to 2.7 bn units on improved demand with easing of lockdown restrictions. EBITDA/unit declined by 16% yoy to Rs1.2.

Oman divestment closure and multiple other triggers lined up

In 2QFY21, JSPL successfully completed the first tranche of the Oman divestment by transferring 48.99% stake whereas it expects to conclude the transaction by 3QFY21. The divestment also addresses concerns on lumpy debt repayments in FY2021E (Exhibit 5).

We see upside risks from various other events in the medium term – (1) restart of inventory access at Sarda mines, (2) higher coal security with success in the ongoing commercial coal block auctions, (3) execution of PPA contracts, (4) refinancing of the remaining US$800 mn international debt and (5) divestment of other international businesses and land parcels in Australia.

Attractive risk-reward and multiple upside optionality; maintain BUY

Management has so far walked the talk with impressive volume performance and debt reduction in Sumangal Nevatia the past 3-4 quarters. Despite limited growth capex, it still has growth headroom till FY2023E with 82% utilization for the steel business in 1HFY21. Deleverage would continue at an impressive pace Prayatn Mahajan with average 26% FCF yield over FY2021-23E. We estimate net debt/EBITDA to reduce from 4.6X in FY2020 to 2.8X/2.3X/1.8X in FY2021/22/23E. We factor higher steel spreads and increase standalone EBITDA by 13%/5%/7% for FY2021/22/23E; however, adjusting for Oman divestment, consolidated EBITDA is revised by +4%/(5)%/(6)% for FY2021/22/23E. Our Fair Value stands at Rs285/share (from Rs280) based on March 2022E SoTP. JSP offers the best risk-reward in the metals sector and trades at attractive valuations of 4.3X EV/EBITDA and 0.5X P/B FY2022. [email protected] Contact: +91 22 6218 6427

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

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

(% chg.) 2QFY21 2QFY21E 2QFY20 1QFY21 KIE yoy qoq 1HFY21 1HFY20 (%chg) FY2021E FY2020 (%chg) Net sales 89,898 106,292 76,878 75,847 (15) 17 19 165,745 161,432 3 351,946 369,175 (5) Total expenditure (62,875) (79,722) (61,697) (53,826) (21) 2 17 (116,702) (126,324) (8) (255,587) (290,636) (12) (Inc)/Dec in stock (4,042) 2,567 1,683 997 (257) (340) (505) (3,044) 1,793 — — Raw material consumed (25,088) (40,734) (31,679) (27,625) (38) (21) (9) (52,713) (64,403) (18) (127,436) (144,912) (12) Staff costs (2,277) (3,042) (2,151) (2,284) (25) 6 (0) (4,561) (4,463) 2 (9,780) (11,121) (12) Other expenses (31,469) (38,513) (29,550) (24,914) (18) 6 26 (56,383) (59,251) (5) (118,371) (134,604) (12) EBITDA 27,023 26,569 15,181 22,021 2 78 23 49,044 35,107 40 96,359 78,539 23 Other income 1,476 8 8 31 17,476 17,476 4,647 1,508 17 9,036 1,472 262 461 Net interest (7,981) (10,227) (9,382) (9,240) (22) (15) (14) (17,221) (19,688) (13) (33,312) (41,493) (20) Depreciation (8,729) (9,878) (9,287) (8,641) (12) (6) 1 (17,370) (18,744) (7) (35,305) (41,604) (15) Pretax profits 11,789 6,473 (3,480) 4,171 82 (439) 183 15,960 (3,308) (582) 29,215 (4,297) (780) Exceptional item — — — — — — — 6,753 Tax (24) (4,080) (4) (13) (37) (12) 211 (5,843) (6,453) (9) Deferred Tax (2,732) — 277 (1,249) (3,980) (664) — — Net income 9,033 2,393 (3,207) 2,909 277 (382) 210 11,942 (3,984) (400) 23,372 (3,997) (685) Share of profit from associates — — — — — — 40 40 Minority Interest (606) (57) 643 (845) (1,450) 1,956 854 2,905 Net income 8,427 2,336 (2,564) 2,065 261 (429) 308 10,492 (2,028) 24,266 (1,052) Adjusted net income 8,427 2,336 (2,564) 2,065 261 (429) 308 10,492 (2,470) 24,266 (7,804) EPS (Rs) 9 2 (3) 2 11 (3) 24 (1) Ratios EBITDA margin (%) 30 25 20 29 30 22 27 21 ETR (%) 23 21 8 30 25 (20) 20 263

Source: Company, Kotak Institutional Equities estimates

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

(% chg.) 2QFY21 2QFY21E 2QFY20 1QFY21 KIE yoy qoq 1HFY21 1HFY20 (%chg) FY2021E FY2020 (%chg) Net sales 78,593 77,514 65,729 61,605 1 20 28 140,198 136,577 3 304,422 262,283 16 Total expenditure (54,245) (53,873) (53,179) (44,525) 1 2 22 (98,770) (107,947) (9) (219,744) (204,509) 7 (Inc)/Dec in stock (4,143) (5) 1,654 675 — 13 33 (3,468) 2,245 — — Raw material consumed (24,984) (31,038) (32,452) (24,668) (6) (5) 21 (49,651) (65,160) (24) (122,927) (112,767) 9 Staff costs (1,699) (1,723) (1,625) (1,723) (1) 5 (1) (3,422) (3,242) 6 (6,787) (6,787) — Other expenses (23,420) (21,107) (20,755) (18,810) 11 13 25 (42,229) (41,790) 1 (90,030) (84,956) 6 EBITDA 24,348 23,640 12,551 17,080 3 94 43 41,428 28,630 45 84,677 57,773 47 Other income 115 — — — 115 — — — Net interest (5,536) (6,225) (6,569) (6,040) (11) (16) (8) (11,576) (13,538) (14) (22,773) (26,106) (13) Depreciation (5,680) (5,676) (5,823) (5,616) 0 (2) 1 (11,296) (11,494) (2) (22,754) (22,871) (1) Pretax profits 13,247 11,740 159 5,425 13 8,232 144 18,672 3,599 419 39,151 8,796 345 Exceptional item — — — 1,203 1,203 — — 4,914 Tax — (4,080) — — — — (10,023) (7,534) Deferred tax (3,267) — (8) (1,580) (4,847) (1,209) — — Net income 9,980 7,660 151 5,047 30 6,487 98 15,027 2,390 529 29,128 6,177 372 Adjusted Net Profit 9,980 7,660 151 3,845 30 6,487 160 13,825 2,390 478 29,128 3,963 635 EPS (Rs/share) 10 8 0 5 30 6,487 98 3 9 29 6 Ratios EBITDA margin (%) 31.0 30.5 19.1 27.7 29.5 21.0 27.8 22.0 ETR (%) 24.7 34.8 4.7 23.8 24.4 33.6 25.6 54.9 Sales Volume (mn tons) Pellets (External sales) 0.73 0.73 0.74 0.83 — (1) (12) 1.56 2.58 (40) 2.8 2.4 19 Steel 1.93 1.93 1.46 1.56 — 32 24 3.49 2.76 26 7.33 6.06 21 Operational details (Rs/ton) Blended realizations (Rs/ton) 40,722 40,163 45,020 39,491 1 (10) 3 40,171 45,986 (13) 41,529 43,289 (4) EBITDA/ton (Rs/ton) 12,615 12,252 8,596 10,949 3 47 15 11,871 9,640 23 11,552 9,535 21 Cost (Rs/ton) 28,106 27,911 36,424 28,542 1 (23) (2) 28,301 36,346 (22) 29,978 33,754 (11)

Source: Company, Kotak Institutional Equities estimates

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

Other highlights from 2QFY21 results and earnings call

 India steel operations. Margins improve on higher prices and lower costs

. Adjusted EBITDA/ton increased to Rs12,615 (+47% yoy,+15% qoq), led by higher prices and lower material costs – (1) lower thermal coal cost, (2) benefits of SMPL iron ore at zero cost, (3) lower consumables – refractory, electrodes, etc. and (4) operating leverage.

. NSR increased by Rs1,200/ton qoq due to higher domestic prices, lower exports and higher sales of value added products..

 Steel demand outlook. The management remains bullish on the current domestic demand and expects it to continue in 2HFY21 with easing of lockdown restrictions. Primary sources of demand continue to be infrastructure projects and investments being encouraged by the government.

 Volume guidance. The company has maintained its standalone volume guidance between 7.3 and 7.5 mn tons in FY2021E. The company aims to achieve 8 mn tons volume by FY2022 with further ramp-up at the DRI plant at Angul.

 Exports. In 2QFY21, exports at 0.74 mn tons declined to 38% from 58% of total volumes in 1QFY21. Exports were majorly to Europe, SEA as these regions faced production cuts and low supply from China. However, with the continuous recovery in domestic demand, exports are expected to decline 32%/20% in October/November and are expected to stabilize at those levels in 4QFY21.

 Cost guidance. The management expects industry costs to go up with the increase in coking coal costs by US$15-20/ton; however, management highlighted that it had already booked its coking coal shipments up to February 2021 at lower prices. Moreover, operating leverage benefits in 2HFY21 will aid costs further.

 Guali iron ore mine. The management has not gone ahead with taking over the Guali mine, due to discrepancies in grades, reserves and boundary wall of the mine. Management expects the mine to be re-auctioned while JSP said it will take over control of the mine only if necessary amendments were made in the contract.

 SMPL iron ore case. JSP expects to start lifting its inventory lying at SMPL very soon. Management remains confident that the recent issue regarding JSP’s access to its inventory lying at SMPL shall be resolved very soon basis the Supreme Court’s order. As of now, JSP has 7.5 mn tons of inventory lying at SMPL.

 Capex guidance. On a consolidated basis, the management guided for a capex of Rs6-8 bn primarily towards maintenance capex in FY2021.The management’s focus remains on deleveraging and not planning any growth capex in the next 1-2 years.

 Jindal Power—earnings miss on higher provisions

. EBITDA of Rs3 bn (+1% yoy) was much below our estimates (Rs3.4 bn) on lower prices and higher costs. JSPL has charged Rs1 bn of surcharge provision at EBITDA level. Power generation increased by 21% yoy to 2.7 bn units on improved demand with easing of lockdown restrictions. EBITDA/unit declined by 16% yoy to Rs1.2 on higher costs and lower prices.

. Cost guidance. The company expects coal costs to remain low given oversupply in the domestic market and expects Coal India to focus on volume growth.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 45 Metals & Mining Jindal Steel and Power

. Price guidance. The company expects realization to remain strong with high mix of PPA sales and higher exchange prices due to recovery in domestic demand. Increased disbursements to state governments will increase demand for power and aid realizations in 2HFY21.

. Receivables. The company expects to receive 50% of total receivables of Rs16 bn from TANGEDCO over the next 1-2 quarters. The company has already received Rs1 bn towards the same.

. Management is hopeful of securing captive coal mine for its power business after the recent approval for commercial coal mining by the government. JPL will participate in the auction of 4 such mines.

. JSP was awarded L1 under PFC scheme1 for 420 MW. However, management believes that the timeline of execution of this PPA is uncertain.

 Oman divestment.

. In 2QFY21, JSPL successfully completed the first tranche of the divestment by selling the 48.99% of the Oman subsidiary to the acquirer. In accordance with Ind-AS 105 “Non-current Assets held for Sale and Discontinued Operations”, assets and liabilities of business operation forming part of disposal Group (Group Oman) have been disclosed as assets and liabilities held for sale in the consolidated financial statements.

. The company plans to close the transaction by 3QFY21.

 Deleveraging plans.

. The company remains committed to its deleveraging plans for FY2021. It is working on divesting stake in various international assets for this purpose.

. JSP’s net debt declined by Rs70 bn over 1HFY21 to Rs289 bn as of September 2020 from Rs359 bn as of March 2020. This was led by (1) Rs53 bn from Oman de- consolidation, (2) Rs39 bn from OCF pre working capital, offset by (3) Rs11 bn of increase in WC, (4) Rs4.5 bn from capex and (5) Rs7 bn from capitalization of deferred interest under moratorium.

. Consolidated debt repayments stand at Rs50 bn for FY2021. The company has repaid Rs26 bn in 1HFY21 and plans to repay Rs24 bn in 2HFY21. The company has repayment of US$230 mn by March 2021 at the international entity. It is working towards raising a US$ bond to refinance the US$800 mn outstanding international debt.

. The company has plans to reduce debt to Rs150 bn by FY2023 and bring down leverage to under 2X, This shall be aided by internal accruals and divestment of other international businesses after Oman.

 International operations. All international subsidiaries ex-Oman reported an EBITDA loss of Rs2.2 bn versus Rs669 mn EBITDA loss in 1QFY21 and EBITDA loss of Rs1.5 bn in 2QFY20.

. Australia coal mine operations remained under repair and maintenance. Both Wongawilli & Russell Vale mines remain under care & maintenance. The company is looking to monetize its non-mining land parcels in Wongawilli and the mandate for the same has been given to CBRE.

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

. Mozambique. During this quarter, the mine at Chirodzi produced 874,000 tons ROM (663,000 tons in 1QFY21). Due to the falling demand of coking coal, the realizations during the reported quarter went down significantly. Mozambique operations reported EBITDA loss of US$1.6 mn in 2QFY21 versus an EBITDA profit of US$1.2 mn in 1QFY21.

Exhibit 3: JSP's steel EBITDA/ton increased 15% qoq in 2QFY21 on higher prices and lower costs JSP's domestic steel sales and realizations, 2QFY19- 2QFY21 (mn tons, Rs/ton)

(Change %) 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 yoy qoq India Standalone Revenues (Rs mn) 68,851 67,183 72,854 70,848 65,729 66,403 59,303 61,605 78,593 20 28 EBITDA (Rs mn) 14,147 13,888 13,907 16,080 12,551 13,521 15,622 17,080 24,348 94 43 Steel product sales (mn tons) 1.32 1.20 1.45 1.51 1.46 1.67 1.40 1.56 1.93 32 24 Blended realization (Rs/ton) 52,160 55,986 50,244 46,919 45,020 39,762 42,359 39,491 40,722 (10) 3 EBITDA (Rs/ton) 10,718 11,574 9,591 10,649 8,596 8,096 11,159 10,949 12,615 47 15

Source: Company, Kotak Institutional Equities estimates

Exhibit 4: JPL’s EBITDA declined 18% qoq to Rs3 bn on provisioning of an outstanding surcharge of Rs1 bn Jindal Power, interim results, 2QFY19 - 2QFY21 (mn units, Rs mn)

(Change %) 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 yoy qoq Jindal Power Sales (Rs mn) 9,110 10,040 9,990 11,140 9,470 7,840 9,130 8,560 9,900 5 16 EBITDA (Rs mn) 3,020 2,730 2,670 3,600 2,990 2,570 3,330 3,680 3,020 1 (18) Power generation (mn units) 2,427 2,609 2,609 2,982 2,271 1,900 2,430 2,179 2,744 21 26 JPL realizations (Rs/unit) 4.2 4.3 4.3 4.2 4.6 4.6 4.2 4.4 4.0 (13) (8) Cost (Rs/unit) 2.8 3.1 3.1 2.8 3.2 3.1 2.7 2.5 2.8 (12) 12 EBITDA (Rs/unit) 1.4 1.2 1.1 1.3 1.5 1.5 1.5 1.9 1.2 (16) (35)

PLF (%) 32.6 35.0 35.0 40.0 30.5 25.5 32.6 29.3 36.9 21 26

Source: Company, Kotak Institutional Equities estimates

Exhibit 5: JSP aims to repay Rs110 bn in the next 2 years JSP's debt repayments, March fiscal year-ends, 2021-23E (%)

Debt Repayments 200 183 180 160 140 120 100 80 60 60 50 40 20 0 2021E 2022E 2023E and after

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 47 Metals & Mining Jindal Steel and Power

Exhibit 6: JSP's net debt/EBITDA is likely to decline to 2.3X in FY2022 post Oman divestment JSP's leverage ratios, March fiscal year-ends, 2017-23E (Rs mn, X)

2017 2018 2019 2020 2021E 2022E 2023E Equity (Rs bn) 301 304 321 321 336 360 384 Consolidated EBITDA (Rs bn) 47 62 84 79 96 94 90 Net debt (Rs bn) 453 433 389 359 266 213 161 Debt/Equity (X) 1.5 1.4 1.2 1.1 0.8 0.6 0.4 Net debt/EBITDA (X) 9.7 7.0 4.6 4.6 2.8 2.3 1.8

Source: Kotak Institutional Equities estimates

Exhibit 7: JSP's net debt has been declining sequentially from strong operational cash flows JSP's net debt, March fiscal year-ends, 2QFY19-21 (Rs bn)

Consolidated Net Debt (Rs bn) 450 410 392 391 400 376 365 359 355 346 350 289 300

250

200

150

100

50

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

Source: Kotak Institutional Equities estimates

Exhibit 8: JSP to generate strong FCF in FY2021-23E Exhibit 9: JSP to generate average 26% FCF yield, FY2021-23E JSP free cash flow, FY2015-23E (Rs bn) JSP free cash flow yield, FY2015-23E (Rs bn)

FCF (Rs bn) FCF Yield (%) 60 53 53 40 45 27 27 39 30 23 40 33 18 20 20 14 8 20 2 10 - - (10) (20) (20) (40) (32) (30) (22) (60) (40) (50) (39) (80) (75) (60)

(100) (70) (62)

2015 2016 2017 2018 2019

2018 2015 2016 2017 2019

FY2020

FY2020

FY2021E FY2022E FY2023E

FY2022E FY2023E FY2021E

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

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

Change in estimates

We increase our standalone EBITDA by 13%/5%/7% for FY2021/22/23E; however, adjusting for Oman divestment, consolidated EBITDA is revised by +4%/(5)%/(6)% for FY2021/22/23E.

The drivers for revision are –

 Lower costs in steel division factoring 1HFY21 run-rate.

 Higher realization in power division.

 Lower interest cost due to favorable rate negotiation with lenders.

 Divestment of Oman assets.

 Revised currency forecasts.

 Adjusting for Oman and revised earnings, our Fair Value is revised to Rs285 (from Rs280) based on March 2022E financials.

Exhibit 10: Jindal Steel and Power, change in estimates, March fiscal year-ends, 2021-23E (Rs mn)

Revised estimates Old estimates Changes (%) Units 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E Consolidated Net sales Rs mn 351,946 381,208 395,768 416,986 462,229 481,669 (16) (18) (18) EBITDA Rs mn 96,359 94,284 89,629 92,849 98,895 95,262 4 (5) (6) Adjusted PAT Rs mn 24,266 24,099 24,275 13,007 20,853 22,103 87 16 10 Adjusted EPS Rs/share 23.8 23.6 23.8 12.8 20.4 21.7 87 16 10 Standalone business China HRC Price US$/ton 475 500 500 475 500 500 — — — Total steel volumes (incl. semis) mn tons 7.3 7.5 8.1 7.3 7.5 8.1 — — — Net sales Rs mn 304,422 325,972 337,553 309,019 341,336 354,158 (1) (5) (5) EBITDA Rs mn 84,677 82,208 77,207 74,920 78,123 72,115 13 5 7 EBITDA Rs/ton 11,552 10,930 9,577 10,221 10,387 8,946 13 5 7 Steel EBITDA Rs/ton 8,994 10,099 9,577 8,004 9,224 8,946 12 9 7 SMPL Iron ore benefit Rs mn 18,750 6,250 - 16,250 8,750 - Adjusted PAT Rs mn 29,128 30,109 29,015 20,471 25,924 24,320 42 16 19 Jindal Power Net sales Rs mn 34,849 42,560 45,539 33,190 41,993 44,932 5 1 1 EBITDA Rs mn 13,207 13,604 13,952 11,547 13,036 13,345 14 4 5 Profit after tax Rs mn (4,084) (3,208) (922) (5,495) (3,690) (1,439) (26) (13) (36) Capacity MW 3,400 3,400 3,400 3,400 3,400 3,400 — — — PLF % 32 41 44 32 41 44 — — —

INR INR/US$ 74.2 75.0 75.0 75.5 76.0 76.0 (2) (1) (1) Net Debt Rs bn 266 213 161 322 278 227 (17) (23) (29) Capex Rs bn 10 10 10 10 10 10

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 49 Metals & Mining Jindal Steel and Power

Exhibit 11: Jindal Steel and Power, key assumptions, March fiscal year-ends, 2017-23E (Rs mn)

2017 2018 2019 2020 2021E 2022E 2023E Standalone (steel business) Capacity (mn tons) 4.8 8.6 8.6 8.6 8.6 8.6 8.6 Total steel sales (mn tons) (incl. semis) 3.1 3.8 5.1 6.1 7.3 7.5 8.1 Utilization 66% 44% 60% 70% 85% 87% 94% Realization (Rs/ton) 46,034 46,953 54,133 43,289 41,529 43,341 41,873 Costs (Rs/ton) 36,928 36,387 42,479 33,754 29,978 32,411 32,295 Steel EBITDA (Rs/ton) 9,106 10,567 11,654 9,535 11,552 10,930 9,577 Jindal Power Capacity (MW) 2,800 3,400 3,400 3,400 3,400 3,400 3,400 Units generated (mn units) 8,538 10,905 10,396 9,583 8,970 11,349 12,144 PLF (%) 37 39 35 32 32 41 44 Realisation (Rs/units) 3.7 3.8 3.7 3.9 3.9 3.8 3.8 Cost (Rs/units) 2.4 2.5 2.6 2.6 2.4 2.6 2.6 EBITDA (Rs/units) 1.2 1.3 1.1 1.3 1.5 1.2 1.1 EBITDA (Rs mn) Standalone 28,581 39,731 59,670 57,773 84,677 82,208 77,207 Jindal Power 10,486 14,399 11,552 12,490 13,207 13,604 13,952 Others 793 (6,817) 216 (1,507) (1,525) (1,527) (1,530) Consolidated EBITDA 46,580 61,547 84,056 78,539 96,359 94,284 89,629

Source: Company, Kotak Institutional Equities estimates

Exhibit 12: JSP’s EBITDA changes by 3.4% for 1% change in HRC Exhibit 13: JSP's EPS changes 9% for 1% change in HRC prices prices EPS sensitivity of JSP to HRC prices, FY2022E (Rs/share) EBITDA sensitivity of JSP to HRC prices, FY2022E (Rs mn)

US$/INR US$/INR 73 74 75 76 77 73 74 75 76 77 480 72,030 71,542 71,054 70,567 70,079 24 16 15 15 14 14 490 77,607 77,119 76,631 76,143 75,655 480 20 20 19 19 18 500 83,183 82,695 82,208 81,720 81,232 490 24 24 24 23 23 500 29 28 28 28 27

510 88,760 88,272 87,784 87,296 86,809 (US$/Ton)

(US$/Ton) (US$/Ton)

HRC Prices HRC

HRC Prices HRC 520 94,336 93,848 93,361 92,873 92,385 510 33 33 32 32 32

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

Exhibit 14: Jindal Steel and Power, SoTP-based valuation, March 2022E basis (Rs bn)

(Rs bn) (Rs/share) Steel business Steel business EBITDA 76 Assigned multiple (X) 5.5 Steel business enterprise value (Includes captive power) 418 410 Less: Debt of steel business (140) (137) Steel business equity value (A) 278 273 Power business Equity value of Tamnar I and Tamnar II 88 86 Power business equity value (B) 88 86 Less: Debt of international subsidiaries (75) (74) Fair Value 291 285

Source: Kotak Institutional Equities estimates

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

Exhibit 15: Jindal Steel & Power, profit model, balance sheet and cash flow model, March fiscal year-ends, 2017-23E (Rs mn)

2017 2018 2019 2020 2021E 2022E 2023E Profit model (Rs mn) Net sales 216,555 276,583 393,721 369,175 351,946 381,208 395,768 EBITDA 46,580 61,547 84,056 78,539 96,359 94,284 89,629 Other income 100 3,174 157 262 1,472 500 500 Interest (33,896) (38,657) (42,642) (41,493) (33,312) (29,700) (25,948) Depreciation (39,490) (38,830) (54,804) (41,604) (35,305) (36,118) (35,097) Profit before tax (30,429) (18,641) (28,017) 2,456 29,215 28,966 29,085 Taxes 5,027 2,398 3,902 (6,453) (5,843) (5,793) (5,817) Net profit (25,402) (16,242) (24,115) (3,997) 23,372 23,173 23,268 Adjusted PAT (19,090) (8,218) (1,669) (7,804) 24,266 24,099 24,275 Earnings per share (Rs) (20.9) (8.5) (1.7) (7.7) 23.8 23.6 23.8 Balance sheet (Rs mn) Equity 300,505 303,846 320,846 321,371 335,638 359,736 384,011 Total Borrowings 458,505 439,402 395,074 368,709 271,506 234,617 197,825 Total liabilities 905,979 892,304 890,008 897,419 780,421 771,301 766,780 Net fixed assets 750,813 728,353 730,335 718,973 620,419 594,301 569,205 Investments 3,680 1,458 1,502 1,430 1,430 1,430 1,430 Cash 5,140 4,784 4,234 9,519 5,045 21,316 37,115 Total assets 905,979 892,304 890,009 897,419 780,421 771,301 766,780 Net Debt 453,365 434,618 390,840 359,190 266,461 213,301 160,709 Free cash flow (Rs mn) Operating cash flow excl. working capital 4,647 20,146 40,067 40,084 64,559 65,124 64,221 Working capital changes 22,456 10,252 4,503 15,127 (10,080) (1,964) (1,630) Capital expenditure (24,975) (16,217) (11,897) (16,307) (9,750) (10,000) (10,000) Free cash flow 2,128 14,181 32,673 38,903 44,729 53,160 52,591 Ratios EV/EBITDA 13.5 10.0 6.8 7.1 4.8 4.3 4.0 P/E (9.2) (22.6) (111.0) (25.0) 8.0 8.1 8.0 P/B 0.6 0.6 0.6 0.6 0.6 0.5 0.5 FCF Yield (22.1) 7.7 17.6 19.9 22.9 27.2 26.9 Book Value 328 314 332 315 329 353 376 Net Debt/EBITDA 9.7 7.1 4.6 4.6 2.8 2.3 1.8 RoAE (%) (7.4) (4.8) (5.4) (0.3) 7.5 7.1 6.6 RoACE (%) 0.1 1.7 1.9 4.1 7.5 7.7 7.4

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 51 ADD Zee Entertainment Enterprises (Z) https://ultraviewer.et/en/own Media NOVEMBER 03, 2020 load.html RESULT Sector view: Cautious

Slow progress. Zee reported 26% yoy decline in ad revenues and 43% decline in CMP (`): 183 adjusted EBITDA; operating print was broadly in line with moderated expectations. Zee Fair Value (`): 225 made a provision of Rs1.8 bn pertaining to related-party (Siti) overdue receivables and BSE-30: 39,758 corporate guarantee. Other than this, there was no material positive/negative surprise on BS/governance front. We cut FY2021-23 estimates by 4-6% as we factor in share loss in key regional markets, lower domestic subscription and higher losses in ZEE5. Revise FV to Rs225 valuing Zee at 13X Dec-22E earnings (14X earlier).

Zee Entertainment Enterprises Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 183/225/ADD EPS (Rs) 10.9 16.5 17.9 52-week range (Rs) (high-low) 364-114 EPS growth (%) (2.1) 51.4 8.4 Mcap (bn) (Rs/US$) 177/2.4 P/E (X) 16.8 11.1 10.2 ADTV-3M (mn) (Rs/US$) 7,966/107 P/B (X) 1.8 1.6 1.5 Shareholding pattern (%) EV/EBITDA (X) 10.4 6.9 5.9 Promoters 4.8 RoE (%) 10.9 15.3 14.9 FPIs/MFs/BFIs 67.3/3.8/5.9 Div. yield (%) 1.9 2.2 2.5 Price performance (%) 1M 3M 12M Sales (Rs bn) 71 87 94 Absolute (14.3) 32.2 (40.7) EBITDA (Rs bn) 16 23 25 Rel. to BSE-30 (16.6) 25.1 (40.1) Net profits (Rs bn) 10 16 17

2QFY21— Operating performance excluding provisions in line with moderated expectations Ad revenues declined 26% yoy (KIE -25%) to Rs9 bn as against 66% decline in 1Q. Domestic subscription revenues grew 2.3% (in-line) to Rs6.6 bn off a high base (+27% yoy). EBITDA declined 55% yoy to Rs3.1 bn, 24% below our estimates largely due to provision of Rs812 mn (included in other expenses) pertaining to overdue receivables from Siti. Adjusted for the same, EBITDA stood at Rs3.9 bn (KIE Rs4.1 bn) and EBITDA margin was 22.9%. A&P spends were up 40% yoy off a low base; the management attributed it to two campaigns carried out to drive viewership for TV and ZEE5. Exceptional item of Rs971 mn pertains to provision associated with corporate guarantee of Rs2.05 bn to banks against loans given to Siti. PAT adjusted for both provisions stood at Rs2.7 bn, broadly in line with our estimate, down 54% yoy.

Slow progress on key markers pertaining to BS/governance, ZEE5 and core business Zee’s 2Q report card on BS items/governance was not encouraging— (1) Inventory— flat qoq at Rs52.1 bn (we expected a dip; gross investment in 2Q should have been lower than quarterly amortization charge given scarcity of new movies), (2) Advances to aggregators at Rs4.2 bn (flat in 1H). Zee has guided for receipt of content or refund of this amount by end-FY2021, (3) offshore investments of Rs2.25 bn— Zee had initially guided completion of divestment and receipt of proceeds by Sep-20. Per management divestment has been completed and it expects proceeds in 3Q, (4) receivables from Dish and Siti. Dish receivables are down to Rs5 bn (Sep-20) from Rs5.8 bn (Mar-20). Overdue receivables from Siti have been entirely provided for and the subscription engagement has moved to cash-and-carry mode. (5) Board augmentation— no changes in 2Q. We will continue to closely track delivery versus promise on the above metrics. ZEE5—Zee reported good sequential progress in MAUs. DAUs and engagement metrics. These metrics do not inspire confidence, thus far as (1) Zee has moved away from reporting 3rd party data to internal MIS, and (2) improvement in metrics is not backed by commensurate Jaykumar Doshi improvement in monetization. Core business— Zee has lost leadership in its top two regional genres. The management indicated that it is working on content to regain market share.

We cut FY2021-23E earnings by 4-6% and FV to Rs225 (Rs250 earlier) We cut revenue and margin forecasts in view of viewership share loss, NTO2 uncertainty and higher losses in ZEE5. We revise FV to Rs225 valuing Zee at 13X (14X earlier). [email protected] Contact: +91 22 6218 6427

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

Key highlights from conference call

 2QFY21 Balance sheet—

(1) Cash and treasury investments increased to Rs14.5 bn (Sep-20) from Rs13.2 bn (Jun-20), second consecutive quarter of increase after several quarters of decline,

(2) Inventory was flat qoq at Rs52.1 bn (Sep-20). It implies gross investment of about Rs3 bn in line with amortization charge. We expected negligible gross investment in view of scarcity of movies,

(3) Receivables stood at Rs20.1 bn (Sep-20) as against Rs20.8 bn (Mar-20). The management has indicated that receivables from Dish has reduced to Rs5 bn (gross; Rs4.6 bn net of provisions) in Sep-20 from Rs5.8 bn as at Mar-20. Zee has collected receivables from Siti relating to revenue accounted for in 1HFY21 and has provided Rs812 mn for overdue receivables (we note that this provision is in addition to a similar provision of Rs1.1 bn made in 4QFY20). With this, receivables from Siti have been fully provided for and subscription contract has now moved to a cash-and-carry format (no credit period for Siti). Additionally, Zee has made provision of Rs971 mn (classified as an exceptional item) associated with corporate guarantee of Rs2.05 bn to banks against loans given to Siti; residual corporate guarantee of Rs1.08 bn is not yet provided for.

(4) Advances to aggregators stood at Rs4.2 bn (flat versus Mar-20). We expect the company to procure inventory against it during the course of the year.

(5) Offshore investments (Rs2.25 bn)— We note that Zee management had guided for completion of divestment and receipt of proceeds by Sep-20. The management indicated that it has completed divestment and proceeds are expected soon. We are surprised at the time taken to unwind this investment even after write-off of 63% (net investment of Rs2.25 bn following write off of about Rs3.75 bn).

 ZEE5 operating and financial highlights— ZEE5 reported revenue of Rs989 mn (Rs949 mn in 1Q) and EBITDA loss of Rs1.9 bn (11% of overall sales; Rs1.45 bn in 1Q). The management didn’t provide any break-up of operating costs but indicated that operating costs were higher partly due to a marketing campaign carried out to attract eyeballs. Zee reported global MAUs of 54.7 mn (39.7 mn in 1Q), global DAUs of 5.2 mn (4 mn in 1Q) and average watch time per viewer of 152 mins (112 mins in 1Q); sequential improvement in MAUs and DAUs is on account of change in reporting to internal system data from Comscore data. Per management average watch time on ZEE5 increased qoq due to resumption of fresh TV content. We are surprised that such a sharp sequential improvement in engagement metrics of ZEE5 and recovery in overall ad spends environment didn’t translate into pick in ZEE5’s revenues; the management indicated that the bulk of revenues of ZEE5 are subscription. Improvement in ad revenues was offset by non-renewal of a digital subscription contract with a telco (Bharti Airtel). Overall, ZEE5’s operating metrics and monetization are tracking below key competition whereas EBITDA loss (Rs3.4 bn in 1HFY21) is much ahead of our expectations.

 Ad growth outlook. Zee management expects ad revenues to remain flat in 3QFY21 and grow in 4QFY21. We are not so optimistic about recovery in ad revenues in 3QFY21 in view of IPL (3QFY21 this year) and viewership share loss of Zee key regional GECs— Zee Marathi and Zee Bangla. The management acknowledged that loss of leadership in these two markets and attributed it to weak performance of its content. The management indicated that its distribution and reach are intact and it is working to regain market share.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 53 Media Zee Entertainment Enterprises

 Domestic subscription growth outlook. Zee management has guided for negligible growth in domestic subscription revenues in FY2021 (versus moderate growth guidance earlier) partly due to uncertainty/overhang associated with TRAI’s NTO2. The company has not increase PayTV tariffs and expects broadly flat domestic subscription revenues in the core TV business. On the digital front, it expects growth driven by pickup in B2C subscription revenues of ZEE5 partly offset by non-renewal of digital content contract with Bharti Airtel.

 Sugarbox. Zee management indicated status-quo as it is awaiting a contract from the Railways. We believe Zee will be better off cancelling this project.

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

% chg. 2QFY21 2QFY21E 2QFY20 1QFY21 KIE yoy qoq 1HFY21 1HFY20 % chg. FY2021E FY2020 % chg. Total revenues 17,227 17,535 21,220 13,120 (1.8) (18.8) 31.3 30,347 41,301 (27) 71,153 81,299 (12) Advertising revenues 9,028 9,185 12,247 4,211 (1.7) (26.3) 114.4 13,239 24,114 (45) 37,449 46,811 (20) Subscription revenues 7,439 7,400 7,235 7,443 0.5 2.8 (0.1) 14,882 14,323 4 29,354 28,874 2 --Domestic subscription 6,608 6,600 6,459 6,627 0.1 2.3 (0.3) 13,234 12,699 4 26,134 25,622 2 --International subscription 831 800 776 817 3.9 7.1 1.8 1,648 1,624 1 3,219 3,252 (1) Other sales (incl. syndication) 761 950 1,739 1,466 (19.9) (56.3) (48.1) 2,227 2,865 (22) 4,350 5,614 (23) Total expenditure (14,090) (13,400) (14,291) (10,921) 5.2 (1.4) 29.0 (25,011) (27,775) (10) (55,607) (64,953) (14) Content and other direct costs (8,342) (8,500) (8,963) (6,578) (1.9) (6.9) 26.8 (14,920) (16,763) (11) (34,237) (38,285) (11) Employee costs (1,967) (1,900) (2,123) (2,001) 3.5 (7.3) (1.7) (3,968) (4,126) (4) (7,805) (7,805) - Advt. and publicity costs (1,760) (1,250) (1,253) (1,111) 40.8 40.5 58.5 (2,871) (3,207) (10) (5,565) (6,956) (20) Other expenses (2,021) (1,750) (1,953) (1,231) 15.5 3.5 64.2 (3,252) (3,679) (12) (8,000) (11,907) (33) EBITDA 3,137 4,135 6,929 2,199 (24.1) (54.7) 42.6 5,336 13,527 (61) 15,545 16,346 (5) EBITDA margin (%) 18.2 23.6 32.7 16.8 17.6 32.8 (46) 21.8 20.1 9 Other income 379 300 681 264 26.4 (44.3) 43.7 643 1,720 (63) 1,632 2,836 (42) Fair value through P&L (RPS) (207) — (88) (1,123) (1,331) 591 (325) — (2,597) (100) Finance costs (b) (13) (50) (180) (45) (74) (92.7) (71.0) (58) (385) (85) (625) (1,449) (57) D&A expenses (651) (700) (583) (719) (6.9) 11.7 (9.3) (1,370) (1,273) 8 (2,728) (2,706) 1 Pretax profits 2,644 3,685 6,760 576 (28.2) (60.9) 359.0 3,220 14,180 (77) 13,825 12,431 11 Extraordinaries (971) — (1,706) — (971) (1,706) (971) (2,843) Tax provision (c) (740) (929) (921) (284) (1,023) (3,067) (67) (3,342) (4,317) (23) Minority interest 7 10 (1) 11 19 30 (38) (5) (5) — Reported PAT (post RPS impact) 941 2,766 4,133 304 (66.0) (77.2) 209.8 1,244 9,438 (87) 9,507 5,266 81 EPS post RPS impact (Rs) 1.0 2.9 4.3 0.3 1.3 9.8 (87) 9.9 5.5 81 PAT (pre-RPS and pre-exceptional) 2,119 2,766 5,926 1,427 (23.4) (64.2) 48.5 3,546 10,553 (66) 10,478 10,706 (2) EPS (pre-RPS and pre-exceptional) (Rs) 2.2 2.9 6.2 1.5 (23.4) (64.2) 48.5 3.7 11.0 (66) 10.9 11.1 (2) Tax rate (%) 28.0 25.2 13.6 49.3 32 22 24 35

Notes: (a) Fair value through P&L (RPS) incorporates MTM changes in RPS liability.

Source: Company, Kotak Institutional Equities estimates

54 KOTAK INSTITUTIONAL EQUITIES RESEARCH Zee Entertainment Enterprises Media

Exhibit 2: Revised earnings estimates of Zee, FY2021-23E (Rs mn)

Revised Previous % change 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E Consolidated Ad revenues 37,449 49,807 54,788 37,449 50,556 56,623 — (1.5) (3.2) Subscription revenues 29,354 31,380 33,575 29,866 31,933 34,173 (1.7) (1.7) (1.7) Other operating revenues 4,350 5,520 6,134 4,885 5,758 6,431 (10.9) (4.1) (4.6) Total revenues 71,153 86,707 94,497 72,200 88,248 97,227 (1.5) (1.7) (2.8) Direct costs 34,237 39,893 43,156 34,583 40,133 43,555 (1.0) (0.6) (0.9) Employee cost 7,805 8,429 9,272 7,805 8,429 9,357 — — (0.9) SG&A expenses 13,565 15,181 16,873 12,926 15,078 17,027 4.9 0.7 (0.9) Total expenditure 55,607 63,504 69,302 55,314 63,640 69,938 0.5 (0.2) (0.9) EBITDA 15,545 23,203 25,195 16,886 24,608 27,288 (7.9) (5.7) (7.7) PAT 9,507 15,863 17,196 11,014 16,606 18,338 (13.7) (4.5) (6.2) Adj PAT (excl. RPS impact) 10,478 15,863 17,196 11,014 16,606 18,338 (4.9) (4.5) (6.2) EPS (Rs) 9.9 16.5 17.9 11.5 17.3 19.1 (13.7) (4.5) (6.2) Adj EPS (Rs) (excl. RPS impact) 10.9 16.5 17.9 11.5 17.3 19.1 (4.9) (4.5) (6.2)

Key assumptions Ad revenue growth (%) (a) (20.0) 33.0 10.0 (20.0) 35.0 12.0 Domestic subscription growth (%) (a) 2.0 8.0 8.0 4.0 8.0 8.0 International subscription growth (%) (a) (1.0) (2.0) (2.0) (1.0) (2.0) (2.0) EBITDA margin (%) 21.8 26.8 26.7 23.4 27.9 28.1

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 55 Media Zee Entertainment Enterprises

Exhibit 3: Key markers to track Zee's delivery versus promise (guidance provided as at end-1QFY21)

KIE expectations post 1QFY21 call / Key markers to track Jun-20 Sep-20E Mar-21E Mar-22E Management guidance on 1QFY21 call 2QFY21 performance Balance sheet and Free cash flow generation

We expect inventories to be flat or lower (versus Jun-20 levels) 52,177 Inventory as gross investments in movies will likely be lower than Movie buying is set to significantly (Jun-20) No progress in 2QFY21, per se. inventory amortization charge of about Rs12 bn per year. moderate in FY2021. Accordingly, FY2021 Inventories flat at Rs52.1 bn and will see a decline in working capital tied in advances stood at Rs4.2 bn (same as Advances to content, i.e. inventory plus content 4,200 We expect Zee to receive content against Mar-20) aggregators for advances. (Mar-20) this advance or refund by Mar-21 content procurement

Zee has writen-off Rs3.8 bn from offshore investment of Rs6 bn and entered into Expect divestment to 2,245 sale agreement to divest it at Rs2.2 bn. Delayed to 3QFY21 as against initial Offshore investments be completed by (Mar-20) The company has received 15% non- guidance of Sep-20 Sep-20 as guided. refundable part of consideration and expects residual payment by Sep-20.

Zee revised payment plans for Dish and Siti: Provision of Rs812 mn on overdue Siti to recover overdue receivables within receivables + Provision of Rs971 mn We expect receivables from Dish TV and Siti to reduce to Receivables from Dish 8,155 12-24 months starting FY2021. Per Zee, pertaining to corporate guarantee. normalized levels of Rs3 bn or so by Mar-22. We expect steady TV and Siti (Mar-20) Dish TV and Siti are making payments as Dish receivables moderated to Rs5 bn decline quarter after quarter. per these plans and overdue amount (Sep-20) from Rs5.8 bn (Mar-20) in line came down in Jun-20 with expectations.

We believe Zee is well-positioned to deliver healthy FCF Zee has refrained from giving guidance on conversion (>50% of PAT) in FY2021 driven by (1) reduction in cash generation for FY2021 until end of Wcap led by decline in inventories/advances/receivables and (2) 2QFY21 in view of uncertainty. However, On track: FCF of Rs5.11 bn in 1HFY21 Free cash flow modest capex (SugarBox capex unlikely to commence in the it has committed to deliver PAT to free (versus EBITDA of Rs5.3 bn) aided by generation current calendar year). We believe that Zee is comfortably cash flow conversion of 50% (FCF after modest capex of Rs450 mn placed to deliver FCF (post RPS payout of Rs5-5.5 bn) @50%+ RPS redemption and interest payout of of PAT in FY2022 as well. This is a key re-rating trigger about Rs5.5 bn)

We expect modest capex (say

Inclusion of eminent individuals, who Zee management has guided addition of No changes in 2QFY21. Management inspire investor confidence and can 2-3 independent directors with expertise in Augmentation of Board reiterated guidance of board contribute towards Zee’s TV-to-digital media/law/finance to the board by end of augmentation in FY2021 transition, would aid re-rating FY2021.

Core business

Zee's viewership has slipped a bit in Hindi, Marathi and Bangla genres over the past 2-3 quarters. Per our checks, TV ad Viewership share loss in Marathi and Recovery in viewership revenues have recovered to about 75% of base in the current Bangla (key regional markets). and advertising quarter. Recovery in viewership is critical for strong and Weakness in Hindi GEC continues sustainble recovery in ad growth starting 4QFY21.

Implementation of TRAI's proposed amendments to the new Uncertainty continues. Zee has tariff order (NTO 2) in its current form could impact domestic lowered guidance for domestic Developments around subscription revenues. The matter is sub-judiced; a favourable subscription revenue growth to NTO 2 outcome poses upside risk to our forecast of 4%/8% growth in 'negligible growth' from 'moderate domestic subscription revenues in FY2021/22. growth' earlier

As per unauthenticated media articles, Sony and Viacom are in talks for merger wherein Sony may own majority stake and Status quo; Sony-Viacom 18 merger Competitive landscape control the merged entity (RIL owned TV18 may give away called off as per unauthenticated operating control of Viacom18). We will keep an eye on media articles developments on this front, if any.

