india daily, july 27, 2018 - kotak securities · 2018. 7. 27. · overview exhibit 1: key...

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

Contents

Special Reports

Initiating Coverage

Aster DM Healthcare: Healthy prospects

Daily Alerts

Results

ITC: Improving cigarette EBIT growth trajectory encouraging

Maruti Suzuki: Slight miss due to increase in other expenses

YES Bank: NIM under pressure; as expected

SBI Life Insurance: VNB margins rise; protection story playing out

Bharti Infratel: In-line operating trends; we remain cautious

Dr Reddy's Laboratories: Suboxone and tax benefits help drive outperformance

Shriram Transport: Strong growth; lower provisions

Colgate-Palmolive (India): Not out of the woods yet

Tata Power: Coal earnings clipped by DMO

Bayer Cropscience: Strong start; expensive valuations

Crompton Greaves Consumer: Revenue growth below estimates

Schaeffler India: Look beyond the quarter

SIS: Security business margins disappoint

J&K Bank: Restructured loans in J&K stable

Results, Change in Reco

CESC: Reducing losses at Chandrapur and Spencer prompt upgrade

Company alerts

Hindalco Industries: Aleris acquisition—a good opportunity

UPL: Too good, if true

KIE COMMUNICATION

We are dropping coverage of Manpasand Beverages. Our last rating was SELL and target

price was Rs132.

INDIA DAILY July 27, 2018 India 26-Jul 1-day 1-mo 3-mo

Sensex 36,985 0.3 5.0 5.8

Nifty 11,167 0.3 4.6 4.4

Global/Regional indices

Dow Jones 25,527 0.4 5.8 5.0

Nasdaq Composite 7,852 (1.0) 5.5 10.3

FTSE 7,663 0.1 0.5 2.1

Nikkei 22,641 0.2 1.7 0.8

Hang Seng 28,781 (0.5) 1.5 (5.0)

KOSPI 2,286 (0.1) (2.4) (8.3)

Value traded – India

Cash (NSE+BSE) 474 328 329

Derivatives (NSE) 17,812 9,316 14,14

1

Deri. open interest 4,331 4,204 4,664

Forex/money market

Change, basis points

26-Jul 1-day 1-mo 3-mo

Rs/US$ 68.7 (0) (17) 227

10yr govt bond, % 8.1 (2) 2 13

Net investment (US$ mn)

25-Jul MTD CYTD

FIIs (91) (388) (1,010)

MFs (29) 801 11,353

Top movers

Change, %

Best performers 26-Jul 1-day 1-mo 3-mo

APNT IN Equity 1,434 (1.1) 13.2 21.3

GCPL IN Equity 1,336 (1.5) 10.5 19.8

SBIN IN Equity 288 5.8 9.9 18.6

INFO IN Equity 1,373 (0.8) 8.1 16.8

HDFCB IN Equity 2,193 1.0 3.8 14.0

Worst performers

HDIL IN Equity 19 (1.0) (5.2) (45.4)

AL IN Equity 112 1.7 (13.4) (30.8)

UT IN Equity 4 (2.3) 1.2 (29.4)

VEDL IN Equity 217 (1.1) (5.9) (26.4)

TTMT/A IN Equity 143 1.2 (11.7) (24.3)

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

Leading player in GCC hospitals market—Saudi issues resolved

Over the last decade, Aster has emerged as one of the leading healthcare service providers in

GCC with 9 hospitals accounting for 20% of FY2018 revenues. From FY2015-18, Aster’s GCC

hospital business was impacted due to aggressive expansion and losses in Sanad Hospital in

Saudi Arabia (was a key contributor to profits in FY2014). However, with Sanad accounting for

only ~5% of FY2018 revenues and losses at an EBITDA level, it is no longer a big drag, while

the mature GCC business operates at high 27% RoCE. We expect the GCC hospitals to grow at

15% CAGR driven by a mix of existing and new hospitals, and expect EBITDA margins to

improve by 400 bps to ~17% by FY2021E driven by maturity mix and turnaround in Sanad.

>30% steady-state RoCE for GCC clinics and pharmacy business

Aster DM operates one of the largest networks of private clinics in the GCC with 98 clinics,

though given a doubling of clinic count from FY2014-17, profitability suffered with EBITDA

falling to 11.3% in FY2018 from a peak of ~18%. With an improving maturity profile, we

expect EBITDA margin to move up to 14.5% in FY2021E. Given an asset-light model, the clinics

business has attractive return dynamics, with mature clinics operating at >30% RoCE. Aster DM

has a strong retail pharmacy network across the GCC with 207 pharmacies across GCC and

RoCE of 39% with steady performance. We expect pharmacy revenues to grow at a steady 9%

EBITDA CAGR over FY2018-21E, with gradual margin expansion, driven by operating leverage

as well as gradual, continued shift to private label.

Rapid expansion in India, with strong EBITDA growth prospects

Aster DM’s India operations are focused in Kerala and Bengaluru, which account for 1,478 beds

and 72% of India revenues in FY2018. Aster DM’s flagship Kochi hospital commenced

operations in FY2015, and broke even in FY2017, with FY2018 EBITDA margins crossing 15%

on revenues of `3.3 bn. Aster DM’s CMI Bengaluru hospital also turned profitable and we

expect it to reach double-digit EBITDA margin by FY2020. While the company is now moving to

an asset-light model, given the asset block in Kochi and MedCity, we expect India RoCE to

move to 6-7% by FY2021, despite a strong 32% EBITDA CAGR from FY2018-21E.

Maturity mix to drive profitability – BUY

Aster DM’s business stands out among listed Indian peers given (1) strong underlying

profitability of GCC hospitals, (2) scalable asset-light model for clinics and pharmacies, and (3) a

fast-growing India business. Aster DM trades at ~10X FY2020E EV/EBITDA, a significant

discount to Indian and GCC peers. We value Aster DM at `240/share, valuing both India and

GCC businesses at 15X FY2020E attributable EBITDA.

Aster DM Healthcare (ASTERDM) Pharmaceuticals

Healthy prospects. We initiate coverage on Aster DM with a BUY rating and a target

price of `240/share. Aster DM is a leading healthcare service provider in the Gulf

Cooperation Council (GCC) countries (~82% of FY2018 EBITDA), with a network

spanning hospitals, clinics and pharmacies, all of which have strong underlying return

profiles. Aster is also expanding its presence across India with a strong network in the

South. We forecast 12% and 25% revenue and EBITDA CAGR, respectively over

FY2018-21E, and expect RoCE to improve to 12% by FY2021E. BUY

BUY

JULY 27, 2018

INITIATING COVERAGE

Coverage view: Neutral

Price (`): 165

Target price (`): 240

BSE-30: 36,985

Chirag Talati, CFA

Kumar Gaurav

Aster DM Healthcare

Stock data Forecasts/Valuations 2018 2019E 2020E

52-week range (Rs) (high,low) EPS (Rs) 2.8 4.5 7.2

Market Cap. (Rs bn) EPS growth (%) 163.1 64.2 59.2

Shareholding pattern (%) P/E (X) 59.9 36.5 22.9

Promoters 37.5 Sales (Rs bn) 67.2 75.6 87.0

FIIs 6.8 Net profits (Rs bn) 1.4 2.3 3.6

MFs 1.8 EBITDA (Rs bn) 6.1 8.3 10.1

Price performance (%) 1M 3M 12M EV/EBITDA (X) 16.7 12.4 9.9

Absolute 0.3 (1.3) 0.0 ROE (%) 5.9 7.8 11.4

Rel. to BSE-30 (3.7) (7.4) 0.0 Div. Yield (%) 0.0 0.0 0.0

Company data and valuation summary

194-140

83.4

Aster DM Healthcare Pharmaceuticals

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

OVERVIEW

Exhibit 1: Key consolidated financials of Aster DM Healthcare March fiscal year-ends, 2014-21E

Source: Company

Exhibit 2: Profit and loss statement, balance sheet and cash model March fiscal year-ends, 2014-21E (₹ mn)

Source: Company

EBITDA margin P/E EV/EBITDA RoCE (post-tax) RoE

(%) (X) (X) (%) (%)

2014 28,711 4,508 2,685 15.7 NM 19.7 15.8 19.6

2015 38,758 5,060 3,610 13.1 NM 18.0 14.7 16.1

2016 52,499 4,456 3,756 8.5 NM 25.5 13.4 63.0

2017 59,313 3,326 (2,026) 5.6 NM 32.8 1.8 (9.0)

2018 67,212 6,128 1,392 9.1 59.9 16.7 5.6 4.4

2019E 75,607 8,281 2,286 11.0 36.5 12.4 7.1 6.7

2020E 86,954 10,138 3,639 11.7 22.9 9.9 9.5 9.6

2021E 95,239 12,007 5,299 12.6 15.7 8.0 11.8 12.3

Net revenues EBITDA PAT

(Rs mn) (Rs mn) (Rs mn)

2014 2015 2016 2017 2018 2019E 2020E 2021E

Net revenues 28,711 38,758 52,499 59,313 67,212 75,607 86,954 95,239

Gross profit 18,657 26,537 36,267 40,440 46,622 53,626 62,308 67,993

EBITDA 4,508 5,060 4,456 3,326 6,128 8,281 10,138 12,007

Adjusted EBITDA 4,508 6,394 7,802 4,213 6,128 8,281 10,138 12,007

Depreciation & amortisation (1,111) (1,440) (2,430) (3,229) (2,977) (4,063) (4,360) (4,700)

EBIT 3,397 3,620 2,026 97 3,150 4,218 5,778 7,307

Adjusted EBIT 3,397 4,954 5,372 984 3,150 4,218 5,778 7,307

Net interest (294) (558) (1,641) (3,170) (1,392) (1,430) (1,340) (845)

Exceptional items — — — 5,961 1,296 — — —

Profit before tax 3,103 3,062 384 2,888 3,055 2,788 4,438 6,462

Tax & deferred tax (267) (342) (294) (218) (261) (251) (399) (582)

Less: minority interest (1,058) (1,393) (680) (683) (105) (251) (399) (582)

Net income (reported) 1,778 1,327 (590) 1,987 2,689 2,286 3,639 5,299

Net income (adjusted) 2,685 3,610 3,756 (2,026) 1,392 2,286 3,639 5,299

EPS (reported) Rs. 4.5 3.4 (1.3) 4.3 5.3 4.5 7.2 10.5

Balance sheet

Cash & equivalents 3,247 3,069 3,044 1,736 3,245 6,759 4,141 2,593

Debtors 6,775 8,843 13,423 12,876 15,464 16,571 19,058 20,874

Other current assets 4,267 6,095 8,589 10,112 9,981 10,764 11,823 12,596

Current assets 14,289 18,007 25,056 24,725 28,690 34,095 35,022 36,064

Fixed assets (incl. goodwill) 14,448 24,343 28,656 38,094 41,400 43,337 42,477 41,777

Other non-current assets 200 1,770 3,846 5,254 4,753 4,753 4,753 4,753

Total assets 28,937 44,120 57,558 68,073 74,842 82,185 82,252 82,593

Short-term loans 2,042 2,894 5,841 8,304 6,345 6,345 6,345 6,345

Creditors and other liabilities 5,502 9,461 13,585 13,455 15,890 16,946 18,374 19,416

Current liabilities 7,545 12,354 19,427 21,759 22,235 23,291 24,719 25,761

Long-term loans 6,814 8,013 27,364 19,272 15,779 19,779 14,779 8,779

Other liabilities (incl. deferred) 872 1,292 4,800 4,534 4,929 4,929 4,929 4,929

Total liabilities 15,231 21,659 51,591 45,566 42,942 47,998 44,426 39,469

Equity (inc. minority interest) 13,706 22,461 5,967 22,507 31,900 34,187 37,826 43,124

Total equity and liabilities 28,937 44,120 57,558 68,073 74,842 82,185 82,252 82,593

Cash flow

CF from operations pre WC 5,317 7,255 8,841 5,198 7,137 7,779 9,339 10,844

Working capital (2,044) (4,900) (6,814) (1,536) (1,764) (834) (2,118) (1,546)

Capex (3,627) (3,947) (7,440) (9,246) (5,171) (6,000) (3,500) (4,000)

FCF (354) (1,592) (5,414) (5,584) 203 945 3,722 5,298

Margins (%)

EBITDA margin 15.7 16.5 14.9 7.1 9.1 11.0 11.7 12.6

EBIT margin 11.8 12.8 10.2 1.7 4.7 5.6 6.6 7.7

Ratios

Net debt to equity (X) 0.4 0.3 5.1 1.1 0.6 0.6 0.4 0.3

RoE (%) 19.6 16.1 63.0 (9.0) 4.4 6.7 9.6 12.3

RoCE (%) 15.8 14.7 13.4 1.8 5.6 7.1 9.5 11.8

Pharmaceuticals Aster DM Healthcare

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

VALUATION: BUY, WITH TARGET PRICE OF `240

We value Aster DM at `240/share based on a blended ~15X FY2020E attributable EBITDA, valuing both India

and GCC businesses at 15X FY2020E EV/EBITDA. Our multiple of 15X for India business represents a slight

premium with Indian peers and reflects a stronger growth profile (2.5X EBITDA jump from FY2018-21E), while

our GCC multiple of 15X is at a slight discount to other Middle East-based listed players, reflecting slightly

lower profitability in the UAE and Saudi versus peers. Given improving profitability in hospitals and clinics

(27% EBITDA CAGR from FY2018-21E) and improving cash flow profile (~`12 bn FCF generation over

FY2019-21E), we believe Aster DM can trade at a premium to Indian peers.

Sharp discount to peers unwarranted

Aster DM shares trade at ~10X FY2020E EV/EBITDA, a significant discount to Indian and

GCC peers. We believe the discount partially reflects a lack of understanding of the GCC

profitability, given the volatility in profits in FY2015-18, as well as strong seasonality element

(65% of EBITDA in 2H), which has precluded investors from getting comfort on the EBITDA

ramp-up, witnessed in FY2018.

Aster DM’s business stands out among listed Indian peers having a unique mix of highly

profitable GCC assets and an increasing presence in India. Given strong underlying

profitability of GCC hospitals (established units RoCE at 27%), (2) scalable asset-light model

for clinics (30-35% for mature units) and pharmacies (~40% RoCE for mature units), and

(3) a relatively nascent India business (2.5X EBITDA growth from FY2018-21E), we believe

Aster’s current business mix is superior to other Indian listed peers. We model healthy 14%

revenue CAGR over FY2018-21E, and expect EBITDA to grow at 27% CAGR over the same

period with 320 bps expansion in EBITDA margin led by improving maturity mix in the UAE

for hospitals and clinics, and continued margin expansion in India, primarily driven by Kochi

and Bengaluru hospitals. Return ratios are expected to improve and we forecast 12%

consolidated RoCE (post-tax) in FY2021 versus 5.6% in FY2018.

Exhibit 3: GCC contributes to majority of Aster’s revenues Aster DM snapshot, March fiscal year-end, 2018

Source: Company, Bloomberg, Kotak Institutional Equities estimates

Aster DM Healthcare

Clinics

(26% of revenues)

Hospitals

(46% of revenues)

Pharmacy

(28% of revenues)

GCC

(29% of revenues)

India

(17% of revenues)

• One of the largest hospital

chains in South India with majority of hospitals set-

up after 2014• EBITDA margins have

improved from 2% in FY2017 to 10% in FY2018

• Indian operations also act as source of talent for

GCC

• UAE contributes to 65%

of GCC hospitals, most profitable and largely

stable division. • Sanad Hospital in Saudi

contributes to 17% of GCC hospitals' revenues.

Turned loss making due to delay in receivables during

FY2016-17. Turnaround ongoing

• Other hospitals in Oman

and Kuwait largely stable

• Largest network of 92 clinics

in GCC• Mature state EBITDA margin

and RoCE at 20% and 30% respectively

• 20% of clinics are <3 years old and yet to break-even

• Largest network

pharmacies in GCC with over 200 stores

• Mature state EBITDA margin and RoCE at

10% and 40% respectively



Initiate with BUY rating; target price of `240/share

We value Aster DM at `240/share based on a blended ~15X FY2020E EBITDA (attributable

to Aster), valuing both India and GCC at 15X FY2020E EV/EBITDA. Our multiple of 15X for

India business represents a slight premium to Indian peers and reflects a stronger growth

profile (2.5X EBITDA jump from FY2018-21E), while our GCC multiple of 15X is at a

discount to other Middle East-based listed players, reflecting slightly lower profitability in the

UAE and Saudi versus peers.

Exhibit 4: Aster DM is trading at a discount to Indian and Middle Eastern peers Valuation table for hospitals, March fiscal year ends, 2018-21E


Strong growth in all segments to support valuation re-rating

GCC hospitals to benefit from maturity mix. The UAE remains Aster’s key geography

for hospitals with five hospitals in Dubai and Sharjah operated under MedCare and Aster

brand. We expect hospitals in the UAE to grow at 15% CAGR driven by steady 7-8% in

growth in matured facilities as well as contribution from new facilities. Recently

commissioned hospitals had a `930 mn loss in FY2018, which we expect to swing to

profitability by FY2020, though EBITDA margins are expected to remain stable given

ongoing expansion (commissioning of three new facilities during FY2018-21 in the UAE).

Saudi turnaround to aid margins. We expect Aster’s Sanad hospital to continue to turn

around with reduction in government patients and increasing contribution from insurance

and cash patients. Over FY2018-21E, we expect Sanad to grow at 18% CAGR and reach

EBITDA margin of 18% by FY2021E.

India still in ramp-up mode. We expect India hospitals to grow at 13% CAGR driven by

11% growth in Kochi, 15% growth in CMI Bangalore and contribution from upcoming

EV

Country (US$ mn) 2018 2019E 2020E 2021E 2018 2019E 2020E 2021E

Indian companies

Apollo Hospitals India 1,899 2,353 111.6 49.7 36.0 29.2 20.5 17.5 14.7 12.8

Aster DM Healthcare India/UAE 1,244 1,526 30.4 35.8 22.5 15.4 16.7 12.4 9.9 8.0

Healthcare Global India 352 415 178.4 80.8 51.3 31.8 23.5 18.3 15.6 12.1

Narayana Hrudayalaya India 744 851 27.0 64.2 36.3 27.2 27.0 20.4 14.9 12.3

Fortis India 1,055 1,378 (7.2) 113.9 40.1 26.6 34.2 20.6 14.7 11.4

Mean 68.0 68.9 37.2 26.0 24.4 17.8 14.0 11.3

Median 30.4 64.2 36.3 27.2 23.5 18.3 14.7 12.1

South East Asian companies

Bangkok Chain Thailand 1,244 1,378 45.1 39.2 34.2 30.3 22.2 19.9 17.9 16.4

Bangkok Dusit Thailand 12,632 13,743 52.7 42.6 37.6 32.5 29.3 26.1 23.4 21.0

Bumrungrad Thailand 3,974 3,792 33.5 31.0 29.8 28.2 21.0 19.7 18.2 16.6

IHH Healthcare Malaysia 12,187 13,396 103.1 55.0 43.8 32.4 24.1 19.8 17.1 14.7

KPJ Healthcare Malaysia 1,070 1,459 27.7 25.1 22.9 23.4 15.1 12.9 12.1 11.2

Raffles Medical Singapore 1,479 1,475 28.9 31.1 33.9 32.0 21.8 20.6 20.9 19.0

Talkmed Group Ltd Singapore 618 558 26.2 32.0 32.0 32.0 19.1 21.3 20.6 20.0

Mean 45.3 36.6 33.5 30.1 21.8 20.1 18.6 17.0

Median 33.5 32.0 33.9 32.0 21.8 19.9 18.2 16.6

Middle East companies

Nmc Health Plc UAE 10,401 11,468 3,969 34.1 27.5 22.6 32.4 24.7 20.6 17.8

Dallah Healthcare Saudi Arabia 1,386 1,504 17.1 18.4 15.8 12.5 14.9 15.4 13.0 10.4

Mouwasat Medical Services Saudi Arabia 2,554 2,671 28.5 25.7 22.8 18.3 21.6 19.2 16.6 13.6

Middle East Healthcare Saudi Arabia 1,438 1,496 18.0 16.9 15.7 15.7 15.9 14.1 12.5 12.2

Al Hammadi Saudi Arabia 1,033 1,171 35.9 32.2 23.0 15.3 22.4 18.9 15.2 11.0

Mean 813.7 25.5 21.0 16.9 21.5 18.5 15.6 13.0

Median 28.5 25.7 22.8 15.7 21.6 18.9 15.2 12.2

Notes:

(a) For South East Asia and Middle East companies, 2018-21 represents CY2017-20E

Company

Market Cap.

