INDIA DAILY
May 15, 2019 India 14-May 1-day 1-mo 3-mo Sensex 37,319 0.6 (4.1) 4.2 Nifty 11,222 0.7 (4.0) 4.6 Contents Global/Regional indices Dow Jones 25,532 0.8 (3.2) (1.4) Special Reports Nasdaq Composite 7,734 1.1 (3.0) 3.5 Re-initiating Coverage FTSE 7,242 1.1 (2.6) 0.1 Vodafone Idea: Fighting hard but not in control of its destiny; reinitiate with Nikkei 20,993 (0.4) (5.3) 0.4 ADD Hang Seng 28,122 (1.5) (5.7) 0.8 4QFY19 earnings print - a couple of hits and a couple of misses KOSPI 2,089 0.3 (6.9) (4.9) Reinitiate coverage with ADD rating and fair value of Rs16/share Value traded – India Cash (NSE+BSE) 372 350 369 15,90 Daily Alerts Derivatives (NSE) 10,684 5,827 1 Results Deri. open interest 3,196 3,298 3,652 Nestle India: Slow start to CY2019 4QCY19 print - revenue growth slows down to a six-quarter low Forex/money market
To launch organic food products Change, basis points
Cut EBITDA estimates by 3-4% and lower fair value to Rs10,700; REDUCE 14-May 1-day 1-mo 3-mo
stays Rs/US$ 70.4 5 95 (97) SRF: Stellar performance 10yr govt bond, % 7.6 (3) (7) (1) Net investment (US$ mn) Strong growth in revenues across all segments; margins surge in packaging and chemicals 13-May MTD CYTD FIIs (136) 12 9,780 Raise FY2020-21 EPS estimates by 11-15% MFs 177 480 99
Union Bank: Improving, albeit at a pace slower than peers Top movers Elevated credit cost and one-off expenses dent earning Change, % Asset quality stable but not a material improvement, as expected Best performers 14-May 1-day 1-mo 3-mo UT IN Equity 1 3.7 12.0 33.3 Maintain ADD; improvement in NPL ratios to see valuation expansion UTCEM IN Equity 4,424 2.0 4.7 28.6
Results, Change in Reco HPCL IN Equity 268 2.1 4.3 24.0 Just Dial: Revenue trajectory improves but challenges remain FB IN Equity 98 1.8 0.8 22.4 Improving Tier II/III penetration drives higher revenue growth ONGC IN Equity 164 0.0 4.9 21.6 Worst performers Cost controls drove a meaningful margin improvement in FY2019 RCOM IN Equity 2 (4.3) (15.4) (60.0) Pace of user addition healthy though app downloads continue to trend RPWR IN Equity 6 5.3 (37.2) (41.2) down YES IN Equity 156 0.7 (41.3) (28.8)
Stay cautious; stock underperformance drives a rating upgrade to REDUCE RCAPT IN Equity 111 3.0 (40.2) (25.5) Company alerts IDEA IN Equity 14 (3.1) (17.6) (22.7) Power Grid: Irony of strength Powergrid has won 39% of the projects by value and 35% by revenue over the past six years Powergrid has advantageous scale compared to private sector players Attractive valuations, stable growth prospects and threatened competition Economy alerts Economy: Input inflation moderates WPI inflation softens to 3.07% in April Growth concerns lead to moderation in core manufacturing inflation to 1.8% Benign growth-inflation outcome to create space for 25-50 bps of rate cuts [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. ADD Vodafone Idea (IDEA) Telecommunication Services MAY 15, 2019 RE-INITIATING COVERAGE Coverage view: Cautious
Fighting hard but not in control of its destiny; reinitiate with ADD. After being Price (`): 14 compliance-restricted the past few months, we reinitiate our coverage on VIL with an Fair Value (`): 16 ADD rating and a fair value of Rs16. We found the company’s 4QFY19 earnings print a BSE-30: 37,319 mixed bag on headline numbers and reasonably good as far as delivery on controllable variables (cost synergies, network integration, etc.) is concerned. Prognosis remains uncertain with several plausible scenarios that can play out. Our fair value of Rs16 and corresponding ADD rating is based on one of the many plausible scenarios.
Company data and valuation summary Vodafone Idea Stock data Forecasts/Valuations 2019 2020E 2021E 52-week range (Rs) (high,low) 40-13 EPS (Rs) (19.1) (0.6) (4.0) Market Cap. (Rs bn) 402.3 EPS growth (%) (99.3) 96.9 (583.0) Shareholding pattern (%) P/E (X) (0.7) (24.1) (3.5) Promoters 71.3 Sales (Rs bn) 370.9 474.6 479.5 FIIs 12.8 Net profits (Rs bn) (143.3) (126.7) (110.2) MFs 3.4 EBITDA (Rs bn) 38.4 100.3 144.7 Price performance (%) 1M 3M 12M EV/EBITDA (X) 38.1 12.9 9.9 Absolute (12.8) (26.8) (55.2) ROE (%) (33.0) (17.8) (14.3) Rel. to BSE-30 (9.4) (29.6) (57.3) Div. Yield (%) 0.0 0.0 0.0
4QFY19 earnings print – a couple of hits and a couple of misses
VIL reported consolidated revenues of Rs117.8 bn for 4QFY18, flattish qoq. EBITDA, adjusted for Rs2 bn one-off in reported numbers, stood at Rs15.9 bn, up from Rs11.37 bn with bulk of the qoq EBITDA increase coming from build-up of cost synergies – these stood at Rs12.8 bn for 4Q versus Rs7.5 bn for 3Q. Recurring PAT loss stood at Rs39 bn, marginally lower than recurring loss of Rs42 bn in 3Q, aided by higher EBITDA. Quick look at how VIL’s 4QFY19 performance tracks on the key monitorables –
Revenue performance, absolute and relative – flattish qoq revenues implying a higher per- day revenue (90 days in 4Q versus 92 in 3Q) is an improvement from the declining trends seen for the past many quarters. However – (a) growth print is weaker than that reported by Bharti (+4% qoq) as well as R-Jio (+7% qoq) and hence weak on a relative basis, and (b) revenue performance was aided by accretion from introduction of ‘minimum recharge construct’; revenues outside this remained under pressure.
In-market competitiveness – even as Bharti has not disclosed its 4QFY19 operating parameters yet, we believe VIL’s sequential MBB/LTE net adds (2.3 mn/5.4 mn) as well as data volume growth (+9% qoq) were weaker than both Bharti and R-Jio. VIL’s LTE network still lags peers’ on coverage and capacity and this could continue to hurt competitiveness.
Cost synergy delivery – with Rs51 bn annualized cost synergy delivered within three quarters
of merger against a target of Rs84 bn by 1QFY21, VIL has done a good job on this front. Rohit Chordia
Other integration aspects – network integration progress has impressed even as the larger circles are yet to be integrated. Front-end integration is now done and the company has Aniket Sethi signed a new IT deal with IBM. Good progress, overall, with no visible mishaps.
Reinitiate coverage with ADD rating and fair value of Rs16/share
From Rs4 to Rs40, we can present a plausible scenario for any fair value for VIL. We continue to refrain from taking an extreme view, either way and build a slow improvement in our model.
[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. Vodafone Idea Telecommunication Services
EOP net debt jumps Rs59 bn qoq to Rs1.18 tn; cash burn pace to rise
VIL burnt cash at the pace of Rs20 bn/month in 4QFY19. We do note that 4QFY19 sees adverse working capital swing on account of advance payment of regulatory charges. Even adjusted for the same, with capex likely to rise (to Rs40-45 bn a quarter from Rs32 bn in 4QFY19), we believe VIL’s cash burn pace could remain at around Rs180-200 bn per annum assuming no market repair (no price increase, in other words). Our math assumes 100% delivery on cost synergy targets and bakes in the negative impact of net domestic IC EBITDA going down to zero from Jan 1, 2020. Current cash balance (Rs 76 bn), right issue proceeds (Rs250 bn) and likely proceeds from Indus take and fiber asset sales can support the expected cash burn pace for just about two years.
Our forecasts bake in modest increases in ARPU led by subscriber mix improvement in FY2020E and modest pricing uptick in FY2021E
Our revenue and EBITDA forecasts for FY2020E/ 2021E stand at Rs475/480 bn and Rs100/145 bn, respectively. Low revenue growth in FY2021E is on account of IC revenues going down to zero from 4QFY20. As highlighted earlier, we bake in 100% delivery on targeted cost synergies. Our ARPU (including IC) assumptions for FY2020E and FY2021E stand at Rs113/sub/month and Rs112, respectively, as opposed to Rs104 reported in 4QFY19. On an ex-IC (comparable) basis, ARPU assumption stands at Rs101 and Rs111 for FY2020E and FY2021E, respectively, as opposed to Rs89 (estimated) in 4QFY19. Part of ARPU increase in FY2020E is on account of the sharp decline in subs base in 2HFY19. On an adjusted basis, ARPU increase assumed for FY2020E is roughly Rs6 over FY2019 levels.
We bake in capex of Rs170 bn for FY2020E, in line with the company’s guidance (Rs270 bn in FY2019 and FY2020 combined; Rs100 bn spent in FY2019). We keep the capex at similar levels in FY2021E as well. Net debt rises back to Rs1.15 tn by end-FY2021E with our EBITDA and capex assumptions; net debt to TTM EBITDA on forecasted numbers stands at around 8X at end-FY2021E.
Rs16 FV based on 9X FY2023E EBITDA discounted back to March 2020
Tough-to-forecast timing, pace and extent of pricing recovery (if it happens at all; that’s an added uncertainty) in the sector makes fair value math challenging for companies in the sector. Relatively weaker (versus peers) balance sheet and in-market competitiveness makes the exercise even more challenging for VIL. These challenges notwithstanding, our remit is to arrive at and publish a point fair value estimate and we duly do so. Exhibit 4 depicts the math.
Key takeaways from the earnings call
Network integration progressing well. Network integration continues at a swift pace and has been done in 10 circles – West Bengal, Andhra Pradesh, Haryana, Madhya Pradesh, Himachal Pradesh, Assam, North East, J&K, Bihar and Punjab along with part of the Delhi circle. Network capacity in these circles has increased 34% qoq post integration. The company is seeing higher data traffic growth in these circles which is driving higher revenue growth. The company has already removed surplus equipment on 24,000 sites out of the total 67,000 co-located sites and has also exited 9,900 low utilization sites. They expect capacity to increase further by 30% in the next quarter. To augment capacity, the company has added 8,915 4G TDD sites during the quarter and have also deployed massive MIMO on around 2,000 sites in select locations.
Calibrated investments in network infrastructure. Company is executing its network investments by planning at a district level and prioritizing regions, which have higher revenue potential and superior current competition positioning of VIL. They have also deployed massive MIMO on around 2,000 sites in key locations. Their current 4G population coverage reaches 65% compared to less than 50% in August. The company seeks 4G coverage for 1 bn pop by end-FY2020.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 Telecommunication Services Vodafone Idea
Strategies to drive ARPU usage. For driving up ARPU, company has initiated several measures. (a) Minimum ARPU plans of Rs35 (despite leading to loss of customers having ARPU of Rs0-10). (b) Introduced plans of Rs119 offering unlimited voice along with 1GB/month, enticing users to smartphone data consumption. (c) Continued content partnership to drive adoption of higher ARPU plans. (d) In line with Bharti Airtel’s decision to remove Rs299 postpaid plan, VIL has also indicated they may consider the same but may do it on staggered manner.
Cost reduction targets. While the management clarified that it will be difficult to realize synergy benefits beyond the initial guidance of Rs84 bn, there are several additional cost control measures they can target. These would be looked at in due course. Focus at this point remains delivery of targeted merger cost synergies.
Other key points. (a) Capex for 4FY19 stood at Rs32.3 bn taking FY2019 capex to Rs102.2 bn. The company maintained its FY2019-20E capex guidance of Rs270 bn. (b) Net IUC revenues for 4QFY19 was just a little over Rs4 bn compared to Rs4.5 bn in 3QFY19. This will go to zero from January 2020. Secondly, interconnect costs for the quarter has increased due to higher international costs. (c) Duplication of the retail distribution network has been removed to a large extent. (d) VIL’s share of 4G smartphone incremental market share should be marginally lower than peers in 4QFY19 after being almost similar to peers in 3QFY19.
Exhibit 1: Vodafone Idea 4QFY19 review, Ind-AS, March fiscal year-ends (Rs mn)
2QFY19 3QFY19 4QFY19 Consolidated Revenues 76,635 117,648 117,750 Costs (72,021) (106,279) (101,897) EBITDA 4,614 11,369 15,853 EBITDA margin (%) 6.0 9.7 13.5 D&A (30,059) (47,734) (46,639) EBIT (25,445) (36,365) (30,786) Net interest income/(expense) (19,511) (26,068) (27,894) PBT (44,956) (62,433) (58,680) Taxes 453 19,997 18,770 MI and share of associates 423 398 549 PAT (44,080) (42,038) (39,361) Extraordinaries (5,658) (8,008) (9,458) Reported net income (49,738) (50,046) (48,819)
Source: Company, Kotak Institutional Equities
4 KOTAK INSTITUTIONAL EQUITIES RESEARCH Vodafone Idea Telecommunication Services
Exhibit 2: Vodafone Idea, Key Performance Indicators, March fiscal year-ends
1QFY19 2QFY19 3QFY19 4QFY19 Revenues (Rs mn) 129,441 120,238 117,648 117,750 EBITDA (Rs mn) 13,722 9,778 11,369 15,853 Subs criber Base (EoP) (mn) 435.4 422.3 387.2 334.1 VLR Subs cribers (EoP) (mn) 411.6 402.8 390.8 368.3 Net VLR Subs criber addi tion (mn) (5.8) (8.7) (12.0) (22.5) Pre-paid Subs (% of EoP subs cribers ) 94.2% 94.3% 93.9% 93.1% Blended ARPU (Rs/month) 92 88 89 104 Average MoU (min) 555 568 580 662 ARPM (paisa/min) 16.6 15.5 Blended churn (%) 4.1% 4.3% 5.0% 7.2% 2G Coverage - No. of census towns (#) 7,985 7,986 7,955 7,938 2G Coverage - No. of villages (#) 478,554 479,187 472,381 462,593 2G Coverage - Population (#) 1,104 1,104 1,097 1,084 % of Population 91.2% 91.3% 90.7% 89.5% Broadband Coverage - No. of census towns (#) 7,519 7,580 7,573 7,570 Broadband Coverage - No. of villages (#) 231,117 253,205 263,915 265,464 Broadband Coverage - Population (#) 779 817 833 836 % of Population 64.4% 67.6% 68.8% 69.1% Total Unique Towers (EoP) (#) 201,854 202,650 198,171 192,580 Total Unique Broadband Towers (EoP) (#) 151,544 155,511 157,683 155,632 Total Broadband sites (3G+4G) (#) 340,709 365,575 376,816 371,922 Total Minutes of Use (mn) 732,837 731,195 712,283 702,749 Total Data Volume (2G+3G+4G) (bn MB) 2,028 2,426 2,705 2,947 Total Data Suscribers (2G+3G+4G) (mn) 141.7 140.1 146.3 146.3 Data Usage by Data Subs criber (2G+3G+4G) (MB) 5,114 5,740 6,324 6,716 Broadband Subs cribers (3G+4G) (mn) 95.3 99.7 107.9 110.2 4G subs 57.4 65.8 75.3 80.7
Note: Pro-forma for 1QFY19 and 2QFY19.
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 5 Telecommunication Services Vodafone Idea
Exhibit 3: VIL summary financials and key assumptions, March fiscal year-ends (Rs mn)
Rs mn FY2019 FY2020E FY2021E FY2022E FY2023E FY2024E Profit and loss statement Revenues 370,925 474,588 479,510 531,066 583,098 635,273 Total costs (332,495) (374,269) (334,798) (354,785) (375,005) (395,910) Total costs ex-IC, ex-LF/SUC (251,474) (281,082) (271,617) (285,053) (298,652) (312,909) EBITDA 38,430 100,320 144,712 176,281 208,093 239,363 D&A (145,356) (194,056) (206,056) (210,404) (220,955) (226,692) EBIT (106,926) (93,736) (61,344) (34,124) (12,862) 12,671 Net finance costs (87,317) (101,227) (108,245) (121,707) (133,265) (141,295) PBT (194,243) (194,963) (169,589) (155,830) (146,126) (128,623) Provision for taxes 48,950 68,237 59,356 54,541 51,144 45,018 PAT before MI/associates (145,293) (126,726) (110,233) (101,290) (94,982) (83,605) MI + Associates 1,969 — — — — — Recurring PAT (143,324) (126,726) (110,233) (101,290) (94,982) (83,605) EO items (23,124) 110,000 (4,000) — — — Reported PAT (166,448) (16,726) (114,233) (101,290) (94,982) (83,605) # of shares (mn) 8,736 28,736 28,736 28,736 28,736 28,736 EPS (Rs/share) (19.1) (0.6) (4.0) (3.5) (3.3) (2.9) Condensed balance sheet Net fixed assets 1,801,588 1,777,532 1,741,476 1,723,572 1,672,617 1,609,125 Other LT assets 311,595 385,233 441,899 499,905 553,170 604,338 Current assets ex-cash 182,945 328,887 331,944 329,155 330,983 319,368 Total assets 2,296,128 2,491,652 2,515,319 2,552,632 2,556,769 2,532,831 Shareholders' equity 596,348 829,622 715,389 614,100 519,118 435,512 Net debt 1,183,883 1,016,704 1,148,195 1,285,937 1,379,359 1,446,538 Other LT liabilities (25,620) 147,530 146,039 138,297 134,875 117,696 Current liabilities 541,517 497,796 505,695 514,298 523,418 533,084 Total equity and liabilities 2,296,128 2,491,652 2,515,319 2,552,632 2,556,769 2,532,831 Condensed CF statement Operating cash flow 95,577 58,406 146,754 176,465 209,843 237,315 Capex (44,000) (170,000) (170,000) (192,500) (170,000) (163,200) FCF 51,577 (111,594) (23,246) (16,035) 39,843 74,115 Change in borrowings 15,580 5,971 130,000 130,000 90,000 50,000 Net finance costs (53,962) (101,227) (108,245) (121,707) (133,265) (141,295) Proceeds from sale of assets 0 130,000 — — — — Key assumptions Pro-forma revenues 485,077 474,588 479,510 531,066 583,098 635,273 EOP subs (mn) 334 334 346 361 375 387 ARPU (consumer-level + IC, Rs/month) 113 112 120 127 134 Ex-IC ARPU (Rs/month) 101 111 119 126 133
Source: Company, Kotak Institutional Equities
Exhibit 4: Our fair value stands at Rs16/share
Rs bn FY2023E EBITDA 208 EV/EBITDA (X) 9.0 EV (end-FY2022E) 1,873 Net debt (end-FY2022E) 1,286 Equity value (end-FY2022E) 587 # of shares (bn) 28.7 Fair value (end-FY2022E, Rs/share) 20 Cost of equity (%) 13.0 Fair value (Mar-2020E, Rs/share) 16.0
Source: Kotak Institutional Equities estimates
6 KOTAK INSTITUTIONAL EQUITIES RESEARCH REDUCE Nestle India (NEST) Consumer Staples MAY 14, 2019 RESULT Coverage view: Cautious
Slow start to CY2019. Nestle reported a soft, albeit marginally better than several peers, Price (`): 10,199 1QCY19 print. Domestic revenues grew 10% yoy (volume-led) while export revenues Fair Value (`): 10,700 declined 9% yoy. Weak margin print led to EBITDA growing a modest 5% yoy, 9% BSE-30: 37,319 below estimate. Nestle’s performance is in line with the trends visible in the peers’ earnings prints thus far – slowing overall growth with faster deceleration in rural categories. We cut our CY2019-21E EBITDA and EPS forecasts by 3-4% and 1.6-2.1%, respectively. Fair value stands revised down to Rs10,700 (from Rs11,100). REDUCE stays.
Company data and valuation summary Nestle India Stock data Forecasts/Valuations 2019 2020E 2021E 52-week range (Rs) (high,low) 11,751-9,047 EPS (Rs) 166.7 195.6 224.5 Market Cap. (Rs bn) 983.3 EPS growth (%) 31.2 17.4 14.8 Shareholding pattern (%) P/E (X) 61.2 52.1 45.4 Promoters 62.8 Sales (Rs bn) 112.2 125.5 141.7 FIIs 12.4 Net profits (Rs bn) 16.1 18.9 21.6 MFs 3.1 EBITDA (Rs bn) 26.6 30.2 34.2 Price performance (%) 1M 3M 12M EV/EBITDA (X) 35.7 31.1 27.2 Absolute (7.1) (4.0) 6.6 ROE (%) 45.3 49.3 52.1 Rel. to BSE-30 (3.5) (7.8) 1.5 Div. Yield (%) 1.1 1.3 1.5
4QCY19 print – revenue growth slows down to a six-quarter low
Net sales grew 9% yoy to Rs29.8 bn, 5% below expectations. Domestic revenue growth was higher at 10% (albeit a six-quarter low) while export revenues declined 9% yoy on account of decline in coffee exports to Turkey. Gross margins came in at 58.2%, down 56 bps yoy; we had expected flattish GMs. Gross profit growth stood at 8% yoy. EBITDA margin decline was a sharper 83 bps yoy to 24.4%, 100 bps below our expectations. EBITDA grew 5% yoy to Rs7.29 bn. We do note that adspends likely normalized in 1QCY19 after a sharp surge in 4QCY18. While the company does not disclose quarterly adspends, other expenses’ growth of 9% yoy suggests there wasn’t an adspend surge in 1Q.
Recurring PAT grew 9% yoy to Rs4.63 bn, 8% below our estimate of Rs5.06 bn. EPS stood at Rs48/share. EPS growth was ahead of EBITDA growth on account of a sharp 30% jump in other income, 6% yoy decline in D&A and flattish gross finance cost.
To launch organic food products
Continuing its new launch aggression, the company’s earnings press release indicates that the company intends to foray into the small-but-fast-growing organic food products segment. Even as the press release is silent on what the specific products could be, it does suggest the launch should happen in the next few months. From a quarter standpoint, the press release calls out – Rohit Chordia (a) predominantly volume-led growth in domestic revenues, (b) decline in coffee exports to Turkey, and (c) strong performance in the chocolates and prepared dishes portfolio led by Kitkat, Munch, and Maggi. Interestingly, the press release termed market momentum as Jaykumar Doshi ‘strong’. This is despite 1Q domestic sales growing being the lowest in the past six quarters. More importantly, we wonder if 10% growth qualifies as strong for the Street.
Aniket Sethi Cut EBITDA estimates by 3-4% and lower fair value to Rs10,700; REDUCE stays
While below expectations, Nestle’s earnings print is healthy on a relative basis and could mean the stock remains a sector outperformer. Management commentary on strong market momentum would support the same as well. We do not see much absolute value at CMP. REDUCE stays. March-2020 fair value stands revised down to Rs10,700 (from 11,100).
