INDIA DAILY
May 31, 2021 India 28-May 1-day 1-mo 3-mo Sensex 51,423 0.6 5.4 4.7 Nifty 15,436 0.6 5.5 6.2 Contents Global/Regional indices Dow Jones 34,529 0.2 1.9 11.6 Daily Alerts Nasdaq Composite 13,749 0.1 (1.5) 4.2 Results FTSE 7,023 0.0 0.8 8.3 Divis Laboratories: Strong performance continues Nikkei 29,149 2.1 1.2 0.6 Hang Seng 29,124 0.0 1.4 0.5 Mahindra & Mahindra: Delivering on key metrics KOSPI 3,189 0.7 1.3 5.8
Bank of Baroda: Less stressful for now Value traded – India Bayer Cropscience: Uncertainty ahead Cash (NSE+BSE) 1,259 842 481 30,48 Derivatives (NSE) 87,541 27,759 Aditya Birla Fashion and Retail: Second wave of Covid impacts footfalls 0 Phoenix Mills: W-shaped recovery? Deri. open interest 10,291 6,225 4,902 Metropolis Healthcare: In-line quarter; aggressive expansion plans announced Forex/money market
City Union Bank: A few more quarters to go Change, basis points Dilip Buildcon: Strong inflows in FY2021 to rein in near-term weakness 28-May 1-day 1-mo 3-mo Rs/US$ 72.4 (14) (192) (110) Gujarat Pipavav Port: Moving towards becoming significant 10yr govt bond, % 6.0 2 (5) (23)
IRB Infrastructure: Improving visibility on construction segment growth Net investment (US$ mn) S H Kelkar and Company: Nice and steady 25-May MTD CYTD FIIs 205 1,719 23,258 Company alerts MFs (91) 888 (7,000)
Infosys: Progressing smoothly - call with Infosys CFO Top movers Sector alerts Change, % Best performers 28-May 1-day 1-mo 3-mo Banks: To normalize from hereon JSTL in Equity 690 1.2 4.1 74.4
Banks: Delayed recognition on the cards TATA in Equity 1,104 0.6 13.6 54.3
Quant Research: AlphaBet: All-Season underperforms marginally UPLL in Equity 812 (1.0) 33.5 44.5
NMDC in Equity 179 0.4 21.5 41.1
WPRO in Equity 539 (0.4) 10.1 31.3
Worst performers
MMFS in Equity 160 3.4 (4.6) (21.6)
INFOE in Equity 4,462 (0.5) (11.1) (9.1)
RBK in Equity 216 2.5 11.7 (8.2)
HAVL in Equity 1,018 (0.2) (0.2) (7.9)
HMCL in Equity 2,991 (0.0) 2.2 (7.2)
[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. REDUCE Divis Laboratories (DIVI) https://ultraviewer.et/en/own Pharmaceuticals MAY 31, 2021 load.html RESULT Sector view: Attractive
Strong performance continues. Divi’s continued its strong growth momentum in CMP (`): 4,120 4QFY21 with revenues/EBITDA exceeding our estimates by 6%/2%. Generics and Fair Value (`): 3,750 synthesis business recorded 21%/22% yoy growth with gross margin expansion driving BSE-30: 51,423 profitability. We believe market share gains across existing API portfolio and introduction of new products through capacity additions will help drive 17% EPS CAGR over FY2021-24E. At 38X FY2023E P/E, valuations fully capture the superior growth in APIs, while ignoring the risks to the synthesis segment over the long-term. REDUCE
Divis Laboratories Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 4,120/3,750/REDUCE EPS (Rs) 74.8 94.1 107.4 52-week range (Rs) (high-low) 4,205-2,090 EPS growth (%) 44.2 25.8 14.2 Mcap (bn) (Rs/US$) 1,094/15.1 P/E (X) 55.1 43.8 38.4 ADTV-3M (mn) (Rs/US$) 2,741/38 P/B (X) 11.8 10.0 8.6 Shareholding pattern (%) EV/EBITDA (X) 37.5 31.0 26.9 Promoters 51.9 RoE (%) 21.3 22.9 22.3 FPIs/MFs/BFIs 19.9/12.6/1.2 Div. yield (%) 0.0 (0.8) (0.9) Price performance (%) 1M 3M 12M Sales (Rs bn) 70 82 93 Absolute 6.1 22.5 80.3 EBITDA (Rs bn) 29 34 39 Rel. to BSE-30 2.6 17.0 12.9 Net profits (Rs bn) 20 25 29
In-line quarter; strong revenue growth to cap off an impressive FY2021
Divi’s posted 29% yoy revenue growth in 4QFY21 (+6% versus KIE). Generics segment grew 22% yoy led by continued traction in key molecules while custom synthesis witnessed 22% yoy growth with commercial shipments of molnupiravir aiding growth. Cartenoids segments recorded a sharp 68% yoy growth. Gross margins declined 150bps qoq to 67.5% (-50 bps vs KIE). Employee expenses normalized in the quarter declining 8% qoq as 3QFY21 included additional Rs340 mn incentives to employees. Despite a sharp jump in other expenses sequentially, EBITDA was 2% ahead of our estimates led by strong revenues with EBITDA margins remaining healthy at 40.1% (-100 bps vs KIE). Higher depreciation was offset by higher other income with PAT largely in-line with estimates. DIvi’s incurred a capex of Rs91 bn and generated FCF of Rs10 bn in FY2021.
Long runway for growth in API business; molnupiravir to support synthesis growth in near term
With continued capacity addition, we believe Divi’s is well positioned to gain share from competitors in existing products, particularly, given the ongoing shifts away from China. With capacity related bottlenecks now addressed, Divi’s has also identified a new set of products with patent expiries from 2023-25, where it is aiming for market leadership and is also eyeing market share gains in iodine-based contrast media products through process efficiencies. We expect strong market share gains and introduction of new APIs to drive robust 16% sales CAGR in generics segment over FY2021-23E. On the synthesis segment, commercial shipments for monupiravir has commenced and with additional streams coming online by 1QFY22, we expect robust near term growth. However, we expect headwinds over a longer term in this segment Kumar Gaurav led by decline in tonnage requirements of NCEs bringing down addressable opportunity size.
Increase FY2022-23E estimates by 5%, REDUCE on expensive valuations Samitinjoy Basak
We increase our FY2022-23E EPS estimates by 5% each to bake-in higher molnupiravir sales through supplies to Indian VL partners. However, at 38X FY2023E P/E and 27X FY2023E EBITDA, the stock fully captures strong medium term growth. Revise Fair Value to Rs3,750 (from Rs3,300 earlier) based on 35X FY2023E EPS. REDUCE.
[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. Divis Laboratories Pharmaceuticals
Exhibit 1: Divi's posted strong revenue growth in 4QFY21 Divi's interim results, March fiscal year-ends (Rs mn)
(% chg.) yoy 4QFY21 4QFY21E 4QFY20 3QFY21 4QFY21E 4QFY20 3QFY21 FY2021 FY2020 (% chg.) FY2022E FY2021 (% chg.) Sales 17,882 16,838 13,897 17,014 6.2 28.7 5.1 69,694 53,528 30.2 82,464 69,694 18.3 Raw material (5,814) (5,380) (5,154) (5,266) 8.1 12.8 10.4 (23,241) (20,937) 11.0 (28,012) (23,241) 20.5 Employee expenses (2,151) (1,967) (1,731) (2,336) 9.4 24.2 (7.9) (8,258) (6,152) 34.2 (9,629) (8,258) 16.6 Other expenses (2,755) (2,484) (2,567) (2,500) 10.9 7.3 10.2 (9,596) (8,186) 17.2 (10,268) (9,596) 7.0 EBITDA 7,163 7,008 4,445 6,912 2.2 61.2 3.6 28,599 18,253 56.7 34,555 28,599 20.8 Other income/FX losses 235 208 767 193 626 1,974 1,617 626 Interest (2) (3) (4) (3) (9) (61) (25) (9) Depreciation (701) (677) (498) (682) (2,556) (1,862) (2,731) (2,556) Pretax profits 6,695 6,535 4,710 6,421 2.4 42.2 4.3 26,660 18,304 45.7 33,416 26,660 25.3 Tax (1,675) (1,482) (827) (1,715) (6,818) (4,399) (8,354) (6,818) Minority interest — — — — — 6 — Net income 5,020 5,053 3,882 4,706 (0.6) 29.3 6.7 19,843 13,905 42.7 25,062 19,843 26.3 Adjusted EPS (Rs) 18.9 19.1 14.7 17.8 (0.6) 29.3 6.7 74.8 52.5 42.5 94.4 74.8 26.3 Tax rate (%) 25.0 22.7 17.6 26.7 25.6 24.0 25.0 25.6 Segment wise sales Generics 9,369 9,087 7,719 8,759 3.1 21.4 7.0 35,866 27,352 31.1 42,655 35,866 18.9 Custom synthesis 7,153 6,351 5,845 6,806 12.6 22.4 5.1 27,878 21,976 26.9 32,967 27,878 18.3 Cartenoids 1,360 1,400 807 1,450 (2.9) 68.6 (6.2) 5,950 4,616 28.9 6,843 5,950 15.0 Total 17,882 16,838 13,897 17,014 6.2 28.7 5.1 69,694 53,528 30.2 82,464 69,694 18.3 % margin Gross margin 67.5 68.0 62.9 69.0 66.7 60.9 66.0 66.7 Staff cost 12.0 11.7 12.5 13.7 11.8 11.5 11.7 11.8 R&D expenses 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other expenditure 15.4 14.8 18.5 14.7 13.8 15.3 12.5 13.8 EBITDA 40.1 41.6 32.0 40.6 41.0 34.1 41.9 41.0
Source: Company, Kotak Institutional Equities estimates
Exhibit 2: We increase our EPS estimates by 5% Divi's change to estimates, March fiscal year-ends, 2021-23E (Rs mn)
New estimates New estimates % change 2022E 2023E 2022E 2023E 2022E 2023E Revenues 82,464 93,627 80,740 90,751 2.1 3.2 EBITDA 34,555 39,566 33,514 38,274 3.1 3.4 PAT 25,062 28,612 23,766 27,215 5.5 5.1 EPS 94.4 107.8 89.6 102.6 5.5 5.1 EBITDA margin (%) 41.9 42.3 41.5 42.2
Source: Company, Kotak Institutional Equities estimates
Exhibit 3: We expect robust 15% sales CAGR over FY2021-24E led by generics segment Divi's segmental break-up, March fiscal year-ends, 2015-23E (Rs mn)
2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Revenues (Rs mn) Generics 13,825 16,713 20,180 18,978 24,255 27,352 36,105 42,655 49,315 55,726 Custom synthesis 15,788 19,190 18,088 16,884 20,731 21,976 27,791 32,967 36,443 39,098 Neutraceuticals 1,536 1,857 2,390 2,510 3,810 4,616 5,950 6,843 7,869 9,049 Total 31,150 37,760 40,658 38,372 48,797 53,944 69,846 82,464 93,627 103,873 Revenue Mix (%) Generics 44 44 50 49 50 51 52 52 53 54 Custom synthesis 51 51 44 44 42 41 40 40 39 38 Neutraceuticals 5 5 6 7 8 9 9 8 8 9 Total 100 100 100 100 100 100 100 100 100 100 Growth (%) Generics 19 21 21 (6) 28 13 32 18 16 13 Custom synthesis 30 22 (6) (7) 23 6 26 19 11 7 Neutraceuticals 69 21 29 5 52 21 29 15 15 15 Total 27 21 8 (6) 27 11 29 18 14 11
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 Pharmaceuticals Divis Laboratories
Exhibit 4: We expect 17% EPS CAGR over FY2021-24E Divi's profit loss, balance sheet and cash flow, March fiscal year-ends, 2015-24E (Rs mn)
2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Net revenues 31,150 37,760 40,640 38,910 48,797 53,944 69,694 82,464 93,627 103,873 Gross profit 19,017 22,720 24,965 23,198 30,418 32,859 46,453 54,452 61,718 68,326 Adjusted EBITDA 11,734 14,217 14,484 12,685 18,490 18,222 28,599 34,555 39,566 43,620 Depreciation & amortisation (1,360) (1,180) (1,230) (1,420) (1,688) (1,862) (2,556) (2,731) (3,281) (3,831) EBIT 10,374 13,037 13,254 11,265 16,802 16,359 26,044 31,824 36,285 39,789 Other income 350 890 700 1,050 1,531 1,835 617 1,592 1,864 2,311 Profit before tax 10,724 13,927 13,954 12,315 18,332 18,195 26,660 33,416 38,149 42,100 Tax & deferred Tax (2,252) (2,646) (3,349) (3,571) (5,006) (4,429) (6,818) (8,354) (9,537) (10,525) Net income (reported) 8,472 11,281 10,605 8,743 13,327 13,765 19,843 25,062 28,612 31,575 EPS (reported) Rs. 31.9 42.5 40.0 33.0 50.2 51.9 74.8 94.4 107.8 119.0 Balance sheet Cash & equivalents 7,982 8,742 17,094 20,017 15,035 10,940 21,560 25,526 31,485 40,543 Debtors 7,416 8,809 9,009 10,144 12,822 14,134 16,765 20,632 23,878 26,781 Inventories 11,626 12,078 13,199 13,507 16,632 18,639 21,452 26,401 30,553 34,268 Other current assets 699 1,317 803 1,684 1,985 3,086 1,969 1,969 1,969 1,969 Current assets 27,724 30,946 40,105 45,351 46,475 46,798 61,747 74,529 87,885 103,561 Fixed assets (incl. goodwill) 15,231 16,998 16,668 21,094 25,753 36,979 44,053 49,322 56,041 62,210 Other non-current assets 1,159 1,740 4,812 1,386 8,174 1,579 1,941 1,941 1,941 1,941 Total assets 44,114 49,684 61,585 67,832 80,402 85,357 107,741 125,792 145,867 167,712 Short-term loans — — — — — — — — — — Creditors and other liabilities 7,755 5,195 6,595 6,507 8,325 9,268 11,125 12,885 14,362 15,684 Current liabilities 7,755 5,195 6,595 6,507 8,325 9,268 11,125 12,885 14,362 15,684 Long-term loans 11 5 — — — — — — — — Other liabilities (incl. deferred) 1,412 1,608 1,417 2,076 2,344 2,990 3,670 3,670 3,670 3,670 Total liabilities 9,178 6,807 8,011 8,584 10,669 12,258 14,795 16,555 18,032 19,354 Equity (inc. minority interest) 34,936 42,877 53,574 59,248 69,733 73,099 92,946 109,236 127,834 148,358 Total equity and liabilities 44,114 49,684 61,585 67,832 80,402 85,357 107,741 125,792 145,867 167,712 Cash flow CF from operations pre WC 9,519 11,589 9,618 12,180 14,541 14,342 22,110 27,793 31,893 35,406 Working capital (1,256) (1,209) (371) (2,164) (4,998) (2,183) (2,641) (7,055) (5,921) (5,296) Capex (3,072) (3,957) (3,767) (2,739) (7,331) (11,832) (9,102) (8,000) (10,000) (10,000) FCF 5,191 6,422 5,480 7,277 2,212 327 10,367 12,738 15,972 20,110 Ratios EBITDA margin (%) 37.7 37.7 35.6 32.6 37.9 33.8 41.0 41.9 42.3 42.0 RoAE (%) 26.2 29.0 22.0 15.5 20.7 19.3 23.9 24.8 24.1 22.9 RoACE (%) 30.8 32.2 26.6 19.4 25.2 22.1 30.2 30.4 29.7 28.1 Net debt to equity (X) (0.2) (0.2) (0.3) (0.3) (0.2) (0.1) (0.2) (0.2) (0.2) (0.3)
Source: Company, Kotak Institutional Equities estimates
4 KOTAK INSTITUTIONAL EQUITIES RESEARCH BUY Mahindra & Mahindra (MM) https://ultraviewer.et/en/own Automobiles & Components MAY 28, 2021 load.html RESULT Sector view: Cautious
Delivering on key metrics. M&M+MVML reported 4QFY21 EBITDA of Rs19.6 bn CMP (`): 846 (+60% yoy), broadly in line with our estimates. M&M management has taken multiple Fair Value (`): 975 steps to improve its capital-allocation strategy by selling stakes in lossmaking BSE-30: 51,423 subsidiaries and exiting certain JVs or deals, which would have consumed capital. Also, turnaround in international farm and auto subsidiaries will aid the company to meet its RoE target. Maintain BUY with revised FV of Rs975.
Mahindra & Mahindra Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 846/975/BUY EPS (Rs) 29.0 38.9 52.9 52-week range (Rs) (high-low) 952-424 EPS growth (%) 22.0 33.9 36.2 Mcap (bn) (Rs/US$) 1,052/14.6 P/E (X) 29.1 21.8 16.0 ADTV-3M (mn) (Rs/US$) 3,912/54 P/B (X) 2.7 2.5 2.2 Shareholding pattern (%) EV/EBITDA (X) 14.7 13.6 10.4 Promoters 18.9 RoE (%) 9.4 11.9 14.5 FPIs/MFs/BFIs 40.7/10.1/12.9 Div. yield (%) 1.0 0.7 0.9 Price performance (%) 1M 3M 12M Sales (Rs bn) 446 528 617 Absolute 8.2 4.9 92.1 EBITDA (Rs bn) 70 76 96 Rel. to BSE-30 4.6 0.2 20.3 Net profits (Rs bn) 33 44 60
4QFY21 EBITDA 2% below our estimates
M&M+MVML reported net EBITDA Rs19.6 bn (+60% yoy), 2% below our expectations in 4QFY21. Net revenues came in at Rs133.4 bn (+48% yoy), 3% above our expectations. Net revenues increased by 48% yoy led by (1) 33% yoy increase in volumes and (2) 11% yoy increase in realizations. Automotive division revenues came in at Rs78.6 bn, an increase of 43% yoy led by (1) 22% yoy increase in ASPs due to BS-VI transition and a richer product mix and (2) 17% yoy increase in volumes in 4QFY21. Tractor division revenues increased by 60% yoy led by (1) 58% yoy increase in volumes and (2) 1% yoy increase in ASPs in 4QFY21. Automotive EBIT margin came in at 5% (+90 bps yoy), 100 bps below our estimates due to RM headwinds. In the automotive segment, shortage of semi-conductors remained an area of concern for the company. Tractor EBIT margins came in at 22.0% (+440 bps yoy, -140 bps qoq), 200 bps above our expectations possibly due to cost optimization, partly offset by RM headwinds. EBITDA margin came in at 14.7% (+110 bps yoy, -230 bps qoq), 80 bps below our estimate mainly due to higher-than-expected other expenses. Adjusted net profit came in at Rs8 bn, 35% below our estimates due to lower-than-expected other income and higher tax rate. During the quarter, the company took exceptional loss of Rs8.4 bn on account of impairment provisions for certain long-term assets and other exposures. For FY2021, the company took exceptional loss of Rs31.7 bn, mainly pertaining to write-down of investments in Ssangyong Motors and in other subsidiaries.
Cut our FY2022-23E EPS estimates by 5-19%; maintain BUY on cheap valuations
We have cut our FY2022-23E EPS by 5-19% due to 80-170 bps cut in EBITDA margin assumptions owing to RM headwinds. We expect recovery in automotive and tractor segment Hitesh Goel volumes once the Covid and chip shortage situation normalizes. The company has guided for capex (including investments) of Rs170 bn over the next three years to accelerate its core growth and also invest in new growth gems, which could be a concern for investors if they Rishi Vora don’t execute well. Losses in international farm and auto subsidiaries have reduced despite challenging external environment, which is encouraging. Maintain BUY rating on attractive valuations; SoTP-based FV increased to Rs975 (Rs1,000 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. Automobiles & Components Mahindra & Mahindra
Exhibit 1: 4QFY21 EBITDA was 2% below our estimates due to higher-than-expected other cost Interim results of M&M+MVML, March fiscal year-ends (Rs mn)
(% chg.) 4QFY21 4QFY21E 4QFY20 3QFY21 4QFY21E 4QFY20 3QFY21 FY2021 FY2020 Yoy (%) FY2022E FY2021 Yoy (%) Volumes (units) 202,223 202,223 151,713 223,968 33.3 (9.7) 706,779 777,198 (9.1) 839,406 706,779 18.8 Net realization (Rs) 659,576 637,813 593,536 627,614 3.4 11.1 5.1 630,670 577,273 9.2 628,909 630,670 (0.3) Net sales 133,382 128,980 90,047 140,565 3.4 48.1 (5.1) 445,744 448,655 (0.6) 527,910 445,744 18.4 Raw materials (92,255) (90,286) (57,898) (96,292) 2.2 59.3 (4.2) (301,766) (298,668) 1.0 (364,258) (301,766) 20.7 Staff costs (7,964) (8,500) (7,127) (8,841) (6.3) 11.7 (9.9) (32,428) (32,237) 0.6 (37,292) (32,428) 15.0 Other expenses (13,559) (10,187) (12,748) (11,576) 33.1 6.4 17.1 (41,785) (54,245) (23.0) (50,142) (41,785) 20.0 Total expenses (113,777) (108,973) (77,773) (116,709) 4.4 46.3 (2.5) (375,979) (385,150) (2.4) (451,692) (375,979) 20.1 EBITDA 19,605 20,007 12,275 23,856 (2.0) 59.7 (17.8) 69,766 63,506 9.9 76,218 69,766 9.2 Other income 1,178 3,500 3,155 5,618 (66.3) (62.7) (79.0) 11,973 15,391 (22.2) 13,473 11,973 12.5 Interest expense (971) (1,000) (359) (1,039) (2.9) 170.8 (6.6) (3,957) (1,245) 217.8 (3,500) (3,957) (11.6) Depreciation expense (5,899) (6,200) (6,172) (6,043) (4.9) (4.4) (2.4) (23,624) (23,631) (0.0) (27,047) (23,624) 14.5 Extraordinary income/exp (8,399) — (35,776) (12,140) (31,745) (28,112) — (31,745) Profit before tax 5,514 16,307 (26,877) 10,253 (66.2) (46.2) 22,413 25,910 (13.5) 59,144 22,413 163.9 Tax expense (3,888) (4,077) (5,673) (4,944) (4.6) (21.4) (13,183) (18,513) (28.8) (14,904) (13,183) 13.1 Profit after tax 1,625 12,231 (32,550) 5,309 (86.7) (69.4) 9,229 7,397 24.8 44,240 9,229 379.3 Adj PAT 7,975 12,231 (5,503) 14,486 (34.8) (44.9) 33,038 27,075 22.0 44,240 33,038 33.9 Adj EPS 7.0 10.7 (4.8) 12.7 (34.8) (44.9) 29.0 23.8 22.0 38.9 29.0 33.9 Raw material cost as % of net sales 69.2 70.0 64.3 68.5 67.7 66.6 69.0 67.7 Staff cost as % of net sales 6.0 6.6 7.9 6.3 7.3 7.2 7.1 7.3 Other expenses as % of net sales 10.2 7.9 14.2 8.2 9.4 12.1 9.5 9.4 Gross margin (%) 30.8 30.0 35.7 31.5 32.3 33.4 31.0 32.3 EBITDA margin (%) 14.7 15.5 13.6 17.0 15.7 14.2 14.4 15.7 Tax rate (%) 70.5 25.0 (21.1) 48.2 58.8 71.5 25.2 58.8 Volumes (units) Automotive division volumes 108,329 108,329 92,423 122,267 17.2 (11.4) 352,281 475,283 (25.9) 456,548 352,281 29.6 Tractors volumes 93,894 93,894 59,290 101,701 58.4 (7.7) 354,498 301,915 17.4 382,858 354,498 8.0 Total volumes 202,223 202,223 151,713 223,968 33.3 (9.7) 706,779 777,198 (9.1) 839,406 706,779 18.8 Volume mix (%) Automotive division 53.6 53.6 60.9 54.6 49.8 61.2 54.4 49.8 Tractors 46.4 46.4 39.1 45.4 50.2 38.8 45.6 50.2 Total volumes 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Segmental break up Revenue break up Automotive revenues 78,581 74,373 55,058 83,111 5.7 42.7 (5.4) 245,652 278,083 (11.7) 304,170 245,652 23.8 Farm Equipment revenues 49,755 49,249 31,110 52,815 1.0 59.9 (5.8) 184,333 154,025 19.7 203,252 184,333 10.3 Others (including eliminations) revenues 5,045 5,359 4,518 5,359 (5.9) 11.7 (5.9) 15,760 16,548 20,488 15,760 EBIT Automotive EBIT 3,900 4,462 2,253 6,141 (12.6) 73.1 (36.5) 8,320 16,824 (50.5) 13,688 8,320 64.5 Farm Equipment EBIT 10,950 9,850 5,488 12,359 11.2 99.5 (11.4) 41,927 29,262 43.3 40,650 41,927 (3.0) EBIT margin (%) Automotive 5.0 6.0 4.1 7.4 3.4 6.1 4.5 3.4 Farm Equipment 22.0 20.0 17.6 23.4 22.7 19.0 20.0 22.7 Average selling prices (Rs) Automotive 725,396 686,544 595,720 679,747 5.7 21.8 6.7 697,318 585,088 19.2 666,239 697,318 (4.5) Farm Equipment 529,906 524,514 524,709 519,320 1.0 1.0 2.0 519,982 510,158 1.9 530,880 519,982 2.1
Source: Company, Kotak Institutional Equities estimates
Exhibit 2: Consolidated EBIT grew by 19% on a qoq basis in 4QFY21; in FY2021, consolidated EBIT was 8% higher on a yoy basis Interim consolidated quarterly results, March fiscal year-ends, 2020-21 (Rs mn, %)
4QFY21 4QFY20 3QFY21 Yoy (%) QoQ (%) FY2021 FY2020 Yoy (%) Revenues (Rs mn) Automotive segment 85,045 58,514 86,062 45.3 (1.2) 259,897 288,235 (9.8) Farm equipment 65,926 42,088 68,148 56.6 (3.3) 247,925 211,132 17.4 Financial Services 29,912 30,883 29,490 (3.1) 1.4 119,904 118,276 1.4 Hospitality 4,685 6,173 4,961 (24.1) (5.5) 17,467 23,738 (26.4) Real estate 619 1,104 714 (44.0) (13.4) 1,837 6,391 (71.3) Others 35,918 29,255 32,484 22.8 10.6 115,263 128,210 (10.1) Total 222,104 168,017 221,858 32.2 0.1 762,293 775,981 (1.8) Less: Inter-segment revenue 7,544 4,870 5,599 54.9 34.7 19,515 22,162 (11.9) Consolidated revenues 214,560 163,147 216,260 31.5 (0.8) 742,778 753,819 (1.5) EBIT (excluding exceptional) Automotive segment 5,051 2,025 5,766 (12.4) 7,357 13,098 (43.8) Farm equipment 11,241 2,299 12,369 389.0 (9.1) 41,578 22,766 82.6 Financial Services 2,239 2,638 (3,668) (15.1) 5,383 14,498 (62.9) Hospitality (308) 384 162 (257) 1,280 Real estate (382) (493) (202) (989) (500) Others 705 (490) 1,147 (38.5) 2,779 437 535.9 Consolidated EBIT 18,545 6,363 15,574 19.1 55,851 51,580 8.3 Profit/(Loss) from discontinued operations attributable to the company (4,851) (11,661) (9,983) (21,895) (30,338)
Source: Company, Kotak Institutional Equities
6 KOTAK INSTITUTIONAL EQUITIES RESEARCH Mahindra & Mahindra Automobiles & Components
Expect low single-digit volume growth for domestic tractor industry in FY2022E
The company has guided for low single-digit domestic tractor industry volume growth on a yoy basis in FY2022E. The company highlighted tractor segment fundamentals continue to remain strong led by (1) strong Kharif procurement and higher Rabi acreage, (2) higher reservoir levels, (3) strong agricultural credit growth and (4) expectations of normal monsoons. The company will launch new products such as K2 model, Plus series, Yuvo Refresh and horticulture-focused products. Also, the company will expand its dealer network in order to further consolidate its market share. The company will commence its production for Project K2 and will launch six models in 20-25 HP range by CY2023E, nine models in 21- 30 HP range & 11 models in 26-40 HP range by CY2023-24E and 11 models in 45-70 HP range by CY2024-25E. Overall, the company remains optimistic about medium-term growth prospects led by (1) strong product pipelines, (2) scale-up in exports and farm implement revenues and (3) channel expansion. We expect M&M tractor volumes to grow by 8% CAGR over the next two years and building in EBIT margin of 20% in FY2022E and 22% in FY2023E.
Exhibit 3: The company will launch 37 models over four platforms across four geographies over the next five years Details on project K2, calendar year-ends, 2023-25
Source: Company, Kotak Institutional Equities
New Thar launch has spurred some optimism in automotive business
The company witnessed strong growth in the UV segment in 4QFY21 led by strong demand for Thar, XUV300, Bolero and Scorpio. They have received 55,000+ bookings (47% of the bookings were for automatic variants). Also, the company received 6,000+ bookings per month in 2HFY21 for XUV300. The company witnessed booking growth of 90% yoy in 2HFY21 for XUV300 and has a waiting period of 12+ weeks. Also, Bolero and Scorpio combined clocked in monthly sales of 10,000+ units in 4QFY21 and has waiting period of 6- 8 weeks. The company expects to launch new Scorpio, W620 and XUV700 in CY2021-22E. The company intends to launch differentiated and profitable products and not compete on market share. The company intends to launch nine new products by CY2026E. In the automotive segment, shortage of semi-conductors remained an area of concern for the company. In terms of cost savings, the company reduced the fixed expense by Rs9 bn over the past two years led by (1) 40% reduction in manufacturing fixed overheads, (2) 70% reduction in sales and marketing spends and (3) 30% reduction in G&A expenses. Also, in the LCV business, the company will launch 14 new products by CY2026E to strengthen its
KOTAK INSTITUTIONAL EQUITIES RESEARCH 7 Automobiles & Components Mahindra & Mahindra
leadership position. We expect automotive segment volumes to grow by 25% CAGR over FY2022-23E and building in EBIT margin of 4.5% in FY2022E and 6.5% in FY2023E.
Exhibit 4: New Thar continues to do well Model-wise volumes of M&M, 4QFY17-4QFY21 (units, %)
4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 Volumes (units) Bolero 21,721 19,480 21,742 18,835 25,311 22,822 19,635 17,636 23,991 16,375 12,618 16,672 13,379 5,007 15,436 19,106 21,315 Scorpio 14,155 12,498 15,035 10,415 15,986 11,455 11,423 10,199 14,760 10,477 9,326 12,162 6,861 3,287 9,989 11,103 9,946 Xylo 1,840 1,691 2,131 1,351 2,146 1,465 1,783 863 1,140 1,066 735 215 56 — — — — XUV500 6,997 5,690 8,594 5,345 5,784 8,482 6,746 4,329 6,381 3,832 3,204 3,758 1,808 267 2,327 2,651 2,320 Quanto/NuvoSport 201 137 71 42 4 1 1 — — — 8 11 — — — — — Rexton/Alturas G4 4 3 1 18 64 6 37 357 1,072 484 227 259 106 — 74 101 95 TUV300 7,197 6,450 7,360 6,717 8,491 5,803 5,803 4,174 3,444 3,853 3,176 2,813 1,701 — — — — KUV100 8,593 5,579 4,263 7,471 8,229 4,509 3,635 2,051 1,502 786 517 302 198 73 134 74 16 Thar 4,861 4,207 6,245 4,600 6,127 5,729 6,878 4,778 6,161 4,056 2,583 1,559 632 238 766 5,541 8,110 Marazzo — — — — — — 4,591 10,403 9,136 4,279 2,545 3,343 2,526 — 1,591 1,124 550 XUV300 — — — — — — — 9,532 14,082 9,488 7,401 6,605 3,069 9,209 13,314 10,373 Domestic utilitiy vehicles 65,569 55,735 65,442 54,794 72,142 60,272 60,532 54,790 77,119 59,290 44,427 48,495 33,872 11,941 39,526 53,014 52,725 Volume Mix (%) Bolero 33.1 35.0 33.2 34.4 35.1 37.9 32.4 32.2 31.1 27.6 28.4 34.4 39.5 41.9 39.1 36.0 40.4 Scorpio 21.6 22.4 23.0 19.0 22.2 19.0 18.9 18.6 19.1 17.7 21.0 25.1 20.3 27.5 25.3 20.9 18.9 Xylo 2.8 3.0 3.3 2.5 3.0 2.4 2.9 1.6 1.5 1.8 1.7 0.4 0.2 — — — — XUV500 10.7 10.2 13.1 9.8 8.0 14.1 11.1 7.9 8.3 6.5 7.2 7.7 5.3 2.2 5.9 5.0 4.4 Quanto/NuvoSport 0.3 0.2 0.1 0.1 0.0 0.0 0.0 — — — 0.0 0.0 — — — — — Rexton 0.0 0.0 0.0 0.0 0.1 0.0 0.1 0.7 1.4 0.8 0.5 0.5 0.3 — — — — TUV300 11.0 11.6 11.2 12.3 11.8 9.6 9.6 7.6 4.5 6.5 7.1 5.8 5.0 — — — — KUV100 13.1 10.0 6.5 13.6 11.4 7.5 6.0 3.7 1.9 1.3 1.2 0.6 0.6 0.6 0.3 0.1 0.0 Thar 7.4 7.5 9.5 8.4 8.5 9.5 11.4 8.7 8.0 6.8 5.8 3.2 1.9 2.0 1.9 10.5 15.4 Marazzo — — — — — — 7.6 19.0 11.8 7.2 5.7 6.9 7.5 — 4.0 2.1 1.0 XUV300 — — — — — — — — 12.4 23.8 21.4 15.3 19.5 25.7 23.3 25.1 19.7 Domestic utilitiy vehicles 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Source: Company, Kotak Institutional Equities estimates
Exhibit 5: The company will launch nine new products by CY2026E Details on UV product launches, calendar year-ends, 2021-26
Source: Company, Kotak Institutional Equities
8 KOTAK INSTITUTIONAL EQUITIES RESEARCH Mahindra & Mahindra Automobiles & Components
Exhibit 6: The company will launch 14 new products by CY2026E Details on LCV product launches, calendar year-ends, 2021-26
Source: Company, Kotak Institutional Equities
Turnaround continues in international auto and farm subsidiaries
Since the inception of FY2021, the company has focused on realigning its capital-allocation norms. Over the last one year, the company has taken several decisions to correct its capital allocation strategy – (1) no infusion of further capital into Ssangyong and eventually exited from the company, (2) complete exit from Genze business, (3) the company has bailed out from the bid to manufacture small delivery trucks for the United States’ Postal Service, which would have required investment worth US$500 mn, (4) the company has also shut down the aerospace business in Australia, (5) divestment of entire stake held in Mahindra First Choice Services and its subsidiary Auto Digitech to TVS Automobile Solutions (TASL) in a share-swap deal, (6) called off the proposed JV with Ford India due to higher investments required, which would have impacted return ratios and (7) is scouting for strategic investors for Mahindra Electric Mobility and Automobili Pininfarina. Also, the company has focused on improving the profitability of international subsidiaries and has been successful in achieving the same.
Global farm equipment subsidiaries clocked in EBIT of Rs290 mn in 4QFY21 versus EBIT profit of Rs10 mn in 3QFY21. For the full year, EBIT loss came in at Rs360 mn versus loss of Rs6.5 bn in FY2020. Overall the company has improved its operating performance as compared to previous year in Mexico, Brazil, North America, Turkey as well as Japan. The company achieved PBIT breakeven in global farm international subsidiaries for the third consecutive quarter. Global auto subsidiaries net loss has declined from Rs9.7 bn in FY2020 to Rs5.9 bn in FY2021 despite challenging conditions led by lower losses in Peugeot Motorcycles and MANA. The company has identified Peugeot Motorcycles as one of the companies with clear path to 18% RoE and turnaround action includes (1) capitalizing on recovery in China, (2) cost-control initiatives, (3) new product launches and geography expansion and (4) improvement in European operations led by volume and pricing growth.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 9 Automobiles & Components Mahindra & Mahindra
Exhibit 7: Losses in international subsidiaries have reduced on a yoy basis in FY2021 despite challenging external environment Performance of international subsidiaries, March fiscal year-ends, 2020-21 (Rs crore)
Source: Company, Kotak Institutional Equities
Exhibit 8: The company has strong presence in global markets Details on international farm subsidiaries
Source: Company, Kotak Institutional Equities
10 KOTAK INSTITUTIONAL EQUITIES RESEARCH Mahindra & Mahindra Automobiles & Components
Company’s way forward – differentiated and profitable growth (FLY strategy)
The company highlighted its strategy in both automotive and farm sectors. During 1HFY21 (Walk strategy), the company had focused on managing cash, gradually ramping up of operations with safety first, support dealers and suppliers and focus on high growth segments such as rural, goods mobility and B2B. During 2HFY21 (Run strategy), the company had focused on its core business with launch of new models in the SUV segment, capex and investment prioritization and work towards aggressive cost optimization. From FY2022E onwards (Fly strategy), the company will launch models, focus on EV portfolio, focus on SUV core brand differentiation and will build path to profitability for global subsidiaries. Also, the company highlighted that it will focus on several sectors which can be multi-bagger over the long term – (1) logistics, (2) Mahindra Rural Housing Finance, (3) farm implements, (4) Mahindra Accelo, (5) Mahindra two-wheeler (Classic legends), (6) hospitality business, (7) Mahindra Susten (renewables business), (8) real estate segment and (9) Bristlecone. For each of these segments, the company is targeting market cap of US$1 bn over the next three-five years. Management highlighted they will spend Rs35 bn in these verticals over FY2022-24E, which could be a concern area for investors as investors don’t think these are core areas of M&M.
Exhibit 9: The company has identified nine segments which can reach US$1 bn market capitalization over the next 3-5 years Details on growth gems
Source: Company, Kotak Institutional Equities
Gearing to enter EV space
The company highlighted its strategy to enter into the EV space. Initially the company will focus on last mile mobility applications with its current product portfolio of Treo, Alfa and Atom. The company will tie up with Amazon and Flipkart to scale up its EV business. Over the next two-three years, the company will provide EV offerings from its current SUV portfolio with the help of relevant partnerships and its research arm Mahindra Research Valley (MRV). In FY2025-30E, the company will develop BEVs with its internal R&D capabilities (MRV, UK design center) and partnerships with relevant players. The company has earmarked an investment of Rs30 bn for electrification of its portfolio over FY2022-24 period, mainly in product development.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 11 Automobiles & Components Mahindra & Mahindra
Exhibit 10: The company will invest Rs30 bn in the EV space over the next three years Details on EV strategy
Source: Company, Kotak Institutional Equities
Capital deployment of Rs170 bn over the next three years
The company will deploy Rs170 bn over the next three years out of which Rs120 bn will be the capex and Rs50 bn will be the investments in the group companies and growth gems. Out of Rs120 bn of capex, the company will spend Rs90 bn in the automotive business (includes Rs30 bn for EV business) and the company will spend Rs30 bn in the farm business. Out of Rs50 bn of investments, the company will invest Rs15 bn in auto and farm segments and Rs35 bn in other group companies. Also, the company has reiterated its target to achieve 18%+ RoCE by FY2025E and has aspirations of achieving revenue growth as well as EPS CAGR of 15-20% over the next four years.
12 KOTAK INSTITUTIONAL EQUITIES RESEARCH Mahindra & Mahindra Automobiles & Components
Exhibit 11: The company will spend Rs170 bn over the next three years Details on cash utilization plan, March fiscal year-ends, 2022-24 (Rs crore)
Source: Company, Kotak Institutional Equities
Exhibit 12: We have increased our FY2022-23E EPS estimates by 5-19% on lower EBITDA margin assumptions Earnings revision table, M&M+MVML, March fiscal year-ends, 2022-23E (Rs mn, %)
New estimates Old estimates % change 2022E 2023E 2022E 2023E 2022E 2023E M&M+MVML Volumes (units) 839,406 964,152 865,231 967,505 (3.0) (0.3) Net sales 527,910 617,456 531,251 596,736 (0.6) 3.5 EBITDA 76,218 95,980 85,689 97,464 (11.1) (1.5) EBITDA margin (%) 14.4 15.5 16.1 16.3 Adjusted profit after tax 44,240 60,233 54,357 63,045 (18.6) (4.5) Adjusted EPS FD 38.9 52.9 47.8 55.4 (18.6) (4.5)
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 13 Automobiles & Components Mahindra & Mahindra
Exhibit 13: We value M&M at Rs975/share SoTP, March fiscal year-ends (Rs)
Value per share (Rs) Comment Tractor segment 510 DCF based methodology UV segment 27 DCF based methodology LCV segment 150 DCF based methodology Core business value 687 Tech Mahindra 207 Based on KIE fair value of Rs1,150 per share Mahindra finance 41 Based on KIE value of Rs200 per share Mahindra Logistics 14 Based on current market price Mahindra Holidays 12 Based on current market price Mahindra Lifespace Developers Ltd 8 Based on current market price Mahindra CIE Automotive Limited 7 Based on KIE fair value of Rs150 per share Other unlisted subsidiaries — Assuming unlisted subsidiaries to reach break-even point in FY2023E Subsidiaries 289 SOTP-based fair value 975
Source: Company, Kotak Institutional Equities estimates
Exhibit 14: We value tractor business at Rs510/share DCF analysis of M&M tractor division, March fiscal year-ends, 2019-36E (Rs mn, %)
CAGR (%) 2019 2020 2021 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2036E (FY2021-36E) Tractor population in India (mn units) 5.9 6.2 6.7 7.1 7.6 8.0 8.6 9.3 10.0 10.6 11.2 12.0 16.2 Industry sales volumes (units) 788,396 705,018 899,406 953,370 1,010,573 1,071,207 1,135,479 1,203,608 1,275,825 1,352,374 1,419,993 1,490,992 1,998,072 5.5 Yoy growth (%) 7.8 (10.6) 27.6 6.0 6.0 6.0 6.0 6.0 6.0 6.0 5.0 5.0 5.0 M&M market share (%) 40.2 41.4 38.2 39.0 39.7 40.4 40.0 40.0 40.0 40.0 40.0 40.0 40.0 Domestic volumes of M&M (units) 316,742 291,901 343,833 371,340 401,047 433,131 454,192 481,443 510,330 540,950 567,997 596,397 799,229 5.8 Export volumes of M&M(units) 13,694 10,014 10,665 11,518 12,440 13,062 13,715 14,400 15,120 15,877 16,670 17,504 23,457 Total volumes of M&M (units) 330,436 301,915 354,498 382,858 413,486 421,756 467,906 495,844 525,450 556,826 584,667 613,901 822,686 5.8 Yoy growth (%) 3.4 (8.6) 17.4 8.0 8.0 2.0 10.9 6.0 6.0 6.0 5.0 5.0 5.0 ASPs 498,634 496,976 504,264 510,505 516,972 515,655 525,968 536,487 547,217 558,161 569,324 580,711 653,975 1.7 Tractor revenues 164,767 150,045 178,761 195,451 213,761 217,481 246,104 266,014 287,535 310,799 332,865 356,499 538,016 7.6 Farm implements revenues 3,980 3,980 5,572 7,801 10,141 13,183 17,138 20,566 24,679 29,615 35,538 42,646 112,076 22.2 Overall revenues 168,747 154,025 184,333 203,252 223,902 230,664 263,242 286,580 312,214 340,414 368,403 399,145 650,092 8.8 Yoy growth (%) 6.8 (8.7) 19.7 10.3 10.2 3.0 14.1 8.9 8.9 9.0 8.2 8.3 8.4 EBIT 32,651 29,262 41,927 40,650 49,258 50,746 57,913 57,316 62,443 64,679 69,997 71,846 100,764 EBIT margin (%) 19.3 19.0 22.7 20.0 22.0 22.0 22.0 20.0 20.0 19.0 19.0 18.0 15.5 EBIT (1-tax) 22,855.8 21,771 31,194 30,244 36,648 37,755 43,087 42,643 46,458 48,121 52,078 53,453 74,969 6.0 Depreciation 3,270 3,687 4,065 4,478 4,613 5,265 5,732 6,244 6,808 7,368 7,983 10,401 Increase/(Decrease) in working capital (807) 11,761 (711) 1,980 648 3,124 (9,539) 1,405 1,545 1,534 (3,783) 2,067 Capex (4,542) (4,860) (5,200) (5,564) (6,009) (6,490) (7,009) (7,570) (8,175) (8,829) (9,535) (15,132) Free cash flow 19,693 41,782 28,398 37,543 37,008 44,987 31,826 46,537 48,299 52,150 48,118 72,305 3.7 Discounted free cash flow 28,398 33,520 29,502 32,021 20,226 26,406 24,470 23,590 19,434 14,795
WACC (%) 12.0 Terminal growth (%) 4.0 Capitalization rate (%) 8.0 Sum of free cash flows 343,219 Cash flow of terminal value 72,305 Terminal value 939,965 Discounted terminal value 192,335 Enterprise value 535,554 Net debt/(cash) - March 2020 (45,000) Equity value 580,554 Shares outstanding (mn) 1,138 DCF-based fair value 510
Source: Company, Kotak Institutional Equities estimates
14 KOTAK INSTITUTIONAL EQUITIES RESEARCH Mahindra & Mahindra Automobiles & Components
Exhibit 15: We value UV business at Rs27/share DCF analysis of M&M UV division, March fiscal year-ends, 2019-24E (Rs mn, %)
2019 2020 2021E 2022E 2023E 2024E Total volumes of M&M (units) 268,195 198,407 163,963 224,624 280,937 308,614 Yoy growth (%) 365.3 (26.0) (17.4) 37.0 25.1 9.9 ASPs 564,259 582,457 616,367 612,846 640,114 648,820 Overall revenues 151,331 115,564 101,061 137,660 179,832 200,235 Yoy growth (%) (23.6) (12.5) 36.2 30.6 11.3 EBIT 6,053 2,311 2,021 5,506 10,790 14,016 EBIT margin (%) 4.0 2.0 2.0 4.0 6.0 7.0 EBIT (1-tax) 4,237 1,720 1,504 4,097 8,028 10,428 Depreciation 11,407 11,118 13,632 14,763 16,490 Increase/(Decrease) in working capital (15,352) 23,113 (12,389) 6,745 10,280 Capex (27,251) (15,997) (23,151) (22,787) (21,409) Free cash flow (29,476) 19,738 (17,811) 6,749 15,788
Valuation FCF as of FY2023E (Rs mn) 6,749 No-growth mutiple (EV/FCF) 8 Implied EV value (Rs mn) 56,246 Net debt as of March 2020 (Rs mn) 25,183 Implied market capitlization (Rs mn) 31,063 Shares outstanding (mn) 1,138 Equity value per share on March 2023E basis 27
Source: Company, Kotak Institutional Equities estimates
Exhibit 16: We value LCV business at Rs150/share DCF analysis of M&M LCV division, March fiscal year-ends, 2019-40E (Rs mn, %)
CAGR (%) 2019 2020 2021 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2040E (FY2021-40E) Total LCV volumes of M&M (units) 258,159 206,051 164,167 197,344 226,860 249,371 274,124 301,344 323,223 356,085 392,282 432,153 812,186 8.8 Total M&HCV volumes of M&M (units) 12,802 6,987 3,271 4,579 6,869 7,556 7,934 8,331 8,747 9,184 9,644 10,126 16,494 8.9 Total 3W volumes of M&M (units) 70,472 63,838 20,880 30,000 36,000 37,800 39,312 40,884 42,520 44,221 45,989 47,829 70,799 6.6 Total volumes of M&M (units) 341,433 276,876 188,318 231,923 269,729 294,727 321,370 350,559 374,490 409,490 447,915 490,108 899,479 8.6 Yoy growth (%) 6.8 (18.9) (32.0) 23.2 16.3 9.3 9.0 9.1 6.8 9.3 9.4 9.4 5.2 ASPs 610,381 646,741 851,488 806,292 792,361 794,242 810,127 826,330 842,856 859,713 876,908 894,446 1,090,324 1.3 Overall revenues 208,404 179,067 160,351 186,998 213,723 234,085 260,351 289,677 315,641 352,044 392,780 438,375 980,724 10.0 Yoy growth (%) 31.9 (14.1) (10.5) 16.6 14.3 9.5 11.2 11.3 9.0 11.5 11.6 11.6 7.3 EBIT 22,277 15,239 6,560 8,520 13,719 15,108 16,804 18,696 20,372 22,722 29,459 32,878 49,036 EBIT margin (%) 10.7 8.5 4.1 4.6 6.4 6.5 6.5 6.5 6.5 6.5 7.5 7.5 5.0 EBIT (1-tax) 15,594 11,338 4,880 6,339 10,207 11,241 12,502 13,910 15,157 16,905 21,917 24,461 36,483 11.2 Depreciation 8,953 8,819 9,350 10,686 11,704 13,018 13,035 14,204 15,842 17,675 18,850 39,229 Increase/(Decrease) in working capital 1,206 769 (6,218) 4,025 (4,043) (1,439) (1,607) (1,423) (1,995) (2,232) (2,498) (3,671) Capex (13,625) (12,263) (11,650) (11,650) (12,582) (13,588) (14,675) (15,849) (17,117) (18,486) (19,965) (41,906) Free cash flow 7,871 2,206 (2,179) 13,268 6,320 10,492 10,663 12,089 13,635 18,874 20,848 30,134 14.8 Discounted free cash flow (2,179) 11,847 5,038 7,468 6,777 6,860 6,908 8,537 8,420 3,919
WACC (%) 12.0 Terminal growth (%) 4.0 Capitalization rate (%) 8.0 Sum of free cash flows 121,177 Cash flow of terminal value 30,134 Terminal value 391,747 Discounted terminal value 50,943 Enterprise value 172,120 Net debt/(cash) - March 2020 2,000 Equity value 170,120 Shares outstanding (mn) 1,138 DCF-based fair value 150
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 15 Automobiles & Components Mahindra & Mahindra
Exhibit 17: We expect losses from other subsidiaries to decline to nil in FY2023E from Rs6.3 bn in FY2021 M&M subsidiaries financial forecast, March fiscal year-ends, 2015-24E (Rs mn)
2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Financial performance (Rs mn) Standalone PAT (before exceptional) 29,854 31,358 30,949 39,224 48,258 33,445 39,319 44,240 60,233 67,129 Subsidiaries profit (6,676) (4,591) (3,909) 3,000 (3,998) (4,877) (3,484) 17,000 22,994 28,390 Share of profit from associates 7,887 8,460 8,994 11,073 13,665 10,273 12,767 15,878 18,423 20,807 Minority interest 2,439 4,061 3,525 4,474 7,014 3,210 3,545 9,609 11,833 14,320 Consolidated PAT (before exceptional) 28,626 31,167 32,509 48,823 50,911 35,631 45,057 67,509 89,817 102,006 Key subsidiaries/associates PAT (Rs mn) Domestic listed subsidiaries/associates PAT (Rs mn) Associates profit contribution (Rs mn) Tech Mahindra 7,018 8,267 7,406 9,951 12,452 11,651 12,944 15,539 17,287 19,300 Mahindra CIE (158) 284 292 618 658 405 122 339 636 707 Total domestic listed associates PAT 6,860 8,551 7,697 10,569 13,109 12,056 13,066 15,878 17,923 20,007 Subsidiaries profit (Rs mn) M&M Financial Services 12,536 10,382 6,201 13,728 15,571 9,064 3,352 17,469 20,171 24,390 Mahindra Lifespace Developers 3,377 1,417 706 789 586 (1,927) (715) 400 600 800 Mahindra Holiday & Resorts India 1,050 1,721 2,009 2,072 639 (1,321) (131) 500 1,000 1,200 Mahindra Logistics 621 373 483 974 844 551 300 881 1,223 1,500 Total domestic listed subsidiaries PAT 17,584 13,893 9,399 17,562 17,640 6,368 2,807 19,250 22,994 27,890 Other subsidiaries/associates PAT (Rs mn) Other associates profit contribution (Rs mn) Other associates PAT contribution 1,027 (90) 1,297 504 556 (1,783) (299) — 500 800 Other subsidiaries PAT (Rs mn) Mahindra Electric mobility (534) (916) (1,132) (1,290) (530) (552) (1,000) (1,000) (1,000) (1,000) SsangYong Motor company (7,169) (3,303) 3,196 (5,562) (3,974) — — — — — Automobili Pininfarina GmbH — — — — (961) (1,296) (1,810) (2,000) (1,000) (1,000) Mahindra USA 246 414 426 391 (5,493) (5,071) (1,280) — 100 200 Mahindra Rural Housing Limited 653 967 439 2,246 2,505 1,486 500 750 1,700 2,000 Peugeot Motorcycles (486) (1,665) (1,731) (1,715) (2,814) (2,558) (440) — 200 300 Mahindra Tractor Assembly (35) (959) (1,124) (1,345) (2,429) (2,216) (310) — — — Mahindra Aerospace Private Limited (12) (1,399) (53) (1,331) (1,798) (3,194) (1,000) — — — Other subsidiaries profit (16,924) (11,625) (13,330) (5,957) (6,143) 2,156 (951) — — — Other subsidiaries PAT (24,260) (18,484) (13,308) (14,562) (21,637) (11,245) (6,291) (2,250) — 500 Total subsidiaries profit (6,676) (4,591) (3,909) 3,000 (3,998) (4,877) (3,484) 17,000 22,994 28,390
Note: We have excluded losses from Ssangyong in FY2020 and FY2021 as the company has exited the business and is part of discontinued operations
Source: Company, Kotak Institutional Equities estimates
Exhibit 18: We expect consolidated RoE (excluding financial subsidiaries) to improve to 18% in FY2023E M&M consolidated RoIC forecast, March fiscal year-ends, 2015-23E (Rs mn)
2015 2016 2017 2018 2019 2020 2021 2022E 2023E Consol PBT 40,378 47,942 50,038 65,901 72,800 48,324 52,293 81,653 110,970 Minus: financial subsidiaries PBT 13,209 11,348 7,468 18,431 27,486 15,494 4,891 24,480 29,379 Minus: financial subsidiaries interest expense 26,379 28,526 31,553 34,636 44,621 54,237 52,832 52,712 55,187 Add: Consol interest expense 31,567 33,676 36,485 39,871 50,214 60,212 61,022 57,712 60,187 (Consol EBIT - finance EBIT)*(1-tax) 22,650 29,221 33,250 36,894 35,634 27,163 38,915 46,630 64,943 Consol Equity 258,564 264,927 297,380 367,752 399,834 399,693 415,819 476,692 557,474 Consol net debt 356,290 389,414 474,698 533,484 665,576 767,278 687,012 630,150 597,752 Minus: financial subsidiaries finance equity 58,426 63,639 69,352 103,674 120,351 126,120 161,110 175,745 193,199 Minus: financial subsidiaries net debt 275,484 314,812 384,833 447,985 582,090 641,329 614,050 612,902 658,852 Consol capital employed ex financial subsidiaries 280,944 275,890 317,893 349,578 362,969 399,522 327,671 318,195 303,175 Consol ROIC (post-tax) ex financial subsidiaires 8.1 10.6 10.5 10.6 9.8 6.8 11.9 14.7 21.4 Consol book value per share 227.2 232.8 261.3 323.2 351.3 351.2 365.4 418.9 489.9 Consol RoE ex financial subsidiaries 11.3 14.5 14.6 14.0 12.8 9.9 15.3 15.5 17.8 Consol ROE 11.4 11.8 11.4 15.4 12.9 8.9 9.4 12.8 14.9
Source: Company, Kotak Institutional Equities estimates
16 KOTAK INSTITUTIONAL EQUITIES RESEARCH Mahindra & Mahindra Automobiles & Components
Exhibit 19: We expect overall volume to grow at a CAGR of 13% over FY2021-24E Volume assumptions, March fiscal year-ends, 2014-24E (units)
2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Volumes (units) Bolero 107,178 100,553 81,559 69,328 85,368 84,144 59,044 60,864 72,000 80,640 87,091 Scorpio 50,950 51,553 48,087 49,317 53,934 47,837 38,826 34,325 36,000 38,880 41,990 Xylo 13,970 8,472 7,274 6,588 7,319 5,251 2,072 — — — — XUV500/XUV700 30,007 34,418 36,320 26,894 25,413 25,938 12,602 7,565 7,565 41,296 48,000 Quanto/Nuvo Sport 7,415 1,939 1,815 2,417 254 2 19 — — — — Rexton 1,843 1,010 228 121 86 — — — — — — Jeeps, Thar 8,058 8,804 6,525 5,935 6,981 6,095 2,151 12,979 48,000 52,800 58,080 TUV300 — — 24,189 26,241 29,018 19,264 11,543 — — — — KUV100 Petrol — — 6,395 17,000 14,000 7,000 800 — — — — KUV100 Diesel — — 7,816 18,698 11,542 4,697 1,003 297 386 386 386 Verito/Alturas G4 9,734 3,184 3,393 3,219 725 3,010 1,934 280 364 419 419 Marazzo — — — — — 24,130 12,693 3,265 2,286 2,286 2,286 XUV300 — — — — — 9,532 37,576 35,965 48,000 52,800 58,080 Vans 25,189 13,947 10,588 10,370 14,198 17,451 6,679 1,676 1,927 2,120 2,226 Exports 7,599 6,842 7,090 10,173 6,755 13,844 11,465 6,747 8,096 9,311 10,056 Passenger vehicles 261,943 230,722 241,278 246,301 255,593 268,195 198,407 163,963 224,624 280,937 308,614 Yoy growth (%) (17.3) (11.9) 4.6 2.1 3.8 4.9 (26.0) (17.4) 37.0 25.1 9.9 Total trucks and buses 3,264 4,460 7,361 8,631 10,946 12,802 6,987 3,271 4,579 6,869 7,556 Total LCV (<3.5T) (including passenger carriers) 174,938 167,311 181,957 193,485 218,874 252,903 202,928 163,022 195,626 224,970 242,968 Total LCV (>3.5T) 2,521 2,842 3,598 4,480 5,427 5,256 3,123 1,145 1,718 1,889 1,984 Total three-wheelers 64,510 59,706 56,185 53,731 57,638 70,472 63,838 20,880 30,000 36,000 37,800 Tractors 267,635 234,023 213,591 262,992 319,623 330,436 301,915 354,498 382,858 413,486 421,756 Total volumes 774,811 699,064 703,970 769,620 868,101 940,064 777,198 706,779 839,406 964,152 1,020,678
Source: Company, Kotak Institutional Equities estimates
Exhibit 20: We expect M&M’s EBITDA to increase by 14% CAGR over FY2021-24E M&M+MVML profit model, balance sheet and cash flow, March fiscal year-ends, 2012-24E (Rs mn)
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Volumes 697,279 789,386 774,811 699,064 703,970 769,620 868,101 940,064 777,198 706,779 839,406 964,152 1,020,678 Avg realization 450,051 485,904 500,988 528,818 552,408 537,641 548,063 562,177 577,273 630,670 628,909 640,414 651,512 Net sales 313,811 383,566 388,171 369,677 388,879 413,779 475,774 528,482 448,655 445,744 527,910 617,456 664,983 Raw materials 223,947 273,971 269,199 257,269 265,013 280,192 316,280 359,977 298,668 301,766 364,258 426,045 458,838 Staff costs 17,946 19,977 23,108 24,936 25,720 29,920 31,630 32,830 32,237 32,428 37,292 40,276 43,498 Other expenses 30,306 36,326 43,383 41,440 45,683 49,625 57,429 60,375 54,245 41,785 50,142 55,156 59,568 Total expenses 272,199 330,274 335,690 323,645 336,416 359,737 405,339 453,182 385,150 375,979 451,692 521,476 561,904 EBITDA 41,613 53,292 52,481 46,033 52,463 54,042 70,435 75,301 63,506 69,766 76,218 95,980 103,079 Other income 4,735 5,697 6,648 8,201 7,845 12,064 9,517 16,303 15,391 11,973 13,473 16,973 20,973 Interest expense 2,874 2,964 3,611 3,039 2,653 2,426 1,882 1,467 1,245 3,957 3,500 2,500 1,500 Depreciation 6,699 8,178 9,760 10,980 12,047 16,745 16,254 20,030 23,631 23,624 27,047 29,927 32,807 Extraordinary income 1,083 906 528 3,357 60 5,485 4,336 (227) (28,112) (31,745) — — — Profit before tax 37,858 48,753 46,286 43,572 45,667 52,420 66,152 69,879 25,910 22,413 59,144 80,526 89,745 Tax expenses 7,887 12,410 7,235 9,339 12,230 13,181 19,920 15,867 18,513 13,183 14,904 20,293 22,616 Profit after tax 29,970 36,343 39,051 34,233 33,438 39,239 46,232 54,012 7,397 9,229 44,240 60,233 67,129 Adj profit after tax 28,888 35,437 38,523 30,876 33,394 35,400 43,197 54,159 27,075 33,038 44,240 60,233 67,129 EPS FD 25.4 31.1 33.9 27.1 29.3 31.1 38.0 47.6 23.8 29.0 38.9 52.9 59.0 EPS FD ex subs dividends 24.5 30.2 31.9 24.1 26.3 26.5 33.9 39.7 15.5 21.6 30.7 43.9 49.1 Ratios (%) EBITDA margin (%) 13.3 13.9 13.5 12.5 13.5 13.1 14.8 14.2 14.2 15.7 14.4 15.5 15.5 Gross margin (%) 28.6 28.6 30.6 30.4 31.9 32.3 33.5 31.9 33.1 32.2 31.0 31.0 31.0 Raw material cost as % of sales 71.4 71.4 69.4 69.6 68.1 67.7 66.5 68.1 66.9 67.8 69.0 69.0 69.0 Staff cost as % of sales 5.7 5.2 6.0 6.7 6.6 7.2 6.6 6.2 7.2 7.3 7.1 6.5 6.5 Other expenses as % of sales 9.7 9.5 11.2 11.2 11.7 12.0 12.1 11.4 12.1 9.4 9.5 8.9 9.0 Effective tax rate (%) 20.8 25.5 15.6 21.4 26.8 25.1 30.1 22.7 71.5 58.8 25.2 25.2 25.2
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 17 ADD Bank of Baroda (BOB) https://ultraviewer.et/en/own Banks MAY 30, 2021 load.html RESULT Sector view: Attractive
Less stressful for now. BoB’s reported earnings were on the lower side on account of CMP (`): 84 the one-off DTA transition charge. Operating profits grew 22% yoy aided by a large Fair Value (`): 95 recovery in written-off accounts. Gross NPL declined 75 bps qoq, net NPL declined ~25 BSE-30: 51,423 bps qoq and restructured loans are at <1.5%. The risk of equity dilution is low as CET-1 is at 11%. Maintain ADD with FV at Rs95 (from Rs80).
