Institutional Equity Research 15 May 2021

R Weekly Round Up 10th - 14th May 2021

What We Did 1. R Friday High Tea - IT Services - Expert Speaker Access - Conference Call

2. Automobile Sector - Monthly Quick View

3. R Weekly Technical

4. R Long Short - SBIN - Directional Long

5. R Long Short - SBILIFE - Directional Long Update - Book Profit

What We Saw & What We Heard - Company Quarterly Result Highlights & Conference Call Key Takeaways

1. 8. KEC International

2. 9. Larsen & Toubro

3. Cholamandalam 10.

4. Escorts 11. Prince Pipes & Fittings

5. HDFC 12. Sagar Cements

6. H.G. Infra Engineering 13. UltraTech Cement

7. Kalpataru Power 14.

We have made changes to our Recommendation and Target Price. Please refer to Page no. 30 at the end of the report. 1 R Friday High Tea - IT Services - Expert Speaker Access - Conference Call

We had a detailed discussion with Mr. Dinesh Goel (Partner, Siana Capital and former MD of Research Analyst: ISG) on May 14, 2021 to get some insights/trends of the Indian IT services industry. The key Suyog Kulkarni, CFA takeaways of our discussions are enumerated hereunder. Contact: (022) 41681371 / 9890966735 Email : [email protected] 1. Deal Environment Remains Strong; COVID Accelerated Transformation Demand: Currently, the demand environment remains quite strong. While trends such as automation, cloud migration and digital transformation were underway, COVID has accelerated Research Associate: technology adoption, as the enterprises now require engaging both the consumers and Chaitanya Panchmatia employees remotely. Typically, , telecom and retail verticals were early Contact: (022) 41681371 / 8080782900 adopters of digital technology. Now, the other industries are also aggressively adopting Email: [email protected] newer contactless technologies. Mr. Goel highlighted that technology intensity across industries/world will rise, going forward. It means the enterprises will have to spend more on technology and the very definition of ‘technology spend’ will get broader. Technology budgets will not only comprise of software applications and hardware, but also it will include launch of new service lines, consolidation of activities and cost optimization projects. Basically, technology will become front-end of all business verticals and the IT industry is likely to be the key beneficiary of this transformation. 2. Expect Strong Demand for Cloud Related Services: Mr. Goel envisages strong demand specially across cloud related services such as consulting, migration, re-architecture and integration of application to cloud. Entire cloud ecosystem is likely to witness strong demand. Large number of enterprises are still sitting on the fence with on-premise data centers, which will migrate to cloud in the coming years. There will be greater demand for automation, cyber security and data analytics services. According to Mr. Goel, the Indian IT industry has the potential to grow in the range of 10-15% over next few years. The leaders can grow at upper range of the industry growth, as they will benefit from market share gain. 3. Current Attrition Spike is Manageable: Mr. Goel attributed the current attrition spike to robust demand environment. Skilled workforce around cloud, cyber, full stack services and data science is in demand and the employers are trying to retain/attract new talent. This is not a new phenomenon, as the industry witnessed this even earlier. Ruling out any cause of concern for the large players, Mr. Goel expects the IT industry can handle it ably. 4. Impact of Second COVID Wave on Execution: Industry is well-prepared in terms of business continuity. Even last year, the metros were under lockdown and the people continued to work from home even after lockdown was lifted. Captives also operate in a similar environment, but some captives have transferred work onsite, which is critical for business operations as the western world is currently in a better pandemic situation with significant population have been vaccinated. Sub-contractors have gone up for most companies, which is more due to nature of demand and talent scarcity as opposed to travel restrictions. 5. Greater Acceptance of Remote Working Model: Lockdown forced the enterprises to adopt work from home model. Surprisingly, in post lockdown era also, several enterprises continued with 80-85% of workforce working remotely. Enterprises have highlighted increased productivity in remote working model. Mr. Goel highlighted greater acceptance of remote working model by the IT names and their end customers. 6. ER&D Spend is Underexploited – Offers Huge Opportunity: ER&D services is less matured compared to offshoring. Mr. Goel believes ER&D as segment is underexploited and has a huge growth potential. Despite lagging behind by few years, it witnesses growth trajectory like that of the IT industry. There is a great talent pool available In and the independent companies and divisions of large companies are also present in this segment. ER&D services is much more technical and it helps the company with vertical focus; for example, KPIT - a smaller ER&D firm, which is totally focused on automotive vertical. 7. Global Competitive Landscape: (1) Captives: Mr. Goel believes the captives are not a threat to IT industry, as they are the partners. Large enterprises should have both captives and third-party vendors in their IT ecosystem. Captives are here to stay. There is a room for both third-party vendors and captives to grow. (2) Hyperscalers: Their business model is different. They are not interested in competing with service providers. It might be possible that the hyperscalers are in some adjacent services because of their core offerings, which may have some competition with traditional system integrators (SI). Mr. Goel does not expect any overlap between SI and hyperscalers, as the focus of hyperscalers is different. They do not want to be the likes of TCS and . (3) Global Vendors: Other than large known global vendors, rest of the global vendors are losing ground to Indian IT names. (4) Consultants: They have limited capacity to compete with the Indian IT names in other than legacy consulting business. In a nutshell, other than Accenture, Capgemini and few others, there is limited global competition for the Indian IT names.

2 8. Technology Related Consultancy Business Makes Sense: Mr. Goel highlighted that since 2001, the Indian IT names have made 2-3 attempts to enter into consulting business. They acquired subsidiaries and hired people from consulting firm but that did not work out. The situation is bit different this time. In every US$50mn+ IT deal, the client generally expects some help on ‘what to do?’ than mere ‘how to do?’. Therefore, it makes sense for the IT names to acquire consulting firms, which are into technology-related consultancy.

9. Other Comments: f Mr. Goel believes that no other country can challenge India in terms of engineering talent pool. Thus, India will continue to dominate the global IT industry. f Though there is a decline in legacy IT spend, overall technology budgets are on the rise. Mr. Goel believes that this generational shift to newer technology occurs after few years. He does not see any concern, provided the IT names can manage to modernize their service offerings and maintain their market share. f Mr. Goel believes that DNA of product company is not same as services company. He believes that the Indian IT companies are good in stitching solutions, which are combination of both products and services. While the Indian IT companies have developed some products relating to IT services, they do not directly compete with the product companies. Rather, the IT names will need to partner with the product companies to stay relevant. f Overall, HCLT’s portfolio remains strong even though some products may not perform well for 1-2 quarters. f ’s new CEO has made multiple changes such as new acquisitions and appointment of regional leaders etc. As there were many people at same place for long time in Wipro, shakeout was needed to change cultural complacency of people and time will tell whether it will work.

Indian IT Industry – At a Glance US$ bn FY15 FY16 FY17 FY18 FY19 FY20 FY21 Indian IT Industry Market Size 132.6 142.4 154.4 167.0 177.0 191.0 194.0 YoY Growth (%) 12.3 7.4 8.4 8.2 6.0 7.9 1.6 Source: NASSCOM

3 Automobile Sector Institutional Equity Research

Monthly Quick View - Apr’21 | 12 May 2021

Beginning of COVID 2.0 Impact; MoM Volume Slides

As per the Society of Indian Automobile Manufacturers (SIAM), domestic auto sales volume CV Segment: The SIAM has stopped reporting monthly CV volume performance since (excluding CVs) de-grew by 32% MoM to 12,70,458 units in Apr’21. Notably, MoM decline beginning of FY21 due to unavailability of monthly CV volume data of select OEMs. It reports was witnessed across geographies including rural markets. Though retail sales volume is quarterly volume performance. Therefore, we analyse these data on quarterly basis only. anticipated to have been highly subdued due to COVID 2.0 led disruptions and lockdown Exports: Overall exports grew by 19% MoM to 5,20,289 units. PV exports rose by 5% MoM, (seasonality to some extent), wholesale volume was better with relatively lower MoM decline while 3W exports increased by 17% MoM. Motorcycle exports grew by 19% MoM in Apr’21. during the month. Overall inventory level for most segments increased by 1-1.5 weeks in Apr’21. Notably, MoM decline was witnessed across geographies including rural markets. COVID 2.0 Inventory: In PV segment, inventory increased at the company level, as production was 1% has deeper impact this time, as it spread its tentacles in rural areas too, which led to restricted higher than the sales volume. In 2W segment, the inventory increased at the company level, movements/partial lockdown in villages and most regions, which impacted retail sales as as the production was 6% higher than the sales volume. Factory inventories increased across well as wholesale dispatches. The 2W segment (being a price sensitive in nature) started OEMs due to restriction on dispatches to dealers amid lockdown in various states and existing witnessing slower traction since last 3 months due to increasing fuel prices. Retail demand got higher inventories with the dealers. impacted more in second fortnight of Apr’21 due to rising COVID-19 cases. Our View: Considering the ongoing COVID-led disruptions, we expect retail demand across Note: As Apr’20 witnessed zero sales across segments and OEMs, we have considered segments to witness continued pressure in the near-term. We expect subdued volume for MoM performance for meaningful analysis this time. next 1-2 months with likelihood of MoM decline in May’21 as well. Rural economy is severely impacted due to COVID second wave this time, which would take some more time to recover PV Segment: Overall PV volume declined by 10% MoM due to 11% MoM decline in UV sales due to limited medical support and slower vaccination drive. We expect this would considerably led by production stoppage by key OEMs amid restriction on commercial use of oxygen and impact 1QFY22 performance and lead to lower sequential profitability. Moreover, recent plant supply constraints of spare parts. While MPV volume remained flat on MoM basis, PC sales shutdown due to unavailability of oxygen would continue impacting production for the next decreased by 10% MoM in Apr’21. 1-2 months. However, we believe that with increasing vaccination and government’s various Scooter & Motorcycle Segment: Scooter and motorcycle sales de-grew by 34% MoM and initiatives to break the chain of COVID including temporary lockdown, situation would improve 33% MoM, respectively. Overall domestic 2W volume declined by 34% MoM. Moped sales from 2QFY22 onwards. Moreover, supply constraint for semiconductors and container de-grew by 42% MoM. Further, 2W production was 6% higher than the sales during the month. availability issue are expected to get resolved by that time. We expect M&HCV segment to witness strong >100% volume growth in FY22E. Long-term fundamentals remain intact 3W Segment: Domestic 3Ws sales decreased by 57% MoM to 13,728 units. 3W passenger for automobile sector. We prefer auto companies with stronger global presence at this carriers’ volume fell by 57% MoM, while 3W goods carriers’ sales declined by 57% MoM in juncture and and continue to remain our top picks. Apr’21. Research Analyst: Mitul Shah Research Associate: Sheryl Fernandes Contact: (022) 41681371 / 9869253554 Contact: (022) 41681371 / 8879415031 Email: [email protected] Email: [email protected] PLEASE CLICK HERE FOR DETAILED REPORT 4 4 R Weekly Technical

May 10, 2021

Broad Market Indices Sectoral Indices

Nifty Nifty Bank f The index breached its upper band of rising channel on week f The index took support at around its intermediate upper band ended 19th, Mar’21 and remained sideways for about a month. of the rising channel and after forming multiple bullish reversal f On week ended 23rd, of Apr’21, the index took support of its 20- patterns, it rose to 6-week high of 34,287-level. week EMA and bounced subsequently. f The key technical indicators on the short-term timeframe chart are f Major technical indicators on the short-term timeframe chart are positively poised. positively poised. f As per the current set-up, we believe the index will consolidate upwards and will move towards 36,000-level.

