INDIA DAILY

October 11, 2018 India 10-Oct 1-day 1-mo 3-mo Sensex 34,761 1.3 (7.1) (4.2) Nifty 10,460 1.5 (7.3) (4.5) Contents Global/Regional indices Dow Jones 25,599 (3.1) (1.4) 3.6 Special Reports Nasdaq Composite 7,422 (4.1) (6.9) (3.8) Theme Report FTSE 7,146 (1.3) (1.8) (5.9) Media: OTT: New dawn rising Nikkei 22,803 (3.0) 0.6 4.0 Hang Seng 26,193 0.1 (0.9) (7.5) Daily Alerts KOSPI 2,174 (2.4) (4.8) (4.7) Change in Reco Value traded – India Cash (NSE+BSE) 411 421 384 Zee Entertainment Enterprises: Odds mount Derivatives (NSE) 11,942 8,015 5,864

Company alerts Deri. open interest 3,655 4,131 3,632 Sun TV Network: Priorities not cognizant of changing landscape

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Cement: 2QFY19E preview - no cheer yet 10yr govt bond, % 8.2 (2) (19) -

Net investment (US$ mn) Consumer Products: 2QFY19E preview: modest improvement in underlying growth trends 9-Oct MTD CYTD (1,687 FIIs (111) (3,692) ) MFs 142 990 14,710

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ARBP IN Equity 780 1.7 (1.4) 28.0

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

India OCTOBER 11, 2018 THEME BSE-30: 34,761 OTT: New dawn rising. We expect explosive growth in digital video consumption over the next five years, led by a fast-evolving ecosystem, consumption trends and massive investments by global and local players. Competition is more intense than anticipated and platform-plays are putting pure-plays at some disadvantage. Local broadcasters’ cost of doing business is likely to rise and maintaining a fair share in the OTT market would be difficult given the stiffly competitive landscape. These trends and concerns underpin our sharp cut in target PE multiples for broadcasting stocks - we downgrade Zee to REDUCE (TP `430 from `600) and maintain REDUCE on Sun (TP `660 from `925).

OTT: trends gather pace; expect screen convergence and TV-to-OTT shift in ad spends in 4 years  We expect 52% CAGR in OTT (over-the-top) consumption over the next five years, propelled by a fast-evolving ecosystem and consumption trends, and massive investments by global and local players. OTT is likely to contribute 25% to overall video (TV + OTT) consumption in FY2023E (9% at present). Unlike developed markets, a bulk of the OTT consumption in India would be driven by advertising-led platforms resulting in an abundant supply of OTT ad inventory that would compete with TV. We expect overall video advertising to gain share from print and non- video digital mediums. However, within video advertising, TV is likely to begin losing share to OTT in 3-4 years. The OTT subscription opportunity is limited for now, given the low willingness and ability of Indian consumers to pay for content. We see negligible risk to Pay-TV subscription.

Competition intense: Indian OTT’s ‘e-com’ moment

The enthusiasm of global companies for Indian OTT is overwhelming; we would venture that it may be disproportionate relative to the market opportunity. Global players/platform-plays (Netflix, Amazon Prime, Jio and Youtube) can take the long-term view and outspend others. It is difficult to call out winners, but we note the three key attributes for success in OTT: (1) content capability, (2) technology, and (3) capital. Global players/platform-plays are strong in at least two of these areas. We see two challenges for OTT pure-play platforms of local broadcasters such as Zee: (1) increase in cost of doing business, and (2) difficultly in maintaining its fair share in the more-competitive and fragmented OTT market. Given this backdrop, we believe local broadcasters such a ZEE5 would be better positioned with a Hulu-like collaborative approach or a JV partner with complementary strengths.

Zee: Odds mount. Downgrade to REDUCE and cut TP to `430

Zee’s execution in the TV broadcasting business continues to be flawless but the intensity and quality of competition pose challenges for ZEE5. Zee’s fortunes are not only dependent on ZEE5’s execution but also on the strategy and execution of its ferocious competition (external factors). In our view, Zee may have to either increase its capital outlay for ZEE5 and/or adopt a collaborative approach (JV partnership) to better tackle external risks. We cut PE multiple to capture the medium-term risk to TV business and uncertainties in OTT. We value Zee at 21X Sep-20E EPS (19X for core + 2X for optionality of ZEE5; 28X earlier); TP revised to `430 (`600).

Sun: Priorities not cognizant of changing landscape. Stay cautious, cut TP to `660 Jaykumar Doshi Sun’s underinvestment in OTT and viewership share loss in Tamil GEC could sustain its underperformance. We believe Sun needs to step up investment in digital and prioritize it over regional expansion, if necessary. Penetration of TV and internet in South is higher than rest of India; potentially, this implies lower TV-penetration led opportunity and faster adoption of OTT. We cut FY2012-21E EPS by 4% and target PE multiple to 17X Sep-20 EPS (from 24X).

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

OTT: Executive Summary of FAQs

In the following pages we have examined five FAQs on OTT at length. Here is a quick view.

#1: Size of OTT opportunity: US$3.1 bn by FY2023E at a CAGR of 48% on low base

We estimate over-the-top (OTT) revenue will increase to US$3.1 bn at a CAGR of 48% over FY2018-23E, driven by (1) digital video advertising ballooning to US$2.2 bn at a 43% CAGR and (2) OTT subscription increasing to US$0.9 bn at a 67% CAGR. We expect online video consumption (watch time) to grow at 52% CAGR and contribute 25% to total video (TV+digital) consumption in FY2023E from the present 9%. We expect the share of video in total ad spends to increase to 51% from 46%; TV’s share will likely drop 300 bps to 39% whereas digital video would gain 800 bps to 12% of total ad spends. (Exhibit 13)

Our underlying assumptions are: (1) about 500-550 mn daily active users (DAUs) with average time spent (ATS) of 100 mins/day in FY2023E versus 200-225 mn users spending 60-70 mins/day at present. To put this in perspective, TV has 614 mn daily tune-ins and ATS of 228 mins/day at present, (2) the launch of a third-party digital viewership measurement product (BARC’s Ekam) by the end of CY2019, and (3) Jio-led proliferation of the high- speed fixed-line broadband in the top 70-80 cities within 2-3 years.

#2: Risk to TV: Not in the next 3-4 years, likely thereafter

We expect India’s OTT video services market to largely grow through advertising video on demand (AVOD) rather than subscription video on demand (SVOD), the primary mode of digital video consumption in most developed markets. Abundant supply of OTT video ad inventory would pose some risk to TV ad spends 3-4 years out. TV advertising as yet beats digital advertising in several ways (1) reach: TV offers a reach of 836 mn viewers versus 250 mn monthly active users (MAUs) of OTT platforms, (2) lack of third-party viewership measurement for digital video, (3) perception of ad impact being bigger on larger screens (TV) than on mobile, (4) pricing: TV is more efficient on cost-per-thousand views. These concerns around digital advertising would be resolved in the next 2-3 years, paving the way for some shift in ad spends to OTT from TV. We see little risk to Pay-TV subscription revenue growth in the foreseeable future given the under-penetration of TV and lack of price arbitrage between cable TV bundles and SVOD services.

We expect the convergence of screens from a consumer and advertiser standpoint. We do not aver that TV will stop growing or decline in the near future.

#3: OTT winners: Platform-plays have the edge, but too early to call

It is difficult to call out winners or to predict if it will be a ‘winner-takes-most’ market. Three key attributes for success in OTT are (1) content capability, (2) technology/product, and (3) capital. Jio, Hotstar, Amazon Prime, Netflix, YouTube and Facebook are strong in at least two of these three areas. Further, Jio, Amazon and Netflix have an edge in terms of their global viewer base and/or other businesses (platform-play) that allow them to outspend others. YouTube and Facebook have scale (180-200 mn DAUs) and solid engagement driven by their evolved recommendation engines and monetization strength. Hotstar has made a mark thanks to sports content and its impressive handling of huge live-streaming traffic.

ZEE5 scores well on the first attribute but scores low on the second and third relative to the competition. Its success depends not only on its own execution (internal factors) but also on the strategy/execution of its competition, especially, Jio and Hotstar (external factors).

We believe ZEE5 would be better placed to tackle external risks (such as a prolonged phase of irrational competition) if it strengthens the second and third attributes through JV partnerships with companies having complementary strengths (the obvious names that come to mind are Flipkart, Hotstar, Airtel, Chinese internet players, AT&T-TWC).

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 India Media

#4: Impact on profitability

A tricky question. OTT business economics are yet to stabilize, even in mature markets. Our broad thoughts on Indian OTT industry economics: (1) content production cost is 30-50% higher than TV as fixed cost is apportioned over short 8-10 episode series in OTT as against 300+ episodes in case of TV, (2) the ad rate is better on a per-eyeball basis but absolute numbers are small due to a lack of scale, (3) subscription potential is much lower than TV at present. Medium-term profitability will be a function of the number of players in the market. Network benefits will likely be more acute in the digital ecosystem than TV.

#5: Valuation: Historical multiples do not matter as rules of the game are being redefined

Zee and Sun have long-enjoyed premium valuation multiples thanks to several factors: (1) broadcasters captured a bulk of the value in the media value chain, (2) longevity of the growth opportunity (proxy to consumption), and (3) digitization-led structural improvements in Pay-TV. A 30X P/E multiple implied 13-14% revenue CAGR over 15 years at stable profitability and cash generation (WACC of 11-11.5% and terminal growth rate of 5.5-6%). Historical valuations do not matter anymore as the rules of the game are being redefined. Given this, we lower our target PE multiple for Zee and Sun to 19X and 16X (from 28X and 24X). We ascribe an additional 2X and 1X PE multiple to factor in the optionality of ZEE5 and Sun NXT. Our revised TP for Zee is `430 (`600 earlier) and Sun is `660 (`925 earlier).

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH Media India

Exhibit 1: Snapshot of Indian TV and digital ecosystem, March fiscal year-ends, 2018-23E

FY2018 FY2023E

Demographics

Population: 1.3 bn Population: 1.37 bn

Households (HHs): 298 mn Households (HHs): 329 mn

Urban HHs: 110 mn Urban HHs: 135 mn

Rural HHs: 188 mn Rural HHs: 194 mn

Ecosystem

Internet users: 494 mn Internet users: 887 mn

Internet penetration: 38% Internet penetration: 65%

Smartphone users: 291 mn Smartphone users: 678 mn

Smartphone users: 23% Smartphone penetration: 50%

Unique 3G/4G subs: 315 mn Unique 3G/4G subs: 698 mn

3G/4G penetration: 24% 3G/4G penetration: 51%

Wireline subs: 21.1 mn Wireline subs: 48 mn

Linear TV

TV households: 197 mn CAGR: TV penetration: 66% TV consumption: TV households: 234 mn 3% TV penetration: 71% TV reach: 836 mn TV reach: 935 mn TV daily tune-ins: 614 mn TV daily tune-ins: 677 mn Avg. time spent: 228 mins Avg. time spent: 236 mins TV watch time: 140 bn mins/day

Key players: Zee, Star, TV18, TV watch time: 160 bn mins/day Sony and Sun

OTT

CAGR: OTT consumption: MAUs: 250 mn MAUs: 600-650 52% DAUs: 180-200 mn DAUs: 500-550

Avg time spent: 60-70 mins/day Avg time spent: 60-70 mins/day

Total watch time: 7 bn mins/day Total watch time: 53 bn mins/day

Monetization

CAGR: TV ad revenue: US$4 bn TV ad revenue: US$ 6.9 bn TV ad rev: 11% TV's share in ad spends: 42% Pay-TV rev: 9% TV's share in ad spends: 39%

Pay-TV subscription : US$4.9 bn Pay-TV subscription: US$7.5

OTT ad revenue: US$0.4 bn OTT ad revenue: US$2.2 bn

OTT's share in ad spends: 4% OTT's share in ad spends: 13% CAGR: OTT subscription: US$0.1 bn OTT ad rev: 43% OTT subscription: US$0.9 bn OTT sub rev: 67%

Source: BARC, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 5 India Media

#1: Size of OTT opportunity: US$3.1 bn by FY2023E at a CAGR of 48% on low base

We expect OTT revenues to increase to US$3.1 bn at a CAGR of 48% over FY2018-23E driven by (1) 43% CAGR in online (digital) video advertising to US$2.2 bn and (2) 67% CAGR in OTT subscription revenue to US$0.9 bn (B2C subscriptions excluding B2B OTT- Telco deals). Key assumptions and arguments are detailed below.

Exhibit 2: We estimate 48% CAGR in OTT revenues to US$3.1 bn over FY2018-23E OTT advertising and subscription revenues forecast, March fiscal-year ends (US$ bn)

Digital video ad spends (US$ bn) Digital video subscription revenue (net of GST) (US$ bn) 12

9 2.7

2.2

6 1.9

1.5 1.2 7.6 3 6.1 0.9 4.9 0.7 3.9 0.5 3.0 2.2 0.1 0.2 0.3 1.6 0.4 0.8 1.2 0 0.6 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E

Source: Kotak Institutional Equities estimates

A burgeoning digital ecosystem is revolutionising media consumption trends

The digital ecosystem has come a long way following the launch of Jio. Key data points (August 2018 over March 2016)—

 Internet users—increased to 525 mn from 350 mn; internet penetration up to 42% from 27%,

 Smartphone users—up to 350 mn from 215 mn; smartphone penetration at 28% of population,

 Mobile data costs plunged 95-98% to `3.5/GB and cable broadband costs have fallen 80-85% to `5-7/GB,

 Total video watch time in India has shot up 9-10X to about 14 bn mins per day (aggregate of top 8-10 OTT platforms including YouTube and Facebook videos),

 YouTube’s monthly active users (MAUs) have doubled to about 240 mn and daily active users (DAUs) have nearly quadrupled to about 180-200 mn (source: industry interactions).

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH Media India

Exhibit 3: Internet penetration in India, March fiscal year-ends Exhibit 4: Smartphone penetration in India, Calendar year-ends

Internet users (LHS, mn) Smartphone users (LHS, mn) 57 900 Internet penetration (RHS, %) 60 Smartphone penetration (RHS, %) 50 51 750 50 44 750 45 50 39 763 678 38 600 40 600 674 40 591 33 29 587 450 26 516 30 27 23 450 24 494 30 441 20 20 422 300 16 366 20 300 13 343 20 11 291 10 302 252 252 150 10 150 199 10 165 121 137

0 0 0 0

2011

2015

2012

2016

2013

2017

2014

2015

2016

2017

2018

2019E

2020E

2021E

2018E

2019E

2020E 2021E 2022E

Source: Census of India, TRAI, Kotak Institutional Equities estimates Source: e-marketer, Kotak Institutional Equities estimates

Exhibit 5: India: Mobile data cost down 98% in the past 2 years Exhibit 6: India: Mobile data usage up 11X in the past 2 years

Mobile data cost (Rs/GB) Mobile data usage (bn MB/quarter) 250 4,500 4,228 225 4,000

200 3,500

3,000 150 2,500

2,000 100 1,606 1,500

1,000 50 391 500 3.5 0 0 Sep-16 Sep-17 Jun-18 Apr-16 Sep-18

Source: Kotak Institutional Equities Source: Companies, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 7 India Media

Exhibit 7: Digital video watch time up 10-11X in the past 2 years Exhibit 8: YouTube: MAUs have doubled, time spent/user up 4X

Digital video watch time (aggregate) (bn mins per day) Youtube MAUs (mn) 16 300

14 250

12 2X 200 10

8 150

6 100 5X 4 50 2

0 0 Aug-16 Aug-17 Aug-18 Aug-16 Aug-18

Source: Kotak Institutional Equities Source: Industry interactions, Kotak Institutional Equities

We expect 52% CAGR in digital video consumption over FY2018-23E.

We expect 52% CAGR in digital video consumption over the next five years driven by:

 Digital video penetration. India has about 250 mn digital video MAUs and about 180- 200 mn digital video DAUs at present. These numbers have increased 100% and 200% respectively, over the past two years. We expect these digital video users to more than double in five years driven by (1) an increase in unique 3G/4G subscribers to about 700 mn from 315 mn, (2) increase in smartphone users to about 650 mn+ from 350 mn (India smartphone shipments at 120-130 mn/year), (3) increase in fixed-line broadband subscribers to about 45 mn from 21 mn (penetration in households to increase to 15% from 7%). Our base case assumes that Jio will launch fixed-line broadband offerings in 70-80 cities over the next 2-3 years.

 Higher engagement. At present, the average daily time spent per video viewer ranges from 25-55 mins for key OTT platforms, much lower than TV’s 228 mins/day in India and the time spent on digital content in developed markets. We expect OTT engagement to strengthen and time spent on digital platforms to increase to about 100 mins/day in FY2023E driven by (1) a shift in consumer preferences towards digital media. This will especially be the case in single-TV households wherein individuals have different content preferences and (2) a plethora of digital-exclusive original content.

Digital video advertising growth will follow consumption

We expect digital video ad spends to increase to US$2.2 bn at a 43% CAGR over FY2018- 23E. Our base case assumes the launch of BARC’s third-party digital viewership measurement system by the end of CY2019. Standardized data and metrics from a third party platform will increase the acceptance of digital video advertising among marketers.

8 KOTAK INSTITUTIONAL EQUITIES RESEARCH Media India

OTT subscription opportunity may be relatively small in the initial years

There are two types of OTT subscriptions— (1) subscription from direct customers (B2C) and (2) subscription through telco tie-ups (B2B2C content deals). Here, we assess only the B2C (direct) subscription opportunity. In our view, B2B2C subscription opportunity may not scale up beyond a certain limit as we do not expect telcos (Jio in particular) to continue to bear any meaningful content cost for a long time without seeking a share in ad revenues.

To assess the potential for direct (B2C) subscription revenues from direct customers, it is important to understand an average Indian viewers’ willingness and ability to pay for content.

 Willingness to pay for content. We believe that the Indian viewer may not pay OTT subscription for TV content. Sample this—Hotstar offers Live cricket (especially IPL) as a premium (paid) service whereas the same content can be watched with a 5-minute lag for free (AVOD). We gather that a very small percentage (less than 5-10%) of Hotstar’s viewers subscribe to the premium (paid) service. The rest watch live sports free with a lag of five mins.

We believe Indian viewers would only pay for original content. At present, most OTT platforms have limited original content in local languages.

 Ability to pay for content. We use NCCS (New Consumer Classification System) to better understand the affordability aspect. NCCS classifies households based on two variables—education of the chief wage earner and the number of consumer durables owned by the household (Exhibit 9). It captures the affordability quotient of a household. NCCS A + B strata cover a broad set of households, many of which can potentially afford to spend `100-200 per month on OTT subscriptions. India has about 100 mn Households under NCCS A + B—a stretched potential medium-term target segment for OTT subscription, in our view.

Exhibit 9: New consumer classification system (NCCS)

Education of Chief Wage Earner in a household Literate but no Some College No. of formal school/ (incl Diploma) Durables Illiterate School upto 4 yrs School- 5 to 9 years SSC/ HSC but not Grad Grad/ PG: General Grad/ PG: Professional Owned 1 2 3 4 5 6 7 0 E3 E2 E2 E2 E2 E1 D2 1 E2 E1 E1 E1 D2 D2 D2 2 E1 E1 D2 D2 D1 D1 D1 3 D2 D2 D1 D1 C2 C2 C2 4 D1 C2 C2 C1 C1 B2 B2 5 C2 C1 C1 B2 B1 B1 B1 6 C1 B2 B2 B1 A3 A3 A3 7 C1 B1 B1 A3 A3 A2 A2 8 B1 A3 A3 A3 A2 A2 A2 9 + B1 A3 A3 A2 A2 A1 A1

Notes: (1) Pre-defined list of consumer durables: Electricity Connection, Ceiling Fan, Gas Stove, Refrigerator, Two Wheeler, Washing Machine, Colour TV, Computer, Four-wheeler, Air Conditioner, Agricultural Land (in rural areas).

Source: MRUC, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 9 India Media

Exhibit 10: Composition of 298 mn Indian households as per NCCS, July 2018 (mn households , % of total households)

Urban 1mn+ | NCCS A, Urban 1mn+ | NCCS B, 15 , 5% 12 , 4% Urban 1mn+ | NCCS C, 10 , 4% Urban 1mn+ | NCCS D/E, 2 , 1% Non-TV HHs, 101 , 34% Urban below 1mn | NCCS A, 11 , 4% Urban below 1mn | NCCS B, 14 , 5% Urban below 1mn | NCCS C, 16 , 5% Urban below 1mn | NCCS D/E, 7 , 2%

Rural | NCCS A, 15 , 5%

Rural | NCCS D/E, 22 , Rural | NCCS B, 30 , 7% 10% Rural | NCCS C, 42 , 14%

Source: BARC, Kotak Institutional Equities

Paid subscriptions likely to grow to about 67 mn in FY2023E from 16 mn in FY2018

We work with the following assumptions to arrive at our estimate of 67 mn paid B2C OTT subscriptions by FY2023E (the unique subscriber count would be lower as many would have multiple subscriptions)—

(1) 4.5% CAGR in NCCS A and NCCS B households to 120 mn over FY2018-23E.

(2) 3.8% CAGR in Urban NCCS C households to 32 mn over FY2018-23E.

(3) Potential SVOD market would be 152 mn households (FY2023E) comprising urban + rural NCCS A+B (120 mn households) and urban NCCS C (32 mn households). We expect the rest of the households to be AVOD users or (B2B2C subscribers).

(4) We further break down 152 mn potential SVOD households into 49 mn potential households for premium SVOD services (monthly ARPU of `100+ net of GST; Prime/Netflix/Hotstar premium) and remaining 103 mn potential households for basic SVOD services (monthly ARPU of `35 net of GST; ZEE5, Alt Balaji, and transaction video on demand TVOD services of Hotstar/Jio).

(5) We model penetration of 53% in premium SVOD potential households and 30% in basic SVOD. We also assume that there would be no duplication of a subscription within a household. It is difficult to estimate subscription-sharing (for instance two households sharing a Netflix subscription; not uncommon in our view); our conservative penetration numbers factor in that aspect.

Based on the above assumptions, we arrive at 56 mn subscribers and ARPU of `95 in FY2023E (Exhibit 11). We have also estimated direct B2C subscriptions and subscription revenues of key OTT players in Exhibit 12.

Besides the above assumptions, we have also applied our understanding of affluent households based on (1) car ownership—India has about 22 mn unique car households at present, (2) about 35-40 mn households in India watch at least a movie/year in multiplexes (at an average ticket price of `175-200/person), and (3) about 13-14 mn active HD subscribers pay about `100/month for HD content over the SD subscription price.

We note that India has forever been a ‘low-ARPU’ Pay-TV market and ARPU growth has lagged inflation for over two decades. Given this, we remain less optimistic about any material change in paying habits in the near term.

10 KOTAK INSTITUTIONAL EQUITIES RESEARCH Media India

Exhibit 11: Assessing SVOD opportunity for Indian OTT industry based on NCCS data

FY2023E Potential HHs (mn) Penetration Subscribers ARPU Subscription FY2018 FY2023E (%) (mn) (Rs/month/sub) (Rs bn) Key assumptions/comments Premium SVOD subscribers (paying Rs100+/month net of GST) 6 metros | NCCS A+B 14 18 65 12 200 28 We expect Netflix and Amazon Prime to have the lion's share of this segment followed by Urban 1mn+ (excl 6 metros) | NCCS A+B 13 17 50 8 150 15 Hotstar (courtesy sports). ZEE5 will have a Urban below 1mn | NCCS A 11 14 40 6 120 8 small share in this revenue pool. Total premium SVOD 38 49 53 26 166 51 Basic SVOD subscribers (paying Rs35/month net of GST) Rural | NCCS A 15 19 45 8 35 4

6 metros | NCCS C 5 7 35 2 35 1 We expect Jio, Hotstar and ZEE5 to have a Urban 1mn+ (excl 6 metros) | NCCS C 5 6 35 2 35 1 dominant share in this segment. In addition, we expect TVOD transactions (pay-per-view Urban below 1mn | NCCS B 14 17 35 6 35 2 for content behind paywall) of a few other Urban below 1mn | NCCS C 16 19 25 5 35 2 platforms to contribute to this pool. Rural | NCCS B 30 36 20 7 35 3 Total basic SVOD 85 103 30 31 35 13

Total SVOD 123 152 56 95 64 Total TV subscribers 197 234 234 64 Total Pay-TV 163 196 196 223 526 SVOD as a % of Pay-TV 29 42 12 AVOD subscribers

YouTube and Facebook are strong players together having 80-85% share in digital video ad spends of about US$600 mn (CY2018E). We expect Jio, Hotstar and ZEE5 AVOD OTT MAUs (mn individuals) 250-275 550-600 to participate in this opportunity. We would not be surprised if Netflix and/or Amazon Prime also introduce AVOD offerings in India to capture this huge opportunity.

Source: Company, Kotak Institutional Equities estimates

Exhibit 12: Forecast of OTT subscription (direct subscriptions) revenue opportunity for key OTT players

FY2019E FY2023E ARPU (gross) Paying (B2C) Subscription ARPU (gross) Paying (B2C) Subscription Paying direct subscribers (mn) (Rs/sub/month) Subscribers (mn) Rs bn (net) (Rs/sub/month) Subscribers (mn) Rs bn (net) Netflix 650 0.7 4.3 650 2.7 18 Amazon Prime video (a) 42 12.0 5.1 86 32.0 28 Hotstar 83 0.8 0.6 83 11.0 9 ZEE5 42 0.3 0.1 42 7.0 3 Others (Alt Balaji, Eros Now etc) 42 2.0 0.8 42 14.0 6 Total B2C OTT subscription 58 15.7 11.0 80 66.7 64

Notes: (a) Amazon Prime subscription includes Prime video, music and Amazon shopping/delivery benefits. We have allocated 50% of Amazon Prime subscription to Prime video. (b) Subscriber numbers are not unique subscribers.

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11 India Media

Exhibits 13, 14 and 16 capture our detailed forecast of the OTT industry opportunity

Exhibit 13: Video consumption forecast, March fiscal year-ends, 2018-28E

2018 2019E 2020E 2021E 2022E 2023E 2028E TV consumption forecast Population (mn) 1,300 1,314 1,327 1,341 1,355 1,369 1,440 Total households (mn) 298 304 310 316 323 329 363

TV penetration as % of households (%) 66.0 67.0 68.0 69.0 70.0 71.0 76.0 TV households (mn) 197 204 211 218 226 234 276

TV audience per household (individuals) 4.3 4.2 4.2 4.1 4.1 4.0 3.8 Total TV audience (mn individuals) 836 855 875 895 915 935 1,035

Daily tune-ins on TV as % of TV audience (%) 73.4 73.9 74.4 74.4 73.4 72.4 66.7 Average daily TV view ers (mn individuals) 614 633 651 666 672 677 691 Average time spent (mins/day) 228 233 236 238 238 236 189

Daily TV viewing (bn mins per day) 140 147 154 159 160 160 131

Digital video consumption forecast Mobile traffic Number of 3G/4G SIMs (mn) 394 500 600 690 794 873 1,157 Less: adjustment for dual SIMs (@20%) 79 100 120 138 159 175 231 Total number of 3G/4G subscribers 315 400 480 552 635 698 925 3G/4G subscribers as % of population 24 30 36 41 47 51 64

Digital video consumption (mins/day per 3G/4G subscribers) 18 31 39 47 55 63 90 Digital video consumption (bn mins per day) 6 13 19 26 35 44 83

Wireline traffic Wireline internet subscribers (mn) 21 23 28 34 40 48 101 Wireline penetration as % of total households (%) 7 8 9 11 13 15 28 Digital video consumption (mins/day per w ireline internet subscribers) 47 70 95 124 155 185 310 Digital video consumption (bn mins per day) 1 2 3 4 6 9 31

Total digital video consumption (bn mins per day) 7 14 22 30 41 53 114

Total video consumption (bn mins per day) 147 161 175 189 201 213 245 Share of digital in total video consumption (%) 5 9 12 16 20 25 47 Share of TV in total video consumption (%) 95 91 88 84 80 75 53

Growth metrics (yoy %) Wireless internet subscribers (3G/4G) 27 20 15 15 10 5 Wireline internet subscribers 10 20 20 20 20 10 Digital video consumption 114 51 40 37 29 12 TV video consumption 5 5 3 1 (0) (5) Total video consumption 10 9 8 7 6 2

Source: BARC, Kotak Institutional Equities estimates

12 KOTAK INSTITUTIONAL EQUITIES RESEARCH Media India

Exhibit 14: Advertising spends forecast, March fiscal year-ends, 2018-28E

2018 2019E 2020E 2021E 2022E 2023E 2028E Ad spends forecast (Rs bn) TV 280 324 372 412 448 481 655 Print (1) 204 213 213 215 217 219 221 Digital (1) 125 164 215 277 351 439 1,056 - Digital video 26 39 57 81 114 156 529 - Digital non-video (search, display etc) 99 125 158 195 237 283 527 OoH 29 33 37 41 46 50 75 Radio 24 28 32 37 41 46 75 Cinema 7 8 9 10 12 14 23 Total 669 770 878 992 1,116 1,250 2,105

Ad spends growth (yoy %) TV 16.0 14.7 10.7 8.9 7.3 5.2 Print (1) 4.0 0.0 1.0 1.0 1.0 0.0 Digital (1) 31.0 31.0 29.0 27.0 25.0 16.0 - Digital video 50.0 46.0 43.0 40.0 37.0 23.0 - Digital non-video (search, display etc) 26.0 26.3 23.9 21.6 19.2 9.7 OoH 13.0 12.0 11.0 10.5 10.0 7.0 Radio 16.0 15.0 14.0 12.5 12.0 9.0 Cinema 17.0 16.0 15.0 14.0 13.5 10.0 Total 15.0 14.0 13.0 12.5 12.0 10.0

Ad spends market share by mediums (%) TV 41.8 42.1 42.4 41.5 40.2 38.5 31.1 Print (1) 30.5 27.6 24.2 21.7 19.4 17.5 10.5 Digital (1) 18.7 21.3 24.4 27.9 31.5 35.2 50.2 - Digital video 3.9 5.1 6.5 8.2 10.2 12.5 25.1 - Digital non-video (search, display etc) 14.8 16.2 18.0 19.7 21.3 22.7 25.0 OoH 4.4 4.3 4.2 4.2 4.1 4.0 3.6 Radio 3.6 3.6 3.7 3.7 3.7 3.7 3.6 Cinema 1.0 1.0 1.0 1.1 1.1 1.1 1.1 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Total video advertising TV + Digital video advertising (Rs bn) 306 363 429 493 562 637 1,184 TV + Digital video advertising grow th (yoy %) 19 18 15 14 13 12 TV + Digital video share in total ad spends (%) 46 47 49 50 50 51 56

Key metrics Share of digital in total video consumption (%) 5 9 12 16 20 25 47 Share of TV in total video consumption (%) 95 91 88 84 80 75 53 Brand-safe (BS) digital video in total BS video consumption (%) 3 7 9 13 17 21 41 Share of TV in total BS video consumption (%) 97 93 91 87 83 79 59 Share of digital in total video ad spends (%) 9 11 13 17 20 25 45 Share of TV in total video ad spends (%) 91 89 87 83 80 75 55 Digital video consumption grow th (yoy %) 114 51 40 37 29 12 Digital video ad spends grow th (yoy %) 50 46 43 40 37 23

Key numbers in US$ terms (constant exchange rate of Rs70/US$) TV ad spends (US$ bn) 4.0 4.6 5.3 5.9 6.4 6.9 9.4 Digital video ad spends (US$ bn) 0.4 0.6 0.8 1.2 1.6 2.2 7.6 Total video ad spends (US$ bn) 4.4 5.2 6.1 7.0 8.0 9.1 16.9 Total ad spends (US$ bn) 9.6 11.0 12.5 14.2 15.9 17.9 30.1

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 13 India Media

Exhibit 15: Contribution of Television, print and digital to total ad spends, December year-ends, 2007-17 (%)

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Digital China 5.4 7.1 7.9 10.8 14.8 19.4 25.5 33.1 42.3 51.7 57.8 India 2.5 3.1 3.6 3.9 4.5 5.5 6.5 7.8 9.9 13.1 15.5 Russia 5.0 5.8 9.5 12.3 15.9 18.9 21.9 24.9 34.7 37.4 39.9 UK 21.4 26.0 30.9 32.9 33.6 37.8 40.9 44.5 48.7 52.1 56.4 US 12.7 14.5 17.5 19.1 20.8 22.0 24.2 26.2 28.9 31.3 35.0

Television China 65.0 62.8 62.8 59.0 56.8 54.0 50.3 45.8 40.6 34.2 29.3 India 37.3 38.4 38.9 40.0 42.0 42.2 43.6 44.6 46.3 45.5 45.6 Russia 44.0 45.8 51.7 50.7 49.7 48.1 47.7 47.0 42.4 41.5 41.0 UK 26.6 26.1 26.3 27.7 27.6 26.5 26.9 26.2 26.0 24.9 22.9 US 40.6 42.2 42.7 44.0 44.2 44.4 43.4 43.6 42.6 42.3 41.0

Print China 17.7 16.7 16.7 17.1 15.8 13.6 11.7 8.9 5.4 2.9 2.0 India 49.4 47.1 45.6 44.5 42.3 41.1 39.0 37.0 33.8 31.4 29.0 Russia 25.7 24.8 19.1 17.3 15.3 13.8 11.3 9.7 7.3 6.1 4.9 UK 41.6 37.7 32.8 29.6 29.3 25.8 22.9 20.3 16.8 14.4 12.5 US 38.7 36.0 32.4 29.7 27.9 26.5 25.4 23.6 22.0 20.1 17.8

Source: GroupM, Kotak Institutional Equities

Exhibit 16: Subscription revenue forecast, March fiscal year-ends, 2018-28E

2018 2019E 2020E 2021E 2022E 2023E 2028E Subscription revenue forecast (Rs bn) (net of GST) Pay-TV subscription revenue forecast (consumer-level net of GST) Pay-TV subscription revenue (Rs bn) 343 374 408 444 484 526 756 Pay-TV subscribers (mn) 163 170 176 183 190 196 232 Pay-TV ARPU (Rs/sub/month) (net of GST) 175 184 193 203 213 223 272 Pay-TV subscription revenue growth (%) 9 9 9 9 9 7

OTT subscription revenue forecast (consumer-level net of GST) Digital video subscription revenue (Rs mn) (net of GST) 5 11 24 35 48 64 189 Digital video subscribers (mn) 7 16 28 40 54 67 128 Digital video ARPU (Rs/sub/month) (net of GST) 58 58 72 73 75 80 123 OTT subscription revenue growth (%) 122 121 44 37 33 21

Total video subscription TV + Digital video subscription (Rs bn) 385 432 479 532 590 945 TV + Digital video advertising growth (yoy %) 12.2 11.0 11.1 10.8 9.9 Digital video share in total subscription revenues (%) 2.9 5.6 7.3 9.0 10.8 20.0 TV share in total subscription revenues (%) 97.1 94.4 92.7 91.0 89.2 80.0 Total video subscription revenue growth (%) 12 11 11 11 10

Key numbers in US$ terms (constant exchange rate of Rs70/US$) Pay-TV subscription revenue (US$ bn) 4.9 5.3 5.8 6.3 6.9 7.5 10.8 Pay-TV ARPU (US$/sub/month) 2.5 2.6 2.8 2.9 3.0 3.2 3.9 Digital video subscription revenue (net of GST) (US$ bn) 0.1 0.2 0.3 0.5 0.7 0.9 2.7 Digital video ARPU (US$/sub/month) 0.8 0.8 1.0 1.0 1.1 1.1 1.8 Total video subscription revenue (US$ bn) 5.0 5.5 6.2 6.8 7.6 8.4 13.5

Source: Company, Kotak Institutional Equities estimates

14 KOTAK INSTITUTIONAL EQUITIES RESEARCH Media India

Exhibit 17: China: AVOD-led OTT evolution; SVOD model gained traction with lag China: OTT advertising and subscription revenues, Calendar year-ends, 2012-22E (RMB bn)

China: OTT subscription revenue (RMB bn) China: OTT ad revenue (RMB bn) 140 125.8 120 114.7 95.6 100 77.1 73 80 67.3 61.2 56.3 60 46.3 44.6 40 32.6 33.3 23.3 23.6 15.2 20 9.8 12.1 6.7 5.2 0.4 0.7 1.4 0 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E

Source: iResearch Report, Kotak Institutional Equities

#2: Risk to TV: Not in the next 3-4 years, likely thereafter

There are two parts to this question— (1) Risk to Pay-TV subscription revenues, and (2) Risk to TV advertising revenues. We detail our thoughts.

Cord cutting fears are unwarranted; we see negligible risk for a foreseeable future

A key reason for cord cutting in several developed countries is the price arbitrage between cable TV bundles and SVOD services, and a conducive digital ecosystem (high penetration of fixed-line broadband and high penetration of smart TVs). The dynamics are completely opposite in India. For instance (1) SVOD services cost more than Pay-TV bundles, (2) fixed- line broadband penetration and smart TV penetration is low, and (3) TV subscriber growth story still has legs in view of 66% TV penetration in total households and about 84% Pay-TV penetration in TV households. An average Indian family’s size is 4.25 individuals per household; Pay-TV bundles cater to diverse content preferences of a household at a nominal price of `250-300/month (about `1/channel).