Source: Company, Kotak Institutional Equities estimates

56 KOTAK INSTITUTIONAL EQUITIES RESEARCH Zee Entertainment Enterprises Media

Exhibit 4: Trends in inventory of Zee Entertainment, March fiscal year-ends (Rs bn)

Inventory (Rs bn) 60 53.5 52.2 52.1 50 43.1 38.5 40

30 26.3

20 16.8 11.7 11.9 13.2 7.3 8.7 10 5.4

0

2011

2012

2013

2014

2015

2016

2017

2018

2019

Jun-20

Sep-19

Sep-20 Mar-20

Source: Company, Kotak Institutional Equities

Exhibit 5: Zee's net cash and cash equivalents, March fiscal year-ends (Rs bn)

50

39.7 40 32.4

30 23.1 20.0 20.6 20 16.1 14.4 14.8 14.5 12.7 12.4 13.2 10.2 10

0 2011 2012 2013 2014 2015 2016 2017 2018 2019 Sep-19 Mar-20 Jun-20 Sep-20

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 57 Media Zee Entertainment Enterprises

Exhibit 6: Hindi genre- BARC ratings market share, 1-Apr-17 to 16-Oct-20 (Week 14, 2017 to Week 41, 2020) (%)

1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21E Hindi GEC (Urban + Rural)- Viewership share in the top 7 channels (%) Star Plus 21.5 18.9 16.3 15.9 17.6 18.8 20.0 19.5 20.5 20.5 19.3 18.1 25.0 26.9 25.5 Colors (TV18) 17.3 18.1 19.9 19.1 17.9 18.5 16.7 18.0 16.4 15.0 16.6 18.8 13.5 15.3 18.8 Zee TV 17.4 20.1 20.9 19.1 21.2 19.3 20.1 19.3 18.6 18.5 17.6 16.1 9.5 16.0 16.7 Sony TV 12.3 13.8 13.4 14.9 13.0 15.4 16.2 17.2 15.4 16.2 15.5 14.2 13.3 12.4 12.5 Sony SAB 14.5 12.3 12.5 13.2 13.9 13.7 12.1 11.9 15.0 16.7 18.3 19.8 24.4 18.2 17.1 &TV (Zee) 5.4 6.4 6.0 5.6 5.0 4.9 4.6 4.9 4.5 4.0 4.0 4.7 6.2 4.4 3.6 Life Ok (Star Bharat) 11.6 10.5 11.0 12.2 11.4 9.5 10.3 9.2 9.5 9.0 8.7 8.3 8.1 6.9 5.9 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Zee Network 22.8 26.4 26.9 24.7 26.2 24.2 24.7 24.2 23.1 22.5 21.6 20.8 15.7 20.4 20.3

Hindi movies (Urban + Rural)- Viewership share in the top 6 channels (%) Sony Max 27.2 26.8 28.2 27.6 27.9 28.5 25.8 25.2 23.8 22.6 23.3 23.4 23.9 23.2 24.3 Star Gold 20.2 20.2 19.1 19.9 19.8 18.5 20.1 19.8 21.5 20.8 20.8 19.9 20.4 20.4 21.1 Zee Cinema 22.1 20.8 20.7 20.3 20.8 21.9 22.2 21.1 22.1 21.5 20.4 21.1 21.1 20.9 20.5 Movies OK 10.8 12.0 11.7 11.3 11.2 10.8 11.5 12.4 12.6 12.8 13.4 13.3 12.8 13.3 13.8 & Pictures 11.5 11.4 11.3 11.2 11.8 11.1 11.8 12.1 11.6 12.8 12.2 12.9 13.1 13.1 12.3 Sony Max 2 8.2 8.8 9.1 9.6 8.5 9.1 8.6 9.3 8.4 9.5 9.9 9.4 8.8 9.0 8.0 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Zee Network 33.7 32.2 32.0 31.5 32.5 33.0 34.0 33.2 33.7 34.3 32.6 33.9 34.1 34.0 32.8

FTA Hindi GEC (Urban + Rural)- Viewership share in the top 8 channels (%) Star Bharat 4.1 10.9 10.7 8.9 8.7 9.9 6.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Zee Anmol 19.7 25.0 21.1 21.5 23.3 21.2 22.5 18.3 3.4 5.0 3.8 3.7 10.2 17.7 18.2 Sony PAL 23.9 19.3 18.6 19.2 18.2 16.9 16.0 12.5 7.6 7.9 6.4 5.5 10.4 15.0 17.2 Colors Rishtey 21.2 18.3 13.5 13.2 17.1 13.8 11.0 11.6 3.5 4.9 7.3 6.4 8.6 13.3 15.1 Star Utsav 15.4 10.7 15.7 16.6 14.9 18.3 19.0 15.8 6.2 8.3 8.0 8.0 15.2 26.5 22.2 Zee Big Magic 7.9 7.9 7.0 7.1 8.1 7.8 8.0 11.3 32.9 24.2 21.1 20.0 13.4 6.8 8.5 Dangal TV 4.9 8.1 9.2 9.6 7.9 11.5 12.2 21.4 43.3 46.2 51.1 50.2 24.1 15.8 14.8 DD National 6.9 6.5 4.0 2.2 1.6 1.8 1.5 2.2 3.1 3.4 2.4 6.1 18.1 4.9 4.1 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Zee Network 27.6 32.9 28.1 28.6 31.5 29.0 30.5 29.6 36.2 29.3 24.9 23.7 23.5 24.5 26.6

FTA Hindi movies (Urban + Rural)- Viewership share in the top 4 channels (%) Sony Wah 29.9 29.7 27.2 29.2 29.2 29.7 29.8 25.6 34.3 27.1 25.7 28.5 21.1 20.6 18.5 Rishtey Cineplex 24.5 26.0 27.2 27.3 26.0 24.6 27.1 30.8 32.3 38.8 39.1 39.0 37.0 36.3 32.8 Zee Anmol Cinema 23.8 21.7 22.6 21.9 21.4 21.5 20.1 21.7 14.3 12.7 15.7 15.9 27.6 29.2 35.9 Star Utsav movies 21.8 22.7 23.0 21.5 23.4 24.2 23.0 21.8 19.1 21.5 19.5 16.5 14.2 13.9 12.8 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Notes: (a) Top 5-8 channels (relevant channels) in each genre are considered for market share calculation. (b) Life Ok was rebranded as Star Bharat (Free-to-Air channel) on 28th August 2017. We have split its ratings in 50:50 (Paid/FTA) ratio for market share calculation of Paid and FTA Hindi GEC groups starting 28th Aug 2017.

Source: BARC, Kotak Institutional Equities estimates

58 KOTAK INSTITUTIONAL EQUITIES RESEARCH Zee Entertainment Enterprises Media

Exhibit 7: Regional genres- BARC ratings market share, 1-Apr-17 to 16-Oct-20 (Week 14, 2017 to Week 41, 2020) (%)

1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21E Tamil GEC (Urban + Rural)- Viewership share in the top 6 channels (%) Sun TV 55.9 49.2 51.5 49.3 45.5 44.2 41.5 40.2 39.6 41.1 44.2 45.8 46.4 41.1 36.9 STAR Vijay 16.5 24.0 21.4 19.9 20.7 21.5 21.8 22.7 23.5 25.7 22.6 20.8 18.1 21.9 27.5 Zee Tamil 13.2 13.9 15.2 17.6 19.6 20.9 22.7 22.1 22.5 19.6 20.3 19.1 15.6 22.0 21.9 Polimer 4.7 3.7 3.6 3.2 3.1 2.5 2.1 2.1 1.7 1.4 1.3 1.3 2.2 1.4 1.2 Kalaignar TV 3.1 2.8 3.4 3.3 2.4 2.2 2.0 3.9 3.9 3.5 3.5 4.0 5.0 3.3 2.7 Jaya TV 3.9 3.8 2.4 2.3 2.2 2.3 2.3 1.6 1.3 1.8 1.7 2.8 4.2 2.9 3.1 Colors Tamil 1.5 3.7 3.1 3.8 3.4 3.3 3.0 2.8 3.1 3.9 3.3 2.7 Sun Life 2.8 2.5 2.4 2.8 2.9 3.2 3.8 4.0 4.1 3.9 3.5 3.1 4.6 4.1 4.0 Total of top 8 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Telugu GEC (Urban + Rural)- Viewership share in the top 4 channels (%) Zee Telugu 24.3 22.9 24.6 24.0 26.8 25.1 24.8 24.9 23.6 21.1 20.9 21.8 21.5 25.2 24.2 Star Maa TV 22.2 27.7 24.5 25.7 27.8 30.1 31.9 31.0 33.4 36.3 36.6 33.8 30.1 34.2 38.3 Gemini TV (Sun) 29.4 25.6 24.4 24.8 22.4 22.0 21.6 19.6 20.5 19.9 19.6 21.2 24.4 17.7 15.7 ETV Telugu 24.1 23.8 26.4 25.6 23.0 22.8 21.8 24.5 22.5 22.7 22.8 23.2 24.0 23.0 21.7 Total of Top 4 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Kannada GEC (Urban + Rural)- Viewership share in the top 5 channels (%) Colors Kannada 34.4 35.0 34.8 35.0 33.9 33.5 32.4 31.2 28.1 23.9 24.7 19.1 16.9 20.2 21.6 Colors Super 8.0 8.4 11.4 10.3 8.0 8.9 10.7 9.2 10.2 9.6 7.4 6.4 4.5 2.7 3.0 Zee Kannada 25.6 24.5 22.3 24.7 25.0 29.2 29.6 31.3 32.1 35.9 38.1 39.5 31.9 34.9 32.7 Udaya TV (Sun) 13.6 16.4 18.7 18.0 18.8 17.0 16.1 16.7 16.9 16.9 15.6 18.2 29.1 21.8 18.0 Star Suvarna 18.3 15.6 12.8 12.0 14.4 11.3 11.1 11.7 12.7 13.7 14.3 16.8 17.6 20.4 24.6 Total of Top 5 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Malayalam GEC (Urban + Rural)- Viewership share in the top 4 channels (%) Star Asianet 54.9 51.9 43.7 48.1 52.8 52.7 49.7 46.9 43.9 46.0 49.1 49.6 36.3 42.6 45.8 Surya TV (Sun) 15.5 20.1 20.3 18.4 16.6 16.8 14.2 12.4 12.6 11.2 11.0 12.3 20.6 14.3 12.1 Mazhavil Manorama 18.2 16.7 21.3 16.9 15.5 15.8 15.0 17.3 17.8 16.0 15.3 14.4 17.4 14.3 14.4 Flowers TV 11.4 11.3 14.8 16.6 15.1 14.7 17.0 19.3 19.8 18.3 14.2 12.9 15.3 17.0 16.0 Zee Keralam 4.0 4.1 5.9 8.5 10.4 10.8 10.4 11.7 11.7 Total of Top 4 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Marathi GEC (Urban + Rural)- Viewership share in the top 6 channels (%) Zee Marathi 59.8 56.7 55.7 49.8 51.7 51.1 54.5 56.2 53.8 53.6 48.3 41.3 45.6 43.0 36.3 Colors Marathi 17.5 16.6 17.5 20.9 20.2 20.6 20.1 22.3 26.3 24.9 27.2 29.4 15.4 17.5 17.8 Star Pravah 14.8 15.5 17.8 20.1 18.6 19.3 19.2 15.5 14.5 15.7 19.2 23.2 26.9 34.7 42.6 Zee Yuva 7.9 11.1 9.0 9.2 9.5 8.9 6.3 6.1 5.5 5.8 5.3 6.0 12.1 4.8 3.3 Fakt Marathi 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Maiboli 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total of top 6 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 47.3 Bangla GEC (Urban + Rural)- Viewership share in the top 4 channels (%) Star Jalsha 55.7 57.1 55.3 47.7 44.8 38.3 38.9 37.6 35.9 37.2 39.1 42.3 34.5 45.2 45.6 Zee Bangla 32.1 31.7 31.7 38.8 41.0 46.1 45.7 49.1 48.4 47.1 45.4 42.1 35.3 37.3 37.4 Colors Bangla 5.1 6.1 8.2 9.3 8.3 8.9 8.4 7.2 7.1 7.4 7.9 7.8 15.0 9.2 9.9 Sony Aath 7.0 5.2 4.8 4.3 5.8 6.6 7.1 6.1 8.6 8.3 7.6 7.8 15.2 8.3 7.1 Total of Top 4 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Oriya GEC (Urban + Rural)- Viewership share in the top 4 channels (%) Sarthak TV 48.4 51.3 49.2 45.2 47.0 47.7 46.7 39.1 37.0 38.0 41.1 40.7 33.4 35.0 37.0 Tarang TV 35.3 34.0 37.4 41.1 37.8 36.4 40.5 46.6 48.6 47.3 43.6 41.1 37.1 46.3 52.6 Odisha TV 8.4 8.7 7.8 7.4 8.2 10.2 7.9 10.7 9.7 8.3 7.7 10.0 17.4 8.5 0.0 Colors Oriya 7.9 6.1 5.6 6.4 7.1 5.6 4.8 3.6 4.7 6.3 7.6 8.2 12.1 10.1 10.4 Total of Top 4 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: BARC, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 59 Media Zee Entertainment Enterprises

Exhibit 8: Weighted viewership share of Zee network in Hindi and regional genres

Zee 30 28.1 28.4 28.3 27.7 27.6 27.4 28 27.2 27.0 26.5 26.4 25.9 25.7 25.5 26 25.1 25.3 24.9 24.5 24.0 24 23.3

22

20

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21 3QFY21

Notes: (1) Above market share working is based on Zee network's quarterly viewership share in its key genres (Hindi Gec, Hindi movies Hindi FTA GEC+movies and regional GECs) and it uses ad market size of respective genre as weight (2) The above calculation does not cover English, music, regional movies and niche genres that collectively account for less than 10-12% of Zee's domestic ad revenues. Zee's domestic/international ad revenue is 94%/6%.

Source: Kotak Institutional Equities estimates

60 KOTAK INSTITUTIONAL EQUITIES RESEARCH Zee Entertainment Enterprises Media

Exhibit 9: Consolidated financial summary of Zee Entertainment, March fiscal year-ends, 2013-23E (Rs mn)

2016 2017 2018 2019 2020 2021E 2022E 2023E Profit model (Rs mn) Total revenues 58,514 64,332 66,857 79,339 81,299 71,153 86,707 94,497 EBITDA 15,094 19,260 20,761 25,639 16,346 15,545 23,203 25,195 Other income 2,016 2,240 2,795 2,515 2,836 1,632 1,827 2,237 Interest (123) (161) (1,448) (1,305) (1,449) (625) (500) (350) Depreciation (840) (1,152) (1,821) (2,347) (2,706) (2,728) (3,088) (3,838) Pretax profits 16,147 20,187 20,287 24,501 15,028 13,825 21,443 23,245 Extraordinary items (331) 12,234 2,955 (218) (2,843) 971— — — Taxes (5,528) (6,805) (8,409) (8,673) (4,317) (3,342) (5,575) (6,044) Minority interest (22) 5 25 23 (5) (5) (5) (5) RPS dividends (incl tax) (1,457) 0 0 0 0 0 0 0 PAT 8,810 23,416 14,791 15,670 5,266 9,507 15,863 17,196 Adj PAT (pre-exceptional; excl RPS impact) 10,482 13,386 14,428 15,852 10,706 10,478 15,863 17,196 EPS (Rs) 9.2 24.4 15.4 16.3 5.5 9.9 16.5 17.9 Adj EPS (Rs) - (excl RPS impact) 10.9 13.9 15.0 16.5 11.1 10.9 16.5 17.9

Balance sheet (Rs mn) Total Equity 42,145 66,567 75,617 89,239 93,439 98,415 109,410 121,160 Preference capital 20,169 0 0 0 0 0 0 0 Minority interest 85 10 141 143 110 110 110 110 Total borrowings 9 19,088 15,254 11,133 5,950 2,975 0 0 Currrent liabilities 16,532 14,702 20,284 28,814 24,238 21,127 22,183 24,175 Total capital 62,408 85,665 91,012 100,515 99,499 101,499 109,519 121,270 Cash and cash eq 21,346 40,935 33,264 23,798 11,750 14,104 17,200 27,029 Inventories 13,160 16,843 26,278 38,505 53,475 51,475 49,475 47,475 Receivables 13,245 13,059 15,365 18,274 20,847 17,544 20,192 22,006 Loans and advances 12,972 14,156 13,114 24,744 15,421 15,921 17,440 18,978 Other current assets 2,127 3,429 7,026 7,982 7,789 8,189 8,589 8,989 Net fixed assets 14,960 9,721 14,125 14,155 13,182 13,954 17,367 19,529 Investments 576 1,321 2,124 1,872 1,274 1,274 1,274 1,274 Deferred tax assets 556 903 0 0 0 0 0 0 Total assets 62,408 85,665 91,012 100,516 99,499 101,500 109,520 121,270

Free cash flow (Rs mn) Operating cash flow, excl. W-cap, ex-taxes 15,713 19,170 22,390 27,802 22,371 14,570 23,363 25,355 Working capital (2,632) (5,670) (8,551) (17,151) (16,758) 1,292 (1,512) 241 Taxes paid (5,827) (6,810) (8,295) (9,299) (3,114) (3,342) (5,575) (6,044) Capital expenditure (4,064) (2,768) (4,605) (2,823) (1,451) (3,500) (6,500) (6,000) Other income (net) 1,003 1,001 1,107 956 1,300 1,007 1,327 1,887 Free cash flow (prior to RPS dividends) 4,193 4,923 2,046 (515) 2,348 10,026 11,103 15,440 RPS redemption + RPS dividend payout (excl DDT) (1,457) - (3,834) (4,121) (5,183) (2,975) (5,475) (2,500) Free cash flow to equity holders 2,736 4,923 (1,788) (4,636) (2,835) 7,051 5,628 12,940

Key assumptions / metrics Ad revenue growth (%) 28.9 9.2 14.5 19.8 (7.1) (20.0) 33.0 10.0 Domestic subscription revenue growth (%) 14.5 11.7 11.8 17.4 33.2 2.0 8.0 8.0 Overseas subscription revenue growth (%) 15.7 3.0 (2.8) (0.7) (16.0) (1.0) (2.0) (2.0) Content cost as % of revenue 42.2 40.9 35.3 36.1 44.4 44.9 43.3 43.1 Effective tax rate (%) 34.2 33.7 41.5 35.4 28.7 24.2 26.0 26.0 EBITDA margin (%) 25.8 29.9 31.1 32.3 20.1 21.8 26.8 26.7 ROAE 22.7 43.1 20.8 19.0 5.8 9.9 15.3 14.9 ROACE 21.6 20.5 15.7 21.1 13.2 12.5 17.8 17.1

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 61 ADD City Union Bank (CUBK) https://ultraviewer.et/en/own Banks NOVEMBER 02, 2020 load.html RESULT Sector view: Attractive

Need to bite into the promise. CUBK reported a better-than-expected operating CMP (`): 152 profit performance led by NIM expansion, treasury gains and tight cost control. Asset Fair Value (`): 160 quality was better but largely benefitting from the Supreme Court ruling. The BSE-30: 39,758 management outlook has turned a lot more positive, reflecting economic recovery, credit guarantee benefit and restructuring scheme. A niche franchise with a strong history drives our positive outlook. Revise FV to Rs160 (from Rs140 earlier). City Union Bank Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 152/160/ADD EPS (Rs) 6.8 11.1 11.6 52-week range (Rs) (high-low) 249-110 EPS growth (%) 4.7 64.4 3.9 Mcap (bn) (Rs/US$) 113/1.6 P/E (X) 22.5 13.7 13.2 QUICK NUMBERS ADTV-3M (bn) (Rs/US$) 0.4/0.1 P/B (X) 2.2 2.0 1.7 Shareholding pattern (%) BVPS 68.8 77.2 87.5  NII up 16% yoy; PAT Promoters 0.0 RoE (%) 9.1 13.6 13.0 decline of 18% yoy FPIs/MFs/BFIs 21.7/25.3/7.0 Div. yield (%) 0.8 1.3 1.3 Price performance (%) 1M 3M 12M NII (Rs bn) 19 20 19  GNPL down ~50 bps Absolute 7.8 25.8 (28.4) PPOP (Rs bn) 14 14 15 Rel. to BSE-30 4.9 19.0 (27.7) Net profits (Rs bn) 5 8 9 qoq to 3.4% and NNPL down ~30 bps Provisions continue to hurt earnings growth; revenue growth better than expected qoq to 1.8%

CUBK reported 18% yoy decline in earnings but 11% yoy operating profit growth. Provisions  Maintain ADD with were high mostly due to contingent provisions for Covid. Loan growth was weak at 5% yoy revised FV of Rs160 while NIM has expanded 15 bps qoq to 4.1%. Treasury gains continued to support revenues for (Rs140 earlier) this quarter as well. Gross NPLs declined 45 bps qoq while net NPLs declined 30 bps qoq. The bank has sanctioned 6% of loans (disbursed 5% of loans) under ECLGS. The bank has indicated that it would restructure <5% of loans as well under the revised scheme.

The familiar ‘what-if’ problem

The management has provided with a solid upbeat commentary on the pace of recovery in the business environment. To that extent, we saw an improved guidance with RoA likely to be at ~100-125 bps for FY2021 and the timeline for RoA moving back to pre-Covid levels could be advanced by a few quarters than 2HFY23 that was communicated earlier. This guidance presents the familiar problem that we faced during the corporate NPL cycle backing a recovery theme. For cyclical stocks, where equity dilution risk is lower, we are not disputing the M B Mahesh, CFA hypothesis but there is always a probability that the timing uncertainty on recovery can change the return expectations, resulting in valuation settling at a different level as compared to its own history. We like the franchise but the risk remains if the recovery is slower than anticipated. A Nischint Chawathe prolonged slowdown has implications elsewhere: the bank would slow down growth, leading to lower revenue growth with an inflexible cost structure leading to operating ratios. There is Abhijeet Sakhare focus on lower asset impairment risk and/or make high provisions leading to weak RoEs. This journey is painful and is usually understood on a post facto basis. Ashlesh Sonje

Maintain ADD: looking a lot better than previously anticipated Dipanjan Ghosh CUBK should come out of the crisis with lower damage than its peers. The ECLGS scheme along with restructuring should aid this recovery. However, our less bullish outlook is mostly driven by lack of conviction on the timing of recovery as the economy has just opened up and the riskiness of the book is yet to be established. We maintain our ADD rating with FV at Rs160 (from Rs140 earlier), valuing the bank at ~1.7X book and 13X September 2022E EPS.

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

Exhibit 1: City Union Bank – quarterly March fiscal year-ends, 2QFY20-2QFY21 (Rs mn) (% chg.) 2QFY21 2QFY21E 2QFY20 1QFY21 2QFY21E 2QFY20 1QFY21 1HFY21 1HFY20 (% chg.) 2021E 2020 (% chg.) 2022E Interest Earned 10,610 10,454 10,368 10,494 1.5 2.3 1.1 21,103 20,661 2.1 42,306 41,686 1.5 43,430 Interest/Discount on Advances/Bills 8,988 8,826 8,618 8,922 1.8 4.3 0.7 17,910 17,304 3.5 35,928 34,946 2.8 36,283 Interest on Investment 1,522 1,447 1,602 1,401 5.2 (5.0) 8.6 2,922 3,013 (3.0) 5,860 6,099 (3.9) 6,435 Interest on bal. with RBI & others 100 181 148 171 (44.9) (32.7) (41.6) 271 344 (21.2) 517 641 (19.3) 712 Interest expense 5,858 6,033 6,253 6,124 (2.9) (6.3) (4.3) 11,982 12,376 (3.2) 23,532 24,934 (5.6) 23,925 Net interest income 4,751 4,421 4,115 4,370 7.5 15.5 8.7 9,121 8,284 10.1 18,774 16,752 12.1 19,505 Other Income 1,693 1,124 1,950 1,606 50.6 (13.2) 5.4 3,299 3,583 (7.9) 6,092 6,799 (10.4) 5,883 Treasury 686 126 789 1,085 444.4 (13.1) (36.8) 1,771 1,235 43.4 2,000 1,596 25.3 750 Total Income 6,445 5,545 6,065 5,976 16.2 6.3 7.8 12,420 11,867 4.7 24,865 23,551 5.6 25,388 Operating Expenses 2,598 2,657 2,600 2,415 (2.2) (0.1) 7.6 5,013 4,888 2.6 10,475 10,137 3.3 11,235 Payments to / Provisions for employees 1,199 1,176 1,131 1,164 1.9 6.0 3.0 2,363 2,135 10.7 4,712 4,207 12.0 5,034 Other operating expenses 1,399 1,481 1,469 1,251 (5.5) (4.8) 11.9 2,650 2,754 (3.8) 5,762 5,931 (2.8) 6,201 Pre-provisioning operating profit 3,847 2,889 3,465 3,560 33.2 11.0 8.0 7,407 6,979 6.1 14,391 13,414 7.3 14,153 Provisions & Contingencies 1,770 1,727 1,080 1,570 2.5 64.0 12.7 3,340 2,237 49.3 7,687 7,551 1.8 4,816 Profit before tax 2,077 1,162 2,385 1,990 78.8 (12.9) 4.3 4,067 4,742 (14.2) 6,704 5,863 14.3 9,337 Provision for Taxes 500 297 450 450 68.1 11.1 11.1 950 950 — 1,716 1,100 56.0 2,390 Net Profit 1,577 864 1,935 1,540 82.4 (18.5) 2.4 3,117 3,792 (17.8) 4,988 4,763 4.7 6,947 PBT - treasury + investment dep. 1,591 1,036 1,596 905 53.6 (0.4) 75.7 2,496 3,267 (23.6) 4,704 3,950 19.1 8,587 Tax rate 24 26 19 23 -152 bps 521 bps 147 bps 23 20 26 19 684 bps 26 Key balance sheet items (Rs bn) Deposits 414 410 405 410 1.1 2.4 1.0 399 408 (2) 433 Savings 75 69 72 8.9 3.6 75 73 3.2 83 Current 32 31 29 1.5 10.0 32 29 9.1 35 CASA (%) 26 25 25 101 bps 109 bps 27 25 184 bps 27 CASA 106 100 101 6.6 5.4 19 18 5.6 Advances 348 345 333 345 0.9 4.6 0.8 355 339 4.7 378 Agriculture — 47 54 (100.0) (100.0) Retail 54 37 41 46.0 31.7 Gold loans 22 4 8 445.5 168.9 MSME 123 111 110 11.0 11.5 Large industries 21 22 22 (6.1) (5.8) Traders (retail and wholesale) 53 56 53 (6.7) (0.4) Commercial real estate 27 23 28 16.3 (3.5) Loans collateralized by deposits 5 6 5 (8.7) (2.8) Others 66 31 32 112.0 107.4 Investments 108 95 99 97 13.7 9.3 11.4 83 91 (8.9) 108 Key calculated ratios (%) Yield on advances 10.4 10.5 10.3 -16 bps 4 bps — — 0 bps 10.3 10.5 -15 bps 9.9 Yield on investment 5.9 6.9 5.9 -99 bps 1 bps — — 0 bps 6.7 7.2 -52 bps 6.7 Cost of deposit 5.7 6.3 6.0 -61 bps -30 bps — — 0 bps 5.8 6.3 -46 bps 5.8 NIM 3.8 3.6 3.6 28 bps 23 bps — — 0 bps 4.9 4.6 34 bps 4.8 CD ratio 84.1 82.3 84.2 181 bps -10 bps — — 0 bps 89.1 83.1 600 bps 87.4 Cost to income 40.3 42.9 40.4 -256 bps -11 bps — — 0 bps 42.1 43.0 -92 bps 44.3 Cost to average assets 2.5 2.3 2.3 16 bps 20 bps — — 0 bps 2.1 2.1 -4 bps 2.1 Credit cost 1.7 1.2 1.8 50 bps -7 bps 2.2 2.3 -15 bps 1.3 Asset quality measures Gross NPL (Rs mn) 12,206 11,354 13,461 7.5 (9.3) 16,788 14,134 18.8 18,291 Gross NPL (%) 3.4 3.4 3.9 3 bps -46 bps 4.7 4.2 56 bps 4.8 Net NPL (Rs mn) 6,314 6,241 7,164 1.2 (11.9) 9,503 7,785 22.1 9,577 Net NPL (%) 1.8 1.9 2.1 -9 bps -30 bps 2.7 2.3 38 bps 2.5 Provision coverage (%) 48 45 47 323 bps 148 bps 43 45 -152 bps 48 Provision coverage (inc write-offs) (%) 70 65 68 500 bps 200 bps Slippages (Rs mn) — 2,003 34 (100.0) (100.0) 34 4,002 (99.2) 12,766 11,105 15.0 12,626 Slippage (%) — 2.5 0.0 -249 bps -4 bps — — 0 bps 3.5 3.2 28 bps 3.3 Capital adequacy details (%) CAR 17 15 17 187 bps 59 bps Tier-I 16 15 16 133 bps 60 bps Other key parameters (#) ATM 1,780 1,724 1,788 3.2 (0.4) 1,893 1,793 5.6 1,993 Branches 700 650 700 7.7 — 705 700 0.7 715

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 63 Banks City Union Bank

Loan growth remains muted at 5% yoy

CUBK reported tepid loan growth of 5% yoy in 2QFY21 led by 6-7% yoy contraction in advances to large industries and trade segment. The SME book (~35% of overall advances) grew 11% yoy in 2QFY21 after being flat in the last two quarters. The retail loan book grew 15% yoy, driven by >4X yoy growth in the retail gold loan portfolio. The overall agri loans portfolio saw ~15% yoy contraction – mainly due to shift in gold loan borrowers from agri gold loans to personal gold loans. The bank has sanctioned Rs19.7 bn under the MSME ECLGS scheme and disbursed ~Rs16.9 bn.

Management guided towards high single digit growth in advances in FY2021 and indicated that the focus stays on strengthening the balance sheet. Growth would be supported to some extent by the MSME credit guarantee scheme and gold loan portfolio.

Exhibit 2: Share of SME/trader segment is ~45% of loans Break-up of loans; March fiscal year-ends, 2011-2020, 2QFY21 (%) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 1QFY21 2QFY21 Retail 7.4 12.0 15.7 12.4 11.4 10.8 11.2 11.6 11.4 11.6 11.9 15.5 SME 29.7 26.7 26.0 30.1 33.7 34.3 30.1 33.9 31.1 31.1 31.9 35.3 Large industries 12.5 16.1 13.8 8.0 6.2 6.7 7.4 6.7 6.7 6.2 6.3 5.9 Agriculture 12.8 13.4 15.7 19.1 16.8 16.0 18.3 14.5 14.8 15.8 15.7 11.5 Traders (wholesale and retail) 21.1 20.4 18.4 17.9 17.8 17.9 18.0 18.2 17.3 16.6 15.3 15.1 Commercial real estate 8.2 5.3 5.1 5.4 5.3 5.5 5.2 4.9 5.9 8.0 8.2 7.8 Loans collateralized by deposits — 1.6 1.7 2.5 2.1 1.9 1.8 1.8 1.8 1.7 1.5 1.4 Others 8.3 4.5 3.6 4.6 6.6 6.9 8.1 8.5 11.0 9.0 9.2 7.4 Total loans (Rs bn) 93 121 152 162 181 213 238 282 331 346 345 348 Gold loans 14.5 22.3 18.3 13.8 9.6 9.0 8.3 8.8 9.6 10.0 13.0 Retail gold loans — — 9.1 5.0 2.3 1.2 1.2 1.3 1.1 2.1 2.4 6.3

Source: Company, Kotak Institutional Equities

Margins have stabilized at ~4%

NIM (reported) was up ~10 bps qoq at 4.1% in 2QFY21. NIM has been in the range of 3.9- 4.1% over the last few quarters. Yields on advances were down ~20 bps qoq to ~10.2%, while cost of funds dropped even more sharply by ~30 bps qoq to ~4.6%.

NIM was also impacted due to interest reversal of Rs250 mn on SMA account balances over the seven-month period from March to September 2020. If not for this reversal, NIM would have been at ~4.3%.

Management expects margins to stay in the range of 3.8-4.2% over the next few quarters. We expect NIM to stabilize at ~3.8% over FY2022-23E.

64 KOTAK INSTITUTIONAL EQUITIES RESEARCH City Union Bank Banks

Exhibit 3: NIM stable qoq and yoy Reported YoA, CoF and NIM; March fiscal year-ends, 2QFY17-2QFY21 (%) Yield on advances (LHS) Cost of funds (LHS) NIM (RHS) 17.5 5.0 4.5 4.5 4.4 4.4 4.3 4.4 4.4 4.2 4.2 4.2 4.2 4.1 4.1 3.9 4.0 3.9 4.0 14.0 4.0

10.5 3.0

7.0 6.0 5.8 2.0 5.7 5.5 5.3 5.3 5.2 5.2 5.2 5.2 5.4 5.2 5.2 5.1 5.0 4.9 4.6

3.5 1.0

12.2 12.1 11.9 11.8 11.5 11.4 11.2 10.9 10.9 11.0 11.1 11.0 10.8 10.7 10.5 10.4 10.2

- -

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21 2QFY21

Source: Company, Kotak Institutional Equities

Tepid deposit growth

Deposit growth fell to 2% yoy from double-digit average growth levels seen in pre-Covid period. CASA growth was better at ~7% yoy, driven by ~9% growth in saving account balances. CASA ratio for the bank improved >100 bps qoq to ~26%. Only ~9% of the deposits are bulk deposits (>Rs20 mn) and their share declined in 2QFY21.

Tamil Nadu continues to dominate deposits with share in overall deposits at 80%. City Union Bank maintains deposit market share in Tamil Nadu, although it has dropped marginally yoy from 4.0% in 1QFY20 to 3.8% in 1QFY21. Frontline private players including HDFC Bank have witnessed sharper market share gains.

Exhibit 4: CASA ratio stable at ~25% Break-up of deposits, March fiscal year-ends, 2011-2020, 2QFY21 (%) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 1QFY21 2QFY21 Current 8.4 7.4 6.6 6.5 6.9 7.1 8.0 8.5 8.4 7.2 7.1 7.7 Savings 11.2 10.8 10.2 11.2 12.3 13.3 15.4 15.7 16.9 17.8 17.6 18.0 CASA 19.6 18.2 16.8 17.8 19.2 20.4 23.4 24.2 25.2 25.0 24.6 25.7 Term deposits 80.4 81.8 83.2 82.2 80.8 79.6 76.6 75.8 74.8 75.0 75.4 74.3

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 65 Banks City Union Bank

Exhibit 5: Tamil Nadu accounts ~70% of branches, ~80% of deposits and ~65% of loans for City Union Bank Break-up of business across states, March fiscal year-ends, 2QFY21 (%) Branches Deposits Loans Kerala, Gujarat, Others, Mahara Kerala, Gujarat, Others, Others, Mahara 3 2 6 shtra, 2 2 1 4 Gujarat, 8 Kerala, shtra, Karnata Mahara 4 2 3 ka, 6 shtra, 3 Karnata Telenga ka, 6 na, 2 Karnata ka, 6 Telenga Andhra na, 5 Telenga Pradesh na, 5 , 3 Tamin Tamin Nadu, Andhra Nadu, 64 Pradesh Tamin 69 Andhra , 6 Nadu, Pradesh 80 , 8

Source: Company, Kotak Institutional Equities

Exhibit 6: ~80% of deposits are from Tamil Nadu Exhibit 7: ~63% of loans are from Tamil Nadu State-wise deposit mix, March fiscal year-ends, 2QFY19-2QFY21 (%) State-wise advances mix, March fiscal year-ends, 2QFY19-2QFY21 (%) Tamil Nadu Andhra Paradesh Telengana Tamil Nadu Andhra Paradesh Telengana Karnataka Maharashtra Kerala Karnataka Maharashtra Kerala Gujarat Others Gujarat Others 100 100 4 4 4 4 4 4 4 4 4 7 7 7 7 8 8 8 8 8 3 3 4 3 2 2 2 2 2 6 6 7 6 6 6 6 3 7 7 3 3 3 2 3 3 4 4 4 4 4 3 80 3 3 3 3 3 80 5 5 5 5 5 5 6 5 6 3 6 6 6 6 6 6 5 2 3 2 2 2 2 2 2 6 6 9 8 9 9 8 8 8 60 60 8 8

40 79 77 77 79 79 80 80 80 80 40 64 64 63 63 63 62 62 63 64 20 20

0 0

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20 1QFY21 2QFY21

Source: Public documents, Kotak Institutional Equities Source: Public documents, Kotak Institutional Equities

66 KOTAK INSTITUTIONAL EQUITIES RESEARCH City Union Bank Banks

Exhibit 8: Growth and asset quality concerns in the SME portfolio in Tamil Nadu Performance of banks in TN, March fiscal year-ends, 2015-2020, 1QFY21 Key financial metrics (Rs bn) Performance in TN - Growth (%) Overall sector trends - Growth (%) 2015 2016 2017 2018 2019 2020 1QFY21 2015 2016 2017 2018 2019 2020 1QFY21 2015 2016 2017 2018 2019 2020 1QFY21 Number of branches 9,496 9,971 10,501 10,612 10,837 11,061 11,182 7.4 5.0 5.3 1.1 2.1 2.1 1.5 Deposits 5,441 5,968 6,860 7,177 7,717 8,407 8,684 7.0 9.7 14.9 4.6 7.5 8.9 11.2 10.6 7.0 6.8 6.7 9.6 9.8 9.8 Loans 6,499 6,828 6,955 7,848 8,737 9,280 9,380 7.3 5.1 1.9 12.8 11.3 6.2 6.9 9.7 9.0 7.3 10.3 13.0 7.6 7.6 Priority sector 2,664 3,002 3,161 3,566 3,910 4,243 4,203 9.6 12.7 5.3 12.8 9.7 8.5 6.3 7.0 10.7 9.4 4.8 7.3 6.1 6.1 Agriculture 1,207 1,246 1,353 1,568 1,744 1,901 1,906 12.1 3.3 8.5 15.9 11.2 9.0 7.8 14.4 15.2 12.3 3.1 8.2 5.4 5.4 SME 962 1,178 1,244 1,403 1,557 1,687 1,658 10.8 22.4 5.6 12.8 11.0 8.4 7.2 6.6 5.9 6.4 10.5 7.1 5.7 5.7 Housing 304 320 320 306 348 431 420 3.7 5.2 (0.0) (4.3) 13.7 24.0 17.0 6.3 6.2 7.6 2.0 15.2 11.9 11.9 Others 191 258 244 289 261 224 220 0.1 34.9 (5.2) 18.1 (9.6) (14.3) (22.4) (21.0) 26.1 13.7 (8.5) (16.0) (2.9) (2.9) Non priority sector 3,835 3,826 3,794 4,282 4,827 5,037 5,177 5.8 (0.2) (0.8) 12.9 12.7 4.3 7.4 8.3 8.1 6.2 5.4 11.0 4.0 4.0 NPL (%) Priority sector 4.6 5.8 6.3 6.7 7.2 7.2 7.9 Housing 2.1 2.7 2.7 4.9 3.6 3.0 2.6 Agriculture 3.6 4.3 4.7 4.3 4.8 4.7 5.0 SME 5.6 7.5 7.9 9.0 9.6 9.8 11.1 SME (1 year lag) 6.2 9.1 8.3 10.1 10.6 10.6 11.9

Source: SLBC, Public documents, Kotak Institutional Equities

Exhibit 9: Business landscape has changed with competition from new private banks picking pace Deposit and credit market share of various banks in Tamil Nadu, March fiscal year-ends, 2013–2020, 1QFY21 (%) 2013 2014 2015 2016 2017 2018 2019 1QFY20 2020 1QFY21 (% chg. yoy) Market share comparison in deposits PSU banks SBI Group 17.0 16.9 16.5 16.9 17.9 17.9 18.3 18.7 19.1 19.6 88 bps Indian Overseas Bank 11.0 10.4 10.5 9.8 9.7 9.0 8.7 8.8 8.6 8.6 -25 bps Canara Bank 7.3 6.8 7.1 7.2 7.1 7.1 7.3 7.7 7.8 9.2 150 bps Indian Bank 13.2 13.2 11.8 11.3 9.8 10.2 10.7 10.9 11.4 11.1 22 bps Private banks Axis Bank 3.1 2.4 2.7 2.9 3.0 3.2 3.2 3.3 3.6 3.6 31 bps City Union Bank 3.2 3.2 3.4 3.5 3.4 3.6 3.8 4.0 3.9 3.8 -16 bps Federal Bank 0.6 0.5 0.5 0.5 0.7 0.6 0.7 0.7 0.7 0.7 4 bps HDFC Bank 3.7 4.0 4.6 5.5 5.6 6.3 7.2 7.2 8.3 8.2 101 bps ICICI Bank 4.1 4.3 4.3 4.5 4.6 5.0 5.4 5.3 6.2 6.0 72 bps Karur Vysya Bank 3.5 5.5 4.4 4.4 4.1 4.4 4.4 3.1 4.1 4.0 90 bps Market share comparison in loans PSU banks SBI Group 21.1 19.9 19.1 18.9 17.9 18.7 18.5 18.2 19.0 18.8 64 bps Indian Overseas Bank 8.6 8.1 7.7 6.9 6.1 5.9 5.4 5.4 5.1 5.1 -38 bps Canara Bank 6.7 7.3 7.7 7.9 9.5 8.0 8.2 8.5 8.7 10.7 226 bps Indian Bank 7.8 7.6 7.1 7.8 7.3 7.7 8.0 8.2 8.7 8.9 70 bps Private banks Axis Bank 2.8 3.9 4.1 3.1 4.9 5.1 5.2 5.2 5.3 5.4 21 bps City Union Bank 2.1 1.9 1.9 2.0 2.2 2.3 2.4 2.3 2.3 2.4 11 bps Federal Bank 0.9 0.9 0.9 0.9 1.2 1.4 1.6 1.6 1.7 1.6 8 bps HDFC Bank 4.5 4.9 5.3 6.9 7.7 8.5 9.0 9.4 10.1 9.8 43 bps ICICI Bank 4.2 3.3 3.3 3.5 4.1 3.9 4.3 4.3 4.3 4.4 9 bps

Karur Vysya Bank 2.6 2.6 2.5 2.6 2.4 2.7 2.6 2.6 2.5 2.5 -9 bps

Source: Public documents, Kotak Institutional Equities

Collections improved to ~90% overall in September 2020

 Headline ratios. City Union Bank reported a decline of ~50 bps in gross NPA level to 3.4% in 2QFY21, while net NPA declined ~30 bps qoq to 1.8%. The improvement in asset quality was supported by asset classification standstill due to the moratorium and Supreme Court order.

 Slippages and overdues. The bank reported no slippages in 2QFY21 on account of the moratorium (it had granted moratorium to all customers) till August and subsequent

KOTAK INSTITUTIONAL EQUITIES RESEARCH 67 Banks City Union Bank

Supreme Court order in September. The bank has total SMA-0, SMA-1 and SMA-2 portfolio of ~18 bps, ~65 bps and ~31 bps of net advances respectively. The management indicated that it expects to see slippages between 3-3.5% of closing advances in FY2021.

 Recoveries. The bank saw recoveries/ upgrades amounting to ~Rs530 mn in 2QFY21 (quarterly average of ~Rs750 mn in FY2020). In the near future, the bank expects to make recoveries on Security Receipts from four accounts (constituting ~90% of total SR outstanding of ~Rs2.4 bn) where resolution has been finalized and payments have started.

 Provisions. The bank has ramped up Covid provisions further by ~Rs1.2 bn in 2QFY21, taking the overall Covid provision buffer to ~Rs3.2 bn (~90 bps of net advances).

 Restructuring. The management guided that it will see overall restructuring (including MSME and other schemes) of 5-6% of its loan book. As of 2QFY21, total restructured advances stood at ~Rs4.8 bn (~1.4% of net advances).

Exhibit 10: GNPL stable qoq due to lower recoveries GNPL ratio, NNPL ratio and slippage ratio (annualized), March fiscal year-ends, 2QFY17-2QFY21 (%) GNPL ratio (LHS) NNPL ratio (LHS) Slippages (RHS) 5.0 10.0 4.1 3.9 4.0 3.5 8.0 3.3 3.3 3.4 3.4 3.1 3.1 3.0 3.0 3.0 2.8 2.9 2.9 3.0 5.7 3.0 2.7 6.0

2.0 4.0 2.5 2.7 2.8 2.3 2.2 2.5 2.4 2.3 2.2 2.4 2.5 2.1 1.8 1.9 1.0 2.0 1.6 1.7 1.7 1.8 1.8 1.7 1.7 1.7 1.7 1.7 1.8 1.9 1.9 2.0 2.3 0.02.1 1.8-

- -

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20 1QFY21 2QFY21

Source: Public documents, Kotak Institutional Equities

Exhibit 11: City Union Bank has had a relatively weak asset quality performance in recent years as compared to DCB Bank Asset quality metrics, March fiscal year-ends, 2015-2020, 2QFY21 (%)

Gross NPA Net NPA Slippages Loan growth 2015 2016 2017 2018 2019 2020 2QFY21 2015 2016 2017 2018 2019 2020 2QFY21 2015 2016 2017 2018 2019 2020 2QFY21 Large private banks HDFC Bank 0.9 0.9 1.1 1.3 1.4 1.3 1.1 0.2 0.3 0.3 0.4 0.4 0.4 0.2 1.4 1.3 1.2 1.8 1.8 1.8 2.0 ICICI Bank 3.7 5.7 8.5 9.5 7.0 5.8 5.2 1.6 3.0 5.4 5.4 2.3 1.5 1.1 2.4 4.3 7.7 6.2 2.1 2.4 1.9 Axis Bank 1.4 1.7 5.2 7.5 5.8 4.9 4.2 0.5 0.7 2.3 3.8 2.3 1.6 1.0 1.2 2.6 5.8 9.0 3.2 4.0 0.5 Mid and small private banks IndusInd Bank 0.8 0.9 0.9 1.2 2.1 2.4 2.2 0.3 0.4 0.4 0.5 1.2 0.9 0.5 1.6 1.2 1.6 2.9 3.6 3.0 0.8 RBL Bank 0.8 1.0 1.2 1.4 1.4 3.5 3.3 0.3 0.6 0.6 0.8 0.7 2.0 1.4 0.5 1.4 2.5 1.9 1.7 6.0 1.0 DCB Bank 1.8 1.5 1.6 1.8 1.8 2.5 2.3 1.0 0.8 0.8 0.7 0.7 1.2 0.8 2.1 2.1 2.0 2.2 2.0 2.8 0.1 Federal Bank 2.0 2.8 2.3 3.0 2.9 2.8 2.8 0.7 1.6 1.3 1.7 1.5 1.3 1.0 1.8 3.6 1.8 3.0 1.8 1.7 0.0 Karur Vysya Bank 1.8 1.3 3.5 6.3 8.4 8.7 7.9 0.8 0.6 2.5 4.2 5.0 3.9 3.0 1.8 3.1 3.3 4.9 4.9 3.5 0.1 City Union Bank 1.8 2.3 2.7 2.9 2.8 3.9 3.4 1.3 1.5 1.7 1.7 1.8 2.3 1.8 2.6 2.3 2.2 2.3 2.2 3.2 -

Source: Company, Kotak Institutional Equities

Other highlights

 Costs kept under control. Cost-income ratio was down ~10 bps qoq to 40% in 2QFY21 after declining ~400 bps in 1QFY21. Management indicated that the decline in cost ratio in FY2021 has been driven by elevated treasury income, and is likely to revert to 42-44% levels.

68 KOTAK INSTITUTIONAL EQUITIES RESEARCH City Union Bank Banks

 Non-interest income was up ~5% qoq, supported by 43% qoq increase in fee income as business improved. Further, the bank currently holds ~Rs2 bn in unrealized gains in its HTM investment portfolio.

 Capital position stands comfortable with CAR at 17.4% as the bank slowed down its advances growth and focused on ECLGS scheme. Management indicated that it expects to tide over the Covid crisis without the need to raise further capital.