Nifty Financial Service Nifty Next 50 f The index reversed upwards from its 11-week low of 14,601-level f The index tested its lower band of the rising channel on week taking support of its lower band of rising channel. ended 16th and 23rd,of Apr’21 and bounced subsequently. f On week ended 30th,of Apr’21, the index rose to 16,298-level and f Major moving averages are sloping upwards. advanced gradually thereafter. f The index has potential to test its upper band of the rising channel, f This could take the index towards 16,298-level initially and which is placed at around 40,600-level. 17,000-level subsequently.

LIC Housing Finance – BUY - BUY Reco.Range: Rs425-415 | Target: Rs487 | Stop Loss: Rs390 Reco.Range: Rs250-255 | Target: Rs285 | Stop Loss: Rs234 f The stock witnessed breakout from its upper band of the falling f Over the past months, the stock is trading in a range of short and channel on 28th,of Apr’21 and remained sideways subsequently. term long averages with higher bottoms on weekly chart. f On Friday, the stock rose to one month high of Rs425 utilising prior f We expect a positive breakout from the current levels with consolidation. improvement in delivery volume and positive price performance. f Its RSI reversed upwards from its bull market support zone and f RSI is trading above the average line and we expect it to strengthen managed to surpass 50-mark convincingly. from the current levels confirming the up move.

Note: * Close of 7th, May’21 Source: www.nseindia.com and Reliance Research Technical Research Analyst: Vikas Jain Technical Research Analyst: Jatin Gohil Contact : 9324611393 Contact: 7498411546 Email : [email protected] Email: [email protected] PLEASE CLICK HERE FOR DETAILED REPORT 5 R Long Future Price (Rs)* 364.70 Short Recommended Range (Rs) 355-365 Target Price (Rs) 445 Stop Loss (Rs) 320 SBIN Potential Absolute Return 22.2% Directional Long Time Horizon 10 Weeks Fundamental Rating NOT COVERED

Date: 12 May 2021

f The stock has witnessed correction from its all-time high of Rs428 recorded in Feb’21. f The stock has completed its 38% retracement of the previous move (Rs149-428) near Rs321 and witnessed strong bounce. f Crossover of its short-term and medium-term averages on daily charts and strong volume reinforce our positive stance. f RSI, which is trading above its average line, indicates a strong up-move. f Therefore, we recommend directional long position with the target of Rs445 and stop loss of Rs320 on closing basis.

Technical Research Analyst: Vikas Jain Contact: 9324611393 Email : [email protected]

Source: Bloomberg & RSec Research; Note: * Near Month- Single Stock Future Price as 11th May 2021 PLEASE CLICK HERE FOR DETAILED REPORT 6 R Long Recommended Date 20-01-2021 Short Closure Date 11-05-2021 Recommended Range (Rs) 900 Target Price (Rs) 1,050 SBILIFE Stop Loss (Rs) 818 Directional Long Exit Price (Rs) 1010 Return 12.2% Fundamental Rating NOT COVERED Directional Long Update – Booked Profit

f The stock made a high of 1,049, almost near to our target price and witnessed corrective action over the past few days. f Multiple tops in the range of 1,020-1,050 levels near the resistance area indicate exhaustion of up move in short term from here. f So, we recommend to book profit at current levels of 1,010 generating a return of 12.2%.

Technical Research Analyst: Vikas Jain Contact: 9324611393 Email : [email protected]

Source: Bloomberg & RSec Research PLEASE CLICK HERE FOR DETAILED REPORT 7 Automobile Apollo Tyres (APTL IN; M Cap. - Rs.123bn; SELL; 2-Yr TP - Rs.195; CMP - Rs.208)

Representatives Present on the Call: Research Analyst: Mr. Gaurav Kumar, CFO; and other senior management representatives Mitul Shah Contact: (022) 41681371 / 9869253554 What We Saw – Quarterly Result – Key Highlights: Email: [email protected] 1. Apollo Tyre (APTL) delivered a decent operating performance in 4QFY21 with EBITDA margin coming in at 16.2% broadly in line with our estimate of 16.5%. Research Associate: Sheryl Fernandes 2. Consolidated revenue decreased by 3% QoQ (up 39% YoY) to Rs50.3bn vs. our estimate of Contact: (022) 41681371 / 8879415031 Rs46.3bn. Email: [email protected] 3. EBITDA margin came in at 16.2% (down 362bps QoQ and up 292bps YoY) due to higher RM cost, as RM/Sales ratio increased by 228bps YoY and 284bps QoQ. 4. Standalone revenue grew by 6% QoQ and 49% YoY to Rs36.3bn. 5. Consolidated EBITDA stood at Rs8.2bn (down 21% QoQ and up 70% YoY) vs. our estimate of Rs7.7bn due to improved operating leverage. 6. Consolidated adjusted PAT stood at Rs2.9bn (down 36% QoQ and up 270% YoY) vs. our estimate of Rs3bn due to higher interest outgo, increased tax rate and lower non-operating income. What We Heard – Conference Call - Key Takeaways: 1. India Operations – Quarterly & Annual Highlights: The company gained market share across categories. In FY21, it gained a market share to the tune of ~350bps to 21% in PCR/ Agri segment, while in truck segment its market share increased to 30% (up ~150bps YoY). During the quarter, the company witnessed ~12% QoQ rise in RM cost owing to which it hiked prices by ~4% during last 2 quarters. Effective tax rate (ETR) for India operations stood at ~31%. Other operating income was higher due to increased investment proportion of subsidy to the tune of ~Rs400mn.

2. Europe Operations – Quarterly & Annual Highlights: The UHP/UUHP (high-margin products) contributed to ~36% to APTL’s overall product-mix and helped the company to increase its market share to ~2.7%. Liquidity situation remains healthy on the back of lower capex, higher collection and efficient working capital management. Liquidity position was maintained despite funding the cost of specialization to the tune of ~€50mn of ~500 workers, who left the Dutch operations. Major benefit of this would be witnessed in FY22. ETR stood at ~25%. Its German subsidiary, Reifen reported €30mn revenue in 4QFY21 compared to €26mn in 4QFY20. Reifen reported €180mn revenue in FY21 as against €164mn in FY20. EBITDA for the quarter stood at €9mn.

3. Demand Outlook: Ramping up of the latest greenfield capacity in Andhra Pradesh (AP) will help the company to cater to incremental demand. The company expects its top-line to grow by ~20% in FY22E. Due to restructuring in Europe, APTL sees its top-line to be in the range of €750-800mn in the next 5 years.

4. Capacity & Utilization Levels: As per the management, both the operations (India and European) are running at the peak utilization levels currently. Post de-bottlenecking in Hungary, the PCR capacity would be increased to 5.5mn units by FY22-end from the current level of 4.5mn units. Due to shift in sourcing, the Dutch plant would now produce only 0.5mn PCR units in FY22E as against 3.7mn PCR units in FY20. Further, an additional ~3mn units would be sourced from India and Hungary. The TBB and PCR capacity stands at 450MT/day and 300MT/day (~50,000 tyres/day), respectively. Post capacity ramp-up in AP, TBR capacity would stand at 800MT/day (~14,500 tyres/day). Total India capacity stands at ~2,000MT/day including the new AP unit. By Mar’22, the AP plant would reach to a capacity of 15k/day PCR tyres and ~3K/day TBR tyres. On international side, Hungary would have a capacity of 5.5mn PCR units/annum (~17,000 tyres/day) in the next 2 years. Including 0.5mn units capacity of Dutch plant, APTL's total EU capacity would stand at 6mn units/annum. While on TBR front, the Hungary plant produces just ~450K tyres/annum.

8 5. RM Basket: The prices of natural rubber, synthetic rubber and carbon black stood at Rs140/kg, Rs135/kg and Rs75/kg, respectively in 4QFY21. The company expects this trend to continue and anticipates higher single-digit rise in RM cost in 1QFY22E. Notably, the natural rubber prices hover at an elevated level of Rs170/kg currently. 6. Capex & Debt: For FY22, APTL had earlier planed a total capex of Rs16bn for India operations, which has now been revised to Rs18bn to be used for completion of AP plant, various digitization initiatives and maintenance of other plants. FY22 maintenance capex is seen at ~Rs2-2.5bn and ~€20mn for India and European operations, respectively. On consolidated basis, APTL’s net debt fell to Rs43bn in FY21 from Rs60bn in FY20. Net debt/ EBITDA ratio stood at 1.5x in FY21 compared to 3.2x in FY20. On standalone basis, its gross debt stood at Rs50bn, while net debt stood at Rs36bn as of FY21-end vs. Rs48bn in FY20.

Our View: Looking ahead, we expect sizable volume pressure on replacement as well as OEM side to continue, which would impact its overall revenue. The second COVID wave led to plant shutdown by the OEMs and vendors have already started impacting tyre sales and production. We expect tough time for tyre industry in 1HFY22. Moreover, we believe intensifying competitive situation in tyre industry would continue to impact APTL’s profitability. We expect working capital debt to increase, once situation normalises and inventory as well as debtors’ days increases to normal level. Considering upward revision in capex and expected higher working capital, we expect increase in debt and interest outgo. APTL’s profitability and return ratios will be impacted over the next 2-3 years on account of capex-led high depreciation, lower utilization with new capacity addition and higher interest outgo. Therefore, we maintain our SELL rating on APTL with a 2-Year Target Price of Rs195.

