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[email protected] Contact: +91 22 6218 6427
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. ADD HDFC Bank (HDFCB) https://ultraviewer.et/en/own Banks JULY 18, 2021 load.html RESULT Sector view: Attractive
Covid 2 bites into performance. HDFC Bank reported 16% yoy earnings growth on CMP (`): 1,522 the back of 18% yoy operating profit growth. Asset quality ratios showed deterioration Fair Value (`): 1,650 and the bank has reported slippages of 2.5% of loans. The retail portfolio has taken BSE-30: 53,140 most of the impact when we look at the segmental profits. We expect a recovery in business performance in the next few quarters as the situation improves from a macro standpoint. Maintain ADD with Fair Value unchanged at Rs1,650. HDFC Bank Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 1,522/1,650/ADD EPS (Rs) 56.4 62.6 72.6 52-week range (Rs) (high-low) 1,641-993 EPS growth (%) 17.9 11.0 15.9 Mcap (bn) (Rs/US$) 8,414/112.9 P/E (X) 27.0 24.3 21.0 QUICK NUMBERS ADTV-3M (bn) (Rs/US$) 11.4/0.2 P/B (X) 4.2 3.7 3.2 Shareholding pattern (%) BVPS 363.4 410.9 469.7 NII up 9% yoy; PAT Promoters 21.1 RoE (%) 16.6 15.9 16.2 increased 16% yoy; FPIs/MFs/BFIs 51.0/10.6/3.0 Div. yield (%) 0.0 0.8 1.0 Price performance (%) 1M 3M 12M NII (Rs bn) 649 731 820 PBT up 15% yoy Absolute 2.5 6.6 43.3 PPOP (Rs bn) 574 635 697 Rel. to BSE-30 1.3 (2.1) (1.7) Net profits (Rs bn) 311 345 400 GNPL and NNPL ratios up ~15 bps Operationally weak despite strong earnings growth and ~10 bps qoq to ~1.5% and ~0.5% HDFC Bank reported 16% yoy earnings growth on the back of (1) 18% yoy revenue growth, (2) 18% yoy operating profit growth, but offset by (3) ~25% yoy growth in provisions. NII grew Maintain ADD with 9% yoy (third weakest growth since the global financial crisis) while non-interest income grew FV at Rs1,650 ~55% yoy (low base) with fee income growing ~75% yoy and supported by higher income (unchanged) from forex. Loans grew ~14% yoy with retail loan growth at 10% yoy (1% qoq decline). NIM declined 10 bps qoq to 4.1% Asset quality ratio showed marginal deterioration with gross NPL ratio increasing 15 bps qoq to 1.5% while net NPLs increased ~10 bps qoq to 0.5% of loans. Restructured loans are at 0.8% of loans while the bank has disbursed Rs330 bn under ECLGS.
Retail takes the most impact; but we expect a faster recovery as well
We have broadly a few issues at hand in the retail portfolio. (1) Loan growth: growth trends have started to accelerate but largely driven by business banking. The share of unsecured loans is declining and could probably continue till we have clarity on the credit card operations. Also, EMI products where principal amortization is high in subsequent years need a much stronger M B Mahesh, CFA disbursement growth to start contributing to overall growth. (2) Revenue growth: even if the retail portfolio accelerates, it would probably take a bit longer for NII growth to contribute as the share of high-yielding assets is showing a decelerating trend and the high-yielding fixed-rate Nischint Chawathe book is being re-priced at a lower interest rate. (3) Profitability: this quarter showed that the provisions are still running quite high. Given the nature of slippages, we should expect a faster recovery although timelines are a bit challenging as we are also dependent on the recovery Abhijeet Sakhare environment on existing NPLs. (4) We are still unsure of the cost involved in the transformation of the bank from a technology perspective. We understand that HDFC Bank is likely to spend more to improve its infrastructure but its impact on cost and timing is still not well-defined. Ashlesh Sonje
Maintain ADD: a steady performer
We maintain ADD rating with FV at Rs1,650 (unchanged). At our FV, we value the bank at 3.4X Dipanjan Ghosh book and 22X FY2023E EPS for RoEs at 15% levels and 15% CAGR. We keep our thesis unchanged. We believe that the near-term outlook for the large banks remains quite strong.
[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. HDFC Bank Banks
Exhibit 1: HDFC Bank – quarterly performance March fiscal year-ends, 1QFY21 – 1QFY22 (Rs mn)
(% chg.) 1QFY22 1QFY22E 1QFY21 4QFY21 1QFY22E 1QFY21 4QFY21 2022E 2021 (% chg.) 2023E Income statement (Rs mn) Interest income 304,830 311,637 303,780 304,236 (2.2) 0.3 0.2 1,321,349 1,208,750 9.3 1,499,812 Interest on advances 235,927 242,272 240,374 238,116 (2.6) (1.8) (0.9) 1,011,334 948,345 6.6 1,137,700 Interest on investments 64,931 65,355 55,976 61,663 (0.6) 16.0 5.3 283,815 232,311 22.2 333,203 Other interest 3,971 4,011 7,430 4,456 (1.0) (46.6) (10.9) 26,200 28,094 (6.7) 28,908 Interest expense 134,740 133,600 147,126 133,034 0.9 (8.4) 1.3 590,423 559,787 5.5 679,967 Net interest income 170,090 178,037 156,654 171,202 (4.5) 8.6 (0.6) 730,925 648,964 12.6 819,845 Non interest income 62,885 56,803 40,753 75,939 10.7 54.3 (17.2) 266,933 252,049 5.9 296,995 - fee income 38,854 39,037 22,307 50,233 (0.5) 74.2 (22.7) 190,781 161,693 18.0 218,309 - exchange income 11,987 6,549 4,366 8,793 83.0 174.6 36.3 30,480 24,384 25.0 34,138 - sale of invts. 6,010 5,000 10,867 6,551 20.2 (44.7) (8.3) 15,000 38,670 (61.2) 10,000 Non treasury income 56,875 51,803 29,886 69,388 9.8 90.3 (18.0) 251,933 213,379 18.1 286,995 Total income 232,975 234,841 197,407 247,141 (0.8) 18.0 (5.7) 997,859 901,013 10.7 1,116,840 Op. expenses 81,604 86,304 69,115 91,813 (5.4) 18.1 (11.1) 362,933 327,226 10.9 419,880 Employee cost 27,656 27,860 25,134 26,789 (0.7) 10.0 3.2 118,926 103,648 14.7 138,504 Other cost 53,949 58,444 43,980 65,024 (7.7) 22.7 (17.0) 244,007 223,578 9.1 281,377 Operating profit 151,370 148,536 128,293 155,328 1.9 18.0 (2.5) 634,926 573,786 10.7 696,959 Provisions and cont. 48,308 47,876 38,915 46,937 0.9 24.1 2.9 170,892 157,197 8.7 159,316 PBT 103,062 100,661 89,378 108,391 2.4 15.3 (4.9) 464,034 416,590 11.4 537,643 Tax 25,766 22,454 22,791 26,526 14.7 13.0 (2.9) 118,793 105,425 12.7 137,637 Net profit 77,296 78,207 66,586 81,865 (1.2) 16.1 (5.6) 345,241 311,165 11.0 400,007 Tax rate (%) 25.0 22.3 25.5 24.5 269 bps -50 bps 53 bps 25.6 25.3 29 bps 25.6 Op.profit excl treasury gains 145,360 143,536 117,426 148,777 1.3 23.8 (2.3) 619,926 535,116 15.8 686,959 EPS (Rs) 14 28 12 15 (50.7) 15.3 (5.8) 63 56 11.0 73 Key balance sheet items (Rs bn) Total deposits 13,458 13,460 11,894 13,351 (0.0) 13.2 0.8 15,319 13,351 14.7 17,516 Savings deposits 4,261 3,274 4,035 30.2 5.6 4,553 4,035 13 5,119 Current deposits 1,857 1,501 2,122 23.7 (12.5) 2,298 2,122 8 2,627 Term deposits 7,340 7,120 7,194 3.1 2.0 8,468 7,194 18 9,770 CASA ratio (%) 45.5 40.1 46.1 532 bps -66 bps 44.72 46.12 -139 bps 44.22 Investment 4361.3 4,615 3793.5 4437.3 (5.5) 15.0 (1.7) 5,171 4,437 16.5 5,923 Loans 11,477 11,475 10,033 11,328 0.0 14.4 1.3 12,878 11,328 13.7 14,725 Corporate and others 6,242 5,283 6,053 18.1 3.1 Retail credit 5,235 4,750 5,276 10.2 (0.8) Housing loans 723 627 702 15.3 2.9 Car loans 838 811 844 3.3 (0.7) Loan against sec 18 18 18 — (2.7) Personal loans 1,198 1,116 1,186 7.4 1.0 Two wheeler 86 96 93 (10.3) (7.6) Credit cards 604 547 647 10.5 (6.6) Commercial vehicles 271 278 280 (2.5) (3.1) Business Banking 735 606 709 21.3 3.6 Others 762 653 797 16.7 (4.3) Asset quality (Rs bn) Gross NPL 171 138 151 24.1 13.3 196.2 150.9 30.0 209.1 Net NPL 55 33 46 67.3 20.4 65.0 45.5 42.7 59.1 Gross NPL (%) 1.5 1.4 1.3 11 bps 15 bps 1.5 1.3 17 bps 1.4 Net NPL (%) 0.5 0.3 0.4 15 bps 8 bps 0.5 0.4 10 bps 0.4 PCR (%) 68 76 70 -827 bps -189 bps 66.9 69.8 -294 bps 71.7 Capital adequecy (%) CAR 19.1 18.9 18.8 20 bps 30 bps - Tier- I 17.9 17.5 17.6 40 bps 30 bps - Key calculated ratios (%) Yield on advances 8.3 9.6 8.6 -135 bps -32 bps 8.4 8.9 -56 bps 8.2 Yield on investment 5.7 5.6 5.5 6 bps 17 bps 5.9 5.6 35 bps 6.0 Yield on funds 7.2 8.2 7.4 -103 bps -21 bps 7.3 7.6 -36 bps 7.2 Cost of funds 3.7 4.5 3.7 -87 bps -6 bps 3.7 4.0 -29 bps 3.8 NIM 4.0 4.2 4.2 -23 bps -15 bps 4.0 4.1 -8 bps 3.9 Cost-income 35.0 35.0 37.2 2 bps -212 bps 36.4 36.3 5 bps 37.6 Cost to average assets 1.9 1.8 2.2 7 bps -29 bps 1.9 2.0 -6 bps 2.0 CD ratio 85.3 84.4 84.9 92 bps 42 bps 84.1 84.9 -79 bps 84.1 RoA 1.8 1.7 1.9 3 bps -16 bps 1.8 1.9 -5 bps 1.9 RoE 14.9 15.3 16.4 -41 bps -156 bps 15.9 16.6 -74 bps 16.2 Other key parameters (#) Branch 5,653 5,326 5,608 6.1 0.8 5,958 5,608 6.2 6,308 ATM 16,291 14,996 16,087 8.6 1.3 16,756 15,756 6.3 17,756
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 Banks HDFC Bank
Exhibit 2: Non-interest income supported yoy revenue growth as NII growth took a hit Revenue and earnings growth, March fiscal year-ends (%)
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 1QFY22 Net interest income 40.9 42.0 13.0 25.7 22.2 22.7 16.9 21.2 23.2 20.1 21.0 20.3 16.5 15.5 8.6 Non interest income 50.4 44.2 15.7 13.9 33.4 18.5 15.6 13.6 19.5 14.4 23.8 15.8 32.0 8.4 54.3 Total revenue 43.7 42.6 13.8 22.0 25.5 21.4 16.5 18.9 22.1 18.5 21.7 19.1 20.6 13.4 18.0 Total operating expenses 54.7 47.7 4.2 24.1 29.7 21.1 7.2 16.2 21.4 16.0 15.2 15.1 17.5 6.6 18.1 Loans 35.1 55.9 27.3 27.1 22.2 22.7 26.4 20.6 27.1 19.4 18.7 24.5 21.3 14.0 14.4 Balance sheet 46.0 37.6 21.4 24.7 21.8 18.5 22.8 20.1 25.5 16.6 23.2 17.0 23.0 14.1 13.5 Earnings growth 39.3 41.2 31.4 33.2 31.6 30.2 26.0 20.5 20.4 18.3 20.2 20.5 24.6 18.5 16.1
Source: Company, Kotak Institutional Equities
Exhibit 3: HDFC Bank trading at 3.5X one-year forward book Exhibit 4: HDFC Bank has traded at premium to peers One-year forward PER and PBR (X) 1-year forward PBR for HDFC Bank, ICICI Bank and Axis Bank (X)
Rolling PER (X) (LHS) Rolling PBR (X) (RHS) ICICI Bank Axis Bank HDFC Bank 35 4.5 4.5
30 3.6 3.6
25 2.7 2.7
20 1.8 1.8
15 0.9 0.9
10 0.0
-
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
Jul-20
Jul-21
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
Jul-20 Jul-21
Source: Company, Bloomberg, Kotak Institutional Equities estimates Source: Company, Bloomberg, Kotak Institutional Equities estimates
Corporate segment continues to drive growth; retail marginally declines qoq
Loan growth continues to exhibit broadly similar trends to past few quarters with the corporate segment doing bulk of the heavy lifting from a yoy growth standpoint. 14% yoy loan growth is driven by 18% yoy for corporate and 10% yoy for retail. Sequentially as well, retail declined marginally after a strong show in 4QFY21, whereas corporate grew 3% qoq despite the seasonality.
Sequentially, most retail segments declined whereas business banking and home loans grew 3-4% qoq with strongest decline in credit cards (-7% qoq). The bank indicated that the credit card decline is driven by reduced tendency to revolve as well as tighter filters by the bank. In the retail segment, the bank has witnessed a strong bounce-back in demand levels for unsecured, HL and LAP. The bank has gained market share in the vehicle finance segment during the quarter. July disbursements are trending back to pre-Covid levels, indicating confidence on growth outlook for the rest of the year. The bank plans to increase focus on the government employee segment going ahead.
Wholesale banking in terms of large, mid and SME segments is about Rs6 tn of customer assets for the bank. This has grown at 18% yoy and 3% qoq. The wholesale segment now comprises 54% of loans, with strong growth led by SME and mid-corporate segments supported by new to bank customer acquisition, deeper presence and improved utilization. Over the last year, the bank has also been active user of the ECLGS scheme, disbursing close to Rs300 bn. Large corporate growth was slower due to general deleveraging in this segment as well as strong base effect.
4 KOTAK INSTITUTIONAL EQUITIES RESEARCH HDFC Bank Banks
We expect the bank to deliver 14-15% loan CAGR over next three years, supported by growth recovery on the retail side where growth rates are likely to be in the similar range of 13-15%. Faster economic recovery along with retail credit demand could support stronger growth assumptions.
Exhibit 5: Share of non-retail loans up further by ~100 bps qoq in 1QFY22; share of unsecured loans has declined as credit card portfolio has shrunk Break-up of loan book, March fiscal year-ends (%)
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 1QFY22 Retail 61.9 61.8 50.2 50.1 54.8 56.9 49.4 47.3 48.2 51.2 55.1 52.6 49.8 46.6 45.6 Housing loans 3.0 5.1 6.9 7.2 7.3 7.0 6.4 6.6 6.9 6.9 5.5 6.3 6.4 6.2 6.3 Auto loans 26.9 25.7 20.4 20.2 21.5 20.9 16.8 15.7 15.1 15.8 16.5 14.6 12.4 10.7 10.4 Commercial vehicles 9.4 8.1 4.8 5.1 6.7 6.7 4.8 3.5 3.2 3.5 3.6 3.5 2.9 2.5 2.4 Car loans 15.1 15.7 14.3 13.8 13.5 12.9 10.9 11.1 10.8 11.2 11.6 9.8 8.4 7.4 7.3 Two wheelers 2.4 1.9 1.3 1.2 1.3 1.3 1.1 1.1 1.2 1.1 1.3 1.2 1.0 0.8 0.7 Unsecured 15.5 12.8 10.0 9.5 10.7 11.5 10.8 11.5 12.4 13.7 16.4 17.0 17.4 16.2 15.7 Personal loans 10.5 8.9 6.9 6.4 7.1 7.3 6.7 7.1 8.0 9.0 10.9 11.3 11.6 10.5 10.4 Credit cards 5.0 3.9 3.1 3.0 3.6 4.2 4.0 4.4 4.4 4.7 5.5 5.7 5.8 5.7 5.3 Business loans 13.5 12.8 8.7 9.4 9.5 10.2 8.3 5.2 5.4 6.5 8.2 7.0 6.5 6.3 6.4 Others 3.1 5.3 4.2 3.9 5.8 7.3 7.2 8.3 8.4 8.2 8.4 7.8 7.1 7.2 6.8 Corporate loans/others 38.1 38.2 49.8 49.9 45.2 43.1 50.6 52.7 51.8 48.8 44.9 47.4 50.2 53.4 54.4
Source: Company, Kotak Institutional Equities
Exhibit 6: Retail loan growth has improved to ~10% yoy; non-retail loan growth has slowed a bit but continues to be relatively stronger Growth across product segments, March fiscal year-ends (%)
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 1QFY22 Loan growth (%) 35.1 55.9 27.3 27.1 22.2 22.7 26.4 20.6 27.1 19.4 18.7 24.5 21.3 14.0 14.4 Retail 38.6 55.8 3.3 26.8 33.7 27.3 9.7 15.5 29.7 26.6 27.8 19.0 14.6 6.7 10.2 Housing loans (7.3) 166.8 71.5 32.1 24.1 17.7 15.0 25.0 32.0 20.5 (5.5) 41.7 23.5 10.7 15.3 Auto loans 23.6 49.3 0.7 26.0 30.0 19.2 1.5 13.1 22.3 24.6 23.9 10.1 2.8 (1.0) 0.9 Commercial vehicles 24.0 34.5 (24.7) 35.7 59.6 23.4 (10.5) (11.3) 14.8 30.9 21.7 22.8 1.1 (3.7) (2.5) Car loans 37.1 62.0 15.5 23.2 19.3 17.2 6.8 22.6 23.9 23.6 23.2 5.6 4.0 0.5 3.3 Two wheelers (25.0) 27.1 (13.5) 20.8 27.4 18.6 10.9 24.6 29.4 16.9 37.9 15.9 (1.9) (5.7) (10.3) Unsecured 29.4 (0.8) 20.4 37.6 32.4 18.3 28.5 37.5 31.8 42.0 29.3 24.0 5.9 8.4 Personal loans 51.1 32.1 (0.6) 17.7 35.2 26.0 16.6 26.5 44.1 34.6 43.6 29.4 24.3 2.7 7.4 Credit cards 57.5 23.8 (1.4) 26.7 42.8 45.3 21.2 31.8 27.0 26.7 38.9 29.1 23.5 12.3 10.5 Business loans 64.4 48.5 (13.5) 36.6 24.3 31.5 2.1 (24.8) 34.3 43.3 49.4 5.4 12.4 10.6 21.3 Others 123.6 167.4 0.4 17.3 84.5 52.9 25.5 39.3 28.1 16.5 22.4 14.9 10.9 15.0 16.3 Corporate loans/others 29.8 56.1 66.1 27.4 10.5 17.0 48.4 25.6 24.8 12.7 9.2 31.2 28.7 21.2 18.1
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 5 Banks HDFC Bank
Exhibit 7: Retail PBT contribution has been volatile in past few Exhibit 8: … while revenue contribution from retail has been quarters, wholesale is doing the heavy-lifting broadly stable Segmental shares in PBT, March fiscal year-ends (%) Segmental shares in revenue, March fiscal year-ends (%)
Treasury Retail Wholesale Treasury Retail Wholesale Other banking ops Unallocated Other banking ops Inter-segment 120 180
40 90 120 45 44 43 47 47 46 47 47 45 44 43 41 39 38 39 39 41 41 47 43 45 33 48 38 46 42 39 40 42 34 52 60 79 77 76 77 77 77 75 77 80 77 79 79 77 74 73 60 45 50 77 73 25 39 30 26 11 0 36 41 36 45 32 29 32 40 45 39 29 35 13 0 (60)
(30) (120)
1QFY18
1QFY18
2QFY18
2QFY18
3QFY18
3QFY18
4QFY18
4QFY18
1QFY19 1QFY19
2QFY19 2QFY19
3QFY19 3QFY19
4QFY19 4QFY19
1QFY20 1QFY20
2QFY20 2QFY20
3QFY20 3QFY20
4QFY20 4QFY20
1QFY21 1QFY21
2QFY21 2QFY21
3QFY21 3QFY21
4QFY21 4QFY21 1QFY22 1QFY22
Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities
Asset quality has been hurt by the fresh Covid wave
Gross NPL ratio was up ~15 bps qoq to ~1.5%, while net NPL ratio was up <10 bps qoq to ~0.5% as on 1QFY22. These delinquency ratios are weaker than pre-Covid level, which is not a surprising outcome because the fresh Covid wave in CY2021 was not accompanied by any repayment moratorium or asset classification standstill. The deterioration can be attributed to higher share of auto loans and rural portfolio in the bank’s loan book – which usually require physical collections.
Slippages. The bank’s portfolio saw a slippage of ~2.5% (annualized) in 1QFY22, up from ~1.7% in 4QFY2. If we exclude the agri portfolio, slippages were relatively lower at 2.2% in 1QFY22 (~1.6% in 4QFY21 and 1.2% in 1QFY21). We believe that retail contributed meaningfully to the slippages in 1QFY22.
Collections hit by disruption from the fresh Covid wave. The bank has indicated the fresh Covid wave resulted in business disruptions for two-thirds of the quarter, causing a decline in collection efficiency. The management had reported during 4QFY21 result that it saw a minor blip on check bounce rates in the first two weeks of April 2021, especially in the states of Maharashtra, Madhya Pradesh, Punjab and Telangana. The bank reported that demand resolution was hit significantly in April and May. However, there has been a recovery in June and July – on the way back to almost March 2021 level (which was ~1% below pre-Covid level). Peak bounce rates were lower than those observed in the first wave. 0DPD bounce rates have reverted back to pre-Covid level. The bank has seen a reversal in bounce rates during June and July. The bank continues to see NACH bounce rates, which are significantly better than those reported by NPCI for the system. However, the commercial transportation segment has been hit by diesel price hikes. It usually takes a couple of quarters for passing on the price hikes to customers. Collections in the rural portfolio have also recovered in June.
Recoveries. Recoveries were at ~14 bps of gross advances in 1QFY22 against ~25 bps in the previous quarter. The bank sold NPAs amounting to ~Rs18 bn in 4QFY21 as part of a policy to offload such assets. Months of June and July were better than April and May. The bank expects better recoveries in 2QFY22.
6 KOTAK INSTITUTIONAL EQUITIES RESEARCH HDFC Bank Banks
Provisions. Provisions and contingencies for the quarter amounted to ~Rs48 bn, which includes a contingent provision of >Rs6 bn. The total credit cost ratio stood at ~1.7% in 1QFY22 (against 1.6% in 4QFY21 and 1.5% in 1QFY21). Credit cost for FY2020 and FY2021 was ~1.3-1.4%, which is higher than the average credit cost of ~1.1% seen during the 9-year period of FY2011-19. However, this is still lower than the credit cost of ~2.1-2.2% that the bank made during FY2007-09. The qoq decline in retail segment PBT in spite of stable retail segment revenues qoq indicates that a bulk of the provisions (and slippages) during 1QFY22 could be attributed to the retail segment.
The bank has added to its contingent provisions in this quarter taking the outstanding contingent provisions to ~0.6% of gross loans. At the same time, the provision coverage ratio (PCR) has declined by ~190 bps qoq to ~68% in 1QFY22. However, the bank is comfortably placed with total provisions (including specific, floating, contingent and general provisions) amounting to 146% of gross NPA as of 1QFY22.
Exhibit 9: Total provisions held on balance sheet stand at ~146% of gross NPLs and ~2.1% of gross loans Breakup of outstanding provisions on balance sheet for HDFC Bank, March fiscal year-ends (Rs bn)
1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 1QFY22 Outstanding provisions (Rs bn) Specific 82.0 87.2 89.6 91.1 104.9 95.5 78.1 105.3 116.1 Floating 14.5 14.5 14.5 14.5 14.5 14.5 14.5 14.5 14.5 Contingent 5.0 9.2 14.6 30.0 40.0 63.0 86.6 58.6 66.0 General 38.8 40.9 41.1 44.4 45.8 47.3 50.0 53.0 53.0 Total outstanding provisions 140.4 151.8 159.8 179.9 205.3 220.4 229.2 231.4 249.6 Outstanding provisions (% of gross loans) Specific 0.98 0.96 0.95 0.91 1.04 0.91 0.72 0.92 1.00 Floating 0.17 0.16 0.15 0.14 0.14 0.14 0.13 0.13 0.12 Contingent 0.06 0.10 0.15 0.30 0.40 0.60 0.79 0.51 0.57 General 0.46 0.45 0.43 0.44 0.45 0.45 0.46 0.46 0.46 Total outstanding provisions 1.67 1.67 1.69 1.79 2.03 2.11 2.10 2.02 2.15 Outstanding provisions (% of GNPA) Specific 69.7 69.7 66.7 72.0 76.2 84.5 88.5 69.8 67.9 Floating 12.3 11.6 10.8 11.5 10.5 12.8 16.4 9.6 8.5 Contingent 4.3 7.3 10.9 23.7 29.1 55.8 98.1 38.9 38.6 General 33.0 32.7 30.6 35.1 33.3 41.9 56.7 35.1 31.0 Total outstanding provisions 119.3 121.3 119.0 142.2 149.0 194.9 259.7 153.4 146.0
Source: Company, Kotak Institutional Equities
Restructuring. The bank had restructured ~50 bps of advances (predominantly retail) under RBI’s Covid restructuring option by 3QFY21, which increased to ~60 bps of net advances by the end of 4QFY21. This further increased to ~80 bps by the end of 1QFY22. The management also indicated that about two-thirds of retail restructuring is from the unsecured portfolio and one-third from secured portfolio. Total ECLGS book for the bank stood at ~Rs330 bn (~2.9% of net advances).
Based on internal ratings, the wholesale portfolio continues to be rated around historical level of ~4.3 (on a scale of 1-10, with 1 being least risky and 10 being most risky). The unsecured wholesale portfolio is rated even better at ~3.5. AAA and AA portfolio is at ~80% of the book.
We have seen that HDFC Bank has demonstrated one of the best banking franchises among private banks. Historically, the bank has only sparingly resorted to the use of regulatory forbearances. Further, the bank seemed to have navigated the first wave of the pandemic with a commendable outcome as slippages for FY2021 and FY2020 were comparable – although agri slippages in FY2020 and regulatory forbearance schemes in FY2021 had a role to play in this equation. While we are seeing a relatively higher and immediate impact on the bank’s performance from the second Covid wave, we remain positive on the recovery in asset quality and business. We continue to be comfortable with the steady long-term
KOTAK INSTITUTIONAL EQUITIES RESEARCH 7 Banks HDFC Bank
trajectory of the bank, but will watch the near-term performance with a bit of caution. Note that the portfolio is far more diversified by customer segment and geography than it was a decade back. We are building in gross NPLs to decline to ~1.3% and net NPLs at 0.4% of loans by FY2024E.
Exhibit 10: GNPLs have grown faster than loan growth in the past couple of quarters Yoy growth in loans and gross NPLs, March fiscal year-ends (#)
Loan growth (LHS) Gross NPL growth 60
40
20
0
(20)
(40)
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21
3QFY21 4QFY21 1QFY22
Source: Company, Kotak Institutional Equities
Exhibit 11: HDFC Bank (consolidated) – summary of Basel disclosures March fiscal year-ends, 2020-22 (Rs mn)
Gross NPL Gross NPL Gross NPL Gross NPL Gross NPL Gross NPL QoQ YoY Fund based GNPL+1Q'22 w/o (Mar-2020) (Jun-2020) (Sep-2020) (Dec-2020) (Mar-2021) (Jun-2021) growth growth exposure (% of loans) Consumer Loans 17,168 26,892 17,880 4,972 31,873 32,753 3 22 3,385,439 1.6 Power 106 103 92 89 3,973 259 (93) 151 741,579 0.0 Other Industries 8,919 6,845 11,037 6,264 10,299 14,824 44 117 720,877 2.1 Financial Institutions - 5 12 6 17 36 117 641 611,380 0.0 Retail Trade 8,394 8,058 6,822 4,972 13,470 17,347 29 115 517,613 3.7 NBFC 82 767 24 2,536 102 102 0 (87) 550,791 0.0 Consumer Services 5,419 6,028 5,089 4,892 8,285 11,776 42 95 424,607 3.0 Automobile & Auto 5,417 5,368 5,711 5,040 7,855 10,249 30 91 401,886 2.6 Road Transportation 13,481 9,542 10,130 4,972 15,339 24,294 58 155 354,365 7.2 Food and Beverage 7,964 7,850 7,552 5,948 6,146 6,872 12 (12) 354,579 2.0 Agriculture Production – food 22,546 21,933 20,269 4,972 21,024 25,489 21 16 301,806 8.5 Real Estate & 5,111 4,872 2,085 1,627 2,295 2,831 23 (42) 304,264 1.0 Coal & Petroleum 203 216 172 99 375 428 14 98 365,566 0.1 Wholesale Trade - Non industrial 3,930 4,140 4,046 3,414 4,955 6,078 23 47 301,830 2.0 Iron and Steel 1,227 1,361 1,183 1,035 1,079 1,033 (4) (24) 282,135 0.5 Housing Finance Companies 3,963 4,913 4,913 4,913 4,913 4,913 — — 257,321 1.9 Wholesale Trade – Industrial 3,881 3,957 3,393 2,495 3,525 4,465 27 13 266,853 1.7 Textiles & Garments 2,636 2,559 2,468 1,791 3,828 4,293 12 68 276,153 1.6 Agriculture Produce – trade 3,640 3,710 3,372 2,751 2,235 2,425 8 (35) 77,848 3.1 Agriculture – Allied 7,652 7,196 6,297 4,972 9,685 13,976 44 94 250,391 5.8 Business Services 2,612 2,993 1,934 986 3,961 5,031 27 68 278,766 2.2 Engineering 2,426 2,377 2,334 2,088 2,480 3,875 56 63 210,282 1.9 Infrastructure Development 5,382 4,950 4,906 4,659 5,254 6,970 33 41 227,251 3.1 Agriculture Production - non food 5,250 4,981 3,690 4,972 6,645 9,358 41 88 156,575 6.7 Cement & Products 153 145 223 149 253 459 81 217 117,540 0.4 Telecom 100 89 93 79 147 178 21 99 212,296 0.1 Gems and Jewellery 521 489 495 332 565 688 22 41 124,931 0.6 Fertilisers & Pesticides 45 44 44 10 11 14 28 (69) 63,295 0.0 Non-ferrous Metals 804 602 764 526 796 1,180 48 96 126,863 1.0 Chemical and Products 179 194 166 83 175 217 24 12 119,205 0.2 Drugs and Pharmaceuticals 448 275 350 246 305 454 49 65 104,660 0.4 Mining and Minerals 1,970 1,773 1,944 1,395 1,779 2,399 35 35 113,298 2.2 Consumer Durables 445 502 394 283 809 1,089 34 117 87,617 1.4 Plastic & Products 2,480 2,440 2,461 2,411 2,495 2,779 11 14 71,922 3.9 Paper, Printing and 658 658 637 339 469 681 45 4 69,903 1.0 FMCG & Personal 354 247 532 260 564 1,043 85 323 45,145 2.3 Information Technology 809 727 351 660 740 916 24 26 43,750 2.1 Capital Market Intermediaries 3,658 4,352 3,924 3,935 3,877 3,867 (0) (11) 11,008 35.1 Total 151,062 154,685 137,787 103,552 182,930 225,985 24 46 13,202,250 2.0
Source: Company, Kotak Institutional Equities
8 KOTAK INSTITUTIONAL EQUITIES RESEARCH HDFC Bank Banks
NIMs decline on lower lending yields
NIM (calculated) declined ~20 bps qoq and yoy to 4% for the quarter, with yield on loans declining ~30 bps qoq to 8.3% (-130 bps yoy) and cost of funds stable qoq at 3.7% (-80 bps yoy). NIM was impacted (interest income would have been 6% higher yoy) by factors such as (1) lower balance of higher-yielding card balances, (2) interest reversals from slippages during the quarter, and (3) higher cash balance due to increase in mandatory CRR ratio. CD ratio has remained in 84-85% range for the past five quarters. Liquidity coverage ratio stood at 126% vs 138% in the previous quarter. The company has been monetizing gains on excess liquidity investments to offset the lower NII growth.
We are building NIM to be flat around ~4% over FY2022-24E given the less aggressive portfolio mix till there is greater clarity of the borrowers’ financial profile. A prolonged slowdown could result in a higher preference of better rated corporate portfolio or more collateral-backed lending. Fee income impacted by Covid disruptions, but more resilient than last year
Non-interest income increased robustly by ~54% yoy on a low base of 1QFY21 when disbursements were impacted a lot more significantly due to a nationwide lockdown. 74% yoy growth in fee income and ~175% yoy growth in FX and derivatives revenue supported this outcome. However, fee income was still down ~17% sequentially.
At the same time, fee income from cards continues to be impacted due to RBI restrictions on new issuance and impact of lockdowns on card spends. The bank has seen meaningful erosion in market share on both number of cards and card spends. While the restrictions are in place, the bank continues to focus on engaging with existing card customers to reactivate them and increasing usage. Credit card fees contribute 25-33% to total fee income of the bank, with higher contribution during the festive season (due to higher card spends) and lower contribution during the past quarter due to higher fees from disbursement-related activities.
