INDIA DAILY

September 14, 2016 India 12-Sep 1-day 1-mo 3-mo Sensex 28,354 (1.5) 0.7 7.4 Nifty 8,716 (1.7) 0.5 7.5 Contents Global/Regional indices Dow Jones 18,067 (1.4) (2.7) 2.2 Daily Alerts Nasdaq Composite 5,155 (1.1) (1.5) 6.4 Results FTSE 6,666 (0.5) (3.6) 12.5 Coal India: Weak realizations give a shaky start Nikkei 16,627 (0.6) (1.7) 4.8 Hang Seng 23,216 (0.3) 2.0 13.9

Tata Steel: In line; improves across geographies KOSPI 1,999 0.4 (2.5) 1.4 Reliance Power: Distorted earnings Value traded – India Cash (NSE+BSE) 244 250 238 National Aluminium Co.: A weak quarter Derivatives (NSE) 3,885 3,215 2,600 Balkrishna Industries: Recovery gaining ground Deri. open interest 3,010 2,767 2,354

Change in Reco Forex/money market Vedanta: Cairn merger - a done deal; upgrade to ADD from REDUCE Change, basis points

Mahindra CIE Automotive: Acquisition of Bill Forge a right fit 12-Sep 1-day 1-mo 3-mo

Rs/US$ 67.1 (4) 25 (19)

Sector alerts 10yr govt bond, % 7.2 - (2) (56) Banks: Unchanged trends; investment cycle still anemic Net investment (US$ mn) 9-Sep MTD CYTD Insurance: ICICI Prudential Life: High growth, moderate profitability FIIs (51) 289 6,397

Economy alerts MFs (33) (97) 1,428 Top movers

Economy: Benign inflation dynamics keep rate cut hopes alive Change, %

Best performers 12-Sep 1-day 1-mo 3-mo

PNB IN Equity 137.2 (5.3) 11.6 52.6

CBK IN Equity 297.0 (4.6) 16.1 50.6

POWF IN Equity 118.4 (5.2) 6.6 46.2

JPA IN Equity 11.3 (7.0) (0.4) 41.5

VEDL IN Equity 161.3 (5.8) (2.9) 40.6

Worst performers

AL IN Equity 83.5 (4.4) (3.7) (20.5)

IDEA IN Equity 82.8 (1.0) (11.9) (17.0)

TECHM IN Equity 463.9 1.2 (6.0) (12.0)

WPRO IN Equity 480.4 (0.1) (11.7) (11.5)

INFO IN Equity 1054.0 1.8 (0.8) (10.3)

Kotak Institutional Equities Research [email protected] . Mumbai: +91-22-4336-0000

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

REDUCE Coal India (COAL) Metals & Mining SEPTEMBER 14, 2016 RESULT Coverage view: Cautious

Weak realizations give a shaky start. Coal India reported 20% yoy decline in net Price (`): 330 income for 1QFY17 as meager 3% yoy growth in volumes was not able to absorb 9% Target price (`): 315 yoy decline in realizations despite substantial reduction in provision for overburden BSE-30: 28,354 removal. Continued slump in power and industrial offtake will keep volume growth in check even as an impending wage revision will keep FY2017 financials under pressure. Maintain REDUCE with a revised target price of `315 (versus `320 previously).

Company data and valuation summary Coal India Stock data Forecasts/Valuations 2016 2017E 2018E 52-week range (Rs) (high,low) 350-272 EPS (Rs) 22.7 22.1 25.6

Market Cap. (Rs bn) 2,087.2 EPS growth (%) 4.3 (2.5) 15.8 Shareholding pattern (%) P/E (X) 14.6 15.0 12.9 Promoters 79.6 Sales (Rs bn) 793.3 844.4 908.6 FIIs 8.1 Net profits (Rs bn) 143.2 139.6 161.6 MFs 1.7 EBITDA (Rs bn) 181.8 176.1 191.6 Price performance (%) 1M 3M 12M EV/EBITDA (X) 9.4 9.6 8.6 Absolute (2.2) 7.8 (1.0) ROE (%) 35.6 38.0 42.6 Rel. to BSE-30 (2.9) 1.2 (10.6) Div. Yield (%) 8.3 4.7 5.4

1QFY17 starts with a 19% yoy decline in earnings despite a substantial reduction in provisions.

CIL reported a 19% yoy decline in net income at `30.6 bn (KIE `31.6 bn) on account of weak revenue performance (-6% yoy) and despite 67% reduction in provision for overburden removal during the quarter. Revenue weakness was on account of modest volume growth (+3% yoy) and was dragged significantly down by a 9% yoy reduction in blended realizations at `1,336/ton. Weak realizations were on account of (1) 6% yoy reduction in notified prices, and (2) 28% yoy reduction in e-auction realizations at `1,570/ton. The weakness in realizations would have been worse but for an improved sales mix (higher e-auction and beneficiated coal sales) and a price increase effected from June 2016.

Trends point towards continued weakness in earnings with rising costs and weak offtake.

The trends on volumes and pricing offer little comfort on revenue growth for the remaining nine months, with July and August reporting flat-to-declining volumes, dragging growth down to 0.1% YTD. Lead indicators on e-auction prices offer little comfort with premium over notified price remaining below 20% for July 2016, even though rising prices of imported coal may help improve prospects in the months going forward. On the cost side, the impact of wage revision will likely accrue from 2QFY17 and rising diesel cost will start impacting overall production cost. Our earnings estimates for FY2017E currently factor in (1) 3.6% growth in volumes, (2) blended realizations of `1,484/ton supported by full benefit of increase in notified prices and improvement in e-auction realizations, and (3) increase in wage cost of 17% for FY2017E.

Maintain REDUCE rating with revised target price of `315/share.

Murtuza Arsiwalla Weak volume trends, an impending wage revision and the risk of continued weakness in e- [email protected] auction realizations may keep Coal India’s earnings subdued for FY2017E. Our target price is Mumbai: +91-22-4336-0870 based on 10X P/E on June 2018E core earnings. Dividend yield remains the only positive in the Ajinkya Bhat near-term while a reversal in spot auction prices or better demand for special auctions remains [email protected] an upside risk. We maintain the REDUCE rating with a revised target price of `315/share (versus Mumbai: +91-22-4336-0888

`320 previously). We have revised our earnings downwards by 3.9/3.7% for FY2017E/18E to factor in lower volume growth and realizations though offset by lower provision for overburden.

Kotak Institutional Equities Research [email protected] Mumbai: +91-22-4336-0000

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

Key highlights of 1QFY17 result

 Volumes up 3% yoy. Coal India reported sales volumes of 133 mn ton in 1QFY17, up 3% yoy. Key laggards were CCL (-9.5% yoy) and WCL (-9.6% yoy) which were compensated by strong growth in NCL (+11.3% yoy) and MCL (+11.7% yoy) during the quarter. Volume growth is much short of the 12% CAGR target set by CIL to achieve its billion ton vision, and is reflective of the sedate demand from the power sector. Even on YTD FY2017 basis, dispatch volumes are flat yoy indicating continued sluggishness.

As highlighted previously, CIL and the government are likely to re-visit their billion ton aspirations (based on unconfirmed media reports), noting (1) the absence of adequate demand from both power and industrial sectors, and (2) record inventory levels that make it difficult to continue to build stockpiles of coal. We have long stated that consumption of a billion tons by FY2020 appears aggressive as the corresponding ‘clean-up’ of the power distribution system may not move at the same pace.

 Blended realizations down yoy, but partially supported by volume mix. Coal India reported blended realization of `1,336/ton, down 9% yoy. A steep decline of 6% yoy in raw coal realizations as well as 28% yoy decline in e-auction coal realizations was supported by favorable volume mix. Both e-auction and beneficiated coal sales command better realizations than raw coal. Their increased share in volume mix partially contained the decline in blended realizations. The weakness in notified prices of coal is surprising especially given the revision in notified prices of coal with effect from June 2016, and likely reflects deterioration in average grade of raw coal.

 Impending wage revision will pose a further challenge. Wage costs at Coal India were relatively contained in 1QFY17 with 7% yoy increase but flat qoq. The full impact of wage revision will be likely seen from 2QFY17. We note that an element of increase in employee cost would likely be on account of revaluation of employee related liabilities under new Ind-AS. Our estimates currently factor in 17% wage inflation in FY2017E followed by 3.5% increase in FY2018E. We highlight that initial provisioning will likely be lower and actual employee cost for FY2017E would be a function of the final settlement, both in terms of cost as well as timing.

 Sharp reduction in provision for overburden removal. Coal India reported a sharp 67% yoy decline in provision for overburden removal, though not entirely eliminated as was anticipated under the new Ind-AS. We seek clarity from the management on the quantum of overburden removal and the accounting treatment of the same going forward.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 Metals & Mining Coal India

Exhibit 1: Earnings were impacted by lower notified prices amid subdued demand as well as lower e-auction realizations Interim financials of Coal India Ltd, March fiscal year-ends (Rs mn)

Growth (%) 1QFY17 1QFY17E 1QFY16 4QFY16 1QFY17E 1QFY16 4QFY16 FY2017E FY2016 (% change) Profit & Loss Net sales 177,961 182,932 189,558 207,595 (2.7) (6.1) (14.3) 821,894 756,443 8.7 Accretion in stock (40) (1,948) (5,931) 21,864 885 14,442 Employee expense (76,465) (77,090) (71,852) (75,902) (0.8) 6.4 0.7 (345,900) (296,598) Social overhead (425) (1,545) (1,773) (3,898) (72.5) (76.0) (89.1) (10,903) (10,821) Power & Fuel (6,225) (6,338) (5,882) (6,433) (1.8) 5.8 (3.2) (26,963) (25,035) Contractual expense (28,006) (25,350) (24,903) (34,232) 10.5 12.5 (18.2) (121,089) (111,292) OBR adjustment (2,331) (9,221) (7,091) (13,195) (74.7) (67.1) (82.3) (27,505) (28,114) Consumption of stores and spares (14,869) (17,428) (15,867) (20,711) (14.7) (6.3) (28.2) (76,922) (70,826) Other (13,309) (12,346) (12,439) (26,185) 7.8 7.0 (49.2) (58,995) (68,794) EBITDA 36,290 31,667 43,819 48,905 14.6 (17.2) (25.8) 154,503 159,404 (3.1) Depreciation (6,672) (6,631) (5,575) (6,946) 0.6 19.7 (4.0) (26,955) (24,664) Interest (890) (26) (40) (121) (87) (207) Other income 17,564 22,166 20,095 21,393 (20.8) (12.6) (17.9) 70,174 80,943 PBT 46,293 47,176 58,298 63,231 (1.9) (20.6) (26.8) 197,634 215,476 (8.3) Tax (15,641) (15,568) (20,429) (20,807) (58,066) (73,148) PAT 30,653 31,608 37,869 42,424 (3.0) (19.1) (27.7) 139,569 142,329 (1.9) Extraordinary 0 — (226) 56 0 415 Reported PAT 30,653 31,608 37,643 42,479 (3.0) (18.6) (27.8) 139,569 142,743 (2.2) EPS (Rs/share) 4.9 5.0 6.0 6.7 22.1 22.5 Ratios (%) EBITDA margins (%) 20.4 17.3 23.1 23.6 18.8 21.1 Effective tax rate (%) 33.8 33.0 35.0 32.9 29.4 33.9 Operational data Production (mn tons) 126 129 121 165 (2.6) 3.6 (23.9) 559 539 3.7 Sale (mn tons) 133 132 129 145 1.3 3.0 (8.2) 554 534 3.6 Average realization (Rs/ton) 1,336 1,391 1,465 1,381 (4.0) (8.8) (3.3) 1,484 1,415 4.9 Over burden removal (mcum) 346 265 267 422 30.8 29.6 (18.0) 1,196 1,149 4.1 Composite production (mn tons) 371 317 311 465 17.2 19.4 (20.1) 1,408 1,354 3.9 Power & Fuel (Rs/ton) 17 20 19 14 (16.2) (11.4) 21.1 19 18 3.6 Contractual expense (Rs/ton) 75 80 80 74 (5.7) (5.8) 2.4 86 82 4.7 Consumption of stores and spares (Rs/ton) 40 55 51 45 (27.2) (21.5) (10.2) 55 52 4.5

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: E-auction realizations declined 5% qoq reflecting continued weakness in international prices of coal Key operational and financial assumptions, March fiscal year-ends (Rs mn)

Growth (%) 1QFY17 1QFY16 4QFY16 (yoy) (qoq) FY2017E FY2016 Growth (%) Volumes (mn tons) Production 126 121 165 3.6 (23.9) 559 539 3.7 Sales 133 129 145 3.0 (8.2) 554 534 3.6 Sale mix Raw coal Volumes (mn tons) 108 109 119 (1.2) (9.7) 452 448 1.0 Realization (Rs/ton) 1,239 1,318 1,266 (6.0) (2.2) 1,388 1,311 5.9 Revenue (Rs mn) 133,380 143,630 161,080 (7.1) (17.2) 627,930 586,750 7.0 E-auction Volumes (mn tons) 20 16 20 27.9 0.2 83 66 24.6 Realization (Rs/ton) 1,570 2,184 1,648 (28.1) (4.7) 1,809 1,858 (2.6) Revenue (Rs mn) 32,120 34,940 33,630 (8.1) (4.5) 149,483 123,210 21.3 Beneficiated Volumes (mn tons) 4.07 3 4 19.4 (0.2) 19 14 32.3 Realization (Rs/ton) 2,353 2,229 2,375 5.6 (0.9) 2,353 2,328 1.0 Revenue (Rs mn) 9,580 7,600 9,690 26.1 (1.1) 44,481 33,270 33.7 Other products Total revenue 177,950 189,560 207,590 (6.1) (14.3) 821,894 743,230 10.6

Source: Kotak Institutional Equities estimates

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH Coal India Metals & Mining

Exhibit 3: In YTD FY17, MCL and NCL have been the key supporters to volumes amid continued decline in BCCL, CCL and WCL Subsidiary-wise dispatch volumes, March fiscal year-ends (mn tons)

Growth YTD Quarterly Aug-16 Aug-15 Jul-16 yoy mom 2017 2016 (% chg.) 1QFY17 1QFY16 (% chg.) Dispatches ECL 3.1 2.1 3.4 46.2 (7.5) 17.0 15.2 12.0 10.5 10.5 0.5 BCCL 2.4 2.9 2.9 (17.2) (15.4) 14.1 14.9 (5.6) 8.8 9.2 (4.6) CCL 4.1 4.9 4.8 (16.9) (14.3) 22.2 24.4 (9.1) 13.4 14.8 (9.5) NCL 5.1 5.8 6.6 (12.0) (22.5) 32.6 30.3 7.6 20.9 18.7 11.3 WCL 2.4 3.1 1.9 (22.0) 25.5 14.1 17.7 (20.4) 9.7 10.8 (9.6) SECL 9.1 10.1 10.0 (10.7) (9.9) 52.4 53.8 (2.5) 33.3 32.9 1.1 MCL 10.5 11.1 11.9 (5.9) (12.0) 58.7 54.2 8.3 36.3 32.5 11.7 NEC 0.1 0.1 0.1 - 50.0 0.2 0.2 17.6 0.1 0.1 (16.7) CIL 36.7 40.6 41.5 (9.6) (11.5) 211.1 211.0 0.1 132.9 129.5 2.7 Production ECL 2.3 1.8 2.5 30.0 (7.5) 13.7 12.9 6.0 8.8 9.1 (3.2) BCCL 2.5 2.7 2.7 (7.9) (9.9) 14.1 14.0 0.3 8.9 8.8 1.0 CCL 3.6 4.3 3.8 (15.2) (2.9) 20.3 20.5 (0.9) 12.9 12.6 2.5 NCL 4.6 5.7 6.3 (19.0) (26.2) 31.4 29.5 6.3 20.5 18.3 12.1 WCL 2.0 2.5 1.4 (22.1) 38.7 11.7 15.8 (25.8) 8.3 10.3 (18.9) SECL 8.1 9.1 9.7 (10.7) (15.9) 49.6 49.3 0.6 31.8 31.2 2.2 MCL 9.3 10.1 10.4 (8.3) (10.6) 53.7 50.2 7.0 34.1 31.1 9.8 NEC 0.0 0.0 0.0 166.7 14.3 0.1 0.1 (23.6) 0.0 0.1 (49.3) CIL 32.4 36.2 36.7 (10.4) (11.7) 194.6 192.4 1.1 125.4 121.3 3.4

Source: Company, Kotak Institutional Equities

Exhibit 4: Our earnings assumptions factor 17% yoy wage revision in FY2017 Key operational and financial assumptions, March fiscal year-ends, 2015-19E (Rs mn)

Growth (%) 2015 2016 2017E 2018E 2019E 2015 2016 2017E 2018E 2019E Volumes (mn tons) 489 534 554 592 624 3.8 9.2 3.6 6.9 5.4 Realization (Rs/ton) 1,472 1,415 1,484 1,496 1,533 0.9 (3.8) 4.9 0.8 2.5 Revenue (Rs mn) 720,146 756,443 821,894 885,154 955,786 4.7 5.0 8.7 7.7 8.0 Employee costs (298,741) (296,598) (345,900) (357,882) (377,513) 7.6 (0.7) 16.6 3.5 5.5 Overburden (38,267) (28,114) (27,505) (30,197) (33,543) 16.4 (26.5) (2.2) 9.8 11.1 EBITDA 172,569 181,791 176,104 191,590 206,948 (2.3) 5.3 (3.1) 8.8 8.0 PAT 137,216 142,329 139,569 161,585 180,478 (9.2) 3.7 (1.9) 15.8 11.7

EBITDA margins (%) 24 24 21 22 22 (6.6) 0.3 (10.8) 1.0 0.0 EBITDA (Rs/ton) 353 340 318 324 332 (5.8) (3.5) (6.5) 1.8 2.5

Source: Company, Kotak Institutional Equities estimates

Exhibit 5: Earnings revision factors-in impending wage revision as well as only a modest uptick in volumes and realizations Changes in earnings estimates, March fiscal year-ends, 2017-19E (Rs mn)

Net sales EBITDA PAT Old New Change (%) Old New Change (%) Old New Change (%) 2017E 863,241 821,894 (4.8) 186,038 176,104 (5.3) 145,247 139,569 (3.9) 2018E 928,503 885,154 (4.7) 198,560 191,590 (3.5) 167,813 161,585 (3.7) 2019E 1,001,763 955,786 (4.6) 215,212 206,948 (3.8) 189,106 180,478 (4.6)

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 5 Metals & Mining Coal India

Exhibit 6: SOTP value of Rs315/share

Jun-18 EBITDA 195 Adj EBITDA (ex OBR adjustment) 226 PAT 166 Adjusted PAT (ex OBR adjustment and interest income) 148 EPS 26 Adj EPS (ex OBR adjustment and interest income) 23 P/E on core earnings 10 Value of core business (Rs/share) 242 Net cash (Rs bn) (459) Net cash (Rs/share) (73) Target price (Rs/share) 315 Notes: (1) Adjusted EBITDA is calculated after removing the effect OBR adjustment. (2) Adjusted PAT is calculated after removing the effect of OBR adjustment and interest income net of taxes.

Source: Kotak Institutional Equities estimates

Exhibit 7: Profit model, balance sheet, cash model of Coal India, March fiscal year ends, 2012-19E (Rs mn)

2012 2013 2014 2015 2016 2017E 2018E 2019E Profit model Net sales 624,154 683,027 688,100 720,146 756,443 821,894 885,154 955,786 Transport and loading recovery 13,760 14,690 16,976 20,270 22,386 21,601 23,008 24,220 Total income 641,726 692,778 704,150 745,721 793,271 844,380 908,580 980,498 EBITDA 170,439 195,527 176,608 172,569 181,791 176,104 191,590 206,948 Interest income 59,588 61,108 58,084 55,775 48,042 36,481 53,522 66,302 Other Income (ex transport, interest) 2,021 11,669 14,634 10,716 10,515 12,092 12,092 12,092 Interest expense (540) (452) (580) (73) (207) (87) (97) (97) Depreciation (19,692) (18,130) (19,964) (23,198) (24,664) (26,955) (27,590) (27,590) Pretax profits 211,815 249,722 228,781 215,789 215,476 197,634 229,516 257,654 Tax (64,969) (76,227) (77,679) (78,573) (73,148) (58,066) (67,932) (77,176) Net income 146,846 173,495 151,102 137,216 142,329 139,569 161,585 180,478 Extraordinary items 1,036 69 14 51 415 — — — Reported profit 147,882 173,564 151,116 137,267 142,743 139,569 161,585 180,478 Earnings per share (Rs) 23.4 27.5 23.9 21.7 22.6 22.1 25.6 28.6 Balance sheet Paid-up common stock 63,164 63,164 63,164 63,164 63,164 63,164 63,164 63,164 Total shareholders' equity 404,530 484,720 424,045 403,531 338,976 364,248 393,506 426,185 Minority interest 536 636 636 658 1,048 1,048 1,048 1,048 Total borrowings 15,274 12,017 1,778 4,083 11,988 1,374 1,374 1,374 Shifting and rehab fund 19,770 23,059 25,200 29,044 31,777 - - - Total liabilities and equity 440,110 520,432 451,659 437,317 383,788 366,670 395,928 428,607 Net fixed assets 134,403 134,657 145,949 161,150 183,608 214,153 226,563 238,973 Capital work-in progress 29,034 34,960 45,053 51,594 58,942 60,644 67,644 74,646 Investments 19,814 23,950 37,749 28,134 29,019 29,019 29,019 29,019 Cash 582,028 622,360 523,895 530,925 383,128 400,711 447,801 496,580 Current assets (excl. cash) 292,247 377,171 270,060 314,015 427,055 395,457 407,055 426,254 Current liabilities and provisions 629,356 695,216 590,765 668,098 718,408 756,104 808,112 866,543 Deferred tax asset 11,941 22,550 19,717 19,596 20,445 22,789 25,957 29,677 Misc. expenditure — — — — — — — — Total assets 440,110 520,432 451,659 437,317 383,788 366,670 395,928 428,607 Free cash flow Operating cash flow, excl. working capital 164,366 188,762 172,519 163,355 165,021 164,180 186,007 204,348 Working capital changes 73,721 (19,064) 2,660 33,378 (62,730) 69,293 40,410 39,232 Capital expenditure (20,606) (15,068) (28,958) (45,650) (43,450) (59,203) (47,000) (47,002) Investments (9,177) (4,136) (13,799) 9,615 (885) — — — Free cash flow 208,304 150,494 132,422 160,698 57,957 174,270 179,416 196,578 Ratios Net debt/equity (%) (140) (126) (123) (131) (109) (110) (113) (116) Return on equity (%) 40 39 33 33 38 40 43 44 Book value per share (Rs) 64 77 67 64 54 58 62 67 ROCE (%) 39 40 35 35 39 41 45 46

Source: Company, Kotak Institutional Equities estimates

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH

ADD Tata Steel (TATA) Metals & Mining SEPTEMBER 14, 2016 RESULT Coverage view: Cautious

In line; improves across geographies. Tata Steel’s consolidated EBITDA of `32.4 bn Price (`): 373 (+21% yoy, +47% qoq) was in line with our estimate. Higher steel prices aided Target price (`): 445 earnings across geographies as India EBITDA/ton increased 30% qoq to `10,400/ton BSE-30: 28,354 and Europe earnings recovered (EBITDA: US$51/ton) from EBITDA losses. In the near term, the company’s margins will be under pressure due to weaker steel prices and higher coal costs, though we expect prices to increase in India as demand improves. The expected import restrictions in Europe can aid margins as well. ADD with TP of `445.

Company data and valuation summary Tata Steel Stock data Forecasts/Valuations 2016 2017E 2018E 52-week range (Rs) (high,low) 409-200 EPS (Rs) (23.4) 27.7 48.7 Market Cap. (Rs bn) 362.6 EPS growth (%) NM 218.3 75.6 Shareholding pattern (%) P/E (X) (15.9) 13.5 7.7 Promoters 31.4 Sales (Rs bn) 1,171.5 1,090.7 977.9 FIIs 15.5 Net profits (Rs bn) (22.8) 26.9 47.3 MFs 7.0 EBITDA (Rs bn) 75.9 148.6 179.5 Price performance (%) 1M 3M 12M EV/EBITDA (X) 14.9 7.7 6.1 Absolute (0.4) 11.6 60.2 ROE (%) (7.6) 9.7 16.5 Rel. to BSE-30 (1.1) 4.9 44.7 Div. Yield (%) 2.1 2.1 2.1

In line—improvement in domestic and overseas EBITDA aided by higher steel prices

Tata Steel’s consolidated EBITDA increased 21% yoy to `32.4 bn (+47 % qoq) and was in line with our estimate. Europe reported positive EBITDA of `8.6 bn (`3.6 bn of EBITDA loss in 4QFY16) aided by (a) short term improvement in steel prices, (b) depreciation of GBP, (c) restructuring in long products business; Europe’s EBITDA/ton increased to US$51 compared to EBITDA loss of US$15/ton in 4QFY16. SE Asia reported EBITDA of `1.9 bn compared to `650 mn in 4QFY16 led by higher steel prices. Overall, the EBITDA at subsidiaries increased to `10.2 bn in 1QFY17 from mere `419 mn in 4QFY16 (`8.1 bn in 1QFY16). Standalone EBITDA increased 19% yoy to `22.2 bn (+3% qoq) but was 8% lower than our estimate due to weaker volumes. Steel deliveries were flat yoy at 2.14 mn tons (-21% qoq) as KPO started commercial production from June 1, 2016. EBITDA/ton increased by `2,420/ton to `10,380/ton (+19% yoy) aided by an increase in steel realizations (+`3,000/ton qoq). Adjusted net income of `3.2 bn was lower than our estimate due to higher deferred tax charge. The company’s reported net loss of `32 bn included exceptional charge of (a) `1.7 bn pertaining to

VRS expenses and impairments, and (b) `32 bn loss due to divestment of long products, UK. Weaker steel prices and increase in coking coal costs may affect near term earnings

As per management, steel prices in India have declined since 1QFY17 (over `1,000/ton) owing to weak demand (less than 1% in 1QFY17). Weak steel prices together with recent increase in imported coking coal prices can negatively impact near term margins—expect moderate decline in EBITDA/ton in 2Q and 3Q. However, steel demand in India will likely recover from such low growth rates on the back of infrastructure push, good monsoons and pick up in economy. We expect domestic steel prices to improve with recovery in demand. And of course import restrictions from anti-dumping will help isolating domestic prices from global volatility.

We expect steady improvement in earnings from 2HFY16; maintain ADD with TP of `445 Abhishek Poddar [email protected] European steel industry is also moving towards anti-dumping duties to restrict steel dumping Mumbai: +91-22-4336-0861 from China. The anti-dumping investigations on HRC started in February 2016 and expect a provisional duty by 4QCY16--- this will aid Europe’s earnings. Besides, the company continues to pursue strategic options in Europe including discussion with Thyssenkrupp for a JV. These measures will plug cash burn in Europe and aid strong FCF. Maintain ADD with TP of `445.

Kotak Institutional Equities Research [email protected] Mumbai: +91-22-4336-0000

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

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

(% chg.) 1QFY17 1QFY17E 1QFY16 4QFY16 1QFY17E 1QFY16 4QFY16 FY2017E FY2016 (%chg) Net sales 252,298 292,416 269,378 295,076 (14) (6) (14) 1,090,744 1,171,516 (7) Expenditure (219,878) (259,175) (242,551) (273,023) (15) (9) (19) (942,163) (1,095,659) (14) Consumption of raw materials (81,839) (108,863) (101,336) (114,678) (25) (19) (29) (392,251) (448,161) (12) Staff Cost (46,796) (50,307) (46,193) (51,160) (7) 1 (9) (151,953) (199,668) (24) Power and fuel (12,203) (11,915) (12,499) (12,890) 2 (2) (5) (51,401) (54,336) (5) Freight and handling (16,932) (18,433) (17,109) (19,810) (8) (1) (15) (70,208) (80,455) (13) Other Expenditure (62,107) (69,657) (65,414) (74,485) (11) (5) (17) (276,349) (313,039) (12) EBITDA 32,420 33,241 26,828 22,052 (2) 21 47 148,581 75,857 96 Other income 1,367 1,327 620 1,291 3 121 6 4,906 4,204 17 Interest (10,707) (11,541) (11,470) (10,178) (7) (7) 5 (50,904) (41,286) 23 Depreciation (12,417) (13,421) (13,371) (12,319) (7) (7) 1 (55,338) (50,818) 9 Pretax profits 10,662 9,606 2,607 847 11 309 1,159 47,244 (12,045) (492) Extraordinaries (1,678) - (1,446) (28,578) (34,638) (4,696) Deferred tax (5,066) 2,413 429 (1,261) (239) Current tax (2,338) (4,854) (3,420) (5,489) (19,470) (14,811) Net income 1,580 4,394 154 (32,791) (64) 925 (105) (8,124) (31,790) (74) Minority interest (236) (68) 22 (67) 327 302 NM Share of profit from associates 142 728 63 720 100 995 PAT after minority interest 1,486 5,054 195 (32,138) (71) 662 NM (7,698) (30,493) (75) Discontinued operations - profit/(loss) (33,553) — (3,386) — — — Adjusted PAT 3,164 5,054 1,641 (3,560) (37) NM NM 26,940 (22,767) (218) Ratios EBITDA margin (%) 12.8 11.4 17.3 7.5 13.6 6.5 ETR (%) 82.4 50.5 86.7 (18.2) 164.4 (89.9) Adjusted EPS (Rs) 3.3 5.2 1.7 (3.7) 27.7 (23.4) Per ton analysis Realisations (Rs/ton) 46,635 46,383 42,556 42,530 1 10 10 47,434 45,114 5 EBITDA (Rs/ton) 5,993 3,802 4,238 3,178 58 41 89 6,461 2,921 121 Steel sales volumes (mn tons) 5.4 6.4 6.3 6.9 (15) (15) (22) 23.0 26.0 (11) Segment revenue Tata Steel India 103,235 101,749 1 Other Indian operations 14,708 15,998 (8) Tata Steel Europe 131,005 148,654 (12) Other trade related operations 41,748 39,089 7 SE Asia operations 22,247 26,328 (16) Rest of the world/others 1,473 2,274 (35) Less: Inter-segment (50,355) (53,838) (6) Net sales 264,061 280,254 (6) Segment EBITDA Tata Steel India 22,361 18,973 18 108,623 72,118 51 Other Indian operations 1,239 1,572 (21) Tata Steel Europe 8,562 3,255 163 29,658 (6,950) NM Other trade related operations (2,033) 2,789 (173) SE Asia operations 1,914 192 898 3,228 2,210 46 Rest of the world/others 98 (126) (178) 7,072 8,479 (17) Less: Inter-segment (56) (271) (79) EBITDA 32,698 26,926 21 148,581 75,857 96

Source: Company, Kotak Institutional Equities estimates

Changes in our estimate

Exhibit 10 highlights key changes in our estimates.

We cut our India EBITDA estimate for FY2017E by 7% to account for moderate weakness in domestic steel prices and recent increase in coking coal costs. We also cut our FY2017E steel volumes by 2% to 10.5 mn tons. However, our FY2018-19E EBITDA estimates are unchanged as we expect steel prices to improve with recovery in steel demand in India. We assume that anti-dumping duties will continue to stay in force for a longer period (and cover FY2018-19E).

However, our FY2017E EPS estimate is unchanged due to change in depreciation, interest charge. We estimate EPS of `27.7, `48.7 and `56.1 for FY2017E, FY2018E and FY2019E.

Our fair value of `445 is based on 6.5X March 2018E EBITDA. At our fair value, the stock will trade at 9.1X/7.9X FY2018/19E earnings.

