Top Stock Picks for 2021 Outlook

• The Indian economy has fared relatively better than expected in 2020. The efforts taken by the GoI and RBI aren’t glorified enough and have played a significant role in rural revival. Favourable policies and rural tailwinds are expected to be key drivers whilst urban economy nurses back to recovery. • The Global Central Banks and Governments are likely to maintain their stance and unleash new rounds of stimulus if needed. India is one of the brighter spots in the emerging market space where these funds are expected to be mobilized. This is evident in the strongest of FPI flows seen in the recent past which also include flows on account of MSCI rebalancing. • Some economic & health indicators are pointing at gradual normalisation which sets the stage for upwards revision to GDP forecast. Political stability is an important factor that will support the markets. • Although the valuations are expensive and are factoring most positives, uptick in commodity prices pose a risk to inflation. However, the impact on our recommended portfolio is not expected to be significant. We are presenting opportunities that either have resilient business models which stood the test of time (Reliance, ICICI Bank, HCL Tech & Coforge), are expected consolidation plays (Tata Consumer), are expected beneficiaries of sectoral upcycle (Divi’s, JB Chem, Dalmia Bharat & Avaas) or are available at compelling valuation and/or have attractive dividend yield (Power Grid, NHPC, RBL & Kaveri).

2 Stock Recommendations

Sr. Weight Target Price Upside Stock CMP (₹) No. (%) (₹) (%) Large Caps 1 1,994 9 2,204 11 2 ICICI Bank 514 9 580 13 3 HCL Technologies 919 9 1,048 14 4 Divi‘s Laboratories 3,750 9 4,154 11 5 Power Grid Corporation of India 190 9 220 16 6 601 9 688 14 Mid & Small Caps 7 NHPC 23 7 28 21 8 Dalmia Bharat 1,026 7 1,203 17 9 Coforge 2,653 7 3,043 15 10 RBL Bank 220 7 300 36 11 Aavas Financiers 1,699 6 1,970 16 12 JB Chemicals & Pharmaceuticals 1,032 6 1,222 18 13 Kaveri Seed Company 512 6 714 39

*Price as on December 24, 2020

3 LARGE CAPS

4 Reliance Industries

CMP: ₹1,994 BUY TP: ₹2,204 Upside: 11%

• Reliance Industries (RIL), India’s largest company by market capitalization, has major presence across petroleum refining & marketing, petrochemicals, retail and telecom & technology. • RIL’s has a highly integrated and complex O2C operation which provides cushion during volatile periods. The refining margins are under pressure however, RIL has the ability to adjust its product slate in-line with changing product crack and it stands to benefit the most from improving middle distillate cracks. As for petchem, RIL has high level of flexibility to choose feedstock which enhances its margins and we believe that RIL stands to benefit from sharp spike in margins of key petchem products. • The Retail and Jio businesses have enabled significant deleveraging and have transformed the company which has provided support during volatile period for O2C. Factors like tariff hikes, entry in postpaid & enterprise segments and collaboration with Google for entry-level smart phone would drive growth for Jio. New store opening and scale up of JioMart along with inorganic opportunities are main drivers for R-Retail. • We expect Reliance to register 18% pa PAT growth over FY21-23E largely driven by B2C businesses.

Financial Summary EBITDA Consolidated (₹Cr) Revenue EPS (₹) EPS growth (%) P/E (x) RoE (%) RoCE (%) Margin FY21E 6,06,888 12.2 65.3 (5.5) 30.5 8.7 7.6

