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CAMS: Lion's share in the RTA duopoly Value traded – India
Improving productivity to mitigate yield pressure and slower AUM growth Cash (NSE+BSE) 741 767 505 61,18 Derivatives (NSE) 95,091 86,151 Risks: Excessive yield compression, concentration, adverse regulation, 5 operating risks Deri. open interest 8,603 9,563 7,266 Theme Report Consumer Durables & Apparel: PLI scheme for ACs: a step towards make-in- Forex/money market India Change, basis points 26-Mar 1-day 1-mo 3-mo PLI for ACs can significantly increase value addition in India Rs/US$ 72.6 3 (129) (90)
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[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. Computer Age Management Services (CAMS) Company Report ADD Diversified Financials March 29, 2021 INITIATING COVERAGE
Key pick among MF plays. CAMS’ prospects are directly linked to those of India’s MF Sector view: Attractive industry, with a market share of ~70% in MF AAUM. As a dominant operator in a CMP (`): 1,768 duopoly RTA market, its breadth offers protection against market share volatility. We do Fair Value (`): 1,850 note that its revenue concentration among top AMCs limits its pricing power and compresses yields. We expect its improving productivity and unit economies to mitigate BSE-30: 49,009 slower MF AUM growth to drive 14% EPS CAGR over FY2021-24E. We initiate coverage with an ADD rating and DCF-based Fair Value of Rs1,850.
Initiate with ADD rating: Leading MF play We initiate coverage on CAMS with an ADD rating and Fair Value of Rs1,850 (5% upside). CAMS has a dominant position in India’s registrar and transfer agent (RTA) market duopoly, which reduces risks of market share movements. This makes it one of the best MF plays and INSIDE provides visibility for its earnings. We continue to be cautious about medium-term challenges to Duopoly market; India’s mutual fund industry, which will likely pressure CAMS’ revenues, driving (moderate) 14% pricing power EPS CAGR during FY2021-24E. skewed towards AMCs ...... pg09 CAMS: Lion’s share in the RTA duopoly
CAMS’ model is intrinsically directly linked to Indian MF AAUMs, serving about 70% of Indian MF Largest MF RTA; AUMs—this makes it broadly agnostic to market share movements among AMCs. Its MF revenues focus on product (87% of total in FY2020), although mostly linked to served AUMs, have lagged asset growth due diversification to persistent yield compression. This is a result of the high revenue concentration from top clients ...... pg21 (~36% from top-2 AMCs and ~67% from top-5), which limits its pricing power vis-a-vis AMCs. Along with its subsidiaries, CAMS provides several value-added services to mutual funds, insurance companies and AIFs as well as related stakeholders like distributors and investors. Its business Yield pressure and proposition is underscored by wide distribution, diverse product bouquet, domain expertise and slower MF AAUM proprietary software and technology platforms. growth to pressure earnings ..... pg33 Improving productivity to mitigate yield pressure and slower AUM growth CAMS’ strong profitability (40-44% RoEs over FY2021-24E) is supported by low capital requirements with inherently strong operating leverage of the RTA business (EBITDA margins of 41.4-43% during FY2021-24E). Moderation in broad AUM growth (16% CAGR over FY2022-24E Nischint Chawathe compared to 23% over FY2015-20) and compression in yields (2.45 bps in FY2024E from 3 bps in FY2020; 4.5 bps in FY2015) will likely constrain revenue growth to 12% CAGR over FY2021-24E. M B Mahesh, CFA We expect its strong focus on expense management and consistent productivity improvements to boost PAT growth to 15% CAGR during the period, although CAMS’ share of the non-MF business remains muted at ~10% of revenue. Dipanjan Ghosh Risks: Excessive yield compression, concentration, adverse regulation, operating risks Abhijeet Sakhare Key risks for CAMS are: (1) faster-than-expected yield compression due to brisk digital adoption or otherwise, (2) lower negotiating power due to high client concentration and (3) operating risks— Ashlesh Sonje including cyber-attacks. Additionally, it could face risks endemic to the MF like weak financial savings, shift to passives, volatility in capital markets and adverse regulations.
Company data and valuation summary
Company data Stock data High Low Price performance 1M 3M 12M RATING: ADD 52-week range (Rs) 2,023 1,260 Absolute (%) (3) 4 NA Rel to BSE-30 (%) (3) (0) NA CMP (Rs) Price at close of: 26/3/2021 1,768 Capitalization Forecast/ valuation 2021E 2022E 2023E Market cap (Rs bn) 86 EPS (Rs) 41.8 48.1 55.0 Promoter (%) 31 P/E (X) 42.2 36.7 32.2 Free float (%) 69 P/B (X) 17.6 14.8 12.6 Shares outstanding (# mn) 49 RoE 39.7 43.9 42.4 [email protected] Source: Bloomberg, Company, Kotak Institutional Equities estimates Contact: +91 22 6218 6427
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Computer Age Management Services Diversified Financials
BUSINESS OVERVIEW: COMPUTER AGE MANAGEMENT SERVICES
Exhibit 1: Key financial metrics for CAMS March fiscal year-ends, 2017-24E
Equity Data MF MF oriented MF Revenue Profit processing Dividend AAUM AAUM handled to from after EPS charges/ Cost-to- EBITDA PBT payout handled yoy overall AAUM operations tax EPS yoy BVPS PER PBR DPS ROE MF AAUM income margin margin ratio (Rs tn) (%) (%) (Rs mn) (Rs mn) (Rs) (%) (Rs) (X) (X) (Rs) (%) (bps) (%) (%) (%) (%) 2017 10 30 28 4,783 1,235 25 NA 85 69.8 20.9 12 NA 3.7 62.4 40.9 37.6 58.2 2018 14 34 36 6,415 1,459 30 18.2 91 59.1 19.4 20 34.1 3.6 65.6 39.1 34.4 79.8 2019 16 15 39 6,936 1,304 27 (10.6) 91 66.1 19.5 22 29.5 3.4 71.8 33.6 28.2 101.3 2020 18 15 37 6,996 1,734 36 32.9 111 49.7 16.0 12 35.4 3.0 65.2 39.7 34.8 41.3 2021E 20 11 35 6,984 2,040 42 17.7 100 42.2 17.6 52 39.7 2.9 62.6 41.9 37.4 125.0 2022E 25 24 37 8,181 2,354 48 14.9 119 36.7 14.8 31 43.9 2.7 62.3 41.4 37.7 65.0 2023E 29 15 37 8,983 2,699 55 14.3 141 32.2 12.6 36 42.4 2.6 61.0 42.1 39.0 65.0 2024E 33 16 37 9,809 3,063 62 13.1 164 28.4 10.8 40 40.8 2.5 59.7 43.0 40.3 65.0 Notes: (1) All ratios are annualized. (2) Profit after tax is post-minority interest. (3) ROE: Profit after tax post-minority interest/average of period-ending shareholders' funds pre-minority interest. (4) EBITDA margin: (Operational revenue-employee expenses-operating expenses-other expenses)/(operational revenues)*100. (5) Cost-to-income: Overall expenses including depreciation and amortization expense and finance cost/total income including other income.
Source: Company, Kotak Institutional Equities estimates
Exhibit 2: CAMS – financial highlights March fiscal year-ends, 2017-24E
2017 2018 2019 2020 2021E 2022E 2023E 2024E Key growth rates (%) Revenue from operations NA 34.1 8.1 0.9 (0.2) 17.1 9.8 9.2 Data processing fees NA 30.2 8.4 3.4 4.4 16.5 10.8 10.0 Overall expenses NA 37.6 18.5 (7.9) (2.8) 14.6 8.5 7.3 EBITDA (excluding other income) NA 28.3 (7.0) 19.0 5.3 15.8 11.6 11.5 Profit after tax post minority interest NA 18.2 (10.6) 32.9 17.7 15.4 14.7 13.5 Growth in overall MF AAUM serviced 29.8 33.7 15.1 14.6 10.5 24.3 15.5 16.3 Key ratios Share of equity-oriented MF AAUM serviced (%) 28.4 35.5 39.3 37.0 34.5 36.5 36.8 37.0 Data processing fees to MF AAUM (bps) 3.7 3.6 3.4 3.0 2.9 2.7 2.6 2.5 Overall MF revenues to MF AAUM serviced (bps) NA NA 3.8 3.4 3.1 3.0 2.8 2.6 Cost-to-income (%) 62.4 65.6 71.8 65.2 62.6 62.3 61.0 59.7 EBITDA margin (% of revenues) 40.9 39.1 33.6 39.7 41.9 41.4 42.1 43.0 ROE to shareholders of CAMS NA 34.1 29.5 35.4 39.7 43.9 42.4 40.8 Income statement (Rs mn) Revenue from operations 4,783 6,415 6,936 6,996 6,984 8,181 8,983 9,809 RTA services 4,751 6,365 6,839 6,910 6,932 8,108 8,899 9,713 Software license fee, development and other services 32 50 97 86 52 73 84 96 Other income 243 163 182 217 317 223 329 408 Total income 5,026 6,578 7,118 7,213 7,301 8,404 9,312 10,217 Overall expenses (3,134) (4,312) (5,109) (4,706) (4,572) (5,239) (5,683) (6,099) EBITDA excluding other income 1,955 2,508 2,334 2,778 2,927 3,389 3,781 4,215 Profit before tax 1,892 2,266 2,009 2,508 2,729 3,165 3,629 4,118 Tax (650) (803) (700) (773) (688) (810) (929) (1,054) Profit after tax 1,242 1,463 1,309 1,735 2,041 2,355 2,700 3,064 Profit after tax post-minority interest 1,235 1,459 1,304 1,734 2,040 2,354 2,699 3,063 Balance sheet (Rs mn) Investment 2,223 2,182 2,325 3,061 3,272 4,164 5,250 6,409 Other assets 3,626 4,797 5,038 4,964 5,219 5,533 5,793 6,131 Net assets 5,848 6,979 7,363 8,025 8,491 9,696 11,043 12,540 Total liabilities 1,640 2,466 2,869 2,627 3,598 3,857 4,137 4,439 Equity share capital 488 488 488 488 488 489 491 493 Reserves and surplus 3,639 3,948 3,925 4,911 4,400 5,345 6,410 7,603 Shareholders' funds 4,127 4,435 4,413 5,398 4,888 5,834 6,901 8,096 Minority interest 82 77 82 — 5 5 5 5 AAUM details (Rs bn) MF AAUM handled 10,294 13,759 15,841 18,150 20,059 24,924 28,784 33,469 Equity-oriented MF AAUM handled 2,921 4,885 6,233 6,707 6,920 9,097 10,578 12,383 Cah flow analysis (Rs mn) Operating cash flows (excluding WC changes) 1,942 1,611 2,292 1,840 2,630 2,898 3,299 3,712 Changes in working capital/other adjustments 17 24 (411) 49 10 (13) (17) (21) Capital expenditure (1,016) (428) (351) (151) 334 (393) (78) (184) Free cash flow 942 1,207 1,529 1,737 2,974 2,492 3,204 3,507
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 3
Diversified Financials Computer Age Management Services
INITIATE WITH ADD: KEY PICK AMONG MF PLAYS We initiate coverage on CAMS with an ADD rating and FV of Rs1,850 (33.7X FY2023E PER). Our business view is underpinned by CAMS’ dominant position in the duopoly RTA industry (~70% market share in overall MF AUMs in India) and high entry barriers. These factors reduce the risk from vagaries in market share movements and provide more visibility to earnings over AMCs. We do remain watchful of medium-term challenges to the Indian mutual fund industry (lower inflows, shift to ETFs), which will likely continue to pressure CAMS’ yields and constrain EPS to 14% CAGR during FY2021-24E.
Initiate with ADD
We initiate coverage on CAMS (Computer Age Management Services) with an ADD rating and DCF-based FV of Rs1, 850, i.e. 33.7X March 2023E EPS (Exhibit 3). We assign a lower cost of equity in our DCF-based model for CAMS compared to AMCs owing to relatively lower sensitivity to market share movements in MF AUMs. The stock is close to full valuation which constrains our rating. We remain cautious about industry headwinds pressuring CAMS revenues.
Moderate medium-term growth for the MF industry
A significant portion of the RTAs’ income is linked to MF AUMs. The MF business drove ~87% of CAMS’ revenues in FY2020 and FY2019. We expect the MF industry to deliver 15% AUM CAGR during FY2021-31E. Meanwhile, we expect low-yielding passive funds to gain traction over the medium term (increase in share of ETFs to 22% by FY2031E from ~7% in FY2020), gaining incremental flow share from the active fund management industry as the latter struggles to outperform indices. This will in turn likely pressure yields of the MF business, driving 11% revenue growth for MFs and 10% CAGR for RTAs (discussed later in the report).
Duopoly structure helps while yields head south
CAMS has reported gradual compression in commission yields over the years–calculated yields have moderated to 3 bps in FY2020 from 6.4 bps in FY2009 and around 4.5 bps in FY2015. We are building in a further compression to 2.45 bps by FY2024E.
A significant proportion of CAMS’ revenue is linked to MF AUMs managed by the company. CAMS’ agreements with MFs follow a tiered structure, thus yields are formulated to decline as AUMs increase over time. Additionally, yields may be renegotiated downwards bilaterally. We believe MFs will resort to yield renegotiation if and when they face significant revenue pressure. Notably, most MFs renegotiated yields down after the TER cuts in the past year. We believe that further headwinds to the MF industry will prompt MFs to further renegotiate yields.
The current duopolistic structure of the industry helps CAMS during this renegotiation. However, the MF industry in general is highly polarized as well with the top 13 players driving ~90% of AUMs (as of 3QFY21). CAMS’ top two clients drive ~35% of its revenues while top 5 clients drove 67% of its total revenues.
Improving productivity to cushion yield compression
We expect CAMS’ PAT growth to moderate to ~15% CAGR over FY2021-24E from ~17% CAGR over FY2015-20 on the back of slower revenue growth despite adjusting for higher business due to the acquisition of Franklin Templeton’s MF RTA business (~2.5-3% of overall MF AUMs in India).
Slower MF AAUM growth for the industry (~16% CAGR over FY2022-24E compared to 19% CAGR over FY2015-20) and yield compression (impact of tiered fee structure and rise in low- yielding ETFs although partially offset by increasing share of equity-oriented funds) will likely drive moderation in revenue growth to ~10% CAGR over FY2022-24E (up 17% yoy in FY2022E due to the low base of FY2021E and acquisition of Franklin Templeton’s RTA business) compared to ~13% CAGR over FY2015-20 (Exhibit 4).
4 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Computer Age Management Services Diversified Financials
We expect cost ratios to improve on the back of stringent cost control, process automation, focus on increasing productivity, branch rationalization and a flexible employee model. We expect cost-to-income to decline ~290 bps over FY2021-24E to 59.7%, thereby driving marginal increase in EBITDA margins to 43% in FY2024E from 41.9% in FY2021E (39.7% in FY2020 and 40.9% in FY2017).
Our DCF implies 33.7X PER March 2023E
We validate our multiple-based Fair Value target with a DCF-based FV calculation to arrive at a Fair Value of Rs1,850 for March 2023E. Our DCF already builds in aggressive assumptions, viz. (1) strong 15% AAUM CAGR over FY2021-31E, tapering down to 12% AAUM CAGR over FY2031-43E, (2) EBIT ratio (% of AAUM) of 110-118 bps over FY2021-25E moderating to 94-107 bps over FY2026-30E and further squeezing to 63-91 bps over FY2031-43E as an interplay of compression in revenue yields (this has already declined to 2.45 bps in FY2024E from 3 bps in FY2020) even as EBITDA margin remains strong (43% in FY2024E versus 39.7% in FY2020) and (3) WACC of 11.8%; we bake in lower WACC compared to AMCs (WACC for HDFC AMC at 12.8%) as the company is relatively shielded from movements in market share and is a dominant player in a duopoly with high barriers to entry providing stability to earnings despite near-term headwinds of yield compression.
Exhibit 3: We value CAMS at Rs1,850/share March 2023E DCF-based FV calculation for CAMS, March fiscal year-ends, 2020-43E
2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2032E 2033E 2034E 2035E 2036E 2037E 2038E 2039E 2040E 2041E 2042E 2043E AAUM (Rs tn) 18 20 25 29 33 39 44 51 58 66 75 85 96 108 121 136 153 171 191 213 237 264 292 324 YoY (%) 14.6 10.5 24.3 15.5 16.3 15.1 14.8 14.5 14.2 13.9 13.6 13.3 13.1 12.8 12.6 12.3 12.1 11.9 11.7 11.5 11.3 11.1 11.0 10.8 EBIT (Rs mn) 2,288 2,332 2,940 3,298 3,708 4,228 4,708 5,225 5,776 6,363 6,983 7,679 8,419 9,200 10,022 10,880 11,853 12,879 13,956 15,083 16,254 17,602 19,019 20,502 YoY (%) 25 2 26 12 12 14 11 11 11 10 10 10 10 9 9 9 9 9 8 8 8 8 8 8 EBIT/AAUM (bps) 1.26 1.16 1.18 1.15 1.11 1.10 1.07 1.03 1.00 0.97 0.94 0.91 0.88 0.85 0.83 0.80 0.78 0.75 0.73 0.71 0.69 0.67 0.65 0.63 EBIT*(1-tax) (Rs mn) 1,582 1,744 2,186 2,452 2,758 3,145 3,502 3,886 4,296 4,732 5,193 5,711 6,261 6,843 7,453 8,092 8,815 9,578 10,380 11,218 12,089 13,091 14,145 15,248 EBIT*(1-tax) yoy (%) 10 25 12 12 14 11 11 11 10 10 10 10 9 9 9 9 9 8 8 8 8 8 8 Tax rate (%) 31 25 26 26 26 26 26 26 26 26 26 26 26 26 26 26 26 26 26 26 26 26 26 26 Depreciation expense (Rs mn) (485) (434) (446) (480) (503) (532) (547) (565) (585) (608) (635) (666) (700) (739) (783) (833) (889) (951) (1,020) (1,097) (1,182) (1,277) (1,381) (1,496) Changes in working capital (Rs mn) 172 (0) (23) (27) (31) (300) (23) (26) (29) (32) (36) (40) (44) (49) (54) (60) (66) (73) (80) (88) (96) (106) (115) (126) Capex (151) 334 (393) (78) (184) (216) (248) (284) (325) (370) (421) (478) (541) (610) (688) (773) (868) (972) (1,086) (1,212) (1,350) (1,502) (1,668) (1,849) Free cash flow (Rs mn) 2,088 2,512 2,216 2,828 3,046 3,161 3,778 4,140 4,527 4,938 5,372 5,860 6,377 6,922 7,495 8,092 8,770 9,485 10,233 11,014 11,824 12,761 13,743 14,770 Years discounted 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Discounting factor 0.89 0.80 0.72 0.64 0.57 0.51 0.46 0.41 0.37 0.33 0.29 0.26 0.24 0.21 0.19 0.17 0.15 0.14 0.12 0.11 Discounted cash flow (Rs mn) 2,725 2,530 2,706 2,654 2,596 2,534 2,467 2,408 2,344 2,277 2,206 2,131 2,067 2,000 1,931 1,860 1,786 1,725 1,662 1,598 38 DCF as on 31-Mar-23 3,749 3,069 3,399 3,749 4,114 4,493 4,881 5,343 5,824 6,322 6,831 7,346 7,990 8,662 9,357 10,073 10,802 11,766 12,786 13,863 Valuation of CAMS 702 (92) (378) (392) (413) (445) (490) (517) (553) (601) (664) (745) (780) (823) (876) (942) (1,022) (994) (957) (906) Risk free rate (%) 7.0 Risk premium (%) 5.0 WACC (%) Beta (X) 1.0 1,850 9 10 11 12 13 14 15 16 Cost of equity (%) 12 6.0 3,174 2,361 1,877 1,626 1,331 1,164 1,035 933 WACC (%) 12 6.5 3,564 2,536 1,969 1,687 1,364 1,185 1,049 942 Terminal growth rate (%) 7.5 7.0 4,148 2,770 2,083 1,760 1,402 1,208 1,064 953 Sum of free cash flow (Rs mn) 44,208 7.5 5,121 3,097 2,231 1,850 1,446 1,236 1,082 965 Terminal value (Rs mn) 40,424 (%) rate 8.0 7,068 3,588 2,428 1,964 1,500 1,268 1,102 978
Enterprise value (Rs mn) 84,633 growth Terminal 8.5 12,909 4,406 2,703 2,113 1,565 1,305 1,125 993 Equity value (Rs mn) 84,633 Cash on balance sheet (Rs mn) 6,204 Enterprise value (Rs mn) 90,837 No. of shares (mn) 49 Equity value per share (Rs) 1,850 Calculation of terminal value WACC used (%) 11.8 Terminal growth rate 7.5 Terminal value calculation (Rs mn) Cash flow in terminal year 14,770 Terminal value 373,584 Discount factor 0.11 Discounted value 40,424
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 5
Diversified Financials Computer Age Management Services
Exhibit 4: Slower MF AAUM growth and yield compression to put pressure on revenues for CAMS CAMS' revenues, MF AAUM and yields, March fiscal year-ends, 2018-31E
Revenues yoy (LHS) MF AAUM yoy (LHS) Calculated yields (RHS) (%) (bps) 40 4.6 5 4.3
34 3.8 30 3.5 4 3.3 3.1 2.9 2.8 20 2.7 3 2.6 2.5 2.3 2.2 17 2.1 10 2 11 10 10 9 9 9 8 34 7 16 1 14 1 11 24 15 16 15 15 14 14 14 7 14 7 13 0 1
(10) 0 2018 2019 2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E
Notes: (1) Yields: (Overall revenues/MF AAUM)%*100.
Source: Company, Kotak Institutional Equities estimates
CAMS relatively more shielded from market share movements; commands a premium
CAMS (32.2X FY2023E EPS) trades at a discount to HDFC AMC (34.9X FY2023E EPS, one of its top five clients) and at a marginal premium to Nippon Life India Asset Management (Nippon Life Indian AMC, 28.4X FY2023E EPS) (Exhibit 5).
We believe that CAMS should command a premium to AMCs in general. CAMS’ relatively stable MF AAUM market share, high barrier to entry in a duopoly, high switching cost for clients and relatively lower impact of volatilities in fund performance are key positives. Two key arguments to support our call –
CAMS is relatively more shielded from market share movements. Unlike mutual funds, CAMS is relatively shielded from market share movements. CAMS has strong relationships with top AMCs in India (top four out of five AMCs and top nine out of 15 AMCs are CAMS’ clients). The overall AMC industry in India is relatively concentrated with top 10 players occupying 82.8% market share (up from 81.1% in FY2017). While individual MFs may gain/lose market share due to fund outperformance/underperformance and changes in distribution strategy, CAMS will likely retain its revenue share.
High switching cost, barriers to entry and scope for horizontal integration augur well. Client attrition is relatively lower in the MF RTA industry as the overall process of shifting from one RTA to another in relatively cumbersome. Additionally, AMCs are likely more focused on garnering fresh inflows, fund management, marketing and enhancing distribution capabilities, providing relatively less scope of disruption from incumbents. RTA industry benefits from economies of scale and domain expertise gained over the years. High switching cost for clients and barriers to entry for disruptors entail less risks to the business model. Moreover, MF RTAs focus on expanding their product bouquet by expanding into similar lines of businesses (ex. RTA for AIFs) or focus on providing software-based value-added services for other players in the financial ecosystem (ex. insurance repository).
6 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Computer Age Management Services Diversified Financials
Exhibit 5: CAMS trades at a discount to HDFC AMC but at a premium to Nippon Life India Asset Management Valuation summary of India asset managers and RTAs, March fiscal year-ends, 2020-23E
Market AUM AUM CAGR EPS CAGR CMP cap (3QFY21) (2015-20) EPS (Rs) (2020-23E) PER (X) RoE (%) (Rs) (Rs bn) (Rs tn) (%) 2020 2021E 2022E 2023E (%) 2020 2021E 2022E 2023E 2020 2021E 2022E 2023E CAMS 1,768 86 21 23 35.6 41.8 48.1 55.0 15.6 49.7 42.2 36.7 32.2 35.4 39.7 43.9 42.4 HDFC AMC 2,860 609 4 15 59.2 63.1 72.3 81.9 11.4 48.3 45.3 39.5 34.9 33.5 29.1 29.1 28.8 Nippon Life India AMC 330 203 2 15 6.8 10.1 10.1 11.6 19.7 48.6 32.7 32.8 28.4 16.1 24.0 21.7 23.9 UTI AMC 558 70.8 2 7 21.5 34.2 30.1 36.9 19.7 25.9 16.3 18.6 15.1 10.2 16.5 13.9 15.3 Notes: (1) AUM refers to MAAUM for period-ending month for HDFC AMC and NAM while it refers to AAUM for the period for CAMS.
Source: Company, Bloomberg, Kotak Institutional Equities estimates
SS&C trades at a rich valuation due to a diverse offering
SS&C Technologies, the largest mutual fund transfer agent globally, trades at ~27X trailing PER. SS&C has a unique business model that combines end-to-end expertise across financial services operations with software and solutions to service a diversified customer base in the financial services and healthcare industries.
SS&C owns and operates the full technology stack across securities accounting, front-to- back-office operations, performance and risk analytics, regulatory reporting, and healthcare information processes. Apart from being the largest mutual fund transfer agent globally, the company is also the world’s largest private equity and hedge fund administrator.
Additionally, the company offers a diverse product bouquet to the healthcare industry including pharmacy, healthcare administration and health outcomes optimization solutions including claims adjudication, benefit management, care management and business intelligence services.
It acquired DST Systems in CY2019 including various other inorganic expansionary strategies adopted over the years. The company is hence not directly comparable to CAMS.
Increasing regulatory and compliance pressure, strong relationship with clients in different domains (SS&C Technologies has tie-ups with >1,100 clients operating as AMCs, hedge funds, AIFs, etc.) and continued investment in new software capabilities likely drive premium for SS&C. Overall client base is high at >18,000 clients, providing granularity to earnings profile.
SS&C Technologies delivered strong 29% CAGR in revenues over CY2011-17 and 35% yoy growth in revenues in CY2019 (numbers from CY2018 onwards are not comparable to historical values as the company acquired DST systems in CY2018). Earnings growth was strong at 36% CAGR over CY2011-17 (up >2.3X in CY2019 adjusted for expenses incurred for inorganic expansion in CY2018) (Exhibit 6). Strong addition to client base, robust pace of product and service diversification and expanding business reach and verticals through inorganic acquisitions have been key levers for growth.
We believe that CAMS may not be directly comparable with SS&C, the latter has a much more diverse offering and is less dependent on any single sector.
The State Street Corporation, a large investment servicing-transfer agent in the US is also engaged in investment management. The company trades at ~11X trailing PER (Exhibit 7); this compares with other AMCs that mostly trade at 15-25X. State Street has delivered muted 1% CAGR in revenues over CY2014-19 translating to 3% PBT CAGR over CY2014- 19; continued decline in yields to 1.48 bps in CY2019 from 1.81 bps in CY2014 is the key driver.
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Exhibit 6: Strong growth in revenues for SS&C Technologies while it has been muted for State Street Corporation Financial highlights for SS&C Technologies and State Street Corporation, calendar year-ends, 2009-19
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 SS&C Technologies Key growth rates (%) Overall revenues (3.2) 21.4 12.7 48.8 29.1 7.7 30.3 48.1 13.1 104.2 35.4 Overall expenses (5.2) 22.2 11.2 54.7 23.6 7.1 47.2 42.7 7.2 134.0 24.3 EBITDA (0.4) 19.0 12.0 35.1 56.3 5.8 (4.6) 80.2 20.5 45.8 87.2 PBT 11.1 54.2 66.4 (4.7) 106.0 22.4 (65.8) 168.9 72.8 (55.7) 325.0 PAT 1.2 70.4 57.4 (10.2) 157.3 11.2 (67.3) 205.6 151.1 (68.6) 324.9 EPS 47 43 (13) 151 9 (85) 191 142 (73) 295 Key ratios EBITDA margin (% of revenues) 37.5 36.8 36.6 33.2 40.2 39.5 28.9 35.2 37.4 26.7 36.9 Core cost-to-income (%) 75.2 75.7 74.7 77.7 74.3 73.9 83.5 80.5 76.3 87.5 80.3 ROE (%) 2.9 4.3 5.6 4.5 10.2 10.2 2.5 6.0 13.3 2.8 9.0 State Street Corporation (investment servicing segment Key growth rates (%) Overall growth in fee income (23) 13 11 (2) 7 6 5 (4) 8 2 (4) Servicing fees (11) 18 11 1 9 6 1 (2) 6 1 (7) Others (40) 3 10 (10) 1 4 17 (11) 13 6 3 Net interest income 1 3 (13) 10 (8) (1) (7) (0) 11 17 (4) Other income NM (59) 16 3 (113) NM (250) NM (657) NM 617 Overall expenses (10) 9 8 2 2 7 5 (5) 1 6 1 PBT (21) 7 (6) (0) (0) (4) (8) 2 29 8 (13) Key ratios Servicing fee to AAUC (bps) 1.8 1.8 2.0 1.8 1.7 1.8 1.9 1.8 1.6 1.7 1.5 Core cost-to-income (%) 68.7 68.4 71.2 71.6 71.5 73.9 76.4 75.2 69.9 69.7 73.0 PBT margin (% of total income) 32.6 32.1 29.3 29.0 28.5 26.1 23.6 24.9 29.8 30.3 27.3 Notes: (1) EBITDA for SS&C Technologies includes other income. (2) Core cost-to-income for SS&C Technologies: (Operating expenses cost of revenues)/(revenues)*100. (3) SS&C Technologies acquired DST Systems in CY2018 and as such growth rates for CY2018 are not comparable. (4) Core cost-to-income for investment servicing unit of State Street Corporation: Overall expenses including provisions/total income*100.
Source: Company, Kotak Institutional Equities
Exhibit 7: SS&C Technologies trades at a premium to State Street and other AMCs Trailing PE multiple for global transfer agents and AMCs, calendar year-ends, March 2011-March 2021 (X)
SS&C Technologies State Street Corporation Blackrock T. Row Price 65
53
41
29
17
5
Jul-11 Jul-13 Jul-15 Jul-17 Jul-19 Jul-12 Jul-14 Jul-16 Jul-18 Jul-20
Nov-11 Nov-13 Nov-15 Nov-12 Nov-14 Nov-16 Nov-17 Nov-18 Nov-19 Nov-20
Mar-11 Mar-13 Mar-15 Mar-17 Mar-19 Mar-21 Mar-12 Mar-14 Mar-16 Mar-18 Mar-20
Source: Bloomberg, Kotak Institutional Equities
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MF RTA: DUOPOLY DOMINANCE BUT PRICING POWER SKEWED TOWARDS AMCS MF RTAs are integral to the MF ecosystem providing an entire gamut of back office services to MFs, distributors, investors and other stakeholders. RTAs’ revenue, though mostly linked to MF AUM growth, has lagged growth in served assets due to consistent yield compression. Importantly, high revenue concentration from top clients (top 10 AMCs have >80% market share in MF AAUM) skews pricing power towards AMCs. Despite limited pricing power, high switching cost, elevated upfront capital requirements and economies of scale create entry barriers, providing RTAs a relatively safe play in capital markets. With a modest expectation of MF AUM growth, we expect RTAs to deliver 11% revenue CAGR during FY2021-26E, down from 15% during FY2016-20. Continued investment in technology and inorganic opportunities to diversify product offerings lowers scope for improvement in cost ratios; horizontal integration into similar services like AIF RTA and insurance repository help expand revenues.