9 BFSI Bandhan Bank (BANDHAN IN; M Cap. – Rs.452bn; NOT RATED; CMP - Rs.281)

Representatives Present on the Call: Research Analyst: Mr. Chandra Shekhar Ghosh, MD & CEO; Mr. Sudhin Choksey, ED; Mr. Sunil Samdani, CFO; Abhijit Tibrewal and Mr. Hiren Shah, Senior VP & Head (IR) Contact: (022) 41681371 / 9972584400 Email : [email protected] What We Saw – Quarterly Result – Key Highlights: 1. Bandhan Bank (Bandhan) reported Rs1bn PAT (down 84% QoQ and down 80% YoY) in Research Associate: 4QFY21 led by elevated provisioning cost of Rs15.9bn including write-offs of Rs19.3bn and Sripriya Konakanchi accelerated provisioning as well as interest reversal. Contact: (022) 41681371 / 9930111983 Email : [email protected] 2. NII declined by ~15% QoQ (up 5% YoY) due to interest reversal of Rs5.3bn on account of NPA recognition. The bank also provided for compound interest waiver of Rs130mn. Annualized NIM stood at 7.8% in FY21 compared to 8.1% in FY20. 3. Total deposit stood at ~Rs779bn (up 37% YoY and up ~10% QoQ). CASA deposit rose by 61% YoY, while CASA ratio improved to 43.4% (up 50bps QoQ). SA deposits grew by 65% YoY, while the bank’s SA cost is much higher than its peers. The bank lowered SA rate for minimum balance from 4% to 3% in 4QFY21. As the bank’s overall SA cost stands at 5.15%, there is still room for further downward revision in SA interest rates. 4. Loan portfolio (including on-book + off-book + TLRO investments) rose by 21% YoY (up 8% QoQ) supported by strong disbursement in Emerging Entrepreneurs Business (EEB) segment. Disbursement stood at Rs568bn in FY21 compared to Rs268bn in 4QFY21. EEB loan book grew by 26% YoY (up 10% QoQ). Mortgage segment grew by ~10% YoY in FY21 (up 2.5% QoQ). 5. GNPA declined to 6.8% (down 30bps QoQ on proforma basis), while NNPA deteriorated to 3.5% (up 110bps QoQ on proforma basis). GNPA in EEB, mortgage and commercial banking segments stood at 7.6%, 3.1% and 9.1%, respectively. Credit cost stood at Rs15.9bn (up ~49% QoQ and up 93% YoY). The bank made aggressive write-offs of Rs19.3bn (equivalent to 3.5% of MFI AUM and 2.5% of overall AUM). What We Heard – Conference Call - Key Takeaways: 1. The bank utilized its entire COVID provisioning of ~Rs27.4bn during the quarter. In terms of contingent buffer, it now carries additional standard asset provisioning of just 0.7% (Rs3.9bn) on its micro-banking portfolio. 2. It reported higher gross slippages of Rs22bn and Rs69bn in 4QFY21 and FY21 (6.5% of loans), respectively primarily due to elections in Assam/West Bengal and the first COVID wave. However, it made aggressive write offs, which somewhat moderated its NPA (6.8% in 4QFY21). 3. 14% of its NPA customers are still honouring full EMI, 64% of NPA customers are paying part EMIs and 22% have not paid at all. Its collection efficiency (CE) stood at 99.6% for new borrowers, who were sanctioned/disbursed loans in FY21. CE stood at 95% (excluding arrears but including NPAs and write-offs) in Mar’21. Despite election, CE in West Bengal and Assam stood at 95% (vs. 90% in Dec’20 and 89% in Jan’21) and 83% (vs. 88% in Dec’20, 78% in Jan’21), respectively. CE in other states stood at 97%. However, CE was down by 3-4% in Apr’21 due to second COVID wave. 4. The bank expects 72% of its EEB NPA customers to make regular payments in future. As they are currently paying either full or part payments, the bank does not see any risk in its EEB portfolio. 5. Out of the total write-offs, Rs7.7bn was from Assam and Rs6.7bn from West Bengal.

10 BFSI Cholamandalam (CIFC IN; M Cap - Rs.432bn; BUY; 2-Yr Target Price – Rs.662; CMP - Rs.527)

Representatives Present on the Call: Research Analyst: Mr. Vellayan Subbiah, MD; Mr. Arul Selvan, Executive VP & CFO; Mr. Ravindra Kundu, ED; and Abhijit Tibrewal other senior management. Contact: (022) 41681371 / 9972584400 Email : [email protected] What We Saw – Quarterly Result – Key Highlights: 1. Cholamandalam Investment & Finance Company (CIFC) reported Rs2.4bn PAT in 4QFY21 Research Associate: (down ~41% QoQ) largely on account of higher-than-estimated operating expenses (up Sripriya Konakanchi 28% YoY and up 39% QoQ) and elevated credit cost. Contact: (022) 41681371 / 9930111983 Email : [email protected] 2. Credit cost stood at Rs5bn (~2.9% annualized) and was up 13% QoQ. This included additional COVID provisioning of ~Rs3.5bn (~50bps of AUM) in 4QFY21, with which the aggregate COVID provisioning rose to Rs11bn (~157bps of AUM). 3. Reported AUM stood at ~Rs700bn (up ~16% YoY and up 2% QoQ). Within this, vehicle, LAP and home loan rose by 14% YoY, 14% YoY and 39% YoY, respectively. 4. Disbursement stood at Rs80.7bn in 4QFY21 (up ~43% YoY and 2% QoQ). Vehicle disbursement stood at Rs61.5bn (up 1% QoQ). 5. Net Interest Income (NII) stood at Rs13.4bn (up 32% YoY and down 2% QoQ). Fee income rose by 24% QoQ despite no major sequential growth in disbursement. NIM stood at 7.6% in FY21 (up 80bps YoY). 6. Other expenses increased by 16% QoQ owing to CSR spend during last two quarters of the fiscal. Further, concession on branch rentals, which reverted to normal level in 4QFY21, led to marginal up-tick in rental expenses. 7. CIFC reported Gross Stage 3 and Net Stage 3 of 4% (up 20bps QoQ) and 2.2% (up ~10bps QoQ), respectively. 8. Total CAR stood at 19.1% with Tier-I at 15.1%. vs. the minimum regulatory requirement of 15% and 10%, respectively. 9. The company partnered with Zoho, , Razorpay and Ujjivan to form a consortium “Vishwakarma Payments” and jointly applied to the RBI for an NUE (New Umbrella Entity) licence for retail payments. 10. The Board of Directors has recommended a final dividend of Rs0.7/share in addition to interim dividend of Rs1.3/share declared earlier taking the total dividend to Rs2/share for FY21. What We Heard – Conference Call - Key Takeaways: 1. Restructuring: Total restructured pool stood at Rs14.6bn (Rs2.8bn for individuals and Rs11.8bn for MSMEs). Within vehicle finance segment, restructured pool stood at Rs11.6bn, while restructuring stood at Rs3bn in the remaining product segments. CIFC has consciously kept the restructured pool in Stage 2, so that it can monitor them closely and can make higher provisioning on restructured pool. CIFC maintains a PCR of ~7% (below 10% mandated for banks by the RBI) on individual restructured loans. 2. Collection Efficiency (CE) & Impact on Collection due to Second COVID Wave: • Till April 10, 2021, collection was very normal, as lockdown was in force only in few states. However, owing to wide-spread lockdown across key states, CIFC’s employees were not able to go out and collect EMI from the customers. • Vehicle Finance: a. Billing stood at Rs24.7bn in Mar’21, out of which CIFC collected Rs21.2bn, translating into a CE of 115%. However, overall CE stood at 62% in Mar'21. b. Billing stood at Rs21.2bn in Apr'21, out of which CIFC collected Rs19.8bn, translating into CE of 93%. Overall CE stood at 60% in Apr'21. 3. ECLGS: In FY21, CIFC disbursed ~Rs8bn under ECLGS in LAP segment. Cumulative ECLGS disbursement (including vehicle finance, LAP and home loan) stood at Rs20bn.

11 4. Employee expenses sharply increased by 68% YoY and 75% QoQ due to the following. a. Promotion and increment were rolled out in Nov-Dec'20 with effect from Jan'21. b. Incentives (for sales and collection team) were rolled out in the later part of 3QFY21. Since CIFC could meet its targets, it awarded incentives in 4QFY21. As this is just a one-off spike, we expect CIFC’s employee expenses to revert to a quarterly run-rate of ~Rs1.85bn in FY22E. 5. Reported interest income declined by 2% QoQ. This included reversal of compound interest worth Rs350mn on loans >Rs20mn as per the SC’s order. 6. Write-offs (including repo loss and loss on settlements) stood at ~Rs600mn. 7. Total ECL provisioning stood at 3.58%, as against the pre-COVID level of 1.75%. 8. As per the management, Apr’21 and May’21 will be impacted due to the second COVID wave and recovery can be expected only by Jun’21. Our View: Making additional COVID provisioning of Rs3.5bn instead of utilizing the COVID provisioning made earlier suggests that the management believes that the Chola franchise (and the broader vehicle financiers in general) will be more vulnerable to the second COVID wave compared to the first wave. Despite near-term headwinds on disbursement and collection front, we remain convinced that CIFC has the wherewithal to navigate this pandemic better than its peers. The second COVID wave will lead to higher-than-estimated credit cost, which would still be much lower than its vehicle finance peers. CIFC continues to deliver best-in- class asset quality led by superior underwriting and risk-selection along with a robust collection framework. Its strategy of promptly adjusting product-mix across cycles will ensure better asset quality. Over the period, CIFC has improved its OEM tie-ups, which has helped it to gain market share. Its LAP segment witnessed major improvement in sourcing, underwriting and collection. We have BUY rating on CIFC with a 2-Year Target Price of Rs662, which implies 26% upside from the current levels.

12 Automobile Escorts (ESC IN; M Cap. – Rs.157bn; BUY; 2-Yr TP - Rs.1,820; CMP - Rs.1,164)

Representatives Present on the Call: Research Analyst: Mr. Shailendra Agarwal, ED; Mr. Bharat Mandan, Group CFO & Corporate Head; Mr. Shenu Mitul Shah Agarwal, CEO (Agri Machinery); Mr. Ajay Mandahr, CEO (Construction Equipment); and Mr. Contact: (022) 41681371 / 9869253554 Dipankar Ghosh, CEO (Railway Equipment Division) Email: [email protected] What We Saw – Quarterly Result – Key Highlights: Research Associate: 1. Escorts (ESC) reported lower-than-expected performance in 4QFY21 with EBITDA margin Sheryl Fernandes coming in at 15.6% vs. our estimate of 17.3%. Contact: (022) 41681371 / 8879415031 Email: [email protected] 2. Revenue increased by 10% QoQ and 60% YoY to Rs22.1bn (vs. our estimate of Rs22.3bn) supported by higher realization in tractors and increased construction equipment volume. Tractor volume grew by 3% QoQ and 62% YoY, while construction equipment volume surged by 30% QoQ and 63% YoY (vs. our expectation of 40% YoY growth).

3. EBITDA decreased by 5% QoQ (up 77% YoY) to Rs3.4bn vs. our estimate of Rs3.8bn due to higher RM cost and increased employee cost. EBITDA margin contracted by 245bps QoQ (up 151bps YoY) to 15.6% due to negative operating leverage.