[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. Consumer Staples Nestle India
Exhibit 1: Key changes to estimates, Nestle India, CY2019-21E
Revised Earlier Change (%) 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E Revenues (Rs mn) 125,497 141,674 159,384 127,831 143,825 161,353 (1.8) (1.5) (1.2) EBITDA (Rs mn) 30,188 34,186 39,017 30,981 35,487 40,395 (2.6) (3.7) (3.4) EBITDA margin (%) 24.1 24.1 24.5 24.2 24.7 25.0 Net income (Rs mn) 18,858 21,646 25,099 19,161 22,111 25,549 (1.6) (2.1) (1.8) EPS (Rs/share) 195.6 224.5 260.3 198.7 229.3 265.0 (1.6) (2.1) (1.8)
Source: Kotak Institutional Equities estimates
Exhibit 2: Interim standalone results of Nestle India, calendar year-ends (Rs mn)
(% chg.) 1QCY19 1QCY19E 1QCY18 4QCY18 vs KIE yoy qoq Net domestic revenues 28,216 29,442 25,602 26,905 (4) 10 5 Export revenues 1,608 1,978 1,766 1,883 (19) (9) (15) Net sales 29,824 31,421 27,368 28,788 (5) 9 4 Material cost (12,453) (12,945) (11,277) (11,894) (4) 10 5 Gross Profit 17,371 18,475 16,092 16,894 (6) 8 3 Gross margin (%) 58.2 58.8 58.8 58.7 -56 bps -56 bps -44 bps Employee cost (3,038) (2,959) (2,690) (2,799) 3 13 9 Other expenditure (7,044) (7,524) (6,487) (8,142) (6) 9 (13) Total expenditure (22,535) (23,429) (20,453) (22,835) (4) 10 (1) EBITDA 7,289 7,992 6,915 5,953 (9) 5 22 EBITDA Margin (%) 24.4 25.4 25.3 20.7 -100 bps -83 bps 376 bps Other income 732 700 564 752 5 30 (3) Other operating income 206 220 204 184 (7) 1 11 Interest (316) (250) (311) (252) 26 2 26 Depreciation (780) (825) (825) (784) (6) (6) (1) Pretax profits 7,131 7,837 6,547 5,854 (9) 9 22 Tax (2,381) (2,606) (2,157) (1,804) (9) 10 32 PAT 4,750 5,231 4,391 4,049 (9) 8 17 Impairment of fixed assets — — — (69) — Provision for contingencies (118) (172) (151) (562) (31) NM (79) Recurring PAT 4,633 5,059 4,240 3,418 (8) 9 36 EO item — — — — Reported PAT 4,633 5,059 4,240 3,418 (8) 9 36 Recurring EPS (Rs/share) 48.0 52.5 44.0 35.4 (8) 9 36 Income tax rate (%) 33.9 34.0 33.7 34.6 -6 bps 23 bps -62 bps Costs as a % of sales Material cost 41.8 41.2 41.2 41.3 55 bps 55 bps 43 bps Employee cost 10.2 9.4 9.8 9.7 76 bps 35 bps 46 bps Other expenditure 23.6 23.9 23.7 28.3 -33 bps -9 bps -467 bps
Source: Company, Kotak Institutional Equities estimates
8 KOTAK INSTITUTIONAL EQUITIES RESEARCH Nestle India Consumer Staples
Exhibit 3: Nestle’s net domestic revenue growth and EBITDA margin (%)
Net domestic revenue growth (LHS, %) EBITDA margin (RHS, %) 50 26 40 30 24 20 22 10 - 20 (10) (20) 18 (30)
(40) 16
1QCY16
2QCY16
3QCY16
4QCY16
1QCY17
2QCY17
3QCY17
4QCY17
1QCY18
2QCY18
3QCY18 4QCY18 1QCY19
Source: Company, Kotak Institutional Equities
Exhibit 4: Nestle's 1QCY19 gross margins were flat yoy
61 60 59 58 57 56 55 54 53 52
51
1QCY16
2QCY16
3QCY16
4QCY16
1QCY17
2QCY17
3QCY17
4QCY17
1QCY18
2QCY18
3QCY18 4QCY18 1QCY19
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 9 Consumer Staples Nestle India
Exhibit 5: Nestle: Profit model, balance sheet, December calendar year-ends, 2015-2021E (Rs mn)
IGAAP Ind-AS 2015 2016 2017 2018 2019E 2020E 2021E Profit model Net sales 81,233 90,764 99,525 112,162 125,497 141,674 159,384 EBITDA 15,946 19,652 21,643 26,564 30,188 34,186 39,017 Other income 1,621 2,159 2,340 3,350 4,093 4,708 5,532 Interest expense (33) (909) (919) (1,120) (1,187) (1,261) (1,334) Depreciation (3,473) (3,537) (3,423) (3,357) (3,239) (3,392) (3,565) Pretax profits 14,062 17,365 19,642 25,437 29,855 34,240 39,650 Tax (4,206) (5,440) (6,141) (8,220) (9,715) (11,151) (12,930) Net income 9,855 11,924 13,500 17,217 20,140 23,090 26,720 Provision for contingencies/impairment losses (917) (1,803) (1,248) (1,148) (1,282) (1,444) (1,621) Net income after contingencies/impairment 8,938 10,121 12,252 16,069 18,858 21,646 25,099 EO items (3,306) (108) — — — — — Reported net income 5,633 10,014 12,252 16,069 18,858 21,646 25,099 Earnings per share (Rs) 92.7 105.0 127.1 166.7 195.6 224.5 260.3 Balance sheet Total equity 30,359 32,823 34,206 36,737 39,813 43,240 47,103 Total borrowings 177 332 351 351 — — — Deferred tax liability 1,747 1,553 1,220 588 588 588 588 Total liabilities and equity 32,283 34,708 35,777 37,677 40,401 43,828 47,691 Cash 4,996 8,800 14,574 16,101 23,911 33,135 43,159 Investments 13,297 17,557 19,789 26,585 26,585 26,585 26,585 Net current assets (excl cash) (17,296) (20,832) (25,689) (30,067) (33,795) (38,326) (43,313) Net fixed assets (incl CWIP) 31,286 29,183 27,103 25,058 23,701 22,434 21,259 Total assets 32,283 34,708 35,777 37,677 40,401 43,828 47,691 Free cash flow Operating cash flow, excl. working capital 7,665 12,618 14,428 16,397 20,030 22,513 25,480 Working capital 3,316 2,040 3,750 4,128 3,729 4,530 4,987 Capital expenditure (1,508) (2,070) (1,986) (1,660) (1,882) (2,125) (2,391) Free cash flow 9,473 12,589 16,192 18,865 21,876 24,918 28,076 Key assumptions Revenue growth (%) (17.2) 11.7 9.7 12.7 11.9 12.9 12.5 EBITDA Margin (%) 19.6 21.7 21.7 23.7 24.1 24.1 24.5 EPS Growth (%) (24.1) 13.2 21.1 31.2 17.4 14.8 16.0 RoE (%) 30.4 32.0 36.6 45.3 49.3 52.1 55.6 RoCE (%) 18.3 20.4 21.5 25.4 27.3 28.4 29.7
Source: Company, Kotak Institutional Equities estimates
10 KOTAK INSTITUTIONAL EQUITIES RESEARCH BUY SRF (SRF) Speciality Chemicals MAY 14, 2019 RESULT Coverage view: Neutral Stellar performance. SRF delivered strong results in 4QFY19 driven by robust growth in specialty chemicals and packaging films segments. The management maintained its Price (`): 2,600 optimism on growth trajectory seeking comfort from healthy demand in end-markets. Fair Value (`): 2,850 We raise our FY2020-21E EPS estimates by 11-15% factoring in modestly higher BSE-30: 37,319 revenues and further expansion in margins. We retain BUY rating on the stock with a revised fair value of Rs2,850, rolling forward to March 2021E EPS.
Company data and valuation summary SRF Stock data Forecasts/Valuations 2019 2020E 2021E 52-week range (Rs) (high,low) 2,626-1,530 EPS (Rs) 111.7 141.2 165.5 Market Cap. (Rs bn) 149.5 EPS growth (%) 39.0 26.4 17.2 Shareholding pattern (%) P/E (X) 23.3 18.4 15.7 Promoters 52.3 Sales (Rs bn) 76.9 85.0 92.3 FIIs 19.2 Net profits (Rs bn) 6.4 8.1 9.5 MFs 8.5 EBITDA (Rs bn) 13.6 16.2 18.4 Price performance (%) 1M 3M 12M EV/EBITDA (X) 13.2 11.0 9.4 Absolute 6.4 15.8 17.2 ROE (%) 16.7 18.1 18.1 Rel. to BSE-30 10.5 11.3 11.7 Div. Yield (%) 0.5 0.6 0.6
Strong growth in revenues across all segments; margins surge in packaging and chemicals SRF’s 4QFY19 results were well ahead of our expectations, primarily led by robust performance of chemicals and polymers segment, which surprised positively on revenue growth as well as margin expansion. Reported revenues jumped 29% yoy and 5% qoq to Rs20.72 bn, 3% above our estimate, led by a strong 66% growth in chemicals and polymers revenues and healthy 18% growth in packaging film revenues. EBITDA increased 39% yoy and 14% qoq to Rs3.88 bn, 15% above our estimate, benefiting from lower operating costs, which increased at a pace slower than revenues. Net income increased 54% yoy and 15% qoq to Rs1.91 bn (EPS of Rs33.2), 40% above our estimate, further boosted by lower depreciation and modestly higher other income. SRF delivered a robust 39% yoy growth in net income to Rs6.42 bn (EPS of Rs111.7) in FY2019 led by a robust all-round performance across business segments. Robust growth in chemicals revenues; margins rebound to 11-quarter high. Chemicals revenues grew robustly by 66% yoy and 43% qoq to Rs8.4 bn reflecting likely strong off- take in end markets; segment EBIT jumped 80% yoy and 117% qoq to Rs1.66 bn reflecting ~670 bps qoq expansion in margins to 19.8%, highest in past 11 quarters. The company attributed its strong performance to (1) robust growth in specialty chemicals segment reflecting recovery in global ag-chem sector, which is expected to sustain, (2) higher volumes and realizations for refrigerants, and (3) increase in chloromethanes sales. The management indicated that the brief unplanned shutdown at Dahej plant impacted operations in April 2019; however, the shortfall is likely to be recovered over 5-6 months. Healthy growth in revenues and surge in margins for packaging films. Packaging films revenues increased 18% yoy, but declined 11% qoq to Rs6.2 bn. EBIT jumped 46% yoy and 20% qoq to Rs1.06 bn as margins expanded by ~440 bps qoq to 17%. New plants in Hungary and Thailand remain on track to commission in the coming months. The company
indicated that healthy demand outlook for BOPET may keep the global capacity utilization Tarun Lakhotia elevated, notwithstanding new capacity addition in the near term. Weaker margins for technical textiles. Technical textiles revenues increased 4% yoy to Rs4.8 bn; however, EBIT declined 16% yoy to Rs563 mn reflecting ~275 bps yoy contraction Hemang Khanna in margins to 11.7% amid inventory loss and lower sales volumes for tire cord fabric. Raise FY2020-21 EPS estimates by 11-15% We raise our FY2020-21E EPS estimates by 11-15% factoring in higher growth in revenues as well as further expansion in margins for chemicals and polymer business. Our SoTP-based fair value increases to Rs2,850 (from Rs2,300), as we roll forward to March 2021E estimates.
[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. Speciality Chemicals SRF
Exhibit 1: Interim results of SRF, consolidated, March fiscal year-ends (Rs mn)
Change (%) 4QFY19 4QFY19E 4QFY18 3QFY19 4QFY19E 4QFY18 3QFY19 FY2019 FY2018 Yoy (%) FY2020 Net sales 20,720 20,156 16,123 19,640 3 29 5 76,927 55,890 38 84,965 Raw material (11,528) (11,076) (8,875) (11,268) 4 30 2 (43,596) (30,320) 44 (47,515) Employee costs (1,397) (1,381) (1,249) (1,305) 1 12 7 (5,159) (4,740) 9 (5,623) Power and fuel (1,588) (1,675) (1,329) (1,585) 19 0 (6,286) (5,008) 26 (7,072) Forex gain/(loss) (9) — 64 102 (238) 463 — Other expenses (2,319) (2,637) (1,944) (2,173) (12) 19 7 (8,095) (6,760) 20 (8,603) EBITDA 3,879 3,387 2,790 3,412 15 39 14 13,552 9,526 42 16,152 EBITDA margins (%) 18.7 16.8 17.3 17.4 17.6 17.0 19.0 Other income 165 131 130 52 27 27 217 401 688 (42) 569 Interest cost (529) (555) (425) (544) (5) 25 (3) (2,016) (1,239) 63 (2,031) Depreciation (971) (1,108) (861) (932) (12) 13 4 (3,669) (3,158) 16 (4,159) Exceptionals — — — — — — — PBT 2,545 1,854 1,634 1,988 37 56 28 8,269 5,817 42 10,532 Tax (636) (488) (395) (331) 30 61 92 (1,853) (1,200) 54 (2,422) PAT 1,909 1,366 1,239 1,657 40 54 15 6,416 4,617 39 8,110 Adjusted PAT 1,909 1,366 1,239 1,657 40 54 15 6,416 4,617 39 8,110 Adjusted EPS (Rs) 33.2 23.8 21.6 28.9 40 54 15 111.7 80.4 39 141.2 Segment-wise sales Technical textiles 4,815 4,622 5,478 4 (12) 20,742 18,388 13 21,465 Chemicals and polymers 8,400 5,066 5,860 66 43 24,454 16,114 52 29,827 Packaging film 6,231 5,267 7,026 18 (11) 26,533 17,823 49 28,057 Others 1,287 1,182 1,292 9 (0) 5,254 4,573 15 5,687 Total 20,732 16,136 19,656 28 5 76,984 56,898 35 85,036 Segment-wise EBIT Technical textiles 563 668 817 (16) (31) 2,982 2,529 18 3,043 Chemicals and polymers 1,660 924 766 80 117 3,843 2,694 43 5,880 Packaging film 1,057 723 881 46 20 4,115 2,298 79 4,295 Others 107 105 121 2 (11) 467 444 5 523 Total 3,387 2,420 2,585 40 31 10,940 7,520 45 13,218 EBIT margins (%) Technical textiles 11.7 14.4 14.9 (275)bps (322)bps 14.4 13.8 63 bps 14.2 Chemicals and polymers 19.8 18.2 13.1 153 bps 668 bps 15.7 16.7 (100)bps 19.7 Packaging film 17.0 13.7 12.5 323 bps 442 bps 15.5 12.9 262 bps 15.3 Others 8.3 8.9 9.3 (60)bps (102)bps 8.9 9.7 (81)bps 9.2 Overall EBIT margins 16.3 15.0 13.2 134 bps 318 bps 14.2 13.2 99 bps 15.5
Source: Company, Kotak Institutional Equities estimates
12 KOTAK INSTITUTIONAL EQUITIES RESEARCH SRF Speciality Chemicals
Exhibit 2: Consolidated segment-wise performance of SRF, 1QFY17 onwards (Rs mn, %)
1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 Segment revenues Technical textiles 5,073 4,805 4,892 5,332 5,073 4,172 4,522 4,622 5,014 5,436 5,478 4,815 Chemicals and polymers 4,466 3,864 3,822 5,063 3,567 3,462 4,018 5,066 4,774 5,420 5,860 8,400 Packaging films 3,467 3,494 3,352 3,779 4,148 4,107 4,302 5,267 6,318 6,959 7,026 6,231 Others — — — — 1,116 1,136 1,140 1,182 1,322 1,353 1,292 1,287 Total 12,994 12,154 12,055 14,164 13,891 12,864 13,971 16,123 17,413 19,154 19,640 20,720 Yoy growth (%) Technical textiles 3 (4) 13 23 (0) (13) (8) (13) (1) 30 21 4 Chemicals and polymers 18 0 (4) 12 (20) (10) 5 0 34 57 46 66 Packaging films (2) (2) (0) 26 20 18 28 39 52 69 63 18 Total 6 (2) 3 20 7 6 16 14 25 49 41 29 Segment EBIT Technical textiles 715 610 654 536 591 507 763 668 721 880 817 563 Chemicals and polymers 1,126 676 622 841 594 443 733 924 787 630 766 1,660 Packaging films 601 527 477 366 450 495 629 723 973 1,204 881 1,057 Others — — — — 73 146 121 105 117 123 121 107 Total 2,442 1,813 1,753 1,742 1,708 1,591 2,245 2,420 2,599 2,837 2,585 3,387 EBIT margins (%) Technical textiles 14.1 12.7 13.4 10.0 11.7 12.2 16.9 14.4 14.4 16.2 14.9 11.7 Chemicals and polymers 25.2 17.5 16.3 16.6 16.7 12.8 18.2 18.2 16.5 11.6 13.1 19.8 Packaging films 17.3 15.1 14.2 9.7 10.9 12.1 14.6 13.7 15.4 17.3 12.5 17.0 Overall EBIT margins 18.8 14.9 14.5 12.3 12.3 12.4 16.1 15.0 14.9 14.8 13.2 16.3
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 13 Speciality Chemicals SRF
Exhibit 3: We assume chemicals and polymers business to grow robustly over the next few years Consolidated segment-wise break-up of revenues and EBIT, March fiscal year-ends, 2018-22E (Rs mn) 2018 2019 2020E 2021E 2022E Segment revenues Technical textiles 18,388 20,742 21,465 22,134 22,826 Chemicals and polymers 16,114 24,454 29,827 34,947 40,723 Packaging films 17,823 26,533 28,057 29,323 30,657 Others 4,573 5,254 5,687 5,971 6,270 Total 56,849 76,927 84,965 92,304 100,405 Yoy growth (%) Technical textiles NA 13 3 3 3 Chemicals and polymers NA 52 22 17 17 Packaging films NA 49 6 5 5 Others NA 15 8 5 5 Total 11 35 10 9 9 Segment EBIT Technical textiles 2,529 2,982 3,043 3,083 3,122 Chemicals and polymers 2,694 3,843 5,880 7,588 9,250 Packaging films 2,298 4,115 4,295 4,415 4,540 Others 444 467 523 567 614 Total 5,904 9,884 11,993 13,759 15,459 EBIT margins (%) Technical textiles 13.8 14.4 14.2 13.9 13.7 Chemicals and polymers 16.7 15.7 19.7 21.7 22.7 Packaging films 12.9 15.5 15.3 15.1 14.8 Others 9.7 8.9 9.2 9.5 9.8 Overall EBIT margins 10.4 12.8 14.1 14.9 15.4
Source: Company, Kotak Institutional Equities
Exhibit 4: We value SRF at Rs2,850 SoTP valuation of SRF, March 2021E
EPS P/E Fair value (Rs) (X) (Rs) Technical textiles business 33 10 326 Chemicals and polymers business 80 22 1,765 Packaging films business 47 15 700 Other business 6 10 60 Target price 2,851 Consolidated EPS (March 2021E) 165 Implied target P/E multiple (X) 17
Source: Kotak Institutional Equities estimates
14 KOTAK INSTITUTIONAL EQUITIES RESEARCH SRF Speciality Chemicals
Exhibit 5: Consolidated profit model, balance sheet and cash flow statement for SRF, March fiscal year-ends (Rs mn)
2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Profit model (Rs mn) Sales 37,829 40,181 45,398 45,927 48,218 55,890 76,927 84,965 92,304 100,405 EBITDA 6,143 5,053 7,175 9,625 9,970 9,062 13,552 16,152 18,400 20,577 Other income 420 235 646 278 455 1,151 401 569 657 768 Interest (998) (961) (1,376) (1,305) (1,018) (1,239) (2,016) (2,031) (1,913) (1,741) Depreciation (2,089) (2,247) (2,450) (2,750) (2,834) (3,158) (3,669) (4,159) (4,641) (5,118) Profit before tax 3,476 2,080 3,994 5,849 6,572 5,817 8,269 10,532 12,503 14,486 Tax expenses (946) (455) (966) (1,551) (1,422) (1,200) (1,853) (2,422) (3,001) (3,621) Extraordinary items — — — — — — — — — — Reported PAT 2,530 1,625 3,028 4,299 5,150 4,617 6,416 8,110 9,502 10,864 Adjusted PAT 618 1,625 3,028 4,299 5,150 4,617 6,416 8,110 9,502 10,864 Fully diluted number of shares 57 57 57 57 57 57 57 57 57 57 Adjusted EPS-fully diluted (Rs) 11 28 53 75 90 80 112 141 165 189 Balance sheet (Rs mn) Equity 19,689 20,667 22,963 27,630 31,827 35,645 41,293 48,407 56,765 66,313 Total borrowings 17,040 21,753 24,349 21,297 19,774 31,418 32,887 31,887 29,137 26,387 Other long term liabilities 2,818 3,422 4,761 4,321 5,702 3,695 3,986 3,986 3,986 3,986 Current liabilities and provisions 6,343 9,344 7,466 12,288 14,510 12,871 20,713 22,846 24,923 27,212 Total liabilities 45,890 55,186 59,540 65,536 71,813 83,631 98,879 107,127 114,811 123,899 Net fixed assets 29,022 36,536 40,230 42,142 46,586 56,763 63,589 67,887 71,516 74,693 Investments/other long-term assets 1,856 1,499 2,147 3,558 4,532 3,019 3,567 3,567 3,567 3,567 Cash & cash equivalent 3,324 1,089 2,015 5,498 2,669 2,184 2,994 3,969 5,195 7,984 Current assets 11,687 16,062 15,148 14,338 18,026 21,664 28,729 31,704 34,533 37,654 Total assets 45,890 55,186 59,540 65,537 71,813 83,630 98,879 107,127 114,811 123,899 Free cash flow (Rs mn) Operating cash flow 4,674 3,705 5,058 7,382 8,000 7,449 10,089 11,699 13,486 15,215 Working capital changes (1,484) (1,199) (1,011) 2,214 (2,564) (1,693) 386 (841) (753) (831) Capital expenditure (6,779) (7,900) (4,423) (5,729) (6,867) (12,829) (10,495) (8,457) (8,269) (8,296) Free cash flow (3,589) (5,394) (375) 3,867 (1,430) (7,072) (19) 2,401 4,464 6,088 Ratios (%) EBITDA margin 16.2 12.6 15.8 21.0 20.7 16.2 17.6 19.0 19.9 20.5 Net debt/equity (X) 0.7 1.0 1.0 0.6 0.5 0.8 0.7 0.6 0.4 0.3 Book value (R/share) 343 360 400 481 554 621 719 843 989 1,155 Adjusted RoAE 3.2 8.1 13.9 17.0 17.3 13.7 16.7 18.1 18.1 17.7 Adjusted RoACE 1.9 6.9 8.9 12.3 12.9 8.9 13.1 14.5 15.2 15.7
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 15 ADD Union Bank (UNBK) Banks MAY 14, 2019 RESULT Coverage view: Attractive
Improving, albeit at a pace slower than peers. Union Bank reported a higher-than- Price (`): 79 expected loss on account of higher provisions for bad loans to reduce net NPL ratios. Fair Value (`): 105 Decline in gross and net NPLs was lower than peers though directionally we are seeing BSE-30: 37,319 improvement. The underlying theme on corporate banks remains intact and we see Union Bank being one of the beneficiaries. Inexpensive valuations, despite dilution, drive our positive view. Maintain ADD (fair value unchanged).
