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10-Dec MTD CYTD
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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. INDIA [ Economy Macro DECEMBER 11, 2020 NEW RELEASE BSE-30: 46,099
CY2021 outlook: turning the corner. CY2021 will be marked with hopes for (1) early roll-out of the Covid-19 vaccine, (2) normalization of activities, and (3) unperturbed growth recovery. India will see a slow cyclical recovery along with inflation gradually easing though not enough to sustain the accommodative stance. Interest rates will likely harden with no rate cuts and persistent fiscal pressure. Key risks will be steering through any financial sector stress, reviving the weak investment cycle, and any adverse global liquidity issues.
CY2021-22: hopes of turnaround years for macro QUICK NUMBERS Two issues will shape India’s macro situation in CY2021: (1) easy DM monetary policies and (2) vaccine rollout/mass availability. An easy global monetary policy will aid risk-on flows, while FY2022E GDP vaccine rollouts will aid in faster growth normalization. However, risks of higher commodity growth at 9.3%, prices (especially crude oil) could weigh on India’s inflation and external sector balance. We FY2021E at (-)8.6% expect a cyclical recovery in growth and a gradual adjustment in interest rates. Beyond FY2022E, growth will likely moderate as interest rates move higher, global tailwinds fade, and FY2022E CPI fiscal stress continues even as benefits from PLIs in manufacturing and labor reforms could start inflation at 4.7%; yielding nascent benefits. Exhibit 1 summarizes our key macro estimates for FY2021-23E. FY2021E at 6.4%
Growth-inflation: cyclical recovery coupled with higher-than-comfortable inflation levels FY2022E GFD/GDP at 5.5%; FY2021E at The Indian economy is likely to see a gradual cyclical recovery barring the large base effects. 7.1% We estimate FY2022E real GDP growth at 9.3% (6.1% in FY2023E) after (-)8.6% in FY2021E. Services sector will likely outpace manufacturing sector in 2HFY22E. Investment cycle will FY2022E CAD/GDP remain a drag with the financial/ corporate sectors and the governments continuing to be at 0.4% of GDP; under pressure. We assume that supply related issues in inflation will normalize through surplus of 0.7% in 1HCY21, thereby, lowering food prices. While inflation is yet not driven by monetary causes, FY2021E it is certainly more broad-based and upside risks could emanate from demand side pressures given normalization in economic activity. However, base effects will keep inflation on a gradual glide path towards 4.8%. We estimate average FY2022E inflation at 4.7% (6.4% in FY2021E).
Interest rates: to harden in FY2022
Most of RBI’s liquidity injection (which has driven market interest rates lower) has been through forex accretion in FY2021 and is likely to continue. With inflation expected to settle above 4%, we expect RBI to begin liquidity normalization from FY2022 onwards, even as repo rate may remain steady. Accordingly, market rates are expected to harden across the curve in FY2022, with the shorter end of the curve underperforming the far end. Fiscal consolidation is also unlikely to be sharp (FY2022E GFD/GDP at 5.5%) with gross borrowing only marginally lower Suvodeep Rakshit than FY2021E. We expect the 10-year yield to inch higher towards 6.25%-6.5% in 2HFY22 given RBI’s increasing constraints to support bond markets due to huge FX related liquidity. Upasna Bhardwaj INR: story of two halves Avijit Puri FX market outlook will broadly be determined by (1) secular USD weakness, (2) sustenance of easy DM monetary policies and (3) pace of vaccine rollout. While these are favorable for risk-on flows across EMs, the consequent growth recovery will provide a fillip to commodity prices capping some of the gains in INR. Meanwhile, moves in INR are likely to remain a function of RBI FX intervention. We, thus, expect INR to trade with an appreciating bias through 1HFY22 (72-75), with risks emanating in the latter part of the year (74-77), with sharp depreciation bias being stemmed given the enormous forex accretion. [email protected] Contact: +91 22 6218 6427
For Private Circulation Only. Economy India
Exhibit 1: Summary of India's macro-fundamentals, March fiscal-year ends
2016 2017 2018 2019 2020 2021E 2022E 2023E Real GDP growth (%) 8.0 8.3 7.0 6.1 4.2 (8.6) 9.3 6.1 Nominal GDP growth (%) 10.5 11.8 11.1 11.0 7.2 (6.1) 13.8 10.1 CPI inflation (%, avg.) 4.9 4.5 3.6 3.4 4.8 6.4 4.7 4.9 Repo rate (%, eop) 6.75 6.25 6.00 6.25 4.40 4.00 4.00 4.50 Reverse repo rate (%, eop) 5.75 5.75 5.75 6.00 4.00 3.35 3.75 4.25 Central GFD/GDP (%) 3.9 3.5 3.5 3.4 4.6 7.1 5.5 5.0 Consolidated GFD/GDP (%) 7.0 7.0 5.9 5.8 7.6 11.9 9.0 8.0 3-M T-bill (%, eop) 7.13 5.78 6.09 6.14 4.24 3.05 3.80 4.50 10-year Gsec benchmark (%, eop) 7.47 6.68 7.40 7.35 6.14 5.85 6.50 7.00 Current account balance (% of GDP) (1.1) (0.6) (1.8) (2.1) (0.9) 0.7 (0.4) (1.0) Brent Crude ($/bbl, avg.) 47.5 49.0 57.6 70.0 60.9 40.0 45.0 50.0
USD-INR (avg.) 65.4 67.2 64.5 69.9 70.9 74.3 74.1 76.0
Source: Kotak Economics Research estimates
Growth: gradual turnaround with few lingering long-term concerns
India’s growth trajectory will move into positive in FY2022E. We estimate real GDP growth in FY2022E at 9.3% against (-)8.6% in FY2021E (Exhibit 2). Growth will be hinged on (1) revival in business and consumer sentiments based on the pace of the Covid-19 vaccine rollout, (2) revival of services sector, especially contact-based services, as the pace of manufacturing sector growth starts plateauing. It is important to note that prior to the pandemic, India’s consumption and investment growth had weakened considerably. During the pandemic, workers, mostly in the informal sector, would have seen income losses and the ability to take on additional leverage may be lower. However, with a large portion of the consumption being driven by the top of the consumer pyramid, consumption will likely hold up in FY2022E.
Exhibit 2: We expect GDP growth at 9.3% in FY2022E and at 6.1% in FY2023E Real GVA and components growth, March fiscal-year ends, 2016-23E (%)
2016 2017 2018 2019 2020 2021E 2022E 2023E Real GVA 8.0 8.0 6.6 6.0 3.9 (8.2) 9.3 6.0 Agriculture and allied 0.6 6.8 5.9 2.4 4.0 3.4 3.5 2.9 Industry 9.6 7.7 6.3 4.9 0.9 (8.8) 13.3 5.4 Mining 10.1 9.8 4.9 (5.8) 3.1 (9.5) 11.3 4.1 Manufacturing 13.1 7.9 6.6 5.7 0.0 (6.8) 12.8 4.7 Electricity 4.7 10.0 11.2 8.2 4.1 3.4 6.3 6.9 Construction 3.6 5.9 5.0 6.1 1.3 (16.9) 17.9 7.0 Services 9.4 8.5 6.9 7.7 5.5 (10.9) 8.9 7.2 Trade, hotel, transport, communication 10.2 7.7 7.6 7.7 3.6 (18.9) 14.7 9.4 Financial, real estate, professional services 10.7 8.6 4.7 6.8 4.6 (4.9) 5.3 5.7 Public admin, defence, and others 6.1 9.3 9.9 9.4 10.0 (9.1) 7.8 6.7 Real GDP 8.0 8.3 7.0 6.1 4.2 (8.6) 9.3 6.1
Source: CEIC, Kotak Economics Research estimates
Industrial versus services growth. Industrial sector growth has outpaced services sector growth in FY2021E. In FY2022E, industrial sector growth will continue to normalize but at a gradual pace. Services sector, on the other hand, should see faster normalization provided there is an early rollout of the vaccine and a sizeable portion of the vulnerable population is covered within 1HCY21. We factor in a moderate pickup in services only in 2HFY22. We expect credit growth to pick up from the current levels in FY2022E which will aid economic activity with credit costs remaining relatively low. We pencil in industrial sector growth at 13.3% in FY2022E against services sector growth of 8.9% (Exhibit 3).
KOTAK ECONOMIC RESEARCH 3 India Economy
Exhibit 3: Services sector likely to see a faster pace of normalization in 2HFY22 Trend in GVA growth across industry and services (%)
50 Industry growth (%) Services growth (%) 40
30
20
10
0
(10)
Jun-18
Jun-19
Jun-20
Jun-21
Sep-18
Sep-19
Sep-20
Sep-21
Dec-18
Dec-19
Dec-20
Dec-21
Mar-18
Mar-19
Mar-20
Mar-21 Mar-22 (20)
(30)
(40)
Source: CEIC, Kotak Economics Research estimates
Consumption. Consumption growth had been slowing down even before the pandemic, as income growth remained weak and much of the recent growth had been fueled by a run-down on savings and retail credit (Exhibits 4-6). Further, as we highlighted earlier (India’s economic reboot: Bold or nothing, July 22 report:), consumption is concentrated in the top 100-150 mn consumers with bulk of the discretionary spends dependent on the top 5-10% of the rural population and around 15-20% of the urban population, dominated by formal salaried and self-employed workers (Exhibits 7-8).
Exhibit 4: Consumption growth has been slowing down even before the pandemic Trend in private final consumption growth (%)
Private final consumption growth (%) 12
7
2
(3)
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
Dec-16
Dec-17
Dec-18
Dec-19
Mar-17
Mar-18 Mar-19 (8) Mar-20
(13)
(18)
(23)
(28)
Source: CEIC, Kotak Economics Research
4 KOTAK ECONOMIC RESEARCH Economy India
Exhibit 5: Share of private consumption has increased as household savings rate has fallen Share of private domestic consumption expenditure and household savings in GDP, March fiscal year-ends, 2006-20E (%)
Private consumption/GDP (%, LHS) Household savings/GDP (%, RHS) 62 28
25 25 26 24 60 24 24 22 60 22 21 59 59 22 21 20 59 59 58 58 20 19 20 58 18 18 18 57 18 18 56 57 56 56 56 56 56 16 55
54 14
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018 2019 2020E
Source: CEIC, Kotak Economics Research estimates
Exhibit 6: Retail loans growth has moderated significantly Growth of retail loans (%, 3MMA)
Personal loans growth (%, 3MMA) Personal loans (ex-housing) growth (%, 3MMA) 26 24 22 20 18 16 14 12 10 8
6
Jul-16
Jul-17
Jul-18
Jul-19
Jul-20
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Oct-15
Oct-16
Oct-17
Oct-18
Oct-19
Oct-20
Apr-16
Apr-17
Apr-18 Apr-19 Apr-20
Source: RBI, Kotak Economics Research
KOTAK ECONOMIC RESEARCH 5 India Economy
Exhibit 7: Discretionary spending is concentrated in top 20% of rural and urban population Share of essentials and discretionary spending in top 20% of rural and urban population (%)
Contribution of top 20% population Rural Urban Essentials 37 41 Food 33 35 Fuel and light 29 34 Medical 56 57 Education 53 50 Conveyance 55 56 Discretionary 44 55 Clothing, bedding and footwear 34 40 Durable goods 68 72 Entertainment 47 46 Household consumables 37 38 Consumer services 42 57 Rent 82 63 Others 38 39 Total spending 39 45
Source: NSS 68th round, 2011-12, Kotak Economics Research estimates
Exhibit 8: Rural and urban consumption supported at the highest bracket by self-employed and regular wages/salary cohort Breakup of workforce at top 20 percentile of MPCE (%)
Top 20% of workforce according to MPCE Rural Urban Self employed/helpers 15.2 6.9 - Agriculture and allied 9.9 0.3 - Industry 1.6 1.9 - Services 3.7 4.7 Regular wages/salary 6.5 13.5 - Agriculture and allied 0.2 0.0 - Industry 1.6 3.0 - Services 4.8 10.5 Casual labor 5.8 0.6 - Agriculture and allied 2.8 0.0 - Industry 2.2 0.4 - Services 0.8 0.2 Total workforce 27.5 21.0
Notes: (a) The PLFS MPCE deciles are derived from much less detailed method compared to the NSS and may not be an exact match.
Source: PLFS 2018-19, Kotak Economics research
We note that while the listed companies would indicate that at an aggregate level employee costs have marginally increased, the situation is sharply skewed towards larger companies. Larger companies’ employees have fared much better than those in smaller companies (Exhibit 9). This further indicates that while consumption growth would have a floor in FY2022E, it is unlikely to see any rapid increase given that employees in smaller companies have seen income/job losses. The larger cohort of workers in the informal segment (across self-employed, casual, and salaried) would have been impacted the most (which is supported by even the formal sector employee cost data). Workers in select services (mostly contact services) will continue to see pressure till the vaccine rollout gains momentum (Exhibit 10). However, the worst may be over for most of the firms, especially in the manufacturing sector. Our SME survey (August edition) had also indicated a much more positive sentiment with most firms more sanguine about their survival (Exhibit 11).
6 KOTAK ECONOMIC RESEARCH Economy India
Exhibit 9: Larger firms have fared better through pandemic and employees' salaries have also been much better than smaller firms Growth in employee cost and net sales in 1HFY21 over 1HFY20 (%)
Growth in employee cost (1HFY21/1HFY20) Growth in net sales (1HFY21/1HFY20) 10 0 5.9 5.9
5 1001+
(5) Top-50
51--100 101-200
1.7 201-500 501-1000 (0.5) 0 (10)
(10.2)
All listed companies 1001+
(5) Top-50 (15)
51--100 101-200 201-500 (14.1) (12.2) (6.1) 501-1000 (15.4) (10) (20)
(12.0) All listed companies (15) (25) (22.8) (24.0)
(17.1) (27.4) (20) (30)
Notes: (a) Firms have been ranked based on cumulative 4Q-trailing net sales.
Source: Capitaline, Kotak Economics Research
Exhibit 10: Workers in contact-intensive services may get a respite through normalization in service sector activity Number of workers in select services which have been affected due to pandemic (mn)
Number of workers Bus services, rentals of private cars, taxis, etc. 7.5 Personal service activities 4.9 Activities of households as employers of domestic personnel 4.7 Restaurants and mobile food service activities 4.0 Retail sale of clothing, footwear and leather articles in specialized stores 3.3 Urban or suburban passenger land transport 3.0 Beverage serving activities 1.3 Event catering and other food service activities 1.0 Creative, arts and entertainment activities 0.9 Retail sale via stalls and markets 0.6 Short term accommodation activities 0.7 Passenger rail transport 0.5 Renting and leasing of personal and household goods 0.5 Travel agency and tour operator activities 0.2 Others 0.3 Total 33.4
Share in total workforce (%) 8.8
Source: PLFS 2018-19, Kotak Economics Research
KOTAK ECONOMIC RESEARCH 7 India Economy
Exhibit 11: Most SMEs in manufacturing expect to survive through the next 12 months Period of sustaining business given current conditions (% of respondents)
> 12 months, 11.2 < 3 months, 20.5
6–12 months, 31.7
3-6 months, 36.5
Source: KIE SME August Survey, Kotak Institutional Equities
The long-term concerns around consumption remain centered around empowering a larger cohort of consumers. Unless jobs are created and/or income/productivities are enhanced, it will be difficult to see a sustained consumption growth over the next 5-10 years. Further, the pandemic would have seen savings erosion for a large part of the middle-bottom of the consumer pyramid (even in formal sector workers). This in effect would imply that the ability to take on debt as well as potential for consumption for the long term will be weaker unless sustained income/job creation (preferably through public and private investment) can be provided.
Rural demand. The rural economy has been performing better than the urban economy on the back of the agriculture sector. Higher rabi procurement in 4QFY20-1QFY21 has helped the farmers (Exhibit 12). Similar trends have continued in the current kharif season as well as continue in the next rabi season (Exhibit 13). On a structural basis, however, farm income growth has remained low for key crops and much of the price increases at the retail level do not accrue to the farmers (Exhibit 14).
8 KOTAK ECONOMIC RESEARCH Economy India
Exhibit 12: Payout on account of procurements have increased though procurement levels remain around 35-40% Trend in procurement and payouts, March fiscal year-ends
Payout by govt (Rs bn, LHS) Total payout by govt (Rs bn, LHS) 800 45 1,000 50 Wheat procurement (% of output, RHS) Rice procurement (% of output, RHS) 700 40 900 45 35 800 40 600 700 35 30 500 600 30 25 400 500 25 20 300 400 20 15 300 15 200 10 200 10 100 5 100 5
0 0 0 0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019 2020
Source: CMIE, Kotak Economic Research
Exhibit 13: Stocks through procurement has been significantly higher than buffer stocks Cumulative stock of rice and wheat with FCI against the buffer norm
2017 2018 2019 2020 Buffer 90
80
70
60
50
40
30
20
10
0 March June September December
Notes: (a) Only rice and wheat is taken into consideration.
Source: FCI, Kotak Economics Research
KOTAK ECONOMIC RESEARCH 9 India Economy
Exhibit 14: Farm profitability growth has been muted across most food grains Trend in profit per hectare (at A2+FL cost) across major food grains, March fiscal-year ends (Rs/hectare)
2015 2016 2017 2018 2019 2020
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0 Paddy Wheat Moong Tur Gram
Source: CMIE, Kotak Economics Research
While the agriculture sector has been doing well, the jobs demanded under NREGA continue to indicate that the non-agriculture sector remains under stress (Exhibit 15).We expect the non-agriculture sector to improve in FY2022E especially as economic activity such as construction and manufacturing normalize and migration back to urban areas is complete (Exhibit 16). Further, while rural wage growth had seen a sharp uptick at the start of the lockdown (NREGA wages were revised higher), growth will moderate over the next few months (Exhibit 17). The government will also reduce the NREGA allocations to some extent in FY2022E. We pencil in Rs800 bn in FY2022E against Rs1.2 tn in FY2021E. Overall, we expect the agriculture sector to continue to perform better than the non- agriculture sector, while overall rural demand will see some moderation from trends seen in FY2021E.
Exhibit 15: Jobs demanded under MGNREGA remain high Employment demanded by persons under MGNREGA (in mn)
Employment demanded (in mn) 70 63
60 54
50 43 40 36 36 32 31 29 31 31 28 28 27 28 29 30 25 24 22 20 18 18 19 20 16
10
0
Jul-19 Jul-20
Jan-19 Jan-20
Jun-19 Jun-20
Oct-20 Oct-19
Feb-19 Feb-20
Sep-20 Apr-19 Sep-19 Apr-20
Dec-19
Nov-20 Nov-19
Mar-19 Mar-20
Aug-19 Aug-20 May-20 May-19
Source: CMIE, Kotak Economics Research
10 KOTAK ECONOMIC RESEARCH Economy India
Exhibit 16: Construction, manufacturing, and retail trade absorb majority of the rural workforce Share of non-agricultural workforce across various sectors in rural areas (%)
Others, 10 Accommodation and food services, 3 Construction, 31 Transport, 9
Education, health and social work, 11
Manufacturing, 18 Trade and repairs, 17
Source: PLFS 2018-19, Kotak Economics Research
Exhibit 17: Rural wage growth has started to moderate again Trend in growth in rural wages (%)
Nominal rural wage growth (%) 8
7
6
5
4
3
2
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
Oct-16
Feb-17
Oct-17
Feb-18
Oct-18
Feb-19
Oct-19
Feb-20
Apr-16
Apr-17
Apr-18
Apr-19
Apr-20
Dec-16
Dec-17
Dec-18
Dec-19
Aug-16
Aug-17
Aug-18
Aug-19 Aug-20
Source: CMIE, Kotak Economics Research
Financial sector. Despite the economic fallout of the pandemic, banks have been able to keep their GNPAs under check as the RBI allowed lenders regulatory forbearances. The RBI has also allowed a one-time restructuring of loans which could keep slippages under check in the near term. Positively though, there seems to have been a limited number of entities opting for restructuring. Further, banks have also been cautious, making provisions every quarter and improving their capital buffers which should partly offset any possible risks from deteriorating balance sheets next year. We expect the private banks to be better equipped to deal with the stress of rising NPAs in comparison to PSU banks which had entered the pandemic with lower capital buffers. As economic activity improves in FY2022, we expect credit growth to pick up from the current levels though PSUs (especially smaller banks) may still lag behind given their need for recapitalization. Given the adequate liquidity, we expect the NBFCs to fare better than in FY2020-21 though they will be cautious regarding the borrowers’ profiles. While credit was minimal, FY2021 witnessed a surge in borrowing from the debt market, especially at shorter tenors
KOTAK ECONOMIC RESEARCH 11 India Economy
(Exhibit 18). With liquidity expected to tighten in FY2022 and weigh on short term rates, we expect a shift back towards loans and advances.
Exhibit 18: Bank credit has lagged behind significantly in FY2021; debt Issuances have picked up in FY2021 Trend in incremental deposits and credit, and issuances of corporate bonds and CPs, March fiscal-year ends (Rs bn)
Incremental deposits (Rs bn) Incremental credit (Rs bn) Corporate bond issuances (Rs bn) CP issuances (Rs bn)
16,000 16,000 14,730 14,000 14,000 12,555 12,911 12,000 12,000 10,604 9,851 10,000 9,436 10,000 8,594 8,000 8,000 7,065 6,645 6,423 6,752 6,000 6,000 4,948 4,861 3,856 4,000 4,000
2,000 2,000
0 0 2016 2017 2018 2019 2020 FYTD20 FYTD21 2016 2017 2018 2019 2020 FYTD20 FYTD21
Source: RBI, CEIC, Kotak Economics Research
Public finance. The government will have to navigate between (1) managing the high and rising debt burden which will constrain the government’s ability to provide any major fiscal impetus, and (2) need for stimulating the economy given the sharp deceleration in both consumption and investment (Exhibit 19). In this context, the government’s push to growth can only come through prioritized spending. We have always preferred an investment-focused stimulus over a consumption-focused stimulus given the larger multiplier effect on both growth and employment. We factor in additional spending on public infrastructure in FY2022E (roads, railways, housing, etc.) and on social infrastructure (health, education, etc.). At the same time, the government will have to present a revised and credible FRBM roadmap given that FY2021E GFD/GDP would be around 7.1% and public debt to GDP at around 87%, way higher than the FRBM’s target of 60% by FY2023E. On center’s account we factor in expenditure growth at 4% with most of the expenditure growth being driven by capital expenditure growth of 12%. The resource crunch will likely persist for states (even as tax collections gradually normalize) as the center will likely have a shortfall in compensation cess fund; similar to FY2021.
12 KOTAK ECONOMIC RESEARCH Economy India
Exhibit 19: Debt stock will spike in FY2021E due to Covid related impact on fiscal deficit Trend in debt of center, state and general government, March fiscal year-ends (% of GDP)
Center's debt States debt General govt debt
100 87 84 90 83 75 80 73 74 72 71 67 68 67 67 68 68 69 66 68 70 32 31 30 23 60 22 25 24 23 21 21 21 21 22 23 24 24 25 50 40
30 55 51 51 49 48 53 53 20 45 46 46 46 45 46 44 45 44 46 10
0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020E
2021E 2022E 2023E
Note: (a) Center's liabilities have been adjusted for loans to states and state liabilities have been adjusted for investment in center's T-bills
Source: CEIC, Kotak Economics Research estimates
Inflation: steady glide down but with a higher floor
While Covid has pushed demand well below the level of potential output, inflation readings have been hovering well above the RBI’s upper limit of 6% over FY2021 (continuing from 2HFY20) owing to non-monetary factors such as supply disruptions in food, higher taxes on fuel, and higher gold prices. At the same time, inflation has become more broad-based, with higher food prices risking increasing inflation expectations and pushing core inflation higher, even though there is limited evidence of it being demand-led for now (Exhibit 20-21).
Exhibit 20: Inflation is more broad-based though vegetables, gold, and medicine have been dominating from before Covid-19 Top-20 contributors to CPI inflation (%)
Oct-20 Feb-20 Dec-19 Sep-19 Jul-19 Potato 1.0 Onion 0.8 Onion 2.2 Onion 0.5 House rent 0.5 Chicken 0.4 House rent 0.4 House rent 0.4 House rent 0.5 Medicine 0.3 Milk 0.3 Milk 0.4 Garlic 0.4 Medicine 0.3 Tomato 0.2 Gold 0.3 Potato 0.4 Potato 0.3 Gold 0.2 Tuition fees 0.2 House rent 0.3 Garlic 0.3 Milk 0.3 Tuition fees 0.2 Wheat/atta 0.2 Mobile charges 0.2 LPG 0.2 Gold 0.2 Garlic 0.2 Fish/prawn 0.1 Medicine 0.2 Mobile charges 0.2 Mobile charges 0.2 Fish/prawn 0.2 Chicken 0.1 Meat 0.2 Gold 0.2 Medicine 0.2 Tomato 0.2 Tur (pulses) 0.1 Mustard oil 0.2 Medicine 0.2 Wheat/atta 0.2 Wheat/atta 0.1 Gold 0.1 Onion 0.2 Wheat/atta 0.2 Tomato 0.2 Chicken 0.1 Ginger 0.1 Rice 0.2 Rice 0.2 Rice 0.2 Milk 0.1 Kerosene 0.1 Bus fare 0.2 Fish 0.2 Fish 0.1 Tur dal 0.1 Meat 0.1 Refined edible oil 0.2 School fees 0.1 Tur dal 0.1 Ginge 0.1 Garlic 0.1 Petrol 0.2 Dry chillies 0.1 School fees 0.1 Meat 0.1 Cooked meals 0.1 Tur dal 0.1 Tur dal 0.1 Chicken 0.1 Kerosene 0.1 Milk 0.1 Tomato 0.1 Chicken 0.1 Petrol 0.1 Mobile charges 0.1 Private tuition charges 0.1 Cooked meals 0.1 Meat 0.1 Kerosene 0.1 Cooked meals 0.1 Hospital charges 0.1 Dry chillies 0.1 Parwal 0.1 Dry chillies 0.1 Hospital charges 0.0 Bus fare 0.1 Fish 0.1 Kerosene 0.1 Meat 0.1 Private tuition charges 0.0 Cable TV charges 0.1 LPG 0.1 Refined edible oil 0.1 Cooked meals 0.1 Cable TV charges 0.0 Mobile charges 0.0 Top-20 (%) 4.8 Top-20 (%) 4.6 Top-20 (%) 5.6 Top-20 (%) 3.2 Top-20 (%) 2.5 CPI inflation (%) 7.6 CPI inflation (%) 6.6 CPI inflation (%) 7.4 CPI inflation (%) 4.0 CPI inflation (%) 3.1 Top-20/Total (%) 63.3 Top-20/Total (%) 70.5 Top-20/Total (%) 76.1 Top-20/Total (%) 79.7 Top-20/Total (%) 80.0
Source: CEIC, Kotak Institutional Equities
KOTAK ECONOMIC RESEARCH 13 India Economy
Exhibit 21: Recent money supply growth has been due to credit to government and forex assets; inflation risks will increase as credit growth picks up Trend in the relationship between CPI inflation and components of money supply (%)
CPI (%yoy) Net bank credit to govt (%yoy, RHS) CPI (%yoy) Bank credit to comm. sector (%yoy, RHS) 18 60 18 40 16 50 16 35 14 14 40 30 12 12 25 10 30 10 20 8 20 8 15 6 6 10 4 4 10 0 2 2 5
0 (10) 0 0
Oct-08 Oct-10 Oct-12 Oct-14 Oct-16 Oct-18 Oct-20 Oct-00 Oct-01 Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-09 Oct-11 Oct-13 Oct-15 Oct-17 Oct-19
Oct-02 Oct-03 Oct-08 Oct-09 Oct-14 Oct-15 Oct-20 Oct-00 Oct-01 Oct-04 Oct-05 Oct-06 Oct-07 Oct-10 Oct-11 Oct-12 Oct-13 Oct-16 Oct-17 Oct-18 Oct-19
CPI (%yoy) CPI (%yoy) M3 (%yoy, RHS) Net FX Assets of Banking Sector (%yoy, RHS) 18 30 18 70 16 16 60 25 14 14 50 12 20 12 40 10 10 30 15 8 8 20 6 10 6 10 4 0 4 5 2 (10) 2
0 (20) 0 0
Oct-00 Oct-03 Oct-06 Oct-09 Oct-10 Oct-13 Oct-16 Oct-19 Oct-01 Oct-02 Oct-04 Oct-05 Oct-07 Oct-08 Oct-11 Oct-12 Oct-14 Oct-15 Oct-17 Oct-18 Oct-20
Oct-00 Oct-01 Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-20 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Oct-18 Oct-19
Source: RBI, Kotak Economics Research
Over the next 2-3 months we expect food items such as vegetables and cereals to soften as new crop hits the market. However, supply disruptions in protein items (eggs, meat, and fish) will take longer (3-9 months) to soften given their production cycle. Price levels of petrol and diesel are unlikely to reduce given that excise duty hikes are unlikely to be rolled back soon. However, we should note that the indirect impact of higher fuel prices is getting transmitted to headline inflation. Overall, while favorable base effects along with varying timelines of supply-led price corrections will keep the inflation on a gradual slide, the demand side pressures are expected to gradually become entrenched providing an elevated floor (above 4%) for headline inflation.
We estimate the headline CPI inflation to trend towards 5.9% by March 2021 and to normalize further towards 4.8% by March 2022 aided by favorable base effects (Exhibit 22). We estimate average FY2022E inflation at 4.7% (6.4% in FY2021E). Notably, in an economic recovery phase (likely in the coming quarters) the threshold for MPC to accept above 4% inflation on a sustained basis will reduce, thereby prompting a shift towards a neutral policy stance.
14 KOTAK ECONOMIC RESEARCH Economy India
Exhibit 22: We expect CPI inflation to average 4.7% in FY2022 Headline and core CPI inflation (%)
CPI inflation Core CPI inflation 8
7
6
5
4
3
2
1
0
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
Jun-21
Jun-22
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
Sep-21
Sep-22
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Dec-21
Dec-22
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Mar-21 Mar-22 Mar-23
Source: CEIC, Kotak Economics Research estimates
Food inflation. We expect food inflation to be in the range of 5.2-9.9% for the rest of FY2021 and in the range of 1.7-6.1% in FY2022. Food inflation recently has been driven by vegetables, pulses and eggs, meat and fish. Vegetable prices have persistently remained elevated, earlier due to supply-chain disruptions induced by lockdowns and recently due to unseasonal rains. Eggs, meat, and fish saw a combination of supply chain and production issues, as large unorganized players had little financial capacity to continue producing during lockdowns given transport issues. Production of pulses may also have been lower than anticipated due to excess rainfall in August and September.
These supply bottlenecks are gradually getting eliminated as unlocking has picked speed, causing both agriculture and non-agricultural prices to correct. With resumption of businesses by small poultry, high prices in protein items should witness some correction in the coming months. At the same time, government intervention (for instance, blanket ban on onion exports along with stockholding limits), arrival of the produce of the kharif season, normal monsoon, along with a robust rabi sowing pattern should bode fell for the trajectory of food prices (Exhibit 23).
Exhibit 23: Adequate reservoir levels resulting in strong sowing of rabi Trend in sowing of rabi crops (mn hectares and % growth)
Acreage (mn hectares) Change FYTD21 FYTD20 (%) Foodgrains 36.4 35.1 3.5 Cereals 24.7 24.8 (0.5) Rice 1.0 1.0 (4.0) Wheat 20.4 20.3 0.8 Coarse cereals 3.3 3.6 (7.2) Pulses 11.7 10.3 13.2 Gram 8.2 7.1 16.2 Other pulses 3.4 3.2 6.5 Oilseeds 6.7 6.3 6.2 All Crops 43.1 41.4 3.9
Source: Ministry of Agriculture, Kotak Economics Research
KOTAK ECONOMIC RESEARCH 15 India Economy
Core Inflation. We expect core inflation to trend higher towards 5.9% by March 2021 despite weak (even though improving) domestic economic activity. Core inflation has been driven higher by excise duty hikes on petrol and diesel (total weightage of 2.3%) along with higher gold and silver (total weightage of 1.2%) prices. For now, there is very little evidence of any demand side pressures, as also visible in the relatively benign core- inflation (core inflation excluding petrol, diesel, gold, silver) reading —although higher than 4% (Exhibit 24). In FY2022E, we expect core inflation to move towards 5.5% by March 2022 owing to favorable base effects even as sequential pickup will continue owing to the improvement in economic activity. Some of the non-monetary factors which have been the cause for sticky and elevated core inflation may partly recede going ahead, however, the sheer persistence of these factors risks resetting inflationary expectations significantly higher. Besides, the wide gap between the money supply and credit growth is will likely narrow going ahead in FY2022 thereby risking monetary-led inflation.
