india daily, august 06, 2018 - kotak securities · nestle india (nest) consumer products strong...

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL.

Contents

Daily Alerts

Results

Nestle India: Strong momentum sustains

Titan Company: Watches pick up the jewelry slack

Marico: 1Q a mixed bag; prognosis promising

Godrej Properties: Moderating momentum

KEC International: Telling quarter

Laurus Labs: China cost push hurts performance

JK Lakshmi Cement: Volumes disappoint

Jagran Prakashan: Inexpensive valuations but triggers missing

Results, Change in Reco

Mahindra Logistics: Transient troubles, rich valuations

Change in Reco

PVR: A masterstroke

Company alerts

ICICI Bank: Getting better and better

Sector alerts

Technology: 1QFY19 review: The familiar story

INDIA DAILY August 6, 2018 India 3-Aug 1-day 1-mo 3-mo

Sensex 37,556 1.1 5.3 7.6

Nifty 11,361 1.0 5.5 7.0

Global/Regional indices

Dow Jones 25,463 0.5 4.1 4.9

Nasdaq Composite 7,812 0.1 1.6 8.4

FTSE 7,659 1.1 0.5 1.2

Nikkei 22,513 (0.1) 3.3 0.2

Hang Seng 27,676 (0.1) (2.3) (7.5)

KOSPI 2,295 0.3 1.0 (6.8)

Value traded – India

Cash (NSE+BSE) 365 343 332

Derivatives (NSE) 4,722 5,749 11,81

3

Deri. open interest 3,568 3,286 3,902

Forex/money market

Change, basis points

3-Aug 1-day 1-mo 3-mo

Rs/US$ 68.5 (2) (27) 135

10yr govt bond, % 8.0 - (10) 9

Net investment (US$ mn)

2-Aug MTD CYTD

FIIs (81) (121) (535)

MFs (35) (35) 11,078

Top movers

Change, %

Best performers 3-Aug 1-day 1-mo 3-mo

SBIN IN Equity 299 1.8 16.3 23.7

RIL IN Equity 1,177 0.7 20.4 23.4

HUVR IN Equity 1,763 0.8 5.0 20.4

GCPL IN Equity 1,330 0.2 6.4 20.1

DABUR IN Equity 437 1.9 18.1 19.5

Worst performers

AL IN Equity 118 (1.7) (10.7) (27.9)

UT IN Equity 4 0.0 0.0 (26.1)

TTMT/A IN Equity 143 (0.6) (9.1) (23.9)

TTMT IN Equity 258 (0.9) (4.6) (22.7)

HDIL IN Equity 25 (0.4) 23.3 (21.8)

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

2QCY18 earnings print – a healthy set of numbers

Revenues grew 12% yoy to `26.8 bn, broadly in line with our expected `26.9 bn. Domestic

sales grew 12% on a reported basis and 14.5% on an underlying basis. Export revenues grew a

solid 16% yoy, the highest yoy growth comp reported since March 2015 quarter. Gross

margins expanded 455 bps to 59.3%, 184 bps ahead of our expectation and an all-time high.

Even as part of the GM expansion was optical on account of GST-related accounting changes,

we believe these reflect improvement in mix within as well as across segments. EBITDA for the

quarter stood at `6.45 bn, +46% yoy and 4% above our estimate.

EBITDA margin stood at 24.1%, +551 bps yoy and 109 bps ahead of our Street-high expectation.

Staff and other expenses increased by 13% and 8%, respectively. Nestle does not disclose

adspends on a quarterly basis but we believe the company is reinvesting a decent portion of

gross margin expansion behind the brands. Recurring PAT grew 50% yoy to `3.95 bn, 5%

ahead of expectation. Fixed asset impairment charges and provision for contingencies (both

extremely volatile and tough-to-forecast numbers on quarterly basis) were both higher than our

estimate. PAT, ex these charges, was 9% ahead of our estimate. EPS stood at `41/share taking

1HCY18 EPS to `85/share.

Base-adjusted 2-year CAGRs healthy; reflect solid underlying business momentum

Even as Nestle’s base was not as favorable as some of its peers, it was favorable nonetheless.

EBITDA and PAT had declined 6% and 3% yoy, respectively in the base quarter. For 2QCY18,

2-year CAGRs on revenues, EBITDA and recurring PAT stood at 10%, 17% and 21%,

respectively. These are easily among the best 2-year comps we have seen in the sector so far

and generate good confidence on our prognosis of the business being in a fairly healthy shape.

Retain ADD; revise target price to `11,000/share

We have tweaked our margin assumptions a tad driving a 1-4% increase in CY2018-20E EPS

forecasts. Our DCF-based fair value target (baking in around 10% FCF CAGR through CY2040,

TG of 6% and WACC of 10.2%) stands revised to `11,000/share (from `9,500). We retain ADD

rating. Strong performance in the past 12 months (stock up nearly 60%) does not leave much

upside on the table, however. We would accumulate on dips.

Nestle India (NEST) Consumer Products

Strong momentum sustains. Nestle reported another solid quarter with underlying

domestic sales growth of 14.5%, EBITDA growth of 46%, and recurring PAT growth of

50% yoy. Two-year CAGRs were strong as well. Even as yoy comps are likely to

moderate from here as the base catches up, we like the shape the business is in. The

company’s renewed volume focus is yielding good dividend. We raise our CY2018-20E

EPS forecast by 1-4% and fair value target to `11,000 (from `9,500). ADD stays.

ADD

AUGUST 06, 2018

RESULT

Coverage view: Cautious

Price (`): 10,313

Target price (`): 11,000

BSE-30: 37,556

Rohit Chordia

Jaykumar Doshi

Aniket Sethi

Nestle India

Stock data Forecasts/Valuations 2018 2019E 2020E

52-week range (Rs) (high,low) EPS (Rs) 127.1 170.6 197.4

Market Cap. (Rs bn) EPS growth (%) 21.1 34.2 15.7

Shareholding pattern (%) P/E (X) 81.2 60.5 52.3

Promoters 62.8 Sales (Rs bn) 99.5 111.9 124.7

FIIs 11.9 Net profits (Rs bn) 12.3 16.4 19.0

MFs 2.4 EBITDA (Rs bn) 21.6 27.7 31.8

Price performance (%) 1M 3M 12M EV/EBITDA (X) 44.6 34.6 29.9

Absolute 5.4 13.3 53.2 ROE (%) 36.6 46.1 49.0

Rel. to BSE-30 (0.7) 5.9 31.5 Div. Yield (%) 0.8 1.1 1.3

Company data and valuation summary

10,951-6,501

994.4

Nestle India Consumer Products

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

Exhibit 1: Key changes to estimates, Nestle India, CY2018-20E

Source: Kotak Institutional Equities estimates

Exhibit 2: Interim standalone results of Nestle India, calendar year-ends (Rs mn)

Source: Company, Kotak Institutional Equities estimates

2018E 2019E 2020E 2018E 2019E 2020E 2018E 2019E 2020E

Revenues (Rs mn) 111,871 124,722 139,009 111,871 124,722 139,009 — — —

EBITDA (Rs mn) 27,713 31,832 35,928 27,601 31,115 35,026 0.4 2.3 2.6

EBITDA margin (%) 24.8 25.5 25.8 24.7 24.9 25.2

Net income (Rs mn) 16,445 19,031 21,548 16,229 18,397 20,771 1.3 3.4 3.7

EPS (Rs/share) 170.6 197.4 223.5 168.3 190.8 215.4 1.3 3.4 3.7

Revised Earlier Change (%)

2QCY18 2QCY18E 2QCY17 1QCY18 vs KIE yoy qoq 1HCY18 1HCY17 %yoy 2QCY16 2-yr CAGR (%)

Net domestic revenues 25,073 25,346 22,386 25,602 (1) 12 (2) 50,675 45,479 11 20,652 10.2

Export revenues 1,712 1,598 1,479 1,766 7 16 (3) 3,479 3,143 11 1,681 0.9

Net sales 26,786 26,944 23,865 27,368 (1) 12 (2) 54,154 48,622 11 22,332 9.5

Material cost (10,890) (11,451) (10,791) (11,277) (5) 1 (3) (22,167) (21,729) 2 (9,495) 7.1

Gross Profit 15,896 15,493 13,075 16,092 3 22 (1) 31,987 26,893 19 12,837 11.3

Gross margin (%) 59.3 57.5 54.8 58.8 184 bps 455 bps 54 bps 59.1 55.3 375 bps 57.5

Employee cost (2,849) (2,759) (2,531) (2,690) 3 13 6 (5,539) (4,992) 11 (2,265) 12.1

Other expenditure (6,598) (6,542) (6,114) (6,487) 1 8 2 (13,084) (12,361) 6 (5,853) 6.2

Total expenditure (20,337) (20,752) (19,436) (20,453) (2) 5 (1) (40,790) (39,083) 4 (17,614) 7.5

EBITDA 6,449 6,192 4,430 6,915 4 46 (7) 13,364 9,540 40 4,718 16.9

EBITDA Margin (%) 24.1 23.0 18.6 25.3 109 bps 551 bps -119 bps 24.7 19.6 505 bps 21.1

Other income 602 487 412 564 24 46 7 1,167 828 41 368 28.0

Other operating income 198 172 157 204 15 27 (3) 402 319 26 156 12.7

Interest (283) (235) (229) (311) 20 23 (9) (593) (457) 30 (220)

Depreciation (817) (850) (854) (825) (4) (4) (1) (1,642) (1,721) (5) (889) (4.2)

Pretax profits 6,150 5,765 3,915 6,547 7 57 (6) 12,698 8,509 49 4,132 22.0

Tax (2,003) (1,943) (1,311) (2,157) 3 53 (7) (4,159) (2,739) 52 (1,186) 30.0

PAT 4,147 3,822 2,604 4,391 9 59 (6) 8,538 5,770 48 2,947 18.6

Impairment of fixed assets (41) — 0 — — (41) — 0

Provision for contingencies (156) (50) 31 (151) 211 (610) 3 (306) (68) 353 (224) (16.7)

Recurring PAT 3,950 3,772 2,634 4,240 5 50 (7) 8,191 5,702 44 2,722 20.5

EO item — — — — — — (320)

Reported PAT 3,950 3,772 2,634 4,240 5 50 (7) 8,191 5,702 44 2,402 28.2

Recurring EPS (Rs/share) 41.0 39.1 27.3 44.0 5 50 (7) 84.9 59.1 44 28.2 20.5

Income tax rate (%) 33.6 34.0 33.2 33.7 -36 bps 40 bps -7 bps 33.7 32.4 122 bps 30.3

Costs as a % of sales

Material cost 40.7 42.5 45.2 41.2 -185 bps -456 bps -55 bps 40.9 44.7 -376 bps 42.5

Employee cost 10.6 10.2 10.6 9.8 39 bps 2 bps 80 bps 10.2 10.3 -5 bps 10.1

Other expenditure 24.6 24.3 25.6 23.7 35 bps -99 bps 93 bps 24.2 25.4 -127 bps 26.2

(% chg.)

Consumer Products Nestle India

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Exhibit 3: Nestle’s net domestic revenue growth and EBITDA margin (%)

Source: Company, Kotak Institutional Equities

Exhibit 4: Nestle's 2QCY18 gross margins expanded 455 bps yoy


16

18

20

22

24

26

(40)

(30)

(20)

(10)

-

10

20

30

40

50

1Q

CY15

2Q

CY15

3Q

CY15

4Q

CY15

1Q

CY16

2Q

CY16

3Q

CY16

4Q

CY16

1Q

CY17

2Q

CY17

3Q

CY17

4Q

CY17

1Q

CY18

2Q

CY18

Net domestic revenue growth (LHS, %) EBITDA margin (RHS, %)

51

52

53

54

55

56

57

58

59

60

61

1Q

CY15

2Q

CY15

3Q

CY15

4Q

CY15

1Q

CY16

2Q

CY16

3Q

CY16

4Q

CY16

1Q

CY17

2Q

CY17

3Q

CY17

4Q

CY17

1Q

CY18

2Q

CY18

Nestle India Consumer Products


Exhibit 5: Nestle: Profit model, balance sheet, 2014-20E, December calendar year-ends (Rs mn)


2014 2015 2016 2017 2018E 2019E 2020E

Profit model

Net sales 98,063 81,233 90,764 99,525 111,871 124,722 139,009

EBITDA 20,527 15,946 19,652 21,643 27,713 31,832 35,928

Other income 1,359 1,621 2,159 2,340 3,017 3,589 4,216

Interest expense (142) (33) (909) (919) (1,150) (1,269) (1,401)

Depreciation (3,375) (3,473) (3,537) (3,423) (3,354) (3,566) (3,801)

Pretax profits 18,368 14,062 17,365 19,642 26,225 30,585 34,942

Tax (5,897) (4,206) (5,440) (6,141) (8,472) (10,024) (11,603)

Net income 12,472 9,855 11,924 13,500 17,754 20,561 23,339

Provision for contingencies/impairment losses (695) (917) (1,803) (1,248) (1,309) (1,530) (1,791)

Net income after contingencies/impairment 11,777 8,938 10,121 12,252 16,445 19,031 21,548

EO items 70 (3,306) (108) — — — —

Reported net income 11,847 5,633 10,014 12,252 16,445 19,031 21,548

Earnings per share (Rs) 122.1 92.7 105.0 127.1 170.6 197.4 223.5

Balance sheet

Total equity 28,372 30,359 32,823 34,206 37,189 40,555 44,232

Total borrowings 196 177 332 351 — — —

Deferred tax liability 2,227 1,747 1,553 1,220 1,220 1,220 1,220

Total liabilities and equity 30,795 32,283 34,708 35,777 38,409 41,774 45,452

Cash 4,458 4,996 8,800 14,574 21,627 29,436 37,900

Investments 8,118 13,297 17,557 19,789 19,789 19,789 19,789

Net current assets (excl cash) (15,996) (17,296) (20,832) (25,689) (29,105) (32,602) (36,507)

Net fixed assets (incl CWIP) 34,214 31,286 29,183 27,103 26,098 25,152 24,270

Total assets 30,795 32,283 34,708 35,777 38,409 41,774 45,452

Free cash flow

Operating cash flow, excl. working capital 14,623 7,665 12,618 14,428 18,667 21,086 23,424

Working capital 1,818 3,316 2,040 3,750 3,416 3,497 3,905

Capital expenditure (4,146) (1,508) (2,070) (1,986) (2,349) (2,619) (2,919)

Free cash flow 12,294 9,473 12,589 16,192 19,734 21,964 24,410

Key assumptions

Revenue growth (%) 8.2 (17.2) 11.7 9.7 12.4 11.5 11.5

EBITDA Margin (%) 20.9 19.6 21.7 21.7 24.8 25.5 25.8

EPS Growth (%) 6.7 (24.1) 13.2 21.1 34.2 15.7 13.2

RoE (%) 45.2 30.4 32.0 36.6 46.1 49.0 50.8

RoCE (%) 36.4 26.8 31.4 32.2 39.6 42.0 43.4

IGAAP Ind-AS


An in-line-with-consensus quarter or a miss?

We note that our estimates for TTAN, especially for the jewelry segment, were materially higher

than consensus as we had published the same before the company released its post-quarter-

pre-earnings update. Consensus estimates were built on the toned-down management

commentary and hence, the deviation versus consensus estimates is likely different from the

deviation versus ours. That said, the important aspect to appreciate is that 1QFY19 earnings

print, but for the adjustments made to published 1QFY19 forecasts by the Street, were weaker

than expectations. TTAN management also indicated that 1QFY19 jewelry revenues were short

of its own internal targets and revised down its FY2019E jewelry revenue growth guidance to

the extent of 1QFY19 miss.

Underlying financials weaker than reported, adjusted for watches primary sales boost

TTAN reported standalone revenues of `43.19 bn for 1QFY19, +8% yoy and 6% below our

estimates. EBITDA for the quarter stood at `4.95 bn, +27% yoy but again 6% below our

estimate. EBITDA margin of 11.5% was marginally ahead of our estimated 11.4%. Recurring

PAT stood at `3.49 bn, +26% yoy and 5% below our estimate. Other income was materially

ahead of estimate on account of higher average cash balance as the company cut down in-

store jewelry inventory sharply. ETR stood at 28.3%.

Segmental financials – jewelry below estimate, watch segment surprises

Jewelry revenues grew 6% yoy to `35.72 bn, 8% below our forecast. The slack was picked up

to some extent by watches (+15% yoy, 8% above estimate) and eyewear (+16% yoy, 8%

above estimate). Jewelry EBIT grew 16% yoy to `3.93 bn missing our estimate by 14%.

Watches segment picked up the slack here too growing a strong 128% yoy, 50% above our

estimate. Watches segment performance was boosted by higher-than-normal primary sales

towards the end of the quarter in anticipation of upcoming activation. Retail sales were much

lower. On the jewelry front, gold tonnage declined 2.6% yoy, first decline in seven quarters.

Growth in jewelry segment was driven by gold price inflation and higher studded sales.

Customer base for the jewelry segment was flattish reflecting poor industry growth.

Titan Company (TTAN) Consumer Products

Watches pick up the jewelry slack. TTAN’s 1QFY19 earnings print was a mixed bag;

the jewelry segment underperformed the Street’s expectations (before the company’s

post-quarter-pre-earnings update) as well as the management’s own internal targets.

The slack was picked up partly by primary sales boost in the watches segment.

Management toned down its FY2019E jewelry sales growth target to the extent of

1QFY19 miss. There was enough in the earnings call to sustain the strong narrative,

however. We tweak estimates a tad and retain SELL. TP raised to `840 (from `800).

SELL

AUGUST 06, 2018

RESULT


Price (`): 919

Target price (`): 840

BSE-30: 37,556

Rohit Chordia

Jaykumar Doshi

Aniket Sethi

Titan Industries







MFs 3.5 EBITDA (Rs bn) 16.5 21.2 26.5


Absolute 2.9 (4.2) 64.7 ROE (%) 24.3 25.6 26.3

Rel. to BSE-30 (3.1) (10.4) 41.4 Div. Yield (%) 0.4 0.5 0.6


1,000-547

816.1

Titan Company Consumer Products


A good narrative but not without risks; bullish case priced in. We remain cautious

We like the narrative for TTAN; demonetization and GST have given the company a multi-

year market share gain opportunity as unbranded jewelry segment struggles. Management’s

five-year growth outlook (2.5X jewelry sales in FY2023E versus FY2018) reflects the

narrative. Our model bakes in similar levels of growth. Our discomfort on the stock is on two

counts, related to each other perhaps – (a) there is little appreciation for risks to the

narrative; to be sure, no material risk is visible at this point. However, weaker-than-expected

industry growth, a sharp fall or a sharp rise in gold price (both not good for demand), any

increase in GST rate (jewelry is a luxury good, after all), the unbranded players finding a way

to revive their competitiveness, etc. are all potential risks, and (b) rich valuations which as we

said is related to the Street’s ‘upside-a-given, risks-not-even-an-afterthought’ construct for

the stock (and the sector in general). We remain cautious and retain our SELL rating. Our

forecasts see some minor tweaks and we raise our fair value target to `840 (from `800).

Conference call highlights

Jewelry segment. Jewelry business reported muted 6% yoy growth in revenues to

`35.7 bn. Per management, industry declined 10-25% yoy and Titan gained market share

in line with expectations even as reported growth was 10 percent points below internal

expectations. Weakness was partly due lower than usual number of wedding days.

Additionally, base quarter revenues were higher by about `2.5 bn due to advancement of

sales ahead of GST implementation in the month of June 2018. Segmental EBIT grew

16% yoy to `3.94 bn (14% below our estimate) on 100 bps yoy jump in EBIT margin to

11% aided by better studded share, better mix overall and tight cost control.

Management highlighted – (1) growth in the month of July was 70% yoy+ partly aided

by weak base, (2) gold procurement through exchange stood at 43% (versus 40% in

1QFY18), (3) 1Q revenues missed company’s expectation by about 10% (or `3.2 bn); the

company reduced its revenue guidance for FY2019 to the extent of this 1Q miss of `3.2 bn,

(4) Jewelry inventory reduced by `4.5 bn sequentially due to rationalization of in-store

inventory levels.

Watches. Watches posted a good quarter with 15% yoy growth in revenues to `5.9 bn.

Growth was partly boosted by stocking up ahead of rollout of schemes. Retail sales of

world of Titan were muted at 3% yoy on account of activation phasing. Margin

expansion of 930 bps to 18.8% was driven by a number of factors (1) product mix. Titan

watches reported disproportionate growth on stocking up ahead of schemes. It was key

contributor of margin expansion and is not sustainable, (2) Ecommerce segment is

growing faster and profitability is higher on this channel for Titan. This trend can sustain,

(3) cost control measures taken by the company and (4) non-recurrence of business

conference expense of `110 mn. The management expects full year EBIT margin in

double digits.

Eyewear. Eyewear segment reported overall revenue growth of 19% and like-to-like

growth of 8%. Sunglasses category grew 44% yoy on weak base. The company had

2.4 mn customers last year and it is targeting 3.7 mn this year.

Other takeaways. (1) The company added 44 stores with retail space of 44,000 sq. ft in

1QFY19 (across formats) and (2) depreciation increased due to shift of corporate office to

own premise from rented space and accelerated depreciation of furniture and fixtures.

1QFY19 depreciation is the new base going forward.

Consumer Products Titan Company


Exhibit 1: Interim results (standalone) - Titan Industries, March fiscal year-ends (Rs mn)


1QFY19 1QFY19E 1QFY18 4QFY18 KIE Est yoy qoq FY2019E FY2018 (% chg.)

Net operating revenue 43,189 46,080 39,921 39,168 (6) 8 10 189,789 155,360 22 25

Material cost (31,587) (34,716) (29,783) (27,809) (9) 6 14 (139,976) (113,779) 23

Gross Profit 11,602 11,364 10,138 11,360 2 14 2 49,814 41,581 20 22

Gross Margin (%) 26.9 24.7 25.4 29.0 220 bps 146 bps -214 bps 26.2 26.8 -52 bps

Employee cost (2,065) (2,000) (1,797) (2,110) 3 15 (2) (8,877) (7,645) 16

Advertising and promotion (1,362) (1,100) (1,059) (1,022) 24 29 33 (5,561) (4,486) 24

Other expenditure (3,221) (3,000) (3,395) (3,674) 7 (5) (12) (13,689) (12,117) 13

Total expenditure (38,236) (40,816) (36,033) (34,614) (6) 6 10 (168,103) (138,027) 22

EBITDA 4,953 5,264 3,888 4,554 (6) 27 9 21,686 17,333 25 32

OPM (%) 11.5 11.4 9.7 11.6 4 bps 172 bps -16 bps 11.4 11.2 26 bps

Other income 357 250 276 200 43 29 79 1,068 864 24

Interest (88) (110) (106) (124) (20) (17) (29) (369) (477) (23)

Depreciation (351) (315) (248) (301) 12 42 17 (1,476) (1,097) 35

Pretax profits 4,870 5,089 3,810 4,329 (4) 28 12 20,909 16,624 26 35

Tax (1,378) (1,399) (1,038) (967) (2) 33 43 (5,883) (4,345) 35

PAT 3,492 3,689 2,772 3,362 (5) 26 4 15,026 12,279 22 36

Extraordinary items — — (103) (541) — (650)

Net profit (reported) 3,492 3,689 2,669 2,821 (5) 31 24 15,026 11,629 29 64

Recurring EPS (Rs) 3.9 4.2 3.1 3.8 (5) 26 4 16.9 13.8 22 36

Income tax rate (%) 28.3 27.5 27.2 22.3 79 bps 105 bps 596 bps 28.1 26.1 200 bps


Material cost 73.1 75.3 74.6 71.0 -221 bps -147 bps 213 bps 73.8 73.2 51 bps

Employee cost 4.8 4.3 4.5 5.4 44 bps 28 bps -61 bps 4.7 4.9 -25 bps

Advertising and promotion 3.2 2.4 2.7 2.6 76 bps 50 bps 54 bps 2.9 2.9 4 bps

Other expenditure 7.5 6.5 8.5 9.4 94 bps -105 bps -193 bps 7.2 7.8 -59 bps

Segmental Results

Revenue break-up (incl OI)

Jewelry 35,717 39,031 33,807 32,921 (8) 6 8 160,419 130,359 23

Watches 5,935 5,482 5,167 4,940 8 15 20 23,490 21,264 10

Eyewear 1,316 1,217 1,130 1,087 8 16 21 4,772 4,150 15

Others 263 325 200 265 (19) 32 (1) 1,243 950 31

Unallocated 315 275 239 155 14 32 103 933 700 33

Total 43,545 46,330 40,542 39,368 (6) 7 11 190,857 157,423 21

EBIT break-up (incl OI)

Jewelry 3,934 4,586 3,388 4,519 (14) 16 (13) 19,763 15,455 28

Watches 1,113 740 488 351 50 128 217 3,266 2,720 20

Eyewear 17 43 32 23 (59) (45) (24) 42 24 75

Others (131) (120) (61) (127) 9 (115) (3) (468) (443) (6)

Unallocated 25 (50) (33) (1,120) (150) 175 102 (1,352) (656) 106

Total 4,958 5,199 3,813 3,646 (5) 30 36 21,251 17,101 24

EBIT margin (%)

Jewelry 11.0 11.8 10.0 13.7 -74 bps 99 bps -272 bps 12.3 11.9 46 bps

Watches 18.8 13.5 9.4 7.1 525 bps 931 bps 1164 bps 13.9 12.8 111 bps

Eyewear 1.3 3.5 2.8 2.1 -218 bps -149 bps -80 bps 0.9 0.6 30 bps

Others (49.8) (36.9) (30.6) (48.0) -1293 bps -1930 bps -189 bps (37.7) (46.6) 893 bps

Total 11.4 11.2 9.4 9.3 16 bps 198 bps 212 bps 11.1 10.9 27 bps

(% chg.) 2-year

CAGR (%)



Exhibit 2: Interim results (consolidated) - Titan Industries, March fiscal year-ends (Rs mn)


1QFY19 1QFY18 4QFY18 yoy qoq FY2019E FY2018 (% chg.)

Net operating revenue 44,510 40,673 41,072 9 8 189,789 156,213 21

Material cost (32,333) (29,918) (29,003) 8 11 (139,976) (113,857) 23

Gross Profit 12,177 10,755 12,069 13 1 49,814 42,356 18

Gross Margin (%) 27.4 26.4 29.4 91 bps -203 bps 26.2 27.1 -87 bps

Employee cost (2,393) (2,085) (2,463) 15 (3) (8,877) (7,623) 16

Advertising and promotion (1,554) (1,197) (1,115) 30 39 (5,561) (4,410) 26

Other expenditure (3,401) (3,823) (4,137) (11) (18) (13,689) (12,990) 5

Total expenditure (39,682) (37,024) (36,718) 7 8 (168,103) (138,880) 21

EBITDA 4,829 3,649 4,355 32 11 21,686 17,333 25

OPM (%) 10.8 9.0 10.6 187 bps 24 bps 11.4 11.1 33 bps

Other income 361 283 185 28 96 1,068 864 24

Interest (109) (108) (167) 1 (35) (369) (477) (23)

Depreciation (407) (295) (360) 38 13 (1,476) (1,097) 35

Pretax profits 4,674 3,529 4,013 32 16 20,909 16,624 26

Tax (1,388) (1,073) (912) 29 52 (5,883) (4,381) 34

PAT 3,286 2,456 3,101 34 6 15,026 12,243 23

Share of associate profits (5) (8) (19) (28) 0

PAT before EO items 3282 2448 3082 34 6 14998 12243 23

Extraordinary items (68) (38) — (614)

Net profit (reported) 3,282 2,380 3,044 38 8 14,998 11,629 29

Recurring EPS (Rs) 3.7 2.8 3.5 34 6 16.9 13.8 23

Income tax rate (%) 29.7 30.4 22.7 -72 bps 695 bps 28.1 26.4 178 bps


Material cost 72.6 73.6 70.6 -92 bps 202 bps 73.8 72.9 86 bps

Employee cost 5.4 5.1 6.0 25 bps -62 bps 4.7 4.9 -21 bps

Advertising and promotion 3.5 2.9 2.7 54 bps 77 bps 2.9 2.8 10 bps

Other expenditure 7.6 9.4 10.1 -176 bps -244 bps 7.2 8.3 -111 bps

Segmental Results

Revenue break-up (incl OI)

Jewelry 36,426 34,252 33,581 6 8 160,419 130,359 23

Watches 5,963 5,186 4,924 15 21 23,490 21,264 10

Eyewear 1,316 1,130 1,087 16 21 4,772 4,150 15

Others 853 511 1,516 67 (44) 1,243 950 31

Unallocated 315 239 150 32 110 933 700 33

Total 44,872 41,317 41,257 9 9 190,857 157,423 21

EBIT break-up (incl OI)

Jewelry 3,842 3,233 4,247 19 (10) 19,763 15,455 28

Watches 996 399 174 149 471 3,266 2,720 20

Eyewear 17 32 23 (45) (24) 42 24 75

Others (97) (97) 21 0 557 (468) (443) (6)

Unallocated 20 (41) (361) 148 106 (1,352) (656) 106

Total 4,778 3,525 4,104 36 16 21,251 17,101 24

EBIT margin (%)

Jewelry 10.5 9.4 12.6 110 bps -211 bps 12.3 11.9 46 bps

Watches 16.7 7.7 3.5 900 bps 1315 bps 13.9 12.8 111 bps

Eyewear 1.3 2.8 2.1 -149 bps -80 bps 0.9 0.6 30 bps

Others (11.3) (18.9) 1.4 760 bps -1271 bps (37.7) (46.6) 893 bps

Total 10.6 8.5 9.9 211 bps 70 bps 11.1 10.9 27 bps

(% chg.)



Exhibit 3: Titan - key changes to earnings model, March fiscal year-ends, 2019-21E (Rs mn)


Exhibit 4: Store-wise sales growth and presence

Source: Company

2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2020E

Net revenues 195,789 232,561 275,334 198,668 235,362 277,853 (1.4) (1.2) (0.9)

EBITDA 21,186 26,466 32,046 21,559 26,848 32,399 (1.7) (1.4) (1.1)

PAT 14,253 17,359 20,709 14,387 17,344 20,636 (0.9) 0.1 0.4

EPS (Rs/share) 16.1 19.6 23.3 16.2 19.5 23.2 (0.9) 0.1 0.4

EBITDA margin (%) 10.8 11.4 11.6 10.9 11.4 11.7

Net revenue break-up

Jewellery 162,545 195,643 234,494 166,055 199,264 238,053 (2.1) (1.8) (1.5)

Watches 23,481 25,885 28,401 23,021 25,378 27,845 2.0 2.0 2.0


Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18

Sales value growth (%)

World of Titan (6) 11 4 12 8 9 7 8 (3) 3

Tanishq (1) 9 9 20 55 55 22 15 19 8

Goldplus (16) (5) (10) 2 NA NA NA NA NA NA

Helios 12 7 1 16 4 40 9 37 32 25

Fastrack 2 4 (1) 3 — (3) 4 10 1 4

LFS-Watches 1 15 11 28 12 20 4 11 14 17

Titan Eye + 18 9 10 10 9 10 10 23 10 19

Like to Like growth (%)

World of Titan (9) 6 (2) 9 5 6 5 7 (4) 2

Tanishq (5) 3 4 15 52 51 18 12 17 2

Goldplus (16) (1) (7) 8 NA NA NA NA NA NA

Helios 15 13 1 11 (3) 24 (9) 4 5 (2)

Fastrack (5) (1) (5) 1 (1) (3) 2 6 (6) —

LFS-Watches (7) 16 4 13 3 8 1 6 11 12

Titan Eye + 7 (2) 4 3 1 3 3 14 1 8

No of stores (Total Presence)

Zoya 2 2 2 2 2 2 2 3 3 3

Helios 41 41 44 47 49 53 62 67 70 73

World of Titan 452 458 467 470 474 482 485 481 486 496

Fastrack 159 160 163 155 155 160 166 164 166 173

Tanishq 193 197 198 202 208 219 229 240 253 263

Titan Eye 404 405 413 428 448 459 462 478 500 509

Gold Plus 32 30 29 29 29 20 7 4 — —

Total exclusive stores 1,283 1,293 1,316 1,333 1,365 1,395 1,413 1,437 1,478 1,517

Towns 247 251 253 256 261 266 266 271 276 278

Sq ft 1.72mn+ 1.74mn+ 1.75mn+ 1.76mn+ 1.8mn+ 1.8mn+ 1.8mn+ 1.9mn+ 1.9mn+ 2mn+

Sevice Centres 707 707 702 722 722 714 716 716 730 730

International Presence

Countries 32 32 32 32 32 32 32 33 33 33

No of Outlets 2,264 2,264 2,264 2,264 2,264 2,264 2,264 2,264 2,264 2,265



Exhibit 5: Key segment-wise performance metrics

Source: Company


Jewelry business

Jewelry revenue growth (%) 1.0 3.7 0.2 15.4 57.9 57.2 36.4 9.8 13.0 5.7

Jewelry volume growth (%) 15.0 6.0 (32.0) 4.0 37.0 49.0 49.0 6.0 6.0 (2.6)

Implied price/mix change (%) (12.2) (2.1) 47.4 11.0 15.2 5.5 (8.5) 3.6 6.6 8.5

Average gold price (Rs/10 gm) 26,430 28,090 29,640 27,910 27,730 27,900 27,770 27,980 29,030 29,680

Change (%) 3.9 10.4 21.3 13.9 4.9 (0.7) (6.3) 0.3 4.7 6.4

Studded share (%) 34.0 23.8 42.0 21.0 33.6 23.4 36.0 25.0 36.0 25.0

Distribution

Tanishq (Incl Zoya)

No 195 199 200 204 210 221 231 243 256 262

Towns 111 114 115 118 121 132 140 147 159 173

Sq ft ('000s) 815 830 835 847 875 900 940 971 1,010 1,020

GoldPLus

No 32 30 29 29 29 20 7 4 4 4

Towns 32 30 29 29 29 20 7 4 4 4

Sq ft ('000s) 81 74 73 73 73 49 14 8 8 8

Watches business

Watches revenue growth (%) (13.0) 2.2 (5.2) 5.1 13.0 3.4 8.8 6.1 (1.7) 14.9

Watches volume growth (%) (19.0) 1.0 (9.0) 4.0 10.0 5.0 9.0 11.0 (1.0) 10.0

Implied price change (%) 7.5 1.2 4.2 1.0 2.7 (1.5) (0.1) (4.4) (0.7) 4.4

Distribution

World of Titan

No 452 458 467 470 474 482 485 481 486 496

Towns 204 206 208 211 214 220 220 221 224 226

Sq ft ('000s) 423 426 428 420 420 420 418 412 411 419

Fastrack

No 159 160 163 155 155 161 166 164 166 173

Towns 85 83 86 85 84 84 85 83 83 88

Sq ft ('000s) 94 95 95 90 90 92 94 98 92 95

Helios

No 41 41 44 47 49 54 62 67 70 72

Towns 23 22 25 25 25 28 28 32 33 35

Sq ft ('000s) 48 45 46 49 50 54 60 64 67 68

Others

Others revenue growth (%) 2.5 (71.9) (71.7) (66.9) (79.0) 46.4 53.1 26.2 60.4 31.5

Eyewear revenue growth (%) 9.4 2.8 6.6 12.4 15.6 2.3 3.5 2.3 (2.6) 16.4

Distribution

No of outlets 404 405 413 428 448 457 462 478 500 509

Towns 170 172 176 182 192 198 204 210 218 228



Exhibit 6: Titan - key assumptions driving our earnings model, March fiscal year-ends, 2015-21E (Rs mn)


2014 2015 2016 2017 2018 2019E 2020E 2021E

Jewelry business

Net revenues 86,274 94,206 87,227 103,487 132,569 162,545 195,643 234,494

Rev growth yoy (%) 7 9 (7) 19 28 23 20 20

EBITDA 8,728 9,694 8,388 10,455 15,014 19,180 23,673 28,608

EBITDA growth yoy (%) 4 11 (13) 25 44 28 23 21

EBITDA margin (%) 10.1 10.3 9.6 10.1 11.3 11.8 12.1 12.2

Total gold sold (tonnes) 19.2 20.5 20.3 20.9 26.0 30.1 34.7 39.7

Change yoy (%) 12 7 (1) 3 24 16 15 14

Average gold price (Rs/gm) 28,279 27,685 27,311 30,862 30,708 31,475 32,262 33,069

Change yoy (%) (6) (2) (1) 13 (1) 2 2 2

Studded share (%) 30.0 32.0 28.0 29.6 30.3 30.7 31.7 32.7

Total # of stores 198 209 227 240 262 302 332 352

Revenue/store (Rs '000) 457,688 462,928 400,122 443,201 528,161 576,400 617,169 685,655

EBITDA/store (Rs '000) 46,302 47,636 38,476 44,773 59,816 68,015 74,677 83,650

Watches business

Net revenues 17,889 19,188 19,744 20,355 21,315 23,481 25,885 28,401

Rev growth yoy (%) 7 7 3 3 5 10 10 10

EBITDA 2,075 2,293 1,953 2,124 2,624 3,099 3,624 4,047

EBITDA growth yoy (%) (4) 10 (15) 9 24 18 17 12

EBITDA margin (%) 11.6 12.0 9.9 10.4 12.3 13.2 14.0 14.3

Watches sold (mn) 14.4 14.7 13.9 14.1 14.9 16.1 17.1 18.0

Change yoy (%) (6) 2 (6) 1 6 8 6 5

Others

Net revenues 5,111 2,421 3,124 3,806 4,415 4,991 5,640 6,506

Rev growth yoy (%) 24 (53) 29 22 16 13 13 15



Exhibit 7: Titan - Consolidated profit model, balance sheet, cash model, March fiscal year-ends, 2015-2021E (Rs mn)


2015 2016 2017 2018 2019E 2020E 2021E

Profit model (Rs mn)

Net sales 119,134 112,759 132,608 161,198 195,789 232,561 275,334

EBITDA 11,484 9,347 11,555 16,447 21,186 26,466 32,046

Other income 708 739 705 889 1,093 1,362 1,628

Interest (807) (424) (377) (529) (449) (475) (516)

Depreciation (896) (982) (1,105) (1,314) (1,716) (2,156) (2,663)

Pretax profits 10,489 8,681 10,777 15,492 20,114 25,198 30,495

Tax (2,326) (1,916) (3,099) (4,334) (5,833) (7,811) (9,758)

PAT 8,163 6,765 7,679 11,158 14,281 17,387 20,737

Share of associate earnings 0 (20) (18) (28) (28) (28) (28)

PAT after Associates 8,163 6,745 7,661 11,131 14,253 17,359 20,709

Extraordinary items — — (688) (112) — — —

Net profit (reported) 8,163 6,745 6,973 11,019 14,253 17,359 20,709

Earnings per share (Rs) 9.2 7.6 8.6 12.5 16.1 19.6 23.3

Balance sheet (Rs mn)

Total equity 30,839 35,063 42,587 50,881 60,320 71,795 85,015

Total borrowings 998 1,834 610 790 540 - -

Deferred tax liabilities (net) (193) 131 (33) (329) (329) (329) (329)


Net fixed assets (Incl CWIP) 7,441 8,573 10,071 11,681 13,881 16,260 18,912

Intangible assets 102 200 3,337 3,491 3,491 3,491 3,491

Investments 31 1,355 5,208 360 332 305 277

Cash 2,138 1,164 8,020 6,179 10,925 13,257 17,862

Net current assets (excl cash) 21,931 25,736 16,529 29,631 31,902 38,154 44,145

Total assets 31,643 37,027 43,165 51,342 60,531 71,466 84,686

Free cash flow (Rs mn)

Operating cash flow (excl working capital) 9,178 7,392 8,034 12,096 15,325 18,627 22,260

Working capital (4,152) (1,631) 9,475 (12,501) (2,271) (6,252) (5,991)


Free cash flow 2,956 3,239 11,161 (4,328) 9,138 7,840 10,954

Key assumptions, growth, %

Net revenue growth 9.0 (5.4) 17.6 21.6 21.5 18.8 18.4

EBITDA growth 10.0 (18.6) 23.6 42.3 28.8 24.9 21.1

EPS growth 9.1 (17.4) 13.6 45.3 28.1 21.8 19.3

EBITDA margin (%) 9.6 8.3 8.7 10.2 10.8 11.4 11.6

Tax rate (% of PBT) 22.2 22.1 28.8 28.0 29.0 31.0 32.0

Segment revenue assumptions, growth, %

Jewellery 9.2 (7.4) 18.6 28.1 22.6 20.4 19.9

Watches 7.3 2.9 3.1 4.7 10.2 10.2 9.7

Others 12.3 19.7 14.5 8.9 14.0 13.0 12.7

Ratios (%)

ROE (%) 29.1 20.5 19.7 23.8 25.6 26.3 26.4

ROCE (%) 31.7 23.6 25.3 31.1 33.9 36.0 36.9


1QFY19 – in-line headline print but subpar internals

MRCO’s largely in-line consolidated operating profit print for 1QFY19 hides what we see as

slightly weaker-than-expected internals. Lower-than-expected overheads aided in-line operating

profit delivery even as gross profit fell 6% short of estimates on account of material miss in

gross margins. In addition to the gross margin miss, we were also disappointed slightly with the

Parachute (rigids) volume growth print of 9%. We note that this 9% volume growth print was

on a -9% base. On the positive side, Saffola volume growth of 10% was materially above

expectation; we do note that the management stopped short of calling Saffola revival complete.

Consolidated revenues, EBITDA and recurring PAT grew +21% yoy (1% above), +9% yoy

(2% below) and +10% yoy (6% below), respectively. Gross margins declined 554 bps yoy while

EBITDA margin decline was restricted to 183 bps yoy. ETR stood at 26%. EBITDA and PAT were

both lower than 1QFY17 levels.

Standalone revenues, EBITDA and recurring PAT grew 23% yoy (3% above), +9% yoy

(4% below) and +9% yoy (3% below), respectively. Gross margins declined 611 bps yoy while

EBITDA margins declined 202 bps as the company kept overhead costs in control. Importantly,

adspends were flat yoy on a reported basis and up only 9% on a GST-adjusted basis. We note

that several peers have stepped up adspends quite meaningfully in 1QFY19. EBITDA and PAT

were both lower than 1QFY17 levels for the standalone business as well.

Segmental performance – a mixed bag, again

Parachute (rigids) volume growth of 9% yoy disappointed a tad, coming off a weak -9% base.

VAHO volume growth was in line at 15% (-14% base). Saffola surprised with 10% yoy volume

growth while other segments in India posted broadly in-line and healthy-off-a-low-base growth

comps. Revenue surprise, both consol and standalone, was driven by higher-than-expected

realization growth in Parachute.

Stay constructive; see earnings growth acceleration ahead

We expect earnings growth acceleration from 2HFY19 onwards on the back of improving

underlying demand environment. Copra prices remain a risk but historical trends suggest

favorable movement from here. Raise TP to `375 (from `345). ADD stays.

Marico (MRCO) Consumer Products

1Q a mixed bag; prognosis promising. MRCO’s earnings continue to be impacted by

the high inflation in its RM basket. A reversal in copra (some moderation seen already;

decline trends expected to continue) is important for (a) better earnings growth delivery

and (b) the company to step up adspends that is now tracking contra to competition.

Underlying demand environment is supportive of management’s confident stance on

volumes. We stay constructive and raise our fair value target to `375 (from `345). ADD.

ADD

AUGUST 06, 2018

RESULT


Price (`): 353


BSE-30: 37,556

Rohit Chordia

Jaykumar Doshi

Aniket Sethi

Marico







MFs 2.3 EBITDA (Rs bn) 11.4 12.5 15.1


Absolute 3.4 12.9 7.5 ROE (%) 33.2 33.7 37.9

Rel. to BSE-30 (2.6) 5.6 (7.7) Div. Yield (%) 1.2 1.3 1.6


375-284

455.0

Marico Consumer Products


Exhibit 1: Interim consolidated results of Marico (based on Ind-AS), March fiscal year-ends (Rs mn)


Exhibit 2: Interim standalone results of Marico (based on Ind-AS), March fiscal year-ends (Rs mn)


1QFY19 1QFY19E 1QFY18 4QFY18 KIE Est yoy qoq 1QFY17 2-yr CAGR (%)

Net operating income 20,268 20,024 16,815 14,801 1 21 37 17,523 8

Material cost (11,696) (10,870) (8,773) (7,896) 8 33 48 (8,400)

Gross Profit 8,572 9,154 8,042 6,905 (6) 7 24 9,123 (3)

Gross Margin (%) 42.3 45.7 47.8 46.6 -343 bps -554 bps -436 bps 52.1

Employee cost (1,147) (1,230) (1,086) (1,035) (7) 6 11 (1,052) 4

Advertising and promotion (1,657) (1,890) (1,639) (1,189) (12) 1 39 (2,091) (11)

Other expenditure (2,219) (2,396) (2,066) (2,158) (7) 7 3 (2,241) (0)

Total expenditure (16,719) (16,387) (13,564) (12,278) 2 23 36 (13,784)

EBITDA 3,549 3,637 3,251 2,523 (2) 9 41 3,740 (3)

OPM (%) 17.5 18.2 19.3 17.0 -66 bps -183 bps 46 bps 21.3

Other income 240 380 222 229 (37) 8 5 275

Interest (53) (40) (35) (53) 32 52 0 (54)

Depreciation (224) (225) (211) (231) (0) 6 (3) (208)

Pretax profits 3,512 3,752 3,226 2,468 (6) 9 42 3,753 (3)

Tax (913) (1,005) (866) (642) (9) 5 42 (1,072)

Minority Interest (42) (38) (40) (20) 11 — 111 (40)

Recurring PAT (after MI) 2,557 2,710 2,320 1,806 (6) 10 42 2,641 (2)

Extraordinary items — — — — —

Net profit (reported) 2,557 2,710 2,320 1,806 (6) 10 42 2,641 (2)

EPS 2.0 2.1 1.8 1.4 (6) 10 42 2.0 (2)

Income tax rate (%) 26.0 26.8 26.8 26.0 -78 bps -85 bps -2 bps 28.6


Material cost 57.7 54.3 52.2 53.4 342 bps 553 bps 435 bps 47.9

Employee cost 5.7 6.1 6.5 7.0 -49 bps -81 bps -134 bps 6.0

Advertising and promotion 8.2 9.4 9.7 8.0 -127 bps -158 bps 14 bps 11.9

Other expenditure 10.9 12.0 12.3 14.6 -102 bps -134 bps -364 bps 12.8

(% change)

1QFY19 1QFY19E 1QFY18 4QFY18 KIE Est yoy qoq 1QFY17 2-yr CAGR (%)

Net operating income 16,846 16,401 13,728 12,138 3 23 39 14,525 8

Material cost (10,248) (9,349) (7,512) (6,747) 10 36 52 (7,324)

Gross Profit 6,599 7,052 6,215 5,390 (6) 6 22 7,201 (4)

Gross Margin (%) 39.2 43.0 45.3 44.4 -384 bps -611 bps -525 bps 49.6

Employee cost (773) (803) (730) (653) (4) 6 18 (652) 9

Advertising and promotion (1,266) (1,448) (1,264) (862) (13) 0 47 (1,542) (9)

Other expenditure (1,810) (1,945) (1,704) (1,741) (7) 6 4 (1,869) (2)

Total expenditure (14,096) (13,545) (11,211) (10,003) 4 26 41 (11,387)

EBITDA 2,750 2,856 2,517 2,135 (4) 9 29 3,138 (6)

OPM (%) 16.3 17.4 18.3 17.6 -110 bps -202 bps -127 bps 21.6

Other income 230 300 215 917 (23) 7 (75) 223

Interest (24) (20) (20) (18) 21 22 32 (34)

Depreciation (190) (170) (155) (172) 12 23 10 (147)

Pretax profits 2,766 2,966 2,557 2,861 (7) 8 (3) 3,179 (7)

Tax (617) (742) (577) (831) (17) 7 (26) (830)

PAT 2,149 2,225 1,980 2,030 (3) 9 6 2,349 (4)

Extraordinary items 0 — — (832) —

Net profit (reported) 2,149 2,225 1,980 1,198 (3) 9 79 2,349 (4)

EPS 1.7 1.7 1.5 1.6 (3) 9 6 1.8 (4)

Income tax rate (%) 22.3 25.0 22.5 29.1 -270 bps -25 bps -675 bps 26.1


Material cost 60.8 57.0 54.7 55.6 383 bps 610 bps 524 bps 50.4

Employee cost 4.6 4.9 5.3 5.4 -32 bps -74 bps -80 bps 4.5

Advertising and promotion 7.5 8.8 9.2 7.1 -131 bps -170 bps 41 bps 10.6

Other expenditure 10.7 11.9 12.4 14.3 -112 bps -168 bps -360 bps 12.9

(% change)

Consumer Products Marico


Exhibit 3: Key changes to earnings model, Marico, March fiscal year-ends, 2019-21E (Rs mn)


Key segmental highlights and takeaways from the earnings call

Rural growth outperforms urban growth. Marico’s rural growth continued to outpace

urban growth in 1QFY19 – rural grew 28% yoy while urban sales grew by 16% in value

terms. MT (11% of turnover) grew by 39% while CSD (7% of turnover) also recorded

strong growth of 15% yoy.