8 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Steel Metals & Mining

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

(% chg.) 1QFY17 1QFY17E 1QFY16 4QFY16 1QFY17E 1QFY16 4QFY16 FY2017E FY2016 (%chg) Net sales 91,205 98,745 90,753 105,217 (8) 0 (13) 463,417 382,103 21 Expenditure (68,991) (74,617) (72,037) (83,583) (8) (4) (17) (354,794) (309,986) 14 Consumption of raw materials (14,757) (26,653) (22,879) (30,294) (45) (35) (51) (130,482) (108,345) 20 Staff Cost (11,604) (10,386) (10,657) (10,182) 12 9 14 (45,561) (43,249) 5 Power and fuel (6,871) (6,243) (6,097) (7,068) 10 13 (3) (30,512) (27,431) 11 Freight and handling (7,639) (7,068) (6,954) (8,145) 8 10 (6) (32,952) (29,949) 10 Other Expenditure (28,121) (24,267) (25,451) (27,894) 16 10 1 (115,287) (101,012) 14 EBITDA 22,214 24,128 18,716 21,634 (8) 19 3 108,623 72,118 51 Other income 1,055 1,200 515 1,263 (12) 105 (16) 4,556 3,854 18 Interest (5,292) (4,661) (5,075) (3,829) 14 4 38 (22,539) (14,603) 54 Depreciation (7,030) (5,957) (7,291) (4,929) 18 (4) 43 (32,082) (19,331) 66 Pretax profits 10,947 14,710 6,866 14,139 (26) 59 (23) 58,559 42,038 39 Extraordinaries (1,555) - 7 (3,272) (1,555) 19,227 Tax (3,638) (4,854) (2,619) (4,100) (25) 39 (11) (15,676) (12,256) 28 Net income 5,754 9,856 4,253 6,766 (42) 35 (15) 41,328 49,010 (16) Adjusted net income 6,843 9,856 4,249 9,056 42,455 32,747 30 Ratios EBITDA margin (%) 24.4 24.4 20.6 20.6 23.4 18.9 ETR (%) 38.7 33.0 38.1 37.7 27.5 20.0 EPS (Rs) 7.0 10.2 4.4 9.3 43.7 33.7 Per ton analysis (Rs/ton) Realisations 42,328 41,315 41,936 38,159 2 1 11 44,135 39,626 11 EBITDA 10,380 10,241 8,734 7,959 1 19 30 10,345 7,557 37 Steel sales (mn tons) 2.14 2.36 2.14 2.72 (9) (0) (21) 10.50 9.54 10

Source: Company, Kotak Institutional Equities estimates

Ind-AS-impact—mainly from recognition of finance leases, equity method of JV accounting and fair value

Exhibit 3 highlights key changes due to Ind-AS adoption in 1QFY16 financials. We highlight the following main changes that impacted the income statement.

 Finance leases. Power and fuel cost were restored (-12%) due to recognition of long term power purchase agreements as finance lease. Accordingly, this recognition has impacted depreciation and interest cost as well due to inclusion of leased amount and assets in balance sheet.

 Equity method of JV accounting. The company’s associates and JVs are now accounted using ‘equity method’ instead of proportionate line-by-line method. The company’s JVs including (a) Jamshedpur Continuous Annealing and Processing Company Private Limited, (b) TM Mining, and (c) TM International Logistics Ltd are now accounted as JVs using the equity method.

 Fair value. The fair value accounting has impacted (a) changes in value of derivatives. Also, profits on sale of investments are routed through OCI now, and (b) there is some increase in PPE value due to fair valuation. This has led to increase in depreciation cost as well.

 Other changes. Besides, Ind-AS has led to (a) cosmetic changes in income statement like grossing up of excise with revenues, (b) deferred tax calculation is based on balance sheet instead of income statement approach, and (c) certain companies are accounted as JVs based on control definition.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 9 Metals & Mining Tata Steel

Exhibit 3: Changes in 1QFY16 financials due to Ind-AS adoption, 1QFY16 (Rs mn)

1QFY16 Standalone Consolidated Ind-AS I-GAAP (% chg.) Ind-AS I-GAAP (% chg.) Net sales 90,753 90,937 (0) 269,378 303,003 (11) Total expenditure 72,037 74,050 (3) 242,551 275,261 (12) Stock adjustment (2,783) (1,690) (7,440) (4,904) Raw materials 25,661 25,369 1 108,776 115,355 (6) Employee cost 10,657 10,823 (2) 46,193 48,958 (6) Power and fuel cost 6,097 6,943 (12) 12,499 14,485 (14) Freight 6,954 6,954 - 17,109 20,310 (16) Other costs 25,451 25,652 (1) 65,414 81,058 (19) EBITDA 18,716 16,887 11 26,828 27,742 (3) OPM (%) 21 19 10 9 Other income 515 518 (1) 620 652 (5) Interest 5,075 3,960 28 11,470 10,980 4 Depreciation 7,291 4,682 56 13,371 13,465 (1) Pretax profits 6,866 8,763 (22) 2,607 3,949 (34) Extraordinaries 7 8,029 (1,446) 8,554 Tax 2,619 4,306 (39) 1,007 5,154 (80) Net income 4,253 12,486 (66) 154 7,349 (98) Add: Share of associates — — — 63 212 Less: Minority interest — — — 22 68 Reported net income — — — 195 7,630 (97) Discontinued operations - profit/(loss) — — — (3,386) —

Adjusted net income 4,249 6,516 (35) 1,641 (925) (277)

Source: Company, Kotak Institutional Equities

Ind-AS impact—net debt as on March 2016 declines by `36 bn

Due to Ind-AS adoption, the company restored net debt numbers for March 2016 to `733 bn from `769 bn earlier (our calculation assumes `22.8 bn of hybrid perpetual securities as part of debt) (Exhibit 4). The impact was due to (a) +`15 bn due to accounting for finance leases in the books (power purchase agreements, (b) –`33 bn due to equity method of accounting from proportional consolidation earlier and (c) –`20 bn due change in accounting for debentures (redeemable at premium).

Net debt increase in June 2016 by `43 bn. However, the company’s net debt again increased by `43 bn qoq in June 2016 to `775 bn. It generated cash flow from operations of `11 bn in 1QFY17 and incurred capex of `24.4 bn (`11.2 bn in India, `7 bn in Europe). Besides, there was also the impact of (a) `8 bn due to finance lease obligations, and (b) `3.2 bn of Fx impact.

We believe the company’s net debt will peak in March 2017. This is largely due to capex guidance of `90 bn for FY2017E to complete whatever is remaining in KPO Phase -1 as well as Europe capex of `35 bn. The capex of the company is likely to decline from FY2018E (in India and Europe). Besides we also expected strong FCFs in FY2018/19E from full ramp-up of the KPO project.

10 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Steel Metals & Mining

Exhibit 4: Tata Steel's net debt increased to `775 bn in 1QFY17 (includes hybrid perpetual securities) Tata steel group quarterly net debt trend, 1QFY13 - 1QFY17 (Rs bn)

Net debt (Rs bn)

800 772 769 775 758 755 759 750 724 725 728 733 708 36 700 706 666 650 625 603 600 574 577 563 550

500

1QFY13

2QFY13

3QFY13

4QFY13

1QFY14

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17 Ind-AS impact Ind-AS

4QFY16 (revised) 4QFY16

Source: Company, Kotak Institutional Equities estimates

Exhibit 5: Tata Steel's leverage ratios will improve with recovery in EBITDA Tata Steel consolidated leverage details, March fiscal year ends (Rs mn), FY2014-19E (X)

2014 2015 2016 2017E 2018E 2019E Existing EBITDA (Rs mn) 164,110 125,358 75,856 148,581 179,515 181,667 Total equity (Rs mn) 405,320 313,494 284,789 267,765 305,759 350,931 Net debt (Rs mn) 726,308 728,717 769,010 780,026 732,571 669,047 Net debt/ EBITDA (X) 4.4 5.8 10.1 5.2 4.1 3.7 Net debt/ Equity (X) 1.8 2.3 2.7 2.9 2.4 1.9

Source: Company, Kotak Institutional Equities estimates

Analyzing 1QFY17 results and conference call highlights

The detailed analysis of 1QFY17 results is as follows:

Standalone results—steel prices increases aid, expect near term pressure on earnings

 Higher EBITDA/ton led by strong realizations. EBITDA/ton for Indian operations increased by 30% qoq to `10,380/ton (+18% yoy) aided by increase in steel realizations by `3,000/ton (post MIP). Volumes were flat yoy at 2.14 mn tons as KPO started production from June 01, 2016 only. The company has maintained its volume guidance of ~1 mn tons of additional volumes from KPO in FY2017E. We have built in 10.5 mn tons for India for FY2017E (9.5 mn tons in FY2016).

 2QFY17 realizations to decline. As per the management, steel prices have corrected by over `1,000/ton since 1QFY17 due to weak demand and supply side pressures from domestic steel companies. This, together with rise in coking coal prices in recent months, can hurt near term margins. The company carries around 70-80 days of coking coal inventory and hence the cost impact will be with a lag.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11 Metals & Mining Tata Steel

 KPO starts commercial production. The Kalinganagar project started commercial operations from June 1, 2016. The earnings contribution for KPO will be negligible in the current financials due to lower levels of utilization and higher fixed costs. The earnings from KPO will likely improve as the year progresses. We also note that interest, depreciation cost will rise as KPO is accounted for the full quarter from 2QFY17 onwards.

 Automotive product sales increases by 19%. The overall steel volumes were flat yoy at 2.14 m tons, but the company’s product mix improved with higher sales of automotive products. The automotive sector now accounts for 18.5% of total sales while branded products account for 34% of total sales.

Tata Steel Europe

 Europe EBITDA turns positive. The Europe operations reported EBITDA of `8.6 bn compared to EBITDA loss of `3.6 bn in 4QFY16—the restored EBITDA loss in 4QFY16 excluding long products and as per Ind-AS was `5.8 bn. Steel deliveries declined 27% yoy to 2.53 mn tons (-29% yoy) due to sale of longs product, UK (~2.7 mn tons annual quantity). The earnings in Europe also benefitted from performance improvement initiatives, cost savings and recent restructuring announcements.

 Outlook. In Europe, the management expects supply side pressures from imports will continue, though the weak GBP is expected to improve short term competitive position on exports.

 Strategic restructuring. The company continues with efforts towards strategic restructuring of its European operations. The discussions with Thyussenkrupp are centered around resolution of pension issues as well as business sustainability of Port Talbot. The company has also initiated the sale process of specialty steel business Hartlepool pipe mills in UK which employ 2,000.

Tata Steel South East Asia

 SE Asia reports EBITDA improves. The EBITDA in SE Asia increased to `1.9 bn from `650 mn in 4QFY16. The deliveries declined 6% qoq to 0.65 mn tons and EBITDA/ton improved to US$43/ton from US$14/ton in 4QFY16.

 Other subsidiaries report negative EBITDA. The EBIDTA from other subsidiaries declined to -`224 mn in 1QFY17 compared to EBITDA of `3.4 bn in 4QFY16. The EBITDA losses were largely in trade related operations (EBITDA loss of `2 bn).

Other points

 Exceptional charge of `34.7 bn. The company’s total exceptional charge was ` 34.7 bn which included (a) `33 bn loss on discontinued operations due to sale Long steel business in UK. This loss was due to accounting for working capital in the sale (business sold at nominal consideration), (b) `500 mn due to VRS scheme for employees, and (c) `1.2 bn due to write-off in value of investments.

12 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Steel Metals & Mining

Exhibit 6: Interim results of Tata Steel International operations, 1QFY15 - 1QFY17 (Rs mn)

1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 Net Sales 259,590 249,920 237,365 230,313 178,625 197,736 189,751 189,859 161,093 Expenditure 249,422 244,432 229,390 231,672 170,514 198,047 196,976 189,440 150,887 Stock adjustment (2,492) 3,376 1,501 15,997 (4,657) 2,461 11,298 12,564 (7,932) Raw materials 125,070 111,651 101,614 83,449 83,115 81,073 73,827 71,821 75,015 Employee costs 45,040 42,584 37,853 42,580 35,535 39,053 38,254 40,977 35,193 Power and fuel 8,854 8,504 8,069 8,004 6,403 7,105 6,436 5,822 5,333 Freight and handling 14,994 14,965 14,027 15,296 10,156 13,377 12,107 11,665 9,293 Other expenditure 57,956 63,354 66,326 66,348 39,963 54,977 55,053 46,591 33,986 EBITDA 10,167 5,488 7,975 (1,359) 8,111 (311) (7,224) 419 10,206 Other Income 726 591 108 708 105 55 133 28 312 Interest (net) 7,600 7,440 7,050 6,628 6,395 7,175 6,140 6,349 5,415 Depreciation 10,570 9,549 9,938 9,403 6,080 8,898 6,417 7,390 5,388 Profit Before Extra-ord Items (7,277) (10,910) (8,905) (16,682) (4,259) (16,328) (19,649) (13,291) (285) Extra-ord items (10,504) (19) 3,000 (47,672) (1,453) 7,578 (6,721) (25,306) (123) Profit Before Tax (17,781) (10,928) (5,905) (64,354) (5,712) (8,750) (26,369) (38,597) (408) Tax 1,467 1,112 1,589 809 (1,613) 1,027 (40) 960 3,767 Reported net earnings (19,248) (12,040) (7,493) (65,164) (4,099) (9,777) (26,329) (39,557) (4,174) Adjusted net profit (11,888) (12,212) (9,882) (17,370) (2,608) (16,497) (18,961) (12,616) (3,679)

Note: (1) Other operations include Tata Steel Europe, Tata Steel Thailand, Natsteel and others.

Source: Company, Kotak Institutional Equities estimates

Exhibit 7: Interim results of Tata Steel International operations, 1QFY15 - 1QFY17 (Rs mn)

1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 International operations Revenues 259,590 249,920 237,365 230,313 178,625 197,736 189,751 189,859 161,093 EBITDA 10,167 5,488 7,975 (1,359) 8,111 (311) (7,224) 419 10,206 - South East Asia Revenues 40,450 37,100 28,310 24,610 22,620 20,010 17,850 18,030 20,200 EBITDA 300 (2,810) (180) (2,320) 340 700 520 650 1,870 - Tata Steel Europe Revenues 207,410 202,020 193,990 195,370 178,550 169,480 163,444 162,540 131,000 EBITDA 9,950 9,290 13,080 10,530 5,750 (2,380) (6,750) (3,570) 8,560 - Others Revenues 11,730 10,800 15,065 10,333 (22,545) 8,246 8,457 9,289 9,893 EBITDA (83) (992) (4,925) (9,569) 2,021 1,369 (994) 3,339 (224)

Source: Company, Kotak Institutional Equities estimates

Exhibit 8: Tata Steel Europe EBITDA/ton quarterly trend, 1QFY15 - 1QFY17

1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 Tata Steel Europe Deliveries (mn tons) 3.2 3.4 3.3 3.8 3.4 3.3 3.4 3.6 2.5 Turnover (US$ mn) 3,470 3,334 3,129 3,140 2,814 2,608 2,481 2,408 1,958 Adjusted EBITDA (US$ mn) 166 153 163 169 91 (37) (102) (53) 128 Adjusted EBITDA/ton (US$) 52 46 49 44 26 (11) (31) (15) 51 Tata Steel Europe (Rs mn) Revenues 207,410 202,020 193,990 195,370 178,550 169,480 163,444 162,540 131,000 EBITDA 9,950 9,290 13,080 10,530 5,750 (2,380) (6,750) (3,570) 8,560

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 13 Metals & Mining Tata Steel

Exhibit 9: Tata Steel , Quarterly analysis of cost-structure and profitability, 1QFY15 - 1QFY17 (US$/ton)

1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 Tata Steel India (Rs/ton) Realization (Rs/ ton) 49,347 50,716 46,128 43,699 42,025 40,487 38,261 38,159 42,328 Other operating income 430 399 357 466 410 366 309 552 291 Raw material cost 10,882 12,293 15,401 14,493 11,049 12,587 10,642 11,146 6,896 Employee cost 5,375 5,419 5,483 4,851 5,051 4,651 4,848 3,746 5,422 Power and fuel cost 3,430 3,211 2,520 2,636 3,240 2,865 2,866 2,601 3,211 Freight and handling 3,285 3,289 3,416 3,203 3,245 3,031 3,310 2,997 3,569 Other expenditure 11,324 12,239 10,366 12,010 11,970 9,740 10,529 10,263 13,141 Conversion cost 23,414 24,158 21,785 22,700 23,505 20,287 21,553 19,606 25,343 EBITDA/ ton (Rs/ ton) 15,482 14,664 9,300 6,972 7,880 7,979 6,375 7,959 10,380

Tata Steel (Consolidated) (US$/ton) Realization (US$/ ton) 943 908 861 767 755 713 668 630 697 Raw material cost 377 358 348 306 275 275 262 245 226 Employee cost 146 137 127 124 122 121 118 109 129 Power and fuel cost 42 39 34 33 36 34 31 28 34 Freight and handling 57 56 55 52 51 50 47 42 47 Other expenditure 212 226 226 217 202 189 190 159 172 EBITDA/ ton 111 92 71 35 69 45 18 47 90

Source: Company, Kotak Institutional Equities estimates

Exhibit 10: Tata Steel, changes in estimates, March fiscal year ends, FY2017-19E

Revised estimates Old estimates Change (%) 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Earnings (consolidated) Net sales 1,090,744 977,933 1,000,211 1,092,573 973,186 999,217 (0) 0 0 EBITDA 148,581 179,515 181,667 156,900 179,493 181,649 (5) 0 0 Adj. PAT 26,940 47,319 54,498 26,473 47,772 54,645 2 (1) (0) EPS (Rs) 27.7 48.7 56.1 27.3 49.2 56.3 2 (1) (0) Volumes India (mn tons) 10.5 11.9 12.2 10.7 11.9 12.2 (2) — — Europe (mn tons) 9.8 6.3 6.3 9.8 6.3 6.3 — — — Pricing HRC price India -landed (US$/ton) 330 340 350 330 340 350 — — — Corus Realization (US$/ton) 841 863 865 841 863 865 — — — Re/US$ rate 68.5 70.0 70.0 68.5 70.0 70.0 — — — Tata Steel India Net sales 463,417 531,954 550,075 465,246 527,207 549,081 (0) 1 0 EBITDA 108,623 134,389 134,882 116,942 134,367 134,864 (7) 0 0 EBITDA/ton 10,345 11,293 11,101 10,929 11,291 11,100 (5) 0 0 Re/US$ rate 68.5 70.0 70.0 68.5 70.0 70.0 — — — Tata Steel Europe Net sales 563,343 378,408 379,285 563,343 378,408 379,285 — — — EBITDA 29,658 37,181 37,316 29,658 37,181 37,316 — — — GBP/USD 1.44 1.44 1.44 1.44 1.44 1.44 — — — EBITDA/ton 44 85 85 44 85 85 — — —

Source: Kotak Institutional Equities estimates

14 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Steel Metals & Mining

Exhibit 11: Tata Steel, Key assumptions, March fiscal-year ends, FY2014-2019E (Rs mn)

2014 2015 2016 2017E 2018E 2019E Tata Steel (India) Average HRC Price (US$/ton) 526 485 307 330 340 350 Crude Steel capacity (mn tons) 9.7 9.7 9.7 12.7 12.7 12.7 Volume (mn tons) 8.5 8.8 9.5 10.5 11.9 12.2 EBITDA margin (%) 30.7 24.0 18.9 23.4 25.3 24.5 EBITDA/ton (US$/ton) 249 187 116 151 161 159 Corus Average HRC Price (US$/ton) 981 957 799 841 863 865 Premium over HRC Price (US$/ton) 395 412 499 521 533 515 Crude Steel capacity (mn tons) 17.8 17.8 17.8 13.3 7.2 7.2 Volume (mn tons) 13.9 13.7 13.6 9.8 6.3 6.3 EBITDA margin (%) 3.7 5.4 (1.0) 5.3 9.8 9.8 EBITDA/ton (US$/ton) 36 51 (8) 44 85 85

Source: Company, Kotak Institutional Equities estimates

Exhibit 12: Tata Steel, valuation, March fiscal year-ends, March 2018E basis (Rs mn)

EBITDA Multiple Enterprise value EV (Rs mn) (X) (Rs mn) (Rs/share) Tata Steel standalone 134,389 6.5 873,527 900 Tata Steel Europe 37,181 6.5 241,676 249 Tata Steel thailand and other businesses 3,391 6.5 22,040 23 Total Enterprise Value 174,960 1,137,243 1,171 Consolidated group net debt 732,571 Total borrowings 732,571 754 Arrived market capitalization 404,672 417 Add: Value of investments 27,604 28 Arrived market capitalization 432,276 445 Target price (Rs) 445

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 15 Metals & Mining Tata Steel

Exhibit 13: Tata Steel (consolidated), Profit model, balance sheet and cash flow model, March fiscal year-ends, 2013-2019E (Rs mn)

2014 2015 2016 2017E 2018E 2019E Profit model (Rs mn) Net sales 1,486,136 1,395,037 1,171,516 1,090,744 977,933 1,000,211 EBITDA 164,110 125,358 75,856 148,581 179,515 181,667 Other income 5,168 7,962 4,204 4,906 4,946 4,988 Interest (43,368) (48,478) (41,286) (50,904) (48,803) (44,821) Depreciation (58,412) (59,436) (50,818) (55,338) (54,622) (54,523) Profit before tax 67,498 25,406 (12,045) 47,244 81,035 87,311 Extraordinaries (276) (39,287) (4,696) (34,638) — — Taxes (30,582) (25,674) (15,050) (20,731) (34,111) (33,178) Profit after tax 36,640 (39,555) (31,790) (8,124) 46,925 54,133 Minority interest (699) 133 1,089 327 294 265 Share in profit/(loss) of associates 8 167 207 100 100 100 Reported net income 35,949 (39,255) (30,493) (7,698) 47,319 54,498 Adjusted net income 36,225 32 (22,767) 26,940 47,319 54,498 Fully diluted EPS (Rs) 37.3 0.0 (23.4) 27.7 48.7 56.1 Balance sheet (Rs mn) Equity 405,320 313,494 284,789 267,765 305,759 350,931 Deferred tax liability 25,550 28,618 28,830 30,091 33,332 36,825 Total Borrowings 839,037 829,963 883,327 883,327 883,327 883,327 Current liabilities 428,754 400,115 418,794 398,776 364,759 371,902 Minority interest 17,377 17,039 16,542 16,216 15,921 15,657 Total liabilities 1,716,037 1,589,228 1,632,282 1,596,175 1,603,098 1,658,641 Net fixed assets 591,581 546,928 593,993 742,255 728,722 715,290 Capital work in progress 268,225 286,781 230,181 115,281 115,281 115,281 Goodwill 157,488 134,075 137,194 137,194 137,194 137,194 Investments 50,935 34,551 68,006 68,106 68,206 68,306 Cash 86,045 87,499 67,156 56,140 103,595 167,119 Other current assets 561,763 499,393 535,752 477,199 450,100 455,451 Total assets 1,716,037 1,589,228 1,632,282 1,596,175 1,603,098 1,658,641 Free cash flow (Rs mn) Operating cash flow excl. working capital 108,192 60,833 101,416 48,475 104,788 112,148 Working capital changes (12,696) 3,514 (17,679) 38,535 (6,918) 1,792 Capital expenditure (164,201) (134,924) (114,860) (88,700) (41,090) (41,090) Free cash flow (68,705) (70,578) (31,123) (1,690) 56,780 72,850 Ratios EBITDA margin (%) 11.0 9.0 6.5 13.6 18.4 18.2 EBIT margin (%) 7.1 4.7 2.1 8.5 12.8 12.7 Debt/equity (X) 2.1 2.6 3.1 3.3 2.9 2.5 Net debt/equity (X) 1.8 2.3 2.7 2.9 2.4 1.9 Net debt/EBITDA (X) 4.4 5.8 10.1 5.2 4.1 3.7 P/B (X) 0.8 1.0 1.1 1.2 1.0 0.9 RoAE (%) 9.7 0.0 (7.6) 9.8 16.5 16.6 RoACE (%) 6.8 4.6 2.3 6.3 8.0 7.8

Source: Kotak Institutional Equities estimates

16 KOTAK INSTITUTIONAL EQUITIES RESEARCH

SELL Reliance Power (RPWR) Utilities SEPTEMBER 14, 2016 RESULT Coverage view: Attractive

Distorted earnings. Reliance Power’s reported earnings were distorted by accounting Price (`): 52 of two assets (Rosa and Butibori) as financial leases, though net income at `3.4 bn was Target price (`): 36 in line with estimates on improved operational performance reflected in the 10% yoy BSE-30: 28,354 growth in generation. Potential resolution of the gas-based capacity at Samalkot through relocation to Bangladesh is a positive, though we would wait for more concrete milestones to be achieved before including it in our earnings and fair value estimate. Maintain SELL with a target price of `36/share.

Company data and valuation summary Reliance Power Stock data Forecasts/Valuations 2016 2017E 2018E 52-week range (Rs) (high,low) 61-38 EPS (Rs) 4.9 4.8 5.3 Market Cap. (Rs bn) 144.5 EPS growth (%) 32.6 (1.1) 11.1 Shareholding pattern (%) P/E (X) 10.6 10.7 9.7 Promoters 75.0 Sales (Rs bn) 106.6 108.6 114.3 FIIs 4.5 Net profits (Rs bn) 13.6 13.5 15.0 MFs 1.6 EBITDA (Rs bn) 48.2 45.4 48.5 Price performance (%) 1M 3M 12M EV/EBITDA (X) 9.4 9.3 8.1 Absolute 1.0 (1.3) 34.6 ROE (%) 6.6 6.2 6.5 Rel. to BSE-30 0.3 (7.3) 21.6 Div. Yield (%) (1.9) 0.0 0.0

Sasan leads strong operational performance; positive PAT impact from Ind-AS-led changes

Higher generation at Sasan (93% PLF) led to better operational performance for Reliance Power with total generation at 11 BU (up 10% yoy) in 1QFY17. Sasan generated 8 BU (up 15% yoy) followed by Rosa at 2 BU (down 3% yoy) and Butibori at 1 BU (up 4% yoy) during the quarter. The company reported revenues of `27 bn, flat yoy, at an average realization of `2.38/kwh, down 9% yoy. RPWR reported EBITDA of `11 bn, up 5.3% yoy. Ind-AS adoption amplified this EBITDA performance at the PAT level led by (1) lower interest expense due to MTM gains on hedging instruments and (2) lower depreciation due to classification of Rosa and Butibori power plants as financial lease and their subsequent removal from book assets. Accordingly, the reported PAT stood at `3.4 bn, up 12.5% yoy.

Samalkot project moving to Bangladesh in three phases; construction to start by end-1QCY17

The company is moving its Samalkot project to Bangladesh in three phases out of which two phases are in advanced stages of finalization of terms. Phase 1 (750 MW) has received land near Dhaka at Meghanaghat while phase 2 (750 MW) is acquiring land at Chittagong. Talks are ongoing with multilateral agencies such as ADB for financial closure. The company expects to start on-site physical construction activity by the end of 1QCY17 (with a previously declared target to commission phase 1 by FY2018-19). The company has also invited bids to secure gas supply arrangements for the project and has received good response from prospective suppliers.

Maintain SELL with a target price of `36/share

We maintain our SELL rating on RPWR with a target price of `36/share. The change in estimates Murtuza Arsiwalla [email protected] largely arise from Ind-AS-led classification of Rosa and Butibori power plants as financial leases Mumbai: +91-22-4336-0870 and their subsequent removal from book assets. Samalkot is moving ahead with relocation to Ajinkya Bhat Bangladesh. We recently dropped Chitrangi from our estimates till more clarity emerges. The [email protected] key revision in earnings estimates is on account of lower depreciation charge owing to Mumbai: +91-22-4336-0888 classification of Butibori and Rosa as financial leases under Ind-AS resulting in revision of estimates for FY2017E by 6% and for FY2018E by 17%.

Kotak Institutional Equities Research [email protected] Mumbai: +91-22-4336-0000

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

Key takeaways from 1QFY17 earnings call

 Ind-AS related changes to affect the financials significantly. The company has classified the Rosa and Butibori projects as financial leases under Ind-AS. As a result, it will not account for asset depreciation; instead will recognize the interest revenue earned from the lease payment using effective interest method. This would have the effect of reducing both the depreciation expense as well as recognized revenues from the P&L statement.

 Judgments on various APTEL appeals would be the key events to track. As is the case with several power generation companies, Reliance Power has a few appeals pending with APTEL which can not only affect the financials in the short term but also set powerful precedents for the future. The key ones to watch are:

. One appeal requests APTEL and CERC to recognize sharp changes in forex rates (such as a sharp depreciation of INR versus other currencies) as a force majeure event since it can significantly affect the cost dynamics of a power project dependent on imported fuel despite prudent hedging steps.

. Another appeal relates to the disallowance of certain fuel and fixed charges by MERC for the Butibori power plant citing the Letter of Assurance (LOA) from SECL for coal supply. The company, however, contends that the fuel charge must be determined based on the actual fuel supply agreement (FSA) especially for a project like Butibori where the actual fuel cost is a pass-through under the section 62 of regulatory act.