Exhibit 24: Demand-side pressures remain muted but showing some upside Trend in CPI, core and core-core inflation (%)
CPI inflation (%) Core inflation (%) Core-core inflation (%) 8
7
6
5
4
3
2
1
0
Jul-16
Jul-17
Jul-18
Jul-19
Jul-20
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Oct-15
Oct-16
Oct-17
Oct-18
Oct-19
Oct-20
Apr-16
Apr-17
Apr-18 Apr-19 Apr-20 Notes: (1) Core-core inflation excludes petrol, diesel, and gold.
Source: CEIC, Kotak Economics Research
Public finance: remains a key concern in the near to medium term India entered the pandemic with a deteriorating and already high fiscal burden. The fiscal profile deteriorated with tax collections cratering due to lockdown-related disruptions, even as government has been prioritizing its spending to avoid significant slippages. We expect FY2021E GFD/GDP to be around 7.1% and FY2021E public debt to GDP to be around 87% (71% in FY2020E) (refer to Exhibit 20). We believe that reversing public debt/GDP to pre- Covid levels will require some heavy-lifting rather than a business-as-usual approach. At the same time, providing some support to economic activity will be of paramount importance. We have been advocating for infrastructure focused spending to address income/job losses as the economy comes out of the pandemic. The focus should therefore be on physical infrastructure such as energy, roads (highways and rural), urban infrastructure (housing and transport) and social infrastructure such as health and education. However, it is important that the government announces a credible consolidation path for the medium term. We model FY2022E GFD/GDP at 5.5% following 7.1% in FY2021E (Exhibit 25). We estimate gross tax revenue growth at 16%, non-tax revenues at Rs2.6 tn and divestments at Rs1.8 tn. We assume overall expenditure growth at 4% (revenue and capital expenditure growth at 3% and 12%, respectively). The FY2022E gross market borrowing in dated securities is likely to be Rs10.7 tn marginally lower than the borrowing of Rs12 tn for FY2021 (Rs2.8 tn of redemptions and Rs8 tn of net market borrowings). The state governments are also unlikely to revert back to FRBM levels immediately in FY2022E after a likely borrowing of around Rs6.8 tn (4.8% of FY2021E GDP). The level of borrowing (despite a lower fiscal deficit) will weigh on the debt markets if the RBI does not continue to support government borrowings (Exhibit 26-27).
16 KOTAK ECONOMIC RESEARCH Economy India
Exhibit 25: FY2021 GFD/GDP likely at 7.1%; 5.5% in FY2022E Major central government budgetary items, March fiscal year-ends, 2016-21E (Rs bn)
Change (%) 2019/ 2020RE/ 2020P/ 2021BE/ 2021E/ 2022E/ 2016 2017 2018 2019 2020P 2021BE 2021E 2022E 2018 2019 2019 2020P 2020P 2021E Receipts 1. Revenue receipts (2d + 3) 11,950 13,742 14,352 15,529 16,821 20,209 15,653 17,421 8 19 8 20 (7) 11 2. Gross tax revenues (a + b ) 14,556 17,158 19,190 20,805 20,099 24,230 18,257 21,206 8 4 (3) 21 (9) 16 2.a. Direct taxes 7,458 8,539 10,068 11,431 10,536 13,265 9,070 10,250 14 3 (8) 26 (14) 13 2.a.1. Corporation tax 4,532 4,849 5,712 6,636 5,569 6,810 4,733 5,396 16 (8) (16) 22 (15) 14 2.a.2. Income tax 2,876 3,646 4,308 4,730 4,898 6,380 4,262 4,773 10 18 4 30 (13) 12 2.a.3. Other taxes 50 43 48 66 69 75 75 81 37 5 5 9 9 8 2.b. Indirect taxes 7,098 8,620 9,122 9,373 9,563 10,965 9,187 10,956 3 5 2 15 (4) 19 2.b.1. Goods and Services Tax — — 4,426 5,816 6,015 6,905 4,974 6,000 31 5 3 15 (17) 21 2.b.1.1. CGST — — 2,033 4,575 4,967 5,800 4,290 5,040 125 12 9 17 (14) 17 2.b.1.2. IGST — — 1,767 289 92 — — — (84) 2.b.1.3. Compensation cess — — 626 951 956 1,105 684 960 52 3 0 16 (28) 40 2.b.2. Customs duty 2,103 2,254 1,290 1,178 1,092 1,380 897 996 (9) 6 (7) 26 (18) 11 2.b.2.1. Basic duties 572 646 808 1,048 946 1,240 757 840 30 5 (10) 31 (20) 11 2.b.2.2. Others 1,532 1,608 483 130 146 140 140 155 (73) 12 12 (4) (4) 11 2.b.3. Excise duty 2,881 3,821 2,594 2,310 2,396 2,670 3,256 3,960 (11) 7 4 11 36 22 2.b.4. Service tax 2,114 2,545 812 69 60 10 60 — (92) (83) (12) (83) 2.c Transfers to states, UTs, etc. 5,119 6,145 6,765 7,633 6,540 7,871 5,655 6,373 13 (14) (14) 20 (14) 13 2.d Net tax revenues 9,438 11,014 12,425 13,172 13,559 16,359 12,602 14,833 6 14 3 21 (7) 18 3. Non-tax revenues 2,513 2,728 1,927 2,357 3,262 3,850 3,051 2,588 22 47 38 18 (6) (15) 3.a. RBI's transfer of surplus 659 659 407 680 1,476 600 800 700 67 117 117 (59) (46) (13) 3.a. Telecommunications 565 702 321 408 590 1,330 875 375 27 45 45 126 48 (57) 4. Non-debt capital receipts (a + b) 630 654 1,157 1,128 686 2,250 850 1,950 (3) (28) (39) 228 24 129 4.a Recovery of loans 208 176 156 181 183 150 150 150 15 (8) 1 (18) (18) 0 4.b Other receipts (disinvestments) 421 477 1,000 947 503 2,100 700 1,800 (5) (31) (47) 317 39 157 5. Total receipts (1 + 4) 12,580 14,396 15,509 16,657 17,507 22,459 16,503 19,371 7 16 5 28 (6) 17 Expenditure 6. Revenue expenditure 15,378 16,906 18,788 20,074 23,496 26,301 26,774 27,630 7 17 17 12 14 3 6.a. Interest payments 4,417 4,807 5,290 5,826 6,110 7,082 7,082 7,729 10 7 5 16 16 9 6.b. Subsidies 2,418 2,040 1,912 1,968 2,232 2,278 2,728 2,000 3 15 13 2 22 (27) 6.b.1. Food 1,394 1,102 1,003 1,013 1,087 1,156 1,156 1,200 1 7 7 6 6 4 6.b.2. Fertilizer 724 663 664 706 811 713 1,363 700 6 13 15 (12) 68 (49) 6.b.3. Oil 300 275 245 248 334 409 209 100 2 55 34 23 (37) (52) 6.c. Pay, allowances and pensions 3,301 3,996 4,464 4,957 4,997 5,877 5,627 6,640 11 10 1 18 13 18 6.c.1.a. Pay and allowances 2,334 2,682 3,007 3,291 3,306 3,770 3,520 4,322 9 10 0 14 6 23 6.c.1.b. Pensions 967 1,314 1,457 1,666 1,691 2,107 2,107 2,318 14 11 2 25 25 10 6.d. Agriculture and farmers' welfare 153 369 374 461 942 1,343 1,359 1,188 23 121 105 43 44 (13) 6.e. Education 672 720 800 781 873 972 722 794 (2) 19 12 11 (17) 10 6.f. Health and family welfare 322 364 483 506 607 639 869 1,174 5 20 20 5 43 35 6.g. Rural development 774 951 1,086 1,118 1,221 1,200 1,756 1,681 3 10 9 (2) 44 (4) 6.h. Others 3,321 3,658 4,381 4,457 6,513 6,909 6,630 6,425 2 29 46 6 2 (3) 7. Capital expenditure 2,530 2,846 2,631 3,077 3,367 4,121 3,344 3,749 17 13 9 22 (1) 12 7. a. Defence 836 915 954 998 1,161 1,186 1,137 1,250 5 16 16 2 (2) 10 7. b. Railways 350 452 434 528 678 700 600 690 22 28 28 3 (12) 15 7. c. Roads and Highways 275 412 508 676 673 820 720 828 33 7 (1) 22 7 15 7. d. Housing and urban affairs 106 165 153 158 193 211 211 278 3 22 22 10 9 32 7. e. Others 963 902 582 717 663 1,204 677 703 23 4 (7) 82 2 4 8. Total expenditure (6 + 7) 17,908 19,752 21,420 23,151 26,864 30,422 30,118 31,379 8 17 16 13 12 4 Deficit Primary deficit (PD) 911 549 621 668 3,246 881 6,533 4,280 7 112 386 (73) 101 (34) Revenue deficit (RD) 3,427 3,164 4,436 4,545 6,675 6,092 11,121 10,209 2 10 47 (9) 67 (8) Gross fiscal deficit (GFD) 5,328 5,356 5,911 6,494 9,356 7,963 13,615 12,008 10 18 44 (15) 46 (12) Gross borrowings (dated securities) 5,850 5,842 5,891 5,715 7,059 7,800 11,997 10,774 (3) 24 24 11 70 (10) Net market borrowing 4,416 4,093 4,518 4,233 4,698 5,449 9,723 7,976 (6) 12 11 16 107 (18) Net market borrowing (adjusted for buyback) 4,041 3,497 4,103 4,233 4,698 5,149 9,723 7,976 3 12 11 10 107 (18) Short-term borrowing (T-bills) 507 55 449 69 1,560 250 250 350 Nominal GDP at market prices 137,719 153,917 170,983 189,712 203,398 224,894 191,500 217,927 11.0 7.8 7.2 10.6 (5.8) 13.8 PD/GDP (%) 0.7 0.4 0.4 0.4 1.6 0.4 3.4 2.0 RD/GDP (%) 2.5 2.1 2.6 2.4 3.3 2.7 5.8 4.7 GFD/GDP (%) 3.9 3.5 3.5 3.4 4.6 3.5 7.1 5.5
Source: Union Budget, Kotak Economics Research estimates
KOTAK ECONOMIC RESEARCH 17 India Economy
Exhibit 26: Consolidated GFD/GDP likely to remain elevated in FY2022 Trend in center, state and consolidated GFD/GDP (%)
Center GFD/GDP State GFD/GDP Consolidated GFD/GDP 14 11.9 12 9.4 10 9.0 8.4 4.8 8.0 7.8 7.6 8 6.9 6.9 6.9 7.0 6.4 3.0 6.7 6.7 2.4 1.9 5.9 5.9 3.5 5.1 3.0 6 2.1 2.0 3.0 2.5 4.1 2.2 2.6 3.1 3.5 2.4 2.5 4 1.8 7.1 1.5 6.0 6.5 5.9 4.9 5.5 5.0 4.8 4.5 4.1 4.6 2 4.0 3.3 3.9 3.5 3.5 3.4 2.5
0
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020E
2021E 2022E 2023E
Source: RBI, Ministry of Finance, Kotak Economics Research estimates
Exhibit 27: Weekly borrowing pressure is substantially larger in FY2021-22E compared to past years Governments' average weekly borrowing, March fiscal year-ends (Rs bn)
Gross (centre+state) dated borrowing (Rs bn) Net (centre+state) dated borrowing (Rs bn) 500 450 400 350 300 250 200 150 100 50 0 2013 2014 2015 2016 2017 2018 2019 2020 2021E 2022E
Source: RBI, Kotak Economics Research
Direct tax revenues. We factor in 14% growth in corporate tax revenues and 12% growth in personal income tax revenue keeping in view our nominal GDP growth of 13.8% in FY2022E. Overall, we model direct tax revenue growth at 13% in FY2022E after (-)14% in FY2021E. We do not expect any major personal income tax rate changes.
GST revenue. The GST revenue run-rate is currently around Rs730 bn per month in FY2021. Of this, the CGST run-rate is around Rs350 bn and SGST run-rate is around Rs320 bn. We expect the CGST run-rate for FY2021 to be around Rs358 bn. Based on the GST collections (and compliance levels) for March-October, we factor in a run-rate of around Rs420 bn of CGST for FY2022. GST compensation cess is likely to be inadequate to compensate states in FY2022E too. We estimate a shortfall of around Rs1-1.5 tn which is likely to be compensated through a similar mechanism as FY2021E.
18 KOTAK ECONOMIC RESEARCH Economy India
Expenditure. We expect most of the pandemic related budgetary expenditure to be discontinued. However, few expenditure such as on NREGA will be continue (though lower than in FY221E). We pencil in higher capital expenditure growth than revenue expenditure growth. We factor in expenditure growth at 4% with revenue expenditure at 3% and capital expenditure growth at 12%. The government could prioritize spending on urban infrastructure and social infra (health and education), especially rollout of the Covid vaccination program. With limited fiscal space, we assume (-)4% growth in expenditure on rural development, 15% in railways, and 15% in roads and highways. Nearly 46% of the total expenditure is expected to be utilized for meeting the interest payments and for pay, allowances and pensions.
Interest rates: to harden in FY2022
RBI has had to walk the tight rope in FY2021 while attempting to handle multiple objectives in the current pandemic period from managing growth despite high inflation, bond yields and INR appreciation amidst significant capital flows. While RBI’s measures have pushed borrowing costs lower, the term premia remain elevated (Exhibits 28-29). In FY2022, RBI will need to revamp its policy direction and priorities and provide a clear guidance on its rulebook. Most of the excesses of FY2021 will need a gradual withdrawal with minimal financial market disruptions. We believe that RBI will need to let go of one of the parameters in the ‘impossible trinity’ to allow for a gradual normalization.
Exhibit 28: System liquidity has been in huge surplus Trend in banking system liquidity (Rs bn)
Notes: (a) Negative number implies surplus liquidity.
Source: CEIC, Kotak Economics Research
KOTAK ECONOMIC RESEARCH 19 India Economy
Exhibit 29: Yield curve has moved significantly lower compared to last year Yield curve of Indian treasury bills and government securities (%)
8 Current 3M prior 6M prior 12M prior
7
6
5
4
3
2 3M 6M 1y 2y 3y 5y 6y 7y 8y 10y 30y
Source: Bloomberg, Kotak Economics Research
Given the growth-inflation mix, we expect the RBI to keep the repo rate unchanged in CY2021 even as the accommodative stance will be revisited in 1QFY22E. Our inflation trajectory suggests that while headline inflation is likely to come off from current high levels, it is likely to remain above the RBI’s comfort level of 4% for most part of FY2022. We note that the government is due to review the inflation target in March 2021. Accordingly, any changes to the current target will change the tolerance level and the policy decisions of the RBI. We will revisit our view on the withdrawal of accommodation in case of any shift in the mandate/target. We do not see much merit in changing the target given the adequate room in the range which allows for flexible inflation targeting. Instead, certain caveats can be added to the revised framework to create room for additional objectives in extreme shocks like natural calamities/pandemic etc.
Assuming no change to the inflation target for now we note that RBI is expected to begin monetary policy normalization (although only gradually) from FY2022 onwards.
What could monetary policy normalization look like? We believe that the sequencing of policy could be: (1) gradual reduction in liquidity (most effectively through MSS) to move the short-term market rates first towards reverse repo rate (currently short term rates being well below reverse repo rate), (2) change the ‘accommodative’ stance to ‘neutral’; effectively indicating that the rate cut cycle is officially over, and/or (3) reduce the repo and reverse repo corridor to 50 bps from 65 bps currently, (4) further withdrawal of liquidity to move short term rates towards the repo rate, and (5) raise the repo rate finally.
While it is difficult to time the process of normalization, we expect this to play out between 1QFY22E and 1HFY23E. Given our expected sequence of policy normalization, we expect rates to harden across the curve in FY2022, with the shorter end of the curve underperforming the far end, thereby resulting in some flattening of the curve. While the liquidity withdrawal is expected to weigh on short term rates, the far end is expected to remain under pressure given that we do not expect a sharp fiscal consolidation in FY2022. We expect the 10-year yield to inch higher towards 6.25%-6.5% in 2HFY22, given RBI’s increasing constraint in supporting bond markets due to huge FX related liquidity.
20 KOTAK ECONOMIC RESEARCH Economy India
External sector: broadly comfortable (risks increase in 2HFY22)
We expect the external sector metrics to remain comfortable through most of FY2022E. Assuming (1) average crude prices of US$45/bbl, and (2) easy DM monetary policy (DXY weakness continuing), capital flows into India should ensure a large BOP surplus. With the recovery in domestic economic activity, we expect current account to return to a marginal deficit of around US$12.1 bn (0.4% of GDP) in FY2022E as against a surplus of US$17.4 bn (0.7% of GDP) in FY2021E (Exhibit 30). While global growth recovery will bode well for exports, a bigger adverse risk (mostly in 2HFY22) will be any sharp increase in crude prices (demand-led) and/or lower-than-expected capital flows depending on signals of global liquidity plateauing. We expect INR to trade with an appreciating bias through 1HFY22 (72- 75), although gains are expected to be capped through FX intervention by the RBI. With risks in the latter part of the year likely to weigh adversely on the external sector balance, we expect the range to shift towards 74-77, with any sharp depreciation getting capped by RBI’s enormous FX buffer.
Exhibit 30: BOP to remain comfortable in FY2022E India's balance of payments, March fiscal year-ends, 2016-22E (US$ bn)
2021E 2022E 2017 2018 2019 2020 Oil@35/bbl Oil@40/bbl Oil@45/bbl Oil@35/bbl Oil@45/bbl Oil@55/bbl Current account (14.4) (48.7) (57.3) (24.7) 13.9 17.4 10.8 (3.6) (12.1) (24.0) GDP 2,290 2,653 2,715 2,868 2,570 2,570 2,570 2,932 2,932 2,932 CAD/GDP (%) (0.6) (1.8) (2.1) (0.9) 0.5 0.7 0.4 (0.1) (0.4) (0.8) Trade balance (112) (160) (180) (158) (91) (98) (104) (118) (133) (148) Trade balance/GDP (%) (4.9) (6.0) (6.6) (5.5) (3.5) (3.8) (4.1) (4.0) (4.5) (5.1) - Exports 280 309 337 320 283 286 288 300 305 310 - oil exports 32 37 47 41 32 34 37 32 37 42 - non-oil exports 249 272 291 279 251 251 251 268 268 268 - Imports 393 469 518 478 374 383 392 418 438 458 - oil imports 87 109 141 131 69 78 87 76 96 116 - non-oil imports 306 360 377 347 306 306 306 342 342 342 - gold imports 34 33 33 28 21 21 21 28 28 28 Invisibles (net) 98 111 123 133 105 115 115 114 121 124 - Services 68 78 82 85 82 82 82 86 86 86 - software 71 72 78 85 82 82 82 86 86 86 - non-software (2.4) 5.4 4.3 0.3 0.0 0.0 0.0 0.0 0.0 0.0 - Transfers 56 62 70 75 55 65 65 60 67 70 - Income (net) (26) (29) (29) (27) (32) (32) (32) (32) (32) (32) Capital account 36 91 54 83 79 79 79 70 70 70 Percentage of GDP 1.6 3.4 2.0 2.9 3.1 3.1 3.1 2.4 2.4 2.4 Foreign investment 43 52 30 44 66 66 66 55 55 55 - FDI 36 30 31 43 50 50 50 40 40 40 - FPI 8 22 (1) 1 16 16 16 15 15 15 - Equities 8 2 3 0 18 18 18 10 10 10 - Debt (1) 21 (4) 1 (2) (2) (2) 5 5 5 - ADRs/GDRs 0 0 2 0 0 Banking capital (17) 16 7 (5) 5 5 5 5 5 5 - NRI deposits (12) 10 10 9 10 10 10 10 10 10 Short-term credit 6 14 2 (1) 0 0 0 2 2 2 ECBs (6) (0) 10 23 5 5 5 5 5 5 External assistance 2 3 3 4 2 2 2 2 2 2 Other capital account items 8 6 1 18 1 1 1 1 1 1 E&O (0) 1 (0) 1 — — — — — — Overall balance 21.6 43.6 (3.3) 59.5 92.9 96.4 89.8 66.4 57.9 46.0 Memo items RBI's FX intervention Average USD/INR 67.2 64.5 69.9 70.9 74.3 74.3 74.3 74.1 74.1 74.1 Average Brent (US$/bbl) 49.0 57.6 70.0 60.9 35.0 40.0 45.0 35.0 45.0 55.0
Source: RBI, Kotak Economic Research estimates
KOTAK ECONOMIC RESEARCH 21 India Economy
Trade balance. We expect a global economic recovery in CY2021, which should push exports growth to around 7% with non-oil export growth at 7%. Import growth is likely to outpace exports growth in FY2022E given the sharper deceleration in import in FY2021 and continuing recovery in economic activity. We expect an import growth of 14% with non-oil import growth at 12%. Overall, we expect FY2022E trade deficit to be higher at US$133 bn against US$98 bn in FY2021E.
Capital flows. Given our base assumption of continuing an easy DM monetary policy (implying DXY weakness) we expect the capital flows to remain favorable, at least in 1HFY22, where (1) vaccine-related euphoria, (2) global accommodative policy stance, and (3) recovery in economic activity will aid capital flows. Risks to overall capital flows may, however, start manifesting sometime in 2HFY22 when central banks may start signaling withdrawal of stimulus after economic activity normalizes. Central banks may begin to taper the aggressive asset purchases which may have repercussions for capital flows to EMs. Overall, we estimate that the combined balance sheets of Fed, ECB and BoJ may expand by around US$3.7 tn by the end of CY2022 as against US$7.8 tn in CY2021 (Exhibit 31). Factoring these trends, we expect BOP surplus to remain comfortable at US$57.9 bn in FY2022E against US$96.4 bn in FY2021E.
Exhibit 31: Central bank balance sheet will continue to expand in CY2022E Net change in balance sheet size of DM central banks, December calendar year-ends, 2007-21E (US$ bn)
Fed ECB BoJ Total 8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
(1,000)
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020E 2021E (2,000)
Source:
INR outlook. Our base case for INR outlook is shaped by continued capital flows on the back of (1) sustenance of capital flows for the major part of CY2021 on the back of easy DM monetary policy, and (2) risk-on flows given the global economic recovery. In this scenario we expect the RBI to continue mopping up the FX flows (through spot and forwards) to keep the INR anchored in the range of 72-77 against the USD (Exhibit 32). We expect INR to trade with an appreciating bias through 1HFY22 (72-75), although gains are expected to be capped through FX intervention by the RBI. With risks in the latter part of the year likely to weigh adversely on the external sector balance, we expect the range to shift towards 74-77, with any sharp depreciation getting capped by RBI’s enormous FX buffer.
22 KOTAK ECONOMIC RESEARCH Economy India
Exhibit 32: INR likely to range between 72-77 against USD through CY2021/FY2022 Trend and estimates of INR and major currencies against USD, March fiscal year-ends (X)
2020 2021E 2022E 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21E 4QFY21E 1QFY22E 2QFY22E 3QFY22E 4QFY22E Average Rate USD/INR 70.9 74.3 74.1 69.6 70.4 71.2 72.4 75.9 74.37 73.75 73.25 73.00 73.25 74.75 75.50 EUR/USD 1.11 1.14 1.19 1.12 1.11 1.11 1.10 1.10 1.11 1.15 1.20 1.21 1.20 1.18 1.16 GBP/USD 1.27 1.30 1.30 1.29 1.23 1.29 1.28 1.24 1.29 1.32 1.35 1.33 1.30 1.28 1.28 USD/JPY 108.7 106.3 111.00 110.0 107.3 108.7 109.0 107.5 106.1 104.5 107.0 108.0 110.0 112.0 114.0 Depreciation (-)/appreciation (+) against USD (%) INR (1.4) (4.6) 0.3 1.2 (1.1) (1.2) (1.6) (4.6) 2.0 0.8 0.7 0.3 (0.3) (2.0) (1.0) EUR (4.1) 2.7 4.0 (1.1) (1.0) (0.5) (0.4) (0.1) 1.3 3.1 4.3 0.8 (0.8) (1.7) (1.7) GBP (3.2) 2.3 (0.3) (1.3) (4.1) 4.4 (0.6) (3.0) 4.1 2.1 2.3 (1.5) (2.3) (1.5) 0.0 JPY 1.9 2.3 4.4 0.2 2.5 (1.3) (0.2) 1.3 1.3 1.6 (2.3) (0.9) (1.8) (1.8) (1.8)
Source: Bloomberg, Kotak Economics Research estimates
KOTAK ECONOMIC RESEARCH 23 Company Report Internet Software & Services CAUTIOUS Sector December 14, 2020 THEME
BSE-30: 46,099 India e-commerce: the race for leadership. The Indian e-commerce industry is attractively poised driven by: (1) rising adoption of e-commerce particularly post- Covid, (2) continuous capital infusion by extant players and entry of new players (JioMart) also backed by a large sum of capital, and (3) increased omni-channel initiatives. There may be space for more than one player to eventually turn profitable; the leader would not only require capital but would also need to solve India’s supply- chain challenges and be compliant with the spirit of regulations (if the player is foreign-owned). We peg India’s total e-tail GMV at US$270 bn for FY2030 and US$800 bn for FY2040, and value the industry currently at US$120 bn.
India e-commerce: multiple players backed by huge capital chasing market leadership
The Indian e-commerce industry is interestingly poised as it promises to become significantly larger over the next 10 years driven by rising internet penetration and greater propensity to shop online post-Covid. Market growth will be spurred by incumbents such as Amazon and Flipkart who continue to pump money in order to grow the market as well as new competitors such as JioMart who will seek to gain share. Besides customer acquisition, we believe supply chain (warehousing and last mile delivery) and merchandising (particularly as focus on under- penetrated segments such as grocery increases) may also see elevated investments.
India e-commerce is a large market in the making
We estimate India’s e-commerce market to attain GMV of US$270 bn by FY2030 and US$800 bn by FY2040 compared to US$31 bn in FY2020. At scale, Indian e-commerce businesses can generate decent profits, as evidenced by Amazon’s North America e-commerce business (6% adjusted EBITDA margin in CY2019) and Alibaba (2.5% EBITDA margin in FY2020). We believe Indian e-commerce companies can also attain profitability over the next few years as they attain scale and competitive intensity recedes. Assuming steady increase in margins leading to terminal year EBITDA margin of 7%, we compute fair value of Indian e-commerce industry at US$120 bn. There may be upside to this estimate as extant players exploit new, innovative ways to monetize their user base (payments, services, media, etc.).
Grocery e-tail: key focus area for all horizontal retailers Garima Mishra
With food and grocery contributing 67% of India’s overall retail consumption, grocery e-tail is Kawaljeet Saluja a big focus area for horizontal e-commerce players. Amazon has adopted multiple delivery
models and taken a lead in this segment; Flipkart intends to catch up as it now has Walmart’s B2B assets with it while RR has launched in 200 cities and seeks to acquire customers by Shubhangi Nigam offering attractive deals. This segment may also see M&A as horizontal players may acquire vertical players to attain market leadership.
Brick-and-mortar retailers: establishing omni-channel capabilities is the way forward
Covid is driving an increasing number of customers to explore online shopping. All retailers, in our view, will need to tweak their selling strategies by treating online not merely as a discount channel but as a regular sale channel. Retailers would thus need to: (1) revamp supply chain systems such that e-commerce and offline channels are synced and inventory can move between the two seamlessly, (2) invest in own website and over time reduce dependence on [email protected] Contact: +91 22 6218 6427 marketplaces, and (3) invest in data analytics. Apparel retailers like ABFRL, TCNS, TRENT are already ramping up their omni-channel presence. Companies such as Dmart are also increasing the coverage of their e-commerce offering, though need to up the pace of transformation.
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Sector Internet Software & Services
INDIA E-TAIL: LONG RUNWAY FOR GROWTH India’s e-tail story is just getting started – at ~US$30 bn of GMV posted in FY2020 (accounting for 3% of total retail merchandise sales), we believe this segment of the market can grow at elevated CAGR for several years. Several enablers such as increasing smartphone penetration and cheap data costs are already in place and will drive buyer penetration. Capital is the other resource that typically drives e-commerce adoption; both Indian (primarily Reliance Retail) and foreign-backed (Flipkart, Amazon India) players have brought in the necessary funds to drive increased adoption and create the necessary infrastructure.
E-commerce in India set to pick up pace
India’s retail market is highly unorganized and while penetration of organized retail has been on the rise, several categories such as food and grocery and apparel offer a long runway of growth to organized retailers. These categories currently have low penetration of e- commerce, and with the right focus, innovation and investments can drive growth for a long period of time for at least a few players operating in India.
Exhibit 1: Food and grocery is the largest category but the least penetrated by organized retail Snapshot of India’s retail market, March fiscal year-ends, 2017-30E (US$ bn)
2017 2020E 2025E 2030E Nominal GDP 2,464 3,555 5,990 9,648 Private consumption 1,454 2,062 3,634 5,853 Private consumption as proportion of GDP (%) 59 58 61 61 Merchandise retail 710 990 1,708 2,751 Merchandise retail as proportion of private consumption (%) 49 48 47 47 Organized retail 67 119 256 523 Organized retail as proportion of retail (%) 9 12 15 19 Category-wise size of retail Food and grocery 474 659 1,126 1,769 Apparel and accessories 56 79 139 234 Jewelry and watches 55 77 136 229 Consumer electronics 42 59 104 175 Home and living 31 44 77 129 Others 23 32 57 96 Pharmacy and wellness 21 30 52 88 Foot apparel 8 10 18 30 Total 710 990 1,708 2,751 Category-wise contribution to overall retail (%) Food and grocery 67 67 66 64 Apparel and accessories 8 8 8 8 Jewelry and watches 8 8 8 8 Consumer electronics 6 6 6 6 Home and living 4 4 4 5 Others 3 3 3 3 Pharmacy and wellness 3 3 3 3 Foot apparel 1 1 1 1 Total 100 100 100 100 Penetration of organized retail (%) Food and grocery 3 6 Apparel and accessories 24 36 Jewelry and watches 28 35 Consumer electronics 27 30 Home and living 11 13 Others 13 15 Pharmacy and wellness 11 20 Foot apparel 27 34
Source: Technopak, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 3
Internet Software & Services Sector
We value the Indian e-tail industry at US$120 bn
In order to value the Indian e-tail industry, we assume: (1) GMV of US$270 bn by FY2030 and US$800 bn by FY2040, (2) steady improvement in EBITDA margins leading to terminal year margin of 7% and (3) terminal growth rate of 6%. Our DCF analysis yields valuation of US$120 bn as of December 2021 for the Indian e-tail industry. We believe there may be upsides to this valuation as e-tailers find new and innovative ways of monetizing their customer base (value added services, fin-tech, media and streaming services, etc.)
Exhibit 2: We peg the valuation of the Indian e-commerce industry at US$120 bn Key assumptions for e-commerce industry valuation, March fiscal year-ends
GMV of India's e-tail market in FY2040 (US$ bn) 800 Terminal year (FY2040) EBITDA margin (%) 7.0 Terminal growth rate assumed (%) 6.0 DCF-based valuation of e-tail market (US$ bn) 121
Source: Kotak Institutional Equities estimates
Our EBITDA margin assumption is line with the ~7% margin that Amazon is currently making in its North America e-commerce business (we compute this as a proportion of estimated GMV, not reported revenues). We assume that Indian e-tailers would be able to make similar margins by FY2040; this would imply a large aggregate profit pool of US$56 bn in FY2040. Our DCF analysis imputes FY2040 EV/EBITDA multiple of 18X; reasonable in the context of the large growth potential of this industry.
Exhibit 3: E-tail industry has EBITDA potential of US$56 bn by FY2040 Valuation analysis of Indian e-tail industry, March fiscal year-ends, 2040
FY2040 GMV of India's e-tail market (US$ bn) 800 Terminal year (FY2040) EBITDA margin (%) 7 Estimated EBITDA pool of e-tailers (US$ bn) 56 EV/EBITDA multiple ascribed (X) 18 March 2040 EV (US$ bn) 992 EV discounted back to December 2022 (US$ bn) 120
Source: Kotak Institutional Equities estimates
We believe e-commerce adoption in India is set to accelerate as: (1) internet adoption is fairly high and buyer penetration is steadily improving, and (2) large companies continue to deploy an increasing amount of capital in their India businesses to expand the market and change consumers’ habits in favor of e-commerce.