Mutual fund RTAs provide a wide gamut of services to clients
Registrar and transfer agents (RTAs) provide diversified services to mutual fund houses, distributors, investors and other stakeholders through proprietary technology platforms, branch network and call center services.
RTAs practically act as a transaction back-office of the MF AMCs. An RTA, among other things, (1) offers transaction origination services (both paper-based and electronic), including managing KYC, (2) accepts and executes orders on behalf of mutual funds and provides transaction processing and payments services, (3) accepts and processes transaction requests of investors and reports its effect on the unit capital and (4) computes and pays brokerage fees and reconciles bank accounts.
Thus, MF RTAs effectively act as partners for mutual fund houses, service aggregators for value-based offerings, offer customer touch-points for investors and distributors, business enablers and distribution engines at a wide scale (Exhibit 8). These entities provide wide access, assist in increasing sales and help save cost overheads for mutual fund houses with their geographically spread out branches and back-end call centers along with proprietary technology platforms. This helps the management of the MFs to focus on its key functions, viz. marketing and distribution. Some key characteristics of MF RTAs are described below.
Partner for mutual fund houses. Incumbent MF RTAs are associated with mutual fund houses since inception and have demonstrated the capability to handle the nuances of the industry. The mutual fund industry has collected extensive data on investor behavior, requirements, preferences, etc., which impacts decisions related to new launches and scheme composition changes, etc. The large volume of information is replicated into technology systems to maintain it for actionable insights. This requires huge infrastructural capability. Additionally, processing and maintaining transaction (both digital and paper-based) details requires expertise. MF RTAs apply analytical solutions to the accumulated data and support clients in the development of innovative products.
Service aggregator for driving value-based offerings. MF RTAs have various business continuity mechanisms in place with mutual fund houses to attract and retain customers in a dynamic and competitive environment in a cost-efficient manner. For example, a simple change in alerts and notifications requires considerable technical investment from a mutual fund’s perspective, but for MF RTAs, this is just a one-time investment, which can be leveraged for all other clients.
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Operational integration and customer care services. MF RTAs have been instrumental in providing operational efficiency to clients. These entities have enabled fund houses to come up with timely launches backed by infrastructural stability amid growing investor intensity. On-boarding a large number of customers or subscribers to these funds and maintaining their records in addition to adhering to the customer service standards expected in the industry are largely possible owing to the strong infrastructure backbone provided by MF RTAs.
Risk management and business enablers. Maintaining security standards is absolutely crucial for MF RTAs. There is a high risk of disruption in operations and customer experience in case of failure of these systems. MF RTAs have acquired domain-centric capabilities from multiple partners, which are difficult to replicate.
Value-added services provided to multiple stakeholders in mutual fund industry. In addition to regular services, MF RTAs have evolved their service offerings and set up digital platforms for retail and corporate investors as add-ons. Having better understanding of investor queries and dedicated platforms for the relevant audience on multiple fronts has increased the importance of these entities in query handling and resolution.
Exhibit 8: MF RTAs act as one-stop solution for providing value-added services to mutual fund houses and other related stakeholders
MF RTA
Knowledge Valued added Customercare partner for Service Business services enhancing service touch- mutual fund aggregator enablers industry-wide points houses network and reach
Source: Company
RTA is a niche segment, integral to the MF ecosystem
RTA is a niche business with total revenue pool of ~Rs10.1 bn in FY2020 (Rs9 bn of MF RTA revenues and ~Rs1.1 bn of RTA revenues from AIFs) as compared to the revenue pool of ~Rs250-260 bn for Indian AMCs. RTA revenues in the India MF industry have grown by 15% CAGR during FY2016-20 (high growth phase for India mutual fund industry with MF AAUM CAGR of ~19% over FY2016-20), similar to revenue CAGR for AMCs. RTAs’ fees are primarily linked to AUMs (mostly charged as ~1.5-6 bps of AAUMs depending on AUM mix; blended yield of ~3.8 bps of AAUM as of FY2020; this may however be a bit inflated as it includes some portion of non-AUM-linked fees also) and hence directly linked to growth in MF AAUMs; the ratio being negotiated periodically.
RTA revenue lags MF AAUM growth; further moderation over medium term
Strong revenue growth during FY2016-20 though lagging MF AAUM growth. CRISIL pegs the overall revenues of the MF RTA industry at ~Rs9 bn for FY2020 (up ~18% CAGR over FY2015-20). Additionally, revenues from AIFs is gauged at ~Rs1-1.2 bn for FY2020 (~10% of overall revenues for MF RTAs); this was significantly lower in FY2015 (Exhibit 9).
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. Rough estimates suggest that MF RTAs reported strong growth in revenues (including revenues from AIFs) at ~15% CAGR over FY2016-20 (~18% CAGR over FY2015-20) on the back of (1) 19% AAUM CAGR in MF AAUM (FY2016-20), (2) increase in share of high-yielding actively managed equity-oriented assets to ~41% in FY2020 from ~31% in FY2016 (Exhibit 10) despite increase in share of low-yielding ETFs (~6% in FY2020 from ~1.5% in FY2016), (3) gradual shrinkage in yields in the MF RTA segment (overall revenues from MF segment to average MF AAUM) to ~3.8 bps in FY2020 from ~4.1 bps in FY2016 and (4) rise in contribution of AIF revenues in overall revenue mix.
. Yields compressed despite increase in share of high-yielding assets owing to (1) increase in AUM size per scheme (fees charged by MF RTA follow a tiered structure similar to TER charged by AMCs) and (2) renegotiation and decline in fees as select AMCs likely passed on the impact of TER cut to RTAs (apart from distributors) (Exhibit 11).
RTAs delivered similar growth as AMCs; might be difficult to sustain. During FY2016-20, MF RTAs delivered similar revenue growth compared to AMCs at ~15% CAGR. Revenue growth for MF RTAs, however, superseded revenue growth of their top clients over the past two years; this may be difficult to sustain.
. The growth in revenues for MF RTAs was higher than the revenue growth for their top clients. For example, CAMS delivered ~15% CAGR in revenues over FY2016-20 compared to 14% for HDFC AMC and ICICI Prudential AMC (Exhibit 12). While most AMCs delivered strong growth over FY2015-18 (larger clients of RTAs delivered superior growth compared to RTAs), lower inflows, regulatory pressure and moderation in pace of growth in high-yielding actively managed equity-oriented funds led to a sharp decline in the pace of revenue growth. In FY2019 and FY2020, CAMS delivered higher growth at 8% yoy and 1% yoy compared to 4% yoy growth and 6% yoy decline for HDFC AMC and 1% yoy and 4% yoy decline for ICICI Prudential AMC, respectively.
. On the back of moderate inflows, underperformance of active funds, higher focus on realigning interest of distributors by likely increasing commission and stringent cost control, revenue growth (post distributor pay-outs) will likely remain weak for AMCs. Under such circumstances, AMCs might intend to aggressively push for reducing RTA cost to manage overall earnings. Unlike a duopoly, the pricing power is relatively more skewed towards AMCs due to high contribution to overall revenues by top players (overall MF AAUM managed by top 10- players is ~83% and top 5 client contribute ~67% of CAMS’ revenues).
Revenue growth for RTAs to taper down. We expect MF RTAs to deliver 11% CAGR in revenues over FY2021-26E and marginally moderate to 9% CAGR over FY2026-31E translating to 20% CAGR over FY2021-31E; this compares with 11% revenue CAGR for the AMC industry over FY2021-31E (13% CAGR over FY2021-26E and 10% over FY2026-31E). We expect yield compression, moderation in AAUM CAGR (16% CAGR over FY2021-26E compared to 19% over FY2016-20), lower share of high-yielding actively managed equity assets over FY2020-22E and rise in share of low-yielding ETFs to be a key driving forces for moderation in the pace of revenue growth. Apart from the change in AUM mix and impact of tiered fee structure, we do not rule out further fee renegotiation by top AMCs with higher bargaining power.
. MF AAUM growth to moderate. We expect overall MF AAUM growth to moderate to 16% CAGR over FY2021-26E compared to 19% over FY2016-20 on the back of tepid inflows.
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. Yields under pressure. Fees charged by MF RTAs differ based on AUM composition and quantum of AUM (tiered price structure similar to TER). Fees on equity AUM are higher than others. According to CRISIL, fees charged on equity AUM declined to 5.9 bps in FY2020 (6.2 bps in FY2019) from 6.7 bps in FY2017 and 7.5 bps in FY2015. Increased AUM per scheme and increasing share of low-yielding ETFs will pose pressure on fees. Additionally, shares of high-yielding actively managed equity assets have moderated a bit from peak levels.
Exhibit 9: MF RTA industry likely to deliver 10% revenue CAGR over FY2021-31E, marginally lower than 11% CAGR for AMCs MF RTA and AMC market in India, March fiscal year-ends, 2016-31E
CAGR (%) 2016 2017 2018 2019 2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2016-20 2021-26E 2026-31E 2021-31E MF RTA market in India MF AAUM (Rs tn) 13 16 22 23 26 29 35 40 46 53 61 70 80 91 104 118 19 16 14 15 MF RTA revenues (Rs bn) 6 7 10 9 10 10 12 13 14 15 17 18 20 22 24 25 15 11 9 10 Calculated yields (bps) 4.11 4.08 4.05 4.03 3.84 3.53 3.34 3.18 3.00 2.89 2.77 2.64 2.52 2.39 2.27 2.14 -27 bps -77 bps -62 bps -139 bps AMC market in India MF AAUM handled (Rs tn) 13 16 22 23 26 29 35 40 46 53 61 70 80 91 104 118 19 16 14 15 AMC revenues (Rs bn) 149 187 261 270 258 290 345 375 421 474 532 593 655 717 781 848 15 13 10 11 Calculated yields (bps) 1.16 1.16 1.26 1.14 1.05 1.02 1.00 0.94 0.92 0.89 0.87 0.85 0.82 0.79 0.75 0.72 -12 bps -14 bps -16 bps -30 bps
Source: Company, CRISIL, Kotak Institutional Equities estimates
Exhibit 10: Share of high-yielding actively managed equity-oriented assets has increased over FY2016-20 Share of actively-managed equity-oriented MAAUM to overall MAAUM for AMCs, March fiscal year-ends, 2014-20, 10MFY21
2014 2015 2016 2017 2018 2019 2020 10MFY21 Proportion of actively-managed equity oriented MAAUM Aditya Birla Sun Life 13.8 21.8 23.7 26.8 34.8 36.9 33.5 35.4 Axis AMC 18.5 30.9 33.4 33.3 44.9 52.2 50.6 52.7 DSP Mutual Fund 28.4 41.9 40.9 40.7 47.6 51.9 51.7 54.8 Franklin Templeton 30.3 35.5 48.1 54.3 51.9 44.5 42.4 56.5 HDFC AMC 34.7 41.8 35.8 40.3 50.4 47.2 42.0 40.9 ICICI Prudential AMC 21.0 32.6 33.5 37.3 45.8 46.4 41.1 40.8 IDFC Mutual fund 19.4 26.6 24.1 23.0 29.4 31.6 26.2 21.6 Kotak AMC 10.6 21.2 22.3 23.7 36.1 35.0 36.4 36.4 Mirae AMC 4.0 93.3 93.5 93.4 86.4 87.8 87.6 89.1 Nippon India AMC 23.6 32.2 29.6 27.5 35.5 40.7 39.3 39.8 SBI AMC 21.4 28.9 26.7 30.0 33.9 31.9 27.3 26.4 Tata AMC 19.3 26.6 32.2 29.6 34.4 44.1 48.7 51.2 Total of above players 23.2 32.3 31.4 33.2 40.7 41.4 38.6 39.2 Others 21.6 29.2 28.7 30.1 37.1 38.5 36.6 37.7
Source: AMFI, Kotak Institutional Equities
Exhibit 11: Yields have dropped for MF RTAs Fees charges by MF RTA to AUM, March fiscal year-ends, 2015-20 (bps)
2015 2017 2019 2020 Equity funds 7.5 6.7 6.2 5.9 Hybrid 7.8 6.1 6.0 6.0 Debt 2.4 2.2 2.2 2.2 Liquid 3.3 2.0 2.0 2.0 Others 4.3 2.4 1.6 1.5
Source: CRISIL
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Exhibit 12: MF RTAs have delivered stronger growth compared to their larger clients over the past few years Gross revenue growth for AMCs (charged at scheme accounts) and MT RTA, March fiscal year-ends, 2017-20 (%)
CAGR (%) 2017 2018 2019 2020 (2016-20) CAMS 20.2 34.1 8.1 0.9 15.2 HDFC AMC 21.4 43.9 3.6 (6.1) 14.2 ICICI Prudential Life AMC 33.1 35.5 (1.4) (3.9) 14.4 KFin Technologies (including Sundaram BNP Paribas) 32.5 30.2 (6.7) 6.7 14.5 NAM 20.0 33.7 (2.4) (17.4) 6.7 Notes: (1) Gross revenue data for KFin Technologies (including Sundaram BNP Fund Services Limited) are KIE estimates and gross revenue for NAM for FY2016 is an estimated value.
Source: Company, Kotak Institutional Equities estimates
Low mutual fund penetration and lower performance-related risks augur well
Low MF penetration in India. AUM growth will likely taper down over the medium term from peak levels, however, low MF penetration compared to global averages will likely support the long-term growth trajectory (Exhibit 13). Product innovation, enhancing distribution capabilities, rising dominance of direct channels and increasing penetration among retail customers in B-30 cities will likely support growth. MF RTAs tend to benefit the most in times of strong MF AUM growth as they are relatively shielded from changes in market share. Unlike in the case of AMCs, we expect the market share of players in the MF RTA market to be broadly stable.
RTAs remain relatively more shielded to performance-related risks. Unlike AMCs, the market shares of RTAs are indirectly related to the performance of their clients and do not shift much based on performance of funds or diversification in the channel mix. Inorganic expansion by AMCs and consolidation of larger players, however, result in a change in market share. As such, RTAs are less exposed to fund performance cycles and are relatively shielded from sudden pressure on revenues.
Exhibit 13: Mutual fund penetration (especially equity AUM) is quite low in India compared to other countries Mutual fund penetration (MF and equity AUM to GDP), March fiscal year-ends, December 2018 (%)
MF AUM to GDP (LHS) Equity AUM to GDP (RHS) 125 75 80
100 55 64
75 40 48 34 36 28 27 50 23 32 18
25 6 16 3 5 120 80 81 68 67 63 63 48 40 32 13 12
0 0
UK
USA
India
Brazil
Japan
South Africa Korea China
World
France Canada
Germany Notes: (1) Only open-ended funds have been considered (includes equity, debt and others) for calculating overall MF AUM to GDP. (2) Only open-ended funds have been considered for calculating equity AUM to GDP. For balanced/mixed funds, 70% of equity mix is assumed. Guaranteed/protected and real estate funds are not considered.
Source: CRISIL
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Revenue contribution from AIFs to increase over time CRISIL pegs overall revenues garnered by MF RTAs from AIFs at ~Rs1-1.2 bn, translating to ~10% of overall revenues for RTAs. The share of revenues from AIFs has increased over the past few years and will likely support overall revenues going ahead. Globally, RTAs have developed customized solution for AIFs and are normally able to command higher yields. Proprietary domain knowledge and agility to customize solution based on regulatory requirements augur well for MF RTAs in India. Funds raised by Indian AIFs increased to Rs2.1 tn as of December 2020 from Rs227 bn as of FY2016. The amount of investments made by AIFs rose to Rs1.8 tn during the same period from Rs182 bn (up 64% CAGR over FY2016-20) (Exhibit 14). While the pace of growth will moderate from peak levels (impact of low base gradually decreasing), CRISIL expects AIFs to deliver strong growth at 30-35% CAGR over FY2019-24E.
Exhibit 14: Strong growth in AIFs; albeit moderation in pace of growth Cumulative investments by AIFs, March fiscal year-ends, 2014-20, 3QFY21
AIF (LHS) YoY (RHS) (Rs bn) 146 (%) 5,000 150 131
4,000 120 93
3,000 75 79 90
2,000 60 40 32 30 1,000 1,845 30 1,534 1,657 1,098 32 74 182 351 614 0 - 2014 2015 2016 2017 2018 2019 2020 2QFY21 3QFY21
Source: CRISIL, SEBI, Kotak Institutional Equities
Despite a duopoly, pricing power skewed towards AMCs Two RTAs in India The MF RTA industry in India is duopolistic in nature with only two players: CAMS and KFin Technologies. CAMS is the market leader and manages ~70% of MF AAUM (~73-74% including AUM of Franklin Templeton) while KFin Technologies manages the remaining ~26- 27% (Exhibit 15).
CAMS manages the RTA business for top four of the five largest mutual funds (in terms of AAUM) and nine among the top 15 mutual funds (excluding the acquired business of Franklin Templeton). Among top players, Nippon Life India Asset Management and UTI Asset Management are managed by KFin Technologies as of 3QFY21. KFin Technologies acquired Sundaram BNP Paribas Fund Services Limited (managed two clients with ~2% of AUM) in October 2019. Franklin Templeton has entered into an arrangement with CAMS to transfer its RTA business to the latter from an in-house model followed previously (effective from 3QFY21). B2B business and high concentration of top MFs lower pricing power of RTAs Growth in MF AUM is skewed for larger players with a wider presence. Exhibit 16 shows that the share of top 10 players in overall mutual fund AAUM has increased to ~83% in 10MY21 from ~77% in FY2015 (share of top five players increased to ~57% from ~55% during the same period). Growth in AUM drives revenues for MT RTAs, while lower pricing power with key clients with a strong financial backbone and vast presence has led to yield compression. Over the past four years, fees charged by MF RTAs dropped across all fund classes.
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Exhibit 15: MF RTA market is a duopoly MF AAUM market share for MF RTAs in India, March fiscal year-ends, 2015-20, 4MFY21
(%) CAMS Kfin Technologies Franklin Templeton Sundaram BNP Paribas 2 2 - - 100 4 3 6 5
27 80 26 27 31
60
40 68 69 70 61 20
0 2015 2019 2020 4MFY21
Notes: (1) Infra funds (IIFCL and IL&FS Asset Management) have been excluded from industry's AUM for computation of market share. (2) Post October 2019, Sundaram BNP Paribas Fund Services has been acquired by Karvy Fintech Limited (now renamed as KFin Technologies). (3) Franklin Templeton has entered into an arrangement with CAMS to transfer its RTA business to the latter from 2HFY21E. As of 3QFY21, CAMS had 70% market share and the business is yet to be transferred.
Source: Company, CRISIL, Kotak Institutional Equities
Exhibit 16: Top 10 AMCs constitute ~83% of MF AUM market in India MF MAAUM market share across AMCs, March fiscal year-ends, 2014-20, 10MFY21
2014 2015 2016 2017 2018 2019 2020 10MFY21 Market share in total MAAUM Aditya Birla Sun Life 9.6 10.1 10.1 10.6 10.8 10.1 9.1 8.4 Axis AMC 1.8 2.3 2.9 3.2 3.3 3.8 5.3 6.1 DSP Mutual Fund 3.5 3.0 2.8 3.5 3.8 3.2 3.0 3.0 Franklin Templeton 5.1 5.9 4.8 4.5 4.4 5.0 4.0 2.7 HDFC AMC 12.7 13.6 13.1 12.9 13.2 14.1 13.7 13.2 ICICI Prudential AMC 11.8 12.8 13.2 13.3 13.4 13.1 13.0 12.5 IDFC Mutual fund 4.6 4.5 3.8 3.2 3.0 2.9 4.0 3.9 Kotak AMC 3.7 3.6 4.4 5.2 5.4 6.2 6.9 7.3 Mirae AMC 1.8 0.2 0.2 0.4 0.7 1.0 1.6 2.1 Nippon India AMC 11.5 11.7 11.8 11.5 10.6 9.3 7.5 7.1 SBI AMC 7.6 6.5 8.1 8.8 9.6 11.8 14.2 15.6 Tata AMC 2.5 2.4 2.4 2.4 2.1 2.2 1.9 2.0 Total of above players 84.3 84.3 85.5 87.0 86.7 88.9 89.5 89.5 Top 10 78.2 79.5 80.0 81.1 81.0 82.7 83.0 82.8 Others 15.7 15.7 14.5 13.0 13.3 11.1 10.5 10.5 Notes: (1) We have considered MF MAAUM for period-ending month.
Source: AMFI, Kotak Institutional Equities
Market dynamics unlikely to alter
We do not see a significant change in market dynamics even as yields continue to compress. Learnings from global markets and domestic channel checks suggest that AMCs prefer to outsource the transfer agency business to third party providers. Standalone RTAs (e.g. CAMS, KFin Technologies or global players like SS&C Technologies, etc.) or large financial conglomerates (BNY Mellon, State Street Corporation, etc.) carry out the transfer agency business. Consolidation and investment in technology to drive horizontal integration are key characteristics of RTAs. In the domestic context, the industry has consolidated over the years with two players currently in the market. RTAs continue to invest in technology initiatives to increase value proposition for MF stakeholder or penetrate related business segments (ex. transfer agency business for AIFs).
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High upfront costs. High initial (upfront fixed capital investment to build technological prowess) and recurring investments in technology, regulatory barriers, need for a pan- India branch network (CAMS, the market leader, had 271 branches and KFin Technologies had 203 branches as of FY2020), operating leverage from high business volumes and domain expertise acquired from industry experience pose high barriers to entry and high switching cost.
Shift to direct plans does not have an impact on MF RTA revenues. MF MAAUM under direct plans grew at a CAGR of 24% during FY2016-10MFY21 to Rs15 tn from Rs12.9 tn. The share of direct plans to overall AUM has increased to 46% of the industry’s AUM as of 10MFY21 from 38% in FY2016 (Exhibit 17). The primary difference between the variation in fees of regular and direct plans is the savings on distributor fees due to which the overall TER for direct plan is lower compared to regular plans. Market sources suggest that for now there is no impact on management fees. Notably, fees charged by MF RTAs are based on AUM, irrespective of which plan is opted for by an investor (Exhibit 18).
Exhibit 17: ~20% of actively managed equity MAAUM is Exhibit 18: Rising interest in direct plans to not impact the originated through direct channel business of MF RTAs MAAUM mix through direct channel, March fiscal year-ends, 2014- Break-up of TER on regular and direct plans 20, 10MFY21 (%) Distributor fee Management fee RTA/other fees (bps) Direct Direct (actively-managed equity oriented) 250
50 45.4 46.4 30 42.0 40.7 41.1 38.4 200 41 35.0 33.9 32 150 30 140 23 19.3 19.8 16.4 16.2 13.8 14.6 100 11.0 14 8.4 140 50 5
60
2015 2017 2019 2016 2018 2020 2014 0 0
10MFY21 Regular plan expense ratio Direct plan expense ratio
Source: AMFI, Kotak Institutional Equities Source: CRISIL
CAMS versus KFin: higher AUMs for CAMS; revenue CAGR similar
As discussed previously, the MF RTA market is a duopoly with the two players demonstrating strong performance over the past few years. Among them, the market leader, CAMS, has outperformed its immediate competitor on most parameters over the past few years. As such, the two players run a technology-intensive business with high upfront fixed cost of investment.
CAMS delivered higher AUM growth; performs similar on revenues. MF RTAs have demonstrated strong growth in serviced AAUM largely on the back of a robust pace of overall MF AUM growth. Growth in AAUM for CAMS was, however, higher at 23% CAGR over FY2016-20 compared to 12% for KFin Technologies (including data for Sundaram BNP Paribas Fund Services Limited). Revenue growth for KFin Technologies was, however, similar to CAMS at ~15% CAGR despite relatively lower AAUM growth. This was interplay of three factors –
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. Clients managed by CAMS gained market share and reported stronger AUM growth and thus effective yields shrunk due to tiered fee structure (AAUM growth for CAMS was ~23% CAGR compared to 12% CAGR for KFin Technologies during FY2016-20).
. Compression in yields for KFin Technologies (including business of Sundaram BNP Paribas Fund Services Limited) was likely lower than CAMS; this was likely due to increase in actively managed equity-oriented business for smaller players (share of actively managed equity oriented MAAUM for top-10 players declined to 78.1% in 10MFY21 from 83% in FY2016 (Exhibit 19).
. Lower AUM per scheme for smaller players compared to the larger ones managed by CAMS (Exhibit 20).
Exhibit 19: Top 10 AMCs have ~78% market share in equity-oriented AUM Market share in equity-oriented MAAUM, March fiscal year-ends, 2014-20, 10MFY21
2014 2015 2016 2017 2018 2019 2020 10MFY21 Market share in equity oriented MAAUM Aditya Birla Sun Life 6.0 7.2 7.7 8.7 9.2 8.8 7.7 7.3 Axis AMC 1.5 2.3 3.1 3.3 3.6 4.6 6.8 8.0 DSP Mutual Fund 4.5 4.1 3.7 4.4 4.4 3.9 3.9 4.1 Franklin Templeton 7.1 6.8 7.5 7.5 5.6 5.2 4.3 3.7 HDFC AMC 19.9 18.5 15.1 15.8 16.2 15.6 14.4 13.3 ICICI Prudential AMC 11.2 13.5 14.2 15.2 15.0 14.3 13.5 12.6 IDFC Mutual fund 4.0 3.8 2.9 2.2 2.1 2.2 2.6 2.1 Kotak AMC 1.8 2.5 3.2 3.7 4.7 5.1 6.4 6.5 Mirae AMC 0.3 0.5 0.7 1.2 1.5 2.2 3.5 4.6 Nippon Life India AMC 12.3 12.2 11.2 9.7 9.2 8.9 7.4 6.9 SBI AMC 7.3 6.1 7.0 8.0 7.9 8.9 9.7 10.2 Tata AMC 2.2 2.0 2.5 2.1 1.7 2.3 2.3 2.5 UTI AMC 10.6 8.7 7.4 6.3 4.8 4.7 4.4 4.8 Total of above players 88.8 88.1 86.4 88.2 86.1 86.5 86.9 86.4 Top 10 85.2 83.3 80.2 82.7 80.7 79.9 78.5 78.1 Others 11.2 11.9 13.6 11.8 13.9 13.5 13.1 13.6 Notes: (1) We have MAAUM for respective period-ending month.
Source: AMFI, Kotak Institutional Equities
Exhibit 20: CAMS manages clients with higher AAUM Peer comparison across MF RTAs, March fiscal year-ends, 2015-20
CAGR 2015 2016 2017 2018 2019 2020 (%) AAUM (Rs tn) CAMS 6.6 7.9 10.3 13.8 15.9 18.1 22.3 KFin Technologies 3.4 4.5 5.3 6.7 6.1 7.1 16.1 Clients (#) CAMS 15 15 15 15 16 16 1.3 KFin Technologies 23 22 21 21 22 22 (0.9) AAUM per client (Rs bn) CAMS 442 529 686 917 996 1,134 20.8 KFin Technologies 135 186 231 290 254 323 19.1 Notes: (1) Data for KFin Technologies also include data for Sundaram BNP Paribas Fund Services Limited. Sundaram BNP Paribas Fund Services Limited has been acquired by Karvy Fintech Private Limited (now renamed as KFin Technologies) post October 2019. (3) AAUM per client: Outstanding AAUM/number of clients outstanding as of the end of the respective period.
Source: CRISIL, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 17
Diversified Financials Computer Age Management Services
Lessons from global peers: yields compress and margins shrink; cost ratios remain elevated
We studied two global RTAs: SS&C Technologies (standalone RTA with horizontal integration model) and investment serving segment of State Street Corporation (asset manager with vertical integration model) to understand key trends in the RTA business globally. Disruptions are lower due to high switching cost, high upfront investment to be incurred by possible disruptors, gains from economies of scale for larger players and technological dominance acquired over the years. Most players tend to gain dominance by acquiring smaller players, mostly software firms that have developed core competencies in select product or service classes.
State Street Corporation
The investment servicing segment for State Street Corporation provides services for institutional clients, including mutual funds, collective investment funds and other investment pools, corporate and public retirement plans, insurance companies, investment managers, foundations and endowments. Key products include custody (product and participant level accounting), daily pricing and administration, master trust and master custody, record-keeping, brokerage and other trading services, performance, risk and compliance analytics to support institutional investors, etc.
Slower growth in AAUC and yield compression over CY2014-19. Overall revenue growth was muted at 1% CAGR over CY2014-19 for the investment servicing unit of State Street Corporation owing to flat growth trajectory in the core revenues (servicing fees). Servicing fees were flat over CY2014-19 owing to (1) muted 4% CAGR in AAUC (average assets under custody) and (2) shrinkage in calculated yields to ~1.5 bps in CY2019 from ~1.8 bps in CY2014; increasing share of low-yielding ETFs was a likely driver (Exhibit 21). Revenue growth was, however, stronger at 7% CAGR over CY2009- 14 led by 8% CAGR in AAUC and broadly stable yields.
. While revenues from the core business remained muted, income from non-core segments picked up in CY2014-19 to 5% CAGR from 1% CAGR over CY2009-14. The share of non-core revenues increased to 30% in CY2019 from 27% in CY2017 and 24% in CY2014. This provided support to earnings.
Cost ratios remain elevated. Despite pressure in revenues, core cost ratios remained elevated and expense growth was marginally higher than growth in servicing fees over CY2014-19. Calculated core cost-to-income remained high at ~70-74% over CY2014-19 (Exhibit 22).
Margins held on; albeit lower than historical peaks. Calculated PBT margins were stable in the range of 24-30%. Margins compressed sharply over CY2008-15 to 24% in CY2015 from 35% in CY2008; it, however, recovered thereafter owing to increase in the pace of growth of non-core revenues.
SS&C Technologies
SS&C Technologies is the largest hedge fund and private equity administrator, as well as the largest mutual fund transfer agent. SS&C Technologies revenues, earnings and expenses growths are not strictly comparable across years as the company pursued various inorganic activities over the past few years (ex. acquired DST Systems in CY2018).
Strong 19% EPS CAGR over CY2009-19. SS&C Technologies has delivered strong growth over the past decade at 19% EPS CAGR over CY2009-19. Strong growth in revenues supported profitability even as cost ratios remained elevated. Strong growth in revenues was driven by (1) increasing share of the highly profitable PMS/AIF RTA business and (2) horizontal integration into the healthcare business. Growth in revenues was significantly higher at 33% CAGR due to higher incremental business from inorganic acquisitions (26% CAGR over CY2009-17 prior to the major acquisition of DST Systems).
18 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Computer Age Management Services Diversified Financials
Margins collapsed over CY2015-19 on the back of elevated cost ratios. Cost ratios remained elevated for SS&C Technologies over the past few years. Calculated core cost- to-income was elevated at 76-88% over CY2015-19 compared to 74-78% over CY2009- 14 (Exhibit 23). Elevated cost pressure shrinkage in EBITDA margins (calculated) to 27-37% over CY2015-19 can be compared to 33-40% over CY2009-14 (Exhibit 24).
. Operating leverage in this business tends to be low due to continued investment in technology initiatives, inorganic opportunities to gain from economies of scope and continued focus on diversifying business lines and offerings (mostly relevant for standalone players).