Exhibit 1: Sasan formed the mainstay of earnings growth during the quarter contributing 48% of revenues and 54% of EBITDA Interim financials of Reliance Power, March fiscal year-ends (Rs mn)

Ind-AS I-GAAP I-GAAP Ind-AS (% Chg.) I-GAAP 1QFY17 1QFY17E 1QFY16 1QFY16 vs est. yoy (Ind-AS) FY2017E FY2016 (% chg.) Net sales 26,787 29,290 27,509 26,839 (8.5) (0.2) 108,621 106,586 1.9 Operating costs Cost of fuel (12,642) (12,850) (13,283) (13,283) (1.6) (4.8) (52,779) (46,508) 13.5 Personnel costs (401) (432) (390) (403) (7.4) (0.7) (1,600) (2,077) (23.0) Other expenses (2,325) (2,444) (2,310) (2,310) (4.9) 0.6 (8,842) (9,814) (9.9) EBITDA 11,420 13,564 11,526 10,842 (15.8) 5.3 45,400 48,186 (5.8) EBITDA margin (%) 43 46 42 40 (7.9) 5.5 42 45 (7.5) Other income 697 903 1,128 815 (22.8) (14.5) 3,378 3,799 (11.1) Interest & finance charges (6,460) (7,454) (5,757) (6,009) (13.3) 7.5 (25,055) (25,765) (2.8) Depreciation (1,467) (2,651) (2,511) (1,297) (44.7) 13.1 (6,842) (10,565) (35.2) PBT 4,190 4,361 4,386 4,352 (3.9) (3.7) 16,881 15,656 7.8 Provision for tax (net) (785) (872) (943) (1,325) (10.0) (40.8) (3,403) (2,036) 67.1 Net profit 3,405 3,489 3,443 3,026 (2.4) 12.5 13,478 13,619 (1.0) EPS 1.2 1.2 1.2 1.1 4.8 4.9 EBITDA margin (%) 43 46 42 40 42 45 Tax rate (%) 19 20 21 30 20 13 Key operating parameters Units generated (MU) 11,234 11,280 10,207 10,207 (0.4) 10.1 45,272 42,490 6.5 Average realization (Rs/kWh) 2.38 2.60 2.70 2.63 (8.2) (9.3) 2.55 2.67 (4.5) Cost of fuel (Rs/unit) 1.13 1.14 1.30 1.30 (1.2) (13.5) 1.17 1.09 6.5 O&M (Rs/unit) 0.24 0.25 0.26 0.27 (4.9) (8.7) 0.23 0.28 (17.6)

Source: Company, Kotak Institutional Equities estimates

18 KOTAK INSTITUTIONAL EQUITIES RESEARCH Reliance Power Utilities

Exhibit 2: EBITDA realization at Sasan improved largely due to change-in-law tariff approvals regarding electricity duty and energy development cess in Mdhya Pradesh Project-wise operating metrics for Reliance Power, March fiscal year-ends (Rs/kwh)

1QFY16 2QFY16 3QFY16 4QFY16 FY2016 1QFY17 yoy (%) Gross generation (MU) Rosa 2,141 2,187 1,342 1,390 7,060 2,072 (3.2) Butibori 1,075 944 1,022 981 4,022 1,116 3.8 Sasan 6,948 7,922 8,158 8,233 31,261 8,003 15.2 Others 43 50 26 29 147 43 2.3 Total 10,207 11,103 10,548 10,633 42,490 11,234 10.1 Realization (Rs/kwh) Rosa 5.1 4.6 5.7 6.3 5.3 4.4 (14.5) Butibori 5.1 5.5 4.8 6.0 5.3 4.1 (20.3) Sasan 1.5 1.5 1.6 1.5 1.5 1.6 6.8 Total 2.7 2.5 2.4 2.4 2.5 2.4 (11.5) Cost of generation (Rs/kwh) Rosa 3.4 3.1 3.0 4.0 3.3 2.7 (18.5) Butibori 3.0 3.4 3.3 2.9 3.1 2.6 (11.0) Sasan 0.8 0.7 0.7 0.7 0.7 0.8 10.3 Total 1.6 1.4 1.3 1.3 1.4 1.4 (12.7) EBITDA (Rs/kwh) Rosa 1.8 1.6 2.7 2.3 2.0 1.7 (6.9) Butibori 2.1 2.2 1.4 3.1 2.2 1.4 (33.2) Sasan 0.7 0.8 0.8 0.8 0.8 0.8 3.2 Total 1.1 1.1 1.2 1.2 1.1 1.0 (10.0)

Source: Company, Kotak Institutional Equities

Exhibit 3: Valuation of power project portfolio of Reliance Power

Capacity Ownership Value (Rs bn) CoE Project Type (MW) (%) 2018E (%) Rosa Thermal 1,200 100 31 12 Butibori Thermal 600 100 22 12 Sasan Thermal 3,960 100 16 12 Projects (Rs bn) 5,760 69 Cash (Rs bn) 33 Total (Rs bn) 102 No. of shares (bn) 3 Value per share (Rs) 36

Source: Company, Kotak Institutional Equities estimates

Exhibit 4: Change in estimates largely led by reclassification of Rosa and Butibori power plants as financial lease Change in estimates for Reliance Power, March fiscal year-ends, 2017-19E (Rs mn)

Revenues EBITDA Net profit Old New % Chg. Old New % Chg. Old New % Chg. 2017E 115,446 108,621 (5.9) 50,843 48,778 (4.1) 12,688 13,478 6.2 2018E 115,538 114,335 (1.0) 49,518 51,777 4.6 12,741 14,967 17.5 2018E 115,635 114,457 (1.0) 49,640 51,944 4.6 14,188 16,482 16.2

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 19 Utilities Reliance Power

Exhibit 5: Profit model, balance sheet, cash model of Reliance Power, March fiscal year ends, 2012-19E (Rs mn)

2012 2013 2014 2015 2016 2017E 2018E 2019E Profit model Net revenues 20,192 49,266 51,122 68,507 106,586 108,621 114,335 114,457 EBITDA 6,239 17,129 18,534 25,329 48,186 45,400 48,505 47,283 Other income 7,476 3,572 4,337 3,514 3,799 3,378 3,272 4,661 Interest (expense)/income (2,976) (5,853) (6,844) (10,742) (25,765) (25,055) (23,719) (22,133) Depreciation (1,215) (2,851) (3,639) (5,237) (10,565) (6,842) (8,342) (8,342) Pretax profits 9,524 11,996 12,388 12,864 15,656 16,881 19,716 21,469 Tax (856) (1,882) (2,121) (2,580) (2,022) (3,403) (4,748) (4,986) Net income 8,668 10,115 10,267 10,283 13,619 13,478 14,967 16,482 Extraordinary items — — — — — — — — Reported profit 8,668 10,115 10,267 10,283 13,619 13,478 14,967 16,482 Earnings per share (Rs) 3.1 3.6 3.7 3.7 4.9 4.8 5.3 5.9 Balance sheet Paid-up common stock 28,051 28,051 27,966 28,051 28,051 28,051 28,051 28,051 Total shareholders' equity 175,696 185,811 194,684 206,320 209,077 222,555 237,522 254,004 Deferred taxation liability - 70 - - 14 14 14 14 Minority interest - 15 15 15 - - - - Total borrowings 181,353 275,107 300,425 332,185 342,409 298,831 282,705 266,578 Total liabilities and equity 357,049 461,002 495,125 538,520 551,500 521,400 520,241 520,597 Net fixed assets 65,720 89,462 138,389 336,337 357,832 332,166 323,824 315,481 Capital work-in-progress 217,970 303,104 322,548 155,306 133,487 129,031 129,031 129,031 Investments 14,140 401 1,414 8,609 8,626 8,626 8,626 8,626 Cash 14,058 48,353 26,411 11,708 31,576 20,417 32,511 41,178 Net current assets (excl. cash) 45,161 19,682 6,363 26,560 19,979 31,161 26,250 26,281 Total assets 357,049 461,002 495,125 538,520 551,500 521,400 520,241 520,597 Free cash flow Operating cash flow, excl. working capital 9,882 12,966 13,905 15,520 24,198 20,320 23,309 24,825 Working capital changes (42,025) 25,478 13,319 (20,197) 6,581 (11,182) 4,911 (31) Capital expenditure (122,445) (112,548) (74,460) (40,802) (17,497) 23,280 0 0 Free cash flow (154,587) (74,103) (47,235) (45,478) 13,282 32,418 28,220 24,793 Ratios Net debt/equity (%) 95 122 141 155 149 125 105 89 Return on equity (%) 5.0 5.6 5.4 5.1 6.6 6.2 6.5 6.7 Book value per share (Rs) 62.6 66.3 69.6 73.6 74.5 79.3 84.7 90.6 RoCE (%) 3.2 2.9 2.6 2.5 2.9 3.1 3.8 4.1

Source: Company, Kotak Institutional Equities estimates

20 KOTAK INSTITUTIONAL EQUITIES RESEARCH

SELL National Aluminium Co. (NACL) Metals & Mining SEPTEMBER 14, 2016 RESULT Coverage view: Cautious

A weak quarter. Nalco’s EBITDA declined 15% yoy to `1.9 bn (-18% qoq) and was Price (`): 47 materially lower than our estimate. Lower alumina realizations and shipments (291,000 Target price (`): 36 tons) led to weak earnings. Aluminum operations remain a drag with EBIT loss of `1.1 BSE-30: 28,354 bn—here we estimate losses at EBITDA level as well. The sharp fall in alumina prices will hurt earnings. Concerns on usage of cash and cost inefficient aluminum operations underpin our cautious stance. Maintain SELL with unchanged TP of `36.

Company data and valuation summary National Aluminium Co. Stock data Forecasts/Valuations 2016 2017E 2018E 52-week range (Rs) (high,low) 51-29 EPS (Rs) 2.7 2.2 2.9

Market Cap. (Rs bn) 121.4 EPS growth (%) (43.2) (20.1) 33.6 Shareholding pattern (%) P/E (X) 17.4 21.8 16.3 Promoters 80.9 Sales (Rs bn) 67.9 68.4 75.9 FIIs 2.3 Net profits (Rs bn) 7.0 5.6 7.4 MFs 0.3 EBITDA (Rs bn) 9.1 8.0 11.0 Price performance (%) 1M 3M 12M EV/EBITDA (X) 7.8 7.8 5.5 Absolute (0.9) 13.4 33.4 ROE (%) 5.4 4.3 5.6 Rel. to BSE-30 (1.6) 6.5 20.5 Div. Yield (%) 4.2 2.1 2.1

1QFY17 EBITDA weaker than expected due to fall in realizations, lower shipments

Nalco’s EBITDA of `1.95 bn (-15% yoy, -18% qoq) was materially lower than our estimate. Lower-than-expected alumina sales of 291,000 tons (+32% yoy, -19% qoq) against our estimate (335,000 tons) and lower alumina realizations led to weak earnings in the quarter; note that 1QFY16 alumina sales (220,000 tons) are not comparable due to lower production from refinery shut down. The 1QFY17 earnings were also hit by a sharp decline in alumina realizations—benchmark prices were down 25% yoy to US$254/ton during the quarter (Exhibit 2).

Nalco’s high-cost aluminum smelting operations reported EBIT loss of `1.06 bn (`96 mn EBIT loss in 1QFY16) due to lower all-in aluminum prices (-15% yoy) despite 10% yoy increase in aluminum production to 94,500 tons (-2% qoq). Net income declined 23% yoy to `1.35 bn.

Nalco’s high cost aluminum continues to report EBIT losses

Nalco reported aluminum EBIT loss of `1.06 bn in 1QFY17 on all-in aluminum prices of US$1,670/ton. At the spot INR:USD rate, we estimate aluminum production cost of ~US$1,780/ton. Flexibility to bring about major changes in Nalco’s cost structure is limited due to high employee cost, inefficient and old smelters and high overhead costs. We believe in the low commodity pricing era, the cost efficiencies will play an even bigger role than before in determining a smelter’s earnings trajectory.

Sharp fall in alumina prices over the past few months will affect earnings; maintain SELL

The benchmark alumina prices have again corrected by 8% since 1QFY17 and will affect Nalco’s earnings. The losses in aluminum business leave alumina the sole breadwinner for the company. We estimate Nalco’s alumina production cost at ~US$180/ton and at spot alumina prices of US$230/ton (versus US$255/ton in 1QFY17), alumina earnings will have a significant Abhishek Poddar impact. The cash usage on large Greenfield and downstream aluminum projects (including [email protected] Mumbai: +91-22-4336-0861 overseas investments) remain a concern, especially given weak earnings in the core business. Our cautious stance is largely due to weak fundamentals of aluminum (China oversupply,

Exhibit 4) and high cost operations of Nalco. Maintain SELL with unchanged TP of `36.

Kotak Institutional Equities Research [email protected] Mumbai: +91-22-4336-0000

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

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

(% chg.) 1QFY17 1QFY17E 1QFY16 4QFY16 1QFY17E 1QFY16 4QFY16 FY2017E FY2016 (%chg) Net sales 15,282 17,344 14,701 18,369 (12) 4 (17) 68,374 67,033 2 Other operating income 208 354 212 375 1,056 1,127 (6) Total expenditure (13,544) (14,646) (12,622) (16,357) (8) 7 (17) (60,365) (58,780) 3 Inc/(Dec) in stock 1,668 - 871 (1,788) - 90 Raw materials (2,469) (3,040) (2,155) (2,856) (19) 15 (14) (11,412) (11,044) 3 Power & Fuel (5,040) (4,343) (4,253) (4,380) 16 19 15 (19,316) (18,646) 4 Staff cost (3,470) (3,403) (3,543) (3,276) 2 (2) 6 (13,827) (13,614) 2 Other expenditure (4,233) (3,860) (3,542) (4,057) 10 20 4 (15,809) (15,566) 2 EBITDA 1,946 3,052 2,291 2,387 (36) (15) (18) 8,009 9,380 (15) Other income 1,336 1,573 1,382 1,558 (15) (3) (14) 4,829 5,366 (10) Interest (5) — (17) — — (12) Depreciation (1,188) (1,143) (995) (1,132) 4 19 5 (4,417) (4,241) 4 Pretax profits 2,089 3,482 2,661 2,812 (40) (22) (26) 8,422 10,493 (20) Extraordinaries — — — — — 535 Tax (739) (1,184) (918) (733) (38) (20) 1 (2,862) (3,718) (23) Net income 1,350 2,298 1,743 2,079 (41) (23) (35) 5,559 7,310 (24) Adjusted net income 1,350 2,298 1,743 2,079 (41) (23) (35) 5,559 6,957 (20) Ratios EBITDA margin (%) 12.6 17.2 15.4 12.7 11.7 13.8 ETR (%) 35.4 34.0 34.5 26.1 34.0 33.7 EPS (Rs) 0.5 0.9 0.7 0.8 2.2 2.7 Production ('000 tons) Alumina 524,000 520,000 388,000 517,000 35 1 1,983,600 1,953,000 2 Aluminum 94,496 96,500 85,722 96,424 10 (2) 379,500 372,424 2 Alumina sales 291,000 334,720 220,000 360,000 32 (19) 1,240,402 315,040 Segmental revenue Chemicals 8,306 — 7,699 8,928 8 (7) 36,277 Aluminium 10,268 — 10,423 12,232 (1) (16) 45,384 Segmental PBIT Chemicals 2,148 — 1,801 1,252 19 72 8,755 Aluminium (1,060) — (96) 647 1,002 (264) (1,926) Segmental PBIT (%) Chemicals 25.9 — 23.4 14.0 24.1 Aluminium (10.3) — (0.9) 5.3 (4.2)

Source: Company, Kotak Institutional Equities estimates

22 KOTAK INSTITUTIONAL EQUITIES RESEARCH National Aluminium Co. Metals & Mining

Exhibit 2: Alumina prices has weakened again over past month Metallurgical grade alumina prices (US$/t, FOB), Sep 2013 - Sep 2016

Metallurgical grade alumina prices (US$/t, FOB) 400

350

300

250

200

150

Jun-14

Jun-15

Jun-16

Sep-13

Sep-14

Sep-15

Sep-16

Dec-13

Dec-14

Dec-15

Mar-14 Mar-15 Mar-16

Source: CRU, Kotak Institutional Equities

Exhibit 3: Exhibit 2: All-in aluminum prices remains weak due to China oversupply LME prices of aluminum and regional premia, US$/ton

Aluminum LME price (US$/ton) Regional premium (US$/ton)

2,650

2,400

2,150

1,900

1,650

1,400

1,150

Sep-10

Sep-11

Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Mar-11

Mar-12

Mar-13

Mar-14

Mar-15 Mar-16

Source: Bloomberg, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 23 Metals & Mining National Aluminium Co.

Exhibit 4: Global aluminum markets to remain in surplus in 2016E due to large China capacity (aided by restarts) Aluminum demand supply for China and World ex-China ('000 tons)

2009 2010 2011 2012 2013 2014 2015 2016E China capacity 18,984 21,789 23,210 26,140 29,470 34,287 37,690 41,300 World ex-China capacity 29,199 30,413 31,357 31,881 33,132 33,751 33,402 33,100 Global capacity ('000 tons) 48,183 52,202 54,567 58,021 62,602 68,038 71,092 74,400 World ex-China production (000' tons) 23,968 24,965 26,395 25,758 25,685 25,834 26,294 26,744 World ex-China consumption (000' tons) 20,371 24,097 25,513 25,789 26,123 26,813 27,256 27,912 World ex-China Surplus/(Deficit) (000' tons) 3,597 869 882 (31) (438) (979) (962) (1,168) China production (000' tons) 13,642 16,968 19,251 21,548 24,453 28,108 31,191 32,177 China consumption (000' tons) 13,931 16,834 19,421 21,153 23,904 26,864 28,990 30,932 China Surplus/(Deficit) (000' tons) (289) 134 (170) 395 548 1,244 2,201 1,244 Global production (000' tons) 37,610 41,933 45,646 47,306 50,138 53,942 57,485 58,920 Global consumption (000' tons) 34,302 40,931 44,934 46,942 50,028 53,677 56,246 58,844 Global Surplus/(Deficit) (000' tons) 3,308 1,002 711 363 110 265 1,239 76 Utilization rates (%) World ex-China 82.1 82.1 84.2 80.8 77.5 76.5 78.7 80.8 China 71.9 77.9 82.9 82.4 83.0 82.0 82.8 77.9 Global 78.1 80.3 83.7 81.5 80.1 79.3 80.9 79.2

Source: CRU, Kotak Institutional Equities estimates

Exhibit 5: Nalco, Key assumptions sheet, March fiscal year-ends, 2014-19E

2014 2015 2016 2017E 2018E 2019E ALUMINIUM Aluminium metal sales ('000 tons) 319,986 326,079 372,000 379,410 379,500 379,500 Average LME aluminium price (US$/ton) 2,030 2,280 1,719 1,700 1,750 1,800 ALUMINA Alumina production ('000 tons) 1,925,000 1,851,100 1,953,000 1,983,600 2,052,000 2,097,600 Alumina sales ('000 tons) 1,342,761 1,224,690 1,190,294 1,240,402 1,306,087 1,353,325 Average Alumina price (US$/ton) 316 335 295 264 272 281

Source: Company, Kotak Institutional Equities estimates

Exhibit 6: Nalco, Valuation details, March 2018E (Rs mn)

Multiple EV (Rs mn) (X) (Rs mn) Rs/share EBIT (post tax) 4,220 8 31,857 12 Net debt (61,068) (24) Equity value 92,925 36 Target price (Rs/share) 36

Source: Kotak Institutional Equities estimates

24 KOTAK INSTITUTIONAL EQUITIES RESEARCH National Aluminium Co. Metals & Mining

Exhibit 7: NALCO, Profit model, balance sheet and cash flow model, March fiscal year-ends, 2014-2019E (Rs mn)

2014 2015 2016 2017E 2018E 2019E Profit model (Rs mn) Net sales 67,809 73,828 68,160 68,374 75,939 79,039 EBITDA 9,343 17,060 9,380 8,009 10,992 11,548 Other income 5,577 6,726 5,366 4,829 4,861 5,629 Depreciaiton (5,247) (4,137) (4,241) (4,417) (4,599) (4,742) Profit before tax 9,672 19,650 10,493 8,422 11,254 12,435 Current tax (2,683) (5,964) (2,971) (2,207) (3,247) (3,736) Deferred tax (72) (1,951) (747) (656) (578) (490) Net profit 6,424 13,218 7,310 5,559 7,428 8,208 Adjusted net profit 6,750 12,239 6,957 5,559 7,428 8,208 Earnings per share (Rs) 2.6 4.7 2.7 2.2 2.9 3.2 Balance sheet (Rs mn) Equity 121,224 127,973 129,077 131,533 135,858 141,061 Deferred tax liability 9,101 11,053 11,101 11,757 12,335 12,825 Current liabilities 35,159 22,751 25,012 24,071 25,148 26,240 Total liabilities 165,485 161,777 165,190 167,361 173,341 180,126 Net fixed assets 75,607 71,952 71,289 72,978 74,728 74,939 Investments 12,440 9,500 660 660 660 660 Cash 40,483 46,280 49,335 58,193 60,408 64,810 Other current assets 36,955 34,045 43,906 35,530 37,544 39,717 Total assets 165,485 161,777 165,190 167,361 173,341 180,126 Free cash flow (Rs mn) Operating cash flow excl. working capital 6,434 9,612 6,944 5,802 7,745 7,811 Working capital changes 3,379 (4,690) (6,826) 7,961 (938) (983) Capital expenditure (6,187) (4,004) (5,963) (6,106) (6,350) (4,953) Free cash flow 3,627 918 (5,845) 7,658 457 1,876 Ratios Net debt/equity (X) (0.4) (0.4) (0.4) (0.4) (0.4) (0.5) RoAE (%) 5.6 9.8 5.4 4.3 5.6 5.9 RoACE (%) 2.4 6.2 2.6 1.8 3.2 3.2

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 25

ADD Balkrishna Industries (BIL) Automobiles SEPTEMBER 14, 2016 RESULT Coverage view: Attractive

Recovery gaining ground. BKT’s 1QFY17 performance (revenues, EBITDA and PAT up Price (`): 888 8%, 137% and 47% yoy, respectively) was robust and much ahead of estimates. Target price (`): 950 Volume growth was strong (+11% yoy) while gross margins remained intact BSE-30: 28,354 sequentially despite a sharp qoq spurt in natural rubber price in the quarter, leading to a beat on the margins front. Performance in coming quarters too, is likely to be similar in our view; increase estimates and TP to `950 (`820 earlier); recommend ADD.

Company data and valuation summary Balkrishna Industries Stock data Forecasts/Valuations 2016 2017E 2018E 52-week range (Rs) (high,low) 919-547 EPS (Rs) 59.6 63.1 72.3

Market Cap. (Rs bn) 85.8 EPS growth (%) 21.2 5.9 14.6

Shareholding pattern (%) P/E (X) 14.9 14.1 12.3 Promoters 58.3 Sales (Rs bn) 32.6 37.8 44.1 FIIs 18.8 Net profits (Rs bn) 5.8 6.1 7.0 MFs 13.9 EBITDA (Rs bn) 8.8 10.8 11.9 Price performance (%) 1M 3M 12M EV/EBITDA (X) 11.3 8.7 7.3 Absolute 21.4 30.5 29.4 ROE (%) 22.7 19.9 19.2 Rel. to BSE-30 20.5 22.6 16.9 Div. Yield (%) 0.6 0.7 0.7

Turnaround in volume growth sustains; margins stay robust on lower input prices

Revenues, at `9.3 bn, were up 8% yoy on (1) 11% increase in volumes and (2) 3% decline in realizations in 1QFY17. Improvement in volume growth, which started in 4QFY16 with 5% yoy growth, was supported by (1) restocking by dealers (volumes up 8% yoy) and (2) increasing offtake in the OEM segment (volumes up 21% yoy). Gross margins stayed flat qoq (+740 bps yoy), against our expectations of a sharp contraction as rubber prices had moved up 31% qoq in 1QFY17. As per the management, input prices stabilized in June 2016, which along with the presence of low-cost inventory in the system enabled healthy gross margins. EBITDA margins, at 28.0%, were much ahead of estimates of 23.4%, mainly due to higher gross margins, as staff and other expenditure were broadly in line. EBITDA, at `2.6 bn, was up 137% yoy; the strong yoy growth in EBITDA was mainly due to sharply lower EBITDA in 1QFY16 reported under Ind-

AS, due to MTM loss of `910 mn booked in other expenditure last year. PAT, at `1.5 bn, was up 47% yoy, sharply ahead of estimates as the beat at EBITDA level percolated to PAT level.

Management slightly ups guidance on volumes growth and margins in FY2017 The management expected challenging demand environment in the off-highway tyre industry continuing in CY2016, though it expected to outperform industry growth. It has increased its volumes growth guidance for FY2017 to 8-15% (versus 5-11% earlier), citing gradual improvement in orders from its replacement channel and rising traction for BKT in the OEM segment. It also noted that BKT’s EBITDA margins are likely to range between 28-30% in FY2017 (from 25-27% earlier) as it sees lower impact of input cost inflation now due to the recent cool-off in natural rubber price, versus earlier. Long-term debt level has declined further to USD125 mn in August, as the company repaid USD33 mn in August.

Valuations: Increase near-term EPS; revise TP to `950 (`820 earlier), recommend ADD Mohan Lal We have increased our gross margin estimates for FY2017E leading to a 20% increase in our [email protected] FY2017E EPS estimate. However, we continue to build in significant moderation in gross Mumbai: +91-22-4336-0879 margins in FY2018-19E. As a result, our FY2018-19E EPS estimates have gone up by 11% and 4%, respectively. We increase our TP to `950 (`820 earlier) due to valuation rollover to June 2018E, but lower the rating a notch to ADD, from BUY earlier, due to sharp recent run-up in the stock price.

Kotak Institutional Equities Research [email protected] Mumbai: +91-22-4336-0000

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

Exhibit 1: Volumes growth gathered momentum in 1QFY17; gross margins stayed in-tact qoq Interim results of BKT, standalone, March fiscal year-ends (Rs mn)

Change (%) 12 months 1QFY17 1QFY17E 1QFY16 4QFY16 KIE est Yoy Qoq 2016 2015 Chng. (%) FY2017E Volumes (tonnes) 43,306 40,057 39,031 41,306 8.1 11.0 4.8 148,244 154,156 (4) 39,031 Total Income 9,281 8,885 8,559 8,796 4 8 6 32,587 38,168 (15) 37,793 Total Expenditure (6,681) (6,805) (7,460) (6,407) (2) (10) 4 (21,689) (28,236) (23) (27,031) Raw materials (3,846) (4,261) (4,180) (3,662) (8) 5 (14,223) (19,784) (28) (16,863) Employee expense (546) (544) (497) (611) 10 (11) (2,383) (2,273) 5 (2,540) Other expenditure (2,290) (1,999) (2,784) (2,133) (18) 7 (7,201) (8,839) (19) (7,628) EBITDA 2,600 2,080 1,099 2,389 25 137 9 10,898 9,933 10 10,762 EBITDA (%) 28.0 23.4 12.8 27.2 33.4 26.0 28.5 Depreciation (775) (708) (644) (705) 20 10 (2,813) (2,437) 15 (3,187) Interest (66) (81) (97) (81) (32) (19) (343) (476) (28) (255) Other income 517 295 1,117 821 (54) (37) 832 114 631 1,631 PBT 2,277 1,586 1,476 2,424 44 54 (6) 8,574 7,133 20 8,951 Exceptional items — — — — — Tax expense (786) (476) (459) (874) 71 (10) (2,815) (2,408) 17 (2,854) PAT 1,490 1,110 1,016 1,550 47 (4) 5,759 4,726 22 6,097 Adjusted PAT 1,490 1,110 1,016 1,550 34 47 (4) 5,759 4,726 22 6,097 EPS (Rs) 15.4 11.5 10.5 16.0 60 49 63 Key ratios (as % of sales) RM 41.4 48.0 48.8 41.6 43.6 51.8 44.6 Employee cost 5.9 6.1 5.8 6.9 7.3 6.0 6.7 Other expenditure 24.7 22.5 32.5 24.3 22.1 23.2 20.2

Notes: (a) 1QFY16 and 1QFY17 financials are as per Ind-AS, the rest as per Indian GAAP.

Source: Company, Kotak Institutional Equities

Exhibit 2: Recovery in volumes growth, which started in 4QFY16, gathered pace in 1QFY17 Trend in yoy growth in BKT's volumes, March fiscal year-ends (%)

25 20 20 13 12 13 15 12 11 10 5 5 (0) - (4) (6) (5) (11) (8) (8) (10)

(15)

1QFY14

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16 1QFY17

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 27 Automobiles Balkrishna Industries

Exhibit 3: Robust growth in the OEM segment drove overall volumes growth in 1QFY17 Channel-wise growth in volumes in 1QFY17 (yoy %)

Channel Yoy growth (%) OEM 21 Replacement 8 Others 11 Overall 11

Source: Company, Kotak Institutional Equities

Exhibit 4: Natural rubber price moved up 31% qoq in 1QFY17 Trend in monthly price of Kottayam natural rubber RSS4 (Rs per ton)

16,000

15,000

14,000

13,000

12,000

11,000

10,000

9,000

8,000

Jun-14

Jun-15

Jun-16

Oct-14

Feb-15

Oct-15

Feb-16

Apr-14

Apr-15

Apr-16

Dec-14

Dec-15

Aug-14 Aug-15 Aug-16

Source: Bloomberg, Kotak Institutional Equities

Exhibit 5: Gains from lower input costs continue to come through strongly on a yoy basis Trend in operating parameters for the standalone business, BKT, March fiscal year-ends

1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 USD/INR 59.8 60.6 62.0 62.2 63.4 64.9 65.9 67.5 66.9 Euro/INR 82.0 80.3 77.2 70.1 70.3 72.3 72.2 74.4 75.5 Volumes (MT) 39,202 37,281 38,382 39,290 39,031 34,333 35,311 41,306 43,306 Sales (Rs mn) 9,590 8,813 9,603 8,935 8,559 7,869 7,498 8,796 9,281 EBITDA (Rs mn) 2,386 2,075 2,641 2,919 1,099 2,423 1,840 2,389 2,600 RMs (Rs mn) 4,871 4,613 4,826 4,841 4,180 3,271 3,300 3,662 3,846 Net sales per kg 245 236 250 227 219 229 212 213 214 RM per kg (Rs) 124 124 126 123 107 95 93 89 89 Gross margins (Rs per kg) 120 113 124 104 112 134 119 124 126 EBITDA per kg (Rs) 61 56 69 74 28 71 52 58 60 EBITDA (%) 24.9 23.5 27.5 32.7 12.8 30.8 24.5 27.2 28.0

Source: Company, Kotak Institutional Equities

28 KOTAK INSTITUTIONAL EQUITIES RESEARCH Balkrishna Industries Automobiles

Other highlights

 The US regulators have found no evidence of dumping by BKT in its preliminary determination, but have proposed a countervailing duty of 4.7% on BKT’s OTR tyres, to balance the element of subsidy as per their calculations. The final determination on this is due by January 2017.

 BKT has entered the two wheeler tyre segment in 1QFY17, at the request of its dealers who needed 2W tyres to complement their range of agriculture tyres in the rural market. The management does not expect this business to be a major revenue generator.

 The share of OEMs in total volumes has been rising strongly for BKT, as the company makes inroads into product segments of major OEMs. The share of OEMs in BKT’s total volumes has increased to 24% in 1QFY17, from 22% in 1QFY16 and 15% in FY2013. The management noted the addition of Caterpillar as their OE client in FY2016 driving traction in this segment.

 The management noted that its dealers normally keep inventory of 3-4 months, but this has come down to 2 months in FY2016 as the dealers avoided stocking due to the continuous fall in natural rubber price. The stability in natural rubber price in recent months has spurred demand from the replacement channel in the past two quarters, even though demand environment in the global OHT industry remains weak.

 The management has been hedging its Euro/USD exposure for FY2017 by covering its exposure at `79-80 (versus `84 in FY2016). This implies a hit of 300-350 bps on BKT’s margins in FY2017E.

 The management expects small investments in working capital and capex in the medium term, implying strong FCF generation for the company, which will be largely utilized to pay down its long-term debt (at `13 bn at the end of 1QFY17). The company aims to be free of long-term debt by FY2019.

Change in estimates – increase near-term margins

We expected sharp decline in BKT’s gross margins in FY2017 as the input cost had moved up significantly in 1QFY17, and the management intended to absorb the impact. However, the recent cool-off in natural rubber price, along with the management’s commentary on movement in price of other major inputs suggests that the deterioration in BKT’s gross margins may not be significant in FY2017E. Hence we, have increased our gross margin estimates for FY2017E to 55.4%, from 51.8% earlier, leading to a 20% increase in our FY2017E estimates PAT.

However, we continue to build a decline in BKT’s gross margins in FY2018-19E, expecting its gross margins to decline to 52.7% and 51.5% in FY2018-19E, in line with our expectations of increase in natural rubber price (expect 7% CAGR in FY2016-19E). Hence, our FY2018- 19E EPS has increased by only 11% and 4%, respectively. We see BKT’s earnings remaining flat in FY2017 and growing strongly in FY2017-19E (expect 16% CAGR in consolidated EPS in FY2017-19E) on account of (1) recovery in volume growth to 15% levels, (2) steady margins and (3) operating leverage benefits in the form of declining interest cost and steady depreciation expenses. We expect BKT’s FCF in FY2017-19E to remain robust (expect cumulative FCF generation of `17 bn) on account of strong profitability and negligible capex. We see BKT becoming a debt-free company by FY2018E.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 29 Automobiles Balkrishna Industries

Exhibit 6: Change in estimates for BKT, consolidated, March fiscal year-ends (Rs mn)

New Old Change (%) 2017 2018 2019 2017 2018 2019 2017 2018 2019 Revenues (Rs mn) 37,793 44,131 51,562 37,605 43,924 51,338 1 — — EBITDA (Rs mn) 10,762 11,876 13,230 8,969 10,488 12,271 20 13 8 PAT (Rs mn) 6,097 6,987 8,119 5,063 6,319 7,811 20 11 4 EPS (Rs) 63.1 72.3 84.0 52.4 65.4 80.8 20 11 4

Source: Kotak Institutional Equities estimates

Exhibit 7: Our assumptions for BKT, consolidated, March fiscal year-ends (Rs mn)

2011 2012 2013 2014 2015 2016 2017E 2018E 2019E Volumes (MT) 111,544 133,039 138,339 142,810 154,156 148,244 165,593 189,993 218,237 Sales (Rs mn) 21,921 30,166 33,939 37,719 38,168 32,587 37,793 44,131 51,562 EBITDA (Rs mn) 3,675 5,120 6,824 9,807 7,272 10,898 10,762 11,876 13,230 RMs (Rs mn) 13,249 18,174 18,947 18,219 19,784 14,223 16,863 20,880 25,023 Net sales per kg 196.5 226.7 245.3 264.1 247.6 219.8 228.2 232.3 236.3 RM per kg (Rs) 118.8 136.6 137.0 127.6 128.3 95.9 101.8 109.9 114.7 EBITDA per kg (Rs) 32.9 38.5 49.3 68.7 47.2 73.5 65.0 62.5 60.6 EBITDA (%) 16.8 17.0 20.1 26.0 19.1 33.4 28.5 26.9 25.7

Source: Company, Kotak Institutional Equities estimates

30 KOTAK INSTITUTIONAL EQUITIES RESEARCH Balkrishna Industries Automobiles

Exhibit 8: Summary financials: BKT Profit and loss model, cash flow statement and balance sheet for BKT, consolidated, March fiscal year-ends (Rs mn)

2012 2013 2014 2015 2016 2017E 2018E 2019E Profit model (Rs mn) Sales 30,166 33,939 37,719 38,168 32,587 37,827 44,169 51,606 EBITDA 5,120 6,824 9,807 7,272 10,898 10,787 11,905 13,263 Other income 40 (90) (770) 2,800 832 1,632 1,753 1,967 Interest (292) (274) (272) (476) (343) (255) (171) (107) Depreciation (864) (1,122) (1,703) (2,437) (2,813) (3,187) (3,341) (3,495) Profit before tax 4,004 5,338 7,062 7,159 8,574 8,977 10,146 11,628 Tax expense (1,315) (1,839) (2,316) (2,408) (2,815) (2,862) (3,138) (3,485) PAT 2,689 3,499 4,747 4,751 5,759 6,114 7,008 8,143 EPS 27.8 36.2 49.1 49.2 59.6 63.3 72.5 84.2 Balance sheet (Rs mn) Equity 11,101 14,430 18,951 22,760 27,879 33,289 39,523 46,814 Total borrowings 17,092 21,640 24,385 23,578 19,141 12,644 8,644 4,644 Deferred tax liability/minority interest 2,277 2,041 2,212 1,887 2,382 2,382 2,382 2,382 Current liabilities and provisions 2,910 3,397 4,672 4,958 4,503 5,203 6,076 7,099 Total liabilites 33,379 41,507 50,221 53,184 53,905 53,519 56,625 60,939 Net fixed assets 13,497 23,478 29,546 30,494 30,854 28,667 26,325 23,830 Investments 4,082 2,910 2,236 2,254 5,613 6,971 6,971 6,971 Cash & cash equivalent 3,699 2,782 3,821 8,207 5,709 4,888 7,572 11,450 Other current assets and miscellaneous 12,101 12,337 14,618 12,228 11,730 12,993 15,756 18,688 Total assets 33,379 41,507 50,221 53,184 53,905 53,519 56,625 60,939 Free cash flow (Rs mn) Operating cash flow 3,374 4,938 7,089 7,405 8,306 7,669 8,596 9,672 Working capital changes (2,832) 273 (1,355) 1,959 2,084 (1,918) (1,891) (1,908) Capital expenditure (7,029) (10,126) (8,858) (3,699) (2,387) (1,000) (1,000) (1,000) Free cash flow (6,487) (4,915) (3,123) 5,665 8,003 4,751 5,705 6,763 Ratios EBITDA margin (%) 17.0 20.1 26.0 19.1 26.9 28.5 27.0 25.7 Net debt/equity (X) 1.21 1.31 1.09 0.68 0.48 0.23 0.03 (0.15) Book value (Rs/share) 114.8 149.3 196.1 235.5 288.4 344.4 408.9 484.3 ROAE (%) 27.3 27.4 28.4 22.8 22.7 20.0 19.2 18.9 ROACE (%) 20.9 24.0 26.3 13.9 23.3 20.9 23.0 25.9

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 31

ADD Vedanta (VEDL) Metals & Mining SEPTEMBER 14, 2016 CHANGE IN RECO. Coverage view: Cautious

Cairn merger—a done deal; upgrade to ADD from REDUCE. The approval by Price (`): 161 Cairn’s minority shareholders clears the deck for merger with Vedanta. The merger will Target price (`): 190 substantially improve the stretched debt situation at the standalone level—the benefits BSE-30: 28,354 include lower funding cost, easier capital access, early execution of growth projects as well as more robust balance sheet to see through volatility in commodity prices. We upgrade Vedanta to ADD from REDUCE and raise TP to `190 (`170 earlier). We also restore ADD on Cairn India with TP of `230, aligned with our Vedanta fair value.