Internet and smartphone adoption: still some way to go
India’s internet penetration as of March 2020 was pegged at 55%, and while it has increased meaningfully from 24% as of March 2015, it is still lower than 63% in China and 95% in the US. We believe internet penetration would steadily increase over time as cheap data plans draw in more subscribers, and penetration in rural India improves.
4 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Sector Internet Software & Services
Exhibit 4: India’s internet penetration risen substantially over the past five years India internet penetration, March fiscal year-ends, 2015-2020E (%)
(%) India's Internet penetration (%) 60 55 49 50
38 40 33
30 27 24
20
10
- 2015 2016 2017 2018 2019 2020E
Source: TRAI, Kotak Institutional Equities
Exhibit 5: India lags US and China in internet penetration levels Country-wise internet penetration levels, December calendar year-ends, 2015-2019 (%)
(%) Internet user penetration (%) 100 India China US 90 95 89 90 80 88 88 70 60 63 59 50 56 53 55 50 40 49 30 38 33 20 27 10 - 2015 2016 2017 2018 2019 Notes: (a) India data is for fiscal year ending March 2016-20.
Source: TRAI, World Bank, Statista, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 5
Internet Software & Services Sector
Exhibit 6: Number of online shoppers significantly lag internet users and can rise substantially Categorization of the Indian online user by use case, December calendar year-end, 2020E
Number of users (mn)
Product transactors 105
Service transactions 180
Video content 302.5
Chatting and social media 360
Internet users 625
0 100 200 300 400 500 600 700
Source: Flipkart, Bain & Company, Kotak Institutional Equities
Covid has also accelerated e-commerce adoption
Covid, in our view, has been another driver of e-tail demand. Consumers have been reluctant during this period to venture out to stores, and have become more comfortable ordering products online and getting those delivered at home. For instance, offline food and grocery player such as Reliance Retail, Avenue Supermarts and Spencers’ posted sequential declines in revenues in 1QFY21; online retailers such as BigBasket and Grofers saw a meaningful spike in orders. While customer walk-ins to brick-and-mortar stores may revive as stores are permitted to open, we believe order intensity at e-commerce platforms may still exceed pre-Covid levels. In this context, it will become imperative for large retailers to have a complementary e- commerce strategy
Exhibit 7: Sharp spike in post-Covid daily order run rates for online grocery e-tailers Daily orders delivered by grocery e-tailers (000s per day)
Order run-rate (per day) Pre-Covid Post-Covid Big Basket 150 283 Grofers 100 190 JioMart — 250
Source: Companies, Media reports, Kotak Institutional Equities
6 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Sector Internet Software & Services
INDIA E-TAIL MARKET COULD ACHIEVE A SIZE OF US$270 BN BY FY2030 Drivers such as rising internet penetration, increased propensity to spend online as well as ever-increasing online product assortment at prices equal to or cheaper than offline format will drive e-tail penetration in India. We believe the Indian e-tail market could grow at a CAGR of 31% during FY2020-25 to reach a size of US$117 bn and at a CAGR of 18% during FY2025-30 to reach a size of US$270 bn by FY2030.
Long runway of growth for organized retailers in India
India’s retail market is highly unorganized and while penetration of organized retail has been on the rise, several categories such as food and grocery and apparel offer a long runway of growth to organized retailers.
Exhibit 8: India can potentially become a US$1.7 tn merchandise retail market by FY2025 Consumption and retail metrics of India, March fiscal year-ends, 2017-30E
2020-25 CAGR 2025-30 CAGR 2017 2020E 2025E 2030E (%) (%) Nominal GDP 2,464 3,555 5,990 9,648 11 10 Private consumption 1,454 2,062 3,634 5,853 12 10 Private consumption as proportion of GDP (%) 59 58 61 61 Merchandise retail 710 990 1,708 2,751 12 10 Merchandise retail as proportion of private consumption (%) 49 48 47 47 Organized retail 67 119 256 523 17 15 Organized retail as proportion of retail (%) 9 12 15 19
Source: Company, Kotak Institutional Equities estimates
We expect Indian e-tail market to attain GMV of US$270 bn by FY2030
We believe Indian online retail GMV could nearly quadruple from US$30 bn in FY2020 to reach US$117 bn by FY2025 and increase further to US$270 bn by FY2030, providing a fair amount of growth runway for existing and potentially new players. This growth in online retail will be driven by rising internet penetration, improving buyer penetration and higher online spends per shopper as online merchandise assortment improves and the propensity to shop online increases (for reasons such as ease of purchase, return, payment).
Exhibit 9: Improving buyer penetration and spends will drive e-commerce market size to US$270 bn by FY2030 Estimated size of e-commerce market, March fiscal year-ends, 2015-30E
2020-25 CAGR 2025-30 CAGR 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2030E (%) (%) Population (mn) 1,257 1,269 1,281 1,293 1,305 1,318 1,330 1,343 1,354 1,367 1,380 1,422 0.9 0.6 Internet penetration (%) 24 27 33 38 49 55 60 64 67 70 73 78 Internet population (mn) 302 343 422 494 637 725 798 859 907 957 1,007 1,109 6.8 1.9 Number of online shoppers (mn) 30 40 50 69 96 120 144 173 200 230 263 378 16.9 7.5 Buyer penetration (%) 10 12 12 14 15 17 18 20 22 24 26 34 Online money spent (Rs) 8,015 11,307 12,437 14,303 16,448 18,093 20,807 23,720 26,804 30,020 33,323 53,666 13.0 10.0 Yoy increase in online spend (%) 148 41 10 15 15 10 15 14 13 12 11 10 Total e-tail market size (Rs bn) 240 452 623 980 1,579 2,173 3,001 4,092 5,367 6,915 8,752 20,279 32 18 Total e-tail market size (US$ bn) 4 7 9 15 23 31 40 55 72 92 117 270 30.6 18.3 Yoy growth (%) 76 34 64 49 36 30 37 31 29 27
Source: IAMAI, Census 2011, TRAI, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 7
Internet Software & Services Sector
Apparel and food and grocery categories: significant scope for e-commerce to gain share
Unlike the US and China which have large absolute consumption of categories such as electronics, apparel and home furnishing and appliances, size of such categories is relatively small in India, and some of these such as electronics are already well-penetrated by e- commerce. It will thus be imperative for e-commerce companies to penetrate categories such as apparel and food which are large in size and have a high proportion of unorganized retail.
Exhibit 10: Low penetration of organized retail in food and grocery and apparel offers opportunity Category-wise market size and unorganized sales in India, December calendar year-end, 2020E (US$ bn)
(US$ bn) Unorganized retail Total retail market size 700 659 619 600
500
400
300
200
79 100 50
- Food and grocery Apparel and accessories
Source: Industry discussions, Kotak Institutional Equities estimates
During FY2020-30, we expect categories such as food and grocery, apparel and furniture and homeware to grow faster than hitherto large categories such as mobile phones, electronics and other accessories.
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Sector Internet Software & Services
Exhibit 11: Grocery will be the fastest growing e-commerce category over the next 5-10 years Category-wise estimation of e-commerce market size, March fiscal year-ends
2020 2025E 2030E 2020-25E CAGR 2025-30E CAGR (US$ bn) (US$ bn) (US$ bn) (%) (%) Category-wise size of e-tail market (US$ bn) Mobile phones, electronics and appliances 13 36 79 22 17 Apparel 6 17 37 25 17 FMCG + grocery 3 23 70 50 25 Furniture and homeware 1 3 7 40 17 Others 8 38 78 36 16 Total 31 117 270 31 18 As proportion of total e-commerce (%) Mobile phones, electronics and appliances 43 31 29 Apparel 18 14 14 FMCG + grocery 10 20 26 Furniture and homeware 2 3 3 Others 27 33 29 Total 100 100 100 As proportion of overall category retail size (%) Mobile phones, electronics and appliances 23 35 45 Apparel 7 12 16 FMCG + grocery 0 2 4 Furniture and homeware 1 4 5 Others 6 14 18 Total e-tail as proportion of retail 3 7 10 Overall retail category size (US$ bn) Mobile phones, electronics and appliances 59 104 175 12 11 Apparel 79 139 234 12 11 FMCG + grocery 659 1,126 1,769 11 9 Furniture and homeware 44 77 129 12 11 Others 150 263 443 12 11 Total 990 1,708 2,751 12 10 Notes: (a) Others includes health, eyewear, luxury, toys and games.
Source: Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 9
Internet Software & Services Sector
Exhibit 12: Electronics, mobiles, appliances, apparel are some of the highest-penetration e-commerce categories in China and US Category-wise e-commerce penetration in China and US, December calendar year-end, 2019 (%)
E-commerce penetration (%) China US
44% Mobile & accessories 14% 34% Apparel 26% 45% TV & appliances 20% 15% FMCG 6% 5% Grocery 5% 55% Computer & IT peripherals 48% 11% Furniture 15% 18% Homeware 19% 25% Others 22%
0% 10% 20% 30% 40% 50% 60% Notes: (a) Others include health, eyewear, luxury, toys and games.
Source: A&M-CII 2020 report, Kotak Institutional Equities estimates
10 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Sector Internet Software & Services
OMNI-CHANNEL WILL BE THE WAY FORWARD FOR LARGE HORIZONTAL PLAYERS The omni-channel strategy enabling retailers to be present across both online and offline channels will be important for platforms to remain relevant across various categories of consumers. Omni-channel will also be important for better utilization of a company’s supply chain, reduce risk of stock-outs, offer differentiated shopping experience and in certain cases to cross-sell different products sold by the platform. Amazon and Flipkart in India are steadily acquiring stakes and/or forging new partnerships with offline retailers in order to further their omni-channel strategy. Reliance Retail is relatively new (or small) in the e-tail space but its large offline network of 3,562 retail stores (ex-Jio points) can provide it with difficult-to-replicate advantages.
Large global e-commerce companies may have emerged first as online-only platforms, however, they have also been investing into offline assets, highlighting the importance of having presence across channels. E-commerce players such as Amazon and Flipkart are working on their offline retail strategies in India. Globally, similar strategies are being followed by Amazon and Alibaba to fine-tune their O2O (online-to-offline) strategy.
Amazon India – picking up stakes in Indian retailers
Amazon India has picked up stakes in three offline retailers, Future Group, More Retail and Shoppers Stop (its Future Group stake may not be relevant now that Reliance Retail is in the process of acquiring retail assets of Future Group on a slump sale basis). We believe Amazon has done this with a view to improve its offline supply chain and to get exclusive access to products of these chains to offer online. Further, Amazon also wants to utilize the offline footprint of these stores to push its own private labels: AmazonBasics—products include ACs, HDMI cables, batteries and cables, home necessities and general merchandise and apparel labels—Prowl and Just F. Amazon may use these stores to retail its grocery brands in the future as well.
Apart from this, its recently launched ‘Local Shops on Amazon’ initiative is to enable offline stores to do more business through their platform. It has already signed up over 5,000 offline shops, including large retailers such as Tata’s Croma as sellers on its platform. Offline stores will have options to ship orders themselves, or via third-party logistics or through Amazon’s fulfillment channel.
Smart Stores launched by Amazon Pay allows customers to scan QR codes to explore products within offline stores and pay for them using various payment instruments. It will provide own credit facility under the ‘buy now, pay later’ scheme. Smart Stores will also expose product listings on the app, allowing customers to see their details and reviews.
Flipkart: partnering with local stores to ramp up its grocery sales
Flipkart has partnered with 37,000 kirana stores to leverage their network and to have last- mile relationship with customers. It has launched ‘Flipkart Wholesale’, a B2B marketplace for small shops that has started supplying apparel in Bengaluru, Delhi, and Gurugram. It will take up grocery supply shortly.
In addition, Flipkart has also acquired Walmart India’s wholesale business that operates 28 Best Price cash and carry stores. Walmart’s India wholesale business revenues stand at Rs49 bn in FY2020; our sense is that Flipkart would selectively expand this network in order to cater to shops in high-consumption areas (metro and Tier-I cities).
Flipkart has also recently partnered with retail chains like Spencers and Vishal Mega Mart to enable hyperlocal deliveries of groceries and essentials in various cities.
It has partnered with Authentic Brands to license and distribute fashion brand Nautica in India. As a part of the agreement, Flipkart will manage Nautica’s online and offline businesses in the country through a network of franchisees. Nautica currently has more than 40 retail stores in India.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 11
Internet Software & Services Sector
Alibaba: rapidly developing its offline network in China Alibaba has a majority stake in brick-and-mortar retailer Intime. It has also invested in Hema, a 150-unit grocery chain in 21 Chinese cities. Hema seamlessly integrates physical store conveniences with digital tools, Hema has been called ‘the most futuristic retailer’ in the world. Hema offers free 30-minute deliveries of fresh produces within a radius of 3 kilometers from stores. Hema is the only Chinese supermarket chain operating both online and offline channels; it virtually dominates Chinese online grocery scene. Its business has been gaining steam during the Covid-19 crisis, with its sales more than tripling. Alibaba Group also has acquired 36% of Sun Art Retail Group, which operate nearly 400 hypermarkets under the Auchan and RT-Mart banners. Per the agreement, Alibaba would share its Digital commerce technology and insights of consumer trends with RT Mart to expedite its digitization, sync its online and offline operations, improve its in-store layout and increase efficiencies in the grocer’s inventory management. As part the digital makeover, RT-Mart gains access to Alibaba’s customer insights, supply- chain management, retail technologies and electronic payments via Alipay. RIL – bringing kiranas under its fold While the proportion of modern trade has been on the rise, we believe RIL would want to integrate its Reliance Market offering with its network of kirana stores, thereby disintermediating the existing value chain (company – distributor – wholesaler – stockist – retailer). We believe this business can be an important feeder to the digital commerce business and can significantly aid supply aggregation in a fragmented market. RR’s intent to launch its distribution service on a large scale can help it amass sizeable revenues. RR will need to establish a virtuous cycle by offering consistently low-priced products to shops, the widest variety while at the same time negotiating for best prices with FMCG companies and other large producers. As discussed above, RR has several private labels in its grocery retail business. It can push these private labels on a large scale through this channel and ultimately to customers ordering products online. This business is currently in a trial phase and we expect it to be gradually ramped up, in sync with JioMart online. We note that apart from RIL, there are others also who are trying to modernize the kiranas and seeking to integrate their supply chain by taking over their B2B needs. Physical versus digital retail: margin analysis Physical and digital retail margin structures can be different at different scale of operations. The key difference between the two retail channels is customer acquisition cost (CAC). In our view, an offline retailer will incur costs such as rent and ad-spends as CAC, while an online retailer will incur costs in the form of initial discounts, delivery cost, ad-spends, website/app development and customer service. In general, we reckon an online retailer will need a large scale of revenues to break-even such that delivery costs could come down (many to many deliveries versus one to many deliveries), and other fixed costs of website development and ad-spends can be amortized over a wider set of customers. Compared to this, a brick-and-mortar retailer may break-even at a smaller scale of operations (a single store operator may also be profitable) provided its merchandise finds customer appeal and it is able to generate a decent store throughput. Online retailers however may benefit eventually from economies of scale, the propensity to generate very high levels of revenue (they are not constrained by physical store space, timings of operations and even selection of merchandise though there may be constraints from a delivery infrastructure perspective). As seen below, successful US retailers such as Walmart and Costco make 4-5% EBIT margin. Amazon in its North America e-commerce business also generates similar EBIT margin (calculated on GMV). Note that Amazon’s model is hybrid in nature (both inventory-led and marketplace model) and hence calculation of margins on reported revenues can be a tad misleading. JD.com, the China-based competitor to Alibaba has a predominantly inventory- led model. High competitive intensity has driven low gross margins (possibly on account of price discounts) as well as high CAC leading to near break-even margins.
12 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Sector Internet Software & Services
Exhibit 13: Walmart generates EBIT margins of 3-4% Exhibit 14: Costco’s EBIT margin profile has been fairly Historical margin profile of Walmart, January fiscal year-ends (%) consistent at 3% Historical margin profile of Costco, September fiscal year-ends (%)
(%) Cost of sales Operating, selling, G&A EBIT margin (%) Cost of sales Operating, selling, G&A EBIT margin 3 3 100 3 4 3 4 4 100 3 3 3
80 80
60 60
40 40
20 20
- - 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019
Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities
Exhibit 15: Amazon’s e-commerce business margins are similar Exhibit 16: JD.com’s EBIT margins at near break-even levels to its successful brick-and-mortar peers Historical margin profile of JD.com, December calendar year-ends (%) Historical margin profile of Amazon’s North America e-commerce business, December calendar year-ends (%) (%) Cost of revenues Fulfillment Marketing (%) Adjusted EBIT margin (%) R&D G&A EBIT margin 6.0 100 1
4.9 5.0 80 4.3 4.0 60 3.2 3.2 3.0 2.7 40
20 2.0 1.5
1.0 - (1) (0) (0) (1) 2015 2016 2017 2018 2019
- (20) 2014 2015 2016 2017 2018 2019 Source: Company, Kotak Institutional Equities Notes: (a) Margins calculated on estimated GMVs for the North American e- commerce business and adjusted for estimated share-based compensation.
Source: Company, Kotak Institutional Equities
Eventually, we expect margins of physical and online retailers to converge: (1) for the same product there should be little price arbitrage between the two channels, (2) CAC + delivery cost incurred by an online retailer should equal cost of rent + advertising by an offline retailer. Further, most large retailers will evolve an omni-channel strategy driving further margin convergence between the two channels.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 13
Internet Software & Services Sector
Varied e-commerce models prevalent globally; India will evolve as a hybrid model
Several different e-commerce models are prevalent globally with varied levels of success. Amazon in the US started off as a largely inventory-led model (implying the company would buy its own inventory, stock it, and then sell it to end customers; it would bear the entire risk of buying and selling), but over a period of time opened its sale channel to third-party sellers also who could use Amazon’s platform to reach out to customers.
Exhibit 17: Third-party sellers have been contributing an increasing proportion of GMV to Amazon’s overall GMV Contribution of third-party sellers to Amazon’s overall GMV (%)
Amazon's third-party GMV as proportion of total GMV (%) 65
60
55
50
45
40
35
30
25 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: Company, Kotak Institutional Equities
Alibaba operates various marketplaces such as Tmall and Taobao. Tmall connects various large shops and brands with customers while Taobao caters to smaller merchants who want to sell products online. Overall, Alibaba has thrived on a marketplace model by connecting millions of buyers with sellers and generating large GMVs (US$945 bn in FY2020 and US$853 bn in FY2019).
We believe India will evolve into a hybrid model: Amazon and Flipkart will continue operations as large marketplaces while Reliance Retail will have a mix of inventory-led and marketplace models. As discussed in the next section, by virtue of being a domestic owned retailer, Reliance will have greater flexibility in adopting the model of its choice.
In our view, inventory-led model in general can provide better margins and control of shopping experience to customers, particularly in India where seller ecosystem as well as supply chain is relatively under-developed when compared to China and US (developed road infrastructure, massive seller base).
Note that Indian regulations pose no restrictions to B2B sales; we expect Amazon and Flipkart to develop large distribution businesses in India. Their customers may eventually list products on their respective marketplaces and thus these companies may also function with a hybrid model.
14 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Sector Internet Software & Services
Foreign retailers will likely continue operating as marketplaces
Retail is a widespread occupation in India with ~15 mn enterprises involved in the retail business and employing several more individuals. India’s laws regarding B2C retail (both online and offline) impose certain restrictions on foreign-owned entities. For instance, foreign entities cannot own more than 51% in multi-brand retail stores and they cannot carry out inventory-owned model of e-commerce.
The Indian online retail landscape is dominated by online marketplaces such as Flipkart and Amazon India – both majority foreign-held and hence cannot carry out B2C retail operations. Indian entities like Reliance Retail will have the flexibility to sell its own inventory, private labels and the like, unlike most extant players who can only be aggregators.
Regulations have tended to become stricter for foreign-owned e-commerce players, as local sellers have protested against large, company-owned sellers being active on marketplaces, effectively accusing marketplaces of buying and selling products.
A case in point is that of Flipkart, which was recently denied permission by the DPIIT (Department for Promotion of Industry and Internal Trade) to undertake a food retail business in India citing violation of marketplace model. Per DPIIT, a foreign-owned marketplace cannot be a seller on its own platform. However, rival Amazon already operates in the space through subsidiary Amazon Retail India (ARIPL); this may also be reviewed by DPIIT.
Further, the DPIIT in December 2018 had ruled that a foreign-owned ecommerce entity cannot exercise any control over inventory sold on its marketplace. Further, it also clarified that a seller would be deemed to be controlled by the e-commerce entity, if it purchased more than 25% of its inventory from group companies of the marketplace. We reckon this caused some amount of restructuring of group companies by Flipkart and Amazon in order to make their businesses compliant with regulations.
In April 2020, the government tweaked FDI policy, banning fresh investments from China through the automatic route. Chinese e-commerce companies such as Alibaba are large investors in Indian startups like Big Basket. The change in policy makes it mandatory for all Chinese investors to seek government approval before investing in Indian firms, which may affect further funding rounds in startups by Chinese investors.
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Internet Software & Services Sector
Exhibit 18: Government has restricted foreign investment in inventory led e-commerce and multi-brand retail Details of permitted foreign investment in Indian retail
Foreign investment cap (%) Government approval Comments Sale of products (other than food) 100 Automatic Retail sale via e-commerce is allowed. manufactured in India by the manufacturer Sale of food products manufactured in India 100 Government approval Retail sale via e-commerce is allowed.
Wholesale/cash and carry trader can also undertake single brand retail trading. Such traders will be mandated to maintain separate books of Cash and carry/wholesale trading including B2B 100 Automatic accounts for these two arms of the business and duly audited by the e-commerce statutory auditors. Government regulations have to be separately complied with by the respective business arms.
Such companies would engage only in B2B e-commerce and not in retail B2B e-commerce 100 Automatic trading, thus implying that existing restrictions on FDI in domestic trading would be applicable to ecommerce as well. Marketplace model of e-commerce means providing of an IT platform by an Market place model of e-commerce 100 Automatic e-commerce entity on a digital & electronic network to act as a facilitator between buyer and seller. Foreign-owned ecommerce entity cannot exercise any control over inventory sold on its marketplace. Foreign investment is not permitted in inventory-based model of e- Inventory model of e-commerce Not allowed commerce. For foreign investment beyond 51%, sourcing of 30% of the value of goods purchased be done from India preferably from MSMEs, in all sectors. The Automatic up to 49%; quantum of domestic sourcing will be self-certified by the company, to be Single brand product retail trading 100 government approval subsequently checked by statutory auditors. The procurement requirement is beyond this to be met in the first instance as an average five years total value of goods purchased beginning April 1 of the year of the commencement of the business. Thereafter it shall be met on an annual basis.
Multi brand retail trading 51 Government approval Minimum amount to be brought in as foreign investment is US$100 mn. At least 50% of the total foreign investment brought in the first tranche of US$100 mn shall be invested in 'back-end infrastructure' within three years.
Source: DPIIT, Kotak Institutional Equities
Existing e-commerce players have made significant investments to acquire users
India’s e-commerce landscape has till now been ruled by primarily foreign-capital backed start-ups, with Amazon’s Indian entity joining the fray. Pure-play Indian corporate-backed e- commerce players are very few (the likes of Tata Cliq) and none of these have managed to make a mark on the digital commerce landscape.
Online retailers in India have invested significantly and incurred large losses to fuel change in customers’ buying behavior. These losses have been on account of significant customer acquisition costs in the form of deals and discounts offered to customers as well as other costs such as free delivery. As shown below, losses incurred by extant Indian e-commerce players have increased meaningfully in the past few years. Until it gains scale, RIL may also incur some losses as it seeks to increase its share in the online retail pie.
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Sector Internet Software & Services
Exhibit 19: Several players in B2B and B2C e-commerce have raised substantial capital Snapshot of B2C and B2B players in the Indian e-commerce space
Last Total funds valuation raised Company Sub-category Key Owners / Investors round (US$ mn) B2C e-commerce Grocery Big Basket Grocery delivery Alibaba, Mirae, CDC Group, TR Capital, IFC, Abraaj Group, Sands Capital Apr-20 1,100 Grofers Grocery delivery Sequoia Capital, Softbank VF, ADIA, Bennette Coleman & Co., Tiger Global, KTB Ventures Nov-19 607 JioMart Grocery delivery Reliance Retail Spencers Online Grocery delivery RPG group Nature's Basket Grocery delivery RPG group Non-Grocery Amazon India Horizontal marketplace Amazon Inc Flipkart Horizontal marketplace Walmart Jul-20 8,900 Alibaba, Softbank, Nexus, Premji, Temasek, Bessemer, Saama Capital, Ru-Net Holdings, Recruit Snapdeal Horizontal marketplace Mar-17 2,088 Strategic Partners, Kalaari Capital, Intel Capital, Nexus Venture Partners, Others Myntra Apparel e-retail Walmart Ajio Apparel e-retail Reliance Retail Tata Cliq Apparel e-retail Tata Group Reliance Digital Electronics retail Reliance Retail Croma Electronics retail Tata Group Nykaa Beauty products marketplace Lighthouse, Max Ventures, Sharrp Ventures, TechPro Ventures, Steadview Capital Apr-20 100 Lenskart Eyewear retail Softbank VF, Lightbulb, Kedaara, Steadview, Chiratae, TPG, PI Opportunities, IFC Jul-20 460 Pepperfry Furniture marketplace Norwest Ventures, Pidilite, Zodius Technology, Goldman Sachs, Bertelsmann Feb-20 241 Urban Ladder Furniture marketplace Reliance Retail (Pending acquisition) Nov-20 115 Shopclues Horizontal marketplace Qoo10 Pte (Pending acquisition) Nov-19 275 B2B e-commerce DC Agarwal, Brijesh K Agrawal, , Intel Capital(Mauritius), Westbridge Crossover Fund, Amadeus DPF, IndiaMART Horizontal marketplace Accion Frontier Inclusion Mauritius Udaan Horizontal marketplace GGV Capital, Altimeter Capital, Tencent, Hillhouse Capital, DST Global, Lightspeed Ventures, Others Aug-19 871 ShopX FMCG marketplace Nandan Nilekani, Fungs Capital Holdings, Kewal Nohria Apr-20 56 Jumbotail Food-FMCG marketplace Nexus Ventures, Heron Rock fund, Kalaari, BNK Ventures, Capria Ventures Nov-19 36 Ninjacart Fresh produce marketplace Flipkart-Walmart, Trifecta Capital, Syngenta, Tiger Global, Qualcomm Ventures, Accel India Dec-19 194
Source: VCC Edge, Venture Intelligence, Tracxn, Press reports, Crunchbase, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 17
Internet Software & Services Sector
Exhibit 20: E-commerce players have made significant investments into acquiring customers Details of financial performance of key e-commerce players (including group companies), March fiscal year- ends (Rs mn)
2015 2016 2017 2018 2019 E-tail Flipkart group Revenues 104,376 157,889 180,000 271,682 404,525 PBT (26,286) (44,770) (42,515) (49,823) (81,137) Amazon India Revenues 22,931 74,268 168,608 262,647 306,389 PBT (17,539) (37,306) (50,383) (66,557) (68,231) Paytm E-commerce Revenues — — 72 7,442 8,928 PBT — — (136) (18,056) (11,714) Shopclues Revenues 773 1,780 1,800 2,713 2,041 PBT (1,014) (3,830) (3,471) (2,081) (686) Snapdeal Revenues 7,664 11,589 9,038 4,361 8,138 PBT (13,192) (29,600) (14,740) (2,566) (1,884) E-tail total Revenues 135,744 245,525 359,518 548,844 730,021 PBT (58,031) (115,505) (111,246) (139,084) (163,651) Notes: (a) Total revenues of various companies are not comparable given varying proportions of B2B sales.
Source: MCA, Kotak Institutional Equities
The e-commerce companies invest heavily in customer acquisition costs in the hope that once acquired the customer would consume a wide array of products and services from the same portal. For instance, a customer who has purchased a mobile phone from an e-com site, would purchase everything from grocery, apparel, books, etc. from the same. In addition, the customer would also consume other services such as video, flight booking, music, e-books, etc. from the same portal, thereby eventually helping the portal recover its initial customer acquisition cost and perhaps make money from the consumer.
Exhibit 21: Amazon and Flipkart have raced ahead in customer acquisition Total monthly mobile web and desktop visits (#, mn)
(#, mn) Amazon India Flipkart Snapdeal JioMart 350
292 300 281 289
243 240 250 225 221 215 200 207 200 186 158 150 110
100 72
50 13 17 16 14 12 12 5 0.6 0.9 1.9 2.1 1.6 1.7 - Apr'20 May'20 Jun'20 Jul'20 Aug'20 Sep'20 Oct'20
Source: SimilarWeb, Kotak Institutional Equities
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Sector Internet Software & Services
Snapshot of horizontal e-commerce players
Flipkart: among the two largest marketplaces in India
Launched in October 2007, Flipkart is one of India’s largest online marketplaces showcasing 80 mn products across 80+ categories. It has 100 mn+ registered users, 100,000 sellers and witnesses ~10 mn daily page visits. Per commentary from Walmart, Flipkart had 55 mn MAUs in 3QFY20, and was acquiring 3 mn new customers per month. It has consistently built its supply chain and currently has 21 technology-enabled warehouses that can enable 8 mn shipments a month.
Exhibit 22: Flipkart has steadily added products and services to its portfolio since its inception Timeline of Flipkart’s evolution into one of India’s leading marketplaces
Source: Company, Kotak Institutional Equities
Flipkart also owns Myntra platform which is a leading apparel and accessories marketplace in India. With the fashion offering on its own marketplace and India, we believe Flipkart is the online leader for fashion and apparel sales.
Flipkart is looking to steadily enhance its customer proposition by enhancing its product offering by investing in new partnerships, products as well as private labels.
Post-Covid trends. Flipkart is witnessing an increase in customer adoption of online shopping, and is attempting to make the buying experience easier for the first-time user. This is being done by increasing product assortment, enabling sellers with information on latest trends to fine-tune product offering and introducing fresh categories on its portal.
Specifically, Flipkart is seeing enhanced demand for: (1) consumer durables such as TVs, laptops and other items such as kitchen equipment, (2) furniture, especially low-ticket items that enable work-from-home, (3) hygiene products such as sanitizers and masks, and (4) health and wellness products; which has led to Flipkart launching its own health vertical.
Flipkart has private labels like Flipkart Smartbuy and Flipkart Supermart that bring grocery, general merchandise and essentials at value to consumers. In order to serve customers better, Flipkart is enhancing its private label portfolio actively and intends to launch 320 new products this year across FMCG, sports and fitness, baby care and some essentials. It also aims to add private label merchandise providing customers with affordable, high quality consumer durables like televisions, washing machines, refrigerators, and other technology products like IoT and streaming devices.
Flipkart is also tying up with well-known brands to offer differentiated products to consumers. For instance, it has the India license for international brands like Nokia and Motorola. It has launched 6 new Nokia Smart TVs for the Big Billion Days 2020 sale at affordable price points. With Motorola, it is bringing Smart Home Appliances including smart TVs, refrigerators, air-conditioners, and washing machines. These products are highly differentiated and pack features that are unavailable in mainstream brands.
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Internet Software & Services Sector
Flipkart Wholesale. In July 2020, the Flipkart Group announced the launch of Flipkart Wholesale, a digital marketplace aimed at transforming the kirana retail ecosystem. As part of this launch, the Group also announced the acquisition of 100% interest in Wal-Mart India Private Limited, which operates the Best Price cash-and-carry business, to leverage the strong wholesale capabilities of the company and enable growth for kiranas and MSMEs. Flipkart Wholesale focuses on meeting the needs of these small businesses by providing them with a wide selection at significant value, powered by technology, to bring convenience and ease to their operations. With Flipkart Wholesale, these small businesses in grocery, general merchandise or fashion will have one-stop access to an extensive selection of products. Offerings include attractive incentives, supplemented with data-driven recommendations for stock selection, delivered through a fast and reliable network to drive greater efficiencies and better margins. Flipkart Wholesale is starting operations with the Fashion category where 95% of products will be sourced locally. The platform is currently available for fashion retailers, especially footwear and apparel, in Gurugram, Delhi and Bengaluru, and soon to Mumbai as well. By the end of 2020, Flipkart Wholesale will have three categories—fashion (apparel, footwear and accessories), home furnishing, and grocery—and will look to expand to another 20 cities.