Bank of Baroda Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 84/95/ADD EPS (Rs) 1.6 15.9 20.4 52-week range (Rs) (high-low) 100-38 EPS growth (%) 35.5 890.3 28.9 Mcap (bn) (Rs/US$) 434/6 P/E (X) 52.5 5.3 4.1 QUICK NUMBERS ADTV-3M (bn) (Rs/US$) 4.7/0.1 P/B (X) 0.8 0.7 0.6 Shareholding pattern (%) BVPS 110.9 128.2 146.6 NII up 5% yoy – Promoters 64.0 RoE (%) 1.2 11.0 12.8 higher than 2% yoy FPIs/MFs/BFIs 6.9/9.2/6.6 Div. yield (%) 0.0 3.8 4.9 Price performance (%) 1M 3M 12M NII (Rs bn) 292 326 359 loan growth; Absolute 23.8 (1.8) 117.2 PPOP (Rs bn) 214 218 250 deposits up 2% yoy Rel. to BSE-30 19.7 (6.3) 36.0 Net profits (Rs bn) 8 82 106 Gross NPLs declined DTA charge to lower future tax rate results in a subdued headline earnings print 75 bps qoq on a pro-forma basis to BoB’s reported earnings had a lot of one-offs for the quarter resulting in a loss. While the bank 8.9%; net NPLs reported a PBT of Rs27 bn, a one-off DTA charge of Rs33 bn resulted in a loss for the quarter. declined ~25 bps The bank would move into a lower tax rate (25%) from FY2022 with this change. On the income side, the bank reversed NII on account of slippages as well as compound interest on qoq to 3.1% loan exposure >Rs20 mn. Further, the bank had a large recovery from a written-off NPL Maintain ADD resulting in a sharp increase in non-interest income. The bank has also made a higher provision rating with FV at for wage settlement this quarter. Business performance was muted with deposit and loan Rs95 (from Rs80) growth at 2% yoy, respectively. NIM declined qoq on account of income de-recognition.
Asset quality less stressful as corporate book holding up well
One of the redeeming features for the quarter was the performance on asset quality for the quarter. Gross NPLs declined 75 bps qoq to 8.9%, net NPLs declined ~25 bps qoq to 3.1% and provision coverage is comfortable at 67% (82% including technical write-off). Restructured loans are <1.5% of loans. The bank has reported slippage of ~3% for FY2021 with a large share of it coming from the international loan book. Overall SMA book stands comfortable at M B Mahesh, CFA 4% of loans for loans >Rs50 mn. In our view, this is a good outcome as the corporate book (including international loans) is ~60% of the overall loan book, which is less impacted by Covid Nischint Chawathe currently. The bank has a relatively lower share of retail loans (16% of loans) and MSME (13% of loans). The retail portfolio is holding up well suggesting that the slippages on account of Covid could be manageable. There could be some upside in the corporate NPL book, which Abhijeet Sakhare would ensure that the headline NPL ratios have more headroom for decline despite the second wave of Covid.
Ashlesh Sonje Maintain ADD: poised to head higher as asset quality issues appear to be less worrisome
We maintain ADD with FV of Rs95 (from Rs80), valuing the stock at 0.6X book and 5X FY2023E EPS for RoEs in the range of ~12-14%. Over the next few quarters, we are likely to develop Dipanjan Ghosh more comfort on slippages as corporate India is holding up well, which implies that the overall slippages are likely to be manageable. Dilution risk is lower given that the CET-1 ratio is at 11%. As compared to SBI (1.5%), the net NPL for BoB (3.1%) is still high, which implies that the return to normalized levels of RoEs could be slower and likely to be behind SBI.
[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. Bank of Baroda Banks
Exhibit 1: Bank of Baroda, quarterly results March fiscal year-ends, 4QFY20 – 4QFY21 (Rs mn)
(% chg.) Calc. 4QFY21 4QFY21E 4QFY20 3QFY21 4QFY21E 4QFY20 3QFY21 2021 2020 (% chg.) 2022E Income statement (Rs mn) Interest income 166,845 173,674 186,984 177,687 (4) (11) (6) 708,648 759,837 (7) 724,264 Interest on advances 117,485 123,977 132,918 127,561 (5) (12) (8) 504,216 541,158 (7) 527,646 Income from invts 41,335 40,940 44,638 41,722 1 (7) (1) 170,775 180,974 (6) 162,613 Bal with RBI 8,025 8,757 9,429 8,404 (8) (15) (5) 33,658 37,705 (11) 34,005 Interest expenses 95,779 100,876 119,003 100,200 (5) (20) (4) 416,860 485,324 (14) 398,165 Net interest income 71,066 72,798 67,982 77,487 (2) 5 (8) 291,789 274,513 6 326,098 Non-interest income 48,484 29,483 28,347 28,955 64 71 67 123,642 103,173 20 99,489 Other income (excl. treasury) 39,444 28,203 19,597 19,705 40 101 100 89,882 75,666 19 81,489 Total income 119,550 102,280 96,328 106,442 17 24 12 415,430 377,686 10 425,587 Operating expenses 56,894 50,476 45,120 50,536 13 26 13 198,150 180,772 10 207,317 Employee expenses 31,249 27,204 19,545 28,002 15 60 12 107,174 87,695 22 110,282 Other operating expenses 25,645 23,271 25,576 22,534 10 0 14 90,976 93,077 (2) 97,035 Operating profit 62,656 51,805 51,208 55,906 21 22 12 217,281 196,914 10 218,270 Provisions 35,860 27,679 68,441 39,567 30 (48) (9) 161,723 214,928 (25) 110,221 Loan loss 45,930 14,132 31,906 20,800 225 44 121 124,080 194,904 (36) 109,469 PBT 26,796 24,126 (17,233) 16,340 11 NM 64 55,558 (18,014) NM 108,049 Taxation 37,261 6,919 (22,299) 5,729 439 NM 550 47,266 (23,483) NM 25,932 Net profit (10,465) 17,206 5,066 10,611 (161) (307) (199) 8,292 5,469 52 82,118 PBT-invt gains/losses 22,486 24,726 (18,583) 5,910 (9) NM 280 24,898 (35,654) NM 90,300 PBT-invt gains + provisions 68,416 38,857 13,323 26,710 76 414 156 148,978 159,250 (6) 199,769 Tax rate 139 29 NM 35 85 NM 24 Key balance sheet items (Rs bn) Shareholder funds 770 719 739 7 4 770 719 7 833 Deposits 9,670 9,580 9,460 9,546 1 2 1 9,670 9,460 2 10,126 Borrowings 668 931 915 (28) (27) 668 931 (28) 831 Other liabilities and provisions 445 470 535 (5) (17) 445 470 (5) 447 Total liabilities 10,783 10,861 10,995 (1) (2) 10,783 10,861 (1) 11,404 Advances 7,516 7,688 7,381 7,454 (2) 2 1 7,516 6,901 9 7,533 Fixed assets 80 89 84 (10) (4) 80 89 (10) 74 Other assets 1,345 1,363 1,525 (1) (12) 1,345 1,843 (27) 1,795 Net assets 11,554 11,579 11,734 (0) (2) 11,554 11,579 (0) 12,238 Key calculated ratios (%) Yield on loans 6.3 7.4 7.0 -111 bps -69 bps 6.8 9.3 -257 bps 7.2 Yield on investment 6.3 6.6 6.2 -35 bps 2 bps 6.4 7.9 -155 bps 6.0 Cost of deposits 4.0 5.2 4.2 -118 bps -21 bps 4.4 6.1 -177 bps 4.0 NIM 2.8 2.7 3.1 6 bps -29 bps 2.9 3.4 -52 bps 3.3 Cost-income 47.6 46.8 47.5 75 bps 11 bps 47.7 47.9 -17 bps 48.7 CD ratio 77.7 78.0 78.1 -30 bps -37 bps 77.7 73.0 477 bps 74.4 Asset quality (Rs bn) GNPL 667 694 632 (4) 6 667 694 (4) 673 NNPL 218 216 167 1 31 218 216 1 185 GNPL (%) 8.9 9.4 8.5 -53 bps 39 bps 8.9 9.4 -53 bps 8.1 NNPL (%) 3.1 3.1 2.4 -4 bps 70 bps 3.1 3.1 -4 bps 2.5 PCR (%) 67 69 74 -160 bps -630 bps 67 69 -160 bps 73 Slippage (Rs bn) 123 31 46 302 169 214 233 (8) 177 Slippage (%) 6.6 1.7 2.5 485 bps 405 bps 3 5 -208 bps 3 Capital adequacy details (%) CAR 15.0 13.3 12.9 169 bps 206 bps Tier-I 12.7 10.7 10.6 196 bps 210 bps Other key parameters (#) Branches 8,214 9,482 (13) 8,214 9,482 (13) 7,964 ATMs 10,033 13,193 (24) 10,033 11,613 (14) 9,533
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 19 Banks Bank of Baroda
Asset quality holding up well so far
NPL ratios improved over the 3QFY21 pro-forma NPLs. Gross NPLs declined 75 bps qoq on a pro-forma basis to 8.9% while net NPLs declined ~25 bps qoq to 3.1%. Provision coverage ratio is at 67% (82% including write-off). The bank has utilized Covid provisions created until 3QFY21 and has also adjusted the floating provision towards net NPL calculations.
FY2021 slippages were 2.9% compared to 3.6% in FY2020 with skew towards slippages from the international book (~35% of fresh slippages in FY2021). Credit costs for FY2021 were 2.1% compared to 3.4% in FY2020 (year of merger with Dena & Vijaya Bank).
Across segments, FY2021 corporate slippages were 1.9% (3.1% in FY2020), retail at 1% (1%), SME at 3.6% (3.9%), agri at 1.3% (2.7%) and international at 5.6% (2.1%). NPL reductions in FY2021 were 3.3% of loans (3.7% in FY2020), broadly driven by higher write-offs (~2.5% of loans).
The restructured loan book is also progressing lower than expected at 1.3% of loans as of March 2021. SMA-1&2 book was 3.9%, declining from 4.4% at 3QFY21. There is 0.4% overlap between restructuring and SMA book.
Exhibit 2: Reported gross NPL improved qoq Break-up of gross NPLs and restructured loans, March fiscal year-ends, 4QFY18 – 4QFY21 (%)
4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 Gross NPL 12.3 12.5 11.8 11.0 9.6 10.3 10.3 10.4 9.4 9.4 9.1 8.5 8.9 Net NPL 5.5 5.4 4.9 4.3 3.3 4.0 3.9 4.1 3.1 2.8 2.5 2.4 3.1 Slippages 12.6 4.4 3.6 3.4 3.3 5.7 4.3 6.9 1.7 1.6 0.8 2.5 6.6 Coverage 58.4 59.9 61.8 64.0 67.6 64.1 64.4 63.8 68.9 71.9 74.4 73.6 67.3 Coverage (write-off) 67.2 69.1 70.8 73.5 78.7 77.2 77.9 77.8 81.3 83.3 85.4 85.5 81.8 Notes: (a) Numbers from 1QFY20 are for the merged entity.
Source: Company, Kotak Institutional Equities
20 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bank of Baroda Banks
Exhibit 3: Share of A and above corporate loans at 63% Distribution of credit ratings of domestic corporate (>Rs50 mn) portfolio, March fiscal year-ends, 2015-21 (%)
A and above BBB Below BBB Unrated 100% 13 11 11 16 23 80% 37 17 13 20 9 53 13 11 22 16 60% 15 19 16 40% 11 14 10 62 63 52 56 20% 39 26 29
0% 2015 2016 2017 2018 2019 2020 2021
Notes: (a) Numbers post FY2018 are not comparable with earlier numbers due to merger.
Source: Company, Kotak Institutional Equities
Exhibit 4: Share of AA and above NBFCs is ~87% Rating profile of NBFCs, March fiscal year-ends, 2018-21 (%)
2018 2019 2020 2021 BBB, 2 BB and BB and BB and BB and Unrated, BBB, 2 below, 1 below, 3 below, 1 BBB, 2 below, 3 A, 3 1 BBB, 3 Unrated, 3 A, 7 A, 5 A, 8
AAA, 48 AA, 39 AAA, 53 AA, 33 AA, 27 AAA, 57 AAA, 60 AA, 39
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 21 Banks Bank of Baroda
Exhibit 5: Bank of Baroda – key metrics March fiscal year-ends (%)
4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 YoY (%) QoQ (%) Key balance sheet items (Rs bn) Deposits 9,460 9,345 9,543 9,546 9,670 2.2 1.3 Domestic 8,087 8,135 8,359 8,348 8,584 6.1 2.8 CASA ratio (%) 39 39 40 41 43 380 bps 167 bps Foreign 1,373 1,209 1,184 1,197 1,086 (20.9) (9.3) Advances 7,381 7,365 7,190 7,454 7,516 1.8 0.8 Domestic 6,110 6,150 6,052 6,330 6,411 4.9 1.3 Retail loans 1,207 1,225 1,119 1,160 1,203 (0.3) 3.6 Home loans 830 840 756 773 792 (4.6) 2.5 Retail to total advances (%) 16 17 16 16 16 (2.1) 2.8 SME 873 876 912 953 962 10.2 0.9 Farm credit 879 886 938 965 995 13.2 3.2 Foreign 1,271 1,215 1,137 1,124 1,105 (13.0) (1.7) Investments 2,746 2,709 2,682 2,671 2,612 (4.9) (2.2) Domestic 2,650 2,623 2,567 2,579 2,517 (5.0) (2.4) International 97 97 96 97 96 (0.2) (0.2) AFS 958 1,131 1,088 1,122 1,027 7.2 (8.4) Duration (years) 1.3 1.8 1.6 1.6 1.3 (1.5) (18.2) Yield management measures (%) Cost of deposits 4.8 4.5 4.0 3.9 3.7 -105 bps -14 bps Cost of deposits (domestic) 5.2 5.0 4.4 4.3 4.1 -110 bps -17 bps Cost of deposits (international) 1.8 1.4 1.0 0.8 0.6 -114 bps -18 bps Yield on advances (total) 7.8 7.3 7.1 7.0 6.6 -125 bps -44 bps Yield on advances (domestic) 8.8 8.1 8.1 8.0 7.3 -148 bps -70 bps Yield on advances (international) 3.3 3.2 2.5 1.7 2.5 -84 bps 76 bps Yield on investments (total) 7.0 6.8 6.5 6.5 6.5 -46 bps 4 bps Yield on investments (domestic) 7.1 6.9 6.7 6.6 6.6 -51 bps -8 bps Yield on investments (international) 7.0 3.4 3.4 3.0 3.0 -402 bps -9 bps NIM 2.7 2.6 2.9 2.9 2.7 5 bps -15 bps NIMs (domestic) 2.8 2.6 2.9 3.0 2.7 -5 bps -23 bps NIMs (international) 1.2 1.4 1.3 0.8 1.6 36 bps 76 bps Asset quality details Gross NPLs (Rs bn) 693.8 691.3 657.0 631.8 666.7 (3.9) 5.5 Gross NPLs (%) 9.4 9.4 9.1 8.5 8.9 -53 bps 39 bps Net NPLs (Rs bn) 215.8 194.5 167.9 166.8 218.0 1.0 30.7 Net NPLs (%) 3.1 2.8 2.5 2.4 3.1 -4 bps 70 bps Provision Coverage 68.9 71.9 74.4 73.6 67.3 -160 bps -630 bps Provision Coverage (inc write off) 81.3 83.3 85.4 85.5 81.8 47 bps -366 bps Slippages (Rs bn) 30.5 30.0 15.2 45.6 122.7 302.4 169.2 Slippages (%) 1.7 1.6 0.8 2.5 6.6 485 bps 405 bps Capital adequacy details (%) CAR 13.3 12.8 13.3 12.9 15.0 169 bps 206 bps Tier I 10.7 10.3 10.8 10.6 12.7 196 bps 210 bps Tier II 2.6 2.5 2.5 2.4 2.3 -27 bps -4 bps Notes: (a) Numbers are not comparable on yoy basis due to the merger.
Source: Company, Kotak Institutional Equities
Loan growth weak at ~2% yoy; retail growth stronger at ~14% yoy
Overall advances growth was weak at ~2% yoy and nearly flat qoq. Retail loan growth was sharper at 14% yoy, driven by ~28% yoy growth in auto loans and 11% yoy growth in home loans. The domestic corporate book was flat yoy while the international book declined 13% yoy. The MSME and agri book grew 13-14% yoy.
The bank continues to focus on growing the retail book, especially on the secured side. The management has previously indicated that the share of retail exposure to salaried PSU borrowers would be lower than that of SBI. The bank guided that it will continue with this strategy of rebalancing the loan book towards retail. At the same time, corporate growth is at the higher quality end.
22 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bank of Baroda Banks
Overall loan mix still remains quite heavily skewed towards corporate loans with ~51% share of domestic advances followed by retail at ~18% and MSME and agri at ~15% each. Rating mix (for loans >Rs50 mn) has shown a marginal worsening. 75% of corporate growth has come from A rated or better or government entities or PSUs. Exposure to the NBFC sector is quite high at 15% of loans. Similarly, 73% of retail book has a CIBIL score >725. More than 50% of the MSME growth has come from the ECLGS scheme. The bank has so far disbursed ~Rs80 bn under the ECLGS scheme with >90% of eligible borrowers availing this facility. Similarly, a large part of growth in the agri book is expected to come through gold loans going forward.
Exhibit 6: Retail loans at ~20% of overall loans Domestic loan mix, March fiscal year-ends, 2009-21 (%)
Retail SME Farm credit Corporate 100%
80% 44 43 42 53 49 50 51 50 52 48 48 52 51
60% 14 15 13 13 16 16 14 13 10 40% 16 14 14 16 18 15 21 20 20 13 16 16 17 20 21 14 15 20% 25 28 18 18 19 18 17 17 18 19 21 20 19
0%
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019 2020 2021 Notes: (a) Numbers are not comparable on yoy basis due to merger.
Source: Company, Kotak Institutional Equities
Exhibit 7: Contribution of SME loans at 15% Exhibit 8: Loan growth muted at ~2% yoy Contribution of international and SME loans to overall loans, March Growth in overall, domestic and international loans, March fiscal year- fiscal year-ends (%) ends (%)
SME (LHS) International (RHS) Domestic International Loan growth 30 30 100
24 24 75
18 18 50
12 12 25
6 6 -
0 - (25)
1QFY20 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21
1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 4QFY18 Notes: Notes: (a) Numbers are not comparable on yoy basis due to merger. (a) Numbers are not comparable on yoy basis due to merger.
Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 23 Banks Bank of Baroda
Exhibit 9: NII up 5% yoy – better than 2% loan growth Exhibit 10: PPOP was up 22% yoy Loan and NII growth, March fiscal year-ends (%) PPOP and NII growth, March fiscal year-ends (%)
Loan growth NII growth PPOP growth NII growth 75 80
60 60
45 40
30 20
15 -
- (20)
4QFY18
4QFY18
1QFY19
1QFY19
2QFY19
2QFY19
3QFY19 3QFY19
4QFY19 4QFY19
1QFY20 1QFY20
2QFY20 2QFY20
3QFY20 3QFY20
4QFY20 4QFY20
1QFY21 1QFY21
2QFY21 2QFY21
3QFY21 3QFY21 4QFY21 4QFY21 Notes: Notes: (a) Numbers are not comparable on yoy basis due to the merger. (a) Numbers are not comparable on yoy basis due to the merger.
Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities
Deposit growth in line with loan growth at 2%; CD ratio at 78%
Overall deposit growth was modest at 2% yoy, driven by strong CASA growth at ~16%, while retail TD growth was sluggish at ~4%. CD ratio was flat yoy at 78% reflecting the bank’s focus on aligning deposit growth with advances growth. Domestic CASA ratio has shown decent improvement over the past few quarters growing to ~43% from 39% a year ago. The bank is optimistic about growing its CA deposits through a push in its cash management product.
NIM (overall) was down ~30 bps qoq to ~2.8%; NPLs impact domestic margins
NIM (calc.) declined by ~30 bps qoq to ~2.8% driven by ~70 bps qoq decline in yield on advances while domestic cost of deposits also declined ~20 bps qoq. 4QFY21 NIMs were impacted by interest reversals on account of bunched slippages as well as provision for interest on interest waiver. We expect NIMs to touch 3% over the medium term driven by stabilization of asset quality and mix shift towards the domestic loan book.
24 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bank of Baroda Banks
Exhibit 11: NIM declined qoq due to interest reversals NIM for BoB, March fiscal year-ends, 4QFY12 – 4QFY21 (%)
NIM (%) NIM domestic (%) 5
4
2.73 3
2.72 2
1
-
4QFY12
2QFY13
4QFY13
2QFY14
4QFY14
2QFY15
4QFY15
2QFY16
2QFY17
4QFY17
2QFY18
4QFY18
2QFY19
4QFY19
2QFY20
4QFY20
2QFY21 4QFY21 4QFY16 Notes: (a) Numbers are not comparable on yoy basis due to the merger.
Source: Company, Kotak Institutional Equities
Other highlights for the quarter
Non-interest income driven by large recovery. Non-interest income grew 71% yoy, driven by income from written-off accounts (+7X yoy) due to recovery from a large steel account, which was written off from the books. Fee income growth was healthy at ~15% yoy.
Operating expense growth disappoints. Operating expense growth was elevated at 26% yoy, driven by staff cost growth at 60% yoy while non-staff costs were flat yoy. The cost-income ratio increased ~100 bps yoy to 48%. The bank has closed the year with 52% cost-income and we expect this to moderate to ~45% over the medium term as wage-related expenses form part of the base along with lower impact from mark-to- market provisions on retirement liabilities due to interest rate decline.
Capital ratios improve post recent QIP. Capital Adequacy Ratio (CAR) for the bank increased ~200 bps qoq to ~15%. CET-1 ratio increased to 10.9%. The management has taken a board approval to raise Rs50 bn, of which Rs20 bn is via equity and the rest via bonds.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 25 Banks Bank of Baroda
Exhibit 12: BoB trading at 0.7X one-year forward book (adj.) Exhibit 13: BoB trading at discount to peers Rolling P/BV (one-year forward adjusted book) multiples (X) BoB trading premium to public bank peers (X)
2.5 1.4
2.0 1.2
1.5 1.0
1.0 0.8
0.5 0.6
0.0 0.4
May-13
May-14
May-15
May-16
May-17
May-18
May-19
May-20
May-21
May-11
May-12
May-13
May-14
May-15
May-16
May-17
May-18
May-19 May-20 May-21
Source: Company, Bloomberg, Kotak Institutional Equities estimates Source: Company, Bloomberg, Kotak Institutional Equities estimates
Exhibit 14: Revision to key estimates Old and new estimates, March fiscal year-ends, 2022E-24E (Rs mn)
New estimates Old estimates % Change New estimates 2022E 2023E 2024E 2022E 2023E 2022E 2023E Net interest income 326,098 358,716 395,134 314,774 340,893 3.6 5.2 Loan growth (%) 6.7 8.5 8.4 7.0 8.9 -38 bps -41 bps NIM (%) 2.9 3.0 3.0 2.8 2.8 13 bps 19 bps Non-treasury other income 81,489 93,005 106,181 87,183 97,967 (6.5) (5.1) Fee income 53,053 61,011 70,163 25,644 29,490 106.9 106.9 Operating expenses 207,317 217,274 222,692 200,538 205,149 3.4 5.9 Employee expenses 110,282 113,480 114,547 104,099 105,078 5.9 8.0 Provisions and contingencies Loan loss provisions 109,469 109,933 119,195 101,287 109,389 8.1 0.5 PBT 108,049 139,262 171,676 117,380 139,069 (7.9) 0.1 PAT 82,118 105,839 130,473 79,818 94,567 2.9 11.9 PBT- invt gains + provisions 200,270 234,447 278,623 201,419 233,710 (0.6) 0.3 EPS (Rs) 15.9 20.4 25.2 17.3 20.4 (8.1) 0.0 Adjusted BVPS (Rs) 128 147 171 130 149 (1.7) (1.4) Gross NPA (%) 8.1 7.2 6.2 8.7 8.4 -63 bps -118 bps Slippages (%) 2.5 2.3 2.0 2.5 2.3 0 bps 0 bps Credit cost (%) 1.5 1.4 1.4 1.4 1.4 10 bps 0 bps Cost-income ratio (%) 51.0 48.3 44.6 50.1 46.9 97 bps 135 bps RoA (%) 0.7 0.8 1.0 0.7 0.7 3 bps 10 bps RoE (%) 11.0 12.8 14.1 11.0 11.9 -9 bps 90 bps
Source: Company, Kotak Institutional Equities estimates
26 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bank of Baroda Banks
Exhibit 15: Bank of Baroda, key ratios and growth rates March fiscal year-ends, 2018-24E (%)
2018 2019 2020 2021E 2022E 2023E 2024E Growth rates (%) Net loan 11.5 9.7 47.2 2.3 6.7 8.5 8.4 Total Asset 3.6 8.5 48.3 (0.2) 5.9 7.4 7.6 Deposits (1.7) 8.0 48.1 2.2 4.7 8.5 8.4 Current 8.3 1.8 37.7 (4.6) 6.4 10.2 10.0 Savings 9.8 6.7 52.2 13.8 6.0 9.8 9.7 Fixed (7.0) 9.3 47.5 (2.2) 3.9 7.6 7.5 Net interest income 14.9 20.4 46.9 6.3 11.8 10.0 10.2 Loan loss provisions 63.7 (12.2) 60.3 (23.4) (26.7) 0.4 8.4 Total other income (1.5) (8.5) 69.4 19.8 (19.5) 9.1 9.8 Net fee income 13.9 11.5 30.2 86.2 10.0 15.0 15.0 Net capital gains (28.3) (47.3) 178.0 22.7 (46.7) (13.9) (16.1) Net exchange gains (6.8) (23.8) 46.6 3.2 15.0 15.0 15.0 Operating expenses 9.4 11.0 60.1 9.6 4.6 4.8 2.5 Employee expenses (0.7) 9.4 74.0 22.2 2.9 2.9 0.9 Key ratios (%) Yield on average earning assets 6.5 7.0 8.3 6.5 6.4 6.5 6.7 Yield on average loans 7.2 7.7 9.3 7.2 7.2 7.3 7.4 Yield on average investments 7.3 7.6 8.1 6.5 6.1 6.3 6.5 Average cost of funds 4.4 4.6 5.5 4.0 3.7 3.8 3.9 Interest on deposits 4.4 4.5 5.5 3.9 3.6 3.7 3.8 Difference 2.1 2.4 2.8 2.5 2.7 2.8 2.8 Net interest income/earning assets 2.3 2.6 3.0 2.7 2.9 3.0 3.0 New provisions/average net loans 3.4 2.7 3.4 2.1 1.5 1.4 1.4 Interest income/total income 77.0 79.1 78.6 76.7 80.3 79.7 79.1 Fee income to total income 8.0 8.0 6.9 11.6 12.5 13.1 13.6 Operating expenses/total income 50.4 47.8 51.8 52.1 51.0 48.3 44.6 Tax rate 12.9 37.9 130.4 85.1 24.0 24.0 24.0 Dividend payout ratio 0.0 0.0 0.0 0.0 20.0 20.0 20.0 Share of deposits Current 7.8 7.3 6.8 6.4 6.5 6.6 6.7 Fixed 64.2 65.0 64.7 61.9 61.4 60.9 60.4 Savings 28.0 27.7 28.5 31.7 32.1 32.5 32.9 Loans-to-deposit ratio 72.3 73.4 73.0 73.0 74.4 74.4 74.4 Equity/assets (EoY) 6.0 6.5 6.2 6.7 6.8 7.0 7.2 Asset quality trends (%) Gross NPL 12.3 9.6 9.4 8.9 8.1 7.2 6.2 Net NPL 5.5 3.3 3.1 3.1 2.5 2.1 1.6 Slippages 6.3 3.2 3.6 2.9 2.5 2.3 2.0 Provision coverage (ex writeoff) 58.4 67.6 68.9 67.3 72.5 73.9 77.3 Dupont analysis (%) Net interest income 2.2 2.5 2.8 2.5 2.7 2.8 2.9 Loan loss provisions 2.0 1.6 2.0 1.3 0.9 0.9 0.9 Net other income 0.9 0.8 1.1 1.1 0.8 0.9 0.9 Operating expenses 1.5 1.6 2.0 1.8 1.7 1.7 1.6 Invt. depreciation 0.1 0.0 0.1 0.0 0.0 0.0 0.0 (1- tax rate) 87.1 62.1 (30.4) 14.9 76.0 76.0 76.0 ROA (0.3) 0.1 0.1 0.1 0.7 0.8 1.0 Average assets/average equity 16.9 15.9 17.3 16.8 15.9 15.3 14.8 ROE (5.8) 0.9 1.0 1.2 11.0 12.8 14.1 Notes: (a) Numbers from FY2020E onwards are for the merged entity.
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 27 Banks Bank of Baroda
Exhibit 16: Bank of Baroda, P&L and balance sheet March fiscal year-ends, 2018-24E (Rs mn)
2018 2019 2020 2021E 2022E 2023E 2024E Income statement Total interest income 436,485 499,741 759,837 708,648 724,264 788,249 870,732 Loans 290,698 343,890 541,158 504,216 527,646 570,791 629,354 Investments 104,202 127,867 180,974 170,775 162,613 182,483 204,972 Cash and deposits 41,586 27,984 37,705 33,658 34,005 34,975 36,406 Total interest expense 281,268 312,903 485,324 416,860 398,165 429,533 475,598 Deposits from customers 260,079 276,211 436,570 375,640 356,840 386,342 435,489 Net interest income 155,218 186,838 274,513 291,789 326,098 358,716 395,134 Loan loss provisions 138,427 121,569 194,904 149,370 109,469 109,933 119,195 Net interest income (after prov.) 16,791 65,269 79,609 142,419 216,630 248,783 275,939 Other income 66,572 60,910 103,173 123,642 99,489 108,505 119,181 Net fee income 17,845 19,894 25,903 48,230 53,053 61,011 70,163 Net capital gains 18,776 9,895 27,507 33,760 18,000 15,500 13,000 Net exchange gains 9,092 6,932 10,161 10,490 12,064 13,873 15,954 Operating expenses 101,734 112,880 180,772 198,150 207,317 217,274 222,692 Employee expenses 46,069 50,391 87,695 107,174 110,282 113,480 114,547 Depreciation on investments 7,682 1,586 9,867 3,100 251 251 251 Other Provisions 1,854 4,731 10,157 9,253 501 501 501 Pretax income (27,907) 6,982 (18,014) 55,558 108,049 139,262 171,676 Tax provisions (3,589) 2,646 (23,483) 47,266 25,932 33,423 41,202 Net Profit (24,318) 4,335 5,469 8,292 82,118 105,839 130,473 % growth (276) (118) 26 52 890 29 23 PBT - treasury gains + provisions 101,279 124,974 169,407 183,521 200,270 234,447 278,623 % growth 21 23 36 8 9 17 19 Balance sheet Cash and bank balance 928,974 892,296 1,219,011 1,204,128 1,224,773 1,273,461 1,326,966 Cash 30,245 33,367 47,616 47,616 47,616 47,616 47,616 Balance with RBI 196,752 233,250 278,843 340,794 344,274 373,483 404,744 Balance with banks 99,698 45,181 46,966 56,360 67,632 81,158 97,389 Net value of investments 1,631,845 1,822,981 2,746,146 2,612,203 2,835,477 3,079,706 3,355,833 Govt. and other securities 1,407,785 1,589,038 2,440,561 2,295,500 2,506,575 2,737,430 2,998,892 Shares 18,585 22,657 27,889 28,447 29,016 29,596 30,188 Debentures and bonds 66,190 61,139 100,289 100,289 100,289 100,289 100,289 Net loans and advances 4,274,318 4,688,187 6,901,207 7,063,005 7,532,840 8,171,940 8,855,951 Fixed assets 53,674 69,903 88,893 80,162 74,034 72,755 75,922 Net Owned assets 53,674 69,903 88,893 80,162 74,035 72,756 75,923 Other assets 311,186 336,507 623,898 594,149 570,383 547,568 525,665 Total assets 7,199,998 7,809,874 11,579,155 11,553,648 12,237,508 13,145,430 14,140,337
Deposits 5,913,148 6,386,897 9,459,844 9,669,969 10,125,708 10,984,791 11,904,244 Borrowings and bills payable 645,669 690,912 951,918 691,827 857,045 824,809 800,317 Other liabilities 207,233 222,234 448,831 421,395 421,395 421,395 421,395 Total liabilities 6,766,050 7,300,043 10,860,593 10,783,191 11,404,148 12,230,994 13,125,956 Paid-up capital 5,304 5,304 9,254 10,355 10,355 10,355 10,355 Reserves & surplus 428,644 504,527 709,308 760,102 823,006 904,080 1,004,026 Total shareholders' equity 433,948 509,831 718,562 770,457 833,361 914,436 1,014,381 Notes: (a) Numbers from FY2020E onwards are for the merged entity.
Source: Company, Kotak Institutional Equities estimates
28 KOTAK INSTITUTIONAL EQUITIES RESEARCH SELL Bayer Cropscience (BYRCS) https://ultraviewer.et/en/own Fertilizers & Agricultural Chemicals MAY 30, 2021 load.html RESULT Sector view: Cautious
Uncertainty ahead. 4Q results were well ahead of our estimates aided by strong CMP (`): 5,276 growth in the crop protection segment. Weaker corn seed sales on account of lower Fair Value (`): 4,600 acreages amid weaker local prices drove gross margin pressure. Covid-related BSE-30: 51,423 challenges and weaker corn acreages are likely to weigh into FY2022. Our revised FV of Rs4,600 implies 25X FY2023 EPS, indicating a long growth runway but limited short- term earnings predictability.
Bayer Cropscience Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 5,276/4,600/SELL EPS (Rs) 129.9 158.9 183.5 52-week range (Rs) (high-low) 6,601-4,922 EPS growth (%) 0.5 22.3 15.5 Mcap (bn) (Rs/US$) 238/3.3 P/E (X) 40.6 33.2 28.7 ADTV-3M (mn) (Rs/US$) 123/2 P/B (X) 9.3 7.6 6.3 Shareholding pattern (%) EV/EBITDA (X) 27.7 23.6 19.9 Promoters 71.4 RoE (%) 22.8 25.2 23.9 FPIs/MFs/BFIs 2.9/9.5/2.9 Div. yield (%) 0.5 0.6 0.7 Price performance (%) 1M 3M 12M Sales (Rs bn) 43 48 53 Absolute (2.3) 2.6 (1.9) EBITDA (Rs bn) 8 9 11 Rel. to BSE-30 (5.5) (2.0) (38.6) Net profits (Rs bn) 6 7 8
Healthy crop protection revenues drive outperformance despite weaker corn seed performance
Bayer’s 4QFY21 results were well ahead of our estimates. Sales reported a 60% increase yoy to Rs7.3 bn, driven by (1) better crop protection sales amid management focus on improving penetration with small landholding farmers and (2) lesser sales return post end of the Rabi season given good liquidation. Corn seed sales were quite weak in 4QFY21 due to lower acreages impacted by subdued crop prices. Higher contribution from lower-margin glyphosate, weaker contribution from higher-margin corn seeds and limited price hikes despite RM inflation meant overall gross margins declined ~1,400 bps on a yoy basis. Contained employee cost (up only 1% yoy) and other expenses (up 28% yoy) led to only a 140 bps EBITDA margin drop on yoy basis. EBITDA of Rs0.8 bn (up 42% yoy) exceeded our expectations by 39%. Adjusted 4QFY21 EPS of Rs12.7 was 38% ahead of our estimates.
Good monsoons led to a healthy performance in the crop protection business, which drove FY2021 revenues of Rs43 bn (up 18% yoy). A weaker mix (largely due to lower corn seed sales) and limited prices hikes despite RM inflation drove ~450 bps compression in gross margins. EBITDA margin compression was only 110 bps yoy largely due to contained employee costs (flat yoy) and other expenses (up 5% yoy). Overall PBT growth of 11% yoy was further weak due to lower other income. Adjusted FY2021 EPS of Rs131/share was flat on a yoy basis.
Analysts meet takeaways: some positives and negatives getting into FY2022
The likelihood of a normal monsoon and good ground water levels bode well for overall agri inputs industry growth in FY2022. However, Covid-19 has impacted agriculture across the country. With rise in cases, movement of field staff has been restricted materially. Retailers’ and Ritesh Gupta distributors’ willingness to extend credit to farmers has reduced. Farmer purchases are also likely to be in one go rather than multiple visits to stores as in the past. Consequently, Bayer is looking to offer extended credit periods and/or increased cash discounts to ensure last mile Hemang Khanna availability early in the season. Bayer may face challenges as (1) weaker commodity prices on perishables will impact demand in vegetables and (2) shift in acreages from corn to soybean/pulses in Kharif will drive both volumes/gross margin pressure in seeds.
[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. Fertilizers & Agricultural Chemicals Bayer Cropscience
Good long-term story but prefer to wait for better opportunities
Bayer AG’s global parentage provides Bayer India with probably the best molecule pipeline; Pyroxasulfone (launched last year) and Tetranilliprole (under registration) seemingly are two big future opportunities for the crop protection business. That said, pricing erosion in some of the old insecticide products like imidacloprid, weakening seeds portfolio (rice and corn) and reduced export sales have been some of the challenges. The Monsanto acquisition has added to the cyclicality of the business with both corn seeds (volatile acreages, market shares wars with Pioneer and Syngenta) and glyphosate (pricing volatility). In light of the same, we find the stock fairly valued at 25X FY2023 EPS, implying an FV of Rs4,600 (earlier Rs4,250). Our earnings are marginally tweaked upwards by 1-2% for FY2022/23E.
Analysts meet takeaways
Limited price hikes. During FY2021, price hikes were taken but they were rolled back through cash discounts and selective price cuts. Given weak conditions in FY2022, the management is looking to extend credit to the channel.
Good synergy gains post Monsanto. The management noted that on a pro-forma basis, Bayer+Monsanto has grown sales at 12.7% and profits (PBT pre-exceptionals) at 21.9%. Growth in sales was driven by improved distribution of corn seeds (legacy Monsanto), glyphosate (legacy Monsanto) and Laudis (corn herbicide, legacy Bayer).
CP revenues doubled in 4Q. Crop protection revenues accounted for 72% of Bayer’s sales. The management highlighted that product returns were much lower in 4Q due to overall clear channel inventory. Glyphosate revenues grew by 51% during the quarter. Glyphosate accounts for 31% of the company’s sales. Wheat herbicides sales were weaker during the quarter due to loss of sprays in Jan-Mar months.
Corn seed continues to remain under pressure. The management noted that weaker corn prices led to lower Rabi acreages. Indian corn prices continue to remain weak despite higher global prices due to lower poultry demand amid lockdowns. The management believes they have at least maintained market share in corn while they have gained share in hybrid rice. Corn seeds account for 12% of sales but we believe margin contribution is much higher. In FY2022 too, corn acreages are liked to be shifted towards oil seeds/soybean given better global prices. The management noted in the presentation that rice seed supplies are running delayed due to Covid-linked disruptions.
Perishables-linked agrochemical demand likely to be under pressure. Lower prices in perishables such as tomato, flowers, etc. are leading to a weaker demand. Labor shortages on the back of restricted movements also should bode well for herbicides. The environment business, which is likely to get divested at a global level, doesn’t have any meaningful contribution to Bayer’s listed entity.
Balance sheet parameters improved. Receivables were up only 6% yoy to Rs7.5 bn despite 18% growth in revenues. Inventories increased by 38% yoy to Rs13 bn, ahead of upcoming kharif season. Cash from operations marginally improved from Rs8.0 bn last year to Rs8.5 bn this year, partly impacted by higher inventories. Cash balance too improved from Rs11 bn to Rs12 bn in FY2021 despite higher interim dividend payouts.
Others. Sustainable tax rates are likely to remain ~22%. Bayer has taken some price hikes in Roundup (glyphosate herbicide brand). However, in a competitive environment, price hikes may not be as much going forward across the portfolio.
30 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bayer Cropscience Fertilizers & Agricultural Chemicals
Exhibit 1: Covid-19 challenges are likely higher during this season versus last year Covid-19 is impacting farmer behavior and channel cash flow; management is factoring it in commercial decisions to tide over challenges
Source: Company
Exhibit 2: Interim reported results of Bayer Cropscience, March fiscal year-ends (Rs mn)
Change (%) 4QFY21 4QFY21E 4QFY20 3QFY21 4QFY21E 4QFY20 3QFY21 FY2021 FY2020 YoY(%) FY2022E Sales 7,337 4,796 4,587 9,182 53 60 (20) 42,613 36,094 18% 47,788 Raw material cost (4,066) (2,040) (1,912) (5,453) 99 113 (25) (24,459) (19,098) 28% (27,430) Employee cost (967) (961) (938) (948) 1 3 2 (3,622) (3,616) 0% (3,876) Other expenses (1,477) (1,199) (1,155) (1,721) 23 28 (14) (6,415) (6,116) 5% (7,051) EBITDA 827 596 582 1,060 39 42 (22) 8,117 7,264 12% 9,433 Other income 159 165 178 183 (4) (11) (13) 638 660 -3% 800 Depreciation and amortization (216) (201) (191) (143) 7 13 51 (735) (653) 13% (801) Interest cost (35) (33) (26) (39) 5 35 (10) (126) (138) -9% (135) Profit before tax 735 527 543 1,061 39 35 (31) 7,894 7,133 11% 9,296 Extraordinaries 63 — (286) (1,272) (1,221) (1,302) — Income tax (179) (114) 58 (240) (1,742) (1,086) 60% (2,161) Net income 619 413 315 (451) 50 97 (237) 4,931 4,745 4% 7,135 Adjusted net income 571 413 632 533 38 (10) 7 5,883 5,849 1% 7,135 Adjusted EPS (Rs) 12.7 9.2 14.8 11.9 38 (14) 7 131.0 129.3 1% 158.9 Key ratios (%) Gross margins 44.6 57.5 58.3 40.6 (1,288)bps (1,373)bps 397 bps 42.6 47.1 (449)bps 42.6 EBITDA margins 11.3 12.4 12.7 11.5 (116)bps (142)bps (27)bps 19.0 20.1 (108)bps 19.7 Tax rate 24.4 21.7 (10.7) 22.6 22.1 15.2 23.3
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 31 Fertilizers & Agricultural Chemicals Bayer Cropscience
Exhibit 3: Bayer has underperformed domestic agrichem peers despite benefits of Monsanto acquisition Performance of domestic agri-chem segment for key companies, 1QFY19 onwards (Rs mn)
Quarterly Annual 5-year CAGR 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2016-21 Revenues Bayer CropScience 9,504 13,463 8,540 4,587 12,278 13,816 9,182 7,337 37,233 27,690 28,028 27,099 30,930 36,094 42,613 9.0 Dhanuka 2,190 4,020 2,715 2,276 3,738 4,424 2,957 2,755 7,902 8,310 8,816 9,626 10,058 11,201 13,874 10.8 GAVL (a) 2,093 2,002 912 670 2,082 1,763 1,035 935 3,352 3,826 4,661 5,142 5,495 5,677 5,815 8.7 PI Industries (a) 2,535 2,824 2,054 1,720 4,460 3,590 2,600 1,910 7,985 8,528 8,971 8,220 9,724 9,000 17,317 15.2 Rallis (b) 6,232 7,488 5,332 3,463 6,627 7,250 5,705 4,713 15,185 12,880 14,005 14,984 17,215 22,514 24,294 13.5 UPL (a) 11,930 11,950 7,500 6,900 15,110 14,090 9,060 8,510 26,220 26,859 29,615 31,890 33,180 38,280 46,770 11.7 Growth (%) Bayer CropScience 14.3 9.1 10.2 81.9 29.2 2.6 7.5 (25.6) 1.2 (3.3) 14.1 16.7 18.1 Dhanuka 2.8 4.9 25.2 18.1 70.7 10.0 8.9 21.1 5.2 6.1 9.2 4.5 11.4 23.9 GAVL (a) 9.4 (2.2) (15.7) 48.2 (0.5) (11.9) 13.5 39.6 14.1 21.8 10.3 6.9 3.3 2.4 PI Industries (a) (13.0) (12.0) 24.0 (11.6) 75.9 27.1 26.6 11.0 6.8 5.2 (8.4) 18.3 (7.4) 92.4 Rallis (b) 76.8 22.1 27.8 2.2 6.3 (3.2) 7.0 36.1 (15.2) 8.7 7.0 14.9 30.8 7.9 UPL (a) (4.4) 11.0 54.3 36.1 26.7 17.9 20.8 23.3 2.4 10.3 7.7 4.0 15.4 22.2 Gross margins (%) Bayer CropScience 49.7 42.1 46.0 58.3 47.3 38.7 40.6 44.6 35.2 42.8 41.3 40.9 47.6 47.1 42.4 Dhanuka 34.1 35.0 35.1 42.8 34.3 38.0 37.1 42.9 37.7 39.1 43.4 41.6 38.7 36.5 37.8 PI Industries (a) 44.8 42.4 46.6 46.8 42.0 44.1 46.9 42.1 42.6 45.8 47.1 50.7 45.2 45.5 31.7 Rallis (b) 37.4 36.1 37.9 43.5 39.7 38.1 38.5 41.4 41.3 42.8 42.2 41.1 39.5 38.0 39.3 UPL (c) 46.8 50.6 50.2 43.9 54.7 49.6 54.9 45.9 50.7 52.3 53.0 54.6 53.4 48.1 51.6 EBITDA margins (%) Bayer CropScience 21.2 22.7 18.8 12.7 26.5 21.5 11.5 11.3 13.8 15.7 14.8 15.1 14.9 20.1 19.9 Dhanuka 9.1 18.3 12.6 20.1 17.5 20.1 17.0 23.4 17.3 17.1 19.3 17.3 14.5 15.5 19.4 PI Industries (a) NA NA NA NA NA NA NA NA 19.2 20.6 24.3 21.7 NA NA NA Rallis (b) 15.3 15.9 10.3 (2.9) 19.4 16.1 10.5 3.8 16.7 16.0 16.8 15.0 10.3 11.5 13.3 UPL (c) 16.7 18.5 23.6 17.1 23.4 18.6 24.1 20.7 18.2 17.6 18.8 19.0 18.4 18.7 21.6
Notes: (a) Data pertains to domestic agri business segment. (b) Includes revenues from contract manufacturing operations. (c) Data pertains to global operations.