Company data and valuation summary Sesa Sterlite Stock data Forecasts/Valuations 2016 2017E 2018E 52-week range (Rs) (high,low) 181-58 EPS (Rs) 7.9 16.4 20.7 Market Cap. (Rs bn) 478.2 EPS growth (%) (54.0) 108.2 26.6 Shareholding pattern (%) P/E (X) 20.5 9.9 7.8 Promoters 62.9 Sales (Rs bn) 644.4 758.0 864.4 FIIs 19.7 Net profits (Rs bn) 23.3 60.8 77.0 MFs 2.4 EBITDA (Rs bn) 151.5 194.9 226.1 Price performance (%) 1M 3M 12M EV/EBITDA (X) 8.1 6.0 5.0 Absolute (2.9) 38.1 66.3 ROE (%) 4.7 11.5 12.1 Rel. to BSE-30 (3.6) 29.7 50.2 Div. Yield (%) 2.2 1.7 1.7 Minority shareholders vote in favor of merger with Vedanta Public shareholders of Cairn India have approved the merger with Vedanta—of the 23.9% who voted (total minorities shareholding at 40.1%), 72.4% voted in favor of merger. Note that earlier, the shareholders of Vedanta had already approved the merger. Post the public shareholder’s approval, the company requires approval from (a) Foreign Investment Promotion Board, (b) High Court, (c) Ministry of Petroleum and Natural Gas (Exhibit 2). We believe the approval from minority shareholders clears the decks for merger and expect other approvals to come through. The company expects to close the transaction by 1QCY17. Benefits of merger—stretched debt situation eases, materially The merger with Cairn will substantially improve tight liquidity at Vedanta standalone given the large debt and limited cash flows. Post-merger, the standalone net debt will decline to `437 bn from `743 bn (on inclusion of Cairn’s cash reserves) and standalone EBITDA will increase to `104 bn from `66 bn—calculations are based on FY2017E financials. Our calculations assume wholly owned subsidiaries as part of standalone financials. Net debt/EBITDA at standalone level will improve to 4.2X/3.5X for FY2017/18E from 11.2X/9.6X from pre-merger scenario (Exhibit 1).

We believe easing liquidity at Vedanta will help in (a) lowering the cost of funding with easier access to capital, (b) restarting other growth projects. The company may pursue projects such as new copper smelter, Gamsberg zinc mine, aluminum smelter ramp-up with much ease now, and (c) help sail through more easily in the volatile commodity price environment, unlike last year.

We upgrade VEDL to ADD from REDUCE with TP of `190; restore Cairn to ADD (TP: `230) Abhishek Poddar [email protected] Improving capital structure increases confidence on the company’s ability to deliver on strong Mumbai: +91-22-4336-0861 growth pipeline in aluminum, power business as well as invest in zinc mining operations in Gamsberg to sustain longer mine life. Vedanta will also benefit from firm zinc prices led by Tarun Lakhotia strong fundamentals due to global mine supply deficit. We upgrade Vedanta to ADD from [email protected] Mumbai: +91-22-4336-0875 REDUCE with a revised TP of `190 (`170 earlier). The increase in our fair value is led by 2-7% increase in our zinc price assumption and increase in standalone earnings estimate. Simran Kaur [email protected] We restore ADD on Cairn with a TP of `230, aligned with our Vedanta fair value. We expect Mumbai: +91-22-4336-0876 improvement in Cairn’s operational performance driven by medium-term recovery in crude price. However, we expect Cairn to trade as a proxy to Vedanta, post minority shareholders’ approval.

Kotak Institutional Equities Research [email protected] Mumbai: +91-22-4336-0000

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

Exhibit 1: Merger with Cairn will significantly ease high leverage at Vedanta's standalone financials (including wholly owned subsidiaries) Scenario analysis of Cairn merger on Net debt, EBITDA and leverage ratios of Vedanta, March fiscal year-ends, (Rs bn)

Pre-merger Post merger 2016 2017E 2018E 2019E 2017E 2018E 2019E Net debt (Rs bn) Standalone, wholly owned subsidiaries Vedanta Standalone* 745 673 696 681 673 696 681 Talwandi Sabo 73 70 65 57 70 65 57 Zinc International (6) 0 5 3 0 5 3 Others 19 — — — — — — Cairn India* — — — — (306) (328) (344) Sub total 830 743 766 740 437 438 397 Other subsidiaries Zinc India (352) (275) (329) (392) (275) (329) (392) Cairn India* (280) (306) (328) (344) — — — Balco 55 61 60 57 61 60 57 Sub total (578) (521) (597) (679) (215) (269) (335) Total 253 222 168 61 222 168 61 EBITDA (Rs bn) Standalone, wholly owned subsidiaries Vedanta Standalone* 39 47 56 64 47 56 64 Talwandi Sabo 5 11 15 15 11 15 15 Zinc International 4 6 7 5 6 7 5 Others 2 2 2 2 2 2 2 Cairn India — — — — 38 44 54 Sub total 50 66 80 87 104 123 140 Other subsidiaries Zinc India 66 86 97 106 86 97 106 Cairn India 36 38 44 54 — — — Balco (1) 5 6 9 5 6 9 Sub total 101 129 146 168 91 103 115 Total 152 195 226 255 195 226 255 Leverage ratios (X) Standalone & wholly owned subsidiaries Net debt/EBITDA (X) 16.5 11.2 9.6 8.6 4.2 3.5 2.8 Consolidated Net debt/EBITDA (X) 1.7 1.1 0.7 0.2 1.1 0.7 0.2 Note: (a) Standalone net debt includes net debt of Twin Star Mauritius Holding pertaining to Cairn India acquisition.

Source: Company, Kotak Institutional Equities estimates

Changes in our estimates

Exhibit 4 highlights key changes in our estimates.

We raise our zinc price assumption to US$2,100/ton, US$2,200/ton and US$2,250/ton for FY2017E, FY2018E and FY2019E from US$2,050/ton, US$2,100/ton and US$2,100/ton. Our KIE energy team factors in crude prices at US$50/bbl for FY2017E, US$55/bbl for FY2018E and US$60/bbl for FY2019E and long term crude prices of US$65/bbl.

We have also raised our standalone EBITDA estimate by 4-5% led by increase in iron-ore earnings estimate. We expect iron-ore EBITDA of `8.2 bn, `8.9 bn and `9.5 bn for FY2017E, FY2018E and FY2019E based on approved iron-ore volumes of 7.8 mn tons in Karnataka and Goa combined. Our iron-ore earnings estimate can increase in Vedanta is allowed to mine more ore in these states, the approval for which is pending.

We raise our consolidated EBITDA estimate for Vedanta by 3-5% to `195 bn for FY2017E, `226 bn for FY2018E and `255 bn for FY2019E. Our EPS estimates are `16.4 for FY2017E, `20.7 for FY2018E and `25.8 for FY2019E. Our TP for Vedanta increases to `190 from `170 earlier.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 33 Metals & Mining Vedanta

Zinc—tightening concentrate market can lead to weak refined production in 2H

Global zinc markets were in deficit of 50,000 tons in 2QCY16 and 75,000 tons in 1QCY16 due to declining production in world ex-China markets. The global refined zinc production declined by 6% in 1H2016 to 3.66 mn tons after closure of Century and Lisheen mines and weak production from Hindustan Zinc, Glencore. We also highlight that refined metal is yet to react to zinc concentrate’s tightness and due to which TC/RCs have fallen sharply. China’s smelters operated at high rates in 2QCY16 to take advantage of higher prices and tighter concentrate markets may affect smelter operating rates.

The tightening concentrate markets are also impacted by lower production from Hindustan Zinc in 1HFY17 as well as production cutbacks from Glencore, besides shutdowns of Century mine and Lisheen. However, improvement in HZ’s production later this year may only provide little respite due to the large shortfall from Lisheen and Century.

Exhibit 2: Vedanta expects Cairn merger to be complete by 1QCY17 Various approvals required for the Cairn merger and their indicative timelines

Key events/approvals Indicative timeline Vedanta Plc posting of UK Circular Aug-16 Vedanta Plc EGM Sep-16 Vedanta Ltd shareholder meetings 8-Sep-16 Cairn India shareholder meetings 12-Sep-16 Foreign Investment Promotion Board approval 4QCY16 High Court of India approval 1QCY17 Ministry of Petroleum & Natural Gas 1QCY17 Transaction completion 1QCY17

Source: Company, Kotak Institutional Equities

Exhibit 3: Promoter shareholding at Vedanta will reduce to 50.1% from 62.9% on Cairn merger Computation of revised promoter stake on merger with Cairn India, (%)

No. of shares (mn) Equity swap ratio (X) - (A) 1.0 Vedanta shares outstanding 2,965 Promoter's stake in Vedanta 62.9% 1,864 Cairn shares outstanding 1,875 Cairn India shareholding Promoter stake (Vedanta) 59.9% 1,123 Minority stake (B) 40.1% 752 New Vedanta shares to be issued (A x B) - (C) 752 Vedanta - new shareholding Existing shares 2,965 New shares to Cairn minorities 752 Total shares outstanding 3,717 Shares with promoters 1,864 Promoter stake (%) 50.1

Source: BSE, Company, Kotak Institutional Equities estimates

34 KOTAK INSTITUTIONAL EQUITIES RESEARCH Vedanta Metals & Mining

Exhibit 4: Vedanta Ltd (pro-forma financials post Cairn merger), change in estimates, March fiscal year-ends, 2017-19E (Rs mn)

Revised estimate Old estimate % change 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Prices (US$/ton) Aluminium (all- in) 1,700 1,750 1,800 1,700 1,750 1,800 — — — Zinc 2,100 2,200 2,250 2,050 2,100 2,100 2 5 7 Lead 1,850 1,950 2,000 1,850 1,950 2,000 — — — Crude brent (US$/bbl) 50.0 55 60 50.0 55 60 — — — Vedanta Consolidated Net sales 757,960 864,429 967,993 752,732 855,752 955,808 1 1 1 EBITDA 194,939 226,102 254,820 190,153 218,229 243,822 3 4 5 EPS (Rs) 16.4 20.7 25.8 15.4 19.3 23.8 6 8 8 Standalone Net sales 339,816 397,693 454,904 337,657 395,427 452,524 1 1 1 EBITDA 46,706 55,826 64,472 44,671 53,689 62,229 5 4 4 Talwandi Sabo Revenues 50,089 64,037 64,366 50,089 64,037 64,366 — — — EBITDA 11,439 15,208 15,065 11,439 15,208 15,065 — — — Hindustan Zinc Revenues 163,283 177,735 192,237 163,283 177,735 192,237 — — — EBITDA 83,759 91,687 98,155 83,759 91,687 98,155 — — — BALCO Revenues 61,872 73,640 92,482 61,872 73,640 92,482 — — — EBITDA 4,879 6,169 8,825 4,879 6,169 8,825 — — — Zinc International Net sales 23,190 19,931 18,190 22,724 19,050 17,013 2 5 7 EBITDA 5,885 6,563 5,019 5,419 5,681 3,842 9 16 31 Cairn India Net sales 83,372 92,128 103,450 83,372 92,128 103,450 — — — EBITDA 37,961 43,769 53,679 37,961 43,769 53,679 — — —

Re/ US$ rate 68.5 70.0 70.0 68.5 70.0 70.0 — — —

Source: Kotak Institutional Equities estimates

Exhibit 5: Vedanta, Key assumptions, March fiscal year ends 2014-19E (Rs mn)

2014 2015 2016 2017E 2018E 2019E Volumes (tons) Zinc 750,766 735,783 760,436 721,208 748,793 778,244 Lead 121,120 134,898 145,417 147,729 155,402 168,891 Copper 297,000 361,658 383,434 388,234 392,284 396,334 Aluminum - Balco 252,172 300,135 308,144 411,950 500,225 559,075 Aluminum - Jharsuguda I 542,000 534,000 516,000 550,000 550,000 550,000 Aluminum - Jharsuguda II — — 25,000 312,500 625,000 937,500 Refined silver 347 328 426 485 512 552 Power (mn units) 7,530 8,419 10,111 15,812 18,917 18,917 Cairn-net production (O+OEG) (000's b/d) 218 213 204 196 187 178 Average realization (Rs/ton) Zinc 130,493 150,805 133,581 161,794 172,949 173,215 Lead 143,907 132,248 129,696 143,921 152,632 154,047 Copper cathode 442,810 416,584 361,311 360,849 383,044 404,483 Aluminium ingots 134,733 149,158 123,553 130,737 137,730 141,665 Silver (Rs mn/ton) 43 36 33 38 40 41 Base assumptions (US$/ton) Zinc 1,909 2,176 1,833 2,100 2,200 2,250 Lead 2,092 2,021 1,770 1,850 1,950 2,000 Copper 7,108 6,558 5,228 5,000 5,200 5,500 Aluminium (all in) 2,030 2,290 1,719 1,700 1,750 1,800 Dated Brent crude price (US$/bbl) 108 86 48 50 55 60

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 35 Metals & Mining Vedanta

Exhibit 6: SOTP-based target price of Vedanta is Rs190/share SOTP-based target price of Vedanta, March fiscal year-ends, March 2018E basis (Rs mn)

Implied Vedanta's Attributable EBITDA Multiple EV Net debt M Cap stake M Cap Contribution (Rs bn) (X) (Rs bn) (Rs bn) (Rs bn) (%) (Rs bn) Rs/ share BALCO 6 6.5 40 60 (20) 51 (10) (3) Zinc business Hindustan Zinc 97 6.0 579 (348) 927 64.9 602 162 Zinc International 7 5.0 33 3 30 100 30 8 Cairn India (fair value of KIE's energy team) 121 Standalone (ex-power, iron ore) 42 6.5 274 726 (452) 100 (452) (122) Iron ore business 12 Power business 12 Vedanta share price (Rs/share) 191 Target price of Vedanta (Rs/share) 190

Source: Kotak Institutional Equities estimates

36 KOTAK INSTITUTIONAL EQUITIES RESEARCH Vedanta Metals & Mining

Exhibit 7: Vedanta, Proforma (Cairn merger) profit model, balance sheet and cash flow model, March fiscal year-ends, 2014-2019E (Rs mn)

2014 2015 2016 2017E 2018E 2019E Profit model (Rs mn) Net sales 722,341 737,095 644,415 757,960 864,429 967,993 EBITDA 256,650 220,446 151,510 194,939 226,102 254,820 Other income 24,460 29,772 45,050 45,378 44,465 47,413 Interest (61,110) (56,588) (57,820) (60,440) (63,854) (61,840) Depreciaiton (55,840) (51,096) (61,340) (62,577) (64,702) (70,305) Goodwill amortization (28,400) (20,496) — — — — Profit before tax 135,760 122,039 77,400 117,300 142,011 170,088 Extraordinaries (2,290) (221,289) (138,620) — — — Current tax (10,000) (27,736) (20,914) (30,582) (36,008) (40,697) Deferred tax — 13,253 1,975 1,769 870 217 Net income before minorities 123,470 (113,734) (80,160) 88,487 106,873 129,608 Minority interest (73,420) (42,764) (29,150) (27,705) (29,893) (33,890) Net income 50,050 (156,498) (109,310) 60,782 76,979 95,717 Adjusted net income 50,200 50,601 23,290 60,782 76,979 95,717 EPS adjusted (Rs) 16.9 17.1 7.9 16.4 20.7 25.8 EPS (ex-goodwill amortization) (Rs) 26.5 24.0 7.9 16.4 20.7 25.8 Balance sheet (Rs mn) Shareholder's funds 730,087 538,753 446,723 607,710 668,787 748,050 Borrowings 805,660 777,523 779,520 753,880 778,429 767,979 Preference shares — — — 30,085 30,085 — Minority Interest 337,975 355,297 329,674 147,109 164,988 184,552 Deferred tax liability 27,352 33,297 31,959 30,190 29,321 29,104 Current liabilities 240,110 197,942 291,895 234,588 224,894 241,783 Total liabilities 2,141,183 1,902,812 1,879,772 1,803,562 1,896,504 1,971,468 Net fixed assets 479,671 523,181 673,741 782,565 811,980 847,400 Capital work-in-progress 431,277 387,480 269,911 166,153 133,885 88,617 Goodwill 392,383 177,897 56,327 — — — Cash and cash equivalents 507,970 462,126 526,661 544,341 618,260 681,197 Current assets 329,882 352,128 353,132 310,502 332,378 354,253 Total assets 2,141,183 1,902,812 1,879,772 1,803,562 1,896,504 1,971,468 Free cash flow (Rs mn) Operating cash flow excl. working capital 135,554 156,086 91,512 149,295 170,705 199,696 Working capital changes (10,239) (25,345) 63,674 (14,678) (31,570) (4,985) Capital expenditure (72,317) (105,742) (53,758) (67,644) (61,849) (60,457) Free cash flow 52,999 25,000 101,428 66,974 77,286 134,253 Ratios Debt/equity (X) 1.1 1.4 1.7 1.2 1.2 1.0 Net debt/equity (X) 0.4 0.6 0.6 0.3 0.2 0.1 RoE (%) 7.2 8.0 4.7 11.5 12.1 13.5 RoACE (%) 7.2 8.0 4.7 11.5 12.1 13.5

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 37 Metals & Mining Vedanta

Exhibit 8: Cairn India, profit model, balance sheet, cash model, March fiscal year-ends, 2014-19E (Rs mn)

2014 2015 2016 2017E 2018E 2019E Profit model (Rs mn) Net sales 243,573 193,806 109,895 89,216 97,631 108,505 EBITDA 140,981 96,207 36,249 37,961 43,769 53,679 Other income 15,027 18,093 20,084 18,515 19,319 19,600 Interest (415) (203) (270) (750) (750) (750) DD&A (27,097) (36,675) (33,672) (30,403) (30,197) (31,558) Pretax profits 128,496 77,421 22,392 25,323 32,141 40,971 Extraordinary items — (26,330) (116,738) — — — Tax (1,463) (933) (1,663) (9,783) (12,837) (15,306) Deferred taxation (2,715) (5,362) 1,690 1,176 1,913 1,380 Adjusted net profits 124,318 65,410 21,450 16,715 21,216 27,045 Earnings per share (Rs) 65.2 34.9 11.4 8.9 11.3 14.4 Balance sheet (Rs mn) Total equity 574,377 588,702 487,926 499,017 510,109 521,406 Deferred tax liability 7,356 12,718 11,028 9,852 7,939 6,559 Currrent liabilities 75,190 66,923 66,002 64,564 64,861 64,892 Total liabilities and equity 656,922 668,343 564,956 573,433 582,910 592,858 Cash 66,542 18,066 47,252 72,883 94,996 110,676 Current assets 40,069 33,178 119,833 122,234 123,145 124,322 Total fixed assets 117,561 118,540 92,122 77,935 64,546 50,571 Net producing properties 38,644 25,336 33,111 27,742 27,585 34,651 Investments 163,638 152,334 150,541 150,541 150,541 150,541 Goodwill 151,522 151,522 37,626 37,626 37,626 37,626 Other non-current assets 78,946 169,366 84,471 84,471 84,471 84,471 Total assets 656,922 668,343 564,956 573,433 582,910 592,858 Free cash flow (Rs mn) Operating cash flow, excl. working capital 124,947 89,142 36,159 27,077 29,832 37,273 Working capital changes (14,099) 5,938 4,882 (3,839) (613) (1,146) Capital expenditure (27,010) (55,744) (16,491) (10,498) (16,300) (24,300) Investments/Goodwill (57,423) (9,127) (11,297) — — — Other income 3,142 5,458 6,106 18,515 19,319 19,600 Free cash flow 29,558 35,667 19,360 31,255 32,237 31,428 Key assumptions Gross production ('000 boe/d) 218 213 204 196 187 178 Net production ('000 boe/d) 136 133 128 125 121 116 Gross production from Rajasthan block ('000 boe/d) 180 175 170 166 162 157 Dated Brent (US$/bbl) 108 86 48 50 55 60 Discount of Rajasthan crude to Dated Brent (US$/bbl) 12 9 7 9 9 9

Source: Company, Kotak Institutional Equities estimates

38 KOTAK INSTITUTIONAL EQUITIES RESEARCH

ADD Mahindra CIE Automotive (MACA) Automobiles SEPTEMBER 14, 2016 CHANGE IN RECO. Coverage view: Attractive

Acquisition of Bill Forge a right fit. MACA has acquired 100% stake in Bill Forge for Price (`): 191 ₹13.3 bn which will be largely funded through equity issuance to Bill Forge’s Target price (`): 205 shareholders and CIE. On our estimates, the valuation multiples are reasonable and the BSE-30: 28,354 deal will be EPS accretive from the first year itself. We believe that access to large passenger OEMs through Bill Forge is a significant positive; acquisition will steer the domestic business on growth path which has been our key concern on the company so far. We upgrade the stock to ADD from REDUCE with a revised TP of ₹205 (from ₹175 earlier).

Company data and valuation summary Mahindra CIE Automotive Stock data Forecasts/Valuations 2016 2017E 2018E 52-week range (Rs) (high,low) 280-156 EPS (Rs) 4.4 7.8 9.9 Market Cap. (Rs bn) 61.9 EPS growth (%) (41.1) 77.2 27.5 Shareholding pattern (%) P/E (X) 43.6 24.6 19.3 Promoters 74.7 Sales (Rs bn) 38.6 54.7 67.4 FIIs 5.8 Net profits (Rs bn) 1.4 2.5 3.7 MFs 6.5 EBITDA (Rs bn) 3.8 6.2 8.8 Price performance (%) 1M 3M 12M EV/EBITDA (X) 18.9 11.2 8.0 Absolute 6.7 (1.3) (27.4) ROE (%) 7.3 11.8 12.5 Rel. to BSE-30 6.0 (7.2) (34.4) Div. Yield (%) 0.0 0.0 0.0

Mahindra CIE acquires 100% stake in Bill Forge; CIE and Bill Forge shareholders to infuse equity

Mahindra CIE has decided to acquire 100% stake in Bill Forge Private Ltd for ₹13.3 bn. Bill Forge, owned by Bangalore-based by Haridass family is a well-managed forging company with access to leading OEMs in passenger vehicle and two-wheeler segments. The deal will be funded through (1) equity issuance of ₹10.9 bn to shareholders of Bill Forge (₹6.4 bn) and CIE (₹4.5 bn) at ₹200 per share (54.5 mn new shares) and (2) remaining ₹2.4 bn through debt. The acquisition is EPS accretive; access to new customers a significant long-term positive

Bill Forge has an excellent track record which is reflected in strong 20% revenue CAGR over FY2010-16, healthy EBITDA margin and a well-managed balance sheet with strong return ratios (20% plus RoE as of FY2014). On our estimates, the deal values Bill Forge at 14.6X FY2018E EPS and 7.8X FY2018E EV/EBITDA which we believe is reasonable given strong fundamentals.

 Our biggest concern on Mahindra CIE has been the lack of growth in the standalone

business due to its inability to acquire new customers. We believe that acquisition of Bill Forge will give Mahindra CIE access to large OEMs (Maruti, Hyundai, Honda, etc.) and help it to expand its content share with OEMs in India.

 Equity infusion by promoters of Bill Forge will ensure business continuity and also reflects that through due diligence has been done on financials of Bill Forge.

 With the acquisition, Mahindra CIE will more than double its domestic forging revenues Hitesh Goel while overall standalone revenues will increase by almost 40-45%. This will lead to scale [email protected] Mumbai: +91-22-4336-0878 benefits both in terms of fixed overheads and also better price negotiation from vendors. Nishit Jalan Growth concern somewhat addressed; upgrade to ADD with revised TP of ₹205 (from ₹175) [email protected] Mumbai: +91-22-4336-0877 We have increased our CY2017-18E consolidated EPS estimates by 6-11%. We expect EPS of the domestic business to grow at 55% CAGR over CY2016-19E while consolidated EPS will likely grow at 26% CAGR over the period. We upgrade the stock to ADD (from REDUCE) with revised TP of ₹205, valuing the company at 17X September 2018 EPS (multiple unchanged).

Kotak Institutional Equities Research [email protected] Mumbai: +91-22-4336-0000

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

Key details of the transactions

As per the release in Bombay stock exchange, the Board of Directors of Mahindra CIE has approved (1) acquisition of 100% stake in Bill Forge Private Ltd for ₹13.3 bn, (2) preferential allotment of 31.99 mn equity shares of Mahindra CIE to the shareholders of Bill Forge at ₹200/share (₹6.4 bn of equity issuance), (3) preferential allotment of 22.5 mn equity shares of Mahindra CIE to PIA2 (subsidiary of CIE Automotive) at ₹200/share (₹4.5 bn of equity issuance) and (4) further fund raising of up to ₹7 bn through QIP route. The company expects to complete these transactions by October 2016.

Exhibit 1: Mahindra CIE expects to complete the deal by October 2016 Indicative timeline of the transactions

Event Timeline Board resolutions & announcement 12 September 2016 Shareholder meeting to approve issuance of equity shares 13 October 2016 Completion of Acquisition of Bill Forge Private Ltd (BFPL) and issue of equity shares under preferential allotment to shareholders of BFPL and CIE 27 October 2016 Stock Exchange approval for listing of equity shares issued under preferential allotment 31 October 2016

Source: Company

Post the competition of these transactions,

(1) The total number of equity shares of Mahindra CIE will increase to 378.06 mn from 323.57 mn shares currently which implies ~17% equity dilution,

(2) Shareholders of Bill Forge (Haridass family and Kedaara Capital) will own 8.46% stake in Mahindra CIE and

(3) CIE Automotive’s stake (through PIA2) in Mahindra CIE will come down to 51.39% from 53.09% currently. Other shareholders like Mahindra will also get diluted post the deal.

Exhibit 2: CIE Auto holds 53% stake currently in Mahindra CIE Shareholding structure of Mahindra prior to these transactions

Source: Company

40 KOTAK INSTITUTIONAL EQUITIES RESEARCH Mahindra CIE Automotive Automobiles

Exhibit 3: Post the transactions, CIE Auto will hold 51.4% stake while Bill Forge shareholders will hold 8.46% stake in Mahindra CIE Shareholding structure of Mahindra post the completion of these transactions

Source: Company

Key details of the acquisition and the acquired entity

 The deal value of ₹13.3 bn will be funded by (1) ₹10.9 bn through preferential allotment of shares and (2) the remaining ₹2.4 bn through internal accruals and borrowings. We note that equity issuance to Bill Forge shareholders and CIE Automotive would ensure limited increase in net debt of Mahindra CIE. On our estimates, net debt of Mahindra CIE will be ₹8.5 bn as of December 2017 and net debt to equity would be 0.22X.

 Bill Forge (BFPL) is a promoter-driven private company; Haridass family led by Anil Haridass and private equity firm Kedaara Capital are key shareholders. It is a precision forging and machining company focused on two-wheeler and passenger car auto components, primarily for steering, transmission and wheel-related assemblies. Most of the products supplied are either fully finished (60%) or semi-finished (30%).

 Through Tier 1 vendors, Bill Forge has access to passenger vehicle OEMs like Maruti, Hyundai and Honda. Hero, Bajaj, HMSI and TVS are key two-wheeler customers of the company. The company also exports products to countries such as Thailand, China, Mexico, Europe and US.

 Key products include steering races and engine valve retainers for two-wheelers and constant velocity joints, tulips, steering shafts, steering yokes and wheel hubs for passenger cars.

Exhibit 4: Passenger vehicle segment accounts for bulk of Bill Exhibit 5: Steering races, tulip, wheel hubs are key products of Forge’s revenues Bill Forge Revenue breakdown of Bill Forge, March fiscal year-ends, 2016 Product mix of Bill Forge, March fiscal year-ends, 2016

Source: Company Source: Company

KOTAK INSTITUTIONAL EQUITIES RESEARCH 41 Automobiles Mahindra CIE Automotive

Our view: Several positives; new client access could create long-term value

 Robust financials of the acquired entity: Bill Forge has an excellent track record which is reflected in strong 20% revenue CAGR over FY2010-16, healthy EBITDA margin and well-managed balance sheet with strong return ratios (20% plus RoE as of FY2014) and net debt only ₹745 mn as of FY2016 (refer to Exhibit 6-8 for details).

 Deal is EPS accretive: On our estimates, the deal value of ₹13.3 bn implies 14.6 X P/E multiple and 7.8X EV/EBITDA based on FY2018E financials which appears reasonable given strong fundamentals of the acquired entity. Given reasonable valuation and potential for strong revenue growth (for Bill Forge) going ahead, the deal is EPS accretive from first year itself.

 Continuity of the management: We note that the promoter of Bill Forge (Anil Haridass) is investing almost half of his cash inflow from the deal back into Mahindra CIE to acquire stake in the company (at ₹200/share). This will ensure continuity of the business and also reflects confidence of Mr. Haridass on potential long-term value creation by the combined entity.

 Scale benefits: With the acquisition, Mahindra CIE will more than double its domestic forging revenues while overall standalone revenues will increase by almost 40-45%. This will lead to scale benefits both in terms of fixed overheads and also better negotiation from vendors.

 Access to new customers: Our biggest concern on Mahindra CIE has been the inability of the company to acquire new customers or to expand product offerings with small existing customers due to lack of strong relationship with the OEMs. We note that Bill Forge is one of the top suppliers in its product categories and has strong relationship with big passenger vehicle OEMs such as Maruti, Hyundai, Honda, etc. through Tier 1 suppliers. In our view, this is a significant positive as over the next few years, it could help Mahindra CIE penetrate deeper into these OEMs with expanded product offerings such as crankshafts, axle shafts, turbo charger housings, steering knuckles, etc. The acquisition also gives Mahindra CIE entry into two-wheeler OEMs.

