Strategy

Event Update

September 13, 2020 Be Selective in likely Mid/Small caps Rush

Quick Pointers: NSE Mid Cap Index outperformed Nifty by 60% while small cap index by 43% between . NIFTY Mid/small cap index has declined 23% and 40% from 2018 peak 2013 to 2018. Mid/Small caps could witness a shift of Rs120bn and Rs220bn to Mid/small . caps till the date of compliance in Jan2021

. MF’s likely to approach SEBI for scheme reorganization and other measures Nifty increased by 9.5% upto Jan 18 while Mid cap and Small cap index saw a rout of given low liquidity and high impact cost in these segments 16% and 34% SEBI circular on Multicap funds with 25% investment each in Mid/Small caps

will create a near term disruption as top 8 multi cap funds have allocation of Rs1000bn and the share of large caps is 65-90% and small cap allocation is in low to mid-single digits. Although Mid Cap/Small cap index is still 23% and Post March 20, as against 38% decline in Nifty, Mid cap and small cap index has 40% lower than 2018 peak, poor liquidity results in high impact cost. Given shown comeback with uptick of 46% and that quantum of Rs220bn flow to small caps in just 4 months, near term uptick 63% in stocks can’t be ruled out although we expect MF’s to undertake scheme organization and categorization to reduce the impact. We note that Mid-caps and small caps have outperformed Nifty since March lows by 8% and 25%, they still leave a scope of re-rating given drubbing of past two years.

However, we advise a selective approach and focus on companies with

strong balance sheets, corporate governance practices, brands, technology and ability to withstand shocks.

Coverage Stocks

. Mid Cap Picks - IRCTC, Sumitomo, , Chola, Crompton Consumer, JSPL, MGL, and as key Mid cap picks.

. Small Cap Picks - Bajaj Electricals, Rallis India, Inox, VIP Inds, JK Lakshmi,

Rallis India, CEAT, NOCIL, , PNC, HG Infra, Navneet

Education, Music Broadcast, Teamlease and Eris Lifesciences

Non Coverage Stocks

. RBL Bank, NAM, Chola Holdings, Chambal fertilizers, Astec Life, , Galaxy Surfactants,

. Bata India, Relaxo, ABFRL, Westlife Development, Zee Entertainment, Affelle

India, Blue Star, Dixon, Polycab, TTK prestige

. Endurance, Minda Inds, Escorts, Dalmia Bharat, AIA Eng., BEML, Esab India, Tata Elxsi, Mishra Dhatu, Narayana Hrudalya, , etc.

. Cyclical beaten down segments like Auto Ancillary, Infra/ Construction, Amnish Aggarwal Engineering, Bearings and Logistics are likely to stage a comeback [email protected] | 91-22-66322233 . Covid Hit segments like Media, Retail, banks, NBFC, Consumer Durables will

see heightened investor interest

September 13, 2020 1 India Strategy

SEBI circular looks at reducing impact of 2018 categorization

SEBI had created category of large caps, Mid- caps and small caps in 2018 which contributed to a sharp selloff in mid and small cap stocks as fund flow shifted from these stocks to large caps stocks. In order to diversify the underlying investments of Multi Cap Funds across the large, mid and small cap companies, SEBI has announced to partially modify the scheme characteristics of Multi Cap Funds.

. Minimum investment in equity & equity related instruments -75% of total assets

. Minimum allocation to large cap/Mid cap and Small Cap companies is 25% of total assets for each segment

. Existing Multi Cap Funds shall ensure compliance with these provisions within one month from publishing the next list of stocks by AMFI in January 2021.

Multicap funds might see flow into small/mid-caps

We estimate the size of various Multicap funds at Rs1400bn. Top 8 schemes led by Kotak, HDFC, Axis, MOAM and BMF account for a size of Rs1000bn.