Exhibit 12: HDFC Bank has lost credit card market share since the RBI restrictions in December 2020 Market share in number of credit cards outstanding (%)
30 May-20 Jun-20 23.8 24 Jul-20 Aug-20 19.2 17.4 Sep-20 18 Oct-20 Nov-20 11.4 12 Dec-20 Jan-21 6 4.9 Feb-21 Mar-21 Apr-21 0 HDFCB SBI ICICI Axis RBL May-21
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 9 Banks HDFC Bank
Exhibit 13: HDFC Bank has steadily lost share in credit card spends as well during CY2021 Market share in credit card spends (%)
35 May-20 Jun-20 28.4 Jul-20 28 Aug-20 Sep-20 21 19.2 18.3 Oct-20 Nov-20 14 Dec-20 8.3 Jan-21 7 5.1 Feb-21 Mar-21 Apr-21 0 HDFCB SBI ICICI Axis RBL May-21
Source: Company, Kotak Institutional Equities
Cost ratios declined sequentially driven by non-staff costs
The bank reported 18% yoy growth in operating expenses on a low base of 1QFY21. However, on a sequential basis, the bank’s cost-income ratio showed an improvement by declining to ~35%, primarily on the back of a ~17% qoq decline in non-staff costs. The bank’s staff count increased by ~3,400 (up ~3%) during 1QFY22 and now stands at >123,000. The management expects cost-income ratio to revert to ~38-39% levels in the short run driven by sales and promotional activities. However, in the relatively medium to long term, the goal would be to bring this down again.
Deposit momentum continues; CASA ratio at ~45%
Deposit growth in 1QFY22 was robust at 13% yoy led by stronger 28% yoy growth in CASA (24% and 30% yoy growth in CA and SA deposits respectively) and ~3% yoy growth in term deposits. However, there was a sequential decline in CASA deposits, driven by a 12% qoq decline in CA deposits – a seasonal phenomenon. CASA ratio was marginally lower qoq at ~45% as a result. The bank acquired nearly 1.64 mn new liability accounts during 1QFY22, slightly below the ~2 mn acquisitions in 4QFY21. ~82% of total deposits of the bank come from retail and ~88% of CASA deposits of the bank come from retail. Wholesale time deposits decreased 7% yoy for the bank.
Other key highlights
Capital. The bank’s overall CAR stands comfortably at 19.1% as per Basel-3 guidelines. RWA growth at ~14% yoy was in line with loan growth at ~14% yoy. RWA/assets were sequentially up by ~100 bps at ~66%, which is still well below the peak level of ~76% in 1QFY20.
Branch network. HDFC Bank saw a net branch addition of 45 during 1QFY22, taking the total branch count to ~5,650. ATMs increased at 9% yoy to ~16,300. The bank has been rapidly expanding footprint in semi-urban areas and rural areas, which now account for ~50% of the total banking outlets. In addition to this, the company has >15,900 business correspondents most of whom were added only recently (~3,600 as of 3QFY20).
10 KOTAK INSTITUTIONAL EQUITIES RESEARCH HDFC Bank Banks
Exhibit 14: HDFC Bank has grown its network robustly HDFC Bank’s physical presence, March fiscal year-ends (# in 000s)
Branches ATMs 17.5 16.1 16.3 14.9 13.2 14.0 12.6 12.0 12.0 12.3 10.7 11.2 10.5 8.9
7.0 5.5 5.4 5.6 5.7 4.7 4.8 5.1 4.2 4.0 4.5 3.3 3.4 2.5 3.1 3.5 2.0 1.4 1.7
0.0
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021 1QFY22
Source: Company, Kotak Institutional Equities
Exhibit 15: HDFC Bank has seen a convergence in its opex to assets ratio with other frontline private banks Operating expenses to total assets, March fiscal year-ends (%)
Opex to total assets Employee costs to total assets 2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E 2024E Axis Bank 2.2 1.8 2.2 2.1 2.2 2.1 2.0 1.8 1.8 1.8 0.7 0.7 0.7 0.7 0.6 0.6 0.6 0.6 0.6 0.5 HDFC Bank 2.6 2.6 2.5 2.4 2.3 2.3 2.2 2.0 2.0 2.0 0.9 0.9 0.8 0.7 0.7 0.7 0.6 0.6 0.6 0.7 ICICI Bank 1.9 1.9 2.1 2.0 2.2 2.2 1.9 2.0 2.1 2.1 0.8 0.7 0.8 0.7 0.7 0.8 0.7 0.7 0.7 0.7 IndusInd Bank 2.9 2.9 3.0 2.8 2.6 2.8 2.5 2.6 2.5 2.3 1.0 1.0 0.9 0.9 0.7 0.8 0.7 0.7 0.8 0.8
Source: Companies, Kotak Institutional Equities estimates
Exhibit 16: Consistent improvement in cost-income ratio, better than most peers Cost-income ratio, March fiscal year-ends (%)
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Axis Bank 42.7 44.7 42.6 40.8 40.7 38.5 41.0 47.3 45.4 42.5 41.7 40.2 39.7 40.0 HDFC Bank 48.1 49.7 49.6 44.6 44.6 44.3 43.4 41.0 39.7 38.6 36.3 36.4 37.6 38.4 ICICI Bank 42.2 43.0 40.6 36.8 36.8 34.7 35.8 38.8 43.6 43.5 37.2 41.2 42.2 42.1 IndusInd Bank 48.2 49.4 48.8 45.7 48.1 47.0 46.7 45.7 44.2 43.3 41.3 50.3 46.9 43.2
Source: Companies, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 11 Banks HDFC Bank
Exhibit 17: Growth in revenues and earnings is still on recovery Exhibit 18: Earnings growth marginally better than loan growth path Earnings and loan growth, March fiscal year-ends (%) Earnings and revenue growth, March fiscal year-ends (%) Loan growth (LHS) Earnings growth (RHS) Revenue growth (LHS) Earnings growth (RHS) 35 35 28 28 21 21 14 14 7 7 0
0
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21
3QFY21
4QFY21 1QFY22
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21
3QFY21 4QFY21 1QFY22 Notes: Source: Company, Kotak Institutional Equities (a) Revenues not strictly comparable as the bank has changed its accounting for certain expenses and income.
Source: Company, Kotak Institutional Equities
12 KOTAK INSTITUTIONAL EQUITIES RESEARCH HDFC Bank Banks
Exhibit 19: HDFC Bank—key parameters and balance sheet March fiscal year-ends
1QFY21 2QFY21 3QFY21 4QFY21 1QFY22 Yield management measures (%) Reported NIM (%) 4.3 4.1 4.2 4.2 4.1 Asset quality details Gross NPL(Rs mn) 137,735 113,046 88,256 150,860 170,985 Gross NPL (%) 1.4 1.1 0.8 1.3 1.5 Net NPLs (Rs mn) 32,800 17,561 10,160 45,548 54,858 Net NPL (%) 0.3 0.2 0.1 0.4 0.5 Capital adequacy ratios (%) CAR 18.9 19.1 18.9 18.8 19.1 Tier I 17.5 17.7 17.6 17.6 17.9 Tier II 1.4 1.4 1.3 1.2 1.2 Other key details Branches 5,326 5,430 5,485 5,608 5,653 ATM network 14,996 15,292 15,541 16,087 16,291 Balance sheet snapshot (Rs bn) Capital and liabilities Capital 5 6 6 6 6 Reserves and surplus 1,774 1,856 1,946 2,032 2,119 Deposits 11,894 12,293 12,711 13,351 13,458 Borrowings 1,164 1,326 1,201 1,355 1,313 Other liabilities and provisions 614 614 678 726 643 Total 15,451 16,094 16,542 17,469 17,539 Assets Cash and balances with RBI 966 995 877 973 1,046 Balances with banks, money at call and short notice 130 86 177 221 154 Investments 3,794 4,140 4,144 4,437 4,361 Advances 10,033 10,383 10,823 11,328 11,477 Fixed assets 45 46 48 49 50 Other assets 483 445 473 459 452 Total 15,451 16,094 16,542 17,469 17,539
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 13 Banks HDFC Bank
Exhibit 20: HDFC Bank—estimate changes March fiscal year-ends, 2022E-24E (Rs mn)
New estimates Old estimates % change 2022E 2023E 2024E 2022E 2023E 2024E 2022E 2023E 2024E Net loan growth (%) 13.7 14.3 14.0 14.7 14.3 14.0 -106 bps 0 bps 0 bps Total assets 19,921,287 22,701,907 25,849,232 19,858,523 22,626,237 25,757,559 0.3 0.3 0.4 Total income 997,741 1,116,757 1,260,394 1,028,824 1,153,612 1,296,103 (3.0) (3.2) (2.8) Net interest income 730,808 819,762 922,609 757,805 859,540 970,748 (3.6) (4.6) (5.0) NIM (%) 4.0 3.9 3.9 4.2 4.2 4.1 -16 bps -22 bps -23 bps Other income 266,933 296,995 337,785 271,019 294,072 325,355 (1.5) 1.0 3.8 Fee income 190,781 218,309 249,861 197,458 217,641 239,912 (3.4) 0.3 4.1 Expenses 362,933 419,880 484,489 376,146 435,456 502,772 (3.5) (3.6) (3.6) Employee cost 118,926 138,504 160,807 118,726 138,271 160,537 0.2 0.2 0.2 Other cost 244,007 281,377 323,682 257,419 297,185 342,235 (5.2) (5.3) (5.4) Loan loss provisions 163,392 151,816 157,553 164,204 153,235 159,026 (0.5) (0.9) (0.9) PBT 464,034 537,643 610,909 480,938 557,395 626,788 (3.5) (3.5) (2.5) PAT 345,241 400,007 454,517 357,818 414,702 466,330 (3.5) (3.5) (2.5) PBT-treasury+provisions 619,926 686,959 765,963 637,642 708,130 783,313 (2.8) (3.0) (2.2) EPS (Rs) 63 73 82 65 75 85 (3.5) (3.5) (2.5) Adjusted BVPS (Rs) 411 470 535 409 461 520 0.4 2.0 2.9 Slippage ratio (%) 2.2 1.8 1.8 2.2 1.8 1.8 0 bps 0 bps 0 bps Gross NPA (%) 1.5 1.4 1.3 1.5 1.4 1.3 -5 bps -5 bps -4 bps Credit cost (%) 1.4 1.1 1.0 1.4 1.1 1.0 0 bps 0 bps 0 bps Cost-income ratio (%) 36.4 37.6 38.4 36.6 37.7 38.8 -19 bps -15 bps -35 bps
Source: Company, Kotak Institutional Equities estimates
Exhibit 21: We expect HDFC Bank to deliver RoEs of ~16% in the medium term RoE breakup, March fiscal year-ends (%)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Net interest income 3.6 3.7 4.1 4.5 4.7 4.7 4.1 4.2 4.2 4.3 4.1 4.1 4.1 4.1 4.2 4.2 4.0 4.0 3.9 3.8 3.8 Other income 1.4 1.5 1.8 1.8 2.0 2.1 1.9 1.7 1.9 1.9 1.7 1.7 1.6 1.5 1.6 1.5 1.7 1.5 1.4 1.4 1.4 Treasury 0.1 (0.1) (0.1) (0.1) 0.2 0.2 0.2 (0.0) (0.1) 0.0 0.1 0.1 0.1 0.1 0.1 0.0 0.1 0.2 0.1 0.0 0.0 Others 1.3 1.7 1.9 1.9 1.8 1.8 1.7 1.8 1.9 1.8 1.6 1.6 1.5 1.4 1.5 1.5 1.5 1.3 1.3 1.3 1.4 Total income 4.7 4.8 5.5 6.1 6.7 6.8 6.0 6.0 6.0 6.1 5.8 5.8 5.8 5.7 5.7 5.7 5.7 5.5 5.3 5.2 5.2 Operating expenses 2.3 2.3 2.7 3.0 3.6 3.6 2.9 3.1 3.0 3.0 2.6 2.6 2.6 2.5 2.4 2.3 2.3 2.2 2.0 2.0 2.0 Employees 0.6 0.6 0.8 0.9 1.2 1.4 1.1 1.1 1.1 1.1 0.9 0.9 0.9 0.8 0.7 0.7 0.7 0.6 0.6 0.6 0.7 Others 1.7 1.7 1.9 2.1 2.4 2.2 1.8 1.9 1.9 1.9 1.7 1.7 1.7 1.7 1.7 1.6 1.6 1.6 1.3 1.4 1.4 Pre provision income 2.5 2.5 2.8 3.0 3.1 3.2 3.1 2.9 3.1 3.1 3.2 3.2 3.2 3.2 3.3 3.4 3.5 3.3 3.4 3.2 3.2 Loan loss provisions 0.5 0.4 0.8 1.0 1.1 1.1 1.0 0.6 0.6 0.5 0.4 0.4 0.4 0.4 0.6 0.6 0.8 0.8 0.9 0.7 0.6 PBT 2.0 2.1 2.0 2.0 2.0 2.1 2.1 2.3 2.4 2.6 2.8 2.8 2.8 2.8 2.8 2.8 2.6 2.5 2.5 2.5 2.5 (1- tax rate) 70.8 67.9 69.5 69.6 69.7 68.0 68.7 67.5 68.8 69.0 66.6 66.6 66.0 65.7 65.5 65.5 71.7 74.7 74.4 74.4 74.4 RoA 1.4 1.4 1.4 1.4 1.4 1.4 1.5 1.6 1.7 1.8 1.9 1.9 1.8 1.8 1.8 1.8 1.9 1.9 1.8 1.9 1.9 Avg assets/avg equity 14.7 13.0 12.7 14.0 12.5 11.9 11.1 10.7 11.1 11.2 10.3 10.3 9.9 9.9 9.8 9.0 8.7 8.7 8.6 8.6 8.6 RoE 20.6 18.5 17.7 19.5 17.7 16.9 16.1 16.7 18.7 20.3 19.4 19.4 18.3 17.9 17.9 16.5 16.4 16.6 15.9 16.2 16.1
Source: Company, Kotak Institutional Equities estimates
14 KOTAK INSTITUTIONAL EQUITIES RESEARCH HDFC Bank Banks
Exhibit 22: HDFC Bank growth rates and key ratios March fiscal year-ends (%)
2017 2018 2019 2020 2021 2022E 2023E 2024E Growth rates (%) Net loan 19.4 18.7 24.5 21.3 14.0 13.7 14.3 14.0 Customer assets growth 23.1 21.3 21.8 20.0 18.0 12.8 13.5 13.3 Retail loans to Customer assets 48.9 51.5 50.4 48.1 43.5 43.2 43.5 43.3 Net fixed assets 54.5 (0.5) 11.7 10.0 10.8 (9.2) (11.3) (14.0) Cash and bank balance 25.8 151.1 (33.8) 6.5 37.9 13.5 12.8 12.8 Total Asset 16.6 23.2 17.0 23.0 14.1 14.0 14.0 13.9 Deposits 17.8 22.5 17.0 24.3 16.3 14.7 14.3 14.0 Current 30.7 3.2 19.5 22.3 21.8 8.3 14.3 14.0 Savings 7.9 33.2 19.4 24.6 8.5 17.7 15.4 15.0 Fixed 30.9 15.6 11.1 24.8 30.0 12.8 12.4 12.0 Net interest income 20.1 21.0 20.3 16.5 15.5 12.6 12.2 12.5 Loan loss provisions 33.3 54.6 27.9 62.3 7.8 32.7 (7.1) 3.8 Total other income 14.4 23.8 15.8 32.0 8.4 5.9 11.3 13.7 Net fee income 13.6 29.3 21.2 18.3 (1.0) 18.0 14.4 14.5 Net capital gains 55.5 (18.8) (57.5) 391.9 99.9 (61.2) (33.3) - Net exchange gains 2.9 20.6 12.9 25.2 13.2 25.0 12.0 14.0 Operating expenses 16.0 15.2 15.1 17.5 6.6 10.9 15.7 15.4 Employee expenses 13.7 5.0 14.0 22.7 8.8 14.7 16.5 16.1 Key ratios (%) Yield on average earning assets 9.1 8.7 8.9 8.6 7.6 7.3 7.2 7.3 Yield on average loans 10.2 10.3 10.5 10.1 8.9 8.4 8.2 8.3 Yield on average investments 7.8 7.1 7.5 6.1 5.6 5.9 6.0 6.1 Average cost of funds 5.3 4.9 5.2 5.0 4.0 3.7 3.8 4.0 Interest on deposits 5.3 4.6 4.8 4.9 4.0 3.7 3.8 4.0 Difference 3.9 3.9 3.8 3.6 3.6 3.5 3.4 3.3 Net interest income/earning assets 4.4 4.4 4.4 4.2 4.1 4.0 3.9 3.9 New provisions/average net loans 0.7 0.9 1.0 1.3 1.2 1.4 1.1 1.0 Interest income/total income 72.9 72.5 73.2 70.7 72.0 73.2 73.4 73.2 Fee income to total income 19.4 20.6 21.0 20.6 17.9 19.1 19.5 19.8 Fees income to PBT 39.8 42.7 42.9 44.6 38.8 41.1 40.6 40.9 Net trading income to PBT 5.2 3.3 1.2 5.3 9.3 3.3 1.9 1.6 Exchange inc./PBT 5.7 5.7 5.3 5.9 5.9 6.6 6.3 6.4 Operating expenses/total income 43.4 41.0 39.7 38.6 36.3 36.4 37.6 38.4 Operating expenses/assets 2.5 2.4 2.3 2.2 2.0 1.9 2.0 2.0 Operating profit /AWF 2.8 2.8 2.9 2.6 2.4 2.5 2.5 2.5 Tax rate 34.3 34.5 34.5 28.3 25.3 25.6 25.6 25.6 Dividend payout ratio 19.4 19.3 19.4 - - 20.0 20.0 20.0 Share of deposits Current 18.0 15.1 15.4 15.2 15.9 15.0 15.0 15.0 Fixed 52.0 56.5 57.6 57.8 53.9 55.3 55.8 56.3 Savings 30.1 28.4 26.9 27.0 30.2 29.7 29.2 28.7 Loans-to-deposit ratio 86.2 83.5 88.8 86.6 84.9 84.1 84.1 84.1 Equity/assets (EoY) 10.4 10.0 12.0 11.2 11.7 11.6 11.6 11.6 Asset quality trends (%) Gross NPL 1.1 1.3 1.4 1.3 1.3 1.5 1.4 1.3 Net NPL 0.3 0.4 0.4 0.4 0.4 0.5 0.4 0.4 Slippages 1.5 2.3 2.2 2.1 1.6 2.2 1.8 1.8 Provision coverage (ex writeoff) 68.7 69.8 71.4 72.0 69.8 66.9 71.7 71.8 Dupont analysis (%) Net interest income 4.1 4.2 4.2 4.0 4.0 3.9 3.8 3.8 Loan loss provisions 0.4 0.6 0.6 0.8 0.8 0.9 0.7 0.6 Net other income 1.5 1.6 1.5 1.7 1.5 1.4 1.4 1.4 Operating expenses 2.5 2.4 2.3 2.3 2.2 2.0 2.0 2.0 Invt. depreciation — — — — — — — — (1- tax rate) 65.7 65.5 65.5 71.7 74.7 74.4 74.4 74.4 ROA 1.8 1.8 1.8 1.9 1.9 1.8 1.9 1.9 Average assets/average equity 9.9 9.8 9.0 8.7 8.7 8.6 8.6 8.6 ROE 17.9 17.9 16.5 16.4 16.6 15.9 16.2 16.1
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 15 Banks HDFC Bank
Exhibit 23: HDFC Bank P&L and balance sheet March fiscal year-ends (Rs mn)
2017 2018 2019 2020 2021 2022E 2023E 2024E Income statement Total interest income 693,060 802,414 989,721 1,148,127 1,208,582 1,321,231 1,499,730 1,726,626 Loans 520,553 626,618 775,442 917,879 948,345 1,011,334 1,137,700 1,306,170 Investments 159,443 162,224 199,975 206,333 232,143 283,697 333,121 388,567 Cash and deposits 13,064 13,572 14,304 23,914 28,094 26,200 28,908 31,889 Total interest expense 361,667 401,465 507,288 586,264 559,787 590,423 679,967 804,017 Deposits from customers 313,315 327,713 410,519 508,038 501,433 532,133 619,987 742,025 Net interest income 331,392 400,949 482,432 561,863 648,796 730,808 819,762 922,609 Loan loss provisions 35,626 55,079 70,425 114,293 123,168 163,392 151,816 157,553 Net interest income (after prov.) 295,766 345,870 412,007 447,570 525,628 567,416 667,946 765,056 Other income 122,965 152,203 176,259 232,608 252,049 266,933 296,995 337,785 Net fee income 88,116 113,939 138,055 163,337 161,693 190,781 218,309 249,861 Net capital gains 11,380 9,243 3,933 19,344 38,670 15,000 10,000 10,000 Net exchange gains 12,634 15,235 17,204 21,547 24,384 30,480 34,138 38,917 Operating expenses 197,033 226,904 261,194 306,975 327,226 362,933 419,880 484,489 Employee expenses 64,837 68,057 77,618 95,257 103,648 118,926 138,504 160,807 Depreciation on investments (76) 305 47 74 (168) (118) (82) (58) Other Provisions 383 3,892 5,029 7,057 34,029 7,500 7,500 7,500 Pretax income 221,391 266,973 321,997 366,072 416,590 464,034 537,643 610,909 Tax provisions 75,894 92,106 111,215 103,498 105,425 118,793 137,637 156,393 Net Profit 145,496 174,867 210,782 262,573 311,165 345,241 400,007 454,517 % growth 18.3 20.2 20.5 24.6 18.5 11.0 15.9 13.6 Operating profit 246,020 316,700 393,518 468,078 535,116 619,926 686,959 765,963 % growth 19.3 28.7 24.3 18.9 14.3 15.8 10.8 11.5 Balance sheet Assets Cash and bank balance 489,521 1,229,151 813,476 866,187 1,194,704 1,356,306 1,529,712 1,725,060 Cash 42,636 75,323 73,915 92,077 106,926 117,618 129,380 142,318 Balance with RBI 336,333 971,381 393,721 629,974 866,482 991,924 1,123,886 1,271,141 Balance with banks 11,795 9,539 3,412 3,477 8,344 12,515 18,773 28,160 Net value of investments 2,144,633 2,422,002 2,905,879 3,918,267 4,437,283 5,171,429 5,923,369 6,806,100 Govt. and other securities 1,624,187 1,883,648 2,396,593 3,230,399 3,511,410 4,269,238 5,021,178 5,903,909 Shares 1,114 1,198 3,981 4,044 4,333 4,333 4,333 4,333 Debentures and bonds 194,698 347,873 286,970 264,504 617,897 617,897 617,897 617,897 Net loans and advances 5,545,682 6,583,331 8,194,012 9,937,029 11,328,366 12,877,856 14,725,108 16,785,503 Fixed assets 36,267 36,072 40,300 44,319 49,093 44,561 39,518 34,000 Net Owned assets 36,267 36,072 40,300 44,319 49,093 44,561 39,518 34,000 Other assets 422,298 368,787 491,740 539,311 459,259 471,135 484,199 498,569 Total assets 8,638,402 10,639,343 12,445,407 15,305,113 17,468,705 19,921,287 22,701,907 25,849,232 Liabilities Deposits 6,436,397 7,887,706 9,231,409 11,475,023 13,350,602 15,318,530 17,515,883 19,966,774 Borrowings and bills payable 906,960 1,313,268 1,241,255 1,522,123 1,479,115 1,518,850 1,566,078 1,622,294 Other liabilities 400,422 375,419 480,679 598,107 601,780 770,506 986,539 1,263,144 Total liabilities 7,743,778 9,576,393 10,953,343 13,595,252 15,431,497 17,607,886 20,068,501 22,852,213 Paid-up capital 5,125 5,190 5,447 5,483 5,513 5,513 5,513 5,513 Reserves & surplus 889,498 1,057,760 1,486,617 1,704,377 2,031,696 2,307,888 2,627,894 2,991,507 Total shareholders' equity 894,624 1,062,950 1,492,064 1,709,860 2,037,208 2,313,401 2,633,406 2,997,020
Source: Company, Kotak Institutional Equities estimates
16 KOTAK INSTITUTIONAL EQUITIES RESEARCH REDUCE L&T Infotech (LTI) https://ultraviewer.et/en/own IT Services JULY 17, 2021 load.html RESULT Sector view: Attractive
Choosing the right battles to win the talent war. LTI reported a good quarter with CMP (`): 4,289 qoq growth of 4.8% in c/c, powered by volume growth of 8.8%. EBIT margin declined Fair Value (`): 4,100 sharply due to wage revisions and S&M investments; while advancing wage revisions BSE-30: 53,140 impacted EBIT margin, this is a good decision as tech firms are embroiled in a war for talent. Deal wins were soft but compensated by discretionary spending by clients. LTI is well positioned to capture market opportunities and is poised for another strong year after industry leading growth in FY2021. Valuations at 28X FY2023E earnings are full. Maintain REDUCE. L&T Infotech Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 4,289/4,100/REDUCE EPS (Rs) 110.0 127.4 150.0 52-week range (Rs) (high-low) 4,600-2,195 EPS growth (%) 27.0 15.9 17.7 Mcap (bn) (Rs/US$) 750/10.1 P/E (X) 39.0 33.7 28.6 ADTV-3M (mn) (Rs/US$) 1,487/20 P/B (X) 10.3 8.6 7.1 Shareholding pattern (%) EV/EBITDA (X) 26.2 23.8 20.0 Promoters 74.3 RoE (%) 30.5 27.8 27.2 FPIs/MFs/BFIs 13.6/3.6/0.2 Div. yield (%) 0.6 0.8 0.9 Price performance (%) 1M 3M 12M Sales (Rs bn) 124 150 179 Absolute 1.9 4.9 87.2 EBITDA (Rs bn) 27 30 35 Rel. to BSE-30 0.7 (3.6) 28.5 Net profits (Rs bn) 19 22 26
Strong volume growth of 8.8% qoq; EBIT margin declines sharply, weak FCF generation
LTI reported revenue growth of 5.1% qoq (4.8% in c/c) to US$470 mn, 1.6% higher than our estimate. Growth was broad-based reflecting buoyancy in spending. Hi-tech vertical led the growth with 13.2% sequential increase, courtesy full ramp up of US$204 mn Injazat deal. The banking vertical grew by 8.8% in c/c sequentially and insurance was by 5%. Growth was broad based across client buckets with top 5 and top 10 clients growing by 6.6% and 5.8% respectively. EBIT margin of 16.4% was 40 bps lower than our estimate and declined 300 bps qoq. Wage revision impacted EBIT margin by 340 bps, higher SG&A by 180 bps (previous quarter had write back that aided margins by 120 bps), offset to some extent by 140 bps from productivity and 80 bps from lower pass through and Fx movements. EBIT margin declined by 100 bps yoy. Net profit margin stood at 14.3%. Net profit of Rs4.96 bn grew 19% yoy and declined 9% qoq and beat our estimate by 2% largely on the back of higher forex gain. OCF/ net profit conversion was weak at 19% impacted by incentive payments and higher DSO.
Existing large clients to drive growth
Growth in top accounts lagged the company average in FY2021 due to clients in impacted verticals such as energy, manufacturing and insurance. Spending recovery in these verticals together with strong demand from clients in resilient verticals will lead to strong growth in top accounts in FY2022E. The absence of large deals in 1QFY22 and difficulty in new logo addition in the initial months of Covid reduces the growth potential from these avenues in FY2022. Consequently we expect large accounts to be the primary drivers of growth for the year. Kawaljeet Saluja
Raise revenue estimates by 1-2%; maintain REDUCE with revised FV of Rs4,100 Sathishkumar S Strong F-500 client base, strength in addressing core spending and consistent track record of scaling up accounts continues to be relevant although ubiquitous demand levels the playing field in the near term. Growth leadership in FY2022 will be a race involving more participants than in the past. LTI is well positioned for sustainable growth leadership in the medium term. Market bets and investments are oriented towards capturing the next wave of opportunity.
[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. IT Services L&T Infotech
LTI’s hiring and talent policies indicate foresight and position the company well for the war for talent, crucial given that supply is the key constraint for growth. We take into account strong growth and increase revenue estimates by 1-2%. Our EPS estimates are largely unchanged. We roll over and increase FV to Rs4,100 (Rs3,850 earlier) valuing the stock at ~26X June 2023E EPS. We maintain REDUCE rating on expensive valuations.
Maintains guidance of 14-15% net profit margin
EBIT margin declined sharply by 380 bps in the past two quarters due to consecutive quarters of wage hikes. Net profit margin declined 240 bps sequentially to 14.3% in 1QFY22. We expect EBIT margin to increase in the next few quarters on leverage from growth and benefit from levers such as pyramid, automation and higher offshore mix.
LTI has maintained guidance of 14-15% net profit margin for FY2022. We forecast 15% PAT margin aided by strong forex gains (Rs2.1 bn in FY2022E compared to just Rs93 mn in FY2021).
No new large deal announced in the quarter; pipeline is healthy
We are surprised that LTI has not announced any new large deal. The company has announced at least one such deal every quarter since the first announcement in the Mar-18 quarter.
Large deals are an integral component of LTI’s growth model. In 1QFY22 strong growth in hi-tech and growth in utilities was due to ramp up of large deals announced earlier. CEO’s comment that all four levers of growth are intact is reassuring. The large deal pipeline is healthy and broad based. LTI is confident on deal conversion as well. We believe growth momentum will not be significantly impacted by slower conversion or volatility in large deals as the strength in flow business is strong and LTI is focused on capturing this demand. We believe the large deals’ engine is healthy despite the lack of wins in the quarter.
Making the right moves to stay abreast of the war for talent
Net addition of 2,307 employees increased headcount to 38,298. Strong hiring indicates strength of underlying demand. For example, volume growth of 8.8% in June 2021 quarter was remarkably strong. Note that LTI advanced wage hike cycle from July to April for FY2022, second wage hike in a span of three months. Prudent talent policies position LTI better among mid-tier peers in the war for talent. However we are surprised with a rather high voluntary attrition rate of 15.5% despite lower concentration headcount in the high attrition city of Bengaluru.
The company has increased fresher intake to 4,500 freshers in FY2022 up from ~3,000 in FY2021. LTI will also hire 1,500 employees with 1-2 years of experience during the year and upskill them to shore up supply.
Strong broad-based revenue growth led by banking vertical
Banking vertical revenues continued to grow at a rapid pace evident in strong revenue growth of 8.8% qoq (in c/c) and an even more impressive 34.7% yoy. Strength in the banking vertical has helped LTI tide over Covid impact on manufacturing and E&U and underperformance of insurance. Combined contribution to revenues from these verticals declined 5.2% yoy, shifting mostly to the banking vertical (+4.4% yoy). While demand for banking is strong, demand is picking up well in manufacturing, E&U and insurance with opening up of discretionary spending. The hi-tech vertical posted a second consecutive quarter of strong growth aided by incremental ramp up of the Injazat deal. The deal has fully ramped up in the quarter.
Growth was broad based across both North America and Europe. Sharp decline in India was due to the absence of pass through revenues and Covid impact on government business which will rebound.
Top clients grew faster than the company average. Top 5 clients grew 6.6% while top 10 grew 5.9%.
18 KOTAK INSTITUTIONAL EQUITIES RESEARCH L&T Infotech IT Services
Foray into digital engineering expedited with acquisition of Cuelogic
LTI acquired Cuelogic in June and will be fully consolidated in September. Cuelogic is a Pune based boutique digital engineering services firm with annual revenue of US$5.5 mn and 350 headcount. Services provided by the company include cloud native web and mobile application development, software modernization and innovation lab as a service. The tuck- in acquisition will enable LTI to ramp up presence in a fast growing digital engineering space. LTI has done six small acquisitions since 2016 prior to Cuelogic with a good track record. For example acquisition of Synchordis helped position LTI as a top tier Temenos partner for core banking implementation.
Key highlights of earnings call
Vertical-wise commentary. (1) BFSI- demand continues to be strong; Insurance- healthy growth was due to ramp up of recently added logos, ramp up of a large deal announced in the previous quarter and growth in existing business. New leadership team is driving opportunities in the market; manufacturing- revenues grew ex-pass through impact. Demand environment remains healthy with continued momentum in opening up of discretionary spending; energy & utilities- growth is healthy in utilities; a large deal announced in 3QFY21 is ramping as per schedule and will further ramp up in the next few quarters; CPG/retail- healthy growth from large deal wins in FY2021 and from existing accounts; hi-tech- strong growth was from incremental ramp up of Injazat deal which has fully ramped up.
Demand outlook. Digital adoption among clients is accelerating. Discretionary spending has picked up. Demand cycle has accelerated for digital transformation and now for modern ERP as well. The demand environment is the strongest in the past 10 years and can sustain for the next 4-5 years, hence LTI is not concerned on demand. Increasingly demand is in the form of shorter duration projects executed by small agile teams where speed to market is of the essence.
Digital engineering is a significant market opportunity. Clients are shifting towards productized IT from traditional application development approach to bring faster innovation to end customers. The trend is a tailwind for digital engineering services. Prior to Cuelogic acquisition LTI was building out digital engineering capabilities organically. Addition of 350 headcount from Cuelogic will accelerate the effort. LTI is focused on strong scale up in digital engineering capabilities.
Client metrics start to improve. # of clients in US$50 mn bucket increased by 1 sequentially to 6; flat on yoy basis. Client progression in US$5 mn and US$10 mn buckets has been impressive. # of US$5 mn clients increased by 3 qoq and 7 yoy to 66 while # of US$10 mn clients increased by 3 qoq and 8 yoy to 38.
Data products business. The business has a separate sales team and go-to-market and works together with LTI account teams. Market validation and analyst recognition are improving. Client profile for both current license holders and those in the pipeline are mostly existing clients. The data products business is predicated on reducing data to decisions journey for clients. LTI believes it can provide more value to clients by combining product expertise with vertical-specific know-how compared with pure play product companies which focus mainly on horizontal capability.
Pick up in attrition. Attrition increased sharply by 290 bps to 15.2%. Attrition will remain elevated due to tight labor market and burgeoning demand.
Cloud. Cloud is all pervasive. Demand is not just for infrastructure migration, but for large scale business transformation programs. Every client discussion involves cloud.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 19 IT Services L&T Infotech
India business. Sharp decline on sequential basis is due to (1) absence of pass through revenues and (2) Covid impact. Government spending on IT projects with LTI reduced due to increase in Covid related spending. The impacted business will rebound once spending by the government normalizes. LTI will continue to be selective in government business with focus on data and ERP work.
Weak CFO conversion. CFO as a % of net profit was low at 19% due to a few factors which are temporary— (1) payout of annual incentive in advance in 1QFY22, (2) increase in DSO by 4 which is Covid related and will reverse and (3) cash outflow for pass through license which is slated to occur in 2HFY22.
Talent shortage. Industry and LTI can manage talent shortage in the medium term by creating a fresh pool of talent. Talent shortage will persist in the near term. LTI is taking measures to deal with the same and ensure that demand fulfillment ability is not impacted.