Exhibit 18: Pricing and ecosystem dynamics in India not conducive for cord cutting Comparison of factors influencing cord-cutting in India and US, August 2018

US India Price of cable (Pay-TV) bundle $80 INR 300 Aggregate price of top 3 SVOD services $34 INR 625 Top-3 SVOD services as % of cable (Pay-TV) bundle 43 208

TV penetration in total households (%) 95 66 Multi-TV household penetration (%) 60+ 3 Fixed-line broadband penetration (%) 80 7 CRT TV penetration (%) NA 79 LED/LCD/Plasma/HDTV TV penetration (%) 75+ 21 Connected-TV homes penetration (%) 65+ NA

Source: BARC, Kotak Institutional Equities

That said, we do not rule out some cord cutting in multiple TV households as we expect OTT platforms to replace second/third Pay-TV in a household. Additionally, we note that most of the TV channels are available on Jio TV live at no cost. If this trend continues, there is a possibility of cord cutting in a small percentage of households that are light consumers of TV or extremely price conscious. Overall, we expect TV and Pay-TV penetration-led growth to continue for the foreseeable future.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 15 India Media

Exhibit 19: India's 66% TV penetration offers ample of headroom for growth TV households and penetration, March fiscal-year ends

TV households (LHS, mn) TV penetration as % of total households (RHS, %) 250 66 70 64

200 60 54 197 183 150 46 50 143 40 100 40 106 83 50 30

0 20 2004 2008 2013 2016 2018

Source: Company, Kotak Institutional Equities

Screen convergence can trigger shift in advertising to OTT from TV

Unlike US, where digital video consumption is largely SVOD, we expect an AVOD-led evolution in India. This could imperil TV ad spends 3-4 years out. We expect digital video advertising in India to follow a higher growth trajectory than in other markets.

Even as digital video advertising is a part of all major ad campaigns nowadays, we highlight three key concerns of marketers against digital video advertising:

 Digital video scale and reach is inadequate at present. TV offers unparalleled reach and scale to advertisers. Sample this, (1) India’s TV universe includes 836 mn individuals of which 614 mn tune-in daily, (2) Hindi GECs reach 315 mn individuals every day, and (2) Zee TV’s channels reach 75 mn individuals daily. On the other hand, monthly active digital video users are about 250 mn and daily active digital video users stand at 180-200 mn. Digital video is far behind TV in terms of overall scale and reach. This gap will narrow with time making digital more competitive. We note that digital video is not too far behind in terms of scale and reach in the top 10 cities when compared to a single TV channel.

16 KOTAK INSTITUTIONAL EQUITIES RESEARCH Media India

Exhibit 20: TV's reach is multiple times that of digital video Reach of TV and YouTube in terms of mn individuals (Aug 2018)

900 836

750 614 600 535

450 315 300 240 180

150 70

0 TV individuals Avg. daily Hindi GEC- Hindi GEC- Zee TV-daily Youtube Youtube (mn) tune-ins on TVmonthly reach daily reach reach (mn) DAUs (mn) MAUs (mn) (mn) (mn) (mn)

Source: BARC, Kotak Institutional Equities estimates

 Lack of third party viewership measurement. TV enjoys advertisers’ trust thanks to BARC’s viewership measurement system. On the other hand, digital video advertising tends to attract a bit of skepticism due to the lack of a third party measurement system, different definitions of views across large players (YouTube, Facebook, Hotstar, etc.) and advertisers do not have a way to find out if and when the ad was telecast. In order to address this, BARC is in the process of building a digital viewership measurement system that allows advertisers to compare viewership metrics across digital platforms and also with TV. BARC’s technical sub-committee for this project has representatives from major OTT platforms and advertising agencies. We expect this product to be rolled out sometime in CY2019 and accepted as currency sometime in CY2020. We believe BARC’s digital measurement insights could swing ad spends to OTT from TV.

 Small-screen (mobile) advertising not as impactful as large-screen (TV) advertising. At present, the bulk of digital video consumption in India (say 75%+) is on small screens (mostly mobile phone). The general belief among media planners and advertisers is that an advertisement aired on TV is far more impactful than one aired on mobile screens (everything else being constant). As of now, there is no research that confirms or disproves this hypothesis. In our view, acceptance of and faith in mobile advertising will increase gradually over time. Further, with increase in wireline broadband penetration and smart TVs, digital video consumption may shift a bit from small screen to large screens.

 Pricing. At present, TV is a lot more efficient than digital video on cost per thousand views and cost per thousand impressions. That said, we do note that this comparison is not like for like—(1) there is wastage on TV as it does not allow targeting whereas advertising on digital video is usually targeted, and (2) digital video viewer base perhaps comprises of individuals better-valued by advertisers (urban, youth and higher proportion of NCCS A/B). Given surplus inventory on digital video, we expect prices to converge over time adjusted for viewer quality.

We expect the above four concerns to be largely resolved over the next 3-4 years, paving the way for acceleration in growth of OTT advertising. As the convergence-of-screens theme plays out, media planners will no longer treat TV and digital video as different but one and the same. On convergence, we expect video advertising to gain market share from non- video advertising (print media and non-video digital) as this highly effective branding medium also offers sophisticated targeting tools.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 17 India Media

Exhibit 21: Digital video is 2-3X expensive but offers targeted advertising Cost per thousand views of a 30-second advertisement on TV and digital video (CPM in Rs)

450 Rs350-500 Rs350-500 400

350

300

250

200 Rs130-150 150

100

50

0 Hindi GEC- Prime time slot Youtube / Facebook Hotstar

Source: Kotak Institutional Equities

Analysis of viewership of different TV genres to assess risk of shift to OTT

In our view, TV genres popular among - (1) male viewers, (2) young viewers (say under 40 age group), (3) urban viewers and (4) NCCS A+B viewers, are more vulnerable to the shift in consumption and ad spends to OTT, in the medium-term. As highlighted in Exhibit 22, we expect English entertainment, sports, kids and perhaps news genres to be affected first. This would be followed by Hindi movies and Hindi GEC. We see minimum risk to regional genres based on their viewership composition and also as we expect the bulk of the investments in OTT originals to be directed towards Hindi entertainment at least early on.

Exhibit 22: English entertainment, sports, kids and Hindi movie genres are vulnerable to disruption from OTT in the same order TV viewership mix of key genres by gender, age groups, NCCS classification and urban/rural, July-September 2018

Ad spends Viewership Gender share (%) Age share (%) NCCS share (%) Geo Share (%) share (%) share (%) Male Female 2-40 40+ A+B CDE Urban Rural Hindi entertainment- moderate risk of impact from digital Hindi GEC (Paid) 22 12 47 53 69 31 57 43 68 32 Hindi movies 8 8 54 46 72 28 50 50 64 36 Hindi GEC+movies (FTA) 7 20 51 49 75 25 39 61 28 72 Total Hindi 37 41

Regional entertainment- Low risk of impact from digital Regional GEC- South 16 27 47 53 63 37 46 54 46 54 Regional movies- South 2 5 51 49 68 33 37 63 37 63 Regional GEC (HSM) 9 10 48 52 61 39 45 55 44 56 Regional movies (HSM) 1 2 50 50 69 31 35 65 36 64 Total regional 27 44

Other genres- High risk of impact from digital English movies+GEC 5 1 55 45 67 33 58 42 62 38 Sports 10 2 59 41 67 33 56 44 56 44 Youth/Music 3 4 45 55 76 24 42 58 49 51 Kids 4 5 53 47 80 20 50 50 61 39 News 11 3 55 45 61 39 59 41 54 46 Other misc 4 1 Total others 35 15

Total TV 100 100 50 50 68 32 47 53 47 53

Source: BARC data, Kotak Institutional Equities estimates

18 KOTAK INSTITUTIONAL EQUITIES RESEARCH Media India

#3: OTT winners: Platform-plays have the edge, but too early to call

A snapshot of key OTT landscape

Exhibit 23: List of select OTT (AVOD/SVOD) platforms in India

Platform Youtube Jio Netflix Prime Hotstar ZEE5 Voot Sony Liv Sun NXT Eros Now ALT Balaji Reliance Sony Pictures EROS Balaji Owned by Google Netflix Amazon STAR Zee Viacom18 Industries Network International Telefims Revenue model AVOD AVOD SVOD SVOD AVOD / SVOD AVOD / SVOD AVOD AVOD/ SVOD SVOD SVOD SVOD Telco tie-ups Subscription Free Free Rs 500- Rs1,000/year Hostar Premium: Premium Free Rs99/month, Rs49- Rs300/year 800/month Rs129/month Rs1,000/year content: Rs149/3 months, 99/month Rs199/month Rs500/year Rs499/12 months and Rs470- Rs49/month 950/year

Content type User generated Aggregator International Movies- Sports- Key cricket Zee's content Movies Select Bollywood Movies and Movies and Original content model-- Carries content of Bollywood, /sporting events library (movies Viacom18 and Hollywood TV content music across (digital-only Content of few Live TV feeds (Netflix Originals Hollywood and HBO Originals and shows) fiction and non- movies of Sun Indian or digital free broadcasters/ and catch-up TV + some licensed regional ABC studios Content of fiction content TV content of Network languages content) content content of most content) Amazon original Showtime select smaller Kids content Sony and Ten Targets 250 producers broadcasters. Indian films series, select 21st Century Fox broadcasters of almost all Sports hours of To produce Eros Now and TV shows with foreign soaps and content International big studios original some original Alt Balaji original content kids programming All Star India content and content content in content going premium Planning to step Producing a few channels digital original producers first year forward content up original originals in India Bollywood and series Voot Originals available to Jio content Hollywood movies Prime production in Hotstar originals subscribers India

MAUs (mn) 220-240 40-50 10-15 25-35 75-100 25-35 30-40 20-30 2-5 NA NA DAUs (mn) 170-190 8-10 4-5 5-7 14-18 3-4 4-6 3-5 0-0.5 NA NA

Source: Kotak Institutional Equities

Our 10-point framework to assess strengths of select OTT players

We use a 10-point framework to assess strengths of key OTT players. Our grading takes into consideration (1) existing capabilities of players and nuances of the Indian market, and (2) the ability to build/acquire capabilities that can lend a sustainable competitive advantage. Further thoughts on the four broad areas

 Content. Content libraries (which include live TV content) lend an edge to broadcaster- led platforms such as Hotstar and ZEE5. Global players do not have this advantage but can license some old content from studios (and create movie libraries) for a couple of hundred million dollars. Content production capability is key for sustainable competitive advantage. Local players understand the tricks of the trade and preferences of Indian audience whereas global players have the ability to attract the best talent, adopt best practices and use data/analytics for content decisions.

 Product and technology. User-friendliness of app (e.g. multi-lingual and voice-based support) and streaming experience helps early on. We expect this aspect of the product to become a commodity in the near to medium term. Recommendation engine and advanced analytics capabilities may offer a sustainable competitive edge in the medium to long term. It will help improve user engagement, enable programmatic advertising and take content decisions. Global players have an edge given their engineering prowess. Local players may have to depend on third-party vendors to some extent. We note that Hotstar delivered the best-in-class live streaming service during the IPL powered by an in- house engineering team.

 Capital/platform play. Global players and RJio have deep pockets and/or a global viewer base and/or other businesses (ecommerce/telecom) that can allow it to economically outspend standalone OTT players. Big boys have the luxury to invest more, burn more in pursuit of market share without worrying about cash flows. The street rewards big boys but penalizes smaller players if they were to take the same approach. Global players and Jio have a huge advantage on this front over Indian broadcasters.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 19 India Media

 Other aspects. The DNA and culture of an organization and ability to attract talent plays an important role in its success or failure. Indian players need to consciously work on this front to be able to compete with global majors. Tie-ups with telcos and traditional PayTV distributors are important to drive subscriber and consumption growth. These partnerships are relatively easy to build

Exhibit 24: Our 10-point framework to assess strengths of OTT players

Global players Local players Netflix Amazon Prime Youtube Facebook RJio Hotstar ZEE5 Sony Liv Sun Nxt Content 1 Content library a a aa a aaa aaaaa aaaa aa aaa 2 Content production capabilities aaaa aaa aa a aaaa aaaaa aaaaa aaa aa 3 Hook aaa aa aaa aa aa aaaa aa a a Product and technology 4 User interface and streaming experience aaaaa aaaaa aaaaa aaaaa aaa aaaaa aaa aa aa 5 Recommendation engine aaaaa aaaa aaaaa aaaa a a a a a 6 Data/analytics capabilities aaaaa aaaaa aaaaa aaaaa aa aaa aa aa a Capital availability / Platform play 7 Capital aaaaa aaaaa aaaaa aaaaa aaaaa aaa aa aa a 8 Platform play (Local/Global) aaa aaaa aa aa aaaaa aa a a a Others 9 Organization DNA and talent aaaa aaaa aaaa aaaa aaa aaa aa a a 10 Monetization capabilites aaa aaa aaaaa aaaaa aaa aaaa aaaa aa aa Overall aaaa aaa aaaa aaa aaaa aaaa aa 1/2 a a

Source: Kotak Institutional Equities

Key caveats— In our grading, we are unable capture the intent and focus of OTT players especially global firms as their India strategy is not publicly disclosed. Our grading could be a bit subjective based on our own experience as consumers and our industry interactions. Even though YouTube and Facebook do not have any professional content, we consider them as important stakeholders in OTT given their penetration, engagement and advertising revenue base. Finally, while we have graded players based on their on-paper strengths, the eventual winners will be the ones with razor-sharp focus and determination.

We recall a famous quote of Ted Sarandos (Chief content officer, Netflix) in 2013 “Our goal is to become HBO faster than HBO becomes us” All players have a few strengths and a few gaps from the Indian market’s perspective. The ones who fill the gaps sooner stand a better chance.

20 KOTAK INSTITUTIONAL EQUITIES RESEARCH Media India

Exhibit 25: Key metrics of OTT players in India, Aug 2018

MAUs DAUs Average time spent (mn) (mn) (mins per user per day) Youtube 220-240 170-190 50-60 Facebook 200-220 140-160 30-40 Hotstar (a) 75-100 14-18 35-40 JioTV Live 40-50 8-10 25-30 Prime Video 25-35 5-7 40-45 Netflix 10-15 4-5 40-45 Voot 30-40 4-6 35-40 Airtel TV 15-20 5-7 25-30 ZEE5 41 NA 31 SONY LIV 20-30 3-5 20-25 JioCinema 8-15 2-3 25-30 Vodafone Play 3-7 0.5-1.5 NA Sun NXT 2-5 0-0.5 35-40

Notes: (a) Hotstar's MAUs and DAUs on non-cricket days. It is 30-50% higher on key cricketing days (especially IPL). (b) Above metrics includes Android, iOS as w ell as w eb users. (c) ZEE5's metrics are for Sep 2018 as reported by the company. Its comparison w ith metrics of other players in the table may not be like-for-like.

Source: Industry interactions, , Kotak Institutional Equities estimates

Decoding the competitive landscape and likely strategies of key players

 Netflix and Amazon Prime—Our earlier assessment was that Netflix and Amazon Prime will cater to the top 5-10% English-speaking viewers, leaving the rest of the market for local players. However, we believe that both these companies have prioritized India and are eyeing a bigger pie of the Indian market. We would not be surprised to see significant investments in Hindi as well as regional content keeping in mind Indian demographics and diversity.

 Strategically, Prime Video has positioned itself as a key destination for Indian language films. We note that it has 54% share (value terms) in the top-25 Hindi movies released in the past 12 months. More importantly, all recent buys look like exclusive rights. At a price point of `1,000/year or `129/month, Prime is a value-offering for movie loving Indian audiences and especially in view of other bundled offerings such as Prime delivery (free/express delivery on Amazon.com) and shopping deals. Prime video is also making significant investments in original content. Overall, we believe Prime video has the positioning and pricing to become a broad based product in India. It is worth noting that with about 12 mn prime subscribers, it is a leader in SVOD and has about 70-75% share of paying OTT subscribers (direct B2C subscribers) in India.

 Netflix bought a few movies rights (mostly non-exclusive) in 2017 but seems to be focusing more on originals this year. We expect it to step up investments in 2019.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 21 India Media

Exhibit 26: Amazon Prime dominates in digital movie rights Digital rights of top-25 Bollywood movies released during Jun 2017-Jun 2018

NBOC (Rs mn) Prime Jio ZEE5 Eros now Hotstar Netflix Bollywood 1 Tubelight 23-Jun-17 1,170 a a 2 Mubarakan 26-Jul-17 531 a 3 Jab Harry Met Sejal 04-Aug-17 577 a 4 Toilet-Ek Prem Katha 11-Aug-17 1,350 a a 5 Bareilly Ki Barfi 18-Aug-17 340 a a 6 Baadshaho 01-Sep-17 665 a a 7 Shubh Mangal Saavdhan 01-Sep-17 419 a a a 8 Judwaa 2 29-Sep-17 1,333 a a 9 Secret Superstar 20-Oct-17 596 a 10 Golmaal Again 20-Oct-17 2,045 a a 11 Tumhari Sulu 17-Nov-17 330 a 12 Fukrey Returns 08-Dec-17 746 a 13 Tiger Zinda Hain 22-Dec-17 3,280 a 14 Padmaavat 26-Jan-18 2,823 a 15 Padman 09-Feb-18 813 a a 16 Sonu Ke Titu Ki Sweety 23-Feb-18 1,050 a 17 Hichki 23-Feb-18 425 a 18 Raazi 11-May-18 1,205 a 19 Raid 16-Mar-18 1,019 a 20 Baaghi 2 30-Mar-18 1,582 a 21 Parmanu - The Story Of Pokhran 25-May-18 625 a a 22 October 13-Apr-18 369 a 23 102 Not Out 04-May-18 466 a 24 Veere Di Wedding 01-Jun-18 859 a 25 Race 3 15-Jun-18 1,676 a 26 Dhadak (1) 20-Jul-18 716 a Total count 13 6 1 6 9 Share in NBOC (%) 54 9 1 19 17

a Exclusive digital rights a Non-exclusiveExclusive digital rights digital rights Notes: (1) Dhadak co-produced by Zee studios is available exclusively on Prime Video. Looks like Zee may have opportunistically sold digital rights to Prime Video.

Source: Kotak Institutional Equities

These platforms have a few advantages:

1. Global viewer base. We note that the Indian diaspora is about 30-35 mn strong. In addition, Indian content especially Hindi speaking content appeals to viewers in several countries in Asia and the Middle East. We note that Zee network has international reach of 578 mn across 170 countries. In the world of OTT, Netflix and Amazon Prime are well placed to monetize Indian content in global markets as well. To put this in perspective— even though the SVOD market opportunity in India for Netflix and Amazon prime at current price points could be 2-3 mn subscribers and 30-35 mn subscribers, respectively, they may already have a subscriber base overseas consuming and indirectly paying for select Indian content.

22 KOTAK INSTITUTIONAL EQUITIES RESEARCH Media India

Exhibit 27: Netflix + Prime Video paying sub is <10% of Zee Exhibit 28: Netflix + Prime Video subscription revenue >= Pay-TV/SVOD subscribers, CY2018/FY2019 (mn) Viacom Pay-TV/SVOD subscription revenues, CY2018/FY2019 (Rs mn)

140 20,000

120 16,000 100 12,000 80

60 8,000

40 4,000 20

0 0 Zee Network Sun Network Netflix + Viacom18 Netflix + Prime Zee Network Prime

Source: Industry interactions, Kotak Institutional Equities estimates Source: Industry interactions, Kotak Institutional Equities estimates

2. Subscription revenue stream that can fund a lot of content. As per our estimates, aggregate subscription revenue of Netflix and Prime video would be in the range of `9-10 bn in CY2018 (after allocating only 50% of Prime membership fee to Prime video as the membership also offers delivery/shopping benefits). At a global level, Netflix’s cash spend on content is about 70-75% of revenues. India being a priority growth market, Netflix may invest more than this threshold in the initial years. However, even if we consider that Netflix India invests only 70-75% of its India revenues in content (in line with global operations), it has `4-5 bn at its disposal for content. Assuming programming cost of `17.5 mn/hour (almost 4X that of ZEE5), Netflix can potentially produce about 20 shows (of 10 hours each) annually from India. In our view, all it may need to build a franchise and an aura is 4-5 marquee shows.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 23 India Media

Exhibit 29: Netflix cash spend on content is about 75% of revenues

Revenues (LHS, US$ bn) 15 Cash outgo on content (LHS, US$ bn) 90 Cash outgo on content as % of revenues (RHS, %) 78 12 76 76 80

68 9 70

58 6 60

3 50

0 40 CY2014 CY2015 CY2016 CY2017 CY2018E

Source: Company, Bloomberg consensus

Exhibit 30: Netflix cash potentially produce 20 original series in India (200 hours of original content)

Netflix India CY2019E Paying subscribers (mn) 1.0 ARPU (Rs/sub/month) - net of GST 551 Subscription revenue (Rs mn) 6,610 Potential cash spend on content (@75% of revenues) 4,958 - Potential cash spend on digital rights of movies (Rs mn) 1,500 - Potential cash spend on originals (Rs mn) 3,458 Average content cost per hour (Rs mn) 17.5 Hours of original content that Netflix can be produce in India- hypothetical 198 Average number of hours per series 10 Number of series that Netflix can produce (hypothetical) 20

Source: Company, Bloomberg consensus

3. Technology and data analytics. About 75-80% consumption on Netflix, globally, is driven by its recommendation engine. Although content discovery would not matter in India given relatively limited local language content, it would give a strong competitive advantage in the medium to long term. Another important strength of Netflix is its intense obsession with data and using data/insights as a key input for content decisions. It shortens the learning curve and can somewhat compensate for the lack of adequate understanding of audience preferences in a new market.

4. Multiple monetization avenues. The scale and opportunity of Amazon’s ecommerce business in India can justify and support Prime video’s content investments.

24 KOTAK INSTITUTIONAL EQUITIES RESEARCH Media India

Our thoughts on monetization strategy of Netflix and Amazon Prime

While Prime video is a value-proposition in India, Netflix is a premium-offering at `500- 800/month. We note that Netflix strives to be a value-proposition in almost all markets it operates in and Reed Hastings on the recent earnings call reiterated the same about India. This essentially means that either Netflix would produce a lot of content that justifies its price to an Indian viewer or else slash prices at some point if it sees subscriber growth slowing. We would not be surprised if Netflix reduces its price point at some point in the next 1-2 years. This is likely once Jio achieves some critical scale in the fixed-line broadband business. We expect both Amazon Prime and Netflix apps to be available to Jio’s fixed-line users through smart set-top boxes. We note that Netflix already has a deal in place with Tata Sky and Hathway. Lastly, even after all efforts, if SVOD subscriber growth falls short of expectations, Netflix and Amazon prime may contemplate experimenting with the AVOD model in India. We note that there is chatter about Netflix and Prime contemplating introduction of advertising in some markets at some point in the foreseeable future.

 Jio— Jio’s platform-play ambition is well-known. The company is in the process of stitching together all its offerings - telecom (wireless + fixed-line)—media—retail (ecommerce + offline retail). We note that it is augmenting its content capabilities through a stake purchase in (1) Balaji Telefilms (25% stake acquired for `4.1 bn), (2) Eros international (5% stake acquired for US$47 bn), and (3) acquired 1% from Viacom in Viacom18 (51:49 JV between RIL and Viacom Inc after this transaction of 1%) to gain operating control of Viacom18. We note that RIL owns TV18 group that operates 45-50 channels spanning a portfolio of English, Hindi and regional news and Viacom18’s portfolio of entertainment channels.

At the scale at which it operates and the opportunity size that it is eyeing, it can justify and support any investment in content and can economically outspend others. To put it in perspective, we expect `12-15 bn of cash investments over the next 18 months in OTT originals (excluding sports and movie rights) in India. This number builds in a modest investment from Jio given the lack of visibility even though technically Jio could have the lion’s share in content investments. Jio’s flexibility to bundle offerings to offer a value- proposition is unparalleled in India.

Lastly, about 55-60% of India’s overall OTT traffic and 65-70% of OTT consumption on mobile is supported by Jio’s telecom network. Its share will increase further following the launch of its fixed-line broadband offering. We note that at present, Jio pays broadcasters and content producers for content available on JioTV and JioCinema. We would not be surprised if it demands some revenue share or carriage in future if some of these OTTs start garnering sizeable advertising revenue. It is worth noting that RIL is a savvy and tough negotiator in B2B deals; we are hearing that Jio would soon be one too.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 25 India Media

Exhibit 31: About 55% of total digital video traffic (wireless+fixed-line) is supported by Jio's network

60 55

50

40

30

20 15

10

0 Jio's share in India's digital video traffic (%) Dish TV's share in Pay-TV subscribers (%)

Source: Kotak Institutional Equities estimates

 Hotstar— Hotstar’s early investments are reaping rewards as visible from key metrics that are far ahead of its local competitors. It has made its mark and earned respect having handled large volumes of concurrent live streaming during IPL; very few platforms in the world can achieve this feat. Buoyed by this success and Disney parentage, Hotstar has all the ingredients to be the leading OTT platform among professional content OTT platforms (i.e. excluding YouTube and Facebook) in terms of total watch time.

Our earlier hypothesis was that Hotstar may not invest in original entertainment content in the near term in view of its heavy commitment towards sports. However, we believe its investment appetite may increase under Disney. We note that the company recently appointed a new head of original entertainment content production. In our view, Hotstar is best-positioned among broadcaster-led platforms to be able to attract a strategic investment that can further strengthen its positioning and lead. We note that Hotstar’s current CEO is on his way out to join Facebook as its India head.

 YouTube and Facebook. Even as these players do not attract a lot of attention in the OTT discussion, they are as serious players in the game as anyone else irrespective of lack of professional content. It is worth noting that YouTube is the largest entertainment channel in terms of reach and ad revenues, well ahead of Star Plus. Further, its daily reach in the top 8-10 cities is not far behind that of the Hindi GEC genre. YouTube has recently signed A.R. Rahman for an original show and we expect Facebook to take a plunge in content sooner than later. We note that Facebook was one of the top bidders for the digital rights of IPL. Key strengths of these players are (1) unparalleled MAUs and DAUs in India, (2) evolved recommendation engine driving solid engagement, (3) digital sales force already clocking more than US$200 mn+ and US$100mn+ of digital video advertising respectively (CY2017).

26 KOTAK INSTITUTIONAL EQUITIES RESEARCH Media India

Exhibit 32: YouTube India’s daily reach is higher than Star Plus Exhibit 33: YouTube India to surpass Star Plus in ad revenues Daily reach of YouTube India and Hindi GECs, Aug 2018 (mn) Ad revenues of YouTube and Hindi GECs, CY2018/FY2019 (Rs mn)

350 25,000

300 20,000

250 15,000 200

150 10,000

100 5,000

50 0 0 Youtube Star Plus Zee TV Colors Sony Ent. Sun TV Youtube India Hindi GEC Star Plus India

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

 Other players—We expect Voot, Eros Now and Alt Balaji to eventually integrate/fully align with Jio in view of Jio’s ownership in these entities. Sony Liv and Sun NXT do not seem to have adequate focus and strategy in place to compete with the big boys. ZEE5 is lagging but has the mettle to succeed; we expect it to strengthen its positioning either through consolidation with other broadcaster-led platforms or partnering with players with complementary strengths.

Exhibit 34: We expect consolidation in the number of apps

Source: Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 27 India Media

#4: Impact on profitability

This is a tricky question as economics of the OTT business has not stabilized yet even in developed markets. That said, it is safe to assume that return on investment or profitability of OTT platforms will be much lower than that of television in the initial years. Key reasons— (1) higher cost of content production and procurement. An average TV soap runs for 300+ episodes whereas digital originals have 8-10 episodes per season. Cost of sets and other fixed costs are apportioned over 300+ episodes that reduce per episode production cost. Even a modest-budget digital original series can cost more on per episode basis than a TV soap. On an average the cost of production per hour is 30-50% higher in case of digital originals as compared to TV (everything else being same). Other than this, we gather that Amazon Prime’s aggression has resulted in unreasonable inflation in digital rights of movies.

From a monetization perspective, digital garners higher yields on advertising and subscription front. However, till the time it scales up in terms of absolute numbers, revenues may not cover operating costs. .

We believe medium-term profitability will be a function of the number of players in the market. Network effect and economies of scale benefits may be more acute in case of digital platforms.

Exhibit 35: Forecast of ZEE5, March fiscal-year ends, (Rs mn)

FY2019E FY2020E FY2021E Comments Revenues 1,220 2,406 3,933 - Ad revenues 730 1,369 1,956 Assumed some pressure on digital yields due to over-supply of digital video ad inventory. Subscription revenues from content deals with telcos and direct subscribers. We have assumed - Subscription revenues (Rs mn) 490 1,036 1,976 ZEE5 to close deal Jio TV by end of FY2019E.

Operating expenses - Programming costs 1,700 2,450 3,400 Programming cost of digital originals + Amortization cost of movie rights and overseas content - Marketing and ad expense 1,100 1,375 1,500 - SG&A and CDN costs 1,280 1,813 2,238 Total operating costs 4,080 5,638 7,138

EBITDA (2,860) (3,232) (3,205)

Key assumptions Daily Active Users (DAUs) in mn 4.0 7.0 10.0 Engagement / DAUs (hours) 0.5 0.67 0.67

Paid subscribers ('000s) - Paying Direct subs ('000s) 300 1,500 3,000 - Indirect subs through Telcos ('000s) 2,500 4,000 7,000 Blended ARPU (Rs/sub/month) - Direct subs ARPU (Rs/sub/month) 36 36 36 - Indirect subs ARPU (Rs/sub/month) 12 8 8

Original programming hours 200 300 400 Blended cost of programming (Rs mn/hr) 4.0 4.5 4.8 Amortization of movies and overseas content 900 1,100 1,500

Notes: (1) Above revenues and costs are incremental to investments made in the traditional business. For instance, above content costs does not include transfer pricing cost of TV content library of Zee Network. SG&A does not include allocation of corporate overheads. Marketing and promotional expense is also incremental to existing budget of Rs5-6 bn of broadcasting business. Zee can always shift marketing expense from traditional medium to ZEE5 if needed.

Source: Kotak Institutional Equities estimates

28 KOTAK INSTITUTIONAL EQUITIES RESEARCH Media India

#5: Valuation: Historical multiples do not matter as rules of the game are being redefined

Indian broadcasters have long-enjoyed premium valuations due to a combination of factors (1) broadcasters capture the bulk of the value in Indian TV industry value chain, (2) longevity of growth opportunity (viewed as a proxy to the India consumption story) and comfort on profitability, (3) structural improvement in Pay-TV subscription revenue led by digitization and the huge subscription opportunity size in view of subdued ARPUs and under- penetration of TV.

A 28-30X earnings multiple implied in case of Zee (1) 13-14% CAGR over the next 15 years, (2) stable profitability and cash generation, (3) Cost of equity of 11-11.5%, and (4) terminal growth rate of 5.5-6%. These expectations looked achievable in the absence of risk from digital video or if one assumes that well-run broadcasters will retain their share in the overall video space (TV + video). We note that revenue CAGR of 13-14% over the next 15 years looks reasonable for the overall video industry. The business model is undergoing a change and the rules of the game are being redefined by new players. Given this, any benchmarking to historical valuation multiples would be inappropriate.

We cut target PE multiple of broadcasting business by 33% to 16-19X and ascribe 1- 2X to factor OTT optionality

The disruption of TV by OTT is certain; it is just a matter of time— we believe some impact of digital video on TV will be visible 3-4 years from now. Traditional broadcasters, worldwide, have lost market share and mind share to the next-gen media companies such as Netflix and Amazon Prime, etc. It was due to a few costly mistakes made by incumbents and complacency in responding to new competition. In comparison, Indian broadcasters especially Star, Zee and Viacom are a lot more vigilant and are preparing for the opportunity that digital video has to offer. Nonetheless, it may be difficult for incumbents to retain market share in the overall video space in view of heavy-weight competition in the digital video space. Players who successfully transition and manage to maintain their fair share in the digital ecosystem would be re-rated in the medium term. In the interim, we expect pressure on multiples.

We lower our target PE multiple for Zee and Sun to 19X and 16X (from 28X and 24X). We ascribe an additional 2X and 1X PE multiple to factor in the optionality of ZEE5 and Sun NXT. Our revised TP for Zee is `430 (`600 earlier) and Sun is `660 (`925 earlier).

Exhibit 36: We lower our target multiple for the core broadcasting business of Zee and Sun Dividend-discount model based fair PE derivation

Revised Earlier Zee Sun Zee Sun Comments Base year EPS (Rs/share) 100 100 100 100 Expect deflationary pressure on satellite (TV) rights of movies as OTT gains Base year payout ratio (%) 78 93 59 85 share. It will reduce capex andimprove cash generation. We assumed Terminal year payout 78 93 59 85 Payout ratio (%) to be same as FCF/ PAT (%).

High-growth phase # years 10.0 10.0 15.0 15.0 We reduce 'high-growth' phase to 10 years (from 15) and lower dividend Dividend growth - HGP (%) 12.0 8.0 13.9 10.0 (i.e. FCF) CAGR to factor potential risk from digital 3-4 years out

Terminal growth- TG (%) 4.0 4.0 5.5 5.3 We lower terminal growth rate and marginally increase WACC (same as Ke WACC (%) 12.0 12.5 11.0 11.5 in this case) in view of rise in risk premium and to factor potential risk from digital video in the medium term Fair PE (X) 19.0 16.0 28.0 24.0 Terminal value as % of total 54.4 47.4 59.1 48.7

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 29 India Media

Exhibit 37: Zee: Dividend-discount model based fair PE derivation under different scenarios

Payout ratio (%) HGP (years) HGP-Growth (%) TG (%) WACC (%) PE (X) 70 7 10.0 4.0 12.0 13.3 70 7 11.0 4.0 12.0 14.0 70 7 12.0 4.0 12.0 14.7 70 7 13.0 4.0 12.0 15.5 75 7 10.0 4.0 11.5 15.2

Bear case Bear 75 7 11.0 4.0 11.5 16.0 75 7 12.0 4.0 11.5 16.8 75 7 13.0 4.0 11.5 17.7 75 10 10.0 4.0 12.0 15.7 75 10 11.0 4.0 12.0 16.8 75 10 12.0 4.0 12.0 18.0 75 10 13.0 4.0 12.0 19.3 80 10 10.0 4.0 11.5 17.9

Base case Base 80 10 11.0 4.0 11.5 19.2 80 10 12.0 4.0 11.5 20.6 80 10 13.0 4.0 11.5 22.1 65 15 11.0 5.0 11.5 19.9 65 15 12.0 5.0 11.5 22.0 65 15 13.0 5.0 11.5 24.3 65 15 14.0 5.0 11.5 27.0 65 15 11.0 5.5 11.5 20.7 Bull case 65 15 12.0 5.5 11.5 23.0 65 15 13.0 5.5 11.5 25.5 65 15 14.0 5.5 11.5 28.3

Source: Kotak Institutional Equities estimates

30 KOTAK INSTITUTIONAL EQUITIES RESEARCH Media India

Exhibit 38: Sun: Dividend-discount model based fair PE derivation under different scenarios

Payout ratio (%) HGP (years) HGP-Gr (%) TG (%) WACC (%) PE (X) 90 7 6.0 4.0 12.5 13.2 90 7 7.0 4.0 12.5 13.8 90 7 8.0 4.0 12.5 14.5 90 7 9.0 4.0 12.5 15.3 95 7 6.0 4.0 12.0 14.7

Bear case Bear 95 7 7.0 4.0 12.0 15.5 95 7 8.0 4.0 12.0 16.3 95 7 9.0 4.0 12.0 17.1 90 10 7.0 4.0 12.5 14.5 90 10 8.0 4.0 12.5 15.5 90 10 9.0 4.0 12.5 16.5 90 10 10.0 4.0 12.5 17.7 95 10 7.0 4.0 12.0 16.2

Base case Base 95 10 8.0 4.0 12.0 17.4 95 10 9.0 4.0 12.0 18.6 95 10 10.0 4.0 12.0 19.9 90 15 8.0 5.0 12.0 18.9 90 15 9.0 5.0 12.0 20.8 90 15 10.0 5.0 12.0 22.9 90 15 11.0 5.0 12.0 25.3 95 15 8.0 5.5 12.0 20.7 Bull case 95 15 9.0 5.5 12.0 22.8 95 15 10.0 5.5 12.0 25.1 95 15 11.0 5.5 12.0 27.7

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 31 India Media

Exhibit 39: Valuations of broadcasters have de-rated across the world 1-year forward P/E multiples of key TV broadcast networks across the world

US: 1-year forward P/E band of select TV broadcasters Europe: 1-year forward P/E band of select TV broadcasters

Average (Disney, Fox, Time Warner, CBS, Discovery and Viacom) Vivendi (France) RTL Group (Europe) Mediaset (Italy) 20 45 40 17 35

14 30 25 21.2 10.7 11 20 15 8 12.2 10 12.1

5 5

Mar-…

Mar-…

Mar-…

Mar-…

Mar-…

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17

Sep-18

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17

Sep-18

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Dec-13

Dec-14

Dec-15

Dec-16 Dec-17

Note: Time Warner and Fox excluded from computation of average post merger announcement.