. The current allocation to Mid-caps and small caps is 17% and 9%. We note that the ratio of large caps in top 10 multi cap funds ranges between 65-90% with most being close to 80%. Among these funds MOAM, HDFC and Franklin Templeton have allocation of just 3%, 7.7% and 13%.

. Allocations for small caps is in mid-single digits with large funds having allocation in low single digits only. We estimate a shift from large caps to Mid and Small caps aggregating Rs120bn and Rs220bn respectively.

Why MF allocations to Midcaps/Small Caps are lower?

We note that MF allocations to Mid/small caps have been lower and there has been very limited interest among funds for the same. Although one can’t paint all the companies with the same brush, but in general following have been the issues:

. Issues with regards to high promoter pledges

. Low floating stocks and trading volumes result in high impact cost at both entry and exit levels and easy manipulation

The Smooth Transition Looks Unlikely

We believe it is not a straight and smooth road for MF’s to shift allocation to small and Mid-caps as high volatility and difficulty in exit can hurt investor interests.

. Mutual fund industry is likely to approach SEBI for extension of deadline, as such they have 4 months at their disposal for the same.

. We believe MF’s can look at scheme mergers (Multicap with Large/Mid cap funds), shift the scheme to different segment to lessen the impact, which is dependent upon SEBI approvals and involve some time.

September 13, 2020 2 India Strategy

. We expect MF industry to make a slow transition and immediate knee jerk reaction looks unlikely.

SEBI circular a technical factor, Don’t ignore fundamentals

We believe that the current SEBI circular is a technical factor and does not alter the impact on various companies and industries in the post pandemic scenario.

. While we have seen sharp correction in Mid/Small caps post 2018, the fundamental changes in the business cycle and competitive position is very different than it was 2-3 years back.

. We also note that in beginning of 2018, small and Midcaps were trading at a premium to large caps and earnings recovery in several of these companies remains doubtful in the post Covid scenario.

. Covid19 has had a cascading impact on several industries and several smaller companies with weak balance sheets and shaky business models are unlikely to see recovery in the near term.

. Our fundamental view of large and financially/brand and technologically sound companies gaining significant ground post pandemic still holds good.

. While we expect sharp increase in demand for Small caps in particular, we advise caution with focus on fundamentally strong companies with strong balance sheet and viable business models.

As per the current SEBI definition top 100 market cap stocks fall in the category of Large caps, 100-250 are Mid-caps and rest are Small caps. Given the likely euphoria and impact cost we have limited our Mid cap recommendations to stocks upto Rs200bn market cap and small caps have been the ones with market cap exceeding Rs10bn. We have also tried to look at their correction from 2018 peak, daily volumes and overall fundamentals.

NIFTY Small cap and Mid Cap Index has seen sharp decline post January 2018

Nifty 50 Index NSE 50 Midcap Index NSE 50 Small Cap Index

300

250

200

150

100

50

Jul-11 Jul-12 Jul-13 Jul-16 Jul-17 Jul-10 Jul-14 Jul-15 Jul-18 Jul-19 Jul-20

Apr-10 Oct-11 Oct-12 Apr-13 Apr-14 Oct-15 Oct-16 Apr-18 Apr-19 Oct-19 Oct-10 Apr-11 Apr-12 Oct-13 Oct-14 Apr-15 Apr-16 Apr-17 Oct-17 Oct-18 Apr-20

Jan-11 Jan-12 Jan-15 Jan-16 Jan-17 Jan-20 Jan-14 Jan-18 Jan-19 Jan-13 Source: PL

September 13, 2020 3 India Strategy

NSE Small Cap Index declined sharply post Jan 2018 Indexed Nifty 50 Index NSE 50 Midcap Index NSE 50 Small Cap Index NSE Mid Cap Index outperformed Nifty by 60% while small cap index by Jan-13 112 111 103 43% between 2013 to 2018. Jan-14 119 104 95 Jan-15 157 162 146 Nifty increased by 9.5% upto Jan 18 Jan-16 151 174 156 while Mid cap and Small cap index saw a rout of 16% and 34% Jan-18 210 280 257 Jan-19 205 223 172 Post March 20, as against 38% Jan-20 230 234 171 decline in Nifty, Mid cap and small Mar-20 157 148 94 cap index has shown comeback with uptick of 46% and 63% Sep-20 217 216 154 Source: PL Research

Key Mid Cap Picks

. Among our coverage universe for Mid-Caps, we have zeroed on these 10 stocks to play this transition. We believe these companies have structural tailwinds and strength in their respective businesses.