Source: Companies, Kotak Institutional Equities estimates
Exhibit 4: Bayer trades at a premium to the domestic peers in ag-chem business Comparative valuation of global/domestic ag-chem companies, March fiscal year-ends, 2022-23E
Price Market cap. P/E (X) EV/EBITDA (X) EPS
(LC) (US$ mn) FY2021E FY2022E FY2023E FY2021E FY2022E FY2023E Global companies BASF SE 67 75,409 23.1 14.1 13.6 10.9 8.0 7.7 Bayer AG 52 62,751 8.3 9.0 8.1 7.4 8.2 7.5 Corteva 45 33,357 32.8 23.3 19.4 16.3 12.6 10.8 FMC Corp. 116 14,981 18.8 16.3 14.4 14.2 13.0 11.9 Nufarm Ltd 5 1,425 NM 34.2 19.9 NM 6.6 5.9 Indian companies Bayer CropScience 5,276 3,271 40.3 33.2 28.7 27.7 23.6 19.9 Dhanuka Agritech 906 582 20.5 21.2 19.3 15.0 15.4 13.9 Godrej Agrovet 553 1,466 37.2 30.0 26.0 21.0 16.9 14.3 PI Industries 2,599 5,441 51.4 42.7 35.6 35.8 29.0 23.9 Rallis India 311 835 26.4 21.0 17.3 18.7 14.7 12.1 UPL 812 8,557 24.0 20.8 18.9 10.6 9.6 8.7
Source: Bloomberg, Kotak Institutional Equities estimates
32 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bayer Cropscience Fertilizers & Agricultural Chemicals
Exhibit 5: DCF-based Fair Value of Rs4,600 DCF-based valuation of Bayer Cropscience, March fiscal year-ends, 2023-37E (Rs mn)
2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2032E 2037E Net revenues 53,078 58,804 64,685 71,153 78,269 84,922 92,140 99,972 108,469 117,689 150,205 EBIT 10,031 11,590 12,814 14,166 15,661 17,077 18,621 20,304 22,138 24,137 30,806 EBIT margin (%) 18.9 19.7 19.8 19.9 20.0 20.1 20.2 20.3 20.4 20.5 20.5 EBIT*(1-tax rate) 7,642 8,842 9,775 10,807 11,947 13,028 14,205 15,489 16,888 18,414 23,501 Tax 2,389 2,748 3,039 3,359 3,714 4,050 4,416 4,815 5,250 5,724 7,305 Depreciation / amortisation 885 978 1,076 1,184 1,302 1,413 1,533 1,664 1,805 1,958 2,499 Working capital outlay (1,698) (1,888) (1,347) (1,482) (1,630) (1,524) (1,654) (1,794) (1,947) (2,112) (1,638) Capital expenditure (550) (605) (704) (902) (992) (928) (1,006) (1,092) (1,185) (1,285) (997) Free cash flows 6,279 7,327 8,800 9,607 10,628 11,989 13,079 14,267 15,562 16,974 23,365 Year for discounting 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 15.0 Discounted cash flow 5,657 5,947 6,435 6,329 6,307 6,410 6,299 6,191 6,084 5,978 4,883 Key assumptions NPV calculation WACC (%) 11.0 NPV of free cash flow 89,007 Terminal growth rate (%) 6.0 Terminal value 103,526 Capitalization rate (%) 5.0 Enterprise value 192,533 Terminal value calculation Net debt (14,306) Cash flow in terminal year 23,365 Equity value 206,839 Terminal value 495,330 Shares o/s (# mn) 45 Discounted terminal value 103,526 NPV /share (Rs) 4,607
Source: Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 33 Fertilizers & Agricultural Chemicals Bayer Cropscience
Exhibit 6: Profit and loss model, balance sheet and cash flow statement March fiscal year-ends, 2017-24E (Rs mn)
2017 2018 2019 2020 2021E 2022E 2023E 2024E Profit model (Rs mn) 12% 11% 11% Sales 28,028 27,099 31,673 36,094 42,613 47,788 53,078 58,804 EBITDA 4,136 4,094 4,811 7,264 8,117 9,433 10,916 12,568 Other income 701 388 531 660 638 800 922 1,006 Interest (69) (113) (104) (138) (126) (135) (146) (157) Depreciation (289) (331) (438) (653) (735) (801) (885) (978) Profit before tax 4,479 4,038 4,800 7,133 7,894 9,296 10,807 12,439 Extraordinary items — — — (1,302) (1,221) — — — Tax expenses (1,569) (1,037) (1,429) (1,086) (1,742) (2,161) (2,567) (2,954) Reported PAT 2,910 3,001 3,371 4,745 4,931 7,135 8,241 9,485 Adjusted PAT 2,910 3,001 3,371 5,805 5,883 7,135 8,241 9,485 Adjusted EPS (Rs) 82 87 78 129 131 159 184 211 Balance sheet (Rs mn) Equity 20,567 17,783 22,394 25,725 25,503 31,211 37,803 45,391 Borrowings — — — 15 — — — — Long-term liabilities 20 156 1 138 141 141 141 141 Current liabilities and provisions 7,667 7,409 13,097 12,479 16,749 17,787 19,649 21,662 Total liabilities 28,254 25,348 35,492 38,357 42,393 49,139 57,593 67,194 Net fixed assets 3,354 3,403 4,565 4,939 4,710 4,408 4,073 3,699 Investments/other long-term assets 307 302 398 575 479 479 479 479 Cash and cash equivalent 8,887 4,178 5,820 10,710 12,095 14,306 19,536 25,609 Current assets 15,706 17,465 24,709 22,133 25,109 29,946 33,506 37,407 Total assets 28,254 25,348 35,492 38,357 42,393 49,139 57,593 67,194 Free cash flow (Rs mn) Operating cash flow 3,082 3,462 3,426 6,378 6,941 7,271 8,349 9,614 Working capital change (1,509) (2,248) 902 281 (74) (3,799) (1,698) (1,888) Capital expenditure (net) (493) (419) (4,505) (279) (312) (500) (550) (605) Free cash flow 1,080 795 (177) 6,380 6,555 2,973 6,102 7,121 Ratios (%) EBITDA margin 14.8 15.1 15.2 20.1 19.0 19.7 20.6 21.4 Net debt/equity (X) (0.4) (0.2) (0.3) (0.4) (0.5) (0.5) (0.5) (0.6) Book value (Rs/share) 581 518 521 573 568 695 842 1,011 Adjusted RoAE 14.1 16.9 15.1 22.6 23.1 22.9 21.8 20.9 Adjusted RoACE 19.5 20.0 17.8 36.8 42.1 38.3 40.9 43.7
Source: Kotak Institutional Equities estimates
34 KOTAK INSTITUTIONAL EQUITIES RESEARCH BUY Aditya Birla Fashion and Retail (ABFRL) https://ultraviewer.et/en/own Retailing MAY 30, 2021 load.html RESULT Sector view: Attractive
Second wave of Covid impacts footfalls. ABFRL posted a marginal 2% yoy revenue CMP (`): 191 decline, against our estimate of 10% growth, on account of reduced store footfalls Fair Value (`): 230 across both Madura and Pantaloons due to resurgence of the second wave of Covid. BSE-30: 51,423 Optimization of costs, tighter working capital and deleveraged balance sheet bode well for future. We trim FY2022/23 estimates on Covid impact as well as losses from ethnic wear. Roll-forward drives a revised SoTP-based FV of Rs230 (Rs250 earlier). BUY.
Aditya Birla Fashion and Retail Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 191/230/BUY EPS (Rs) (8.0) (4.3) 3.6 52-week range (Rs) (high-low) 224-100 EPS growth (%) (276.7) 46.9 183.6 Mcap (bn) (Rs/US$) 176/2.5 P/E (X) (23.7) (44.7) 53.4 ADTV-3M (mn) (Rs/US$) 531/7 P/B (X) 6.6 7.2 6.3 Shareholding pattern (%) EV/EBITDA (X) 31.9 25.1 11.3 Promoters 56.1 RoE (%) (39.7) (15.6) 12.6 FPIs/MFs/BFIs 14.0/13.9/3.6 Div. yield (%) 0.0 0.0 0.0 Price performance (%) 1M 3M 12M Sales (Rs bn) 52 76 109 Absolute 6.3 4.1 63.8 EBITDA (Rs bn) 6 7 16 Rel. to BSE-30 2.8 (0.6) 2.6 Net profits (Rs bn) (7) (4) 3
Lower footfalls impact store sales; growth in e-commerce channel continues
ABFRL reported a marginal 2% yoy revenue decline (vs KIE estimate: 10% growth) on account of lower-than-expected footfalls during March 2021. The company registered yoy revenue growth in Jan-Feb 2021 driven by renewed consumer optimism and wedding demand. Segmentally, (1) Lifestyle brands revenues (LTL of -1.7%) recovered to 94% of last year, with retail channel +8% yoy, (2) Pantaloons revenues recovered to 95% of last year levels (LTL of - 10.6%), and (3) innerwear segment revenues grew 56% yoy driven by solid e-commerce growth (1.5X yoy). Only ~15% of the company’s stores across formats are currently operational.
Other businesses record first-ever positive EBITDA margins due to strong operating leverage
EBITDA margin expansion of 582 bps yoy appeared high but was expected on account of higher gross margins (+200 bps yoy) mostly due to low write-downs and improved cost controls (yoy reduction in rent, employee and other expenses). Adjusting for one-time tax impact of Rs1.1 bn, net loss was Rs870 mn (vs Rs1.47 bn loss in 4QFY20). ABFRL is again negotiating with landlords for lower rentals/waivers on account of store closures for most part of 1QFY22.
Funds inflow drove deleveraging and a stronger balance sheet
Fresh funds infusion of Rs22.5 bn (Rs15 bn from Flipkart and Rs7.5 bn from rights issue) coupled with healthy OCF generation (largely aided by large working capital release) resulted in net debt reducing to Rs6.5 bn as of March 2021 from Rs25 bn in March 2020. Actual net debt reduction has been higher as the company has invested Rs5.2 bn in ethnic wear acquisitions. Garima Mishra However, we expect debt levels to increase in FY2022 (loss funding + regular working cap.).
Second wave a dampener but expect normalcy by 2HFY22; retain BUY Shubhangi Nigam We cut FY2022 revenues/EBITDA by 17%/48% on sharply lower 1QFY22 sales. We also trim FY2023E EBITDA by 5% as we bake in higher losses from the ethnic wear business. Net profit cut is higher due to negative operating leverage and higher depreciation charge. We roll forward to June 2023E and revise our SoTP-based FV to Rs230 (from Rs250). Retain BUY.
[email protected] Contact: +91 22 6218 6427
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Retailing Aditya Birla Fashion and Retail
Exhibit 1: Revenue print came in lower than expected due to impact of second wave of Covid in March 2021 Standalone quarterly financials of ABFRL, March fiscal year-ends (Rs mn)
Change (%) 2-yr CAGR Yoy growth 4QFY21 4QFY21E 4QFY20 3QFY21 KIE yoy qoq 4QFY19 (%) FY2021 FY2020 (%) FY2022E Revenue from operations 17,836 20,051 18,174 20,590 (11) (2) (13) 19,153 (3) 51,811 87,425 (41) 76,355 COGS (8,326) (9,825) (8,856) (9,823) (15) (6) (15) (8,998) (4) (25,376) (42,058) (40) (35,571) Gross profit 9,510 10,226 9,318 10,767 (7) 2 (12) 10,155 (3) 26,435 45,368 (42) 40,784 Gross margin (%) 53.3 51.0 51.3 52.3 232 bps 205 bps 103 bps 53.0 51.0 51.9 53.4 Employee cost (2,204) (2,017) (2,749) (2,002) 9 (20) 10 (2,351) (3) (8,304) (10,460) (21) (10,308) Rental expense (869) (1,526) (1,062) (1,097) (43) (18) (21) (2,794) (44) (2,897) (4,869) (40) (4,363) Other expenses (3,867) (3,609) (3,948) (3,555) 7 (2) 9 (3,765) 1 (12,082) (17,785) (32) (18,623) Total expenses (15,266) (16,978) (16,614) (16,477) (10) (8) (7) (17,908) (8) (48,659) (75,172) (35) (68,864) EBITDA 2,570 3,074 1,561 4,113 (16) 65 (38) 1,245 44 3,153 12,254 (74) 7,491 EBITDA margin (%) 14.4 15.3 8.6 20.0 -92 bps 582 bps -557 bps 6.5 6.1 14.0 -57 bps 9.8 Finance costs (1,196) (991) (1,186) (1,095) 21 1 9 (453) 62 (4,984) (4,227) 18 (2,889) Depreciation and amortization expense (2,470) (2,230) (2,325) (2,271) 11 6 9 (729) 84 (9,450) (8,768) 8 (9,811) Other income 202 700 169 141 (71) 20 43 242 (9) 3,517 651 440 1,200 PBT (894) 553 (1,782) 888 305 (7,764) (91) (4,009) Tax expense (455) (142) 379 (224) 1,721 (1,268) (1,361) (7) — PAT (1,348) 412 (1,403) 664 2,026 (9,032) (1,452) nm (4,009) EPS (1.5) 0.4 (1.8) 0.7 2.6 (11.2) (1.9) (2.4) Tax rate (%) (50.9) 25.6 21.3 25.2 (564.0) (16.3) — Costs as % of revenue from operations (%) COGS 46.7 49.0 48.7 47.7 -232 bps -205 bps -103 bps 47.0 49.0 48.1 2 bps 46.6 Employee cost 12.4 10.1 15.1 9.7 230 bps -276 bps 264 bps 12.3 16.0 12.0 34 bps 13.5 Rental expense 4.9 7.6 5.8 5.3 -274 bps -97 bps -46 bps 14.6 5.6 5.6 0 bps 5.7 Other expenses 21.7 18.0 21.7 17.3 368 bps -4 bps 442 bps 19.7 23.3 20.3 15 bps 24.4 Segmental performance Madura Fashion & Lifestyle 12,550 12,852 12,438 12,631 (2) 1 (1) 13,199 (2) 44,691 50,315 (11) 50,857 Pantaloons 5,965 7,199 6,260 8,113 (17) (5) (26) 6,332 (3) 28,613 31,940 (10) 25,498 Total revenue 18,515 20,051 18,698 20,744 (8) (1) (11) 19,531 (3) 73,305 82,256 (11) 76,355 Less: inter-segment revenue (300) — (379) (18) (377) (11) (1,489) (1,078) 38 - Net sales 18,216 20,051 18,319 20,726 (9) (1) (12) 19,153 (2) 71,816 81,177 (12) 76,355 EBIT Madura Fashion & Lifestyle 205 — (227) 832 (190) (75) 994 (55) (2,142) 2,259 Pantaloons (226) — (394) 891 (43) (125) (193) 8 (1,445) 1,845 Total EBIT (21) — (621) 1,722 (97) (101) 801 (3,587) 4,104 Less: inter-segment EBIT 79 — (51) 175 (49) nm 245 (227) Total EBIT 58 — (671) 1,897 (109) (97) 751 (3,341) 3,878 EBIT margin excl. inter-segment elimination (%) Madura Fashion & Lifestyle 1.6 — (1.8) 6.6 7.5 (4.8) 4.5 Pantaloons (3.8) — (6.3) 11.0 (3.1) (5.0) 5.8 Total EBIT (0.1) — (3.3) 8.3 4.1 (4.9) 5.0
Source: Company, Kotak Institutional Equities estimates
x
36 KOTAK INSTITUTIONAL EQUITIES RESEARCH Aditya Birla Fashion and Retail Retailing
Exhibit 2: Strong qoq margin expansion across segments Segmental quarterly performance of ABFRL, March fiscal year-ends (Rs mn)
1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 Yoy (%) Net Sale Value (by format) Madura Lifestyle brands 9,450 10,900 11,370 11,320 10,060 12,540 12,950 10,720 1,900 5,310 10,260 10,030 (6) Fast Fashion 880 880 1,020 800 800 750 890 410 na na na na nm Other businesses 710 840 1,060 1,070 1,250 1,340 1,480 1,300 500 1,850 2,370 2,520 94 Total Madura 11,040 12,620 13,450 13,190 12,110 14,630 15,320 12,430 2,400 7,160 12,630 12,550 1 Pantaloons 8,130 7,870 9,610 6,330 8,900 9,150 10,830 6,260 820 3,690 8,110 5,970 (5) Elimination (30) (430) (240) (380) (340) (810) (520) (380) 10 (560) 20 (300) (21) Total 19,140 20,060 22,820 19,140 20,670 22,970 25,630 18,310 3,230 10,290 20,760 18,220 (0) EBITDA Madura Lifestyle brands 770 1,400 1,320 1,690 940 1,580 1,380 1,640 (670) 390 1,920 1,760 7 Fast Fashion (60) (100) (120) (50) (90) — (40) — na na na na nm Other businesses (250) (170) (190) (240) (220) (210) (210) (490) (440) 220 220 (120) (76) Total Madura 460 1,130 1,010 1,400 630 1,370 1,130 1,150 (1,110) 610 2,140 1,640 43 Pantaloons 780 520 880 130 870 640 1,090 560 (720) 710 1,900 865 54 Elimination (20) (40) (30) (43) 60 (230) 30 (40) (20) 30 190 20 (150) Total 1,220 1,610 1,860 1,487 1,560 1,780 2,250 1,670 (1,850) 1,350 4,230 2,525 51 EBITDA margin Madura Lifestyle brands 8.1 12.8 11.6 14.9 9.3 12.6 10.7 15.3 (35.3) 7.3 18.7 17.5 225 bps Fast Fashion (6.8) (11.4) (11.8) (6.3) (11.3) — (4.5) — na na na na nm Other businesses (35.2) (20.2) (17.9) (22.4) (17.6) (15.7) (14.2) (37.7) (88.0) 11.9 9.3 (4.8) 3293 bps Total Madura 4.2 9.0 7.5 10.6 5.2 9.4 7.4 9.3 (46.3) 8.5 16.9 13.1 382 bps Pantaloons 9.6 6.6 9.2 2.1 9.8 7.0 10.1 8.9 (87.8) 19.2 23.4 14.5 554 bps Total 6.4 8.0 8.2 7.8 7.5 7.7 8.8 9.1 (57.3) 13.1 20.4 13.9 474 bps
Source: Company, Kotak Institutional Equities
Key trends. (1) Aggressive store expansion to follow, especially in tier II/III towns, (2) new product categories in line with changing consumer preference for more casual and activewear, (3) recovery in high street stores significantly better than malls, (4) athleisure and innerwear expanded to 25,500 outlets in FY2021, and (5) e-commerce and other new commerce models have received decent traction. The company highlighted that Madura e- commerce share moved to 15% in FY2021 (up from 7% in FY2020). Pantaloons e- commerce sales grew 3X yoy on the back of stronger assortment and own site grew 3X yoy.
Exhibit 3: Madura rationalized unviable stores in 4QFY21 Retail touch-points of Madura, March fiscal year-ends (#)
1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 Madura stores (#) EBOs 1,862 1,769 1,798 1,813 1,838 1,897 1,959 1,980 2,057 2,096 2,656 2,699 2,662 2,686 2,813 2,866 MBOs 4,700 4,600 4,850 4,982 5,019 14,000 16,000 18,000 19,800 22,000 24,000 25,000 23,700 26,000 39,900 31,767 SIS 3,500 3,700 3,750 4,054 4,126 4,153 4,326 5,077 5,200 5,403 6,261 6,514 6,754 6,589 6,835 6,878 Total 10,062 10,069 10,398 10,849 10,983 20,050 22,285 25,057 27,057 29,499 32,917 34,213 33,116 35,275 49,548 41,511
Source: Company, Kotak Institutional Equities
X
KOTAK INSTITUTIONAL EQUITIES RESEARCH 37 Retailing Aditya Birla Fashion and Retail
Exhibit 4: Madura added 53 EBOs in 4QFY21 Madura's EBO count excluding value stores (#, LHS) and retail area (mn sq. ft, RHS)
EBO count (ex-value stores, #) EBO area (mn sq. ft) (#) mn sq. ft 2,500 3.05 2,400 2.95 2,300 2,200 2.85 2,100 2.75 2,000 1,900 2.65 1,800 2.55 1,700 2.45 1,600
1,500 2.35
Jun-19
Jun-20
Sep-18
Sep-19
Sep-20
Dec-18
Dec-19
Dec-20
Mar-16
Mar-17
Mar-18
Mar-19 Mar-20 Mar-21
Source: Company, Kotak Institutional Equities
x
Exhibit 5: Wholesale channel remains weak and will be slow to recover; e-commerce on a strong trajectory Channel-wise NSV of Madura, March fiscal year-ends (Rs mn)
Yoy growth 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 (%) NSV by channel (Rs mn) Wholesale 3,200 5,010 3,430 4,580 3,560 5,180 4,110 4,930 3,490 5,950 3,940 4,110 350 720 1,440 2,450 (40) Retail 4,240 3,140 4,470 3,920 4,100 3,540 4,950 4,300 4,500 4,040 6,420 4,580 710 2,360 5,910 4,940 8 Others 1,480 1,620 1,930 1,660 1,810 2,180 2,310 2,090 2,070 2,550 2,590 2,030 840 2,230 2,910 2,640 30 Total 8,920 9,770 9,830 10,160 9,470 10,900 11,370 11,320 10,060 12,540 12,950 10,720 1,900 5,310 10,260 10,030 (6) Channel mix (%) Wholesale 36 51 35 45 38 48 36 44 35 47 30 38 18 14 14 24 Retail 48 32 45 39 43 32 44 38 45 32 50 43 37 44 58 49 Others 17 17 20 16 19 20 20 18 21 20 20 19 44 42 28 26
Source: Company, Kotak Institutional Equities
X
38 KOTAK INSTITUTIONAL EQUITIES RESEARCH Aditya Birla Fashion and Retail Retailing
Exhibit 6: Pantaloons opened 19 new stores in FY2021 Pantaloons store count (#) and area (mn sq. ft)
No. of stores (#, LHS) Store area (mn sq. ft, RHS) (#) mn sq. ft 370 4.7 330 4.2 290
250 3.7 210 170 3.2 130 2.7 90
50 2.2
Jun-19
Jun-20
Sep-18
Sep-19
Sep-20
Dec-18
Dec-19
Dec-20
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19 Mar-20 Mar-21
Source: Company, Kotak Institutional Equities
Takeaways from the results call
Industry update. (1) E-commerce continues to post strong growth, and new digital-led sales channels are emerging. (2) Value fashion players continue to expand in Tier 2 and Tier 3 markets and are being supported by some down-trading from customers and the growth of essentials. (3) Significant shift towards casual and unstructured clothing; sportswear, activewear, and loungewear are emerging as the new winners. (4) Recovery in high street stores is significantly better than stores in malls.
Business performance. Footfalls remain low in larger cities and bigger malls. Smaller size stores, smaller cities and high street have showed faster recovery in FY2021. ABFRL plans to aggressively open 60 stores in Pantaloons during FY2022 and will accelerate pace of store addition in ethnic wear segment as well. The wholesale channel remains weak but is being managed by cautious liquidation of inventory. Pantaloons 12-season model is helping in optimizing inventory levels for the business. With 2,866 Lifestyle brands EBOs, 346 Pantaloons stores, 31,767 MBO and 6,878 SIS, ABFRL has grown its footprint to 8.4 mn sq. ft. Innovative products were launched to cater to changing consumer needs. Categories such as work from home, kids wear and home furnishing gained traction during FY2021.
Lifestyle brands. The share of casual wear rose to 55% in FY2021 (up from 50% in FY2019). Wholesale channel (particularly DS) continued to be impacted by the Covid, although it grew 70% yoy in 4QFY21. Sales through the wholesale channel are down 40% yoy as sales were controlled to help in liquidation of existing inventory in the wholesale channel. Other channels (including e-commerce) posted a remarkable growth of ~30%. E-commerce grew 28% yoy and its share more than doubled from 7% in FY2020 to 15% in FY2021. Improved gross margins and strong cost-control measures drove EBIT margin expansion of 340 bps yoy to 1.6%. Aggressive network expansion into newer markets with focus on smaller towns has started. PE Red crossed 300+ stores in FY2021. The company has piloted Allen Solly Prime stores. Overall, Lifestyle brands added 100 stores in 4QFY21 and 383 stores in FY2021 (~88% franchisee led). It closed 247 unviable stores.
Pantaloons. Smaller towns grew yoy while metro/tier I cities lagged. High street recovered faster than malls. E-commerce grew 2.3X over last year and has witnessed continued rollout of omni-channel across the network. Working capital of Rs2.5 bn is in line to achieve target RoCE of 20%. Significant reduction in rentals (30% reduction),
KOTAK INSTITUTIONAL EQUITIES RESEARCH 39 Retailing Aditya Birla Fashion and Retail
overall overheads (15% reduction) led to improved cash position along with restricted buying decisions, optimizing working capital and tight inventory management. Advertising expense will come back. Pantaloons opened 19 stores in FY2021 and closed 15 unviable stores. Newly launched home category did well while women’s ethnic wear remained a laggard. Pantaloons plans to aggressively add 60 stores in FY2022. It also looks to double its revenues in the next 3-4 years as levers such as better merchandizing strategy, fresh drop of merchandize every two weeks, contemporary brand positioning and new retail identity, store expansion plan and improved store economics come in place.
Other businesses. (1) Innerwear and Athleisure. Revenues grew 56% on a yoy basis in 4QFY21 led by strong demand for Innerwear and Athleisure categories. E-commerce channel sales share expanded to 15% growing 154% yoy. 5,500+ outlets were added during the year taking the count to 25,500 outlets. It added 10 EBOs in FY2021 taking the total count to 47 stores. (2) American Eagle. It grew 80% yoy in 4QFY21, backed by strong penetration of denim category. E-commerce share doubled in FY2021. (3) Forever 21. Revenues grew 7% on a yoy basis in 4QFY21 and continued to remain profitable. (4) Super premium brands. It delivered 100% yoy growth in 4QFY21. Strong improvement in profitability as EBITDA grew 64% yoy. TheCollective grew 5X in 4QFY21.
Ethnic wear. Adjusted for transaction cost of Sabyasachi Couture of Rs50-60 mn, losses were Rs170 mn. Further investments will be required in Jaypore and S&N. Jaypore grew 72% yoy backed by strong online sales (61% yoy growth) in home, sleepwear and loungewear categories. With further equity investments planned, Jaypore is expected to add 10 new stores in FY2022. Shantanu & Nikhil grew 12% yoy in 4QFY21 as it is expanding retail presence (3 stores opened+2 WIP). FY2026 revenue target stands at Rs20 bn. 4QFY21 is tainted by exceptional items; more steady state losses will emerge in FY2022.
Omni-channel strategy. Phygital channel grew 40% yoy. Targeted digital marketing initiatives helped in improving customer visits on their digital platform. Hyperlocal delivery services, O2O service, Whatsapp commerce have been piloted and are seeing decent demand. Nearly 1,000 stores are now omni-enabled. ABFRL now has the capability to take orders from own websites and deliver through stores without using third-party retailers. Currently, delivering through stores is not possible as stores are shut due to restrictions. Half of ownbrand.com is typically fulfilled by own stores. Ownbrand.com is slightly less profitable due to higher CAC but gets partly compensated by lower delivery cost vis-à-vis third party partners.
Cost reduction. ABFRL was able to save Rs12.2 bn of fixed costs in FY2021 over last year. Rs4.8 bn was saved in rent expense, Rs2 bn in employee expense and Rs5.4 bn in other expenses in FY2021.
Working capital management. The company demonstrated strong cash flow from operations (including reduction of inventory by Rs6 bn in FY2021). NWC came down to Rs1.3 bn in Mar 2021 (from Rs9.2 bn in Mar 2020). 1HFY21 was focused on liquidating old inventory and deferred inventory buying in 2HFY21 depending on business recovery. Inventory, receivable and payable days increased to 123, 51 and 164 days (from 98, 35 and 95 days in Mar 2020), respectively.
40 KOTAK INSTITUTIONAL EQUITIES RESEARCH Aditya Birla Fashion and Retail Retailing
Exhibit 7: Snapshot of standalone balance sheet of ABFRL, March fiscal year-ends (Rs mn)
Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Sep-20 Mar-21 Assets Non-current assets Fixed assets 7,686 7,454 7,183 8,599 7,379 7,016 6,145 Goodwill 18,596 18,596 18,596 19,544 18,596 18,596 18,596 RoU assets — — — 20,310 21,744 19,938 20,669 Deferred tax assets 688 688 2,634 2,988 1,950 3,901 3,212 Non-current tax assets 188 230 162 192 223 207 216 Other non-current assets 3,678 3,880 3,945 3,888 5,489 5,164 12,067 Cash and cash equivalents 728 781 574 1,188 2,651 860 1,645 Current assets Inventories 16,912 20,075 19,213 23,564 23,494 20,905 17,429 Loans + security deposits + investments 739 726 856 1,166 1,148 2,149 4,058 Trade receivables 5,518 9,770 7,866 10,677 8,402 9,107 7,224 Other current assets 2,606 4,407 5,183 5,809 5,814 6,192 6,366 Total current assets 25,775 34,978 33,118 41,216 38,858 38,352 35,077 Current liabilities Trade payables 20,093 25,655 23,986 27,382 22,733 17,151 23,337 Deposits 890 1,068 1,113 1,492 1,534 1,435 1,306 Other financial liabilities 1,305 2,048 5,192 4,905 4,636 5,075 4,783 Short term provisions 709 706 870 792 879 1,012 849 Lease Liability — — — 6,156 6,757 6,036 6,905 Other current liabilities 947 3,619 843 930 1,019 765 801 Total current liabilities 23,944 33,097 32,004 41,657 37,558 31,472 37,981 Net current assets 1,831 1,882 1,113 (440) 1,300 6,880 (2,903) Total assets 33,395 33,512 34,206 56,268 59,331 62,561 59,646 Equity + liabilities Shareholders' funds 10,931 11,550 14,289 13,577 10,859 10,121 26,846 Debt 19,645 19,170 17,029 23,236 27,763 33,183 11,179 Non-current liabilities 2,818 2,792 2,889 19,454 20,709 19,257 21,621 Total equity + liabilities 33,395 33,512 34,206 56,268 59,331 62,561 59,646 Net debt 18,918 18,389 16,455 22,049 25,113 32,324 9,534
Net debt:equity 1.7 1.6 1.2 1.6 2.3 3.2 0.4
Source: Company, Kotak Institutional Equities
Lower estimates to bake in the impact of second wave of Covid
We cut our FY2022 revenue forecasts by 17% as we bake in sharply weaker revenues in 1HFY22. This drives negative operating leverage and results in a sharp 48% cut in EBITDA. We incorporate higher losses from ethnic wear business in FY2023 and this drives a 5% cut in EBITDA; PAT cut is higher as we also bake in higher depreciation charge.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 41 Retailing Aditya Birla Fashion and Retail
Exhibit 8: Key changes to estimates of ABFRL, March fiscal year-ends, 2022-23E
New estimates Old estimates % revision 2022E 2023E 2022E 2023E 2022E 2023E Total Revenue (Rs mn) 76,355 109,186 91,704 106,263 (16.7) 2.8 Revenue growth (%) 47 43 67 16 Gross profit (Rs mn) 40,784 58,416 48,280 55,888 (15.5) 4.5 Gross margin (%) 53 54 53 53 EBITDA (Rs mn) 7,491 16,369 14,480 17,211 (48.3) (4.9) EBITDA margin (%) 9.8 15.0 15.8 16.2 PBT (Rs mn) (4,009) 4,530 2,997 6,106 (233.8) (25.8) Net Profit (Rs mn) (4,009) 3,352 2,997 4,518 (233.8) (25.8) EPS (Rs) (4.3) 3.6 3.2 4.8 (233.8) (25.8)
EPS growth (%) (57) (184) (152) 51
Source: Company, Kotak Institutional Equities estimates
X
Exhibit 9: After the deceleration in FY2021-22, we expect revenues to fully recover only by FY2023 Details of key assumptions, March fiscal year-ends, 2013-24E
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Lifestyle brands Revenues (Rs mn) 36,330 36,170 37,170 41,980 44,220 26,670 38,366 52,397 58,342 Yoy growth (%) (0) 3 13 5 (40) 44 37 11 EBITDA (Rs mn) 3,133 3,946 3,977 5,055 8,058 4,391 6,426 10,119 11,679 EBITDA margin (%) 9 11 11 12 18 16 17 19 20 SSSG (%) 0 (6) 9 5 5 (35) 20 22 8 Period-ending store count (#) 1,877 1,761 1,813 1,980 2,253 2,379 2,504 2,704 2,929 Period-ending store area (sq. ft) 2.6 2.6 2.6 2.8 3.1 3.3 3.5 3.7 4.0 Pantaloon Revenues (Rs mn) 12,851 16,610 18,510 21,570 25,520 28,620 31,940 35,139 18,587 25,498 41,272 48,834 Yoy growth (%) 29 11 17 18 12 12 10 (47) 37 62 18 EBITDA (Rs mn) 661 334 727 1,030 1,260 1,730 2,310 5,632 2,755 2,232 6,773 8,072 EBITDA margin (%) 5 2 4 5 5 6 7 16 15 9 16 17 SSSG (%) — (2) 6 6 3 (3) 1 3 (48) 15 43 5 Period-ending store count (#) 95 107 134 163 209 275 308 342 346 406 476 556 Period-ending store area (sq. ft) 1.7 2.0 2.3 2.9 3.2 3.8 4.0 4.4 4.5 5.5 6.4 7.5 Other businesses Revenues (Rs mn) — — — 2,450 4,640 6,020 7,202 8,720 7,386 12,491 15,516 19,121 Yoy growth (%) — 89 30 20 21 (15) 69 24 23 EBITDA (Rs mn) (380) (831) (1,030) (1,264) (941) (459) (1,166) (523) (2) EBITDA margin (%) (15) (18) (17) (18) (11) (6) (9) (3) (0) Total Revenues (Rs mn) 12,851 16,610 18,510 60,350 66,330 71,810 81,121 88,078 52,643 76,355 109,186 126,297 Yoy growth (%) 29 11 226 10 8 13 9 (40) 45 43 16 EBITDA (Rs mn) 661 334 727 3,784 4,375 4,677 6,101 12,749 6,687 7,491 16,369 19,749 EBITDA margin (%) 5 2 4 6 7 7 8 14 13 10 15 16
Source: Company, Kotak Institutional Equities estimates
X
42 KOTAK INSTITUTIONAL EQUITIES RESEARCH Aditya Birla Fashion and Retail Retailing
Exhibit 10: SoTP-based Fair Value of Rs230/share
2023E 2024E Lifestyle brands EBITDA (Rs mn) 10,119 11,679 EV/EBITDA (X) 13 13 EV (Rs mn) 131,542 151,824 Pantaloons EBITDA (Rs mn) 6,773 8,072 EV/EBITDA (X) 11 11 EV (Rs mn) 74,508 88,796 Ethnic wear business Revenues (Rs mn) 5,880 7,938 EV/Revenues (X) 2 2 EV (Rs mn) 8,820 11,907 Other businesses Revenues (Rs mn) 9,636 11,183 EV/revenues (X) 3 3 EV of other businesses 28,908 33,550 Total EV 243,778 286,077 Net debt (Rs mn) 40,391 37,537 March equity value (Rs mn) 203,388 248,541 Fair value as of June 2023 (Rs/sh) 229 Notes: (a) Debt above is inclusive of lease rent liability.
Source: Kotak Institutional Equities estimates
X
KOTAK INSTITUTIONAL EQUITIES RESEARCH 43 Retailing Aditya Birla Fashion and Retail
Exhibit 11: Snapshot of consolidated financials of ABFRL, March fiscal year-ends, 2013-24E
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Profit model Revenue from operations 12,851 16,612 18,507 60,346 66,330 71,814 81,177 87,879 52,489 76,355 109,186 126,297 Gross profit 5,108 7,090 8,502 32,822 35,942 37,820 41,928 45,637 26,860 40,784 58,416 68,093 EBITDA 661 334 727 3,784 4,375 4,683 5,541 12,118 5,547 7,491 16,369 19,749 Depreciation and amortisation expense (544) (1,090) (1,835) (3,381) (2,425) (2,805) (2,823) (8,853) (9,628) (9,811) (10,316) (10,868) EBIT 117 (756) (1,108) 403 1,950 1,878 2,717 3,265 (4,080) (2,320) 6,054 8,881 Other income 632 51 28 264 382 328 648 653 734 1,200 1,373 901 Finance costs (1,438) (1,173) (1,202) (1,765) (1,797) (1,716) (1,874) (4,247) (5,026) (2,889) (2,897) (2,795) Profit before tax (689) (1,877) (2,281) (1,098) 535 490 1,491 (329) (8,372) (4,009) 4,530 6,987 Taxation 0 0 0 0 0 688 1,721 (1,321) 1,015 — (1,178) (1,817) Profit after tax (689) (1,877) (2,281) (1,098) 535 1,178 3,212 (1,650) (7,357) (4,009) 3,352 5,171 Diluted EPS (Rs/share) (9.9) (20.2) (24.6) (1.4) 0.7 1.5 4.2 (2.1) (8.0) (4.3) 3.6 5.5 Weighted average number of shares - diluted (mn) 70 93 93 773 773 773 773 773 915 932 938 938 Balance sheet Shareholders' funds 7,695 5,795 3,456 9,055 9,582 10,931 14,289 10,679 26,438 24,929 28,281 33,452 Total debt 17,307 10,821 13,106 14,764 20,317 18,615 17,029 27,823 8,184 19,040 17,000 13,000 Long-term liabilities 388 485 607 4,325 1,111 872 925 123 114 114 114 114 Total shareholders' funds + liabilities 25,390 17,100 17,169 28,144 31,010 30,418 32,242 63,915 59,698 69,688 72,103 74,431 Net fixed assets 16,508 16,580 15,831 23,486 25,121 26,282 25,779 27,808 33,092 33,943 34,666 35,749 Investments 8,000 60 0 344 242 42 42 142 4,198 4,198 4,198 4,198 Net current assets excluding cash 4 (418) 449 3,324 4,008 1,381 1,872 8,240 (5,957) 2,576 2,758 2,834 Total assets 25,390 17,100 17,169 28,144 31,010 30,418 32,242 63,914 59,698 69,688 72,103 74,431 Key ratios (%) Revenue growth 29 11 226 10 8 13 8 (40) 45 43 16 EBITDA growth (50) 118 421 16 7 18 119 (54) 35 119 21 EPS growth 173 22 (52) (149) 120 173 (151) 346 (46) (184) 54 Gross margin 40 43 46 54 54 53 52 48 49 47 46 46 EBITDA margin 5.1 2.0 3.9 6.3 6.6 6.5 6.8 13.8 10.6 9.8 15.0 15.6 Tax rate 0 0 0 0 0 (141) (115) (402) 12 — 26 26 Debt/equity (X) 2 2 4 2 2 2 1 5 1 1 1 1 RoE (18) (28) (49) (18) 6 11 25 (13) (39) (15) 11 15 RoCE 6 (3) (6) 3 8 9 23 41 (5) (2) 9 11 Cash flow 5 2 4 6 7 7 7 14 11 10 15 16 Operating profit before working capital changes 543 294 737 3,850 4,644 5,699 7,910 6,341 (445) 2,300 10,255 12,565 Change in working capital/ other adjustments (516) 408 (1,096) (741) (461) 2,627 (491) (6,368) 14,198 (8,533) (182) (76) Capital expenditure (8,234) 6,813 (1,087) (1,859) (4,403) (3,767) (2,320) (4,617) (12,273) (4,913) (5,832) (6,840) Free cash flow (8,207) 7,515 (1,447) 1,250 (221) 4,559 5,099 (4,644) 1,479 (11,146) 4,241 5,649
Source: Company, Kotak Institutional Equities estimates
44 KOTAK INSTITUTIONAL EQUITIES RESEARCH BUY Phoenix Mills (PHNX) https://ultraviewer.et/en/own Real Estate MAY 31, 2021 load.html RESULT Sector view: Attractive
W-shaped recovery? Phoenix Mills ended 4QFY21 with consumption at Rs14.3 bn CMP (`): 766 almost equivalent to the consumption in 4QFY20 (90% on a like-for-like comparison) Fair Value (`): 940 reflecting the underlying strength of the business to bounce back in a post-Covid world. BSE-30: 51,423 We do concede a reversal in fortunes in 1QFY22 owing to the second wave of Covid-19 though take comfort from the results of 4QFY21 that business will bounce back once normalcy prevails. Maintain BUY with revised Fair Value of Rs940/share (from Rs960/share).
Phoenix Mills Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 766/940/BUY EPS (Rs) 3.1 10.5 30.8 52-week range (Rs) (high-low) 871-480 EPS growth (%) (72.4) 243.9 192.9 Mcap (bn) (Rs/US$) 132/1.9 P/E (X) 250.3 72.8 24.8 ADTV-3M (mn) (Rs/US$) 140/2 P/B (X) 2.7 2.6 2.4 Shareholding pattern (%) EV/EBITDA (X) 33.0 20.5 12.1 Promoters 45.5 RoE (%) 1.2 3.7 10.1 FPIs/MFs/BFIs 34.3/15.3/0.7 Div. yield (%) 0.1 0.3 0.4 Price performance (%) 1M 3M 12M Sales (Rs bn) 11 15 23 Absolute 3.4 (5.9) 56.0 EBITDA (Rs bn) 5 9 14 Rel. to BSE-30 0.0) (10.1) (2.3) Net profits (Rs bn) 1 2 5
Strong consumption recovery in 4QFY21 ended the year at 69% of FY2020 consumption levels Phoenix Mills reported a strong recovery in retail operations with consumption in 4QFY21 at Rs14.4 bn matching the levels of 4QFY20 (90% of 4QFY20 on same store basis after excluding Phoenix Pallasio, Lucknow). Phoenix reported consolidated revenues of Rs3.8 bn (-3% yoy, +14% qoq), EBITDA of Rs1.7 bn (-15% yoy, +9% qoq) and PAT (after minority interest) of Rs655 mn (+40% yoy, flat qoq) in 4QFY21. On a segment basis retail revenues were down 1% yoy, commercial revenues were up 13% yoy and residential revenues were up 4.3X only dragged down by 66% yoy decline in hospitality revenues. Steady recovery in consumption across malls has led to sequential improvement in earnings. For FY2021, revenue and EBTIDA stood at Rs10.7 bn (-45% yoy) and Rs4.9 bn (-39% yoy) reflective of the weakness in business performance in 1HFY21.
CPP Investments extends partnership for development of mall in Kolkata Phoenix Mills, strengthening its ties with CPP IB, entered into 51:49 JV with the pension fund for retail-led mixed use development (1 mn sq. ft of retail in first phase) at its recently acquired land parcel in Alipore, Kolkata. CPP will invest Rs5.6 bn—Rs1.8 bn in tranche one for 31% stake and another Rs2 bn on receipt of construction approvals taking aggregate stake to 49%. Estimated cost for the project is estimated at Rs9.3 bn, which with base rentals of Rs170 per sq. ft per month is estimated to give annual rentals of Rs2 bn. We note that Phoenix Mills has so far paid Rs3.1 bn towards cost of land at Alipore, Kolkata and the company will get back Rs1.5 bn from the equity infusion by CPP IB.
Maintain BUY with revised Fair Value of Rs940/share Murtuza Arsiwalla Phoenix Mills performed well over the previous quarter with consumption levels reaching 100% of 4QFY20 levels, though earnings trajectory will once again reverse in 1QFY22 owing to the second wave of Covid-19. We have revised downwards the EBITDA estimates for FY2022E to Samrat Verma Rs8.5 bn (from Rs11.3 bn) to factor earnings disruption on account of the second wave of Covid-19 while leaving earnings for FY2023E largely unchanged. Maintain BUY rating with revised Fair Value of Rs940/share (from Rs960/share). Phoenix Mills currently trades at 13X EV/EBITDA on FY2023E with 11% CAGR growth in attributable EBITDA between FY2020 and FY2025E.
[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. Real Estate Phoenix Mills
Exhibit 1: Phoenix Mills reported 45% yoy decline in revenues to Rs10.7 bn and 39% yoy decline in EBTIDA to Rs4.9 bn in FY2021 Interim (consolidated) results for Phoenix Mills, March fiscal year-ends, 2020-22E (Rs mn)
% change 4QFY21 4QFY21E 4QFY20 2QFY21 4QFY21E 4QFY20 2QFY21 2021 2020 % change 2022E Revenues 3,858 3,887 3,992 3,378 (1) (3) 14 10,733 19,411 (45) 15,123 Cost of material/construction (189) (121) (252) (111) (332) (1,140) (331) Change in inventory (121) (13) 94 (165) (437) (818) - Employee expenses (320) (362) (354) (374) (1,125) (1,655) (1,293) Electricity (276) (307) (304) (296) (873) (1,568) (670) Other expenses (1,219) (884) (1,133) (844) (3,024) (6,126) (4,311) EBITDA 1,734 2,200 2,044 1,588 (21) (15) 9 4,942 8,103 (39) 8,518 Depreciation / amortisation (520) (535) (545) (531) (2,094) (2,076) (2,189) EBIT 1,214 1,664 1,498 1,058 (27) (19) 15 2,848 6,027 (53) 6,329 Other income 496 230 104 151 923 585 548 Finance cost (807) (907) (840) (857) (3,478) (3,478) (4,086) Pre-tax profits 903 987 762 352 (9) 19 157 292 3,134 (91) 2,791 Tax (260) (184) (279) 249 47 (1,221) (992) Net income 643 804 483 601 (20) 33 7 339 1,913 (82) 1,798 Minority interests (63) (60) (61) (8) 49 (538) (209) Share of profit of associates 75 68 46 61 138 326 220 PAT (after minority interest) 655 812 467 654 (19) 40 0 526 1,701 (69) 1,809 Exceptional items - - - - - 78 -
Source: Company, Kotak Institutional Equities estimates
Segment-wise performance
Retail. Retail portfolio clocked consumption of Rs14.4 billion in 4QFY21, up 5% QoQ and at ~100% of 4QFY20. Consumption across malls stood at Rs33.3 bn in FY2021 and was at 69% of FY2020 levels. Retail rental income was at Rs5.6 bn (55% of FY2020 rentals). Retail malls contributed to 68% of total revenues in FY2021. Collections (rentals + recoveries) from malls improved 42% qoq to Rs3.7 bn taking total collections to Rs7.6 bn in FY2021. On an assets basis, malls in Mumbai (96% for HSP), Pune (93% of 4QFY20) and Bangalore (105% of 4QFY20) reported strong consumption trends, dragged down by malls at Chennai (70% of 4QFY20) and Lucknow (73% of 4QFY20).
Commercial. Annuity portfolio, with total leased area of 1.02 mn sq. ft, generated revenues of Rs326 mn in 4QFY21 (112% of 4QFY20) and Rs1.1 bn (-2% yoy) in FY2021. Fountainhead Tower 2 with leasable area of 0.25 msft was completed and received OC in October 2020 of which 60,000 sq. ft has been leased till March 2021 and expected to commence operations from 2QFY22. Collection efficiency for commercial portfolio was in excess of 90%.
Hospitality. St. Regis contributed revenues of Rs243 mn and EBITDA of Rs10 mn in 4QFY21 as occupancy improved sequentially to 39% from 35% in 3QFY21 with 1% qoq decline in ARRs at Rs7,290/day. Courtyard by Marriott, Agra reported revenues of Rs56 mn in 4QFY21 while EBTIDA continued to remain negative. The property registered a sharp increase in occupancy to 53% in 4QFY21 even as ARRs remained flat sequentially at Rs3,246. For FY2021, hotel segment reported steepest decline in revenues at Rs766 mn (-78% yoy) and EBITDA at Rs65 mn (-55% yoy).
Residential. Phoenix Mills sold and registered agreements for inventory worth Rs630 mn during 4QFY21 and Rs 1.7 bn during FY2021. Additional sales of Rs325 mn completed during FY2021 for which registration is pending taking the cumulative sales figure to Rs2 bn during FY2021. Collections for the quarter were at Rs499 mn and Rs1.4 bn for FY2021.
46 KOTAK INSTITUTIONAL EQUITIES RESEARCH Phoenix Mills Real Estate
Other highlights from the earnings call
Phoenix Mills and CPP Investments have committed to invest another Rs8 bn (in 51:49 JV ISMDL) for the under-construction malls at Bengaluru, Hyderabad and Indore. The company has incurred cost of Rs17 bn (till March 2021) and will require another Rs16 bn for the completion of these retails malls. Phoenix Mills is adopting a more conservative approach in funding of under-construction assets—management contention being less favorable terms on construction finance.
Post the second wave of Covid-19, the company has not yet negotiated rentals with its tenants and will commence the process upon easing of lockdown restriction across states. Cash burn in the month of April and May 2022 was at Rs250 mn per month per mall.
Phoenix Mills (standalone entity) transferred a few units at Art Guild House and Centrium from standalone entity to 100% wholly-owned subsidiary Offbeat Developers for sales consideration of Rs3.1 bn for which profit of Rs800-850 mn was recognized during the quarter.
The company highlighted that its commercial portfolio did not witness tenant churn and occupancy continues to remain high along with no pressure on rentals. For retail malls, there has been a 4-5% decline in occupancy across malls primarily owing to exits from tenants in F&B category in FY2021.
Project Rise, in Lower Parel, will have 1-1.2 mn sq. ft of commercial area and another 0.2- 0.35 mn sq. ft of retail area requiring total cost of Rs12 bn. Under-construction assets in Bengaluru and Indore have been 30% and 65% pre-leased at rentals of Rs165 and Rs90 per sq. per month, respectively. Palladium Mall in Ahmedabad has been 50% pre-leased with rentals averaging at Rs150 per sq. ft per month.
The company increased its gross debt by Rs748 mn to Rs45 bn during the quarter along with average cost of debt declining to 8.17% in 4QFY21 from 8.46% in 3QFY21.