Mexico and Spain: 1-year forward P/E band of select TV broadcasters Indonesia: 1-year forward P/E band of select TV broadcasters

Mediaset Espana (Spain) Grupo Televisa (Mexico) Surya Citra Media Nusantara Citra 45 35

40 30 35 25 30 26.7 20 25 15 20 15.4

15 10 11.0 6.9

10 5

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17

Sep-18

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17

Sep-18

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-14

Mar-15

Mar-16

Mar-17 Mar-18

India: 1-year forward P/E band of select TV broadcasters Japan: 1-year forward P/E band of select TV broadcasters

Zee Sun TV Asahi Fuji Media 40 25

22 30 19.8 19 17.9 25.1 16 20 18.3 13

10 10

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17

Sep-18

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17

Sep-18

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Mar-14

Mar-15

Mar-16

Mar-17 Mar-18

Source: Bloomberg, Kotak Institutional Equities estimates

32 KOTAK INSTITUTIONAL EQUITIES RESEARCH REDUCE Zee Entertainment Enterprises (Z)

Media OCTOBER 11, 2018 CHANGE IN RECO. Coverage view: Attractive

Odds mount. We downgrade Zee to REDUCE from ADD as (1) we expect a shift in ad Price (`): 459 spends to OTT from TV in the next 3-4 years, (2) competition in the OTT space is more Target price (`): 430 ferocious than anticipated and it may be difficult for Zee to maintain its fair share in BSE-30: 34,761 OTT market. We cut PE multiple to capture the medium-term risk to TV business and uncertainties in OTT. We now value Zee at 21X Sep-20E earnings (19X for core business and 2X for optionality that ZEE5 offers) versus 28X earlier; revise TP to `430 (`600).

Company data and valuation summary Zee Entertainment Enterprises Stock data Forecasts/Valuations 2019E 2020E 2021E 52-week range (Rs) (high,low) 619-410 EPS (Rs) 16.7 19.6 22.1 Market Cap. (Rs bn) 441.0 EPS growth (%) 11.4 17.1 12.6 Shareholding pattern (%) P/E (X) 27.4 23.4 20.8 Promoters 41.6 Sales (Rs bn) 77.7 88.8 101.2 FIIs 40.8 Net profits (Rs bn) 16.1 18.8 21.2 MFs 6.0 EBITDA (Rs bn) 25.3 28.5 32.1 Price performance (%) 1M 3M 12M EV/EBITDA (X) 16.1 14.2 12.5 Absolute (2.9) (14.7) (12.2) ROE (%) 19.9 20.6 20.5 Rel. to BSE-30 6.0 (11.1) (19.3) Div. Yield (%) 1.0 1.2 1.5

Indian OTT’s ‘e-com’ moment The interest and investments of global companies in India’s OTT space are overwhelming and perhaps disproportionate relative to the monetization opportunity. At an industry level, we expect aggregate cash spends of `12-15 bn on digital video content (entertainment excl. sports and movies) over the next 18 months versus `70-75 bn/year on TV. Given this, we expect (1) talent scarcity and content cost inflation, (2) Netflix, Amazon and Jio may outspend others in content procurement, and (3) either digital subscription revenue picks up meaningfully to justify these investments (looks difficult) or else OTT players (including Netflix and/or Prime) opt for the advertising-led model, accelerating a shift of ad spends to OTT from TV. ZEE5 may have to revisit strategy in view of competitive landscape Three key attributes for success in OTT are (1) content, (2) product/technology and (3) capital. ZEE5 scores well on #1 but scores low on #2 and #3 relative to the competition. Further, Zee’s margin guidance compels it to invest judiciously. Meanwhile, less constrained peers are taking the long view, outspending Zee thanks to monetization avenues in associated businesses (telecom/ecommerce/global viewer base). Zee’s core strengths are (1) ability to produce content with cost efficiency and scale, and (2) strong audience-connect in the large Hindi-speaking and regional markets. We believe ZEE5 could better capitalize on these strengths and somewhat insulate itself from the irrational competition scenario if it found a JV partner with complementary attributes. Obvious names that come to mind are Flipkart, Hotstar, Airtel, Chinese internet players and AT&T-TWC. Valuations—historical multiples do not matter when rules of the game are being redefined Zee’s historical premium valuation was predicated upon solid execution and sustained growth opportunities. Even as the core business performance is flawless, we turn cautious as (1) we expect OTT to start gaining ad revenue share from TV in 3-4 years, (2) the digital video ecosystem is crowded with heavyweights, and (3) ZEE5’s progress is short of our expectations Jaykumar Doshi and the aggression demanded by the competitive landscape. We incorporate 2Q and tweak our earnings to model higher investments in ZEE5. We cut TP to `430 (`600 earlier), valuing it at 21X Sep-20E earnings (19X for core + 2X for optionality of ZEE5; 28X earlier). Despite limited downside after the recent correction in the stock price, we recommend REDUCE and prefer to stay on the sidelines until we see creditable progress in ZEE5 and/or any favorable change in the competitive landscape. Please refer to page 11 for 2Q results analysis and key takeaways.

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

What has made us cautious on Zee?

 Competitive intensity higher than anticipated. The interest and investments of global players in the Indian OTT space are overwhelming and perhaps disproportionate relative to the monetization opportunity. Our earlier assessment was that Netflix and Amazon Prime will cater to the top 5-10%, leaving rest of the market for local players. The underlying hypothesis was that subscription opportunity in India is too small for these behemoths to focus. However, we note the following.

. Netflix and Amazon Prime video. Netflix’s spends on ‘Sacred Games’ were unprecedented in the Indian context and it is likely to step up investments in CY2019. We would not be surprised if it ramps up to produce two shows/month in India by mid-CY2019. Prime video is on a movie-buying spree in India (Exhibit 1) and paying top dollar. Additionally, it is also churning out originals at regular intervals. Clearly, Netflix and Prime have aspirations to cater to the broader market and not just a niche audience. We would not be surprised if they experiment with AVOD at some point or Netflix halves subscription price to become a broad-based product from a premium product.

. Jio and Hotstar. Jio is a savvy negotiator in B2B deals. Its bargaining power as a distributor will increase further as it forays in the fixed-line broadband and Pay-TV distribution. Separately, Jio is also augmenting content capabilities (24.9% stake purchase in Balaji Telefilms and 5% stake in Eros and operating control in Viacom18). We gather that Hotstar may resume its investments in originals soon encouraged by its success in sports (IPL).

. YouTube and Facebook. YouTube India has just begun original shows and Facebook may do so sooner than later. Both these companies have daily active user (DAU) base of about 200 mn, impressive engagement metrics and sizeable digital video ad revenue stream growing at 40-50%+ annually. Investments in content would further strengthen their positioning in the AVOD space.

We see a possibility of elevated content investments disproportionate to OTT opportunity size (as we foresee today), by a number of players with deep pockets.

 Unstoppable traction in digital video consumption. We gather that aggregate video- watch time is growing in the vicinity of 100% yoy for players who are doing well. More importantly, MAUs, DAUs and engagement metrics are all trending in the right direction and ahead of expectations. Consumption trends may change faster than expectations, especially if the ecosystem evolution continues (fixed-line broadband proliferation and 5G implementation in the next 3-5 years).

 ZEE5—ZEE5 app has been conceptualized and designed well keeping in mind nuances of Indian viewers and ecosystem constraints. However, the pace of implementation lags expectations and makes us wonder if ZEE5 has the right set of technology partners to compete against heavyweights. Separately, it looks like Prime video is gearing up to become a key destination for Indian films, a positioning that ZEE5 was eyeing.

In a nutshell, Zee’s fortunes are not only dependent on ZEE5’s execution but also on strategy and execution of its heavyweight competition. Zee’s core strength is its understanding of the Indian mass market and ability to cost-efficiently produce content at scale. Even as this is an important competitive edge, it may not be sufficient in an irrational competitive environment. Zee’s listed status does not allow it the luxury of making huge investments akin its unlisted or pseudo-unlisted competitors.

34 KOTAK INSTITUTIONAL EQUITIES RESEARCH Zee Entertainment Enterprises Media

Exhibit 1: Our 10-point framework to assess strengths of OTT players

Global players Local players Netflix Amazon Prime Youtube Facebook RJio Hotstar ZEE5 Sony Liv Sun Nxt Content 1 Content library a a aa a aaa aaaaa aaaa aa aaa 2 Content production capabilities aaaa aaa aa a aaaa aaaaa aaaaa aaa aa 3 Hook aaa aa aaa aa aa aaaa aa a a Product and technology 4 User interface and streaming experience aaaaa aaaaa aaaaa aaaaa aaa aaaaa aaa aa aa 5 Recommendation engine aaaaa aaaa aaaaa aaaa a a a a a 6 Data/analytics capabilities aaaaa aaaaa aaaaa aaaaa aa aaa aa aa a Capital availability / Platform play 7 Capital aaaaa aaaaa aaaaa aaaaa aaaaa aaa aa aa a 8 Platform play (Local/Global) aaa aaaa aa aa aaaaa aa a a a Others 9 Organization DNA and talent aaaa aaaa aaaa aaaa aaa aaa aa a a 10 Monetization capabilites aaa aaa aaaaa aaaaa aaa aaaa aaaa aa aa Overall aaaa aaa aaaa aaa aaaa aaaa aa 1/2 a a

Source: Kotak Institutional Equities

Our thoughts on Zee’s movie strategy

Zee stepped up investments in movies starting FY2017 after exiting sports broadcasting— largely towards purchase/advance for satellite rights of movies plus partly for purchase/advance of digital rights and partly towards w-cap for the movie production business. Over the past two years (FY2017-18), Zee has invested (cash outgo) about `22-25 bn in movies, much higher than previous years (annual run-rate was about `4-5 bn over FY2013-16). These investments were made with an objective to further strengthen its positioning in the movie genre on TV and to position ZEE5 as a key digital destination for Indian language films.

We see two risks to this strategy—

 Amazon Prime video has spoilt the movie rights market. Our industry interactions suggest that Prime Video is on a movie-buying spree and paying top dollar for digital rights. We note that it has 54% share in top-25 Hindi movies released in the past 12 months (Exhibit 2). More importantly, it looks like Prime video’s recent buys are all exclusive rights for which it may have paid a huge premium; this corroborates with what we are hearing from industry participants. This has resulted in irrational inflation in cost of digital rights of movies. We believe this inflation can upset Zee’s strategy and compel it to either increase budget or buy fewer films than planned earlier.

 Hindi movie genre on TV looks susceptible to disruption from OTT. Our analysis of viewership composition of genres indicates that paid Hindi movie genre could be more vulnerable to disruption from OTT as compared to other sub-genres within the Hindi and regional entertainment space. We note that higher share of (1) male viewers, (2) NCCS A+B, (3) under-40 age group and (4) urban audience, makes a genre more vulnerable to shift of consumption to OTT. Further, theatrical window for digital release of a film is eight weeks whereas that for TV release is 12 weeks.

As of now, most of the popular movies are behind the pay-wall and ad-free. Thus, there is no visible risk to ad spends garnered by the movie genre on TV. However, at some point if OTT platforms open up for advertising on blockbuster movies, it can lead to some shift of ad spends to OTT from TV. Subsequently, it can result in deflationary pressure on ad yields of movie channels and price of satellite rights. It is worth noting that price paid for satellite rights of movies is based on revenue potential estimated over five years (life of movie rights) and it assumes sustained growth in ad yield and consumption. Any change on the latter can deteriorate RoIs of movie rights purchased in the past.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 35 Media Zee Entertainment Enterprises

We note that Zee management has indicated moderation in movie capex in FY2019, essentially normalization following significant investments over the past two years. That said, it could also be due to inflation in purchase in digital rights of movies.

Exhibit 2: Amazon Prime video dominates purchase of digital rights of blockbuster movies Digital rights of top-25 Bollywood movies released during Jun 2017-Jun 2018

NBOC (Rs mn) Prime Jio ZEE5 Eros now Hotstar Netflix Bollywood 1 Tubelight 23-Jun-17 1,170 a a 2 Mubarakan 26-Jul-17 531 a 3 Jab Harry Met Sejal 4-Aug-17 577 a 4 Toilet-Ek Prem Katha 11-Aug-17 1,350 a a 5 Bareilly Ki Barfi 18-Aug-17 340 a a 6 Baadshaho 1-Sep-17 665 a a 7 Shubh Mangal Saavdhan 1-Sep-17 419 a a a 8 Judwaa 2 29-Sep-17 1,333 a a 9 Secret Superstar 20-Oct-17 596 a 10 Golmaal Again 20-Oct-17 2,045 a a 11 Tumhari Sulu 17-Nov-17 330 a 12 Fukrey Returns 8-Dec-17 746 a 13 Tiger Zinda Hain 22-Dec-17 3,280 a 14 Padmaavat 26-Jan-18 2,823 a 15 Padman 9-Feb-18 813 a a 16 Sonu Ke Titu Ki Sweety 23-Feb-18 1,050 a 17 Hichki 23-Feb-18 425 a 18 Raazi 11-May-18 1,205 a 19 Raid 16-Mar-18 1,019 a 20 Baaghi 2 30-Mar-18 1,582 a 21 Parmanu - The Story Of Pokhran 25-May-18 625 a a 22 October 13-Apr-18 369 a 23 102 Not Out 4-May-18 466 a 24 Veere Di Wedding 1-Jun-18 859 a 25 Race 3 15-Jun-18 1,676 a Total count 12 6 1 6 9 Share in NBOC (%) 53 9 1 20 18

a Exclusive digital rights a Non-exclusiveExclusive digital rights digital rights

Source: Kotak Institutional Equities

36 KOTAK INSTITUTIONAL EQUITIES RESEARCH Zee Entertainment Enterprises Media

Exhibit 3: Amazon Prime loaded with blockbuster movies; ZEE5 focuses on smaller movies with a good storyline

Source: Kotak Institutional Equities

Opportunities and optionality

Nuances of Indian video ecosystem that favour local broadcasters

Even as broadcasters globally have struggled to compete against Netflix, there are a number of nuances (detailed below) of Indian market that gives Indian broadcasters a better chance against next-gen media companies.

 Low Pay-TV ARPU and lack of price arbitrage. A key reason for early success of Netflix in most countries was the price arbitrage between cable TV bundle (US$80/month in US) and Netflix streaming membership (US$11/month). The dynamics are completely opposite in India and should work in favor of TV.

 Demographic and linguistic diversity. An average Indian family’s size is 4.25 individuals per household; Pay-TV bundle fulfills diverse content preferences of a household at a nominal price of `250-300/month (about `1/channel). We note that English accounts for less than 5% of content consumption on TV. Rest of the consumption is in Hindi, six popular regional languages and a few other smaller regional languages. In addition, content preferences vary significantly across the socioeconomic strata. It isn’t easy for a new entrant to disrupt the TV market or alter viewing preferences of audience so easily.

 Learning from mistakes of global players. As it is well-known, the biggest mistake US TV networks made was to license TV content to Netflix and that too long-term contracts that were not structured favorably. This shortsightedness and short-term profiteering of US broadcasters helped Netflix establish itself. Another mistake was not picking up the change in consumption patterns and not investing in their own OTT platforms on time. For example, Viacom’s content and viewer base was heavily skewed towards youth and yet it didn’t invest in OTT platform and instead used surplus cash for buybacks. We believe Indian broadcasters are unlikely to make these mistakes.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 37 Media Zee Entertainment Enterprises

That said, we do note that broadcasters (including Zee) are occasionally selling rights of select content other OTT platforms. For instance, Zee has licensed rights of a popular show of &TV to Netflix. It recently sold digital rights of its co-produced Hindi movie, ‘ Dhadak’ to Amazon prime video.

 Early investment and focus on digital relative to global peers. Even as OTT is still in its early days in India, several Indian broadcasters have invested in their own OTT platforms. Hotstar stands out at a global level in terms of its ability to handle large volumes of live-sports streaming.

 Other nuances of ecosystem. Even as the digital ecosystem is rapidly evolving, India significantly lags other nations on a few parameters that are essential for widespread consumption of OTT—(1) fixed-lined broadband penetration, (2) small share of LCD TV sets/smart TVs that enable streaming on large screen and (3) low penetration of smartphone. These nuances would allow OTT players some time to get their act together.

While the above factors give local Indian broadcasters better chance to compete against the global players, we expect it to be partly offset by high competitive intensity. India is one of the few markets that is attracting serious competition from all quarters—Netflix to Jio to Youtube.

Key inherent strengths of Zee for OTT

 Content library. Zee has a vast content library (about 250,000 hours as per FY2018 annual report). The management has indicated that its movie library has 4,100 titles that include about 3,000 dual rights (satellite + digital).

 Exposure to genres and markets that are less susceptible to disruption from OTT. Zee network has no/negligible exposure to genres such as sports, kids, music and English that are highly vulnerable to TV-to-OTT consumption shift. Contrarily, about 43% of Zee’s viewership comes from regional genres that relatively more immune to digital. It essentially makes Zee less vulnerable to TV-to-OTT shift as compared to its broadcasting peers, at least in the near term.

 Opportunities to consolidate its position in TV. Zee’s network viewership share has steadily increased over the past few years. It is about 19-20% at present as compared to 16-17% two years ago. Zee’ viewership share gain has been largely driven by regional markets. Zee has opportunity to further strengthen its market share, especially so as there is a possibility that its competition in the TV space may lose some focus from TV in the event of a TV-to-OTT shift.

What can Zee do to de-risk ZEE5 from intense/irrational competition?

We continue to believe that Zee has ingredients to be successful in the OTT space and emerge as a key OTT destination for Indian-language entertainment content for the mass- market audience. However, for this to play out, competitive intensity has to be benign. Increasingly we fear that competitive intensity could adversely change the dynamics for Zee. For instance, price of digital rights of movies is much higher than anticipated earlier, compelling Zee to increase its movie-buying budget or settle for fewer movies. We consider a few more scenarios that could play out. Essentially, what if—

 Hotstar raises funding and steps up investments in original content. At present, Hotstar’s investments (and cash burn) in sports make it difficult for it to adequately invest in original non-sports entertainment content. With none of the other broadcasters making serious investments in original entertainment content, there is an opportunity for ZEE5 to emerge as a #1 OTT on the back of its TV library and digital originals. However, this scenario can change if (1) Hotstar raises PE funding that allows it to step up investments in digital originals shows and/or (2) Hotstar gets a mandate from its new parent, Walt Disney, to invest more and especially in original content. In this case, ZEE5 will be compelled to further step up investments.

38 KOTAK INSTITUTIONAL EQUITIES RESEARCH Zee Entertainment Enterprises Media

 Jio’s content and consolidation strategy. Jio has acquired minority stakes in Eros and Balaji and RIL owns TV18 group. At a consolidated level, RIL has decent content capabilities. It can further strengthen its content capabilities if it participates in a few more consolidation opportunities. In this case, Jio becomes a strong force from the content perspective.

 Strategy of other broadcasters. At present, most Indian broadcasters have refrained from licensing its content to Netflix and Amazon. However, one cannot rule out a scenario whereby some of the smaller/fragmented players license content/movie library rights to global OTTs or Jio. This can hurt Zee’s prospects.

Thus, there are number of scenarios that can alter ZEE5’s prospects and compel the management to keep changing its strategy/investment plan depending on the competitive landscape. In our view, ZEE5 would be better-placed if it operates like a startup, has solid product/technology capabilities and excess supply of capital. This can be achieved if Zee considers a JV partnership or raises strategic investment. We detail our thoughts below

 JV partnership with Flipkart/Airtel. Flipkart’s key competitor, Amazon, and future competitor, Jio’s ecommerce arm, have luxury of bundling OTT services along with prime membership. At present, Flipkart has a loyalty program that allows its customers to use reward points to consume content on platforms such as Hotstar. We believe that any partnership of ZEE5 and Flipkart could be a win-win for both the companies in view of complementary attributes. Likewise, Airtel and ZEE5 can also consider a more strategic partnership beyond the extant B2B digital content deals.

 Hulu-like model with Hotstar. We believe Indian broadcasters would be best-placed to capitalize on opportunities that OTT has to offer if they were to co-own and operate a single platform (concept akin Hulu). We do note that Hulu’s success has been suboptimal so far due to varying priorities of its stakeholders. With the benefit of hindsight, Indian broadcasters can avoid mistakes made by the stakeholders of Hulu. If Zee and Star come together for OTT, its combined OTT platform can dominate the Indian OTT market. We note that both these companies have collaborated in the past (MediaPro distribution JV) and immensely benefited from it. Such an arrangement in OTT looks difficult as of now given (1) ongoing Fox-Disney merger and (2) Hotstar has made huge investments and established itself to some extent; it may prefer to stay solo.

 Strategic investments from PE or preferably Chinese internet players/AT&T-TWC. We believe ZEE5 can be a key local partner or OTT investment opportunity for a private equity firm or Chinese internet players interested in Indian OTT space. Although early days, we do note that Indian movies are gaining popularity in Chinese market. Given this, we would not be surprised if any of the Chinese tech firms invest in Indian OTT space.

If any of the above three scenarios play out, it would strengthen ZEE5’s ability to compete and result in re-rating. We partially bake in this optionality by ascribing additional 2X PE multiple over our target PE multiple of 20X for the broadcasting business. Core broadcasting business on a strong footing, thanks to impressive and consistent execution

Zee’s execution in the core broadcasting business continues to be impressive and consistent.

 Strong outperformance in ad revenue growth to continue—it is worth noting that Zee has surpassed Star to become #1 network in terms of viewership for the first time in 2QFY19 (Exhibit 4). We track weighted viewership share (Exhibit 5), which is a lead indicator of ad growth performance versus industry; it continues to trend in the right direction. We expect Zee to continue to deliver solid growth in advertising revenues for the next few quarters driven by buoyancy in the TV advertising environment and benefits of viewership share gains. We note that ad growth over the past four quarters was 20%+ yoy and we estimate 18.7% and 16.5% growth in ad revenues in FY2019E and FY2020E.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 39 Media Zee Entertainment Enterprises

 Steady growth in domestic subscription revenues—Zee expects better growth trajectory for domestic subscription revenues in FY2019 (KIE 15%) as monetization benefits of phase-III digitization resume; it had not fully accrued due to pending implementation of tariff order. Additionally, Zee has gained network viewership share that helps in negotiations/renewals. We do note that Zee has renewed its digital content deal with Reliance Jio.

Exhibit 4: Zee has surpassed Star to become India’s #1 network in terms of viewership (2QFY19E) Viewership share of top-5 broadcasting networks, 16-Oct-2015 to 17-Aug-2018 (%)

Star network TV18 Network Zee network Sony network Sun network 24

22 21.9 19.9 20

18 18.9 17.7 16.9 16 14.3 14 13.0 12 11.7 11.8 11.0 10 9.1 8 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19E Notes: (1) Zee bought two channels from RBNL and sold Ten portfolio in FY2017. Both these transaction were effective from 1QFY18. We have incorporated the same in viewership share. (2) Spike in viewership share of Sony (1QFY17 and 1QFY18) and Star (1QFY19) is due to IPL. (3) TV18 network includes Viacom portfolio (51:49 JV between TV18:Viacom Inc) and ETV (an associate company in which TV18 owns 24.5% stake). Attributable viewership share of TV18 broadcast (listed entity) is about 6.5% in 2QFY19 (about half that of TV18 network).

Source: BARC, , Kotak Institutional Equities

40 KOTAK INSTITUTIONAL EQUITIES RESEARCH Zee Entertainment Enterprises Media

Exhibit 5: Viewership share gains (yoy basis) will continue to aid Zee's ad growth outperformance Weighted viewership share of Zee network in Hindi and regional genres (%)

30 Zee's weighted viewership share in Hindi + regional genres (%)

27.9 28 27.5 26.7 26.7 26.3 26 24.7 24.9 24.3 24.0 23.6 24

22

20 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19

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

Source: BARC, Kotak Institutional Equities

Our thoughts on profitability

We are not worried about profitability of the core broadcasting business given viewership trends and tailwinds on advertising and domestic subscription revenue front. Underlying EBITDA margin of core TV broadcasting business is 35-37% as visible in 2QFY19 results. Zee’s guidance of 30% EBITDA margin allows it to absorb EBITDA margin loss of 400 bps in ZEE5 (or absolute EBITDA loss of `3 bn or so). Assuming ZEE5’s revenue of about `1.2 bn in FY2019E, it allows the company to invest `4.2 bn in the digital platform (FY2019E). We note that this ~`4 bn investment (operational costs of ZEE5) would be incremental to investments made in the traditional business. For instance, it does not include transfer pricing cost of TV content library of Zee Network. SG&A does not include allocation of corporate overheads. Marketing and promotional expense is also incremental to existing budget of `5-6 bn of the broadcasting business. Zee can always shift marketing expense from traditional medium to ZEE5, if needed.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 41 Media Zee Entertainment Enterprises

Exhibit 6: Forecast of ZEE5, March fiscal-year ends (Rs mn)

FY2019E FY2020E FY2021E Comments Revenues 1,220 2,406 3,933 - Ad revenues 730 1,369 1,956 Assumed some pressure on digital yields due to over-supply of digital video ad inventory. Subscription revenues from content deals with telcos and direct subscribers. We have assumed - Subscription revenues (Rs mn) 490 1,036 1,976 ZEE5 to close deal Jio TV by end of FY2019E.

Operating expenses - Programming costs 1,700 2,450 3,400 Programming cost of digital originals + Amortization cost of movie rights and overseas content - Marketing and ad expense 1,100 1,375 1,500 - SG&A and CDN costs 1,280 1,813 2,238 Total operating costs 4,080 5,638 7,138

EBITDA (2,860) (3,232) (3,205)

Key assumptions Daily Active Users (DAUs) in mn 4.0 7.0 10.0 Engagement / DAUs (hours) 0.5 0.67 0.67

Paid subscribers ('000s) - Paying Direct subs ('000s) 300 1,500 3,000 - Indirect subs through Telcos ('000s) 2,500 4,000 7,000 Blended ARPU (Rs/sub/month) - Direct subs ARPU (Rs/sub/month) 36 36 36 - Indirect subs ARPU (Rs/sub/month) 12 8 8

Original programming hours 200 300 400 Blended cost of programming (Rs mn/hr) 4.0 4.5 4.8 Amortization of movies and overseas content 900 1,100 1,500

Notes: (1) Above revenues and costs are incremental to investments made in the traditional business. For instance, above content costs does not include transfer pricing cost of TV content library of Zee Network. SG&A does not include allocation of corporate overheads. Marketing and promotional expense is also incremental to existing budget of Rs5-6 bn of broadcasting business. Zee can always shift marketing expense from traditional medium to ZEE5 if needed.

Source: Kotak Institutional Equities estimates

42 KOTAK INSTITUTIONAL EQUITIES RESEARCH Zee Entertainment Enterprises Media

Key highlights from 2QFY19 results and earnings conference call

Exhibit 7: Interim results of Zee Entertainment, March fiscal year-ends (Rs mn)

% chg. 2QFY19 2QFY19E 2QFY18 1QFY19 KIE yoy qoq 1HFY19 1HFY18 % chg. FY2019E yoy % Total revenues 19,759 18,870 15,821 17,720 4.7 24.9 11.5 37,479 66,857 (44) 77,660 16 Advertising revenues 12,106 11,940 9,867 11,460 1.4 22.7 5.6 23,566 42,048 (44) 49,911 19 Subscription revenues 6,082 5,731 5,014 5,186 6.1 21.3 17.3 11,268 20,287 (44) 22,746 12 --Domestic subscription 5,093 4,751 4,043 4,252 7.2 26.0 19.8 9,345 16,388 (43) 18,846 15 --International subscription 989 980 971 934 0.9 1.8 5.9 1,923 3,899 (51) 3,899 - Other sales (incl. syndication) 1,571 1,200 939 1,074 30.9 67.3 46.3 2,645 4,522 (42) 5,004 11 Total expenditure (13,001) (12,870) (10,909) (12,064) 1.0 19.2 7.8 (25,065) (46,095) (46) (52,337) 14 Content and other direct costs (7,263) (7,000) (5,789) (6,683) 3.8 25.5 8.7 (13,947) (25,275) (45) (29,603) 17 Employee costs (1,687) (1,970) (1,814) (1,714) (14.4) (7.0) (1.6) (3,401) (6,657) (49) (7,189) 8 Advt. and publicity costs (1,651) (1,500) (1,410) (1,402) 10.0 17.0 17.8 (3,052) (5,773) (47) (6,466) 12 Other expenses (2,400) (2,400) (1,896) (2,265) 0.0 26.6 6.0 (4,666) (8,390) (44) (9,079) 8 EBITDA 6,758 6,000 4,912 5,657 12.6 37.6 19.5 12,414 20,761 (40) 25,323 22 EBITDA margin (%) 34.2 31.8 31.0 31.9 33.1 31.1 32.6 5 Other income 589 450 422 498 31.0 39.6 18.5 1,087 2,795 (61) 2,214 (21) Fair value through P&L (RPS) (220) (290) (148) (213) (24.2) (433) (68) (84) (969) 1,333 Finance costs (b) (55) (53) (3) (53) 3 1,846.4 3.0 (107) (1,448) (93) (100) (93) D&A expenses (588) (575) (411) (576) 2.3 43.2 2.1 (1,165) (1,821) (36) (2,363) 30 Pretax profits 6,484 5,532 4,772 5,312 17.2 35.9 22.1 11,795 20,220 (42) 24,105 19 Extraordinaries — — 2,955 — - 2,955 - (100) Tax provision (c) (2,624) (1,980) (1,832) (2,071) 32.6 43.3 26.7 (4,695) (8,409) (44) (9,027) 7 Minority interest 2 18 12 18 19 25 30 25 - Reported PAT (post RPS impact) 3,861 3,570 5,908 3,259 8.2 (34.6) 18.5 7,120 14,791 (52) 15,104 2 EPS post RPS impact (Rs) 4.0 2.6 6.2 3.4 55.6 (34.6) 18.5 7.4 15.4 15.7 2 Adj. PAT (pre-RPS and pre-exceptional) 4,082 3,860 3,161 3,472 5.7 29.1 17.6 7,553 14,428 (48) 16,073 11 Adj. EPS (pre-RPS and pre-exceptional) (Rs) 4.2 4.0 3.3 3.6 5.7 29.1 17.6 7.9 15.0 (48) 16.7 11 Tax rate (%) 40.5 35.8 38.4 39.0 39.8 41.6 37.4

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

Source: Company, Kotak Institutional Equities estimates

 Ad revenues grew 22.7% yoy aided by low base and viewership share gains (2-yr CAGR at 12.3%). As per our estimate, outperformance over industry could be about 500-700 bps largely attributable to market share gains.

 Domestic subscription revenue growth at 26% yoy was (KIE 17.5%) was partly aided by catch-up revenues and benefits of phase III digitization. Zee management has raised full year domestic subscription revenue growth guidance to mid-teens from low-teens growth rate.

 EBITDA at Rs6.75 bn (+38% yoy) was 13% above our estimates led by higher than estimated domestic subscription revenues and syndicate sales. We note that base quarter EBITDA was impacted by one-time costs pertaining to corporate re-branding. 2QFY19 EBITDA is after factoring ZEE5 loses. EBITDA margin of 34.2% was up 320 bps yoy and best our estimates by 240 bps.

 Adjusted net profit was 6% above our estimates on account of higher taxes (ETR of 40.5%).

Balance sheet improvement not up to expectations and guidance

On 1QFY19 earnings conference call, Zee’s management acknowledged the feedback of minority investors around surplus cash invested in overseas funds. The management had indicated that surplus cash including investments in overseas funds would be brought back to India in due course of time and switching to low-risk liquid funds from high-yield securities starting 2QFY19. Given this, we were hopeful of some repatriation of surplus cash parked in overseas funds to India especially in view of sharp depreciation of rupee. However, there was no change in treasury management in 2Q. The management reiterated its intent to bring back surplus cash to India in due course in a calibrated manner. On the positive side, Zee management indicated that it expects to recover its investment in SGGD sometime in this month; it expects IRR of 11% on this investment as against original IRR of 17%.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 43 Media Zee Entertainment Enterprises

Inventory was broadly flat at Rs27.1 bn in the first half of FY2019. Other current assets increase to Rs13.8 bn from Rs10.2 bn in the first six months. The management attributed it to advances paid for movies and other content acquired for ZEE5. Zee management hinted at moderation of investments in movies in FY2019 as compared to FY2018. This potentially implies better cash generation in FY2019.

ZEE5—headline MAU encouraging but we would wait for additional disclosures and for data to stabilize

Zee management indicated that ZEE5 garnered MAUs of 41.3 mn in the month of September to become #2 digital entertainment platform as per Google analytics data. Its engagement metric was average daily time spent of 31 mins. Although these numbers are encouraging, we would wait for data to stabilize and for ZEE5 to share additional metrics such as DAUs, paid subscribers and daily video viewers used to derive average time spent. Further, we prefer disclosure of ZEE5 metrics as per App Annie, the most widely-used app analytics/database in the OTT space. Even better if Zee discloses metrics of competition as per App Annie allowing analyst/investors to better assess ZEE5’s positioning in competitive landscape. We present key metrics of OTT players in exhibit 9.

We note that Zee management has indicated pick up in digital content production. It has launched about 29 shows of original content so far (less than 100 hours) and it plans to launch another 60 shows over the next 6-9 months. This target looks a bit aggressive to us. Separately, the management indicated that it intends to release 600 hours of original content (including re-cap part; first few mins of an episode) over the next 18 months. This target also looks fairly stretched to us.

Renewal content deal with Jio

We note that Zee had pulled out its content from JioTV in August 2018 as negotiations failed. This content deal has been renewed. There are two parts to this deal (1) Live TV. All 37 channels of Zee network would be available on Jio TV. Jio Prime users will have free access to this content through JioTV app and Reliance Jio would pay a certain amount to Zee for this content. In this case, the content consumption happens on Jio TV app but Zee would get consumption data/metrics from JioTV, (2) Original/premium content— The above deal does not cover premium/original content available on ZEE5. Jio subscribers would have to pay for this content. This is an app-in-app deal.

44 KOTAK INSTITUTIONAL EQUITIES RESEARCH Zee Entertainment Enterprises Media

Exhibit 8: Zee's consolidated balance sheet (Rs mn)

Mar-18 Sep-18 YoY (%) Comments EQUITY AND LIABILITIES Equity Share capital 961 961 0 Other equity 74,657 80,605 8 Total equity 75,617 81,565 8 Minority Interest 142 131 (8) Non-current Liabilities Long-term borrowings 15,245 15,832 4 Long-term provisions 892 954 7 Other Non-current liabilities 10 8 (13) Total non-current liabilities 16,146 16,794 4 Current liabilities Trade payables 11,497 12,128 5 Other current liabilities 4,017 3,593 (11) Short-term provisions 83 95 15 Income tax liabilities / DTL 3,795 4,691 24 Total current liabilities 19,391 20,507 6 Total equity and liabilities 111,297 118,997 7 ASSETS Non-current assets Fixed assets 6,005 6,275 4 CWIP 920 1,096 19 Investment property 1,555 1,587 2 Goodwill 5,467 5,472 0 Intangible assets 1,734 1,715 (1) Non-current investments 1,593 1,491 (6) - Investments in associates 2 3 - Investments in JVs 194 213 10 - Other investments 1,397 1,276 (9) Deferred tax assets (net) 0 0 Income tax assets 7,026 6,806 (3) Other non-current assets 340 328 (3) Total non-current assets 24,640 24,769 1 Current assets Includes investments in (1) unknown/unfamiliar overseas funds of about Current investments 13,695 12,453 (9) US$80 mn, (2) Rs1.7 bn in SGGD, and (3) balance in domestic MFs and CDs. Inventories 26,278 27,107 3 Trade receivables 15,365 18,684 22 Cash and bank balances 16,117 14,391 (11) Comprises of inter-corporate deposits of which from Rs1 bn+ is lended in Short-term loans and advances 2,428 2,173 (10) overseas goegraphies. Other financial assets 2,556 5,591 119 Other current assets 10,218 13,830 35 Total current assets 86,657 94,228 9 Total assets 111,297 118,997 7

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 45 Media Zee Entertainment Enterprises

Exhibit 9: Key metrics of OTT players in India, Aug 2018

MAUs DAUs Average time spent (mn) (mn) (mins per user per day) Youtube 220-240 170-190 50-60 Facebook 200-220 140-160 30-40 Hotstar (a) 75-100 14-18 35-40 JioTV Live 40-50 8-10 25-30 Prime Video 25-35 5-7 40-45 Netflix 10-15 4-5 40-45 Voot 30-40 4-6 35-40 Airtel TV 15-20 5-7 25-30 ZEE5 41 NA 31 SONY LIV 20-30 3-5 20-25 JioCinema 8-15 2-3 25-30 Vodafone Play 3-7 0.5-1.5 NA Sun NXT 2-5 0-0.5 35-40

Notes: (a) Hotstar's MAUs and DAUs on non-cricket days. It is 30-50% higher on key cricketing days (especially IPL). (b) Above metrics includes Android, iOS as w ell as w eb users. (c) ZEE5's metrics are for Sep 2018 as reported by the company. Its comparison w ith metrics of other players in the table may not be like-for-like.