Exhibit 12: CUBK trading at 2.1X one-year forward book Exhibit 13: CUBK has been trading at a marginal discount to its PBR and PER (rolling 1-year forward book), October 2010 onwards (X) peers since June 2020 PBR premium to peers (rolling 1-year forward book), October 2010 PER (X) (LHS) PBR (X) (RHS) onwards (X) 45 4.0 1.50

36 3.2 1.20 27 2.4 0.90 18 1.6

0.60 9 0.8

0.30 0 0.0

0.00

Oct-10

Oct-11

Oct-12

Oct-13

Oct-14

Oct-15

Oct-16

Oct-17

Oct-18

Oct-19 Oct-20

Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Oct-18 Oct-19 Oct-20 Source: Company, Bloomberg, Kotak Institutional Equities estimates

Source: Company, Bloomberg, Kotak Institutional Equities estimates

Exhibit 14: Change in estimates March fiscal year-ends, 2021-2023E (Rs mn) New New estimates Old estimates Old versus new (%) estimates 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E Loans (Rs bn) 355 378 411 335 357 388 6.1 6.1 6.1 Loan growth (%) 4.7 6.5 8.7 (1.3) 6.5 8.7 604 bps 0 bps 0 bps Net interest income 18,774 19,505 21,388 17,497 18,239 20,550 7.3 6.9 4.1 NIM (%) 3.9 3.8 3.8 3.7 3.7 3.8 22 bps 12 bps -1 bps Other income 6,092 5,883 6,436 5,492 6,283 6,836 11 (6) (6) Net fee income 499 573 659 499 573 659 - - - Net capital gains 2,000 750 500 1,400 1,150 900 43 (35) (44) Operating expenses 10,475 11,235 12,445 10,685 11,463 12,705 (2.0) (2.0) (2.0) Employee expenses 4,712 5,034 5,585 4,712 5,034 5,585 - - - Loan loss provisions 7,641 4,770 3,356 6,741 2,939 3,162 13.3 62.3 6.1 PBT 6,704 9,337 11,977 5,516 10,074 11,472 21.5 (7.3) 4.4 Tax 1,716 2,390 3,066 1,412 2,579 2,937 21.5 (7.3) 4.4 Net profit 4,988 6,947 8,911 4,104 7,495 8,535 21.5 (7.3) 4.4 % growth 4.7 39.3 28.3 (13.8) 82.6 13.9 1856 bps -4336 bps 1439 bps PBT - Treasury + Provisions 12,391 13,403 14,879 10,903 11,908 13,780 13.6 12.6 8.0 EPS (Rs) 6.8 9.4 12.1 5.6 10.2 11.6 21.5 (7.3) 4.4 Adjusted BVPS (Rs) 65 69 76 65 68 76 - 1.7 0.4 RoA (%) 1.0 1.3 1.5 0.8 1.5 1.5 17 bps -15 bps 0 bps RoE (%) 9.1 11.6 13.5 7.5 12.7 13.0 156 bps -102 bps 49 bps Gross NPA (%) 4.3 4.4 3.1 4.6 4.5 3.0 -25 bps -10 bps 8 bps Slippage ratio (%) 3.5 3.3 1.9 3.5 3.3 1.9 0 bps 0 bps 0 bps Credit cost (%) 2.2 1.3 0.9 2.0 0.9 0.9 20 bps 45 bps 0 bps Cost-income ratio (%) 42.1 44.3 44.7 46.5 46.7 46.4 -436 bps -249 bps -167 bps

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 69 Banks City Union Bank

Exhibit 15: City Union Bank – growth rates and key ratios March fiscal year-ends, 2017-2023E (%) 2017 2018 2019 2020E 2021E 2022E 2023E Growth rates (%) Net loan 13.2 16.9 17.3 3.8 4.7 6.5 8.7 Total asset 10.9 13.2 13.3 9.9 1.2 9.7 10.1 Deposits 10.9 9.1 17.0 6.2 (2.3) 8.5 8.7 Current 25.5 15.6 15.4 (9.0) 9.1 8.5 8.7 Savings 28.1 11.7 25.4 12.2 3.2 10.0 10.1 Fixed 6.7 7.9 15.5 6.6 (4.7) 8.1 8.3 Net interest income 22.2 19.3 12.7 4.0 12.1 3.9 9.7 Loan loss provisions 19.2 18.2 (5.3) 172.1 (2.3) (37.6) (29.6) Total other income 18.0 10.0 (3.3) 32.2 (10.4) (3.4) 9.4 Net fee income (1.4) 12.6 10.2 1.6 (10.0) 15.0 15.0 Net capital gains 137.7 (12.9) (65.3) 390.2 25.3 (62.5) (33.3) Net exchange gains 21.4 (24.0) (26.8) 55.4 10.0 18.0 18.0 Operating expenses 23.5 9.5 17.4 14.4 3.3 7.3 10.8 Employee expenses 39.9 6.0 15.4 15.4 12.0 6.8 10.9 Key ratios (%) Yield on average earning assets 9.9 9.4 9.2 9.2 8.8 8.5 8.4 Yield on average loans 11.5 11.0 10.5 10.5 10.3 9.9 9.7 Yield on average investments 7.8 7.0 7.1 7.3 6.7 6.7 6.7 Average cost of funds 6.7 6.0 5.8 6.1 5.5 5.3 5.2 Interest on deposits 6.8 6.1 5.9 6.1 5.7 5.5 5.5 Spread 3.2 3.4 3.4 3.1 3.3 3.2 3.1 Net interest income/earning assets 3.7 4.0 3.9 3.7 3.9 3.8 3.8 Spreads on lending business 4.8 5.0 4.7 4.4 4.9 4.6 4.5 New provisions/average net loans 1.1 1.2 1.0 2.3 2.2 1.3 0.9 Total provisions/gross loans 4.7 5.0 5.1 7.0 8.5 9.1 9.1 Interest income/total income 71.2 72.9 75.8 71.1 75.5 76.8 76.9 Other income / total income 28.8 27.1 24.2 28.9 24.5 23.2 23.1 Fee income to total income 2.6 2.5 2.6 2.4 2.0 2.3 2.4 Fee income to advances 0.2 0.2 0.2 0.2 0.1 0.2 0.2 Fees income to PBT 6.3 6.3 5.9 9.5 7.4 6.1 5.5 Net trading income to PBT 8.5 (0.2) 1.1 32.6 29.8 8.0 4.2 Exchange income to PBT 14.1 9.4 5.9 14.4 13.9 11.8 10.8 Operating expenses/total income 40.9 38.5 41.7 43.0 42.1 44.3 44.7 Operating expenses/assets 2.1 2.0 2.1 2.1 2.1 2.1 2.1 Operating profit /AWF 1.8 1.9 2.2 0.9 1.0 1.7 2.0 Tax rate 27.4 25.1 26.2 18.8 25.6 25.6 25.6 Dividend payout ratio 17.8 17.8 17.8 17.8 17.8 17.8 17.8 Share of deposits Current 15.4 15.7 16.9 17.8 18.8 19.1 19.3 Fixed 76.6 75.8 74.8 75.0 73.2 72.9 72.7 Savings 15.4 15.7 16.9 17.8 18.8 19.1 19.3 Loans-to-deposit ratio 79.1 84.8 85.0 83.1 89.1 87.4 87.4 Equity/assets (EoY) 10.1 10.4 10.7 10.6 11.3 11.3 11.4 Loan impairment ratios (%) Gross NPL 2.7 2.9 2.8 3.9 4.3 4.4 3.1 Net NPL 1.7 1.7 1.8 2.3 2.7 2.5 1.1 Slippage 2.2 2.3 2.2 3.2 3.5 3.3 1.9 Provision coverage 40.1 44.5 39.4 44.9 43.3 47.6 67.9 Dupont analysis (%) Net interest income 3.6 3.8 3.8 3.5 3.8 3.7 3.7 Loan loss provisions 0.8 0.8 0.7 1.6 1.5 0.9 0.6 Net other income 1.4 1.4 1.2 1.4 1.2 1.1 1.1 Operating expenses 2.0 2.1 2.1 2.1 2.1 2.1 2.2 (1- tax rate) 72.6 74.9 73.8 81.2 74.4 74.4 74.4 ROA 1.5 1.6 1.6 1.0 1.0 1.3 1.5 Average assets/average equity 10.1 9.7 9.5 9.4 9.1 8.8 8.8 ROE 15.2 15.3 15.2 9.4 9.1 11.6 13.5

Source: Company, Kotak Institutional Equities estimates

70 KOTAK INSTITUTIONAL EQUITIES RESEARCH City Union Bank Banks

Exhibit 16: City Union Bank – financial statements March fiscal year-ends, 2017-2023E (Rs mn) 2017 2018 2019 2020E 2021E 2022E 2023E Income statement Total interest income 31,738 34,024 37,672 41,686 42,306 43,430 47,113 Loans 25,902 28,404 31,777 34,946 35,928 36,283 38,354 Investments 5,385 5,228 5,536 6,099 5,860 6,435 8,027 Cash and deposits 451 393 359 641 517 712 732 Total interest expense 19,750 19,721 21,557 24,934 23,532 23,925 25,725 Deposits from customers 19,418 19,271 21,080 24,369 22,814 23,008 24,625 Net interest income 11,988 14,303 16,115 16,752 18,774 19,505 21,388 Loan loss provisions 2,570 3,037 2,875 7,822 7,641 4,770 3,356 Net interest income (after prov.) 9,418 11,266 13,240 8,930 11,133 14,736 18,032 Other income 4,839 5,321 5,144 6,799 6,092 5,883 6,436 Net fee income 439 495 545 554 499 573 659 Net capital gains 1,078 938 326 1,596 2,000 750 500 Net exchange gains 978 744 545 846 931 1,098 1,296 Operating expenses 6,890 7,546 8,859 10,137 10,475 11,235 12,445 Employee expenses 2,981 3,159 3,644 4,207 4,712 5,034 5,585 Depreciation on investments 490 957 225 (317) - - - Other provisions (50) 183 51 46 46 46 46 Pretax income 6,928 7,900 9,249 5,863 6,704 9,337 11,977 Tax provisions 1,900 1,980 2,420 1,100 1,716 2,390 3,066 Net profit 5,028 5,920 6,829 4,763 4,988 6,947 8,911 % growth 13 18 15 (30) 5 39 28 PBT - Treasury + Provisions 8,860 11,139 12,074 11,818 12,391 13,403 14,879 % growth 12 26 8 (2) 5 8 11 Balance sheet Cash and bank balance 28,790 26,364 29,633 47,216 46,870 48,120 49,502 Cash 2,848 3,628 5,167 5,275 5,275 5,275 5,275 Balance with RBI 11,993 14,990 14,764 15,029 14,682 15,932 17,314 Net value of investments 70,315 78,791 77,120 91,166 83,076 108,217 130,355 Govt. and other securities 66,906 76,344 74,764 89,395 95,393 120,571 142,743 Shares 157 102 100 71 71 71 71 Debentures and bonds 211 252 514 417 375 338 304 Net loans and advances 238,327 278,528 326,733 339,274 355,366 378,427 411,241 Fixed assets 2,151 2,231 2,500 2,452 604 98 (282) Net Owned assets 2,151 2,231 2,500 2,452 604 98 (282) Other assets 13,126 13,458 16,600 17,225 17,225 17,225 17,225 Total assets 352,708 399,372 452,587 497,333 503,141 552,087 608,041 Deposits 301,157 328,526 384,479 408,325 398,904 432,882 470,419 Borrowings and bills payable 7,623 20,336 9,015 22,330 30,861 37,033 44,440 Other liabilities 8,225 8,878 10,687 13,720 16,463 19,756 23,707 Total liabilities 317,006 357,740 404,181 444,375 446,229 489,671 538,566 Paid-up capital 601 665 735 737 737 737 737 Reserves & surplus 35,101 40,968 47,673 52,223 56,175 61,679 68,738 Total shareholders' equity 35,702 41,632 48,408 52,961 56,912 62,416 69,475

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 71 BUY Escorts (ESC) https://ultraviewer.et/en/own Automobiles & Components NOVEMBER 02, 2020 load.html RESULT Sector view: Cautious

Strong performance, margins to sustain. ESC reported EBITDA of Rs3 bn, which was CMP (`): 1,229 68% above our estimates due to (1) a better product mix, (2) lower SG&A expenses, Fair Value (`): 1,535 (3) cost-cutting initiatives and (4) RM tailwinds. The company has increased its guidance BSE-30: 39,758 to double-digit growth in the tractor industry in FY2021 (versus low single digit earlier). Sharp recovery in construction and railway segments also bodes well for the company. Maintain BUY with revised FV of Rs1,535 (from Rs1,300 earlier). Escorts Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 1,229/1,535/BUY EPS (Rs) 72.0 84.7 95.9 52-week range (Rs) (high-low) 1,343-526 EPS growth (%) 31.7 17.6 13.3 Mcap (bn) (Rs/US$) 110/2.3 P/E (X) 17.1 14.5 12.8 ADTV-3M (mn) (Rs/US$) 2,929/39 P/B (X) 2.4 2.1 1.9 Shareholding pattern (%) EV/EBITDA (X) 9.7 8.0 6.6 Promoters 40.2 RoE (%) 14.2 14.6 14.5 FPIs/MFs/BFIs 20.4/9.9/1.3 Div. yield (%) 0.9 1.0 1.2 Price performance (%) 1M 3M 12M Sales (Rs bn) 60 71 78 Absolute (4.3) 8.4 86.9 EBITDA (Rs bn) 10 11 12 Rel. to BSE-30 (6.8) 2.5 88.8 Net profits (Rs bn) 7 9 10

2QFY21 EBITDA 68% above estimates

Escorts reported 2QFY21 EBITDA of Rs3 bn (+137% yoy), 68% above our estimates mostly led by (1) better-than-expected revenue print in construction equipment and railway segments, (2) better-than expected gross margins possibly due to increase in finished goods inventory and better product mix and (3) cost-cutting initiatives. Net revenues increased by 23% yoy led by (1) 33% yoy increase in tractor revenues and (2) 26% yoy increase in railway segment revenues, partly offset by 22% yoy decline in construction equipment segment revenues in 2QFY21. EBITDA margins came in 18.3% (+870 bps yoy and +700 bps qoq), which was 660 bps above our estimates due to better-than-expected gross margins and cost-cutting initiatives. Gross margins came in at 36.4% in 2QFY21 (versus 33% in 2QFY20) possibly led by (1) increase in finished goods inventory and (2) a better product mix (+150 bps qoq). However, the company expects EBITDA margin to come off in the coming quarters led by RM headwinds and normalization of costs. Adjusted PAT came in at Rs2.3 bn (+106% yoy), which was 71% above our estimates due to outperformance at EBITDA level. Tractor EBIT margin came in at 20% (up 970 bps yoy), 500 bps above our estimates due to (1) better product mix (2/3rd of the mix came from >40 hp segment), (2) better gross margins on account of lower RM costs and (3) cost optimization. The company expects tractor EBIT margin to taper off to 17-18% led by normalization of product mix, SG&A expense and RM headwinds in 2HFY21E; however, the company has structurally improved the EBIT margin of the tractor business led by cost-cutting initiatives. Construction equipment EBIT margin came in at 1.7% (-100 bps yoy) due to negative operating leverage in 2QFY21.

Increase FY2022-23E EPS estimates by 10-14%; maintain BUY on attractive valuations

We have increased our FY2022-23E EPS estimates by 10-14% mainly led by higher EBITDA Hitesh Goel margin assumptions for tractor segments. We expect tractor volumes to grow at 12% yoy in FY2021E and the tractor business to clock in EBIT margins of 17-18% over FY2021-23E led by Rishi Vora cost-cutting initiatives and a leaner cost structure. We expect railway segment growth to be driven by a strong order book (current order book size of Rs3.5 bn) and new product introductions over the medium term. Maintain BUY with Fair Value of Rs1,535 (from Rs1,300) as we value the stock at 17X September 2022E EPS (from 16X September 2022E EPS).

[email protected] Contact: +91 22 6218 6427

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

2QFY21 conference call takeaways

 Expects domestic tractor industry to grow at low double digit in FY2021E. The company expects the domestic tractor industry to grow at low double-digit on a yoy basis in FY2021E, which implies >10% yoy growth in remaining 2HFY21E. The company also highlighted that agricultural mandis have opened up, the government is aggressively procuring food crops as well improvement in financing availability have improved the liquidity situation for the farmers, which augurs well for the tractor industry. The company also highlighted that adequate water reservoir levels and record Kharif and Rabi crops production in the current fiscal can lead to strong growth for the tractor industry in FY2022E. Escorts domestic tractor volumes grew by 23.2% yoy as against industry growth 41.4% yoy in 2QFY21. As a result, the company lost 144 bps market share yoy in 2QFY21 mainly on account of capacity and supply-chain constraints faced by the company during the quarter. The company has lost market share in all the regions except South India. Domestic tractor industry growth was led by 30% yoy growth in North and Central regions and 56% yoy growth in South and West regions. EBIT margin came in at 20% (+970 bps yoy), which was 500 bps above our estimates due to gross margin expansion, better product mix and cost-cutting initiatives. Farmtrac mix stood at 43% in 2QFY21 versus 41% in 2QFY20. Dealer inventory is at the lowest levels (3 weeks). The company expects to clock in EBIT margins of 17-18% in the tractor business in 2HFY21E. The company expects 150-200 bps commodity price inflation over the next three-four months.

 Construction equipment segment to remain under pressure in FY2021E. Volumes declined by 13% yoy to 821 units in 2QFY21. Overall served industry (backhoe loaders, pick and carry crane and compactors) volumes went up by 31% yoy in 2QFY21 led by (1) 44% yoy increase in backhoe loaders volumes, (2) 47% yoy increase in compactor volumes and (3) 20% yoy decline in crane volumes. Escorts construction equipment division revenues declined by 22% yoy due to (1) 13% yoy decline in volumes and (2) inferior product mix. The company derived (1) 61% of the revenues from crane segment, (2) 10% of the revenues from compactor segment, (3) 17% of the revenues from backhoe loader segment and (4) 13% for spares in 2QFY21. The company has 36.5% market share in crane segment (-350 bps yoy), 10% market share in compactor segment and 1.3% market share in backhoe loader segment as of 2QFY21. EBIT margin came in at 1.7%, which was down 100 bps yoy due to negative operating leverage in 2QFY21. The company expects strong recovery in 2HFY21E and guided for a flattish margin on a yoy basis at 3-4% in FY2021E.

 Railways segment margins impacted by weaker product mix. Revenues increased by 26% yoy with 58% of the revenues coming from new products. The company has an order book of Rs3.5 bn as of September 2020, which will be executed over the next 6-8 months. Due to the pandemic during 1HFY21, there has been significant impact on fresh order tendering and order inflow. However, the company expects tendering process to get back to pre-Covid level by 4QFY21E. EBIT margin came in 20.3% (+120 bps yoy) mainly led by operating leverage benefits and cost-cutting initiatives. The company has guided for a flattish margin on a yoy basis at 18% in FY2021E.

 Supply chain is normalizing. The company highlighted that situation with suppliers is gradually improving as the company procures 3,000 parts from different suppliers situated across India. The company is in constant dialogue with each supplier and is helping them for getting necessary approvals to restart their production. The company highlighted that they are running at 85% capacity utilization levels in September, which came down to 50-60% due to issues at one of their proprietary suppliers (supplier of fuel injectors). The company expects production capacity utilization to reach normalized levels by next month.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 73 Automobiles & Components Escorts

 Other key points. (1) Net cash stood at Rs16.7 bn as of September 2020 versus net cash levels at Rs3.1 bn as of March 2020, (2) capex for FY2021E will be Rs3-3.5 bn (from Rs2.25-2.5 bn earlier); the company has incurred capex of Rs450 mn till 1HFY21. The company will incur additional capex of Rs9-10 bn to increase the capacity from current 10,000 units per month to 12,500 units per month, (3) tractor financing mix – 66% of the total financing done by NBFCs, 33% of the total financing done by private banks and balance 1% done by PSUs, (4) the company has targets to reach 1,200 dealers in the near term (mostly focus in Southern and Western regions), (5) as per draft notifications, TREM- IV regulations will likely be postponed by six months to April 1, 2021, (6) target to reduce fixed cost by 10-15% in FY2021E, (7) >40 hp mix stood at 66% in 2QFY21 (45% in 2QFY20) versus 62% in 1QFY21; the company expects the mix to come off led by the recovery in haulage volumes, (8) replacement demand is around 40-45% for the tractor segment, (9) the company had produced more than 11,000 units in September and October 2020, (10) the capacity from Kubota JV will come in from FY2022E onwards and (11) favorable model mix had a positive impact of Rs180-200 mn in 2QFY21.

Exhibit 1: Escorts’ 2QFY21 EBITDA was 68% above our expectations due to better-than-expected gross margins and cost-cutting initiatives Escorts, standalone interim results, March fiscal year-ends (Rs mn)

(% chg.) 2QFY21 2QFY21E 2QFY20 1QFY21 2QFY21E 2QFY20 1QFY21 1HFY21 1HFY20 Yoy (%) FY2021E FY2020 Yoy (%) Tractor volumes (units) 24,441 24,441 19,750 18,150 23.8 34.7 42,591 40,801 4.4 96,077 86,018 11.7 Tractor ASPs (Rs) 540,968 525,361 504,111 525,361 3.0 7.3 3.0 534,317 511,666 4.4 511,917 515,890 (0.8) Total Income 16,397 15,290 13,239 10,616 7.2 23.9 54.5 27,013 27,468 (1.7) 60,254 57,610 4.6 Total Expenditure (13,389) (13,497) (11,972) (9,420) (0.8) 11.8 42.1 (22,809) (24,777) (7.9) (50,748) (50,851) (0.2) Raw materials (10,422) (10,397) (8,871) (7,128) 0.2 17.5 46.2 (17,550) (18,688) (6.1) (39,165) (38,196) 2.5 Employee expense (1,256) (1,300) (1,253) (1,262) (3.4) 0.2 (0.5) (2,518) (2,479) 1.6 (5,167) (5,103) 1.3 Other expenditure (1,711) (1,800) (1,847) (1,031) (5.0) (7.4) 66.0 (2,742) (3,610) (24.1) (6,416) (7,552) (15.0) EBITDA 3,009 1,793 1,267 1,196 67.8 137.4 151.5 4,205 2,692 56.2 9,505 6,758 40.6 Depreciation (274) (278) (260) (264) (1.5) 5.2 3.5 (538) (501) (1,121) (1,046) Interest (32) (20) (39) (19) 60.5 (16.6) 66.3 (51) (97) (90) (155) Other income 376 300 211 298 25.2 78.4 25.9 674 378 1,448 923 PBT 3,078 1,795 1,179 1,211 71.5 161.1 154.2 4,289 2,471 73.6 9,742 6,481 50.3 Exceptional items — — (92) — — (92) — (92) Tax expense (779) (452) (41) (289) 72.3 1,805.4 169.4 (1,069) (457) (2,455) (1,533) Reported net profit 2,299 1,343 1,046 922 71.2 119.8 149.5 3,221 1,921 67.6 7,287 4,855 50.1 Adjusted net profit 2,299 1,343 1,115 922 71.2 106.3 149.5 3,221 1,996 7,287 4,926 Number of shares (mn) 101 101 89 101 101 89 101 89 Adjusted EPS 22.7 13.3 12.5 9.1 71.2 81.1 149.5 31.8 22.5 41.6 72.0 55.4 29.9 Ratios (%) RM as % of sales 63.6 68.0 67.0 67.1 65.0 68.0 65.0 66.3 Employee cost as % of sales 7.7 8.5 9.5 11.9 9.3 9.0 8.6 8.9 Other expenditure as % of sales 10.4 11.8 14.0 9.7 10.1 13.1 10.6 13.1 EBITDA margin (%) 18.3 11.7 9.6 11.3 15.6 9.8 15.8 11.7 Effective tax rate 25.3 25.2 3.5 23.9 24.9 18.5 25.2 23.7 Segmental revenues Tractor revenues 13,222 12,840 9,956 9,535 3.0 32.8 38.7 22,757 20,877 9.0 49,183 44,376 10.8 Construction revenues 1,569 1,407 2,010 525 11.5 (21.9) 199.0 2,094 4,132 (49.3) 6,298 8,398 (25.0) Railways revenues 1,602 1,000 1,267 549 60.2 26.4 191.8 2,151 2,448 (12.1) 4,772 4,772 — Unallocated revenues 4 43 5 7 11 12 — 64 Traded Revenues — — — — — — — — Less: Intersegmental — — — — — — — — Total revenues 16,397 15,290 13,239 10,616 7.2 23.9 54.5 27,013 27,468 (1.7) 60,254 57,610 4.6 Segmental EBIT Tractor EBIT 2,648 1,926 1,025 1,379 37.5 158.3 92.1 4,026 2,215 81.8 8,853 5,764 53.6 Construction EBIT 27 (100) 54 (168) (141) 108 (230.8) 252 302 (16.6) Railways EBIT 325 150 242 14 116.7 34.2 2,188.7 339 478 (29.1) 859 858 0.1 Unallocated EBIT — — (103) 5 5 (233) (102.3) (500) (382) 31.1 Total EBIT 3,000 1,976 1,218 1,230 51.8 146.4 143.9 4,145 2,508 65.2 9,464 6,543 44.6 EBIT margin (%) Tractor EBT margin 20.0 15.0 10.3 14.5 17.7 10.6 18.0 13.0 Construction EBIT margin 1.7 (7.1) 2.7 (32.0) (6.7) 2.6 4.0 3.6 Railways EBIT margin 20.3 15.0 19.1 2.6 15.8 19.5 18.0 18.0 Overall EBIT margin 18.3 12.9 9.2 11.6 15.3 9.1 15.7 11.4

Source: Company, Kotak Institutional Equities estimates

74 KOTAK INSTITUTIONAL EQUITIES RESEARCH Escorts Automobiles & Components

Exhibit 2: We have increased our FY2022-23E EPS estimates by 10-14% on higher EBITDA margin assumptions for tractor business Earnings revision table, March fiscal year-ends, 2021-23E (Rs mn, %)

New estimates Old estimates Change (%) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E Tractor volumes (units) 96,077 108,515 116,040 90,953 105,349 116,647 5.6 3.0 (0.5) Net sales 60,254 70,966 78,461 56,996 69,363 78,558 5.7 2.3 (0.1) EBITDA 9,505 10,836 12,130 7,222 9,420 10,942 31.6 15.0 10.9 EBITDA margin (%) 15.8 15.3 15.5 12.7 13.6 13.9 Adjusted net profit 7,287 8,570 9,712 5,609 7,526 8,866 29.9 13.9 9.5 EPS (Rs) 72.0 84.7 95.9 55.4 74.3 87.6 29.9 13.9 9.5

Source: Kotak Institutional Equities estimates

Exhibit 3: We expect Escorts’ tractor volumes to grow at 10.5% CAGR over FY2020-23E Tractor volume and yoy growth assumptions, March fiscal year-ends, 2011-23E (units, %)

2011 2012 2014 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E Tractor volumes Domestic 58,227 61,344 105,305 57,565 50,698 62,699 78,446 93,191 82,252 92,122 103,177 109,368 Exports 1,590 1,989 1,252 2,214 757 1,087 1,971 3,221 3,766 3,954 5,338 6,673 Total volumes 59,817 63,333 106,557 59,779 51,455 63,786 80,417 96,412 86,018 96,077 108,515 116,040 Tractor capacity 98,940 98,940 98,940 98,940 98,940 98,940 98,940 98,940 98,940 123,940 123,940 123,940 Capacity utilization (%) 60.5 64.0 71.8 60.4 52.0 64.5 81.3 97.4 86.9 77.5 87.6 93.6 Yoy (%) Domestic 0.3 5.4 71.7 (45.3) (11.9) 23.7 25.1 18.8 (11.7) 12.0 12.0 6.0 Exports (21.2) 25.1 (37.1) 76.8 (65.8) 43.6 81.3 63.4 16.9 5.0 35.0 25.0 Total volumes (0.4) 5.9 68.2 (43.9) (13.9) 24.0 26.1 19.9 (10.8) 11.7 12.9 6.9

Notes: (a) 2011-12 volumes are for year-ending September period. (b) FY2014 volumes are for 18-month period (September 2012 to March 2014). (c) Volumes for 2015-23E are for year-ending March period.

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 75 Automobiles & Components Escorts

Exhibit 4: We expect tractor segment EBIT margins to improve to 17-18% over FY2020-23E Segmental revenue and EBIT assumptions, March fiscal year-ends, 2014-23E (Rs mn, %)

2014 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E Segmental revenues (Rs mn) Tractors (includes traded revenues) 51,333 31,883 27,269 33,460 39,579 47,440 44,376 49,183 57,081 62,744 Railways 2,055 2,463 2,370 2,445 2,866 3,941 4,772 4,772 5,488 6,311 Construction 7,395 5,069 4,965 6,068 7,803 10,541 8,398 6,298 8,398 9,405 Auto component 1,893 967 1,005 513 — — — — — — Inter-segment eliminations — — (217) (297) (88) 43 64 — — — Gross revenues 62,676 40,381 35,392 42,189 50,160 61,964 57,610 60,254 70,966 78,461 Yoy growth in revenues (%) Tractors (includes traded revenues) (37.9) (14.5) 22.7 18.3 19.9 (6.5) 10.8 16.1 9.9 Railways 19.8 (3.8) 3.2 17.2 37.5 21.1 — 15.0 15.0 Construction (31.5) (2.0) 22.2 28.6 35.1 (20.3) (25.0) 33.3 12.0 Auto component (48.9) 4.0 (48.9) Gross revenues (35.6) (12.4) 19.2 18.9 23.5 (7.0) 4.6 17.8 10.6 Segmental EBIT (Rs mn) Tractors 4,964 2,293 2,236 3,446 5,399 6,665 5,764 8,853 9,704 10,667 Railways 146 175 224 307 398 783 858 859 988 1,136 Construction (322) (248) (257) (138) 150 378 302 252 420 470 Auto component (296) (237) (170) (103) — 19 — — — — Others (including unallocable expenses and exceptional items) (697) (730) (329) (574) (573) (429) (382) (500) (500) (500) Overall EBIT 3,794 1,254 1,703 2,938 5,374 7,416 6,543 9,464 10,611 11,773 Segmental EBIT margin (%) Tractors 9.7 7.2 8.2 10.3 13.6 14.0 13.0 18.0 17.0 17.0 Railways 7.1 7.1 9.5 12.5 13.9 19.9 18.0 18.0 18.0 18.0 Construction (4.4) (4.9) (5.2) (2.3) 1.9 3.6 3.6 4.0 5.0 5.0 Auto component (15.7) (24.5) (16.9) (20.0) — — — — — — Overall EBIT margin 6.1 3.1 4.8 7.0 10.7 12.0 11.4 15.7 15.0 15.0

Notes: (a) FY2014 financials are for 18-month period (September 2012 to March 2014). (b) Financials for 2015-23E are for year-ending March period.

Source: Company, Kotak Institutional Equities estimates

76 KOTAK INSTITUTIONAL EQUITIES RESEARCH Escorts Automobiles & Components

Exhibit 5: We expect EPS to grow at 20% CAGR over FY2020-23E Financial summary of Escorts, March fiscal year-ends, 2010-23E (Rs mn, %)

2010 2011 2012 2014 2018 2016 2017 2018 2019 2020 2021E 2022E 2023E Profit model (Rs mn) Net sales 27,458 32,382 38,939 62,915 39,858 33,668 40,932 49,951 61,964 57,610 60,254 70,966 78,461 EBITDA 2,124 1,481 1,822 3,812 1,299 1,767 3,237 5,572 7,333 6,758 9,505 10,836 12,130 Other income 189 417 489 814 606 558 435 594 809 923 1,448 1,840 2,185 Interest (117) (558) (964) (1,107) (571) (495) (311) (286) (185) (155) (90) — — Depreciation (435) (380) (484) (832) (661) (575) (631) (725) (854) (1,046) (1,121) (1,218) (1,331) Profit before tax 1,761 960 863 2,688 674 1,255 2,730 5,156 7,103 6,481 9,742 11,458 12,984 Extraordinary income/(losses) 119 47 17 36 (306) (123) 38 (68) 109 (92) — — — Tax (505) 195 (183) (275) 65 (125) (756) (1,641) (2,375) (1,533) (2,455) (2,887) (3,272) Reported net profit 1,376 1,201 696 2,449 432 1,007 2,011 3,447 4,837 4,855 7,287 8,570 9,712 Adjusted net profit 1,292 1,168 684 2,423 647 1,093 1,985 3,495 4,760 4,920 7,287 8,570 9,712 Earnings per share (Rs) 14.5 13.5 7.8 27.6 4.9 11.3 22.6 38.8 54.4 55.4 72.0 84.7 95.9 Balance sheet (Rs mn) Equity 17,378 17,985 16,139 18,314 17,963 18,377 19,912 25,481 30,229 34,801 51,395 58,680 66,935 Total borrowings 2,986 2,858 4,599 3,504 4,084 3,076 2,117 137 2,694 66 — — — Other liabilities 8,678 10,528 13,562 13,109 11,824 11,229 13,103 17,077 17,047 18,254 18,401 22,021 24,155 Total liabilities 29,042 31,371 34,301 34,927 33,871 32,682 35,132 42,695 49,969 53,121 69,796 80,701 91,090 Net fixed assets 14,691 15,072 16,527 16,800 16,385 16,175 16,122 16,451 17,070 18,125 19,120 20,902 22,571 Investments 3,658 3,658 3,823 3,815 3,834 4,155 5,875 8,943 8,566 11,663 11,663 11,663 11,663 Cash 1,744 2,034 1,306 2,619 2,364 313 545 3,119 2,301 3,185 17,348 22,954 28,980 Other current assets 8,948 10,608 12,645 11,692 11,288 12,040 12,590 14,182 22,033 20,149 21,666 25,182 27,876 Total assets 29,042 31,371 34,301 34,927 33,871 32,682 35,132 42,695 49,969 53,121 69,796 80,701 91,090 Free cash flow (Rs mn) Operating cash flow excl. working capital 1,521 1,415 1,457 3,230 1,180 1,860 2,610 3,660 3,510 4,862 8,498 9,788 11,043 Working capital changes (1,093) 324 (1,483) (155) (1,195) 357 398 1,062 (5,917) 3,304 (1,370) 104 (560) Capital expenditure (484) (931) (1,063) (1,184) (517) (465) (528) (1,147) (1,499) (1,946) (2,116) (3,000) (3,000) Free cash flow (485) 334 (1,893) 960 (1,026) 1,305 2,202 3,366 (4,034) 6,134 4,922 6,892 7,483 Ratios EBITDA margin (%) 7.7 4.6 4.7 6.1 3.3 5.2 7.9 11.2 11.8 11.7 15.8 15.3 15.5 PAT margin (%) 4.7 3.7 1.8 3.9 1.1 3.0 4.9 6.9 7.8 8.4 12.1 12.1 12.4 Net debt/equity (X) 0.1 0.0 0.2 0.0 0.1 0.2 0.1 (0.1) 0.0 (0.1) (0.3) (0.4) (0.4) Book value (Rs/share) 196 202 182 206 202 207 224 287 340 392 508 580 661 RoAE (%) 7.9 6.7 4.3 13.4 2.4 5.5 10.1 13.5 16.0 14.0 14.2 14.6 14.5 RoACE (%) 10.6 6.0 8.2 21.2 4.5 7.6 16.6 36.0 34.8 22.0 27.3 26.7 26.2

Notes: (a) Financials for 2011-12 are for year-ending September period (b) FY2014 financials are for 18-month period (September 2012 to March 2014) (c) Financials for 2015-23E are for year-ending March period

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 77 BUY Shriram City Union Finance (SCUF) https://ultraviewer.et/en/own Diversified Financials NOVEMBER 03, 2020 load.html RESULT Sector view: Attractive

Improvements continue. SCUF continued to report mom improvement in collections CMP (`): 823 in September to reach near-normal levels, providing conviction to the management to Fair Value (`): 1,400 increase disbursements beyond gold and two-wheeler loans. While the complete impact BSE-30: 39,758 of moratorium exit is yet to be seen, the ‘gradual trend’ of improvement in collections provides comfort. As business gets back to normal, any funding-side comfort will further increase Street’s conviction on the stock. Retain BUY; FV Rs1,400 (up from Rs1,300).

Shriram City Union Finance Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 823/1,400/BUY EPS (Rs) 137.9 179.5 200.5 52-week range (Rs) (high-low) 1,570-617 EPS growth (%) (9.0) 30.1 11.7 QUICK NUMBERS Mcap (bn) (Rs/US$) 55/0.8 P/E (X) 6.0 4.6 4.1 ADTV-3M (bn) (Rs/US$) 0.1/0.1 P/B (X) 0.7 0.6 0.5  PAT down 14% yoy; Shareholding pattern (%) BVPS 1,212.3 1,364.9 1,535.3 core PBT flat yoy Promoters 33.9 RoE (%) 12.0 13.9 13.8 FPIs/MFs/BFIs 26.8/5.0/0.0 Div. yield (%) 2.2 3.3 3.7  AUM down 3% qoq Price performance (%) 1M 3M 12M NII (Rs bn) 34 34 38 Absolute (12.1) 25.3 (37.8) PPOP (Rs bn) 22 23 25  ~105 bps yoy Rel. to BSE-30 (14.4) 18.5 (37.2) Net profits (Rs bn) 9 12 13 increase in overall ECL coverage to SCUF reported consistent improvements in collections 7.8% SCUF reported 95% collection efficiency in September, improving from 82% in August, 80% in July, 71% in June, 52% in May and 30% in April. Since the company has reported consistent improvements in the past, particularly strong trends in July and August, September performance, unlike other NBFCs, is not very surprising. Its gold loan book (about 11% of AUMs) may boost these ratios to some extent. While September collections may have overdues of previous months, trends in the previous months reflect overall steadily-improving momentum. Having said that, the actual trends in 3QFY21, after the complete impact of the moratorium exit is known, are crucial.

SCUF downgraded a notch; improving collections should improve conviction to debt and equity markets alike

CARE downgraded SCUF’s rating by to AA (Stable) from AA+ (Negative) in October; CRISIL carries an AA (Negative) rating on the company. SCUF’s financial flexibility has recently Nischint Chawathe increased significantly. Its overall liquidity buffer increased to Rs26 bn in 2QFY21 from Rs15 bn in 1QFY21, excluding undrawn lines of Rs4.9 bn. SCUF raised Rs30 bn from banks and FDs in 2QFY21and a further Rs5 bn in the first fortnight of October (through a bond issuance to a PSU M B Mahesh, CFA Bank and two-wheeler loan securitization). We believe that improving collection will provide comfort to rating agencies and debt market participants; 3Q remains crucial. Dipanjan Ghosh

Retain BUY; FV Rs1,400 Abhijeet Sakhare We are raising our core PBT estimates by 5-6% to reflected higher loan growth. A likely fall in funding costs will largely be offset by a cut in asset yields. Current trends suggest improvement Ashlesh Sonje in credit costs though still remain a bit challenging to model. Encouraging collections trends, visibility of normalization in collections, strong long-term franchise and inexpensive valuations drive our BUY rating; RGM-based FV of Rs1,400 (1.05X book September 2022E, up from Rs1,300). The overhang of the merger within Shriram group will likely weigh in on stock performance beyond a point.

[email protected] Contact: +91 22 6218 6427

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Shriram City Union Finance Diversified Financials

Exhibit 1: SCUF - quarterly result highlights March fiscal year-ends, 2QFY20-2QFY21 (Rs mn)

Ind-AS Ind-AS Ind-AS Ind-AS (% chg.) Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS 2QFY21 2QFY21E 2QFY20 1QFY21 2QFY21E 2QFY20 1QFY21 1HFY21 1HFY20 (% chg.) 2021E 2020 (% chg.) 2022E Income statement (Rs mn) Operational income 13,972 14,123 14,892 14,117 (1) (6) (1) 28,088 29,756 (6) 56,670 58,839 (4) 58,436 Interest income 13,698 13,853 14,312 13,899 (1) (4) (1) 27,598 28,762 (4) 55,238 56,972 (3) 55,554 Dividend income - - - - - 17 17 17 (1) 17 Fee and commission income 98 15 16 53 554 498 85 151 21 616 115 137 (16) 215 Profit on sale of investments ------25 - 25 Net gain on fair value change 2 5 12 4 6 12 (51) 25 24 5 25 Assignment income - 50 126 - - 126 (100) 350 224 56 300 Bad debt recovery 173 200 425 160 (13) (59) 8 334 818 (59) 900 1,466 (39) 2,300 Interest expense 5,190 5,333 5,384 5,375 (3) (4) (3) 10,565 10,700 (1) 21,323 21,402 (0) 21,342 NII 8,508 8,520 8,928 8,525 (0) (5) (0) 17,033 18,062 (6) 33,915 35,569 (5) 34,212 Net operational income 8,782 8,790 9,508 8,742 (0) (8) 0 17,524 19,056 (8) 35,347 37,437 (6) 37,094 Other income 19 8 10 29 143 92 (34) 49 19 157 25 34 (25) - Total income 8,801 8,798 9,518 8,771 0 (8) 0 17,572 19,075 (8) 35,372 37,471 (6) 37,094 Operating expense 3,180 3,271 3,774 3,105 (3) (16) 2 6,285 7,555 (17) 12,938 15,084 (14) 13,862 Net loss on fair value change - - - - - 85 50 - 50 Fee and commission expense 185 250 286 215 (26) (35) (14) 400 688 (42) 524 1,303 (60) 610 Employee expense 1,739 1,945 2,229 1,918 (11) (22) (9) 3,656 4,319 (15) 7,629 8,477 (10) 7,782 Depreciation and amortization expense 205 200 207 201 2 (1) 2 406 410 (1) 700 822 (15) 700 Other expenses 1,052 876 1,053 771 20 (0) 36 1,823 2,053 (11) 4,035 4,483 (10) 4,720 PPOP 5,621 5,527 5,744 5,666 2 (2) (1) 11,288 11,520 (2) 22,435 22,387 0 23,232 Provisions 2,017 3,038 1,969 3,102 (34) 2 (35) 5,119 3,904 31 10,201 9,037 13 7,311 Impairments (83) (39) 849 NM (110) 766 140 448 2,301 1,385 66 289 Bad debts written off 2,098 2,008 2,253 4 (7) 4,351 3,763 16 7,900 7,652 3 7,021 Net loss on de-recognition of financial instruments 2 - 0 3 2 - - - PBT 3,604 2,489 3,775 2,564 45 (5) 41 6,169 7,616 (19) 12,234 13,350 (8) 15,921 Tax 1,035 637 800 642 63 29 61 1,677 2,109 (20) 3,132 3,545 (12) 4,076 PAT 2,569 1,852 2,975 1,923 39 (14) 34 4,492 5,507 (18) 9,102 9,805 (7) 11,845 Tax rate (%) 29 26 21 25 313 bps 753 bps 371 bps 27 28 -51 bps 26 27 -95 bps 26 Core PBT 5,619 5,472 5,606 5,662 3 0 (1) 11,282 11,450 (1) 22,068 22,122 (0) 22,915 Key balance sheet line items (Rs mn) Total AUM 275,370 287,458 297,220 284,460 (4) (7) (3) 275,370 297,220 (7) 283,680 290,850 (2) 301,441 Gold 30,040 29,290 29,380 3 2 30,040 29,290 3 32,750 31,190 5 36,024 Small business loans 160,290 174,330 166,020 (8) (3) 160,290 174,330 (8) 157,862 166,530 (5) 160,210 Personal loans 13,240 29,290 15,820 (55) (16) 13,240 29,290 (55) 7,756 18,570 (58) 5,517 Two wheelers 58,530 55,210 60,280 6 (3) 58,530 55,210 6 68,900 60,760 13 81,531 Auto and pre-owned 13,270 9,100 12,960 46 2 13,270 9,100 46 16,413 13,800 19 18,158 Total disbursements 30,610 52,010 13,260 (41) 131 43,870 114,750 (62) 227,120 Business loans 3,640 15,960 200 (77) 1,720 3,840 38,740 (90) 72,590 Gold loans 15,620 16,500 6,480 (5) 141 22,100 34,400 (36) 71,070 Two Wheelers 8,830 12,510 6,520 (29) 35 15,350 25,350 (39) 56,040 Auto and pre-owned 1,940 50 60 3,780 3,133 2,000 1,510 32 10,380 Personal Loan 580 6,990 - (92) 580 14,750 (96) 17,040 Borrowings (Rs mn) 217,700 213,960 216,660 2 0 217,700 213,960 2 237,472 231,660 3 231,589 Asset quality details Gross stage 3 (%) 6.7 8.7 7.3 -202 bps -61 bps 6.7 8.7 -202 bps 9.3 7.8 153 bps 9.1 Net stage 3 (%) 3.3 5.3 3.9 -196 bps -61 bps 3.3 5.3 -196 bps 5.3 4.3 95 bps 5.2 ECL coverage on stage-3 (%) 54.3 43.5 50.4 1088 bps 397 bps 48.0 48.5 -48 bps 47.0 ECL coverage on stage-1 and 2 (%) 4.4 3.2 4.2 124 bps 22 bps 3.9 3.5 38 bps Overall ECL coverage (%) 7.8 6.7 7.6 107 bps 19 bps 8.0 7.0 99 bps Calculated ratios (%) Yield on loans on balance sheet 19.8 19.5 19.6 32 bps 20 bps 19.7 19.9 -14 bps 19.6 19.8 -22 bps 19.4 Cost of borrowings 9.6 9.9 9.6 -32 bps -3 bps 9.4 9.7 -33 bps 9.1 9.4 -27 bps 9.1 Core NIM (% of loans on balance sheet) 12.3 12.1 12.0 15 bps 28 bps 12.2 12.5 -30 bps 12.0 12.4 -34 bps 11.9 Cost-to-income 36.1 37.2 39.7 35.4 -105 bps -352 bps 73 bps 35.8 39.6 -384 bps 36.6 40.3 -368 bps 37.4 Cost-to-income 36.1 37.2 39.7 35.4 -105 bps -352 bps 73 bps 35.8 39.6 -384 bps 36.6 40.3 -368 bps 37.4 Cost-to-average AUM 4.5 4.6 5.0 4.3 -3 bps -48 bps 23 bps 4.4 5.1 -66 bps 4.5 5.1 -64 bps 4.7 Credit cost (% of AUM) 2.9 4.3 2.6 4.3 -137 bps 26 bps -143 bps 3.6 2.6 98 bps 3.6 3.1 47 bps 2.5 Borrowing mix (Rs mn) Net borrowings 217,700 213,960 216,660 1.7 0.5 217,700 213,960 2 237,472 231,660 3 231,589 Retail 47,894 47,071 44,415 1.7 7.8 47,894 47,071 2 51,197 Bank borrowings 134,974 130,516 134,979 3.4 (0.0) 134,974 130,516 3 143,629 Market borrowing 34,832 36,373 37,266 (4.2) (6.5) 34,832 36,373 (4) 36,834 Capital adequacy details (%) CAR 30.1 24.4 28.8 577 bps 134 bps

Source: Company, Kotak Institutional Equities estimates

Core PBT flat yoy

SCUF’s PAT declined 14% yoy in 2QFY21 despite a flat core PBT; higher tax rate (29% in 2QFY21 compared to 21% in base quarter) led to a decline in earnings. Strong cost control led to flat core PBT despite 5% yoy decline in NII. Provisions were muted at 3% yoy.

Sharp 7% yoy/3% qoq decline in AUM led to 5% yoy drop in NII; this was however partially offset by 15 bps yoy/27 bps qoq expansion in NIM (calculated) to 12.3%. NIM was an interplay of (1) 32 bps yoy/20 bps qoq expansion in yields to 19.8%, (2) 32 bps yoy/3 bps qoq decline in borrowings cost to 9.56% and (3) impact of negative carry due to elevated liquidity on-balance sheet (closing liquidity buffer of Rs26 bn in 2QFY21 compared to Rs15 bn in 1QFY21).

KOTAK INSTITUTIONAL EQUITIES RESEARCH 79 Diversified Financials Shriram City Union Finance

Disbursements have picked up gradually over the past few months on the back of a pick-up in demand for select products like two wheelers, improvement in collections and easing of funding availability. While disbursements (excluding gold) picked up 1.2X qoq, it was down 58% yoy leading to 3% qoq compression in AUM; lower repayments continued to cushion AUMs.

Operating expenses decreased 16% yoy on the back of 22% yoy drop in employee expenses and flat other expenses. Overheads have increased to pre-Covid levels owing to a pick-up in overall business activity and investment in collection and digital initiatives; business expansion however remained paused. Drop in employee expenses was led by 13% yoy/8% qoq decline in overall employee base to 24,581 (down 2,282 qoq). The company continues to focus on improving productivity of existing infrastructure and employee base.

Provisions were muted at 2% yoy despite Rs1 bn of one-off Covid-19 provisions and elevated write-offs. Adjusting for write-offs and one-off Covid-19 provisions, the company witnessed reversal of provisions to the tune of Rs1.1 bn. Overall ECL coverage increased 105 bps yoy/20 bps qoq to 7.8%.

Disbursements improve from trough levels, yet to reach pre-Covid levels

 1.2X qoq jump in disbursements; down 41% yoy (excluding gold). Disbursements (ex-gold) increased 1.2X qoq on a low base. While disbursements have picked up from trough levels, it remains significantly lower than pre-Covid levels (disbursements down 58% yoy). On the back of a recent rally in gold prices (up 5% qoq in 2QFY21 on a high base despite moderating post mid-August 2020) and increasing gold loan activation across branches (the company has started to disburse gold loans in non-southern states), gold loan disbursements were down only 5% yoy (up 1.4X qoq). Gold loan AUM was up 2% qoq/3% yoy.

. Small business loan disbursements were muted and started to increase marginally from September 2020 onwards. Overall disbursements declined 77% yoy. 17X qoq increase in disbursements was likely driven by disbursements under ECLGS. While the company has not disclosed the overall ECLGS disbursements in 2QFY21, management had previously guided about Rs3-4 bn of disbursements under ECLGS; similar to Rs3.6 bn of business loan disbursements during the quarter

. SCUF re-commenced personal loan disbursements from 2QFY21; it continues to remain muted (down 92% yoy). Cautious stance and focus on cross-selling to existing customer are key drivers.