Exhibit 21: Calculated yields have compressed in investment Exhibit 22: Elevated cost ratios have led to margin shrinkage for servicing for State Street Corporation investment servicing segment of State Street Corporation Growth in servicing fees, AAUC and calculated yields in investment Calculated PBT margin and core cost-to-income for investment servicing servicing for State Street Corporation, calendar year-ends, 2009-19 segment of State Street Corporation, calendar year-ends, 2008-19
Servicing fee yoy (LHS) AAUC yoy (LHS) Core cost-to-income (LHS) PBT margin (RHS) (%) Servicing fee to AAUC (RHS) (bps) 22.5 2.25 80 40
2.01 35 15.0 2.05 75 36 1.87 33 32 1.83 1.81 1.81 7.5 1.77 1.76 1.85 70 30 32 1.75 29 30 1.72 29 28 1.62 27 0.0 1.65 65 26 28 25 1.48 24 -7.5 1.45 60 24 64 69 68 71 72 71 74 76 75 70 70 73 55 20
-15.0 1.25
2008 2010 2012 2013 2015 2016 2017 2018 2009 2011 2014 2019
2010 2011 2013 2014 2016 2017 2018 2012 2015 2019 2009 Notes: Source: Company, Kotak Institutional Equities (1) Core cost-to-income: (Overall expenses+provisions)/(total income- other income)*100. (2) PBT margin is calculated as percentage of total income.
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 19
Diversified Financials Computer Age Management Services
Exhibit 23: Core cost ratios remain elevated for SS&C Exhibit 24: EBITDA margin has compressed from peak levels Technologies EBITDA and PBT margin, calendar year-ends, 2008-19 (%) Core cost-to-income, calendar year-ends, 2008-19 (%) EBITDA margin (% of revenues) Core cost-to-income 45 90 40.2 39.5 87.5 36.5 37.5 36.8 36.6 37.4 36.9 35.2 36 33.2 86 83.5 28.9 26.7 27 82 80.5
77.7 80.3 18 78 76.8 75.2 75.7 74.7 74.3 73.9 76.3 9 74
0
70
2008 2009 2010 2011 2013 2014 2015 2016 2018 2019 2017
2012
2008 2010 2011 2012 2013 2014 2015 2017 2018 2019 2016 2009 Notes: Notes: (1) EBITDA includes other income and is calculated as percentage of (1) Core cost-to-income: (Operating expenses+cost of revenues. revenues)/(revenues)*100. Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities
20 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Computer Age Management Services Diversified Financials
CAMS: LARGEST MF RTA IN A DUOPOLY; FOCUS ON PRODUCT DIVERSIFICATION CAMS is India’s largest RTA (registrar and transfer agent) with ~70% market share in FY2020 (~72-73% including the acquired business of Franklin Templeton from FY2022E). Along with its subsidiaries, it provides various value-added services to mutual funds (in the form of an RTA), insurance companies, AIFs, banking and non-banking companies along with other related stakeholders like distributors and investors. Its dominant position in the MF RTA business (~70% market share in MF AAUM as of 3QFY21) drives a majority of revenues (~87% of overall revenues in FY2020 was from mutual funds). CAMS’ dominant position in most business segments is underpinned by its wide distribution reach, diverse product bouquet, domain expertise and proprietary software and technology platforms.
CAMS is financial infrastructure service provider
CAMS, as an MF RTA, manages several operational and investor servicing-related requirements of AMCs thereby enabling mutual fund houses to focus on design, sales and fund management functions.
Apart from being the largest player in the MF RTA business with ~70% market share in MF AAUMs as of December 2020 (~72-73% including AAUMs of Franklin Templeton which will be transferred to CAMS gradually), CAMS provides a wide gamut of services to mutual fund houses and other related stakeholders like distributors and investors. It additionally caters to insurance companies, AIFs, banking and non-banking institutional clients also.
A dominant player in MF RTA industry, operates across multiple lines
CAMS, along with its subsidiaries, is organized across six other business verticals (apart from MF RTA), viz. electronic payment collection services business, insurance services business, alternate investment fund services business, banking and non-banking services business, KYC registration agency business and software solutions business (Exhibit 25). The company is, however, in the process of winding up its banking and non-banking services business.
Exhibit 25: Corporate structure for Computer Age Management Services (CAMS) March fiscal year-end, 2QFY21
Computer Age Management Services Limited
Mutual funds services, alternate investment funds services, payment services and banking and non-banking service businesses
Sterling Software CAMS Insurance CAMS Investor Services CAMS Financial Private Limited Repository Services Private Limited Information Services Limited Private Limited Software solutions KYC registration agency business Insurance services business business Account aggregator business
Sterling Software (Deutschland) GmbH
Notes: (1) The company is currently in the process of winding down the operations of Sterling Software (Deutschland) GmbH. (2) The company is currently in the process of closing banking and non-banking services business. (3) All subsidiaries are wholly-owned.
Source: Company
KOTAK INSTITUTIONAL EQUITIES RESEARCH 21
Diversified Financials Computer Age Management Services
Largest mutual fund registrar in India
CAMS is India’s largest registrar and transfer agent of mutual funds with an aggregate market share of ~70 % as of December 2020 (market share of ~61% in FY2015), based on mutual fund AAUM serviced by the company (Exhibit 26). Mutual fund clients include four of the five largest mutual fund houses as well as nine of the top 15 largest mutual fund houses in India based on MF AAUM as of December 2020. Additionally, the company has entered into an agreement with Franklin Templeton who will transfer the management of their RTA business to CAMS from 2HFY21E (earlier Franklin Templeton used to manage the transfer agency business in-house).
Market share likely to inch up. We expect CAMS’ market share to inch up a bit by ~100-200 bps going ahead (including the acquired business of Franklin Templeton). Increase in market share will likely be driven by higher consolidation in the AMC space; CAMS has tie-ups with the larger AMCs. Additionally, smaller players may be acquired by larger AMCs which can further drive rise in market share. Increase in market share may however translate to yield compression; impact of tiered fee structure. Additionally, it may further decrease the negotiating power of CAMS as larger AMCs gain scale and dominance.
Wide product bouquet to various stakeholders in MF business. The company offers a diversified bouquet of products to various stake holders of mutual fund houses. As a result of the domain expertise, established processes, technology-driven infrastructure and marquee clients, the company is well positioned to capitalize on incremental growth opportunities in the sector (Exhibit 27).
Exhibit 26: CAMS has dominant share in MF AAUMs managed by RTAs CAMS' market share in managed AAUM, March fiscal year-ends, 2015-20, 3QFY21 (%)
Market share in managed MF AAUM 75
70.0 69.0 70 67.6
63.9 65 62.4 60.5 60.3 60
55
50 2015 2016 2017 2018 2019 2020 3QFY21
Notes: (1) Franklin Templeton has entered into an arrangement with CAMS to transfer its RTA business to the latter from 2HFY21E. As of 3QFY21, CAMS had 70% market share and the business is yet to be transferred.
Source: Company, AMFI, CRISIL, Kotak Institutional Equities
22 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Computer Age Management Services Diversified Financials
Exhibit 27: CAMS offers a wide bouquet of products to various stakeholders in the mutual fund industry Products offered under mutual fund business
Business Function/ segments application Brief description Transaction origination services (both paper-based and electronic), including managing KYC requirements of investors Transaction origination (operated through a subsidiary).
CAMS is responsible for accepting and executing orders on behalf of mutual fund clients and provide transaction processing and payments services. Additionally, perform record keeping functions and ensure that all records are stored Operations in a digital format on the servers. Finally, the company computes and process fees and commission payable by the mutual funds to distributors and assist with the disbursement of such money. Transfer agency services CAMS accepts transaction requests from investors (in both physical and online modes), process the transaction and Investor services sends transaction confirmation to investors and their distributors. The company also computes and pay the brokerage fees and reconcile the bank accounts. CAMS offer variety of services to mutual fund clients such as anti-money laundering services, reporting to government Risk management agencies and authorities such as the SEBI and suspicious transaction reporting. CAMS assists mutual fund clients in complying with the scheme document requirements, KYC regulations, SEBI and tax Compliance requirements and generation of various statutory and non-statutory compliance reports. CAMS provides plug and play services to new market entrants. The front offices act as a physical touch point for the Front offices receipt, initial verification and processing of financial and non-financial transactions. As of 1QFY21, the company had employed 1,242 employees at front offices. Business process management: setting up of accounts, records management, maintenance functions, transaction processing and reporting. Back offices Customer interaction: mail management, online customer service, SMS services and operations of a call center. Intermediary services: on-boarding, enrolment services, fee computation and revenue administration. Customer care Provides inbound and outbound call centre services to clients from centers established at Mumbai, New Delhi, Chennai Call centres services and Kolkata. Employees are trained in-house and assigned as dedicated resources to provide exclusive services to clients.
CAMS has set up exclusive touch points to handle all queries for mutual fund distributors. The company services Distributor help desk distributor requests through emails and telephone calls. CAMS also provides several services through the help desk including requests on brokerage structures, general queries, mail back services and brokerage amounts. Push services: available across financial transactions such as for purchase and redemption. Pull services: provide general information such as NAV as well as specific information about the portfolio. Mobile based services CAMS Online system: provides a comprehensive list of on-line and value added services to all participants of the mutual fund industry. CAMS offers distributors a service package to help them provide efficient services to their customers. To further enhance Distributor the services the company recently launched a mobile application, edge360, with several features enabling distributors to services service their investors more efficiently.
This is a B2C mobile application to facilitate retail mutual fund transactions. The application enables investors to create a myCAMS new folio and works with other applications to allow investors to immediately start making SIPs in the mutual funds of their choice. The number of myCAMS registered users have grown from to 3.3 mn in 1QFY21 from 0.2 mn as of FY2015. CAMServ This application has a self-service chatbot to help investors navigate through mutual fund services and investing options. This application was developed to service mutual funds and is a business intelligence service. It assists with reporting, CAMSmart predictive and prescriptive analytics, data mining, measuring business performance and benchmarking. The application is designed for investors and distributors and has been developed to obtain minimal data input from digiSIP existing investors thereby eliminating the process time required for separate mandate registration for each SIP. It helps investors and distributors in setting up multiple SIPs at one time.
This application is a corporate investment portal designed for corporates. It provides a single gateway to transact across multiple participating mutual funds and does away with the need to complete multiple forms and transaction slips. The GoCORP application allows corporates to schedule redemption transactions and allows same-day purchase and redemption transaction. Technology and This is a proprietary front office investor service application and is targeted at mutual funds. The application allows mutual mobile based Mf360 funds to track transactions, investor enquiries and account statement requests. applications This application assists in linking the transfer agent’s back offices with the mutual funds front office in real time, while mfCompass offering a holistic and real time view of inflows and outflows to the fund managers. It allows quick reporting of physical applications received through mutual fund branches with limited data encoding requirements.
This is a mobility solution for mutual fund relationship and sales managers to better manage investor relationships and distributor performance. It provides real time access to funds data directly from the transfer agent’s database and industry mfCRM data from data aggregation service MFDEx. It enables a relationship manager to optimize time with the right investors and prospects and target their communications appropriately
The application helps with the aggregation of mutual fund data with various parameters. It also allows sales and MFDEx marketing teams to facilitate better alignment of resources through reviewing market performance, sales and distribution effectiveness. This application was developed for mutual fund distributors and advisors. It enables the tracking of brokerage for edge360 transactions, with paid or unpaid details. It provides distributors the ability to view, track and manage portfolios of new, active and dormant investors.
Source: Company
KOTAK INSTITUTIONAL EQUITIES RESEARCH 23
Diversified Financials Computer Age Management Services
Growth in CAMS’ serviced MF AAUM to moderate over the medium term
We expect growth in served MF AAUMs to moderate to ~16% CAGR over FY2022-24E from 23% CAGR during FY2015-20 owing to (1) pressure on fresh inflows for AMCs in FY2021-22E, (2) higher redemptions driving tepid net inflows and (3) sluggishness in SIPs (Exhibit 28). Likely gains in market share for larger AMCs may, however, provide some upside; the same has not been factored in our estimates though.
CAMS delivered strong growth in serviced MF AAUM at 23% CAGR over FY2015-20 (up 19% over FY2009-20). Strong rally in markets from FY2016-18 and higher consolidation with gains in market share by larger players led to strong growth in MF AAUMs (industry AAUM was up at 19% CAGR over FY2015-20 and 17% CAGR over FY2009-20).
Vertical integration to augment MF product portfolio. CAMS has focused on increasing bouquet of value-added services to be provided to various stakeholders in the AMC space. The company has witnessed robust increase in overall user base of myCAMS (its B2C application,~6 mn as of 9MFY21 compared to 3.3 mn in FY2020 and 0.2 mn in FY2017). Overall transactions of CAMS have increased to 328 mn in FY2020 from 76 mn in FY2019. In FY2020 (237 mn in 9MFY21, down 2% yoy), the company processed 238 mn SIP transactions compared to 192 mn in FY2019 and 46 mn in FY2017 (175 mn in 9MFY21; down 2% yoy). Overall SIP transactions processed will, however, likely moderate a bit going ahead owing to weak retail sentiment. This is further facilitated by the technology application ‘digiSIP’. Additionally, overall transactions on edge360 have witnessed strong traction over the past few quarters (up 38% qoq in 2QFY21 and 75% qoq in 3QFY21 on a low base).
Exhibit 28: Growth in MF AAUM serviced by CAMS to moderate from peak levels MF AAUM serviced by CAMS, March fiscal year-ends, 2015-24E
(Rs tn) MF AAUM serviced (LHS) YoY (RHS) (%) 35 40 33.7
28 29.8 32 24.3 21 20.7 24 16.3 15.1 14.6 15.5 14 16 10.5
7 8
6.6 7.9 10.3 13.8 15.8 18.1 20.1 24.9 28.8 33.5
0 0
2015 2017 2018 2020 2016 2019
2023E 2022E 2024E 2021E
Source: Company, Kotak Institutional Equities estimates
Proprietary technology platforms, domain expertise and large scale of operations provide competitive advantage for CAMS’ mutual fund business
CAMS is one of the largest financial infrastructure and services providers in a rapidly growing mutual fund market. While AMCs may continue to have higher negotiating power, CAMS will remain a dominant player in the MF ecosystem.
Relationship with clients is sticky in nature. Client relationships are sticky with average tenure of relationship with its top 10 clients is 19 years and 18 years with top four mutual fund clients as of 3QFY21. Over the past five years, the company has lost only one client as a result of the merger of such fund with another fund that was serviced by a competitor.
24 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Computer Age Management Services Diversified Financials
Wide distribution engine supports strong client base. CAMS has a wide pan-India physical distribution network comprising 271 service centers across 25 states and five union territories as of 3QFY21 and this is supported by call centers in four major cities, four back offices including a disaster recovery site (with ~500 personnel), all having real time connectivity, continuous availability and data replication and redundancy capabilities. The company has tie-ups with four out of top five mutual fund houses and nine out of top 15 mutual fund houses.
Scalable technology-enabled systems. CAMS has competitive technological advantage over peers owing to capability, functionality, integration and scalability of proprietary platforms, which deliver breadth and quality of service alongside cost efficiencies. The company handled 328 mn transactions in FY2020 (down 2% yoy in 9MFY21) compared to 98 mn in FY2015. Continued investment in proprietary IT platforms further strengthens competitive advantage. Technology-related spends were Rs604 mn in FY2020 (12.8% of overall expenses) compared to Rs540 mn in FY2019 (10.7% of overall expenses) and Rs608 mn in FY2018 (13.9% of overall expenses). The IT team has over 400 qualified IT professionals as of FY2020, who manage comprehensive proprietary IT infrastructure, develop innovative products and ensure systems and data security, in addition to offering 24x7 support to clients.
. CAMS has developed in-house technology platforms and owns Investrak.NET, a mutual fund transfer agency platform, myCAMS, a mobile device investor interface application, GoCORP, a distributor focused application, and MFDEx, a market intelligence product/information database among many other services.
. The company has aggregate of over 275 TB data storage as of 1QFY21.
Comprehensive risk management at the helm of the business model. CAMS continuously monitors systems and processes and endeavor to not only benchmark them against Indian competitors but also focuses on incorporating industry best practices and technological advancements in overall operations. The company is focused on automating processes and enhancing systems and risk management practices to ensure that all obligations and regulatory requirements are fulfilled on a timely basis and without errors. It has implemented cyber security and cyber resilience policy and established a technology committee comprising eminent specialists from IIT Bombay and IIT Madras, as well as from the banking industry.
Contribution of non-mutual fund business to overall revenues to remain low at ~10-15%
Apart from servicing mutual funds (including KYC registration agency service through its subsidiary), CAMS also provides other services to insurers through one of its subsidiaries and software solutions business through another subsidiary, Sterling Software (it provides IT platforms to third parties apart from providing IT platform to CAMS for its core mutual fund business). CAMS also provides RTA services to AIFs and provides electronic payment and collection services (through the parent) (Exhibit 29).
Rising penetration of insurance companies, ease of regulation for AIFs and strong growth in overall investor base will result in strong growth of the non-mutual fund businesses and thereby business for CAMS from these clients will also scale up. While the company is in the process of shutting down its bank/NBFC services business, it has applied for account aggregator license. The share of non-mutual fund business was low at ~13% over FY2019- 20 and will likely remain muted at ~10%.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 25
Diversified Financials Computer Age Management Services
Revenue contribution from non-MF segments to remain low at ~10%. The non-MF business segment contributed ~13% of revenues in FY2020 (broadly stable yoy). However, the pace of growth declined sharply in 9MFY21 (down around 25% yoy compared to flat yoy trends in the MF segment) owing to pandemic-related disruptions and de-focusing select segments like banking and non-banking financial services business. While the company will continue to invest in expanding its product and service capabilities, we do not envisage significant change in revenue contribution from these entities. As such, the revenue contribution from the non-MF business segments is likely to remain low at ~10%.
Rise in e-insurance policies will likely drive growth for insurance repository business. As part of the insurance repository business, CAMS assists clients with agent management, branch operations, processing new business applications, servicing policies and other support functions. It assists clients with scrutinizing and processing applications, coordinating training and onboarding of new insurance agents apart from back office operations as well as physical infrastructure and facility management functions. According to the CRISIL Report, the company had a market share of 39% in the insurance repository business (based on e-insurance policies) in FY2018. With steady increase in e-insurance policies (55% CAGR over FY2015-18) supported by regulatory push and digital penetration, the repository business will likely maintain strong pace of growth. The share of overall e-insurance policies to overall insurance policies is low at ~0.24% as of FY2018.
Key player in AIF RTA business. As part of the alternate investment fund services business, CAMS services investors, manages records and does fund accounting and reporting, among others. As of 3QFY21, the company had tie-ups with 82 alternate investment funds (AIFs), having an aggregate of ~Rs159 bn in AAUM (Exhibit 30).
. Lessons from global players suggest that AIF RTAs provide the next lever for growth for RTAs. Most AIFs expect RTAs to provide them customized solutions. While the technological expertise is broadly similar to that of MF RTAs, yields are likely higher in this business. While the overall revenues for AIFs RTAs are ~10% of overall revenues for RTAs (including AIF and MF industry), the managed AUM is ~2-3%. Thus, a back- of-the-envelope calculation suggests that yields in the AIF RTA business are ~4-5X that of yields in the MF RTA segment. While the contribution from this segment to overall revenues remains low for CAMS, it can be significant contributor to revenues going ahead.
KYC registration business taps into another oligopolistic market. CAMS Investor Services Private Limited (CISPL) is one of the five entities to be granted a KYC registration agency license by SEBI. CAMS maintains KYC records of investors, on behalf of capital market intermediaries registered with SEBI, eliminating the need to repeat KYC procedures. Online services for intermediaries include verification of PAN card details, facilitating upload of new KYC data, entering data for new KYC applicants, scanning and uploading KYC document and viewing and downloading KYC data maintained by CAMS as well as other KYC registration agencies.
Proprietary software business knits different diversified businesses. CAMS conducts software solutions business through the subsidiary, Sterling Software. Sterling Software owns, develops and maintains the technology solutions for mutual fund clients. It had a technology team of ~428 personnel as of March 2020. The company has developed in-house, Investrak.NET, a scalable mutual fund transfer agency platform, among others like MFDEx, mfCompass, etc. This business segment assists with website designing and development of other businesses and consumers, providing mobility solutions, performing trend analysis, business intelligence and analytics-based services, and technical and domain consulting services.
26 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Computer Age Management Services Diversified Financials
Electronic payment and collection services. As part of the electronic payment collection services business (services mutual funds through the parent), CAMS manages end-to-end automated clearing house transaction and electronic clearance services (ECS) and service mutual funds, non-banking financial companies and insurance companies. The company provides these services through CAMSPay, which is a highly automated ECS or National Automated Clearing House (NACH) platform that supports periodical or ad hoc payments to be collected from customers electronically through the National Payment Corporation of India’s (NPCI) ECS or NACH platform. The overall ECS and NACH transactions were 93.3 mn in FY2020 (up 16% yoy) compared to 55.4 mn in FY2018 (Exhibit 31).
Exhibit 29: A wide bouquet of non-mutual fund based services March fiscal year-end, 2020
Business Description Operating entity Management of mandated transactions, including registering of mandates, initiation of collections, Electronic payment collections reconciliation and the related reporting services, for mutual funds, non-banking finance companies, CAMS (parent) services business banks and insurance companies The business is operated through a subsidiary, CAMS Insurance Repository Services Limited. As part CAMS Insurance Insurance service business of this business, the company assists clients with agent management, branch operations, processing Repository Services new business applications, servicing policies and other permitted support functions. Limited (subsidiary)
Alternate investment fund As part of this business, the company services investors, manages records and performs fund CAMS (parent) services businesses accounting and reporting, among other services, for alternate investment and other types of funds.
Banking and non-banking In the banking and non-banking services business, the company offers digitization of account CAMS (parent) services business opening, facilitation of loan processing and back-office processing services to financial institutions.
The KYC registration agency business is operated through a subsidiary, CAMS Investor Services Private Limited, which is one of five entities granted a KRA license by SEBI. The company maintains KYC records of investors, on behalf of capital market intermediaries registered with SEBI, eliminating CAMS Investor KYC registration agency the need to repeat KYC procedures. Online services for intermediaries include verification of PAN card Services Private business details, facilitate uploading new KYC data, entering data for new KYC applicants, scanning and Limited (subsidiary) uploading KYC documents and viewing and downloading KYC data maintained by the company as well as other KYC registration agencies.
Sterling Software The software solutions business is operated through a subsidiary, Sterling Software. Sterling Software Private Limited owns, develops and maintains technology solutions for mutual fund clients as well as banks and (subsidiary) and its Software solutions business NBFCs and had a technology team of 362 personnel. Through the subsidiary, the company developed immediate subsidiary Investrak.NET, a scalable mutual fund transfer agency platform, among others. Sterling Software (Deutschland) GmbH
Source: Company
KOTAK INSTITUTIONAL EQUITIES RESEARCH 27
Diversified Financials Computer Age Management Services
Exhibit 30: AIF client base has increased at a modest pace AIF clients, March fiscal year-ends, 2017-20, 3QFY21
(#) AIF clients (LHS) YoY (RHS) (%) 100 50 42.9
80 40
60 30
19.7 40 20
10.0 20 10
42 60 66 79 82 0 0 2017 2018 2019 2020 3QFY21 Notes: (1) As of 3QFY21, the company managed AUM of ~Rs159 bn.
Source: Company, Kotak Institutional Equities
Exhibit 31: Growth rate of transactions handled by CAMSpay has moderated from peak levels Transactions handled by CAMSpay, March fiscal year-ends, 2017-20
ECS and NACH registrations and transactions (LHS) YoY (RHS) (# mn) (%) 100 134.7 93.3 150
80.6 80 120
60 55.4 90
40 45.5 60 23.6
20 15.8 30
0 0 2017 2018 2019 2020
Source: Company, Kotak Institutional Equities
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MARKET RISK, CHANGE IN REGULATIONS, CONCENTRATION AND OPERATING RISKS Key risks for CAMS include (1) faster-than-expected yield compression due to faster digital adoption or otherwise, (2) lower negotiating power due to high client concentration (top 5 clients drive ~67% of its revenue for FY2020) and (3) operating risks including cyber-attacks. Additionally, weak financial savings, shift to passives, volatility in capital markets and adverse regulations are endemic risks for the MF industry.
Faster-than-expected yield compression
Persistent yield compression. CAMS has reported consistent and significant compression in commission yields over the years – calculated yields have moderated to 3 bps in FY2020 from 6.4 bps in FY2009 and 4.5 bps in FY2015. We are building in a further compression to 2.45 bps by FY2024E.
CAMS has periodic negotiations with MFs. A significant proportion of CAMS’ revenue is linked to MF AUMs managed by the company. AUMs are likely to increase over time due to MTM gains and higher ticket size of transactions, with limited efforts for CAMS, making case for yield compression for the company. CAMS’ agreements with MFs follow a tiered structure but may be renegotiated downwards bilaterally. We believe the efforts and expenses incurred by CAMS to service MFs will be an important point of discussion even as majority of the RTA fees are linked to AUMs. A current duopoly structure in the industry helps CAMS to some extent, in our view.
Digital adoption benefits in the near term, but may get priced in. A faster-than- expected shift to digital origination, though benefit in the near term, will likely prompt MFs to negotiate down commissions over time. While overall transaction volumes declined 2% yoy in 9MFY21, paper-based transaction volumes declined sharply around 20-40% yoy indicating a significant pick-up in volume of digital transactions, one of the reasons for CAMS improved productivity in 9MFY21. A back-of-the-envelope calculation (~30% of overall transaction volumes are paper-based for FY2020) suggests that digital transactions were up ~10% yoy in 9MFY21. Market sources suggest that the lockdown has prompted distributors to move to digital sourcing and servicing.
Third-party platform may reduce RTAs role in origination. BSE and NSE have developed MF platforms for distributors to purchase and redeem on behalf of their clients. These platforms earn fees from mutual funds. A similar platform provided by CAMS does not offer mutual funds serviced by K-Fin and hence has not been very successful. These (BSE/NSE) platforms provide standardized data for transactions originated by them and hence reduce the efforts of the RTA. In this regard, CAMS has made two arguments:
. Transaction origination is only one of RTAs’ functions; these platforms have no role in the back office and reconciliation functions.
. This is a small segment with NSE and BSE’s total revenue from the MF platform at around Rs500 mn (BSE’s revenues were Rs447 mn for FY2020 and it commanded almost 85% of the market) in FY2020 versus revenue of MF RTA at ~Rs9 bn. The low revenue pool suggest the low value-add of these platforms.
CAMS will aggressively cut expenses over time, if the eventual scenario plays out. While CAMS has been consistently working on improving productivity, its cost levels are broadly fixed. The company has 271 service centers across the country as of 3QFY21; the company, for now, has no plans to reduce the network. We believe that CAMS may be prompted to eventually curtail expenses on its physical network, in case the above scenario plays out. This may, however, put pressure on earnings in the interim.
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Diversified Financials Computer Age Management Services
High concentration risk; top 2 MFs drive ~35% of operational revenue CAMS faces significant concentration risk with high contribution of top clients (~35% and ~67% of operational revenues were contributed by top 2 and 5 clients respectively in FY2020 (Exhibit 32). The loss of one or more of its significant clients or a reduction in the amount of business or fees it obtains from them or an adverse change in the determination of the fees that it receive from them could have an adverse effect. CAMS’ reliance on a select group of clients may also constrain its ability to negotiate arrangements, which may have an impact on its profit margins and financial performance. CAMS’ largest MF and two other mutual funds have been recently listed. We believe that the listings will prompt these companies to focus on expenses, leading them to negotiate harder with RTAs.
Exhibit 32: Top 2 players contribute ~36% of overall revenues for CAMS RTA revenues from AMCs, March fiscal year-ends, 2017-20
2017 2018 2019 2020 RTA revenues from select AMCs (Rs mn) Player 1 970 1,221 1,255 1,273 Player 2 709 931 1,123 1,217 Others 3,073 4,213 4,461 4,420 Overall revenues 4,751 6,365 6,839 6,910 Revenue share from top clients Top 2 35 34 35 36 Top 5 67 67 67 67 Calculated MF AAUM (Rs bn) Player 1 2,185 2,817 3,264 3,644 Player 2 2,243 2,880 3,137 3,486 Others 5,866 8,062 9,440 11,020 Overall MF AAUM 10,294 13,759 15,841 18,150 Calculated yields (bps) Player 1 4.4 4.3 3.8 3.5 Player 2 3.2 3.2 3.6 3.5 Others 5.2 5.2 4.7 4.0 Overall 4.6 4.6 4.3 3.8 Notes: (1) Calculated AAUM for HDFC AMC and NAM is average of MAAUM for quarter-ending months while it is reported AAUM for the overall managed funds. (2) (2) Player 1 and player 2 are largest AMCs in term of overall actively-managed equity oriented MAAUM as of FY2020.
Source: Company, AMFI, Kotak Institutional Equities estimates
Operating risk, including risk of cyber attacks CAMS indemnifies MFs of operating risk. CAMS’ contracts with its clients include provisions pursuant to which it is liable to such client for losses, including any indirect or consequential losses, arising in connection with error or omission, fraud, negligence or default caused by CAMS, any of its employees or agent’s actions. Indemnity provisions in such contracts include, among others, CAMS holding the client harmless from and against all such losses, damages, injury liabilities, claims, actions, costs (including attorney’s fees and court fees) relating to third-party claims arising out of or related to its performance or failure of the terms of such contract for which it has assumed financial, administrative or operational responsibility. The aggregate cumulative financial liability under some of these contracts ranges between 25% and 100% of the fees received by CAMS the client for a particular transaction or 12 months preceding the month in which such claim is made, as the case may be. However, in the event of certain breaches, there is no limit on the liability that could incur under these contracts. Also, one of its contracts with a mutual fund client does not have a cap on liability. Further, validity of indemnities provided within a majority of the contracts with its clients ranges between one year and five years from the expiry of such contracts. Such financial liability and penalty may have an adverse effect on its business and reputation, including loss for clients.
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The company incurred claims equivalent to 2% of revenues over FY2017-19. However, from FY2020 onwards, CAMS transitioned to ad-hoc provisioning for claims compared to rule based provisioning follower earlier. The board has fixed the threshold for claim based provisions at Rs650 mn and as such incremental provision will be event based or ad-hoc. Risk of cyber attacks. The size and complexity of CAMS’ computer systems may make them potentially vulnerable to breakdowns. Its systems are vulnerable to attacks including viruses, ransomware and spam attacks. The company has experienced cyber-security threats to its information technology infrastructure and has experienced non-material cyber-attacks. For example, the company experienced an attack by a Crysis/Dharma ransomware variant on the web server hosting the marketing website of its subsidiary, SSPL, in December 2018 which caused its data to get encrypted. This attack was contained and did not spread through SSPL’s network or that of CAMS. Regulations for RTAs CAMS and other RTAs operate in a highly regulated environment in which it is regulated by the SEBI, RBI, IRDAI and the MCA, among others. Accordingly, there are inherent legal and regulatory risks in the business. As the company operates under licenses or registrations obtained from appropriate regulators, it is subject to scrutiny, supervision and actions taken by such regulators. The company is also exposed to the risk of any of its employees being non-compliant with insider trading rules or engaging in fraudulent practices to take advantage of its clients and their investors. Risks for the MF industry: shift to passives, market risk and regulations
Shift to passives may hasten yield compression. We believe that the rise of passive funds will reduce inflows to actively managed equity-oriented funds and drive pressure on yields in the Indian mutual fund industry (and also for CAMS). We expect industry-wide share of ETFs to increase to ~33% of equity AUMS (actively managed equity-oriented funds and ETFs) in FY2030E from 14% in FY2020. The share of non-gold ETFs from the individual segment as proportion of overall equity AUMs will also increase over the same period from trough levels of ~1% in FY2020. While the contribution of ETFs is currently small, increasing investor awareness to focus on IRRs and concerns over consistent underperformance of actively managed funds will likely drive a J-curve in ETF growth trajectory. Recent underperformance of several actively managed equity-oriented funds and lower outperformance of those which outperformed the benchmark has likely raised concerns in the minds of retail investors. Developed market trends (US, Canada, Japan and select European markets) suggest that fund underperformance over a five-year bucket accelerates the pace of migration of ETF.