4. Adjusted PAT de-grew by 3% QoQ (up 93% YoY) to Rs2.7bn vs. our estimate of Rs3bn due to lower operating margin.

5. The Board of Directors has recommended a total dividend of 75% (Rs7.5/share), including one-time platinum jubilee year special dividend of 25% (Rs2.5/share). What We Heard – Conference Call - Key Takeaways:

1. Agri Machinery Business: • The company recorded highest ever quarterly tractor volume in 4QFY21. For the first time, the company crossed the 100K-milestone in domestic market during the fiscal. • The management indicated healthy inventory levels at industry level at the end of 4QFY21 vis-à-vis 4QFY20. • In last 4 months, Escorts regained its market share of ~13%, which it lost due to supply constraints during previous 3 quarters. In domestic market, its market share stood at 11.3% in FY21 from 11.6% in FY20. • >40HP tractors contributed ~62% to overall sales in FY21 as against 51% in FY20. Its market share in 30-40Hp tractors reduced due to slowdown in commercial activities, whereas it gained market share in 40-50HP tractors due to high agri activities during the fiscal. The management indicated that this would reverse, going forward once commercial activities come back to normalcy. • Non-agri sales normally contribute ~32-35% to overall sales, which declined to ~25- 30% in FY21. Subsidized sales in FY21 stood at <50k units for the industry, which is expected to remain low due to shift in focus by the government towards COVID related spending. • The company hiked the prices in Nov’20 and Apr’21 by ~2% and ~3%, respectively. It witnessed cost escalation to the tune of ~8-10% in RM prices during 2HFY21. The management expects to see some amount of commodity pressure in 1QFY22 as well. • The company commenced its sales through Kubota network from FY21-end. It expects the volume to see significant growth from next year onwards once it forays into newer markets. The company has already forayed into 4 markets. • Its total dealer count stood at ~1,100 as of Mar’21. Due to lockdown, ~2/3 of its dealers are either closed or open for limited hours, which would impact its near-term sales. • The management indicated that the average replacement cycle for tractors is ~7-8 years. At lower end, it would be ~4 years in some cases, while in few regions it would be >12 years. • Overall sentiment remains positive with favourable industry dynamics. The management expects domestic tractor industry to grow by mid-single-digit in FY22E on the back of uniform availability of water, better retail financing, restart of commercial- demand, record crop production along with higher MSPs.

13 2. Construction Equipment Segment: • The company recorded its highest ever quarterly volume in the construction equipment also. • Crane demand remained flat in FY21 due to COVID-led disruptions in 1HFY21. Pick & Carry crane industry shifted more towards price-sensitive hydra segment, which accounted for ~58% of total crane volume in FY21 as against 47% in FY20. • The company expects this industry to grow in high-single-digit in FY22E led by vaccination drive and steady pick-up in commercial activities. 3. Railway Equipment Business: • During the quarter, the company executed 53% of total orders from new product category compared to 69% in the previous quarter. • Segmental EBIT margin was impacted in 4QFY21 due to unfavourable product-mix and one-off provisioning towards GST rate differential in respect of orders executed post Sept’19. • Segmental order book stood at ~Rs3.4bn as of Mar’21-end, which will be executed in next 6~8 months. • The company expects segmental revenue to grow by low double-digit in FY22E. 4. Capex & Debt: The company plans to spend a total capex of Rs3-3.3bn in FY22E. The company plans to increase its in-house capacity from 120k to 150K units, while additional ~30k capacity would come from Kubota JV. By Sept’21, the company expects a total capacity of ~190k units. The company became debt-free in FY21.

Our View: We believe the second COVID wave would continue to impact rural economy due to its deeper penetration and severity this time, which would impact tractor sales and agri equipment industry in 1HFY22. This would certainly put pressure on ESC in the near-term, while from a long- term perspective, we expect the tractor industry to continue growing at higher than historical long-term average of 8% on account of changing industry dynamics, increasing mechanization, rising affordability and widening alternate usage of tractors. Moreover, ESC’s railway equipment business would be back on track in next 1-2 quarters. Its construction equipment business is also expected to grow at healthy pace over FY22E-FY23E. In view of sizable presence in tractor segment, strong positive cash flow and improving return ratios, we maintain BUY on ESC with a 2-Year Target Price of Rs1,820.

14 BFSI HDFC (HDFC IN; M Cap. - Rs.4,369bn; BUY; 2-Yr TP - Rs.3,000; CMP - Rs.2,422)

Representatives Present on the Call: Research Analyst: Mr. Keki Mistry, Vice Chairman & CEO and other senior members of management Abhijit Tibrewal Contact: (022) 41681371 / 9972584400 What We Saw – Quarterly Result – Key Highlights: Email : [email protected] 1. HDFC Ltd. reported a standalone PAT of Rs31.8bn (up 42% YoY and up 9% QoQ) in 4QFY21 and Rs120.3bn (down 32% YoY) in FY21. However, there were quite a few one-offs owing to Research Associate: which the reported PAT numbers are not comparable on YoY basis. Sripriya Konakanchi 2. Consequent to the merger of GRUH with Bandhan Bank, the company had recorded a Contact: (022) 41681371 / 9930111983 fair value gain of Rs90.2bn in FY20. Profit on sale of investments stood at ~Rs14bn in FY21 Email : [email protected] compared to ~Rs35.2bn in FY20 from stake sale in insurance and AMC subsidiaries as well as GRUH Finance. Charge for employee stock options stood at Rs3.4bn in FY21 (compared to Rs0.13bn in FY20). This charge for employee stock options is expected to continue for the next two quarters. Net gain on fair value changes and income on loans assigned stood at Rs21.5bn (compared to Rs10.7bn in FY20). This also includes MTM on investments in RBL Bank. 3. NIM stood at 3.5% in FY21 vs. 3.4% in FY20, aided by broadly stable spreads and normalization in surplus liquidity buffer, which declined to Rs157bn in 4QFY21 compared to Rs168bn in 3QFY21. While NIM expanded by ~10bps in FY21, it would be difficult to sustain since there will be downward pressure with the back-book getting repriced with a time lag. Spreads remained largely stable at 2.29% on QoQ comparison. 4. AUM stood at Rs5.7 trillion (up ~10% YoY and up 3% QoQ). Individual AUM rose by ~12% YoY, while non-individual AUM was up by just ~4% YoY. Disbursement continued to improve on MoM basis with the highest-ever approvals/disbursement in Mar'21. Individual disbursement rose by 60% YoY in 4QFY21. Notably, the disbursement growth came from both affordable housing as well as high-end properties. 5. GNPA stood at 1.98% in 4QFY21 vs. proforma GNPA of 1.91% in 3QFY21. The individual GNPA stood at 0.99% in 4QFY21 vs. 0.98% in 3QFY21, while non-individual GNPA stood at 4.77% in 4QFY21 (up 42bps QoQ). While there could have been resolutions in non-individual book, HDFC saw new slippages here as well. What We Heard – Conference Call - Key Takeaways: 1. In Apr'21 itself, HDFC crossed the disbursement level it recorded in 1QFY21. Disbursement stood at ~Rs400bn in 4QFY21. Individual loan disbursement rose by 3% YoY in FY21 despite 1QFY21 being largely a washed-out quarter. 2. Average ticket-size (ATS) of incremental individual loan stood at Rs3.14mn in 4QFY21 led by increased activity in metro cities and demand for higher-end properties. Cities like , Delhi and Bangalore witnessed robust growth during the quarter. 3. During FY21, bulk of the AUM growth came from the individual loan-book. In FY21, individual loans formed ~92% of AUM, while non-individual loans accounted for the rest 8%. 4. Under ECLGS, the company sanctioned Rs24.8bn and disbursed Rs9.36bn in FY21. Total restructured pool of advances fell by ~Rs5bn QoQ to Rs44.8bn (~0.8% of AUM), as restructuring was invoked in few accounts but not implemented. Out of restructured pool, 23% of loans were individual and 73% were non-individual loans. One non-individual account contributed ~58% to restructured pool (~0.5% of AUM). 5. Aggregate COVID provisioning stood at Rs8.4bn (~15bps of total AUM). These provisions were made towards loans given to customers working in the affected segments like airline, travel and tourism segments etc. 6. As per the RBI guidelines, the company reduced its stake in HDFC Life in Jun'20 and expects to reduce its stake below 50% in HDFC Ergo in May'21. It raised Rs100bn of fresh equity capital during FY21. HDFC also received Rs3.1bn from the issue of warrants, which have an exercise price of Rs2,165/share. Notably, no warrant has been converted into equity share as of date. Our View: HDFC has the strongest liability franchise among the leading housing financiers in India. During last two years, it has steadily strengthened its balance sheet and improved the provisioning buffers to guard against any contingency/lumpy slippages in wholesale loan book. Across interest rate cycles, HDFC has been able to demonstrate stable-to-improving spreads and NIM. After completion of capital raise in Aug’20, we believe HDFC is well-capitalized to tap the potential organic/inorganic growth opportunities in general/health insurance space. Moreover, HDFC will be looking at further strengthening the position of HDFC Ergo (general insurance subsidiary) and monetize its stake (through a potential IPO) in FY23. We have BUY rating on HDFC with an SOTP-based 2-Year Target Price of Rs3,000 (valuing its core mortgage business at 2x of FY24E P/BV). 15 Construction H.G. Infra Engineering (HGINFRA IN; M Cap. - Rs.22bn; BUY; 2-Yr TP – Rs.392; CMP - Rs.332)

Representatives Present on the Call: Research Analyst: Mr. Harendra Singh, CMD; and Mr. Rajeev Mishra, CFO Binod Modi Contact : (022) 41681371 / 9870009382 What We Saw – Quarterly Result – Key Highlights: Email: [email protected] 1. Revenue soared by 65% YoY to Rs10.3bn (up 40% QoQ) in 4QFY21 vs. our estimate of Rs9.4bn. EBIDTA surged by a stellar ~64% YoY (up 41% QoQ) to Rs1.67bn vs. our estimate Research Associatae: of Rs1.5bn, while EBIDTA margin came in at 16.2% in 4QFY21 vs. 16.3% in 4QFY20 and 16.1% Girija Shankar Ray in 3QFY21. Contact : (022) 41681371 / 91670411117 Email : [email protected] 2. Net profit stood at Rs977mn (up 91% YoY and up 49% QoQ) vs. our estimate of Rs850mn. 3. The company generated Rs5.3bn OCF in FY21 compared to Rs2.5bn in FY20, led by sharp reduction in receivable to Rs6.9bn in FY21 vs. Rs8bn in FY20. 4. Order backlog stood at Rs70bn as of the quarter end, which is 2.8x of FY21 revenue. What We Heard – Conference Call - Key Takeaways:

1. Impact of Second COVID-19 Wave: Average availability of labourers at project sites remains in the range of ~70-75%, which is even as low as 50% at certain project sites. The management is hopeful about improvement in labour availability in the coming months and does not expect any significant impact on project execution as of now.

2. Order Inflow: HGINFRA secured 4 orders worth Rs19.3bn in FY21 out of total bidding of Rs550bn, while the outcome of Rs80bn bid is yet to come out. Notably, it expects order inflow of Rs50-60bn in FY22E, as it sees sizeable orders to be announced in the coming months including Rs500bn from the NHAI in 1HFY22E. Out of guided order inflows, it expects Rs10bn from new segments and Rs30bn from HAM projects.

3. Revenue, EBITDA & Margin Guidance: The management expects revenue to grow by 25- 30% in FY22E, which is commendable in our view. It pegs EBITDA at ~Rs5bnin FY22E. Whilst sustaining 16% margin is rather challenging, the management seems to be comfortable to maintain this margin, as it is conservative in bidding.