Source: Industry interactions, Kotak Institutional Equities estimates

Exhibit 10: Revised earnings estimates of Zee, FY2019E-21E (Rs mn)

Revised Previous % change 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E Consolidated Ad revenues 49,911 57,896 66,581 49,616 57,307 65,616 0.6 1.0 1.5 Subscription revenues 22,746 25,290 28,284 22,586 25,400 28,637 0.7 (0.4) (1.2) Other operating revenues 5,004 5,634 6,344 5,083 5,810 6,543 (1.5) (3.0) (3.0) Total revenues 77,660 88,820 101,209 77,284 88,517 100,796 0.5 0.3 0.4 Direct costs 29,603 35,255 41,357 30,075 35,114 40,858 (1.6) 0.4 1.2 Employee cost 7,189 8,052 9,018 7,655 8,574 9,603 (6.1) (6.1) (6.1) SG&A expenses 15,545 16,974 18,746 15,542 16,713 18,308 0.0 1.6 2.4 Total expenditure 52,337 60,281 69,121 53,271 60,400 68,768 (1.8) (0.2) 0.5 EBITDA 25,323 28,539 32,088 24,013 28,117 32,028 5.5 1.5 0.2 PAT 15,104 17,849 20,358 15,095 18,105 20,895 0.1 (1.4) (2.6) Adj PAT (excl. RPS impact) 16,073 18,542 20,869 16,064 18,797 21,406 0.1 (1.4) (2.5) EPS (Rs) 15.7 18.6 21.2 15.7 18.8 21.8 0.1 (1.4) (2.6) Adj EPS (Rs) (excl. RPS impact) 16.7 19.3 21.7 16.7 19.6 22.3 0.1 (1.4) (2.5)

Key assumptions Ad revenue growth (%) (a) 18.7 16.0 15.0 18.0 15.5 14.5 Domestic subscription growth (%) (a) 15.0 13.5 14.0 14.5 15.0 15.0 International subscription growth (%) (a) — — — (2.0) — — Core business EBITDA margin 36.9 36.8 36.3 34.8 34.7 34.7 EBITDA margin (%) 32.6 32.1 31.7 31.1 31.8 31.8 EBITDA loss in digital (Rs mn) 2,860 3,232 3,205 2,500 1,800 1,800

Source: Kotak Institutional Equities estimates

46 KOTAK INSTITUTIONAL EQUITIES RESEARCH Zee Entertainment Enterprises Media

Exhibit 11 : Zee: Dividend-discount model based fair PE derivation

Revised Earlier Zee Sun Zee Sun Comments Base year EPS (Rs/share) 100 100 100 100 Expect deflationary pressure on satellite (TV) rights of movies as OTT gains Base year payout ratio (%) 78 93 59 85 share. It will reduce capex andimprove cash generation. We assumed Terminal year payout 78 93 59 85 Payout ratio (%) to be same as FCF/ PAT (%).

High-growth phase # years 10.0 10.0 15.0 15.0 We reduce 'high-growth' phase to 10 years (from 15) and lower dividend Dividend growth - HGP (%) 12.0 8.0 13.9 10.0 (i.e. FCF) CAGR to factor potential risk from digital 3-4 years out

Terminal growth- TG (%) 4.0 4.0 5.5 5.3 We lower terminal growth rate and marginally increase WACC (same as Ke WACC (%) 12.0 12.5 11.0 11.5 in this case) in view of rise in risk premium and to factor potential risk from digital video in the medium term Fair PE (X) 19.0 16.0 28.0 24.0 Terminal value as % of total 54.4 47.4 59.1 48.7

Source: Kotak Institutional Equities

Exhibit 12: Zee: Dividend-discount model based fair PE derivation under different scenarios

Payout ratio (%) HGP (years) HGP-Growth (%) TG (%) WACC (%) PE (X) 70 7 10.0 4.0 12.0 13.3 70 7 11.0 4.0 12.0 14.0 70 7 12.0 4.0 12.0 14.7 70 7 13.0 4.0 12.0 15.5 75 7 10.0 4.0 11.5 15.2

Bear case Bear 75 7 11.0 4.0 11.5 16.0 75 7 12.0 4.0 11.5 16.8 75 7 13.0 4.0 11.5 17.7 75 10 10.0 4.0 12.0 15.7 75 10 11.0 4.0 12.0 16.8 75 10 12.0 4.0 12.0 18.0 75 10 13.0 4.0 12.0 19.3 80 10 10.0 4.0 11.5 17.9

Base case Base 80 10 11.0 4.0 11.5 19.2 80 10 12.0 4.0 11.5 20.6 80 10 13.0 4.0 11.5 22.1 65 15 11.0 5.0 11.5 19.9 65 15 12.0 5.0 11.5 22.0 65 15 13.0 5.0 11.5 24.3 65 15 14.0 5.0 11.5 27.0 65 15 11.0 5.5 11.5 20.7

Bullcase 65 15 12.0 5.5 11.5 23.0 65 15 13.0 5.5 11.5 25.5 65 15 14.0 5.5 11.5 28.3

Source: Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 47 Media Zee Entertainment Enterprises

Exhibit 13: Consolidated financial summary of Zee Entertainment, March fiscal year-ends, 2014-21E (Rs mn)

2014 2015 2016 2017 2018 2019E 2020E 2021E Profit model (Rs mn) Total revenues 44,217 48,837 58,514 64,332 66,857 77,660 88,820 101,209 EBITDA 12,033 12,538 15,094 19,260 20,761 25,323 28,539 32,088 Other income 1,807 2,278 2,016 2,240 2,795 2,214 2,563 2,785 Interest (158) (103) (123) (161) (1,448) (100) (50) (50) Depreciation (501) (673) (840) (1,152) (1,821) (2,363) (2,513) (2,704) Pretax profits 13,181 14,040 16,147 20,187 20,287 25,074 28,539 32,120 Extraordinary items — — (331) 12,234 2,955 — — — Taxes (4,291) (4,284) (5,528) (6,805) (8,409) (9,027) (9,989) (11,242) Minority interest 21 20 (22) 5 25 25 25 25 RPS dividends (incl tax) (101) (1,453) (1,457) (1,211) 0 (969) (727) (545) PAT 8,810 8,323 8,810 22,205 14,791 15,104 17,849 20,358 Adj PAT (pre-exceptional; excl RPS impact) 8,911 9,776 10,482 13,386 14,428 16,073 18,542 20,869 EPS (Rs) 9.2 8.7 9.2 23.1 15.4 15.7 18.6 21.2 Adj EPS (Rs) - (excl RPS impact) 9.3 10.2 10.9 13.9 15.0 16.7 19.3 21.7

Balance sheet (Rs mn) Total Equity 27,207 35,306 42,145 66,567 75,617 85,518 97,007 109,270 Preference capital 20,169 20,192 20,169 0 0 0 0 0 Minority interest 61 4 85 10 141 141 141 141 Total borrow ings 29 12 9 19,088 15,254 11,441 7,627 3,814 Currrent liabilities 12,850 14,544 16,532 14,702 20,284 21,678 24,886 28,452 Total capital 47,467 55,514 62,408 85,665 91,012 97,099 104,775 113,225 Cash and cash eq 16,500 20,476 21,346 40,935 33,264 33,822 36,793 40,932 Inventories 11,736 11,878 13,160 16,843 26,278 29,278 33,278 37,278 Receivables 10,281 10,692 13,245 13,059 15,365 17,021 19,467 22,183 Loans and advances 7,645 11,627 12,972 14,156 13,114 14,994 16,723 18,265 Other current assets 1,243 1,706 2,127 3,429 7,026 7,326 7,726 8,126 Net fixed assets 11,730 12,254 14,960 9,721 14,125 14,212 13,549 12,446 Investments 884 894 576 1,321 2,124 2,124 2,124 2,124 Deferred tax assets 298 531 556 903 0 0 0 0 Total assets 47,467 55,514 62,408 85,665 91,012 97,099 104,775 113,225

Free cash flow (Rs mn) Operating cash flow , excl. W-cap, ex-taxes 12,976 13,209 15,713 19,170 22,390 25,642 28,564 32,113 Working capital (4,904) (2,236) (2,632) (5,670) (8,551) (5,442) (5,367) (5,091) Taxes paid (4,242) (4,164) (5,827) (6,810) (8,295) (9,027) (9,989) (11,242) Capital expenditure (1,482) (1,147) (4,064) (2,768) (4,605) (2,450) (1,850) (1,600) Other income (net) 1,108 1,126 1,003 1,001 1,107 2,114 2,513 2,735 Free cash flow (prior to RPS dividends) 3,456 6,788 4,193 4,923 2,046 10,838 13,871 16,915 RPS dividends (101) (1,453) (1,457) (1,211) - (969) (727) (545) Free cash flow to equity holders 3,355 5,335 2,736 3,712 2,046 9,870 13,144 16,370

Key assumptions / metrics Ad revenue grow th (%) 21.2 11.8 28.9 9.2 14.5 18.7 16.0 15.0 Domestic subscription revenue grow th (%) 13.2 8.0 14.5 11.7 11.8 15.0 13.5 14.0 Overseas subscription revenue grow th (%) 5.5 (23.6) 15.7 3.0 (2.8) - - - Content cost as % of revenue 37.7 38.6 41.2 42.2 40.9 35.3 35.8 37.6 Effective tax rate (%) 32.6 30.5 34.2 33.7 41.5 36.0 35.0 35.0 EBITDA margin (%) 27.2 25.7 25.8 29.9 31.1 32.6 32.1 31.7 ROAE 26.6 26.6 22.7 40.9 20.8 18.7 19.6 19.7 ROACE 24.9 21.8 21.6 20.5 15.7 20.1 21.8 23.2

Source: Kotak Institutional Equities estimates

48 KOTAK INSTITUTIONAL EQUITIES RESEARCH REDUCE Sun TV Network (SUNTV)

Media OCTOBER 11, 2018 UPDATE Coverage view: Attractive

Priorities not cognizant of changing landscape. Sun’s viewership share loss in Tamil Price (`): 644 GEC could result in continued underperformance versus industry. Further, its strategy of Target price (`): 660 expanding its TV network in new regional markets and its lack of focus/underinvestment BSE-30: 34,761 in OTT could have ramifications in the event of accelerated ‘TV-to-OTT’ shift. We cut FY2020-21E earnings by 4% and target multiple to 17X Sep-20E earnings from 24X; we have lowered multiples of broadcasters in view of potential risks from digital. Stay cautious despite a sharp correction in the stock price; our revised TP is `660 (`925).

Company data and valuation summary Sun TV Network Stock data Forecasts/Valuations 2019E 2020E 2021E 52-week range (Rs) (high,low) 1,098-557 EPS (Rs) 34.7 37.0 40.8 Market Cap. (Rs bn) 253.6 EPS growth (%) 20.6 6.6 10.3 Shareholding pattern (%) P/E (X) 18.5 17.4 15.8 Promoters 75.0 Sales (Rs bn) 37.4 42.0 47.2 FIIs 12.1 Net profits (Rs bn) 13.7 14.6 16.1 MFs 4.7 EBITDA (Rs bn) 19.5 20.8 23.6 Price performance (%) 1M 3M 12M EV/EBITDA (X) 12.4 11.5 10.0 Absolute (6.9) (20.5) (21.3) ROE (%) 28.4 27.9 28.6 Rel. to BSE-30 1.6 (17.1) (27.7) Div. Yield (%) 3.1 3.5 3.9

Sun should prioritize digital over regional expansion

The penetration of TV and internet in Southern states is higher compared to the rest of India (HSM) (Exhibits 1-4). This potentially implies (1) lower TV penetration-led opportunity and (2) faster adoption of OTT, in South. Yet, Sun’s focus and investments in digital are underwhelming and its OTT platform, Sun NXT (launched in June 2017), lags peers on key metrics (Exhibit 5). It looks like the company is somewhat oblivious of risks/opportunities that OTT present. On the other hand, Sun is eyeing regional expansion in TV (not opportune time in our view) and it plans to launch a Bangla GEC by end-FY2019. This initiative would incur an investment of `1.25-1.5 bn/year and take at least 3-4 years to break even. We believe it is about time Sun steps up investments in digital and prioritize it over regional expansion, if necessary.

TN—corrective measures underway for viewership share defense; would wait and watch

Sun TV’s viewership share in the Tamil GEC genre has dropped to 46-47% from 65% over the past two years (Exhibits 7-8). Share loss to competition is attributable to (1) Sun’s reluctance to experiment with contemporary/bold content on Sun TV, (2) lack of second GEC to cater to urban/youth audience and (3) perhaps, dismissive view about competition. As a corrective measure, Sun is about to re-launch Sun Life as the second GEC with programming focused on urban/youth audience that Sun TV has lost to its competition. We are not expecting any fireworks from Sun Life as we believe investments may be modest/suboptimal in the near term. However, we would keep an eye on its launch and subsequent progress. Stay cautious notwithstanding sharp correction in the stock price

We tweak our earnings to incorporate (1) higher content investments, (2) lower ad growth in view of share loss, (3) higher-than-estimated revenue and EBIT from IPL, (4) marginal delays in Jaykumar Doshi digitization in TN and (5) promoter compensation cap (at FY2018-level of `1.75 bn). Net result—4% earnings cut for FY2020-21E. We lower our target PE multiple to 16X September 2020E earnings from 24X as we ascribe lower value to the broadcasting business in view of potential risks from digital. Despite Sun NXT’s weak positioning and lack of strategy, we ascribe 1X P/E multiple to factor optionality of digital in view of content library. We maintain our cautious stance with a revised TP of `660 (`925 earlier).

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

What Sun needs to do?

Sun scores low on our 10-point framework for success in digital

As discussed in the industry section, three key attributes of success in digital are (1) content capabilities, (2) product and technology and (3) capital. Sun scores moderately on #1 and low on #2 and #3. Why moderately on content capabilities? Sun has unparalleled content and movie library in the South; however, its content capabilities are largely attributable to its private (third-party) content producers. While most of these producers have exclusively worked for Sun TV Network so far, the same may not hold in the OTT universe. In-house content capabilities and team strength of Sun are not at par with those of national broadcasters such as Star and Zee.

Partnership with other broadcasters should be the way forward, in our view

Sun’s historical strength in the TV broadcasting business was largely due to distribution strength and exclusive working relationships with good private content producers. These two advantages would not continue in the OTT universe. In our view, Sun is lagging Zee and Star by 1-3 years in its digital transition journey. And it does not have any inherent advantages (such as technological-edge or deep pockets) to compete against the heavyweights.

In our view, it does not make sense for Sun NXT to be a ‘me-too’ OTT. The best way forward for Sun is to form Hulu-like partnership with other large broadcasters such as Star and Zee.

Exhibit 1: TV penetration is already very high in South; we Exhibit 2: An average TV viewer in South spends about 20% expect muted growth ahead more time on TV than his counterpart in HSM TV households and penetration, July 2018 Average time spent on TV per TV viewer (mins/day), July 2018

TV households (LHS, mn) TV penetration (RHS, %) 260 India South Rest of India (HSM) 250 100 95 249 250

200 80 240 66 150 60 230 57 224

220 100 197 40 211 128 210 50 20 68 200

0 0 India South Rest of India 190 India South Rest of India (HSM) (HSM)

Source: BARC India, Kotak Institutional Equities Source: BARC India, Kotak Institutional Equities

50 KOTAK INSTITUTIONAL EQUITIES RESEARCH Sun TV Network Media

Exhibit 3: Internet penetration is higher in South; TV-to-OTT Exhibit 4: Within South, internet penetration in highest in TN, shift could be faster than HSM Sun's core market Internet subscribers and penetration, March 2018 Internet subscribers and penetration, March 2018

Internet subscribers (LHS, mn) Internet subscribers (LHS, mn) 600 Internet penetration (RHS, %) 60 60 Internet penetration (RHS, %) 60 55 55 51 500 49 50 50 50

42 400 40 40 40 38 35 300 30 30 30 494 200 20 365 20 40 38 20 32 100 10 129 10 20 10 0 0 India South Rest of India 0 0 Tamil Nadu Kerala Karnataka AP/Telangana (HSM)

Source: TRAI, Kotak Institutional Equities Source: TRAI, Kotak Institutional Equities

Exhibit 5: Sun NXT is significantly behind peers of MAUs and DAUs Key metrics of OTT players in India, Aug 2018

MAUs DAUs Average time spent (mn) (mn) (mins per user per day) Youtube 220-240 170-190 50-60 Facebook 200-220 140-160 30-40 Hotstar (a) 75-100 14-18 35-40 JioTV Live 40-50 8-10 25-30 Prime Video 25-35 5-7 40-45 Netflix 10-15 4-5 40-45 Voot 30-40 4-6 35-40 Airtel TV 15-20 5-7 25-30 ZEE5 41 NA 31 SONY LIV 20-30 3-5 20-25 JioCinema 8-15 2-3 25-30 Vodafone Play 3-7 0.5-1.5 NA Sun NXT 2-5 0-0.5 35-40

Notes: (a) Hotstar's MAUs and DAUs on non-cricket days. It is 30-50% higher on key cricketing days (especially IPL). (b) Above metrics includes Android, iOS as w ell as w eb users. (c) ZEE5's metrics are for Sep 2018 as reported by the company. Its comparison w ith metrics of other players in the table may not be like-for-like.

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 51 Media Sun TV Network

Exhibit 6: Sun scores low on our 10-point framework to assess strengths of OTT players

Global players Local players Netflix Amazon Prime Youtube Facebook RJio Hotstar ZEE5 Sony Liv Sun Nxt Content 1 Content library a a aa a aaa aaaaa aaaa aa aaa 2 Content production capabilities aaaa aaa aa a aaaa aaaaa aaaaa aaa aa 3 Hook aaa aa aaa aa aa aaaa aa a a Product and technology 4 User interface and streaming experience aaaaa aaaaa aaaaa aaaaa aaa aaaaa aaa aa aa 5 Recommendation engine aaaaa aaaa aaaaa aaaa a a a a a 6 Data/analytics capabilities aaaaa aaaaa aaaaa aaaaa aa aaa aa aa a Capital availability / Platform play 7 Capital aaaaa aaaaa aaaaa aaaaa aaaaa aaa aa aa a 8 Platform play (Local/Global) aaa aaaa aa aa aaaaa aa a a a Others 9 Organization DNA and talent aaaa aaaa aaaa aaaa aaa aaa aa a a 10 Monetization capabilites aaa aaa aaaaa aaaaa aaa aaaa aaaa aa aa Overall aaaa aaa aaaa aaa aaaa aaaa aa 1/2 a a

Notes: (1) We have not covered a few OTT players such as Eros Now, Alt Balaji, Airtel TV, Vodafone play.

Source: Kotak Institutional Equities

52 KOTAK INSTITUTIONAL EQUITIES RESEARCH Sun TV Network Media

Exhibit 7: Regional genres - BARC ratings market share, 2-Apr-16 to 21-Sep-18 (Week 14, 2016 to Week 38, 2018) (%)

1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 Tamil GEC (Urban + Rural)- Viewership share in the top 6 channels (%) Sun TV 65.7 61.5 62.3 61.7 57.5 50.5 52.8 50.7 46.8 45.8 STAR Vijay 12.2 12.9 10.7 12.6 16.9 24.6 21.9 20.5 21.4 22.2 Zee Tamil 8.4 12.4 14.0 13.4 13.6 14.3 15.6 18.1 20.1 21.5 Polimer 5.5 4.9 4.5 4.7 4.8 3.8 3.7 3.3 3.1 2.6 Kalaignar TV 4.6 3.6 3.5 3.3 3.1 2.9 3.5 3.4 2.5 2.3 Jaya TV 3.6 4.7 5.0 4.2 4.0 3.9 2.5 2.4 2.2 2.4 Colors Tamil 1.5 3.8 3.2 Total of top 7 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Telugu GEC (Urban + Rural)- Viewership share in the top 4 channels (%) Zee Telugu 27.9 24.5 22.8 24.0 24.3 22.9 24.6 24.0 26.8 25.1 Star Maa TV 24.4 22.1 22.5 23.0 22.2 27.7 24.5 25.7 27.8 30.0 Gemini TV (Sun) 21.8 28.3 30.1 29.3 29.4 25.6 24.4 24.8 22.4 22.0 ETV Telugu 25.9 25.1 24.6 23.7 24.1 23.8 26.4 25.6 23.0 22.8 Total of Top 4 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Kannada GEC (Urban + Rural)- Viewership share in the top 5 channels (%) Colors Kannada 35.5 36.2 35.2 34.2 34.4 35.0 34.8 35.0 33.9 33.1 Colors Super 0.0 2.8 4.5 6.5 8.0 8.4 11.4 10.3 8.0 9.0 Zee Kannada 23.4 22.4 24.5 24.8 25.6 24.5 22.3 24.7 25.0 29.3 Udaya TV (Sun) 20.2 18.8 12.8 13.0 13.6 16.4 18.7 18.0 18.8 17.3 Star Suvarna 20.9 19.8 23.0 21.6 18.3 15.6 12.8 12.0 14.4 11.3 Total of Top 5 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Malayalam GEC (Urban + Rural)- Viewership share in the top 4 channels (%) Star Asianet 57.2 52.9 55.3 56.8 54.9 51.9 43.7 48.1 52.8 52.6 Surya TV (Sun) 12.3 17.4 15.5 14.5 15.5 20.1 20.3 18.4 16.6 17.0 Mazhavil Manorama 18.7 16.8 15.5 15.7 18.2 16.7 21.3 16.9 15.5 15.8 Flowers TV 11.8 12.8 13.7 12.9 11.4 11.3 14.8 16.6 15.1 14.6 Total of Top 4 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Telugu movie channels (Urban + Rural)- Viewership share in the top 4 channels (%) Gemini movies (Sun) 48.3 47.0 42.2 41.0 35.6 32.2 31.9 33.1 28.4 32.1 Zee Cinemalu 0.0 3.3 14.2 17.2 18.9 21.7 21.8 23.1 26.0 24.7 Star MAA movies 35.3 32.3 26.2 25.3 29.2 32.4 30.2 28.3 31.8 27.5 ETV cinema 16.4 17.4 17.4 16.6 16.2 13.6 16.1 15.5 13.7 15.7 Total of Top 4 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Malayalam movie channels (Urban + Rural)- Viewership share in the top 2 channels (%) Star Asianet movies 54.0 51.1 56.1 51.0 49.2 51.3 50.4 55.3 53.9 54.6 Surya movies (Sun) 46.0 48.9 43.9 49.0 50.8 48.7 49.6 44.7 46.1 45.4 Total of Top 2 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Tamil movie channel (Urban + Rural)- (GVMs) KTV (Sun) 273 265 278 268 316 332 337 294 275 303

Kannada movie channel (Urban + Rural)- (GVMs) Udaya movies (Sun) 172 156 151 170 190 193 186 191 185 220

Source: BARC data,, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 53 Media Sun TV Network

Exhibit 8: Weighted viewership share of Sun network in regional GECs

Sun's weighted viewership share in South regional GECs (%) 42

39.7 39.8 40 39.2 38.6

38 37.0

35.5 36 34.3 34.2 34

31.8 32 31.0

30 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19E

Notes: (1) Above market share working is based on Sun network's quarterly viewership share in regional GECs (South) and it uses ad market size of respective regional GE genre as weight. (2) The above calculation does not cover regional movies, regional music, regional news, regional comedy and regional kids genres that collectively account for about 30-35% of Sun's ad revenues. It only covers four regional GECs of Sun (Sun TV, Gemini TV, Udaya TV and Surya TV) that account for 65-70% of Sun’s ad revenues.

Source: BARC data, Kotak Institutional Equities estimates

Exhibit 9: Revised earnings estimates of Sun TV Network, FY2019E-21E (Rs mn)

Revised Previous Change (%) 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E Advertising revenues (incl. slot sale) 15,430 17,132 19,081 15,745 17,699 20,037 (2) (3) (5) Domestic subscription revenues 13,505 16,422 19,229 13,690 16,966 20,001 (1) (3) (4) - DTH subscription revenues 9,015 10,971 12,633 9,015 11,053 12,727 0 (1) (1) - Cable subscription revenues 4,490 5,451 6,596 4,676 5,913 7,273 (4) (8) (9) Overseas subscription revenues 1,736 1,771 1,771 1,745 1,780 1,815 (0) (0) (2) Radio revenues 1,128 1,319 1,517 1,148 1,320 1,518 (2) (0) (0) Sun Pictures (movie production) 1,500 1,500 1,500 1,500 1,500 1,500 0 0 0 Other operating revenues (incl IPL) 4,109 3,833 4,116 2,950 3,179 3,358 39 21 23 Total revenues 35,909 40,478 45,714 35,277 40,943 46,729 2 (1) (2) Direct expenses 4,210 6,129 7,032 3,957 5,369 6,032 6 14 17 Movie production costs 1,500 1,500 1,500 1,500 1,500 1,500 Employee expenses 3,554 3,915 4,240 3,743 4,304 4,950 (5) (9) (14) SG&A expenses 4,154 4,539 4,962 3,488 3,896 4,251 19 17 17 D&A expenses (incl movie amortization) 5,345 6,046 6,876 5,595 6,396 7,271 (4) (5) (5) Total expenditure 18,764 22,130 24,610 18,283 21,465 24,004 3 3 3 EBIT 17,145 18,348 21,103 16,994 19,478 22,725 1 (6) (7) EBIT margin (%) 47.7 45.3 46.2 48.2 47.6 48.6 PAT 13,690 14,588 16,092 13,702 15,189 16,816 (0) (4) (4) EPS (Rs/share) 34.7 37.0 40.8 34.8 38.5 42.7 (0) (4) (4) Key assumptions Ad revenue (incl slot sale) growth (%) 10.6 11.0 11.4 12.9 12.4 13.2 Domestic subs revenue growth (%) 20.5 21.6 17.1 22.1 23.9 17.9 - DTH subscription revenue growth (%) 22.1 21.7 15.2 22.1 22.6 15.2 - Cable subscription revenue growth (%) 17.2 21.4 21.0 22.1 26.5 23.0 Overseas subscription revenue growth (%) 2.5 2.0 - 3.0 2.0 2.0 Radio revenue growth (%) 13.0 17.0 15.0 15.0 15.0 15.0 Movies amortization expense 4,533 5,143 5,898 4,783 5,493 6,293 (5) (6) (6) IPL operating profit / (loss) 1,993 1,519 1,522 1,215 1,193 1,196 64 27 27

Source: Company, Kotak Institutional Equities estimates

54 KOTAK INSTITUTIONAL EQUITIES RESEARCH Sun TV Network Media

Exhibit 10: Sun: Dividend-discount model based fair PE derivation

Revised Earlier Zee Sun Zee Sun Comments Base year EPS (Rs/share) 100.0 100.0 100.0 100.0 Expect deflationary pressure on satellite (TV) rights of movies as OTT gains Base year payout ratio (%) 78 93 59 85 share. It will reduce capex andimprove cash generation. We assumed Terminal year payout 78 93 59 85 Payout ratio (%) to be same as FCF/ PAT (%).

Hi-growth phase # years 10.0 10.0 15.0 15.0 We reduce 'high-growth' phase to 10 years (from 15) and lower dividend Dividend growth - HGP (%) 12.0 8.0 13.9 10.0 (i.e. FCF) CAGR to factor potential risk from digital 3-4 years out

Terminal growth (%) 4.0 4.0 5.5 5.3 We lower terminal growth rate and marginally increase WACC (same as Ke WACC (%) 12.0 12.5 11.0 11.5 in this case) in view of rise in risk premium and to factor potential risk from digital video in the medium term Fair PE (X) 19.0 16.0 28.0 24.0 Terminal value as % of total 54.4 47.4 59.1 48.7

Source: Kotak Institutional Equities estimates

Exhibit 11: Sun: Dividend-discount model based fair PE derivation under different scenarios

Payout ratio (%) HGP (years) HGP-Gr (%) TG (%) WACC (%) PE (X) 90 7 6.0 4.0 12.5 13.2 90 7 7.0 4.0 12.5 13.8 90 7 8.0 4.0 12.5 14.5 90 7 9.0 4.0 12.5 15.3 95 7 6.0 4.0 12.0 14.7

Bear case Bear 95 7 7.0 4.0 12.0 15.5 95 7 8.0 4.0 12.0 16.3 95 7 9.0 4.0 12.0 17.1 90 10 7.0 4.0 12.5 14.5 90 10 8.0 4.0 12.5 15.5 90 10 9.0 4.0 12.5 16.5 90 10 10.0 4.0 12.5 17.7 95 10 7.0 4.0 12.0 16.2

Base case Base 95 10 8.0 4.0 12.0 17.4 95 10 9.0 4.0 12.0 18.6 95 10 10.0 4.0 12.0 19.9 90 15 8.0 5.0 12.0 18.9 90 15 9.0 5.0 12.0 20.8 90 15 10.0 5.0 12.0 22.9 90 15 11.0 5.0 12.0 25.3 95 15 8.0 5.5 12.0 20.7

Bullcase 95 15 9.0 5.5 12.0 22.8 95 15 10.0 5.5 12.0 25.1 95 15 11.0 5.5 12.0 27.7

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 55 Media Sun TV Network

Exhibit 12: Consolidated financial summary of Sun TV Network, FY2013-21E (Rs mn)

2013 2014 2015 2016 2017 2018 2019E 2020E 2021E Profit model (Rs mn) Net sales 19,230 22,236 23,954 25,698 26,457 29,630 37,409 41,978 47,214 EBIT 9,674 10,314 10,619 12,693 13,694 15,538 18,645 19,848 22,603 Other income 722 866 989 1,106 1,538 1,423 1,744 1,814 1,987 Interest (expense)/income (49) (46) (23) (22) (10) (11) (11) (11) (11) Pretax profits 10,347 11,134 11,586 13,777 15,222 16,950 20,378 21,651 24,579 Tax-cash (3,359) (3,730) (3,760) (4,755) (5,203) (5,822) (6,950) (7,369) (8,846) Tax-deferred 53 48 — — — — — — — Minority interest 54 28 (6) (68) 288 228 262 306 358 Net profits after minority interests 7,096 7,480 7,820 9,015 10,307 11,355 13,690 14,588 16,092 Earnings per share (Rs) 18.0 19.0 19.8 22.9 26.2 28.8 34.7 37.0 40.8 Balance sheet (Rs mn) Total equity 27,854 30,954 33,481 35,263 40,285 46,121 50,322 54,234 58,464 Deferred Tax 284 260 226 176 521 763 763 763 763 Total borrowings — — — — — — — — — Currrent liabilities 3,006 3,082 2,262 2,765 2,941 5,832 6,855 7,838 8,794 Total capital 32,396 35,636 37,450 40,894 43,782 52,756 57,979 62,874 68,060 Cash 4,162 6,094 7,866 10,931 7,884 12,771 12,318 14,608 16,861 Current assets 12,000 11,075 12,716 14,950 11,519 15,632 20,341 22,151 24,802 Total fixed assets 8,564 7,976 7,330 4,544 7,841 7,763 7,701 7,798 7,723 Intangible assets 5,233 5,775 4,481 4,551 4,421 4,246 5,012 5,404 5,404 Total assets 32,396 35,636 37,450 40,894 39,706 48,453 53,414 58,002 62,830 Free cash flow (Rs mn) Operating cash flow, excl. WC 10,325 12,358 13,034 13,300 12,794 14,216 17,039 18,525 20,634 Working capital (WC) (1,926) (710) (1,519) (254) (293) (1,221) (3,687) (827) (1,695) Capital expenditure (4,037) (4,305) (4,400) (3,735) (5,324) (4,353) (6,050) (6,535) (7,103) Other income 403 773 823 938 1,089 1,423 1,744 1,814 1,987 Free cash flow 4,765 8,116 7,938 10,249 8,267 10,065 9,047 12,976 13,823 Ratios (%) Debt/equity — — — — — — — — — Net debt/equity (15) (20) (23) (31) (20) (28) (24) (27) (29) RoAE 26 25 24 26 27 26 28 28 28 RoACE 27 25 24 26 26 25 27 27 28 Ratios (%) Ad revenue (incl slot sale) growth (%) 7.6 0.1 4.8 5.6 (3.7) 9.7 10.6 11.0 11.4 Domestic subs revenue growth (%) 3.2 25.9 14.5 10.5 15.7 18.9 20.5 21.6 17.1 - DTH subscription revenue growth (%) 12.0 20.2 17.3 11.3 12.2 12.3 22.1 21.7 15.2 - Cable subscription revenue growth (%) (14.7) 41.2 8.1 8.3 24.6 33.9 17.2 21.4 21.0 Overseas subscription revenue growth (%) 22.3 21.2 8.8 5.5 7.4 7.1 3.0 2.0 2.0 Radio revenue growth (%) 25.9 20.4 20.2 11.2 (47.7) 12.0 13.0 17.0 15.0 Movies amortization expense 3,202 3,827 5,261 4,292 3,442 3,778 4,533 5,143 5,898 IPL operating profit / (loss) — (308) (583) (566) (318) (227) 1,993 1,519 1,522

Source: Company, Kotak Institutional Equities estimates

56 KOTAK INSTITUTIONAL EQUITIES RESEARCH ATTRACTIVE Banks

India OCTOBER 11, 2018 UPDATE BSE-30: 34,761

MCLR rate hikes now getting visible. RBI’s data for system-wide average lending and deposit rates for August showed a marginal upward movement in lending yields, as the impact of MCLR rate hikes is getting a lot more visible. The outcome was different for private and public banks with the former witnessing a sharp rise. However, the gap between outstanding WALR and fresh loans worsened ~10 bps mom. Rise in term deposit rates was marginal at 5 bps mom. Back book re-pricing (increase in MCLR) is offsetting the pressure of lower rate of fresh lending. NIM pressure will persist in the medium term.

QUICK NUMBERS Weighted average term deposit rates show sluggish upward movement

As per latest data by RBI, term deposit rates maintained slow upward trajectory in August 2018.  Weighted average Term deposit rates had seen a strong upward movement from November 2017 to March 2018 term deposit rates by 20 bps to 6.7% but were flat thereafter with marginal 11 bps rise until August 2018 to flat mom at 6.8% 6.8% (Exhibit 1). Wholesale deposit cost (as measured by CD rates) has also shown a similar trend (Exhibit 2). Average term deposit rates are broadly similar to term deposit rates (1-2 years)  Weighted average offered by most banks today, thereby indicating a stable deposit rate trend over the near term, lending rates though skew in CD ratio might push some private banks to raise deposit rates during the high- increased growth festive season when loan growth will be higher. marginally to 10.4%

Fresh loans not showing a firm trend of improvement  Gap between fresh lending and Fresh lending rates for banks were flat mom in August 2018 (Exhibit 3) despite rise in MCLR outstanding lending rates. It is quite possible that lending to NBFCs/retail is causing this lack of improvement. MCLR rates still negative rates (8.7% as of September 2018), however, continue to rise, up 18 bps since June 2018 and 30 bps since March 2018 (Exhibits 4 and 5). MCLR rate increased 15 bps qoq in 2QFY19 to by ~76 bps (from 67 8.7% for PSU banks (8.4% in March 2018) while the rise for private banks was similar in bps mom) 2QFY19 at 15 bps qoq to 9.3% (9% in March 2018). Most banks continued to raise MCLR rates in October 2018. With deposit rates broadly stable, a swift rise in MCLR rates is less likely.

Gap between outstanding lending rates and fresh loans widened in August 2018

As we have highlighted in earlier notes, there is a significant presence of a gap between fresh lending rates and weighted average lending rates (Exhibits 6-8), even as funding costs have started to rise. While there was some improvement in July 2018, the trend reversed in August 2018 with spread widening 11 bps mom. The gap for the sector increased to ~76 bps in August 2018 from ~67 bps in July 2018 (95 bps in March 2018). PSU banks saw a drop in spreads to

~83 bps in August 2018 (from ~94 bps mom) while spreads increased to ~84 bps (from ~43 M B Mahesh CFA bps mom) for private banks over the same period. We do see that overall yields have improved, suggesting the upward re-pricing of the back book due to increase in MCLR rates. Nischint Chawathe NIM pressure likely to sustain; intensity to drop from here

The gap between fresh lending rates and weighted average lending rates increased 11 bps mom in August 2018 to 76 bps. While outstanding lending rates have improved, fresh lending Dipanjan Ghosh rates continue to be flat over the past few months, mostly owing to change in loan mix towards higher retail products and lending to better-rated companies. This will result in broadly flat fresh Shrey Singh lending yields going ahead. We are facing a unique situation where lending is skewed towards some banks while deposit accretion is broadly spread across the space. This is pushing private banks to increase rates to borrow funds while passing them is still a challenge, though the trend shows improvement.

