Equity Research July 23, 2021

FIRST CALL DAILY REPORT

MARKETS Change in % Metals & Mining - Sector Update - Steel: Domestic price sulks 22-Jul-21 1D 1M 1Y Despite relative optimism elsewhere, domestic HRC prices were down a further Nifty 50 15,824 1.2 0.9 41.1 Nifty 200 8,410 1.3 1.3 45.7 INR375/t WoW. Export HRC price, however, edged up 1.6% WoW to USD896/t. Far Nifty 500 13,670 1.3 1.8 50.0 East prices persist within USD1,025–1,050/t while CIS price was stable at USD930/t. Price in US/Europe continued to remain firm with lead times stretching into Q1CY22. INDIA STOCK PERFORMANCE Avenue Supermarts - Company Update - Measured approach 16,000 80,000 At its analyst meet, Avenue Supermart (DMart) maintained its store addition 14,500 70,000

13,000 guidance of 59 stores over FY20–22. According to management, the long-term (x) 11,500 60,000 (x) potential is in excess of 1,200 stores in existing geographies alone. On DMart Ready 10,000 50,000 – the key focus during the meet – management reiterated ‘profitability over market 8,500

7,000 40,000 share’. Focus on expansion will be in metro cities (see our note), and a step-up in Jul 20 Oct 20 Jan 21 Apr 21 Jul 21 aggression in any city will be only after breaking even thereof. Nifty Index MSCI EM Index - Local Currency (RHS) - Result Update - Strong volume; margins to look up in

H2 GLOBAL Hindustan Unilever (HUL) reported Q1FY22 net sales (up 12.8% YoY), EBITDA (up 22-Jul-21 1D 1M 1Y 7.7% YoY) and adjusted PAT (up 4.4% YoY) ahead of our estimates. Domestic Dow 34,823 0.1 2.8 30.7 volumes rose 9% YoY on a base of -8% YoY, ahead of expectations. Growth was China 3,561 -0.4 -0.1 7.1 EM Index 1,326 1.1 -2.5 23.1 broad-based with all segments clocking strong double-digit growth. April saw sustained growth momentum from Q4FY21; subsequently, the shoot-up in covid UPCOMING EVENTS CALENDER cases made May a challenging month. June marked a rebound to Mar-21 levels; all in all, HUL exited the quarter on a strong note. UltraTech Cement - Result Update - Picture-perfect performance The Q1FY22 performance of UltraTech Cement (UTCL) is picture-perfect—akin to Q4FY21. Despite the odds, it exceeded expectations across volumes, realisation and cost, driving EBITDA/t to an all-time high. EBITDA topped our estimate by 19%. Factoring in firm underlying cement prices, we are raising FY22E and FY23E EBITDA by ~7% each.

Bajaj Finserv - Result Update - Soft quarter: Covid leaves a mark MACRO Change in % reported a soft performance across businesses reflecting the impact of 22-Jul-21 1D 1M 1Y Fx the second wave and consequent mobility restrictions. (BAF) saw a 74.5 0.2 -0.1 0.4 (INR/USD) quarter with muted growth, sharp rise in asset quality markers and lower coverage. !0-yr G-sec 6.2 0.2 2.9 6.7 Oil (USD) 73.7 -0.1 -2.0 70.1 Insurance businesses (BAGIC, BALIC) suffered higher covid claims. Sectoral Movements %Change Explore: Ticker 22-Jul-21 1 D 1 M 3 M 1 Y Nifty 15,824 1.2 0.9 10.3 41.1 Banking 39,362 0.7 0.6 9.3 50.3 IT 29,780 1.8 5.4 16.3 74.7 Pharmaceuticals 26,314 1.0 5.8 12.8 53.3 Oil 15,716 1.5 -7.4 8.3 14.2 Sales Traders Says Currency Conversations Power 2.0 -5.1 10.2 72.5 2,698 Auto 22,876 0.1 -3.4 5.9 38.4 Metals 19,328 3.0 7.0 19.6 150.0

Real Estate 1.6 13.4 31.1 97.1 3,143 Bond Vectors Valuation Vista FMCG 13,557 -0.2 0.4 8.3 17.9 Capital Goods 24,049 2.8 6.0 20.5 86.4

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FIRST CALL

Hindustan Zinc - Result Update - Performance in line (HZL) posted Q1FY22 results along expected lines. Key points: i) Production was affected by covid-related disruptions. ii) CoP/t rose 12% YoY to USD1,070 owing to lower volume and higher commodity prices. iii) Operating profit was impacted by lower silver volume. iv) FY22 guidance for production, CoP and capex retained. - Result Update - Tug of war: Headwinds against tailwinds While Q1FY22 EBITDA of INR11.2bn is 12% lower than our estimate, near-term headwinds – commodity pressure, weaker-than-expected domestic demand revival – continue to overpower medium-term tailwinds. However, BJAUT is better placed than peers due to a favourable export outlook (~45% of revenue), currency tailwind, new platform launches from September and an improving mix. India - Result Update - Solid beat; optimism demands caution Havells turned in a sharp beat on revenue/margins led by better stocking across segments and inventory gains. Segments barring Lloyd are close to pre-covid levels. Management indicated better demand cycle across products, except in case of further covid disruptions. ICICI Lombard GI - Result Update - Covid claims play spoilsport ICICI Lombard’s (ICICIGI) PAT declined 62% YoY to INR1.5bn, much lower than our estimate of INR3.5bn primarily due to heightened covid claims. Impact of this was INR6bn in Q1FY22 partially offset by a 36% rise in investment income. This doubled health loss ratio to 153%. Consequently, the overall loss ratio increased by 2,140bps to 91.2%. Polycab India - Result Update - Sharp miss on OPM; FMEG challenging Polycab, contrary to Havells, undershot consensus on Q1 EBITDA. This, in our view, is due to sharper GM impact and higher overheads across segments with FMEG in a sharp loss. Importantly, Polycab, ex-pricing, seems to be below pre-covid in both FMEG and cables & wires. Schaeffler India - Result Update - Strong showing across the board Schaeffler India (SCHFL) reported robust Q2CY21 sales growth of 181% YoY (up 85% YoY in H1CY21) and a mere 6% QoQ decline, 30% ahead of our estimate. The performance was led by automotive tech sales, outperformance in all segments and improved exports. EBITDA edged down ~3% QoQ (48% above estimate) but EBITDA margin rose 63bps QoQ driven by better gross margin (up 254bps QoQ). Sterlite Tech. - Result Update - Time for acceleration Sterlite Technologies (Sterlite) posted Q1FY22 results broadly in line with estimates as the second wave impacted execution in the services business. Management commentary was optimistic as product business utilisation is high while order book for services is strong. Rallis India - Result Update - Domestic segment drives growth Rallis India reported in-line revenue growth of 12% YoY driven by a 31% uptick in the domestic cropcare business. However, influx of illegal cotton seeds and delay in the cropping season stunted seeds growth to merely 3% YoY. Challenges in pricing for few AI’s (Metribuzin) as well as the sales spillover in the base quarter hurt international business growth. Meanwhile, sharply higher raw material prices dragged EBITDA margin by 260bps YoY to 16.4%.

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FIRST CALL

CEAT - Result Update - Rolling resistance: Cost pressure sticky Despite a sharp revenue outperformance, CEAT posted in-line Q1FY22 EBITDA of INR1.7bn reflecting margin pressures. The company was unable to raise prices adequately in Q1FY22 to counter the surge in commodity costs. In fact, cost inflation continues to persist in Q2FY22.