Other highlights. Deal pipeline is healthy; LTI declared special dividend of Rs10/ share; LTI intends to operate at utilization rates lower than the current level; clients are willing to give the right price for skills but want higher productivity using technologies such as AI/ML; LTI will not shy away from investments that help capture demand.
Exhibit 1: LTI: Consolidated quarterly results as per Ind-AS, March fiscal year-ends (Rs mn)
% chg. 1QFY22 1QFY22E 1QFY21 4QFY21 KIE yoy qoq FY2022E % chg. Revenue (US$ mn) 470 463 390 447 1.6 20.5 5.1 2,006 20.1 Revenues 34,625 34,144 29,492 32,694 1.4 17.4 5.9 149,912 21.2 Employee costs (22,082) (21,317) (18,232) (19,855) 3.6 21.1 11.2 (92,242) 24.2 Other operating expenses (6,066) (6,247) (5,340) (5,684) (2.9) 13.6 6.7 (27,858) 25.7 EBITDA 6,477 6,581 5,920 7,155 (1.6) 9.4 (9.5) 29,811 9.4 Depreciation (795) (857) (781) (826) (7.2) 1.8 (3.8) (3,585) 7.8 EBIT 5,682 5,724 5,139 6,329 (0.7) 10.6 (10.2) 26,226 9.6 Other Income 1,206 628 648 902 92.0 86.1 33.7 2,805 5.8 Forex gains/(loss) 10 361 10 128 (97.2) — (92.2) 2,063 2,118.6 Finance costs (177) (189) (208) (191) (6.1) (14.9) (7.3) (754) (4) Profit Before Tax 6,721 6,525 5,589 7,168 3.0 20.3 (6.2) 30,340 17.2 Provision for Tax (1,753) (1,670) (1,425) (1,711) 4.9 23.0 2.5 (7,888) 21.4 Minority Interest (5) — 2 (5) (21) Net Profit (before EO) 4,963 4,854 4,166 5,452 2.2 19.1 (9.0) 22,430 15.9 Extraordinary charge (net of taxes) — — — — — Net Profit- Reported 4,963 4,854 4,166 5,452 2.2 19.1 (9.0) 22,430 15.9
Recurring EPS (Rs/share) 28.3 27.6 23.7 31.0 2.5 19.1 (8.9) 127.4 15.9
As % of revenues EBITDA margin (post Fx gain/loss) 18.7 20.3 20.1 22.3 21.3 EBITDA margin (ex FX gain/loss) 18.7 19.3 20.1 21.9 19.9 EBIT margin (post forex gains/losses) 16.4 17.8 17.5 19.7 18.9 EBIT margin (ex Fx gain/loss) 16.4 16.8 17.4 19.4 17.5 Net profit margin (%) 14.3 14.2 14.1 16.7 15.0 Effective tax rate (%) 26.1 25.6 25.5 23.9 26.0
Source: Company, Kotak Institutional Equities estimates
20 KOTAK INSTITUTIONAL EQUITIES RESEARCH L&T Infotech IT Services
Exhibit 2: Key changes to estimates, March fiscal year-ends, 2022-24E (Rs mn)
New Old Change (%) 2022E 2023E 2024E 2022E 2023E 2024E 2022E 2023E 2024E Revenues 149,912 179,011 208,666 147,746 175,760 205,112 1.5 1.8 1.7 EBITDA (before Fx gain/(loss)) 29,811 34,842 40,629 29,557 33,889 39,177 0.9 2.8 3.7 EBIT (before Fx gain/(loss)) 26,226 31,166 36,382 26,096 30,323 35,415 0.5 2.8 2.7 Net profit 22,430 26,401 30,785 22,341 26,276 30,407 0.4 0.5 1.2 EPS (Rs/ share) 127.4 150.0 174.9 126.9 149.3 172.8 0.4 0.5 1.2
Revenues (US$ mn) 2,006 2,325 2,675 1,970 2,283 2,630 1.8 1.8 1.7 US$ revenue growth (%) 20.1 15.9 15.1 18.0 15.9 15.2 Revenue growth (c/c, %) 19.7 15.9 15.1 15.2 Revenue growth (organic c/c, %) 19.4 15.9 15.1 0.0 0.0 15.2 EBITDA margin (before Fx gain/(loss)) (%) 19.9 19.5 19.5 20.0 19.3 19.1 -12 bps 18 bps 37 bps EBIT margin (before Fx gain/(loss)) (%) 17.5 17.4 17.4 17.7 17.3 17.3 -17 bps 16 bps 17 bps Net profit margin (%) 15.0 14.7 14.8 15.1 15.0 14.8 Forex gains/(loss) 2,063 2,034 2,006 1,574 1,997 1,972 31.1 1.8 1.7 Exchange rate (Rs/US$) 74.7 77.0 78.0 75.0 77.0 78.0 (0.3) 0.0 0.0
Source: Kotak Institutional Equities estimates
Exhibit 3: Revenue growth across geographies, verticals and service lines (Jun 2021)
Revenues Growth (%) Contribution to C/C growth (%) US$ mn qoq yoy revenues (%) qoq yoy Total revenues 470 5.1 20.5 100.0 4.8 17.8 Geographical split of revenues North America 315 6.4 14.0 67.0 6.2 13.5 Europe 78 5.7 38.9 16.6 4.9 27.5 India 32 (20.9) 17.0 6.7 (19.9) 14.6 RoW 45 20.1 46.4 9.6 19.1 42.1 Vertical split of revenues Banking and financial services 151 9.9 39.6 32.1 8.8 34.7 Insurance 68 5.1 1.6 14.5 5.0 0.4 Manufacturing 71 (6.7) 14.4 15.0 (6.7) 12.6 Energy & utilities 43 5.1 1.5 9.1 4.6 (0.1) CPG retail and pharma 50 0.1 12.1 10.7 4.2 8.7 High-Tech, Media & Entertainment 60 13.1 31.9 12.7 13.2 31.2 Others 28 0.0 31.6 5.9 0.5 28.5 Service line split of revenues ADM and Testing 160 7.3 15.1 34.0 7.1 12.9 Enterprise solutions 144 (0.1) 24.5 30.7 (0.5) 21.1 Cloud infrastructure & security 70 3.7 32.0 14.9 2.8 28.4 Analytics, AI and Cognitive 55 10.8 12.8 11.7 10.3 11.3 Enterprise integration and mobility 41 11.5 21.9 8.7 12.0 19.5 Revenue metrics Top 5 clients 133 6.6 11.4 28.2 Top 10 clients 194 5.9 14.6 41.3 Top 20 clients 260 4.3 14.3 55.2
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 21 IT Services L&T Infotech
Exhibit 4: YoY revenue growth trend
c/c yoy growth rate (%) 25 22.9 22.9 20.6 18.7 20 17.5 17.4 17.8 16.4 14.2 15 12.9 12.1 11.8 11.7 11.9 10.3 10.2 10.6 10.5 10 7.2 7.4 7.1
5
0
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
Jun-21
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Mar-17
Mar-18
Mar-19 Mar-20 Mar-21
Source: Company, Kotak Institutional Equities
Exhibit 5: SG&A increases 220 bps to 12.3%
SG&A as a % of revenues 20 18.5 17.9 17.1 18 17.0 16.8 16.8 16.416.2 16.2 15.9 15.415.5 15.7 16 14.8 14.6 14.2 14.7 13.7 13.6 14 13.0 12.4 12.0 12.3 11.7 12 10.1
10
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
Jun-21
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20 Mar-21
Source: Company, Kotak Institutional Equities
22 KOTAK INSTITUTIONAL EQUITIES RESEARCH L&T Infotech IT Services
Exhibit 6: Gross margin declines 100 bps sequentially to 31% due to wage hike partially offset by productivity improvements
Gross margin (%) 37 36.4 35.8 35.4 35.235.1 35.0 34.8 34.835.0 34.5 35 34.3 33.833.9 34.0 33.5 33.333.5 34.0 33.1 32.832.5 33 31.831.7 32.0 31.0 31
29
27
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
Jun-21
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Mar-16
Mar-17
Mar-18
Mar-19 Mar-20 Mar-21
Source: Company, Kotak Institutional Equities
Exhibit 7: Trend in CFO as a % of net profit
CFO as a % of net profit 250 225.9
200 171.6 152.4 147.3 141.5 150 130.6 130.9 116.6 102.2 96.5 93.7 98.0 100 81.4 82.3 70.7 53.1 44.0 50 12.0 19.0
0
Jun-17
Jun-18
Jun-19
Jun-20
Jun-21
Sep-17
Sep-18
Sep-19
Sep-20
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Mar-17
Mar-18
Mar-19 Mar-20 Mar-21
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 23 IT Services L&T Infotech
Exhibit 8: Receivable days (including unbilled) trend: DSO increases by 4 sequentially to 98
Receivable days (LTM basis) 130 124
120 115 114 109 110 110 110 106 105 106 103 103 104 98 98 99 98 100 94 93 94 91 90
80
Jun-17
Jun-18
Jun-19
Jun-20
Jun-21
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Mar-17
Mar-18
Mar-19 Mar-20 Mar-21
Source: Company, Kotak Institutional Equities
Exhibit 9: Sharp uptick in attrition rate to 15.2%
Attrition (%) 19.7 19.5 20 18.5 18.5 18.4 18.4 18.1 18.3 17.5 17.7 18 16.9 16.5 16.5
16 15 15.115.3 15.2 15.2 14.7 14.614.8 13.5 14 12.4 12.3 12
10
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
Jun-21
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Mar-16
Mar-17
Mar-18
Mar-19 Mar-20 Mar-21
Source: Company, Kotak Institutional Equities
24 KOTAK INSTITUTIONAL EQUITIES RESEARCH L&T Infotech IT Services
Exhibit 10: No large deals announced in 1QFY22, pipeline is healthy List of large deals announced by LTI since Mar-18 quarter
Period Vertical Nature of services New/Existing TCV (US$ mn) Mar-18 E&U Application management and IT operations support New logo 25 Mar-18 BFS Core banking NA 25 Jun-18 CPG, retail and pharma ERP, data & analytics Existing 50 Sep-18 CPG, retail and pharma Managed services Existing 55 Dec-18 BFS Primary IT partner- multiple offerings Existing 50 Mar-19 Manufacturing Application operations Existing 92 Mar-19 Insurance IT landscape modernization New logo 40 Jun-19 Insurance IT infrastructure and IT security operations New logo 44 Sep-19 Energy & Utilties Cloud and infrastructure managed services New logo 53 Sep-19 Energy & Utilties Greenfield SAP S4/ HANA implementation New logo 15 Sep-19 BFS Managed services New logo 31 Dec-19 Manufacturing Application operations NA 60 Dec-19 Others Data management New logo 18 Mar-20 CPG, retail and pharma Managed services- apps and infra New logo 40 Mar-20 Others Applications, data and analytics NA 73 Jun-20 BFS IT infrastructure, cyber security, cloud migration NA 20 Sep-20 Others Data and analytics New logo 41 Dec-20 Hi-tech Infrastriucture and application operations support New logo 204 Dec-20 Energy & Utilties Application managed services New logo 74 Mar-21 Insurance Vendor consolidation Existing 21
Mar-21 BFS Core banking New logo 45
Source: Company, Kotak Institutional Equities
Exhibit 11: Segmental margin trend
Change (bps) Verticals Margin (%) QoQ YoY Revenue mix (%) BFSI 19.7 (140) (67) 46.6 Manufacturing 19.2 (292) (7) 15.0 E&U 22.7 235 600 9.1 Hi-tech, media & entertainment 14.3 (431) (657) 12.7 CPG, retail, pharma & others 17.6 (1,064) (489) 16.6 Total — (2,188) (1,919) 100.0
Source: Company, Kotak Institutional Equities
Exhibit 12: List of acquisitions since 2016
Date Company Country Capabilities Consideration (US$ mn) Jun-21 Cuelogic India Digital engineering and outsourced software product development 8.4 Oct-19 PowerupCloud Technologies India Cloud consulting, cloud managed services, Al and Data Analytics 15.0 Jul-19 Lymbyc India AI,ML and advanced analytics 5.5 Feb-19 Nielsen+Partners Germany Temenos WealthSuite impementation 31.6 Jan-19 Ruletronics US Pega implementation 7.5 Nov-17 Synchordis Luxembourg Core banking Temenos implementation 33.6 Oct-16 Augment IQ India Big data and analytics 1.0
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 25 IT Services L&T Infotech
Exhibit 13: Key model assumptions, March fiscal year ends, 2015-2024E
2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E INR/USD rate 65.9 67.0 64.5 70.0 71.4 74.1 74.7 77.0 78.0 78.0 Revenues (US$ mn) 887 970 1,132 1,349 1,525 1,670 2,006 2,325 2,675 3,010 % growth 9.5 9.3 16.7 19.1 13.0 9.5 20.1 15.9 15.1 12.5 C/c revenue growth (%) 10.5 13.5 10.2 14.7 20.9 14.2 8.8 19.7 15.4 16.0 C/c revenue growth (organic %) 9.3 13.5 10.2 13.9 19.4 13.1 8.6 19.5 15.4 16.0 EBITDA margin (%) 20.2 17.5 18.9 16.3 19.9 18.7 22.0 19.9 19.5 19.5 EBIT margin (%) 17.0 14.6 16.2 14.1 18.4 16.1 19.3 17.5 17.4 17.4
Headcount 19,479 20,072 21,023 24,139 28,169 31,437 35,991 41,443 47,326 53,726 Blended pricing change (USD, %) (5.4) 3.2 (1.6) 0.5 0.7 (0.7) 0.1 (2.0) 1.3 2.2
Source: Company, Kotak Institutional Equities estimates
26 KOTAK INSTITUTIONAL EQUITIES RESEARCH L&T Infotech IT Services
Exhibit 14: LTI: Key operating metrics
Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Revenues (US$ mn) 364 394 410 390 405 428 447 470 qoq growth (%) 2.0 8.4 3.9 (4.8) 3.6 5.8 4.6 5.1 Revenues (Rs mn) 25,707 28,111 30,119 29,492 29,984 31,528 32,694 34,625 Exchange rate 70.7 71.3 73.5 75.6 74.1 73.7 73.1 73.6 Revenue by verticals (%) Banking and financial services 27.1 27.8 27.6 27.7 29.9 30.6 30.7 32.1 Insurance 18.7 17.7 16.8 17.2 16.0 15.0 14.5 14.5 Manufacturing 16.4 17.5 18.0 15.8 16.2 16.8 16.9 15.0 Energy & utilities 12.1 11.3 11.4 10.8 10.6 10.0 9.1 9.1 CPG retail and pharma 11.5 11.2 11.2 11.5 11.0 10.9 10.8 10.7 High-Tech, Media & Entertainment 10.8 10.8 11.0 11.6 10.6 10.6 11.8 12.7 Others 3.5 3.7 4.0 5.4 5.7 6.0 6.2 5.9 Revenue by service lines (%) - new classification ADM ADM and Testing 36.1 35.8 34.7 35.6 36.0 33.6 33.3 34.0 Enterprise solutions 29.5 28.7 30.0 29.7 30.8 31.4 32.3 30.7 IMS 11.1 11.5 12.6 13.6 14.4 14.3 15.1 14.9 Testing Analytics, AI and Cognitive 11.3 12.8 11.6 12.5 10.6 11.9 11.1 11.7 Enterprise integration and mobility 9.0 8.5 8.7 8.6 8.3 8.8 8.2 8.7 Platform based solutions 3.0 2.7 2.5 Revenue by geographies (%) - new classification North America 68.7 69.5 68.9 70.8 68.7 67.9 66.2 67.0 Europe 16.4 15.6 15.1 14.4 16.1 16.1 16.5 16.6 India 6.0 7.6 7.8 6.9 6.9 8.6 8.9 6.7 RoW 8.9 7.4 8.1 7.9 8.2 7.4 8.4 9.6 Onsite-Offshore mix (%) Onsite 22.0 21.9 21.5 21.1 19.4 18.4 17.9 17.3 Offshore 78.0 78.1 78.5 78.9 80.6 81.6 82.1 82.7 Revenue mix (%) Onsite 48.6 49.0 50.9 49.2 46.5 44.3 44.1 42.7 Offshore 51.4 51.0 49.1 50.8 53.5 55.7 55.9 57.3 Billed person months Onsite 14,383 15,198 15,044 14,634 13,887 13,836 14,044 14,791 Offshore 51,143 54,133 55,034 54,858 57,533 61,304 64,495 70,647 Total 65,526 69,331 70,078 69,492 71,420 75,140 78,539 85,438 Utilization (%) Including trainees 78.9 79.2 79.3 79.4 80.5 81.1 80.8 83.7 Excluding trainees 80.6 81.3 80.6 79.6 82.0 84.1 82.2 84.1 Client metrics Clients billed 366 429 424 409 419 419 427 438 Clients added 20 29 27 16 26 22 14 23 Revenue concentration (%) Top 1 client Top 5 clients 31.7 32.8 31.2 30.5 30.0 29.3 27.8 28.2 Top 10 clients 45.5 46.8 45.8 43.4 42.9 42.0 41.0 41.3 Top 20 clients 61.4 62.0 59.8 58.2 57.8 57.1 55.6 55.2 Client size (ttm) > US$1 mn 137 153 165 164 169 165 167 169 > US$5 mn 48 48 53 59 61 60 63 66 > US$10 mn 27 28 27 30 32 32 35 38 > US$20 mn 18 18 16 16 16 18 18 18 > US$50 mn 6 6 6 6 6 5 5 6 >US$100 mn 1 1 1 1 1 1 1 1 Employee metrics Total employees (consolidated) 30,979 31,419 31,437 31,477 32,455 33,983 35,991 38,298 Development 29,266 29,669 29,683 29,712 30,682 32,194 34,176 36,431 Sales and support 1,713 1,750 1,754 1,765 1,773 1,789 1,815 1,867 Attrition (%) 18.4 17.7 16.5 15.2 13.5 12.4 12.3 15.2
Note (a) Platform solutions grouped under Enterprise Solutions from 1QFY21
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 27 IT Services L&T Infotech
Exhibit 15: Condensed consolidated financials for LTIT, March fiscal year-ends, 2017-24E (Rs mn)
2017 2018 2019 2020 2021 2022E 2023E 2024E Profit model Revenues 65,009 73,065 94,458 108,786 123,698 149,912 179,011 208,666 EBITDA 12,302 11,876 18,833 20,292 27,251 29,811 34,842 40,629 Depreciation and amortization (1,779) (1,562) (1,472) (2,730) (3,325) (3,585) (3,676) (4,247) EBIT 10,523 10,314 17,361 17,562 23,926 26,226 31,166 36,382 Other income 222 744 1,115 1,171 2,651 2,805 3,339 4,156 Forex gains/(loss) 1,645 3,357 1,826 2,121 93 2,063 2,034 2,006 Interest expense (32) — — (826) (788) (754) (834) (914) Pretax profits 12,358 14,415 20,302 20,028 25,882 30,340 35,705 41,630 Tax (2,649) (3,291) (5,123) (4,825) (6,500) (7,888) (9,283) (10,824) Adjusted profit from continuing ops 9,707 11,120 15,184 15,198 19,361 22,430 26,401 30,785 Adj diluted EPS (Rs) 55.8 63.5 86.4 86.6 110.0 127.4 150.0 174.9 Weighted avg fully diluted shares (mn) 174.0 175.0 175.6 175.5 176.0 176.0 176.0 176.0 Balance sheet Total equity 31,443 38,598 48,938 54,040 73,034 88,072 106,201 127,482 Borrowings 0 1,042 936 3,204 859 859 859 859 Long term liabilities 456 411 347 9,230 8,446 9,446 10,446 11,446 Current liabilities 12,437 13,762 16,463 21,764 24,715 28,296 33,477 38,753 Total liabilities and equity 44,344 53,826 66,692 88,249 107,091 126,731 151,062 178,640 Tangible fixed assets 2,578 2,508 3,052 11,723 10,078 11,686 13,744 15,911 Goodwill and Intangibles 2,841 4,298 6,247 7,474 8,982 8,605 8,299 7,977 Other non-current assets 5,625 5,010 5,577 5,170 6,056 6,306 6,556 6,806 Cash and cash equivalents 13,201 16,276 21,552 27,438 43,876 49,608 61,768 76,882 Other current assets 20,086 25,666 30,149 35,852 37,437 49,863 60,033 70,401 Total assets 44,344 53,826 66,692 88,249 107,091 126,731 151,062 178,640 Cash flow Operating cash flow, excl. w-capital 10,980 11,814 16,340 17,837 21,286 23,986 27,593 31,812 Working capital changes 2,643 (3,839) (3,048) (2,313) 2,704 (7,989) (5,239) (5,343) Capital expenditure (754) (983) 561 (1,977) (2,239) (4,817) (5,427) (6,093) Acquisitions — — (2,092) (488) (426) — — — Other income (net) (248) 540 762 (360) 1,393 3,805 4,339 5,156 Free cash flow (includes other income) 12,621 7,532 12,523 12,699 22,718 14,985 21,266 25,532 Key ratios/metrics EBITDA margin before forex gains/loss (%) 18.9 16.3 19.9 18.7 22.0 19.9 19.5 19.5 EBIT margin before forex gains/loss (%) 16.2 14.1 18.4 16.1 19.3 17.5 17.4 17.4 NPM (excluding extraordinaries) (%) 14.9 15.2 16.1 14.0 15.7 15.0 14.7 14.8 US$ revenues from continuing ops 970 1,132 1,349 1,525 1,670 2,006 2,325 2,675 US$ revenue growth (%) 9.3 16.7 19.1 13.0 9.5 20.1 15.9 15.1 Net cash and cash equivalents 13,201 15,234 20,616 15,435 35,448 40,180 51,340 65,454 Effective tax rate (%) 21.4 22.8 25.2 24.1 25.1 26.0 26.0 26.0 RoAE (%) 37.6 31.8 34.7 29.5 30.5 27.8 27.2 26.3 RoACE (%) 38.1 28.7 38.5 30.1 32.1 29.0 28.9 28.3
Source: Company, Kotak Institutional Equities estimates
28 KOTAK INSTITUTIONAL EQUITIES RESEARCH SELL HDFC AMC (HDFCAMC) https://ultraviewer.et/en/own Diversified Financials JULY 16, 2021 load.html RESULT Sector view: Attractive
Inflows buoy near term, long-term risks unchanged. HDFC AMC’s 1QFY22 CMP (`): 3,089 performance was buoyed by higher equity AUMs although offset by higher expenses, mostly on Fair Value (`): 2,350 ESOPs. We expect near-term inflows to remain strong, supporting its core profitability. Risks from BSE-30: 53,140 passives and higher distributor payouts remain key concerns, driving our SELL rating; FV stands at Rs2,350. However, HDFC AMC’s change in outlook to assertively embrace technology on the distribution front and pursue an ETF strategy are key positives. HDFC AMC Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 3,089/2,350/SELL EPS (Rs) 62.3 69.7 82.8 52-week range (Rs) (high-low) 3,359-2,070 EPS growth (%) 5.1 11.9 18.9 Mcap (bn) (Rs/US$) 659/8.9 P/E (X) 49.6 44.3 37.3 QUICK NUMBERS ADTV-3M (bn) (Rs/US$) 0.8/0.1 P/B (X) 13.8 11.9 10.2 Shareholding pattern (%) BVPS 224.3 260.5 302.5 PAT up 14% yoy; Promoters 73.9 RoE (%) 30.1 28.8 29.5 core PBT up 27% FPIs/MFs/BFIs 9.4/1.1/4.2 Div. yield (%) 1.1 1.2 1.5 Price performance (%) 1M 3M 12M Revenue (Rs bn) 19 22 25 yoy Absolute 1.1 5.4 26.1 Core PBT (Rs bn) 14 17 20 Rel. to BSE-30 (0.1) (3.1) (13.4) Net profits (Rs bn) 13 15 18 QAAUM up 17% yoy/flat qoq
Core PBT ratio down Equity market buoyancy will support in near term 1 bps qoq to 36.7 We believe that capital market buoyancy will benefit HDFC AMC and its peers in the near term. bps The AMC industry reported net inflows of Rs201 bn in 1QFY22 as compared to net outflows of Rs662 bn in FY2021; gross inflows were higher at Rs300 bn in 1QFY22 versus quarterly average of Rs225 bn in FY2021. NFOs contributed to strong gross inflows during the quarter and HDFC AMC raised ~Rs30 bn from its two NFOs. With multiple new launches on its way; AAUM growth will likely remain strong at ~18% in FY2022E.
HDFC AMC has issued large ESOPs to select employees; we expect the overall ESOP cost charged to the P&L to remain high at Rs600 mn in FY2022E (12% of ex-ESOP expenses). Thus, while HDFC AMC manages expenses sharply, high ESOP expenses will temper its financials periodically; strong equity inflows will, however, help offset the impact in FY2022E.
Three key takeaways from the earnings call
We picked three key takeaways from HDFC AMC’s earnings call. (1) Discussions on competition Dipanjan Ghosh from passive funds and technology-based aggregators have increased significantly even as excitement in the near-term inflows remains high. (2) HDFC AMC seems to be more open to participate in the ETF market; apart from multiple NFOs related to actively-managed thematic Nischint Chawathe funds, new passive funds are also on its cards. (3) The company will aggressively use technology to improve customer experience and its internal productivity ratios as well as work more closely M B Mahesh, CFA with online technology aggregators to tap the younger investors, who are currently investing directly in equity markets. Abhijeet Sakhare Tweak estimates; SELL remains unchanged in light of imminent ETF risk
We are tweaking our core PBT estimates by 0-1% to reflect higher equity flows and expenses. We expect HDFC AMC to deliver 20% core PBT growth in FY2022E (low base and strong Ashlesh Sonje inflows), followed by 16-17% over the next two years. We continue to be concerned by imminent risk of ETF that will pull down the profitability of the actively-managed asset management business, driving a moderate PE multiple in our DCF; we roll over FV to Rs2,350 Jatin Sangwan (26.2X EPS September 2023E) from Rs2,260.
[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. Diversified Financials HDFC AMC
1QFY22 highlights
HDFC AMC reported PAT of Rs3.5 bn, up 15% yoy. High one-off ESOP expense in 1QFY22 and lower tax rate in the base quarter drag PAT growth even as strong other income (supported by one-off gains) provided cushion. Core PBT (adjusted for other income and ESOP expense) growth was strong at 29% yoy. Strong growth in core PBT was led by robust QAAUM growth (up 17% yoy on a low base of 1QFY21; flat qoq), rise in share of high- yielding actively-managed equity-oriented mix (from low base of 1QFY21) and stringent control over overheads.
Other income was high at Rs1 bn in 1QFY22 versus Rs426 mn in 4QFY21 and Rs798 mn in 1QFY21 – this was led by higher MTM gains, increase in investment book and one-off gains from sale of financial instruments linked to a stressed asset (Essel group).
QAAUM flat qoq; market share in actively-managed equity-oriented segment down further. Yoy growth in QAAUM was high at 17% even as it was broadly flat qoq. Closing AUM was, however, up 6% qoq. The share of actively-managed equity-oriented funds (MAAUM) increased to 45.2% in June 2021 from 43.7% in March 2020 (low at 39% in 1QFY21). The company, however, continued to lose market share in the actively- managed equity-oriented segment. Market share declined to 12.7% in 1QFY22 (13% in FY2021) from 16.2% in FY2018 and 18.5% in FY2015.
Calculated yields moderate a bit even as high yielding actively-managed equity- oriented mix increases. Calculated yields (revenues to calculated average AUM) moderated a bit to 48.6 bps in 1QFY22 from 48.9 bps in 4QFY21 (yields were low at 47.4 bps in 1QFY21 due to high MTM losses leading to lower share of actively-managed equity AUM during the quarter) despite ~100 bps qoq rise in share of high-yielding equity- oriented funds. Management guided that higher growth in the larger schemes with relatively lower TER has led to stable qoq yields despite rising mix of high-yielding asset classes.
High ESOP expenses and one-off employee payouts in 1QFY22. Overall expense growth was high at 28% yoy due to one-off ESOP expenses and high employee payouts. Operating expense growth (adjusted for ESOPs) was modest at 12% yoy owing to strong control over overheads (other expenses fat yoy). Growth in employee expenses (excluding ESOP expenses) was, however, strong at 25% in 1QFY22 due to annual increments paid out during the quarter. Additionally, the company incurred one-off ESOP expenses of Rs176 mn in 1QFY22 (Rs73.5 mn in 4QFY21 and nil in the base quarter).
. Calculated core cost-to-income ratio (adjusted for EOSP expenses) declined 215 bps yoy/70 bps qoq to 20.4% reflecting stringent control overheads. Investment in technology and digital initiatives, however, remained high.
NFOs and gradual revival in fund performance likely to support inflows
In order to attract fresh inflows and retain the dominant market position, the company is following a four-pronged approach – (1) diversifying of investment styles by expanding the investment team to include fund managers with different investment styles, (2) adding new products to the bouquet (international funds, passive funds and sector-based thematic funds), (3) incentivizing distributors to push select schemes in some cases and (4) actively embracing digital initiatives and strategic partnerships to increase flows from tech-savvy customers.
Fund performance on a rolling basis has started to improve and management believes that investors will take cognizance of the gradual revival in returns of select schemes (relative to peers). Additionally, its focus on increasing digital footprint and targeting tech-savvy customer through various digital channels is expected to support gradual improvement in flows across various equity schemes.