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: Deposit rates continue to move upwards at a slow pace Weighted average term deposit rates, March fiscal year ends, August 2013 – August 2018 (%)

Repo (month end) Commercial Banks Public Sector Banks Private Sector Banks 9.5

8.7

7.9

7.1

6.3

5.5

Feb-14

Feb-15

Feb-16

Feb-17

Feb-18

Nov-13

Nov-14

Nov-15

Nov-16

Nov-17

Aug-13

Aug-14

Aug-15

Aug-16

Aug-17

Aug-18

May-14

May-15

May-16 May-17 May-18

Source: RBI, Kotak Institutional Equities

Exhibit 2: CD rates increased around 80 bps in 2QFY19 CD rates, March fiscal year ends, April 2013 – October 2018 (%)

12.5

10.0

7.5

5.0

2.5

0.0

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Oct-18

Apr-13

Apr-14

Apr-15

Apr-16

Apr-17

Apr-18

Aug-13

Aug-14

Aug-15

Aug-16 Aug-17 Aug-18

Source: RBI, Kotak Institutional Equities

58 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks India

Exhibit 3: Fresh lending rates increased sharply in July 2018; flat mom in August 2018 Weighted fresh lending rates, March fiscal year ends, August 2015 – August 2018 (%)

Public sector banks Private sector banks Foreign banks SCBs 13

12

11

10

9

8

Jun-16

Jun-17

Jun-18

Oct-15

Oct-16

Oct-17

Feb-16

Feb-17

Feb-18

Apr-16

Apr-17

Apr-18

Dec-15

Dec-16

Dec-17

Aug-15

Aug-16 Aug-17 Aug-18

Source: RBI, Kotak Institutional Equities

Exhibit 4: MCLR rates continue to rise upwards; 30 bps mom increase for PSU banks to 8.45% One-year MCLR rate for private and public banks, April 2016 - September 2018 (%)

Private banks Public banks 10.0

9.4

8.8

8.2

7.6

7.0

Jul-16

Jul-17

Jul-18

Jan-17

Jan-18

Jun-16

Jun-17

Jun-18

Oct-16

Oct-17

Feb-17

Feb-18

Apr-16

Sep-16

Apr-17

Sep-17

Apr-18

Sep-18

Dec-16

Dec-17

Nov-16

Nov-17

Mar-17

Mar-18

Aug-16

Aug-17

Aug-18

May-16 May-17 May-18

Source: RBI, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 59 India Banks

Exhibit 5: MCLR rates have shown an increase across most banks MCLR rate across banks, October 2017-October 2018 (%)

(bps cJange) Oct-17 Nov-17 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 (Apr-18 to Oct-18) Public sector banks Allahabad 8.45 8.45 8.45 8.25 8.25 8.35 8.45 8.45 8.50 8.50 0.25 Andhra 8.40 8.40 8.40 8.40 8.50 8.55 8.55 8.70 8.70 8.70 0.30 BoB 8.35 8.30 8.30 8.30 8.40 8.45 8.50 8.50 8.55 8.55 0.25 BoI 8.30 8.30 8.30 8.30 8.40 8.50 8.50 8.55 8.60 8.60 0.30 BoMH 8.70 8.65 8.65 8.65 8.75 8.75 8.75 8.75 8.80 8.75 0.10 Canara 8.30 8.30 8.30 8.40 8.45 8.50 8.50 8.60 8.65 8.70 0.30 Central 8.30 8.30 8.30 8.45 8.45 8.45 8.50 8.85 8.60 8.60 0.15 Corporation 8.65 8.65 8.65 8.75 8.75 8.85 8.85 8.50 8.95 8.95 0.20 Dena 8.25 8.25 8.30 8.30 8.35 8.35 8.45 8.50 8.60 8.60 0.30 IDBI 8.55 8.65 8.55 8.55 8.65 8.65 8.75 8.85 8.85 8.85 0.30 Indian NA NA 8.25 8.25 8.40 8.50 8.60 8.60 8.60 8.60 0.35 IOB 8.55 8.40 8.40 8.40 8.50 8.50 8.50 8.65 8.70 8.70 0.30 OBC 8.40 8.40 8.35 8.50 8.50 8.65 8.65 8.65 8.65 8.75 0.25 PNB 8.15 8.15 8.30 8.30 8.30 8.40 8.45 8.45 8.45 8.45 0.15 PSB 8.55 8.45 8.40 8.40 8.50 8.60 8.65 8.70 8.80 8.80 0.40 SBI 8.00 7.95 8.15 8.15 8.15 8.25 8.25 8.25 8.45 8.50 0.35 Syndicate 8.50 8.50 8.45 8.45 8.50 8.55 8.65 8.65 8.80 8.80 0.35 UCO 8.45 8.45 8.45 8.45 8.45 8.55 8.55 8.55 8.65 8.65 0.20 Union 8.20 8.20 8.20 8.35 8.35 8.45 8.45 8.55 8.55 8.55 0.20 United Bank 8.75 8.60 8.60 8.60 8.70 8.70 8.80 8.80 8.85 8.85 0.25 Vijaya 8.50 8.50 8.50 8.50 8.50 8.50 8.55 8.65 8.70 8.70 0.20 Old private banks CUBK 9.25 9.25 9.25 9.05 9.05 9.05 9.05 9.05 9.05 9.25 0.20 DCB 9.72 9.72 9.87 9.87 9.87 9.97 9.97 10.40 10.40 10.62 0.75 FB 8.90 8.90 8.90 8.90 8.90 9.15 9.15 9.20 9.20 9.20 0.30 J&K 8.90 8.80 8.80 8.70 8.80 8.80 8.80 8.80 8.85 8.85 0.15 KVB 9.00 9.00 9.00 9.15 9.15 9.30 9.30 9.55 9.55 9.55 0.40 New private banks Axis 8.25 8.25 8.40 8.40 8.40 8.50 8.60 8.60 8.70 8.70 0.30 Bandhan - - 9.95 9.91 9.75 9.75 10.38 10.38 10.50 10.45 0.54 HDFC 8.15 8.10 8.20 8.30 8.30 8.40 8.40 8.40 8.60 8.65 0.35 ICICI 8.20 8.20 8.20 8.30 8.30 8.40 8.40 8.40 8.55 8.65 0.35 IDFC 8.00 8.50 8.60 8.75 8.80 8.90 8.90 8.90 9.10 9.20 0.45 IndusInd 8.95 8.85 9.10 9.25 9.25 9.35 9.55 9.60 9.65 9.65 0.40 Karnataka 8.85 8.75 8.75 8.35 8.80 8.85 8.90 8.90 8.90 8.95 0.60 Kotak 8.60 8.60 8.65 8.60 8.70 8.90 8.95 8.95 8.95 9.05 0.45 LVB 9.35 9.30 9.35 9.40 9.45 9.70 9.70 9.70 10.05 9.80 0.40 RBL 9.30 9.25 9.40 9.45 9.50 9.55 9.70 9.75 9.90 9.90 0.45 SIB 9.00 9.00 9.00 9.00 9.00 9.00 9.25 9.25 9.35 9.35 0.35 Yes 8.80 8.85 9.25 9.25 9.35 9.45 9.45 9.55 9.70 9.70 0.45 Small finance banks AU 12.85 12.75 12.95 12.55 12.90 13.00 12.65 12.50 12.40 12.70 0.15 Equitas 16.15 16.15 16.15 16.10 15.55 15.30 15.40 15.15 15.35 15.95 (0.15) Ujjivan 16.80 16.80 14.90 15.00 15.20 15.45 15.00 15.65 15.80 15.80 0.80

Source: Company, Public documents, Kotak Institutional Equities

60 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks India

Exhibit 6: Spread between lending and deposit rates has been flat around 360 bps over the past five months Spread between outstanding lending rates and deposit rates for all SCBs, August 2016 – August 2018 (%)

PSU Private Foreign SCBs 5.5

4.9

4.3

3.7

3.1

2.5

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Oct-13

Oct-14

Oct-15

Oct-16

Oct-17

Feb-14

Feb-15

Feb-16

Feb-17

Feb-18

Apr-14

Apr-15

Apr-16

Apr-17

Apr-18

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Aug-13

Aug-14

Aug-15

Aug-16 Aug-17 Aug-18

Source: RBI, Kotak Institutional Equities

Exhibit 7: The spread between fresh and outstanding lending rates increased in August 2018 owing to increase in spread for private banks Average outstanding and fresh lending rates for all SCBs, August 2016 – August 2018 (%)

Outstanding WALR Fresh WALR Spread between fresh and weighted average (RHS) 11.5 0.0

11.0 (0.2)

10.5 (0.5)

10.0 (0.7)

9.5 (1.0)

9.0 (1.2)

Jul-17

Jul-18

Jan-17

Jan-18

Jun-17

Jun-18

Oct-16

Feb-17

Oct-17

Feb-18

Sep-16

Apr-17

Sep-17

Apr-18

Dec-16

Dec-17

Nov-16

Nov-17

Mar-17

Mar-18

Aug-16

Aug-17

Aug-18

May-17 May-18

Source: RBI, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 61 India Banks

Exhibit 8: Private banks – fresh and outstanding lending rates spread saw a sharp rise in August 2018 Average outstanding and fresh lending rates for private banks, March fiscal year ends, May 2016 – May 2018 (%)

Outstanding WALR Fresh loans WALR Spread between fresh and weighted average (RHS) 11.5 0.0

11.0 (0.2)

10.5 (0.5)

10.0 (0.7)

9.5 (1.0)

9.0 (1.2)

Jul-17

Jul-18

Jan-17

Jan-18

Jun-17

Jun-18

Oct-16

Feb-17

Oct-17

Feb-18

Sep-16

Apr-17

Sep-17

Apr-18

Dec-16

Dec-17

Nov-16

Nov-17

Mar-17

Mar-18

Aug-16

Aug-17

Aug-18 May-17 May-18

Source: RBI, Kotak Institutional Equities

Exhibit 9: Public banks – sharp drop in spread led by rise in fresh lending rates Average outstanding and fresh lending rates for PSU banks, March fiscal year ends, August 2016 – August 2018 (%)

Outstanding WALR Fresh loans WALR Spread between fresh and weighted average (RHS)

11.5 0.0

10.9 (0.4)

10.3 (0.8)

9.7 (1.2)

9.1 (1.6)

8.5 (2.0)

Jul-17

Jul-18

Jan-17

Jan-18

Jun-17

Jun-18

Oct-16

Feb-17

Oct-17

Feb-18

Sep-16

Apr-17

Sep-17

Apr-18

Dec-16

Dec-17

Nov-16

Nov-17

Mar-17

Mar-18

Aug-16

Aug-17

Aug-18 May-17 May-18

Source: RBI, Kotak Institutional Equities

62 KOTAK INSTITUTIONAL EQUITIES RESEARCH CAUTIOUS Cement

India OCTOBER 11, 2018 UPDATE BSE-30: 34,761

2QFY19E preview—no cheer yet. Rising costs in absence of a meaningful price increase will result in another subdued quarter for cement companies, despite strong volumes (+13% yoy, but on a low base). We expect EBITDA for companies to increase by 11% yoy largely on the back of assumed cost efficiencies at ACC and Ambuja. We expect EBITDA for regional names to decline by 6% yoy. Rising costs and muted prices continue to risk earnings estimates for the sector, as industry utilizations remain low.

All-India cement prices up 1% qoq—prices up in North, Central but decline in South, West

All-India cement prices increased by `3/bag qoq to `331/bag in 2QFY19 with regional variations—prices increased by (1) `12/bag qoq in Central, (2) `8/bag qoq in North, (3) `5/bag qoq in East, while declining in (4) West, South by `2-3/bag qoq. We highlight that prices are down by `7/bag on yoy basis led by lower prices in South (-`23/bag yoy) and North (-`7/bag yoy) while prices were up in Central region (+`18/bag yoy). We expect realizations to move by (1) -1 to 4% yoy in 2QFY19E for pan-India names, (2) -1 to +1% yoy for North-based regional names, and (3) decline by 1-7% yoy for South, West based names (see Exhibits 3 and 4).

Costs to rise due to higher pet-coke prices, lower INR/US$ rate We expect fuel costs for companies to increase due to rising pet-coke prices and a lower INR/US$ rate—we estimate a 3-4% qoq increase in fuel costs. We estimate that close to 35% of the costs of cement companies are impacted due to Fx movement (pet-coke prices as well as diesel in freight costs). The cement companies may benefit from lower freight costs led by an increase in axle load limit. Our channel checks suggest that such gains can be higher in South as there was strict compliance with axle load limits in these markets compared with North. However, the gains may accrue gradually as full implementation may require a few system upgrades such as new truck-weighing scales.

Volumes—we expect another good quarter on favorable base Industry cement volumes (per DIPP) increased by 12.5% yoy for July-August 2018 on a low base; 2-year CAGR works out to 7% for the two months. We expect pan-India names to report 7-20% yoy growth in volumes—Ultratech will report highest volume growth (+20% yoy) led by higher capacity utilization for acquired assets of Jaiprakash. We note that Ultratech completed the acquisition of these assets in 1QFY18 and these operated at very low utilizations in 2QFY18—lower than average capacity utilization of 53% in FY2018 with gradual ramp-up over the quarters to close to 75%. For regional names, we expect volume growth of 4-15% yoy.

2QFY19E earnings—mixed bag for pan-India names, regional names to see a decline Among pan-India names, we expect EBITDA to move -2% to +56% yoy—we expect EBITDA to Abhishek Poddar decline for Shree Cement (-2% yoy) due to lower prices in North (-`9/bag yoy) and higher fuel costs, while ACC and Ambuja will see improvement led by cost efficiencies. We expect Ultratech's EBITDA to increase by 7% yoy on the back of higher volumes as we estimate Murtuza Arsiwalla EBITDA/ton to decline by 11% yoy to `915/ton due to higher fuel costs. We expect EBITDA for regional names to decline by 5-26% yoy due to subdued realizations and increased costs.

Maintain cautious stance on the sector on expensive valuations, large capacity additions Prayatn Mahajan We maintain our cautious stance on the cement sector on expensive valuations and on expectations of moderate improvement in earnings over the next two years. Cost headwinds on the back of rising fuel costs necessitate a sharp improvement in industry utilization for a meaningful earnings improvement. However, we believe close to 70 mtpa of new capacities over the next three years will keep industry utilizations low (<70%).

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

Exhibit 1: We expect EBITDA/ton to decline due to weak realizations, higher costs; improvement at ACC, Ambuja led by efficiencies Earnings estimate for cement companies for the quarter ended September 2018

Ultratech Cement ACC Ambuja Cements Sep-18 Sep-17 Jun-18 % (yoy) % (qoq) Sep-18 Sep-17 Jun-18 % (yoy) % (qoq) Sep-18 Sep-17 Jun-18 % (yoy) % (qoq) Sales, (mn tons) 15.8 13.1 17.5 20 (10) 6.4 6.0 7.2 7 (12) 5.3 5.0 6.4 7 (16) Realization (Rs/ton) 4,971 5,001 4,946 (1) 1 4,906 4,733 4,836 4 1 4,776 4,621 4,736 3 1 Operating costs (Rs/ton) 4,055 3,973 4,018 2 1 4,087 4,176 4,123 (2) (1) 3,808 3,915 3,759 (3) 1 Profitability (Rs/ton) 916 1,028 928 (11) (1) 819 557 713 47 15 968 706 977 37 (1)

Shree Cement JK Lakshmi Cement JK Cement Sep-18 Sep-17 Jun-18 % (yoy) % (qoq) Sep-18 Sep-17 Jun-18 % (yoy) % (qoq) Sep-18 Sep-17 Jun-18 % (yoy) % (qoq) Sales, (mn tons) 5.7 4.9 7.0 17 (18) 2.0 1.9 2.3 4 (14) 2.0 1.8 2.0 10 1 Realization (Rs/ton) 4,210 4,170 4,107 1 3 4,146 4,109 4,038 1 3 5,022 5,097 4,821 (1) 4 Operating costs (Rs/ton) 3,474 3,076 3,385 13 3 3,684 3,604 3,627 2 2 4,240 4,131 4,163 3 2 Profitability (Rs/ton) 736 1,094 722 (33) 2 462 505 410 (9) 13 782 966 658 (19) 19

India Cement Orient Cement Dalmia Cement Sep-18 Sep-17 Jun-18 % (yoy) % (qoq) Sep-18 Sep-17 Jun-18 % (yoy) % (qoq) Sep-18 Sep-17 Jun-18 % (yoy) % (qoq) Sales, (mn tons) 3.0 2.7 3.1 12 (2) 1.5 1.3 1.6 15 (6) 6.9 6.3 7.8 9 (12) Realization (Rs/ton) 4,379 4,696 4,425 (7) (1) 3,961 3,996 3,992 (1) (1) 5,484 5,038 5,250 9 4 Operating costs (Rs/ton) 3,935 4,024 3,917 (2) 0 3,544 3,426 3,459 3 2 4,294 3,825 4,088 12 5 Profitability (Rs/ton) 444 672 508 (34) (13) 417 570 533 (27) (22) 1,190 1,213 1,162 (2) 2

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: We estimate volume growth of 13% yoy for companies under our coverage Quarterly volumes of cement companies, March fiscal year-ends, 2QFY18 - 2QFY19E (mn tons)

Growth (%) 2QFY19E 2QFY18 1QFY19 (yoy) (qoq) ACC 6.4 6.0 7.2 7 (12) Ambuja 5.3 5.0 6.4 7 (16) Ultratech 15.8 13.1 17.5 20 (10) Shree Cement 5.7 4.9 7.0 17 (18) India Cement 3.0 2.7 3.1 12 (2) JK Cement 2.0 1.8 2.0 10 1 JK Lakshmi Cement 2.0 1.9 2.3 4 (14) Dalmia Cement (ex-OCL) 3.9 3.6 4.5 8 (13) Orient Cement 1.5 1.3 1.6 15 (6) OCL India 1.5 1.3 1.6 13 (8) Total 47.1 41.7 53.2 13 (11)

Source: Company, Kotak Institutional Equities estimates

Exhibit 3: All-India cement prices increased by Rs3/bag qoq; prices were weak in South, West regions Quarterly cement prices per region (Rs per 50 kg bag)

2QFY19—change (%) 2QFY18 1QFY19 2QFY19 (yoy) (qoq) North 314 297 305 (3) 3 Central 316 322 334 6 4 East 344 336 341 (1) 1 West 320 319 316 (1) (1) South 369 350 347 (6) (1) All India average 338 328 331 (2) 1

Source: Industry, Kotak Institutional Equities estimates

64 KOTAK INSTITUTIONAL EQUITIES RESEARCH Cement India

Exhibit 4: We expect realizations to improve 1-3% qoq for pan-India, North-based companies, but decline for South Quarterly realizations of cement companies, March fiscal year-ends, 2QFY17 – 2QFY19E (Rs/ton)

yoy growth (%) 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19E 4QFY18 1QFY19 2QFY19 Pan India players ACC 4,462 4,477 4,348 4,597 4,733 4,569 4,626 4,836 4,906 6 5 4 Ambuja 4,477 4,393 4,208 4,667 4,621 4,565 4,602 4,736 4,776 9 1 3 Ultratech 4,828 4,719 4,687 5,020 5,001 4,789 4,877 4,946 4,971 4 (1) (1) Pan-India 4,663 4,586 4,496 4,828 4,856 4,690 4,767 4,877 4,918 6 1 1 North based players Shree Cement 3,965 3,697 3,771 4,146 4,170 4,120 4,157 4,107 4,210 10 (1) 1 JK Cement 4,743 4,601 4,754 5,169 5,097 4,790 4,807 4,821 5,022 1 (7) (1) JK Lakshmi Cement 3,816 3,665 3,574 3,944 4,109 3,978 3,896 4,038 4,146 9 2 1 North 4,094 3,869 3,908 4,278 4,355 4,232 4,243 4,220 4,367 9 (1) 0 South based players India Cement 4,779 4,633 4,601 4,857 4,696 4,450 4,528 4,425 4,379 (2) (9) (7) Dalmia Cement (ex-OCL) 4,921 4,845 4,802 5,160 5,038 5,037 5,093 5,250 5,243 6 2 4 OCL India 5,258 5,506 5,316 5,249 5,027 5,239 5,273 5,423 5,484 (1) 3 9 Orient Cement 3,273 3,632 3,443 4,065 3,996 3,737 3,696 3,992 3,961 7 (2) (1) South 4,692 4,700 4,609 4,932 4,783 4,729 4,781 4,859 4,821 4 (1) 1 All-India 4,547 4,458 4,397 4,730 4,737 4,607 4,664 4,734 4,784 6 0 1

Source: Companies, Kotak Institutional Equities estimates

Exhibit 5: EBITDA/ton for cement companies to decline due to muted prices, higher costs; ACC, Ambuja may fare better led by efficiencies Quarterly EBITDA/ton of cement companies, March fiscal year-ends, 2QFY17 - 2QFY19E (Rs/ton)

yoy growth (%) 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19E 4QFY18 1QFY19 2QFY19 Pan India players ACC 426 309 483 711 557 473 550 713 819 14 0 47 Ambuja 684 589 606 1,013 706 865 815 977 968 34 (4) 37 Ultratech 978 890 908 1,182 1,028 801 922 928 916 2 (21) (11) Pan-India 780 680 735 1,021 845 735 818 888 904 11 (13) 7 North based players Shree Cement 1,351 989 856 1,167 1,094 1,041 962 722 736 12 (38) (33) JK Cement 761 768 843 993 966 733 669 658 782 (21) (34) (19) JK Lakshmi Cement 545 452 317 527 505 448 440 410 462 39 (22) (9) North 1,054 829 733 989 937 843 791 648 690 8 (35) (26) South based players India Cement 935 750 651 699 672 614 514 508 444 (21) (27) (34) Dalmia Cement (ex-OCL) 1,141 1,142 1,212 1,395 1,213 1,095 1,137 1,162 1,190 (6) (17) (2) OCL India 977 1,248 1,223 1,276 1,013 1,038 937 953 1,171 (23) (25) 16 Orient Cement 136 349 436 836 570 286 445 533 417 2 (36) (27) South 913 922 939 1,102 927 841 845 852 843 (10) (23) (9) All-India 868 765 781 1,031 882 778 819 830 847 5 (20) (4)

Source: Companies, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 65 India Cement

Exhibit 6: As per DIPP data, cement volumes increased 12.5% yoy in July – August 2018 Monthly cement production volumes in India, 2016 - 2018 ('000 tons, %)

('000 tons) (%, yoy) [RHS] (%, yoy 3MA) [RHS] 32,000 25 20 28,000 15 10 24,000 5 0 20,000 (5)

16,000 (10) (15)

12,000 (20)

Jun-17

Jun-18

Oct-16

Feb-17

Oct-17

Feb-18

Apr-17

Apr-18

Dec-16

Dec-17

Aug-16 Aug-17 Aug-18

Source: DIPP, Kotak Institutional Equities

Exhibit 7: The fuel costs will increase due to higher pet-coke prices, lower INR/US$ rate US pet coke prices (CFR basis), 2016 - 2018 (US$/ton)

US pet-coke prices (US$/ton) (CFR) 140 125 125 122 116 120 112 113 113 115 110 108 108 104 104 104 100 102 100 100 102 102 96 100 94 95 88 86

80

60

40

20

Jul-17

Jul-18

Jan-17

Jan-18

Jun-17

Jun-18

Oct-16

Oct-17

Oct-18

Feb-17

Feb-18

Apr-17

Sep-17

Apr-18

Sep-18

Dec-16

Dec-17

Nov-16

Nov-17

Mar-17

Mar-18

Aug-17

Aug-18 May-17 May-18

Source: Company, Steelmint, Kotak Institutional Equities estimates

66 KOTAK INSTITUTIONAL EQUITIES RESEARCH Cement India

Exhibit 8: Pan-India earnings to be a mixed bag—ACC, Ambuja to improve while Shree Cement's EBITDA to decline Earnings estimate of cement companies for the quarter ended September 2018 (Rs mn)

Q2FY18 Q1FY19 Q2FY19 Change (%) Sep-17 Jun-18 Sep-18 yoy qoq Comments ACC Net sales 30,545 37,679 34,553 13 (8) We factor 7% yoy growth in volumes to 6.4 mn tons (-12% qoq) and expect realizations EBITDA 3,530 5,435 5,495 56 1 to increase by 1% qoq to to Rs5,000/ton (+3% yoy). Cement prices were up in Central EBIT 1,979 3,954 3,999 102 1 and North region (40% of volumes) but declined in South, West (40% of volumes). PBT 2,624 4,798 4,863 85 1 PAT 1,777 3,255 3,307 86 2 We estimate EBITDA/ton to increase to Rs860/ton (+21% qoq)—the sequential Extraordinaries — — — improvement is largely led by lower costs as 2QCY18 included Rs438 mn as employee PAT-reported 1,777 3,255 3,307 86 2 separation expense (one-off). Ambuja Cements Net sales 23,196 30,169 25,535 10 (15) We expect volumes to grow 6.5% yoy to 5.4 mn tons (-16% qoq). We expect realization EBITDA 3,544 6,223 5,176 46 (17) to increase by 1% qoq to Rs4,780/ton (+3% yoy)—in the company's key markets, prices EBIT 2,141 4,859 3,798 77 (22) increased in North, Central but declined in the West. PBT 3,359 6,578 4,141 23 (37) PAT 2,724 4,993 2,981 9 (40) We estimate EBITDA/ton to decline 1% qoq to Rs968 (+37% yoy) due to an increase in Extraordinaries — — — fuel costs and lower qoq volumes due to seasonality. PAT-reported 2,724 4,993 2,981 9 (40) Grasim Industries Net sales 40,373 47,892 49,067 22 2 In the chemical operations, we expect volume growth of 7% yoy to 235,000 tons. We EBITDA 7,852 10,542 10,021 28 (5) expect volume growth at VSF to be subdued (+2% yoy) as it continues to operate at high EBIT 6,188 8,714 8,184 32 (6) capacity utilization levels. PBT 8,449 9,343 8,880 5 (5) We estimate VSF EBITDA to increase 24% yoy to Rs5.8 bn (-1% qoq) aided by firm PAT 6,285 6,426 6,393 2 (0) realizations, higher domestic volumes. We estimate chemicals EBITDA of Rs4.3 bn (+49% Extraordinaries 540 — — yoy, -14% qoq) as we factor in a sequential decline in caustic soda prices. PAT-reported 5,745 6,426 6,393 11 (0) Shree Cement Net sales 21,368 30,699 25,795 21 (16) We expect volume growth of 17% yoy to 5.7 mn tons (-18% qoq) due to last year's EBITDA 5,605 5,752 5,505 (2) (4) favorable base. We expect blended realizations to increase 3% qoq to Rs4,500/ton (3% EBIT 3,352 2,697 2,419 (28) (10) yoy) led by higher prices in the company's key markets in North, Central and East region. PBT 3,968 3,071 2,797 (30) (9) We estimate EBITDA/ton (blended) to increase 17% qoq to Rs960/ton (-16% yoy) led by PAT 2,115 2,795 2,238 6 (20) higher realizations, partially offset by fuel cost increase. We factor some efficiencies in the Extraordinaries — — — logistics costs aided by an increase in the axle load limit. PAT-reported 2,115 2,795 2,238 6 (20) UltraTech Cement Net sales 65,713 86,550 78,289 19 (10) We model 20% yoy growth in volumes to 15.8 mn tons (-10% qoq)—lower than 33% yoy EBITDA 13,513 16,238 14,427 7 (11) growth reported in 1QFY19 as FY2018 numbers included volumes from acquired capacities EBIT 8,525 11,378 9,615 13 (15) of Jaiprakash. PBT 6,447 8,753 7,098 10 (19) We expect 1% qoq increase in realizations to Rs4,970/ton (-1% yoy) led by higher prices in PAT 4,312 5,984 4,826 12 (19) North, Central partially offset by a decline in the South. We estimate EBITDA/ton to decline Extraordinaries — — — 1% qoq to Rs915 (-11% yoy) due to an increase in fuel costs. PAT-reported 4,312 5,984 4,826 12 (19)

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 67 India Cement

Exhibit 9: We expect earnings for regional cement companies to decline due subdued prices, cost increase Earnings estimate of cement companies for the quarter ended September 2018 (Rs mn)

Q2FY18 Q1FY19 Q2FY19 Change (%) Sep-17 Jun-18 Sep-18 yoy qoq Comments Orient Cement Net sales 5,231 6,399 5,963 14 (7) We expect cement volumes to grow by 15% yoy to 1.5 mn tons (-6% qoq) and EBITDA 746 854 627 (16) (27) realizations to decline by 1% qoq to Rs3,960/ton (-1% yoy). Cement prices declined in the EBIT 428 530 300 (30) (43) company's key markets in the West and South regions. PBT 177 269 43 (76) (84) PAT 102 160 30 (71) (81) We estimate EBITDA/ton to decline 22% qoq to Rs415/ton (-27% yoy) due to weak Extraordinaries — — — realization and increase in fuel costs. PAT-reported 102 160 30 (71) (81) JK Lakshmi Cement Net sales 7,767 9,234 8,149 5 (12) We expect cement volumes to grow by 4% yoy to 2 mn tons (-14% qoq), lower than the EBITDA 954 939 908 (5) (3) industry growth rate as the company's sales to non-trade channels remains weak. EBIT 508 493 458 (10) (7) PBT 188 152 122 (35) (20) We expect realizations to increase by 3% qoq to Rs4,150/ton (+1% yoy) led by higher PAT 132 138 92 (31) (33) prices in North and Central region. We estimate EBITDA/ton to increase by 12% qoq Extraordinaries — — — Rs460/ton (-9% yoy) aided by higher realizations, partially offset by an increase in fuel PAT-reported 132 138 92 (31) (33) cost. JK Cement Net sales 11,077 11,156 11,875 7 6 We expect (1) grey cement volumes to grow by 10% yoy to 2 mn tons (flat qoq) and white EBITDA 2,072 1,504 1,849 (11) 23 cement/wall putty volumes by 13% yoy to 0.33 mn tons (+18% qoq), and (2) grey cement EBIT 1,580 1,029 1,372 (13) 33 realizations to increase by 3% qoq to Rs3,975/ton (-3% yoy) led by higher prices in North, PBT 1,290 640 987 (23) 54 Central region (+Rs8-12/bag qoq). PAT 931 493 740 (21) 50 We estimate grey cement EBITDA/ton to increase by 29% qoq to Rs380/ton (-33% yoy) Extraordinaries — — — led by higher realizations, partially offset by an increase in fuel costs. We expect white PAT-reported 931 493 740 (21) 50 cement EBITDA to increase 6% yoy to Rs1.1 bn (+18% qoq). Dalmia Bharat Net sales 18,337 23,676 20,585 12 (13) We expect 8% yoy growth in volumes to 3.9 mn tons (-13% qoq) led by (1) 6% yoy EBITDA 4,414 5,240 4,672 6 (11) volume growth for OCL India to 1.5 mn tons, and (2) 9% yoy growth for South to 2.5 mn EBIT 2,866 3,442 2,857 (0) (17) tons. PBT 1,814 2,254 1,683 (7) (25) We estimate blended realization to remain flat qoq at Rs5,240/ton (+4% yoy) as we PAT 1,037 1,243 924 (11) (26) expect price increases in the East (+Rs5/bag qoq) to be offset by lower prices in the South Extraordinaries — — — (-Rs3/bag qoq). We estimate EBITDA/ton to increase 2% qoq to Rs1,190 (-2% yoy). PAT-reported 1,037 1,243 924 (11) (26) India Cements Net sales 12,683 13,607 13,246 4 (3) We model 12% yoy growth in volumes to 3 mn tons (-7% qoq). We expect the company's EBITDA 1,814 1,561 1,343 (26) (14) sales to be affected due to Kerala floods. EBIT 1,182 945 724 (39) (23) PBT 362 267 33 (91) (88) We expect realizations to decline by 1% qoq to Rs4,380/ton (-7% yoy) due to lower prices PAT 237 210 25 (89) (88) in South region (-Rs3/bag qoq). We estimate EBITDA/ton to decline by 13% qoq to Extraordinaries — — — Rs445/ton (-34% yoy) due to weak realization and increase in fuel costs. PAT-reported 237 210 25 (89) (88)

Source: Company, Kotak Institutional Equities estimates

68 KOTAK INSTITUTIONAL EQUITIES RESEARCH Cement India

Exhibit 10: Cement comparative valuation

Market cap. CMP (Rs) Target price EPS (Rs) P/E (X) Company (US$ mn) 10-Oct (Rs) Rating 2017 2018 2019E 2020E 2017 2018 2019E 2020E Large-cap. stocks ACC 3,917 1,464 1,270 SELL 34 49 62 70 43 30 24 21 Ambuja Cements 5,929 210 210 REDUCE 6 8 9 11 36 28 24 20 Grasim Industries 5,933 910 1,170 BUY 68 47 46 55 13 19 20 17 Shree Cement 7,702 15,542 12,500 SELL 384 397 421 630 40 39 37 25 UltraTech Cement 14,727 3,778 2,950 SELL 96 88 126 162 40 43 30 23 Mid-cap. stocks Dalmia Bharat 2,466 2,135 2,830 ADD 39 60 94 122 55 35 23 18 India Cements 419 96 118 REDUCE 6 3 4 8 17 29 23 11 JK Cement 693 697 890 ADD 27 43 45 79 26 16 16 9 JK Lakshmi Cement 478 286 370 ADD 7 4 11 28 41 64 25 10 Orient Cement 261 90 145 ADD (2) 2 7 11 (57) 42 13 8

EV/EBITDA (X) EV/ton of capacity (US$) P/B (X) Company 2017 2018 2019E 2020E 2017 2018 2019E 2020E 2017 2018 2019E 2020E Large-cap. stocks ACC 20.5 16.0 13.0 11.2 109 106 104 99 3.1 2.9 2.7 2.5 Ambuja Cements 16.7 13.6 11.0 9.1 112 113 110 105 2.1 2.0 1.9 1.8 Grasim Industries 5.4 11.3 7.0 6.7 NA NA NA NA 1.4 1.0 1.0 0.9 Shree Cement 20.3 20.9 17.1 12.8 248 211 192 179 7.0 6.1 5.3 4.5 UltraTech Cement 21.6 21.3 15.4 12.9 217 193 181 166 4.3 4.0 3.6 3.1 Mid-cap. stocks Dalmia Bharat 14.1 12.4 9.7 8.0 157 149 142 133 3.8 3.1 2.8 2.4 India Cements 6.8 8.8 8.0 6.2 54 56 56 54 0.6 0.6 0.6 0.5 JK Cement 10.7 9.1 9.5 7.9 99 92 98 107 2.8 2.5 2.2 1.8 JK Lakshmi Cement 14.4 12.4 9.2 5.9 76 69 67 62 2.4 2.3 2.2 1.8 Orient Cement 17.1 10.0 6.7 5.1 54 55 51 46 1.9 1.8 1.6 1.4

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 69 CAUTIOUS Consumer Products

India OCTOBER 11, 2018 UPDATE BSE-30: 34,761

2QFY19E preview: modest improvement in underlying growth trends. We forecast aggregate (coverage universe) revenue, EBITDA and PAT growth of 11.4%, 16.1%, and 16.1%, respectively for 2QFY19E. Even as yoy EBITDA and PAT growth for 2QFY19E is likely to be slightly lower than 1QFY19 prints, we note that this is off a higher base. Underlying growth (2-year CAGR is a decent proxy) is accelerating a tad on the back of improved volume growth. Inflationary RM (spot) is unlikely to have a material bearing on 2Q gross margins.

Revenues: underlying volume growth accelerating

We forecast 11.4% yoy revenue growth in aggregate for our consumer universe. We expect the staples (+12.5% yoy) pack to grow marginally ahead of the discretionary pack (+10.3% yoy). The yoy aggregate revenue growth print for 2QFY19E is likely to be similar to 1QFY19; however, the previous quarter had a soft base and to that extent, a similar-to-1Q growth print reflects modest acceleration in underlying growth trends. We expect an improvement in 2-year CAGR on volumes as well as revenues for most companies under our coverage. We expect better volume growth prints for the discretionary pack (APNT, JUBI, PAG, TTAN and the alcohol names) than the staples pack; ITC’s cigarette volume growth could surprise. Within staples, we expect Dabur and HUVR to lead the pack on volume growth while Colgate may spring a surprise. Margins: RM-inflation drag unlikely to hit the 2QFY19E prints

We forecast an aggregate 88 bps yoy expansion in EBITDA margin for our coverage universe, 104 bps for the aggregate staples pack and 79 bps for the discretionary pack. The bulk of the operating margin expansion is a flow-through of gross margin improvement. RM inflation will reflect in consumption costs only in a quarter or two from now. Benefit of higher fixed overhead leverage is likely to be offset by an increase in A&SP spends.

We bake in strong margin expansion for JUBI (+378 bps), Page (+322 bps), ITC (+260 bps), HUL (+232 bps), Nestle (+229 bps), APNT (+181 bps), and UNSP (+145 bps). JYL, PIDI and Marico are likely to see margin contraction of 191 bps, 130 bps and 114 bps respectively. Marico continues to be impacted by elevated copra prices (on a yoy basis) even as copra price has started to cool off, JYL’s margins are likely to be hit by Kerala floods and PIDI faces a high base on margins. Net income: healthy growth overall, staples to outperform discretionary

We expect 16.1% growth in recurring PAT for our coverage universe with the staples pack likely to see PAT growth of 20% while the discretionary pack is likely to clock 13%. We note that PAT growth base is now catching up. 2QFY19E aggregate PAT growth print of 16.1% is lower than the 20%-odd levels seen for the past three quarters but is off a higher base. In fact, base quarter aggregate PAT growth is in double-digits for the first time in five quarters. Rohit Chordia

Several companies (JUBI, Page, UBBL, UNSP, HUL and APNT) are likely to report 25%+ PAT growth for the quarter. Aggregate ETR is likely to be higher by 55 bps at 32.4%. JYL is the only Jaykumar Doshi company which is likely to show a PAT decline (-12% yoy), impacted by Kerala floods. Factors to watch out for – pricing component of growth and commentary on demand Aniket Sethi With RM inflation likely to hit COGS for various companies, HPC names in particular, in the next quarter or two, pricing component of growth is an important metric to track. This is important to assess likely gross margin trajectory in the backdrop of the general Street assumption of continued expansion. The other key focus area for us would be management commentaries on underlying demand trends – whether the growth prognosis has improved further.