FY22E 6,89,424 13.5 73.1 11.9 27.3 9.0 9.3

*Price and valuations ratios as on December 24, 2020 5 ICICI Bank

CMP: ₹514 BUY TP: ₹580 Upside: 13%

• ICICI Bank, India’s second-largest private bank is aiming to focus on data, analytics and technology to drive growth and improve productivity and efficiency. It has surplus liquidity (current LCR of 150%) and strong capitalization (Tier 1 CAR at 14.9%). It has healthy CASA ratio of ~44% and has lower cost of funds vs. peers. • Initiatives like automated and data driven acquisition and decision making have lowered turn-around times in H1FY2021 and are likely to have aided performance to reach pre-covid levels faster than anticipated. These initiatives solidify ICICI bank’s dominant position and we expect these digital led offerings to drive market share gains. • Apart from driving growth, we believe that focus on Digitisation/Tech will improve efficiencies and core operating profitability across business segments. We expect loan growth of 11.9% CAGR over FY20-23E and expect core RoA and ROE to improve from 0.8% and 7.3% in FY20 to 1.6% and 14.3% over FY20-23E respectively. • Profitability of life insurance, general insurance, asset management and securities companies remains robust. Almost all group businesses will end up on a stronger footing versus peers in the medium term. The stock is trading at 2.0x FY23E BVPS (1.4x core PB) and offers value. Financial Summary

Standalone (₹Cr) NII PPOP EPS (₹) EPS growth (%) P/BV (x) RoA (%) RoE (%)

FY21E 37,850 32,330 17.2 40.3 2.5 1.3 11.6

FY22E 43,480 37,890 28.3 64.4 2.2 1.5 12.9

*Price and valuations ratios as on December 24, 2020 6 HCL Technologies

CMP: ₹919 BUY TP: ₹1,048 Upside: 14% • HCL Tech is India’s third largest listed IT services company by revenue and is the only company with major presence across services and products. It also has a leadership position in IMS. The company has been witnessing solid traction in deal wins and the pipe line remains robust which provides good revenue visibility. • We believe that HCL’s portfolio is relatively insulated vs. peers as it has lower concentration to verticals like travel, energy, hospitality, etc. and higher exposure to low-impact verticals like BFSI, healthcare and technology. Moreover, it has ~37% exposure to IMS (resilient service line) where it has strong partnerships and capabilities that can enable it to capitalize on opportunities in areas of cloud migration and network security. • HCL Tech has been successful in strengthening its Products & Platform segment by acquiring IBM products, which have yielded positive results in the first year. This BU too has shown resilience and provides recurring revenue stream. • Aided by a healthy mix of recurring product revenue & managed services, we expect HCL Tech to post US revenue CAGR of 6% over FY20-22E with earnings CAGR of 12%. The stock is trading at 18x FY22E P/E, at 15%/35% discount to peers/TCS.

Financial Summary

Consolidated (₹Cr) Revenue EBIT Margin EPS (₹) EPS growth (%) P/E (x) RoE (%) RoCE (%)

FY21E 75,523 20.9 45.6 12.0 20.2 22.0 25.2

FY22E 83,513 20.9 51.1 11.9 18.0 21.4 24.8

*Price and valuations ratios as on December 24, 2020

7 Divi's Laboratories

CMP: ₹3,750 BUY TP: ₹4,154 Upside: 11% • Divi’s is one of the largest API manufacturers in the world with a selective portfolio and having leadership position in at least 10 of its ~30 APIs. It also develops and undertakes contract manufacturing (custom synthesis, CS) of APIs/intermediates for innovator companies. • The company has a proven execution record on account of its chemistry skills, cost competitive and fast delivery structure as well as long standing relationship with clients. We believe that Divi’s is well placed to capitalize on growth opportunities in its key generic API molecules as well as new products in the CS segment. • Divi’s is already witnessing strong growth on account of structural tailwinds and is in midst of completing its capex plan of ₹1,800cr. It has announced ₹400cr for CS and will commence work for ₹600cr greenfield facility at Kakinada. This points at strong revenue visibility as the company has excellent track record with past capex where the same was undertaken provided that there was sturdy revenue visibility. • We believe these incremental capacities provide revenue visibility of 22% CAGR over FY20-23E, which along with improvement in margins led by backward integration/debottlenecking, would drive an EPS CAGR of 25% over the next 3 years. We value the stock at 38x FY23E EPS.