4. Progress on HAM Projects: All 4 HAM projects are moving as per schedule now. The management expects 3 HAM projects to complete by Mar’22. Further, it acquired land up to 24% for 3 new HAM projects. It expects to obtain Appointed Dates for all new HAM projects in next 9 months.

5. Equity Commitment: Total equity commitment for all 7 HAM projects is pegged at Rs4.6bn (including Rs3.6bn for newly secured projects). The company is likely to infuse Rs1bn, Rs1.75bn and Rs0.8bn in FY22E, FY23E and FY24E, respectively. Considering strong OCF (Rs5.3bn in FY21) with capex of Rs0.7-0.8bn, the company can fund equity commitment rather comfortably.

6. Monetization of HAM Projects: The company is likely to monetize completed HAM projects, for which discussions with the potential investors are underway. The management stated that any formal announcement can be made in next 2-3 quarters. This will release a significant capital for the company, in our view.

7. Entry into New Segments: HGINFRA is actively pursuing opportunity in new segments like water, airports, metro and railways. It has already hired some senior executives in technical team to pursue these segments. The company expects to secure orders worth Rs10bn from these new segments in the current fiscal.

Our View: Notwithstanding COVID-led disruptions including the labour availability issue in 1HFY21, HGINFRA exceeded our estimates in FY21. Notably, the company is one of the few quality EPC companies, which has been delivering steady earnings performance (68% CAGR over FY15-FY21) for last couple of years despite challenges on macro front. We continue to expect its earnings to clock 16% CAGR in the next 2 years led by robust order book, strong prospects and healthy execution credential. At CMP, the stock trades at 9.5x and 7.6x of FY22E and FY23E earnings with >20% return ratio. We have BUY rating on HGINFRA with a 2-Year Target Price of Rs392.

16 Capital Goods Kalpataru Power (KPP IN; M Cap. - Rs57bn; BUY; 2-Yr TP - Rs.403; CMP - Rs.384)

Representatives Present on the Call: Research Analyst: Mr. Manish Mohnot, Executive Director (Kalpataru Power); Mr. Ram Patodia, President & CFO Arafat Saiyed (Kalpataru Power); Mr. S.K. Tripathi, Deputy MD and CEO (JMC Projects); and Mr. Vardhan Contact: (022) 41681371 / 9819503007 Dharkar, CFO (JMC Projects) Email : [email protected]

What We Saw – Quarterly Result – Key Highlights: 1. Kalpataru Power (KPP) delivered a stable performance in 4QFY21, with its standalone revenue increasing by 2% YoY to Rs23.4bn vs. our estimate of Rs25.8bn.

2. EBITDA declined by 4% YoY to Rs2.4bn, while EBITDA margin declined by 60bps YoY to 10.4% due to higher other expenses.

3. Adjusted PAT came in at Rs1.3bn (up 22% YoY) supported by higher other income of Rs140mn (up 100% YoY) and lower interest cost of Rs280mn (down 39% YoY).

4. Consolidated net debt declined by Rs33% YoY to Rs23bn as of FY21-end.

5. Standalone order book stood at Rs139.8bn as of FY21-end, while order inflow stood at Rs84bn during the year apart from L1 of Rs13bn.

6. JMC: JMC reported revenue of Rs13.9bn (up 43% YoY), while EBITDA margin expanded by 670bps YoY to 12.2%. JMC reported Rs414mn PAT compared to Rs548mn net loss in the year-ago period. Order book stood at Rs140bn as of FY21 with order inflows of Rs79bn during the year apart from L1 of Rs10bn. What We Heard – Conference Call - Key Takeaways: 1. FY22 Guidance: The management expects revenue to grow by 10-15% and pegs EBITDA margin at ~10%, while JMC is expected to show healthy growth of 15-20%.

2. Progress on Divestment/Acquisition/Restructuring: • Acquisition of Fasttel Engenharia (Brazil): With acquisition of 51% in Fasttel Engenharia, Brazil for ~US$8.8mn, KPP penetrated into Latin America, one of the largest T&D EPC markets. It entered into five new countries across Asia, Latin America and Africa and expanded substation business to 10 countries in total. KPP also successfully scaled-up Linjemontage (Sweden) business with 2x growth in revenue and 3x growth in profitability in a span of two years.

• Divestment of T&D BOOT Assets: KPP expects the deal with CLP India for Kohima- Mariani Transmission to close by 1QFY22.

• Divestment of Road BOOT Assets:

• Restructuring of Kurukshetra Expressway and Wainganga Expressway is in advance stage. It targets to complete the entire restructuring process by 1QFY22. • It received interest from leading investors for Vindhyachal Expressway. The sale is expected to be completed in FY22. • Significant improvement in toll revenue of Brij Bhoomi Expressway with average daily revenue of Rs9 lakh with >7% traffic growth in FY21. 3. Labour Availability: The labour availability is better than last year. The company has not witnessed any major disruption, as 90% labourers are still at work. Most sites and projects are operational, but state-wise lockdown have some impact on some projects.

4. Impact of Higher RM Cost: The margin may get impacted in case the RM prices continue to move northwards. The company is confident of achieving double-digit margin at current level of RM prices. KPP has 40% orders on variable price contract, which stands at 90% for JMC. Its exposure to aluminium and copper is hedged. However, exposure to steel is not hedged, which is a major concern, in case the prices continue to rise.

17 5. Strong Performance of Subsidiaries: • Road BOOT Assets: All road BOT projects are operating on full length and full toll basis. Daily revenue stood at Rs5.34mn in 4QFY21. JMC’s total investment in road BOT assets stood at Rs8.7bn (including fresh investment of Rs450mn) as of FY21-end. • Shree Shubham Logistics (SSL): Operations improved significantly in FY21 with revenue growing by 13% YoY to Rs1.5bn. EBITDA grew by 4% YoY to Rs460mn, while EBITDA margin stood at 31%. PAT increased to Rs50mn in FY21 compared to Rs80mn net loss in FY20. • Linjemontage: Linjemontage (Sweden) reported Rs2.45bn and Rs10.6bn revenue in 4QFY21 and FY21, respectively. Order book stood at Rs10.7bn as of FY21-end. 6. Reduction in Debt: KPP’s net debt reduced to Rs7.8bn in FY21 from Rs9.7bn in FY20. Net debt of JMC reduced to Rs5.1bn in FY21 from Rs7.4bn in FY20 due to better collection and efficient working capital management. Our View: Looking ahead, we expect KPP to be one of the key beneficiaries of strong transmission capex in both domestic and global markets considering strong visibility on revenue and order flow front, sustained earnings momentum and likely improvement in return ratios. We believe, healthy orderbook, strong intake from railways and focus on debt reduction to support earnings CAGR of 10% over FY21-FY23E. We value its standalone business at Rs349 (10x of FY23E standalone earnings), JMC at Rs19 (10x of FY23E earnings, 30% holdco discount), SSL at 50% discount to potential valuation at Rs10/share and other assets at Rs25. We have BUY rating on KPP with a 2-Year Target Price of Rs403.

18 Capital Goods KEC International (KECI IN; M Cap. - Rs.100bn; BUY; 2-Yr TP - Rs.400, CMP - Rs.390)

Representatives Present on the Call: Research Analyst: Mr.Vimal Kejriwal, MD & CEO; and Mr. Rajeev Aggarwal, CFO Arafat Saiyed Contact: (022) 41681371 / 9819503007 What We Saw – Quarterly Result – Key Highlights: Email : [email protected] 1. KEC International (KECI) reported strong revenue growth of 19% YoY, which came in at Rs43.6bn (in-line with our estimate of Rs43.1bn) in 4QFY21, led by strong 39% YoY and 190% YoY growth Railways and Civil segments, respectively. Revenue of T&D business declined by 6% YoY, while revenue of non-T&D segment surged by 66% YoY. 2. EBITDA declined by 4% YoY to Rs3.5bn, while EBITDA margin declined by 200bps YoY to 8.1%. 3. PAT came in at Rs1.9bn (flat on YoY basis), helped by higher other income of Rs123mn (up 352%) and lower interest cost of Rs632mn (1.4% of sales from 1.8% of sales YoY) 4. Order book including L1 stood at Rs250bn (1.9x of FY21 revenue). Order inflow stood at Rs118.8bn (up 5% YoY) in FY21. What We Heard – Conference Call - Key Takeaways: 1. Second COVID Wave: All manufacturing facilities and project sites are operational, although challenges are being faced due to lockdown like restrictions in several states. Migration of workers is being seen, which is manageable and minimal compared to last year. However, overall business environment remains uncertain. 2. T&D Business (ex-SAE): Significant traction was seen in order inflows of both domestic and international T&D business. Execution was also ramped up in the quarter. KECI received Green Energy Corridor orders worth ~Rs15bn from PGCIL under tariff based competitive bidding (TBCB) route. International T&D continued its strong performance with significant orders from Middle East and Africa. 3. T&D (SAE, Brazil): KECI reported another dismal quarter due to higher commodity price inflation, workforce crunch and additional cost on account of time overruns. Despite uncertainty, the company expects this business to achieve breakeven in FY22. 4. Railways: Railway is the key growth driver for the company, although the quarterly order inflows were lower-than-expectation due to delay in order awarding. Whilst delay in tender pipeline was witnessed in Mar’21 and Apr’21, the order pipeline continues to remain strong. The company sees strong opportunities in technologically enabled/emerging areas i.e. metros, dedicated freight corridor and high-speed trains. The company has even bid for international projects and is L1 in a few. 5. Civil Segment: The company diversified into new growth areas with breakthrough orders in Water Pipeline, Hydrocarbon, Warehouse, Chemical and FGD (Flue Gas Desulfurisation) segments. It is L1 in few airport projects also. Civil and Railways segments continued significant contribution to the company’s growth and will do in the future as well. 6. EBITDA Margin: Margin was impacted due to SAE Brazil’s poor performance along with steep rise in metal prices. Steel price inflation has the most impact, as the procurement cannot be delayed, which would result in factory shutdown. The impact of commodity price inflation will be felt in 1QFY22E also. 7. Net Working Capital: Net Working Capital (NWC) brought down to 112 days as of FY21 from 119 days during FY20 and 144 days during 3QFY21, mainly due to increase in payable days to 90-120 days with supply from few large vendors. 8. Debt & Finance Cost: Net debt stood at Rs16.8bn as of FY21, while interest-bearing acceptances stood at Rs15.2bn, which is in line with long-term borrowing target of Rs25bn. Interest cost continues to be low at 2% of sales. Our View: KECI is well-placed to capitalize on the current industrial upcycle in India and revival in overseas markets. Railway and Civil segments emerged as key driver, which account for 43% of its current order book from just 8% in FY15. We believe healthy orderbook, strong intake from railways and civil and focus on debt reduction to support earnings CAGR of 15% over FY21- FY23E. KECI is also exploring new verticals like Oil & Gas infrastructure and smart infrastructure for further diversification. We expect strong order intake traction to continue, going forward led by higher T&D spending by PGCIL and SEBs, improved railways ordering and recovery in overseas markets and strong growth civil segments. We have BUY rating on KECI with a 2-Year Target Price of Rs400, valuing the stock at 14x of FY23E earnings. 19 Capital Goods Larsen & Toubro (LT IN; M Cap. - Rs.1,988bn; BUY; 2-Yr TP - Rs.1,280; CMP - Rs.1,416)