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

Exhibit 1: KIE Consumer universe valuation summary

Upside / (downside) TP 10-Oct-18 Mkt cap. EPS (Rs) EPS Growth, % PER (X) EPS Sales Company Rating (Rs) Price (Rs) (%) (Rs bn) (US$ m) 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E CAGR - (2018-20E), % Consumer Products Asian Paints REDUCE 1,200 1,226 (2) 1,176 15,806 20.5 27.1 32.6 2.9 32.1 20.3 59.7 45.2 37.6 26.0 18.0 Bajaj Corp ADD 405 399 1 59 792 14.3 15.4 17.0 (9.4) 7.8 10.3 27.9 25.9 23.5 9.1 12.6 Britannia Industries ADD 5,875 5,709 3 685 9,207 83.7 104.2 127.3 13.5 24.5 22.2 68.2 54.8 44.8 23.4 14.7 Coffee day Enterprises REDUCE 265 258 3 53 714 3.4 7.9 10.3 53.0 129.9 30.0 75.1 32.7 25.1 72.9 10.6 Colgate-Palmolive (India) ADD 1,120 1,053 6 286 3,849 23.8 27.3 31.5 15.2 14.7 15.6 44.3 38.6 33.4 15.1 10.4 Dabur India REDUCE 345 405 (15) 714 9,595 7.8 9.1 10.3 7.2 17.3 12.9 52.1 44.5 39.4 15.1 13.4 GlaxoSmithKline Consumer REDUCE 6,325 6,780 (7) 285 3,832 166.5 199.0 223.1 6.6 19.5 12.1 40.7 34.1 30.4 15.8 11.0 Godrej Consumer Products REDUCE 645 719 (10) 734 9,871 14.2 16.9 19.2 11.6 18.8 13.7 50.5 42.5 37.4 16.2 11.8 Hindustan Unilever REDUCE 1,430 1,528 (6) 3,306 44,438 24.5 29.3 33.1 24.8 19.5 13.2 62.4 52.2 46.1 16.3 12.2 ITC ADD 310 270 15 3,301 44,373 8.9 9.6 10.8 7.8 8.2 12.3 30.3 28.0 24.9 10.2 8.0 Jubilant Foodworks BUY 1,430 1,191 20 157 2,111 14.6 25.4 35.0 191.7 74.7 37.6 81.8 46.8 34.0 55.1 18.0 Jyothy Laboratories ADD 210 192 10 70 937 4.4 5.6 6.6 (26.4) 27.6 16.7 43.5 34.1 29.2 22.0 14.3 Marico ADD 310 302 3 389 5,234 6.3 6.8 8.2 2.0 8.1 20.0 47.8 44.2 36.8 13.9 14.2 Nestle India ADD 9,950 9,510 5 917 12,325 127.1 170.6 197.4 21.1 34.2 15.7 74.8 55.8 48.2 24.6 11.9 Page Industries SELL 22,300 29,999 (26) 335 4,497 311.1 417.8 508.2 30.3 34.3 21.6 96.4 71.8 59.0 27.8 19.5 Pidilite Industries REDUCE 960 953 1 489 6,566 18.0 21.1 25.7 7.5 16.8 21.8 52.8 45.2 37.1 19.3 16.6 S H Kelkar BUY 240 199 20 29 387 7.4 6.9 9.9 2.1 (6.2) 41.9 26.9 28.7 20.2 15.4 9.3 Tata Global Beverages ADD 230 228 1 144 1,938 7.3 7.9 9.3 20.7 7.7 17.0 31.1 28.9 24.7 12.3 5.5 Titan Co. REDUCE 760 789 (4) 700 9,409 12.5 16.1 19.6 45.3 28.1 21.8 62.9 49.1 40.3 24.9 20.1 United Breweries REDUCE 1,040 1,196 (13) 316 4,249 14.9 20.8 25.7 71.6 39.2 23.6 80.0 57.5 46.5 31.2 12.3 United Spirits REDUCE 470 472 (0) 343 4,606 7.6 10.2 13.4 39.1 34.7 30.9 62.0 46.0 35.1 32.8 10.6 Varun Beverages REDUCE 700 745 (6) 136 1,826 11.5 15.0 20.1 378.1 29.9 34.5 64.6 49.8 37.0 32.2 18.6 KIE universe 14,635 196,714 12.6 17.9 16.1 48.4 41.0 35.4 15.2 12.9 KIE universe (ex-ITC) 11,198 150,514 15.2 23.3 17.9 58.0 47.0 39.9 19.2 14.1

Price performance (%) EV/EBITDA (X) EV/Sales (X) FCF yield (%) Dividend yield (%) 1-mo 3-mo 6-mo 1-yr 2018E 2019E 2020E 2018E 2019E 2020E 2018E 2019E 2020E 2019E 2020E Asian Paints (5) (11) 6 5 36.5 28.3 23.4 6.9 5.9 4.9 0.6 1.1 2.1 1.0 1.2 Bajaj Corp (5) (5) (17) (0) 22.0 20.7 17.6 6.7 6.0 5.3 2.9 3.4 4.2 3.3 3.5 Britannia Industries (6) (11) 11 31 45.0 35.8 29.3 6.8 5.9 5.1 1.2 1.3 1.6 0.6 0.8 Coffee day (18) (2) (15) 20 13.0 11.3 9.9 2.1 2.0 1.8 2.7 0.4 1.0 — — Colgate-Palmolive (India) (7) (9) (3) (3) 25.3 22.0 19.1 6.7 6.2 5.4 1.7 2.9 3.0 1.5 1.8 Dabur India (10) 8 22 29 46.0 39.8 34.3 9.3 8.2 7.2 1.2 1.9 2.1 0.9 1.1 GlaxoSmithKline Consumer (6) 8 11 36 28.2 23.6 20.3 5.8 5.2 4.5 2.7 2.1 2.4 1.3 1.5 Godrej Consumer Products (17) (14) 0 9 36.8 31.0 26.8 7.8 6.8 6.0 3.0 2.5 2.6 0.8 0.9 Hindustan Unilever (5) (9) 10 26 44.6 36.0 31.6 9.4 8.3 7.4 1.6 1.8 2.1 1.4 1.6 ITC (12) (3) 1 1 20.2 18.4 16.3 7.6 7.2 6.5 3.3 3.0 3.4 2.1 2.5 Jubilant Foodworks (14) (16) (2) 56 34.8 24.0 18.6 5.1 4.3 3.6 0.0 1.9 2.5 0.2 0.3 Jyothy Laboratories (6) (13) 2 (2) 28.4 23.1 19.5 4.2 3.6 3.1 3.4 2.4 3.2 0.5 0.8 Marico (12) (14) (7) (5) 33.9 30.6 25.3 6.1 5.3 4.6 1.1 2.2 2.8 1.6 1.8 Nestle India (8) (5) 12 30 40.8 31.6 27.3 8.9 7.8 7.0 1.8 2.3 2.5 1.2 1.4 Page Industries (8) 4 20 61 61.5 46.4 38.2 13.0 10.8 9.0 1.2 1.1 1.3 0.6 0.7 Pidilite Industries (17) (11) (5) 19 35.6 30.2 24.9 7.8 6.6 5.7 0.9 1.1 1.8 0.7 0.9 S H Kelkar (11) (7) (22) (30) 18.8 18.6 13.4 3.0 2.8 2.4 (1.0) 1.8 2.3 0.9 1.0 Tata Global Beverages 3 (17) (17) 10 16.3 15.8 13.8 2.0 1.9 1.7 0.0 2.6 2.9 1.3 1.5 Titan Co. (8) (5) (18) 28 42.2 32.6 26.0 4.3 3.5 3.0 (0.6) 1.3 1.1 0.6 0.7 United Breweries (8) (1) 20 40 35.3 28.4 24.3 5.7 5.0 4.4 1.1 1.4 1.8 0.3 0.4 United Spirits (21) (26) (30) (0) 36.3 27.0 21.8 4.5 4.0 3.5 3.5 1.8 2.2 — 0.4 Varun Beverages (4) (1) 16 45 19.7 16.6 14.1 4.1 3.3 2.9 (3.0) 0.8 1.4 — — KIE FMCG universe (9) (7) 3 16 31.8 26.8 23.0 7.0 6.2 5.4 1.8 2.0 2.4 1.0 1.2 KIE universe (ex-ITC) (10) (9) 2 20 37.6 30.6 25.9 6.9 6.0 5.2 1.3 1.7 2.1 0.9 1.1 Sensex (8) (4) 3 9

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 71 India Consumer Products

Aggregate sectoral trends (in charts)

Exhibit 2: Overall revenue growth momentum to continue KIE consumer universe revenue growth trends, yoy (%)

14

12

10 9.4 8 8.8 8.3 7.7 7.6 11.7 11.4 6 7.0 6.1 5.6 5.6 4 3.8 2

- 1.1

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18 1QFY19 2QFY19E

Source: Company, Kotak Institutional Equities

Exhibit 3: Staples revenue growth to rise to 12.5% yoy Exhibit 4: Discretionary to grow at a slightly lower pace KIE consumer staples universe revenue growth trends, yoy (%) KIE consumer discretionary universe revenue growth trends, yoy (%)

14 18 12 16 12.5 16.7 10 11.2 14 12 8 9.0 11.9 11.5 12.2 10 6 10.0 8 8.8 10.3 4 5.5 5.1 5.2 8.2 11.2 4.7 6 7.5 7.6 3.9 2 3.5 3.4 6.3 4 5.8 (0.6) 1.7 - 2 3.3

(2) -

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19 2QFY19E 2QFY19E

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

72 KOTAK INSTITUTIONAL EQUITIES RESEARCH Consumer Products India

Exhibit 5: Overall EBITDA to grow at ~16% aided by higher gross margin KIE consumer universe EBITDA growth trends, yoy (%)

25

20

18.4 18.3 15 18.0 17.4

13.5 14.0 19.9 10 16.1 11.3 10.8

5 6.1

- (2.6) 1.6

(5)

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18 1QFY19 2QFY19E

Source: Company, Kotak Institutional Equities

Exhibit 6: Staples and discretionary EBITDA growth to see… Exhibit 7: …some deceleration due to a tougher base KIE consumer staples universe EBITDA growth trends, yoy (%) KIE consumer discretionary universe EBITDA growth trends, yoy (%)

30 30 25 25 24.4 26.0 20 23.5 20 19.7 15 19.1 22.5 18.2 15.314.2 15 10 12.3 13.4 15.5 10.8 14.514.0 9.6 10 13.4 17.9 13.7 5 7.3 9.1 5 - (3.7) 0.5 3.9 (5) - 2.5 (0.8)

(10) (5)

2QFY16 2QFY16

3QFY16 3QFY16

4QFY16 4QFY16

1QFY17 1QFY17

2QFY17 2QFY17

3QFY17 3QFY17

4QFY17 4QFY17

1QFY18 1QFY18

2QFY18 2QFY18

3QFY18 3QFY18

4QFY18 4QFY18

1QFY19 1QFY19 2QFY19E 2QFY19E

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH 73 India Consumer Products

Exhibit 8: Overall PAT to grow at 16% levels KIE consumer universe PAT growth trends, yoy (%)

25

20 19.5 19.7 19.7 18.3 15 16.1 20.5 10 13.3 13.0 8.8 8.7 5 7.4

- 2.4 (4.1) (5)

(10)

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18 1QFY19

2QFY19E

Source: Company, Kotak Institutional Equities

Exhibit 9: Staples PAT likely to grow at ~20% yoy Exhibit 10: Discretionary could see lower growth KIE consumer staples universe PAT growth trends, yoy (%) KIE consumer discretionary universe PAT growth trends, yoy (%)

30 35

25 27.9 30 24.4 20 25 28.6 19.4 15 19.6 20 14.914.3 31.0 10 15 10.8 11.2 22.6 19.9 8.9 9.0 14.1 17.4 13.2 5 7.2 10 14.5 8.1 - 5 7.8 4.0 (5.5) 1.0 (5) - 3.5 (1.3)

(10) (5)

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19 2QFY19E 2QFY19E

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

74 KOTAK INSTITUTIONAL EQUITIES RESEARCH Consumer Products India

Exhibit 11: Aggregate EBITDA margin expansion driven mainly by higher gross margin KIE consumer universe EBITDA margin change yoy (bps)

200

150 150 158 100 127 125 177 107 136 88 50 71 47

- 8 (34) (50) (60)

(100)

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18 1QFY19

2QFY19E

Source: Company, Kotak Institutional Equities

Exhibit 12: Favorable RM environment (except oil) to help GMs Exhibit 13: Aggregate A&SP spends should rise KIE Consumer universe gross margin change yoy (bps) KIE Consumer universe A&SP change yoy (bps)

250 100

200 80 205 150 173 60 75 191 64 100 150 82 144 108 96 40 50 52 50 60 (9) 20 7 18 - - 11 (50) (87) (100) (147)(76) (20) (30) (27) (127) (50) (34) (150) (40) (52)

(200) (60)

2QFY16 2QFY16

3QFY16 3QFY16

4QFY16 4QFY16

1QFY17 1QFY17

2QFY17 2QFY17

3QFY17 3QFY17

4QFY17 4QFY17

1QFY18 1QFY18

2QFY18 2QFY18

3QFY18 3QFY18

4QFY18 4QFY18

1QFY19 1QFY19 2QFY19E 2QFY19E

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH 75 India Consumer Products

Company-wise estimates for 2QFY19 (in charts)

Exhibit 14: TTAN, Page, JUBI, APNT, PIDI to post strong revenue growth; ITC and TGBL to post relatively subdued growth KIE consumer universe company-wise revenue growth estimate for 2QFY19, yoy (%)

30

25 26 20 20 18 15 16 15 15 15 10 13

12 12 12 12 11 10 9 9 5 8 8 1

-

UB

ITC

HUL

Page

Titan

TGBL

UNSP

GCPL

Nestle

Dabur

Pidilite

Marico

GSK

Colgate

Britannia

Consumer

Bajaj Corp. Bajaj

Jyothy Labs Jyothy Asian Paints Asian

Jubilant Foods Jubilant

Source: Company, Kotak Institutional Equities estimates

Exhibit 15: Volume growth to continue at decent levels despite a tougher base KIE consumer universe company-wise revenue growth trends, yoy (%)

2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19E 2QFY19 - 2yr CAGR Staples Bajaj Corp. - Almond Drop Hair Oil 1.6 (4.2) (7.1) (6.6) 6.5 4.5 6.0 11.2 4.0 5.2 Britannia Industries - Domestic 8.0 2.0 2.0 2.0 6.0 13.0 13.0 12.5 9.0 7.5 Colgate - Overall 4.0 (11.0) (3.0) (5.0) (0.9) 12.0 5.0 4.0 5.0 2.0 Dabur - Domestic 4.5 (5.2) 2.4 (4.4) 7.2 13.0 6.0 21.0 10.0 8.6 GSK Consumer (3.0) (17.0) (0.7) (3.0) 2.4 17.0 5.0 12.8 10.0 6.1 GCPL - Soaps (5.0) (8.0) 5.0 (8.0) 15.0 15.0 8.0 8.0 8.0 11.4 HUL (FMCG business) (1.0) (4.0) 4.0 — 4.0 11.0 11.0 12.0 10.0 7.0 Marico - Domestic 3.4 (4.0) 10.0 (9.0) 8.0 9.4 6.0 12.4 6.5 7.2 Marico - Parachute (6.0) (1.0) 15.0 (9.0) 12.0 15.0 1.0 9.0 4.0 7.9 Marico - Saffola 8.0 6.0 6.0 (9.0) 3.0 — 1.0 10.0 2.0 2.5 Marico - Value-added hair oils 11.0 (12.0) 10.0 (8.0) 12.0 8.0 10.0 15.0 10.0 11.0 Discretionary Asian Paints (Domestic paints) 12.0 3.0 10.0 2.0 9.0 6.0 10.0 13.0 12.0 10.5 ITC - Cigarettes 4.0 (1.0) — 2.0 (7.0) (5.0) (4.0) (2.5) 2.5 (2.4) Jubilant Foodworks - SSG 4.2 (3.3) (7.5) 6.5 5.5 17.8 24.0 19.0 18.0 11.6 Page (overall) 10.7 8.7 10.8 13.4 11.1 11.3 15.2 8.8 11.5 11.3 Pidilite - Domestic consumer business 7.8 (1.5) 8.2 — 15.0 23.0 15.0 20.0 11.5 13.2 Titan - Jewelry (tonnage) (32.0) 4.0 37.0 49.0 49.0 6.0 13.7 (2.6) 14.0 30.3 United Breweries (overall) (1.0) (8.0) (9.4) — 11.0 10.4 12.3 12.0 10.0 10.5 United Spirits (overall) 0.9 (5.0) (8.2) (18.9) (15.9) (13.9) (9.0) 1.1 4.4 (6.3)

Note: (1) Asian Paints, Britannia Industries and ITC are KIE estimates.

Source: Company, Kotak Institutional Equities estimates

76 KOTAK INSTITUTIONAL EQUITIES RESEARCH Consumer Products India

Exhibit 16: Strong EBITDA growth across companies led by JUBI, Page, HUL, APNT and Nestle KIE consumer universe company-wise EBITDA growth estimate for 2QFY19, yoy (%)

60

50 50 40 39 30 28 20 27 23 10 21 20 19 16 16 14 12 11 9 9 8 8 7 - (3)

(10)

UB

ITC

HUL

Page

Titan

TGBL

GCPL

UNSP

Nestle

Dabur

Pidilite

Marico

Colgate

Britannia

Bajaj Corp. Bajaj

Jyothy Labs Jyothy

Asian Paints Asian Jubilant Foods Jubilant

GSK Consumer GSK

Source: Company, Kotak Institutional Equities estimates

Exhibit 17: PAT growth robust across most companies KIE consumer universe company-wise recurring PAT growth estimate for 2QFY19, yoy (%) 100

80 84 60

40 38 20 30 30 27 26 24 20 20 19 17 13 11 11 10 10 - 7 6 (12)

(20)

UB

ITC

HUL

Page

Titan

TGBL

UNSP

GCPL

Nestle

Dabur

Pidilite

Marico

Colgate

Britannia

Bajaj Corp. Bajaj

Jyothy Labs Jyothy

Asian Paints Asian Jubilant Foods Jubilant GSK Consumer GSK

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 77 India Consumer Products

Exhibit 18: EBITDA margin to expand across most companies led by JUBI, Page, ITC, HUL; JYL, PIDI, Marico could see some weakness KIE consumer universe company-wise EBITDA margin change estimate for 2QFY19, yoy (bps)

500 400 300 378 322 200 100 260 232 229 181 145 98 77 71 101 44 2 - (7) (69) (100) (25) (114) (130) (191) (200)

(300)

UB

ITC

HUL

Page

Titan

TGBL

GCPL

UNSP

Nestle

Dabur

Pidilite

Marico

Colgate

Britannia

Bajaj Corp. Bajaj

Jyothy Labs Jyothy

Asian Paints Asian Jubilant Foods Jubilant

GSK Consumer GSK

Source: Company, Kotak Institutional Equities estimates

Exhibit 19: Favorable RM environment except oil commodities along with higher pricing contribution to help companies KIE consumer universe company-wise GM change estimate for 2QFY19, yoy (bps)

400

300 352 200 297 100 187 159 132 127 122 104 54 37 20 9 6 - (14) (39) (48) (76) (100) (189) (258) (200)

(300)

UB

ITC

HUL

Page

Titan

TGBL

UNSP

GCPL

Nestle

Dabur

Pidilite

Marico

Colgate

Britannia

Bajaj Corp. Bajaj

Jyothy Labs Jyothy

Asian Paints Asian Jubilant Foods Jubilant

GSK Consumer GSK

Source: Company, Kotak Institutional Equities estimates

78 KOTAK INSTITUTIONAL EQUITIES RESEARCH Consumer Products India

Exhibit 20: Stable to deflationary trends in agri commodities; oil commodities seeing cost inflation Quarterly movement in inputs/commodities

Inflationary = +3% % chg - local currency % chg - currency Adj. Deflationary = -3% No Commodity Unit 2QFY19 qoq yoy vs FY18 qoq yoy vs FY18 Companies impacted Agri Commodities 1 Tea - India Avg. Rs/Kg 148 7 9 15 7 9 15 HUL, TGBL 2 Tea - World Avg. USD/MT 2,837 (4) (11) (9) (1) (4) (2) HUL, TGBL 3 Tea - Mombassa/Kenya USD/Kg 3 (7) (17) (17) (4) (11) (11) HUL, TGBL 4 Coffee Arabica - Intl. US cents/Pound 130 (8) (14) (12) (5) (8) (5) HUL, Nestle, TGBL 5 Coffee Robusta - Intl. US cents/Pound 85 (7) (19) (15) (4) (13) (8) HUL, Nestle, TGBL 6 Sugar - domestic Rs/Quintal 3,492 11 (13) (9) 11 (13) (9) HUL, Nestle, GSKCHL, ITC, Dabur, Britannia 7 Wheat Rs/Quintal 1,949 11 11 10 11 11 10 ITC, Nestle, GSKCHL, Britannia 8 Barley Rs/Quintal 1,611 9 11 9 9 11 9 GSKCHL 9 Maize (corn) USD/MT 160 (7) 6 3 (4) 14 11 Colgate, HUL, Dabur (Sorbitol) 10 Liquid Milk - domestic Rs/Ltr 33 (4) (14) (12) (4) (14) (12) Nestle, GSKCHL, Jubilant Foodworks, Britannia 11 Milk Powder - domestic Rs/Kg 250 (1) (7) (6) (1) (7) (6) Nestle, GSKCHL, Britannia 12 Cocoa Bean USD/MT 2,276 (14) 11 8 (11) 20 16 Nestle Oil Commodities 13 Crude Oil - Brent USD/Barrel 74 (1) 42 28 2 53 37 HUL, GCPL, Jyothy Labs, Asian Paints, Pidilite 14 Palm oil Rs/MT 60,869 (6) 18 12 (3) 27 20 HUL, GCPL, Jyothy Labs 15 PFAD USD/MT 489 (7) (22) (21) (4) (16) (16) HUL, GCPL, Jyothy Labs 16 Light liquid paraffin (LLP) Rs/Ltr 48 2 25 11 2 25 11 Marico, Dabur, Bajaj Corp 17 Copra Rs/Quintal 11,660 (10) 9 1 (10) 9 1 Marico, Dabur 18 Coconut oil Rs/Quintal 16,533 (7) 13 5 (7) 13 5 Marico, Dabur 19 Rice Bran oil Rs/10Kg 690 5 17 19 5 17 19 Marico 20 Kardi oil/ Safflower oil Rs/MT 1,271 (3) (1) 1 (3) (1) 1 Marico 21 Sunflower oil Rs/MT 75,479 6 23 19 6 23 19 Marico 22 Groundnut oil Rs/MT 90,808 9 4 (1) 9 4 (1) Marico, Dabur 23 Linseed oil Rs/MT 92,296 16 22 18 16 22 18 Marico, Dabur, Bajaj Corp, Asian Paints 24 Castor oil Rs/MT 93,119 10 (4) (2) 10 (4) (2) Marico, Dabur, Bajaj Corp, Asian Paints 25 Mentha oil Rs/Kg 1,986 28 60 45 28 60 45 Emami, Colgate, HUL, Dabur Chemicals/Paints/Other Commodities 26 Caustic soda Rs/ 50Kg 2,131 (10) (1) (8) (10) (1) (8) HUL, GCPL, Jyothy Labs 27 Soda ash Rs/ 50Kg 1,253 2 (0) 1 2 (0) 1 HUL, GCPL, Jyothy Labs 28 LAB Rs/Kg 112 3 18 12 3 18 12 HUL, Jyothy Labs 39 HDPE - domestic Rs/Kg 127 3 29 23 3 29 23 All companies 30 PAN Rs/Kg 80 — 14 7 — 14 7 Asian Paints 31 PENTA Rs/Kg 115 — — — — — — Asian Paints 32 Tio2 Anatese Rs/Kg 168 (8) (5) (6) (8) (5) (6) Asian Paints 33 Tio2 Rutile Rs/Kg 215 — 2 2 — 2 2 Asian Paints 34 Tio2 Dupont Rs/Kg 264 2 6 5 2 6 5 Asian Paints 35 Turpentine oil Rs/Ltr 107 11 45 40 11 45 40 Asian Paints 36 Formaldehyde Rs/Kg 26 — 13 12 — 13 12 Asian Paints 37 Acrylic acid Rs/Kg 125 — 14 13 — 14 13 Asian Paints 38 Vinyl Acetate - China USD/MT 1,274 (2) 25 20 1 34 29 39 Styrene - domestic Rs/Kg 102 4 (4) (3) 4 (4) (3) Asian Paints 40 Gold Rs/10gm 29,789 (4) 3 2 (4) 3 2 Titan, Jewellery companies 41 Diamond price index USD/Carrat 120 0 3 3 3 11 10 Titan, Jewellery companies

Source: Bloomberg, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 79 India Consumer Products

Exhibit 21: INR has depreciated against a lot of currencies; this is likely to benefit reported growth for IBD for consumer companies Movement of Rupee vs. relevant international currencies for KIE Consumer universe

Period end Average rate Currency 30th Sep 2018 30th Jun 2018 qoq (%) 2QFY19 Avg 2QFY18 Avg yoy (%) Companies impacted Euro 84.1 80.0 5 80.3 75.6 6 Dabur, TGBL USD 72.5 68.5 6 69.1 64.3 8 All Companies GBP 94.5 90.4 5 90.0 84.2 7 GCPL, TGBL Canada 56.2 52.1 8 52.8 51.3 3 TGBL Australia 52.4 50.7 3 50.9 50.8 0 TGBL

SL 0.4 0.4 (1) 0.4 0.4 3 GCPL, Marico, Dabur, Asian Paints Bangladesh 0.9 0.8 6 0.8 0.8 4 GCPL, Marico, Dabur, Asian Paints, Pidilite Nepal 0.6 0.6 0 0.6 0.6 (0) Dabur, Asian Paints

Indonesia 0.5 0.5 1 0.5 0.5 (1) GCPL Malaysia 17.5 17.0 3 17.0 15.1 13 Marico (Revenue), GCPL/HUL (Palm oil imports) Vietnam 0.3 0.3 4 0.3 0.3 3 Marico

South Africa 5.1 5.0 3 5.0 4.9 3 GCPL, Marico, TGBL Nigeria 0.2 0.2 5 0.2 0.2 (9) GCPL, Dabur Kenya 0.7 0.7 6 0.7 0.6 11 GCPL, TGBL Turkey 12.0 14.9 (20) 13.1 18.3 (28) Dabur Egypt 4.1 3.8 6 3.9 3.6 7 Marico, Dabur, Pidilite Middle East (AED) 18.6 17.7 5 18.8 17.5 8 GCPL, Marico, Dabur, Asian Paints, Pidilite

Argentina 1.8 2.4 (26) 2.4 3.7 (35) GCPL Uruguay 2.2 2.2 0 2.2 2.2 (1) GCPL Chile 1.1 1.0 5 1.1 1.0 5 GCPL Poland 19.7 18.3 7 18.7 17.7 5 TGBL Czech 3.3 3.1 6 3.1 2.9 8 TGBL Russia 1.1 1.1 1 1.1 1.1 (2) TGBL

Source: Bloomberg, Kotak Institutional Equities

80 KOTAK INSTITUTIONAL EQUITIES RESEARCH Consumer Products India

Exhibit 22: Results preview for KIE Consumer universe for the quarter ending September 2018 (Rs mn)

Company Sep-17 Jun-18 Sep-18E YoY (%) qoq (%) Comments Asian Paints (consolidated) We model ~16.5% domestic sales growth aided by 12% volume growth and ~4.5% price-led growth. Our Revenues 42,652 43,903 49,476 16.0 12.7 volume growth assumption translates into a 2-year CAGR of 10.5%. Gross margin (%) 41.3 43.2 42.5 122 bps -73 bps

We expect EBITDA margin to expand about 180 bps yoy, aided by 122 bps expansion in GM, tight cost EBITDA 8,011 8,744 10,188 27.2 16.5 control and higher operating leverage.

EBITDA margin (%) 18.8 19.9 20.6 180 bps 67 bps Net income 5,084 5,580 6,424 26.4 15.1 EPS (Rs/share) 5.3 5.8 6.7 26.4 15.1 Bajaj Corp. We expect ADHO volumes to grow 4% yoy partly impacted by weakness in the CSD channel that has come off to 4-5% of revenues from about 6-7% earlier. The company has taken two price increases, part of which Revenues 2,041 2,214 2,289 12.1 3.4 will reflect in 2QFY19; we expect 8% increase in ADHO revenues and 9% increase in overall revenues. Reported revenue growth will be higher at 12.1% due to GST refunds (nil in 2QFY18) . Gross margin (%) 67.0 66.6 66.3 -77 bps -36 bps Expect some pressure on GM on account of RM inflation and rupee depreciation partly offset by price hikes. EBITDA 583 691 649 11.2 (6.2) EBITDA margin would be broadly flat on yoy basis on account of operating leverage and cost controls.

EBITDA margin (%) 28.6 31.2 28.3 -25 bps -289 bps Net income 507 538 557 9.8 3.5 EPS (Rs/share) 3.4 3.6 3.8 9.8 3.5 Britannia Industries (consolidated) Our standalone operating revenue estimate bakes in (1) 9% volume growth in the biscuits segment and (2) Revenues 25,453 25,438 28,720 12.8 12.9 4% increase in realizations (price/mix). Gross margin (%) 37.8 40.0 39.0 126 bps -97 bps We expect EBITDA margin to expand 100 bps yoy aided by 125 bps expansion in GM partly offset by a tad EBITDA 3,777 3,894 4,552 20.5 16.9 higher increase in employee and other expenses (including A&SP spends). EBITDA margin (%) 14.8 15.3 15.9 101 bps 54 bps Net income 2,611 2,582 3,127 19.8 21.1 EPS (Rs/share) 21.7 21.5 26.0 19.8 21.1 Colgate Our topline growth estimate of 8% yoy bakes in 5% volume growth and 3% increase in realizations. Our Revenues 10,849 10,413 11,717 8.0 12.5 volume growth assumption translates into a 2-yr CAGR of around 2%. Gross margin (%) 63.4 65.9 65.0 158 bps -92 bps We model 100 bps yoy expansion in EBITDA margin aided by 158 bps increase in gross margin and partly EBITDA 3,006 2,816 3,362 11.8 19.4 offset by higher A&SP and other expenses. EBITDA margin (%) 27.7 27.0 28.7 98 bps 164 bps Net income 1,758 1,666 1,980 12.7 18.8 EPS (Rs/share) 6.5 6.1 7.3 12.7 18.8 Coffee Day Global (CDGL) - coffee business only Our revenue growth estimate bakes in (1) 30 net café additions qoq, (2) 5% growth in retail ASPD and (3) Revenues 4,304 4,718 4,785 11.2 1.4 around 15% yoy growth in vending machine count. Gross margin (%) 54.7 55.6 55.0 25 bps -62 bps EBITDA 690 780 783 13.4 0.4 We model 30 bps expansion in EBITDA margin aided by better operating leverage. EBITDA margin (%) 16.0 16.5 16.4 32 bps -17 bps Net income 95 105 120 26.0 14.4 EPS (Rs/share) 0.6 0.6 0.7 26.0 14.4 Dabur (consolidated)

We model around 12.5% like-on-like growth in domestic revenues, a combination of 10% volume growth Revenues 19,549 20,507 21,912 12.1 6.9 and 2.5% realization improvement.

Gross margin (%) 50.0 48.9 50.1 9 bps 124 bps We expect only a modest improvement in EBITDA margins (+44 bps yoy) as the company is likely to undertake EBITDA 4,159 3,561 4,759 14.4 33.6 higher A&SP spends. Gross margin should be largely flat (+9 bps yoy). EBITDA margin (%) 21.3 17.4 21.7 44 bps 435 bps Net income 3,619 3,292 4,227 16.8 28.4 EPS (Rs/share) 2.1 1.9 2.4 16.8 28.4 GSK Consumer Our revenue growth forecast bakes in 12% growth in domestic revenues led by 10% volume growth and Revenues 11,153 11,071 12,542 12.4 13.3 2% realization growth. We model 15% revenue growth in exports on a low base. Gross margin (%) 64.7 69.6 67.6 296 bps -193 bps EBITDA 2,614 2,303 3,029 15.9 31.5 We estimate 70 bps yoy expansion in EBITDA margin to 24.1% entirely driven by GM expansion. EBITDA margin (%) 23.4 20.8 24.1 71 bps 334 bps Net income 1,924 2,004 2,306 19.9 15.1 EPS (Rs/share) 45.7 47.7 54.8 19.9 15.1 GCPL (consolidated) We model 11% yoy growth in domestic and 7% in international business partly muted due to completion of Revenues 25,066 24,760 27,324 9.0 10.4 sale of UK business around August end. On the domestic front, we expect 8% growth in HI, 9% growth in soaps segment on a healthy base and 14% growth in hair colors. Gross margin (%) 56.2 55.8 56.8 53 bps 98 bps We model flattish EBITDA margin as marginal expansion in GM would be offset by higher A&SP spends. EBITDA 5,318 4,442 5,779 8.7 30.1 Please note that we have not modeled gains from divestment of the UK business. EBITDA margin (%) 21.2 17.9 21.2 -7 bps 321 bps Net income 3,664 2,975 4,056 10.7 36.3 EPS (Rs/share) 3.6 2.9 4.0 10.7 36.3

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 81 India Consumer Products

Exhibit 22 (continued): Results preview for KIE Consumer universe for the quarter ending June 2018 (Rs mn)

Company Sep-17 Jun-18 Sep-18E YoY (%) qoq (%) Comments HUL (standalone) We model 15% revenue growth in domestic FMCG business (comparable) aided by 10% UVG and 5% price- Revenues 83,090 94,870 95,575 15.0 0.7 led growth; this implies a 2-yr UVG CAGR of 7%. On a segmental basis, we bake in 17% and 14% yoy revenue growth for Home Care and Personal Care, respectively. Gross margin (%) 52.7 54.0 53.8 103 bps -26 bps We expect EBITDA margin to expand 230 bps yoy aided by 100 bps expansion in GM. Impact of higher A&P EBITDA 16,820 22,510 21,563 28.2 (4.2) intensity will be partly offset by cost efficiencies and operating leverage benefits. EBITDA margin (%) 20.2 23.7 22.6 231 bps -117 bps Net income 12,360 15,670 15,722 27.2 0.3 EPS (Rs/share) 5.7 7.2 7.3 27.2 0.3 ITC (standalone)

We model 2.5% increase in cigarette volumes yoy and a 7.5% increase in gross realizations (portfolio-level). Revenues 102,264 105,547 102,990 0.7 (2.4) We forecast 8.8% yoy growth in cigarette EBIT.

Gross margin (%) 57.4 61.1 60.9 351 bps -15 bps We bake in modest acceleration in yoy growth for other FMCG, Hotels and Paperboards segments for the EBITDA 36,738 40,498 39,679 8.0 (2.0) quarter. On a whole, EBIT is likely to rise 7.9% yoy. EBITDA margin (%) 35.9 38.4 38.5 260 bps 15 bps Net income 26,398 28,187 28,102 6.5 (0.3) EPS (Rs/share) 2.2 2.3 2.3 6.4 (0.3) Jubilant Foodworks We model 18% SSG aided by a favorable base and Everyday Value 99 Offer; we have modeled 20 Dominos Revenues 7,265 8,550 8,598 18.3 0.6 store additions and 2 store additions in DD (net). Gross margin (%) 74.1 74.5 74.0 -15 bps -53 bps EBITDA 1,021 1,420 1,533 50.2 8.0 We expect EBITDA margin to expand 378 bps yoy aided, despite a small contraction in GM, aided by EBITDA margin (%) 14.1 16.6 17.8 378 bps 122 bps operating leverage benefit and cost saving initiatives. Net income 443 747 815 83.8 9.1 EPS (Rs/share) 3.4 5.7 6.2 83.8 9.1 Jyothy Laboratories (Standalone) We expect muted 9.5% yoy growth in standalone revenues impacted by Kerala floods (impact of 200 bps on Revenues 4,193 4,053 4,591 9.5 13.3 overall revenue growth). Gross margin (%) 47.0 47.4 46.6 -39 bps -72 bps EBITDA 723 610 704 (2.6) 15.4 We estimate 190 bps decline in margin largely due to the impact of Kerala floods. EBITDA margin (%) 17.2 15.1 15.3 -191 bps 28 bps Net income 421 324 371 (11.7) 14.6 EPS (Rs/share) 1.2 0.9 1.0 (11.7) 14.6 Marico (consolidated)

We model 15% topline growth in the domestic business driven by 6.5% volume growth and around ~8.5% Revenues 15,363 20,268 17,614 14.7 (13.1) realization improvement. We bake in volume growth of 4%, 2% and 10% in Parachute rigid, Saffola and VAHO, respectively.