Exhibit 23: Flipkart Wholesale attempting to offer distributor services to SMEs Snapshot of Flipkart Wholesale’s offering
Source: Company, Kotak Institutional Equities
PhonePe. In 2016, Flipkart acquired PhonePe, a UPI-based payments app. PhonePe recorded more than 2 bn transactions on its app in 2019. Use cases of the app include: (1) money transfer, recharges, utility bill payments, (2) credit card bill payments, (3) buying 24K gold at real-time market prices, (4) online and offline merchant payments, and (5) purchasing financial products (MFs and insurance).
As of September 2020, PhonePe had 230 mn registered users, 90 mn MAUs, 13 mn merchants and US$225 bn of TPV.
It claims to be the only consumer app supporting all payment instruments such as UPI, credit/debit cards and third-party wallets.
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Sector Internet Software & Services
Exhibit 24: Flipkart has extensive investments in the Indian e-commerce and internet space Snapshot of Flipkart’s investments, 2012-2020
Deal value Acquired Valuation Date Target Business description Transaction type (US$ mn) stake (%) (US$ mn) November-20 Scapic Innovations VR-AR content platform M&A — 100.0 na November-20 Universal SportsBiz Sports products retail PE investment — na 163.0 November-20 Mech Mocha Game Studios Mobile gaming M&A — 100.0 30.0 October-20 Aditya Birla Fashion and Retail Apparel fashion M&A 203.9 7.8 2,614.1 October-20 63Ideas Infolabs (Ninjacart) B2B marketplace M&A 10.0 na 321.8 July-20 Arvind Youth Brands Apparel fashion M&A 34.8 27.0 128.8 December-19 63Ideas Infolabs (Ninjacart) B2B marketplace M&A 10.1 na 321.8 December-19 Shadowfax Technologies Logistics service provider PE investment 60.0 12.0 250.0 June-19 EasyRewardz Loyalty rewards marketplace PE investment 5.0 20.0 17.0 September-18 Upstream Commerce Data analytics solutions M&A — 100.0 na August-18 Liv AI AI (speech-to-text converter) M&A 40.0 100.0 40.0 February-18 Wildcraft India Apparel and accessories M&A 10.1 5.0 50.0 April-17 Mintkart India (eBay) Virtual auction and marketplace M&A 211.0 na na January-17 Tinystep Parenting social network PE investment 2.0 na 5.0 January-17 Wehive Technologies Virtual auction and marketplace PE investment 2.0 na na December-16 Zinka Logistics Online freight booking service PE investment 70.0 na 850.0 July-16 Wehive Technologies Virtual auction and marketplace PE investment 1.6 na na April-16 PhonePe Payments interface M&A — 100.0 7,000.0 December-15 MapmyIndia Digital mapping M&A 5.0 34.0 250.0 December-15 Zinka Logistics Online freight booking service PE investment 25.0 na 850.0 November-15 LeapMile Logistic (Qikpod) Locker service provider PE investment 9.0 na 22.0 September-15 Mech Mocha Game Studios Mobile gaming PE investment 1.0 na 30.0 September-15 FX Mart Payments interface M&A 6.8 na na September-15 WS Retail Services Internet retail M&A — na na July-15 Nestaway Online home rental PE investment 12.0 na 225.0 July-15 Zinka Logistics Logistics service provider PE investment 4.4 na na June-15 PhonePe Payments interface M&A — 100.0 7,000.0 June-15 Zapr-Red Brick Lane Marketing Marketing solutions PE investment 2.7 na 60.0 March-15 AdIquity Technologies Mobile advertising M&A 12.0 100.0 na January-15 DSYN Technologies IT consulting M&A — 100.0 na December-14 Wehive Technologies Virtual auction and marketplace PE investment 0.5 na na August-14 Kitpay Collection management services M&A — na na May-14 Myntra Designs Online fashion retailers M&A 285.6 100.0 1,000.0 February-13 WS Retail Internet retail M&A — na na February-12 Letsbuy Online electronics retailers M&A — 100.0 na Notes: (a) Total deal value in PE investments includes funds raised from other investors as well.
Source: VCCEdge, Tracxn, Media reports, Kotak Institutional Equities
Financials. Flipkart group incurred loss of Rs81 bn in FY2019. Bulk of these losses were incurred in the Flipkart marketplace (Flipkart Internet and Flipkart India) and PhonePe. Losses at Myntra seem to be stabilizing, while those at Ekart (its logistics arm) seem to be coming off. Losses may remain elevated for the next 2-3 years as competitive intensity remains high and Flipkart attempts to get new customers primarily from Tier II/III cities.
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Internet Software & Services Sector
Exhibit 25: Flipkart has various entities through which it operates the India business Details of financial performance of Flipkart (including group companies), March fiscal year-ends (Rs mn)
2015 2016 2017 2018 2019 E-tail Flipkart group Flipkart Internet Revenues 6,594 16,351 18,824 27,909 42,338 PBT (10,616) (23,057) (16,393) (11,594) (16,244) Flipkart India Revenues 90,322 128,180 152,644 214,387 305,712 PBT (8,267) (5,446) (2,447) (20,648) (38,353) Myntra Revenues 7,460 10,318 1,175 4,072 10,411 PBT (7,403) (8,165) (7,063) (4,983) (5,392) Ekart Revenues — 3,040 7,327 24,887 44,222 PBT — (8,102) (15,321) (5,001) (2,936) PhonePe Revenues — — 30 428 1,842 PBT — — (1,291) (7,597) (18,212) Flipkart Group total Revenues 104,376 157,889 180,000 271,682 404,525 PBT (26,286) (44,770) (42,515) (49,823) (81,137)
Source: MCA, Kotak Institutional Equities
Amazon India: gunning for market leadership
Amazon India launched its marketplace operations in India in 2013 in an attempt to garner market-share in a fast growing but largely unorganized retail market.
Per our understanding, Amazon is now neck-and-neck with Flipkart as far as GMV is concerned; we reckon both these marketplaces generated GMV of ~US$13-14 bn each in FY2020.
Over the years, Amazon has invested in supply chain infrastructure, seller education and onboarding as well as customer acquisition. It launched Amazon Prime in July 2016, in a bid to replicate its success with the platform in the US. Amazon is attempting to become a one- stop-shop, not only for retail needs of a consumer, but other needs such as video (Prime), payment solutions (Amazon Pay), smart devices (Alexa, Firestick and other proprietary products), and ticketing (by enabling train and air bookings).
Amazon recently launched ‘Local Shops’, offering shopkeepers and retailers with physical stores the ability to register to serve more customers from their local areas. Since launch, more than 11k sellers have enrolled in the program. In addition, Amazon introduced seller registration and account management services in Hindi to help businesses overcome language barriers. It is planning to deepen its vernacular offering in the future.
Amazon is also focusing on its private label offering and has already introduced various brands such as Solimo, Vedaka, Amazonbasics, Symbol, etc. With substantial user data generated on its portals, we believe Amazon will keep fine-tuning tis product offering to offer relevant products to customers.
In July 2020, Amazon announced a 20% increase in its warehousing capacity in India to 32 mn cu. ft. It now operates 60 fulfillment centres across 15 states. Amazon also recently launched ‘Receive centres’ that act as product collection points where sellers ship their products for further distribution across the Amazon FC network in India.
Like Flipkart, Amazon has also incurred significant losses in the past 4-5 years. Between FY2015-19, it has incurred accumulated losses of Rs240 bn.
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Sector Internet Software & Services
Exhibit 26: Amazon India has been investing steadily into its e-commerce business Details of financial performance of Flipkart (including group companies), March fiscal year-ends (Rs mn)
2015 2016 2017 2018 2019 E-tail Amazon India Amazon Seller Services Revenues 9,771 22,179 31,287 49,284 75,935 PBT (17,237) (36,799) (48,306) (62,872) (56,854) Cloudtail Revenues 11,391 45,870 56,888 71,488 89,404 PBT (311) (302) (267) (94) 448 Amazon Wholesale Revenues — 26 70,473 122,242 112,316 PBT — (232) 109 (1,314) (1,408) Amazon Transport Revenues 1,770 6,193 9,919 15,742 20,669 PBT 9 28 (140) (248) (216) Amazon Pay Revenues — — 41 3,891 8,065 PBT — — (1,779) (3,342) (11,608) Amazon India total Revenues 22,931 74,268 168,608 262,647 306,389
PBT (17,539) (37,306) (50,383) (66,557) (68,231)
Source: MCA, Kotak Institutional Equities
Reliance Retail: Looking to evolve from offline to online
RIL’s accelerated expansion in the offline retail business over the past few years followed by its recent foray into digital commerce via JioMart sets the stage for it to command leadership in the entire retail value chain. The strategic commercial partnership with Facebook/WhatsApp can enable it to reach out to customers with user-friendly interfaces to enable online shopping, payments and cross-sell other digital services, while domestic- centric policies may allow it to overcome the head-start achieved by other e-commerce players.
RIL has established leadership in India’s offline retail business
Reliance Retail (RR) has gradually metamorphosed from a network of standalone stores into a behemoth achieving core retail revenues of US$13 bn in FY2020 underpinned by an offline presence of ~11,800 outlets across 7,000+ cities and towns. It has steadily cemented its leadership presence in India’s organized retail space by increasing its touch-points at a pace of 48% over FY2017-20 and adding retail trading area at a CAGR of 28%, which led to revenues growing at a robust CAGR of 54% in the given period. In India’s largely fragmented as well as unorganized merchandise retail landscape, RR now commands a market-share of ~1.4% (excluding recharges and fuel retail), and is the largest retailer in terms of presence as well as revenues.
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Internet Software & Services Sector
Exhibit 27: Multi-category retailer with presence across key consumption baskets RR’s various retail categories with revenue and proportion contribution, March fiscal year-end, 2020
Reliance Retail
Food and grocery Fashion and lifestyle Consumer electronics Connectivity Petroleum retail (US$5 bn, 21%) (US$2 bn, 8%) (US$6 bn, 27%) (US$7 bn, 34%) (US$2 bn, 9%) F&G
Reliance Fresh Reliance Trends Reliance Digital F&L CE
Reliance Smart Reliance Jewels Jio Point JR PR
Smart Point Trends Footwear RESQ
Business segment Reliance Market Project Eve RelianceDigital
Offline store format
JioMart AJIO.com Digital commerce portal
Brand Partnerships
Source: Company, Kotak Institutional Equities
Exhibit 28: RR is a leader in India’s fragmented retail market RR’s estimated market-share in key retail categories, March fiscal year-end, 2020
Reliance Retail Overall India market RR's market-share (US$ bn) (US$ bn) (%) Grocery retail 5 659 0.7 Fashion and lifestyle retail 2 166 1.1 Electronics retail 6 59 10.1 Total 12 884 1.4
Source: Company, Kotak Institutional Equities estimates
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Sector Internet Software & Services
Exhibit 29: Formidable presence across the country Segment-wise presence across the country as of March 2020
Source: Company, Kotak Institutional Equities
As an extension of Facebook’s strategic investment in Jio Platforms, Reliance Retail and WhatsApp have entered into a commercial partnership agreement to further accelerate Reliance Retail’s digital commerce business through its JioMart platform and to support digital transformation of small and medium-sized businesses using integration with WhatsApp.
We believe RR’s arrangement with WhatsApp can enable access to a huge untapped opportunity to play for a bigger share of the pie in India’s huge retail market, ~98% of which is still offline. This can give RR a higher pool of ‘transacting users’ as opposed to only ‘online users’ enabling superior user monetization in the future.
We reckon RR may look at multiple monetization streams—(1) O2O offering to end- customers serviced by a combination of local kirana networks and RR’s own offline presence, (2) commission-based revenues by transforming India’s retail distribution network by aggregating distribution requirements of large clusters of kirana stores and (3) transactional revenues by enabling transactions on ‘JioPay’.
Apart from the offline business, RIL is attempting new models to further boost its presence in India’s fast growing organized retail space: it is partnering with small kirana stores by digitizing them through JioPoS offering and attempting to increase its distribution reach, and has also launched its online grocery portal, JioMart, which already has a presence in ~200 cities.
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Internet Software & Services Sector
JioMart provides an interesting play by straddling both offline retail (the large but unorganized network of kirana stores that it seeks to integrate, as well as RIL’s offline stores) and online retail (WhatsApp enabled e-commerce which could potentially interlink with other plays such as AJIO).
RIL already has the online apparel property AJIO, which has evolved into a fashion marketplace retailing Reliance Trend’s private label, RR’s partner luxury brands as well as third-party brands. With RIL already targeting apparel and grocery, the two large components of retail (76% of overall retail in FY2020), we believe it can steadily foray into other categories such as jewelry, home and living, consumer electronics and others. It already has offline formats offering this merchandise and hence it would be only a matter of time before it readies its comprehensive online merchandise offering.
A steady foray into digital commerce backed by its own merchandise, partnership with a variety of brands, pan-India network and widespread customer reach via WhatsApp and other popular apps, and regulations favoring Indian companies can drive RIL to steadily ramp up its share in the Indian digital commerce market.
JioMart’s kirana digitization strategy to supplement digital commerce
We believe RR’s JioMart seeks to not only become a meaningful grocery retailer by providing customers the convenience of shopping online, it also seeks a slice of the large B2B market, which hitherto has been driven by traditional distributors. While the proportion of modern trade has been on the rise, we believe RIL would want to integrate its Reliance Market offering with its network of kirana stores, thereby disintermediating the existing value chain (company – distributor – wholesaler – stockist – retailer). We believe this business can be an important feeder to the digital commerce business and can significantly aid supply aggregation in a fragmented market.
RR’s intent to launch its distribution service on a large scale can help it amass sizeable revenues. RR will need to establish a virtuous cycle by offering consistently low-priced products to shops, the widest variety while at the same time negotiating for best prices with FMCG companies and other large producers. As discussed above, RR has several private labels in its grocery retail business. It can push these private labels on a large scale through this channel and ultimately to customers ordering products online. This business is currently in a trial phase and we expect it to be gradually ramped up, in sync with JioMart online.
B2C can be extended into O2O, and can play on synergies between RIL’s offline and online offering.
O2O generally refers to ‘online to offline’, implying that online services can be used to generate in-store revenues. Reverse O2O refers to offline to online, implying that a physical point-of-sale can generate online revenues. There are several benefits of O2O, important among these being enabling a customer to research online and purchase offline; or browse offline and purchase online. Both are important as buy rate in offline retail can be very high (as high as 30-70% per some estimates), significantly higher than 1-3% on online platforms.
Benefits of O2O to the platform operator can be immense: (1) it can significantly increase a user’s engagement within the ecosystem: for instance, a grocery buyer on WhatsApp can be a customer of Reliance Trends, Reliance Jio telecom services, Jio Movies etc., and (2) the more significantly engaged a user is, the more the platform can understand the user’s behavior through data analytics.
RIL has acquired stakes in several start-ups over the past few years to strengthen its O2O platform, offer support of voice assistants to customers, software services to SMEs as well as logistic network.
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Sector Internet Software & Services
Tata Cliq – a fourth large player in the running?
Another plausible player in this space may be Tata Cliq, provided it is able to secure investments from a foreign player. Recent media reports (Livemint) have mentioned that Tata Cliq is working on its own e-commerce platform, which will not only showcase Tata Group’s own merchandise (consumer products, apparel, perhaps automobiles as well), but will also act as a full-fledged marketplace. Tata Cliq will also need to invest in customer acquisition, and may need external funding for the same. This could be an opportunity for a foreign player to enter India as they would get to partner with a reputable group, and will benefit from all regulatory benefits that accrue to domestic firms (provided Tata Cliq continues to hold more than 50% stake in the said partnership).
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Internet Software & Services Sector
GROCERY E-TAILING: ANTICIPATE BRISK INCREASE IN SALES THROUGH E-COMMERCE Grocery e-tailing is an important category for e-commerce companies in India given food and grocery’s high consumption share (67% in FY2020) in India’s overall retail consumption. Indian online grocery retail landscape comprises specialist verticals (BigBasket and Grofers) as well as horizontals (Amazon, Flipkart). JioMart, having commenced online grocery delivery earlier this year, will compete with extant players for market-share, but will also help grow the grocery e-tail pie. A tough category to crack, focus on customer service, product assortment and value-for-money proposition will be paramount to win in this segment.
We believe the evolution of grocery e-tailing in India would be faster than that seen in other countries. This is because food and grocery comprises a very high chunk of overall retail in India (67% in FY2020). E-commerce companies operating in India have already garnered a high share of electronics retail; other categories such as apparel, furniture are steadily scaling up. However, food and grocery, owing to its sheer size, will attract several e-commerce companies in the hope of driving GMV and acquiring a large number of frequently transacting customers.
Online grocers such as BigBasket and Grofers have built a decent presence in the 20-30 cities they are present in and are aspiring to spread even wider. We believe these companies have created a niche in a difficult category by offering good quality products, large product assortments and timely delivery to customers.
We expect competition in the segment to increase, as JioMart, Amazon and Flipkart up investments and seek to gain share in this segment. By its very nature, this is a high- frequency and steady order value business, and is viewed as essential by horizontal e- commerce companies also.
We thus think that competitive intensity in the next 2-3 years would increase with verticals (Grofers, BigBasket), competing with horizontals (Amazon, Flipkart, JioMart). There may be more than one winner as apart from capital, the winner would be required to possess: (1) keen understanding of customer behavior and requirements, (2) robust supply chain and storage infrastructure, especially as some products are perishables, (3) efficient last mile delivery system that is geared to hyperlocal deliveries at short notice for bulky items, (4) consistent quality control, large product assortment and pricing lower than competition, and (5) excellent customer service, help in returns, etc.
Note that Indian customers have hitherto been used to buying products largely from neighborhood stores, who may not have provided best pricing, but have consistently provided other services such as home delivery, decent product assortment and occasionally credit.
Exhibit 30: Snapshot of grocery delivery companies operating in Indian market
Total site visits App downloads on in last 3 months Funds raised Annualised Order per day Company Google play (mn) (mn) (US$ mn) Key investors GMV (US$ mn) ('000s) Tiger Global, Soft Bank, Sequioa Capital, Grofers 10+ 3.6 607 600 190 KTB Ventures Alibaba, Mirae, CDC Group, TR Capital, Big Basket 10+ 8.8 1,100 1,000 283 IFC, Abraaj Group, Sands Capital Reliance, PIF, GIC, KKR, Mubadala, ADIA, JioMart 5+ 5.3 ~6,450 na 250-400 Silver Lake, General Atlantic, TPG
Source: Crunchbase, Similarweb, Google Playstore, Media Reports, Kotak Institutional Equities
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Sector Internet Software & Services
Industry discussions reveal that the Indian online grocery delivery segment clocked ~US$2.0- 2.5 bn of GMV in FY2020, implying a minuscule 0.3-0.4% share of online grocery in the overall food and grocery pie. This is also much lower than shares that e-commerce has managed to achieve in certain other categories such as electronics and apparel.
Exhibit 31: Big Basket and Grofers have steadily scaled up revenues though losses have also gone up Standalone financials of Big Basket and Grofers, March fiscal year-ends (Rs mn)
2014 2015 2016 2017 2018 2019 Revenues Big Basket 751 1,837 5,275 10,905 15,832 27,526 Grofers — — 80 132 298 701 EBITDA Big Basket (23) (77) (941) (1,778) (3,070) (5,580) Grofers — — (2,279) (2,809) (2,661) (4,484) PBT Big Basket (23) (76) (1,034) (1,918) (3,103) (5,627) Grofers — — (2,251) (2,683) (2,583) (4,480) Notes: (a) Grofers reports gross commission as revenue as it does not own inventory. Its revenue figures are thus not comparable with those of Big Basket.
Source: Tofler, MCA, Kotak Institutional Equities
Exhibit 32: Big Basket leads online grocery user visits Total monthly mobile website and desktop visits of online grocers (#, mn)
Feb'20 Mar'20 Apr'20 May'20 Jun'20 Jul'20 Aug'20 Sep'20 Oct'20 BigBasket 5.7 9.1 6.9 5.4 3.8 3.7 3.3 2.8 2.8 Grofers 2.0 3.4 3.0 1.7 1.4 1.4 1.4 1.0 1.2 JioMart 0.6 0.9 1.9 2.1 1.6 1.7
Spencers Online 1.6 1.3 1.6 1.7 1.7 1.9 2.0 2.2 2.3
Source: SimilarWeb, Kotak Institutional Equities
JioMart has also forayed into grocery space serving 200 cities and scaled up to 0.4 mn orders per day beating Grofers’ and Big Basket’s scale of 0.2-0.3 mn orders per day.
We believe grocery has been a much tougher nut to crack for most companies given: (1) inherently low margins in the business, (2) low ATV (average transaction value) compared to categories such as apparel and electronics, (3) demand for quick turnaround times and deliveries, (4) high number of SKUs demanded per order, and (5) high competition from offline channel.
There are a few key cost variables critical for profitability in grocery e-commerce: average order value, gross margin, cost of delivery. AOV is perhaps easier to control by putting a minimum order value limit. Gross margins for players may remain under pressure for some time as they seek to provide discounts to customers. Discounts may sustain for the next 2-3 years as customer acquisition will remain of primary importance. Delivery cost will come down over time as ordering densities improve resulting in improved utilization of delivery infrastructure.
Note that besides variable costs such as COGS and direct delivery costs, e-tailers also have to incur other costs such as tech, advertising, and other fixed people costs. E-tailers would thus need to gradually improve delivery efficiency and make decent operating margins so as to continuously invest in technology, customer analytics and supply chain.
Different e-tailers are following different delivery models in order to save costs.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 29
Internet Software & Services Sector
BigBasket. It follows an inventory-led model and has established a network of dark stores within large cities, in addition to large warehouses at the outskirts. Orders are typically delivered within 1-3 days of ordering. Select items are available for delivery within 1-3 hours of ordering; these typically incur an additional delivery charge. Based on our industry discussions, BigBasket has created a model appealing to the convenience seeking customer – product assortment includes several gourmet/organic products, customers are encouraged to apply for paid membership (BbStar) in order to get preferred delivery slots, and there are typically very few instances of stock-outs. BigBasket has also launched its own private label (Royal, Popular, Home and Fresho) across various product categories.
Grofers. Grofers has carried out several business model pivots, and is now an inventory-led model with its own network of warehouses. Its focus segment is the value seeking customer, and Grofers seeks to provide best priced product to customers. It has also launched its own private label with products at 10-15% discount to comparable FMCG brands. It seeks to keep increasing its private label offering with a view to offer quality products at best possible price to consumers. Grofers uses a distributed delivery model where it takes care of the first mile (warehouse to a location close to the customer). It has tied up with several local retailers/businesses who carry out the last mile delivery for Grofers for a certain commission.
Amazon India. Amazon India has three offerings in the food and grocery space (grocery includes non-food FMCG also), Amazon Pantry, Amazon Fresh and regular e-commerce. All three fulfill different use cases and Amazon will continue with the three formats. Pantry encourages users to build baskets, does not offer perishables, and delivery is 1-3 days out. Fresh typically sees smaller basket sizes, but promises very fast delivery (often consumers purchase 5-10 items; this may not be their primary monthly purchase but is more of a need- based top-up). Regular e-commerce caters to customers who may be ordering a bunch of other products (non-food/grocery), they discover food and grocery, and order like any regular product. Amazon has also tied-up with kiranas to further its presence in the grocery segment. Some of them become sellers on Amazon’s website, some act as delivery agents (offer some space for Amazon to store stuff and act as a pick-up point), some others have a distributor-type tie-up. Amazon also has a private label offering in dry grocery and general merchandise segments.
Whatever the model, we believe actual cost saving would happen once order densities improve. We show below a matrix on how profitability of a grocery e-tailer can improve manifold if orders delivered per vehicle per day scale up. We assume a constant AOV of Rs1,000 for this analysis. Note that vertical e-tailers are already seeing AOVs above Rs1,000.
Exhibit 33: A typical delivery vehicle would need to make at least 20 deliveries to generate decent operating profit per order Sensitivity analysis of operating profit per order (Rs) to gross margin (%) and number of daily orders delivered per vehicle (#)
Number of orders delivered per vehicle per day (#) 55 12 16 20 24 28 13 (17) 16 35 49 58 14 (7) 26 45 59 68 15 3 36 55 69 78
Gross Gross 16 13 46 65 79 88 margin (%)margin 17 23 56 75 89 98
Source: Kotak Institutional Equities estimates
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Sector Internet Software & Services
Boom of private labels in e-grocery space
E-commerce retailers like Amazon, Flipkart and grocery firms like Big Basket, Grofers are increasingly focusing on in-house brands as they offer better margins. Newcomer JioMart has also launched its own product range across foods, hygiene and personal care categories. Private label products are priced at a decent discount to products of competitor FMCG companies and as customer acceptance of these increases, these may offer better margins to retailers.
Exhibit 34: Multiple private label brands launched by the online and offline retailers List of private label brands of retailers
Dmart Big Basket Easyday Amazon Flipkart Grofers Premia BB Popular Golden Harvest Solimo Supermart Select G-Mother's Choice BB Royal Tasty Treat Presto Supermart Home G-Happy Home Fresho Nilgiris Vedaka Farmlife G-Happy Day BB Home Karmiq Essentials Billion G-Fresh Milk BB Royal Organic Desi Atta Basics MarQ O'range Sunkist Symbol Perfect Homes Clean Mate Fresh Cara Mia Kara Jiomart Best Farms Kaffe Enzo Get Real Freshomz Scrubz Good Life Aarambh Tea Mopz Petals Puric RelGlow Masti Oye Healthy Life Expelz Sudz Graphite Home One Snactac Yeah Juices
Source: Company websites, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 31
Internet Software & Services Sector
Exhibit 35: Multiple private label brands launched by the online and offline retailers Price chart of leading e-retailers with private label brands vis-à-vis FMCG brands (in Rs)
Prices Product Quantity Jiomart Grofers Big Basket Amazon HUL ITC Tata Cheapest Staples Wheat/Atta 10 kg 325 306 339 na 330 340 na Grofers Chana Dal 500 gm 47 59 46 na na na 61 Big Basket Salt 1 kg 10 14 na na 16 18 14 Jiomart Mustard Oil 1 L 119 146 199 na na na na Jiomart Soya chunks 1 kg 113 na 110 122 na na na Big Basket Snacks Bourbon 150 gm 20 na na na na 27 na Jiomart Instant Noodles 300 gm 35 48 na na na 45 na Jiomart Oats 1 kg 95 110 149 375 na na na Jiomart Aloo Bhujia 150 gm 28 na na na na na na Jiomart Instant Soup (Tomato) 60 gm 25 na na na 52 na na Jiomart Tomato Ketchup 950 gm 89 131 na 90 110 na na Jiomart Tea 250 gm 80 67 119 na 62 na 55 Tata Coffee 50 gm 60 na na na 90 na 90 Jiomart HPC Face Wash 100 ml 60 na na na 100 na na Jiomart Shower Gel 250 ml 75 99 na na 120 64 na ITC Detergent Powder 1 kg 65 75 na na 53 na 55 HUL Dishwash gel 1L 225 166 220 129 200 na na Amazon Floor cleaner 1L na 117 190 115 152 93 na ITC Toilet cleaner 1L na 130 168 119 na na na Amazon Notes: (a) Prices for leading FMCG brands are taken from Amazon portal. (b) Remainder prices extracted from respective online company portals
Source: Companies (retrieved as of December 3, 2020), Kotak Institutional Equities
How large can grocery e-commerce become?
We believe e-commerce companies can clock GMV of US$4.0 bn in FY2021 driven by: (1) increased ordering by consumers in the wake of Covid, and (2) commencement of operations by JioMart which achieved order run-rate of 400,000 a day within two months of launch of operations in 200 cities. In FY2021, we believe the vertical players are in a position to achieve GMV of US$1.4-1.5 bn, while the horizontals (Amazon, JioMart, Flipkart) can garner GMV of US$2.5-2.6 bn.
Given significant under-penetration of organized grocery retail and infusion of fresh capital by the likes of JioMart and other incumbents, we believe grocery e-tail can grow at a healthy CAGR of 25-50% for the next few years. Assuming a 50% CAGR during FY2020-25, we peg the size of grocery e-tail market at US$23 bn by F2025. Among industry participants growth could be more skewed towards horizontals as companies such as Amazon and Flipkart, while JioMart will deploy more capital, and possibly use its WhatsApp partnership to bring new customers online in new cities. Primarily offline players such as Avenue Supermarts and Spencers Retail will also attempt to grow their online channels, however their phased expansion plan may result in slower growth and not-very-meaningful contribution to overall grocery e-tail GMV.
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Exhibit 36: We expect e-grocery market to achieve a CAGR of 50% during FY2020-25 Estimated size of e-grocery market, March fiscal year-ends, 2020-25 (US$ bn)
(US$ bn) 25 22.8
20
15
10
4.0 5 3.0
0 2020 2021E 2025E
Source: Kotak Institutional Equities estimates
Multiple winners possible, omni-channel key here as well
Given the large and generally fragmented nature of food and grocery retail, it is unlikely that the market will be dominated by only one player. We believe a multitude of retailers can co- exist, though e-commerce channel can see the fastest growth, followed by organized retail and lastly unorganized or small retailers. Organized retail is only 8.8% of overall F&G retail, and hence it will be a long time before organized retail becomes the dominant retail channel in India.
We believe verticals can also co-exist, as they can provide specialist services and a curated product assortment. Several verticals such as Myntra, BigBasket, Grofers, Pepperfry, Nykaa and Lenskart continue to grow well despite the presence of larger marketplaces.
Global retailers are steadily acquiring offline grocery assets
Alibaba has invested in Hema, a 150-unit grocery chain in 21 Chinese cities. Hema seamlessly integrates physical store conveniences with digital tools, and is aiming to become the ‘most futuristic retailer’ in the world. Hema offers free 30-minute deliveries of fresh produces within a radius of 3 kilometers from stores. Hema is the only Chinese supermarket chain operating both online and offline channels; it virtually dominates Chinese online grocery scene. Its business has been gaining steam during the Covid-19 crisis, with its sales more than tripling.
Amazon, in the US, is also bolstering its grocery presence gradually. It acquired Whole Foods in June 2017 for US$13.7 bn in order to provide an omni-channel experience to customers and also amp up its offering for its prime program. By acquiring Whole Foods, Amazon got a brick-and-mortar platform that would: (1) help minimize certain costs such as cost of returns, (2) Amazon can cross sell certain products (perhaps its own brands) in Whole Foods stores, (3) offer a more holistic product basket with Whole Foods focus on premium and organic produce, and (4) possibly reach out to a set of customers who have traditionally not ordered grocery online.
In India, foreign-owned retailers like Amazon and Flipkart face certain regulatory challenges as they are not allowed to operate an inventory-led B2C model, and can acquire only up to 49% of a brick-and-mortar retailer (there will be complexities around acquisition of retailers with omni-channel presence). This can prove to be beneficial for Reliance Retail which has one of the largest food and grocery store presence in India and is looking to expand its presence further with the acquisition of JioMart.
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Internet Software & Services Sector
Exhibit 37: Brick and mortar retailers trying to increase online presence Operating metrics of offline retailers, March fiscal year-ends, 2015-20 (US$ mn)
2015 2016 2017 2018 2019 2020 Revenues (Rs mn) Reliance Retail 1,272 1,152 1,441 1,864 3,122 4,613 Dmart 859 1,145 1,586 2,004 2,667 3,316 Spencers 222 248 268 139 292 316 Future Retail na 913 2,277 2,464 2,689 2,711 More 386 468 512 540 568 na E-commerce share (as % of total revenues) Reliance Retail — — — — — — Dmart — — 0.0 0.3 0.7 1.4 Spencers — — — — 0.3 0.1 Future Retail — — — — — — More — — — — — — Stores (#) Reliance Retail 616 566 447 537 605 797 Dmart 89 110 131 155 176 214 Spencers 126 118 124 127 156 160 Big Bazaar na 218 235 285 292 239 More na 506 513 549 602 na Notes: (a) Future Retail’s assets are in the process of being acquired by Reliance Retail (b) Reliance Retail figures are representative of value and grocery business
Source: Companies, Kotak Institutional Equities
Exhibit 38: Global offline retailers are steadily venturing online Operating metrics of global offline retailers, 2015-19
2015 2016 2017 2018 2019 Revenues (US$ bn) Walmart 482 486 500 514 524 Target 74 69 73 75 78 Kroger 109 115 123 122 122 Costco 114 116 126 141 149 Tesco 54 56 57 64 65 Carrefour 79 81 75 75 89 Online sales (%) Walmart na na 3.7 4.9 7.0 Target 3.4 4.4 5.5 7.1 8.8 Kroger na 1.5 2.1 4.1 5.3 Costco 3.0 4.0 4.0 4.0 4.0 Tesco na na na na na Carrefour na na 1.2 1.6 1.6 Notes: (a) EU retailers Tesco and Carrefour have August and December fiscal year-end (b) Rest US retailers have January fiscal year-ends. (c) 2015-19 is representative of fiscal years ending January 31 of years 2016-2020
Source: Companies, Kotak Institutional Equities
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Sector Internet Software & Services
B2B E-COMMERCE: START-UPS SEEK TO DISRUPT TRADITIONAL SUPPLY CHAINS B2B e-commerce has seen a proliferation of start-ups as well as established companies seeking to gain a share of the hitherto largely unorganized market. With no restriction on foreign investment in B2B e-commerce, we believe e-commerce penetration of B2B retail can increase at a healthy pace over the next few years. B2B players will seek to disrupt traditional retail on product assortment, price as well as service.