. IRCTC is a play on Online ticketing, Ashok Leyland on expected CV recovery from 1Q22 while Chola is a CV financer with strong pedigree

. MGL is a play on CGD with low PE and attractive dividend yield

. Crompton Consumer is a steady performer amongst consumer electrical companies and has strong balance sheet

. JSPL enjoys highest EBIDTA/Ton and is a play on structural story and deleveraging of balance sheet

. Sumitomo Chemical has the potential to emerge as a strong sourcing base of parent which has large number of patents in Agrochemicals

. Some of these names have been recommended in context of current theme. Consequently, some of the coverage stocks might have target prices lower than CMP, however long term outlook on these names is positive

September 13, 2020 4

India Strategy

PL Coverage Picks

Mcap Mcap Revenue Gr. (%) Earnings Gr. (%) RoE (%) RoCE (%)* PER (x) P/BV (x)* CMP (Rs.) TP (Rs) Upside (Rs bn) (US$ m) 2022E 2023E 2022E 2023E 2022E 2023E 2022E 2023E 2022E 2023E 2022E 2023E

Mid Cap Indian Railway Catering and Tourism Corporation 1,371 1,495 9.1% 219.3 2,984 127.5 NA 189.3 NA 48.4 NA 58.2 NA 26.2 NA 11.2 NA Mphasis 1,154 1,302 12.8% 214.8 2,924 12.9 9.8 18.5 9.4 19.2 18.4 23.9 22.7 15.8 14.4 2.8 2.5 Jindal Steel & Power 202 215 6.4% 205.1 2,791 10.7 0.2 NA 70.4 1.3 2.2 7.0 7.3 47.8 28.0 0.6 0.6 Ashok Leyland 68 76 11.0% 200.1 2,723 19.3 11.5 115.9 (6.1) 11.9 10.4 6.7 5.9 21.3 22.7 2.4 2.3 Cholamandalam Investment and Finance Company 224 240 6.8% 189.6 2,581 27.2 14.9 170.9 20.4 14.9 15.6 2.0 2.2 12.9 10.7 1.8 1.6 Emami 384 419 9.3% 167.5 2,279 11.5 11.5 21.4 19.9 30.3 29.4 24.8 23.2 23.5 19.6 6.3 5.3 Crompton Greaves Consumer Electricals 254 288 13.4% 159.5 2,171 17.9 12.0 32.7 14.7 26.9 25.8 32.8 32.7 28.4 24.8 7.0 5.9 Sumitomo Chemical India 274 295 7.7% 137.0 1,864 13.0 13.0 16.8 13.4 23.0 22.1 30.4 29.1 37.7 33.2 8.0 6.8 52 67 29.3% 103.2 1,405 12.8 14.0 25.5 18.7 12.2 13.0 1.0 1.0 4.9 4.2 0.7 0.6

Mahanagar Gas 906 1,226 35.3% 89.5 1,218 44.4 7.4 71.1 10.1 23.1 21.8 26.2 24.0 10.8 9.8 2.3 2.0