Representatives Present on the Call: Research Analyst: Mr. R. Shankar Raman, CFO; and Mr. P. Ramakrishnan (IR) Arafat Saiyed Contact: (022) 41681371 / 9819503007 What We Saw – Quarterly Result – Key Highlights: Email : [email protected] 1. Larsen & Toubro (L&T) posted Rs481bn revenue (up 9% YoY) in 4QFY21 in-line with our estimate of Rs478bn. Research Analyst: Binod Modi 2. EBITDA rose by 25% YoY to Rs63.9bn (vs. our estimate of Rs59.7bn), while EBITDA margin Contact : (022) 41681371 / 9870009382 expanded by 170bps to 13.3%. PAT increased by 11% YoY to Rs38.2bn. Email: [email protected] 3. Revenue of Power and Heavy engineering segment grew by 116% YoY and 54% YoY, respectively while revenue from core infrastructure segment grew by 3% YoY in 4QFY21. 4. Revenue of domestic business increased by 7% YoY to Rs322bn (67% of total sales), while revenue of international business grew by 12% YoY to Rs159bn. 5. Order inflow declined by 12% YoY and 6% YoY to Rs507bn and Rs1,755bn in 4QFY21 and FY21, respectively. Domestic inflow declined by 22% YoY to Rs323bn in 4QFY21, while international inflow increased by 12% YoY. Order book increased by 8% YoY to Rs3,274bn. 6. Net working capital declined to 22.3% of sales in FY21 from 23.7% in FY20. RoE expanded to 16.2% in FY21 from 14.8% in FY20 led by divestment of E&A business. What We Heard – Conference Call - Key Takeaways: 1. COVID-19 Impact: L&T made substantial improvement in healthcare facilities for its workers, which aided the company in avoiding exodus of labourers. Further, spread of coronavirus cases in hinterland has also prevented the labourers to go back to villages this time. L&T recognizes safety as a prime need for the employees/labourers, which is encouraging. 2. Prospective Opportunities: While L&T did not share any inflow guidance for FY22E, it sees total prospective opportunities at Rs9.6 trillion in FY22E vs. Rs8.4 trillion in FY21. Prospective opportunities include Rs6.6 trillion from domestic and rest from international businesses. Notably, infrastructure segment is expected to account for Rs7 trillion in FY22E vs. Rs6.3 trillion in FY21. As per the management, L&T’s share could be in the range of 15-20% of the prospective opportunities. 3. Huge Opportunities in Infra Space: As per the management, as the Government of India continues to focus on driving economic growth through investments remains intact, infrastructure space offers huge opportunities in FY22E. Further, it expects recovery in hydrocarbon segment in international markets, as steady crude prices made the GCC nations to revisit their investment plans. 4. Guidance: Ongoing uncertainties due to second COVID wave prevented the company to give any quantitative guidance on revenue growth and order inflow front. However, it stated that low-teen to mid-teen revenue growth can be expected in FY22E. We believe this is very conservative given low base and sizeable order backlog. NWC is expected to be maintained at ~22% of sales, going ahead. 5. Reasons for Margin Expansion in Infrastructure Space: (a) Favourable mix of jobs; (b) several projects reaching threshold of margin recognition; (c) execution of high-margin work components; (d) release of cost contingencies; (e) process automation; and (f) cost efficiency. In FY22E, L&T expects to maintain infrastructure EBITDA margin at FY21-level, despite ~50% of its projects are fixed-priced contracts. However, this could be rather challenging, in our view. 6. Public vs. Private Order Book: Order book from public sector remains high at 82%, which offers better clarity over payments. However, the management expects the share of private order can potentially increase to 25% in next five years led by revival of private capex. 7. Key Developmental Assets: (a) Hyderabad Metro: As the ongoing pandemic continues to hurt business, L&T is still in the process of discussion with the lenders/government to restructure projects finance and annual fare escalation. It also intends to unlock commercial real estate opportunity from this project. (b) Power Assets: It remains committed to divest these assets for which discussions are underway. 20 8. Utilization of Huge Cash Balance (Rs473bn): The management stated that it will continue to reward the shareholders through higher dividend instead of buyback. The company has declared Rs36/share dividend (including Rs18/share special dividend). Further, special dividend in the current fiscal cannot be ruled out. Our View: The management appears to be confident of witnessing healthy order inflows in the next couple of years. With strong order prospects compared to previous years, L&T looks forward to opportunities to the tune of Rs9.6 trillion in FY22E vs. Rs8.4 trillion in FY21. Cash burns in Hyderabad Metro project and higher input cost are seen as the key near-term overhangs. However, expected healthy pick-up in ordering activities and sharp improvement in order inflow may drive stock performance in the medium-to-long-term. Valuation at 17x of FY23E earnings still looks comfortable, as the company continues to enjoy decent value accretion from the subsidiaries. We have BUY rating on the stock with a 2-Year Target Price of Rs1,280.

21 IT Mphasis (MPHL IN; M Cap. - Rs.338bn; BUY; 2-Yr TP - Rs.1,200; CMP - Rs.1,789)

Representatives Present on the Call: Research Analyst: Mr. Nitin Rakesh, CEO; and Mr. Manish Dugar, CFO Suyog Kulkarni, CFA Contact: (022) 41681371 / 9890966735 What We Saw – Quarterly Result – Key Highlights: Email : [email protected] 1. Revenue came in at US$342.2mn in 4QFY21, which is 0.9% lower than our estimate of US$345mn. In CC terms, revenue grew by 2% QoQ (up 4.9% YoY) vs. our estimate of 2.9% QoQ. Research Associate: 2. EBIT margin stood at 16.1% (down 30bps QoQ) vs. our estimate of 16.4%. Chaitanya Panchmatia Contact: (022) 41681371 / 8080782900 3. Net income came in at Rs3.16bn, which is 5.7% lower than our estimate of Rs3.35bn, Email: [email protected] driven by lower operating leverage and lower-than-expected other income and higher tax expenses. 4. New TCV (Total Contract Value) wins in direct business came in at US$245mn during the quarter, which stood at US$1.12bn (up 51% YoY) in FY21. In addition, the company has closed a large deal of US$250mn in 1QFY22. 5. In CC terms, revenue from direct business grew by 3.5% QoQ (up 19.9% YoY), whereas DXC revenue declined by 7.2% QoQ and 46.2% YoY. Notably, DXC business contributed 12% to the company’s quarterly revenue. 6. The company announced final dividend of Rs65/share (including Rs27 special dividend) for FY21. What We Heard – Conference Call - Key Takeaways: Industry Specific Takeaways 1. The company highlighted favourable pricing scenario driven by talent shortage. There is more discussion on pricing and value now vs. discussion about discounts in the previous year. More clarity on pricing will emerge in the next 3-4 quarters. Company Specific Takeaways 1. The company recorded 5% CC growth in FY21, which is well-above the industry average. Geography-wise, both core market (US) and invest market (Europe) witnessed strong growth, which was even better in the later. In Europe region, its CC revenue grew by ~25% YoY in FY21. 2. Contribution of DXC is expected to settle in mid-single digit of revenue in the medium-term. Mphasis will provide clarity on Minimum Revenue Commitment (MRC) with DXC post deal renewal timeline (Sept’21). 3. Revenue from Top-5 and Top-5 -10 clients grew by 13% YoY and 42% YoY, respectively in FY21, whereas the Top-11-20 accounts grew by 16% YoY. All Top-5 clients are in US$100mn+ category and Top-10 in US$25mn+ category. 4. The company recorded TCV of US$245mn (69% of next generation areas) in 4QFY21. Additionally, it closed a landmark deal worth US$250mn of a UK-based BFS client in 1QFY22. Further, it highlighted that average large deal win size was US$79mn in FY21, which is 2.5x of average size in FY20. 5. Among verticals, Banking and Capital Markets grew by 26% YoY in direct channel in FY21. The company witnessed market share gain in top BFS clients in FY21. The management expects strong growth in 1QFY22 and expects continued growth momentum to continue over FY22 as well. Insurance vertical reported consistent sequential growth since 2QFY21 and the management expects continued growth momentum in the coming quarters as well on the back of recent deal wins. In case of Information Technology, Communication and Entertainment vertical, the management expects strong growth driven by recent large deal wins. 6. The company has not witnessed any impact of second COVID wave in terms of deal execution and conversation so far. 7. The management expects industry leading growth in direct business in FY22 and pegs EBIT margin in 15.5-17% range. It expects upward bias on EBIT margin front in the medium-term. Our View: Though Mphasis reported soft performance on both revenue and margin front in 4QFY21, it reported strong net new TCV of US$245mn, which is encouraging. DXC channel contributed only 12% to 4QFY21 revenue, which is healthy in our view, as this reduces dependency on non-direct channels. We prefer Mphasis given its double-digit revenue growth rate over FY22E-FY23E driven by strong direct business (85% of revenue), largely stable EBIT margin (in 15.5-17% range) and strong dividend yield of 3.5%. Additionally, recently announced Blackstone ownership re-commitment rests debate over continuity of promoter. We expect continued patronage from promoters will help the management to take bolder bets in buoyant end- market environment. At CMP, the stock trades at 20.3x of FY23E consensus EPS, which is ~15.3% discount to . We maintain BUY on MPHASIS with a 2-Year Target Price of Rs1,200.