30 KOTAK INSTITUTIONAL EQUITIES RESEARCH HDFC AMC Diversified Financials
Exhibit 1: HDFC AMC – quarterly summary March fiscal year-end, 1QFY22 (Rs mn)
Change (%) 1QFY22 1QFY22E 1QFY21 4QFY21 1QFY22E 1QFY21 4QFY21 2022E 2021 Change (%) 2023E Income statement (Rs mn) Revenue from operations 5,071 5,081 4,115 5,029 (0) 23 1 21,716 18,525 17 24,836 Other income 1,009 500 798 426 102 26 137 3,577 3,492 2 4,152 Total income 6,080 5,581 4,913 5,456 9 24 11 25,293 22,017 15 28,988 Operating expenses 1,419 1,212 1,109 1,226 17 28 16 5,478 4,528 21 5,379 Employee expense 835 622 526 638 34 59 31 3,013 2,268 33 2,755 Depreciation expense 135 140 137 136 (4) (2) (1) 582 554 5 611 Other expenses 449 450 446 451 (0) 1 (0) 1,883 1,706 10 2,014 Profit before tax 4,661 4,369 3,804 4,230 7 23 10 19,816 17,490 13 23,608 Taxes 1,207 1,049 780 1,069 15 55 13 4,954 4,232 17 5,902 Profit after tax 3,455 3,321 3,024 3,161 4 14 9 14,862 13,258 12 17,706 Core PBT 3,828 3,869 3,006 3,877 (1) 27 (1) 16,839 14,071 20 19,607 Tax rate (%) 26 24 21 25 189 bps 538 bps 61 bps 25 24 80 bps 25 Closing AUM (Rs bn) MF AUM 4,187 4,110 3,575 3,955 2 17 6 4,478 3,955 13 5,180 PMS and SMA AUM 105 100 94 97 5 12 8 112 97 15 168 Overall closing AUM 4,292 4,210 3,669 4,052 2 17 6 4,590 4,052 13 5,348 Closing MF AUM mix (Rs bn) Equity 1,863 1,409 1,701 32 10 2,028 1,701 19 2,404 Debt 1,549 1,055 1,523 47 2 1,629 1,522 7 1,832 Liquid 670 1,033 637 (35) 5 689 638 8 772 Others 109 79 91 38 20 132 94 40 172 Overall 4,191 4,110 3,575 3,955 2 17 6 4,478 3,955 13 5,180 Closing MF AUM mix (%) Equity 45 39 43 510 bps 150 bps 45 43 230 bps 46 Debt 37 30 39 750 bps -150 bps 36 38 -212 bps 35 Liquid 16 29 16 -1290 bps -10 bps 15 16 -74 bps 15 Others 3 2 2 40 bps 30 bps 3 2 56 bps 3 QAAUM mix (Rs bn) Equity 1,776 1,318 1,712 35 4 Debt 1,568 990 1,588 58 (1) Liquid 725 1,186 769 (39) (6) Others 100 68 87 48 15 Overall 4,169 3,562 4,156 17 0 QAAUM mix (%) Equity 43 37 41 560 bps 140 bps Debt 38 28 38 980 bps -60 bps Liquid 17 33 19 -1590 bps -110 bps Others 2 2 2 50 bps 30 bps Key ratios Overall yields (bps) 48.6 49.2 47.4 48.9 -1 bps 1 bps 0 bps 50.3 50.6 0 bps 50.0 Core PBT (bps) 36.7 37.5 34.6 37.7 -1 bps 2 bps -1 bps 39.0 38.4 1 bps 39.5 RoAAUM (bps) 33.1 32.2 34.8 30.7 1 bps -2 bps 2 bps 34.4 36.2 -2 bps 35.6 Cost-to-income 23.3 21.7 22.6 22.5 162 bps 75 bps 87 bps 21.7 20.6 109 bps 18.6
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 31 Diversified Financials HDFC AMC
Exhibit 2: Core PBT ratio has dropped from peak levels Key ratio for HDFC AMC, March fiscal year-ends, 4QFY19-1QFY22 (Rs bn)
Yields (LHS) Core PBT ratio (RHS) RoAAUM (RHS) 70 45 42.3 42.1 40.9 40.4 40.2 56 41 38.2 37.8 37.7 39.5 36.7 42 37 34.6 37.7 37.2 37.0
28 34.8 33 33.1 31.9 32.3 14 30.7 29
57.8 55.9 53.4 55.4 28.253.8 47.4 49.9 49.3 48.9 48.6 0 25 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 1QFY22
Source: Company, Kotak Institutional Equities
Exhibit 3: HDFC AMC has lost market share in actively-managed equity-oriented business over the past few years Actively-managed equity-oriented MAAUM market share, March fiscal year-ends, 2014-20, 1QFY22 (%)
2014 2015 2016 2017 2018 2019 2020 2021 1QFY22 Axis AMC 1.5 2.3 3.1 3.3 3.6 4.6 6.8 8.0 8.1 DSP Mutual Fund 4.5 4.1 3.7 4.4 4.4 3.9 3.9 4.1 4.2 Franklin Templeton 7.1 6.8 7.5 7.5 5.6 5.2 4.3 3.7 3.4 HDFC AMC 19.9 18.5 15.1 15.8 16.2 15.6 14.4 13.0 12.7 ICICI Prudential AMC 11.2 13.5 14.2 15.2 15.0 14.3 13.5 12.5 12.3 IDFC Mutual fund 4.0 3.8 2.9 2.2 2.1 2.2 2.6 2.0 1.9 Kotak AMC 1.8 2.5 3.2 3.7 4.7 5.1 6.4 6.7 6.9 Mirae AMC 0.3 0.5 0.7 1.2 1.5 2.2 3.5 4.7 4.9 Nippon Life India AMC 12.3 12.2 11.2 9.7 9.2 8.9 7.4 6.9 6.8 SBI AMC 7.3 6.1 7.0 8.0 7.9 8.9 9.7 10.2 10.2 Tata AMC 2.2 2.0 2.5 2.1 1.7 2.3 2.3 2.5 2.7 UTI AMC 10.6 8.7 7.4 6.3 4.8 4.7 4.4 4.8 4.8 Total of above players 88.8 88.1 86.4 88.2 86.1 86.5 86.9 86.3 85.9 Top 10 85.2 83.3 80.2 82.7 80.7 79.9 78.5 78.0 77.8 Others 11.2 11.9 13.6 11.8 13.9 13.5 13.1 13.7 14.1
Source: AMFI
32 KOTAK INSTITUTIONAL EQUITIES RESEARCH HDFC AMC Diversified Financials
Exhibit 4: Actively-managed equity-oriented AUM increased qoq in 1QFY22 Share of actively-managed equity MAAUM to overall MAAUM, March fiscal year-ends, 2014-20, 1QFY22 (%)
2014 2015 2016 2017 2018 2019 2020 2021 1QFY22 Axis AMC 18.5 30.9 33.4 33.3 44.9 52.2 50.6 55.4 56.3 DSP Mutual Fund 28.4 41.9 40.9 40.7 47.6 51.9 51.7 57.1 60.5 Franklin Templeton 30.3 35.5 48.1 54.3 51.9 44.5 42.4 63.7 83.3 HDFC AMC 34.7 41.8 35.8 40.3 50.4 47.2 42.0 43.7 45.2 ICICI Prudential AMC 21.0 32.6 33.5 37.3 45.8 46.4 41.1 41.9 44.3 IDFC Mutual fund 19.4 26.6 24.1 23.0 29.4 31.6 26.2 22.6 23.2 Kotak AMC 10.6 21.2 22.3 23.7 36.1 35.0 36.4 39.5 41.6 Mirae AMC 4.0 93.3 93.5 93.4 86.4 87.8 87.6 89.6 89.5 Nippon Life India AMC 23.6 32.2 29.6 27.5 35.5 40.7 39.3 41.3 42.0 SBI AMC 21.4 28.9 26.7 30.0 33.9 31.9 27.3 27.6 29.0 Tata AMC 19.3 26.6 32.2 29.6 34.4 44.1 48.7 56.6 61.0 UTI AMC 28.9 34.7 29.8 27.9 30.4 31.6 32.5 35.2 37.5 Total of above players 23.2 32.3 31.4 33.2 40.7 41.4 38.6 41.2 43.2 Others 21.6 29.2 28.7 30.1 37.1 38.5 36.6 39.6 41.7
Source: AMFI
Decline in individual accounts likely arrested
Exhibit 5: Sharp 5% yoy decline in individual live accounts; broadly flat qoq Individual live accounts, March fiscal year-ends, 2013-21, 1QFY22
Individual live accounts (LHS) YoY (RHS) (# mn) (%) 10 30.8 37.5
8 25.0 15.8 13.1 10.9 6 7.9 12.5 2.6
4 (5.1) (5.1) 0.0 (9.6)
2 -12.5
4.9 4.4 5.1 5.5 6.2 8.0 9.1 9.3 8.9 8.9 0 -25.0 2013 2014 2015 2016 2017 2018 2019 2020 2021 1QFY22
Source: Company, Kotak Institutional Equities
SIP market share has moderated a bit
HDFC AMC’s SIP inflows moderated a bit qoq even as the industry continued to witness gradual rise in SIP inflows. Market share in SIP inflows moderated to ~11% in 1QFY22 from peak levels of ~15-19% over 1QFY18-1QFY20.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 33 Diversified Financials HDFC AMC
Exhibit 6: SIPs moderated a bit qoq in 1QFY22 Monthly systematic inflows (for respective periods), March fiscal year-ends, March 2013-June 2021
Monthly net systematic inflows (Rs bn) 13.0
10.4
7.8 12.712.8 11.511.6 11.711.8 12.2 10.7 11.5 11.3 5.2 10.0 10.49.8 9.6 9.0 9.1 6.8 2.6 5.5 4.3 4.7 5.0 4.9 3.8 3.2 3.1
0.0
Jun-18
Jun-19
Jun-20
Jun-21
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
Dec-17
Dec-18
Dec-19
Dec-20
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19 Mar-20 Mar-21 Notes: (a) Monthly average SIP inflows have been multiplied by 3 to achieve quarterly inflows.
Source: Company, Kotak Institutional Equities
Exhibit 7: Market share in SIP inflows has declined from peak levels Market share in SIP inflows (average), March fiscal year-ends, 1QFY18-1QFY22
SIP market share (%) 20 19.2 18.3 18.1 18 17.1 16.2 15.5 15.5 16 15.0 14.6 14.6 14.6
14 13.2 12.6 11.8 11.5 11.6 12 11.1
10
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21
3QFY21 4QFY21 1QFY22
Source: AMFI, Company, Kotak Institutional Equities
34 KOTAK INSTITUTIONAL EQUITIES RESEARCH HDFC AMC Diversified Financials
Exhibit 8: Net inflows revived a bit in 1QFY22 Net MF flows (Equity + ELSS + 70% of Balance) for Indian asset management industry, March fiscal year-ends, 2006-21, 1QFY22 (Rs bn)
3,200
2,400
1,600
2,313 800 1,167 790 878 956 375 282 510 41 17 4 635 201 - (122) (144) (107) (662)
(800)
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020 2021
1QFY22
Source: AMFI, Kotak Institutional Equities
Exhibit 9: Gross inflows held up well in 1QFY22 Net and gross inflows to actively-managed (equity-oriented) MF funds for Indian asset management industry, March fiscal year-ends, June 2019-June 2021 (Rs bn)
Gross inflow Net inflow
450 402 338 343 335 303 298 266 288 286 264 239 263 300 218 202 210 188 199 175 195 198 158 143 156163 169 150
91 86 96 96 96 104 0 58 72 69 46 44 32 44 35 28 (32) (20) (27) -150 (63) (56) (64) (131) (164)(167)(144)
-300
Jul-19
Jul-20
Jan-20
Jan-21
Jun-19
Jun-20
Jun-21
Oct-19
Oct-20
Feb-20
Feb-21
Sep-19
Apr-20
Sep-20
Apr-21
Dec-19
Dec-20
Nov-19
Nov-20
Mar-20
Mar-21
Aug-19
Aug-20 May-20 May-21
Source: AMFI, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 35 Diversified Financials HDFC AMC
Exhibit 10: Gross inflows have picked up (adjusted for SIPs), up yoy Gross inflows to actively-managed (equity-oriented) MF funds (adjusted for SIPs) for the asset management industry in India, March fiscal year-ends, June 2019-June 2021 (Rs bn)
Gross inflows adjusted for SIPs 350 327
280 252 251 243 218 203 206 210 210 181 181 177 153 137 128 140 120 117 117 120 106 97 96 74 7784 62 70
0
Jul-19
Jul-20
Jan-20
Jan-21
Jun-19
Jun-20
Jun-21
Oct-19
Feb-20
Oct-20
Feb-21
Sep-19
Apr-20
Sep-20
Apr-21
Dec-19
Dec-20
Nov-19
Nov-20
Mar-20
Mar-21
Aug-19
Aug-20 May-20 May-21
Source: AMFI, Kotak Institutional Equities
MFDs remain pivotal to increase penetration even as direct continues to rise
The share of equity-oriented AUM originated through the mutual fund distributor (MFD) channel has broadly remained stable at ~40-42% over 4QFY19-1QFY21. MFDs remained pivotal to originating new business and increasing penetration in smaller cities. While the company’s overall MFD base has declined a bit from peak levels, the management guided that overall active MFD base has remained broadly stable.
The share of direct channels on the rise. Increasing participation from tech-savvy investors (millennials for example) and focus on IRRs have led to gradual increase in share of the direct channel (21% of overall equity-oriented AUM in 1QFY22; up 80 bps qoq and higher than 17.2% as of FY2018). In its endeavor to attract tech-savvy clients, the company has revamped its mobile app and has focused on various other digital initiatives and strategic partnerships to increase penetration in this customer cohort.
36 KOTAK INSTITUTIONAL EQUITIES RESEARCH HDFC AMC Diversified Financials
Exhibit 11: Share of bancassurance has declined Exhibit 12: Share of MFDs flat qoq Channel-wise break-up of MF MAAUM for HDFC AMC, March fiscal Channel-wise break-up of equity-oriented MF MAAUM for HDFC year-ends, 2018-21, 1QFY22 (%) AMC, March fiscal year-ends, 2018-21, 1QFY22 (%)
HDFC bank Other banks MFDs National distributors Direct HDFC bank Other banks MFDs National distributors Direct 100 100 17.5 17.2 19.2 20.2 21.0 80 34.1 38.3 80 47.8 46.5 46.9 24.2 24.8 24.8 23.9 23.8 60 60 21.0 20.0 18.1 17.6 17.8 40 40 39.2 41.1 40.3 41.7 41.5 27.6 27.5 20 23.4 25.9 25.6 20 7.0 7.0 5.6 6.2 5.8 5.0 5.0 5.1 4.4 4.2 10.3 8.6 12.1 10.7 9.9 9.2 8.8
0 5.6 5.6 5.4 0
2018
2019
2020
2021
2018
2019
2020
2021 1QFY22 1QFY22
Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities
AUM growth to pick up from trough levels; share of active equity to
increase a bit
Exhibit 13: Growth in high-yielding active equity to moderate a Exhibit 14: Share of active equity in overall AAUM to marginally bit from historical levels pick up over medium term AAUM mix, March fiscal year-ends, 2016-24E (Rs bn) AAUM mix, March fiscal year-ends, 2016-24E (%)
Active equity Passive equity Debt Liquid Others Active equity Passive equity Debt Liquid Others
6,000 100 0 0 0 1 1 2 3 3 3 11 13 13 189 17 16 15 15 24 21 818 4,800 152 80 730 113 39 664 46 45 32 37 36 35 3,600 74 1,947 60 31 36 49 27 753 1,730 551 805 2 1 9 1,575 0 2 2 3 2,400 330 175 40 1 2 1 117 9 1,026 1,022 1,284 264 1,025 70 8 29 180 16 34 46 49 1,200 882 46 2,445 20 41 40 43 43 43 44 726 2,100 40 33 1,546 1,795 13 1,203 1,422 1,427 652 793 - - 2016 2017 2018 2019 2020 2021 2022E2023E2024E 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E
Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 37 Diversified Financials HDFC AMC
Rising active-equity mix to support yields even as passives act as a drag
We expect HDFC AMC’s calculated yields to inch up a bit over the next few quarters owing to marginal rise in active equity mix to ~45.3% of overall AUM (FY2022E closing AUM) from ~44.5% in 1QFY22 and rising inflows from new schemes (smaller schemes tend to be have higher TER and resultant higher yields). We build-in ~50 bps of yields over the next nine months compared to 48.6 bps in 1QFY22. Strong inflows into passive funds will, however, act as a drag.
Over the medium term, we bake in marginal yield compression by 1-2 bps over FY2022-24E as an interplay of (1) organic compression in TER due to increase in scheme sizes and (2) high growth in passive funds (on a low base), though offset to some extent by marginal 50- 100 bps increase in active equity mix. Net yields tend to be a function of (1) asset mix, (2) movement in distributor and RTA commissions and (3) movement of different schemes (MTM or net inflows) within a particular asset class (larger schemes tend have lower TER), as such yields are difficult to forecast.
High ESOP expenses to drag core profitability even as core cost ratios are likely to improve further
One-off ESOP expenses in FY2022-23E are expected to drag core profitability even as core operating efficiencies continue to improve. In an environment of weak inflows, HDFC AMC focused on stringent cost control over the past few quarters (reducing discretionary spends, travel expenses and overheads). As business volumes pick up, we expect other expenses to gradually pick up (~8% CAGR over FY2022-24E) from trough levels. Excluding ESOP expenses, we except the core cost-to-income ratio to decline further to 17.1% by FY2024E from ~19.3% in FY2022E (~20.2% in FY2020). We bake in ~Rs600 mn of ESOP expenses in FY2022E and Rs150 mn in FY2023E.
As such, we expect core PBT growth to remain flat at 39-39 bps over FY2022-24E, lower than 44 bps in FY2020.
Exhibit 15: Yields to remain broadly stable going forward Yields across various MF product classes, March fiscal year-ends, 2016-24E (bps)
140 127
109108 112 103 96 93 86 8482 77 84 72 66 6059 52 5151 50 50 56 4547 44 38 39 34 35 3330 30 30 3030 30 28 19 2020 1515 1815 10 9 9 9 9 5 5 5 5 5 5 5 7 7
-
2016
2017
2018
2019
2020
2021
2016
2017
2018
2019
2020
2021
2016
2017
2018
2019
2020
2021
2016
2017
2018
2019
2020
2021
2016
2017
2018
2019
2020
2021
2016
2017
2018
2019
2020
2021
2022E
2023E
2024E
2022E
2023E
2024E
2022E
2023E
2024E
2022E
2023E
2024E
2022E
2023E
2024E
2022E
2023E 2024E Active equity Passive equity Debt Liquid Others Overall
Source: Company, Kotak Institutional Equities
38 KOTAK INSTITUTIONAL EQUITIES RESEARCH HDFC AMC Diversified Financials
Exhibit 16: Core PBT ratio to remain broadly stable at 38-39 bps, marginally down from peak levels witnessed in FY2020 Du-Pont, March fiscal year-ends, 2015-24E (%)
2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Revenue from operations 0.77 0.89 0.73 0.66 0.59 0.59 0.51 0.50 0.50 0.49 Investment management fees 0.69 0.75 0.70 0.65 0.58 0.58 0.50 0.49 0.49 0.48 Portfolio management and other advisory fees 0.08 0.14 0.03 0.01 0.01 0.01 0.00 0.01 0.01 0.01 Other income 0.03 0.03 0.05 0.04 0.06 0.04 0.10 0.08 0.08 0.08 Investment income 0.01 0.01 0.01 0.01 — — — — - - Others 0.02 0.02 0.04 0.03 0.03 0.02 0.00 0.08 0.08 0.08 Total income 0.80 0.93 0.78 0.70 0.64 0.63 0.60 0.59 0.58 0.58 Operating expenses 0.33 0.49 0.39 0.30 0.22 0.14 0.12 0.13 0.11 0.10 Employee expenses 0.10 0.09 0.08 0.07 0.06 0.06 0.06 0.07 0.06 0.05 Other expenses 0.23 0.39 0.30 0.23 0.15 0.07 0.05 0.04 0.04 0.04 MF expenses/ brokerage/ incentives/ fees 0.13 0.28 0.21 0.14 0.08 0.01 0.00 - - - Businee promotion 0.02 0.02 0.03 0.03 0.01 0.01 0.00 0.01 0.01 0.01 Others 0.08 0.09 0.07 0.06 0.07 0.05 0.04 0.04 0.04 0.03 Depreciation and amorization expenses 0.01 0.01 0.01 0.00 0.00 0.01 0.02 0.01 0.01 0.01 PBT 0.47 0.44 0.39 0.40 0.42 0.49 0.48 0.46 0.48 0.48 (1-tax rate) 0.67 0.67 0.69 0.68 0.68 0.76 0.76 0.75 0.75 0.75 RoAUM 0.31 0.30 0.27 0.27 0.29 0.37 0.36 0.34 0.36 0.36 Core PBT 0.41 0.34 0.34 0.36 0.37 0.44 0.38 0.39 0.39 0.40
Source: Company, Kotak Institutional Equities estimates
Exhibit 17: HDFC AMC – change in estimates March fiscal year-ends, 2015-24E
New estimates (Rs mn) Old estimates (Rs mn) Change (%) 2022E 2023E 2024E 2022E 2023E 2024E 2022E 2023E 2024E Revenue from operations 21,716 24,836 28,470 21,594 24,565 27,911 0.6 1.1 2.0 Other income 3,577 4,152 4,857 3,321 3,855 4,510 7.7 7.7 7.7 Total income 25,293 28,988 33,328 24,916 28,420 32,422 1.5 2.0 2.8 Operating expnses 5,478 5,379 5,766 5,014 5,165 5,463 9.2 4.2 5.6 Employee expenses 3,013 2,755 2,894 2,843 2,805 2,894 6.0 (1.8) - Other expenses 2,465 2,625 2,873 2,172 2,360 2,569 13.5 11.2 11.8 PBT 19,816 23,608 27,562 19,901 23,255 26,959 (0.4) 1.5 2.2 Tax 4,954 5,902 6,890 4,815 5,627 6,523 2.9 4.9 5.6 PAT 14,862 17,706 20,671 15,086 17,628 20,436 (1.5) 0.4 1.2 Core PBT 16,839 19,607 22,784 17,010 19,600 22,528 (1.0) 0.0 1.1 MF AUM (Rs bn) 4,478 5,180 5,968 4,629 5,283 6,014 (3.2) (2.0) (0.8) Core yields (bps) 50 50 49 49 48 48 1 bps 1 bps 1 bps Core PBT ratio (bps) 39 39 40 39 39 39 0 bps 1 bps 0 bps RoAAUM (bps) 34 36 36 34 35 35 0 bps 1 bps 0 bps EPS (Rs) 70 83 97 71 83 95 (2) 0 1 BVPS (Rs) 260 303 351 259 301 351 1 1 (0) Cost-to-income (%) 21.7 18.6 17.3 20.1 18.2 16.9 153 bps 38 bps 45 bps
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 39 Diversified Financials HDFC AMC
Exhibit 18: HDFC AMC – key growth rates and ratios March fiscal year-ends, 2015-24E (%)
2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Key growth rates Revenue from operations 19.1 41.1 2.6 18.9 8.8 4.6 (7.5) 17.2 14.4 14.6 Investment management fees 28.8 31.4 18.1 21.6 9.2 3.7 (6.4) 15.8 14.0 14.1 Portfolio management and advisory fees (29.2) 129.2 (77.8) (54.9) (15.0) 91.9 (65.7) 221.5 33.7 38.0 Other income (6.1) 23.8 108.3 (0.4) 68.9 (22.8) 149.1 2.4 16.1 17.0 Total income 17.8 40.4 6.3 17.6 12.3 2.2 2.7 14.9 14.6 15.0 Operating expenses 16.0 78.0 0.3 2.1 (10.3) (32.1) (7.7) 21.0 (1.8) 7.2 Employee expenses 14.3 12.3 10.0 11.0 17.9 4.1 5.6 32.9 (8.6) 5.1 Other expenses 16.6 107.8 (2.1) (0.0) (18.7) (55.2) (24.3) 10.4 7.0 10.8 MF expenses/brokerage/incentives/fees 15.1 163.3 (8.2) (12.1) (33.1) (89.2) (63.5) (100.0) NA NA Business promotion expenses 45.5 47.2 37.1 50.9 (54.5) (24.7) (44.2) 66.8 - 30.0 Depreciation expenses 20.1 9.1 8.2 (4.4) 12.3 292.0 10.0 5.0 5.0 5.0 PBT 19.2 13.8 12.9 32.8 29.4 20.2 5.8 13.3 19.1 16.7 PAT 16.1 15.0 15.1 31.1 29.0 35.7 5.0 12.1 19.1 16.7 Core PBT 27.5 0.4 26.2 38.0 24.9 26.8 (7.0) 19.7 16.4 16.2 Key calculated ratios Investment management fees/total income 86.5 81.0 90.0 93.0 90.4 91.7 83.5 84.2 83.7 83.1 Operating expenses/total income 41.5 52.6 49.6 43.1 34.4 22.9 20.6 21.7 18.6 17.3 Employee expenses/operating expenses 28.9 18.2 20.0 21.7 28.6 43.8 50.1 55.0 51.2 50.2 MF expenses/operating expenses 39.3 58.1 53.2 45.8 34.1 5.4 2.1 - - - Core PBT margin (of total income) 51.3 36.7 43.6 51.1 56.9 70.6 63.9 66.6 67.6 68.4 PAT margin (of total income) 39.0 32.0 34.7 38.6 44.4 58.9 60.2 58.8 61.1 62.0 Tax rate 33.3 32.5 31.2 32.1 32.3 23.6 24.2 25.0 25.0 25.0 Payout ratio 39.2 41.7 41.7 46.6 54.7 47.2 54.6 55.0 55.0 55.0 ROE (%) 41.1 42.1 42.8 40.3 35.6 35.6 30.1 28.8 29.5 29.6 Return ratios (% of average of period-ending overall AUM) Revenue from operations 0.77 0.89 0.73 0.66 0.59 0.59 0.51 0.50 0.50 0.49 Investment management fees 0.69 0.75 0.70 0.65 0.58 0.58 0.50 0.49 0.49 0.48 Portfolio management and other advisory fees 0.08 0.14 0.03 0.01 0.01 0.01 0.00 0.01 0.01 0.01 Other income 0.03 0.03 0.05 0.04 0.06 0.04 0.10 0.08 0.08 0.08 Total income 0.80 0.93 0.78 0.70 0.64 0.63 0.60 0.59 0.58 0.58 Operating expenses 0.33 0.49 0.39 0.30 0.22 0.14 0.12 0.13 0.11 0.10 Employee expenses 0.10 0.09 0.08 0.07 0.06 0.06 0.06 0.07 0.06 0.05 Other expenses 0.23 0.39 0.30 0.23 0.15 0.07 0.05 0.04 0.04 0.04 MF expenses/brokerage/incentives/fees 0.13 0.28 0.21 0.14 0.08 0.01 0.00 - - - Business promotion 0.02 0.02 0.03 0.03 0.01 0.01 0.00 0.01 0.01 0.01 Depreciation and amortization expenses 0.01 0.01 0.01 0.00 0.00 0.01 0.02 0.01 0.01 0.01 PBT 0.47 0.44 0.39 0.40 0.42 0.49 0.48 0.46 0.48 0.48 Core PBT 0.41 0.34 0.34 0.36 0.37 0.44 0.38 0.39 0.39 0.40 (1-tax rate) 0.67 0.67 0.69 0.68 0.68 0.76 0.76 0.75 0.75 0.75 RoAUM 0.31 0.30 0.27 0.27 0.29 0.37 0.36 0.34 0.36 0.36
Source: Company, Kotak Institutional Equities estimates
40 KOTAK INSTITUTIONAL EQUITIES RESEARCH HDFC AMC Diversified Financials
Exhibit 19: HDFC AMC – financial summary March fiscal year-ends, 2015-24E (Rs mn)
2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Income statement Revenue from operations 10,224 14,425 14,800 17,598 19,152 20,033 18,525 21,716 24,836 28,470 Investment management fees 9,209 12,097 14,285 17,365 18,954 19,653 18,395 21,298 24,276 27,698 Portfolio management fees 1,016 2,328 516 233 198 380 130 419 560 772 Other income 418 518 1,079 1,075 1,816 1,402 3,492 3,577 4,152 4,857 Total income 10,643 14,943 15,879 18,672 20,968 21,434 22,017 25,293 28,988 33,328 Operating expenses (4,417) (7,861) (7,881) (8,047) (7,221) (4,904) (4,528) (5,478) (5,379) (5,766) Employee expense (4,417) (7,861) (7,881) (8,047) (7,221) (4,904) (4,528) (5,478) (5,379) (5,766) Other expenses (3,040) (6,318) (6,186) (6,183) (5,030) (2,253) (1,706) (1,883) (2,014) (2,231) MF expenses/brokerage/incentives/fees (1,734) (4,566) (4,193) (3,687) (2,466) (266) (97) - - - Business promotion (258) (379) (520) (785) (357) (269) (150) (250) (250) (325) Others (1,048) (1,373) (1,473) (1,712) (2,207) (1,718) (1,459) (1,633) (1,764) (1,906) Depreciation and amortization expenses (101) (111) (120) (114) (129) (504) (554) (582) (611) (641) PBT 6,226 7,083 7,998 10,625 13,747 16,531 17,490 19,816 23,608 27,562 Tax (2,071) (2,304) (2,496) (3,409) (4,441) (3,906) (4,232) (4,954) (5,902) (6,890) PAT 4,155 4,779 5,502 7,216 9,306 12,624 13,258 14,862 17,706 20,671 Tax rate (%) 33 33 31 32 32 24 24 25 25 25 Core PBT 5,459 5,482 6,919 9,550 11,931 15,129 14,071 16,839 19,607 22,784 EPS 20 23 27 35 44 59 62 70 83 97 BVPS 55 57 70 105 144 189 224 260 303 351 DPS 8 10 11 16 24 28 34 38 46 53 Balance sheet Share capital 252 252 252 1,053 1,063 1,064 1,065 1,067 1,069 1,071 Reserves and surplus 10,946 11,261 13,978 20,547 29,644 39,229 46,697 54,503 63,589 74,009 Shareholders' funds 11,199 11,512 14,229 21,600 30,707 40,293 47,762 55,569 64,657 75,079 Trade payables 951 1,720 961 1,116 474 467 421 463 510 560 Provisions 150 150 9 9 10 73 79 79 79 79 Other liabilities 818 845 797 982 1,047 2,254 2,685 2,820 2,961 3,109 Total liabilities 1,919 2,715 1,766 2,107 1,530 2,793 3,185 3,362 3,549 3,748 Total equity and liabilities 13,118 14,227 15,996 23,706 32,238 43,086 50,947 58,931 68,206 78,827 Investment 6,505 9,858 12,367 19,506 29,350 39,445 47,533 54,662 63,955 74,827 Advances 4,239 2,695 2,318 2,671 1,191 894 1,009 1,000 1,000 1,000 Current assets 1,901 1,213 882 1,044 1,349 917 861 1,569 1,451 1,100 Fixed assets 339 323 336 388 348 1,613 1,544 1,700 1,800 1,900 Deferred tax assets 133 139 94 97 - 217 - - - - Net assets 13,118 14,227 15,996 23,706 32,238 43,086 50,947 58,931 68,206 78,827
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 41
ADD Just Dial (JUST) https://ultraviewer.et/en/own Internet Software & Services JULY 18, 2021 load.html RESULT, CHANGE IN RECO. Sector view: Cautious
White knight may set it right. Reliance Retail Ventures (RRVL) will acquire ~67% CMP (`): 1,073 stake in JUST via a preferential allotment, stake purchase from promoter and open offer Fair Value (`): 1,130 for Rs57.2 bn. Change in ownership may boost JUST’s transformation from a plain BSE-30: 53,140 vanilla listings platform to a comprehensive discovery and transactions platform. We upgrade FY2023-24 EPS by 16-18% as we bake in the cash inflow from the deal. We upgrade rating to ADD from SELL with a new FV of Rs1,130 (Rs595 earlier). Just Dial Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 1,073/1,130/ADD EPS (Rs) 34.6 25.4 42.0 52-week range (Rs) (high-low) 1,138-332 EPS growth (%) (17.5) (26.6) 65.3 Mcap (bn) (Rs/US$) 67/0.9 P/E (X) 31.0 42.2 25.5
ADTV-3M (mn) (Rs/US$) 3,428/46 P/B (X) 5.3 2.5 2.2 Shareholding pattern (%) EV/EBITDA (X) 33.3 19.2 12.5 Promoters 35.6 RoE (%) 16.8 8.6 9.2 FPIs/MFs/BFIs 32.3/14.7/0.0 Div. yield (%) 0.0 0.0 0.0 Price performance (%) 1M 3M 12M Sales (Rs bn) 7 8 8 Absolute 0.2 24.4 185.5 EBITDA (Rs bn) 2 1 2 Rel. to BSE-30 (1.0) 14.3 96.0 Net profits (Rs bn) 2 2 4
RRVL to acquire ~67% stake in Just Dial for total consideration of Rs57.2 bn
JUST has announced that RRVL will acquire up to 67% stake in the company via: (1) preferential allotment of 21.2 mn equity shares (25.33% diluted stake) to RRVL at price per share of Rs1,022.25 (consideration of Rs21.7 bn), (2) acquisition of 13.1 mn equity shares by RRVL from VSS Mani (15.62% diluted stake) at a price per share of Rs1,020.0 (consideration of Rs13.3 bn), and (3) open offer to acquire 21.7 mn equity shares (26% diluted stake) for a consideration of Rs22.2 bn implying price per share of Rs1,022.25. RRVL will push towards development of a transactions platform
We believe RRVL will utilize JUST’s 30 mn business listings to drive digitization of these businesses such that RRVL’s platforms could ultimately become a large-scale aggregator platform providing myriad products and services to end consumers. RRVL will seek to significantly improve the Omni, JD Mart and JDXperts offerings. In the process, RRVL will gain access to consumer data, which it may utilize to cross-sell other products and services from within the Reliance platform. Change in ownership may seek to revive investments in technology and customer acquisition
Post open offer, RRVL will have ~67% shareholding in JUST with the current promoter left with only 10.7% stake. Change in ownership may revive investments in customer acquisition and engagement (improved user interface, advertising) as well as tech-stack (superior product and Garima Mishra [email protected] back-end integration). Mumbai: +91-22-4336-0862
Optimistic on JUST’s future growth prospects; upgrade to ADD Kawaljeet Saluja [email protected] Our negative view on Just Dial was hinged on the company’s inability to grow its current Mumbai: +91-22-4336-0860 classifieds business as well as sustained underinvestment in customer acquisition and Shubhangi Nigam technology. We believe RRVL will seek to revive these investments and JUST’s future growth [email protected] trajectory may appear different from what we currently forecast. In the absence of concrete Mumbai: +91-22-4336-1375 strategic plans available to us, we make some tweaks to our EBITDA estimates but sharply increase our P/E multiple to 25X (15X earlier). We revise our FV to Rs1,130 (Rs595 earlier) and upgrade our rating on the stock to ADD (from SELL).
Kotak Institutional Equities Research [email protected] Mumbai: +91-22-4336-0000
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Just Dial Internet Software & Services
RRVL to acquire 67% stake in Just Dial for Rs57 bn
JUST has announced that RRVL will acquire total 66.95% stake in the company: (1) preferential allotment of 21.2 mn equity shares (equivalent to 25.33% post preferential share capital) to RRVL at price per share of Rs1,022.25 (consideration of Rs21.7 bn), (2) acquisition of 13.1 mn equity shares by RRVL from VSS Mani (equivalent to 15.62% post preferential share capital) at a price per share of Rs1,020.0 (consideration of Rs13.3 bn), and (3) RRVL has also made a public announcement to acquire 21.7 mn equity shares (equivalent to 26% stake in JD) for a consideration of Rs22.2 bn implying price per share of Rs1,022.25.
Exhibit 1: RRVL intends to have 67% shareholding in JUST Details of RRVL’s investment in JUST
Number of shares Diluted shareholding Consideration Price per share (#) (%) (Rs mn) (Rs) Preferential allotment 21,177,636 25 21,649 1,022 Purchase from JUST's promoter 13,061,163 16 13,322 1,020 Open offer 21,736,894 26 22,220 1,022
Total 55,975,693 67 57,191 1,022
Source: Company, Kotak Institutional Equities
xx
RRVL: aiming to gain from JUST’s sizeable customer and merchant base
We believe RRVL will use Just Dial’s listings and paid customer base to achieve its ambition to become a pan-India aggregator of small merchants selling products and services to consumers.
With JioMart, RRVL is already acquiring and digitizing kirana shops. Within a year of its launch, JioMart has acquired 0.3 mn partner stores, compared to 0.44 mn paid merchants with Just Dial. We believe RRVL can drive up JUST’s paid merchant acquisition pace a lot more in future by providing a suite of value added services such as a listings platform (that can drive merchant/product discovery), transactions platform (perhaps with services such as delivery, service slot booking etc.), payments, etc.
Exhibit 2: Total paid campaigns declined by ~19,500 in 1Q Exhibit 3: Total listings were at 30.6 mn in 1Q Sequential campaign addition, March fiscal year-ends (#, 000) Quarterly listings, March fiscal year-ends (#, mn)
(#, '000) (#, mn) 2119 18 36.0 16 14 16 1515 14 14 11 8 32.0 3030303031 5 4 5 6 4 5 2929 8 3 1 1 1 4 28 28.0 2627 2425 24.0 2223 -12 21 1920
20.0 171718
2QFY19 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 1QFY22 1QFY16 16161617 (19) 15 -32 16.0 12.0
-52 8.0 4.0 -72 -
-92
2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 1QFY22 (91) 1QFY16
Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 43 Internet Software & Services Just Dial
Exhibit 4: Unique visitors of Just Dial across various platforms, March fiscal year-ends (mn)
(mn) Mobile Internet Voice 180
160
8
8 9
140 23
22
7
22
8
9
6
6
9
6
6
9 21
120 21
18
17
20
19
22
14
9
9 24
100 3
10
10
24
16
25 9
80 26
28
10
10
10
11
11
9
11
26
130
10 128
60 125
24
11
11
12
25
111
110
27
27
108
106
104
28
106
105
24
25
101
92 26
40 81
25
79
29
74
30
69
63
52 47
20 42
37
39
37
38
36
31
27
24 21
0
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21
3QFY21
4QFY21 1QFY22
Source: Company, Kotak Institutional Equities
We believe RRVL will aspire to model this similar to Alibaba’s platforms: (1) Taobao which enables small merchants and businesses to open online stores, and (2) Ele.me that provides a digital sales platform to small local businesses (product sellers and service providers). In particular, Ele.me, as well as its competitor Meituan Dianping aspire to provide consumers access to all hyperlocal products and services that they need on a daily basis.