Small Cap

Eris Lifesciences 490 576 17.6% 66.5 905 13.8 13.8 18.1 24.8 30.4 37.7 30.9 38.8 17.5 14.1 5.4 5.2 Rallis India 296 321 8.7% 57.5 783 12.8 12.0 18.1 12.0 17.5 17.2 20.9 20.5 19.5 17.4 3.2 2.8 Bajaj Electricals 459 500 9.0% 52.2 710 14.7 12.7 225.6 35.1 13.7 16.3 17.3 20.9 24.6 18.2 3.2 2.8 Engineers India 64 104 61.9% 40.4 550 14.5 17.7 37.0 35.0 19.8 23.7 15.2 19.9 7.4 5.5 1.4 1.2 PNC Infratech 158 219 39.0% 40.4 550 41.9 11.3 65.4 7.4 16.9 15.6 20.8 19.4 7.7 7.2 1.2 1.0 V.I.P. Industries 283 240 -15.3% 40.0 544 104.1 16.7 (201.7) 50.8 19.6 24.3 18.6 30.1 37.0 24.6 7.3 6.0 TeamLease Services 2,185 2,858 30.8% 37.4 508 8.2 8.2 44.3 39.9 16.5 19.2 7.6 10.2 31.8 22.8 4.8 4.0 CEAT 894 951 6.4% 36.2 492 15.0 16.0 71.6 38.7 7.8 10.1 7.5 9.3 15.0 10.8 1.1 1.0 JK Lakshmi Cement 258 350 35.9% 30.4 413 8.9 7.8 11.2 19.6 13.1 13.8 14.6 16.5 11.1 9.3 1.4 1.2 Inox Leisure 289 262 -9.4% 29.7 404 167.2 24.6 (198.8) 44.5 27.2 28.6 10.3 13.0 18.2 12.6 5.0 3.6 NOCIL 126 153 21.2% 20.9 285 30.0 31.3 46.5 54.4 8.4 11.9 11.2 16.0 19.7 12.7 1.6 1.5 Navneet Education 79 94 19.3% 18.0 245 24.4 12.4 40.6 14.0 20.0 19.4 22.7 22.2 8.8 7.7 1.7 1.4 H.G. Infra Engineering 193 259 34.0% 12.6 171 60.8 11.5 211.5 13.2 21.1 19.5 23.0 21.8 6.0 5.3 1.1 0.9 Voltamp Transformers 975 1,244 27.6% 9.9 134 17.2 17.3 24.4 15.5 12.3 12.9 11.2 11.7 9.4 8.1 1.1 1.0 Music Broadcast 19 18 -2.2% 6.5 89 82.4 19.1 (250.7) 69.4 5.0 7.8 5.3 9.2 20.3 12.0 1.0 0.9

Source: Company, PL

September 12, 2020 5

India Strategy

PL Non-Coverage Pick (Mid Cap) % Chng % Chng EPS (Rs) RoE (%) PER (x) Mcap Mcap 52 Week All Time from All CMP (Rs.) from 52 W / (Rs bn) (US$ m) High High Time High / CMP 2022E 2023E 2022E 2023E 2022E 2023E CMP Escorts 1,193 161.6 2,199.4 1,236 1,236 -3.4% -3.4% 68.1 87.7 13.8 15.0 17.5 13.6

Auto & Auto Endurance Technologies 1,078 152.0 2,069.2 1,205 1,579 -10.5% -31.7% 43.8 51.6 16.9 17.2 24.6 20.9 Ancillary Schaffler India 4,045 124.4 1,693.5 4,960 5,989 -18.4% -32.4% 113.0 145.1 8.6 NA 35.8 27.9 Minda Industries 341 89.0 1,211.5 424 457 -19.5% -25.3% 10.9 13.1 13.3 14.9 31.3 26.1

AU Small Finance Bank 658 206.3 2,807.8 1,218 1,218 -46.0% -46.0% 28.3 41.1 16.2 19.8 23.2 16.0 Nippon Life India Asset Management 273 167.7 2,281.6 453 453 -39.6% -39.6% 9.5 11.0 21.0 23.6 28.8 25.0 BFSI 134 98.7 1,343.1 249 249 -46.4% -46.4% 9.5 12.2 11.3 13.3 14.1 11.0 RBL Bank 181 92.9 1,264.6 415 717 -56.5% -74.8% 19.8 29.3 8.8 12.0 9.1 6.2 Capital Goods / Infra AIA Engineering 1,751 164.8 2,243.4 1,990 2,026 -12.0% -13.6% 66.1 75.4 14.2 14.6 26.5 23.2 Cement Dalmia Bharat 711 133.2 1,813.1 919 1,220 -22.7% -41.8% 27.9 45.2 4.9 7.3 25.5 15.7