Financial Summary EBITDA Consolidated (₹Cr) Revenue EPS (₹) EPS growth (%) P/E (x) RoE (%) RoCE (%) Margin FY21E 6,837 40.7 72.6 40.1 51.6 24.0 30.9

FY22E 8,339 40.0 84.4 16.2 44.4 23.4 30.3

*Price and valuations ratios as on December 24, 2020 8 Power Grid Corporation of India

CMP: ₹190 BUY TP: ₹220 Upside: 16% • Power Grid Corporation of India Ltd. (POWERGRID) one of the world’s largest electrical power transmission utilities should benefit from steady capitalization and the regulated ROE model which should drive standalone PAT over the next few years. • The company has orders in hand worth ₹41,000cr and the company has guided that it has projects in pipeline of ~₹17,900cr for inter/intra state transmission work works. Additionally, projects of 20GW from Rajasthan, 20GW from Gujarat and 10GW Leh-Ladakh RE Parks are under consideration with opportunity size of ~₹28,000-30,000cr. We believe that current orders and pipeline offers growth visibility for next 3 years. • Although the lack of significant new orders has resulted in declining order book, the management has indicated in the past that it will maximize payout of dividend if there is no capex to meet. Hence, we expect dividend to increase form ₹10 per share in FY20 to ₹14.3 and ₹15.0 per share in FY22E and FY23E respectively. Moreover, the company is best placed to gain from pick up in transmission investments over the long run. • At 1.3x FY22E PBV and 8x FY22E P/E, the valuations are cheap considering enhanced dividend yield of 7-8% and decent EPS CAGR of ~8% over FY20-22E.

Financial Summary

Standalone (₹Cr) Revenue EPS (₹) EPS growth (%) P/B (x) P/E (x) RoE (%) RoCE (%)

FY21E 39,299 20.6 (0.1) 1.4 9.2 13.8 10.7

FY22E 42,738 23.9 15.8 1.3 8.0 15.0 11.9

*Price and valuations ratios as on December 24, 2020 9 Tata Consumer Products

CMP: ₹601 BUY TP: ₹688 Upside: 14%

• Tata Consumer Products (TCPL), the second largest branded tea player in the world is transforming from being a largely branded tea & coffee player into a diversified FMCG company. • We believe that TCPL would be a key beneficiary of gradual shift from unbranded to branded tea in a market where top two (TCPL & HUL) account for ~45% by value and the unorganized segment accounts for ~40-45% share. • Apart from its already established two key brands (Tata Tea and Salt), the company intends to drive growth from its relatively smaller portfolio of pulses and spices (Tata Sampann). We believe that there is significant opportunity for TCPL to leverage on the direct reach of the tea portfolio. Moreover, the integration of food business is expected to yield synergies of 2-3% of sales of the combined entity and only part of the synergy has been realized so far. • We believe that market share gains in branded tea, steady build up food business (also aided by revenue & cost synergies) would drive Revenue and EBITDA CAGR of 11% and 15% respectively over FY20-23E.

Financial Summary EBITDA Consolidated (₹Cr) Revenue EPS (₹) EPS growth (%) P/E (x) RoE (%) RoCE (%) Margin FY21E 11,231 14.3 10.6 51.9 56.7 6.9 8.5