22 PVC Pipes Prince Pipes & Fittings (PRINCPIP IN; BUY; M Cap. - Rs.70bn; 2-Yr TP - Rs.710; CMP - Rs.633)

Representatives Present on the Call: Research Analyst: Mr. Parag Chheda Executive Director; Mr. Shyam Sharda, VP & Group CFO; Mr. Anand Gupta, Arafat Saiyed Deputy CFO; and Mr. Nihar Chheda, AVP (Strategy) Contact: (022) 41681371 / 9819503007 What We Saw – Quarterly Result – Key Highlights: Email : [email protected] 1. Prince Pipes (PRINCPIP) reported its highest ever quarterly revenue of Rs7.6bn (up 77% YoY) in 4QFY21 vs. our estimate of Rs5.3bn, led by strong 26% YoY growth in volume to 41,644 MT. Realization/kg also improved by 41% YoY to Rs183. 2. EBITDA increased by 155% YoY to Rs1.47bn, while EBITDA margin expanded by 590bps YoY to 19.3% led by inventory gains (Rs300-350mn), better product-mix, superior pricing power and improved operating efficiency. 3. PAT increased by 244% YoY to Rs972mn aided by strong operating performance and lower interest cost. What We Heard – Conference Call - Key Takeaways: 1. Second COVID Wave: The business is likely to be impacted in 1QFY22E due to lockdown and similar restrictions in several states. All its manufacturing plants are operational, albeit at lower capacity utilization level. The company is confident of demand recovery once the restrictions are lifted. 2. Business Performance: • Stellar quarterly performance was led by brand premiumisation and favourable product-mix across plumbing and SWR categories. Robust volume growth was supported by strong performance of plumbing portfolio. Expansion in distribution network led to volume growth along with ability to cross-sell PVC pipes to CPVC customers due to added brand equity post tie-up with Lubrizol. • Aggressive product penetration of Prince Flowguard across India continues with encouraging response from the channel partners/plumbers at pan-India level. CPVC category contributed significantly to overall growth during the quarter. • Plumbing and SWR categories were the key growth drivers. Share of these categories in the revenue-mix increased to 69% in FY21 from 66% in FY20. • Agri pipes business witnessed decent quarterly performance. However, some impact of high PVC prices was seen on the demand. • B2B business (albeit small at present) is an area of improvement for the company, as it offers huge opportunities. The company is currently in the process of team-building, as this business is driven by relationship building having higher gestation period. 3. Industry Volume: PVC consumption declined by ~15% in FY21, while the company saw 4% YoY volume growth in FY21. Organized players continued to gain market share, while the unorganized players were impacted by supply chain disruptions and other issues. 4. Margin: EBITDA margin continued to remain elevated in 4QFY21 led by inventory gain to the tune of Rs300-350mn, better product-mix and superior pricing power. For the past two years, the company has been trying to improve its brand equity for which it now enjoys strong pricing power. The company has guided for sustainable margin of 14-17%, going forward. 5. PVC Prices: PVC prices witnessed a marginal correction to the tune of Rs4/kg from the all- time high of Rs135-140/kg. Notably, this correction is India-specific only, as the PVC prices continue to remain firm in global markets. According to the management, a fall in PVC prices will only happen slowly and the correction will not be as steep as the rise and even the prices may never return to the previous normal levels at all. 6. Brand Investment: The company increased brand investment to 4% of net sales led by inventory gain. It plans to make brand investment of 2-3% of net sales, going ahead. 7. Water Tank Biz: Sales from water tank business is currently negligible. The company plans to use a combination of in-house manufacturing and outsourcing for this segment. 8. Telangana Plant: Seventh manufacturing facility was inaugurated in Sangareddy (Telangana), which commenced commercial production ahead of schedule. The plant is expected to have total installed capacity of ~50,000 MTPA, which will be ramped up in a phased manner over the next 2-3 years. The unit will serve southern markets and play an integral role at a time when the industry is witnessing consolidation. Our View: PRINCPIP continued to deliver strong performance led by healthy growth in agri and plumbing segments, improved operating efficiency and cost optimization measures. It has made multiple strategies to embark on its journey to the next level and sustain the business in the long run with tie-up with Lubrizol and Tooling Holland. We expect PRINCPIP to sustain its leadership by leveraging manufacturing expertise, distribution network and competitive agility. PRINCPIP continues to benefit from market consolidation, steady capex plan, imminent opportunities in infra pipe segment. We expect its revenue, EBITDA and PAT to clock 10%, 5% and 6% CAGR, respectively over FY21-24E. We have BUY on PRINCPIP with a 2-Year Target Price of Rs710, valuing the stock at 33x of FY24E EPS. 23 Cement Sagar Cements (SGC IN; M Cap. - Rs.18bn; BUY; 2-Yr TP – Rs.619; CMP - Rs.779)

Representative Present on the Call: Research Analyst: Mr. S. Sreekanth Reddy, Executive Director Binod Modi Contact : (022) 41681371 / 9870009382 What We Saw – Quarterly Result – Key Highlights: Email: [email protected] 1. Consolidated EBITDA grew by a stellar 133% YoY to Rs1.04bn in 4QFY21 vs. our estimate of Rs1.15bn. EBITDA/tonne stood strong at Rs1,019 in 4QFY21 vs. Rs534 in 4QFY20 and Rs1,213 Research Associatae: in 3QFY21. Girija Shankar Ray Contact : (022) 41681371 / 91670411117 2. Average realization/tonne fell by 3.2% QoQ (up 12% YoY) to Rs4,073, which is Rs187 lower Email : [email protected] than our estimate.

3. Sales volume stood at 1.02mnT (up 22% YoY and up 19% QoQ) mainly on account of higher construction activities in its key markets.

4. Operating cost/tonne increased by 1.7% QoQ to Rs3,064, which is quite competitive among peers. While its Power & Fuel cost/tonne increased by sharp 10% QoQ, input cost/tonne contracted by 0.5% QoQ to Rs1,580 due to lower RM prices. Further, sequential decline in lead distance aided the company to record flat sequential growth in freight cost/tonne to Rs742.

5. Net profit quadrupled on YoY comparison to Rs498mn vs. our estimate of Rs572mn. What We Heard – Conference Call - Key Takeaways: 1. Demand Scenario: Second COVID-19 wave has started impacting the demand momentum from mid-Apr’21 onwards. As per the management, despite state-level lockdown, construction activities have not come to standstill and dispatches are still being made. It expects demand scenario to see up-tick in the coming weeks. Notably, the AP Government supported the demand scenario in FY21 with monthly buying of >1mnT. The management expects the AP Government to further increase its monthly consumption in the coming months.

2. Reason for Sharp Sequential Decline in Realisation: (a) Change in product-mix; and (b) sharp decline in first two months of the quarter.

3. Volume Guidance: The management sees consolidated sales volume at 3.6mnT in FY22E vs. 3.1mnT in FY21. Guided volume includes 0.4mnT sales from new units, which are scheduled to be commissioned in Sept’21. However, the volume guidance is very conservative, in our view.

4. Ongoing Expansion - Satguru (1mnT integrated) & Jajpur (1.5mnT SGU): Works on these projects are moving as per schedule and these units are expected to be commissioned by Sept’21. SGC incurred ~Rs4bn capex in FY21 and ~Rs2.3bn capex will be incurred in FY22E as against total project cost of Rs8bn for both the projects. SGC’s net debt is expected to peak at ~Rs8bn in 1HFY22E. Post commissioning, SGC’s total cement capacity will reach 8.5mnT, which is very close to its own target of 10mnT by FY25E. Earlier, the management had guided that these units can easily generate unitary EBITDA of Rs1,500.

5. Operating Cost: While SGC’s operating cost remains competitive, the management expects it to increase by Rs250/tonne on YoY basis and Rs200/tonne on QoQ basis in next two quarters led by higher fuel/diesel prices.

Our View: Robust quarterly performance, notwithstanding weak realization, is purely supported by higher volume and cost savings. Improved operating efficiency has enabled the company to achieve industry-leading cost efficiency. Further, OCF stood at strong Rs3.8bn in FY21 vs. Rs2bn in FY20. Going forward, commissioning of its new units in central and eastern region (expected on Sept’21) will be the key catalyst for the company. In our view, SGC’s volume can potentially grow in double-digit for next three years led by robust capacity addition and enhanced market reach in demand-rich markets. Additionally, new SGU in eastern region (Jajpur, Odisha) is expected to result in further improvement its operating efficiency.We have BUY rating on SGC with a 2-Year Target Price of Rs619.

24 Cement UltraTech Cement (UTCEM IN; M Cap. - Rs.1,838bn; BUY; 2-Yr TP - Rs.4,825; CMP- Rs.6,368)

Representative Present on the Call: Research Analyst: Mr. Atul Daga, CFO & Whole Time Director Binod Modi Contact : (022) 41681371 / 9870009382 What We Saw – Quarterly Result – Key Highlights: Email: [email protected] 1. UltraTech Cement (UTCEM) delivered superior and higher-than-expected operating performance in 4QFY21, mainly led by better-than-expected volume, higher realization and Research Associatae: lower operating cost. Girija Shankar Ray Contact : (022) 41681371 / 91670411117 2. EBITDA grew by stellar 51% YoY and 19% QoQ to Rs36.9bn vs. our estimate of Rs34.6bn, Email : [email protected] while EBITDA/tonne stood at strong Rs1,328 in 4QFY21 vs. Rs1,126 in 4QFY20 and Rs1,299 in 3QFY21.

3. Sales volume surged by 27.8% YoY and 16% QoQ to 27.8mnT vs. our estimate of 26.8mnT, while average realization grew by 4.4% YoY and 1.8% QoQ to Rs4,816/tonne (Rs36/tonne higher than our estimate).

4. Opex/tonne increased by 0.6% QoQ (down 0.4% YoY) to Rs3,857/tonne, which is Rs102 lower than our estimate. Input cost surged by 9% YoY (up 5% QoQ)to Rs1,841/tonne mainly due to sharp rise in RM cost. However, freight cost/tonne contracted by 0.8% QoQ, which is encouraging. Additionally, the company managed to reduce its other expenditure/tonne by 3% QoQ, while the employee cost/tonne also fell by 13% QoQ mostly led by operating leverage from higher utilization and cost-saving initiatives.

5. However, its APAT stood at Rs18bn (up 26% YoY and up 14% QoQ) marginally lower than our estimate of Rs18.7bn led by lower other income, higher tax and increased finance cost.

6. Notably, the company included UNCL’s Dubai subsidiary (2mnT cement) in its P&L, which used to be shown as discontinued operation (held for sale) earlier. What We Heard – Conference Call - Key Takeaways: 1. Demand Scenario: While the management cited that the demand is very unpredictable now led by state-level lockdown, it also exuded confidence about recovery of demand momentum like last year. Despite slowdown in recent weeks, infrastructure projects continue to aid cement consumption. Notably, rural demand was also hit by second COVID wave, but it is still not worrisome. UTCEM gained market share during the quarter led by its regional diversity. It has started seeing gradual improvement in urban real estate market demand in 4QFY21. 2. Capacity Utilization: Capacity utilization stood at 99% in Mar’21 and 93% in 4QFY21. While Eastern region saw 100% capacity utilization, other regions (barring South, which saw <90% utilization) witnessed >90% utilization. 3. Expansion Programme: Capacity expansion programme of 19.5mnT (11.4mnT clinker) is moving as per schedule with minor delay due to second wave of COVID-19. However, it sticks to commission all expansion by FY23E. It has secured environmental clearance from Ministry of Environment, Forest & Climate Change (MEFCC) for its Dalla clinker plant (2.3mnT). Further, 2mnT Bara Line 2 capacity is commissioned in 4QFY21. Necessary equipment has already been ordered and civil construction work is underway. Capex is pegged at Rs40-50bn and Rs30bn for FY22E and FY23E, respectively. 4. Nathdwara Unit Operation: The unit operated at 85% utilization in 4QFY21 and generated EBITDA/tonne if Rs1,500. UTCEM is likely call for merger in FY23. 5. Century Assets Operation: Assets operated at 90% utilization in 4QFY21 and generated EBITDA/tonne of Rs800. The management expects EBITDA/tonne to reach Rs900 shortly with Rs65/tonne royalty benefits after amendments in in MMDR Act. Around 77% of its total operations have been rebranded so far. 6. RMC & Building Products Division: UTCEM has been focusing aggressively on RMC business, as it helps in incremental sales volume with the rising preference of the construction industry for RMCs. It set up 23 RMC plants in 4QFY21 taking total number of RMC plants to 132 from 109 in 3QFY21. Further, RMC is RoCE-accretive for UTCEM, as it generates ~25% RoCE for the company with handsome margin. Further, UTCEM also looks to be more focused on building products division, which it expects to witness healthy traction, going ahead.