Parachute CNO. Parachute rigids posted a decent but slightly disappointing quarter –

volumes up 9% yoy, off a -9% base. Marico continued to gain market share (on a MAT

basis) in the coconut oil segment. In the medium term, the company expects to deliver 5-

7% volume CAGR (guidance unchanged). Value growth in Parachute rigids was at 38%

yoy. Management explained that they operate in a band of gross margin per unit rather

than % margins. Also, they will continue to focus on franchise expansion as long as

absolute spreads remain within a band.

Saffola. Saffola reported volume growth of 10% yoy (9% growth in value terms) after a

weak performance in FY2018. Management highlighted that the challenges for the brand

are still not completely over. While they have taken actions on promotional packs and

modern trade channel for the brand, work remains to be done to fix issues in urban

general trade. Intense competition continues in the segment and the company is taking

measures to differentiate its communication. They have upped media investments behind

the brand in the quarter. Management expects a healthy growth trajectory for Saffola

over the next 2-3 quarters and expects double-digit growth in the medium term.

Other food brands – the healthy foods franchise grew 23% in value terms during the

quarter. Saffola Masala Oats maintained it momentum and consolidated its value share to

69% (June, 2018 MAT) in flavored oats category. Marico has prototyped Saffola Masala

Oats with Multigrain Crunchies and have also launched two new variants of Lemony

Twist and Mint Chutney. With current vending machine network of 200, management

believes that this initiative drives consumer trials and repeats. They continue to guide that

they are aiming to grow the business first to `2 bn by next year (achieve a critical mass)

and will then chalk out a future strategy.

Value added hair oils. Domestic VAHO portfolio grew 15% in volume terms and 12%

in value terms. Going forward, the company targets double-digit volume growth in

VAHO. They also aim to defend both their volume and value market share in the

segment. For fueling growth in the segment, Marico has launched `10 packs of several of

its hair oil brands like Parachute Jasmine, Nihar Jasmine and Sarson. They would also

target to grow premium end of its portfolio like Aloe Vera to negate any likely negative

impact on margins.

2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E

Revenues (Rs mn) 72,937 82,404 92,602 72,947 82,402 92,587 (0.0) 0.0 0.0

EBITDA (Rs mn) 12,531 15,072 17,407 13,463 15,347 17,446 (6.9) (1.8) (0.2)

EBITDA (%) 17.2 18.3 18.8 18.5 18.6 18.8

PAT (Rs mn) 8,807 10,571 12,107 9,444 10,741 12,099 (6.7) (1.6) 0.1

EPS (Rs/share) 6.8 8.2 9.4 7.3 8.3 9.4 (6.7) (1.6) 0.1




Youth brands. Male grooming portfolio grew 44% yoy in value terms during the

quarter. Given the strong response to its pocket spray, company plans to extend it to

beyond the initial launch markets. They have also launched its first exclusively digital

brand – Set Wet Studio X – introducing products across seven categories such as

Shampoo, Bodywash, Facewash, etc. Company seeks to build a consistent value growth

trajectory of 20%+ in the category in the medium term.

International business. Marico’s international business posted 7% yoy growth in c/c

terms (volume growth of 3% yoy and reported growth of 9% yoy).

Bangladesh (45% of turnover) posted 9% c/c growth in revenues despite flat

volumes. Parachute CNO posted a flattish quarter (maintaining leadership position

with ~87% market share) and non-CNO portfolio grew by 50% in c/c terms.

Management continued to highlight that they continue to focus on expanding their

product base in the country. Saffola Edible Oil and Set Wet Gels responded well in the

quarter.

MENA (14% of turnover) posted strong 17% c/c growth, largely volume-driven. This

was on the back of good growth in both Egypt and the Middle East businesses.

However, the management indicated that there could be some concerns in the region

in the medium term given the tough macros in the region.

Others – (1) SE Asia (26% of turnover) remained muted in c/c revenue terms. Weak

performance in the foods business dragged overall performance of Vietnam. The

bright spot in its Vietnam performance was the male shampoos, which grew at 9% in

constant-currency terms. Management has taken definitive steps to correct its GTM

strategy. Myanmar business was impacted by supply constraints. However, the near

term prospects in the country remains strong. (2) South Africa (9% of turnover)

registered 7% c/c growth aided by good progress in Isoplus.

Exhibit 4: Domestic volume growth trends (yoy %)


6.5 8.0

5.0

3.0

6.0 5.5

10.5

8.4 8.0

3.4

(4.0)

10.0

(9.0)

8.0 9.4

1.0

12.4

(10)

(7)

(4)

(1)

2

5

8

11

14

17

20

1Q

FY1

5

2Q

FY1

5

3Q

FY1

5

4Q

FY1

5

1Q

FY1

6

2Q

FY1

6

3Q

FY1

6

4Q

FY1

6

1Q

FY1

7

2Q

FY1

7

3Q

FY1

7

4Q

FY1

7

1Q

FY1

8

2Q

FY1

8

3Q

FY1

8

4Q

FY1

8

1Q

FY1

9

Consumer Products Marico


Exhibit 5: Parachute (rigids) volume growth (%)

Source: Company, Kotak Institutional Equities estimates, Kotak Institutional Equities

Exhibit 6: Value added hair oils volume growth trends (in %)


Exhibit 7: Saffola volume growth trends (in %)


6 7 8

5

8

11

4 6 7

(6)

(1)

15

(9)

12

15

(5)

9

(15)

(10)

(5)

-

5

10

15

20

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

3Q

FY17

4Q

FY17

1Q

FY18

2Q

FY18

3Q

FY18

4Q

FY18

1Q

FY19

11 13

10

5

14

8

21

11 9

11

(12)

10

(8)

12

8

11

15

(15)

(10)

(5)

-

5

10

15

20

25

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

3Q

FY17

4Q

FY17

1Q

FY18

2Q

FY18

3Q

FY18

4Q

FY18

1Q

FY19

10 10

3 (1) 4 4

17

13 11

8 6

6

(9)

3

-

(1)

10

(12)

(8)

(4)

-

4

8

12

16

20

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

3Q

FY17

4Q

FY17

1Q

FY18

2Q

FY18

3Q

FY18

4Q

FY18

1Q

FY19



Exhibit 8: Consolidated Profit model, balance sheet of Marico (based on Ind-AS), March fiscal year-ends, 2016-2021E


2016 2017 2018 2019E 2020E 2021E

Profit model

Net sales 60,173 59,178 63,222 72,937 82,404 92,602

EBITDA 10,514 11,593 11,378 12,531 15,072 17,407

Other income 933 973 846 866 1,080 1,279

Interest expense (206) (166) (162) (162) (131) (101)

Depreciation (949) (903) (891) (965) (1,103) (1,262)

Pretax profits 10,292 11,497 11,171 12,270 14,918 17,322

Tax (3,054) (3,377) (2,896) (3,313) (4,177) (5,023)

Minority Interest (124) (134) (131) (151) (170) (192)

Net income 7,115 7,986 8,145 8,807 10,571 12,107

Extraordinary items — — — — — —

Reported Net income 7,115 7,986 8,145 8,807 10,571 12,107

Earnings per share (Rs) 5.5 6.2 6.3 6.8 8.2 9.4

Balance sheet

Total shareholder's equity 20,174 23,257 25,429 26,877 28,928 31,353

Total borrowings 3,306 2,388 3,093 2,593 2,093 1,593

Minority interest 143 133 125 276 446 638

Total liabilities and equity 23,623 25,778 28,647 29,746 31,467 33,584

Net fixed assets 5,917 5,883 5,613 5,961 6,312 6,651

Goodwill 5,261 5,075 5,463 5,463 5,463 5,463

Investments 5,132 6,082 5,724 5,724 5,724 5,724

Cash 3,171 2,273 2,001 3,283 5,946 7,075

Net current assets 3,720 6,590 10,140 9,610 8,317 8,966

Deferred tax asset (Net) 421 (125) (294) (294) (294) (294)

Total assets 23,623 25,778 28,647 29,746 31,467 33,584

Free cash flow

Operating cash flow (excl. working capital) 8,373 8,901 8,610 9,218 10,895 12,383

Working capital changes (197) (2,785) (3,065) 531 1,293 (649)

Capital expenditure (878) (981) (1,280) (1,313) (1,454) (1,601)

Free cash flow 7,299 5,135 4,266 8,435 10,734 10,134

Ratios

Sales growth (%) NM -1.7 6.8 15.4 13.0 12.4

EPS growth (%) 24.1 12.2 2.0 8.1 20.0 14.5

EBITDA margin (%) 17.5 19.6 18.0 17.2 18.3 18.8

Gross margin (%) 49.0 52.2 47.0 45.6 47.5 48.2

A&SP % of sales 11.5 11.1 9.3 9.1 10.0 10.2

ROE (%) 35.3 34.3 32.0 32.8 36.5 38.6

ROCE (%) 41.0 41.0 36.0 38.2 43.6 47.3


Sales momentum moderated in 1QFY19, equity issuance helped overall cash flows

Collections for 1QFY19 stood at Rs11.3 bn though total sales at Rs8.2 bn, were below the

average quarterly run-rate of Rs12,700 mn seen in FY2018. Bulk of the sales (64%) were

reported from four new launches (of which two projects under DM model) in Mumbai, Pune

and Delhi NCR. With total area sold during the quarter at 1.17 mn sq. ft, avg. realizations

declined to Rs6,672/sq. ft. Overall net operating cash flows were negative at Rs1.6 bn. During

the quarter GPL raised Rs10 bn selling 5.6% of its stake to GIC. With this equity issuance, the

company’s net debt/equity ratio improved to 0.7 (1.9 till March 2018) providing significant

headroom for new business development opportunities as current borrowing cost remains low

at 7.86%.

More launches in the pipeline; however GPL’s share continues to remain low

As per the management, nine new term sheets have been signed in this quarter with most of

them likely to see launches in this financial year. Of these nine projects signed, three are under

the JV/DM model with two being in NCR and remaining one in Thane. We highlight that

Godrej’s economic interest in JV project format has traditionally remained low. In order to

improve construction timelines, the company has set up a precast plant in Greater Noida. The

plant has a capacity to construct 0.5 mn sq. ft per annum.

Lower attributable sales, rich valuations

GPL is recovering operations with the help of favorable project structures, concentrated market

approach and strong pre-sales. We expect GPL to continue generating positive cash flow from

operations. At 4.3X Mar’20 BV and with 50% of value for new projects and sales estimates

running beyond 10 mn sq. ft (modeled from FY2019), GPL continues to be expensive versus

sector peers. GPL’s business model on JVs and hence its reporting structure for financials is

complex.

Godrej Properties (GPL) Real Estate

Moderating momentum. Godrej Properties had moderating sales at Rs8.2 bn,

compared to quarterly sales of Rs11.3 bn clocked in FY2018. Cash collection remained

strong, even as cash flows were supported by Rs10 bn of equity raise during the

quarter. During the quarter GPL launched four new projects that accounted for the bulk

of the sale activity, even as the team prepares to launch nine more projects during the

current fiscal. Strong launch pipeline and improving cash generation are already

factored in the rich valuations. Maintain SELL with TP of Rs400/share.

SELL

AUGUST 06, 2018

RESULT

Coverage view: Neutral

Price (`): 733


BSE-30: 37,556

Murtuza Arsiwalla

Samrat Verma

Godrej Properties







MFs 2.5 EBITDA (Rs bn) (0.0) 0.6 1.1

Price performance (%) 1M 3M 12M EV/EBITDA (X) ####### 324.7 169.0

Absolute 2.6 (6.7) 46.6 ROE (%) 11.1 10.5 9.7

Rel. to BSE-30 (3.3) (12.8) 25.9 Div. Yield (%) 0.0 0.0 0.0


920-475

168.1

Godrej Properties Real Estate


Exhibit 1: Cash flow post land payments were in black for 3QFY18 and 9MFY18 GPL: Gross OCF, March fiscal year-ends, 1QFY17-1QFY19 (Rs mn)


Exhibit 2: High costs at Godrej BKC reflect in lower reported margins GPL: Revenue contribution, March fiscal year-ends, 1QFY16-1QFY19 (Rs mn)


1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19

Operating cash inflow 5,790 8,550 4,370 6,970 11,670 7,400 9,020 12,770 11,280

Construction and related outflow (3,760) (3,620) (3,160) (3,490) (2,590) (2,590) (2,640) (3,600) (5,050)

Other project related outflow (1,570) (1,520) (1,280) (1,360) (2,490) (2,540) (3,260) (2,350) (3,470)

Interest and related outflow (990) (1,110) (1,020) (1,590) (1,050) (1,120) (940) 350 (1,180)

PE exits (2,490) -

Operating cash flow (3,020) 2,300 (1,090) 530 5,540 1,150 2,180 7,170 1,580

Land and approval costs (530) (1,310) (1,370) (2,730) (860) (1,570) (1,240) (2,530) (3,110)

Advance to JV partners (130) (120) (10) (340) (180) (290) (280) (1,460) (90)

Net cash flow (3,680) 870 (2,470) (2,540) 4,500 (710) 660 3,180 (1,620)

Equity raise 10,000

Ind-AS adjustments 2,000 (220) 160 (430) 410 (80) (990) 2,330

Net cash flow (1,680) 650 (2,470) (2,380) 4,070 (300) 580 2,190 10,710

1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19

Godrej Trees Mumbai — — — — — — 3,350 2,920 750 730 1,000 3,410 —

Godrej Garden City Ahmedabad 360 360 320 240 260 260 250 320 330 110 190 — —

Godrej BKC Mumbai 250 11,450 790 1,770 1,090 1,830 460 110 150 2,890 4,240 — 8,400

Godrej Summit Gurgaon 410 420 630 920 640 520 430 — 170 220 — 460 —

Other projects 1,253 1,174 1,310 910 1,340 960 800 1,150 1,087 973 840 4,620 2,150

Total 2,633 14,814 4,500 5,330 3,038 3,296 5,183 4,313 2,487 4,923 6,270 8,490 10,550

Contribution (%)

Godrej Trees Mumbai — — — — — — 65 68 30 15 16 40 —

Godrej Garden City Ahmedabad 14 2 7 5 9 8 5 7 13 2 3 — —

Godrej BKC Mumbai 9 77 18 33 36 56 9 3 6 59 68 — 80

Godrej Summit Gurgaon 16 3 14 17 21 16 8 — 7 4 — 5 —

Other projects 48 8 29 17 44 29 15 27 44 20 13 54 20

Gross margins (%) 68 13 33 16 32 26 35 32 28 31 21 13 14

23 11 19 10 13 7 23 15 (7) 15 7 (21) 7 EBITDA margins (%)

Real Estate Godrej Properties


Exhibit 3: Sales at Godrej BKC drive recognition and lower margin recognition GPL: Results snapshot, March fiscal year-ends (Rs mn)


Exhibit 4:GPL selling inventory at its completed projects at discounted prices GPL: Sales and sales value, March fiscal year-ends, 2013-1QFY19

Source: Company, Kotak Institutional Equities estimates, Kotak Institutional Equities

Exhibit 5: We have modeled strong sales for GPL GPL: Sales, March fiscal year-ends 2015-21E


1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 FY2019E FY2018 % change

Financials snapshot

Net sales 9,967 6,760 2,487 5,212 47 301 91 19,049 18,892 1

Operating costs (9,298) (6,118) (2,669) (6,286) 52 248 48 (18,490) (18,936) (2)

EBITDA 669 642 (183) (1,074) 4 (466) (162) 559 (44)

Other income 700 607 964 3,274 15 (27) (79) 3,877 5,015 (23)

Interest costs (590) (400) (315) (407) 48 87 45 (1,168) (1,501) (22)

Depreciation (33) (41) (36) (43) (20) (7) (23) (177) (161.3) 10

PBT 746 807 430 1,750 (8) 73 (57) 3,091 3,308

Taxes (288) (266) (195) (343) 8 48 (16) (102) (1,019) (90)

PAT 458 540 235 1,407 (15) 95 (67) 2,989 2,289

EPS (Rs/share) 1.5 — 1.1 6.4 13.0 10.6

Key ratios

EBITDA margin (%) 6.7 9.5 (7.4) (20.6) 2.9 (0.2)

PAT margin (%) 4.6 8.0 9.5 27.0 15.7 12.1

Effective tax rate (%) 38.6 33.0 45.3 19.6 3.3 30.8

Operational (a)

Resi. sales (mn sq. ft) 1.11 1.18 1.44 4.6 2.4

Comm. sales (mn sq. ft) 0.06 0.10 0.03 0.2 0.1

Sale value (Rs mn) 8,200 6,920 10,540 40,290 16,350

Collections (Rs mn) 11,280 11,670 12,770 28,090 18,710

% change

2013 2014 2015 2016 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19

Saes (mn sq. ft)

Residential

From new launches (a) 1.65 0.59 0.92 3.10 0.31 0.59 1.04 0.50 0.96 0.80 0.64 0.57 0.70

From existing projects 1.96 1.55 2.72 0.75 0.23 0.09 0.14 0.09 0.84 0.76 0.79 0.90 0.47

Total residential 3.61 2.15 3.64 3.85 0.54 0.67 1.18 0.58 1.80 1.56 1.43 1.47 1.17

Commercial

From new launches 0.05 — — — — — — — — — — — —

From existing projects 0.41 0.81 0.25 0.47 0.04 0.05 0.01 0.01 0.00 0.08 0.12 0.03 0.06

Total commercial 0.46 0.81 0.25 0.47 0.04 0.05 0.01 0.01 0.00 0.08 0.12 0.03 0.06

Total sales 4.08 2.96 3.89 4.32 0.58 0.73 1.19 0.59 1.80 1.63 1.55 1.50 1.23

Sales value (Rs mn)

Residential 21,311 15,090 23,890 35,430 2,895 4,565 6,560 3,370 14,720 10,630 7,950 10,410 7,980

Commercial 6,322 9,250 2,890 14,940 750 1,220 360 30 20 2,720 4,250 130 220

Total 27,633 24,340 26,780 50,370 3,645 5,785 6,920 3,400 14,740 13,350 12,200 10,540 8,200

Avg. realizations (Rs/sq. ft) 6,776 8,221 6,879 11,665 6,267 7,970 5,813 5,771 8,190 8,180 7,854 7,003 6,672

2015 2016 2017 2018 2019E 2020E 2021E

Sales (mn sq. ft) 3.89 4.30 3.09 6.26 10.22 10.58 8.47

Sales value (Rs mn) 26,780 50,250 19,750 50,820 66,961 67,093 59,498

Godrej Properties Real Estate


Exhibit 6: We will issue revised estimates post clarity on certain queries GPL: Profit model, balance sheet, cash flow model, March fiscal year-ends, 2016-20E (Rs mn)


2016 2017 2018 2019E 2020E 2021E

Profit model

Net sales 21,226 15,829 18,892 19,049 20,264 14,002

EBITDA 1,366 2,504 (44) 559 1,106 1,322

Other income 1,295 1,254 5,015 3,877 4,143 4,281

Interest (406) (1,015) (1,501) (1,168) (1,172) (711)

Depreciation (142) (145) (161) (177) (197) (222)

Pre-tax profits 2,113 2,598 3,308 3,091 3,881 4,671

Tax (1,304) (777) (1,019) (102) (310) (549)

Deferred tax (390) — — — — —

Net income 419 1,821 2,289 2,989 3,570 4,121

Adjusted net income 1,598 2,068 2,349 3,039 3,620 4,171


Balance sheet

Total equity 17,648 20,037 22,403 35,443 39,063 43,235

Gross borrowings 31,230 39,765 37,230 29,532 37,420 19,420

Non-current liabilities 55 74 119 114 114 114

Current liabilities 12,657 9,909 9,403 7,099 5,782 7,964


Net fixed assets 1,072 1,021 1,841 1,104 1,111 1,143

Investments in Joint Ventures 582 814 2,905— — — —

Non-current financial assets 3,405 3,891 7,701 4,171 4,119 4,086

Other non-current assets 2,191 2,900 2,925 2,925 2,925 2,925

Current assets 54,869 59,503 50,410 65,711 75,949 64,303

Investments 3,665 3,663 5,438— — — —

Total assets 65,784 71,791 71,222 73,912 84,103 72,457

Free cash flow

Operating cash flow excl. working capital 1,758 2,054 2,290 3,210 3,817 4,393

Working capital changes 49 (10,040) 8,769 (2,426) (8,790) (1,452)

Capital expenditure 300 (94) (982) 560 (203) (254)

Free cash flow 2,108 (8,080) 10,077 1,343 (5,176) 2,688

Ratios (%)

Debt/equity 177 198 166 83 96 45

Net debt/equity 150 175 161 38 48 37

RoE (%) 9.5 11.0 11.1 10.5 9.7 0.0

RoCE (%) 1.0 3.0 (0.2) 0.6 1.2 0.0

Book value per share (Rs) 82 93 103 155 170 189


1QFY19 – steady on operations and weak on order inflows; working capital deteriorates

Adjusted for forex gains, EBITDA for KEC at Rs2 bn was in line with our estimate and grew in

sync with 13% growth in topline. EBITDA margin at 9.4% was flat yoy despite the sharp

decline in T&D revenues. Essentially KEC leveraged uptick in margin across segments and

benefits of cost control.

Interest cost grew 9% yoy, slower than the revenue growth despite a worsening working

capital, reduction in share of overseas in debt and higher interest cost. Working capital

excluding acceptances was impacted by higher inventories (to correct incrementally) and lower

payables (to partly correct over time). Change in mix of debt was sharp from being largely

overseas to now becoming broadly equally split, in line with customer mix. The same has

happened due to RBI disallowing usage of short-term buyer’s credit on a rolling forward basis

to fund debt requirements. Interest rates have stiffened meaningfully over the past one year

both in India and overseas (unlikely to change in the near term).

Higher other income (interest on tax refunds) and forex gains (Rs150-200 mn) more than

compensated for the higher-than-expected interest cost, yielding a large outperformance versus

our estimates. Adjusted for both these items, there was a modest 1%/3%/5% miss on

revenues/EBITDA/PAT for 1QFY19.

Retains guidance on revenues and margin; tightens guidance on interest cost and order inflows

KEC expects revenue growth to strengthen from expected improvement in T&D revenues and

strong growth across other business segments. On margin, it retained guidance of 10%

(conservative in our view) while suggesting limited cost pressures and potential benefit of recent

commodity price correction. KEC, however, does not envisage any improvement in interest cost

as share of revenues (from 1Q level) and hinted at a modest growth expectation in order

inflows (expects order backlog to grow in sync or better than revenue growth).

Cut estimates by 4-8% on deferral of deleveraging and lower growth in orders

We align interest cost estimate in line with revised guidance of the flattish yoy share of sales,

deferring recovery by a year. We also reduce order inflow growth estimate for FY2019 to 6%

(7% cut) based on flattish 1QFY19 ordering. This yields a revised TP of Rs410 on roll-forward.

BUY.

KEC International (KECI) Industrials

Telling quarter. 1QFY19 reaffirmed the resilience of the KEC EPC business as it

reported (1) steady margin despite sharp decline in T&D revenues and (2) a steady

interest cost to sales ratio despite a hit on interest rate, payables and inventory. We

defer the benefits of deleveraging for KEC by a year and moderate growth assumptions

for order inflows given a weak start to the year; cut TP to Rs410 (from Rs430).

BUY

AUGUST 06, 2018

RESULT


Price (`): 328


BSE-30: 37,556

Aditya Mongia

Ajinkya Bhat

KEC International







MFs 18.3 EBITDA (Rs bn) 10.1 11.9 14.6


Absolute (1.5) (21.9) 7.9 ROE (%) 25.7 24.1 25.2

Rel. to BSE-30 (7.2) (27.0) (7.3) Div. Yield (%) 0.6 0.7 0.9


443-274

84.4

KEC International Industrials


Exhibit 1: Steady on operations and weak on order inflows; working capital deteriorates in 1QFY19 1QFY19 - key numbers for KEC (consolidated), March fiscal year-ends (Rs mn)


Exhibit 2: Slack in T&D revenues was compensated by a sharp ramp-up in railways and civil segments that also supported margin Segment-wise adjusted

(a) revenues for KEC (consolidated) in 1QFY19, March fiscal year-ends (Rs mn)

Notes:

(a) Segmental revenues in pre-GST regime have been adjusted to net-off the excise duty by allocating as per the revenue mix.


1QFY19 1QFY19E 1QFY18 4QFY18 vs est. yoy qoq FY2018 FY2017 % change FY2019E FY2018 % change

Total operating income 21,047 21,334 18,568 36,642 (1) 13 (43) 100,580 85,844 17 115,190 100,580 15

Expenses (18,885) (19,308) (16,804) (32,943) (2) 12 (43) (90,518) (77,665) 17 (103,338) (90,518) 14

Raw material cost (14,729) (13,526) (28,332) 9 (48) (73,764) (59,580) 24 (84,088) (73,764) 14

Employee expenses (2,034) (1,913) (2,208) 6 (8) (7,984) (7,327) 9 (4,275) (7,984) (46)

Other expenses (1,584) (2,282) (2,827) (31) (44) (9,819) (10,849) (9) (14,975) (9,819) 53

EBITDA 2,162 2,026 1,763 3,699 7 23 (42) 10,062 8,179 23 11,851 10,062 18

Other income 175 39 98 126 350 79 40 404 289 40 350 404 (14)

Interest (691) (605) (631) (656) 14 9 5 (2,466) (2,536) (3) (2,949) (2,466) 20

Depreciation (298) (300) (272) (275) (1) 10 9 (1,097) (1,297) (15) (1,180) (1,097) 8

PBT 1,348 1,160 958 2,894 16 41 (53) 6,902 4,635 49 8,072 6,902 17

Tax (480) (405) (329) (930) 18 46 (48) (2,298) (1,587) 45 (2,688) (2,298) 17

Net profit 869 755 630 1,963 15 38 (56) 4,604 3,048 51 5,384 4,604 17

Key ratios (%)

Raw material cost/ Sales 72.5 67.9 76.2 72.3 69.3 73.0 72.3

Employee expenses/ Sales 9.7 10.3 6.0 7.9 8.5 3.7 7.9

Other expenses/ Sales 7.5 12.3 7.7 9.8 12.6 13.0 9.8

EBITDA margin 10.3 9.5 9.5 10.1 10.0 9.5 10.3 10.0

PBT margin 6.4 5.4 5.2 7.9 6.9 5.4 7.0 6.9

Tax rate 35.6 34.9 34.3 32.2 33.3 34.2 33.3 33.3

PAT margin 4.1 3.5 3.4 5.4 4.6 3.6 4.7 4.6

EPS (Rs) 3.4 2.9 2.4 7.6 17.9 11.9 20.9 17.9

Order details

Order inflows 27,480 27,900 57,871 (1.5) (52.5) 150,980 123,580 22.2 160,198 150,980 6.1

Order backlog 177,910 135,320 172,980 31.5 2.9 172,980 126,310 36.9 217,554 172,980 25.8

% change

1QFY19 1QFY18 4QFY18 yoy qoq FY2018 FY2017 % change FY2019E FY2018 % change

T&D total 12,770 14,549 27,750 (12.2) (54.0) 78,200 68,943 13.4 87,161 78,200 11.5

Cables 2,590 2,155 2,780 20.2 (6.8) 10,090 10,329 (2.3) 7,878 10,090 (21.9)

Railway 3,130 1,548 3,590 102.2 (12.8) 8,440 4,378 92.8 15,934 8,440 88.8

Civil, solar and water 2,560 314 2,520 716.5 1.6 4,230 2,333 81.3 4,217 4,230 (0.3)

Total revenues 21,050 18,567 36,640 13.4 (42.5) 100,960 85,984 17.4 115,190 100,960 14.1

Revenue contribution (%)

Transmission & Distribition 60.7 78.4 75.7 77.5 80.2 75.7 77.5

Cables 12.3 11.6 7.6 10.0 12.0 6.8 10.0

Railway 14.9 8.3 9.8 8.4 5.1 13.8 8.4

Civil, solar and water 12.2 1.7 6.9 4.2 2.7 3.7 4.2

% change

Industrials KEC International


Exhibit 3: KEC’s resilience is evident from yoy and qoq improvement in EBITDA margin despite a slowdown in T&D revenues Trends in EBITDA margin over the past few quarters, March fiscal year-ends, 1QFY14-1QFY19 (%)


Exhibit 4: Interest cost as percentage of sales has not improved materially on yoy basis due to

deterioration in working capital, reduction in share of forex debt and higher interest rate Interest cost as percentage of sales for KEC, March fiscal year-ends, 1QFY14-1QFY19 (%)


27.5

15.0

19.0

23.0

27.0

31.0

35.0

1Q

FY14

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

3Q

FY17

4Q

FY17

1Q

FY18

2Q

FY18

3Q

FY18

4Q

FY18

1Q

FY19

Gross margin

10.3

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1Q

FY14

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

3Q

FY17

4Q

FY17

1Q

FY18

2Q

FY18

3Q

FY18

4Q

FY18

1Q

FY19

EBITDA margin

3.43.6

3.33.1

3.84.2

3.9

2.8

3.83.4 3.4

2.8

4.1

2.93.1

2.2

3.4

2.7 2.5

1.8

3.3

0

1

2

3

4

5

1Q

FY14

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

3Q

FY17

4Q

FY17

1Q

FY18

2Q

FY18

3Q

FY18

4Q

FY18

1Q

FY19



Exhibit 5: Based on 1QFY19 performance, KEC has hinted at moderation in order inflow growth for FY2019 Trends in order inflows and backlog of KEC, March fiscal year-ends, 1QFY14-1QFY19 (Rs bn)


Exhibit 6: Geographical and segmental breakup of backlog and inflow, March fiscal year-ends


27

0

10

20

30

40

50

60

70

1Q

FY14

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

3Q

FY17

4Q

FY17

1Q

FY18

2Q

FY18

3Q

FY18

4Q

FY18

1Q

FY19

Order inflows

182

0

40

80

120

160

200

1Q

FY14

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

3Q

FY17

4Q

FY17

1Q

FY18

2Q

FY18

3Q

FY18

4Q

FY18

1Q

FY19

Order backlog

Transmission & Distribution

70%

Cables1%

Water3%

Railways26%

1QFY19-end backlog (Rs182 bn)

India 54%

Overseas46%

1QFY19-end backlog (Rs182bn)

Transmission &

Distribution51%

Transmission - SAE

1%

Cables7%

Railways34%

Water8%

1QFY19 order inflows (Rs27 bn)

India 61%

Overseas39%

1QFY19 order inflows (Rs27 bn)



Exhibit 7: Net debt levels of KEC International, March fiscal year-ends, 2012-21E (Rs bn)

Notes:

(a) Debt adjusted to include acceptances.


Exhibit 8: Visibility on trailing revenues for KEC International, March fiscal year-ends, 2009-18

(number of years)


Takeaways from the conference call

KEC saw a marked deterioration in working capital, part of which is transitory. The

payables went down given high starting point and inability of vendors to operate at such

starting point due to tight liquidity conditions. Acceptances went down due to RBI

disallowing the practice of rolling over debt for the international business. KEC used to

avail low cost buyer’s credit and then use the same on a roll-over basis to fund

international debt. Thirdly inventories went up to safety stock of copper and steel to

cushion against scenario of limited availability of these inputs. Receivables were also

marginally impacted by delay in receiving money from contracts in Saudi Arabia. The

increase in working capital and the increase in interest cost (both domestic and overseas)

negated any gains natural deleveraging of a high-return EPC business growing at a steady

rate.

18

24

32 33

30 29

36

33 34 32

-

5

10

15

20

25

30

35

40

2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

(Rs bn) Net debt

1.5 1.4

1.7

1.5 1.4

1.3

1.1 1.1

1.5

1.7

-

0.4

0.8

1.2

1.6

2.0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

(years) Visibility on trailing revenues



Despite a sharp decline in T&D revenues, the company was able to report healthy EBITDA

margin of 9.3% (adjusted for forex gain). The same was attributed to (1) improved

margin in T&D, (2) improvement in margin for civil/cables/railways businesses and (2) cost-

control measures.

Order inflows were weak in the first quarter largely on a decline in T&D order inflows.

The company is confident of the order inflows picking up on the back of a large L1

position of Rs31.75 bn. This includes Rs10 bn of PGCIL orders and a couple of large

railways orders. It remains positive on ordering from India (green energy corridor, SEB,

TBCB orders, railways electrification). It expects Rs50 bn of tenders in T&D in 2QFY19.

KEC has maintained its guidance of 10% EBITDA margin and of a 15% revenue growth.

It is limited cost pressures and support in form of currency from here. It also such expects

some benefit on the commodity price front if order won recently (at higher commodity

cost estimate) were to be awarded now. On the interest cost, it has changed its guidance

to a flattish interest cost to sales ratio on a yoy basis versus its earlier expectation of a

modest improvement. Also on the order inflow front, it is now guiding for at least

growing order backlog in line with sales.

Exhibit 9: We arrive at a justified one-year forward P/E multiple of 14X for KEC International Justified multiple framework for KEC International, March fiscal year-ends

Notes:

(1) Working capital adjusted to include acceptances.

Source: Company, Kotak Institutional Equities analysis

Key inputs

Inputs for growth and terminal phase Inputs for cash conversion

Growth phase revenue CAGR (%) 13.4 PAT margin (%) 5.5

Growth phase PAT CAGR (%) 19.0 Interest rate (%) 8.4

No. of years in initial growth phase (Growth_years) 5.0 Marginal tax rate (%) 34.9

Terminal growth rate (Tg, %) 5.0 Gross FATR (X) 9.0

Cost of equity (COE, %) 12.5 Average asset life (years) 14.2

Steady state capital structure - debt mix (%) 50.0 Adjusted working capital as days of sales 125

Component of justified multiple calculation Formula Calculation

One-year forward exit multiple on FCFE in terminal year 1 / (COE - Tg) 13.3

Terminal phase cash conversion ratio FCFE / PAT 0.71

One-year forward P/E multiple in terminal year 9.5

Discount factor for terminal year multiple to target year 1 / ((1+COE)^ growth

years)

0.55

Bump up the multiple by the PAT jump over the growth

years

1 * ( (1 + growth CAGR) ^

(growth years-1)) *

(1+Tg)

2.1

Justified one-year forward P/E multiple for terminal

value component

11.1

Value of growth period

Value of growth period in terms of FCFE 4.7

Value of growth period in terms of P/E FCFE multiple * cash

conversion

3.4

Justified one-year forward P/E multiple 14.4



Exhibit 10: Sensitivity of justified P/E multiple for KEC, March fiscal year-ends

Source: Kotak Institutional Equities analysis

Exhibit 11: Consolidated estimates of KEC International, March fiscal year-ends, 2017-21E (Rs mn)


14 15 17 19 21 23

3 11.1 11.5 11.8 12.1 12.5

4 12.0 12.5 13.1 13.6 14.2

5 12.9 13.6 14.4 15.3 16.1

6 13.8 14.8 15.9 17.0 18.2

7 14.7 16.0 17.4 18.9 20.5

Sensitivity of justified target P/E multiple

PAT CAGR in initial high-growth period (%)

No

. o

f years

of

bu

sin

ess

gro

wth

2017 2018 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E

Order inflows 123,580 150,980 160,198 183,355 205,021 172,145 196,404 219,392 (7) (7) (7)

Yoy growth (%) 41.8 22.2 6.1 14.5 11.8 14.0 14.1 11.7

Order backlog 126,310 172,980 217,554 259,339 298,853 226,156 272,238 314,478 (4) (5) (5)

Revenues 85,844 100,580 115,190 141,037 164,884 118,522 149,756 176,486 (3) (6) (7)

Yoy growth (%) 0.8 17.2 14.5 22.4 16.9 17.8 26.4 17.8

EBITDA 8,179 10,062 11,851 14,623 17,049 12,102 15,454 18,417 (2) (5) (7)

EBITDA margin (%) 9.5 10.0 10.3 10.4 10.3 10.2 10.3 10.4 7 bps 4 bps -10 bps

Interest cost (2,536) (2,466) (2,949) (3,156) (3,087) (2,660) (2,920) (3,225) 11 8 (4)

Net PAT 3,048 4,604 5,384 6,982 8,586 5,616 7,549 9,167 (4) (8) (6)

EPS (Rs) 11.9 17.9 20.9 27.2 33.4 21.8 29.4 35.7 (4) (8) (6)

Yoy growth (%) 106.1 51.1 16.9 29.7 23.0 22.0 34.4 21.4

Working capital (days of sales) 141 163 147 138 132 120 119 123

% changeRevised estimates Previous estimates



Exhibit 12: Key segmental financials of KEC (consolidated), March fiscal year-ends, 2011-21E (Rs mn)


2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Total

Order inflows 55,280 65,870 78,770 84,905 82,230 87,140 123,580 150,980 160,198 183,355 205,021

Yoy growth (%) 30.2 19.2 19.6 7.8 (3.2) 6.0 41.8 22.2 6.1 14.5 11.8

Revenues 44,742 58,147 69,795 79,018 84,678 85,178 85,844 100,580 115,190 141,037 164,884

Yoy growth (%) 14.5 30.0 20.0 13.2 7.2 0.9 2.7 15.1 14.5 22.4 16.9

Order backlog 78,000 85,720 94,700 102,000 95,080 94,868 126,310 172,980 217,554 259,339 298,853

Bill to book ratio (%) 54.1 52.4 55.8 57.6 59.2 61.6 56.0 50.0 45.7 45.8 45.7

EBITDA 4,626 4,654 3,814 4,933 5,118 6,923 8,179 10,062 11,851 14,623 17,049

EBITDA margin (%) 10.3 8.0 5.5 6.2 6.0 8.1 9.5 10.0 10.3 10.4 10.3

T&D total

Inflows 46,090 47,873 57,506 59,544 55,916 63,612 76,620 81,529 78,565 87,377 96,974

Inflows growth (%) - 3.9 20.1 3.5 (6.1) 13.8 20.4 6.4 (3.6) 11.2 11.0

Revenues 35,490 41,480 49,980 61,160 64,840 62,800 60,300 67,950 75,148 80,630 87,648

Backlog 63,640 70,033 77,559 80,784 71,310 70,868 90,943 103,788 107,205 113,952 123,278


EBITDA 3,899 3,510 2,706 4,657 5,385 5,649 6,217 7,297 8,170 8,767 9,532

EBITDA margin (%) 11.0 8.5 5.4 7.6 8.3 9.0 10.3 10.7 10.9 10.9 10.9

Cables

Inflows 5,440 5,927 5,104 8,567 11,512 9,585 9,886 10,569 11,625 12,788 13,811

Inflows growth (%) 277.8 9.0 (13.9) 67.8 30.0 (16.7) 3.1 20.0 10.0 10.0 8.0

Revenues 4,800 5,710 5,520 6,310 9,070 10,260 10,540 10,090 7,907 11,574 13,045

Backlog 1,240 1,457 1,042 2,448 5,705 4,725 1,263 3,460 7,178 8,392 9,157


EBITDA 120 114 (110) (316) (272) 205 527 706 593 926 1,044

EBITDA margin (%) 2.5 2.0 (2.0) (5.0) (3.0) 2.0 5.0 7.0 7.5 8.0 8.0

Railways

Inflows 3,440 1,179 3,627 2,375 2,467 2,614 14,830 39,255 43,586 51,145 58,816

Inflows growth (%) 173.0 (65.7) 207.7 (34.5) (25.0) 6.0 467.3 164.7 11.0 17.3 15.0

Revenues 910 1,640 2,700 1,690 1,330 2,100 4,460 8,440 15,994 24,866 34,023

Backlog 3,890 3,429 4,356 4,488 4,754 5,669 15,157 41,515 69,107 95,386 120,179


EBITDA 18 - - (51) (40) 126 312 760 1,519 2,487 3,402

EBITDA margin (%) 2.0 - - (3.0) (3.0) 6.0 7.0 9.0 9.5 10.0 10.0

Civil/solar

Inflows 310 3,137 2,464 4,411 - 1,743 6,179 4,529 6,794 8,493 9,512

Inflows growth (%) 912.1 (21.5) 79.0 (20.0) 254.5 15.0 50.0 25.0 12.0

Revenues - 190 1,270 1,310 1,410 1,960 2,380 4,230 4,233 5,914 7,437

Backlog 310 3,257 4,451 5,712 3,803 2,268 6,316 5,189 7,750 10,329 12,404

Bill to book ratio (%) - 10.1 28.3 19.7 24.7 41.9 44.4 49.3 49.3 49.3 49.3

EBITDA - - - (39) (42) 59 143 381 402 591 744

EBITDA margin (%) - - - (3.0) (3.0) 3.0 6.0 9.0 9.5 10.0 10.0

SAE

Inflows - 7,753 10,069 10,009 12,335 9,585 16,065 15,098 19,627 23,553 25,908

Inflows growth (%) - - 29.9 - - (22.3) 67.6 (6.0) 30.0 20.0 10.0

Revenues 3,540 9,130 10,320 8,540 8,030 8,300 10,020 10,250 12,342 18,585 23,353

Backlog 8,920 7,543 7,292 8,568 9,508 11,339 12,631 19,028 26,313 31,281 33,836

Bill to book ratio (%) 71.3 82.1 69.5 54.5 58.0 51.7 50.8 42.8 48.8 52.8

EBITDA 496 1,096 1,290 837 80 415 902 923 1,172 1,858 2,335

EBITDA margin (%) 14.0 12.0 12.5 9.8 1.0 5.0 9.0 9.0 9.5 10.0 10.0



Exhibit 13: Key financials for KEC (consolidated), March fiscal year-ends, 2011-21E (Rs mn)


2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Income statement

Total operating income 44,742 58,147 69,795 79,018 84,678 85,178 85,844 100,580 115,190 141,037 164,884

Total operating costs (40,116) (53,493) (65,981) (74,085) (79,560) (78,255) (77,665) (90,518) (103,338) (126,414) (147,834)

Raw materials consumed (32,358) (43,173) (53,301) (59,594) (64,527) (61,798) (59,489) (72,716) (84,088) (102,957) (120,365)

Employee expenses (2,832) (4,284) (4,829) (5,661) (5,865) (6,392) (7,327) (7,984) (4,275) (5,122) (6,035)

Operating and other expenses (4,926) (6,037) (7,852) (8,831) (9,168) (10,064) (10,849) (9,819) (14,975) (18,335) (21,435)

EBITDA 4,626 4,654 3,814 4,933 5,118 6,923 8,179 10,062 11,851 14,623 17,049

Other income 26 12 160 138 1,462 103 289 404 350 265 249

Interest expense (1,075) (1,448) (1,944) (2,633) (3,089) (2,794) (2,536) (2,466) (2,949) (3,156) (3,087)

Depreciation (408) (479) (561) (705) (881) (1,318) (1,297) (1,097) (1,180) (1,265) (1,339)

PBT 3,168 2,739 1,470 1,733 2,611 2,914 4,634 6,902 8,072 10,467 12,872

Taxes paid (1,111) (971) (818) (883) (1,001) (1,436) (1,587) (2,298) (2,688) (3,485) (4,286)

Net PAT 2,057 1,768 652 850 1,610 1,478 3,048 4,604 5,384 6,982 8,586

Earnings per share (Rs) 8.0 6.9 2.5 3.3 6.3 5.8 11.9 17.9 20.9 27.2 33.4

Balance sheet

Shareholders funds 9,466 11,078 11,472 11,916 13,298 12,904 15,864 19,974 24,682 30,786 38,293

Equity share capital 514 514 514 514 514 514 514 514 514 514 514

Reserves & surplus 8,952 10,564 10,958 11,402 12,784 12,390 15,349 19,460 24,168 30,272 37,779

Loan funds 14,322 12,392 16,690 21,273 21,894 32,212 20,957 17,663 22,663 21,663 21,663

Deferred tax liability 497 513 621 514 527 1,034 1,240 1,007 1,007 1,007 1,007

Total source of funds 24,285 23,983 28,783 33,702 35,719 46,150 38,060 38,645 48,352 53,457 60,963

Net fixed assets 8,409 9,348 10,114 9,922 8,811 10,109 9,216 9,983 10,203 9,938 9,699

Goodwill on consolidation 2,812 3,209 3,424 3,778 3,943 1,952 1,910 1,920 1,920 1,920 1,920

Cash balances 1,614 2,102 1,556 1,440 2,063 853 2,080 2,313 3,925 2,706 3,513

Net current assets excluding cash 11,450 9,324 13,689 18,562 20,902 32,982 23,550 24,036 31,913 38,500 45,439

Total application of funds 24,285 23,983 28,783 33,702 35,719 46,150 38,060 38,645 48,352 53,457 60,963

Cash flow statement

Operating profit before working capital changes 3,541 3,695 3,157 4,188 5,579 5,590 6,881 8,168 9,513 11,403 13,012

Change in working capital/other adjustments (3,149) 2,126 (4,365) (4,873) (2,340) (12,080) 9,432 (486) (7,876) (6,588) (6,938)

Net cash flow from operating activites 392 5,821 (1,209) (686) 3,239 (6,490) 16,312 7,682 1,637 4,816 6,074

Cash (used)/realised in investing activities (4,429) (1,815) (1,542) (866) 65 (879) (1,412) (963) (1,400) (1,000) (1,100)

Free cash flow (OCF + net capex) (4,067) 4,006 (2,751) (1,552) 3,305 (7,115) 15,950 5,808 237 3,816 4,974

Cash (used)/realised in financing activities 4,917 (3,858) 2,098 1,725 (2,695) 5,652 (13,880) (6,253) 1,374 (5,034) (4,166)

Cash generated/utilised 916 164 (546) (116) 623 (1,210) 1,227 233 1,612 (1,219) 807

Net cash at end of year 1,614 1,777 1,556 1,440 2,063 853 2,080 2,313 3,925 2,706 3,513

Key ratios

EBITDA margin (%) 10.3 8.0 5.5 6.2 6.0 8.1 9.5 10.0 10.3 10.4 10.3

PAT margin (%) 4.6 3.0 0.9 1.1 1.9 1.7 3.6 4.6 4.7 5.0 5.2

Effective tax rate (%) 35.1 35.5 55.6 51.0 38.3 49.3 34.2 33.3 33.3 33.3 33.3

Net debt to equity 1.3 0.9 1.3 1.7 1.5 2.4 1.2 0.8 0.8 0.6 0.5

Return on Equity (%) 23.7 17.2 5.8 7.3 12.8 11.3 21.2 25.7 24.1 25.2 24.9

ROCE (%) 13.6 11.2 5.7 6.9 10.1 7.1 11.2 16.3 16.9 17.9 18.6

Book value per share (Rs) 36.8 43.1 44.6 46.3 51.7 50.2 61.7 77.7 96.0 119.7 148.9


ARV strong; ingredients and synthesis drive a miss

Laurus’ 4QFY18 revenues were 7% higher than our expectations, led by strong performance in

the ARV segment (+28% vs KIE), and synthesis (+2% vs KIE). However, other segments

disappointed with Hep-C down 69% yoy (-36% vs KIE). Other APIs declined 45% yoy (-55% vs

KIE), largely due to customer delays, which will likely be recovered from 2QFY19 onwards.