(US$ mn)

EV/EBITDA (X)P/E (X)

Pharmaceuticals Aster DM Healthcare


facilities. More importantly, we expect Kochi and CMI Bengaluru to reach 16% and 15%

EBITDA margin, respectively by FY2020 (from 15% and -8%, respectively in FY2018),

thereby positively aiding margin progression, with 90 bps EBITDA margin contribution to

consolidated EBITDA margin in FY2018-20. India business contribution is set to increase

to 18% of revenues and 22% of EBITDA in FY2020.

Maturity mix to drive clinics margin profile. Aster’s clinics profitability over FY2016-17

suffered from aggressive expansion of clinic network in the UAE. Post implementation of

universal health insurance in Dubai, we expect clinics to grow at 10% CAGR over

FY2018-21 with improving margin trajectory as the pace of clinics addition slows down.

Steady growth expected in pharmacies. We expect pharmacies to grow at a steady

pace of 9% CAGR led by addition of new stores with SSG in existing stores at 4-5%. We

expect EBITDA margins in pharmacy business to continue to improve driven by increasing

contribution from non-pharma products along with increasing penetration of generics.

Exhibit 5: Growth driven by improvement in all segments Revenue and EBITDA breakup, March fiscal year-ends, 2017-21E (Rs mn)

Source: Company, Kotak Institutional Equities

2017 2018 2019E 2020E 2021E

Revenues

GCC

Hospitals 18,240 20,910 24,486 30,414 32,424

UAE 11,576 13,673 15,842 20,406 20,886

Saudi 3,743 3,642 4,151 5,062 5,994

Others 2,921 3,595 4,494 4,947 5,544

Clinics 16,440 18,630 20,618 22,736 24,991

Pharmacies 17,920 19,690 21,277 23,166 25,709

GCC total 52,600 59,230 66,381 76,317 83,124

India 9,570 11,780 13,209 15,216 17,103

Total revenues 59,313 67,210 75,607 86,954 95,239

EBITDA

GCC

Hospitals 1,528 2,672 3,843 4,690 5,461

UAE 2,026 2,322 2,873 3,239 3,551

Saudi (936) 109 415 759 1,079

Others 438 240 554 693 832

Clinics 1,414 2,105 2,577 3,069 3,624

Pharmacies 1,667 1,851 2,021 2,317 2,699

GCC total 4,609 6,628 8,441 10,076 11,784

India 302 1,117 1,787 2,204 2,579

Corporate expenses (1,585) (1,617) (1,947) (2,142) (2,356)

Total EBITDA 3,326 6,128 8,281 10,138 12,007

EBITDA margin (%)

GCC

Hospitals 8.4 12.8 15.7 15.4 16.8

UAE 17.5 17.0 18.1 15.9 17.0

Saudi (25.0) 3.0 10.0 15.0 18.0

Others 15.0 6.7 12.3 14.0 15.0

Clinics 8.6 11.3 12.5 13.5 14.5

Pharmacies 9.3 9.4 9.5 10.0 10.5

GCC total 8.8 11.2 12.7 13.2 14.2

India 3.2 9.5 13.5 14.5 15.1

Corporate expenses as % of sales (2.7) (2.4) (2.6) (2.5) (2.5)

Consolidated 5.6 9.1 11.0 11.7 12.6



Exhibit 6: Revenue waterfall chart March fiscal year-ends, 2018-20E (Rs mn)


Exhibit 7: EBITDA waterfall chart March fiscal ear-ends, 2018-20E (Rs mn)


Holding structure discount should narrow given clarity on Middle East structure

Typically, Middle East hospital chains trade at a premium valuation to Indian hospitals due to

the intrinsic high returns, though the Middle East hospitals trade at a discount to South East

Asian players, partially due to the holding structure discount. We value Aster’s Middle East

business in line with the Indian peers (instead of a premium) to capture its holding structure,

as it holds minority shareholding in most of its GCC operations despite having management

control as laws in GCC states such as the UAE, Kuwait, Qatar state that 51% of ownership

should reside with local nationals, even as 70% foreign ownership is allowed in Oman. In

order to provide comfort on the holding structure, Aster implemented a revised holding

structure in CY2015 (see Exhibit 44). The revised structure is based out of the Dubai

International Finance Centre (DIFC), operating under a trust law modeled on common law

principles, which permits the enforcements of trusts through the DIFC Court. While trust

agreements are not recognized under the civil law system operating in the UAE, the DIFC

trust is self-contained in the DIFC jurisdiction, which has laws explicitly recognizing the legal

concepts of trusts and beneficial ownership, thereby, removing the risks pertaining to the

local ownership holding structure. Moreover, the UAE has recently proposed a law to

allow 100% foreign ownership, which should remove the potential ownership risks.

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1QFY19 earnings print – encouraging after several quarters

ITC’s net operating revenues for 1QFY19 stood at `107 bn (+8% yoy), 1% ahead of our

estimated `105.6 bn. EBITDA for the quarter stood at `42 bn, +12% yoy and 5% ahead of our

estimate. Recurring PAT of `28.2 bn, +10% yoy, was 3% ahead. EBITDA margin stood at

39.2%, +161 bps yoy and 126 bps ahead of our estimate driven by sharp improvement in

profitability of hotels, FMCG and paperboard segments. ETR for the quarter stood at 34.4%.

Other income was below our expectations resulting in a lower outperformance at the PAT level

as compared to that at the EBITDA level.

Cigarettes – EBIT growth accelerates marginally to 9% yoy

ITC’s cigarette EBIT grew 9% yoy to `35.6 bn, 2% ahead of our estimate. This was ahead of

EBIT growth levels reported in the past three quarters and was aided by an improved volume

growth trajectory. We estimate a volume growth of +1% yoy as opposed to the 4-7% yoy

volume decline seen in each of the past three quarters. We believe the mix continued to move

in favor of the 64 mm segment.

Other segments – healthy EBIT growth in all segments excluding agri

Other FMCG segment saw a slightly disappointing topline growth of 10% yoy (14.3%

underlying); our estimate was 12%. We do note that ITC did not have as low a pre-GST

1QFY18 base for the FMCG business as peers and the 2-year CAGR growth of around 9% is

fairly robust in context of what the peers have reported thus far. FMCG EBIT margin stood at

1.7%, +153 bps yoy. Hotels segment saw revenue and EBIT growth of 12% and 149%,

respectively, reflecting improved industry scenario. Paperboards had a decent quarter (flat

revenues, +15% EBIT) while agri business disappointed (segment EBIT declined 17% yoy).

Remain constructive on the stock; risk/reward favorable

We have tweaked our forecasts marginally and raise our June 2019E fair value target to

`330/share from `315 earlier. We value the cigarette business at 25X post-tax EBIT and the

FMCG business as 5X EV/sales. We remain positive; it is perhaps the only large-cap stock in the

sector where the current valuations factor in a less-than-super-optimistic view of the future.

ITC (ITC) Consumer Products

Improving cigarette EBIT growth trajectory encouraging. ITC’s 1QFY19 earnings

print was ahead of our expectations with multi-quarter high operating profit growth

comps. Cigarette volume growth in the positive zone (+1% yoy, our estimate) and

modest acceleration in cigarette EBIT growth were the key positives while subdued

topline growth in the FMCG was the key disappointment. We tweak estimates

marginally, raise fair value target to `330 (from `315) and reiterate ADD.

ADD

JULY 27, 2018

RESULT

Coverage view: Cautious

Price (`): 287


BSE-30: 36,985

Rohit Chordia

Jaykumar Doshi

Aniket Sethi

ITC







MFs 6.3 EBITDA (Rs bn) 155.4 170.1 191.6


Absolute 8.5 3.2 (2.2) ROE (%) 19.4 20.4 22.2

Rel. to BSE-30 4.1 (3.1) (14.4) Div. Yield (%) 1.8 2.0 2.3


295-250

3,508.9

ITC Consumer Products


Press release highlights

FMCG growth was led by (a) staples (Aashirvaad atta), snacks (Bingo), and meals in the

packaged foods segment, (b) deodorants, handwash and bodywash in the personal care

segment, and (c) continued strong performance in Classmate notebooks. Lifestyle

(apparel) retailing business continued to struggle.

FMCG segment EBITDA stood at `1.28 bn, up 86% yoy. EBITDA margins work out to

4.5%.

The company launched a premium skincare brand ‘Dermafique’ during the quarter.

Hotels segment performance was aided by higher room rates, strong F&B sales and

operating leverage. ITC commissioned ITC Kohenur, a 271-room luxury property in

Hyderabad.

Paperboard segment revenues were partly impacted by shutdown of a paperboard

machine for a part of the quarter.

Consumer Products ITC


Exhibit 1: Interim standalone results of ITC (as per Ind-AS), March fiscal year-ends (Rs mn)


1QFY19 1QFY19E 1QFY18 4QFY18 KIE est yoy qoq 1QFY17

Net sales 105,547 104,750 98,765 104,792 1 7 1 99,577 3

Other operating income 1,524 868 782 1,075 76 95 42 964

Gross revenues 108,132 108,132 138,004 108,132 0 (22) 0 132,531 (10)

Less: Excise duty (1,676) (2,138) (38,458) (2,265) (22) (96) (26) (31,990)

Excise duty as % of GR 1.5 2 27.9 2.1 -43 bps -2632 bps -55 bps 24.1

Net operating income 107,070 105,618 99,547 105,867 1 8 1 100,540 3

Total expenditure (65,049) (65,502) (62,083) (64,427) (1) 5 1 (65,278)

Material cost (41,094) (40,593) (38,360) (40,012) 1 7 3 (42,456)

Employee cost (7,430) (7,084) (6,746) (6,113) 5 10 22 (7,003)

Other expenditure (16,526) (17,825) (16,976) (18,303) (7) (3) (10) (15,819)

EBITDA 42,021 40,116 37,464 41,440 5 12 1 35,262 9

OPM (%) 39.2 38.0 37.6 39.1 126 bps 161 bps 10 bps 35.1

Other income 4,039 5,078 4,768 5,165 (20) (15) (22) 4,205

Interest (73) (100) (104) (232) (27) (29) (68) (101)

Depreciation (2,987) (3,100) (2,682) (3,040) (4) 11 (2) (2,613)

Pretax profits 42,999 41,994 39,446 43,333 2 9 (1) 36,754 8

Tax (14,813) (14,698) (13,841) (14,006) 1 7 6 (12,907)

PAT 28,187 27,296 25,605 29,327 3 10 (4) 23,847 9

Extraordinary items — — — - -

Net profit (reported) 28,187 27,296 25,605 29,327 3 10 (4) 23,847 9

EPS 2.3 2.2 2.1 2.4 3 10 (4) 2.0 8

Income tax rate (%) 34.4 35.0 35.1 32.3 -56 bps -64 bps 212 bps 35.1

Costs as a % of sales

Material cost 38.9 38.8 38.8 38.2 18 bps 9 bps 75 bps 42.6

Employee cost 7.0 6.8 6.8 5.8 27 bps 20 bps 120 bps 7.0

Other expenditure 15.7 17.0 17.2 17.5 -136 bps -154 bps -181 bps 15.9

Segment results

Gross revenues (NOT COMPARABLE YOY)

Cigarettes 51,276 50,000 87,742 49,365 3 (42) 4 82,306

Other FMCG 28,700 29,130 26,009 30,518 (1) 10 (6) 23,852

Hotels 3,413 3,354 3,049 4,080 2 12 (16) 2,874

Agri business 31,513 26,777 27,605 18,083 18 14 74 27,941

Paperboards, paper, and 13,558 13,598 13,598 13,008 (0) (0) 4 13,229

Total segment revenue 128,460 158,003 115,054 (19) 12 150,201

Less: Intersegmental (21,238) (20,781) (7,996) 2 166 (18,634)

Total gross revenues 107,222 137,222 107,058 (22) 0 131,567

Segment EBIT

Cigarettes 35,584 35,000 32,741 35,058 2 9 2 30,046

Other FMCG 501 146 54 912 244 823 NM (45)

Hotels 132 84 53 755 58 149 (82) 12

Agri business 1,945 2,276 2,351 1,240 (15) (17) 57 2,373

Paperboards, paper, and 2,957 2,584 2,573 2,424 14 15 22 2,477

Total segment EBIT 41,119 40,089 37,773 40,388 3 9 2 34,863

Segment EBIT margins, % (NOT COMPARABLE YOY)

Cigarettes 69.4 70.0 37.3 71.0 3208 bps -163 bps 36.5

Other FMCG 1.7 0.5 0.2 3.0 153 bps -125 bps (0.2)

Hotels 3.9 2.5 1.7 18.5 213 bps -1463 bps 0.4

Agri business 6.2 8.5 8.5 6.9 -235 bps -69 bps 8.5

Paperboards, paper, and 21.8 19.0 18.9 18.6 288 bps 317 bps 18.7

Capital employed

Cigarettes 32,113 44,294 33,321 (27) (4)

Other FMCG 67,115 65,082 57,167 3 17

Hotels 50,921 48,008 49,991 6 2

Agri business 25,610 27,248 25,072 (6) 2

Paperboards, paper, and 60,970 57,841 59,527 5 2

Total 236,729 242,473 225,078 (2) 5

(% chg.) 2-year

CAGR (%)



Exhibit 2: ITC: Key changes, March fiscal year-ends, 2019-21E (Rs mn)

Source: Company, Kotak Institutional Equities estimates

Exhibit 3: ITC: Sum-of-the-parts (SoTP) valuation model, March fiscal year-ends (Rs mn)


Exhibit 4: Cigarette volumes rose 1% yoy, as per our estimate Quarterly cigarette volume growth, yoy (%)


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

Consolidated

Net revenues 425,413 469,106 514,885 422,582 466,819 512,939 0.7 0.5 0.4

EBIT 153,059 172,979 194,380 151,565 171,688 193,187 1.0 0.8 0.6

EBIT margin (%) 36.0 36.9 37.8 35.9 36.8 37.7

PAT 118,541 133,272 149,015 118,130 132,858 148,497 0.3 0.3 0.3

EPS (Rs/share) 9.6 10.8 12.1 9.6 10.8 12.1 0.3 0.3 0.3

Key segments

Cigarette - net sales 204,643 224,579 244,703 201,848 220,456 239,690 1.4 1.9 2.1

Cigarette - EBIT 144,994 162,784 180,838 142,621 159,256 176,477 1.7 2.2 2.5

Cigarete - EBIT margin (%) 70.9 72.5 73.9 70.7 72.2 73.6

Other FMCG - gross sales 127,318 142,461 158,929 128,109 144,253 161,960 (0.6) (1.2) (1.9)

Other FMCG - EBIT 3,438 6,055 9,536 3,459 6,131 9,718 (0.6) (1.2) (1.9)

Other FMCG - EBIT margin (%) 2.7 4.3 6.0 2.7 4.3 6.0

Cigarette EBIT growth (%) 8.7 12.3 11.1 6.9 11.7 10.8

Cigarette volume growth (%) 1.0 0.6 0.3 (0.7) 0.0 0.1

Revised Earlier Change (%)

Segment Metric Multiple (x) Per share Value (Rs) % of Total Value Comment

Cigarettes P/E 25 227 69 35% discount to FMCG sector (ex-ITC)

FMCG (Others) EV/Sales 5 61 18 20% discount to FMCG peers

Hotels EV/EBITDA 12 4 1 In-line with peers

Paperboards EV/EBITDA 7 9 3 In-line with peers

Agri-Business EV/Sales 1 7 2 At commodity valuations

Less: Net Debt (22) 7 At 1x book value

Total Equity Value 330

Implied consol P/E (X) 30

(2)(4)

(3) (3) (3)(4)

(14) (13)(17)

(17)

(4)

—3 4

(1) - 2

(7)(5) (4)

1

(20)

(15)

(10)

(5)

-

5

10

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: Cigarette EBIT grew 8.7% yoy Quarterly cigarette EBIT growth, yoy (%)


Exhibit 6: Underlying growth in FMCG business at 14.3% Other FMCG net revenue growth, yoy (%)


Exhibit 7: Other FMCG EBIT trend (Rs mn)


18.0

15.9

18.8

20.8 21.4

19.5

8.8

6.0

2.2 3.0 3.4

11.5

8.0 8.4

1.7

8.0 9.0

2.3

7.8 7.6 8.7

-

5

10

15

20

25

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

11 12

11 11

12

7 7

5

10

13

3

6

9

5

12

6

10

0

2

4

6

8

10

12

14

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

(156)(103)

115

485

(80)(111)

188

786

(45)(33)

(197)

556

54

205

470

912

501

(400)

(200)

0

200

400

600

800

1,000

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: ITC: Key assumptions 2015-2021E, March fiscal year-ends (Rs mn)


2015 2016 2017 2018 2019E 2020E 2021E

Revenues

Cigarettes (net) 168,046 172,311 188,819 193,928 204,643 224,579 244,703

Other FMCG 90,380 97,312 105,118 113,286 127,318 142,461 158,929

Hotels 11,870 12,862 13,417 14,175 16,221 18,468 20,756

Agri business 83,805 74,569 82,646 80,677 85,933 93,624 101,854

Paperboards, paper, and packaging 52,816 53,277 53,629 52,496 52,888 58,377 63,031

Revenue growth (%)

Cigarettes (Gross Rev) 8.7 2.5 9.6 2.7 5.5 9.7 9.0

Other FMCG 11.3 7.7 8.0 7.8 12.4 11.9 11.6

Hotels 4.8 8.4 4.3 5.6 14.4 13.9 12.4

Agri business 8.1 (11.0) 10.8 (2.4) 6.5 9.0 8.8

Paperboards, paper, and packaging 2.2 0.9 0.7 (2.1) 0.7 10.4 8.0

PBIT (Rs mn)

Cigarettes 111,963 117,524 125,139 133,408 144,994 162,784 180,838

Other FMCG 341 1,018 281 1,641 3,438 6,055 9,536

Hotels 491 557 1,110 1,398 1,744 2,124 2,491

Agri business 9,040 9,330 9,058 8,486 7,304 8,099 8,963

Paperboards, paper, and packaging 9,215 9,076 9,658 10,422 10,974 12,259 13,394

PBIT Margin (%) @ Gross level

Cigarettes 66.6 68.2 66.3 68.8 70.9 72.5 73.9

Other FMCG 0.4 1.0 0.3 1.4 2.7 4.3 6.0

Hotels 4.1 4.3 8.3 9.9 10.8 11.5 12.0

Agri business 10.8 12.5 11.0 10.5 8.5 8.7 8.8

Paperboards, paper, and packaging 17.4 17.0 18.0 19.9 20.8 21.0 21.3

PBIT growth (%)

Cigarettes 14.0 5.0 6.5 6.6 8.7 12.3 11.1

Other FMCG 56.2 198.6 (72.4) 483.6 109.5 76.1 57.5

Hotels (64.9) 13.5 99.2 26.0 24.7 21.8 17.3

Agri business 8.3 3.2 (2.9) (6.3) (13.9) 10.9 10.7

Paperboards, paper, and packaging 3.3 (1.5) 6.4 7.9 5.3 11.7 9.3

Source: Kotak Institutional Equities estimates.