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India Equity Research Metals & Mining July 22, 2021

METALS & MINING SECTOR UPDATE

Steel: Domestic price sulks

Despite relative optimism elsewhere, domestic HRC prices were down a further INR375/t WoW. Export HRC price, however, edged up 1.6% WoW to USD896/t. Far East prices persist within USD1,025–1,050/t while CIS price was stable at USD930/t. Price in US/Europe continued to remain firm with lead times stretching into Q1CY22. In case of China, both domestic and export prices firmed up on the possibility of production cuts and export tax being imposed. However, we remain watchful of weak demand indicators and increasing inventory. We continue to maintain our measured stance on the sector with (TP: INR1,300 at 4.5x Q2FY23E EBITDA) as the lone ‘BUY’. Domestic price slips further; spreads might come under pressure Domestic HRC price slipped by INR400–800/t WoW in the key markets of and Kolkata. Average domestic HRC price in traders’ market is at INR63,875/t— lowest in past three months owing to continued domestic demand weakness. Primary rebar prices slipped by 2% WoW to INR49,167/t on average. However, secondary rebar price fared better; rising 2% WoW to INR46,380/t. Export realisation edged up 1.5% WoW to USD896/t—largely tracking the uptick in China’s export price; but still the lowest in the region. The purple patch in US/Europe continues with HRC price in the US scaling USD2,000/t for the first time ever. In Europe, lead times stretched further into Q1CY22 as prices stay robust at USD1,435/t. China’s policy flip-flop keeping steel on the edge China’s domestic price got a boost from probable production cuts in the Tangshan and Jiangsu provinces in H2CY21. Additionally, the mills are less interested in concluding export deals on the likelihood of central government imposing export tax. As a result, China’s export price was marginally up WoW at USD945/t. That said, Chinese authorities expressed concerns over the high level of prices yet again. We await greater clarity on China’s policies and export volume cooling off. Outlook: Uncertainty looms large Domestic HRC prices continued to languish—faring worse than major regions. On the other hand, spot spreads continue to trend down owing to higher coking coal prices. After a hiatus, we are again witnessing domestic (mainly flats) producers resorting to exports in Jul-21 as domestic demand continues to be weak in the key auto, construction and appliances markets. While we see no import threat as domestic prices continue to imply a 20–25% discount to landed price of imports, we believe that the weakness in traders’ market might prompt discount/price cut by the domestic players in Aug-21. We maintain ‘BUY’ only on Tata Steel (TP: INR1,300) among major steel companies owing to a likely turnaround of its European operations.

Amit Dixit Meera Midha +91 (22) 6620 3160 +91 (22) 4088 5804 [email protected] [email protected]

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India Equity Research Retail July 22, 2021

AVENUE SUPERMARTS

COMPANY UPDATE

KEY DATA Rating HOLD Measured approach continues Sector relative Neutral Price (INR) 3,397 12 month price target (INR) 3,211 At its analyst meet, Avenue Supermart (DMart) maintained its store Market cap (INR bn/USD bn) 2,201/29.5 addition guidance of 59 stores over FY20–22. According to Free float/Foreign ownership (%) 861.5/598.3 What’s Changed management, the long-term potential is in excess of 1,200 stores in Target Price ⚊ existing geographies alone. On DMart Ready – the key focus during the Rating/Risk Rating ⚊ meet – management reiterated ‘profitability over market share’. Focus INVESTMENT METRICS 250 on expansion will be in metro cities (see our note), and a step-up in 195 aggression in any city will be only after breaking even thereof. 140 85 Though the brick-and-mortar retail opportunity remains sizeable, a 30 -25 measured approach on e-commerce will limit growth and re-rating Sales Growth EPS Growth RoE PE (%) (%) (%) (x) potential. We, hence, retain ‘HOLD’. Apart from e-commerce, strong Retail DMART IN Equity store addition or SSSG growth could prompt us to reconsider our view.

FINANCIALS (INR mn) Expansion target for stores intact; open to smaller-size stores Year to March FY21A FY22E FY23E FY24E Key points: i) DMart maintained its store addition guidance at 59 stores for FY21–22. Revenue 2,41,431 3,22,217 4,11,271 4,94,899 ii) Management reiterated the opportunity in offline retail, and believes there is EBITDA 17,430 27,952 36,089 43,922 Adjusted profit 10,994 18,067 23,587 28,811 potential to add 1,200–1,300 stores in its existing geographies alone. They also argue Diluted EPS (INR) 17.0 27.9 36.4 44.5 any city with a population of more than 0.1mn can accommodate a DMart. 70% of EPS growth (%) (15.5) 64.3 30.6 22.1 expansion will continue in existing territories. iii) While DMart is open to smaller RoAE (%) 9.5 13.8 15.5 16.2 stores, it is not keen on the convenience store model. P/E (x) 199.1 121.1 92.8 76.0 EV/EBITDA (x) 124.7 77.1 59.5 48.3 DMart Ready: Aggression to remain controlled; metro cities in focus Dividend yield (%) 0 0 0 0 Key points: i) Conversion of stores to fulfilment centres was on a pilot basis and to meet the sudden surge in demand. ii) The bulk Of DMart Ready revenues come from PRICE PERFORMANCE Mumbai. The company added four cities this year; it plans to widen presence 3,400 54,000 primarily in metro/top cities. iii) Aggression on e-commerce will be driven by overall 3,110 50,400 company performance. Besides, once DMart breaks even in a city, it will look at 2,820 46,800 significantly scaling up business. iv) The obsession on customer satisfaction involves 2,530 43,200 2,240 39,600 a lot of investment, which DMart believes hampers profitability. v) In e-commerce 1,950 36,000 grocery market, DMart is comfortable being in the middle-of-the-market-share Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 order. vi) E-commerce is running at an optimum cost and incremental profitability DMART IN Equity Sensex will be driven by improvement in gross margin. Outlook and valuation: Time to evolve; maintain ‘HOLD’ Explore: DMart has tasted phenomenal success and re-rating on the back of its hugely popular offline stores, a rarity in the space. And that drives its premium valuation. Evolving trends in retail grocery though call for greater adaptability. Hence, for us, if DMart can step up aggression while the industry stays stable, the stock would re-rate irrespective of initial losses (refer to our note). Financial model Podcast A steadfast measured approach on e-commerce would limit DMart’s growth and re- rating potential in our view. Retain ‘HOLD/SN’ with a unchanged TP of INR3,211 (60x Q3FY23E EV/EBITDA). Beyond e-commerce, sharp step-up in store addition or strong SSSG growth can be potent reasons to reconsider our stance on the stock. Corporate access Video

Nihal Mahesh Jham Abneesh Roy +91 (22) 6623 3352 +91 (22) 6620 3141 [email protected] [email protected]

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India Equity Research Consumer Staples July 22, 2021