Exhibit 2: Contribution from malls stood at 68% of overall revenues in FY2021 Segment -wise contribution for Phoenix Mills, March fiscal year-ends, 2020-22E (Rs mn)
% change 4QFY21 4QFY20 3QFY21 4QFY20 3QFY21 2021 2020 % change 2022E Revenues Retail 2,672 2,705 2,230 (1) 20 7,289 11,993 (39) 12,611 Residential 563 130 556 333 1 1,566 2,794 (44) 591 Commercial 326 290 315 12 3 1,115 1,138 (2) 802 Hospitality & others 297 867 278 (66) 7 763 3,486 (78) 1,120 Revenues 3,858 3,992 3,379 (3) 14 10,733 19,411 (45) 15,123
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 47 Real Estate Phoenix Mills
Exhibit 3: Consumption across malls has recovered substantially in 4QFY21 Asset wise performance for Phoenix Mills, March fiscal year-ends, 4QFY20 - 4QFY21 (Rs mn)
% change 4QFY21 4QFY20 3QFY21 4QFY20 3QFY21 2021 2020 Chg. (%) Consumption Phoenix Palladium 3,503 3,663 3,413 (4) 3 8,098 17,102 (53) Phoenix Marketcity Bangalore 2,689 2,552 2,583 5 4 6,726 13,140 (49) Phoenix Marketcity Pune 2,199 2,371 2,281 (7) (4) 5,206 12,592 (59) Phoenix Marketcity Mumbai 1,611 1,896 1,591 (15) 1 3,769 9,790 (62) Phoenix Marketcity and Palladium Chennai 2,084 2,256 1,794 (8) 16 4,170 11,538 (64) Phoenix Palassio 1,354 NA 1,210 NA 12 2,896 — NA Phoenix United Lucknow 500 681 554 (27) (10) 1,387 3,113 (55) Phoenix United Bareilly 410 455 380 (10) 8 1,049 2,033 (48) Total 14,350 13,874 13,806 3 4 33,301 69,308 (52) Rental Phoenix Palladium 662 780 622 (15) 6 1,962 3,486 (44) Phoenix Marketcity Bangalore 293 307 238 (5) 23 779 1,426 (45) Phoenix Marketcity Pune 336 350 250 (4) 34 847 1,667 (49) Phoenix Marketcity Mumbai 255 283 186 (10) 37 615 1,270 (52) Phoenix Marketcity and Palladium Chennai 338 285 236 19 43 782 1,809 (57) Phoenix Palassio 161 — 123 NA 31 321 — NA Phoenix United Lucknow 64 72 40 (11) 60 181 318 (43) Phoenix United Bareilly 57 50 48 14 19 145 224 (35)
Total 2,166 2,127 1,743 2 24 5,632 10,200 (45)
Source: Company, Kotak Institutional Equities
Exhibit 4: Performance at St. Regis, Mumbai continues to languish due to absence of business travel Performance of hospitality segment for Phoenix Mills, March fiscal year-ends, 4QFY20 - 4QFY21 (Rs mn)
% change 4QFY21 4QFY20 3QFY21 4QFY20 3QFY21 2021 2020 % change 2022E St. Regis, Mumbai Revenue 243 753 230 (68) 6 653 3,088 (79) 913 EBTIDA 10 276 21 (96) (52) (43) 1,169 (104) (124) Occupancy (%) 39 69 35 (43) 11 29 78 (63) 40 ARR (Rs) 7,290 13,189 7,394 (45) (1) 7,396 12,241 (40) 7,396 Courtyard by Marriott, Agra Revenue 56 109 49 (49) 14 113 376 (70) 207 Occupancy (%) 53 60 32 (12) 66 36 65 (45) 40
ARR (Rs) 3,246 5,827 3,222 (44) 1 3,340 4,352 (23) 3,507
Source: Company, Kotak Institutional Equities
48 KOTAK INSTITUTIONAL EQUITIES RESEARCH Phoenix Mills Real Estate
Exhibit 5: Phoenix Mills reduced its gross debt by Rs870 mn to Rs45 bn in FY2021 Movement of gross debt for Phoenix Mills, March fiscal year-ends, 3QFY19 - 4QFY21 (Rs bn)
Gross debt (Rs mn)
48 47
47 47 46 46
46 46 45
45 45 45 45 44 44
43
42 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21
Source: Company, Kotak Institutional Equities
Exhibit 6: Phoenix Mills is looking to near-double its retail presence Details of under-construction and development portfolio of Phoenix Mills (mn sq. ft)
Retail Office Total Portfolio under construction Phoenix Millennium, Wakad, Pune 1.10 — 1.10 Phoenix Mall of Asia, Hebbal, Bengaluru 1.20 — 1.20 Phoenix Citadel, Indore 1.00 — 1.00 Palladium, Ahmedabad 0.70 — 0.70 Fountainhead -Tower 2 & 3 — 0.66 0.66 Phoenix MarketCity, Chennai — 0.42 0.42 Sub - total 4.00 1.08 5.08 Portfolio under planning High Street Phoenix 0.50 1.00 1.50 Phoenix MarketCity, Whitefield, Bengaluru 0.31 1.00 1.31 Phoenix Millennium, Wakad, Pune — 0.60 0.60 Phoenix Mall of Asia, Hebbal, Bengaluru — 1.20 1.20 Sub - total 0.81 3.80 4.61 Total 4.81 4.88 9.69
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 49 Real Estate Phoenix Mills
Exhibit 7: We estimate the leasable area to grow at 13% CAGR over the next five years Key assumptions for retail, commercial and hotels business, March fiscal year-ends, 2015-25E (Rs mn)
2019 2020 2021 2022E 2023E 2024E 2025E Retail + Commercial Leasable area (mn sq. ft) 7.28 7.32 8.22 9.92 11.00 13.30 13.30 Occupancy (%) 92.22 92.40 87.80 84.80 85.48 83.60 88.63 Rental (Rs mn) 10,435 11,178 6,762 10,961 14,733 17,175 18,071 Rental (Rs/sq. ft) 130 138 78 109 131 129 128 Hotels Hotel Keys 588 588 588 588 588 588 588 Occupancy (%) 76 74 31 40 70 73 73 ARR 9,491 9,958 5,865 6,120 8,280 8,793 9,233 RevPAR (Rs/day) 7,188 7,343 1,836 2,448 5,796 6,451 6,773
Source: Company, Kotak Institutional Equities
Exhibit 8: Change in estimates for Phoenix Mills, March fiscal year-ends, 2022-2024E (Rs mn)
Revised estimates Old estimates Change (%) 2022E 2023E 2024E 2022E 2023E 2024E 2022E 2023E 2024E Revenue 15,123 23,212 27,383 19,607 23,710 27,784 (22.9) (2.1) (1.4) EBITDA 8,518 14,096 16,641 11,396 14,003 16,436 (25.3) 0.7 1.2 PAT 1,809 5,299 6,370 3,848 5,676 6,815 (53.0) (6.6) (6.5)
Source: Kotak Institutional Equities estimates
50 KOTAK INSTITUTIONAL EQUITIES RESEARCH Phoenix Mills Real Estate
Exhibit 9: SoTP-based Fair Value of Rs940/share based on March 2023E earnings SoTP of Phoenix Mills, March fiscal year-ends (Rs mn)
Valuations (Rs mn) Ownership Attributable value Year DF EBITDA EV Net debt Equity (%) (Rs mn) (Rs/share) (%) Retail Operational HSP & Palladium, Mumbai 2023E 1.00 3,601 48,019 4,106 43,913 100 43,913 256 27 Phoenix MarketCity, Bengaluru 2023E 1.00 1,594 21,259 193 21,066 51 10,743 63 7 Phoenix MarketCity, Chennai 2023E 1.00 2,072 27,631 4,450 23,181 50 11,591 68 7 Phoenix MarketCity, Mumbai 2023E 1.00 1,299 17,321 5,297 12,024 100 12,024 70 7 Phoenix MarketCity, Pune 2023E 1.00 1,671 22,285 4,241 18,044 100 18,044 105 11 Phoenix United, Lucknow 2023E 1.00 299 3,982 397 3,584 100 3,584 21 2 Phoenix United, Bareilly 2023E 1.00 211 2,808 633 2,175 100 2,175 13 1 Phoenix Palassio, Lucknow 2023E 1.00 757 10,096 4,468 5,628 100 5,628 33 3 Operational 11,505 153,401 23,786 129,615 83 107,702 627 67 Under construction Phoenix MarketCity West, Wakad, Pune 2025E 0.80 720 7,654 2,901 4,753 51 2,424 14 2 Phoenix MarketCity, Hebbal, Bengaluru 2025E 0.80 1,067 11,345 3,001 8,344 51 4,255 25 3 Phoenix MarketCity, Indore 2023E 1.00 623 8,301 4,204 4,097 51 2,089 12 1 Palladium, Ahmedabad 2023E 1.00 458 6,102 3,191 2,911 50 1,456 8 1 Under construction 2,868 33,402 13,298 20,104 51 10,224 60 6 Under development HSP & Palladium, Mumbai 5,000 5,000 100 5,000 29 3 Phoenix MarketCity, Bengaluru 930 930 51 474 3 0 Under development 5,930 5,930 92 5,474 32 3 Retail 14,373 192,733 37,083 155,649 79 123,401 719 76 Commercial Operational Phoenix Paragon Plaza 2023E 1.00 469 5,857 252 5,606 80 4,485 26 3 Fountainhead Tower-1 2023E 1.00 109 1,361 (265) 1,626 75 1,220 7 1 Art Guild House 2023E 1.00 537 6,717 — 6,717 100 6,717 39 4 Centrium 2023E 1.00 35 433 — 433 100 433 3 0 Phoenix House 2023E 1.00 115 1,432 — 1,432 100 1,432 8 1 East Court 2023E 1.00 27 338 — 338 100 338 2 0 Operational 1,291 16,138 (14) 16,152 91 14,624 85 9 Under construction Fountainhead Tower-2&3 2025E 0.80 306 3,046 1,500 1,546 75 1,160 7 1 Phoenix MarketCity, Chennai 2024E 0.89 210 2,340 1,000 1,340 50 670 4 0 Classic Mall — — — — — — — — Under construction 515 5,386 2,500 2,886 63 1,830 11 1 Under development High Street Phoenix — 10,000 — 10,000 100 10,000 58 6 Phoenix MarketCity, Whitefield, Bengaluru — 3,000 — 3,000 51 1,530 9 1 Phoenix MarketCity West, Wakad, Pune — 1,530 — 1,530 51 780 5 0 Phoenix MarketCity, Hebbal, Bengaluru — 3,600 — 3,600 51 1,836 11 1 Under development — 18,130 — 18,130 78 14,146 82 9 Commercial 1,806 39,654 2,486 37,168 232 30,600 178 19 Hotels The St. Regis 2023E 1.00 693 8,318 4,037 4,281 73 3,125 18 2 Courtyard by Marriot 2023E 1.00 95 1,134 2,441 (1,306) 80 (1,045) (6) (1) Hotels 788 9,452 6,478 2,974 70 2,080 12 1 Residential One Bangalore West 354 3,049 (76) 3,125 80 2,500 15 2 Kessaku 500 3,341 (76) 3,417 80 2,733 16 2 Residential 854 6,390 (152) 6,542 80 5,234 30 3 Operational 14,438 185,380 30,098 155,283 83 129,639 755 80 Under construction 3,383 38,788 15,798 22,991 52 12,054 70 7 Under development — 24,060 — 24,060 82 19,621 114 12 Grand total 17,821 248,229 45,895 202,334 80 161,314 940 100
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 51 Real Estate Phoenix Mills
Exhibit 10: Phoenix Mills will see 19% CAGR in PAT between FY2020 and FY2025E Phoenix Mills: Profit model, balance sheet, cash model, March fiscal year-ends, 2018 - 25E (Rs mn)
2018 2019 2020 2021 2022E 2023E 2024E 2025E Profit model Net sales 16,198 19,816 19,411 10,733 15,123 23,212 27,383 29,865 EBITDA 7,774 9,931 9,671 4,942 8,518 14,096 16,641 18,239 Depreciation (1,983) (2,042) (2,076) (2,094) (2,189) (2,178) (2,585) (2,735) EBIT 5,791 7,889 7,595 2,848 6,329 11,917 14,056 15,504 Interest (3,476) (3,506) (3,478) (3,478) (4,086) (4,097) (4,538) (4,244) Other income 556 851 585 923 548 353 546 913 Pre-tax profits 2,871 5,235 4,702 292 2,791 8,173 10,063 12,174 Tax (758) (1,099) (1,221) 47 (992) (2,497) (2,885) (3,488) Net income 2,113 4,136 3,481 339 1,798 5,676 7,178 8,686 Minority interests (135) (760) (538) 49 (209) (870) (1,347) (1,625) Share of profit of associates 442 353 326 138 220 493 540 605 PAT (after minority interest) 2,421 3,729 3,270 526 1,809 5,299 6,370 7,666 Reported PAT 2,421 4,220 3,347 526 1,809 5,299 6,370 7,666 Earnings per share (Rs) 13.2 24.2 21.8 3.1 10.5 30.8 37.1 44.6 Balance sheet Total equity 28,517 34,741 37,084 48,848 50,227 55,010 60,779 67,758 Minority interests 4,661 12,233 12,788 13,190 13,399 14,269 15,616 17,241 Total borrowings 34,509 39,810 41,075 36,537 48,741 48,241 45,641 42,041 Current liabilities 17,284 14,371 14,499 15,955 15,051 13,513 12,640 14,777 Total liabilities and equity 84,972 101,156 105,446 114,529 127,418 131,033 134,676 141,816 Net fixed assets 52,965 61,516 60,817 69,013 75,528 76,250 85,664 82,929 CWIP 5,025 8,960 15,341 12,740 10,185 8,124 1,016 1,516 Goodwill 3,711 3,711 3,711 3,711 3,711 3,711 3,711 3,711 Current assets 14,135 18,132 19,096 22,110 27,137 30,928 32,327 41,757 Investments 8,290 7,450 5,897 5,740 9,757 11,030 11,077 11,143 Deferred tax asset 846 1,386 585 1,215 1,100 990 880 760 Total assets 84,972 101,156 105,446 114,529 127,418 131,033 134,676 141,816 Free cash flow Operating cash flow excl. working capital 7,042 9,165 8,973 4,189 7,847 13,698 16,290 17,954 Working capital changes 7,417 (7,175) (985) 2,173 (5,385) (1,709) 170 3,320 Capital expenditure (15,013) (14,606) (7,801) (7,689) (6,149) (840) (4,891) (500) Free cash flow (554) (12,616) 187 (1,327) (3,687) 11,149 11,569 20,774 Ratios (%) Debt/equity 1.2 1.1 1.1 0.7 1.0 0.9 0.8 0.6 Net debt/equity (X) 1.2 1.1 1.1 0.6 0.9 0.7 0.6 0.3 Debt /EBITDA 4.4 4.0 4.2 7.4 5.7 3.4 2.7 2.3 Net debt/EBITDA 4.4 3.8 4.1 6.4 5.1 2.8 2.0 1.1 RoAE (%) 9.7 13.3 9.3 1.2 3.7 10.1 11.0 11.9 RoACE (%) (pre-tax) 9.2 10.2 8.5 3.0 6.0 10.4 11.7 12.4
Source: Company, Kotak Institutional Equities
52 KOTAK INSTITUTIONAL EQUITIES RESEARCH SELL Metropolis Healthcare (METROHL) https://ultraviewer.et/en/own Health Care Services MAY 31, 2021 load.html RESULT Sector view: Attractive
In-line quarter; aggressive expansion plans announced. Metropolis’ 4QFY21 CMP (`): 2,524 revenue growth of 41% yoy was in line with non-Covid business registering a 21% yoy Fair Value (`): 1,800 growth. As organized players benefit from higher traction in home collection and BSE-30: 51,423 enhanced brand recognition, Metropolis is eyeing rapid expansion in new regions and has announced a plan to increase its lab/PSC network by 70% to deepen presence in core areas and fill gaps in non-core regions. We like METROHL’s renewed approach towards building a pan-India presence. Valuations at 54X FY23E EPS remain expensive.
Metropolis Healthcare Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 2,524/1,800/SELL EPS (Rs) 36.2 43.6 46.6 52-week range (Rs) (high-low) 2,615-1,312 EPS growth (%) 20.6 20.5 7.0 Mcap (bn) (Rs/US$) 130/1.8 P/E (X) 69.8 57.9 54.1 ADTV-3M (mn) (Rs/US$) 319/4 P/B (X) 18.1 15.2 12.8 Shareholding pattern (%) EV/EBITDA (X) 43.6 34.8 31.4 Promoters 50.4 RoE (%) 29.8 28.6 25.7 FPIs/MFs/BFIs 27.2/13.5/1.8 Div. yield (%) 0.4 0.5 0.6 Price performance (%) 1M 3M 12M Sales (Rs bn) 10 13 14 Absolute 3.4 28.8 91.0 EBITDA (Rs bn) 3 4 4 Rel. to BSE-30 0.0 23.0 19.6 Net profits (Rs bn) 2 2 2
In-line quarter, non Covid business recovers well
Metropolis posted 41% yoy growth in revenues, in line with a business update provided earlier. Non-Covid business recovered strongly registering 21% yoy growth on a low base (11.5% 2- year CAGR) while Covid segment declined 20% qoq, reflecting decline in Covid cases and reduction in the price of RT-PCR tests across states. Consolidated realization declined 11% qoq to Rs920 reflecting lower Covid testing. Gross margins increased 100 bps qoq (+40 bps qoq) driven by pick-up in home collection and bundled testing along with recovery in focus cities. Staff costs remained well controlled and below estimates, while other expenses increased 27% yoy. EBITDA margins were at 33% in the quarter (in line versus KIE), benefitting from operating leverage. Higher depreciation led to PAT missing our estimate.
Accelerating network expansion in non-core regions
Over the past 12 months, the Covid-19 crisis has helped enhance the brand presence of organized players, especially in their non-core regions while increasing demand for home collection over walk-ins has also positioned large chains with strong infrastructure at a better footing versus unorganized chains. Metropolis’s non-Covid home collection revenues grew 22% in FY2021 through expansion of home collection footprint to 60 locations versus 13 in FY2020. To further capitalize on these emerging trends and enhance presence in non-core regions, Metropolis has now announced an aggressive network roll-out plan where the company will (1) increase lab network to 215 (versus 125 currently) (2) add 70% collection centers to its existing base of 2,555 by FY2025E and (3) expand home visit coverage to 100 Kumar Gaurav locations in FY2022 and to 200 locations by FY2023. We like the renewed approach of large players towards building a pan-India presence and accelerate the shift from unorganized chains.
Samitinjoy Basak Increase estimates to factor in second wave; SELL on expensive valuations
We increase our FY2022 EPS estimates by 6% to factor-in the second wave, which is partially offset by three months delay in completing Hitech acquisition. At 54X FY2023E EPS, stock remains richly valued.
[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. Health Care Services Metropolis Healthcare
Exhibit 1: METROHL’s 3QFY21 EBITDA was in line versus estimates Metropolis Healthcare, interim results, March fiscal year ends (Rs mn)
chg. (%) chg. (%) chg. (%) 4QFY21 4QFY21E 4QFY20 3QFY21 4QFY21E 4QFY20 3QFY21 FY2021 FY2020 yoy FY2022E FY2021 yoy Net sales 2,917 2,923 2,070 2,748 (0.2) 41.0 6.2 9,980 8,564 16.5 12,995 9,980 30.2 Cost of materials (718) (731) (535) (703) (1.7) 34.2 2.2 (2,576) (2,110) 22.1 (3,691) (2,576) 43.3 Gross profit 2,199 2,192 1,534 2,045 0.3 43.3 7.5 7,404 6,454 14.7 9,304 7,404 25.7 Employee benefit expense (511) (540) (449) (529) (5.4) 13.7 (3.5) (1,986) (1,902) 4.5 (2,375) (1,986) 19.6 Other expenses (724) (680) (571) (649) 6.5 26.8 11.5 (2,557) (2,226) 14.9 (3,235) (2,557) 26.5 EBITDA 964 972 514 866 (0.9) 87.5 11.3 2,860 2,326 23.0 3,694 2,860 29.2 Depreciation (141) (111) (111) (110) 26.9 26.4 28.4 (459) (393) 17.0 (660) (459) 43.6 EBIT 823 861 403 757 (4.5) 104.5 8.8 2,401 1,933 24.2 3,034 2,401 26.4 Other income 21 40 61 37 120 83 45.9 143 120 18.7 Finance expense (27) (17) (23) (16) (78) (83) (182) (78) Profit before tax 817 884 441 778 (7.7) 85.1 5.0 2,443 1,933 26.4 2,995 2,443 22.6 Exceptional items — — (177) — — (245) — — Tax expense (203) (218) (79) (191) (610) (412) (767) (610) 25.7 Net profit (pre exceptional) 613 667 362 586 (8.1) 69.3 4.6 1,833 1,521 20.6 2,228 1,833 21.5 Minority interest 3 (1) (0) (1) (3) (2) — (3) (100.0) Net profit after minority 616 666 186 586 (7.6) 231.8 5.2 1,831 1,273 43.8 2,228 1,831 21.7 Net profit (adjusted) 616 666 332 586 (7.6) 85.8 5.2 1,831 1,537 19.1 2,228 1,831 21.7 FD number of shares 51 51 51 51 51 51 51 51 FD EPS (Rs) 12.0 13.0 3.6 11.5 (7.6) 231.8 5.2 36.2 25.1 43.6 36.2 20.5 FD EPS (adjusted) (Rs) 12.0 13.0 6.5 11.5 (7.6) 85.8 5.2 36.2 30.4 43.6 36.2 20.5 Margin (%) Gross margin (%) 75.4 75.0 74.1 74.4 74.2 75.4 71.6 74.2 EBITDA margin (%) 33.0 33.3 24.8 31.5 28.7 27.2 28.4 28.7 Staff costs to sales (%) 17.5 18.5 21.7 19.3 19.9 22.2 18.3 19.9 Other expenses to sales (%) 24.8 23.3 27.6 23.6 25.6 26.0 24.9 25.6 Tax rate (%) 24.9 24.6 17.9 24.6 25.0 21.3 25.6 25.0 Revenues (Rs mn) Non-Covid 2,510 2,523 2,070 2,236 (0.5) 21.3 12.3 7,660 8,564 11,011 Covid 408 400 — 511 2.0 (20.2) 2,321 - 1,984 Operational data Number of tests (mn) 6.5 — 5.3 5.1 22.8 26.2 19.1 19.6 (2.9) 21.0 16.1 30.7 Realizations/test (Rs) 452 — 393 537 14.8 (15.9) 524 436 20.0 502 477 5.2 Number of patients (mn) 3.2 3.0 2.5 2.7 4.0 29.4 18.7 9.9 10.0 (1.5) 13.4 8.3 61.6 Realizations/patient (Rs) 920 959 845 1,029 (4.0) 8.9 (10.6) 1,013 856 18.3 973 921 5.7 Tests/patient 2.04 — 2.15 1.92 (5.1) 6.3 1.9 2.0 (1.4) 1.9 1.9 0.5
Source: Company, Kotak Institutional Equities estimates
54 KOTAK INSTITUTIONAL EQUITIES RESEARCH Metropolis Healthcare Health Care Services
Exhibit 2: Strong revenue growth on a low base in 4QFY21 Exhibit 3: Non Covid recovery weaker for Metropolis versus peers Revenue growth, March fiscal year-ends, 1QFY21-4QFY21 (%) Non-Covid revenue growth, March fiscal year-ends, 1QFY21-4QFY21 (%) 60 Metropolis Dr Lal Thyrocare 49 40 Metropolis Dr Lal Thyrocare 43 38 38 41.0 27 28 40 35 21 29.1 23.3 20 18 8 7 20 0 - 1QFY21 2QFY21(2) 3QFY21 4QFY21 0 (6) 1QFY21 2QFY21 3QFY21 4QFY21 (20) (15) (20) (21) (40) (37) (29.6) (40) (60) (50) (46) (60) (69) (80)
Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities
Exhibit 4: Non-covid contribution revenues declined sequentially for the industry Covid revenues, March fiscal year ends, 1QFY21-3QFY21 (Rs mn)
1,200 Metropolis Dr Lal Thyrocare
995 977 1,000
800 734
559 600 511 477 483 407 408 400 273 234 202 200
- 1QFY21 2QFY21 3QFY21 4QFY21
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 55 Health Care Services Metropolis Healthcare
Exhibit 5: Aggressive expansion of lab network announced Exhibit 6: Service network expansion to resume after Number of labs, March fiscal year-ends, 2017-2025E rationalization in FY2021 Collection network, March fiscal year-ends, 2017-2025E 250 5,000 215 4,355 200 4,000 90 1,800 150 3,000 2,731 119 124 125 2,555 106 2,336 100 95 2,000 1,650 887 50 1,000
- 2017 2018 2019 2020 2021 2025E 0 2017 2018 2019 2020 2021 2025E
Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities
Exhibit 7: We increase our FY2022E estimates to bake-in second wave impact Earnings estimates change, March fiscal year ends, 2020-23E (Rs mn)
New estimates Old estimates Change (%) 2022E 2023E 2022E 2023E 2022E 2023E Revenues 12,995 13,871 12,609 13,863 3.1 0.1 EBITDA 3,694 4,048 3,553 3,946 4.0 2.6 EBITDA (pre-Ind-AS) 3,505 3,848 3,365 3,746 4.2 2.7 PBT 2,995 3,205 2,827 3,145 5.9 1.9 PAT 2,228 2,384 2,103 2,340 5.9 1.9 EPS 43.6 46.6 41.1 45.8 5.9 1.9 EBITDA margin (%) 28.4 29.2 28.2 28.5
Source: Company, Kotak Institutional Equities estimates
56 KOTAK INSTITUTIONAL EQUITIES RESEARCH Metropolis Healthcare Health Care Services
Exhibit 8: We expect no-Covid recovery to drive revenue growth in FY2022 Revenue breakup, March fiscal year ends, 2017-23E (Rs mn)
2018 2019 2020 2021E 2022E 2023E Non-COVID Patient volumes (mn) 7.7 8.9 10.0 8.3 10.8 14.1 Growth (%) 16 12 (17) 30 30 Realizations (Rs) 836 855 856 921 973 971 Revenues (Rs mn) 6,436 7,612 8,564 7,659 10,525 13,651 COVID Patient volumes (mn) — — — 1.5 2.6 0.2 RT-PCR (mn) — — — 1.3 2.1 0.2 Antibody (mn) — — — 0.2 0.5 0.1 Realizations (Rs) 1,487 940 RT-PCR (Rs) — — — 1,550 950 1,000 Antibody (Rs) — — — 1,100 900 900 Revenues (Rs mn) — — — 2,215 2,470 229 RT-PCR (Rs mn) — — — 1,984 1,984 180 Antibody (Rs mn) — — — 231 486 49
Consolidated revenues (Rs mn) 6,436 7,612 8,564 9,874 12,995 13,880 Revenue growth (%) 15.8 18.3 12.5 15.3 31.6 6.8
Source: Company, Kotak Institutional Equities estimates
Exhibit 9: We value METROHL at Rs1,800 based on March 2023E DCF DCF based valuation, March fiscal year ends, 2019-40E (Rs mn)
2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2032E 2033E 2040E Net sales 8,564 9,980 12,995 13,871 15,632 17,821 20,316 23,160 26,402 30,099 34,011 38,093 42,283 46,511 71,890 YoY (%) 12.5 16.5 30.2 6.7 12.7 14.0 14.0 14.0 14.0 14.0 13.0 12.0 11.0 10.0 5.0 EBITDA (pre Ind-AS) 2,160 2,682 3,505 3,848 4,437 4,990 5,688 6,485 7,393 8,428 9,523 10,666 11,839 13,023 20,129 Margin (%) 25.2 26.9 27.0 27.7 28.4 28.0 28.0 28.0 28.0 28.0 28.0 28.0 28.0 28.0 28.0 Depreciation (pre Ind-AS) 225 263 435 524 568 613 662 717 780 851 933 1,024 1,126 1,239 2,301 EBIT 1,936 2,419 3,070 3,324 3,869 4,377 5,027 5,768 6,613 7,576 8,591 9,642 10,713 11,785 17,828 Margin (%) 22.6 24.2 23.6 24.0 24.7 24.6 24.7 24.9 25.0 25.2 25.3 25.3 25.3 25.3 24.8 EBIT (1-tax) 1,523 1,815 2,284 2,473 2,878 3,256 3,740 4,291 4,920 5,637 6,391 7,174 7,971 8,768 13,264 Capex (486) (337) (5,550) (350) (350) (356) (406) (463) (528) (602) (680) (762) (846) (930) (1,438) % of revenues (%) 5.7 3.4 42.7 2.5 2.5 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 Change in WC 1,376 (53) (160) (46) (477) (109) (125) (142) (162) (185) (196) (204) (210) (211) (171) FCFF 2,638 1,689 (2,991) 2,601 2,620 3,404 3,870 4,403 5,010 5,701 6,448 7,232 8,041 8,865 13,956 Discount factor 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0 18.0 Discounted free cash 2,353 2,144 2,520 2,592 2,668 2,746 2,827 2,893 2,935 2,952 2,944 2,298
WACC (%) 10.5 WACC (%) Terminal growth (%) 5.0 1,800 9.5 10.0 10.5 11.0 11.5 Discounted free cash flow 48,023 4.0 2,028 1,830 1,663 1,521 1,399 Terminal value 43,561 Terminal 4.5 2,132 1,910 1,726 1,571 1,439 Enterprise value 91,584 growth 5.0 2,259 2,006 1,800 1,629 1,485 Less: Net debt (449) rate (%) 5.5 2,417 2,124 1,889 1,698 1,539 6.0 2,620 2,270 1,998 1,780 1,603 Equity value 92,033 No. of shares 51 Equity value per share (Rs) 1,800
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 57 Health Care Services Metropolis Healthcare
Exhibit 10: We expect Metropolis to deliver 15% EPS CAGR over FY2021-24E Summary financials, March fiscal year ends, 2014-23E (Rs mn)
2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Net revenues 3,883 4,555 4,755 5,447 6,436 7,612 8,564 9,980 12,995 13,871 15,632 Gross profit 2,735 3,228 3,477 4,071 4,920 5,821 6,454 7,404 9,304 10,278 11,724 EBITDA 1,066 1,181 1,265 1,519 1,725 2,004 2,328 2,860 3,694 4,048 4,649 Depreciation & amortisation (160) (205) (166) (172) (190) (201) (393) (459) (660) (726) (793) EBIT 906 976 1,098 1,347 1,535 1,803 1,936 2,401 3,034 3,322 3,856 Net interest 44 35 144 226 68 77 2 43 (39) (118) (33) Profit before tax 950 1,011 1,242 1,573 1,603 1,866 1,933 2,443 2,995 3,205 3,823 Tax and deferred tax (324) (331) (456) (527) (506) (629) (412) (610) (767) (820) (979) Less: minority interest (61) (70) (18) (29) (75) (35) (2) (3) — — — Net income 565 610 768 1,017 1,023 1,201 1,273 1,831 2,228 2,384 2,844 Net income (adjusted) 565 610 768 1,017 1,023 1,201 1,519 1,831 2,228 2,384 2,844 Fully diluted number of shares (mn) 50.2 50.2 50.2 50.2 50.2 50.2 50.6 50.6 51.1 51.1 51.1 FD EPS (adjusted) (Rs) 11.3 12.2 15.3 20.3 20.4 23.9 30.0 36.2 43.6 46.6 55.6 Balance sheet Cash & equivalents 1,540 1,957 1,278 1,746 1,606 1,113 2,230 4,280 3,049 3,670 4,580 Debtors 496 708 702 803 1,007 1,368 1,282 1,230 1,601 1,709 1,926 Other current assets 250 294 273 303 393 566 458 575 697 733 804 Current assets 2,286 2,958 2,253 2,851 3,006 3,047 3,971 6,085 5,347 6,112 7,311 Fixed assets (incl. goodwill) 1,500 1,531 1,422 2,033 2,074 2,186 2,397 2,400 7,515 7,391 7,229 Other non-current assets 140 146 284 267 223 293 1,155 1,560 1,660 1,760 1,860 Total assets 3,926 4,635 3,959 5,152 5,303 5,526 7,522 10,044 14,522 15,263 16,399 Short-term loans 2 2 4 4 4 4 — — — — — Creditors and other liabilities 507 602 905 1,515 902 510 1,695 1,706 2,040 2,137 2,332 Current liabilities 508 604 910 1,519 906 514 1,695 1,706 2,040 2,137 2,332 Long-term loans 197 135 5 4 2 176 — — 2,600 1,600 600 Other liabilities (incl. deferred) 42 51 106 188 104 637 576 1,257 1,357 1,457 1,557 Total liabilities 748 790 1,020 1,710 1,012 1,327 2,271 2,963 5,997 5,195 4,490 Equity 3,178 3,845 2,939 3,442 4,291 4,200 5,252 7,081 8,524 10,068 11,910 Total equity and liabilities 3,926 4,635 3,959 5,152 5,303 5,526 7,522 10,044 14,522 15,263 16,399 Cash flow CFO pre-WC changes 1,128 1,181 1,321 1,569 1,847 2,083 2,515 3,212 3,373 3,688 4,248 Working capital (58) (196) (5) (39) (177) (508) 280 (153) (160) (46) (94) Tax (300) (320) (403) (513) (576) (674) (644) (568) (767) (820) (979) Cash flow from operations 769 666 913 1,018 1,094 902 2,150 2,490 2,447 2,821 3,176 Capex (203) (231) (164) (166) (157) (196) (486) (337) (5,550) (350) (350) Free cash flow 566 435 749 852 938 706 1,664 2,154 (3,103) 2,471 2,826 Key ratios (%) Sales growth (% 17.3 4.4 14.6 18.1 18.3 12.5 16.5 30.2 6.7 12.7 EBITDA margin (%) 27.5 25.9 26.6 27.9 26.8 26.3 27.2 28.7 28.4 29.2 29.7 RoAE (%) 17.8 15.9 26.1 29.5 23.8 28.6 28.9 25.9 26.1 23.7 23.9 RoACE (post-tax, ex-cash) (%) 32.5 32.4 41.7 52.6 39.1 36.6 50.4 64.3 28.0 30.9 36.2 Net debt to equity (X) (0.4) (0.5) (0.4) (0.5) (0.4) (0.2) (0.4) (0.6) (0.1) (0.2) (0.3)
Source: Company, Kotak Institutional Equities estimates
58 KOTAK INSTITUTIONAL EQUITIES RESEARCH REDUCE City Union Bank (CUBK) https://ultraviewer.et/en/own Banks MAY 28, 2021 load.html RESULT Sector view: Attractive
A few more quarters to go. CUBK reported 15% yoy decline in operating profits and CMP (`): 174 loan-loss provisions continued to remain high. Impairment ratios were high with 5% Fair Value (`): 160 gross NPL, 3% slippages, 5% restructured loans and 5% of loans disbursed through BSE-30: 51,423 ECLGS. Even as the management is optimistic about a less painful impact of Covid 2.0, we prefer a wait-and-watch approach as we expect a slower-than-peers normalization in growth and return ratios. Maintain REDUCE with FV at Rs160 (unchanged).
City Union Bank Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 174/160/REDUCE EPS (Rs) 8.0 7.8 11.4 52-week range (Rs) (high-low) 200-116 EPS growth (%) 24.2 (2.2) 44.7 Mcap (bn) (Rs/US$) 129/1.8 P/E (X) 21.7 22.2 15.3 QUICK NUMBERS ADTV-3M (bn) (Rs/US$) 0.6/0.1 P/B (X) 2.5 2.4 2.1 Shareholding pattern (%) BVPS 68.3 72.3 81.2 NII up 2% yoy; PAT Promoters 0.0 RoE (%) 10.6 9.6 12.7 at ~Rs1.1 bn (loss in FPIs/MFs/BFIs 18.0/29.0/9.5 Div. yield (%) 1.4 0.9 1.3 base quarter yoy) Price performance (%) 1M 3M 12M NII (Rs bn) 18 20 23 Absolute 3.1 5.2 34.4 PPOP (Rs bn) 15 14 16 GNPL at 5.1%; NNPL Rel. to BSE-30 (0.3) 0.5 (15.8) Net profits (Rs bn) 6 6 8 down ~40 bps qoq Weak performance on overall metrics to 3%; restructured loans and ECLGS at CUBK reported a weak business performance with operating profits declining 15% yoy on the ~5% each back of higher interest income de-recognition and lower treasury income contribution. NII grew 2% yoy on the back of 7% yoy loan growth. Loan growth was largely supported by gold loans Maintain REDUCE which doubled yoy while ex-gold loans, the book declined 3% yoy. NIM declined 45 bps qoq to with FV of Rs160 3.7% primarily on account of higher slippage and compound interest on loans >Rs20 mn. Cost (unchanged) ratios deteriorated sharply at 50% (compared to 35% in 3QFY21) on account of weak revenue growth. On a pro-forma basis, net NPL declined ~40 bps qoq to 3%. Gross NPL was at 5.1%. The bank ended FY2021 with an RoA of 1.2%, which was marginally higher than 1% in FY2020, the second consecutive year of weak performance.
Better-than-expected commentary on near-term outlook but we would prefer a wait-and-watch
In the first year of Covid, CUBK reported 3% slippages, 5% of loans restructured and ~5% disbursements through ECLGS. This is on the higher side when we look at banks that have reported results so far. It is not an underwriting issue but a reflection of the impact that Covid has had on its borrowers who are largely self-employed. The management has given a more M B Mahesh, CFA optimistic view with slippages for FY2022 likely to be similar to FY2021 but front-loaded in 1HFY22. The bank would still attempt to achieve RoAs of 1.4% levels by 2HFY22. Our Nischint Chawathe estimates are conservative than that of the management on return ratios although we admit that forecasting the Covid 2.0 impact is challenging even as the Covid 1.0 impact is not yet over. The bank is well-capitalized with tier-1 ratio at 18.5% to manage this crisis. Abhijeet Sakhare
Maintain REDUCE: alternatives exist in the mid and small cap banks
We maintain our REDUCE rating and see no immediate reason to own the stock. We like the Ashlesh Sonje management but near-term business challenges for the current valuations are hard to ignore. CUBK’s performance on asset quality in recent years has been weaker than that of Federal Bank and DCB Bank, two stocks that we would probably prefer to own on a relative basis. In our Dipanjan Ghosh view, CUBK is likely to take more time to get its return ratios and growth metrics normalized as compared to the other two banks. The RoA is getting capped at 1.5% levels, which implies return ratios are likely to be at 15% levels. We maintain our REDUCE rating with FV at Rs160 (unchanged), valuing the stock at ~1.7X book and 14X FY2023E EPS.
[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. Banks City Union Bank
Exhibit 1: City Union Bank – quarterly March fiscal year-ends, 4QFY20 – 4QFY21 (Rs mn)
(% chg.) Calc. 4QFY21 4QFY21E 4QFY20 3QFY21 4QFY21E 4QFY20 3QFY21 2021 2020 (% chg.) 2022E Interest Earned 9,763 10,358 10,417 10,480 (5.7) (6.3) (6.8) 41,347 41,686 (0.8) 42,481 Interest/Discount on Advances/Bills 8,261 8,850 8,806 8,907 (6.6) (6.2) (7.2) 35,078 34,946 0.4 35,678 Interest on Investment 1,436 1,357 1,455 1,470 5.8 (1.3) (2.3) 5,828 6,099 (4.4) 6,210 Interest on bal. with RBI & others 66 151 156 104 (56.3) (57.7) (36.5) 441 641 (31.3) 593 Interest expense 5,478 5,700 6,222 5,590 (3.9) (12.0) (2.0) 23,050 24,934 (7.6) 22,572 Net interest income 4,285 4,658 4,195 4,890 (8.0) 2.2 (12.4) 18,297 16,752 9.2 19,909 Other Income 1,451 1,615 1,793 2,298 (10.1) (19.1) (36.9) 7,048 6,799 3.7 5,145 Treasury 296 542 790 1,187 (45.4) (62.5) (75.1) 3,254 1,596 103.9 754 Total Income 5,736 6,273 5,988 7,188 (8.6) (4.2) (20.2) 25,344 23,551 7.6 25,054 Operating Expenses 2,889 2,601 2,637 2,604 11.1 9.6 11.0 10,506 10,137 3.6 11,128 Payments to / Provisions for employees 1,072 1,147 938 1,202 (6.5) 14.3 (10.8) 4,637 4,207 10.2 4,952 Other operating expenses 1,817 1,454 1,699 1,402 25.0 6.9 29.6 5,869 5,931 (1.0) 6,176 Pre-provisioning operating profit 2,847 3,672 3,351 4,584 (22.5) (15.0) (37.9) 14,838 13,414 10.6 13,926 Provisions & Contingencies 2,385 2,609 4,505 2,185 (8.6) (47.1) 9.2 7,910 7,551 4.8 6,132 Profit before tax 462 1,063 (1,154) 2,399 (56.5) NM (80.8) 6,928 5,863 18.2 7,794 Provision for Taxes (650) 278 (200) 700 (334.2) NM (192.9) 1,000 1,100 (9.1) 1,995 Net Profit 1,112 785 (954) 1,699 41.6 NM (34.6) 5,928 4,763 24.5 5,799 PBT - treasury + investment dep. 44 621 (1,914) 1,312 (92.9) NM (96.7) 3,852 3,950 (2.5) 7,040 Tax rate (141) 26 NM 29 -16684 bps NM-16991 bps 14 19 -433 bps 26 Key balance sheet items (Rs bn) Deposits 445 440 408 433 1.2 9.1 2.9 0 408 (100) 492 Savings 92 73 87 26.9 6.2 92 73 26.9 103 Current 38 29 32 28.4 17.0 38 29 28.4 39 CASA (%) 29 25 27 417 bps 166 bps 29 25 417 bps 29 CASA 130 102 119 27.3 9.1 21 18 16.3 Advances 370 376 346 365 (1.5) 7.1 1.4 0 339 (99.9) 392 Agriculture 48 55 41 (11.8) 17.0 Retail 64 40 60 58.6 5.5 Gold loans 35 7 30 385.2 16.2 MSME 146 108 127 36.2 15.1 Large industries 7 21 19 (68.3) (63.8) Traders (retail and wholesale) 52 57 52 (8.9) 1.5 Commercial real estate 25 28 26 (8.4) (3.9) Loans collateralized by deposits 5 6 5 (8.6) 9.0 Others 22 31 35 (29.0) (36.4) Investments 95 102 92 96 (6.7) 3.1 (0.6) 95 91 4.5 123 Key calculated ratios (%) Yield on advances 9.0 10.3 10.0 -131 bps -100 bps 9.8 10.5 -70 bps 9.5 Yield on investment 6.0 6.3 5.8 -33 bps 26 bps 6.2 7.2 -104 bps 5.7 Cost of deposit 5.0 6.2 5.3 -118 bps -29 bps 5.4 6.3 -89 bps 4.8 NIM 3.4 3.5 3.9 -15 bps -51 bps 3.7 4.6 -89 bps 4.8 CD ratio 83.1 84.7 84.3 -155 bps -120 bps 83.1 83.1 3 bps 79.7 Cost to income 50.4 44.0 36.2 633 bps 1414 bps 41.5 43.0 -159 bps 44.4 Cost to average assets 2.2 2.1 2.1 5 bps 13 bps 2.0 2.1 -10 bps 2.0 Credit cost 2.0 5.2 2.0 -320 bps 5 bps 1.9 2.3 -48 bps 1.6 Asset quality measures Gross NPL (Rs mn) 18,932 14,134 10,717 33.9 76.7 18,932 14,134 33.9 20,547 Gross NPL (%) 5.1 4.1 2.9 102 bps 217 bps 5.1 4.2 95 bps 5.2 Net NPL (Rs mn) 10,752 7,785 5,272 38.1 104.0 10,752 7,785 38.1 12,723 Net NPL (%) 3.0 2.3 1.5 68 bps 150 bps 3.0 2.3 68 bps 3.2 Provision coverage (%) 43 45 51 -171 bps -760 bps 43 45 -171 bps 38 Provision coverage (inc write-offs) (%) 64 65 73 -100 bps -900 bps Slippages (Rs mn) 11,097 4,807 — 130.9 #DIV/0! 11,131 11,105 0.2 11,115 Slippage (%) 12.2 5.7 — 648 bps 1216 bps 3.2 3.2 -1 bps 3.0 Capital adequacy details (%) CAR 20 17 17 276 bps 213 bps Tier-I 18 16 16 265 bps 214 bps Other key parameters (#) ATM 1,724 1,793 1,749 (3.8) (1.4) 1,724 1,793 (3.8) 1,824 Branches 702 700 700 0.3 0.3 702 700 0.3 712
Source: Company, Kotak Institutional Equities estimates
60 KOTAK INSTITUTIONAL EQUITIES RESEARCH City Union Bank Banks
Loan growth stays modest at 7% yoy
CUBK reported a modest loan growth of 7% yoy in 4QFY21 led by ~97% yoy growth in the gold loan portfolio. Overall retail advances were up 59% yoy. Credit growth was also supported by the ECLGS scheme.
There was some reclassification of loans from the ‘large industries’ segment to ‘MSME’, as a result of which the SME book grew optically by 36% yoy. If we adjust for the effect of this reclassification, the SME book grew ~6% yoy and it currently accounts for ~40% of overall advances for the bank. The overall agri loans portfolio saw ~12% yoy contraction – mainly due to shift in gold loan borrowers from agri gold loans to personal gold loans. Adjusted for the effect of reclassification, the ‘large industries’ segment was flat yoy and it currently contributes <2% of the overall advances for the bank.
The management guided towards mid to high single-digit growth in advances in FY2022E, largely driven by the gold loan portfolio.
Exhibit 2: Share of SME/trader segment is ~54% of loans Break-up of loans; March fiscal year-ends (%)
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Retail 7.4 12.0 15.7 12.4 11.4 10.8 11.2 11.6 11.4 11.6 17.2 SME 29.7 26.7 26.0 30.1 33.7 34.3 30.1 33.9 31.1 31.1 39.6 Large industries 12.5 16.1 13.8 8.0 6.2 6.7 7.4 6.7 6.7 6.2 1.8 Agriculture 12.8 13.4 15.7 19.1 16.8 16.0 18.3 14.5 14.8 15.8 13.0 Traders (wholesale and retail) 21.1 20.4 18.4 17.9 17.8 17.9 18.0 18.2 17.3 16.6 14.2 Commercial real estate 8.2 5.3 5.1 5.4 5.3 5.5 5.2 4.9 5.9 8.0 6.9 Loans collateralized by deposits — 1.6 1.7 2.5 2.1 1.9 1.8 1.8 1.8 1.7 1.4 Others 8.3 4.5 3.6 4.6 6.6 6.9 8.1 8.5 11.0 9.0 5.9 Total loans (Rs bn) 93 121 152 162 181 213 238 282 331 346 370 Gold loans 14.5 22.3 18.3 13.8 9.6 9.0 8.3 8.8 9.6 17.7 Retail gold loans — — 9.1 5.0 2.3 1.2 1.2 1.3 1.1 2.1 9.3
Note: In 4QFY21, the bank re-classified ~Rs12 bn of advances from the ‘large industries’ segment to SME segment.
Source: Company, Kotak Institutional Equities
Margins impacted due to interest reversal on slippages
NIM (reported) was down ~40 bps qoq to ~3.7% in 4QFY21. Yields on advances were down ~70 bps qoq to ~9.2%, while cost of funds dropped by ~10 bps qoq to ~4.1%. NIM was impacted to the extent of ~60 bps due to interest reversals on NPA.
We expect calculated NIM to stay around current levels of ~3.7% over the medium term.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 61 Banks City Union Bank
Exhibit 3: NIM impacted due to interest reversals on pro forma slippages Reported YoA, CoF and NIM; March fiscal year-ends (%)
Yield on advances (LHS) Cost of funds (LHS) NIM (RHS) 17.5 5.0 4.5 4.5 4.4 4.4 4.3 4.4 4.4 4.2 4.2 4.1 4.1 4.2 3.9 4.0 3.9 4.0 3.7 14.0 4.0
10.5 3.0
7.0 5.7 5.5 2.0 5.3 5.3 5.2 5.2 5.1 5.2 5.2 5.4 5.2 5.2 5.0 4.9 4.6 4.2 4.2 3.5 1.0
11.9 11.8 11.5 11.4 11.2 10.9 10.9 11.0 11.1 11.0 10.8 10.7 10.5 10.4 10.2 9.9 9.2
- -
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21
3QFY21 4QFY21
Source: Company, Kotak Institutional Equities
Modest growth in deposits, but CASA improvement continues
Deposit growth has been stable at ~9% yoy, but lower than double-digit average growth levels seen in the pre-Covid period. CASA growth was better at ~27% yoy. CASA ratio continued to improve for the bank, increasing by ~170 bps qoq to ~29%. Only ~10% of the deposits are bulk deposits (>Rs20 mn).
Tamil Nadu continues to dominate deposits with share in overall deposits at 80%. City Union Bank has lost deposit market share in Tamil Nadu recently and it now stands at ~3.7% as of 2QFY21. Frontline private players including HDFC Bank have witnessed sharper market share gains.
Exhibit 4: CASA ratio has improved Break-up of deposits, March fiscal year-ends (%)
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Current 8.4 7.4 6.6 6.5 6.9 7.1 8.0 8.5 8.4 7.2 8.4 Savings 11.2 10.8 10.2 11.2 12.3 13.3 15.4 15.7 16.9 17.8 20.7 CASA 19.6 18.2 16.8 17.8 19.2 20.4 23.4 24.2 25.2 25.0 29.1 Term deposits 80.4 81.8 83.2 82.2 80.8 79.6 76.6 75.8 74.8 75.0 70.9
Source: Company, Kotak Institutional Equities
62 KOTAK INSTITUTIONAL EQUITIES RESEARCH City Union Bank Banks
Exhibit 5: Tamil Nadu accounts ~70% of branches, ~80% of deposits and ~65% of loans for City Union Bank Break-up of business across states, March fiscal year-ends (%)
Branches Deposits Loans Gujarat, 2 Others, 6 Maharashtr Kerala, 2 Others, 4 Others, 7 Kerala, 3 a, 2 Gujarat, 1 Maharashtr Gujarat, 4 Maharashtr Karnataka, a, 3 Kerala, 2 a, 3 6
Karnataka, Karnataka, 6 Telengana, 5 3
Telengana, Telengana, 5 6 Andhra Pradesh, 2 Tamin Tamin Nadu, 65 Andhra Nadu, 69 Pradesh, 6 Tamin Nadu, 80 Andhra Pradesh, 8
Source: Company, Kotak Institutional Equities
Exhibit 6: ~80% of deposits are from Tamil Nadu Exhibit 7: ~65% of loans are from Tamil Nadu State-wise deposit mix, March fiscal year-ends (%) State-wise advances mix, March fiscal year-ends (%) Tamil Nadu Andhra Paradesh Telengana Tamil Nadu Andhra Paradesh Telengana Karnataka Maharashtra Kerala Karnataka Maharashtra Kerala Gujarat Others Gujarat Others 100 100 4 4 4 4 4 4 4 4 4 7 7 8 8 8 8 8 7 7 4 3 2 2 2 2 2 2 2 6 7 6 6 6 6 7 6 3 7 3 3 3 2 3 3 4 4 4 4 4 3 4 80 3 3 3 3 80 5 5 5 5 6 5 6 5 5 3 6 6 6 6 5 6 6 2 2 2 2 2 2 2 2 6 6 9 9 8 8 8 8 8 60 60 8 8
40 77 79 79 80 80 80 80 79 80 40 63 63 63 62 62 63 64 64 65 20 20
0 0
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21
3QFY21
4QFY21
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21 3QFY21 4QFY21
Source: Public documents, Kotak Institutional Equities Source: Public documents, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 63 Banks City Union Bank
Exhibit 8: Growth and asset quality concerns in the SME portfolio in Tamil Nadu Performance of banks in TN, March fiscal year-ends
Key financial metrics (Rs bn) Performance in TN - Growth (%) Overall sector trends - Growth (%) 2015 2016 2017 2018 2019 2020 2QFY21 2015 2016 2017 2018 2019 2020 2QFY21 2015 2016 2017 2018 2019 2020 2QFY21 Number of branches 9,496 9,971 10,501 10,612 10,837 11,061 11,246 7.4 5.0 5.3 1.1 2.1 2.1 1.8 Deposits 5,441 5,968 6,860 7,177 7,717 8,407 8,937 7.0 9.7 14.9 4.6 7.5 8.9 11.1 10.6 7.0 6.8 6.7 9.6 7.9 10.5 Loans 6,499 6,828 6,955 7,848 8,737 9,280 9,480 7.3 5.1 1.9 12.8 11.3 6.2 4.7 9.7 9.0 7.3 10.3 13.0 6.1 5.1 Priority sector 2,664 3,002 3,161 3,566 3,910 4,243 4,441 9.6 12.7 5.3 12.8 9.7 8.5 9.5 7.0 10.7 9.4 4.8 7.3 5.8 6.0 Agriculture 1,207 1,246 1,353 1,568 1,744 1,901 2,023 12.1 3.3 8.5 15.9 11.2 9.0 10.8 14.4 15.2 12.3 3.1 8.2 3.8 7.7 SME 962 1,178 1,244 1,403 1,557 1,687 1,777 10.8 22.4 5.6 12.8 11.0 8.4 10.8 6.6 5.9 6.4 10.5 7.1 7.7 6.6 Housing 304 320 320 306 348 431 414 3.7 5.2 (0.0) (4.3) 13.7 24.0 13.3 6.3 6.2 7.6 2.0 15.2 4.0 2.2 Others 191 258 244 289 261 224 228 0.1 34.9 (5.2) 18.1 (9.6) (14.3) (13.1) (21.0) 26.1 13.7 (8.5) (16.0) 12.9 (1.3) Non priority sector 3,835 3,826 3,794 4,282 4,827 5,037 5,038 5.8 (0.2) (0.8) 12.9 12.7 4.3 0.9 8.3 8.1 6.2 5.4 11.0 4.0 4.5 NPL (%) Priority sector 4.6 5.8 6.3 6.7 7.2 7.2 6.5 Housing 2.1 2.7 2.7 4.9 3.6 3.0 2.6 Agriculture 3.6 4.3 4.7 4.3 4.8 4.7 4.3 SME 5.6 7.5 7.9 9.0 9.6 9.8 8.6 SME (1 year lag) 6.2 9.1 8.3 10.1 10.6 10.6 9.5
Source: SLBC, Public documents, Kotak Institutional Equities
Exhibit 9: Business landscape has changed with competition from new private banks picking pace Deposit and credit market share of various banks in Tamil Nadu, March fiscal year-ends (%)
2013 2014 2015 2016 2017 2018 2019 2020 2QFY21 4Y chng (%) Market share comparison in deposits PSU banks SBI Group 17.0 16.9 16.5 16.9 17.9 17.9 18.3 19.1 19.3 101 bps Indian Overseas Bank 11.0 10.4 10.5 9.8 9.7 9.0 8.7 8.6 8.5 -114 bps Canara Bank 7.3 6.8 7.1 7.2 7.1 7.1 7.3 7.8 9.0 175 bps Indian Bank 13.2 13.2 11.8 11.3 9.8 10.2 10.7 11.4 11.1 19 bps Private banks Axis Bank 3.1 2.4 2.7 2.9 3.0 3.2 3.2 3.6 3.6 57 bps City Union Bank 3.2 3.2 3.4 3.5 3.4 3.6 3.8 3.9 3.7 16 bps Federal Bank 0.6 0.5 0.5 0.5 0.7 0.6 0.7 0.7 0.7 17 bps HDFC Bank 3.7 4.0 4.6 5.5 5.6 6.3 7.2 8.3 8.5 279 bps ICICI Bank 4.1 4.3 4.3 4.5 4.6 5.0 5.4 6.2 6.1 119 bps Karur Vysya Bank 3.5 5.5 4.4 4.4 4.1 4.4 4.4 4.1 4.0 85 bps Market share comparison in loans PSU banks SBI Group 21.1 19.9 19.1 18.9 17.9 18.7 18.5 19.0 18.6 -73 bps Indian Overseas Bank 8.6 8.1 7.7 6.9 6.1 5.9 5.4 5.1 5.3 -121 bps Canara Bank 6.7 7.3 7.7 7.9 9.5 8.0 8.2 8.7 11.2 324 bps Indian Bank 7.8 7.6 7.1 7.8 7.3 7.7 8.0 8.7 9.1 162 bps Private banks Axis Bank 2.8 3.9 4.1 3.1 4.9 5.1 5.2 5.3 5.2 85 bps City Union Bank 2.1 1.9 1.9 2.0 2.2 2.3 2.4 2.3 2.4 32 bps Federal Bank 0.9 0.9 0.9 0.9 1.2 1.4 1.6 1.7 1.7 65 bps HDFC Bank 4.5 4.9 5.3 6.9 7.7 8.5 9.0 10.1 10.2 327 bps ICICI Bank 4.2 3.3 3.3 3.5 4.1 3.9 4.3 4.3 4.6 96 bps Karur Vysya Bank 2.6 2.6 2.5 2.6 2.4 2.7 2.6 2.5 2.4 -16 bps
Source: Public documents, Kotak Institutional Equities
64 KOTAK INSTITUTIONAL EQUITIES RESEARCH City Union Bank Banks
Asset quality impact has been largest among peer banks
Headline ratios. City Union Bank reported a gross NPA of 5.1% in 4QFY21. On the other hand, net NPA declined ~40 bps qoq to 3.0% from pro forma level of ~3.4% in 3QFY21. The bank has a provision coverage ratio of ~43%, down from ~45% in 4QFY20.
Slippages and restructuring. The bank reported slippages of ~Rs11.1 bn (~12% of advances, annualized basis) for 4QFY21. FY2021 slippages of ~3.2% were marginally lower than earlier management guidance of ~3.5%. As of 4QFY21, total restructured advances stood at ~Rs18.5 bn (~5.1% of net advances) – in line with earlier guidance from the management. Further, the SMA-2 book stood at ~2% as on 4QFY21 (much below the ~6% level of 3QFY20).
ECLGS. In addition, the bank has sanctioned Rs22.1 bn under the ECLGS scheme. Out of this, it has disbursed ~Rs21 bn against an exposure of ~Rs104 bn (~28% of gross advances for the bank). The outstanding ECLGS advances stood at ~Rs19.6 bn as of 4QFY21 (~5.3% of total advances). The bank expects to disburse a further amount of ~Rs2 bn under the scheme.
Recoveries. The bank made recoveries of ~Rs1.1 bn in 4QFY21, consisting of ~Rs760 mn recovery from live accounts and ~Rs340 mn from technically written off accounts. This was comparable to the recoveries in 3QFY21. For the full year, recoveries were down from ~Rs4.1 bn in FY2020 to ~Rs3.2 bn in FY2021. The management indicated that the bank is likely to see recovery efforts being hampered over the first few months of FY2022 due to logistical issues arising from the fresh Covid wave.
Provisions. As of 3QFY21, the bank carried a provision buffer of ~Rs4.7 bn against Covid contingencies (including pro forma GNPA). Out of this, the bank wrote back ~Rs3.1 bn provision in 4QFY21 and utilized it for NPA provision. As a result, the ad-hoc Covid provision remaining as of 4QFY21 is ~Rs1.5 bn (~40 bps of net advances).