ITC: Cigarette business assumptions 2015-2021E, March fiscal year-ends (Rs mn)

2015 2016 2017 2018 2019E 2020E 2021E

Sales qty (mn sticks) 78,485 70,993 72,031 69,505 70,200 70,633 70,825

Volume growth yoy (%) (8.4) (9.5) 1.5 (3.5) 1.0 0.6 0.3

ASP per stick (Rs) 4.8 5.7 6.0 6.4 7.1 7.8 8.6

Realisation growth yoy (%) 15.0 18.6 4.5 7.2 10.2 10.0 10.0

Total tax incidence per stick (Rs) 2.7 3.3 3.4 3.7 4.2 4.6 5.1

yoy (%) 12.1 22.8 1.9 10.6 11.7 10.6 11.0

EBIT per stick (Rs) 1.4 1.7 1.7 1.9 2.1 2.3 2.6

EBIT growth (%) 14.0 5.0 6.5 6.6 8.7 12.3 11.1

EBIT margin @ net level (%) 66.6 68.2 66.3 68.8 70.9 72.5 73.9



Exhibit 9: ITC: Standalone profit model, balance sheet, cash flow model 2015-2021E, March fiscal year-ends (Rs mn)


2015 2016 2017 2018 2019E 2020E 2021E

Profit model (Rs mn)

Net revenues 360,832 362,206 396,419 402,547 425,413 469,106 514,885

EBITDA 130,494 133,525 141,313 151,681 165,657 186,687 209,158

Other income 19,673 21,314 22,948 25,027 26,938 29,283 31,678

Interest (574) (491) (230) (867) (390) (334) (278)

Depreciation (9,617) (10,007) (10,380) (11,454) (12,597) (13,708) (14,778)

Pretax profits 139,975 144,341 153,650 164,388 179,608 201,928 225,780

Tax (43,898) (51,057) (52,552) (54,922) (61,067) (68,656) (76,765)

Recurring Net income 96,077 93,284 101,099 109,466 118,541 133,272 149,015

FD Earnings per share (Rs) 8.0 7.7 8.3 8.9 9.6 10.8 12.1

Balance sheet (Rs mn)

Total equity 307,357 416,564 453,410 514,001 547,943 581,903 616,893

Total borrowings 387 294 180 111 111 111 111

Deferrex tax liabilities 16,316 18,674 18,717 19,179 19,179 19,179 19,179

Total liabilities and equity 324,060 435,533 472,307 533,291 567,234 601,194 636,183

Net fixed assets (Incl CWIP) 162,926 164,301 184,173 205,916 220,185 234,844 249,933

Cash 75,886 56,392 27,473 25,949 44,693 61,400 78,771

Investments 84,055 133,245 185,853 244,131 244,131 244,131 244,131

Net current assets 1,193 81,594 74,808 57,296 58,224 60,819 63,349

Total assets 324,060 435,533 472,307 533,291 567,234 601,194 636,183

Free cash flow (Rs mn)

Operating cash flow (excl working capital) 92,787 94,637 99,389 107,307 118,290 133,102 148,921

Working capital 302 (2,518) 631 19,202 (928) (2,595) (2,530)

Capital expenditure (30,445) (21,377) (28,971) (25,478) (26,867) (28,367) (29,867)

Free cash flow 62,644 70,743 71,049 101,030 90,495 102,139 116,524

Key ratios (%)

Sales growth 9.7 NM 9.4 1.5 5.7 10.3 9.8

EBITDA margin 36.2 36.9 35.6 37.7 38.9 39.8 40.6

EPS growth 10.6 NM 7.6 7.8 8.2 12.3 11.7

RoE (%) 33.7 25.8 23.2 22.6 22.3 23.6 24.9

RoCE (%) 40.1 32.4 28.8 27.8 27.7 29.5 31.3


1QFY19 EBITDA 6% below estimates due to higher-than-expected other expenses

The company reported EBITDA of ₹33.5 bn (+43.8% yoy), which was 6% below our estimates

led by higher-than-expected other expenses. Revenues grew 28% yoy led by (1) 24.3% yoy

growth in volumes, (2) 2.4% yoy improvement in net average realizations and (3) 57% yoy

increase in other operating income (recovery of freight income is booked in operating income,

which was `2.45 bn in 1QFY19). Gross margin improved by 100 bps on a yoy basis but declined

by 110 bps qoq. Sequential decline in gross margin was led by rise in input costs (-80 bps qoq)

and increase in discounts (-30 bps qoq). Product mix improved on a sequential basis as volume

share of high-margin models (Baleno, Brezza and Dzire) was 34.6% in 1QFY19 versus 26.1% in

1QFY18 and 32.9% in 4QFY18.

Staff cost increased by 17% yoy while other expenses increased by 25% yoy, which was 6%

higher than our estimates mainly led by increase in freight costs, repairs and maintenance

expenses in Gurgaon plant and higher-than-expected increase in royalty expenses. Royalty costs

were 5.5% of net sales in 1QFY19 (-30 bps qoq) versus our estimate of 5.1%. FX negatively

impacted royalty cost by 25 bps on a yoy basis. Other income was lower in the quarter as the

company took an MTM hit of `4.5 bn due to 80 bps increase in interest rates during the

quarter. The company hasn’t taken any price increase in 1QFY19 but we believe a 1-2% price

hike in 2QFY19 is likely as per our channel checks.

Maintain ADD rating as volume growth outlook remains strong

We believe MSIL’s capacity will be booked for the next three years as volumes can grow at 12%

CAGR over this period while Gujarat plant will stabilize over the next one year, which will lead

to improvement in EBITDA margin for the company. We factor in 15.4% and 16.1% EBITDA

margin for the company in FY2019 and FY2020, respectively versus 15.1% for FY2018. We

have cut our EBITDA estimates by 3-5% over FY2019-21 due to lower EBITDA margin

assumptions factoring in higher other expenses. We have increased our target price to `10,000

(from `9,700 earlier) as we roll over from March 2020E to June 2020E. We value the company

at 25X on our March 2020E EPS + `1,300 of cash and cash equivalents.

Maruti Suzuki (MSIL) Automobiles

Slight miss due to increase in other expenses. Maruti Suzuki reported EBITDA of

`33.5 bn in 1QFY19 (+44% yoy), which was 6% below our estimates mainly led by

higher-than-expected increase in other expenses. Revenues increased by 28% yoy led

by strong volume growth and a richer product mix. We believe Maruti Suzuki’s operating

margins will improve due to scale benefits, a richer product mix and reduction in

discounts. We maintain ADD rating; TP revised to `10,000 (from `9,700).

ADD

JULY 27, 2018

RESULT


Price (`): 9,397

Target price (`): 10,000

BSE-30: 36,985

Hitesh Goel

Nishit Jalan

Maruti Suzuki





Promoters 56.2 Sales (Rs bn) 797.6 942.0 1,103.6


MFs 5.7 EBITDA (Rs bn) 120.6 145.0 177.5


Absolute 5.2 5.0 24.2 ROE (%) 19.8 21.6 22.5

Rel. to BSE-30 1.0 (1.4) 8.8 Div. Yield (%) 0.9 0.9 1.0


9,996-7,378

2,838.5

Automobiles Maruti Suzuki


Conference call highlights

The company remains confident on the demand environment going ahead and has

guided double-digit volume growth for itself in FY2019E as compared to industry growth

estimate of 8-9%. Demand is strong in both rural and urban markets; rural markets now

account for 33% of its overall volumes. We note that there is a continued shift towards

petrol models in the market, which augurs well for Maruti’s market share. Share of petrol

vehicles was 72% of the company’s volumes in 1QFY19.

Despite ramp-up in production over the past few months, there is still waiting period in

key models such as Baleno (2-4 weeks), Brezza (4 months), Swift petrol (4 weeks) and

Dzire models (2-4 weeks). Pending order book is around 110,000 units currently.

The company indicated their enquiries and bookings increased by 13% and 15% yoy,

respectively.

Production from Gujarat plant was 66,000 in 1QFY19 versus 58,000 units in 4QFY18. The

third assembly line in Gujarat will be commissioned in January 2019.

Gross margin declined by 110 bps qoq led by (1) increase in commodity prices, which

negatively impacted the company’s gross margins by 80 bps qoq in 1QFY19 and (2)

increase in discounts on a qoq basis (30 bps negative impact). Discount per vehicle

declined to `15,161 in 1QFY19 from ₹13,880 per vehicle in 4QFY18.

Raw material imports are 15% of sales in 1QFY19 (5% is direct imports and 10% is

indirect imports). 5.5% of sales is royalty cost. 10% of net sales is exports, so net imports

are around 9-10% of sales.

For FY2018, Maruti incurred capex of ₹34 bn as against its guidance of `40 bn; of this,

`8 bn was incurred towards acquisition of land for dealers. The company is guiding a

capex of `50 bn in FY2019E, which will be incurred for engine capacity expansion,

product development, R&D, maintenance expenses and `10 bn spend towards acquisition

of land for dealers.

The company added 315 new dealers in FY2018; of this, 140 dealers were added for the

commercial vehicle segment where Maruti has around 190 dealers currently.

Finance penetration for Maruti’s vehicles was 80.5% in FY2018, which was largely similar

to FY2017 levels of 80%.

Maruti Suzuki Automobiles


Exhibit 1: 1QFY19 EBITDA was 6% below our estimates on higher-than-expected other expenses Maruti Suzuki 1QFY19 result summary, March fiscal year-ends (` mn)


(% chg.)

1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 FY2019 FY2018 Yoy (%)

Volumes (units) 490,479 490,479 394,571 461,773 24.3 6.2 2,032,627 1,779,574 14.2

Net average selling prices (Rs) 444,682 450,654 434,203 445,983 (1.3) 2.4 (0.3) 450,892 438,896 2.7

Net sales 218,107 221,036 171,324 205,943 (1.3) 27.3 5.9 916,494 781,048 17.3

Other operating income 6,487 4,648 4,133 5,713 57.0 13.5 25,463 16,579 53.6

Net sales (incl op income) 224,594 225,685 175,457 211,656 (0.5) 28.0 6.1 941,958 797,627 18.1

Raw materials (155,020) (155,147) (122,884) (143,763) (0.1) 26.2 7.8 (648,161) (549,750) 17.9

Staff costs (7,652) (8,000) (6,521) (8,282) (4.4) 17.3 (7.6) (32,508) (28,338) 14.7

Other expenses (28,411) (26,762) (22,740) (29,461) 6.2 24.9 (3.6) (116,251) (98,924) 17.5

Total expenses (191,083) (189,909) (152,145) (181,506) 0.6 25.6 5.3 (796,920) (677,012) 17.7

EBITDA 33,511 35,776 23,312 30,150 (6.3) 43.8 11.1 145,038 120,615 20.2

Other income 2,718 5,500 6,827 5,950 (50.6) (60.2) (54.3) 22,913 20,455 12.0

Interest expense (207) — (313) (2,731) (866) (3,457) (75.0)

Depreciation (7,198) (7,500) (6,839) (7,025) (4.0) 5.2 2.5 (29,592) (27,579) 7.3

Profit before tax 28,824 33,776 22,987 26,344 (14.7) 25.4 9.4 137,493 110,034 25.0

Tax expense (9,071) (9,795) (7,423) (7,523) (7.4) 22.2 20.6 (39,873) (32,816) 21.5

Profit after tax 19,753 23,981 15,564 18,821 (17.6) 26.9 5.0 97,620 77,218 26.4

EPS (Rs) 65.4 79.4 51.5 62.3 (17.6) 26.9 5.0 323.2 255.6 26.4

Raw material to net sales (%) 69.0 68.7 70.0 67.9 68.8 68.9

Staff costs to net sales (%) 3.4 3.5 3.7 3.9 3.5 3.6

Other expenses to net sales (%) 12.6 11.9 13.0 13.9 12.3 12.4

No. of shares 302 302 302 302 302 302

Gross margin (%) 31.0 31.3 30.0 32.1 31.2 31.1

EBITDA margin (%) 14.9 15.9 13.3 14.2 15.4 15.1

Tax rate (%) 31.5 29.0 32.3 28.6 29.0 29.8

Volume mix (units)

Alto 61,193 61,193 61,023 62,197 0.3 (1.6) 258,539 258,539 —

Baleno 57,660 57,660 41,216 49,831 39.9 15.7 241,079 190,480 26.6

Celerio 26,361 26,361 20,942 21,878 25.9 20.5 108,929 94,721 15.0

Ciaz 10,719 10,719 15,698 14,280 (31.7) (24.9) 54,201 58,913 (8.0)

Dzire 74,765 74,765 30,259 65,676 147.1 13.8 296,105 240,124 23.3

Eeco and Omni 44,788 44,788 35,739 38,364 25.3 16.7 186,164 155,137 20.0

Gypsy, Ertiga 15,927 15,927 20,651 16,507 (22.9) (3.5) 62,801 74,374 (15.6)

Ritz/Ignis 13,726 13,726 12,661 13,638 51,044 47,222 8.1

Swift 60,155 60,155 50,236 50,943 19.7 18.1 251,354 175,928 42.9

SX4 (includes SX4 cross) 12,667 12,667 5,153 10,722 145.8 18.1 46,385 30,923 50.0

Wagon R 43,846 43,846 42,487 42,419 3.2 3.4 168,644 168,644 —

Vitara Brezza 37,160 37,160 31,321 36,552 18.6 1.7 163,308 148,462 10.0

Light commercial vehicle 4,873 4,873 1,045 4,075 19.6 18,000 10,033 79.4

Domestic vols 463,840 463,840 368,431 427,082 25.9 8.6 1,906,553 1,653,500 15.3

Export vols 26,639 26,639 26,140 34,691 1.9 (23.2) 126,074 126,074 —

Total volumes 490,479 490,479 394,571 461,773 24.3 6.2 2,032,627 1,779,574 14.2

Volume Mix (%)

Alto 12.5 12.5 15.5 13.5 12.7 14.5

Baleno 11.8 11.8 10.4 10.8 11.9 10.7

Celerio 5.4 5.4 5.3 4.7 5.4 5.3

Ciaz 2.2 2.2 4.0 3.1 2.7 3.3

Dzire 15.2 15.2 7.7 14.2 14.6 13.5

Eeco and Omni 9.1 9.1 9.1 8.3 9.2 8.7

Gypsy, Ertiga 3.2 3.2 5.2 3.6 3.1 4.2

Ritz/Ignis 2.8 2.8 3.2 3.0 2.5 2.7

Swift 12.3 12.3 12.7 11.0 12.4 9.9

SX4 (includes SX4 cross) 2.6 2.6 1.3 2.3 2.3 1.7

Wagon R 8.9 8.9 10.8 9.2 8.3 9.5

Vitara Brezza 7.6 7.6 7.9 7.9 8.0 8.3

Light commercial vehicle 1.0 1.0 — 0.9 0.9 0.6

Domestic vols 94.6 94.6 93.4 92.5 93.8 92.9



Exhibit 2: Discount/vehicle increased by 9% on qoq basis in 1QFY19 Average discount per vehicle, Maruti Suzuki, March fiscal year-ends, 1QFY11-1QFY19 (`)


Exhibit 3: We cut our FY2019-21E EPS estimates by around 1-2% Earnings revision table, March fiscal year-ends, 2019-21E

Source: Kotak Institutional Equities estimate

-

4,000

8,000

12,000

16,000

20,000

24,000

1Q

FY1

1

2Q

FY1

1

3Q

FY1

1

4Q

FY1

1

1Q

FY1

2

2Q

FY1

2

3Q

FY1

2

4Q

FY1

2

1Q

FY1

3

2Q

FY1

3

3Q

FY1

3

4Q

FY1

3

1Q

FY1

4

2Q

FY1

4

3Q

FY1

4

4Q

FY1

4

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

(Rs/vehicle)

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

Volumes (units) 2,032,627 2,276,147 2,523,571 2,001,219 2,230,824 2,469,048 1.6 2.0 2.2

Net ASPs (Rs) 463,419 484,844 505,789 464,961 486,273 507,657 (0.3) (0.3) (0.4)

Net sales 941,958 1,103,576 1,276,395 930,489 1,084,789 1,253,429 1.2 1.7 1.8

EBITDA 145,038 177,538 206,883 152,018 182,684 214,530 (4.6) (2.8) (3.6)

Margin (%) 15.4 16.1 16.2 16.3 16.8 17.1

EBITDA/vehicle (Rs) 71,355 77,999 81,980 75,963 81,891 86,888

Net Profit 97,620 118,857 139,274 99,760 119,339 140,125 (2.1) (0.4) (0.6)

EPS (Rs) 323.2 393.5 461.1 330.2 395.0 463.8 (2.1) (0.4) (0.6)

New estimates Old estimates change (%)

Maruti Suzuki Automobiles


Exhibit 4: We expect Maruti’s volumes to grow by ~12% CAGR over FY2018-21E Volume assumptions, March fiscal year-ends, 2014-21E (units)


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

Models

Maruti 800 16,948 — — — — — — —

Omni 61,133 74,686 79,830 84,746 80,583 96,700 101,535 106,611

Alto 258,281 264,492 264,176 241,635 258,539 258,539 258,539 258,539

Zen Estillo 6,282 — — — — — — —

Wagon R 156,369 161,250 168,801 172,346 168,644 168,644 177,076 191,242

Ritz/Ignis petrol 14,270 18,811 12,252 24,089 29,222 32,144 35,359 38,894

Swift petrol 65,528 74,948 76,659 75,089 102,507 174,263 200,402 250,502

Dzire petrol 49,421 62,385 84,022 79,951 146,581 197,884 227,567 284,459

A star 4,434 — — — — — — —

Eeco 40,982 54,282 63,641 67,263 74,554 89,465 89,465 93,938

Grand Vitara — — — — — — — —

Gypsy 5,000 5,968 4,324 2,157 8,233 8,233 8,233 8,233

SX4 petrol 2,015 401 — — — — — —

Kizashi 1 — — — — — — —

Ertiga petrol 16,836 19,230 20,451 22,234 33,107 28,141 29,548 31,025

Vitara Brezza petrol — — — - - 60,000 72,000

Celerio 16,143 68,143 86,350 97,361 94,721 108,929 114,376 125,813

Ciaz 16,576 26,233 38,669 38,290 32,546 37,428 46,785

Baleno petrol 29,697 96,658 144,568 195,166 234,200 292,749

Exports 101,352 121,713 123,897 124,062 126,074 126,074 138,681 152,550

Petrol volumes 814,995 942,884 1,040,333 1,126,260 1,305,623 1,516,728 1,712,408 1,953,342

Ritz/Ignis diesel 17,442 15,697 7,849 8,447 18,000 18,900 19,845 19,845

Swift diesel 133,043 126,390 120,071 91,776 73,421 77,092 80,946 80,946

Dzire diesel 148,264 148,264 148,355 119,927 93,543 98,220 103,131 103,131

SX4 diesel 2,015 — — — — — — —

Ertiga diesel 39,283 43,000 40,000 41,293 33,034 26,427 27,749 29,136

Ciaz diesel 16,175 28,000 25,779 20,623 21,655 22,737 22,737

Vitara Brezza diesel — 5,563 108,640 148,462 163,308 187,804 187,804

S cross — 24,077 21,417 30,923 46,385 51,023 56,125

Baleno diesel — 15,000 24,164 45,912 45,912 50,504 50,504

Light commercial vehicle — — — 900 10,033 18,000 20,000 20,000

Diesel volumes 340,046 349,526 388,915 442,343 473,951 515,898 563,739 570,229

Total volumes 1,155,041 1,292,410 1,429,248 1,568,603 1,779,574 2,032,627 2,276,147 2,523,571

YoY chg (%) (1.4) 11.9 10.6 9.8 13.4 14.2 12.0 10.9

Volume mix (%)

Petrol 70.6 73.0 72.8 71.8 73.4 74.6 75.2 77.4

Diesel 29.4 27.0 27.2 28.2 26.6 25.4 24.8 22.6



Exhibit 5: We expect ASPs to increase by 4% CAGR over FY2018-21E Net average selling prices per vehicle, March fiscal year-ends, 2010-21 (`, %)