HINDUSTAN UNILEVER

RESULT UPDATE

KEY DATA Rating BUY Strong volume; margins to look up in H2 Sector relative Outperformer Price (INR) 2,378 12 month price target (INR) 2,900 Hindustan Unilever (HUL) reported Q1FY22 net sales (up 12.8% YoY), Market cap (INR bn/USD bn) 5,588/75.0 EBITDA (up 7.7% YoY) and adjusted PAT (up 4.4% YoY) ahead of our Free float/Foreign ownership (%) 38.1/14.5 What’s Changed estimates. Domestic volumes rose 9% YoY on a base of -8% YoY, ahead Target Price ⚊ of expectations. Growth was broad-based with all segments clocking Rating/Risk Rating ⚊ strong double-digit growth. April saw sustained growth momentum QUICK TAKE from Q4FY21; subsequently, the shoot-up in covid cases made May a Above In line Below challenging month. June marked a rebound to Mar-21 levels; all in all, Profit  Margins  HUL exited the quarter on a strong note. Revenue Growth  Overall  Overall, an improving portfolio mix combined with cost control, price hikes and synergies from the GSK takeover should aid EBITDA margin despite inflationary input prices. Retain ‘BUY’ with a TP of INR2,900. FINANCIALS (INR mn) Broad-based growth Year to March FY21A FY22E FY23E FY24E HUL logged strong volume growth of 9% YoY despite the second wave. The company Revenue 4,70,280 5,31,121 5,79,710 6,38,340 has ramped up e-commerce operations, whose contribution has doubled since EBITDA 1,16,260 1,31,917 1,48,643 1,66,879 Adjusted profit 80,000 94,083 1,08,566 1,23,176 Q1FY21. 80% of the business is gaining relative penetration. The home care segment Diluted EPS (INR) 34.0 40.0 46.2 52.4 grew 12% YoY enabled by double-digit growth in Fabric Wash. Beauty & Personal EPS growth (%) 9.0 17.6 15.4 13.5 Care grew 13% YoY led by Hair Care and Skin Care, both growing in high double- RoAE (%) 29.5 19.5 22.1 24.5 digits. Foods & Refreshment delivered another quarter of strong performance, up P/E (x) 69.9 59.4 51.5 45.4 12% YoY. The HFD portfolio is progressing well, gaining penetration sequentially; its EV/EBITDA (x) 47.4 41.7 36.8 32.7 Dividend yield (%) 1.7 1.5 1.7 2.0 volumes grew in mid-single digit. Gross margin dipped 146bps YoY due to a spike in inflation in a few key raw materials (tea, palm oil); QoQ, gross margin dipped 216bps due to the second wave’s impact on the discretionary portfolio. Cost optimisation PRICE PERFORMANCE restricted EBITDA margin compression to 114bps YoY. 2,525 54,000 2,425 50,400 Q1FY22 conference call: Key takeaways 2,325 46,800 Q1FY22 pricing is ahead of Q4FY21. The sequential lower difference in value and 2,225 43,200 volume is down to covid-led promotions volatility. With commodity prices at multi- 2,125 39,600 2,025 36,000 year high levels, the company is looking to make sensible pricing decisions to Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 maintain its healthy volume growth. As mobility improves, the mix would improve; HUVR IN Equity Sensex hence margins too will improve. Premium has grown at 2x overall company growth.

Outlook and valuation: On a firm footing; maintain ‘BUY’ Explore: We expect HUL to be a key beneficiary of strong rural demand. Demand situation is dynamic though due to uncertainty around covid-19; however, HUL is well placed in terms of supply chain preparedness. We retain ‘BUY/SO’ with a TP of INR2,900. The stock is trading at 51.5x FY23E EPS.

Financial model Podcast Financials Year to March Q1FY22 Q1FY21 % Change Q4FY21 % Change Net Revenue 1,19,150 1,05,600 12.8 1,21,320 (1.8) EBITDA 28,470 26,440 7.7 29,570 (3.7) Adjusted Profit 20,870 19,990 4.4 21,290 (2.0) Video Corporate access Diluted EPS (INR) 8.9 8.5 4.4 9.1 (2.0)

Abneesh Roy Tushar Sundrani +91 (22) 6620 3141 +91 (22) 6620 3004 [email protected] [email protected]

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India Equity Research Cement July 22, 2021

ULTRATECH CEMENT

RESULT UPDATE

KEY DATA Rating BUY Picture-perfect performance Sector relative Outperfomer Price (INR) 7,459 12 month price target (INR) 8,627 The Q1FY22 performance of UltraTech Cement (UTCL) is picture- Market cap (INR bn/USD bn) 2,153/28.9 perfect—akin to Q4FY21. Despite the odds, it exceeded expectations Free float/Foreign ownership (%) 40.1/15.3 What’s Changed across volumes, realisation and cost, driving EBITDA/t to an all-time Target Price  Rating/Risk Rating  high. EBITDA topped our estimate by 19%. Factoring in firm underlying cement prices, we are raising FY22E and FY23E EBITDA by ~7% each. QUICK TAKE UTCL’s robust performance – and also peers’ – reinforces our faith in Above In line Below the sector’s ability to protect earnings in tough times. Furthermore, Profit   Margins   we view improving demand outlook, firm cement prices and potential Revenue   peaking of fuel cost as valuation re-rating arguments. Accordingly, we Growth are revising up UTCL’s EV/EBITDA to 17x (from 15x) and upgrading it Overall   to ‘BUY’ (from ‘HOLD’) with a revised TP of INR8,627 (INR6,736 earlier).

FINANCIALS (INR mn) Outperformance across parameters Year to March FY20A FY21E FY22E FY23E The second covid wave dragged UTCL’s volumes by 22% QoQ to 21.53mn tonnes (up Revenue 4,21,248 4,46,477 5,25,415 5,67,351 47% YoY on a low base), but it still came in 2.6% above our estimate. Blended EBITDA 92,836 1,15,542 1,36,167 1,44,196 Adjusted profit 58,177 54,070 73,366 82,205 realisation rose 6% QoQ (>7% for grey segment), beating our estimate by 1.3%. While Diluted EPS (INR) 201.6 187.4 254.2 284.8 variable cost/t stood flat QoQ (2.3% below expectation), overall cost/t was 3.5% EPS growth (%) 123.3 (7.1) 35.7 12.0 below estimates (rising 2.6% QoQ). All in all, blended EBITDA/t rose to an all-time RoAE (%) 16.0 12.3 15.9 15.6 high of INR1,536 while margins climbed to a decadal high of 28%. P/E (x) 37.0 39.8 29.3 26.2 EV/EBITDA (x) 25.2 19.4 16.1 14.7 Factoring in firm underlying cement prices, we are raising FY22E and FY23E EBITDA Dividend yield (%) 0.2 0.5 0.5 0.5 by ~7% each. Our revised EBITDA/t is INR1,417 for FY22E and INR1,402 for FY23E vis- à-vis INR1,338 in FY21. PRICE PERFORMANCE Strengthening sector conviction

7,475 54,000 Robust Q1FY22 performance displayed by UTCL and industry peers (including pan- 6,735 50,400 India major ACC) convinces us of the sector’s ability to protect earnings in tough 5,995 46,800 times—be it through firm cement prices or tight cost control. With a massive drop 5,255 43,200 4,515 39,600 in current covid-19 cases, demand outlook has turned bright, yet again. While 3,775 36,000 current cement prices stay broadly firm, the recent decline in global crude oil prices Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 hints at a potential peak, for the time being at least. Factoring in the earnings UTCEM IN Equity Sensex upgrade and rising sector conviction, we are raising EV/EBITDA to 17x for UTCL. Outlook and valuation: Improving prospects; upgrade to ‘BUY’ Explore: UTCL’s agility displayed across volumes, realization and cost since the past few quarters is heartening. Improving ROE, strengthening Balance Sheet and scope of efficiency enhancement compliment the improving sector outlook. We therefore upgrade to ‘BUY/SO’ with a TP of INR8,627.

Financial model Podcast Financials Year to March Q1FY22 Q1FY21 % Change Q4FY21 % Change Net Revenue 1,18,298 76,338 55.0 1,44,056 (17.9) EBITDA 33,075 20,746 59.4 36,904 (10.4) Adjusted Profit 17,000 7,966 113.4 17,752 (4.2) Video Corporate access Diluted EPS (INR) 61.9 32.9 87.8 65.5 (5.5)

Navin Rameshwar Sahadeo Shubham Mittal +91 (22) 4088 6242 +91 (22) 4063 5459 [email protected] [email protected]

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India Equity Research Insurance July 22, 2021