Exhibit 10: Slippages in FY2021 at ~3.1%, comparable to ~3.2% in FY2020 GNPL ratio, NNPL ratio and slippage ratio (annualized), March fiscal year-ends (%)
GNPL ratio (LHS) NNPL ratio (LHS) Slippages (RHS) 12.2 5.5 5.1 12.5
4.1 4.4 3.9 10.0 3.5 3.3 3.3 3.4 3.4 3.1 3.1 3.0 3.0 3.3 2.8 2.9 2.9 3.0 2.9 7.5 5.7
2.2 5.0 2.7 2.8 2.5 2.5 2.4 2.3 2.2 2.4 2.5 2.1 1.8 1.9 1.1 2.5 1.7 1.8 1.8 1.7 1.7 1.7 1.7 1.7 1.8 1.9 1.9 2.0 2.3 0.02.1 1.8- 1.5- 3.0
- -
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21 3QFY21 4QFY21
Source: Public documents, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 65 Banks City Union Bank
Exhibit 11: City Union Bank has had a relatively weak asset quality performance in recent years as compared to DCB Bank Asset quality metrics, March fiscal year-ends (%)
Gross NPA Net NPA Slippages 2015 2016 2017 2018 2019 2020 2021 2015 2016 2017 2018 2019 2020 2021 2015 2016 2017 2018 2019 2020 2021 Large private banks HDFC Bank 0.9 0.9 1.1 1.3 1.4 1.3 1.3 0.2 0.3 0.3 0.4 0.4 0.4 0.4 1.4 1.3 1.2 1.8 1.8 1.8 1.6 ICICI Bank 3.7 5.7 8.5 9.5 7.0 5.8 5.0 1.6 3.0 5.4 5.4 2.3 1.5 1.3 2.4 4.3 7.7 6.2 2.1 2.4 2.5 Axis Bank 1.4 1.7 5.2 7.5 5.8 4.9 3.7 0.5 0.7 2.3 3.8 2.3 1.6 1.1 1.2 2.6 5.8 9.0 3.2 4.0 3.0 Mid and small private banks IndusInd Bank 0.8 0.9 0.9 1.2 2.1 2.4 2.7 0.3 0.4 0.4 0.5 1.2 0.9 0.7 1.6 1.2 1.6 2.9 3.6 3.0 3.9 RBL Bank 0.8 1.0 1.2 1.4 1.4 3.5 4.3 0.3 0.6 0.6 0.8 0.7 2.0 2.1 0.5 1.4 2.5 1.9 1.7 6.0 5.1 DCB Bank 1.8 1.5 1.6 1.8 1.8 2.5 4.1 1.0 0.8 0.8 0.7 0.7 1.2 2.3 2.1 2.1 2.0 2.2 2.0 2.8 2.6 Federal Bank 2.0 2.8 2.3 3.0 2.9 2.8 3.4 0.7 1.6 1.3 1.7 1.5 1.3 1.2 1.8 3.6 1.8 3.0 1.8 1.7 1.5 Karur Vysya Bank 1.8 1.3 3.5 6.3 8.4 8.1 7.3 0.8 0.6 2.5 4.2 5.0 3.9 3.4 1.8 3.1 3.3 4.9 4.9 3.0 2.0 City Union Bank 1.8 2.3 2.7 2.9 2.8 3.9 5.1 1.3 1.5 1.7 1.7 1.8 2.3 3.0 2.6 2.3 2.2 2.3 2.2 3.2 3.1
Source: Company, Kotak Institutional Equities
Exhibit 12: City Union Bank has had a relatively weak performance on growth and profitability as compared to Federal or DCB Bank Key operating metrics for select private banks, March fiscal year-ends (%)
Loan growth Operating profit growth PAT growth 2015 2016 2017 2018 2019 2020 2021 CAGR 2015 2016 2017 2018 2019 2020 2021 CAGR 2015 2016 2017 2018 2019 2020 2021 CAGR Large private banks HDFC Bank 26 21 27 19 19 24 21 21 18 23 19 29 24 19 14 21 20 20 18 20 21 25 19 20 ICICI Bank 14 12 7 10 14 10 14 11 15 10 (14) (4) 32 14 26 10 15 (14) 1 (31) (50) 136 104 6 Axis Bank 22 21 10 18 13 15 9 14 11 22 (4) (1) 28 17 9 11 18 12 (58) (92) 1,596 (65) 305 (2) Mid and small private banks IndusInd Bank 29 28 28 29 11 3 10 21 21 34 29 22 27 28 1 23 27 25 26 (8) 34 (35) 73 8 RBL Bank 47 47 39 37 35 7 1 26 121 60 66 45 60 39 9 45 124 41 52 42 37 (42) 0 16 DCB Bank 29 23 22 29 16 8 2 16 51 23 22 29 27 13 10 20 26 2 3 23 33 4 (1) 10 Federal Bank 18 13 26 25 20 11 8 19 4 (5) 25 27 24 2 22 15 20 (53) 74 6 42 24 3 8 Karur Vysya Bank 6 8 5 10 8 (5) 9 6 19 31 20 23 (2) (13) (24) 4 6 25 7 (43) (39) 11 53 (4) City Union Bank 12 17 13 17 17 4 7 12 15 22 12 26 8 (2) (2) 10 14 13 13 18 15 (30) 24 7
Source: Company, Kotak Institutional Equities
Other highlights
Cost-income ratio deteriorated due to lower revenues. Cost-income ratio increased by ~1,400 bps qoq to ~50%. Lower treasury income and interest reversals on NPA were major drivers for this increase.
Capital. Capital position stands comfortable with CAR at 19.5% as the bank slowed down its advances growth and focused on the government guaranteed ECLGS advances and secured gold loan advances. Management indicated no requirement for raising capital in FY2022E.
66 KOTAK INSTITUTIONAL EQUITIES RESEARCH City Union Bank Banks
Exhibit 13: CUBK trading at 2.4X one-year forward book Exhibit 14: CUBK has been trading at a marginal discount to its PBR and PER (rolling 1-year forward book) (X) peers PBR premium to peers (rolling 1-year forward book) (X) PER (X) (LHS) PBR (X) (RHS) 45 4.0 1.50
36 3.2 1.20
27 2.4 0.90
18 1.6 0.60
9 0.8 0.30
0 0.0
0.00
May-11
May-12
May-13
May-14
May-15
May-16
May-17
May-18
May-19 May-20
May-21
May-11
May-12
May-13
May-14
May-15
May-16
May-17
May-18
May-19 May-20 May-21 Source: Company, Bloomberg, Kotak Institutional Equities estimates Source: Company, Bloomberg, Kotak Institutional Equities estimates
Exhibit 15: Change in estimates March fiscal year-ends, 2022-24E (Rs mn)
New estimates Old estimates Old versus new (%) New 2022E 2023E 2024E 2022E 2023E 2022E 2023E Loans (Rs bn) 392 439 499 400 435 (2.0) 0.9 Loan growth (%) 8.5 11.8 13.7 6.5 8.7 203 bps 312 bps Net interest income 19,909 22,574 25,455 20,173 21,790 (1.3) 3.6 NIM (%) 3.7 3.7 3.7 3.7 3.7 -1 bps 6 bps Other income 5,145 5,747 6,521 5,138 5,617 0 2 Net fee income 1,938 2,287 2,698 573 659 238 247 Net capital gains 754 504 254 500 250 51 102 Operating expenses 11,128 12,371 13,765 11,145 12,361 (0.2) 0.1 Employee expenses 4,952 5,493 6,093 5,034 5,585 (1.6) (1.6) Loan loss provisions 6,032 4,571 4,688 6,209 4,594 (2.9) (0.5) PBT 7,794 11,279 13,423 7,857 10,352 (0.8) 8.9 Tax 1,995 2,887 3,436 2,011 2,650 (0.8) 8.9 Net profit 5,799 8,392 9,986 5,846 7,702 (0.8) 8.9 % growth (2.2) 44.7 19.0 4.4 31.8 -654 bps 1296 bps PBT - Treasury + Provisions 13,172 15,446 17,957 13,666 14,796 (3.6) 4.4 EPS (Rs) 7.8 11.4 13.5 7.9 10.4 (1.0) 8.7 Adjusted BVPS (Rs) 72 81 94 74 84 (2.3) (2.8) RoA (%) 1.0 1.3 1.4 1.0 1.3 0 bps 8 bps RoE (%) 9.6 12.7 13.7 9.8 11.8 -23 bps 86 bps Gross NPA (%) 4.8 4.0 3.1 4.1 3.2 68 bps 74 bps Slippage ratio (%) 3.0 2.3 2.2 3.3 1.9 -25 bps 40 bps Credit cost (%) 1.6 1.1 1.0 1.6 1.1 0 bps 0 bps Cost-income ratio (%) 44.4 43.7 43.0 44.0 45.1 38 bps -142 bps
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 67 Banks City Union Bank
Exhibit 16: City Union Bank – growth rates and key ratios March fiscal year-ends, 2018-24E (%)
2018 2019 2020 2021 2022E 2023E 2024E Growth rates (%) Net loan 16.9 17.3 3.8 6.6 8.5 11.8 13.7 Total asset 13.2 13.3 9.9 7.2 10.4 11.8 13.6 Deposits 9.1 17.0 6.2 9.1 10.6 11.8 13.7 Current 15.6 15.4 (9.0) 28.4 4.9 11.8 13.7 Savings 11.7 25.4 12.2 26.9 11.9 13.1 15.1 Fixed 7.9 15.5 6.6 3.0 10.8 11.4 13.3 Net interest income 19.3 12.7 4.0 9.2 8.8 13.4 12.8 Loan loss provisions 18.2 (5.3) 172.1 (2.7) (20.7) (24.2) 2.6 Total other income 10.0 (3.3) 32.2 3.7 (27.0) 11.7 13.5 Net fee income 12.6 10.2 1.6 (10.0) 15.0 18.0 18.0 Net capital gains (12.9) (65.3) 390.2 103.9 (76.8) (33.2) (49.6) Net exchange gains (24.0) (26.8) 55.4 10.0 18.0 15.0 15.0 Operating expenses 9.5 17.4 14.4 3.6 5.9 11.2 11.3 Employee expenses 6.0 15.4 15.4 10.2 6.8 10.9 10.9 Key ratios (%) Yield on average earning assets 9.4 9.2 9.2 8.4 7.9 7.9 7.9 Yield on average loans 11.0 10.5 10.5 10.0 9.5 9.4 9.4 Yield on average investments 7.0 7.1 7.3 6.3 5.7 5.8 5.8 Average cost of funds 6.0 5.8 6.1 5.2 4.7 4.6 4.7 Interest on deposits 6.1 5.9 6.1 5.3 4.7 4.7 4.7 Spread 3.4 3.4 3.1 3.2 3.2 3.3 3.2 Net interest income/earning assets 4.0 3.9 3.7 3.7 3.7 3.7 3.7 Spreads on lending business 5.0 4.7 4.4 4.8 4.8 4.8 4.7 New provisions/average net loans 1.2 1.0 2.3 2.2 1.6 1.1 1.0 Total provisions/gross loans 5.0 5.1 7.0 8.9 9.1 9.1 8.8 Interest income/total income 72.9 75.8 71.1 72.2 79.5 79.7 79.6 Other income / total income 27.1 24.2 28.9 27.8 20.5 20.3 20.4 Fee income to total income 2.5 2.6 2.4 6.6 7.7 8.1 8.4 Fee income to advances 0.2 0.2 0.2 0.5 0.5 0.6 0.6 Fees income to PBT 6.3 5.9 9.5 24.3 24.9 20.3 20.1 Net trading income to PBT (0.2) 1.1 32.6 44.4 9.7 4.5 1.9 Exchange income to PBT 9.4 5.9 14.4 13.4 14.1 11.2 10.8 Operating expenses/total income 38.5 41.7 43.0 41.5 44.4 43.7 43.0 Operating expenses/assets 2.0 2.1 2.1 2.0 2.0 2.0 2.0 Operating profit /AWF 1.9 2.2 0.9 0.7 1.3 1.8 1.9 Tax rate 25.1 26.2 18.8 14.4 25.6 25.6 25.6 Dividend payout ratio 17.8 17.8 17.8 30.0 20.0 20.0 20.0 Share of deposits Current 15.7 16.9 17.8 20.7 21.0 21.2 21.5 Fixed 75.8 74.8 75.0 70.9 71.0 70.8 70.5 Savings 15.7 16.9 17.8 20.7 21.0 21.2 21.5 Loans-to-deposit ratio 84.8 85.0 83.1 81.2 79.7 79.7 79.7 Equity/assets (EoY) 10.4 10.7 10.6 11.0 10.7 10.5 10.3 Loan impairment ratios (%) Gross NPL 2.9 2.8 3.9 5.1 4.8 4.0 3.1 Net NPL 1.7 1.8 2.3 3.0 3.2 2.9 2.0 Slippage 2.3 2.2 3.2 3.1 3.0 2.3 2.2 Provision coverage 44.5 39.4 44.9 43.1 38.0 34.3 42.3 Dupont analysis (%) Net interest income 3.8 3.8 3.5 3.6 3.6 3.6 3.6 Loan loss provisions 0.8 0.7 1.6 1.5 1.1 0.7 0.7 Net other income 1.4 1.2 1.4 1.4 0.9 0.9 0.9 Operating expenses 2.1 2.1 2.1 2.1 2.0 2.0 2.0 (1- tax rate) 74.9 73.8 81.2 85.6 74.4 74.4 74.4 ROA 1.6 1.6 1.0 1.2 1.0 1.3 1.4 Average assets/average equity 9.7 9.5 9.4 9.3 9.2 9.4 9.6 ROE 15.3 15.2 9.4 10.6 9.6 12.7 13.7
Source: Company, Kotak Institutional Equities estimates
68 KOTAK INSTITUTIONAL EQUITIES RESEARCH City Union Bank Banks
Exhibit 17: City Union Bank – financial statements March fiscal year-ends, 2018-24E (Rs mn)
2018 2019 2020E 2021E 2022E 2023E 2024E Income statement Total interest income 34,024 37,672 41,686 41,347 42,481 47,333 53,772 Loans 28,404 31,777 34,946 35,078 35,678 38,983 43,977 Investments 5,228 5,536 6,099 5,828 6,210 7,717 9,133 Cash and deposits 393 359 641 441 593 632 662 Total interest expense 19,721 21,557 24,934 23,050 22,572 24,759 28,318 Deposits from customers 19,271 21,080 24,369 22,529 22,128 24,273 27,774 Net interest income 14,303 16,115 16,752 18,297 19,909 22,574 25,455 Loan loss provisions 3,037 2,875 7,822 7,610 6,032 4,571 4,688 Net interest income (after prov.) 11,266 13,240 8,930 10,687 13,878 18,003 20,767 Other income 5,321 5,144 6,799 7,048 5,145 5,747 6,521 Net fee income 495 545 554 1,685 1,938 2,287 2,698 Net capital gains 938 326 1,596 3,254 754 504 254 Net exchange gains 744 545 846 931 1,098 1,263 1,453 Operating expenses 7,546 8,859 10,137 10,506 11,128 12,371 13,765 Employee expenses 3,159 3,644 4,207 4,637 4,952 5,493 6,093 Depreciation on investments 957 225 (317) 178 - - - Other provisions 183 51 46 122 100 100 100 Pretax income 7,900 9,249 5,863 6,928 7,794 11,279 13,423 Tax provisions 1,980 2,420 1,100 1,000 1,995 2,887 3,436 Net profit 5,920 6,829 4,763 5,928 5,799 8,392 9,986 % growth 18 15 (30) 24 (2) 45 19 PBT - Treasury + Provisions 11,139 12,074 11,818 11,584 13,172 15,446 17,957 % growth 26 8 (2) (2) 14 17 16 Balance sheet Cash and bank balance 26,364 29,633 47,216 56,151 51,621 53,758 56,539 Cash 3,628 5,167 5,275 5,275 5,275 5,275 5,275 Balance with RBI 14,990 14,764 15,029 22,652 18,122 20,259 23,041 Net value of investments 78,791 77,120 91,166 94,359 123,426 144,588 170,801 Govt. and other securities 76,344 74,764 89,395 106,676 135,781 156,976 183,220 Shares 102 100 71 71 71 71 71 Debentures and bonds 252 514 417 375 338 304 274 Net loans and advances 278,528 326,733 339,274 361,578 392,400 438,672 498,908 Fixed assets 2,231 2,500 2,452 2,327 2,254 2,393 2,516 Net Owned assets 2,231 2,500 2,452 2,327 2,254 2,393 2,516 Other assets 13,458 16,600 17,225 18,702 18,702 18,702 18,702 Total assets 399,372 452,587 497,333 533,117 588,403 658,112 747,466 Deposits 328,526 384,479 408,325 445,374 492,373 550,434 626,016 Borrowings and bills payable 20,336 9,015 22,330 15,864 17,019 19,009 21,257 Other liabilities 8,878 10,687 13,720 13,454 16,145 19,374 23,249 Total liabilities 357,740 404,181 444,375 474,692 525,536 588,817 670,522 Paid-up capital 665 735 737 739 739 739 739 Reserves & surplus 40,968 47,673 52,223 57,686 62,128 68,556 76,206 Total shareholders' equity 41,632 48,408 52,961 58,425 62,867 69,295 76,944
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 69 BUY Dilip Buildcon (DBL) https://ultraviewer.et/en/own Capital Goods MAY 31, 2021 load.html RESULT Sector view: Attractive
Strong inflows in FY2021 to rein in near-term weakness. DBL ended the year with CMP (`): 544 a marginal increase in overall revenues despite being impacted by the pandemic. Order Fair Value (`): 630 inflows for the year stood at a multi-year high. The company remains focused on debt BSE-30: 51,423 reduction and working capital improvement. We revise estimates to bake in improved inflows, Covid second wave impact and recent fund raise by QIP. Revise Fair Value to Rs630 net of roll forward. Retain BUY. Dilip Buildcon Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 544/630/BUY EPS (Rs) 21.8 40.2 58.2 52-week range (Rs) (high-low) 720-245 EPS growth (%) (23.2) 83.9 44.9 Mcap (bn) (Rs/US$) 80/1.1 P/E (X) 24.9 13.5 9.3 ADTV-3M (mn) (Rs/US$) 255/4 P/B (X) 2.0 1.6 1.4 Shareholding pattern (%) EV/EBITDA (X) 7.7 6.2 5.2 Promoters 75.0 RoE (%) 8.5 13.1 15.6 FPIs/MFs/BFIs 10.9/5.9/0.0 Div. yield (%) 0.2 0.1 0.2 Price performance (%) 1M 3M 12M Sales (Rs bn) 92 106 124 Absolute 0.4 (19.9) 111.9 EBITDA (Rs bn) 15 17 21 Rel. to BSE-30 (2.9) (23.5) 32.7 Net profits (Rs bn) 3 6 9
4QFY21 performance was ahead on revenues and marginally lower at EBITDA DBL’s revenues were marginally ahead of our estimates driven by strong inflows and a healthy order book. The company ended the year with 3% yoy growth in revenues despite the impact of the pandemic. Inflows remained strong for other non-road segments while pace of execution in non-road was lower than expectations. Impact of higher commodity prices and a one-time CSR expense of Rs400-450 mn was reflected in EBITDA margins which came in at 15.6%. Interest and depreciation charges were down for FY2021 on lower interest rate and capex. DBL witnessed robust order inflows of Rs219 bn in FY2021 and order book witnessed 44% yoy growth.
Well-positioned to meet incremental equity requirements The reduction in trade working capital cycle was in line with management’s guidance. However, overall working capital requirements moved on higher inventory and lower other current liabilities. This resulted in lower than expected operational cash flow and free cash flow for the year. Remaining proceeds of Rs800 mn from Shrem Group have come in 4QFY21. DBL also raised funds via QIP worth Rs5.1 bn during April, 2021 to repay debt and meet incremental equity requirement. Along with this, the company expects to receive Rs6 bn from Cube highways and expects to close the deal for stake sale of remaining seven HAM projects. It expects these payments to take care of incremental equity requirements for this year and next year. Equity investment for new and existing HAM road projects is around Rs8 bn/Rs4 bn/Rs3 bn for FY2022/23/24 while total monetization proceeds are expected to be around Rs20 bn.
Strong order book and balance sheet to drive growth
We witnessed consolidation in DBL’s revenues over the past two years on weak ordering and Teena Virmani Covid but now expect revenues to come back on growth trajectory based on strong inflows received during the year. Order inflow for DBL for FY2021 stood at Rs219 bn taking order book to Rs274 bn and providing revenue visibility for 2.5 years. Inflow is more than 3X of FY2020. Aditya Mongia Large sized order inflows bagged during 1HFY21 have already commenced construction particularly in the irrigation segment. We expect current balance sheet strength coupled with a recent fund raise to enable timely financial closure and construction for HAM projects.
Revise estimates to bake in Covid impact and recent fund raise; retain BUY We cut our estimates by 6%/2% for FY2022/23 to factor in the impact of the lockdown in 1QFY22 and the recent fund raise. Net of roll-forward, we revise Fair Value to Rs630 (from [email protected] Contact: +91 22 6218 6427 Rs600 earlier).
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Dilip Buildcon Capital Goods
Exhibit 1: EBITDA was 3% lower than our estimates on one time high other expenses. 1QFY22 to have an impact of lockdown and lower labor availability. Quarterly standalone financials of Dilip Buildcon, March fiscal year-end, 4QFY21 (Rs mn)
% change 4QFY21 4QFY21E 4QFY20 3QFY21 vs est. yoy qoq FY2021 FY2020 % change FY2022E FY2021 % change Net sales 29,250 28,717 24,997 24,667 2 17 19 92,089 89,838 3 105,870 92,089 15 Total expenses (24,688) (24,005) (20,871) (20,598) 3 18 20 (77,396) (74,118) 4 (88,933) (77,396) 15 Stock 482 - 262 9 183 (1,176) (116) - 183 Operating expenses (RM and others) (23,585) (22,772) (20,291) (19,553) 4 16 21 (72,982) (68,956) 6 (83,637) (72,982) 15 Employee cost (433) (603) (500) (523) (28) (13) (17) (1,925) (1,958) (2) (2,223) (1,925) 15 Other expenses (1,152) (632) (342) (530) 82 237 117 (2,672) (2,029) 32 (3,072) (2,672) 15 EBITDA 4,562 4,712 4,127 4,069 (3) 11 12 14,693 15,662 (6) 16,937 14,693 15 Other income 50 78 96 59 (36) (48) (16) 288 313 (8) 407 288 41 EBITDA (incl. other income) 4,612 4,789 4,222 4,129 (4) 9 12 14,981 16,033 (7) 17,344 14,981 16 Depreciation (961) (817) (1,059) (1,000) 18 (9) (4) (4,071) (4,241) (4) (3,670) (4,071) (10) EBIT 3,651 3,973 3,164 3,129 (8) 15 17 10,910 11,792 (7) 13,674 10,910 25 Interest (1,500) (1,519) (1,475) (1,449) (1) 2 4 (5,862) (6,127) (4) (4,841) (5,862) (17) Profit before tax 2,150 2,454 1,689 1,680 (12) 27 28 5,048 5,665 (11) 8,833 5,048 75 Tax expense (878) (816) (588) (569) (1,855) (1,505) (2,959) (1,855) Net profit 1,273 1,638 1,101 1,111 (22) 16 15 3,193 4,160 (23) 5,874 3,193 84 Exceptional items - - 50 - - 89 (100) 344 - Reported PAT 1,273 1,638 1,151 1,111 (22) 11 15 3,193 4,250 (25) 6,218 3,193 95
Key ratios (%) Operating expenses/ Sales 79.0 79.3 80.1 79.2 79.1 78.1 79.0 79.1 Employee exp./ Sales 1.5 2.1 2.0 2.1 2.1 2.2 2.1 2.1 Other exp./ Sales 3.9 2.2 1.4 2.1 2.9 2.3 2.9 2.9 EBITDA margin 15.6 16.4 16.5 16.5 16.0 17.4 16.0 16.0 PBT Margin 7.4 - 6.8 6.8 5.5 6.3 8.3 5.5 Tax rate 40.8 33.5 34.8 33.9 36.7 26.6 33.5 36.7 PAT Margin 4.4 - 4.4 4.5 3.5 4.6 5.5 3.5 EPS 9.3 12.0 7.5 7.6 23.3 28.5 40.2 23.3
Order details Order booking 61,276 5,543 54,917 1,005 11.6 219,581 67,250 227 134,959 219,581 (38.5) Order backlog 274,114 190,816 261,410 44 4.9 274,114 190,816 44 304,154 274,114 11.0
Source: Company, Kotak Institutional Equities estimates
Exhibit 2: Roads segment has remained dominant segment for Dilip Buildcon. Growth in irrigation, urban development and mining to be reflected from FY2022. Quarterly segmental standalone financials of Dilip Buildcon, March fiscal year-end, 4QFY21 (Rs mn)
% change 4QFY21 4QFY21E 4QFY20 3QFY21 vs est. yoy qoq FY2021 FY2020 % change FY2022E FY2021 % change Segmental revenues Roads & Bridges 24,814 19,953 22,045 19,178 24 13 29 76,522 77,831 (2) 75,414 76,522 (1) Irrigation 1,509 2,214 212 1,998 (32) 612 (24) 3,889 528 637 7,883 3,889 103 Urban Development 760 4,274 242 1,321 (82) 214 (42) 2,798 904 210 5,241 2,798 87 Mining 1,958 2,274 2,135 1,973 (14) (8) (1) 7,944 10,575 (25) 17,332 7,944 118 Total 29,041 28,716 24,634 24,470 1 18 19 91,153 89,838 1 105,870 91,153 16
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 71 Capital Goods Dilip Buildcon
Exhibit 3: DBL’s order book of Rs274 bn has a well-diversified presence across various states in India State-wise mix of DBL’s order backlog across various states, Mar-2021 (%)
Bihar Maharashtra Tamil Nadu 5% 6% 4% Karnataka Uttarakhand 17% 4%
Gujarat 15% Uttar Pradesh 9%
Rajasthan 4% Andhra Pradesh 4% Odisha Madhya Pradesh 9% 7% Goa Jharkhand Telengana1% 11% 3%
Source: Company, Kotak Institutional Equities
Exhibit 4: Quarterly trend in net working capital of Dilip Buildcon (standalone), March fiscal year ends, 4QFY17-4QFY21 (days of sales)
Debtor days Inventory days Creditor days Working capital days
160 135 140 127 123 118 117 120 107 100 96 92 89 87 90 89 87 100 85 83 82 80 127 60 113 114 120 103 102 104 104 104 106 101 104 95 91 100 40 86 89 80 82 71 77 72 71 69 69 69 71 63 61 62 65 59 60 63 60 66 66 59 63 53 48 49 55 56 57 51 55 50 20 37 41 44 - 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY191QFY20 2QFY203QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21
Source: Company, Kotak Institutional Equities
72 KOTAK INSTITUTIONAL EQUITIES RESEARCH Dilip Buildcon Capital Goods
Exhibit 5: Debt to equity ratios have remained <1X over the past two years Debt to equity ratios of Dilip Buildcon, March fiscal year-ends, Dec-2016 - Mar-2021 (X)
Net debt/equity Equipment debt/equity Working capital debt/equity
1.6 1.4 1.3 1.3 1.4 1.4 1.4 1.2 1.1 1.1 1.2 1.2 1.1 1.0 1.0 0.9 0.9 1.0 0.9 0.9 0.9 0.9 0.8 0.8 0.8 0.8 0.8 0.8 0.7 0.8 0.6 0.7 0.6 0.6 0.6 0.6 0.6 0.5 0.5 0.6 0.5 0.5 0.6 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.4 0.4 0.4 0.4 0.3 0.3 0.4 0.3 0.2
-
Jun-2017
Jun-2018
Jun-2019
Jun-2020
Sep-2017
Sep-2018
Sep-2019
Sep-2020
Dec-2016
Dec-2017
Dec-2017
Dec-2018
Dec-2019
Dec-2020
Mar-2018
Mar-2019
Mar-2020 Mar-2021
Source: Company, Kotak Institutional Equities
Exhibit 6: Key order inflows of Rs219 bn announced by Dilip Buildcon in FY2021 give healthy visibility of revenues Order inflow details, March fiscal year ends (Rs mn)
Project name Segment State Client Value(Rs bn) Quarter Construction of Tunnels, Bridges and yards in JV with HCC Irrigation Uttarakhand Rail Vikas Nigam 13 2Q HAM project in Telangana Roads Telangana NHAI 11 2Q Construction of irrigation project across Narmada river in JV with HCC Irrigation Gujarat Water resource dept 42 2Q Construction of bypass and bridge and road widening in JV with HCC Roads Bihar NHAI 19 2Q HAM project in Gujarat Roads Gujarat NHAI 9 2Q HAM project in Karnataka Roads Karnataka NHAI 13 2Q Road project in Bihar Roads Bihar NHAI 19 2Q Delhi-Vadodara expressway Roads Rajasthan NHAI 10 3Q Civil work including track linking Railways Chattisgarh Railways 7 4Q 4 laning of Bangalore to Malur Section of Bangalore Chennai Expressway - Package 1 Roads Karnataka NHAI 12 4Q 4 laning of Malur Section to Bangerpet of Bangalore Chennai Expressway - Package 2 Roads Karnataka NHAI 13 4Q Four Laning of Viluppuram Puducherry section Roads TN/PuducherryNHAI 10 4Q Four laning of Puducherry-Poondiyankuppam Section Roads TN/PuducherryNHAI 12 4Q Construction of 4 lane Bangalore-Chennai Expressway - Package 3 Roads AP NHAI 11 4Q Development and Operation of Siarmal open cast mine - Rs369 bn for 25 years, year 1 14.8Mining bn Odisha MCL 15 4Q
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 73 Capital Goods Dilip Buildcon
Exhibit 7: DBL would get some support from cash flows from Cube highways in order to fund required equity contributions in HAM projects Equity requirement for HAM projects of DBL as per the company, March fiscal year-ends, 2019-24E
Equity requirement in HAM projects Support from Shrem deal Support from Cube highways
9,000 8,377 8,000 6,945 7,000 6,000 6,000
5,000 4,319 3,890 4,076 4,000 3,450 3,306 2,708 3,000 2,000 1,244 1,000 1,000 - - 0 2019 2020 2021 2022E 2023E 2024E
Source: Company, Kotak Institutional Equities estimates
Exhibit 8: We expect DBL to end FY2023 at close to 1.4X net debt to EBITDA despite a spike up in investments in existing and new HAM projects Trends in investments and net debt/EBITDA for DBL (standalone), March fiscal year-ends, 2013-24E
Investments (LHS, Rs mn) Net debt/EBITDA (RHS, X)
18,000 16,988 4.5 16,000 4.0
14,000 12,556 3.5 11,444 11,897 12,000 10,447 3.0 10,000 2.5 8,000 2.0 5,376 5,238 6,000 4,695 1.5 4,000 2,789 2,898 1.0 1,830 2,000 952 0.5 - - 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E
Source: Company, Kotak Institutional Equities estimates
74 KOTAK INSTITUTIONAL EQUITIES RESEARCH Dilip Buildcon Capital Goods
Exhibit 9: Change in estimates for Dilip Buildcon, March fiscal year-ends, 2019-23E (Rs mn)
New estimates Old estimates % change 2019 2020 2021 2022E 2023E 2022E 2023E 2022E 2023E Net revenues 91,182 89,838 92,089 105,870 124,375 111,111 129,911 (5) (4) Total operating expenses (75,138) (74,118) (77,396) (88,933) (103,853) (92,961) (108,144) EBITDA 16,044 15,720 14,693 16,937 20,522 18,150 21,767 (7) (6) Depreciation & Amortization (3,202) (4,241) (4,071) (3,670) (3,395) (3,707) (3,737) EBIT 13,306 11,791 10,910 13,674 17,454 14,739 18,318 (7) (5) Interest expense (5,299) (6,127) (5,862) (4,841) (4,655) (5,374) (5,319) PBT 8,007 5,665 5,048 8,833 12,798 9,365 12,999 (6) (2) Tax expense (400) (1,505) (1,855) (2,959) (4,287) (3,137) (4,355) Recurring PAT 7,607 4,160 3,193 5,874 8,511 6,228 8,644 (6) (2) Recurring EPS 52.0 28.4 21.8 40.2 58.2 45.5 63.2
Ratios Revenue growth (%) 17.7 (1.5) 2.5 15.0 17.5 21.4 16.9 EBITDA margin (%) 17.6 17.5 16.0 16.0 16.5 16.3 16.8 Effective tax rate (%) 5.0 26.6 36.7 33.5 33.5 33.5 33.5 PAT margin (%) 8.3 4.6 3.5 5.5 6.8 5.6 6.7
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 75 Capital Goods Dilip Buildcon
Exhibit 10: We revise our ordering growth estimates to take into account inflows announced in FY2021 Segmental financials of Dilip Buildcon (standalone), March fiscal year-ends, 2016-24E (Rs mn)
CAGR 2020-24E 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E (%) Comments Roads and bridges Order inflow 75,665 91,358 140,514 51,496 31,608 149,315 90,000 97,200 102,060 34 NHAI ordering was very strong in FY2021 and DBL had Yoy growth (%) 49.8 20.7 53.8 (63.4) (38.6) 372.4 (39.7) 8.0 5.0 maintained 10-11% market share in the total awards. Order backlog 96,697 145,809 219,250 171,141 122,008 158,822 173,408 184,025 194,413 12 Yoy growth (%) 48.1 50.8 50.4 (21.9) (28.7) 30.2 9.2 6.1 5.6 Gross revenue 36,477 45,714 66,694 80,136 77,831 76,522 75,414 86,583 91,671 4 Yoy growth (%) 54.6 25.3 45.9 20.2 (2.9) (1.7) (1.4) 14.8 5.9 We expect execution to improve post 1QFY22 as Bill-to-book ratio (%) 35.4 32.1 30.9 32.7 41.6 38.9 37.0 39.0 39.0 challenges due to lockdown get resolved Irrigation Order inflow 2,700 — 387 5,320 8,743 41,720 11,802 13,573 14,251 13 DBL had won large sized irrigation projects; we expect Yoy growth (%) — (100.0) NA 1,274.3 5.0 8.0 (71.7) 15.0 5.0 these projects to ramp up from FY2022 Order backlog 7,055 1,648 426 5,366 13,491 46,650 50,570 51,524 51,113 40 Yoy growth (%) 4.8 (76.6) (74.2) 1,160.0 151.4 245.8 8.4 1.9 (0.8) Gross revenue 2,378 2,783 1,610 380 528 3,889 7,883 12,618 14,662 130 Yoy growth (%) 137.3 17.0 (42.2) (76.4) 38.9 636.6 102.7 60.1 16.2 Execution was weak in FY2020 and ramped up sharply Bill-to-book ratio (%) 29.4 39.4 87.4 12.3 5.4 11.3 15.0 22.0 25.0 from FY2021. New projects will start contributing from FY2022 Urban development Order inflow 1,890 — — 4,441 8,743 13,175 13,175 14,229 15,367 15 DBL has forayed into urban development projects as Yoy growth (%) — (100.0) NA NA 5.0 120.0 12.0 8.0 8.0 the next growth vertical Order backlog 2,990 2,108 1,400 4,729 19,845 28,354 36,288 44,006 51,620 27 Yoy growth (%) 9.5 (29.5) (33.6) 237.7 319.6 42.9 28.0 21.3 17.3 Gross revenue 1,558 901 315 1,112 904 2,798 5,241 6,510 7,753 71 Yoy growth (%) 23.6 (42.2) (65.1) 253.5 (18.7) 209.5 87.3 24.2 19.1 Bill-to-book ratio (%) 42.4 30.1 14.9 30.7 9.9 10.6 15.0 15.0 15.0 We expect execution period of three years Mining Order inflow 1,045 26,471 99 22,073 18,158 15,371 19,982 20,981 22,030 5 These are large contracts; company has received Yoy growth (%) — 2,433.1 (99.6) (100.0) - 20.0 30.0 5.0 5.0 healthy inflow in FY2020/FY2021 Order backlog 1,045 26,117 17,805 30,482 35,415 40,303 43,889 47,142 50,213 9 Yoy growth (%) — 2,399.3 (31.8) 71.2 16.2 13.8 8.9 7.4 6.5 Gross revenue — 1,399 8,411 9,396 10,575 7,944 16,396 17,728 18,959 16 Yoy growth (%) — NA 501.2 11.7 12.5 (24.9) 106.4 8.1 6.9 Large multi-year contract; we assume execution rate to Bill-to-book ratio (%) — 9.8 32.1 32.6 26.7 18.4 32.6 32.6 32.6 start scaling up particularly for Siarmal project Sum of segments Total order inflow 81,300 117,830 141,000 83,330 67,250 219,581 134,959 145,983 153,709 23 Total order backlog 107,787 175,683 238,881 211,718 190,759 274,129 304,154 326,697 347,359 Total revenues 40,413 50,797 77,030 91,024 89,838 91,153 104,934 123,439 133,047 10 Less Intersegment — — — — — — — — — Other adjustments (if any) 440 179 429 158 - 936 936 936 936 Net revenue 40,853 50,976 77,459 91,182 89,838 92,089 105,870 124,375 133,983 11
Source: Company, Kotak Institutional Equities estimates
76 KOTAK INSTITUTIONAL EQUITIES RESEARCH Dilip Buildcon Capital Goods
Exhibit 11: We arrive at a DCF-based fair value of Rs630/share for Dilip Buildcon DCF valuation of Dilip Buildcon, March fiscal year-ends, 2022-31E (Rs mn)
2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E Assumptions Revenues 105,870 124,375 133,983 141,396 146,377 154,868 162,970 170,947 178,968 187,143 Growth (%) 15.0 17.5 7.7 5.5 3.5 5.8 5.2 4.9 4.7 4.6 DCF model EBITDA 16,937 20,522 20,821 21,973 22,702 24,066 25,325 26,565 27,812 29,082 Adjusted tax expense (2,653) (3,425) (3,440) (3,613) (4,056) (5,058) (5,317) (5,585) (5,864) (6,158) Change in working capital (3,138) (4,784) (3,597) (1,673) (1,147) (3,201) (4,129) (2,102) (2,108) (2,145) Operating cash flow 11,146 12,312 13,784 16,686 17,498 15,808 15,880 18,878 19,840 20,779 Capital expenditure (1,000) (4,500) (5,000) (5,000) (5,000) (5,500) (5,500) (5,500) (5,500) (3,500) Equity contribution (7,714) (6,782) (4,967) (4,741) (4,978) (5,211) (5,430) (5,647) (5,873) (6,108) Equity divestment 5,808 1,836 11,924 7,187 4,940 5,187 5,446 5,718 5,947 6,185 Free cash flow 8,240 2,866 15,741 14,133 12,460 10,284 10,396 13,450 14,414 17,356 Discounted cash flow-now 7,468 2,278 10,974 8,642 6,684 4,839 4,290 4,868 4,576 4,834 Discounted cash flow-1 year forward 2,597 12,515 9,852 7,620 5,516 4,892 5,550 5,217 5,510 Discounted cash flow-2 year forward 14,267 11,236 8,686 6,289 5,577 6,329 5,947 6,282
Now +1-year +2-years Discount rate (%) 14.0% 14.0% 14.0% Total PV of free cash flow 59,453 64,296 75,571 Terminal value assumption Growth in perpetuity 4.0% 4.0% 4.0% Sensitivity of 12-month fair value to WACC and perpetual growth FCF in terminal year 17,356 18,050 18,772 Perpetual growth (%) Exit FCF multiple (X) 10.4 10.4 10.4 628 2.0% 3.0% 4.0% 5.0% 6.0% Exit EV/EBITDA multiple (X) 6.2 6.5 6.7 13.0% 630 672 723 787 869 Terminal value 180,503 187,723 195,232 13.5% 592 628 673 728 798 PV of terminal value 50,270 52,281 54,372 14.0% 557 589 628 676 736 Enterprise value 109,723 116,577 129,943 14.5% 525 553 588 629 681 Net debt 33,317 24,711 26,600 WACC(%) 15.0% 495 521 551 588 632 Equity value 76,407 91,866 103,344 Shares outstanding (mn) 146 146 146 Fair value of DBL (Rs) 628 707
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 77 Capital Goods Dilip Buildcon
Exhibit 12: Summary financials of Dilip Buildcon (standalone), March fiscal year-ends, 2014-24E (Rs mn)
2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Income statement Net revenues 23,158 26,241 40,853 50,976 77,459 91,182 89,838 92,089 105,870 124,375 133,983 Total operating expenses (18,458) (20,586) (32,861) (41,054) (63,431) (75,138) (74,118) (77,396) (88,933) (103,853) (113,162) EBITDA 4,700 5,655 7,992 9,922 14,028 16,044 15,720 14,693 16,937 20,522 20,821 Other income 62 60 162 114 155 464 313 288 407 327 412 Depreciation & Amortization (788) (1,179) (1,835) (2,274) (2,750) (3,202) (4,241) (4,071) (3,670) (3,395) (3,622) EBIT 3,975 4,537 6,320 7,763 11,434 13,306 11,791 10,910 13,674 17,454 17,610 Interest expense (1,551) (2,587) (3,814) (4,162) (4,644) (5,299) (6,127) (5,862) (4,841) (4,655) (4,724) PBT 2,423 1,949 2,506 3,601 6,789 8,007 5,665 5,048 8,833 12,798 12,886 Tax expense (484) (491) (293) 9 (434) (400) (1,505) (1,855) (2,959) (4,287) (3,299) Cash tax paid as Minimum Alternate Tax (MAT) (511) (438) (589) (835) (128) (1,299) (1,813) (2,047) (1,767) (2,560) (2,577) Net profit 1,940 1,458 2,213 3,609 6,355 7,607 4,160 3,193 5,874 8,511 9,587 Exceptional items 3 — (5) - (152) 43 89 - 344 109 706 Reported PAT 1,943 1,458 2,208 3,609 6,203 7,650 4,249 3,193 6,218 8,620 10,293 Recurring EPS 13.3 10.0 15.1 24.7 43.5 52.0 28.4 21.8 40.2 58.2 65.6 Balance sheet Shareholders' funds 7,284 8,730 10,621 18,529 24,571 32,044 36,060 39,172 50,355 58,788 68,857 Share capital 592 1,171 1,171 1,368 1,368 1,368 1,368 1,368 1,462 1,462 1,462 Reserves & surplus 6,691 7,558 9,450 17,161 23,203 30,677 34,692 37,804 48,893 57,326 67,395 Debt 12,589 24,184 25,114 25,634 29,549 35,763 34,630 36,239 30,239 27,739 23,839 Deferred tax liabilities 268 707 775 759 1,067 171 (196) (359) (359) (359) (359) Total sources of funds 20,141 33,621 36,510 44,922 57,931 70,737 72,046 77,572 82,755 88,688 94,858 Net fixed assets 6,391 11,890 14,204 16,825 18,319 20,822 20,318 19,151 16,481 17,586 18,964 Net working capital (ex-cash) 11,251 16,600 18,349 21,844 32,623 40,031 35,512 42,533 45,671 50,455 54,052 Investments 1,830 2,789 2,898 4,695 5,376 5,238 11,444 10,447 12,556 16,988 11,897 Cash and bank balances and current investments 668 2,342 1,059 1,137 1,613 1,888 3,219 2,922 5,527 1,139 7,424 Total application of funds 20,141 33,621 36,510 44,501 57,931 70,737 72,045 77,572 82,755 88,688 94,857 Free cash flow Operating profit before wcap. changes 4,725 5,745 8,355 10,339 13,806 17,378 16,108 14,979 16,495 19,229 21,217 Change in working capital / other adjustments (3,362) (2,895) (3,498) (2,967) (8,109) (6,196) 4,371 (6,593) (3,138) (4,784) (3,597) Direct tax paid (801) (647) (589) (835) (1,504) (1,604) (1,950) (1,396) (1,767) (2,560) (2,577) Net cashflow from operating activites 563 2,203 4,268 6,537 4,192 9,579 18,529 6,990 11,591 11,886 15,042 Fixed assets (1,700) (6,682) (4,156) (4,884) (4,242) (5,704) (3,107) (2,951) (1,000) (4,500) (5,000) Cash (used) / realised in investing activities (2,541) (7,610) (4,221) (6,592) (4,560) (8,150) (7,708) (2,637) (3,110) (8,932) 90 Free cash flow (CFO + net capex) (1,137) (4,479) 112 1,653 (50) 3,875 15,422 4,039 10,591 7,386 10,042
Growth (%) Revenue growth 13.3 55.7 24.8 52.0 17.7 (1.5) 2.5 15.0 17.5 7.7 EBITDA growth 20.3 41.3 24.1 41.4 14.4 (2.0) (6.5) 15.3 21.2 1.5 Recurring PAT growth (24.8) 51.8 63.1 76.1 19.7 (45.3) (23.2) 83.9 44.9 12.6 Key ratios EBITDA margin (%) 20.3 21.6 19.6 19.5 18.1 17.6 17.5 16.0 16.0 16.5 15.5 Net debt/equity 1.6 2.5 2.3 1.3 1.1 1.1 0.9 0.9 0.5 0.5 0.2 Book value per share (Rs) 49.8 59.7 72.6 126.7 168.0 219.1 246.6 267.9 344.4 402.0 470.9 RoAE (%) 30.7 18.2 22.9 24.8 29.5 26.9 12.2 8.5 13.1 15.6 15.0 RoACE (%) 18.2 12.6 14.9 16.7 18.2 17.4 10.8 8.1 10.0 11.8 12.4
Source: Company, Kotak Institutional Equities estimates
78 KOTAK INSTITUTIONAL EQUITIES RESEARCH BUY Gujarat Pipavav Port (GPPV) https://ultraviewer.et/en/own Transportation MAY 30, 2021 load.html RESULT Sector view: Attractive
Moving towards becoming significant. GPPV’s 4Q results reflect hurdles in the way CMP (`): 106 of a small port. The recent 60,000 TEU boost in new services is material and the port Fair Value (`): 119 needs two more of such boosts to cross the 1 mn TEU mark and be called a significant BSE-30: 51,423 port. The support to invest and cross 1 mn TEU may be nearing with the Gujarat Maritime Board considering renewal of port concession. The stock trades at benign sub- 6X FY2023E EV/EBITDA with our projections not building in any benefits of DFC.
Gujarat Pipavav Port Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 106/119/BUY EPS (Rs) 4.5 6.2 7.3 52-week range (Rs) (high-low) 118-60 EPS growth (%) (25.3) 37.5 16.9 Mcap (bn) (Rs/US$) 52/0.8 P/E (X) 23.5 17.1 14.6 ADTV-3M (mn) (Rs/US$) 99/1 P/B (X) 2.5 2.6 2.6 Shareholding pattern (%) EV/EBITDA (X) 10.4 8.9 7.6 Promoters 44.0 RoE (%) 10.6 14.9 17.6 FPIs/MFs/BFIs 21.4/23.0/3.5 Div. yield (%) 4.2 5.8 6.7 Price performance (%) 1M 3M 12M Sales (Rs bn) 7 8 10 Absolute 11.7 7.3 74.7 EBITDA (Rs bn) 4 5 6 Rel. to BSE-30 8.1 2.4 9.4 Net profits (Rs bn) 2 3 4
4QFY21: loss in share drives revenue miss; cost-control initiatives negated by average mix GPPV reported a 3% miss in revenues (+19% yoy) with yoy growth driven by sharp growth in bulk volumes. The key container volumes were flat yoy and liquid volumes declined despite the support from select sub-segments inside – coastal for container and non-LPG volumes for liquid. GPPV mentioned losing share in the key gateway container market to Mundra as key shipping lines optimized their yields. Mundra Port, with its offerings that service a wide range of customers with different vessel sizes, has gained share at the expense of GPPV. GPPV reported healthy ~60% margin despite an adverse volume mix. Its operating expenses per ton declined for the second consecutive year in FY2021.
Receives a 60,000 TEU boost to gateway volumes; targets of crossing 1 mn TEU in FY2023 The current annualized run-rate of container volumes at 800,000 TEU is still ~200,000 TEU short of levels when a port is considered significant. GPPV has received a boost in the form of two services (one to Jebel Ali and one from China) that would boost the annualized volumes by 50,000-60,000 TEU. It is confident of achieving 1 mn TEU run-rate of annualized volumes before ending FY2023, which would require two more such additions of 60,000 TEU each. It is banking on the support from growth in hinterland volumes in the near term. It is not focusing on adding transshipment volumes from here. It expects DFC to be a game changer over the medium term in increasing India’s manufacturing competitiveness and thus aiding market growth.
GPPV expects a positive decision on renewal of port concession in near term The recent cyclone has led to modest business and capital losses, both of which GPPV is insured against. GPPV believes that the requirement to rebuild the port operations to cover against future climatic disturbances as another reason for the Gujarat Maritime Board to provide clarity Aditya Mongia on renewal of the port’s concession. GPPV has already shared its intention to invest to grow the port and has used the same to seek clarity from GMB on renewal of the port’s concession. Teena Virmani GPPV expects a favorable decision from GMB over the next few quarters.
We broadly retain estimates and Fair Value of Rs119 We retain our BUY rating with broadly unchanged estimates and Fair Value. Even after the recent uptick, the stock trades at ~6.5/5.5X FY2022E/2023E on an EV/EBITDA basis.