Of India’s overall retail market of US$990 bn in FY2020, ~88% is unorganized. For a bulk of this unorganized market, we believe the distribution process is time consuming and involves plenty of middlemen. Start-ups are trying to disrupt this set-up by aggregating demand of end-retailers (food and grocery shops, apparel shops, etc.) and directly distributing by sourcing products from manufacturers. Till now, while there has been no dearth of distributors, they have proven costly to the end-retailer as: (1) there are multiple layers of distribution resulting in cost increases at each layer, and (2) there is limited demand aggregation as nobody has sought to connect small retailers.
We see several changes happening in food and grocery distribution. Currently, bulk of the food and grocery market is dominated by kiranas (~91% of food and grocery market was with unorganized players in FY2020). JioMart, Amazon and Flipkart are all trying to forge direct relationships with kiranas in order to garner a share of the very large distribution market which hitherto has been dominated by traditional distributors.
Udaan, ShopX, Ninjacart, Jumbotail, JioMart are all attempting to disrupt the existing B2B supply chains by eliminating middlemen and directly connecting end-retailer with the product manufacturer.
We believe B2B e-commerce can also become fairly large in the years to come as players invest in supply chain and disrupt the traditional, fragmented dealer-distributor network. These companies may also provide new opportunities of retail to partners by providing fresh avenues of sourcing and selling products.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 35
Internet Software & Services Sector
INDIA B2C E-COMMERCE: WE VALUE IT AT US$120 BN India’s e-commerce industry is poised to grow at a healthy trajectory over the next few years as several drivers such as internet penetration, Covid-related increased demand and higher participation from Tier II/III cities are in place. We believe a select set of e-commerce companies will churn out profits; the quantum of those will be dependent on relative competitive intensity and innovative monetization of customers perhaps beyond e-commerce (think payments, value added services, media and entertainment). With JioMart throwing its hat in the ring, industry profitability may get deferred, though as evidenced by companies in US and China, core e-commerce can be profitable when certain scale is achieved.
Valuation of e-commerce companies remains subjective given heavy investments into customer acquisition costs and high losses in initial few years of operations. As highlighted in an earlier section, companies such as Flipkart and Amazon have already incurred significant losses to garner customers, and these losses may subsequently decline as operating leverage kicks in and customer acquisition costs go down. Competition with JioMart may defer profitability a bit, and we thus employ a probability weighted model to calculate valuation of India’s e-commerce industry.
Platform-type service structure essential for profitability
When we analyze financials of foreign e-commerce companies such as Alibaba and Amazon, which are large e-tailers in their respective countries, we observe that: (1) standalone e- commerce is a single-digit EBITDA margin business (we estimate these companies made 2.5- 6.2% operating margin as a percentage of their GMV for the last available annual financial), and (2) overall margins of the total entity are much higher as these companies have other high-margin businesses such as AWS for Amazon and Alipay for Alibaba.
The winners in Indian e-commerce would thus be companies that are able to monetize their customers not only by offering them online shopping, but other value added services as well (potentially food delivery, travel bookings, payment facilities, financial products, media and content and other value added services). These associated services are important as they increase lifecycle of a customer on a particular platform and ultimately result in better profitability.
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Sector Internet Software & Services
Exhibit 39: Amazon’s North America businesses, including e-commerce, are highly profitable Financial performance of Amazon’s North American businesses, December calendar year-ends (US$ bn)
2014 2015 2016 2017 2018 2019 North America GMV (US$ bn) 81 101 128 169 217 263 EBIT (US$ bn) 0.4 1.4 2.4 2.8 7.3 7.0 EBIT margin (%) 0.4 1.4 1.8 1.7 3.3 2.7 EBITDA (US$ bn) 1.6 3.0 4.3 5.9 11.7 12.1 EBITDA margin (%) 1.9 3.0 3.4 3.5 5.4 4.6 Adjusted EBITDA (US$ bn) 2.4 4.2 6.1 8.4 15.0 16.3 Adjusted EBITDA margin (%) 3.0 4.2 4.7 5.0 6.9 6.2 AWS Revenues (US$ bn) 5 8 12 17 26 35 EBIT (US$ bn) 0.5 1.5 3.1 4.3 7.3 9.2 EBIT margin (%) 9.9 19.1 25.4 24.8 28.4 26.3 EBITDA (US$ bn) 2.1 4.1 6.6 8.9 13.4 17.4 EBITDA margin (%) 45.9 51.8 53.8 50.7 52.2 49.6 Adjusted EBITDA (US$ bn) 2.2 4.2 6.8 9.3 14.0 18.2 Adjusted EBITDA margin (%) 47.6 53.8 55.9 53.1 54.5 52.0 North America + AWS Revenues/GMV (US$ bn) 86 109 140 186 243 298 EBIT (US$ bn) 0.8 2.9 5.5 7.2 14.6 16.2 EBIT margin (%) 1.0 2.7 3.9 3.9 6.0 5.5 EBITDA (US$ bn) 3.7 7.1 10.9 14.7 25.1 29.5 EBITDA margin (%) 4.3 6.5 7.8 7.9 10.3 9.9 Adjusted EBITDA (US$ bn) 4.6 8.5 12.9 17.6 29.0 34.5 Adjusted EBITDA margin (%) 5.4 7.8 9.2 9.5 11.9 11.6 Notes: (a) North America GMV is estimated assuming that the split of revenues of own and third-party sellers is similar in North America and international segments. (b) Adjusted EBITDA refers to EBITDA adjusted for ESOP compensation paid to employees. In the absence of segmental split of ESOP costs, we have allocated these to various segments in proportion of their revenues.
Source: Company, Kotak Institutional Equities estimates
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Internet Software & Services Sector
Exhibit 40: Alibaba utilizes strong cash flows of its e-commerce business to seed other businesses Financial performance of Alibaba, December calendar year-ends (RMB bn)
2015 2016 2017 2018 2019 2020 Core commerce GMV 2,444 3,092 3,767 4,820 5,727 7,053 EBITDA 46 60 85 118 143 174 EBITDA margin (%) 1.9 1.9 2.2 2.4 2.5 2.5 Cloud computing Revenue 1 3 7 13 25 40 EBITDA (0) (0) 1 2 5 7 EBITDA margin (%) (38.9) (4.5) 14.4 16.8 21.9 18.7 Digital media and entertainment Revenue 2 4 15 20 24 27 EBITDA (1) (1) (6) (7) (15) (10) EBITDA margin (%) (60.7) (37.6) (39.3) (37.4) (60.7) (36.3) Innovation initiatives and others Revenue 3 2 3 3 5 7 EBITDA (1) (3) (2) (2) (5) (7) EBITDA margin (%) (45.3) (172.5) (71.9) (61.5) (116.7) (106.3) Total Revenue 2,451 3,101 3,791 4,856 5,780 7,127 EBITDA 43 55 78 111 128 165 EBITDA margin (%) 1.7 1.8 2.0 2.3 2.2 2.3
Source: Company, Kotak Institutional Equities
We value the Indian e-tail industry at US$120 bn
In order to value the Indian e-tail industry, we assume: (1) GMV of US$270 bn by FY2030 and US$800 bn by FY2040, (2) steady improvement in EBITDA margins leading to terminal year margin of 7% and (3) terminal growth rate of 6%. Our DCF analysis yields valuation of US$120 bn as of December 2021 for the Indian e-tail industry. We believe there may be upsides to this valuation as e-tailers find new and innovative ways of monetizing their customer base (value added services, fin-tech, media and streaming services, etc.)
Exhibit 41: We peg the valuation of the Indian e-commerce industry at US$120 bn Key assumptions for e-commerce industry valuation, March fiscal year-ends
GMV of India's e-tail market in FY2040 (US$ bn) 800 Terminal year (FY2040) EBITDA margin (%) 7.0 Terminal growth rate assumed (%) 6.0 DCF-based valuation of e-tail market (US$ bn) 121
Source: Kotak Institutional Equities estimates
Our EBITDA margin assumption is line with the ~7% margin that Amazon is currently making in its North America e-commerce business (we compute this as a proportion of estimated GMV, not reported revenues). We assume that Indian e-tailers would be able to make similar margins by FY2040; this would imply a large aggregate profit pool of US$56 bn in FY2040. Our DCF analysis imputes FY2040 EV/EBITDA multiple of 18X; reasonable in the context of the large growth potential of this industry.
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Exhibit 42: E-tail industry has EBITDA potential of US$56 bn by FY2040 Valuation analysis of Indian e-tail industry, March fiscal year-ends, 2040
FY2040 GMV of India's e-tail market (US$ bn) 800 Terminal year (FY2040) EBITDA margin (%) 7 Estimated EBITDA pool of e-tailers (US$ bn) 56 EV/EBITDA multiple ascribed (X) 18 March 2040 EV (US$ bn) 992 EV discounted back to December 2022 (US$ bn) 120
Source: Kotak Institutional Equities estimates
Reliance Retail: late to start but may be a force to reckon with in the future
With RR having only begun its digital commerce business (JioMart’s online grocery delivery business and the kirana B2B distribution business), we believe value creation from this business will happen only over the medium term (next decade or so). Our optimism for this business segment for RR stems from various factors—(1) initial-phase development of e- commerce market has already happened in India, (2) Jio has already brought a large population online (nearly 400 mn subscribers); low buyer penetration implies large growth opportunity, (3) RR’s large physical store presence and associated infrastructure provides it with competitive advantage and (4) regulatory advantage of having the ability to store and sell own inventory as opposed to restrictions on majority foreign-owned competitors (Amazon and Flipkart). Overall, we think RR is better positioned among its peers as it has a large offline network that can complement its online business.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 39 REDUCE TCS (TCS) https://ultraviewer.et/en/own IT Services DECEMBER 14, 2020 load.html UPDATE Sector view: Attractive
Industry view from TCS’ lens. TCS organized a virtual interaction with its leadership CMP (`): 2,784 team for analysts. The key takeaways are as follows- (1) cloud transformation is a multi- Fair Value (`): 2,800 year exercise akin to ERP adoption and offers strong medium-to-long term opportunity, BSE-30: 46,099 (2) growth opportunities driven by Covid will be meaningful but lower than that post- GFC, (3) TCS will be disciplined in undertaking lift-shift-transform deals and (4) a hybrid working model is the way forward.
TCS Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 2,784/2,800/REDUCE EPS (Rs) 86.6 99.6 110.7 52-week range (Rs) (high-low) 2,885-1,504 EPS growth (%) 0.4 15.0 11.2 Mcap (bn) (Rs/US$) 10,446/141.8 P/E (X) 32.2 28.0 25.2 ADTV-3M (mn) (Rs/US$) 12,941/176 P/B (X) 12.3 10.3 9.5 Shareholding pattern (%) EV/EBITDA (X) 22.5 19.9 17.9 Promoters 72.0 RoE (%) 37.9 39.9 39.4 FPIs/MFs/BFIs 16.0/2.8/5.0 Div. yield (%) 1.2 2.1 3.2 Price performance (%) 1M 3M 12M Sales (Rs bn) 1,602 1,795 2,008 Absolute 3.6 17.2 36.3 EBITDA (Rs bn) 447 500 553 Rel. to BSE-30 (2.1) (1.2) 19.5 Net profits (Rs bn) 325 368 409
Cloud transformation provides a multi-year opportunity
TCS indicated that cloud transformation is a multi-year opportunity. The CEO indicated three phases of the cloud transformation journey of clients which are as follows-
Infrastructure migration to the cloud. This involves lift, shift and transformation of existing infrastructure, data and applications to the cloud driven by benefits such as ability to scale infrastructure on demand, cost efficiencies and better security. This is a huge opportunity for the industry since cloud penetrations levels are low. TCS indicated that anecdotally even early cloud adopters and clients who have signed large scale cloud contracts have shifted only 30-50% workloads to the cloud with majority of lift and shift type migrations. In many cases transformation has not happened or only very little of transformation has happened. Opportunity is across industries. Hence there is huge opportunity in the migration activity into the next year and beyond. Clients’ contractual commitments with hyperscalers are a leading indicator of the opportunity.
The next opportunity following migration is building upon native capabilities of the cloud platforms. TCS indicated that currently analytics based native capabilities are being utilized especially by retailers who were early movers in deploying such capabilities. However other areas such as inbuilt integration capabilities have not been exploited in a big way by traditional companies.
The third opportunity is from architecting enterprise to enterprise collaboration and new business models. Such collaboration and new models will be enabled by cloud technologies. Kawaljeet Saluja Several collaborative business models will come into play in the near-term which can form an early template for other industries to follow. Sathishkumar S
TCS can partner with clients and capture demand in all three phases. Covid has accelerated the cloud transformation journey of enterprises. Covid has made cloud adoption compulsory for organizations. The business case for cloud has changed from cost focus in the past. Hurdles such as security related concerns have been overcome in the past few months. Focus of clients is now on cloud migration and transformation. The pandemic has heightened clients’ need for [email protected] high quality and resilient services provided by companies such as TCS. Contact: +91 22 6218 6427
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. IT Services TCS
Cloud is the new ERP
We find TCS’ approach to cloud refreshing and holistic where it is setting itself up for a multi-year opportunity rather than simply focusing on setting up a digital foundation. Management indicated that cloud is the new ERP wave. The company believes that there are several use cases and opportunities from cloud adoption in the next 5-10 years that are not even being imagined right now. The company likened the evolution of cloud opportunity to the evolution of ERP. From its roots in manufacturing and resource planning in the 1980s and 1990s ERP gradually expanded to other functional areas within the organization such as finance and supply chain. ERP platforms were not significantly different at a functional level but the nuances became more important once clients utilized the platforms for a few years. A similar scenario is possible with cloud technology. TCS is confident that the future potential of cloud will be similar to what has been achieved by ERP in the past 20-30 years.
TCS is realigning service line organizations to better cater to the cloud opportunity. TCS is also creating separate business units for cloud practice and has moved some very senior people to lead these units. Service delivery structure will also be anchored into these units. This is similar to service delivery organized by various ERP platforms in the past.
Demand rebound post Covid will be lower than bounce post GFC
The CEO indicated that the huge surge in demand post GFC was driven by realignment of industry structure of clients. The company does not expect a similar type or level of industry realignment post Covid. Corporate restructuring and realignments driven by the need to increase industry competitiveness is expected to drive a meaningful level of fresh demand but lower than the demand surge post GFC. Adoption of cloud and associated technology refresh cycle will take a few years to play out and provide significant demand support but will not result in a single phase of pent up demand.
TCS will be disciplined in taking on lift-shift-transform deals
Management indicated that clients expect lift-shift-transform deals to involve bundling of people, technology and assets. TCS will take a disciplined approach in bidding for such deals. Recently signed deals with Deutsche Bank and Prudential America involve people and asset transfers but TCS has the right business case to create a win-win proposition for TCS and the clients. We believe the commercials of both deals are far better than Street’s perception.
Collaboration with hyperscalers
Hyperscalers and system integrators such as TCS are natural partners as per the company. Both the business models are sufficiently differentiated. Business model of hyperscalers is one-to-many whereas that of SIs is one-to-one model. One-to-one model of Sis is useful as it uses available tools and combines it with the needs of the enterprise to provide the required differentiation. The one-to-one business model will be relevant as long as enterprises want to differentiate with technology. It is a continuous movement.
TCS highlighted that partnership with hyperscalers creates a win-win scenario for lift-shift- transform deals. Hyperscalers can take on the assets offloaded by clients while TCS can onboard the talent. It is a very powerful combination and is becoming a part and parcel of many deal conversations with clients.
26 KOTAK INSTITUTIONAL EQUITIES RESEARCH TCS IT Services
Hybrid working model is the way forward
TCS indicated that employees are tired of the work only from home scenario created by Covid and are anticipating return to office. TCS expects to operate in a well-planned and safe hybrid working model post Covid. Management is of the view that face-to-face interactions are crucial to build trust and sustain strong relationships with clients and employees. Clients are looking forward to in-person meetings and physical perusal of infrastructure and facilities. TCS indicated that a safe hybrid model can be operable once sufficient people are vaccinated. Business travel will resume with a healthy intensity. TCS expects employees to spend 1 or 2 days in a week from home. Work patterns will change with more collaborative work done out of office. TCS’ office workspaces will undergo a change to complement hybrid working model. More office workspaces will be dedicated to fostering collaboration and ideation. Currently ~3 out of 4 workspaces are designed for non-collaborative work and not best suited to fostering collaboration and ideation.
Perspectives on talent management
TCS might experiment but does not have plans to adopt crowdsourcing/ freelancer model in a meaningful way in its talent model. The company indicated that the success of the business model is derived from talent management and not from talent sourcing. TCS’ talent supply model is built on the following premise- take a long term bet on talent, invest to develop them taking on utilization risk. The risk is offset by employees’ trust in the company based on shared values and culture and low attrition rates. TCS will not deviate from the current model. Focus is on long term training agenda for talent.
TCS believes that remote working model will make talent fungible which can have significant benefits in talent deployment model. Remote working model will also help the company address certain causes of attrition such as employees mainly in experience band of around 10 years switching due to family reasons. Addressing wider talent pool made accessible due to remote working model is not a current area of focus for the company.
Engineering services remains an untapped opportunity
CEO indicated that engineering services is still fairly untapped. Outsourced delivery model is still not widely accepted. The company as well as the industry is slowly moving away from point solutions to taking on more end-to-end responsibility. Large deals such as the one announced by TCS with General Motors in the previous year help. TCS plans to keep chipping away at incremental opportunity and convert to revenues.
Elevated role for TCS Co-Innovation Network (TCS COIN)
TCS has placed a significant bet on deploying capabilities at scale to clients through COIN which brings together a network of experts from the start-up, research, academics, and corporate worlds to work on collaborative innovations for clients. TCS indicated that scalability was a major constraint in integrating capabilities from COIN. The cloud deployment fabric provides means of frictionless scaling up of capabilities of new technologies through the COIN ecosystem. The company can take on the role of an ecosystem platform and become a trusted entity to the client. TCS believes that the opportunity to use and exploit COIN network will keep on increasing with cloud adoption. It can also integrate own products and platforms along with offerings from COIN ecosystem and drive more value for clients.
M&A—a tactical shift but no change in underlying philosophy
TCS indicated that the philosophical stance of M&A has not changed. However the company is open to M&A that can help manage the accelerated pace of change due to Covid.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 27 IT Services TCS
Other highlights from the call
Return to office. Management indicated that return to work timelines will be accelerated for regions such as Australia and some parts of Asia which have contained Covid infections better. Work from office will not be a mandate in such regions. Western geographies are not in hurry to return to office and would prefer to wait out the second or third Covid waves.
Cloud migration in banking. Focus is on adoption of a multi-cloud strategy. Clients are deciding on which workloads to shift to each cloud, how to drive resilience from the multi cloud approach and how to best leverage the native capabilities of each of the cloud providers.
Correlation with hyperscalers’ growth. TCS indicated that growth of cloud hyperscalers is not aligned with growth for system integrators such as TCS.
Digital adoption across industries. TCS indicated that digital adoption level was lower than 30% in most industries as per a recent survey. Manufacturing and BFSI have lower adoption rates compared to other industries. More than 90% of the clients surveyed indicated acceleration in spending on technology and digital.
Delivery model changes. TCS indicated significant changes in delivery model in the next five years. Automation will play an important role in running internal operations. Automation can result in greater adoption of newer business models like shared services based models and newer pricing models such as outcome based models. Talent fungibility will also drive changes in delivery model. Management also noted that difference in onsite and offshore delivery is reducing.
Japan. TCS indicated that opportunities for the company in Japan have not significantly increased due to Covid. The company is investing steadily and building a base in Japan. Management indicated that it takes a long time to build relationships in Japan but the investment pays off as the relationships last longer.
Attrition. TCS believes lower levels of attrition in 1HFY21 are sustainable and helped by employee centric measures taken by the company during Covid
Banking and financial services. TCS indicated investments by clients in areas such as (1) payments, (2) wealth management and (3) mortgages. Core functionality is being rebuilt due to change in the industry structure. This differs from situation post GFC where integration was the primary driver for demand.
Shift to as-a-service. Management indicated that digital technologies will eventually force all service industries to operate as a service. This will involve converting to a platform based model and becoming a part of an ecosystem. Companies may either (1) participate in or (2) anchor the ecosystem.
28 KOTAK INSTITUTIONAL EQUITIES RESEARCH TCS IT Services
Exhibit 1: Profit model, balance sheet, cash model of TCS, March fiscal year-ends (Rs mn), 2016-2023E
2016 2017 2018 2019 2020 2021E 2022E 2023E Profit model Revenues 1,086,462 1,179,660 1,231,040 1,464,630 1,569,490 1,602,214 1,795,154 2,007,526 Cost of sales (608,996) (668,870) (712,880) (851,580) (923,220) (953,220) (1,054,144) (1,182,985) SG&A expenses (189,565) (207,550) (213,140) (238,550) (260,470) (241,604) (280,299) (311,520) EBIT 287,901 303,240 305,020 374,500 385,800 407,390 460,711 513,021 Other income 30,503 41,890 35,900 41,130 36,680 27,730 32,532 35,362 Pre-tax profits 318,404 345,130 340,920 415,630 422,480 435,120 493,243 548,383 Provision for tax (75,027) (81,560) (82,120) (100,010) (98,010) (109,243) (123,676) (137,663) Recurring net income 243,377 263,570 258,800 315,620 324,470 325,877 369,567 410,720 Minority Interest (1,229) (680) (540) (900) (1,070) (1,298) (1,268) (1,268) Extraordinary items — — — — — (9,580) — — Reported net income 242,148 262,890 258,260 314,720 323,400 324,579 368,299 409,452 EPS (Rs) 61.4 66.7 67.5 83.1 86.2 86.6 99.6 110.7 Balance Sheet Shareholders funds 731,899 883,150 872,410 915,560 862,400 850,288 997,607 1,079,497 Borrowings 825 710 540 440 — — — — Minority interest 3,542 3,660 4,020 4,530 6,230 7,528 8,796 10,064 Other non-current liabilities 20,169 20,890 28,840 10,300 88,820 82,708 76,938 71,256 Total liabilities 756,436 908,410 905,810 930,830 957,450 940,523 1,083,341 1,160,818 Net fixed assets 117,900 117,410 116,000 116,500 199,320 196,710 199,543 199,936 Goodwill 38,120 37,210 38,840 38,340 38,500 38,500 38,500 38,500 Intangibles 1,343 470 120 1,790 2,830 2,830 2,830 2,830 Investments 3,431 3,440 3,010 2,390 2,160 2,160 2,160 2,160 Other non-current assets 90,393 89,740 94,185 74,920 69,700 69,700 69,700 69,700 Cash and bank balances 330,134 482,234 474,365 494,128 441,092 400,948 518,642 578,026 Net current assets excluding cash 175,116 177,906 179,290 202,762 203,848 229,675 251,966 269,666 Total assets 756,436 908,410 905,810 930,830 957,450 940,523 1,083,341 1,160,818 Cash flow Operating cash flow, excl. working capital 231,753 237,230 248,820 295,040 362,630 327,977 376,225 414,867 Working capital changes (48,707) (11,060) (3,060) (23,120) (45,000) (25,679) (21,421) (16,741) Capital expenditure (19,894) (19,900) (18,060) (20,708) (30,880) (34,349) (42,023) (39,902) Acquisitions — — — — (2,270) — — — Other income 30,503 41,890 35,900 41,130 36,680 27,730 32,532 35,362 Free cash flow 193,655 248,160 263,600 292,342 321,160 295,678 345,313 393,585 Ratios (%) Gross profit margin 43.9 43.3 42.1 41.9 41.2 40.5 41.3 41.1 EBITDA margin 28.2 27.4 26.4 27.0 26.8 27.9 27.8 27.5 EBIT margin 26.5 25.7 24.8 25.6 24.6 25.4 25.7 25.6 EPS growth 22.5 8.6 1.1 23.1 3.8 0.4 15.0 11.2 RoAE 37.1 32.6 29.4 35.2 36.4 37.9 39.9 39.4
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 29 BUY Cipla (CIPLA) fhttps://ultraviewer.et/en/ow Pharmaceuticals DECEMBER 14, 2020 nload.html UPDATE Sector view: Attractive
Revlimid litigation settled. Cipla announced patent settlement for Revlimid with CMP (`): 756 BMS, with a volume restricted launch post March 2022. While exact details on volumes Fair Value (`): 915 for Cipla are not yet available, we believe the settlement terms will be similar to that of BSE-30: 46,099 Alvogen. The event is in line with our base case assumption of incremental 3-5 settlements, in addition to three prior settlements, for CY2022-24 launch timelines. Revise fair value to Rs915/share to incorporate Revlimid NPV of Rs35/share. BUY.
Cipla Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 756/915/BUY EPS (Rs) 29.7 33.4 48.8 52-week range (Rs) (high-low) 829-354 EPS growth (%) 54.9 12.4 46.2 Mcap (bn) (Rs/US$) 610/8.3 P/E (X) 25.4 22.6 15.5 ADTV-3M (mn) (Rs/US$) 6,565/89 P/B (X) 3.4 3.0 2.6 Shareholding pattern (%) EV/EBITDA (X) 14.0 12.6 8.7 Promoters 36.6 RoE (%) 13.3 13.4 16.9 FPIs/MFs/BFIs 20.2/16.6/4.1 Div. yield (%) 0.7 0.8 1.2 Price performance (%) 1M 3M 12M Sales (Rs bn) 191 202 232 Absolute 1.8 4.1 68.4 EBITDA (Rs bn) 43 46 63 Rel. to BSE-30 (3.7) (12.2)) 47.6 Net profits (Rs bn) 24 27 39
Revlimid launch settled; incremental settlements for other filers likely over next 12 months
Cipla has announced settlement of litigations with Celgene (BMS) on Revlimid patents and this is the fourth settlement following Celgene’s prior settlements with Natco/Teva, DRRD and Alvogen. As per the agreement, Cipla will be allowed a volume limited launch sometime after March 2022 (Natco’s launch) and without volume limitations from Jan 2026. We expect a 2HFY23 launch and believe settlement terms will be similar to that of Alvogen (<10% volume share in final volume period) given similar filing timelines. The event removes uncertainty around Cipla’s launch, and also eliminates DRRD’s bull case scenario of no additional settlement till FY2027. We note that the economics will be contingent on the final outcomes of pending litigations with seven other P-IV filers. We highlight the key dynamics around the product.
Revlimid is a large opportunity for generic filers: Revlimid is one of the largest products in the US with sales of ~US$8 bn. The product is protected by (1) key API polymorph patents ‘217 and ‘800 expiring in Nov 2024 and Apr 2027 respectively, with three more non-OB patents expiring in CY2024-25, (2) dosing regimen patents on MM/MDS/FL/MZL expiring in 2023, though, most patents, barring MM can be bypassed using Section viii carve outs.
We expect other filers to settle over next 12-18 months: Cipla’s settlement is Celgene’s fourth settlement on Revlimid, though the product has 7 additional filers including Sun, Lupin, Aurobindo and Cadila. We believe that the ‘800 and ‘217 polymorph patents (as well as the non-OB patents) are unlikely to protect Revlimid. As highlighted in our previous note on DRRD settlement, we expect 3-4 incremental settlements (Cadila, Apotex, Sun) with launch in CY2023, and 2-3 launch settlements in CY2024. We currently forecast revenues of ~US$48 mn, ~US$185 mn and ~US$150 mn in FY2023E, FY2024E and FY2025E respectively for Cipla, with NPV of Rs35/share. Assuming potential settlements for Sun, Aurobindo and Lupin, we also expect an NPV opportunity of Rs18-22 bn for each of these names. Kumar Gaurav BUY with revised fair value of Rs915/share
We bake in 4QFY23 launch for Revlimid and increase FY2023 EPS estimates by 6.6%. We also revise our fair value to Rs915 (from Rs880 earlier) to incorporate Revlimid cash flows. With respiratory launches and continued execution in domestic, we believe Cipla is well positioned to deliver robust earnings growth over the medium term. BUY [email protected] Contact: +91 22 6218 6427
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Cipla Pharmaceuticals
Exhibit 1: Revlimid has multiple P-IV filers List of Revlimid filers
Filer Status Lawsuit date 30 month expiry Settlement details Volume limited license starting March 2022, mid single digit in first year and gradually Teva / Natco Settled Oct-10 Expired increasing every year until March 2025. Not expected to exceed 1/3rd of total volumes in final year of volume limited agreement. No limit on volumes starting January 31, 2026. Volume limited license starting on a date after March 2022. No limit on volumes starting Dr Reddy's Settled Oct-16 Expired January 31, 2026. Volume limited license starting on a date after March 2022, gradually increasing every year Alvogen / Lotus Settled Sep-17 Expired till January 31, 2026 to no more than a single-digit percentage in the final volume-limited period. No limit on volumes starting January 31, 2026. Volume limited license starting on a date after March 2022. No limit on volumes starting Cipla Settled Aug-17 Expired January 31, 2026. Cadila Litigation ongoing Apr-17 Expired We expect a launch settlement range from Mar'23 to Oct'24, depending on progress in dosing regime patent litigations. More broadly, we do not expect '800 polymorph patent Apotex Litigation ongoing Jan-18 Expired to block generics, while Celgene has already granted a "covenent not to sue" on the '217 Hetero Litigation ongoing Dec-18 May-21 crystalline hemi-hydrate to all. In addition to these, '357, '219 and '598 non-OB listed crystalline patents are also under litigation, though, we do not expect these patents to Sun Litigation ongoing Jul-18 Jan-21 prevent incremental generic settlements.