Earnings revision: Increase CY2017-18E consol estimates by 6-11%

On our estimates, the deal is EPS accretive and hence, we revise up our CY2017-18E consolidated EPS estimates by 6-11%. Our CY2016E earnings estimates remain unchanged as we have merged the financials of Bill Forge into standalone Mahindra CIE entity from CY2017 onwards. We expect Bill Forge’s revenues to grow at 20% CAGR over FY2016-19E (in-line with last five years growth) and build in EBITDA margin of 21-22% over this period (refer to Exhibit 8 for details).

42 KOTAK INSTITUTIONAL EQUITIES RESEARCH Mahindra CIE Automotive Automobiles

Exhibit 6: Bill Forge’s revenues have grown at 20% CAGR over Exhibit 7: Bill Forge’s EBITDA have grown at 23% CAGR over FY2010-16 FY2010-16; EBITDA margin has improved by 200 bps Revenues of Bill Forge, March fiscal year-ends, 2010-16 (₹ mn) EBITDA and EBITDA margin of Bill Forge, March fiscal year-ends, 2010-16 (₹ mn, %) 7,000 EBITDA [LHS] EBITDA margin (%) [RHS] 6,000 1,400 21.0

5,000 1,200 20.5

4,000 1,000 20.0

800 19.5 3,000 600 19.0 2,000 400 18.5 1,000 200 18.0

- - 17.5 2010 2016 2010 2016

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

Exhibit 8: We expect Bill Forge’s revenues to grow at 20% CAGR over FY2016-19E Key historical financials and our estimates for Bill Forge, March fiscal year-ends, 2013-19E (₹ mn)

2013 2014 2015 2016 2017E 2018E 2019E Key P&L items Revenues 3,640 3,940 4,988 5,823 6,988 8,385 10,062 EBITDA N/A N/A N/A 1,205 1,467 1,803 2,214 EBITDA margin (%) N/A N/A N/A 20.7 21.0 21.5 22.0 Net profit 187 256 N/A 514 688 913 1,189 Net margin (%) 5.1 6.5 N/A 8.8 9.8 10.9 11.8 Key Balance sheet items Shareholder's equity 1,087 1,185 Total debt 1,626 1,485 Trade payables 279 529 Other liabilities 507 562 Total equity and liabilities 3,499 3,761 Gross block 2,631 2,829 Accumulated depreciation 1,065 1,289 CWIP 8 0 Total fixed assets 1,573 1,540 Debtors 804 927 Inventory 828 996 Cash 37 43 Other assets 257 254 Total assets 3,499 3,761 Key ratios Net debt (Rs mn) 1,589 1,442 754 Net debt to equity (X) 1.5 1.2 Debtor days 81 86 Inventory days 83 92 Payable days 28 49 Net working capital days 136 129

Notes: (1) Mahindra CIE has disclosed key FY2015-16 financials in the presentation (2) FY2013-14 financials are sourced from Registrar of Companies

Source: Company, Registrar of Companies (RoC), Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 43 Automobiles Mahindra CIE Automotive

Exhibit 9: We raise our CY2017-18E consolidated EPS estimates by 6-11% as we build in the impact of Bill Forge acquisition from CY2017E Earnings revision table, Calendar year-ends, 2016-18E (₹ mn)

New estimates Old estimates % change 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E Standalone Net sales 16,844 27,039 31,412 16,844 18,654 21,350 - 45.0 47.1 EBITDA 1,625 3,741 4,619 1,625 1,938 2,399 - 93.0 92.5 EBITDA margin (%) 9.6 13.8 14.7 9.6 10.4 11.2 0 bps 345 bps 347 bps Adjusted net profit 679 1,581 2,205 679 842 1,127 - 87.8 95.6 EPS 2.1 4.2 5.8 2.1 2.6 3.5 - 60.5 67.2 Consolidated Net sales 54,717 67,414 74,105 54,717 59,028 64,043 - 14.2 15.7 EBITDA 6,166 8,771 10,175 6,166 6,969 7,955 - 25.9 27.9 EBITDA margin (%) 11.3 13.0 13.7 11.3 11.8 12.4 0 bps 121 bps 131 bps Adjusted net profit 2,512 3,749 4,733 2,512 3,010 3,655 - 24.5 29.5 EPS 7.8 9.9 12.5 7.8 9.3 11.3 - 6.4 10.7

Source: Company, Kotak Institutional Equities estimates

44 KOTAK INSTITUTIONAL EQUITIES RESEARCH Mahindra CIE Automotive Automobiles

Exhibit 10: Standalone earnings will more than double in CY2017E post the merger of Bill Forge Standalone profit, balance sheet and cash model, Calendar year-ends, 2015-19E (₹ mn)

FY2015 9MFY16 CY2016E CY2017E CY2018E CY2019E Profit model (Rs mn) Net sales 16,425 12,036 16,844 27,039 31,412 37,156 EBITDA 1,332 1,008 1,625 3,741 4,619 5,828 Other income 199 51 149 130 137 143 Interest (140) (23) - (400) (280) (180) Depreciation (689) (544) (760) (1,180) (1,280) (1,420) Exceptionals ------Profit before tax 703 492 1,014 2,291 3,196 4,372 Tax 74 (184) (335) (710) (991) (1,355) Net profit 777 308 679 1,581 2,205 3,017 Earnings per share (Rs) 2.4 1.0 2.1 4.2 5.8 8.0 Balance sheet (Rs mn) Equity 23,085 23,462 24,141 36,621 38,827 41,843 Deferred tax liability 175 263 263 263 263 263 Total borrowings 575 239 - 3,167 1,967 267 Other liabilities 3,229 3,273 3,641 5,171 5,917 6,865 Provisions 288 451 451 451 451 451 Total liabilities 27,352 27,689 28,496 45,673 47,424 49,689 Net fixed assets 6,111 5,886 6,126 8,446 9,666 10,746 Investments 15,774 16,260 16,260 16,260 16,260 16,260 Cash 178 257 343 298 (814) (1,786) Inventories 1,525 1,513 1,269 2,593 3,012 3,563 Trade receivables 2,307 2,202 2,307 4,074 4,733 5,599 Other current assets 1,458 1,571 2,190 14,001 14,566 15,306 Total assets 27,352 27,689 28,496 45,673 47,424 49,689 Free cash flow (Rs mn) Operating cash flow excl. working capital 938 1,439 2,761 3,485 4,437 Working capital changes 179 (114) (2,872) (897) (1,209) Capital expenditure (364) (1,000) (3,500) (2,500) (2,500) Free cash flow 753 326 (3,611) 88 728 Ratios EBITDA margin (%) 8.1 8.4 9.6 13.8 14.7 15.7 PAT margin (%) 4.7 2.6 4.0 5.8 7.0 8.1 Net debt/equity (X) 0.0 (0.0) (0.0) 0.1 0.1 0.0 Book value (Rs/share) 71.4 72.6 74.7 96.9 102.7 110.7 RoAE (%) 1.3 2.9 5.2 5.8 7.5

Notes: (1) The company has changed fiscal year from March 2016 to December 2015 (2) 9MFY16 represents financials for April 2015 to December 2015 period (3) We have assumed merger of Bill Forge from 1st January 2017 in our estimates

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 45 Automobiles Mahindra CIE Automotive

Exhibit 11: We expect consolidated earnings to increase at a 21% CAGR over CY2016-19E Consolidated profit, balance sheet and cash model, Calendar year-ends, 2015-19E (₹ mn)

FY2015 9MFY16 CY2016E CY2017E CY2018E CY2019E Profit model (Rs mn) Net sales 55,699 38,613 54,717 67,414 74,105 82,319 EBITDA 4,403 3,781 6,166 8,771 10,175 11,961 Other income 429 174 322 311 327 343 Interest (1,197) (471) (538) (838) (618) (448) Depreciation (2,375) (1,637) (2,317) (2,857) (3,077) (3,337) Exceptionals (2,261) (779) - - - - Profit before tax (1,001) 1,068 3,632 5,388 6,807 8,519 Tax 219 (196) (1,120) (1,639) (2,074) (2,599) Net profit (782) 872 2,512 3,749 4,733 5,919 Adjusted net profit 2,406 1,418 2,512 3,749 4,733 5,919 Earnings per share (Rs) 7.4 4.4 7.8 9.9 12.5 15.7 Balance sheet (Rs mn) Equity 18,865 20,107 22,620 37,267 42,000 47,920 Deferred tax liability 333 659 659 659 659 659 Total borrowings 15,491 10,776 10,200 9,500 7,500 4,400 Other liabilities 12,633 17,371 18,098 21,518 23,656 26,238 Provisions 2,362 3,020 3,020 3,020 3,020 3,020 Total liabilities 49,684 51,934 54,597 71,965 76,836 82,237 Net fixed assets 32,501 33,976 34,659 37,802 40,725 43,388 Investments 570 722 722 722 722 722 Cash 893 501 2,550 352 184 345 Inventories 6,850 7,189 6,614 8,295 9,157 10,225 Trade receivables 4,225 3,724 3,898 7,388 8,121 9,021 Other current assets 4,801 5,822 6,155 17,407 17,927 18,537 Total assets 49,839 51,934 54,597 71,965 76,836 82,238 Free cash flow (Rs mn) Operating cash flow excl. working capital 2,815 4,829 6,606 7,810 9,257 Working capital changes 3,666 796 (2,503) 22 5 Capital expenditure (2,006) (3,000) (6,000) (6,000) (6,000) Free cash flow 4,475 2,625 (1,898) 1,832 3,262 Ratios EBITDA margin (%) 7.9 9.8 11.3 13.0 13.7 14.5 PAT margin (%) (1.4) 2.3 4.6 5.6 6.4 7.2 Net debt/equity (X) 0.8 0.5 0.3 0.2 0.2 0.1 Book value (Rs/share) 58.4 62.2 70.0 98.6 111.1 126.8 RoAE (%) 4.5 11.8 12.5 11.9 13.2

Notes: (1) The company has changed fiscal year from March 2016 to December 2015 (2) 9MFY16 represents financials for April 2015 to December 2015 period

Source: Company, Kotak Institutional Equities estimates

46 KOTAK INSTITUTIONAL EQUITIES RESEARCH

ATTRACTIVE Banks India SEPTEMBER 14, 2016 UPDATE BSE-30: 28,354

Unchanged trends; investment cycle still anemic. RBI’s recent release on sanctions of project loans (private sector) by banks/FI for FY2016 shows fresh sanctions at ~1.5% of outstanding loans. However, pending disbursements for the near term suggest that loan growth would be fairly subdued at below 10% levels for FY2017-18 as corporates are looking at deleveraging rather than adding new assets. Focus of banks will remain on the retail portfolio which is growing at ~17% yoy.

Fresh sanctions stabilize; loan growth recovery continues to appear distant and challenging

Overall fresh sanctions by banks and financial institutions for long term projects showed modest QUICK NUMBERS growth of 9% yoy (see exhibit 2); however, we are not reading too much into it considering the weak base of FY2015. Total sanctions are extremely weak at ~1.5% of FY2016 loans of the  Fresh sanctions still banking sector. From peak levels, sanctions for FY2016 are down by ~80% yoy indicating that weak at 1.5% of growth prospects were largely unchanged for the year. ~75% of the loans sanctioned continue loans to remain in the infrastructure sector with a dominating share in the power portfolio (see exhibit 3). On the power side, we notice banks getting a bit more comfortable on the  <1% project renewable space as compared to focusing on only thermal projects earlier. cancellations gives comfort Retain our view that capex led loan growth revival would be disappointing in the short term  Credit growth could We maintain our outlook that the loan growth in the corporate side, which is ~40-45% (see still be <10% in the exhibit 6) of loans for the sector, would be a challenge in the short term. We see limited capital medium term expenditure in the stocks under our coverage which concurs with the sanctions reported by banks. Most corporates are looking at completing projects that are under construction and focusing on reducing leverage levels through multiple options than looking at fresh capital expenditure. We are less inclined to take a constructive view on growth from this segment. Also, we don’t see any immediate recovery in working capital loans given current inflation levels as well as possible improvement in working capital cycle as the economy shows gradual recovery. Loan growth in large corporate segment is less than 5% yoy (see exhibit 13) and broadly reflects the cyclical slowdown seen in FY1998-2005 (see exhibit 12).

Project cancellations have started to decline giving greater confidence to underlying sanctions

One of the key positives that we see from the report is that cancellations of earlier announced projects have slowed sharply in the past four consecutive years. In FY2015, there were negligible cancellations or revisions (see exhibit 5 and 6) as compared to 20-25% on projects announced in FY2008-11. This only gives confidence that promoters are taking a good view of the underlying business environment before investing in new projects. Most incremental sanctions are in small ticket projects as compared to the earlier norm of large projects. M.B. Mahesh, CFA [email protected] Cyclical changes should see banks placing greater emphasis on building retail portfolios Mumbai: +91-22-4336-0886

The shift to retail has begun with the share of retail loans increasing to ~22% in July 2016 from Nischint Chawathe [email protected] 18.3% in FY2014. We expect retail loans to grow at 17% CAGR over FY2016-20 and their Mumbai: +91-22-4336-0887 contribution to overall loans to increase to ~25% of loans (see exhibit 8). As highlighted in the Abhijeet Sakhare previous report, we expect this transition to be a lot more cyclical in nature than structural. As [email protected] with most cycles, we don’t see any immediate concern on the retail portfolio, especially when Mumbai: +91-22-4336-0889 we look at the steady acceleration in loan growth and contribution to overall loans at this stage.

This should give banks additional comfort to build business from this segment. The mix should change over time as banks look to build unsecured portfolio a bit more aggressively to offset the pressure on lending yields and take advantage of subdued credit costs in the short term.

Kotak Institutional Equities Research [email protected] Mumbai: +91-22-4336-0000

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

Exhibit 1: Fresh sanctions were ~1% of FY2016 loans Exhibit 2: Sanctions grew on a low base Sanctions of long term projects, March fiscal year-ends, 2006-16 (` Growth in sanctions of long term projects, March fiscal year-ends, bn) 2007-16 (%)

120 4,500

3,600 80

2,700 40

1,800 0

900 (40)

-

(80)

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2007

2008

2009

2010

2011

2012

2013

2014 2015 2016

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

Exhibit 3: Infrastructure contributed to 50% of the project sanctioned Break-up of projects sanctions across sector, Marc fiscal year-ends, 2006-16 (number of projects and cost of projects)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 (#) (Rs bn) (#) (Rs bn) (#) (Rs bn) (#) (Rs bn) (#) (Rs bn) (#) (Rs bn) (#) (Rs bn) (#) (Rs bn) (#) (Rs bn) (#) (Rs bn) (#) (Rs bn) Infrastructure 109 445 123 1,005 124 905 97 1,403 100 2,002 120 2,015 107 908 88 932 87 507 75 427 114 695 Power 66 353 62 504 60 675 54 868 75 1,257 104 1,733 82 812 71 747 70 447 66 369 97 541 Telecom 5 26 9 179 7 37 6 339 6 672 2 214 1 — 2 106 1 — 1 43 1 3 Ports and airports 3 24 7 107 6 21 4 87 2 12 1 26 1 25 1 36 1 10 — 4 39 Others 35 42 45 215 51 172 33 109 17 61 13 41 23 71 14 44 15 50 8 16 12 112 Food products 31 12 38 25 41 16 50 31 41 20 39 26 41 29 36 17 43 23 35 27 26 16 Sugar 20 29 33 88 16 30 21 37 21 33 21 30 12 21 5 9 8 10 6 11 5 4 Textiles 158 142 255 253 116 103 45 37 77 90 77 109 94 134 31 36 58 131 50 36 49 44 Petroleum products 2 11 10 394 5 172 4 3 2 53 3 98 3 23 — 1 6 1 30 2 18 Chemicals/ pesticides 26 30 35 41 25 23 27 53 28 33 27 49 17 67 19 21 15 13 7 23 11 15 Glass and pottery 10 11 9 8 9 9 6 9 9 8 6 15 10 25 3 — 11 4 19 6 8 5 Cement 13 20 26 102 24 136 28 187 29 115 14 90 9 38 11 74 12 90 7 33 5 17 Metal and products 126 218 130 399 122 358 97 551 134 741 113 792 73 312 51 548 44 216 17 152 14 14 Electrical equipment 17 8 22 11 26 21 17 40 16 8 24 75 12 6 10 36 9 25 7 2 3 2 Transport equipment 13 11 29 52 38 80 30 93 25 53 28 30 26 50 17 17 16 15 7 46 4 23 Construction 33 47 33 88 38 90 30 336 20 471 18 124 22 33 20 53 27 27 29 35 27 20 Hotel and restaurants 37 45 74 110 51 90 57 87 56 106 63 131 51 88 31 59 29 34 15 10 16 10 Transport services 21 169 17 17 17 32 14 31 22 57 14 23 19 52 16 32 15 6 5 5 10 10 Hospitals 14 11 21 14 27 30 16 16 23 37 22 23 9 6 17 27 10 9 2 1 - Entertainment 9 18 20 8 10 11 19 37 12 45 5 30 9 25 7 4 9 32 2 3 2 3 Others 173 88 170 138 179 191 150 159 114 221 103 94 122 100 52 30 78 123 44 29 56 57

Total 812 1,313 1,045 2,754 868 2,297 708 3,111 729 4,095 697 3,752 636 1,916 414 1,895 472 1,273 328 876 352 954

Source: RBI, Kotak Institutional Equities

48 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks India

Exhibit 4: Visibility of loan growth continues to decline Schedule of disbursements across years, March fiscal year-ends, 2008-16

Phasing of Capital Expenditure of Projects Sanctioned Assistance by Banks/FIs Capital Expenditure Project Beyond in the Year Cost 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2016 Year of sanction Up to 2008 5,051 1826 1316 583 375 98 47 2009 3,111 263 1013 829 529 346 84 46 2010 4,095 2 436 1324 1161 747 314 77 34 2011 3,752 3 286 1071 1046 788 464 85 1 9 2012 1,916 57 230 669 554 282 95 29 0 2013 1,895 1 367 567 490 273 112 65 20 2014 1,273 13 151 348 449 199 71 42 2015 873 1 148 348 259 95 24 2016 954 38 78 397 295 146 Total 2,091 2,768 3,079 3,367 3,286 2,506 1,893 1,362 997 535 232

Incremental loans 4,056 3,999 4,411 6,610 6,298 5,849 6,931 4,451 5,477 - % of inc. capex to inc. loans 51.6 69.2 69.8 50.9 52.2 42.8 27.3 30.6 18.2 Total loans 22,474 26,474 30,885 37,495 43,793 49,642 56,572 61,023 66,500 % of inc. capex to opening loans 11.4 12.3 11.6 10.9 8.8 5.7 3.8 2.4 1.6

Source: RBI, Kotak Institutional Equities

Exhibit 5: Lower cancellations of projects in recent years Exhibit 6: FY2015 saw one of the least cancellations Initial and revised sanctions, March fiscal year-ends, 2007-16 (` bn) Changes from initial sanctions, March fiscal year-ends, 2007-15 (%)

Initial Revised 0 6,000 -6 5,000

4,000 -12

3,000 -18 2,000 -24 1,000

0 -30

2007

2008

2009

2010

2011

2012

2013

2014

2015

2007

2008

2009

2010

2011

2012

2013

2014 2015 2016

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH 49 India Banks

Exhibit 7: Industry loan growth is slowing down gradually Break-up of loans and growth across segments, March fiscal year-ends, 2012-1QFY17 (%)

Proportion of loans Growth yoy Incremental contribution 2012- Jun-16 2012- 2012 2013 2014 2015 2016 Jun-16 2012 2013 2014 2015 2016 CAGR 2012 2013 2014 2015 2016 Jun-16 Agriculture & Allied 12.7 12.1 12.0 12.8 13.5 13.8 13.3 7.7 13.5 14.4 15.3 12.5 10.5 7.4 11.4 22.1 21.5 15.8 Priority Sector 33.1 31.6 33.7 33.5 34.0 34.5 12.1 8.2 22.0 7.0 10.7 11.5 25.1 20.5 48.6 30.3 39.6 37.1 Agriculture & Allied 12.7 12.1 12.0 12.8 13.5 13.8 13.3 7.7 13.5 14.4 15.2 12.5 10.5 7.4 11.4 22.1 21.5 15.8 SME 11.6 11.5 13.5 13.3 12.9 13.0 12.3 12.5 33.6 6.6 5.9 13.3 9.0 11.0 27.1 11.3 8.7 15.5 Manufacturing 5.5 5.8 6.9 6.3 5.7 5.5 12.2 20.0 35.5 (1.3) (2.3) 10.3 4.2 8.3 14.5 (1.2) (1.6) 5.4 Services 6.1 5.7 6.6 7.0 7.3 7.5 12.5 5.8 31.6 14.9 13.3 15.8 4.8 2.7 12.6 12.5 10.3 10.1 Housing 6.2 5.5 5.5 5.4 5.2 5.3 10.7 0.3 13.5 6.3 6.2 6.4 4.2 0.1 5.2 4.3 3.7 3.6 Weaker Sections 5.4 5.6 6.9 6.7 7.3 7.5 18.1 17.1 41.3 4.8 17.9 19.2 5.9 7.0 16.2 4.3 13.3 11.5

Industry 45.2 45.8 45.3 44.3 41.7 40.4 20.3 14.9 13.1 5.3 2.7 7.6 53.7 50.6 42.0 30.8 13.4 31.3 Mining & Quarrying 0.8 0.7 0.6 0.6 0.6 0.5 27.6 6.6 2.0 1.8 8.5 0.9 1.2 0.4 0.1 0.1 0.6 0.1 Food processing 2.2 2.4 2.7 2.9 2.3 2.2 22.1 24.5 26.1 15.9 (12.5) 10.8 2.8 4.0 4.4 5.4 (3.9) 2.3 Textiles 3.7 3.8 3.7 3.4 3.1 3.0 9.4 14.9 11.1 (1.0) 1.9 5.3 2.2 4.2 2.9 (0.5) 0.7 1.7 Rubber, Plastic others 0.7 0.6 0.7 0.6 0.6 0.6 15.7 4.1 18.0 2.6 (1.1) 4.8 0.7 0.2 0.8 0.2 (0.1) 0.3 Glass & Glassware 0.1 0.2 0.2 0.1 0.1 0.1 14.8 18.5 17.0 1.5 0.6 7.1 0.1 0.2 0.2 0.0 0.0 0.1 Cement 0.9 0.9 1.0 0.9 0.8 0.8 24.9 24.0 18.0 3.6 (3.1) 9.7 1.2 1.6 1.2 0.4 (0.3) 0.8 Basic metals 6.1 6.5 6.5 6.4 6.4 6.4 22.4 19.7 15.2 6.5 7.9 11.7 7.9 9.0 6.9 5.4 5.6 7.0 Construction 1.1 1.1 1.1 1.2 1.1 1.2 11.9 7.3 17.7 21.0 0.3 10.9 0.8 0.6 1.3 3.0 0.0 1.2 Infrastructure 14.7 15.0 15.1 15.4 14.7 13.9 20.5 15.7 15.1 10.1 4.4 9.1 17.6 17.3 15.8 19.4 7.4 12.5 Power 7.7 8.5 8.8 9.3 8.9 8.1 23.9 25.5 17.4 14.2 4.0 11.6 10.5 14.8 10.4 15.8 4.1 8.8 Telecom 2.2 1.8 1.6 1.5 1.4 1.4 0.5 (6.8) 3.0 1.7 (0.7) (0.8) 0.1 (1.1) 0.4 0.3 (0.1) (0.1) Roads 2.6 2.7 2.8 2.8 2.7 2.8 22.1 18.2 19.9 7.2 5.2 12.6 3.3 3.5 3.7 2.6 1.6 3.2 Other Infrastructure 2.2 1.9 1.9 1.8 1.8 1.7 32.2 0.5 9.3 2.6 9.2 3.7 3.8 0.1 1.3 0.6 1.8 0.7

Services 23.7 23.7 24.0 23.5 23.5 23.9 14.4 13.1 16.1 5.7 9.1 10.6 21.0 23.3 26.6 17.4 23.5 24.2 Transport 1.8 1.6 1.6 1.5 1.5 1.6 9.1 4.2 12.4 2.3 8.9 7.9 1.0 0.6 1.4 0.5 1.5 1.3 Professional Services 1.1 1.2 1.3 1.4 1.6 1.7 5.0 18.8 25.3 19.4 23.9 22.8 0.4 1.6 2.1 3.1 3.7 2.9 Trade 5.2 5.7 5.8 6.1 5.8 5.9 21.1 22.4 17.0 13.3 4.2 13.6 6.4 8.8 6.7 9.8 2.8 7.2 Real Estate 2.6 2.6 2.8 2.8 2.7 2.8 15.6 11.9 22.4 7.8 6.7 12.1 2.5 2.3 4.1 2.8 2.1 3.1 NBFCs 5.3 5.3 5.3 5.2 5.4 5.3 23.9 14.1 13.2 5.8 13.2 10.2 7.2 5.6 4.9 3.9 7.5 5.2

Personal Loans 18.4 18.4 18.6 19.4 21.3 21.9 12.9 13.6 15.5 12.5 19.4 15.1 14.8 18.8 20.0 29.7 41.5 28.7 Housing 9.4 9.4 9.7 10.5 11.4 11.8 12.3 13.2 18.4 16.2 18.8 16.6 7.3 9.3 12.1 20.1 21.7 16.4 Vehicle 2.1 2.3 2.3 2.1 2.3 2.4 22.2 24.5 17.4 (4.5) 22.7 14.1 2.7 3.8 2.8 (1.3) 5.2 3.0 Other Personal Loans 3.7 3.6 3.6 3.9 4.5 4.7 8.1 11.1 12.6 18.2 25.2 17.0 2.0 3.1 3.2 8.3 11.0 6.7

Source: RBI, Kotak Institutional Equities

FY2015 saw the first signs of shift in loan mix towards retail

As highlighted in our previous reports, the first sign of improvement in the share of retail loans is now visible. FY2015 saw an improvement of 120bps to 19.5% of loans. Our broad outlook on the sector’s growth remains unchanged that retail loans would be the main source of growth for the sector in the medium term.

Banks have altered their strategy to grow their loans in the retail portfolio for two main reasons: (1) the corporate loan-book slowdown is still not complete while recovery is likely to be anemic, in our view, and (2) retail loans went through a cyclical slowdown post FY2007, having gone through a period of solid growth after FY2002-03. With rising NPLs and nascent analytical skills, most banks had to reassess their strategies. With a slowdown in the economy, most banks shifted focus to corporate loans from the retail segment. Over the past few years, retail consumer balance sheets have been far stronger than corporate balance sheets, which resulted in negligible impairments over the past few years. This has instilled confidence in banks to shift focus to retail.

50 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks India

Exhibit 8: Retail loan growth will be strong for the next few Exhibit 9: The contribution of retail loans to total loans will rise years as demand for corporate loans will be weak Contribution of retail loans to overall loans, March fiscal year-ends, Growth in retail loans, March fiscal year-ends, 2004-20E (%) 2004-20E (%)

45 30

36 27

27 24

18 21

9 18

0 15

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017E

2018E

2019E

2020E

2017E

2018E

2019E 2020E

Source: RBI, Kotak Institutional Equities estimates Source: RBI, Kotak Institutional Equities estimates

We expect retail loans to post 17% CAGR over FY2015-20

Retail loans grew 19% yoy in FY2016, which is the best that we have seen in recent years. Housing loans grew 19% yoy and has the largest share of the retail loans of ~50%. However, some of the unsecured loan products have picked up considerable pace as compared to FY2014. Outstanding receivables in the credit card business grew over 25% yoy.

However, we do believe that the foundation for faster growth in retail is still quite intact. We expect retail loans for the banking sector to grow 17% CAGR over FY2015-20 (see Exhibit 3). As highlighted before, we have so far seen one complete cycle in the retail space—from FY2003 to FY2010. A large part of the slowdown is explained by the exit of ICICI Bank, a few quarters before the global financial crisis.

The next cycle probably appears to have started in FY2011-12 and there are early signs that trends in retail loan growth may accelerate henceforth. Housing loans will remain the largest product offering for banks and is likely to grow at 15-17% CAGR in this period though the contribution from this portfolio is likely to decline to 49% from ~52% currently. Growth in vehicle loans should be comfortable at 20% CAGR considering that banks are re-entering new product segments, such as used vehicle financing. Credit cards or unsecured loans will see the fastest growth at 35% CAGR in the retail portfolio though its contribution from a size perspective would still be negligible at 5% against 3% currently. While the size is insignificant, we are still bullish about this space, considering it is expected to be a far more profitable portfolio than other products.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 51 India Banks

Exhibit 10: Retail loans are likely to grow 17% CAGR over the next few years Growth in retail loans in recent years, March fiscal year-ends, 2003-20E (` bn)

Personal Loans Consumer durables Housing Loans against FD Credit cards Education Vehicle Others

60,000

50,000

40,000

30,000

20,000

10,000

- 2003 2007 2010 2015 2020E

Source: RBI, Kotak Institutional Equities estimates

Demand for corporate loans remains fairly subdued

We maintain our broad outlook on the weakness of corporate demand. We are still not too optimistic on loan growth as balance sheets of most corporates are still on the mend. The following table (see Exhibit 4) broadly gives an indicative assessment of the weakness in capital expenditure. We do acknowledge that there is a large set of companies outside our coverage building assets at this stage but we note that these companies too have indicated a similar view on capital expenditure. There is excitement that the investment cycle will come back, which would result in higher credit demand but we think this is some time away.

52 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks India

Exhibit 11: There are no signs of pick-up in investment activity in our universe of companies Capital expenditure by sectors, March fiscal year-ends, 2010-17E (` bn)

2010 2011 2012 2013 2014 2015 2016E 2017E Energy 733 679 718 772 1,279 1,107 843 717 Automobiles 139 155 241 302 381 439 496 506 Utilities 483 680 634 742 766 563 881 476 Metals & Mining 256 360 411 488 606 513 366 313 Telecom 272 404 263 238 319 613 513 455 Industrials 76 110 106 116 93 83 54 121 Technology 42 52 62 89 87 106 101 100 Cement 61 67 95 127 118 117 93 77 Consumer products 36 75 81 80 67 60 74 76 Infrastructure 37 40 73 75 51 49 99 94 Others 126 144 144 225 117 41 11 43 Pharmaceuticals 21 30 32 33 38 38 36 29 Media 13 19 18 21 12 15 34 19 Real estate 138 16 17 3 (15) 18 11 17 Internet 0 1 0 2 0 5 1 1 Total 2,432 2,830 2,896 3,312 3,918 3,767 3,613 3,043 Grow th yoy (%) 16.4 2.3 14.4 18.3 (3.9) (4.1) (15.8) Notes: (a) The above sample for capital expenditure has been taken from a list of 130 companies that we have under coverage. (b) The list includes companies where the capital expenditure are being done at their international subsidiaries/offices.

Source: Company, Kotak Institutional Equities

The slowdown that started in FY1998 extended for nearly five years (see Exhibit 6) and we are broadly seeing something similar today. Loan growth in the corporate segment has slowed to 6-8% yoy (see Exhibit 5), led by a large decline in the corporate segment. We are not giving the subsequent few years because there were two major events that drove growth, the reverse-merger of ICICI Ltd with ICICI Bank and IDBI Ltd with IDBI Bank. The two entities helped to show much stronger growth in subsequent years.