Market risks in MFs. Mutual fund industry is vulnerable to the volatility in capital markets. The AAUM of mutual funds may decline or fluctuate for various reasons, viz. declines in the Indian equity markets, which could impact future equity flows as well. In response to market conditions, inconsistent or poor investment performance, the pursuit of other investment opportunities or other factors, investors may redeem or withdraw their investments in funds. Income from mutual funds contributes ~87% of CAMS’ overall operational revenues. The revenue model of MF RTAs is interplay of (1) fees for processing of new fund offer, (2) monthly asset bases fee (calculated basis MAAUM), (3) mix of AUM serviced across asset classes (equity, debt, liquid, hybrid and others) as equity funds tend to earn higher than others, (4) transaction fee, (5) application usage fee and (6) call center fees. Hence, volatility in mutual fund AUMs can significantly affect CAMS’ earnings trajectory.
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Regulations for mutual funds. With large contribution of fees from mutual funds, changes in regulations of mutual funds specifically regulating their income could in turn affect the income of RTAs. Mutual funds are permitted to charge certain operating expenses for managing a scheme such as sales and marketing/advertising expenses, administrative expenses, transaction costs, investment management fees, registrar fees, custodian fees and audit fees, as a percentage of the scheme’s daily net assets. Total expense ratio (TER) charged to the scheme is the cost of running and managing a scheme. All expenses incurred by a scheme are required to be managed by the asset management company within the limits specified by SEBI’s MF Regulations. On September 18, 2018, SEBI mandated, among others, that the TER for (1) equity oriented open schemes shall range from 1.05% to 2.25%; and (2) other open schemes shall range from 0.80% to 2.00%, depending on the AUM of such scheme. SEBI mandated TER for close-ended schemes, liquid schemes, index funds schemes, etc. as well.
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YIELD PRESSURE AND SLOWER AUM GROWTH TO CRAMP EARNINGS TRAJECTORY CAMS’ strong profitability (~40-44% RoE over FY2021-24E) is supported by low capital requirements with inherently strong operating leverage of the RTA business (EBITDA margins of 41.4-43% during FY2021-24E). Sluggish AUM growth, compression in yields (down to 2.45 bps in FY2024E from 3 bps in FY2020, further declining from 4.5 bps in FY2015) will likely drive muted revenue growth (~10% CAGR during FY2022-24E, up 17% yoy in FY2022E, led by acquisition of Franklin Templeton’s RTA service) compared to 14% CAGR over FY2017-20. The share of non-MF business remains low at 10-15% of revenue. A focus on expense management and consistent productivity improvements will boost PAT growth to ~15% CAGR during the period.
PBT growth to moderate; cost efficiencies to support margin improvement
We expect CAMS’ PBT growth to be modest at 14% CAGR over FY2022-24E (up 16% yoy in FY2022E due to acquisition of Franklin Templeton’s RTA service) compared to 16% CAGR over FY2015-20 (lower at 10% CAGR over FY2017-20 due to one-off payouts) (Exhibit 33). Slower growth in MF AAUM (16% CAGR over FY2022-24E compared to 23% CAGR over FY2015-20; up 24% yoy in FY2022E and ~19-20% yoy adjusted for Franklin Templeton’s service), gradual decline in yields in the MF business, steep decline in non-asset linked MF revenues due to lower transactions and usage of value-added products and likely slower pace of growth in revenues of the non-MF segments will put pressure on revenues.
Growth in expenses will taper down driving improvement in cost ratios, while investment in technological initiatives and focus on product bouquet diversification will continue to offset steep improvement in PBT margins. Overall, calculated PBT margins will increase to ~40% in FY2024E from 35% in FY2020 (38% in FY2017).
Revenue growth to moderate; cost control to support margins. We expect CAMS’ revenues to moderate to ~10% CAGR over FY2022-24E (up 17% yoy in FY2022E leading to 12% CAGR over FY2021-24E) compared to 14% CAGR over FY2017-20 (flat yoy in FY2020) on the back of decline in yields and slower pace of MF AAUM growth driving moderation in pace of growth on AUM linked revenues (~60-65% of overall revenues) (Exhibit 34). Stringent cost control, process automation, high share of contractual employee providing flexibility to alter employee base (albeit with a lead lag effect) and focus on reducing overheads and cost rationalization measures will, however, support EBITDA margins; as such EBITDA margins are likely to expand to ~43% in FY2024E from 40% in FY2020 (41% in FY2017).
Pace of MF AAUM growth to moderate. We expect tepid gross inflows and higher redemptions to drive slower growth in MF AAUM serviced by CAMS at 16% CAGR over FY2022-24E (up 24% yoy in FY2022E due to low base of FY2021E and acquisition of Franklin Templeton’s MF RTA service) compared to 23% over FY2015-20 (Exhibit 35). We build in broadly stable market share (~72-73% including business from Franklin Templeton from FY2022E) though higher consolidation among AMCs and increasing dominance of larger players can provide upside to our estimates. The MF business contributed ~87% of CAMS’ operational revenues (FY2019 and FY2020); it increased to ~90% in 9MFY21 due to sharp decline in non-MF business volumes and gradual winding up of the banking and non-banking financial services businesses. Its revenue growth is interplay of (1) growth in serviced MF AAUM, (2) MF AAUM mix (as yields vary across product classes) and (3) increase/decrease in yields, apart from other revenue streams like fees for processing new fund offers, etc. Slower pace of growth in MF AAUMs will thus put downward pressure on revenues.
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. MF AAUM serviced by CAMS has increased at a robust pace of 25% CAGR over FY2015-19 (24% CAGR over FY2017-19), higher than industry average of 21% CAGR during the same period. AAUM growth moderated to 15% yoy in FY2020. The share of high yielding equity-oriented AAUM increased to 39.3% in FY2019 (declined to 37% in FY2020 due to MTM losses in 4QFY20) from 28.4% in FY2017 and 27% in FY2015. This led to strong revenue growth at 20% CAGR over FY2017-19 (flat yoy in FY2020) despite shrinkage in yields. The share of equity-oriented AAUM further moderated to ~34% in 9MFY21 due to weakness in capital markets early this year and high redemptions driving high net outflows in recent months. We expect the share of high- yielding equity-oriented AAUM to increase ~200 bps from trough levels to 36.5% in FY2022E and marginally inch up to 37% by FY2024E.
Yield compression to put further pressure on revenues. Yields charged by MF RTAs are interplay of (1) fund size (AUM per scheme), (2) product mix (active equity-oriented funds tend to garner highest yields while ETFs have the lowest) and (3) pricing power based on negotiation of fees with different AMCs. We expect calculated yields (data processing charges to MF AAUM serviced by CAMS) to decline to 2.9 bps in FY2021E from 3 bps in FY2020 and further decline gradually to 2.45 bps by FY2024E (Exhibit 36). Yield compression will be driven by (1) increase in fund size (CAMS has tie-ups with larger AMCs), (2) increase in share of low-yielding ETFs and (3) fee renegotiation by larger AMCs who face revenue headwinds. As such, growth in data processing revenues (~80% of this is MF AAUM linked) will significantly lag growth in MF AAUM serviced by CAMS.
Non-RTA revenues to witness tepid growth. We expect muted growth in non-RTA revenues (from mutual funds and other segments) to grow at a muted pace of 8% CAGR over FY2021-24E compared to 14% CAGR over FY2017-20 owing to (1) slowdown in paper based transaction volumes driving lower customer care service charges, (2) cost management by AMCs driving lower recoverable fees and (3) marginal moderation in pace of growth of software and technology related fees. AUM linked revenues constitute ~80% of data processing charges (~35-40% of overall revenues).
Share of other income to remain low at 3-4% of total income. The share of other income to total income will likely remain low at 3-4% over FY2021-24E (low at 2-5% over FY2017-19). Other income will likely report strong growth at 45% yoy in FY2021E due to strong MTM gains but moderate thereafter from FY2022E. Volatilities in investment gains and net gain/(loss) on financial assets are likely to persist.
Growth in expenses to moderate, cost-to-income to remain elevated. We expect growth in overall expenses to be muted over FY2021-24E at 10% CAGR (up 15% yoy in FY2022E on a low base and ~8% CAGR over FY2022-24E) compared to 15% CAGR over FY2017-20 (down 8% yoy in FY2020) (Exhibit 37). Consequently, cost-to-income will likely decrease to 62.3% in FY2022E (down 260 bps yoy in FY2021E) and further moderate to ~59.7% in FY2024E from 65% in FY2020. Slower pace of growth in expenses will be interplay of (1) lower overall employee base due to weakness in fresh MF inflows, transaction volumes and process automation driving productivity improvement; CAMS has a variable employee model with 30% of overall employees being contractual in nature, (2) focus on branch rationalization and slowdown in pace of business expansion, (3) drop in claim-based provisioning and (4) focus on reducing overheads in an environment of decreasing yields and slower growth in MF AAUM. Investment in technology initiatives and diversification of product bouquet will however continue to put pressure on expenses.
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Exhibit 33: PBT margin to increase from trough levels PBT growth and PBT margin (% of total income), March fiscal year-ends, 2017-24E
(%) PBT growth (LHS) PBT margin (RHS) (%) 40 50
40 39 38 38 30 37 40 34 35
28 20 30
10 20
20 25 9 16 15 13 0 10 (11)
(10) 0 2017 2018 2019 2020 2021E 2022E 2023E 2024E
Source: Company, Kotak Institutional Equities estimates
Exhibit 34: Pace of revenue growth has declined Revenues, March fiscal year-ends, 2017-24E
(Rs mn) Revenues (LHS) YoY (RHS) (%) 10,000 40 34
8,000 30
6,000 17 20
10 8 9 4,000 10
1 (0) 2,000 0
4,783 6,415 6,936 6,996 6,984 8,181 8,983 9,809 0 (10) 2017 2018 2019 2020 2021E 2022E 2023E 2024E
Source: Company, Kotak Institutional Equities estimates
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Exhibit 35: Pace of growth in MF AAUMs to moderate from peak levels MF AAUM serviced by CAMS, March fiscal year-ends, 2015-24E
MF AAUM serviced by CAMS (LHS) YoY (RHS) (Rs tn) 34 (%) 35 35 30
28 28 24 21 21 21 16 15 15 15
14 11 14
7 7
7 8 10 14 16 18 20 25 29 33 0 0 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E 2024E
Source: Company, Kotak Institutional Equities estimates
Exhibit 36: Calculated yields in MF business will likely compress over the next few years Yields, March fiscal year-ends, 2017-24E
(bps) Data processing charges to MF AAUM 5
4 3.7 3.6 3.4 3.0 2.9 3 2.7 2.6 2.5
2
1
0 2017 2018 2019 2020 2021E 2022E 2023E 2024E
Source: Company, Kotak Institutional Equities estimates
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Exhibit 37: Cost-to-income to decline from peak levels Overall growth in expenses and cost-to-income, March fiscal year-ends, 2018-24E
Operating expenses yoy (LHS) Cost-to-income (RHS) (%) (%) 45 75 72
30 71
15 66 65 67
38 18 63 15 8 7 0 63 (8) (3) 62 61 60 (15) 59
(30) 55 2018 2019 2020 2021E 2022E 2023E 2024E
Source: Company, Kotak Institutional Equities estimates
Data processing fees dominate overall revenues
MF RTA business drives majority of CAMS’ income. CAMS’ RTA income (98-99% of revenues) comprises income from data processing (majority of it is linked to mutual fund business), customer care services, recoverable, miscellaneous services and software license fee, development and support services (Exhibit 38). The share of revenues from the MF business to overall operational revenues is high at ~87% (FY2019 and FY2020); ~90% in 9MFY21. In 9MFY21, asset based revenues (~80% of MF revenues) was up 5% yoy while non-asset based revenues were down 22% yoy and non-MF revenues declined 28% yoy. We expect non-MF revenues to grow at a muted pace of 15% CAGR over FY2021-24E (down 26% yoy in FY2021E) (Exhibit 39).
Yield compression and lower AUM growth to drive decline in pace of growth of data processing fees. Data processing fees which also include AUM linked fees from MF business constitute significant proportion of overall revenues (78-80% of overall RTA revenues) (Exhibit 40). Data processing is mostly AUM linked (~80%). Lower AUM growth and yields compression (discussed earlier) will lead to moderation in pace of growth in data processing fees. We build in ~10% CAGR in data processing fees from FY2022-24E (up 4% yoy in FY2021E and 17% yoy in FY2022E; impact of low base and acquisition of Franklin Templeton’s RTA business) compared to 13% CAGR in FY2017-20 (muted at 3% yoy in FY2020); compression in yields and slower MF AAUM growth are key drivers (Exhibit 41).
. The share of data processing fees to overall revenues is expected to inch up further to 82-84% over FY2021-24E owing to slowdown in non-MF linked business segments, lower transaction linked fees and moderation in pace of revenues from value-added services in the MF ecosystem (albeit lower base).
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Steep decline in customer care service charges. Customer care service charges primarily comprise paper transaction volume-based fees and NACH (National Automated Clearing House) volume-based fees from electronic payment collection services business. We expect customer care service charges to remain stable over FY2021-24E at ~Rs580- 590 mn (down 6% yoy in FY2021E). Lower transaction volumes and likely to decline in paper-based transactions owing to push towards digital platforms and will put pressure on customer care service charges. While drop in paper based transaction volumes will put downward pressure on revenues, strong traction in electronic payment transaction volumes will provide some support (ECS and NACH transactions increased 16% yoy in FY2020 and 45% yoy in FY2019). Even as revenues will likely decline, it will be somewhat offset by lower data entry charges and drop in overall manpower. Customer care service charges dropped 5% yoy in FY2020 and 8% yoy in FY2019 compared to strong 48% yoy growth in FY2018.
Recoverable to service charges ratio to remain stable. Recoverables comprise out-of- pocket expenses incurred on behalf of mutual fund, AIF, insurance, banking and non- banking clients and KYC details obtained from other KRAs. Growth in recoverables is expected to decline a bit as AMCs focus on cost control. These revenues tend to move in line with service charges and as such do not have any meaningful impact on the P&L. The ratio of recoverable revenues to service charges has remained broadly stable at 0.97- 1.02X over FY2017-20; this is expected to remain stable at ~0.99X.
Slowdown in revenues from miscellaneous services. Miscellaneous services comprise revenues from call center services and fees for applications made available to clients. Revenues from miscellaneous services will likely remain moderate over the next few years to 10% CAGR over FY2022-24E compared to 21% CAGR over FY2017-20 (up 50% yoy in FY2022E on a low base of 30% yoy decline in FY2021E).
Growth in software license, development and other services to drop sharply. Software license fee, development and support services comprises fee earned by the subsidiary Sterling Software for providing services to external clients. The company operates with a team of ~428 personnel and develops and maintains software and technology platforms and internal and external stakeholders. With rapid digital penetration to ease the process of client on-boarding, seamless data processing, aggregation, information dissemination and other function, this segment delivered robust growth in revenues at 74% CAGR over FY2017-19 prior to declining 11% yoy in FY2020. We bake in modest 15% CAGR in software related fees (up 40% yoy in FY2022E on a low base of ~40% yoy decline in FY2021E) owing to muted demand.
Volatile trends in other income. Other income tends to be volatile and contribution to total income is <5%. Other income will likely be high in FY2021E at ~Rs320 mn compared to Rs220 mn in FY2020 (up 46% yoy in 9MFY21) due to Rs104 mn of gain on sale of investment booked in 1QFY21 (Rs 6 mn in 1QFY20). Other income was up 16% yoy in FY2020; it however declined 10% and 18% yoy in FY2019 and FY2018 respectively. We expect 9% CAGR in other income over FY2021-24E (Exhibit 42).
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Exhibit 38: ~75-80% of overall revenues is data processing charges Income composition for CAMS, March fiscal year-ends, 2017-24E
2017 2018 2019 2020 2021E 2022E 2023E 2024E Description Income streams (Rs mn) Revenue from operations 4,783 6,415 6,936 6,996 6,984 8,181 8,983 9,809 RTA services 4,751 6,365 6,839 6,910 6,932 8,108 8,899 9,713 Data processing 3,791 4,935 5,350 5,534 5,777 6,730 7,455 Mostly includes 8,200 AUM linked fees from MF business (~80-90%). Paper transaction volume-based fees and Customer care services 480 712 657 625 587 581 583 585 volume-based fees from electronic payment collection services business. Includes out-of-pocket expenses incurred on behalf of mutual fund, AIF, insurance, banking Recoverable 262 411 480 363 297 391 413 435 and non-banking clients and KYC details obtained from other KRAs. Comprises revenues from call center services Miscellaeneous services 218 308 353 388 271 407 448 493 and fees for applications made available to clients. Software license fee, development and support services comprises fee earned by the Software license fee, development and other services 32 50 97 86 52 73 84 96 subsidiary Sterling Software for providing services to external clients. Other income 243 163 182 217 317 223 329 408 Total income 5,026 6,578 7,118 7,213 7,301 8,404 9,312 10,217 Key ratios (%) Data processing fees to MF AAUM (bps) 3.7 3.6 3.4 3.0 2.9 2.7 2.6 2.5 Data processing fees to equity-oriented MF AAUM (bps) 13.0 10.1 8.6 8.3 8.3 7.4 7.0 6.6 Overall MF revenues to MF AAUM (bps) NA NA 3.8 3.4 3.1 3.0 2.8 2.6 Income growth rates (%) Revenue from operations NA 34.1 8.1 0.9 (0.2) 17.1 9.8 9.2 RTA services NA 34.0 7.5 1.0 0.3 17.0 9.8 9.1 Data processing NA 30.2 8.4 3.4 4.4 16.5 10.8 10.0 Customer care services NA 48.2 (7.8) (4.7) (6.2) (1.1) 0.5 0.3 Recoverable NA 56.9 16.7 (24.4) (18.2) 31.7 5.6 5.4 Miscellaeneous services NA 40.9 14.7 9.9 (30.0) 50.0 10.0 10.0 Software license fee, development and other services NA 57.3 93.3 (11.0) (40.0) 40.0 15.0 15.0 Other income NA (33.1) 11.5 19.5 45.8 (29.6) 47.7 23.9 Total income NA 30.9 8.2 1.3 1.2 15.1 10.8 9.7 Income break-up (% of total income) Total income 100 100 100 100 100 100 100 100 Revenue from operations 95 98 97 97 96 97 96 96 RTA services 95 97 96 96 95 96 96 95 Data processing 75 75 75 77 79 80 80 80 Customer care services 10 11 9 9 8 7 6 6 Recoverable 5 6 7 5 4 5 4 4 Miscellaeneous services 4 5 5 5 4 5 5 5 Software license fee, development and other services 1 1 1 1 1 1 1 1 Other income 5 2 3 3 4 3 4 4
Source: Company, Kotak Institutional Equities estimates
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Diversified Financials Computer Age Management Services
Exhibit 39: Share of MF revenues to remain high at 89-90% Exhibit 40: Data processing charges dominate revenues from MF and non-MF revenues, March fiscal year-ends, 2019-24E (%) RTA services RTA revenue mix for CAMS, March fiscal year-ends, 2017-24E (%) MF revenues yoy (LHS) Non-MF revenues yoy (RHS) Data processing Customer care services Recoverable Miscellaeneous services Share of MF revenues to overall revenues (RHS) (%) 60 91.0 100 4.6 4.8 5.2 5.6 3.9 5.0 5.0 5.1 5.5 6.5 7.0 5.2 4.3 4.8 4.6 4.5 40 90.4 89.8 10.1 8.5 7.2 6.6 6.0 90.1 11.2 9.6 9.1 89.9 80 20.2 89.6 20 12.6 11.9 88.6 60 1.0 3.7 16.8 9.5 8.9 0 87.4 (0.2) 40 86.9 (20) 86.8 86.2 20 (26.2) (40) 85.0 79.8 77.5 78.2 80.1 83.3 83.0 83.8 84.4 0 2019 2020 2021E 2022E 2023E 2024E 2017 2018 2019 2020 2021E 2022E 2023 2024E
Source: Company, Kotak Institutional Equities estimates Source: Company, Kotak Institutional Equities estimates
Exhibit 41: Growth in data processing fees to lag MF AAUM growth Growth in data processing fees and serviced MF AAUM for CAMS, March fiscal year-ends, 2018-24E (%)
Data processing fees yoy MF AAUM yoy 40
30
20 33.7 30.2 24.3 10 15.1 14.6 16.5 15.5 16.3 10.5 10.8 10.0 8.4 3.4 4.4 0
(10) 2018 2019 2020 2021E 2022E 2023 2024E
Source: Company, Kotak Institutional Equities estimates
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Exhibit 42: Other income tends to be volatile Other income for CAMS, March fiscal year-ends, 2017-24E
(Rs mn) Other income (LHS) YoY (RHS) (%) 400 60 46 48
320 40 24 20 240 12 20
160 0
80 (30) -20 (33) 243 163 182 217 317 223 329 408 0 -40 2017 2018 2019 2020 2021E 2022E 2023E 2024E
Source: Company, Kotak Institutional Equities estimates
Expense moderation to offset sluggish topline; cost ratios to decrease from peak levels
In our view, CAMS will focus on stringent expense control to offset likely pressure on sluggish revenue growth. We expect overall expenses growth to remain muted over the medium term at 10% CAGR over FY2021-24E (down 3% yoy and FY2021E and up 15% yoy in FY2022E on a low base) compared to 15% CAGR over FY2017-20 (down 8% yoy in FY2020 on a high base in FY2019 due to one-off payouts) (Exhibit 43).
We expect to see the pace of growth of expenses slow down on account of several factors: (1) branch rationalization coupled with slowdown in business expansion, (2) lower overall employee base as overall transaction volumes moderate and process automation picks up, (3) focus on reducing overheads, (4) lower service charges as AMCs focus on cost rationalization (this will however be counter-balanced by lower recoverable) and (5) decline in claims (the company started to incur provisions for claims on an ad-hoc basis from FY2020 compared to 2% of revenues earlier). Investment in technology-related initiatives, diversification of product bouquet and scaling up new business lines will however remain high. Employee expenses dominate overall expense mix at ~50-55% (Exhibit 44).
Drop in overall employee base to support moderation in employee expenses. We expect employee expenses to be muted at 5% CAGR over FY2022-24E (up 17% yoy in FY2022E on a low base of FY2021E) compared to 16% CAGR over FY2017-20 (down 6% yoy in FY2020) as operating efficiencies increase(Exhibit 45). The company is focused on improving productivity of its existing employee base and infrastructure through various process automation initiatives. Of the overall employee base of 6,163 as of 1QFY21, ~4,697 are involved in customer servicing of which 1,242 are employee in front offices and the remaining 3,455 in back offices. Additionally, a high proportion of employees are contractual (~30%) in nature. This provides flexibility to the business model to alter its employee structure in case of sharp volatilities in transaction volumes albeit with a lead- lag impact.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 41
Diversified Financials Computer Age Management Services
. FY2018 witnessed highest actively managed equity-oriented inflows over the past decade. Overall closing employee base was high at 8,297 for CAMS compared to 5,986 in FY2017. As inflows started to moderate, overall employee base declined to 7,025 in September 2018 and 6,600 in March 2019. It further dropped to 6,453 in March 2020 and 6,163 as of June 2020. Manpower charges (~17-22% of employee expenses over FY2017-20 and is mostly related to payout for contractual employees) declined 17% yoy in FY2020 (Exhibit 46). We expect further moderation in overall employee base to 6,203 in FY2024E from ~6,250 in FY2021; process automation will drive efficiencies while cost per employee will likely remain flat (Exhibit 47).
Lower data entry charges and provision for claims to drive slower growth in operating expenses. We expect operating expenses to moderate to 7% CAGR over FY2022-24E (up 16% yoy in FY2022E on a low base of 7% yoy decline in FY2021E) compared to 11% CAGR over FY2017-20 (down 18% yoy in FY2020 on a high base in FY2020 due to one-off payouts to center heads and change in recognition for provision for claims from FY2020) (Exhibits 48 and 49). Slowdown in pace of growth of operating expenses is likely to be interplay of (1) lower service charges (as AMCs focus on cost rationalization), (2) decline in data entry charges due to lower paper-based transaction volumes and (3) drop in provisions for claims (claims are realized on an ad-hoc basis from FY2020 compared to 2% of revenues earlier; as such, the board has fixed the threshold for claim based provisions at Rs650 mn).
. Data entry charges, which are primarily incurred for processing paper-based applications in the mutual fund services business, dropped sharply in FY2019 and FY2020 (down 42% yoy in FY2019 and 20% yoy in FY2020) owing to lower paper- based transaction volumes. This is expected to significantly decline in FY2021E due to Covid-19 related restrictions driving lower footfall across branches prior to picking up marginally from FY2022E; this is however expected to remain significantly lower than historical levels. Lower data entry volumes will also drive lower manpower. This is in line with the overall strategy to digitize transactions.
. Claims, which are incurred on account of claims raised against CAMS as well as funds set aside by the company through a charge in the statement of profit and loss to provide for future claims dropped in FY2020 (down 13% yoy) owing to change in limit for provisions (as discussed above). We expect claims to remain broadly stable at Rs140-160 mn (~15-20% of operating expenses).
. Customer service center charges, which are expenses primarily associated with management of service centers and payment of fees to center heads are expected to grow at a modest pace (~15% CAGR) over FY2022-24E. Gradual increase in MF AAUMs will drive increasing requirements for customer care services, though focus on improving productivity will support overall expense growth.
. Service charges, which are primarily out of pocket expenses incurred for communication services to investors or distributors, stationery and postage on behalf of mutual fund, KYC, insurance and banking and non-banking clients will likely grow at a muted pace as AMCs focus on cost rationalization. As such, this expense items is recovered from the AMCs and does not have any meaningful impact on P&L.
. Software expenses primarily include expenses to maintain software and hardware assets of the company and expenses incurred to improve cyber security. This is expected to grow at a robust pace (up ~7% CAGR over FY2022-24E and up 10% yoy in FY2022E on a flat yoy growth in FY2021E); albeit lower than historical levels, as the company will likely focus on augmenting its IT capabilities. Software expenses increased at a strong pace of 45% CAGR over FY2017-20 (up 13% yoy in FY2020) owing to purchase of new software licenses purchased during the period, investment in applications to enhance cyber-security and technology related spends incurred to improve information technology capabilities to handle a higher volume of transactions. Overall technology-related expenses increased sharply at 19% CAGR over FY2017-20 (up 12% yoy in FY2020) (Exhibit 50).
42 KOTAK INSTITUTIONAL EQUITIES RESEARCH
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Focus on reducing overheads though headroom for improvement is marginal. We build in 20% CAGR in other expenses over FY2022-24E (up 25% yoy in FY2022E on a low base of 11% yoy decline in FY2021E) compared to 11% CAGR over FY2017-20 (down 3% yoy in FY2020). While the company will continue to focus on reducing overheads and improving productivity, a high fixed cost (apart from employee expenses) model does not leave much headroom for improvement.
Cost-to-income drop from peak levels. We expect cost-to-income ratio to decline from peak levels to ~62% in FY2022E and further moderate to ~60% in FY2024E compared to 65-72% over FY2018-20 (Exhibit 51). Stringent cost control measures will marginally be offset by investment in technology initiatives, diversification of products and services and tepid growth in overall revenues suppressing sharp improvement in cost ratios. Global players like SS&C Technologies continue to invest in new technologies to diversify product bouquet apart from inorganic activities. Over CY2014-19, growth in cost for SS&C Technologies was marginally higher than growth in overall revenues.
Other highlights
Goodwill of Rs1.3 bn. CAMS has goodwill of Rs1.3 bn in its book. The company does not amortize the goodwill though it is tested for impairments on an annual basis.
ESOP dilution at <2%. We bake-in ~1.5% dilution due to ESOP over FY2021-24E. We have assumed a vesting period of 4 years.
Expect stable dividend payout ratio of 65%. We expect payout ratio to remain high at 65% over FY2022-24E (higher at 125% in FY2021E due to one-time special dividend, adjusted payout ratio of ~64%).
Exhibit 43: Overall expenses growth to remain tepid Exhibit 44: Employee expenses dominate overall expense mix Overall expenses, March fiscal year-ends, 2017-24E Overall expense mix, March fiscal year-ends, 2017-24E
Overall expenses (LHS) YoY (RHS) Other expense Finance cost (Rs mn) 37.6 (%) Operating expense Depreciation and amortization 7,000 40 Employee benefits expense (%) 100 5,600 30 18.0 16.3 15.6 16.4 15.1 16.5 18.2 20.4 0.0 0.1 0.1 0.0 1.7 0.0 0.0 18.5 80 0.0 20.1 21.8 20.7 18.4 17.6 17.8 17.5 4,200 14.6 20 17.4 9.5 8.5 60 9.7 9.3 9.9 10.3 8.4 8.2 8.5 7.3 2,800 10 40 (2.8) 1,400 0 20 (7.9) 3,134 4,312 5,109 4,706 4,572 5,239 5,683 6,099 52.1 52.5 53.7 54.8 56.0 57.2 55.8 53.9
0 (10) 0
2017 2019 2020 2018
2017 2018 2019 2020
2021E 2022E 2024E 2023E
2021E 2023E 2024E 2022E Notes: (1) Overall expenses include depreciation and amortization expense Source: Company, Kotak Institutional Equities estimates and finance cost.