FY22E 12,061 14.6 11.5 8.6 52.3 7.1 9.0

*Price and valuations ratios as on December 24, 2020

10 MID AND SMALL CAPS

11 NHPC

CMP: ₹23 BUY TP: ₹28 Upside: 21%

• NHPC is a largest player in India, in the field of hydro power development, and has completed projects aggregating 7.1GW (including 1.5GW capacity under JV). • NHPC is currently executing 2.8GW projects on its own, and 500MW projects through its 100% subsidiaries. The two key project, Subansiri Lower (2GW) and Parbati-II (800MW), have cleared major hurdles and are expected to get commissioned over FY22E-23E. • We expect NHPC to add 800MW capacity through FY21-23E while the 2GW Subansiri Lower could commission in 2HFY23E, its benefits would be seen only in FY24E. On the back of increased standalone capacity, we expect NHPC’s earnings to post 10% CAGR over FY21E-23E and expect regulated equity to grow at 6% over the same period. • NHPC typically pays 5% of net worth towards dividends. At CMP, the dividend yield works out to 7%. We find stock valuations compelling at 0.7x BV and 7.0x FY22E EPS. Improved visibility on completion of key projects should re-rate the stock’s cheap valuation multiples. Given its hydro portfolio, NHPC is well placed on the ESG framework as well.

Financial Summary EPS growth Standalone (₹Cr) Revenue EPS (₹) P/B (x) P/E (x) RoE (%) RoCE (%) (%) FY21E 9,965 2.8 (1.4) 0.7 8.3 8.9 8.0

FY22E 10,460 3.2 12.9 0.7 7.2 9.6 8.6

*Price and valuations ratios as on December 24, 2020 12 Dalmia Bharat

CMP: ₹ 1,026 BUY TP: ₹1,203 Upside: 17%

• Dalmia Bharat (DBL), the fourth largest cement manufacturer in the country, with an installed capacity of 26.5 MTPA (46% in the southern region and 54% in the eastern region) has aggressive plans to ramp up its volume with new capacities in East and West. • DBL is expanding its cement capacity in the East by ~8 MTPA (5.3 MTPA brownfield, 2.5 MTPA greenfield) of which 3.5MT is likely to get commissioned in FY21E and the balance through FY23E. The company also has completed the acquisition of Murli Industries which will provide it exposure to the west market which the management is hopeful to revive over the next 9-12 months. • The management expect demand from East to remain strong on account high rural mix and government infra projects. Aided by strong demand environment and capacity absorption, we expect cement volume CAGR of ~12% over FY20-22E. • We believe that improving utilization along with operational efficiencies likely to result in EBITDA/t growth and we expect the company to generate strong FCF thus enabling deleveraging. The stock trades at valuation of 7.8x FY22E EV/EBITDA and USD75/t of EV/capacity.

Financial Summary

EBITDA Consolidated (₹Cr) Revenue EPS (₹) EPS growth (%) P/E (x) RoE (%) RoCE (%) Margin FY21E 9,929 26.5 41.2 258.3 24.9 7.3 6.3

FY22E 12,052 22.6 43.3 5.1 23.7 7.3 6.6

*Price and valuations ratios as on December 24, 2020 13 Coforge

CMP: ₹ 2,653 BUY TP: ₹3,043 Upside: 15%

• Coforge (erstwhile NIIT Technologies), a part of Baring Private Equity, is mid-size IT services company which has been posting sector leading growth profile after change in management and re- orientation of its Go-To-Market strategy. • COFO has continuously invested in building digital capabilities and its specialisation in emerging tech, including digital integration, in verticals such as insurance, BFS and transportation has given it scale that is equivalent to a large peer. Consistent focus on client mining and deal wins have aided the sector leading growth rates. This has enabled it to perform well despite significant impact on its travel vertical (~19% of revenue) in Q1FY21. • Coforge has a healthy deal pipeline and executable orders of USD489mn over the next 12 months. The healthy order intake on TTM basis implies a book-to-bill ratio of 1.3x. We forecast Coforge to clock top-quartile USD revenue growth of 12% CAGR over FY20-23E. • Led by consistent top-quartile growth, COFO has traded at ~19% premium to mid-cap peers over the past two years. We believe the stock will continue to command premium valuations, given its strong execution capabilities.