Exhibit 6: We expect earnings to grow at 22% CAGR over FY2018-21E Maruti Suzuki profit and loss, balance sheet and cash flow statement, March fiscal year-ends, 2014-21E (` mn)


(5)

0

5

10

15

20

-

100,000

200,000

300,000

400,000

500,000

600,000

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

E

20

20

E

20

21

E

Net ASPs (Rs) (LHS) Yoy increase (%) (RHS)

2014 2015 2016 2017 2018 2019E 2020E 2021E


Net sales 437,918 499,706 575,381 680,348 797,627 941,958 1,103,576 1,276,395

EBITDA 51,911 67,129 88,844 103,517 120,615 145,038 177,538 206,883

Other income 7,317 8,316 14,610 23,001 20,455 22,913 25,949 30,986

Interest (1,759) (2,060) (815) (894) (3,457) (866) (866) (866)

Depreciation (20,884) (24,703) (28,202) (26,021) (27,579) (29,592) (35,217) (40,842)

Profit before tax 36,585 48,682 74,437 99,603 110,034 137,493 167,404 196,161

Tax expense 8,755 11,570 20,794 26,101 32,816 39,873 48,547 56,887

Adj. net profit 27,830 37,112 53,643 73,502 77,218 97,620 118,857 139,274

Earnings per share (Rs) 92.1 122.9 177.6 243.3 255.6 323.2 393.5 461.1


Equity 209,780 237,042 298,842 364,311 417,573 485,820 568,914 666,282

Deferred tax liability 5,866 4,810 1,943 4,662 5,589 5,589 5,589 5,589

Total Borrowings 16,851 8,521 774 4,836 1,108 1,108 1,108 1,108

Current liabilities 72,860 85,137 117,067 138,697 169,431 193,700 218,842 246,815


Net fixed assets 134,118 141,421 135,169 145,450 154,849 170,257 180,039 184,197

Investments 101,179 128,140 199,322 284,810 352,902 387,902 462,902 547,902

Cash 6,297 183 391 138 711 7,315 10,373 24,341

Other current assets 63,763 65,766 83,744 82,108 85,239 120,743 141,138 163,354

Total assets 305,357 335,510 418,626 512,506 593,701 686,217 794,453 919,793


Operating cash flow excl. working capital 41,474 55,750 70,398 81,270 89,796 105,165 128,991 149,996

Working capital changes 7,561 7,457 14,631 21,940 28,058 (11,235) 4,747 5,757

Capital expenditure (34,927) (31,487) (26,327) (33,723) (38,653) (45,000) (45,000) (45,000)

Free cash flow 14,108 31,720 58,702 69,487 79,201 48,930 88,738 110,754

Ratios

Gross margin (%) 28.4 29.9 32.7 31.3 31.1 31.2 31.2 30.8

EBITDA margin (%) 11.9 13.4 15.4 15.2 15.1 15.4 16.1 16.2

PAT margin (%) 6.4 7.4 9.3 10.8 9.7 10.4 10.8 10.9

Net debt/equity (X) (0.4) (0.5) (0.7) (0.8) (0.8) (0.8) (0.8) (0.9)

Book value (Rs/share) 714 801 996 1,221 1,401 1,627 1,902 2,224

RoAE (%) 13.7 16.2 19.8 21.9 19.5 21.3 22.3 22.3

RoACE (%) 17.4 24.0 37.9 56.9 81.7 96.2 99.8 114.5


NIM slips further by 10 bps as cost of funds rises sharply

Yes Bank reported 31% yoy earnings growth led by 33% yoy growth in revenues while

provisions for bad loans grew 120% yoy. NII growth, despite a 52% yoy growth in loans, was

slower at 23% yoy resulting in 10 bps qoq (40 bps yoy) growth in NIM to 3.3%. Fee income

growth was strong led by strong growth in corporate fees. Asset quality ratios were stable on

most metrics while coverage ratio improved 500 bps qoq to 55%. Gross NPLs was flat qoq at

1.3% of loans with slippages at ~1% of loans. The bank has made a total MTM impact of

`3.7 bn of which a provision of `0.9 bn was made during the quarter.

Not much change to our commentary: NIM pressure, high fees, employee additions and tier-1

This quarter has again highlighted some of our concerns that we have raised in the previous

few quarters: (1) loan growth remains high though sequential growth suggests that the

slowdown would be visible by 3QFY19. We would be a lot more comfortable if the growth has

a lower contribution from the large corporate segment, (2) NIM pressure has accentuated for

the past few quarters and while the management is confident of a recovery of ~25 bps in the

medium term, we are less optimistic of such a recovery given the rise in cost of funds, (3) CET-1

has declined 20 bps qoq to 9.5%, which is increasing the need to raise capital in the next few

quarters, (4) the bank reported a decline of 6% yoy (rose 7% qoq) in employee headcount

despite higher growth in retail loans and (5) fee contribution is still high from corporate

banking.

Maintain SELL with TP of `335 (from `325 earlier)

We maintain our negative outlook on the bank. Our SELL rating has been driven by our inability

to take a constructive positive view from a valuation and business standpoint. We are a lot more

comfortable to play the recovery on corporate NPL cycle through ICICI Bank and SBI rather than

Yes Bank given the valuation differential. Also, as highlighted in the previous few quarters, we

believe some of the headwinds that we have seen on NIM is a bit more cyclical while fee

growth would be a challenge in the new accounting regime as and when implemented. Hence,

the RoEs pressure argument continues. AT our revised TP of `335 (from `325 earlier on account

of earnings revision), we value the bank at 2.4X book and 16X March 2020E EPS for RoEs in the

range of ~15-17% in the medium term.

YES Bank (YES) Banks

NIM under pressure; as expected. Yes Bank focus on loan growth led to another 5%

qoq (52% yoy) growth with nearly all segments contributing to this performance.

However, this has hurt NIM (10 bps qoq) resulting in disappointing NII growth (23% yoy).

Composition of non-interest income is still skewed towards corporate banking. CET-1 is

at 9.5% and there is a need to strengthen this ratio in the short term. Asset quality

metrics is stable. We maintain SELL rating as valuations are still expensive.

SELL

JULY 27, 2018

RESULT

Coverage view: Attractive

Price (`): 370


BSE-30: 36,985

QUICK NUMBERS

NII up 23% yoy; net

profit increased

31% yoy

GNPL and NNPL

ratios broadly stable

at 1.3% and 0.6%,

respectively

Maintain ADD

rating with TP at

`335 (from `325)

M B Mahesh CFA

Nischint Chawathe

Dipanjan Ghosh

Yes Bank





Promoters 20.0 NII (Rs bn) 77.4 94.8 109.9


MFs 10.3 BVPS 108.0 122.7 140.2

Price performance (%) 1M 3M 12M P/B (X) 3.4 3.0 2.6

Absolute 10.0 4.9 7.9 ROE (%) 17.7 16.6 15.9

Rel. to BSE-30 5.6 (1.6) (5.5) Div. Yield (%) 0.6 0.9 1.0


394-285

852.2

Banks YES Bank


Exhibit 1: Yes Bank – quarterly results

March fiscal year-end, 1QFY18-1QFY19 (₹ mn)


1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 FY2019E FY2018 FY2020E

Income statement (Rs mn)

Interest income 65,780 63,892 46,538 57,430 3.0 41.3 14.5 288,683 202,686 42.4 338,423

Advances 50,047 49,577 35,345 44,044 0.9 41.6 13.6 221,935 154,778 43.4 256,852

Investments 13,509 12,534 9,027 11,794 7.8 49.6 14.5 58,597 41,025 42.8 72,410

Balance with RBI 1,620 1,260 1,794 1,096 28.6 (9.7) 47.8 8,152 6,882 18.4 9,161

Interest expenses 43,589 42,545 28,449 35,887 2.5 53.2 21.5 193,890 125,294 54.7 228,474

Net interest income 22,191 21,347 18,089 21,542 4.0 22.7 3.0 94,793 77,392 22.5 109,949

Non-interest income 16,941 14,171 11,322 14,210 19.5 49.6 19.2 57,310 52,829 8.5 64,121

Total income 39,133 35,518 29,411 35,752 10.2 33.1 9.5 152,103 130,221 16.8 174,069

Operating expenses 14,586 14,642 12,369 14,398 (0.4) 17.9 1.3 60,845 52,735 15.4 78,631

Employee cost 5,906 6,007 5,461 5,467 (1.7) 8.2 8.0 25,140 22,347 12.5 28,000

Other operating cost 8,680 8,635 6,908 8,931 0.5 25.6 (2.8) 35,705 30,389 17.5 50,631

Pre-prov profit 24,547 20,876 17,042 21,354 17.6 44.0 15.0 91,258 77,485 17.8 95,439

Provisions 6,257 3,131 2,858 3,996 99.8 118.9 56.6 23,777 15,542 53.0 20,990

Profit before tax 18,291 17,745 14,184 17,358 3.1 29.0 5.4 67,481 61,943 8.9 74,449

Tax 5,687 5,789 4,529 5,564 (1.8) 25.6 2.2 21,796 19,697 10.7 24,419

Profit after tax 12,604 11,956 9,655 11,794 5.4 30.5 6.9 45,685 42,246 8.1 50,030

Tax rate (%) 31.1 32.6 31.9 32.1 -153 bps -84 bps -96 bps 32.3 31.8 50 bps 32.8

PBT- treasury gains 14,962 14,123 11,595 13,886 5.9 29.0 7.7 52,298 50,264 4.0 54,711

PBT- treasury gains+provisions 21,218 17,254 14,453 17,882 23.0 46.8 18.7 76,075 65,806 15.6 75,701

Asset quality

GNPL (Rs bn) 28 14 26 107.0 7.5 34 26 31 44

NNPL (Rs bn) 13 5 13 131.5 (3.8) 17 13 33 18

GNPL (%) 1.3 1.0 1.3 34 bps 3 bps 1.5 1.3 17 bps 1.6

NNPL (%) 0.6 0.4 0.6 20 bps -5 bps 0.7 0.6 10 bps 0.6

Provision coverage (%) 55 60 50 -473 bps 527 bps 49 50 -63 bps 60

Restructured loans (Rs mn) 0.5 3.3 0.9 (84.6) (44.0)

Restructured loans (%) 0.02 0.24 0.04 -22 bps -2 bps

Key balance sheet (Rs bn)

Shareholder funds 263 275 224 258 (4.4) 17.5 2.2 294 258 14.3 335

Advances 2,147 2,056 1,400 2,035 4.5 53.4 5.5 2,336 2,035 14.8 2,737

Deposits 2,134 2,208 1,502 2,007 (3.4) 42.0 6.3 2,349 2,007 17.0 2,807

Current 283 185 288 53.1 (1.7) 349 288 21.1 431

Saving 466 367 444 26.9 5.1 554 444 25.0 704

CASA (%) 35.1 36.8 36.5 -164

bps -134 bps 38.5 36.5 200 bps 40.5

Investment 830 718 521 684 15.5 59.1 21.3 833 683 22.0 1,016

Net assets 3,325 3,183 2,221 3,124 4.5 49.7 6.4 3,638 3,124 16.4 4,320

Advances break-up (Rs bn)

Corporate and institutional 1,452 953 1,382 52.3 5.0 1,382

Commercial 696 447 653 55.8 6.5 653

Business banking 187 139 197 34.8 (5.4) 197

Micro and small 208 161 208 29.4 0.3 208

Retail 301 147 248 104.5 21.1 248

Key ratios calculated (%)

Yield on advances 9.6 10.4 9.4 -81 bps 18 bps 10.2 9.2 94 bps 10.1

Cost of funds 6.7 6.4 6.2 24 bps 52 bps 6.5 5.5 100 bps 6.4

NIM 2.8 3.3 3.0 -56 bps -23 bps 3.0 3.1 -15 bps 2.9

Cost income 37.3 42.1 40.3 -478

bps

-300

bps 40.0 40.0 0 bps 45.2

CD ratio 100.6 93.2 101.4 746 bps -77 bps 99.4 101.4 -197 bps 97.5

RoA 1.6 1.8 1.6 -20 bps -7 bps 1.4 1.6 -25 bps 1.3

RoE 19.4 17.4 18.8 198 bps 61 bps 16.6 17.7 -112 bps 15.9

Capital adequecy (%)

CAR 16.9 17.6 18.4 -70 bps -150 bps 18.4

Tier-I 12.8 13.8 13.2 -100

bps -40 bps 13.2

Other key parameters (#)

Branches 1,105 1,020 1,100 8.3 0.5 1,250 1,100 13.6 1,450

Employees 19,597 20,851 18,238 (6.0) 7.5 20,725 18,238 13.6 23,316

(% chg.)

(% chg.)

YES Bank Banks


Exhibit 2: Yes Bank – quarterly results Key financial items, March fiscal year-ends, 1QFY18-1QFY19 (Rs mn)


Slippages (annualized) at 1.1% in 1QFY19

Gross NPL stable qoq. Reported Gross NPL increased 8% qoq to `28 bn (up 1X yoy).

GNPL ratio was, however, stable qoq at 1.3% (up 35 bps yoy). The growth in GNPL at 1X

yoy was higher than loan growth at 53% yoy. Net NPL declined 4% qoq on absolute

terms to ~`13 bn with NNPL ratio at 0.6% (flat qoq and up 20 bps yoy). Provision

coverage, which had dipped to 43% in 2QFY18, improved to 55% (up 530 bps qoq).

Total stress loans after considering SR, SDR, 5:25 and S4A is ~2.3% of loans (down 11

bps qoq). Slippages for the quarter were high at 1.1% (up 20 bps qoq). Out of the total

slippages of `5.6 bn, management expects `3.1 bn to be recovered by 1HFY19.

NCLT accounts at 0.32% of advances. With respect to the initial 12 accounts referred

by RBI to IBC, the bank had an exposure to 2 accounts. Out of these, one account was

resolved in 1QFY19 and the company recovered `1.8 bn as a result. The other account

(exposure of `0.2 bn) has already been classified as NPL and the company maintains

coverage of 50% on this. The bank has exposure to 7 accounts under NCLT list 2 with

total exposure of `6.5 bn. The funded exposure is `5.7 bn (43% coverage).

GNPL to deteriorate in medium term. We forecast 1.5% GNPL in FY2019E and 1.7%

by FY2021E. The bank is growing its corporate book at a fast pace. Exposure to sensitive

sector like telecom and iron steel saw a rise in exposure by 140 bps and 60 bps qoq to

3.6% and 2.6%, respectively.

1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 YoY (%)

Key balance sheet items (Rs mn)

Deposits 1,502,409 1,579,898 1,717,314 2,007,382 2,133,945 42.0

Current deposits 185,059 196,947 226,042 288,257 283,325 53.1

Saving deposits 367,092 390,299 426,848 443,505 465,975 26.9

CASA ratio (%) 36.8 37.2 38.0 36.5 35.1

Branches 1,020 1,040 1,050 1,100 1,105 8.3

Loans 1,399,718 1,486,753 1,715,149 2,035,339 2,147,201 53.4

Investments 521,362 539,078 654,187 683,989 829,532 59.1

Total assets 2,221,452 2,373,941 2,654,320 3,124,456 3,325,493 49.7

Yield management measures (%)

Cost of funds 6.2 6.1 6.0 6.0 6.3 10 bps

Yield on advances 10.4 10.2 9.8 9.9 10.0 -40 bps

NIM 3.7 3.7 3.5 3.4 3.3 -40 bps

Spread 4.1 4.1 3.6 3.6 3.4 -79 bps

Asset quality details

Gross NPL (Rs mn) 13,644 27,203 29,743 26,268 28,245 107.0

Gross NPL (%) 1.0 1.8 1.7 1.3 1.3 34 bps

Net NPL (Rs mn) 5,453 15,433 15,951 13,128 12,626 131.5

Net NPL (%) 0.4 1.0 0.9 0.6 0.6 20 bps

Provisions (Rs mn) 8,191 11,771 13,793 13,141 15,619 90.7

Provision Coverage (%) 60.0 43.3 46.4 50.0 55.3 -473 bps

Restructured Loans (Rs mn) 3,314 1,161 903 910 510 (84.6)

Restructured Loans (% of cust. assets) 0.2 0.1 0.1 0.0 0.0 -22 bps

Capital adequacy details (%)

CAR 17.6 17.0 19.5 18.4 16.9 -70 bps

Tier I 13.8 13.2 14.7 13.2 12.8 -100 bps

Tier II 3.8 3.8 4.8 5.2 4.1 30 bps

Fee income composition (Rs mn)

Forex, DCM and securities 2,031 1,518 1,428 836 2,903 42.9

Corporate Banking 4,108 4,768 7,231 6,441 6,827 66.2

Retail fee 2,589 2,718 2,900 3,472 3,329 28.6

Trade and Cash Mgmt 1,352 1,439 1,536 2,398 2,162 59.9

Total 11,322 12,484 14,223 14,210 16,941 49.6

Banks YES Bank


Exhibit 3: Total stress loans of around 2.3% with 49% provision coverage Stress loans break-up, March 2018

Notes: (1) General provisions are as of 4QFY18.


Exhibit 4: NPL divergence has seen an increase over the years March fiscal year-ends, 2015-1QFY19 (%)


Amount Share of loans

(Rs mn) (%)

Gross NPL (A) 28,245 1.3

Net NPL (B) 12,626 0.6

Other forms of stress (C) 20,665 1.0

Standard restructured 510

Security receipts 17,712

Standard SDR —

5:25 scheme 1,068

S4A scheme 1,375

Total stress loans (D=A+B) 48,910 2.3

Provisions (E) 24,156 1.1

Specific provisions (A-B) 15,619

General provisions 8,537

Net stress loans (D-E) 24,754 1.2

Provision coverage (%) (E/D) 49

Net stress (% of net worth) 9.4

0.4 0.8

1.5 1.3 1.3

4.1

5.0

6.3

0.1 0.3

0.8 0.6 0.6

3.7

4.5

-

1.4

2.8

4.2

5.6

7.0

2015 2016 2017 2018 1QFY19

GNPL GNPL (RBI assessment) NNPL NNPL (RBI assessment)

YES Bank Banks


Exhibit 5: NII growth drags rise in revenues Revenue and NII growth, March fiscal year-ends, 1QFY16-1QFY9 (%)


Exhibit 6: Earnings growth stood at 31% yoy Earnings growth, March fiscal year-ends, 1QFY16-1QFY19 (%)


Exhibit 7: Capital consumption remains high Total assets to net worth, March fiscal year-ends, 1QFY14-1QFY19 (X)


Weak other income growth

Yes Bank reported 50% yoy growth in non-interest income driven by strong growth in forex,

debt capital markets and securities income at 43% yoy (up 1.6X qoq). Growth in retail

banking fees maintained robust growth at 29% yoy. Within this, growth in processing fee

and general banking fees were strong at 42% and 58% yoy, respectively. Fee from third

party sales dropped 17% yoy. Corporate trade and cash management and corporate

banking fees witnessed spike in growth in 1QFY19; up 60% and 66% yoy, respectively

Non-interest income is expected to deliver strong growth going ahead driven by robust

performance on corporate banking fees. We forecast 12% CAGR in other income over

FY2018-21E.