BAJAJ FINSERV

RESULT UPDATE

KEY DATA Rating HOLD Soft quarter: Covid leaves a mark Sector relative Underperformer Price (INR) 12,597 12 month price target (INR) 12,000 Bajaj Finserv reported a soft performance across businesses reflecting Market cap (INR bn/USD bn) 2,005/26.8 the impact of the second wave and consequent mobility restrictions. Free float/Foreign ownership (%) 39.2/8.0 What’s Changed Bajaj Finance (BAF) saw a quarter with muted growth, sharp rise in Target Price  Rating/Risk Rating ⚊ asset quality markers and lower coverage. Insurance businesses (BAGIC, BALIC) suffered higher covid claims. QUICK TAKE Underlying metrics however remain steady: i) better exit month collections and sustained improvement thereof; ii) growth in preferred general insurance segments; and iii) strong growth in new individual life insurance business, despite lockdowns. Maintain ‘HOLD’ with a

revised TP of INR12,000 (INR10,600 earlier; change largely due to BAF stock price). FINANCIALS (standalone) (INR mn) Bajaj Finance: Weak quarter, but pickup visible Year to March FY20A FY21E FY22E FY23E Bajaj Finance reported a soft quarter, reflected in below-trend growth (15% YoY) and Total Income 5,677 6,511 7,474 9,550 a sharp rise in asset quality stress—essentially in the auto segment. Moreover, a dip Total expenses 1,336 1,624 1,858 2,300 PBT 4,324 4,870 5,598 7,232 in coverage and management use of overlay provisions warrant monitoring. Upfront PAT 3,805 3,993 4,590 5,930 recognition of asset quality pain should provide support to FY22 earnings. Diluted EPS 23.9 25.1 28.8 37.3 DPS 1.6 1.6 1.6 1.6 BAGIC: Covid claims spoil combined ratio; structural story intact Networth 35,354 39,097 43,438 49,117 GWP increased 9% in Q1FY22, underperforming industry growth of 11%. However, Investments 32,761 36,222 40,176 45,434 it continues to outperform in preferred areas of private cars, two wheelers, Total assets 35,481 39,297 43,638 49,317 commercial lines and retail health. The loss ratio jumped 780bps YoY to 75.9% in Q1FY22 due to higher covid claims and a lower benefit from reduced frequency of PRICE PERFORMANCE motor OD claims. Despite this, PAT fell just 8% YoY to INR3.6bn. 13,000 54,000 BALIC: Robust momentum in growth; mortality reserving only blip 11,485 50,400 9,970 46,800 In line with peers, growth momentum has picked up in life insurance. Individual- 8,455 43,200 rated new business grew 49% in Q1FY22 driven by pension and ULIPs. Annuity 6,940 39,600 5,425 36,000 product launched in Q4FY21 has been well received and forms 12% of individual Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 business. Higher covid claims – 1,600+ on retail side of INR1.2bn (gross) and a step- BJFIN IN Equity Sensex up in covid reserve to INR3bn in Q1FY22 dragged PAT 35% YoY to INR0.8bn.

Outlook and valuation: Valuations high; maintain ‘HOLD’ Explore: While we, structurally, like most pieces of the story (life insurance clearly the least though), strong price action has rendered valuations rather full. Moreover, we are not altering our individual target multiples. Growth resumption/asset quality trajectory at BFL will drive stock performance. Maintain ‘HOLD/SU’ with a revised TP of INR12,000. Financial model Podcast Financials (standalone) Year to March Q1FY22 Q1FY21 % Change Q4FY21 % Change Net Revenue 408 379 7.7 2,678 (84.8) Profit before tax 5 32 (84.4) 2,309 (99.8) Corporate access Video Profit after tax 4 10 (60.0) 1,687 (99.8) EPS 0.0 0.1 10.6

Santanu Chakrabarti Vinayak Agarwal +91 (22) 4342 8680 +91 (22) 6620 3020 [email protected] [email protected]

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India Equity Research Metals & Mining July 22, 2021

HINDUSTAN ZINC

RESULT UPDATE

KEY DATA Rating HOLD Performance in line Sector relative Neutral Price (INR) 327 12 month price target (INR) 310 Hindustan Zinc (HZL) posted Q1FY22 results along expected lines. Key Market cap (INR bn/USD bn) 1,382/18.6 points: i) Production was affected by covid-related disruptions. Free float/Foreign ownership (%) 35.1/1.1 What’s Changed ii) CoP/t rose 12% YoY to USD1,070 owing to lower volume and higher Target Price ⚊ commodity prices. iii) Operating profit was impacted by lower silver Rating/Risk Rating ⚊ volume. iv) FY22 guidance for production, CoP and capex retained. QUICK TAKE Above In line Below Going ahead, we expect CoP to trend down and EBITDA to get a boost Profit  from higher volumes. That said, we believe the stock is fairly priced. Margins  Maintain ‘HOLD’ with a TP of INR310 (11x Q3FY22E EPS). Our Revenue Growth  recommendation also factors in the stock’s sustainable dividend yield Overall  of 6% through FY24E.

FINANCIALS (INR mn) Operating performance impacted by covid-19; guidance retained Year to March FY21A FY22E FY23E FY24E HZL’s operating performance, particularly at the Rampur Agucha (RA) and Sindesar Revenue 2,26,290 3,02,525 3,00,196 3,01,251 Khurd (SK) mines, was impacted by covid-related disruptions. Key points: i) Refined EBITDA 1,16,720 1,69,941 1,65,204 1,63,413 Adjusted profit 79,800 1,16,904 1,15,959 1,15,671 metal production volume at 236kt (down 8%QoQ) was aided by liquidated of Mined Diluted EPS (INR) 18.9 27.7 27.4 27.4 Metal (MM) inventory. ii) CoP/t at USD1,070 (up 13%QoQ, 12%YoY) was impacted EPS growth (%) 17.3 46.5 (0.8) (0.2) by higher coal and diesel cost. iii) Average grade for Q1FY22 plunged to 6.91% owing RoAE (%) 22.0 34.5 31.2 28.7 to sequencing of mining faces (Q4FY21: 7.41%). iv) Capital mine development at P/E (x) 17.3 11.8 11.9 11.9 13km compared with 7.6km in Q1FY21 (Q4FY21: 14.1km). Going ahead, EV/EBITDA (x) 10.5 7.0 7.0 6.9 Dividend yield (%) 11.6 6.1 6.1 6.1 management expects performance to improve on volume ramp-up and has kept FY22 guidance unchanged at: i) MM production volume- 1.025-1.05kt; ii) saleable silver production- ~720t; iii) CoP/t- sub-USD1,000/t; and iv) project capex- PRICE PERFORMANCE USD100mn. 350 54,000 315 50,400 Production/capacity ramp-up is key 280 46,800 In our view, production ramp-up for FY22 is key as Street will closely monitor silver 245 43,200 volume and commissioning of Fumer at Chanderia. Furthermore, despite high 210 39,600 175 36,000 imported coal prices, we expect MM volume ramp-up to lead to better fixed cost Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 absorption. On further expansion to 1.35mtpa, we would keep close tabs on HZ IN Equity Sensex exploration progress in Galena zone and addition of reserves in FY22.

Outlook and valuation: Fairly priced; maintain ‘HOLD’ Explore: In our view, the stock is pricing in the benefits from production volume ramp-up and robust underlying commodity prices. We maintain ‘HOLD/SN’ with a TP of INR310 on 11x Q3FY22E EPS. Our recommendation also factors in a sustainable dividend yield of 6% through FY24E.

Financial model Podcast Financials Year to March Q1FY22 Q1FY21 % Change Q4FY21 % Change Net Revenue 65,310 39,890 63.7 69,470 (6.0) EBITDA 35,580 15,760 125.8 38,750 (8.2) Adjusted Profit 20,709 13,590 52.4 24,810 (16.5) Video Corporate access Diluted EPS (INR) 4.9 3.2 52.4 5.9 (16.5)

Amit Dixit Meera Midha +91 (22) 6620 3160 +91 (22) 4088 5804 [email protected] [email protected]

Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited

India Equity Research Automobiles July 22, 2021

BAJAJ AUTO

RESULT UPDATE

KEY DATA Rating BUY Tug of war: Headwinds against tailwinds Sector relative Outperformer Price (INR) 3,853 12 month price target (INR) 4,483 While Q1FY22 EBITDA of INR11.2bn is 12% lower than our estimate, Market cap (INR bn/USD bn) 1,115/15.0 near-term headwinds – commodity pressure, weaker-than-expected Free float/Foreign ownership (%) 46.3/13.7 What’s Changed domestic demand revival – continue to overpower medium-term Target Price  Rating/Risk Rating ⚊ tailwinds. However, BJAUT is better placed than peers due to a favourable export outlook (~45% of revenue), currency tailwind, new QUICK TAKE platform launches from September and an improving mix. On balance, we are cutting FY22E EPS by ~9% while retaining FY23E earnings. Maintain ‘BUY’ with a revised TP of INR4,481 (up from INR4,428) as we roll over the valuation to Dec-22E earnings.