44 KOTAK INSTITUTIONAL EQUITIES RESEARCH Just Dial Internet Software & Services
Exhibit 5: Chinese giants and RRVL focusing on enabling smaller merchants Details on business streams of major technology players
Reliance Retail + Jio Platforms Alibaba Group Tencent
(1) Retail owned brands: Fresh, Smart, Ajio etc. (2) Textile Taobao is B2C/C2C focused, enabling small owned brands (3) In-Store brands-John Players, businesses and individuals to open online stores. Partnered with JD.com in 2014. JD.com features E-commerce (B2C) Snactac, avaasa (Ethnic Indianwear), GoodLife (Full range Tmall offers a wide selection of branded products prominently on WeChat. grocery brand) and LYF smartphones (4G mobile oriented towards China's growing middle class. handsets and connectivity devices)
Alibaba B2B is a trading platform, connecting Reliance Market can evolve as a large B2B national E-commerce (B2B) manufacturers from countries such as China, India, supplier Pakistan, US and Thailand with international buyers. JioMart and Just Dial enabled O2O connecting offline Ele.me (connects local shops to consumers), Didi Local commerce Didi Kuaidi (cab aggregator) customers with online platforms and B2C/B2B portals Kuaidi (Cab aggregator) Alipay. Online third-party payment platform. It Payment and fintech. Weixin Pay, QQ Wallet, Payment JioMoney/JioPay provides payments and escrow services for LiCaiTong, WeSure, Weiliadai transactions on Alibaba Group platforms. Cainiao Logistics - provides logistics support to all of Logistics Grab (acquired in 2019) Alibaba's operations FB, Instagram, Whatsapp. Communication and social Social media and Communication and Social network-QQ IM, network. JioChat Free Chat, SMS, Voice & Video Call. Influencing and personal content on Taobao messaging Weixin & WeChat (Free service) JioCall Smart Landline Calling Services. JioMovies, videos, music, news, sports, online games, live Advanced Casual Games ACGs, Mobile games, Digital Content Relevant digital content on B2C websites broadcast Massively Multiplayer Online Games MMOGs Alipay. Online third-party payment platform. It Weixin Pay, QQ Wallet, LiCaiTong, WeSure, Finance Jio Payments Bank enabled financial services provides payments and escrow services for Weiliadai transactions on Alibaba Group platforms. Online advertising. (1) Media. Includes news, Online advertising. Alimama is an online marketing video and music properties, e.g. Tencent News platform that provides sellers on Alibaba Group's app; QQ.com and verticals; regional portals; QQ marketplaces a range of marketing and advertising FB and Insta Platforms, JioAds Cross-device Marketing Music etc. (2) Social and others. Includes social Marketing services. Advertisers can choose between pay-for- Technology Platform. properties, app store, browser and ad performance and display marketing. These ads are networks, e.g. Qzone, QQ, Weixin Official the primary means through which Alibaba makes Accounts, Weixin Moments, Mini Programs, QQ money from Taobao. Browser, Mobile Ad Network, YingYongBao etc.
Aliyun Alibaba Cloud. Develops platforms for cloud JioCloud Store and Access your files from anywhere. computing and data management, ensuring that Utilities & Infrastructure (Cloud services, Online infrastructure JioBrowser Fast, Safe & Light weight browser. JioSecurity Alibaba's e-commerce portals can handle its massive Browser) Protect phone, secure data traffic and transaction volumes.
Network of 4,200+ stores with US$10 bn of core Offline Retail Hema Supermarket, Intime Retail, Suning Vipshop revenues across grocery, electronics and apparel
Source: Companies, Kotak Institutional Equities
RRVL may revive JUST’s growth trajectory by first upping investments
JUST has witnessed a structural flat-lining of revenues on account of underinvestment in its product offering to both consumers and merchants. This, we believe, can change with RRVL at the helm. We believe RRVL will up spends on both advertisements and technology that will have a positive rub-off on revenues over the medium term. We also believe that a shift in strategy towards transactions will drive quicker merchant acquisition for JUST.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 45 Internet Software & Services Just Dial
Exhibit 6: Revenue decline of 29% yoy in FY2021 was due to Covid-induced stress Revenues and yoy revenue growth of JUST, March fiscal year-ends, (Rs mn, LHS; % yoy, RHS)
(Rs mn) Revenues (Rs mn) Yoy growth (%) (% Yoy) 12,000 40
30 10,000 27 28 9,531 8,915 20 7,818 8,000 13 7,186 14 6,677 6,752 10 8 9 7 5,898 6,000 - 4,613 3,628 (10) 4,000 (20) 2,000 (29) (30)
- (40) 2013 2014 2015 2016 2017 2018 2019 2020 2021
Source: Company, Kotak Institutional Equities
Exhibit 7: Annual ad-spends of JUST, March fiscal year-ends (Rs Exhibit 8: Annual employee expense of JUST, March fiscal year- mn) ends, (Rs mn)
Ad-spends (Rs mn) Employee expense (Rs mn) 800 6,000 5,329 700 664 667 4,971 5,000 583 4,409 4,416 4,432 600 4,000 3,799 500 3,088 400 3,000 321 2,286 300 253 2,000 167 200 142 1,000 100 34 - - 2014 2015 2016 2017 2018 2019 2020 2021 2014 2015 2016 2017 2018 2019 2020 2021
Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities
46 KOTAK INSTITUTIONAL EQUITIES RESEARCH Just Dial Internet Software & Services
Exhibit 9: Employee count of JUST, March fiscal year-ends, (#, Exhibit 10: Core and non-core employee split of JUST, March ‘000) fiscal year-ends, (#, ‘000)
(#, 000) Employee count (#, 000) (#, '000) Sales and marketing (#,000) Others (#, 000) 14 12.7 12.4 12 12 11.1 11.3 11.5 11.2 3.3 3.0 9.8 9.2 10 10 3.4 3.3 2.9 4.4 8 8 2.8 3.7 6 6 9.4 9.4 4 7.9 8.1 8.3 6.8 6.9 4 2 5.5
0 2
2015
2016
2017
2018
2019
2020
2021
2015
2016
2017
2018
2019
2020
2021 1QFY22 1QFY22
Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities
In the past, Just Dial has envisaged a comprehensive O2O tech-enabled platform to drive both discovery and transactions for merchants. However, it has fallen short on account of weak user interface as well as inadequate back-end integration. We believe RRVL will drive better acceptance of these products by revamping interfaces wherever required, improving the tech stack and strengthening product sales.
Just Dial’s new product offerings that RRVL will seek to augment include: (1) JD Mart (envisages connect of B2B sellers and buyers with the promise of providing discovery, transactions, logistics, payments and lending), (2) JD Xperts (one stop destination for on- demand home services such as pest control, salon etc.), and (3) JD Omni (cloud-hosted solution for digitizing businesses; includes merchant discovery, online store, transactions, logistics, loyalty programs, inventory management etc.).
Exhibit 11: JD Mart: envisages full stack solution to B2B merchants JD Mart’s product offering to B2B merchants
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 47 Internet Software & Services Just Dial
Exhibit 12: JD Xpert’s product interface for local service providers
Source: Company, Kotak Institutional Equities
Exhibit 13: JD Omni seeks to provide an integrated full-stack O2O offering to small merchants Snapshot of JD Omni’s product offering
Source: Company, Kotak Institutional Equities
Acquisition by RRVL significantly improves long-term prospects of Just Dial
Acquisition by RRVL may significantly increase long-term revenue potential for Just Dial. We believe RRVL may help it realize higher revenues from new product lines and significantly increase paid merchant base. This may, however, not play out in the very near term as business integration and product development may take time.
48 KOTAK INSTITUTIONAL EQUITIES RESEARCH Just Dial Internet Software & Services
To bake in higher long-term revenue potential, we significantly increase our target P/E multiple for JUST to 25X (15X earlier). This drives an increase in our FV for the stock to Rs1,130 (Rs595 earlier). We upgrade the stock to ADD (from SELL). We have revised down our FY2022 EPS as we bake in higher ad-spends. We increase our FY2023-24 estimates as we bake in the Rs21.6 bn of inflow from the preferential allotment and the resultant other income.
Exhibit 14: Key changes in estimates for Just Dial, March fiscal year-ends, 2022-24E (Rs mn)
New Estimates Old estimates % revision 2022E 2023E 2024E 2022E 2023E 2024E 2022E 2023E 2024E Total revenues 7,562 8,469 9,486 7,562 8,205 8,902 - 3.2 6.6 EBITDA 1,436 1,886 2,300 1,701 1,832 2,045 (15.6) 2.9 12.5 EBITDA margin (%) 19.0 22.3 24.2 22.5 22.3 23.0 PAT 2,121 3,505 4,033 1,912 2,232 2,531 10.9 57.1 59.3 EPS (Rs) 25.4 42.0 48.3 30.9 36.1 40.9 (17.7) 16.5 18.1 Tax rate (%) 20.3 19.9 20.2 21.5 21.3 21.3 Yoy growth metrics (%) Sales 12.0 12.0 12.0 12.0 8.5 8.5 EBITDA (7.3) 31.3 22.0 9.8 7.7 11.6 PAT (1.0) 65.3 15.1 (10.7) 16.7 13.4
Source: Kotak Institutional Equities estimates
1QFY22 results: sluggish pace of revenue recovery
JUST reported another weaker-than-expected quarterly performance. Revenue growth of 1.8% yoy was driven by a surprising 1.6% yoy decline in paid campaigns offset by 3.5% yoy increase in realizations. Decline in paid campaigns was possibly due to the second Covid wave and the resultant loss of business for SMEs and a consequent reduction in ad- spends. Unique visitors decreased 4% qoq to 124.1 mn visitors indicating that customer usage is yet to be back to pre-Covid levels.
Negative operating leverage drove weaker-than-expected EBITDA margins of (-)10.4% (vs KIE estimate of -6.2%). This was the first time that JUST reported EBITDA loss in the past eight years. Cost increase of 46% yoy can be attributed to higher advertising costs (Rs505 mn on account of IPL and JDMart spends vs Rs3 mn in 1QFY21) and higher employee cost (up 4% yoy). EBITDA miss flowed down to net profit miss as well.
JUST ended 1QFY22 with cash balance of Rs15.3 bn, slightly lower than Rs15.7 bn as of March 2021.
With lockdowns easing and impact of Covid-19 abating post first wave, monetization had been on an improving trajectory in FY2022 (85% of pre-Covid level in 4QFY21). However, due to unpredictable second wave restrictions, collections got impacted in 1QFY22 and stood Rs1.43 bn (down 28.9% qoq and up 26% yoy).
Active paid campaigns stood at 438k (vs 457k in 4QFY21). Deferred revenues increased 7% yoy but were down 7.4% qoq. Just Dial may hence see a full recovery in revenues to pre-Covid levels only over the next 2-3 quarters.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 49 Internet Software & Services Just Dial
Exhibit 15: Revenue growth of 2% yoy on a weak base Standalone quarterly financials of Just Dial, March fiscal year-ends (Rs mn)
Change (%) 2-yr CAGR Yoy growth 1QFY22 1QFY22E 1QFY21 4QFY21 KIE Est yoy qoq 1QFY20 (%) FY2022E FY2021 (%) Sales 1,654 1,652 1,624 1,757 0.1 1.8 (5.8) 2,402 (17.0) 7,562 6,752 12.0 Expenses (1,826) (1,754) (1,249) (1,411) 4.1 46.1 29.4 (1,759) 1.9 (6,126) (5,203) 17.7 Employee (1,121) (1,078) (1,078) (1,176) 4.0 4.0 (4.7) (1,340) (8.5) (4,685) (4,432) 5.7 Other expenses (705) (676) (172) (235) 4.2 310.8 199.8 (419) 29.7 (1,441) (771) 86.9 Operating profit (172) (102) 375 345 nm (145.8) (149.7) 642 1,436 1,549 (7.3) Other income 228 291 769 156 (21.8) (70.4) 46.4 311 (14.3) 1,655 1,495 EBIDT 56 189 1,144 501 (70.4) (95.1) (88.8) 953 (75.7) 3,090 3,044 1.5 Interest (15) (15) (15) (18) (0.7) — (15.8) (18) (8.8) (11) (74) Depreciation (85) (105) (116) (94) (18.9) (26.9) (9.7) (136) (21.0) (420) (423) PBT (44) 69 1,013 389 nm nm nm 799 2,660 2,547 4.4 Tax 9 (18) (180) (54) (149.0) (104.8) (116.3) (226) (539) (405) Net profit (35) 52 833 336 nm nm nm 573 2,121 2,142 (1.0) Extraordinary items — — — — — — — Reported PAT (35) 52 833 336 (168.2) (104.2) (110.5) 573 2,121 2,142 (1.0) Key ratios (%) Employee cost/sales 67.8 65.2 66.4 67.0 55.8 62.0 65.6 Other operating expenses/sales 42.6 40.9 10.6 13.4 17.5 19.1 11.4 EBITDA margin (10.4) (6.2) 23.1 19.7 26.7 19.0 22.9 PBT margin (2.7) 4.2 62.3 22.2 33.3 35.2 37.7 Tax rate 19.8 25.6 17.7 13.7 28.3 20.3 15.9 PAT margin (2.1) 3.1 51.3 19.1 23.8 28.1 31.7 Other operating metrics Total campaigns (#) 437,865 443,639 444,934 457,360 (1.3) (1.6) (4.3) 515,300 (8) 512,243 457,360 12.0 Price per campaign (Rs) 15,111 14,895 14,603 15,365 1.4 3.5 (1.7) 18,643 (10) 14,763 14,763 — Headcount (#) 9,751 — 10,984 11,162 (11.2) (12.6) 13,601 (15) Advertising spend (Rs mn) 505 — 3 15 16,740.0 3,268.0 190 63 Unearned revenue (Rs mn) 3,074 — 2,871 3,303 7.1 (6.9) 3,991 (12)
Source: Company, Kotak Institutional Equities estimates
Exhibit 16: Campaign count declined by 4% qoq End of the period paid campaigns (#, LHS) and yoy growth (%, RHS), March fiscal year-ends
(#, '000) Yoy growth (%)
32.0
510 28.0 536 536 535 535 24.0 470 529
515 515 20.0 501 501
430 485 16.0
471 471
457 457
454 454
453 453
449 449 445 445
390 445 12.0
441 441
440 440
438
436 436 435 435 425 425 8.0 350 409
389 4.0
310 369
355 355 0.0
350 350 347 347
270 331 -4.0 313 313
230 296 -8.0
278 -12.0
262 262
250 250 239 239 190 222 -16.0
150 -20.0
1QFY15 2QFY15 3QFY15 1QFY17 2QFY17 4QFY18 1QFY19 2QFY19 3QFY20 4QFY20 1QFY21 1QFY14 2QFY14 3QFY14 4QFY14 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 3QFY19 4QFY19 1QFY20 2QFY20 2QFY21 3QFY21 4QFY21 1QFY22
Source: Company, Kotak Institutional Equities
50 KOTAK INSTITUTIONAL EQUITIES RESEARCH Just Dial Internet Software & Services
Exhibit 17: Realization has improved 3.5% yoy Yoy change in per campaign realization, March fiscal year-ends (%)
Yoy growth (%) 8.0
3.0
-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
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21
3QFY21
4QFY21 1QFY22 -7.0
-12.0
-17.0
-22.0
Source: Company, Kotak Institutional Equities
Exhibit 18: Unearned revenue base declines sequentially due to second Covid-wave impact Unearned revenue growth, March fiscal year-ends
1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 1QFY22 Total billings (Rs mn) 2,497 2,246 2,305 2,591 2,339 2,239 2,262 1,998 1,135 1,599 1,953 2,007 1,425 Yoy growth (%) 21 24 13 4 (6) (0) (2) (23) (51) (29) (14) 0 26 Unearned revenue (Rs mn) 3,713 3,749 3,786 4,054 3,991 3,804 3,712 3,360 2,871 2,795 3,053 3,303 3,074 Yoy growth (%) 28 35 33 22 7 1 (2) (17) (28) (27) (18) (2) 7 Revenue (Rs mn) 2,114 2,210 2,268 2,323 2,402 2,426 2,354 2,350 1,624 1,675 1,695 1,757 1,654 Yoy growth (%) 11 14 15 16 14 10 4 1 (32) (31) (28) (25) 2
Source: Company, Kotak Institutional Equities
Exhibit 19: Revenue per employee improved marginally in 1Q End of the period employee count (#, LHS) and revenue per employee (Rs 000, RHS), March fiscal year-ends
(#, '000) Revenue per employee (Rs 000) 16 190 180 14 170 12 160 150 10 140 8 130 120 6 110
4 100
1QFY14 3QFY14 4QFY14 1QFY15 3QFY15 4QFY15 3QFY16 4QFY16 2QFY17 3QFY17 2QFY18 3QFY18 2QFY19 3QFY19 1QFY20 2QFY20 1QFY21 2QFY21 4QFY21 1QFY22 2QFY14 2QFY15 1QFY16 2QFY16 1QFY17 4QFY17 1QFY18 4QFY18 1QFY19 4QFY19 3QFY20 4QFY20 3QFY21
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 51 Internet Software & Services Just Dial
Exhibit 20: Campaigns per sales employee metric in 1Q End of the period sales and marketing employee count (#, LHS) and campaigns per employee (#, RHS), March fiscal year-ends
(#) Campaigns per employee (#) 11,000 66
10,000 63
9,000 60
8,000 57
7,000 54
6,000 51
5,000 48
4,000 45
2QFY15 3QFY15 1QFY16 2QFY16 4QFY16 1QFY17 3QFY17 4QFY17 2QFY18 3QFY18 1QFY19 2QFY19 4QFY19 1QFY20 3QFY20 4QFY20 2QFY21 3QFY21 1QFY22 1QFY15 4QFY15 3QFY16 2QFY17 1QFY18 4QFY18 3QFY19 2QFY20 1QFY21 4QFY21
Source: Company, Kotak Institutional Equities
Exhibit 21: Unique visitor count up 24% yoy Key operating metrics of JUST's platform, March fiscal year-ends
Yoy growth 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 1QFY22 (%) Unique visitors (mn) 125.2 131.3 134.2 139.1 156.1 161.2 157.1 138.9 100.0 130.6 132.6 129.1 124.1 24.1 Total listings (mn) 22.7 23.8 24.8 25.7 26.6 27.6 28.6 29.4 29.6 30.0 30.2 30.4 30.6 3.4 Total images in listings (mn) 47.9 51.4 55.3 60.3 66.8 73.4 78.4 84.2 85.1 96.6 99.6 103.6 106.4 25.0 Listings with geocodes (mn) 11.8 12.3 13.4 14.0 14.5 15.2 15.9 16.5 16.8 17.0 17.2 17.3 17.5 4.2 Ratings and reviews (mn) 85.1 88.0 91.3 95.6 98.1 100.8 105.9 109.7 110.5 111.9 114.7 117.8 120.0 8.6 Cumulative app downloads (mn) 20.8 21.8 22.8 23.7 24.5 25.4 26.0 26.6 27.1 27.6 28.1 28.7 29.1 7.4 Android 17.9 18.9 19.8 20.6 21.4 22.2 22.8 — 23.7 24.2 — — — iOS 2.1 2.1 2.2 2.3 2.3 2.4 2.4 — 2.5 2.5 — — — Others 0.8 0.8 0.8 0.8 0.8 0.8 0.8 — 0.8 0.8 — — — App downloads per day (#) 14,351 13,555 14,437 12,588 13,131 13,849 11,912 10,120 7,693 9,207 9,604 9,614 7,831 1.8
Source: Company, Kotak Institutional Equities
Exhibit 22: Details of the assumptions for Just Dial, March fiscal year-ends, 2015-24E (Rs mn)
2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Search Campaigns (#) 331,200 367,000 429,840 445,110 500,838 536,236 457,360 512,243 573,712 642,558 Revenues from core business (Rs mn) 5,898 6,640 7,062 7,818 8,915 9,531 6,752 7,562 8,469 9,486 Yoy growth (%) 27.9 12.6 6.4 10.7 14.0 6.9 (29.2) 12.0 12.0 12.0 Other revenues — 37 132 — — — — — — — Total revenues 5,898 6,677 7,186 7,818 8,915 9,531 6,752 7,562 8,469 9,486 Yoy growth (%) 27.9 13.2 7.6 8.8 14.0 6.9 -29.2 12.0 12.0 12.0 Number of employees (#) 9,533 11,142 11,334 11,452 12,691 12,423 11,162 11,762 12,062 12,362 Employee cost/ sales (%) 52.4 56.9 61.4 56.5 55.8 55.9 65.6 62.0 60.2 57.7 Other expenses/sales (%) 19.5 21.5 23.4 22.5 18.6 15.4 11.4 19.1 17.6 18.1 EBITDA margin (%) 28.1 21.6 15.3 21.0 25.7 28.6 22.9 19.0 22.3 24.2 PAT 1,389 1,427 1,214 1,432 2,068 2,723 2,142 2,121 3,505 4,033 EPS (Rs) 19.7 20.5 17.5 21.2 31.9 42.0 34.6 25.4 42.0 48.3 Yoy growth (%) 15.2 2.8 (15.0) 18.0 44.4 31.7 (21.3) (1.0) 65.3 15.1
Source: Company, Kotak Institutional Equities estimates
52 KOTAK INSTITUTIONAL EQUITIES RESEARCH Just Dial Internet Software & Services
Exhibit 23: Financial snapshot of Just Dial, March fiscal year-ends, 2011-24E (Rs mn)
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E Profit model Total operating income 1,839 2,621 3,628 4,613 5,898 6,677 7,186 7,818 8,915 9,531 6,752 7,562 8,469 9,486 Operating expenses (1,385) (1,948) (2,619) (3,191) (4,240) (5,235) (6,090) (6,174) (6,626) (6,802) (5,203) (6,126) (6,584) (7,186) Employee expenses (947) (1,308) (1,779) (2,286) (3,088) (3,799) (4,409) (4,416) (4,971) (5,329) (4,432) (4,685) (5,096) (5,473) Operating and other expenses (438) (640) (841) (905) (1,152) (1,435) (1,681) (1,758) (1,654) (1,473) (771) (1,441) (1,487) (1,713) EBITDA 454 672 1,008 1,422 1,658 1,442 1,096 1,644 2,289 2,729 1,549 1,436 1,886 2,300 Pre-tax profit 423 713 1,000 1,649 1,905 1,931 1,565 1,939 2,881 3,517 2,547 2,660 4,378 5,052 PAT 288 504 685 1,206 1,389 1,427 1,214 1,432 2,068 2,723 2,142 2,121 3,505 4,033 Weighted diluted number of shares (mn) 53 60 69 70 70 69 70 67 65 65 62 83 83 83 EPS (Rs) 5 8 10 17 20 21 17 21 32 42 35 25 42 48 Balance sheet Equity share capital 519 519 695 702 705 695 695 674 648 649 619 835 835 835 Reserves & surplus 433 542 3,556 4,643 6,029 6,699 8,356 9,118 9,339 12,228 12,024 35,582 39,088 43,121 Shareholders funds 954 1,033 4,259 5,345 6,734 7,394 9,052 9,792 9,986 12,877 12,643 36,417 39,922 43,955 Loan funds 1 — — — — — — — 42 764 630 92 77 81 Total source of funds 956 1,033 4,269 5,363 6,734 7,396 9,052 9,792 10,201 13,945 13,532 36,509 40,000 44,037 Net fixed assets 272 360 623 539 921 1,474 1,647 1,489 1,321 1,724 1,390 1,216 1,175 1,200 Investments 1,182 1,568 4,858 6,257 7,722 8,077 9,768 11,549 13,038 15,642 15,227 15,727 16,227 16,727 Cash balances 196 237 239 369 422 336 525 575 404 397 615 23,585 27,053 31,048 Net current assets excluding cash (707) (1,102) (1,452) (1,803) (2,355) (2,492) (3,128) (3,946) (4,562) (3,817) (3,700) (4,019) (4,455) (4,938) Total application of funds 956 1,033 4,269 5,363 6,734 7,396 9,052 9,792 10,201 13,945 13,532 36,509 40,000 44,037 Cash flow statement Operating profit before working capital changes 357 595 846 1,379 1,630 1,738 1,615 1,796 2,406 3,333 2,639 2,552 3,905 4,468 Change in working capital/other adjustments 230 395 350 351 552 137 636 818 616 (745) (117) 319 436 483 Cashflow from operating activites 586 990 1,196 1,730 2,182 1,875 2,251 2,614 3,022 2,588 2,522 2,871 4,340 4,950 Cash (used)/ realised in investing activities (152) (179) (407) (89) (623) (864) (574) (207) (168) 163 (252) (154) (252) (349) Free cash flow 435 811 789 1,641 1,559 1,012 1,677 2,407 2,854 2,751 2,270 2,717 4,089 4,601 Issue of share capital 8 (425) 2,541 43 170 (767) 444 (692) (1,874) 168 (2,376) 21,653 — — Cash (used)/realised in financing activities 6 (427) 2,541 (121) 0 (767) 444 (692) (1,833) 801 (2,585) 21,012 (101) (87) Cash generated/utilised 457 427 3,292 1,529 1,517 270 1,880 1,831 1,318 3,683 (359) 23,470 3,968 4,494 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 16,038 15,842 39,312 43,280 Cash+investments at end of year 1,378 1,805 5,097 6,626 8,143 8,414 10,294 12,124 13,442 17,125 15,679 39,312 43,280 47,775
Notes: (a) Estimates FY2020 onwards are based on Ind-AS 116 and are hence not comparable to prior years.
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 53 ADD Reliance Industries (RIL) https://ultraviewer.et/en/own Oil, Gas & Consumable Fuels JULY 19, 2021 load.html UPDATE Sector view: Attractive
Another step. Reliance Retail has announced acquisition of up to ~67% stake in Just CMP (`): 2,112 Dial for a consideration of ~Rs57 bn with plans to develop it as a comprehensive listing Fair Value (`): 2,200 and commerce platform. It will enable RRVL to extend its new commerce foray across a BSE-30: 53,140 wider base of merchants and provide an ecosystem of products as well as services to end consumers. A significant step-up in user traction on RIL’s digital ecosystem is desirable for further upside to our SoTP valuation, as we already ascribe higher-than- telecom business multiple for JPL and an option value for the new commerce business. Reliance Industries Stock data Forecasts/valuations 2021 2022E 2023E CMP(Rs)/FV(Rs)/Rating 2,112/2,200/ADD EPS (Rs) 72.1 81.1 102.0 52-week range (Rs) (high-low) 2,369-1,746 EPS growth (%) 8.0 12.4 25.9 Mcap (bn) (Rs/US$) 13,409/179.8 P/E (X) 29.3 26.1 20.7 ADTV-3M (mn) (Rs/US$) 18,832/252 P/B (X) 1.8 1.8 1.7 Shareholding pattern (%) EV/EBITDA (X) 17.3 12.5 9.8 Promoters 49.1 RoE (%) 7.5 7.1 8.3 FPIs/MFs/BFIs 27.8/4.3/5.7 Div. yield (%) 0.3 0.4 0.4 Price performance (%) 1M 3M 12M Sales (Rs bn) 4,669 6,601 7,478 Absolute (4.5) 9.3 14.6 EBITDA (Rs bn) 807 1,123 1,378 Rel. to BSE-30 (5.7) 0.4 (21.4) Net profits (Rs bn) 435 515 648
RRVL to acquire up to ~67% stake in Just Dial for a cumulative consideration of Rs57.2 bn
Reliance Retail Ventures Limited (RRVL) has announced the acquisition of up to 66.95% stake in Just Dial for a cumulative consideration of Rs57.2 bn through (1) preferential allotment of 21.2 mn equity shares (25.33% diluted stake) at Rs1,022.25/share infusing cash of Rs21.7 bn in the company, (2) acquisition of 13.1 mn equity shares (15.62% diluted stake) from VSS Mani for a consideration of Rs13.3 bn at Rs1,020/share and (3) open offer to acquire up to 21.7 mn equity shares (26% diluted stake) for a consideration of Rs22.2 bn at Rs1,022.25/share.
RRVL to steer Just Dial to develop a comprehensive listing and commerce platform
RRVL plans to direct Just Dial towards becoming a comprehensive listing and commerce platform from its current avatar of local search engine. RRVL intends to leverage Just Dial’s ~30 mn business listings and ~129 mn quarterly unique users in its endeavor to become a large- scale aggregator platform providing a whole gamut of products and services to the end- consumers; we note that RRVL had recently acquired NetMeds, Urban Ladder and Zivame as well to augment its portfolio. In our view, RRVL may step up Just Dial’s investments for customer acquisition and engagement by improving user interface, advertising and providing transaction services; it may also attempt to build a tech-stack with superior product and back- end integration. RRVL may also seek to significantly expand Just Dial’s offerings such as Omni Tarun Lakhotia (eCommerce website builder platform), JD Mart (B2B marketplace) and JDXperts (on-demand services platform). We believe RIL may also cross-sell offerings from Jio Platforms Limited (JPL) to digitize merchants or businesses and enhance the experience for end-consumers. Garima Mishra
JPL and RRVL building a portfolio of offerings, similar to the Chinese technology giants
We highlight that JPL and RRVL are together building an omni-channel portfolio of offerings Hemang Khanna catering to requirements of merchants as well as end-consumers, in a way somewhat similar to the Chinese technology giants, Alibaba and Tencent. RRVL already has a formidable offline Shubhangi Nigam presence and is building several online assets through organic (JioMart, AJIO, Reliancedigital) and inorganic routes (NetMeds, Urban Ladder, Zivame and Just Dial). On the other hand, JPL already has the largest telecom subscriber base under Reliance Jio and it is also developing an ecosystem of entertainment platforms (JioTV, JioCinema, JioSaavn, JioGames) and several other offerings or solutions such as JioBusiness, JioPOS, JioMeet, Haptik and Embibe.
[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. Reliance Industries Oil, Gas & Consumable Fuels
Exhibit 1: RRVL to acquire up to ~67% stake in Just Dial Details of RRVL’s potential investment in Just Dial
Number of shares Diluted shareholding Consideration Price per share (# mn) (%) (Rs bn) (Rs) Preferential allotment 21.2 25.33 21.6 1,022 Purchase from Just Dial's promoter 13.1 15.62 13.3 1,020 Open offer 21.7 26.00 22.2 1,022
Total 56.0 66.95 57.2
Source: Company, Kotak Institutional Equities
Exhibit 2: RRVL building a portfolio of digital assets Online assets owned or acquired by Reliance Retail
App/portal Portfolio Stake (%) JioMart Grocery, fashion and lifestyle, consumer electronics Own AJIO Fashion and lifestyle Own reliancedigital.in Consumer electronics Own Netmeds Pharma retail Acquired 85.06% stake Urban Ladder Furniture and home décor Acquired 81.95% stake Zivame Lingerie and intimate wear Acquired 73.28% stake Just Dial Local search engine platform To acquire up to 66.95% stake
Source: Company, Kotak Institutional Equities
Exhibit 3: JPL and RRVL building an omni-channel portfolio of offerings, like Chinese technology giants Portfolio of businesses under JPL and RRVL
Offline commerce Fresh, Smart, Digital, Trends, Project EVE, Jewels, Jio Stores, Hamleys Online commerce JioMart, AJIO, reliancedigital, Netmeds, Urban Ladder, Zivame, Just Dial Own brands GoodLife, Snactac, YEAH!, BestFarms, Puric, ENZO, Petals, John Players, avaasa, etc. Reliance Retail Fanchise brands Armani, BOSS, Diesel, Marks & Spencers, Mothercare, Steve Madden, Superdry, TUMI etc. Devices JioPhone, JioPhone Next Service offering ResQ Connectivity services Jio Infocomm, JioFiber, JioBusiness, JioMeet Content and entertainment JioTV, JioCinema, JioSaavn, JioNews, JioGames, etc. Payments and finance JioPay, JioMoney, JioUPI, Jio Payments Bank, NUE with Google and Facebook Jio Platforms Education Embibe Hyperlocal Logistics Grab, Urovo
Digital solutions JioPOS, JioCloud, JioSecurity, Haptik, JioAds, etc.
Source: Companies, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 55 Oil, Gas & Consumable Fuels Reliance Industries
Key assumptions behind earnings model
Exhibit 4: Major assumptions for RIL's refining segment, March fiscal year-ends, 2018-24E (US$/bbl)
2018 2019 2020 2021 2022E 2023E 2024E Exchange rate (Rs/US$) 64.5 69.9 70.8 74.2 75.0 77.0 78.5 Crude throughput (mn tons) DTA refinery 32.8 31.4 32.8 34.1 31.2 32.8 32.8 SEZ refinery 37.0 37.0 37.8 31.6 36.9 37.8 37.8 Total crude throughput 69.8 68.3 70.6 65.7 68.0 70.6 70.6 Blended refining margins (US$/bbl) 11.7 9.2 8.9 6.0 7.6 9.0 10.0 Implied operating costs (US$/bbl) 3.3 2.8 2.3 2.4 2.6 2.6 2.7
Source: Company, Kotak Institutional Equities estimates
Exhibit 5: Major assumptions for RIL's petchem segment, March fiscal year-ends, 2018-24E (US$/ton)
2018 2019 2020 2021 2022E 2023E 2024E Exchange rate (Rs/US$) 64.5 69.9 70.8 74.2 75.0 77.0 78.5 Production volumes (mn tons) Polymers 4.9 5.8 6.0 5.9 6.0 6.0 6.0 PE 1.4 2.1 2.3 2.3 2.3 2.3 2.3 PP 2.8 2.9 2.9 2.9 2.9 2.9 2.9 PVC 0.7 0.7 0.8 0.7 0.8 0.8 0.8 Polyesters 2.4 3.5 3.4 2.9 3.5 3.5 3.5 PFY 0.8 1.7 1.6 1.4 1.7 1.7 1.7 PSF 0.6 0.7 0.7 0.6 0.7 0.7 0.7 PET 1.0 1.2 1.2 1.0 1.2 1.2 1.2 Fiber intermediates 9.0 10.9 10.8 9.6 11.0 11.1 11.1 PX 3.7 4.3 4.2 3.9 4.5 4.5 4.5 PTA 4.1 4.9 4.9 4.3 4.9 4.9 4.9 MEG 1.2 1.7 1.7 1.5 1.7 1.7 1.7 Total volumes 16.4 20.1 20.2 18.4 20.6 20.6 20.6 Petchem EBITDA per ton (US$/ton) 244 263 212 176 212 221 223
Notes: (a) Volumes include Recron Malaysia from FY2019 onwards.