. Two wheeler and pre-owned vehicle disbursements supported disbursements during the quarter. Two wheeler disbursements increased 35% qoq (down 29% yoy). SCUF’s disbursements in this segment are however marginally lower than peers like L&TFH (disbursements down 1% yoy). Overall volumes were flat yoy and tightening of credit underwriting and focus on liquidity management and collection likely led to slowed growth in this segment. Management guided that strong demand during the festive season will lead to gradual uptick in disbursements. Pre-owed disbursements the new segment launched from 2HFY20 witnessed Rs1.8 bn of disbursements (~13% of ex gold disbursements).

80 KOTAK INSTITUTIONAL EQUITIES RESEARCH Shriram City Union Finance Diversified Financials

Gradual revival in disbursements from 2H

 Disbursements (excluding gold) will likely decline 3% yoy in 2HFY21E. We expect disbursements (excluding gold) to decline 4% yoy in 2HFY21E, significantly lower than 73% yoy decline in 1HFY21 on the back of (1) strong demand during the ongoing festive season, (2) improving collections, (3) ease of funding availability and (3) gradually pushing select segment like personal loans and SME loans where the company has maintained a cautious stance. Lower repayments will however support AUMs and we expect marginal 2% yoy decline in AUM in FY2021E. Gold loans will likely witness muted 5% yoy growth.

. Steep decline in small business loan (SME) disbursements. SCUF will likely push SME disbursements in 2H as funding avenues have increased and collection are gradually improving. We bake-in 4% yoy decline in disbursements in 2HFY21E translating to 50% yoy decline in disbursements for the years. Cautious stance in select business segments like unsecured businesses will drag growth. Additionally, the company will likely tighten credit underwriting standards towards select customer cohorts. As cash flows of the underlying borrower improves from FY2022E, disbursement growth will likely bounce back to 50% yoy in FY2022E (on a low base).

. Focus on two wheeler segment. We expect 5% yoy growth in disbursements in two wheeler segment in 2HFY21 largely led by recover in overall demand and strong sales during the festive season. Most OEMs have reported strong ~10-40% yoy growth in sales during October 2020. SCUF’s growth will likely be marginally lower due to tightening of credit underwriting. On the back of robust demand, we expect two wheeler disbursements to increase 35% yoy in FY2022E (on a low base). Increasing demand from tier-II and II cities will likely drive disbursements.

. Cautious stance in personal loans. We expect personal loans to decline 13% yoy in 2HFY21E (decline in cushioned by low base of 2HFY20). SCUF will continue to maintain a cautious stance in this segment. The company is focused on cross-selling personal loan products to existing two wheeler customers (after the existing loan is fully repaid); as such market sourcing of personal loans is negligible.

. Product diversification to support growth in auto and pre-owned. While overall auto loans will remain muted on the back of muted auto volumes in 2HFY21E, diversification of product suite will drive growth in auto loans and other segment. We expect 23% yoy decline in disbursements in 2HFY21E. The company has started disbursals for pre-owned vehicles (mostly used 2W, PV, cars, etc.) from 3QFY20 onwards. On the back of strong demand from rural areas, this segment will likely deliver robust growth in; volumes were however negligible in 1H. The average yield in this segment is 18-26% which will support yield over going ahead. Competition is quite low in this segment (mostly local financiers who charge interest rates in the range of 35-40%).

. Focus on gold loans as gold prices rally. Gold loan disbursements will likely remain robust in FY2021E on the back of (1) increase in branch activation and (2) rally in gold prices (up 19% 1QFY21 and 25% yoy in FY2020). The company operates only from 5 states and plans to expand its gold loan pan-India footprint to all branches in FY2021E. A significant proportion of customers are repeat borrowers (~60%) and new customers are mostly from referrals. With higher presence and rally in gold prices, gold loans will maintain robust pace of growth. Increase in LTV limits on gold loans for banks to 90% may however cannibalize growth opportunities in select regions. The company does not expect banks to increase focus on gold loans (despite increase in LTV to 90%) due to the recent volatility in gold prices.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 81 Diversified Financials Shriram City Union Finance

. Growth to bounce back in FY2022E. As overall operating environment improves for MSMEs and auto volumes revive, growth will pick pace on a low base in FY2020; we build-in ~42% yoy rise in disbursements (excluding gold) in FY2022E driving 6% AUM growth (6% AUM growth including gold). AUM growth will further improve to ~14% yoy in FY2023; traction in disbursements to support growth despite gradual increase in repayment rates over FY2022-23E.

Exhibit 2: ~40% yoy decline in disbursements (excluding gold in Exhibit 3: ~2% yoy decline in AUM in FY2021E FY2021E) AUM, March fiscal year-ends, 2007-2023E Disbursements (excluding gold), March fiscal year-ends, 2007-2023E AUM (LHS) YoY (RHS) (Rs bn) 343 (%) Disbursements (LHS) YoY (RHS) 350 80 (Rs bn) (%) 68 200 182183 186 69 296291 301 276 284 66 53 64 157 156 280 60 160 46 45 231 138 136 36 42 210 196 40 37 120 110109 23 158 167 30 95 18146 18 19 26 134 14 17 140 14 14 20 14 17 14 16 7 6 80 10 67 0 80 51 (2) (2) (2) 47 (0) 1 52 (8) 36 41 40 70 46 0 23 34 40 21 (15) -23 - -20 - -46

(39)

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2019

2020

2021E 2022E 2023E Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities

Exhibit 4: Higher share of 2W disbursements in FY2021E Exhibit 5: Share of MSME loans to decline over medium-term Disbursements (excluding gold) , March fiscal year-ends, 2007-2023E AUM mix, March fiscal year-ends, 2007-2023E

SME Personal loans/CD 2W Auto and pre-owned Gold SME Personal loans/CD 2W Auto and pre-owned 100 100 6 5 3 6 5 4 5 6 11 6 7 7 9 10 10 12 11 7 6 6 7 14 18 13 18 25 25 23 18 34 33 30 18 18 18 18 21 80 27 26 28 27 80 40 13 18 24 27 48 31 48 10 29 32 27 36 5 7 9 13 5 4 4 8 6 41 28 50 47 45 7 3 2 26 8 9 11 13 2 60 32 6 6 60 10 25 31 13 11 11 33 29 40 13 3 53 54 40 21 15 3 40 18 11 24 51 55 56 3 60 57 56 53 51 32 20 59 58 30 54 57 57 57 21 11 19 18 46 47 42 22 20 40 38 40 20 36 34 15 29 30 21 13 16 17 18 17 15 13 13 13 12 8 12 9 11 12 12 12

0 0 1 4

2007 2008 2010 2012 2013 2014 2015 2017 2019 2020 2009 2011 2016 2018

2007 2008 2010 2012 2013 2014 2015 2017 2019 2020 2009 2011 2016 2018

2022E 2021E 2023E

2022E 2023E 2021E

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

82 KOTAK INSTITUTIONAL EQUITIES RESEARCH Shriram City Union Finance Diversified Financials

Exhibit 6: Strong correlation (~0.6) between yoy growth in gold Exhibit 7: Lower 2W disbursements despite pick up in 2W prices and growth in gold AUM of SCUF volumes Growth in gold prices and gold AUM for SCUF, March fiscal year- 2W industry sales and SCUF’S disbursements, March fiscal year-ends, ends, 2010-2020, 1QFY21 (%) 2008-2020, 1QFY21 (%)

Gold AUM yoy Gold prices yoy 2W disbursements yoy 2W industry sales yoy 200 66

150 33

100 -

50 (33)

- (66)

(50) (99)

2008

2010

2009

2011

2010

2012

2011

2013

2012

2014 2013

2014 2015

2015 2016

2016

2017

2017

2018

2018

2019

2019

2020

2020

1QFY21

1QFY21 2QFY21 2QFY21

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

Exhibit 8: 2W disbursements weaker than immediate peers Trends in 2W segment, March fiscal year-ends, 1QFY18-1QFY21

1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 Growth in 2W OEM sales (%) Overall domestic 2W sales 8 12 16 25 16 5 8 (9) (12) (21) (15) (41) (74) 0 AUM growth of various lenders (%) Bajaj 28 21 NA 24 29 37 44 55 62 61 51 35 17 7 HDFC Bank 18 18 26 38 41 41 31 16 9 2 1 (2) (5) (4) Indus Ind Bank 6 5 5 10 15 18 24 25 24 24 23 16 24 20 L&TFH 27 43 47 62 68 66 75 68 55 41 23 15 9 12 Mas Financials 40 40 27 21 25 41 27 16 8 (8) (14) (12) NA SCUF 9 14 17 24 33 26 9 6 4 2 18 13 10 6 Disbursement growth (%) L&TFH 34 177 56 99 105 2 93 37 14 1 (9) (5) (72) (1) SCUF 2 5 36 44 25 20 (36) (1) - (1) 80 (10) (49) (29)

Source: Company, Kotak Institutional Equities

Lower funding cost to support NIM in 2H

 Calculated margins up 15 bps yoy to 12.3% in 2QFY21. Calculated NIM expanded15 bps yoy/27 bps qoq expansion to 12.3%. NIM was interplay of (1) 32 bps yoy/20 bps qoq expansion in yields to 19.8%, (2) 32 bps yoy/3 bps qoq decline in borrowings cost to 9.56% and (3) impact of negative carry due to elevated liquidity on-balance sheet (closing liquidity buffer of Rs26 bn in 2QFY21 compared to Rs15 bn in 1QFY21).

 Lower funding cost to support NIM in 2H. We expect calculated NIM to expand 18 bps yoy in 2HFY21E to 12.3% (12.2% in 1HFY21) on the back of lower funding cost and marginal expansion in yields. Continued decline in marginal cost of funds from 1Q onwards will support borrowings cost; we build-in 20 bps yoy decline in cost of borrowings to 9.5% in 2HFY21E. Elevated liquidity buffers will however continue to drag NIM. While gradual decline in liquidity buffers from FY2022E will support NIMs, it will be offset by gradual decline in yields; intensifying competition in select segments like secured small business loans from SFBs/NBFCs and two wheelers will put pressure on yields. We expect calculated NIM to remain broadly stable over FY2021-23E.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 83 Diversified Financials Shriram City Union Finance

Liquidity position comfortable; funding constraints gradually easing

 Cumulative positive ALM gap in near-term buckets. Capital position is strong with tier-I ratio at 30.1% as of 2QFY21. Cumulative ALM is positive across near-term buckets. SCUF has liquidity buffer of Rs33 bn as of 2QFY21 (excluding Rs5 bn of undrawn lines); this will likely remain high going ahead.

 Funding constraint gradually easing. SCUF faced significant challenges on mobilizing fresh funds post IL&FS crisis. Overall funding availability has gradually improved from 1Q with availability of fresh sanctions from select banks. Overall gross mobilization of resources during the quarter was high at Rs31.5 bn or 14% of borrowings (Rs22.5 bn mobilized from banks, Rs7.5 bn through partial credit guarantee scheme and additional Rs8.6 bn of deposits). The company has additionally raised Rs5 bn in October 2020 including Rs 3 bn from a securitization transaction.

Exhibit 9: NIM expanded in 2QFY21 Calculated yield on loans, cost of borrowings and NIM, March fiscal year-end, 1QFY17-1QFY21 (%)

Yield on loans-KS Cost of borrowings-KS NIM-KS 25 17.5

20 14.0 14.0 13.9 14.2 14.2 14.4 14.2 13.1 13.4 12.5 12.4 12.4 12.6 12.4 15 12.1 12.3 11.8 12.0 12.3 10.5

21.3 21.0 21.0 21.0 21.4 20.9 10 19.4 18.8 19.6 20.1 19.7 19.6 19.7 19.5 19.6 19.4 19.6 19.8 7.0

5 3.5

10.1 9.8 9.4 9.2 9.2 9.3 8.9 8.3 8.6 8.7 9.2 8.9 9.5 9.9 9.8 9.7 9.6 9.6

0 0.0

2QFY17

3QFY17

4QFY17

1QFY18

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20 1QFY21 2QFY21

Source: Company, Kotak Institutional Equities

Exhibit 10: ~35 bps yoy NIM compression in FY2021E Calculated yield on loans, cost of borrowings and NIM, March fiscal year-end, 2007-2023E (%)

Yield on loans (LHS) Cost of funds (LHS) NIM (RHS) 13.7 24.0 13.5 13.6 13.5 14.0 12.8 13.0 19.2 13.0 12.4 12.5 12.4 12.1 12.0 11.9 11.9 14.4 11.6 12.0 11.1 11.2 9.6 11.0 10.0 12.6 11.1 11.1 11.8 11.5 11.5 10.9 11.0 10.3 4.8 9.8 9.7 8.6 9.0 9.4 9.1 9.1 9.2 10.0 19.7 21.3 23.1 21.7 19.8 18.8 20.5 20.6 21.3 20.5 20.3 20.1 20.0 19.8 19.6 19.4 19.2

0.0 9.0

2007 2011 2012 2016 2017 2020 2008 2009 2010 2013 2014 2015 2018 2019

2021E 2023E 2022E

Source: Company, Kotak Institutional Equities

84 KOTAK INSTITUTIONAL EQUITIES RESEARCH Shriram City Union Finance Diversified Financials

Exhibit 11: Continued focus on diversification of funding mix; share of retail (fixed deposits and sub-debt) has increased to >20% Funding mix, March fiscal year-end, 2019, 2020, 1QFY21 (%)

FY2019 FY2020 1QFY21 Securitisatio n, 4.9 Securitisatio Securitisatio CP, 7.9 n, 16 n, 13 Public issue NCD, 0.5 CP, 0 CP, 0.5 Term loans, Public issue Public issue NCD, 4 Institutional 37 Term loans, NCD, 4 Term loans, NCD and Institutional 43.7 40 SD, 16.2 NCD and SD, 11 Institutional NCD and SD, 16

Retail FDs and sub- CC and Retail FDs CC and Retail FDs debt, 16.4 WCDL, and sub- WCDL, 9 and sub- CC and debt, 18 10.4 debt, 22 WCDL, 9

Source: Company, Kotak Institutional Equities

Exhibit 12: ALM position looks comfortable ALM statement assuming different collection efficiencies, March fiscal year ends, 1QFY21 (Rs bn)

0-1 month 1-2 months 2-3 months 3-6 months 6-12 months 1-3 years 3-5 years >5 years Total 2QFY21 Net cash position 26 26 Schedule inflows 18 13 14 34 61 90 24 18 273 Scheduled outflows 11 5 13 21 61 89 18 - 218 Mismatch 34 8 1 14 (0) 1 6 18 81 Cumulative mismatch 34 42 42 56 56 57 63 81 Notes: (1) ALM assumes 100% collections.

Source: Company, Kotak Institutional Equities

Collection trends encouraging

 Gradual improvement in mom collections. Amidst a challenging macro, SCUF has focused on collections over the past few quarters. Collections (including overdue to expected billing) improved to 95% in September 2020 from 82% in August 2020, 80% in July 2020, 71% in June 2020, 52% in May 2020 and 30% in April 2020. While the company has not reported the collection from overdue accounts, it was about 3-4% in June 2020. Collection trends are encouraging as the company has ~15% share of unsecured loans and even in secured loans it operates at the high risk more vulnerable customer segments. Gold loans (11% of AUMs) helps.

 Aggressive write-off drives decline in gross stage 3 ratio Gross stage 3 loans declined 28% yoy/11% qoq to Rs18.2 bn in 2QFY21 on the back of negligible slippages and elevated write-offs. Gross stage 3 ratio declined 200 bps yoy/60 bps qoq to 6.7% (adjusted for dpd freeze).

 Rs1 bn of incremental COVID-19 provisions in 2QFY21. Provisions were muted at 2% yoy despite Rs1 bn of one-off Covid-19 provisions and elevated write-offs. Adjusting for write-offs and one-off Covid-19 provisions, the company witnessed reversal of provisions to the tune of Rs1.1 bn. Overall ECL coverage increased 105 bps yoy/20 bps qoq to 7.8%.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 85 Diversified Financials Shriram City Union Finance

Forecasting credit cost is challenging

 We model gross stage 3 loans to increase to 9.5% in FY2021E from 7.9% in FY2020 (6.7% in 2QFY21). On the back of COVID-19 related disruptions, a significant share of SMEs (around 55% of AUM) will witness cash flow crisis. We expect rise in delinquencies from 3QFY21E as the moratorium ends in August; while overall collections were strong in September 2020, we remain cautious of (1) continued demonstration of strong repayment behavior and (2) likely lower collections from accounts which moved out of moratorium. The company might however restructure some of these accounts which will make it challenging to model gross stage 3 loans. Prima-facie, SCUF is not keen to restructure loans to avoid risk of moral hazard, will prefer to let gross stage 3 loans rise instead. Exceptions may be select borrowers in stressed segments like travel and hospitability.

 We conservatively build-on high credit cost of 3.6% in 2HFY21E (up 27 bps yoy/similar to 1HFY21) as we expect slippages from stressed accounts, elevated write-offs and continued frontloading of provisions; a strategy followed by SCUF’s management. While ECL coverage on stage 3 will broadly remain flat yoy at 48% in FY2021E, coverage on stage 1 and 2 loans will increase 40 bps yoy in FY2021E to 4%. Write-off will likely remain elevated at 2.8% (up 10 bps yoy). High coverage on the overall book and low share of unsecured loans (~15% of AUM) provides some comfort. As overall collection improve, the company will likely decrease their coverage on stage 1 and 2 loans; this coupled with lower slippages and write-offs will continue to drive gradual reduction on credit cost to 2.5% in FY2022E and further to 2.1% by FY2023E.

Exhibit 13: Continued improvement in collection efficiency Month-wise collection efficiency (including collections of overdues), March fiscal year-ends, April 2020- Septmeber 2020

Collection efficiency (%)

100

80

60

95 40 80 82 71 52 20 30

0 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20

Source: Company, Kotak Institutional Equities

86 KOTAK INSTITUTIONAL EQUITIES RESEARCH Shriram City Union Finance Diversified Financials

Exhibit 14: Gross stage 3 loans down 60 bps qoq to 6.7% Asset quality under Ind-AS, March fiscal year-ends, 1QFY19-1QFY21 (Rs mn)

2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 YoY (%) QoQ (%) AUM break-up Stage 1 and 2 266,240 255,480 263,390 271,960 264,440 264,610 263,940 260,420 254,600 (3.7) (2.2) Stage 3 28,000 25,680 25,770 26,540 25,170 24,610 22,630 20,450 18,200 (27.7) (11.0) Gross AUM 294,240 281,160 289,160 298,500 289,610 289,220 286,570 280,870 272,800 (5.8) (2.9) ECL provisions Stage 1 and 2 6,530 7,480 8,030 7,910 8,460 8,540 9,470 10,980 11,300 33.6 2.9 Stage 3 12,690 11,690 11,240 11,530 10,940 10,730 10,970 10,300 9,890 (9.6) (4.0) ECL provisions 19,220 19,170 19,270 19,440 19,400 19,270 20,440 21,280 21,190 9.2 (0.4) ECL coverage (%) Stage 1 and 2 2.45 2.93 3.05 2.91 3.20 3.23 3.59 4.22 4.44 124 bps 22 bps Stage 3 45.32 45.52 43.62 43.44 43.46 43.60 48.48 50.37 54.34 1088 bps 397 bps ECL coverage 6.53 6.82 6.66 6.51 6.70 6.66 7.13 7.58 7.77 107 bps 19 bps Key ratios Gross stage 3 (%) 9.52 9.13 8.91 8.89 8.69 8.51 7.90 7.28 6.67 -202 bps -61 bps Net stage 3 (%) 5.57 5.34 5.38 5.38 5.27 5.14 4.38 3.91 3.30 -196 bps -61 bps

Source: Company, Kotak Institutional Equities

Exhibit 15: Coverage on stage 3 has increased Sectoral gross stage 3, net stage 3 and ECL coverage, March fiscal year-end, 1QFY19-1QFY21 (%)

2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 YoY QoQ Gross stage-3 (%) Gold loans 2.0 2.3 2.3 2.3 2.8 3.4 4.4 4.4 3.5 73 bps -82 bps SME loans 10.3 9.7 9.2 9.3 9.0 8.9 8.3 7.8 7.5 -153 bps -32 bps Personal loans 11.3 10.9 11.0 11.3 10.9 11.0 11.1 11.7 10.9 0 bps -76 bps 2W 10.4 9.7 9.6 9.4 9.1 8.9 8.1 6.8 5.9 -322 bps -88 bps Auto and pre-owned 11.7 11.6 11.6 11.8 12.1 9.1 11.6 3.3 3.2 -890 bps -5 bps Core auto 11.8 12.1 11.6 9.4 8.6 -349 bps -78 bps Pre-owned - - 0.1 0.1 0.1 9 bps -1 bps Overall gross stage 3 9.5 9.1 8.9 8.9 8.7 8.5 7.9 7.3 6.7 -202 bps -61 bps ECL-coverage on stage-3 Gold loans 4.4 5.1 4.9 4.9 4.9 5.0 4.8 4.8 4.7 -17 bps -3 bps SME loans 47.4 46.8 44.4 44.3 44.8 45.3 51.4 54.4 60.1 1531 bps 576 bps Personal loans 41.5 41.9 41.5 41.4 41.5 41.5 42.3 44.6 44.6 306 bps -2 bps 2W 44.2 46.7 45.4 45.4 45.3 45.4 54.0 53.6 53.2 791 bps -36 bps Auto and pre-owned 49.6 51.2 51.0 51.2 51.6 51.8 57.4 61.7 61.1 952 bps -59 bps Core auto 51.2 51.6 57.4 59.5 58.8 722 bps -66 bps Pre-owned - - 59.8 61.7 61.1 6113 bps -59 bps Overall ECL coverage 45.3 45.5 43.6 43.4 43.5 43.7 48.5 50.4 54.4 1088 bps 399 bps

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 87 Diversified Financials Shriram City Union Finance

Exhibit 16: We expect ECL coverage to increase to 8.2% (up 181 bps yoy) by FY2021E NPL and provisions, March fiscal year-end, 2018-2023E

Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS 2018 2019 2020 2021E 2022E 2023E Gross loan mix (Rs mn) Gross stage 1 and 2 249,850 263,390 263,940 251,596 268,087 307,018 Gross stage 3 25,940 25,770 22,630 26,411 27,326 29,440 Gross loans 275,790 289,160 286,570 278,006 295,412 336,458 Gross loan mix (%) Gross stage 1 and 2 90.6 91.1 92.1 90.5 90.8 91.3 Gross stage 3 9.4 8.9 7.9 9.5 9.3 8.7 ECL mix (Rs mn) ECL provision on stage 1 and 2 5,680 8,030 9,470 10,064 10,187 10,132 ECL provision on stage 3 12,230 11,240 10,970 12,677 12,843 13,248 Overall ECL provisions 17,910 19,270 20,440 22,741 23,030 23,380 ECL coverage ratios (%) ECL coverage on stage 1 and 2 2.3 3.0 3.6 4.0 3.8 3.3 ECL coverage on stage 3 47.1 43.6 48.5 48.0 47.0 45.0 Overall ECL coverage 6.5 6.7 7.1 8.2 7.8 6.9 Credit cost details (% of AUM) Overall credit cost 4.0 2.7 3.0 3.5 2.5 2.1 Provisions on stage 1 to 3 loans 1.6 0.5 0.5 0.8 0.1 0.1 Write-offs 2.5 2.3 2.6 2.8 2.4 2.0

Source: Company, Kotak Institutional Equities estimates

Exhibit 17: GNPL/gross 3 loans will jump to ~9.5% by FY2021E GNPL/gross stage 3 ratio, March fiscal year-ends, 2007-2023E

GNPL/gross stage 3 (%) 12.5

10.0 9.4 9.5 9.3 8.9 8.8 7.9 7.5 6.6

5.0 5.0 2.9 2.1 2.3 2.5 1.6 1.7 1.9 1.2 1.6 1.2

0.0

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021E

2022E 2023E

Source: Company, Kotak Institutional Equities estimates

88 KOTAK INSTITUTIONAL EQUITIES RESEARCH Shriram City Union Finance Diversified Financials

Exhibit 18: Credit cost will remain elevated at 3.6% in FY2021E Credit cost, March fiscal year-ends, 2007-2023E

Credit cost (% of AUM) 6.0

4.8 4.3 4.1 3.4 3.6 3.6 2.9 3.0 2.6 2.7 2.4 2.5 2.5 2.4 1.9 2.1 1.8 1.8 1.6 1.5 1.2

0.0

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021E

2022E 2023E

Source: Company, Kotak Institutional Equities estimates

Stringent cost control to support core earnings; may not sustain

 Stringent cost control. Operating expenses decreased 16% yoy on the back of 22% yoy drop in employee expenses and flat other expenses. Overheads have increased to pre- Covid levels owing to pick up in overall business activity and investment in collection and digital initiatives; business expansion however remained paused. Drop in employee expenses was led by 13% yoy/8% qoq decline in overall employee base to 24,581 (down 2,282 qoq). The company continues to focus on improving productivity of existing infrastructure and employee base.

. Calculated cost-to-average AUM declined 50 bps yoy to 4.5% (up 22 bps qoq).

 Cost ratios to inch up a bit. Gradual increase in overall volumes will likely lead to marginal increase in operating expenses to Rs6.7 (down 12% yoy) in 2HFY21E compared to Rs6.3 bn in 1HFY21 (down 17% yoy). Additionally, business expansion will pick up over medium-term driving increase in cost-to-average AUM to 4.7% over FY202-23 from 4.5% in FY2021E; it will however remain lower than pre-Covid levels of >5%.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 89 Diversified Financials Shriram City Union Finance

Exhibit 19: Cost-to-income down 370 bps yoy to 36.6% Cost ratios, March fiscal year-end, 1QFY18-1QFY21 (%)

Cost-to-income (LHS) Cost-to-average AUM (RHS) 45 10

36 8 6.0 5.6 5.5 5.3 5.3 5.3 27 4.9 5.2 5.0 5.0 5.0 5.0 6 4.3 4.5 18 4

9 2

39.5 38.9 40.5 38.2 39.7 38.6 40.8 38.7 39.6 39.7 39.1 42.9 35.4 36.1

0 0

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20 1QFY21 2QFY21

Source: Company, Kotak Institutional Equities

Exhibit 20: Cost to average AUM will likely decline from normalized levels Cost ratios, March fiscal year-end, 2007-2023E (%)

Cost-to-income (LHS) Cost-to-average AUM (RHS) (%) (%) 60 6.6 6.9 7.5 6.2 5.7 5.7 5.4 48 5.3 5.2 5.1 6.0 4.8 4.5 4.7 4.7 4.3 36 3.9 4.5 3.7 3.5 52.2 24 51.9 49.0 3.0 40.8 42.3 37.2 38.3 39.2 39.3 39.3 40.3 36.6 37.4 38.0 31.2 34.9 34.9 12 1.5

0 0.0

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021E 2022E 2023E

Source: Company, Kotak Institutional Equities estimates

90 KOTAK INSTITUTIONAL EQUITIES RESEARCH Shriram City Union Finance Diversified Financials

Exhibit 21: Focus on improving productivity across existing Exhibit 22: Marginal decline in per employee cost in FY2021E branches Employees and per employee cost, March fiscal year-ends, 2014- Branches and branch productivity, March fiscal year-ends, 2008- 2023E 2023E Employees (LHS) Per employee cost (RHS) Branches (LHS) AUM per branch (RHS) (#) (Rs mn) (#) (Rs bn) 30,000 0.45 1,000 0.40 24,000 0.39 800 0.34 18,000 0.33 600 0.28 12,000 0.27 400 0.22 6,000 0.21 200 0.16 0 0.15

- 0.10

2014

2015

2016

2017

2018

2019

2020

2021E 2022E

2023E

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021E 2022E 2023E Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities

Shriram Housing Finance – Highest ever quarterly disbursements in 2QFY21

 Highest ever quarterly disbursements. Shriram Housing reported highest ever quarterly disbursements of Rs5.2 bn in 2QFY21 (up 4.3X yoy/5.7X qoq). The company had slowed down in 1QFY21 but growth revived from 2Q. Shriram Housing has revamped its distribution strategy to focus on seven states (Gujarat, Maharashtra, Rajasthan, Andhra Pradesh, Telengana, Tamil Nadu and Karnataka) where demand is robust. AUM was up 48% yoy/17% qoq. Additionally, sourcing is mostly through select DSA network and cross-selling. Focus will mainly be on the retail business (~60% home loans and ~35% LAP as of FY2020) limiting wholesale business to ~5% of total loans.

 Collections have improved from trough levels. Shriram Housing’s collection efficiency improved to ~94.3% in September 2020 from 60% in June 2020 and 41% in May 2020. Overall collection levels are broadly in-line with industry average.

 Liquidity position comfortable. Shriram Housing’s capital position is comfortable with CAR of 24.1 % as of 2QFY21. The company’s liquidity buffer of Rs6.9 bn as of 2QFY21 (Rs9.7 bn in 1QFY21) is sufficient to meet near-term debt obligations.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 91 Diversified Financials Shriram City Union Finance

Exhibit 23: Highest ever quarterly disbursements in 2QFY21 Quarterly financial summary for Shriram Housing Finance, March fiscal year-end, 1QFY19-1QFY21, 2019-2020

Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 YoY (%) QoQ (%) 1HFY21 1HFY20 YoY (%) 2019 2020 YoY (%) P&L (Rs mn) Total income 738.0 736 714 784 732 1,020 1,124 718 1,130 54 57 1,848 1,516 22 2,913 3,660 26 Interest expenses 318.9 332 335 381 388 419 443 439 501 29 14 940 768 22 1,286 1,630 27 Net income 419.1 404 379 404 344 601 681 280 629 83 125 908 748 21 1,627 2,030 25 Provisions (12.3) 31 (30) 22 4 14 168 (6) 49 1,192 NM 43 26 66 258 256 (1) Income post provisions 431.4 373 409 381 340 587 513 286 579 70 103 865 722 20 1,369 1,774 30 Operating expenses 307.1 250 284 241 240 296 344 204 296 24 45 500 481 4 1,118 1,121 0 PBT 124.3 123 125 140 101 291 169 82 283 182 245 365 241 52 251 653 160 PBT post non-operational items 124.3 (100) 125 92 101 291 169 82 283 182 245 365 193 90 251 653 160 Tax 53.4 (35) 33 23 26 85 52 22 104 294 371 126 50 154 84 187 123 PAT 70.9 (65) 92 69 74 206 117 60 179 142 199 239 143 67 167 466 179 Loan book (Rs mn) AUM 19,400 17,210 18,480 19,330 18,750 21,000 23,040 23,690 27,790 48 17 27,790 18,750 48 18,480 23,040 25 Disbursements 2,490 110 2,650 2,430 980 3,869 4,000 770 5,170 428 571 5,940 3,410 74 7,480 11,279 51 Key ratios (%) NIM 7.5 7.5 7.6 7.6 6.1 11.2 12.7 5.5 11.0 490 bps 551 bps 8.1 8.0 12 bps 7.6 9.5 190 bps Cost-income ratio 73.3 61.8 75.0 59.8 69.7 49.3 50.5 72.8 47.1-2263 bps -2573 bps 55.0 64.3 -931 bps 68.7 55.2 -1350 bps ROA 1.4 (1.3) 1.8 1.2 1.3 3.6 1.9 1.2 3.1 182 bps 196 bps 3.3 1.5 174 bps 0.8 2.0 120 bps Asset quality (%) Gross NPL 6.1 3.2 2.8 2.9 3.0 2.7 2.4 2.3 2.2 -77 bps -6 bps 2.2 3.0 -77 bps 2.8 2.4 -40 bps Net NPL 4.6 2.4 2.2 2.3 2.4 2.1 1.9 1.8 1.8 -61 bps -4 bps 1.8 2.4 -61 bps 2.2 1.9 -29 bps Coverage 24.5 27.0 21.8 21.3 21.3 21.1 20.8 21.7 21.4 17 bps -31 bps 21.4 21.3 17 bps 22 20.8 -95 bps

Source: Company, Kotak Institutional Equities

Exhibit 24: SCUF is trading at 0.6X one-year forward book One-year forward rolling PER and PBR, March fiscal year-ends, July 2007-July 2020 (X)

Rolling PER (X) (LHS) Rolling PBR (X) (RHS) 30 5

24 4

18 3

12 2

6 1

0 0

Oct-07

Oct-08

Oct-09

Oct-10

Oct-11

Oct-12

Oct-13

Oct-14

Oct-15

Oct-16

Oct-17

Oct-18

Oct-19

Oct-20

Apr-08

Apr-09

Apr-10

Apr-11

Apr-12

Apr-13

Apr-14

Apr-15

Apr-16

Apr-17

Apr-18 Apr-19 Apr-20

Source: Company, Bloomberg, Kotak Institutional Equities estimates

92 KOTAK INSTITUTIONAL EQUITIES RESEARCH Shriram City Union Finance Diversified Financials

Exhibit 25: SCUF – change in estimates Old and new estimates, March fiscal year-ends, 2021-2023E (Rs mn)

New estimates Old estimates Change in estimates 2021E 2022E 2022E 2021E 2022E 2022E 2021E 2022E 2022E NIM (%) 11.8 11.7 11.7 11.8 11.8 12.0 1 bps -6 bps -31 bps AUM 283,680 301,441 343,325 273,875 287,684 321,904 4 5 7 AUM growth (%) (2.5) 6.3 13.9 (5.8) 5.0 11.9 337 bps 122 bps 200 bps NII 33,915 34,212 37,741 33,300 33,003 36,637 2 4 3 Other income 1,457 2,882 1,882 1,457 2,882 1,882 - - - Total income 35,372 37,094 39,623 34,757 35,885 38,519 2 3 3 Provisions 10,201 7,311 6,797 12,435 6,319 6,280 (18) 16 8 Operating expenses 12,938 13,862 15,045 13,358 13,865 15,233 (3) (0) (1) Employee expenses 7,629 7,782 7,937 8,053 7,892 8,286 (5) (1) (4) PBT 12,234 15,921 17,782 8,964 15,700 17,006 36 1 5 Tax 3,132 4,076 4,552 2,295 4,019 4,353 36 1 5 PAT 9,102 11,845 13,230 6,670 11,681 12,653 36 1 5 Core PBT 22,068 22,915 24,261 21,032 21,703 22,968 5 6 6 Cost-to-income (%) 37 37 38 38 39 40 -186 bps -127 bps -158 bps Credit cost (%) 4 2 2 4 2 2 -85 bps 25 bps 5 bps EPS (Rs) 138 179 200 101 177 192 36 1 5 BVPS (Rs) 1,212 1,365 1,535 1,180 1,331 1,494 3 3 3 ABVPS 1,134 1,283 1,443 1,096 1,252 1,406 3 2 3 ROA (%) 3 4 4 2 4 4 72 bps -8 bps -2 bps ROE (%) 12 14 14 9 14 14 307 bps -17 bps 25 bps

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 93 Diversified Financials Shriram City Union Finance

Exhibit 26: SCUF - growth rates, key ratios and Du Pont analysis March fiscal year-ends, 2018-2023E (%)

SCUF-key growth rates and ratios, March fiscal year-ends, 2018-2023E (%) Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS 2018 2019 2020 2021E 2022E 2023E Growth in key parameters (%) Profit and loss statement - yoy (%) Operating income NA 12 2 (4) 3 7 Interest income NA 11 1 (3) 1 9 Interest expense NA 19 8 (0) 0 7 Net interest income NA 7 (3) (5) 1 10 Net operational income NA 9 (1) (6) 5 7 Total income NA 9 (1) (6) 5 7 Operating expense NA 9 1 (14) 7 9 Employee expense NA 19 1 (10) 2 2 PPOP NA 9 (3) 0 4 6 Provisions NA (24) 13 15 (28) (7) PBT NA 40 (11) (10) 30 12 PAT NA 39 1 (9) 30 12 Balance sheet - yoy (%) NA Loans NA 5 (1) 4 6 14 Investment NA 18 (16) 0 0 0 Net assets NA 8 5 4 1 14 Borrowings NA 5 3 3 (2) 15 Total liabilities NA 6 3 2 (2) 14 Total shareholder funds NA 39 1 (9) 30 12 Key ratios (%) Yield on loans 20.1 20.0 19.8 19.6 19.4 19.2 Cost of borrowings 8.6 9.0 9.4 9.1 9.1 9.2 Core NIM 13.2 12.7 12.0 11.3 11.3 11.3 NIM (% of on-balance sheet loans) 13.5 13.0 12.4 12.0 11.9 11.9 Cost-to-income 39.3 39.3 40.3 36.6 37.4 38.0 Cost-to-average AUM 5.4 5.2 5.1 4.5 4.7 4.7 Credit cost (% of AUM) 4.1 2.7 3.0 3.6 2.5 2.1 Du Pont analysis (% of average assets and off-balance sheet assets) Net interest income 13.2 12.8 11.6 10.6 10.3 10.6 Total income 13.5 13.2 12.2 11.0 11.2 11.1 Operating expenses 5.29 5.20 4.91 4.03 4.19 4.22 Credit cost 4.0 2.7 2.9 3.2 2.2 1.9 PBT post extraordinaries 4.2 5.3 4.4 3.8 4.8 5.0 1-tax rate 0.7 0.7 0.7 0.7 0.7 0.7 ROA 2.7 3.4 3.3 2.8 3.6 3.7 Average assets and off-balance sheet/average equity 4.7 4.8 4.5 4.2 3.9 3.7 RoE 12.8 16.6 14.7 12.0 13.9 13.8

Source: Company, Kotak Institutional Equities estimates

.

94 KOTAK INSTITUTIONAL EQUITIES RESEARCH Shriram City Union Finance Diversified Financials

Exhibit 27: SCUF – financial statements March fiscal year-ends, 2018-2023E (Rs mn)

Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS 2018 2019 2020 2021E 2022E 2023E Income statement (Rs mn) Operating income 51,567 57,788 58,839 56,670 58,436 62,417 Interest income 50,840 56,564 56,972 55,238 55,554 60,535 Fee and commission income 23 115 137 115 215 215 Net gain on fair value change 85 89 24 25 25 25 Dividend income 14 17 17 17 17 17 Profit on sale of investment 151 - - 25 25 25 Assignment income - 223 224 350 300 300 Other operational income 454 781 1,466 900 2,300 1,300 Interest expense 16,641 19,862 21,402 21,323 21,342 22,794 Net interest income 34,199 36,702 35,569 33,915 34,212 37,741 Net operational income 34,926 37,926 37,437 35,347 37,094 39,623 Other income 17 25 34 25 - - Total income 34,943 37,951 37,471 35,372 37,094 39,623 Operating expense 13,729 14,927 15,084 12,938 13,862 15,045 Fee and commission expense 1,304 1,548 1,303 524 610 929 Employee expense 7,063 8,379 8,477 7,629 7,782 7,937 Employee expense 7,063 8,379 8,477 7,629 7,782 7,937 Depreciation expense 333 312 822 700 700 700 Other expense 5,030 4,688 4,483 4,035 4,720 5,428 PPOP 21,214 23,024 22,387 22,435 23,232 24,578 On loans 3,935 1,347 1,385 2,301 289 349 Bad debt written-off 6,297 6,474 7,652 7,900 7,021 6,448 Others 98 0 (200) - - - PBT 10,885 15,203 13,550 12,234 15,921 17,782 Tax 3,775 5,314 3,545 3,132 4,076 4,552 PAT 7,109 9,889 10,005 9,102 11,845 13,230 Tax rate (%) 34.7 35.0 26.2 25.6 25.6 25.6 Core PBT 20,964 22,696 22,122 22,068 22,915 24,261 Balance sheet (Rs mn) Loans and Advances 257,873 269,891 266,125 278,006 295,412 336,458 Investments 7,355 8,697 7,341 7,341 7,341 7,341 Fixed assets 789 808 743 785 832 894 Other assets 7,239 14,757 35,532 36,874 23,701 27,533 Total assets 273,256 294,153 309,743 323,007 327,286 372,227 Borrowings 214,010 225,720 231,660 237,472 231,589 265,171 Other liabilities 3,456 4,267 5,610 5,050 5,050 5,050 Provisions 244 253 393 471 565 679 Total liabilities 217,710 230,239 237,663 242,993 237,204 270,899 Share capital 660 660 660 660 660 660 Reserves and surplus 54,887 63,253 71,420 79,354 89,422 100,667 Shareholders funds 55,547 63,913 72,080 80,014 90,082 101,327 Loan on books 275,790 289,160 286,570 278,006 295,412 336,458 Loans outside books 30 6,660 4,280 5,674 6,029 6,866 Loans under management 275,820 295,820 290,850 283,680 301,441 343,325

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 95 ADD Bandhan Bank (BANDHAN) https://ultraviewer.et/en/own Banks NOVEMBER 02, 2020 load.html RESULT, CHANGE IN RECO. Sector view: Attractive

Recovering gradually. Bandhan reported 6% yoy earnings decline despite 25% yoy CMP (`): 301 operating profit growth primarily on account of higher provisions. The impact of MFI Fair Value (`): 340 has been less serious due to Covid, especially for Bandhan as seen in collections data. BSE-30: 39,758 We upgrade Bandhan to ADD from REDUCE and revise FV to Rs340 (from Rs330 earlier) factoring (1) price correction, (2) loan mix that is more rural and highly profitable, (3) favorable policy responses and (4) actions less divisive on the ground. Bandhan Bank Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 301/340/ADD EPS (Rs) 20.1 20.4 24.8 52-week range (Rs) (high-low) 605-152 EPS growth (%) 7.3 1.0 22.0 Mcap (bn) (Rs/US$) 485/6.6 P/E (X) 14.9 14.8 12.1 QUICK NUMBERS ADTV-3M (bn) (Rs/US$) 6.7/0.1 P/B (X) 2.7 2.3 1.9 Shareholding pattern (%) BVPS 110.2 130.4 155.9  NII up 26% yoy; PAT Promoters 61.0 RoE (%) 19.3 16.3 16.9 down 5% yoy FPIs/MFs/BFIs 19.4/1.7/10.2 Div. yield (%) 0.0 0.0 0.0 Price performance (%) 1M 3M 12M NII (Rs bn) 79 85 96  GNPL ratio declined; Absolute 5.3 (12.8) (49.8) PPOP (Rs bn) 67 70 76 Rel. to BSE-30 2.5 (17.5) (49.3) Net profits (Rs bn) 32 33 40 PCR improves to 70% (+300 bps qoq)

 Upgrade to ADD Provisions dent earnings; strong operating performance (from REDUCE) with Bandhan Bank reported ~5% yoy earnings decline on the back of higher loan loss provisions FV at Rs340 (from (up over ~3X yoy) while operating performance was healthy with 25% yoy PPOP growth. Rs330 earlier) Operating performance improved sequentially with 3% AUM (5% in microloans) growth as disbursements approached pre-Covid levels. Deposit momentum continued driven by ~60% yoy growth in SA deposits with CASA ratio and retail deposits improving to 38% and 77% of total deposits. NIM declined qoq due to higher liquidity while lending spreads were stable. Cost- income ratio is back to pre-Covid levels of ~30% with expense growth of 16% yoy (10% qoq).

Near term improving; long-term business shift creates uncertainty

Headline NPL ratios declined due to extended standstill and write-offs. Collection rates on the overall book improved to 92% compared to ~75% in June. In the microfinance book, 95% of customers serviced loans in 2QFY21, partly supported by top-up loans being rolled out since Covid-start. The bank has made further prudential provisions, now totaling 2.7% of AUM. M B Mahesh, CFA Covid-impact on the overall book currently appears to be contained.

Bandhan has also outlined a five-year plan to transform into a more diversified franchise with Nischint Chawathe national footprint. This entails: (1) diversify the loan book with target mix of 30/30/30/10% across microfinance, housing, MSME and retail, compared to 62/25/12/1% respectively and (2) Abhijeet Sakhare expanding the branch network 3X over FY2020-25 with greater presence outside home markets. Even though the strategy appears to be in right direction, it creates considerable Ashlesh Sonje uncertainty regarding execution risks, payback on investments and overall profitability.

Upgrade to ADD (from REDUCE): reasonable entry valuations for a strong downside protection Dipanjan Ghosh

We upgrade the stock to ADD (from REDUCE) with FV of Rs340 (from Rs330), valuing the bank at 2.3X book and 15X September 2022 EPS for RoEs at 15% in the medium term. While there is better handle on near-term credit costs, strategy shift could potentially impact the high operating profitability and low cost characteristics of the business model over medium to long term. Nevertheless, we see current entry valuations being reasonable to gain from the re- emerging momentum from improving growth and fading credit costs. [email protected] Contact: +91 22 6218 6427

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

Exhibit 1: Bandhan Bank- quarterly summary March fiscal year-ends, 2QFY20-2QFY21 (Rs mn)

(% chg.) (% 2QFY21 1QFY21 2QFY20 1QFY21 2QFY20 2QFY21E 1HFY21 1HFY20 chg.) 2021E 2020 (% chg.) 2022E Income statement (Rs mn) Interest income 31,976 30,181 26,903 5.9 18.9 3.6 62,157 53,213 16.8 128,294 108,855 17.9 144,289 Interest expense 12,745 12,066 11,612 5.6 9.8 3.4 24,811 22,172 11.9 49,341 45,616 8.2 58,918 Net interest income 19,231 18,115 15,290 6.2 25.8 3.8 37,346 31,040 20.3 78,953 63,239 24.8 85,372 Non interest income 3,818 3,868 3,603 (1.3) 6.0 (1.0) 7,685 6,913 11.2 16,470 15,492 6.3 19,181 Total income 23,049 21,983 18,893 4.8 22.0 3.0 45,031 37,953 18.6 95,424 78,731 21.2 104,553 Operating expenses 6,773 6,141 5,824 10.3 16.3 2.8 12,914 11,324 14.0 28,223 24,265 16.3 34,320 Employee expenses 4,148 3,894 3,327 6.5 24.7 6.6 8,042 6,653 20.9 16,167 13,670 18.3 19,893 Other expenses 2,626 2,247 2,497 16.8 5.2 (2.6) 4,873 4,671 4.3 12,056 10,595 13.8 14,427 Operating profit 16,275 15,842 13,069 2.7 24.5 3.0 32,117 26,629 20.6 67,201 54,466 23.4 70,233 Provisions 3,945 8,491 1,455 (53.5) 171.0 (33.6) 12,436 2,705 359.6 23,715 13,932 70.2 26,299 PBT 12,330 7,351 11,614 67.7 6.2 25.1 19,681 23,924 (17.7) 43,486 40,534 7.3 43,934 Tax 3,130 1,853 1,896 68.9 65.1 25.1 4,983 6,166 (19.2) 11,047 10,297 7.3 11,160 Net profit 9,200 5,498 9,718 67.3 (5.3) 25.2 14,698 17,758 (17.2) 32,439 30,237 7.3 32,773 Tax rate (%) 25.4 25.2 16.3 18 bps 906 bps -2 bps 25.3 25.8 -45 bps 25.4 25.4 0 bps 25.4 Key balance sheet items (Rs bn) Total deposits 661 606 492 9.1 34.4 (0.8) 770 571 34.8 991 Savings deposits 220 195 135 12.9 62.6 226 177 27 275 Current deposits 33 30 27 9.7 23.5 39 33 17 50 Term deposits 408 381 330 7.1 23.8 505 361 40 665 CASA ratio (%) 38.2 37.1 32.9 115 bps 533 bps 34.34 36.84 -250 bps 32.84 AUM 766 743 642 3.1 19.4 0.1 770 718 7.2 847 Microloans 498 475 392 4.8 27.0 508.1 461.9 10.0 558.9 Others 268 269 250 (0.0) 7.4 262.3 256.6 2.2 288.5 Asset quality (Rs mn) Gross NPL 8,740 10,067 10,642 (13.2) (17.9) 21,562 9,927 117 28,043 Net NPL 2,625 3,358 3,369 (21.8) (22.1) 10,574 3,894 172 11,140 Gross NPL (%) 1.2 1.4 1.8 -25 bps -58 bps 2.7 1.5 122 bps 3.1 Net NPL (%) 0.4 0.5 0.6 -12 bps -20 bps 1.4 0.6 79 bps 1.3 PCR (%) 70 67 68 331 bps 161 bps 51.0 60.8 -982 bps 60.3 Capital adequecy (%) CAR 25.7 26.5 25.1 -77 bps 59 bps Tier- I 22.2 23.2 23.0 -102 bps -81 bps Key calculated ratios (%) Yield on AUM 13.3 13.6 14.2 -30 bps -90 bps 14.6 15.8 -124 bps 14.8 16.3 -147 bps 14.8 Cost of funds 6.2 6.4 7.2 -20 bps -100 bps 7.0 7.0 0 bps 6.3 7.8 -148 bps 6.3 NIM 8.0 8.2 8.2 -20 bps -20 bps 7.5 7.6 -3 bps 7.9 8.1 -17 bps 7.4 Cost-income 29.4 27.9 30.8 145 bps -144 bps 28.7 29.8 -116 bps 29.6 30.8 -124 bps 32.8 Cost to average AUM 3.6 3.4 4.3 23 bps -66 bps 1.7 1.8 -5 bps 3.8 4.2 -37 bps 4.2 CD ratio 110.9 115.1 121.5 -422 bps -1067 bps 115.9 130.5 -1461 bps 100.1 116.7 -1663 bps 85.5 Credit cost 2.1 4.6 1.1 -256 bps 103 bps 3.4 0.9 249 bps 3.2 2.4 80 bps 3.3 RoA 3.6 2.3 4.8 130 bps -120 bps 3.2 3.8 -60 bps 2.8 RoE 22.5 14.1 28.3 840 bps -580 bps 19.3 22.9 -362 bps 16.3 Other key parameters (#) Branch 1,045 1,018 1,000 1,098 1,018 7.9 1,178 Banking outlets 3,656 3,541 3,220 Employees 45,549 41,563 32,774 42,930 39,750 8.0 49,370

Notes: (1) Yield, cost of funds, NIM, RoA and RoE for quarterly numbers are reported ratios.