However, gross margins declined by 300 bps qoq, down to 45.2%, fully explained by `150-160

mn impact due to China raw material price hikes, with emtricitabine and lamivudine

intermediates witnessing 80% price hike. `50 mn forex loss further exacerbated the impact on

EBITDA margins, which declined to 14.9%, down 590 bps qoq (-380 bps vs KIE). We expect the

company to be able to partially offset the China impact in 2QFY19, which will still have partial

sourcing from China (50% dependency) and expect it to be able to fully offset the impact from

3QFY19, largely through alternate sourcing and backward integration. Only a small benefit

from price hikes is expected as a significant portion of its ARV supplies are locked in fixed-price

contracts. Given lower other income, the miss on PAT was higher at 47%.

Evolving business mix to drive revenues and margin growth over FY2019-20E

Laurus presents a unique business model offering a hybrid of rapidly growing synthesis

business, an emerging formulations business along with a steady ARV business. While the

recent quarters have seen delays to the strategy on account of Hep-C declines and China cost

push, we expect ARV revenues to continue to grow in high single digit over the next two years

with increasing contribution from EU/US formulations, first supplies to ARV tenders in LMIC

countries, as well as LMV/RTV API supplies from 2QFY19. This, along with strong scale-up of

the synthesis business, particularly for Aspen and C2 Pharma, will likely drive profitability. Laurus

has filed a total of 13 ANDAs, and is targeting 10 more ANDA filings in FY2019, with tenofovir

having been launched in 4QFY18 (`51 mn revenues in 1QFY19) and three other ANDAs

expected to be launched in FY2019. Over the past three years, Laurus has made meaningful

investments in capacities with gross block of `8 bn yet to generate revenues (units 2, 4, 5 and

6) with operating costs of `1.4 bn in FY2018 (`274 mn in 1QFY19), including its formulations

investments, which we expect to break even only in FY2020 (FY2018 loss of ~`1 bn). Laurus

has now received approval for its TLD combination and we expect it to enter the LMIC tender

market from 3QFY19, with ramp-up in FY2020, once TLE, TLE400 and TEE formulations are

approved in key markets.

Reasonable valuations to help minimize the impact of earnings cut – ADD

Our FY2019E EBITDA stands reduced by 10% given the China impact, though the hit on EPS is

significant with FY2019 estimates down 25%. We also cut our FY2020/21E EBITDA by 5-6%,

and EPS by ~14%. We cut our target price to `500 (vs `540 earlier), ~16X June 2020E EPS.

Laurus Labs (LAURUS) Pharmaceuticals

China cost push hurts performance. Laurus’ 4QFY18 revenues were 7% higher than

our expectations, led by the ARV segment. However, EBITDA missed our estimates by

14%, due to a combination of (1) `150-160 mn gross profit compression due to >80%

price hikes for 2 key ARV intermediates sourced from China and (2) `54 mn forex loss.

We expect the China cost push impact to persist until 3QFY19E. We cut our FY2019E EPS

by 25% and FY2020-21E EPS by ~14% each; cut TP to `500 (from `540 earlier).

ADD

AUGUST 06, 2018

RESULT


Price (`): 470


BSE-30: 37,556

Chirag Talati, CFA

Kumar Gaurav

Laurus Labs



Market Cap. (Rs bn) EPS growth (%) (11.9) 2.4 79.9




MFs 7.8 EBITDA (Rs bn) 4.1 4.5 6.5


Absolute (0.8) (6.3) (18.6) ROE (%) 11.9 10.9 17.1



595-419

49.8

Pharmaceuticals Laurus Labs


Exhibit 1: Laurus - 1QFY19 interim results March fiscal year-ends (` mn)


Exhibit 2: Laurus - changes to estimates March fiscal year-ends, 2019-21E (` mn)

Source: Kotak Institutional Equities estimates

(% chg.)

1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 FY2019E FY2018 (% chg.)

Sales 5,390 5,036 4,912 5,602 7.0 9.7 (3.8) 23,916 20,690 15.6

Raw material (2,951) (2,593) (2,457) (2,909) 13.8 20.1 1.5 (12,737) (10,637) 19.7

Employee expenses (728) (690) (627) (672) 5.5 16.1 8.3 (2,890) (2,580) 12.0

R&D expenses (345) (300) (229) (442) 15.0 50.7 (21.9) (1,435) (1,196) 20.0

Other expenses (560) (510) (634) (410) 9.8 (11.7) 36.6 (2,315) (2,143) 8.0

EBITDA 806 942 965 1,169 (14.5) (16.5) (31.1) 4,540 4,133 9.8

Other income 26 75 75 51 150 292

Interest (223) (240) (191) (233) (810) (796)

Depreciation (382) (355) (298) (346) (1,545) (1,255)

Pretax profits 226 423 552 641 (46.5) (59.0) (64.7) 2,335 2,374 (1.7)

Tax (61) (110) (163) (190) (619) (698)

Minority interest - - - - - -

Net income - adjusted 166 313 389 451 (47.1) (57.4) (63.3) 1,716 1,676 2.4

Adjusted EPS (Rs) 1.6 3.0 3.7 4.3 (47.1) (57.4) (63.3) 16.2 15.9 2.4

Tax rate (%) 26.8 26.0 29.5 29.7 26.5 29.4

Segment wise sales

ARV 3,710 2,892 2,702 3,698 28.3 37.3 0.3 14,982 13,433 11.5

Hepatitis C 241 375 767 392 (35.7) (68.6) (38.5) 1,278 1,668 (23.4)

Oncology 440 450 441 392 (2.2) (0.2) 12.2 1,762 1,641 7.4

Other APIs 217 480 394 448 (54.8) (44.9) (51.6) 2,032 1,704 19.2

Ingredients 190 250 147 224 (24.0) 29.3 (15.2) 863 628 37.3

Synthesis 541 530 328 448 2.1 64.9 20.7 2,472 1,483

Total 5,390 5,036 4,912 5,602 7.0 9.7 (3.8) 23,916 20,690 15.6

% margin

Gross margin 45.2 48.5 50.0 48.1 46.7 48.6

Staff cost 13.5 13.7 12.8 12.0 12.1 12.5

R&D expenses 6.4 6.0 4.7 7.9 6.0 5.8

Other expenditure 10.4 10.1 12.9 7.3 9.7 10.4

EBITDA 14.9 18.7 19.6 20.9 19.0 20.0

2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E

Revenues 23,916 28,341 31,211 23,989 28,082 30,639 (0.3) 0.9 1.9

EBITDA 4,540 6,493 7,194 5,060 6,804 7,672 (10.3) (4.6) (6.2)

PBT 2,335 4,172 4,902 3,174 4,866 5,776 (26.4) (14.3) (15.1)

PAT 1,716 3,087 3,627 2,301 3,552 4,216 (25.4) (13.1) (14.0)

EPS 16.2 29.2 34.3 21.8 33.6 39.9 (25.4) (13.1) (14.0)

New estimates Change (%)Old estimates

Laurus Labs Pharmaceuticals


Exhibit 3: Laurus – revenues by segments March fiscal year-ends, 2013-21E (` mn)


2014 2015 2016 2017 2018 2019E 2020E 2021E

Revenues (Rs mn)

ARVs 9,302 10,776 12,619 12,212 13,655 14,982 16,214 17,315

Hep-C — 231 1,971 2,509 1,655 1,278 1,223 1,019

Oncology 1,082 1,261 1,413 1,073 1,655 1,762 1,892 2,013

Other APIs 523 265 513 1,498 1,655 2,032 2,546 2,921

APIs 10,907 12,534 16,517 17,292 18,621 20,055 21,874 23,269

Synthesis 200 477 835 1,015 1,448 2,472 3,380 3,845

Ingredients 373 255 465 612 621 863 949 1,044

Formulations — — — — - 543 2,152 3,053

Total revenues 11,480 13,266 17,817 18,919 20,690 23,932 28,355 31,211

As % of revenues

ARVs 81.0 81.2 70.8 64.5 66.0 62.6 57.2 55.5

Hep-C — 1.7 11.1 13.3 8.0 5.3 4.3 3.3

Oncology 9.4 9.5 7.9 5.7 8.0 7.4 6.7 6.5

Other APIs 4.6 2.0 2.9 7.9 8.0 8.5 9.0 9.4

APIs 95.0 94.5 92.7 91.4 90.0 83.8 77.1 74.6

Synthesis 1.7 3.6 4.7 5.4 7.0 10.3 11.9 12.3

Ingredients 3.2 1.9 2.6 3.2 3.0 3.6 3.3 3.3

Formulations — — — — - 2.3 7.6 9.8

Total revenues 100 100 100 100 100 100 100 100

yoy growth (%)

ARVs 15.8 17.1 (3.2) 11.8 9.7 8.2 6.8

Hep-C NM 27.3 (34.0) (22.8) (4.3) (16.6)

Oncology 16.6 12.0 (24.1) 54.3 6.5 7.4 6.4

Other APIs (49.3) 93.6 191.8 10.5 22.8 25.3 14.7

APIs 14.9 31.8 4.7 7.7 7.7 9.1 6.4

Synthesis 138.7 75.0 21.5 42.7 70.7 36.7 13.8

Ingredients (31.6) 82.3 31.6 1.4 39.1 10.0 10.0

Formulations NM 296.5 41.9

Total revenues 15.6 34.3 6.2 9.4 15.7 18.5 10.1

Pharmaceuticals Laurus Labs


Exhibit 4: Laurus – profit and loss, balance sheet, cash flow model March fiscal year-ends, 2013-21E (` mn)


2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Net revenues 7,185 11,597 13,266 18,110 19,315 20,690 23,916 28,341 31,211

Gross profit 3,062 4,338 4,982 8,028 9,348 10,053 11,180 13,919 15,365

Adjusted EBITDA 1,448 2,089 2,002 3,622 4,076 4,133 4,540 6,493 7,194

Depreciation & amortisation (226) (329) (615) (864) (1,060) (1,255) (1,545) (1,724) (1,903)

EBIT 1,222 1,760 1,387 2,758 3,017 2,879 2,995 4,769 5,292

Net interest (361) (551) (721) (1,067) (665) (505) (660) (597) (390)

Profit before tax 861 1,209 666 1,690 2,352 2,374 2,335 4,172 4,902

Tax & deferred Tax 21 (236) 16 (349) (439) (698) (619) (1,085) (1,274)

Minority interest — — 2 (4) (11) — — — —

Net income (reported) 882 973 684 1,337 1,903 1,676 1,716 3,087 3,627

EPS (FD) (reported) (Rs) 10.9 12.0 7.7 13.6 18.0 15.9 16.2 29.2 34.3

Balance sheet

Cash & equivalents 136 232 589 288 105 31 (1,297) (1,559) (2,196)

Debtors 1,567 1,949 2,851 4,449 5,676 5,706 7,028 8,328 9,172

Other current assets 1,599 3,317 4,871 5,291 5,617 6,739 6,475 7,213 7,838

Current assets 3,302 5,498 8,311 10,027 11,398 12,476 12,206 13,982 14,813

Fixed assets (incl. goodwill) 3,083 6,153 9,107 10,906 13,732 16,440 17,645 18,671 19,518

Other non-current assets 624 1,080 1,465 1,302 1,404 1,252 1,252 1,252 1,252

Total assets 7,010 12,732 18,883 22,235 26,534 30,167 31,102 33,905 35,583

Short-term loans 1,778 3,122 4,316 4,814 6,442 8,382 6,500 5,000 3,000

Creditors and other liabilities 1,468 3,116 2,851 4,023 4,820 4,687 4,704 5,119 5,471

Current liabilities 3,247 6,238 7,167 8,837 11,262 13,069 11,204 10,119 8,471

Long-term loans 1,142 2,753 3,895 4,597 1,246 1,417 2,500 3,300 3,000

Other liabilities (incl. deferred) 28 158 601 232 722 855 855 855 855

Total liabilities 4,417 9,148 11,662 13,667 13,230 15,341 14,559 14,275 12,326

Equity (inc. minority interest) 2,593 3,584 7,221 8,568 13,304 14,826 16,542 19,630 23,257

Total equity and liabilities 7,010 12,732 18,883 22,235 26,534 30,167 31,102 33,904 35,583

Cash flow

CF from operations pre WC 1,287 1,805 1,860 3,409 3,844 3,880 4,071 5,558 6,070

Working capital (405) (593) (2,507) (1,476) (525) (1,368) (1,040) (1,623) (1,117)

Capex (1,187) (3,091) (3,831) (3,370) (2,775) (3,500) (2,750) (2,750) (2,750)

FCF (305) (1,879) (4,478) (1,437) 545 (988) 281 1,185 2,203

Ratios

EBITDA margin (%) 20.2 18.0 15.1 20.0 21.1 20.0 19.0 22.9 23.1

RoE (%) 34.0 27.2 9.5 15.6 14.3 11.3 10.4 15.7 15.6

RoCE (%) 22.2 19.1 9.3 15.6 14.4 11.7 11.2 16.2 16.8

Net debt to equity (X) 1.1 1.6 1.1 1.1 0.6 0.7 0.6 0.5 0.4


Earnings weak due to flat volumes, cost increases and muted realizations

JKLC reported a weak quarter as EBITDA declined 22% yoy to Rs939 mn (-7% qoq) and net-

income declined 51% yoy to Rs138 mn (-51% yoy, -59% qoq)—earnings though weak were

higher than our estimate (KIE EBITDA: Rs769 mn) led by better-than-expected realizations. The

company’s volumes were flat yoy at 2.3 mn tons (-1% qoq) largely due to lower non-trade

sales. The management highlighted that some of the non-trade sales were not profitable due to

lower prices and the company decided to exit those sales—there is a pricing differential of

Rs25-30/bag between trade and non-trade but for a few deals it was as high as Rs50-55/bag.

JKLC’s EBITDA/ton declined 7% qoq to Rs410 (-22% yoy) led by cost increases and muted

realizations. The company’s FoR sales increased during the quarter resulting in optically high

realizations and freights costs—realization improved 4% qoq to Rs4,038/ton (+2% yoy) and

freight costs increased to Rs1,074/ton (+15% yoy, +4% qoq). The higher FoR sales enables

buyers to claim input GST credit on freight costs as well. On costs, (1) the lead distance declined

by 20 to 25 kms which saved Rs40/ton, but diesel cost increase offset these benefit, (2) power

and fuel costs rose 12% yoy to Rs940 (-1% qoq).

Limited capex for next couple of year and focus shifts to de-lever the balance sheet

JKLC will spend close to Rs1 bn only in capex for the next two years as ongoing projects are

limited to completion of 20 MW power plant commissioning at Durg, and (2) Odisha grinding

unit. The company has a longer term plan for 7 mtpa brownfield expansion but will take a call

on these projects based on improvement in demand in key markets. The company will take a

pause from new projects for 12-18 months and cash flows will be used to deleverage. The key

focus areas for the next two years will include (1) stabilization of Udaipur Cement Works were

costs are higher due to lower efficiencies, and (2) ramp-up of existing facilities, especially in

east.

We cut target price to Rs370 (Rs425 earlier) and maintain ADD rating

We cut our target price to Rs370 (from Rs425 earlier) due to the 9-13% cut in our EBITDA

estimates on lower volumes, realization assumption. Our positive view on the stock is led by

(1) improvement in the company’s balance sheet post large capex cycle aided by stabilization of

capacities and limited sustenance capex, (2) Udaipur Cement Works, which will see earnings

improvement and is loss making now, and (3) its large presence in North, East markets where

we believe prices can improve led by higher utilization. The stock trades at 10X/6.6X

FY2019/2020E EBITDA. We maintain our ADD rating.

JK Lakshmi Cement (JKLC) Cement

Volumes disappoint. JK Lakshmi reported flat volumes (2.3 mn tons, -1% qoq) on the

back of lower non-trade sales. The price fall for certain sales mix in the non-trade

segment led to the company restricting its sales volume since February 2018—this

increased the trade sales mix to 54% (50% in last quarter). The company has a large

presence in the North, East markets where we expect prices to improve led by higher

industry utilization rates. The company’s focus will be on improved asset sweating, cost

efficiencies and deleveraging. Maintain ADD and revise TP to Rs370 (Rs425 earlier).

ADD

AUGUST 06, 2018

RESULT


Price (`): 330


BSE-30: 37,556

Abhishek Poddar

Murtuza Arsiwalla

Samrat Verma

JK Lakshmi Cement







MFs 15.6 EBITDA (Rs bn) 4.3 5.6 8.1


Absolute 5.2 (19.0) (27.2) ROE (%) 3.7 8.9 19.5



487-298

38.9

Cement JK Lakshmi Cement


Exhibit 1: JK Lakshmi's volumes were flat yoy in 1QFY19; EBITDA/ton declined 7% qoq to Rs410/ton led by cost increases Quarterly results for JK Lakshmi Cement (Standalone), March fiscal year-ends, 2017-2019E (Rs mn)


Changes in our estimates

Exhibit 5 highlights key changes in our estimates.

We cut our standalone volume estimates by 2% to 9.1 mn tons, 9.7 mn tons and 10.4 mn

tons for FY2019E, FY2020E and FY2021E. We cut our cement realization assumption by 1-

2% due to pricing weakness in the company’s key markets and non-trade segment. We

estimate cement realizations at Rs4,137/ton, Rs4,397/ton and Rs4,537/ton for FY2019E,

FY2020E and FY2021E.

Overall, we cut our EBITDA/ton estimate by 7-14% to Rs567, Rs742 and Rs785 for FY2019E,

FY2020E and FY2021E.The net effect is a cut in our consolidated EBITDA estimate by 9-13%

to Rs5.6 bn, Rs8.1 bn and Rs9.1 bn for FY2019E, FY2020E and FY2021E. We estimate

consolidated EPS of Rs11.3, Rs28.1 and Rs36.7 for FY2019E, FY2020E and FY2021E.

Change (%)

1QFY19 1QFY19E 1QFY18 4QFY18 KIE yoy qoq FY2019E FY2018 (% chg)

Net sales 9,234 9,164 9,011 8,970 1 2 3 37,446 34,122 10

Raw materials (2,206) (2,111) (2,325) (1,952) (9,064) (7,784)

Employee costs (632) (615) (591) (607) (2,553) (2,350)

Power costs (2,150) (2,353) (1,920) (2,194) (8,713) (7,959)

Freight costs (2,456) (2,515) (2,140) (2,378) (8,567) (8,726)

Other costs (852) (802) (832) (826) (3,415) (3,190)

EBITDA 939 769 1,203 1,013 22 (22) (7) 5,134 4,114 25

EBITDA (%) 10.2 8.4 13.4 11.3 13.7 12.1

Other income 110 261 102 264 506 681

Interest (451) (485) (492) (480) (1,661) (1,975)

Depreciation (446) (464) (439) (459) (1,860) (1,793)

PBT 152 81 374 338 2,119 1,027

Tax (14) (26) (91) 1 (593) (188)

PAT 138 55 283 338 149 (51) (59) 1,525 840 82

Extraordinaries — — — — — —

Reported PAT 138 55 283 338 1,525 840

EPS (Rs) 1.2 0.5 2.4 2.9 13.0 7.1

Sales (mn tons) 2.3 2.4 2.3 2.3 (5) 0 (1) 9.1 8.6 5

Realization (Rs/ton) 4,038 3,820 3,944 3,896 6 2 4 4,137 3,977 4

Cost (Rs/ton) 3,627 3,499 3,417 3,456 3,570 3,497

Raw materials 965 880 1,017 848 1,001 907

Employee costs 276 256 259 264 282 274

Power & fuel costs 940 981 840 953 963 928

Freight costs 1,074 1,048 937 1,033 946 1,017

Other costs 372 334 364 359 377 372

Profitability (Rs/ton) 410 320 527 440 28 (22) (7) 567 479 18

Tax rate (%) 9.4 32.0 24.4 (0.3) 28.0 18.3

JK Lakshmi Cement Cement


Other highlights, key takeaways from the earnings call

Subdued volumes due to lower sales by company in non-trade segment. JK

Lakshmi’s sales volume was flat yoy at 2.3 mn tons; sales volumes included clinker sales

of 0.28 mn tons. Sales volumes were weak due to lower sales to non-trade segment due

to lower prices—as per the company, prices in some cases are at a five year low. The

management stated that they sacrificed on volumes to improve overall profitability—now

the focus is only on profitable non-trade volumes.

The trade sales mix improved to 54% in 1QFY19 from 50% earlier. We highlight that

management earlier stated that demand from non-trade segment was strong but price

fell sharply in February 2018. The usual pricing differential in non-trade segment is close

to Rs25-30/bag (but costs are low as well) and this widened to as high as Rs50-55/bag on

the sales that the company missed.

Udaipur Cement Works—expect improvement from cost efficiencies. UCWL is

operating at close to 80% utilization and earned EBITDA/ton of Rs200 in 1QFY19. The

profitability of this unit will improve aided by improvement in cost efficiencies. The

management highlighted that there is no pricing difference between realizations with

parent.

Fuel costs increase due to higher pet-coke prices. JK Lakshmi uses 81% pet-coke in

northern plants—other fuel mix includes 13% coal and balance 6% other fuel sources.

The pet-coke costs increased to Rs8,100/ton (from Rs6,400/ton in 1QFY18 & Rs7,500/ton

in 4QFY18) resulting in an increase in fuel costs. Power & fuel costs (on per ton basis)

increased 12% yoy to Rs940, but were steady qoq. The company highlighted also that

power consumption dropped to 67 kwh/ton in 1QFY19 from 72 kwh/ton in 1QFY18.

Lead distance also improved by 20-25 kms which led to cost savings of Rs40/ton.

However, freight costs still increased due to an increase in diesel costs (as well as higher

FoR sales).

Capex guidance at Rs1 bn. The management expects capex of Rs1 bn each for the next

two years for completion of thermal power plant in Durg, Odisha grinding unit and

sustenance capex. Management highlighted that it will take a pause for the next 12-18

months from new projects and will prioritize stabilizing newly commissioned projects and

use cash flows to deleverage.

Sales of premium cement. The sales of premium cement are close to 20% for trade

segment—it works to only 12-14% on including non-trade sales.



Exhibit 2: Udaipur Cement Works is in stabilization phase; profitability to improve from efficiencies Quarterly results for Udaipur Cement Works (Subsidiary), March fiscal year-ends, 2017-2019E (Rs mn)


Exhibit 3: EBITDA/ton declined in 1QFY19 due to increase in fuel, freight costs & muted realizations Quarterly realizations and EBITDA/ton of JK Lakshmi Cement, 1QFY15- 1QFY19 (Rs/ton)


Change (%)

1QFY19 1QFY18 4QFY18 yoy qoq FY2019E FY2018 (% chg)

Net sales 1,290 681 1,338 90 (4) 4,592 3,761 22

Raw materials (315) (241) (291) (1,003) (864)

Employee costs (72) (63) (63) (291) (269)

Power costs (445) (149) (430) (1,387) (1,223)

Freight costs (281) (92) (309) (955) (777)

Other costs (112) (84) (144) (458) (416)

EBITDA 67 51 101 30 (34) 498 211 136

EBITDA (%) 5.2 7.5 7.6 10.8 5.6

Other income — — — 9 7

Interest (84) (74) (73) (309) (303)

Depreciation (169) (166) (153) (575) (674)

PBT (186) (189) (125) (377) (759)

Tax 50 - 298 - 298

PAT (136) (189) 173 (28) (179) (377) (461) (18)

Extraordinaries 27 11 1 - 27

Reported PAT (109) (178) 174 (377) (434)

3,3

82

3,3

11

3,2

04

3,3

07

3,2

61

3,3

05

3,3

03

3,0

49

3,1

27

3,2

71

3,2

14

3,2

57

3,4

17

3,6

04

3,5

30

3,4

56

3,6

27

78

8

611

50

3

46

6

30

6

38

0

38

0

40

3

55

7

545

45

2

317 527

50

5

448

440

410

2,000

2,500

3,000

3,500

4,000

4,500

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

3Q

FY17

4Q

FY17

1Q

FY18

2Q

FY18

3Q

FY18

4Q

FY18

1Q

FY19

Cost (Rs/ton) EBITDA (Rs/ton)



Exhibit 4: JK Lakshmi's volumes were flat yoy in 1QFY19 due to lower non-trade sales Quarterly volumes of JK Lakshmi Cement, 1QFY15- 1QFY19 (Rs/ton)


Exhibit 5: JK Lakshmi Cement, changes in estimates, March fiscal year ends, FY2019-2021E


1.4 1.5 1.5 1.5 1.7

1.8 1.8

2.1 2.1

1.7 1.8

2.3 2.3

1.89 2.10

2.30 2.29

26%

13%

6%

-10%

15%

20%17%

39%

27%

-2%

4%

6%

8%

10%15%

2%

0%

-20%

-10%

0%

10%

20%

30%

40%

50%

-

0.5

1.0

1.5

2.0

2.5

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

3Q

FY17

4Q

FY17

1Q

FY18

2Q

FY18

3Q

FY18

4Q

FY18

1Q

FY19

Volumes (mn tons) Growth yoy (%)

2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2020E

Volume and realizations (mn tons, Rs/ton)

Cement sales - standalone (mn tons) 9.1 9.7 10.4 9.3 10.0 10.7 (2) (2) (2)

Cement sales - Udaipur Cement (mn tons) 1.1 1.2 1.2 1.1 1.2 1.2 0 0 0

Realization (Rs/ton) 4,137 4,397 4,537 4,217 4,457 4,597 (2) (1) (1)

EBITDA (Rs/ton) 567 742 785 658 805 849 (14) (8) (7)

Earnings estimates (Consolidated) (Rs mn)

Revenues 41,640 47,849 52,485 43,503 49,461 54,244 (4) (3) (3)

EBITDA 5,625 8,100 9,065 6,820 8,904 9,935 (18) (9) (9)

PAT 1,334 3,305 4,314 2,163 3,884 4,940 (38) (15) (13)

EPS 11.3 28.1 36.7 18.4 33.0 42.0 (38) (15) (13)

Revised estimate Previous estimate Change (%)



Exhibit 6: JK Lakshmi Cement, Assumptions, March fiscal year ends, 2016-2021E (mn tons, Rs mn)


Exhibit 7: Our fair value of Rs370 is based on 7X FY2020E EBITDA JK Lakshmi Cement, Valuation details, March 2020E fiscal year ends


2016 2017 2018 2019E 2020E 2021E CAGR (%)

Standalone capacity (mn tons) 8.7 10.0 11.0 11.0 11.0 11.0 -

Udaipur cement capacity (mn tons) 0.6 0.6 1.4 1.4 1.4 1.4

Total capacity ( mn tons) 9.3 10.6 12.4 12.4 12.4 12.4 -

Utilization (%) 84 79 78 82 88 95

Standalone volumes (mn tons) 7.3 7.9 8.6 9.1 9.7 10.4 7

Udaipur cement volumes (mn tons) 0.3 0.3 0.9 1.1 1.2 1.2

Total volumes ( mn tons) 7.6 8.2 9.5 10.2 11.0 11.6 7

Growth (%) 22.0 8.7 15.5 6.9 7.7 6.2

Standalone realization (Rs/ton) 3,589 3,666 3,977 4,137 4,397 4,537 4

Growth (%) (7.8) 2.1 8.5 4.0 6.3 3.2

EBITDA (Rs/ton) 370 460 479 567 742 785 18

Growth (%) (37.2) 24.4 4.2 18.3 30.8 5.8

Revenues (Rs mn) 26,352 29,216 37,484 41,640 47,849 52,485 12

EBITDA (Rs mn) 2,711 3,697 4,318 5,625 8,100 9,065 28

PAT (Rs mn) 232 818 526 1,334 3,305 4,314 102

Net debt (Rs mn) 19,988 19,586 19,919 17,980 14,400 9,835 (21)

Multiple EV

(Rs mn) (X) (Rs mn) (Rs/share)

Valuation

EBITDA (Rs mn) 7,219 7 51,613 439

Net Debt (Rs mn) (8,645) (73)

Standalone valuations 42,968 365

Udaipur Cement Works 556 5

Equity value (Rs mn) 43,524 370

TP (Rs/share) 370



Exhibit 8: JK Lakshmi Cement, Financial summary (consolidated), March fiscal year ends, 2016-2021E (Rs mn)


2016 2017 2018 2019E 2020E 2021E

Profit model (Rs mn)

Net sales 26,352 29,216 37,484 41,640 47,849 52,485

EBITDA 2,711 3,697 4,318 5,625 8,100 9,065

Other income 660 1,251 690 517 660 893

Interest (1,986) (2,444) (2,637) (2,225) (1,975) (1,725)

Depreciation (1,656) (1,750) (2,073) (2,146) (2,203) (2,249)

Pretax profits (270) 755 298 1,771 4,583 5,984

Tax 537 78 109 (465) (1,276) (1,669)

Net profit before minority 266 833 407 1,306 3,307 4,315

Less: Minority interest 33 15 (120) (27) 1 2

Add: Profit of associates (1) — — — — —

Net profit after minority 232 818 526 1,334 3,305 4,314

Extraordinary items (83) 40 27 0 0 0

Reported net income 149 858 553 1,334 3,305 4,314



Equity 589 589 589 589 589 589

Reserves and surplus 12,903 13,421 13,847 14,870 17,895 21,928

Minority interest 163 132 13 (15) (14) (12)

Borrowings 22,730 24,825 24,674 22,174 19,674 17,174

Deferred tax liability 627 — — — — —

Currrent liabilities 9,513 12,860 11,889 11,900 12,482 12,906


Gross block 46,008 54,185 56,972 58,472 59,722 60,972

Net fixed assets 28,427 34,853 35,568 34,921 33,969 32,969

Capital work in progress 6,330 3,071 2,283 3,031 3,531 4,031

Goodwill 719 705 705 705 705 705

Cash 328 102 125 (208) 872 2,937

Current assets 8,112 7,871 7,603 6,570 7,051 7,444

Investments 2,610 5,224 4,728 4,500 4,500 4,500

Total assets 46,525 51,827 51,011 49,519 50,626 52,586

Free cash flow (Rs mn)

Operating cash flow, excl. working capital 1,586 2,519 2,661 3,425 5,511 6,567

Working capital 1,014 3,587 (703) 1,045 101 31

Capital expenditure (5,534) (4,918) (1,999) (2,248) (1,750) (1,750)

Free cash flow (2,935) 1,189 (41) 2,222 3,862 4,847

Ratios

EBITDA margin (%) 10.3 12.7 11.5 13.5 16.9 17.3

PAT margin (%) 0.9 2.8 1.4 3.2 6.9 8.2

Net debt/equity (X) 1.5 1.4 1.4 1.2 0.8 0.4

Book value per share (Rs) 115 119 123 131 157 191

Net debt/EBITDA (X) 7.4 5.3 4.6 3.2 1.8 1.1

RoAE (%) 1.7 5.9 3.7 8.9 19.5 21.0

RoACE (%) (3.2) 6.4 9.0 7.6 12.7 14.2

CRoCI (%) 6.3 7.9 8.5 8.9 12.0 13.1


1QFY19— print ad revenue growth continues to disappoint; cost optimization in play

Jagran reported 0.5% yoy decline in print ad revenues (KIE +2%). Circulation revenues grew at

a modest 1% yoy partly due to pressure in Bihar given the rise in competitive intensity. Radio

revenue growth of 7.7% yoy (KIE 12%) was a tad disappointing in view of some benefit from

the new stations. Digital ad revenues grew 24% yoy to Rs96 mn. EBITDA at Rs1.6 bn (+1.4%

yoy) was 3.5% above our estimate due to lower than estimated RM and other costs. We note

that the price of imported newsprint has shot up 30-35% (domestic newsprint is pegged

against landed cost of imported newsprint). Jagran's profitability was protected in 1QFY19 by

low-cost inventory; about 3.3% growth in RM costs was due to 8-9% increase in newsprint

price partly offset by 4-5% drop in consumption (reduction in copies and pagination tweaks).

Full impact of newsprint price inflation will be felt starting 2QFY19; the management has

guided for 13% increase in newsprint costs for FY2019 (18% inflation of which 5% will be

offset by lower consumption). Net profit declined by 1.4% yoy to Rs854 mn.

No visibility on sustainable recovery in print ad environment as yet

Even as we have been underweight on regional print since July 2016, print ad growth has

decelerated sharper than our expectations due to (1) impact of demonetization/GST on

local/retail advertising, (2) weak rural consumption, (3) challenged categories such as real estate,

education and government, and (4) share loss to other mediums. Some of these drags are

cyclical and some structural (digital disruption); it is difficult to gauge the impact of cyclical

versus structural. 2HFY19 would be a better year for print advertising on high political and

government ad spends ahead of the elections. For a clearer view on sustainable print ad growth,

one will have to wait till FY2020. There is no visibility on cyclical recovery as yet in our view.

Inexpensive valuations offer trade; we stay cautious till we see signs of sustainable improvement

Jagran’s stock has corrected 27% over the past three months and is trading at 10X FY2020E

earnings and 6% dividend yield. Election-led pick-up in print ad environment in 2HFY19 can

drive some stock performance from current levels. We recommend investors to pass this ‘trade

opportunity’ and stay cautious till there is visibility on sustainable improvement in print ad

environment and/or reversal in newsprint prices.

Jagran Prakashan (JAGP) Media

Inexpensive valuations but triggers missing. Jagran’s print ad revenues were flat yoy

against our modest expectation of 2% growth. Even as we have been cautious on print

media since July 2016, print ad growth deceleration has been sharper than our

expectation. Any election-led uptick in 2HFY19E would not enthuse us. We prefer to

stay cautious till there is a decisive improvement in print ad outlook or a sharp drop in

newsprint prices. We cut FY2019-20E EPS by 12-14% and TP to Rs131 (from Rs168

earlier) valuing Jagran at 11X FY2020E earnings (12X earlier). REDUCE.

REDUCE

AUGUST 06, 2018

RESULT

Coverage view: Attractive

Price (`): 122


BSE-30: 37,556

Jaykumar Doshi

Jagran Prakashan







MFs 16.4 EBITDA (Rs bn) 5.8 6.1 6.7


Absolute (11.1) (27.3) (31.5) ROE (%) 14.3 15.9 18.2


Company data and v aluat ion summary

193-115

38.0

Media Jagran Prakashan


Exhibit 1: Consolidated Ind-AS financials of Jagran Prakashan (JAGP), March fiscal year-ends (Rs mn)

% chg.

Consolidated financials 1QFY19 1QFY19E 1QFY18 4QFY18 KIE yoy qoq FY2019E FY2018 % chg.

Total revenues 6,026 6,112 5,913 5,481 (1.4) 1.9 9.9 24,873 23,040 8.0

Print advertising revenues 3,601 3,692 3,620 3,122 (2.5) (0.5) 15.4 14,636 13,682 7.0

Circulation revenues 1,097 1,108 1,086 1,074 (1.0) 1.0 2.2 4,524 4,255 6.3

Radio revenues 757 787 703 759 (3.9) 7.7 (0.3) 3,399 2,982 14.0

Digital ad revenues 96 95 77 93 0.6 24.3 2.5 467 333 40.0

Other operating revenues 475 430 427 433 10.6 11.2 9.9 1,848 1,788 3.4

Total expenditure (4,390) (4,533) (4,301) (4,277) (3.1) 2.1 2.6 (18,768) (17,204) 9.1

Raw material costs (1,754) (1,800) (1,698) (1,600) (2.6) 3.3 9.6 (8,106) (7,115) 13.9

Employee expenses (1,041) (1,042) (992) (1,021) (0.1) 4.9 1.9 (4,243) (4,003) 6.0

Other expenses (1,596) (1,691) (1,611) (1,655) (5.6) (0.9) (3.6) (6,419) (6,086) 5.5

EBITDA 1,636 1,580 1,613 1,204 3.5 1.4 35.9 6,105 5,836 4.6

EBITDA margin (%) 27.1 25.8 27.3 22.0 24.5 25.3

Other income 49 130 120 113 (62.4) (59.3) (56.8) 350 467 (25.1)

Interest expense (31) (45) (72) (49) (30.9) (56.6) (36.9) (150) (271) (44.6)

D&A expenses (307) (350) (328) (350) (12.3) (6.4) (12.3) (1,375) (1,361) 1.0

Pretax profits 1,346 1,315 1,333 918 2.4 1.0 46.7 4,930 4,671 5.6

Extraordinaries — — — —

Tax provision (463) (440) (446) (290) 5.1 3.8 59.5 (1,652) (1,557) 6.1

Minority interest (29) — (21) (37) (133) (111)

Reported PAT 854 874 866 590 (2.3) (1.4) 44.8 3,145 3,003 4.7

EPS (Rs/share) 2.7 2.8 2.8 1.9 (2.3) (1.4) 44.8 10.6 9.6 10.0

Tax rate (%) 34.4 33.5 33.5 31.7 33.5 33.3


Exhibit 2: Revised earnings estimates of JAGP, March fiscal year-ends (Rs mn)

2019E 2020E 2019E 2020E 2019E 2020E

Print ad revenue 14,636 15,294 14,913 15,674 (1.9) (2.4)

Circulation revenue 4,524 4,753 4,524 4,753 - -

Other operating revenue 2,314 2,518 2,314 2,518 - -

Radio revenues 3,399 3,909 3,489 4,012 (2.6) (2.6)

Total revenues 24,873 26,474 25,241 26,957 (1.5) (1.8)

Total expenditure 18,768 19,753 18,593 19,618 0.9 0.7

EBITDA 6,105 6,721 6,648 7,339 (8.2) (8.4)

Adjusted PAT 3,145 3,573 3,607 4,158 (12.8) (14.1)

Adjusted EPS (Rs) 10.6 12.1 12.2 14.0 (12.8) (14.1)

Print ad revenue growth (%) 7.0 4.5 9.0 5.1

EBITDA margin (%) 24.5 25.4 26.3 27.2

OldNew Change (%)


Jagran Prakashan Media


Exhibit 3: Trends in print ad revenue growth of JAGP (yoy %)

Notes:

(a) Standalone ad revenue growth for 1QFY12-4QFY13 and 2Q-4QFY17 and consolidated (incl. Mid-Day)

for rest of the quarters.

810

15

11

8

4

78

1210

12

17

78

6

0

8 89

14

9

5 4 5 4

0

-4-6

-1

(10)

(5)

0

5

10

15

20

1Q

FY12

2Q

FY12

3Q

FY12

4Q

FY12

1Q

FY13

2Q

FY13

3Q

FY13

4Q

FY13

1Q

FY14

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

3Q

FY17

4Q

FY17

1Q

FY18

2Q

FY18

3Q

FY18

4Q

FY18

1Q

FY19


Exhibit 4: Trends in circulation revenue growth of JAGP (yoy %)

Notes:

(a) Standalone circulation revenue growth for 1QFY12-4QFY13 and 2Q-4QFY17 and consolidated

(incl. Mid-Day) for rest of the quarters.

5

12

9

12

10 9

12 11

15 15 14

1211

7 7

10

5 4

2

87 6

7

4

20 0.7

-2.6

1

(5)

0

5

10

15

20

1Q

FY12

2Q

FY12

3Q

FY12

4Q

FY12

1Q

FY13

2Q

FY13

3Q

FY13

4Q

FY13

1Q

FY14

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

3Q

FY17

4Q

FY17

1Q

FY18

2Q

FY18

3Q

FY18

4Q

FY18

1Q

FY19


Media Jagran Prakashan


Exhibit 5: Trends in EBITDA margin of JAGP (%)

Notes:

(a) Standalone EBITDA margins for 1QFY12-4QFY13 and consolidated thereafter.

27 26 26

21

25 24 26

16

25

22 24

19

24 24

28

25

28 28 30

26 28 28

31

26 27

24

27

22

27

10

15

20

25

30

35

1Q

FY12

2Q

FY12

3Q

FY12

4Q

FY12

1Q

FY13

2Q

FY13

3Q

FY13

4Q

FY13

1Q

FY14

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

3Q

FY17

4Q

FY17

1Q

FY18

2Q

FY18

3Q

FY18

4Q

FY18

1Q

FY19


Jagran Prakashan Media


Exhibit 6: Financial summary of JAGP, March fiscal year-ends, FY2013-21E (Rs mn)

2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Profit model

Net sales 15,255 17,027 17,698 21,065 22,830 23,040 24,873 26,474 28,314

EBITDA 2,952 3,664 4,464 5,896 6,396 5,836 6,105 6,721 7,364

Other income 206 628 321 345 412 467 350 500 650

Interest (307) (345) (369) (523) (350) (271) (150) (200) (200)

Depreciation (755) (789) (1,035) (1,044) (1,289) (1,361) (1,375) (1,365) (1,325)

Pretax profits 2,096 3,158 3,380 4,674 5,169 4,671 4,930 5,656 6,489

Extraordinary items 949 (101) 803 1,163 0 0 0 0 0

Current tax (497) (795) (1,102) (1,390) (1,675) (1,557) (1,652) (1,923) (2,206)

Deferred taxation 0 0 0 0 0 0 0 0 0

Net income 2,551 2,262 3,080 4,447 3,476 3,003 3,145 3,573 4,091

Adjusted net income 1,602 2,337 2,538 3,400 3,476 3,003 3,145 3,573 4,091

Adjusted EPS (Rs) 5.1 7.5 8.0 10.4 10.6 9.6 10.6 12.1 13.8

Balance sheet

Total equity 9,324 9,616 11,342 15,812 21,548 20,515 19,084 20,140 21,389

Deferred taxation liability 701 851 707 726 1,702 1,702 1,702 1,702 1,702

Total borrow ings 4,840 4,897 6,480 5,120 3,834 — — — —

Current liabilities 3,144 3,889 4,005 4,028 5,032 6,630 7,165 7,480 7,820

Total liabilities and equity 18,009 19,253 22,534 25,686 32,116 28,846 27,951 29,322 30,911

Cash 523 325 4,931 493 3,491 892 1,127 2,754 4,504

Other current assets 6,194 6,560 5,576 7,449 7,600 7,690 8,335 8,843 9,408

Total fixed assets 9,069 9,048 8,454 14,676 15,678 14,917 14,142 13,377 12,652

Investments (largely cash equivalent) 2,224 3,320 3,573 3,068 5,347 5,347 4,347 4,347 4,347

Total assets 18,009 19,253 22,534 25,686 32,116 28,846 27,951 29,322 30,911

Free cash flow

Operating cash flow 3,655 3,681 4,819 5,669 4,721 3,293 4,453 4,798 5,158

Working capital changes (692) (120) (506) (1,839) (1,511) 1,508 (109) (194) (225)

Capital expenditure (961) (497) (512) (7,670) (800) (800) (600) (600) (600)

Other income 80 48 199 345 412 467 350 500 650

Free cash flow 2,082 3,112 3,999 (3,495) 2,822 4,467 4,094 4,504 4,983

Key metrics and ratios (%)

Print ad revenue growth (%) 12.2 12.7 4.0 9.2 2.9 (1.3) 7.0 4.5 5.0

EBITDA margin (%) 19.4 21.5 25.2 28.0 28.0 25.3 24.5 25.4 26.0

Debt/equity 48 47 54 31 16 — — — —

Net debt/equity 21 12 (17) 9 (22) (28) (26) (33) (38)

ROAE (%) 18 23 23 24 17 13 15 17 18

ROACE (%) 14 18 21 24 18 15 17 20 22

Notes:

(1) F inancials as per Ind-AS from FY2017. Prior period financials are as per Indian GAAP.



1QFY19 results – disappointing on non-M&M growth, commendable performance on margin

Mahindra Logistics reported 1QFY19 revenues of Rs9.2 bn, up 9% yoy and 9% below estimates

due to weak 6% growth in non-M&M SCM. Non-M&M SCM transportation was flat yoy. There

were several reasons for such weakness such as (1) slow progress by clients on supply chain

redesign post GST, (2) difficulty in technological integration with clients, (3) specific issue with

large clients such as business stagnation and reduced transportation lead distance and (4)

pricing pressure from startups leading MLL to forgo some business to protect profitability. The

key positive was a strong 27% growth in warehousing and other value-added activities as well

as operational efficiency improvement that lifted adjusted EBITDA margin to 4.4%, up 80 bps

yoy, completely negating the impact of topline miss. Below-EBITDA items were in line and thus

the adjusted PAT came out to Rs240 mn, up 36% yoy, 1% above estimates.