Source: Company, Kotak Institutional Equities estimates
56 KOTAK INSTITUTIONAL EQUITIES RESEARCH Reliance Industries Oil, Gas & Consumable Fuels
Exhibit 6: Financial model of Reliance Jio, March fiscal year-ends, 2018-24E (Rs bn)
2018 2019 2020 2021 2022E 2023E 2024E Assumptions Wireless subscriber base at end-period (mn) 187 307 388 424 464 499 520 Wireless subscriber market share (%) 17 28 34 36 38 40 41 Wireless ARPU (Rs/month) 96 131 130 141 145 160 167 Broadband subscriber base at end-period (mn) 1 1 3 6 11 15 Broadband ARPU (Rs/month) — — 683 526 537 548 Overall EBITDA margins (%) 33 39 40 44 49 50 53 Profit model Revenues 202 388 543 699 802 977 1,104 EBITDA 67 151 216 309 393 488 580 Net income 7 30 56 120 153 214 285 Contribution to RIL's EPS (Rs) 1 5 10 13 16 22 30 Balance sheet Net-worth 1,029 404 1,710 1,830 1,983 2,197 2,482 Effective net debt 1,400 1,456 495 511 880 638 329 Invested capital 2,278 1,760 2,144 2,295 3,012 3,119 3,249 Cash flow Operating cash flow (20) 50 99 283 292 373 450 Working capital (29) (75) (37) 19 (3) (5) (3) Capital expenditure (358) (438) (518) (261) (171) (146) (239) Free cash flow (407) (464) (455) 41 119 222 208 Returns (%) RoAE 0.8 4.1 5.3 6.8 8.0 10.2 12.2 RoACE 0.9 2.6 5.2 6.4 7.4 8.8 11.0 CRoCI 2.5 6.9 8.4 11.5 10.9 13.0 14.9 Adjusted CRoCI 2.5 6.9 8.8 11.4 11.0 13.5 16.3
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 57 Oil, Gas & Consumable Fuels Reliance Industries
Exhibit 7: Financial model of Reliance Retail, March fiscal year-ends, 2018-24E (Rs bn)
2018 2019 2020 2021 2022E 2023E 2024E Profit model Revenues (gross) 622 1,166 1,465 1,359 1,991 2,563 2,960 Core retail 362 735 928 767 1,165 1,557 1,823 Jio recharges 330 570 702 777 826 1,006 1,137 EBITDA 25 62 97 85 125 176 212 Core retail 22 52 83 69 108 156 189 Jio recharges 4 10 14 16 17 20 23 EBIT 21 55 83 66 96 135 158 Net income 13 33 54 55 87 114 131 Contribution to RIL's EPS (Rs) 2 5 9 8 12 15 18 Balance sheet Net-worth 92 128 184 780 867 981 1,112 Net debt 32 120 28 54 69 73 57 Invested capital 124 248 212 834 936 1,054 1,169 Operating metrics (%) Revenue growth 86.7 87.4 25.6 (7.2) 46.5 28.8 15.5 Core retail 42.3 102.9 26.2 (17.3) 51.9 33.7 17.1 Jio and fuel 296.9 73.1 23.0 10.8 6.2 21.9 13.0 EBITDA margins 4.1 5.3 6.6 6.2 6.3 6.9 7.2 Core retail 6.0 7.0 8.9 9.0 9.3 10.0 10.4 Jio and fuel 1.1 1.8 2.0 2.0 2.0 2.0 2.0 EBIT margins 3.3 4.8 5.6 4.9 4.8 5.3 5.3 RoAE 16.5 30.0 34.9 11.4 10.5 12.3 12.5 RoACE 14.2 19.4 26.7 9.4 8.1 10.1 10.6
Notes: (a) Fuel retail business transferred to RIL-bp JV during FY2021.
Source: Company, Kotak Institutional Equities estimates
Exhibit 8: Segment break-up of consolidated EBITDA, March fiscal year-ends, 2018-24E (Rs bn)
2018 2019 2020 2021 2022E 2023E 2024E EBITDA Petrochemicals 243 379 309 248 334 358 368 Refining and marketing 306 261 245 133 195 260 306 Oil and gas 17 16 4 3 63 80 89 Organized retail 25 62 97 85 125 176 212 Digital services 68 153 225 340 430 530 628 Others (17) (32) (48) (3) (24) (27) (31)
Total 642 839 831 807 1,123 1,378 1,572
Source: Company, Kotak Institutional Equities estimates
58 KOTAK INSTITUTIONAL EQUITIES RESEARCH Reliance Industries Oil, Gas & Consumable Fuels
Exhibit 9: RIL's earnings are leveraged to several business drivers Sensitivity of consolidated EBITDA, EPS and SoTP to key assumptions, March fiscal year-end, 2022-23
FY2022E FY2023E SoTP valuation EBITDA EPS EBITDA EPS Mar-23 Change (Rs bn) (%) (Rs bn) (%) (Rs bn) (%) (Rs bn) (%) (Rs/share) (%) Refining margins +US$1/bbl 37 3% 4.5 6% 40 3% 4.7 5% 47 2% Refining operating cost +US$0.5/bbl (19) -2% (2.3) -3% (20) -1% (2.4) -2% (24) -1% Petchem margins +US$25/ton 39 3% 4.7 6% 40 3% 4.7 5% 47 2% Retail EBITDA margins +50 bps 10 1% 1.2 1% 13 1% 1.5 1% 50 2% Jio wireless ARPU +Rs10/month 40 4% 4.9 6% 44 3% 5.2 5% 69 3% Jio wireless subscriber +25 mn 25 2% 3.0 4% 27 2% 3.3 3% 43 2% Exchange rate Rs1/US$ 11 1% 1.3 2% 12 1% 1.4 1% 14 1% Base case 1,123 81 1,378 102 2,119
Source: Kotak Institutional Equities estimates
Exhibit 10: We compute US$17 bn of equity value based on probability-weighted valuation scenario for RR’s digital commerce segment Valuation scenario for digital commerce business, March fiscal year-end, 2030 (US$ bn)
Scenario A - Duopoly Scenario B - Oligopoly Scenario C - Intense competition Top-2 players command 80% in the e- Top-3 players commanding 80% All the players continue fighting for Description commerce market market share market share Gross Merchandise Value (GMV, 225 225 225 US$ bn) Market share of RR's e- 40 30 20 commerce segment (%) GMV of RR's e-commerce 90 67 45 segment (US$ bn) Discounting continues to attract new Explanation Limited discounting by top-2 players Limited discounting by top-3 players customers and retain old ones Operating profit / EBITDA margin 8.0 7.0 (10.0) (%) EBITDA of RR's e-commerce 7.2 4.7 (4.5) segment (US$ bn)
EV/EBITDA valuation multiple (X) 12.0 12.0 NA
Reasonable valuation multiple for stable Reasonable valuation multiple for stable Continues to burn cash; accumulated Explanation cash flow generating business cash flow generating business EBITDA loss included in CAC EV of RR's e-commerce 86.3 56.6 — segment (US$ bn) Initial investment in customer 18.0 20.2 22.5 acquisition costs (US$ bn) Equity value of RR's e- 68.3 36.4 (22.5) commerce segment (US$ bn) Equity value discounted to Mar- 30.9 16.5 (10.2) 2023 (US$ bn) Probability 0.4 0.4 0.2 Probability-weighted equity 16.9 value (US$ bn)
Source: Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 59 Oil, Gas & Consumable Fuels Reliance Industries
Exhibit 11: Our SoTP valuation of RIL is Rs2,120 per share Sum-of-the-parts valuation of RIL based on March 2023 estimates (Rs)
EBITDA EV/EBITDA EV Valuation (Rs bn) (X) (Rs bn) (US$ bn) (Rs/share) Energy 5,242 70 826 Petrochemicals 358 7.5 2,687 36 423 Refining and marketing 260 7.5 1,952 26 307 Upstream 80 7.5 603 8 95 Digital services 4,244 57 669 Base case 530 10.0 5,303 71 835 Telecom option value 638 9 100 Minority interest (33.52%) (1,696) (23) (267) Retail 4,523 60 712 Core retail 156 25.0 3,906 52 615 Connecivity (Jio) 20 10.0 202 3 32 New commerce option value 1,268 17 200 Minority interest (14.94%) (853) (11) (134) Total enterprise value 14,010 187 2,207 Others 75 1 12 Consolidated net debt 634 8 100 Fair value 13,451 179 2,119
Notes: (a) We use 6.349 bn shares including rights issue but excluding 412.8 mn treasury shares.
Source: Kotak Institutional Equities estimates
Exhibit 12: Our SoTP valuation of RIL is Rs2,450 per share Sum-of-the-parts valuation of RIL based on March 2024 estimates (Rs)
EBITDA EV/EBITDA EV Valuation (Rs bn) (X) (Rs bn) (US$ bn) (Rs/share) Energy 5,526 72 870 Petrochemicals 368 7.5 2,759 36 435 Refining and marketing 306 7.0 2,144 28 338 Upstream 89 7.0 623 8 98 Digital services 4,812 62 758 Base case 628 10.0 6,278 82 989 Telecom option value 638 8 100 Minority interest (33.52%) (2,104) (27) (331) Retail 5,248 68 827 Core retail 189 25.0 4,727 61 745 Connecivity (Jio) 23 10.0 229 3 36 New commerce option value 1,268 16 200 Minority interest (14.94%) (976) (13) (154) Total enterprise value 15,585 202 2,455 Others 66 1 10 Consolidated net debt 100 1 16 Fair value 15,552 202 2,449
Notes: (a) We use 6.349 bn shares including rights issue but excluding 412.8 mn treasury shares.
Source: Kotak Institutional Equities estimates
60 KOTAK INSTITUTIONAL EQUITIES RESEARCH Reliance Industries Oil, Gas & Consumable Fuels
Exhibit 13: Consolidated profit model, balance sheet, cash model, March fiscal year-ends, 2018-24E (Rs bn)
2018 2019 2020 2021 2022E 2023E 2024E Profit model (Rs bn) Net sales 3,917 5,671 5,967 4,669 6,601 7,478 8,019 EBITDA 642 839 831 807 1,123 1,378 1,572 Other income 89 81 140 163 143 155 172 Finance cost (81) (165) (220) (212) (189) (178) (158) DD&A expense (167) (209) (222) (266) (324) (380) (422) Pretax profits 483 546 528 493 752 975 1,164 Minority interest/share of associates 1 (1) (4) (41) (64) (89) (115) Extraordinary items 11 5 (2) 56 — — — Effective tax (133) (154) (128) (17) (173) (239) (298) Net profits 361 396 394 491 515 648 751 Adjusted net profits 350 391 396 435 515 648 751 Adjusted EPS (Rs) 59 66 67 72 81 102 118
Balance sheet (Rs bn) Total equity 2,935 3,871 4,533 7,002 7,475 8,072 8,769 Deferred tax liability 245 451 512 370 403 453 519 Minority interest 35 83 80 993 1,057 1,146 1,261 Total borrowings 2,188 2,875 2,914 2,238 1,811 1,556 1,324 Other liabilities 2,709 2,696 3,590 2,610 3,178 3,236 3,172 Total liabilities and equity 8,113 9,976 11,630 13,212 13,923 14,462 15,044 Cash 43 75 309 174 399 619 957 Loans and advances 50 74 224 25 25 25 25 Other assets 1,341 1,814 2,014 2,794 2,466 2,613 2,722 Total fixed assets 5,851 5,658 6,315 6,570 7,385 7,557 7,691 Investments 829 2,355 2,768 3,648 3,648 3,648 3,648 Total assets 8,113 9,976 11,630 13,212 13,923 14,462 15,044 Effective net debt 2,349 2,335 2,487 594 634 100 (601) Free cash flow (Rs bn) Operating cash flow, excl. working capital 353 475 504 586 782 1,011 1,179 Working capital 185 (251) 192 (507) 204 (30) (43) Capital expenditure (740) (936) (765) (1,058) (834) (611) (683) Other income 23 16 22 92 143 155 172 Free cash flow (178) (697) (47) (888) 295 525 625
Ratios (%) Debt/equity 74.5 74.3 64.3 32.0 24.2 19.3 15.1 Net debt/equity 80.0 60.3 54.9 8.5 8.5 1.2 (6.9) RoAE 12.6 11.5 9.4 7.5 7.1 8.3 8.9 RoACE 7.7 7.8 7.2 7.2 6.6 7.5 8.1 Adjusted RoACE 12.3 11.8 9.9 9.2 9.5 10.8 11.9 CRoCI 7.4 7.5 7.3 7.4 7.6 8.7 9.4 Adjusted CRoCI 10.2 12.4 10.3 10.1 10.7 12.4 13.7
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 61 ESG India JULY 18, 2021 UPDATE BSE-30: 53,140
Sustainability disclosures to evolve over time. Sustainability reporting in India will make a big shift to a more comprehensive format – Business Responsibility & Sustainability Reporting (BRSR) effective FY2023. This is in line with global trends, where regulators are increasing the sustainability disclosure to keep pace with the growing acceptance of ESG investing – which continues to become mainstream. Even as the new norms are a good start to transition top-1,000 companies in one go, they will need to evolve over time to be at par with the best global practices.
BRSR: a step in the right direction; more quantitative disclosure under the new norm QUICK NUMBERS
The government in its continued effort to embrace sustainability has rolled out a new detailed Globally, provisions disclosure format BRSR to replace the business responsibility reporting (BRR) through a circular on sustainability in May 2021 (refer to our earlier report). The BRSR is a material departure from BRR and lays reporting witness a considerable emphasis on quantifiable metrics and enhanced qualitative disclosures, which are sharp increase in made more comprehensive (see Exhibits 2-12). However, BRSR like the BRR continues to be the recent years based on the nine principles (thematic pillars) of business responsibility, which are inter- dependent and inter-related and can be mapped to the UN’s sustainable development goals BRSR will be (see Exhibit 13). mandatory for top- A bold step to transition top-1,000 companies in one go; some disclosures kept voluntary 1,000 companies in India from FY2023 The BRSR will be voluntary for top-1,000 companies (by market capitalization) in FY2022 and mandatory from FY2023. However, to facilitate the transition, some disclosures are kept BRSR’s nine mandatory (‘essential category’) while the more detailed and value-chain related disclosure are principles are kept voluntary (‘leadership category’). The two categories will eventually be merged into the aligned with UN essential category, in our view. The mid/small cap companies need to act fast to prepare SDGs themselves to comply with the new requirements. The format also comes along with a guidance note to ensure consistency and facilitate comparability of data across companies, sectors and time periods.
Creates a win-win situation for all stakeholders
Capital market participants will be better-placed to integrate ESG in investing with the availability of detailed non-financial/sustainability disclosures, while banks, credit rating agencies, and other financial institution can use this along with financial information to assess credibility of a company/business. Businesses on the other hand will also gain by increase in access to capital, reduced financial risk, improved value creation, and obtaining a license to operate.
Evolution to continue to be at par with best global practices
We believe that the new disclosure standards offer a promising start, but need to evolve over time to (1) bring sector-wise focus on material performance indicators, (2) provide flexibility to Sandeep Gupta companies to furnish voluntary disclosures and details on key strategic initiatives, (3) make some of the disclosure on important parameters (such as renewable energy generation/consumption, Umesh Jain plant-wise water consumption in water-stressed areas, data breach and initiatives taken to improve resource efficiency/reduce emissions; see Exhibit 14) mandatory instead of voluntary as in the current format at the earliest, and (4) disclose time-bound targets and its progress mandatory on factors where a company has taken up specific projects or committed resources.
[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. ESG India
Exhibit 1: Provisions for sustainability reporting have increased significantly Number of non-financial/sustainability reporting provisions by different issuer types, across the globe
Source: Carrots & Sticks, Kotak Institutional Equities
Exhibit 2: Gender diversity & employee attrition disclosures improved in BRSR Key differences in the general disclosure requirements of BRR and BRSR
BRR BRSR Section A: General Disclosures Yes/No Qualitative Quantitative Yes/No Qualitative Quantitative Basic details such as entity-name, corporate identification number, registered office address, paid-up capital. Significant products sold/services rendered. Number of locations where business activity is undertaken--classified into (1) national, and (2) international. Number of employees/workers along-with the break-up by (1) gender, and (2) permanent/other than permanent. Turnover/ attrition rate of permanent employees & workers, along-with gender- wise details. Total number of board members and KMP's along-with details about women representation. Complaints/grievances on any of the nine principles of BRSR. Material issues on responsible business conduct/sustainability that present a risk or an opportunity. Rationale for identifying the same, approach taken to adapt or mitigate the risk along-with its implications. Details on reporting boundary.
Source: SEBI, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 63 India ESG
Exhibit 3: Commitment/target on ESG to be disclosed in BRSR Key differences in the management & process disclosures requirements of BRR and BRSR
BRR BRSR Section B: Management and Process Disclosures Yes/No Qualitative Quantitative Yes/No Qualitative Quantitative Specific commitments, goals and targets set by the entity with defined timelines, if any. Performance of the entity against the specific commitments, goals and targets along-with reasons in case the same are not met. Does the entity have a specified committee of the board/director responsible for decision making on sustainability related issues? If yes, provide details. Statement by director responsible for sustainability highlighting overall vision and strategy of the organization and broader trends influencing the sustainability of the organization. Does the company have policies with respect to each of the nine principles? If yes, whether approved by the board? Web link to the policy (if any). Whether the entity has translated the policy into procedures/does company have in- house structure to implement the policy? Performance/regulatory compliance against above policies and follow up action /rectification plan.
Source: SEBI, Kotak Institutional Equities
Exhibit 4: Quantitative & qualitative disclosures enhanced to monitor conduct of business with integrity in BRSR Key differences in the disclosure requirement pertaining to principle 1 under BRSR and BRR
Section C: Principle wise performance disclosures
Principle 1: Businesses should conduct and govern themselves with integrity, and in a manner that is Ethical, Transparent and Accountable BRR BRSR Reporting requirement Yes/No Qualitative Quantitative Yes/No Qualitative Quantitative Essential Training and awareness programme on any of the nine principles conducted during the year for BOD/KMPs/employees & workers and its impact. Details of material fines and penalties paid in proceedings (by the entity or by directors/KMPs) to regulatory authorities. Does the entity have an anti-corruption or anti-bribery policy? If yes, provide details. Number and details of complaint filed with regard to conflict of interest of the KMP/directors. Details of any corrective action taken or underway on issues related to fines/penalties/action taken by any regulatory/judicial authority, on cases of corruption and conflict of interest. Leadership Awareness programme conducted for value chain partners on any of the nine principles during the financial year.
Source: SEBI, Kotak Institutional Equities
64 KOTAK INSTITUTIONAL EQUITIES RESEARCH ESG India
Exhibit 5: Measures to assess sustainability of products/services over the entire life cycle enhanced in BRSR Key differences in the disclosure requirement pertaining to principle 2 under BRSR and BRR
Principle 2: Businesses should provide goods and services in a manner that is sustainable and safe BRR BRSR Reporting requirement Yes/No Qualitative Quantitative Yes/No Qualitative Quantitative Essential R&D and capital expenditure investments on specific technologies to improve the environmental and social impact of products and process. Does company have procedure in place for sustainable sourcing? If yes, provide details. Whether Extended Producer Responsibility (EPR) is applicable to the entity’s? If yes, whether the waste collection plan is in line with the EPR plan submitted to Pollution Control Boards? Describe the process in place to safely reclaim company's products for reusing, recycling and disposing products such as plastics, E-waste, hazardous waste and any other waste. Leadership Of the products and packaging reclaimed at end of life of products, amount (in metric tons) reused, recycled, and safely disposed. Product life cycle assessment (LCA) carried out for products and services. Describe any social or environmental risk identified from LCA and what are action taken to mitigate them. Percentage of recycled or reused input material to total material (by value) used.
Source: SEBI, Kotak Institutional Equities
Exhibit 6: Quantitative disclosures to access company’s efforts to manage the well-being of employees introduced in BRSR Key differences in the disclosure requirement pertaining to principle 3 under BRSR and BRR
Principle 3: Businesses should respect and promote the well-being of all employees, including those in their value chains BRR BRSR Reporting requirement Yes/No Qualitative Quantitative Yes/No Qualitative Quantitative Essential Details of training given to employees and workers on health & safety and skill up-gradation. Details of safety related incidents such as lost time injury frequency rate, number of fatalities of both employees and workers. Efforts taken by entity to ensure a safe and healthy work place. Return to work and retention rates of permanent employees and workers that took parental leave. Details of performance and career development reviews of employees and worker. Membership of employees and worker in associations or unions recognized by the listed entity. Number of complaints made by employees & workers about health and safety practices and working conditions during the year and instances remaining un-resolved at the end of year. Details of measures for well being (accidental insurance, health insurance , maternity/paternity benefits, day care facility) and retirement benefits given to employees & workers.
Proportion of plants and offices that were assessed by entity or statutory authorities or third parties for health & safety practices/working conditions. Also, details on any corrective action taken or underway to address safety- related incidents or significant concerns highlighted from these assessments.
Leadership Number of employees/workers suffered from injuries or fatalities are rehabilitated or whose family members have been placed in suitable employment and does the entity extend any life insurance/ compensation package in event of death of employees/workers.
For value chain partners--(1) assessment of health and safety practices and working condition and corrective measures undertaken from findings of the assessment, and (2) ensuring that statutory dues have been deducted and deposited of value chain partners.
Source: SEBI, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 65 India ESG
Exhibit 7: Consultation with stakeholders to identify company’s ESG risks more focused in BRSR Key differences in the disclosure requirement pertaining to principle 4 under BRSR and BRR
Principle 4: Businesses should respect the interests of and be responsive to all its stakeholder BRR BRSR Reporting requirement Yes/No Qualitative Quantitative Yes/No Qualitative Quantitative Essential List of key stakeholder group identified, whether identified as vulnerable or marginal, frequency of communication and any concern raised during interaction with stakeholders. Leadership Process for consultation between stakeholder & how the stakeholder consultation is used to support the identification and management of environmental, and social topics. Detail of instance of action taken to address the concern of vulnerable or marginalized stakeholder group.
Source: SEBI, Kotak Institutional Equities
Exhibit 8: Multiple measures introduced to access how company promotes human rights while conducting its business in BRSR Key differences in the disclosure requirement pertaining to principle 5 under BRSR and BRR
Principle 5: Businesses should respect promote human rights
BRR BRSR Reporting requirement Yes/No Qualitative Quantitative Yes/No Qualitative Quantitative Essential Number of employees/workers who have been provided training on human rights issues and policies of the entity. Describe internal mechanism in place to redress grievances related to human right issues. Number of complaints made on sexual harassment, discrimination at workplace, child labor, forced labor and other human right related issues. Mechanism to prevent adverse consequences to the complainant in discrimination and harassment cases. Percentage of plants assessed by entity or statutory authority or third party on above specified issues and details of any corrective actions taken or underway to address significant risks /concerns arising from the assessments.
Details of remuneration/salary/wages paid to board of directors, KMPs, employees and workers. Also, proportion of employees/ workers which are paid salary/wages equal to minimum wages.
Leadership Details on assessment of value chain partners on sexual harassment, discrimination at workplace, child labor, forced labor and other human right related issues. Corrective action taken or underway to address significant risk/concern arising from above assessments.
Source: SEBI, Kotak Institutional Equities
66 KOTAK INSTITUTIONAL EQUITIES RESEARCH ESG India
Exhibit 9: Quantitative disclosures of environmental parameters significantly increased in BRSR Key differences in the disclosure requirement pertaining to principle 6 under BRSR and BRR
Principle 6: Businesses should respect and make efforts to protect and restore environment BRR BRSR Reporting requirement Yes/No Qualitative Quantitative Yes/No Qualitative Quantitative Essential Total energy consumption by the entity classifying them into - energy consumption, fuel consumption and others. Energy consumption per rupee of revenue and any other relevant metric. Does the entity have any sites/facilities identified as designated consumers (DCs) under the Performance, Achieve and Trade (PAT) Scheme ? If so disclose if the targets under the PAT scheme have been achieved or else share the details of remedial actions taken. Total water withdrawal (by source), water consumption, water intensity per rupee of revenue and any other relevant metric. Has the entity implemented mechanism of zero liquid discharge? If yes, provide details.
Detail of air emissions (NOx, Sox, particulate matter, persistent organic pollutants, hazardous air pollutant etc.). Total absolute GHG emissions (scope 1 and scope 2) and emissions per rupee of revenue and any other relevant metric. Does the company have any project related to reducing GHG emissions/clean development? If yes, provide details. Detail of waste (1) generated (2) recovered through recycling, re-using or other recovery options and (3) disposed - detailing the nature of disposal method. Strategy adopted by the company to reduce usage of hazardous and toxic chemicals in the products and processes and the practices adopted to manage such wastes. Detail of operations/offices in/around ecologically sensitive area and whether environmental approval is taken if required. Is the entity compliant with the applicable environmental law/regulations/guidelines in India? If not, provide details of all such non-compliances, fines/penalties levied (if any) and corrective action taken. Leadership Breakup of total energy consumed into renewable and non-renewable sources. Water discharge by destination (sea-water, groundwater etc.) and level of treatment (Primarily, secondary or tertiary treatment) (In kiloliters). Water withdrawal, consumed and discharge (by source/destination) for each facility/plant located in water stress area. Total absolute scope 3 emissions and its intensity by relevant metrics. Detail of any specific initiatives or used innovative technology or solutions to improve resource efficiency, or reduce impact due to emissions/effluent discharge/waste generated. Value chain related: (1) any significant adverse impact on environment arising from value chain of the entity; any adaptation/migration measures taken up by the entity? (2) Percentage of value chain partners that were assessed for environmental impact.
Source: SEBI, Kotak Institutional Equities
Exhibit 10: Disclosures on business engagement to influence public & regulatory policy remain broadly the same in BRR & BRSR Key differences in the disclosure requirement pertaining to principle 7 under BRSR and BRR
Principle 7: Businesses, when engaging in influencing public and regulatory policy, should do so in a manner that is responsible and transparent
BRR BRSR Reporting requirement Yes/No Qualitative Quantitative Yes/No Qualitative Quantitative Essential Is the company a member of any trade and chamber or association? If yes, provide details. Leadership Detail of public policy position advocated by entity.
Source: SEBI, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 67 India ESG
Exhibit 11: Quantitative disclosures to measure social impact of business enhanced in BRSR Key differences in the disclosure requirement pertaining to principle 8 under BRSR and BRR
Principle 8: Businesses should promote inclusive growth and equitable development BRR BRSR Reporting requirement Yes/No Qualitative Quantitative Yes/No Qualitative Quantitative Essential Have company done any impact assessment of social initiative? If yes, provide details of Social Impact Assessments (SIA) of projects undertaken by the entity. Projects for which ongoing rehabilitation and resettlement is being undertaken by your entity. Has the company taken any steps to procure goods and services from small/local suppliers. If yes, provide detail of initiatives to improve their capacity/capability. Leadership Detail of any negative social impact identified in SIA. Details of beneficiaries of CSR projects.
Source: SEBI, Kotak Institutional Equities
Exhibit 12: Qualitative disclosures to measure company efforts to provide value to customers in a responsible manner enhanced in BRSR Key differences in the disclosure requirement pertaining to principle 9 under BRSR and BRR
Principle 9: Businesses should engage with and provide value to their consumers in a responsible manner
BRR BRSR Reporting requirement Yes/No Qualitative Quantitative Yes/No Qualitative Quantitative Essential Number of consumer complaints received and pending for resolution pertaining to data privacy, advertising, cyber- security, delivery of essential services, restrictive trade practice and unfair trade practice. Details of instances of product recalls on account of safety issue. Details of any corrective actions taken or underway on issues relating to advertising, and delivery of essential services; cyber security and data privacy of customers; re-occurrence of instances of product recalls; penalty/action taken by regulatory authorities on safety of products/services. Leadership Information relating to data breach regarding (1) data breach along with impact and (2) data breach involving personally identifiable information of customers. Does the entity display product information on the product over and above what is mandated as per local laws? If yes, provide details in brief. Steps taken to inform and educate consumers about safe and responsible usage of products and/or services.
Source: SEBI, Kotak Institutional Equities
68 KOTAK INSTITUTIONAL EQUITIES RESEARCH ESG India
Exhibit 13: Nine core principles of BRSR are aligned with UN SDGs SDGs mapped with principles of BRSR
Source: NGRBC, Kotak Institutional Equities
Exhibit 14: Key reporting factors that should be made mandatory (currently voluntary) in BRSR A few reporting requirements kept under leadership category in BRSR
Source: Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 69 ATTRACTIVE Oil, Gas & Consumable Fuels India JULY 19, 2021 UPDATE BSE-30: 53,140 Staying together for longer. OPEC+ has agreed to raise supply by 2 mn b/d by end- CY2021 and extend their overall agreement until end-CY2022, while allowing for higher baseline capacity for key nations from May 2022. The arrangement may provide near-term relief to the tight oil markets amid ongoing recovery in demand and curtailed supplies. However, the deal extension paves the way for OPEC+ to calibrate oil markets for a longer duration, which may allow them to manage scenarios of any volatility in demand or increase in supplies from the US or Iran, thereby keeping prices steadier.
OPEC+ to raise supply by 2 mn b/d by end-CY2021; remaining cuts to be phased out in CY2022
OPEC+ cartel has agreed to—(1) increase overall supply by 0.4 mn b/d per month over August- December 2021, thereby adding 2 mn b/d of supply by end-CY2021, (2) re-evaluate market conditions in December 2021 and continue to phase out the remaining production cuts by September 2022, (3) extend the Declaration of Cooperation to control oil production levels up to December 2022 and (4) raise baseline capacity for the Cartel by 1.6 mn b/d to 45.49 mn b/d in May 2022, allowing an increase of 0.5 mn b/d for Saudi Arabia and Russia, 0.33 mn b/d for UAE and 0.15 mn b/d for Kuwait and Iraq. The anticipated recovery in global demand in the coming months provides headroom for the Cartel to raise production, as the call on OPEC+ crude is estimated to rise to 38.8 mn b/d in 4QCY21 from 36.8 mn b/d in 2QCY21.
Extension of the deal to end-CY2022 allows greater control over supply and hence, oil prices
OPEC+ decision to extend their arrangement until December 2022 from earlier timeline of April 2022 will allow for a calibrated increase in production aligned to the demand-supply balance in global oil markets for a longer duration and thereby managing oil prices at steadier levels. The extension will enable the Cartel to manage their supplies in scenarios of (1) volatility in demand due to any recurrence of Covid, (2) ramp-up in production from Iran, if sanctions are lifted and (3) increase in production from the US, as and when the shale players decide to raise their capital outlay program with higher crude prices. The Cartel has been remarkably successful in adhering strictly to overall production quotas so far thereby keeping oil markets in check.
The US production remains restrained, while negotiations with Iran hit an impasse
Overall oil production from the US has remained restrained, rising gradually relative to previous periods of elevated crude prices as the shale players continue to focus on commitments of deleveraging and dividend payments by maintaining discipline on their capital projects. On the other hand, media articles suggest that the negotiations between Iran, the US and key European nations to restore the nuclear accord have hit an impasse post the change of regime in Iran and emergence of other geopolitical issues between the countries.
Prefer GAIL over upstream PSUs as a hedge against crude prices Tarun Lakhotia We prefer GAIL as a hedge against higher crude prices as it benefits from an increase in profitability of LPG production and LNG marketing segments; the recent sharp increase in spot
LNG prices also augurs well for the latter. We recommend investors to avoid ONGC and OIL as a Hemang Khanna play on crude prices, despite higher direct leverage on their profits, given (1) an uninspiring production track record notwithstanding a sustained increase in capital expenditure and operating costs and (2) limited free cash flow generation and deteriorating returns profile due to inefficient capital allocation policies.