FINANCIALS (INR mn) Cost pressures continue to rear their head Year to March FY21A FY22E FY23E FY24E Net revenue at INR73.8bn is in line with our estimate. However, despite a favorable Revenue 2,77,411 3,46,549 3,87,354 4,24,524 currency tailwind (1% QoQ lever), gross margin edged down QoQ by 110bps to 27% EBITDA 49,285 56,107 68,558 79,014 Adjusted profit 45,730 51,046 60,848 69,519 due to partial pass-through. Management expects under recovery to continue in Diluted EPS (INR) 158.0 176.4 210.3 240.2 Q2FY22 too. Also, staff cost jumped 20% QoQ due to normalisation of wages (Q4 had EPS growth (%) (10.3) 11.6 19.2 14.2 some reversal of retirement benefit accruals). As a result, INR11.2bn EBITDA missed RoAE (%) 20.3 20.1 23.4 26.1 our estimates by 12%. P/E (x) 24.3 21.7 18.2 16.0 EV/EBITDA (x) 20.7 18.2 14.9 12.9 Strong execution benefits from multiple tailwinds Dividend yield (%) 3.6 4.1 4.9 5.6 Premiumisation continues to be the overarching strategy. This is reflected in market share gain in the 125cc segment with Pulsar 125cc (25% in Q1FY221 versus 22% in PRICE PERFORMANCE Q4FY21) and rising share of 110cc and disc brake & electric start variants in the entry

4,300 54,000 segment. We expect BJAUT to widen its product bouquet with offerings in the 125cc 4,005 50,400 and 250cc segments and continue to leverage the KTM, Triumph and Husqvarna 3,710 46,800 stable. Management also indicated launch of new platforms September onwards. 3,415 43,200 Improving outlook for 3Ws and exports along with currency tailwinds provide 3,120 39,600 2,825 36,000 multiple advantages to counter commodity inflation and softening domestic 2W Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 demand. BJAUT IN Equity Sensex

FPOutlook Table Body and valuation: Bright prospects; retain ‘BUY’ Explore: We like BJAUT’s strong execution, which instils confidence that it can succeed in expanding offerings. The new dividend policy will improve return ratios and offers 4–5% dividend yield. Maintain ‘BUY/SO’, valuing the stock at 22x Dec-22E core EPS of INR161 plus cash/share of INR771 and KTM at INR165. The stock is trading at FY22E/23E PER of 21.7/18.2x. Financial model Podcast Financials

Year to March Q1FY22 Q1FY21 % Change Q4FY21 % Change Net Revenue 73,860 30,792 139.9 85,961 (14.1) EBITDA 11,198 4,085 174.1 15,241 (26.5) Adjusted Profit 10,612 5,280 101.0 13,321 (20.3) Video Corporate access Diluted EPS (INR) 0.0 0.0 0.0

Chirag Shah +91 (22) 6623 3367 [email protected]

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India Equity Research Consumer Durables July 22, 2021

HAVELLS INDIA

RESULT UPDATE

KEY DATA Rating HOLD Solid beat; optimism demands caution Sector relative Neutral Price (INR) 1,150 12 month price target (INR) 1,100 Havells turned in a sharp beat on revenue/margins led by better Market cap (INR bn/USD bn) 691/9.3 stocking across segments and inventory gains. Segments barring Lloyd Free float/Foreign ownership (%) 40.5/8.2 What’s Changed are close to pre-covid levels. Management indicated better demand Target Price  Rating/Risk Rating ⚊ cycle across products, except in case of further covid disruptions. QUICK TAKE In our view, the results reflect the impact of sharp pricing in cables/switchgears business, which should normalise, while consumer Above In line Below segments have seen a sharper drop in OPMs (QoQ) beyond revenue Profit   Margins   dip. Favourable demand/penetration trend for Havells’s electricals Revenue Growth   business augurs well for growth; however, we reiterate that Overall   improvement at Lloyd remains a key value driver. Retain ‘HOLD’.

FINANCIALS (INR mn) Solid pricing/restocking led Q1 beat; inventory gains to normalise Year to March FY20A FY21A FY22E FY23E Havells posted a 16/34% beat on revenue/EBITDA versus consensus led by sharp Revenue 94,292 1,04,279 1,17,365 1,36,685 pricing impact, lower overheads with a decent ramp-up in switches/cable business. EBITDA 10,274 15,653 17,242 20,411 Adjusted profit 7,330 10,396 11,783 14,265 Ex-cable and wires, which saw sharper pricing actions, Havells raised prices by 10– Diluted EPS (INR) 11.7 16.6 18.8 22.8 15% in the last few months. Management expects demand to be better as revenues EPS growth (%) (7.4) 41.8 13.3 21.1 across most segments reach pre-covid levels. They also expect penetration-led (3000 RoAE (%) 17.3 22.0 21.5 23.1 towns below 50K population) growth. Meanwhile, management attributed the P/E (x) 94.2 66.4 58.6 48.4 weakness in cash flow (for a second quarter in a row) to higher cooling season EV/EBITDA (x) 66.2 43.4 39.3 33.1 Dividend yield (%) 0.4 0.3 0.8 0.9 inventory. Havells is sticking to its INR5bn capex guidance with better OPMs at Lloyd. Read-across for Crompton/; key value driver for Havells PRICE PERFORMANCE The results vis-à-vis Q4FY21 reflect a far better performance (revenue/margins) for

1,225 54,000 wires/switches while pure consumer segments fared relatively weak. On RACs, a 1,090 50,400 mere 16% QoQ drop in Lloyd should benefit Voltas in our view. Net-net, we believe, 955 46,800 Havells’s performance and commentary reflect a positive momentum; however, in 820 43,200 our view, the biggest wealth creation potential lies in scaling up Lloyd, which has had 685 39,600 550 36,000 a lower returns structure than Havells’s conventional business segments. The Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 conventional business seem to be on a solid track. HAVL IN Equity Sensex

Outlook and valuation: Operational outperformance; retain ‘HOLD’ Explore: Management optimism around Q1 reflects a better demand cycle in our view while reported numbers reflect high impact of pricing, with Havells scoring over peers. Retain ‘HOLD/SN’ even as we raise EPS by ~3/5% (FY22/23E), rolling forward the valuation to Dec-22E with a revised TP of INR1,100 (up from INR1,000).

Financial model Podcast Financials Year to March Q1FY22 Q1FY21 % Change Q4FY21 % Change Net Revenue 25,982 14,791 75.7 33,312 (22.0) EBITDA 3,531 1,309 169.8 5,057 (30.2) Adjusted Profit 2,343 633 269.9 3,023 (22.5) Video Corporate access Diluted EPS (INR) 3.7 1.0 269.6 4.8 (22.5)

Amit Mahawar Angad Saluja Manoj Kumar K V +91 (22) 4040 7451 [email protected] [email protected] [email protected]

Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited

India Equity Research Insurance July 22, 2021

ICICI LOMBARD GI

RESULT UPDATE

KEY DATA Rating BUY Covid claims play spoilsport Sector relative Outperformer Price (INR) 1,544 12 month price target (INR) 1,840 ICICI Lombard’s (ICICIGI) PAT declined 62% YoY to INR1.5bn, much Market cap (INR bn/USD bn) 702/9.4 lower than our estimate of INR3.5bn primarily due to heightened covid Free float/Foreign ownership (%) 48.1/26.6 What’s Changed claims. Impact of this was INR6bn in Q1FY22 partially offset by a 36% Target Price  Rating/Risk Rating ⚊ rise in investment income. This doubled health loss ratio to 153%. Consequently, the overall loss ratio increased by 2,140bps to 91.2%. QUICK TAKE Above In line Below We view this as a one-off (including a discretionary buffer component) Profit  and fully expect the loss ratio to normalise going forward. We cut Margins  FY22E PAT by 25%, largely from Q1 actuals. More importantly, FY23 Revenue Growth  Overall estimates are nearly unchanged and our enthusiasm in the long-term  compounding thesis remains intact and keen. We maintain ‘BUY’ with TP of INR1,840 (INR1,750 earlier) as we roll forward to Sep-22E. FINANCIALS (INR mn) A quarter marked by headwinds Year to March FY20A FY21E FY22E FY23E In Q1FY22, the company settled more than 46,000 claims compared to 49,000+ for GDPI 1,33,128 1,40,031 2,04,396 2,41,268 FY21. As the lag in reporting claims is higher than previous wave, ICICIGI has also NEP 94,035 1,00,140 1,25,815 1,57,246 U/W profit/(loss) (1,052) (1,919) (9,371) (1,893) created an IBNR of INR2.2bn to combat this. Together, this led to a toll of INR6.0bn. PAT 11,937 14,731 14,229 24,408 Consequently, the health loss ratio doubled to 153%. Average claim size was also EPS growth (%) 13.5 23.7 (3.4) 71.5 higher in second wave as the ratio of moderate and severe cases was much higher. Combined ratio (%) 101.1 101.9 107.4 101.2 Within motor insurance, growth (+2%) was muted as the company typically has a RoAE (%) 20.8 21.7 17.6 25.1 stronger presence in new vehicles and sales were affected due to local lockdowns. P/E (x) 58.9 47.6 49.3 28.7 P/BV (x) 11.4 9.4 8.0 6.5 No clarity on TP price hike is a further dampener for ICICIGI and broader industry. Committed to building a solid retail health business PRICE PERFORMANCE While loss ratios could remain elevated in the near term, there is no denying in the

1,625 54,000 robust long-term growth outlook of the individual health indemnity business. A 1,540 50,400 pandemic-induced mind-set reset towards the idea of health insurance for the 1,455 46,800 population at large should act as a further trigger. ICICIGI plans to add 1,000 1,370 43,200 employees/frontline distribution staff to capture this growth. Typically, it takes 6-9 1,285 39,600 1,200 36,000 months for on-boarding and training and therefore contribution will pick up only in Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 FY23. The company is also focussed on scaling up ‘IL Take Care’ app, a unique product ICICIGI IN Equity Sensex which addresses the complete healthcare needs of customers.

Outlook and valuation: Compounding story intact; maintain ‘BUY’ Explore: We believe ICICI Lombard can grow at 20% for the next 20 years while maintaining an ROE of 20%. High float levels, scale-led cost/pricing edge, investment in distribution and technology are key moats. High granularity and diversification benefits lend comfort. Maintain ‘BUY/SO’ with TP of INR1,840 (40x P/E Sep-22E).

Financial model Podcast Financials Year to March Q1FY22 Q1FY21 % Change Q4FY21 % Change NEP 27,058 23,238 16.4 26,162 3.4 Combined ratio (%) 118.8 98.4 103.5 Profit after tax 1,516 3,981 (61.9) 3,457 (56.1) Video Corporate access EPS 3.3 8.8 (61.9) 7.6 (56.1)

Santanu Chakrabarti Vinayak Agarwal +91 (22) 4342 8680 +91 (22) 6620 3020 [email protected] [email protected]

Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited

India Equity Research Consumer Durables July 22, 2021

POLYCAB INDIA

RESULT UPDATE

KEY DATA Rating HOLD Sharp miss on OPM; FMEG challenging Sector relative Neutral Price (INR) 1,915 12 month price target (INR) 1,825 Polycab, contrary to Havells, undershot consensus on Q1 EBITDA. This, Market cap (INR bn/USD bn) 297/4.0 in our view, is due to sharper GM impact and higher overheads across Free float/Foreign ownership (%) 31.4/4.6 What’s Changed segments with FMEG in a sharp loss. Importantly, Polycab, ex-pricing, Target Price  Rating/Risk Rating ⚊ seems to be below pre-covid in both FMEG and cables & wires. QUICK TAKE Management mentioned employee appraisals, gap in cost pricing, pick-up in ASP, etc with lower volumes underpin a sharper-than- Above In line Below expected OPM drop. They expect a pickup in H2 though. In our view, Profit  Margins  C&W growth/OPM is a non-issue; however, the FMEG returns profile Revenue Growth   remains a re-rating card on management in our view, apart from Overall    capital allocation/product innovation. Retain ‘HOLD’.

FINANCIALS (INR mn) Profitability underperformance: C&W pricing, FMEG volumes hurt Year to March FY20A FY21A FY22E FY23E Cutting out noise, Polycab’s divergence in results vis-à-vis peers such as Havells is led Revenue 88,300 89,265 1,10,135 1,28,570 by both revenue mix (higher B2B, cables) and cost-pricing gap—the latter should EBITDA 11,350 11,670 14,462 16,902 Adjusted profit 7,591 8,724 9,775 11,533 normalise going ahead. However, on FMEG both growth (2Y) and margins have been Diluted EPS (INR) 51.0 58.5 65.6 77.3 lower due to a stronger-than-expected EBIT loss on weaker volumes and higher EPS growth (%) 43.9 14.7 12.0 18.0 overhead allocations. In FMEG, fans (>50%) make up the bulk – as we understand – RoAE (%) 22.7 20.5 18.8 18.6 while switchgears/lightings are very small segments. Meanwhile, WC increased QoQ P/E (x) 37.6 32.7 29.2 24.8 to 73 days led by higher inventory, which pushed OCF down by 26% QoQ. EV/EBITDA (x) 26.0 25.2 20.3 17.3 Dividend yield (%) 0.4 0.5 0.3 0.3 Guidance for 20%-plus growth; triggers for better value Management reiterated INR200bn FY25E revenue guidance, implying a 22% four- PRICE PERFORMANCE year top-line CAGR, led by sharper growth in FMEG given a low market share base

2,025 54,000 and includes input price impact. 1,780 50,400 In our view, stakeholder value creation for Polycab will largely hinge on two major 1,535 46,800 1,290 43,200 areas: i) upgrade in FMEG business profile (product SKUs, categories, etc) driving 1,045 39,600 better returns; and ii) capital allocation and dominance in C&W with a potential 800 36,000 share of the recurring retail wires business. B2B and Infra seem favourable in our Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 view given improving spending outlook. POLYCAB IN Equity Sensex

Outlook and valuation: Higher OPM volatility; retain ‘HOLD’ Explore: We are not worried about the OPM miss in C&W as it should normalise and competitive dynamics are favourable. But in our view, the FMEG loss implies a weak competitive profile. Retain ‘HOLD/SN’ with a revised TP of INR1,825 (versus INR1,690), rolling over to Dec-22E with a 2.5/4.5% earnings upgrade for FY22/23E.