Source: Company, Kotak Institutional Equities estimates

Headline NPL ratios stable – provisioning build-up continues

 Headline NPL ratios decline. Gross and net NPL ratios decline ~10-20 bps qoq to 1.2% and 0.4% respectively. Adjusting for extended standstill, these ratios would be 1.5% and 0.7% respectively. Annualized write-off in the micro-banking unit was ~1% during the quarter.

 Collection efficiency. Collection efficiency was 89% for the micro-banking segment in September, which improved to 91% by October end. Further, 95% of micro-banking customers repaid in October month, improving from 75% in 1QFY21. Bank expects to reach pre-Covid levels in the next 90 days.

 Collection efficiency in West Bengal was 90% (96% basis customer count). Assam collection efficiency was 87% (88% on customer count). Collection efficiency in Bihar remains strong at 97%.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 97 Banks Bandhan Bank

 September collection efficiency in housing, SME and NBFC book was 98%, 96% and 100% respectively.

 Additional provisions. Bank has cumulatively made Rs17 bn Covid provisions, which along with standard asset provisions on micro-banking business are Rs21 bn, i.e. bank had estimated 3.5% credit cost due to Covid and has currently provided 2.8%.

 Credit cost estimates. We are factoring in credit costs of ~3.5-3.3% in FY2021-22E with GNPLs rising to 3.5% by FY2022E led by the riskier customer and business segments the company operates in.

Exhibit 2: GNPL lower at 1.2% Exhibit 3: Credit costs jump due to Covid-19 related provisions GNPL ratio, NNPL ratio and provision coverage ratio, March fiscal year- Credit cost, March fiscal year-ends, 2017-2QFY21 (%) ends, 2016-2QFY21 (%)

GNPL LHS) NNPL (LHS) PCR (RHS) Credit cost 2.5 80 6.00 72.1 70.0 66.6 60.8 2.0 64 4.80 53.7 45.4 1.5 48 3.60

29.1 5.50 1.0 32 2.40 4.82 4.65 0.6 0.6 0.6 0.5 0.4 0.4 0.5 16 1.20 2.09 1.53 1.82 0.1 1.19 0.2 0.5 1.3 2.0 1.5 1.4 1.2 1.01 1.05 1.06

- 0 0.00

2016

2017

2018

2019

2020

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21 1QFY21 2QFY21

Notes: Notes: (1) 1QFY20 and 3QFY20 numbers are for the combined entity. (1) 1QFY20 and 3QFY20 numbers are for the combined entity

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

98 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bandhan Bank Banks

Exhibit 4: GNPL will rise over the medium-term Exhibit 5: Slippages at 3.5-3.3% over FY2021-22E GNPL ratio, NNPL ratio and provision coverage ratio, March fiscal year- Credit cost and slippages, March fiscal year-ends, 2016-2023E (%) ends, 2016-2023E (%) Slippages (LHS) Credit cost (RHS) GNPL (LHS) NNPL (LHS) PCR (RHS) 5.5 4.5 5.0 100 3.5 4.4 3.3 3.6 4.0 72 71 80 2.6 2.5 61 3.3 2.7 55 2.2 3.0 54 52 60 45 2.2 1.4 1.8 2.0 40 29 1.7 1.4 3.5 2.8 1.1 0.5 0.9 0.5 1.0 0.6 2.00.6 0.6 1.9 20 0.4 1.3 1.5 0.6 0.8 2.1 2.6 2.6 5.0 5.0 3.0 0.0 0.0 0.2 0.1 0.5

0.0 0

2016

2017

2018

2019

2020E

2021E 2022E

2023E

2016

2017

2018

2019

2020E

2021E 2022E 2023E Source: Company, Kotak Institutional Equities estimates Source: Company, Kotak Institutional Equities estimates

AUM growth at 3% qoq; disbursements recover but ~20% below last year

 AUM growth 19% yoy and MFI book growth of 27% yoy (+5% qoq). Within non-MFI, mortgage and MSME business have grown 5-10% qoq, helped by moratorium which has slowed down disbursements. Disbursements and number of loan disbursed are at close to pre-Covid levels. Bank is confident of delivering better growth traction in 2H, in-line with historical trends.

 Bank has started offering top-up loans to help customers restart their businesses (~7% and ~12% of micro-banking AUM and customer base). Further, bank is also targeting about 30-35% of its customers who have additional loan apart from Bandhan by offering them additional loans and move them to individual loans.

 Bank has outlined five year plans to diversify the loan mix and branch location presence. Micro-banking (group lending) business share will decline to 30% in 5 years from ~60% currently. Micro-banking branches will also focus on catering to microbanking customers by offering products such as housing loans, gold loans and consumer loans.

 Housing share is targeted to increase to 30%. Housing will be grown through micro- banking customers (to be handled by the micro-banking unit) and housing loans (incl. affordable housing). Average ticket size of loans for erstwhile Gruh book will likely increase from ~1 mn level as bank expands the target customer base. Another 30% in the commercial banking and retail loans to contribute 10% of loans.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 99 Banks Bandhan Bank

Exhibit 6: AUM growth moderates to ~3% qoq AUM, March fiscal year-ends, 2016-2019, 2QFY20-2QFY21 (%)

(Rs bn) AUM (LHS) YoY (RHS) (%) 800 100

640 80 64 60 480 51 60

37 38 320 40

19 160 20

156 235 323 448 718 743 766 0 - 2016 2017 2018 2019 2020 1QFY21 2QFY21

Source: Company, Kotak Institutional Equities

Exhibit 7: Loan mix: Current and FY2025 target Exhibit 8: Branch mix: Current and FY2025 target Loan mix for the bank, September 2020, March 2025 (%) Branch location mix for the bank, September 2020, March 2025 (%)

Microbanking Housing Commercial banking Retail East North East Central West South North 1 100 100 10 7 12 6 14 80 25 80 9 30 19 13

60 60 12 17 30

40 40 23 62 53 20 20 4 30 23 0 0 Sep-20 2025 Sep-20 2025

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

100 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bandhan Bank Banks

Exhibit 9: Bandhan's loan market share in West Bengal has been steady; presence is strongest in rural Loans market share in West Bengal, March fiscal year-ends, 2016-2019, 3QFY20 (%)

Overall Rural Semi-urban Urban Metropolitan 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 PSU Banks Allahabad 6.5 6.5 5.9 5.6 5.3 5.1 5.3 5.2 5.8 5.4 4.9 4.7 4.4 4.4 3.8 5.1 5.3 6.1 5.0 4.3 7.2 7.2 6.1 5.9 5.9 BOI 4.9 5.0 4.7 3.8 3.7 2.9 3.3 4.1 4.5 4.4 5.3 5.6 3.7 3.3 3.0 6.5 7.0 3.2 2.8 2.6 4.8 4.8 5.3 4.0 4.0 PNB 4.8 4.6 4.3 4.2 4.3 10.0 9.3 9.2 5.7 5.5 4.9 4.1 4.3 1.3 1.1 4.8 4.2 9.1 4.0 3.5 4.0 3.9 2.2 4.3 4.9 SBI 20.5 19.7 18.4 16.6 16.0 12.9 13.0 15.2 18.4 18.3 16.8 16.2 17.9 20.4 18.6 17.4 17.7 16.7 18.9 20.6 22.8 21.7 19.5 15.2 14.5 United 9.7 9.5 8.9 8.5 8.3 24.1 23.0 19.5 9.7 15.5 15.3 14.1 12.1 7.7 11.5 10.4 9.7 8.0 5.4 5.1 6.7 6.6 6.9 9.2 7.5 Others 31.9 30.8 28.2 26.1 25.0 10.6 10.3 10.6 10.7 10.5 20.4 19.9 19.1 17.7 15.5 28.0 27.2 24.3 25.2 21.9 37.4 36.4 33.6 30.1 30.6 PSU 78.4 76.1 70.5 64.8 62.6 65.7 64.3 63.8 54.8 59.7 67.7 64.7 61.6 54.8 53.7 72.2 71.0 67.4 61.3 57.9 82.8 80.6 73.6 68.7 67.5 Private Banks Axis 4.4 4.4 5.0 5.8 6.2 0.1 0.1 0.1 0.2 0.2 2.2 2.4 2.2 2.8 2.9 3.8 4.2 4.1 5.4 5.8 5.4 5.4 6.5 7.2 8.0 Bandhan 2.1 3.0 3.5 4.7 5.4 10.4 12.8 13.9 19.2 17.7 5.2 9.7 10.8 14.3 15.0 3.2 4.6 5.1 7.0 7.5 0.2 0.2 0.3 0.4 0.6 HDFC 4.6 5.2 5.3 6.1 5.8 0.2 0.1 1.2 1.4 1.6 4.1 4.2 4.9 5.6 5.4 4.9 5.2 6.0 7.0 7.4 5.3 6.2 5.9 6.8 6.3 ICICI 5.3 5.2 5.8 6.2 6.1 4.5 4.2 4.2 4.7 0.9 14.9 12.7 12.9 13.8 12.9 11.9 11.5 12.6 13.6 12.2 3.0 3.1 3.5 3.7 3.8 IndusInd 1.4 1.4 2.2 2.4 2.6 0.1 0.0 0.2 0.4 0.2 0.8 1.7 2.1 2.7 2.4 2.2 1.8 2.3 2.2 2.2 1.5 1.6 2.5 2.7 2.1 Others 2.4 3.0 5.0 7.0 8.4 0.2 0.2 0.2 0.7 1.6 0.2 0.1 0.1 0.6 2.4 0.6 0.2 0.5 1.2 5.0 3.4 4.5 7.6 10.4 11.6 Private (ex. SFB) 20.1 22.4 26.8 32.2 34.4 15.4 17.4 19.8 26.6 22.2 27.5 30.9 33.1 39.8 41.0 26.6 27.6 30.6 36.5 40.1 18.8 21.0 26.4 31.2 32.4 SFBs - - 0.3 0.3 0.4 - - 0.2 0.3 0.5 - - 0.9 1.1 1.3 - - 0.8 1.0 1.1 - - 0.1 0.1 0.1 RRBs 2.6 2.6 2.5 2.6 2.5 18.9 18.3 16.2 18.4 17.6 4.8 4.4 4.4 4.3 4.0 1.2 1.5 1.3 1.2 0.8 0.0 0.0 0.0 0.0 0.0

Source: Company, SLBC, Kotak Institutional Equities estimates

Exhibit 10: Share of micro-banking increased qoq to 65% AUM mix, March fiscal year-ends, 2016-2019, 1QFY21-2QFY21 (%)

Microbanking SME and others Retail Mortgages

100 1 02 4 4 7 10 10 26 26 25 80 1 1 1 9 9 9 60 99 91 86 40 86 64 64 65

20

- 2016 2017 2018 2019 2020 1QFY21 2QFY21

Notes: (1) Numbers from 2QFY20 are for the merged entity.

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 101 Banks Bandhan Bank

Exhibit 11: AUM growth of ~5-13% over the medium-term AUM, March fiscal year-ends, 2016-2022E

(Rs bn) AUM (LHS) YoY (RHS) (%) 1,000 60 65

51 800 52

37 38 600 39

400 26

10 10 200 7 13

156 235 323 448 718 770 847 932

- 0

2016

2017

2018

2019

2020

2021E 2022E 2023E

Notes: (1) Numbers from FY2020E are for the merged entity.

Source: Company, Kotak Institutional Equities estimates

Deposit momentum continues

Overall deposit growth of 34% yoy and 9% qoq driven by ~60% yoy growth in savings deposits and ~16% yoy growth in retail term deposits. CASA ratio has improved ~100 bps qoq to 38% and further retail deposits comprise 77% of total deposits. Strong brand recognition in home state and rapid penetration into newer geographies is driving the rise in retail deposits. Bandhan’s market share of deposits in West Bengal continues its upward trajectory (up ~60 bps yoy to 3% in FY2020).

Exhibit 12: Deposit growth at 34% yoy Exhibit 13: CASA ratio at 37% Deposits, March fiscal year-ends, 2016-1QFY21 CASA, March fiscal year-ends, 2016-2QFY21

(Rs bn) Deposits (LHS) YoY (RHS) (%) (Rs bn) CASA (LHS) CASA ratio (RHS) (%) 650 100 250 60 92

520 80 200 48 41 37 37 38 34 390 60 150 36 46 29 39 22 260 32 34 40 28 100 24

130 20 50 12

121 232 339 432 571 606 661 26 68 116 176 210 225 253

0 - 0 -

2017 2018 2016 2019 2020

2016

2017

2018

2019

2020

1QFY21 2QFY21 1QFY21 2QFY21 Notes: Notes: (1) Numbers from 2QFY20 are for the merged entity. (1) Numbers from 2QFY20 are for the merged entity.

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

102 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bandhan Bank Banks

Exhibit 14: Bandhan’s continues to gain deposit market share in West Bengal; strong growth across rural, semi-urban, urban and metro Deposit market share in West Bengal, March fiscal year-ends, 2016-2020 (%)

Overall Rural Semi-urban Urban Metropolitan 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 PSU Banks Allahabad 7.8 7.5 7.1 6.6 6.4 9.7 10.2 9.8 8.9 9.2 7.4 7.5 6.6 6.1 6.0 7.4 7.4 7.5 6.9 6.8 7.5 6.5 5.8 5.4 4.9 BOI 4.8 4.8 4.5 4.3 4.2 2.7 3.1 6.7 5.7 5.9 3.3 3.4 5.9 5.0 5.3 6.0 5.9 5.5 4.5 4.1 5.1 5.1 2.5 3.2 3.1 PNB 3.8 3.8 3.8 3.7 3.8 8.3 7.7 5.9 5.1 5.6 3.5 3.3 2.7 1.4 1.6 3.7 3.8 4.2 4.2 4.3 2.2 2.5 3.1 3.5 3.5 SBI 25.3 25.7 25.4 24.7 25.1 31.2 30.7 31.1 27.7 29.1 31.8 32.6 32.9 30.9 29.1 26.2 26.2 22.5 22.7 24.9 20.8 21.4 22.4 22.2 22.1 United 10.9 11.0 9.9 9.7 9.9 16.8 16.3 14.0 12.8 13.8 12.3 12.4 10.2 11.7 13.2 12.4 11.9 10.7 10.5 10.9 7.3 8.0 7.6 6.9 6.1 Others 30.4 28.7 28.0 24.0 23.2 16.9 15.9 15.4 14.1 14.9 25.4 22.7 22.2 20.2 22.0 29.1 27.6 29.9 27.1 24.9 37.6 36.1 34.1 28.1 25.9 PSU 83.0 81.4 78.8 73.0 72.5 85.7 83.8 82.9 74.2 78.5 83.7 81.8 80.5 75.4 77.0 84.9 82.8 80.3 76.0 75.8 80.6 79.4 75.4 69.3 65.6 Private Banks Axis 5.3 5.3 4.9 4.9 5.2 1.1 1.1 1.1 0.7 0.8 5.4 5.6 5.5 4.8 5.1 6.8 6.8 6.5 6.3 6.2 5.7 5.8 5.2 6.0 6.4 Bandhan 0.6 1.4 2.0 2.4 3.0 0.8 1.5 2.1 2.5 3.0 0.4 1.5 1.9 2.4 3.1 0.4 2.1 2.7 3.4 3.8 0.7 0.9 1.3 1.7 2.3 HDFC 4.1 4.4 4.7 4.9 5.8 0.4 0.5 0.4 0.5 0.6 1.4 1.6 1.4 1.5 1.8 3.3 3.5 3.7 4.2 4.6 6.7 7.3 8.3 9.1 10.3 ICICI 3.1 3.3 3.8 4.4 4.6 1.2 1.9 1.9 2.0 2.6 4.8 4.9 4.8 5.6 6.5 3.6 3.6 4.6 5.4 5.0 3.1 3.1 3.6 4.5 4.4 IndusInd 0.6 0.6 0.6 0.8 0.6 0.0 0.0 0.0 0.0 0.1 0.2 0.3 0.3 0.5 0.5 0.2 0.2 0.2 0.2 0.3 1.2 1.1 1.3 1.6 1.2 Others 0.9 1.0 2.1 3.2 5.2 0.1 0.1 0.1 0.1 0.8 0.0 0.0 0.0 0.2 2.0 0.2 0.1 0.4 0.9 3.3 2.0 2.4 4.8 7.7 9.7 Private (ex. SFB) 14.6 16.0 18.0 20.7 24.3 3.6 5.1 5.6 5.7 7.9 12.3 14.0 14.0 14.9 19.0 14.4 16.3 18.2 20.4 23.2 19.4 20.6 24.5 30.6 34.3 RRBs 2.4 2.6 3.2 3.1 3.1 10.7 11.1 11.5 10.0 13.5 4.0 4.2 5.5 4.8 3.9 0.8 0.9 1.5 1.8 0.8 0.0 0.0 0.0 0.0 0.0

Source: Company, SLBC, Kotak Institutional Equities estimates

Exhibit 15: Deposit growth to remain strong Exhibit 16: CASA growth in line with overall deposit growth Deposits, March fiscal year-ends, 2016-2023E CASA, March fiscal year-ends, 2016-2023E

Deposits (LHS) YoY (RHS) CASA (RHS) CASA ratio (LHS) (Rs bn) (%) (Rs bn) (%) 500 41 45 1,600 110 37 92 34 34 33 400 31 36 1,280 90 29

300 27 960 70 22

46 640 50 200 18 32 35 28 29 28 320 30 100 9

121 232 339 432 571 770 991 1,270 26 68 116 176 210 264 325 397

- 10 - -

2016

2017

2018

2019

2016

2017

2018

2019

2020E

2021E

2022E

2023E

2020E

2021E 2022E 2023E Notes: Notes: (1) Numbers from FY2020E are for the merged entity (1) Numbers from FY2020E are for the merged entity

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

NIMs decline but spreads stable qoq; cost of funds at 6.2%

Bandhan reported NIM of 8% in 2QFY20 (-20 bps qoq) driven by decline of ~20-30 bps in cost of funds and lending yields. Reported cost of funds now stands at 6.2% while reported yields were 13.3%. We await the progress towards loan mix shift outlined by the bank as it has a bearing on the margins over the medium-term. Improving share of CASA and retail deposits is supporting fall in cost of funds.

We forecast calculated NIM to decline by ~150 bps over FY2020-23E to ~6.5% on the back of a decline in yields led by the increasing share of low yielding assets in the loan book. Drop in cost of funds will be gradual as CASA deposits would accrete at a slower pace than overall deposit growth.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 103 Banks Bandhan Bank

Exhibit 17: NIM has been largely stable Exhibit 18: NIM is expected to compress further Yield on advances, cost of funds and NIM, March fiscal year-ends, Yield on advances, cost of funds and NIM, March fiscal year-ends, 2QFY19-2QFY21 (%) 2017-2023E (%)

Yield on advances (LHS) Cost of funds (LHS) Yield (LHS) Cost of funds (LHS) NIM (RHS) NIM (RHS) 17.5 12.0 16.0 12.5 15.9 15.0 10.3 10.5 10.7 10.5 13.1 13.4 13.4 12.8 10.0 14.0 12.5 9.6 8.2 7.9 8.1 8.2 8.0 9.8 11.7 9.1 8.7 9.6 7.5 10.5 8.3 8.3 7.2 15.6 15.7 7.4 15.3 15.4 6.7 14.2 14.0 13.8 13.6 13.3 6.4 5.0 7.0 4.8

3.2 2.5 3.5 2.4 6.3 6.3 6.1 6.6 7.2 7.2 6.7 6.4 6.2 0.0 0.0 7.6 6.1 5.5 7.8 6.3 6.3 6.2

0.0 -

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

2017

2018

2019

2020E

2021E 2022E 2023E Notes: Notes: (1) Numbers from 2QFY20 are for the merged entity. (1) Numbers from FY2020E are for the merged entity (2) Yield and NIM on interest earning assets Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities estimates

Exhibit 19: Opex growth was moderate at 2QFY21 Exhibit 20: Cost-to-income ratio range-bound in 30-35% Operating expenses, March fiscal year-ends, 2016-2QFY21 Cost-to-income and cost-to-average AUM, March fiscal year-ends, 2016-2QFY21 (%) (Rs bn) Operating expenses (LHS) YoY (RHS) (%) 25 70 Cost-to-income Cost-to-average AUM 66 75 5.5 5.2 20 56 5.0 60 5.0 38 4.7 4.7 15 34 42 28 45 4.5 10 28 19 16 30 4.0 5 14 3.6 3.4 15 3.5 6.2 10.2 13.1 18.1 24.3 6.1 6.8 0 0 56.9 36.3 35.0 32.6 30.8 27.9 29.4

0 3.0

2016

2017

2018

2019

2020

1QFY21

2QFY21

2016 2017 2018 2019 2020 2QFY21 Notes: 1QFY21 (1) Numbers from 2QFY20 are for the merged entity. Notes: (1) Numbers from 2QFY20 are for the merged entity Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities

104 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bandhan Bank Banks

Exhibit 21: Employee addition remains strong; branch expansion has moderated Branches and employees, March fiscal year-ends, 2016-2QFY21 (#)

Branches (LHS) Employees (RHS) 1,100 50,000

45,549 880 40,000 41,563 39,750

660 30,000 32,342 28,159 440 20,000 22,585 19,654

220 10,000

656 840 936 986 1,018 1,018 1,045 - - 2016 2017 2018 2019 2020 1QFY21 2QFY21

Notes: (1) 3QFY20 numbers are for the merged entity.

Source: Company, Kotak Institutional Equities

Exhibit 22: Cost growth to moderate in FY2021E Exhibit 23: Cost-to-income to inch up again in FY2022E Operating expenses, March fiscal year-ends, 2016-2022E Cost-to-income and cost-to-average AUM, March fiscal year-ends, 2016-2022E (%) Operating expenses (LHS) YoY (RHS) (Rs bn) (%) Cost-income (LHS) Cost-to-average AUM (RHS) 45 75 66 60 6.0 5.2 5.1 4.7 4.7 36 60 4.4 48 4.1 4.8 3.8 27 38 45 32 36 3.6 28 26 26 18 30 24 2.4 15 9 15 12 1.2 6 10 13 18 24 27 35 44 - 0 57 36 35 33 31 28 33 37

0 0.0

2016

2017

2018

2019

2020E

2021E

2022E

2023E

2016

2017 2018

2019

2020E

2021E 2022E Notes: 2023E (1) Numbers from FY2020E are for the merged entity. Notes: (1) Numbers from FY2020E are for the merged entity. Source: Company, Kotak Institutional Equities estimates Source: Company, Kotak Institutional Equities estimates

Other key highlights of the quarter

 Cost control. Growth in operating expenses was at ~16% yoy in 2QFY21 (up 10% qoq), lower than overall revenue growth. Cost-to-income ratio as moved back to pre-Covid levels of ~30%. The company operates at one of the lowest cost ratios compared to other major private sector banks. Management expects cost ratios to rise from these levels as business activity picks up. We build-in stable cost-to-income ratio of ~35% over FY2021-23E.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 105 Banks Bandhan Bank

 Non-interest income up 6% yoy. Non-interest income growth was at 6% yoy. While the breakup is not disclosed, PSLC fees s likely to be a significant contributor. 90% of overall AUM of the bank is PSL compliant.

 Strong capital position. Capital position is robust with CAR at 25.7% and tier-I ratio at 22%.

Exhibit 24: Share of non-interest income is stable Exhibit 25: CAR stays at comfortable levels Break-up of total revenues, March fiscal year-ends, 2016-2QFY21 (%) CAR and tier-I, March fiscal year-ends, 2016-2QFY21 (%)

Non-interest income Net interest income CAR Tier-I 100 35

31.5 80 28 27.9 24.8 25.2 60 21 23.2 86 85 81 81 80 82 83 22.2 32.7 40 14 29.2 26.4 27.4 26.5 25.7

20 7

14 15 19 19 20 18 17

- 0

2016

2017

2018

2019

2020

2017

2018

2019

2020

1QFY21

2QFY21 1QFY21 2QFY21

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

Exhibit 26: Bandhan Bank – change in estimates Change in estimates, March fiscal year-ends, 2021-2023E

New estimates (Rs mn) Old estimates (Rs mn) change (%) New estimates (Rs mn) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E AUM growth (%) 7 10 10 3 10 10 383 bps 0 bps 0 bps MFI AUM to overall AUM (%) 66 66 66 65 65 65 66 bps 66 bps 66 bps Net interest income 78,953 85,372 96,311 79,924 85,053 95,985 (1.2) 0.4 0.3 NIM (%) 8.2 7.4 6.7 8.3 7.4 6.7 -10 bps 3 bps 3 bps Other income 16,470 19,181 22,325 16,470 19,181 22,325 — — — Total income 95,424 104,553 118,635 96,394 104,234 118,309 (1.0) 0.3 0.3 Operating expenses 28,223 34,320 42,771 28,223 34,320 42,771 — — — Employee expenses 16,167 19,893 24,478 16,167 19,893 24,478 — — — Other expenses 12,056 14,427 18,293 12,056 14,427 18,293 — — — Loan loss provisions 23,705 26,289 22,244 24,660 25,349 21,449 (3.9) 3.7 3.7 PBT 43,486 43,934 53,610 43,501 44,555 54,079 (0.0) (1.4) (0.9) PAT 32,439 32,773 39,991 32,451 33,237 40,342 (0.0) (1.4) (0.9) PBT-treasury+provisions 66,624 69,556 75,087 67,594 69,237 74,762 (1.4) 0.5 0.4 EPS (Rs) 20.1 20.4 24.8 20.2 20.6 25.1 (0.0) (1.4) (0.9) Adj. BVPS (Rs) 110 130 156 110 130 158 (0.1) 0.5 (1.3) RoA (%) 3.2 2.8 2.7 3 3 3 0 bps -4 bps -2 bps RoE (%) 19.3 16.3 16.9 19 17 17 -1 bps -21 bps -10 bps Gross NPA (%) 2.7 3.1 2.2 2.8 3.5 1.9 -9 bps -39 bps 34 bps Slippage ratio (%) 5.0 4.5 3.0 5.0 5.0 3.0 0 bps -50 bps 0 bps Credit cost (%) 3.3 3.3 2.5 3.5 3.3 2.5 -20 bps 0 bps 0 bps Cost-income ratio (%) 30 33 36 29 33 36 30 bps -10 bps -10 bps

Source: Company, Kotak Institutional Equities estimates

106 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bandhan Bank Banks

Exhibit 27: Bandhan is trading at 2.4X one year-forward book Exhibit 28: Valuation is broadly in line with peers Rolling one year forward PER and PBR, March fiscal year-ends, April Rolling one year forward PBR divergence to other major private banks, 2018-Oct 2020 (X) March fiscal year-ends, April 2018-Oct 2020 (X)

Rolling PER (X) (LHS) Rolling PBR (X) (RHS) 3.0 45 8.0

2.5 37 6.6

2.0 29 5.2

21 3.8 1.5

13 2.4 1.0

5 1.0 0.5

Jun-18

Jun-19

Jun-20

Oct-18

Feb-19

Oct-19

Feb-20

Oct-20

Apr-18

Apr-19

Apr-20

Dec-18

Dec-19

Jun-18 Jun-19 Jun-20

Aug-18

Aug-19

Aug-20

Oct-18 Oct-19 Oct-20

Feb-19 Feb-20

Apr-18 Apr-19 Apr-20

Dec-18 Dec-19

Aug-19 Aug-20 Aug-18

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH 107 Banks Bandhan Bank

Exhibit 29: Bandhan Bank- key growth rates and ratios March fiscal year-ends, 2017-2022E (%)

2018 2019 2020 2021E 2022E 2023E Growth rates (%) Income statement NII 26 48 41 25 8 13 Other income 72 51 46 6 16 16 Total income 33 49 42 21 10 13 Operating expenses 28 38 34 16 22 25 PPOP 36 54 45 23 5 8 Provisions and contingencies 323 96 90 70 11 (15) Loan loss provisions 316 128 83 70 11 (15) PBT 21 47 35 7 1 22 PAT 21 45 55 7 1 22 Balance sheet Cash and bank balances (25) 5 44 (26) 10 9 Investment 52 20 53 33 79 63 Net loans and advances 76 33 68 16 10 10 Fixed assets (5) 39 11 16 1 0 Total assets 47 27 63 15 23 25 Deposits 46 28 32 35 29 28 Term 36 15 41 40 32 31 CASA 70 52 19 26 23 22 Net liabilities 35 30 69 13 25 26 Key calculated ratios (%) Yield on loans 16.4 16.5 17.9 15.3 14.8 14.8 Yield on investment 7.1 6.7 6.6 6.7 6.7 6.6 Yield on earning assets 13.1 13.4 15.0 13.3 12.5 11.7 Interest on deposits 5.9 5.4 6.6 6.5 6.4 6.2 Cost of funds 6.1 5.5 7.8 6.3 6.3 6.2 NIM 8.3 9.1 8.7 8.2 7.4 6.7 Credit cost 1.4 2.2 2.6 3.3 3.3 2.5 Cost to income 35.0 32.6 30.8 29.6 32.8 36.1 Cost to assets 3.5 3.6 3.3 2.9 2.9 2.9 RoE decomposition (%) NII 7.9 8.3 8.0 7.8 7.3 6.6 Loan loss provisions 0.9 1.4 1.8 2.4 2.2 1.5 Other income 1.8 2.0 2.0 1.6 1.6 1.5 Total income 9.7 10.3 10.0 9.5 8.9 8.1 Operating expenses 3.4 3.4 3.1 2.8 2.9 2.9 PPOP 6.3 6.9 6.9 6.7 6.0 5.2 (1- tax rate) 65.4 64.8 74.6 74.6 74.6 74.6 RoA 3.5 3.6 3.8 3.2 2.8 2.7 Average assets/ equity 5.6 5.2 6.0 6.0 5.8 6.1 RoE 19.5 19.0 22.9 19.3 16.3 16.9

Source: Company, Kotak Institutional Equities estimates

108 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bandhan Bank Banks

Exhibit 30: Bandhan Bank- key financials March fiscal year-ends, 2017-2022E (Rs mn)

2018 2019 2020 2021E 2022E 2023E Income statement Interest income 48,023 66,441 108,855 128,294 144,289 168,786 Interest expenses 17,701 21,480 45,616 49,341 58,918 72,475 NII 30,322 44,961 63,239 78,953 85,372 96,311 Loan loss provisions 3,331 7,598 13,922 23,705 26,289 22,244 Other income 7,062 10,630 15,492 16,470 19,181 22,325 Total income 37,384 55,591 78,731 95,424 104,553 118,635 Operating expenses 13,083 18,110 24,265 28,223 34,320 42,771 PPOP 24,301 37,482 54,466 67,201 70,233 75,864 PBT 20,559 30,131 40,534 43,486 43,934 53,610 Taxes 7,103 10,616 10,297 11,047 11,160 13,618 PAT 13,456 19,515 30,237 32,439 32,773 39,991 Tax rate (%) 35 35 25 25 25 25 Balance sheet items Assets Cash and bank balances 55,106 58,027 83,529 61,880 68,193 74,613 Net value of investment 83,719 100,375 153,518 203,422 364,724 593,837 Net loans and advances 297,130 396,434 666,299 770,366 847,402 932,142 Fixed assets 2,381 3,312 3,688 4,260 4,305 4,312 Other assets 4,764 6,270 10,144 11,158 12,274 13,502 Net assets 443,101 564,417 917,178 1,051,087 1,296,899 1,618,405 Liabilities Deposits 338,690 432,316 570,815 769,591 990,796 1,269,699 CASA (%) 34.3 40.8 36.8 34.3 32.8 31.3 Borrowings 2,850 5,214 163,792 60,362 44,848 38,642 Net liabilities 349,281 452,400 765,223 866,693 1,079,732 1,361,247 Shareholder's equity Paid up capital 11,928 11,931 16,102 16,102 16,102 16,102 Reserves and surplus 81,891 100,087 135,852 168,291 201,065 241,056 Shareholder's funds 93,819 112,017 151,955 184,394 217,167 257,159 AUM 323,390 447,760 718,460 770,366 847,402 932,142

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 109 SELL Just Dial (JUST) https://ultraviewer.et/en/own Internet Software & Services NOVEMBER 02, 2020 load.html RESULT, CHANGE IN RECO. Sector view: Cautious

Core business on a weak trajectory. JUST’s 2QFY21 revenues were down 31% yoy CMP (`): 597 and missed estimates on weak demand from SMEs. While collections improved 41% Fair Value (`): 550 sequentially, they were still only at 75% of pre-Covid levels in September 2020. We BSE-30: 39,758 believe revenue growth from the core business may remain tepid. Value creation from new products will take time as well as significant investments towards customer acquisition; downgrade to SELL with an unchanged FV of Rs550. Just Dial Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 597/550/SELL EPS (Rs) 25.9 29.9 35.5 52-week range (Rs) (high-low) 718-250 EPS growth (%) (38.2) 15.3 18.8 Mcap (bn) (Rs/US$) 37/0.5 P/E (X) 23.0 20.0 16.8 ADTV-3M (mn) (Rs/US$) 1,336/18 P/B (X) 3.0 2.6 2.3 Shareholding pattern (%) EV/EBITDA (X) 15.4 12.8 10.6 Promoters 33.4 RoE (%) 12.7 14.0 14.4 FPIs/MFs/BFIs 35.4/14.6/1.3 Div. yield (%) 0.0 0.0 0.0 Price performance (%) 1M 3M 12M Sales (Rs bn) 7 8 8 Absolute 51.4 62.8 7.0 EBITDA (Rs bn) 2 2 2 Rel. to BSE-30 47.3 53.9 8.1 Net profits (Rs bn) 2 2 2

Revenues miss estimates on slower-than-expected recovery of SME demand

JUST reported a weaker-than-expected performance with revenues missing our estimates by 8%. Revenue decline of 31% yoy was driven by higher-than-expected decline in paid campaigns (down 15% yoy) and realizations (down 19% yoy). The yoy reduction in realizations was possibly due to a higher mix of lower-priced campaigns and some payment holiday/discounts provided to existing customers. Collections grew 41% qoq, but were down 28% yoy indicating that demand from SMEs remains muted post-Covid. This resulted in unearned revenues declining 27% yoy and 3% qoq. Collections are currently trending at 75% of pre-Covid levels and may take some more time to recover fully.

Stringent cost controls drive healthy margin print

Aggressive cost controls drove better-than-expected EBITDA margins of 26.7% (vs KIE estimate of 24.6%). Cost reduction of 30% yoy can be attributed to lower advertising (almost nil during the quarter) and sales headcount rationalization (21% yoy decline in employee headcount). We believe advertising spends will come back in 4QFY21 when JD Mart goes live though some other fixed cost savings may sustain.

Traffic inching up but still below pre-Covid levels Garima Mishra JUST’s unique user count came in at 130.6 mn during 2QFY21, a decline of 19% yoy. The company highlighted that organic traffic run-rate is 14% higher than pre-Covid levels and currently all of the traffic is being acquired without advertising. We however believe that JUST Kawaljeet Saluja will have to step up advertising in order to grow traffic and to also advertise JD Mart. Shubhangi Nigam New businesses will take time to ramp up; downgrade to SELL

Value creation from JUST’s new platforms will take time as there are already competing platforms. Further, JUST is relying on its existing six million B2B customers on JD app to kickstart its JD Mart operations. Hence, we view the new platforms as extensions of the current business and not entirely new revenue streams. Recent stock price performance drives a downgrade in our rating to SELL with unchanged FV of Rs550 based on December 2022 P/E of 14X. [email protected] Contact: +91 22 6218 6427

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Just Dial Internet Software & Services

Exhibit 1: Revenue decline of 31% yoy driven by decline in paid campaigns and lower realizations Standalone quarterly financials of Just Dial, March fiscal year-ends (Rs mn)

Change (%) Yoy growth Yoy growth 2QFY21 2QFY21E 2QFY20 1QFY21 KIE Est yoy qoq 1HYF21 1HYF20 (%) FY2021E FY2020 (%) Sales 1,675 1,821 2,426 1,624 (8.0) (30.9) 3.1 3,300 4,827 (31.6) 6,791 9,531 (28.8) Expenses (1,228) (1,374) (1,753) (1,249) (10.6) (29.9) (1.7) (2,478) (3,512) (29.5) (5,258) (6,802) (22.7) Employee (1,061) (1,161) (1,365) (1,078) (8.6) (22.3) (1.5) (2,139) (2,705) (4,284) (5,329) (19.6) Other expenses (167) (213) (388) (172) (21.6) (56.9) (2.5) (339) (807) (974) (1,473) (33.8) Operating profit 447 447 673 375 (0.1) (33.6) 19.2 822 1,315 (37.5) 1,532 2,729 (43.8) Other income 267 400 441 769 (33.4) (39.6) (65.3) 1,036 752 1,048 1,397 EBIDT 714 847 1,114 1,144 (15.8) (35.9) (37.6) 1,858 2,067 (10.1) 2,581 4,126 (37.5) Interest (25) (20) (23) (15) 26.0 11.5 69.1 (40) (41) (88) (89) Depreciation (108) (120) (130) (116) (10.1) (16.7) (7.3) (224) (266) (467) (521) PBT 580 707 962 1,013 (18.0) (39.6) (42.7) 1,593 1,761 (9.5) 2,026 3,517 (42.4) Tax (107) (150) (192) (180) (28.7) (44.4) (40.4) (286) (418) (424) (793) Net profit 474 557 769 833 (15.1) (38.5) (43.2) 1,307 1,342 (2.6) 1,602 2,723 (41.2) Extraordinary items — — — — — — — — Reported PAT 474 557 769 833 (15.1) (38.5) (43.2) 1,307 1,342 (2.6) 1,602 2,723 (41.2) Key ratios (%) Employee cost/sales 63.3 63.7 56.3 66.4 64.8 56.0 63.1 55.9 Other operating expenses/sales 10.0 11.7 16.0 10.6 10.3 16.7 14.3 15.4 EBITDA margin 26.7 24.6 27.7 23.1 24.9 27.2 22.6 28.6 PBT margin 34.6 38.8 39.6 62.3 48.3 36.5 29.8 36.9 Tax rate 18.4 21.2 20.0 17.7 18.0 23.8 20.9 22.6 PAT margin 28.3 30.6 31.7 51.3 39.6 27.8 23.6 28.6 Other operating metrics Total campaigns (#) 448,600 467,181 528,915 444,934 (4.0) (15.2) 0.8 448,600 528,915 402,177 536,236 (25.0) Price per campaign (Rs) 14,938 15,593 18,345 14,603 (4.2) (18.6) 2.3 14,711 18,254 16,885 17,774 (5.0) Headcount (#) 10,305 — 12,997 10,984 (20.7) (6.2) Advertising spend (Rs mn) 2 — 190 3 (98.9) (33.3) Unearned revenue (Rs mn) 2,795 — 3,804 2,871 (26.5) (2.6)

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Campaign additions increasingly driven to Tier II/III cities

Yoy growth 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 (%) Total Revenue 2,114 2,210 2,268 2,323 2,402 2,426 2,354 2,350 1,624 1,675 (30.9) Tier I 1,639 1,669 1,678 1,695 1,705 1,698 1,624 1,621 1,072 1,106 (34.9) Tier II/III 476 542 590 627 696 728 730 728 552 570 (21.7) % share of Tier II/III 23 25 26 27 29 30 31 31 34 34 Campaigns 452,900 470,620 485,410 500,838 515,300 528,915 534,960 536,236 444,934 448,600 (15.2) Tier I 253,624 258,841 262,121 262,940 257,650 264,458 262,130 262,756 200,220 201,870 (23.7) Tier II/III 199,276 211,779 223,289 237,898 257,650 264,458 272,830 273,480 244,714 246,730 (6.7) % share of Tier II/III 44 45 46 48 50 50 51 51 55 55

Source: Company, Kotak Institutional Equities

JUST’s revenue stream is dependent on spending on advertisements by SMEs. Loss of revenues on account of Covid for SMEs has driven them to stop/defer spends on the platform. Further, the business mortality may also result in erosion of JUST’s client base.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 111 Internet Software & Services Just Dial

Exhibit 3: Tepid realizations implying deteriorating pricing power Price per campaign, March fiscal year-ends, 1QFY18-2QFY21 (Rs 000s)

Tier II/III realizations Tier I realizations (Rs, 000s) 30

25

26.5

25.8

25.8

25.8

25.7 25.7

25.6 25.6

25.0 25.0

24.9 24.9

24.8 24.7 24.7

20 24.4

23.6 23.6

21.9 21.9 21.4 15

10

11.0 11.0

10.8

10.7 10.7

10.7

10.6 10.6

10.5 10.5

9.5 9.5

10.2 10.2

9.2 9.2

9.0 9.0

8.9

8.8 8.4

5 8.0

0

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21 2QFY21

Source: Company, Kotak Institutional Equities

Exhibit 4: Campaign count declined by 15% yoy End of the period paid campaigns (#, LHS) and yoy growth (%, RHS), March fiscal year-ends

(#, '000) Yoy growth (%)

32.0

510 28.0 536 535 24.0 470 529

515 20.0 501

430 485 16.0

471

453

449 445

390 445 12.0

441

440

436 435 425 8.0 350 409

389 4.0

310 369

355 0.0

350 347

270 331 -4.0 313

230 296 -8.0

278 -12.0

262

250 222 190 239 -16.0

150 -20.0

1QFY14

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21 2QFY21

Source: Company, Kotak Institutional Equities

112 KOTAK INSTITUTIONAL EQUITIES RESEARCH Just Dial Internet Software & Services

Exhibit 5: Total paid campaigns improved by ~4k in 2Q Sequential campaign addition, March fiscal year-ends (#, 000)

(#, '000)

40 18 18 21 19 16 17 13 16 17 16 14 16 18 15 15 14 14 20 11 11 8 6 3 5 1 4 1 5 1 4 0

-20

1QFY14

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20 1QFY21 -40 2QFY21 -60 -80

-100 (91)

Source: Company, Kotak Institutional Equities

Exhibit 6: Realization has improved sequentially but remain low due to higher tier II/III contribution Yoy change in per campaign realization, March fiscal year-ends (%)

Yoy growth (%)

8.0

3.0

-2.0

4QFY14 1QFY15 1QFY16 1QFY17 2QFY17 2QFY18 3QFY18 3QFY19 4QFY19 4QFY20 1QFY21 2QFY14 3QFY14 2QFY15 3QFY15 4QFY15 2QFY16 3QFY16 4QFY16 3QFY17 4QFY17 1QFY18 4QFY18 1QFY19 2QFY19 1QFY20 2QFY20 3QFY20 2QFY21 -7.0 1QFY14

-12.0

-17.0

-22.0

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 113 Internet Software & Services Just Dial

Exhibit 7: Steady growth in listings database Total listings database of Just Dial, March fiscal year-ends (mn)

(#, mn) 30 30 29 29 28 28.0 27 25 26 24 24.0 22 23 20 21 19 20.0 17 18 16 16 17 17 15 15 16 16.0 14 15 15 12 12.0 10 11 9 9 10 8.0

4.0

-

3QFY13

4QFY13

1QFY14

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21 2QFY21

Source: Company, Kotak Institutional Equities

Exhibit 8: Calculated billings significantly below pre-Covid run-rate Unearned revenue growth, March fiscal year-ends

1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 Total billings (Rs mn) 2,497 2,246 2,305 2,591 2,339 2,239 2,262 1,998 1,135 1,599 Yoy growth (%) 21 24 13 4 (6) (0) (2) (23) (51) (29) Unearned revenue (Rs mn) 3,713 3,749 3,786 4,054 3,991 3,804 3,712 3,360 2,871 2,795 Yoy growth (%) 28 35 33 22 7 1 (2) (17) (28) (27) Revenue (Rs mn) 2,114 2,210 2,268 2,323 2,402 2,426 2,354 2,350 1,624 1,675 Yoy growth (%) 11 14 15 16 14 10 4 1 (32) (31)

Source: Company, Kotak Institutional Equities

Exhibit 9: Core and non-core employee count declines sharply in 2QFY21 End of the period employee count in sales and other functions, March fiscal year-ends (#, ‘000)

Sales and marketing (#) Others (#) (#, '000)

12 3.4 3.3 3.2 3.3 3.0 3.5 3.3 3.2 10 4.5 4.3 3.4 3.5 3.3 2.9 4.4 3.9 3.4 3.4 2.6 4.5 4.4 8 4.2 4.1 3.9 3.6 3.7 6 10.29.7 9.9 8.8 9.2 9.2 9.4 9.4 7.5 7.9 7.8 7.5 7.6 8.1 8.1 7.7 6.8 7.5 7.3 4 6.2 6.2 6.0 5.8 5.6 5.3 5.5

2

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

Source: Company, Kotak Institutional Equities

x

114 KOTAK INSTITUTIONAL EQUITIES RESEARCH Just Dial Internet Software & Services

Exhibit 10: Revenue per employee improved in 2Q End of the period employee count (#, LHS) and revenue per employee (Rs 000, RHS), March fiscal year-ends

(#, '000) Revenue per employee (Rs 000)

16 190 180 14 170 12 160 150 10 140 8 130 120 6 110

4 100

1QFY14

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21 2QFY21

Source: Company, Kotak Institutional Equities

x

Exhibit 11: Campaigns per sales employee metric in 2Q End of the period sales and marketing employee count (#, LHS) and campaigns per employee (#, RHS), March fiscal year-ends

(#, '000) Campaigns per employee (#)

11 63

10 60 9 57 8 54 7 51 6

5 48

4 45

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21 2QFY21

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 115 Internet Software & Services Just Dial

Exhibit 12: Mobile visitors’ share continues to improve Unique visitors of Just Dial across various platforms, March fiscal year-ends (mn)

(mn) Mobile Internet Voice 180

160 8 9 8 23 140 8 22 22 7 9 9 6 120 9 21 21 22 20 19 9 9 24 100 10 10 3 24 16 9 26 25 80 10 28 11 11 10 10 11 9 26 130128 60 10 24 125 12 11 11 25 110 111 28 27 24 25 27 101105 106 26 92 40 29 25 74 79 81 30 63 69 52 42 47 20 31 36 38 37 37 39 21 24 27

0

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21 2QFY21

Source: Company, Kotak Institutional Equities

Exhibit 13: Overall unique visitor count declined 19% yoy Key operating metrics of JUST's platform, March fiscal year-ends

Yoy growth 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 (%) Unique visitors (mn) 100.5 105.0 107.6 111.6 125.2 131.3 134.2 139.1 156.1 161.2 157.1 138.9 100.0 130.6 (19.0) Total listings (mn) 18.8 19.8 20.7 21.8 22.7 23.8 24.8 25.7 26.6 27.6 28.6 29.4 29.6 30.0 8.7 Total images in listings (mn) 35.6 38.5 41.4 44.8 47.9 51.4 55.3 60.3 66.8 73.4 78.4 84.2 85.1 96.6 31.6 Listings with geocodes (mn) 7.8 9.2 10.1 10.9 11.8 12.3 13.4 14.0 14.5 15.2 15.9 16.5 16.8 17.0 11.8 Ratings and reviews (mn) 73.1 76.1 79.0 81.9 85.1 88.0 91.3 95.6 98.1 100.8 105.9 109.7 110.5 111.9 11.0 Cumulative app downloads (mn) 15.4 17.3 18.7 19.8 20.8 21.8 22.8 23.7 24.5 25.4 26.0 26.6 27.1 27.6 8.7 Android 12.9 14.7 16.0 17.0 17.9 18.9 19.8 20.6 21.4 22.2 22.8 - 23.7 24.2 9.0 iOS 1.7 1.8 1.9 2.0 2.1 2.1 2.2 2.3 2.3 2.4 2.4 - 2.5 2.5 4.2 Others 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 - 0.8 0.8 - Add downloads per day (#) 26,533 23,871 19,103 15,501 14,351 13,555 14,437 12,588 13,131 13,849 11,912 10,120 7,693 9,207 (33.5)

Source: Company, Kotak Institutional Equities

Other takeaways from the earnings call

 Collections. Rs1.6 bn of total collections were achieved during the quarter. Exit run-rate was around Rs580 mn in September 2020 and October saw run-rate of Rs620-630 mn. Pre-Covid monthly run-rate was at Rs780 mn.