C ompany data and valuation summary Union Bank Stock data Forecasts/Valuations 2019 2020E 2021E 52-week range (Rs) (high,low) 100-61 EPS (Rs) (16.7) 6.3 19.5 Market Cap. (Rs bn) 139.8 EPS growth (%) 62.8 137.5 211.3 QUICK NUMBERS Shareholding pattern (%) P/E (X) (4.7) 12.7 4.1 Promoters 67.4 NII (Rs bn) 102.1 121.5 139.0 FIIs 5.2 Net profits (Rs bn) (29.5) 11.1 34.4 NII up 19% yoy; net MFs 8.0 BVPS 62.9 72.1 113.8 reported loss at Price performance (%) 1M 3M 12M P/B (X) 1.3 1.1 0.7 Rs34 bn Absolute (15.2) 11.8 (9.9) ROE (%) (12.5) 4.4 12.8 Rel. to BSE-30 (11.9) 7.4 (14.2) Div. Yield (%) 0.0 1.2 3.7 GNPL ratio down 70 bps qoq to 15%; Elevated credit cost and one-off expenses dent earning NNPL ratio down 140 bps qoq to Union Bank reported net loss of Rs34 bn in 4QFY19 owing to elevated credit cost and strong 6.9% growth in operating expenses. NII growth was solid at 19% yoy on the back of marginal NIM (reported) expansion by 5 bps qoq and 35 bps yoy while loan growth was muted at 4% yoy. Maintain ADD with Non-interest income adjusted for income tax refund in 4QFY18 saw strong growth at 23% yoy fair value at Rs105 driven by strong growth in fee income, recovery in written-off accounts and revival in treasury (unchanged) gains. Operating expenses increased 20% yoy led by wage-related provision (Rs600 mn) and employee stock schemes (Rs1.4 bn). Adjusted for the same, the cost-income ratio was down 100 bps qoq/up 160 bps yoy. Credit cost spiked in 4QFY19 to 7.1% (up 440 bps qoq). The management incurred additional provisions worth Rs23 bn (divergence in provisioning for 4QFY19). Deposit growth was muted in 4QFY19 (CASA ratio increased marginally to 36%).
Asset quality stable but not a material improvement, as expected
Overall gross and net NPL ratio was stable qoq, which was lower than we had expected considering the performance in 1HFY19 and the performance that we have seen from other pubic banks that have reported so far. Gross NPL ratio declined ~10 bps qoq to 15.7% and net NPL ratio declined 15 bps qoq to 8.3% of loans. Slippages were higher at 3.8% of loans and were partly led non-fund based exposures and one large account in the thermal sector (IL&FS). Overall SMA-2 remains unchanged at ~2.5% of loans. Directionally we are seeing an improvement in headline asset quality led by lower slippages, which is positive and we expect M B Mahesh, CFA traction to accelerate as we see resolutions picking up pace in FY2020. The management is guiding for gross NPLs at 12%, net NPLs at 6% and credit costs at 2% for FY2020. Nischint Chawathe Maintain ADD; improvement in NPL ratios to see valuation expansion
We maintain our ADD rating and value the bank at Rs105 (unchanged). At our fair value, we Dipanjan Ghosh see the bank trading at 0.9X book and 6X March 2021E EPS for RoEs moving closer to 13-15% in the medium term. The bank has used a substantial part of the capital infusion for improving its net NPL ratios in 4QFY19 and we expect higher resolutions to drive the convergence in book Shrey Singh and adjusted book value and aid valuation expansion from current inexpensive valuation.
[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. Union Bank Banks
Exhibit 1: Union Bank of India – quarterly performance March fiscal year-ends, 4QFY18-4QFY19 (Rs mn)
(% chg.) 4QFY19 4QFY19E 4QFY18 3QFY19 4QFY19E 4QFY18 3QFY19 2019 2018 (% chg.) 2020E Interest income 83,495 87,521 81,121 84,775 (4.6) 2.9 (1.5) 340,667 327,480 4.0 382,569 Loans 58,785 60,225 55,487 59,747 (2.4) 5.9 (1.6) 237,719 227,730 4.4 277,615 Investments 20,524 21,753 22,034 22,189 (5.7) (6.9) (7.5) 90,033 87,800 2.5 92,584 Others 4,186 5,542 3,600 2,840 (24.5) 16.3 47.4 12,914 23,344 (44.7) 12,370 Interest expense 57,480 61,618 59,190 59,834 (6.7) (2.9) (3.9) 238,518 234,434 1.7 262,958 Net interest income 26,015 25,902 21,931 24,942 0.4 18.6 4.3 102,149 93,046 9.8 119,612 Non-int.income 12,715 9,932 14,848 10,951 28.0 (14.4) 16.1 44,740 49,899 (10.3) 44,689 Treasury Income 1,880 140 1,320 1,100 1,242.9 42.4 70.9 5,740 12,579 (54.4) 7,240 Non-int income excl treasury 10,835 9,792 13,528 9,851 10.6 (19.9) 10.0 39,000 37,320 4.5 37,449 Total income 38,730 35,835 36,778 35,892 8.1 5.3 7.9 146,889 142,945 2.8 164,301 Op. expenses 21,428 18,991 17,884 18,389 12.8 19.8 16.5 73,476 67,550 8.8 82,556 Employee cost 9,811 9,051 8,154 8,042 8.4 20.3 22.0 33,309 32,552 2.3 38,122 Other cost 11,617 9,940 9,731 10,347 16.9 19.4 12.3 40,167 34,997 14.8 44,433 Operating profit 17,302 16,844 18,894 17,504 2.7 (8.4) (1.2) 73,413 75,395 (2.6) 81,746 Provisions and cont. 57,662 30,794 56,679 16,171 87.3 1.7 256.6 112,679 141,807 (20.5) 68,887 Investment Depreciation (260) 279 11,200 (5,510) (193.2) (102.3) NM (4,039) 15,600 (125.9) (500) NPLs 56,820 29,947 54,560 21,390 89.7 4.1 165.6 110,800 125,438 (11.7) 68,887 PBT (40,360) (13,950) (37,785) 1,332 NM NM (3,128.9) (39,266) (66,412) NM 12,859 Tax (6,667) 427 (11,951) (200) (1,662.4) NM NM (9,792) (13,938) NM 2,956 Net profit (33,692) (14,377) (25,834) 1,532 NM NM (2,299.1) (29,474) (52,474) NM 9,903 Tax rate (%) NM NM NM (15) NM NM 23 PBT-invt gains+ provisions 15,422 16,704 17,574 16,404 (7.7) (12.2) (6.0) 67,673 62,816 7.7 74,506 Key balance sheet items (Rs bn) Total Deposit 4,159 4,172 4,085 4,023 (0.3) 1.8 3.4 4,159 4,085 1.8 4,528 Savings deposits 1,236 1,142 1,192 8.3 3.8 1,236 1,142 8.3 1,346 Current deposits 265 251 239 5.8 11.2 265 251 5.8 289 Term deposits 2,658 2,693 2,593 (1.3) 2.5 2,658 2,693 (1.3) 2,893 CASA (%) 36.1 34.1 35.5 201 bps 55 bps 36 34 201bps 36 Gross loans 3,253 3,279 3,139 3,175 (0.8) 3.6 2.4 3,253 3,247 0.2 3,834 Retail loans 571 494 565 15.5 1.0 494 Investments 1,284 1,320 1,265 1,213 (2.7) 1.5 5.9 1,284 1,265 1.5 1,334 AFS 423 392 361 7.9 17.4 392 Duration (years) 3 5 3 (33.5) 3.4 5 Yield management measures (%) Yield on advances 7.3 7.1 7.5 25 bps -21 bps 7.4 7.2 26bps 7.6 Yield on investment 6.6 7.0 7.1 -45 bps -49 bps 7.1 7.4 -29bps 7.1 Cost of deposit 5.6 5.9 6.0 -25 bps -35 bps 5.8 6.0 -19bps 6.1 NIM 2.3 2.0 2.3 34 bps 8 bps 2.3 2.1 15bps 2.4 Cost to income 55.3 48.6 51.2 670 bps 409 bps 50.0 47.3 277bps 50.2 Cost to average assets 1.8 1.5 1.5 28 bps 23 bps 1.5 1.4 6bps 1.6 Credit cost 7.1 6.9 2.7 12 bps 438 bps 3.5 4.0 -58bps 2.0 RoA (2.8) (2.1) 0.1 (0.6) (1.1) 0.2 RoE (51.8) (42.8) 2.4 (11.4) (21.4) 3.7 Capital adequacy details (%) CAR 11.8 12 11 28 bps 35 bps 12 Tier I 9.5 9 9 41 bps 46 bps 9 Tier II 2.3 2 2 -13 bps -11 bps 2 Asset quality details Gross NPLs (Rs bn) 487 494 497 (1.3) (2.0) 0 494 (99.9) 458 Gross NPLs (%) 15.0 15.7 15.7 -75 bps -68 bps 15.0 15.2 -22bps 11.9 Net NPLs (Rs bn) 203 243 241 (16.4) (15.8) 0 243 (99.9) 133 Net NPLs (%) 6.9 8.4 8.3 -157 bps -142 bps 6.9 8.4 -157bps 4.0 Provision coverage ratio (%) 58.3 51 51 755 bps 684 bps 58 51 755bps 71 Provision coverage ratio (tech w/o) (%) 66.2 57 59 908 bps 740 bps Net restructured loans (Rs bn) 13 12 11 5.4 13.8 Net restructured loans (%) 0.4 0.4 0.4 1 bps 4 bps Slippages (Rs bn) 33 100 30 (67.4) 9.8 136 214 (36.5) 45 Slippages (%) 4.1 12.8 3.8 -865 bps 37 bps 4.3 7.5 -313bps 1.5 Other key parameters (#) Branches 4,291 4,301 4,292 (0.2) (0.0) 4,291 4,301 4,366 ATM 6,750 7,642 6,621 (11.7) 1.9 6,750 7,642
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 17 Banks Union Bank
Stressed loans decline ~160 bps qoq to 7.5%
Gross NPL dropped 70 bps qoq to 15% owing to increase in slippages from the agriculture and corporate book while recoveries were relatively lower sequentially. Overall stressed assets (NNPL + standard restructured + SDR + S4A + 5/25) decreased 160 bps qoq to 8.2%. net NPLs saw a steep dip by 140 bps qoq to 6.9%. The company has 10 accounts under 5/25 worth Rs27 bn (owing to slippage of power account under overall IL&FS exposure) and 2 accounts under S4A worth Rs660 mn. On absolute basis, SMA-2 book declined to Rs90 bn (2.8% of loans) from Rs110 bn qoq (3.4% of loans). 40% of the SMA-2 book is retail in nature and the management does not expect significant slippages from this book. Corporate SMA-2 saw sharp decline to Rs2 bn from Rs3 bn qoq. ~Rs7 bn slipped from SMA-2 book in 4QFY19. Provision coverage ratio (including technical write-off) improved 740 bps qoq and 900 bps yoy to 66%.
Slippages increased 30 bps qoq to 4.1% owing to rise in slippages in the corporate (up 70 bps qoq to 4.8%) and agriculture (up 130 bps qoq to 6.3%) books. Corporate slippages increased owing to slippage of power SPV of IL&FS (Rs8.9 bn; 110 bps of loans) and additional Rs1,850 mn of slippages from the road space (20 bps of loans). SME slippages were elevated at 3.4%; similar to previous quarters. Management remained cautious in this segment going ahead. Retail slippages saw significant improvement (down 60 bps qoq to 1.5%). Retail slippages were the lowest in the past four quarters.
The company has improved credit profile of corporate borrowers. Lending to A and above rated borrowers increased to >65% (up ~100 bps qoq) in March 2019 from ~60% in March 2017. With respect to lending to NBFCs (total exposure of Rs370 bn, ~11% of gross advances), ~99% exposure to NBFCs and HFCs is rated A and above.
Union Bank has exposure to 8 accounts worth Rs60 bn and 15 accounts worth Rs37 bn for accounts under NCLT list 1 and 2, respectively as of March 2019. The company maintains provision coverage ratio of ~70% and ~80%, respectively on these accounts. The cumulative provisions on these accounts are >70%.
The management is comfortable on Rs40 bn of exposure to SEBs. They do not foresee any deterioration in asset quality from this portfolio going ahead.
We forecast GNPL to reduce to 10% by FY2021E driven by drop in slippages to ~1.8% over FY2020-21E. Recoveries of various stressed corporate sector assets will remain a key moni- torable.
Exhibit 2: Corporate slippages increased in 4QFY19 owing to slippages of a power SPV worth Rs9 bn from IL&FS group Gross NPL and net NPL ratios, March fiscal year-ends, 4QFY17-4QFY19 (%)
Gross NPLs (%) Slippages (%) 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 Agriculture 5.1 8.0 6.7 6.1 6.1 6.9 7.6 7.7 8.2 2.7 6.3 3.9 2.3 6.8 4.6 7.4 5.0 6.3 MSE 8.9 9.6 10.7 11.0 12.0 12.0 12.2 12.2 11.5 2.5 3.8 4.3 2.4 7.2 1.8 2.8 3.4 3.4 Retail 3.1 2.7 2.5 2.3 2.1 2.7 2.5 2.2 2.1 3.2 1.9 1.2 1.0 2.0 3.1 1.7 2.1 1.5 Corporate/others 15.2 17.4 20.6 18.2 23.3 23.3 22.8 26.2 24.4 5.7 7.7 4.0 8.6 19.7 8.9 3.0 4.1 4.8 Overall 11.2 12.6 12.4 13.0 15.7 16.0 15.7 15.7 15.0 4.3 5.9 3.6 5.4 12.8 5.9 3.3 3.8 4.1
Source: Company, Kotak Institutional Equities
18 KOTAK INSTITUTIONAL EQUITIES RESEARCH Union Bank Banks
Exhibit 3: Overall stressed assets decreased 160 bps qoq to 7.5% Movement of NPLs and restructured loans, March fiscal year-ends, 4QFY16-4QFY19
4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 Movement of NPLs (Rs bn) Opening NPL 185.0 241.7 272.8 298.6 324.0 337.1 372.9 382.9 409.9 493.7 509.7 501.6 497.1 Addition of gross NPL 61.7 36.0 34.0 32.9 29.5 44.5 26.9 41.9 100.4 46.5 26.7 29.8 32.8 Reductions 4.9 4.9 8.1 7.5 5.3 8.8 16.9 14.9 16.6 30.5 34.8 34.3 42.6 Upgradations 4.0 4.9 6.7 3.6 3.9 5.4 14.0 11.9 8.1 16.2 16.2 18.0 14.1 Write off 1.0 0.0 1.5 4.0 7.2 3.4 11.1 7.9 12.3 14.3 18.7 16.3 28.5 Closing NPL 241.7 272.8 298.6 324.0 337.1 372.9 382.9 409.9 493.7 509.7 501.6 497.1 487.3 Slippages (%) 9.4 5.2 5.1 4.7 4.3 5.9 3.6 5.4 12.8 5.9 3.3 3.8 4.1 Gross NPLs (%) 8.7 10.2 10.7 11.7 11.2 12.6 12.4 13.0 15.7 16.0 15.7 15.7 15.0 Net NPLs 140.3 158.2 169.5 182.5 188.3 207.8 194.8 204.3 243.3 255.1 246.6 241.4 203.3 Net NPLs (%) 5.3 6.2 6.4 7.0 6.6 7.5 6.7 7.0 8.4 8.7 8.4 8.3 6.9 Restructured loans (Rs bn) Outstanding restructured loans (net) 85.7 72.5 56.4 56.4 57.0 38.6 52.7 37.4 12.4 10.8 13.0 11.4 13.0 Outstanding restructured loans (net) (%) 3.1 2.7 2.0 2.0 1.9 1.3 1.7 1.2 0.4 0.3 0.4 0.4 0.4 Net NPL and restr. loans (%) 8.3 8.9 8.4 9.0 8.5 8.8 8.4 8.1 8.8 9.0 8.8 8.6 7.3 Fresh impairments (%) 10.4 5.2 5.1 4.7 4.3 6.0 6.4 5.4 12.8 6.1 3.3 3.8 4.1 Other formats (Rs bn) SDR 21.2 46.8 50.3 42.8 42.3 37.2 26.6 — — — — — `5:25 35.9 39.3 37.4 33.2 32.8 31.0 28.0 36.3 34.5 34.5 34.5 26.7 S4A — 2.8 10.8 15.4 19.4 9.5 19.2 1.2 1.3 1.2 0.7 0.7 Total 57.2 88.8 98.5 91.5 94.5 77.6 73.8 37.4 35.8 35.7 35.2 27.4 Less: Overlap 18.7 25.0 — — — — 3— Total stressed loans (Rs bn) 226.0 287.9 314.7 337.3 336.7 322.2 325.1 290.4 293.0 301.6 295.3 288.0 241.2 (% of loans) 8.1 10.7 11.3 12.2 11.2 10.9 10.5 9.2 9.3 9.5 9.3 9.1 7.4
Source: Company, Kotak Institutional Equities
Exhibit 4: 72% coverage ratio on accounts under NCLT Details of NCLT accounts, March fiscal year-ends, 2019 (Rs bn)
NCLT list 1 NCLT list 2 Total Exposure # of accounts 8 15 23 Loans outstanding 60.2 36.9 97.1 Provision held 40.8 29.2 70.0 PCR (%) 67.8 79.1 72.1
Source: Company, Kotak Institutional Equities
Muted growth in gross advances in 4QFY19
Loan growth was muted at 4% yoy in 4QFY19 on the back of 2% yoy decline in corporate loans (including international advances). Retail loan growth slowed down (up 15% yoy/flat qoq). Within the retail portfolio, the housing loan portfolio saw modest rise at 15% yoy to Rs281 bn (flat qoq). The share of retail loans in the overall portfolio increased to 18% in 4QFY19 (up 180 bps yoy). Vehicle loans saw muted growth at 5% yoy. LAP and other retail loan portfolio saw a sharp spike in growth at 25% yoy (on a low base). Agriculture loans and SME loans saw moderate growth at ~5% yoy, respectively in 4QFY19. Within the SME book, 75% of the exposure is towards micro and small enterprises. ~65% of agricultural loans is towards lending to small and marginal farmers.
We expect loan growth to improve at ~10% CAGR over FY2018-21E driven by modest performance in SME and agriculture loans. Retail loans will drive majority growth while corporate lending is expected to pick pace in the medium term.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 19 Banks Union Bank
Exhibit 5: Other retail loans continue to rise Break-up of retail loans, March fiscal year-ends, 4QFY17-4QFY19 (Rs bn)
4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 Retail loans (Rs mn) Home loan 278 235 241 247 252 254 257 281 281 Vehicle loans 33 35 37 39 40 40 41 42 42 Education loans 30 31 32 32 32 33 34 34 34 LAP 25 16 37 42 50 49 49 48 47 Personal loans 13 14 14 14 13 13 14 14 14 Others 25 92 86 89 108 110 117 146 153 Total 404 424 447 463 494 500 513 565 571 Share of total (%) Home loan 68.8 55.5 53.9 53.3 50.9 50.8 50.2 49.7 49.2 Vehicle loans 8.2 8.2 8.2 8.4 8.0 8.0 8.0 7.4 7.3 Education loans 7.5 7.3 7.2 7.0 6.5 6.6 6.7 6.0 6.0 LAP 6.2 3.8 8.3 9.1 10.1 9.9 9.5 8.5 8.2 Personal loans 3.1 3.4 3.1 3.0 2.7 2.7 2.8 2.5 2.5 Others 6.2 21.8 19.3 19.2 21.8 22.0 22.8 25.9 26.8
Source: Company, Kotak Institutional Equities
Exhibit 6: Loan growth muted in 4QFY19 Exhibit 7: Asset quality shows signs of improvement at a slow March fiscal year-ends, 4QFY16-4QFY19 (%) pace Gross, net NPL and provision coverage ratio, 4QFY16-4QFY19
25 Gross NPL (LHS) Net NPL (LHS) (Rs bn) (%) Prov cov (RHS) 550 75 20 440 60 15 330 45 10 220 30 5 110 15
-
0 -
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19 3QFY19 4QFY19
Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities
Marginal improvement in NIM
Reported NIM saw a marginal increase by ~5 bps qoq to 2.3% on the back of sharp decline in cost of funds. Reported cost of funds declined 25 bps qoq to 4.6%. There was, however, drag on margins from yields. Reported yield on advances decreased ~25 bps qoq to 7.5% owing to increase in interest reversals and change in loan mix towards higher share of retail products and lending to better-rated corporates.
Yields are expected to improve going ahead as recoveries from various NCLT cases pick pace in FY2020E. There will be marginal drag on yields driven by change in loan mix towards higher share of low-yielding retail loans. We maintain a positive view on NIM driven by higher recoveries and lower interest reversals. We forecast NIM to improve to 2.4% by FY2020E from 2.1% in FY2018 and further improve to 2.5% by FY2021E.
20 KOTAK INSTITUTIONAL EQUITIES RESEARCH Union Bank Banks
Muted deposit growth for fourth consecutive quarter
Growth in total deposits was muted at 2% yoy. While CASA growth was moderate at 8% yoy in 4QFY19, term deposits declined 1% yoy. Modest growth in CASA was driven by robust rise in SA at 8% yoy, broadly similar to past two quarters while CA revived to 6% yoy growth. CASA ratio increased 60 bps qoq and 200 bps yoy to 36%.
We forecast 7% CAGR in CASA over FY2019-21E and stable CASA of 34% during the same period.
Other highlights of the quarter
Strong growth in fee income. Non-interest income decreased 15% yoy in 4QFY19 owing to one-off income from income tax refund in the base quarter. Adjusted for the same, non-interest income increased ~25% yoy on the back of sharp rise in recoveries and fee income (up 30% yoy; adjusted for income tax refund in base quarter). Treasury gains revived to 40% yoy. Recovery from written-off accounts saw a sharp rise in 4QFY19 to Rs1.4 bn (up 70% yoy).
Elevated cost ratios. Cost-income ratios increased 400 bps qoq to 55% (flat yoy; adjusted for income tax refund in 4QFY18) driven by strong growth in operating expenses at 20% yoy. Other expenses increased 20% yoy despite a gradual slowdown in business expansion (branches declined by 1 in 4QFY19 and 10 in FY2019) as the company has invested in improving collections and technology initiatives. Employee expenses increased 20% yoy (up 13% yoy; adjusted for provision of wage revision worth Rs600 mn in 4QFY19). There were additional on-off expenses worth Rs1.4 bn on account of the employee stock schemes.
RWA declined 3% yoy. Capital adequacy ratio (CAR) ratio is comfortable at 11.8% with tier-1 ratio of 9.5%. RWA dropped by 3% yoy compared to growth in gross advances at 4% yoy showing a gradually improving credit profile of borrowers and rise in share of the retail mix.