Mylan Litigation ongoing Dec-19 Jun-21 Given the filing timelines, we expect settlements for launches in the CY2023-24 Aurobindo Litigation ongoing Jan-20 Jul-22 timeframe. Lupin Litigation ongoing Jul-20 Jan-23
Source: Company, Kotak Institutional Equities estimates
Exhibit 2: Multiple patents on Revlimid
Unexpired orange book patents Expiry date Type of patent 7,189,740 Apr-23 MDS dosing regime 7,465,800 Apr-27 API polymorph patent 7,468,363 Oct-23 MCL/FL/MZL dosing regime 7,855,217 Nov-24 Crystalline structure with >80% hemihydrate 7,968,569 Oct-23 MM dosing regime 8,404,717 Apr-23 MDS dosing regime 8,492,406 Oct-23 FL indication and dosing regime 8,530,498 May-23 MM dosing regime 8,648,095 May-23 MM dosing regime 8,741,929 Mar-28 MCL dosing regime 9,056,120 Apr-23 MDS dosing regime 9,101,621 May-23 MM dosing regime 9,101,622 May-23 MM dosing regime 9,155,730 May-23 FL indication and dosing regime 9,393,238 May-23 FL indication and dosing regime
Source: Company, Kotak Institutional Equities estimates
Exhibit 3: Changes to estimates March fiscal year-ends, 2021-23E, (%)
New estimates Old estimates Changes (%) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E Sales 191,474 202,021 232,008 191,474 202,021 228,375 — — 1.6 Gross profits 119,397 130,307 153,750 119,397 130,307 150,297 — — 2.3 EBITDA 43,419 46,061 63,407 43,419 46,061 60,137 — — 5.4 PAT 23,958 26,929 39,378 23,958 26,929 36,925 — — 6.6 EPS (Rs) 29.7 33.4 48.8 29.7 33.4 45.8 — — 6.6
Source: Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 31 Pharmaceuticals Cipla
Exhibit 4: Cipla - revenues by segments March fiscal year-ends, 2015-23E (Rs mn)
2015 2016 2017 2018 2019 2020 2021E 2022E 2023E Net revenues 113,454 136,098 146,302 152,193 163,624 171,320 191,474 202,021 232,008 Domestic sales 46,830 50,220 55,300 58,710 62,720 66,625 78,430 80,236 88,606 Export formulations 53,757 76,890 81,550 82,414 88,321 92,269 103,109 111,495 132,517 South Africa 15,883 15,690 18,270 20,465 20,927 22,005 21,764 22,420 22,458 Africa and global access 12,863 14,792 14,053 13,025 9,342 8,205 10,256 10,974 11,742 RoW 11,592 19,298 17,557 16,838 17,213 14,803 17,747 19,877 22,262 US 9,069 21,050 26,240 25,890 34,540 38,931 43,559 48,597 66,545 Europe 4,351 6,060 5,430 6,197 6,299 8,325 9,783 9,627 9,511 Bulk exports 7,006 7,380 5,270 6,249 6,990 7,340 7,935 8,490 9,085 Others 5,861 1,608 4,182 4,819 5,593 5,086 2,000 1,800 1,800 Growth % Domestic sales 18 7 10 6 7 6 18 2 10 Export formulations 12 43 6 1 7 4 12 8 19 South Africa 20 (1) 16 12 2 5 (1) 3 0 Africa and global access 15 15 (5) (7) (28) (12) 25 7 7 RoW 9 66 (9) (4) 2 (14) 20 12 12 US 22 132 25 (1) 33 13 12 12 37 Europe (23) 39 (10) 14 2 32 18 (2) (1) Bulk exports (16) 5 (29) 19 12 5 8 7 7 % of sales Domestic sales 41 37 38 39 38 39 41 40 38 Export formulations 47 56 56 54 54 54 54 55 57 South Africa 14 12 12 13 13 13 11 11 10 Africa and global access 11 11 10 9 6 5 5 5 5 RoW 10 14 12 11 11 9 9 10 10 US 8 15 18 17 21 23 23 24 29 Europe 4 4 4 4 4 5 5 5 4 Bulk exports 6 5 4 4 4 4 4 4 4 Others 5 1 3 3 3 3 1 1 1
Source: Company, Kotak Institutional Equities
32 KOTAK INSTITUTIONAL EQUITIES RESEARCH Cipla Pharmaceuticals
Exhibit 5: Cipla profit and loss, balance sheet, cash model March fiscal year-ends, 2015-23E (Rs mn)
2015 2016 2017 2018 2019 2020 2021E 2022E 2023E Net revenues 113,454 136,098 146,302 152,193 163,624 171,320 191,474 202,021 232,008 Gross Profit 71,557 85,199 93,131 97,808 105,779 111,460 119,397 130,307 153,750 Staff costs (19,737) (24,340) (26,338) (26,901) (28,565) (30,270) (32,086) (34,011) (36,392) R&D expenses (7,034) (8,846) (10,741) (10,415) (12,108) (11,750) (9,179) (11,356) (12,350) Other expenses (23,170) (27,257) (31,294) (32,229) (34,133) (37,326) (34,713) (38,878) (41,600) EBITDA 21,617 24,755 24,758 28,264 30,973 32,114 43,419 46,061 63,407 Depreciation & amortisation (5,047) (7,159) (13,229) (13,228) (13,263) (11,747) (11,016) (13,256) (13,991) EBIT 16,570 17,596 11,529 15,036 17,710 20,367 32,403 32,806 49,416 Net Interest (1,683) (2,062) (1,594) (1,142) (1,684) (1,974) (1,558) (376) 568 Other income 1,403 2,170 2,287 2,774 4,766 3,442 2,500 3,069 2,586 Profit before tax 16,290 17,704 12,222 16,667 20,791 21,777 33,344 35,499 52,570 Tax & Deferred Tax (4,000) (3,779) (1,798) (2,501) (5,695) (6,312) (9,336) (8,520) (13,143) Net Income 11,808 13,504 10,064 14,105 15,277 15,470 23,958 26,929 39,378 EPS (Rs) 14.7 16.8 12.5 17.5 19.0 19.2 29.7 33.4 48.8 Balance sheet Equity 109,820 120,149 129,637 145,816 153,443 160,573 179,739 201,282 232,785 Total borrowings 17,018 51,991 41,126 40,980 43,162 28,164 21,664 15,164 8,664 Other liabilities 30,338 41,419 38,938 41,809 43,028 47,889 50,834 51,751 53,987 Total liabilities 157,175 213,558 209,701 228,606 239,633 236,626 252,237 268,198 295,435 Net fixed assets 81,261 125,052 121,471 120,465 115,387 119,564 115,547 109,292 102,301 Investments 7,156 9,483 9,922 11,160 13,160 18,960 18,960 18,960 18,960 Cash 9,543 14,532 14,477 20,678 27,446 20,204 24,419 44,454 66,846 Other current assets 66,372 73,974 73,752 87,463 96,800 96,858 112,271 114,451 126,288 Total assets 157,175 213,558 209,701 228,606 239,633 236,626 252,237 268,198 295,435 Cashflow statement Operating profit before working capital 22,843 27,258 26,019 29,681 33,479 37,437 44,311 48,704 66,511 Tax paid (3,923) (5,077) (4,503) (7,220) (5,932) (8,483) (9,336) (8,520) (13,143) Change in working capital (7,186) (4,242) 2,307 (7,833) (10,635) 1,730 (12,468) (1,263) (9,601) Capital expenditure (6,262) (10,769) (11,360) (8,162) (3,601) (5,728) (6,000) (6,000) (6,000) Free cash flow 5,472 7,170 12,464 6,466 13,311 24,956 16,506 32,922 37,767 Margins and ratios Gross profit margin (%) 63.1 62.6 63.7 64.3 64.6 65.1 62.4 64.5 66.3 EBITDA margin (%) 19.1 18.2 16.9 18.6 18.9 18.7 22.7 22.8 27.3 Tax rate (%) 14.4 13.0 8.4 11.0 12.7 12.7 17.4 17.6 22.7 RoAE (%) 11.2 11.7 8.1 10.2 10.2 9.9 14.1 14.1 18.1 RoACE (%) 11.1 10.1 6.3 7.8 7.7 8.6 13.5 14.3 21.4
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 33 SELL ABB (ABB) https://ultraviewer.et/en/own Capital Goods DECEMBER 11, 2020 load.html UPDATE Sector view: Attractive
Prospects of right-sizing costs to parent beyond royalty. We note meaningful CMP (`): 1,176 divergence in payout to parent as share of sales by ABB beyond royalty versus that of Fair Value (`): 980 the global parent and peers in India. Such spending can be volatile, may moderate or BSE-30: 46,099 start yielding pricing benefits for ABB over time. This represents the key upside risk to our margin estimate. We would await clarity from the management on such count before building in material benefit. ABB Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 1,176/980/SELL EPS (Rs) 9.9 20.0 26.4 52-week range (Rs) (high-low) 1,411-722 EPS growth (%) (43.5) 101.7 32.0 Mcap (bn) (Rs/US$) 250/3.4 P/E (X) 118.6 58.8 44.6 ADTV-3M (mn) (Rs/US$) 175/2 P/B (X) 6.9 6.5 5.9 Shareholding pattern (%) EV/EBITDA (X) 84.4 39.3 29.6 Promoters 75.0 RoE (%) 5.9 11.4 13.9 FPIs/MFs/BFIs 3.5/5.7/5.1 Div. yield (%) 0.5 0.6 0.7 Price performance (%) 1M 3M 12M Sales (Rs bn) 58 73 85 Absolute 24.6 30.9 (10.5) EBITDA (Rs bn) 3 6 8 Rel. to BSE-30 17.8 10.3 (21.5) Net profits (Rs bn) 2 4 6
ABB’s increase in payout to parent has been compensated by a similar increase in gross margin
On an aggregate basis, ABB ends up paying close to 8% of its sales as costs to the parent and its entities. This has an element of royalty +technology costs + trademark fees (~4%), information technology fees (~3%) and group management costs (~1%). The overall payout to the parent has increased by 80 bps over CY2017-19, against which ABB has been able to report a similar improvement in gross margin.
Quantum beyond royalty is still large, especially information technology fees at ~3% of sales
The quantum of royalty paid by ABB and R&D spending by parent is comparable, however, we see a significant divergence in other costs. ABB’s information technology expense at 2.8% of sales compares with our assessment of cost of ~1% of sales for the parent – we include the relevant component of amortization expense for the global parent to better assess spending by parent. Our assessment of such fees for ABB’s peers in India also suggests a lower range of 0.6-1.2% of sales. We understand the limitations in comparing such metrics across organizations. We however find the difference between ABB and peers large, especially considering that its gross margin is comparable or lower than that of peers.
Prospects of right-sizing cost/margin exist and present an upside risk to our margin estimate
We highlight that the volatility in IT fees as share of sales for peers of ABB over time. For instance, Schneider Electric India (unlisted) reported such spending decline back to 0.7% of sales in FY2020 after two years of high 1.4% levels. Such volatility may relate to varied intensity of spending seen on digital across various sub-divisions, making overall spending change with Aditya Mongia changing focus among such sub-divisions. ABB’s spending on software and digital thus may normalize over time. Separately, we also note that prospects for ABB pricing its digital offering Teena Virmani around such cost element better, yielding benefits from a gross margin perspective – ABB may be pricing its digital offering closer to cost to support customer trials initially.
We note upside risk to our margin estimate of ~8/9% for CY2021/22 which builds in a modest ~20 bps benefit from lower payout to parent. Against the 7.3% EBITDA margin reported in CY2019, we assume additional benefits of (1) sale of low-margin solar invertor business (60 bps), (2) pricing benefits in electrification (40 bps) and (3) operating leverage (40 bps). [email protected] Contact: +91 22 6218 6427
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. ABB Capital Goods
Exhibit 1: IT fees for the continuing business has increased meaningfully as share of sales over the past two years Charges paid by ABB India for royalty, technology, group management and other related services, December calendar year-ends, 2014-19
Combined Demerged 2014 2015 2016 2017 2017 2018 2019 Quantum (%) Royalty and technology fees 2,154 2,489 3,062 2,896 1,568 1,745 2,145 IT fees 977 1,239 1,440 1,423 1,229 1,934 2,079 Trademark fees 608 637 670 1,013 652 682 807 Group management fees 1,120 848 1,134 1,461 1,010 873 859 Sales 77,333 81,403 86,427 91,401 60,937 66,901 73,151 Share of sales (%) Royalty and technology fees 2.8 3.1 3.5 3.2 2.6 2.6 2.9 IT fees 1.3 1.5 1.7 1.6 2.0 2.9 2.8 Trademark fees 0.8 0.8 0.8 1.1 1.1 1.0 1.1 Group management fees 1.4 1.0 1.3 1.6 1.7 1.3 1.2 Total 6.3 6.4 7.3 7.4 7.3 7.8 8.1
Source: Company, Kotak Institutional Equities
Exhibit 2: ABB's increase in gross margin has compensated for the increase in payout to the parent, unlike Siemens Comparison of gross margin before and after payout to the parent, December calendar year-ends, 2017-19
ABB - Gross margin (%) Siemens - Gross margin (%) Gross margin after royalty and other payments (%) Gross margin after royalty and other payments (%) 36 36 33.5 32.7 33.3
32 31.9 32 31.1
28 29.6 25.4 25.5 28 24
20 24 2017 2018 2019 2017 2018 2019
Source: Companies, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 35 Capital Goods ABB
Exhibit 3: ABB Global spends lesser on IT expenses as share of sales versus ABB India for CY2019 Comparison of spending on R&D and information technology by ABB India and ABB parent as share of sales for year ending December 2019
5.0 ABB India ABB Global
4.2 4.0 4.0
3.0 2.8
2.0
0.9 1.0
- Royalty/R&D spending Spending on digital and software
Notes: (a) For spending on software by ABB Global, we include the amortization expense related to software and for technology-related purposes (b) We estimate the base spending on software and digital at 0.2% of sales based overall 4.7% of sales of spending less 4.5% that goes into R&D
Source: Company, Kotak Institutional Equities estimates
Exhibit 4: ABB India has higher levels of spending on information technology at present; history of a peer suggests volatile profile in such spending Spending on information technology by ABB and peers as share of sales
Spending on software services for year ending Spending on software services for Schneider Electric December 2019 (% of sales) India (unlisted), March fiscal year-ends (% of sales) 2.8 3.0 1.6 1.4 1.3 2.5 1.2 2.0
1.5 0.7 1.0 0.8 0.7 1.0 0.7 0.5 0.5 0.4
0.0 ABB India Siemens India Schneider Electric Rockwell 0.0 Automation India 2017 2018 2019 2020
Source: Companies, Kotak Institutional Equities
36 KOTAK INSTITUTIONAL EQUITIES RESEARCH ABB Capital Goods
Exhibit 5: The intensity of spending on R&D is quite varied across divisions of ABB The spread of spending on R&D across divisions for ABB Global for nine months ending September 2020
Source: Company
Exhibit 6: We expect a 150 bps expansion in margin over 2019-22 and assume a support of a modest 20 bps for lower payout to the parent EBIT margin for ABB India, 2018-22E (%)
100 5.5 6.0 2.91.7 6.4 7.5 EBIT margin 1.4 1.2 1.5 1.3 17.9 18.2 21.4 18.6 17.9 80 Depreciation - - 7.8 8.1 8.1 8.0 7.9 60 Fixed expenses
Impact of sale of solar 40 invertor business 67.5 66.5 66.3 66.2 66.1 Payout to parent 20 RM as share of sales
0 (0.3) (0.6) (0.6) 2018 2019 2020E 2021E 2022E
(20)
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 37 Capital Goods ABB
Exhibit 7: We build in an improvement of 170/110 bps in EBITDA margin over CY2019-22 in reported basis/adjusted for sale of low- margin solar invertor business Financials of ABB, December calendar year-ends, 2011-22E (Rs mn)
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Income statement Net revenues 74,490 75,650 77,220 77,333 81,403 86,427 60,937 66,901 73,151 58,243 73,277 84,875 Total operating expenses (70,872) (72,689) (72,521) (71,776) (74,278) (79,482) (56,792) (62,323) (67,838) (55,549) (67,526) (77,379) Raw material cost (54,785) (54,595) (53,985) (52,429) (53,000) (56,173) (41,030) (45,137) (48,610) (38,588) (48,475) (56,062) Employee expenses (5,868) (6,240) (6,771) (7,052) (7,499) (7,678) (5,187) (5,295) (5,796) (5,482) (5,788) (6,331) Other expenses (10,218) (11,854) (11,765) (12,295) (13,779) (15,631) (10,575) (11,892) (13,432) (11,479) (13,263) (14,986) EBITDA 3,618 2,961 4,699 5,557 7,125 6,945 4,146 4,578 5,313 2,695 5,751 7,496 Other income 162 55 70 173 130 1,216 777 840 943 1,288 1,263 1,398 Interest (307) (432) (1,011) (1,050) (912) (919) (572) (539) (214) (168) (224) (246) Depreciation (795) (942) (1,033) (1,128) (1,598) (1,510) (1,012) (928) (904) (1,006) (1,069) (1,107) PBT 2,677 1,642 2,725 3,552 4,746 5,733 3,338 3,951 5,138 2,808 5,721 7,542 Tax (832) (705) (956) (1,267) (1,747) (1,988) (1,084) (1,410) (1,418) (708) (1,442) (1,900) Recurring PAT 1,845 937 1,769 2,285 2,999 3,745 2,255 2,542 3,720 2,101 4,279 5,641 Discontinued operations — — — — — — 1,945 2,567 12 — — — Extraordinary income (post-tax) — — — — — — — — (697) — — — Reported PAT 1,845 937 1,769 2,285 2,999 3,745 4,200 5,109 3,035 2,101 4,279 5,641 Recurring EPS (Rs) 8.7 4.4 8.3 10.8 14.2 17.7 10.6 12.0 17.6 9.9 20.2 26.6 Balance sheet Shareholders funds 25,345 26,016 26,776 28,120 30,086 32,867 36,069 40,073 35,201 35,874 38,439 42,024 Equity capital 424 424 424 424 424 424 424 424 424 424 424 424 Reserves and surplus 24,921 25,593 26,352 27,696 29,662 32,443 35,645 39,649 34,777 35,450 38,015 41,600 Loan funds 18 3,277 6,201 3,711 6,000 6,000 6,041 20 71 — — — Total sources of funds 25,364 29,293 32,977 31,831 36,086 38,867 42,110 40,094 35,272 35,874 38,439 42,024 Total fixed assets 12,268 12,719 13,870 13,792 12,904 12,763 12,887 9,616 7,866 9,371 9,564 9,909 Investments 167 166 166 165 164 163 2,706 2 1 1 1 1 Cash and bank balance 2,691 868 3,166 2,260 5,736 11,892 14,917 14,751 15,976 21,756 23,045 25,376 Net working capital 9,493 14,600 14,976 14,939 16,269 12,282 9,963 7,635 8,671 3,497 4,580 5,489 Total application of funds 25,364 29,293 32,977 31,831 36,086 38,867 42,110 40,094 35,272 35,874 38,439 42,024 Cash flow statement Cash flow from operating activites 1,181 (502) 3,301 4,790 3,817 8,626 7,998 6,255 6,669 7,161 3,226 4,687 Cash flow from investing activities (3,612) (3,398) (2,197) (1,477) (764) (681) (3,287) 1,437 (3,907) (1,002) (1,263) (1,452) Free cash flow (CFO+net capex) (355) (2,243) 1,084 3,721 2,915 7,586 6,152 3,894 5,454 4,649 1,964 3,235 Cash flow from financing activities (799) 2,106 1,191 (4,221) 422 (1,788) (1,710) (7,937) (1,467) (379) (675) (904) Cash generated/(utilised) (3,230) (1,794) 2,296 (908) 3,474 6,156 3,001 (245) 1,295 5,780 1,289 2,331 Net cash at start of the year 5,776 2,545 752 3,149 2,241 5,716 11,869 14,892 14,724 16,019 21,799 23,088 Net cash at end of the year 2,644 767 3,166 2,260 5,736 11,892 14,917 14,751 15,976 21,756 23,045 25,376
Key ratios EBITDA margin (%) 4.9 3.9 6.1 7.2 8.8 8.0 6.8 6.8 7.3 4.6 7.8 8.8 PAT margin (%) 2.5 1.2 2.3 3.0 3.7 4.3 3.7 3.8 5.1 3.6 5.8 6.6 Effective tax rate (%) 31.1 42.9 35.1 35.7 36.8 34.7 32.5 35.7 31.9 25.2 25.2 25.2 Net debt to equity (0.1) 0.1 0.1 0.1 0.0 (0.2) (0.2) (0.4) (0.5) (0.6) (0.6) (0.6) Return on Equity (%) 7.5 3.6 6.7 8.3 10.3 11.9 6.5 6.7 9.9 5.9 11.5 14.0 ROCE (%) 8.3 4.3 7.8 9.1 10.5 11.6 6.5 7.0 10.3 6.3 12.0 14.5 Book value per share (Rs) 120 123 126 133 142 155 170 189 166 169 181 198
Source: Company, Kotak Institutional Equities estimates
38 KOTAK INSTITUTIONAL EQUITIES RESEARCH ABB Capital Goods
APPENDIX –SPENDING ON INTANGIBLES BY GLOBAL PARENT
Exhibit 8: There has not been any meaningful increase in the parent's investment in intangibles apart from the B&R acquisition, which does not apply to India ABB Global's gross value of intangible assets beyond goodwill, December calendar year-ends, 2014-19 (US$ mn)
Including power grids business Demerged business 2014 2015 2016 2017 (a) 2017 2018 2019 Capitalized software for internal use 692 719 712 787 704 779 790 Capitalized software for sale 405 401 409 453 31 30 29 Intangibles other than software - Customer-related 2,618 2,517 2,500 2,861 2,452 2,609 2,513 - Technology-related 782 790 755 1,239 1,082 1,131 1,056 - Marketing-related 314 308 291 371 366 483 501 - Other 72 67 34 38 33 67 49 Total 4,883 4,802 4,701 5,749 4,668 5,099 4,938
Notes: (a) 2017 prior to demerger saw an increase of US$1 bn of which US$0.8 bn relates to the B&R acquisition (b) Acquisition of B&R's India operations were not merged with ABB India
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 39 INDIA Economy IIP DECEMBER 11, 2020 UPDATE BSE-30: 46,099
Positive surprise from IIP. Economic activity normalized further in October aided by festive and pent-up demand. While the pick-up is encouraging, growth is at risk of losing some momentum from petering out of festive demand and a second wave of infections. We therefore expect a gradual normalization in economic activity. We expect FY2021E GDP growth at (-)8.6%. Going ahead, we expect FY2022E GDP growth to improve to 9.3% supported by revival in economic sentiments with the vaccine roll-out.
IIP growth at 8-month high
October IIP growth surprised on the upside, probably on account of support from festive and QUICK NUMBERS pent-up demand. October IIP grew 3.6% (Kotak: 2.5%, Consensus: 1.1%) as against an upward revised print of 0.5% for September, amid growing momentum despite unfavorable October IIP growth base effects (Exhibits 1-2). Among the sectors, manufacturing production grew 3.5% as against at 3.6% a fall of 0.2% in September (Exhibit 3). Some of the major segments that saw an increase in production in October are electrical equipment (20.3%), motor vehicles, trailers and semi- Manufacturing trailers (17.7%), computer, electronic and optical products (10.9%), fabricated metal products growth at 3.5% (13.4%), pharmaceuticals, medicinal chemical and botanical products (12.9%), chemicals and Expect FY2021E chemical products (9.6%), and rubber and plastics products (15.5%). Some of the segments that registered a fall are coke and refined petroleum products (17.3%), wearing apparel GDP growth at (11.8%), textiles (7.7%), beverages (11.3%), and paper and paper products (20.2%). (-)8.6% and Meanwhile, electricity production grew by 11.2% (4.9% in September) while mining activity fell FY2022E GDP 1.5% in October. growth at 9.3%
Festive demand leading to a sharp pick-up in consumer durables segment
The data as per the use-based classification points out that production of consumer durables saw a sharp increase of 17.6% (3.4% in September) on the back of festive and pent-up demand (Exhibit 4). Signs of recovery were also visible in the expansion across capital goods (3.3%) and the infrastructure/construction goods (7.8%). Meanwhile, production of consumer non-durables went up by 7.5%, while intermediate goods were almost at par with last year’s levels. Production of primary goods registered a fall of 3.3%.
Expect a gradual normalization in economic activity; FY2021E GDP growth at (-)8.6%
The latest IIP reading along with other high frequency data point towards the sharp pick-up in economic activity supported by festive and pent-up demand. We however remain cautious about extrapolating this trend linearly to the rest of FY2021 given that growth in the services segment remains weak, even as manufacturing continues to normalize at a robust pace. We will continue to monitor (1) increase in the pace of spread of infections recently which has led to re- Upasna Bhardwaj imposition of restrictions/night-curfews in certain districts, (2) lockdowns in Europe and a spike in infection rate in the US likely keeping exports subdued over the next few months, and (3) Suvodeep Rakshit likely loss of momentum in economic activity as the impact of pent-up and festive demand starts to subside. Keeping these factors in mind, we expect FY2021E GDP growth to be around Avijit Puri (-)8.6% (Exhibit 5). We note that our estimate is lower than the RBI’s recent projection of (-)7.5%. Going ahead, we expect FY2022E GDP growth to turn positive and register a growth of 9.3%, aided by boost in consumer and business sentiments with the vaccine roll-out and by revival in the services sector (refer to our December 11 report: CY2021 outlook: turning the corner).