 Monthly contracts. Earlier in February 2020, the company pushed to increase monthly plans and improved it to 70% of total campaigns. The plan was to monetize customers using setup fees and provide customers with flexibility. The proportion of monthly plans has however dropped to 30%. Ideally, the company wants monthly plans to come back to 70-75% of total.

 Split between tier I and tier II/III cities. Tier II/III cities represent 34% of revenues and 55% in terms of campaigns. The company expects tier I cities to maintain their share of revenues. The growth in tier II/III however indicates lower ticket sizes (~40-45% of tier I).

 B2B business. Almost 22%,or ~Rs2 bn of annual revenues come from B2B businesses. The company has also diversified its presence across sectors with no sector contributing

116 KOTAK INSTITUTIONAL EQUITIES RESEARCH Just Dial Internet Software & Services

more than 3-4% to the business. Average annualized realization for B2B transaction is Rs20,000 which is ~10% higher than average. B2B customers have higher propensity to pay than B2C sellers. Most B2B packages are annual in nature. JD Mart is expected to be launched by December 2020 and will be a pan India platform but there will be focus on industrial belts where chances of monetization are higher. Three types of subscription pricing packages will be offered to JD Mart customers starting from Rs3,000 per month. JD Mart’s current 30 mn product listings are from businesses who are already listed on JD platform; there is thus a fair bit of overlap between JD and JD Mart.

 Churn. The churn has remained at 40-45% yearly for the last two decades. About 18- 20% can be attributed to business mortality.

We have tweaked our FY2021 EBITDA estimate as we account for lower-than-expected cost structure and the possibility that JUST may be able to keep ad-spends under check in 2HFY21. Note we are currently not baking in any incremental revenues or costs towards the new platforms.

Exhibit 14: Key changes in estimates for Just Dial, March fiscal year-ends, 2021-23E (Rs mn)

New Estimates Old estimates % revision 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E Total revenues 6,791 7,538 8,141 6,791 7,538 8,141 - - - EBITDA 1,532 1,672 1,790 1,431 1,672 1,790 7.1 0.0 0.0 EBITDA margin (%) 22.6 22.2 22.0 21.1 22.2 22.0 PAT 1,602 1,847 2,195 1,526 1,847 2,195 5.0 0.0 0.0 EPS (Rs) 25.9 29.9 35.5 24.7 29.9 35.5 5.0 0.0 0.0 Tax rate (%) 20.9 21.8 21.9 20.7 21.8 21.9 Yoy growth metrics (%) Sales (28.8) 11.0 8.0 (28.8) 11.0 8.0 EBITDA (43.8) 9.1 7.1 (47.6) 16.9 7.1 PAT (41.2) 15.3 18.8 (44.0) 21.0 18.8

Source: Kotak Institutional Equities estimates

x

Exhibit 15: Details of the assumptions for Just Dial, March fiscal year-ends, 2015-23E (Rs mn)

2015 2016 2017 2018 2019 2020 2021E 2022E 2023E Search Campaigns (#) 331,200 367,000 429,840 445,110 500,838 536,236 402,177 446,416 482,130 Revenues from core business (Rs mn) 5,898 6,640 7,062 7,818 8,915 9,531 6,791 7,538 8,141 Yoy growth (%) 27.9 12.6 6.4 10.7 14.0 6.9 (28.8) 11.0 8.0 Other revenues — 37 132 — — — — — — Total revenues 5,898 6,677 7,186 7,818 8,915 9,531 6,791 7,538 8,141 Yoy growth (%) 27.9 13.2 7.6 8.8 14.0 6.9 -28.8 11.0 8.0 Number of employees (#) 9,533 11,142 11,334 11,452 12,691 13,601 12,601 13,201 13,501 Employee cost/ sales (%) 52.4 56.9 61.4 56.5 55.8 55.9 63.1 61.4 61.6 Other expenses/sales (%) 19.5 21.5 23.4 22.5 18.6 15.4 14.3 16.4 16.4 EBITDA margin (%) 28.1 21.6 15.3 21.0 25.7 28.6 22.6 22.2 22.0 PAT 1,389 1,427 1,214 1,432 2,068 2,723 1,602 1,847 2,195 EPS (Rs) 19.7 20.5 17.5 21.2 31.9 42.0 25.9 29.9 35.5 Yoy growth (%) 15.2 2.8 (15.0) 18.0 44.4 31.7 (41.2) 15.3 18.8

Source: Company, Kotak Institutional Equities estimates

x

KOTAK INSTITUTIONAL EQUITIES RESEARCH 117 Internet Software & Services Just Dial

Exhibit 16: Financial snapshot of Just Dial, March fiscal year-ends, 2011-23E (Rs mn)

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E Profit model Total operating income 1,839 2,621 3,628 4,613 5,898 6,677 7,186 7,818 8,915 9,531 6,791 7,538 8,141 Operating expenses (1,385) (1,948) (2,619) (3,191) (4,240) (5,235) (6,090) (6,174) (6,626) (6,802) (5,258) (5,866) (6,351) Employee expenses (947) (1,308) (1,779) (2,286) (3,088) (3,799) (4,409) (4,416) (4,971) (5,329) (4,284) (4,626) (5,012) Operating and other expenses (438) (640) (841) (905) (1,152) (1,435) (1,681) (1,758) (1,654) (1,473) (974) (1,240) (1,339) EBITDA 454 672 1,008 1,422 1,658 1,442 1,096 1,644 2,289 2,729 1,532 1,672 1,790 Pre-tax profit 423 713 1,000 1,649 1,905 1,931 1,565 1,939 2,881 3,517 2,026 2,361 2,809 PAT 288 504 685 1,206 1,389 1,427 1,214 1,432 2,068 2,723 1,602 1,847 2,195 Weighted diluted number of shares (mn) 53 60 69 70 70 69 70 67 65 65 62 62 62 EPS (Rs) 5 8 10 17 20 21 17 21 32 42 26 30 36 Balance sheet Equity share capital 519 519 695 702 705 695 695 674 648 649 618 618 618 Reserves & surplus 433 542 3,556 4,643 6,029 6,699 8,356 9,118 9,339 12,228 11,661 13,509 15,703 Shareholders funds 954 1,033 4,259 5,345 6,734 7,394 9,052 9,792 9,986 12,877 12,279 14,126 16,321 Loan funds 1 — — — — — — — 42 764 764 802 843 Total source of funds 956 1,033 4,269 5,363 6,734 7,396 9,052 9,792 10,201 13,945 13,043 14,929 17,164 Net fixed assets 272 360 623 539 921 1,474 1,647 1,489 1,321 1,724 1,327 1,154 1,148 Investments 1,182 1,568 4,858 6,257 7,722 8,077 9,768 11,549 13,038 15,642 13,642 14,142 14,642 Cash balances 196 237 239 369 422 336 525 575 404 397 346 2,154 4,096 Net current assets excluding cash (707) (1,102) (1,452) (1,803) (2,355) (2,492) (3,128) (3,946) (4,562) (3,817) (2,271) (2,521) (2,723) Total application of funds 956 1,033 4,269 5,363 6,734 7,396 9,052 9,792 10,201 13,945 13,044 14,929 17,164 Cash flow statement Operating profit before working capital changes 357 595 846 1,379 1,630 1,738 1,615 1,796 2,406 3,333 2,156 2,213 2,397 Change in working capital/other adjustments 230 395 350 351 552 137 636 818 616 (745) (1,546) 250 202 Cashflow from operating activites 586 990 1,196 1,730 2,182 1,875 2,251 2,614 3,022 2,588 610 2,463 2,599 Cash (used)/ realised in investing activities (152) (179) (407) (89) (623) (864) (574) (207) (168) 163 (16) (43) (40) Free cash flow 435 811 789 1,641 1,559 1,012 1,677 2,407 2,854 2,751 595 2,420 2,559 Issue of share capital 8 (425) 2,541 43 170 (767) 444 (692) (1,874) 168 (2,200) — — Cash (used)/realised in financing activities 6 (427) 2,541 (121) 0 (767) 444 (692) (1,833) 801 (2,288) (92) (97) Cash generated/utilised 457 427 3,292 1,529 1,517 270 1,880 1,831 1,318 3,683 (2,051) 2,309 2,442 Cash+investments at beginning of year 922 1,378 1,805 5,097 6,626 8,143 8,414 10,294 12,124 13,442 16,038 13,987 16,296 Cash+investments at end of year 1,378 1,805 5,097 6,626 8,143 8,414 10,294 12,124 13,442 17,125 13,987 16,296 18,738

Notes: (a) Estimates FY2020 onwards are based on Ind-AS 116 and are hence not comparable to prior years.

Source: Company, Kotak Institutional Equities estimates

118 KOTAK INSTITUTIONAL EQUITIES RESEARCH REDUCE Mahindra Logistics (MAHLOG) https://ultraviewer.et/en/own Transportation NOVEMBER 02, 2020 load.html RESULT, CHANGE IN RECO. Sector view: Attractive

Swift recovery, swifter price move. MLL has seen swift growth across sectors driven CMP (`): 366 by changing demand patterns from clients as they look for integrated solutions and Fair Value (`): 340 partly on pent-up demand. Recovery in non-M&M non-auto segment, new order wins BSE-30: 39,758 and expansion in warehousing bode well for the coming quarters and factored in. We revise Fair Value to Rs340 (from Rs305) on ~8% higher estimates and unchanged 25X multiple. We downgrade to REDUCE (from ADD) after the recent uptick in stock price. Mahindra Logistics Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 366/340/REDUCE EPS (Rs) 5.6 11.7 15.6 52-week range (Rs) (high-low) 458-195 EPS growth (%) (37.5) 110.9 33.2 Mcap (bn) (Rs/US$) 27/0.4 P/E (X) 65.7 31.2 23.4 ADTV-3M (mn) (Rs/US$) 37/0 P/B (X) 4.6 4.1 3.6 Shareholding pattern (%) EV/EBITDA (X) 20.3 12.6 10.0 Promoters 58.4 RoE (%) 7.1 13.8 16.4 FPIs/MFs/BFIs 19.3/8.8/2.3 Div. yield (%) 0.0 0.0 0.0 Price performance (%) 1M 3M 12M Sales (Rs bn) 31 38 43 Absolute 4.3 22.7 (3.4) EBITDA (Rs bn) 1 2 2 Rel. to BSE-30 1.5 16.1 (2.4) Net profits (Rs bn) 0 1 1

Results ahead of our estimates on improved SCM revenues; mobility segment fails to recover

MLL reported better-than-expected results on higher SCM revenues and income-tax refunds. The key auto business reached pre-Covid levels for both M&M and non-M&M clients, driven by pent-up demand. Non-auto SCM revenues grew ~17% on strong growth and penetration gains in e-commerce and consumer segments. Gross margin improvement was contained due to one- time cost related to project starts, higher freight expenses and volatility in pricing of services. The PTS segment reported another weak quarter on weak demand from IT/ITES and financial services. MLL generated meaningful free cash flow in 1H (comparable to FY2020 levels) on account of release of working capital and release of pending income-tax refunds. Non-M&M SCM revenues deliver healthy growth print on low base

16% yoy growth in non-M&M revenues should be seen in the context of base effects – weakness on loss of large customer in the bulk segment and modest seasonality due to an early festive season. The growth thus is well-spread across transportation (non-auto) and warehousing segments. While uptick in transportation revenues may have a pent-up effect, the growth in warehousing is commendable. Here MLL’s express distribution and flex warehousing are adding to its existing offering. MLL expects the growth seen in e-commerce, consumer and auto to sustain in the coming quarters. The auto segment now accounts for less than one-fifth of the segmental revenues and almost half of the related warehousing and service revenue. Expect business reaching pre-Covid levels in next few quarters

MLL’s overall SCM revenues have reached near pre-Covid levels. Customer acquisition was Aditya Mongia strong during the quarter and the company added a few accounts from a leading capital goods company, consumer durable company, power tool manufacturer and freight forwarding. MLL continues to see opportunities in growth in warehousing services, multi-modal networks, omni- Teena Virmani channel distribution, service integration and greater level of technology adoption. Revise estimates by 8% and Fair Value to Rs340; downgrade to REDUCE on full valuations

We increase estimates to build in higher 45-55 bps margin and broadly unchanged revenues. We downgrade the stock to REDUCE from ADD on expensive 27X two-year forward earnings.

[email protected] Contact: +91 22 6218 6427

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

Exhibit 1: Results were ahead of our estimates on better-than-expected revenues and income-tax refunds Quarterly income statement of Mahindra Logistics (consolidated), March fiscal year-end, 2QFY21 (Rs mn)

% change % change 2QFY21 2QFY21E 2QFY20 1QFY21 vs est. yoy qoq 1HFY21 1HFY20 yoy FY2021E FY2020 % change Net revenue 8,325 7,659 8,524 4,105 9 (2) 103 12,430 17,515 (29) 31,064 34,711 (11) Total expenses (7,952) (7,374) (8,146) (4,127) 8 (2) 93 (12,079) (16,736) (28) (29,818) (33,129) (10) Employee benefit expense (726) (734) (732) (1) (1) (1,457) (1,451) (2,796) (2,946) RSU/ESOP charges — (30) (21) (21) (58) (60) (120) Freight and other expenses (7,226) (7,382) (3,374) (2) 114 (10,600) (15,227) (26,962) (30,062) EBITDA 373 283 378 (22) 32 (1) NM 351 778 (55) 1,246 1,583 (21) Other income 83 27 19 28 111 89 206 140 Depreciation & Amortization (209) (188) (177) (184) (393) (326) (816) (734) EBIT 247 123 219 (178) 101 13 NM 69 541 (87) 635 988 (36) Interest expense (45) (41) (42) (46) (90) (77) (164) (176) PBT 202 82 178 (224) 147 14 NM (21) 464 (105) 471 812 (42) Tax expense (54) (21) (65) 59 5 (164) (119) (257) Recurring PAT 149 61 113 (165) 142 31 NM (16) 300 (105) 353 554 (36) Exceptional items and prior period items (net) — — — — — — — — Reported PAT 149 61 113 (165) 142 31 NM (16) 300 (105) 353 554 (36) Associate profits (1) — (2) (2) (3) (3) — (6) Minority interest 3 1 1 8 11 1 3 3 Reported PAT for equity holders 150 62 112 (158) 142 34 NM (8) 298 (103) 355 551 (36) Adjusted EPS (excluding ESOPs and RSU cost) 2.1 1.0 2.0 (2.0) 108 4 (204) 0.1 4.9 (98) 5.6 9.0 (38) Key ratios Employee expense / sales 8.7 8.6 17.8 11.7 8.3 9.0 8.5 Other expenses / sales 86.8 86.6 82.2 85.3 86.9 86.8 86.6 EBITDA margin (%) 4.5 3.7 4.4 (0.5) 2.8 4.4 4.0 4.6 Adjusted EBITDA margin (%) 4.5 — 4.8 (0.0) 3.0 4.8 4.2 4.9 Effective tax rate (%) 26.6 25.2 36.4 26.4 23.9 35.4 25.2 31.7 PAT margin (%) 1.8 — 1.3 (4.0) (0.1) 1.7 1.1 1.6

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: SCM segment reported better-than-expected segmental profit; PTS reported another weak quarter Quarterly segmental financials of Mahindra Logistics (consolidated), March fiscal year-end, 2QFY21 (Rs mn)

% change 2QFY21 2QFY21E 2QFY20 1QFY21 vs est. yoy qoq 1HFY21 1HFY20 % change FY2021E FY2020 % change Revenues from customers SCM 8,039 6,884 7,553 3,926 17 6 105 11,965 15,562 (23) 29,529 31,035 (5) PTS 287 775 971 178 (63) (71) 61 465 1,951 (76) 1,535 3,675 (58) Adjustments and eliminations — — — — — — — — Total 8,325 7,659 8,524 4,105 9 (2) 103 12,430 17,514 (29) 31,064 34,711 (11) Gross profit (Rs mn) SCM 808 782 405 3 100 1,213 1,559 (22) 3,145 3,181 (1) PTS 16 85 (7) (81) (329) 9 178 (95) 95 337 (72) Total 824 867 398 (5) 107 1,222 1,737 (30) 3,239 3,518 (8) Gross margin (%) SCM 10.1 10.4 10.3 10.1 10.0 10.6 10.2 PTS 5.6 8.8 (3.9) 1.9 9.1 6.2 9.2 Total 9.9 10.2 9.7 9.8 9.9 10.4 10.1 Segment profit (Rs mn) SCM 631 516 629 241 22 0 162 872 1,271 (31) 2,318 2,529 (8) PTS 6 39 85 (7) (84) (93) (191) (1) 180 (100) 46 338 (86) Total 637 555 714 234 15 (11) 172 871 1,451 (40) 2,364 2,867 (18) Segment profit margin (%) SCM 7.9 7.5 8.3 6.1 7.3 8.2 7.8 8.1 PTS 2.1 5.0 8.8 (3.8) (0.1) 9.2 3.0 9.2 Total 7.7 7.2 8.4 5.7 7.0 8.3 7.6 8.3

Source: Company, Kotak Institutional Equities estimates

120 KOTAK INSTITUTIONAL EQUITIES RESEARCH Mahindra Logistics Transportation

Exhibit 3: For non-M&M SCM revenues, transportation revenues grew similar to warehousing revenues due to base effects Split of non-M&M revenues for MLL, March fiscal year-ends (Rs mn)

2Q19 2Q20 2Q21 Transportation 2,250 2,196 2,530 Warehousing 848 1,142 1,344 Total 3,098 3,338 3,874

Auto 831 600 706 Non-auto 2,267 2,639 3,168 Total 3,098 3,239 3,874

Source: Company, Kotak Institutional Equities

Exhibit 4: SCM business margin was boosted by improved revenue mix Trend in share of non-Mahindra Group clients in SCM revenues and corresponding segmental gross margin, March fiscal year-ends, 2013-23E (%)

Share of non-Mahindra Group clients in SCM revenues (LHS, %) SCM EBIT margin (RHS, %) 60 10.6 10.5 10.6 12 10.2 10.3 10.1 50 10 8.2 7.7 7.9 40 7.0 7.2 8 6.3 5.7 30 58 6 50 50 50 44 48 20 40 41 39 4 29 10 21 2 10 11

0 0

2013

2014

2015

2016

2017

2018

2019

2020

1Q21

2Q21

2021E

2022E 2023E

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 121 Transportation Mahindra Logistics

Exhibit 5: Working capital has improved on improved receivables and payables Balance sheet details of Mahindra Logistics (consolidated), March fiscal year-ends, 2013-1HFY21 (Rs mn)

Ind-AS 2015 2016 2017 2018 1HFY19 2019 1HFY20 2020 1HFY21 Shareholders' funds 2,646 3,018 3,477 4,196 4,481 4,982 5,080 5,447 5,342 Share capital 598 598 680 711 711 715 715 715 716 Reserves & surplus 2,048 2,420 2,797 3,485 3,769 4,268 4,365 4,731 4,626 Minority interest 35 29 48 70 64 57 56 54 29 Debt 40 236 280 346 326 377 1,390 1,490 1,367 Total sources of funds 2,721 3,283 3,805 4,612 4,870 5,416 6,526 6,991 6,738 Net block 216 452 572 616 614 670 2,246 2,266 2,524 CWIP 0 28 7 6 7 26 82 150 29 Investments and goodwill 1,147 724 624 544 93 856 424 279 269 Cash and bank balances 1,121 1,106 502 660 660 700 656 995 1,924 Current assets 2,614 3,497 6,315 7,875 9,227 9,594 9,950 10,308 10,447 Inventories — — — — — — — — — Trade receivables 1,994 2,452 4,121 5,200 6,121 6,385 6,592 5,356 4,822 Other current assets 620 1,045 2,195 2,674 3,106 3,208 3,358 4,952 5,624 Current liabilities (2,467) (2,631) (4,363) (5,248) (5,924) (6,635) (6,987) (7,227) (8,665) Trade payables (2,191) (2,229) (3,858) (4,863) (5,411) (6,001) (5,934) (6,172) (7,440) Other current liabilities (161) (238) (312) (205) (318) (419) (823) (843) (1,015) Provisions (115) (165) (192) (180) (194) (215) (230) (213) (210) Net working capital (ex-cash) 147 866 1,953 2,626 3,304 2,959 2,964 3,081 1,781 Deferred tax assets 71 88 128 141 173 187 136 200 210 Non-current assets held for sale 19 19 19 19 19 19 19 19 - Total application of funds 2,721 3,283 3,805 4,612 4,870 5,416 6,526 6,991 6,738

Operating working capital(a) (146) 269 660 1,075 1,448 1,382 1,655 1,539 (264) Net working capital as days of sales (3) 5 9 11 15 13 16 16 (3)

Source: Company, Kotak Institutional Equities

Exhibit 6: Trade receivables for non-M&M clients stand at much higher level than the M&M business Trend in receivables of M&M and non-M&M clients and operating working capital, March fiscal year- ends,2013-23E (days of sales)

Operating working capital M&M receivables Non-M&M receivables (Days of sales) 120 108 101 101 96 97 100 89 85 87 87 87 87 80

60

40 26 21 21 21 24 24 16 19 18 20 11 11 16 14 15 5 9 11 13 - 5 (7) (7) (3) (20) 2013 2014 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E

Source: Company, Kotak Institutional Equities estimates

122 KOTAK INSTITUTIONAL EQUITIES RESEARCH Mahindra Logistics Transportation

Exhibit 7: We increase our estimates by 8% on account of margin increase Change in estimates of Mahindra Logistics (consolidated), March fiscal year-ends, 2018-23E (Rs mn)

New estimates Old estimates Revision (%) 2018 2019 2020 2021E 2022E 2023E 2021 2022E 2023E 2021E 2022E 2023E Segmental financials Revenues SCM segment 30,761 34,658 31,036 29,529 35,424 40,504 28,517 34,582 39,141 4 2 3 Yoy growth (%) 30 13 (10) (5) 20 14 (8) 17 10 Mahindra group 18,177 20,998 17,243 14,657 18,321 20,153 14,657 18,321 20,153 — — — Yoy growth (%) 28 16 (18) (15) 25 10 (15) 25 10 Non-Mahindra group 12,583 13,660 13,793 14,872 17,103 20,351 13,861 16,262 18,989 7 5 7 Yoy growth (%) 32 9 1 8 15 19 0 9 11 PTS segment 3,400 3,855 3,675 1,535 2,672 2,939 2,940 3,234 3,557 (48) (17) (17) Yoy growth (%) 15 13 (5) (58) 74 10 (20) 111 33 Segmental profit SCM segment 2,263 2,649 2,529 2,318 2,993 3,503 2,153 2,818 3,268 8 6 7 EBIT margin (%) 7.4 7.6 8.1 7.8 8.4 8.6 7.5 8.1 8.3 30 bps 30 bps 30 bps PTS segment 316 405 338 46 246 276 182 298 334 (75) (17) (17) EBIT margin (%) 9.3 10.5 9.2 3.0 9.2 9.4 6.2 9.2 9.4 (320) bps 0 bps 0 bps Other unallocable expenditure (1,521) (1,685) (1,879) (1,729) (2,014) (2,182) (1,729) (1,974) (2,118) Overall EBIT 1,059 1,369 988 635 1,225 1,598 606 1,142 1,485 5 7 8 EBIT margin (%) 3.1 3.6 2.8 2.0 3 4 1.9 3.0 3.5 12 bps 20 bps 20 bps Key financials Net revenue 34,161 38,513 34,711 31,064 38,096 43,443 31,457 37,816 42,699 (1) 1 2 EBITDA 1,197 1,512 1,583 1,246 1,986 2,441 1,248 1,792 2,161 Adjusted EBITDA 1,294 1,568 1,703 1,306 2,047 2,502 1,308 1,853 2,221 (0) 10 13 Adjusted EBITDA margin (%) 3.8 4.1 4.9 4.2 5.4 5.8 4.2 4.9 5.2 5 bps 47 bps 56 bps Depreciation (197) (220) (734) (816) (944) (1,054) (751) (802) (876) PBT 1,021 1,334 812 471 1,061 1,434 443 978 1,321 6 9 9 Tax expense (368) (468) (257) (119) (267) (361) (112) (246) (333) Effective tax rate (%) 36.1 35.1 31.7 25.2 25.2 25.2 25.2 25.2 25.2 Reported PAT 640 856 551 355 796 1,075 334 734 991 Adjusted PAT 708 896 636 398 839 1,118 376 777 1,033 6 8 8 Adjusted EPS 9.9 12.5 8.9 5.6 11.7 15.6 5.3 10.9 14.5 6 8 8

Operating working capital cycle (days of 11 sales) (a) 13 16 5 14 15 22 21 22

Yoy growth (%) Net sales 28 13 (10) (11) 23 14 (9) 20 13 Adjusted EBITDA 34 21 9 (23) 57 22 (23) 42 20 Adjusted PAT 18 27 (29) (37) 111 33 (41) 106 33 Adjusted EPS 18 27 (29) (37) 111 33 (41) 106 33

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 123 Transportation Mahindra Logistics

Exhibit 8: We arrive at DCF-based Fair Value of Rs340/share for Mahindra Logistics DCF valuation of Mahindra Logistics (consolidated), March fiscal year-ends, 2017-30E (Rs mn)

2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E FCFF calculation Net revenue 26,666 34,161 38,513 34,711 31,064 38,096 43,443 49,960 57,454 66,072 75,982 87,380 100,487 115,560 Revenue growth (%) 29.2 28.1 12.7 (9.9) (10.5) 22.6 14.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 EBIT (excluding other income) 616 1,000 1,293 848 430 1,042 1,387 1,620 1,724 1,982 2,279 2,621 3,015 3,467 EBIT margin (%) 2.3 2.9 3.4 2.4 1.4 2.7 3.2 3.2 3.0 3.0 3.0 3.0 3.0 3.0 Operating tax expense (238) (370) (499) (262) (108) (263) (350) (408) (434) (500) (574) (661) (760) (874) NOPLAT 378 630 794 587 321 780 1,038 1,212 1,289 1,483 1,705 1,961 2,255 2,593 Depreciation 146 197 220 734 816 944 1,054 1,212 1,394 1,603 1,844 2,120 2,438 2,804 Change in working capital (1,087) (674) (332) (122) 1,111 (552) (211) (560) (494) (568) (653) (751) (864) (994) Capital expenditure (266) (241) (274) (2,331) (968) (868) (968) (1,113) (1,280) (1,472) (1,693) (1,946) (2,238) (2,574) Free cash flow to the firm (829) (87) 407 (1,132) 1,281 304 913 751 910 1,046 1,203 1,383 1,591 1,829 Key assumptions and value drivers Tax rate (%) 38.7 37.0 38.6 30.8 25.2 25.2 25.2 25.2 25.2 25.2 25.2 25.2 25.2 25.2 Depreciation as % of sales 0.5 0.6 0.6 2.1 2.6 2.5 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 Net working capital excluding cash as % of sales 7.3 7.7 7.7 8.9 6.3 6.6 6.3 6.6 6.6 6.6 6.6 6.6 6.6 6.6 DCF valuation Terminal growth rate (%) 5.0 WACC (%) 12.0 EV and target price calculation Sum of discounted FCF 6,439 7,815 PV of terminal value 13,225 13,886 Enterprise value 19,664 21,702 Investments 279 279 Net debt/(cash) (903) (1,077) Equity value 20,846 23,058 Implied share price (Rs/share) 292 323 One-year forward target price (Rs/share) 340 1-yr forward P/E multiple at target price (X) 25

Source: Company, Kotak Institutional Equities estimates

124 KOTAK INSTITUTIONAL EQUITIES RESEARCH Mahindra Logistics Transportation

Exhibit 9: Income statement of Mahindra Logistics (consolidated), March fiscal year-ends, 2013-23E (Rs mn)

I-GAAP Ind-AS 2013 2014 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E Net revenue 15,321 17,507 19,309 20,639 26,666 34,161 38,513 34,711 31,064 38,096 43,443 Total expenses (14,956) (16,994) (18,739) (20,116) (25,903) (32,964) (37,001) (33,129) (29,818) (36,109) (41,002) Employee benefit expenses (688) (882) (1,228) (1,509) (1,883) (2,291) (2,582) (2,946) (2,796) (2,984) (3,235) Fixed term consultant fees — — (25) (62) (206) (97) (56) (120) (60) (60) (60) Other expenses (1) (14,268) (16,112) (17,486) (18,546) (23,815) (30,576) (34,363) (30,062) (26,962) (33,066) (37,707) Freight and other related expenses (13,111) (14,862) (15,889) (16,555) (20,940) (26,785) (29,780) (25,284) (22,677) (27,810) (31,714) Labor and other related expenses (584) (592) (775) (967) (1,421) (1,872) (2,375) (2,720) (2,439) (2,992) (3,411) Rent including lease rentals (157) (228) (295) (337) (399) (645) (674) (338) (303) (372) (424) Warehouse and related expenses (123) (102) (125) (169) (265) (241) (416) (563) (505) (619) (706) Legal and other professional costs (35) (52) (78) (137) (285) (172) (143) (136) (122) (149) (170) Miscellaneous expenses (257) (275) (324) (382) (505) (861) (976) (1,022) (916) (1,124) (1,281) EBITDA 365 513 570 523 762 1,197 1,512 1,583 1,246 1,986 2,441 Adjusted EBITDA 365 513 595 585 968 1,294 1,568 1,703 1,306 2,047 2,502 Other income 35 63 87 132 97 59 76 140 206 183 211 Depreciation & amortization (31) (32) (60) (83) (146) (197) (220) (734) (816) (944) (1,054) EBIT 369 544 596 573 713 1,059 1,369 988 635 1,225 1,598 Interest expense (7) (1) (4) (13) (35) (38) (35) (176) (164) (164) (164) PBT 362 543 592 559 678 1,021 1,334 812 471 1,061 1,434 Tax expense (117) (177) (207) (200) (218) (368) (468) (257) (119) (267) (361) Reported PAT prior to associated income and minority interest 244 366 385 360 461 653 867 555 353 794 1,073 Minority interest — — 7 6 (5) (13) (8) 3 3 3 3 Reported PAT 244 366 393 365 456 640 856 551 355 796 1,075 Adjusted PAT 244 366 402 399 600 708 896 636 398 839 1,118 Adjusted EPS 3.4 5.1 5.6 5.6 8.4 9.9 12.5 8.9 5.6 11.7 15.6 Key ratios Employee expenses/sales 4.5 5.0 6.4 7.3 7.1 6.7 6.7 8.5 9.0 7.8 7.4 Other expenses/sales 93.1 92.0 90.6 89.9 89.3 89.5 89.2 86.6 86.8 86.8 86.8 EBITDA margin (%) 2.4 2.9 3.0 2.5 2.9 3.5 3.9 4.6 4.0 5.2 5.6 Adjusted EBITDA margin (%) 2.4 2.9 3.1 2.8 3.6 3.8 4.1 4.9 4.2 5.4 5.8 Effective tax rate (%) 32.5 32.6 35.0 35.7 32.1 36.1 35.1 31.7 25.2 25.2 25.2 PAT margin (%) 1.6 2.1 2.0 1.7 1.7 1.9 2.2 1.6 1.1 2.1 2.5 Yoy growth (%) Net sales NA 14.3 10.3 6.9 29.2 28.1 12.7 (9.9) (10.5) 22.6 14.0 Adjusted EBITDA NA 40.7 16.0 (1.7) 65.5 33.7 21.2 8.6 (23.3) 56.7 22.2 Adjusted PAT NA 49.9 9.7 (0.5) 50.3 17.9 26.5 (29.0) (37.5) 110.9 33.2

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 125 Transportation Mahindra Logistics

Exhibit 10: Balance sheet and cash flow details of Mahindra Logistics (consolidated), March fiscal year-ends, 2013-23E (Rs mn)

I-GAAP Ind-AS 2013 2014 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E Shareholders' funds 859 1,243 2,646 3,018 3,477 4,196 4,982 5,447 5,738 6,390 7,271 Share capital 577 591 598 598 680 711 715 715 715 715 715 Reserves & surplus 282 653 2,048 2,420 2,797 3,485 4,268 4,731 5,022 5,675 6,556 Minority interest — — 35 29 48 70 57 54 52 49 46 Debt and liabilities related to leased assets — — 40 236 280 346 377 1,490 1,490 1,490 1,490 Total sources of funds 859 1,243 2,721 3,283 3,805 4,612 5,416 6,991 7,279 7,929 8,807 Net block 101 156 216 452 572 616 670 2,266 2,418 2,341 2,255 Investments and goodwill — — 1,147 724 624 544 856 279 279 279 279 Cash and bank balances 557 892 1,121 1,106 502 660 700 995 2,393 2,567 3,321 Net working capital (ex-cash) 164 141 147 866 1,953 2,626 2,959 3,081 1,970 2,522 2,733 Deferred tax assets 34 53 71 88 128 141 187 200 200 200 200 Non-current assets held for sale — — 19 19 19 19 19 19 19 19 19 Total application of funds 859 1,243 2,721 3,283 3,805 4,612 5,416 6,991 7,279 7,929 8,807 Free cash flow Cash flow from operations before wcap. changes 277 423 439 166 295 602 1,215 1,507 1,130 1,722 2,083 Change in working capital / other adjustments 207 64 (171) (645) (589) (483) (265) (653) 1,111 (552) (211) Net cashflow from operating activites 484 487 268 (479) (293) 119 950 855 2,241 1,170 1,872 Fixed assets (52) (99) (108) (353) (243) (376) (342) (617) (968) (868) (968) Cash (used) / realised in investing activities (18) (39) (1,648) 10 534 1 (797) 355 (612) (685) (757) Free cash flow (CFO + net capex) 432 387 160 (832) (536) (257) 608 238 1,273 302 904

Ratios Debt/equity — — — 0.1 0.1 0.1 0.1 0.3 0.3 0.2 0.2 Net debt/equity (0.6) (0.7) (0.4) (0.3) (0.1) (0.1) (0.1) 0.1 (0.2) (0.2) (0.3) Book value per share (Rs) 12 17 37 42 49 59 70 76 80 89 102 RoAE (%) NA 35 21 14 18 18 20 12 7 14 16 RoAE (adj., %) NA NA 90 40 34 26 30 17 15 29 38 RoACE (%) NA 31 17 9 12 15 17 9 5 10 12

Source: Company, Kotak Institutional Equities estimates

126 KOTAK INSTITUTIONAL EQUITIES RESEARCH BUY Cummins India (KKC) https://ultraviewer.et/en/own Capital Goods NOVEMBER 02, 2020 load.html UPDATE Sector view: Attractive

The India ecosystem: a boon more than a bane. Cummins India is well-placed to CMP (`): 434 leverage its ecosystem and become the hub for serving the emission regulations Fair Value (`): 525 opportunity for the group. Off-highway applications have a longer growth runway BSE-30: 39,614 within such opportunity, which Cummins India serves locally. A shift towards stringent emission norms in India thus can enhance its quantum/scope of business in domestic/ export markets. That Cummins India won’t be the only beneficiary matters less. Cummins India Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 434/525/BUY EPS (Rs) 21.4 25.9 28.7 52-week range (Rs) (high-low) 653-280 EPS growth (%) (16.1) 21.1 10.5 Mcap (bn) (Rs/US$) 121/1.7 P/E (X) 20.3 16.7 15.1 ADTV-3M (mn) (Rs/US$) 606/8 P/B (X) 2.8 2.6 2.5 Shareholding pattern (%) EV/EBITDA (X) 21.1 16.8 14.8 Promoters 51.0 RoE (%) 13.9 16.2 17.1 FPIs/MFs/BFIs 8.6/18.6/8.7 Div. yield (%) 2.7 3.3 3.6 Price performance (%) 1M 3M 12M Sales (Rs bn) 40 51 57 Absolute (2.5) 9.1 (21.7) EBITDA (Rs bn) 5 7 8 Rel. to BSE-30 (6.3) 3.9 (20.8) Net profits (Rs bn) 6 7 8

India scores over China on cost, delivery, control – reflective in group’s deployment of resources

Both India and China would be front-runners for incremental investment opportunities within the group related to emission regulations given (1) the breadth of their operations and (2) large end markets they serve. In Cummins’ assessment, India scores very high on the strength of its purchasing network and is ahead of China in terms of its scale advantage (Phaltan Megasite). Unlike China, which is primarily manufactures for domestic demand, India has the supply chain set up for exports of key product lines including and beyond power generation. India also scores well over China in terms of control the company exercises over its manufacturing entities – all key manufacturing entities in China are through joint ventures. These relative advantages are reaffirmed by the group’s deployment of financial and human resources within the two geographies – India leads China on both counts.

Listed entity in India can be a beneficiary; it matters less that it won’t be the only one

Within the global opportunity related to emission regulations, the group considers the off- highway applications to have a longer runway to growth versus non-highway applications. Within off-highway applications, power generation, construction and HHP industrial applications stand out. This bodes well from the perspective of Cummins India (KKC) given the impending change towards stringent emission norms in such sectors. As the sole engine manufacturer for such applications for the domestic market, KKC would benefit from the related exports opportunity. It won’t be the only beneficiary given the presence of engine manufacturing facilities in India in CTIL (produces HHP engines for exports where domestic demand does not exist). KKC would unlikely play a role in the export opportunity for on- highway engines, which would be taken up by Tata Cummins. Aditya Mongia

Cummins’ ecosystem in India broadens appeal of Cummins India while capping profitability Teena Virmani

Value addition from Cummins in India for off-highway applications is split across entities. This restricts the profitability of KKC as it buys products from other related entities to cater to the domestic demand. Such dependence may increase as KKC develops products complying with the upcoming stringent emission norms. Investors, however, should not lose sight of (1) the cost advantage KKC would have over peers in such a context and (2) the exports opportunity that can open up, which would likely earn much higher margin versus domestic. [email protected] Contact: +91 22 6218 6427

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

In the group’s assessment, there is a large business opportunity related to emission Cummins group sees regulations at a global level. The group sees strong growth potential in both its on-highway a meaningful global and off-highway applications. The group considers the off-highway applications to have a opportunity related to longer runway to growth versus non-highway applications. India and China are large emission regulations domestic markets in key applications for both off-highway and on-highway applications.

Exhibit 1: Off-highway applications provide a more long-term opportunity from emission regulations versus on-highway applications Global opportunity for Cummins group from emission regulations

Outgrowth: Opportunity from emissions regulations

Source: Company, Kotak Institutional Equities

Both India and China stand out within the global network of Cummins for incremental investment opportunities given the breadth of operations carried out – engines, gensets, distribution, R&D. These are even stronger front-runners for serving the new business related to emission regulations for on-highway applications globally, given the large domestic markets they serve – domestic opportunity of these markets is comparable as per Cummins.

Exhibit 2: Both China and India are large markets for on-highway applications in the near term Near-term opportunity for on-highway applications for Cummins group in China and India

Notes: (a) As per Cummins management, the pie is split equally between India and China

Source: Company, Kotak Institutional Equities

128 KOTAK INSTITUTIONAL EQUITIES RESEARCH Cummins India Capital Goods

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

Source: Company, Kotak Institutional Equities

Exhibit 4: India accounts for a modest 7% share in terms of domestic demand Split of power systems business for Cummins Inc for the year-ending September 2020

Power Systems Segment - Sales Mix

Notes: (a) The above split is based on originating country of demand and thus does not account for exports

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 129 Capital Goods Cummins India

In Cummins’ assessment, India scores very high on the strength of its purchasing network India scores over and is ahead of China in terms of its scale advantage (Phaltan Megasite). Unlike China, China on cost, which is primarily manufactures for domestic demand, India has the supply chain set up for delivery, control – exports of key product lines including and beyond power generation. India also scores well reflective in group’s over China in terms of control it has of its manufacturing entities – all key manufacturing deployment of entities in China are through joint ventures. These relative advantages are reaffirmed by the group’s deployment of financial and human resources within the two geographies – India resources leads China on both counts.

Exhibit 5: Within the Cummins group, India is #1 in terms of manufacturing scale and a close #2 in terms of purchasing network Comparison of manufacturing hubs of Cummins group

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

Source: Company, Kotak Institutional Equities

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

Exhibit 6: Cummins does not have complete control in any of its engine facilities in China Key entities of Cummins in China

JV Details Engines Dongfeng Cummins Plant Yes 3.9, 4.5, 5.9, 6.7, 8.3, 8.9, 13L Chongqing Cummins Plant Yes 11, 14, 19, 38, 50L Xi'an Cummins Plant Yes 11L Beijing Foton Cummins Plant Yes 2.8 and 3.8L Guangxi Cummins Plant Yes 9.3 and 7L Power Generation Wuhan Genset Plant Generator sets Wuxi Alternator Plant Stamford alternators Xiangyang Cummins Power Technologies G-drives Shanghai Cummisn Jardine Energy Solutions Imported gas power generators and power solutions Components Shanghai Filtration Plant Filtration and coolant hanghai Fleetguard Plant Air filters, lube filters, fuel filters and water filters Xiangfan Fleetguard Plant Yes Fleetguard Wuxi Turbo Plant Yes Turbochargers Wuxi Vane Wheel Plant Yes Turbocharger vane wheel Wuhan Fuel Systems Plant Fuel system Beijing Emission Solutions Plant Aftertreatment system Cummins (Xiangfan) Machining Co Shanghai Valvoline Cummins Yes Lubricants Distribution Business Unit Cummins Tianyuan Yes Distribution unit Tech centers East Asia R&D Center (Wuhan) Turbo Technologies Tech Center (Wuxi) Engineering Centers Beijing Engineering Centers Xiangyang Engineering Centers Chongqing

Source: Company, Kotak Institutional Equities

130 KOTAK INSTITUTIONAL EQUITIES RESEARCH Cummins India Capital Goods

Exhibit 7: Cummins has complete control in its engine facilities in India beyond Tata Cummins Key entities of Cummins in India

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

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

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

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

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

Source: Company, Kotak Institutional Equities

We would also want to clarify that Cummins China largely caters to the domestic demand and thus does not have a supply chain on the exports front that it can scale up. In a recent interview (refer), Nathan Stoner, vice president of China ABO of Cummings had commented in this context - "Twelve of the 30 entities and some of our major R&D, manufacturing entities – both serving customers in China and to a limited degree export – are based in Wuhan and Hubei Province." In earlier interviews, the group has also suggested dependence of Cummins China on imports to cater to domestic demand. Cummins India is a key supplier.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 131 Capital Goods Cummins India

Exhibit 8: Cummins serves the Chinese demand largely from its own manufacturing with limited dependence on imports Break-up of Cummins sales in China

Break-up of Cummins sales in China

Imported 10%

Manufactured in China 90%

Source: Company

In terms of deployment of resources, Cummins India is getting favored relatively over the past few years. For instance, India is more prominent than China in terms of share of employees and leaders in spite of China revenues being a multiple of India revenues for Cummins group.

Exhibit 9: India is a relevant geography in terms of deployment of human resources for the group Deployment of human resources across the Cummins group for the year ending December 2019

Breakdown of Cummins employees by Country of birth for leaders assignment countries 60 55 50 47 50 40 40

30 30

20 14 20 12 9 9 9 11 10 7 9 10 6 3 3 2 2 3 - - Australia Brazil China India Mexico RoW United United Australia Brazil China India Mexico RoW United United Kingdom States Kingdom States

Source: Company, Kotak Institutional Equities

Cummins group has also been increasing its presence in India and has scaled up select businesses in India quite meaningfully. For instance, the technical center now has 2,500 engineers and accounts for more than a Rs8 bn top-line.

132 KOTAK INSTITUTIONAL EQUITIES RESEARCH Cummins India Capital Goods

Exhibit 10: Cummins has been investing in businesses in India Key India businesses of India that have been recently established or scaled up, March fiscal year-ends, 2014-20 (Rs mn)

Technical centre Emission Solutions 10,000 10,000 9,269 8,390 8,000 8,000

6,000 6,000 5,200 4,000 4,000 2,000 2,000 - - 2014 2015 2016 2017 2018 2019 2020 2014 2015 2016 2017 2018 2019 2020 Electronic Fuel Systems Business process services 6,000 4,000 5,045 3,280 4,800 3,730 3,000 3,600 2,000 2,400

1,200 1,000

- - 2014 2015 2016 2017 2018 2019 2020 2014 2015 2016 2017 2018 2019 2020

Notes: (a) These business verticals have been invested through the Cummins Technologies India platform

Source: Company, Kotak Institutional Equities

We understand that Cummins India won’t be the only beneficiary given the presence of engine manufacturing facilities in India in CTIL (produces HHP engines for exports where domestic demand does not exist). KKC would unlikely play a role in the export opportunity for on-highway engines, which would be taken up by Tata Cummins.