Exhibit 8: Union Bank trading at 0.5X one-year forward book Exhibit 9: Union Bank trading at sharp discount to peers One-year forward rolling trading multiples, May 2009- May 2019 Union Bank trading premium to public banks, May 2008- May 2019
2.0 1.2
1.6 1.0
1.2 0.8
0.8 0.6
0.4 0.4
0.0
0.2
May-09
May-10
May-11
May-12
May-13
May-14
May-15
May-16
May-17
May-18
May-19
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18 Jan-19
Source: Bloomberg, Company, Kotak Institutional Equities estimates Source: Bloomberg, Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 21 Banks Union Bank
Exhibit 10: Change in estimates March fiscal year-ends, 2020E-22E (Rs mn)
New estimates (Rs mn) Old estimates (Rs mn) % change 2020E 2021E 2022E 2020E 2021E 2020E 2021E Net interest income 121,475 138,988 170,972 116,807 132,654 4.0 4.8 NIM (%) 2.5 2.6 3.0 2.4 2.5 9 bps 11 bps Loan growth (%) 10.9 10.9 10.8 10.9 10.9 1 bps 1 bps Loan loss provisions 68,887 52,082 57,736 65,726 49,689 4.8 4.8 Other income 44,689 50,084 55,913 45,261 49,395 (1.3) 1.4 Treasury income 7,240 8,740 10,240 5,500 7,000 31.6 24.9 Operating expenses 82,556 92,318 103,262 79,787 89,201 3.5 3.5 Employee expenses 38,122 42,830 48,120 37,252 41,853 2.3 2.3 PBT 14,721 44,673 65,887 16,555 43,159 (11.1) 3.5 Net profit 11,050 34,398 50,733 12,750 33,232 (13.3) 3.5
PBT -treasury + NPL provisions 76,368 88,015 113,383 76,781 85,848 (0.5) 2.5
Source: Company, Kotak Institutional Equities estimates
22 KOTAK INSTITUTIONAL EQUITIES RESEARCH Union Bank Banks
Exhibit 11: Union Bank of India: growth rates and key ratios March fiscal year-ends, 2017-22E (%)
2017 2018 2019 2020E 2021E 2022E Growth rates (%) Net loan 7.1 0.8 2.8 10.9 10.9 10.8 Customer assets 8.2 1.5 2.7 10.2 10.3 10.3 Investments excld. CPs and debentures 23.4 11.2 2.2 7.2 8.2 8.6 Net fixed and leased assets (1.2) (1.6) (1.9) 1.4 1.4 1.5 Cash and bank balance 12.1 50.6 (12.9) 3.8 4.5 4.6 Total Asset 11.9 7.7 1.4 8.7 9.0 9.2 Deposits 9.7 8.7 1.8 8.9 8.8 8.8 Current (20.2) 5.5 5.8 8.9 8.8 8.8 Savings 28.3 9.7 8.3 8.9 8.8 8.8 Fixed 7.0 8.5 (1.3) 8.9 8.8 8.8 Net interest income 7.1 4.5 9.8 18.9 14.4 23.0 Loan loss provisions 68.5 89.7 (10.6) (38.6) (24.4) 10.9 Total other income 36.7 0.5 (10.3) (0.1) 12.1 11.6 Net fee income 14.4 11.3 26.0 (10.0) 12.0 12.0 Net capital gains 127.9 (39.7) (54.4) 26.1 20.7 17.2 Net exchange gains (2.6) (6.3) (60.0) 30.0 10.0 10.0 Operating expenses 2.2 4.9 8.8 12.4 11.8 11.9 Employee expenses (7.2) (5.2) 2.3 14.5 12.4 12.4 Key ratios (%) Yield on average earning assets 8.0 7.3 7.3 7.5 7.8 8.2 Yield on average loans 8.3 7.9 8.1 8.4 8.7 9.3 Yield on average investments 8.8 7.6 7.3 6.9 7.0 7.0 Average cost of funds 6.0 5.4 5.2 5.0 5.2 5.3 Interest on deposits 6.1 5.5 5.4 5.1 5.2 5.4 Difference 2.0 2.0 2.1 2.4 2.5 2.9 Net interest income/earning assets 2.2 2.1 2.2 2.5 2.6 3.0 New provisions/average net loans 2.4 4.4 3.8 2.2 1.5 1.5 Interest income/total income 75.6 71.4 72.4 76.4 77.1 78.9 Other income / total income 35.8 34.9 30.5 26.9 26.5 24.6 Operating expenses/total income 54.6 51.8 52.1 51.9 51.2 47.7 Operating profit /AWF (0.4) (1.8) (1.0) 0.2 0.7 1.0 Tax rate (62.2) 21.0 24.9 24.9 23.0 23.0 Dividend payout ratio — — — 15.0 15.0 15.0 Current deposit 27.7 28.0 29.7 29.7 29.7 29.7 Fixed deposit 66.0 65.9 63.9 63.9 63.9 63.9 Savings deposit 27.7 28.0 29.7 29.7 29.7 29.7 Loans-to-deposit ratio 76.2 70.7 71.4 72.7 74.1 75.5 Asset quality (%) Gross NPL 10.9 15.2 14.2 12.1 10.0 8.1 Net NPL 6.6 8.4 6.8 5.9 3.5 2.9 Slippages 5.0 7.5 4.7 1.8 1.8 1.8 Provision coverage (ex write-off) 44.1 50.7 58.3 58.1 69.9 68.8 Dupont analysis (%) Net interest income 2.1 2.0 2.1 2.4 2.5 2.8 Loan loss provisions 1.6 2.7 2.3 1.3 0.9 0.9 Net other income 1.2 1.1 0.9 0.9 0.9 0.9 Operating expenses 1.5 1.5 1.6 1.6 1.7 1.7 Invt. depreciation 0.1 0.3 (0.1) (0.0) (0.0) (0.0) (1- tax rate) 162.2 79.0 75.1 75.1 77.0 77.0 ROA 0.1 (1.1) (0.6) 0.2 0.6 0.8 Average assets/average equity 20.4 21.1 20.8 20.7 20.8 20.0 ROE 2.7 (23.7) (12.5) 4.4 12.8 16.6
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 23 Banks Union Bank
Exhibit 12: Union Bank of India: financial summary March fiscal year-ends, 2017-22E (%)
2017 2018 2019 2020E 2021E 2022E Income statement Total interest income 326,600 327,480 340,667 363,611 412,292 475,197 Loans 229,431 227,730 237,719 262,520 303,590 359,098 Investments 86,951 87,800 90,033 88,720 95,781 102,568 Cash and deposits 10,218 11,951 12,914 12,370 12,921 13,531 Total interest expense 237,566 234,434 238,518 242,136 273,304 304,224 Deposits from customers 219,991 215,562 222,865 222,140 247,849 276,290 Net interest income 89,033 93,046 102,149 121,475 138,988 170,972 Loan loss provisions 66,134 125,438 112,170 68,887 52,082 57,736 Net interest income (after prov.) 22,899 (32,392) (10,021) 52,588 86,906 113,236 Other income 49,646 49,899 44,740 44,689 50,084 55,913 Net fee income 4,687 5,218 28,750 25,875 28,980 32,458 Net capital gains 20,845 12,579 5,740 7,240 8,740 10,240 Net exchange gains 9,523 8,925 3,250 4,225 4,648 5,112 Operating expenses 64,378 67,550 73,476 82,556 92,318 103,262 Employee expenses 34,342 32,552 33,309 38,122 42,830 48,120 Depreciation on investments 6,304 15,600 (4,039) (500) (500) (500) Other Provisions (1,559) 769 4,548 500 500 500 Pretax income 3,422 (66,412) (39,266) 14,721 44,673 65,887 Tax provisions (2,130) (13,938) (9,792) 3,671 10,275 15,154 Net Profit 5,552 (52,474) (29,474) 11,050 34,398 50,733 % growth (58.9) (1,045.1) (43.8) (137.5) 211.3 47.5 PBT - Treasury + Provisions 53,456 62,816 67,673 76,368 88,015 113,383 % growth 13.1 17.5 7.7 12.9 15.3 28.8
Balance sheet Cash and bank balance 328,225 494,412 430,460 446,855 466,816 488,472 Cash 10,308 12,903 13,549 14,226 14,937 15,684 Balance with RBI 154,897 197,261 194,416 210,134 229,384 250,292 Balance with banks 56,482 71,811 71,811 71,811 71,811 71,811 Net value of investments 1,121,490 1,237,801 1,260,466 1,335,139 1,426,743 1,530,842 Govt. and other securities 875,510 973,490 996,156 1,070,828 1,162,432 1,266,531 Shares 20,061 18,469 18,469 18,469 18,469 18,469 Debentures and bonds 172,217 194,536 194,536 194,536 194,536 194,536 Net loans and advances 2,864,666 2,887,606 2,969,322 3,293,130 3,651,174 4,046,990 Fixed assets 38,944 38,333 37,623 38,138 38,688 39,270 Other assets 173,720 215,908 242,518 254,644 267,376 280,745 Total assets 4,527,044 4,874,060 4,940,388 5,367,907 5,850,797 6,386,318
Deposits 3,758,990 4,085,016 4,159,153 4,528,075 4,928,269 5,362,303 Borrowings and bills payable 427,214 469,444 442,538 485,475 532,705 584,658 Other liabilities 101,078 68,633 73,828 80,376 87,480 95,184 Total liabilities 4,287,282 4,623,093 4,675,518 5,093,925 5,548,454 6,042,145 Paid-up capital 6,874 11,686 17,630 17,630 17,630 17,630 Reserves & surplus 232,888 239,282 247,240 256,351 284,713 326,543 Total shareholders' equity 239,762 250,968 264,870 273,981 302,343 344,173
Source: Company, Kotak Institutional Equities estimates
24 KOTAK INSTITUTIONAL EQUITIES RESEARCH REDUCE Just Dial (JUST) Internet Software & Services MAY 14, 2019 RESULT, CHANGE IN RECO. Coverage view: Attractive
Revenue trajectory improves but challenges remain. JUST reported an in-line Price (`): 562 4QFY19 performance with acceleration in pace of revenue growth to 16% yoy. While Fair Value (`): 590 this acceleration is on expected line and a positive, sustainability remains questionable. BSE-30: 37,319 We remain cautious; recent stock price underperformance drives a change in rating to REDUCE (from SELL) with a revised fair value of Rs590.
Company data and valuation summary Just Dial Stock data Forecasts/Valuations 2019 2020E 2021E 52-week range (Rs) (high,low) 677-401 EPS (Rs) 31.9 31.3 33.0 Market Cap. (Rs bn) 36.4 EPS growth (%) 50.3 (1.9) 5.4 Shareholding pattern (%) P/E (X) 17.6 17.9 17.0 Promoters 33.8 Sales (Rs bn) 8.9 9.9 10.8 FIIs 40.4 Net profits (Rs bn) 2.1 2.0 2.1 MFs 9.0 EBITDA (Rs bn) 2.3 2.2 2.3 Price performance (%) 1M 3M 12M EV/EBITDA (X) 10.0 9.5 8.4 Absolute (4.9) 14.1 34.8 ROE (%) 20.9 18.6 16.8 Rel. to BSE-30 (1.2) 9.7 28.5 Div. Yield (%) 0.0 0.6 0.6
Improving Tier II/III penetration drives higher revenue growth
Just Dial's revenue growth expectedly accelerated to 15.9% yoy, from 12.4% yoy in 1HFY19 and 15.2% in 3QFY19. This was driven by a 12.5% increase in paid campaigns and 3% increase in pricing. Growth in deferred revenues was 21.7%, in large part due to longer duration contracts. Further, proportion of revenues from Tier II/III cities continues to increase, implying greater reliance on campaign addition in future to boost revenue growth.
Cost controls drove a meaningful margin improvement in FY2019
EBITDA of Rs588 mn was 5% ahead of our estimates, though the outperformance was explained by a qoq decline of Rs34 mn in ESOP expense. Margins expanded by a sharp 460 bps yoy in FY2019 due to acceleration in revenue growth and cost control. Key cost savings came from renegotiation of AMC contracts (such as server storage), telecom and SMS cost. We believe JUST has realized most efficiencies in FY2019, and operating costs may not decline further from here.
Pace of user addition healthy though app downloads continue to trend down
JUST’s unique visitor count increased 25% yoy to 139 mn. Both the desktop and voice-based platforms continued to decline yoy in user base, with mobile contributing to the growth. Pace of app downloads have declined over the past few quarters, indicating reliance on the mobile website. We reckon JUST would need to increase its ad-spends as well as add more features and services to improve mind-share among users.
Stay cautious; stock underperformance drives a rating upgrade to REDUCE Kawaljeet Saluja JUST’s focus on specific verticals as well as relatively underpenetrated Tier II/III cities is resulting in improved revenue trajectory. However, threat from better funded rivals remains, and hence sustenance of current revenue streams is uncertain. Structural growth theme remains on a weak Garima Mishra footing. We revise our fair value to Rs590 (Rs625 earlier) and fine-tune our target multiple. We upgrade our rating on the stock to REDUCE (from SELL) on the back of 10% stock correction in the past two months.
[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. Internet Software & Services Just Dial
Exhibit 1: Revenue growth momentum improved further in 4QFY19 4QFY19 results of Just Dial, March fiscal year-ends (Rs mn)
Change (%) Yoy growth 4QFY19 4QFY19E 4QFY18 3QFY19 KIE Est yoy qoq FY2019 FY2018 (%) FY2020E Sales 2,323 2,325 2,005 2,268 (0.1) 15.9 2.4 8,915 7,818 14.0 9,878 Expenses (1,734) (1,766) (1,547) (1,716) (1.8) 12.1 1.1 (6,626) (6,174) 7.3 (7,647) Employee (1,296) (1,296) (1,189) (1,258) 0.0 9.0 3.0 (4,971) (4,416) 12.6 (5,730) Other expenses (438) (470) (358) (458) (6.7) 22.4 (4.2) (1,654) (1,758) (5.9) (1,917) Operating profit 588 560 458 552 5.1 28.5 6.6 2,289 1,644 39.2 2,231 Other income 322 250 166 341 29.0 94.0 (5.4) 930 659 41.1 934 Interest (1) — — (0) (1) — — Depreciation (83) (88) (84) (86) (6.0) (1.9) (3.3) (337) (364) (7.6) (346) PBT 827 722 540 807 14.6 53.3 2.5 2,881 1,939 48.6 2,819 Tax (202) (216) (150) (234) (6.9) 34.3 (13.7) (813) (507) 60.4 (790) Net profit 626 505 390 573 23.8 60.5 9.1 2,068 1,432 44.4 2,028 Extraordinary items — — — — — — — Reported PAT 626 505 390 573 23.8 60.5 9.1 2,068 1,432 2,028 Key ratios (%) Employee cost/sales 55.8 55.7 59.3 55.5 55.8 56.5 58.0 Other operating expenses/sales 18.9 20.2 17.9 20.2 18.6 22.5 19.4 EBITDA margin 25.3 24.1 22.8 24.3 25.7 21.0 22.6 PBT margin 35.6 31.0 26.9 35.6 32.3 24.8 28.5 Tax rate 24.4 30.0 27.8 28.9 28.2 26.1 28.0 PAT margin 26.9 21.7 19.4 25.3 23.2 18.3 20.5 Other operating metrics Total campaigns (#) 500,838 — 445,110 485,410 12.5 3.2 500,838 445,110 554,929 Price per campaign (Rs) 18,550 — 18,015 18,688 3.0 (0.7) 17,800 17,564 17,800 Headcount (#) 12,691 — 11,452 12,476 10.8 1.7 Advertising spend (Rs mn) 180 92 190 95.7 (5.3) Unearned revenue (Rs mn) 4,054 3,330 3,786 21.7 7.1
Source: Company, Kotak Institutional Equities estimates
xx
Exhibit 2: Pace of campaigns addition on a recovery path End of the period paid campaigns (#, LHS) and yoy growth (%, RHS), March fiscal year-ends
(#, '000) Yoy growth (%)
501 485 32.0 510 471 453 470 440 441 445 28.0 425 435 436 430 409 389 24.0 390 369 347 350355 20.0 331 350 313 296 16.0 310 278 262 12.0 270 239250 222 230 8.0 190 4.0
150 0.0
2QFY14 3QFY14 1QFY15 2QFY15 4QFY15 1QFY16 4QFY16 1QFY17 3QFY17 4QFY17 2QFY18 3QFY18 1QFY19 2QFY19 4QFY14 3QFY15 2QFY16 3QFY16 2QFY17 1QFY18 4QFY18 3QFY19 4QFY19 1QFY14
Source: Company, Kotak Institutional Equities
26 KOTAK INSTITUTIONAL EQUITIES RESEARCH Just Dial Internet Software & Services
Exhibit 3: Campaign addition pace has stabilized Sequential campaign addition, March fiscal year-ends (#, 000)
(#, '000)
25 21 19 20 18 18 18 17 17 16 16 16 16 15 14 15 15 13 11 11 10 8 5 5 5 3 4 1 1
0
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19 4QFY19
Source: Company, Kotak Institutional Equities
Exhibit 4: Pricing is trending down on higher Tier II/III contribution Yoy change in per campaign realization, March fiscal year-ends (%)
Yoy growth (%) 8.0 6.0 4.0 2.0 0.0
-2.0
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19 3QFY19 -4.0 4QFY19 -6.0 -8.0 -10.0 -12.0
Source: Company, Kotak Institutional Equities
xx
KOTAK INSTITUTIONAL EQUITIES RESEARCH 27 Internet Software & Services Just Dial
Exhibit 5: Steady growth in listings database Total listings database of Just Dial, March fiscal year-ends (mn)
(#, mn) 26 25 24 23 24.0 22 21 20 20.0 19 17 18 16 16 17 17 15 15 16 16.0 14 15 15 12 12.0 10 11 9 9 10 8.0
4.0
-
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19 4QFY19
Source: Company, Kotak Institutional Equities
JUST’s unearned revenue base increased 22% yoy, similar to the increase in 4QFY18. We note that JUST’s revenue growth, however, has not managed to catch up with the pace of growth in deferred revenue, implying that some contracts are longer-dated in nature, and revenues from those may be realized over a period of more than a year.
Exhibit 6: Growth in reported revenues has not kept pace with growth in unearned revenue Unearned revenue growth, March fiscal year-ends
1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 Unearned revenue (Rs mn) 2,419 2,451 2,559 2,743 2,904 2,774 2,852 3,330 3,713 3,749 3,786 4,054 Yoy growth (%) 20 13 11 21 28 35 33 22 Revenue (Rs mn) 1,763 1,803 1,803 1,817 1,900 1,945 1,968 2,005 2,114 2,210 2,268 2,323
Yoy growth (%) 8 8 9 10 11 14 15 16
Source: Company, Kotak Institutional Equities
28 KOTAK INSTITUTIONAL EQUITIES RESEARCH Just Dial Internet Software & Services
Exhibit 7: Sales force headcount increases, non-core employee headcount flattish End of the period employee count in sales and other functions, March fiscal year-ends (#, ‘000)
(#, '000) Sales and marketing (#) Others (#)
12 3.3 3.5 3.3 3.2 10 4.5 4.3 3.4 3.5 3.3 4.4 3.9 3.4 3.4 4.5 4.4 8 4.2 4.1 3.9 3.6 3.7 6 8.8 9.2 9.2 9.4 7.5 7.9 7.8 7.5 7.6 8.1 6.8 7.5 7.3 4 6.2 6.2 6.0 5.8 5.6 5.3 5.5
2
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19 3QFY19 4QFY19
Source: Company, Kotak Institutional Equities
Exhibit 8: Revenue per employee inches up in 4Q End of the period employee count (#, LHS) and revenue per employee (Rs 000, RHS), March fiscal year-ends
(#, '000) Revenue per employee (Rs 000) 14 190 13 180 12 170 11 160 10 150 9 140 8 130 7 6 120 5 110
4 100
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19 3QFY19 4QFY19
Source: Company, Kotak Institutional Equities
xx
KOTAK INSTITUTIONAL EQUITIES RESEARCH 29 Internet Software & Services Just Dial
Exhibit 9: Campaigns per sales employee metric improved in 4Q End of the period sales and marketing employee count (#, LHS) and campaigns per employee (#, RHS), March fiscal year-ends
(#, '000) Campaigns per employee (#) 10 63
9 60
8 57
7 54
6 51
5 48
4 45
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19 3QFY19 4QFY19
Source: Company, Kotak Institutional Equities
Exhibit 10: Mobile continues to drive user addition Unique visitors of Just Dial across various platforms, March fiscal year-ends (mn)
(mn) Mobile Internet Voice 160
140 8 9 9 120 9 21 20 22 9 100 10 9 24 10 24 9 26 25 80 10 28 11 10 10 11 11 9 60 10 26 12 11 11 24 110 27 27 25 101 105 28 24 25 92 40 25 26 30 29 74 79 63 69 52 20 42 47 31 36 38 37 37 39 21 24 27
0
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19 3QFY19 4QFY19
Source: Company, Kotak Institutional Equities
30 KOTAK INSTITUTIONAL EQUITIES RESEARCH Just Dial Internet Software & Services
Exhibit 11: App downloads per day on a downward trajectory Key operating metrics of JUST's platform, March fiscal year-ends
Yoy growth 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 (%) Unique visitors (mn) 71.5 71.3 75.9 76.6 80.5 86.8 100.5 105.0 107.6 111.6 125.2 131.3 134.2 139.1 24.6 Total listings (mn) 16.1 16.3 16.6 16.9 17.3 17.9 18.8 19.8 20.7 21.8 22.7 23.8 24.8 25.7 17.9 Total images in listings (mn) 17.0 19.7 22.5 25.4 27.9 31.7 35.6 38.5 41.4 44.8 47.9 51.4 55.3 60.3 34.6 Listings with geocodes (mn) 5.6 5.9 6.1 6.2 6.3 6.8 7.8 9.2 10.1 10.9 11.8 12.3 13.4 14.0 28.4 Ratings and reviews (mn) 58.3 60.6 62.6 64.8 67.9 70.5 73.1 76.1 79.0 81.9 85.1 88.0 91.3 95.6 16.7 Cumulative app downloads (mn) 9.1 9.6 10.1 10.7 11.6 13.3 15.4 17.3 18.7 19.8 20.8 21.8 22.8 23.7 19.7 Android 8.1 8.6 9.4 10.9 12.9 14.7 16.0 17.0 17.9 18.9 19.8 20.6 21.2 iOS 1.4 1.4 1.5 1.6 1.7 1.8 1.9 2.0 2.1 2.1 2.2 2.3 15.0 Others 0.7 0.7 0.7 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 — Add downloads per day (#) 7,721 8,704 12,416 19,687 26,533 23,871 19,103 15,501 14,351 13,555 14,437 12,588 (18.8)
Source: Company, Kotak Institutional Equities
Other takeaways from the earnings call
Campaign addition. Contribution from tier II/III cities continues to increase. These cities contributed 27% to topline and 47% to campaigns in 4QFY19, and their contribution is increasing every quarter. More than 60% of the incremental revenue growth is being contributed by these cities.
Realizations. On a blended basis, there will be downward pressure on realizations as Tier II/III contribution increases. However, JUST will try to arrest some of the realization decline by focusing on more bundled offerings. Further, given the generally low ticket price of contracts in Tier II/III cities, JUST believes it will be easier to pass on price hikes on contract renewals.