Source: Company, Kotak Institutional Equities estimates
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Diversified Financials Computer Age Management Services
Exhibit 45: Employee expenses have moderated from peak Exhibit 46: Drop in contractual employee has led to decline in levels share of manpower charges to overall employee expenses Employee expenses, March fiscal year-ends, 2017-24E Employee expense mix, March fiscal year-ends, 2017-20
Employee benefits expenses (LHS) YoY (RHS) (%) Salaries, wages and bonus Manpower charges (Rs mn) 38.5 (%) 100 3,500 40 10.2 10.7 8.6 10.4 3,288 3,170 80 20.9 21.6 19.7 17.3 2,800 21.3 2,995 30 2,746 2,580 2,562 16.9 60 2,100 2,263 20
1,400 5.8 10 40 1,634 3.7 (0.7) 700 0 20 (6.1) 68.8 67.8 71.6 72.3
0 -10 0
2017 2019 2020 2018
2017 2018 2020 2019
2021E 2022E 2023E 2024E
Source: Company, Kotak Institutional Equities estimates Source: Company, Kotak Institutional Equities estimates
Exhibit 47: Overall employee base likely to shrink further Employees and cost per employee, March fiscal year-ends, 2018-24E
Cost per employee (LHS) Employees yoy (RHS) (Rs mn) (%) 0.55 88
0.44 66
38.6 0.33 44
0.51 0.53 0.48 0.22 22 0.40 0.37 0.39 0.32 - (3.1) (3.1) (0.4) (0.4) 0.11 0 (19.7) 0.00 (22) 2018 2019 2020 2021E 2022E 2023E 2024E
Source: Company, Kotak Institutional Equities estimates
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Exhibit 48: Growth in operating expenses to remain muted Exhibit 49: Share of service charges will likely increase Operating expenses, March fiscal year-ends, 2017-24E Operating expense mix, March fiscal year-ends, 2017-24E
Operating expense (LHS) YoY (RHS) Service charges (Rs mn) Data entry charges (%) 1,100 60 Customer service centre charges 49.2 Claims (%) Software expenses 100 880 40
80 37.2 15.9 40.9 44.3 46.8 42.7 42.3 41.8 41.3 660 12.5 20 6.8 6.7 60 7.0 6.5 6.2 (7.0) 12.3 7.5 6.8 440 0 16.6 10.5 15.8 15.7 16.9 18.2 40 19.4 15.0 (18.2) 14.1 13.5 19.5 220 (20) 15.8 15.8 15.3 14.8 20 18.8 14.5 14.8 631 941 1,058 866 805 934 997 1,064 8.6 11.1 13.8 19.0 20.5 19.4 19.5 19.5
0 (40) 0
2017 2018 2019 2020
2017 2018 2019 2020
2021E 2023E 2022E 2024E
2022E 2023E 2024E 2021E
Source: Company, Kotak Institutional Equities estimates Source: Company, Kotak Institutional Equities estimates
Exhibit 50: Technology related spends at 10-15% of overall expenses Technology related spends, March fiscal year-ends, 2017-20
Overall technology related spend (LHS) Technology related spend to overall expenses (RHS) (Rs mn) (%) 14.0 650 14.0
520 13.3 12.8
390 12.6
260 11.9 11.3
130 11.2
356 603 540 604 0 10.6 10.5 2017 2018 2019 2020
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 45
Diversified Financials Computer Age Management Services
Exhibit 51: Cost ratios to reduce over medium term Cost ratios, March fiscal year-ends, 2017-24E
Cost-to-income (LHS) Cost-to-average MF AAUM (%) (bps) 75 3.5 3.2 3.1 3.0 60 3.1
45 2.6 2.7
2.3 30 2.1 2.3 2.0 1.8 15 1.9
62.4 65.6 71.8 65.2 62.6 62.3 61.0 59.7 0 1.5 2017 2018 2019 2020 2021E 2022E 2023E 2024E
Source: Company, Kotak Institutional Equities estimates
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Exhibit 52: CAMS – key growth rates and ratios March fiscal year-ends, 2017-24E 2017 2018 2019 2020 2021E 2022E 2023E 2024E Key income statement growth rates (%) Revenue from operations NA 34 8 1 (0) 17 10 9 RTA services NA 34 7 1 0 17 10 9 Data processing fees NA 30 8 3 4 16 11 10 Customer care services NA 48 (8) (5) (6) (1) 1 0 Others NA 50 16 (10) (24) 40 8 8 Software, license and development fees NA 57 93 (11) (40) 40 15 15 Other income NA (33) 12 20 46 (30) 48 24 Total income NA 31 8 1 1 15 11 10 Overall expenses NA 38 18 (8) (3) 15 8 7 Employee benefits expenses NA 38 21 (6) (1) 17 6 4 Operating expenses NA 49 12 (18) (7) 16 7 7 Claims NA 15 15 (12) 15 (6) 4 3 Other operating expenses NA 57 12 (19) (11) 21 7 7 Others NA 27 18 (3) (4) 9 16 15 EBITDA (excluding other income) NA 28 (7) 19 5 16 12 11 Profit before tax NA 20 (11) 25 9 16 15 13 Profit after tax post-minority interest NA 18 (11) 33 18 15 15 13 Key balance sheet growth rates Cash and cash equivalents NA 81 57 16 100 (10) 5 5 Investment NA (2) 7 32 7 27 26 22 Fixed assets (including intangibles) NA 23 (1) (7) (6) 12 4 6 Net assets NA 19 6 9 6 14 14 14 Total liabilities NA 50 16 (8) 37 7 7 7 Shareholders' funds (pre-minority interest) NA 7 (1) 22 (9) 19 18 17 Other key growth rates/ratios (%) Growth in overall MF AAUM handled 30 34 15 15 11 24 15 16 Share of equity-oriented MF AAUM handled 28 36 39 37 35 37 37 37 Growth in overall MF transaction handled 32 65 25 5 (2) 5 5 5 Growth in SIP transactions processed 33 58 45 24 (1) 12 7 7 Key ratios Revenues from MF business to overall revenue from operations (%) NA NA 86.8 86.9 90.4 90.1 89.9 89.6 Data processing fees to MF AAUM (bps) 3.7 3.6 3.4 3.0 2.9 2.7 2.6 2.5 Customer care services to overall MF transactions (Rs) 3.2 2.8 2.1 1.9 1.8 1.7 1.6 1.6 Other income to total income (%) 4.8 2.5 2.6 3.0 4.3 2.7 3.5 4.0 Employee benefits expenses to overall expenses (%) 52.1 52.5 53.7 54.8 56.0 57.2 55.8 53.9 Service charges to recoverable (X) 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 Cost-to-income (%) 62.4 65.6 71.8 65.2 62.6 62.3 61.0 59.7 Cost-to-MF AAUM (bps) 3.0 3.1 3.2 2.6 2.3 2.1 2.0 1.8 EBITDA margin (% of revenues) 40.9 39.1 33.6 39.7 41.9 41.4 42.1 43.0 ROE (%) NA 34.1 29.5 35.4 39.7 43.9 42.4 40.8 Tax rate (%) 34.3 35.4 34.8 30.8 25.2 25.6 25.6 25.6 Income statement common-size (% of total income) Total income 100 100 100 100 100 100 100 100 Revenue from operations 95 98 97 97 96 97 96 96 RTA services 95 97 96 96 95 96 96 95 Data processing 75 75 75 77 79 80 80 80 Customer care services 10 11 9 9 8 7 6 6 Recoverable 5 6 7 5 4 5 4 4 Miscellaneous services 4 5 5 5 4 5 5 5 Software license fee, development and other services 1 1 1 1 1 1 1 1 Other income 5 2 3 3 4 3 4 4 Overall expenses 62 66 72 65 63 62 61 60 Employee benefits expenses 52 52 54 55 56 57 56 54 Other expenses 11 11 11 11 9 10 11 12 Others (1) 2 7 (0) (3) (5) (6) (6) Profit before tax 38 34 28 35 37 38 39 40 Tax 13 12 10 11 9 10 10 10 Profit after tax post-minority interest 25 22 18 24 28 28 29 30 Notes: (1) All ratios are annualised.
Source: Company, Kotak Institutional Equities estimates
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Exhibit 53: CAMS – financial summary March fiscal year-ends, 2017-24E
2017 2018 2019 2020 2021E 2022E 2023E 2024E Income statement (Rs mn) Revenue from operations 4,783 6,415 6,936 6,996 6,984 8,181 8,983 9,809 RTA services 4,751 6,365 6,839 6,910 6,932 8,108 8,899 9,713 Data processing 3,791 4,935 5,350 5,534 5,777 6,730 7,455 8,200 Customer care services 480 712 657 625 587 581 583 585 Recoverable 262 411 480 363 297 391 413 435 Miscellaeneous services 218 308 353 388 271 407 448 493 Software license fee, development and other services 32 50 97 86 52 73 84 96 Other income 243 163 182 217 317 223 329 408 Total income 5,026 6,578 7,118 7,213 7,301 8,404 9,312 10,217 Overall expenses (3,134) (4,312) (5,109) (4,706) (4,572) (5,239) (5,683) (6,099) Employee benefits expenses (1,634) (2,263) (2,746) (2,580) (2,562) (2,995) (3,170) (3,288) Depreciation and amortization expense (does not include amortization (306) of non-compete (402) fees) (504) (485) (434) (446) (480) (503) Operating expenses (631) (941) (1,058) (866) (805) (934) (997) (1,064) Service charges (258) (417) (496) (369) (300) (395) (417) (439) Data entry charges (78) (156) (111) (65) (56) (64) (65) (66) Customer service centre charges (123) (127) (149) (130) (127) (147) (168) (194) Claims (118) (137) (157) (137) (157) (147) (153) (157) Provision for claims (95) (128) (137) (13) Others (23) (9) (20) (124) Software expenses (54) (104) (146) (165) (165) (181) (194) (208) Finance cost (1) (3) (3) (2) (80) (2) (2) (2) Other expenses (563) (703) (798) (772) (690) (863) (1,035) (1,242) EBITDA excluding other income 1,955 2,508 2,334 2,778 2,927 3,389 3,781 4,215 Profit before tax 1,892 2,266 2,009 2,508 2,729 3,165 3,629 4,118 Tax (650) (803) (700) (773) (688) (810) (929) (1,054) PAT 1,242 1,463 1,309 1,735 2,041 2,355 2,700 3,064 Minority interest 7 4 4 0 1 1 1 1 PAT post minority interest 1,235 1,459 1,304 1,734 2,040 2,354 2,699 3,063 Balance sheet (Rs mn) Cash and cash equivalents 153 277 435 505 1,009 908 954 1,001 Trade receivables 119 225 270 320 333 346 360 375 Investment 2,223 2,182 2,325 3,061 3,272 4,164 5,250 6,409 Loans 88 127 123 129 154 185 222 267 Current tax assets (net) — — — 150 50 50 50 50 Deferred tax assets (net) 90 138 202 83 50 50 50 50 Other financial assets 1 14 4 60 50 50 50 50 Fixed assets 2,626 3,235 3,200 2,985 2,804 3,136 3,259 3,449 Property,plant and equipment 1,243 1,770 1,682 1,538 1,343 1,572 1,618 1,725 Intangible assets 1,383 1,466 1,518 1,447 1,461 1,564 1,642 1,724 Other assets 550 781 804 732 769 807 847 890 Net assets 5,848 6,979 7,363 8,025 8,491 9,696 11,043 12,540 Trade payables 281 336 350 360 540 594 653 718 Provisions 492 646 882 839 1,049 1,154 1,270 1,397 Current tax liabilities 48 11 19 - 10 10 10 10 Other liabilities 820 1,473 1,617 1,428 1,999 2,099 2,204 2,314 Total liabilities 1,640 2,466 2,869 2,627 3,598 3,857 4,137 4,439 Equity share capital 488 488 488 488 488 489 491 493 Reserves and surplus 3,639 3,948 3,925 4,911 4,400 5,345 6,410 7,603 Shareholders' funds 4,127 4,435 4,413 5,398 4,888 5,834 6,901 8,096 Minority interest 82 77 82 — 5 5 5 5 Shareholders' funds post-minority interest 4,208 4,512 4,494 5,398 4,893 5,839 6,906 8,101 Total liabilities and shareholders' funds 5,849 6,979 7,363 8,025 8,491 9,696 11,043 12,540 Other key items MF AAUM serviced (Rs bn) 10,294 13,759 15,841 18,150 20,059 24,924 28,784 33,469 Equity-oriented MF AAUM serviced (Rs bn) 2,921 4,885 6,233 6,707 6,920 9,097 10,578 12,383 Overall transactions handled (# mn) 152 250 313 328 324 340 357 375 SIP transactions processed (# mn) 84 132 192 238 235 263 282 302 Cah flow analysis (Rs mn) Operating cash flows (excluding WC changes) 1,942 1,611 2,292 1,840 2,630 2,898 3,299 3,712 Changes in working capital/other adjustments 17 24 (411) 49 10 (13) (17) (21) Capital expenditure (1,016) (428) (351) (151) 334 (393) (78) (184) Free cash flow 942 1,207 1,529 1,737 2,974 2,492 3,204 3,507
Source: Company, Kotak Institutional Equities estimates
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ABOUT THE COMPANY
CAMS is a technology-driven financial infrastructure and services provider company targeted at catering to various needs of mutual fund houses, other financial institutions and related stakeholders like distributors and investors/policyholders. CAMS, along with its subsidiaries, is organized across six other business verticals (apart from MF RTA), viz. electronic payment collection services business, insurance services business, alternate investment fund services business, banking and non-banking services business, KYC registration agency business and software solutions business.
With the initiative of creating an end-to-end value chain of services, the company has grown its service offerings for mutual fund houses and currently provides a comprehensive portfolio of technology-based services, such as transaction origination interface, transaction execution, payment, settlement and reconciliation, dividend processing, investor interface, record keeping, report generation, intermediary empanelment and brokerage computation and compliance related services, through a pan-India network of 271 centers. Apart from servicing mutual fund house, CAMS also services alternative investment funds, insurance companies, banks and non-banking finance companies. These centers are supported by call centers in four major cities, four back offices including a disaster recovery site, all having real time connectivity, continuous availability and data replication and redundancy.
The company has over two decades of experience and is India’s largest registrar and transfer agent for mutual funds with an aggregate market share of ~70% (December2020), based on MF AAUM managed by clients who are serviced by the company (post the agreement between CAMS and Franklin Templeton whereby the latter will transfer the RTA business to CAMS, CAMS’ market share in managed MF AAUM will increase to ~72-73%. Market share has increased over the past four years to ~70% as of 3QFY21 from ~61% in FY2015.
A strong clientele in a duopoly market, high switching cost for clients owing to high initial fixed capital requirements and strong domain expertise provide competitive advantage. Mutual fund clients include four of the five largest mutual funds as well as nine of the 15 largest mutual funds based on AAUM during December 2020, according to the CRISIL Report (excluding Franklin Templeton). However, high concentration of top MFs (>83% of AUMs with top 10 players) lowers pricing power of RTAs.
Exhibit 54: Promoter holds 31% in the company Shareholding pattern for CAMS, March fiscal year-end, 3QFY21
3QFY21 Shares Shareholding (# mn) (%) Promoter 15.1 31.0 Great Terrain 15.1 31.0 Public shareholders 33.7 69.0 Mutual funds 6.8 14.0 HDFC 2.9 6.0 HDFC Bank 1.6 3.3 Foreign portfolio investors 10.8 22.1 Faering Capital India Evolving Fund II 0.9 1.9 IIFL Private Equity Fund Series IA 1.0 2.1 Faering Capital India Evolving Fund III 0.5 1.1 Acsys Investments Private Limited 0.9 1.9 Insurance companies 1.2 2.5 Others 6.8 13.9 Total 48.8 Notes: (1) Great Terrain is an affiliate of Warburg Pincus.
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 49
Diversified Financials Computer Age Management Services
Exhibit 55: Brief profile of board of directors March fiscal year-end, 1HFY21
Name Designation Educational background Age Brief profile
He joined the company as chief operating officer – asset management services in March, 2016 and was Bachelor's degree in engineering appointed as whole-time Director and CEO with (mechanical) from Birla Institute of Whole-time Director and effect from November 6, 2018. He was previously Anuj Kumar Technology and post-graduate diploma in 53 CEO associated with Godrej & Boyce Mfg. Co. Ltd., Blow management from the Indian Institute of Plast Limited, Escorts Finance Limited, BillJunction Management Calcutta Payments Limited, IBM India Private Limited and Concentrix Daksh Services India Private Limited.
He is on the board since December 17, 2019. He has previously served as Chairman and Managing Chairman and Independent Bachelor’s degree in science (honours) from Dinesh Kumar Mehrotra 67 Director of Life Insurance Corporation of India where Director the University of Patna he also served as the Executive Director of international operations.
Post-graduate diploma in management from He is associated with Warburg Pincus India Private Indian Institute of Management Bangalore Limited since 2007 where and currently holds the Narendra Ostawal Non-executive Director and attended the international executive 42 position of Managing Director. He has previously business program at the University of been associated with 3i India Private Limited and Chicago’s Graduate School of Business McKinsey & Company, Inc.
Bachelor's degree with honours in commerce from University of Bombay and master's He was previously associated with ATC Tires Pvt. Zubin Soli Dubash Non-executive Director degree in business administration from the 61 Ltd., Tata Sons Private Limited, WNS Global Services Wharton School of the University of Pvt. Ltd. and DSP Merrill Lynch Limited. Pennsylvania
Bachelor's degree with honours in commerce He was associated with HDFC and is currently a Vedanthachari Srinivasa from University of Delhi and is an associate Non-executive Director 60 whole-time director of HDFC and is responsible for Rangan of the Institute of Chartered Accountants of its treasury, resources and accounts functions. India
He was a director on the board of directors of Member of the Institute of Chartered Cholamandalam Financial Holdings Limited and Natarajan Srinivasan Independent Director Accountants of India and the Institute of 62 Cholamandalam Investment and Finance Company Company Secretaries of India Limited, previously.
She has previously served as an Executive Director of Master’s degree in commerce from Central Bank of India and the Chairperson and Vijayalakshmi Rajaram Iyer Independent Director 65 University of Bombay Managing Director of Bank of India. She was also associated with IRDAI as a member (F&I).
Source: Company, Kotak Institutional Equities
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Computer Age Management Services Diversified Financials
Exhibit 56: Brief profile of top management March fiscal year-ends, 1HFY21
Remuneration (Rs mn) Name Designation Educational background FY2020 Brief profile He joined the company as chief operating officer – asset management services in March, 2016 and was Bachelor's degree in engineering appointed as whole-time Director and CEO with Whole-time (mechanical) from Birla Institute of effect from November 6, 2018. He was previously Anuj Kumar Director and Technology and post-graduate diploma in 32.0 associated with Godrej & Boyce Mfg. Co. Ltd., Blow CEO management from the Indian Institute of Plast Limited, Escorts Finance Limited, BillJunction Management Calcutta Payments Limited, IBM India Private Limited and Concentrix Daksh Services India Private Limited.
Bachelors degree in commerce from the He joined the company on July 6, 2009 as a General University of Madras and passed the final Manager and was promoted to Chief Financial Chief Financial examination held by the Institute of Cost Officer with effect from April 1, 2018. He was Somasundaram M. 13.0 Officer and Works Accountants of India and the previously associated with SRF Limited, Henkel SPIC final examination held by the Institute of India Ltd., Pond’s India Limited, Hindustan Lever Company Secretaries of India Limited and TVS Electronics Limited.
Bachelors degree in commerce from the Chief Financial University of Madras, Faculty of He joined the company on March 2, 2020. He was S.R. Ram Charan Officer- Commerce and an associate meber of 1.0 previously associated with Photon Interactive Private designate the Institute of Chartered Accountants of Limited and Reliance Jio Infocomm Ltd. India
He joined the company on December 18, 2014 as a Bachelor's degree in technology Senior Vice President and was promoted to Chief (chemical engineering) from Indian Chief Operations Officer on April 6, 2018. He was Institute of Technology Delhi and post Srikanth Tanikella Operations 15.7 previously associated with Accenture India Private graduate diploma in management from Officer Limited, Infosys BPO Limited, Infosys Technologies the Indian Institute of Management Limited, Global e: Business Operations Pvt. Ltd. and Calcutta Williams Lea India Private Limited.
Bachelor's degree in technology (electronics and communication He joined the company as Chief Platform Officer on Chief Platform engineering) from Jawaharlal Nehru December 10, 2019. He was previously associated Ravi Kethana 2.9 Officer Technological University and master's with Tata Consultancy Services Limited and Wipro degree in technology (electronics) from Limited. Banaras Hindu University He joined the company on April 3, 2017 as Head–New Businesses. He is also a director on the Bachelors degree in science from board of directors of CFISPL and CIRSL. He was Bangalore University, post graduate previously associated with Bangalore Business to diploma in business administration Head–New Business (Eastern Circle Yellow Pages Pvt. Ltd.), N. Ravi Kiran (general) from St. Joseph’s College of 14.5 Businesses Dharma Software Solutions Pvt. Ltd., VeriFone India Business Administration Bangalore and Limited, Reliance Systems Private Limited, Venture diploma in management from Indira Infotek Global Private Limited, Wipro Technologies (a Gandhi National Open University division of Wipro Ltd.), Amansa Capital Pte Ltd and Value Labs LLP.
Bachelors degree in science (chemistry) He joined the company on October 14, 2017. He has Vasanth Jeyapaul Senior Vice and a masters degree in business previously worked with with Bennett, Coleman & Co. 13.2 Emmanuel President administration from Madurai Kamaraj Ltd., Agenda Netmarketing Ltd. and Financial University Software & Systems (P) Ltd.
He joined the company on December 2, 2014 as Senior Vice President and was appointed as the Chief Executive officer–insurance of CIRSL on August 14, Post-graduate diploma in management Chief Executive 2019. He was previously associated with the Indian from Indian Institute of Management Abhishek Mishra Officer–insuran 8.8 Railway Service of Mechanical Engineers, A.F. Society, Lucknow and an associate of the ce of CIRSL Ferguson & Co. (Management Consultancy Division), Institution of Engineers (India) HCL Perot Systems, GE Capital International Services, Washington Mutual Bank, Accenture Services Private Limited and ISG NovaSoft Technologies Limited.
He joined the company as Company Secretary on Company Bachelor's degree in commerce from June 8, 2011 and was designated as the Compliance Manikandan Secretary and Bharathidasan University and master's 6.2 Officer on December 17, 2019. He was previously Gopalakrishnan Compliance degree in commerce from Madurai associated with BPL Limited, Precot Meridian Limited, Officer Kamaraj University SJK Steel Plant Limited and SBQ Steels Limited.
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 51 CAUTIOUS Consumer Durables & Apparel India MARCH 30, 2021 THEME BSE-30: 49,009
PLI scheme for ACs: a step towards make-in-India. The soon-to-be-announced Rs51 bn PLI scheme for ACs will seek to reduce import dependence by: (1) incentivizing component production, and (2) attracting foreign companies to invest in India. Overall value addition, we believe, can increase significantly from the current 25%, which will drive higher revenue opportunity for component manufacturers and margin opportunity for companies that backward integrate. Voltas and Havells will also seek to invest towards manufacturing capabilities; value accretion from the same will happen only over the medium-to-long term.
PLI for ACs can significantly increase value addition in India
The Production Linked Incentive scheme for ACs will attempt to significantly increase domestic manufacturing of ACs and specific components by providing incentives to manufacturers. The ~Rs180 bn AC industry currently imports ~70% of its requirements (in the form of fully built-up ACs and components); we reckon this can change meaningfully as manufacturers get incentivized to make in India. Like the scheme for mobile phones, we believe the PLI for ACs will also seek to incentivize a few large players (domestic and foreign).
Component and AC manufacturers to potentially benefit from the scheme
We reckon that the cost of manufacturing an AC in India using India-made components is ~15% higher than the cost of an AC imported from China or manufactured using Chinese components. This gap will be bridged by: (1) incentives offered by the PLI scheme on incremental production, and (2) phased increase in import duties of specific components. Indian manufacturers may need higher incentives over the next 2-3 years as component ecosystem in India is under-developed and technology-heavy components such as compressors will need foreign partners to invest in setting up Indian facilities. Assuming the PLI achieves its target of fully substituting imports with domestic manufacturing, we calculate an incremental revenue opportunity of Rs105-162 bn for India-based manufacturers (domestic and foreign companies).
Expect foreign manufacturers to set-up complex component facilities in India
Compressors and PCBs form a significant 35% chunk of the cost of a typical AC. Indian manufacturers lack the capability to manufacture these complex components on their own; we thus anticipate foreign companies to set-up manufacturing units in India. GMCC and Highly already have compressor capacities in India (catering to ~30% of current domestic AC compressor demand), we expect capacity expansion by these players. Amber/other domestic players could also form JVs with some of these foreign companies to set up manufacturing plants for compressors and PCBs in India.
Export opportunity is massive, but India will take time to become competitive Garima Mishra Global AC export market is ~US$50 bn in size per annum, significantly larger than domestic AC market of US$2.5 bn. It is thus logical that the PLI will envisage Indian companies taking away Shubhangi Nigam some share of the export market. We believe Indian companies would need to significantly ramp-up scale (which will be in line with domestic demand) or receive additional support from the government, before which they can target exports.
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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. Consumer Durables & Apparel India
PLI SCHEME TO BOOST DOMESTIC AC MANUFACTURING AND VALUE ADDITION The Indian air conditioner (AC) market was ~7 mn units (Rs180 bn) in size in FY2020. It has the potential to grow at a CAGR of 15-18% during FY2020-25, reaching a size of ~16 mn units by FY2025. Household AC penetration in India is very low at 5-6%, and indicates a large growth runway. However, AC industry is highly import dependent; per estimates, 70-75% of total bill-of-materials of all ACs sold in India are accounted for imports. The PLI scheme is set to change this by providing incentives to domestic manufacturing units and increasing duties on components. These measures may take time to play out; however they can potentially help create a larger and more complex component ecosystem in India which can set the stage for: (1) significant increase in value addition in India, and (2) catering to the large export market.
PLI schemes envisage higher manufacturing and value addition within India
Production-Linked Incentives (PLI) are envisaged for a variety of sectors and seek to increase India’s manufacturing capacity, replace imports and potentially boost exports. Across sectors, PLI seeks to: (1) provide time-bound incentives to domestic manufacturers to gain scale vis-à-vis global peers to compete effectively in domestic as well as international markets, and (2) emphasize a high level of domestic value addition rather than assembly of parts.
Per industry discussions, India imports nearly Rs105-110 bn of CBUs (completely built units) and components annually. China accounts for a large part of imports due to its scale. We believe the PLI will seek to reduce import dependence and capture significantly higher value addition within India. Domestic AC brands can gain from: (1) growing domestic market, (2) preference for renowned brands, (3) backward integration of supply chain, and (4) potential export opportunity.
China is the major source of imported components
The proportion of imported components for AC manufacturing (including fully built units) is very high in India. Estimates peg India’s AC industry import dependence at 70%+, rendering this sector as a potential target of the PLI scheme.
From a policy perspective, while the final PLI scheme is still awaited, the government has already announced several measures in order to push its make-in-India agenda. These basically include a continuous hike in customs duties on imported components; this could be one of the ways to boost domestic manufacturing.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 53 India Consumer Durables & Apparel
Exhibit 1: Government notifications impacting AC industry
Date Government notification Details 27-Sep-18 Custom notification Basic customs duty hike for- (1) fully finished AC units: 20% (earlier 10%); (2) Compressors: 10% (earlier 7.5%) Smaller companies were importing IDU and ODU separately at 10% BCD only. Thereby, circumventing the notification. 5-Jul-19 Finance bill Clarification: Split AC ODU/IDU: 20% (earlier 10%) 1-Mar-20 Annual Finance budget Basic customs duty hike for- (1) Compressors: 12.5% (earlier 10%) 28-May-20 DPIIT notification Atmanirbhar Bharat PMPs scheme: Proposed gradual BCD hike over five years on imported AC components 15-Oct-20 DGFT ban- Import of AC The two HS codes that have been banned amount to US$500 mn worth of imports (FY2020). Total size of India's AC units with refrigerants is industry is roughly US$3 bn. So the ban seems to impact nearly 15% of the industry. prohibited (earlier free) 1. Voltas does not import ACs with refrigerants (per the company it's a minuscule figure). Hence no direct impact on the company. 2. We think larger brands with scale source refrigerants domestically (Lloyd, Blue Star, LG, Hitachi, Daikin) and hence no direct import on these names as well 3. Companies/brands that get negatively impacted are small fringe players, private labels of e-com companies who don't have their own AC assembly plants in India and who have hitherto been importing fully manufactured AC units. 4. All AC units need refrigerants (it's mostly a HFC) and hence there may be a shift in demand in favour of Indian refrigerant manufacturers 5. The fringe players who were fully importing, may now have to assemble in India. This may be a positive for contract manufacturers like Amber (note Dixon does not have AC manufacturing capacity) 6. Hence from a relative perspective, this may be a positive for companies such as Voltas, Blue Star, Havells (Lloyd) all of whom have partial manufacturing/assembly in India. 1-Feb-21 Annual Finance budget Basic customs duty hike for- (1) Compressors: 15% (earlier 12.5%)
Source: GoI, Kotak Institutional Equities
Xx
Exhibit 2: Proposed duty structure envisages a gradual increase in key AC components such as compressors and motors Component-wise phased increase in duty structure as envisaged by the MEITY
Proposed phasing of BCD (%) Item Current BCD (%) Y1 Y2 Y3 Y4 Y5 AC ODU/IDU 20.0 20.0 22.5 25.0 27.5 30.0 Compressor 12.5 12.5 15.0 17.5 20.0 20.0 PCB controller 10.0 10.0 12.5 15.0 17.5 20.0 Motor-ODU/IDU 10.0 10.0 12.5 15.0 17.5 20.0 Service valve 7.5 10.0 12.5 15.0 17.5 20.0 Cross flow fan 10.0 10.0 12.5 15.0 17.5 20.0 Evaporator 10.0 10.0 15.0 20.0 20.0 20.0 Sheet metal/ metal parts 10.0 10.0 20.0 20.0 20.0 20.0 Plastic parts of IDU 10.0 10.0 20.0 20.0 20.0 20.0
Evaporator 10.0 10.0 20.0 20.0 20.0 20.0 Note: (1) BCD on compressors was hiked to 15% in Feb 1, 2021 annual finance budget
Source: Ministry of electronics & information technology, Kotak Institutional Equities
We peg India’s total AC related imports at Rs105-110 bn (CBUs+components). Government’s PMP program intends to target most of these high-value components. The PLI scheme will part compensate for the extent of RM price increase that domestic AC brands will witness.
54 KOTAK INSTITUTIONAL EQUITIES RESEARCH Consumer Durables & Apparel India
Exhibit 3: AC component imports falling under government’s PMP program Annual import of AC components, March fiscal year-ends, Rs mn
S.No. Item Commodity Imports Yoy growth FY2019 FY2020 (%) 1 AC Gas compressors used in Air conditioning 25,173 29,218 16.1 2 AC Other AC components (PCB controllers, 27,214 26,941 (1.0) evaporator, plastic parts of IDU, sheet metal/metal parts for ODU body) 3 AC Other window/wall types self-contained AC 7,024 2,514 (64.2) 4 AC Air conditioners ODU/IDU 33,776 33,328 (1.3) 5 AC Motor-ODU/IDU 11,983 10,740 (10.4) 6 AC Service valve 51,923 54,087 4.2 7 AC Cross flow fan 10,481 10,086 (3.8)
Notes: (a) Service valve and cross flow fan import data is not specific to AC industry. These imports may be towards some other industries as well.
Source: Ministry of Commerce & Industry, Kotak Institutional Equities
We analyze below the bill-of-materials for a 1.5 Ton, split AC (70% of units sold in India are of this configuration) and the components that get made in India. Indian manufacturers currently don’t have the technology to produce two key components – compressors and PCBs. Together these account for ~36% of the total bill-of-materials of ACs.
Exhibit 4: India doesn’t have manufacturing capabilities for components like compressors and PCB Bill of materials for an average split air-conditioner in India
Split AC main components Price (Rs) Does India currently have manufacturing capability? Compressor ODU 6,000 N (foreign companies manufacture compressors in India) Condensor fan motor ODU 1,100 Y Condensor coil ODU 2,000 Y Capacitor (Running, Starting) ODU 130 Y Voltage Relay ODU/IDU 50 Y Blower motor IDU 2,750 Y Evaporator IDU 3,000 Y PCB IDU 1,200 N Swing motor IDU 550 Y Total of main parts (Rs) 16,780 Other smaller components (Rs) 3,245 Y Total bill-of-materials (Rs) 20,025
Source: Indiamart, Aldahome, Industry discussions, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 55 India Consumer Durables & Apparel
Exhibit 5: AC component imports falling under government’s PMP program Annual import of AC components, March fiscal year-ends, Rs mn
S.No. Item Commodity Imports Yoy growth FY2019 FY2020 (%) 1 AC Gas compressors used in Air conditioning 25,173 29,218 16.1 2 AC Other AC components (PCB controllers, 27,214 26,941 (1.0) evaporator, plastic parts of IDU, sheet metal/metal parts for ODU body) 3 AC Other window/wall types self-contained AC 7,024 2,514 (64.2) 4 AC Air conditioners ODU/IDU 33,776 33,328 (1.3) 5 AC Motor-ODU/IDU 11,983 10,740 (10.4) 6 AC Service valve 51,923 54,087 4.2 7 AC Cross flow fan 10,481 10,086 (3.8)
Notes: (a) Service valve and cross flow fan import data is not specific to AC industry. These imports may be towards some other industries as well.