Exhibit 11: Cummins India has not benefitted from the shift in capacities serving Europe to India India HHP revenues, bifurcated between listed and unlisted entities of Cummins, March fiscal year-ends, 2012- 20 (Rs bn)

30 HHP India (listed) HHP india (unlisted) HHP India 25 25 23

20 18

15 15 13 13 13 13 11 12 12 10 10 7

5 4 2 2 0 - 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 133 Capital Goods Cummins India

Exhibit 12: Tata Cummins has seen increase in business of direct and potentially indirect exports Sales of Tata Cummins towards exports, March fiscal year-ends, 2015-20

Direct exports Sales to CTIL and thus potentially indirect exports 10 8.8

8 7.4

6 4.9 6.8 4.5

4 3.4 2.6 1.6 2 1.2 2.9 1.9 2.3 1.9 1.2 0 - 2015 2017 2018 2019 2020

Source: Company, Kotak Institutional Equities

Exhibit 13: We expect export revenues to revive back to FY2019 levels in FY2023 Breakup of export revenues of Cummins India, March fiscal year-ends, 2011-23E (Rs bn)

LHP Mid-range Heavy Duty HHP Spares/others 25

20 16.6 16.7

15 12.9

10

5

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

Source: Company, Kotak Institutional Equities estimates

134 KOTAK INSTITUTIONAL EQUITIES RESEARCH Cummins India Capital Goods

Exhibit 14: Standalone balance sheet, profit model and cash flow statement of Cummins, March fiscal year-ends, 2010-23E (Rs mn)

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E Profit model Net revenue 29,027 40,425 41,172 46,012 39,767 44,058 47,088 50,773 50,825 56,590 51,577 40,354 50,967 57,044 Total operating costs (23,175) (32,791) (34,200) (37,545) (32,799) (36,708) (39,337) (42,755) (43,501) (47,949) (45,715) (35,170) (44,356) (49,522) EBITDA 5,852 7,634 6,972 8,467 6,967 7,351 7,751 8,018 7,325 8,641 5,863 5,183 6,611 7,521 Other operational income 578 914 651 922 776 847 1,212 1,192 1,307 1,333 961 1,033 1,111 1,196 Other income 638 804 1,233 1,949 1,777 2,040 2,259 2,080 2,285 2,928 3,315 3,673 3,799 3,926 PBDIT 6,489 8,438 8,206 10,416 8,744 9,390 10,010 10,098 9,609 11,569 9,178 8,856 10,410 11,447 Financial charges (21) (48) (54) (46) (42) (45) (96) (168) (148) (162) (203) (247) (247) (247) Depreciation (361) (366) (420) (473) (528) (797) (810) (848) (938) (1,103) (1,187) (1,219) (1,314) (1,417) Pre-tax profit 6,108 8,024 7,732 9,897 8,175 8,548 9,104 9,082 8,523 10,303 7,789 7,390 8,849 9,783 Taxation (1,670) (2,114) (2,282) (2,872) (2,175) (1,515) (1,561) (1,736) (1,826) (3,078) (1,297) (1,774) (2,124) (2,348) PAT 4,437 5,910 5,913 7,641 6,000 7,859 7,543 7,346 7,085 7,226 6,293 5,616 6,725 7,435 Adjusted PAT 4,715 6,259 5,788 7,348 5,999 6,805 7,179 7,280 6,745 7,306 7,072 5,936 7,188 7,944 Balance sheet Shareholders funds 15,610 18,063 20,432 23,867 25,652 28,865 34,813 37,422 39,861 41,305 41,750 43,446 45,423 47,611 Loan funds 86 — — — — — — 2,508 2,515 3,092 4,854 4,854 4,854 4,854 Total source of funds 15,696 18,063 20,432 23,867 25,652 28,865 34,813 39,930 42,376 44,396 46,603 48,299 50,277 52,465 Net block 2,944 3,564 4,649 4,934 9,192 12,340 12,894 12,322 12,882 12,848 12,277 13,273 14,175 15,324 Net fixed assets 3,337 4,411 6,273 8,066 12,215 14,763 18,086 16,954 13,261 14,433 13,077 14,074 14,975 16,124 Investments and goodwill 7,329 7,255 5,975 6,276 4,954 4,650 3,336 9,753 12,798 10,133 18,606 18,606 18,606 18,606 Cash balances 559 1,037 2,235 3,547 865 799 897 1,291 4,709 7,379 4,538 7,784 6,589 6,327 Net current assets excluding cash 4,301 5,173 5,879 6,307 8,083 9,284 12,246 11,501 11,866 13,400 11,038 8,636 10,907 12,207 Total application of funds 15,696 18,063 20,432 23,867 25,652 28,865 34,813 39,930 42,376 44,396 46,603 48,299 50,277 52,465 Cash flow statement Operating profit before working capital changes 5,872 7,829 7,404 8,826 7,525 8,006 8,579 8,951 8,537 10,202 7,455 7,860 9,609 10,685 Change in working capital 1,436 (1,356) (825) (883) (1,607) (1,142) 33 371 (370) (2,341) 144 2,402 (2,271) (1,300) Tax paid (1,549) (2,181) (2,155) (2,657) (2,308) (1,853) (1,694) (1,867) (1,823) (2,361) (1,609) (1,774) (2,124) (2,348) Cashflow from operating activites 5,759 4,293 4,425 5,286 3,611 5,012 6,918 7,456 6,344 5,500 5,990 8,488 5,214 7,036 Fixed assets (618) (1,479) (2,281) (2,148) (4,678) (3,304) (4,899) (2,315) (905) (2,734) (2,366) (2,071) (2,216) (2,566) Investments (3,340) 75 1,547 302 1,489 1,296 1,339 (3,655) (1,518) 1,956 (1,163) — — — Cash (used) / realised in investing activities (3,368) (1,327) 77 (2,186) 552 (563) (2,121) (4,860) (1,327) 169 (2,135) (1,075) (1,414) (1,803) Borrowings (126) — — — — — — — — — — — — — Dividend paid (1,992) (3,002) (3,452) (3,544) (4,216) (4,216) (4,669) (4,663) (4,639) (5,681) (5,681) (3,920) (4,748) (5,247) Cash (used) /realised in financing activities (2,155) (3,049) (3,506) (3,590) (4,258) (4,261) (4,677) (2,245) (4,731) (5,226) (4,109) (4,168) (4,995) (5,494) Cash generated /utilised 236 (83) 996 (490) (95) 188 119 350 285 443 (254) 3,246 (1,195) (261) Cash at beginning of year 323 239 156 1,152 662 567 755 851 1,237 4,709 7,379 4,538 7,784 6,589 Cash at end of year 559 156 1,152 662 567 755 851 1,237 1,523 5,139 7,240 7,784 6,589 6,327

Growth (%) Revenue growth (15.0) 39.3 1.8 11.8 (13.6) 10.8 6.9 7.8 0.1 11.3 (8.9) (21.8) 26.3 11.9 EBITDA growth (0.6) 30.5 (8.7) 21.4 (17.7) 5.5 5.4 3.4 (8.7) 18.0 (32.2) (11.6) 27.5 13.8 Recurring PAT growth NA 32.8 (7.5) 26.9 (18.4) 13.4 5.5 1.4 (7.3) 8.3 (3.2) (16.1) 21.1 10.5 Key ratios (%) Gross margin 37.9 36.2 35.7 37.2 39.0 38.2 37.1 35.5 35.9 36.1 34.7 37.7 35.2 35.2 EBITDA margin 20.2 18.9 16.9 18.4 17.5 16.7 16.5 15.8 14.4 15.3 11.4 12.8 13.0 13.2 PAT margin 15.3 14.6 13.2 15.3 15.1 16.0 16.0 14.5 13.2 12.8 12.6 13.9 13.2 13.0 RoE 30.0 35.1 28.3 31.7 24.2 25.8 23.7 20.3 17.3 17.8 15.6 13.2 15.1 16.0 RoCE 26.1 27.9 22.7 28.7 19.9 26.1 18.8 11.5 9.9 5.9 6.9 -0.2 2.1 3.4 Debt / equity (X) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Adj. EPS (Rs) 17.0 22.6 20.9 26.5 21.6 24.5 25.9 26.3 24.3 26.4 25.5 21.4 25.9 28.7

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 135 CAUTIOUS Automobiles & Components India NOVEMBER 02, 2020 UPDATE BSE-30: 39,758

Festive season to be the key. Auto sector volumes continued to recover across segments in October 2020 led by (1) inventory push by OEMs to fill up channel inventory before the festive season and (2) improving retail sales trend supported by pent-up demand. A few OEMs’ volume recovery was hindered by supply chain and capacity constraints. Tractor segment demand remains buoyant amid improving farm sentiments. The M&HCV segment continues to lag in terms of recovery in volumes.

Domestic PVs report double-digit volume growth in October 2020

As per our estimate, the domestic passenger vehicle industry is set to report double-digit wholesale volume increase on a yoy basis in October 2020 due to (1) inventory push by OEMs in order to stock up channel inventory before the festive season and (2) single-digit growth in retail sales aided by new launches. Maruti’s overall volumes increased by 19% yoy to 182,448 units in October 2020 led by (1) 20% yoy increase in domestic volumes and (2) 5% yoy increase in exports volume. Entry and compact hatchback car segment volumes increased by 19% yoy in October 2020. SUV volumes increased by 10% yoy; also, van segment volumes were up by 33% yoy. In terms of other OEMs, Hyundai Motors domestic volumes increased by 13% yoy in October 2020. Honda Motors domestic PV volumes increased by 8% yoy while Toyota India domestic PV volumes increased by 4% yoy in October 2020. MG Motors retail sales stood at 3,750 units (+6% yoy) and Kia Motors sold 21,021 units (+64% yoy) in October 2020. Renault- Nissan, Volkswagen, Skoda and FCA volumes declined on a yoy basis in October 2020. M&M’s auto volumes down by 15% yoy; tractor volumes up by 3% yoy in October 2020

Mahindra’s auto division reported 15% yoy volume decline in October 2020, which was due to (1) 56% yoy decline in the 3W segment amid the pandemic, (2) 25% yoy decline in the exports segment and (3) 13% yoy decline in the domestic CV segment, partly offset by 1% yoy increase in the domestic PV segment. Domestic CV segment volumes declined by 12% yoy led by (1) 37% yoy decline in >3.5T LCV and M&HCV segment, (2) 14% decline in 2-3.5T LCV segment and (3) 2% yoy decline <2T LCV segment in October 2020. M&M’s overall tractor volumes increased by 2% yoy led by 2% yoy increase in domestic volumes due to aggressive procurement of crops by the government and higher MSPs of key crops. Escorts domestic volumes increased by only 2% yoy in October 2020 due to capacity constraints. Sequential improvement in CV segment continues

VECV’s total volumes increased by 12% yoy led by (1) 15% yoy increase in domestic volumes and (2) 15% yoy decline in export volumes in October 2020. Ashok Leyland volumes increased by 1% yoy led by (1) 11% yoy decline in the M&HCV segment and (2) 14% yoy increase in the LCV segment. Domestic motorcycle segment outperforms; RE volume recovery constrained by supply chain

Hero MotoCorp volumes increased by 35% yoy in October 2020 led by (1) 32.5% yoy growth Hitesh Goel in the motorcycle segment and (2) 60% yoy increase in the scooter segment on account of inventory push before the festive season. Royal Enfield volumes declined by 7% yoy in October 2020 led by (1) 7% yoy decline in domestic volumes and (2) 7% yoy decline in export volumes. Rishi Vora

TVS Motor total volumes increased by 22% yoy in October 2020 led by (1) 34-38% yoy increase in motorcycle and moped segments and (2) 5% yoy increase in the scooter segment, partly offset by 17% yoy decline in the 3W segment. Bajaj Auto reported 11% yoy increase in volumes led by (1) 11% yoy growth in the domestic 2W segment and (2) 29% yoy growth in the export 2W segment, partly offset by 35% yoy decline in the 3W segment in October 2020.

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

Exhibit 1: Maruti Suzuki reported 19% yoy increase in volumes in October 2020; domestic sales up by 20% yoy Maruti Suzuki monthly sales volume, March fiscal year-ends (units)

FYTD Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 2020 2021 Sales volume (units) M800, Alto, A-Star, Old WagonR 28,537 26,306 23,883 25,885 27,499 15,988 — 1,995 10,458 17,258 19,709 27,246 28,462 128,215 105,128 Swift, Baleno, Ritz, Celerio, Dzire, New WagnoR, S Presso 75,094 78,013 65,673 84,340 69,828 40,519 — 6,262 26,696 51,529 61,956 84,213 95,067 449,237 325,723 Gypsy, Ertiga, S-Cross, Brezza, XL6 23,108 23,204 23,808 16,460 22,604 11,904 — 3,636 9,764 19,177 21,030 23,699 25,396 137,318 102,702 Omni and Eeco 10,011 10,162 7,634 12,324 11,227 5,966 — 1,617 3,803 8,501 9,115 11,220 13,309 71,091 47,565 Ciaz 2,371 1,448 1,786 835 2,544 1,863 — 192 553 1,303 1,223 1,534 1,422 16,782 6,227 Light commercial vehicle 2,429 2,267 1,591 2,406 448 736 — 163 1,026 2,232 2,292 2,128 3,169 14,330 11,010 Sales to other OEMs 2,727 2,286 1,360 2,249 2,699 2,104 — 23 839 1,307 1,379 2,568 6,037 14,304 12,153 Total domestic 144,277 143,686 125,735 144,499 136,849 79,080 — 13,888 53,139 101,307 116,704 152,608 172,862 831,277 610,508 Exports 9,158 6,944 7,561 9,624 10,261 4,712 632 4,651 4,289 6,757 7,920 7,834 9,586 63,069 41,669 Total volumes 153,435 150,630 133,296 154,123 147,110 83,792 632 18,539 57,428 108,064 124,624 160,442 182,448 894,346 652,177 Yoy change (%) M800, Alto, A-Star, Wagonr (13.1) (12.2) (13.6) 10.8 11.1 (5.0) (87.8) (44.2) 49.1 94.7 35.7 (0.3) (18.0) Swift, Baleno, Ritz, Celerio, Dzire, New WagnoR, S Presso 15.9 7.6 27.9 11.6 (3.9) (50.9) (91.1) (57.6) (10.4) 14.2 47.3 26.6 (27.5) Gypsy, Ertiga, S-Cross, Brezza, XL6 11.3 (1.3) 17.7 (26.6) 3.5 (53.4) (81.0) (45.1) 26.3 13.5 10.1 9.9 (25.2) Omni and Eeco (26.8) (27.7) (51.8) (18.6) (22.9) (63.7) (86.2) (59.0) (13.4) 5.3 12.8 32.9 (33.1) Ciaz (39.1) (62.3) (62.3) (71.5) (17.5) (49.3) (94.7) (76.2) (45.6) (23.4) (10.6) (40.0) (62.9) Light commercial vehicle 12.9 6.5 (5.0) (11.2) (79.5) (71.5) (92.7) (49.1) 28.9 47.4 4.0 30.5 (23.2) Total domestic 4.5 (1.6) 3.5 1.7 (1.6) (46.4) (88.9) (53.7) 1.3 20.2 32.2 19.8 (26.6) Exports 5.7 (7.7) 10.2 0.6 7.1 (55.0) (93.1) (48.8) (56.4) (27.0) (15.3) 9.0 4.7 (33.9) Total volumes 4.5 (1.9) 3.9 1.6 (1.1) (47.0) (99.6) (86.2) (54.0) (1.1) 17.1 30.8 18.9 (27.1)

Source: Company, Kotak Institutional Equities

Exhibit 2: Mahindra & Mahindra’s domestic PV volume increased by 1% yoy in October 2020; total tractor sales volume up 3% yoy Mahindra & Mahindra monthly sales volume, March fiscal year-ends (units)

FYTD Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 2020 2021 Sales volume (units) Passenger UVs (incl. Verito) 18,460 14,637 15,691 19,797 10,938 3,384 — 3,867 8,075 11,025 13,651 14,857 18,622 122,531 70,097 Commercial Vehicles 23,582 17,384 16,018 22,851 15,856 2,325 — 5,170 10,417 13,103 15,299 18,907 20,588 124,701 83,484 3-wheelers 7,151 6,593 5,372 8,137 3,843 421 — 39 13 83 307 587 3,118 37,821 4,147 Exports (Auto sector) 2,703 2,621 2,149 1,761 1,839 1,271 733 484 853 1,467 1,169 1,569 2,021 18,102 8,296 Auto division 51,896 41,235 39,230 52,546 32,476 7,401 733 9,560 19,358 25,678 30,426 35,920 44,349 303,155 166,024 Tractors (Dom + Exp) 45,433 21,032 17,990 23,116 22,561 13,613 4,772 24,341 36,544 25,402 24,458 43,386 46,558 203,603 205,461 Total 97,329 62,267 57,220 75,662 55,037 21,014 5,505 33,901 55,902 51,080 54,884 79,306 90,907 506,758 371,485 Yoy change (%) Passenger UVs (incl. Verito) (23.3) (9.6) 4.0 (17.1) (58.1) (87.8) (100.0) (81.2) (57.1) (34.5) 1.1 3.7 0.9 (42.8) Commercial vehicles (3.2) (11.6) (5.3) 1.0 (25.0) (90.5) (100.0) (71.1) (36.5) (17.9) 4.2 0.2 (12.7) (33.1) 3-wheelers 3.2 15.6 14.5 35.5 (32.0) (93.9) (100.0) (99.1) (99.7) (98.2) (94.3) (92.2) (56.4) (89.0) Exports (Auto sector) (11.8) (25.9) (29.9) (45.3) (40.5) (67.7) (65.4) (79.5) (72.3) (45.0) (53.6) (40.8) (25.2) (54.2) Auto division (11.2) (8.6) (1.3) (5.7) (42.0) (88.2) (98.3) (79.0) (54.5) (36.0) (15.7) (17.1) (14.5) (45.2) Tractors (Dom + Exp) (4.1) (18.9) 3.4 4.1 18.9 (30.9) (83.3) (1.5) 10.4 27.1 65.1 17.2 2.5 0.9 Total (8.0) (12.4) 0.1 (2.9) (26.6) (74.6) (92.4) (51.7) (26.1) (15.1) 7.8 (1.3) (6.6) (26.7)

Source: Company, Kotak Institutional Equities

Exhibit 3: VECV reported 12% yoy volume increase in October 2020; domestic volumes increased by 15% yoy VECV monthly sales volume, March fiscal year-ends (units)

FYTD Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 2020 2021 Domestic sales Domestic volumes 3,309 2,948 4,410 4,871 3,875 1,409 — 468 1,016 1,734 2,190 2,940 3,815 25,533 12,163 Export sales Total 372 502 500 517 564 67 54 218 305 401 250 510 315 2,418 2,053 Total sales 3,681 3,450 4,910 5,388 4,439 1,476 54 686 1,321 2,135 2,440 3,450 4,130 27,951 14,216 Yoy change (%) Total domestic (35.4) (22.8) (13.7) (5.9) (27.4) (80.8) (100.0) (89.5) (75.4) (53.1) (30.3) (6.4) 15.3 (52.4) Export sales Total exports (47.2) (36.1) (50.0) (18.1) (39.4) (94.5) (75.3) (28.3) (16.7) 31.0 (21.4) (4.3) (15.3) (15.1) Total sales (36.8) (25.0) (19.7) (7.2) (29.2) (82.7) (98.6) (85.6) (70.7) (46.6) (29.5) (6.1) 12.2 (49.1)

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 137 India Automobiles & Components

Exhibit 4: Eicher Motors volume down by 7% yoy in October 2020; domestic volumes down by 7% yoy Eicher Motors monthly sales volume, March fiscal year-ends (units)

FYTD Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 2020 2021 Sales volume (units) Royal Enfield 71,964 60,411 50,416 63,520 63,536 35,814 91 19,113 38,065 40,334 50,144 60,041 66,891 422,262 274,679 Domestic 67,538 58,292 48,489 61,292 61,188 32,630 — 18,429 36,510 37,925 47,571 55,998 62,760 394,760 259,193 Exports 4,426 2,119 1,927 2,228 2,348 3,184 91 684 1,555 2,409 2,573 4,043 4,131 27,502 15,486 Yoy change (%) Royal Enfield 2.1 (8.1) (13.5) (12.6) 1.4 (41.1) (99.9) (69.4) (34.8) (25.7) (5.2) 0.9 (7.0) (35.0) Domestic (3.6) (10.4) (13.5) (13.5) 1.9 (44.2) (100.0) (69.4) (33.7) (22.9) (2.4) 2.1 (7.1) (34.3) Exports 987.5 195.1 (14.4) 21.8 (8.4) 32.8 (97.6) (68.3) (52.3) (53.0) (38.0) (12.9) (6.7) (43.7)

Source: Company, Kotak Institutional Equities

Exhibit 5: Escorts volumes increased by 2% yoy in October 2020; domestic volumes up by 1% yoy Escorts monthly sales volume, March fiscal year-ends (units)

FYTD Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 2020 2021 Sales volume (units) Escorts 13,353 7,642 4,114 6,063 8,601 5,444 705 6,594 10,851 5,322 7,268 11,851 13,664 54,154 56,255 Domestic 13,034 7,379 3,806 5,845 8,049 5,228 613 6,454 10,623 4,953 6,750 11,453 13,180 51,945 54,026 Exports 319 263 308 218 552 216 92 140 228 369 518 398 484 2,209 2,229 Yoy change (%) Escorts 1.6 (4.5) (10.5) 1.2 18.8 (54.3) (86.6) (3.4) 21.1 9.5 80.1 9.2 2.3 3.9 Domestic 1.3 (3.4) (9.6) 1.4 16.3 (54.3) (87.7) (0.5) 22.8 9.9 79.4 8.9 1.1 4.0 Exports 16.8 (27.7) (20.2) (4.8) 71.4 (54.4) (66.9) (58.7) (26.9) 3.9 90.4 19.2 51.7 0.9

Source: Company, Kotak Institutional Equities

Exhibit 6: Hero MotoCorp total volumes increased by 35% yoy in October 2020 Hero MotoCorp monthly sales volume, March fiscal year-ends (units)

FYTD Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 2020 2021 Total sales 599,248 516,775 424,845 501,622 498,242 334,647 — 112,682 450,586 514,509 584,456 715,718 806,848 4,133,588 3,184,799 Yoy change (%) (18.4) (15.3) (6.4) (14.2) (19.3) (42.4) (100.0) (82.7) (26.9) (4.0) 7.5 16.9 34.6 (23.0)

Source: Company, Kotak Institutional Equities

Exhibit 7: Ashok Leyland total CV volumes increased by 1% yoy in October 2020; M&HCV volumes down by 11% yoy Ashok Leyland monthly sales volume, March fiscal year-ends (units)

FYTD Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 2020 2021 Sales volume (units) LCV 4,731 4,209 4,143 4,096 4,107 348 — 1,154 1,639 3,070 3,736 4,702 5,401 29,743 19,702 MHCV 5,131 5,966 7,025 7,754 7,368 1,831 — 255 755 1,705 2,589 3,642 4,588 48,663 13,534 Total CVs 9,862 10,175 11,168 11,850 11,475 2,179 — 1,409 2,394 4,775 6,325 8,344 9,989 78,406 33,236 Yoy change (%) LCV (11.6) (4.4) (1.3) (18.8) (17.1) (93.7) (100.0) (72.7) (62.6) (27.0) (3.8) 16.5 14.2 (33.8) MHCV (47.6) (31.6) (37.8) (47.2) (44.6) (88.6) (100.0) (97.1) (91.0) (74.6) (51.6) (23.2) (10.6) (72.2) Total CVs (34.9) (22.4) (27.9) (40.0) (37.1) (89.9) (100.0) (89.3) (81.3) (56.3) (31.5) (5.0) 1.3 (57.6)

Source: Company, Kotak Institutional Equities

138 KOTAK INSTITUTIONAL EQUITIES RESEARCH Automobiles & Components India

Exhibit 8: TVS Motor total volumes increased by 22% yoy in October 2020; total motorcycles volumes up by 38% yoy TVS Motor monthly sales volume, March fiscal year-ends (units)

FYTD Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 2020 2021 Sales volume (units) Motorcycles 125,660 105,963 93,697 94,367 118,514 66,673 7,500 39,353 84,401 106,062 119,878 139,698 173,263 884,362 670,155 Scooters 121,437 84,169 74,716 72,383 60,633 34,191 500 11,244 65,666 78,603 87,044 103,877 127,138 749,052 474,072 Mopeds 61,064 59,218 47,206 53,689 56,744 33,124 134 5,622 41,009 59,123 70,304 69,757 81,720 400,690 327,669 Three-wheelers 15,207 17,232 15,952 14,481 17,370 10,751 1,506 2,688 7,311 8,956 10,172 14,360 12,603 98,125 57,596 Total sales 323,368 266,582 231,571 234,920 253,261 144,739 9,640 58,906 198,387 252,744 287,398 327,692 394,724 2,132,229 1,529,491 Yoy change (%) Motorcycles (16.5) (11.6) (12.6) (15.2) (3.3) (52.7) (94.8) (72.4) (35.7) (2.0) 9.6 12.7 37.9 (24.2) Scooters (19.6) (24.7) (18.3) (15.1) (30.3) (65.3) (99.5) (88.6) (33.7) (25.3) (20.3) (12.4) 4.7 (36.7) Mopeds (26.3) (21.6) (21.4) (26.2) (25.5) (53.6) (99.8) (89.5) (22.8) 13.1 22.9 19.7 33.8 (18.2) Total three-wheelers 7.7 34.4 25.7 8.4 26.4 (25.5) (88.5) (79.0) (46.4) (35.0) (30.3) (4.3) (17.1) (41.3) Total sales (18.8) (16.7) (14.7) (16.9) (15.4) (55.5) (97.0) (80.8) (33.2) (9.6) (1.1) 3.8 22.1 (28.3)

Source: Company, Kotak Institutional Equities

Exhibit 9: Bajaj Auto total volumes increased by 11% yoy in October 2020; export motorcycles volumes up by 29% yoy Bajaj Auto monthly sales volume, March fiscal year-ends (units)

FYTD Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 2020 2021 Sales volume (units) Domestic motorcycles 242,516 176,337 124,125 157,796 146,876 98,412 — 39,286 146,695 152,474 178,220 219,500 268,631 1,374,802 1,004,806 Export motorcycles 156,397 167,109 160,677 174,546 163,346 112,564 32,009 73,512 108,427 86,082 142,838 185,351 201,659 1,090,978 829,878 Total motorcycles 398,913 343,446 284,802 332,342 310,222 210,976 32,009 112,798 255,122 238,556 321,058 404,851 470,290 2,465,780 1,834,684 Domestic three-wheelers 36,260 31,438 29,038 35,076 21,871 18,129 — 788 4,494 6,502 7,659 9,231 12,529 230,207 41,203 Exports three-wheelers 28,035 28,339 22,215 27,055 22,820 13,470 5,869 13,542 18,481 10,774 27,482 27,224 29,219 187,986 132,591 Total three-wheelers 64,295 59,777 51,253 62,131 44,691 31,599 5,869 14,330 22,975 17,276 35,141 36,455 41,748 418,193 173,794 Total sales 463,208 403,223 336,055 394,473 354,913 242,575 37,878 127,128 278,097 255,832 356,199 441,306 512,038 2,883,973 2,008,478 Yoy change (%) Domestic motorcycles (13.9) (14.1) (21.1) (22.4) (21.3) (55.3) (100.0) (80.9) (26.4) (10.8) 3.0 23.8 10.8 (26.9) Exports motorcycles 3.3 18.3 13.5 18.7 15.5 8.9 (80.0) (53.9) (28.6) (43.1) (6.2) 16.3 28.9 (23.9) Total motorcycles (7.9) (0.9) (4.7) (5.2) (5.4) (34.8) (91.3) (69.1) (27.4) (26.0) (1.3) 20.2 17.9 (25.6) Domestic three-wheelers (5.5) 6.4 25.7 24.8 (37.8) (53.5) (100.0) (97.4) (85.0) (81.1) (78.2) (75.8) (65.4) (82.1) Exports three-wheelers (20.7) (8.1) (8.4) (5.4) (23.7) (56.3) (81.0) (43.7) (21.2) (56.6) (7.3) 0.3 4.2 (29.5) Total three-wheelers (12.8) (1.0) 8.3 9.6 (31.4) (54.7) (89.7) (73.5) (56.9) (70.9) (45.7) (44.2) (35.1) (58.4) Total sales (8.6) (0.9) (2.9) (3.1) (9.7) (38.3) (91.1) (69.7) (31.3) (32.9) (8.7) 9.8 10.5 (30.4)

Source: Company, Kotak Institutional Equities

Exhibit 10: Overall September volume numbers were better than our expectations due to inventory push; festive will be the key for OEMs OEM summary table (units)

Residual monthly Residual volume run OEM Oct-20 Yoy chg (%) Mom chg (%) FYTD21 Yoy chg (%) volume run rate rate (Yoy growth) Ashok Leyland 9,989 1.3 19.7 33,236 (57.6) 11,006 17.5 Bajaj Auto 512,038 10.5 16.0 2,008,478 (30.4) 388,927 12.3 Eicher Motor (RE) 66,891 (7.0) 11.4 274,679 (35.0) 66,578 20.9 Eicher Motor (VECV) 4,130 12.2 19.7 14,216 (49.1) 3,186 (2.8) Escorts 13,664 2.3 15.3 56,255 3.9 6,740 5.8 Hero Motocorp 806,848 34.6 12.7 3,184,799 (23.0) 490,883 7.8 Maruti Suzuki 182,448 18.9 13.7 652,177 (27.1) 143,177 4.8 Mahindra and Mahindra 90,907 (6.6) 14.6 371,485 (26.7) 55,994 3.2 TVS Motors 394,724 22.1 20.5 1,529,491 (28.3) 247,589 9.4

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 139

September 2020: Results calendar India Daily Summary Daily Summary India

Mon Tue Wed Thu Fri Sat Sun

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK 2-Nov 3-Nov 4-Nov 5-Nov 6-Nov 7-Nov 8-Nov AIA Engineering Adani Gas Adani Enterprises ABB Aditya Birla Fashion Divi's Laboratories Bandhan Bank Adani Port and SEZ Adani Green Energy Adani Pow er Alkem Laboratories IPCA Laboratories Cadila Healthcare Ajanta Pharma Apollo Tyres Adani Transmission Ashok Leyland Sobha City Union Bank Dabur India Godrej Agrovet Aditya Birla Capital Astral Poly Technik Ujjivan Small Finance Bank Coromandel International Godrej Properties HPCL Berger Paints Balkrishna Industries Escorts Jagran Prakashan Indian Hotels Co. Container Corporation Bank of India HDFC JSW Energy JK Lakshmi Cement Dalmia Bharat Bharat Electronics Narayana Hrudayalaya Kansai Nerolac Jubilant Life Science Emami BHEL NTPC Muthoot Finance Jyothy Labs Godrej Consumer Products Bosch

Oracle Financial Services PVR Kalpataru Pow er Transmission Gujarat Gas CESC -

Pfizer Sun Pharmaceuticals KEC International Torrent Pow er Cipla 2020 3, November Punjab National Bank Varun Beverages Lupin Trent Dilip Buildcon Shriram City Union Finance Petronet LNG Dr Lal Pathlabs

The Ramco Cement Pidilite Industries Glenmark Pharmaceuticals Whirlpool SRF ITC Zee Entertainment Enterprises State Bank of India Lemon Tree Hotels Thermax MRF United Spirits REC SAIL Tata Consumer Products

Union Bank

United Brew eries Vedanta Voltas 9-Nov 10-Nov 11-Nov 12-Nov 13-Nov 14-Nov 15-Nov Honeyw ell Automation Aarti Industries Ashoka Buildcon Eicher Motors 3M India J K Cement Aster DM Healthcare Aurobindo Pharma Grasim Industries Oil India Bata India Bharat Forge Gujarat Pipavav Port Endurance Technologies Coal India Mahanagar Gas Exide Industries GSPL Page Industries GAIL (India) Mindspace REIT Timken Gillette India New India Assurance Hindalco Industries NHPC Info Edge Shree Cement Mahindra & Mahindra Ujjivan Financial Services Motherson Sumi Systems NMDC P&G Hygiene Tata Pow er TeamLease Services

Source: NSE, Kotak Institutional Equities

140 140 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

141 Fair O/S ADVT

Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo Company Rating 2-Nov-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E (US$ mn) Automobiles & Components Amara Raja Batteries REDUCE 775 730 (6) 132 1.8 171 36 46 52 (7.3) 27.5 13.3 22 17.0 15.0 11.7 9.3 8.1 3.2 2.8 2.5 15.8 17.7 17.6 1.2 1.5 1.7 10.1 Apollo Tyres BUY 141 140 (1) 81 1.1 638 2.9 9.9 15.1 (64.7) 238.7 51.8 48.1 14.2 9.4 7.6 5.7 4.3 0.8 0.8 0.7 1.8 5.6 8.1 0.9 1.9 1.9 15.5 Ashok Leyland BUY 82 85 4 240 3.2 2,936 (0.4) 3.0 6.6 (134.0) 807.7 123.2 NM 27.6 12.4 36.0 12.6 7.1 3.3 3.1 2.6 NM 11.6 23 0.0 1.1 2.4 51 Bajaj Auto BUY 2,844 3,900 37 823 11 289 154 185 216 (12.5) 19.7 17.1 18.4 15.4 13.2 13.3 10.5 8.6 3.8 3.5 3.1 21 23 25 3.3 3.9 4.6 42 Balkrishna Industries SELL 1,337 1,150 (14) 258 3.5 193 48 58 71 (3.4) 21.7 21.0 27.9 22.9 18.9 15.8 12.9 10.7 4.7 4.2 3.7 17.6 19.3 21 1.6 1.8 2.0 15.4 Bharat Forge SELL 451 340 (25) 210 2.8 466 1 14 21 (87.3) 1,341.4 53.6 473.6 32.9 21.4 38.2 17.4 12.7 4.0 3.6 3.2 0.8 11.6 15.9 0.0 0.7 0.7 21 CEAT ADD 1,106 1,200 8 45 0.6 40 72 92 108 14.4 28.7 17.2 15.4 12.0 10.2 8.5 6.6 5.8 1.4 1.3 1.2 9.6 11.3 12.0 1.1 1.1 1.1 4.2 Eicher Motors SELL 2,030 1,920 (5) 555 7.4 272 59 83 107 (11.7) 39.8 28.9 34.2 24.5 19.0 25.6 18.0 13.4 5.8 4.8 4.0 18.0 21 23 0.6 0.6 0.6 60 Endurance Technologies REDUCE 1,075 875 (19) 151 2.0 141 29 46 57 (27.6) 59.6 22.1 37 23.1 18.9 15.1 10.8 8.9 4.5 3.9 3.3 12.2 16.8 17.5 0.4 0.7 0.9 1.4 Escorts BUY 1,229 1,535 25 109 2.2 101 72 85 96 31.7 17.6 13.3 17.1 14.5 12.8 9.7 8.0 6.6 2.4 2.1 1.9 14.2 14.6 14.5 0.9 1.0 1.2 39 Exide Industries REDUCE 159 155 (3) 135 1.8 850 7.8 9.1 9.9 (21.7) 16.5 9.0 20.4 17.5 16.1 10.9 9.6 8.8 2.0 1.9 1.8 10.2 11.2 11.4 2.2 2.2 2.2 8.9 Hero Motocorp SELL 2,835 2,700 (5) 566 7.6 200 136 175 202 (14.7) 29.2 14.9 20.9 16.2 14.1 13.1 9.7 8.3 3.8 3.4 3.1 18.6 22 23 3.1 3.7 4.3 72 Mahindra CIE Automotive SELL 137 110 (20) 52 0.7 378 1.8 8.2 12.1 (80.6) 347.1 48.3 75.0 16.8 11.3 15.0 7.8 5.7 1.1 1.0 0.9 1.5 6.4 8.8 — — — 0.6 Mahindra & Mahindra BUY 596 725 22 741 10.0 1,138 30 42 48 26.3 40.8 13.8 19.8 14.1 12.4 12.3 9.1 7.7 1.8 1.6 1.5 9.5 12.1 12.4 0.5 1.1 1.2 50 Maruti Suzuki SELL 6,863 5,200 (24) 2,073 27.9 302 155 243 300 (16.9) 56.0 23.9 44 28 23 27.9 16.7 12.8 4.0 3.6 3.2 9.4 13.5 15.0 0.8 0.9 1.1 113 Motherson Sumi Systems ADD 106 125 18 335 4.5 3,158 1.6 6.6 8.6 (55.6) 302.2 29.5 64.5 16.0 12.4 10.2 4.9 3.9 3.0 2.4 1.9 4.6 16.7 17.4 1.1 1.4 1.6 25 MRF SELL 66,226 58,500 (12) 281 3.8 4 2,159 2,896 3,578 (35.7) 34.2 23.5 31 22.9 18.5 11.3 9.1 7.4 2.1 2.0 1.8 7.2 9.0 10.1 0.1 0.1 0.2 17.1 Schaeffler India SELL 3,645 3,500 (4) 114 1.5 31 87 139 166 (26.5) 60.7 19.5 42 26 22 20.6 13.7 11.4 3.6 3.2 2.8 8.8 12.8 13.5 — — — 0.8 SKF REDUCE 1,482 1,450 (2) 73 1.0 49 43 54 67 (26.4) 26.2 22.9 34 27 22 25.0 19.0 15.2 5.0 4.3 3.8 14.4 15.9 16.9 7.3 0.6 0.7 0.7 Tata Motors SELL 133 120 (10) 478 5.9 3,829 (12.7) 12.8 17.5 38.6 200.4 36.5 NM 10.4 7.6 4.8 3.4 2.9 0.8 0.8 0.7 NM 7.6 9.6 — — — 138 Timken SELL 1,071 825 (23) 81 1.1 75 22 35 42 (34.2) 60.6 21.7 50 31 25 28.5 18.7 15.3 5.9 5.0 4.3 11.0 17.6 18.2 0.1 0.1 0.2 0.9 TVS Motor SELL 458 300 (35) 218 2.9 475 7.5 15.5 20.1 (41.9) 106.0 29.4 61 29 23 21.2 14.2 11.7 5.7 5.0 4.4 9.7 18.2 21 0.7 0.8 1.1 21 Varroc Engineering BUY 285 380 34 38 0.5 135 (13) 22 38 (7,121.8) 267.2 72.4 NM 13.0 7.6 10.0 5.4 4.1 1.3 1.2 1.1 NM 9.5 14.2 — — — 1.6 Automobiles & Components Cautious 7,790 104.9 (11.5) 123.6 25.8 43.0 19.2 15.3 11.7 8.0 6.6 2.7 2.4 2.2 6.2 12.6 14.1 1.2 1.4 1.6 708 Banks AU Small Finance Bank SELL 769 620 (19) 236 3.2 304 29.0 23.9 31.4 30.8 (17.6) 31.4 27 32 24 — — — 4.6 4.1 3.5 18.3 12.9 14.8 — — — 6.5 Axis Bank BUY 523 600 15 1,599 21.5 2,822 34.4 43 54 496.2 24.5 25.4 15 12.2 9.7 — — — 1.7 1.5 1.4 10.9 12.3 13.9 1.0 1.2 1.5 156 Bandhan Bank ADD 301 340 13 485 6.5 1,610 20.1 20.4 24.8 7.3 1.0 22.0 14.9 14.8 12.1 — — — 2.7 2.3 1.9 19.3 16.3 16.9 — — — 89 Bank of Baroda ADD 45 65 45 207 2.8 4,627 8.8 18.3 20 648.3 106.8 9.3 5 2.4 2.2 — — — 0.4 0.4 0.3 6.0 11.6 11.5 3.9 8.2 8.9 19.1 Canara Bank REDUCE 87 85 (3) 127 1.7 1,454 (1.0) 7.0 20.1 95.2 774.8 185.4 NM 12.4 4.4 — — — 0.4 0.4 0.4 NM 1.9 5.3 — — — 13.0

City Union Bank ADD 152 160 5 113 1.5 737 6.8 9.4 11.6 4.7 39.3 22.6 23 16.2 13.2 — — — 2.2 2.0 1.7 9.1 11.6 13.0 0.8 1.1 1.3 4.9 India Daily Summary Daily Summary India DCB Bank BUY 78 150 91 24 0.3 310 9.3 11.6 16.7 (14.2) 23.9 44.4 8.4 6.8 4.7 — — — 0.7 0.7 0.6 8.8 10.0 13.0 1.2 1.5 2.1 3.0 Equitas Holdings BUY 45 100 121 15 0.2 342 5.5 8.8 16.2 (8.0) 58.7 84.6 8.2 5.1 2.8 — — — 0.5 0.5 0.4 6.6 9.6 15.6 — — — 4.9 Federal Bank BUY 52 80 55 103 1.4 1,993 7.1 7.7 11.7 (8.4) 8.1 52.4 7.3 6.7 4.4 — — — 0.7 0.7 0.6 9.4 9.5 13.2 3.1 3.3 5.0 28 HDFC Bank ADD 1,215 1,300 7 6,690 89.9 5,483 53 58 68 10.3 10.4 16.3 23 21 18 — — — 3.5 3.1 2.8 15.9 15.5 16.0 0.8 0.9 1.1 186 ICICI Bank BUY 417 500 20 2,879 38.7 6,893 23.3 27 30 90.0 15.9 11.4 18 15.5 13.9 — — — 2.1 1.9 1.7 12.3 12.3 12.5 1.1 1.3 1.4 170 IndusInd Bank ADD 628 620 (1) 475 6.4 756 26 61 75 (58.8) 132.4 22.9 24 10.3 8.4 — — — 1.3 1.1 1.0 5.5 11.2 12.5 0.6 1.5 1.8 154 Karur Vysya Bank BUY 32 65 102 26 0.3 799 4.7 7 9 60.5 39.0 42.7 7 4.9 3.4 — — — 0.4 0.4 0.4 5.6 7.4 10.0 3.8 5.3 7.6 1.5 Punjab National Bank REDUCE 28 33 18 263 3.5 9,411 1 5 7 5.7 885.4 34.5 53 5.4 4.0 — — — 0.5 0.5 0.4 0.7 6.0 7.4 — — — 13.3 RBL Bank BUY 180 270 50 91 1.2 597 9.5 19 24 (4.8) 96.0 28.5 19 9.7 7.5 — — — 0.9 0.8 0.8 4.9 8.5 10.1 0.8 1.6 2.0 54 State Bank of India BUY 196 340 73 1,750 23.5 8,925 24 29 40 49.2 17.9 38.4 8 6.9 5.0 — — — 0.9 0.8 0.7 8.9 9.6 11.9 0.1 0.1 0.1 156 Ujjivan Financial Services BUY 213 490 130 26 0.3 121 33.6 44 - 24.9 31.6 (100.0) 6 4.8 - — — — 1.0 0.9 — 17.0 19.3 NM 2.0 2.8 0.0 5.6 Ujjivan Small Finance Bank ADD 31 39 27 53 0.7 1,750 2 2 3 (12.3) 2.5 82.3 19 18.1 9.9 — — — 1.8 1.7 1.4 9.3 8.7 13.9 0.0 0.0 0.0 0.0 Union Bank REDUCE 24 25 4 153 2.1 6,407 (1) 0 4 86.0 135.5 901.5 NM 56.7 5.7 — — — 0.4 0.4 0.4 NM 0.5 4.7 (0.7) 0.3 2.6 1.5

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK YES Bank SELL 12 11 (10) 307 4.1 25,055 (1) (0) 0 95.4 49.9 131.1 NM NM 130.8 — — — 1.1 1.1 1.1 NM NM 0.7 0.0 0.0 0.0 34

Banks Attractive 15,623 209.9 112.4 30.9 27.2 18 13.5 10.6 1.4 1.3 1.2 8.0 9.6 11.1 0.8 1.0 1.2 1,100

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Source: Company, Bloomberg, Kotak Institutional Equities estimates 2020 3, November

KOTAK INSTITUTIONAL EQUITIES RESEARCH 141

Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India Fair O/S ADVT Price (Rs) Value 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 2-Nov-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E (US$ mn) Building Products Astral Poly Technik SELL 1,121 765 (32) 169 2.3 151 18.3 25 31 11.3 37.9 24.6 61 44 36 33.5 25.2 20.1 9.7 8.2 6.9 17.0 20.0 21 0.2 0.4 0.5 2.6 Building Products Cautious 169 2.3 11.3 37.9 24.6 61 44 36 33.5 25.2 20.1 9.7 8.2 6.9 15.8 18.4 19.4 0.2 0.4 0.5 2.6 Capital goods ABB SELL 876 840 (4) 186 2.5 212 9 21 26 (50.0) 140.4 22.5 100 41 34 64.4 26.8 21.6 5.2 4.8 4.4 5.3 12.1 13.7 0.7 0.8 0.9 2.3 Ashoka Buildcon BUY 60 130 116 17 0.2 281 9.3 11.4 12.4 (32.8) 23.3 8.3 6.5 5.3 4.9 4.4 3.6 2.8 0.6 0.6 0.5 9.6 10.9 10.8 2.5 3.0 3.3 1.7 Bharat Electronics BUY 89 130 47 216 2.9 2,437 6.2 6.9 7.0 (16.7) 11.3 1.4 14.2 12.8 12.6 8.1 7.0 6.3 2.0 1.8 1.7 14.5 14.9 13.9 2.6 2.9 3.0 16.7 BHEL SELL 28 28 0 97 1.3 3,482 (2.2) 2.4 2.7 48.4 208.5 14.1 NM 11.7 10.3 (17.9) 4.9 4.2 0.3 0.3 0.3 NM 2.8 3.2 (3.5) 3.4 3.5 19.6 Carborundum Universal ADD 295 310 5 56 0.8 189 13.6 16.1 18.3 (5.3) 18.1 14.1 22 18.3 16.1 12.1 10.1 8.6 2.8 2.5 2.3 13.3 14.3 14.8 1.3 1.5 1.7 1.1 Cochin Shipyard BUY 340 530 56 45 0.6 132 38 46 38 (21.6) 21.8 (16.8) 8.9 7.3 8.8 4.5 4.4 4.7 1.1 1.0 0.9 12.9 14.3 11.0 3.5 3.8 4.1 1.7 Cummins India BUY 437 525 20 121 1.6 277 21 26 29 (16.1) 21.1 10.5 20 16.8 15.2 21.3 16.9 14.9 2.8 2.7 2.5 13.9 16.2 17.1 2.7 3.3 3.6 8.1 Dilip Buildcon BUY 325 545 68 44 0.6 137 27 46 65 (12.3) 73.2 40.4 12.2 7.0 5.0 5.2 3.8 3.1 1.1 1.0 0.8 9.6 14.7 17.5 0.1 0.3 0.4 1.6

IRB Infrastructure BUY 113 150 33 40 0.5 351 15 12 9 (26.7) (22.8) (21.0) 7.5 9.7 12.3 6.4 5.8 5.0 0.6 0.5 0.5 7.7 5.7 4.3 3.4 2.1 2.4 2.8 -

Kalpataru Power Transmission BUY 250 470 88 39 0.5 153 25 40 44 (1.2) 57.4 11.8 10.0 6.3 5.7 4.3 3.8 3.2 1.0 0.9 0.8 10.9 15.4 15.1 1.3 1.8 2.1 1.5 November 3, 2020 3, November KEC International BUY 330 360 9 85 1.1 257 24.5 30 34 11.6 24.3 12.6 13.4 10.8 9.6 7.8 6.4 5.7 2.5 2.1 1.8 21 21 20 0.8 1.0 1.1 2.2 L&T BUY 929 1,300 40 1,305 17.5 1,403 34 63 76 (46.9) 86.9 21.0 28 14.8 12.2 20.6 15.3 14.0 1.9 1.8 1.6 7.5 12.5 13.9 1.6 2.1 2.5 68 Sadbhav Engineering BUY 47 105 123 8 0.1 172 4.7 10.9 11.9 12.8 130.1 9.3 9.9 4.3 3.9 6.0 3.7 3.2 0.4 0.3 0.3 3.8 8.3 8.4 — — — 0.5