[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. Transportation Gujarat Pipavav Port
Exhibit 1: GPPV reported results marginally lower than our estimates on weak volumes and adverse mix GPPL - 4QFY21 - key numbers, March fiscal year-ends (Rs mn)
% change 4QFY21 4QFY21E 4QFY20 3QFY21 vs est. yoy qoq FY2021 FY2020 % change FY2022E FY2021 % change Net operating income 1,934 2,000 1,619 1,984 (3) 19 (3) 7,335 7,353 (0) 8,419 7,335 15 Total expenditure (779) (800) (615) (884) (3) 27 (12) (3,095) (2,888) 7 (3,451) (3,095) 12 Operating expenses (332) (254) (385) 31 (14) (1,375) (1,271) 8 (1,593) (1,375) 16 Employee costs (168) (141) (188) 19 (10) (672) (567) 18 (705) (672) 5 Admin and other exp. (278) (220) (311) 27 (11) (1,049) (1,050) (0) (1,153) (1,049) 10 EBITDA 1,155 1,200 1,004 1,100 (4) 15 5 4,240 4,466 (5) 4,968 4,240 17 Other income 94 167 118 84 (44) (20) 12 423 509 (17) 518 423 22 Interest expense (15) (15) (20) (15) (63) (74) (63) (63) Depreciation (335) (347) (338) (333) (3) (1) 1 (1,334) (1,314) 2 (1,409) (1,334) 6 PBT 900 1,006 764 837 (11) 18 8 3,265 3,586 (9) 4,014 3,265 23 Tax expense (248) (289) (285) (294) (13) (16) (1,082) (662) 63 (1,010) (1,082) NA PAT 652 717 479 543 (9) 36 20 2,184 2,924 (25) 3,004 2,184 38 Extraordinary items — — — — — — NA — — NA Reported PAT 652 717 479 543 (9) 36 20 2,184 2,924 (25) 3,004 2,184 38
Key ratios (%) Operating exp./sales 17.2 15.7 19.4 18.7 17.3 18.9 18.7 Employee costs/sales 8.7 8.7 9.5 9.2 7.7 8.4 9.2 Admin and other exp./sales 14.4 13.6 15.7 14.3 14.3 13.7 14.3 EBITDA margin 59.7 60.0 62.0 55.5 57.8 60.7 59.0 57.8 PBT margin 46.5 50.3 47.1 42.2 44.5 48.8 47.7 44.5 PAT margin 33.7 35.8 29.6 27.4 29.8 39.8 35.7 29.8 Effective tax rate 27.6 28.7 37.3 35.1 33.1 18.5 25.2 33.1 EPS (Rs) 1.3 1.5 1.0 1.1 4.5 6.0 6.2 4.5
Volumes Bulk ('000 tons) 1,029 789 412 770 30 150 34 3,130 2,331 34 3,286 3,130 5 Container ('000 TEUs) 195 198 197 199 (1) (1) (2) 748 873 (14) 844 748 13 Liquid ('000 tons) 162 190 194 170 (15) (17) (5) 694 820 (15) 798 694 15 Ro-ro ('000) 5 4 3 0 18 62 1,519 10 47 (78) 11 10 10 Total ('000 tons) 3,927 3,753 3,368 3,726 5 17 5 14,308 15,429 (7) 15,914 14,308 11
Avg. realization (Rs/ton) 493 533 481 532 (8) 2 (7) 513 477 8 529 513 3
Source: Company, Kotak Institutional Equities estimates
Exhibit 2: Container volumes declined by 1% yoy for the quarter despite support from coastal volumes Quarterly and annual trajectory of container volumes for Gujarat Pipavav, March fiscal year-ends
Quarterly container cargo ('000 TEUs) Annual container cargo (%) ('000 TEUs) Container quarterly volumes ('LHS, 000 TEU) (%) 1,200 Container volumes ('LHS, 000 TEU) 80 300 yoy growth (RHS, %) 60 yoy growth (RHS, %) 1,021 945 50 1,000 903 873 844 60 250 793 40 748 800 695 703 200 30 661 663 40 610570 20 600 150 466 10 20 400 321 100 - 192196 (10) 200 135 0 50 (20) 0 (20)
- (30)
2012 2013 2016 2006 2007 2008 2009 2010 2011 2017 2018 2019 2020 2021
2023E 2024E 2022E
Sep-14 Sep-15 Sep-18 Sep-19 Sep-13 Sep-16 Sep-17 Sep-20
Mar-13 Mar-14 Mar-17 Mar-20 Mar-21 Mar-15 Mar-16 Mar-18 Mar-19 12MFY15
Source: Company, Kotak Institutional Equities estimates
80 KOTAK INSTITUTIONAL EQUITIES RESEARCH Gujarat Pipavav Port Transportation
Exhibit 3: GPPV has Rs7.2 bn of cash and bank balances Key balance sheet financials of GPPV, March fiscal year-ends, 2016-21 (Rs mn)
Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 Shareholders' funds 19,164 20,195 20,141 20,210 20,848 20,321 Equity share capital 4,834 4,834 4,834 4,834 4,834 4,834 Reserves and surplus 14,329 15,361 15,306 15,376 16,014 15,487 Loan funds — — — — — — Deferred tax liabilities 1,274 (416) 3 462 494 1,007 Total sources of funds 20,438 19,779 20,144 20,672 21,342 21,328
Total fixed assets 17,309 17,684 17,186 16,354 15,882 15,200 Investments 830 873 830 830 830 830 Cash and bank balances 2,898 3,522 4,315 5,337 6,495 7,254 Current assets 2,740 1,010 773 1,171 1,050 1,136 Inventories 129 156 136 84 76 105 Sundry debtors 294 286 258 510 459 441 Loans & advances and other assets 2,317 569 380 577 514 590 Current liabilities & provisions 3,339 3,311 2,961 3,020 2,915 3,092 Current liabilities 1,817 2,945 2,596 2,655 2,707 2,884 Provisions 1,522 366 365 365 208 208 Net current assets excl. cash (599) (2,301) (2,187) (1,849) (1,865) (1,956) Total application of funds 20,438 19,779 20,144 20,672 21,342 21,328
Source: Company, Kotak Institutional Equities estimates
Exhibit 4: We model a marginal improvement in realizations Average realization at Pipavav port, CY2009-FY2024E (Rs per ton)
Average realizations 600 558 541 542 550 524 529 512 507 500 477 448 456 450 423
400 364
350 319 289 300 280
250
FY2015
FY2016
FY2017
FY2018
FY2019
FY2020
FY2021
CY2009
CY2010
CY2011
CY2012
CY2013
FY2022E FY2023E FY2024E
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 81 Transportation Gujarat Pipavav Port
Exhibit 5: We build in 1 mn TEU volumes by FY2024 versus GPPV target of achieving the quantum in FY2023 Volume and tariff details of GPPL, March fiscal year-ends, 2012-24E
2012 2013 15M2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Volumes Container volumes (TEUs) 570,489 660,729 980,689 694,614 663,380 703,000 903,000 873,000 748,000 844,000 945,280 1,020,902 Yoy growth (%) (6.5) 15.8 15.7 (10.8) (4.5) 6.0 28.4 (3.3) (14.3) 12.8 12.0 8.0 Bulk volumes (tons) 3,010,500 3,106,000 4,643,675 2,478,743 2,112,078 1,820,000 2,008,000 2,331,000 3,129,977 3,286,476 3,450,800 3,623,340 Yoy growth (%) (18.2) 3.2 22.2 (28.0) (14.8) (13.8) 10.3 16.1 34.3 5.0 5.0 5.0 Liquid volumes (tons) — — 304,548 706,877 685,960 1,020,000 639,000 820,000 693,719 797,777 877,555 965,310 Yoy growth (%) — — NA 132 (3) 49 (37) 28 (12) 15 10 10 Ro/ro volumes — — — 19,644 83,607 98,000 76,000 47,000 10,158 11,174 12,291 13,520 Total volumes (mn tons) 11 12 19 13 12 13 15 15 14 16 18 19 Yoy growth (%) (10.0) 12.4 24.5 (15.9) (5.8) 5.0 20.2 0.3 (7.3) 11.2 10.5 7.5
Tariffs (blended rate) Container (Rs/TEU) 4,707 5,177 5,695 6,492 6,687 6,286 5,657 5,827 6,118 6,363 6,554 6,751 yoy increase (%) 15.0 10.0 10.0 14.0 3.0 (6.0) (10.0) 3.0 5.0 4.0 3.0 3.0 Bulk (Rs/ton) 438 460 483 483 483 435 435 478 545 562 579 596 yoy increase (%) 15.0 5.0 5.0 — — (10.0) — 10.0 14.0 3.0 3.0 3.0 Liquid (Rs/ton) — 500 500 500 508 457 411 493 508 523 544 566 yoy increase (%) — — — — 1.5 (10.0) (10.0) 20.0 3.0 3.0 4.0 4.0 Ro/ro realization — — — 3,000 3,150 3,150 3,150 3,308 3,473 3,647 3,829 4,020 Overall realization (Rs / ton) 364 423 467 504 541 510 458 478 514 529 542 558 yoy increase (%) 14.1 16.1 10.5 7.9 7.3 (5.8) (10.2) 4.4 7.4 3.0 2.5 2.9
Revenues (Rs mn) Container 2,685 3,421 5,585 4,510 4,436 4,419 5,109 5,087 4,577 5,370 6,195 6,892 Bulk 1,320 1,430 2,244 1,198 1,021 792 873 1,115 1,707 1,846 1,997 2,159 Liquid — — 152 353 348 466 263 404 352 418 478 546 Ro/ro — — — 59 263 309 239 155 35 41 47 54 Total revenues 4,005 5,224 8,729 6,524 6,597 6,529 7,043 7,377 7,348 8,419 9,536 10,553 yoy increase (%) 2.7 30.5 36.1 (8.2) 1.1 (1.0) 7.9 4.7 (0.4) 14.6 13.3 10.7
Source: Company, Kotak Institutional Equities estimates
82 KOTAK INSTITUTIONAL EQUITIES RESEARCH Gujarat Pipavav Port Transportation
Exhibit 6: We marginally cut estimates on slower pace of margin improvement Change in estimates for GPPL, March fiscal year-ends, 2019-23E
Revised estimates Previous estimates % change 2019 2020 2021 2022E 2023E 2022E 2023E 2022E 2023E Volumes Container volumes (TEUs) 903,000 873,000 748,000 844,000 945,280 840,874 899,735 0 5 Yoy growth (%) 28.4 (3.3) (14.3) 12.8 12.0 12.0 7.0 Bulk volumes (tons) 2,008,000 2,331,000 3,129,977 3,286,476 3,450,800 3,034,962 3,186,710 8 8 Yoy growth (%) 10.3 16.1 34.3 5.0 5.0 5.0 5.0 Liquid volumes (tons) 639,000 820,000 693,719 797,777 877,555 829,840 912,824 (4) (4) Yoy growth (%) (37) 28 (12) 15 10 15 10 Ro/ro volumes 76,000 47,000 10,158 11,174 12,291 10,340 11,374 8 8 Yoy growth (%) (22.4) (38.2) (78.4) 10.0 10.0 10.0 10.0 Total volumes (mn tons) 15 15 14 16 18 16 17 2 5 Yoy growth (%) 20.2 0.3 (7.3) 11.2 10.5 10.7 6.8
Tariffs (blended rate) Container (Rs/TEU) 5,657 5,827 6,118 6,363 6,554 6,424 6,616 (1) (1) yoy increase (%) (10.0) 3.0 5.0 4.0 3.0 4.0 3.0 Bulk (Rs/ton) 435 478 545 562 579 601 619 (7) (7) yoy increase (%) — 10.0 14.0 3.0 3.0 3.0 3.0 Liquid (Rs/ton) 411 493 508 523 544 523 544 — — yoy increase (%) (10.0) 20.0 3.0 3.0 4.0 3.0 4.0 Ro/ro realization 3,150 3,308 3,473 3,647 3,829 3,647 3,829 — — yoy increase (%) — 5.0 5.0 5.0 5.0 5.0 5.0 Overall realization (Rs / ton) 458 478 514 529 542 539 556 (2) (2) yoy increase (%) (10.2) 4.4 7.4 3.0 2.5 3.0 3.0
Revenues (Rs mn) Container 5,109 5,087 4,577 5,370 6,195 5,402 5,953 (1) 4 Bulk 873 1,115 1,707 1,846 1,997 1,825 1,973 1 1 Liquid 263 404 352 418 478 434 497 (4) (4) Ro/ro 239 155 35 41 47 38 44 8 8 Total revenues 7,043 7,377 7,348 8,419 9,536 8,442 9,285 (0) 3 yoy increase (%) 7.9 4.7 (0.4) 14.6 13.3 14.1 10.0 EBITDA 3,872 4,466 4,240 4,968 5,734 5,144 5,761 (3) (0) EBITDA margin (%) 55.0 60.5 57.7 59.0 60.1 60.9 62.0 PBT 3,210 3,586 3,265 4,014 4,694 4,274 4,866 (6) (4) Tax (1,153) (662) (1,082) (1,010) (1,181) (1,076) (1,225) Tax rate (%) 35.9 18.5 33.1 25.2 25.2 25.2 25.2 PAT 2,057 2,924 2,184 3,004 3,512 3,198 3,641 (6) (4) EPS 4.3 6.0 4.5 6.2 7.3 6.6 7.5 (6) (4)
Source: Company, Kotak Institutional Equities estimates
Exhibit 7: We broadly maintain our DCF-based Fair Value on roll-forward to June 2022E Sum-of-the-parts valuation of GPPL
Value Stake GPPL stake value Per share (Rs bn) (%) (Rs bn) (Rs) Method of valuation Pipavav port 50,070 100.0 50,070 104 One-year forward FCFE valuation Pipavav Rail Corporation Ltd (PRCL) 18,844 38.8 7,311 15 16X two'-year forward EPS Total value for GPPV 68,913 57,381 119
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 83 Transportation Gujarat Pipavav Port
Exhibit 8: GPPV trades at 6.5X FY2022E EV/EBITDA, about half the valuation multiple for ADSEZ Key numbers and valuation metrics of GPPL versus Adani Ports and SEZ, March fiscal year-ends, 2019-24E
Pipavav Port Adani Ports and SEZ (consolidated) 2019 2020 2021 2022E 2023E 2024E 2019 2020 2021 2022E 2023E 2024E Volumes Total (mn tons) 15 15 14 16 18 19 208 222 265 366 414 466 Financial summary (Rs mn) Revenues 7,020 7,353 7,335 8,419 9,536 10,553 109,254 118,731 125,496 186,402 214,947 239,057 EBIDTA 3,872 4,466 4,240 4,968 5,734 6,435 65,916 75,654 79,835 124,399 145,242 159,381 PAT 2,057 2,924 2,184 3,004 3,512 4,247 39,902 37,842 49,942 66,868 76,388 87,709 Net debt (5,337) (6,495) (7,254) (7,174) (7,980) (8,522) 212,206 221,489 294,147 267,918 227,840 157,129 Book value 20,210 20,848 20,321 20,095 19,832 19,517 245,382 256,235 306,283 419,308 487,536 567,214 Key ratios (%) Revenue growth 8.2 4.7 (0.3) 14.8 13.3 10.7 (3.5) 8.7 5.7 48.5 15.3 11.2 PAT growth 3.6 42.2 (25.3) 37.5 16.9 20.9 8.6 (5.2) 32.0 33.9 14.2 14.8 EBIDTA margin 55.1 60.7 57.8 59.0 60.1 61.0 60.3 63.7 63.6 66.7 67.6 66.7 RoE 10.2 14.2 10.6 14.9 17.6 21.6 17.8 21.8 15.9 18.4 16.8 16.6 RoCE 10.2 14.5 10.8 15.1 17.8 21.8 14.2 14.7 13.0 14.5 14.1 14.8 Per share (Rs) EPS 4.3 6.0 4.5 6.2 7.3 8.8 18.9 17.9 23.6 31.7 36.2 41.5 BVPS 41.8 43.1 42.0 41.6 41.0 40.4 116.2 121.3 145.0 198.5 230.8 268.5 Key valuation ratios at MP (X) P/E 19.2 13.5 18.1 13.1 11.2 9.3 39.8 41.9 31.8 23.7 20.8 18.1 P/B 2.0 1.9 1.9 2.0 2.0 2.0 6.5 6.2 5.2 3.8 3.3 2.8 P/Sales 8.2 7.8 7.8 6.8 6.0 5.4 14.5 13.4 12.6 8.5 7.4 6.6 EV/EBITDA 8.8 7.4 7.6 6.5 5.5 4.8 27.3 23.9 23.6 14.9 12.5 10.9 Valuation at TP (X) P/E 24.3 17.1 22.9 16.7 14.3 11.8 42.9 45.3 34.3 25.6 22.4 19.5 P/B 2.5 2.4 2.5 2.5 2.5 2.6 7.0 6.7 5.6 4.1 3.5 3.0 P/Sales 7.1 6.8 6.8 5.9 5.3 4.7 15.7 14.4 13.7 9.2 8.0 7.2 EV/EBITDA 11.6 9.8 10.1 8.6 7.3 6.5 29.2 25.6 25.1 15.9 13.4 11.7
Source: Company, Kotak Institutional Equities estimates
84 KOTAK INSTITUTIONAL EQUITIES RESEARCH Gujarat Pipavav Port Transportation
Exhibit 9: Profit, balance sheet and cash model of GPPL, CY2012-FY2024E (Rs mn)
CY2012 CY2013 15MFY15 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022E FY2023E FY2024E Profit model Net sales 4,160 5,179 8,670 6,600 6,831 6,489 7,020 7,353 7,335 8,419 9,536 10,553 Total operating costs (2,342) (2,611) (3,656) (2,839) (2,645) (2,748) (3,149) (2,888) (3,095) (3,451) (3,802) (4,118) EBITDA 1,819 2,568 5,015 3,761 4,186 3,741 3,872 4,466 4,240 4,968 5,734 6,435 EBITDA margin (%) 43.7 49.6 57.8 57.0 61.3 57.6 55.1 60.7 57.8 59.0 60.1 61.0 Other income 154 168 401 258 354 370 470 509 423 518 522 577 Financial charges (684) (374) (262) (2) (4) (3) (4) (74) (63) (63) (63) (63) Depreciation (549) (756) (833) (964) (1,065) (1,036) (1,128) (1,314) (1,334) (1,409) (1,499) (1,543) Pre-tax profit 740 1,605 4,321 3,054 3,470 3,072 3,210 3,586 3,265 4,014 4,694 5,406 Taxation — — — (1,392) (971) (1,087) (1,153) (662) (1,082) (1,010) (1,181) (1,159) Adjusted PAT 740 1,605 4,321 1,661 2,499 1,985 2,057 2,924 2,184 3,004 3,512 4,247 EPS (Rs) 1.5 3.3 8.9 3.4 5.2 4.1 4.3 6.0 4.5 6.2 7.3 8.8 Balance sheet Shareholders' funds 12,117 14,035 17,908 19,164 20,195 20,141 20,210 20,848 20,321 20,095 19,832 19,517 Equity share capital 4,834 4,834 4,834 4,834 4,834 4,834 4,834 4,834 4,834 4,834 4,834 4,834 Reserves and surplus 7,283 9,201 13,073 14,329 15,361 15,306 15,376 16,014 15,487 15,261 14,997 14,682 Loan funds 3,207 2,819 — — — — — — — — — — Total sources of funds 15,325 16,854 17,908 19,164 20,195 20,141 20,210 20,848 20,321 20,095 19,832 19,517 Total fixed assets 14,039 14,639 14,046 17,309 17,684 17,186 16,354 15,882 15,200 14,902 14,072 13,231 Investments 830 830 830 830 830 830 830 830 830 830 830 830 Cash and bank balances 511 2,023 2,439 2,898 3,522 4,315 5,337 6,495 7,254 7,174 7,980 8,522 Net current assets excl. cash (56) (638) 593 (599) (2,258) (2,187) (1,849) (1,865) (1,956) (1,804) (2,043) (2,261) Total application of funds 15,325 16,854 17,908 19,164 20,195 20,141 20,210 20,848 20,321 20,095 19,832 19,517 Cash flow statement Cash flow from operations 2,621 2,900 4,435 3,894 4,020 3,035 2,879 3,395 3,841 3,810 4,556 5,044 Cash flow from investing activities (1,751) (909) (1,137) (3,648) (1,430) (533) (294) (148) (448) (1,326) (669) (702) Free cash flows 870 1,991 3,298 246 2,590 2,502 2,585 3,248 3,393 2,485 3,887 4,342 Cash flow from financing activities (888) (544) (3,316) (2) (2,272) (2,222) (2,231) (2,503) (2,957) (3,620) (4,197) (5,010) Cash generated /utilised 105 598 (953) 1,036 (661) 851 1,076 81 (126) (87) 806 542 Net cash at start of year 405 511 1,108 155 1,195 534 1,385 108 190 63 (24) 782 Net cash at end of year 511 1,108 155 1,191 534 1,385 2,461 190 63 (24) 782 1,324
Growth (%) Revenue growth 5 24 67 (24) 4 (5) 8 5 (0) 15 13 11 EBITDA growth (1) 41 95 (25) 11 (11) 4 15 (5) 17 15 12 Recurring PAT growth 30 117 169 (62) 50 (21) 4 42 (25) 38 17 21 Key ratios EBITDA margin (%) 43.7 49.6 57.8 57.0 61.3 57.6 55.1 60.7 57.8 59.0 60.1 61.0 Recurring PAT margin (%) 17.8 31.0 49.8 25.2 36.6 30.6 29.3 39.8 29.8 35.7 36.8 40.2 Effective tax rate (%) — — — 46 28 35 36 18 33 25 25 21 Net debt to equity (X) 0 0 (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) BVPS (Rs) 25 29 37 40 42 42 42 43 42 42 41 40 RoE (%) 7 12 27 9 13 10 10 14 11 15 18 22 RoCE (%) 8 12 26 9 13 10 10 14 11 15 18 22
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 85 BUY IRB Infrastructure (IRB) https://ultraviewer.et/en/own Capital Goods MAY 31, 2021 load.html RESULT Sector view: Attractive
Improving visibility on construction segment growth. Results during 4QFY21 were CMP (`): 106 impacted by delays in appointed date and the second Covid wave. However, visibility on Fair Value (`): 145 construction segment revenues has increased on improved inflows during the quarter. We expect near-term performance to remain impacted by the lockdown. With gradual BSE-30: 51,423 opening up of the economy, we expect toll collections at its key projects to rebound sharply. Maintain Fair Value of Rs145 net of higher debt and roll forward. BUY.
IRB Infrastructure Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 106/145/BUY EPS (Rs) 3.3 9.3 11.9 52-week range (Rs) (high-low) 139-58 EPS growth (%) (83.7) 177.6 28.0 Mcap (bn) (Rs/US$) 38/0.6 P/E (X) 31.8 11.4 8.9 ADTV-3M (mn) (Rs/US$) 227/3 P/B (X) 0.5 0.5 0.5 Shareholding pattern (%) EV/EBITDA (X) 7.8 7.1 5.8 Promoters 58.6 RoE (%) 1.7 4.6 5.7 FPIs/MFs/BFIs 15.2/4.8/6.6 Div. yield (%) 3.6 1.4 2.0 Price performance (%) 1M 3M 12M Sales (Rs bn) 53 60 64 Absolute 0.1 (1.7) 75.6 EBITDA (Rs bn) 25 26 30 Rel. to BSE-30 (3.2) (6.1) 10.0 Net profits (Rs bn) 1 3 4
Results impacted by delays in appointed date and second wave of Covid Revenues and EBITDA were marginally lower than our estimates. Construction revenue growth yoy was impacted by delays in appointed date for VM-7 project during the quarter. Toll collection from Mumbai-Pune and Ahmedabad-Vadodara project improved qoq but was impacted by the second wave of coronavirus infections and is down by 15-20% in April-May, 2021. The company expects to get similar extension of concession period as was given during 1QFY21. Toll collection in north-based projects in private InVIT remained impacted due to farmers’ protests. We expect toll revenues of private InVIT to improve sharply on completion of construction during FY2022. Increase in interest and depreciation charges on account of consolidation of Mumbai-Pune project impacted profit performance yoy. Net debt has moved up on MIPL consolidation. Cash flows are not comparable yoy on transfer of assets to private InVIT.
Visibility on construction segment improved on order inflow ramp up Order inflows improved during the quarter and full year order inflow stood at Rs50 bn for the company taking current order book to Rs145 bn. These inflows provide revenue visibility for the next three years which was earlier looking weak on weak inflows. Management expects to maintain 5% share in NHAI’s expected ordering of 4,500 km for FY2022 and is optimistic on getting inflows of Rs50-55 bn during the year from BOT and HAM bids. We build in Rs45/45 bn of order inflows for FY2022/23. We also expect interest expenses to remain high on consolidation of the Mumbai-Pune project and incremental debt on new HAM projects from FY2022 end.
Improved debt maturity profile Teena Virmani The company raised Rs21.85 bn during the quarter via offshore bond issue to diversify sources of capital, to improve maturity profile and to free up credit lines domestically. It is done at an Aditya Mongia effective interest rate of 9.9% including hedging cost. It has already repaid Rs15 bn of corporate debt and plans to repay further Rs2-3 bn during the year. This also enables the company to achieve timely financial closure for recently awarded projects. We expect consolidated debt to start increasing from FY2023 onwards.
Cut FY2022 estimates by 8%, retain BUY with a Fair Value of Rs145 We cut our FY2022 estimates by 8% to bake in the impact of lockdowns and higher than expected debt. Net of roll-forward, our SoTP-based FV remains unchanged at Rs145. [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. IRB Infrastructure Capital Goods
.
Exhibit 1: Revenues and EBITDA were marginally lower than our estimates. Financials are not comparable yoy on transfer of assets to private InVIT IRB (consolidated) - 4QFY21 - key numbers, March fiscal year-ends (Rs mn)
%change 4QFY21 4QFY21E 4QFY20 3QFY21 vs est. yoy qoq FY2021 FY2020 % change FY2022E FY2021 % change Net Sales 16,059 16,367 15,845 15,472 (2) 1 4 52,987 68,522 (23) 60,104 52,987 13 Construction 11,179 11,170 12,014 10,523 0 (7) 6 36,334 50,156 (28) 42,048 36,334 16 BOT 4,880 5,196 3,830 4,949 (6) 27 (1) 16,652 18,366 (9) 18,056 16,652 8 Total Expenses (8,457) - (9,295) (8,272) 2 (27,859) (38,808) (34,049) (27,859) Direct expenses (6,849) - (7,943) (6,840) 0 (21,618) (32,524) - (21,618) Employees cost (518) - (675) (554) (7) (2,618) (2,873) - (2,618) Other expenditure (1,091) - (678) (878) 24 (3,622) (3,411) - (3,622) EBITDA 7,601 7,790 6,549 7,200 (2) 16 6 25,127 29,715 (15) 26,055 25,127 4 Other income 446 369 504 477 (7) 1,889 1,949 (3) 2,042 1,889 8 PBDIT 8,047 8,159 7,053 7,676 5 27,016 31,664 (15) 28,097 27,016 4 Depreciation (1,774) (1,976) (1,054) (1,914) (7) (5,817) (4,683) 24 (7,057) (5,817) 21 EBIT 6,273 6,183 5,999 5,762 1 5 9 21,199 26,981 (21) 21,040 21,199 (1) Interest (4,511) (4,629) (4,104) (4,407) 2 (16,924) (15,643) 8 (14,770) (16,924) (13) PBT 1,762 1,554 1,895 1,355 13 (7) 30 4,275 11,338 (62) 6,269 4,275 47 Tax Expense (496) (513) (767) (468) 6 (1,445) (4,543) (68) (1,966) (1,445) 36 Recurring PAT 1,265 1,041 1,128 887 22 12 43 2,830 6,795 (58) 4,304 2,830 52 Minority interest - - Share of profit or loss from SPV (290) (500) 415 (192) 51 (1,658) 415 (1,050) (1,658) Reported PAT 975 541 1,543 695 (37) 40 1,172 7,210 (83.7) 3,254 1,172 177.6
Key ratios (%) Direct expenses/sales 42.6 50.1 44.2 40.8 47.5 - 40.8 Employees cost/sales 3.2 4.3 3.6 4.9 4.2 - 4.9 Other expenditure/sales 6.8 4.3 5.7 6.8 5.0 - 6.8 EBITDA margin 47.3 47.6 41.3 46.5 47.4 43.4 43.3 47.4 PBDIT margin 50.1 49.9 44.5 49.6 51.0 46.2 46.7 51.0 PBT margin 11.0 9.5 12.0 8.8 8.1 16.5 10.4 8.1 PAT margin 7.9 6.4 7.1 5.7 5.3 9.9 7.2 5.3 Effective tax rate 28.2 33.0 40.5 34.5 33.8 40.1 31.4 33.8 Recurring EPS (Rs) 3.6 3.0 3.2 2.5 8.1 19.3 12.2 8.1
Source: Company, Kotak Institutional Equities estimates
Exhibit 2: Margins for BOT segment were ahead of estimates IRB – key segmental numbers – 4QFY21, March fiscal year-ends (Rs mn)
%change 4QFY21 4QFY21E 4QFY20 3QFY21 vs est. yoy qoq FY2021 FY2020 % change FY2022E FY2021 % change Revenues 16,059 16,367 15,845 15,472 (2) 1 4 52,987 68,522 (22.7) 60,104 52,987 13.4 Construction 11,179 11,170 12,014 10,523 0 (7) 6 36,334 50,156 (27.6) 42,048 36,334 15.7 BOT 4,880 5,196 3,830 4,949 (6) 27 (1) 16,652 18,366 (9.3) 18,056 16,652 8.4 EBITDA 7,601 7,790 6,550 7,200 (2) 16 6 25,127 29,713 (15.4) 26,055 25,127 3.7 Construction 3,142 3,217 3,303 2,728 (2) (5) 15 10,051 13,626 (26.2) 11,353 10,051 12.9 BOT 4,459 4,573 3,247 4,472 (2) 37 (0) 15,075 16,087 (6.3) 14,702 15,075 (2.5) Margins (%) 47.3 47.6 41.3 46.5 47.4 43.4 43.3 47.4 Construction 28.1 28.8 27.5 25.9 27.7 27.2 27.0 27.7 BOT 91.4 88.0 84.8 90.4 90.5 87.6 81.4 90.5
PBT 1,761 - 2,469 1,355 (28.7) 30.0 4,274 11,911 (64.1) Construction 1,758 - 2,639 1,391 (33.4) 26.4 5,433 11,275 (51.8) BOT 3 - (169) (36) (101.7) (108.1) (1,159) 636 (282.2)
PAT 974 - 1,544 695 (36.9) 40.2 1,171 7,209 (83.8) Construction 1,290 - 2,023 1,010 (36.2) 27.7 3,981 8,162 (51.2) BOT (316) - (479) (315) (34.0) 0.2 (2,810) (953) 194.9
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 87 Capital Goods IRB Infrastructure
Exhibit 3: Revenue visibility has improved with recent order inflows Break-up of the order backlog of IRB at end of 4QFY21, March fiscal year-ends (Rs bn)
Order backlog: Rs146 bn
O&M of InVIT projects 47% Ongoing BOT/HAM projects 53%
Source: Company, Kotak Institutional Equities
Exhibit 4: Daily toll collections have seen yoy recovery Trend in daily toll collection for IRB's projects for operational period, March fiscal year-ends (Rs mn)
Daily toll collection
70.0
60.0 59.1 53.3 54.5 50.0 48.5 46.0 45.8 46.1 40.0 38.6 36.5 36.8 32.7 30.0 27.6
20.0 16.4 10.0
0.0 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21
Source: Company, Kotak Institutional Equities
88 KOTAK INSTITUTIONAL EQUITIES RESEARCH IRB Infrastructure Capital Goods
Exhibit 5: Revision in estimates factors in higher debt Change in estimates for IRB (consolidated), March fiscal year-ends (Rs mn)
New estimates Old estimates % revision 2019 2020 2021 2022E 2023E 2022E 2023E 2022E 2023E Income statement Total operating income 66,070 68,522 52,987 60,104 63,684 60,062 62,706 0 2 Construction 44,142 50,156 36,334 42,048 44,413 42,048 43,543 — 2 Toll collection BOT 21,928 18,366 16,652 18,056 19,270 18,014 19,163 0 1 Total operating costs (36,697) (38,808) (27,859) (34,049) (34,084) (34,046) (33,440) 0 2 Construction expenses (34,121) (36,529) (26,282) (30,695) (32,422) (30,695) (31,786) — 2 BOT expenses (2,576) (2,279) (1,577) (3,354) (1,662) (3,351) (1,653) EBITDA 29,373 29,714 25,127 26,055 29,600 26,016 29,266 0 1 Other income 1,955 1,949 1,889 2,042 1,827 2,042 1,825 PBDIT 31,328 31,664 27,016 28,097 31,427 28,058 31,091 Financial charges (11,200) (15,643) (16,924) (14,770) (14,635) (11,550) (11,855) Depreciation (5,395) (4,683) (5,817) (7,057) (7,544) (9,919) (10,562) Pre-tax profit 14,733 11,338 4,275 6,269 9,248 6,589 8,674 (5) 7 Taxation (6,233) (4,543) (1,445) (1,966) (2,630) (1,905) (2,319) PAT 8,500 6,794 2,830 4,304 6,619 4,683 6,355 (8) 4 Share of profit/loss from SPVs 415 (1,658) (1,050) (2,452) (1,050) (2,452) Adjusted PAT 8,500 7,210 1,172 3,254 4,167 3,634 3,903 EPS (Rs) 24.2 20.5 3.3 9.3 11.9 10.3 11.1 Key ratios (%) EBITDA margin 44.5 43.4 47.4 43.3 46.5 43.3 46.7 PAT margin 12.9 10.5 2.2 5.4 6.5 6.0 6.2 RoE 14.2 11.1 1.7 4.6 5.7 5.3 5.4 Yoy growth (%) Revenues 16.0 3.7 (22.7) 13.4 6.0 4.2 4.4 EBITDA 9.6 1.2 (15.4) 3.7 13.6 1.6 12.5 PAT 7.2 (15.2) (83.7) 177.6 28.0 45.3 7.4
Source: Company, Kotak Institutional Equities estimates
Exhibit 6: We largely maintain our fair value to Rs145 per share based on sum-of-the-parts valuation for IRB Sum-of-the-parts analysis of IRB, March fiscal year-ends (Rs/share)
Value of IRB's Value Stake stake Per share (Rs mn) (%) (Rs mn) (Rs) Comment BOT FCFE Ahmedabad Vadodara (9,573) 100 (9,573) (27) One-year forward FCFE Mumbai-Pune 15,376 100 15,376 44 One-year forward FCFE InVIT Equity value 90,000 51 45,900 Discounting is due to a) holding in the form of InVITs units having lower liquidity b) comparable with listed InVIT c) also, in Holding discount (40%) 18,360 line with our valuation of these 9 assets 27,540 78 Other investment in Sindhudurg, InVIT, real estate, VK1 8,386 100 8,386 24 1X book value Construction business 8,274 100 8,274 24 4X one-year forward EV/EBITDA Sum 50,845 142
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 89 Capital Goods IRB Infrastructure
Exhibit 7: Consolidated financials of IRB Infrastructure, March fiscal year-ends, 2013-24E (Rs mn)
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Income statement Total operating income 36,872 37,319 38,475 51,279 58,459 56,941 66,070 68,522 52,987 60,104 63,684 66,623 Construction 25,988 25,364 20,029 30,049 34,675 38,047 44,142 50,156 36,334 42,048 44,413 43,517 Toll collection BOT 10,884 11,955 18,356 21,231 23,784 18,894 21,928 18,366 16,652 18,056 19,270 23,106 Total operating costs (20,540) (19,782) (16,358) (24,676) (27,976) (30,147) (36,697) (38,808) (27,859) (34,049) (34,084) (33,748) Construction expenses (19,126) (18,189) (13,871) (21,694) (24,540) (27,190) (34,121) (36,529) (26,282) (30,695) (32,422) (31,768) BOT expenses (1,414) (1,593) (2,487) (2,983) (3,436) (2,957) (2,576) (2,279) (1,577) (3,354) (1,662) (1,981) EBITDA 16,333 17,537 22,117 26,603 30,483 26,794 29,373 29,714 25,127 26,055 29,600 32,875 Other income 1,301 1,214 1,130 1,271 1,232 1,687 1,955 1,949 1,889 2,042 1,827 2,480 Financial charges (6,153) (7,561) (9,312) (10,639) (13,327) (9,667) (11,200) (15,643) (16,924) (14,770) (14,635) (15,232) Depreciation (4,415) (4,770) (7,071) (8,533) (8,548) (5,440) (5,395) (4,683) (5,817) (7,057) (7,544) (8,924) Pre-tax profit 7,066 6,419 6,865 8,702 9,840 13,373 14,733 11,338 4,275 6,269 9,248 11,199 Taxation (1,530) (1,823) (1,441) (2,306) (2,685) (5,444) (6,233) (4,543) (1,445) (1,966) (2,630) (3,373) Net profit 5,536 4,596 5,424 6,396 7,155 7,930 8,500 6,794 2,830 4,304 6,619 7,826 Share of profit/(loss) from 9 SPVs or ext income — — — — — — — 415 (1,658) (1,050) (2,452) (1,380) Minority interest 31 (5) 6 4 1 — — — — — — — Adjusted PAT 5,567 4,591 5,429 6,400 7,155 7,930 8,500 7,210 1,172 3,254 4,167 6,446 EPS (Rs) 16.7 13.8 15.4 18.2 20.4 22.6 24.2 20.5 3.3 9.3 11.9 18.3 Balance sheet Share holder's funds 32,556 35,607 43,609 48,363 52,716 56,925 63,151 66,829 69,008 71,648 74,915 80,033 Minority interest 1,092 356 351 355 — — — — — — — — Loan funds 87,761 110,841 125,762 156,261 139,631 138,256 165,931 85,240 180,851 149,642 135,159 135,949 Total sources of funds 121,667 146,947 385,391 407,759 449,306 347,787 362,124 290,382 373,946 343,551 330,998 335,350 Net block 104,248 130,411 365,991 390,565 310,826 367,115 367,320 280,657 277,673 274,826 268,567 276,226 Investments 620 145 88 1,483 2,574 9,533 6,532 41,537 48,078 48,078 48,078 48,078 Cash & bank balances 14,710 15,012 15,798 15,008 13,077 12,678 15,603 22,707 23,380 2,868 2,206 3,403 Net current assets (ecl. cash) 2,089 1,379 3,515 703 (4,006) (41,539) (27,330) (54,519) 24,815 17,778 12,148 7,643 Total application of funds 121,667 146,947 385,391 407,759 449,306 347,787 362,124 290,382 373,947 343,551 330,998 335,350
Yoy growth (%) Revenues 17.7 1.2 3.1 33.3 14.0 (2.6) 16.0 3.7 (22.7) 13.4 6.0 4.6 EBITDA 19.3 7.4 26.1 20.3 14.6 (12.1) 9.6 1.2 (15.4) 3.7 13.6 11.1 PAT 11.1 (17.5) 18.2 17.9 11.8 10.8 7.2 (15.2) (83.7) 177.6 28.0 54.7 Key ratios (%) EBITDA margin 44.3 47.0 57.5 51.9 52.1 47.1 44.5 43.4 47.4 43.3 46.5 49.3 PAT margin 15.1 12.3 14.1 12.5 12.2 13.9 12.9 10.5 2.2 5.4 6.5 9.7 Net debt: Equity (X) 2.2 2.7 2.5 2.9 2.4 2.2 2.4 0.9 2.3 2.0 1.8 1.7 RoE 18.2 13.5 13.7 13.9 14.2 14.5 14.2 11.1 1.7 4.6 5.7 8.3 RoCE 9.3 7.5 4.8 3.6 3.9 3.4 4.2 5.1 3.7 3.7 4.3 5.1
Source: Company, Kotak Institutional Equities estimates
90 KOTAK INSTITUTIONAL EQUITIES RESEARCH BUY S H Kelkar and Company (SHKL) https://ultraviewer.et/en/own Speciality Chemicals MAY 31, 2021 load.html RESULT Sector view: Attractive
Nice and steady. SHKL reported 22% yoy growth in revenues (+11% on 2-year CAGR CMP (`): 161 basis) and 73% growth in EBITDA led by 490 bps margin expansion; both like-for-like Fair Value (`): 185 adjusted for consolidation of CFF. SHKL’s revenue growth trajectory and margins have BSE-30: 51,423 improved significantly over the past 2-3 quarters. Consistency in performance can drive further re-rating; it remains to be seen how SHKL navigates through an inflationary RM environment. We raise FY2022-23E EPS by 9-15%, roll-over and revise DCF-based FV to Rs185 (Rs145) implying 15X Jun-23E EPS. BUY. S H Kelkar and Company Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 161/185/BUY EPS (Rs) 9.6 9.9 11.7 52-week range (Rs) (high-low) 168-51 EPS growth (%) 106.7 3.5 17.9 Mcap (bn) (Rs/US$) 23/0.4 P/E (X) 16.8 16.2 13.8 ADTV-3M (mn) (Rs/US$) 102/1 P/B (X) 2.4 2.2 1.9 Shareholding pattern (%) EV/EBITDA (X) 11.1 9.7 8.3 Promoters 58.6 RoE (%) 15.2 14.0 14.8 FPIs/MFs/BFIs 7.1/4.4/0.6 Div. yield (%) 1.1 1.6 2.0 Price performance (%) 1M 3M 12M Sales (Rs bn) 13 15 17 Absolute 12.7 36.7 214.6 EBITDA (Rs bn) 2 3 3 Rel. to BSE-30 9.0 30.5 97.0 Net profits (Rs bn) 1 1 2
4QFY21— Good quarter with 22% yoy growth in revenues on LFL basis Revenues grew 22% yoy (LFL, excluding CFF consolidation) to Rs3.97 bn (KIE: Rs3.73 bn). On a 2-year CAGR basis, revenues grew 11% (LFL). Segmental performance (reported basis) – (1) Fragrance segment grew 51% yoy with 26% yoy growth in domestic business, (2) Flavors segment grew 11% yoy with 47%/83% yoy growth in India/Europe respectively while RoW declined 16% yoy. Reported GM stood at 42.2% (KIE: 42.2%) – down ~220/110 bps yoy/qoq respectively. On LFL basis, GM declined ~160/80 bps yoy/qoq. Gross margin was impacted by global supply chain disruption and RM inflation issues, partially offset by prudent inventory management and better product mix. Gross profit (LFL) grew 17% yoy in 4Q. Reported EBITDA grew 111% yoy to Rs671 mn (KIE: Rs631 mn). EBITDA margin (LFL) expanded ~490 bps yoy on the back of operating leverage in the Fragrance business and cost optimization measures. EBITDA (LFL) was up 73% yoy to Rs548 mn. Recurring net profit stood at Rs401 mn. Total dividend for FY2021 stands at Rs1.75 per share. Consolidated net debt at Rs3.8 bn was down Rs1.12 bn qoq led by robust collections, strong cash flows and normalization of inventory levels. FY2021— (1) Revenues grew 19% yoy (3.1% on LFL basis adjusted for CFF consolidation) to Rs13.2 bn, (2) EBITDA grew 49% yoy (31% on LFL basis) to Rs2.36 bn, (3) recurring EPS was up to Rs9.6 from Rs4.6, (2) Net debt stood at Rs3.8 bn (Mar-21) versus Rs3 bn (Mar-20); net debt was down Rs1.2 bn yoy adjusted for Rs2 bn increase due to consolidation of CFF debt (~Rs0.6 bn) and payment of second and final tranche of CFF acquisition of Rs1.4 bn.
Transitory pressures on demand and profitability Jaykumar Doshi Management noted Covid-led business impact in 1Q, and expects 12% revenue growth for rest of the year with 42-43% GM. Over the medium term, SHKL expects to register 12% yoy revenue growth (market share gains) with gradual GM improvement to 43-45% levels. Nova Sushruta Mishra acquisition will add EUR 1.8 mn sales at 58-59% gross margin. SHKL expects 10% yoy growth in CFF + Nova over the medium term. Fragrances/Flavors segments are currently operating at 55/50% capacity utilization respectively. The company expects 7-8% inflation in input costs in FY2022E, to be managed by prudent inventory buying and price hikes.
We raise FY2022-23E EPS by 9-15%, roll-over and increase FV to Rs185 (from Rs145)
We raise revenue marginally, and EBITDA margin by ~100bps. Roll-over and raise DCF based FV [email protected] Contact: +91 22 6218 6427 to Rs185 (from Rs145 earlier). Maintain BUY given inexpensive valuations.
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Speciality Chemicals S H Kelkar and Company
Exhibit 1: Interim consolidated results of SH Kelkar, March fiscal year-ends (Rs mn)
% Chg. 2-year 4QFY21 4QFY21E 4QFY20 3QFY21 KIE yoy qoq FY2021 FY2020 % chg. 4QFY19 CAGR Net operating revenues 3,970 3,726 2,712 3,780 7 46 5 13,220 11,142 19 2,697 21 Material cost (2,295) (2,155) (1,509) (2,143) 7 52 7 (7,504) (6,310) 19 (1,565) Gross Profit 1,675 1,571 1,203 1,636 7 39 2 5,716 4,833 18 1,133 22 Gross margin (%) 42.2 42.2 44.4 43.3 2 bps -217 bps -111 bps 43.2 43.4 -14 bps 42.0 Employee cost (439) (396) (306) (427) 11 44 3 (1,500) (1,377) 9 (301) Other expenditure (565) (545) (580) (543) 4 (3) 4 (1,857) (1,874) (1) (582) Total expenditure (3,299) (3,095) (2,394) (3,113) 7 38 6 (10,861) (9,561) 14 (2,448) EBITDA 671 631 318 667 6 111 1 2,359 1,582 49 249 64 EBITDA margin (%) 16.9 16.9 11.7 17.7 -3 bps 519 bps -75 bps 17.8 14.2 364 bps 9.2 Other income 82 77 24 51 6 244 62 235 78 200 111 Interest (40) (48) (35) (42) (17) 12 (7) (171) (247) — (61) Depreciation (182) (170) (125) (168) 7 45 8 (615) (515) 19 (79) Pretax profits 532 491 181 507 8 194 5 1,808 898 101 220 55 Tax (131) (131) (61) (157) (0) 115 (17) (464) (253) 83 (19) PAT 401 360 120 350 11 234 15 1,344 645 108 202 41 MI/share of profit from associates (3) (3) 7 4 7 9 (6) Extraordinary items 0 — 0 0 94 (298) Net profit (reported) 399 357 127 354 11 NM 13 1,445 357 305 196 Recurring EPS 2.8 2.5 0.9 2.5 11 214 13 9.6 4.6 106 1.4 44 Income tax rate (%) 24.5 26.6 33.5 30.9 -209 bps -897 bps -637 bps 25.7 28.2 -252 bps 8.5 Costs as a % of net operating revenues Material cost 57.8 57.8 55.6 56.7 -3 bps 216 bps 110 bps 56.8 56.6 13 bps 58.0 Employee cost 11.1 10.6 11.3 11.3 43 bps -21 bps -23 bps 11.3 12.4 -101 bps 11.2 Other expenditure 14.2 14.6 21.4 14.4 -39 bps -715 bps -14 bps 14.0 16.8 -278 bps 21.6 4QFY21 4QFY20 3QFY21 yoy qoq FY2021 FY2020 % chg. 4QFY19 Excluding CFF acquisition Revenue 3,295 2,712 3,083 22 7 11,466 11,142 3 2,697 11 Gross Profit 1,409 1,203 1,355 17 4 5,013 4,833 4 1,133 Gross margin (%) 42.8 44.4 44.0 -160 bps -121 bps 43.7 43.4 34 bps 42.0 EBITDA 548 318 568 73 (4) 2,072 1,582 31 249 48 EBITDA margin (%) 16.6 11.7 18.4 492 bps -180 bps 18.1 14.2 387 bps 9.2
Source: Company, Kotak Institutional Equities
Exhibit 2: Key changes to estimates, S H Kelkar, FY2022-23E
Revised Earlier Change (%) 2022E 2023E 2022E 2023E 2022E 2023E Net revenues (Rs mn) 15,257 16,701 15,052 16,172 1.4 3.3 Revenue growth (%) 15.4 9.5 16.7 7.4 EBITDA (Rs mn) 2,615 3,017 2,566 2,833 1.9 6.5 EBITDA margin (%) 17.1 18.1 17.1 17.5 8 bps 54 bps Recurring net income (Rs mn) 1,401 1,652 1,284 1,443 9.1 14.5 Recurring EPS (Rs/share) 9.9 11.7 9.1 10.2 9.1 14.5
Source: Company, Kotak Institutional Equities estimates
92 KOTAK INSTITUTIONAL EQUITIES RESEARCH S H Kelkar and Company Speciality Chemicals
Exhibit 3: SHKL – consolidated segmental performance
4QFY21 4QFY20 3QFY21 yoy (%) qoq (%) Segmental revenues (Rs mn) Fragrance 3,635 2,401 3,420 51 6 Flavors 330 297 334 11 (1) Total 3,965 2,698 3,754 47 6 Segment PBIT (Rs mn) Fragrance 656 247 487 166 35 Flavors 35 43 70 (19) (50) Total 690 290 556 138 24 Margins (%) Fragrance 18.0 10.3 14.2 775 bps 380 bps Flavors 10.6 14.5 20.8 -392 bps -1026 bps Blended 17.4 10.7 14.8 666 bps 259 bps
Source: Company, Kotak Institutional Equities
Exhibit 4: S H Kelkar: consolidated profit & loss, balance sheet and cash flow, March fiscal year-ends, 2018-24E
2018 2019 2020 2021 2022E 2023E 2024E Profit model (Rs mn) Net operating revenues 10,210 10,436 11,142 13,220 15,257 16,701 18,154 EBITDA 1,581 1,321 1,582 2,359 2,615 3,017 3,406 Other income 257 279 78 235 189 197 237 Interest expense (40) (140) (247) (171) (172) (166) (169) Depreciation (238) (312) (515) (615) (694) (765) (840) Pretax profits 1,560 1,149 898 1,808 1,938 2,282 2,634 Tax (506) (270) (253) (464) (539) (633) (750) Minority Interest/share of profit from associates 16 6 10 10 2 2 2 Recurring PAT 1,070 885 655 1,353 1,401 1,652 1,886 Extraordinary items (129) — (298) 94 — — — Reported net income 942 885 357 1,447 1,401 1,652 1,886 Wtd average no. of shares - FD (mn) 145 145 141 141 141 141 141 Fully diluted EPS (Rs) 7.4 6.1 4.6 9.6 9.9 11.7 13.3 Balance sheet (Rs mn) Total shareholder's equity 8,569 8,634 8,240 9,516 10,564 11,756 13,042 Preference share capital/ CCPS — — — — — — — Total borrowings 1,933 3,611 3,425 4,929 3,329 2,729 2,729 Deferred tax liability 82 179 236 362 362 362 362 Minority interest 0 108 106 30 30 30 30 Total liabilities and equity 10,584 12,531 12,007 14,837 14,284 14,877 16,163 Net fixed assets incl CWIP 3,978 4,858 4,308 7,062 7,344 7,682 7,700 Investments 1,105 1,112 1,104 142 142 142 142 Cash 239 409 656 1,392 678 526 1,402 Net current assets 5,263 6,153 5,940 6,241 6,120 6,527 6,919 Total assets 10,584 12,531 12,007 14,837 14,284 14,877 16,163 Free cash flow (Rs mn) Operating cash flow (excl working capital) 1,246 1,388 1,579 2,607 1,948 2,251 2,521 Working capital (212) (616) 473 (655) 121 (407) (392) Capital expenditure (1,310) (1,424) (447) (1,532) (750) (856) (590) Free cash flow (276) (651) 1,605 419 1,318 988 1,540 Key ratios (%) Sales growth 4.5 2.1 6.1 19.0 15.2 9.4 8.7 EBITDA growth (4.6) (16.5) 19.7 49.1 10.9 15.4 12.9 PAT growth 2.1 (17.3) (26.0) 106.7 3.5 17.9 14.2 EBITDA margin 15.5 12.7 14.2 17.8 17.1 18.1 18.8 Gross margin 44.9 43.5 43.7 43.5 43.2 43.8 44.4
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 93 BUY Infosys (INFO) , (3) https://ultraviewer.et/en/own IT Services MAY 31, 2021 load.html UPDATE Sector view: Attractive
Progressing smoothly—call with Infosys CFO. We interacted with Infosys CFO to get CMP (`): 1,405 insights on trends in talent supply, pricing, and demand. Key takeaways are— (1) Fair Value (`): 1,600 Infosys can manage supply side, (2) talent shortage is a temporary phenomenon for the BSE-30: 51,423 industry, (3) environment allows for right pricing of skills, (4) deal pipeline is up yoy and (5) mega deals are not margin dilutive at the portfolio level. Infosys continues to be our top pick in the sector. Maintain BUY. Infosys Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 1,405/1,600/BUY EPS (Rs) 45.5 52.4 60.9 52-week range (Rs) (high-low) 1,478-675 EPS growth (%) 16.9 15.0 16.2 Mcap (bn) (Rs/US$) 5,987/82.6 P/E (X) 30.9 26.8 23.1 ADTV-3M (mn) (Rs/US$) 11,123/153 P/B (X) 7.8 7.0 6.2 Shareholding pattern (%) EV/EBITDA (X) 20.6 17.9 15.4 Promoters 12.9 RoE (%) 27.3 27.4 28.3 FPIs/MFs/BFIs 49.9/13.2/9.5 Div. yield (%) 1.9 2.1 2.5 Price performance (%) 1M 3M 12M Sales (Rs bn) 1,005 1,192 1,376 Absolute 3.6 12.1 98.6 EBITDA (Rs bn) 279 317 365 Rel. to BSE-30 0.2 7.0 24.4 Net profits (Rs bn) 194 223 259
Talent supply not a growth constraint
Demand fulfillment has not been significantly impacted by the second Covid wave. The company is not leaving significant demand on the table due to lack of talent. Infosys is reasonably positioned on talent supply due to a few factors—
Healthy net addition of 17,248 in FY2021 or headcount growth of 7.1% (Exhibit 1)
Wage hikes announcements in line with industry
Focus on retention of premium talent through promotions, wage incentives
Strong fresher intake of 25K planned for FY2022, 4K or 19% higher than FY2021 Infosys has a robust recruiting engine and good relationships with top engineering colleges in India which ensures availability of good offshore talent. The company honored all campus offers last year although fresher onboarding was delayed.
Attrition has inched back to pre-Covid levels (Exhibit 2). CFO expects attrition to remain high but the pickup will not impact growth. Infosys has managed high attrition in the past and has a strong lateral recruiting engine. Moreover attrition in the crucial senior and client facing roles is low. Majority of attrition is in the manageable lower experience band. If necessary Infosys will undertake off-campus recruitments to augment campus freshers.
Infosys expects talent shortage to be a temporary phenomenon for the industry
A good part of the talent shortage faced by the industry is due to strong pent up demand. It will take a couple of quarters for the supply chain to catch up. The IT industry has a good track Kawaljeet Saluja record of meeting supply side challenges in the past and is capable of handling the current situation. Fresher availability is plenty and adequate to meet heightened industry demand. Cases of unmet demand due to talent shortage will occur in a few cases but are exceptions Sathishkumar S rather than the norm.
We note that headcount addition for the industry in FY2021 was better than expected due to strong hiring in 2HFY21 (Exhibit 3). In fact hiring was at record high in FY2021 for a few companies (Exhibit 4). We believe industry has added considerably more headcount compared to Nasscom’s estimate of 138K.
[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. Infosys IT Services
Pricing environment is favorable for hot skills
Clients are willing to pay a premium for expensive talent provided it adds value to the engagement. Infosys uses right pricing of digital talent as a lever to offset margin impact of higher wage cost. Intention is not to leave money on the table. Focus is on strategic leverage of pricing power rather than tactical. Infosys has programs in place for sales team around themes such as value-based selling and fine tuning of rate cards. Incentive structure of select sales personnel is linked to digital pricing and rate cards.
Deal pipeline is up on yoy basis
Overall demand environment is picking up and is strong is major verticals of BFSI and retail. Pipeline is replenishing well following strong deal closure in FY2021 (Exhibits 5 and 6). Deal pipeline is higher on yoy comparison. Pipeline contains a good mix of deals of all sizes. Pipeline contains digital+ cloud deals and legacy optimization deals.
Margin profile accommodates mega deals; robust processes in place
Infosys does not rely on aggressive pricing to win mega deals. Success in mega deals comes from merit of solution that enables Infosys to qualify for final round of deal discussions where pricing becomes an important decision variable. Mega deals at times may have lower than corporate margins but can be subsidized through higher margins from mid-sized deals. This enables superior growth without compromising margins at an organizational level. Infosys has executed quite a few mega deals in the last three years without impact on margin profile (Exhibit 7). Learning acquired from these deals will be used in subsequent deals.
CFO focuses on managing margin of deal portfolio and not too concerned on individual deal margins. Margins vary across deals. Infosys has lived with deals that have been unprofitable for five years. At the same time several deals have delivered operating efficiencies higher than anticipated.
Infosys has strong processes and teams in place right from deal prospecting to implementation. Deal validation involves rigorous analysis of assumptions. Cost optimization levers put in place are reviewed on quarterly basis to ensure that execution is on track.
Stock has room for upside; maintain BUY
Infosys is well-equipped for industry leading growth in the medium term. Focused execution is visible in revenue growth acceleration (Exhibit 8), recouping of margins and acceleration in deal TCV. We believe the company will be at the forefront of digital transformation opportunities. The company is relatively well positioned from a talent perspective and can manage increase in attrition and war for talent. Maintain BUY at unchanged FV of Rs1600.
Other highlights from the call
US attrition. Attrition among US workforce is higher than average for Infosys and the industry. Talent is not easily fungible in the US. Replacing lost talent is harder compared to India due to constraints such as location.