Reality sets in; time to accept delays and tone down near-term growth expectations

Fundamentally Mahindra Logistics remains a strong structural play on penetration of 3rd

party

logistics (3PL) with key levers in GST, e-way bill, infrastructure status to logistics and increased

government focus on the sector. However, 1QFY19 provided a window into several factors that

will keep the pace of 3PL penetration slow, at least initially for the next 12-18 months. These

factors range from corporate anxiety on policy changes leading to a ‘wait-and-watch’ approach,

and resistance by transporters to formalization, to practical aspects such as difficulty in

integration of IT systems with clients. We thus tone down our growth expectations in the near

term. While growth was weak in the quarter, MLL has maintained a steady focus on

profitability, with operational efficiency measures and increased warehousing revenues pushing

up margins.

Rich valuations lead us to downgrade to REDUCE despite better margin and EPS estimates

We defer our growth expectations by ~18 months but expect a ‘catch-up’ happening in

FY2020/21. Sustainable margin improvement through operational efficiency measures and

strong warehousing growth lead to a net 10-11% increase in EPS estimates. Based on annual

report 2018, we model higher working capital for non-M&M. Revised one-year forward target

price stands at Rs565 (Rs540 previously). Rich valuations force us to downgrade to REDUCE.

Mahindra Logistics (MAHLOG) Infrastructure

Transient troubles, rich valuations. 1QFY19 results highlighted structural (slow

decision-making, resistance to tax compliance) and practical (technology integration)

issues with various participants in the logistics value chain. These are, however,

transient issues in our view. What’s commendable is MLL’s margin performance

through operational efficiency and focus on warehousing/value-adding activities. On a

net basis, EPS estimates increase by ~10-11% as topline growth plays ‘catch-up’ along

with higher margin in FY2020/21. Rich valuations force us to downgrade the stock to

REDUCE (from BUY) with a revised target price of Rs565/share (Rs540 previously).

REDUCE

AUGUST 06, 2018

RESULT, CHANGE IN RECO.


Price (`): 580


BSE-30: 37,556

Aditya Mongia

Ajinkya Bhat

Mahindra Logistics







MFs 7.8 EBITDA (Rs bn) 1.2 1.8 2.5


Absolute 1.9 18.0 0.0 ROE (%) 18.2 22.7 25.8

Rel. to BSE-30 (4.0) 10.2 0.0 Div. Yield (%) 0.0 0.0 0.0


654-405

41.2

Infrastructure Mahindra Logistics


Exhibit 1: Revenue miss was led by flat non-M&M transportation business; margin improvement led by strong growth in warehousing Quarterly income statement of Mahindra Logistics (consolidated), March fiscal year-ends, 1QFY19 (Rs mn)

Notes:

(1) Adjusted EBITDA and adjusted PAT exclude the fixed-term consultancy fee expense from the reported numbers for the period; this expense ended

in FY2018.


Exhibit 2: Gross margin miss was led by weak growth in non-M&M revenues, in spite of which EBITDA margin beat our estimates Quarterly segmental financials of Mahindra Logistics (consolidated), March fiscal year-end, 1QFY19 (Rs mn)

Notes:

(1) Non-M&M revenues in SCM grew a weak 6% yoy in 1QFY19 contributing 38% of segmental sales, indicating that post-GST ramp up has not

happened as expected by the management.

(2) Revenues from warehousing and other value-added activities for non-M&M clients grew a strong 27% in 1QFY19. These are typically high-margin

activities leading to yoy gross margin improvement.


% change


Net revenue 9,282 10,209 8,525 8,927 (9.1) 8.9 4.0 34,161 26,666 28.1 39,889 34,161 16.8

Total expenses (8,877) (9,803) (8,259) (8,550) (9.4) 7.5 3.8 (32,964) (25,903) 27.3 (38,081) (32,964) 15.5

Employee benefit expense (607) (676) (537) (598) (10.1) 13.1 1.5 (2,291) (1,883) 21.7 (2,614) (2,291) 14.1

Fixed term consultant fees - - (39) (23) (82) (206) - (82) (100.0)

Freight and other expenses (8,270) (9,128) (7,684) (7,929) (9.4) 7.6 4.3 (30,591) (23,815) 28.5 (35,468) (30,591) 15.9

EBITDA 405 406 265 377 (0.2) 52.6 7.5 1,197 762 57.0 1,808 1,197 51.0

Adjusted EBITDA 405 406 304 400 (0.2) 33.1 1.3 1,279 968 32.1 1,808 1,279 41.4

Other income 29 26 20 8 44.7 247.0 59 97 (39.3) 86 59 47.1

Depreciation & Amortization (51) (56) (42) (53) 21.4 (3.6) (197) (146) 35.0 (223) (197) 13.1

EBIT 383 376 244 333 2.0 57.3 15.3 1,059 713 48.5 1,671 1,059 57.9

Interest expense (8) (7) (9) (9) (13.8) (9.4) (38) (35) 7.8 (26) (38) (30.3)

PBT 376 369 235 324 1.7 60.0 15.9 1,021 678 50.6 1,645 1,021 61.1

Tax expense (133) (129) (83) (115) 2.8 58.8 15.0 (368) (218) 69.4 (581) (368) 57.6

Recurring PAT 243 240 151 209 1.2 60.7 16.4 653 461 41.7 1,064 653 63.1

Exceptional items and prior period items (net) - - - - - - - -

Reported PAT 243 240 151 209 1.2 60.7 16.4 653 461 41.7 1,064 653 63.1

Associate profits - - - - - - - -

Minority interest (3) (3) (3) (4) (13) (5) (13) (13)

Reported PAT for equity holders 240 237 148 205 1.2 62.0 17.2 640 456 40.4 1,052 640 64.3

Adjusted PBT (excluding consultant fees) 376 369 274 347 1.7 37.3 8.1 1,103 884 24.8 1,645 1,103 49.2

Adjusted PAT (excluding consultant fees) 240 237 176 220 1.2 36.2 8.9 695 600 15.7 1,052 695 51.4

Adjusted EPS (excluding consultant fees) 3.4 3.3 2.5 3.1 1.2 36.2 8.9 9.8 8.4 15.7 14.8 9.8 51.4

Key ratios

Employee expense / sales 6.5 6.6 6.3 6.7 6.7 7.1 6.6 6.7

Other expenses / sales 89.1 89.4 90.1 88.8 89.5 89.3 88.9 89.5

EBITDA margin (%) 4.4 4.0 3.1 4.2 3.5 2.9 4.5 3.5

Adjusted EBITDA margin (%) 4.4 4.0 3.6 4.5 3.7 3.6 4.5 3.7

Effective tax rate (%) 35.3 34.9 35.5 35.6 36.1 32.1 35.3 36.1

PAT margin (%) 2.6 2.4 1.8 2.3 1.9 1.7 2.7 1.9

% change


Revenues from customers

SCM 8,382 9,261 7,663 8,066 (9.5) 9.4 3.9 30,757 23,715 29.7 36,088 30,757 17.3

PTS 900 948 862 861 (5.1) 4.4 4.5 3,405 2,951 15.4 3,801 3,405 11.6

Total 9,282 10,209 8,525 8,927 (9.1) 8.9 4.0 34,161 26,666 28.1 39,889 34,161 16.8

Gross profit (Rs mn)

SCM 712 839 560 690 (15.0) 27.3 3.3 2,422 1,818 33.2 3,128 2,422 29.2

PTS 96 99 87 90 (3.6) 10.3 6.2 318 297 7.0 403 318 26.8

Total 808 938 646 780 (13.8) 25.0 3.6 2,740 2,115 29.5 3,531 2,740 28.9

Gross margin (%)

SCM 8.5 9.1 7.3 8.6 7.9 7.7 8.7 7.9

PTS 10.6 10.5 10.0 10.5 9.3 10.1 10.6 9.3

Total 8.7 9.2 7.6 8.7 8.0 7.9 8.9 8.0

Mahindra Logistics Infrastructure


Exhibit 3: SCM continues to account for ~90% of revenue and gross profit of Mahindra Logistics Segment-wise break-up of revenue and gross profit of Mahindra Logistics (consolidated), March fiscal year-end, 1QFY19

Revenue break-up Gross profit break-up


Exhibit 4: Increase in share of non-M&M revenues has improved gross margin over the years Trend in share of non-Mahindra Group clients in SCM revenues and corresponding segmental gross margin, March fiscal year-ends, 2013-21E (%)


SCM90%

PTS10%

SCM88%

PTS12%

10 11

21 29

40 41 44 48 51

39 38

5.7 6.3

7.0 7.2 7.7 7.9

8.7 9.2

9.6

7.3

8.5

0

2

4

6

8

10

0

10

20

30

40

50

60

2013 2014 2015 2016 2017 2018 2019E 2020E 2021E 1QFY181QFY19

Share of non-Mahindra Group clients in SCM revenues (LHS, %)

SCM gross margin (RHS, %)



1QFY19 earnings call takeaways

Several reasons for weak non-M&M SCM growth. The company surprised negatively

on revenue growth in 1QFY19, especially posting a weak 6% yoy growth in non-M&M

revenues and even lower performance with flat transportation business which constituted

76% of non-M&M SCM business. The management mentioned several reasons for this

underperformance as follows:

GST and e-way bill. Corporates are still grappling with GST and relatively nascent e-

way bill. The supply chain redesign, warehouse consolidation and other GST-related

changes to the logistics chain are taking place slower than expected. As a result, new

business acquisition has taken a hit in the quarter and will see only a slow pickup.

Technological integration. The management acknowledged that the challenges with

technological integration were perhaps underestimated. The company is pushing

clients for technological integration with MLL’s systems as it will not only improve the

scope and level of service offered by MLL but will also increase switching cost for

customer and will lead to more sticky, profitable business for MLL. However,

interfacing with client systems, some of which are foreign companies and

technologies, has proven harder than expected and has affected business growth in

1QFY19.

Specific customer issues. The management mentioned that in the transportation

business, one large customer faced stagnation in the quarter reducing the logistics

business for MLL. Another customer undertook a restructuring of its distribution

strategy due to which the average lead distance for material transportation came out

much shorter than earlier, thereby impacting the topline. Barring these specific clients,

the growth for the rest of the non-M&M clients was faster than the industry according

to the management.

Pricing pressure from startups. According to the management, some startups tried

to undercut MLL on some vanilla pure transportation contracts. As per MLL’s

assessment, this is a bane of the startup ecosystem where investor funding and

valuation is available at a multiple of the revenue growth. The founders of such startup

then chase topline without paying any attention to profitability. MLL decided to favor

profitability over growth and thus let go of some contracts instead of sacrificing

profitability. According to the company’s past experience, such contracts are not

sustainable as the transporter may not be able to perform the contracted duties at the

aggressive prices quoted and the customer may thus return to MLL’s fold after a while.

Guidance for FY2019. For FY2019, the management has guided for M&M SCM growth

in line with the parent’s growth, non-M&M SCM growth faster than the expected

industry growth of 10-15% and 50 bps of margin improvement. The company also

envisages 10-15% growth for PTS segment in FY2019 on the back of new technology

deployment and rollout in 2QFY19 with help from a logistics sector startup. MLL has

planned a capex of Rs200-250 mn for FY2019 which will be spent on technology and

material handling equipment. Warehousing and non-transport value adding activities will

be the focus area for MLL going forward. The company’s Gurgaon warehouse has

reached optimum utilization whereas Chakan warehouse is still ramping up and may

support both growth and margin in FY2019. MLL is also planning to set up new

warehouses at Delhi, Bangalore and Chennai. The management expects free cash flow

(FCF) to turn positive in FY2019.

New customer acquisitions. The company has won the contract to set up regional

distribution center for L’Oreal catering to NCR region. The company already provides

distribution service to Mumbai region from its Chakan facilities. It has also received line-

feed contracts for 2 manufacturing plants of an FMCG player adding to the list of 40



manufacturing plants across India where MLL handles line-feed for various clients. From

the industry perspective, the company expects automotive and consumer goods industries

to grow strongly, especially in rural India, on the back of third consecutive year of normal

monsoon and improving sentiment. E-commerce clients will continue to put pricing

pressure on MLL as they undertake cost control efforts.

Key priorities for MLL remain intact. Key priorities for MLL are three fold:

Building strong client relationships. MLL has continued client engagement to

deepen the business relationships and has been able to achieve a 92% retention rate

among the top-20 customers.

Investing in technology. The company has created a new post and appointed a

digital transformation officer to push technology adoption. For PTS segment, the

company is also collaborating with a startup to deploy new technologies.

Improve business partner engagement. MLL had previously mentioned the cloud

platform for business partner onboarding. The company has also started a joint forum

with representatives of transporters to undertake mutually beneficial initiatives.

Other takeaways.

The company is facing some resistance from both clients and transporters on its

attempt to move to forward charge mechanism (FCM) under GST from currently

prevalent reverse charge mechanism (RCM). Some clients have enough input tax credit

and thus do not wish to pay higher GST under FCM whereas the resistance from

transporters is arising from their fear of coming into the GST net unlike RCM where

the client pays the indirect tax. The company has seen good success with clients as

90% of them have agreed to FCM while success rate with transporters has been

limited at 50% so far.

Given the prospective nature of the new axle load norms, the company sees limited

and slow benefits in terms of trucking capacity as new trucks with allowed higher axle

load limit get gradually pressed into service by transporters. Further, the usage of the

higher limit depends on the type of cargo carried. Low-density voluminous cargo may

anyway not be able reach even current axle load allowance. For high density cargo,

however, the company intends to take advantage of the new norms.

The company has decided to acquire additional 8.7% stake in its freight forwarding

subsidiary Lords for a sum of Rs19 mn. This will increase MLL’s shareholding to 68.7%.

The company has received tax refund of Rs177 mn including interest of Rs19 mn in

1QFY19. As per MLL’s petition to the assessing officer, the TDS rate on transportation

has been reduced to 1.04% (from 2% earlier) and that on warehousing, rental and

interest income has been reduced to 2.5% (vs 10% earlier). TDS reduction will prevent

further buildup of income tax assets and will help normalize the working capital.



Exhibit 5: Note that topline estimates for FY2020/21 have not been reduced as we believe that growth is getting deferred, not denied Change in estimates of Mahindra Logistics (consolidated), March fiscal year-ends, 2018-21E (Rs mn)

Notes:

(a) The first published annual report FY2018 indicates much higher receivable days required for non-M&M client business which has been

incorporated in our revised working capital estimates.


2018 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E

Segmental financials

Revenues

SCM segment 30,761 36,088 44,036 52,081 36,717 44,068 52,120 (1.7) (0.1) (0.1)

Yoy growth (%) 29.7 17.3 22.0 18.3 19.4 20.0 18.3

Mahindra group 18,177 20,359 22,802 25,538 20,359 22,802 25,538 - - -

Yoy growth (%) 28.1 12.0 12.0 12.0 12.0 12.0 12.0

Non-Mahindra group 12,583 15,729 21,234 26,543 16,358 21,266 26,582 (3.8) (0.1) (0.1)

Yoy growth (%) 32.1 25.0 35.0 25.0 30.0 30.0 25.0

PTS segment 3,400 3,801 4,249 4,750 3,808 4,265 4,777 (0.2) (0.4) (0.6)

Yoy growth (%) 15.2 11.8 11.8 11.8 12.0 12.0 12.0

Gross profit

SCM segment 2,422 3,128 4,073 5,003 3,103 3,902 4,747 0.8 4.4 5.4

Gross margin (%) 7.9 8.7 9.2 9.6 8.5 8.9 9.1 22 bps 39 bps 50 bps

Assumed M&M margin (%) 6.0 6.3 6.5 6.6 6.0 6.2 6.2

Implied non-M&M margin (%) 10.6 11.8 12.2 12.5 11.5 11.7 11.9

PTS segment 318 403 450 504 371 424 480 8.5 6.1 4.9

Gross margin (%) 9.3 10.6 10.6 10.6 9.8 10.0 10.1 85 bps 65 bps 55 bps

Key financials

Net revenue 34,161 39,889 48,285 56,831 40,525 48,333 56,898 (1.6) (0.1) (0.1)

EBITDA 1,197 1,808 2,455 3,025 1,721 2,223 2,703

Adjusted EBITDA 1,279 1,808 2,455 3,025 1,721 2,223 2,703 5.0 10.4 11.9

Adjusted EBITDA margin (%) 3.7 4.5 5.1 5.3 4.2 4.6 4.8 28 bps 48 bps 57 bps

Depreciation (197) (223) (284) (352) (234) (294) (364)

PBT 1,021 1,645 2,269 2,801 1,566 2,061 2,532

Tax expense (368) (581) (792) (978) (547) (719) (884)

Effective tax rate (%) 36.1 35.3 34.9 34.9 34.9 34.9 34.9

Reported PAT 640 1,052 1,464 1,811 1,007 1,329 1,635

Adjusted PAT 698 1,052 1,464 1,811 1,007 1,329 1,635 4.5 10.2 10.7

Adjusted EPS 9.8 14.8 20.6 25.5 14.2 18.7 23.0 4.5 10.2 10.7

Operating working capital cycle (days of sales) (a) 11 12 14 16 5 6 6

Yoy growth (%)

Net sales 28 17 21 18 19 19 18

Adjusted EBITDA 32 41 36 23 35 29 22

Adjusted PAT 16 51 39 24 44 32 23

Adjusted EPS 16 51 39 24 44 32 23

New estimates Old estimates Revision (%)



Exhibit 6: Trade receivables for non-M&M clients stand at much higher level than the M&M business Trend in receivables of M&M and non-M&M clients and operating working capital, March fiscal year-ends, 2013-21E (days of sales)

Notes:

(a) The first published annual report 2018 indicates this split of receivables which has been incorporated into

our revised working capital estimates to reflect increasing share of non-M&M business in revenue mix.


Exhibit 7: We derive a DCF-based target price of Rs565/share for Mahindra Logistics; valuation impact from higher EPS estimates has

been moderated due to increased working capital estimates DCF valuation of Mahindra Logistics (consolidated), March fiscal year-ends, 2017-26E (Rs mn)


96 101 100

94

108 102 100 100 100

11 11 11 14 13 16 14 14 14

(7) (7) (3)

5 9 11 12 14 16

(20)

-

20

40

60

80

100

120

2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Operating working capital M&M receivables Non-M&M receivables

(Days of sales)

2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E

FCFF calculation

Net revenue 26,666 34,161 39,889 48,285 56,831 65,765 75,630 86,974 100,020 115,023

Revenue growth (%) 29.2 28.1 16.8 21.0 17.7 15.7 15.0 15.0 15.0 15.0

EBIT (excluding other income) 616 1,000 1,585 2,171 2,673 3,178 3,655 4,203 4,833 5,558

EBIT margin (%) 2.3 2.9 4.0 4.5 4.7 4.8 4.8 4.8 4.8 4.8

Operating tax expense (238) (370) (559) (758) (933) (1,109) (1,275) (1,467) (1,687) (1,940)

NOPLAT 378 630 1,025 1,413 1,740 2,069 2,379 2,736 3,146 3,618

Depreciation 146 197 223 284 352 429 493 567 652 750

Change in working capital (1,087) (600) 485 (416) (637) (618) (561) (645) (742) (853)

Capital expenditure (266) (230) (281) (466) (351) (573) (659) (758) (871) (1,002)

Free cash flow to the firm (829) (3) 1,453 815 1,104 1,307 1,652 1,900 2,185 2,513

Key assumptions and value drivers

Tax rate (%) 38.7 37.0 35.3 34.9 34.9 34.9 34.9 34.9 34.9 34.9

Depreciation as % of sales 0.5 0.6 0.6 0.6 0.6 0.7 0.7 0.7 0.7 0.7

Net working capital excluding cash as % of sales 7.3 7.5 5.2 5.1 5.5 5.7 5.7 5.7 5.7 5.7

DCF valuation

Terminal growth rate (%) 5.0

WACC (%) 12.0

EV and target price calculation

Sum of discounted FCF 20,086 22,810

PV of terminal value 16,749 17,586

Enterprise value 36,835 40,396

Investments 544 544

Net debt/(cash) (1,711) (2,333)

Equity value 39,090 43,273

Implied share price (Rs/share) 549 608

One-year forward target price (Rs/share) 564



Exhibit 8: Income statement of Mahindra Logistics (consolidated), March fiscal year-ends, 2013-21E (Rs mn)

Notes:

(1) Breakup of other expenses in FY2018 are KIE estimates.


I-GAAP Ind-AS

2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Net revenue 15,321 17,507 19,309 20,639 26,666 34,161 39,889 48,285 56,831

Total expenses (14,956) (16,994) (18,739) (20,116) (25,903) (32,964) (38,081) (45,831) (53,806)

Employee benefit expenses (688) (882) (1,228) (1,509) (1,883) (2,291) (2,614) (3,097) (3,693)

Fixed term consultant fees — — (25) (62) (206) (82) — — —

Other expenses (1) (14,268) (16,112) (17,486) (18,546) (23,815) (30,591) (35,468) (42,733) (50,113)

Freight and other related expenses (13,111) (14,862) (15,889) (16,555) (20,940) (26,785) (31,276) (37,860) (44,560)

Labor and other related expenses (584) (592) (775) (967) (1,421) (1,872) (2,185) (2,645) (3,113)

Rent including lease rentals (157) (228) (295) (337) (399) (645) (753) (912) (1,073)

Warehouse and related expenses (123) (102) (125) (169) (265) (241) (282) (341) (401)

Legal and other professional costs (35) (52) (78) (137) (285) (172) (201) (243) (286)

Miscellaneous expenses (257) (275) (324) (382) (505) (876) (770) (732) (679)

EBITDA 365 513 570 523 762 1,197 1,808 2,455 3,025

Adjusted EBITDA 365 513 595 585 968 1,279 1,808 2,455 3,025

Other income 35 63 87 132 97 59 86 125 154

Depreciation & amortization (31) (32) (60) (83) (146) (197) (223) (284) (352)

EBIT 369 544 596 573 713 1,059 1,671 2,295 2,828

Interest expense (7) (1) (4) (13) (35) (38) (26) (26) (26)

PBT 362 543 592 559 678 1,021 1,645 2,269 2,801

Tax expense (117) (177) (207) (200) (218) (368) (581) (792) (978)

Current tax (115) (196) (224) (216) (261) (378) (581) (792) (978)

Deferred tax (2) 19 17 16 41 9 — — —

MAT credit entitlement — — — — 3 — — — —

Reported PAT prior to associated income and minority interest 244 366 385 360 461 653 1,064 1,477 1,824

Associate profits — — — — — — — — —

Minority interest — — 7 6 (5) (13) (13) (13) (13)

Reported PAT 244 366 393 365 456 640 1,052 1,464 1,811

Adjusted PAT 244 366 402 399 600 698 1,052 1,464 1,811

Adjusted EPS 3.4 5.1 5.6 5.6 8.4 9.8 14.8 20.6 25.5

Key ratios

Employee expenses/sales 4.5 5.0 6.4 7.3 7.1 6.7 6.6 6.4 6.5

Other expenses/sales 93.1 92.0 90.6 89.9 89.3 89.5 88.9 88.5 88.2

EBITDA margin (%) 2.4 2.9 3.0 2.5 2.9 3.5 4.5 5.1 5.3

Adjusted EBITDA margin (%) 2.4 2.9 3.1 2.8 3.6 3.7 4.5 5.1 5.3

Effective tax rate (%) 32.5 32.6 35.0 35.7 32.1 36.1 35.3 34.9 34.9

PAT margin (%) 1.6 2.1 2.0 1.7 1.7 1.9 2.7 3.1 3.2

Yoy growth (%)

Net sales NA 14.3 10.3 6.9 29.2 28.1 16.8 21.0 17.7

Adjusted EBITDA NA 40.7 16.0 (1.7) 65.5 32.1 41.4 35.8 23.2

Adjusted PAT NA 49.9 9.7 (0.5) 50.3 16.2 50.7 39.3 23.7



Exhibit 9: Balance sheet and cash flow details of Mahindra Logistics (consolidated), March fiscal year-ends, 2013-21E (Rs mn)

Notes:

(1) RoAE (adjusted): Return on Equity adjusted for fixed-term consultant fees (post-tax) and surplus funds. Surplus funds include cash and cash

equivalents, bank deposits with more than 12 months maturity, investments in mutual funds and loans and advances to certain related parties.


I-GAAP

2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Shareholders' funds 859 1,243 2,646 3,018 3,477 4,196 5,063 6,270 7,764

Share capital 577 591 598 598 680 711 711 711 711

Reserves & surplus 282 653 2,048 2,420 2,797 3,485 4,352 5,559 7,052

Minority interest — — 35 29 48 70 82 95 108

Debt — — 40 236 280 262 262 262 262

Total sources of funds 859 1,243 2,721 3,283 3,805 4,527 5,407 6,627 8,133

Net block 101 156 216 452 572 605 663 845 844

Investments and goodwill — — 1,147 724 624 544 544 544 544

Cash and bank balances 557 892 1,121 1,106 502 660 1,973 2,595 3,464

Net working capital (ex-cash) 164 141 147 866 1,953 2,553 2,068 2,484 3,121

Deferred tax assets 34 53 71 88 128 141 141 141 141

Non-current assets held for sale — — 19 19 19 19 19 19 19

Total application of funds 859 1,243 2,721 3,283 3,805 4,527 5,407 6,627 8,133

Free cash flow

Cash flow from operations before wcap. changes 277 423 439 166 295 602 1,214 1,650 2,035

Change in working capital / other adjustments 207 64 (171) (645) (589) (483) 485 (416) (637)

Net cashflow from operating activites 484 487 268 (479) (293) 119 1,699 1,234 1,397

Fixed assets (52) (99) (108) (353) (243) (376) (281) (466) (351)

Cash (used) / realised in investing activities (18) (39) (1,648) 10 534 1 (189) (341) (197)

Free cash flow (CFO + net capex) 432 387 160 (832) (536) (257) 1,419 768 1,046

Ratios

Debt/equity — — — 0.1 0.1 0.1 0.1 0.0 0.0

Net debt/equity (0.6) (0.7) (0.4) (0.3) (0.1) (0.1) (0.3) (0.4) (0.4)

Book value per share (Rs) 12 17 37 42 49 59 71 88 109

RoAE (%) NA 35 21 14 18 18 23 26 26

RoAE (adj., %) NA NA 90 40 34 30 58 65 67

RoACE (%) NA 31 17 9 12 15 21 23 24

Ind-AS


Event— PVR’s deal renewal with BMS and Paytm

PVR has renewed its arrangements with bookmyshow (BMS) and Paytm for three years w.e.f.

July 15, 2018. As per the new agreement, BMS and Paytm will pay PVR an aggregate amount

of `4.1 bn (minimum guarantee+refundable deposit; `3.6 bn + `0.5 bn per KIE) for allowing

them to book PVR tickets. Of this amount, PVR will receive `3.5 bn upfront. At present, BMS

and Paytm charge a convenience fee of ~`30/ticket to consumers and pass on ~`14 to PVR.

PVR’s share would now increase to ~`22/ticket (KIE). In our view, BMS and Paytm’s rationale,

for offering a sweet deal to PVR, could be (1) high dependence on PVR, (2) monetization

potential (besides movie tickets) of PVR’s consumer base, (3) higher F&B sales through their

platform along with movie tickets booking. We note that PVR has a separate deal with these

platforms for F&B sales whereby PVR pays some commission on F&B sales that happen through

third-party platforms. As per this deal, PVR cannot sign up with any other third-party platform

but can continue ticket booking on its own website/app.

Implications: 5-7% EBITDA upgrade and reduction in net debt

While we were aware of the impending deal renewals with BMS and Paytm and we had built

some upside, we are positively surprised by the quantum. We increase our aggregate

convenience fee forecast for FY2019-21E by 45% to `3.9 bn (upside of `1.2 bn). Sample this,

PVR earned about `1.3 bn as convenience fees from third-party platforms over FY2015-18 and

it now has minimum guarantee of about `3.6 bn over the next three years from these two

platforms. In addition, we expect PVR to earn convenience fee of about `100 mn/year from its

own website/app. This deal renewal results in 5-7% upside to our FY2020E EBITDA and

reduction in net debt (`8 bn as at March 2018 end) thanks to an upfront advance of `3.5 bn.

We raise EBITDA estimates by 5-7%, TP to `1,360 ( from `1,210); Upgrade to BUY from ADD

That PVR could pull off such a sweet deal is a reflection of the scale and quality of its consumer

base. We are happy that the management has given due weightage to consumer goodwill and

swiftly rolled out price interventions to improve the price-value equation of its F&B offerings

(see Exhibit 5). We value PVR at 11X June 2020E EV/EBITDA, factoring in uncertainty in the F&B

business in view of pending PIL/government policy even as we believe that the outcome will be

benign relative to concerns.

PVR (PVRL) Media

A masterstroke. PVR has renewed its deals with bookmyshow (BMS) and Paytm for

three years for an aggregate amount of ~`4.1 bn (2.5-3X that earned over FY2015-18).

We raise our aggregate convenience fee forecast for FY2019-21E by 45% to `3.9 bn; it

results in 5-7% EBITDA upgrade. We like PVR’s swift rollout of offers to improve the

price-value equation of its F&B offerings. We value PVR at 11X June 2020E EV/EBITDA,

factoring in uncertainty in the F&B business even as we believe that the outcome will be

benign relative to concerns. Upgrade to BUY from ADD, revise TP to `1,360 (from

`1,210 earlier).

BUY

AUGUST 06, 2018

CHANGE IN RECO.


Price (`): 1,102

Target price (`): 1,360

BSE-30: 37,165

Jaykumar Doshi

PVR







MFs 9.9 EBITDA (Rs bn) 4.2 5.0 6.0


Absolute (19.4) (21.8) (20.0) ROE (%) 12.3 15.3 17.6



1,568-1,063

51.5

PVR Media


Exhibit 1: Revised earnings estimates of PVR, FY2019E-21E (Rs mn)


Exhibit: PVR: Online ticket bookings as % of total tickets (admits)


2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E

Ticket sales (net) 14,655 17,274 20,108 14,655 17,274 20,108 - - -

F&B sales 7,153 8,351 10,088 7,153 8,351 10,088 - - -

Ad revenues 3,527 4,197 4,885 3,527 4,197 4,885 - - -

Convenience fees 1,044 1,370 1,481 767 905 1,051 36.1 51.5 40.9

Other operating income 1,310 1,376 1,445 1,310 1,376 1,445 0.0 (0.0) (0.0)

Total revenues 27,689 32,568 38,006 27,413 32,103 37,576 1.0 1.5 1.1

Film hire charges (6,350) (7,502) (8,753) (6,350) (7,502) (8,753) - - -

F&B consumption (1,913) (2,297) (2,724) (1,913) (2,297) (2,724) - - -

Employee costs (2,958) (3,412) (3,928) (2,958) (3,412) (3,928) - - -

Rent (4,918) (5,815) (6,821) (4,918) (5,815) (6,821) - - -

Other operating costs (6,529) (7,504) (8,583) (6,473) (7,414) (8,499) 0.9 1.2 1.0

Total operating costs (22,669) (26,529) (30,808) (22,613) (26,440) (30,724) 0.3 0.3 0.3

EBITDA 5,020 6,039 7,198 4,800 5,663 6,852 4.6 6.6 5.0

PAT 1,770 2,342 2,866 1,522 1,943 2,566 16.3 20.5 11.7

EPS (Rs/share) 37.9 50.2 61.4 32.6 41.6 55.0 16.3 20.5 11.7

Key assumptions

EBITDA margin (%) 18.1 18.5 18.9 17.5 17.6 18.2

Screen additions (#) 85 85 85 85 85 85 - - -

Footfalls (mn) 84 93 102 84 93 102 - - -

ATP gross (Rs) 224 237 251 224 237 251 - - -

SPH gross (Rs) 90 94 104 90 94 104 - - -

Ad revenue growth (%) 18 19 16 18 19 16

Occupancy (%) 32.0 32.0 32.0 32.0 32.0 32.0

F&B revenue growth (%) 14.9 16.8 20.8 14.9 16.8 20.8

F&B gross margin (%) 73.3 72.5 73.0 73.3 72.5 73.0

F&B gross profit (Rs mn) 5,239 6,055 7,364 5,239 6,055 7,364 - - -

Change (%)Revised Previous

19.0

26.0

34.0

45.0

51.0

58.0

64.0

70.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

0.0

15.0

30.0

45.0

60.0

75.0

90.0

105.0

120.0

2014 2015 2016 2017 2018 2019E 2020E 2021E

Total admits (LHS, mn) Online admits as % of total admits (RHS)

Media PVR


Exhibit: PVR: Online ticket bookings as % of total tickets (admits)


Exhibit 5: PVR has rolled out attractive deals to improve price-value equation of its F&B offerings


Notes:

(1) We have used our estimate of footfalls over FY2019-21E and assumed

(a) increase in online bookings to 70% of total tickets by FY2021E from 51% in FY2018

(b) about 5-10% of online bookings from PVR's own website/app

(c) convenience fee of about Rs3.6 bn from BMS and Paytm

1213 13

16

14

2122 22

0.0

5.0

10.0

15.0

20.0

25.0

2014 2015 2016 2017 2018 2019E 2020E 2021E

Convenience fee/ticket from 3rd party platforms (Rs)

PVR Media


Exhibit 6: Condensed consolidated financials for PVR, March fiscal year-ends (Rs mn), 2015-2021E


2015 2016 2017 2018 2019E 2020E 2021E

Profit model

Revenues 14,813 18,688 21,628 23,535 27,689 32,568 38,006

EBITDA 2,044 3,306 3,570 4,212 5,020 6,039 7,198

Other income 46 283 189 119 150 205 250

Depreciation 1,168 1,252 1,384 1,537 1,798 2,111 2,426

Interest expense 783 839 806 837 690 585 680

Pretax profits 118 1,432 1,528 1,952 2,681 3,548 4,342

Tax 8 232 570 704 912 1,206 1,476

PAT before minority interest 110 1,200 958 1,247 1,770 2,342 2,866

Minority interest (11) 5 1 0 - - -

PAT 121 1,194 958 1,247 1,770 2,342 2,866

Diluted earnings per share (Rs) 2.9 25.6 20.5 26.7 37.9 50.2 61.4

Balance sheet

Total equity 4,092 8,695 9,650 10,754 12,310 14,370 16,891

Deferred taxation liability 11 93 9 6 6 6 6

Total borrowings 7,470 6,623 8,196 8,305 5,855 7,155 7,955

Minority interest 383 401 405 8 8 8 8

Current liabilities 2,309 3,276 3,925 4,316 5,063 5,925 6,881


Cash and cash equivalents 261 2,674 309 339 455 229 254

Other current assets 4,605 5,763 5,363 5,880 3,382 5,659 8,038

Tangible fixed assets 7,523 8,824 10,447 11,270 13,527 15,720 17,614

Goodwill and Intangibles 1,273 1,262 4,640 4,629 4,606 4,585 4,564

CWIP 611 570 1,056 1,017 1,017 1,017 1,017

Total assets 14,288 19,108 22,257 23,488 23,342 27,564 31,841

Free cash flow

Operating cash flow, excl. working capital 2,170 3,169 3,442 3,502 4,108 4,833 5,722

Working capital changes (617) 204 (246) (127) 3,245 (1,415) (1,424)

Interest expense (net) (759) 837 (617) (718) (540) (380) (430)


Free cash flow (900) 1,877 80 348 2,780 (1,245) (431)

Key ratios and assumptions

Footfalls (mn) 59.1 69.6 75.2 76.1 83.5 92.9 102.0

Average Ticket Price (ATP) (Rs) 177 188 196 210 224 237 251

F&B spends per head (SPH) (Rs) 66 72 81 89 90 94 104

Ad revenue growth (%) 17.2 21.1 17.3 18.7 18.0 19.0 16.4

Screens (#) 464 516 579 625 710 795 880

EBITDA margin (%) 13.8 17.7 16.5 17.9 18.1 18.5 18.9

Net debt/equity (X) 1.8 0.5 0.8 0.7 0.4 0.5 0.5

RoAE (%) 3.0 18.7 10.4 12.2 15.3 17.6 18.3

RoACE (%) 7.8 14.4 9.1 9.4 11.7 13.3 13.7


Retail continues to shine; corporate book reports high losses

A broadly unchanged trend has been noticed since FY2017: (1) retail continues to have another

strong year, delivering 33% yoy earnings growth; retail fees are >70% of the total fee income

of the bank, (2) losses increased in the corporate banking business, led by high provisions for

bad loans and weak NII growth, (3) capital market-related subsidiaries had another strong year

while housing finance business reported sharp decline in overall performance and

(4) international subsidiaries were mixed with Canada moving back to profits while UK reported

another year of loss led by high provisions for bad loans. The bank has made higher provisions

for its India exposure.

Asset quality concerns to significantly abate this year; early warning signals at lowest levels

There is evidence that FY2019 can be a year in which ICICI Bank gives investors greater comfort

on its impaired loan portfolio. 20 F filings have given the following insights: (1) sharp decline in

the ‘below investment grade’ portfolio (Exhibit 17), (2) higher share of this book is now

represented by net NPLs as compared to ‘watchlist’ in earlier years, (3) early warning indicators

suggest that the overall portfolio of 31-60 days (0.9% of loans from a peak of 5.7% in FY2015)

and 61-90 days (0.2% of loans) and beyond is at its lowest point since we have been able to

monitor this portfolio (Exhibit 18) and (4) the bank has been growing its investment grade

portfolio at a relatively healthy pace and the share of working capital loans has increased to

45% of corporate loans as compared to ~20% in FY2012-13 (Exhibit 7). We believe

incremental discussions would move towards coverage ratio and the path to steady RoEs from

here.

Maintain BUY; TP unchanged at `400

We maintain BUY rating with target price unchanged at `400. We value the bank at 1.7X

adjusted book and ~11X March 2020E EPS for RoEs that can move back to ~13-15% in the

near term. The management has proffered an unchanged guidance of ~15% RoE

(consolidated) for 1QFY21 and net NPLs at 1.5% of loans including normalized credit costs. The

strength of the liability franchise, granular and low-risk asset mix and gradual improvement in

recovery of bad loans would aid multiple expansions. We retain our view of ICICI Bank and SBI

as preferred choices to ride the corporate-recovery cycle.

ICICI Bank (ICICIBC) Banks

Getting better and better. Our readings of the annual report and 20-F filing reaffirm

our view that despite the headline disappointment on earnings, slower loan growth and

high slippages from drilldown list, there is a lot in it to retain our positive view. We like

the shift towards low-risk loans (retail and corporate), healthy mobilization of CASA

deposits, sharp decline in unrecognized impaired loans and most importantly, strong

improvement in early warning signals. Maintain BUY; our top pick (TP unchanged).

BUY

AUGUST 06, 2018

UPDATE


Price (`): 305


BSE-30: 37,556

QUICK NUMBERS

Retail delivered

~30% earnings

growth, losses in

corporate loans

increased further

Loans that are

current move back

to 98.5% in FY2018

from a low 93.3% in

FY2015

Maintain BUY (TP

unchanged)

M B Mahesh CFA

Nischint Chawathe

Dipanjan Ghosh

ICICI Bank



Market Cap. (Rs bn) EPS growth (%) (31.1) (19.6) 209.1


Promoters 0.0 NII (Rs bn) 230.3 252.9 290.6


MFs 17.2 BVPS 130.1 147.6 176.0

Price performance (%) 1M 3M 12M P/B (X) 2.3 2.1 1.7

Absolute 11.8 8.2 3.1 ROE (%) 6.6 5.1 14.5

Rel. to BSE-30 5.3 1.1 (11.5) Div. Yield (%) 0.5 0.6 1.7


366-255

1,961.8

ICICI Bank Banks


Exhibit 1: The lending business has been the biggest drag to profitability for the group Contribution of profits from individual business to consolidated profits, March fiscal year-ends, 2006-18 (%)

Notes: (A) Intra group adjustments have not been fully factored and hence, would be not be exactly at 100%


Exhibit 2: Improvement in earnings going ahead Revenue and earnings growth, March fiscal year-ends, 2008-20E (%)


Exhibit 3: RoE improvement in medium-term RoE (core), March fiscal year-ends, 2008-20E (%)


2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Lending business

ICICI standalone adjusted 22 27 30 34 37 47 57 74 85 97 82 84 56

ICICI Bank UK 1 2 2 0 2 2 1 1 2 1 0 (1) (2)

ICICI Bank Canada (0) 0 1 1 1 2 2 3 3 2 1 (2) 2

ICICI Bank Eurasia 0 (0) 0 (0) 1 0 0 0 0

ICICI Home Finance Company 0 0 1 1 2 2 3 2 2 2 2 2 1

Total lending business 23 29 33 37 42 53 63 80 92 102 85 83 57

Insurance

ICICI Prudential Life (2) (7) (14) (8) 3 8 14 15 16 16 17 17 16

ICICI Lombard General Insurance 1 1 1 0 1 (1) (4) 3 5 5 5 7 9

Total insurance business (1) (6) (13) (8) 4 7 10 18 21 22 22 24 25

Capital Markets

ICICI Securities 0 1 2 0 1 1 1 1 1 2 2 3 6

ICICI Securities Primary Dealership 1 1 1 3 1 1 1 1 1 2 2 4 1

ICICI Prudentual Asset Management 0 0 1 0 1 1 1 1 2 2 3 5 6

ICICI Venture Funds Management 1 1 1 1 1 1 1 0 0 0 (0) 0 0

Total captital market 3 3 5 4 4 3 3 3 4 7 7 12 13

Conslidated profits 24 28 34 36 47 61 76 96 110 122 102 102 77

Consolidated net worth 226 243 451 471 513 553 613 688 764 847 941 1,046 1,106

Consolidated assets 3,943 4,856 4,827 4,983 5,338 6,042 6,748 7,475 8,261 9,188 9,860 11,243

34

(10)

7 28 26 29

18 15

(14)

1

(12)

60

18

20

(1)

(2)

0

16

22 21

16 17

13

(5)

5

13

(20)

-

20

40

60

80

(7)

-

7

14

21

28

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018E

2019E

2020E

Revenue (RHS) Earnings (LHS)

10 9 10

12 13

15 15 15

11 10

8

12 13

-

3

6

10

13

16

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018E

2019E

2020E

Banks ICICI Bank


Exhibit 4: Retail and treasury contributing to the bulk of earnings while high provisions are denting corporate book for the bank Segmental break-up of income, growth and contribution, March fiscal year-ends, 2011-18

Notes:

(A) ICICI Bank has stopped reporting the operating expenses and provisions for corporate banking and treasury/others since FY2012. We have

calculated the provisions assuming that the depreciation/other provisions are charged to treasury/others and allocated the balance to corporate

banking. We have not got the non-interest income for corporate banking in FY2016. We have assumed it to be `1 bn lower than FY2017

(B) Operating expenses would be the balancing figure once the above assumptions are made.

(C) We have assumed that non-interest income for treasury and others includes the dividends from subsidiaries and investments gains

(D) Impact of transfer pricing and cost allocation across business segments can have significant impact on earnings. Also, any revisions to the

formula across years could make them less significant from an analysis perspective


Income (Rs bn) Growth (%, yoy) Proportion (%)

2011 2012 2013 2014 2015 2016 2017 2018 2012 2013 2014 2015 2016 2017 2018 2011 2012 2013 2014 2015 2016 2017 2018

Retail banking

Net interest income 33 38 42 58 71 92 113 134 14.9 10.3 37.2 23.7 28.7 23.2 18.7 36.8 35.5 30.4 35.0 37.5 43.3 52.1 58.4

Non-interest income 21 26 30 36 43 49 58 66 21.7 18.1 19.0 18.1 14.6 17.4 14.2 31.8 34.3 36.4 34.7 35.1 32.0 29.5 37.7

Third party products 3 4 5 7 9 10 13 15 44.8 29.3 27.4 40.8 8.1 29.6 13.2 4.2 5.4 6.3 6.4 7.7 6.7 6.8 8.6

Total revenues 54 64 73 94 114 141 171 200 17.6 13.5 29.6 21.6 23.4 21.2 17.2 34.7 35.0 32.6 34.9 36.6 38.6 41.4 49.5

Total expenses 46 57 63 77 86 98 112 121 23.7 11.8 21.2 12.7 13.6 14.6 8.1 69.0 72.0 70.1 74.3 75.0 77.2 76.1 77.3

Provisions 14 2 (0) (1) 1 4 5 7 (86.4) (112.8) 291.7 NM 486.8 17.5 58.8 60.4 11.9 (1.3) (3.6) 1.8 3.4 3.1 4.3

PBT (5) 6 10 18 27 39 54 71 (207.0) 73.6 91.6 48.9 43.1 38.1 32.6 (7.6) 6.2 8.4 13.1 17.1 32.0 47.7 96.1

Corporate banking

Net interest income 34 49 68 75 84 84 66 61 46.4 38.7 10.1 12.0 (1.0) (21.4) (7.2) 37.4 46.0 49.4 45.8 44.4 39.4 30.2 26.5

Non-interest income 40 41 38 41 39 38 35 36 2.9 (6.8) 6.1 (3.8) (2.6) (7.1) 1.7 59.9 54.7 45.8 38.9 32.0 24.8 18.1 20.6

Total revenues 74 90 107 116 123 122 101 97 22.8 18.0 8.7 6.5 (1.5) (16.9) (4.1) 47.0 49.6 48.0 43.1 39.6 33.3 24.5 24.0

Total expenses 18 20 25 24 28 26 32 33 11.1 22.7 (2.9) 15.4 (6.9) 25.0 1.9 27.5 25.8 27.6 23.4 24.2 20.4 22.0 21.0

Provisions 6 8 16 26 33 108 143 147 27.0 94.1 66.1 28.7 223.8 32.2 2.6 27.7 50.9 86.7 98.8 88.3 92.7 94.0 84.8

PBT 49 62 66 66 62 (12) (74) (83) 26.7 6.6 (0.5) (5.5) NM NM NM 72.5 70.5 58.1 47.2 39.1 (10.2) (65.9) (111.4)

Treasury and others

Net interest income 23 20 28 32 35 37 38 35 (14.7) 41.8 12.5 9.1 6.4 4.6 (9.3) 25.8 18.5 20.3 19.2 18.1 17.3 17.7 15.1

Non-interest income 5 8 15 27 40 66 102 73 51.0 79.4 85.6 45.4 65.6 54.4 (29.0) 8.2 11.0 17.8 26.4 32.8 43.2 52.4 41.7

Dividend from subs 4 7 9 13 16 15 14 12 79.0 23.8 42.1 20.3 (1.5) (7.6) (14.4) 6.2 9.8 10.9 12.4 12.8 10.0 7.3 7.0

Investment gains (2) (1) 4 8 15 38 86 63 (3.7) (1.0) 5.2 7.3 12.7 24.8 44.2 36.2

Others 4 2 1 7 9 13 2 (3) 5.7 2.2 1.6 6.6 7.3 8.4 0.9 (1.5)

Total revenues 29 28 43 59 74 103 141 107 (2.2) 52.9 37.7 26.0 38.2 36.6 (23.6) 18.3 15.4 19.3 22.0 23.9 28.2 34.1 26.5

Total expenses 2 2 2 2 1 2 (1) (9) (23.8) 20.4 15.1 (64.3) 128.9 (165.9) 603.1 3.4 2.2 2.3 2.3 0.7 1.5 (0.9) (5.7)

Provisions 3 6 3 1 4 6 9 31

PBT 24 20 38 56 70 95 133 86 (13.8) 86.8 45.2 25.9 36.5 39.7 (35.7) 35.1 23.2 33.5 39.7 43.9 78.2 118.2 115.3

Total

Net interest income 90 107 139 165 190 212 217 230 19.0 29.2 18.8 15.6 11.5 2.4 5.9

Non-interest income 66 75 83 104 122 153 195 174 12.9 11.2 24.9 16.8 25.8 27.3 (10.7)

- Bancassurance 3 4 5 7 9 10 13 15 44.8 29.3 27.4 40.8 8.1 29.6 13.2

Total revenues 157 182 222 269 312 365 412 404 16.4 21.8 21.1 16.0 17.1 12.8 (1.9)

Total expenses 66 79 90 103 115 127 148 157 18.6 14.8 14.4 11.5 10.3 16.3 6.4

Provisions 23 16 18 26 38 117 152 173 (30.8) 13.9 45.7 44.0 208.5 30.3 13.8

PBT 68 88 114 140 159 122 113 74 30.2 29.5 22.6 14.1 (23.5) (7.5) (34.1)

ICICI Bank Banks


LOAN GROWTH – RETAIL SHIFT CONTINUES; STRESS SECTORS DECLINE FURTHER

The transition towards low-risk and granular assets which began in FY2013 has continued into FY2018.