42

29 27 27 24 30 30 32

37 30

25 31

23

38

27

32 30

38 35

32

42

33 34 32

23

33

-

10

20

30

40

50

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

NII growth Revenue growth

28 26

25 27

33 31 31 30

32

25

22

29 31

-

8

16

24

32

40

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

0

3

6

9

12

15

5

8

11

14

17

20

1Q

FY1

4

2Q

FY1

4

3Q

FY1

4

4Q

FY1

4

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

Tier-1 (RHS) Leverage (LHS)(X) (%)

Banks YES Bank


Exhibit 8: Yes Bank – overall non-interest income growth was 50% yoy Break-up of non-interest income, March fiscal year-ends, 1QFY18-1QFY19 (Rs mn)


Exhibit 9: Contribution of corporate banking fees continues to rise Break-up of fee income, March fiscal year-ends, 2008-1QFY19 (%)


Exhibit 10: Contribution of bancassurance to fee income saw a steep decline in FY2018 Bancassurance fees, March fiscal year-ends, 2011-18 (%)


(% of fee income) 1QFY19 1QFY18 YoY (%) 4QFY18 QoQ (%)

Non Interest Income 16,941 11,322 49.6 14,210 19

Corporate Trade & Cash Management 2,162 1,352 59.9 2,398 (10)

Forex, Debt Capital Markets & Securities 4,603 3,221 42.9 1,781 158

Corporate Banking Fees 6,827 4,108 66.2 6,441 6

Retail Banking Fees 3,329 2,589 28.6 3,472 (4)

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1QFY19

Corporate trade and cash management 19 24 30 28 26 25 24 17 11 13 13

Retail banking 9 7 10 9 11 12 20 23 22 22 20

Forex, debt capital markets and securities 25 21 24 11 6 22 13 10 17 11 17

Corporate banking fees 21 31 39 38 39 32 37 39 35 38 40

Treasury trading and others 26 17 (3) 14 18 9 6 12 15 16 10

Notes:

(1) Treasury and trading income has been clubbed with forex, DCM and securities.

148 148 200 238 358

565

1,004

768 -

35

19

51 58

78

(23)

-25

0

25

50

75

100

-

250

500

750

1,000

1,250

2011 2012 2013 2014 2015 2016 2017 2018

(%)(Rs mn)

Fee income from bancassurance (LHS) YoY (RHS)

YES Bank Banks


Margins shrink qoq

Reported NIM dropped 10 bps qoq and 40 bps yoy to 3.3% driven by rise in cost of funds.

Cost of funds increased 30 bps qoq to 6.3% led by drop in CASA. This was party nullified by

10 bps rise in yield on advances by 10 bps qoq to 10% (down 40 bps yoy). The bank has

raised one-year MCLR rates in May and June 2018 by 10 bps each time.

We forecast about 19 bps NIM (calculated) compression over FY2018-20E to 2.9% driven by

shift in loan mix towards more increase in share of low-yielding retail products.

CASA ratio drops 140 bps qoq

Yes Bank reported ~36% yoy and muted 2% qoq growth in CASA driven by strong SA

growth. SA increased 27% yoy and 5% qoq. CA dropped 2% qoq. CASA ratio declined

~150 bps qoq to 35%. Overall strong deposit growth at 42% yoy was below loan growth.

One notes a reasonably strong growth in borrowings (up 1X yoy) in the current quarter to

support strong loan growth.

We forecast 24% CASA CAGR over FY2018-21E and 42% CASA ratio by FY2021E.

Exhibit 11: Yes Bank is targeting to improve the share of retail loans to overall loans Break-up of loans, March fiscal year-ends, 2008-1QFY19 (%)


Loan growth maintains momentum

Loan growth was strong at 53% yoy, similar to the previous quarter. The strong loan growth

was driven by robust growth on corporate and retail loans side. Corporate loans saw strong

growth at 52% yoy in 1QFY19. The share of AA and above-rated loans increased 90 bps yoy

to 36%. Growth in retail assets picked pace at 1X yoy growth in 1QFY19. The share of retail

loans in the overall portfolio has increased 350 bps yoy and 180 bps qoq to 14%. Going

ahead, this mix will gradually increase. Business banking and micro and SME segments grew

35% and 29% yoy, respectively. Growth has been broadly stable across segments.

We forecast 16% loan growth in FY2018-21E driven by swift growth in the retail book.

1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 YoY (%)

Loan book 1,059 1,102 1,171 1,323 1,400 1,487 1,715 2,035 2,147 53

Corporate and institutional 715 748 807 895 953 1,002 1,161 1,382 1,452 52

Business banking 117 118 125 139 139 147 170 197 187 35

Micro and small 128 141 138 163 161 168 182 208 208 29

Retail 100 95 101 126 147 169 202 248 301 105

% of loan book

Corporate and institutional 68 68 69 68 68 67 68 68 68 -50 bps

Business banking 11 11 11 11 10 10 10 10 9 -120 bps

Micro and small 12 13 12 12 12 11 11 10 10 -180 bps

Retail 9 9 9 10 11 11 12 12 14 350 bps

Banks YES Bank


Exhibit 12: Yes Bank has seen a qoq rise in exposure to telecom and iron and steel sectors Break-up of customer assets, March fiscal year-ends, 2013-1QFY19 (%)


Exhibit 13: Share of AA and above-rated corporate segment has increased yoy Credit rating of corporate portfolio, March fiscal year-ends, 1QFY16-1QFY19 (%)


Other highlights for the quarter

Cost-income ratio dropped 300 bps qoq and 480 bps yoy to 37%. Operating expenses

grew 18% yoy on the back of modest 8% yoy growth in staff costs and 26% yoy growth

in non-staff costs. The company added 1,359 (net) employees in 1QFY19, which might

increase employee expenses going ahead. Growth in other expenses is expected to slow

down given the slowdown in business expansion adopted by the bank in the past few

quarters. The bank witnessed net addition of 5 branches in 1QFY19. We forecast 21%

CAGR in operating expenses over FY2018-21E.

CAR dropped 150 bps qoq to 16.9%. Tier-I stands at 12.8%. Growth in RWA at 47%

yoy is almost similar to loan growth.

2013 2014 2015 2016 2017 2018 1QFY19

Electricity 3.0 4.8 8.3 8.7 11.3 9.2 9.3

Commercial real estate - 0.0 0.0 6.8 5.8 5.9 5.8

Other real estate - 0.0 0.0 0.9 0.8 0.5 0.4

Tech, ITES, Media 3.4 3.4 2.9 1.4 1.2 1.0 1.0

Food processing 4.6 4.4 3.2 2.7 2.4 2.4 2.4

Iron & Steel 5.7 3.5 3.3 2.2 1.8 2.0 2.6

Social & Commercial 2.1 1.8 2.7 2.4 2.7 2.5 2.4

Vehicles & equipments 2.4 2.8 3.1 2.5 2.4 2.8 2.8

Construction/ EPC 3.1 2.9 3.1 6.0 7.3 7.9 8.1

Other metal and metal 2.4 2.3 2.0 2.4 2.5 3.1 2.3

Telecom 2.4 3.1 2.2 4.5 4.9 2.2 3.6

Textiles 0.6 0.7 0.5 0.9 1.4 1.5 1.4

Aviation 0.3 0.3 0.2 0.6 1.0 0.8 0.9

Other industries 29.7 68.4 66.8 58.0 54.5 58.2 57.0

19.0 19.2 19.4 17.1 20.9 20.8 19.7 22.0 23.2 22.2

15.8 17.8 17.6 19.5 15.6 14.0 14.8 13.4 13.3 13.5

40.9 38.6 38.9 39.6 39.6 41.6 41.1 42.8 42.9 43.2

22.0 21.9 21.8 22.1 21.8 21.8 21.5 19.0 18.5 18.7

2.4 2.5 2.3 1.7 2.1 1.8 2.9 2.8 2.1 2.4

0

20

40

60

80

100

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

AAA AA A BBB BB and Below

YES Bank Banks


Exhibit 14: Cost-to-income ratio dropped in 1QFY19 Cost-to-income and total employees, 1QFY14–1QFY19 (%)


Exhibit 15: Yes Bank has one of the highest percentages of employee cost to total cost among private banks Employee cost as a percentage of overall costs, March fiscal year-ends, 2012-21E (%)


Exhibit 16: Yes Bank – estimate changes March fiscal year-ends, 2019-21E (` mn)


30

34

38

42

46

50

0

4,400

8,800

13,200

17,600

22,000

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

Employees (LHS) Cost-to-income (RHS)(#) (%)

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

Axis Bank 34.6 34.4 32.9 33.4 33.4 31.9 30.8 29.6 28.5 26.7

HDFC Bank 36.6 35.3 34.7 34.0 33.6 32.9 30.0 29.3 30.4 31.4

ICICI Bank 44.8 43.2 40.9 41.3 39.4 38.9 37.7 38.1 38.0 37.7

IndusInd Bank 36.1 37.7 37.0 34.2 33.7 31.8 31.8 30.6 29.9 29.1

Yes Bank 51.0 49.1 44.8 43.6 43.6 44.1 42.4 41.3 35.6 32.8

New estimates Old estimates % change

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

Net interest income 94,793 109,949 136,433 90,765 105,719 126,661 4.4 4.0 7.7

NIM (%) 3.0 2.9 3.1 2.8 2.8 2.8 13 bps 11 bps 22 bps

Customer assets 2,480,887 2,881,717 3,352,613 2,480,887 2,881,717 3,352,613

Loan loss provisions 18,577 20,290 23,777 18,577 20,290 23,777

Other income 57,310 64,121 73,799 52,495 59,554 69,115 9.2 7.7 6.8

Fee income 47,741 51,784 59,328 42,925 47,217 54,643 11.2 9.7 8.6

Treasury income 2,500 3,500 3,500 2,500 3,500 3,500

Operating expenses 60,845 78,631 93,162 58,733 72,085 84,969 3.6 9.1 9.6

Employee expenses 25,140 28,000 30,563 25,140 28,000 30,563

PBT 67,481 74,449 92,593 65,249 72,198 86,330 3.4 3.1 7.3

Tax 21,796 24,419 30,833 21,075 23,175 27,539 3.4 5.4 12.0

Net profit 45,685 50,030 61,760 44,174 49,023 58,791 3.4 2.1 5.1

PBT-treasury+provisions 88,758 91,939 113,570 82,026 89,688 107,307 8.2 2.5 5.8

Banks YES Bank


Exhibit 17: Yes Bank trading at 3X one-year forward book (adj.) March fiscal year-ends, July 2010- July 2018 (X)

Source: Company, Bloomberg estimates, Kotak Institutional Equities

Exhibit 18: Yes Bank trading premium in line with peers Yes Bank trading premium to peers, July 2010- July 2018 (X)

Source: Company, Bloomberg estimates, Kotak Institutional Equities

-

7

13

20

26

-

1.2

2.4

3.6

4.8

6.0

Jul-10

Jul-11

Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

Rolling PBR (X) (RHS) Rolling PER (RHS)

0.5

0.7

0.9

1.1

1.3

1.5

Jul-10

Jul-11

Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

YES Bank Banks


Exhibit 19: Yes Bank – key financial growth rates and ratios March fiscal year-ends, 20216-21E (Rs mn)


2016 2017 2018 2019E 2020E 2021E

Growth rates (%)

Net loan 30.0 34.7 53.9 14.8 17.2 17.2

Net fixed assets 47.6 45.9 21.9 11.2 (1.2) (1.0)

Cash and bank balance 8.8 137.9 26.6 12.9 22.1 4.3

Total Asset 21.4 30.1 45.3 16.4 18.7 17.4

Deposits 22.5 27.9 40.5 17.0 19.5 17.2

Current 28.5 74.6 51.1 21.1 23.5 21.0

Savings 62.3 60.6 35.3 25.0 27.1 24.2

Net interest income 30.9 29.4 30.9 22.5 16.0 24.1

Loan loss provisions 43.3 39.4 67.0 48.9 9.2 17.2

Total other income 32.5 51.1 29.0 8.5 11.9 15.1

Net fee income 24.4 30.2 31.4 13.5 8.5 14.6

Operating expenses 30.3 40.1 26.5 15.4 29.2 18.5

Employee expenses 32.4 41.9 21.4 12.5 11.4 9.2

Key ratios (%)

Yield on average earning assets 9.6 9.3 8.1 9.0 9.0 9.0

Yield on average loans 11.2 10.7 9.2 10.2 10.1 10.1

Yield on average investments 7.6 7.7 7.0 7.7 7.8 7.9

Average cost of funds 6.9 6.5 5.5 6.5 6.4 6.3

Interest on deposits 7.1 6.4 5.5 6.3 6.2 5.9

Difference 2.8 2.7 2.7 2.5 2.5 2.7

Net interest income/earning assets 3.2 3.3 3.1 3.0 2.9 3.1

New provisions/average net loans 0.6 0.6 0.7 0.9 0.8 0.8

Interest income/total income 62.7 59.1 59.4 62.3 63.2 64.9

Other income / total income 37.3 40.9 40.6 37.7 36.8 35.1

Fee income to total income 33.8 32.0 32.3 31.4 29.7 28.2

Operating expenses/total income 40.9 41.7 40.5 40.0 45.2 44.3

Tax rate 32.6 34.0 31.8 32.3 32.8 33.3

Dividend payout ratio 16.6 14.0 13.0 16.6 16.6 16.6

Share of deposits

Current 9.8 13.3 14.4 14.9 15.4 15.9

Savings 18.3 22.9 22.1 23.6 25.1 26.6

Loans-to-deposit ratio 87.9 92.6 101.4 99.4 97.5 97.5

Equity/assets (EoY) 8.3 10.2 8.2 8.1 7.7 7.6

Dupont analysis (%)



Net other income 1.8 2.2 2.0 1.7 1.6 1.6


(1- tax rate) 67.4 66.0 68.2 67.7 67.2 66.7

ROA 1.7 1.8 1.6 1.4 1.3 1.3

Average assets/average equity 11.8 10.6 11.0 12.3 12.7 13.1

ROE 19.9 18.6 17.7 16.6 15.9 17.2

Banks YES Bank


Exhibit 20: Yes Bank – key financials March fiscal year-ends, 2016-21E (Rs mn)


2016 2017 2018 2019E 2020E 2021E

Income statement (Rs mn)

Total interest income 135,334 165,374 202,686 288,683 338,423 400,426

Loans 97,115 123,225 154,778 221,935 256,852 300,394

Investments 35,082 37,968 41,025 58,597 72,410 89,470

Cash and deposits 3,138 4,180 6,882 8,152 9,161 10,563

Total interest expense 89,667 106,273 125,294 193,890 228,474 263,993

Deposits from customers 71,784 82,040 93,825 136,539 159,470 180,017

Net interest income 45,667 59,100 77,392 94,793 109,949 136,433


Net interest income (after prov.) 40,307 51,627 64,912 76,216 89,659 112,656

Other income 27,121 40,969 52,829 57,310 64,121 73,799

Net fee income 24,592 32,009 42,071 47,741 51,784 59,328

Net capital gains 2,606 7,113 5,135 2,500 3,500 3,500

Net exchange gains (176) 1,019 2,136 2,670 3,337 4,171

Operating expenses 29,764 41,686 52,735 60,845 78,631 93,162


Depreciation on investments 25 522 2,599 4,500 — —

Other Provisions (23) (54) 463 700 700 700

Pretax income 37,662 50,441 61,943 67,481 74,449 92,593

Tax provisions 12,268 17,140 19,697 21,796 24,419 30,833

Net Profit 25,394 33,301 42,246 45,685 50,030 61,760

% growth 26.6 31.1 26.9 8.1 9.5 23.4

Operating profit 40,419 51,270 72,351 88,758 91,939 113,570

% growth 27 24 31 14 9 26

Tax rate (%) 33 34 32 32 33 33

Balance sheet (Rsmn)

Cash and bank balance 82,184 195,547 247,538 279,499 341,144 355,811

Cash 4,124 5,705 6,227 33,057 68,747 54,972

Balance with RBI 53,638 63,815 108,031 127,655 153,611 182,052

Balance with banks 556 667 976 976 976 976

Net value of investments 488,385 499,818 682,934 833,180 1,016,480 1,240,105

Govt. and other securities 351,863 354,805 488,861 607,229 752,384 930,327

Shares 628 2,369 644 644 644 644

Debentures and bonds 95,154 110,453 145,046 174,055 208,866 250,639

Net loans and advances 982,099 1,322,627 2,035,188 2,335,841 2,736,672 3,207,568

Fixed assets 4,707 6,868 8,373 9,312 9,198 9,110

Other assets 95,259 125,738 150,463 180,555 216,666 260,000

Total assets 1,652,634 2,150,597 3,124,497 3,638,387 4,320,160 5,072,593

Deposits 1,117,195 1,428,574 2,006,886 2,348,969 2,806,548 3,289,468

Borrowings and bills payable 319,759 391,992 758,087 886,962 1,064,355 1,277,225

Other liabilities 77,814 109,634 101,998 108,118 114,605 121,481

Total liabilities 1,514,768 1,930,201 2,866,971 3,344,049 3,985,508 4,688,175

Paid-up capital 4,205 4,565 4,606 4,606 4,606 4,606

Reserves & surplus 133,661 215,831 252,919 289,732 330,046 379,812

Total shareholders' equity 137,866 220,396 257,525 294,338 334,652 384,418


Margins expand in 1QFY19

SBI Life reported VNB margin of 17% in 1QFY19, up from 16.3% in FY2018 from 15.4% in

FY2017. The company had not shared margins in 1QFY18 and hence we don’t have a yoy

comparison. Increase in VNB margins over FY2018 was largely due to change in business

composition in favor of protection business. On NBP basis, the share of protection (individual

and group) increased to 10.2% from 5.7% in 1QFY18. Individual protection APE was up 76%

yoy; share of individual protection business increased to 1.5% of APE in 1QFY19 from 0.8% in

1QFY18. In the group credit life segment, the company migrated to single premium in 1QFY19

from regular premium in 1QFY18. As such, APE was down 66% yoy even as margin in this

segment increased significantly. On an APE basis, protection (individual and group) was low at

1.8% in 1QFY19. Management highlighted that while the transition to single premium reduced

volumes significantly, VNB margins increased and the net benefit was a marginally higher

contribution to VNB.

Persistency continues to improve

SBI Life’s persistency improved across the board in individual non-single business. 13th month

persistency increased to 82.25% in 1QFY19 from 78.93% in 1QFY18 and 81.27% in FY2018.

The company revised its assumption on persistency upwards in FY2018 and hence we don’t

find any immediate benefit on our VNB assumptions.

Volumes weak in 1QFY19; will likely pick up

SBI Life delivered 5% growth in APE as compared to 27% in FY2018. The company has focused

on process restructuring and pushing protection products, largely in the SBI ecosystem.

Management highlight that business should pick up from 2QFY19—a trend we will closely

monitor. The company expects 20-25% APE growth in FY2019E.

Retain positive stance

We are tweaking our estimates for SBI Life to factor lower growth in FY2019E, which is partially

offset by higher margins as a consequence of increase in protection business. We expect SBI Life

to deliver 19-20% medium-term operating RoEV and 21% EVOP CAGR during FY2019-21E.

Retain positive stance with price target of `785; at our TP, the stock will trade at 3X EV and 18X

EVOP FY2020E.

SBI Life Insurance (SBILIFE) NBFCs

VNB margins rise; protection story playing out. SBI Life delivered further expansion

in VNB margins to 17% in 1QFY19 from 16.2% in FY2018 and 15.4% in FY2017 even

as premium growth was weak. Margin expansion was largely due to change in business

composition towards higher-margin protection business—a trend that will continue

over the medium term. Improving persistency is a positive trend though we don’t find

any immediate-term impact of the same. We tweak estimates to factor near-term

weakness in volumes, retain ADD with price target of `785 (down from `815).

ADD

JULY 27, 2018

RESULT


Price (`): 673


BSE-30: 36,985

QUICK NUMBERS

• PAT increased 13%

yoy

• VNB margin at 17%

in 1QFY19

• Share of

bancassurance to

total NBP high at

61%

Nischint Chawathe

M B Mahesh CFA

Dipanjan Ghosh

Shrey Singh

SBI Life Insurance







MFs 3.4 BVPS 64.3 76.5 91.5


Absolute (1.7) (11.7) 0.0 ROE (%) 19.4 20.6 21.3



775-625

673.2

NBFCs SBI Life Insurance


13% growth in earnings

SBI Life reported 13% yoy growth in PAT to `3.54 bn. 26% growth in overall premium

(even as new business premium was up 3% yoy) and reduction in benefits paid led to

increase in net cash flows post expenses to `48 bn versus `17 bn in 1QFY18. We believe

that net cash flow can’t be monitored on a quarterly basis but remain an important

parameter.