No massive increase in IT budgets. Budgets are not increasing in double-digits. Clients are cutting legacy costs to fund digital and cloud investments.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 95 IT Services Infosys
Exhibit 1: Healthy net headcount addition of 17,248 or 7.1% headcount growth in FY2021 Net headcount addition, Infosys, 2012-2021, March fiscal year ends
30,000 Infosys net headcount addition
25,000 24,016
19,174 20,000 17,857 17,248 15,782 14,248 15,000
10,000 6,694 6,320 5,000 3,717 3,743
- 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Source: Company, Kotak Institutional Equities
Exhibit 2: Attrition has inched back to pre-Covid levels Quarterly annualized voluntary attrition rate (%), Infosys, 1QFY20-4QFY21
Quarterly annualized voluntary attrition (%) 30
26
2220.2 18.3 18 15.8 15.3 15.2
14 11.7 10 10 7.8
6
2
(2)
Jun-19
Jun-20
Sep-19
Sep-20
Dec-19
Dec-20
Mar-20 Mar-21
Source: Company, Kotak Institutional Equities
96 KOTAK INSTITUTIONAL EQUITIES RESEARCH Infosys IT Services
Exhibit 3: Industry headcount addition in FY2021 is likely considerably higher than Nasscom estimate of 138K Net headcount addition and headcount growth, Indian IT industry, 2004-2021, March fiscal year ends
Incremental headcount addition (000's, RHS) IT industry headcount growth (%, LHS) 30 400 341 328 350 25 27.5 25.4 300 23.9 266 20 22.2 241 228 235 234 234 21.0 227 217 250 203 192 15 175 172 200 160 138 150 10 11.9 104 105 10.5 9.2 9.6 100 5 7.5 6.6 5.8 50 4.7 4.7 4.3 4.6
0 2.7 3.2 -
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019 2020 2021
Source: Nasscom, Kotak Institutional Equities
Exhibit 4: Net headcount addition in FY2021 for cumulative Tier 1 IT is higher than FY2020 despite a tough year Headcount and net addition, Tier 1 Indian IT, March fiscal year ends
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Tier 1 IT TCS 238,583 276,196 300,464 319,656 353,843 387,223 394,998 424,285 448,464 488,649 CTSH 137,700 156,700 171,400 211,500 221,700 260,200 260,000 281,600 292,500 289,500 Infosys 149,994 156,688 160,405 176,187 194,044 200,364 204,107 228,123 242,371 259,619 HCLT 84,319 85,505 94,038 106,107 104,896 115,973 120,081 137,965 150,423 168,977 Wipro 135,920 145,812 146,053 158,217 172,912 181,482 178,763 185,785 197,794 213,080 TechM 74,116 83,109 89,441 103,281 105,432 117,693 112,807 121,082 125,236 121,054 Total 820,632 904,010 961,801 1,074,948 1,152,827 1,262,935 1,270,756 1,378,840 1,456,788 1,540,879 Net addition TCS 39,969 37,613 24,268 19,192 34,187 33,380 7,775 29,287 24,179 40,185 CTSH 33,700 19,000 14,700 40,100 10,200 38,500 (200) 21,600 10,900 (3,000) Infosys 19,174 6,694 3,717 15,782 17,857 6,320 3,743 24,016 14,248 17,248 HCLT 7,273 1,186 8,533 12,069 (1,211) 11,077 4,108 17,884 12,458 18,554 Wipro 13,535 9,892 241 12,164 14,695 8,570 (2,719) 7,022 12,009 15,286 TechM 35,783 8,993 6,332 13,840 2,151 12,261 (4,886) 8,275 4,154 (4,182) Total 149,434 83,378 57,791 113,147 77,879 110,108 7,821 108,084 77,948 84,091 Note: (a) HCLT has June fiscal till 2015; CTSH has December year ends
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 97 IT Services Infosys
Exhibit 5: Infosys won largest ever deals in 2QFY1 and 3QFY21 Quarterly TCV of deal wins (US$ bn), Infosys, 3QFY15-4QFY21
TCV of large deal wins (US$ bn) 8.0 7.1 7.0
6.0
5.0
4.0 3.1 2.8 3.0 2.7 2.0 2.1 1.8 1.7 2.0 1.6 1.6 1.7 1.2 1.0 1.2 1.1 1.0 0.8 0.8 0.7 0.8 0.9 1.0 0.7 0.7 0.7 0.2 0.4
-
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19 Mar-20 Mar-21
Source: Company, Kotak Institutional Equities
Exhibit 6: Strong deal closures in FY2021 lift deal TCV to record highs TCV of large deal wins on ttm basis (US$ bn) and TCV growth (%), Infosys, 3QFY15-4QFY21
TTM TCV of large deal wins (LHS, US$ bn) Growth (yoy %) 14.1 140 13.7 14 120 123 12 100 108 100 105 10 8.9 9.0 80 89 8.7 8.4 83 7.9 80 8.1 60 8 69 6.3 59 5.6 53 57 40 6 4.8 44 38 3.9 4.0 4.2 3.9 20 28 3.3 3.5 4 3.0 2.9 3.0 3.1 2.2 2.3 3.5 - 1.9 1.9 6 2 2 (8) (4) (20) (12) (10) (12) (19) (16) 0 (24) (40)
(32)
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19 Mar-20 Mar-21
Source: Company, Kotak Institutional Equities
98 KOTAK INSTITUTIONAL EQUITIES RESEARCH Infosys IT Services
Exhibit 7: We estimate margin band to sustain in 23-24% range EBIT margin (%), Infosys, 4QFY11-4QFY21
EBIT margin (%) 33
31
29
27
25 24.5 23
21
19
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20 Mar-21
Source: Company, Kotak Institutional Equities
Exhibit 8: Revenue growth has accelerated to 9.6% from Jun-20 lows Revenue growth (yoy c/c %), Infosys, 1QFY16-4QFY21
Infosys YoY c/c revenue growth (%) 15
12 9.6 9
6
3
0
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Mar-16
Mar-17
Mar-18
Mar-19 Mar-20 Mar-21
Source: Company, Kotak Institutional Equities
Exhibit 9: Key assumptions, March fiscal year ends, 2015-2024E
2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E INR/USD rate 61.2 65.7 67.1 64.5 70.1 71.0 74.1 75.0 77.0 78.0 Revenues (US$ mn) 8,711 9,501 10,208 10,939 11,799 12,781 13,562 15,894 17,872 19,683 % growth 5.6 9.1 7.4 7.2 7.9 8.3 6.1 17.2 12.4 10.1 C/c revenue growth (%) 7.7 13.3 8.3 5.8 9.0 9.8 5.0 16.4 12.4 10.1 C/c revenue growth (organic %) 7.7 12.6 8.0 5.8 8.5 8.4 4.1 16.1 12.4 10.1 EBITDA margin (%) 27.9 27.4 27.2 27.0 25.3 24.5 27.8 26.6 26.5 26.3 EBIT margin (%) 25.9 25.0 24.7 24.3 22.8 21.3 24.5 23.6 23.7 23.7
Headcount 176,187 194,044 200,364 204,107 228,123 242,371 259,619 291,299 312,641 342,385 Blended pricing change (USD, %) (2.4) (4.8) (2.7) 4.3 (3.7) (4.1) (2.6) 1.3 0.5 (0.1)
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 99 IT Services Infosys
Exhibit 10: Key operating metrics, 1QFY20-4QFY21
Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Revenues (US$ mn) 3,131 3,210 3,243 3,197 3,121 3,312 3,516 3,613 Revenues (Rs mn) 218,030 226,290 230,920 232,670 236,650 245,700 259,270 263,110 Exchange rate (Re/US$) 69.6 70.5 71.2 72.8 75.8 74.2 73.7 72.8 Revenue by verticals- New classification Financial Services 31.4 31.9 31.5 31.3 31.5 32.0 33.1 33.0 Retail 15.8 15.2 15.3 15.5 14.3 14.9 14.7 14.8 Communications 13.8 13.1 13.0 13.0 13.4 12.6 12.4 12.0 Energy, Utilities, Resources and Servcies 13.0 13.1 12.8 12.9 12.8 12.3 12.5 12.3 Manufacturing 9.6 10.1 10.3 10.1 9.5 9.1 9.3 9.6 Hi Tech 7.7 7.6 7.6 7.9 8.7 9.1 8.2 8.1 Life Sciences 6.1 6.4 6.7 6.4 6.7 6.8 7.1 6.8 Others 2.6 2.6 2.8 2.9 3.1 3.2 2.7 3.4 Revenue by service offerings (%)- NEW Services 94.3 93.6 94.0 93.7 93.0 92.5 92.9 93.3 Products & platforms 5.7 6.4 6.0 6.3 7.0 7.5 7.1 6.7 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Digital 35.7 38.3 40.6 41.9 44.5 47.3 50.1 51.5 Core 64.3 61.7 59.4 58.1 55.5 52.7 49.9 48.5 Revenue by geography (%) North America 61.6 61.4 61.3 61.6 61.5 60.7 61.6 61.6 Europe 23.6 24.1 24.4 24.4 24.0 24.3 24.0 24.4 India 2.3 2.7 2.8 2.6 2.9 3.0 2.6 3.0 ROW 12.5 11.8 11.5 11.4 11.6 12.0 11.8 11.0 Onsite-offshore effort split Onsite 28.7 28.2 27.7 27.6 28.0 26.1 25.2 24.3 Offshore 71.3 71.8 72.3 72.4 72.0 73.9 74.8 75.7 Client metrics Top 5 client contribution to revenues (%) 12.1 11.5 11.3 11.3 11.8 11.3 10.8 10.9 Top 10 client contribution to revenues (%) 20.0 19.2 18.9 18.7 19.3 18.7 18.5 18.3 Top 25 client contribution to revenues (%) 34.9 34.6 34.2 34.1 34.6 34.2 34.6 34.2 Number of active clients 1,336 1,364 1,384 1,411 1,458 1,487 1,562 1,626 New clients added in the period (gross) 112 96 84 84 110 96 139 130 Repeat business % 99 98.1 97.2 95.9 99 98 95.1 93.4 Million $ clients 680 693 705 718 729 745 761 779 10 Million $ clients 228 228 232 234 236 242 246 252 50 Million $ clients 59 61 61 61 60 60 60 59 100 Million $ clients 27 27 28 28 25 30 29 32 Currency-wise revenues (%) USD 67.7 67.5 67.3 67.6 67.1 65.9 66.9 66.2 GBP 5.0 4.9 4.9 5.0 4.7 4.8 4.3 4.7 Euro 11.9 12.4 12.7 12.6 12.8 13.5 13.3 13.7 AUD 7.3 6.9 6.7 6.1 6.8 7.4 6.7 6.6 Utilization measures (IT Services and Consulting) Including trainees 80.3 81.6 80.4 79.0 78.2 80.6 82.3 82.2 Excluding trainees 83.1 84.9 84.4 83.5 81.2 83.6 86.3 87.7 Employee metrics Total Employees (Consolidated) 229,029 236,486 243,454 242,371 239,233 240,208 249,312 259,619 S/W professionals (Consolidated) 215,412 222,851 229,658 228,449 225,167 226,067 234,829 245,037 S/W professionals (IT Services & Consulting) 180,231 186,119 191,252 190,210 NA NA NA NA Sales and support 13,617 13,635 13,796 13,922 14,066 14,141 14,483 14,582 Net additions 906 7,457 6,968 (1,083) (3,138) 975 9,104 10,307 Attrition quarterly annualized (standalone, %) 21.5 19.4 17.6 18.2 NA NA NA NA Attrition quarterly annualized (consolidated, %) 23.4 21.7 19.6 20.7 NA NA NA NA Voluntary Attrition % (Annualized - IT Services) 20.2 18.3 15.8 15.3 11.7 7.8 10.0 15.2 Deal wins TCVs (US$ mn) 2,714 2,847 1,813 1,650 1,744 3,145 7,130 2,111 Large deal wins 13 13 14 12 15 16 22 23
Source: Company, Kotak Institutional Equities
100 KOTAK INSTITUTIONAL EQUITIES RESEARCH Infosys IT Services
Exhibit 11: Condensed consolidated financials for Infosys, March fiscal year-ends (Rs mn), 2017-2024E
2017 2018 2019 2020 2021 2022 2023E 2024E Profit model Revenues 684,850 705,220 826,760 907,910 1,004,730 1,192,130 1,376,150 1,535,240 EBITDA 186,050 190,100 208,890 222,680 278,900 316,805 364,698 404,258 Depreciation (17,030) (18,620) (20,100) (28,940) (32,680) (35,722) (38,423) (41,110) Other income 30,790 31,930 26,130 28,030 22,010 26,795 30,973 34,516 Pretax profits 199,811 203,411 214,921 221,771 268,231 307,879 357,249 397,664 Tax (55,980) (56,740) (57,648) (53,680) (72,050) (82,587) (95,917) (106,829) Profit after tax 143,831 146,671 157,273 168,091 196,181 225,292 261,332 290,835 Diluted earnings per share (Rs) 31.4 32.3 35.4 38.9 45.5 52.4 60.9 67.8 Balance sheet Total equity 689,820 649,230 649,480 654,500 763,510 858,621 968,522 1,065,426 Assets held for sale — 3,240 — — — — — — Minority interest — 10 580 3,940 4,310 4,990 5,670 6,350 Current liabilities 141,660 141,010 190,600 259,560 307,290 331,704 352,011 369,567 Total liabilities and equity 831,480 793,490 840,660 918,000 1,075,110 1,195,315 1,326,203 1,441,343 Cash 226,250 198,180 195,680 186,490 247,140 305,260 375,052 433,287 Other current assets 276,940 299,660 349,500 385,300 418,010 478,734 538,577 590,343 Deferred taxation 3,330 7,410 7,000 7,760 2,230 2,230 2,230 2,230 Goodwill 36,520 22,110 35,400 52,860 60,790 60,790 60,790 60,790 Tangible fixed assets 124,920 144,500 140,470 197,670 204,890 206,250 207,503 212,643 Investments 163,520 121,630 112,610 87,920 142,050 142,050 142,050 142,050 Total assets 831,480 793,490 840,660 918,000 1,075,110 1,195,315 1,326,203 1,441,343 Free cash flow Operating cash flow, excl. working capital 126,080 124,854 139,960 177,180 215,010 234,218 268,781 297,428 Working capital changes (16,240) (1,114) (5,121) (19,380) 8,780 (36,311) (39,536) (34,210) Capital expenditure (27,600) (19,980) (24,450) (33,070) (21,070) (37,082) (39,676) (46,250) Acquisitions — (600) (7,560) (5,110) (14,280) — — — Other income 29,570 31,930 19,170 28,030 17,480 26,795 30,973 34,516 Free cash flow 111,810 135,090 121,999 147,650 205,920 187,620 220,542 251,485 Key ratios and assumptions Revenue growth (US$ terms) (%) 7.4 7.2 7.9 8.3 6.1 17.2 12.4 10.1 Re/US$ rate 67.1 64.5 70.1 71.0 74.1 75.0 77.0 78.0 EBITDA margin (%) 27.2 27.0 25.3 24.5 27.8 26.6 26.5 26.3 EBIT margin (%) 24.7 24.3 22.8 21.3 24.5 23.6 23.7 23.7 RoAE 22.7 21.9 24.2 25.5 27.4 27.5 28.4 28.4 RoIC 45.7 39.3 41.2 40.6 47.6 52.2 55.2 56.3
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 101 ATTRACTIVE Banks India MAY 31, 2021 UPDATE BSE-30: 51,423
To normalize from hereon. A total of 4,376 cases have been admitted under the insolvency process as of FY2021, with only 499 new cases being admitted in FY2021. ~48% of all closed cases till date concluded via liquidation while only ~13% cases were resolved with an average haircut of ~60% on admitted claims. We are likely to see a ramp up in the number of cases being admitted now that the IBC suspension has been lifted, though its impact is likely to be smaller compared to the previous cycle.
New admitted cases drop in FY2021; 43% of cases admitted so far are by financial creditors
In the wake of the Covid pandemic, the IBBI had suspended initiation of insolvency proceedings QUICK NUMBERS against firms that default during the twelve-month period starting on March 25, 2020. This amendment and the disruptions from the lockdown resulted in fewer new cases (only 499 in 499 new cases FY2021 vis-à-vis 1,978 in FY2020) being admitted to NCLT. Out of the total admitted cases admitted to IBC in (4,376) till FY2021, ~57% cases were admitted during FY2020 and FY2021 (Exhibit 1). This was FY2021 against an important outcome as financial creditors still continue to use IBC as a framework of 1,978 in FY2020 resolution. This reflects the increasing pivotal role played by this body in resolution of stressed assets despite the introduction of a new circular from RBI in June 2019 which removed a clause Average resolution that made it mandatory for cases to be admitted to IBC. Out of the total admitted cases, 51% duration is 406 cases were initiated by operational creditors and ~43% by financial creditors (Exhibit 3). Of the days; 79% of 2,653 cases which were closed till March 2021, only ~13% were resolved while ~48% faced ongoing cases have liquidation. The average duration of resolution is 406 days for all resolved cases till FY2021 crossed 270 days (excluding the time excluding the Adjudicating Authority). About 79% of ongoing cases have crossed 270 days. Out of the total admitted cases till FY2021, 41% were from the Financial creditors manufacturing space and 30% from real estate and construction (Exhibit 6). have taken ~60% haircut on cases Haircuts on resolved cases continue to rise; 4QFY21 was at 74% resolved till date Based on available data for all cases resolved under the insolvency resolution process till FY2021, financial creditors have faced a haircut of ~60% on admitted claims Exhibit 7). The amount yielded on resolution as a percentage of liquidation value is high (~180%). The haircut for cases resolved in 4QFY21 was high at ~74%, lower the massive 87% haircut for resolutions in 3QFY21. Barring seven, all other resolutions in 4QFY21 had a haircut of >50%. The overall haircut scenario is not very encouraging.
M B Mahesh, CFA Closure by liquidation remains dominant
Liquidation (accounting for ~48% of all closed cases) remains the most common path of closure for cases under the insolvency resolution process (Exhibit 1). As of FY2021, ~79% of ongoing Nischint Chawathe cases have passed 270 days since admission, with another ~4% crossing 180 days (Exhibit 5). Hence, the number of cases facing liquidation is likely to increase in the next few quarters. Abhijeet Sakhare Bandwidth of insolvency professionals is adequate; usage of information utility is rising
The available number of insolvency professionals is significantly higher (3,504; up by ~195 qoq) Ashlesh Sonje than the number of ongoing cases in the insolvency process (1,723) as on 4QFY21 (Exhibit 12). The number of registered debtors and authenticated records with NeSL (National E-Governance Services Limited) continues to increase (Exhibit 14). We are likely to see a ramp up in the Dipanjan Ghosh number of cases being admitted now that the IBC suspension has been lifted. Further, we might see the utilization of the IBC pre-pack alternative as the government has promulgated an ordinance to allow this scheme.
[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. Banks India
Exhibit 1: Drop in cases admitted under the corporate insolvency resolution process in 2021 Cumulative number of cases under corporate insolvency resolution process, March fiscal year-ends (#)
Admitted Closure Ongoing 5,000 4,376 3,877 4,000
3,000
1,899 2,000 1,838 1,723
1,063 1,000 743 537 37 1 36 206 836 2,039 2,653 - 2017 2018 2019 2020 2021
Source: IBBI, Kotak Institutional Equities
Exhibit 2: Almost half of the CIRPs concluded through liquidation Mode of closure of CIRPs till March 2021 (%)
13 Commencement of liquidation
Appeal/ review/ settled 16 48
Withdrawal under Section 12A
Approval of resolution plan
23
Source: IBBI, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 103 India Banks
Exhibit 3: Operational creditors initiated more resolutions than financial creditors Share of stakeholders initiating the resolution, March fiscal year-ends (#)
Operational creditor Financial creditor Corporate debtors 1,100 1,048
880
660 570
440 879 310 290 515 220 285 7 8 22 111 71 51 188 21 - 2017 2018 2019 2020 2021
Source: IBBI, Kotak Institutional Equities
Exhibit 4: Most cases ending up in liquidation were either non- Exhibit 5: ~80% of ongoing CIRPs have crossed 270 days as there functional and/or a part of BIFR is delay at several places in the resolution process Status of CD (at commencement of CIRP) for CIRPs ending in Timeline of ongoing CIRPs as on March 2021 (%) liquidation, till March 2021 (%)
>270 days 180-270 days 90-180 days <90 days Either in BIFR or non-functional or both Others
12
26 5 4
74 79
Source: IBBI, , Kotak Institutional Equities Source: IBBI, , Kotak Institutional Equities
104 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks India
Exhibit 6: Manufacturing, real estate and construction account for ~70% of CIRPs admitted Sector-wise breakup of CIRPs as on March 2021 (%)
100 16 19 21 20 Others 80 9 10 6 12 Wholesale and 10 13 9 7 retail trade 60 13 17 20 25 Construction 40
Real estate 51 44 20 41 37 Manufacturing 0 Admissions Appeal/ review/ Resolved Commencement of settled/ withdrawn liquidation
Source: IBBI, Kotak Institutional Equities
Exhibit 7: Financial creditors have taken a haircut of ~60% on cases resolved till 4QFY21 Cases that yielded resolution, March fiscal year-ends (Rs bn)
Total Realisation by FCs as % Realisation by FCs as % admitted Liquidation Realisation of their claims of liquidation claims of FCs value by FCs admitted value 3QFY18 55 14 19 34 130 4QFY18 44 14 31 70 215 1QFY19 762 181 429 56 237 2QFY19 423 95 111 26 116 3QFY19 84 30 73 86 247 4QFY19 891 172 506 57 294 1QFY20 315 42 44 14 105 2QFY20 786 148 271 34 183 3QFY20 237 24 29 12 118 4QFY20 391 196 251 64 128 1QFY21 294 46 89 30 194 2QFY21 183 26 38 21 145 3QFY21 609 59 77 13 131 4QFY21 174 35 46 26 131 Total 5,160 1,126 2,026 39 180
Source: IBBI, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 105 India Banks
Exhibit 8: Majority of voluntary liquidations occur because Exhibit 9: Voluntary liquidation cases are time consuming business is non-operational or unviable Status of voluntary liquidation cases, March fiscal year-ends (#) Reasons for voluntary liquidation (%) >24 months 12-24 months 9-12 months Not carrying business operations Commercially unviable 6-9 months 3-6 months <3 months Promotors unable to manage affairs Purpose accomplished/ contract termination
11 18 29 2 3
12
15
9 3 69 29
Source: IBBI, , Kotak Institutional Equities Source: IBBI, , Kotak Institutional Equities
Exhibit 10: About half of the withdrawn CIRPs are Other Full 10 to 100 settlement mn, 25 settlement <10 mn, 48 with Agreement with other creditors, to settle in creditors, 89 future, 25 33 Source: IBBI, Kotak Institutional Equities Source: IBBI, Kotak Institutional Equities 106 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks India Exhibit 12: Pool of insolvency professionals continues to grow Registered insolvency professionals, March fiscal year-ends (#) 4,000 3,504 3,309 3,122 3,182 3,200 2,911 3,009 2,787 2,659 2,460 2,290 2,400 2,037 1,883 1,600 800 - 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 Source: IBBI, Kotak Institutional Equities Exhibit 13: Number of recognized Insolvency professional entities increased to 77 Insolvency professional entities, March fiscal year-ends (#) 100 83 77 80 75 73 73 73 74 67 69 61 60 56 56 54 48 38 40 17 20 3 - 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 Source: IBBI, Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH 107 India Banks Exhibit 14: Pool of available information to insolvency professionals continues to increase Details of information with NeSL, March fiscal year-ends (#) No. of debtors registered (#) No. of records authenticated (#) Value of records authenticated (Rs tn, RHS) 300,000 5.00 5.5 240,000 4.4 180,000 3.3 120,000 2.2 1.18 60,000 0.48 1.1 - 0.0 2019 2020 2021 Source: IBBI, Kotak Institutional Equities 108 KOTAK INSTITUTIONAL EQUITIES RESEARCH ATTRACTIVE Banks India MAY 31, 2021 UPDATE BSE-30: 51,423 Delayed recognition on the cards. The government has further expanded the scope of ECLGS as per the latest announcement. Of the announcements, ECLGS 4.0 allows banks to extend the period of repayment of loans disbursed under ECLGS 1.0 by another 12 months and further disburse additional 10% of loans if required. We believe this would delay recognition and see regional private banks as key beneficiaries. However, the impact of these schemes has been lower-than-expected. ECLGS 4: repayment period extended along with additional disbursements The government has announced the following measures to combat the latest slowdown on QUICK NUMBERS account of the second Covid wave: (1) 100% guarantee cover to loans up to Rs 20mn for setting up on-site oxygen generation plants with interest rate capped at 7.5%, (2) borrowers Only interest who had availed loans under ECLGS 1.0 will get an extension of additional year (first two years payment for an of only interest and three years for repayment of principal and interest), (3) 10% additional additional 12 disbursement to borrowers covered under ECLGS 1.0, (4) eligibility criteria (ceiling of Rs 5 bn of months for loans loan outstanding under ECLGS 3.0) has been relaxed but each borrower would be limited to under ECLGS 1.0 40% of loans outstanding or Rs2 bn, whichever is lower, (5) the scheme has been extended to 2QFY22 or till guarantees for an amount of Rs3 tn are issued. Disbursement under the scheme 10% additional permitted up to 3QFY22. disbursement allowed for loans NPL recognition would get delayed further; regional banks to benefit the most under ECLGS 1.0 Of the various measures offered, the extension for repayment and the additional disbursement City Union, Karur that can be made for existing borrowers who took ECLGS 1 is quite noteworthy. The repayment of principal has already/will begin for a lot of borrowers and hence, this relief should result in Vysya Bank and DCB lower NPL recognition in the near term. have 4-5% of loans disbursed under the In our coverage, we see regional banks like City Union Bank, Karur Vysya Bank and small private scheme to benefit banks like DCB Bank to be key beneficiaries as they have disbursed 3-5% of loans under this scheme. The impact is lower for public banks (1-1.5% of loans). The exposure for the frontline private banks is not high (~2% of loans) and discussions with these large private banks in the past has indicated that the disbursements were also towards borrowers who utilized the scheme to lower the cost of debt and not necessarily to improve cash flows. Overall utilization of various schemes is quite low M B Mahesh, CFA Two unique aspects are noteworthy: (1) the quantum of loans disbursed has remained unchanged at Rs3 tn despite expansion in its scope. We started with ECLGS 1 and then revised Nischint Chawathe to include the large corporates and then further expanded to specific stressed sectors. (2) The pace of utilization of this scheme has been quite low as well. Our initial thesis was that the borrowers and lenders would look to utilize the scheme in a relatively short time post the Abhijeet Sakhare window was opened. We understand, from the press meet, that the scheme still has another ~25% (Rs450 bn) unutilized as of date. Ashlesh Sonje Several public banks who have disclosed their SMA data as of March 2021 or have disclosed slippages under the SME segment for FY2021 show that the stress is quite high. There was also an expectation, especially given our recent experience on these banks’ behavior to such Dipanjan Ghosh schemes, that they would be liberal in their use. However, we see that banks have been quite restrictive in using restructuring or ECLGS schemes. It is quite hard to understand if this behavior represents borrowers or lenders lack of confidence to recover from this slowdown or confidence to come back strongly once the economy returns to normalcy. Kotak Institutional Equities Research [email protected] Mumbai: +91-22-4336-0000 For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. India Banks Exhibit 1: The overall utilization of the scheme has probably been slower-than-anticipated Impairment ratios and ECLGS utilization across banks, March fiscal year-ends, 4QFY21 (%) Restructured advances ECLGS disbursements Total [A+B] Headline ratios [A] [B] Gross NPL (%) Net NPL (%) (% of net advances) (% of net advances) (% of net advances) Large private banks Axis Bank 3.7 1.1 0.3 1.7 2.0 HDFC Bank 1.3 0.4 0.6 2.3 2.9 ICICI Bank 5.0 1.2 0.5 1.9 2.5 Mid and small private banks Bandhan Bank 6.8 3.5 0.7 2.8 3.5 City Union Bank 5.1 3.0 5.2 5.4 10.6 DCB Bank 4.1 2.3 3.7 3.5 7.3 Federal Bank 3.4 1.2 1.1 2.3 3.3 IndusInd Bank 2.7 0.7 1.8 1.6 3.3 KVB 7.9 3.4 1.9 4.2 6.1 RBL Bank 4.3 2.1 1.6 2.1 3.6 Yes Bank 15.4 5.9 1.5 3.3 4.8 Small Finance Banks AU SFB 4.3 2.2 1.9 1.4 3.3 Equitas SFB 3.7 1.6 2.6 — 2.6 Ujjivan SFB 7.1 2.9 5.2 0.4 5.6 PSU banks Bank of Baroda 8.9 3.1 1.3 1.1 2.5 Canara Bank 8.9 3.8 0.9 1.6 2.6 State Bank of India 5.0 1.5 0.7 1.0 1.7 Punjab National Bank 14.7 5.7 2.3 0.9 3.2 Union Bank 15.3 4.5 2.5 0.7 3.2 Notes: (a) 3QFY21 proforma data for PNB and UNBK. (b) ECLGS disbursements based on last available data. (c) Only Covid-related restructuring shown for HDFCB, AXSB and YES. (d) While ECLGS disbursements were low for DCBB, sanctions were relatively high at ~Rs21 bn (~8.5% of advances). Source: Company, Kotak Institutional Equities 110 KOTAK INSTITUTIONAL EQUITIES RESEARCH Quant Research India MAY 31, 2021 UPDATE BSE-30: 51,423 AlphaBet: All-Season underperforms marginally. The concentrated All-Season portfolio underperformed marginally while the benchmark reached a new all-time high on May 28, 2021. None of the concentrated single factor portfolios beat the index in May while all the broad versions of single-factor portfolios outperformed the index, except low-volatility. We add APNT, WPRO and TATA to the concentrated All-Season portfolio, replacing HUVR, TECHM and TATA. Concentrated All-Season underperforms while market leaves Covid-19 worries behind Momentum was the best performing single factor (Exhibit 1). However, the returns of all the QUICK NUMBERS single-factor portfolios were in a narrow band around the index returns. May was not a month for concentration as all concentrated single-factor portfolios underperformed the index. The Conc. All-Season monthly return figures for the single-factor portfolios hides the underlying dynamics of the underperforms by return. The decoupling of low-volatility and momentum continued to play out (Exhibit 3) with 2.4% the active returns of these two factors displaying negative correlation in May. The flagship concentrated All-Season portfolio underperformed the index by 2.4%. However, it has +7.1% against index outperformed the index by 7.1% since inception, beating the index in eight out of fifteen since inception months since inception (Exhibit 2). HUVR was a drag on the performance in May. The anti- factor portfolio, which consists of stocks with the worst factor scores, also underperformed the Has outperformed index by 1%. the index in eight out of fifteen Sentiment remains bullish months since inception The net upgrades in May returned to positive (Exhibit 5) after being negative in April. The aggregate consensus on stocks in the Nifty index continues to remains bullish (Exhibit 4). Compared to the consensus average rating of ~4.2 for stocks in the Nifty Index, KIE analysts have an average rating of ~3.6 for the stocks in the index on a scale of 1-5 where 5 is a BUY and 1 is a SELL. Nifty at an all-time high Nifty index reached an all-time high on May 28, 2021. Historically, all-time highs are followed by periods of decent returns. Since 2004, Nifty has formed new all-time highs close to 350 times. The average 10-day, 22-day and 66-day returns after reaching the all-time high are 30 bps, 80 bps and 2.9% respectively. The median 10-day, 22-day and 66-day returns after reaching the all-time high are 90 bps, 70 bps and 3.4% respectively. Changes to the portfolio June 2021 All-Season portfolio consists of Asian Paints (APNT), Tata Consultancy Services (TCS), Wipro Ltd (WPRO), Infosys (INFO) and Tata Steel (TATA). This portfolio is effective from the close of May 31, 2021. HUVR, TECHM and TTAN are the stocks going out of the concentrated All- Season portfolio, being replaced by APNT, WPRO and TATA. APNT saw significant rating upgrades in May which improved their multi-factor score. On the other hand, the extremely strong returns of TATA have boosted its momentum score and forced its entry into the portfolio Anurag Singh despite its relatively higher volatility. WPRO gets selected on the basis of its higher than average momentum and lower than average volatility. We show the factor scores of these stocks and their position within the universe in Exhibit 6. The factor portfolios are provided in Exhibits 7-14. The anti-factor portfolio, which contains the stocks with the worst factor scores, has Tata Consumer Products (TATACONS), UPL Limited (UPLL), Bajaj Finserv (BJFIN), IOCL (IOCL) and NTPC (NTPC). AlphaBet recommendations can differ from KIE analyst recommendations. [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. India Quant Research PERFORMANCE UPDATE: NIFTY PROCEEDS TO ANOTHER ALL TIME HIGH The All-Season portfolio underperformed the benchmark in May 2021 as the index proceeded to an all-time high value on May 28 (Exhibit 1). Since inception, the concentrated All-Season portfolio has outperformed the index by 7% and in eight out of fifteen months (Exhibit 2). The concentrated versions of all the single-factor portfolios underperformed the index marginally and the broad version of all the single-factor portfolios, except low- volatility, outperformed the index. The anti-factor portfolio, which takes exposure to low-momentum, high-volatility, lower quality and worsening sentiment stocks, also underperformed the index by close to 1%. It has outperformed the index by ~79% since inception. We believe that the long-term returns of this portfolio will lag the benchmark. Exhibit 1: The All-Season portfolio underperformed the index by 2.4% in May Performance of single factor and All-Season portfolios in May 2021 and since inception (28 February, 2020) May 2021 returns (%) Returns since inception (%) Active May returns (%) Active returns since inception (%) Nifty Index 5.5 37.8 NA NA Concentrated All-season 3.1 44.9 (2.4) 7.1 Broad All-Season 5.5 39.7 0.1 1.9 Concentrated fundamental 4.0 31.3 (1.5) (6.5) Broad fundamental 5.8 41.7 0.3 3.9 Concentrated low volatility 5.2 10.6 (0.3) (27.2) Broad low volatility 4.4 40.0 (1.1) 2.2 Concentrated momentum 5.7 0.4 0.2 (37.4) Broad momentum 6.2 35.5 0.7 (2.3) Concentrated sentiment 4.4 121.9 (1.1) 84.0 Broad sentiment 6.4 63.4 1.0 25.6 Concentrated anti-factor 4.4 116.9 (1.1) 79.1 Broad anti-factor 5.9 105.9 0.5 68.1 Source: Bloomberg, Kotak Institutional Equities Exhibit 2: The concentrated All-Season portfolio has outperformed the index in eight out of fifteen months since inception The monthly total returns of the concentrated All-Season portfolio and the index since Feb 2020 Concentrated All-Season Nifty Index 20% 15% 10% 5% 0% -5% Jul-20 Jan-21 Jun-20 Oct-20 Feb-21 Apr-20 Sep-20 Apr-21 Dec-20 Nov-20 Mar-20 Mar-21 Aug-20 May-20 -10% May-21 -15% -20% -25% Source: Bloomberg, Kotak Institutional Equities 112 KOTAK INSTITUTIONAL EQUITIES RESEARCH Quant Research India Exhibit 3: Decoupling of momentum and low-volatility stocks continues to play out The correlation of active returns of the concentrated single-factor and All-Season portfolios in May 2021 Fundamental Momentum Sentiment Low-volatility Multi-factor Fundamental 1.0 (0.3) (0.2) 0.5 0.1 Momentum 1.0 0.3 (0.5) (0.1) Sentiment 1.0 0.1 0.7 Low-volatility 1.0 0.6 Multi-factor 1.0 Source: Bloomberg, Kotak Institutional Equities The street has remained extremely bullish, as we have highlighted in our previous month- end updates. The average sell-side rating on the stocks in the Nifty index remains quite high (Exhibit 4). Compared to the consensus average rating of ~4.2 for stocks in the Nifty Index, KIE analysts have an average rating of ~3.6 for the stocks in the index. We track the average of the consensus sell-side rating on each stock in the Nifty index (where a rating of 1 indicates SELL and a rating of 5 indicates a BUY). Exhibit 4: Street sentiment continues to remain extremely bullish Average of the consensus sell-side rating on each stock in Nifty at each month-end (with 1 being the most bearish, and 5 being the most bullish) Nifty Index Average consensus sell-side rating (rhs) 18,000 4.50 16,000 4.30 14,000 4.10 3.90 12,000 3.70 10,000 3.50 8,000 3.30 6,000 3.10 4,000 2.90 2,000 2.70 0 2.50 Jul-06 Jul-11 Jul-16 Jan-09 Jan-14 Jan-19 Jun-04 Jun-09 Jun-14 Jun-19 Oct-07 Oct-12 Oct-17 Feb-06 Feb-11 Feb-16 Feb-21 Apr-05 Sep-05 Apr-10 Sep-10 Apr-15 Sep-15 Apr-20 Sep-20 Dec-06 Dec-11 Dec-16 Nov-04 Nov-09 Nov-14 Nov-19 Mar-08 Mar-13 Mar-18 Aug-08 Aug-13 Aug-18 May-07 May-12 May-17 Source: Bloomberg, Kotak Institutional Equities We also show the net EPS estimate upgrades percentage for stocks in the Nifty index. This is defined as number of EPS estimate upgrades over the past thirty days minus the number of EPS estimate downgrades over the same period, divided by the number of changes in EPS estimates over the same period. We show this for both FY1 and FY2 (Exhibit 5). The net upgrades for both FY1 and FY2 were marginally positive in May. KOTAK INSTITUTIONAL EQUITIES RESEARCH 113 India Quant Research Exhibit 5: Stocks in the Nifty index saw a net upgrade for FY1 and FY2 in May 2021 Percentage of net EPS estimate upgrades ([#upgrades - #downgrades] /[#upgrades + #downgrades]) for FY1 and FY2 Net upgrade % FY1 Net upgrade % FY2 80 60 40 20 0 -20 Jul-10 Jul-15 Jul-20 Jan-08 Jan-13 Jan-18 Jun-08 Jun-13 Jun-18 Oct-06 Feb-10 Oct-11 Feb-15 Oct-16 Feb-20 Apr-09 Sep-09 Apr-14 Sep-14 Apr-19 Sep-19 Dec-05 Dec-10 Dec-15 Dec-20 Nov-08 Nov-13 Nov-18 Mar-07 Mar-12 Mar-17 Aug-07 Aug-12 Aug-17 May-06 May-11 May-16 -40 May-21 -60 -80 -100 Source: Bloomberg, Kotak Institutional Equities 114 KOTAK INSTITUTIONAL EQUITIES RESEARCH Quant Research India JUNE 2021 PORTFOLIOS The stocks selected in the concentrated All-Season portfolio for the June 2021 portfolio are Asian Paints (APNT), Tata Consultancy Services (TCS), Wipro Ltd (WPRO), Infosys Limited (INFO) and Tata Steel (TATA). APNT, WPRO and TATA replace HUVR, TECHM and TTAN. This portfolio will be effective from the close of May 31, 2021. APNT saw significant rating upgrades in May which improved their multi-factor score. On the other hand, the extremely strong returns of TATA have boosted its momentum score and forced its entry into the portfolio despite its relatively higher volatility. WPRO gets selected on the basis of its higher than average momentum and lower than average volatility. Exhibit 6 shows the top half of the Nifty50 Index, as sorted by the combined multi-factor score. The tickers in red (top five) are a part of the concentrated All-Season portfolio. Exhibit 6: Three out of five constituents of the All-Season portfolio get replaced Top half of Nifty50 Index, as sorted by combined factor score; stock names in red are part of the May 2021 concentrated All-Season portfolio Stock name Sentiment Fundamental Momentum Low volatility Multi-factor Asian Paints Ltd 2.1 0.6 (0.5) 1.3 0.9 Tata Consultancy Services Ltd 0.3 0.5 (0.1) 1.0 0.4 Infosys Ltd 0.1 0.5 0.4 0.6 0.4 Wipro Ltd 0.1 0.1 0.6 0.6 0.4 Tata Steel Ltd 0.1 (0.1) 2.2 (0.7) 0.4 HDFC Bank Ltd 0.1 0.8 (0.3) 0.7 0.3 Power Grid Corp of India Ltd (0.0) 0.4 (0.2) 1.1 0.3 Britannia Industries Ltd 0.1 0.6 (0.6) 1.0 0.3 Tech Mahindra Ltd 0.1 0.3 0.1 0.6 0.3 HCL Technologies Ltd 0.1 0.1 (0.0) 0.7 0.2 Nestle India Ltd (0.1) 0.4 (0.9) 1.5 0.2 Divi's Laboratories (0.1) 0.0 0.2 0.9 0.2 ITC Ltd 0.1 1.0 (0.8) 0.3 0.2 Reliance Industries Ltd 1.0 (0.4) (0.4) 0.3 0.1 Hindustan Unilever Ltd (1.1) 0.3 (0.4) 1.7 0.1 Housing Development Finance Corp Ltd 0.6 (0.3) (0.2) 0.2 0.1 Bajaj Auto Ltd (0.0) 0.4 (0.4) 0.7 0.1 Titan Co Ltd 0.1 (0.3) (0.0) 0.2 (0.0) HDFC Life Insurance 0.1 (0.1) (0.3) 0.6 0.1 Dr Reddy's Laboratories Ltd (0.2) (0.4) (0.3) 1.0 0.0 Cipla Ltd/India (0.1) (0.2) (0.2) 0.7 0.0 Grasim Industries Ltd 0.1 (0.6) 0.9 (0.4) (0.0) SBI Life Insurance (0.2) (0.0) (0.5) 0.3 (0.1) Coal India Ltd (0.0) 1.4 (1.0) (0.3) 0.0 Larsen & Toubro Ltd (0.0) 0.1 (0.4) 0.2 (0.0) Sun Pharmaceutical Industries Ltd 0.8 (0.5) (0.3) (0.1) (0.0) Source: Bloomberg, Kotak Institutional Equities We also show the portfolio for the broad and concentrated All-Season portfolio, along with the different single factor portfolios in Exhibits 7-14. KOTAK INSTITUTIONAL EQUITIES RESEARCH 115 India Quant Research Exhibit 7: APNT, WPRO and TATA new entrants to the concentrated All-Season portfolio The concentrated All-Season portfolio, as of May 31, 2021 Stock name Portfolio Weight KIE analyst recommendation Asian Paints Ltd 27.2% REDUCE Tata Consultancy Services Ltd 23.1% REDUCE Wipro Ltd 22.5% ADD Infosys Ltd 16.4% BUY Tata Steel Ltd 10.8% BUY Source: Bloomberg, Kotak Institutional Equities Exhibit 8: Broader sector representation in the broad All-Season portfolio The broad All-Season portfolio, as of May 31, 2021 Stock name Portfolio Weight KIE analyst recommendation Hindustan Unilever Ltd 12.2% ADD Nestle India Ltd 9.8% ADD Asian Paints Ltd 8.1% REDUCE Power Grid Corp of India Ltd 7.3% BUY Tata Consultancy Services Ltd 6.8% REDUCE Wipro Ltd 6.7% ADD HDFC Bank Ltd 6.6% ADD Britannia Industries Ltd 6.4% ADD HCL Technologies Ltd 6.4% ADD Divi's Laboratories 5.9% REDUCE ITC Ltd 5.9% BUY Tech Mahindra Ltd 5.5% BUY Infosys Ltd 4.9% BUY Housing Development Finance Corp Ltd 4.5% BUY Tata Steel Ltd 3.2% BUY Source: Bloomberg, Kotak Institutional Equities Exhibit 9: The momentum portfolio is financials and metals focused The concentrated momentum portfolio, as of May 31, 2021 Stock name Portfolio Weight KIE analyst recommendation Tata Steel Ltd 25.0% BUY JSW Steel Ltd 23.7% REDUCE Hindalco Industries Ltd 19.3% BUY Bajaj Finance Ltd 18.4% SELL Tata Motors Ltd 13.5% SELL Source: Bloomberg, Kotak Institutional Equities 116 KOTAK INSTITUTIONAL EQUITIES RESEARCH Quant Research India Exhibit 10: Broad momentum portfolio is better diversified across sectors The broad momentum portfolio, as of May 31, 2021 Stock name Portfolio Weight KIE analyst recommendation Wipro Ltd 11.9% ADD HCL Technologies Ltd 11.3% ADD UltraTech Cement Ltd 10.2% REDUCE Infosys Ltd 8.6% BUY Tata Consumer Products Ltd 8.2% ADD Adani Ports & Special Economic Zone Ltd 7.9% ADD Grasim Industries Ltd 6.5% ADD State Bank of India 5.9% BUY Tata Steel Ltd 5.7% BUY JSW Steel Ltd 5.4% REDUCE Bajaj Finserv Ltd 5.0% ADD Hindalco Industries Ltd 4.4% BUY Bajaj Finance Ltd 4.2% SELL Tata Motors Ltd 3.1% SELL IndusInd Bank Ltd 1.9% ADD Source: Bloomberg, Kotak Institutional Equities Exhibit 11: Low-volatility portfolio remains stable The concentrated low volatility portfolio, as of May 31, 2021 Stock name Portfolio Weight KIE analyst recommendation Hindustan Unilever Ltd 27.6% ADD Nestle India Ltd 22.2% ADD Asian Paints Ltd 18.3% REDUCE Power Grid Corp of India Ltd 16.5% BUY Tata Consultancy Services Ltd 15.5% REDUCE Source: Bloomberg, Kotak Institutional Equities Exhibit 12: The broad low-volatility portfolio has a defensive tilt, as expected The broad low volatility portfolio, as of May 31, 2021 Stock name Portfolio Weight KIE analyst recommendation Hindustan Unilever Ltd 11.2% ADD Nestle India Ltd 9.0% ADD Cipla Ltd/India 7.6% BUY Asian Paints Ltd 7.4% REDUCE Power Grid Corp of India Ltd 6.7% BUY Dr Reddy's Laboratories Ltd 6.4% SELL Tata Consultancy Services Ltd 6.3% REDUCE Wipro Ltd 6.1% ADD HDFC Bank Ltd 6.0% ADD Bajaj Auto Ltd 5.9% BUY Britannia Industries Ltd 5.9% ADD HCL Technologies Ltd 5.8% ADD Bharti Airtel Ltd 5.8% BUY Divi's Laboratories 5.4% REDUCE Infosys Ltd 4.5% BUY Source: Bloomberg, Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH 117 India Quant Research Exhibit 13: Financials and auto stocks make the bulk of concentrated sentiment portfolio The concentrated sentiment portfolio, as of May 31, 2021 Stock name Portfolio Weight KIE analyst recommendation Asian Paints Ltd 30.0% REDUCE Hero MotoCorp Ltd 30.0% REDUCE Bajaj Finance Ltd 18.3% SELL Tata Motors Ltd 13.5% SELL IndusInd Bank Ltd 8.2% ADD Source: Bloomberg, Kotak Institutional Equities Exhibit 14: Broad sector allocations in the broad sentiment portfolio The broad sentiment portfolio, as of May 31, 2021 Stock name Portfolio Weight KIE analyst recommendation Asian Paints Ltd 13.3% REDUCE Tata Consultancy Services Ltd 11.3% REDUCE Wipro Ltd 11.0% ADD Hero MotoCorp Ltd 8.1% REDUCE Reliance Industries Ltd 7.6% ADD Housing Development Finance Corp Ltd 7.4% BUY Sun Pharmaceutical Industries Ltd 6.9% ADD Grasim Industries Ltd 6.1% ADD State Bank of India 5.5% BUY Eicher Motors Ltd 5.4% SELL Tata Steel Ltd 5.3% BUY Bajaj Finance Ltd 3.9% SELL UPL Ltd 3.6% SELL Tata Motors Ltd 2.8% SELL IndusInd Bank Ltd 1.7% ADD Source: Bloomberg, Kotak Institutional Equities 118 KOTAK INSTITUTIONAL EQUITIES RESEARCH March 2021: Results calendar 119 Mon Tue Wed Thu Fri Sat 31-May 1-Jun 2-Jun 3-Jun 4-Jun 5-Jun Aurobindo Pharma Gujarat Gas Motherson Sumi Systems GIC Bank of India Interglobe Aviation Honeyw ell Auto ITC Muthoot Finance Gujarat State Petronet Bharat Forge Narayana Hrudaya PVR Punjab National Bank Varroc Engineering 7-Jun 8-Jun 9-Jun 10-Jun 11-Jun 12-Jun MRF TeamLease Services J K Cements New India Assurance 14-Jun 15-Jun 16-Jun 17-Jun 18-Jun 19-Jun CESC Timken India Source: NSE, Kotak Institutional Equities India Daily Summary Daily Summary India KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK - May 31, 2021 KOTAK INSTITUTIONAL EQUITIES RESEARCH 119 Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK 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 28-May-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 744 725 (3) 127 1.8 171 38 42 48 (2) 10 16 20 18 15 11.3 9.8 8.4 3.0 2.7 2.4 16.4 15.9 16.3 1.5 1.4 1.6 20 Apollo Tyres ADD 224 240 7 142 2.0 638 13 15 19 57 17 24 17 15 12 6.6 6.1 5.0 1.2 1.2 1.1 7.8 8.3 9.5 1.6 1.2 1.2 26 Ashok Leyland REDUCE 124 125 1 365 5.0 2,936 (1) 2 6 (207) 239 254 NM 68 19 #### 24.2 11.2 5.3 5.1 4.3 NM 7.6 24 0.0 0.4 1.6 39 Bajaj Auto BUY 4,200 4,600 10 1,215 17 289 157 199 239 (11) 27 20 27 21 18 20.2 15.5 12.4 4.8 4.4 4.0 20 22 24 3.3 2.9 3.4 38 Balkrishna Industries SELL 2,191 1,500 (32) 424 5.8 193 61 67 79 23 10 19 36 33 28 22.8 20.1 16.9 7.1 6.1 5.2 21 20.0 20 0.8 0.9 0.9 17 Bharat Forge SELL 678 375 (45) 315 4.4 466 (5) 11 19 (164) 319 76 NM 64 36 49.9 29.0 20.0 6.3 5.9 5.2 NM 9.5 15.2 0.0 0.4 0.4 19 CEAT ADD 