Overall retail loans contribute ~55% of the loan book. On the other hand, we are seeing greater focus on

building working capital loans in the corporate segment as well. Further, the de-risking of the corporate loan

portfolio is underway as the share of stressed sectors has started to decline at a faster pace in FY2018.

ICICI Bank’s loan growth was closer to industry average at ~10% yoy in FY2018 though

lower than most private banks posted stronger growth rates. ICICI Bank has been

attempting to rebalance its portfolio given the high share of lending in the riskier segment in

earlier years. The bank is trying to shift the composition of assets with a greater share of

retail loans and less riskier corporate loan portfolio. The shift to the retail segment started

sometime in FY2013 and the book has been growing quite strongly at ~20% CAGR. While

the initial years of loan growth in the retail segment was led by the housing sector, we are

now seeing a shift in lending towards unsecured loan portfolio. However, the contribution

from this segment is quite low at 6% of loans while the same for HDFC Bank is ~15%.

SME loans grew 15% yoy while the domestic corporate loan portfolio grew 5% yoy. Foreign

currency loans growth has started to decline. After many years, we have started to see the

exposure in some of the stressed sectors declining, albeit at a much faster scale. Loans to the

stress sectors like infrastructure, iron and steel and the power sector declined 110-120 bps

yoy.

Exhibit 5: Strong growth continues in the retail segment while the bank is gradually lowering its exposure in its stressed sectors Break-up of loan portfolio, March fiscal year-ends, 2008-18 (%)


Lending in overseas branches declines on dollar basis

Foreign currency loans were flat yoy on rupee basis but the dollar exposure has declined 6%

yoy. We note that NIM in the international business improved in FY2015 as the bank took

opportunity to deploy excess liquidity and a cautious approach to build this business. Yield in

the portfolio has improved but the bank has reported a fair bit of impaired loans in FY2016.

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Retail loans 57.1 48.7 43.7 38.8 39.3 37.7 40.8 43.5 47.3 50.6 54.7

Home loans 28.9 25.8 25.3 24.1 18.7 19.4 20.4 22.4 24.4 26.6 28.0

Auto loans 7.6 5.9 4.5 3.8 3.6 3.9 4.5 4.8 5.0 5.3 5.5

Commercial business/SME 8.9 7.4 7.3 6.8 6.9 5.1 3.6 2.7 2.8 3.1 3.2

Two wheeler loans 1.3 0.8 0.2 0.1 — — — — — — —

Personal loans 6.3 4.9 3.1 1.8 1.1 1.1 1.4 1.8 2.3 3.0 3.9

Credit cards 4.2 4.0 3.2 2.2 1.8 1.2 1.0 1.0 1.2 1.6 1.8

Others 7.2 7.0 10.0 10.8 11.6 11.0 12.2

Loans against FCNR deposits — — — — — — 1.9 1.7 1.5 1.4 1.3

Non retail loans 42.9 51.3 56.3 61.2 60.7 62.3 59.2 56.5 52.7 49.4 45.3

Power 2.5 2.4 3.0 4.4 5.4 6.2 6.4 6.2 6.1 6.3 5.1

Infrastructure ex power 2.2 4.2 5.5 5.8 6.9 7.3 7.3 6.1 6.0 4.7 3.8

Services - Non finance 6.3 7.5 7.2 7.7 7.4 6.8 6.3 5.8 5.1 3.7 3.2

Iron and steel 4.1 4.4 4.6 4.2 4.7 5.4 5.4 5.5 5.7 4.9 3.8

Services - Finance 2.9 3.5 3.4 7.2 6.0 5.3 3.5 3.2 3.2 5.7 6.4

Wholesale/retail trade 1.1 1.2 2.4 2.3 1.9 1.9 1.9 2.9 2.8 2.4 2.3

Crude/refining 2.5 6.4 7.1 6.3 2.7 3.0 3.0 2.9 1.7 1.4 2.5

Construction 1.3 1.1 1.0 1.6 2.2 2.4 2.4 2.5 2.3 2.0 2.2

Mining — — 0.2 1.8 3.2 2.7 1.8 1.8 1.6 2.2 2.0

Electronics and engineering 0.9 1.6 1.7 2.0 2.2 2.2 2.3 1.7 1.5 1.5 1.5

Food and beverages 2.8 2.4 3.3 3.1 2.6 2.3 2.1 1.5 1.5 1.5 1.1

Cement — — — — — — — — 1.9 1.6 1.2

Other industries 13.6 13.5 13.4 12.4 14.2 15.5 16.8 16.1 13.3 11.5 10.3

Banks ICICI Bank


Exhibit 6: Foreign currency loans declined since FY2016 Foreign currency loans, March fiscal year-ends, 2010-18


Share of working capital consistently on the rise

In the two exhibits below we are using the contribution from 20 F filings to understand the

change that the bank is undertaking today in the corporate sector. As we have been

highlighting in the past few years, the change is already evident in the shift in loan portfolio

towards low risk assets. The bank has one of the best low cost deposits which allow the

bank to focus more on such low risk products. In the medium term, it is quite likely that the

share of working capital loans keeps increasing as a share of overall corporate lending.

Exhibit 7: Share of working capital lending has been rising Break-up of term and working capital loans in the corporate sector, March fiscal year-ends, 2010-18 (%)

Source: Company 20F filings, Kotak Institutional Equities

Exhibit 8: Working capital loans is growing at ~20% CAGR Growth in working capital and term loans in the corporate sector, March fiscal year-ends, 2011-18 (%)


2010 2011 2012 2013 2014 2015 2016 2017 2018

Loans from overseas branches (US$ bn) 10.1 12.4 13.6 13.5 15.0 15.1 14.2 NA NA

Growth YoY (%) (5.6) 22.8 9.7 (0.7) 11.1 0.7 (6.0)

Loans from overseas branches (Rs bn) 453 552 694 734 897 941 938 750 644

Growth YoY (%) (16.6) 21.8 25.8 5.7 22.3 4.9 (0.3) (20.1) (14.1)

Currency impact (%) (11.0) (1.0) 16.1 6.4 11.2 4.3 5.6

79 80 81 78 77 73 7265

57

21 20 19 22 23 27 2835

43

-

20.0

40.0

60.0

80.0

100.0

2010 2011 2012 2013 2014 2015 2016 2017 2018

Term loans Working capital

-20

-10

0

10

20

30

40

2011 2012 2013 2014 2015 2016 2017 2018

Term loans Working capital

ICICI Bank Banks


Exhibit 9: Share of investment grade portfolio on the rise for the bank Break-up of the overall loan book, March fiscal year-ends, 2011-18 (%)


Exhibit 10: The investment grade portfolio is growing at a much faster pace Growth in loan book in each rating profile, March fiscal year-ends, 2012-18 (%)


Growth in PSL loans slower; rural loans grew 25% yoy

Growth in PSL loans was on the lower side at 7% yoy broadly mirroring the overall loan

growth for the bank. Importantly, the bank’s rural portfolio (8% of loans) grew 15% yoy.

Note that we have revised FY2015 data to reflect the change in definition in PSL loans. The

PSL loans contributed to ~40% of the overall loan portfolio for the bank. The bank’s

investment in RIDF bonds was marginally higher but it is likely that the calls were higher for

the year. From an NIM perspective, the drag was lower given the better yields received in

this book. From a sub-segment perspective, ICICI Bank has achieved 15% of loans in

agriculture. Importantly, the bank has been able to achieve ~65% of its requirement under

weaker sections.

29 25 25 28 30 3238 42

2829 24 23 20 21

1920

29 34 37 36 35 2829

28

9 10 11 11 12 19 14 9

0

20

40

60

80

100

2011 2012 2013 2014 2015 2016 2017 2018

AAA AA+ AA AA- 1 2A-C A+ A A- 3 A-C BBB+ BBB and BBB- 4A-CBelow investment grade Unrated

2012 2013 2014 2015 2016 2017 2018

Investment grade 16.0 12.5 17.3 11.7 5.8 10.5 16.1

AAA AA+ AA AA- 1 2A-C 0.4 13.0 30.4 22.2 19.3 23.1 22.5

A+ A A- 3 A-C 14.8 (3.6) 9.0 1.4 15.8 (6.0) 18.0

BBB+ BBB and BBB- 4A-C 32.7 25.8 13.8 10.0 (11.7) 8.2 6.3

Below investment grade 27.6 23.8 18.6 23.1 71.3 (21.5) (28.2)

Unrated (46.3) (17.6) 13.1 26.1 (60.6) (15.8) 34.5

Net loans 14.1 13.0 17.4 13.2 12.6 4.4 10.0

Banks ICICI Bank


Exhibit 11: The bank has not been able to achieve some of the sub-segment targets PSL loans and investments, March fiscal year-ends, 2010-18 (` bn)

Notes: (A) With effect from fiscal 2013, the targets on PSL for ICICI Bank was at par with other banks (B) PSL loan has undergone a change in definition. FY2015-16 are not fully comparable but not for earlier years. Direct agriculture has been replaced with small and marginal farmers.


Share of off-balance sheet items stable

Overall contingent liabilities to loans stood at 2.5X of loans, which is sharp decline from

FY2010-11 levels of 4-4.3X of loans. There has been an increase in the past few years but

most of the increase is on account derivative contracts rather than riskier off balance sheet

items. The high credit risk item like guarantees and acceptances has been stable over the

past 4-5 years. Moderate corporate activity and a far more cautious approach to lending in

this space by the bank is leading to this performance.

Exhibit 12: Share of contingent liabilities has declined to 2.5X of loans from 4X in FY2010-11 Contingent liabilities and its composition, March fiscal year-ends, 2010-18


2010 2011 2012 2013 2014 2015 2016 2017 2018

PSL loans 540 534 593 598 646 1,130 1,312 1,399 1,501

Growth yoy (%) (13.0) (1.1) 11.0 0.9 8.0 75.1 16.1 6.7 7.2

PSL (% of opening loans) 32.9 39.3 36.8 32.4 29.8 45.4 44.7 41.0 38.6

Agriculture 176 192 251 333 546 547 588

(% of ANBC) 10.0 10.8 12.1 17.0 15.6 14.8

Direct agriculture 146 209 126 142 171

(% of requirement) 46.4 56.1 55.7 51.3 53.8

Weaker section 34 42 49 63 95 204 221 247

(% of requirement) 33.0 39.0 25.2 27.0 34.5 63.0 63.0 62.0

Micro enterprises 218 241 266

(% of requirement) 97.1 92.0 89.3

Total loans (domestic) 1,359 1,612 1,843 2,169 2,490 2,934 3,415 3,892 4,480

RIDF and related investments 101 151 181 202 248 285 281 241 269

2010 2011 2012 2013 2014 2015 2016 2017 2018

Claims against the bank, not acknowledged as debts 34 17 29 36 42 40 35 47 63

Liability for partly paid investments 0 0 0 0 0 0 0 0 0

Notional principal of outstanding forward exchnage contracts 1,661 2,469 3,560 2,839 2,691 2,899 3,568 4,272 4,327

Guarantees given on behalf of constituents 618 826 955 944 1,022 993 1,005 930 945

Acceptances, endorsements and obligations 321 393 569 621 506 497 473 478 410

Notional principal of currency swaps 525 561 616 565 594 514 460 411 369

Notional principal of interest rate swaps and futures, currency options 4,012 4,904 3,362 2,856 2,919 3,538 3,414 4,131 6,593

Others 100 61 63 38 40 39 53 41 138

Total contigent liabilties (Rs bn) 7,271 9,231 9,155 7,900 7,814 8,520 9,008 10,310 12,844

Total contigent liabilties (% of loans) 401 427 361 272 231 220 207 222 251

Break-up of contigent liabilities (%)

Claims against the bank, not acknowledged as debts 0 0 0 0 1 0 0 0 0

Liability for partly paid investments 0 0 0 0 0 0 0 0 0

Notional principal of outstanding forward exchange contracts 23 27 39 36 34 34 40 41 34

Guarantees given on behalf of constituents 9 9 10 12 13 12 11 9 7

Acceptances, endorsements and obligations 4 4 6 8 6 6 5 5 3

Notional principal of currency swaps 7 6 7 7 8 6 5 4 3

Notional principal of interest rate swaps/futures and currency options 55 53 37 36 37 42 38 40 51

Others 1 1 1 0 1 0 1 0 1

ICICI Bank Banks


IMPAIRMENT: MORE ROOM FOR POSITIVE SURPRISE FROM HERE

We believe that ICICI Bank is all set to enter into a stage for normalized business environment having gone

through a decade of too many mistakes led by a few factors: (1) CASA share is now at its best among peers,

(2) early warning signals across retail and corporate segment is back to trend levels and (3) outstanding share

of “below investment grade” loans largely explained by net NPLs. Investors are likely to take some time to

adjust to this new normal scenario of ICICI Bank having been disappointed for the past decade.

We believe that we are soon reaching to a point where investors would start to recognised

that the peak stress levels is behind and the bank is quite quickly to head towards

normalized levels of business. There have been significant additions to bad loans from three

major segments all of which has a very low level of outstanding loans currently: (1) 50% of

the slippages in FY2018 has come from the drill down list or non-fund based devolvement,

(2) 45% of the slippages has come from the revocation of the various drill down schemes

such as SDR, S4A and 5:25. Contribution to slippages from the restructured loan portfolio

has come off sharply as the bulk of the book was classified as NPL in FY2017. Retail NPL

appears to be broadly comfortable. On the reduction of NPLs, we have started to see

acceleration in resolution cycle for the bank largely led by one large upgrade in the cement

sector. Loan-loss provisions have been higher as most of the accounts that are slipping or

have slipped earlier are moving towards the older buckets implying that the provisions

would be higher as per RBI policy on provisions for bad loans.

Exhibit 13: Slippages have been uncomfortably high over the past few years Movement and break-up of NPLs (gross) and contribution of top 4 NPLs, March fiscal year-ends, 2010-18 (%)

Notes:

(a) Normalized slippages = Normalized slippages/(opening loans-below investment grade-opening restructured loans)


2010 2011 2012 2013 2014 2015 2016 2017 2018 1QFY19

Movement of gross NPLs (% of opening loans)

Gross NPL 4.3 4.9 4.3 3.5 3.2 3.0 3.7 5.7 8.5 9.9

Slippages 2.9 1.6 1.4 1.4 1.6 2.4 4.3 7.7 6.2 3.0

Restructured loans 0.2 0.3 1.3 1.4 1.0 0.5 0.1

(% of FY2011 ) 6.6 9.0 31.0 51.5 71.1 81.5 88.3

Drill down/non-fund and others 4.5 3.0 1.3

(% of opening book) 44.2 50.6 30.8

Normal slippages 1.2 1.3 1.0 2.9 2.2 2.7 1.6

Normal slippages (%) 1.3 1.3 1.1 3.0 2.5 2.9 1.6

Reductions 3.0 1.3 1.6 1.4 1.3 1.0 1.4 4.0 3.8 3.3

Upgradations 0.3 0.4 0.3 0.3 0.1 0.2 0.3 0.2 0.8 1.5

Recoveries 1.1 0.8 0.8 0.5 0.4 0.3 0.4 1.0 1.1

Write-off 1.6 0.1 0.5 0.6 0.8 0.5 0.8 2.8 1.8 1.8

Closing gross NPL (% of closing loans) 4.9 4.3 3.5 3.2 3.0 3.7 5.7 8.5 9.5 9.7

Break-up of gross NPLs (%)

Sub-standard 52.9 17.9 15.3 19.5 21.3 17.4 15.6 34.4 14.2 16.4

Doubtful 42.5 73.7 77.4 70.7 59.7 66.7 74.7 61.5 84.5 80.8

Loss 4.5 8.4 8.2 10.2 19.4 16.9 11.6 5.1 2.8 2.8

Coverage ratio (%)

Sub-standard 37.4 30.0 21.2 23.1 20.1 25.7 22.6 23.0 26.2 26.2

Doubtful 76.1 80.9 86.2 84.0 72.7 55.2 48.3 46.4 58.4 58.4

Doubtful 1 72.6 67.9 69.9 60.5 58.8 43.9 35.7 34.2 43.9 43.9

Doubtful 2 62.2 79.7 88.5 90.0 67.5 60.2 53.8 58.3 62.4 62.4

Doubtful 3 97.6 98.9 96.2 98.7 96.7 98.9 97.4 72.9 97.1 70.9

Loss 99.6 99.8 99.8 99.8 97.5 99.5 100.0 100.0 100.0 100.0

Coverage ratio 55.5 72.8 74.4 72.7 63.6 55.6 49.9 41.1 54.3 54.3

Contribution of top 4 NPLs

Amount (Rs mn) 7,200 6,508 5,657 12,511 17,487 62,016 108,419 149,247 154,385 —

(% of NPLs) 7.6 6.5 6.0 13.0 16.6 41.1 41.3 35.4 29.0 —

Banks ICICI Bank


The exhibit below shows the break-up of NPLs across sectors. The retail portfolio continues

to do well with negligible NPLs but the corporate portfolio has seen quite a bit of

deterioration in FY2018. A large share of the deterioration has come from the infrastructure,

mining and construction portfolio along with one large NPL in the electronics and

engineering segment. On the power sector, as per the last available release with us for

1QFY19, the bank has indicated that 40% of the book has been classified as impaired and

of the balance, 80% of the exposure (excluding a small portion of lending to state electricity

board) is rated A and above giving comfort on the book.

Exhibit 14: Gross NPLs ratio in the retail portfolio is lower than the corporate portfolio Break-up of NPL, March fiscal year-ends, 2014-2018


2014 2015 2016 2017 2018

Priority sector

Agriculture and allied 3.6 3.0 3.2 3.1 3.1

Industries 3.4 3.2 3.3 3.0 1.9

Construction 8.6 — — — —

Services 1.4 1.7 2.0 1.6 2.1

Transport operators 1.5 2.1 1.6 1.2 1.1

Wholesale trade — 3.4 2.6 2.0 2.6

Personal loans 1.3 1.3 1.2 1.2 1.0

Housing 1.4 1.2 1.0 0.9 1.0

Vehicle loan 1.1 1.2 1.6 1.7 1.0

Total 2.3 2.1 2.2 2.2 2.2

Non Priority sector

Agriculture and allied

Industries 3.0 4.8 10.3 19.8 25.5

Infrastructure 1.7 3.5 7.7 16.2 26.3

Metal and metal products 1.3 3.7 18.7 24.9 25.2

Services 3.8 5.9 7.2 7.3 6.8

Commercial real estate 2.1 1.9 2.1 2.9 3.8

Wholesale trade 4.9 3.4 4.4 5.5 4.4

Personal loans 3.0 1.3 1.0 0.9 1.3

Housing 0.8 0.6 0.6 0.6 0.8

Total 3.2 4.2 6.8 10.6 11.5

Total 3.0 3.8 5.8 8.7 9.9

ICICI Bank Banks


Exhibit 15: Most of the increase in gross NPLs in FY2018 was driven by power, mining and the construction sector Break up of exposure and gross NPLs across sectors, March fiscal year-ends, 2011-18 (%)


Restructured loans have been a disappointing experience

As indicated by the bank in FY2015-16, there was a drop in the number of cases for fresh

restructuring of loans. Outstanding share of restructured loans stood at ~0.3% of loans.

Overall it has been a fairly disappointing performance on the restructured loan portfolio.

While there is some degree of subjectivity on our analysis but if we take FY2011 as a base

case year to understand restructured loans and monitor the progress of this book since then,

we note that ~90% of the reduction of this book is mostly explained by slippages indicating

that the recovery or upgradation has been quite abysmal. Given that these loans have

completed more than two years of performance, probability of further slippages looks

unlikely and most importantly the size is insignificant to discuss this from hereon.

Exhibit 16: Share of slippages explained by the failure in restructuring of loan was ~8% in FY2018 Movement of restructured loans, March fiscal year-ends, 2013-18 (` mn)


Early warning indicators broadly suggests less concerns on the ‘below

investment grade’ exposure

Gross NPL Gross NPL - 20 F filings

2011 2012 2013 2014 2015 2016 2017 2018 2011 2012 2013 2014 2015 2016 2017 2018

Retail finance 7.4 6.3 5.2 2.9 1.9 1.8 1.5 1.6 8.3 6.7 4.6 2.6 1.8 1.7 1.4 1.6

Power 0.2 0.1 0.0 0.0 — 6.4 21.0 38.1 0.0 0.1 0.0 0.3 0.3 6.2 20.5 36.8

Mining — — 0.2 0.3 1.3 — 36.4 85.4 — 0.7 1.0 1.4 2.0 0.9 36.4 85.2

Iron and steel 0.2 0.8 1.2 1.3 4.4 25.4 34.1 33.7 0.1 0.7 1.1 1.9 4.2 24.1 34.3 34.8

Construction — — 3.2 3.8 7.4 21.2 31.7 50.7 1.4 1.5 3.0 5.4 12.9 20.7 35.7 52.6

Services - non finance 0.2 0.2 4.3 6.9 10.1 12.8 20.0 27.6 0.3 0.2 3.8 5.9 9.0 13.0 18.7 23.7

Services - finance 1.4 0.7 — 0.5 0.4 0.4 — — 0.8 0.8 0.0 0.4 0.4 0.3 — —

Other infrastructure — — 0.1 3.2 7.5 9.7 10.1 13.2 0.0 0.1 0.1 3.6 8.7 10.8 9.6 12.4

Crude petrol/others — — 0.0 0.0 0.0 0.0 0.7 13.8 0.0 3.6 2.6 2.1 2.0 2.8 4.4 15.2

Electronics and eng ing 1.5 4.2 3.9 2.7 11.6 4.5 4.3 19.0 0.6 2.8 4.1 3.5 10.8 4.6 3.3 15.1

Food and beverages 4.1 3.9 2.8 5.2 6.4 6.7 9.0 11.5 5.1 4.7 5.0 8.7 7.9 8.1 9.4 11.7

Wholesale/retail trade 7.4 4.2 7.5 6.2 3.9 4.7 6.1 4.9 5.1 2.1 5.9 4.9 3.5 4.0 5.3 4.2

Cement — — — 0.4 0.3 — 71.3 — 1.4 — — 0.4 0.3 — 70.7 —

Metal & products 6.9 2.3 2.4 1.5 1.9 1.1 0.0 — 2.9 2.0 2.1 1.4 1.5 1.8 1.1 2.0

Total 4.5 3.6 3.2 3.0 3.8 5.9 8.8 10.0 4.2 3.6 3.2 3.1 3.9 5.8 8.6 9.7

2013 2014 2015 2016 2017 2018

Restructured loans - closing

CDR 35,357 80,946 80,737 56,661 27,578 4,170

SME 4 4 — 2 1 —

Others 22,891 35,575 38,724 36,458 17,903 11,780

Total restructured loans 58,252 116,525 119,460 93,120 45,483 15,950

Fresh additions and increase in exposure in existing facilities

CDR 10,082 39,852 33,970 3,336 1,630 7,802

SME — 0 (4) — — —

Others 8,058 22,459 19,728 26,135 3,169 4

Total restructured loans 18,140 62,311 53,694 29,471 4,800 4

Downgradation of restructured loans

CDR 2,054 2,219 36,161 27,368 27,632 15,606

(% of opening restructured loans) 7.5 6.3 44.7 33.9 48.8 56.6

Others 2,482 5,056 9,131 25,634 17,570 7,232


Total restructured loans slipping into NPLs 4,536 7,275 45,292 53,002 45,202 22,838


Total slippages reported 35,871 45,314 79,674 167,109 335,466 286,350

Slippages explained by the failed restructuring 13 16 57 32 13 8

Banks ICICI Bank


We shift our attention to 20F filings as the disclosures in that report are far superior that

what is available to us from the annual report and regular quarterly disclosures. A key

concern raised post 1QFY19 results is the risk that the new disclosures provided by the bank

has on the near term forecast of slippages for the bank. We discuss that the same is not too

worrying at this stage. If anything, ICICI Bank’s loan portfolio is probably at its best in terms

of performance that we have seen in many years in almost each segment where this

reporting is available.

Exhibit 17: Net NPLs explains ~60% of the overall ‘below investment grade’ portfolio Break-up of below investment grade portfolio across segments, March fiscal year-ends, 2014-18 (%)


This table appears to be a reasonably good early warning indicator considering that the

sharp rise in slippages in the corporate loan portfolio was seen through the early warning

indicators in FY2015.

As we see the data today, the corporate loan portfolio should see lower risk of slippages

from hereon. The data shows that the retail is quite steady though mortgages are showing

marginally higher stress level in the early buckets. It is quite surprising to see that the retail

secured book is showing relatively higher stress than the unsecured book which was

something similar to what we had described in our takeaways from CIBIL report on retail

loan performance for the sector a month back.

2014 2015 2016 2017 2018

Below investment grade 11.2 12.2 18.6 14.0 9.1

NPL 1.2 1.8 3.0 5.2 5.2

India 0.9 1.4 2.6 4.9 4.9

Other subsidiaries 0.3 0.3 0.4 0.4 0.3

Restructured loans 3.4 3.0 2.0 1.0 0.3

India 3.0 2.7 1.9 0.9 0.3

Other subsidiaries 0.4 0.3 0.1 0.1 0.0

Others — — 8.9 4.4 1.2

Watchlist — — 8.9 3.7 0.8

5:25, SDR — — — 0.7 0.4

Outside India — — — — —

Others — — 4.7 3.4 2.4

ICICI Bank Banks


Exhibit 18: Nearly all segments of the business are now showing stable performance Ageing analysis of 20F filings of the overall loan portfolio of the bank, March fiscal year-ends, 2011-18 (%)

Notes:

(a) All loans up to 30 days past due is considered to be current


2011 2012 2013 2014 2015 2016 2017 2018

All loans

Current 98.3 96.8 95.1 95.1 93.3 93.5 94.9 98.5

31-60 days 0.9 2.0 3.4 3.4 5.7 5.2 2.5 0.9

61-90 days 0.6 1.0 0.9 0.9 0.7 0.4 1.0 0.2

Above 90 days 0.2 0.1 0.6 0.6 0.3 0.9 1.6 0.3

All delayed 1.7 3.2 4.9 4.9 6.7 6.5 5.1 1.5

Commercial loans

Current 98.9 95.5 92.8 92.8 87.9 87.3 90.6 98.2

31-60 days 0.6 2.9 4.9 4.9 10.6 10.6 4.4 1.7

61-90 days 0.3 1.4 1.4 1.4 1.0 0.4 1.5 0.1

Above 90 days 0.2 0.2 0.9 0.9 0.5 1.7 3.5 0.0

All delayed 1.1 4.5 7.2 7.2 12.1 12.7 9.4 1.8

Working capital

Current 98.9 98.1 95.4 95.4 95.2 93.8 91.9 99.1

31-60 days 0.8 1.5 3.9 3.9 4.3 4.3 4.4 0.6

61-90 days 0.1 0.4 0.4 0.4 0.2 0.9 1.9 0.1

Above 90 days 0.1 — 0.4 0.4 0.3 1.0 1.8 0.2

All delayed 1.1 1.9 4.6 4.6 4.8 6.2 8.1 0.9

Consumer loans

Current 97.9 98.6 99.0 99.0 99.4 99.4 99.4 99.4

31-60 days 1.1 0.7 0.5 0.5 0.3 0.4 0.3 0.4

61-90 days 0.9 0.6 0.4 0.4 0.2 0.2 0.3 0.2

Above 90 days 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0

All delayed 2.1 1.4 1.0 1.0 0.6 0.6 0.6 0.6

Mortgage loans

Current 95.2 98.4 97.6 97.6 97.1 97.9 97.4 96.3

31-60 days 2.3 0.8 1.2 1.2 1.3 0.9 0.9 1.4

61-90 days 1.9 0.4 0.8 0.8 0.9 0.5 0.6 0.6

Above 90 days 0.6 0.4 0.4 0.4 0.7 0.7 1.1 1.7

All delayed 4.8 1.6 2.4 2.4 2.9 2.1 2.6 3.7

Other secured loans

Current 95.4 97.9 98.1 98.1 98.5 98.5 98.6 98.4

31-60 days 2.5 1.1 1.4 1.4 1.0 1.1 1.0 1.1

61-90 days 2.0 1.0 0.5 0.5 0.6 0.4 0.4 0.5

Above 90 days — — — — — — 0.0 0.0

All delayed 4.6 2.1 1.9 1.9 1.5 1.5 1.4 1.6

Credit cards

Current 97.3 99.0 99.7 99.7 99.4 99.4 99.3 99.4

31-60 days 1.4 0.6 0.2 0.2 0.4 0.4 0.3 0.4

61-90 days 1.3 0.4 0.1 0.1 0.2 0.2 0.2 0.2

Above 90 days 0.0 0.0 0.0 0.0 0.0 0.0 0.1 —

All delayed 2.7 1.0 0.3 0.3 0.6 0.6 0.7 0.6

Other unsecured loans

Current 98.3 96.8 95.1 95.1 93.3 93.5 94.9 98.5

31-60 days 0.9 2.0 3.4 3.4 5.7 5.2 2.5 0.9

61-90 days 0.6 1.0 0.9 0.9 0.7 0.4 1.0 0.2

Above 90 days 0.2 0.1 0.6 0.6 0.3 0.9 1.6 0.3

All delayed 1.7 3.2 4.9 4.9 6.7 6.5 5.1 1.5

Banks ICICI Bank


LIABILITY FRANCHISE: STRONG AS EVER LEADING TO BETTER NIM PROFILE

NIM broadly stable but is impacted by high income de-recognition

FY2018 saw NIM stable at ~3% of loans though the bank is seeing a lot of pressure on the

corporate loan portfolio led by high NPLs. NIM in the domestic business was flat yoy at 3.6%

while NIMs in the international business declined ~80bps to 0.5% which is the lowest that

we have seen since this data has been reported.

NII grew 6% yoy despite a 10% yoy in loan growth and 6% yoy growth in balance sheet.

The impact on NIM would probably have been higher had the bank not seen the cut in

savings deposits rate in FY2018. The bank saw a substantial improvement in its liability

profile which sharply lowered the cost of deposits/funds resulting in better-than-initially

expected NIM for the bank.

Our broad view remains that the underlying NIM which has been under pressure for the

corporate banks could reverse in the next few quarters led by lower slippages, better pricing

power, marginally improving spreads in the international business and higher share of loans

in the domestic business.

Exhibit 19: NIM is likely to show expansion from hereon Net interest margin, March fiscal year-ends, 2011-21E (%)


Exhibit 20: NII growth likely to grow ahead of loan growth NII growth, March fiscal year-ends, 1QFY15-1QFY19 (%)


2.3 2.4 2.7 2.9 3.1 3.1 3.0 3.0 3.1 3.2 3.3

11

19

29

19 16

11

2 6

11

16 15

(10)

-

10

20

30

40

2.0

2.3

2.6

3.0

3.3

3.6

2011

2012

2013

2014

2015

2016

2017

2018

2019E

2020E

2021E

NIM (LHS) NII growth (RHS)

(5)

-

5

10

15

20

1Q

FY15

3Q

FY15

1Q

FY16

3Q

FY16

1Q

FY17

3Q

FY17

1Q

FY18

3Q

FY18

1Q

FY19

ICICI Bank Banks


Exhibit 21: Lending yields declined 40 bps while costs declined 50 bps; NIM flat yoy Reported yields and costs across various segments, March fiscal year-ends, 2010-18 (%)


Investment yields soften due to decline in G-Sec yields and fall in wholesale rates

Investment yield declined ~40bps yoy partly led by ~40bps decline in the G-Sec portfolio to

7.1% and ~50bps decline in yields to 6.1% in the bond and debentures, CD, PTC and CP

portfolio. Some of the decline in bonds and debentures is also a function of the book which

may have substantially lower yielding investments as a part of the NPL/restructuring exercise.

Deposit mobilization continues at a brisk pace; CASA ratio healthy at 50% levels

Overall deposits grew 14% yoy led by strong growth in CASA deposits. Savings deposits

grew 17% yoy while current account deposits grew 19% yoy. We note the saving deposit

mobilization was maintained at healthy levels of despite a strong base of FY2016 due to

demonetization. Overall CASA ratio was healthy at ~50% of overall deposits. Positive trend

was seen even when we look at the same ratio on an average balance basis or when you

include the overall external funds (deposits and borrowings).

We see the liability profile to be the best improvement for ICICI Bank. With cost of funds

comparable to HDFC Bank, the bank now can now aggressively challenge HDFC Bank on

most of its products and report similar margins on those products.

2010 2011 2012 2013 2014 2015 2016 2017 2018

Yield on interest earning assets 7.9 7.6 8.5 9.0 8.9 9.0 8.7 8.1 7.7

On loans 9.1 8.5 9.6 9.9 10.0 10.0 9.5 8.9 8.6

Domestic business 11.9 11.1 10.1 9.5

International business 4.4 4.3 4.1 3.7

On investments 6.2 6.4 7.2 7.7 7.5 7.9 7.6 7.2 6.8

On SLR investments 6.4 6.3 7.3 7.8 7.8 8.0 7.8 7.5 7.1

On other investments 5.8 6.6 7.1 7.6 6.9 7.5 6.8 6.6 6.1

On other interest earnings assets 6.3 6.5 6.2 6.0 4.6 5.1 5.5 4.8 3.6

Cost of interest-bearing liabilities 5.8 5.4 6.3 6.4 6.2 6.2 5.9 5.5 5.0

Cost of deposits 5.8 4.9 6.1 6.4 6.1 6.2 5.9 5.4 4.9

CASA deposits 2.0 2.5 2.9 3.0 3.0 3.0 3.0 3.0 2.8

Term deposits 7.7 6.5 8.2 8.5 8.2 8.3 7.9 7.3 6.6

Cost of borrowings 5.6 6.1 6.7 6.5 6.4 6.2 5.8 5.6 5.4

Spread 2.1 2.3 2.2 2.5 2.7 2.8 2.8 2.6 2.7

NIM 2.5 2.6 2.7 3.1 3.3 3.5 3.5 3.3 3.2

Domestic business 3.0 3.0 3.5 3.7 3.9 3.8 3.6 3.6

International business 0.9 1.2 1.3 1.7 1.7 1.9 1.3 0.5

Banks ICICI Bank


Exhibit 22: ICICI Banks’ savings account balances have been in line with peers Growth (absolute) in savings account balances, March fiscal year-ends, 2008-1QFY19 (Rs bn)


Exhibit 23: CASA ratio (period ending) is currently standing comfortable at 50% Break-up of CASA across savings and current to total deposits, March fiscal year-ends, 2008-1QFY19 (%)


2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1QFY19

Absolute accretion of savings account balances (Rs bn, yoy)

Axis Bank 79 58 80 70 108 121 140 105 175 203 222 193

HDFC Bank 66 88 150 136 106 142 149 218 230 457 302 336

ICICI Bank 103 19 122 137 92 96 135 157 194 376 291 297

IndusInd Bank 3 1 6 11 16 23 29 30 43 98 189 162

Branches (#)

Axis Bank 671 835 1,035 1,390 1,622 1,947 2,402 2,589 2,904 3,304 3,703 3,779

HDFC Bank 761 1,412 1,725 1,986 2,544 3,062 3,403 4,014 4,520 4,715 4,787 4,804

ICICI Bank 1,308 1,419 1,741 2,529 2,752 3,100 3,753 4,050 4,450 4,850 4,867 4,867

IndusInd Bank 180 180 210 300 400 500 602 801 1,000 1,200 1,400 1,410

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1QFY19

Axis Bank

Current 22.9 21.1 22.8 19.5 18.1 19.1 17.3 17.4 17.8 21.0 21.1 18.2

Savings 22.8 22.0 24.0 21.6 23.5 25.2 27.7 27.4 29.6 30.4 32.7 31.0

HDFC Bank

Current 28.5 19.9 22.2 22.3 18.4 17.7 16.7 16.3 16.2 18.0 15.1 15.2

Savings 26.0 24.4 29.8 30.4 30.0 29.8 28.1 27.7 27.1 30.1 28.4 28.8

ICICI Bank

Current 10.1 9.9 15.3 15.4 13.7 12.6 13.0 13.7 14.0 15.3 15.9 14.0

Savings 16.0 18.8 26.3 29.6 29.8 29.3 29.9 31.8 31.9 35.1 35.8 35.0

IndusInd Bank

Current 9.5 13.4 16.5 18.3 16.2 16.3 16.2 16.7 16.6 15.5 15.5 14.2

Savings 6.2 5.9 7.2 8.9 11.1 13.0 16.4 17.5 18.5 21.4 25.1 23.6

Yes Bank

Current 7.4 7.5 9.1 8.6 9.9 10.0 9.5 9.3 9.8 13.4 14.4 12.3

Savings 1.1 1.2 1.5 1.8 5.1 9.0 12.6 13.8 18.3 22.9 22.1 24.4

ICICI Bank Banks


STABLE COST STRUCTURE: INVESTMENTS IN RETAIL CONTINUE

FY2018 saw a marginal deterioration in cost-income ratio of ~300bps to 38% but this is still

one of the lowest amongst private banks. The previous few years (FY2016-18) has the

benefit of one-off stake sale gains supporting income which is not available from here at the

same levels resulting in marginally higher cost-income ratios for the bank. Operating

expenses grew at 6% yoy with staff costs growing by 3% yoy. The bank has made lower

provisions relating to retirement related expenses on account of increase in interest rates.

Direct Marketing Agency expenses (DMA) grew 13% yoy which is broadly similar to FY2016-

19 (see exhibit 24). This contributes to 13% of the non-staff expenses. This appears to be

the best proxy to understand disbursements given the limited information that we have and

this growth, gives comfort that the underlying business momentum in retail did not decline

too much despite the bank seeing higher pressure of corporate NPLs.

Exhibit 24: DMA expenses grew 18% yoy led by higher disbursements in the retail business Growth and contribution of DMA to overall expenses, March fiscal year-ends, 2010-18 (%)


Exhibit 25: Headcount increased 3% yoy but average cost/employee increased 5% yoy Break-up of staff costs, March fiscal year-ends, 2010-18


From a segmental perspective, operating expenses in the retail division grew 8% yoy and

contributed to ~75% of the overall expenses (see exhibit 26). However, revenue in this

business grew faster at 13% yoy largely on the back of better performance on the lending

business. The operating cost ratios (per branch basis) in the retail division were broadly

unchanged for the past four years which is probably growing at a pace which is closer to

inflation levels suggesting some maturity levels to the business. Note that a large part of

growth could be attributed to the increase in physical infrastructure and more importantly

on the origination costs of retail loans (increase in DMA expenses).

2010 2011 2012 2013 2014 2015 2016 2017 2018

Total operating expenses 59 66 79 90 103 115 127 148 157

Employee expenses 19 28 35 39 42 47 50 57 59

Non-staff expenses 39 38 43 51 61 67 77 90 98

Direct marketing agency expenses 1 2 2 3 6 8 9 11 13

(YoY %) (76) 25 2 116 66 38 18 19 18

(% of non-staff expenses) 3 4 4 7 9 12 12 12 13

2010 2011 2012 2013 2014 2015 2016 2017 2018

Employee costs (Rs mn) 19,258 28,169 35,153 38,933 42,201 47,499 50,023 57,337 59,140

Growth yoy (%) (2.3) 46.3 24.8 10.8 8.4 12.6 5.3 14.6 3.1

Total employees (#) 41,068 56,969 58,276 62,065 72,226 67,857 74,096 82,841 81,548

Growth yoy (%) 18.7 38.7 2.3 6.5 16.4 (6.0) 9.2 11.8 (1.6)

Cost/ employee (Rs mn) 0.5 0.5 0.6 0.6 0.6 0.7 0.7 0.7 0.7

Growth yoy (%) (17.7) 5.4 22.0 4.0 (6.9) 19.8 (3.6) 2.5 4.8

Total employees/branch (#) 24 23 21 20 19 17 17 17 17

Growth yoy (%) (3.2) (4.5) (6.0) (5.5) (3.9) (12.9) (0.6) 2.6 (1.9)

Banks ICICI Bank


Exhibit 26: Retail banking investments remain fairly high Break-up of operating costs across business segments, March fiscal year-ends, 2010-18 (` mn)

Notes:

(A) ICICI Bank does not give a specific break-up of expenses across different segments. However, this can be computed based on the income,

provisions and PBT reported by the bank

(B) FY2016-17 corporate expenses might be incorrect for the corporate bank has not provided the non-interest income which is required to

calculate the operating expenses of that business. We may not be too different from the actual performance given that the corporate portfolio

had a subdued performance. We are deriving FY2017 corporate expenses by keeping `2bn of treasury related operating costs.


2010 2011 2012 2013 2014 2015 2016 2017 2018

Retail banking

Operating expenses 43,560 45,690 56,530 63,200 76,580 86,270 97,960 112,260 121,340

Growth (%) 4.9 23.7 11.8 21.2 12.7 13.6 14.6 8.1

(% of costs) 74.3 69.0 72.0 70.1 74.3 75.0 77.2 76.1 77.3

Branches 1,741 2,529 2,752 3,100 3,753 4,050 4,450 4,850 4,867

Growth (%) 22.7 45.3 8.8 12.6 21.1 7.9 9.9 9.0 0.4

Average cost/branch (Rs mn) 25.0 18.1 20.5 20.4 20.4 21.3 22.0 23.1 24.9

Growth (%) (27.8) 13.7 (0.8) 0.1 4.4 3.3 5.1 7.7

Corporate banking

Operating expenses 12,360 18,230 20,258 24,863 24,130 27,840 25,920 32,410 33,010

Growth (%) 47.5 11.1 22.7 (2.9) 15.4 (6.9) 25.0 1.9

(% of costs) 21.1 27.5 25.8 27.6 23.4 24.2 20.4 22.0 21.0

Treasury and others

Operating expenses 2,678 2,252 1,716 2,066 2,379 849 1,942 (1,279) (6,224)

Growth (%) (15.9) (23.8) 20.4 15.1 (64.3) 128.9 (165.9) 386.5

(% of costs) 4.6 3.4 2.2 2.3 2.3 0.7 1.5 (0.9) (4.0)

ICICI Bank Banks


SUBSIDIARIES: UK REMAINS THE ONLY AREA OF PAIN

The performances by subsidiaries were broadly strong across all subsidiaries barring UK. All the capital market

subsidiaries had a solid year while the insurance business had strong profitability and growth metrics as well.

UK remains an area of concern while Canadian subsidiary has moved back to profits. Exposure towards Indian

companies is falling sharply in the international branches loan portfolio.

Subsidiary performance snapshot

The performance across various subsidiaries improved in FY2018 as the capital market

related business had a solid year, insurance business continues to do well and Canadian

subsidiary moved back to profits. We have explored most of the main subsidiaries in this

report but note there are a few more whose contribution is quite negligible. The overall

earnings increased in these subsidiaries by 10% yoy. In the insurance business, ICICI

Prudential Life Insurance reported flat earnings while ICICI Lombard’s earnings increased

22% yoy. The capital market related business had another strong performance with the

AMC business reporting ~30% yoy growth in earnings while securities business grew ~60%

yoy while primary dealership business saw earnings falling sharply on account of sharp rise in

interest rates. In the lending business, UK business reported a loss led by higher provisions

while Canadian subsidiary moved back to profits after a weak performance in FY2017.

Performance in the home finance business showed higher provisioning pressure and tepid

loan growth as compared to the parent.

Payout ratio drops primarily due to lower payout from the insurance business

FY2018 saw the overall dividends flat for the third consecutive year (see Exhibit 27). The

exhibit shows that the dividend payout ratio has been steadily declining since FY2016.

Payout ratio in FY2018 was at 47% as compared to a peak of 64% in FY2016 (see Exhibit

28). ICICI Prudential Life Insurance is one of the largest contributors to the overall payout as

it has contributed to ~55% of the overall dividends declared but lower than 60% reported

in FY2016 due to change in their dividend policy. As indicated in the previous years the

overall quantum of payout appears to be sustainable though the growth in dividends may

not be too sharp as select businesses are not seeing such a strong traction on earnings as

growth is quite subdued.