Gross margin (%) 47.0 42.3 44.4 -258 bps 212 bps Copra inflation remains high (even as prices have started to cool-off) and reflects in our 258 bps yoy GM EBITDA 2,591 3,549 2,771 6.9 (21.9) decline forecast despite building a 22% yoy realization improvement in CNO. Expect EBITDA margin contraction to be restricted to 114 bps yoy due to cost controls and leverage benefits. EBITDA margin (%) 16.9 17.5 15.7 -114 bps -179 bps Net income 1,814 2,557 1,938 6.8 (24.2) EPS (Rs/share) 1.4 2.0 1.5 6.9 (24.2) Nestle We model 12% growth in net domestic revenues aided by robust growth in both the Maggi and non- Revenues 25,007 26,786 27,928 11.7 4.3 Maggi portfolio. Gross margin (%) 56.6 59.3 58.5 187 bps -85 bps EBITDA 5,773 6,449 7,086 22.7 9.9 We model 228 bps expansion in EBITDA margin driven by higher gross margins (+187 bps yoy) and EBITDA margin (%) 23.1 24.1 25.4 228 bps 129 bps operating leverage benefits. Net income 3,440 3,950 4,273 24.2 8.2 EPS (Rs/share) 35.7 41.0 44.3 24.2 8.2 Page Industries

Revenues 6,257 8,153 7,527 20.3 (7.7) We expect ~20% revenue growth aided by 12% volume growth and 8% price/mix-led growth.

With only a modest expansion in GM, we model a strong 321 bps expansion in EBITDA margin aided by Gross margin (%) 57.6 54.9 58.0 37 bps 306 bps operating leverage. EBITDA 1,284 1,893 1,787 39.1 (5.6) EBITDA margin (%) 20.5 23.2 23.7 321 bps 52 bps Net income 841 1,244 1,163 38.4 (6.5) EPS (Rs/share) 75.4 111.6 104.3 38.4 (6.5)

Source: Company, Kotak Institutional Equities estimates

82 KOTAK INSTITUTIONAL EQUITIES RESEARCH Consumer Products India

Exhibit 22 (continued): Results preview for KIE Consumer universe for the quarter ending June 2018 (Rs mn)

Company Sep-17 Jun-18 Sep-18E YoY (%) qoq (%) Comments Pidilite Industries (consolidated) We model 12% volume growth and 15% revenue growth for the consumer bazaar (CBP) business. PIDI has Revenues 15,299 18,341 17,665 15.5 (3.7) taken two price increases of 1.5-2% each (blended) over the past two quarters in view of RM pressure. Gross margin (%) 53.0 50.5 51.1 -189 bps 59 bps We estimate 130 bps declined in EBITDA margin to 23.3% led by (1) 230 bps decline in standalone EBITDA EBITDA 3,761 3,817 4,113 9.4 7.8 margins from a high base and on account of RM inflation and (2) partly offset by sharp expansion in subsidiary margins off a low base. EBITDA margin (%) 24.6 20.8 23.3 -130 bps 247 bps Net income 2,519 2,387 2,804 11.3 17.5 EPS (Rs/share) 4.9 4.7 5.5 12.4 17.5 S H Kelkar and Company (consolidated) We estimate 10.5% growth in consolidated revenues aided by a low base and steady volume growth of Revenues 2,219 2,364 2,455 10.6 3.8 FMCG. Gross margin (%) 48.4 44.1 44.7 -373 bps 55 bps Expect the continued RM challenges to result in GM contraction of 370 bps yoy; we expect modest 60 bps EBITDA 355 329 340 (4.2) 3.1 qoq expansion in GM on a sequential basis. We expect the decline in EBITDA margin to be restricted at 215 bps yoy led by tight control on operating costs. EBITDA margin (%) 16.0 13.9 13.8 -214 bps -10 bps Net income 189 187 187 (0.8) 0.3 EPS (Rs/share) 1.3 1.3 1.3 (0.8) 0.3 Tata Global Beverages (consolidated) We model 7.5% growth in consolidated revenues led by 7% growth in the domestic tea business and 8% Revenues 16,921 18,026 18,191 7.5 0.9 growth in the international business in INR terms partly aided by rupee depreciation. Gross margin (%) 45.5 45.6 45.0 -49 bps -62 bps

EBITDA 2,140 2,488 2,303 7.7 (7.4) We model flattish EBITDA margin in the domestic and international business.

EBITDA margin (%) 12.6 13.8 12.7 1 bps -114 bps Net income 1,560 1,344 1,717 10.1 27.8 EPS (Rs/share) 2.5 2.1 2.7 10.1 27.8 Titan Industries

We model (1) 30% yoy growth in jewelry segment revenues off a high 36% growth in the base quarter, (2) Revenues 34,023 43,189 42,772 25.7 (1.0) 7% like for like growth in the watches segment revenues, driven by share gains and (3) modest revival in growth in other smaller business segments, including eyewear (+14% yoy).

Gross margin (%) 27.0 26.9 27.2 19 bps 35 bps EBITDA 4,444 4,953 5,291 19.1 6.8 EBITDA margins show an optical contraction due to one-off hedging gains (included in other expenses) in EBITDA margin (%) 13.1 11.5 12.4 -70 bps 90 bps the base quarter (2QFY18) - not quantified by the company. Net income 3,063 3,492 3,657 19.4 4.7 EPS (Rs/share) 3.4 3.9 4.1 19.4 4.7 United Breweries

Revenues 12,764 18,659 14,173 11.0 (24.0) We expect 11% growth in revenues aided by 10% volume growth and 1% growth in net realization/case.

Gross margin (%) 54.1 54.1 54.2 6 bps 7 bps EBITDA 2,219 4,004 2,573 16.0 (35.7) We model 75 bps expansion in EBITDA margin aided by better leverage and cost saving initiatives. EBITDA margin (%) 17.4 21.5 18.2 77 bps -331 bps Net income 938 2,219 1,217 29.7 (45.1) EPS (Rs/share) 3.5 8.4 4.6 29.7 (45.1) United Spirits (standalone)

We model 10% net revenue growth led by 5.5% growth in underlying volumes; on a reported basis, we Revenues 19,513 20,119 21,456 10.0 6.6 expect a volume growth of 4.4% yoy on account of low-end franchising impact.

Gross margin (%) 47.6 49.1 48.9 131 bps -23 bps We model 131 bps yoy expansion in gross margin on account of RM softness and also a better mix. At an EBITDA 3,177 2,283 3,805 19.8 66.7 EBITDA level, we expect expansion of 145 bps yoy. Lower interest expenses on account of deleveraging efforts to also help earnings growth. EBITDA margin (%) 16.3 11.3 17.7 145 bps 638 bps Net income 1,675 1,051 2,172 29.7 106.7 EPS (Rs/share) 2.3 1.4 3.0 29.7 106.7 Varun Beverages (consolidated) We expect 28% net revenue growth driven by 23% volume growth (kicker from consolidation of acquired Revenues 9,598 20,591 12,277 27.9 (40.4) territories) and 5% price/mix-led growth. Gross margin (%) 54.8 53.4 54.8 -8 bps 131 bps We model 120 bps yoy drop in EBITDA margin largely due to lower profitability of acquired territories and EBITDA 1,854 5,749 2,225 20.0 (61.3) distribution rights for Tropicana and Quaker oat drinks. EBITDA margin (%) 19.3 27.9 18.1 -120 bps -980 bps Net income 329 3,034 464 41.2 (84.7) EPS (Rs/share) 1.8 16.6 2.5 41.2 (84.7)

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 83 September 2018: Results calendar India Daily Summary Daily Summary India Mon Tue Wed Thu Fri Sat Sun

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK 8-Oct 9-Oct 10-Oct 11-Oct 12-Oct 13-Oct 14-Oct Indiabulls Ventures TCS Hindustan Unilever AU Small Finance Zee Entertainment Enterprises Avenue Supermarts 15-Oct 16-Oct 17-Oct 18-Oct 19-Oct 20-Oct 21-Oct Indiabulls Housing Crisil ACC SBI Life Insurance HDFC Bank IndusInd Bank Federal Bank DCB Bank UltraTech Cement ICICI Lombard Hero Motocorp Havells india Infosys Mindtree J&K Bank Mphasis Mahindra CIE Automotive Reliance Industries 22-Oct 23-Oct 24-Oct 25-Oct 26-Oct 27-Oct 28-Oct

Asian Paints Adani Port and SEZ Bajaj Auto Bharti Airtel Bharat Electronics -

GlaxoSmithkline Pharmaceuticals Ambuja Cements Bajaj Holding & Investment Biocon Coromandel International 2018 October 11, Kansai Nerolac Bajaj Finance Bharat Financial Inclusion Crompton Greaves Consumer Dr Reddy's Laboratories Schaeffler India Bajaj Finserv Hexaw are Technologies JSW Steel ICICI Bank

HDFC Standard Life IDFC Bank Maruti Suzuki PI Industries ICICI Prudential Life Jubilant Foodw orks Yes Bank RBL Bank Kotak Mahindra Bank TVS Motor L&T Finance Holdings L&T Infotech Mahindra & Mahindra Financial SIS

SKF Wipro 29-Oct 30-Oct 31-Oct 1-Nov 2-Nov 3-Nov 4-Nov Carborundum Universal ABB Dabur India Berger Paints Aditya Birla Fashion Endurance Technologies Colgate-Palmolive (India) Cholamandalam Tata Motors HDFC Axis Bank GRUH Finance Container Corporation Gillette India Tata Pow er Info Edge Godrej Consumer Products Pidilite Industries Magma Fincorp Prestige Estates Projects P&G Hygiene Tech Mahindra The Ramco Cement Torrent Pow er 5-Nov 6-Nov 7-Nov 8-Nov 9-Nov 10-Nov 11-Nov Cipla Amara Raja Batteries PNB Housing Finance Titan Company Timken WABCO India 12-Nov 13-Nov 14-Nov 15-Nov 16-Nov 17-Nov 18-Nov

Source: NSE, Kotak Institutional Equities

84 KOTAK INSTITUTIONAL EQUITIES RESEARCH 84

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

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

Company Rating 10-Oct-18 (Rs) (%) (Rs bn) (US$ bn) (mn) 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E (US$ mn) Automobiles Amara Raja Batteries REDUCE 735 780 6.2 125 1.7 171 32 37 43 17.1 15.9 14.5 22.7 19.6 17.1 12.1 10.3 8.9 3.7 3.2 2.8 17.4 17.5 17.4 0.7 0.8 0.9 6.4 Apollo Tyres BUY 214 340 59.0 122 1.6 541 19 23 28 38.9 26.1 18.1 11.5 9.1 7.7 7.3 6.1 5.0 1.2 1.0 0.9 10.4 12.0 12.7 1.4 1.4 1.4 12.7 Ashok Leyland BUY 115 160 39.7 336 4.5 2,926 6.2 8.9 9.4 15.3 43.2 6.1 18.5 12.9 12.2 9.3 6.7 6.3 4.0 3.4 2.9 23.4 28.4 25.4 1.6 2.3 2.5 46.2 Bajaj Auto SELL 2,582 2,600 0.7 747 10.1 289 155 168 180 10.8 8.1 7.4 16.6 15.4 14.3 11.1 9.9 8.9 3.5 3.1 2.8 22.2 21.4 20.6 2.4 2.6 2.8 30.3 Balkrishna Industries BUY 1,043 1,180 13.1 202 2.7 193 50 61 69 32.7 23.3 12.3 21.0 17.0 15.2 11.5 9.5 8.4 4.1 3.4 2.8 21.3 21.7 20.2 0.5 0.6 0.6 15.9 Bharat Forge SELL 589 600 1.9 274 3.7 466 23 27 29 44.4 14.6 7.1 25.2 22.0 20.5 14.4 12.5 11.6 5.0 4.3 3.7 21.5 21.0 19.4 0.8 0.9 1.0 12.4 CEAT ADD 1,090 1,500 37.6 44 0.6 40 99 108 116 53.7 8.3 7.9 11.0 10.1 9.4 7.4 6.4 5.8 1.5 1.3 1.2 14.4 13.8 13.2 0.9 0.9 1.0 12.4 Eicher Motors SELL 22,455 21,500 (4.3) 612 8.3 27 981 1,124 1,251 23.7 14.6 11.3 22.9 20.0 18.0 16.2 14.1 12.0 8.3 6.3 4.9 41.8 35.8 30.8 0.1 0.1 — 27.4 Escorts BUY 591 1,200 103.1 50 1.0 89 59 71 78 52.3 19.9 10.2 10.0 8.3 7.6 5.8 4.6 3.7 1.8 1.5 1.3 17.6 18.0 17.1 1.5 1.8 2.0 15.3 Exide Industries SELL 257 235 (8.5) 218 2.9 850 10 11 13 25.3 11.0 11.6 25.0 22.5 20.2 14.2 12.7 11.3 3.7 3.3 3.0 15.4 15.5 15.7 1.2 1.4 1.6 8.6 Hero Motocorp SELL 2,920 2,600 (11.0) 583 7.9 200 174 182 196 (6.1) 4.7 7.6 16.8 16.0 14.9 9.8 9.2 8.3 4.4 4.0 3.6 27.9 26.2 25.4 3.0 3.1 3.4 22.4 Mahindra CIE Automotive ADD 252 290 15.0 95 1.3 378 14 16 17 45.0 12.7 10.4 18.1 16.1 14.6 9.1 8.0 7.1 2.2 2.0 1.7 13.2 13.1 12.7 ——— 2.2 Mahindra & Mahindra BUY 764 1,125 47.2 950 12.8 1,138 45 54 56 18.8 19.0 4.2 16.9 14.2 13.7 11.0 9.1 8.5 2.5 2.2 2.0 15.8 16.6 15.4 1.2 1.4 1.5 33.1 Maruti Suzuki ADD 6,986 9,200 31.7 2,110 28.4 302 298 362 408 16.7 21.2 12.9 23.4 19.3 17.1 12.6 10.0 8.4 4.4 3.8 3.3 20.1 21.1 20.5 1.1 1.3 1.5 85.0 Motherson Sumi Systems SELL 232 280 20.6 489 6.6 2,105 11 14 16 40.2 21.5 13.8 20.2 16.7 14.6 8.3 6.9 6.0 4.2 3.6 3.0 22.5 23.2 22.3 1.2 1.4 1.5 15.9 MRF REDUCE 63,980 69,000 7.8 271 3.7 4 3,425 3,932 4,411 28.3 14.8 12.2 18.7 16.3 14.5 8.7 7.5 6.4 2.4 2.1 1.9 13.9 13.9 13.7 0.1 0.1 0.1 8.1 Schaeffler India BUY 5,120 6,000 17.2 85 1.1 17 156 199 233 9.0 27.3 17.6 32.8 25.8 21.9 19.9 15.1 12.5 4.5 4.0 3.5 14.5 16.4 17.0 0.6 0.8 0.9 0.7 SKF ADD 1,657 1,800 8.6 85 1.1 51 69 82 97 19.7 18.5 18.2 24.0 20.3 17.1 15.3 12.6 10.3 4.0 3.5 3.0 16.7 17.1 17.4 0.7 0.9 1.0 0.4 Tata Motors BUY 189 425 125.2 641 8.1 3,396 22 36 39 10.7 62.7 8.0 8.5 5.3 4.9 3.0 2.5 2.3 0.6 0.6 0.5 7.6 11.2 10.8 ——— 52.6 Timken SELL 552 570 3.3 41 0.6 68 19 24 28 41.7 25.1 18.0 28.8 23.0 19.5 17.5 14.1 11.8 4.4 3.7 3.1 16.9 17.5 17.2 0.2 0.2 0.2 0.2 TVS Motor SELL 533 350 (34.3) 253 3.4 475 15 17 20 8.4 15.1 15.6 35.3 30.6 26.5 19.3 16.8 14.7 7.6 6.5 5.7 23.1 22.9 22.9 0.8 1.0 1.1 15.5 Varroc Engineering BUY 796 1,250 57.1 107 1.4 135 39 47 51 52.3 19.9 10.2 20.4 17.0 15.5 16.1 13.6 11.7 3.1 2.6 2.1 15.3 15.3 13.5 ———— WABCO India SELL 6,248 6,350 1.6 119 1.6 19 169 222 225 17.8 31.3 1.0 36.9 28.1 27.8 23.8 18.0 17.7 6.5 5.3 4.5 19.2 20.9 17.7 0.2 0.2 0.2 0.4 Automobiles Neutral 8,563 115 17.4 25.0 9.7 18.5 14.8 13.5 8.2 6.8 6.1 2.7 2.4 2.1 14.8 16.2 15.6 1.1 1.3 1.4 424.3 Banks Axis Bank REDUCE 589 600 1.8 1,514 20.4 2,567 19 41 46 1,635.7 118.8 12.3 31.6 14.4 12.9 ——— 2.5 2.1 1.8 7.3 14.3 14.3 0.5 1.0 1.2 97.4 Bank of Baroda ADD 96 130— — 253 3.4 2,652 21 26 29 323.7 26.4 12.1 4.7 3.7 3.3 ——— 0.8 0.6 0.5 12.7 14.0 13.7 ——— 42.9 Canara Bank ADD 233 280 20.3 171 2.3 733 (5) 51 68 91.6 1,147.0 33.3 (48.0) 4.6 3.4 ——— 1.4 0.8 0.6 (1.0) 10.1 12.0 ——— 26.7 City Union Bank ADD 172 185 7.5 126 1.7 665 9 11 12 5.8 13.3 16.7 18.3 16.1 13.8 ——— 2.8 2.5 2.1 15.5 15.6 16.0 1.0 1.1 1.3 2.0 DCB Bank BUY 151 180 19.4 47 0.6 308 10 12 16 28.2 21.0 33.1 14.8 12.2 9.2 ——— 1.7 1.6 1.4 11.7 12.7 14.9 0.6 0.8 1.0 4.3 Equitas Holdings BUY 126 160 27.4 43 0.6 340 4.4 8.4 11.4 378.4 89.9 35.6 28.3 14.9 11.0 ——— 1.8 1.6 1.4 6.4 11.2 13.4 ——— 5.1 Federal Bank BUY 74 105 42.7 146 2.0 1,972 5.7 8.0 9.8 27.8 39.5 22.9 12.9 9.3 7.5 ——— 1.2 1.1 1.0 8.9 11.5 12.9 1.7 2.4 3.0 18.1

HDFC Bank ADD 1,966 2,100 6.8 5,343 72.0 2,595 78 94 112 15.7 20.0 19.1 25.2 21.0 17.6 ——— 3.7 3.3 2.9 16.7 16.2 17.0 0.8 0.9 1.1 79.9 Daily Summary India ICICI Bank BUY 320 400 25.1 2,058 27.7 7,072 8 26 31 (17.6) 227.0 18.6 40.5 12.4 10.4 ——— 2.2 1.8 1.6 4.7 14.4 15.2 0.5 1.6 1.9 96.4 IDFC Bank NR 36 —— 122 1.6 3,404 1.2 2.9 4.3 (52.7) 146.7 44.8 30.1 12.2 8.4 ——— 0.8 0.7 0.7 2.6 6.3 8.6 0.7 1.6 2.4 6.7 IndusInd Bank BUY 1,638 1,900 16.0 985 13.3 600 70 86 101 15.8 24.3 17.0 23.5 18.9 16.2 ——— 3.5 3.0 2.6 17.4 16.7 16.9 — 0.6 0.7 39.2 J&K Bank BUY 40 100 150.0 22 0.3 557 7 11 15 82.4 63.8 33.5 6.0 3.7 2.8 ——— 0.5 0.4 0.4 5.9 9.1 11.2 3.3 5.4 7.3 0.3 Karur Vysya Bank ADD 77 110 42.0 62 0.8 727 3 13 14 (32.3) 306.7 9.1 24.1 5.9 5.4 ——— 1.1 0.9 0.8 3.7 14.1 13.9 1.0 4.2 4.8 2.0 Punjab National Bank ADD 66 80 20.7 183 2.5 2,761 (27) 12 18 40.4 145.3 46.9 (2.5) 5.5 3.8 ——— 3.3 1.1 0.6 (23.4) 10.7 13.8 ——— 41.4 RBL Bank REDUCE 535 500 (6.5) 227 3.1 420 22 29 36 48.1 31.5 21.0 23.9 18.1 15.0 ——— 3.1 2.8 2.4 13.3 15.5 16.5 0.6 0.8 1.0 15.7 State Bank of India BUY 279 370 32.8 2,487 33.5 8,925 8 37 53 204.8 380.5 42.7 36.2 7.5 5.3 ——— 1.8 1.3 1.0 3.1 13.6 16.7 — 0.1 0.2 103.1 Ujjivan Financial Services BUY 253 360 42.0 31 0.4 121 19 28 32 3,033.9 47.3 15.1 13.6 9.2 8.0 ——— 1.6 1.4 1.2 12.1 15.8 15.8 0.7 1.1 1.4 5.4 Union Bank ADD 72 90 25.5 84 1.1 1,169 8 33 40 117.1 330.8 22.5 9.4 2.2 1.8 ——— 1.0 0.6 0.4 3.9 15.2 16.3 1.6 6.9 8.5 10.3 YES Bank SELL 234 200 (14.5) 540 7.3 2,303 18 19 25 (4.4) 10.6 28.2 13.3 12.1 9.4 ——— 1.9 1.7 1.5 14.7 14.5 16.4 1.2 1.4 1.8 140.9 Banks Attractive 14,442 195 804.7 147.0 26.4 29.4 11.9 9.4 1.8 1.6 1.4 6.0 13.1 14.5 0.6 0.9 1.1 737.7 KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK

Source: Company, Bloomberg, Kotak Institutional Equities estimates -

October 11, 2018 October 11,

KOTAK INSTITUTIONAL EQUITIES RESEARCH 85

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 10-Oct-18 (Rs) (%) (Rs bn) (US$ bn) (mn) 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E (US$ mn) NBFCs Bajaj Finance SELL 2,271 2,000 (11.9) 1,312 17.7 575 68 90 114 56.6 31.9 27.3 33.4 25.3 19.9 — — — 6.8 5.5 4.4 22.4 24.0 24.6 0.3 0.4 0.5 81.6 Bajaj Finserv REDUCE 5,962 6,100 2.3 949 12.8 159 245 307 376 39.7 25.2 22.5 24.3 19.4 15.9 — — — 3.8 3.2 2.7 17.5 18.1 18.6 0.2 0.2 0.2 21.9 Bharat Financial Inclusion NA 1,019 — — 143 1.9 139 43 54 69 31.1 27.2 25.8 23.8 18.7 14.9 — — — 3.9 3.1 2.6 17.9 18.5 19.0 — — — 11.5 Cholamandalam ADD 1,165 1,425 22.3 182 2.5 156 74 92 113 19.4 23.8 23.1 15.7 12.7 10.3 — — — 3.1 2.6 2.2 20.6 21.3 21.7 0.8 0.9 1.2 7.9 HDFC ADD 1,737 2,020 16.3 2,947 39.7 1,676 55 65 79 (27.3) 18.7 21.2 31.7 26.7 22.0 — — — 4.0 3.6 3.3 13.6 14.2 15.7 1.2 1.4 1.7 82.4 HDFC Standard Life Insurance SELL 370 405 9.5 745 10.0 2,007 6 7 8 14.8 10.9 14.7 58.2 52.5 45.8 — — — 15.4 13.8 12.3 28.0 27.7 28.4 0.4 0.5 0.5 7.9 ICICI Lombard SELL 780 620 (20.5) 354 4.8 454 26 32 37 37.1 21.5 18.5 30.0 24.7 20.8 — — — 6.6 5.5 4.6 23.8 24.2 24.0 0.8 0.9 1.1 5.8 ICICI Prudential Life BUY 332 500 50.4 477 6.4 1,436 12 13 15 10.1 7.0 10.0 26.8 25.0 22.7 — — — 6.0 5.0 4.3 24.5 21.8 20.2 0.6 0.7 0.7 8.5 IIFL Holdings SELL 468 625 33.6 149 2.0 319 38 45 52 31.5 18.6 16.0 12.4 10.5 9.0 — — — 2.2 1.9 1.7 20.5 20.0 20.0 1.7 2.0 2.4 2.0 L&T Finance Holdings ADD 134 165 23.0 268 3.6 1,996 13 14 16 70.9 12.3 12.8 10.7 9.5 8.4 — — — 1.9 1.7 1.4 18.9 18.8 18.3 1.5 1.9 1.8 21.1 LIC Housing Finance BUY 429 580 35.2 216 2.9 505 48 55 66 10.9 13.9 19.8 8.9 7.8 6.5 — — — 1.4 1.2 1.1 17.0 16.2 16.9 1.8 2.0 2.4 17.3

Magma Fincorp BUY 116 165 42.1 31 0.4 237 13 17 21 34.0 31.8 23.0 8.9 6.8 5.5 — — — 1.1 1.0 0.9 13.9 15.8 17.0 1.7 2.2 2.7 1.0 -

Mahindra & Mahindra Financial ADD 406 450 10.9 251 3.4 614 23 28 34 58.4 23.2 18.6 17.7 14.3 12.1 — — — 2.6 2.3 2.1 14.3 15.8 16.7 1.6 1.9 2.3 12.2 October 11, 2018 11, October Max Financial Services ADD 378 650 71.8 102 1.4 268 6 6 6 36.9 1.8 1.8 60.3 59.2 58.2 — — — — — — 8.3 8.0 7.8 0.6 0.6 0.6 5.8 Muthoot Finance ADD 405 480 18.6 162 2.2 400 40 42 48 (7.8) 6.0 14.8 10.2 9.6 8.4 — — — 1.8 1.6 1.4 19.0 17.6 17.8 2.3 2.4 2.7 7.4 PNB Housing Finance REDUCE 876 1,200 37.0 147 2.0 167 62 75 92 25.3 20.9 22.4 14.0 11.6 9.5 — — — 2.0 1.8 1.5 15.2 15.9 17.0 0.4 0.4 0.4 4.3

SBI Life Insurance ADD 561 785 39.9 561 7.6 1,000 15 18 21 26.0 22.9 17.0 38.6 31.4 26.8 — — — 7.3 6.1 5.1 20.6 21.3 20.9 0.4 0.5 0.6 3.3 Shriram City Union Finance ADD 1,590 2,120 33.3 105 1.4 66 139 171 206 38.1 22.6 20.5 11.4 9.3 7.7 — — — 1.8 1.6 1.4 15.5 16.7 17.4 1.1 1.3 1.6 1.4 Shriram Transport BUY 1,080 1,450 34.3 245 3.3 227 109 127 143 57.8 16.2 12.5 9.9 8.5 7.6 — — — 1.7 1.5 1.3 17.6 17.2 16.8 1.4 1.6 2.0 29.3 NBFCs Neutral 9,346 126 13.2 19.5 19.6 24.1 20.2 16.9 3.8 3.3 2.9 15.9 16.5 17.1 0.8 1.0 1.1 737.7 Cement ACC SELL 1,464 1,270 (13.2) 275 3.7 188 62 70 81 27.0 13.8 15.2 23.7 20.8 18.0 13.0 11.2 9.4 2.7 2.5 2.3 11.9 12.5 13.1 1.2 1.2 1.2 16.8 Ambuja Cements REDUCE 210 210 0.0 417 5.6 1,986 9 11 12 14.5 23.2 15.8 24.4 19.8 17.1 8.1 6.6 5.5 1.9 1.8 1.7 8.1 9.5 10.4 1.7 1.7 1.7 10.7 Dalmia Bharat ADD 2,135 2,830 32.6 190 2.6 89 94 122 139 55.8 29.3 14.8 22.7 17.6 15.3 8.8 7.2 6.0 2.8 2.4 2.1 12.9 14.6 14.5 0.1 0.1 0.1 4.3 Grasim Industries BUY 910 1,170 28.6 598 8.1 657 46 55 70 (2.5) 18.8 28.0 19.7 16.6 12.9 7.0 6.7 6.3 1.0 0.9 0.9 5.2 5.9 7.1 0.6 0.6 0.6 16.8

India Cements REDUCE 96 118 23.2 30 0.4 308 4 8 12 28.0 102.6 41.3 22.9 11.3 8.0 8.0 6.2 5.2 0.6 0.5 0.5 2.5 4.8 6.5 1.0 1.0 1.0 9.8 J K Cement ADD 697 890 27.8 49 0.7 70 45 79 78 3.7 75.4 (0.8) 15.5 8.9 8.9 9.5 7.9 6.4 2.2 1.8 1.5 15.0 22.3 18.5 1.1 1.1 1.1 0.4 JK Lakshmi Cement ADD 286 370 29.4 34 0.5 118 11 28 37 153.5 147.9 30.5 25.2 10.2 7.8 9.2 5.9 4.8 2.2 1.8 1.5 8.9 19.5 21.0 0.7 0.7 0.7 0.4 Orient Cement ADD 90 145 61.7 18 0.2 205 7 11 15 212.9 58.7 41.3 13.3 8.4 5.9 6.7 5.1 3.7 1.6 1.4 1.2 12.9 18.2 21.8 1.7 2.2 2.2 0.3 Shree Cement SELL 15,542 12,500 (19.6) 541 7.3 35 421 630 760 6.0 49.7 20.6 36.9 24.7 20.5 17.1 12.8 10.3 5.3 4.5 3.7 15.4 19.7 19.8 0.3 0.3 0.3 5.6 UltraTech Cement SELL 3,778 2,950 (21.9) 1,038 14.0 275 126 162 201 42.7 28.9 24.0 30.0 23.3 18.8 15.8 13.0 10.8 3.6 3.1 2.7 12.6 14.3 15.4 0.3 0.3 0.3 19.2 Cement Cautious 3,189 43 19.5 30.3 21.8 25.8 19.8 16.2 10.0 8.6 7.4 2.2 2.0 1.8 8.4 10.0 11.0 0.6 0.6 0.6 84.3

Source: Company, Bloomberg, Kotak Institutional Equities estimates

86 KOTAK INSTITUTIONAL EQUITIES RESEARCH

86

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

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

Company Rating 10-Oct-18 (Rs) (%) (Rs bn) (US$ bn) (mn) 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E (US$ mn) Consumer products Asian Paints REDUCE 1,226 1,200 (2.1) 1,176 15.9 959 27 33 39 32.1 20.3 18.3 45.2 37.6 31.8 28.3 23.4 19.7 12.2 10.6 9.3 28.8 30.3 31.3 1.0 1.2 1.5 23.9 Bajaj Corp. ADD 399 405 1.4 59 0.8 148 15 17 19 7.8 10.3 9.5 25.9 23.5 21.4 20.7 17.6 15.3 12.0 12.0 11.8 46.3 51.2 55.4 3.3 3.5 3.8 0.6 Britannia Industries ADD 5,709 5,875 2.9 686 9.2 120 104 127 152 24.5 22.2 19.2 54.8 44.8 37.6 35.9 29.3 24.5 16.0 12.9 10.6 32.5 31.8 30.9 0.6 0.8 1.0 15.7 Coffee Day Enterprises REDUCE 258 265 2.8 54 0.7 211 8 10 12 129.9 30.0 21.2 33.5 25.8 21.3 11.5 10.1 9.3 2.1 2.0 1.8 6.6 8.0 8.9 — — — 1.1 Colgate-Palmolive (India) ADD 1,053 1,120 6.4 286 3.9 272 27 32 36 14.7 15.6 15.5 38.6 33.4 28.9 22.0 19.1 16.6 16.8 14.6 12.8 46.0 46.9 47.3 1.5 1.8 2.2 7.5 Dabur India REDUCE 405 345 (14.9) 716 9.6 1,762 9 10 12 17.3 12.9 13.6 44.5 39.4 34.7 37.2 32.1 27.8 12.5 10.9 9.6 28.1 29.6 29.4 0.9 1.1 1.4 21.5 GlaxoSmithKline Consumer REDUCE 6,780 6,325 (6.7) 285 3.8 42 199 223 246 19.5 12.1 10.1 34.1 30.4 27.6 23.6 20.3 17.8 7.4 6.7 6.1 22.8 23.0 23.1 1.3 1.5 1.8 2.2 Godrej Consumer Products REDUCE 719 645 (10.2) 735 9.9 1,022 17 19 22 18.8 13.7 12.7 42.5 37.4 33.2 30.1 26.1 22.7 10.0 8.6 7.5 25.3 24.7 24.2 0.8 0.9 1.0 14.5 Hindustan Unilever REDUCE 1,528 1,430 (6.4) 3,307 44.6 2,160 29 33 37 19.5 13.2 12.6 52.1 46.0 40.9 36.0 31.6 28.0 40.8 34.6 29.8 83.5 81.4 78.3 1.4 1.6 1.8 37.4 ITC ADD 270 310 14.8 3,306 44.6 12,275 10 11 12 8.2 12.3 11.7 28.0 24.9 22.3 18.0 15.9 14.1 6.1 5.7 5.4 20.4 22.2 24.2 2.1 2.5 2.8 58.6 Jubilant Foodworks BUY 1,191 1,430 20.1 157 2.1 132 25 35 46 74.7 37.6 32.4 46.8 34.0 25.7 23.3 17.4 13.1 11.7 8.9 6.7 29.0 29.7 29.9 0.2 0.3 0.3 28.5 Jyothy Laboratories ADD 192 210 9.5 70 0.9 364 6 7 8 27.6 16.7 15.4 34.1 29.2 25.3 22.8 19.3 16.4 5.3 4.6 4.0 16.6 16.8 16.9 0.5 0.8 1.0 0.9 Marico ADD 302 310 2.7 390 5.3 1,291 7 8 9 8.9 20.0 14.5 44.2 36.8 32.2 30.6 25.3 21.8 14.5 13.5 12.4 33.7 37.9 40.2 1.6 1.8 2.1 10.5 Nestle India ADD 9,510 9,950 4.6 917 12.4 96 171 197 223 34.2 15.7 13.2 55.8 48.2 42.6 31.8 27.4 24.1 24.7 22.6 20.7 46.1 49.0 50.8 1.2 1.4 1.6 10.2 Page Industries SELL 29,999 22,300 (25.7) 335 4.5 11 418 508 607 34.3 21.6 19.5 71.8 59.0 49.4 46.4 38.2 31.9 30.3 24.0 19.3 47.8 45.5 43.4 0.6 0.7 0.9 18.4 Pidilite Industries REDUCE 953 960 0.8 484 6.5 508 21 26 31 16.8 21.8 20.2 45.2 37.1 30.9 30.0 24.7 20.5 11.5 9.6 8.0 27.4 28.2 28.4 0.7 0.9 1.0 8.4 S H Kelkar and Company BUY 199 240 20.4 29 0.4 145 7 10 12 (6.2) 41.9 23.2 28.7 20.2 16.4 18.6 13.4 11.5 3.1 2.8 2.5 11.3 14.5 16.0 0.9 1.0 1.4 0.5 Tata Global Beverages ADD 228 230 0.7 144 1.9 631 8 9 10 7.7 17.0 12.9 28.9 24.7 21.8 15.8 13.8 12.2 2.0 1.9 1.8 7.0 7.9 8.5 1.3 1.5 1.8 10.3 Titan Company REDUCE 789 760 (3.6) 700 9.4 888 16 20 23 25.6 21.8 19.3 49.1 40.3 33.8 32.5 25.9 21.3 11.6 9.8 8.2 25.6 26.3 26.4 0.6 0.7 0.9 39.5 United Breweries REDUCE 1,196 1,040 (13.0) 316 4.3 264 21 26 31 39.2 23.6 20.6 57.5 46.5 38.6 28.4 24.3 20.8 10.0 8.4 7.1 18.7 19.6 20.0 0.3 0.4 0.5 14.8 United Spirits REDUCE 472 470 (0.3) 343 4.6 727 10 13 17 34.7 30.9 24.5 46.0 35.1 28.2 27.0 21.8 18.2 9.4 6.9 5.3 24.2 22.7 21.3 — — 0.5 11.6 Varun Beverages REDUCE 745 700 (6.1) 136 1.8 183 15 20 26 29.8 34.5 30.7 49.8 37.1 28.3 16.6 14.1 11.9 6.9 5.9 5.0 14.6 17.1 19.0 — — 0.3 1.3 Consumer products Cautious 14,630 197 17.7 16.0 14.7 41.2 35.5 31.0 26.6 22.8 19.8 10.8 9.6 8.6 26.1 27.1 27.8 1.3 1.5 1.7 337.6 Energy BPCL REDUCE 265 275 3.6 576 7.8 1,967 33 33 36 (19.2) 2.6 7.5 8.2 8.0 7.4 6.3 5.9 5.4 1.4 1.3 1.2 17.9 16.8 16.5 4.9 5.0 5.4 28.6 Castrol India SELL 139 155 11.8 137 1.8 989 7 8 9 2.9 10.1 9.7 19.6 17.8 16.2 12.2 11.0 9.9 12.9 12.6 12.1 67.1 71.5 76.0 4.0 4.5 4.9 3.6 GAIL (India) BUY 336 455 35.3 758 10.2 2,255 29 31 33 41.7 6.4 8.0 11.6 10.9 10.1 7.3 6.8 6.3 1.7 1.6 1.4 15.4 14.9 14.7 2.8 3.0 3.1 27.0 GSPL SELL 173 185 6.7 98 1.3 564 16 12 13 31.3 (25.1) 12.1 11.1 14.9 13.3 4.4 5.3 4.6 1.7 1.5 1.4 16.2 10.9 11.1 1.3 1.0 1.1 1.5 HPCL REDUCE 181 185 2.4 275 3.7 1,524 28 29 31 (32.3) 1.7 6.6 6.4 6.3 5.9 6.8 7.0 6.9 1.1 1.0 0.9 17.2 16.1 15.8 6.4 6.5 6.9 25.8 Indraprastha Gas SELL 236 240 1.9 165 2.2 700 12 13 15 16.4 12.3 10.7 19.6 17.5 15.8 12.3 10.8 9.5 4.0 3.5 3.1 22.1 21.5 20.9 1.1 1.3 1.7 10.0 IOCL REDUCE 124 120 (3.2) 1,204 16.2 9,479 16 15 17 (24.1) (1.8) 12.3 8.0 8.1 7.2 4.7 4.6 4.0 1.0 0.9 0.9 12.9 11.9 12.6 5.0 4.9 5.5 19.4 Mahanagar Gas ADD 787 965 22.7 78 1.0 99 56 60 64 16.0 7.6 5.4 14.0 13.0 12.4 8.1 7.3 6.7 3.3 2.9 2.6 24.8 23.5 22.0 2.8 3.1 3.2 12.8