Employee addition and cost. JUST has added ~1,300 sales employees in FY2019, and expects these employees to fully contribute in FY2020. Revenue per sales employee and revenue per SME are the two metrics evaluated internally. There is room to increase sales force (even 2-3X the current team size) and drive revenue growth. There is pressure on employee wages as demand for FOS type of employees is increasing as delivery platforms are adding employees at a brisk pace. JUST has, however, not seen any deterioration in its employee attrition metrics.
Mobile traffic. 90%+ of mobile traffic is accounted for by the mobile website. JUST attempts to remain platform agnostic, and thus the app and mobile site are replica of each other. Ideally, the attempt would be to have more aps installed, but JUST will not pay large costs for downloads.
Deferred revenue. Deferred revenue should be best evaluated on a yoy basis. The strong trend in deferred revenues in the past few quarters should gradually start reflecting in revenue growth over the next few quarters. There is no receivable component in the deferred revenue figure and this is basis the actual collections received.
Cash. Rs2.2 bn of buyback was completed earlier in January 2019. The next buyback can thus happen after one year. This is the most tax efficient route of returning cash to shareholders. JUST chose the tender route to carry out the buyback due to the higher permissible limit (25% of equity + free reserves) compared to the 10% cap under the market buyback route.
Future strategy. JUST is focusing on the ‘Beyond Search’ offering such as JD Social, JD Pay and other curated content for users. Most users are discovering these features by accident, and JUST is looking to build a critical mass of users to further improve its offering.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 31 Internet Software & Services Just Dial
Estimate change for Just Dial
We largely retain our revenue and margin assumptions. Lower depreciation cost and higher other income drive a 3-5% increase in our net profit estimates.
Exhibit 12: Change in estimates for Just Dial, March fiscal year-ends, 2020-21E (Rs mn)
New estimates Old estimates % revision 2020E 2021E 2020E 2021E 2020E 2021E Total revenues 9,878 10,757 9,875 10,731 0.0 0.2 EBITDA 2,231 2,258 2,184 2,254 2.1 0.2 EBITDA margin (%) 22.6 21.0 22.1 21.0 PAT 2,028 2,137 1,924 2,081 5.5 2.7 EPS (Rs) 31.3 33.0 29.8 32.2 5.3 2.5 Tax rate (%) 28.0 27.5 28.3 27.8 Yoy growth metrics (%) Sales 10.8 8.9 11.3 8.7 EBITDA -2.6 1.2 2.6 3.2 PAT -1.9 5.4 5.1 8.2
Source: Company, Kotak Institutional Equities estimates
Exhibit 13: Details of the estimates for Just Dial, March fiscal year-ends, 2015-22E (Rs mn)
2015 2016 2017 2018 2019 2020E 2021E 2022E Search Campaigns (#) 331,200 367,000 429,840 445,110 500,838 554,929 604,317 652,663 Revenues from core business (Rs mn) 5,898 6,640 7,062 7,818 8,915 9,878 10,757 11,618 Yoy growth (%) 27.9 12.6 6.4 10.7 14.0 10.8 8.9 8.0 Other revenues — 37 132 — — — — — Total revenues 5,898 6,677 7,186 7,818 8,915 9,878 10,757 11,618 Yoy growth (%) 27.9 13.2 7.6 8.8 14.0 10.8 8.9 8.0 Number of employees (#) 9,533 11,142 11,334 11,452 12,691 13,691 14,191 14,591 Employee cost/ sales (%) 52.4 56.9 61.4 56.5 55.8 58.0 59.2 59.3 Other expenses/sales (%) 19.5 21.5 23.4 22.5 18.6 19.4 19.8 20.1 EBITDA margin (%) 28.1 21.6 15.3 21.0 25.7 22.6 21.0 20.6 PAT 1,389 1,427 1,214 1,432 2,068 2,028 2,137 2,330 EPS (Rs) 19.7 20.5 17.5 21.2 31.3 31.3 33.0 36.0 Yoy growth (%) 15.2 2.8 (15.0) 18.0 44.4 (1.9) 5.4 9.0
Source: Company, Kotak Institutional Equities
xx
32 KOTAK INSTITUTIONAL EQUITIES RESEARCH Just Dial Internet Software & Services
Exhibit 14: Financial snapshot of Just Dial, March fiscal year-ends, 2011-22E (Rs mn)
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Profit model Total operating income 1,839 2,621 3,628 4,613 5,898 6,677 7,186 7,818 8,915 9,878 10,757 11,618 Operating expenses (1,385) (1,948) (2,619) (3,191) (4,240) (5,235) (6,090) (6,174) (6,626) (7,647) (8,499) (9,224) Employee expenses (947) (1,308) (1,779) (2,286) (3,088) (3,799) (4,409) (4,416) (4,971) (5,730) (6,369) (6,888) Operating and other expenses (438) (640) (841) (905) (1,152) (1,435) (1,681) (1,758) (1,654) (1,917) (2,130) (2,336) EBITDA 454 672 1,008 1,422 1,658 1,442 1,096 1,644 2,289 2,231 2,258 2,394 Pre-tax profit 423 713 1,000 1,649 1,905 1,931 1,565 1,939 2,881 2,819 2,948 3,200 PAT 288 504 685 1,206 1,389 1,427 1,214 1,432 2,068 2,028 2,137 2,330 Weighted diluted number of shares (mn) 53 60 69 70 70 69 70 67 66 65 65 65 EPS (Rs) 5 8 10 17 20 21 17 21 31 31 33 36 Balance sheet Equity share capital 519 519 695 702 705 695 695 674 648 648 648 648 Reserves & surplus 433 542 3,556 4,643 6,029 6,699 8,356 9,118 9,339 11,123 13,003 15,052 Shareholders funds 954 1,033 4,259 5,345 6,734 7,394 9,052 9,792 9,986 11,771 13,651 15,700 Loan funds 1 — — — — — — — 42 — — — Total source of funds 956 1,033 4,269 5,363 6,734 7,396 9,052 9,792 10,201 11,771 13,651 15,700 Net fixed assets 272 360 623 539 921 1,474 1,647 1,489 1,321 1,420 1,530 1,650 Investments 1,182 1,568 4,858 6,257 7,722 8,077 9,768 11,549 13,038 15,038 17,238 19,538 Cash balances 196 237 239 369 422 336 525 575 404 248 197 253 Net current assets excluding cash (707) (1,102) (1,452) (1,803) (2,355) (2,492) (3,128) (3,946) (4,562) (4,934) (5,314) (5,740) Total application of funds 956 1,033 4,269 5,363 6,734 7,396 9,052 9,792 10,201 11,771 13,651 15,700 Cash flow statement Operating profit before working capital changes 357 595 846 1,379 1,630 1,738 1,615 1,796 2,406 2,374 2,510 2,733 Change in working capital/other adjustments 230 395 350 351 552 137 636 818 616 372 380 425 Cashflow from operating activites 586 990 1,196 1,730 2,182 1,875 2,251 2,614 3,022 2,747 2,891 3,159 Fixed assets (152) (179) (407) (89) (623) (864) (574) (207) (168) (445) (484) (523) Free cash flow 435 811 789 1,641 1,559 1,012 1,677 2,407 2,854 2,302 2,407 2,636 Issue of share capital 8 (425) 2,541 43 170 (767) 444 (692) (1,874) — — — Cash (used)/realised in financing activities 6 (427) 2,541 (121) 0 (767) 444 (692) (1,833) (286) (257) (280) Cash generated/utilised 457 427 3,292 1,529 1,517 270 1,880 1,831 1,318 1,843 2,149 2,355 Cash+investments at beginning of year 922 1,378 1,805 5,097 6,626 8,143 8,414 10,294 12,124 13,442 15,285 17,435 Cash+investments at end of year 1,378 1,805 5,097 6,626 8,143 8,414 10,294 12,124 13,442 15,285 17,435 19,790
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 33 BUY Power Grid (PWGR) Electric Utilities MAY 15, 2019 UPDATE Coverage view: Attractive Irony of strength. Media reports highlighted private sector players raising concerns Price (`): 182 with the Competition Commission, that they are unable to compete with Powergrid on account of the latter’s inherent strengths driven primarily by low cost of capital and Fair Value (`): 235 scale benefits of a large extant asset base. Without getting into the merits of the BSE-30: 37,319 concerns, we use the opportunity to evaluate Powergrid’s experience in competing with the private sector for tariff based competitive bids (TBCB).
Company data and valuation summary Power Grid Stock data Forecasts/Valuations 2019 2020E 2021E 52-week range (Rs) (high,low) 216-173 EPS (Rs) 18.3 21.4 23.9 Market Cap. (Rs bn) 950.3 EPS growth (%) 16.1 17.0 11.5 Shareholding pattern (%) P/E (X) 9.9 8.5 7.6 Promoters 56.3 Sales (Rs bn) 348.1 385.2 416.7 FIIs 24.0 Net profits (Rs bn) 95.8 112.0 124.9 MFs 7.2 EBITDA (Rs bn) 300.9 333.3 361.3 Price performance (%) 1M 3M 12M EV/EBITDA (X) 7.3 6.7 6.4 Absolute (7.8) 3.8 (13.1) ROE (%) 16.7 17.6 17.6 Rel. to BSE-30 (4.2) (0.2) (17.2) Div. Yield (%) 3.4 3.9 4.4
Powergrid has won 39% of the projects by value and 35% by revenue over the past six years
Powergrid has won 11 out of 41 projects bid so far under the TBCB route, sizing up 39% of the total projects by value and 35% of the projects by revenue. PWGR’s run-rate of winning projects has improved in more recent years, in an environment wherein the number of bids for projects has also been reducing. We further highlight the consolidation in the TBCB space, with Adani Transmission having acquired projects from two previously active participants—Reliance Transmission and GMR, while Essel group that had previously been an aggressive bidder grapples with financial constraints on account of investments made in the infrastructure space at large. Adani Transmission, Strelite, L&T and Essel group have continued to be active participants under TBCB.
Powergrid has advantageous scale compared to private sector players
Powergrid has an asset base of Rs1.8 tn, much larger than that of private sector players (Exhibit 5), incubated under the regulated regime over the past few decades. The size and stability of its portfolio enables PWGR to enjoy (1) lower cost of debt compared to peers, (2) favorable cost and payment terms from contractors, and (3) lower operating and maintenance cost.
Street concerns on potential dilution of earnings profile under tariff-based competitive bids have been contradicted so far, as PWGR reports healthy double-digit RoEs for projects commissioned under TBCB (Exhibit 4). The improved return profile is aided by (1) lower than anticipated project cost on the back of scale benefits, (2) higher leverage of 80% unlike 70%for regulated return projects.
Attractive valuations, stable growth prospects and threatened competition Murtuza Arsiwalla Street concerns on PWGR’s ability to compete profitability under TBCB may seem unfounded as (1) TBCB will still form a very small proportion of the overall asset base, (2) PWGR is able to fend Samrat Verma off competition on the back of lower cost of capital as well as capex cost, and (3) early numbers show PWGR is doing well on the return profile even under TBCB projects. Maintain BUY rating with unchanged fair value of Rs235/share.
[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. Power Grid Electric Utilities
Powergrid continues to trade at very attractive valuations (9X P/E) even after uncertainties on potential dilution of return proved unwarranted. Existing projects under various stages of implementation, assure earnings growth of 14% CAGR up to FY2022E.
Exhibit 1: Powergrid has won 39% of TBCB projects by value TBCB projects awarded by value cost), March fiscal year-ends, 2010-2018 (Rs bn)
PGCIL Others 300
250
194 200
150 135
29 144 101 100 58 57 51 47 50 106 36 58 10 32 14 51 - 51 44 - 22 - - - 10 - 15 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Sigma Insight, Kotak Institutional Equities
Exhibit 2: Powergrid has won 35% of TBCB projects by revenue over the last six years TBCB projects awarded by revenue, March fiscal year-ends, 2010-2018 (Rs bn)
PGCIL Others 20
18 16.7 16 13.5 14 12.5 12 10 5.0 13.1 8.2 8.5 8 5.2 6 5.1 4.3 3.7 4 7.6 2.0 5.2 1.0 5.0 2 3.7 3.1 3.6 - - 2.3 0 - - 1.0 - 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Sigma Insight, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 35 Electric Utilities Power Grid
Exhibit 3: Powergrid has maintained a steady run-rate of winning TBCB projects Number of TBCB projects awarded in recent years, March fiscal year-ends, 2010-2018 (nos.)
PGCIL Others 20
16
12 11 9
8
6 5 10 5 4 4 3 3 2 4 2 1 3 3 - - 3 3 2 - - - 1 - 1 1 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Sigma Insight, Kotak Institutional Equities
Exhibit 4: Newly formed subsidiaries of PWGR having TBCB projects have generated healthy ROE Return profile for few subsidiaries of Powergrid, March fiscal year-ends, 2017-2018 (Rs mn)
Warora Transmission Vizag Transmission Unchahar Transmission Kala Amb Transmission 2017 2018 2017 2018 2017 2018 2017 2018 Balance sheet Share capital 251 1,763 2,097 2,097 130 130 11 560 Reserves and surplus 13 303 (255) 334 (1) 67 — 75 Total assets 8,529 20,325 13,094 12,887 797 757 2,279 3,345 Total liabilities 8,265 18,259 11,251 10,455 668 561 2,269 2,710 Income statement Revenues 37 637 676 2,423 41 163 — 376 PBT 31 368 (303) 812 (1) 75 — 106 Provision for taxation (17) (78) 85 (35) — 15 — (31) PAT 13 289 (218) 777 (1) 91 — 75 Adjusted RoE (%) 16 37 58 13
Note: (a) RoE has been computed on closing share capital invested, and after adjusting for normalized tax expenses.
Source: Company, Kotak Institutional Equities
36 KOTAK INSTITUTIONAL EQUITIES RESEARCH Power Grid Electric Utilities
Exhibit 5: Strong execution capabilities coupled with lower cost of debt provides Powergrid advantage over smaller private players Comparison of Powergrid with other players in transmission space, March fiscal year-ends, 2017-2019 (Rs mn)
PowerGrid L&T Infrastructure Development Projects Adani Transmission Kalpataru Power Transmission IndiGrid InvIT 2017 2018 2017 2018 2017 2018 2018 2019 2018 2019 Balance sheet Equity 498,073 544,150 47,648 46,068 29,465 40,203 35,564 31,522 29,154 27,861 Debt 1,124,632 1,234,203 5,700 3,500 86,540 86,604 7,742 6,079 9,941 16,795 Total liabilities 1,697,033 1,853,722 58,099 51,826 118,215 128,111 35,130 37,601 39,683 44,890 Total asset 1,697,033 1,853,722 58,099 51,826 118,215 128,111 35,130 37,601 39,683 44,890 Income statement Revenues 257,165 301,140 14,822 16,653 28,978 40,552 57,412 71,151 4,554 6,668 EBITDA 226,015 262,992 7,245 10,231 20,052 29,367 6,312 7,782 4,151 6,036 PBT 95,698 104,906 (2,611) (1,011) 5,319 14,717 4,993 6,244 2,036 1,546 PAT 75,202 82,527 (2,530) (2,725) 4,164 11,429 3,220 4,013 2,104 1,539
Source: Company, Kotak Institutional Equities
Exhibit 6: Central and state sector have added bulk of the transmission capacity in India All-India transmission capacity, March fiscal year-ends, 2009-2019 (‘000 cktkm)
Central State Private 450 413 391 400 368 31 342 27 350 25 313 20 291 300 269 275 18 255 13 236 8 11 224 250 221 7 214 4 202 - 192 200 181 164 172 156 163 150 142 148
100 159 129 141 150 50 106 115 79 84 91 98 99 - 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: CEA, Kotak Institutional Equities
Exhibit 7: Asset capitalization of Rs69 bn in 3QFY19 Quartely capex and capitalization for PGCIL, March fiscal year-ends, 3QFY12-3FY19 (Rs bn)
Capex Capitalisation 200 180 172 160 140 131 120 100 100 78 79 78 78 80 72 67 68 69 61 60 49 47 50 51 41 46 45 46 35 34 40 27 26 30 22 20 25 25 20
-
4QFY12 1QFY13 3QFY13 4QFY13 3QFY14 4QFY14 3QFY15 4QFY15 3QFY16 2QFY17 3QFY17 2QFY18 3QFY18 2QFY19 2QFY13 1QFY14 2QFY14 1QFY15 2QFY15 1QFY16 2QFY16 4QFY16 1QFY17 4QFY17 1QFY18 4QFY18 1QFY19 3QFY19 3QFY12
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 37 Electric Utilities Power Grid
Exhibit 8: PGCIL continues to maintain strong on the ground traction on project execution Project commissioning of PGCIL, March fiscal year-ends, 2018-2019
FY2018 FY2019 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 Transmission lines (ckm) 1,083 3,153 1,729 2,934 1,796 5,921 5,042 Substation (MVA) 5,185 8,870 12,405 7,235 11,685 16,905 16,105
Source: CEA, Kotak Institutional Equities
Exhibit 9: Investment ordering of Rs14bn was done in 3QFY19 Quarterly ordering and investment approvals for PGCIL, March fiscal year-ends, 3QFY12-3QFY19 (Rs bn)
Approvals Ordering 300
250
200
150 108 114 100 74 75 61 57 51 57 47 42 44 50 32 29 31 36 32 22 24 24 27 26 24 27 21 19 15 14 8 14
-
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19 2QFY19 3QFY19
Source: Company, Kotak Institutional Equities
Exhibit 10: PWGR has outstanding approvals of Rs729 bn to be capitalized on extant base Details of incremental asset capitalization of Powergrid (Rs bn)
2,500 2,180
2,000
1,500
1,000 729
457 500
- Gross block Approved Ordered
Source: Company, Kotak Institutional Equities
38 KOTAK INSTITUTIONAL EQUITIES RESEARCH Power Grid Electric Utilities
Exhibit 11: We factor a capitalization of Rs240 bn in FY2019E and FY2020E Details of incremental asset capitalization of Powergrid (Rs bn)
2016 2017 2018 2019E 2020E 2021E Capex (Rs bn) 225 244 258 242 240 260 Capitalization (Rs bn) 314 290 274 241 240 250 Regulated equity (Rs bn) 446 530 611 684 756 831 Growth rate (%) Capex 0 8 6 (6) (1) 8 Capitalization 44 (8) (6) (12) (0) 4 Regulated equity 27 19 15 12 11 10 Net worth (Rs bn) 427 498 544 603 671 747 Book value (Rs/share) 86 100 109 121 134 148 EPS (Rs/share) 11 14 16 18 21 24
Source: Company, Kotak Institutional Equities
Exhibit 12: At 1.4X P/B and 9X 2020E earnings, PGCIL remains attractive given its earnings profile Key valuation metrics for PGCIL, March fiscal year-ends, 2016-21E
2016 2017 2018 2019E 2020E 2021E Valuations (at CMP) 185 Book value (Rs) 86 100 109 121 134 148 P/B (X) 2.1 1.8 1.7 1.5 1.4 1.3 EPS 11.4 14.4 15.8 18.3 21.4 23.9 P/E (X) 16 13 12 10 9 8 RoE (%) 14.0 15.4 15.1 16.0 16.9 17.0 RoCE (%) 6.6 7.6 8.0 8.7 9.1 9.3 EV/EBITDA (X) 8.5 7.4 6.7 5.9 5.7 5.3
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 39 Electric Utilities Power Grid
Exhibit 13: Profit model, balance sheet, cash model of PGCIL, March fiscal year-ends, 2016-21E (Rs mn)
2016 2017 2018 2019E 2020E 2021E Profit model Net revenues 207,348 257,165 301,140 348,082 385,182 416,700 EBITDA 182,133 226,015 262,992 300,908 333,291 361,310 Other income 5,464 9,349 8,733 13,367 13,077 14,232 Interest expense (50,230) (63,038) (75,907) (89,291) (92,865) (94,858) Depreciation (61,828) (76,628) (90,913) (103,038) (114,409) (126,001) Pretax profits 75,540 95,698 104,906 121,945 139,094 154,683 Tax (15,748) (19,885) (22,189) (24,003) (27,421) (30,528) Deferred taxation (172) (612) (190) (2,166) 341 760 Net income 59,620 75,202 82,527 95,776 112,014 124,915 Extraordinary items 647 — — — — — Reported profit 60,267 75,202 82,527 95,776 112,014 124,915 Earnings per share (Rs) 11 14 16 18 21 24 Balance sheet Paid-up common stock 52,316 52,316 52,316 52,316 52,316 52,316 Total shareholders' equity 427,340 498,073 544,150 602,633 671,032 747,308 Deferred taxation liability 24,894 25,505 25,695 27,861 27,520 26,761 Income received on account of AAD 57,239 48,824 49,674 49,674 49,674 49,674 Total borrowings 1,083,214 1,124,632 1,234,203 1,301,739 1,356,249 1,413,166 Total liabilities and equity 1,592,686 1,697,033 1,853,722 1,981,907 2,104,475 2,236,910 Net fixed assets 1,151,579 1,355,080 1,536,104 1,673,654 1,799,245 1,923,244 Capital work-in progress 438,100 358,842 303,072 304,847 304,847 314,847 Investments 8,069 13,581 16,082 16,082 16,082 16,082 Miscellaneous expenses not w/o — — — — — — Cash 24,537 33,406 21,704 51,473 57,889 64,870 Net current assets (excl. cash) (29,599) (63,874) (23,240) (64,149) (73,588) (82,134) Net current assets (incl. cash) (5,062) (30,468) (1,536) (12,676) (15,699) (17,264) Total assets 1,592,686 1,697,033 1,853,722 1,981,907 2,104,475 2,236,910 Free cash flow Operating cash flow, excl. working capital 131,876 144,026 174,479 200,981 226,082 250,157 Working capital changes (21,937) 34,275 (40,634) 40,909 9,439 8,546 Capital expenditure (226,735) (200,871) (216,166) (242,364) (240,000) (260,000) Free cash flow (116,795) (22,569) (82,322) (474) (4,479) (1,297) Ratios Net debt/equity (%) 246 216 220 205 191 178 Return on equity (%) 14.0 15.4 15.1 16.0 16.9 17.0 Book value per share (Rs) 86 100 109 121 134 148 ROCE (%) 6.6 7.6 8.0 8.7 9.1 9.3
Source: Company, Kotak Institutional Equities
40 KOTAK INSTITUTIONAL EQUITIES RESEARCH INDIA Economy Inflation MAY 14, 2019 UPDATE BSE-30: 37,319
Input inflation moderates. Softening of April WPI inflation was driven primarily by moderation in core and fuel inflation even as food prices continued their uptrend. Sharp moderations in both core CPI and WPI inflation are indicative of the sluggish demand in the economy. With limited room for fiscal stimuli and with softer core inflation, we believe that the MPC will likely cut the repo rate by 25-50 bps in the rest of CY2019, even though transmission of rate cuts remains the key.