Exhibit 27: Dividends declared was stable in recent years PAT and dividends from subs, March fiscal year-ends, 2010-18 (` bn)


Exhibit 28: Payout ratio has reduced in the past two years Payout ratio across subsidiaries, March fiscal year-ends, 2010-18 (%)


-

7

14

21

28

35

42

2010 2011 2012 2013 2014 2015 2016 2017 2018

PAT Dividends paid

33

26

4237

5351

60

54

47

-

14

28

42

56

70

2010 2011 2012 2013 2014 2015 2016 2017 2018

Banks ICICI Bank


Exhibit 29: AMC business saw a higher payout in FY2018 Payout ratios across subsidiaries, March fiscal year-ends, 2010-18 (%)


2010 2011 2012 2013 2014 2015 2016 2017 2018

ICICI AMC 62.7 35.2 65.1 54.5 38.6 32.2 32.5 66.5 71.1

ICICI Securities 75.0 71.6 67.4 44.0 53.4 66.0 54.1 60.7 32.0

ICICI Securities - PD 49.7 48.9 49.7 45.0 44.5 46.2 51.9 53.4 79.3

ICICI Ventures 50.5 60.9 21.9 7.6 3.0 — — — —

ICICI Life Insurance — — 29.9 32.4 69.8 51.2 72.9 50.7 61.1

ICICI Lombard General 40.8 NA — — — 15.2 26.5 22.4 7.9

ICICI UK — — — 153.4 99.1 163.8 — — —

ICICI Canada — — — 46.7 47.3 69.0 73.6 — —

ICICI Home Finance 77.6 74.7 73.8 70.2 72.1 79.2 79.1 70.0 92.7

Total 32.9 25.9 41.6 37.4 53.4 50.7 59.5 53.6 47.1

ICICI Bank Banks


Exhibit 30: Performance of key subsidiaries March fiscal year-ends, 2010-2018 (` mn)


2010 2011 2012 2013 2014 2015 2016 2017 2018

United Kingdom

Networth 25,889 28,245 36,103 33,775 37,690 34,090 36,144 34,753 33,028

Assets 333,106 287,282 207,790 194,737 267,889 258,113 304,989 226,794 253,163

PAT 1,661 1,630 1,292 781 1,512 1,145 36 -1,051 -1,664

RoA 0.5 0.5 0.5 0.4 0.7 0.4 0.0 (0.4) 0.1

RoE 5.4 5.4 3.7 2.1 4.1 3.1 0.1 (2.9) 1.0

Canada

Networth 38,289 39,666 46,673 50,868 50,147 47,244 37,624 34,926 33,470

Assets 258,332 210,578 272,499 294,595 306,521 306,984 318,206 328,685 314,247

PAT 1,259 1,590 1,798 2,956 2,616 1,841 1,191 -1,865 2,000

RoA 0.5 0.7 0.7 1.0 0.9 0.6 0.4 (0.6) 0.6

RoE 3.9 4.1 4.2 6.1 5.2 3.8 2.8 (5.1) 5.8

Home Finance

Networth 12,814 13,404 14,085 14,646 15,209 14,917 15,292 16,072 16,133

Assets 134,039 7,631 7,580 72,025 72,575 82,991 93,884 94,300 102,267

PAT 1,607 2,333 2,596 2,202 2,228 1,975 1,799 1,833 643

RoA 1.2 3.3 34.1 5.5 3.1 2.5 2.0 1.9 0.7

RoE 12.7 17.8 18.9 15.3 14.9 13.1 11.9 11.7 4.0

Securities

Networth 2,302 2,913 3,008 3,268 2,996 3,521 3,942 4,851 8,251

Assets 8,681 10,434 9,482 9,085 16,204 13,611 13,920 20,401 28,710

PAT 1,227 1,132 771 682 749 2,440 2,357 3,376 5,534

Primary Dealership

Networth 5,620 5,848 6,210 6,791 7,423 8,106 8,669 9,435 9,742

Assets 39,139 60,991 88,771 107,472 105,512 146,881 158,614 128,524 172,420

PAT 850 528 857 1,217 1,318 2,174 1,955 4,116 1,116

ICICI Mutual Fund

Networth 1,051 1,244 1,458 1,863 2,864 4,390 6,373 7,332 8,233

PAT (Rs mn) 718 1,280 881 1,102 1,830 2,468 3,257 4,805 6,256

AUM (Rs bn) 810 735 687 878 1,068 1,486 1,672 2,430 3,057

Dividend 450 450 574 600 706 794 1,059 3,195 4,448

General Insurance

Net worth 16,731 15,308 18,567 19,591 24,143 29,067 32,554 37,266 45,412

- Share Capital 4,036 4,046 4,366 4,370 4,451 4,466 4,475 4,512 4,539

- Reserves & Surplus 12,695 11,263 14,202 15,221 19,693 24,601 28,079 32,754 40,872

PAT 1,583 -803 -4,163 3,801 5,515 5,858 5,053 7,018 8,618

Dividend 645 566 0 0 0 890 1,341 1,571 680

Life Insurance

Net worth 12,685 20,783 29,845 39,171 43,053 48,649 50,739 61,350 65,764

- Share Capital 14,281 14,285 14,288 14,289 15,277 14,329 14,324 14,353 14,355

- Reserves & Surplus -1,597 6,498 15,557 24,882 27,776 34,320 36,415 46,996 51,409

PAT 2,580 8,076 13,842 14,959 15,667 16,343 16,505 16,822 16,198

Dividend 0 0 4,140 4,840 10,930 8,370 12,030 8,530 9,901

Venture capital

PAT 515 739 684 198 330 9 -212 93 112

Dividend 260 450 150 15 10 0 0 0 0

Banks ICICI Bank


International subsidiaries – India is less and less significant

Over the past few years, we have seen a change in the bank’s lending activity in both its

international subsidiaries. There has been a marked decline in the lending exposure towards

Indian corporates where the bank has seen a large share of stress being created in recent

years.

ICICI Bank Canada: India-related exposure is declining sharply

FY2016 saw earnings for the Canadian subsidiary moving back to profits (currency taken as

year-ends) due to lower loan loss provisions.

Exhibit 31: Return ratios has been impacted due to weak impairment ratios RoE decomposition of the Canadian subsidiary, March fiscal year-ends, 2010-18 (%)


The bank reported a flat loan portfolio for the past few years but there is quite a churn of

the underlying portfolio. FY02018 saw a broadly similar composition to FY2017 in terms of

the loan portfolio. The exposure towards Indian corporates which was ~50% of the loan

portfolio in FY2010-11 has declined to 4% in FY2018 which adjusted for impairment

provision (90% of the exposure) is negligible at current levels.

The bank follows an expected impairment led policy as against a rule based (date of default)

accounting for impairment recognition. The bank has split the entire portfolio in 8 broad

buckets of which borrower risk ratings (BRR) 1-4 is considered “Satisfactory”, 5 is “Especially

Mentioned”, 6 is “Sub-standard”, 7 is “Closely Monitored” and 8 is “Default and

Impaired”. As of FY2018, the bank’s BRR 7 and 8 was ~3.5% of loans. Given that the

portfolio has been unchanged in the past two years, we think that the portfolio appears to

have reached some stability from an NPL recognition standpoint. The bank has increased its

provisions on its India portfolio reflecting the weakness in this book in recent years but the

portfolio did not see higher provisions in FY2018.

2010 2011 2012 2013 2014 2015 2016 2017 2018

Net interest income 0.5 0.8 1.5 1.4 1.5 1.4 1.3 1.4 1.3

Net other income 0.6 0.7 0.4 0.4 0.5 0.3 0.3 0.3 0.1

Total income 1.2 1.5 1.9 1.9 2.0 1.7 1.5 1.6 1.4

Operating expenses 0.5 0.5 0.7 0.6 0.6 0.6 0.5 0.5 0.6

Employees 0.2 0.2 0.3 0.3 0.3 0.3 0.3 0.3 0.3

Others 0.3 0.3 0.3 0.3 0.3 0.3 0.2 0.2 0.3

Pre provision income 0.6 0.9 1.3 1.3 1.4 1.2 1.0 1.1 0.8

Loan loss provisions 0.1 0.0 0.2 0.2 0.1 0.3 0.4 1.9 (0.0)

Invt. depreciation (0.1) (0.1) 0.0 (0.2) 0.1 0.1 0.0 — —

Pre -tax income 0.7 0.9 1.1 1.3 1.2 0.8 0.5 (0.8) 0.9

(1- tax rate) 69.0 71.9 69.8 77.9 70.9 71.2 71.4 74.2 72.7

ROA 0.5 0.7 0.7 1.0 0.9 0.6 0.4 (0.6) 0.6

Leverage 8.4 6.0 5.6 5.8 6.0 6.3 7.4 8.9 9.4

ROE 3.9 4.1 4.2 6.1 5.2 3.8 2.8 (5.1) 5.8

ICICI Bank Banks


Exhibit 32: Exposure to Indian companies is at negligible levels Break-up of the loan portfolio, March fiscal year-ends, 2010-18 (%)

Notes:

(A) The bank has clubbed select segments of the book in FY2016. The sharp rise in corporate loans in FY2016 is primarily on account of our

classification into a bucket and not company representation.


Exhibit 33: Impaired loans declined in FY2018 Break-up of weak or impaired, March fiscal year-ends, 2011-18

Notes: Impairment in Canada is not a rule based mechanism. Loans assigned on a scale of 1 to 8, with credits rated 1 through 4 considered “Satisfactory”, RR 5 being “Especially Mentioned” and RR 6 treated as “sub-standard”. RR7-8 is considered weak or impaired.


Exhibit 34: India exposure has fallen sharply but impairments

high India exposure loans and impairment provisions, March fiscal year-ends, 2010-18 (₹ bn)


FY2018 saw repatriation of capital; tier-1 ratio quite comfortable

The overall CAR for the bank appears to be comfortable at 21% all of which is tier-1 ratio.

We note that the bank has repatriated its capital for the third consecutive year since FY2018

and the quantum repatriated is broadly similar across these years.

2010 2011 2012 2013 2014 2015 2016 2017 2018

Canada 37.8 33.5 64.5 74.4 82.9 89.0 88.0 86.6 85.7

Corporate loans 11.6 17.2 19.7 23.0 20.3 21.0 33.9 26.7 26.6

Corporate investment portfolio— — — — 11.3 12.1 — — —

Securitized residential mortgages— — 28.0 38.4 38.2 45.9 49.8 51.8 50.7

Others 26.2 16.3 16.8 13.0 13.1 10.0 4.3 8.1 8.4

India 47.4 56.8 30.8 22.7 13.6 5.8 4.0 3.6 3.4

Commercial loans/ mortgages0.4 1.5 5.0 2.5 1.8 0.3 — — —

Corporate loans 47.0 55.3 25.8 20.2 11.8 5.5 4.0 3.6 3.4

Others 14.8 9.7 4.7 2.9 3.5 5.2 8.0 9.8 10.9

Commercial loans/ mortgages0.0 1.1 1.3 0.6 0.9 0.5 — — —

Corporate loans 14.8 8.7 3.5 2.3 2.6 4.7 8.0 9.8 10.9

4

20

4

10 1011

13

10

-

2.4

4.8

7.2

9.6

12.0

0

5

10

15

20

25

2011 2012 2013 2014 2015 2016 2017 2018

Closely monitored or impaired % of loans(Rs bn) (%)

0

20

40

60

80

100

2010 2011 2012 2013 2014 2015 2016 2017 2018

Loans (Rs bn) Allowance for impairment (Rs bn)

Banks ICICI Bank


Exhibit 35: Canada has a strong capital structure at >20% tier-1 Capital adequacy ratio, March fiscal year-ends, 2010-18 (%)


Exhibit 36: FY2018 saw repatriation of capital from Canada Repatriation of capital, March fiscal year-ends, 2010-18 (₹ mn)


Exhibit 37: Net worth has reduced by ~35% from peak levels Net worth and PAT of Canadian subsidiary, March fiscal year-ends, 2010-18 (` mn)


ICICI Bank UK: India exposure remains the sore point

The weak performance in UK continued in FY2018 as the bank continued to make high

provisions for bad loans. Revenue growth was weak led by NIM pressure, negligible loan

growth and low fee income.

However, we do see a few positives in the UK business that is quite similar to what we saw

in the Canadian subsidiary. We understand that the bank is steadily participating in select

local lending opportunities apart from lending in the short term trade financing segment.

We probably need to wait for a few more years of data points to get more comfortable if

the growth is firmly back on track. Loan mix is changing quite sharply with a lesser emphasis

on India related portfolio.

2530 30

32 30 32

24 2521

0

8

16

24

32

40

2010 2011 2012 2013 2014 2015 2016 2017 2018

Tier-1 Tier-2

0

1,000

2,000

3,000

4,000

5,000

2010 2011 2012 2013 2014 2015 2016 2017 2018

-13,000

0

13,000

26,000

39,000

52,000

2010 2011 2012 2013 2014 2015 2016 2017 2018

Net worth PAT

ICICI Bank Banks


We believe that there is a possibility of RoE metric to sharply show an improvement over the

next few years. The bank has already improved its NIM profile in this business over the past

few years and with the India-related exposure falling sharply the risk for sharp rise in

impairment ratios appears to have been reasonably well insulated. The bank is already

generating ~1.5% pre-provisioning operating profit and given the nature of lending, we

should see negligible provisions from hereon. This should result in a sharp improvement in

RoEs in this subsidiary.

Exhibit 38: High provisions drags RoEs RoE decomposition of the bank, March fiscal year-ends, 2010-18 (%)


Exhibit 39: Exposure to India has declined sharply in the past few years Break-up of the loan portfolio in UK, March fiscal year-ends, 2010-18 (%)

Notes:

(A) The bank had raised FCNR deposits and had reported as a separate line item in FY2014-15 which is not there in FY2016 as per the annual report

but we have included it here as they are yet to mature. We have removed this in FY2017 as we assume that it would have matured


Overdue ratios are high and mostly led by India-related exposures

The following two exhibits show the performance of the loan portfolio from an impairment

perspective. The overdue (includes 1 day default) is currently at 10% of loans which is a

marginal decline of ~150bps on a yoy basis. We have seen a decline on absolute basis. India

linked portfolio has nearly 90% of the overall bad loans while the UK portfolio has no

overdues as of the last available information.

2010 2011 2012 2013 2014 2015 2016 2017 2018


Net other income 1.0 0.6 0.4 0.9 1.0 1.1 0.4 0.4 0.4

Total income 1.6 1.6 1.6 2.2 2.4 2.7 2.1 2.0 2.3


Employees 0.3 0.3 0.5 0.6 0.6 0.5 0.4 0.4 0.5

Others 0.4 0.3 0.3 0.4 0.4 0.4 0.4 0.4 0.4


Loan loss provisions 0.3 0.3 0.1 0.7 0.5 1.2 1.3 1.7 2.1

Invt. depreciation — — — — — — (0.1) — —

Pre tax income 0.7 0.7 0.7 0.5 0.9 0.5 0.1 (0.5) (0.8)

(1- tax rate) 70.7 71.6 71.6 75.1 69.8 80.5 9.0 86.6 84.0

ROA 0.5 0.5 0.5 0.4 0.7 0.4 0.0 (0.4) (0.7)

Leverage 11.5 10.2 7.2 5.5 6.3 7.2 7.9 7.4 7.0

ROE 5.4 5.4 3.7 2.1 4.1 3.1 0.1 (2.9) (4.8)

2010 2011 2012 2013 2014 2015 2016 2017 2018

Europe and North America 33.3 27.0 46.0 46.0 44.4 47.4 56.5 63.5 77.6

India 66.0 69.4 53.5 53.5 49.5 45.5 36.8 29.1 17.5

Loans against FCNR deposits 10.3 9.8 9.0 11.4 11.1

Others 39.2 35.6 27.9 17.7 6.4

Rest of the world 0.7 3.6 0.5 0.5 6.1 7.1 6.7 7.3 4.9

Banks ICICI Bank


Exhibit 40: There is a decline in over dues in this book Overdue loans in the UK book, March fiscal year-ends, 2010-18


Exhibit 41: Over dues in the India exposure unchanged Overdue loans in the India exposure, March fiscal year-ends, 2010-18


The bank’s capital structure in the UK business remains fairly comfortable with tier-1 ratio at

14% which is well above the threshold requirements recommended by the local regulators.

There is little headroom to repatriate capital from this subsidiary from hereon. We think that

the bank would want to keep a fairly comfortable capital position in this business as they are

looking to grow the balance sheet and the RoEs are still not sufficient to generate capital for

meeting this growth requirement.

Exhibit 42: Tier-1 is quite comfortable in the UK business Break-up of capital, March fiscal year-ends, 2010-18 (%)


Exhibit 43: There was no repatriation in FY2018 Repatriation of equity capital, March fiscal year-ends, 2010-18 (₹ mn)


1.0 0.9

3.1

9.0

10.8

7.6

6.4

11.5

10.0

-

4

8

12

16

20

-

3.0

6.0

9.0

12.0

15.0

2010 2011 2012 2013 2014 2015 2016 2017 2018

Over due % of loans 3M over due % of loans

(% of loans) (Rs bn)

7

16 15 14

16

32

56

-

5

9

14

18

5.0

18.0

31.0

44.0

57.0

70.0

2012 2013 2014 2015 2016 2017 2018

Overdue % of loans

(% of loans) (Rs bn)

22.6

33.4

21.2 19.3 16.7 14.6 13.1 15.5 14.0

0

10

20

30

40

50

2010 2011 2012 2013 2014 2015 2016 2017 2018

Tier-1 Tier-2

- - -

2,714

-

4,687

- - -0

1000

2000

3000

4000

5000

2010 2011 2012 2013 2014 2015 2016 2017 2018

ICICI Bank Banks


ICICI Home Finance – weak overall performance

ICICI Bank Home Finance division reported a 65% decline in earnings primarily led by a

weak NII growth as NIM declined 40bps yoy, the business reported a flat performance in fee

income and provisions for bad loans was high. The overall impairment ratio rose ~100 bps

to 3.3% of loans and consequently, the bank had increased its provisions for bad loans. The

overall RoEs in this business are quite weak historically at 11-13% as compared to most

comparable housing companies.

Exhibit 44: RoEs in the business are quite low for a comparable housing finance business RoE decomposition of housing finance business, March fiscal year-ends, 2010-18 (%)


The portfolio has grown in the past year by ~8% CAGR. The growth rate was skewed

towards the non-housing portfolio. The non-housing loan portfolio is a book that primarily

consists of loans-against-property and real estate financing. The bank has broadly kept the

ratio between the two at 60:40 since FY2010.

Exhibit 45: RoEs in the business is quite low for a comparable housing finance business RoE decomposition of housing finance business, March fiscal year-ends, 2010-18 (%)


The impairment ratio has shown an increase in NPL ratio in the housing portfolio offsetting

the improvement in the housing loan portfolio. The overall ratio was at 3.3% with similar

NPL in the housing loan and non-housing portfolio.

Exhibit 46: RoEs in the business is quite low for a comparable housing finance business RoE decomposition of housing finance business, March fiscal year-ends, 2010-18 (%)


2010 2011 2012 2013 2014 2015 2016 2017 2018

RoE decomposition


Net other income 1.5 0.6 3.4 2.3 1.6 1.4 1.2 0.8 0.5

Total income 3.0 5.9 60.1 9.9 5.6 5.3 4.6 4.1 3.4


Employees 0.6 0.4 3.1 0.8 0.5 0.5 0.5 0.4 0.3

Others 0.6 0.5 6.6 1.2 0.8 0.9 0.9 0.8 1.0


Provisions 0.2 0.3 4.0 0.2 0.1 0.1 0.2 (0.0) 1.0

(1- tax rate) 75.0 70.8 73.5 72.7 71.6 66.8 66.0 65.9 57.4

ROA 1.2 3.3 34.1 5.5 3.1 2.5 2.0 1.9 0.7

Leverage 10.6 5.4 0.6 2.8 4.8 5.2 5.9 6.0 6.1

ROE 12.7 17.8 18.9 15.3 14.9 13.1 11.9 11.7 4.0

2010 2011 2012 2013 2014 2015 2016 2017 2018

Housing loans (Rs mn) 66,619 51,469 40,466 38,737 38,545 46,578 53,090 54,730 56,406

Growth 22.6 (22.7) (21.4) (4.3) (0.5) 20.8 14.0 3.1 3.1

Non-housing loans (Rs mn) 45,315 32,298 25,611 27,016 27,930 30,496 34,571 35,458 40,572

Growth (20.5) (28.7) (20.7) 5.5 3.4 9.2 13.4 2.6 14.4

Total (Rs mn) 111,934 83,767 66,076 65,753 66,475 77,074 87,661 90,188 96,979

Growth 0.5 (25.2) (21.1) (0.5) 1.1 15.9 13.7 2.9 7.5

2010 2011 2012 2013 2014 2015 2016 2017 2018

Gross NPL — 2.1 2.4 3.0 2.0 1.8 2.1 1.6 3.3

Housing — 1.5 1.7 1.4 1.2 0.9 0.8 0.5 3.3

Non-housing — 3.0 3.6 5.3 3.3 3.2 4.1 3.2 3.3

Banks ICICI Bank


This business is well capitalized and this is a regular dividend paying company for the parent.

As of FY2018, this business had a tier-1 ratio of 21% and the bank has been broadly

returning ~80% of its earnings back to parent.

Exhibit 47: Tier-1 ratio comfortable at >20% levels Capital adequacy ratio, March fiscal year-ends, 2010-18 (%)


Exhibit 48: Payout ratio increased in FY2018 Dividend payout ratio, March fiscal year-ends, 2010-18 (%)


ICICI Asset Management – the good story continues

The AMC business had another strong year with the average AUM growing by 25% yoy led

by a tailwind due to lower interest rates, demonetization and a relatively better performance

from capital markets as compared to other savings products. ICICI Prudential AMC has

grown its average AUMs by 28% CAGR over the past 5 years as compared to the industry

growth of 23%. The company’s market share has improved 250bps to 13% in this period

but has remained stable yoy.

One of the benefits of this business is the strong operating leverage as earnings grew ~50%

yoy in FY2018 and 40% CAGR over the past 5 years. The margins (PAT/average AUM)

improved 3bps to 0.16%.

9.8

15.7

21.7 23.1 27.3

23.3 23.1 24.6 22.4

0

7

14

21

28

35

2010 2011 2012 2013 2014 2015 2016 2017 2018

Tier-1 Tier-2

77.6 74.7 73.8

70.2 72.1

79.2 79.1

70.0

92.7

50

60

70

80

90

100

2010 2011 2012 2013 2014 2015 2016 2017 2018

ICICI Bank Banks


Exhibit 49: Average AUM grew 26% yoy in FY2018 Average AUM, March fiscal year-ends, 2010-18


Exhibit 50: Market share stable at ~13% in FY2018 Market share in AUM, March fiscal year-ends, 2010-18


Exhibit 51: PAT grew ~50% yoy led by solid operating leverage March fiscal year-ends, 2010-18


Exhibit 52: The PAT margin improved 3bps yoy to 16bps PAT/average AUM, March fiscal year-ends, 2010-18


-15

0

15

30

45

60

0

700

1400

2100

2800

3500

2010 2011 2012 2013 2014 2015 2016 2017 2018

AUM Growth(Rs bn) (%)

10.8

10.5 10.3

10.8

11.8

12.5

13.0

13.3 13.3

10

11

12

12

13

14

2010 2011 2012 2013 2014 2015 2016 2017 2018

0

1000

2000

3000

4000

5000

2010 2011 2012 2013 2014 2015 2016 2017 20180.00

0.04

0.08

0.12

0.16

0.20

2010 2011 2012 2013 2014 2015 2016 2017 2018

Banks ICICI Bank


ICICI Securities and Primary Dealership

Mixed trend across these two businesses as equity markets did relatively well as compared to

the bond market players. Activity level in the securities market was solid leading to strong

growth in revenues and earnings but primary dealership was relatively weak due to rising

interest rates on a yoy basis leading to a decline in revenues and earnings in FY2018.

Revenues increased ~30% yoy while earnings grew ~65% yoy in the securities business

while revenues declined 65% and earnings declined ~75% yoy in the primary dealership

business. The revenues in the broking business grew ~32% yoy while bond gains, which are

the primary source of business income in the primary dealership business, declined ~95%

yoy. We are not reading too much into these changes given the nature of business that is

highly dependent on external conditions.

Exhibit 53: Securities saw strong growth in FY2018; primary dealership remains weak Key business metrics, March fiscal year-ends, 2010-18 (₹ mn)


ICICI Lombard General – a solid performance

ICICI Lombard General Insurance reported a decline of 5% yoy in earnings though PBT grew

by ~2% yoy. The tax provided increased to 28% from 22% in FY2015. This led to RoEs in

the business to decline to 17% from >20% reported in the previous few years.

The overall premiums in the business grew 20% yoy and the company’s market share was

maintained at 8% though it has lost share amongst private players by 60bps yoy to 18.4%.

Operating profit in fire insurance was strong but most of the other business had a relatively

weak performance with losses increasing in marine business. Combined ratio in the business

remained >100% for the fourth consecutive year at 107%.

2010 2011 2012 2013 2014 2015 2016 2017 2018

Securities

Revenues 6,131 5,860 5,697 5,922 6,672 10,597 9,810 12,306 16,180

Growth (%) 66 (4) (3) 4 13 59 (7) 25 31

PAT 1,227 1,132 771 682 749 2,440 2,357 3,376 5,534

Growth (%) (8) (32) (12) 10 226 (3) 43 64

Primary dealership

Revenues 1,784 1,249 1,800 2,479 2,687 4,154 3,922 7,288 2,606

Growth (%) (64) (30) 44 38 8 55 (6) 86 (64)

PAT 850 528 857 1,217 1,318 2,174 1,955 4,116 1,116

Growth (%) (69) (38) 62 42 8 65 (10) 111 (73)

ICICI Bank Banks


Exhibit 54: Premium and market share, March fiscal year-ends,

2010-18 Premium and market share, March fiscal year-ends, 2010-18


Exhibit 55: RoEs impressive at ~20% PAT and RoE, March fiscal year-ends, 2010-18

Notes:

(A) Earnings in FY2012 was impacted because of higher provisions

for prior period insurance claims in the auto loan portfolio


Exhibit 56: Combined ratio for the insurance business was at 100% Combined ratio for ICICI Lombard General Insurance, March fiscal year-ends, 2010-18 (%)


11

10 10 10 10

7 6 6

8

-

2

5

7

10

12

-

26

52

78

104

130

2010

2011

2012

2013

2014

2015

2016

2017

2018

Premium (LHS) Market share (RHS)

(Rs bn) (%)

10

-5

-25

2025

22

1620 21

-30

-15

0

15

30

45

(6000)

(3000)

0

3000

6000

9000

2010

2011

2012

2013

2014

2015

2016

2017

2018

PAT (LHS) RoE (RHS)(Rs mn) (%)

92

86

78

104 105 104 107

104

100

70

80

90

100

110

120

2010 2011 2012 2013 2014 2015 2016 2017 2018

Banks ICICI Bank


Exhibit 57: ICICI Bank - change in estimates March fiscal year-ends, 2019E-2021E (₹ mn)


Exhibit 58: ICICI Bank SOTP (FY2020) valuation


New estimates Old estimates (% change)

2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E

Net interest income 255,025 296,961 341,203 252,858 290,601 334,946 1 2 2

Spread 2.4 2.6 2.7 2.8 2.9 3.0

NIM (%) 3.1 3.3 3.3 3.1 3.2 3.2

Customer assets (Rs bn) 6,210 7,004 7,884 6,130 6,935 7,842 1 1 1

Loan loss provisions 162,595 45,758 48,403 163,424 46,272 49,126 (1) (1) (1)

Other income 151,546 173,728 195,738 158,988 182,824 206,897 (5) (5) (5)

Fee income 101,941 116,248 132,596 104,217 118,715 135,273 (2) (2) (2)

Treasury income 17,000 20,000 20,000 17,000 20,000 20,000 0 0 0

Operating expenses 172,430 190,989 210,978 171,659 189,910 209,939 0 1 0

Employee expenses 64,904 71,656 78,645 64,763 71,418 78,285 0 0 0

PBT 71,547 233,942 277,560 76,764 237,244 282,778 (7) (1) (2)

Tax 20,748 67,843 80,492 22,262 68,801 82,006 (7) (1) (2)

Net profit 50,798 166,098 197,067 54,503 168,443 200,773 (7) (1) (2)

PBT-treasury+provisions 217,142 259,700 305,962 223,188 263,516 311,904 (3) (1) (2)

ICICI

share (%) FY2020 (Rs) Valuation methodology

Value of ICICI standalone 100.0 281 Based on residual growth model

Subsidiaries

ICICI Financial Services 91ICICI Prudential Life 54.9 54 3X Embedded Value and 18X EVOP

General insurance 56.8 22 4.4X FY2020 PBR

Mutual funds 51.0 14 5.5% of AUMsOther subsidiaries/associates

ICICI Securities 74.0 9 15X FY2020 PER ICICI Securities Primary Dealer 100.0 2 1X FY2020 PBRICICI Homes 100.0 4 1.5X FY2020 PBRICICI Bank UK 100.0 3 0.6XFY2020 PBRICICI Bank Canada 100.0 3 0.6XFY2020 PBRVenture capital/MF 100.0 2 10% of AUM of US$2 bnValue of subsidiaries 114

Value of company 395

ICICI Bank Banks


Exhibit 59: ICICI Bank - forecasts and valuation March fiscal year-ends, 2013-2021E


P/B

(standalone)

(X) (X)

2013 83 13 23.2 105 2.9 13.1 14.7 16 83 2.3

2014 98 15 19.8 115 2.6 14.0 14.9 14.3 92 2.1

2015 113 18 17.2 126 2.4 14.7 15.0 12.5 101 1.9

2016 97 15 20.2 139 2.2 11.4 11.1 15.0 104 1.8

2017 98 15 19.9 156 2.0 10.9 10.0 14.6 108 1.8

2018 68 10 31.8 149 2.1 8.3 6.0 24.3 103 1.9

2019E 51 8 38.6 170 1.8 4.7 3.8 32.8 131 1.5

2020E 166 26 11.8 189 1.6 14.4 14.3 8.1 159 1.2

2021E 197 31 10.0 213 1.4 15.2 15.1 6.8 187 1.0

PAT

(Rs bn)

EPS

(Rs)

P/E

(X)

BVPS

(Rs)

P/B

(X)

RoE

(%)

Core RoE

(%)

P/E

(standalone)

ABVPS

(standalone)

(Rs)

Banks ICICI Bank


Exhibit 60: ICICI Bank, growth rates, key ratios and Du Pont analysis March fiscal year-ends, 2016-2021E (%)


2016 2017 2018 2019E 2020E 2021E

Growth rates (%)

Net loan growth 12.3 6.7 10.4 11.5 13.5 13.2

Customer assets growth 10.7 6.5 12.4 10.7 12.8 12.6

Corporate loans 3.9 (0.9) (0.8) 8.7 11.3 11.8

Total retail loans 22.7 14.5 20.5 13.6 15.0 14.2

Deposits growth 16.6 16.3 14.5 13.1 15.5 15.0

Borrowings growth (2.6) (26.5) (23.9) 13.5 (3.0) 1.5

Net interest income 11.5 2.4 5.9 10.8 16.4 14.9

Loan loss provisions 226.1 29.1 1.2 12.0 (71.9) 5.8

Non-interest income 25.8 27.3 (10.7) (13.0) 14.6 12.7

Net fee income 6.9 7.7 9.4 16.0 14.0 14.1

Net capital gains 145.1 127.2 (26.9) (73.0) 17.6 -

Total income 17.1 12.8 (1.9) 0.5 15.8 14.1

Operating expenses 10.3 16.3 6.4 9.8 10.8 10.5

Employee expenses 5.3 14.6 3.1 9.7 10.4 9.8

DMA 18.0 18.6 17.7 14.1 19.7 19.7

Asset management measures (%)

Yield on average earning assets 8.7 8.4 7.7 7.5 7.6 7.8

Interest on advances 9.5 8.8 8.4 8.4 8.5 8.7

Interest on investments 7.2 7.6 6.8 6.6 6.7 6.8

Average cost of funds 5.6 5.4 5.0 5.1 5.0 5.1

Interest on deposits 5.5 5.0 4.5 4.6 4.9 5.0

Other interest 5.7 6.4 7.6 7.8 5.3 5.4

Difference 3.2 3.0 2.7 2.4 2.6 2.7

Net interest income/earning assets 3.5 3.4 3.2 3.1 3.3 3.3

New provisions/average net loans 2.7 3.2 3.0 3.0 0.8 0.7

Loans-to-deposit ratio 73.3 75.2 77.9 76.8 77.3 77.2

Share of deposits

Current 14.0 15.3 15.9 15.1 14.6 14.2

Fixed 54.2 49.6 48.3 50.0 51.6 52.9

Savings 31.9 35.1 35.8 34.8 33.9 32.9

Tax rate 20.2 13.1 8.8 29.0 29.0 29.0

Dividend payout ratio 29.9 29.7 21.5 20.0 20.0 20.0

Asset quality metrics (%)

Gross NPL 5.7 8.5 9.5 7.8 5.9 4.6

Net NPL 3.0 5.4 5.4 3.1 1.5 0.8

Slippages 4.3 7.7 6.2 2.4 1.3 1.2

Provision coverage (ex write-off) 47.6 35.8 42.6 60.5 73.8 81.6

RoA composition - % of average assets

Net interest income 3.1 3.0 3.0 3.1 3.2 3.3

Loan loss provisions 1.6 2.0 1.9 2.0 0.5 0.5

Net other income 2.3 2.7 2.3 1.8 1.9 1.9

Operating expenses 1.9 2.1 2.2 2.1 2.1 2.0

(1- tax rate) 79.8 86.9 91.2 71.0 71.0 71.0

RoA 1.4 1.4 1.1 0.6 1.8 1.9

Average assets/average equity 8.0 7.7 7.5 7.8 8.0 8.1

RoE 11.4 10.9 8.3 4.7 14.4 15.2

ICICI Bank Banks


Exhibit 61: ICICI Bank income statement and balance sheet March fiscal year-ends, 2016-2021E (₹ mn)


2016 2017 2018 2019E 2020E 2021E

Total interest income 527,394 541,563 549,659 610,900 692,394 794,667

Interest on advances 389,432 396,034 408,662 455,242 518,991 601,736

Interest on investments 106,253 113,771 115,682 134,809 150,478 168,046

Total interest expense 315,154 324,190 319,400 355,875 395,433 453,464

Deposits from customers 215,488 228,717 234,288 275,044 338,435 395,673

Net interest income 212,240 217,373 230,258 255,025 296,961 341,203

Loan loss provisions 111,127 143,470 145,216 162,595 45,758 48,403

Net interest income (after prov.) 101,114 73,903 85,042 92,430 251,203 292,800

Other income 153,231 195,045 174,196 151,546 173,728 195,738

Net fee income 74,617 80,349 87,894 101,941 116,248 132,596

Net capital gains 37,954 86,232 63,059 17,000 20,000 20,000

Miscellaneous income 2,592 721 834 1,042 1,302 1,628

Operating expenses 126,836 147,551 157,039 172,430 190,989 210,978

Employee expense 50,023 57,337 59,140 64,904 71,656 78,645

DMA 9,340 11,078 13,036 14,872 17,795 21,295

Pre-tax income 121,959 112,787 74,346 71,547 233,942 277,560

Tax provisions 24,694 14,775 6,570 20,748 67,843 80,492

Net profit 97,264 98,012 67,776 50,798 166,098 197,067

% growth (13.9) 0.8 (30.8) (25.0) 227.0 18.6

PBT+provision-treasury gains 200,681 172,545 165,583 217,142 259,700 305,962

% growth 10.4 (14.0) (4.0) 31.1 19.6 17.8


Cash and bank balance 530,266 469,000 625,036 720,060 808,308 907,837

Cash 65,797 71,939 80,448 91,000 105,102 120,879

Balance with RBI 205,263 245,085 250,576 331,672 376,078 427,118

Balance with banks 2,446 3,801 4,849 5,334 5,867 6,454

Outside India 256,759 148,175 289,163 292,054 321,260 353,386

Net value of investments 1,604,118 1,615,065 2,029,942 2,266,147 2,443,214 2,723,024

Investments in India 1,522,607 1,541,700 1,962,100 2,198,912 2,376,704 2,657,223

Govt. and other securities 1,106,493 1,104,084 1,391,853 1,618,966 1,774,306 2,030,670

Shares 19,874 27,419 23,781 23,781 23,781 23,781

Subsidiaries 64,218 62,405 61,489 61,489 61,489 61,489

Debentures and bonds 92,742 100,750 153,889 156,967 172,664 189,930

Net loans and advances 4,352,639 4,642,321 5,123,953 5,715,719 6,486,483 7,342,879

Corporate loans 2,221,939 2,201,941 2,184,003 2,374,498 2,643,159 2,955,039

Total retail loans 2,130,700 2,440,380 2,939,950 3,341,221 3,843,324 4,387,840

Fixed assets 75,770 78,052 79,035 72,540 66,288 59,125

Net leased assets 2,415 2,415 2,415 1,035 880 748

Net owned assets 73,355 75,637 76,620 71,505 65,407 58,377

Other assets 575,737 625,345 - - - -

Total assets 7,138,531 7,429,784 7,857,965 8,774,467 9,804,292 11,032,864

Deposits 4,214,257 4,900,391 5,609,752 6,345,572 7,328,947 8,429,051

Borrowings and bills payable 1,726,711 1,269,105 966,385 1,096,642 1,064,208 1,080,399

Preference capital 3,500 3,500 3,500 3,500 3,500 3,500

Other liabilities 300,207 260,778 230,239 241,751 193,401 154,721

Total liabilities 6,241,175 6,430,274 6,806,376 7,683,965 8,586,556 9,664,170

Paid-up capital 11,699 11,651 12,858 12,858 12,858 12,858

Reserves & surplus 885,657 987,860 1,038,731 1,077,644 1,204,878 1,355,836

Total shareholders' equity 897,356 999,511 1,051,589 1,090,502 1,217,736 1,368,694


1QFY19—TCS adds more incremental revenues than the next four

Tier-1 performance was polarized. TCS impressed with 4.1% c/c revenue growth ahead of

consensus. Infosys’ performance was marginally weaker than expected but did just enough to

indicate that the company was on track for a turnaround. Wipro performed better than

expected yet ended up with flat revenues. HCLT disappointed while Tech Mahindra surprised on

lowered expectations. None of the Tier-1 companies, except TCS, reported yoy acceleration in

organic revenue growth. TCS added US$204 mn of absolute incremental revenues in c/c in the

quarter. The next four managed US$125 mn in c/c terms.

Mid-tier pack—continues to impress

The mid-tier pack impressed with growth rates for Mindtree and L&T Infotech hitting 20%+ on

yoy comparison. Even other mid-tier companies such as Hexaware, NIIT Technologies and L&T

Technology Services delivered impressive growth rates. Factors helping growth rates are—(1)

market share gains amid robust spending by top clients. Mindtree derived 43% of incremental

revenues from the top client in the quarter, (2) lesser legacy drags and (3) deal flow that has

picked up over the past year. Expect select midcaps to outperform large players on growth.

Strong deal flow for all, growth for some

Nearly all companies indicated record bookings, deal flow or TCV wins. A valid question is why

are incremental revenues not added at record levels for IT companies? We can only fathom the

following points—(1) increasing consolidation among Tier-1 vendors. Hence win for one

offshore pure-play may be a loss for another. The entire business won is not net new from

industry standpoint and (2) increasing magnitude of deflationary pressure in the legacy

business. Predicting the leakage in existing revenues is an increasing challenge, especially when

the intensity of leakage has picked up. This dynamics is best highlighted by HCLT’s performance

where two record quarters of bookings will end up translating in modest 4.25-6.25% organic

constant-currency revenue growth rate for FY2019. Bottom line—bookings have to be

juxtaposed with renewal rate of business and magnitude of deflationary pressure in the core.

BFSI conundrum—growth for some, decline for others

Insurance growth is strong across the board. However, growth in the banking vertical was

mixed with Infosys and HCLT reporting decline and Wipro and TCS registering healthy growth.

What explains the divergence? IT spending of banks is growing at a robust clip, which should

have reflected in robust growth across players. However, this has not materialized into growth

due to insourcing and captive shift of spend by key clients. Growth in the vertical will be a

function of two factors—(1) participation rate in digital program. Wipro’s consistent growth in

banking is courtesy a few consolidation and customer experience transformation wins. TCS’

growth in the recent quarter seems to suggest that it is participating aggressively in integration

digital programs and (2) exposure to accounts that have experienced a captive shift. Wipro is

the only company fortuitous enough to avoid the impact. Bottom line—growth will directionally

improve but expect it to be patchy and inconsistent across players in FY2019.

Technology India

1QFY19 review: The familiar story. The familiar actors delivered again in the quarter,

i.e. TCS and the mid-cap pack. The rest of the Tier-1 reported muted results.

Commentary across the board was optimistic backed by strong bookings/TCV of deal

wins. After years of deceleration, the industry is finally set for acceleration in growth,

albeit a modest one (1-2%). Stock valuations reflect this optimism. Our stock pecking

order captures two themes—(1) turnaround/growth normalization themes in Tier-1

where valuations are inexpensive (Infosys and Tech Mahindra) and (2) strong business

models with scalability attributes (Mindtree and L&T Infotech) in the mid-tier category.

CAUTIOUS

AUGUST 06, 2018

UPDATE

BSE-30: 37,556

Kawaljeet Saluja

Jaykumar Doshi

Technology India


Stock selection—turnaround stories in Tier-1, consistency in mid-tier

Stock investment approach can be either to back companies that have executed consistently

and trading at rich multiples or buy into companies that are trading at inexpensive valuations

but have hit an execution or portfolio hurdle. Infosys falls in this category. With a certain

stretch of definition one can consider Tech Mahindra as well. Both these companies have

experienced challenges in recent times. These challenges reflect in relatively inexpensive

multiples (16.5X for Infosys and 12X for Tech Mahindra on June 2020E earnings). However,

focus on execution (Infosys) or upcoming opportunities in the marketplace (Tech Mahindra)

can drive turnaround in growth rates and accordingly valuations. Infosys and Tech Mahindra

are our top picks. We would have loved to recommend TCS noting its global leadership on

multiples attributes but find the valuations really punchy for our comfort.

Scale attributes are important for investments in mid-tier companies. Key scale attributes

are—pockets of differentiation and ability to win consistently against established players in

core areas of competence, quality of employee base, profile of clients and breadth of

offerings demonstrated through number of accounts that have accepted multiple services.

L&T Infotech has demonstrated through wins against well-established competitors and

strengths in core and digital offerings. Mindtree excels in quality of resource base, clients

and digital offerings. Both the stocks are our key picks in the mid-tier category.

Margin concerns addressed by rupee depreciation

Indian IT has been fortuitous that rupee depreciation has absorbed margin headwind

resulting from pricing pressure, investments in digital and project staffing challenges

resulting elevated rejection of H-1B applications. Whether offshore pure-plays can retain the

currency depreciation benefits in the medium term remains debatable (we think they may

not); nonetheless the near-term headwinds have been taken care of. Nearly all companies in

the space have reported stable to yoy increase in EBIT margins as detailed in Exhibit 10.

Interesting data points from results

Revenue growth—muted for Tier-1 except TCS, mid-tier companies on a roll. Topline

growth was weak for Tier-1 but better than expectations. On organic c/c basis, growth of

Tier-1 ITs varied from 0.2-4.1%—TCS (+4.1%) led the pack, followed by Infosys (+2.3%),

HCLT (+0.7%) and Wipro (+0.2%). Mid-tier companies that have reported so far have

delivered stellar numbers—Mindtree leading the pack with 8.2% c/c growth, followed by

L&T Infotech (+5.1%) and Hexaware (+4.5%).

Mixed growth rates in BFS. Mid-tier companies reported strong growth in the BFS vertical.

L&T grew 11.6% qoq, Mindtree by 5.8% and Hexaware by 1.6% in USD terms. Growth

rates were mixed across Tier-1 companies. Infosys and HCLT reported revenue decline,

while TCS and Wipro reported strong growth. CTSH reported muted growth in financial

services for the quarter. Among the companies that reported weak BFS revenues,

commentary on outlook was optimistic.

Hiring has picked up and so has attrition rates. All companies are running at high

utilization rates (Exhibit 12). Further growth requires headcount addition, which showed

in numbers of IT companies. Net hiring by Tier-1 IT companies was at a seven-quarter

high. Attrition rates picked up across the board.

India Technology


Exhibit 1: June 2018 quarter performance versus KIE estimates

Source: Companies, Kotak Institutional Equities

Revenues EBIT margin Net Income FY2019E/CY2018E FY2020E/CY2019E Pre-results Post results

Infosys In-line In-line Miss ▲ ▲ 1,350 1,400

TCS In-line Beat Beat ▲ ▲ 1,650 1,790

Wipro In-line Beat Beat — ▲ 295 295

HCL Tech In-line In-line Beat ▲ ▲ 1,010 1,025

Mindtree Beat In-line Beat ▲ ▲ 1,015 1,115

Hexaware (b) Miss Miss Beat ▲ ▲ 420 435

L&T Infotech Beat Beat Beat ▲ ▲ 1,650 2,000

Tech Mahindra In-line Beat Beat ▲ ▲ 775 785

Notes.

(a) Revenue and net income beat/miss implies revenues/net income more/less than estimates by 1% or more.

Equivalent measure for EBIT margin estimates is 50 bps.

(b) Hexaware has calendar year-ends

vs KIE estimates Earnings changes Target price (Rs)

Technology India


Exhibit 2: June 2018 quarter financial performance of key companies under our coverage


Jun-18 qoq (%) yoy (%) Jun-18E versus est. (%)

Infosys

Revenues (US$ mn) 2,805 6.8 0.9 2,853 (1.7)

Revenues (Rs mn) 191,280 12.0 5.8 191,588 (0.2)

EBIT (Rs mn) 45,370 10.4 1.5 45,329 0.1

Net income (Rs mn) 36,120 3.7 (2.1) 37,069 (2.6)

EBIT margin (%) 23.7 23.7 6 bps

TCS

Revenues (US$ mn) 5,051 1.6 10.0 5,091 (0.8)

Revenues (Rs mn) 342,610 6.8 15.8 341,828 0.2

EBIT (Rs mn) 85,780 5.3 24.1 83,739 2.4

Net income (Rs mn) 73,400 6.3 23.5 69,525 5.6


Wipro

Revenues (US$ mn) - Global IT Services 2,004 (1.7) 2.8 2,009 (0.3)

Revenues (Rs mn) - Wipro Limited 140,548 1.7 2.9 141,097 (0.4)

EBIT (Rs mn) - Wipro Limited 23,308 20.2 5.5 22,417 4.0

Net income (Rs mn) 21,208 17.6 2.1 19,966 6.2

Global IT EBIT margin (%) 15.6 16.7 -105 bps

HCLT

Revenues (US$ mn) 2,055 0.8 9.1 2,064 (0.5)

Revenues (Rs mn) 138,780 5.3 14.2 138,835 (0.0)

EBIT (Rs mn) 27,300 5.7 11.7 27,195 0.4

Net income (Rs mn) 24,040 7.9 10.8 22,347 7.6


Mindtree

Revenues (US$ mn) 242 6.8 20.7 233 3.7

Revenues (Rs mn) 16,395 12.0 27.1 15,632 4.9

EBIT (Rs mn) 1,910 (3.1) 95.7 1,808 5.6

Net income (Rs mn) 1,582 (13.2) 30.0 1,466 7.9


Tech Mahindra

Revenues (US$ mn) 1,224 (1.6) 7.6 1,220 0.3

Revenues (Rs mn) 82,763 2.8 12.8 81,917 1.0

EBIT (Rs mn) 10,761 (3.3) 56.4 10,103 6.5

Net income (Rs mn) 8,979 (26.5) 12.4 8,660 3.7


Hexaware

Revenues (US$ mn) 168 3.8 10.3 170 (1.1)

Revenues (Rs mn) 11,367 8.4 15.6 11,422 (0.5)

EBIT (Rs mn) 1,591 7.9 10.4 1,705 (6.7)

Net income (Rs mn) 1,536 14.4 25.5 1,452 5.8

EBIT margin (%) 14.0 14.9 -93 bps

L&T Infotech

Revenues (US$ mn) 320 23.4 1.9 314 1.9

Revenues (Rs mn) 21,557 29.0 2.3 21,076 2.3

EBIT (Rs mn) 3,811 58.5 12.1 3,399 12.1

Net income (Rs mn) 3,611 24.7 35.1 3,048 18.5

EBIT margin (%) 17.7 16.1 155 bps

India Technology


Exhibit 3: Guidance issued by Indian IT companies


Actuals

Jun-18 Sep-18 qoq (%) yoy (%) Sep-18 qoq (%) yoy (%) FY2019/CY2018 yoy (%) FY2019/CY2018 yoy (%)

Infosys

Revenues (US$ mn) 2,805 11,705 7.0 11,924 9.0

Re/US$ rate 68.2

Wipro

Revenues IT services

(US$ mn) (a),(b)2,004 2,009 0.3 (0.2) 2,049 2.3 1.8

HCLT

Revenues (US$ mn) 2,055 8,496 8.4 8,653 10.4

Hexaware (c)

Revenues (US$ mn) 168 680 12.0 686 13.0

Notes:

(a) Global IT services.