Aditya Birla Fashion & Retail 132 108.8 1,480.7 281 281 -53.0% -53.0% 1.1 3.7 4.7 15.5 115.9 35.4 728 209.9 2,856.8 870 870 -16.3% -16.3% 22.5 29.6 16.8 19.1 32.3 24.6 Consmer / Retail Bata India 1,265 162.5 2,212.0 1,897 1,897 -33.3% -33.3% 30.5 35.3 17.9 21.1 41.5 35.8 Relaxo Footwears 639 159.3 2,167.6 830 830 -23.0% -23.0% 12.7 18.2 20.5 24.0 50.3 35.2 Polycab India 841 126.2 1,717.4 1,182 1,182 -28.8% -28.8% 52.4 61.0 16.3 16.6 16.1 13.8

Consumer Durables India 9,429 106.9 1,454.9 9,777 9,777 -3.6% -3.6% 195.9 265.5 28.3 28.9 48.1 35.5 TTK Prestiage 5,832 80.9 1,100.8 6,650 7,742 -12.3% -24.7% 160.1 190.1 14.8 14.7 36.4 30.7 Healthcare Procter & Gamble Health 4,896 81.2 1,105.3 5,150 5,150 -4.9% -4.9% NA NA NA NA NA NA Corforge 1,912 126.6 1,723.2 2,103 2,103 -9.1% -9.1% 93.2 112.5 22.0 22.8 20.5 17.0 IT Tata Elxsi 1,262 80.3 1,092.5 1,300 1,492 -2.9% -15.4% 50.3 59.7 22.5 23.7 25.1 21.1 Zee Entertainment Enterprises 223 209.5 2,850.9 364 619 -38.7% -64.0% 16.2 19.0 14.4 15.2 13.8 11.7 Media Sun TV Network 481 191.9 2,611.3 551 1,098 -12.8% -56.2% 39.7 42.8 22.3 23.9 12.1 11.2 Oil & Gas Gujarat Gas 294 203.6 2,770.7 335 335 -12.3% -12.3% 16.6 18.0 26.1 25.0 17.7 16.3

Source: Company, PL

September 12, 2020 6

India Strategy

PL Non-Coverage Pick (Small Cap) % Chng % Chng EPS (Rs) RoE (%) PER (x) Mcap Mcap 52 Week All Time from All CMP (Rs.) from 52 W / (Rs bn) (US$ m) High High Time High / CMP 2022E 2023E 2022E 2023E 2022E 2023E CMP Chambal Fertilisers 141 59.4 808.0 186 209 -24.1% -32.6% 29.7 NA 22.6 NA 4.7 NA Agri Astec Lifesciences 1,169 22.4 305.2 1,367 1,367 -14.5% -14.5% 34.5 NA 18.5 NA 33.9 NA Suprajit Engineering 170 23.6 320.9 220 349 -22.6% -51.2% 10.6 14.5 15.0 16.8 16.0 11.8 Auto & Auto Subros 236 15.1 206.0 300 444 -21.2% -46.9% 12.0 16.2 9.8 12.1 19.7 14.6 Ancillary Lumax Industries 1,404 13.1 178.5 1,696 2,585 -17.2% -45.7% 71.3 84.0 13.9 14.9 19.7 16.7 Cholamandalam Financial Holding 405 77.1 1,049.6 570 749 -28.9% -45.9% 49.1 59.0 15.7 17.3 8.2 6.9 Ujjivan Small Finance Bank 34 59.3 806.7 63 63 -45.3% -45.3% 2.4 3.3 12.4 15.2 14.2 10.5 BFSI Can Fin Homes 381 52.1 709.4 519 667 -26.7% -42.9% 36.2 44.8 17.3 18.2 10.5 8.5