WPI inflation softens to 3.07% in April
April WPI inflation moderated to 3.07% (Kotak: 2.94%, consensus: 3.0%) as against 3.18% in QUICK NUMBERS March primarily due to a moderation in fuel and manufacturing inflation even as food inflation hardened (Exhibits 1 and 2). Sequentially, WPI inflation went up by 0.8% mom (0.4% in April WPI inflation March), consistent with the 0.5% increase observed in CPI inflation. At the wholesale level, at 3.07% food inflation showed a strong uptick of 4.9% (3.9% in March). Sequentially, food prices had a sharp uptick of 2.3% mom led by sharp gains of 17.7% in vegetables (11.1% in March) and Core WPI inflation 9.7% in fruits (0.4% in March) (Exhibit 3). Prices of cereals, however, contracted by (-)0.3% in at 1.8% April. Additionally, fuel and power inflation moderated by 3.8% (5.4% in March). Sequentially, Expect average there was a sharp fall in prices across electricity ((-)3.1%), furnace oil ((-)2.1%) and HSD ((-)1.2%). Primary non-food inflation firmed up by 5.2% (2.8% in March). We expect WPI FY2020 WPI at inflation to remain benign going ahead and average 3.1% in FY2020 (Exhibit 4). 3.1%; average core WPI at 1.6% Growth concerns lead to moderation in core manufacturing inflation to 1.8% Expect MPC to cut Core WPI inflation (manufactured products excluding food products) softened to 1.8% in April rates by 25-50 bps (2.5% in March); on a sequential basis, it contracted by (-)0.1% mom. Among the in the rest of heavyweights, prices of ‘basic metals’ contracted by (-)0.4% mom while those of ‘chemicals and CY2019 chemical products’ remained unchanged. Global growth slowdown concerns are weighing on the commodity prices, which seem to have corrected marginally in April (Exhibit 5). Going ahead, we do not expect any sharp reversal in prices given the muted global demand. We expect core WPI inflation to average 1.6% in FY2020.
Benign growth-inflation outcome to create space for 25-50 bps of rate cuts
The momentum to April CPI and WPI inflation came primarily from food inflation while growth concerns led to moderation in core inflation. The growth in the economy, which had been supported primarily by consumption and government spending, has slowed considerably as pointed out by high frequency indicators. Additionally, the fiscal space to support capex in FY2020 will be limited given the tall ask from GST collections and higher revenue expenditure. As we highlighted in our May 6, 2019 report ‘Lackluster prospects for growth’, we see limited Upasna Bhardwaj impetus to economic growth and expect GDP growth to weaken to 6.8% in FY2020 from 6.9% in FY2019 (Exhibit 6). Against this backdrop, we believe that the MPC would cut the repo rate by another 25-50 bps in the rest of CY2019, although for rate cuts to be effective, Suvodeep Rakshit structural liquidity concerns will need to be addressed.
Avijit Puri
[email protected] Contact: +91 22 6218 6427
For Private Circulation Only. India Economy
Exhibit 1: Base effect resulted in moderation of WPI inflation in April Trend in momentum, base effect, and monthly change in WPI inflation (%)
Momentum Base effect Monthly change in WPI inflation 2.0
1.5
1.0
0.5
0.0
(0.5)
Jun-17
Jun-18
Jun-19
Oct-17
Feb-18
Oct-18
Feb-19
Oct-19
Apr-17
Apr-18
Apr-19
Dec-17
Dec-18
Dec-19
Aug-17
Aug-18 Aug-19 (1.0)
(1.5)
(2.0)
Notes: (a) Momentum is mom growth while base effect is 12-m prior mom change with signs reversed.
Source: CEIC, Kotak Economics Research
Exhibit 2: WPI inflation softened to 3.07% due to moderation in manufacturing and fuel inflation Contribution of key items to WPI inflation (%) Primary food articles Primary non-food articles Minerals Crude and natural gas Fuel and power Manufactured products WPI inflation 6
4
2
0
(2)
Jun-15
Jun-16
Jun-17
Jun-18
Oct-15
Feb-16
Oct-16
Feb-17
Oct-17
Feb-18
Oct-18
Feb-19
Apr-15
Apr-16
Apr-17
Apr-18
Apr-19
Dec-15
Dec-16
Dec-17
Dec-18
Aug-15
Aug-16
Aug-17 Aug-18
(4)
(6)
(8)
Source: CEIC, Kotak Economics Research
42 KOTAK ECONOMIC RESEARCH Economy India
Exhibit 3: Vegetables and fruits led to firming up of food inflation Trend in components of food inflation (%) Foodgrains Fruits & vegetables 12 Milk, eggs, meat & fish Other primary food articles Primary food articles 10 8 6 4 2 0 (2) (4)
(6)
Jul-15
Jul-16
Jul-17
Jul-18
Jan-16
Jan-17
Jan-18
Jan-19
Oct-15
Oct-16
Oct-17
Oct-18
Apr-15
Apr-16
Apr-17 Apr-18 Apr-19
Source: CEIC, Kotak Economics Research
Exhibit 4: WPI inflation trajectory remains benign WPI inflation (yoy change), 2015-20E (%)
WPI inflation Core WPI inflation 8
6 Mar 2020: 3.9 4
2 Mar 2020: 2.5 0
(2)
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Mar-16
Mar-17
Mar-18
Mar-19 Mar-20 (4)
(6)
(8)
Source: CEIC, Kotak Economics Research estimates
KOTAK ECONOMIC RESEARCH 43 India Economy
Exhibit 5: Commodity prices undergoing a correction from April Trend in CRB commodities index (X)
CRB Commodities Index 210
200
190
180
170
160
Jul-18
Jan-18
Jan-19
Jun-18
Feb-18
Oct-18
Feb-19
Sep-18
Apr-18
Apr-19
Dec-18
Nov-18
Mar-18
Mar-19 Aug-18 May-18
Source: Bloomberg, Kotak Economics Research
Exhibit 6: We expect growth momentum to moderate in FY2020 Real GVA and components growth, March fiscal-year ends, 2014-20E (%)
2014 2015 2016 2017 2018 2019E 2020E Real GVA 6.1 7.2 8.0 7.9 6.9 6.7 6.6 Agriculture and allied 5.6 (0.2) 0.6 6.3 5.0 2.8 3.1 Industry 3.8 7.0 9.6 7.7 5.9 7.6 6.9 Mining 0.2 9.7 10.1 9.5 5.1 1.2 5.1 Manufacturing 5.0 7.9 13.1 7.9 5.9 7.9 7.3 Electricity 4.2 7.2 4.7 10.0 8.6 8.0 8.2 Construction 2.7 4.3 3.6 6.1 5.6 9.1 6.3 Services 7.7 9.8 9.4 8.4 8.1 7.2 7.3 Trade, hotel, transport, communication 6.5 9.4 10.2 7.7 7.8 7.0 6.9 Financial, real estate, professional services 11.2 11.0 10.7 8.7 6.2 7.1 7.0 Public admin, defence, and others 3.8 8.3 6.1 9.2 11.9 7.6 8.3 Non-agriculture GVA 6.2 8.7 9.5 8.2 7.3 7.3 7.1 Real GDP 6.4 7.4 8.0 8.2 7.2 6.9 6.8
Source: CEIC, Kotak Economics Research estimates
44 KOTAK ECONOMIC RESEARCH March 2019: Results calendar 45
Mon Tue Wed Thu Fri Sat Sun 13-May 14-May 15-May 16-May 17-May 18-May 19-May Godrej Industries Edelw eiss Financial Services Aditya Birla Fashion Bajaj Finance Bajaj Auto Graphite India HDFC Endurance Technologies Amara Raja Batteries Bajaj Finserv Bajaj Holding & Investment J K Cement Idea Gatew ay Distriparks Central Bank of India Bank of India Balkrishna Industries Shree Cement ITC IIFL Holdings Gujarat Pipavav Port DB Corp. CESC Just Dial Indian Bank J&K Bank Hindalco Industries City Union Bank MRPL Pidilite Industries Jubilant Foodw orks JSW Energy Dr Lal Pathlabs Muthoot Finance Siemens Karur Vysya Bank Dr Reddy's Laboratories SRF Union Bank Lupin IOCL Magma Fincorp Jubilant Life Science Petronet LNG PI Industries SKF Sobha Torrent Pow er UPL 20-May 21-May 22-May 23-May 24-May 25-May 26-May Astral Poly Technik Bharat Financial Inclusion Canara Bank GIC Ashok Leyland Divi's Laboratories Bharat Forge Bosch Cipla HCG DishTV WABCO India BPCL Cochin Shipyard Cummins India Indraprastha Gas Grasim Industries GlaxoSmithkline Pharmaceuticals Crompton Greaves Consumer IndusInd Bank Sun TV Netw ork JSW Steel HEG Dhanuka Agritech JK Lakshmi Cement Page Industries HPCL Jindal Steel and Pow er S H Kelkar and Company Rural Electrification Corp. Tata Motors Tech Mahindra The Ramco Cement Varroc Engineering Torrent Pharmaceuticals Timken Thermax United Brew eries 27-May 28-May 29-May 30-May 31-May 1-Jun 2-Jun Colgate-Palmolive (India) 3M India Bharat Electronics Apollo Hospitals Emami Aster DM Healthcare Glenmark Pharmaceuticals Berger Paints GAIL (India) Info Edge GMR Infrastructure Ujjivan Financial Services Interglobe Aviation Sun Pharmaceuticals Lemon Tree Hotels Kaveri Seed Mahindra & Mahindra Motherson Sumi Systems PFC
Mphasis United Spirits Daily Summary India NHPC Oil India Prestige Estates Projects Zee Entertainment Enterprises
Source: NSE, Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK -
May 15, 2019
KOTAK ECONOMIC RESEARCH 45 Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India
Fair O/S ADVT
KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo Company Rating 14-May-19 (Rs) (%) (Rs bn) (US$ bn) (mn) 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E (US$ mn) Automobiles & Components Amara Raja Batteries REDUCE 634 700 10 108 1.5 171 29 35 40 4.9 21 14.7 22 18.2 15.8 11.2 9.3 8.0 3.2 2.8 2.5 15.7 16.6 16.6 0.7 0.8 0.9 8.1 Apollo Tyres BUY 180 270 50 103 1.5 572 14.3 18 22 7.0 25 21 12.5 10.0 8.3 7.5 6.5 5.5 1.0 0.9 0.9 8.3 9.8 10.9 1.8 1.7 1.7 8.4 Ashok Leyland BUY 85 140 65 248 3.5 2,936 6.7 8.0 8.0 12.7 18 (0.2) 12.6 10.6 10.6 8.0 6.6 6.8 3.0 2.5 2.2 25 26 22 2.4 2.8 2.8 33 Bajaj Auto REDUCE 2,937 2,400 (18) 850 12 289 147 162 171 5.0 10.3 5.2 19.9 18.1 17.2 14 12 11.6 4.0 3.6 3.2 21 21 19.7 2.0 2.2 2.3 24 Balkrishna Industries BUY 816 950 16 158 2.2 193 42 49 53 11.1 17 9.6 19.6 16.8 15.3 10.3 9.1 8.1 3.3 2.8 2.4 18.1 18.2 17.1 0.6 0.7 0.8 7.9 Bharat Forge SELL 457 445 (3) 213 3.0 466 23 25 25 44 6.2 2.3 19.7 18.5 18.1 11.5 10.5 9.9 3.9 3.4 3.0 21 19.6 17.5 1.1 1.2 1.3 10.6 CEAT ADD 987 1,080 9 40 0.6 40 62 74 82 (5.0) 20 11.7 16.1 13.4 12.0 8.4 8.3 7.6 1.4 1.3 1.2 9.3 10.3 10.6 1.2 1.2 1.2 8.4 Eicher Motors SELL 19,231 16,200 (16) 525 7.5 27 816 881 892 1.9 8.0 1.3 24 22 22 16 15 14 7.3 5.9 4.9 36 30 25 0.2 0.2 0.0 37 Endurance Technologies SELL 1,150 925 (20) 162 2.3 141 36 42 50 25 16 19 32 27 23 15 12 10.6 6.2 5.2 4.4 19.6 19.1 19.1 0.5 0.6 0.7 3.6 Escorts BUY 572 1,000 75 49 1.0 89 54 61 67 40 11.4 10.6 10.5 9.4 8.5 6.7 5.5 4.6 1.7 1.5 1.3 16.0 15.6 15.1 0.4 1.6 1.8 21 -
Exide Industries SELL 208 210 1 177 2.5 850 9.0 10.0 11.0 10.1 10.6 10.2 23 21 18.9 12 11.1 10.0 3.0 2.7 2.5 13.5 13.6 13.9 1.2 1.7 1.9 7.3 May 15, 2019 Hero Motocorp SELL 2,510 2,400 (4) 501 7.1 200 166 169 178 (10.2) 1.9 5.3 15.1 14.8 14.1 8.9 8.5 7.9 3.9 3.5 3.2 27 25 24 3.5 3.4 3.6 30 Mahindra CIE Automotive ADD 225 245 9 85 1.2 378 14.5 15 17 48 4.8 11.3 15.5 14.8 13.3 8.9 8.1 7.1 2.0 1.8 1.5 13.7 12.6 12.3 ——— 0.5 Mahindra & Mahindra BUY 614 1,000 63 764 10.9 1,138 46 50 54 22 8.3 8.7 13.3 12.2 11.3 9.8 8.1 7.2 2.0 1.8 1.6 16.2 15.5 15.0 1.5 1.6 1.8 34
Maruti Suzuki REDUCE 6,576 6,600 0 1,987 28.3 302 248 259 312 (2.9) 4.4 20 26 25 21 15 13 10.2 4.3 3.8 3.4 17.1 16.0 17.1 0.9 1.0 1.2 92 Motherson Sumi Systems SELL 122 125 3 385 5.5 3,158 5.5 6.7 7.6 0.1 22 13.8 22 18.3 16.1 8.5 7.1 6.1 3.5 3.1 2.7 16.5 17.9 17.9 1.2 1.4 1.5 17.5 MRF REDUCE 53,100 50,000 (6) 225 3.2 4 2,667 3,070 3,336 (0.1) 15 8.7 19.9 17.3 15.9 9.0 7.6 6.6 2.1 1.9 1.7 11.0 11.3 11.1 0.1 0.1 0.1 6.5 Schaeffler India REDUCE 4,875 5,000 3 152 2.2 31 144 159 188 14.9 10.4 18 34 31 26 20 17 14 5.6 4.8 4.1 17.9 16.9 17.1 0.2 0.2 0.2 0.4 SKF ADD 1,802 2,050 14 93 1.3 51 67 82 97 17 22 17 27 22 18.6 17 14 11.4 4.4 3.8 3.3 16.4 17.3 17.5 0.6 0.8 0.9 0.7 Tata Motors BUY 185 280 52 627 8.2 3,396 (9.4) 19 30 (147) 301 57 NM 9.7 6.2 5.5 4.2 3.6 1.0 0.9 0.8 NM 9.4 13.1 ——— 82
Timken SELL 535 550 3 40 0.6 75 18 22 25 34 21 14.8 29 24 21 15 12 10.6 4.8 4.0 3.4 17.8 18.1 17.5 0.2 0.2 0.2 0.1 TVS Motor SELL 464 350 (25) 220 3.1 475 14.1 16 19 1.1 10.1 21 33 30 25 16 15 13 6.6 5.8 5.0 22 21 22 0.8 1.0 1.2 10.1 Varroc Engineering BUY 497 950 91 67 1.0 135 32 42 61 (4.1) 32 43 15.5 11.8 8.2 7.7 6.1 4.5 2.0 1.7 1.4 13.2 14.8 17.5 ——— 0.8 WABCO India SELL 6,170 6,100 (1) 117 1.7 19 183 222 223 27 22 0.1 34 28 28 23 18 18 6.3 5.2 4.4 21 21 17.3 0.2 0.2 0.2 0.9 Automobiles & Components Neutral 7,895 111.9 (19.7) 41 17 24 17.3 14.7 9.6 7.9 6.8 2.9 2.6 2.3 11.8 14.8 15.4 1.1 1.2 1.3 446 Banks AU Small Finance Bank SELL 647 500 (23) 189 2.7 292 13.1 16 23 28 26 40 50 39 28 ——— 6.4 4.7 4.0 14.0 13.2 14.8 0.1 0.0 0.0 0.0 Axis Bank REDUCE 731 730 (0) 1,881 26.8 2,572 18 45 55 1,593 148 23 40 16.2 13.2 ——— 3.2 2.6 2.2 7.2 16.1 16.6 0.1 0.3 0.4 95 Bandhan Bank SELL 543 475 (12) 648 9.2 1,193 16 20 25 45 20 28 33 28 22 ——— 5.9 5.6 4.7 19.0 23 23 0.6 0.7 0.8 0.0 Bank of Baroda ADD 110 145 32 375 5.3 2,652 10.9 24 27 218 117 14.0 10.1 4.7 4.1 ——— 0.9 0.7 0.6 6.9 15.7 13.4 0.0 0.0 0.0 33 Canara Bank ADD 249 315 27 187 2.7 753 4.6 53 72 108 1,046 36 54 4.7 3.5 ——— 1.2 0.8 0.6 1.0 10.4 12.7 ——— 21 City Union Bank ADD 195 215 10 143 2.0 731 9.6 10.5 12.2 7.4 9.8 16 20 18.6 16.0 ——— 3.2 2.9 2.5 15.8 15.3 15.7 0.9 1.0 1.1 2.3 DCB Bank BUY 218 230 6 67 1.0 310 10.5 13.3 17 32 27 25 21 16.3 13.1 ——— 2.4 2.2 1.9 12.0 13.5 14.9 0.5 0.6 0.7 7.3 Equitas Holdings BUY 126 180 43 43 0.6 342 6.3 10.0 13.0 585 57 30 19.9 12.7 9.7 ——— 1.8 1.6 1.4 9.1 12.8 14.5 ——— 4.2 Federal Bank BUY 98 130 32 195 2.8 1,985 6.3 8.9 10.7 41 43 20 15.7 11.0 9.2 ——— 1.6 1.5 1.3 9.8 12.7 13.8 1.4 2.0 2.4 17.8 HDFC Bank ADD 2,288 2,400 5 6,235 88.7 2,723 77 93 112 14.9 21 20 30 25 20 ——— 4.2 3.8 3.3 16.5 16.0 16.9 0.7 0.8 0.9 114 ICICI Bank BUY 380 460 21 2,453 34.9 6,447 5.2 25 32 (45.6) 384 25 73 15.1 12.0 ——— 2.5 2.2 1.9 3.2 14.2 15.9 0.3 1.3 1.7 97 IndusInd Bank ADD 1,433 1,800 26 864 12.3 600 59 79 105 (2) 34 33 24 18.1 13.6 ——— 3.3 2.7 2.3 14.4 17.2 17.8 0.5 0.6 0.9 60 J&K Bank BUY 53 90 71 29 0.4 557 7.1 9.6 18 95 35 84 7.4 5.5 3.0 ——— 0.7 0.6 0.5 6.2 8.0 13.5 2.7 3.6 6.7 1.0 Karur Vysya Bank ADD 80 85 7 64 0.9 727 2.1 4.1 8.3 (56) 97 101 38 19.3 9.6 ——— 1.2 1.1 0.9 2.4 4.6 8.9 0.7 1.3 2.7 2.0 Punjab National Bank ADD 83 105 27 382 5.4 4,514 (18) 11.1 13.0 61 163 17 NM 7.5 6.4 ——— 1.6 1.0 0.9 NM 10.7 11.2 ——— 40 RBL Bank SELL 651 560 (14) 278 4.0 427 20 28 35 34 39 25 32 23 18.4 ——— 3.8 3.4 3.0 12.2 15.0 16.4 0.4 0.6 0.7 19.2 State Bank of India BUY 315 410 30 2,808 39.9 8,925 1.0 37 52 113 3,736 41 326 8.5 6.0 ——— 1.9 1.4 1.1 0.4 13.9 16.9 0.0 0.1 0.2 99 Ujjivan Financial Services ADD 307 375 22 37 0.5 121 16 23 28 2,514 48 24 19.7 13.3 10.8 ——— 1.9 1.7 1.5 10.2 13.5 14.8 0.5 0.7 1.0 7.8 Union Bank ADD 79 105 32 140 2.0 1,763 -16.7 6.3 20 63 137 211 NM 12.7 4.1 ——— 1.3 1.1 0.7 NM 4.4 12.8 0.0 1.2 3.7 12.8 YES Bank SELL 156 170 9 361 5.1 2,315 7.4 2.1 10.2 (59.5) -71.6 382 21 74 15.3 ——— 1.5 1.6 1.4 7.1 1.8 8.3 1.3 0.2 1.1 173 Banks Attractive 17,379 247.2 447 256 31 51 14.4 10.9 2.1 1.8 1.6 4.2 12.7 14.5 0.4 0.7 0.9 807
Source: Company, Bloomberg, Kotak Institutional Equities estimates
46 KOTAK ECONOMIC RESEARCH 46
Kotak Institutional Equities: Valuation summary of KIE Universe stocks
47 Fair O/S ADVT Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo
Company Rating 14-May-19 (Rs) (%) (Rs bn) (US$ bn) (mn) 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E (US$ mn) Building Products Astral Poly Technik SELL 1,158 720 (38) 139 2.0 121 18 22 26 20 25 17 66 53 45 34 29 24 11 9.1 7.6 18.3 18.7 18.3 0.1 0.1 0.1 1.2 Building Products Cautious 139 2.0 20 25 17 66 52 45 34 29 24 11 9.0 7.6 16.4 17.2 16.9 0.1 0.1 0.1 1.2 Capital goods ABB SELL 1,375 1,125 (18) 291 4.1 212 24 27 35 22 13.8 27 57 50 40 60 43 31 7.3 6.5 5.8 13.4 13.7 15.5 0.3 0.4 0.5 3.0 Ashoka Buildcon BUY 118 205 74 33 0.5 282 10.6 11.3 11.5 26 7.0 1.4 11.1 10.4 10.3 7.6 7.1 6.4 1.5 1.4 1.2 14.5 13.8 12.5 1.1 1.2 1.2 0.6 Bharat Electronics BUY 89 100 12 217 3.1 2,437 5.7 5.8 5.2 (2.9) 2.5 (11.6) 15.6 15.2 17.2 9.6 8.0 8.0 2.5 2.3 2.1 16.5 15.4 12.6 2.2 2.3 2.0 16.6 BHEL REDUCE 64 65 1 223 3.2 3,482 3.0 2.7 4.2 29 (9.4) 53 21 24 15.4 11.5 9.7 6.5 0.7 0.7 0.7 3.3 3.0 4.5 2.5 1.9 2.6 14.9 Carborundum Universal SELL 359 310 (14) 68 1.0 189 13.1 16 18 14.8 21 15 27 23 19.7 15 13 10.7 3.9 3.5 3.2 15.1 16.5 17.0 0.8 1.3 1.5 0.8 Cochin Shipyard BUY 355 555 57 47 0.7 132 35 37 39 16 6.4 6.9 10.2 9.6 9.0 3.9 3.9 4.8 1.4 1.3 1.2 13.8 13.8 13.5 2.9 3.0 3.3 0.4 Cummins India REDUCE 698 720 3 193 2.8 277 28 32 37 16 15 15 25 22 18.8 20 17 15 4.6 4.3 4.0 18.8 20 22 2.2 2.5 2.9 5.1 Dilip Buildcon BUY 471 735 56 64 0.9 137 56 49 61 20 (11.8) 23 8.5 9.6 7.8 5.9 5.0 4.5 2.0 1.7 1.4 27 18.9 19.3 0.2 0.0 0.0 6.4 IRB Infrastructure BUY 114 250 119 40 0.6 351 27 30 16 21 8.6 (45) 4.2 3.9 7.0 6.0 6.6 8.2 0.6 0.5 0.5 15.7 14.9 7.6 2.7 3.2 3.3 5.7 Kalpataru Power Transmission BUY 459 570 24 70 1.0 153 30 37 45 66 23 21 15.1 12.3 10.1 6.8 5.5 4.4 2.3 1.9 1.7 16.1 17.0 17.6 0.7 0.8 0.9 0.7 KEC International BUY 277 340 23 71 1.0 257 19 23 29 5.7 21 26 14.6 12.0 9.5 7.4 6.3 5.3 2.9 2.4 2.0 22 22 23 1.0 0.9 1.1 2.0 L&T BUY 1,342 1,500 12 1,882 26.8 1,403 61 68 74 19 11.0 9.0 22 19.7 18.1 19 17 15 3.4 3.1 2.8 16.3 16.3 16.1 1.3 1.7 1.9 62 Sadbhav Engineering BUY 210 280 34 36 0.5 172 13.8 17 17 7.3 26 -0.6 15.2 12.1 12.1 11.0 8.8 7.7 1.7 1.5 1.4 12.0 13.4 11.8 0.0 0.0 0.0 0.9 Siemens SELL 1,087 995 (8) 387 5.5 356 29 34 40 14.1 20 17 38 32 27 22 19 16 4.3 3.9 3.6 11.8 13.1 14.0 0.7 0.9 1.0 8.3 Thermax REDUCE 959 990 3 114 1.6 113 27 38 43 29 42 12.4 36 25 23 25 18 16 25 18 16 10.7 13.9 14.2 0.8 1.1 1.2 2.0 Capital goods Neutral 3,737 53.2 18 10.1 9.3 21 19.3 17.7 2.7 2.4 2.2 12.5 12.6 12.6 1.3 1.5 1.7 807 Commercial & Professional Services SIS REDUCE 858 825 (4) 63 0.9 75 29 35 42 28 22 21 30 24 20 18 14 11.6 5.1 4.3 3.6 18.8 19.1 19.4 0.3 0.4 0.4 0.5 TeamLease Services SELL 2,863 2,000 (30) 49 0.7 17 59 76 99 37 29 30 49 38 29 49 38 29 9.0 7.3 5.8 20 21 22 — — — 1.0 Commercial & Professional Services Cautious 112 1.6 33 24 24 35 29 23 25 19 15 6.2 5.2 4.3 17.6 18.2 18.6 0.2 0.2 0.3 1.5 Commodity Chemicals Asian Paints REDUCE 1,320 1,225 (7) 1,266 18.0 959 23 27 32 9.7 20 20 59 49 41 36 29 24 13 12 11 24 26 28 0.8 1.0 1.2 26 Tata Chemicals BUY 574 700 22 146 2.1 255 43 49 54 (9) 13.1 10.4 13.4 11.8 10.7 6.3 5.1 4.5 1.2 1.1 1.0 9.3 9.7 10.0 2.2 2.3 2.6 8.0 Commodity Chemicals Neutral 1,413 20.1 2.7 17 17 43 37 32 25 21 18 6.5 5.9 5.5 14.9 16.1 17.3 0.9 1.1 1.4 34 Construction Materials ACC SELL 1,572 1,400 (11) 295 4.2 188 53 65 73 9.3 21 13.0 30 24 22 15 13 11.5 2.8 2.6 2.4 10.1 11.1 11.6 0.9 1.0 1.2 22 Ambuja Cements REDUCE 213 192 (10) 423 6.0 1,986 7.3 9.9 11.5 (2.4) 36 16 29 22 18.6 10.6 8.1 6.9 1.9 1.8 1.6 6.7 8.5 9.1 0.7 0.7 0.7 11.6 Dalmia Bharat ADD 1,078 1,225 14 207 2.9 192 14.4 32 43 4 120 37 75 34 25 12 10.2 8.8 1.9 1.8 1.7 2.6 5.6 7.2 — — — 3.0 Grasim Industries ADD 846 930 10 556 7.9 657 71 78 89 49 9.7 14.0 11.9 10.9 9.5 7.1 6.9 6.2 0.9 0.9 0.8 8.0 8.3 8.7 0.7 0.7 0.7 16.7
India Cements REDUCE 96 84 (13) 30 0.4 308 3.0 6.4 9.0 (7.9) 112 42 32 15.1 10.6 9.1 7.4 6.4 0.6 0.5 0.5 1.8 3.7 5.0 1.0 1.0 1.0 10.6 Daily Summary India J K Cement ADD 844 770 (9) 65 0.9 77 31 61 62 (28) 97 1.9 27 13.8 13.6 11.4 10.0 8.1 2.5 2.1 1.9 10.3 16.5 14.8 0.9 0.9 0.9 0.8 JK Lakshmi Cement ADD 344 325 (6) 40 0.6 118 3.1 22 31 (31) 624 37 111 15.3 11.2 13 7.4 6.0 2.8 2.4 2.0 2.5 16.8 19.5 0.6 0.6 0.6 0.4 Orient Cement ADD 102 106 4 21 0.3 205 2.3 7.7 10.8 7.5 230 41 44 13.3 9.4 10.6 6.8 5.8 2.0 1.8 1.6 4.6 14.2 17.8 1.5 2.0 2.0 0.4 Shree Cement SELL 18,954 11,750 (38) 660 9.4 35 339 512 642 (15) 51 25 56 37 30 24 17 14 6.8 5.9 5.0 12.7 17.0 18.2 0.3 0.3 0.3 6.9 UltraTech Cement SELL 4,424 2,960 (33) 1,215 17.3 275 89 133 166 (0.1) 49 25 49 33 27 21 16 14 4.3 3.9 3.4 9.1 12.4 13.7 0.3 0.3 0.3 30 Construction Materials Cautious 3,513 50.0 13.0 35 20 31 23 19.0 12 10.2 8.8 2.3 2.1 1.9 7.6 9.4 10.2 0.5 0.5 0.5 102
KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Source: Company, Bloomberg, Kotak Institutional Equities estimates
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May2019 15,
KOTAK ECONOMIC RESEARCH 47
Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India Fair O/S ADVT Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo
KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 14-May-19 (Rs) (%) (Rs bn) (US$ bn) (mn) 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E (US$ mn) Consumer Durables & Apparel Crompton Greaves Consumer SELL 220 200 (9) 138 2.0 632 6.0 7.2 8.5 16 21 17 37 30 26 23 19 16 12 9.5 7.3 39 35 32 0.9 1.1 0.0 2.8 Havells India SELL 724 520 (28) 453 6.4 625 13.4 17 20 21 23 18 54 44 37 35 28 23 11 9.4 8.2 21 23 24 0.6 0.8 0.9 12.8 Page Industries SELL 21,418 22,300 4 239 3.4 11 397 479 578 28 21 21 54 45 37 34 28 24 24 20 16 48 48 47 1.2 1.0 1.2 14.1 TCNS Clothing Co. ADD 839 855 2 51 0.7 65 21 22 27 37 5.2 22 40 38 31 27 20 16 9.1 7.1 5.6 26 21 20 — — — 0.4 Vardhman Textiles ADD 1,097 1,230 12 63 0.9 56 129 119 136 25.6 -8.4 15.0 8.5 9.3 8.1 7.1 6.7 5.6 1.1 1.0 0.9 13.9 11.5 12.1 1.8 2.7 2.7 0.3 Voltas SELL 572 480 (16) 189 2.7 331 16 17 21 (9.1) 7.1 23 36 34 28 31 25 22 4.6 4.2 3.7 13.0 12.9 14.3 0.5 0.6 0.7 15.1 Whirlpool SELL 1,369 1,220 (11) 174 2.5 127 33 40 46 20 21 15 41 34 30 26 20 18 8.1 6.9 6.0 21 22 22 0.4 0.6 1.0 1.3 Consumer Durables & Apparel Cautious 1,307 18.6 17 12.7 38 33 28 25 21 18 7.0 6.1 18.4 18.2 18.8 0.8 0.9 47 Consumer Staples Bajaj Consumer Care BUY 334 410 23 49 0.7 148 15 17 19 5.0 16 11.9 22 19.2 17.2 17 15 13 11 10 10 46 54 60 4.2 4.2 4.8 2.4
Britannia Industries REDUCE 2,698 2,800 4 648 9.2 240 48 59 70 15 22 19 56 46 39 37 30 25 15 12 10 30 30 29 0.6 0.7 0.9 21 -
Colgate-Palmolive (India) ADD 1,123 1,400 25 305 4.3 272 27 32 37 16 16 17 41 35 30 24 20 18 18 15 13 46 47 48 1.4 1.7 2.0 7.5 May2019 15, Dabur India REDUCE 369 370 0 651 9.3 1,766 8.1 9.5 10.9 4.6 16 16 45 39 34 37 32 27 12 10 9.0 25 28 28 0.7 1.2 1.5 15.8 GlaxoSmithKline Consumer RS 7,162 — — 301 4.3 42 234 242 273 40 3.5 12.9 31 30 26 23 20 18 7.4 6.7 6.0 26 24 24 1.5 1.6 1.8 2.2 Godrej Consumer Products REDUCE 638 635 (0) 652 9.3 1,022 14.4 16 19 1.0 13.4 16 44 39 34 32 28 24 9.0 8.0 7.1 22 22 22 1.5 1.0 1.1 14.6
Hindustan Unilever REDUCE 1,699 1,575 (7) 3,677 52.3 2,160 28 32 37 18 15 14.9 60 52 46 42 36 31 48 42 36 83 85 84 1.3 1.4 1.6 39 ITC ADD 294 335 14 3,608 51.3 12,288 10.1 11.0 12.3 13.3 9.0 11.3 29 27 24 19 17 15 6.2 5.9 5.5 20 21 23 1.9 2.2 2.5 58 Jyothy Laboratories ADD 147 200 36 54 0.8 367 5.6 6.0 6.7 27 7.9 11.4 26 24 22 19 17 15 4.1 3.8 3.6 16.6 16.1 16.9 2.0 2.4 2.7 0.8 Marico ADD 353 380 8 456 6.5 1,290 7.3 8.5 10.0 17 16 17 48 42 35 35 30 25 15 14 13 34 35 38 1.3 1.6 1.8 11.2 Nestle India REDUCE 10,199 10,700 5 983 14.0 96 167 196 224 31 17 14.8 61 52 45 36 31 27 27 25 23 45 49 52 1.1 1.3 1.5 13.8
Tata Global Beverages ADD 200 230 15 126 1.8 631 7.0 8.4 9.4 (4.8) 20 12.4 29 24 21 15 14 12 1.7 1.7 1.6 6.1 7.1 7.6 1.2 1.5 1.7 6.5
United Breweries REDUCE 1,368 1,390 2 362 5.1 264 24 30 37 59 26 23 58 46 37 29 25 21 11 9.2 7.7 21 22 23 0.3 0.4 0.5 14.2 United Spirits REDUCE 531 550 4 386 5.5 727 10.9 13.3 17 44 22 25 49 40 32 30 25 20 12 8.0 5.4 27 24 20 0.0 0.4 0.5 12.6 Varun Beverages ADD 884 975 10 161 2.3 183 16 18 25 39 10.3 41 55 50 35 19 16 13 8.1 7.0 6.0 15.5 15.1 18.3 0.3 0.1 0.2 1.9 Consumer Staples Cautious 12,420 176.6 16 13.1 14.5 42 37 33 28 24 21 11 10.0 9.0 26 27 27 1.4 1.5 1.8 221 Diversified Financials Bajaj Finance SELL 2,884 2,400 (17) 1,667 23.7 575 67 90 118 54 34 31 43 32 24 — — — 8.6 7.0 5.6 22 24 25 0.2 0.3 0.4 52 Bajaj Finserv REDUCE 7,366 7,100 (4) 1,172 16.7 159 242 307 384 38 27 25 30 24 19.2 — — — 4.8 4.0 3.4 17.5 18.3 19.1 0.2 0.2 0.2 23 Bharat Financial Inclusion NA 876 — — 123 1.7 140 63 68 86 93 8.1 27 13.9 12.8 10.1 — — — 3.1 2.5 2.0 25 21 21 — — — 10.4 Cholamandalam ADD 1,276 1,475 16 200 2.8 156 76 89 105 29 17 19 16.8 14.4 12.1 — — — 3.3 2.8 2.3 21 20 20 0.5 0.8 0.9 6.5 HDFC ADD 1,965 2,175 11 3,383 48.1 1,721 56 62 71 (14) 11.5 14.1 35 31 28 — — — 4.4 4.1 3.7 13.6 13.4 14.0 1.1 1.2 1.4 86 IIFL Holdings REDUCE 438 410 (6) 140 2.0 319 26 28 33 (9.0) 9.4 17 16.9 15.4 13.2 — — — 2.5 2.2 2.0 15.6 15.1 15.9 1.3 1.4 1.6 1.4 L&T Finance Holdings REDUCE 118 140 18 237 3.4 1,249 18 12.8 14.6 34 (28.4) 14.3 6.6 9.3 8.1 — — — 1.2 1.5 1.3 19.3 18.0 17.2 1.4 1.1 1.2 13.6 LIC Housing Finance ADD 488 550 13 246 3.5 505 48 57 67 21.4 19 17 10.1 8.5 7.3 — — — 1.6 1.3 1.2 15.9 16.6 16.9 1.6 1.9 2.2 14.3 Magma Fincorp BUY 127 145 14 34 0.5 269 11.3 15 18 16 35 18 11.3 8.3 7.1 — — — 1.3 1.1 1.0 12.1 14.3 14.9 1.3 1.8 2.1 0.8 Mahindra & Mahindra Financial ADD 371 500 35 229 3.3 615 25 31 36 45 24 13.8 14.6 11.8 10.4 — — — 2.3 2.0 1.8 15.2 16.7 16.9 1.8 2.2 2.5 11.1 Muthoot Finance ADD 570 625 10 228 3.2 401 49 54 60 10.8 8.7 11.4 11.6 10.7 9.6 — — — 2.3 2.0 1.8 22 20 19.6 2.1 2.3 2.5 8.3 PNB Housing Finance REDUCE 778 700 (10) 131 1.9 168 71 69 77 9.7 (2.9) 11.5 10.9 11.3 10.1 — — — 1.8 1.6 1.5 16.9 14.5 14.4 1.2 0.4 0.4 6.8 Shriram City Union Finance ADD 1,415 1,900 34 93 1.3 66 150 156 189 39 4.3 21 9.4 9.1 7.5 — — — 1.6 1.4 1.2 16.6 15.1 16.0 1.6 1.4 1.7 0.4 Shriram Transport BUY 1,027 1,425 39 233 3.3 227 113 129 145 4.2 13.9 12.9 9.1 8.0 7.1 — — — 1.5 1.3 1.2 17.4 17.1 16.8 1.2 1.8 2.1 19.0 Diversified Financials Neutral 8,116 115.4 14.3 18 19 24 21 17.6 3.7 3.2 2.8 15.2 15.6 16.1 0.8 0.9 1.1 254
Source: Company, Bloomberg, Kotak Institutional Equities estimates
48 KOTAK ECONOMIC RESEARCH
48
Kotak Institutional Equities: Valuation summary of KIE Universe stocks
49 Fair O/S ADVT Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo
Company Rating 14-May-19 (Rs) (%) (Rs bn) (US$ bn) (mn) 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E (US$ mn) Electric Utilities CESC BUY 662 800 21 88 1.2 133 63 97 107 (6.8) 55 10.4 10.6 6.8 6.2 6.8 5.6 5.1 0.7 0.7 0.6 6.7 10.0 10.2 1.7 1.6 1.7 3.4 JSW Energy REDUCE 67 67 (0) 110 1.6 1,640 4.3 5.4 5.7 42 25 5.6 15.5 12.4 11.8 6.0 5.1 4.6 0.9 0.9 0.8 6.2 7.2 7.1 — — — 1.4 NHPC ADD 22 28 27 222 3.2 10,259 2.7 2.7 3.5 10.4 0.9 28 8.2 8.1 6.4 7.5 7.3 6.2 0.7 0.7 0.7 9.1 8.8 10.9 6.8 6.2 8.3 2.4 NTPC BUY 126 158 25 1,247 17.7 9,895 10.9 12.3 14.0 3.9 12.8 14.1 11.6 10.3 9.0 9.5 8.4 7.1 1.1 1.1 1.0 10.2 10.8 11.4 2.6 2.9 3.3 33 Power Grid BUY 182 235 29 950 13.5 5,232 18 21 24 16 17 11.5 9.9 8.5 7.6 7.3 6.7 6.4 1.6 1.4 1.3 16.7 17.6 17.6 3.4 3.9 4.4 21 Tata Power BUY 63 85 35 170 2.4 2,705 2.1 5.0 6.8 (60.5) 138 34 30 12.5 9.3 9.9 8.5 8.4 1.0 0.9 0.9 3.6 7.8 9.6 — — — 7.9 Electric Utilities Attractive 2,788 39.6 5.3 18 14.9 11.1 9.4 8.2 1.2 1.1 1.0 10.5 11.4 12.1 2.9 3.2 3.7 69 Fertilizers & Agricultural Chemicals Bayer Cropscience SELL 4,072 3,550 (13) 140 2.0 34 94 114 135 7.4 21 19 43 36 30 26 22 18 6.9 6.0 5.2 17.0 18.0 18.6 0.5 0.6 0.7 0.5 Dhanuka Agritech ADD 368 435 18 17 0.2 49 20 24 28 (22.1) 21 17 18.3 15.2 13.0 12 9.9 8.0 2.6 2.3 2.0 14.7 15.8 16.4 1.2 1.4 1.6 0.1 Godrej Agrovet ADD 480 540 13 92 1.3 192 11.5 14.7 18 (0.5) 28 25 42 33 26 21 17 14 4.5 4.0 3.6 11.8 13.0 14.4 0.9 0.8 1.0 1.1 PI Industries BUY 1,020 970 (5) 141 2.0 138 30 39 46 13.9 27 19 34 26 22 24 19 15 6.2 5.2 4.4 20.0 21 21 0.4 0.6 0.7 2.3 Rallis India ADD 144 160 11 28 0.4 195 8.4 9.8 10.6 (2.2) 16 8.9 17.0 14.7 13.5 11.1 10.2 8.7 2.2 2.0 1.8 13.2 14.1 14.0 1.7 1.9 2.1 0.6 UPL ADD 955 775 (19) 486 6.9 507 45 55 62 6.0 21 12.9 21 17.4 15.4 13 11.0 9.7 4.5 3.7 3.1 23 23 22 0.9 1.2 1.3 25 Fertilizers & Agricultural Chemicals Attractive 905 12.9 5.2 22 14.9 26 21 18.3 15 13 11.4 4.7 4.0 3.4 18.4 19.1 18.7 0.8 1.0 1.1 30 Gas Utilities GAIL (India) BUY 345 455 32 778 11.1 2,255 29 33 34 40 13.8 5.9 12.1 10.6 10.0 7.7 6.8 6.4 1.8 1.6 1.5 15.3 16.0 15.5 3.2 3.3 3.6 22 GSPL SELL 177 170 (4) 100 1.4 564 14.1 13.8 13.3 19 (1.8) (4.2) 12.5 12.8 13.3 5.1 4.9 4.8 1.7 1.6 1.4 14.7 12.9 11.2 1.1 1.2 1.1 1.5 Indraprastha Gas SELL 302 250 (17) 212 3.0 700 11.9 13.7 15 16 14.7 11.3 25 22 19.9 16 14 12 5.2 4.6 4.1 22 22 22 0.9 1.2 1.6 8.5 Mahanagar Gas ADD 860 950 10 85 1.2 99 56 61 64 16 8.2 4.7 15.3 14.1 13.5 9.1 8.1 7.6 3.5 3.1 2.8 25 23 22 2.3 2.8 3.3 5.6 Petronet LNG BUY 233 270 16 350 5.0 1,500 15 18 20 11.2 15 11.8 15.1 13.1 11.7 10.0 8.5 7.5 3.3 3.0 2.8 23 24 24 3.3 3.8 4.7 9.1 Gas Utilities Attractive 1,524 21.7 28 13.0 6.9 14.0 12.4 11.6 8.6 7.6 7.0 2.3 2.1 1.9 16.4 16.8 16.4 2.7 3.0 3.4 46 Health Care Services Apollo Hospitals ADD 1,143 1,275 12 159 2.3 139 23 30 37 177 30 21 49 38 31 18 16 14 4.6 4.2 3.8 9.6 11.7 12.9 0.5 0.7 0.8 12.3 Aster DM Healthcare BUY 133 240 80 67 1.0 505 6.1 8.3 11.9 120 37 44 22 16.0 11.1 10.6 8.6 6.8 2.2 1.9 1.7 10.3 12.7 16.1 — — — 0.1 Dr Lal Pathlabs SELL 1,014 945 (7) 85 1.2 83 24 28 33 17 15 18 42 37 31 26 22 19 9.0 7.5 6.4 23 22 22 0.5 0.5 0.6 0.9 HCG BUY 200 260 30 18 0.3 85 (2.5) 0.9 3.4 (261) 137 263 NM 215 59 18 15 12 3.4 3.4 3.2 NM 1.6 5.6 — — — 0.1 Narayana Hrudayalaya BUY 188 265 41 38 0.5 204 1.9 4.5 7.5 (25) 139 64 99 41 25 17 13 10.3 3.6 3.3 2.9 3.7 8.3 12.2 — — — 0.3 Health Care Services Attractive 367 5.2 72 38 34 43 31 23 16 14 11.4 4.0 3.6 3.2 9.3 11.7 13.8 0.3 0.4 0.5 13.7 Hotels & Restaurants Coffee Day Enterprises NR 245 — — 52 0.7 211 7.6 10.1 12.5 127 34 24 32 24 19.6 11.1 9.7 8.9 2.0 1.9 1.7 6.5 8.1 9.2 — — — 1.1 Jubilant Foodworks BUY 1,203 1,450 21 159 2.3 132 24 32 42 67 33 30 49 37 29 25 19 15 12 9.2 7.1 28 28 28 0.2 0.2 0.3 32
Lemon Tree Hotels ADD 73 86 18 58 0.8 786 0.5 1.2 2.0 162 157 68 154 60 36 38 22 16 6.7 6.1 5.6 4.5 10.6 16.3 — — 1.3 1.2 Daily Summary India Hotels & Restaurants Attractive 268 3.8 88 42 33 52 36 27 20 15 13 5.7 4.9 4.3 11.0 13.6 15.7 0.1 0.1 0.5 35 Insurance HDFC Life Insurance ADD 391 450 15 789 11.2 2,008 6.4 7.4 8.5 15 16 14.6 61 53 46 — — — 14 13 11 25 25 26 0.4 0.5 0.5 16.7 ICICI Lombard SELL 1,065 750 (30) 484 6.9 454 23 28 35 22 23 22 46 37 31 — — — 9.1 7.8 6.6 21 22 23 0.6 0.7 0.8 6.5 ICICI Prudential Life BUY 334 500 50 480 6.8 1,436 6.7 7.5 8.8 (40) 11.7 17 50 44 38 — — — 6.5 5.8 5.2 13.9 13.9 14.5 0.3 0.4 0.0 13.8 Max Financial Services BUY 406 530 31 109 1.6 268 6.3 6.4 6.5 37 1.8 1.8 65 64 62 — — — 8.3 8.0 7.8 0.5 0.6 0.6 3.8 SBI Life Insurance BUY 616 800 30 616 8.8 1,000 13.3 15 18 15 17 14.8 46 40 35 — — — 8.3 7.0 6.0 19.0 19.1 18.7 0.3 0.4 0.5 29 Insurance Attractive 2,477 35.2 (1.6) 16 16 52 44 38 8.9 7.8 6.9 17.2 17.6 18.0 0.3 0.3 0.3 69
KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Source: Company, Bloomberg, Kotak Institutional Equities estimates
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May2019 15,
KOTAK ECONOMIC RESEARCH 49
Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India Fair O/S ADVT Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo
KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 14-May-19 (Rs) (%) (Rs bn) (US$ bn) (mn) 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E (US$ mn) Internet Software & Services Info Edge ADD 1,895 1,720 (9) 231 3.3 121.6 24 32 39 6.8 35 20 79 58 49 63 44 36 8.7 7.9 7.1 12.3 14.2 15.4 0.4 0.4 0.5 6.4 Just Dial REDUCE 562 590 5 36 0.5 64.8 32 31 33 50 -1.9 5.4 17.6 17.9 17.0 10.0 9.5 8.4 3.6 3.1 2.7 21 18.6 16.8 0.0 0.6 0.6 32 Internet Software & Services Attractive 268 3.8 20 20 14.9 54 45 39 41 33 28 7.4 6.5 5.8 13.7 14.6 14.9 0.4 0.4 0.5 39 IT Services HCL Technologies ADD 1,066 1,200 13 1,446 20.6 1,377 73 79 85 18 7.9 7.0 14.6 13.5 12.6 9.8 8.3 7.8 3.5 3.0 2.6 26 24 22 0.8 2.9 3.1 33 Hexaware Technologies REDUCE 351 345 (2) 105 1.5 297 20 22 25 19 10.6 14.3 17.9 16.2 14.2 13 11.4 9.7 4.4 3.9 3.4 27 25 26 2.4 2.8 2.8 6.4 Infosys ADD 714 750 5 3,116 44.3 4,353 35 38 43 9.5 6.9 13.3 20 18.9 16.7 14 13 11.6 4.8 4.9 4.4 24 25 28 4.3 3.1 3.4 89 L&T Infotech ADD 1,717 1,940 13 298 4.2 176 86 93 106 36 7.0 15.0 19.9 18.6 16.1 15 14 11.5 6.2 5.1 4.3 35 30 29 1.5 1.7 1.9 4.2 Mindtree ADD 975 1,030 6 160 2.3 165 46 51 60 33 11.7 18 21 19.1 16.1 14 11.6 9.7 4.9 4.2 3.6 25 24 24 1.3 1.6 1.9 27 Mphasis REDUCE 961 900 (6) 179 2.5 189 56 63 65 29 11.1 3.7 17.0 15.3 14.8 12 10.5 9.8 3.6 3.1 2.9 20 22 20 2.1 2.6 3.1 3.2
TCS REDUCE 2,092 1,940 (7) 7,851 111.7 3,790 83 93 101 23 12.1 8.9 25 22 21 19 17 15 8.7 8.1 7.6 35 37 38 1.4 3.1 3.4 99 -
Tech Mahindra ADD 790 875 11 697 9.9 891 49 56 64 13.8 16 14.5 16.3 14.1 12.3 9.7 8.1 6.8 3.2 2.7 2.3 21 21 20 1.2 1.3 1.4 37 May2019 15, Wipro REDUCE 285 270 (5) 1,717 24.4 6,021 15.0 18 19 18 17 9.9 19.0 16.3 14.8 12 11.1 9.8 3.0 3.0 2.5 17.2 18.2 18.2 0.5 0.5 0.7 38 IT Services Cautious 15,570 221.4 16 9.1 9.9 21 19.1 17.4 15 13 11.9 5.3 5.1 4.5 25 26 26 1.8 2.7 2.9 337 Media
DB Corp. ADD 188 220 17 33 0.5 175 16 21 24 (10.5) 31 18 11.9 9.1 7.7 6.2 4.7 3.9 1.8 1.7 1.6 14.9 19.5 21 2.1 5.3 6.6 0.2 DishTV ADD 31 30 (2) 57 0.8 1,925 0.2 1.4 2.4 145 593 71 154 22 13.0 3.5 2.8 2.2 11 8.3 5.8 7.9 43 53 — — — 10.9 Jagran Prakashan REDUCE 108 110 2 32 0.5 296 8.9 11.1 13.0 (8.1) 25 17 12.1 9.7 8.3 5.1 4.2 3.5 1.7 1.7 1.6 13.4 17.6 20 4.6 8.4 8.4 0.3 PVR RS 1,730 — — 81 1.2 48 37 51 65 38 37 28 47 34 27 17 13 11.2 6.8 5.8 4.8 15.5 18.3 19.8 0.2 0.3 0.4 11.3 Sun TV Network REDUCE 537 600 12 212 3.0 394 38 39 42 31 2.7 7.4 14.2 13.8 12.9 9.3 8.8 8.1 3.9 3.5 3.1 30 27 26 2.8 3.3 3.7 21
Zee Entertainment Enterprises ADD 346 490 41 333 4.7 960 17 20 22 14.7 15 11.9 20 17.4 15.6 11.5 10.2 9.0 3.9 3.4 3.0 20 21 20 1.3 1.6 2.0 57
Media Attractive 747 10.6 20 19 16 19.1 16.1 13.9 8.6 7.5 6.6 3.8 3.4 3.0 20 21 22 1.7 2.3 2.6 100 Metals & Mining Hindalco Industries BUY 193 275 42 434 6.2 2,229 27 27 29 24 (1.3) 7.8 7.1 7.2 6.7 4.9 4.7 4.2 0.7 0.7 0.6 10.5 9.5 9.3 0.6 0.6 0.6 24 Hindustan Zinc REDUCE 257 220 (14) 1,084 15.4 4,225 19 19 19 (12.4) (0.8) 1.2 13.6 13.7 13.6 8.6 8.3 8.1 3.2 3.5 3.7 23 24 26 7.8 7.8 7.8 2.6 Jindal Steel and Power REDUCE 161 145 (10) 156 2.2 1,016 4.4 4.4 13.2 152 (0.1) 198 36 36 12.2 6.7 6.8 5.8 0.5 0.5 0.5 1.5 1.4 4.1 — — — 28 JSW Steel REDUCE 281 265 (6) 679 9.7 2,406 31 19 23 17 (38) 16 8.9 14.5 12.5 6.1 8.1 7.3 2.1 1.9 1.7 25 13.5 14.0 1.2 1.2 1.2 32 National Aluminium Co. BUY 49 78 60 91 1.3 1,866 9.7 6.7 7.0 236 (31.3) 4.4 5.0 7.3 7.0 2.1 3.1 3.0 0.9 0.9 0.9 17.3 11.9 12.5 12.3 12.3 12.3 12.4 NMDC REDUCE 92 110 19 282 4.0 3,164 13.5 9.4 10.1 15 (31) 7.6 6.8 9.8 9.1 3.9 5.6 5.1 1.1 1.1 1.0 16.8 11.0 11.4 6.0 6.0 6.0 6.8 Tata Steel ADD 470 515 10 533 7.6 1,146 91 66 71 31 (27.6) 7.7 5.1 7.1 6.6 5.1 5.5 5.3 0.8 0.7 0.7 16.7 10.9 11.4 2.1 2.1 2.1 70 Vedanta BUY 161 225 40 598 8.5 3,717 18 26 27 (16.0) 44 3.2 8.9 6.2 6.0 4.7 4.1 4.1 1.0 0.9 0.9 10.7 15.3 15.4 11.7 12.4 12.4 27 Metals & Mining Attractive 3,857 54.9 13.7 (10.7) 9.7 8.5 9.5 8.7 5.5 5.7 5.4 1.2 1.1 1.1 14.0 11.9 12.3 5.3 5.4 5.4 59 Source: Company, Bloomberg, Kotak Institutional Equities estimates
50 KOTAK ECONOMIC RESEARCH
50
Kotak Institutional Equities: Valuation summary of KIE Universe stocks
51 Fair O/S ADVT Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo
Company Rating 14-May-19 (Rs) (%) (Rs bn) (US$ bn) (mn) 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E (US$ mn) Oil, Gas & Consumable Fuels BPCL SELL 359 275 (23) 778 11.1 1,967 40 33 35 (0) (17.3) 6.5 8.9 10.8 10.2 6.6 7.9 7.4 1.8 1.7 1.6 22 16.3 16.0 4.5 3.7 3.9 31 Coal India BUY 242 290 20 1,490 21.2 6,207 26 27 28 128 5.7 1.0 9.4 8.9 8.8 6.6 6.1 5.6 5.8 6.1 6.4 64 67 71 8.3 10.3 10.3 36 HPCL SELL 268 185 (31) 409 5.8 1,524 40 27 29 (4) (32.1) 7.3 6.7 9.9 9.2 6.1 8.7 8.6 1.5 1.4 1.3 24 14.7 14.7 6.1 4.1 4.4 27 IOCL SELL 144 120 (16) 1,352 19.2 9,479 20 15 17 (5) (21.4) 8.7 7.4 9.4 8.6 4.4 5.3 5.0 1.1 1.1 1.0 16.1 11.8 12.0 5.4 4.3 4.6 36 Oil India BUY 175 235 34 190 2.7 1,135 29 30 31 17.7 4.8 0.8 6.0 5.8 5.7 4.3 4.0 3.9 0.7 0.6 0.6 11.5 11.4 11.0 7.5 7.8 7.9 4.9 ONGC BUY 164 215 31 2,065 29.4 12,833 24 26 26 40 5.3 0.5 6.7 6.4 6.4 3.5 3.3 3.0 0.9 0.8 0.8 13.3 13.0 12.2 4.9 5.2 5.2 39 Reliance Industries SELL 1,260 1,100 (13) 7,471 106.2 5,926 66 75 87 11.7 14.3 16 19.1 16.7 14.4 10.4 9.0 7.5 1.9 1.7 1.6 10.4 9.8 10.3 0.5 0.5 0.6 189 Oil, Gas & Consumable Fuels Attractive 13,754 195.6 21 0.8 7.7 11.3 11.2 10.4 6.5 6.3 5.8 1.6 1.5 1.3 14.0 13.1 13.0 3.0 3.1 3.1 363 Pharmaceuticals Aurobindo Pharma ADD 715 785 10 419 6.0 584 41 61 64 (1.5) 48 5.4 17.4 11.7 11.1 11.9 8.3 7.6 3.0 2.5 2.1 18.9 21 18.5 0.7 0.9 1.0 24 Biocon SELL 529 370 (30) 318 4.5 601 12.1 16 19 96 29 19 44 34 28 23 18 15 4.7 4.3 3.8 11.8 13.3 13.5 0.8 1.0 1.2 14.4 Cipla BUY 556 600 8 448 6.4 805 19 25 32 6.1 34 28 30 22 17.5 16 13 10.2 2.8 2.6 2.3 9.9 12.1 13.2 0.7 0.9 1.2 20 Dr Reddy's Laboratories REDUCE 2,808 2,450 (13) 466 6.6 166 115 132 165 95 14.2 25 24 21 17.1 15 10.7 8.4 3.3 2.9 2.5 14.2 13.6 14.8 0.6 0.7 0.9 35 Laurus Labs BUY 379 430 13 40 0.6 106 11.0 20 28 (30.9) 79 43 35 19.3 13.5 14 10.0 7.9 2.6 2.3 1.9 7.6 12.5 14.4 — — — 1.7 Lupin REDUCE 810 840 4 367 5.2 450 26 31 44 (33) 22 41 32 26 18.4 15 12.0 9.1 2.5 2.4 2.1 8.2 9.4 11.5 0.3 0.6 0.8 23 Sun Pharmaceuticals ADD 419 475 13 1,006 14.3 2,406 18 22 27 16 23 23 24 19.3 15.7 12 9.5 7.7 2.5 2.2 2.0 10.7 12.0 12.5 0.6 1.0 1.3 42 Torrent Pharmaceuticals ADD 1,649 1,950 18 279 4.0 169 47 58 76 18 23 31 35 28 22 15 13 11.2 5.5 4.9 4.3 15.8 17.4 19.8 1.3 1.4 1.6 6.4 Pharmaceuticals Neutral 3,343 47.5 12.6 28 22 26 20 16.6 14 10.8 8.9 3.0 2.6 2.3 11.4 13.0 14.0 0.7 0.9 1.1 168 Real Estate Brigade Enterprises BUY 227 290 28 31 0.4 136 18 22 28 59 27 26 12.9 10.1 8.1 8.9 7.9 6.1 1.4 1.3 1.1 10.8 13.2 14.7 1.1 1.1 1.1 0.5 DLF ADD 166 200 20 367 5.2 2,475 5.1 5.9 6.2 (79) 17.4 5.2 33 28 27 24 26 28 1.3 1.3 1.3 3.8 4.7 4.8 1.2 1.2 1.2 37 Godrej Properties SELL 810 470 (42) 186 2.6 229 11.0 19 21 2 73 10.6 73 42 38 119 40 39 7.5 6.4 5.5 10.8 16.3 15.4 — — — 7.3 Oberoi Realty ADD 509 570 12 185 2.6 364 22 29 41 24 27 42 23 17.8 12.6 17 15 9.6 2.3 2.1 1.8 11.6 12.2 15.2 0.4 0.4 0.4 5.5 Prestige Estates Projects ADD 246 270 10 92 1.3 375 10.6 12.9 20 7 22 58 23 19.1 12.1 11.5 10.9 8.4 2.3 2.1 1.8 9.0 11.3 15.8 0.6 0.6 0.6 3.3 Sobha REDUCE 446 495 11 42 0.6 95 26 33 39 14.8 24 18 16.9 13.7 11.6 12.0 9.9 9.1 1.9 1.8 1.6 10.1 13.5 14.3 1.6 1.6 1.6 1.9 Sunteck Realty REDUCE 438 428 (2) 64 0.9 140 16 27 33 6.0 65 25 27 16.4 13.2 18 11.2 7.9 2.2 1.9 1.7 8.3 12.4 13.7 0.2 0.2 0.2 2.9 Real Estate Neutral 1,231 17.5 (40) 44 23 32 22 18.0 19 17 14 1.6 1.6 1.5 5.1 7.1 8.3 0.6 1.2 1.4 59 Retailing Aditya Birla Fashion and Retail BUY 210 235 12 163 2.3 773 2.1 3.2 5.2 35 54 63 102 66 41 29 23 18 13 11 8.6 13.6 17.9 24 — — — 2.3 Avenue Supermarts SELL 1,250 965 (23) 780 11.1 624 14.5 20 26 11.9 37 31 86 63 48 48 36 27 14 11 9.2 17.6 19.9 21 — — — 0.0 Titan Company REDUCE 1,155 1,000 (13) 1,025 14.6 888 17 22 26 32 28 22 69 54 44 47 36 30 17 14 12 27 28 29 0.4 0.5 0.6 34 Retailing Cautious 1,968 28.0 24 33 28 77 58 45 45 34 27 15 13 10 19.8 22 23 0.2 0.3 0.3 36
Speciality Chemicals Daily Summary India Castrol India SELL 143 145 2 141 2.0 989 7.2 7.7 8.1 4.2 7.7 5.4 19.9 18.5 17.6 13 11.3 10.6 12 11 10 65 63 60 3.5 3.9 4.0 4.0 Pidilite Industries REDUCE 1,139 1,025 (10) 579 8.2 508 18 23 28 (2.8) 31 20 64 49 41 41 32 27 14 12 10 24 27 28 0.6 0.7 0.8 10.5 S H Kelkar and Company BUY 144 210 45 21 0.3 145 6.3 8.3 9.8 (14.6) 32 18 23 17.3 14.7 15 11.7 10.4 2.3 2.1 1.9 10.3 12.5 13.5 1.2 1.4 1.9 0.9 SRF BUY 2,600 2,850 10 149 2.1 57 112 141 165 39 26 17 23 18.4 15.7 13 11.0 9.4 3.6 3.1 2.6 16.7 18.1 18.1 0.5 0.6 0.6 12.1 Speciality Chemicals Neutral 890 12.7 7.6 23 15 38 31 27 23 19 16 8.7 7.5 6.5 23 24 24 1.1 1.2 1.3 28 Source: Company, Bloomberg, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK
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May2019 15,
KOTAK ECONOMIC RESEARCH 51
Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India Fair O/S ADVT Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo
KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 14-May-19 (Rs) (%) (Rs bn) (US$ bn) (mn) 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E (US$ mn) Telecommunication Services Bharti Airtel ADD 337 380 13 1,449 20.6 3,997 (10.0) (11.0) (5.4) NM NM NM NM NM NM 10.2 9.1 7.6 2.1 2.4 2.7 NM NM NM 1.8 1.8 1.8 43 Bharti Infratel REDUCE 270 275 2 499 7.1 1,850 13.1 13.0 14.6 (4.6) (0.8) 12.2 21 21 18.5 8.4 8.6 7.8 3.4 3.7 3.5 15.4 17.1 19.5 5.7 3.8 4.4 40 Vodafone Idea ADD 14 16 — 402 5.7 8,736 (19.1) (0.6) (4.0) NM NM NM NM NM NM 38 13 9.9 0.2 0.5 0.6 NM NM NM — — — 19.9 Tata Communications ADD 549 615 12 157 2.2 285 (10.3) (0.1) 3.3 NM 99 3,040 NM NM 168 9.8 8.9 8.2 NM NM -377.6 NM 1.8 NM 1.2 1.4 1.4 3.3 Telecommunication Services Cautious 2,507 35.7 NM 9.5 29 NM NM NM 13 9.8 8.2 1.8 1.6 1.8 NM NM NM 2.1 1.7 1.8 106 Transportation Adani Ports and SEZ BUY 371 390 5 767 10.9 2,071 21 23 29 16 7.2 27 17.3 16.2 12.7 13 11.3 10.0 3.2 2.7 2.3 19.5 18.1 19.5 0.3 0.5 0.4 22 Container Corp. SELL 469 495 5 286 4.1 609 16 18 22 12.1 8.2 22 29 27 22 20 15 13 2.8 2.6 2.5 10.1 10.1 11.6 1.8 2.0 2.0 7.2 Gateway Distriparks BUY 131 180 38 14 0.2 109 6.4 3.7 6.2 (16.0) (42) 68 20 35 21 22 8.9 7.7 1.3 2.4 2.2 6.6 4.8 10.8 — 2.3 2.3 0.3 Gujarat Pipavav Port BUY 85 126 48 41 0.6 483 4.6 5.6 6.6 12.2 21 19 18.4 15.3 12.8 9.3 7.8 6.6 2.0 2.0 1.9 11.0 13.0 15.2 4.6 5.5 6.5 0.8
InterGlobe Aviation ADD 1,564 1,550 (1) 601 8.6 383 (6) 66 96 (110) 1,212 47 NM 24 16.2 NM 15 9.2 8.7 6.5 4.8 NM 31 34 — 0.2 0.6 39 -
Mahindra Logistics REDUCE 458 500 9 33 0.5 71 12.5 16 20 26 25 29 37 29 23 21 16 13 6.6 5.6 4.6 19.5 21 22 — — — 0.3 May2019 15, Transportation Attractive 1,743 24.8 (24) 57 32 31 19.9 15.1 20 12 10.0 3.9 3.4 2.8 12.4 16.9 18.9 0.6 0.7 0.9 69 KIE universe 110,238 1567.4 13.7 30 18 24 18.1 15.4 10.9 9.8 8.7 2.7 2.5 2.2 11.6 13.6 14.5 1.5 1.7 1.9
Notes: (a) We have used adjusted book values for banking companies. (b) 2019 means calendar year 2018, similarly for 2020 and 2021 for these particular companies. (c) Exchange rate (Rs/US$)= 70.31
Source: Company, Bloomberg, Kotak Institutional Equities estimates
52 KOTAK ECONOMIC RESEARCH
52
Disclosures
n a merger or strategic transaction any, noare longer in effect for this stock Asof March 2019 31, , if, fair value KOTAK INSTITUTIONAL EQUITIES RESEARCH , any, if for this stock,because is there notsufficient a
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Percentageof companies covered by Kotak Equities,Institutional within the specified category. Percentageof companies within each category whichfor Kotak Institutional Equities and or its affiliates has provided investment banking services within the previousmonths. 12 The * above categories are defined as expectfollows: this = Buy We stock to deliver more than 15% returns theover next months; 12 Add = expectWe this stock to deliver5-15% returns over the next months; 12 Reduce =expectWe this stock to deliver -5-+5% returns over the next months; 12 =Sell expectWe this stock to deliver lessthan -5% returns over the next months. 12 targetOur prices are also on a 12-month horizon Thesebasis. ratings are used illustratively to comply with applicableregulations. As of 31/03/2019 Kotak InstitutionalEquities Investment Research had investmentratings on 204 equity securities. luded
pended temporarily.Such suspension is in compliance with applicable regulation(s) r r display is not or applicable. months. . The previous investment and rating
SELL fair valuefair 0.0%
20.6%
term volatility in stock prices related to movements in the market.Hence, a particular Ratingmay not , if, any,have been sus - h analyst’s fundamental overall outlook on the Sector.The coverage viewwill consist of one of the following fair valuefair +5% returns over the next 12 months. 0.5% 22.5%
- REDUCE month horizon basis. 5 - - 15% returns over the next 12 5% returns over the next months.12 The information is not available fo - -
take into account short ADD 28.9% 3.4% Kotak SecuritiesKotak has suspended coverage of this company.
are also on12 a Kotak SecuritiesKotak Research has suspended theinvestment and rating
The information is not meaningful and is therefore exc
Kotak SecuritiesKotak does not cover this company.
The investment and rating
The coverage view represents eac
Attractive, Neutral, Cautious. BUY 4.4% 27.9% is company and in certain other circumstances. We expect this stock to deliver
We expect this stock to deliver 5 We expect this to stock deliver < We expect this to stock deliver more than 15% returns over the next months.12
Fair Value estimates 0% 20% 10% 60% 50% 40% 30% 70% Source:Kotak Institutional Equities Kotak Institutional Equities Research Equities KotakInstitutional coverage universe Distributionof ratings/investment banking relationships RS = RatingRS Suspended. fundamental basis for determining an investment rating or and shouldnot be relied upon. = NA AvailableNot or Applicable.Not = NM Meaningful.Not Other ratings/identifiers Other NR = Rated.Not and/or Kotak Securities policies in circumstances when Securities Kotak or its affiliates is acting in an advisory capacity i involving th CS = Coverage Suspended. = NC Covered.Not Our Our Ratings System notdoes strictly be in accordance with the Rating System all at times. definitions Other Coverage view. designations: ADD. REDUCE. SELL. Our Ratings other and definitions/identifiers ratings of Definitions BUY.
53 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 2019 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: Nestle India, SRF, Union Bank, Just Dial, Power Grid, Idea - 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) 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. 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