(b) Wipro's growth guidance excludes one time gain from divestment of data centre business in Jun-18

(c) Hexaware has calendar year-ends

9.5-11.5% constant currency (8.4-10.4% in USD terms) revenue growth in

FY2019

12-13% US$ revenue growth in CY2018; 13% to 14% EPS growth in US$

terms

Guidance

(upper-end)

6-8% constant currency (7-9% in USD terms) revenue growth in FY2019

Guidance

(lower-end)

Guidance

(upper-end)

Guidance

(lower-end)

Technology India


Exhibit 4: Estimate revision for our IT coverage universe

Source: Companies, Kotak Institutional Equities estimates

FY2019E/ FY2020E/ FY2021E/ FY2019E/ FY2020E/ FY2021E/ FY2019E/ FY2020E/ FY2021E/

CY2018E CY2019E CY2020E CY2018E CY2019E CY2020E CY2018E CY2019E CY2020E

Infosys

Revenues (US$ mn) 11,680 12,737 13,932 11,808 12,871 14,079 (1.1) (1.0) (1.0)

EPS (Rs) 70.9 78.3 85.3 69.8 76.5 84.8 1.5 2.3 0.7

EBIT margin (%) 23.7 23.7 23.7 23.4 23.4 23.5 24 bps 25 bps 16 bps

TCS

Revenues (US$ mn) 20,992 22,880 24,877 20,975 22,857 24,856 0.1 0.1 0.1

EPS (Rs) 81.8 89.0 95.6 77.6 84.4 92.8 5.4 5.5 3.0


Wipro

IT Services Revenues (US$ mn) 8,255 8,748 9,257 8,280 8,751 9,265 (0.3) (0.0) (0.1)

EPS (Rs) 18.9 21.7 23.4 18.8 21.4 23.6 0.6 1.4 (0.9)

EBIT margin (%) - IT 16.6 17.3 17.3 17.0 17.6 17.7 -36 bps -35 bps -43 bps

HCLT

Revenues (US$ mn) 8,593 9,324 9,966 8,674 9,400 10,071 (0.9) (0.8) (1.0)

EPS (Rs) 70.3 73.8 77.5 67.9 71.3 77.2 3.5 3.5 0.3

EBIT margin (%) 19.5 18.8 18.2 19.5 18.9 18.6 -7 bps -13 bps -46 bps

Tech Mahindra

Revenues (US$ mn) 5,059 5,481 5,929 5,138 5,571 6,027 (1.5) (1.6) (1.6)

EPS (Rs) 46.2 54.6 60.6 45.5 52.6 60.5 1.6 3.8 0.2


Mindtree

Revenues (US$ mn) 993 1,123 1,266 972 1,102 1,247 2.1 1.9 1.5

EPS (Rs) 43.1 53.3 61.8 42.6 52.4 61.5 1.3 1.7 0.5

EBIT margin (%) 12.9 14.2 14.5 13.1 14.3 14.5 -13 bps -12 bps 9 bps

Hexaware (a)

Revenues (US$ mn) 688 790 887 693 789 886 (0.7) 0.1 0.1

EPS (Rs) 19.6 23.1 25.4 19.8 22.2 25.3 (0.9) 3.9 0.7

EBIT margin (%) 14.4 15.3 15.1 15.0 15.0 14.9 -65 bps 25 bps 16 bps

L&T Infotech

Revenues (US$ mn) 1,349 1,538 1,746 1,331 1,512 1,718 1.3 1.7 1.6

EPS (Rs) 82.9 93.7 109.1 72.8 84.2 97.3 13.9 11.3 12.2


Note

(a) Hexaware has calendar year-ends

Revised Earlier Change (%)/(bps)

India Technology


Exhibit 5: US$ and constant-currency revenue growth of the Indian IT companies


Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18

Revenues (US$ mn)

TCS 4,156 4,145 4,207 4,362 4,374 4,387 4,452 4,591 4,739 4,787 4,972 5,051

Cognizant 3,187 3,233 3,202 3,370 3,453 3,462 3,546 3,670 3,766 3,828 3,912 4,006

Infosys 2,392 2,407 2,446 2,501 2,587 2,551 2,569 2,651 2,728 2,755 2,805 2,831

Wipro IT 1,832 1,838 1,882 1,931 1,916 1,903 1,955 1,972 2,014 2,013 2,062 2,027

HCL Tech 1,545 1,566 1,587 1,691 1,722 1,745 1,817 1,884 1,928 1,988 2,038 2,055

Tech M 1,011 1,015 1,023 1,032 1,072 1,116 1,131 1,138 1,179 1,209 1,244 1,224

L&T Infotech 224 225 230 231 240 245 254 259 271 294 309 320

Mindtree 180 184 196 199 193 192 196 200 206 214 226 242

Hexaware 125 124 122 130 135 139 145 153 154 156 162 168

Total 10,329 14,962 15,124 15,677 15,933 15,986 16,318 16,777 17,255 17,537 18,040 18,243

US$ - sequential growth (%)

TCS 3.0 (0.3) 1.5 3.7 0.3 0.3 1.5 3.1 3.2 1.0 3.9 1.6

Cognizant 3.3 1.4 (0.9) 5.2 2.5 0.3 2.4 3.5 2.6 1.6 2.2 2.4

Infosys 6.0 0.6 1.6 2.2 3.4 (1.4) 0.7 3.2 2.9 1.0 1.8 0.9

Wipro IT 2.1 0.3 2.4 2.6 (0.8) (0.7) 2.7 0.9 2.1 (0.0) 2.4 (1.7)

HCL Tech 0.4 1.4 1.3 6.5 1.9 1.3 4.1 3.7 2.3 3.1 2.5 0.8

Tech M 2.2 0.4 0.7 0.9 4.0 4.1 1.4 0.6 3.6 2.5 2.9 (1.6)

L&T Infotech 7.3 0.4 2.1 0.6 3.7 2.3 3.7 2.0 4.4 8.5 5.3 3.5

Mindtree 16.4 2.3 6.1 1.7 (3.0) (0.4) 1.8 2.3 3.0 3.9 5.6 6.8

Hexaware 3.1 (0.8) (1.9) 6.6 4.3 2.7 4.1 5.5 0.9 1.3 3.9 3.8

Total 3.4 44.9 1.1 3.7 1.6 0.3 2.1 2.8 2.8 1.6 2.9 1.1

YoY growth (%)

TCS 5.8 5.4 7.9 8.1 5.2 5.8 5.8 5.2 8.3 9.1 11.7 10.0

Cognizant 23.5 17.9 10.0 9.2 8.4 7.1 10.7 8.9 9.1 10.6 10.3 9.2

Infosys 8.7 8.5 13.3 10.9 8.2 6.0 5.0 6.0 5.5 8.0 9.2 6.8

Wipro IT 3.4 2.4 6.1 7.6 4.6 3.5 3.9 2.1 5.1 5.8 5.5 2.8

HCL Tech 7.7 5.1 6.5 9.9 11.5 11.4 14.5 11.4 11.9 13.9 12.2 9.0

Tech M 12.3 9.8 3.9 4.3 6.1 10.0 10.6 10.3 10.0 8.3 10.0 7.6

L&T Infotech 10.8 7.1 9.0 10.6 12.2 12.9 19.7 21.6 23.4

Mindtree 22.6 25.4 33.0 28.5 7.0 4.2 — 0.6 6.8 11.5 15.6 20.7

Hexaware 13.7 8.4 5.9 6.9 8.1 12.0 18.9 17.7 13.9 12.3 12.1 10.3

Total (3.4) 52.9 56.2 57.0 54.3 6.8 7.9 7.0 8.3 9.7 10.6 8.7

Constant currency - sequential growth (%)

TCS 3.9 0.5 2.1 3.1 1.0 2.0 1.0 2.0 1.7 1.3 2.0 4.1

Infosys 6.9 1.1 1.9 1.7 3.9 (0.3) — 2.7 2.2 0.8 0.6 2.3

Wipro IT 3.1 1.4 2.7 2.0 0.9 0.6 1.7 0.2 0.3 0.9 1.1 0.1

HCL Tech 1.2 2.1 1.7 6.0 2.8 3.0 3.8 2.6 2.3 3.3 1.2 2.7

Tech M 3.0 1.2 1.3 0.4 5.0 5.4 0.9 (0.6) 2.3 2.4 1.7 0.3

L&T Infotech (0.3) 3.6 3.8 2.4 1.5 3.5 8.3 4.5 5.1

Mindtree 16.5 3.0 7.1 1.1 1.7 0.4 2.0 1.2 2.1 3.9 4.6 8.2

Hexaware 3.4 (0.5) (1.8) 6.3 4.8 3.4 4.0 4.9 0.4 1.3 3.3 4.7

Local currency - yoy growth (%)

Accenture 12.0 10.0 12.0 10.0 9.0 7.0 6.0 7.0 8.0 10.0 10.0 11.0

Technology India


Exhibit 6: Mid-tier IT outperforming Tier-1 IT on growth



QoQ % in USD revenues

TCS 1.5 3.7 0.3 0.3 1.5 3.1 3.2 1.0 3.9 1.6

CTSH (0.9) 5.2 2.5 0.3 2.4 3.5 2.6 1.6 2.2 2.4

Infosys 1.6 2.2 3.4 (1.4) 0.7 3.2 2.9 1.0 1.8 0.9

Wipro 2.4 2.6 (0.8) (0.7) 2.7 0.9 2.1 (0.0) 2.4 (1.7)

HCL Tech 1.3 6.5 1.9 1.3 4.1 3.7 2.3 3.1 2.5 0.8

Tier 1 IT 1.0 4.0 1.4 (0.0) 2.1 3.0 2.8 1.3 2.7 1.1

QoQ % in USD revenues

L&T Infotech 2.1 0.6 3.7 2.3 3.7 2.0 4.4 8.5 5.3 3.5

Mindtree 6.1 1.7 (3.0) (0.4) 1.8 2.3 3.0 3.9 5.6 6.8

Hexaware (1.9) 6.6 4.3 2.7 4.1 5.5 0.9 1.3 3.9 3.8

L&T Tech 0.3 1.1 2.3 (2.4) 1.0 5.3 9.1 8.4 7.5 4.0

Cyient — 5.3 9.5 (0.5) 3.8 (0.3) 6.8 1.3 8.6 (2.5)

NIIT Tech (1.6) (0.7) 2.3 (0.5) 7.4 (0.4) 4.3 1.7 4.7 1.7

Mid-Tier IT 1.2 2.8 2.4 (0.2) 3.4 2.5 4.6 3.4 6.1 3.1


YoY% in USD revenues

TCS 7.9 8.1 5.2 5.8 5.8 5.2 8.3 9.1 11.7 10.0

CTSH 10.0 9.2 8.4 7.1 10.7 8.9 9.1 10.6 10.3 9.2

Infosys 13.3 10.9 8.2 6.0 5.0 6.0 5.5 8.0 9.2 6.8

Wipro 6.1 7.6 4.6 3.5 3.9 2.1 5.1 5.8 5.5 2.8

HCL Tech 6.5 9.9 11.5 11.4 14.5 11.4 11.9 13.9 12.2 9.0

Tier 1 IT 8.9 9.0 7.2 6.5 7.6 6.6 8.0 9.4 10.1 8.1

YoY % in USD revenues

L&T Infotech 10.8 7.1 9.0 10.6 12.2 12.9 19.7 21.6 23.4

Mindtree 32.3 28.5 7.0 4.2 - 0.6 6.8 11.5 15.6 20.7

Hexaware 5.9 6.9 8.1 12.0 18.9 17.7 13.9 12.3 12.1 10.3

L&T Tech 3.5 1.3 2.0 6.2 13.3 25.8 33.9 32.3

Cyient 0.9 9.1 15.3 14.7 19.1 12.8 10.0 11.9 17.0 14.4

NIIT Tech 3.7 (0.1) (1.3) (0.5) 8.6 8.9 11.0 13.4 10.6 13.0

Mid-Tier IT 6.8 6.3 8.7 8.4 10.6 14.5 17.5 18.2

India Technology


Exhibit 7: Revenues by industry verticals (US$ mn)


June-18 quarter June-18 quarter

Revenue % of revenues qoq yoy Revenues % of revenues qoq yoy

TCS Tech Mahindra

BFSI 1,571 31.1 1.6 5.3 Telecom 485 39.6 (6.4) (5.8)

Retail & CPG 838 16.6 1.6 14.1 Manufacturing 246 20.1 2.5 12.0

Communication & Media 359 7.1 1.6 10.0 Tech, Media & Entertainment 88 7.2 (3.0) 29.1

Manufacturing 369 7.3 0.2 8.5 BFSI 166 13.6 2.9 1.6

Life sciences & healthcare 369 7.3 3.0 13.1 Retail, transport, logistics 75 6.1 (3.2) (3.5)

Energy & Utilities 242 4.8 1.6 32.0 Others 164 13.4 4.6 73.6

Technology & Services 389 7.7 0.3 7.2 Total 1,224 100.0 (1.6) 7.6

Regional markets and others 914 18.1 2.2 10.6 L&T Infotech

Total 5,051 100.0 1.6 10.0 Banking and financial services 99 31.0 11.6 42.3

Cognizant Insurance 58 18.2 3.0 9.0

Financial Services 1,469 36.7 0.5 4.5 Manufacturing 50 15.7 (6.0) 16.7

Healthcare 1,156 28.9 3.1 10.1 Energy & utilities 32 10.1 (9.1) 6.5

Products and resources 840 21.0 2.3 12.4 CPG retail and pharma 29 9.1 4.7 32.1

Comm, Media and Tech (TMT) 541 13.5 6.3 15.8 High-Tech, Media & Entertainment 36 11.3 10.4 32.8

Total 4006 100.0 2.4 9.2 Others 14 4.5 1.3 4.8

Infosys Total 319 100.0 3.5 23.4

Financial Services 899 31.8 (1.5) 2.9 Mindtree

Retail 469 16.6 5.0 8.9 Hi-Tech & Media Services 94 38.8 10.5 23.9

Communications 360 12.7 (0.6) 7.7 BFSI 54 22.3 5.8 7.2

Energy, Utilities, Resources and Servcies 351 12.4 4.3 17.2 Retail, CPG & Manufacturing 56 23.1 2.8 22.8

Manufacturing 272 9.6 1.0 10.2 Travel & Hospitality 38 15.7 6.1 33.3

Hi Tech 211 7.4 1.6 8.5 Total 242 100.0 6.8 20.7

Life Sciences 186 6.6 (0.9) 6.7 Hexaware

Others 83 2.9 1.3 (14.4) Banking and Financial services 72 42.8 1.6 9.0

Total 2,831 100.0 0.9 6.8 Travel & Transportation 19 11.1 (12.1) (8.6)

Wipro Healthcare & Insurance 29 17.1 10.9 20.9

Communications 113 5.6 (5.1) (15.4) Mfg, consumer & others 27 16.1 10.6 32.5

Consumer 324 16.0 0.8 4.1 Professional services 22 12.9 10.6 (0.5)

Energy, Natural Resources & Utilities 253 12.5 (1.7) (4.1) Total 168.3 100.0 3.8 10.3

Finance Solutions 608 30.0 1.0 15.5

Healthcare, Life Sciences & Services 272 13.4 (5.3) (6.9)

Manufacturing 168 8.3 (6.2) (5.2)

Technology 288 14.2 (2.4) 8.1

Total 2,026 100.0 (1.7) 2.8

HCL Tech

Financial services 489 23.8 (3.9) 4.2

Manufacturing 376 18.3 (3.9) (3.6)

Technology&Services 374 18.2 9.2 39.8

Retail & CPG 187 9.1 (4.4) 4.5

Telecom, media, publishing, entertainment 150 7.3 (0.5) 0.8

Life sciences 263 12.8 12.4 18.3

Energy-utilities-public sector 216 10.5 0.1 3.2

Total 2,055 100.0 0.8 9.1

Growth (%) Growth (%)

Technology India


Exhibit 8: Revenues by geographies (US$ mn)


June-18 quarter June-18 quarter

Revenues % of revenues qoq yoy Revenues % of revenues qoq yoy

TCS Tech Mahindra

North America 2,576 51.0 3.2 6.9 Americas 590 48.2 0.0 10.8

Latin America 96 1.9 (3.5) (0.5) Europe 367 30.0 (0.3) 8.3

UK 783 15.5 3.6 22.7 RoW 268 21.9 (6.3) 0.7

Continental Europe 707 14.0 0.2 23.2 Total 1,225 100.0 (1.6) 7.6

India 293 5.8 (5.0) (8.8) L&T Infotech

Asia Pacific 485 9.6 0.5 11.2 North America 213 66.6 4.5 19.6

MEA 111 2.2 (10.6) (3.2) Europe 57 17.9 (0.4) 24.1

Total 5,051 100.0 1.6 10.0 India 20 6.4 (17.2) 11.3

Cognizant RoW 29 9.1 27.3 78.3

North America 3,067 76.6 3.1 7.6 Total 320 100.0 3.5 23.4

Europe 690 17.2 0.9 19.2 Mindtree

Rest of the world 249 6.2 (1.6) 3.8 North America 176 72.7 9.3 26.1

Total 4,006 100.0 2.4 9.2 Europe 49 20.2 1.7 15.0

Infosys India 7 2.9 3.4 24.7

North America 1,699 60.0 1.9 4.9 Rest of the world 10 4.1 (4.6) (19.5)

Europe 688 24.3 (1.1) 15.8 Total 242 100.0 6.8 20.7

India 74 2.6 (6.3) (22.9) Hexaware

Rest of the world 371 13.1 1.7 8.4 Americas 130 77.0 6.1 5.1

Total 2,831 100.0 0.9 6.8 Europe 21 12.7 5.4 25.1

Wipro Asia Pacific 17 10.3 (12.4) 42.0

US 1,113 54.9 2.4 3.5 Total 168 100.0 3.8 10.3

Europe 519 25.6 (6.8) 8.7

India and Middle east business 174 8.6 (10.1) (15.0)

Other emerging markets 221 10.9 (1.7) 2.8

Total 2,027 100.0 (1.7) 2.8

HCL Tech

America 1,325 64.4 5.6 12.0

Europe 577 28.1 (5.6) 11.9

Rest of the world 154 7.5 (11.0) (16.5)

Total 2,057 100.0 0.8 9.1

Growth (%) Growth (%)

India Technology


Exhibit 9: Revenues by service lines (US$ mn)


Exhibit 10: EBIT margin trajectory of Indian IT companies


Revenues % of revenues qoq yoy Revenues % of revenues qoq yoy

Infosys L&T Infotech

Services 2,695 95.2 1.0 7.5 ADM 109 34.1 7.3 15.9

Digital 756 26.7 6.5 27.3 Enterprise solutions 84 26.4 0.8 41.7

Core 1,939 68.5 (1.0) 1.3 IMS 37 11.5 1.8 15.4

Products & platforms 136 4.8 (1.1) (5.1) Testing 26 8.1 (0.2) 11.1

Digital 48 1.7 14.4 21.0 Analytics, AI and Cognitive 33 10.3 (0.3) 31.1

Core 88 3.1 (8.0) (15.1) Enterprise integration and mobility 21 6.5 3.5 25.3

Total 2,831 100.0 0.9 6.8 Platform based solutions 10 3.1 3.5 6.3

Digital 804 28.4 7.0 26.9 Total revenues 319 100.0 3.5 23.4

Core 2,027 71.6 (1.3) 0.5 Mindtree

Total revenues 2,831 100.0 0.9 6.8 ADM 122 50.6 7.6 19.5

Wipro Consulting 8 3.3 (6.9) 20.7

Global Infrastructure Services 555 27.4 (6.5) 0.2 Package implementation 26 10.8 1.0 11.2

Wipro Analytics 144 7.1 (0.3) 2.8 IP led revenue 1 0.4 (28.8) (34.2)

Business Process Services 245 12.1 (1.7) 3.6 Independent testing 32 13.3 10.1 34.0

Product Engineering 148 7.3 (1.7) 7.2 IMS & Tech support 52 21.6 9.8 24.1

Application Services 934 46.1 1.1 3.5 Total revenues 241 100.0 6.8 20.7

Total revenues 2,027 100.0 (1.7) 2.8 Hexaware

HCL Tech ADM 62 36.6 5.8 10.6

Application services 699 34.0 (1.2) 2.2 EAS 18 10.5 (0.0) (0.2)

Engineering and R&D services 503 24.5 2.5 24.3 Testing / QATS 31 18.4 (0.0) 3.0

Infrastructure services 744 36.2 (2.1) 2.3 Business intelligence & analytics 23 13.5 (1.4) 6.3

BPO services 107 5.2 34.4 57.5 BPO 12 7.2 8.3 10.3

Total revenues 2,053 100.0 0.8 9.1 IMS 23 13.8 10.1 38.4

Tech Mahindra Total revenues 168 100.0 3.8 10.3

IT services 1,133 92.6 (1.7) 6.4

BPO 91 7.4 (0.5) 24.0

Total revenues 1,224 100.0 (1.6) 7.6

Growth (%)June-18 quarter June-18 quarter Growth (%)

Jun-17 Mar-18 Jun-18 qoq (bps) yoy (bps)

TCS 23.4 25.4 25.0 -36 bps 167 bps

Infosys 24.1 24.7 23.7 -101 bps -35 bps

Wipro - IT services 16.8 14.4 15.6 124 bps -118 bps

HCL Tech 20.1 19.6 19.7 7 bps -45 bps

Tech Mahindra 9.4 13.8 13.0 -82 bps 363 bps

Hexaware 14.7 14.1 14.0 -6 bps -65 bps

Mindtree 11.2 10.6 7.6 -306 bps -361 bps

CTSH 20.0 20.3 22.0 172 bps 199 bps

L&T Infotech 14.4 12.8 17.7 489 bps 328 bps

Note:

(1) Non-GAAP EBIT margin for CTSH

Technology India


Exhibit 11: Attrition has firmed up for most of the companies


Exhibit 12: Utilization rates for various IT companies



TCS (a) 15.5 15.3 14.7 13.6 12.9 12.2 11.5 11.6 11.3 11.1 11.0 10.9

Infosys (b) 14.1 13.4 12.6 15.8 15.7 14.9 13.5 16.9 17.2 15.8 16.6 20.6

Infosys (e) 19.9 18.1 17.3 21.0 20.0 18.4 17.1 21.0 21.4 18.7 19.5 23.0

Wipro (c ) 16.8 16.3 14.9 17.9 17.2 15.4 14.8 16.1 16.7 16.2 17.5 17.7

Mindtree (a) 17.1 16.0 15.7 16.5 16.4 16.1 15.1 14.0 13.0 12.6 12.5 12.2

Mindtree (e) 17.2 16.2 15.6 17.7 15.7 14.6 13.3 13.4 12.1 13.3 13.3 14.5

HCL Tech (d) 16.3 16.7 17.3 17.8 18.6 17.9 16.9 16.2 15.7 15.2 15.5 16.3

HCL Tech (e) 31.8 31.0 31.0 28.0 26.7 26.0 20.2 26.2 25.0 23.0 25.7 27.9

L&T Infotech (a) 19.7 18.5 18.4 19.5 18.5 18.1 16.9 14.7 15.0 14.6 14.8 15.1

Hexaware (f) 17.4 16.9 16.0 16.6 16.5 16.1 14.9 13.8 13.7 13.1 13.4 14.4

Tech Mahindra (g) 20.0 20.0 21.0 21.0 19.0 18.0 17.0 17.0 16.0 17.0 18.0 19.0

CTSH (e) 20.0 19.0 14.6 17.1 16.6 15.6 14.7 23.6 22.5 17.9 20.3 22.6

Notes:

(a) LTM attrition for IT services.

(b) Standalone attrition numbers for last twelve months, ex BPO/subsidiaries.

(c) Wipro Technologies only, quarterly annualized attrition, excludes involuntary attrition.

(d) For IT services only, excludes involuntary attrition.

(e) Quarterly annualized attrition computed (includes BPO).

(f) LTM attrition

(g) For organic business only


TCS 82.3 80.9

Infosys 75.4 74.2 74.7 76.5 77.7 77.8 78.2 80.2 81.8 82.1 80.8 81.5

Wipro (a) 74.5 74.5 74.5 74.5 74.5 74.5 74.5 74.5 74.5 74.5 74.5 74.5

HCL Tech (b) 83.6 84.7 85.6 85.8 85.3 84.6 85.7 86.0 86.0 85.8 85.9 85.5

Tech Mahindra 77.0 77.0 77.0 78.0 78.0 77.0 77.0 77.0 81.0 83.0 84.0 81.0

Hexaware 70.4 69.7 69.6 70.0 74.1 78.6 78.9 80.8 79.7 80.9 81.3 78.2

Mindtree 71.4 68.5 69.4 71.4 71.4 71.3 70.9 73.2 73.2 72.8 73.8 75.4

L&T Infotech 72.8 74.0 75.9 77.4 78.7 78.1 78.3 77.7 79.6 80.3 79.9 79.7

Notes:

(a) Wipro IT Services gross utilization excl BPS, IFOX, cellent, HPS, Appirio and I&ME

(b) Blended utilization (including trainees) for all segments.

(c ) TCS discontinued disclosing utilization starting March 2016 quarter.

(d) Offshore utilization including trainees.

India Technology


Exhibit 13: Hiring activity has picked up after weak net additions in the past few quarters

Source: Companies (TCS, Infosys, Wipro, HCLT and CTSH), Kotak Institutional Equities

Exhibit 14: Kotak Institutional Equities: valuation summary of key Indian technology companies


(5,000)

5,000

15,000

25,000

35,000

45,000

Dec-

10

Mar-

11

Jun-1

1

Sep

-11

Dec-

11

Mar-

12

Jun-1

2

Sep

-12

Dec-

12

Mar-

13

Jun-1

3

Sep

-13

Dec-

13

Mar-

14

Jun-1

4

Sep

-14

Dec-

14

Mar-

15

Jun-1

5

Sep

-15

Dec-

15

Mar-

16

Jun-1

6

Sep

-16

Dec-

16

Mar-

17

Jun-1

7

Sep

-17

Dec-

17

Mar-

18

Jun-1

8

Net hiring by Tier-I Indian offshore pureplays

3-Aug-18 EPS (Rs) P/E (X) EV/EBITDA (X) RoE (%)

Company Price (Rs) Rating (Rs m) (US$ m) 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E

HCL Technologies 964 REDUCE 1,341,793 19,500 62.3 70.3 73.8 15.5 13.7 13.1 10.9 8.9 8.1 24.8 24.2 21.8

Hexaware Technologies 474 SELL 140,571 2,043 16.5 19.6 23.1 28.6 24.2 20.5 20.6 18.1 14.3 26.6 27.4 27.8

Infosys 1,364 ADD 2,979,368 43,298 64.6 70.9 78.3 21.1 19.2 17.4 14.6 13.2 11.8 21.8 23.0 23.5

L&T Infotech 1,684 ADD 291,296 4,233 63.5 82.9 93.7 26.5 20.3 18.0 23.2 15.5 13.0 31.8 33.5 30.7

Mindtree 959 ADD 157,278 2,286 34.5 43.1 53.3 27.8 22.2 18.0 20.1 13.9 11.1 21.4 23.9 25.2

Mphasis 1,200 SELL 231,969 3,371 43.9 51.9 56.2 27.4 23.1 21.4 19.9 16.1 14.4 14.6 17.4 17.1

TCS 1,977 REDUCE 7,570,433 110,019 67.5 81.8 89.0 29.3 24.2 22.2 21.8 17.7 16.3 29.4 33.4 33.8

Tech Mahindra 663 ADD 584,943 8,501 42.6 46.2 54.6 15.5 14.3 12.1 11.4 8.5 6.9 21.5 20.2 20.5

Wipro 278 REDUCE 1,257,677 18,278 16.9 18.9 21.7 16.4 14.7 12.8 10.4 9.2 8.0 16.0 16.4 16.8

Technology 14,555,329 211,529 22.7 20.1 18.3 16.5 13.8 12.4 23.7 23.8 24.1

KIE universe 112,700,014 1,637,475 27.5 21.7 17.3 12.9 10.9 9.7 11.2 12.9 14.6

Target O/S shares EPS CAGR (%) Sales (Rs mn)

Company Price (Rs) (mn) 2017-20E 2018E 2019E 2020E 2018E 2019E 2020E 2018E 2019E 2020E 2018E 2019E 2020E

HCL Technologies 1,025 1,409 7.7 5.3 12.8 5.0 87,783 96,614 100,229 114,392 135,929 143,647 505,700 592,117 648,011

Hexaware Technologies 435 302 18.9 20.2 18.4 18.0 4,994 5,914 6,978 6,554 7,400 9,170 39,420 46,640 54,894

Infosys 1,400 2,175 7.6 3.0 9.7 10.4 145,960 154,135 170,196 190,100 209,914 230,484 705,220 804,826 885,245

L&T Infotech 2,000 175 18.9 13.9 30.5 13.0 11,120 14,530 16,422 11,876 17,572 20,324 73,065 92,890 106,897

Mindtree 1,115 165 28.6 37.8 24.9 23.6 5,701 7,083 8,757 7,405 10,562 12,849 54,628 68,525 78,031

Mphasis 760 193 13.6 14.4 18.3 8.2 8,477 10,028 10,853 10,596 12,901 14,170 65,459 76,151 84,791

TCS 1,790 3,829 10.1 1.1 21.2 8.8 258,260 309,420 333,970 325,160 397,227 432,018 1,231,040 1,447,885 1,590,149

Tech Mahindra 785 891 19.4 33.1 8.3 18.2 38,000 41,180 49,101 47,170 60,420 70,144 307,730 348,702 380,933

Wipro 295 4,507 7.4 (3.1) 11.8 14.6 80,081 85,332 97,779 105,277 112,513 124,723 546,359 584,322 623,734

Technology 1.6 13.1 9.7 640,376 724,235 794,282 818,530 964,437 1,057,529 3,528,621 4,062,060 4,452,685

KIE universe (5.1) 26.7 26.7

Notes:

(a) Hexaware Technologies is December year-ending.

Mkt cap.

EPS growth (%) Net Profit (Rs mn) EBITDA (Rs mn)


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June 2018: Results calendar

Source: NSE, Kotak Institutional Equities

Mon Tue Wed Thu Fri Sat Sun

6-Aug 7-Aug 8-Aug 9-Aug 10-Aug 11-Aug 12-Aug

Adani Port and SEZ Adani Transmission BPCL 3M India Alkem Laboratories Amara Raja Batteries

Adani Pow er AU Small Finance Cipla AIA Engineering Apollo Hospitals Balkrishna Industries

Arvind Edelw eiss Financial Services City Union Bank Aurobindo Pharma Bosch Coal India

Britannia Industries GlaxoSmithkline Consumer HPCL Bharat Forge Dhanuka Agritech Dalmia Bharat

Gatew ay Distriparks Kalpataru Pow er Transmission Indian Bank Coffee Day Enterprises DLF India Cements

Max Financial Services Mahindra & Mahindra Lupin Cummins India Dr Lal Pathlabs IOCL

Punjab National Bank Motherson Sumi Systems Natco Pharma Eicher Motors Endurance Technologies MRPL

Ujjivan Financial Services Mphasis National Aluminium Co. Engineers India GAIL (India) NBCC

Punjab National Bank NMDC Future Retail Glenmark Pharmaceuticals

Sobha PNB Housing Finance Godrej Agrovet Hindalco Industries

SRF Siemens Gujarat Pipavav Port Indian Hotels Co.

TVS Motor Thermax HCG Indraprastha Gas

Jindal Steel and Pow er NHPC

Kaveri Seed PC Jew eller

MRF State Bank of India

Page Industries Sun TV Netw ork

S H Kelkar and Company Timken

Tata Communications Union Bank

Varun Beverages United Brew eries

Whirlpool Vakrangee

Voltas


Ashoka Buildcon GMR Infrastructure

Cadila Healthcare Grasim Industries

Dew an Housing Finance Rajesh Exports

Godrej Industries Sun Pharmaceuticals

Oil India

Tata Chemicals

Tata Steel


Magma Fincorp P&G Hygiene Gillette India


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Kotak Institutional Equities: Valuation summary of KIE Universe stocks

Source: Company, Bloomberg, Kotak Institutional Equities estimates

Target O/S ADVT

Price (Rs) price Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) 3mo

Company Rating 3-Aug-18 (Rs) (%) (Rs bn) (US$ bn) (mn) 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E (US$ mn)

Automobiles

Amara Raja Batteries REDUCE 816 780 (4.4) 139 2.0 171 28 33 39 (1.6) 21.2 15.5 29.6 24.4 21.1 15.7 13.0 11.1 4.7 4.1 3.5 17.0 18.0 18.0 0.5 0.6 0.7 6.0

Apollo Tyres BUY 287 340 18.6 164 2.4 541 13 20 25 (38.0) 46.9 25.7 21.4 14.6 11.6 11.9 8.7 7.3 1.6 1.5 1.4 8.5 11.0 12.5 1.0 1.0 1.0 11.1

Ashok Leyland BUY 118 160 35.4 347 5.0 2,926 5.4 6.2 8.9 8.0 15.3 43.2 22.0 19.1 13.3 12.7 9.7 7.0 4.8 4.2 3.5 23.7 23.4 28.4 2.1 1.6 2.3 46.8

Bajaj Auto SELL 2,690 2,500 (7.1) 779 11.3 289 140 148 161 6.0 5.4 9.0 19.2 18.2 16.7 13.0 12.5 11.1 4.1 3.7 3.3 22.9 21.2 20.7 2.2 2.2 2.4 31.8

Balkrishna Industries REDUCE 1,263 1,260 (0.3) 244 3.5 193 37 50 63 4.8 34.8 25.0 33.8 25.1 20.1 17.9 13.8 11.0 6.0 4.9 4.1 19.0 21.6 22.2 0.4 0.5 0.5 8.2

Bharat Forge SELL 645 600 (7.0) 300 4.4 466 16 23 27 10.1 43.0 16.8 39.8 27.9 23.9 19.1 15.7 13.6 6.5 5.6 4.7 17.3 21.5 21.4 0.7 0.8 0.9 10.8

CEAT ADD 1,403 1,500 6.9 57 0.8 40 65 99 108 (29.5) 53.7 8.3 21.7 14.1 13.0 10.5 8.9 7.7 2.2 1.9 1.7 10.4 14.4 13.8 0.8 0.7 0.7 14.4

Eicher Motors SELL 26,996 26,000 (3.7) 736 10.7 27 792 995 1,200 29.3 25.5 20.6 34.1 27.1 22.5 24.5 19.7 16.0 13.7 9.9 7.4 46.4 42.3 37.5 0.1 0.1 0.1 19.3

Escorts BUY 899 1,200 33.4 77 1.6 89 39 59 71 71.3 52.3 19.9 23.2 15.2 12.7 13.2 9.2 7.5 3.1 2.7 2.3 13.5 17.6 18.0 0.4 1.0 1.2 16.8

Exide Industries SELL 273 235 (13.9) 232 3.4 850 8 10 11 0.6 25.3 11.0 33.3 26.5 23.9 18.6 15.1 13.5 4.3 3.9 3.5 13.5 15.4 15.5 0.9 1.1 1.3 9.3

Hero Motocorp SELL 3,251 3,000 (7.7) 649 9.4 200 185 183 204 9.5 (0.9) 11.4 17.6 17.7 15.9 10.8 10.5 9.3 5.5 4.9 4.4 33.8 29.3 29.1 2.6 2.8 3.1 22.6

Mahindra CIE Automotive ADD 253 290 14.5 96 1.4 378 10 14 16 107.0 45.0 12.7 26.4 18.2 16.1 13.0 9.1 8.1 2.6 2.3 2.0 10.4 13.2 13.1 — — — 3.0

Mahindra & Mahindra BUY 921 1,015 10.2 1,145 16.6 1,138 38 44 50 22.0 15.6 14.8 24.3 21.0 18.3 15.9 13.6 11.8 3.4 3.1 2.7 15.1 15.4 15.7 0.8 1.0 1.1 31.8

Maruti Suzuki ADD 9,188 10,000 8.8 2,776 40.3 302 256 323 393 5.1 26.4 21.8 35.9 28.4 23.4 20.1 16.4 13.0 6.6 5.7 4.9 19.8 21.6 22.5 0.9 0.9 1.1 64.8

Motherson Sumi Systems SELL 308 265 (13.9) 648 9.4 2,105 8 11 14 6.1 37.7 21.7 37.6 27.3 22.5 14.1 10.9 9.0 6.6 5.6 4.8 19.0 22.1 22.9 0.7 0.9 1.1 13.9

MRF REDUCE 78,426 76,000 (3.1) 333 4.8 4 2,669 3,896 4,447 (23.9) 46.0 14.1 29.4 20.1 17.6 13.4 9.9 8.5 3.4 2.9 2.5 12.3 15.7 15.4 0.1 0.1 0.1 7.1

Schaeffler India BUY 5,295 6,000 13.3 88 1.3 17 143 156 199 22.0 9.0 27.3 37.0 33.9 26.7 21.7 20.6 15.7 5.2 4.7 4.1 15.0 14.5 16.4 0.3 0.6 0.8 0.6

SKF ADD 1,704 1,800 5.7 87 1.3 51 58 69 82 24.6 19.7 18.5 29.5 24.7 20.8 18.2 15.7 13.0 4.8 4.1 3.6 16.1 16.7 17.1 0.6 0.7 0.8 0.4

Tata Motors BUY 258 425 64.4 878 11.9 3,396 20 22 36 (28.0) 10.7 62.7 13.0 11.7 7.2 3.8 3.6 3.0 0.9 0.9 0.8 8.8 7.6 11.2 — — — 59.8

Timken SELL 743 660 (11.2) 51 0.7 68 14 19 25 (5.3) 42.3 27.5 54.9 38.6 30.3 30.6 21.3 17.0 7.2 6.1 5.1 13.9 17.1 18.5 0.1 0.1 0.1 0.3

TVS Motor SELL 520 410 (21.1) 247 3.6 475 14 18 22 18.7 26.8 21.8 37.3 29.4 24.2 22.8 17.2 14.3 8.6 7.2 6.1 25.1 26.7 27.3 0.6 1.0 1.2 12.1

WABCO India SELL 6,744 6,350 (5.8) 128 1.9 19 144 169 222 27.8 17.8 31.3 46.9 39.8 30.3 30.4 25.9 19.6 8.4 7.0 5.8 19.5 19.2 20.9 0.1 0.2 0.2 0.5

Automobiles Neutral 10,199 148 (0.9) 19.6 25.7 26.1 21.8 17.4 11.6 9.8 8.0 3.7 3.3 2.9 14.2 15.1 16.6 0.9 0.9 1.1 391.3

Banks

Axis Bank ADD 575 600 4.4 1,476 21.4 2,567 1 18 40 (92.6) 1,577.6 122.3 535.1 31.9 14.3 — — — 2.8 2.5 2.1 0.5 7.1 14.1 0.9 0.5 1.0 54.2

Bank of Baroda NR 150 — — 396 5.8 2,652 (9) 21 26 (253.2) 323.7 26.4 (16.3) 7.3 5.8 — — — 1.6 1.3 1.0 (5.8) 12.7 14.0 — — — 33.6

Canara Bank ADD 290 300 3.3 213 3.1 733 (58) (5) 51 (406.6) 91.6 1,147.0 (5.0) (59.9) 5.7 — — — 1.8 1.7 1.0 (12.2) (1.0) 10.1 — — — 28.6

City Union Bank ADD 170 190 12.0 124 1.8 665 9 10 12 6.4 16.2 13.0 19.1 16.4 14.5 — — — 2.9 2.5 2.2 15.3 15.5 15.5 0.2 1.1 1.2 1.9

DCB Bank ADD 163 205 26.0 50 0.7 308 8 10 12 13.8 28.2 21.0 20.4 15.9 13.2 — — — 2.0 1.9 1.7 10.9 11.7 12.7 — 0.6 0.7 4.5

Equitas Holdings BUY 146 190 29.9 50 0.7 340 0.9 4.4 8.4 (80.3) 378.4 89.9 157.7 33.0 17.4 — — — 2.3 2.1 1.9 1.4 6.4 11.2 — — — 5.1

Federal Bank BUY 87 130 49.0 173 2.5 1,972 4.4 5.7 7.9 (9.3) 29.5 39.5 20.0 15.4 11.1 — — — 1.5 1.4 1.3 8.2 8.8 11.4 1.1 1.5 2.1 20.3

HDFC Bank REDUCE 2,122 2,000 (5.7) 5,525 80.3 2,595 67 77 93 18.7 14.1 21.1 31.5 27.6 22.8 — — — 5.3 4.0 3.6 17.9 16.5 16.2 0.6 0.7 0.8 84.7

ICICI Bank BUY 305 400 31.1 1,962 28.5 6,429 11 8 26 (31.1) (19.6) 209.1 28.9 36.0 11.6 — — — 2.3 2.1 1.7 6.6 5.1 14.5 0.5 0.6 1.7 91.7

IDFC Bank NR 41 — — 140 2.0 3,404 2.5 1.2 2.9 (16.0) (52.7) 146.7 16.3 34.5 14.0 — — — 0.9 0.9 0.9 5.7 2.6 6.3 1.2 0.6 1.4 9.2

IndusInd Bank REDUCE 2,016 1,900 (5.7) 1,210 17.6 600 60 71 87 25.3 17.5 23.6 33.6 28.6 23.1 — — — 5.3 4.3 3.7 17.1 17.6 16.8 — 0.4 0.5 31.6

J&K Bank BUY 57 100 76.2 32 0.5 557 4 7 11 111.6 82.4 63.8 15.6 8.6 5.2 — — — 0.7 0.7 0.6 3.4 5.9 9.1 — 2.3 3.8 0.4

Karur Vysya Bank ADD 105 110 4.4 77 1.1 727 5 3 13 (52.2) (32.3) 306.7 22.1 32.7 8.0 — — — 1.5 1.5 1.3 6.1 3.7 14.1 0.6 0.8 3.1 2.0

Punjab National Bank ADD 88 90 2.1 243 3.5 2,761 (44) (39) 9 (814.7) 13.4 124.1 (2.0) (2.3) 9.5 — — — 5.2 (4.0) (15.0) (32.4) (31.3) 8.2 — (9.5) 2.3 33.5

RBL Bank SELL 568 475 (16.3) 240 3.5 420 15 22 29 27.3 48.1 31.5 37.5 25.3 19.3 — — — 3.7 3.3 2.9 11.5 13.3 15.5 0.4 0.6 0.8 12.4

State Bank of India BUY 299 370 23.9 2,665 38.7 8,925 (7) 18 37 (155.8) NM 106.1 NM 16.6 8.0 — — — 2.4 1.8 1.3 (3.2) 7.1 13.2 — 0.1 0.1 80.8

Ujjivan Financial Services REDUCE 387 420 8.5 47 0.7 121 1 22 29 (96.5) 3,564.0 30.0 641.3 17.5 13.5 — — — 2.8 2.4 2.1 0.4 14.2 16.1 0.0 0.6 0.8 6.7

Union Bank ADD 88 130 47.2 103 1.5 1,169 (45) 1 24 (655.5) 101.4 3,896.2 (2.0) 144.3 3.6 — — — 1.5 1.3 0.8 (23.6) 0.3 11.8 — 0.1 4.2 9.7

YES Bank SELL 373 335 (10.2) 861 12.5 2,303 18 20 22 25.7 8.1 9.5 20.3 18.8 17.2 — — — 3.5 3.0 2.7 17.7 16.6 15.9 0.6 0.9 1.0 57.5

Banks Attractive 15,587 227 (89.4) 928.6 115.5 287.6 28.0 13.0 2.1 1.9 1.7 0.7 6.7 12.9 0.4 0.4 0.9 568.3

Dividend yield (%)P/B (X) RoE (%)


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Target O/S ADVT



NBFCs

Bajaj Finance SELL 2,681 2,000 (25.4) 1,550 22.5 575 43 68 90 29.2 56.6 31.9 61.8 39.5 29.9 — — — 9.8 8.0 6.5 19.7 22.4 24.0 0.1 0.3 0.3 55.8

Bajaj Finserv REDUCE 6,943 6,100 (12.1) 1,105 16.1 159 176 245 307 10.3 39.7 25.2 39.6 28.3 22.6 — — — 5.5 4.5 3.8 15.6 17.5 18.1 0.2 0.2 0.2 18.6

Bharat Financial Inclusion NA 1,225 — — 171 2.5 139 33 43 54 55.5 31.1 27.2 37.5 28.6 22.5 — — — 5.7 4.6 3.8 16.7 17.9 18.5 — — — 10.0

Cholamandalam REDUCE 1,431 1,500 4.8 224 3.3 156 62 90 110 35.5 44.8 22.1 23.0 15.9 13.0 — — — 4.6 3.7 3.0 20.6 24.5 24.3 0.5 0.8 0.9 7.8

HDFC ADD 1,978 2,075 4.9 3,342 48.6 1,676 75 56 67 52.1 (25.8) 19.0 26.2 35.3 29.7 — — — 5.2 4.5 4.1 23.9 13.8 14.5 1.0 1.1 1.3 72.3

HDFC Standard Life Insurance SELL 486 405 (16.7) 979 14.2 2,007 6 6 7 24.4 14.8 10.9 87.9 76.6 69.1 — — — 22.7 20.3 18.1 27.3 28.0 27.7 0.3 0.3 0.4 11.6

ICICI Lombard SELL 785 620 (21.0) 356 5.2 454 19 26 32 22.0 37.1 21.5 41.4 30.2 24.8 — — — 7.8 6.6 5.5 20.8 23.8 24.2 0.5 0.8 0.9 2.3

ICICI Prudential Life BUY 413 500 21.1 593 8.6 1,436 11 12 13 (3.7) 10.1 7.0 36.6 33.2 31.1 — — — 9.0 7.4 6.2 25.0 24.5 21.8 1.4 0.5 0.5 10.8

IIFL Holdings SELL 701 625 (10.8) 224 3.2 319 29 38 45 32.4 31.5 18.6 24.5 18.7 15.7 — — — 4.4 3.3 2.9 19.0 20.5 20.0 0.9 1.1 1.4 1.4