Mas Financial Services 811 44.3 602.4 1,270 1,270 -36.1% -36.1% 37.5 NA 16.5 NA 21.6 NA DCB Bank 87 26.5 361.3 219 245 -60.4% -64.6% 15.5 16.6 13.6 12.6 5.6 5.2 RITES 240 60.6 824.0 331 331 -27.4% -27.4% 26.0 27.4 22.3 23.3 9.3 8.8 BEML 620 25.8 350.7 1,109 1,947 -44.1% -68.2% 39.0 46.2 7.1 8.1 15.9 13.4 Capital Goods / Infra Mahindra Logistics 318 23.3 316.7 458 654 -30.5% -51.3% 11.6 14.4 13.5 15.2 27.3 22.1 Orient Refractories 195 23.1 315.0 269 280 -27.5% -30.5% 5.7 6.7 17.7 NA 34.1 29.0 Esab India 1,358 21.1 286.5 1,728 1,728 -21.4% -21.4% NA NA NA NA NA NA Cement Birla Corp 597 46.0 626.0 808 1,290 -26.0% -53.7% 59.8 72.1 8.9 9.9 10.0 8.3 Consumer / Retail Westlife Development 362 59.3 807.3 500 500 -27.7% -27.7% 3.2 5.0 10.1 12.6 113.7 73.0

Consumer Durables Blue Star 605 58.4 794.6 888 888 -31.8% -31.8% 18.5 23.3 21.2 24.6 32.7 26.0 Healthcare Narayana Hrudayalaya 313 65.5 890.8 389 389 -19.5% -19.5% 10.5 11.5 16.2 18.4 29.9 27.3 Mishra Dhatu Nigam 204 37.6 512.2 279 279 -26.7% -26.7% 12.6 NA 18.8 NA 16.2 NA Affle India 2,848 74.1 1,009.0 3,083 3,083 -7.6% -7.6% 48.0 68.2 28.4 28.5 59.4 41.8 Galaxy Surfactants 1,820 63.2 859.9 1,950 1,950 -6.6% -6.6% 76.1 88.9 20.0 20.6 23.9 20.5 Others Mold-Tek Packaging 280 7.7 104.9 322 374 -13.1% -25.2% 14.0 17.4 16.4 18.8 20.0 16.1 Thirumalai Chemicals 64 6.8 92.0 88 244 -27.0% -73.7% NA NA NA NA NA NA

Source: Company, PL

September 12, 2020 7

India Strategy

Analyst Coverage Universe

Sr. No. Company Name Rating TP (Rs) Share Price (Rs) 1 Accumulate 1,829 1,717

2 Avenue Supermarts Hold 2,055 2,163 3 Bajaj Electricals BUY 500 436 4 BUY 4,316 3,785 5 Colgate Palmolive Reduce 1,344 1,448 6 Crompton Greaves Consumer Electricals BUY 288 247 7 India Hold 469 494 8 Emami BUY 419 257 9 GlaxoSmithKline Consumer Healthcare Hold 9,377 9,247 10 India Reduce 524 595 11 Hold 2,304 2,249 12 ITC BUY 262 200 13 Jubilant FoodWorks Hold 2,255 2,251 14 Kansai Nerolac Paints BUY 501 443 15 Hold 355 350 16 Nestle India Reduce 14,089 17,095 17 Hold 1,415 1,378 18 Hold 1,057 1,108 19 Accumulate 660 629

PL’s Recommendation Nomenclature Buy : > 15% Accumulate : 5% to 15% Hold : +5% to -5% Reduce : -5% to -15% Sell : < -15% Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly

September 13, 2020 8 India Strategy

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