Exhibit 1: SBI Life - quarterly summary March fiscal year-ends, 1QFY18-1QFY19 (Rs mn)


(% change)

1QFY19 1QFY18 4QFY18 1QFY18 4QFY18 2018

Policyholder's account (Rs mn)

Premium 47,590 37,881 92,901 26 (49) 250,242

First 12,097 11,718 25,418 3 (52) 81,394

Renewal 26,826 19,880 55,244 35 (51) 143,881

Single 8,667 6,282 12,239 38 (29) 24,968

APE 12,963 12,347 26,641 5 (51) 83,890

Net premium 47,545 37,626 92,367 26 (49) 251,601

Commissions (I) 1,959 1,651 3,759 19 (48) 11,209

First 1,123 1,079 2,169 4 (48) 7,045

Renewal 720 539 1,501 33 (52) 3,938

Single 116 33 90 256 29 225

Operating expenses (II) 4,594 3,718 4,842 24 (5) 17,199

Expenses of management (I+II) 6,553 5,370 8,601 22 (24) 28,407

Other income and trf to shareholders 157 188 951 (16) (83) 1,441

Provisions and service taxes 2,380 1,791 1,694 33 41 5,905

Benefits paid 21,648 26,280 35,013 (18) (38) 117,123

Net cash flows 17,122 4,373 48,010 292 (64) 101,606

Income on investments 20,953 26,070 7,205 (20) 191 84,573

Change in liabilities 34,911 27,848 52,585 25 (34) 175,950

Surplus/deficit 3,164 2,595 2,630 22 20 10,229

Appropriations

Transfer to shareholders 2,424 2,180 3,558 11 (32) 8,294

FFA 740 415 (928) 78 (180) 1,935

Shareholders account

Transfer from policyholders 2,424 2,180 3,558 11 (32) 8,294

Total income 1,274 1,104 1,169 15 9 4,634

Investment income 1,240 1,070 1,141 16 9 4,521

Other expenses 73 63 830 16 (91) 1,076

Any other item (7) - 6 7

PBT 3,633 3,222 3,891 13 (7) 11,844

Tax 89 88 79 2 13 341

PAT 3,543 3,134 3,812 13 (7) 11,504

Tax rate (%) 2 3 2 (9) 21 3

SBI Life Insurance NBFCs


Exhibit 2: Share of group business saw a steep jump in 1QFY19 March fiscal year-ends, 2015-2018, 1QFY18-1QFY19 (% of total NBP)


Exhibit 3: NBP composition and VNB March fiscal year-ends, 2015-2018, 1QFY18-1QFY19 (% of total NBP)


Exhibit 4: Share of bancassurance is high at 61% Channel-wise total individual rated premium, March fiscal year-ends, 2015-2018, 1QFY18-1QFY19 (%)


1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 YoY (%) 2015 2016 2017 2018 YoY (%)

Product mix based on total NBP (Rs bn)

Savings 17.0 23.5 27.6 35.5 18.6 9.3 50.9 64.8 96.5 103.6 7

ULIP 9.0 14.9 18.1 19.0 9.5 5.5 18.7 31.9 51.1 61.0 19

Par 2.8 5.6 5.7 6.2 3.2 13.2 14.5 14.7 10.9 20.3 86

Non-par 0.3 0.5 0.6 0.7 0.3 9.9 2.8 1.7 1.7 2.1 24

Group 4.9 2.5 3.2 9.6 5.6 14.0 14.9 16.5 32.8 20.2 (38)

Protection 1.0 1.4 1.5 2.1 2.1 110.0 4.3 6.3 4.9 6.0 22

Share of total NBP (%)

Savings 94 94 95 94 90 -459 bps 92 91 95 95 -64 bps

ULIP 50 60 62 51 46 -407 bps 34 45 50 56 526 bps

Par 16 22 20 16 15 -24 bps 26 21 11 19 777 bps

Non-par 2 2 2 2 1 -7 bps 5 2 2 2 24 bps

Group 27 10 11 26 27 -22 bps 27 23 32 18 -1392 bps

Protection 6 6 5 6 10 459 bps 8 9 5 5 64 bps

YoY YoY

1QFY18 1QFY19 (%) 2015 2016 2017 2018 (%)

New business premium 18 21 15 97 97 101 165 62

Savings 17 19 9 92 91 97 156 61

Protection 1 2 110 4 6 5 9 85

(% of total) 5.6 10.1 459 bps 4.5 6.5 4.8 5.5 67 bps

VNB 2.2 10.4 13.9 34

VNB margin (%) 17.0 15.4 16.3 86 bps

IEV NA 165 191 15

YoY YoY

1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 (%) 2015 2016 2017 2018 (%)

Channel mix based on new business premium (Rs bn)

Agency 4.1 6.2 7.6 9.4 4.8 18 18.2 19.2 22.3 27.4 23

Banca 12.7 16.4 18.6 20.5 12.7 (0) 26.5 38.4 54.8 68.0 24

Others 1.2 2.2 2.9 7.8 3.3 179 10.5 13.5 24.3 14.3 (41)

New business premium18.0 24.9 29.1 37.7 20.8 16 55.3 71.1 101.4 109.7 8

Channel mix based on new busines premium (%)

Agency 23 25 26 25 23 4 bps 33 27 22 25 30 bps

Banca 71 66 64 54 61 -98 bps 48 54 54 62 80 bps

Others 7 9 10 21 16 94 bps 19 18 24 13 -110 bps



Exhibit 5: Cost/APE saw a spike in 1QFY19 Quarterly summary, March fiscal year-ends, 2017-2018, 1QFY18-1QFY19 (Rs mn)


Exhibit 6: Persistency improved across most buckets Persistency in individual non-single business, March fiscal year-ends, 1QFY18-1QFY19 (%)


Exhibit 7: Share of equity AUM is low at 23% AUM mix of SBI Life, March fiscal year-ends, 2015-18 (Rs bn)


YoY YoY

1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 (%) 2017 2018 (%)

Key financials (Rs mn)

Premium 37,881 51,301 68,160 92,901 47,590 26 210,151 250,242 19

First year 11,718 20,390 23,868 25,418 12,097 3 62,072 81,394 31

Renewal 19,880 29,715 39,041 55,244 26,826 35 108,713 143,881 32

Single 6,282 1,195 5,252 12,239 8,667 38 39,366 24,968 (37)

APE 12,347 20,510 24,393 26,641 12,963 5 66,009 83,890 27

Commissions (I) 1,651 2,674 3,124 3,759 1,959 19 7,833 11,209 43

First year 1,079 1,781 2,016 2,169 1,123 4 5,057 7,045 39

Renewal 539 842 1,057 1,501 720 33 2,665 3,938 48

Single 33 52 51 90 116 256 112 225 101

Operating expenses (II) 3,718 4,241 4,397 4,842 4,594 24 16,465 17,199 4

Expenses of management (I+II) 5,370 6,915 7,521 8,601 6,553 22 24,298 28,407 17

AUM (Rs bn) 994 1,051 1,116 1,144 1,203 21 977 1,144 17

Key calculated ratios (%)

Cost/APE 16.7 13.8 11.9 10.5 16.5 -19 bps 13.9 12.5 -144 bps

Cost/average AUM 2.2 2.7 2.8 3.0 2.2 5 bps 2.7 2.7 -6 bps

Net commission ratio 5.1 5.3 4.9 4.6 4.9 -20 bps 4.5 4.9 44 bps

First year 14.1 13.1 13.1 14.8 16.2 210 bps 12.6 13.8 115 bps

Renewal 2.7 2.8 2.7 2.7 2.7 -3 bps 2.5 2.7 29 bps

Single 0.5 4.3 1.0 0.7 1.3 82 bps 0.3 0.9 62 bps

1QFY18 1QFY19 (bps change)

13th month 78.93 82.25 332

25th month 69.86 70.00 14

37th month 62.00 68.00 600

49th month 59.29 58.70 (59)

61st month 44.17 45.71 154

AUM Share of total (%)

2015 2016 2017 2018 1QFY19 2015 2016 2017 2018 1QFY19

Linked mix 713 798 977 1,144 1,203

Linked 350 359 450 549 565 49 45 46 48 47

Non-linked 364 439 528 595 637 51 55 54 52 53

Equity mix 713 798 977 1,144 1,203

Equity 221 184 225 263 277 31 23 23 23 23

Debt 492 615 753 881 926 69 77 77 77 77



Exhibit 8: Individual agent network continues to grow Individual agents for SBI Life, March fiscal year-ends, 2014-2018, 1QFY19 (# 000')

Source: Life Insurance Council

Exhibit 9: We expect 19-20% operating RoEV and VNB margin of 17-18% for SBI Life Key metrics and RoEV movement, March fiscal year-ends, 2017-21E (Rs bn)


110.5

83.7 92.6 95.4

108.3 112.1

40.6

35.6

43.5 44.6

52.3

14.0

0

10

20

30

40

50

60

0

25

50

75

100

125

2014 2015 2016 2017 2018 1QFY19

Agents (LHS) Additions (RHS)

2017 2018 2019E 2020E 2021E

APE 67 85 107 133 163

YoY (%) 26.9 25.0 25.0 22.0

VNB 10 14 18 23 28

YoY (%) 34.1 30.6 26.8 23.8

EV movement

Opening embedded value 125 165 191 223 264

Value of new business (VNB) 10 14 18 23 28

Expected return 11 14 16 19 23

Operating variance

Mortality/morbidity 2 (0) 0 0 1

Expenses 0 0 0 0 0

Persistency 0 2 1 1 1

Assumption change 6 0 0 0 0

Others (1) (0) 0 0 0

EVOP (operating earnings) 29 30 35 43 53

Non-operating variance

Investment variance 15 0 0 1 1

Economic assumption change (2) (2) (1) 0 0

Dividend payouts (2) (2) (3) (3) (3)

Closing embedded value 165 191 223 264 315

Key ratios (%)

VNB margin 15 16 17 17 18

RoEV 32 15 17 19 19

Operating RoEV 23 18 19 20 20



Key assumptions in our EV forecasts

25% APE CAGR during FY2019-21E

SBI Life currently has ~17% penetration among the existing branch network, i.e. 4,000

branches do at least one policy a month. Also, per branch productivity for SBI Life is nearly

1/4th of levels at private banks. SBI branches delivered average business of `2.4 mn in

FY2018 from `1.8 mn in FY2017. SBI Life is focused on increasing the branch coverage by

10-15% every year, which coupled with 10-15% improvement in productivity, can drive 30-

35% growth in bancassurance premiums.

VNB margins inching up

We expect VNB margins to inch up to 17.5% in FY2020E from 16.3% in FY2018 and 17%

in 1QFY19, largely driven by increasing protection business. We don’t expect business drivers

to change significantly. High growth in business will led to operating leverage as well but we

expect the company to continue its investments in new businesses thereby reducing the

aforesaid benefit. ULIPs have contributed to about 66% of SBI Life’s APE in FY2018 and

1QFY19—the company expects the business composition within savings business to remain

stable over time.

Marginal operating variances

We are building marginal operating variances in our estimates, contributing 2-3% to EVOP

as compared to 5% in FY2018. We assume moderate but consistent improvement on

persistency and mortality front even as expense benefits may be passed through higher

margins.

Tax assumption conservative than peers

Unlike its peers (HDFC Life and ICICI Prudential Life) that factor the effective tax rate (net of

available tax credits), SBI Life assumed the gross tax rate in its EV calculation. On assuming

effective tax rate, SBI Life’s margins would be 19% as compared to 17% reported in

1QFY19.

Exhibit 10: SBI Life will trade at 2.8-3.1X EV at our appraisal value-based price target Calculation of appraisal value for SBI Life, March fiscal year-ends, 2019-2021E (Rs bn)


2019E 2020E 2021E

Value of new business (VNB- Rs bn) 18 23 28

New business multiple (NBM- X) 23 23 23

Structural value (SV= VNB X NMB- Rs bn) 412 522 646

Appraisal value (AV= EV+SV- Rs bn) 634 786 961

Appraisal value/ EV (X) 2.8 3.0 3.1

Appraisal value/ VNB (X) 35 34 34

Value per share (Rs) 634 786 961



Exhibit 11: Sensitivity to interest rate has reduced March fiscal year-ends, 2017-2018 (%)

Source: Company

Exhibit 12: SBI Life trades at 2.5X Price/EV FY2020E Valuation comparison of life insurance companies in India, March fiscal year-ends, 2017-2021E (Rs bn)


Impact of VNB Impact on EV

2017 2018 2017 2018

Reference rate up 100 bps 4 1 (6) (4)

Reference rates down 100 bps (5) (2) 7 4

Equity values down 10% NA NA (2) (1)

Mortality/ morbidity rates up 100 bps (4) (8) (1) (2)

Mortality/ morbidity rates down 100 bps 4 8 1 2

Maintenance expenses up 100 bps (3) (2) (1) (1)

Maintenance expenses down 100 bps 3 2 1 1

Change in tax rate to 25% NA (17) NA (9)

TP Price

Market

cap. EVOP (Rs bn) Embedded value (Rs bn) VNB margin (%) Price/EV (X) Price/EVOP (X) Operating RoEV (%)

EVOP

(Rs

bn)

Rating (Rs) (Rs) (Rs bn) 2017 2018 2019E 2020E 2021E 2017 2018 2019E 2020E 2021E 2017 2018 2019E 2020E 2021E 2017 2018 2019E 2020E 2021E 2017 2018 2019E 2020E 2021E 2017 2018E 2019E 2020E 2021E

HDFC Life SELL 405 489 985 22 27 33 40 49 125 152 185 226 274 22 23 24 24 24 7.9 6.5 5.3 4.4 3.6 44.4 36.8 29.5 24.4 20.3 22 22 22 22 21

ICICI Prudential Life BUY 500 413 593 23 37 34 40 48 161 188 214 246 285 10 17 17 18 19 3.7 3.2 2.8 2.4 2.1 25.9 16.1 17.7 14.8 12.5 17 23 18 19 19

Max Life BUY 650 472 127 11 14 15 18 20 66 75 87 101 116 19 20 20 20 20 2.9 2.5 2.2 1.9 1.6 16.9 13.9 12.3 10.7 9.3 20 21 20 20 20

SBI Life ADD 785 673 673 29 30 35 43 53 165 191 223 264 315 15 16 17 17 18 4.1 3.5 3.0 2.5 2.1 23.3 22.7 19.0 15.5 12.8 23 18 19 20 20


1QFY19 earnings print – in line, adjusted for the noise in the internals

Consolidated (100% BHIN SA + 42% of Indus) revenues stood at `36.74 bn, flat qoq, +4.2%

yoy, and 2.4% ahead of our estimate. Core service (rental) revenues of `22 bn were down

2.7% yoy, up 0.6% qoq and 1.7% ahead of our expectations. Reported EBITDA, service +

energy, stood at `15.2 bn, down 4.6% qoq and 3.5% yoy. This was 1.8% below our estimate

largely on account of the miss on energy EBITDA. Service EBITDA stood at `14.65 bn, +2.4%

qoq and down 3.3% yoy. Energy EBITDA saw a sharp qoq decline to `542 mn, also lower on a

yoy basis (down 9.7%). This was 59% below our expectations. Energy EBITDA margin stood at

3.7%. Recurring PAT stood at `6.4 bn (down 3.9% yoy).

Noisy internals – timing of ‘actual exits’, D&A policy change, volatile energy spread

We note that the rental revenues for the quarter included revenues from 6,672 tenancies for

which BHIN has received exit notices but actual exits have not happened yet. These revenues

will go away as actual exits happen and to that extent, reported service revenues have a

small (2.5-3%) non-recurring portion. Underlying recurring service EBITDA, correspondingly,

would be around 4-4.5% lower than reported.

D&A charge for the quarter declined 6% qoq and 9% yoy to `5.39 bn. We note that the

company revised upwards the scrap/residual value of some of its fixed assets (DG sets,

battery banks, etc.) basis realized value of such assets in the recent past. This led to lower

D&A charge.

Energy EBITDA saw a sharp qoq decline to `542 mn, also lower on a yoy basis (down 9.7%).

This was 59% below our expectations that were drawn basis the multi-quarter recurring

theme of the management under-guiding and over-delivering on energy margins. 1Q energy

margins (3.7%) were surprisingly below guidance.

1Q earnings provide no reason to change forecasts or stance; we remain cautious

Given the generally in-line operating trends reported for the quarter, our EBITDA forecasts only

see some minor tweaks. Our stance remains the same as well – cautious; so does TP – `285.

Bharti Infratel (BHIN) Telecom

In-line operating trends; we remain cautious. 1QFY19 operating trends were

broadly in line with our forecasts. Deviation in financials versus estimates was on

account of noise in generally noisy energy spread, challenges of exact tenancy exit

timing estimation and change in D&A policy. We tweak our estimates marginally, retain

target price (`285), and remain cautious. Sharp stock price correction (30% in the past

12 months) does mean we are increasingly less negative on the name. REDUCE stays.

REDUCE

JULY 27, 2018

RESULT


Price (`): 287


BSE-30: 36,985

Rohit Chordia

Aniket Sethi

Bharti Infratel



Market Cap. (Rs bn) EPS growth (%) (7.4) (4.8) (8.5)




MFs 1.6 EBITDA (Rs bn) 63.8 59.2 55.4


Absolute (2.1) (9.3) (30.6) ROE (%) 15.7 14.6 13.7

Rel. to BSE-30 (6.0) (14.8) (39.3) Div. Yield (%) 5.0 3.7 3.4


483-275

530.6

Bharti Infratel Telecom


1QFY19 operating metrics – quick summary

Consolidated (100% BHIN SA + 42% Indus) metrics as below:

EOP tower base – 91,759, +1% yoy, in line with estimate.

EOP tenants – 200,778, down 4,818 qoq and down 17,623 yoy on a net basis; marginally

below expectations.

Gross exits stood at 5,657 at a consolidated level while gross fresh tenancy adds stood at

839.

Gross tenancy additions at 839 represented multi-quarter lows; the narrative of Jio-led

healthy gross tenancy additions hasn’t shown up for a while now.

Rental/tenant stood at `35,276/month, +1.5% qoq and +0.5% yoy, broadly in line with

our expectations.

Capex for the quarter stood at `5.16 bn while AFFO (adjusted funds from operations)

stood at `13.59 bn.

Key takeaways from the earnings call

On BHIN-Indus merger, management highlighted that the scheme of arrangement has

been approved by CCI and the BSE. The merger proposal will now shortly be filed with

NCLT and the merger is likely to be completed by end-FY2019.

Management believes that bulk of the negative impact on tower companies from wireless

industry consolidation is now behind (except Idea-Vodafone’s impending merger). The

fundamental structure of the Indian telecom industry has emerged as a better and

sustainable one (3 private + 1 government players).

Management did highlight that Jio is working on building its own towers. However, they

remain confident of the favorable economics of tower sharing, which companies like

Infratel/Indus can provide.

Management expects network capex to remain elevated for the telcos given that service

differentiation will be critical due to heightened competition; this should augur well for

passive infra demand. Furthermore, with newer technologies like 5G/IoT requiring

denser/ubiquitous coverage, network investments are bound to see an increase.

On impact of Idea-Vodafone merger on tenancy exits, management refrained from giving

any guidance as they await clarity on their network plans.

On smart city projects, BHIN and Indus have done some initial commissioning in

Bhopal/Vadodara. Post the required approvals from the relevant authorities, BHIN expects

to start capitalizing on this growth opportunity,

Management believes that directionally rentals should be moving up on the back of

loading kicker, MSA unfreeze, regular escalator and rental increase on account of tenancy

exits. Massive MIMO deployment would also mean incremental loading revenues.