[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. Oil, Gas & Consumable Fuels India
Exhibit 1: OPEC+ has produced well below its targets in 1HCY21 Global crude demand-supply balance, CY2020-21E (mn b/d)
1QCY20 2QCY20 3QCY20 4QCY20 CY2020 1QCY21 2QCY21 3QCY21E 4QCY21E CY2021E Global oil demand 93.9 82.9 92.6 94.6 91.0 93.3 94.9 98.0 99.3 96.4 Non-OPEC+ oil supply 53.1 49.2 50.6 51.2 51.0 51.9 52.8 55.2 55.2 53.8 OPEC NGLs supply 5.4 5.1 5.1 5.1 5.2 5.2 5.3 5.3 5.3 5.3 OPEC+ oil supply 41.8 37.7 35.4 36.0 37.7 35.3 36.4 Surplus/(deficit) 6.3 9.1 (1.6) (2.2) 2.9 (0.9) (0.4) Call on OPEC+ oil 35.5 28.6 36.9 38.3 34.8 36.2 36.8 37.4 38.8 37.3 OPEC+ production targets 36.7 37.3 38.5 39.7 38.1
Source: IEA, Kotak Institutional Equities estimates
Exhibit 2: OPEC+ has remained remarkably compliant with their production targets OPEC+ crude oil production, targets and compliance levels (mn b/d)
Production Supply Target Compliance (%) May-21 Jun-21 baseline May-21 Jun-21 Jul-21 May-21 Jun-21 OPEC-10 Algeria 0.89 0.91 1.06 0.89 0.90 0.89 98 92 Angola 1.12 1.08 1.53 1.28 1.30 1.28 162 195 Congo 0.27 0.28 0.33 0.27 0.28 0.27 106 92 Equatorial Guinea 0.11 0.11 0.13 0.11 0.11 0.11 85 89 Gabon 0.17 0.19 0.19 0.16 0.16 0.16 23 (11) Iraq 3.94 3.90 4.65 3.91 3.95 3.91 93 108 Kuwait 2.36 2.38 2.81 2.36 2.39 2.36 100 102 Nigeria 1.34 1.31 1.83 1.54 1.55 1.54 166 189 Saudi Arabia 8.54 8.92 11.00 9.23 9.35 9.23 143 126 UAE 2.64 2.68 3.17 2.66 2.69 2.66 104 103 Total OPEC-10 21.38 21.76 26.68 22.40 22.67 22.40 124 123 Non-OPEC Azerbaijan 0.59 0.61 0.72 0.60 0.61 0.60 118 101 Kazakhstan 1.51 1.51 1.71 1.46 1.47 1.46 81 84 Mexico 1.69 1.68 1.75 1.75 1.75 1.75 Oman 0.74 0.74 0.88 0.74 0.75 0.74 101 105 Russia 9.53 9.52 11.00 9.42 9.46 9.42 94 96 Others 0.92 0.91 1.11 0.93 0.94 0.93 91 116 Total non-OPEC 14.97 14.97 17.17 14.90 14.98 14.90 94 97 Total OPEC+ 36.35 36.73 43.85 37.30 37.65 37.30 114 114 Exempted Iran 2.40 2.45 Libya 1.15 1.17 Venezuela 0.55 0.55 Total OPEC 25.48 25.93
Source: IEA, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 71 India Oil, Gas & Consumable Fuels
Exhibit 3: OPEC has more than fully complied to production cuts in the recent months OPEC’s compliance to production cut targets, May 2020 onwards (%)
(%) OPEC compliance to production cuts 140
120
100
80
60
40
20
-
Jul-20
Jan-21
Jun-20
Jun-21
Oct-20
Feb-21
Sep-20
Apr-21
Dec-20
Nov-20
Mar-21
Aug-20
May-20 May-21
Source: IEA, Kotak Institutional Equities
Exhibit 4: Non-OPEC countries have largely complied to production cuts Non-OPEC’s compliance to production cut targets, May 2020 onwards (%)
(%) Non-OPEC compliance to production cuts 100 90 80 70 60 50 40 30 20 10
-
Jul-20
Jan-21
Jun-20
Jun-21
Oct-20
Feb-21
Sep-20
Apr-21
Dec-20
Nov-20
Mar-21
Aug-20
May-20 May-21
Source: IEA, Kotak Institutional Equities
72 KOTAK INSTITUTIONAL EQUITIES RESEARCH Oil, Gas & Consumable Fuels India
Exhibit 5: OPEC+ has increased reference capacity by 1.63 mn b/d to 45.5 mn b/d from May 2022 Revisions in OPEC+’s reference production levels (mn b/d)
Reference production Up to April 2022 From May 2022 Change Algeria 1.06 1.06 — Angola 1.53 1.53 — Congo 0.33 0.33 — Eq.Guinea 0.13 0.13 — Gabon 0.19 0.19 — Iraq 4.65 4.80 0.15 Kuwait 2.81 2.96 0.15 Nigeria 1.83 1.83 — Saudi Arabia 11.00 11.50 0.50 UAE 3.17 3.50 0.33 Azerbaijan 0.72 0.72 — Bahrain 0.21 0.21 — Brunei 0.10 0.10 — Kazakhstan 1.71 1.71 — Malaysia 0.60 0.60 — Mexico 1.75 1.75 — Oman 0.88 0.88 — Russia 11.00 11.50 0.50 Sudan 0.08 0.08 — South Sudan 0.13 0.13 — Total OPEC+ 43.85 45.49 1.63
Source: IEA, Kotak Institutional Equities estimates
Exhibit 6: Production from Saudi Arabia has remained below its targets given unilateral reduction Monthly crude production from Saudi Arabia, January 2015 onwards (mn b/d)
(mn b/d) Saudi Arabia oil production Saudi Arabia target production level 13 12 11 10 9 8 7 6
5
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
Jul-20
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jan-21
Oct-15
Oct-16
Oct-17
Oct-18
Oct-19
Oct-20
Apr-15
Apr-16
Apr-17
Apr-18
Apr-19
Apr-20 Apr-21
Source: OPEC, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 73 India Oil, Gas & Consumable Fuels
Exhibit 7: Russia production has increased modestly in the recent months, aligned with targets Monthly crude production from Russia, January 2017 onwards (mn b/d)
(mn b/d) Russia oil production Russia target production level 13
12
11
10
9
8
7
6
5
Jul-17
Jul-18
Jul-19
Jul-20
Jan-17
Jan-18
Jan-19
Jan-20
Jan-21
Oct-17
Oct-18
Oct-19
Oct-20
Apr-17
Apr-18
Apr-19
Apr-20 Apr-21
Source: Russia, Kotak Institutional Equities
Exhibit 8: Iran is preparing to increase production in anticipation of easing sanctions from the US Monthly average and current crude production from Iran, January 2015 onwards (mn b/d)
(mn b/d) Iran oil production 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5
0.0
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
Jul-20
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jan-21
Oct-15
Oct-16
Oct-17
Oct-18
Oct-19
Oct-20
Apr-15
Apr-16
Apr-17
Apr-18
Apr-19
Apr-20 Apr-21
Source: OPEC, Kotak Institutional Equities
74 KOTAK INSTITUTIONAL EQUITIES RESEARCH Oil, Gas & Consumable Fuels India
Exhibit 9: US oil production has remained range-bound despite elevated crude prices Weekly field production of crude oil in the US, January 2015 onwards (mn b/d)
(mn b/d) US crude oil production 13.5
13.0
12.5
12.0
11.5
11.0
10.5
10.0
9.5
9.0
5-Jan-18
4-Jan-19
3-Jan-20
1-Jan-21
9-Oct-20
2-Feb-18
1-Feb-19
7-Dec-18
6-Dec-19
4-Dec-20
20-Jul-18
9-Nov-18
19-Jul-19
8-Nov-19
17-Jul-20
6-Nov-20
2-Mar-18
1-Mar-19
31-Jan-20
29-Jan-21
22-Jun-18
21-Jun-19
19-Jun-20
18-Jun-21
12-Oct-18
11-Oct-19
28-Feb-20
26-Feb-21
27-Apr-18
14-Sep-18
26-Apr-19
13-Sep-19
24-Apr-20
11-Sep-20
23-Apr-21
30-Mar-18
29-Mar-19
27-Mar-20
26-Mar-21
17-Aug-18
16-Aug-19
14-Aug-20
25-May-18
24-May-19
22-May-20 21-May-21
Source: EIA, Kotak institutional Equities
Exhibit 10: The US oil rig count has increased steadily from lows in August 2020, but remain significantly below pre-Covid levels amid disciplined capital allocation by the shale players US oil rig count, January 2018 onwards (#)
(#) US rig count 1,100
1,000
900
800
700
600
500
400
300
200
5-Jan-18 4-Jan-19 3-Jan-20 1-Jan-21
9-Oct-20
2-Feb-18 1-Feb-19
7-Dec-18 6-Dec-19 4-Dec-20
9-Nov-18 8-Nov-19 6-Nov-20
20-Jul-18 19-Jul-19 17-Jul-20
1-Mar-19 2-Mar-18
29-Jan-21 31-Jan-20
21-Jun-19 19-Jun-20 18-Jun-21 22-Jun-18
28-Feb-20 12-Oct-18 11-Oct-19 26-Feb-21
27-Apr-18 14-Sep-18 26-Apr-19 13-Sep-19 24-Apr-20 11-Sep-20 23-Apr-21
30-Mar-18 29-Mar-19 27-Mar-20 26-Mar-21
17-Aug-18 16-Aug-19 14-Aug-20
21-May-21 25-May-18 24-May-19 22-May-20
Source: EIA, Kotak institutional Equities
Exhibit 11: OECD inventories moderating towards the lower end of the five-year range Total industry and government-controlled crude and product stocks in OECD countries (bn bbls)
Range 2016-20 2015 2016 2017 2018 2019 2020 2021 5.0 4.9 4.8 4.7 4.6 4.5 4.4 4.3 4.2 4.1 4.0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: IEA, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 75 June 2021: Results calendar India Daily Summary Daily Summary India
Mon Tue Wed Thu Fri Sat KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK 19-Jul 20-Jul 21-Jul 22-Jul 23-Jul 24-Jul ACC Asian Paints Bajaj Finserv Bajaj Auto Ambuja Cements ICICI Bank HCL Technologies Bajaj Finance CEAT Bajaj Holdings & Investment Atul ITC HDFC Standard Life ICICI Pru Life Gland Pharma Biocon Crompton Greaves Consumer Nippon Life India Asset ManagementSyngene International Havells India Hindustan Unilever Federal Bank Jubilant Foodworks Hindustan Zinc JSW Steel Mahindra CIE Automative ICICI Lombard Reliance Industries Polycab India MphasiS SBI Cards -
Rallis India UltraTech Cement SKF India July 19,2021 July Schaeffler India United Spirits Supreme Industries Yes Bank
26-Jul 27-Jul 28-Jul 29-Jul 30-Jul 31-Jul Alembic Pharmaceuticals Dalmia Bharat Gateway Distriparks LIC Housing Finance Bharat Heavy Electricals IDFC Bank Axis Bank Dr Reddys Laboratories Mahanagar Gas Tech Mahindra Cholamandalam Investment Coromandel International Sanofi India Maruti Suzuki India TVS Motor Co. Exide Industries
GlaxoSmithkline Pharma The Ramco Cements Pfizer Kansai Nerolac Paints Kotak Mahindra Bank Torrent Pharmaceuticals SIS Marico Larsen & Toubro TeamLease Services Sun Pharmaceuticals MMFSL SBI Life Insurance Vedanta 2-Aug 3-Aug 4-Aug 5-Aug 6-Aug 7-Aug Castrol India Dabur India Bosch Tata Power Co. HDFC IIFL Wealth Tata Consumer Products 9-Aug 10-Aug 11-Aug 12-Aug 13-Aug 14-Aug Computer Age Management ServicesEndurance Technologies 3M India Amara Raja Batteries Trent
Source: NSE, Kotak Institutional Equities
76 KOTAK INSTITUTIONAL EQUITIES RESEARCH 76
Kotak Institutional Equities: Valuation summary of KIE Universe stocks 77
Price (Rs) Fair Value Upside Mkt cap. O/S shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) ADVT-3M Company Rating 16-Jul-21 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E (US$ mn) Automobiles & Components Amara Raja Batteries SELL 728 725 (0) 124 1.7 171 38 42 48 (2) 10 16 19 18 15 11.0 9.6 8.2 3.0 2.6 2.3 16.4 15.9 16.3 1.5 1.4 1.7 20 Apollo Tyres ADD 231 240 4 147 2.0 638 13 15 19 57 16 25 18 15 12 6.9 6.4 5.3 1.3 1.2 1.1 7.8 8.2 9.5 1.5 1.2 1.2 20 Ashok Leyland REDUCE 128 125 (2) 375 5.0 2,936 (1) 2 6 (185) 256 265 NM 80 22 75.9 24.7 12.1 5.4 5.2 4.5 NM 6.6 22 0.5 0.5 1.8 33 Bajaj Auto BUY 3,932 4,600 17 1,138 15 289 157 206 235 (11) 31 14 25 19 17 18.6 13.5 11.6 4.5 4.1 3.8 20 23 23 3.6 3.1 3.6 29 Balkrishna Industries SELL 2,385 1,500 (37) 461 6.2 193 61 67 79 23 10 19 39 36 30 24.9 22.0 18.5 7.7 6.7 5.7 21 20.0 20 0.7 0.8 0.9 15 Bharat Forge SELL 807 485 (40) 376 5.0 466 (3) 16 23 (136) 669 49 NM 52 35 48.4 26.1 19.8 6.9 6.3 5.4 NM 12.7 16.6 0.2 0.4 0.4 28 CEAT ADD 1,450 1,500 3 59 0.8 40 114 98 126 82 (15) 29 13 15 11 7.3 7.4 6.2 1.8 1.6 1.4 14.9 11.4 13.3 1.2 1.2 1.6 5 Eicher Motors SELL 2,616 2,200 (16) 715 9.6 272 49 75 103 (26) 51 38 53 35 25 35.8 26.2 19.9 7.3 6.3 5.3 15.0 19.3 23 0.6 0.5 0.5 26 Endurance Technologies SELL 1,648 1,260 (24) 232 3.1 141 38 49 62 (7) 30 27 44 34 27 21.9 16.8 13.7 6.5 5.6 4.8 14.6 16.6 17.9 0.4 0.5 0.6 3 Escorts BUY 1,194 1,700 42 121 2.2 101 86 92 103 58 7 11 14 13 12 9.5 8.4 7.1 2.2 2.0 1.7 16.2 15.1 14.7 0.6 1.2 1.3 24 Exide Industries REDUCE 184 180 (2) 156 2.1 850 9 10 12 (10) 16 12 21 18 16 11.5 9.7 8.8 2.3 2.1 2.0 11.5 12.3 12.8 1.1 2.4 2.4 8 Hero Motocorp REDUCE 2,904 2,900 (0) 580 7.8 200 148 192 211 (7) 29 10 20 15 14 11.8 9.3 8.1 3.8 3.5 3.2 20 24 24 3.3 4.0 4.3 33 Mahindra CIE Automotive SELL 251 150 (40) 95 1.3 378 3 8 15 (70) 178 88 89 32 17 21.3 10.8 8.8 1.9 1.8 1.7 2.2 5.9 10.4 ——— 2 Mahindra & Mahindra BUY 780 975 25 969 13.0 1,138 29 39 53 22 34 36 27 20 15 13.5 12.5 9.5 2.5 2.3 2.0 9.4 11.9 14.5 1.1 0.7 1.0 45 Maruti Suzuki SELL 7,304 5,600 (23) 2,206 29.6 302 140 213 266 (25) 52 25 52 34 27 33.0 20.0 15.6 4.3 3.9 3.5 8.5 12.0 13.6 0.6 0.7 0.9 67 Minda Industries BUY 720 760 6 196 2.6 282 7 16 22 13 113 39 97 46 33 28.1 19.8 15.4 8.9 7.0 5.8 9.1 15.3 17.7 0.1 0.3 0.5 4 Motherson Sumi Systems ADD 244 260 6 771 10.3 3,158 3 9 12 (7) 160 29 71 27 21 18.8 9.8 7.7 6.1 4.9 3.9 9.1 19.9 21 0.6 0.7 0.9 49 MRF SELL 82,450 69,150 (16) 350 4.7 4 3,012 3,140 3,841 (10) 4 22 27 26 21 10.4 10.5 8.5 2.6 2.4 2.1 10.0 9.5 10.5 0.2 0.1 0.1 20 Schaeffler India SELL 5,402 4,350 (19) 169 2.3 31 93 153 191 (21) 65 25 58 35 28 29.2 19.4 15.5 5.4 4.8 4.3 9.5 14.4 16.1 ——— 1 SKF SELL 2,569 1,890 (26) 127 1.7 49 60 72 88 3 20 21 43 35 29 29.0 25.0 20.4 8.1 6.9 5.8 19.0 19.4 19.7 4.2 0.5 0.6 2 Tata Motors SELL 311 205 (34) 1,192 14.8 3,829 (4) 17 24 82 569 40 NM 18 13 6.2 4.2 3.6 2.2 1.9 1.7 NM 11.4 14.0 ——— 206 Timken SELL 1,527 940 (38) 115 1.5 75 19 29 43 (42) 55 47 80 52 35 45.0 30.9 21.9 8.5 7.6 6.4 9.8 15.5 19.7 0.1 0.1 0.1 2 TVS Motor SELL 612 425 (31) 291 3.9 475 13 20 26 (1) 58 28 47 30 24 20.4 15.7 12.9 7.0 6.0 5.1 15.7 21 23 0.5 0.8 1.1 24 Varroc Engineering ADD 351 450 28 54 0.7 135 (47) 11 34 (25,185) 125 200 NM 31 10 19.2 6.6 4.5 1.5 1.5 1.3 NM 4.8 12.6 ——— 1 Automobiles & Components Cautious 11,018 147.1 13 87 30 47 25 20 14.3 10.2 8.4 3.8 3.4 3.0 8.0 13.4 15.3 1.0 1.0 1.2 667 Banks AU Small Finance Bank SELL 1,227 800 (35) 384 5.1 312 37 27 35 69 (27) 29 33 45 35 ——— 6.7 5.9 5.0 22.0 12.8 14.4 ——— 26 Axis Bank BUY 771 850 10 2,364 31.7 3,064 22 46 56 273 113 22 36 17 14 ——— 2.5 2.2 1.9 7.1 13.1 14.2 0.0 0.9 1.1 118 Bandhan Bank ADD 309 350 13 498 6.7 1,611 14 23 28 (27) 65 26 23 14 11 ——— 3.2 2.5 2.1 13.5 19.1 20.0 — 0.5 0.7 34 Bank of Baroda ADD 82 95 16 423 5.7 5,178 2 16 20 35 890 29 51 5 4 ——— 0.7 0.6 0.6 1.2 11.0 12.8 0.0 3.9 5.0 63 Canara Bank REDUCE 151 150 (1) 249 3.3 1,647 16 17 20 172 7 21 10 9 8 ——— 0.7 0.7 0.6 4.6 4.5 5.3 ——— 38 India Daily Summary Daily Summary India City Union Bank REDUCE 162 160 (1) 120 1.6 739 8 8 11 24 (2) 45 20 21 14 ——— 2.4 2.2 2.0 10.6 9.6 12.7 1.5 1.0 1.4 6 DCB Bank BUY 108 150 38 34 0.5 311 11 12 17 (1) 8 43 10 9 6 ——— 1.1 1.0 0.9 10.0 9.9 12.8 1.0 1.1 1.5 3 Equitas Small Finance Bank ADD 66 65 (1) 75 1.0 1,139 3 4 5 46 21 22 19 16 13 ——— 2.2 2.0 1.7 12.5 12.8 13.7 ——— 2 Federal Bank BUY 88 100 14 175 2.4 1,996 8 9 13 3 9 54 11 10 7 ——— 1.2 1.1 1.0 10.4 10.3 14.4 0.8 1.8 2.7 27 HDFC Bank ADD 1,522 1,650 8 8,414 112.8 5,513 56 63 73 18 11 16 27 24 21 ——— 4.2 3.7 3.2 16.6 15.9 16.2 0.0 0.8 1.0 153 ICICI Bank BUY 660 710 8 4,573 61.3 6,917 23 33 36 91 41 10 28 20 18 ——— 3.3 2.9 2.6 12.3 14.6 14.3 0.3 1.0 1.1 145 IndusInd Bank ADD 1,044 1,050 1 808 10.8 773 37 65 85 (41) 73 31 28 16 12 ——— 1.9 1.8 1.6 7.6 11.1 13.1 0.5 0.9 1.2 73 Karur Vysya Bank BUY 51 65 27 41 0.5 799 4 7 11 53 63 53 11 7 5 ——— 0.7 0.6 0.6 5.3 8.2 11.6 1.0 3.7 5.7 1
KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Punjab National Bank REDUCE 41 36 (12) 450 6.0 11,011 2 4 6 287 130 36 21 9 7 ——— 0.7 0.7 0.6 2.8 5.5 7.0 ——— 83 RBL Bank BUY 215 240 12 129 1.7 598 8 17 32 (15) 103 85 25 12 7 ——— 1.1 1.0 0.9 4.4 7.9 13.3 0.6 1.2 2.2 35 SBI Cards and Payment Services ADD 989 1,100 11 931 12.5 941 10 17 27 (21) 65 56 95 57 37 ——— 14.8 11.9 9.1 16.9 23 28 0.1 0.1 0.1 49 State Bank of India BUY 430 520 21 3,838 51.5 8,925 23 40 51 41 74 27 19 11 9 ——— 2.1 1.7 1.4 8.4 13.1 14.5 0.9 0.0 0.0 231 Ujjivan Small Finance Bank ADD 30 34 12 53 0.7 1,728 (0) 1 3 (103) 2,275 112 NM 23 11 ——— 1.9 1.7 1.5 0.3 7.4 13.5 0.0 0.0 0.0 2 Union Bank REDUCE 37 34 (7) 250 3.4 6,407 5 5 8 154 20 51 8 7 4 ——— 0.5 0.5 0.5 5.0 5.5 7.8 0.0 0.0 0.0 12
YES Bank SELL 13 11 (18) 336 4.5 25,055 (1) (1) (0) 89 37 89 NM NM NM ——— 1.3 1.4 1.3 NM NM NM 0.0 0.0 0.0 24 -
Banks Attractive 24,142 323.7 111 55 25 27 17 14 2.1 1.9 1.7 7.8 10.9 12.3 0.3 0.7 0.8 1,126 19,2021 July
Source: Company, Bloomberg, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 77
Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India
Price (Rs) Fair Value Upside Mkt cap. O/S shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) ADVT-3M
KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 16-Jul-21 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E (US$ mn) Building Products Astral SELL 2,088 1,100 (47) 420 5.6 201 20 23 27 63 17 16 104 89 77 64.4 54.5 46.9 22.1 18.3 15.5 24 23 22 0.1 0.2 0.3 8 Building Products Cautious 420 5.6 63 17 16 104 89 77 64.4 54.5 46.9 22.1 18.3 15.5 21 21 20 0.1 0.2 0.3 8 Capital goods ABB BUY 1,763 1,850 5 374 5.0 212 8 21 28 (54) 157 35 218 85 63 127.4 59.5 43.5 10.4 9.6 8.7 4.8 11.7 14.5 0.3 0.3 0.4 5 Ashoka Buildcon BUY 108 155 44 30 0.4 281 15 13 14 5 (13) 8 7 9 8 6.2 5.7 5.1 1.0 0.9 0.8 14.6 11.3 11.1 0.0 1.9 2.0 4 Bharat Electronics BUY 180 180 0 438 5.9 2,437 9 9 9 15 10 (0) 21 19 19 12.1 12.1 11.4 4.0 3.6 3.2 19.9 19.7 17.7 2.2 2.0 2.0 38 BHEL SELL 66 34 (48) 231 3.1 3,482 (8) (0) 2 (84) 97 983 NM NM 35 (6.8) 55.7 17.7 0.9 0.9 0.9 NM NM 2.4 0.0 0.0 1.0 86 Carborundum Universal ADD 650 545 (16) 123 1.7 190 15 21 26 4 37 26 43 32 25 25.1 19.4 15.4 5.8 5.2 4.6 14.3 17.2 19.2 0.6 0.9 1.1 3 Cochin Shipyard BUY 385 510 33 51 0.7 132 46 41 42 (4) (12) 3 8 9 9 4.2 4.1 4.6 1.3 1.2 1.1 15.8 12.9 12.2 3.1 3.3 3.5 3 Cummins India BUY 858 1,030 20 238 3.2 277 23 31 40 (10) 36 29 37 28 21 38.8 26.7 19.7 5.4 5.1 4.7 14.8 19.0 23 1.7 2.0 2.6 16
Dilip Buildcon BUY 569 630 11 83 1.1 146 22 40 58 (23) 84 45 26 14 10 7.9 6.4 5.4 2.1 1.7 1.4 8.5 13.1 15.6 0.2 0.1 0.2 4 -
IRB Infrastructure BUY 185 145 (22) 65 0.9 351 3 9 12 (84) 178 28 56 20 16 8.9 8.1 6.7 0.9 0.9 0.9 1.7 4.6 5.7 2.1 0.8 1.1 10 2021 19, July Kalpataru Power Transmission BUY 472 540 14 70 0.9 153 33 36 47 29 10 29 14 13 10 5.9 5.9 4.8 1.9 1.6 1.4 14.2 13.3 14.6 1.7 0.8 1.2 3 KEC International BUY 418 450 8 107 1.4 257 21 26 35 (2) 23 33 19 16 12 10.8 8.8 7.0 3.2 2.7 2.3 18.0 18.6 21 0.6 0.7 0.9 3
L&T BUY 1,619 1,850 14 2,273 30.5 1,405 49 71 95 (23) 46 34 33 23 17 22.1 16.3 14.2 3.6 3.4 3.1 11.3 15.2 19.0 2.2 1.8 2.4 57 Siemens SELL 2,013 1,740 (14) 717 9.6 356 35 40 48 63 14 21 58 51 42 40.7 35.4 29.3 6.9 6.4 5.8 12.5 13.1 14.4 0.5 0.5 0.7 13 Thermax SELL 1,427 1,200 (16) 170 2.3 113 23 33 42 22 42 28 62 44 34 43.3 32.2 25.0 43.3 32.2 25.0 8.3 11.1 13.5 0.5 1.1 1.4 2 Capital goods Attractive 4,970 66.6 (23) 65 31 44 27 20 3.3 3.1 2.9 7.5 11.7 14.2 1.5 1.3 1.7 246 Commercial & Professional Services
SIS BUY 507 430 (15) 75 1.0 149 25 20 23 63 (20) 20 21 26 22 14.4 14.6 12.9 4.1 3.7 3.3 23 15.1 16.0 1.2 0.9 1.1 3
TeamLease Services ADD 3,860 3,950 2 66 0.9 17 34 85 112 68 148 32 112 45 34 64.1 41.9 31.6 10.1 8.3 6.7 9.6 20 21 — — — 1 Commercial & Professional ServicesAttractive 141 1.9 64 3 24 33 32 26 22.3 20.4 17.4 5.7 5.0 4.3 17.2 15.4 16.4 0.6 0.5 0.6 4 Commodity Chemicals Asian Paints REDUCE 2,993 2,500 (16) 2,871 38.5 959 33 38 47 20 15 24 91 79 64 58.4 51.8 43.5 22.4 20.0 17.7 27 27 29 0.6 0.7 0.9 57 Berger Paints SELL 844 630 (25) 820 11.0 971 7 10 12 9 32 25 114 86 69 68.8 53.6 44.0 24.3 20.9 18.0 24 26 28 0.3 0.4 0.6 11 Kansai Nerolac REDUCE 600 610 2 323 4.3 539 10 12 15 0 22 26 60 50 39 38.9 32.8 26.3 7.8 7.2 6.5 13.6 15.1 17.3 0.5 0.7 0.9 2 Tata Chemicals SELL 781 540 (31) 199 2.7 255 11 32 36 (66) 199 14 73 25 22 12.2 8.4 7.6 1.4 1.4 1.4 2.0 5.7 6.5 1.3 4.0 4.6 42 Commodity Chemicals Neutral 4,212 56.5 1 29 23 90 70 57 49.7 40.8 34.4 12.2 11.4 10.5 13.5 16.3 18.5 0.6 0.8 1.0 112 Construction Materials ACC REDUCE 2,129 1,950 (8) 400 5.4 188 75 95 106 4 27 11 28 22 20 13.8 11.5 10.1 3.2 2.9 2.6 11.7 13.5 13.5 0.7 1.1 1.2 18 Ambuja Cements REDUCE 383 320 (16) 761 10.2 1,986 13 13 16 28 1 22 29 28 23 13.1 10.7 8.8 3.3 3.1 2.8 11.3 11.2 12.4 4.7 0.7 0.8 21 Dalmia Bharat BUY 2,252 1,800 (20) 421 5.6 187 54 58 80 286 7 37 42 39 28 15.2 13.7 11.0 3.3 3.1 2.8 8.7 8.2 10.3 — — — 5 Grasim Industries ADD 1,572 1,520 (3) 1,035 13.9 657 68 86 108 (22) 27 25 23 18 15 9.7 8.1 6.6 1.6 1.4 1.3 7.3 8.3 9.4 0.6 0.6 0.4 32 J K Cement REDUCE 3,159 2,450 (22) 244 3.3 77 94 122 137 46 30 13 34 26 23 16.8 14.6 12.8 6.5 5.3 4.4 21 23 21 0.5 0.3 0.3 3 JK Lakshmi Cement ADD 657 550 (16) 77 1.0 118 38 39 43 60 4 11 17 17 15 9.1 8.3 7.6 3.7 3.1 2.6 23 20 18.7 0.6 0.9 1.0 6 Orient Cement ADD 145 140 (4) 30 0.4 205 10 10 11 147 (6) 9 14 15 14 6.6 6.4 6.5 2.3 2.0 1.8 17.7 14.5 14.2 1.4 1.4 1.4 2 Shree Cement SELL 28,070 20,000 (29) 1,013 13.6 36 641 833 983 47 30 18 44 34 29 25.1 19.6 16.7 6.6 5.6 4.7 16.4 18.1 18.0 0.2 0.2 0.2 19 The Ramco Cements SELL 1,126 800 (29) 266 3.6 236 32 34 43 26 4 27 35 34 26 19.0 16.3 13.2 4.6 4.1 3.6 14.2 13.0 14.6 0.3 0.3 0.4 9 UltraTech Cement REDUCE 7,335 6,300 (14) 2,117 28.4 289 193 245 282 (3) 27 15 38 30 26 18.9 15.7 14.0 4.8 4.2 3.8 13.4 15.0 15.3 0.5 0.3 0.3 42 Construction Materials Attractive 6,363 85.3 7 21 20 32 27 22 14.9 12.4 10.6 3.4 3.1 2.7 10.5 11.4 12.2 0.9 0.4 0.4 156
Source: Company, Bloomberg, Kotak Institutional Equities estimates
78 KOTAK INSTITUTIONAL EQUITIES RESEARCH
78
Kotak Institutional Equities: Valuation summary of KIE Universe stocks
79 Price (Rs) Fair Value Upside Mkt cap. O/S shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) ADVT-3M
Company Rating 16-Jul-21 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E (US$ mn) Consumer Durables & Apparel Crompton Greaves Consumer SELL 467 305 (35) 293 3.9 628 9 10 11 19 4 15 50 48 41 42 35 30 15.2 12.3 10.0 35 29 27 0.4 0.5 0.5 12 Havells India SELL 1,078 845 (22) 675 9.0 626 17 20 24 41 23 18 65 53 45 42 36 30 13.7 11.9 10.3 23 24 25 0.5 0.7 0.8 20 Page Industries REDUCE 33,141 30,500 (8) 370 5.0 11 305 486 598 (1) 59 23 109 68 55 69 46 38 41.8 34.7 29.4 40 56 57 0.8 1.1 1.4 14 Polycab ADD 1,936 1,700 (12) 289 3.9 149 59 63 69 14 7 10 33 31 28 24 22 19 6.1 5.2 4.5 20 18.2 17.2 0.4 0.4 0.4 8 TCNS Clothing Co. SELL 594 440 (26) 37 0.5 68 (10) 3 15 (194) 133 361 NM 178 39 (502) 26 14.8 6.4 5.9 4.9 NM 3.5 13.8 — — — 2 Voltas SELL 1,051 830 (21) 348 4.7 331 13 24 29 (21) 85 23 82 44 36 64 36 29 7.0 6.3 5.6 9.2 15.0 16.4 0.3 0.6 0.7 24 Whirlpool SELL 2,196 1,920 (13) 279 3.7 127 26 43 60 (30) 64 38 84 51 37 50 35 25 9.9 8.6 7.3 12.4 18.1 21 0.2 0.4 0.5 5 Consumer Durables & Apparel Cautious 2,289 30.7 3 34 21 65 48 40 45 34 28 10.9 9.5 16.9 19.6 21 0.5 0.6 84 Consumer Staples Bajaj Consumer Care ADD 289 325 12 43 0.6 148 15 16 18 21 8 9 19 18 16 15.1 14.1 12.5 5.6 5.1 4.6 32 30 30 3.5 3.8 3.8 5 Britannia Industries ADD 3,441 3,650 6 829 11.1 241 78 70 82 32 (9) 16 44 49 42 33 35 30 23.4 42.7 39.5 46 61 96 3.1 2.2 1.7 24 Colgate-Palmolive (India) ADD 1,746 1,760 1 475 6.4 272 38 39 44 34 3 12 46 45 40 30.9 29.3 26.3 40.7 40.9 37.9 75 92 99 2.2 2.1 2.4 14 Dabur India ADD 580 555 (4) 1,026 13.8 1,767 10 10 12 11 8 18 61 56 48 50 45 39 13.4 12.9 11.7 24 24 26 0.8 0.9 1.1 19 Godrej Consumer Products ADD 951 925 (3) 972 13.0 1,023 17 18 21 25 6 16 55 52 45 40 37 32 10.3 9.2 8.4 20 18.7 19.5 0.0 1.0 1.2 26 Hindustan Unilever ADD 2,417 2,650 10 5,680 76.2 2,350 34 40 48 9 19 18 71 60 50 50 41 35 12.0 11.6 11.2 29 19.7 23 1.3 1.6 1.9 49 ITC BUY 208 257 24 2,559 34.3 12,330 11 12 13 (8) 10 12 20 18 16 14.7 12.8 11.3 4.3 4.2 4.1 21 23 25 5.2 5.0 5.4 68 Jyothy Laboratories ADD 176 170 (3) 65 0.9 367 6 6 7 26 3 19 30 29 24 20.3 20.9 17.8 4.5 4.3 4.1 16.4 15.3 17.4 2.3 2.6 2.8 3 Marico ADD 525 465 (11) 678 9.1 1,290 9 10 11 11 11 13 58 52 46 42 38 33 20.9 19.6 18.3 37 39 41 1.4 1.6 1.8 19 Nestle India ADD 17,615 18,250 4 1,698 22.8 96 216 255 301 6 18 18 82 69 59 53 46 39 84.1 60.9 46.1 106 102 90 1.1 1.0 1.2 16 Tata Consumer Products ADD 763 650 (15) 703 9.4 922 10 11 15 21 16 32 79 68 52 44 39 31 4.8 4.6 4.4 6.3 7.0 8.7 0.5 0.6 0.7 29 United Breweries ADD 1,448 1,365 (6) 383 5.1 264 5 14 31 (72) 212 119 318 102 47 100 52 27 10.7 9.7 8.3 3.4 10.0 19.2 0.0 0.4 1.2 27 United Spirits ADD 667 680 2 485 6.5 727 6 11 16 (45) 75 48 105 60 41 50 36 26 11.3 9.5 8.2 11.1 17.3 22 — — 0.7 17 Varun Beverages BUY 798 767 (4) 345 4.6 433 9 17 24 (16) 89 42 87 46 33 31 20 16 9.8 8.3 6.7 11.5 19.4 23 0.1 0.3 0.3 6 Consumer Staples Attractive 15,940 213.7 3 14 18 48 42 36 35 30 25 9.9 9.5 8.9 20 22 25 1.8 1.9 2.1 321 Diversified Financials Aavas Financiers ADD 2,874 2,500 (13) 226 3.0 79 37 45 57 17 21 27 78 64 51 — — — — — — 12.9 13.6 15.0 0.0 0.0 0.0 3 Aditya Birla Capital NR 125 — — 301 4.0 2,414 4 6 8 4 36 43 29 22 15 — — — — — — 7.8 9.7 12.4 45.2 49.8 56.4 6 Bajaj Finance SELL 6,125 4,200 (31) 3,697 49.6 602 73 123 169 (16) 67 37 83 50 36 — — — 10.0 8.5 7.0 12.8 18.4 21 0.2 0.2 0.3 180 Bajaj Finserv ADD 12,746 11,450 (10) 2,028 27.2 159 281 426 526 33 52 24 45 30 24 — — — 5.7 5.5 4.7 13.3 18.7 21 0.1 0.1 0.1 63 Cholamandalam BUY 512 625 22 420 5.6 820 18 30 36 44 62 20 28 17 14 — — — 4.7 3.8 3.1 17.1 23 23 0.4 0.6 0.8 33 Computer Age Management Services SELL 3,434 1,900 (45) 168 2.2 49 42 49 56 18 17 14 82 70 61 — — — 32.5 27.4 23.4 39 43 41 1.8 0.9 1.1 12