Also, working capital cycles have expanded in recent years, implying an improvement in the economy should initially result in lower working capital demand. Hence, our broad call is that we are likely to see fairly subdued corporate loan demand.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 53 India Banks

Exhibit 12: Corporate loan growth has slowed to ~6-8% Exhibit 13: A similar slowdown was seen over FY1998-2002 too Corporate loan growth, March fiscal year-ends, 2007-19E (%) Corporate loan growth, March fiscal year-ends, 1998-2002 (%)

30 18

24 14

18 11

12 7

6 4

0

0

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016E

2017E

2018E

2019E

2020E

1998

1999

2000

2001 2002

Source: RBI, Kotak Institutional Equities estimates Source: RBI, Kotak Institutional Equities

Exhibit 14: Growth in large corporate loans is 4% yoy Exhibit 15: Share of large corporate loans will decline March fiscal year-ends, 2010-2016 (%) March fiscal year-ends, 2010-2016 (%)

2010 2011 2012 2013 2014 2015 2016 Micro and small Medium Large Micro and small 22.1 2.4 12.2 20.0 23.7 8.1 (2.3) 100 Medium 8.6 (11.8) 12.4 (5.2) 2.2 (0.7) (9.3) Large 27.4 32.1 22.4 15.8 12.2 5.3 4.3 Industry 24.4 23.0 20.3 14.9 13.1 5.3 2.7 80

Source: RBI, Kotak Institutional Equities 74.1 60 79.6 81.0 81.7 81.0 80.9 82.2

40

20 10.1 7.3 6.8 5.6 5.1 4.8 4.2 15.7 13.1 12.2 12.8 13.9 14.3 13.6 0 2010 2011 2012 2013 2014 2015 2016

Source: RBI, Kotak Institutional Equities

54 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Insurance India SEPTEMBER 14, 2016 UPDATE BSE-30: 28,354

ICICI Prudential Life: High growth, moderate profitability. We believe that ICICI Prudential Life is one of the most levered plays on the increase in financial savings. We expect the company to deliver high (about 20%) APE growth in the medium-term even as its RoEVs will likely remain moderate at about 16%. Shift to higher margin (protection) business and higher investment variance can provide upside though constrained by high overruns and limited scope of upside on the persistency experience.

We expect RoEV to remain moderate at 16-17% QUICK NUMBERS We believe that ICICI Prudential Life is well placed to deliver about 20% APE growth over the  We value ICICI medium-term largely driven by high growth in ULIPs. The strong backbone of ICICI Bank, Prudential Life at supported by a strong agency channel (third largest in India) will continue to drive business. `410 bn We expect ICICI Prudential Life to deliver RoEVs of about 16-17%. We expect moderate improvement in pre-overrun NBAP margins from its increasing shift to higher margin business  Overruns were 30% (share of protection increased to 2.5% of APE in FY2016 from 1.5% in FY2015). We expect of acquisition some improvement in expense ratios; ICICI Prudential Life has excellent expense management expenses capabilities with one of the lowest expense ratios in the industry. The company has made concerted efforts to improve sales productivity - sales manager productivity was up 41% CAGR  Better persistency in the past two years. However, with focus on ULIPs (84% of APE in FY2016; product with high contributed 16% to expense overruns due to limited scope on product pricing), its acquisition expense overruns will FY2016 EVOP likely remain high; acquisition expense was about 30% higher than assumption in FY2015. With tall targets on persistency (detailed discussion later in the note), we find limited upside on this front despite an improvement in persistency experience in FY2016 (better persistency has contributed 16% to FY2016 EVOP).

We value ICICI Prudential Life at `410 bn or `285/ share (2.3X EV)

We value ICICI Prudential Life at `410 bn (`285/ share) as on June 2018, using an appraisal value framework; we thus find 5-16% downside to the IPO price band. The life insurance business will add `35/ share to the SOTP of ICICI bank. We value the business at EV+ 22X NBV (high multiple to reflect high APE growth). We expect medium-term RoEV at about 16-17%

(discussed above). At our price target, the business will trade at 2.3X EV.

Key risks: leverage to capital markets, regulations

 ICICI Prudential Life is more levered to capital market movements as compared to most other large life insurance companies. Policyholders typically like the investment appeal of a ULIP

(84% of FY2016 APE) and often consider ULIP as a play on capital markets; ICICI Prudential Life’s average policy size in ULIP is `150,000 in FY2016 as compared to `10,000-45,000 for other policies. Nischint Chawathe [email protected] Mumbai: +91-22-4336-0887  Change in regulatory environment remains a key risk for the life insurance industry. Several regulations over the last few years (2010 ULIP regulations being the most impactful), Abhijeet Sakhare [email protected] directions on expense caps, banking partnerships and draft on commissions payouts, have Mumbai: +91-22-4336-0889 driven business strategies of life insurance players.

Kotak Institutional Equities Research [email protected] Mumbai: +91-22-4336-0000

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

Exhibit 1: Moderate RoEV for ICICI Prudential Life RoEV movement, March fiscal year-ends, 2015-2018E (Rs bn)

2015 2016 2017E 2018E 2019E Comments Opening Embedded value (EV) 117.8 137.0 138.8 152.9 169.1 Methodology/ assumption changes 1.6 1.8 Economic assumption change (4.2) (0.7) NBV (before over-run) 6.4 4.1 8.3 10.0 12.0 Individual business Acquisition expense ovcerrun (3.7) (2.5) (2.5) (1.5) High new business strain in unit-linked business Expected return in force 11.7 12.6 13.9 15.3 16.9 Unwinding at 10%; high ratio reflects higher contribution of net worth Operating variance 2.1 4.5 2.5 2.0 1.5 Better persistency and mortality; includes group business in FY2015 Tax changes Investment variance 15.1 (6.2) 7.0 7.0 7.0 We factor moderate capital gains Dividend payout (9.8) (14.4) (15.1) (15.6) (16.4) Closing EV 137 139 153 169 189 EVOP 18 23 22 25 29 RoEV (%) 16 1 10 11 12 Operating RoEV (%) 15 17 16 16 17

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: We expect ICICI Prudential Life to deliver post-overrun margin of 10-12% NBAP margins in individual business, March fiscal year-ends, 2015-2018E (Rs bn)

2015 2016 2017E 2018E 2019E Comments APE 47.4 51.7 59.5 71.3 85.6 We assume 15-20% APE growth NBV (A) 6.4 8.3 10.0 12.0 NBAP margins pre overrun (%) 13.6 14.0 14.0 14.0 NBAP margins at 14%

NBV post overrun 2.7 4.1 5.8 7.5 10.5 NBAP margins post overrun (%) 5.7 8.0 9.8 10.5 12.2 Post over-run margin will increase gradually

Source: Company, Kotak Institutional Equities estimates

Exhibit 3: We value ICICI Prudential Life at EV + 23X NBV Calculation of appraisal value for ICICI Prudential Life, March fiscal year-ends, 2017-2018E

2017E 2018E 2019E New business value (NBV- Rs bn) 8.3 10.0 12.0 New business multiple (NBM- X) 23 23 23 Strucutral value (SV= NBV X NBM-Rs bn) 189 226 272 Appraisal value (AV= EV+SV - Rs bn) 342 395 460 Appraisal value/ EV (X) 2.2 2.3 2.4 Appraisal value/ NBV (X) 41 40 38 Value for ICICI Bank at 55% stake and 10% holdco discount (Rs bn) 169 196 228 Value for ICICI Bank (Rs/ share) 29 34 39

Target price : ICICI Prudential Life (June 2018) Value of the business (Rs bn) 412 Value per share (Rs/ share) 287 Value for ICICI bank (Rs bn) 204 Value per share of ICICI bank (Rs/ share) 35

Source: Company, Kotak Institutional Equities estimates

56 KOTAK INSTITUTIONAL EQUITIES RESEARCH Insurance India

Exhibit 4: Sensitivity on Price/ EV multiple (X) March fiscal year-ends, 2018 Multiple (X) 1.9 2.1 2.3 2.5 2.8 Valuation (Rs bn) 316 356 395 431 475 Value per share (Rs/ share) 221 249 276 301 331 Value for parent (Rs/ share) 27 30 34 37 41

Source: Kotak Institutional Equities estimates

Exhibit 5: High expense overrun and investment variance for ICICI Prudential Life Movement of embedded value across players, March fiscal year-end, 2015 (Rs bn)

ICICI Bajaj Prudential Allianz Birla SL HDFC Life Life Max Life Opening EV 76.0 32.0 69.9 117.8 44.4 New business value 1.8 1.0 7.4 6.4 4.6 Unw inding 5.5 NA 6.1 11.7 4.0 Operating variance 1.0 NA (0.3) 2.1 1.2 Assumption change 0.7 NA NA 1.6 NA Expense overrun (2.6) NA (1.5) (3.7) (0.4) Investment variance 10.6 NA 4.6 15.1 2.5 Economic assumption change — NA 3.5 (4.2) Capital infusion — — (1.7) (9.8) (4.0) Closing EV 93.0 32.6 88.0 137.0 52.4 RoEV (%) 22 1 26 16 18 Operating RoEV (A-%) 8 22 15 21 Methodology follow ed MCEV TEV MCEV IEV MCEV

Note: (A) Excludes investment variance and capital infusion.

Source: Company, Kotak Institutional Equities

Exhibit 6: Expenses overruns was high for ICICI Prudential Life Pre and post-overrun margins, March fiscal year-end, 2015 (%)b ICICI Bajaj Prudential Allianz Birla SL HDFC Life Life Max Life Pre-overrun NBAP margin calculation APE (Rs bn) 9.9 7.7 31.9 47.4 19.7 NBV (Rs bn) 1.8 1.1 7.4 6.4 4.6 NBAP margin (%) 18.1 14.1 23.2 13.6 23.4 Post-overrun NBAP margin calculation APE (Rs bn) 9.9 7.7 31.9 47.4 19.7 NBV (Rs bn) (0.8) (2.9) 5.9 2.7 4.2 NBAP margin (%) (8.3) (37.7) 18.5 5.7 21.5

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 57 India Insurance

Exhibit 7: Sensitivity to NBV and EV, March fiscal-year end, 2015-16 (%)

2015 2016 ICICI Pru Life HDFC Life Max Life ICICI Pru Life Max Life Reliance Life NBV EV NBV EV NBV EV NBV EV NBV EV NBV EV Reference rate up 100 bps 1.7 (2.4) 8.0 (0.6) (5.7) (2.5) 8.0 (3.0) 22.2 (2.5) Reference rate down 100 bps (3.0) 2.6 (0.8) 0.9 (9.0) 2.0 5.7 2.6 (10.0) 3.0 (22.2) 2.9 Discontinuance rate up 10% (16.0) (1.0) (8.0) (2.2) (6.0) (2.0) (12.3) (1.1) (6.0) (2.0) Discontinuance rate down 10% 18.0 1.2 8.0 2.3 12.7 1.2 6.0 2.0 3.7 Management expenses up 10% (5.8) (0.8) (5.0) (1.0) (4.0) (1.0) (6.4) (1.1) (5.0) (1.0) (3.7) (1.1) Management expenses down 10% 5.8 0.8 5.0 1.0 6.4 1.0 5.0 1.0 3.7 1.5 Mortality up 10% (5.9) (0.7) (5.0) (1.1) (2.0) (1.0) (3.2) (0.4) (3.0) (1.0) (3.7) (1.8) Mortality down 10% 5.9 0.7 5.0 1.1 3.2 0.4 3.0 1.0 7.4 1.8

Source: Company, Kotak Institutional Equities

Exhibit 8: Lower discounting rate for ICICI Life Reference rates (spot yield curve) used in EV calculation, March fiscal year-end, 2015-16 (%) 2015 2016 ICICI Pru Life HDFC Life Max Life ICICI Pru Life Max Life Years (%) (%) (%) (%) 1 7.91 8.28 8.01 7.24 7.29 2 7.91 7.96 7.39 3 7.96 8.16 7.93 7.49 4 7.97 7.89 7.55 5 7.98 8.13 7.89 8.22 7.77 10 7.98 8.11 7.95 8.34 7.48 15 7.98 8.04 8.4 8.22 20 7.98 8.12 8.46 8 25 7.98 8.03 8.5 8.3 30+ 7.98 7.79 8.52 8.13

Source: Company, Kotak Institutional Equities

58 KOTAK INSTITUTIONAL EQUITIES RESEARCH Insurance India

Exhibit 9: Share of unit-linked business high for ICICI Prudential Life Contribution of various products to new business premium, March fiscal year-ends, 2012-1QFY17 (% of total)

2012 2013 2014 2015 2016 1QFY17 Bajaj Life Unit linked policies 12 12 10 24 29 27 Participating policies 60 49 51 21 19 13 Non participating policies 28 39 38 54 52 60

Birla SL Unit linked policies 54 44 40 38 37 35 Participating policies 0 4 31 42 43 46 Non participating policies 46 52 29 20 20 28

ICICI Prudential Life Unit linked policies 56 60 66 85 84 75 Participating policies 18 7 18 13 13 16 Non participating policies 26 33 15 2 3 9

HDFC Life Unit linked policies 57 62 49 60 56 45 Participating policies 40 34 34 20 26 34 Non participating policies 3 5 17 21 18 21

Max Life Unit linked policies 12 10 21 26 25 28 Participating policies 76 74 67 58 60 57 Non participating policies 12 16 12 15 15 15

SBI Life Unit linked policies 44 35 32 40 51 56 Participating policies 21 22 31 40 31 24 Non participating policies 35 43 37 19 18 20

Max+ HDFC Unit linked policies 41 45 37 47 45 39 Participating policies 53 47 48 34 38 43 Non participating policies 6 8 15 19 17 19

Source: Company

KOTAK INSTITUTIONAL EQUITIES RESEARCH 59 India Insurance

Exhibit 10: High contribution of banks for large players Contribution of various channels to new business premium, March fiscal year-ends, 2012-2016 (% of total)

2012 2013 2014 2015 2016 Bajaj Life Agency 66 76 84 92 NA Bankassurance 10 7 8 1 NA Corporate agents 19 13 5 1 NA Others 5 4 3 7 NA Birla SL Agency 70 66 0 67 81 Bankassurance 14 17 0 19 9 Corporate agents 15 17 0 2 5 Others 0 0 0 12 5 HDFC Life Agency 20 16 16 16 13 Bankassurance 64 72 70 67 68 Corporate agents 11 7 7 2 3 Others 4 5 7 14 16 ICICI Prudential Life Agency 44 34 28 25 23 Bankassurance 38 45 54 58 57 Corporate agents 10 13 10 5 4 Others 7.5 7 8 13 16 Max Life Agency 37 35 31 29 28 Bankassurance 40 48 51 57 59 Corporate agents 13 10 9 6 4 Others 9 7 8 8 9 SBI Life ICICI Prudential Life 52 55 50 46 38 Agency 42 45 47 52 61 Bankassurance 6 0 3 3 1 Corporate agents 0 0 0 0 0

Source: Company

Constraints in forecasting financials and reading return ratios

 Challenges in forecasting reserves for all life insurance companies. We find it challenging to forecast the financials of life insurance companies due to challenges in understanding and forecasting the mathematical reserves of the company.

 Income drivers to change significantly for ICICI Prudential Life; share of non-par to decline. We expect earning drivers of ICICI Prudential Life to change significantly over the next few years as the company is heavily focusing on ULIPs. Exhibit 11 shows that non- participating policies contributed to 24% of its policyholder’s surplus in FY2015 and 45% in FY2016 even as the company is currently not actively pursuing business in this segment (excluding pure protection). Its ‘Guaranteed Savings Plan’ – a non-par plan (currently discontinued) had highest contribution to its VIF as on March 2016. As this product runs down from its portfolio, we expect the contribution of ULIPs to increase. Thus, the earning drivers over the next few years will be different as compared to the current ones.

60 KOTAK INSTITUTIONAL EQUITIES RESEARCH Insurance India

Exhibit 11: HDFC Life and Max have generated surplus in par; ICICI Life in non-par Surplus (before appropriation) in policyholders account, March fiscal year-ends, 2012-2016 (% of total)

2012 2013 2014 2015 2016 Bajaj Life Par policies 5 7 6 (7) 29 Non par policies 90 8 12 36 58 Linked policies 5 86 82 71 13 Others — — — — — ICICI Prudential Life Par policies 1 6 12 12 16 Non par policies 0 0 8 24 45 Linked policies 98 94 77 65 39 Others 1 — 3 0 0 HDFC Life Par policies (10) 40 (16) 30 37 Non par policies 0 7 0 25 42 Linked policies 110 53 116 44 21 Others — — — — — Max Life Par policies 43 61 61 62 42 Non par policies 50 36 5 0 22 Linked policies 8 4 34 38 36 Others — — — — — SBI Life Par policies 3 3 7 11 Non par policies 28 19 33 68 Linked policies 69 78 60 21

Source: Company

 Estimating impact of lapses in ULIPs. The 2010 ULIP regulations not only constrains the ability of life insurance companies to price their products (leading to acquisition expense overruns) but also lead to higher surrender payouts in the fifth year. For policies lapse within the first five years, these regulations cap surrender penalties at `6,000 and provide for payment of the fund balance to the policyholder at the end of the fifth year. As such, the company has reported large payout to ULIP policyholders translating into a negative impact of `826 mn in FY2015 and `2.8 bn in FY2016 on its earnings (exhibit 12). Given early days in the new regime (the first set of ULIP policies completed five in FY2015), we find it challenging to forecast the surrender payouts as well as the reduction in acquisition expense overruns.

Exhibit 12: Increasing cost of ULIP lapsation Segment-wise contribution of lapsation to earnings of ICICI, March fiscal year-ends, 2014-16 (Rs)

2014 2015 2016 ULIPs 474 (826) (2,800) Par policies 37 112 176 Non-par policies 100 751 1,322 Pure protection policies 55 143 238 Total 665 180 (1,063) Total (attributable to shareholders) 628 67 (1,240)

Source: Company

High growth at ICICI Prudential Life

ICICI Prudential Life has reported 41% and 10% APE growth between FY2015 and FY2016 as compared to 15% for private sector players. The company has increased its market share to about 10% from 6-7% pre-FY2015 and is the largest private sector life insurance company. High (20%) CAGR in average ticket size of ULIPs has the key growth driver.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 61 India Insurance

Exhibit 13: ICICI Prudential Life has 10% market share Adjusted premium equivalent of life insurance players, March fiscal year-ends, 2011-2016 (Rs bn)

APE (Rs bn) YoY (%) Market share (%) 2011 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 Bajaj Allianz Life 20 14 14 11 9 9 (29) (2) (17) (18) (2) 3 3 2 2 2 Birla Sunlife 16 12 11 9 9 8 (24) (11) (17) (7) (3) 2 2 2 2 2 DHFL Pramerica 0.7 0.9 1.3 1.1 1.8 2.0 35 43 (17) 63 11 0 0 0 0 0 Exide 6.4 6.1 5.2 5.0 4.4 4.9 (5) (15) (3) (12) 10 1 1 1 1 1 HDFC Life 30 28 32 25 32 36 (7) 16 (22) 26 14 5 6 5 7 7 ICICI Prudential Life 39 30 34 33 46 51 (23) 14 (5) 41 10 6 7 6 10 10 Max Life 17 15 15 18 20 21 (12) 0 17 10 8 3 3 3 4 4 Reliance Life 20 11 10 12 13 10 (44) (12) 19 8 (26) 2 2 2 3 2 SBI Life 33 24 26 30 33 45 (27) 8 14 10 36 5 5 6 7 9 Private players 239 186 189 182 211 241 (22) 2 (3) 16 14 100 100 100 100 100 LIC 308 343 326 331 253 279 12 (5) 1 (23) 10 65 63 64 55 54 Total industry 547 529 515 513 464 520 (3) (3) (0) (9) 12 100 100 100 100 100

Source: Company, Kotak Institutional Equities

Exhibit 14: Significantly higher ticket size of ULIPs as compared to others Average ticket size across products of ICICI, March fiscal year-ends, 2014-16 (Rs)

2014 2015 2016 ULIPs 102,706 129,087 149,777 Par policies 34,902 38,430 44,533 Non-par policies 42,262 25,233 23,656 Pure protection policies 2,284 4,408 10,284 Overall 43,143 73,047 87,194

Source: Company

ICICI Bank is the key driver; more ULIPs with higher persistency

ICICI Prudential Life has benefitted from its banking partnership with ICICI Bank. The banking channel (ICICI Bank, Standard Chartered and others) have contributed to 57% of its APE in FY2015 and FY2016 while share of agency stood at 23-25%. Banks have sold more ULIPs (89% of total business from bancassurance in FY2015 and FY2016) as compared to agency (ULIPs were about 77% of business from the agency channel). The persistency from this channel is higher as well (exhibit 15 and 16).

Exhibit 15: Share of ULIPs is higher for bancassurance than agency channel Channel-wise share of products of ICICI, March fiscal year-ends, 2014-16 (Rs)

2014 2015 2016 Bancassurance Retail ULIPs 75 88 89 Retail par products 12 10 9 Retail non-par products 11 0 0 Retail protection products 2 2 2 Agency Retail unit linked insurance products 55 78 76 Retail par products 31 19 20 Retail non-par products 13 1 1 Retail protection products 2 1 3 Total Retail unit linked insurance products 66 84 83 Retail par products 19 13 14 Retail non-par products 14 1 0 Retail protection products 2 2 3

Source: Company

62 KOTAK INSTITUTIONAL EQUITIES RESEARCH Insurance India

Exhibit 16: Higher persistency of bancassurance Channel-wise share trends in persistency of ICICI, March fiscal year-ends, 2014-16 (Rs)

13th month 25th month 37th month 49th month 61st month Bancassurance 2014 75 72 76 18 13 2015 80 70 68 75 12 2016 81 72 65 66 64 Agency 2014 70 65 45 20 12 2015 78 63 60 42 15 2016 85 69 58 58 35 Corporate agency and brokers 2014 62 71 42 20 14 2015 71 59 68 37 14 2016 80 66 56 67 30 Direct sales 2014 75 70 47 31 13 2015 86 70 66 42 24 2016 88 79 65 64 34

Source: Company

Strong expense controls at ICICI Prudential Life

 Lowest expense ratio. ICICI Prudential Life has consistently controlled its expenses better that its peers. Exhibit 17 shows that its expense-premium ratio has been consistently lower than most peers. The company brought down this ratio to 13% in FY2014 from 22% in FY2008, in order to support its profitability during slowdown. The ratio is now down to 10%, marginally higher than SBI Life (9.2%) and lower than all other large players.

 Improving productivity of the sales team. According to CRISIL, ICICI Prudential Life’s agency channel was the third largest in India in terms of new business retail premium and the number of agents in FY2016 (121,016 as on March 2016). The company designates employee unit managers to manage these agents. The retail APE from the agency channel grew to `12.31 bn in FY2016 from ` 9.71 bn in FY2014 while the average number of unit managers declined to 2,662 from 4,156 during the period, thus, translating into 41%CAGR in sales manager productivity.

 The new (2010) product regulations on ULIP constrain the ability of the insurance company to price its policies, thus leading to high expense overruns. In FY2015, the company lost about 700 bps NBAP margin (13.4% of pre-overrun NBAP margin and 5.7% on a post-overrun basis); this compares with 200-500 for other large players.

 Expenses run 30% ahead of estimates. Given its expense management track record, we believe that ICICI Prudential Life will likely reduce this overtime though this may not be easy. Exhibit 18 shows that acquisition expense overruns were 30% of total acquisitions expenses in FY2015. The company did not disclose its pre-overrun NBAP margin in FY2016; it will need to reduce its expenses by 30% to deliver 13.4% NBAP margins from reported levels of 8%.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 63 India Insurance

Exhibit 17: Operating expense are lower for ICICI Prudential Life Cost-to-premium ratio, March fiscal year-ends, 2005-11 (%)

50 2008 2009 2010 2011 2012 2013 2014 2016

41

32

23

14

5

SBI Life SBI

Max Life Max

Bajaj Allianz Bajaj

Birla SunLife Birla

Reliance Life Reliance ICICI Prudential ICICI

HDFC Standard Life Standard HDFC

Source: Company, Kotak Institutional Equities

Exhibit 18: Overruns are about 30% of acquisition expenses Break-up of expenses, March fiscal year-ends, 2014-16 (Rs mn)

2014 2015 2016 Acquisition 11,919 12,505 14,532 Budgeted NA 8,805 NA Overrun NA 3,700 NA Maintenance 4,194 4,021 4,313 Service tax 56 (6) 38 Total expenses 16,169 16,520 18,883

Source: Company

Persistency has improved; positive surprises from here are difficult

 Higher persistency in FY2016. ICICI Prudential Life has considerably improved its persistency ratios in FY2016. Exhibit 23 shows that its 61st month persistency increased to 46% in FY2016 from 15% in FY2015 and is currently higher than of most peers. An exit from the ULIPs sold in old (pre-2010) ULIP regime has likely led to sharp improvement in persistency ratio in FY2016, in addition to the focus of the management.

 Improvement in persistency had 16% contribution to FY2016 EVOP. ICICI Prudential Life’s FY2016 EV disclosures (as in DRHP) factor higher assumptions on persistency (`1.77 bn or 8% of FY2016 EVOP); the company also reported a positive operating variance of `2 bn (9% of FY2016 EVOP) due to improvement in persistency experience.

 Tall task to better current persistency assumptions. Exhibit 24 shows that implied persistency assumptions made by the company for its top three products by VIF and VNB. The implied persistency for 12- 60 months build in its assumptions is higher than its significantly improved FY2016 experience. The company will need to better this performance in order to report any positive persistency variance from hereon.

64 KOTAK INSTITUTIONAL EQUITIES RESEARCH Insurance India

Exhibit 19: Comparison of 13th month persistency across players Exhibit 20:Comparison of 25th month persistency across players March fiscal year-ends, 2011-16 (%) March fiscal year-ends, 2011-16 (%)

2011 2012 2013 2014 2015 2016 2011 2012 2013 2014 2015 2016 Bajaj Allianz 56 54 60 62 68 63 Bajaj Allianz 81 59 50 49 49 51 Birla SL 84 82 81 60 62 65 Birla SL 77 77 77 59 54 57 HDFC Life 81 81 78 71 73 79 HDFC Life 54 74 78 69 64 67 ICICI Prudential Life 76 77 72 71 79 82 ICICI Prudential Life 89 87 90 68 66 71 Max Life 70 75 76 76 78 79 Max Life 60 62 64 66 64 67 SBI Life 52 55 53 59 58 59 SBI Life 82 78 80 58 53 49 Reliance Life 50 61 66 66 68 69 Reliance Life 68 72 75 72 76 78

Source: Company Source: Company

Exhibit 21: Comparison of 37th month persistency across players Exhibit 22: Comparison of 49th month persistency across players March fiscal year-ends, 2011-16 (%) March fiscal year-ends, 2011-16 (%)

2011 2012 2013 2014 2015 2016 2011 2012 2013 2014 2015 2016 Bajaj Allianz 19 12 15 26 42 42 Bajaj Allianz 62 7 7 10 22 37 Birla SL 72 72 72 47 57 50 Birla SL 64 62 60 42 42 52 HDFC Life 29 28 53 67 65 60 HDFC Life 25 21 24 55 64 63 ICICI Prudential Life 46 51 57 20 54 62 ICICI Prudential Life 30 32 36 57 64 62 Max Life 40 39 32 38 49 56 Max Life 49 42 46 53 60 58 SBI Life 75 70 70 13 40 52 SBI Life 34 29 30 45 54 49 Reliance Life 24 16 9 20 39 59 Reliance Life 21 21 24 41 62 62 Source: Company Source: Company

Exhibit 23: Comparison of 61st month persistency across players March fiscal year-ends, 2011-16 (%)

2011 2012 2013 2014 2015 2016 Bajaj Allianz 73 6 4 4 8 16 Birla SL 55 53 51 41 39 35 HDFC Life 26 21 20 21 37 47 ICICI Prudential Life 65 65 61 13 15 46 Max Life 39 31 26 23 32 43 SBI Life 86 77 72 9 33 9 Reliance Life 41 23 8 7 10 17

Source: Company

KOTAK INSTITUTIONAL EQUITIES RESEARCH 65 India Insurance

Exhibit 24: Actual persistency experience is lower than that assumed in its EV March fiscal year-ends, 2016 Month 13th 25th 37th 49th 61st Reported persistency 2014 72 68 57 20 13 2015 79 66 64 54 15 2016 82 71 62 62 46

Year 1 2 3 4 5 Surrender/ lapsation assumed in IEV Top 3 products on VIF Guranteed saving plan 0 25 7.5 1.0 1.0 Wealth builder II 0 20 10.0 10.0 10.0 Elite Life II 0 20 10 10 10 Top 3 products on VNB Iprotect smart 0 10 5 5 5 Loan protection plus 0 7.5 7.5 7.5 7.5 Savings suraksha (AP> Rs18,000 and 10 years +) 0 37.5 10 NA NA Implied persistency ratio from the above Top 3 products on VIF Guranteed saving plan 100 75 69 69 68 Wealth builder II 100 80 72 65 58 Elite Life II 100 80 72 65 58 Top 3 products on VNB Iprotect smart 100 90 86 81 77 Loan protection plus 100 93 86 79 73 Savings suraksha (AP> Rs18,000 and 10 years +) 100 63 56

Source: Company

66 KOTAK INSTITUTIONAL EQUITIES RESEARCH Insurance India

Exhibit 25: ICICI Prudential Life Insurance : Key financials March fiscal year-ends, 2014-2016 (Rs mn)

2014 2015 2016 Policyholders account Net premium income 122,827 151,604 189,987 Income from investments 92,167 187,244 12,084 Other income 172 594 209 Total income 215,166 339,443 202,279 Less: Expenses 146,365 147,573 152,813 Commission 6,275 5,532 6,200 Benefits paid 120,740 122,457 124,087 Operating expenses 16,284 16,515 19,061 Liabilities against life policies 56,617 179,561 35,155 Surplus / (Deficit) 11,653 11,206 13,420 Appropriations 42 (234) (1,344) Shareholders account Transfer from shareholders account 11,695 10,971 12,076 Income from investments 3,875 5,326 6,019 Other income 99 7 0 Operating expenses 377 454 382 Profit/ (Loss) before tax 15,292 15,853 17,714 Provision for tax (374) (490) 1,212 Profit after tax 15,667 16,343 16,501 Balance Sheet Shareholders funds 39,482 53,149 53,233 Share capital 19,446 19,188 19,188 Reserves 816 1,364 1,050 Policyholders fund 217,133 280,249 325,054 Policyholders liabilities 102,789 143,917 190,518 Provisions for linked liabilities 114,344 136,333 134,536 Funds for future appropriation 9,986 13,279 14,563 Total Liabilities 247,381 314,081 359,856 Investments 247,154 312,202 358,240 Shareholders funds 27,750 26,227 23,918 Policyholders 106,101 151,980 202,784 Asset held to cover linked liabilities 113,303 133,996 131,538 Loans 416 592 764 Fixed assets 1,179 1,188 1,679 Current assets 11,856 13,339 15,628 Current liabilities (13,225) (13,240) (16,455) Total Assets 247,380 314,081 359,856

Source: Company

KOTAK INSTITUTIONAL EQUITIES RESEARCH 67

INDIA Economy Inflation, IIP SEPTEMBER 14, 2016 UPDATE BSE-30: 28,354

Benign inflation dynamics keep rate cut hopes alive. The deceleration in August CPI inflation was attributed to the sharp correction in food inflation. 2HFY17 will likely see inflation decelerating further helped by favorable base effect and reversion of seasonal upside pressure on food prices even as core inflation inches up marginally. We continue to see scope for 25 bps rate cut in the December policy and do not rule out room for another cut in 4QFY17 if inflation surprises significantly lower than the 5% mark.

CPI inflation plunges on the back of food items; core firms up marginally

CPI inflation expectedly eased sharply to 5.05% in August after surging to 6.1% in July. The QUICK NUMBERS correction was largely on account of food inflation, which decelerated to 5.9% from 8.4% in July. On a sequential basis, the downtick was owing to contraction in vegetables ((-)3.7%),  August CPI inflation pulses ((-)1.0%) and meat and fish ((-)1.3%). Encouragingly, high frequency data for mandi at 5.05%; core prices indicate continuation of correction in vegetables, pulses, etc. in September, albeit at a inflation at 4.6% slower pace than August. Energy inflation eased marginally to 2.5% in August, even as the sequential momentum picked up. Core inflation picked up marginally to 4.6% from 4.5% in  July IIP growth July, with the miscellaneous items inflation rising 4.2%. Within miscellaneous, personal care contracts by 2.4%; and effect category surged to 8.3%, helped by another sharp sequential increase. Transport Capital goods and communication category eased sequentially reflecting the fall in petrol and diesel prices. growth at (-)29.6%

Price pressures likely to ease in 2HFY17  RBI likely to cut repo rate by 25 bps With high frequency indicators hinting at further fall in sequential momentum in food inflation, in December we believe headline inflation will likely ease further in September. The favorable base effect and reversion of the seasonal upside pressure on food prices will likely keep the 2HFY17 average inflation benign at around 4.4%. Core inflation, on the other hand, is likely to inch up to 4.7% in 2HFY17 from 4.5% in 1HFY17, largely owing to waning base effect.