Telecom Bharti Infratel


Exhibit 1: Bharti Infratel - key changes to estimates, March fiscal year-ends, 2019-21E

Source: Kotak Institutional Equities estimates

Exhibit 2: Our June-2019 SoTP-based target price for BHIN is Rs285/share


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

Consolidated financials

Revenues (Rs mn) 143,729 140,149 144,560 141,173 137,738 140,700 1.8 1.8 2.7

Service revenues (Rs mn) 85,270 81,607 84,715 84,478 81,087 83,561 0.9 0.6 1.4

EBITDA (Rs mn) 59,162 55,438 57,921 58,421 54,744 56,453 1.3 1.3 2.6

EBITDA margin (%, on service revenues) 69.4 67.9 68.4 69.2 67.5 67.6

PAT (Rs mn) 24,215 22,155 23,854 23,233 21,141 22,262 4.2 4.8 7.2

EPS (Rs/share) 13.1 12.0 12.9 12.6 11.4 12.0 4.2 4.8 7.2

Capex (Rs mn) 19,028 17,535 17,976 18,868 17,526 17,967 0.8 0.1 0.1

Operational metrics (standalone)

# of towers 40,173 40,773 41,373 40,123 40,723 41,323 0.1 0.1 0.1

Tenancy ratio (X) 2.09 2.13 2.19 2.15 2.11 2.17 (2.7) 0.9 0.9

Service rental/ tenant/ month (Rs) 37,571 36,628 37,001 36,618 35,881 36,459 2.6 2.1 1.5

Operational metrics (Indus)

# of towers 124,639 125,639 126,639 124,639 125,639 126,639 — — —

Tenancy ratio (X) 2.12 2.11 2.16 2.16 2.11 2.16 (1.9) — —

Service rental/ tenant/ month (Rs) 33,936 33,082 33,423 33,415 32,741 33,282 1.6 1.0 0.4


Rs mn

Bharti Infratel standalone

EV (DCF-based) 239,290

Net debt/ (cash) (68,577)

Equity value - A 307,867

Implied EV/tower (Rs mn) 6.0

Implied EV/EBITDA (X) 8.4

42% stake in Indus

Indus EV (DCF-based) 545,458

Net debt/ (cash) 32,712

Equity value 512,746

Attributable equity value for BIL's 42% stake - B 215,353

Implied EV/tower - Indus (adjusted) (Rs mn) 4.4

Implied EV/EBITDA - Indus (adjusted) (X) 8.5

Overall valuation

Total EV 468,383

Total EV (US$ mn) 7,206

Implied EV/EBITDA (X) 8.4

Total Equity value = A + B 523,220

Implied PE (X) 23.6

Total Equity value (US$ mn) 7,928

Fair value estimate (Rs/share) 283

Key assumptions

BIL (standalone) WACC (%) 10.0

BIL (standalone) terminal growth (%) 3.0

Indus WACC (%) 10.0

Indus terminal growth (%) 3.0



Exhibit 3: Bharti Infratel - 1QFY19 review, Ind-AS, March fiscal year-ends (Rs mn)


Rs mn 1QFY18 4QFY18 1QFY19 qoq yoy 1QFY19E Deviation (%)

Revenues 35,239 36,622 36,735 0.3 4.2 35,891 2.4

Costs

Power and fuel (12,044) (13,148) (14,204) 8.0 17.9 (12,927)

Rent (3,111) (3,230) (3,206) (0.7) 3.1 (3,252)

Employee expenses (1,216) (1,269) (1,229) (3.2) 1.1 (1,286)

Others (3,118) (3,052) (2,900) (5.0) (7.0) (2,950)

Total (19,489) (20,699) (21,539) 4.1 10.5 (20,414) 5.5

EBITDA 15,750 15,923 15,196 (4.6) (3.5) 15,476 (1.8)

Net revenues (ex power and fuel) 23,195 23,474 22,531 (4.0) (2.9) 22,964

EBITDA margin (%, overall) 44.7 43.5 41.4 43.1

Service EBITDA margin (%) 67.1 65.5 66.6 65.4

D&A - net (5,905) (5,721) (5,389) (5.8) (8.7) (5,765) (6.5)

EBIT 9,845 10,202 9,807 (3.9) (0.4) 9,711 1.0

Net finance costs and other income 1,101 827 894 620 44.2

PBT 10,946 11,029 10,701 (3.0) (2.2) 10,331 3.6

Provision for taxes (4,307) (4,469) (4,321) (3.3) 0.3 (4,134) 4.5

Recurring PAT 6,639 6,560 6,380 (2.7) (3.9) 6,197 2.9

EO items

Reported PAT 6,639 6,560 6,380 (2.7) (3.9) 6,197 2.9

# of shares 1,850 1,850 1,850 1,850

Recurring EPS (Rs/share) 3.59 3.55 3.45 (2.7) (3.9) 3.35

Margins (%)

EBITDA 44.7 43.5 41.4 43.1

EBIT 27.9 27.9 26.7 27.1

PAT 18.8 17.9 17.4 17.3

Effective tax rate 39.3 40.5 40.4 40.0

Key operating metrics

Consolidated

Service revenues (Rs mn) 22,595 21,857 21,989 0.6 (2.7) 21,623 1.7

Energy reimbursements (Rs mn) 12,644 14,765 14,746 (0.1) 16.6 14,260 3.4

Service EBITDA (Rs mn) 15,150 14,306 14,654 2.4 (3.3) 14,143 3.6

Energy EBITDA (Rs mn) 600 1,617 542 (66.5) (9.7) 1,333 (59.3)

Gross revenues (Rs mn) 35,239 36,622 36,735 0.3 4.2 35,883 2.4

Total towers (#) 90,837 91,451 91,759 0.3 1.0 91,712 0.1

Total tenants (#) 218,401 205,596 200,778 (2.3) (8.1) 202,006 (0.6)

Incremental tenants (#) 7,795 (7,880) (4,818) (3,590)

Tenancy ratio (end-period) 2.40 2.25 2.19 2.20

Rental/tenant (Rs/month) 35,112 34,770 35,276 1.5 0.5 35,365 (0.3)

Bharti Infratel - Standalone

Total towers (#) 39,211 39,523 39,719 0.5 1.3 39,700 0.0

Total tenants (#) 93,297 88,665 86,053 (2.9) (7.8) 86,965 (1.0)

Tenancy ratio (end-period) 2.38 2.24 2.17 2.19 (1.1)

Sharing revenue per tower (Rs/month) 86,937 83,716 84,316 0.7 (3.0) 82,469 2.2

Sharing revenue per operator (Rs/month) 37,292 36,511 37,281 2.1 (0.0) 37,200 0.2

Indus towers

Total towers (#) 122,920 123,639 123,904 0.2 0.8 123,839 0.1

Total tenants (#) 297,867 278,408 273,154 (1.9) (8.3) 273,908 (0.3)

Tenancy ratio (end-period) 2.42 2.25 2.20 (2.1) (9.0) 2.21 (0.3)

Sharing revenue per tower (Rs/month) 80,085 76,874 76,729 (0.2) (4.2) 75,880 1.1

Sharing revenue per operator (Rs/month) 33,527 33,426 33,753 1.0 0.7 34,000 (0.7)

Change (%)

Telecom Bharti Infratel


Exhibit 4: Key quarterly metrics

Source: Company

Exhibit 5: BHIN – energy spread trends


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

Consolidated financial metrics (Rs mn)

Service revenues 20,573 20,744 21,175 21,834 22,595 22,644 22,598 21,857 21,989

Energy reimbursements 11,533 12,175 12,832 13,370 12,644 13,838 13,955 14,765 14,746

Gross revenues 32,106 32,919 34,007 35,204 35,239 36,482 36,553 36,622 36,735

EBITDA 13,947 14,498 14,801 15,723 15,750 16,146 15,982 15,923 15,196

EBIT 8,299 8,869 9,137 10,039 9,845 10,205 10,087 10,202 9,807

PBT 9,932 11,674 10,441 10,166 10,946 10,715 10,072 11,029 10,701

PAT 6,286 7,568 6,204 5,966 6,639 6,384 5,854 6,560 6,380

Total capex 4,416 5,112 6,830 5,431 5,739 3,985 6,313 5,783 5,163

Maintenance capex 1,359 1,178 1,164 1,346 1,480 1,119 1,095 1,472 1,485

Simple FCF 9,577 9,321 8,014 10,292 10,011 12,161 9,669 10,140 10,033

Adjusted funds from operations (AFFO) 12,633 13,255 13,680 14,382 14,181 15,110 14,914 14,471 13,593

Operating metrics - consolidated

Total towers (#) 89,352 89,791 90,255 90,646 90,837 90,955 91,007 91,451 91,759

Towers added 544 438 465 390 192 117 52 444 308

Total tenants (#) 196,401 198,795 204,934 210,606 218,401 220,088 213,476 205,596 200,778

Net tenancy addition (#) 1,367 2,393 6,139 5,673 7,795 1,687 (6,612) (7,880) (4,818)

Exits (#) (1,179) (186) (271) (1,388) (1,048) (2,711) (8,562) (9,813) (5,657)

Gross tenancy addition (#) 2,546 2,579 6,410 7,061 8,843 4,398 1,950 1,933 839

Tenancy ratio (end-period, X) 2.20 2.21 2.27 2.32 2.40 2.42 2.35 2.25 2.19

Sharing revenue per tower (Rs/month) 76,987 77,197 78,407 80,464 83,001 83,040 82,794 79,861 79,861

Sharing revenue per operator (Rs/month) 35,040 34,994 34,966 35,029 35,112 34,427 34,748 34,770 34,770

Operating metrics - standalone

Total towers (#) 38,642 38,832 38,997 39,099 39,211 39,264 39,363 39,523 39,719

Towers added 184 190 165 102 112 53 99 160 196

Total tenants (#) 81,908 83,085 86,112 89,263 93,297 94,538 92,211 88,665 86,053

Gross tenancy addition 1,005 1,250 3,110 3,623 4,129 2,334 615 410 342

Exits (#) (729) (73) (83) (472) (95) (1,093) (2,942) (3,956) (2,954)

Net tenancy addition 276 1,177 3,027 3,151 4,034 1,241 (2,327) (3,546) (2,612)




Operating metrics - Indus towers

Total towers (#) 120,739 121,330 122,044 122,730 122,920 123,073 122,962 123,639 123,904

Towers added 858 591 714 686 190 153 (111) 677 265

Total tenants (#) 272,603 275,499 282,909 288,913 297,867 298,929 288,727 278,408 273,154

Gross tenancy addition 3,668 3,165 7,858 8,185 11,223 4,914 3,179 3,626 1,182

Exits (#) (1,071) (269) (448) (2,181) (2,269) (3,852) (13,381) (13,945) (6,436)

Net tenancy addition 2,597 2,896 7,410 6,004 8,954 1,062 (10,202) (10,319) (5,254)




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

Energy reimbursements 11,533 12,175 12,832 13,370 12,644 13,838 13,955 14,765 14,746

Power and fuel costs (11,144) (11,447) (11,938) (12,004) (12,044) (12,593) (12,987) (13,148) (14,204)

Spread 389 728 894 1,366 600 1,245 968 1,617 542

Incremental energy spread (720) 339 166 472 (766) 645 (277) 649 (1,075)

Incremental EBITDA (548) 551 303 922 27 396 (164) (59) (727)

Pure service (ex-energy) EBITDA margin (%) 65.9 66.4 65.7 65.8 67.1 65.8 66.4 65.5 66.6



Exhibit 6: Condensed financial statements, BHIN consolidated, March fiscal year-ends, 2016-21E (Rs mn)


2016 2017 2018 2019E 2020E 2021E

Key financials

Income statement

Gross revenues 123,314 134,237 144,896 143,729 140,149 144,560

Service revenues 78,105 84,327 89,688 85,270 81,607 84,715

Power and fuel reimbursements 45,209 49,943 55,242 58,492 58,576 59,879

EBITDA 54,108 58,969 63,801 59,162 55,438 57,921

EBIT 31,872 36,343 40,339 37,431 33,452 35,740

PBT 35,766 42,212 42,762 39,549 35,938 38,661

PAT 22,474 27,470 25,437 24,215 22,155 23,854

OPM (on gross,%) 43.9 43.9 44.0 41.2 39.6 40.1

OPM (on net,%) 69.3 69.9 71.1 69.4 67.9 68.4

EPS (Rs/share) 11.85 14.85 13.75 13.09 11.98 12.90

Balance sheet

Total Equity 182,262 154,865 169,544 162,556 161,886 164,767

Borrowings 17,046 17,350 16,901 16,901 16,901 16,901


Total equity and liabilities 244,777 248,455 239,863 232,272 230,298 234,315

Net fixed assets 142,019 138,894 134,806 132,103 127,652 123,447

Cash and equivalents 49,193 37,960 65,832 65,529 68,723 76,108

Other assets 53,565 71,601 39,225 34,639 33,923 34,760

Total assets 244,777 248,455 239,863 232,272 230,298 234,315

Cash flow statement

Operating cash flow 33,041 71,967 18,513 47,810 41,069 43,413

Capex (21,808) (21,343) (21,610) (19,028) (17,535) (17,976)

Free cash flow 11,233 50,624 (3,097) 28,782 23,533 25,437

Key operating metrics

End-period tower base (#) 88,808 90,646 91,451 92,521 93,541 94,561

End-period tenants (#) 195,035 210,606 205,596 194,697 198,133 205,338

Tenancy (X) 2.20 2.32 2.25 2.10 2.12 2.17

Rental/tenant/month (Rs) 34,499 34,648 35,915 35,503 34,624 34,994

Revenue/tower/annum 894,163 939,819 985,057 926,990 877,203 900,732

EBITDA/tower/annum 619,440 657,206 700,736 643,158 595,912 615,847


Suboxone and tax benefits help DRRD beat estimates

DRRD’s 1QFY18 revenues exceeded our estimates by 2.8%, primarily driven by (1) domestic

formulations, which grew by 30% yoy (2-year CAGR: 8%), exceeding our estimates by 12%,

and (2) RoW, particularly, CIS, which grew by 33% yoy, exceeding our estimates by 20%. The

US at ~US$242 mn qoq grew by US$20 mn qoq, US$7 mn higher than our estimates, largely

led by Suboxone stocking. Nine quarters into the launch of the first two products, proprietary

products continued the disappointing ramp-up trend, with quarterly revenues still struggling at

US$11 mn. Gross margins expanded 220 bps qoq (+100 bps versus KIE), largely attributable to

Suboxone (KIE: US$15 mn), as well as forex benefits. A combination of higher gross margins,

and lower R&D (-5.5% versus KIE), meant that EBITDA exceeded our estimates by 12% with

EBITDA margins expanding to 20.3% (+160 bps versus KIE). Sharply lower tax rate at 9%

meant that the PAT outperformance was higher at 46%. Despite the strong optical

performance, core EPS, when normalized for Suboxone launch and tax rate, remains at

~`18/share. Receivables increased materially by `7.4 bn qoq, reflecting longer cycle in the US,

as well as impact of Suboxone stocking, while capex remained high at `2.3 bn, with FY2019

again likely to see capex of `9-10 bn, in our view.

Erosion on key existing products playing out – pipeline execution key for growth

Adjusting for Suboxone stocking, on our estimates, DRRD’s US sales further declined US$7 mn

qoq, given continued price erosion in key products, particularly, decitabine and Toprol-XL, with

pricing in both expected to continue to deteriorate further in FY2019. New product launches

are critical to offset the erosion, particularly, given our view on the Suboxone litigation (see

Suboxone set-back), where we believe DRRD’s launch is likely to be pushed out to CY2022.

Among other key products, the management expects to file its revised data package for

Copaxone in the next month, though an approval is only likely in 1HFY20 given 8-10 month

review cycle (fourth cycle review and major deficiency). Nuvaring too faces potential delays with

the management guiding to potential 1HCY20 launch. We believe DRRD has filed an NDA for

cyclophosphamide RTU, though we expect an approval only in FY2020, behind ARBP.

Focusing on potential growth though, not the increasing risk profile

DRRD management announced the divestiture of the penicillin facility in the US, while also

talking up the potential for future facility divestitures, though we are perplexed with the

decision to commission an additional injectables facility, given that the Duvvada plant is largely

unutilized. DRRD shares now trade at ~18X FY2020E. REDUCE.

Dr Reddy's Laboratories (DRRD) Pharmaceuticals

Suboxone and tax benefits help drive outperformance. DRRD’s 1QFY19 results

exceeded our expectations, helped by a combination of better gross margins (Suboxone

and INR depreciation), lower R&D, and one-off tax benefits. However, core EPS,

normalized for Suboxone and tax rate, stood at ~`18/share, despite lower R&D spend in

the quarter. DRRD remains vulnerable to continued base business erosion in the US,

with continued delays to its key pipeline products. REDUCE.

REDUCE

JULY 27, 2018

RESULT


Price (`): 2,133


BSE-30: 36,985

Chirag Talati, CFA

Kumar Gaurav

Dr Reddy's Laboratories



Market Cap. (Rs bn) EPS growth (%) (18.5) 50.2 32.8




MFs 8.9 EBITDA (Rs bn) 22.9 29.9 40.2


Absolute (5.9) 2.7 (21.2) ROE (%) 7.8 11.1 12.6



2,723-1,887

353.9

https://kie.kotak.com/kinsite/uploaded/%5bKotak%5d%20Dr%20Reddy's%20Laboratories,%20July%2016,%202018.pdf

Dr Reddy's Laboratories Pharmaceuticals


Exhibit 1: Dr. Reddy's interim results March fiscal year-ends (Rs mn)


Exhibit 2: Bulk of R&D spend on generics March fiscal year-ends, 2012-19E (Rs mn)


1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 FY2019E FY2018 (% chg.)

Sales 37,264 36,249 33,159 35,349 2.8 12.4 5.4 158,982 142,028 11.9

Cost of sales (16,536) (16,493) (16,062) (16,454) 0.3 3.0 0.5 (71,575) (65,724) 8.9

Gross profit 20,728 19,756 17,097 18,895 4.9 21.2 9.7 87,407 76,304 14.6

SG&A (12,106) (11,800) (11,763) (12,067) 2.6 2.9 0.3 (49,656) (46,910) 5.9

R&D (4,157) (4,400) (5,075) (4,348) (5.5) (18.1) (4.4) (20,866) (18,265) 14.2

EBITDA 7,575 6,776 3,058 5,510 11.8 147.7 37.5 29,942 22,891 30.8

Depreciation (3,110) (3,220) (2,799) (3,030) (13,057) (11,762)

Other operating income 303 180 194 167 900 788

Income from associate companies 83 80 98 69 344 344

Interest / finance costs 156 300 221 1,032 250 2,080

Exceptional items 0 0 0 0 0 0

Pretax profits 5,007 4,116 772 3,748 21.7 548.6 33.6 18,379 14,341 28.2

Tax (446) (988) (181) (726) (3,655) (4,535)

Minority interest 0 0 0 0 0 0

Net income 4,561 3,128 591 3,022 45.8 671.7 50.9 14,724 9,806 50.2

Net income (adjusted) 4,561 3,128 591 3,022 45.8 671.7 50.9 14,724 9,806 50.2

EPS (Rs) 27.5 18.8 3.6 18.2 45.8 671.7 50.9 88.7 59.1 50.2

Adjusted EPS (Rs) 27.5 18.8 3.6 18.2 45.8 671.7 50.9 88.7 59.1 50.2

Tax rate (%) 8.9 24.0 23.4 19.4 19.9 31.6

Segment wise sales

Domestic Formulation 6,074 5,390 4,687 6,138 12.7 29.6 (1.0) 25,653 23,321 10.0

Global generics 24,619 24,493 22,768 21,698 0.5 8.1 13.5 104,933 90,693 15.7

US 15,903 15,861 14,946 14,487 0.3 6.4 9.8 68,803 59,824 15.0

Total Europe 2,016 2,283 2,075 1,711 (11.7) (2.8) 17.8 9,448 8,216 15.0

Russia 3,800 3,800 3,500 2,500 0.0 8.6 52.0 15,120 12,600 20.0

CIS 1,200 1,000 900 1,100 20.0 33.3 9.1 4,485 3,900 15.0

RoW 1,700 1,549 1,347 1,900 9.7 26.2 (10.5) 7,076 6,153 15.0

PSAI 5,409 5,116 4,651 6,251 5.7 16.3 (13.5) 23,092 21,992 5.0

Propreitary products and others 1,162 1,250 1,053 1,262 (7.0) 10.4 (7.9) 5,305 4,200 26.3

% margin

Cost of sales 44.4 45.5 48.4 46.5 45.0 46.3

SG&A (ex depreciation) 24.1 23.7 27.0 25.6 23.0 24.7

R&D 11.2 12.1 15.3 12.3 13.1 12.9

EBITDA margin 20.3 18.7 9.2 15.6 18.8 16.1

(% chg.)