[email protected] Contact: +91 22 6218 6427
For Private Circulation Only. Economy India
Exhibit 1: IIP growth went up in October amid a rise in momentum Trend in momentum, base effect and monthly change in IIP growth (%)
Momentum Base effect Monthly change in yoy IIP growth 80
60
40
20
0
(20)
Jun-18
Jun-19
Jun-20
Sep-18
Sep-19
Sep-20
Dec-18
Dec-19
Dec-20
Mar-18
Mar-19
Mar-20 Mar-21
(40)
(60)
Source: CEIC, Kotak Economics Research
Exhibit 2: IIP growth stood at 3.6% in October 3 MMA and yoy growth in IIP (%)
IIP growth (monthly) IIP growth (3M MA) 20
10
0
(10)
(20)
(30)
(40)
(50)
(60)
Jul-17
Jul-18
Jul-19
Jul-20
Jan-17
Jan-18
Jan-19
Jan-20
Oct-16
Oct-17
Oct-18
Oct-19
Oct-20
Apr-17
Apr-18 Apr-19 Apr-20
Source: CEIC, Kotak Economics Research
KOTAK ECONOMIC RESEARCH 41 India Economy
Exhibit 3: Manufacturing growth expanded by 3.5% in October Sectoral classification of IIP growth, March fiscal year-ends, 2019-21 (%)
Mining (%) Manufacturing (%) Electricity (%) General (%) 2019 2020 2021 2019 2020 2021 2019 2020 2021 2019 2020 2021 April 3.8 5.1 (26.9) 4.9 2.5 (66.6) 2.1 6.0 (22.9) 4.5 3.2 (57.3) May 5.8 2.3 (20.4) 3.6 4.4 (37.8) 4.2 7.4 (14.9) 3.8 4.5 (33.4) June 6.5 1.5 (19.5) 6.9 0.3 (17.0) 8.5 8.6 (10.0) 7.0 1.3 (16.6) July 3.4 4.9 (12.7) 7.0 4.8 (11.4) 6.6 5.2 (2.5) 6.5 4.9 (10.5) August (0.6) 0.0 (9.0) 5.2 (1.7) (7.9) 7.6 (0.9) (1.8) 4.8 (1.4) (7.4) September 0.1 (8.6) 1.4 4.8 (4.3) (0.2) 8.2 (2.6) 4.9 4.6 (4.6) 0.5 October 7.3 (8.0) (1.5) 8.2 (5.7) 3.5 10.8 (12.2) 11.2 8.4 (6.6) 3.6 November 2.7 1.9 (0.7) 3.0 5.1 (5.0) 0.2 2.1 December (1.0) 5.7 2.9 (0.3) 4.5 (0.1) 2.5 0.4 January 3.8 4.4 1.3 1.8 0.9 3.1 1.6 2.2 February 2.2 9.6 (0.3) 3.8 1.3 11.5 0.2 5.2 March 0.8 (1.3) 3.1 (22.8) 2.2 (8.2) 2.7 (18.7) Average 2.9 1.5 3.9 (1.2) 5.2 1.1 3.9 (0.6)
Source: CEIC, Kotak Economics Research
Exhibit 4: Production of consumer durables saw a pick-up in the wake of festive demand Use-based classification of IIP growth, March fiscal year-ends, 2019-21 (%)
Infrastructure and Consumer non- Primary goods Capital goods Intermediate goods construction goods Consumer durables durables 2019 2020 2021 2019 2020 2021 2019 2020 2021 2019 2020 2021 2019 2020 2021 2019 2020 2021 April 2.7 5.1 (26.6) 9.8 (1.4) (92.7) 0.4 3.0 (63.9) 8.5 (0.7) (85.0) 3.9 2.2 (95.7) 7.5 5.4 (48.1) May 5.7 2.2 (19.6) 6.4 (2.1) (65.9) 0.1 12.5 (39.7) 7.6 3.0 (39.0) 6.7 0.2 (70.3) (1.6) 8.1 (9.7) June 9.2 0.6 (14.5) 9.7 (6.9) (37.4) 1.5 12.1 (20.7) 9.4 (1.3) (18.3) 13.6 (10.2) (34.8) 0.2 7.4 6.9 July 6.8 3.6 (10.8) 2.3 (7.0) (22.8) 1.3 15.7 (10.7) 9.2 2.9 (8.2) 14.1 (2.4) (23.7) 5.3 8.5 1.8 August 2.5 1.0 (10.8) 10.3 (20.9) (14.8) 2.9 7.3 (6.0) 8.0 (5.7) (1.6) 5.5 (9.7) (9.6) 6.5 3.1 (2.3) September 2.6 (5.2) (1.5) 6.9 (20.5) (1.3) 1.5 6.8 (1.0) 9.5 (7.0) 2.5 5.4 (10.5) 3.4 6.4 (1.1) 2.4 October 6.1 (6.0) (3.3) 16.9 (22.4) 3.3 2.4 8.7 0.8 9.0 (9.7) 7.8 17.4 (18.9) 17.6 8.6 (3.3) 7.5 November 3.2 (0.2) (4.1) (8.9) (4.2) 17.2 4.8 (0.7) (3.0) (1.4) (0.3) 1.1 December (1.1) 2.4 4.2 (18.3) (0.8) 13.1 9.0 0.2 4.1 (5.6) 6.5 (3.2) January 1.4 1.8 (3.6) (4.4) (3.2) 15.6 6.4 (0.3) 2.5 (3.7) 3.8 (0.6) February 1.3 8.2 (9.3) (9.6) (5.1) 23.0 1.9 2.8 0.9 (6.2) 5.0 (0.3) March 2.6 (4.0) (9.1) (38.8) (2.5) (18.6) 5.1 (24.3) (3.2) (36.8) 1.4 (22.3) Average 3.6 0.8 3.4 (13.4) (0.5) 9.7 7.4 (3.4) 5.6 (8.6) 4.1 0.2
Source: CEIC, Kotak Economics Research
42 KOTAK ECONOMIC RESEARCH Economy India
Exhibit 5: We expect GDP growth at (-)8.6% for FY2021E and 9.3% for FY2022E Real GVA and components growth, March fiscal-year ends, 2016-23E (%)
2016 2017 2018 2019 2020 2021E 2022E 2023E Real GVA 8.0 8.0 6.6 6.0 3.9 (8.2) 9.3 6.0 Agriculture and allied 0.6 6.8 5.9 2.4 4.0 3.4 3.5 2.9 Industry 9.6 7.7 6.3 4.9 0.9 (8.8) 13.3 5.4 Mining 10.1 9.8 4.9 (5.8) 3.1 (9.5) 11.3 4.1 Manufacturing 13.1 7.9 6.6 5.7 0.0 (6.8) 12.8 4.7 Electricity 4.7 10.0 11.2 8.2 4.1 3.4 6.3 6.9 Construction 3.6 5.9 5.0 6.1 1.3 (16.9) 17.9 7.0 Services 9.4 8.5 6.9 7.7 5.5 (10.9) 8.9 7.2 Trade, hotel, transport, communication 10.2 7.7 7.6 7.7 3.6 (18.9) 14.7 9.4 Financial, real estate, professional services 10.7 8.6 4.7 6.8 4.6 (4.9) 5.3 5.7 Public admin, defence, and others 6.1 9.3 9.9 9.4 10.0 (9.1) 7.8 6.7 Real GDP 8.0 8.3 7.0 6.1 4.2 (8.6) 9.3 6.1
Source: CEIC, Kotak Economics Research estimates
KOTAK ECONOMIC RESEARCH 43
Kotak Institutional Equities: Valuation summary of KIE Universe stocks India
Fair O/S ADVT Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo
KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK
Company Rating 11-Dec-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E (US$ mn)
Automobiles & Components DailySummary Amara Raja Batteries REDUCE 934 730 (22) 159 2.2 171 36 46 52 (7.3) 27.5 13.3 26 20.4 18.0 14.2 11.3 9.9 3.9 3.4 3.0 15.8 17.7 17.6 1.0 1.2 1.4 11.0 Apollo Tyres BUY 193 175 (9) 110 1.5 638 4.7 11.6 16.2 (43.5) 145.7 39.9 41.0 16.7 11.9 7.6 5.9 4.6 1.1 1.0 1.0 2.8 6.4 8.5 0.7 1.4 1.4 17.2 Ashok Leyland BUY 94 115 22 276 3.7 2,936 (0.3) 3.4 7.5 (121.4) 1,412.9 117.2 NM 27.3 12.6 38.4 13.2 7.5 3.8 3.5 2.9 NM 13.4 25 0.0 1.1 2.4 49 Bajaj Auto BUY 3,328 3,900 17 963 13 289 154 185 216 (12.5) 19.7 17.1 21.6 18.0 15.4 16.2 12.9 10.6 4.4 4.0 3.7 21 23 25 2.8 3.3 3.9 42 Balkrishna Industries SELL 1,666 1,250 (25) 322 4.4 193 52 62 77 4.2 19.5 24.4 32.2 26.9 21.7 19.0 15.7 12.7 5.8 5.1 4.4 18.9 20 22 1.3 1.5 1.6 24 Bharat Forge SELL 552 320 (42) 257 3.5 466 (0) 13 19 (102.4) 7,097.2 50.4 NM 43.7 29.1 51.4 21.9 16.5 4.9 4.5 4.0 NM 10.8 14.7 0.0 0.5 0.5 18.8 CEAT ADD 1,159 1,200 4 47 0.6 40 72 92 108 14.4 28.7 17.2 16.2 12.6 10.7 8.7 6.8 6.0 1.5 1.4 1.2 9.6 11.3 12.0 1.0 1.0 1.0 3.9 Eicher Motors SELL 2,471 1,920 (22) 675 9.2 272 57 84 109 (15.7) 47.7 30.8 43.6 29.5 22.6 31.2 22.5 17.3 7.0 5.9 4.9 17.3 22 24 0.5 0.5 0.5 49 Endurance Technologies REDUCE 1,163 1,020 (12) 164 2.2 141 34 49 59 (16.2) 44.7 21.9 35 23.9 19.6 16.0 12.1 10.0 4.8 4.1 3.5 13.9 17.3 17.9 0.5 0.7 0.9 1.7 Escorts BUY 1,361 1,535 13 121 2.5 101 72 85 96 31.7 17.6 13.3 18.9 16.1 14.2 10.9 9.0 7.6 2.7 2.3 2.1 14.2 14.6 14.5 0.8 0.9 1.1 35 Exide Industries REDUCE 194 165 (15) 165 2.2 850 8.0 9.7 10.6 (19.9) 21.1 9.2 24.3 20.0 18.3 12.9 10.9 9.9 2.5 2.3 2.1 10.5 11.8 12.0 1.8 1.8 1.8 9.5
Hero Motocorp SELL 3,185 2,700 (15) 636 8.6 200 136 175 202 (14.7) 29.2 14.9 23.5 18.2 15.8 15.1 11.2 9.6 4.2 3.9 3.5 18.6 22 23 2.8 3.3 3.8 71 -
Mahindra CIE Automotive SELL 154 110 (29) 59 0.8 378 1.8 8.2 12.1 (80.6) 347.1 48.3 84.4 18.9 12.7 16.6 8.6 6.4 1.2 1.2 1.1 1.5 6.4 8.8 — — — 0.5 December 14, 14, December 2020 Mahindra & Mahindra BUY 728 770 6 904 12.3 1,138 32 44 49 35.1 35.6 12.7 22.6 16.7 14.8 13.7 11.0 9.5 2.2 2.0 1.8 10.2 12.7 12.8 0.4 0.9 1.0 57 Maruti Suzuki SELL 7,734 5,800 (25) 2,336 31.7 302 170 253 310 (8.9) 48.6 22.4 45 31 25 29.3 18.6 14.4 4.5 4.1 3.6 10.3 14.0 15.3 0.8 0.8 1.0 119 Motherson Sumi Systems ADD 154 155 0 487 6.6 3,158 2.7 7.5 9.0 (26.2) 173.2 20.5 56.5 20.7 17.2 11.3 6.1 5.0 4.1 3.3 2.6 7.5 17.7 17.1 0.8 1.0 1.2 26
MRF SELL 77,878 63,325 (19) 330 4.5 4 2,441 3,141 3,896 (27.3) 28.7 24.0 32 24.8 20.0 12.0 9.9 8.1 2.5 2.3 2.0 8.1 9.6 10.8 0.1 0.1 0.1 34 Schaeffler India SELL 4,344 3,500 (19) 136 1.8 31 87 139 166 (26.5) 60.7 19.5 50 31 26 25.0 16.7 14.0 4.2 3.8 3.3 8.8 12.8 13.5 — — — 1.0 SKF REDUCE 1,666 1,450 (13) 82 1.1 49 43 54 67 (26.4) 26.2 22.9 39 31 25 28.2 21.4 17.2 5.6 4.9 4.2 14.4 15.9 16.9 6.5 0.5 0.7 0.7 Tata Motors SELL 179 135 (25) 643 8.0 3,829 (10.6) 12.1 19.6 48.8 213.9 61.7 NM 14.8 9.1 5.2 3.8 3.1 1.1 1.0 0.9 NM 7.2 10.6 — — — 130 Timken SELL 1,127 830 (26) 85 1.1 75 22 36 43 (33.6) 64.9 20.0 52 31 26 29.8 19.1 15.9 6.2 5.3 4.5 11.1 18.1 18.4 0.1 0.1 0.2 0.7 TVS Motor SELL 484 300 (38) 230 3.1 475 7.5 15.5 20.1 (41.9) 106.0 29.4 64 31 24 22.4 15.0 12.3 6.1 5.3 4.6 9.7 18.2 21 0.6 0.8 1.0 19.5 Varroc Engineering BUY 407 380 (7) 55 0.7 135 (20) 23 35 (10,817.5) 213.9 56.2 NM 17.9 11.5 13.0 6.0 4.8 2.0 1.8 1.6 NM 10.1 13.8 — — — 1.2 Automobiles & Components Cautious 9,244 125.5 (1) 106 28 45.9 22.3 17.5 13.1 9.3 7.6 3.2 2.9 2.5 6.9 12.8 14.5 1.0 1.2 1.4 722 Banks AU Small Finance Bank SELL 920 620 (33) 282 3.8 304 29.0 23.9 31.4 30.8 (17.6) 31.4 32 38 29 — — — 5.5 4.8 4.2 18.3 12.9 14.8 — — — 6.8 Axis Bank BUY 613 600 (2) 1,877 25.5 2,822 34.4 43 54 496.2 24.5 25.4 18 14.3 11.4 — — — 2.0 1.8 1.6 10.9 12.3 13.9 0.8 1.0 1.3 175
Bandhan Bank ADD 423 340 (20) 682 9.2 1,610 20.1 20.4 24.8 7.3 1.0 22.0 21.0 20.8 17.0 — — — 3.8 3.2 2.7 19.3 16.3 16.9 — — — 51
Bank of Baroda ADD 65 65 (1) 302 4.1 4,627 8.8 18.3 20 648.3 106.8 9.3 7 3.6 3.3 — — — 0.5 0.5 0.5 6.0 11.6 11.5 2.7 5.6 6.1 27 Canara Bank REDUCE 125 85 (32) 182 2.5 1,454 (1.0) 7.0 20.1 95.2 774.8 185.4 NM 17.8 6.2 — — — 0.6 0.6 0.6 NM 1.9 5.3 — — — 20 City Union Bank ADD 177 160 (10) 131 1.8 737 13.5 18.8 23.6 109.4 39.3 25.4 13 9.4 7.5 — — — 1.3 1.2 1.0 18.2 23 27 1.4 1.9 2.4 4.2 DCB Bank BUY 117 150 28 36 0.5 310 9.3 11.6 16.7 (14.2) 23.9 44.4 12.5 10.1 7.0 — — — 1.1 1.0 0.9 8.8 10.0 13.0 0.8 1.0 1.4 3.0 Equitas Holdings BUY 69 100 45 24 0.3 342 7.8 8.3 16.3 30.2 5.3 96.9 8.8 8.3 4.2 — — — 0.8 0.8 0.7 9.2 8.8 15.4 — — — 3.4 Federal Bank BUY 66 80 21 132 1.8 1,993 7.1 7.7 11.7 (8.4) 8.1 52.4 9.3 8.6 5.7 — — — 0.9 0.9 0.8 9.4 9.5 13.2 2.4 2.6 3.9 31 HDFC Bank ADD 1,383 1,300 (6) 7,615 103.3 5,483 53 58 68 10.3 10.4 16.3 26 24 20 — — — 4.0 3.5 3.1 15.9 15.5 16.0 0.7 0.8 1.0 206 ICICI Bank BUY 515 600 16 3,557 48.2 6,893 23.3 27 30 90.0 15.9 11.4 22 19.1 17.2 — — — 2.6 2.4 2.2 12.3 12.3 12.5 0.9 1.0 1.2 183 IndusInd Bank ADD 924 620 (33) 699 9.5 756 26 61 75 (58.8) 132.4 22.9 35 15.2 12.3 — — — 1.9 1.7 1.5 5.5 11.2 12.5 0.4 1.0 1.2 200 Karur Vysya Bank BUY 47 65 38 38 0.5 799 4.7 7 9 60.5 39.0 42.7 10 7.2 5.0 — — — 0.6 0.6 0.6 5.6 7.4 10.0 2.6 3.6 5.2 1.2 Punjab National Bank REDUCE 41 30 (26) 381 5.2 9,411 1 5 7 2.3 854.1 36.3 79 8.3 6.1 — — — 0.7 0.8 0.6 0.7 5.6 7.1 — — — 21 RBL Bank BUY 236 270 15 141 1.9 597 9.5 19 24 (4.8) 96.0 28.5 25 12.7 9.9 — — — 1.2 1.1 1.0 4.9 8.5 10.1 0.6 1.2 1.5 50 State Bank of India BUY 272 340 25 2,432 33.0 8,925 24 30 39 46.6 24.8 30.4 11 9.2 7.0 — — — 1.3 1.1 1.0 8.8 10.0 11.7 0.1 0.1 0.1 179 Ujjivan Financial Services BUY 283 345 22 34 0.5 121 33.6 44 - 24.9 31.6 (100.0) 8 6.4 - — — — 1.4 1.2 — 17.0 19.3 NM 1.5 2.1 0.0 2.8 Ujjivan Small Finance Bank ADD 39 39 0 67 0.9 1,750 2 2 3 (3.1) (4.8) 82.5 21 22.3 12.2 — — — 2.1 1.9 1.7 10.1 8.9 14.1 0.0 0.0 0.0 0.9 Union Bank REDUCE 33 25 (25) 212 2.9 6,407 3 0 4 131.7 (86.2) 1,041.9 12 89.4 7.8 — — — 0.6 0.6 0.5 3.0 0.4 4.6 1.2 0.2 1.9 2.2 YES Bank SELL 19 11 (43) 487 6.6 25,055 (1) (0) 0 95.4 49.9 131.1 NM NM 207.8 — — — 1.7 1.7 1.7 NM NM 0.7 0.0 0.0 0.0 39 Banks Attractive 19,311 261.9 118.9 28.5 25.6 21 16.5 13.1 1.7 1.6 1.4 8.2 9.7 11.0 0.7 0.8 0.9 1,207
Source: Company, Bloomberg, Kotak Institutional Equities estimates
44 KOTAK ECONOMIC RESEARCH
44
Kotak Institutional Equities: Valuation summary of KIE Universe stocks
Fair O/S ADVT
45 Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo Company Rating 11-Dec-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E (US$ mn) Building Products Astral Poly Technik SELL 1,468 870 (41) 221 3.0 151 19.2 25 31 16.7 32.0 24.3 77 58 47 43.5 34.0 27.1 12.6 10.7 9.2 17.7 20.0 21 0.2 0.3 0.6 3.8 Building Products Cautious 221 3.0 16.7 32.0 24.3 77 58 47 43.5 34.0 27.1 12.6 10.7 9.2 16.5 18.5 19.7 0.2 0.3 0.6 3.8 Capital goods ABB SELL 1,176 980 (17) 249 3.4 212 10 20 26 (43.5) 101.7 32.0 119 59 45 84.4 39.3 29.6 6.9 6.5 5.9 5.9 11.4 13.9 0.5 0.6 0.7 2.4 Ashoka Buildcon BUY 96 135 40 27 0.4 281 11.3 11.9 12.9 (18.1) 5.8 7.7 8.5 8.1 7.5 6.4 5.4 4.6 0.9 0.9 0.8 11.6 11.2 11.0 1.9 2.0 2.1 1.6 Bharat Electronics BUY 115 120 5 279 3.8 2,437 7.0 7.3 7.5 (6.9) 4.9 2.5 16.5 15.7 15.3 10.2 9.1 8.5 2.5 2.3 2.2 16.1 15.5 14.6 2.3 2.4 2.4 14.8 BHEL SELL 36 26 (29) 125 1.7 3,482 (3.8) 1.8 2.8 10.4 148.5 52.5 NM 19.5 12.8 (9.0) 7.1 5.4 0.4 0.4 0.4 NM 2.2 3.4 (4.7) 2.1 2.8 16.5 Carborundum Universal ADD 377 310 (18) 71 1.0 189 13.6 16.1 18.3 (5.3) 18.1 14.1 28 23 21 15.8 13.3 11.4 3.5 3.2 2.9 13.3 14.3 14.8 1.0 1.2 1.4 1.6 Cochin Shipyard BUY 360 520 45 47 0.6 132 35 43 43 (27.2) 20.4 1.1 10.2 8.5 8.4 5.2 5.1 4.7 1.2 1.1 1.0 12.0 13.4 12.5 3.3 3.5 3.8 1.7 Cummins India BUY 583 600 3 162 2.2 277 22 28 32 (14.8) 28.4 14.2 27 21 18.3 28.4 20.8 17.8 3.7 3.5 3.4 14.1 17.4 18.8 2.0 2.6 3.0 9.7 Dilip Buildcon BUY 394 515 31 54 0.7 137 25 45 61 (19.0) 83.2 35.2 16.0 8.7 6.5 5.9 4.5 3.9 1.4 1.2 1.0 8.9 14.5 16.7 0.1 0.2 0.3 0.8 IRB Infrastructure BUY 115 145 27 40 0.5 351 13 10 9 (37.8) (20.0) (10.9) 9.0 11.2 12.6 6.6 5.9 4.9 0.6 0.6 0.5 6.6 5.0 4.3 3.4 1.7 2.1 1.2 Kalpataru Power Transmission BUY 324 475 46 48 0.7 153 25 39 43 (2.4) 56.8 11.7 13.1 8.3 7.5 4.8 4.0 3.4 1.3 1.0 0.9 10.4 13.5 12.9 1.0 1.4 1.6 2.1 KEC International BUY 367 380 4 94 1.3 257 24.0 32 35 9.3 31.4 11.3 15.3 11.6 10.4 8.7 7.0 6.2 2.8 2.3 2.0 20 22 20 0.7 0.9 1.0 2.4 L&T BUY 1,194 1,300 9 1,677 22.7 1,403 34 63 76 (46.9) 86.9 21.0 35 19.0 15.7 23.5 17.4 16.0 2.5 2.3 2.1 7.5 12.5 13.9 1.2 1.6 2.0 83 Siemens SELL 1,536 1,150 (25) 547 7.4 356 35 40 42 65.5 12.6 6.7 44 39 36 30.7 27.0 25.4 5.3 4.9 4.5 12.7 13.1 12.8 0.6 0.7 0.8 14.8 Thermax BUY 912 850 (7) 109 1.5 113 18 29 36 (2.6) 55.2 24.6 50 32 26 33.9 23.1 18.7 33.9 23.1 18.7 6.8 10.3 12.3 1.2 1.6 2.1 0.8 Capital goods Attractive 3,530 47.9 (30.6) 74.2 17.3 35 19.9 16.9 2.3 2.1 2.0 6.5 10.6 11.5 1.0 1.5 1.8 154 Commercial & Professional Services SIS BUY 440 425 (3) 65 0.9 149 16 19 24 5.5 17.5 27.5 28 23 18.4 13.2 12.0 10.2 4.1 3.5 3.0 15.8 16.0 17.4 0.2 0.2 0.3 0.8 TeamLease Services ADD 2,705 2,550 (6) 46 0.6 17 45 67 93 118.9 50.2 38.1 60 40 29 41.6 30.4 23.5 7.1 6.1 5.0 12.5 16.3 18.8 — — — 0.9 Commercial & Professional Services Attractive 111 1.5 20.7 25.5 30.6 35 28 22 18.1 15.7 13.0 4.9 4.2 3.5 13.9 14.9 16.4 0.1 0.1 0.2 2 Commodity Chemicals Asian Paints REDUCE 2,521 2,000 (21) 2,418 32.8 959 27.4 37.2 44.0 0.7 35.8 18.3 92 68 57 55.9 44.1 38.5 21.0 18.1 15.6 24 29 29 0.5 0.7 0.9 74 Berger Paints SELL 677 505 (25) 658 8.9 971 7.0 9.8 11.6 3.2 40.5 18.5 97 69 58 58.9 43.8 37.7 21.0 17.7 15.0 23 28 28 0.3 0.5 0.6 11.1 Kansai Nerolac ADD 549 560 2 296 4.0 539 9.4 13.0 15.3 (5.5) 38.9 17.1 58 42 36 37.5 27.6 24.0 7.2 6.6 5.9 12.8 16.3 17.3 0.5 0.8 1.0 1.7 Tata Chemicals ADD 508 355 (30) 129 1.8 255 20.0 33.3 36.8 (36.9) 66.5 10.7 25 15.3 13.8 8.0 6.0 5.3 1.0 0.9 0.9 3.9 6.3 6.7 1.4 2.3 2.5 26 Commodity Chemicals Neutral 3,501 47.5 (6.2) 40.5 17.2 81 58 49 43.9 33.8 29.7 10.9 9.9 8.9 13.5 17.2 18.1 0.5 0.7 0.9 113 Construction Materials ACC BUY 1,609 1,800 12 302 4.1 188 76.1 90.8 102.1 5.3 19.2 12.4 21 17.7 15.8 9.6 8.0 6.7 2.5 2.3 2.2 12.1 13.5 14.1 2.4 2.8 3.2 36 Ambuja Cements BUY 246 300 22 488 6.6 1,986 12.2 14.4 17.4 15.6 18.0 20.5 20 17.0 14.1 7.7 6.1 4.8 2.1 1.9 1.7 10.3 11.8 12.9 6.9 1.1 1.3 26 Dalmia Bharat BUY 1,056 1,250 18 197 2.7 187 37.5 42.1 63.1 168.8 12.2 50.0 28 25 16.7 8.6 7.9 6.1 1.8 1.7 1.6 6.6 7.0 9.7 — — — 3.0 Grasim Industries ADD 902 875 (3) 594 8.1 657 54.2 76.5 100.1 2.9 41.2 30.9 16.7 11.8 9.0 8.5 6.3 4.9 1.0 0.9 0.8 6.1 8.0 9.7 0.2 0.4 0.6 27
J K Cement ADD 1,949 2,000 3 151 2.0 77 81.5 116.9 138.3 26.8 43.4 18.4 24 16.7 14.1 11.8 8.8 7.5 4.2 3.4 2.8 19.1 23 22 0.5 0.5 0.5 2.9 Daily Summary India JK Lakshmi Cement BUY 344 350 2 40 0.5 118 22.9 29.6 35.8 (2.6) 29.6 20.7 15.0 11.6 9.6 6.7 6.2 5.8 2.1 1.8 1.5 14.9 16.7 17.3 1.0 1.3 1.6 1.7 Orient Cement ADD 79 75 (4) 16 0.2 205 8.9 6.7 8.5 109.6 (24.1) 26.9 8.9 11.7 9.2 4.9 5.6 4.8 1.3 1.2 1.1 15.3 10.5 12.3 2.5 2.5 2.5 0.6 Shree Cement SELL 23,805 17,500 (26) 859 11.6 36 543.6 774.9 904.9 24.9 42.6 16.8 44 31 26 23.3 17.5 15.0 5.9 5.1 4.3 14.3 17.8 17.8 0.5 0.5 0.5 23 UltraTech Cement ADD 5,015 5,250 5 1,448 19.6 289 177.5 231.7 281.1 33.6 30.6 21.3 28 22 17.8 14.4 11.6 9.8 3.3 2.9 2.5 12.3 14.2 15.0 0.3 0.4 0.5 48 Construction Materials Attractive 4,095 55.5 21.1 30.5 23.1 25 19.3 15.6 11.4 9.1 7.4 2.4 2.2 1.9 9.5 11.2 12.3 1.3 0.7 0.8 169
Source: Company, Bloomberg, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL INSTITUTIONAL KOTAK
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December 14, 14, December 2020
EQUITIES RESEARCH EQUITIES
KOTAK ECONOMIC RESEARCH 45
Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Fair O/S ADVT Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo Company Rating 11-Dec-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E (US$ mn)
KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK
Consumer Durables & Apparel
Crompton Greaves Consumer SELL 331 255 (23) 208 2.8 627 8.0 9.5 10.6 1.1 18.9 11.7 41 35 31 31 27 23 11.5 9.1 7.4 31 29 26 0.9 0.8 0.8 9.4 DailySummary Havells India SELL 827 600 (27) 518 7.0 626 14.7 16.2 18.6 24.8 10.3 14.7 56 51 45 38 35 30 10.7 9.5 8.5 20 19.7 20 0.6 0.7 0.8 24 Page Industries REDUCE 23,558 21,000 (11) 263 3.6 11 285 428 499 (7.5) 50.3 16.7 83 55 47 53 37 32 27.6 22.2 18.4 36 45 43 0.7 1.0 1.3 15.9 Polycab ADD 1,039 970 (7) 155 2.1 149 44 52 58 (13.7) 18.0 9.9 23 19.8 18.0 15 13 11 3.5 3.1 2.7 16.1 16.5 15.9 0.6 0.7 0.8 5.6 TCNS Clothing Co. REDUCE 416 390 (6) 26 0.3 66 (5) 14 17 (149.5) 358.7 22.9 NM 30 25 43 11 9.4 4.1 3.5 2.9 NM 12.4 12.9 — — — 0.2 Vardhman Textiles ADD 977 720 (26) 56 0.8 57 25 90 104 (70.8) 260.6 16.1 39 10.9 9.4 14.2 6.8 5.9 0.9 0.8 0.8 2.3 8.0 8.7 1.3 2.0 2.6 0.5 Voltas SELL 805 655 (19) 266 3.6 331 14.0 21.3 24.7 (13.6) 51.8 16.1 57 38 33 50 31 27 5.8 5.2 4.7 10.5 14.5 15.2 0.4 0.7 0.8 23 Whirlpool SELL 2,085 1,750 (16) 264 3.6 127 33 49 61 (12.4) 49.1 24.5 63 43 34 42 29 23 9.4 8.4 7.7 15.6 21 24 0.5 0.9 1.5 1.8 Consumer Durables & Apparel Cautious 1,756 23.8 (13.3) 41.6 52 37 32 33 25 21 6.7 6.0 12.9 16.3 16.7 0.6 0.8 81 Consumer Staples Bajaj Consumer Care ADD 202 230 14 30 0.4 148 15.0 14.8 15.7 19.7 (1.3) 6.1 13.5 13.7 12.9 10.3 10.2 9.2 3.9 3.5 3.1 31 27 26 4.0 4.0 4.4 1.8 Britannia Industries ADD 3,733 4,050 8 899 12.2 240 78 81 93 32.8 2.9 15.8 48 46 40 36 34 30 30.1 22.0 18.4 50 54 50 2.9 1.3 1.5 42
Colgate-Palmolive (India) ADD 1,574 1,600 2 428 5.8 272 33 37 43 18.0 11.8 15.2 47 42 37 30.5 27.5 24.1 26.3 25.1 23.8 56 61 67 2.0 2.3 2.6 17.9 -
Dabur India REDUCE 514 480 (7) 908 12.3 1,767 9.7 11.1 12.5 12.6 14.0 12.5 53 46 41 43 37 32 12.5 11.4 10.3 25 26 26 1.2 1.4 1.5 27 14, December 2020 Godrej Consumer Products ADD 727 750 3 743 10.1 1,022 15.7 18.5 21.2 13.7 18.0 14.5 46 39 34 32 27 24 8.2 7.4 6.7 18.9 19.8 21 1.0 1.3 1.6 15.8 Hindustan Unilever ADD 2,375 2,500 5 5,580 75.7 2,343 35 43 51 11.4 23.3 18.0 68 55 47 48 40 34 12.8 12.3 11.7 32 23 26 1.3 1.6 1.9 75 ITC BUY 216 250 16 2,662 36.1 12,318 10.4 12.4 13.4 (9.8) 18.5 8.3 21 17.5 16.2 14.9 12.3 11.2 4.0 3.9 3.8 18.9 22 23 4.1 4.9 5.3 79
Jyothy Laboratories ADD 141 160 13 52 0.7 367 6.0 6.3 7.1 27.2 4.6 13.5 24 22 19.8 16.4 15.6 13.9 3.9 3.7 3.5 17.3 16.9 18.0 2.5 2.8 3.2 0.9 Marico ADD 415 400 (4) 536 7.3 1,290 8.9 9.9 11.0 10.1 10.6 12.0 47 42 38 33 30 26 16.2 14.9 13.8 36 37 38 1.7 1.9 2.1 17.3 Nestle India REDUCE 18,401 16,000 (13) 1,774 24.1 96 226 265 307 10.5 17.5 15.6 82 69 60 54 47 41 79.6 53.1 38.4 105 92 74 1.1 0.8 0.9 37 Tata Consumer Products ADD 576 530 (8) 531 7.2 922 10.1 12.3 14.3 26.4 21.7 16.6 57 47 40 31 28 24 3.7 3.5 3.3 6.6 7.6 8.4 0.6 0.7 0.9 33 United Breweries ADD 1,157 1,125 (3) 306 4.2 264 3.7 19.7 24.9 (77.3) 435.6 26.0 314 59 47 83 30 25 8.7 7.6 6.8 2.8 13.8 15.4 0.1 0.5 0.7 10.3 United Spirits ADD 593 620 4 431 5.8 727 7.0 14.1 17.2 (38.9) 101.5 22.0 85 42 34 42 26 22 9.7 7.9 6.8 12.1 21 21 — — 0.8 16.7 Varun Beverages BUY 910 850 (7) 263 3.6 289 10.8 25.9 32.6 (33.4) 139.3 26.0 84 35 28 24 15 13 7.1 6.0 5.1 8.9 18.6 19.8 0.1 0.3 0.3 3.9 Consumer Staples Attractive 15,142 205.3 2.5 21.6 13.6 46 38 34 33 27 24 9.2 8.6 8.1 20.0 23 24 1.8 2.0 2.3 377 Diversified Financials Bajaj Finance REDUCE 4,844 3,000 (38) 2,919 39.6 600 73 135 172 (17) 85 27 66 36 28 — — — 8.0 6.7 5.5 12.8 20 22 0.2 0.3 0.4 274 Bajaj Finserv BUY 8,995 8,000 (11) 1,431 19.4 159 270 425 528 28 58 24 33 21 17.0 — — — 4.6 3.9 3.3 13.7 19.9 21 0.2 0.2 0.2 98
Cholamandalam BUY 369 350 (5) 303 4.1 820 20.0 26.4 32.7 56 32.0 23.8 18.5 14.0 11.3 — — — 3.4 2.8 2.3 18.4 20 21 0.6 0.8 1.0 25 HDFC ADD 2,296 2,240 (2) 4,131 56.0 1,789 61 68 81 (40.3) 10 20.4 37 34 28 — — — 3.8 3.5 3.3 11.0 10.8 12.0 0.9 1.0 1.2 152 HDFC AMC REDUCE 2,839 1,950 (31) 604 8.2 213 57 68 79 (3.5) 19 15.8 50 42 36 — — — 13.2 11.6 10.1 28 29 30 1.1 1.3 1.5 12.7 IIFL Wealth ADD 1,046 1,100 5 92 1.2 88 34.7 45.1 60.7 46 29.7 34.6 30 23 17.2 — — — 3.2 3.0 2.8 10.4 13.4 17.0 4.8 2.8 2.9 0.6 L&T Finance Holdings ADD 90 90 (0) 181 2.5 2,005 4 9 13 (55.7) 136 49.6 24 10.2 6.8 — — — 1.2 1.1 1.0 5.1 11.2 14.9 1.6 1.8 1.8 17.0 LIC Housing Finance ADD 353 400 13 178 2.4 505 55.3 73.8 85.9 16 33.4 16.5 6.4 4.8 4.1 — — — 1.0 0.9 0.8 14.5 17.0 17.2 2.6 3.5 4.1 29 Mahindra & Mahindra Financial BUY 173 160 (8) 214 2.9 1,232 8.3 17.2 20.7 (44) 107.0 20.9 21 10.1 8.3 — — — 1.6 1.4 1.3 7.7 13.1 14.3 0.7 2.0 2.4 22 Muthoot Finance REDUCE 1,173 1,150 (2) 471 6.4 401 83 94 104 11.3 12 11.0 14.1 12.5 11.3 — — — 3.3 2.8 2.3 26 24 22 1.4 1.6 1.8 40 Shriram City Union Finance BUY 1,046 1,400 34 69 0.9 66 138 179 200 (9.0) 30 11.7 7.6 5.8 5.2 — — — 0.9 0.8 0.7 12.0 13.9 13.8 1.7 2.6 2.9 0.6 Shriram Transport BUY 1,043 1,100 5 264 3.6 253 74.5 113.9 149.1 (32) 53.0 30.9 14.0 9.2 7.0 — — — 1.3 1.2 1.0 9.6 12.9 15.0 1.1 1.6 2.1 55 Diversified Financials Attractive 10,921 148.1 (16.5) 37.9 20.0 32 23 19.2 3.7 3.3 3.0 11.6 14.2 15.6 0.7 0.9 1.0 727
Source: Company, Bloomberg, Kotak Institutional Equities estimates
46 KOTAK ECONOMIC RESEARCH
46
Kotak Institutional Equities: Valuation summary of KIE Universe stocks
Fair O/S ADVT