Financial Summary

EBITDA Consolidated (₹Cr) Revenue EPS (₹) EPS growth (%) P/E (x) RoE (%) RoCE (%) Margin FY21E 4,675 13.3 80.7 11.8 32.9 20.9 25.7

FY22E 5,474 15.1 109.7 35.9 24.2 26.3 32.1

*Price and valuations ratios as on December 24, 2020 14 RBL Bank

CMP: ₹ 220 BUY TP: ₹300 Upside: 36% • RBL Bank, one of India’s fastest growing private sector banks with an expanding presence across the country, is an attractive play given the steep discount to peers and improved business model. • RBL has an adequate capital positioning with a Tier-1 CAR of 15.1% and total CAR of 16.5% as on Q2FY21. This is further set to strengthen after infusion of ~₹1,566cr via preferential allotment in 3QFY21, which would add ~230bps to CET-1 capital. Stronger internal accruals, potential resolution and Corporate portfolio consolidation will ensure good capitalisation for the near-to-medium term. • RBL’s overall profitability is expected to improve going ahead on account of improvement in NIMs and lower credit cost. Improvement in NIM going forward would be driven by the increasing share of retail loans, deposit rate cuts and run-down of excess liquidity while improving asset quality is expected to bring down credit cost from peak levels. On the liability side, RBL has delivered a strong 32% yoy growth in H1FY21 and shed bulk deposits. • Despite improving profile, RBL is currently trading at a higher discount to peers like IndusInd, City Union and AU than its average discount since listing; similarly, it is trading at a far lower premium to than its average premium.

Financial Summary

Standalone (₹Cr) NII PPOP EPS (₹) EPS growth (%) P/BV (x) RoA (%) RoE (%)

FY21E 3,950 2,880 10.1 40.3 1.0 0.7 5.2

FY22E 4,450 3,110 19.5 64.4 0.9 1.2 8.8

*Price and valuations ratios as on December 24, 2020 15 Aavas Financiers

CMP: ₹1,699 BUY TP: ₹1,970 Upside: 16%

• Aavas Financiers (Aavas), a retail HFC has carved out a niche for itself in affordable housing finance by focusing on self-employed non-professionals that lack adequate income documentation and hence are underserved. • Aavas does not have any presence in the stressed developer loan segment, follows prudent underwriting discipline and it leverages on in-house analytics tools which has helped in achieving superior asset quality. This is reflected in its GNPA being the lowest among HFCs and consistently been at ~0.55% over the past three years. Aavas also has one of the lowest LTVs among HFCs. • Aavas is adequately capitalized, has a strong liquidity profile and has a diversified funding mix which has lower cost of funds on account of its high credit rating. The cost of funds are likely to remain low on account of increasing share of NHB refinancing. We expect the cost to income to decline going ahead as operating leverage kicks in. • We expect Aavas to post loan growth of ~25% CAGR over FY20-22E and expect ROA and ROE to sustain at current levels.

Financial Summary

Consolidated NII PPOP EPS (₹) EPS growth (%) P/BV (x) RoA (%) RoE (%) (₹Cr)

FY21E 1,181 419 36.9 16.4 5.2 3.0 11.3

FY22E 1,408 484 45.8 24.0 4.5 3.1 12.2

*Price and valuations ratios as on December 24, 2020

16 JB Chemicals & Pharmaceuticals

CMP: ₹1,032 BUY TP: ₹1,222 Upside: 18% • JB Chemicals & Pharmaceuticals (JBCP) is a 40-year old pharma company with several well established brands in the domestic market and wide geographical presence in the both regulated and semi-regulated markets. • JBCP has been outperforming the Indian pharma market and we expect this outperformance to sustain on account of new launches and strong growth in focused-products group (especially cardiac), which consist of cardiac brands (Cilacar and Nicardia) and acute brands (Rantac and Metrogyl). • We believe that KKR would also look to accelerate growth in various business segments of JBCP by: (a) further expanding the company’s presence in the high-growth branded formulations markets, (b) entry into newer therapeutic areas in the domestic market and (c) potentially scaling-up JBCP’s highly profitable CMO business over the next 3-4 years. • We believe KKR can extract cost savings of 250-300bps which, along with improving India rep productivity and higher growth in the CMO business, can expand JBCP’s overall EBITDA margins from 22% in FY20 to 26% in FY23E. We forecast JBCP’s EPS to log 18% CAGR over FY20-23E. Despite similar earnings growth profile as other India focused companies like Alkem, IPCA and Torrent, JBCP trades at 10-20% discount on FY21E EV/EBITDA. Financial Summary