Financial model Podcast Financials Year to March Q1FY22 Q1FY21 % Change Q4FY21 % Change Net Revenue 18,805 9,766 92.6 30,374 (38.1) EBITDA 1,393 575 142.4 4,213 (66.9) Adjusted Profit 753 1,176 (36.0) 2,832 (73.4) Video Corporate access Diluted EPS (INR) 5.3 8.3 (36.0) 20.1 (73.4)

Amit Mahawar Angad Saluja Manoj Kumar K V +91 (22) 4040 7451 [email protected] [email protected] [email protected]

Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited

India Equity Research Miscellaneous July 22, 2021

SCHAEFFLER INDIA

RESULT UPDATE

KEY DATA Rating BUY Strong showing across the board Sector relative Outperformer Price (INR) 5,811 12 month price target (INR) 7,720 Schaeffler India (SCHFL) reported robust Q2CY21 sales growth of 181% Market cap (INR bn/USD bn) 182/2.4 YoY (up 85% YoY in H1CY21) and a mere 6% QoQ decline, 30% ahead Free float/Foreign ownership (%) 25.9/3.2 What’s Changed of our estimate. The performance was led by automotive tech sales, Target Price  Rating/Risk Rating ⚊ outperformance in all segments and improved exports. EBITDA edged down ~3% QoQ (48% above estimate) but EBITDA margin rose 63bps QUICK TAKE QoQ driven by better gross margin (up 254bps QoQ). Above In line Below Profit  Our optimism on SCHFL stems from its three key cogs: steady focus on Margins  localisation, rising content per vehicle and thrust on innovation. The Revenue Growth  strong showing prompts us to raise CY21/22E EPS by 19%/11%. This Overall  along with a rollover to Q4CY22E EPS yields a revised TP of INR7,720

(INR6,456 earlier) at 42x (premium to average). Retain ‘BUY’. FINANCIALS (INR mn) Outperformance all over Year to December CY20A CY21E CY22E CY23E Overall sales surged 181% YoY with strong end-market recovery across mobility (up Revenue 37,618 52,857 59,148 65,856 185% YoY) and others (up 148% YoY). Sales outperformed the market in all business EBITDA 5,361 8,499 9,552 10,735 Adjusted profit 3,026 5,235 5,746 6,490 areas. It was led by improvement across automotive technologies (up 287% YoY) and Diluted EPS (INR) 96.8 167.5 183.8 207.6 auto aftermarket (up 161% YoY). However, there was a dip of 9% QoQ in the mobility EPS growth (%) (17.6) 73.0 9.8 13.0 segment. SCHFL gained key wins in the CV and tractor segments for clutch and RoAE (%) 9.9 16.0 16.0 16.1 transmission solutions. Others (non-mobility) was up 169% YoY and 2% QoQ owing P/E (x) 54.8 31.7 28.9 25.6 to improving production across end-users, particularly wind and railways. Overall EV/EBITDA (x) 28.7 18.4 16.1 14.0 Dividend yield (%) 0.7 0.8 0.9 1.2 exports shot up 148% YoY/ 13% QoQ led by increased demand and customers across Asia-Pacific. Management expects demand to remain robust led by offerings in BSVI and e-mobility, where the parent is a leader. Having incurred INR889mn in capex in PRICE PERFORMANCE H1CY21, SCHFL maintained INR2.5bn capex for CY21 and INR10bn for the next three. 5,825 54,000 5,350 50,400 Strong gross margins sequentially 4,875 46,800 Gross margin expanded 116bps YoY/254bps QoQ to 38.5% led by an improved mix 4,400 43,200 towards exports and pass-through of commodity price hike. The cost-reduction 3,925 39,600 3,450 36,000 programme focusing on localisation and logistics led to EBITDA margin expansion of Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 64bps QoQ to 16.8% while EBITDA fell merely 3% QoQ. We expect the improved mix, SCHFL IN Equity Sensex rising localisation and content per vehicle to help sustain margins.

Outlook and valuation: Well-placed; maintain ‘BUY’ Explore: SCHFL is well-positioned as a play on mobility with rising localisation. It is undertaking INR10bn in capex to leverage the uptick over the next three years. Hence, we expect a 21% sales CAGR and 26% EBITDA CAGR over CY20–23. Retain ‘BUY/SO’ with a revised TP of INR7,720 at 42x Q2CY22E EPS.

Financial model Podcast Financials Year to December Q2CY21 Q2CY20 % Change Q1CY21 % Change Net Revenue 12,329 4,389 180.9 13,168 (6.4) EBITDA 2,071 ( 198) NM 2,129 (2.7) Adjusted Profit 1,281 ( 425) NM 1,395 (8.2) Video Corporate access Diluted EPS (INR) 41.0 ( 13.6) NM 44.6 (8.2)

Shradha Sheth Meera Midha +91 (22) 6623 3308 +91 (22) 4088 5804 [email protected] [email protected]

Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited

India Equity Research Telecom July 22, 2021

STERLITE TECH.

RESULT UPDATE

KEY DATA Rating BUY Time for acceleration Sector relative Outperformer Price (INR) 303 12 month price target (INR) 386 Sterlite Technologies (Sterlite) posted Q1FY22 results broadly in line Market cap (INR bn/USD bn) 120/1.6 with estimates as the second wave impacted execution in the services Free float/Foreign ownership (%) 45.5/5.1 What’s Changed business. Management commentary was optimistic as product Target Price  Rating/Risk Rating ⚊ business utilisation is high while order book for services is strong. QUICK TAKE Sterlite acquired Clearcomm, a UK-based network integration company, to bolster its services capabilities in Europe. We believe Above In line Below capacity expansion lends higher credibility to management’s target of Profit   Margins   INR100bn annualised revenue run-rate by Q4FY23. We are increasing Revenue Growth  FY23E revenue/PAT by 11.4%/9.5% and the target to 20x, from 18x, to Overall   factor in capacity expansion and sustained superior returns ratios. Retain ‘BUY’ with a revised TP of INR386 (INR280 earlier).

FINANCIALS (INR mn) Blip due to pandemic; strong order book drives confidence Year to March FY20A FY21E FY22E FY23E Sterlite’s revenue declined 11.2% QoQ (but up 49.4% YoY) as the services segment Revenue 51,544 48,252 63,161 80,042 faced execution challenges in the wake of the second covid wave. EBITDA margin EBITDA 10,693 8,107 11,682 15,255 Adjusted profit 4,907 2,729 5,450 7,892 edged up 30bps QoQ to 17.7% and outclassed Street’s 16.4% estimate. Order book Diluted EPS (INR) 12.0 6.9 14.7 21.2 expanded 4.2% QoQ to INR112bn, with 62% contribution from FY23 and beyond. We EPS growth (%) (12.9) (42.3) 111.6 44.2 believe a strong order book lends revenue visibility. Investments in targeted areas RoAE (%) 24.0 13.7 25.1 30.0 has led to an increase in contribution from desirable geographies such as EMEA and P/E (x) 25.2 43.7 20.7 14.3 the US. Revenue share from telcos has also increased substantially. EV/EBITDA (x) 12.9 17.3 11.9 8.9 Dividend yield (%) 1.1 0.8 1.8 2.5 Acquisition to boost growth Sterlite’s organic and inorganic investments have led to a fivefold increase in Total PRICE PERFORMANCE Addressable Market (TAM) over the last five years. The company has acquired

325 54,000 Clearcomm to gain a foothold in the UK market with a view to globalise its system 280 50,400 integration business. It will also complement IDS’ Data centre interconnect with FTTx 235 46,800 integration capabilities. To factor in the increased TAM and capacity expansion, we 190 43,200 are increasing FY23E revenue by 11.4%. Factoring in the increased R&D and S&M 145 39,600 100 36,000 investments, our FY23E EBITDA rises by 6.4%. While we are building in capacity Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 utilization improvement owing to the strong demand, we have not yet built in any SOTL IN Equity Sensex pricing improvement.

Outlook and valuation: Strong demand to drive growth; retain ‘BUY’ Explore: A strong order book imparts revenue visibility which is likely to be the key driver of over 40% EPS growth in FY23E. The stock is trading at an attractive 14.3x FY23E EPS. Maintain ‘BUY/SO’ with a revised TP of INR386 (20x Q3FY23E EPS) considering strong demand for its product, superior execution and execution ratios.