ONGC ADD 149 200 34.6 1,907 25.7 12,833 20 20 19 16.8 0.3 (5.9) 7.3 7.3 7.7 3.6 3.4 3.4 0.8 0.8 0.7 11.2 10.6 9.5 4.5 4.7 4.7 17.1 Daily Summary India Oil India SELL 199 200 0.6 226 3.0 1,135 23 24 23 (6.7) 3.4 (2.5) 8.6 8.3 8.6 5.7 5.5 5.5 0.8 0.7 0.7 9.2 9.0 8.4 4.6 4.8 4.7 2.4 Petronet LNG BUY 213 280 31.5 319 4.3 1,500 16 18 20 16.7 13.1 9.4 13.1 11.6 10.6 8.8 7.4 6.5 2.9 2.5 2.3 23.3 23.2 22.7 2.7 3.4 4.2 10.2 Reliance Industries SELL 1,102 985 (10.6) 6,524 87.9 5,922 69 78 87 17.6 12.4 11.9 15.9 14.1 12.6 11.0 9.4 8.0 2.0 1.8 1.6 12.2 12.1 12.1 0.6 0.6 0.7 157.5 Energy Attractive 12,267 165 4.0 5.6 6.7 11.4 10.8 10.2 7.1 6.5 6.0 1.4 1.3 1.2 12.6 12.2 12.0 2.3 2.4 2.5 315.9

Source: Company, Bloomberg, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK

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October 11, 2018 11, October

KOTAK INSTITUTIONAL EQUITIES RESEARCH 87

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 10-Oct-18 (Rs) (%) (Rs bn) (US$ bn) (mn) 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E (US$ mn) Industrials ABB SELL 1,341 1,020 (24.0) 284 3.8 212 26 29 36 30.1 14.2 23.5 52.0 45.6 36.9 30.5 27.4 22.7 7.2 6.6 5.8 14.5 15.1 16.7 0.7 0.7 0.7 2.4 BHEL REDUCE 74 89 20.0 272 3.7 3,671 3.3 5.5 7.6 47.9 69.3 38.0 22.8 13.5 9.8 7.2 4.4 3.2 0.8 0.8 0.8 3.6 6.1 8.2 2.7 4.6 6.3 9.6 Carborundum Universal SELL 358 322 (10.0) 68 0.9 189 14 17 20 25.0 21.4 13.8 25.1 20.7 18.2 13.7 11.2 9.7 3.9 3.5 3.1 16.3 17.8 18.1 1.2 1.5 1.7 0.5 CG Power and Industrial BUY 41 62 51.1 26 0.3 627 1.4 3.6 5.7 71.6 157.3 57.0 29.2 11.3 7.2 7.4 5.4 4.2 1.0 0.9 0.9 3.3 8.4 12.5 — — — 4.4 Cummins India REDUCE 688 710 3.2 191 2.6 277 28 33 37 15.2 17.5 13.7 24.7 21.0 18.5 20.7 17.7 15.3 4.5 4.2 3.9 18.7 20.6 21.8 2.2 2.6 2.9 5.1 Kalpataru Power Transmission BUY 303 560 84.6 47 0.6 153 23.9 32.7 41.3 23.4 36.6 26.4 12.7 9.3 7.3 6.2 4.9 4.1 1.6 1.3 1.1 13.0 15.5 16.9 0.5 0.5 0.5 0.6 KEC International BUY 261 410 57.0 67 0.9 257 21 27 33 16.9 29.7 23.0 12.5 9.6 7.8 7.2 5.9 5.0 2.7 2.2 1.8 24.1 25.2 24.9 0.9 1.1 1.4 2.7 L&T BUY 1,251 1,600 27.9 1,753 23.6 1,401 62.8 67.1 83.3 21.5 6.8 24.1 19.9 18.6 15.0 15.9 15.2 13.2 3.2 2.9 2.6 16.7 16.1 18.0 1.7 1.8 2.2 49.6 Siemens SELL 916 1,000 9.2 326 4.4 356 29 35 — 21.4 21.7 — 31.5 25.9 - 17.5 14.0 — 3.8 3.5 — 12.3 14.0 — 1.3 1.6 — 4.0 Thermax REDUCE 894 1,065 19.1 107 1.4 113 27.8 38.7 43.8 34.7 39.2 13.2 32.2 23.1 20.4 20.3 15.0 12.8 3.5 3.2 2.9 11.1 14.3 14.7 1.1 1.2 1.4 1.1 Industrials Neutral 3,140 42 23.8 17.8 15.7 22.6 19.1 16.5 15.0 13.2 11.1 2.7 2.5 2.4 11.8 12.9 14.7 1.6 1.9 2.1 80.0

Infrastructure -

Adani Ports and SEZ BUY 327 460 40.6 677 9.1 2,071 19 23 29 1.2 21.1 29.8 17.5 14.4 11.1 12.2 10.1 8.8 2.8 2.4 2.0 17.0 17.7 19.4 0.6 0.6 0.6 16.0 October 11, 2018 11, October Ashoka Buildcon BUY 108 220 104.7 30 0.4 282 9 10 10 4.1 17.8 (1.3) 12.3 10.4 10.6 8.1 6.9 6.4 1.3 1.2 1.1 11.8 12.3 11.0 1.6 1.2 1.2 0.6 Container Corp. SELL 613 635 3.6 299 4.0 487 21 25 29 17.4 20.9 15.0 29.6 24.5 21.3 18.1 14.4 11.8 2.9 2.7 2.5 10.3 11.6 12.3 1.4 1.7 1.6 5.3 Dilip Buildcon BUY 548 1,240 126.2 75 1.0 137 56 71 85 19.8 27.5 20.1 9.9 7.7 6.4 5.6 4.5 3.8 2.3 1.8 1.4 26.7 26.2 24.4 — — — 3.5

Gateway Distriparks BUY 162 250 54.6 18 0.2 109 7 8 11 (5.8) 15.2 37.5 22.6 19.6 14.2 10.4 8.6 7.1 3.0 2.6 2.2 9.8 14.5 17.1 — 1.9 1.9 0.2 Gujarat Pipavav Port BUY 102 150 46.4 49 0.7 483 5.3 6.5 7.8 29.7 22.9 19.3 19.2 15.6 13.1 10.1 8.3 6.9 2.4 2.4 2.3 12.7 15.3 17.8 4.3 5.2 6.2 0.6 IRB Infrastructure BUY 135 320 136.9 47 0.6 351 31 33 23 36.8 7.1 (31.3) 4.4 4.1 5.9 5.9 6.4 7.7 0.7 0.6 0.6 17.6 16.3 10.0 2.3 3.0 3.2 5.7 Mahindra Logistics REDUCE 523 565 8.1 37 0.5 71 15 21 25 50.7 39.3 23.7 35.4 25.4 20.5 19.6 14.2 11.2 7.3 5.9 4.8 22.7 25.8 25.8 — — — 0.5 Sadbhav Engineering BUY 208 370 77.5 36 0.5 172 17 22 22 31.7 27.9 2.9 12.3 9.6 9.3 9.4 7.4 6.2 1.7 1.4 1.3 14.5 16.2 14.5 — — — 1.3 Infrastructure Attractive 1,269 17 11.3 20.2 16.7 16.5 13.7 11.7 10.5 8.9 8.0 2.4 2.1 1.8 14.8 15.5 15.7 0.9 1.1 1.1 33.8 Internet Info Edge ADD 1,429 1,425 (0.3) 174 2.3 122 26 33 40 14.9 27.5 20.6 55.3 43.3 35.9 41.7 31.6 25.6 6.5 5.9 5.3 13.2 14.3 15.6 0.6 0.6 0.7 3.1 Just Dial ADD 479 610 27.4 32 0.4 67 26 30 33 23.0 15.0 9.4 18.3 15.9 14.6 9.2 7.2 5.9 2.8 2.5 2.1 16.7 16.6 15.7 0.5 0.6 0.7 20.5

Internet Cautious 206 3 17.6 23.0 16.8 42.1 34.2 29.3 30.5 24.0 20.0 5.4 4.9 4.3 12.9 14.2 14.7 0.6 0.6 0.7 23.7 Media DB Corp. REDUCE 191 270 41.1 35 0.5 184 20 23 26 14.9 12.3 14.8 9.4 8.4 7.3 5.0 4.4 — 1.9 1.8 — 20.7 22.3 25.2 8.8 11.0 13.2 0.5 DishTV ADD 56 90 60.7 103 1.4 1,925 1.8 3.4 4.9 514.6 88.2 42.6 NM 16.3 11.4 4.9 3.8 3.0 1.5 1.4 1.2 5.1 8.9 11.5 — — — 4.4 Jagran Prakashan REDUCE 110 168 52.9 33 0.4 311 11 12 14 10.0 12.2 14.6 10.4 9.2 8.1 4.4 3.9 3.4 1.7 1.7 1.6 15.9 18.3 20.2 4.6 8.2 8.2 0.4 PVR BUY 1,297 1,430 10.2 61 0.8 47 38 50 61 41.2 32.3 22.4 34.2 25.9 21.1 13.2 11.2 9.5 4.9 4.2 3.6 15.3 17.6 18.3 0.3 0.4 0.5 11.6 Sun TV Network REDUCE 644 660 2.6 254 3.4 394 35 37 41 20.6 6.6 10.3 18.5 17.4 15.8 12.4 11.5 10.0 5.0 4.7 4.3 28.4 27.9 28.6 3.1 3.5 3.9 17.9 Zee Entertainment Enterprises REDUCE 459 430 (6.4) 441 5.9 960 17 20 22 11.4 17.1 12.6 27.4 23.4 20.8 16.1 14.2 12.5 5.2 4.5 4.0 19.9 20.6 20.5 1.0 1.2 1.5 18.8 Media Attractive 926 12 28.7 19.5 16.7 22.2 18.6 15.9 10.3 9.1 7.6 3.6 3.3 3.2 16.3 17.7 19.9 1.8 2.2 2.6 53.6 Source: Company, Bloomberg, Kotak Institutional Equities estimates

88 KOTAK INSTITUTIONAL EQUITIES RESEARCH

88

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

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

Company Rating 10-Oct-18 (Rs) (%) (Rs bn) (US$ bn) (mn) 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E (US$ mn) Metals & Mining Coal India ADD 272 320 17.8 1,686 22.7 6,207 25 25 27 120.4 2.2 6.6 10.9 10.7 10.0 8.3 7.0 6.5 6.7 7.4 7.8 62.7 65.9 76.0 7.4 9.2 9.2 14.7 Hindalco Industries BUY 227 330 45.4 509 6.9 2,229 28 33 35 28.1 17.8 6.4 8.1 6.9 6.5 5.4 4.6 4.1 0.8 0.7 0.7 10.8 11.4 10.9 0.5 0.5 0.5 38.6 Hindustan Zinc REDUCE 278 280 0.8 1,174 15.8 4,225 21 24 27 (3.8) 15.7 12.3 13.4 11.6 10.3 7.8 6.4 5.3 2.9 2.5 2.2 22.9 23.2 22.6 2.9 2.9 2.9 6.0 Jindal Steel and Power REDUCE 182 215 18.1 176 2.4 968 8 14 22 195.9 68.5 60.8 22.4 13.3 8.3 6.6 6.0 5.1 0.6 0.6 0.5 2.7 4.3 6.5 — — — 36.0 JSW Steel SELL 377 350 (7.1) 911 12.3 2,406 31 26 31 16.1 (16.2) 17.2 12.1 14.4 12.3 7.1 8.3 7.3 2.6 2.2 1.9 23.5 16.6 16.8 0.9 0.9 0.9 37.1 National Aluminium Co. BUY 67 87 30.4 129 1.7 1,933 10 8 9 238.9 (16.0) 3.6 6.8 8.1 7.8 3.1 3.7 3.6 1.2 1.2 1.1 17.6 14.4 14.6 9.0 9.0 9.0 11.6 NMDC REDUCE 110 120 9.1 348 4.7 3,164 12 10 11 4.2 (14.3) 5.9 9.0 10.5 9.9 5.5 6.4 5.9 1.3 1.3 1.2 15.3 12.4 12.5 5.0 5.0 5.0 6.5 Tata Steel ADD 584 660 13.1 667 9.0 1,205 76 85 94 12.8 12.1 10.9 7.7 7 6.2 5.9 6.2 5.9 1.0 1.0 0.8 14.3 14.3 14.4 1.7 1.7 1.7 72.9 Vedanta BUY 218 360 65.0 811 10.9 3,717 27 38 39 26.7 39.0 2.2 8.0 5.7 5.6 5.1 3.9 3.4 1.2 1.1 0.9 15.4 19.4 17.7 3.8 5.2 5.3 50.0 Metals & Mining Attractive 6,411 86 35.8 10.0 9.1 10.0 9.1 8.4 6.3 5.8 5.2 1.7 1.6 1.4 17.3 17.5 17.3 3.7 4.4 4.4 273.3 Pharmaceutical Apollo Hospitals ADD 1,123 1,090 (2.9) 156 2.1 139 20 27 33 133.5 36.7 21.6 57.0 41.7 34.3 19.8 16.8 14.7 4.5 4.2 3.9 8.2 10.5 11.8 0.4 0.6 0.7 15.4 Aster DM Healthcare BUY 156 240 54.3 79 1.1 505 5 8 12 74.4 62.0 51.4 32.4 20.0 13.2 11.8 9.3 7.2 2.6 2.3 2.0 8.3 12.2 16.3 — — — 0.2 Aurobindo Pharma ADD 780 760 (2.5) 457 6.2 584 42 57 64 1.0 35.8 12.3 18.5 13.6 12.1 12.3 9.1 8.1 3.3 2.7 2.3 19.3 19.9 18.6 0.7 0.8 1.0 39.9 Biocon SELL 617 330 (46.5) 370 5.0 601 8 15 18 35.9 75.7 21.7 73.2 41.7 34.3 31.9 21.3 18.1 6.1 5.5 4.9 8.7 13.9 14.3 0.5 0.8 1.0 23.4 Cipla BUY 640 680 6.3 515 6.9 805 24 31 40 34.5 31.0 29.4 27.2 20.7 16.0 15.3 12.1 9.5 3.2 2.9 2.5 12.4 14.6 15.7 0.8 1.0 1.3 22.8 Dr Lal Pathlabs REDUCE 965 900 (6.8) 80 1.1 83 24 29 34 19.0 17.9 18.4 39.7 33.6 28.4 24.3 20.4 16.6 8.5 7.1 6.0 23.4 23.1 22.9 0.5 0.6 0.7 1.2 Dr Reddy's Laboratories REDUCE 2,485 2,150 (13.5) 412 5.6 166 89 118 141 50.2 32.8 19.3 28.0 21.1 17.7 14.1 10.1 8.4 3.0 2.7 2.4 11.1 12.6 13.3 0.5 0.7 0.9 34.2 HCG BUY 216 270 25.2 19 0.3 85 2 4 7 28.8 87.5 73.4 107.1 57.1 32.9 16.6 13.7 10.8 3.4 3.3 3.0 3.3 5.9 9.4 — — — 0.2 Laurus Labs ADD 423 500 18.2 45 0.6 106 16 29 34 2.4 79.9 17.5 26.1 14.5 12.3 12.1 8.4 7.4 2.7 2.3 1.9 10.9 17.1 15.6 — — — 0.6 Lupin REDUCE 858 800 (6.8) 388 5.2 450 27 39 50 (28.9) 44.0 27.4 31.7 22.0 17.3 14.8 10.7 8.6 2.6 2.4 2.1 8.6 11.4 12.4 0.5 0.7 0.9 44.8 Narayana Hrudayalaya ADD 237 265 12.0 48 0.7 204 3 6 9 23.0 103.2 40.7 76.5 37.6 26.7 21.8 15.3 12.2 4.4 3.9 3.4 5.9 11.0 13.7 — — — 0.2 Sun Pharmaceuticals SELL 603 540 (10.4) 1,447 19.5 2,406 16 24 29 7.5 45.5 21.6 37.0 25.4 20.9 19.8 14.3 11.8 3.5 3.1 2.8 9.8 12.9 13.2 0.5 0.8 1.0 60.3 Torrent Pharmaceuticals NR 1,613 — — 273 3.7 169 47 61 81 18.0 29.6 32.1 34.1 26.3 19.9 14.9 12.8 10.5 5.2 4.5 3.8 15.3 17.2 19.3 0.7 0.9 1.2 7.9 Pharmaceuticals Neutral 4,289 58 11.3 40.7 22.6 32.4 23.0 18.8 16.7 12.4 10.3 3.5 3.1 2.7 10.9 13.5 14.6 0.5 0.8 0.9 251.1 Real Estate Brigade Enterprises BUY 195 290 48.9 27 0.4 136 9 15 17 (17.0) 59.2 15.8 21.2 13.3 11.5 13.3 10.3 8.3 1.1 1.0 1.0 5.4 8.1 8.8 1.3 1.3 1.3 0.3 DLF RS 163 — — 292 3.9 1,784 5.3 23.9 14.1 (74.4) 354.6 (41.0) 31.1 6.8 11.6 46.6 8.2 15.3 0.8 0.7 0.7 2.6 11.3 6.2 1.2 1.2 1.2 21.4 Godrej Properties SELL 501 400 (20.2) 115 1.6 216 12.9 15.1 18.2 (32.9) 16.3 20.8 38.7 33.3 27.6 648.9 185.7 99.2 4.0 3.6 2.7 10.9 11.4 10.1 — — — 1.8 Lemon Tree Hotels ADD 71 76 6.4 57 0.8 786 — 1 2 147.2 174.0 66.8 160.0 58.4 35.0 35.7 21.7 16.2 6.6 5.9 5.5 4.2 10.7 16.3 — — 1.3 — Oberoi Realty BUY 375 560 49.3 136 1.8 340 62 44 66 385.4 (28.0) 49.3 6.1 8.4 5.7 8.6 10.6 4.4 1.4 1.2 1.0 27.4 15.2 19.2 0.5 0.5 0.5 2.7 Prestige Estates Projects ADD 179 315 76.4 67 0.9 375 10 10 11 (24.2) 8.4 — 18.8 17.3 16.7 12.4 12.3 12.3 1.3 1.3 — 7.3 7.5 7.3 0.8 0.8 0.8 0.7

Sobha REDUCE 391 510 30.4 37 0.5 95 20 23 24 (7.5) 14.8 3.5 19.4 16.9 16.3 11.7 11.0 10.3 1.3 1.2 1.4 6.8 7.4 9.1 1.8 1.8 1.8 1.4 Daily Summary India Sunteck Realty REDUCE 348 360 3.5 51 0.7 140 19 19 39 22.4 1.6 106.6 18.6 18.3 8.9 16.2 15.8 6.7 1.7 1.6 1.3 9.5 8.9 16.2 0.3 0.3 0.3 1.9 Real Estate Neutral 781 11 (22.8) 69.2 (6.9) 18.2 10.7 11.5 20.7 11.4 11.5 1.3 1.1 1.0 7.0 10.6 9.1 0.8 0.8 0.9 30.1 Source: Company, Bloomberg, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK

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October 11, 2018 11, October

KOTAK INSTITUTIONAL EQUITIES RESEARCH 89

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 10-Oct-18 (Rs) (%) (Rs bn) (US$ bn) (mn) 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E (US$ mn) Technology HCL Technologies REDUCE 1,050 1,100 4.7 1,463 19.7 1,409 71 78 82 14.6 8.9 5.0 14.7 13.5 12.9 9.6 8.5 7.8 3.3 2.8 2.5 24.4 22.3 20.6 0.8 2.9 3.1 34.2 Hexaware Technologies SELL 404 455 12.5 120 1.6 302 20 24 27 19.5 21.6 12.7 20.4 16.8 14.9 15.1 11.4 9.9 5.3 4.4 3.8 27.6 28.7 27.5 2.0 2.0 2.5 22.7 Infosys ADD 700 770 9.9 3,060 41.2 4,350 36 41 45 12.8 13.3 8.9 19.2 17.0 15.6 13.1 11.4 10.2 4.3 3.9 3.5 23.4 24.2 23.7 3.1 2.8 3.0 88.1 L&T Infotech ADD 1,795 2,100 17.0 311 4.2 175 83 96 113 30.5 15.6 18.1 21.6 18.7 15.9 16.4 13.1 11.1 6.5 5.3 4.3 33.5 31.3 30.0 1.3 1.4 1.7 9.9 Mindtree ADD 1,007 1,225 21.6 165 2.2 165 45 57 65 29.5 27.0 14.5 22.5 17.7 15.5 14.2 11.1 9.5 5.2 4.3 3.7 24.7 26.6 25.8 1.3 1.7 1.9 26.1 Mphasis SELL 1,080 900 (16.7) 209 2.8 193 53 60 63 21.9 12.1 4.7 20.2 18.0 17.2 14.8 12.6 11.7 4.0 3.6 3.3 18.9 21.0 20.0 1.9 2.3 2.8 7.2 TCS REDUCE 2,044 1,950 (4.6) 7,824 105.5 3,829 84 94 101 24.9 11.7 7.4 24.3 21.7 20.2 17.8 16.0 14.8 7.9 7.7 7.6 34.3 35.6 37.7 2.1 3.7 4.0 83.5 Tech Mahindra ADD 699 865 23.7 617 8.3 891 46 57 64 8.4 22.4 13.0 15.1 12.4 10.9 8.9 7.0 6.0 2.8 2.4 2.1 20.2 21.2 20.3 1.3 1.5 1.6 38.6 Wipro REDUCE 317 325 2.6 1,433 19.3 4,507 19 23 25 12.8 19.5 7.5 16.6 13.9 12.9 10.7 8.9 8.2 2.5 2.3 2.2 16.5 17.6 17.4 0.5 3.2 3.5 20.9 Technology Cautious 15,202 205 15.6 13.0 8.1 20.5 18.2 16.8 14.1 12.3 11.3 5.0 4.6 4.2 24.2 25.1 24.9 1.9 3.1 3.4 331.2 Telecom

Bharti Airtel ADD 295 445 50.8 1,180 15.9 3,997 (6) (4) 5 (221.5) 28.8 215.1 (51.3) (72.1) 62.7 8.5 7.2 5.7 1.8 1.8 1.8 (3.4) (2.5) 2.9 0.3 (0.3) 0.4 25.9 -

Bharti Infratel REDUCE 259 285 10.1 479 6.5 1,850 13 12 13 (4.8) (8.5) 7.7 19.8 21.6 20.1 7.3 7.7 7.2 2.9 3.0 2.9 14.6 13.7 14.6 4.1 3.7 4.0 9.9 October 11, 2018 11, October IDEA REDUCE 36 45 24.8 315 4.2 4,359 (17) (17) (15) (75.6) (2.4) 11.4 (2.1) (2.1) (2.4) 38.7 32.5 20.0 0.7 1.1 2.0 (29.7) (41.1) (59.4) — — — 16.2 Tata Communications ADD 494 660 33.6 141 1.9 285 0 3 7 (77.5) 694.2 123.5 1,333 167.8 75.1 10.2 9.0 8.1 (61.3) (83.3) (1,613.7) 7.8 (42.1) (211.0) 1.3 1.5 1.5 3.0 Telecom Cautious 2,114 28 (2,384.5) 5.0 68.0 (29.4) (31.0) (96.9) 10.2 9.0 7.4 2.0 2.2 2.4 (6.9) (7.2) (2.4) 1.2 0.7 1.2 55.0

Utilities CESC BUY 886 1,180 33.1 117 1.6 133 115 128 141 31.7 11.6 10.1 7.7 6.9 6.3 5.6 4.9 4.3 0.7 0.7 0.6 10.0 10.4 10.5 1.5 1.4 1.5 8.1 JSW Energy REDUCE 61 70 14.3 101 1.4 1,640 5.1 6.5 6.6 65.9 26.8 2.9 12.0 9.5 9.2 5.4 4.4 4.0 0.8 0.8 0.7 7.2 8.5 8.0 — — — 1.2 NHPC ADD 24 30 26.6 243 3.3 10,260 3.1 3.2 3.4 26.9 1.8 8.0 7.7 7.5 7.0 7.1 6.9 7.4 0.8 0.8 0.7 10.4 10.2 10.6 7.3 7.4 6.3 1.4 NTPC BUY 164 190 15.6 1,355 18.3 8,245 15 16 18 18.8 4.4 16.5 11.0 10.6 9.1 8.8 8.2 6.9 1.2 1.1 1.1 11.6 11.3 12.2 2.7 2.8 3.3 10.7 Power Grid BUY 187 250 33.6 979 13.2 5,232 19 21 23 19.3 13.6 7.6 10.0 8.8 8.1 7.2 6.6 6.3 1.6 1.5 1.3 17.1 17.5 17.0 3.3 3.8 4.1 13.4 Tata Power BUY 65 90 38.5 176 2.4 2,705 6.0 7.0 10.9 12.7 15.6 57.0 10.8 9.3 5.9 10.3 9.8 8.5 1.0 0.9 0.8 10.1 10.6 14.6 — — — 4.5 Utilities Attractive 2,971 40 21.1 8.8 14.1 10.1 9.3 8.2 7.8 7.2 6.5 1.2 1.1 1.0 11.9 12.0 12.5 3.0 3.2 3.4 39.5

Source: Company, Bloomberg, Kotak Institutional Equities estimates

90 KOTAK INSTITUTIONAL EQUITIES RESEARCH

90

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

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

Company Rating 10-Oct-18 (Rs) (%) (Rs bn) (US$ bn) (mn) 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E (US$ mn) Others Aditya Birla Fashion and Retail BUY 176 220 24.9 136 1.8 773 2 4 6 50.6 59.1 53.5 76.8 48.3 31.4 22.7 17.6 14.3 10.7 8.8 6.9 15.0 20.0 24.5 — — — 5.0 Astral Poly Technik SELL 900 640 (28.9) 108 1.5 120 19 25 29 30.2 28.8 16.1 47.1 36.6 31.5 25.4 20.1 17.0 8.3 6.8 5.7 19.8 20.5 19.7 0.1 0.1 0.1 1.0 Avenue Supermarts SELL 1,374 860 (37.4) 858 11.6 624 16 20 26 28.6 26.4 27.5 85.0 67.3 52.8 49.1 38.5 30.3 15.2 12.4 10.0 19.6 20.3 21.0 — — — — Bayer Cropscience REDUCE 4,379 4,100 (6.4) 150 2.0 34 106 130 154 20.5 23.1 18.3 41.5 33.7 28.5 26.3 21.4 17.8 7.3 6.3 5.4 18.9 20.0 20.3 0.5 0.6 0.7 0.5 Crompton Greaves Consumer SELL 203 215 6.0 127 1.7 627 6 7 9 19.5 20.7 17.4 32.8 27.2 23.2 20.4 17.2 14.4 11.2 8.6 6.6 40.4 35.8 32.3 1.0 1.2 — 2.8 Dhanuka Agritech ADD 415 650 56.6 20 0.3 49 27 31 34 3.9 15.4 10.8 15.5 13.5 12.2 11.1 9.1 7.8 2.8 2.4 2.1 19.2 19.2 18.5 1.4 1.6 1.8 0.2 Godrej Agrovet ADD 522 640 22.6 100 1.4 189 15 19 23 28.9 28.8 21.1 35.2 27.3 22.5 19.1 15.0 12.4 5.2 4.4 3.7 15.7 17.4 17.9 — 0.5 0.7 0.9 Godrej Industries RS 482 — — 162 2.2 336 16 20 — 8.9 24.2 — 30.4 24.5 - 26.4 28.6 — 4.0 3.5 — 13.9 15.1 — 0.4 0.4 — 4.0 Havells India SELL 611 485 (20.6) 382 5.2 625 14 17 20 26.6 20.5 17.6 43.6 36.2 30.8 27.8 22.6 19.0 9.0 7.9 6.9 22.0 23.2 23.9 0.8 1.0 1.1 15.0 InterGlobe Aviation BUY 744 980 31.6 286 3.9 383 (11) 42 75 (118.1) 496.4 79.4 (70.1) 17.7 9.9 (39.3) 8.1 4.3 4.3 3.4 2.6 (5.9) 21.5 29.9 (0.1) - 0.5 19.1 Kaveri Seed SELL 508 515 1.5 34 0.5 66 34 34 37 7.3 0.1 8.3 14.8 14.8 13.6 12.0 11.3 10.0 3.6 3.1 2.7 26.4 22.4 21.0 1.6 2.0 2.0 5.0 PI Industries BUY 747 875 17.1 103 1.4 138 31 40 48 17.9 26.8 21.5 23.9 18.8 15.5 16.9 13.2 10.7 4.5 3.7 3.1 20.5 21.7 21.9 0.5 0.6 0.8 2.1 Rallis India ADD 183 220 20.4 36 0.5 195 10 12 13 17.2 19.4 9.7 18.1 15.1 13.8 11.9 10.0 8.8 2.7 2.5 2.2 15.8 17.1 16.9 2.0 2.2 2.4 0.7 SIS REDUCE 965 1,130 17.2 71 1.0 73 33 40 48 48.5 21.1 17.8 28.9 23.9 20.3 18.1 15.1 12.6 5.7 4.7 3.9 21.8 21.7 21.1 0.3 0.4 0.4 0.5 SRF BUY 1,808 2,200 21.7 104 1.4 57 100 132 150 23.8 32.2 14.1 18.2 13.7 12.0 10.7 8.5 7.2 2.6 2.2 1.9 15.0 17.3 17.0 0.7 0.8 0.9 11.4 Tata Chemicals ADD 650 760 17.0 165 2.2 255 44 51 56 (15.3) 14.6 11.5 14.7 12.8 11.5 6.0 5.0 4.2 1.4 1.3 1.2 9.7 10.3 10.8 2.3 2.6 2.6 6.8 TCNS Clothing Co. BUY 579 760 31.4 35 0.5 64 18 23 27 15.3 27.5 20.8 32.7 25.7 21.3 17.5 13.1 10.3 6.5 5.0 3.9 22.7 22.2 20.9 — — — — TeamLease Services SELL 2,406 1,785 (25.8) 41 0.6 17 60 77 100 38.9 29.2 28.7 40.2 31.1 24.2 40.5 30.7 23.5 7.6 6.1 4.9 20.8 21.7 22.4 — — — 1.1 UPL ADD 622 660 6.1 317 4.3 507 49 55 60 14.6 11.9 9.5 12.6 11.3 10.3 8.6 7.3 6.3 2.8 2.4 2.0 24.7 22.9 21.1 1.6 1.8 2.0 30.0 Vardhman Textiles ADD 1,021 1,300 27.3 59 0.8 56 118 130 142 14.8 9.7 9.8 8.6 7.9 7.2 6.6 6.0 5.3 1.1 1.0 0.9 13.1 13.0 13.0 2.0 2.9 2.9 0.4 Voltas SELL 515 530 2.9 170 2.3 331 17 21 25 0.4 18.8 18.9 29.7 25.0 21.0 22.1 18.0 15.0 3.9 3.5 3.1 13.9 14.8 15.7 0.7 0.8 1.0 11.9 Whirlpool SELL 1,428 1,350 (5.5) 181 2.4 127 37 46 56 33.9 24.7 20.2 38.6 30.9 25.7 23.3 18.4 15.0 8.4 6.9 5.9 23.7 24.5 24.8 0.5 0.6 1.2 1.7 Others 3,646 49 (10.1) 39.1 18.2 33.7 24.2 20.5 19.8 14.5 11.2 4.8 4.2 3.7 14.4 17.2 18.3 0.6 0.7 0.8 120.1 KIE universe 103,394 1,393 23.1 28.4 15.1 20.5 16.0 13.9 10.4 9.1 8.1 2.6 2.3 2.1 12.6 14.7 15.2 1.5 1.8 2.0 KIE universe (ex-energy) 91,127 1,228 29.5 34.6 16.9 23.0 17.1 14.6 11.6 10.0 8.8 2.9 2.6 2.3 12.6 15.3 16.1 1.4 1.8 1.9

Notes: (a) We have used adjusted book values for banking companies. (b) 2019 means calendar year 2018, similarly for 2020 and 2021 for these particular companies. (c) Exchange rate (Rs/US$)= 74.19

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK

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October 11, 2018 11, October

KOTAK INSTITUTIONAL EQUITIES RESEARCH 91 India Daily Summary - October 11, 2018 a sufficient able regulation(s) of of the following Asof June 30, 2018 ory capacity in a merger or strategic transaction ing and price target,if any, no longer are in effect for this stock

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

SELL next 12 months. 0.5% 21.9%

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

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

month horizon basis. -

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

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

The information is not meaningful and is therefore excluded.

Kotak SecuritiesKotak does not cover this company.

The investment and rating target price, any, if have been suspended temporarily. Such suspension is in compliance with applic

The coverage view represents each analyst’s fundamental overall outlook on the Sector.The coverage viewwill consist of one

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

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

Corporate Office Overseas Affiliates

Kotak Securities Ltd. Kotak Mahindra (UK) Ltd Kotak Mahindra Inc 27 BKC, Plot No. C-27, “G Block” 8th Floor, Portsoken House 369 Lexington Avenue Bandra Kurla Complex, Bandra (E) 155-157 Minories 28th Floor, New York Mumbai 400 051, India London EC3N 1LS NY 10017, USA Tel: +91-22-43360000 Tel: +44-20-7977-6900 Tel:+1 212 600 8856 Copyright 2018 Kotak Institutional Equities (Kotak Securities Limited). All rights reserved. 1. Note that the research analysts contributing to this report may not be registered/qualified as research analysts with FINRA; and 2. Such research analysts may not be associated persons of Kotak Mahindra Inc and therefore, may not be subject to NASD Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. 3. 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Kotak Securities Limited and its affiliates are a full-service, integrated investment banking, investment management, brokerage and financing group. We along with our affiliates are leading underwriter of securities and participants in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationships with a significant percentage of the companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. Investors should assume that Kotak Securities Limited and/or its affiliates are seeking or will seek investment banking or other business from the company or companies that are the subject of this material and that the research professionals who were involved in preparing this material may participate in the solicitation of such business. Our research professionals are paid in part based on the profitability of Kotak Securities Limited, which include earnings from investment banking and other business. Kotak Securities Limited generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. Additionally, Kotak Securities Limited generally prohibits its analysts and persons reporting to analysts from serving as an officer, director, or advisory board member of any companies that the analysts cover. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. 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Kotak Securities Limited is a corporate trading and clearing member of BSE Limited (BSE), National Stock Exchange of India Limited (NSE), MSEI a. Our businesses include stock broking, services rendered in connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management. Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Kotak Securities Limited is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old Mutual Life Insurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI). Kotak Securities Limited is registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014. 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We or our associates have managed or co-managed public offering of securities for the subject company(ies) in the past 12 months. YES. Visit our website for more details We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received compensation or other benefits from the subject company(ies) or third party in connection with the research report. Our associates may have financial interest in the subject company(ies). 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CIN: U99999MH1994PLC134051, Telephone No.: +22 43360000, Fax No.: +22 67132430. Website: www.kotak.com / www.kotaksecurities.com. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Telephone No: 42856825. SEBI Registration No: INZ000200137 (Member of NSE, BSE & MSE) AMFI ARN 0164, PMS INP000000258 and Research Analyst INH000000586. NSDL/CDSL: IN-DP-NSDL-23-97. Compliance Officer Details: Mr. Manoj Agarwal. Call: 022 - 4285 8484, or Email: [email protected]. Investments in securities market are subject to market risks, read all the related documents carefully before investing. 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