Source: Ministry of Commerce & Industry, Kotak Institutional Equities
India has a very limited compressor ecosystem due to lack of technology availability as well as small industry size (7 mn AC units in India compared to ~110 mn in China in CY2019). Our interactions with AC companies reveal that India does not have scale for compressors, motors, and some copper components. Nonetheless, there is consensus among the brands that India needs to develop a domestic component manufacturing ecosystem and diversification of supply chain is the need of the hour.
We note that products such as compressors may take a long time to be manufactured in India by domestic companies due to lack of technology. India may thus have to seek investment by foreign companies with technical expertise to set up manufacturing facilities in India.
For example, GMCC, the world’s largest compressor manufacturer, has already set up a local facility (commissioning has been delayed on account of the pandemic). Another Chinese company, Highly, also has a compressor manufacturing capacity in India.
We note that India imports about 70-80% of its compressor requirements; new capacities (GMCC greenfield and Highly expansion projects) can reduce import dependence. However, this will take time and is dependent on India’s ability to attract foreign investment and provide them with benefits of PLIs. In the interim period when domestic capacity lags demand, cost of compressors may go up for Indian brands. This may have margin implication for companies or may lead to higher prices for customers.
For Aluminum parts and fins for heat exchangers, Hindalco has been approached by the government. Basic raw materials of compressors such as electrical steel, rotors and motor shafts are also import dependent even if manufacturing gradually shifts to India. PCB boards, capacitors are other components that are imported, but can also be imported from countries other than China.
56 KOTAK INSTITUTIONAL EQUITIES RESEARCH Consumer Durables & Apparel India
Exhibit 6: 61% of gas compressors (used in AC) were imported from China in FY2020 Breakdown of import share of gas compressors country-wise in FY2020, March fiscal year-ends (%)
Belgium Others 2% 5% Indonesia 3%
South Korea 13%
China Thailand 61% 16%
Source: Ministry of Commerce & Industry, Kotak Institutional Equities
PLI scheme: targeting higher value addition and volumes
PLI scheme seeks to address the Rs105-110 bn of AC and components imported by India every year. Given the AC industry is expected to grow at a healthy pace given very low household penetration rates, the quantum of imports may keep surging, if domestic manufacturing does not ramp-up.
Exhibit 7: Domestic AC industry value addition in India in FY2020 was fairly low at 25% Estimate of share of value addition in AC industry carried out in India (%)
Estimated BoM per AC unit (Rs) 20,025 Units of AC sold in FY2020 (mn) 7.0 Estimated BoM of AC industry (Rs mn) 140,175 Value of CBU imports with refrigerants in FY2020 (Rs mn) 35,842 Estimated number of CBU imports impacted (mn) 2.1 Implied number of ACs partially built in India (mn) 4.9 Estimated proportion of BoM imported (%) 70.0 Estimated value of imports for ACs partially built in India (Rs mn) 68,686 Total value of imported ACs + components (Rs mn) 104,527 Estimated value addition in India (%) 25
Source: Industry discussions, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 57 India Consumer Durables & Apparel
Exhibit 8: AC penetration level of India extremely low vis-à-vis other Asia-Pacific countries Country-wise household penetration of air conditioners, CY2018 (%)
(%) 100 90 90 86 80 80 72 70 60 50 40 30 20 9 10 5
-
India
China
Korea
Taiwan Indonesia Singapore
Source: CEAMA, Kotak Institutional Equities
Exhibit 9: China has much larger RAC demand than India indication higher levels of penetration Demand for room air-conditioners by country, December calendar year-ends (in 000 units)
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 China 24,787 30,424 38,425 37,756 41,148 40,325 37,103 38,409 43,487 42,150 India 2,676 3,363 3,383 3,333 3,446 3,674 3,847 4,282 5,138 4,957 Indonesia 1,224 1,493 1,588 1,941 2,153 2,198 2,109 2,209 2,253 2,254 Vietnam 477 670 632 877 956 1,178 1,546 1,912 1,863 1,949 Brazil 2,127 3,195 3,243 3,147 3,809 4,028 3,349 2,578 2,758 2,811
Source: Japan Refrigeration and Air Conditioning Industry Association, Kotak Institutional Equities
58 KOTAK INSTITUTIONAL EQUITIES RESEARCH Consumer Durables & Apparel India
Exhibit 10: Nearly 569 mn air conditioning units are installed in China itself Country-wise total air-conditioner units installed, (mn units)
AC units installed (in mn) China 569 US 374 Japan 148 EU 97 Korea 59 Middle East 47 India 27 Brazil 27 Mexico 16 Indonesia 12 South Africa 3
Source: International Energy Agency, Kotak Institutional Equities
In November 2020, the Union cabinet approved total incentives of ~Rs62.4 bn for AC and LED light industries (of which ~Rs51 bn is pinned for AC industry) over the life of the scheme. Given industry size is pegged at Rs~180 bn currently, we believe associated production targets allotted to manufacturers can be met.
PLI scheme for ACs: who will benefit?
We believe that Indian manufacturers will look to diversify product sourcing and may buy more from other Asian manufacturers such as Thailand and Vietnam, at least in the initial few years when the AC ecosystem is ramping up. They will also look to source incrementally from India, with PLIs acting as incentives for companies to set up new manufacturing capacities.
At the margin, players such as Voltas should be better positioned as: (1) it does not import fully-built ACs (where import duty is likely to be the highest) and (2) it will be able to negotiate prices better with domestic manufacturers, as the largest volume player. Blue Star does not depend on China for IDUs and its indigenization program has been in place for a couple of years. Blue Star’s risk management assessment calls for reduced dependence on imports, particularly China, and targets to reduce it to a level of 15% including components by FY2023.
We believe most AC brands who have currently been mostly assembling ACs will seek to backward integrate in order to benefit from the PLI scheme. Since the scheme is time-bound in manner with incentives available only till FY2025, we believe most AC brands will also become OEMs to a certain extent. We thus think companies like Voltas, who have mostly been assemblers, will look to backward integrate to a certain extent to achieve benefits of PLI.
Amber is one of India’s largest contract manufacturers of air conditioners and supplies to top global brands such as Blue Star, Carrier, Daikin, Hitachi, LG, Midea and Panasonic. Amber would be a key beneficiary of the government’s focus on import substitution in room ACs. Amber has the capacity to manufacture around 4.5 mn ACs annually; it produced 3 mn ACs in FY2020. Hence, it has some spare capacity to cater to more demand in the future.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 59 India Consumer Durables & Apparel
Exhibit 11: OEMs can see significant revenue upsides from higher domestic value addition Estimated revenue opportunity for OEMs from AC PLI scheme
Case I Case II Case III Targeted value addition in India (%) 50.0 60.0 70.0 Additional revenue opportunity for OEMs (Rs bn) 105 134 162
Source: Kotak Institutional Equities estimates
60 KOTAK INSTITUTIONAL EQUITIES RESEARCH Consumer Durables & Apparel India
INDIAN AC COMPANIES CAN BENEFIT FROM HIGHER VALUE ADDITION We believe the PLI scheme can help Indian manufacturers with greater revenue opportunity (ban on imported CBUs, potential exports) as well as margins (on greater value-add being captured within India). With their relatively larger market-shares, brand presence and strong balance sheet that can support capex required for backward integration, these companies can benefit from potential benefits that the PLI scheme can bring.
Higher value add within India can drive up margins for domestic AC companies
Indian AC brands such as Voltas and Lloyd are already witnessing higher revenue growth and margin expansion because of the ban on imports of CBUs with refrigerants.
Higher value addition captured in India on account of the PLI scheme can potentially result in margin improvement for domestic AC companies. Companies such as Voltas are currently primarily assemblers, and despite having a large market-share have seen flattish segment EBIT margins over the past few years. We believe this can change once the company invests in fresh manufacturing capacity in India and captures a higher proportion of value-add currently. The expansion plans are however not clear at this stage.
Exhibit 12: Capex has remained low for Voltas historically Capital expenditure of Voltas, March fiscal year-ends, Rs mn, 2016-20
Voltas capex (Rs mn) 900 832 804 800
700
600
500
400 331
300 229 200 160
100
- 2016 2017 2018 2019 2020
Source: Company, Kotak Institutional Equities estimates
We believe Lloyd can witness a greater delta in margins as it sees the benefit of higher scale, aggressively backward integrates and is a first-mover to capture some of the export market. The company is already talking about investing in a facility in Sri City, which would be close to the port and can potentially export after a tie-up with a foreign agency is worked out.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 61 India Consumer Durables & Apparel
Exhibit 13: Revenues picked up for AC segments of Voltas and Havells in 3QFY21 quarter Revenues and margins of UCP segment of Voltas and Lloyd, March fiscal year-ends, 4QFY20-3QFY21
UCP Revenues (Rs mn, LHS) -Voltas UCP EBIT margin (%, RHS) -Voltas Revenues (Rs mn, LHS) -Lloyd Contribution margin (%, RHS) -Lloyd (Rs mn) (Rs mn) (%) (%) 6,000 12 14,000 18 15.5 9.8 14.6 16 9.7 12,000 5,000 10 12.5 14 10,000 11.0 12 4,000 8 6.0 8,000 10 3,000 6 6,000 8 6 2,000 4 4,000 4 1.8 1,000 2 2,000 2
- 0 0 0 4QFY20 1QFY21 2QFY21 3QFY21 4QFY20 1QFY21 2QFY21 3QFY21
Source: Companies, Kotak Institutional Equities
Exhibit 14: We are baking in steady margin improvement in the AC segments of Voltas and Havells Revenues and margins of UCP segment of Voltas and Lloyd, March fiscal year-ends
UCP Revenues (Rs mn, LHS) -Voltas UCP EBIT margin (%, RHS) -Voltas Revenues (Rs mn, LHS) -Lloyd Contribution margin (%, RHS) -Lloyd (Rs mn) (%) (Rs mn) (%) 19.0 70,000 14.8 14.7 16 35,000 20 14.0 13.6 17.1 13.2 18 60,000 12.6 12.5 12.5 14 16.0 16.0 30,000 15.0 16 12 50,000 10.3 25,000 14 10 12 40,000 20,000 8 8.3 10 30,000 15,000 6 8 20,000 6 4 10,000 4 10,000 2 5,000 2 - 0 - 0 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E 2018 2019 2020 2021E 2022E 2023E
Source: Companies, Kotak Institutional Equities
Global value addition/component companies generate 3-8% margins; we believe it is possible for Indian companies to capture 200-300 bps incremental margins over the medium-term, at a time when they reach certain scale. Of course this would be accompanied by higher capex.
Exhibit 15: Global OEMs’ EBITDA margins in mid-high single digits
EBITDA margin (%) Company Country 2020 2021E 2022E 2023E Amber Enterprises India Ltd India 7.8 7.2 8.4 8.6 Dixon Technologies India Ltd India 5.1 4.7 4.5 4.5 Hon Hai Precision Industry Taiwan 3.4 3.5 4.0 4.2 Pegatron Corp Taiwan 2.6 2.9 3.0 3.1 Jabil Inc US 5.2 6.9 7.1 6.9 Flex Ltd US 5.1 6.2 6.1 5.9 Celestica Inc US 4.4 5.4 5.6 na Sanmina Corp US 5.2 6.3 6.1 na
Source: Bloomberg, Kotak Institutional Equities
62 KOTAK INSTITUTIONAL EQUITIES RESEARCH Consumer Durables & Apparel India
EXPORTS: LARGE MARKET BUT INDIAN COMPANIES MAY TAKE TIME TO CAPITALIZE ON IT As is the case with mobile phone manufacturing, we believe the PLI scheme would ultimately also aim to drive exports from India. The AC export market is very large at US$50 bn annually, with China accounting for a large share of this. We believe this opportunity will take time to fructify as Indians will have to compete with low-cost Chinese manufacturers; however, even a small share shift in favour of Indians as importing countries attempt to diversify their supply chains may lead to decent volume growth opportunity for Indian manufacturers over the medium term.
AC export market is US$50 bn in size, and China is the dominant manufacturer and exporter. We believe that as global consumers (likes of US, Japan and Germany) potentially seek to diversify their supply chains away from China, Indian manufacturers, aided by the PLI scheme, can potentially benefit.
Indian AC market in FY2020 was US$2.5 bn in size. Hence even a small 2-3% market-share in the export market over the next 5-10 years can help increase overall revenue base of Indian manufacturers and brands. However, we note that the export opportunity will take time to materialize –5-10 years – as domestic component ecosystem needs to scale-up and Indian manufacturers need to become cost competitive versus China. Further, we also note that exporting to other countries would mean adherence to different energy efficiency and quality standards. Indian companies would need to clear some testing etc. before they commence exports.
Exhibit 16: China is the top exporter of air conditioners in the world accounting for 34% of share in 2019 Details of top AC importing and exporting countries
% of total exports AC Exports (US$ bn) % of total imports AC Imports (US$ bn) Country 2017 2018 2019 2017 2018 2019 Country 2019 2019 China 33.9 34.3 33.6 15.0 16.8 16.6 US 17.9 8.8 Thailand 11.5 11.4 11.1 5.1 5.6 5.5 Japan 5.4 2.7 Mexico 8.1 8.3 8.5 3.6 4.1 4.2 Germany 5.0 2.5 US 5.7 5.3 5.2 2.5 2.6 2.6 France 4.3 2.1 Germany 4.1 4.0 4.1 1.8 2.0 2.0 Canada 3.5 1.7 Italy 3.8 3.7 3.7 1.7 1.8 1.8 Italy 3.2 1.6 Czechia 4.1 3.8 3.6 1.8 1.9 1.8 Spain 2.5 1.3 Japan 3.3 3.2 2.9 1.5 1.6 1.5 Mexico 2.4 1.2 Malaysia 2.9 2.7 2.9 1.3 1.3 1.4 Saudi Arabia 2.3 1.2 Sout Korea 3.2 2.8 2.7 1.4 1.4 1.3 Vietnam 2.2 1.1 Belgium 1.9 1.9 2.1 0.9 0.9 1.1 Australia 2.1 1.0 Netherlands 1.4 1.8 2.0 0.6 0.9 1.0 India 1.9 1.0 Others 16.1 16.8 17.6 7.1 8.3 8.8 Others 47.4 23.5 Total 100.0 100.0 100.0 44.2 49.1 49.5 Total 100.0 49.5
Source: Observatory of Economic Complexity (OEC), Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 63 India Consumer Durables & Apparel
APPENDIX: UNDERSTANDING THE BASIC PARTS OF AN AIR CONDITIONING UNIT
In India, room air conditioner (RAC) is primarily divided into two categories, (1) window (14% of total room RAC units sold), and (2) split (86% of the total RAC units sold).
Exhibit 17: Main types of room air conditioners
Source: Google Images, Kotak Institutional Equities
Exhibit 18: Split constituted 86% of AC sold in India in CY2019 December calendar year break-up of RAC units sold in India
Window AC, 14%
Split AC, 86%
Source: Amber Annual Report 2020, Kotak Institutional Equities
64 KOTAK INSTITUTIONAL EQUITIES RESEARCH Consumer Durables & Apparel India
Exhibit 19: Nearly ~7 mn units of RAC were sold in India in CY2019 December calendar year-end RACunits sold
(#, mn) AC units sold (in mn) 16 14.9
14
12
10
8 6.8 5.5 6 5.2 3.9 4.2 3.9 3.5 3.6 4 2.8 3.1 3.2
2
0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2025E
Source: Amber Annual Report 2020, Kotak Institutional Equities
Compressors form chunk of Bill of Materials (BoM)
We discuss the split AC in greater detail as it dominates overall Indian AC demand. Split AC is an assembly of two units: (1) Indoor Unit (IDU), the body part which is placed inside the home and (2) Outdoor Unit (ODU), the part which is placed outside.
IDU, the inside component, ensures no dust particles or pollutants taint indoor air quality and provide with cool air. The main parts of IDU are: (1) printed circuit boards (PCBs), (2) evaporator, (3) blower motor, and (4) swing motor.
ODU is the outside component where the hot air is taken from indoors and released outdoors. The main constituents of ODU are: (1) compressors, (2) condenser coil, (3) condenser fan motor, and (4) capacitor.
There are other smaller parts like voltage relay, sensor, flare nut, drainage pipe, capillary tube, service valve, overload protector (OLP).
Exhibit 20: Detailing of components of IDU and ODU of split AC
Source: Google Images, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 65 India Consumer Durables & Apparel
IDU ensures no dust particles or pollutants taint indoor air quality and provide with cool air. The main parts of IDU are: (1) printed circuit boards (PCBs), (2) evaporator, (3) blower motor, and (4) swing motor.
ODU is the outside component where the hot air is taken from indoors and released outdoors. The main constituents of ODU are: (1) compressors, (2) condenser coil, (3) condenser fan motor, and (4) capacitor.
There are other smaller parts like voltage relay, sensor, flare nut, drainage pipe, capillary tube, service valve, overload protector (OLP).
We note that compressor forms the 30-35% of total cost of AC and it is the single most expensive component.
66 KOTAK INSTITUTIONAL EQUITIES RESEARCH BUY Lupin (LPC) https://ultraviewer.et/en/own Pharmaceuticals MARCH 30, 2021 load.html CHANGE IN RECO. Sector view: Attractive
Pivotal year ahead. We see the recent correction in LPC stock as a buying opportunity CMP (`): 980 and believe scale-up concerns on albuterol post supply disruptions and Sandoz entry are Fair Value (`): 1,180 minor. Apart from albuterol, LPC has multiple growth drivers in place over the medium BSE-30: 49,009 term including progress on other inhalation assets, filing of biosimilars in the US and potential resolution of warning letters in 2HFY22. After the recent correction, LPC trades at 9X FY2023E EBITDA. Upgrade to BUY with revised Fair Value of Rs1,180.
Lupin Stock data Forecasts/valuations 2021E 2022E 2023E CMP(Rs)/FV(Rs)/Rating 980/1,180/BUY EPS (Rs) 24.9 41.2 51.8 52-week range (Rs) (high-low) 1,122-535 EPS growth (%) 14.3 65.6 25.8 Mcap (bn) (Rs/US$) 445/6.2 P/E (X) 39.4 23.8 18.9 ADTV-3M (mn) (Rs/US$) 2,903/40 P/B (X) 3.3 2.9 2.6 Shareholding pattern (%) EV/EBITDA (X) 16.0 11.2 8.9 Promoters 46.9 RoE (%) 8.3 12.3 13.6 FPIs/MFs/BFIs 19.0/13.2/7.8 Div. yield (%) 0.4 0.6 0.8 Price performance (%) 1M 3M 12M Sales (Rs bn) 153 179 193 Absolute (3.8) 0.4 75.4 EBITDA (Rs bn) 25 36 43 Rel. to BSE-30 (3.6) (3.8)) 7.2 Net profits (Rs bn) 11 19 23
Albuterol scaling-up gradually with supply disruptions led hiccups now behind
After a sharp dip in albuterol volumes driven by supply disruption of device components in January, gradual pick up in supplies and market share gains will abate concerns on ramp-up of the product. We do not see material risks from Sandoz’ recent in-licensing of distribution rights for Proventil AG from Kindeva as Sandoz entry does not result in additional competition with Endo exiting the market. While Sandoz’ pursuit of market share could impact pricing marginally, we expect prices to sustain above US$10/device over the medium term. Continued absence of Perrigo and 25-30% share still with brands provides opportunity to gain further market share. We forecast US$90-95mn revenues from Proair in FY2022/23E.
FY2022 crucial year for complex portfolio; expect progress on multiple fronts
We expect FY2022 to be a crucial year for LPC’s efforts in the complex generics space. Apart from Proair, we expect progress on multiple products including approval of Fostair (EU) by 1QFY22, potential approval of Dulera (US) in 1HFY22 and litigation/approval progress on Spiriva among respiratory assets. Lupin has also made advancement on the biosimilars front with partner Viatris launching biosimilar Enbrel in multiple EU countries. Filing of pegfilgrastim (US) by 1HCY21 and progress on Lucentis biosimilar (global Phase 3 initiated) will further validate Lupin’s capabilities in the biosimilar space and enhance growth visibility beyond FY2023E. Progress on complex injectables (peptide hormones, depots) remains at a nascent stage with meaningful contribution likely only beyond FY2024E. With FDA restarting inspection of overseas facilities, resolution of Goa/Indore units by 2HFY22 are additional triggers for US business. Despite near term weakness in domestic segment, with US scaling-up, we believe Lupin is well- positioned for a strong recovery in margins and return ratios over the next two years.
Upgrade to BUY, revise Fair Value to Rs1,180 Kumar Gaurav
We cut our FY2021-22 EPS estimates by 2-4% to factor in muted domestic growth in near-term and temporary supply disruption impact on albuterol during 4QFY21. LPC has corrected 12% from its recent high and now trades at 9X FY2023E EBIDTA. We upgrade the stock to BUY with revised Fair Value of Rs1,180 (from Rs1,200 earlier). [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. Pharmaceuticals Lupin
Exhibit 1: Changes to estimates March fiscal year-ends, 2021-23E, (Rs mn)
New estimates Old Estimates Changes % 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E Sales 153,471 179,347 192,583 153,861 181,215 192,885 (0.3) (1.0) (0.2) Gross profits 99,041 116,738 126,546 99,495 118,444 126,986 (0.5) (1.4) (0.3) EBITDA 25,200 35,555 42,593 25,580 36,678 43,051 (1.5) (3.1) (1.1) Adjusted PAT 11,184 18,525 23,300 11,447 19,266 23,602 (2.3) (3.8) (1.3) EPS (Rs) 24.9 41.2 51.8 25.4 42.8 52.4 (2.3) (3.8) (1.3)
Source: Kotak Institutional Equities estimates
Exhibit 2: Goa, Indore clearance now likely only in 2HFY22
Revenue Last contribution Key pending Unit name Business Operations inspected Status (%) products Comments New facility, incremental filings for oral Unit 1 Nagpur Formulations Jan-20 EIR 0-5 Injectables, orals and injectables happening from this unit Hormones (incl. levothyroxine), high Unit 1 Indore API, Formulations Jul-19 EIR 10-15 potent products Unit 2, Indore Formulations Jan-19 WL 8-10 Oral solids and ophthal Unit 3 Indore Formulations Oct-18 EIR 15-20 Spiriva, Dulera Derma and inhalation Goa Formulations May-19 WL 25-30 Oral solids Aurangabad Formulations May-19 EIR 5-8 Oral solids Somerset Formulations Sep-Nov 20 OAI 8-12 Oral, derma and controlled substance Unit 1 Mandideep API, Formulations Dec-18 WL Cephlosporins, no incremental filings Unit 2 Mandideep API Dec-18 EIR Cephlosporins API plant Tarapur API Sep-19 OAI Vizag API Dec-18 EIR API facility
Source: Kotak Institutional Equities estimates
Exhibit 3: Brands still retain ~25% market share providing further market share gain opportunities for generics
Volumes (Units mn) 1QCY19 2QCY19 3QCY19 4QCY19 1QCY20 2QCY20 3QCY20 4QCY20 ProAir brand 5.5 4.1 4.2 4.5 4.4 2.3 2.0 2.2 ProVentil brand 0.6 0.2 0.2 0.3 0.3 0.3 0.1 0.1 Ventolin brand + AG 9.0 9.5 9.3 9.6 8.2 6.8 6.7 7.4 ProAir AG 3.4 3.7 2.9 3.4 3.8 2.9 3.9 4.4 ProAir generic (PRGO) 1.8 3.9 1.2 — ProVentil AG 0.3 0.5 0.8 1.1 0.7 0.2 0.3 ProVentil generic (CIPLA) 0.4 1.1 1.5 ProAir generic (LPC) 0.1 0.9
Source: Company, Kotak Institutional Equities estimates
68 KOTAK INSTITUTIONAL EQUITIES RESEARCH Lupin Pharmaceuticals
Exhibit 4: Inhaler and biosimilar portfolio shaping-up well March fiscal year-ends
Inhalation pipeline Status Type Innovator Market size Comments ~US$800mn at Proair Approved MDI Teva 65-70 mn device market. Requires high mdi capacities. Lupin's price
Patents on Dulera have expired. 2 mn device market. Generic Dulera could potentially take some share away from Symbicort which is a 13 Dulera Filed MDI Merck US$200-250 mn mn device market. Teva/Mylan have filed for Symbicort with Mylan having a tentative approval. AZ has launched Symbicort AG. Patent expiry in July 2023. US$85-90/device net pricing.
5 mn device market, has come down from 9-10 mn as market has Spiriva Filed DPI BI US$1 bn shifted to Respimat device. Litigation ongoing '676 patent which expires in 2027 Fostair (EU)/Foster (UK) Filed MDI Cheisi EUR550 mn Teva also has a filing, 1-2 more players in development. Brovana Filed Inhalation solution Sunovion US$200mn CY2021 patent expiry. Small opportunity given 3-4 more TA Ellipta devices (Breo, Anoro, Late stage opportunity, beyond 2025/26. Vectura has licensed its Development DPI GSK US$2.5-3 (by 2025) Trelegy, Incruse) Ellipta technology to Hikma and Hikma is likely to be first filer in these. Respimat devices (Spiriva, Development Soft Mist inhaler BI US$2 bn Late stage opportunity, beyond 2025/26. Stiolto, Striverdi) Biosimilar portfolio Launched in EU, US Amgen, Pfizer US$2bn in EU, Biogen (Samsung) annualizing US$800mn in Europe at 40% market Enbrel opportunity blocked Fusion protein markets in EU US$4.5 bn in US share, Sandoz has 13-15% market share. Lupin/Mylan launched by 2027 patent Launch in 2HFY23. Coherus is annualizing US$500mn at 20% market US$2.5 bn at Neulasta 1HCY21 filing Recombinant GCSF Amgen share. Mylan/BIOS at 7-8% market share. Market getting crowded with biosimilar pricing Sandoz, Pfizer also in the market while Amneal has also filed Ph-3 endpoint trial 2022 patent expiry. Samsung has filed. Coherus/Fomycon and Xlucane Lucentis ongoing on 600 Mab Roche US$2 bn in US to file in CY21. CY23/24 launch for Lupin patient, filing in CY23
Source: Company
Exhibit 5: ProAir to drive US sales in FY2022 March fiscal year-ends, 2017-24E (US$ mn)
2017 2018 2019 2020 2021E 2022E 2023E 2024E Key product sales (US$ mn) Fortamet + Glumetza 426 135 70 42 20 17 18 19 OC basket 129 135 60 61 58 56 56 51 Gavis basket 100 133 91 86 74 114 92 87 Lisinopril family 46 40 60 75 70 71 73 74 Cephs family 83 78 71 80 45 60 60 60 Key new launches (US$ mn) Solosec — — 9 17 8 19 30 42 Levothyroxine 26 37 57 55 63 ProAir 27 90 92 78 Spiriva 92 Dulera 10 45 Base business & other launches 412 384 441 471 573 Product concentration Top-5 products 502 287 202 205 184 278 250 349 Top products (ex-Solosec) 502 287 193 188 176 259 220 307 Total sales 1,197 898 778 800 722 925 957 1,184
Source: Company
KOTAK INSTITUTIONAL EQUITIES RESEARCH 69 Pharmaceuticals Lupin
Exhibit 6: Lupin – Segmental revenues March fiscal year-ends, 2015-2023E (Rs mn)
2015 2016 2017 2018 2019 2020 2021E 2022E 2023E Domestic formulations 29,679 33,916 37,986 41,253 46,382 51,385 53,588 60,299 66,295 Export formulations 86,991 90,985 121,687 103,415 103,848 85,417 82,634 101,971 108,344 North America 56,953 59,376 82,626 58,939 55,924 58,212 55,656 71,100 73,981 - Branded 4,980 2,941 6,439 4,645 1,613 1,992 1,295 2,023 2,740 - Generics 52,391 55,514 76,276 54,274 52,486 54,788 52,141 66,413 68,043 Japan 13,239 13,646 17,740 20,764 21,790 — — — — Europe 3,262 4,278 5,472 5,937 6,171 6,453 7,321 8,423 9,466 South Africa 4,218 3,956 4,644 5,314 5,735 5,910 5,274 5,907 6,498 LatAm 2,254 3,507 4,519 5,790 5,658 6,143 5,529 6,358 6,994 RoW 7,065 6,222 6,686 6,671 6,467 7,258 8,855 10,183 11,405 Others — — — — 2,103 1,441 — — — API 11,941 12,074 11,833 10,901 13,464 12,999 14,949 15,696 16,481 Other operating income 1,702 5,069 3,745 2,443 3,488 2,320 2,300 1,380 1,463 Total 127,699 142,085 174,943 158,042 167,182 153,748 153,471 179,347 192,583 % yoy growth Domestic formulations 20 14 12 9 12 11 4 13 10 Export formulations 13 5 34 (15) 0 (18) (3) 23 6 North America 17 4 39 (29) (5) 4 (4) 28 4 - Branded 2 (41) 119 (28) (65) 24 (35) 56 35 - Generics 19 6 37 (29) (3) 4 (5) 27 2 Japan 2 3 30 17 5 (100) NM NM NM Europe 5 31 28 8 4 5 13 15 12 South Africa 11 (6) 17 14 8 3 (11) 12 10 RoW 12 (12) 7 (0) (3) 12 22 15 12 Others (100) (31) (100) API 7 1 (2) (8) 24 (3) 15 5 5 Other operating income (15) 198 (26) (35) 43 (33) (1) (40) 6 Total 13.1 11.3 23.1 (9.7) 5.8 (8.0) (0.2) 16.9 7.4 % of sales Domestic formulations 23 24 22 26 28 33 35 34 34 Export formulations 68 64 70 65 62 56 54 57 56 North America 45 42 47 37 33 38 36 40 38 - Branded 4 2 4 3 1 1 1 1 1 - Generics 41 39 44 34 31 36 34 37 35 Japan 10 10 10 13 13 — — — — Europe 3 3 3 4 4 4 5 5 5 South Africa 3 3 3 3 3 4 3 3 3 RoW 6 4 4 4 4 5 6 6 6 Others — — — — 1 1 — — — API 9 8 7 7 8 8 10 9 9 Other operating income 1 4 2 2 2 2 1 1 1
Source: Kotak Institutional Equities, Company
70 KOTAK INSTITUTIONAL EQUITIES RESEARCH Lupin Pharmaceuticals
Exhibit 7: Lupin - Profit and loss, balance sheet and cash model March fiscal year-ends, 2015-2023E (Rs mn)
2015 2016 2017 2018 2019 2020 2021E 2022E 2023E Net revenues 127,699 142,085 174,943 158,042 167,182 153,748 153,471 179,347 192,583 Gross profit 86,129 98,991 124,929 105,298 108,724 99,442 99,041 116,738 126,546 Staff costs (17,473) (21,077) (28,495) (28,647) (31,513) (29,868) (29,121) (31,451) (33,653) R&D expenses (10,998) (16,038) (23,101) (18,510) (15,731) (16,330) (14,430) (17,020) (16,280) Other expenses (21,463) (24,341) (28,401) (26,665) (32,658) (29,695) (30,289) (32,712) (34,020) EBITDA 36,195 37,535 44,932 31,475 28,822 23,549 25,200 35,555 42,593 Depreciation & amortisation (4,347) (4,635) (9,122) (10,859) (10,850) (9,703) (8,968) (9,455) (9,483) EBIT 31,848 32,900 35,810 20,616 17,972 13,846 16,233 26,099 33,110 Net interest (98) (446) (1,525) (2,044) (3,078) (3,629) (1,286) (897) (672) Other income 2,397 1,877 1,147 (13,105) 240 (2,684) 1,200 2,800 2,800 Profit before tax 34,147 34,330 35,432 5,468 15,134 7,533 16,147 28,003 35,238 Tax & deferred Tax (9,704) (11,536) (9,785) (2,885) (9,017) (11,571) (5,006) (9,521) (11,981) Less: minority interest (412) (88) (72) (71) (71) 43 43 43 43 Net Income reported 24,031 22,707 25,575 2,513 6,046 (3,995) 11,184 18,525 23,300 Net Income adjusted 24,031 22,707 25,575 17,156 9,446 9,785 11,184 18,525 23,300 EPS reported (Rs) 53.4 50.5 56.8 5.6 13.4 (8.9) 24.9 41.2 51.8 EPS adjusted (Rs) 53.4 50.5 56.8 38.1 21.0 21.7 24.9 41.2 51.8 Balance sheet Equity 88,982 110,165 135,321 136,171 137,891 125,812 135,318 151,064 170,870 Total borrowings 4,710 71,193 79,521 68,763 82,219 42,860 19,928 14,928 12,928 Other liabilities 37,686 43,020 51,231 58,120 59,384 81,167 80,885 84,758 87,261 Total liabilities 42,396 114,213 130,752 126,882 141,603 124,027 100,812 99,685 100,188 Total liabilities and equity 131,377 224,378 266,073 263,054 279,494 249,839 236,131 250,750 271,058 Net fixed assets 49,442 116,677 131,660 129,602 127,264 88,777 84,810 80,354 75,871 Investments 3,612 10,564 14,884 11,357 13,694 6,624 6,624 6,624 6,624 Cash 21,372 8,379 28,123 16,429 30,971 47,926 41,756 47,034 65,231 Other current assets 56,951 89,411 91,406 105,667 107,565 106,512 102,941 116,738 123,332 Total assets 131,377 225,031 266,073 263,054 279,494 249,839 236,131 250,750 271,058 Cashflow statement Operating profit before working capital 28,280 27,847 36,089 27,706 21,662 24,280 20,653 28,932 33,982 Tax paid (9,436) (11,662) (11,490) (5,584) (9,394) (5,112) (5,006) (9,521) (11,981) Change in working capital (949) (31,537) 5,059 (10,194) (5,002) (9,592) 2,788 (10,876) (5,289) Capital expenditure (8,712) (11,750) (26,368) (15,534) (9,854) (6,731) (5,000) (5,000) (5,000) Free cash flow 18,619 (15,440) 14,780 1,978 6,806 7,957 18,441 13,056 23,693 Margins and ratios Gross profit margin (%) 67.4 69.7 71.4 66.6 65.0 64.7 64.5 65.1 65.7 EBITDA margin (%) 28.3 26.4 25.7 19.9 17.2 15.3 16.4 19.8 22.1 Tax rate (%) 31.2 32.2 29.1 29.6 59.6 153.6 31.1 34.1 34.1 RoAE (%) 30.2 22.8 20.8 1.9 4.4 (3.0) 8.6 12.9 14.5 RoACE (%) 32.1 17.4 14.5 9.5 3.8 (4.8) 9.6 14.3 17.8
Source: Kotak Institutional Equities, Company
KOTAK INSTITUTIONAL EQUITIES RESEARCH 71 INDIA Economy Macro MARCH 26, 2021 UPDATE BSE-30: 49,009
Covid-19 spike: vaccinations and precautions. We hosted Dr Randeep Guleria (Director, AIIMS) to understand India’s approach to the second wave of infections. Slip- ups in precautionary measures as well as variant strains are responsible for the spike in cases. Nation or state-wide lockdowns are unlikely but localized restrictions may be needed to contain the virus. With limitations on vaccine supplies, the strategy is to protect the most vulnerable first. It is likely that vaccines will need to be administered annually given mutations as well as better understanding of long-term efficacies of the vaccines.