L&T Finance Holdings ADD 181 190 5.1 361 5.2 1,996 7 13 14 23.7 70.9 12.3 24.6 14.4 12.8 — — — 2.8 2.6 2.2 14.2 18.9 18.8 1.0 1.1 1.4 12.5

LIC Housing Finance BUY 540 610 13.0 273 4.0 505 44 50 58 3.2 13.8 17.5 12.4 10.9 9.3 — — — 2.1 1.7 1.5 14.5 14.3 14.4 1.3 1.4 1.7 12.1

Magma Fincorp BUY 147 200 36.1 40 0.6 237 10 12 15 1,014.5 24.6 25.8 15.1 12.1 9.7 — — — 1.5 1.4 1.3 10.2 12.9 14.1 0.5 1.2 1.6 1.6

Mahindra & Mahindra Financial REDUCE 505 500 (1.0) 312 4.5 614 15 23 28 105.0 58.4 23.2 34.8 22.0 17.8 — — — 3.6 3.2 2.9 11.3 14.3 15.8 0.8 1.3 1.5 10.6

Max Financial Services BUY 519 650 25.3 139 2.0 268 5 6 6 (20.4) 36.9 1.8 113.2 82.7 81.2 — — — — — — 6.5 8.3 8.0 — 0.4 0.4 4.8

Muthoot Finance ADD 413 480 16.2 165 2.4 400 43 38 40 45.6 (10.8) 4.0 9.6 10.8 10.4 — — — 2.1 1.9 1.6 24.1 18.4 16.9 2.4 2.1 2.2 4.8

PNB Housing Finance REDUCE 1,264 1,375 8.8 212 3.1 167 50 61 77 57.8 23.0 25.3 25.4 20.7 16.5 — — — 3.3 3.1 2.7 14.0 15.2 16.8 0.7 0.3 0.3 9.9

SBI Life Insurance ADD 690 785 13.8 690 10.0 1,000 12 15 18 20.8 26.0 22.9 59.8 47.5 38.6 — — — 10.7 9.0 7.5 19.4 20.6 21.3 0.3 0.3 0.4 4.0

Shriram City Union Finance ADD 1,930 2,250 16.6 127 1.9 66 101 141 174 19.6 40.4 22.7 19.2 13.6 11.1 — — — 2.4 2.2 1.9 12.5 15.8 16.9 0.9 0.9 1.1 1.3

Shriram Transport ADD 1,433 1,550 8.2 325 4.7 227 69 114 130 24.7 64.4 14.3 20.7 12.6 11.0 — — — 2.7 2.2 1.9 13.1 18.3 17.5 0.8 1.1 1.3 30.3

NBFCs Neutral 11,187 163 36.9 14.8 19.6 32.7 28.5 23.8 5.5 4.6 4.0 16.8 16.1 16.8 0.6 0.7 0.8 568.3

Cement

ACC SELL 1,519 1,270 (16.4) 285 4.1 188 49 62 70 32.7 27.0 13.8 31.2 24.6 21.6 16.6 13.5 11.6 3.0 2.8 2.6 10.1 11.9 12.5 1.1 1.1 1.1 15.2

Ambuja Cements REDUCE 226 210 (7.1) 449 6.5 1,986 8 9 11 29.7 14.5 23.2 30.1 26.3 21.3 10.0 8.8 7.3 2.2 2.1 2.0 7.4 8.1 9.5 1.6 1.6 1.6 11.7

Dalmia Bharat ADD 2,675 2,900 8.4 238 3.5 89 60 98 128 55.4 62.6 30.3 44.3 27.3 20.9 13.7 10.4 8.5 3.9 3.4 3.0 9.7 13.4 15.2 0.1 0.1 0.1 5.1

Grasim Industries BUY 1,006 1,275 26.7 662 9.6 657 47 52 69 (30.1) 9.1 32.8 21.2 19.5 14.6 12.1 7.4 6.8 1.2 1.1 1.0 7.0 5.8 7.2 0.5 0.5 0.5 14.4

India Cements REDUCE 118 135 14.8 36 0.5 308 3 5 9 (42.5) 56.2 84.4 36.0 23.1 12.5 9.8 8.4 6.6 0.7 0.7 0.7 2.0 3.0 5.3 0.9 0.9 0.9 7.7

J K Cement ADD 760 890 17.1 53 0.8 70 43 45 79 59.3 3.7 75.4 17.6 16.9 9.7 9.7 10.1 8.3 2.7 2.4 2.0 16.2 15.0 22.3 1.1 1.1 1.1 0.6

JK Lakshmi Cement ADD 330 370 12.0 39 0.6 118 4 11 28 (35.7) 153.5 147.9 73.9 29.2 11.8 13.6 10.1 6.6 2.7 2.5 2.1 3.7 8.9 19.5 0.6 0.6 0.6 0.4

Orient Cement ADD 120 145 20.8 25 0.4 205 2 7 11 237.8 212.9 58.7 55.6 17.8 11.2 12.1 8.2 6.3 2.4 2.2 1.9 4.4 12.9 18.2 0.6 1.3 1.7 0.2

Shree Cement SELL 17,462 12,500 (28.4) 608 8.8 35 397 421 630 3.4 6.0 49.7 44.0 41.5 27.7 23.6 19.3 14.5 6.8 6.0 5.0 16.7 15.4 19.7 0.3 0.3 0.3 5.4

UltraTech Cement SELL 4,168 2,950 (29.2) 1,145 16.6 275 88 126 162 (7.8) 42.7 28.9 47.3 33.1 25.7 23.3 17.3 14.3 4.4 3.9 3.5 9.7 12.6 14.3 0.2 0.2 0.2 19.1

Cement Cautious 3,540 51 6.5 23.6 33.7 34.2 27.6 20.7 15.3 10.9 9.2 2.6 2.4 2.2 7.5 8.6 10.5 0.6 0.6 0.6 79.7



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Target O/S ADVT



Consumer products

Asian Paints REDUCE 1,412 1,325 (6.2) 1,354 19.7 959 21 27 33 2.9 32.1 20.3 68.8 52.1 43.3 42.1 32.6 27.0 16.1 14.1 12.3 24.6 28.8 30.3 0.6 0.8 1.1 21.8

Bajaj Corp. ADD 416 470 12.9 61 0.9 148 14 15 17 (9.4) 7.8 10.3 29.1 27.0 24.5 23.0 21.6 18.4 12.5 12.6 12.5 42.8 46.3 51.2 2.9 3.1 3.4 0.4

Britannia Industries ADD 6,393 6,000 (6.1) 768 11.2 120 84 104 126 13.5 24.4 21.5 76.4 61.4 50.6 50.5 39.7 32.7 22.5 17.9 14.5 32.9 32.4 31.6 0.4 0.5 0.7 10.1

Coffee Day Enterprises REDUCE 263 340 29.5 55 0.8 211 3 8 13 49.1 149.7 59.4 78.5 31.4 19.7 13.4 — — 2.3 2.2 2.0 3.1 7.2 10.4 — — — 0.9

Colgate-Palmolive (India) ADD 1,123 1,250 11.3 305 4.4 272 24 27 32 15.2 14.7 15.6 47.2 41.2 35.6 27.0 23.7 20.6 20.0 20.2 17.2 46.2 48.8 52.2 2.1 1.4 1.7 8.2

Dabur India REDUCE 437 390 (10.7) 772 11.2 1,762 8 9 10 7.2 17.3 12.9 56.2 47.9 42.4 47.7 40.1 34.6 13.5 13.5 11.7 25.9 28.1 29.6 1.7 0.9 1.0 13.3

GlaxoSmithKline Consumer ADD 6,794 6,750 (0.6) 286 4.2 42 166 189 211 6.6 13.3 11.9 40.8 36.0 32.2 28.3 24.3 20.9 8.2 7.5 6.8 21.2 21.7 22.2 1.1 1.3 1.5 2.0

Godrej Consumer Products SELL 1,330 1,100 (17.3) 906 13.2 681 21 25 29 11.5 18.8 13.7 62.3 52.4 46.1 44.1 37.2 32.3 14.5 12.3 10.7 25.2 25.4 24.8 0.5 0.6 0.7 9.9

Hindustan Unilever REDUCE 1,763 1,570 (10.9) 3,816 55.5 2,160 25 29 33 25.0 19.5 13.2 71.9 60.1 53.1 51.6 41.7 36.7 53.8 47.1 40.0 78.1 83.5 81.4 1.1 1.2 1.4 35.2

ITC ADD 304 330 8.6 3,714 54.0 12,275 9 10 11 7.8 8.2 12.3 34.1 31.5 28.1 22.4 20.4 18.0 7.3 6.8 6.4 19.4 20.4 22.2 1.7 1.9 2.2 48.9

Jubilant Foodworks BUY 1,452 1,650 13.7 192 2.8 132 15 25 35 191.7 73.6 37.5 99.7 57.4 41.8 42.6 28.8 21.7 19.8 14.3 10.8 21.7 28.9 29.5 0.1 0.1 0.2 40.1

Jyothy Laboratories ADD 221 240 8.7 80 1.2 364 4 6 7 (26.4) 27.6 16.7 50.1 39.2 33.6 30.7 26.2 22.3 7.0 6.0 5.3 14.4 16.6 16.8 0.2 0.5 0.7 1.6

Marico ADD 353 375 6.4 455 6.6 1,291 6 7 8 7.4 8.9 20.0 56.2 51.7 43.0 39.7 35.9 29.6 17.9 16.9 15.7 33.2 33.7 37.9 1.2 1.3 1.6 10.3

Nestle India ADD 10,313 11,000 6.7 994 14.5 96 127 171 197 21.1 34.2 15.7 81.2 60.5 52.3 44.6 34.6 29.9 29.1 26.7 24.5 36.6 46.1 49.0 0.8 1.1 1.3 8.2

Page Industries SELL 29,974 21,000 (29.9) 334 4.9 11 311 392 482 32.5 26.1 22.9 96.4 76.4 62.2 61.4 48.5 39.9 39.5 30.8 24.6 45.9 45.3 44.0 0.4 0.6 0.7 8.0

Pidilite Industries REDUCE 1,109 1,080 (2.6) 563 8.2 508 18 21 26 7.5 16.8 21.8 61.5 52.6 43.2 41.1 35.0 28.9 15.8 13.3 11.2 26.0 27.4 28.2 0.5 0.6 0.7 13.7

S H Kelkar and Company BUY 195 315 61.3 28 0.4 145 7 8 11 2.1 11.8 28.4 26.4 23.6 18.4 18.4 15.4 12.0 3.3 3.0 2.7 12.8 13.3 15.3 0.9 0.9 1.0 0.4

Tata Global Beverages REDUCE 235 250 6.5 148 2.2 631 7 8 9 20.7 7.7 17.0 31.9 29.6 25.3 16.8 16.2 14.3 2.1 2.0 1.9 7.0 7.0 7.9 1.1 1.3 1.5 13.7

Titan Company SELL 919 840 (8.6) 816 11.9 888 13 16 20 43.3 25.6 21.8 71.9 57.3 47.0 49.3 38.0 30.3 16.0 13.5 11.4 24.3 25.6 26.3 0.4 0.5 0.6 35.8

United Breweries SELL 1,133 1,000 (11.7) 300 4.4 264 15 19 24 71.6 29.7 23.4 75.9 58.5 47.4 33.4 27.8 24.1 11.2 9.6 8.2 15.7 17.6 18.6 0.2 0.3 0.3 10.5

United Spirits REDUCE 615 590 (4.0) 447 6.5 727 8 10 13 39.1 34.7 30.9 80.8 60.0 45.8 46.4 34.8 28.2 17.8 12.2 9.0 24.9 24.2 22.7 — — 0.3 18.4

Varun Beverages ADD 726 750 3.3 133 1.9 183 12 17 22 377.8 45.4 29.8 63.0 43.4 33.4 19.3 15.5 13.3 7.5 6.4 5.5 12.1 16.0 17.7 — — 0.1 1.7

Consumer products Cautious 16,527 240 14.5 17.6 16.0 54.8 46.6 40.1 35.7 30.0 25.8 13.5 12.2 10.9 24.6 26.1 27.1 1.0 1.1 1.3 313.2

Energy

BPCL REDUCE 401 390 (2.7) 870 12.6 1,967 40 39 41 (1.5) (3.6) 5.3 10.0 10.3 9.8 8.0 7.6 7.0 2.3 2.1 1.9 24.8 21.1 20.0 5.2 3.9 4.1 31.6

Castrol India SELL 165 155 (5.8) 163 2.4 989 7 7 8 3.3 2.9 10.1 23.9 23.3 21.1 15.0 14.6 13.2 16.0 15.3 14.9 67.9 67.1 71.5 2.9 3.3 3.8 4.4

GAIL (India) BUY 388 410 5.7 875 12.7 2,255 20 25 27 21.8 23.2 8.3 19.0 15.4 14.2 11.9 9.8 9.1 2.2 2.0 1.8 11.7 13.5 13.5 1.9 2.2 2.3 22.3

GSPL SELL 200 175 (12.5) 113 1.6 564 12 11 11 34.5 (6.5) (0.5) 16.9 18.0 18.1 8.7 6.9 6.9 2.2 2.0 1.9 14.0 11.7 10.7 0.9 0.8 0.8 1.6

HPCL REDUCE 293 320 9.4 446 6.5 1,524 42 32 33 (3.2) (23.4) 3.4 7.0 9.2 8.9 6.0 7.8 7.9 1.9 1.7 1.5 28.7 19.3 18.2 5.8 4.4 4.6 29.4

Indraprastha Gas SELL 310 240 (22.7) 217 3.2 700 10 12 13 19.0 16.5 12.0 30.1 25.8 23.1 19.0 16.6 14.7 6.2 5.3 4.6 22.4 22.2 21.5 0.6 0.8 1.0 11.8

IOCL REDUCE 169 160 (5.1) 1,637 23.8 9,479 21 17 18 (24.8) (17.9) 7.4 8.2 10.0 9.3 4.8 5.6 5.1 1.5 1.3 1.3 18.5 14.0 14.0 6.8 4.0 4.3 25.5

Mahanagar Gas ADD 977 965 (1.3) 97 1.4 99 48 56 60 21.5 16.0 7.6 20.2 17.4 16.2 12.3 10.2 9.3 4.6 4.1 3.6 24.3 24.8 23.5 1.9 2.3 2.5 5.0

ONGC ADD 167 200 19.9 2,141 31.1 12,833 17 20 20 3.1 16.8 0.3 9.6 8.2 8.2 5.1 3.9 3.8 0.9 0.9 0.8 9.9 11.2 10.6 4.0 4.0 4.2 18.3

Oil India SELL 211 220 4.5 239 3.5 1,135 25 24 24 22.6 (1.3) (0.7) 8.5 8.6 8.7 6.6 6.0 6.0 0.9 0.8 0.8 9.8 9.7 9.2 4.9 5.2 5.2 3.1

Petronet LNG BUY 231 280 21.1 347 5.0 1,500 14 16 18 22.1 16.7 13.1 16.7 14.3 12.6 11.1 9.5 8.1 3.6 3.1 2.8 23.3 23.3 23.2 1.9 2.5 3.2 12.7

Reliance Industries SELL 1,177 985 (16.3) 6,965 101.2 5,922 59 69 78 16.9 17.6 12.4 19.9 16.9 15.1 14.5 11.5 9.9 2.4 2.1 1.9 11.6 12.2 12.1 0.5 0.5 0.6 119.7

Energy Attractive 14,108 205 1.0 6.0 7.2 13.7 12.9 12.0 8.9 7.8 7.1 1.8 1.7 1.5 13.3 12.9 12.6 2.4 2.0 2.2 285.5



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Price (Rs) price Upside shares 3mo


Industrials

ABB SELL 1,204 1,020 (15.3) 255 3.7 212 20 26 29 12.1 30.1 14.2 60.8 46.7 40.9 33.5 27.3 24.5 7.1 6.5 5.9 12.2 14.5 15.1 0.3 0.7 0.7 1.2

BHEL REDUCE 74 78 5.4 272 3.9 3,671 2.2 2.6 5.0 62.7 16.5 95.3 33.7 28.9 14.8 8.2 7.8 4.1 0.8 0.8 0.8 2.5 2.9 5.6 2.5 2.9 5.6 10.2

Carborundum Universal SELL 380 310 (18.5) 72 1.0 189 11 14 17 22.8 25.4 20.2 33.3 26.6 22.1 18.0 13.3 11.5 4.6 4.1 3.7 14.6 16.4 17.6 0.6 1.1 1.4 0.3

CG Power and Industrial BUY 63 65 3.8 39 0.6 627 0.8 3.1 4.3 (72.2) 275.7 40.5 76.7 20.4 14.5 11.2 8.4 6.9 1.4 1.5 1.5 1.5 7.3 10.4 — — — 7.4

Crompton Greaves Consumer SELL 251 215 (14.3) 157 2.3 627 5.2 6.2 7.5 13.3 19.5 20.7 48.6 40.6 33.7 29.8 25.3 21.4 19.9 13.9 10.7 49.5 40.4 35.8 0.6 0.8 1.0 2.8

Cummins India REDUCE 703 680 (3.3) 195 2.8 277 24 28 32 (7.8) 16.1 13.9 29.0 25.0 22.0 25.6 22.0 18.2 4.9 4.6 4.2 17.4 18.9 20.1 2.1 2.1 2.4 3.7

Havells India SELL 643 485 (24.6) 402 5.8 625 11 14 17 16.6 26.6 20.5 58.1 45.9 38.1 37.1 29.4 23.9 10.8 9.5 8.3 19.8 22.0 23.2 0.5 0.8 0.9 13.1

Kalpataru Power Transmission BUY 383 530 38.3 59 0.9 153 19 24 34 36.5 24.3 39.8 19.8 15.9 11.4 8.4 7.0 5.6 2.2 2.0 1.7 11.7 13.1 16.1 0.7 0.7 0.7 0.6

KEC International BUY 328 410 25.0 84 1.2 257 18 21 27 51.1 16.9 29.7 18.3 15.7 12.1 9.9 8.7 7.1 4.2 3.4 2.7 25.7 24.1 25.2 0.6 0.7 0.9 2.9

L&T BUY 1,291 1,600 23.9 1,810 26.3 1,401 52 63 70 22.4 21.7 10.9 25.0 20.5 18.5 20.7 16.4 15.7 3.6 3.3 3.0 15.0 16.8 16.8 1.2 1.8 2.0 44.3

Siemens SELL 1,012 975 (3.7) 360 5.2 356 24 30 37 22.5 23.0 23.2 41.8 34.0 27.6 23.8 19.0 15.2 4.4 4.2 3.9 10.9 12.6 14.5 1.0 1.2 1.5 3.5

Thermax REDUCE 1,145 1,065 (7.0) 136 2.0 113 21 30 42 (3.6) 44.2 42.8 55.5 38.5 27.0 33.8 24.0 17.2 4.7 4.4 3.9 8.8 11.8 15.3 0.5 0.7 0.8 0.7

Voltas SELL 575 525 (8.6) 190 2.8 331 17 19 22 12.6 8.3 15.6 33.2 30.7 26.5 27.6 23.5 19.5 4.9 4.4 3.9 15.9 15.0 15.5 0.7 0.8 0.9 13.9

Industrials Neutral 4,033 59 19.8 22.5 20.5 31.4 25.6 21.3 20.5 16.6 14.5 3.4 3.2 2.9 10.8 12.4 13.8 1.1 1.5 1.8 104.6

Infrastructure

Adani Ports and SEZ BUY 400 470 17.6 827 12.0 2,071 20 20 23 6.1 (0.2) 14.7 19.9 20.0 17.4 14.1 13.6 12.0 3.9 3.4 2.9 21.5 18.1 17.9 0.5 0.6 0.8 24.1

Ashoka Buildcon BUY 146 210 44.0 41 0.6 282 8 8 9 34.6 0.5 5.2 17.3 17.2 16.4 14.0 11.9 10.5 2.1 1.8 1.7 13.0 11.4 10.7 0.7 1.1 0.8 0.7

Container Corp. SELL 645 635 (1.6) 314 4.6 487 18 21 25 7.1 17.4 20.9 36.5 31.1 25.8 24.2 19.2 15.2 3.3 3.1 2.9 9.4 10.3 11.6 2.7 1.4 1.6 8.3

Dilip Buildcon BUY 868 1,220 40.6 119 1.7 137 46 54 69 76.5 16.1 28.0 18.7 16.1 12.6 10.3 7.5 6.2 4.8 3.7 2.8 29.5 25.9 25.4 — — — 8.5

Gateway Distriparks BUY 178 250 40.8 19 0.3 109 8 7 8 11.2 (5.8) 15.2 23.3 24.8 21.5 22.2 11.1 9.2 1.9 3.3 2.9 8.2 9.8 14.5 3.9 — 1.7 0.8

Gujarat Pipavav Port BUY 115 170 47.7 56 0.8 483 4.1 5.9 7.2 (20.6) 43.7 22.5 28.0 19.5 15.9 13.7 11.4 9.0 2.8 2.7 2.6 9.8 14.0 16.8 3.0 4.2 5.1 0.8

IRB Infrastructure BUY 195 320 64.2 68 1.0 351 23 31 33 10.8 36.8 7.1 8.6 6.3 5.9 6.9 6.6 7.1 1.2 1.0 0.9 14.5 17.6 16.3 1.2 1.6 2.1 7.3

Mahindra Logistics REDUCE 580 565 (2.5) 41 0.6 71 10 15 21 16.2 50.7 39.3 59.1 39.2 28.2 34.1 21.9 15.8 9.8 8.1 6.6 18.2 22.7 25.8 — — — 0.8

Sadbhav Engineering BUY 285 440 54.3 49 0.7 172 13 18 18 17.4 38.4 2.2 22.2 16.0 15.7 15.3 12.2 9.5 2.6 2.3 2.0 12.5 15.2 13.7 — — — 0.8

Infrastructure Attractive 1,535 22 10.8 10.2 15.5 21.2 19.2 16.6 13.4 11.9 10.4 3.3 2.9 2.6 15.8 15.3 15.5 1.1 0.9 1.1 52.2

Internet

Info Edge ADD 1,362 1,425 4.6 166 2.4 122 23 26 33 33.3 14.9 27.5 60.5 52.7 41.3 50.6 39.6 29.9 7.9 6.2 5.6 13.4 13.2 14.3 0.4 0.6 0.6 2.4

Just Dial ADD 559 610 9.2 38 0.5 67 21 26 30 21.7 23.0 15.0 26.3 21.4 18.6 15.5 11.9 9.7 3.8 3.3 2.9 15.2 16.7 16.6 — 0.5 0.5 50.3

Internet Cautious 204 3 28.0 17.6 23.0 48.9 41.5 33.8 38.1 30.0 23.6 6.6 5.4 4.8 13.5 12.9 14.2 0.3 0.6 0.6 52.7

Media

DB Corp. REDUCE 235 270 14.8 43 0.6 184 18 20 23 (14.1) 14.9 12.3 13.3 11.6 10.3 7.0 6.3 5.5 2.6 2.3 2.3 19.9 20.7 22.3 5.5 7.2 9.0 0.6

DishTV ADD 68 90 32.5 125 1.8 1,925 (0.4) 1.8 3.4 (143.0) 514.6 88.2 NM 37.2 19.8 11.2 5.8 4.6 1.9 1.8 1.7 (2.3) 5.1 8.9 — — — 7.8

Jagran Prakashan REDUCE 122 131 7.3 38 0.6 311 10 11 12 (9.3) 10.0 13.6 12.7 11.5 10.1 5.4 5.3 4.6 1.9 1.9 1.8 14.3 15.9 18.2 2.5 4.1 6.1 0.5

PVR BUY 1,177 1,360 15.5 55 0.8 47 27 38 50 25.5 41.2 32.3 43.9 31.1 23.5 15.0 12.0 10.3 5.1 4.5 3.8 12.3 15.3 17.6 0.2 0.3 0.4 9.2

Sun TV Network REDUCE 806 925 14.8 317 4.6 394 29 35 39 10.2 20.7 10.9 28.0 23.2 20.9 18.7 15.7 13.7 6.9 6.2 5.5 26.3 28.1 27.9 1.2 2.2 2.5 21.8

Zee Entertainment Enterprises ADD 521 600 15.3 500 7.3 960 15 17 20 7.8 11.3 17.0 34.7 31.1 26.6 22.5 19.3 16.4 6.6 5.8 5.1 20.3 19.9 20.6 0.5 0.9 1.1 18.1

Media Attractive 1,079 16 (1.8) 28.7 21.0 33.3 25.9 21.4 16.0 12.3 10.5 4.6 4.2 3.8 13.7 16.3 17.7 0.9 1.5 1.8 57.9

Dividend yield (%)P/B (X) RoE (%)Mkt cap. EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X)


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Metals & Mining

Coal India ADD 279 326 16.7 1,733 25.2 6,207 11 27 28 (24.2) 138.2 3.0 24.7 10.4 10.1 18.5 6.7 6.3 7.2 6.6 6.8 26.7 66.1 66.4 5.9 7.2 9.0 14.2

Hindalco Industries BUY 212 305 44.1 475 6.9 2,229 22 27 31 155.4 23.9 13.6 9.7 7.8 6.9 6.2 5.3 4.6 0.9 0.8 0.7 9.7 10.5 10.7 0.6 0.6 0.6 34.7

Hindustan Zinc ADD 282 290 2.7 1,193 17.3 4,225 22 22 26 9.3 3.7 14.7 13.1 12.7 11.0 8.1 7.3 6.0 3.3 2.9 2.5 27.2 24.4 24.2 2.8 2.8 2.8 8.3

Jindal Steel and Power REDUCE 203 255 25.6 197 2.9 968 (8) 8 18 59.3 194.2 129.1 (23.9) 25.4 11.1 9.5 6.8 5.8 0.6 0.7 0.6 (2.7) 2.6 5.7 — — — 30.2

JSW Steel ADD 337 350 3.8 815 11.8 2,417 27 30 27 83.9 10.2 (8.7) 12.6 11.4 12.5 8.1 7.1 7.8 2.8 2.3 2.0 24.8 22.4 17.3 1.0 1.0 1.0 20.3

National Aluminium Co. ADD 66 85 29.4 127 1.8 1,933 4 7 7 12.7 63.0 11.1 15.9 9.8 8.8 6.6 4.4 4.0 1.2 1.2 1.2 7.7 12.4 13.6 8.7 8.4 8.4 9.4

NMDC REDUCE 107 125 16.9 338 4.9 3,164 12 10 10 43.3 (16.5) 3.6 9.1 10.9 10.5 5.0 6.7 6.4 1.4 1.3 1.3 15.8 12.5 12.4 5.1 5.1 5.1 4.0

Tata Steel ADD 554 700 26.3 634 9.2 1,205 67 69 82 62.6 3.1 18.4 8.2 8 6.7 6.2 6.1 6.2 1.1 1.0 0.9 17.2 13.1 13.9 1.7 1.8 1.8 70.1

Vedanta BUY 222 370 66.8 825 12.0 3,717 22 32 39 9.6 49.1 19.7 10.3 6.9 5.8 5.6 4.6 3.8 1.3 1.2 1.1 12.9 18.0 19.4 3.6 4.4 5.2 52.4

Metals & Mining Attractive 6,337 92 32.3 37.2 11.2 13.4 9.8 8.8 7.5 6.0 5.6 1.9 1.7 1.6 14.3 17.6 17.9 3.4 3.9 4.5 243.6

Pharmaceutical

Apollo Hospitals ADD 971 1,090 12.3 135 2.0 139 8 19 26 (46.9) 124.3 38.0 115.0 51.3 37.1 21.0 17.9 15.1 4.2 3.9 3.7 3.4 7.9 10.2 0.2 0.5 0.7 7.4

Aster DM Healthcare BUY 166 240 44.4 84 1.2 505 3 5 7 163.1 64.2 59.2 60.3 36.7 23.1 16.8 12.5 10.0 3.0 2.8 2.5 5.9 7.8 11.4 - - - 0.4

Aurobindo Pharma ADD 622 640 2.9 364 5.3 584 42 45 51 6.0 7.0 13.5 14.9 13.9 12.3 10.4 9.7 8.3 3.1 2.6 2.2 23.2 20.3 17.9 0.7 0.8 1.0 20.4

Biocon SELL 583 330 (43.4) 350 5.1 601 6 8 15 (39.2) 35.9 75.7 94.1 69.2 39.4 42.2 30.1 20.2 6.2 5.8 5.2 6.9 8.7 13.9 0.2 0.5 0.9 22.9

Cipla BUY 641 650 1.4 516 7.5 805 18 24 32 40.2 36.3 35.1 36.6 26.9 19.9 19.0 14.8 11.6 3.5 3.2 2.9 10.2 12.5 15.2 0.5 0.8 1.1 24.1

Dr Lal Pathlabs REDUCE 935 865 (7.4) 78 1.1 83 20 25 29 7.0 20.8 18.5 45.7 37.8 31.9 27.8 23.3 19.5 9.9 8.2 6.9 23.5 23.7 23.4 0.5 0.5 0.6 1.5

Dr Reddy's Laboratories REDUCE 2,281 2,150 (5.7) 379 5.5 166 59 89 118 (18.5) 50.2 32.8 38.6 25.7 19.4 17.8 13.0 9.2 3.0 2.7 2.4 7.8 11.1 12.6 1.1 0.6 0.8 35.5

HCG REDUCE 285 305 7.0 25 0.4 85 2 3 5 (40.0) 120.9 57.3 182.2 82.5 52.4 24.0 18.7 15.9 4.7 4.5 4.1 2.8 5.5 8.1 — — — 0.2

Laurus Labs ADD 470 500 6.4 50 0.7 106 16 16 29 (11.9) 2.4 79.9 29.6 29.0 16.1 14.4 13.2 9.2 3.4 3.0 2.5 11.9 10.9 17.1 — — — 0.4

Lupin REDUCE 886 800 (9.7) 401 5.8 450 38 36 48 (32.9) (5.1) 33.7 23.2 24.5 18.3 14.2 12.3 9.7 2.9 2.7 2.4 12.6 11.4 13.7 1.0 0.6 0.8 35.5

Narayana Hrudayalaya ADD 254 275 8.5 52 0.8 204 3 4 7 (38.1) 52.2 76.9 100.8 66.2 37.4 27.7 20.9 15.3 5.0 4.7 4.1 5.1 7.3 11.7 — — — 0.4

Sun Pharmaceuticals REDUCE 586 500 (14.7) 1,406 20.4 2,406 15 17 24 (47.5) 12.0 42.0 38.6 34.5 24.3 22.9 18.8 13.9 3.7 3.4 3.0 9.8 10.2 13.1 0.3 0.6 0.8 53.1

Torrent Pharmaceuticals NR 1,623 — — 275 4.0 169 40 47 61 (27.4) 18.0 29.6 40.5 34.3 26.5 22.4 15.0 12.9 5.9 5.2 4.5 15.1 15.3 17.2 1.0 0.7 0.9 5.2

Pharmaceuticals Neutral 4,113 60 (25.8) 17.6 34.9 34.5 29.4 21.8 18.9 15.4 11.9 3.7 3.4 3.0 10.7 11.4 13.6 0.5 0.6 0.8 207.1

Real Estate

Brigade Enterprises BUY 196 340 73.5 27 0.4 136 11 9 9 (17.7) (15.1) (1.6) 17.7 20.8 21.2 10.9 11.1 10.9 1.2 1.1 1.1 7.6 5.5 5.2 1.3 1.3 1.3 0.2

DLF RS 189 — — 337 4.9 1,784 19.6 6.5 3.9 403.9 (66.9) (39.6) 9.6 29.1 48.2 28.7 12.5 12.3 1.0 0.9 0.9 11.7 3.2 1.9 1.1 1.1 1.1 16.4

Godrej Properties SELL 733 400 (45.4) 168 2.4 216 10.9 13.3 15.8 13.5 22.1 19.1 67.5 55.3 46.4 (4,483.6) 324.7 169.0 7.1 4.7 4.3 11.1 10.5 9.7 — — — 2.8

Oberoi Realty BUY 483 560 16.0 176 2.6 340 13 62 44 14.0 385.4 (28.0) 38.0 7.8 10.9 28.4 10.8 13.5 2.7 1.8 1.5 7.3 27.4 15.2 0.4 0.4 0.4 2.6

Prestige Estates Projects ADD 256 315 23.0 96 1.4 375 13 10 10 24.3 (24.2) 8.4 20.4 26.9 24.8 14.4 15.0 15.0 2.0 1.9 1.8 10.3 7.3 7.5 0.6 0.6 0.6 1.0

Sobha REDUCE 485 510 5.1 46 0.7 95 22 20 23 30.9 (7.5) 14.8 22.2 24.0 20.9 13.3 13.6 12.7 1.7 1.6 1.5 7.6 6.8 7.4 1.4 1.4 1.4 1.4

Sunteck Realty REDUCE 416 330 (20.7) 61 0.9 140 15 18 20 4.8 20.2 6.9 27.3 22.7 21.2 17.5 19.1 17.7 2.2 2.0 1.9 9.7 9.4 9.2 0.3 0.2 0.2 1.6

Real Estate Neutral 910 13 139.3 (13.5) (20.4) 17.5 20.2 25.4 25.0 14.8 15.3 1.6 1.5 1.4 9.3 7.3 5.5 0.7 0.7 0.7 26.2

Dividend yield (%)Mkt cap. EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%)


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Technology

HCL Technologies REDUCE 964 1,025 6.4 1,342 19.5 1,409 62 70 74 5.3 12.8 5.0 15.5 13.7 13.1 10.9 8.9 8.1 3.7 3.1 2.7 24.8 24.2 21.8 0.9 0.9 3.2 34.8

Hexaware Technologies SELL 474 435 (8.1) 141 2.0 302 17 20 23 20.2 18.4 18.0 28.6 24.2 20.5 20.6 18.1 14.3 7.1 6.2 5.3 26.6 27.4 27.8 0.8 1.7 1.7 15.1

Infosys ADD 1,364 1,400 2.6 2,979 43.3 2,175 65 71 78 3.0 9.7 10.4 21.1 19.2 17.4 14.6 13.2 11.8 4.6 4.3 3.9 21.8 23.0 23.5 2.0 3.2 2.9 79.4

L&T Infotech ADD 1,684 2,000 18.8 291 4.2 175 64 83 94 13.9 30.5 13.0 26.5 20.3 18.0 23.2 15.5 13.0 7.6 6.1 5.0 31.8 33.5 30.7 1.0 1.4 1.5 4.4

Mindtree ADD 959 1,115 16.3 157 2.3 165 35 43 53 37.8 24.9 23.6 27.8 22.2 18.0 20.1 13.9 11.1 5.8 4.9 4.2 21.4 23.9 25.2 1.1 1.3 1.7 25.6

Mphasis SELL 1,200 760 (36.7) 232 3.4 193 44 52 56 14.4 18.3 8.2 27.4 23.1 21.4 19.9 16.1 14.4 4.2 3.9 3.5 14.6 17.4 17.1 1.7 1.7 1.7 11.4

TCS REDUCE 1,977 1,790 (9.5) 7,570 110.0 3,829 67 82 89 1.1 21.2 8.8 29.3 24.2 22.2 21.8 17.7 16.3 8.7 7.6 7.5 29.4 33.4 33.8 1.3 2.1 3.6 98.7

Tech Mahindra ADD 663 785 18.4 585 8.5 891 43 46 55 33.1 8.3 18.2 15.5 14.3 12.1 11.4 8.5 6.9 3.1 2.7 2.3 21.5 20.2 20.5 2.2 1.4 1.5 35.7

Wipro REDUCE 278 295 6.1 1,258 18.3 4,507 17 19 22 (3.1) 11.8 14.6 16.4 14.7 12.8 10.4 9.2 8.0 2.6 2.2 2.1 16.0 16.4 16.8 0.4 0.5 3.6 12.7

Technology Cautious 14,555 212 1.6 13.1 9.7 22.7 20.1 18.3 16.5 13.8 12.4 5.4 4.8 4.4 23.7 23.8 24.1 1.3 2.0 3.2 317.7

Telecom

Bharti Airtel ADD 375 445 18.8 1,497 21.8 3,997 5 (6) (4) (42.9) (221.5) 28.8 79.1 (65.1) (91.5) 8.3 9.7 8.2 2.2 2.3 2.3 2.8 (3.4) (2.5) 1.4 0.3 (0.2) 31.9

Bharti Infratel REDUCE 290 285 (1.8) 537 7.8 1,850 14 13 12 (7.4) (4.8) (8.5) 21.1 22.2 24.2 7.6 8.2 8.7 3.2 3.3 3.3 15.7 14.6 13.7 5.0 3.6 3.3 12.6

IDEA REDUCE 55 45 (18.5) 241 3.5 4,359 (10) (17) (17) (656.8) (75.6) (2.4) (5.8) (3.3) (3.2) 12.4 35.3 29.8 0.9 1.1 1.7 (16.0) (29.7) (41.1) — — — 17.4

Tata Communications ADD 587 725 23.6 167 2.4 285 2 4 8 (84.3) 121.9 117.7 356 160.6 73.8 10.7 9.6 8.4 33.5 27.0 19.5 4.5 18.6 30.7 1.1 1.1 1.3 4.3

Telecom Cautious 2,441 35 (94.7) (2,354.7) 5.7 776.3 (34.4) (36.5) 8.9 11.0 9.6 2.1 2.3 2.5 0.3 (6.8) (7.0) 2.0 1.0 0.6 66.2

Utilities

CESC BUY 934 1,180 26.3 124 1.8 133 87 115 128 67.1 31.7 11.6 10.7 8.1 7.3 7.7 5.7 5.1 0.8 0.8 0.7 7.9 10.0 10.4 1.3 1.4 1.4 5.9

JSW Energy REDUCE 66 70 6.9 107 1.6 1,640 3.1 5.1 6.5 (19.2) 65.9 26.8 21.4 12.9 10.1 6.8 5.6 4.6 1.0 0.9 0.8 4.7 7.2 8.5 - - - 1.7

NHPC ADD 24 30 24.2 248 3.6 10,260 2.4 3.1 3.2 (17.3) 26.9 1.8 9.9 7.8 7.7 9.2 7.2 7.0 0.8 0.8 0.8 8.5 10.4 10.2 5.8 7.2 7.3 2.0

NTPC BUY 156 190 21.4 1,290 18.7 8,245 11 15 16 (7.6) 30.9 4.4 13.7 10.5 10.1 11.1 8.6 8.0 1.3 1.2 1.1 9.5 11.6 11.3 3.6 2.9 3.0 14.1

Power Grid BUY 190 250 31.4 995 14.5 5,232 16 19 21 9.6 19.3 13.6 12.1 10.1 8.9 8.5 7.2 6.6 1.8 1.6 1.5 15.8 17.1 17.5 2.8 3.3 3.7 30.9

Reliance Power SELL 34 43 28.0 94 1.4 2,805 3.5 5.1 5.2 (16.4) 45.6 2.7 9.7 6.6 6.5 7.9 6.8 6.6 0.4 0.4 0.4 4.5 6.1 5.9 — — — 4.2

Tata Power BUY 72 90 24.6 195 2.8 2,705 5.3 6.0 7.0 (9.6) 12.7 15.6 13.5 12.0 10.4 10.3 10.6 10.2 1.3 1.2 1.0 10.7 10.1 10.6 — — — 5.2

Utilities Attractive 3,054 44 (2.4) 26.8 8.6 12.6 9.9 9.2 9.4 7.8 7.2 1.2 1.1 1.0 9.7 11.4 11.4 2.9 2.9 3.1 64.0

P/B (X) RoE (%) Dividend yield (%)Mkt cap. EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X)


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Others

Astral Poly Technik SELL 1,063 640 (39.8) 127 1.9 120 15 19 25 20.8 30.2 28.8 72.5 55.7 43.3 40.8 30.0 23.8 12.5 9.8 8.1 18.8 19.8 20.5 0.1 0.1 0.1 1.1

Avenue Supermarts SELL 1,651 860 (47.9) 1,030 15.0 624 13 16 20 47.9 28.6 26.4 131.3 102.1 80.8 76.9 58.9 46.2 22.2 18.2 14.9 18.5 19.6 20.3 — — — —

Bayer Cropscience REDUCE 4,394 4,100 (6.7) 174 2.5 34 88 106 130 6.4 20.5 23.1 50.2 41.6 33.8 41.4 30.6 24.9 8.5 7.3 6.3 15.7 18.9 20.0 0.4 0.5 0.6 0.5

Dhanuka Agritech ADD 562 690 22.8 28 0.4 49 26 28 32 7.7 8.9 15.4 21.8 20.1 17.4 16.0 13.8 11.5 4.4 3.7 3.2 21.9 20.1 20.0 1.0 1.1 1.2 0.2

Godrej Agrovet ADD 657 650 (1.0) 126 1.8 189 12 16 20 6.9 39.8 24.6 57.0 40.8 32.8 29.3 22.6 18.3 7.4 6.4 5.4 14.7 16.9 17.9 0.3 0.4 0.5 1.4

Godrej Industries RS 624 — — 210 3.0 336 15 16 20 6.8 8.9 24.2 42.8 39.3 31.6 37.9 32.0 34.9 5.8 5.1 4.5 14.4 13.9 15.1 0.3 0.3 0.3 4.8

InterGlobe Aviation BUY 996 1,220 22.5 383 5.6 383 61 50 83 32.1 (17.9) 65.3 16.4 19.9 12.1 9.2 11.1 6.3 5.4 4.4 3.3 42.9 24.1 31.1 0.6 0.5 0.8 25.3

Kaveri Seed SELL 589 470 (20.1) 39 0.6 66 32 31 33 18.4 (3.7) 6.1 18.4 19.1 18.0 15.6 16.2 14.6 5.0 4.2 3.7 23.6 24.0 21.9 1.0 1.4 1.7 5.1

PI Industries BUY 830 900 8.4 114 1.7 138 27 33 41 (20.0) 25.0 23.2 31.2 25.0 20.3 23.0 18.1 14.4 6.0 5.0 4.1 20.7 21.7 22.1 0.4 0.5 0.6 1.4

Rallis India ADD 204 220 7.9 40 0.6 195 9 10 12 (1.5) 17.2 19.4 23.7 20.2 16.9 14.7 13.3 11.2 3.3 3.0 2.7 14.6 15.8 17.1 1.6 1.8 2.0 0.8

SIS REDUCE 1,051 1,130 7.5 77 1.1 73 22 33 40 43.3 48.5 21.1 46.8 31.5 26.0 25.2 19.7 16.5 7.4 6.3 5.2 20.1 21.8 21.7 0.2 0.3 0.3 0.7

SRF BUY 1,743 2,110 21.1 100 1.5 57 80 92 123 (10.4) 14.4 33.6 21.7 19.0 14.2 13.2 10.4 8.5 2.8 2.5 2.2 13.7 14.0 16.4 0.7 0.8 0.8 11.2

Tata Chemicals ADD 693 760 9.7 177 2.6 255 51 46 52 6.5 (11.2) 13.6 13.5 15.2 13.4 7.4 6.3 5.3 1.6 1.5 1.4 13.8 10.0 10.5 3.2 2.2 2.5 7.9

TeamLease Services SELL 2,676 1,785 (33.3) 46 0.7 17 43 58 75 28.0 34.2 29.0 62.1 46.2 35.9 64.6 46.9 35.7 10.4 8.5 6.8 18.2 20.1 21.1 — — — 1.6

UPL ADD 641 660 3.0 326 4.7 507 43 49 55 20.9 14.0 12.1 14.9 13.1 11.7 10.3 8.9 7.5 3.5 2.9 2.4 26.4 24.6 22.9 1.3 1.6 1.7 22.4

Vardhman Textiles ADD 1,224 1,400 14.4 70 1.0 56 103 130 140 (8.0) 26.4 7.4 11.9 9.4 8.8 10.0 7.4 6.6 1.4 1.3 1.1 12.7 14.3 13.8 1.2 1.6 2.5 1.0

Whirlpool SELL 1,763 1,240 (29.6) 224 3.2 127 28 37 45 13.0 33.9 22.5 63.8 47.6 38.9 38.0 29.3 23.7 12.4 10.3 8.6 21.4 23.7 24.1 0.2 0.4 0.5 1.1

Others 3,290 48 16.1 7.7 26.4 31.9 29.7 23.5 20.7 18.1 14.4 5.8 5.0 4.3 18.3 16.9 18.1 0.5 0.5 0.7 86.5

KIE universe 112,700 1,637 (5.1) 26.6 25.4 27.5 21.7 17.3 12.9 10.9 9.7 3.1 2.8 2.5 11.2 12.9 14.6 1.3 1.3 1.7

KIE universe (ex-energy) 98,592 1,432 (7.0) 33.5 30.3 32.2 24.1 18.5 14.4 12.0 10.6 3.4 3.1 2.8 10.7 12.9 15.2 1.1 1.2 1.6

Notes:

(a) We have used adjusted book values for banking companies.

(b) 2018 means calendar year 2017, similarly for 2019 and 2020 for these particular companies.

(c) Exchange rate (Rs/US$)= 68.81

Mkt cap. EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%)

Disclo

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Disclosures

Ratings and other definitions/identifiers

Definitions of ratings

BUY. We expect this stock to deliver more than 15% returns over the next 12 months.

ADD. We expect this stock to deliver 5-15% returns over the next 12 months.

REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.

SELL. We expect this stock to deliver <-5% returns over the next 12 months.

Our target prices are also on a 12-month horizon basis.

Other definitions

Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following

designations: Attractive, Neutral, Cautious.

Other ratings/identifiers

NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s)

and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction

involving this company and in certain other circumstances.

CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.

NC = Not Covered. Kotak Securities does not cover this company.

RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient

fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock

and should not be relied upon.

NA = Not Available or Not Applicable. The information is not available for display or is not applicable.

NM = Not Meaningful. The information is not meaningful and is therefore excluded.

Kotak Institutional Equities Research coverage universe

Distribution of ratings/investment banking relationships

Source: Kotak Institutional Equities As of June 30, 2018

Percentage of companies covered by Kotak Institutional

Equities, within the specified category.

* The above categories are defined as follows: Buy = We

expect this stock to deliver more than 15% returns over

the next 12 months; Add = We expect this stock to

deliver 5-15% returns over the next 12 months; Reduce

= We expect this stock to deliver -5-+5% returns over

the next 12 months; Sell = We expect this stock to deliver

less than -5% returns over the next 12 months. Our

target prices are also on a 12-month horizon basis.

These ratings are used illustratively to comply with

applicable regulations. As of 31/03/2018 Kotak

Institutional Equities Investment Research had

investment ratings on 207 equity securities.

Percentage of companies within each category for

which Kotak Institutional Equities and or its affiliates has

provided investment banking services within the

previous 12 months.

21.4%

31.3%

25.4%21.9%

2.0%5.0% 4.5%

0.5%

0%

10%

20%

30%

40%

50%

60%

70%

BUY ADD REDUCE SELL

Corporate Office Overseas Affiliates

Kotak Securities Ltd.

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