25 7. Capital Allocation Policy: UTCEM expects to become a net cash company in coming quarters. It cited that even at 70% capacity utilization level, Its EBITDA and FCF can come in the range of Rs120bn and Rs100bn, respectively which can lead to huge amount of cash in the balance sheet. UTCEM will keep on focusing on domestic business through organic and inorganic expansion (if required). Further, 15-20% dividend payout is being targeted as of now, which can be increased in due course. 8. Fuel Cost & Usage: Average pet-coke price stood at ~US$125-130/tonne in 4QFY21 as against ~US$65/tonne in 4QFY20. However, it has prudently shifted to imported coal in 4QFY21 (>50% of total fuel usage), with which pet-coke usage came down to 30%. Notably, imported coal is cheaper by 20-25% compared to imported pet-coke. 9. Trade-mix & Lead Distance: Trade segment accounted for 67% of total volume in 4QFY21 and 69% in FY21. Lead distance stood at 440kms in 4QFY21. 10. Carbon Emission: UTCEM is committed to reduce Co2 emission by 27% by 2032 from the level of 2017, which is also quite imperative for availing low-cost funding. Recently, UTCEM raised low-cost overseas loans, which is linked to reduction in Co2 emission level. Notably, its WHRS capacity will increase from 125MW to 304MW by FY23E. 11. RoCE: It targets RoCE expansion from 15% to 18% in next three years. Our View: UTCEM continued to report superior performance in 4QFY21. Further, its OCF/FCF stood at Rs125bn/Rs106bn in FY21 compared to Rs90bn/Rs73bn in FY20, which enabled the company to reduce its net debt to Rs67bn in FY21from Rs170bn in FY20, following which its net debt to EBITDA ratio now stands at 0.55x. Notably, its RoCE improved to 15.3% in FY21, which is heartening. Looking ahead, we believe UTCEM could potentially witness higher single digit volume growth for next three years led by sizeable capacity addition and steady demand environment. Further, consistent improvement in operating efficiency and firm pricing environment can aid it to register healthy double-digit earnings growth in the coming years. Additionally, visible improvement in RoCE profile can aid UTCEM to see valuation rerating, going forward. We have BUY rating on UTCEM with a 2-Year Target Price of Rs4,825.

26 Consumer Durables Voltas (VOLT IN; M Cap. - Rs.331bn; SELL; 2-Yr TP - Rs.521; CMP - Rs.999)

Representatives Present on the Call: Research Analyst: Mr. Anil George, CFO; Mr. Manish Desai, (Head Corporate Finance); and Mr. Vaibhav Vora, Arafat Saiyed Manager (Corporate Finance) Contact: (022) 41681371 / 9819503007 What We Saw – Quarterly Result – Key Highlights: Email : [email protected] 1. Voltas delivered a strong all-round performance in 4QFY21 with revenue growing by 27% YoY to Rs26.5bn. • Revenue from Unitary Cooling segment increased by 20% YoY to Rs14.4bn, while Electro-mechanical segment’s revenue grew by 37% YoY to Rs11bn. Revenue from Engineering products segment increased by 3% YoY to Rs977mn. 2. The Cooling Products business witnessed good recovery with 18% YoY volume growth. EBITDA stood at Rs3.3bn (up 72% YoY), while EBITDA margin expanded by 330bps YoY to 12.5% led by strong margin expansion in Electro-mechanical segment. • EBIT margin of Unitary cooling and Electro-mechanical segment expanded by 100bps YoY to 15.6% and 700bps to 8.4%, respectively. 3. PAT increased by 48% YoY to Rs2.4bn. What We Heard – Conference Call - Key Takeaways: 1. Near-term Outlook: The general industry outlook remains ambiguous due to lockdown and restrictions in India. Opportunity has been lost in the peak summer season, but the company is confident of strong bounce back, like last year soon after the restrictions were lifted. 2. Segment A – Unitary Cooling Products • As against the full year industry degrowth estimated by external agencies at ~29% (given context of lost sales in the high season of 1Q), Voltas was able to exit the year with a much lower degrowth of 15%. • Voltas continues to be the market leader and is at No.1 position in ACs with a market share of 25.6%. The brand has further strengthened its position in air cooler business and attained a market share of 10.6%, as per the latest third-party market analysis report. • Channel inventory as of Mar’21-end was normal (30-35 days), which has now increased to 45-50 days. The management is confident that once the restrictions are lifted, the company will continue to receive good demand from the channel due to robust secondary sales. • Segmental margin also improved due to better product-mix, (inverter ACs now constitute 77% of total split AC sales) cost efficiency, lower holding cost of carry forward inventories and subdued marketing spend. While changes in custom duty rates, enhanced input and supply chain cost (commodity price increase of 60-80%) took toll on margin, timely price hikes and smart customer schemes helped the company to improve EBIT margin. • PLI Scheme: The production linked incentive (PLI) scheme for white goods was formalized with allocation of ~Rs62bn. The scheme is only for components and not on finished products. The company intends to ramp-up its components manufacturing except for compressors, which will take more time. • Price Hike: Voltas had earlier increased the prices by 5-6% across categories in Unitary Cooling segment to factor in higher commodity prices. It further took a price hike of 3% but not across all geographies and was rather based on competitive scenario. 3. Segment B – Electro-Mechanical Projects & Services (EMPS) • Segmental revenue stood at Rs11bn (up 37% YoY) mainly led by higher execution. • Total carry forward order book at Rs66.35bn as on March 31, 2021 provides an adequate level of forward revenue visibility along with improved margin. • The carry forward order book for domestic projects stood at Rs42bn, which includes a bouquet of orders across water, HVAC, rural electrification, solar and urban infra segments. International order book of Rs24.4bn includes MEP work mainly across the UAE (including the prestigious Sh. Zayed Museum), Qatar and Oman. • Better availability of labour and appropriate access to project sites translated into faster execution resulting in improved turnover and margin. At the same time, a centrally driven focus on cash ensured better collection, helping to restrict ECL provisioning both in international and domestic markets. The management targets segmental margin of 6-7%, going forward. The company is careful in taking new projects and it is taking the projects, which are financed by the government, the World Bank, JICA and other multilateral agencies. 27 4. Segment C – Engineering Products & Services • Segmental revenue increased by 3% YoY to Rs977mn. The Mozambique operation (Vale) continued to contribute handsomely to the performance of Mining and Construction vertical. At the same time, the Government of India’s push for infra projects has re-energized the demand for crushing and screening equipment. • Ban on imports from China, competitive price of cotton and renewed focus of the Government of India on textiles have improved the sentiment, which revived the demand for capital equipment. 5. Voltas Beko • Production at Sanand factory was optimised at ~50,000 units per month. The company sold >3 lakh units of direct cool refrigerators in FY21. The company witnessed significant demand for washing machines, microwaves and dishwashers in 4QFY21. • Voltas Beko dishwasher tops the category in India and enjoys 30% market share. At the same time, the company’s market share in refrigerators and washing machines segment also improved to 3% and 2.5%, respectively. • The billing points scaled up to >1,000 led by introduction of exclusive outlets and experience zones along with cost-effective digital marketing. 6. Restructuring: Voltas is segregating its B2C and B2B businesses into separate entities in order to drive independent focus and facilitate growth. B2B business and Domestic project business (MEP/HVAC, water projects and M&CE business) will move to Universal MEP Projects & Engineering Services (UMPESL) (formerly known as Rohini Industrial Electricals) through a business transfer agreement executed March 24, 2021 and the transaction is expected to be completed by Sept’21. Our View: We remain cautious on the near-term prospects of the company owing to uncertainties over discretionary demand, slower execution and lower margin in the project business. Significant rise in commodity prices is likely to impact the margin despite recent price hike. Beko’s market share is still under 3% for refrigerator and washing machine and the company is looking forward to 10% market share by FY25E with breakeven at EBITDA level. However, we do not see any significant rise in market share unless the company adopts a disruptive pricing strategy, which can only happen at the cost of margin. Structural headwinds in terms of higher cost structure for domestic AC companies and high marketing-related expense for Volt-Beko JV is expected to impact profitability.We have SELL rating on Voltas with a 2-Year Target Price of Rs521.

28 SIGNED BY:

Head of Research: Research Associate: Technical Research Analyst: Mitul Shah Sheryl Fernandes Vikas Jain Contact : (022) 41681371 / 9869253554 Contact : (022) 41681371 / 8879415031 Contact: (022) 42157022 / 9324611393 Email: [email protected] Email: [email protected] Email: [email protected]

Head Strategy: Research Associate: Technical Research Analyst: Binod Modi Girija Shankar Ray Jatin Gohil Contact : (022) 41681371 / 9870009382 Contact : (022) 41681371 / 91670411117 Contact: (022) 42157022 / 7498411546 Email: [email protected] Email : [email protected] Email: [email protected]

Research Analyst: Research Associate: Suyog Kulkarni, CFA Chaitanya Panchmatia Contact: (022) 41681371 / 9890966735 Contact : (022) 4303 4000 / 8080782900 Email: [email protected] Email : [email protected]

Research Analyst: Research Associate: Abhijit Tibrewal Sripriya Konakanchi Contact: (022) 41681371 / 9972584400 Contact : (022) 41681371 / 9930111983 Email : [email protected] Email : [email protected]

Research Analyst: Arafat Saiyed Contact: (022) 41681371 / 9819503007 Email : [email protected]

29 Change in Ratings f We have shifted to BUY & SELL ratings only and no longer continue with HOLD rating. f We have also shifted to 2-year Target Price from 1-year Target Price earlier.

Reliance Securities Limited (RSL), the broking arm of Reliance Capital is one of the India’s leading retail broking houses. Reliance Capital is amongst India’s leading and most valuable financial services companies in the private sector. Reliance Capital has interests in asset management and mutual funds, life and general insurance, commercial finance, equities and commodities broking, wealth management services, distribution of financial products, private equity, asset reconstruction, proprietary investments and other activities in financial services. The list of associates of RSL is available on the website www.reliancecapital.co.in . RSL is registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014

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RSL CIN: U65990MH2005PLC154052. SEBI registration no. ( Stock Brokers: NSE - INB / INF / INE 231234833; BSE - INB / INF / INE 011234839, Depository Participants: CDSL IN-DP-257-2016 IN-DP-NSDL-363-2013, Research Analyst: INH000002384); AMFI ARN No.29889. 30