HDFC BUY 2,537 3,050 20 4,581 61.4 1,804 67 72 86 (35) 8 19 38 35 30 — — — 4.2 3.9 3.6 12.0 11.5 12.6 0.8 0.9 1.0 114 India Daily Summary Daily Summary India HDFC AMC SELL 3,089 2,350 (24) 658 8.8 213 62 70 83 5 12 19 50 44 37 — — — 13.8 11.9 10.2 30 29 29 1.1 1.2 1.5 10 IIFL Wealth ADD 1,389 1,300 (6) 122 1.6 89 42 50 60 75 20 21 33 28 23 — — — 4.4 4.1 3.9 12.7 15.1 17.6 5.0 2.5 3.0 1 L&T Finance Holdings ADD 95 115 21 234 3.1 2,469 4 8 10 (55) 111 24 25 12 9 — — — 1.2 1.1 1.0 4.8 10.2 11.4 0.0 0.6 0.6 18 LIC Housing Finance ADD 469 600 28 236 3.2 550 54 54 67 12 1 23 9 9 7 — — — 1.5 1.4 1.2 14.1 13.1 13.7 1.8 1.8 2.2 26 Mahindra & Mahindra Financial ADD 162 200 23 200 2.7 1,230 3 14 16 (81) 421 15 59 11 10 — — — 1.4 1.3 1.2 2.6 11.4 12.0 0.5 1.8 2.0 22 Muthoot Finance REDUCE 1,569 1,375 (12) 630 8.4 401 93 110 125 23 19 14 17 14 13 — — — 4.1 3.4 2.8 28 26 24 1.3 1.4 1.6 30 Shriram City Union Finance BUY 1,764 1,725 (2) 116 1.6 66 153 173 196 1 13 13 12 10 9 — — — 1.5 1.3 1.2 13.2 13.3 13.4 1.9 1.5 1.7 1 Shriram Transport BUY 1,449 1,575 9 387 5.2 253 98 139 167 (11) 41 20 15 10 9 — — — 1.8 1.6 1.4 12.6 15.2 16.0 1.2 1.4 1.7 39
KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Diversified Financials Attractive 14,005 187.8 (12) 34 23 38 28 23 4.4 4.0 3.5 11.7 14.0 15.1 0.6 0.6 0.8 559
Source: Company, Bloomberg, Kotak Institutional Equities estimates
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July 19, 2021 19, July
KOTAK INSTITUTIONAL EQUITIES RESEARCH 79
Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India Price (Rs) Fair Value Upside Mkt cap. O/S shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) ADVT-3M Company Rating 16-Jul-21 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E (US$ mn)
KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Electric Utilities CESC BUY 838 825 (2) 111 1.5 133 100 115 126 2 14 10 8 7 7 6.1 4.9 4.4 0.9 0.8 0.7 12.1 11.6 11.5 5.4 1.7 2.0 8 JSW Energy SELL 194 100 (48) 319 4.3 1,640 5 6 7 (23) 28 6 40 31 29 12.1 10.4 11.0 2.2 2.0 1.9 6.1 6.8 6.7 — — — 13 NHPC ADD 26 30 16 260 3.5 10,045 3 3 4 20 (2) 10 8 8 7 8.6 8.3 6.8 0.8 0.8 0.7 10.7 9.8 10.4 7.0 7.9 8.8 3 NTPC BUY 119 125 5 1,155 15.5 9,697 16 15 16 40 (4) 8 8 8 7 9.6 7.0 5.9 1.0 0.9 0.8 13.0 11.7 11.7 4.8 3.8 4.1 29 Power Grid BUY 234 260 11 1,223 16.4 5,232 25 29 30 18 18 3 9 8 8 7.0 6.2 5.8 1.7 1.5 1.4 19.2 20 18.8 5.6 5.0 6.3 34 Tata Power ADD 124 110 (11) 397 5.3 3,196 4 5 5 (10) 33 (2) 31 23 24 9.8 8.9 8.7 1.9 1.8 1.6 6.6 7.9 7.2 — — — 77 Electric Utilities Attractive 3,465 46.5 23 7 6 10 9 9 1.3 1.2 1.1 12.9 12.7 12.4 4.3 3.7 4.3 165 Fertilizers & Agricultural Chemicals Bayer Cropscience SELL 5,951 4,600 (23) 267 3.6 45 130 159 184 0 22 15 46 37 32 31 27 23 10.5 8.6 7.1 23 25 24 0.4 0.5 0.6 2 Dhanuka Agritech SELL 1,001 775 (23) 47 0.6 48 44 43 47 49 (3) 10 23 23 21 16.7 17.1 15.5 6.0 5.1 4.4 28 23 22 0.4 1.3 1.6 4
Godrej Agrovet SELL 658 455 (31) 126 1.7 192 16 20 23 41 25 12 40 32 29 24 19 17 5.1 4.7 4.3 13.4 15.2 15.5 1.2 1.5 1.7 5 -
PI Industries REDUCE 2,970 2,420 (19) 451 6.0 152 50 61 74 50 22 23 60 49 40 43 35 28 8.3 7.3 6.4 18.5 16.0 17.1 0.2 0.3 0.4 14 July 19, 2021 19, July Rallis India ADD 339 310 (8) 66 0.9 195 11 14 17 26 26 20 30 24 20 20.5 16.2 13.3 4.1 3.6 3.2 14.8 16.5 17.4 0.9 1.0 1.1 5 UPL SELL 837 650 (22) 640 8.6 765 38 46 55 62 22 20 22 18 15 10.3 8.6 7.4 3.6 3.1 2.7 16.8 18.3 19.1 1.2 1.5 1.7 70 Fertilizers & Agricultural Chemicals Cautious 1,597 21.4 47 22 19 32 27 22 15.9 13.4 11.5 5.2 4.5 3.9 16.1 17.1 17.6 0.7 0.9 1.1 100
Gas Utilities GAIL (India) BUY 145 190 31 643 8.6 4,440 11 14 15 (18) 32 4 13 10 10 10.7 7.6 7.1 1.4 1.3 1.2 10.6 13.1 12.7 3.5 4.1 4.5 34 GSPL SELL 337 200 (41) 190 2.6 564 13 12 8 (23) (11) (32) 26 29 42 12.2 13.3 18.0 2.6 2.4 2.3 10.6 8.7 5.6 0.6 0.7 0.6 5 Indraprastha Gas ADD 553 575 4 387 5.2 700 17 21 26 0 26 23 33 26 21 25.3 19.3 15.4 6.6 5.6 4.8 21 23 24 0.7 0.9 1.3 19 Mahanagar Gas BUY 1,153 1,350 17 114 1.5 99 63 75 105 (16) 20 39 18 15 11 11.6 9.6 6.7 3.5 3.1 2.7 20 22 26 2.0 2.6 4.1 10
Petronet LNG BUY 222 275 24 333 4.5 1,500 20 20 23 11 3 11 11 11 10 6.4 5.9 5.3 2.9 2.6 2.3 26 25 25 5.2 5.4 5.9 14
Gas Utilities Attractive 1,667 22.3 (10) 19 8 16 14 13 11.0 8.8 8.0 2.2 2.0 1.9 13.8 15.1 15.0 2.7 3.1 3.6 82 Health Care Services Apollo Hospitals ADD 3,787 3,400 (10) 544 7.3 144 6 46 61 (66) 632 35 607 83 62 48.6 30.0 25.3 11.8 10.9 9.9 2.3 13.7 16.8 0.1 0.5 0.6 38 Aster DM Healthcare BUY 159 200 25 80 1.1 500 3 9 12 (50) 212 27 54 17 14 9.0 6.4 5.4 2.4 2.1 1.9 4.4 12.9 14.5 — — — 3 Dr Lal Pathlabs SELL 3,416 1,810 (47) 285 3.8 83 35 43 46 29 23 7 98 80 74 63.0 49.7 46.9 22.9 19.8 17.3 26 27 25 0.4 0.6 0.6 18 HCG BUY 239 175 (27) 30 0.4 143 (8) (2) (2) 30 71 21 NM NM NM 23.2 13.3 11.6 3.5 3.7 3.8 NM NM NM — — — 1 Metropolis Healthcare SELL 2,834 1,800 (36) 145 1.9 51 36 44 47 21 21 7 78 65 61 49.2 39.1 35.3 20.3 17.0 14.4 30 29 26 0.4 0.5 0.5 8 Narayana Hrudayalaya ADD 505 540 7 103 1.4 204 (1) 12 15 (112) 1,762 27 NM 43 34 58.2 18.9 16.3 9.2 7.6 6.2 NM 19.2 20.0 — — — 4 Health Care Services Attractive 1,187 15.9 (39) 229 24 205 62 50 37.1 23.8 20.7 9.9 8.9 7.9 4.8 14.2 15.7 0.2 0.4 0.5 72 Hotels & Restaurants Burger King SELL 169 115 (32) 65 0.9 382 (4) (1) 1 (66) 78 167 NM NM 258 619.3 39.9 24.2 9.6 10.1 9.8 NM NM 3.9 0.0 0.0 0.0 9 Jubilant Foodworks BUY 3,145 3,400 8 415 5.6 132 17 34 53 (26) 94 55 180 93 60 53.0 36.4 27.4 28.9 23.0 17.7 17.9 28 33 0.2 0.3 0.6 23 Lemon Tree Hotels REDUCE 42 38 (10) 33 0.4 790 (2) (0) 1 (1,233) 71 226 NM NM 71 85.3 40.8 14.2 3.6 3.6 3.5 NM NM 4.9 — (1.2) 0.3 2 Westlife Development ADD 532 460 (13) 83 1.1 156 (5) 1 6 (1,655) 125 346 NM 415 93 113.2 33.5 23.1 16.5 15.9 13.6 NM 3.9 15.7 — 0.0 0.0 2 Hotels & Restaurants Attractive 596 8.0 (162) 368 117 NM 151 70 66.1 36.6 24.4 16.9 15.3 13.0 NM 10.1 18.7 0.1 0.2 0.4 36
Source: Company, Bloomberg, Kotak Institutional Equities estimates
80 KOTAK INSTITUTIONAL EQUITIES RESEARCH
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Kotak Institutional Equities: Valuation summary of KIE Universe stocks
81 Price (Rs) Fair Value Upside Mkt cap. O/S shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) ADVT-3M
Company Rating 16-Jul-21 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E (US$ mn) Insurance HDFC Life Insurance ADD 698 750 7 1,411 18.9 2,011 7 8 9 5 13 14 103 91 80 — — — 16.6 15.4 14.2 17.6 17.5 18.5 0.3 0.3 0.3 52 ICICI Lombard SELL 1,522 1,150 (24) 692 9.3 490 32 35 40 23 8 15 47 44 38 — — — 9.3 8.1 6.9 22 21 19.6 0.5 0.5 0.5 13 ICICI Prudential Life BUY 627 660 5 901 12.1 1,436 7 7 9 (10) 11 15 94 84 74 — — — 9.9 9.0 8.2 11.5 11.2 11.7 0.3 0.0 0.0 22 Max Financial Services BUY 1,065 1,150 8 367 4.9 345 3 10 10 (72) 237 7 370 110 102 — — — — — — 2.2 4.9 5.0 0.0 0.0 0.0 14 SBI Life Insurance BUY 1,050 1,360 29 1,050 14.1 1,002 15 16 18 2 12 9 72 64 59 — — — 10.4 9.2 8.1 15.3 15.2 14.6 0.2 0.2 0.3 35 Insurance Attractive 4,422 59.3 2 18 13 83 70 62 10.6 9.5 8.5 12.8 13.4 13.6 0.2 0.1 0.2 136 Internet Software & Services Info Edge SELL 5,103 3,550 (30) 657 8.8 128.5 21 42 52 (21) 96 23 239 122 99 224.3 114.9 90.2 14.4 13.3 12.1 7.8 11.3 12.8 0.2 0.2 0.3 46 Just Dial ADD 1,073 1,130 5 67 0.9 83.5 35 25 42 (17) (27) 65 31 42 26 33.3 19.2 12.5 5.3 2.5 2.2 16.8 8.6 9.2 — — — 46 Internet Software & Services Cautious 724 9.7 (19) 54 35 148 97 71 155.9 94.7 73.4 12.4 8.4 7.7 8.4 8.7 10.8 0.2 0.2 0.2 92 IT Services HCL Technologies ADD 1,005 1,080 7 2,727 36.6 2,714 48 51 57 18 7 11 21 20 18 12.7 11.7 10.4 4.4 3.9 3.4 24 21 20 2.2 2.0 2.0 66 Infosys BUY 1,555 1,710 10 6,628 88.9 4,253 46 52 60 17 14 16 34 30 26 22.9 20.2 17.4 8.7 7.7 6.9 27 27 28 1.7 1.9 2.3 133 L&T Infotech REDUCE 4,289 4,100 (4) 750 10.1 176 110 127 150 27 16 18 39 34 29 26.2 23.8 20.0 10.3 8.6 7.1 30 28 27 0.6 0.8 0.9 20 L&T Technology Services ADD 3,397 3,100 (9) 357 4.8 106 63 88 110 (19) 40 25 54 39 31 33.7 24.6 20.4 10.3 8.7 7.3 21 24 26 0.5 0.6 0.8 15 Mindtree SELL 2,736 1,900 (31) 451 6.0 165 67 86 94 76 28 9 41 32 29 25.8 21.7 19.9 10.4 8.7 7.4 30 30 27 0.7 1.3 1.4 32 Mphasis REDUCE 2,390 1,650 (31) 447 6.0 187 65 77 86 2 18 13 37 31 28 23.9 20.6 18.2 6.9 6.2 5.6 19.7 21 21 2.7 1.7 1.9 17 TCS REDUCE 3,195 3,375 6 11,817 158.4 3,699 89 106 121 4 19 13 36 30 26 24.3 20.5 18.2 13.5 11.3 10.4 38 41 41 1.2 2.0 3.0 102 Tech Mahindra BUY 1,103 1,150 4 961 12.9 880 51 61 68 11 20 11 22 18 16 12.5 10.9 9.6 3.9 3.5 3.1 19.2 20 20 3.5 2.2 2.3 44 Wipro REDUCE 578 560 (3) 3,166 42.4 5,477 19 22 24 15 15 11 30 26 24 19.3 16.9 14.5 5.9 4.9 4.2 19.5 20.0 19.0 0.3 0.9 0.9 84 IT Services Attractive 27,304 366.1 10 15 13 32 28 24 21.0 18.2 16.0 8.3 7.2 6.4 26 26 26 1.4 1.8 2.3 514 Media PVR BUY 1,369 1,525 11 83 1.1 61 (110) (33) 45 (478) 70 239 NM NM 30 (18.7) 131.4 11.1 3.0 3.3 3.0 NM NM 10.3 (0.8) (0.2) 0.3 18 Sun TV Network REDUCE 534 490 (8) 210 2.8 394 39 43 44 9 10 4 14 13 12 9.9 8.2 7.6 3.0 2.6 2.4 24 22 21 0.9 3.7 4.7 22 Zee Entertainment Enterprises REDUCE 209 210 1 201 2.7 960 12 15 18 5 29 16 18 14 12 10.1 8.2 7.0 2.0 1.9 1.7 11.6 13.9 14.9 1.2 1.9 2.2 44 Media Cautious 494 6.6 (24) 48 26 25 17 13 14.3 10.1 7.9 2.5 2.3 2.1 10.0 13.8 15.8 0.7 2.3 2.9 85 Metals & Mining Hindalco Industries BUY 406 500 23 911 12.2 2,220 26 43 45 44 67 4 16 9 9 7.8 5.8 5.2 1.4 1.2 1.1 9.1 13.4 12.4 0.7 0.7 1.0 90 Hindustan Zinc BUY 344 370 8 1,454 19.5 4,225 19 24 24 17 25 1 18 15 14 11.1 8.5 8.3 4.5 4.5 4.5 22 31 31 6.2 6.9 6.9 13 Jindal Steel and Power ADD 406 520 28 414 5.6 1,020 63 74 55 3,790 18 (25) 6 5 7 4.4 3.6 4.0 1.3 1.1 0.9 20 21 13.4 — — — 76 JSW Steel REDUCE 704 640 (9) 1,701 22.8 2,417 33 59 51 227 79 (13) 21 12 14 11.1 7.4 8.0 3.6 2.9 2.4 19.1 27 19.3 0.9 1.3 1.0 123 National Aluminium Co. SELL 88 70 (21) 162 2.2 1,837 7 9 7 855 20 (16) 12 10 12 7.8 5.4 6.6 1.5 1.4 1.3 12.6 14.0 10.8 2.8 3.4 2.8 42
NMDC SELL 179 150 (16) 524 7.0 2,931 23 26 15 54 15 (40) 8 7 12 5.5 4.8 7.9 1.8 1.6 1.5 23 24 13.1 4.3 7.3 4.3 53 Daily Summary India SAIL BUY 127 170 34 525 7.0 4,130 10 38 20 234 280 (47) 13 3 6 7.0 2.8 3.9 1.2 0.9 0.8 9.4 30 13.0 2.2 2.6 2.6 132 Tata Steel BUY 1,278 1,400 10 1,540 20.6 1,219 71 256 143 26 260 (44) 18 5 9 7.7 3.9 5.3 2.1 1.5 1.3 11.8 36 16.0 2.0 2.2 1.4 295 Vedanta REDUCE 273 270 (1) 1,013 13.6 3,717 33 40 36 406 21 (11) 8 7 8 4.9 3.3 3.4 1.6 1.4 1.3 21 22 17.8 3.5 6.4 6.5 52 Metals & Mining Attractive 8,243 110.5 159 84 (26) 14 7 10 7.4 4.7 5.5 2.1 1.7 1.5 15.2 23 15.3 2.6 3.4 3.1 877
Source: Company, Bloomberg, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK
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July 19, 2021 19, July
KOTAK INSTITUTIONAL EQUITIES RESEARCH 81
Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India Price (Rs) Fair Value Upside Mkt cap. O/S shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) ADVT-3mo Company Rating 16-Jul-21 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E (US$ mn)
KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Oil, Gas & Consumable Fuels BPCL BUY 448 550 23 972 13.0 2,093 67 34 41 541 (49) 20 7 13 11 5.5 8.4 7.2 1.7 2.0 1.9 32.2 14.3 17.9 17.6 3.8 4.6 47 Coal India REDUCE 146 155 6 897 12.0 6,163 21 17 16 (24) (18) (4) 7 9 9 7.0 7.4 7.3 2.5 2.6 2.8 37.0 29.3 29.9 8.6 13.7 13.7 33 HPCL BUY 268 310 16 380 5.1 1,419 80 34 37 1,014 (58) 11 3 8 7 4.8 8.1 7.6 1.1 1.0 0.9 34.7 12.7 13.1 8.7 5.0 5.6 24 IOCL BUY 106 125 18 999 13.4 9,181 26 14 16 755 (46) 17 4 8 7 3.9 5.1 4.6 0.9 0.8 0.8 23.2 11.3 12.4 11.3 6.6 7.7 30 Oil India SELL 157 125 (20) 170 2.3 1,084 10 17 16 (51) 66 (3) 16 9 10 16.8 7.7 7.7 0.6 0.6 0.6 4.3 6.7 6.2 3.2 4.2 4.1 3 ONGC SELL 117 110 (6) 1,469 19.7 12,580 10 21 19 (27) 117 (9) 12 5 6 5.2 3.0 2.9 0.6 0.6 0.5 5.2 10.6 9.1 3.1 7.0 6.4 44 Reliance Industries ADD 2,112 2,200 4 13,408 179.8 6,349 72 81 102 8 12 26 29 26 21 17.3 12.5 9.8 1.8 1.8 1.7 7.5 7.1 8.3 0.3 0.4 0.4 252 Oil, Gas & Consumable Fuels Attractive 18,296 245.3 58 (3) 13 15 16 14 9.8 8.3 7.1 1.5 1.4 1.3 9.8 9.1 9.5 2.6 2.2 2.3 433 Pharmaceuticals Aurobindo Pharma REDUCE 975 930 (5) 572 7.7 586 55 60 65 13 8 10 18 16 15 10.5 9.9 8.7 2.6 2.3 2.0 14.7 14.0 13.6 0.4 0.9 1.1 36
Biocon SELL 409 300 (27) 491 6.6 1,202 6 8 10 1 31 26 65 50 39 29.5 21.5 17.7 5.8 5.3 4.8 8.9 10.6 12.1 — 0.7 0.9 18 -
Cipla BUY 977 1,040 6 788 10.6 806 30 34 48 55 15 40 33 29 20 18.0 16.3 11.7 4.2 3.8 3.3 12.9 13.3 16.1 (0.0) 0.7 0.9 70 July 19, 2021 19, July Divis Laboratories REDUCE 4,758 3,750 (21) 1,263 16.9 265 75 94 108 44 26 14 64 50 44 43.4 35.8 31.1 13.6 11.6 9.9 21.3 22.9 22.4 — (0.7) (0.8) 35 Dr Reddy's Laboratories SELL 5,407 4,700 (13) 899 12.1 166 156 184 251 20 18 37 35 29 22 20.1 16.6 12.5 5.3 4.6 3.9 15.2 15.6 18.0 0.5 0.6 0.6 65 Gland Pharma REDUCE 3,958 2,550 (36) 649 8.7 163 61 78 92 23 28 18 65 51 43 47.5 38.7 32.0 10.9 9.0 7.4 16.9 17.8 17.4 — — — 15
Laurus Labs REDUCE 669 390 (42) 359 4.8 536 18 21 25 284 15 17 36 32 27 24.0 20.4 17.1 13.8 9.6 7.1 37.9 30.4 26.2 (—) — — 31 Lupin BUY 1,180 1,320 12 535 7.2 450 27 41 54 24 51 31 44 29 22 19.3 14.1 11.0 3.8 3.4 3.0 8.8 11.9 13.8 0.5 0.5 0.7 41 Sun Pharmaceuticals ADD 689 740 7 1,652 22.2 2,406 25 25 30 47 3 19 28 27 23 18.5 16.1 13.6 3.6 3.2 2.9 12.8 12.4 12.6 1.0 0.7 0.9 60 Torrent Pharmaceuticals REDUCE 2,991 2,800 (6) 506 6.8 169 74 86 103 29 16 20 40 35 29 21.3 18.8 16.5 8.7 7.5 6.4 21.4 21.3 22.0 0.7 1.0 1.2 11 Pharmaceuticals Attractive 7,715 103.4 36 15 23 36 31 26 21.6 18.4 15.1 5.1 4.5 4.0 14.2 14.4 15.5 0.4 0.4 0.5 381
Real Estate Brigade Enterprises BUY 339 310 (9) 78 1.0 211 (2) 11 16 (134) 594 47 NM 31 21 25.0 9.3 8.4 3.0 2.8 2.6 NM 9.4 12.7 0.7 0.7 0.7 2 DLF REDUCE 331 270 (18) 819 11.0 2,475 4 7 10 284 65 31 76 46 35 60.2 44.2 37.7 2.3 2.2 2.1 3.1 5.0 6.3 0.2 0.6 0.6 36 Embassy Office Parks REIT ADD 357 360 1 338 4.5 948 7 10 12 (26) 35 20 48 36 30 22.2 17.3 14.6 1.2 1.3 1.4 2.8 3.6 4.5 5.4 6.8 8.0 4 Godrej Properties SELL 1,578 890 (44) 439 5.9 278 (7) 13 27 (163) 286 113 NM 125 59 (133) 205.1 81.6 5.3 5.1 4.7 NM 4.1 8.3 — — — 15 Mindspace REIT ADD 282 320 13 167 2.2 593 5 14 18 (39) 170 25 54 20 16 24.1 13.9 11.8 1.0 1.0 1.0 3.3 5.0 6.2 3.4 6.9 7.5 1 Oberoi Realty ADD 707 610 (14) 257 3.4 364 20 29 39 8 40 37 35 25 18 27.4 22.2 12.4 2.7 2.5 2.2 8.2 10.6 12.9 0.3 0.3 0.3 6 Phoenix Mills BUY 876 940 7 151 2.0 172 3 11 31 (72) 244 193 286 83 28 36.8 22.7 13.4 3.1 3.0 2.7 1.2 3.7 10.1 0.1 0.3 0.3 2 Prestige Estates Projects ADD 330 340 3 132 1.8 401 7 14 25 (27) 105 73 47 23 13 7.6 8.0 6.0 2.0 1.7 1.5 4.7 8.0 12.1 - 0.5 0.5 3 Sobha BUY 658 520 (21) 62 0.8 95 7 38 60 (78) 465 59 99 18 11 13.4 7.1 5.5 2.6 2.3 2.0 2.6 13.9 19.2 1.1 1.1 1.1 4 Sunteck Realty BUY 367 360 (2) 54 0.7 140 4 17 17 (46) 350 (1) 96 21 22 43.3 17.6 16.4 1.9 1.7 1.6 1.9 8.4 7.7 0.3 0.3 0.3 4 Real Estate Attractive 2,497 33.5 15 115 43 82 38 27 32.6 21.6 16.1 2.2 2.1 2.0 2.6 5.5 7.6 1.1 1.7 1.9 78 Retailing Aditya Birla Fashion and Retail BUY 224 230 3 209 2.8 938 (8) (4) 4 (277) 47 184 NM NM 63 37.8 29.5 13.3 7.7 8.4 7.4 NM NM 12.6 — — — 8 Avenue Supermarts SELL 3,349 2,000 (40) 2,170 29.1 648 17 21 39 (19) 24 83 198 159 87 123 101 57 17.8 16.0 13.5 9.4 10.6 16.9 — — — 16 Titan Company ADD 1,695 1,625 (4) 1,505 20.2 888 11 19 27 (35) 76 43 155 88 62 87 55 41 20.1 17.3 14.5 13.7 21.2 25.6 0.2 0.4 0.5 38 Retailing Attractive 3,883 52.1 (50) 100 97 291 145 74 96 69 43 17.4 15.7 13.3 6.0 10.8 18.0 0.1 0.1 0.2 63
Source: Company, Bloomberg, Kotak Institutional Equities estimates
82 KOTAK INSTITUTIONAL EQUITIES RESEARCH
82
Kotak Institutional Equities: Valuation summary of KIE Universe stocks
83 Price (Rs) Fair Value Upside Mkt cap. O/S shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) ADVT-3mo
Company Rating 16-Jul-21 (Rs) (%) (Rs bn) (US$ bn) (mn) 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E (US$ mn) Speciality Chemicals Castrol India BUY 143 165 15 142 1.9 989 6 8 9 (28) 39 13 24 17 15 15.5 11.4 10.0 10.0 9.4 8.9 43.0 56.8 60.4 3.8 5.2 5.9 4 Pidilite Industries REDUCE 2,244 1,760 (22) 1,140 15.3 508 22 26 34 (3) 15 32 100 88 66 68 60 46 20.4 17.9 15.3 22.6 21.8 24.9 0.4 0.4 0.5 17 S H Kelkar and Company BUY 168 185 10 24 0.3 141 10 10 12 107 4 18 18 17 14 11.6 10.1 8.6 2.5 2.2 2.0 15.2 14.0 14.8 1.0 1.5 1.9 2 SRF SELL 7,762 6,000 (23) 460 6.2 59 205 240 303 49 17 26 38 32 26 22.5 19.5 15.8 6.6 5.7 4.7 20.3 19.0 20.2 0.3 0.4 0.5 18 Speciality Chemicals Attractive 1,766 23.7 7 20 25 58 48 38 36.3 30.5 24.8 11.9 10.4 8.9 20.7 21.7 23.2 0.6 0.8 1.0 40 Telecommunication Services Bharti Airtel BUY 541 700 29 2,972 39.8 5,492 (5) 11 22 NM NM NM NM 50 24 9.0 7.5 5.9 5.0 5.0 4.5 NM 10.1 19.6 - 1.1 1.1 72 Indus Towers ADD 241 250 4 649 8.7 2,695 20 19 19 10 (8) 2 12 13 13 5.3 5.0 4.8 4.1 3.9 3.7 32.8 31.3 30.3 8.4 6.6 6.6 9 Vodafone Idea RS 9 — — 272 3.6 28,735 (8) (8) (7) NM NM NM NM NM NM 10.9 10.2 9.0 (0.7) (0.4) (0.3) #### 46.5 27.8 — — — 29 Tata Communications BUY 1,361 1,375 1 388 5.2 285 47 52 62 29 11 19 29 26 22 11.4 10.2 8.9 336.0 32.8 15.6 NM 226 95.6 1.0 1.1 1.4 9 Telecommunication Services Attractive 4,281 57.4 40 48 95 NM NM NM 8.9 7.8 6.5 11.7 26.8 83.0 NM NM NM 1.3 1.9 1.9 119 Transportation Adani Ports and SEZ REDUCE 688 740 8 1,405 18.8 2,112 20 29 34 (22) 41 19 34 24 20 21.4 15.0 11.8 4.7 3.5 3.1 15.2 16.9 16.3 0.7 0.7 0.5 215 Container Corp. SELL 661 540 (18) 403 5.4 609 10 14 18 (41) 39 31 66 47 36 36.6 29.1 18.0 3.9 3.6 3.4 6.0 8.0 9.8 0.8 - 0.6 30 Gateway Distriparks BUY 282 215 (24) 35 0.5 125 8 9 12 79 20 28 37 31 24 12.9 12.3 10.3 2.4 2.3 2.1 6.8 7.5 9.1 1.8 1.1 1.1 2 GMR Infrastructure BUY 31 33 5 188 2.5 6,036 (3) (3) (2) (10) 5 35 NM NM NM 37.5 21.9 16.4 (10.9) (5.8) (5.5) 94.6 75.3 39.7 — — — 12 Gujarat Pipavav Port BUY 106 119 12 51 0.7 483 5 6 7 (25) 38 17 24 17 15 10.4 8.9 7.6 2.5 2.6 2.6 10.6 14.9 17.6 4.2 5.8 6.7 3 InterGlobe Aviation BUY 1,809 2,400 33 696 9.3 383 (152) (109) 134 (2,249) 29 223 NM NM 13 NM 24.7 4.1 976.4 (16.9) 4.1 NM 207.1 NM — — — 17 Mahindra Logistics REDUCE 582 490 (16) 42 0.6 71 5 13 18 (43) 161 36 115 44 32 29.8 19.6 15.2 7.3 6.5 5.6 6.5 15.6 18.6 — — — 1 Transportation Attractive 2,820 37.8 (153) 154 815 NM 204 22 28.9 18.1 9.7 6.5 5.8 4.6 NM 2.8 20.8 0.6 0.5 0.5 280 KIE universe 174,457 2,338 37.4 35.0 15.8 31.5 23.4 20.2 15.1 11.9 10.6 3.4 3.1 2.8 10.9 13.3 14.0 1.2 1.4 1.6
Notes: (a) We have used adjusted book values for banking companies. (b) 2021 means calendar year 2020, similarly for 2022 and 2023 for these particular companies. (c) Exchange rate (Rs/US$)= 74.59
Source: Company, Bloomberg, Kotak Institutional Equities estimates India Daily Summary Daily Summary India
KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK
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July 19, 2021 19, July
KOTAK INSTITUTIONAL EQUITIES RESEARCH 83 Disclosures of of the following As of March 31, 2021 , if, any, noare longer in effect for this stock capacity in a merger or strategic transaction
fair value , any, if for this stock,because is there notsufficient a
ing and fair valuefair
.
Percentage of companies covered by Kotak Institutional Equities, the specifiedwithin category. Percentage of companies each within category for which Kotak Institutional Equities and or its affiliates has provided investment banking services the previouswithin months.12 * The above categories are defined as follows: Buy = We expect this stock to deliver more returns than 15% over the next months;12 Add = We expect this stock to deliver returns 5-15% over the next months;12 Reduce = We expect this stock to deliver returns over -5-+5% the next months;12 Sell = We expect this stock to deliver less returns overthan -5% the next months.12 Our target prices are also on a horizon 12-month basis. These ratings are used illustratively to comply with applicable regulations. As of 31/12/2020 Kotak Institutional Equities Investment Research had investment ratings on 212 equity securities.
r r display is not or applicable. . The previous investment rat
SELL 2.8% 23.6%
fair valuefair
ul andul is therefore excluded term volatility in stock prices related to movements in the market.Hence, a particular Ratingmay not , if, any,have been suspended temporarily.Such suspension is in compliance with applicable regulation(s) - 0.5% 16.5% fair valuefair +5% returns over the next 12 months. REDUCE
- month horizon basis. 5 - - 15% returns over the next 12 months. 5% returns over the next months.12 The information is not available fo - 12 -
ADD 27.4% 4.7% Kotak SecuritiesKotak has suspended coverage of this company.
are also on a Kotak SecuritiesKotak Research has suspended the investment and rating
The information is not meaningf
Kotak SecuritiesKotak does not cover this company.
this stock to deliver 5 The investment and rating
The coverage view represents each analyst’s fundamental overall outlook on the Sector.The coverage viewwill consist of one
Attractive, Neutral, Cautious. BUY 3.8% 32.5% We expect this stock to deliver
definitions We expect We expect this to stock deliver < We expect this to stock deliver more than 15% returns over the next months.12
Fair Value estimates 0% 10% 60% 50% 40% 30% 20% 70% Source: Kotak Institutional Equities Kotak Institutional Equities Research coverage universe coverage Research Equities Institutional Kotak Distribution of ratings/investment banking relationships and shouldnot be relied upon. = NA AvailableNot or Applicable.Not = NM Meaningful.Not and/or and/or Kotak Securities policies in circumstances when Securities Kotak or its affiliates is acting in an advisory involving this company and in certain other circumstances. CS = Coverage Suspended. = NC Covered.Not = RatingRS Suspended. fundamental basis for determining an investment rating or Other Other Coverage view. designations: ratings/identifiers Other NR = Rated.Not REDUCE. SELL. Our Our Ratings System notdoes take into account short strictly be in accordance with the Rating System all at times. Ratings other and definitions/identifiers ratings of Definitions BUY. ADD. Disclosures
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