47 Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo Company Rating 11-Dec-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E (US$ mn) Electric Utilities CESC BUY 623 800 29 83 1.1 133 91 105 113 (8) 16.0 7.7 6.9 5.9 5.5 5.0 4.5 4.0 0.6 0.6 0.5 9.3 9.9 9.9 2.0 2.1 2.4 2.6 JSW Energy BUY 68 65 (4) 112 1.5 1,640 5.2 5.3 6.3 (18) 1 18.9 13.1 12.9 10.9 6.1 5.3 4.9 0.9 0.8 0.8 7.1 6.7 7.4 — — — 2.2 NHPC ADD 22 26 17 222 3.0 10,045 3.0 3.2 3.2 5.8 6 1.0 7.5 7.0 7.0 10.6 9.5 9.0 0.7 0.7 0.6 9.3 9.5 9.2 7.5 8.1 8.1 1.6 NTPC BUY 102 125 22 1,013 13.7 9,895 12.7 15.0 16.0 14.2 18.2 6.6 8.1 6.8 6.4 8.2 6.3 5.4 0.8 0.8 0.7 10.7 11.7 11.5 3.3 4.4 4.7 46 Power Grid BUY 193 220 14 1,010 13.7 5,232 21.8 26 28 8 19.1 7.8 8.9 7.5 6.9 6.8 6.0 5.5 1.5 1.3 1.2 17.0 18.6 18.3 5.6 6.7 7.2 27 Tata Power BUY 73 67 (8) 233 3.2 3,196 4.0 5.3 6.0 (11) 33 14.0 18.3 13.8 12.1 8.3 8.0 7.6 1.1 1.0 0.9 6.3 7.4 7.8 — — — 23 Electric Utilities Attractive 2,673 36.2 8.2 17.4 7.3 8.8 7.5 7.0 1.0 0.9 0.8 11.2 12.1 12.0 4.1 4.9 5.2 101 Fertilizers & Agricultural Chemicals Bayer Cropscience SELL 5,250 3,900 (26) 236 3.2 45 140.8 156.4 176.5 8.9 11.1 12.8 37 34 30 27 23 20 7.7 6.5 5.5 22 21 20 0.5 0.6 0.7 2.7 Dhanuka Agritech SELL 746 650 (13) 35 0.5 48 37.0 40.8 45.8 24.4 10.4 12.2 20.2 18.3 16.3 15.0 13.3 11.5 4.2 3.6 3.2 23 21 21 1.2 1.6 2.2 0.8 Godrej Agrovet SELL 525 455 (13) 101 1.4 192 15.4 18.0 20.9 33.5 17.1 16 34 29 25 18 15 13 4.1 3.7 3.3 12.7 13.4 13.8 1.0 1.2 1.4 1.0 PI Industries SELL 2,305 1,700 (26) 350 4.7 148 50.9 59.5 70.8 54.2 17 19 45 39 33 32 26 22 10.5 8.7 7.2 26 25 24 0.3 0.4 0.6 16.8 Rallis India ADD 285 310 9 56 0.8 195 11.8 14.9 18.0 30.5 26.0 21.1 24.2 19.2 15.9 17.1 13.6 11.1 3.5 3.1 2.6 15.3 17.0 17.9 1.0 1.1 1.2 2.3 UPL SELL 435 375 (14) 332 4.5 765 32.4 37.3 41.2 39.6 15.1 10.3 13 11.7 10.6 7.4 6.6 5.9 1.8 1.6 1.5 14.4 14.9 14.7 1.9 2.2 2.4 56 Fertilizers & Agricultural Chemicals Cautious 1,110 15.0 36.3 15.7 13.1 24 21 18.5 12.3 10.9 9.6 3.8 3.3 2.9 15.6 15.8 15.7 1.0 1.1 1.3 80 Gas Utilities GAIL (India) BUY 126 120 (5) 568 7.7 4,510 8.0 10.4 11.5 (39.2) 29.4 10.8 15.7 12.1 11.0 11.3 8.6 7.5 1.2 1.2 1.1 8.0 9.9 10.5 3.2 4.0 4.8 27 GSPL SELL 232 200 (14) 131 1.8 564 13.2 11.8 8.0 (23.1) (10.6) (32.2) 17.6 19.7 29.0 7.5 8.0 10.6 1.8 1.7 1.6 10.6 8.7 5.6 0.9 1.0 0.9 2.4 Indraprastha Gas ADD 482 500 4 338 4.6 700 16.1 23.0 25.6 (3.2) 42.4 11.4 29.9 21.0 18.8 21.1 15.0 13.3 5.7 4.8 4.2 21 25 24 0.6 1.1 1.4 22 Mahanagar Gas BUY 1,059 1,200 13 105 1.4 99 65.3 90.8 96.4 (12.5) 39.1 6.1 16.2 11.7 11.0 10.3 7.3 6.6 3.1 2.7 2.4 20 25 23 2.4 3.3 3.9 14.9 Petronet LNG BUY 262 300 15 392 5.3 1,500 19.6 21.7 24.1 11.0 11.0 10.8 13.4 12.0 10.9 7.4 6.8 6.2 3.4 3.2 3.0 26 27 29 5.6 6.6 7.8 15.4 Gas Utilities Attractive 1,533 20.8 (20.9) 22.5 7.9 16.9 13.8 12.8 10.6 8.7 7.9 2.1 1.9 1.8 12.2 14.0 14.2 3.0 3.7 4.4 82 Health Care Services Apollo Hospitals ADD 2,360 2,240 (5) 328 4.5 139 -3.4 40 60 (119) 1,261 50 NM 59.6 39.6 25.8 19.0 17.0 9.9 9.0 7.8 NM 15.9 21 (0.1) 0.7 1.0 55 Dr Lal Pathlabs SELL 2,187 1,400 (36) 182 2.5 83 30.0 39.3 42.7 10.8 31.1 8.6 72.9 55.6 51.2 46.7 34.8 31.9 15.1 12.7 10.8 22 25 23 0.4 0.5 0.6 6.4 HCG BUY 159 150 (6) 20 0.3 143 (8.7) (2.4) (1.7) 28 73 27 NM NM NM 16.2 9.0 7.7 2.4 2.4 2.5 NM NM NM — — — 0.2 Metropolis Healthcare SELL 1,990 1,450 (27) 102 1.4 51 37.1 41.8 45.5 23.8 12.6 9 53.6 47.6 43.8 34.8 30.1 27.1 15.6 12.9 10.8 32 30 27 0.6 0.6 0.7 3.6 Narayana Hrudayalaya BUY 386 375 (3) 79 1.1 204 -7.8 7.2 10.7 (233.6) 193 48 NM 53.5 36.1 76.1 17.1 13.8 8.1 7.0 5.9 NM 14.0 17.7 — — — 1.1 Health Care Services Attractive 792 10.7 (70) 475 31 276.5 48.1 36.6 24.1 16.6 14.7 7.5 6.7 5.9 2.7 14.0 16.1 0.1 0.5 0.6 67 Hotels & Restaurants Jubilant Foodworks ADD 2,648 2,700 2 349 4.7 133 19 43 53 (20) 128.2 25 141.0 61.8 49.5 41.5 26.6 22.4 27.3 20.0 15.8 21 37 36 0.2 0.6 0.8 28 Lemon Tree Hotels BUY 44 35 (21) 35 0.5 790 -1.5 0.0 0.7 (1,168) 99 5,898 NM NM 66.3 66.9 20.6 14.1 5.0 5.3 5.3 NM NM 7.9 — 0.8 1.2 1.0
Hotels & Restaurants Attractive 385 5.2 (57) 343 35 298.5 67.3 50.0 43.9 25.5 20.6 19.3 15.8 13.2 6.5 23 26 0.2 0.6 0.8 29 Daily Summary India Insurance HDFC Life Insurance ADD 665 650 (2) 1,342 18.2 2,010 6.8 7.4 7.8 5.8 8.2 6.3 97 90 85 — — — 17.6 16.1 14.9 18.8 18.7 18.3 0.3 0.3 0.3 44 ICICI Lombard SELL 1,467 980 (33) 667 9.0 454 34.5 33.7 38.3 31 (2) 14 43 44 38 — — — 8.8 7.7 6.7 23 19.6 18.7 0.2 0.5 0.5 12.3 ICICI Prudential Life BUY 499 530 6 716 9.7 1,436 8.5 9.6 9.9 14 13.2 3.4 59 52 50 — — — 8.4 7.4 6.7 15.2 15.2 14.0 0.3 0.3 0.3 12.4 Max Financial Services NR 634 — — 171 2.3 343 9.5 26.7 16.0 (6) 180 (40) 66 24 40 — — — — — — 13.5 38 17.3 0.2 1.0 0.3 12.5 SBI Life Insurance BUY 850 1,150 35 850 11.5 1,001 17.8 20.8 23.6 25.3 16.9 13.1 48 41 36 — — — 9.0 7.6 6.4 20 20 19.3 0.3 0.4 0.4 19.1 Insurance Attractive 3,745 50.8 19.5 21.7 2.2 59.7 49.1 48 10.5 8.5 7.9 17.6 17.3 16.5 0.2 0.3 0.3 101
Source: Company, Bloomberg, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL INSTITUTIONAL KOTAK
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December 14, 14, December 2020
EQUITIES RESEARCH EQUITIES
KOTAK ECONOMIC RESEARCH 47
Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Fair O/S ADVT Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo Company Rating 11-Dec-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E (US$ mn)
KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK
Internet Software & Services
Info Edge SELL 4,521 2,910 (36) 581 7.9 128.3 25.8 43.4 53.3 (4.2) 68.6 22.7 175.4 104.1 84.8 166.4 96.9 77.0 12.7 11.7 10.6 9.5 11.7 13.1 0.1 0.2 0.3 31 DailySummary Just Dial SELL 608 550 (10) 38 0.5 61.8 25.9 29.9 35.5 (38.2) 15.3 18.8 23.5 20.3 17.1 15.9 13.2 11.0 3.1 2.7 2.3 12.7 14.0 14.4 — — — 21 Internet Software & Services Cautious 619 8.4 (18.3) 51.2 21.7 126.1 83.4 68.5 118.6 77.7 63.5 10.7 9.7 8.7 8.5 11.6 12.7 0.1 0.2 0.3 53 IT Services HCL Technologies ADD 862 945 10 2,340 31.7 2,716 45.3 50.0 55.1 11.1 10.4 10.1 19.0 17.2 15.6 11.5 10.3 9.1 3.9 3.4 2.9 23 21 19.8 1.2 1.6 1.6 124 Infosys BUY 1,163 1,400 20 4,955 67.2 4,250 43.7 48.9 55.4 12.2 12.0 13.2 26.6 23.8 21.0 17.6 15.7 13.8 6.8 6.1 5.5 27 27 28 2.2 2.6 3.0 184 L&T Infotech ADD 3,269 3,350 2 571 7.7 176 101.3 115.3 138.1 17 13.8 19.7 32.3 28.3 23.7 21.3 19.3 16.4 8.8 7.4 6.1 30 28 28 1.0 1.1 1.2 23 Mindtree SELL 1,437 1,225 (15) 237 3.2 165 60.9 67.1 73.3 59 10 9 23.6 21.4 19.6 14.8 13.7 12.2 6.2 5.2 4.4 29 26 24 1.3 1.4 1.5 31 Mphasis REDUCE 1,316 1,350 3 246 3.3 187 66.3 74.3 83.3 4 12.0 12.1 19.9 17.7 15.8 12.8 11.2 9.8 3.8 3.4 3.1 20 20 20 2.7 2.7 2.7 8.3 TCS REDUCE 2,784 2,800 1 10,445 141.6 3,750 86.6 99.6 110.7 0 15.0 11.2 32.2 28.0 25.1 22.5 19.9 17.9 12.3 10.3 9.5 38 40 39 1.2 2.1 3.2 175 Tech Mahindra BUY 919 1,020 11 801 10.9 880 47.5 55.4 64.3 3.5 16.8 16.0 19.4 16.6 14.3 11.1 9.5 8.1 3.4 3.1 2.8 18.3 19.6 20 2.4 2.6 2.8 68 Wipro ADD 354 380 7 2,020 27.4 5,649 18.0 20.0 21.9 8.6 10.7 9.6 19.6 17.7 16.1 12.8 11.7 10.3 3.8 3.2 2.7 18.7 19.1 18.2 0.6 1.4 1.4 85
IT Services Attractive 21,614 293.1 6.0 12.0 11.7 26.4 23.6 21.1 17.5 15.6 13.9 6.9 6.0 5.4 26 26 25 1.5 2.1 2.7 698 -
Media December 14, 14, December 2020 DB Corp. REDUCE 86 81 (5) 15 0.2 175 5.3 14.1 14.2 (66.5) 166.7 1.2 16.2 6.1 6.0 5.3 2.6 2.8 0.9 0.9 0.9 5.4 14.3 14.6 2.3 14.0 15.2 0.3 Jagran Prakashan REDUCE 44 37 (16) 12 0.2 281 3.9 7.3 8.4 (43.6) 87 NA 11.2 6.0 NA 2.7 1.7 NA 0.6 0.6 NA 5.7 10.3 11.5 4.5 11.3 11.3 0.2 PVR BUY 1,463 1,500 3 81 1.1 55 -92.9 39.5 59.5 (421) 143 51 NM 37.0 24.6 (25.0) 13.0 10.1 3.8 3.5 3.1 NM 9.9 13.5 (0.6) 0.3 0.4 43
Sun TV Network REDUCE 470 435 (7) 185 2.5 394 38.9 39.2 41.4 10 0.7 5.6 12.1 12.0 11.4 8.2 8.0 7.6 3.1 3.0 2.9 26 25 26 5.3 5.9 6.4 16.9 Zee Entertainment Enterprises ADD 213 225 6 204 2.8 960 10.9 16.5 17.9 (2.1) 51.4 8.4 19.5 12.9 11.9 12.2 8.1 7.0 2.1 1.9 1.7 10.9 15.3 14.9 1.6 1.9 2.1 70 Media Cautious 498 6.7 (26.5) 67.3 9.6 21.9 13.1 12.0 12.6 7.8 6.9 2.3 2.1 2.0 10.5 16.4 16.7 2.7 3.7 4.0 131 Metals & Mining Hindalco Industries BUY 244 330 35 547 7.4 2,220 19.2 28.9 31.5 7.7 50.6 9 12.7 8.4 7.7 6.7 5.5 4.8 0.9 0.8 0.7 7.1 9.8 9.7 0.4 0.4 0.4 52 Hindustan Zinc BUY 241 295 22 1,019 13.8 4,225 17.7 20.3 22.7 9.7 14.7 11.8 13.6 11.9 10.6 8.3 6.9 6.3 3.2 3.2 3.2 21 27 30 8.8 8.4 9.4 4.5 Jindal Steel and Power BUY 261 320 23 266 3.6 1,020 30.0 25.8 26.1 492 (14) 1 8.7 10.1 10.0 5.0 4.8 4.5 0.8 0.7 0.7 9.2 7.4 7.0 — — — 35 JSW Steel ADD 360 375 4 869 11.8 2,402 22.2 28.8 34.5 120.1 30 19.8 16.2 12.5 10.4 8.3 6.6 5.6 2.1 1.8 1.6 13.7 15.5 16.0 0.6 0.6 0.6 36 National Aluminium Co. SELL 43 30 (30) 80 1.1 1,866 2.4 2.0 2.9 228 (16) 42.9 17.6 21.0 14.7 5.5 7.4 6.7 0.8 0.7 0.7 4.4 3.6 5.0 0.0 2.4 3.4 7.9 NMDC REDUCE 111 95 (14) 339 4.6 2,931 14.0 10.3 10.0 (4.3) (26.2) (3) 7.9 10.7 11.1 8.0 18.3 (23.8) 1.1 1.1 1.0 14.5 10.1 9.3 3.2 4.7 4.5 11.6 Tata Steel BUY 622 700 13 713 9.7 1,146 42.5 75.0 88.9 21 76 19 14.6 8.3 7.0 7.5 6.0 5.6 1.0 0.9 0.8 6.7 11.1 11.8 2.3 2.6 2.7 121
Vedanta BUY 147 145 (1) 545 7.4 3,717 15.2 20.3 23.4 133 34 15.0 9.6 7.2 6.3 4.5 3.7 3.2 1.1 1.0 1.0 10.8 14.8 16.3 19.1 10.2 11.4 60
Metals & Mining Attractive 4,379 59.4 49.9 25.6 13.1 12.4 9.9 8.8 6.7 5.7 5.3 1.3 1.2 1.1 10.5 12.2 12.7 5.2 4.2 4.6 328
Source: Company, Bloomberg, Kotak Institutional Equities estimates
48 KOTAK ECONOMIC RESEARCH
48
Kotak Institutional Equities: Valuation summary of KIE Universe stocks
Fair O/S ADVT
49 Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo Company Rating 11-Dec-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E (US$ mn) Oil, Gas & Consumable Fuels BPCL BUY 397 425 7 862 11.7 1,967 37 37 39 250.1 0.1 6.1 10.8 10.8 10.2 8.1 8.5 7.6 2.1 1.9 1.8 20.8 18.9 18.3 4.3 4.6 4.9 50.9 Coal India BUY 138 180 30 852 11.6 6,163 17 17 18 (36) 0.4 4.8 8.0 7.9 7.6 8.3 6.9 6.0 2.8 2.9 3.1 34.1 36.1 39.6 14.5 14.5 14.5 26.6 HPCL BUY 217 260 20 331 4.5 1,524 46 33 35 548.6 (27.8) 3.4 4.7 6.5 6.3 6.1 7.4 6.8 1.0 0.9 0.8 22.5 14.4 13.8 6.4 6.2 8.0 22.1 IOCL BUY 94 100 7 884 12.0 9,181 13.8 13.3 14.1 449.2 (3.6) 6.5 6.8 7.1 6.6 6.0 5.9 5.6 0.9 0.8 0.8 13.0 11.7 11.7 6.6 6.4 6.8 23.3 Oil India SELL 110 70 (36) 119 1.6 1,084 4 6 9 (82) 71.3 52.3 30.1 17.6 11.6 9.8 7.8 6.2 0.5 0.5 0.5 1.6 2.7 4.1 0.7 2.3 3.5 1.6 ONGC SELL 97 60 (38) 1,218 16.5 12,580 5 7 12 (65) 50.5 73.2 20.8 13.8 8.0 5.4 4.6 3.5 0.5 0.5 0.5 2.5 3.7 6.2 2.1 3.0 4.6 28.3 Reliance Industries ADD 2,006 2,150 7 11,888 161.2 6,032 67 90 110 0.6 34.4 22.4 29.9 22.2 18.2 15.8 10.1 9.5 2.4 2.1 2.1 8.5 10.4 12.1 0.3 0.4 0.4 463.8 Oil, Gas & Consumable Fuels Attractive 16,154 219.1 12.7 20.9 21.0 19.1 15.8 13.1 10.5 8.1 7.4 1.7 1.5 1.5 8.8 9.5 11.1 1.9 2.0 2.2 617 Pharmaceuticals Aurobindo Pharma REDUCE 897 830 (8) 526 7.1 586 59 60 63 21.8 1 6.0 15.1 15.0 14.2 9.1 8.6 7.7 2.4 2.1 1.9 15.7 14.0 13.2 0.8 1.0 1.2 44.9 Biocon SELL 456 240 (47) 547 7.4 1,202 7.8 9.9 11.3 26 27 14.4 58 46 40 26.0 20.1 17.9 6.7 6.0 5.4 11.5 13.2 13.5 0.6 0.8 0.9 28.5 Cipla BUY 756 915 21 610 8.3 806 29.7 33 49 54.9 12 46 25 22.6 15.5 14.0 12.6 8.7 3.4 3.0 2.6 13.3 13.4 16.9 0.7 0.8 1.2 88.8 Divis Laboratories REDUCE 3,642 3,000 (18) 967 13.1 265 71 86 97 37 21 13.0 51 42.4 37.6 35.9 29.8 26.3 11.3 9.7 8.3 22.1 22.7 22.0 (0.7) (0.8) (0.9) 67.3 Dr Reddy's Laboratories SELL 5,017 4,000 (20) 834 11.3 166 157 203 267 21 29 31.5 32 24.7 18.8 18.1 13.9 10.8 4.7 4.1 3.4 14.8 16.4 18.1 0.5 0.7 0.6 185.1 Laurus Labs REDUCE 329 310 (6) 176 2.4 536 17.1 18.7 23 257.9 9 22 19 17.6 14.4 13.4 11.6 9.1 6.6 4.8 3.6 34.1 27.2 24.9 — — — 25.8 Lupin ADD 939 1,000 6 426 5.8 450 27 42 51 24.5 56 21 35 22 18.4 15.0 10.5 8.6 3.1 2.8 2.5 8.9 12.5 13.4 0.4 0.7 0.8 51.9 Sun Pharmaceuticals ADD 568 525 (8) 1,363 18.5 2,406 21.2 23.7 28 27.0 11 17 27 24 20.4 15.5 13.4 11.4 2.9 2.6 2.4 10.9 11.6 11.6 0.2 0.8 1.0 75.4 Torrent Pharmaceuticals REDUCE 2,647 2,550 (4) 448 6.1 169 71 88 104 23.6 24 17 37 30 26 18.3 15.9 14.1 8.0 6.8 5.8 21.4 22.7 22.6 0.9 1.1 1.3 22.1 Pharmaceuticals Attractive 5,896 80.0 32.5 17 21 30 25 21.1 16.9 14.3 11.9 4.1 3.6 3.2 13.8 14.3 15.1 0.3 0.5 0.6 590 Real Estate Brigade Enterprises BUY 235 230 (2) 49 0.7 204 4.7 13 17 (26) 177 31 49.5 17.9 13.7 16.4 6.6 5.5 2.1 1.9 1.7 4.2 11.1 13.2 1.1 1.1 1.1 0.8 DLF BUY 219 200 (9) 542 7.3 2,475 4.7 8.1 8.8 297 72 10 47 27.1 24.7 39.9 29.0 28.7 1.5 1.5 1.4 3.3 5.6 5.8 0.9 0.9 0.9 33.2 Embassy Office Parks REIT ADD 356 375 5 275 3.7 772 11.3 13.4 15.4 14 19 15 32 27 23 17.1 15.3 14.1 1.3 1.3 1.4 4.0 4.9 6.0 6.2 7.2 8.4 3.6 Godrej Properties SELL 1,303 700 (46) 329 4.5 252 10.2 13.3 33.1 (5.2) 31 149.0 128 98 39 2,053.8 154.9 55.9 6.5 6.1 5.3 5.2 6.4 14.4 — — — 21.4 Mindspace REIT ADD 324 330 2 192 2.6 593 14 16 18 69.4 9.5 13 22.4 20.5 18.1 18.2 14.8 13.3 1.2 1.2 1.2 9.1 5.7 6.5 2.5 6.3 6.7 2.1 Oberoi Realty ADD 520 450 (13) 189 2.6 364 21 26 31 13.3 22.2 17 24.2 19.8 16.9 18.1 16.1 12.7 2.0 1.8 1.7 8.7 9.8 10.4 0.4 0.4 0.4 4.0 Prestige Estates Projects ADD 288 275 (4) 115 1.6 401 4.0 11.5 20 (57.9) 185 71 72 25 14.7 10.2 7.8 6.4 2.1 2.0 1.8 3.0 8.1 12.6 0.5 0.5 0.5 2.2 Sobha BUY 320 400 25 30 0.4 95 11 33 50 (64) 212.3 51.0 30.1 9.7 6.4 6.1 4.5 3.9 1.2 1.1 1.0 4.1 12.2 16.5 2.2 2.2 2.2 1.9 Sunteck Realty BUY 328 300 (8) 48 0.7 140 8.8 18.4 16 23.0 109 (13) 37 17.8 20.4 29.0 14.5 16.1 1.5 1.4 1.3 4.1 8.2 6.7 0.3 0.3 0.3 2.6 Real Estate Attractive 1,769 24.0 77.2 49 26 40 27 21.5 22.4 16.5 14.1 1.8 1.7 1.6 4.4 6.3 7.7 1.7 2.2 2.5 72 Retailing Aditya Birla Fashion and Retail BUY 159 180 13 132 1.8 915 (5.7) 2.0 3.5 (201.1) 134.7 78.9 NM 81 45 34.8 10.3 8.9 6.9 5.8 5.2 NM 7.9 12.1 — — — 6.9
Avenue Supermarts SELL 2,685 1,475 (45) 1,739 23.6 648 15.6 33 42 (25.5) 108.6 27.7 172 82 64 111 55 43 14.4 12.2 10.3 8.7 16.1 17.3 — — — 22.4 Daily Summary India Titan Company ADD 1,442 1,325 (8) 1,281 17.4 888 8.4 20 26 (49.9) 137.3 28.2 171 72 56 89 46 36 17.9 15.2 12.8 10.8 22.8 24.8 0.2 0.4 0.6 52.9 Retailing Attractive 3,152 42.7 (53.3) 227.6 30.3 254 77 59 93 43 35 14.8 12.5 10.6 5.8 16.2 17.8 0.1 0.2 0.2 82 Speciality Chemicals Castrol India BUY 130 165 27 129 1.7 989 6.3 8.9 9.6 (25.2) 41.5 7.9 20.8 14.7 13.6 13.5 9.7 8.9 8.6 8.2 7.7 43.3 57.1 58.0 3.8 6.1 6.5 2.6 Pidilite Industries REDUCE 1,639 1,550 (5) 833 11.3 508 20.8 30 36 (10.0) 44.9 19.6 79 54 46 52 36 31 16.3 13.8 11.7 22.0 27.4 27.7 0.4 0.6 0.7 19.2 S H Kelkar and Company BUY 126 130 3 18 0.2 141 8.5 8.8 9.9 83.4 3.2 13.2 14.9 14.4 12.7 9.5 8.4 7.4 1.8 1.7 1.5 13.4 12.2 12.6 1.2 1.8 2.4 1.3 SRF ADD 5,268 5,000 (5) 312 4.2 58 177 216 271 28.4 22.1 25.2 29.8 24.4 19.5 17.4 14.6 11.9 4.6 4.0 3.4 17.9 17.8 18.8 0.3 0.4 0.4 17.2 Speciality Chemicals Attractive 1,291 17.5 (1.0) 34.7 18.6 46 34 28.6 28.4 21.6 18.3 9.1 7.8 6.7 19.9 23.1 23.5 0.7 1.1 1.3 40
Source: Company, Bloomberg, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL INSTITUTIONAL KOTAK
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December 14, 14, December 2020
EQUITIES RESEARCH EQUITIES
KOTAK ECONOMIC RESEARCH 49
Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Fair O/S ADVT Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo Company Rating 11-Dec-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E (US$ mn)
KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK
Telecommunication Services
Bharti Airtel BUY 504 710 41 2,752 37.3 5,456 (0.2) 10.2 21.4 NM NM NM NM 49.6 23.6 8.2 6.7 5.4 4.8 4.6 4.1 NM 9.5 18.4 1.2 1.2 1.2 138.2 DailySummary Bharti Infratel ADD 245 215 (12) 660 9.0 1,850 16.2 17.4 18.6 (1.8) 7.6 6.5 15.1 14.1 13.2 8.8 8.3 7.9 3.3 3.2 3.2 21.9 23.2 24.2 6.1 6.5 6.9 42.7 Vodafone Idea RS 10 — — 290 3.9 28,735 (8.7) (6.8) (5.0) NM NM NM NM NM NM 10.9 8.6 7.1 (0.8) (0.6) (0.5) 167.0 47.0 26.4 — — — 42 Tata Communications BUY 1,036 1,075 4 295 4.0 285 46.6 52.5 62.5 22.3 12.7 19.2 22.3 19.8 16.6 9.0 8.0 6.9 NM 23.5 10.3 NM 264 86.5 0.4 0.6 0.7 1.5 Telecommunication Services Attractive 3,997 54.2 41.8 55.3 126.6 NM NM 162.3 8.9 7.3 6.1 11.2 14.6 17.6 NM NM 10.8 1.5 1.6 1.6 225 Transportation Adani Ports and SEZ BUY 466 495 6 947 12.8 2,032 22.2 29.4 32.5 (17.4) 32.2 10.4 21.0 15.9 14.4 15.3 11.5 9.9 3.2 2.8 2.4 16.5 18.8 17.7 0.8 0.9 1.0 39.8 Container Corp. SELL 401 360 (10) 244 3.3 609 9.4 12.5 16.4 (44.6) 33.2 30.6 43 32 24 21.0 16.6 13.3 2.4 2.3 2.2 5.6 7.3 9.3 1.3 1.7 2.2 12.6 Gateway Distriparks BUY 115 135 17 14 0.2 125 3.7 3.6 6.2 (12.3) (4.0) 73.7 31.0 32.3 18.6 7.6 7.7 6.5 1.0 1.0 0.9 3.3 3.0 5.1 2.6 2.6 2.6 0.2 GMR Infrastructure BUY 27 26 (2) 161 2.2 6,036 (3.7) (1.4) (0.5) (23.1) 63.1 65.4 NM NM NM 87.0 19.0 13.4 (3.8) (3.4) (4.3) 66.3 18.3 7.4 — — — 4.8 Gujarat Pipavav Port BUY 92 120 31 44 0.6 483 4.8 6.3 7.3 (20.5) 31.5 15.1 19.1 14.5 12.6 8.6 7.4 6.4 2.1 2.1 2.2 11.2 14.7 17.0 4.9 6.4 7.3 0.6 InterGlobe Aviation BUY 1,730 1,870 8 666 9.0 383 (164.5) 91.5 120.2 (2,437.7) 155.6 31.4 NM 19 14.4 NM 5.0 3.8 94.1 15.7 3.8 NM 142.7 70.7 — — — 38
Mahindra Logistics REDUCE 406 340 (16) 29 0.4 71 5.6 11.7 15.6 (37.5) 110.9 33.2 73 35 26 22.6 14.1 11.2 5.1 4.5 4.0 7.1 13.8 16.4 — — — 0.3 -
Transportation Attractive 2,106 28.6 (163.9) 417.6 25.8 NM 21 17.0 25.8 10.0 8.3 5.2 4.3 3.5 NM 20.3 20.8 0.6 0.8 0.9 97 December 14, 14, December 2020 KIE universe 139,545 1892.5 20.2 35.3 20.8 30 21.8 18.1 13.9 11.1 9.7 3.0 2.7 2.5 10.1 12.4 13.8 1.3 1.5 1.8
Notes: (a) We have used adjusted book values for banking companies. (b) 2021 means calendar year 2020, similarly for 2022 and 2023 for these particular companies. (c) Exchange rate (Rs/US$)= 73.74
Source: Company, Bloomberg, Kotak Institutional Equities estimates
50 KOTAK ECONOMIC RESEARCH
50
Disclosures
of of the following trategic transaction n a merger or s As of September 30, 2020 any, noare longer in effect for this stock , if, fair value KOTAK INSTITUTIONAL EQUITIES RESEARCH , any, if for this stock,because is there notsufficient a
fair valuefair
.
Percentage of companies covered by Kotak Institutional Equities, the specifiedwithin category. Percentage of companies each within category for which Kotak Institutional Equities and or its affiliates has provided investment banking services the previouswithin months.12 * The above categories are defined as follows: Buy = We expect this stock to deliver more returns than 15% over the next months;12 Add = We expect this stock to deliverreturns 5-15% over the next months;12 Reduce = We expect this stock to deliver returns over -5-+5% the next months;12 Sell = We expect this stock to deliver less returns overthan -5% the next months.12 Our target prices are also on a horizon 12-month basis. These ratings are used illustratively to comply with applicable regulations. As of 30/09/2020 Kotak Institutional Equities Investment Research had investment ratings on 204 equity securities. luded
r r display is not or applicable. months. . The previous investment and rating
SELL 3.4% 21.1%
fair valuefair
term volatility in stock prices related to movements in the market.Hence, a particular Ratingmay not , if, any,have been suspended temporarily.Such suspension is in compliance with applicable regulation(s) - 1.0% 14.2% fair valuefair +5% returns over the next 12 months. REDUCE
- month horizon basis. 5 - - 15% returns over the next 12 5% returns over the next months.12 The information is not available fo - -
ake into account short ADD 25.5% 2.5% Kotak SecuritiesKotak has suspended coverage of this company.
are also on12 a Kotak SecuritiesKotak Research has suspended the investment and rating
The information is not meaningful and is therefore exc
Kotak SecuritiesKotak does not cover this company.
The investment and rating
The coverage view represents each analyst’s fundamental overall outlook on the Sector.The coverage viewwill consist of one
Attractive, Neutral, Cautious. BUY 2.0% 39.2% We expect this stock to deliver
We this expect stock to deliver 5 We expect this to stock deliver < We expect this to stock deliver more than 15% returns over the next months.12
Fair Value estimates 0% 20% 10% 70% 60% 50% 40% 30% Source: Kotak Institutional Equities Kotak Institutional Equities Research coverage universe coverage Research Equities Institutional Kotak Distribution of ratings/investment banking relationships and shouldnot be relied upon. = NA AvailableNot or Applicable.Not = NM Meaningful.Not and/or and/or Kotak Securities policies in circumstances when Securities Kotak or its affiliates is acting in an advisory capacity i involving this company and in certain other circumstances. CS = Coverage Suspended. = NC Covered.Not = RatingRS Suspended. fundamental basis for determining an investment rating or Other definitions Other Coverage view. designations: ratings/identifiers Other NR = Rated.Not REDUCE. SELL. Our Our Ratings System notdoes t strictly be in accordance with the Rating System all at times. Ratings other and definitions/identifiers ratings of Definitions BUY. ADD.
51 Disclosures
Corporate Office Overseas Affiliates Kotak Securities Ltd. Kotak Mahindra (UK) Ltd Kotak Mahindra Inc 27 BKC, Plot No. C-27, “G Block” 8th Floor, Portsoken House 369 Lexington Avenue Bandra Kurla Complex, Bandra (E) 155-157 Minories 28th Floor, New York Mumbai 400 051, India London EC3N 1LS NY 10017, USA Tel: +91-22-43360000 Tel: +44-20-7977-6900 Tel:+1 212 600 8856
Copyright 2020 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. Any U.S. recipients of the research who wish to effect transactions in any security covered by the report should do so with or through Kotak Mahindra Inc and (ii) any transactions in the securities covered by the research by U.S. recipients must be effected only through Kotak Mahindra Inc at [email protected]. This report is distributed in Singapore by Kotak Mahindra (UK) Limited (Singapore Branch) to institutional investors, accredited investors or expert investors only as defined under the Securities and Futures Act. Recipients of this analysis / report are to contact Kotak Mahindra (UK) Limited (Singapore Branch) (16 Raffles Quay, #35-02/03, Hong Leong Building, Singapore 048581) in respect of any matters arising from, or in connection with, this analysis / report. Kotak Mahindra (UK) Limited (Singapore Branch) is regulated by the Monetary Authority of Singapore. 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. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additionally, other important information regarding our relationships with the company or companies that are the subject of this material is provided herein. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. It is for the general information of clients of Kotak Securities Limited. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, clients should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. 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Please ensure that you have read and understood the current derivatives risk disclosure document before entering into any derivative transactions. Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house. Kotak Securities Limited is a corporate trading and clearing member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE), Metropolitan Stock Exchange of India Limited (MSE), National Commodity and Derivatives Exchange (NCDEX) and Multi Commodity Exchange(MCX). 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). 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We offer our research services to primarily institutional investors and their employees, directors, fund managers, advisors who are registered with us Details of Associates are available on website i.e. www.kotak.com Research Analyst has served as an officer, director or employee of subject company(ies): No We or our associates may have received compensation from the subject company(ies) in the past 12 months. 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. 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Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No Kotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No Subject company(ies) may have been client during twelve months preceding the date of distribution of the research report. A graph of daily closing prices of securities is available at https://www.moneycontrol.com/india/stockpricequote/ and http://economictimes.indiatimes.com/markets/stocks/stock-quotes. (Choose a company from the list on the browser and select the"three years" icon in the price chart). Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. 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, MCX & NCDEX). Member Id: NSE-08081; BSE-673; MSE-1024; MCX-56285; NCDEX-1262. 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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