Lax precautions and variant strains propelling the surge; micro lockdowns will continue
Dr Guleria believes that the recent spike in infection rate has been caused by slip-ups in precautionary measures by individuals. He also highlighted that the virus is mutating and some of the variants are more infectious. In this context, he pointed out that the government’s vaccination drive along with extensive contract tracing over the next four to six weeks will determine the Covid trajectory going ahead. Dr Guleria also pointed out that while a nationwide lockdown seemed unlikely at this juncture, micro lockdowns or containment zones may be needed if cases continue to rise and social distancing is compromised.
Vaccination strategy: protecting the vulnerable first
Dr Guleria highlighted that the government’s strategy is to first protect the people who might be the most vulnerable to the virus. As the vulnerable get vaccinated and more vaccines get approved, the vaccination drive will soon be extended to the larger population depending on the demand-supply dynamics. The government is likely aiming for 5-7 mn doses per day over the near term. In this context, Dr Guleria pointed out that a couple of more vaccine candidates may get approval over the next few weeks. He also added that more companies are getting into MoUs/technology transfers to increase vaccine supply. At the same time, scientists are also exploring a mix of vaccines between doses to allow for greater flexibility. Trials have currently been conducted and more data is awaited.
Vaccines do not guarantee full immunity; asymptomatic may still spread the virus
Dr Guleria highlighted that Covid is caused by a mutating virus and whether the existing vaccines would be effective against the variants depends on if the mutation is of clinical significance. With every round of mutation, there is a possibility that the efficacy rate may be lower, but as long as the efficacy rate is maintained at more than 50%, the vaccine should get approved. Dr Guleria also pointed out that while the vaccine does not guarantee full immunity against the virus, it will reduce the intensity of the infection. In this context, he emphasized the importance of continuing to undertake all the safety measures given that a vaccinated person Suvodeep Rakshit may still be able to transmit the virus to others. Avijit Puri Chances that vaccines need to be administered annually
Dr Guleria believes that it may be the case that people may have to get themselves vaccinated Upasna Bhardwaj every year given that the virus may mutate and that the older vaccine may not be fully effective. He also gave an example of the South Africa strain where the Astra Zeneca vaccine is likely to be less effective. Vaccines will therefore require tweaking depending on the incoming data. He also seemed hopeful that given the developments in vaccine technology, we may reach a rate where vaccines could account for possible mutations in the future using computational analysis. Additionally, Dr Guleria believes that herd immunity is possible when around 70-80% of the population gets vaccinated, provided the virus does not mutate significantly. [email protected] Contact: +91 22 6218 6427
For Private Circulation Only. Kotak Institutional Equities: Valuation summary of KIE Universe stocks 73
Price (Rs) Fair Value Upside Mkt cap. O/S shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) ADVT-3M Company Rating 26-Mar-21 (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 Amara Raja Batteries SELL 842 770 (9) 144 2.0 171 37 46 51 (4) 25 11 23 18 16 12.6 10.2 8.9 3.5 3.0 2.7 16.3 17.9 17.4 1.1 1.4 1.5 14 Apollo Tyres REDUCE 225 210 (7) 143 2.0 638 5 13 17 (45) 183 29 49 17 14 7.0 6.6 5.4 1.3 1.2 1.1 2.8 7.1 8.7 0.6 1.2 1.2 46 Ashok Leyland REDUCE 114 125 10 334 4.6 2,936 (1) 2 7 (208) 230 284 NM 66 17 101.7 22.8 10.1 4.9 4.7 3.9 NM 7.2 25 0.0 0.5 1.7 56 Bajaj Auto BUY 3,600 4,400 22 1,042 14 289 158 191 222 (10) 21 16 23 19 16 17.4 13.6 11.2 4.8 4.3 3.9 22 24 25 2.6 3.2 3.7 50 Balkrishna Industries SELL 1,649 1,320 (20) 319 4.4 193 54 60 73 9 12 21 31 27 22 18.4 15.9 13.2 5.7 5.0 4.4 19.6 19.5 21 1.3 1.5 1.6 22 Bharat Forge SELL 589 375 (36) 274 3.8 466 (5) 11 19 (164) 319 76 NM 56 32 43.9 25.5 17.6 5.5 5.1 4.5 NM 9.5 15.2 0.0 0.5 0.5 26 CEAT ADD 1,519 1,500 (1) 61 0.8 40 99 107 124 59 8 16 15 14 12 7.9 7.1 6.3 1.9 1.7 1.5 13.1 12.7 13.1 0.8 0.8 0.8 10 Eicher Motors SELL 2,562 2,200 (14) 700 9.6 272 50 80 106 (25) 60 32 51 32 24 35.4 24.8 19.1 7.4 6.3 5.3 15.5 21 24 0.5 0.5 0.5 62 Endurance Technologies SELL 1,424 1,200 (16) 200 2.8 141 38 52 65 (7) 39 24 38 27 22 18.8 14.3 11.8 5.8 4.9 4.2 15.1 18.1 18.9 0.4 0.6 0.7 3 Escorts BUY 1,272 1,700 34 113 2.4 101 77 89 100 42 15 12 16 14 13 8.8 7.6 6.3 2.5 2.2 1.9 15.1 15.1 14.8 0.9 1.0 1.2 29 Exide Industries REDUCE 182 180 (1) 155 2.1 850 8 10 11 (17) 24 10 22 18 16 11.6 9.8 8.9 2.3 2.2 2.0 10.9 12.7 12.9 2.5 2.5 2.5 15 Hero Motocorp SELL 2,945 2,700 (8) 588 8.1 200 146 159 190 (8) 9 19 20 18 16 12.9 11.4 9.3 3.9 3.5 3.2 19.9 20.0 22 3.2 3.2 3.9 58 Mahindra CIE Automotive SELL 164 135 (17) 62 0.9 378 3 10 13 (70) 252 32 58 16 12 14.7 8.2 6.1 1.3 1.2 1.1 2.2 7.4 9.0 ——— 1 Mahindra & Mahindra BUY 796 1,000 26 990 13.6 1,138 33 48 55 38 45 16 24 17 14 14.8 11.3 9.5 2.5 2.2 2.0 10.5 14.1 14.5 0.4 0.9 1.0 72 Maruti Suzuki SELL 6,789 5,700 (16) 2,051 28.2 302 160 230 299 (15) 44 30 43 30 23 28.7 18.1 13.1 4.0 3.6 3.2 9.6 12.8 15.0 0.8 0.8 1.1 119 Motherson Sumi Systems ADD 199 200 0 629 8.7 3,158 4 9 11 (1) 139 23 54 23 19 13.1 6.7 5.2 5.0 3.9 3.0 9.7 19.3 18.3 0.5 0.7 0.8 59 MRF SELL 82,150 78,000 (5) 348 4.8 4 3,155 3,735 4,321 (6) 18 16 26 22 19 10.7 9.3 7.7 2.6 2.3 2.1 10.4 11.1 11.5 0.1 0.1 0.2 57 Schaeffler India SELL 5,347 4,050 (24) 167 2.3 31 93 149 179 (21) 60 20 57 36 30 28.9 19.5 16.0 5.3 4.8 4.3 9.5 14.1 15.1 ——— 2 SKF REDUCE 2,176 1,450 (33) 108 1.5 49 43 54 67 (26) 26 23 51 40 33 37.0 28.2 22.8 7.3 6.4 5.5 14.4 15.9 16.9 5.0 0.4 0.5 2 Tata Motors SELL 297 185 (38) 1,068 14.5 3,829 (12) 11 28 45 195 155 NM 27 11 7.1 5.4 4.0 2.1 1.9 1.6 NM 7.5 16.9 ——— 445 Timken SELL 1,260 830 (34) 95 1.3 75 22 36 43 (34) 65 20 58 35 29 33.4 21.5 17.9 6.9 5.9 5.0 11.1 18.1 18.4 0.1 0.1 0.1 1 TVS Motor SELL 572 360 (37) 272 3.7 475 11 17 21 (19) 65 22 54 33 27 21.5 16.0 13.7 7.0 6.1 5.3 13.4 19.9 21 0.8 0.8 0.9 29 Automobiles & Components Cautious 9,914 137.0 (1) 102 39 49 24 17 13.8 10.1 7.8 3.5 3.2 2.8 7.2 13.0 15.9 1.0 1.1 1.3 1,180 Banks AU Small Finance Bank SELL 1,175 720 (39) 367 5.0 304 39 27 34 75 (29) 23 30 43 35 ——— 7.1 5.9 5.1 23.7 14.0 14.8 ——— 15 Axis Bank BUY 702 675 (4) 2,150 29.6 3,060 23 42 51 294 85 22 31 17 14 ——— 2.2 2.0 1.8 7.5 12.2 13.3 0.5 0.9 1.1 184 Bandhan Bank ADD 347 375 8 558 7.7 1,610 16 20 25 (17) 30 21 22 17 14 ——— 3.4 2.8 2.3 15.3 16.9 17.2 ——— 59 Bank of Baroda ADD 71 80 12 368 5.1 4,627 8 17 21 572 120 18 9 4 3 ——— 0.6 0.5 0.5 5.4 11.1 12.0 2.2 4.9 5.8 74 Canara Bank REDUCE 147 115 (22) 242 3.3 1,647 11 9 18 150 (15) 99 13 16 8 ——— 0.7 0.7 0.7 3.4 2.7 5.2 ——— 64 City Union Bank REDUCE 161 160 (0) 119 1.6 737 8 8 11 21 2 32 21 20 15 ——— 2.3 2.2 1.9 10.4 9.8 11.9 0.9 0.9 1.2 8 DCB Bank BUY 103 150 46 32 0.4 310 11 12 16 (2) 15 33 10 8 6 ——— 1.0 0.9 0.8 9.9 10.4 12.5 1.0 1.2 1.6 3 Equitas Holdings BUY 87 100 16 30 0.4 342 8 8 16 30 5 97 11 10 5 ——— 1.0 1.0 0.8 9.2 8.8 15.4 ——— 3
Equitas Small Finance Bank BUY 60 50 (17) 69 0.9 1,138 3 4 5 27 23 36 21 17 12 ——— 2.1 1.9 1.6 11.0 11.5 13.8 ——— - Daily Summary India Federal Bank BUY 77 90 17 153 2.1 1,993 7 9 12 (3) 14 45 10 9 6 ——— 1.1 1.0 0.9 9.9 10.5 13.9 2.2 2.5 3.6 33 HDFC Bank ADD 1,498 1,550 4 8,256 113.6 5,483 55 65 76 16 18 17 27 23 20 ——— 4.3 3.8 3.3 16.6 17.2 17.6 0.7 0.8 1.0 202 ICICI Bank BUY 580 650 12 4,011 55.2 6,893 25 31 35 102 26 13 23 19 16 ——— 2.9 2.6 2.3 13.1 14.0 14.2 0.9 1.1 1.2 207 IndusInd Bank ADD 956 950 (1) 724 10.0 756 34 63 81 (47) 85 29 28 15 12 ——— 1.9 1.7 1.5 7.1 11.4 13.2 0.5 1.0 1.3 154 Karur Vysya Bank BUY 55 65 18 44 0.6 799 4 7 11 34 84 58 14 8 5 ——— 0.8 0.8 0.6 4.7 8.2 12.1 1.9 3.4 5.4 2 Punjab National Bank REDUCE 36 36 (1) 379 5.2 10,481 2 5 6 369 106 29 15 8 6 ——— 0.6 0.6 0.6 3.4 5.7 6.9 ——— 95 RBL Bank BUY 211 270 28 126 1.7 597 10 24 31 (2) 146 29 22 9 7 ——— 1.1 1.0 0.9 5.0 10.8 12.7 0.7 1.7 2.2 61 SBI Cards and Payment Services ADD 948 1,030 9 892 12.3 939 13 20 30 (2) 53 52 73 48 31 ——— 13.8 10.9 8.2 20.7 25 30 0.1 0.2 0.2 40 State Bank of India BUY 359 450 26 3,199 44.0 8,925 23 36 45 45 52 26 15 10 8 ——— 1.6 1.4 1.2 8.6 11.9 13.2 0.1 0.1 0.1 264 Ujjivan Financial Services BUY 213 345 62 26 0.4 121 34 44 - 25 32 (100) 6 5 - ——— 1.0 0.9 — 17.0 19.3 NM 2.0 2.8 0.0 3 KOTAK INSTITUTIONAL EQUITIES EQUITIES INSTITUTIONAL KOTAK Ujjivan Small Finance Bank ADD 31 37 21 53 0.7 1,928 (0) 2 3 (118) 575 85 NM 19 10 ——— 2.0 1.8 1.5 NM 9.2 14.8 0.0 0.0 0.0 2 Union Bank REDUCE 34 27 (20) 217 3.0 6,407 3 1 5 136 (83) 789 11 66 7 ——— 0.5 0.6 0.5 3.4 0.6 4.9 1.3 0.2 2.0 8 YES Bank SELL 14 11 (22) 353 4.9 25,055 (0) (1) (0) 96 (96) 74 NM NM NM ——— 1.3 1.4 1.4 NM NM NM 0.0 0.0 0.0 36 Banks Attractive 22,367 307.9 122 37 26 23 17 14 2.0 1.8 1.6 8.4 10.5 11.9 0.6 0.8 0.9 1,519 -
Source: Company, Bloomberg, Kotak Institutional Equities estimates March2021 30, RESEARCH
KOTAK ECONOMIC RESEARCH 73
Kotak Institutional Equities: Valuation summary of KIE Universe stocks India
Price (Rs) Fair Value Upside Mkt cap. O/S shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) ADVT-3M
KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 26-Mar-21 (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 1,605 985 (39) 322 4.4 151 24 26 32 46 10 21 67 61 50 53.5 47.5 39.3 13.3 11.3 9.7 22 20 21 0.2 0.3 0.5 8 DailySummary Building Products Cautious 322 4.4 46 10 21 89 81 67 53.5 47.5 39.3 17.7 15.0 12.9 19.9 18.6 19.2 0.1 0.2 0.4 8 Capital goods ABB SELL 1,452 1,170 (19) 308 4.2 212 9 22 28 (50) 146 29 166 67 52 109.0 45.8 35.0 8.5 7.9 7.1 5.2 12.1 14.3 0.3 0.4 0.5 4 Ashoka Buildcon BUY 95 145 53 27 0.4 281 12 12 13 (14) 1 9 8 8 7 6.5 5.5 4.6 0.9 0.8 0.8 12.2 11.2 11.2 2.0 2.0 2.2 3 Bharat Electronics BUY 122 150 23 298 4.1 2,437 7 8 8 (1) 7 5 17 16 15 10.5 9.4 8.5 2.7 2.5 2.3 17.0 16.6 15.9 2.3 2.4 2.5 31 BHEL SELL 49 31 (36) 170 2.3 3,482 (4) 2 3 (4) 149 42 NM 23 16 (10.0) 9.2 7.0 0.6 0.6 0.6 NM 2.6 3.7 (4.0) 1.8 2.2 55 Carborundum Universal ADD 477 450 (6) 90 1.2 189 15 19 22 5 23 19 31 26 22 18.6 14.7 12.3 4.4 4.0 3.5 14.7 16.3 17.3 0.9 1.1 1.3 2 Cochin Shipyard BUY 355 520 47 47 0.6 132 35 43 43 (27) 20 1 10 8 8 5.1 5.0 4.6 1.2 1.1 1.0 12.0 13.4 12.5 3.3 3.6 3.9 3 Cummins India REDUCE 876 900 3 243 3.3 277 25 32 39 (4) 32 22 36 27 22 36.6 26.0 20.6 5.6 5.2 4.9 15.9 19.9 23 1.5 2.0 2.5 20 Dilip Buildcon BUY 562 600 7 77 1.1 137 26 46 63 (14) 75 39 22 12 9 7.4 5.8 4.9 1.9 1.7 1.4 9.4 14.6 17.2 0.1 0.2 0.2 4
IRB Infrastructure BUY 103 145 41 36 0.5 351 7 10 11 (65) 45 7 14 10 9 6.1 5.6 4.5 0.5 0.5 0.5 3.7 5.3 5.4 3.7 1.5 2.2 3 -
Kalpataru Power Transmission BUY 369 500 36 55 0.8 153 26 38 46 2 46 20 14 10 8 5.2 4.4 3.8 1.5 1.2 1.0 11.0 13.5 13.7 2.4 1.2 1.4 2 March2021 30, KEC International BUY 413 410 (1) 106 1.5 257 22 29 36 1 31 24 19 14 12 10.6 8.3 6.8 3.2 2.7 2.2 18.7 21 21 0.6 0.8 0.9 2 L&T BUY 1,399 1,720 23 1,965 27.0 1,403 50 81 99 (21) 60 24 28 17 14 19.6 14.3 12.9 2.8 2.6 2.3 11.1 15.5 17.3 1.2 1.8 2.2 84 Siemens SELL 1,820 1,540 (15) 648 8.9 356 37 43 50 73 17 17 49 42 36 34.7 30.4 25.6 6.1 5.6 5.0 13.0 13.7 14.6 0.8 0.7 0.8 11
Thermax SELL 1,325 1,080 (18) 158 2.2 113 25 33 43 34 29 32 52 40 31 36.9 29.6 22.8 36.9 29.6 22.8 9.3 11.6 14.5 0.9 1.2 1.6 2 Capital goods Attractive 4,227 58.2 (15) 67 21 34 20 17 2.7 2.5 2.3 7.9 12.2 13.5 1.0 1.5 1.8 225 Commercial & Professional Services SIS BUY 395 460 16 58 0.8 149 23 21 25 51 (9) 19 17 19 16 11.5 10.7 9.3 3.4 2.9 2.5 22 16.7 17.0 0.3 0.3 0.3 1 TeamLease Services ADD 3,536 3,775 7 60 0.8 17 53 84 113 161 56 35 66 42 31 59.4 37.1 27.7 9.1 7.5 6.1 14.8 19.4 21 — — — 2 Commercial & Professional Services Attractive 119 1.6 66 5 24 28 26 21 19.0 16.3 13.7 5.0 4.2 3.5 18.2 16.1 16.8 0.1 0.1 0.2 3 Commodity Chemicals
Asian Paints SELL 2,498 2,550 2 2,396 33.0 959 32 41 48 19 26 19 78 62 52 49.8 41.3 35.4 20.3 17.3 14.8 28 30 31 0.6 0.8 1.0 92 Berger Paints SELL 756 600 (21) 734 10.1 971 8 10 12 11 34 24 101 75 61 62.7 48.7 40.2 23.7 20.2 17.3 25 29 31 0.3 0.5 0.7 15 Kansai Nerolac REDUCE 570 610 7 307 4.2 539 10 12 15 1 21 26 57 47 37 36.8 31.1 25.0 7.4 6.8 6.2 13.6 15.1 17.3 0.5 0.7 0.9 3 Tata Chemicals ADD 745 540 (28) 190 2.6 255 17 33 38 (46) 94 15 43 22 19 11.8 8.5 7.5 1.4 1.4 1.3 3.4 6.3 6.9 0.8 1.6 1.8 70 Commodity Chemicals Neutral 3,627 49.9 4 33 20 76 57 47 42.6 34.2 29.1 11.3 10.2 9.1 14.9 17.8 19.2 0.5 0.8 0.9 180 Construction Materials ACC REDUCE 1,861 1,775 (5) 349 4.8 188 75 95 97 4 26 2 25 20 19 11.7 9.9 8.9 2.8 2.5 2.3 11.7 13.4 12.5 0.8 1.3 1.3 31 Ambuja Cements ADD 296 300 2 587 8.1 1,986 13 13 16 28 (3) 20 22 23 19 9.7 8.1 6.6 2.6 2.4 2.1 11.3 10.8 11.9 6.1 0.8 1.0 30 Dalmia Bharat BUY 1,543 1,500 (3) 288 4.0 187 40 48 68 189 20 41 38 32 23 11.3 9.9 8.0 2.7 2.5 2.2 7.0 8.0 10.3 — — — 4 Grasim Industries ADD 1,410 1,375 (2) 927 12.8 657 64 93 114 21 46 23 22 15 12 10.3 7.5 6.1 1.5 1.4 1.3 7.2 9.6 10.7 0.2 0.4 0.5 38 J K Cement ADD 2,794 2,300 (18) 216 3.0 77 87 127 140 35 47 10 32 22 20 15.3 12.0 11.2 6.0 4.8 3.9 20 24 22 0.4 0.4 0.4 5 JK Lakshmi Cement BUY 410 400 (2) 48 0.7 118 26 30 35 10 16 16 16 14 12 6.9 6.5 6.2 2.5 2.1 1.8 16.7 16.6 16.7 0.9 1.1 1.3 3 Orient Cement ADD 96 90 (7) 20 0.3 205 8 6 9 82 (18) 37 13 15 11 5.9 6.5 5.8 1.6 1.5 1.4 13.4 10.1 12.7 2.1 2.1 2.1 1 Shree Cement SELL 28,150 18,250 (35) 1,016 14.0 36 595 800 933 37 34 17 47 35 30 25.9 20.3 17.4 6.9 5.9 5.0 15.6 18.1 18.0 0.4 0.4 0.4 24 The Ramco Cements SELL 962 750 (22) 227 3.1 236 34 36 46 34 4 30 28 27 21 16.9 14.6 11.6 4.0 3.5 3.0 15.1 13.7 15.6 0.4 0.4 0.5 10 UltraTech Cement ADD 6,741 5,800 (14) 1,946 26.8 289 187 243 292 41 30 20 36 28 23 18.7 15.0 12.8 4.4 3.8 3.3 13.0 14.8 15.4 0.2 0.3 0.4 63 Construction Materials Attractive 5,624 77.4 32 27 20 30 24 20 14.2 11.3 9.5 3.2 2.8 2.5 10.4 11.8 12.6 0.9 0.5 0.5 209
Source: Company, Bloomberg, Kotak Institutional Equities estimates
74 KOTAK ECONOMIC RESEARCH
74
Kotak Institutional Equities: Valuation summary of KIE Universe stocks
75 Price (Rs) Fair Value Upside Mkt cap. O/S shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) ADVT-3M
Company Rating 26-Mar-21 (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) Consumer Durables & Apparel Crompton Greaves Consumer SELL 383 285 (26) 240 3.3 627 8 10 11 1 24 15 48 39 34 36 30 25 13.3 10.5 8.4 31 30 28 0.8 0.7 0.7 14 Havells India SELL 1,051 820 (22) 658 9.1 626 18 21 24 49 17 18 60 51 43 41 35 29 13.3 11.6 10.0 24 24 25 0.6 0.7 0.8 47 Page Industries REDUCE 30,140 28,500 (5) 336 4.6 11 308 504 594 0 63 18 98 60 51 63 41 34 37.3 30.6 25.8 40 56 55 0.8 1.2 1.4 20 Polycab ADD 1,385 1,300 (6) 207 2.8 149 49 57 63 (4) 16 10 28 24 22 18 16 14 4.6 4.0 3.5 17.7 17.8 16.8 0.5 0.6 0.6 9 TCNS Clothing Co. REDUCE 508 390 (23) 31 0.4 66 (7) 11 15 (162) 269 37 NM 45 33 103 16 12.5 5.1 4.4 3.7 NM 10.4 12.2 — — — 1 Voltas SELL 981 785 (20) 325 4.5 331 15 23 28 (10) 57 24 67 43 35 59 36 29 7.0 6.3 5.6 10.8 15.5 17.1 0.4 0.6 0.7 32 Whirlpool SELL 2,186 1,930 (12) 277 3.8 127 26 48 63 (30) 85 30 84 45 35 51 31 23 10.1 9.0 8.2 12.5 21 25 0.4 0.9 1.4 5 Consumer Durables & Apparel Cautious 2,074 28.6 1 38 19 60 44 37 41 30 25 10.3 8.9 17.1 20 21 0.6 0.7 128 Consumer Staples Bajaj Consumer Care ADD 265 300 13 39 0.5 148 15 16 18 22 7 8 17 16 15 13.9 12.6 11.2 5.1 4.4 3.9 32 29 27 3.0 3.0 3.4 6 Britannia Industries ADD 3,505 3,875 11 844 11.6 240 79 73 86 33 (6) 17 45 48 41 34 34 30 26.7 18.2 16.8 49 45 43 3.1 2.0 2.1 35 Colgate-Palmolive (India) ADD 1,537 1,680 9 418 5.8 272 35 38 43 24 9 13 44 40 35 28.6 26.3 23.4 25.5 24.4 23.2 59 62 67 2.2 2.4 2.7 14 Dabur India ADD 529 555 5 934 12.9 1,767 10 11 13 13 13 14 54 48 42 44 38 33 12.8 11.7 10.6 25 26 27 1.1 1.3 1.5 25 Godrej Consumer Products ADD 710 795 12 726 10.0 1,022 16 18 21 18 12 15 44 39 34 30 27 24 8.0 7.2 6.6 19.5 19.4 20 1.0 1.3 1.6 17 Hindustan Unilever ADD 2,307 2,625 14 5,421 74.6 2,343 34 41 49 9 20 20 68 57 47 47 39 33 12.6 12.3 11.8 31 22 25 1.5 1.6 2.0 78 ITC BUY 211 265 26 2,596 35.7 12,318 10 12 13 (10) 19 8 20 17 16 14.6 12.0 11.0 4.0 3.9 3.8 19.1 22 24 4.7 5.0 5.4 131 Jyothy Laboratories ADD 138 170 23 51 0.7 367 6 6 7 28 4 14 23 22 19 16.3 15.5 13.8 3.8 3.6 3.4 17.3 16.9 18.0 2.5 2.9 3.3 1 Marico ADD 402 450 12 519 7.1 1,290 9 10 11 12 12 11 44 39 36 32 28 25 15.6 14.3 13.1 37 38 38 1.7 2.0 2.2 14 Nestle India ADD 16,560 17,150 4 1,597 22.0 96 216 251 295 6 16 17 77 66 56 50 44 38 79.1 53.3 38.6 105 97 80 1.2 0.9 1.1 29 Tata Consumer Products ADD 628 610 (3) 579 8.0 922 10 12 14 25 19 21 63 53 44 36 32 27 4.0 3.8 3.6 6.5 7.4 8.5 0.6 0.7 0.8 36 United Breweries ADD 1,234 1,375 11 326 4.5 264 4 26 33 (74) 513 28 297 48 38 86 27 22 9.1 7.7 6.6 3.1 17.2 18.8 0.1 0.5 0.7 10 United Spirits ADD 554 680 23 403 5.5 727 6 14 17 (48) 136 22 93 39 32 43 24 21 9.2 7.5 6.4 10.3 21 21 — — 0.9 23 Varun Beverages BUY 992 1,125 13 286 3.9 289 14 30 37 (16) 119 24 72 33 27 26 16 14 8.1 6.7 5.4 11.5 22 22 0.1 0.3 0.3 5 Consumer Staples Attractive 14,738 202.9 2 21 14 45 38 33 32 26 23 9.1 8.5 8.0 20 23 24 2.0 2.0 2.3 425 Diversified Financials Aavas Financiers ADD 2,312 2,400 4 182 2.5 78 33 44 55 5 32 26 70 53 42 — — — — — — 11.6 13.5 14.7 0.0 0.0 0.0 4 Aditya Birla Capital ADD 122 145 19 295 4.1 2,414 4 6 8 4 36 43 29 21 15 — — — — — — 7.8 9.7 12.4 46.2 50.9 57.6 9 Bajaj Finance SELL 5,186 4,000 (23) 3,125 43.0 600 77 144 191 (13) 87 33 68 36 27 — — — 8.5 7.1 5.8 13.4 21 23 0.1 0.3 0.4 211 Bajaj Finserv ADD 9,460 10,050 6 1,505 20.7 159 276 437 566 30 58 29 34 22 17 — — — 4.8 4.1 3.5 14.0 20 22 0.1 0.1 0.1 81 Cholamandalam BUY 559 540 (3) 458 6.3 820 24 33 35 88 35 7 23 17 16 — — — 4.9 3.9 3.2 22 24 21 0.5 0.6 0.7 42 HDFC ADD 2,529 2,750 9 4,562 62.8 1,789 66 73 87 (36) 11 20 39 35 29 — — — 4.2 3.9 3.5 11.7 11.5 12.8 0.9 1.0 1.2 158 HDFC AMC SELL 2,860 2,175 (24) 609 8.4 213 63 72 82 7 15 13 45 40 35 — — — 13.1 11.4 10.0 31 31 30 1.2 1.4 1.6 14