IIP growth remains volatile

IIP growth came in at (-)2.4% in July (Kotak: 1.7%, consensus: 1.4%) after 2% growth in June. The print came as a surprise as core IIP index signaled a much slower moderation and could be the effect of volatility in a few components such as insulated cables. Among the top negative contributors were cable and insulated rubber, apparels, HR sheets, etc., while top positive contributors were high-speed diesel, ACs, etc. Manufacturing pulled down the headline, contracting 3.4% owing to sluggish capital goods ((-)29.6%) and consumer non-durables ((-)1.7). Electricity slumped 1.6% while mining slowed to 0.8%.

RBI likely to ease rates by 25 bps in December Madhavi Arora [email protected] With inflation likely to moderate further, we continue to expect another 25 bps rate cut in Mumbai: +91-22-6166-0541 December. RBI would likely want to (1) be sanguine that the 5% mark is achieved, (2) tide over any volatility risks in the exchange rate over the FCNR redemption period, and (3) weigh the Suvodeep Rakshit [email protected] various global risks before administering another rate cut. We remain cautious on policy actions Mumbai: +91-22-4336-0898 beyond FY2017 and expect inflation to correct modestly as supply-side bottlenecks and Upasna Bhardwaj narrowing output gap keeps downward rigidities intact. Risks to FY2018 inflation will emanate [email protected] from (1) increase in aggregate demand from 7CPC and good monsoons, (2) GST Mumbai: +91-22-6166-0531 implementation, (3) HRA increase from 7CPC, and (4) gradual pass-through from wholesale to retail inflation. It will be important to gauge the MPC’s views on flexible inflation targeting. If it views 4% as more of a medium-term target (instead of achieving 4% by end-FY2018), then it will likely create more leeway for the RBI to ease further.

Kotak Economic Research [email protected] Mumbai: +91-22-4336-0000

For Private Circulation Only. Economy India

Exhibit 1: FY2017 average inflation around 5% Headline and core CPI inflation along with alternate scenario with higher HRA (%)

Alternate scenario (7CPC) CPI inflation Core CPI inflation 12 11 10 9 8 7 March 2018: 6.1 6 March 2018: 4.9 5 4 March 2018: 4.5

3

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17

Nov-13

Nov-14

Nov-15

Nov-16

Nov-17

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

May-13

May-14

May-15

May-16 May-17

Source: CEIC, Kotak Economic Research estimates

Exhibit 2: IIP growth at (-)2.4% on July Trends in IIP monthly and IIP 3M MA growth (%, yoy)

IIP growth (monthly) IIP growth (3M MA) 12 10 8 6 4 2 0 (2) (4)

(6)

Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jan-13

Jan-14

Jan-15

Jan-16

Oct-12

Oct-13

Oct-14

Oct-15

Apr-13

Apr-14

Apr-15 Apr-16

Source: CEIC, Kotak Economic Research

KOTAK ECONOMIC RESEARCH 69

June 2016: Results calendar India Daily Summary Daily Summary India Mon Tue Wed Thu Fri Sat Sun

KOTAK INSTITUTIONAL EQUITIES EQUITIES INSTITUTIONAL KOTAK 12-Sep 13-Sep 14-Sep 15-Sep 16-Sep 17-Sep 18-Sep Natl. Aluminium Coal India CESC Reliance Pow er Natl. Aluminium GMR Infra. Tata Steel Reliance Infra. Kaveri Seed Co. Suzlon Energy Prestige Estates Rel. Comm.

Sunteck Realty

Source: NSE, Kotak Institutional Equities -

RESEARCH

September 14, 2016 14, September

India Daily Summary Daily Summary India

-

September 14, 2016 September 14,

70

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

71 Target O/S Price (Rs) price Upside Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Dividend yield (%) RoE (%) ADVT-3mo

Company Rating 12-Sep-16 (Rs) (%) (Rs mn) (US$ mn) (mn) 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E (US$ mn) Automobiles Amara Raja Batteries SELL 985 800 (18.8) 168,284 2,515 171 28.7 34.0 38.6 19.1 18.8 13.3 34.4 28.9 25.5 20.5 16.7 14.9 8.0 6.6 5.5 0.4 0.7 0.8 25.8 25.0 23.6 5.2 Apollo Tyres BUY 204 230 12.9 103,688 1,549 509 19.9 21.4 23.2 (7.6) 7.2 8.3 10.2 9.5 8.8 5.6 6.1 5.7 1.7 1.5 1.3 1.0 1.0 1.1 18.4 16.8 15.7 7.7 Ashok Leyland SELL 83 85 1.9 237,488 3,549 2,846 3.5 4.8 5.7 284.6 38.1 19.0 23.9 17.3 14.6 11.5 9.5 8.3 4.3 3.7 3.2 1.1 1.7 2.1 18.7 23.1 23.6 19.3 Bajaj Auto REDUCE 2,955 2,850 (3.6) 855,051 12,777 289 126.2 141.2 160.1 15.8 11.9 13.4 23.4 20.9 18.5 16.1 15.0 12.9 7.0 5.9 5.1 1.9 1.9 2.2 31.8 30.5 29.5 11.5 Balkrishna Industries ADD 888 950 7.0 85,809 1,282 97 59.6 63.1 72.3 21.2 5.9 14.6 14.9 14.1 12.3 11.3 8.7 7.3 3.1 2.6 2.2 0.6 0.7 0.7 22.7 19.9 19.2 0.8 Bharat Forge ADD 846 840 (0.7) 196,991 2,944 237 27.4 26.5 37.1 (14.9) (3.0) 39.7 30.9 31.9 22.8 15.6 16.0 12.2 5.6 5.0 4.3 0.9 0.7 1.0 18.5 16.5 20.2 12.8 Eicher Motors SELL 22,741 14,500 (36.2) 617,683 9,230 27 470.5 646.6 736.0 107.2 37.4 13.8 48.3 35.2 30.9 24.4 27.7 24.1 17.8 17.2 11.9 0.4 0.1 0.1 42.7 49.8 45.5 13.1 Exide Industries SELL 184 155 (15.9) 156,570 2,340 850 7.3 7.8 8.5 14.1 6.5 8.5 25.1 23.6 21.8 15.5 14.1 13.0 3.5 3.2 3.0 1.3 1.4 1.6 14.7 14.3 14.2 9.4 Hero Motocorp SELL 3,533 2,950 (16.5) 705,456 10,541 200 156.9 183.8 194.6 23.3 17.2 5.8 22.5 19.2 18.2 14.8 12.8 12.0 8.9 7.5 6.4 2.0 2.6 2.8 43.2 42.3 38.2 19.5 Mahindra CIE Automotive ADD 191 205 7.1 61,948 926 323 4.4 7.8 9.9 (41.1) 77.2 27.5 43.6 24.6 19.3 18.9 11.2 8.0 3.1 2.7 1.9 — — — 7.3 11.8 12.5 0.7 Mahindra & Mahindra REDUCE 1,426 1,370 (3.9) 885,647 13,234 569 58.0 65.2 74.2 6.8 12.5 13.8 24.6 21.9 19.2 16.6 14.7 13.0 3.6 3.2 2.9 0.8 1.1 1.3 15.6 15.6 15.9 23.7 Maruti Suzuki BUY 5,329 5,800 8.8 1,609,785 24,054 302 151.3 232.4 292.5 23.2 53.6 25.9 35.2 22.9 18.2 15.8 13.0 10.1 6.0 5.0 4.2 0.7 1.1 1.4 18.0 23.8 25.2 52.6 Minda Corp. REDUCE 115 110 (4.1) 24,019 359 209 4.6 5.5 6.9 10.6 19.6 24.9 24.8 20.7 16.6 12.8 10.4 8.5 4.2 3.6 3.0 0.4 0.5 0.5 18.8 18.8 19.7 0.2 Motherson Sumi Systems SELL 312 260 (16.8) 413,291 6,176 1,323 9.7 11.8 14.6 29.6 21.8 23.8 32.3 26.6 21.5 12.2 10.6 8.7 9.7 7.9 6.4 1.5 1.1 1.4 33.8 32.8 32.8 16.7 Suprajit Engineering REDUCE 191 190 (0.5) 25,073 375 131 5.5 7.6 9.1 30.7 39.5 18.9 34.8 25.0 21.0 17.8 14.0 12.1 5.6 4.8 4.0 0.6 0.7 0.9 20.9 20.6 20.8 0.3 Tata Motors BUY 553 580 4.8 1,776,144 26,540 3,396 38.7 47.6 57.9 (7.3) 22.9 21.7 14.3 11.6 9.6 5.3 4.7 3.9 2.3 1.9 1.6 — — — 19.2 18.2 18.4 67.8 TVS Motor SELL 322 235 (26.9) 152,788 2,283 475 7.7 11.6 14.3 27.3 50.7 24.1 41.9 27.8 22.4 21.3 16.0 13.2 9.7 7.8 6.3 1.1 0.9 1.1 25.1 31.0 31.0 8.6 WABCO India BUY 6,200 7,200 16.1 117,599 1,757 19 107.9 158.1 182.2 69.6 46.5 15.2 57.5 39.2 34.0 38.7 25.3 21.6 11.2 8.9 7.2 0.1 0.2 0.2 21.3 25.2 23.3 0.7 Automobiles Attractive 8,193,313 122,430 9.1 24.3 18.9 23.0 18.5 15.6 10.6 9.3 7.8 4.4 3.7 3.1 0.8 1.0 1.1 18.9 20.0 19.9 270.6 Banks Axis Bank REDUCE 592 520 (12.2) 1,413,199 21,117 2,383 34.5 32.0 38.0 11.2 (7.2) 18.4 17.2 18.5 15.6 — — — 2.7 2.6 2.3 0.8 0.8 1.0 16.8 13.6 14.3 88.7 Bank of Baroda REDUCE 162 150 (7.3) 372,698 5,569 2,310 (23.4) 6.7 18.4 (252.4) 128.7 174.0 (6.9) 24.1 8.8 — — — 1.6 1.7 1.6 — 0.8 2.3 (14.4) 4.2 10.9 23.6 Bank of India ADD 116 120 3.5 108,255 1,618 817 (74.5) (8.4) 32.3 (390.2) 88.8 486.9 (1.6) (13.9) 3.6 — — — 1.2 1.0 0.7 — (1.4) 5.6 (22.5) (2.6) 9.9 11.5 Canara Bank REDUCE 297 220 (25.9) 161,268 2,410 543 (51.8) 17.5 56.2 (191.1) 133.8 221.4 (5.7) 17.0 5.3 — — — 1.3 1.4 1.3 — — — (8.9) 3.0 9.4 19.1 City Union Bank ADD 136 135 (0.6) 81,204 1,213 598 7.4 8.7 10.2 12.3 17.5 16.7 18.3 15.5 13.3 — — — 2.9 2.5 2.1 0.9 1.0 1.2 15.5 16.0 16.4 0.8 DCB Bank ADD 118 115 (2.4) 33,542 501 284 6.8 6.3 7.9 0.9 (8.0) 26.1 17.2 18.7 14.9 — — — 2.0 1.8 1.7 — — — 11.9 9.8 11.1 2.5 Federal Bank BUY 71 75 5.8 121,819 1,820 1,719 2.8 5.1 6.7 (52.8) 85.5 31.3 25.6 13.8 10.5 — — — 1.6 1.5 1.4 1.0 1.8 2.4 6.0 10.5 12.7 8.1 HDFC Bank ADD 1,280 1,300 1.6 3,240,376 48,420 2,528 48.6 58.9 69.7 19.3 21.1 18.3 26.3 21.7 18.4 — — — 4.5 3.9 3.4 0.7 0.9 1.1 18.3 19.0 19.4 26.4 ICICI Bank BUY 268 335 24.9 1,560,098 23,312 5,849 16.6 17.5 23.5 (14.6) 5.3 34.1 16.1 15.3 11.4 — — — 2.0 1.9 1.7 1.9 2.0 2.6 11.4 11.0 13.6 56.8 IDFC Bank BUY 63 70 10.8 214,385 3,203 3,389 1.5 2.7 4.0 - 85.4 47.7 43.1 23.2 15.7 — — — 1.6 1.5 1.4 0.5 0.8 1.3 6.7 6.2 9.1 4.8 IndusInd Bank ADD 1,196 1,250 4.5 712,490 10,646 595 38.4 48.9 56.7 13.4 27.3 15.9 31.1 24.5 21.1 — — — 4.2 3.7 3.2 0.4 0.5 0.6 17.1 15.9 15.9 21.0

J&K Bank BUY 75 80 7.3 36,140 540 485 8.6 4.9 13.0 (18.2) (42.9) 166.3 8.7 15.2 5.7 — — — 0.7 0.9 0.6 2.3 1.3 3.6 6.6 3.6 9.2 2.1 India Daily Summary Daily Summary India Karur Vysya Bank BUY 463 600 29.6 55,941 836 122 46.6 52.2 56.3 24.3 12.0 8.0 9.9 8.9 8.2 — — — 1.3 1.2 1.1 3.0 2.8 3.0 12.9 13.3 13.0 1.4 Oriental Bank of Commerce ADD 122 120 (1.7) 42,267 632 321 4.9 12.8 27.1 (70.7) 163.6 111.9 25.1 9.5 4.5 — — — 0.5 1.1 0.9 0.6 2.1 4.4 1.1 2.7 5.6 9.8 Punjab National Bank REDUCE 137 115 (16.2) 269,406 4,026 1,964 (20.2) 3.8 23.2 (222.6) 118.8 509.6 (6.8) 36.0 5.9 — — — 2.4 2.0 1.2 — 0.6 3.4 (10.9) 2.1 11.9 34.1 State Bank of India BUY 253 280 10.8 1,962,042 29,318 7,763 12.8 15.1 28.8 (27.0) 18.0 90.1 19.7 16.7 8.8 — — — 2.1 1.9 1.6 1.0 1.1 1.2 7.3 7.9 13.7 82.1 Union Bank ADD 141 145 2.8 96,964 1,449 687 19.7 22.0 37.6 (29.8) 11.8 71.2 7.2 6.4 3.7 — — — 0.9 0.8 0.7 1.4 1.5 2.6 7.0 7.2 11.2 12.8 YES Bank REDUCE 1,205 1,200 (0.4) 507,345 7,581 421 60.4 64.8 77.2 25.8 7.3 19.1 20.0 18.6 15.6 — — — 3.7 3.3 2.8 0.8 0.9 1.1 19.9 18.3 18.8 59.4 Banks Attractive 10,989,439 164,211 (49.8) 88.0 58.6 35.6 18.9 11.9 1.8 1.7 1.5 0.9 1.0 1.4 5.1 8.9 12.7 465.1 NBFCs Bajaj Finserv REDUCE 2,943 2,440 (17.1) 468,308 6,998 159 122.4 144.4 169.4 19.3 18.0 17.3 24.0 20.4 17.4 — — — 3.5 3.2 2.8 0.5 0.5 0.5 16.0 16.5 17.3 8.8 Bharat Financial Inclusion REDUCE 731 670 (8.3) 93,076 1,391 127 23.8 51.3 49.7 59.3 115.6 (3.0) 30.7 14.3 14.7 — — — 6.7 4.6 3.5 — — — 24.9 38.1 26.9 24.7 Cholamandalam REDUCE 1,062 1,010 (4.9) 165,873 2,479 156 36.2 47.5 58.2 20.0 31.3 22.5 29.3 22.3 18.2 — — — 4.8 4.1 3.4 0.4 0.6 0.7 17.9 18.7 19.4 6.4 Dewan Housing Finance BUY 278 250 (10.1) 81,134 1,212 291 27.6 32.1 37.4 (42.0) 16.4 16.3 10.1 8.7 7.4 — — — 1.7 1.5 1.3 2.9 1.3 1.5 16.3 17.0 17.6 9.5 HDFC ADD 1,399 1,430 2.2 2,211,849 33,051 1,580 47.3 52.3 58.0 17.2 10.7 10.8 29.6 26.7 24.1 — — — 6.3 5.5 4.8 1.2 1.3 1.5 22.3 21.9 21.2 53.5 IDFC BUY 59 65 9.8 94,480 1,412 1,594 (5.9) 4.5 6.2 (154.7) 176.1 39.2 (10.1) 13.3 9.5 — — — 0.9 0.8 0.8 (3.7) 0.4 0.6 (4.5) 10.1 13.6 5.9 IIFL Holdings ADD 272 310 14.1 86,049 1,286 317 16.1 19.2 23.3 11.8 18.9 21.3 16.8 14.2 11.7 — — — 2.9 2.0 1.8 1.6 0.9 1.1 20.2 20.2 19.1 1.0

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK L&T Finance Holdings ADD 89 90 1.0 156,228 2,334 1,754 4.9 5.2 6.4 (1.7) 6.0 24.6 18.3 17.3 13.9 — — — 2.2 1.9 1.7 1.5 0.5 0.8 12.6 11.9 13.0 8.8

LIC Housing Finance ADD 560 590 5.3 282,788 4,226 505 36.3 42.8 49.8 20.8 18.0 16.3 15.4 13.1 11.3 — — — 2.9 2.4 2.0 1.0 1.2 1.3 19.6 19.7 21.4 19.1 -

Magma Fincorp ADD 96 125 30.9 22,619 338 235 9.0 10.0 12.1 2.5 10.6 21.5 10.6 9.6 7.9 — — — 1.0 1.0 0.9 0.8 1.6 1.9 10.6 10.7 11.4 0.9 2016 14, September Mahindra & Mahindra Financial REDUCE 338 325 (3.8) 192,100 2,870 565 11.9 13.7 16.9 (19.2) 14.9 23.3 28.3 24.7 20.0 — — — 3.4 3.1 2.7 1.2 1.1 1.3 11.4 12.2 13.7 10.2 Max Financial Services NR 605 — — 161,629 2,415 267 4.3 7.0 7.1 (70.6) 62.8 1.5 140.3 86.2 84.9 — — — 0.3 0.5 0.5 4.5 10.9 10.5 11.0 Muthoot Finance ADD 349 370 6.0 139,252 2,081 399 20.3 28.1 30.4 20.2 38.6 8.2 17.2 12.4 11.5 — — — 2.5 2.2 2.0 1.7 2.4 2.6 15.1 18.8 18.0 6.9 PFC REDUCE 118 100 (15.5) 312,454 4,669 2,640 23.2 16.5 20.7 2.5 (28.7) 25.5 5.1 7.2 5.7 — — — 0.9 1.2 1.0 11.7 2.8 3.5 17.3 10.9 12.5 9.4 Rural Electrification Corp. ADD 227 260 14.6 224,005 3,347 987 57.0 48.1 35.8 7.0 (15.6) (25.7) 4.0 4.7 6.3 — — — 0.8 0.8 1.0 7.5 4.5 3.4 21.0 15.6 10.5 15.5 Shriram City Union Finance REDUCE 2,219 1,900 (14.4) 146,292 2,186 66 80.1 94.1 127.1 (5.4) 17.4 35.0 27.7 23.6 17.5 — — — 3.3 3.0 2.7 0.4 0.5 0.6 12.1 12.8 15.3 3.0 Shriram Transport ADD 1,175 1,385 17.9 266,633 3,984 223 52.8 75.1 93.8 (4.8) 42.2 25.0 22.3 15.7 12.5 — — — 2.7 2.4 2.2 0.6 0.9 1.1 12.2 15.4 16.8 11.7 NBFCs Neutral 5,104,767 76,279 0.5 8.5 12.1 17.4 16.0 14.3 2.8 2.5 2.2 1.9 1.3 1.4 15.9 15.4 15.4 465.1

Source: Company, Bloomberg, Kotak Institutional Equities estimates

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

KOTAK INSTITUTIONAL EQUITIES EQUITIES INSTITUTIONAL KOTAK Company Rating 12-Sep-16 (Rs) (%) (Rs mn) (US$ mn) (mn) 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E (US$ mn) Cement ACC SELL 1,582 1,400 (11.5) 297,155 4,440 188 39.6 51.1 74.4 (13.3) 29.0 45.6 40.0 31.0 21.3 24.7 16.7 11.7 3.5 3.3 3.0 1.1 1.1 1.1 8.9 11.0 14.7 8.0 Ambuja Cements SELL 260 230 (11.5) 515,970 7,710 1,552 5.6 8.2 10.9 (34.7) 47.7 32.3 46.7 31.6 23.9 32.4 13.2 9.5 3.7 2.2 2.1 1.6 1.3 1.3 8.0 9.6 9.2 11.0 Dalmia Bharat ADD 1,809 1,600 (11.6) 160,634 2,400 89 21.5 57.1 91.9 1,802.5 165.8 60.9 84.2 31.7 19.7 14.7 10.5 8.4 4.2 3.7 3.1 0.1 0.1 0.1 5.5 12.4 17.2 1.4 Grasim Industries RS 4,635 - (100.0) 432,681 6,465 93 274.6 396.4 473.8 43.9 44.3 19.5 16.9 11.7 9.8 8.1 5.5 4.2 1.7 1.5 1.3 0.5 0.5 0.5 10.5 13.4 14.1 13.4 India Cements REDUCE 142 92 (35.3) 43,696 653 307 4.6 6.6 9.0 378.8 43.7 36.3 NM 21.6 15.8 9.5 8.3 7.3 1.2 1.2 1.1 0.7 1.5 1.5 3.9 5.5 7.1 12.3 J K Cement BUY 785 850 8.3 54,893 820 70 8.5 40.0 74.9 (52.8) 368.4 87.2 91.9 19.6 10.5 16.2 9.5 6.7 3.4 2.9 2.3 0.5 0.5 0.5 3.7 16.0 24.7 0.5 JK Lakshmi Cement ADD 460 480 4.4 54,093 808 118 2.0 20.2 33.4 (86.6) 921.6 65.3 232.8 22.8 13.8 27.3 11.3 7.5 4.0 3.5 2.8 0.4 0.4 0.4 1.7 16.3 22.6 1.1 Orient Cement BUY 195 175 (10.0) 39,847 595 205 3.0 6.8 16.6 (68.0) 124.3 143.9 64.0 28.5 11.7 29.8 13.0 7.6 3.9 3.6 2.8 0.5 0.9 0.9 6.2 13.1 27.0 0.6

Shree Cement SELL 17,100 12,000 (29.8) 595,717 8,902 35 115.4 515.0 580.9 (13.0) 346.4 12.8 148.2 33.2 29.4 43.7 18.7 15.2 9.6 7.6 6.1 0.1 0.1 0.1 7.0 25.5 22.9 3.6 UltraTech Cement SELL 3,866 2,825 (26.9) 1,061,018 15,854 274 79.2 124.0 159.1 7.9 56.4 28.4 48.8 31.2 24.3 24.6 17.1 13.7 5.1 4.5 3.8 0.2 0.2 0.2 11.0 15.3 16.9 14.4 Cement Cautious 3,255,702 48,649 4.1 77.9 30.1 45.1 25.3 19.5 19.2 12.0 9.3 3.9 3.1 2.7 0.5 0.5 0.5 8.6 12.2 13.9 66.3

Consumer products -

RESEARCH Asian Paints REDUCE 1,155 950 (17.7) 1,107,490 16,549 959 18.7 21.5 25.4 26.3 14.9 18.1 61.7 53.7 45.4 39.4 33.9 28.6 19.8 16.7 14.2 0.6 0.8 1.0 34.7 33.7 33.8 15.7

Bajaj Corp. BUY 401 465 15.8 59,207 885 148 15.9 17.5 19.5 11.3 10.4 11.5 25.3 22.9 20.6 20.6 18.6 16.0 12.3 11.8 11.3 2.9 3.1 3.7 48.3 52.5 56.1 0.6 2016 14, September Britannia Industries ADD 3,428 3,650 6.5 411,271 6,145 120 68.0 79.5 99.3 50.4 16.9 24.9 50.4 43.1 34.5 33.2 28.7 22.9 23.2 17.4 13.2 0.6 0.7 0.9 54.1 46.2 43.4 10.1 Coffee Day Enterprises ADD 235 290 23.4 48,410 723 206 (0.4) 3.6 7.2 92.8 1,090.5 98.8 (643.0) 64.9 32.7 14.8 12.6 10.9 2.3 2.2 2.0 — — — (0.6) 3.4 6.4 0.5 Colgate-Palmolive (India) ADD 978 1,060 8.4 265,975 3,974 272 21.2 23.6 27.9 3.2 11.2 18.4 46.1 41.5 35.0 28.2 24.8 21.0 26.1 20.7 16.3 1.0 1.2 1.3 64.5 55.7 52.0 4.6 Dabur India REDUCE 291 305 5.0 511,031 7,636 1,759 7.0 7.8 8.9 17.3 10.9 14.6 41.4 37.4 32.6 33.6 30.5 26.0 12.3 10.4 8.8 0.8 0.9 1.1 32.8 30.1 29.2 7.0 GlaxoSmithKline Consumer ADD 6,100 6,650 9.0 256,539 3,833 42 154.6 171.5 195.3 11.4 10.9 13.9 39.5 35.6 31.2 27.5 23.8 20.6 10.5 9.3 8.3 1.1 1.3 1.6 28.5 27.7 28.0 1.3 Godrej Consumer Products SELL 1,612 1,375 (14.7) 548,804 8,201 341 35.2 40.5 46.6 33.8 15.2 14.9 45.8 39.8 34.6 33.9 28.7 24.4 10.8 9.3 7.6 0.4 0.4 0.4 25.5 25.1 24.2 5.4 Hindustan Unilever REDUCE 918 885 (3.6) 1,987,751 29,702 2,164 19.3 21.0 23.3 10.8 8.8 11.1 47.7 43.8 39.4 33.6 30.2 26.6 31.7 32.3 33.0 1.7 2.0 2.2 83.4 73.0 82.7 16.4 ITC ADD 252 270 7.0 3,044,862 45,498 12,104 7.7 8.6 9.7 (2.9) 11.0 13.1 32.7 29.4 26.0 21.2 19.1 16.8 9.3 8.6 8.0 2.2 2.1 2.5 27.3 27.3 29.9 38.2 Jubilant Foodworks REDUCE 1,049 1,050 0.1 69,082 1,032 66 15.9 20.4 29.3 (5.7) 28.0 43.8 66.0 51.5 35.8 24.5 19.9 14.8 9.4 8.3 7.1 0.2 0.4 0.6 15.2 17.2 21.4 10.3 Jyothy Laboratories NR 320 — — 57,958 866 181 7.3 9.9 11.1 26.2 36.0 11.9 44.1 32.4 29.0 26.1 22.9 19.5 6.8 7.3 6.7 1.6 1.6 1.9 21.6 27.1 24.0 0.9 Manpasand Beverages REDUCE 718 630 (12.2) 35,919 537 50 10.1 15.3 20.4 26.7 51.8 33.2 71.0 46.8 35.1 31.7 22.2 17.2 6.0 5.4 4.7 0.1 0.2 0.3 12.8 12.1 14.3 1.8 Marico REDUCE 289 270 (6.4) 372,279 5,563 1,290 5.7 6.8 7.9 27.6 19.9 15.2 50.7 42.3 36.7 34.7 28.9 25.0 17.8 14.8 12.5 1.2 1.0 1.2 37.4 38.2 36.9 5.2 Nestle India SELL 6,431 5,650 (12.1) 620,069 9,265 96 92.7 121.3 149.8 (24.1) 30.9 23.5 69.4 53.0 42.9 38.0 29.5 24.6 22.0 19.4 16.9 0.8 1.0 1.3 31.6 38.9 42.1 3.4 Page Industries SELL 14,438 11,500 (20.3) 161,037 2,406 11 208.6 251.5 309.7 18.7 20.6 23.2 69.2 57.4 46.6 42.9 36.1 29.5 31.9 24.5 18.7 0.6 0.7 0.7 52.2 48.2 45.4 2.0

PC Jeweller ADD 481 450 (6.5) 86,174 1,288 179 21.5 26.2 30.7 1.5 22.0 17.3 22.4 18.4 15.7 12.7 9.6 7.7 3.7 2.9 2.4 0.7 0.8 1.0 17.8 17.7 17.6 1.5

Pidilite Industries REDUCE 703 690 (1.8) 360,283 5,384 513 14.7 17.6 20.1 46.0 19.4 14.1 47.7 40.0 35.0 30.2 25.9 22.6 12.9 10.6 8.9 0.6 0.7 0.9 29.9 29.2 27.6 5.8 S H Kelkar and Company REDUCE 301 260 (13.6) 43,545 651 145 5.8 8.8 10.1 8.8 51.2 15.6 52.0 34.4 29.7 27.9 21.9 19.0 5.5 5.1 4.6 0.5 0.7 0.9 12.6 15.7 16.3 0.8 Speciality Restaurants SELL 84 75 (10.9) 3,951 59 47 0.1 (0.3) 0.8 (97.2) (642.3) 373.3 1,519.4 (280.2) 102.5 18.6 19.4 11.3 1.3 1.3 1.3 — — — 0.1 (0.5) 1.2 0.1 Tata Global Beverages ADD 135 150 10.9 85,392 1,276 631 5.0 6.1 7.0 (8.5) 22.3 14.6 27.2 22.2 19.4 13.6 11.4 10.0 1.5 1.4 1.4 1.7 1.7 1.8 5.6 6.6 7.3 4.8 Titan Company REDUCE 411 380 (7.6) 365,146 5,456 888 8.0 10.0 12.3 (14.2) 25.6 23.0 51.6 41.1 33.4 38.3 27.4 21.9 10.5 9.2 7.8 0.5 0.8 0.9 21.5 23.8 25.3 6.6 United Breweries SELL 810 730 (9.9) 214,234 3,201 264 11.2 13.5 17.3 13.5 20.4 28.3 72.5 60.2 46.9 30.5 27.0 22.7 10.2 8.9 7.7 0.1 0.2 0.3 14.9 15.8 17.6 2.8 United Spirits ADD 2,282 2,800 22.7 331,565 4,954 145 12.3 34.4 53.8 210.0 180.9 56.4 NM 66.3 42.4 38.3 29.3 21.9 18.5 10.9 7.3 — — — 14.5 20.7 20.6 12.7 Consumer products Cautious 11,047,974 165,086 8.2 15.5 16.3 44.3 38.4 33.0 28.5 24.7 21.1 12.4 11.1 9.7 1.3 1.4 1.6 28.1 28.8 29.5 158.5 Energy BPCL REDUCE 566 580 2.5 818,387 12,229 1,446 51.4 50.9 54.5 46.2 (1.0) 7.0 11.0 11.1 10.4 7.5 6.9 5.9 3.0 2.6 2.2 2.7 2.7 2.9 30.0 24.9 22.9 28.1 Cairn India ADD 189 — — 354,443 5,296 1,875 11.4 8.9 11.3 (67.2) (22.1) 26.9 16.5 21.2 16.7 8.5 7.4 5.9 0.7 0.7 0.7 1.6 1.3 2.4 4.0 3.4 4.2 11.2 Castrol India ADD 465 450 (3.1) 229,724 3,433 495 12.0 14.3 15.4 25.4 19.1 7.7 38.6 32.4 30.1 24.9 21.4 19.8 39.9 36.4 33.6 1.9 2.4 2.6 111.0 117.4 116.2 7.7 GAIL (India) ADD 387 430 11.3 490,267 7,326 1,268 17.9 27.1 32.7 (31.4) 51.3 20.4 21.6 14.2 11.8 13.1 8.8 7.4 1.6 1.5 1.4 1.4 1.9 2.6 7.6 10.8 11.9 10.8 GSPL ADD 151 170 13.0 84,788 1,267 563 7.9 9.0 11.1 22.2 14.4 23.5 19.1 16.7 13.5 9.5 8.4 6.8 2.1 2.0 1.8 1.0 1.7 2.2 11.7 12.3 13.9 0.9 HPCL REDUCE 1,200 1,200 0.0 406,268 6,071 339 113.9 124.1 124.9 41.3 8.9 0.6 10.5 9.7 9.6 7.8 7.0 7.1 2.2 1.9 1.7 2.9 3.1 3.2 22.5 21.4 18.9 29.9 Indraprastha Gas ADD 748 760 1.6 104,741 1,565 140 33.2 43.4 46.8 6.0 30.9 7.9 22.6 17.2 16.0 13.0 9.8 9.0 4.3 3.8 3.4 0.8 1.6 2.0 20.6 23.5 22.3 9.4