Consolidated EBITDA Revenue EPS (₹) EPS growth (%) P/E (x) RoE (%) RoCE (%) (₹Cr) Margin

FY21E 1,984 25.6 46.5 31.2 22.2 22.9 29.3

FY22E 2,219 25.5 50.9 9.5 20.3 21.0 27.1

*Price and valuations ratios as on December 24, 2020 17 Kaveri Seed Company

CMP: ₹512 BUY TP: ₹714 Upside: 39% • Kaveri Seeds is one of India's leading seed producers, with a broad product portfolio that includes hybrids for cotton, corn, paddy, bajra, sunflower, sorghum and various vegetables. • Kaveri Seeds has not raised any external money in the form of either equity or debt, and meanwhile has paid out ~₹850cr to shareholders (including FY20) via share buybacks & dividends. This reflect the company’s strong FCF generation. • The non-cotton portfolio now contributes around half of total seed revenues but nearly 70% of total seed EBITDA. The non-cotton portfolio is likely to grow faster than the cotton portfolio (barring approval for new technology in cotton) and also generates higher margins. • Kaveri remains ignored by most investors despite steady EPS growth, ~45% ‘core’ ROE (ex-cash), and a 7-8% dividend + buyback yield. At 9.4x FY21E PE, it looks clearly undervalued. We believe the shift in earnings mix towards the non-cotton business – which is less regulated, higher-margin and faster-growing – could drive an expansion in margins and an increase in valuation multiples over time.

Financial Summary EBITDA Consolidated (₹Cr) Revenue EPS (₹) EPS growth (%) P/E (x) RoE (%) RoCE (%) Margin FY21E 10,560 29.0 53.3 27.4 9.6 31.6 31.7

FY22E 11,716 29.6 59.5 11.6 8.6 30.4 30.7

*Price and valuations ratios as on December 24, 2020

18 Disclaimer

Disclaimer:

Investments in securities market are subject to market risks, read all the related documents carefully before investing. There is no assurance or guarantee that the investment objectives shall be achieved. IIFL does not guarantee any assured returns on the investments recommended herein. Past performance of securities/ instruments is not indicative of their future performance. IIFL makes no representation/s or warranty/ies, express or implied, as to the accuracy, completeness or reliability of any information compiled herein, and hereby disclaims any liability with regard to the same, including, without limitation, any direct, indirect, incidental or consequential loss. You shall verify the veracity of the information on your own before using the information provided in the document. Investors are requested to review the prospectus carefully and obtain expert professional advice. IIFL group, associate and subsidiary companies are engaged in providing various financial services and for the said services (including the service for acquiring and sourcing the units of the fund) may earn fees or remuneration.

IIFL Group | IIFL Securities Ltd., IIFL House, Sun Infotech Park, Road No. 16V, Plot No. B-23, MIDC, Thane Industrial Area, Wagle Estate, Thane - 400604. CIN: 99999MH1996PLC132983 Tel.: (91-22)2580 6650. Customer Service: 40071000.Stock Broker SEBI Regn: INZ000164132. NSE: 10975 BSE: 179 MCX: 55995 NCDEX: 01249 Depository: INDP1852016. MF Distributor ARN: 47791. PMS SEBI Regn,: INP000002213. Investment Adviser SEBI Regn. INA00000623. Research Analyst SEBI Regn: INH000000248. Loan products are offered by IIFL Finance Ltd. & IIFL Home Finance Ltd. Kindly refer to www.indiainfoline.com for detailed disclaimer and risk factors.

19