Financial model Podcast Financials Year to March Q1FY22 Q1FY21 % Change Q4FY21 % Change Net Revenue 13,092 8,762 49.4 14,750 (11.2) EBITDA 2,319 1,217 90.6 2,565 (9.6) Adjusted Profit 807 29 2,733.0 1,080 (25.2) Video Corporate access Diluted EPS (INR) 2.9 0.2 1,826.7 3.1 (6.8)

Pranav Kshatriya Sandip Agarwal Pulkit Chawla +91 (22) 4040 7495 +91 (22) 6623 3474 [email protected] [email protected] [email protected]

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India Equity Research Agri Inputs July 22, 2021

RALLIS INDIA

RESULT UPDATE

KEY DATA Rating HOLD Domestic segment drives growth Sector relative Neutral Price (INR) 327 12 month price target (INR) 311 Rallis India reported in-line revenue growth of 12% YoY driven by a Market cap (INR bn/USD bn) 64/0.9 31% uptick in the domestic cropcare business. However, influx of Free float/Foreign ownership (%) 49.9/4.7 What’s Changed illegal cotton seeds and delay in the cropping season stunted seeds Target Price  Rating/Risk Rating ⚊ growth to merely 3% YoY. Challenges in pricing for few AI’s (Metribuzin) as well as the sales spillover in the base quarter hurt QUICK TAKE international business growth. Meanwhile, sharply higher raw Above In line Below material prices dragged EBITDA margin by 260bps YoY to 16.4%. Profit  Margins  We believe Rallis has taken corrective decisions in reviving growth Revenue Growth  across domestic space. However, international business continues to Overall  drag overall profitability. Rolling forward the valuation to Sep-22E yields a TP of INR311 (22x Q2FY23 EPS). Maintain ‘HOLD’. FINANCIALS (INR mn) Domestic agrochemicals: A good performance Year to March FY20A FY21E FY22E FY23E The domestic cropcare business grew 31% YoY aided by strong 34% YoY growth in the Revenue 22,518 24,294 27,586 31,476 formulation space. Flagship brands performed well aided by newly launched products. EBITDA 2,630 3,244 3,879 4,475 Adjusted profit 1,649 2,040 2,588 2,921 While innovation turnover index (ITI) has dipped to 12% during FY21, the company Diluted EPS (INR) 8.5 10.5 13.3 15.0 expects it to improve with new products in place. During Q1FY22, the company EPS growth (%) 6.6 23.7 26.9 12.9 launched three products: one being a 9(3) product-Pepe used as a herbicide in rice and RoAE (%) 13.1 14.4 15.4 15.6 the other two products are 9(4) products targeted towards rice and fruit & vegetables, P/E (x) 38.6 31.2 24.6 21.8 respectively. The company raised prices for some products in its basket; however EV/EBITDA (x) 23.1 18.7 15.6 13.4 Dividend yield (%) 1.1 1.1 1.1 1.1 higher competitive intensity across some molecules impacted pricing strength. International and seeds business under pressure PRICE PERFORMANCE International business has been down by 8% YoY due to a sales spill-over in Q1FY21.

375 54,000 Rallies is seeing optimum utilization in most of AIs; however metribuzin continues to 345 50,400 be under pressure due to soft demand. The company’s focus in international 315 46,800 business remains new registrations and CRAMS. The Seeds business (constituting 285 43,200 35% of revenue mix) reported a muted performance with 3% growth YoY. Its 255 39,600 225 36,000 performance was affected by the influx of cotton seeds as well as delay in crop Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 sowing. Besides, a shift in crop pattern from maize to soybean led to higher inventory RALI IN Equity Sensex build-up.

Outlook and valuation: Monsoon to play pivotal role; retain ‘HOLD’ Explore: Rallis logged strong growth in the domestic business during Q1FY22. New products as well as a normal monsoon will continue to drive momentum over FY22. However, we still remain watchful on execution of the capex incurred. With International business yet to gather pace, we maintain ‘HOLD’ with a TP of INR311.

Financial model Podcast Financials Year to March Q1FY22 Q1FY21 % Change Q4FY21 % Change Net Revenue 7,405 6,627 11.7 4,713 57.1 EBITDA 1,215 1,283 (5.3) 175 596.4 Adjusted Profit 823 919 (10.4) 45 1,733.9 Video Corporate access Diluted EPS (INR) 4.2 4.7 (10.4) 0.2 1,733.9

Rohan Bharat Gupta +91 (22) 4040 7416 +91 (22) 6620 3320 [email protected] [email protected]

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India Equity Research Components July 22, 2021

CEAT

RESULT UPDATE

KEY DATA Rating HOLD Rolling resistance: Cost pressure sticky Sector relative Neutral Price (INR) 1,367 12 month price target (INR) 1,447 Despite a sharp revenue outperformance, CEAT posted in-line Q1FY22 Market cap (INR bn/USD bn) 55/0.7 EBITDA of INR1.7bn reflecting margin pressures. The company was Free float/Foreign ownership (%) 53.3/27.6 What’s Changed unable to raise prices adequately in Q1FY22 to counter the surge in Target Price  Rating/Risk Rating ⚊ commodity costs. In fact, cost inflation continues to persist in Q2FY22. QUICK TAKE OEM demand is weaker than expected while recovery is seen in replacement demand. We are slashing FY22E EPS by 21% to INR76 factoring in higher debt to fund capex amid weaker-than-expected cash flows. Our FY23E EPS remain unchanged for now. Maintain ‘HOLD’ with a TP of INR 1,447 (earlier INR1,481) as we roll over the

valuation to Dec-22E (PE of 13x).

FINANCIALS (INR mn) Q1FY22: Margin pressure offset revenue beat Year to March FY21A FY22E FY23E FY24E Despite a 9% beat in revenue (INR 18.9bn), EBITDA at INR1.7bn was in line with Revenue 75,728 91,968 1,02,166 1,13,504 estimate. This was due to inability to raise prices adequately against commodity cost EBITDA 9,738 9,487 12,445 14,761 Adjusted profit 4,446 3,068 4,979 6,724 pressures. As a result, gross margin dropped ~290bps QoQ to 38.7%. We believe Diluted EPS (INR) 109.9 75.9 123.1 166.2 there is also a drop in gross profit per kg. As a result, EBITDA margins declined 250bps EPS growth (%) 79.1 (31.0) 62.3 35.1 to 8.7% sequentially. Normalising of the replacement mix (gravitating towards OE RoAE (%) 15.0 9.3 13.7 16.2 now) also affected margins. Going ahead, in our view, a combination of spiking raw P/E (x) 12.6 18.2 11.2 8.3 material prices coupled with weak demand outlook and higher costs (new plants) EV/EBITDA (x) 7.2 7.6 5.6 4.3 Dividend yield (%) 0.9 0.9 0.9 0.9 would impact CEAT’s margins in the near term. Balancing act key PRICE PERFORMANCE CEAT needs to find a balance between volume growth and pricing so that it can fund

1,675 54,000 its FY22 capex of ~INR11.5bn (INR4.7bn in FY21) via an optimal debt-to-equity mix. 1,510 50,400 It is looking to expand Chennai PCR capacity by 10K tyres/day (current production 1,345 46,800 10K/day). Similarly, it aims to expand current TBR capacity by ~40% over the next 1,180 43,200 four years. At the same time, CEAT aims to generate about 60% of revenue from PCR, 1,015 39,600 850 36,000 2W and speciality tyres. Also, given CEAT’s relatively small presence in TBR (high Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 single-digit market share) and higher competitive intensity, it will have to ensure TBR CEAT IN Equity Sensex capacity is not RoCE-dilutive.

Outlook and valuation: Pricing power is key; Maintain ‘HOLD’ Explore: With capex intensity waning, we expect CEAT to be FCF-positive from FY23 provided it demonstrates a fine balance between capex and profitability. Given near-term pressure on margin, we maintain ‘HOLD’ with a revised TP of INR1,447 (13x Dec-22E EPS). The stock is trading at FY22/23E PER of 18.2x/11.2x.

Financial model Podcast Financials Year to March Q1FY22 Q1FY21 % Change Q4FY21 % Change Net Revenue 18,978 11,162 70.0 22,790 (16.7) EBITDA 1,655 1,017 62.7 2,553 (35.2) Adjusted Profit 199 ( 83) (341.6) 1,418 (85.9) Video Corporate access Diluted EPS (INR) 4.9 ( 2.0) (341.6) 35.1 (85.9)

Chirag Shah +91 (22) 6623 3367 [email protected]

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