IOCL ADD 553 595 7.6 1,342,536 20,061 2,428 39.1 Daily Summary India 57.2 61.2 127.4 46.3 6.9 14.1 9.7 9.0 8.1 5.7 5.3 1.8 1.6 1.5 2.5 3.1 3.4 13.4 17.7 17.0 21.9 Mahanagar Gas ADD 620 650 4.8 61,237 915 99 31.3 38.0 40.2 2.6 21.7 5.7 19.8 16.3 15.4 11.6 9.5 8.8 4.0 3.6 3.3 2.8 2.8 3.1 21.0 23.2 22.2 - ONGC SELL 251 230 (8.4) 2,147,428 32,088 8,556 20.3 19.8 22.6 (8.5) (2.2) 14.0 12.4 12.7 11.1 4.7 5.0 4.5 1.1 1.1 1.0 3.4 2.8 3.2 9.4 8.8 9.6 17.5 Oil India SELL 396 370 (6.6) 238,020 3,557 601 38.8 35.9 37.9 (7.2) (7.5) 5.6 10.2 11.0 10.5 5.8 6.4 6.0 1.1 1.0 1.0 4.0 3.2 3.8 10.6 9.4 9.4 2.8 Petronet LNG ADD 330 370 12.2 247,388 3,697 750 11.2 19.0 24.0 13.9 69.4 26.1 29.4 17.4 13.8 16.6 10.9 8.5 3.9 3.3 2.9 0.8 1.2 2.0 15.2 20.6 22.3 6.2 Reliance Industries ADD 1,047 1,100 5.1 3,081,366 46,044 3,240 84.6 83.0 94.4 20.5 (2.0) 13.8 12.4 12.6 11.1 10.2 10.9 8.2 1.4 1.3 1.2 0.9 1.1 1.3 12.0 10.7 11.1 48.7 Energy Attractive 9,618,906 143,732 8.8 7.0 11.9 12.8 12.0 10.7 7.8 7.4 6.3 1.4 1.3 1.2 2.1 2.2 2.5 11.2 11.1 11.5 199.9

Source: Company, Bloomberg, Kotak Institutional Equities estimates

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September 14, 2016 September 14,

72

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

73 Target O/S Price (Rs) price Upside Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Dividend yield (%) RoE (%) ADVT-3mo

Company Rating 12-Sep-16 (Rs) (%) (Rs mn) (US$ mn) (mn) 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E (US$ mn) Industrials ABB SELL 1,170 950 (18.8) 248,028 3,706 212 14.2 18.4 27.6 31.2 29.7 50.3 82.7 63.8 42.4 34.8 30.7 23.3 8.2 7.6 6.7 0.3 0.4 0.6 10.3 12.4 16.8 1.1 BHEL SELL 148 100 (32.2) 361,021 5,395 2,448 (3.7) 4.3 6.8 (164.4) 214.5 58.1 (39.5) 34.5 21.8 (13.4) 18.7 9.1 1.1 1.1 1.0 0.3 0.6 0.9 (2.7) 3.1 4.8 19.3 Carborundum Universal REDUCE 264 250 (5.4) 49,779 744 188 7.6 10.4 13.6 8.1 36.7 30.5 34.7 25.4 19.5 17.2 13.6 10.8 4.2 3.8 3.4 0.6 1.2 1.5 12.6 15.7 18.3 2.3 Crompton Greaves REDUCE 80 75 (6.0) 50,014 747 627 2.3 2.4 4.1 (71.2) 3.4 70.4 34.2 33.1 19.4 14.8 10.8 7.6 1.1 1.1 1.0 — 0.6 1.0 3.3 3.2 5.4 5.3 Cummins India REDUCE 929 850 (8.5) 257,408 3,846 277 26.4 28.5 32.6 (3.9) 7.7 14.4 35.1 32.6 28.5 33.4 30.4 26.1 8.1 7.4 6.7 1.5 1.6 1.8 24.2 23.7 24.6 4.4 Havells India REDUCE 408 355 (13.1) 255,222 3,814 624 7.8 10.8 12.4 25.8 39.2 14.3 52.6 37.8 33.1 29.9 25.5 21.8 8.9 7.9 7.1 1.5 1.0 1.2 20.8 22.3 22.6 8.2 Kalpataru Power Transmission BUY 260 300 15.4 39,900 596 153 7.7 12.7 14.1 (2.3) 65.5 11.3 33.9 20.5 18.4 8.6 7.4 6.8 1.7 1.6 1.5 0.6 0.6 0.6 5.2 8.1 8.4 0.6 KEC International ADD 127 160 25.9 32,676 488 257 7.4 9.4 13.1 19.0 26.5 38.6 17.1 13.5 9.7 8.3 6.6 5.7 2.2 1.9 1.6 0.8 1.0 1.4 13.5 15.0 18.1 0.8 L&T REDUCE 1,463 1,500 2.5 1,363,714 20,378 930 50.9 48.6 64.9 45.0 (4.5) 33.5 28.7 30.1 22.5 18.8 20.1 17.2 3.7 3.4 3.1 1.2 1.3 1.3 12.9 11.8 14.5 40.2 Siemens SELL 1,244 900 (27.7) 443,014 6,620 356 18.3 26.6 32.3 62.5 45.2 21.8 68.0 46.8 38.5 38.3 29.1 23.8 6.7 6.3 5.9 3.1 1.1 1.3 11.1 13.8 15.8 4.9 Thermax REDUCE 819 770 (6.0) 97,607 1,459 119 23.1 25.8 28.4 6.2 11.7 9.9 35.4 31.7 28.9 22.3 20.7 18.5 4.1 3.8 3.4 0.7 0.7 0.7 12.2 12.5 12.5 1.0 Voltas ADD 375 360 (3.9) 123,916 1,852 331 10.4 12.6 15.7 2.0 21.0 24.6 35.9 29.7 23.8 28.5 23.6 18.3 5.2 4.6 4.2 0.7 1.0 1.5 15.3 16.5 18.4 8.6 Industrials Cautious 3,322,299 49,644 (9.7) 37.0 31.9 46.1 33.7 25.5 25.0 20.3 16.7 3.3 3.1 2.9 1.3 1.1 1.2 7.2 9.3 11.4 96.8 Infrastructure Adani Port and SEZ ADD 260 255 (1.9) 538,447 8,046 2,085 13.8 14.7 13.0 135.0 6.9 (11.3) 18.9 17.7 19.9 16.1 14.6 13.0 4.1 3.4 3.0 0.4 0.5 0.8 23.9 21.0 16.0 19.1 Ashoka Buildcon BUY 164 220 34.4 30,636 458 188 3.1 4.7 3.5 (39.4) 49.6 (24.3) 52.6 35.2 46.5 9.1 9.2 8.7 1.6 1.6 1.6 0.9 0.9 1.2 3.6 4.6 3.4 0.5 Container Corporation REDUCE 1,320 1,350 2.3 257,278 3,844 195 40.4 42.7 50.0 (24.8) 5.8 17.0 32.7 30.9 26.4 21.7 19.6 16.1 3.2 3.0 2.8 1.0 1.1 1.3 10.0 10.0 11.0 3.9 Gateway Distriparks ADD 275 305 10.9 29,895 447 109 10.1 10.8 12.3 (41.6) 7.2 13.7 27.2 25.4 22.3 12.1 11.4 8.8 2.4 2.3 2.1 2.5 1.2 1.3 8.9 9.2 9.9 0.5 Gujarat Pipavav Port ADD 193 185 (4.2) 93,352 1,395 483 3.4 5.3 6.5 (61.5) 54.2 22.0 56.2 36.4 29.9 24.1 20.5 16.2 4.9 4.7 4.5 1.0 1.6 2.0 9.0 13.1 15.3 1.8 IRB Infrastructure BUY 241 285 18.1 84,805 1,267 351 18.1 16.0 12.7 17.2 (11.5) (20.5) 13.3 15.1 18.9 8.2 7.5 7.8 1.8 1.4 1.3 1.6 1.6 1.6 13.9 10.5 7.3 5.4 Sadbhav Engineering ADD 296 315 6.3 50,817 759 172 8.0 11.1 12.8 13.4 37.8 15.8 36.9 26.8 23.1 19.3 17.1 13.9 3.5 3.1 2.8 — — — 9.8 12.2 12.7 0.8 Infrastructure Attractive 1,085,231 16,216 31.5 7.3 (4.7) 22.8 21.2 22.3 14.4 13.0 11.7 3.3 2.9 2.6 0.8 0.8 1.1 14.6 13.7 11.9 32.0 Internet Info Edge ADD 837 960 14.7 101,165 1,512 121 11.7 16.2 21.3 (27.4) 38.3 31.3 71.5 51.7 39.3 56.9 38.1 27.0 5.7 5.3 4.9 0.4 0.5 0.6 8.3 10.7 12.9 1.2 Just Dial REDUCE 477 460 (3.5) 33,108 495 69 20.4 18.4 20.8 3.6 (9.7) 12.7 23.3 25.9 22.9 15.1 17.6 12.9 4.9 4.2 3.6 — 0.4 0.4 21.1 17.6 17.0 15.4 Internet Attractive 134,273 2,006 (14.8) 14.3 24.0 47.4 41.5 33.4 35.2 30.4 21.9 5.5 5.0 4.5 0.3 0.5 0.6 11.6 12.1 13.4 16.5 Media DB Corp. REDUCE 398 365 (8.3) 73,137 1,093 184 16.1 21.8 26.0 (6.3) 35.1 19.1 24.7 18.2 15.3 13.6 9.9 8.4 5.4 4.8 4.3 2.8 2.8 3.5 22.5 28.0 29.8 0.4 DishTV BUY 92 115 25.3 97,843 1,462 1,066 6.5 2.5 3.6 21,951.6 (61.9) 45.4 NM 37.1 25.5 10.2 8.8 7.5 5.9 5.9 5.9 — — — 41.5 15.8 23.0 9.0 Jagran Prakashan REDUCE 188 195 3.8 61,443 918 327 10.4 12.6 14.1 30.0 21.0 11.7 18.1 14.9 13.4 10.7 8.8 7.5 3.9 3.5 3.2 — 3.2 3.7 25.0 24.7 24.9 0.5 PVR BUY 1,179 1,175 (0.4) 55,096 823 47 26.9 26.3 35.0 647.0 (2.2) 33.4 43.9 44.9 33.7 17.6 15.7 13.0 6.3 5.6 4.9 0.2 0.2 0.3 19.6 13.3 15.6 4.2

Sun TV Network ADD 453 500 10.5 178,363 2,665 394 23.4 27.0 29.9 18.0 15.3 10.6 19.3 16.8 15.2 12.2 10.4 9.0 5.1 4.6 4.2 3.4 3.3 3.8 26.8 28.7 29.0 10.6 India Daily Summary Daily Summary India Zee Entertainment Enterprises BUY 516 560 8.6 495,159 7,399 960 9.4 15.3 17.8 8.4 62.8 16.6 54.9 33.7 28.9 31.5 23.3 17.9 7.9 5.2 4.8 0.4 0.5 0.7 15.3 18.7 17.3 12.8 Media Attractive 961,041 14,361 48.9 13.8 17.2 29.3 25.8 22.0 17.5 14.0 11.6 6.3 5.0 4.6 1.1 1.3 1.6 21.5 19.4 20.8 37.4 Metals & Mining Coal India REDUCE 330 315 (4.7) 2,087,243 31,189 6,316 22.7 22.1 25.6 4.3 (2.5) 15.8 14.6 15.0 12.9 9.4 9.6 8.6 5.6 5.7 5.3 8.3 4.7 5.4 35.6 38.0 42.6 16.0 Hindalco Industries SELL 141 110 (21.9) 290,853 4,346 2,065 2.7 9.0 10.9 (72.9) 230.6 21.4 52.0 15.7 13.0 9.6 7.4 6.8 0.8 0.7 0.7 0.7 0.7 0.7 1.5 4.7 5.5 26.1 Hindustan Zinc REDUCE 213 200 (5.9) 898,092 13,420 4,225 19.4 18.8 20.1 0.2 (3.0) 6.6 11.0 11.3 10.6 8.2 7.4 6.3 2.4 2.1 1.8 13.1 2.1 2.1 20.3 19.8 18.3 5.7 Jindal Steel and Power SELL 81 60 (25.9) 74,107 1,107 915 (18.2) (13.2) (0.5) (363.0) 27.7 96.3 (4.4) (6.1) (165.1) 17.3 10.8 7.9 0.4 0.2 0.2 — — — (8.5) (4.4) (0.1) 18.9 JSW Steel ADD 1,745 2,015 15.5 421,817 6,303 242 (10.5) 150.6 170.9 (113.9) 1,530.8 13.4 (165.7) 11.6 10.2 13.3 6.7 6.1 1.9 1.9 1.6 0.5 0.5 0.5 (1.1) 16.6 17.2 16.1 National Aluminium Co. SELL 47 36 (23.6) 121,388 1,814 2,577 2.7 2.2 2.9 (43.2) (20.1) 33.6 17.4 21.8 16.3 7.8 7.8 5.5 0.9 0.9 0.9 4.2 2.1 2.1 5.4 4.3 5.6 0.8 NMDC SELL 105 75 (28.3) 414,511 6,194 3,965 8.0 7.2 7.6 (51.8) (9.5) 5.5 13.2 14.5 13.8 8.8 9.6 8.7 1.4 1.4 1.4 10.5 5.7 5.7 10.1 9.5 10.0 4.0 Tata Steel ADD 373 445 19.2 362,555 5,418 971 (23.4) 27.7 48.7 (72,377.0) 218.3 75.6 (15.9) 13 7.7 14.9 7.7 6.1 1.3 1.4 1.2 2.1 2.1 2.1 (7.6) 9.7 16.5 41.2 Vedanta ADD 161 190 17.8 478,205 7,146 2,965 7.9 16.4 20.7 (54.0) 108.2 26.6 20.5 9.9 7.8 8.1 6.0 5.0 1.1 1.0 0.9 2.2 1.7 1.7 4.7 11.5 12.1 37.4 Metals & Mining Cautious 5,148,771 76,936 (36.2) 53.2 22.9 20.6 13.4 10.9 10.3 7.8 6.6 1.9 1.7 1.5 7.0 3.2 3.5 9.3 12.4 14.1 166.3 Pharmaceutical Apollo Hospitals REDUCE 1,313 1,270 (3.3) 182,664 2,729 139 21.7 22.6 32.0 (13.8) 4.0 41.6 60.5 58.2 41.1 26.2 25.3 20.5 5.3 5.0 4.6 0.5 0.4 0.6 9.1 8.8 11.6 3.9

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Biocon SELL 886 515 (41.9) 177,160 2,647 200 20.0 26.0 27.6 2.0 30.4 5.9 44.4 34.0 32.1 24.4 18.4 14.8 4.1 3.7 3.4 1.4 1.0 1.1 10.2 11.4 11.1 18.0

Cipla BUY 570 590 3.5 458,114 6,845 805 16.8 21.2 28.7 14.4 26.5 35.2 34.0 26.9 19.9 20.0 17.2 12.6 3.8 3.4 3.0 0.6 0.8 1.0 11.7 13.4 16.1 14.6 -

Dr Lal Pathlabs REDUCE 1,150 925 (19.6) 95,159 1,422 83 15.9 19.0 22.4 19.9 19.2 18.0 72.3 60.7 51.4 44.0 37.0 31.2 19.0 15.1 12.1 0.2 0.2 0.3 31.3 27.7 26.1 1.8 2016 14, September Dr Reddy's Laboratories SELL 3,138 2,500 (20.3) 519,893 7,769 171 139.3 85.3 117.4 2.7 (38.8) 37.6 22.5 36.8 26.7 13.1 17.8 13.5 4.2 4.2 3.7 0.8 0.4 0.6 19.9 11.2 14.7 22.4 Lupin REDUCE 1,533 1,600 4.3 691,317 10,330 450 50.5 63.6 73.2 (5.5) 26.0 15.2 30.4 24.1 20.9 19.6 15.1 12.8 6.3 5.1 4.2 0.6 0.6 0.7 22.8 23.4 22.2 30.0 Sun Pharmaceuticals SELL 787 715 (9.2) 1,894,189 28,304 2,406 22.1 29.7 33.0 11.1 34.2 11.2 35.6 26.5 23.9 22.7 17.4 13.4 6.0 5.0 4.2 0.5 0.8 0.8 18.4 20.5 19.0 41.1 Torrent Pharmaceuticals REDUCE 1,656 1,260 (23.9) 280,144 4,186 169 102.4 60.1 67.3 130.8 (41.3) 12.0 16.2 27.5 24.6 10.4 17.6 15.8 8.3 6.7 5.5 2.4 0.8 0.9 58.9 26.9 24.7 4.6 Pharmaceuticals Cautious 4,298,640 64,233 13.1 9.0 17.7 30.9 28.4 24.1 19.2 17.5 13.8 5.4 4.7 4.0 0.7 0.7 0.8 17.6 16.7 16.8 136.4

Source: Company, Bloomberg, Kotak Institutional Equities estimates

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

KOTAK INSTITUTIONAL EQUITIES EQUITIES INSTITUTIONAL KOTAK Company Rating 12-Sep-16 (Rs) (%) (Rs mn) (US$ mn) (mn) 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E (US$ mn) Real Estate DLF BUY 145 180 23.8 259,357 3,875 1,801 3.1 2.7 2.9 1.4 (13.1) 10.3 47.6 54.8 49.6 12.2 15.2 14.3 0.9 0.9 0.9 1.4 1.4 1.4 1.9 1.6 1.8 21.6 Godrej Properties REDUCE 340 280 (17.6) 73,474 1,098 216 10.7 10.8 13.1 13.4 1.2 21.0 31.8 31.4 26.0 28.5 26.3 23.3 3.4 3.1 2.8 — 0.4 0.7 11.5 10.3 11.5 1.2 Oberoi Realty BUY 299 350 17.2 101,350 1,514 339 12.6 9.6 29.4 29.9 (23.3) 205.3 23.8 31.0 10.2 15.6 19.6 6.1 1.9 1.8 1.6 0.7 0.7 0.7 8.6 6.0 16.6 1.4 Prestige Estates Projects BUY 202 250 24.1 75,563 1,129 375 9.4 7.0 10.6 5.7 (24.8) 50.7 21.5 28.6 19.0 12.8 13.4 11.4 1.8 1.7 1.6 0.7 0.7 0.7 8.8 6.2 8.8 0.6 Sobha BUY 299 440 47.2 29,321 438 98 15.6 16.7 20.3 (35.6) 6.5 21.7 19.1 18.0 14.7 9.8 11.1 10.1 1.1 1.1 1.1 0.7 2.3 2.3 6.1 6.3 7.4 0.4 Sunteck Realty BUY 245 360 46.7 15,449 231 60 27.1 82.0 53.3 138.8 201.9 (34.9) 9.0 3.0 4.6 10.7 2.2 0.2 0.9 0.7 0.6 0.8 0.8 0.8 10.5 26.2 14.1 0.9 Real Estate Attractive 554,514 8,286 11.6 4.4 39.2 29.6 28.3 20.4 13.2 14.0 11.5 1.2 1.2 1.2 0.9 1.1 1.1 4.2 4.3 5.7 26.0 Technology

HCL Technologies REDUCE 783 800 2.2 1,104,199 16,500 1,413 39.2 58.1 59.5 (23.5) 48.0 2.4 19.9 13.5 13.2 14.9 9.5 8.9 4.0 3.4 3.0 2.2 3.2 3.7 21.3 27.1 24.3 25.6 Hexaware Technologies ADD 199 215 7.9 60,165 899 304 12.9 13.2 15.7 19.4 2.1 18.6 15.4 15.1 12.7 10.4 10.1 8.2 4.2 4.0 3.6 4.3 4.3 4.3 28.9 27.2 29.8 3.9 Infosys ADD 1,054 1,215 15.3 2,420,980 36,176 2,286 59.0 61.8 70.5 9.4 4.8 14.1 17.9 17.0 14.9 12.3 10.9 9.3 4.2 3.7 3.3 2.1 2.6 2.8 24.9 23.1 23.5 69.3 Mindtree REDUCE 517 540 4.5 86,685 1,295 168 35.9 32.3 39.0 12.5 (10.0) 20.8 14.4 16.0 13.2 10.0 9.2 7.6 3.6 3.1 2.7 2.0 1.7 2.0 27.4 21.1 22.0 5.5

Mphasis SELL 525 460 (12.3) 110,269 1,648 210 34.5 38.1 40.0 6.8 10.7 4.9 15.2 13.8 13.1 9.5 8.3 7.6 1.8 1.7 1.6 — 3.6 3.8 12.3 12.4 12.4 1.1 -

RESEARCH

TCS REDUCE 2,359 2,425 2.8 4,648,338 69,459 1,970 122.9 132.2 145.2 22.5 7.5 9.8 19.2 17.9 16.3 14.1 12.7 11.2 6.4 5.4 4.6 1.8 2.2 2.5 37.1 32.6 30.4 48.0 2016 14, September Tech Mahindra BUY 464 540 16.4 450,309 6,729 872 35.8 36.3 41.5 19.0 1.5 14.2 13.0 12.8 11.2 9.4 8.6 7.1 2.8 2.5 2.1 1.3 2.7 1.3 23.4 20.7 20.3 11.6 Wipro REDUCE 480 485 1.0 1,167,722 17,449 2,467 36.0 34.5 38.3 2.8 (4.2) 10.9 13.3 13.9 12.5 8.7 8.3 7.2 2.5 2.3 2.1 1.2 1.0 1.0 20.3 17.2 17.2 15.5 Technology Attractive 10,048,665 150,154 9.5 8.2 10.1 17.6 16.3 14.8 12.5 10.9 9.6 4.4 3.8 3.4 1.8 2.3 2.5 24.8 23.5 22.8 180.5

Telecom Bharti Airtel BUY 318 365 14.8 1,271,373 18,998 3,997 9.8 9.1 7.9 (35.3) (6.5) (12.9) 32.6 34.8 40.0 6.5 6.3 6.4 1.9 1.9 1.8 0.4 0.7 0.7 6.1 5.4 4.6 20.0 Bharti Infratel ADD 343 400 16.5 634,970 9,488 1,897 12.6 15.7 17.0 19.4 25.2 8.3 27.3 21.8 20.2 11.2 10.4 9.5 3.5 3.8 3.6 0.9 3.1 3.4 13.5 16.5 18.4 13.0 IDEA BUY 83 105 26.8 298,147 4,455 3,601 8.6 1.1 (2.7) (2.8) (87.1) (341.5) 9.7 75.2 (31.1) 5.3 6.6 7.2 1.2 1.3 1.3 0.7 1.9 2.5 12.6 1.6 (4.1) 15.4 Tata Communications ADD 496 515 3.8 141,346 2,112 285 1.6 11.2 17.3 (56.1) 584.3 54.4 302.3 44.2 28.6 8.3 7.4 6.6 (33.8) (74.9) 46.1 1.1 1.3 1.3 (96.7) (105.4) 838.2 6.0 Telecom Cautious 2,469,663 36,903 (16.0) (22.5) (14.7) 24.5 31.6 37.0 6.9 6.9 6.9 1.7 1.8 1.7 0.6 1.4 1.6 7.1 5.6 4.7 71.7 Utilities Adani Power SELL 27 26 (5.1) 91,350 1,365 3,334 1.5 2.8 4.7 132.8 93.8 64.2 18.7 9.6 5.9 7.2 6.5 5.6 1.2 1.1 0.9 — — — 7.5 12.1 17.1 2.9 CESC ADD 637 685 7.4 84,485 1,262 133 27.9 54.4 70.8 86.6 94.9 30.0 22.8 11.7 9.0 8.6 7.2 6.7 0.9 0.9 0.8 1.6 1.6 1.7 4.3 7.9 9.7 3.2 JSW Energy ADD 79 80 1.1 129,728 1,938 1,640 7.6 7.4 8.7 (10.0) (2.4) 17.5 10.4 10.7 9.1 6.9 6.0 5.4 1.5 1.4 1.2 2.5 2.5 2.5 15.5 13.6 14.4 5.0 NHPC REDUCE 26 24 (6.4) 283,963 4,243 11,071 2.7 2.8 3.4 17.2 4.1 22.1 9.7 9.3 7.6 7.3 7.6 6.1 0.9 0.9 0.8 5.8 6.1 7.5 9.5 9.6 11.3 1.8 NTPC BUY 153 180 17.8 1,260,319 18,833 8,245 11.5 11.5 14.3 (2.6) (0.2) 24.7 13.3 13.3 10.7 12.7 11.2 9.2 1.4 1.3 1.2 2.4 2.3 2.8 11.1 10.3 12.0 10.1 Power Grid BUY 180 210 16.5 942,994 14,091 5,232 11.4 13.8 15.1 18.6 20.7 10.0 15.8 13.1 11.9 11.0 9.6 8.3 2.2 2.0 1.7 1.3 1.5 1.7 14.7 15.8 15.5 12.8 Reliance Power SELL 52 36 (30.1) 144,464 2,159 2,805 4.9 4.8 5.3 32.6 (1.1) 11.1 10.6 10.7 9.7 9.4 9.3 8.1 0.7 0.6 0.6 (1.9) — — 6.6 6.2 6.5 3.0 Tata Power ADD 74 80 7.7 200,954 3,003 2,800 5.5 5.5 6.2 965.8 0.9 12.1 13.5 13.4 11.9 8.3 8.9 8.3 1.4 1.3 1.2 1.7 1.6 1.6 10.5 10.0 10.4 6.4 Utilities Attractive 3,138,257 46,894 24.8 9.1 20.0 13.4 12.3 10.2 9.9 9.1 7.9 1.4 1.3 1.2 2.0 2.2 2.6 10.5 10.6 11.7 45.4 Others Astral Poly Technik REDUCE 458 425 (7.1) 54,786 819 120 8.4 11.1 14.8 31.0 31.7 34.2 54.5 41.4 30.8 27.1 20.8 16.3 7.0 6.0 5.1 0.1 0.1 0.1 14.4 15.7 17.9 0.3 Cera Sanitaryware REDUCE 2,356 2,050 (13.0) 30,646 458 13 64.2 73.7 93.2 23.4 14.9 26.4 36.7 32.0 25.3 21.2 18.7 14.8 7.3 6.1 5.0 0.4 0.4 0.4 21.6 20.8 21.8 0.4 Dhanuka Agritech BUY 671 780 16.2 33,571 502 50 21.3 26.2 32.5 0.6 22.6 24.3 31.5 25.6 20.6 23.4 18.5 14.9 7.0 5.9 4.9 1.0 1.0 1.2 23.9 24.9 25.9 0.3 Godrej Industries REDUCE 416 390 (6.3) 139,823 2,089 336 14.4 17.6 20.6 21.1 22.4 17.0 28.9 23.6 20.2 31.3 18.5 16.4 4.0 3.5 3.0 0.4 0.4 0.4 14.4 15.8 16.1 2.9 HSIL ADD 340 345 1.6 24,552 367 72 12.3 14.6 19.1 4.2 18.9 30.6 27.6 23.2 17.8 9.3 9.6 7.9 1.8 1.7 1.6 1.2 1.2 1.2 6.6 7.5 9.2 0.7 InterGlobe Aviation ADD 865 1,020 17.9 311,690 4,657 351 56.7 53.2 73.9 50.5 (6.2) 38.8 15.2 16.3 11.7 10.0 10.6 7.4 17.9 12.6 8.8 5.5 3.1 4.3 188.2 92.0 88.4 7.8 Kaveri Seed BUY 337 520 54.5 23,237 347 69 25.1 37.5 45.3 (42.7) 49.2 20.8 13.4 9.0 7.4 9.6 6.4 5.0 2.5 2.1 1.8 0.0 3.3 4.0 20.5 25.5 26.1 3.5 PI Industries ADD 819 840 2.6 112,266 1,678 136 22.6 28.6 33.4 35.3 26.5 16.9 36.2 28.6 24.5 26.6 20.8 17.3 9.7 7.6 6.0 0.4 0.5 0.6 30.1 29.6 27.3 1.5 Rallis India ADD 219 240 9.7 42,560 636 194 7.4 10.2 12.8 (9.0) 38.7 25.8 29.8 21.5 17.1 18.8 13.8 10.8 4.7 4.1 3.5 1.1 1.4 1.5 16.7 20.6 22.4 1.3 Tata Chemicals ADD 530 560 5.6 135,123 2,019 255 30.6 40.9 54.3 6.1 33.5 32.9 17.3 13.0 9.8 9.5 7.8 6.4 2.2 2.0 1.5 1.9 1.9 1.9 13.5 16.3 17.8 6.5 TeamLease Services ADD 1,085 1,175 8.3 18,550 277 16 15.9 22.2 29.3 (20.7) 39.2 32.2 68.2 49.0 37.0 62.7 36.6 24.6 5.4 5.3 4.6 — — — 10.8 11.5 13.4 0.6

UPL ADD 649 660 1.7 329,040 4,917 429 31.8 Daily Summary India 36.2 43.5 18.3 13.9 20.1 20.4 17.9 14.9 13.3 11.0 9.3 4.1 3.4 2.8 0.8 0.7 0.8 21.5 22.4 20.7 16.0 Whirlpool REDUCE 924 900 (2.6) 117,242 1,752 127 19.4 24.6 29.8 16.9 26.8 21.1 47.7 37.6 31.0 28.5 22.9 19.2 10.1 7.9 6.6 — — 0.6 23.7 23.6 23.3 0.6 Others 1,317,887 19,693 21.9 19.9 27.5 23.0 19.2 15.1 14.4 12.2 9.9 5.6 4.4 3.6 1.8 1.3 1.7 24.1 23.0 23.6 41.2 KIE universe 80,744,542 1,206,538 (5.7) 21.6 21.3 22.7 18.7 15.4 12.0 10.5 9.0 2.7 2.4 2.2 1.7 1.5 1.8 11.9 13.1 14.4 KIE universe (ex-energy) 71,125,635 1,062,806 (9.0) 25.5 23.5 25.3 20.2 16.4 13.2 11.4 9.8 3.1 2.8 2.5 1.6 1.5 1.7 12.1 13.7 15.2

Notes: (a) We have used adjusted book values for banking companies. (b) 2016 means calendar year 2015, similarly for 2017 and 2018 for these particular companies. (c) Exchange rate (Rs/US$)= 66.92 Source: Company, Bloomberg, Kotak Institutional Equities estimates

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September 14, 2016 September 14,

74

Economy India

"Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Hitesh Goel, Murtuza Arsiwalla, M.B. Mahesh, Nischint Chawathe, Tarun Lakhotia, Abhishek Poddar, Mohan Lal, Suvodeep Rakshit."

Kotak Institutional Equities Research coverage universe Distribution of ratings/investment banking relationships Percentage of companies covered by Kotak Institutional 70% Equities, within the specified category.

60% Percentage of companies within each category for which Kotak Institutional Equities and or its affiliates has 50% provided investment banking services within the previous 12 months. 40% 35.0% * The above categories are defined as follows: Buy = We expect this stock to deliver more than 15% returns over 30.0% 30% the next 12 months; Add = We expect this stock to 22.2% deliver 5-15% returns over the next 12 months; Reduce = We expect this stock to deliver -5-+5% returns over 20% the next 12 months; Sell = We expect this stock to deliver 12.8% less than -5% returns over the next 12 months. Our 10% target prices are also on a 12-month horizon basis. 2.2% 3.3% 2.2% These ratings are used illustratively to comply with 0.0% applicable regulations. As of 30/06/2016 Kotak 0% Institutional Equities Investment Research had BUY ADD REDUCE SELL investment ratings on 180 equity securities. Source: Kotak Institutional Equities As of June 30, 2016 Daily Summary India

Ratings and other definitions/identifiers

Definitions of ratings

BUY. We expect this stock to deliver more than 15% returns over the next 12 months.

ADD. We expect this stock to deliver 5-15% returns over the next 12 months.

REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.

-

SELL. We expect this stock to deliver <-5% returns over the next 12 months. 2016 September 14,

Our target prices are also on a 12-month horizon basis.

Other definitions

Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations: Attractive, Neutral, Cautious.

Other ratings/identifiers

NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances.

CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.

NC = Not Covered. Kotak Securities does not cover this company.

RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.

NA = Not Available or Not Applicable. The information is not available for display or is not applicable.

NM = Not Meaningful. The information is not meaningful and is therefore excluded.

75 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Corporate Office Overseas Affiliates

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