1,319 1,500 14 53 0.7 40 114 98 126 82 (15) 29 12 14 10 6.8 6.9 5.8 1.6 1.5 1.3 14.9 11.4 13.3 1.4 1.4 1.8 5 Eicher Motors SELL 2,638 2,200 (17) 721 10.0 272 49 75 103 (26) 51 38 53 35 26 36.1 26.4 20.1 7.4 6.4 5.4 15.0 19.3 23 0.6 0.5 0.5 33 Endurance Technologies SELL 1,485 1,260 (15) 209 2.9 141 38 49 62 (7) 30 27 40 30 24 19.7 15.1 12.3 5.9 5.0 4.3 14.6 16.6 17.9 0.4 0.5 0.7 3 Escorts BUY 1,162 1,700 46 118 2.2 101 86 91 101 58 6 11 13 13 11 9.2 8.4 7.1 2.2 1.9 1.7 16.2 14.9 14.6 0.6 1.2 1.3 23 - Exide Industries REDUCE 192 180 (6) 163 2.3 850 9 10 12 (10) 16 12 22 19 17 12.0 10.1 9.1 2.4 2.2 2.0 11.5 12.3 12.8 1.0 2.3 2.3 10 May 31, 2021 Hero Motocorp REDUCE 2,991 2,900 (3) 598 8.2 200 148 195 211 (7) 32 8 20 15 14 12.2 9.9 8.9 3.9 3.6 3.2 20 24 24 3.5 3.9 4.2 42 Mahindra CIE Automotive SELL 193 150 (22) 73 1.0 378 3 8 15 (70) 178 88 69 25 13 16.9 8.6 6.9 1.5 1.4 1.3 2.2 5.9 10.4 ——— 1 Mahindra & Mahindra BUY 846 975 15 1,052 14.5 1,138 29 39 53 22 34 36 29 22 16 14.7 13.6 10.4 2.7 2.5 2.2 9.4 11.9 14.5 1.0 0.7 0.9 54 Maruti Suzuki SELL 6,970 5,600 (20) 2,105 29.1 302 140 213 266 (25) 52 25 50 33 26 31.1 18.8 14.6 4.1 3.7 3.4 8.5 12.0 13.6 0.6 0.8 1.0 82 Motherson Sumi Systems ADD 235 200 (15) 743 10.3 3,158 4 9 11 (1) 139 23 64 27 22 15.3 7.9 6.3 6.0 4.6 3.6 9.7 19.3 18.3 0.4 0.6 0.7 47 MRF SELL 83,382 78,000 (6) 354 4.9 4 3,155 3,735 4,321 (6) 18 16 26 22 19 10.8 9.4 7.8 2.6 2.3 2.1 10.4 11.1 11.5 0.1 0.1 0.2 29 Schaeffler India SELL 5,287 4,350 (18) 165 2.3 31 93 153 191 (21) 65 25 57 35 28 28.5 18.9 15.1 5.3 4.7 4.2 9.5 14.4 16.1 ——— 1 SKF SELL 2,354 1,890 (20) 116 1.6 49 60 75 90 3 25 19 39 31 26 26.5 22.0 18.0 7.4 6.2 5.2 19.0 20.0 20.0 4.6 0.5 0.6 1 Tata Motors SELL 319 205 (36) 1,220 15.7 3,829 (4) 16 25 82 541 52 NM 19 13 6.8 4.9 4.1 2.2 2.0 1.7 NM 10.7 14.4 ——— 282 Timken SELL 1,331 830 (38) 100 1.4 75 22 36 43 (34) 65 20 61 37 31 35.4 22.8 18.9 7.3 6.2 5.3 11.1 18.1 18.4 0.1 0.1 0.1 1 TVS Motor SELL 620 425 (31) 294 4.1 475 13 20 26 (1) 55 28 48 31 24 20.7 15.9 13.1 7.1 6.1 5.2 15.7 21 23 0.5 0.8 1.0 25 Automobiles & Components Cautious 10,736 147.5 14 84 31 46 25 19 14.1 10.2 8.3 3.7 3.3 2.9 8.1 13.3 15.4 1.0 1.0 1.2 798 Banks AU Small Finance Bank SELL 995 800 (20) 311 4.3 312 39 27 34 75 (29) 24 26 36 29 ——— 5.3 4.6 4.0 22.9 12.9 13.9 ——— 29 Axis Bank BUY 740 810 9 2,267 31.3 3,064 22 48 58 273 122 21 34 16 13 ——— 2.4 2.1 1.8 7.1 13.6 14.6 0.4 1.0 1.2 165 Bandhan Bank ADD 304 350 15 489 6.7 1,611 14 23 28 (27) 65 26 22 13 11 ——— 3.1 2.5 2.0 13.5 19.1 20.0 — 1— 1— 42 Bank of Baroda ADD 84 95 13 434 6.0 5,178 2 16 20 35 890 29 52 5 4 ——— 0.8 0.7 0.6 1.2 11.0 12.8 0.0 3.8 4.9 64 Canara Bank REDUCE 162 150 (7) 267 3.7 1,647 16 17 20 172 7 21 10 10 8 ——— 0.8 0.7 0.7 4.6 4.5 5.3 ——— 47 City Union Bank REDUCE 174 160 (8) 128 1.8 739 8 8 11 24 (2) 45 22 22 15 ——— 2.5 2.4 2.1 10.6 9.6 12.7 1.4 0.9 1.3 8 DCB Bank BUY 104 150 44 32 0.4 311 11 12 17 (1) 8 43 10 9 6 ——— 1.0 1.0 0.8 10.0 9.9 12.8 1.0 1.1 1.6 3 Equitas Holdings BUY 93 100 8 32 0.4 342 8 8 16 30 5 97 12 11 6 ——— 1.1 1.0 0.9 9.2 8.8 15.4 ——— 2 Equitas Small Finance Bank ADD 61 65 6 70 1.0 1,139 3 4 5 46 21 22 18 15 12 ——— 2.1 1.8 1.6 12.5 12.8 13.7 ——— 2 Federal Bank BUY 89 100 12 177 2.4 1,996 8 9 13 3 9 54 11 10 7 ——— 1.2 1.1 1.0 10.4 10.3 14.4 0.8 1.8 2.7 31 HDFC Bank ADD 1,503 1,650 10 8,296 114.5 5,513 56 65 75 18 15 16 27 23 20 ——— 4.1 3.7 3.3 16.6 16.5 17.0 0.0 1.1 1.3 201 ICICI Bank BUY 643 710 10 4,452 61.4 6,917 23 33 36 91 41 10 27 20 18 ——— 3.2 2.9 2.6 12.3 14.6 14.3 0.3 1.0 1.1 196 IndusInd Bank ADD 1,019 1,050 3 788 10.9 773 37 65 85 (41) 73 31 27 16 12 ——— 1.9 1.7 1.5 7.6 11.1 13.1 0.5 0.9 1.2 99 Karur Vysya Bank BUY 58 65 12 46 0.6 799 4 7 12 30 93 57 15 8 5 ——— 0.9 0.8 0.7 4.6 8.4 12.3 1.7 3.3 5.2 1 Punjab National Bank REDUCE 42 36 (15) 465 6.4 10,481 3 5 6 577 46 28 13 9 7 ——— 0.7 0.7 0.6 4.9 5.8 6.9 ——— 80 RBL Bank BUY 216 240 11 129 1.8 598 8 17 32 (15) 103 85 25 13 7 ——— 1.1 1.0 0.9 4.4 7.9 13.3 0.6 1.2 2.2 46 SBI Cards and Payment Services ADD 1,048 975 (7) 986 13.6 941 10 18 27 (21) 68 54 100 59 39 ——— 15.6 12.6 9.6 16.9 23 28 0.1 0.1 0.2 51 State Bank of India BUY 422 470 11 3,767 52.0 8,925 23 39 49 41 69 26 18 11 9 ——— 2.0 1.7 1.4 8.4 12.7 14.1 0.0 0.0 0.0 278 Ujjivan Financial Services BUY 216 345 60 26 0.4 121 34 44 — 25 32 (100) 6 5 - ——— 1.0 0.9 — 17.0 19.3 NM 1.9 2.8 0.0 2 Ujjivan Small Finance Bank ADD 30 34 14 52 0.7 1,728 (0) 1 3 (103) 2,275 112 NM 23 11 ——— 1.9 1.7 1.5 0.3 7.4 13.5 0.0 0.0 0.0 2 Union Bank REDUCE 34 30 (13) 235 3.2 6,407 3 2 4 134 (39) 159 12 20 8 ——— 0.6 0.6 0.5 3.2 1.9 4.8 1.2 0.8 2.0 7 YES Bank SELL 13 11 (18) 335 4.6 25,055 (1) (1) (0) 89 37 89 NM NM NM ——— 1.3 1.4 1.3 NM NM NM 0.0 0.0 0.0 24 Banks Attractive 23,784 328.2 111 53 25 26 17 14 2.0 1.9 1.7 7.9 10.9 12.3 0.2 0.8 1.0 1,381 Source: Company, Bloomberg, Kotak Institutional Equities estimates 120 120 KOTAK INSTITUTIONAL EQUITIES RESEARCH Kotak Institutional Equities: Valuation summary of KIE Universe stocks 121 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 28-May-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 SELL 1,883 1,100 (42) 378 5.2 201 20 23 27 63 17 16 94 80 69 58.0 49.1 42.2 20.0 16.5 14.0 24 23 22 0.1 0.2 0.3 10 Building Products Cautious 378 5.2 63 17 16 94 80 69 58.0 49.1 42.2 20.0 16.5 14.0 21 21 20 0.1 0.2 0.3 10 Capital goods ABB BUY 1,589 1,550 (2) 337 4.6 212 8 21 28 (54) 157 35 196 76 57 #### 53.3 38.9 9.3 8.6 7.8 4.8 11.7 14.5 0.3 0.4 0.5 3 Ashoka Buildcon BUY 93 145 56 26 0.4 281 12 12 13 (14) 1 9 8 8 7 6.4 5.4 4.5 0.9 0.8 0.8 12.2 11.2 11.2 2.0 2.1 2.2 2 Bharat Electronics BUY 145 150 4 353 4.9 2,437 8 8 8 4 (1) 7 19 19 18 12.1 11.4 10.3 3.2 2.9 2.7 17.9 16.1 15.7 2.0 2.0 2.1 34 BHEL SELL 72 31 (57) 250 3.5 3,482 (4) 2 3 (4) 149 42 NM 33 24 (15.3) 14.1 10.6 0.9 0.9 0.8 NM 2.6 3.7 (2.7) 1.2 1.5 86 Carborundum Universal ADD 602 545 (9) 114 1.6 190 15 21 26 4 37 26 40 29 23 23.1 17.8 14.1 5.4 4.8 4.2 14.3 17.2 19.2 0.7 0.9 1.2 2 Cochin Shipyard BUY 380 550 45 50 0.7 132 41 48 43 (15) 16 (10) 9 8 9 4.9 4.9 4.9 1.2 1.1 1.0 13.8 14.6 12.0 3.1 3.4 3.7 2 Cummins India BUY 791 890 13 219 3.0 277 23 31 39 (10) 36 25 35 25 20 35.6 24.5 18.6 5.0 4.7 4.4 14.8 19.0 22 1.9 2.2 2.7 17 Dilip Buildcon BUY 544 630 16 80 1.1 146 22 40 58 (23) 84 45 25 14 9 7.7 6.2 5.2 2.0 1.6 1.4 8.5 13.1 15.6 0.2 0.1 0.2 4 IRB Infrastructure BUY 106 145 36 37 0.5 351 3 9 12 (84) 178 28 32 11 9 7.8 7.1 5.8 0.5 0.5 0.5 1.7 4.6 5.7 3.6 1.4 2.0 3 Kalpataru Power Transmission BUY 424 525 24 63 0.9 153 33 37 46 29 12 27 13 12 9 5.4 5.3 4.3 1.7 1.4 1.2 14.2 13.4 14.5 2.1 0.9 1.3 2 KEC International BUY 415 430 4 107 1.5 257 21 27 35 (2) 24 32 19 16 12 10.7 8.7 7.0 3.2 2.7 2.2 18.0 18.7 21 0.6 0.7 0.9 3 L&T BUY 1,478 1,850 25 2,076 28.6 1,405 49 71 95 (23) 46 34 30 21 16 20.9 15.3 13.3 3.3 3.1 2.9 11.3 15.2 19.0 2.4 2.0 2.6 65 Siemens SELL 2,037 1,540 (24) 725 10.0 356 37 43 50 73 17 17 55 47 40 39.3 34.4 29.0 6.8 6.2 5.6 13.0 13.7 14.6 0.7 0.6 0.7 12 Thermax SELL 1,457 1,200 (18) 174 2.4 113 23 33 42 22 42 28 63 45 35 44.3 33.0 25.6 44.3 33.0 25.6 8.3 11.1 13.5 0.5 1.1 1.4 1 Capital goods Attractive 4,611 63.6 (17) 58 28 38 24 19 3.0 2.8 2.6 8.0 11.8 14.0 1.5 1.5 1.9 237 Commercial & Professional Services SIS BUY 434 430 (1) 64 0.9 149 25 20 23 63 (20) 20 18 22 18 12.3 12.5 11.1 3.5 3.2 2.8 23 15.1 16.0 1.4 1.1 1.3 1 TeamLease Services ADD 3,554 3,775 6 61 0.8 17 53 84 113 161 56 35 66 43 32 59.7 37.3 27.8 9.2 7.5 6.1 14.8 19.4 21 ——— 1 Commercial & Professional ServicesAttractive 125 1.7 76 (5) 25 27 29 23 19.9 18.0 15.2 5.0 4.4 3.8 18.4 15.2 16.4 0.7 0.6 0.7 3 Commodity Chemicals Asian Paints REDUCE 2,941 2,500 (15) 2,821 38.9 959 33 38 47 20 15 24 90 78 63 57.4 50.9 42.7 22.0 19.6 17.4 27 27 29 0.6 0.7 0.9 71 Berger Paints SELL 802 600 (25) 779 10.8 971 8 10 12 11 34 24 107 80 64 66.6 51.7 42.6 25.2 21.4 18.4 25 29 31 0.3 0.5 0.6 13 Kansai Nerolac REDUCE 572 610 7 308 4.3 539 10 12 15 1 21 26 57 47 38 36.9 31.3 25.1 7.5 6.8 6.2 13.6 15.1 17.3 0.5 0.7 0.9 2 Tata Chemicals SELL 709 540 (24) 181 2.5 255 11 32 36 (66) 198 14 67 22 20 11.0 7.6 6.9 1.3 1.3 1.3 2.0 5.7 6.5 1.4 4.5 5.1 68 Commodity Chemicals Neutral 4,089 56.4 2 29 23 87 68 55 48.3 39.7 33.5 11.9 11.1 10.3 13.6 16.4 18.7 0.6 0.8 1.1 154 Construction Materials ACC REDUCE 1,985 1,950 (2) 373 5.1 188 75 95 106 4 27 11 26 21 19 12.7 10.6 9.2 2.9 2.7 2.4 11.7 13.5 13.5 0.7 1.2 1.3 28 Ambuja Cements REDUCE 326 320 (2) 647 8.9 1,986 13 13 16 28 1 22 24 24 20 10.9 8.8 7.2 2.8 2.6 2.3 11.3 11.2 12.4 5.5 0.8 1.0 29 Dalmia Bharat BUY 1,776 1,800 1 332 4.6 187 54 58 80 286 7 37 33 31 22 12.0 10.8 8.5 2.6 2.4 2.2 8.7 8.2 10.3 ——— 5 Grasim Industries ADD 1,465 1,520 4 964 13.3 657 68 86 108 (22) 27 25 22 17 14 9.3 7.7 6.2 1.5 1.3 1.2 7.3 8.3 9.4 0.6 0.6 0.5 36 India Daily Summary Daily Summary India J K Cement ADD 2,808 2,300 (18) 217 3.0 77 87 127 140 35 47 10 32 22 20 15.4 12.0 11.2 6.0 4.8 3.9 20 24 22 0.4 0.4 0.4 3 JK Lakshmi Cement ADD 538 550 2 63 0.9 118 38 39 43 60 2 11 14 14 13 7.6 6.9 6.3 3.0 2.5 2.1 23 19.7 18.4 0.7 1.1 1.2 4 Orient Cement ADD 143 140 (2) 29 0.4 205 10 10 11 147 (6) 9 14 15 13 6.5 6.3 6.5 2.2 2.0 1.8 17.7 14.5 14.2 1.4 1.4 1.4 2 Shree Cement SELL 27,655 20,000 (28) 998 13.8 36 641 833 983 47 30 18 43 33 28 24.7 19.3 16.4 6.5 5.5 4.7 16.4 18.1 18.0 0.2 0.2 0.2 25 The Ramco Cements SELL 961 800 (17) 227 3.1 236 32 34 43 26 4 27 30 29 22 16.5 14.1 11.4 3.9 3.5 3.1 14.2 13.0 14.6 0.3 0.3 0.4 9 UltraTech Cement REDUCE 6,599 6,300 (5) 1,905 26.3 289 193 245 282 (3) 27 15 34 27 23 17.0 14.1 12.6 4.3 3.8 3.4 13.4 15.0 15.3 0.6 0.3 0.4 56 Construction Materials Attractive 5,755 79.4 7 22 19 29 24 20 13.5 11.2 9.5 3.1 2.8 2.5 10.5 11.4 12.2 1.0 0.5 0.5 196 KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Source: Company, Bloomberg, Kotak Institutional Equities estimates - May 31, 2021 KOTAK INSTITUTIONAL EQUITIES RESEARCH 121 Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary 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 28-May-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 394 305 (23) 247 3.4 628 9 10 11 19 4 15 42 40 35 35 30 25 12.8 10.4 8.4 35 29 27 0.5 0.6 0.6 9 Havells India SELL 1,018 845 (17) 637 8.8 626 17 20 24 41 23 18 61 50 42 40 34 29 13.0 11.3 9.8 23 24 25 0.6 0.7 0.8 26 Page Industries REDUCE 31,320 30,500 (3) 349 4.8 11 305 486 598 (1) 59 23 103 64 52 66 43 35 39.5 32.8 27.8 40 56 57 0.8 1.1 1.4 16 Polycab ADD 1,675 1,700 1 250 3.4 149 59 62 69 14 6 10 28 27 24 21 17 15 5.3 4.5 3.9 20 18.1 17.1 0.4 0.4 0.5 8 TCNS Clothing Co. REDUCE 553 390 (30) 34 0.5 68 (7) 11 15 (162) 269 37 NM 49 36 112 17 13.6 5.5 4.7 4.0 NM 10.4 12.2 — — — 1 Voltas SELL 1,000 830 (17) 331 4.6 331 13 24 29 (21) 85 23 78 42 34 61 34 28 6.6 6.0 5.3 9.2 15.0 16.4 0.3 0.6 0.7 28 Whirlpool SELL 2,165 1,930 (11) 275 3.8 127 26 48 63 (30) 85 30 83 45 34 51 31 23 10.0 8.9 8.1 12.5 21 25 0.4 0.9 1.5 3 Consumer Durables & Apparel Cautious 2,124 29.3 4 36 19 60 44 37 41 30 25 10.2 8.8 17.0 20 21 0.5 0.7 91 Consumer Staples Bajaj Consumer Care ADD 287 325 13 42 0.6 148 15 16 18 21 8 9 19 18 16 15.0 14.0 12.4 5.6 5.1 4.5 32 30 30 3.5 3.8 3.8 5 Britannia Industries ADD 3,422 3,650 7 824 11.4 241 78 70 82 32 (9) 16 44 49 42 33 35 30 23.2 42.4 39.2 46 61 96 3.2 2.2 1.8 29 - Colgate-Palmolive (India) ADD 1,711 1,760 3 465 6.4 272 38 39 44 34 3 12 45 44 39 30.3 28.7 25.7 39.9 40.1 37.2 75 92 99 2.2 2.2 2.4 14 May2021 31, Dabur India ADD 530 555 5 938 12.9 1,767 10 10 12 11 8 18 55 51 43 46 41 35 12.2 11.8 10.7 24 24 26 0.9 1.0 1.2 19 Godrej Consumer Products ADD 845 925 10 864 11.9 1,023 17 18 21 25 6 16 49 46 40 36 32 28 9.2 8.2 7.4 20 18.7 19.5 0.0 1.1 1.4 22 Hindustan Unilever ADD 2,322 2,650 14 5,455 75.3 2,350 34 40 48 9 19 18 69 57 48 48 40 34 11.5 11.1 10.8 29 19.7 23 1.3 1.6 1.9 68 ITC BUY 213 265 24 2,621 36.2 12,330 10 12 13 (10) 19 8 21 17 16 14.8 12.2 11.1 4.1 3.9 3.8 19.1 22 24 4.7 5.0 5.4 88 Jyothy Laboratories ADD 158 170 7 58 0.8 367 6 6 7 26 3 19 27 26 22 18.2 18.7 15.9 4.1 3.9 3.7 16.4 15.3 17.4 2.5 2.8 3.2 2 Marico ADD 471 465 (1) 608 8.4 1,290 9 10 11 11 11 13 52 47 41 37 34 29 18.8 17.6 16.4 37 39 41 1.6 1.8 2.0 16 Nestle India ADD 17,509 18,250 4 1,688 23.3 96 216 255 301 6 18 18 81 69 58 53 45 39 83.6 60.5 45.9 106 102 90 1.1 1.0 1.2 22 Tata Consumer Products ADD 655 650 (1) 604 8.3 922 10 11 15 21 16 32 68 58 44 37 33 26 4.2 4.0 3.8 6.3 7.0 8.7 0.6 0.6 0.8 36 United Breweries ADD 1,276 1,365 7 337 4.7 264 5 14 31 (72) 212 119 280 90 41 88 46 24 9.4 8.6 7.3 3.4 10.0 19.2 0.0 0.5 1.3 8 United Spirits ADD 611 680 11 444 6.1 727 6 11 16 (45) 75 48 96 55 37 45 33 24 10.4 8.7 7.5 11.1 17.3 22 — — 0.8 17 Varun Beverages BUY 1,008 1,150 14 291 4.0 289 14 26 37 (16) 89 42 74 39 27 27 17 14 8.3 7.0 5.7 11.5 19.4 23 0.1 0.3 0.3 5 Consumer Staples Attractive 15,239 210.3 2 17 16 47 40 34 33 28 24 9.1 8.7 8.2 19.5 22 24 1.8 2.0 2.3 351 Diversified Financials Aavas Financiers ADD 2,306 2,500 8 181 2.5 79 37 45 57 17 21 27 63 52 41 — — — — — — 12.9 13.6 15.0 0.0 0.0 0.0 3 Aditya Birla Capital NR 123 — — 298 4.1 2,414 4 6 8 4 36 43 29 21 15 — — — — — — 7.8 9.7 12.4 45.7 50.3 57.0 8 Bajaj Finance SELL 5,611 4,200 (25) 3,387 46.7 602 73 139 174 (16) 89 25 76 40 32 — — — 9.1 7.6 6.3 12.8 21 21 0.2 0.2 0.3 197 Bajaj Finserv ADD 11,713 11,450 (2) 1,864 25.7 159 281 426 526 33 52 24 42 28 22 — — — 5.2 5.1 4.3 13.3 18.7 21 0.1 0.1 0.1 66 Cholamandalam BUY 543 625 15 446 6.1 820 18 30 36 44 62 20 29 18 15 — — — 5.0 4.0 3.3 17.1 23 23 0.4 0.6 0.7 41 Computer Age Management Services SELL 2,509 1,900 (24) 123 1.7 49 42 49 56 18 17 14 60 51 45 — — — 23.7 20.1 17.1 39 43 41 2.5 1.3 1.5 5 HDFC BUY 2,541 3,050 20 4,585 63.3 1,804 67 72 86 (35) 8 19 38 35 30 — — — 4.2 3.9 3.6 12.0 11.5 12.6 0.8 0.9 1.0 135 HDFC AMC SELL 2,970 2,260 (24) 633 8.7 213 62 71 83 5 14 17 48 42 36 — — — 13.2 11.5 9.9 30 29 30 1.1 1.3 1.5 11 IIFL Wealth ADD 1,185 1,300 10 104 1.4 89 42 50 60 75 20 21 29 24 20 — — — 3.7 3.5 3.3 12.7 15.1 17.6 5.9 2.9 3.6 1 L&T Finance Holdings ADD 94 115 23 231 3.2 2,469 4 8 10 (55) 111 24 24 12 9 — — — 1.2 1.1 1.0 4.8 10.2 11.4 0.0 0.6 0.6 19 LIC Housing Finance ADD 456 430 (6) 230 3.2 505 59 73 79 24 24 8 8 6 6 — — — 1.3 1.1 1.0 15.3 16.7 15.9 2.2 2.7 2.9 20 Mahindra & Mahindra Financial ADD 160 200 25 197 2.7 1,230 3 14 16 (81) 421 15 59 11 10 — — — 1.4 1.3 1.2 2.6 11.4 12.0 0.5 1.8 2.1 26 Muthoot Finance REDUCE 1,266 1,250 (1) 508 7.0 401 92 105 113 23 14 7 14 12 11 — — — 3.5 2.9 2.4 29 26 23 1.5 1.7 1.8 19 Shriram City Union Finance BUY 1,720 1,725 0 114 1.6 66 153 173 196 1 13 13 11 10 9 — — — 1.5 1.3 1.2 13.2 13.3 13.4 1.9 1.5 1.7 1 Shriram Transport BUY 1,455 1,575 8 368 5.1 253 98 139 167 (11) 41 20 15 10 9 — — — 1.8 1.6 1.4 12.6 15.2 16.0 1.2 1.4 1.7 48 Diversified Financials Attractive 13,342 184.1 (11) 37 17 35 26 22 4.1 3.7 3.3 11.7 14.4 15.2 0.6 0.7 0.8 603 Source: Company, Bloomberg, Kotak Institutional Equities estimates 122 122 KOTAK INSTITUTIONAL EQUITIES RESEARCH Kotak Institutional Equities: Valuation summary of KIE Universe stocks 123 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 28-May-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) Electric Utilities CESC BUY 670 815 22 89 1.2 133 96 106 117 (3) 11 10 7 6 6 5.3 4.4 4.0 0.7 0.6 0.6 11.2 10.3 10.4 6.7 2.1 2.4 4 JSW Energy REDUCE 116 70 (40) 191 2.6 1,640 6 5 7 (12) (1) 25 21 21 17 9.0 8.3 7.8 1.5 1.4 1.3 7.5 6.9 8.0 — — — 13 NHPC ADD 26 27 4 261 3.6 10,045 4 3 4 26 (2) 1 7 7 7 10.5 9.8 9.3 0.8 0.8 0.7 11.1 10.4 10.0 7.6 7.6 7.6 2 NTPC BUY 109 125 15 1,056 14.6 9,697 15 15 17 32 4 8 7 7 7 8.6 6.6 5.5 0.9 0.8 0.7 12.2 11.8 11.8 3.6 4.2 4.6 33 Power Grid BUY 225 250 11 1,179 16.3 5,232 25 28 30 18 15 7 9 8 7 6.9 6.0 5.6 1.6 1.5 1.3 18.8 19.4 18.7 4.4 5.3 7.0 40 Tata Power ADD 105 110 4 337 4.6 3,196 4 6 6 (10) 52 (1) 26 17 17 9.0 7.8 7.6 1.6 1.5 1.4 6.6 8.9 8.2 — — — 84 Electric Utilities Attractive 3,113 43.0 20 10 7 9 8 8 1.1 1.1 1.0 12.6 12.6 12.5 3.7 4.1 4.9 177 Fertilizers & Agricultural Chemicals Bayer Cropscience SELL 5,276 4,600 (13) 237 3.3 45 130 159 184 0 22 15 41 33 29 28 24 20 9.3 7.6 6.3 23 25 24 0.5 0.6 0.7 2 Dhanuka Agritech SELL 906 775 (14) 42 0.6 48 44 43 47 49 (3) 10 20 21 19 15.0 15.4 13.9 5.4 4.6 4.0 28 23 22 0.4 1.4 1.8 2 Godrej Agrovet SELL 553 455 (18) 106 1.5 192 16 20 23 41 25 12 34 27 24 20 16 15 4.3 3.9 3.6 13.4 15.2 15.5 1.4 1.8 2.0 2 PI Industries REDUCE 2,599 2,420 (7) 394 5.4 152 50 61 74 50 22 23 52 43 35 38 30 24 7.2 6.4 5.6 18.5 16.0 17.1 0.2 0.3 0.4 15 Rallis India ADD 311 310 (0) 61 0.8 195 11 14 17 26 26 20 27 22 18 18.8 14.9 12.2 3.8 3.4 2.9 14.8 16.5 17.4 1.0 1.1 1.2 4 UPL SELL 812 650 (20) 620 8.6 765 38 46 55 62 22 20 22 18 15 10.0 8.4 7.2 3.5 3.0 2.6 16.8 18.3 19.1 1.2 1.5 1.8 87 Fertilizers & Agricultural ChemicalsCautious 1,461 20.2 47 22 19 30 24 20 14.7 12.4 10.6 4.8 4.2 3.6 16.1 17.1 17.6 0.8 1.0 1.2 112 Gas Utilities GAIL (India) BUY 153 170 11 679 9.4 4,510 10 13 14 (22) 30 4 15 11 11 11.5 8.2 7.6 1.5 1.4 1.3 10.2 12.4 12.0 2.6 3.6 3.9 41 GSPL SELL 279 200 (28) 157 2.2 564 13 12 8 (23) (11) (32) 21 24 35 9.6 10.4 13.9 2.1 2.0 1.9 10.6 8.7 5.6 0.7 0.8 0.7 4 Indraprastha Gas ADD 514 575 12 360 5.0 700 16 23 26 (4) 43 11 32 22 20 22.6 16.1 14.2 6.1 5.2 4.4 21 25 24 0.5 1.0 1.3 17 Mahanagar Gas BUY 1,175 1,350 15 116 1.6 99 63 75 105 (16) 20 39 19 16 11 11.9 9.8 6.8 3.6 3.2 2.7 20 22 26 2.0 2.6 4.0 10 Petronet LNG BUY 241 300 25 361 5.0 1,500 20 21 23 16 4 9 12 11 10 6.6 6.3 5.8 3.1 2.9 2.8 27 26 28 6.4 7.1 8.2 12 Gas Utilities Attractive 1,673 23.1 (11) 20 7 16 14 13 10.9 8.8 8.1 2.2 2.1 1.9 13.6 15.1 14.9 2.8 3.5 4.0 84 Health Care Services Apollo Hospitals ADD 3,149 2,860 (9) 453 6.2 144 5 48 65 (71) 785 36 583 66 48 41.4 24.9 20.8 9.9 9.1 8.2 2.0 14.4 17.8 0.1 0.6 0.8 41 Aster DM Healthcare BUY 148 220 49 74 1.0 500 3 10 12 (52) 245 21 52 15 12 9.0 6.2 5.4 2.2 1.9 1.7 4.3 13.6 14.5 — — — 2 Dr Lal Pathlabs SELL 2,806 1,810 (35) 234 3.2 83 35 43 46 29 23 7 80 65 61 51.3 40.5 38.1 18.8 16.2 14.2 26 27 25 0.5 0.7 0.7 19 HCG BUY 187 175 (6) 23 0.3 143 (8) (2) (2) 30 71 21 NM NM NM 18.3 10.5 9.1 2.8 2.9 3.0 NM NM NM — — — 1 Metropolis Healthcare SELL 2,524 1,800 (29) 129 1.8 51 36 44 47 21 21 7 70 58 54 43.6 34.8 31.4 18.1 15.2 12.8 30 29 26 0.4 0.5 0.6 4 Narayana Hrudayalaya BUY 431 540 25 88 1.2 204 (3) 10 13 (152) 421 31 NM 45 34 61.4 17.0 14.2 8.2 6.9 5.8 NM 16.8 18.4 — — — 2 Health Care Services Attractive 1,001 13.8 (46) 274 24 195 52 42 31.9 20.1 17.4 8.4 7.5 6.7 4.3 14.5 15.9 0.2 0.5 0.6 69 Hotels & Restaurants Burger King SELL 147 115 (22) 56 0.8 382 (4) (1) 1 (66) 78 167 NM NM 225 #### 34.6 21.1 8.3 8.8 8.6 NM NM 3.9 0.0 0.0 0.0 6 Jubilant Foodworks BUY 3,121 3,200 3 412 5.7 132 17 33 51 (29) 98 54 186 94 61 52.1 36.6 27.7 32.7 25.5 19.5 18.5 31 36 0.2 0.4 0.6 24 Lemon Tree Hotels REDUCE 42 39 (6) 33 0.5 790 (2) (0) 1 (1,176) 72 237 NM NM 70 74.4 35.5 13.8 4.7 4.5 4.3 NM NM 6.3 — (1.4) (0.1) 1 Daily Summary India Westlife Development ADD 480 460 (4) 75 1.0 156 (5) 1 6 (1,655) 125 346 NM 375 84 #### 30.2 20.9 14.9 14.3 12.2 NM 3.9 15.7 — 0.0 0.0 2 Hotels & Restaurants Attractive 576 7.9 (164) 358 116 NM 149 69 62.9 35.4 23.8 18.4 16.5 13.8 NM 11.1 20 0.1 0.2 0.4 33 Source: Company, Bloomberg, Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK - May2021 31, KOTAK INSTITUTIONAL EQUITIES RESEARCH 123 Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary 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 28-May-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 Insurance HDFC Life Insurance ADD 669 750 12 1,352 18.7 2,011 7 8 9 5 13 14 99 87 76 — — — 15.9 14.7 13.6 17.6 17.5 18.5 0.3 0.3 0.3 29 ICICI Lombard SELL 1,486 1,150 (23) 676 9.3 490 32 35 40 23 8 15 46 43 37 — — — 9.1 7.9 6.7 22 21 19.6 0.5 0.5 0.5 11 ICICI Prudential Life BUY 547 660 21 785 10.8 1,436 7 7 9 (10) 11 15 82 74 64 — — — 8.6 7.9 7.2 11.5 11.2 11.7 0.3 0.0 0.0 25 Max Financial Services BUY 935 1,000 7 322 4.4 343 10 12 16 (6) 29 29 98 76 59 — — — — — — 13.5 15.4 17.5 0.1 0.3 0.3 10 SBI Life Insurance BUY 977 1,360 39 977 13.5 1,002 15 16 18 2 12 9 67 60 55 — — — 9.7 8.5 7.6 15.3 15.2 14.6 0.3 0.3 0.3 61 Insurance Attractive 4,113 56.7 6 14 14 74 65 57 10.9 9.6 8.6 14.8 14.9 15.2 0.2 0.2 0.2 137 Internet Software & Services Info Edge SELL 4,462 3,170 (29) 575 7.9 128.3 22 43 53 (19) 98 23 205 104 84 #### 96.5 76.6 12.7 11.6 10.5 8.0 11.7 13.1 0.1 0.2 0.3 44 Just Dial SELL 922 595 (35) 57 0.8 61.9 35 31 36 (17) (11) 17 27 30 26 27.0 23.3 20.3 4.5 3.9 3.4 16.8 14.1 14.2 — — — 33 Internet Software & Services Cautious 632 8.7 (18) 51 21 128 85 70 #### 79.4 64.8 10.9 9.9 8.9 8.5 11.7 12.7 0.1 0.2 0.3 78 IT Services HCL Technologies ADD 943 1,080 15 2,558 35.3 2,714 48 51 57 18 7 11 20 18 17 11.9 10.9 9.7 4.1 3.6 3.1 24 21 20 2.4 2.2 2.2 85 - Infosys BUY 1,405 1,600 14 5,986 82.6 4,250 46 52 61 17 15 16 31 27 23 20.6 17.9 15.4 7.8 7.0 6.2 27 27 28 1.9 2.1 2.5 153 May2021 31, L&T Infotech REDUCE 3,930 3,850 (2) 687 9.5 176 110 127 149 27 15 18 36 31 26 23.9 21.8 18.7 9.5 7.9 6.5 30 28 27 0.6 0.9 1.0 18 L&T Technology Services ADD 2,705 2,800 4 284 3.9 106 63 88 106 (19) 40 21 43 31 26 26.5 20.0 16.7 8.2 6.9 5.8 21 24 25 0.6 0.8 1.0 14 Mindtree SELL 2,356 1,620 (31) 388 5.4 165 67 82 88 76 22 8 35 29 27 22.1 19.5 18.0 9.0 7.6 6.5 30 29 26 0.9 1.4 1.5 38 Mphasis REDUCE 1,936 1,650 (15) 362 5.0 187 65 77 86 2 18 13 30 25 22 19.1 16.5 14.5 5.5 5.0 4.5 19.7 21 21 3.4 2.1 2.3 14 TCS REDUCE 3,144 3,250 3 11,628 160.4 3,699 89 108 122 4 21 13 35 29 26 23.9 19.7 17.7 13.3 11.1 10.2 38 42 42 1.2 2.1 3.1 134 Tech Mahindra BUY 1,026 1,150 12 894 12.3 880 51 61 68 11 20 11 20 17 15 11.5 10.0 8.8 3.6 3.2 2.9 19.2 20 20 3.7 2.3 2.5 54 Wipro ADD 539 480 (11) 2,951 40.7 5,504 19 20 23 15 7 15 28 26 23 17.9 16.2 13.9 5.5 4.6 4.0 19.5 18.8 18.7 0.4 0.9 0.9 100 IT Services Attractive 25,739 355.1 10 15 14 30 26 23 19.7 17.0 15.0 7.8 6.8 6.0 26 26 26 1.5 1.9 2.5 612 Media DB Corp. REDUCE 95 81 (15) 17 0.2 175 5 14 14 (66) 167 1 18 7 7 5.9 3.0 3.2 1.0 1.0 1.0 5.4 14.3 14.6 2.1 12.6 13.7 0 Jagran Prakashan REDUCE 58 37 (36) 15 0.2 281 4 7 8 (44) 87 NA 15 8 NA 3.7 2.4 NA 0.8 0.8 NA 5.7 10.3 11.5 3.5 8.7 8.7 1 PVR BUY 1,301 1,650 27 79 1.1 55 (93) 40 60 (420) 143 53 NM 33 22 (22.2) 12.6 9.8 3.4 3.1 2.8 NM 10.0 13.7 (0.7) 0.3 0.5 26 Sun TV Network REDUCE 546 465 (15) 215 3.0 394 38 40 42 7 7 5 14 14 13 10.2 9.3 8.8 3.6 3.4 3.3 26 26 26 4.6 5.0 5.5 21 Zee Entertainment Enterprises REDUCE 212 210 (1) 203 2.8 960 12 15 18 5 29 16 18 14 12 10.2 8.3 7.1 2.0 1.9 1.7 11.6 13.9 14.9 1.2 1.9 2.1 47 Media Cautious 530 7.3 (25) 61 13 23 14 13 13.0 8.3 7.4 2.4 2.3 2.1 10.6 16.1 16.9 2.4 3.5 3.8 95 Metals & Mining Hindalco Industries BUY 388 500 29 871 12.0 2,220 26 43 45 44 67 4 15 9 9 7.6 5.6 5.1 1.3 1.1 1.0 9.1 13.4 12.4 0.8 0.8 1.0 103 Hindustan Zinc BUY 327 370 13 1,380 19.0 4,225 19 24 24 17 25 1 17 14 14 10.5 8.0 7.8 4.3 4.3 4.3 22 31 31 6.5 7.2 7.3 14 Jindal Steel and Power ADD 396 520 31 404 5.6 1,020 63 74 55 3,790 18 (25) 6 5 7 4.3 3.5 4.0 1.3 1.0 0.9 20 21 13.4 — — — 78 JSW Steel REDUCE 690 640 (7) 1,667 23.0 2,417 33 59 51 227 79 (13) 21 12 13 10.9 7.2 7.9 3.6 2.8 2.4 19.1 27 19.3 1.0 1.3 1.1 152 National Aluminium Co. SELL 72 65 (10) 132 1.8 1,866 4 7 6 452 71 (10) 18 10 11 8.1 5.3 6.1 1.4 1.3 1.2 7.8 13.1 11.1 2.8 4.9 4.4 35 NMDC REDUCE 179 110 (39) 525 7.2 2,931 20 14 8 34 (28) (40) 9 13 21 8.7 16.3 28.3 1.7 1.6 1.6 19.8 13.2 7.5 2.7 3.9 2.4 40 Tata Steel BUY 1,104 1,400 27 1,329 18.3 1,219 71 256 143 26 260 (44) 16 4 8 7.0 3.5 4.7 1.8 1.3 1.2 11.8 36 16.0 2.3 2.6 1.6 334 Vedanta REDUCE 266 270 1 990 13.7 3,717 33 40 36 406 21 (11) 8 7 7 4.8 3.3 3.3 1.6 1.4 1.3 21 22 17.8 3.6 6.6 6.6 69 Metals & Mining Attractive 7,299 100.7 109 68 (22) 13 8 10 7.3 5.0 5.6 2.1 1.7 1.6 15.7 22 15.4 2.7 3.5 3.2 826 Source: Company, Bloomberg, Kotak Institutional Equities estimates 124 124 KOTAK INSTITUTIONAL EQUITIES RESEARCH Kotak Institutional Equities: Valuation summary of KIE Universe stocks 125 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 28-May-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) Oil, Gas & Consumable Fuels BPCL BUY 472 550 17 1,023 14.1 2,093 67 34 41 541 (49) 20 7 14 11 5.7 8.8 7.6 1.8 2.1 2.0 32.2 14.3 17.9 16.8 3.6 4.4 88 Coal India BUY 147 185 26 905 12.5 6,163 19 17 18 (31) (8) 4 8 9 8 7.3 7.1 6.3 2.9 3.1 3.2 36.2 34.7 38.1 13.6 13.6 13.6 31 HPCL BUY 281 310 10 398 5.5 1,419 80 34 37 1,014 (58) 11 4 8 7 4.9 8.3 7.7 1.1 1.0 0.9 34.7 12.7 13.1 8.3 4.8 5.3 25 IOCL BUY 110 125 14 1,034 14.3 9,181 26 14 16 755 (46) 17 4 8 7 4.0 5.2 4.7 0.9 0.9 0.8 23.2 11.3 12.4 10.9 6.4 7.5 38 Oil India SELL 133 85 (36) 144 2.0 1,084 0 8 9 (100) 8,787 13 1,425 16 14 10.8 7.0 6.8 0.6 0.6 0.6 0.0 3.6 4.0 2.6 2.5 2.8 3 ONGC SELL 112 90 (20) 1,413 19.5 12,580 8 14 15 (42) 85 4 14 8 7 5.0 3.6 3.3 0.6 0.6 0.5 4.2 7.5 7.4 2.2 4.8 5.2 44 Reliance Industries ADD 2,095 2,050 (2) 13,300 183.5 6,349 72 80 100 8 11 25 29 26 21 17.2 12.7 10.1 1.8 1.8 1.6 7.5 7.0 8.1 0.3 0.4 0.4 236 Oil, Gas & Consumable Fuels Attractive 18,218 251.4 52 (8) 17 16 17 15 9.7 8.7 7.4 1.5 1.4 1.4 9.6 8.3 9.1 2.8 2.0 2.1 465 Pharmaceuticals Aurobindo Pharma REDUCE 1,022 880 (14) 599 8.3 586 56 61 65 15 8 7 18 17 16 11.0 9.9 8.9 2.8 2.4 2.1 15.1 14.3 13.7 0.7 0.9 1.1 33 Biocon SELL 382 300 (21) 459 6.3 1,202 6 8 10 1 31 26 61 46 37 27.6 20.0 16.5 5.4 4.9 4.4 8.9 10.6 12.1 - 0.8 0.9 20 Cipla BUY 934 1,040 11 754 10.4 806 30 34 48 55 15 40 31 27 20 17.2 15.6 11.2 4.1 3.6 3.2 12.9 13.3 16.1 (0.0) 0.7 1.0 88 Divis Laboratories REDUCE 4,120 3,750 (9) 1,094 15.1 265 75 94 107 44 26 14 55 44 38 37.5 31.0 26.9 11.8 10.0 8.6 21.3 22.9 22.3 - (0.8) (0.9) 38 Dr Reddy's Laboratories SELL 5,195 4,700 (10) 864 11.9 166 156 184 251 20 18 37 33 28 21 19.3 16.0 12.0 5.1 4.4 3.7 15.2 15.6 18.0 0.5 0.6 0.6 84 Gland Pharma REDUCE 3,224 2,550 (21) 528 7.3 163 61 78 92 23 28 18 53 41 35 38.3 31.1 25.6 8.9 7.3 6.1 16.9 17.8 17.4 — — — 14 Laurus Labs REDUCE 522 390 (25) 280 3.9 536 18 21 25 284 15 17 28 25 21 19.0 16.1 13.5 10.8 7.5 5.5 37.9 30.4 26.2 (—) — — 26 Lupin BUY 1,209 1,320 9 549 7.6 450 27 41 54 24 51 31 45 30 22 19.8 14.4 11.3 3.9 3.5 3.1 8.8 11.9 13.8 0.5 0.5 0.7 46 Sun Pharmaceuticals ADD 670 740 10 1,607 22.2 2,406 25 25 30 47 3 19 27 26 22 18.0 15.6 13.2 3.5 3.1 2.8 12.8 12.4 12.6 1.0 0.8 0.9 69 Torrent Pharmaceuticals REDUCE 2,714 2,800 3 459 6.3 169 74 86 103 29 16 20 37 32 26 19.4 17.1 14.9 7.9 6.8 5.8 21.4 21.3 22.0 0.7 1.1 1.3 12 Pharmaceuticals Attractive 7,192 99.2 36 15 22 34 29 24 20.1 17.0 14.0 4.8 4.2 3.7 14.3 14.5 15.5 0.4 0.4 0.5 430 Real Estate Brigade Enterprises BUY 267 310 16 56 0.8 204 (4) 14 19 (158) 480 38 NM 19 14 23.1 7.5 6.8 2.5 2.3 2.0 NM 12.7 15.6 0.9 0.9 0.9 1 DLF REDUCE 286 245 (14) 709 9.8 2,475 5 7 9 298 48 28 61 41 32 48.1 41.4 34.7 2.0 1.9 1.9 3.4 4.8 6.0 0.7 0.7 0.7 39 Embassy Office Parks REIT ADD 330 360 9 313 4.3 948 7 10 12 (26) 35 20 45 33 28 20.8 16.2 13.7 1.2 1.2 1.3 2.8 3.6 4.5 5.9 7.3 8.6 5 Godrej Properties SELL 1,360 890 (35) 378 5.2 278 (7) 13 27 (163) 286 113 NM 108 50 (114) #### 70.1 4.5 4.4 4.0 NM 4.1 8.3 — — — 17 Mindspace REIT ADD 279 320 15 165 2.3 593 5 14 18 (39) 170 25 54 20 16 23.9 13.8 11.7 1.0 1.0 1.0 3.3 5.0 6.2 3.4 6.9 7.6 1 Oberoi Realty ADD 585 610 4 213 2.9 364 20 29 39 8 40 37 29 20 15 22.9 18.6 10.3 2.3 2.1 1.8 8.2 10.6 12.9 0.3 0.3 0.3 4 Phoenix Mills BUY 766 940 23 132 1.8 172 3 11 31 (72) 244 193 250 73 25 33.0 20.5 12.1 2.7 2.6 2.4 1.2 3.7 10.1 0.1 0.3 0.4 2 Prestige Estates Projects ADD 272 340 25 109 1.5 401 6 11 24 (41) 93 116 48 25 12 6.9 6.1 5.2 1.0 0.9 0.9 2.9 3.9 7.7 0.6 0.6 0.6 2 Sobha BUY 472 480 2 45 0.6 95 11 38 54 (65) 259 43 45 12 9 7.8 5.2 4.4 1.8 1.6 1.4 4.1 13.8 17.4 1.5 1.5 1.5 3 Sunteck Realty BUY 291 345 19 43 0.6 140 7 18 17 4 141 (8) 39 16 17 26.0 12.9 14.6 1.4 1.3 1.2 3.5 8.1 6.9 0.3 0.3 0.3 2 Real Estate Attractive 2,162 29.8 18 105 43 69 34 24 27.4 18.8 14.3 1.8 1.8 1.7 2.6 5.2 7.2 1.5 2.0 2.2 76 Retailing Aditya Birla Fashion and Retail BUY 191 230 20 176 2.4 938 (8) (4) 4 (277) 47 184 NM NM 53 31.9 25.1 11.3 6.6 7.2 6.3 NM NM 12.6 — — — 7 Daily Summary India Avenue Supermarts SELL 3,018 1,950 (35) 1,955 27.0 648 17 22 39 (19) 32 77 178 136 77 111 87 52 16.0 14.3 12.1 9.4 11.2 17.1 — — — 20 Titan Company ADD 1,577 1,625 3 1,400 19.3 888 11 19 27 (35) 76 43 144 82 57 81 51 38 18.7 16.1 13.4 13.7 21.2 25.6 0.2 0.4 0.5 42 Retailing Attractive 3,531 48.7 (50) 106 93 265 128 66 87 62 39 15.8 14.2 12.0 6.0 11.1 18.1 0.1 0.2 0.2 69 Source: Company, Bloomberg, Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK - May2021 31, KOTAK INSTITUTIONAL EQUITIES RESEARCH 125 Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary 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 28-May-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 Speciality Chemicals Castrol India BUY 135 165 23 133 1.8 989 6 8 9 (28) 39 13 22 16 14 14.4 10.6 9.4 9.4 8.9 8.4 43.0 56.8 60.4 4.1 5.6 6.3 3 Pidilite Industries REDUCE 2,060 1,760 (15) 1,047 14.4 508 22 26 34 (3) 15 32 92 80 61 62 55 42 18.7 16.4 14.0 22.6 21.8 24.9 0.4 0.5 0.6 18 S H Kelkar and Company BUY 161 185 15 23 0.3 141 10 10 12 107 4 18 17 16 14 11.1 9.7 8.3 2.4 2.2 1.9 15.2 14.0 14.8 1.1 1.6 2.0 1 SRF SELL 6,516 6,000 (8) 386 5.3 59 205 240 303 49 17 26 32 27 21 19.1 16.5 13.4 5.5 4.8 4.0 20.3 19.0 20.2 0.4 0.4 0.6 20 Speciality Chemicals Attractive 1,589 21.9 7 20 25 52 43 34 32.7 27.4 22.3 10.7 9.3 8.0 20.7 21.7 23.2 0.7 0.9 1.1 42 Telecommunication Services Bharti Airtel BUY 524 700 34 2,876 39.7 5,492 (5) 11 22 NM NM NM NM 48 23 8.8 7.3 5.7 4.9 4.8 4.3 NM 10.1 19.6 - 1.1 1.1 105 Indus Towers ADD 242 250 3 652 9.0 2,695 20 19 19 10 (8) 2 12 13 13 5.3 5.0 4.8 4.1 3.9 3.7 32.8 31.3 30.3 8.3 6.6 6.6 12 Vodafone Idea RS 9 — — 251 3.5 28,735 (8) (6) (4) NM NM NM NM NM NM 10.4 8.0 6.5 (0.8) (0.6) (0.4) #### 47.4 25.7 — — — 27 Tata Communications BUY 1,048 1,220 16 299 4.1 285 47 52 62 23 11 19 23 20 17 9.3 8.3 7.1 #### 25.3 12.0 NM 226 95.6 1.3 1.5 1.8 15 Telecommunication Services Attractive 4,078 56.3 40 72 213 NM NM 63 8.6 7.2 5.9 9.8 12.1 13.6 NM NM 21.4 1.4 2.0 2.0 159 Transportation - Adani Ports and SEZ ADD 776 825 6 1,585 21.9 2,112 21 30 37 (18) 44 21 37 25 21 23.5 16.6 12.9 5.4 3.9 3.4 15.9 17.8 17.2 0.6 0.4 0.4 208 May2021 31, Container Corp. SELL 668 540 (19) 407 5.6 609 10 14 18 (41) 39 31 66 48 36 37.0 29.4 18.2 4.0 3.7 3.4 6.0 8.0 9.8 0.7 - 0.6 35 Gateway Distriparks BUY 300 215 (28) 37 0.5 125 8 9 12 79 20 28 40 33 26 13.6 12.9 10.9 2.5 2.4 2.3 6.8 7.5 9.1 1.7 1.0 1.0 2 GMR Infrastructure BUY 26 25 (4) 158 2.2 6,036 (5) (3) (2) (54) 26 33 NM NM NM 67.7 19.8 14.7 (3.0) (2.2) (2.3) 71.3 33.3 21.8 — — — 7 Gujarat Pipavav Port BUY 106 119 12 51 0.7 483 5 6 7 (25) 38 17 23 17 15 10.4 8.9 7.6 2.5 2.6 2.6 10.6 14.9 17.6 4.2 5.8 6.7 1 InterGlobe Aviation BUY 1,776 2,100 18 684 9.4 383 (143) (93) 129 (2,103) 35 239 NM NM 14 NM - - - - - NM #### #### — — — 24 Mahindra Logistics REDUCE 529 490 (7) 38 0.5 71 5 13 18 (43) 161 36 105 40 29 ------6.5 15.6 18.6 — — — 1 Transportation Attractive 2,960 40.8 (158) 177 494 NM 137 23 31.0 18.9 10.2 7.2 6.2 4.9 NM 4.5 21.4 0.6 0.4 0.4 278 KIE universe 166,048 2,290 33.9 33.3 17.6 30.5 22.8 19.4 14.5 11.7 10.3 3.3 3.0 2.7 10.8 13.1 14.0 1.3 1.4 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$)= 72.48 Source: Company, Bloomberg, Kotak Institutional Equities estimates 126 126 KOTAK INSTITUTIONAL EQUITIES RESEARCH Disclosures of of the following As of March 31, 2021 a merger or strategic transaction n , if, any, noare longer in effect for this stock fair value KOTAK INSTITUTIONAL EQUITIES RESEARCH , any, if for this stock,because is there notsufficient a ing and 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 deliver returns 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 31/12/2020 Kotak Institutional Equities Investment Research had investment ratings on 212 equity securities. r r display is not or applicable. . The previous investment rat SELL 2.8% 23.6% fair valuefair ul andul is therefore excluded 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) - nth horizon basis. 0.5% 16.5% fair valuefair +5% returns over the next 12 months. REDUCE - mo 5 - - 15% returns over the next 12 months. 5% returns over the next months.12 The information is not available fo - - nt and rating ADD 27.4% 4.7% 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 meaningf stock to deliver 5 Kotak SecuritiesKotak does not cover this company. The investme The coverage view represents each analyst’s fundamental overall outlook on the Sector.The coverage viewwill consist of one Attractive, Neutral, Cautious. BUY 3.8% 32.5% We expect this stock to deliver We this expect 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% 10% 50% 40% 30% 20% 70% 60% Source: Kotak Institutional Equities Kotak Institutional Equities Research coverage universe coverage Research Equities Institutional Kotak Distribution of ratings/investment banking relationships fundamental basis for determining an investment rating or and shouldnot be relied upon. = NA AvailableNot or Applicable.Not = NM Meaningful.Not NR = Rated.Not 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. Other definitions Other Coverage view. designations: ratings/identifiers Other REDUCE. SELL. Our Our Ratings System notdoes take into account short strictly be in accordance with the Rating System all at times. Ratings other and definitions/identifiers ratings of Definitions BUY. ADD. 127 Disclosures Corporate Office Overseas Affiliates Kotak Securities Ltd. Kotak Mahindra (UK) Ltd Kotak Mahindra Inc 27 BKC, Plot No. C-27, “G Block” 8th Floor, Portsoken House 369 Lexington Avenue Bandra Kurla Complex, Bandra (E) 155-157 Minories 28th Floor, New York Mumbai 400 051, India London EC3N 1LS NY 10017, USA Tel: +91-22-43360000 Tel: +44-20-7977-6900 Tel:+1 212 600 8856 Copyright 2021 Kotak Institutional Equities (Kotak Securities Limited). All rights reserved. 1. Note that the research analysts contributing to this report may not be registered/qualified as research analysts with FINRA; and 2. Such research analysts may not be associated persons of Kotak Mahindra Inc and therefore, may not be subject to NASD Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. 3. Any U.S. recipients of the research who wish to effect transactions in any security covered by the report should do so with or through Kotak Mahindra Inc and (ii) any transactions in the securities covered by the research by U.S. recipients must be effected only through Kotak Mahindra Inc at [email protected]. This report is distributed in Singapore by Kotak Mahindra (UK) Limited (Singapore Branch) to institutional investors, accredited investors or expert investors only as defined under the Securities and Futures Act. Recipients of this analysis / report are to contact Kotak Mahindra (UK) Limited (Singapore Branch) (16 Raffles Quay, #35-02/03, Hong Leong Building, Singapore 048581) in respect of any matters arising from, or in connection with, this analysis / report. Kotak Mahindra (UK) Limited (Singapore Branch) is regulated by the Monetary Authority of Singapore. Kotak Securities Limited and its affiliates are a full-service, integrated investment banking, investment management, brokerage and financing group. We along with our affiliates are leading underwriter of securities and participants in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationships with a significant percentage of the companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. Investors should assume that Kotak Securities Limited and/or its affiliates are seeking or will seek investment banking or other business from the company or companies that are the subject of this material and that the research professionals who were involved in preparing this material may participate in the solicitation of such business. Our research professionals are paid in part based on the profitability of Kotak Securities Limited, which include earnings from investment banking and other business. Kotak Securities Limited generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. Additionally, Kotak Securities Limited generally prohibits its analysts and persons reporting to analysts from serving as an officer, director, or advisory board member of any companies that the analysts cover. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additionally, other important information regarding our relationships with the company or companies that are the subject of this material is provided herein. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. It is for the general information of clients of Kotak Securities Limited. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, clients should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Kotak Securities Limited does not provide tax advise to its clients, and all investors are strongly advised to consult with their tax advisers regarding any potential investment. Certain transactions -including those involving futures, options, and other derivatives as well as non-investment-grade securities - give rise to substantial risk and are not suitable for all investors. The material is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions expressed are our current opinions as of the date appearing on this material only. We endeavor to update on a reasonable basis the information discussed in this material, but regulatory, compliance, or other reasons may prevent us from doing so. We and our affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this material, may from time to time have "long" or "short" positions in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. Kotak Securities Limited and its non US affiliates may, to the extent permissible under applicable laws, have acted on or used this research to the extent that it relates to non US issuers, prior to or immediately following its publication. Foreign currency denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of or income derived from the investment. In addition, investors in securities such as ADRs, the value of which are influenced by foreign currencies affectively assume currency risk. In addition options involve risks and are not suitable for all investors. Please ensure that you have read and understood the current derivatives risk disclosure document before entering into any derivative transactions. Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house. Kotak Securities Limited is a corporate trading and clearing member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE), Metropolitan Stock Exchange of India Limited (MSE), National Commodity and Derivatives Exchange (NCDEX) and Multi Commodity Exchange(MCX). Our businesses include stock broking, services rendered in connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management. Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Kotak Securities Limited is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old Mutual Life Insurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI). Kotak Securities Limited is registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014. We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in last five years. However SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise letters or levied minor penalty on KSL for certain operational deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has our certificate of registration been cancelled by SEBI at any point of time. We offer our research services to primarily institutional investors and their employees, directors, fund managers, advisors who are registered with us Details of Associates are available on website i.e. www.kotak.com Research Analyst has served as an officer, director or employee of subject company(ies): No We or our associates may have received compensation from the subject company(ies) in the past 12 months. We or our associates have managed or co-managed public offering of securities for the subject company(ies) in the past 12 months. YES. Visit our website for more details We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received compensation or other benefits from the subject company(ies) or third party in connection with the research report. Our associates may have financial interest in the subject company(ies). Research Analyst or his/her relative's financial interest in the subject company(ies): No Kotak Securities Limited has financial interest in the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: Divis Laboratories, Bank of Baroda - YES Nature of Financial interest: Holding equity shares or derivatives of the subject company. Our associates may have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report. Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No Kotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No Subject company(ies) may have been client during twelve months preceding the date of distribution of the research report. A graph of daily closing prices of securities is available at https://www.moneycontrol.com/india/stockpricequote/ and http://economictimes.indiatimes.com/markets/stocks/stock-quotes. (Choose a company from the list on the browser and select the"three years" icon in the price chart). Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. CIN: U99999MH1994PLC134051, Telephone No.: +22 43360000, Fax No.: +22 67132430. Website: www.kotak.com / www.kotaksecurities.com. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Telephone No: 42856825. SEBI Registration No. INZ000200137(Member of NSE, BSE, MSE, MCX & NCDEX). Member Id: NSE-08081; BSE-673; MSE-1024; MCX-56285; NCDEX-1262. AMFI ARN 0164, PMS INP000000258 and Research Analyst INH000000586. NSDL/CDSL: IN-DP-NSDL-23-97. Compliance Officer Details: Mr. Manoj Agarwal. Call: 022 - 4285 8484, or Email: [email protected]. Investments in securities market are subject to market risks, read all the related documents carefully before investing. In case you require any clarification or have any concern, kindly write to us at below email ids: Level 1: For Trading related queries, contact our customer service at ‘[email protected]’ and for demat account related queries contact us at [email protected] or call us on: Toll free numbers 18002099191 / 1860 266 9191 Level 2: If you do not receive a satisfactory response at Level 1 within 3 working days, you may write to us at [email protected] or call us on 022-42858445 and if you feel you are still unheard, write to our customer service HOD at [email protected] or call us on 022-42858208. Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Name: Mr. Manoj Agarwal) at [email protected] or call on 91- (022) 4285 8484. Level 4 : If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach Managing Director / CEO (Mr. Jaideep Hansraj) at [email protected] or call on 91-(022) 4285 8301. First Cut notes published on this site are for information purposes only. They represent early notations and responses by analysts to recent events. Data in the notes may not have been verified by us and investors should not act upon any data or views in these notes. Most First Cut notes, but not necessarily all, will be followed by final research reports on the subject. There could be variance between the First cut note and the final research note on any subject, in which case the contents of the final research note would prevail. We accept no liability for the contents of the First Cut Notes.