IIFL Wealth ADD 1,205 1,250 4 106 1.5 90 38 45 58 61 17 30 32 27 21 — — — 4.0 3.8 3.5 12.1 14.6 17.9 6.6 2.4 2.9 1 India Daily Summary Daily Summary India L&T Finance Holdings ADD 95 105 11 235 3.2 2,005 5 10 12 (45) 104 27 20 10 8 — — — 1.2 1.1 1.0 6.3 11.9 13.5 1.5 1.6 1.6 28 LIC Housing Finance ADD 420 430 2 212 2.9 505 53 71 79 12 33 12 8 6 5 — — — 1.3 1.1 0.9 14.0 16.5 16.1 2.1 2.8 3.2 39 Mahindra & Mahindra Financial BUY 208 195 (6) 256 3.5 1,232 8 14 18 (49) 89 25 28 15 12 — — — 1.8 1.7 1.5 7.0 11.0 12.6 0.5 1.4 1.7 29 Muthoot Finance REDUCE 1,236 1,250 1 496 6.8 401 90 106 112 20 17 6 14 12 11 — — — 3.5 2.8 2.4 28 27 23 1.5 1.7 1.8 32 Shriram City Union Finance BUY 1,370 1,500 9 90 1.2 66 145 180 193 (5) 24 7 9 8 7 — — — 1.2 1.0 0.9 12.5 13.9 13.3 1.4 2.0 2.1 1 Shriram Transport BUY 1,432 1,525 6 362 5.0 253 103 134 161 (7) 30 20 14 11 9 — — — 1.7 1.5 1.3 13.1 14.7 15.5 1.1 1.4 1.7 68 Diversified Financials Attractive 12,643 174.0 (9) 36 19 33 24 20 4.0 3.5 3.2 12.2 14.6 15.8 0.7 0.8 0.9 725
Source: Company, Bloomberg, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES EQUITIES INSTITUTIONAL KOTAK
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March 30, March2021 30,
RESEARCH
KOTAK ECONOMIC RESEARCH 75
Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Price (Rs) Fair Value Upside Mkt cap. O/S shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) ADVT-3M Company Rating 26-Mar-21 (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 Electric Utilities
CESC BUY 603 815 35 80 1.1 133 96 106 117 (3) 11 10 6 6 5 5.1 4.2 3.7 0.6 0.6 0.5 11.2 10.3 10.4 7.5 2.3 2.7 6 Daily Summary DailySummary JSW Energy REDUCE 88 70 (20) 145 2.0 1,640 6 6 7 (11) 0 24 16 16 12 7.4 6.6 6.0 1.1 1.1 1.0 7.6 7.1 8.2 — — — 6 NHPC ADD 23 27 16 233 3.2 10,045 4 3 4 26 (2) 1 7 7 7 10.0 9.3 8.8 0.7 0.7 0.7 11.1 10.4 10.0 8.5 8.5 8.6 3 NTPC BUY 104 125 20 1,010 13.9 9,697 15 15 17 32 4 8 7 7 6 8.5 6.5 5.4 0.8 0.8 0.7 12.2 11.8 11.8 3.8 4.4 4.8 44 Power Grid BUY 214 240 12 1,118 15.4 5,232 24 27 28 21 9 5 9 8 8 7.0 6.3 5.7 1.6 1.5 1.3 19.0 19.0 18.1 5.7 6.2 6.5 41 Tata Power ADD 104 95 (8) 332 4.6 3,196 4 5 6 (20) 46 12 29 20 18 9.3 9.4 8.8 1.5 1.4 1.3 5.7 7.3 7.6 — — — 73 Electric Utilities Attractive 2,917 40.2 21 7 7 9 8 8 1.1 1.0 0.9 12.5 12.4 12.2 4.4 4.6 4.9 175 Fertilizers & Agricultural Chemicals Bayer Cropscience SELL 5,000 4,250 (15) 225 3.1 45 126 158 179 (2) 25 13 40 32 28 27 22 19 7.7 6.4 5.4 21 22 21 0.5 0.6 0.7 2 Dhanuka Agritech SELL 688 680 (1) 32 0.4 48 43 41 45 43 (3) 10 16 17 15 12.0 11.9 10.4 3.8 3.3 2.9 26 21 20 1.5 1.8 2.3 1 Godrej Agrovet SELL 492 455 (8) 94 1.3 192 15 18 21 29 24 15 33 27 23 19 15 13 3.9 3.5 3.1 12.2 13.7 14.2 1.0 1.3 1.5 1 PI Industries SELL 2,266 1,825 (19) 344 4.7 148 51 61 73 53 20 20 45 37 31 31 25 21 6.4 5.7 5.0 19.1 16.5 17.2 0.3 0.5 0.6 11
Rallis India ADD 264 310 17 51 0.7 195 12 15 18 30 26 21 22 18 15 15.9 12.5 10.3 3.2 2.8 2.4 15.3 16.9 17.8 1.0 1.1 1.3 3 -
UPL SELL 587 430 (27) 449 6.2 765 34 39 43 46 15 10 17 15 14 8.5 7.7 6.9 2.5 2.2 2.0 15.0 15.4 15.2 1.5 1.7 1.9 75 March2021 30, Fertilizers & Agricultural Chemicals Cautious 1,195 16.5 38 18 13 26 22 19 12.7 11.2 10.0 3.8 3.4 3.0 14.8 15.4 15.3 0.9 1.1 1.3 94 Gas Utilities GAIL (India) BUY 133 160 21 598 8.2 4,510 10 12 12 (24) 19 4 13 11 11 10.5 8.2 7.5 1.3 1.2 1.1 10.0 11.1 10.9 3.0 3.8 4.5 52
GSPL SELL 264 200 (24) 149 2.1 564 13 12 8 (23) (11) (32) 20 22 33 9.0 9.6 12.9 2.0 1.9 1.8 10.6 8.7 5.6 0.7 0.9 0.8 5 Indraprastha Gas ADD 504 575 14 353 4.9 700 16 23 26 (4) 43 11 31 22 20 22.1 15.8 13.9 6.0 5.1 4.4 21 25 24 0.6 1.0 1.4 27 Mahanagar Gas BUY 1,138 1,350 19 112 1.5 99 64 98 104 (14) 52 6 18 12 11 11.1 7.3 6.5 3.4 2.9 2.5 20 27 24 2.2 3.4 4.1 14 Petronet LNG BUY 224 300 34 336 4.6 1,500 20 21 23 16 4 9 11 11 10 6.1 5.8 5.4 2.9 2.7 2.6 27 26 28 6.9 7.6 8.8 18 Gas Utilities Attractive 1,548 21.3 (12) 17 5 15 13 13 10.1 8.4 7.8 2.1 1.9 1.8 13.5 14.6 14.3 3.0 3.7 4.3 117 Health Care Services Apollo Hospitals ADD 2,868 2,860 (0) 412 5.7 144 5 48 65 (71) 785 36 531 60 44 37.8 22.8 19.0 9.1 8.3 7.5 2.0 14.4 17.8 0.1 0.7 0.9 46
Aster DM Healthcare BUY 133 220 66 66 0.9 500 3 10 12 (52) 245 21 47 14 11 8.4 5.7 5.0 2.0 1.7 1.5 4.3 13.6 14.5 — — — 0 Dr Lal Pathlabs SELL 2,590 1,520 (41) 216 3.0 83 33 40 43 22 23 7 79 64 60 49.6 39.9 37.1 18.3 15.8 13.8 25 26 25 0.6 0.7 0.8 8 HCG BUY 185 175 (6) 23 0.3 143 (8) (2) (2) 30 71 21 NM NM NM 18.1 10.4 9.0 2.7 2.8 2.9 NM NM NM — — — 0 Metropolis Healthcare SELL 2,088 1,510 (28) 107 1.5 51 36 41 46 20 14 11 58 51 46 36.2 30.3 26.8 16.5 13.7 11.5 31 30 27 0.5 0.6 0.7 3 Narayana Hrudayalaya BUY 384 540 41 78 1.1 204 (3) 10 13 (152) 421 31 NM 40 30 55.1 15.2 12.6 7.3 6.2 5.1 NM 16.8 18.4 — — — 2 Health Care Services Attractive 903 12.4 (47) 281 25 182 48 38 29.1 18.4 15.9 7.6 6.9 6.1 4.2 14.4 15.9 0.2 0.5 0.7 60 Hotels & Restaurants Jubilant Foodworks BUY 2,888 3,150 9 381 5.2 132 17 43 54 (26) 144 26 165 68 54 46.8 29.3 24.5 30.1 21.8 16.9 19.2 37 36 0.2 0.5 0.6 38 Lemon Tree Hotels REDUCE 37 39 6 29 0.4 790 (2) (0) 1 (1,176) 72 237 NM NM 62 69.1 33.0 12.8 4.1 4.0 3.8 NM NM 6.3 — (1.6) (0.1) 1 Hotels & Restaurants Attractive 410 5.6 (64) 386 44 377 78 54 48.7 29.7 22.1 20.8 16.6 13.5 5.5 21 25 0.2 0.3 0.6 39
Source: Company, Bloomberg, Kotak Institutional Equities estimates
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Kotak Institutional Equities: Valuation summary of KIE Universe stocks
77 Price (Rs) Fair Value Upside Mkt cap. O/S shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) ADVT-3M Company Rating 26-Mar-21 (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)
Insurance HDFC Life Insurance ADD 672 705 5 1,358 18.7 2,010 8 10 12 18 27 24 89 70 57 — — — 17.6 15.8 14.1 21 24 26 0.3 0.4 0.4 35 ICICI Lombard SELL 1,398 1,075 (23) 636 8.7 454 33 34 38 26 3 13 42 41 36 — — — 8.5 7.4 6.3 22 19.9 18.8 0.2 0.4 0.5 16 ICICI Prudential Life BUY 432 560 30 621 8.5 1,436 9 11 13 16 29 16 50 39 34 — — — 7.3 6.3 5.5 15.4 17.4 17.5 0.3 0.4 0.5 19 Max Financial Services BUY 863 1,000 16 298 4.1 343 10 27 16 (6) 180 (40) 90 32 54 — — — — — — 13.5 38 17.5 0.1 0.9 0.4 19 SBI Life Insurance BUY 870 1,250 44 870 12.0 1,001 13 16 19 (7) 23 15 66 54 47 — — — 9.6 8.3 7.3 15.5 16.6 16.6 0.2 0.3 0.3 45 Insurance Attractive 3,782 52.1 13 33 9 64 48 44 10.7 8.6 8.0 16.7 17.9 18.1 0.2 0.3 0.3 134 Internet Software & Services Info Edge SELL 4,467 3,170 (29) 575 7.9 128.3 22 43 53 (19) 98 23 205 104 84 176.2 96.7 76.7 12.7 11.6 10.5 8.0 11.7 13.1 0.1 0.2 0.3 61 Just Dial SELL 862 570 (34) 53 0.7 61.8 27 30 36 (35) 9 20 31 29 24 24.2 22.7 19.5 4.3 3.7 3.2 13.4 13.9 14.4 — — — 30 Internet Software & Services Cautious 629 8.7 (25) 64 22 140 85 70 122.9 79.6 64.8 10.9 9.9 8.9 7.8 11.6 12.7 0.1 0.2 0.3 92 IT Services HCL Technologies ADD 960 1,120 17 2,605 35.9 2,716 50 53 58 21 7 10 19 18 17 12.2 11.1 9.8 4.3 3.7 3.1 25 22 20 1.1 1.4 1.4 95 Infosys BUY 1,339 1,530 14 5,703 78.5 4,250 46 52 60 17 14 15 29 26 22 19.5 17.2 15.0 7.7 6.8 6.1 28 28 29 1.9 2.2 2.6 160 L&T Infotech REDUCE 3,960 3,810 (4) 692 9.5 176 108 128 151 25 19 17 37 31 26 24.6 21.9 18.8 10.5 8.5 7.0 32 31 29 0.8 0.9 1.0 15 L&T Technology Services ADD 2,556 2,700 6 268 3.7 106 64 89 106 (18) 39 20 40 29 24 25.1 18.9 15.7 8.3 6.9 5.8 22 26 26 0.6 0.9 1.0 11 Mindtree SELL 1,987 1,410 (29) 327 4.5 165 67 76 82 74 15 7 30 26 24 19.4 17.5 16.1 8.5 6.9 5.8 31 29 26 1.0 1.2 1.2 27 Mphasis REDUCE 1,640 1,480 (10) 307 4.2 187 66 76 85 5 14 12 25 22 19 16.1 14.0 12.3 4.8 4.3 3.8 20 21 21 2.1 2.1 2.1 10 TCS REDUCE 3,062 3,070 0 11,326 155.9 3,744 89 106 119 4 19 12 34 29 26 23.3 19.9 17.9 12.6 10.6 9.8 38 40 40 1.0 2.1 3.1 162 Tech Mahindra BUY 990 1,135 15 862 11.9 880 52 60 68 13 16 13 19 16 15 11.3 9.8 8.4 3.6 3.2 2.9 19.8 21 21 2.2 2.4 2.6 60 Wipro ADD 406 450 11 2,223 30.6 5,662 19 19 22 12 3 16 22 21 18 13.5 12.5 10.7 4.3 3.6 3.2 19.3 18.4 18.5 0.5 1.2 1.2 96 IT Services Attractive 24,314 334.7 11 13 13 28 25 22 18.7 16.4 14.5 7.5 6.5 5.8 27 26 26 1.2 1.9 2.5 636 Media DB Corp. REDUCE 90 81 (10) 16 0.2 175 5 14 14 (66) 167 1 17 6 6 5.6 2.8 3.0 0.9 0.9 0.9 5.4 14.3 14.6 2.2 13.4 14.5 1 Jagran Prakashan REDUCE 59 37 (37) 17 0.2 281 4 7 8 (44) 87 NA 15 8 NA 4.1 2.7 NA 0.8 0.8 NA 5.7 10.3 11.5 3.4 8.5 8.5 1 PVR BUY 1,221 1,650 35 74 1.0 55 (93) 40 60 (420) 143 53 NM 31 20 (21.0) 11.9 9.2 3.2 2.9 2.6 NM 10.0 13.7 (0.8) 0.3 0.5 34 Sun TV Network REDUCE 453 465 3 179 2.5 394 38 40 42 7 7 5 12 11 11 8.2 7.4 7.0 3.0 2.9 2.7 26 26 26 5.5 6.1 6.6 23 Zee Entertainment Enterprises REDUCE 200 240 20 192 2.6 960 12 17 18 8 38 11 17 12 11 9.9 7.2 6.2 1.9 1.7 1.6 12.0 15.1 15.1 1.7 2.0 2.2 58 Media Cautious 477 6.6 (24) 65 11 20 12 11 11.8 7.2 6.4 2.2 2.0 1.9 10.8 16.5 16.9 2.9 3.9 4.2 116 Metals & Mining Hindalco Industries BUY 326 400 23 733 10.1 2,220 27 35 37 55 27 4 12 9 9 6.8 6.0 5.4 1.1 1.0 0.9 10.0 11.6 10.9 0.9 1.2 1.5 72 Hindustan Zinc BUY 277 335 21 1,170 16.1 4,225 19 23 24 17 23 3 15 12 12 9.0 7.1 6.9 3.6 3.6 3.6 22 30 31 7.7 8.3 8.6 8 Jindal Steel and Power BUY 324 380 17 330 4.5 1,020 58 36 36 863 (38) (2) 6 9 9 4.0 4.5 4.4 0.9 0.8 0.7 17.2 9.5 8.6 — — — 46 JSW Steel ADD 444 415 (7) 1,073 14.8 2,402 30 29 35 201 (5) 22 15 15 13 8.0 7.4 6.3 2.5 2.1 1.8 18.2 14.8 15.7 0.5 0.5 0.5 45
National Aluminium Co. SELL 54 35 (35) 100 1.4 1,866 3 3 3 362 (13) 5 16 18 17 6.6 7.3 7.8 1.0 1.0 1.0 6.4 5.6 5.7 0.0 2.8 2.9 21 India Daily Summary Daily Summary India NMDC REDUCE 127 110 (13) 372 5.1 2,931 20 14 8 34 (28) (40) 6 9 15 6.0 11.4 19.9 1.2 1.1 1.1 19.8 13.2 7.5 3.9 5.6 3.3 22 Tata Steel BUY 765 875 14 877 12.1 1,204 84 93 92 139 10 (1) 9 8 8 6.1 5.5 5.6 1.2 1.0 0.9 13.5 13.4 11.8 2.4 2.4 2.2 206 Vedanta REDUCE 227 180 (21) 843 11.6 3,717 24 25 26 262 4 7 10 9 9 4.8 4.2 3.8 1.6 1.5 1.4 16.3 16.8 17.0 12.3 7.5 7.7 54 Metals & Mining Attractive 5,500 75.7 124 1 2 10 10 10 6.2 5.8 5.6 1.6 1.4 1.3 15.1 14.0 13.1 4.4 4.0 3.9 476
Source: Company, Bloomberg, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES EQUITIES INSTITUTIONAL KOTAK
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March 30, March2021 30,
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KOTAK ECONOMIC RESEARCH 77
Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Price (Rs) Fair Value Upside Mkt cap. O/S shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) ADVT-3mo Company Rating 26-Mar-21 (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 Oil, Gas & Consumable Fuels
BPCL BUY 425 475 12 923 12.7 1,967 47 38 40 349 (19) 5 9 11 11 7.4 8.9 8.0 2.2 2.0 1.9 26.3 19.2 18.4 5.0 4.5 4.8 84 Daily Summary DailySummary Coal India BUY 129 185 43 798 11.0 6,163 19 17 18 (31) (8) 4 7 8 7 6.4 6.1 5.4 2.5 2.7 2.8 36.2 34.7 38.1 15.4 15.4 15.4 39 HPCL BUY 230 260 13 341 4.7 1,499 57 34 35 700 (40) 4 4 7 6 5.5 7.8 7.1 1.0 0.9 0.8 26.7 13.8 13.2 5.0 5.2 6.2 26 IOCL BUY 91 115 26 856 11.8 9,181 19 15 15 592 (25) 6 5 6 6 4.7 5.2 5.0 0.8 0.8 0.7 18.1 12.6 12.5 8.7 7.2 7.7 43 Oil India SELL 119 85 (29) 129 1.8 1,084 0 8 9 (100) 8,787 13 1,275 14 13 10.0 6.5 6.3 0.5 0.5 0.5 0.0 3.6 4.0 2.9 2.8 3.2 3 ONGC SELL 103 90 (12) 1,291 17.8 12,580 8 14 15 (42) 85 4 13 7 7 4.7 3.4 3.1 0.5 0.5 0.5 4.2 7.5 7.4 2.4 5.3 5.7 52 Reliance Industries ADD 1,994 2,050 3 11,818 162.7 6,032 73 85 101 10 15 20 27 24 20 16.2 10.8 8.7 2.4 2.1 1.9 9.2 9.7 10.3 0.4 0.4 0.4 352 Oil, Gas & Consumable Fuels Attractive 16,157 222.4 35 8 12 16 15 13 9.7 7.7 6.7 1.7 1.5 1.4 10.4 10.0 10.4 2.1 2.2 2.3 601 Pharmaceuticals Aurobindo Pharma REDUCE 851 880 3 499 6.9 586 56 61 65 15 8 7 15 14 13 9.2 8.2 7.3 2.3 2.0 1.8 15.1 14.3 13.7 0.9 1.1 1.3 40 Biocon SELL 395 310 (22) 474 6.5 1,202 6 9 11 0 42 25 63 45 36 27.1 20.0 16.3 4.9 4.5 4.1 7.7 10.1 11.4 0.6 0.8 1.0 28 Cipla BUY 790 950 20 637 8.8 806 32 34 50 66 8 45 25 23 16 13.8 12.9 9.0 3.5 3.1 2.7 14.2 13.6 17.0 0.8 0.8 1.2 53
Divis Laboratories REDUCE 3,461 3,300 (5) 919 12.6 265 75 90 103 44 20 15 46 39 34 32.3 27.1 23.6 10.7 9.1 7.7 23.1 23.4 22.8 (0.8) (0.9) (1.0) 44 -
Dr Reddy's Laboratories SELL 4,400 4,300 (2) 732 10.1 166 157 194 258 20 24 33 28 23 17 16.2 12.8 9.7 4.3 3.7 3.1 15.3 16.4 18.3 0.6 0.7 0.7 74 March2021 30, Gland Pharma REDUCE 2,415 2,200 (9) 395 5.4 163 61 76 89 22 25 17 40 32 27 27.9 23.4 19.5 6.7 5.5 4.6 16.8 17.3 16.9 — — — - Laurus Labs REDUCE 355 340 (4) 190 2.6 536 19 19 24 287 5 22 19 18 15 13.3 11.9 9.5 6.9 5.0 3.7 35.9 27.4 25.1 — — — 16 Lupin BUY 980 1,180 20 445 6.1 450 25 41 52 14 66 26 39 24 19 16.0 11.2 8.9 3.3 2.9 2.6 8.3 12.3 13.6 0.4 0.6 0.8 40
Sun Pharmaceuticals ADD 587 635 8 1,408 19.4 2,406 25 24 29 48 (2) 19 24 24 20 15.2 13.6 11.6 3.0 2.7 2.4 12.6 11.8 12.0 0.4 0.8 1.0 70 Torrent Pharmaceuticals REDUCE 2,460 2,750 12 416 5.7 169 71 84 100 24 18 19 35 29 25 17.4 16.0 13.9 7.4 6.4 5.4 21.4 21.7 22.2 1.0 1.2 1.4 14 Pharmaceuticals Attractive 6,114 84.2 37 14 23 28 25 20 16.8 14.4 11.8 4.1 3.6 3.1 14.3 14.3 15.3 0.3 0.5 0.6 379 Real Estate Brigade Enterprises BUY 263 310 18 55 0.8 204 (4) 14 19 (158) 480 38 NM 19 14 22.9 7.5 6.7 2.5 2.3 2.0 NM 12.7 15.6 1.0 1.0 1.0 1 DLF REDUCE 281 245 (13) 695 9.6 2,475 5 7 9 298 48 28 60 40 31 47.2 40.7 34.1 2.0 1.9 1.8 3.4 4.8 6.0 0.7 0.7 0.7 75 Embassy Office Parks REIT ADD 325 380 17 308 4.2 948 10 11 13 2 12 15 32 29 25 19.4 14.9 13.1 1.1 1.2 1.3 3.8 4.0 4.9 6.1 7.9 9.1 5
Godrej Properties SELL 1,365 810 (41) 379 5.2 252 6 14 32 (48) 156 125 244 95 42 (467) 150.3 67.7 7.0 6.5 5.6 2.9 7.1 14.2 — — — 23 Mindspace REIT ADD 302 340 13 179 2.5 593 14 16 18 69 10 13 21 19 17 17.2 13.9 12.5 1.1 1.1 1.1 9.1 5.7 6.5 2.7 6.7 7.2 2 Oberoi Realty ADD 556 590 6 202 2.8 364 22 28 32 13 31 13 26 20 18 19.1 15.2 13.6 2.2 2.0 1.8 8.7 10.4 10.6 0.4 0.4 0.4 4 Phoenix Mills BUY 775 960 24 133 1.8 172 5 22 33 (78) 373 47 164 35 23 27.5 14.5 11.4 2.7 2.5 2.3 1.9 7.6 10.3 - 0.3 0.4 2 Prestige Estates Projects ADD 307 340 11 123 1.7 401 6 11 24 (41) 93 116 54 28 13 7.5 6.7 5.6 1.2 1.0 1.0 2.9 3.9 7.7 0.5 0.5 0.5 3 Sobha BUY 441 480 9 42 0.6 95 11 38 54 (65) 259 43 42 12 8 7.4 5.0 4.2 1.7 1.5 1.3 4.1 13.8 17.4 1.6 1.6 1.6 2 Sunteck Realty REDUCE 293 345 18 43 0.6 140 8 19 15 9 148 (21) 37 15 19 29.8 12.2 15.3 1.4 1.3 1.2 3.7 8.6 6.4 0.3 0.3 0.3 1 Real Estate Attractive 2,160 29.7 54 58 33 50 31 24 25.0 17.7 14.7 1.9 1.8 1.7 3.7 5.7 7.4 1.4 2.1 2.3 118 Retailing Aditya Birla Fashion and Retail BUY 207 250 21 191 2.6 915 (6) 3 4 (192) 152 39 NM 64 46 56.2 14.2 11.7 9.2 7.4 6.4 NM 13.0 14.9 — — — 9 Avenue Supermarts SELL 2,861 1,885 (34) 1,853 25.5 648 18 33 43 (15) 87 28 160 86 67 105 57 45 15.1 12.9 10.8 9.9 16.2 17.6 — — — 26 Titan Company ADD 1,506 1,625 8 1,337 18.4 888 10 23 29 (40) 132 25 150 65 52 81 41 33 18.3 15.1 12.5 12.8 25.7 26.5 0.2 0.4 0.5 46 Retailing Attractive 3,380 46.5 (44) 207 28 229 75 58 90 43 34 15.7 13.1 10.9 6.8 17.5 18.7 0.1 0.2 0.2 81
Source: Company, Bloomberg, Kotak Institutional Equities estimates
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Kotak Institutional Equities: Valuation summary of KIE Universe stocks
79 Price (Rs) Fair Value Upside Mkt cap. O/S shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) ADVT-3mo Company Rating 26-Mar-21 (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)
Speciality Chemicals Castrol India BUY 123 165 34 121 1.7 989 6 9 10 (28) 50 8 20 14 13 13.0 9.0 8.2 8.6 8.0 7.4 43.0 61.0 61.2 4.5 6.5 6.9 3 Pidilite Industries REDUCE 1,795 1,760 (2) 912 12.6 508 22 29 35 (5) 30 23 82 63 51 56 42 35 17.7 15.3 13.0 23.1 26.0 27.5 0.4 0.6 0.7 17 S H Kelkar and Company BUY 113 145 28 16 0.2 141 9 9 10 92 2 12 13 12 11 8.7 7.4 6.5 1.6 1.5 1.4 14.0 12.5 12.9 1.3 2.0 2.7 1 SRF ADD 5,288 5,600 6 313 4.3 58 186 225 288 35 21 28 28 24 18 16.6 14.2 11.5 4.6 4.0 3.3 18.7 18.3 19.6 0.3 0.4 0.4 14 Speciality Chemicals Attractive 1,363 18.8 2 30 21 47 36 30 29.2 23.0 19.2 9.6 8.3 7.1 20.6 23.1 23.8 0.7 1.1 1.2 35 Telecommunication Services Bharti Airtel BUY 523 710 36 2,874 39.6 5,456 (5) 12 22 NM NM NM NM 45 24 8.8 6.9 5.7 4.7 4.5 4.0 NM 10.4 18.1 1.1 1.1 1.1 192 Indus Towers ADD 240 250 4 648 8.9 2,695 18 18 19 20 (0) 6 13 13 13 5.3 5.0 4.8 4.4 4.2 4.0 34.0 31.9 32.4 9.6 6.7 6.7 22 Vodafone Idea RS 9 — — 264 3.6 28,735 (8) (6) (4) NM NM NM NM NM NM 10.5 8.0 6.6 (0.8) (0.6) (0.5) 176.3 47.4 25.7 — — — 63 Tata Communications BUY 1,118 1,200 7 319 4.4 285 48 55 64 23 13 17 23 21 18 9.6 8.5 7.4 NM 23.5 10.6 NM 245 83.4 0.4 0.5 0.6 11 Telecommunication Services Attractive 4,104 56.5 43 73 213 NM NM 66 8.6 7.0 5.9 9.9 11.4 12.1 NM NM 18.3 2.3 1.9 1.9 287 Transportation Adani Ports and SEZ ADD 702 840 20 1,426 19.6 2,112 22 34 39 (15) 53 15 32 21 18 20.6 13.4 11.2 5.1 3.6 3.1 16.9 20.2 18.3 0.5 0.6 0.6 109 Container Corp. SELL 590 455 (23) 359 4.9 609 12 16 20 (27) 27 29 48 38 29 25.9 21.4 17.1 3.5 3.4 3.2 7.4 9.1 11.4 1.1 1.4 1.9 28 Gateway Distriparks BUY 177 150 (15) 22 0.3 125 5 5 7 29 (12) 54 32 37 24 10.0 10.2 8.6 1.5 1.5 1.5 4.9 4.1 6.2 1.7 1.7 1.7 1 GMR Infrastructure BUY 24 26 7 146 2.0 6,036 (4) (1) (0) (23) 63 65 NM NM NM 83.6 18.4 13.0 (3.5) (3.1) (4.0) 66.3 18.3 7.4 — — — 9 Gujarat Pipavav Port BUY 96 120 25 46 0.6 483 5 7 8 (19) 36 14 20 14 13 9.1 7.6 6.6 2.2 2.2 2.3 11.4 15.5 17.7 4.8 6.5 7.3 1 InterGlobe Aviation BUY 1,613 2,100 30 621 8.5 383 (142) 66 127 (2,095) 147 91 NM 24 13 145.1 5.2 3.3 39.8 15.1 3.3 NM 90.1 74.6 — — — 31 Mahindra Logistics REDUCE 553 440 (20) 40 0.5 71 7 13 18 (20) 81 37 77 43 31 ------9.1 15.0 18.1 — — — 1 Transportation Attractive 2,661 36.6 (139) 636 41 NM 26 18 26.8 11.5 8.9 6.5 4.8 3.9 NM 18.6 21.2 0.5 0.6 0.7 181 KIE universe 153,271 2,110 34.1 30.1 19.5 28.7 22.1 18.5 13.9 11.3 9.8 3.2 2.9 2.6 11.2 13.1 14.2 1.3 1.5 1.7
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$)= 72.65
Source: Company, Bloomberg, Kotak Institutional Equities estimates India Daily Summary Daily Summary India
KOTAK INSTITUTIONAL EQUITIES EQUITIES INSTITUTIONAL KOTAK
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March 30, March2021 30,
RESEARCH
KOTAK ECONOMIC RESEARCH 79 India Daily Summary - March 30, 2021 of of the following trategic transaction As of December 31, 2020 n a merger or s any, noare longer in effect for this stock , if, fair value , 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 205 equity securities. luded
r r display is not or applicable. months. . The previous investment and rating
SELL 3.4% 21.0%
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) - 0.5% 14.6% 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 26.8% 3.9% 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 1.5% 37.6% 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.
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