Siemens SELL 1,283 1,000 (22) 457 6.1 356 32 36 43 70.6 11.7 17.5 40 35 30 26.9 23.9 20.3 4.5 4.1 3.8 11.7 12.1 13.0 0.7 0.8 0.9 12.5 Thermax BUY 754 810 7 90 1.2 113 14 29 36 (24.9) 102.5 24.2 53 26 21 34.5 18.7 15.2 34.5 18.7 15.2 5.2 10.3 12.3 1.2 1.9 2.5 0.9 Capital goods Attractive 2,804 37.7 (27.9) 69.8 15.6 27 15.6 13.5 1.8 1.7 1.5 6.7 10.6 11.4 1.3 1.9 2.2 141 Commercial & Professional Services SIS BUY 385 425 10 57 0.8 149 16 19 24 5.5 17.5 27.5 24 21 16.1 11.7 10.6 9.0 3.6 3.1 2.6 15.8 16.0 17.4 0.2 0.2 0.3 0.6 TeamLease Services ADD 2,200 2,450 11 38 0.5 17 49 67 93 140.9 36.5 38.1 45 33 24 31.6 24.6 18.8 5.7 4.9 4.0 13.7 16.1 18.7 — — — 1.3 Commercial & Professional Services Attractive 94 1.3 23.7 22.5 30.6 29 24 18.3 15.3 13.4 11.1 4.1 3.6 3.0 14.2 14.9 16.4 0.1 0.1 0.2 2 Commodity Chemicals Asian Paints REDUCE 2,173 2,000 (8) 2,084 28.0 959 27.4 37.2 44.0 0.7 35.8 18.3 79 58 49 48.2 37.9 33.1 18.1 15.6 13.4 24 29 29 0.6 0.8 1.0 68 Berger Paints SELL 628 430 (32) 610 8.2 971 6.2 9.4 11.1 (8.5) 51.7 18.2 101 67 57 60.4 42.5 36.6 19.8 16.8 14.3 21 27 27 0.2 0.5 0.6 12.2

Kansai Nerolac ADD 514 560 9 277 3.7 539 9.4 13.0 15.3 (5.5) 38.9 17.1 55 39 34 35.1 25.8 22.5 6.8 6.2 5.6 12.8 16.3 17.3 0.6 0.9 1.0 1.9

Tata Chemicals ADD 314 355 13 80 1.1 255 20.0 33.3 36.8 (36.9) 66.5 10.7 15.7 9.4 8.5 5.1 3.9 3.4 0.6 0.6 0.6 3.9 6.3 6.7 2.2 3.7 4.1 13.7 Commodity Chemicals Neutral 3,051 41.0 (7.9) 42.1 17.1 72 51 43 38.8 29.6 26.0 9.6 8.6 7.8 13.3 17.1 18.0 0.6 0.8 1.0 96 Construction Materials ACC BUY 1,666 1,800 8 313 4.2 188 76.1 90.8 102.1 5.3 19.2 12.4 22 18.4 16.3 10.1 8.4 7.0 2.6 2.4 2.2 12.1 13.5 14.1 2.3 2.7 3.1 24 Ambuja Cements BUY 261 300 15 517 6.9 1,986 12.2 14.4 17.4 15.6 18.0 20.5 21 18.0 15.0 8.2 6.6 5.2 2.2 2.0 1.8 10.3 11.8 12.9 6.5 1.0 1.2 18.4 Dalmia Bharat BUY 839 1,075 28 157 2.1 192 18.4 38.5 60.6 31.9 109.3 57.3 46 22 13.8 8.6 6.6 4.9 1.5 1.4 1.3 3.3 6.6 9.6 — — — 2.0 Grasim Industries ADD 788 700 (11) 518 7.0 657 42.5 71.6 99.6 (19.3) 68.5 39.1 18.5 11.0 7.9 8.9 6.0 4.5 0.9 0.8 0.7 4.8 7.6 9.8 0.1 0.3 0.6 30 J K Cement ADD 1,810 1,550 (14) 140 1.9 77 52.2 96.1 115.6 (18.7) 84.0 20.2 35 18.8 15.7 14.3 9.7 8.3 4.2 3.5 2.9 12.6 20 20 0.6 0.6 0.6 2.1 JK Lakshmi Cement BUY 282 340 21 33 0.4 118 16.0 27.4 35.2 (32.0) 71.4 28.6 17.6 10.3 8.0 6.3 4.9 4.1 1.8 1.6 1.3 10.6 16.2 17.9 0.8 1.5 1.9 1.1 Orient Cement ADD 62 75 20 13 0.2 205 8.9 6.7 8.5 109.6 (24.1) 26.9 7.0 9.3 7.3 4.2 4.8 4.1 1.0 0.9 0.9 15.3 10.5 12.3 3.2 3.2 3.2 0.4 Shree Cement SELL 21,671 16,000 (26) 782 10.5 36 382.0 651.5 720.3 (12.2) 70.5 10.6 57 33 30 22.9 16.0 14.1 5.6 4.9 4.3 10.3 15.8 15.3 0.5 0.5 0.5 19.8 UltraTech Cement ADD 4,548 4,900 8 1,313 17.6 289 166.4 217.8 266.0 25.2 30.8 22.1 27 21 17.1 13.7 10.9 9.1 3.0 2.7 2.3 11.6 13.5 14.5 0.3 0.4 0.5 37 Construction Materials Attractive 3,786 50.9 3.8 42.2 25.1 27 19.1 15.2 11.5 8.6 6.9 2.2 2.0 1.8 8.2 10.6 11.9 1.4 0.7 0.9 135

Source: Company, Bloomberg, Kotak Institutional Equities estimates

142 142 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

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

Company Rating 2-Nov-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E (US$ mn) Consumer Durables & Apparel Crompton Greaves Consumer SELL 291 255 (12) 183 2.5 627 8.0 9.5 10.6 1.1 18.9 11.7 36 31 27 27 23 21 10.1 8.0 6.5 31 29 26 1.0 0.9 0.9 3.9 Havells India SELL 782 600 (23) 489 6.6 626 14.7 16.2 18.6 24.8 10.3 14.7 53 48 42 36 33 28 10.1 9.0 8.0 20 19.7 20 0.7 0.7 0.8 15.9 Page Industries REDUCE 19,662 18,250 (7) 219 2.9 11 240 407 474 (22.2) 70.0 16.3 82 48 42 51 32 28 23.8 19.2 16.0 31 44 42 0.7 1.2 1.4 15.7 Polycab ADD 911 970 6 136 1.8 149 44 52 58 (13.7) 18.0 9.9 20 17.4 15.8 13 11 9 3.1 2.7 2.4 16.1 16.5 15.9 0.7 0.8 0.9 3.5 TCNS Clothing Co. REDUCE 381 380 (0) 23 0.3 66 0 14 17 (99.8) 69,289.2 24.5 19,055 27 22 25 10 8.5 3.6 3.0 2.6 0.0 11.9 12.6 — — — 0.3 Vardhman Textiles ADD 766 720 (6) 44 0.6 57 25 90 104 (70.8) 260.6 16.1 31 8.5 7.4 11.7 5.5 4.7 0.7 0.7 0.6 2.3 8.0 8.7 1.6 2.6 3.3 0.3 Voltas SELL 720 530 (26) 238 3.2 331 12.9 19.7 22.8 (20.8) 52.8 16.1 56 37 32 51 30 26 5.2 4.7 4.3 9.6 13.5 14.2 0.5 0.7 0.8 20 Whirlpool SELL 2,051 1,750 (15) 260 3.5 127 33 49 61 (12.4) 49.1 24.5 62 42 34 42 29 23 9.2 8.3 7.6 15.6 21 24 0.5 1.0 1.5 1.8 Consumer Durables & Apparel Cautious 1,593 21.4 (14.7) 41.6 48 34 29 31 23 19 6.1 5.4 12.7 16.0 16.5 0.7 0.9 62 Consumer Staples Bajaj Consumer Care ADD 186 230 24 27 0.4 148 15.0 14.8 15.7 19.7 (1.3) 6.1 12.4 12.6 11.9 9.3 9.1 8.2 3.6 3.2 2.9 31 27 26 4.3 4.3 4.8 2.1 Britannia Industries ADD 3,420 4,050 18 823 11.1 240 78 81 93 32.8 2.9 15.8 44 42 37 33 31 27 27.6 20.1 16.9 50 54 50 3.2 1.5 1.7 36 Colgate-Palmolive (India) ADD 1,511 1,600 6 411 5.5 272 33 37 43 18.0 11.8 15.2 45 40 35 29.3 26.3 23.1 25.3 24.1 22.9 56 61 67 2.1 2.4 2.7 14.6 Dabur India REDUCE 506 415 (18) 895 12.0 1,767 9.5 11.0 12.3 10.2 15.3 11.9 53 46 41 43 36 32 12.5 11.4 10.3 24 26 26 1.2 1.4 1.5 23 Godrej Consumer Products ADD 656 750 14 671 9.0 1,022 15.4 18.5 21.2 11.8 20.3 14.6 43 35 31 29 24 21 7.4 6.7 6.1 18.6 19.9 21 1.1 1.4 1.8 13.6 Hindustan Unilever ADD 2,072 2,500 21 4,868 65.4 2,343 35 43 51 11.4 23.3 18.0 60 48 41 42 34 29 11.2 10.7 10.2 32 23 26 1.5 1.9 2.2 64 ITC BUY 167 260 56 2,052 27.6 12,318 10.6 12.5 13.8 (7.9) 17.9 9.8 15.7 13.3 12.1 11.0 9.1 8.1 3.1 3.0 2.9 19.2 22 24 5.5 6.4 7.1 69 Jyothy Laboratories ADD 133 160 20 49 0.7 367 5.5 6.0 6.9 17.5 9.1 13.5 24 22 19.4 16.6 15.3 13.5 3.7 3.5 3.3 16.1 16.6 17.7 2.6 3.0 3.4 1.3 Marico ADD 367 400 9 474 6.4 1,290 8.9 9.9 11.0 10.1 10.6 12.0 41 37 33 29 26 23 14.3 13.2 12.2 36 37 38 1.9 2.1 2.4 15.1 Nestle India REDUCE 17,110 16,000 (6) 1,650 22.2 96 226 265 307 10.5 17.5 15.6 76 65 56 50 43 38 74.1 49.4 35.7 105 92 74 1.1 0.9 1.0 28 Tata Consumer Products ADD 494 470 (5) 455 6.1 922 9.8 11.9 13.5 22.3 22.4 12.9 51 41 37 26 24 22 3.1 3.0 2.9 6.4 7.4 8.0 0.7 0.9 1.0 39 United Breweries ADD 925 1,120 21 245 3.3 264 4.9 20.3 26.3 (70.0) 318.8 29.5 191 46 35 54 23 19 6.9 6.0 5.3 3.6 14.1 16.0 0.1 0.6 0.9 11.1 United Spirits ADD 504 620 23 366 4.9 727 8.6 14.0 16.9 (25.0) 62.8 20.6 58 36 30 31 22 19 8.0 6.6 5.7 14.6 20 20 — — 1.0 14.7 Varun Beverages BUY 670 825 23 193 2.6 289 6.5 25.5 32.5 (60.0) 291.5 27.7 103 26 21 21 12 10 5.4 4.6 3.8 5.4 18.9 20 0.2 0.3 0.4 2.6 Consumer Staples Attractive 13,179 177.0 3.1 21.5 14.1 40 33 29 28 23 20 8.0 7.5 7.0 20 23 24 2.1 2.3 2.6 333 Diversified Financials Bajaj Finance REDUCE 3,420 3,000 (12) 2,061 27.7 600 73 135 172 (17) 85 27 47 25 19.9 — — — 5.7 4.7 3.9 12.8 20 22 0.2 0.4 0.5 243 Bajaj Finserv BUY 5,701 8,000 40 907 12.2 159 270 425 528 28 58 24 21 13.4 10.8 — — — 2.9 2.5 2.1 13.7 19.9 21 0.2 0.2 0.2 52 Cholamandalam BUY 293 350 19 240 3.2 820 20.0 26.4 32.7 56 32.0 23.8 14.7 11.1 9.0 — — — 2.7 2.3 1.8 18.4 20 21 0.8 1.0 1.2 22 HDFC ADD 2,041 2,240 10 3,665 49.2 1,789 61 68 81 (40.3) 10 20.4 33 30 25 — — — 3.4 3.1 2.9 11.0 10.8 12.0 1.1 1.2 1.4 121 HDFC AMC REDUCE 2,252 1,950 (13) 479 6.4 213 57 68 79 (3.5) 19 15.8 39 33 29 — — — 10.5 9.2 8.0 28 29 30 1.4 1.7 1.9 11.1

IIFL Wealth ADD 910 1,100 21 79 1.1 88 34.7 45.1 60.7 46 29.7 34.6 26 20 15.0 — — — 2.8 2.6 2.4 10.4 13.4 17.0 5.5 3.2 3.3 0.7 India Daily Summary Daily Summary India L&T Finance Holdings ADD 66 90 37 132 1.8 2,005 4 9 13 (55.7) 136 49.6 17.5 7.4 5.0 — — — 0.9 0.8 0.7 5.1 11.2 14.9 2.2 2.5 2.5 11.9 LIC Housing Finance ADD 299 375 25 151 2.0 505 44.0 71.5 83.5 (8) 62.6 16.7 6.8 4.2 3.6 — — — 1.0 0.8 0.7 11.6 16.8 17.1 2.5 4.0 4.7 21 Mahindra & Mahindra Financial BUY 125 160 28 154 2.1 1,232 8.3 17.2 20.7 (44) 107.0 20.9 15.1 7.3 6.0 — — — 1.1 1.0 0.9 7.7 13.1 14.3 1.0 2.7 3.3 18.2 Muthoot Finance REDUCE 1,238 1,100 (11) 497 6.7 401 77 87 102 2.4 13 16.8 16.1 14.2 12.2 — — — 3.6 3.0 2.5 24 23 22 1.2 1.4 1.6 42 Shriram City Union Finance BUY 823 1,400 70 54 0.7 66 138 179 200 (9.0) 30 11.7 6.0 4.6 4.1 — — — 0.7 0.6 0.6 12.0 13.9 13.8 2.2 3.3 3.7 0.8 Shriram Transport BUY 754 1,100 46 191 2.6 253 74.5 113.9 149.1 (32) 53.0 30.9 10.1 6.6 5.1 — — — 1.0 0.9 0.7 9.6 12.9 15.0 1.5 2.3 3.0 42 Diversified Financials Attractive 8,671 116.5 (18.5) 40.2 20.5 26 18.4 15.3 2.9 2.6 2.4 11.3 14.2 15.6 0.9 1.1 1.3 589

Source: Company, Bloomberg, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK

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November 3, 2020 3, November

KOTAK INSTITUTIONAL EQUITIES RESEARCH 143

Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India Fair O/S ADVT Price (Rs) Value 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 2-Nov-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E (US$ mn) Electric Utilities CESC BUY 572 820 43 76 1.0 133 108 124 135 10 14.8 8.3 5.3 4.6 4.2 4.4 3.9 3.4 0.6 0.5 0.5 11.0 11.4 11.3 2.2 2.3 2.6 2.7 JSW Energy BUY 59 65 11 97 1.3 1,640 4.8 5.3 5.6 (25) 12 4.7 12.3 11.1 10.6 5.8 5.1 4.6 0.8 0.7 0.7 6.5 6.8 6.6 0.0 — — 2.3 NHPC ADD 20 26 31 199 2.7 10,045 3.0 3.2 3.3 5.9 9 1.2 6.7 6.1 6.1 7.9 7.1 6.5 0.6 0.6 0.6 9.3 9.8 9.5 8.8 9.5 9.5 1.5 NTPC BUY 89 125 40 883 11.9 9,895 12.7 15.0 16.0 14.2 18.2 6.6 7.0 5.9 5.6 7.8 6.0 5.1 0.7 0.7 0.6 10.7 11.7 11.5 3.8 5.0 5.4 38 Power Grid BUY 173 220 27 906 12.2 5,232 22.0 25 28 6 16.1 8.9 7.9 6.8 6.2 6.5 5.8 5.3 1.3 1.2 1.1 17.2 18.3 18.1 6.1 7.1 7.8 24 Tata Power BUY 53 70 33 168 2.3 2,705 4.4 6.3 7.1 0 42 12.9 11.8 8.3 7.4 8.0 7.4 6.9 0.7 0.7 0.6 6.4 8.5 8.8 0.0 — — 21 Electric Utilities Attractive 2,328 31.3 7.9 17.1 7.3 7.6 6.5 6.1 0.9 0.8 0.7 11.3 12.2 12.1 4.7 5.6 6.0 89 Fertilizers & Agricultural Chemicals Bayer Cropscience SELL 5,374 3,400 (37) 242 3.2 45 134.2 149.9 166.0 3.8 11.7 10.8 40 36 32 29 25 22 7.9 6.7 5.8 21 20 19.2 0.5 0.6 0.6 2.9 Dhanuka Agritech SELL 715 650 (9) 34 0.5 48 37.0 40.8 45.8 24.4 10.4 12.2 19.3 17.5 15.6 14.4 12.7 11.0 4.1 3.5 3.0 23 21 21 1.3 1.7 2.2 1.2 Godrej Agrovet SELL 514 420 (18) 99 1.3 192 14.9 17.5 20.4 29.1 17.2 17 34 29 25 17 15 13 4.0 3.6 3.3 12.3 13.0 13.6 1.0 1.2 1.4 1.3

PI Industries SELL 2,229 1,700 (24) 338 4.5 148 50.9 59.5 70.8 54.2 17 19 44 37 31 31 25 21 10.1 8.4 6.9 26 25 24 0.3 0.5 0.6 9.0 -

Rallis India ADD 240 290 21 47 0.6 195 11.3 14.5 17.6 25.1 28.2 21.5 21.2 16.5 13.6 14.5 11.4 9.3 3.0 2.6 2.2 14.7 16.7 17.7 1.1 1.3 1.4 3.3 November 3, 2020 3, November UPL SELL 445 420 (6) 340 4.6 765 32.4 37.3 41.2 39.6 15.1 10.3 14 11.9 10.8 7.5 6.7 6.0 1.9 1.7 1.5 14.4 14.9 14.7 1.9 2.2 2.4 37 Fertilizers & Agricultural Chemicals Cautious 1,099 14.8 34.8 16.0 12.9 24 21 18.6 12.2 10.8 9.6 3.8 3.3 2.9 15.4 15.7 15.6 1.0 1.1 1.3 55 Gas Utilities

GAIL (India) BUY 84 140 67 379 5.1 4,510 7.6 11.0 12.4 (42.1) 44.8 12.3 11.0 7.6 6.8 8.0 5.6 4.8 0.8 0.8 0.7 7.7 10.6 11.2 4.8 6.0 7.1 17.3 GSPL SELL 191 200 5 108 1.4 564 13.2 11.8 8.0 (23.1) (10.6) (32.2) 14.5 16.2 23.9 5.7 5.9 7.7 1.5 1.4 1.3 10.6 8.7 5.6 1.0 1.2 1.0 2.6 Indraprastha Gas SELL 404 380 (6) 283 3.8 700 14.4 20.7 23.1 (13.9) 44.1 11.5 28.1 19.5 17.5 19.5 13.7 12.1 4.9 4.2 3.7 18.6 23 22 0.7 1.1 1.5 19.6 Mahanagar Gas ADD 816 1,115 37 81 1.1 99 53.8 81.3 86.6 (27.9) 51.1 6.5 15.2 10.0 9.4 9.8 6.3 5.5 2.5 2.1 1.9 17.0 23 22 2.5 4.2 5.0 13.1 Petronet LNG BUY 227 300 32 340 4.6 1,500 18.3 21.7 24.0 3.7 18.5 10.7 12.4 10.5 9.4 6.8 5.8 5.3 2.9 2.8 2.7 24 27 29 6.0 7.6 9.0 13.2 Gas Utilities Attractive 1,190 16.0 (26.2) 31.7 8.7 14.1 10.7 9.8 8.6 6.6 6.0 1.6 1.5 1.4 11.5 14.1 14.4 3.7 4.7 5.6 66 Health Care Services Apollo Hospitals BUY 2,069 1,840 (11) 288 3.9 139 -18.1 32 60 (198) 277 86 NM 64.5 34.7 38.8 18.3 15.1 9.0 8.3 6.8 NM 13.4 21 (0.4) 0.6 1.2 37 Dr Lal Pathlabs SELL 2,278 1,330 (42) 190 2.6 83 30.1 39.3 42.9 11.4 30.5 9.1 75.6 57.9 53.1 48.3 36.0 33.8 15.7 13.2 11.3 22 25 23 0.4 0.5 0.6 5.5 HCG BUY 120 150 25 15 0.2 143 (8.7) (2.4) (1.7) 28 73 27 NM NM NM 12.4 6.8 5.9 1.8 1.8 1.9 NM NM NM — — — 0.2

Metropolis Healthcare SELL 1,950 1,340 (31) 99 1.3 51 36.5 42.0 45.2 21.6 15.0 8 53.4 46.5 43.2 33.3 29.3 26.6 15.4 12.6 10.6 32 30 27 0.6 0.6 0.7 3.4 Narayana Hrudayalaya BUY 328 345 5 67 0.9 204 -7.4 7.6 10.8 (227.9) 202 42 NM 43.3 30.4 61.4 14.5 11.9 6.8 5.9 4.9 NM 14.6 17.7 — — — 1.0 Health Care Services Attractive 727 9.8 (89) 1,402 40 704.0 46.9 33.6 26.2 15.7 13.5 7.0 6.3 5.4 1.0 13.4 16.1 0.0 0.5 0.7 48 Hotels & Restaurants Jubilant Foodworks ADD 2,167 2,500 15 286 3.8 133 13 34 44 (45) 163.1 30 167.4 63.6 48.8 38.2 24.4 20.1 23.8 18.1 14.4 14.7 32 33 0.2 0.5 0.7 30 Lemon Tree Hotels BUY 27 35 29 22 0.3 790 -1.2 0.6 1.0 (932) 147 77 NM 46.7 26.3 34.5 11.7 8.0 3.0 2.9 2.7 NM 6.2 10.6 — 1.0 1.4 0.7 Hotels & Restaurants Attractive 307 4.1 (76) 579 35 417.1 61.5 45.5 37.8 21.6 17.2 15.9 13.1 10.9 3.8 21 24 0.2 0.5 0.8 30 Insurance HDFC Life Insurance ADD 587 615 5 1,186 15.9 2,010 6.8 7.4 7.8 5.8 8.2 6.3 86 80 75 — — — 15.5 14.3 13.1 18.8 18.7 18.3 0.3 0.3 0.3 31 ICICI Lombard SELL 1,225 980 (20) 557 7.5 454 34.5 33.7 38.3 31 (2) 14 36 36 32 — — — 7.4 6.5 5.6 23 19.6 18.7 0.3 0.6 0.6 8.0 ICICI Prudential Life BUY 403 500 24 579 7.8 1,436 8.5 9.6 9.9 14 13.2 3.4 47 42 41 — — — 6.8 6.0 5.4 15.2 15.2 14.0 0.4 0.4 0.4 11.8 Max Financial Services NR 602 — — 162 2.2 343 9.5 26.7 16.0 (6) 180 (40) 63 22 38 — — — — — — 13.5 38 17.3 — 1.1 0.3 13.7 SBI Life Insurance BUY 766 1,100 44 766 10.3 1,001 17.8 20.8 23.6 25.3 16.9 13.1 43 37 33 — — — 8.1 6.8 5.8 20 20 19.3 — 0.4 0.5 17.6 Insurance Attractive 3,250 43.7 19.5 21.7 2.2 51.8 42.6 42 9.1 7.4 6.9 17.6 17.3 16.5 0.3 0.3 0.3 82

Source: Company, Bloomberg, Kotak Institutional Equities estimates

144 144 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

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

Company Rating 2-Nov-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E (US$ mn) Internet Software & Services Info Edge SELL 3,552 2,800 (21) 457 6.1 128.3 26.7 43.1 52.8 (0.7) 61.3 22.4 132.9 82.4 67.3 123.1 75.4 59.7 10.0 9.2 8.3 9.8 11.6 12.9 0.2 0.3 0.4 25 Just Dial SELL 597 550 (8) 37 0.5 61.8 25.9 29.9 35.5 (38.2) 15.3 18.8 23.0 20.0 16.8 15.4 12.8 10.6 3.0 2.6 2.3 12.7 14.0 14.4 — — — 17.9 Internet Software & Services Cautious 494 6.6 (16.3) 46.7 21.5 98.1 66.9 55.0 89.9 60.9 49.6 8.5 7.7 6.9 8.7 11.5 12.6 0.2 0.3 0.3 43 IT Services HCL Technologies ADD 822 945 15 2,232 30.0 2,716 45.3 50.0 55.1 11.1 10.4 10.1 18.2 16.4 14.9 10.9 9.7 8.6 3.7 3.2 2.7 23 21 19.8 1.2 1.7 1.7 108 Infosys BUY 1,072 1,400 31 4,567 61.4 4,250 43.7 48.9 55.4 12.2 12.0 13.2 24.5 21.9 19.4 16.1 14.4 12.6 6.2 5.6 5.1 27 27 28 2.4 2.8 3.3 153 L&T Infotech ADD 2,853 3,350 17 498 6.7 176 101.3 115.3 138.1 17 13.8 19.7 28.2 24.7 20.7 18.5 16.7 14.1 7.7 6.4 5.3 30 28 28 1.1 1.2 1.4 13.3 Mindtree SELL 1,318 1,225 (7) 217 2.9 165 60.9 67.1 73.3 59 10 9 21.7 19.6 18.0 13.5 12.4 11.1 5.7 4.7 4.0 29 26 24 1.4 1.5 1.7 29 Mphasis REDUCE 1,359 1,350 (1) 254 3.4 187 66.3 74.3 83.3 4 12.0 12.1 20.5 18.3 16.3 13.3 11.6 10.2 4.0 3.5 3.1 20 20 20 2.6 2.6 2.6 8.0 TCS REDUCE 2,605 2,800 8 9,773 131.3 3,750 86.6 99.6 110.7 0 15.0 11.2 30.1 26.2 23.5 21.0 18.5 16.6 11.5 9.7 8.9 38 40 39 1.3 2.3 3.4 170 Tech Mahindra BUY 815 1,020 25 710 9.5 880 47.5 55.4 64.3 3.5 16.8 16.0 17.2 14.7 12.7 9.6 8.2 7.0 3.0 2.7 2.5 18.3 19.6 20 2.7 2.9 3.1 62 Wipro ADD 335 380 13 1,914 25.7 5,649 18.0 20.0 21.9 8.6 10.7 9.6 18.6 16.8 15.3 12.1 10.9 9.6 3.6 3.0 2.6 18.7 19.1 18.2 0.6 1.5 1.5 85 IT Services Attractive 20,165 270.9 6.0 12.0 11.7 24.7 22.0 19.7 16.3 14.5 12.9 6.5 5.6 5.0 26 26 25 1.6 2.2 2.9 628 Media DB Corp. REDUCE 75 81 9 13 0.2 175 5.3 14.1 14.2 (66.5) 166.7 1.2 14.1 5.3 5.2 4.5 2.2 2.4 0.8 0.8 0.8 5.4 14.3 14.6 2.7 16.1 17.4 0.2 Jagran Prakashan REDUCE 37 37 0 10 0.1 281 3.9 7.3 8.4 (43.6) 87 NA 9.4 5.0 NA 1.9 1.2 NA 0.5 0.5 NA 5.7 10.3 11.5 5.4 13.6 13.6 0.2 PVR BUY 1,105 1,650 49 61 0.8 55 -70.7 53.3 67.1 (344) 175 26 NM 20.7 16.5 (36.5) 8.5 7.2 2.8 2.5 2.2 NM 12.6 14.1 (0.6) 0.5 0.6 44 Sun TV Network REDUCE 423 435 3 167 2.2 394 38.5 40.2 42.3 8 4.6 5.1 11.0 10.5 10.0 7.3 6.8 6.5 2.8 2.7 2.6 26 26 26 5.9 6.5 7.1 15.9 Zee Entertainment Enterprises ADD 183 225 23 176 2.4 960 10.9 16.5 17.9 (2.1) 51.4 8.4 16.8 11.1 10.2 10.4 6.9 5.9 1.8 1.6 1.5 10.9 15.3 14.9 1.9 2.2 2.5 107 Media Cautious 427 5.7 (23.1) 64.9 8.2 18.0 10.9 10.1 10.2 6.3 5.7 2.0 1.8 1.7 10.9 16.7 16.8 3.2 4.3 4.7 168 Metals & Mining Hindalco Industries BUY 171 285 67 384 5.2 2,220 16.2 26.7 32.3 (8.9) 65.1 21 10.6 6.4 5.3 6.3 4.7 3.9 0.6 0.6 0.5 6.0 9.2 10.1 0.6 0.6 0.6 42 Hindustan Zinc BUY 203 295 45 857 11.5 4,225 17.7 20.3 22.7 9.7 14.7 11.8 11.5 10.0 9.0 6.8 5.7 5.1 2.7 2.7 2.7 21 27 30 10.5 10.0 11.2 5.8 Jindal Steel and Power BUY 191 285 49 195 2.6 1,020 23.8 23.6 23.8 411 (1) 1 8.0 8.1 8.0 4.8 4.3 4.0 0.6 0.5 0.5 7.4 6.9 6.5 — — — 37 JSW Steel ADD 309 340 10 748 10.0 2,402 17.0 26.6 32.2 68.3 57 20.8 18.2 11.6 9.6 8.6 6.3 5.4 1.8 1.6 1.4 10.6 14.8 15.5 0.7 0.7 0.7 38 National Aluminium Co. SELL 30 26 (14) 56 0.8 1,866 0.9 1.5 2.6 23 61 74.0 32.9 20.5 11.8 5.2 5.7 5.0 0.6 0.5 0.5 1.7 2.7 4.6 0.0 2.4 4.3 6.3 NMDC REDUCE 84 110 31 258 3.5 3,062 13.5 11.1 12.3 (7.4) (18.4) 12 6.2 7.6 6.8 4.1 5.0 4.6 0.9 0.8 0.8 14.5 11.1 11.7 8.0 6.6 7.3 10.9 Tata Steel BUY 403 550 37 459 6.2 1,146 (0.6) 69.1 84.3 (102) 11,559 22 NM 5.8 4.8 8.8 5.3 4.9 0.7 0.6 0.6 NM 11.0 12.2 2.5 3.2 3.5 89 Vedanta BUY 95 165 74 352 4.7 3,717 11.6 17.8 20.7 77 54 16.5 8.2 5.3 4.6 4.4 3.4 3.0 0.6 0.6 0.6 7.9 11.9 13.3 12.9 11.9 15.7 53 Metals & Mining Attractive 3,307 44.4 11.2 59.5 16.9 12.7 7.9 6.8 6.5 4.9 4.4 1.0 0.9 0.9 7.9 11.7 12.6 5.3 5.1 5.9 281

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK

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November 3, 2020 3, November

KOTAK INSTITUTIONAL EQUITIES RESEARCH 145

Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India Fair O/S ADVT Price (Rs) Value 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 2-Nov-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E (US$ mn) Oil, Gas & Consumable Fuels BPCL BUY 346 425 23 751 10.1 1,967 37 37 39 250.1 0.1 6.1 9.4 9.4 8.9 7.3 7.6 6.9 1.9 1.7 1.5 20.8 18.9 18.3 4.9 5.3 5.6 57.1 Coal India BUY 116 195 69 713 9.6 6,163 20 18 18 (28) (8.4) 2.5 5.9 6.4 6.3 5.4 5.6 5.0 2.2 2.3 2.4 37.8 35.4 37.6 17.3 17.3 17.3 21.2 HPCL BUY 187 260 39 285 3.8 1,524 34 29 32 371.9 (13.2) 10.1 5.6 6.4 5.8 6.9 7.2 6.5 0.9 0.8 0.8 17.0 13.7 14.0 9.0 7.8 8.6 20.9 IOCL BUY 78 100 28 736 9.9 9,181 13.8 13.3 14.1 449.2 (3.6) 6.5 5.7 5.9 5.5 5.4 5.4 5.1 0.7 0.7 0.6 13.0 11.7 11.7 7.9 7.6 8.1 24.1 Oil India SELL 84 70 (17) 91 1.2 1,084 3 6 10 (85) 103.6 56.9 27.9 13.7 8.7 8.1 7.0 5.6 0.4 0.4 0.4 1.3 2.7 4.1 1.1 2.9 4.6 1.2 ONGC SELL 66 60 (9) 827 11.1 12,580 4 7 12 (74) 101.4 76.2 18.7 9.3 5.3 4.5 3.4 2.6 0.4 0.3 0.3 1.9 3.8 6.4 2.9 4.4 7.3 20.5 Reliance Industries ADD 1,877 2,150 15 11,128 149.5 6,032 67 90 110 0.5 34.5 22.4 28.0 20.8 17.0 15.0 9.5 9.0 2.3 2.0 2.0 8.5 10.4 12.1 0.4 0.4 0.4 501.2 Oil, Gas & Consumable Fuels Attractive 14,531 195.2 9.8 23.7 21.4 17.7 14.3 11.8 9.8 7.3 6.7 1.5 1.4 1.3 8.6 9.5 11.1 2.1 2.2 2.4 646 Pharmaceuticals Aurobindo Pharma REDUCE 761 790 4 446 6.0 586 55 59 62 12.9 8 4.7 13.9 12.9 12.3 8.4 7.4 6.6 2.3 2.0 1.7 16.3 15.3 14.2 1.0 1.2 1.4 50.0 Biocon SELL 404 240 (41) 485 6.5 1,202 7.8 9.9 11.3 26 27 14.4 52 41 36 23.0 17.8 15.8 6.0 5.4 4.8 11.5 13.2 13.5 0.7 0.9 1.0 30.4

Cipla BUY 751 840 12 606 8.1 806 28.2 33 45 47.3 16 38 27 22.8 16.5 14.7 12.7 9.2 3.4 3.0 2.6 12.7 13.3 16.0 0.7 0.8 1.2 96.4 -

Dr Reddy's Laboratories SELL 4,859 4,000 (18) 808 10.9 166 157 203 267 21 29 31.5 31 23.9 18.2 17.5 13.4 10.5 4.6 3.9 3.3 14.8 16.4 18.1 0.5 0.7 0.7 171.5 November 3, 2020 3, November Laurus Labs REDUCE 301 310 3 161 2.2 536 17.3 18.6 23 261.3 8 21 17 16.2 13.4 12.2 10.8 8.5 6.0 4.4 3.3 34.3 27.0 24.7 — — — 32.9 Lupin ADD 913 1,000 10 414 5.6 450 28 44 52 30.3 54 20 32 21 17.5 14.0 9.8 8.0 3.0 2.7 2.4 9.3 12.8 13.5 0.5 0.7 0.9 62.7 Sun Pharmaceuticals REDUCE 469 510 9 1,126 15.1 2,406 19.7 23.1 28 17.6 17 22 24 20 16.7 12.9 10.8 9.0 2.4 2.2 2.0 10.2 11.3 11.8 0.2 1.0 1.2 73.3

Torrent Pharmaceuticals REDUCE 2,544 2,550 0 431 5.8 169 71 88 104 23.6 24 17 36 29 25 17.7 15.3 13.5 7.7 6.5 5.6 21.4 22.7 22.6 1.0 1.2 1.4 32.3 Pharmaceuticals Attractive 4,476 60.1 27.0 20 22 26 22 17.8 14.2 11.7 9.6 3.4 3.0 2.6 13.0 13.9 14.8 0.5 0.9 1.0 550 Real Estate Brigade Enterprises BUY 181 235 30 37 0.5 204 6.8 15 17 6 114 15 26.7 12.5 10.8 10.8 5.6 5.1 1.6 1.4 1.3 6.0 12.0 12.6 1.4 1.4 1.4 0.7 DLF BUY 165 200 21 408 5.5 2,475 4.7 8.1 8.8 297 72 10 35 20.4 18.6 30.6 22.3 22.0 1.2 1.1 1.1 3.3 5.6 5.8 1.2 1.2 1.2 30.5 Embassy Office Parks REIT ADD 343 375 9 265 3.6 772 11.3 13.4 15.4 14 19 15 30 26 22 16.5 14.8 13.6 1.2 1.3 1.4 4.0 4.9 6.0 6.4 7.5 8.7 2.5 Godrej Properties SELL 1,139 690 (39) 287 3.9 252 12.2 15.8 32.1 14.0 29 103.5 93 72 36 107.2 186.4 62.3 5.6 5.2 4.5 6.2 7.5 13.7 — — — 12.3 Mindspace REIT ADD 306 330 8 181 2.4 593 14 16 18 69.4 9.5 13 21.2 19.3 17.1 17.4 14.1 12.7 1.1 1.1 1.1 9.1 5.7 6.5 2.7 6.7 7.1 — Oberoi Realty ADD 441 450 2 160 2.2 364 21 26 31 13.3 22.2 17 20.5 16.8 14.4 15.7 14.1 11.0 1.7 1.6 1.4 8.7 9.8 10.4 0.5 0.5 0.5 3.3 Prestige Estates Projects ADD 243 275 13 97 1.3 401 6.6 10.2 18 (39.0) 54 81 37 24 13.1 8.0 6.8 5.6 1.8 1.7 1.5 4.9 7.2 11.9 0.6 0.6 0.6 2.5

Sobha BUY 290 400 38 28 0.4 95 32 40 59 9 24.7 45.9 9.0 7.2 4.9 4.8 4.4 3.8 1.0 0.9 0.8 12.1 13.6 17.4 2.4 2.4 2.4 1.8 Sunteck Realty BUY 267 300 12 39 0.5 140 8.8 18.1 20 23.5 105 9 30 14.8 13.6 23.2 12.9 12.0 1.2 1.1 1.1 4.2 8.1 8.1 0.4 0.4 0.4 2.3 Real Estate Attractive 1,503 20.2 89.7 38 24 31 23 18.1 17.4 14.2 12.2 1.5 1.4 1.4 4.8 6.4 7.7 2.0 2.6 2.9 56 Retailing Aditya Birla Fashion and Retail BUY 152 190 25 126 1.7 915 (3.0) 2.9 4.2 (57.4) 196.6 46.3 NM 53 36 17.9 9.1 8.0 5.9 4.9 4.3 NM 10.2 12.7 — — — 6.9 Avenue Supermarts SELL 2,199 1,475 (33) 1,424 19.1 648 15.6 33 42 (25.5) 108.6 27.7 141 67 53 90 45 35 11.8 10.0 8.4 8.7 16.1 17.3 — — — 21.1 Titan Company ADD 1,169 1,325 13 1,037 13.9 888 8.4 20 26 (49.9) 137.3 28.2 139 58 46 72 37 29 14.5 12.4 10.4 10.8 22.8 24.8 0.3 0.5 0.7 52.4 Retailing Attractive 2,588 34.8 (44.1) 178.9 29.1 174 62 48 69 35 28 12.0 10.2 8.6 6.9 16.3 17.8 0.1 0.2 0.3 80 Speciality Chemicals Castrol India BUY 111 165 48 110 1.5 989 6.3 8.9 9.6 (25.2) 41.5 7.9 17.8 12.6 11.7 11.3 8.1 7.5 7.4 7.0 6.6 43.3 57.1 58.0 4.5 7.2 7.6 1.9 Pidilite Industries REDUCE 1,556 1,400 (10) 791 10.6 508 18.3 28 34 (20.4) 54.9 18.3 85 55 46 59 39 33 15.8 13.6 11.6 19.7 26.7 27.0 0.4 0.6 0.8 20.7 S H Kelkar and Company BUY 84 105 25 12 0.2 141 5.3 6.5 7.3 14.3 22.0 13.2 15.8 13.0 11.4 8.3 6.7 6.1 1.3 1.3 1.2 8.8 10.0 10.8 1.2 2.1 3.0 1.1 SRF ADD 4,403 4,000 (9) 261 3.5 57 150 193 244 8.7 28.4 26.5 29.3 22.9 18.1 17.4 14.1 11.4 4.4 3.8 3.2 16.2 17.8 19.1 0.4 0.4 0.5 17.1 Speciality Chemicals Attractive 1,174 15.8 (12.9) 41.4 18.1 47 33 28.2 29.2 21.4 18.4 9.0 7.8 6.7 19.0 23.4 23.8 0.8 1.2 1.4 41

Source: Company, Bloomberg, Kotak Institutional Equities estimates

146 146 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

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

Company Rating 2-Nov-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E (US$ mn) Telecommunication Services Bharti Airtel BUY 457 710 55 2,495 33.5 5,456 (0.2) 10.2 21.4 NM NM NM NM 45.0 21.4 7.7 6.2 5.0 4.3 4.2 3.7 NM 9.5 18.4 1.3 1.3 1.3 182.6 Bharti Infratel ADD 181 215 19 334 4.5 1,850 16.2 17.4 18.6 (1.8) 7.6 6.5 11.2 10.4 9.7 4.5 4.1 3.9 2.4 2.4 2.3 21.9 23.2 24.2 8.3 8.9 9.4 34.4 Vodafone Idea RS 9 — — 251 3.4 28,735 (8.7) (6.8) (5.0) NM NM NM NM NM NM 10.6 8.4 7.0 (0.7) (0.5) (0.4) 167.0 47.0 26.4 — — — 62 Tata Communications BUY 957 1,075 12 273 3.7 285 46.6 52.5 62.5 20.6 12.7 19.2 20.6 18.2 15.3 8.5 7.5 6.5 NM 21.7 9.5 NM 264 86.5 0.4 0.6 0.7 2.1 Telecommunication Services Attractive 3,354 45.1 41.8 55.3 126.6 NM NM 136.2 8.1 6.6 5.5 9.4 12.2 14.8 NM NM 10.8 1.8 1.9 2.0 281 Transportation Adani Ports and SEZ BUY 357 425 19 725 9.7 2,032 19.3 24.9 27.2 (28.3) 28.9 9.4 18.5 14.4 13.1 13.0 10.4 9.0 2.5 2.2 1.9 14.4 16.3 15.6 1.0 1.1 1.1 22.5 Container Corp. SELL 392 350 (11) 239 3.2 609 7.7 12.6 17.1 (54.7) 63.8 35.6 51 31 23 23.6 16.2 12.5 2.3 2.3 2.2 4.6 7.4 9.7 1.1 1.7 2.4 13.6 Gateway Distriparks BUY 93 135 46 12 0.2 125 3.7 3.6 6.2 (12.3) (4.0) 73.7 24.9 26.0 14.9 6.6 6.7 5.6 0.8 0.8 0.8 3.3 3.0 5.1 3.2 3.2 3.2 0.2 GMR Infrastructure BUY 23 26 11 141 1.9 6,036 (5.8) (2.8) (1.6) (95.8) 52.7 41.4 NM NM NM (137.0) 23.5 16.5 (2.5) (2.1) (2.3) 88.2 26.9 16.3 — — — 6.4 Gujarat Pipavav Port BUY 89 111 25 43 0.6 483 4.5 5.8 6.7 (24.9) 27.3 15.7 19.5 15.4 13.3 8.6 7.6 6.6 2.1 2.1 2.1 10.6 13.5 15.7 4.8 6.1 7.0 0.5 InterGlobe Aviation BUY 1,311 1,610 23 505 6.8 383 (164.5) 76.2 114.8 (2,437.7) 146.3 50.6 NM 17 11.4 NM 3.7 2.5 71.3 13.9 2.5 NM 134.9 75.5 — — — 46 Mahindra Logistics REDUCE 366 340 (7) 26 0.4 71 5.6 11.7 15.6 (37.5) 110.9 33.2 66 31 23 20.3 12.6 10.0 4.6 4.1 3.6 7.1 13.8 16.4 — — — 0.5 Transportation Attractive 1,690 22.7 (205.6) 245.8 38.0 NM 23 16.4 27.0 9.6 7.7 4.4 3.8 3.2 NM 16.8 19.2 0.7 0.9 1.0 90 KIE universe 119,371 1603.8 14.5 39.8 21.5 27 19.0 15.7 12.7 9.9 8.6 2.6 2.3 2.2 9.7 12.3 13.8 1.5 1.8 2.1

Notes: (a) We have used adjusted book values for banking companies. (b) 2021 means calendar year 2020, similarly for 2022 and 2023 for these particular companies. (c) Exchange rate (Rs/US$)= 74.44

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK

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November 3, 2020 3, November

KOTAK INSTITUTIONAL EQUITIES RESEARCH 147 Disclosures of of the following trategic transaction n a merger or s As of September 30, 2020 any, noare longer in effect for this stock , if, fair value , any, if for this stock,because is there notsufficient a

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.

Percentage of companies covered by Kotak Institutional Equities, the specifiedwithin category. Percentage of companies each within category for which Kotak Institutional Equities and or its affiliates has provided investment banking services the previouswithin months.12 * The above categories are defined as follows: Buy = We expect this stock to deliver more returns than 15% over the next months;12 Add = We expect this stock to deliverreturns 5-15% over the next months;12 Reduce = We expect this stock to deliver returns over -5-+5% the next months;12 Sell = We expect this stock to deliver less returns overthan -5% the next months.12 Our target prices are also on a horizon 12-month basis. These ratings are used illustratively to comply with applicable regulations. As of 30/09/2020 Kotak Institutional Equities Investment Research had investment ratings on 204 equity securities. luded

r r display is not or applicable. months. . The previous investment and rating

SELL 3.4% 21.1%

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term volatility in stock prices related to movements in the market.Hence, a particular Ratingmay not , if, any,have been suspended temporarily.Such suspension is in compliance with applicable regulation(s) - 1.0% 14.2% fair valuefair +5% returns over the next 12 months. REDUCE

- month horizon basis. 5 - - 15% returns over the next 12 5% returns over the next months.12 The information is not available fo - -

ake into account short ADD 25.5% 2.5% Kotak SecuritiesKotak has suspended coverage of this company.

are also on12 a Kotak SecuritiesKotak Research has suspended the investment and rating

The information is not meaningful and is therefore exc

Kotak SecuritiesKotak does not cover this company.

The investment and rating

The coverage view represents each analyst’s fundamental overall outlook on the Sector.The coverage viewwill consist of one

Attractive, Neutral, Cautious. BUY 2.0% 39.2% We expect this stock to deliver

We this expect stock to deliver 5 We expect this to stock deliver < We expect this to stock deliver more than 15% returns over the next months.12

Fair Value estimates 0% 20% 10% 70% 60% 50% 40% 30% Source: Kotak Institutional Equities Kotak Institutional Equities Research coverage universe coverage Research Equities Institutional Kotak Distribution of ratings/investment banking relationships fundamental basis for determining an investment rating or and shouldnot be relied upon. = NA AvailableNot or Applicable.Not = NM Meaningful.Not NR = Rated.Not and/or Kotak Securities policies in circumstances when Securities Kotak or its affiliates is acting in an advisory capacity i involving this company and in certain other circumstances. CS = Coverage Suspended. = NC Covered.Not = RatingRS Suspended. Other definitions Other Coverage view. designations: ratings/identifiers Other REDUCE. SELL. Our Our Ratings System notdoes t strictly be in accordance with the Rating System all at times. Ratings other and definitions/identifiers ratings of Definitions BUY. ADD. Disclosures

Corporate Office Overseas Affiliates Kotak Securities Ltd. Kotak Mahindra (UK) Ltd Kotak Mahindra Inc 27 BKC, Plot No. C-27, “G Block” 8th Floor, Portsoken House 369 Lexington Avenue Bandra Kurla Complex, Bandra (E) 155-157 Minories 28th Floor, New York Mumbai 400 051, India London EC3N 1LS NY 10017, USA Tel: +91-22-43360000 Tel: +44-20-7977-6900 Tel:+1 212 600 8856

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