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

US Sales 31,889 37,846 55,303 64,723 75,445 63,601 59,824 68,803 82,041 88,715

Sales 96,738 117,257 132,851 148,189 154,708 140,809 142,028 158,982 182,123 199,678

R&D expenses 5,911 7,675 12,402 17,449 17,834 19,551 19,045 20,866 23,286 25,078

- Generics 4,197 4,605 7,689 10,469 11,592 11,926 10,469 11,009 11,896 12,864

- Propreitary products 1,714 3,070 4,713 6,980 6,242 7,625 8,576 9,857 11,390 12,214

R&D as a % of sales 6.1 6.5 9.3 11.8 11.5 13.9 13.4 13.1 12.8 12.6

- of which generics 71 60 62 60 65 61 55 53 51 51

- of which propreitary 29 40 38 40 35 39 45 47 49 49

Generics R&D as a % of US Sales 12.4 12.1 13.8 16.2 15.4 18.8 17.5 16.0 14.5 14.5

R&D expenses (US$ mn) 116 148 205 286 275 292 295 300 325 350

- Generics 82 89 127 172 179 178 162 158 166 180

- Propreitary products 34 59 78 114 96 114 133 142 159 171

Pharmaceuticals Dr Reddy's Laboratories


Exhibit 3: Changes to estimates March fiscal year-ends, 2019-21E (%)

Source: Kotak Institutional Equities

Exhibit 4: Dr. Reddy's – revenues by segments March fiscal year-ends, 2013-21E (Rs mn)


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

Sales 161,082 182,919 198,653 158,982 182,123 199,678 (1.3) (0.4) 0.5

Gross profit 91,360 105,487 115,742 87,407 102,830 113,262 (4.3) (2.5) (2.1)

EBITDA 32,526 41,164 44,766 29,942 40,237 45,392 (7.9) (2.3) 1.4

Adjusted net income 14,848 19,728 22,348 14,724 19,558 23,335 (0.8) (0.9) 4.4

Adjusted EPS (Rs) 89 119 135 89 118 141 (0.8) (0.9) 4.4

% changeNew estimatesOld estimates

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

Global generics 82,563 105,164 120,827 127,970 115,550 114,014 130,586 151,677 167,105

North America 37,846 55,303 64,723 75,445 63,601 59,824 68,803 82,041 88,715

Europe 7,716 6,970 7,193 7,732 7,606 8,216 9,448 10,582 11,852

India 14,560 15,713 17,756 21,293 23,131 23,321 25,653 28,218 31,040

Russia & CIS 16,908 19,819 18,879 14,100 15,200 16,500 19,605 22,910 26,780

Others 5,533 7,359 12,275 9,400 6,012 6,153 7,076 7,925 8,718

PSAI 30,702 23,974 25,795 22,379 21,277 21,992 23,092 24,246 25,458

Propreitary products 2,459 2,459 2,172 2,659 2,130 4,200 3,505 4,221 4,937

Others 1,533 1,254 1,164 1,608 1,993 1,714 1,800 1,980 2,178

Total 117,257 132,851 148,189 154,708 140,809 142,028 158,982 182,123 199,678

% yoy growth

Global generics 17.5 27.4 14.9 5.9 (9.7) (1.3) 14.5 16.2 10.2

North America 18.7 46.1 17.0 16.6 (15.7) (5.9) 15.0 19.2 8.1

Europe (6.6) (9.7) 3.2 7.5 (1.6) 8.0 15.0 12.0 12.0

India 12.6 7.9 13.0 19.9 8.6 0.8 10.0 10.0 10.0

Russia & CIS 27.5 17.2 (4.7) (25.3) 7.8 8.6 18.8 16.9 16.9

Others 41.7 33.0 66.8 (23.4) (36.0) 2.3 15.0 12.0 10.0

PSAI 28.9 (21.9) 7.6 (13.2) (4.9) 3.4 5.0 5.0 5.0

Propreitary products 128.1 0.0 (11.7) 22.4 (19.9) 97.2 (16.5) 20.4 17.0

Others (4.4) (18.2) (7.2) 38.1 23.9 (14.0) 5.0 10.0 10.0

Total 23.3 13.3 11.5 4.4 (9.0) 0.9 11.9 14.6 9.6

% of sales

Global generics 70.4 79.2 81.5 82.7 82.1 80.3 82.1 83.3 83.7

North America 32.3 41.6 43.7 48.8 45.2 42.1 43.3 45.0 44.4

Europe 6.6 5.2 4.9 5.0 5.4 5.8 5.9 5.8 5.9

India 12.4 11.8 12.0 13.8 16.4 16.4 16.1 15.5 15.5

Russia & CIS 14.4 14.9 12.7 9.1 10.8 11.6 12.3 12.6 13.4

Others 4.7 5.5 8.3 6.1 4.3 4.3 4.5 4.4 4.4

PSAI 26.2 18.0 17.4 14.5 15.1 15.5 14.5 13.3 12.7

Propreitary products 2.1 1.9 1.5 1.7 1.5 3.0 2.2 2.3 2.5

Others 1.3 0.9 0.8 1.0 1.4 1.2 1.1 1.1 1.1

Dr Reddy's Laboratories Pharmaceuticals


Exhibit 5: Dr. Reddy's – profit and loss, balance sheet, cash model (IFRS) March fiscal year-ends, 2013-21E (Rs mn)


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

Net revenues 119,736 134,267 149,106 155,582 141,874 142,816 159,882 183,023 200,578

Gross profit 64,049 77,898 86,320 93,155 79,421 77,092 88,307 103,730 114,162

Staff costs (20,413) (24,936) (28,967) (30,364) (31,068) (32,149) (33,756) (36,288) (39,010)

R&D expenses (7,673) (12,402) (17,449) (17,834) (19,551) (18,265) (20,866) (23,286) (25,078)

Other expenses (13,171) (13,847) (13,618) (15,666) (15,304) (14,761) (15,900) (18,571) (19,871)

EBITDA 25,862 31,895 34,101 39,088 24,155 22,891 29,942 40,237 45,392

Depreciation & amortisation (5,549) (6,598) (8,103) (10,343) (11,722) (11,762) (13,057) (15,552) (16,088)

EBIT 22,792 26,713 26,915 29,619 13,498 11,917 17,785 25,585 30,204

Net interest 460 400 1,682 (2,708) 806 2,080 250 (195) 156

Other income 104 — 195 229 349 344 344 344 344

Exceptional items (688) 497 (629) — — — — — —

Profit before tax 22,668 27,610 28,163 27,140 14,653 14,341 18,379 25,734 30,704

Tax & deferred Tax (4,900) (5,094) (5,984) (7,127) (2,614) (4,535) (3,655) (6,176) (7,369)

Less: minority interest — — — — — — — — —

Net income (adjusted) 18,455 22,019 23,004 23,827 12,039 9,806 14,724 19,558 23,335

EPS adjusted (Rs) 109 130 136 139 72.5 59.1 89 118 141

Balance sheet

Equity 73,105 90,800 111,302 128,336 124,044 126,460 138,928 155,489 175,249

Total borrow ings 36,760 44,742 43,126 33,403 49,098 50,618 48,618 46,618 44,618

Other liabilities 32,504 34,681 40,335 45,911 46,679 48,526 47,647 49,236 50,465

Total liabilities 142,369 170,223 194,762 207,650 219,821 225,604 235,193 251,344 270,333

Net fixed assets 56,655 66,476 74,924 87,962 119,446 115,959 102,474 94,422 84,835

Cash 22,099 33,534 39,654 39,955 18,136 20,968 38,871 54,435 76,378

Other current assets 63,615 70,213 80,184 79,733 82,239 88,677 93,847 102,486 109,120

Total assets 142,369 170,223 194,762 207,650 219,821 225,604 235,193 251,344 270,333

Cashflow statement

Operating profit before working capital 28,092 31,497 39,485 41,322 30,019 25,219 27,781 35,110 39,423

Change in working capital (13,146) (10,389) (15,040) (188) (5,350) (8,964) (6,050) (7,049) (5,404)

Capital expenditure (7,082) (10,598) (15,327) (22,727) (41,043) (10,904) (7,500) (7,500) (6,500)

Free cash flow 7,864 10,510 9,118 18,407 (16,374) 5,351 14,231 20,560 27,519

Margins and ratios

Gross profit margin (%) 52.5 57.6 57.6 59.6 55.6 53.7 55.0 56.5 56.7

EBITDA margin (%) 22.1 24.0 23.0 25.3 17.2 16.1 18.8 22.1 22.7

Tax rate (%) 21.6 18.4 21.2 26.3 17.8 31.6 24.0 24.0 24.0

RoAE (%) 25.2 24.2 20.7 18.6 9.7 7.8 10.6 12.6 13.3

RoACE (%) 26.0 26.2 23.5 24.3 8.7 7.6 12.0 17.3 21.0


Strong NII growth; low provisions boost earnings

Shriram Transport Finance (STFC) reported 24% yoy PAT growth to `5.71 bn under Ind-AS.

AUM was up 22% yoy to `1.01 tn; marginal decline in NIM (12 bps yoy to 7.52%) led to 20%

NII growth. While cost-to-income ratio increased 200 bps to 22%, provision growth was low at

4% yoy likely due to better recoveries. GNPL (IGAAP) declined 3% qoq even as seasonally NPLs

tend to go up in 1Q; GNPL ratio inched down to 8.98% from 9.15% in 4QFY18.

STFC reduces extra provisions on balance sheet; standard loan provisions will increase over time

STFC has maintained high (71%) NPL coverage despite its transition to 90 dpd NPL norms in

4QFY18. The company migrated to Ind-AS in 1QFY19 and reduced provision on balance sheet

as prescribed under ECL methodology. Total additions to net worth due to provision release and

other adjustments was `8.78 bn i.e. 7% increase to FY2018 IGAAP book.

STFC’s disclosures on ECL suggest that the stage 1 and 2 provisions were 2.6% of loans in

1QFY19, down from 2.9% in 1QFY18, under a similar methodology; this is significantly higher

than 40 bps of standard asset provisions in the previous regime. Total ECL/AUM was 5.6% in

1QFY19 down from 6.7% in 1QFY18. Thus, total stage 1 and 2 provisions on balance sheet

were 41% of total provisions (stage 1-3); this compares with the ratio of 5% (standard loan

provisions/total provisions) in the previous regime. As such, our provision estimates in FY2020-

21E will be higher by 5-6% to reflect higher stage 1-2 provisions; current year provisions will

remain low as the benefit of improving collections trends leads to further reduction in ECL.

Raise estimates, factor higher book value; ADD

We are raising our estimates by 1-8% to factor moderation in loan growth, higher-than-

expected margins, increase in book value on account of transition impact, increase in balance

sheet loans due to a change in accounting treatment of securitized loans and align provision

estimates to the new regime. We expect the company to deliver 17-18% medium-term. Higher

earnings and increase in book value leads to an increase in our RGM-based TP to `1,550 from

`1,400. We believe that the STFC’s business will be less procyclical over the long term under the

new accounting norm that prescribes higher standard asset provisions as compared to IGAAP.

Shriram Transport (SHTF) NBFCs

Strong growth; lower provisions. Strong (22%) growth in CV loans, steadily

improving collection trends and increase in net worth due to long-awaited reduction in

provisions on balance sheet, along with migration to Ind-AS were the key takeaways

from 1QFY19 results of Shriram Transport Finance. While growth moderates hereon,

reduction in provisions will drive near-term earnings; risk of NIM compression exists

though may be lower than envisaged earlier. Retain ADD with TP of `1,550 (`1,400

earlier).

ADD

JULY 27, 2018

RESULT


Price (`): 1,411


BSE-30: 36,985

QUICK NUMBERS

PAT up 24% yoy in

1QFY19 based on

Ind-AS

AUM increased 22%

yoy

Calculated margins

(NII/average AUM)

down 12 bps yoy to

7.5%

Nischint Chawathe

M B Mahesh CFA

Dipanjan Ghosh

Shrey Singh

Shriram Transport







MFs 3.6 BVPS 521.2 639.6 749.1


Absolute (1.7) (13.9) 43.7 ROE (%) 13.1 18.3 17.5



1,669-898

320.1

Shriram Transport NBFCs


Exhibit 1: Shriram Transport Finance – quarterly data March fiscal year-ends, 1QFY18-1QFY19 (` mn)


Lower credit costs under Ind-AS

Exhibit 2 shows that 1QFY19 PAT under Ind-AS was `5.7 bn and IGAAP was `4.6 bn. There

was a net reduction of credit costs under Ind-AS of `499 mn when compared to IGAAP.

Additionally, there were releases of `171 mn on investments. Amortization of income

(upfront fee income, dealer commissions, upfront fees on borrowings etc) and expenses led

to a hit of `346 mn, partially offsetting the benefits.

Exhibit 2: Reconciliation of PAT under Ind-AS and IGAAP (Rs mn) Asset quality trends, March fiscal year-ends, 2015-2021E

Source: Company

Large provision release under Ind-AS

Exhibit 3 shows that outstanding provisions under Ind-AS (stage 1, 2 and 3) were `56 bn or

5.6% of AUMs (down from 6.7% in FY2019). The provisions on stage 1 and 2 were at

2.6%, down from 2.9% in 1QFY19. Corresponding provisions under IGAAP would be `69.2

bn including NPL/Standard loan provisions of `56.3 bn, provisions on securitized loans of

`7.1 bn and interest reversals of `5.7 bn. The change in norm would lead to release in

provision of `12.6 bn.

Ind-AS IGAAP Ind-AS IGAAP (% chg.) Ind-AS IGAAP Ind-AS

1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 FY2019E FY2018 (% chg.) FY2020E

Total operational income 37,333 31,110 32,709 20 14 154,095 121,436 (21) 184,685

Total interest expense 18,888 15,692 14,633 20 29 74,407 54,090 (27) 94,865

Net operational income (before provisions) 18,445 18,562 15,418 18,076 (1) 20 2 79,688 67,345 (15) 89,820

Net interest income 18,403 15,390 14,869 20 24 79,688 55,945 (30) 89,820

Provision and credit costs 5,330 7,000 5,107 13,666 (24) 4 (61) 21,656 31,221 44 23,697

Net operational income after provisions 13,115 11,562 10,311 4,410 13 27 197 58,032 36,124 (38) 66,123

Other income 64 350 73 1,717 (82) (13) (96) 1,130 2,479 119 1,164

Total income 18,509 18,912 15,491 19,792 (2) 19 (6) 80,818 69,825 (14) 90,984

Operating expenses 4,367 4,100 3,347 4,193 7 30 4 20,104 14,885 (26) 22,632

Employee expenses 2,253 2,000 1,640 2,061 13 37 9 9,499 7,154 (25) 11,412

Other expenses 2,253 2,000 1,640 2,061 13 37 9 9,499 7,154 (25) 11,412

Depreciation 99 100 81 101 (1) 22 (2) 431 361 (16) 514

Pretax income 8,812 7,812 7,037 1,934 13 25 356 39,059 23,718 (39) 44,655

Tax provisions 3,095 2,734 2,440 488 13 27 535 13,280 8,038 (39) 15,183

Net Profit 5,717 5,078 4,597 1,446 13 24 295 25,779 15,680 (39) 29,472

PBT (excl provisions and extraordinaties) 14,142 13,415 12,144 14,202 5 16 (0) 60,714 54,940 (10) 68,352

Tax rate (%) 35 35 35 25 34 34 -11 bps 34

Key items (Rs mn)

AUM (IGAAP) 1,009,781 988,063 825,974 953,063 2 22 6 1,126,670 953,063 (15) 1,323,262

Net assets 1,011,181 852,406 884,704 19 14 1,249,031 884,704 (29) 1,495,501

Networth 140,229 115,424 125,723 21 12 156,060 125,723 (19) 180,705


NIM 7.5 7.7 7.6 7.8 -13 bps -13 bps -29 bps 7.7 7.7 7 bps 7.3

Cost to income 23.6 21.7 21.6 21.2 191 bps 199 bps 241 bps 24.9 21.3 -356 bps 24.9

Key parameters (#)

Employees 24,533 20,489 23,819 20 3 27,500 23,819 (13) 29,500

Branches 1,230 962 1,213 28 1 1,375 1,213 (12) 1,475

1QFY18 1QFY19

Net profit after tax as per IGAAP 4,487 5,405

Adoption of EIR for amortization of income and expenses- financial assets at amortised cost 16 (72)

Adoption of EIR for amortization of expenses- financial liabilities at amortized cost (115) (274)

Expected credit loss 468 499

Others (255) 171

Net profit/ (loss) after tax as per Ind-AS 4,600 5,729

Other comprehensive income (net of tax) (3) (12)

Total comprehensive income as per Ind-AS 4,597 5,717

NBFCs Shriram Transport


Exhibit 3: Comparison of provisions under Ind-AS and IGAAP (Rs mn)

Source: Company

Exhibit 4: We expect ECL to reduce over time NPL and provisions, March fiscal year-end, 2019-2021E (%)


1QFY18 1QFY19 YoY (%) 2018

Ind-AS

Gross stage 3 89,723 91,573 2 90,842

ECL provision stage 3 33,893 33,183 (2) 32,855

Net stage 3 55,830 58,390 5 57,987

Coverage stage 3 (%) 38 36 -153 bps 36.2

Gross stage 1 and 2 734,828 918,751 25 876,175

ECL prvovision stage 1 and 2 21,475 23,404 9 23,640

Net stage 1 and 2 713,353 895,347 26 852,535

ECL provision stage 1 and 2 (%) 2.9 2.6 -37 bps 2.7

ECL prvovision stage 1,2 and 3 55,368 56,587 2 56,495

Total AUMs 825,974 1,009,781 953,063

ECL stage 1-3/AUM 6.70 5.60 5.93

ECL provisions for stage 1-2/total ECL provisions (%) 39 41 42

IGAAP

GNPL 55,490 74,585 34 73,764

Credit provisions 39,293 53,267 36 52,453

NNPL 16,197 21,319 32 21,311

GNPL (%) 8.03 8.98 95 bps 9.15

NNPL (%) 2.49 2.74 25 bps 2.83

Coverage (%) 70.8 71.4 61 bps 71.1

Standard asset provision 2,224 3,025 36 2,928

Standard asset provision (%) 0.4 0.4 5 bps 0.4

NPL and standard provisions under IGAAP 41,517 56,291 36 55,381

Provisions on loans sold 7,179

Interest reversals 5,710

Total provisions unde IGAAP 69,180

Difference between IGAAP and Ind-AS 12,593

Note:

(1) The company followed 120 dpd NPL recognition policy in 1QFY18 versus 90 dpd in 1QFY19 and FY2018.

2019E 2020E 2021E

Gross NPL/stage 3 101,400 105,861 124,513

Gross NPL (% of AUM) 9.0 8.0 8.0

Provision on stage 3 34,183 35,728 40,996

Coverage on stage 3 (%) 34 34 33

Standard loans 1,025,270 1,217,401 1,431,902

Provision on stage 1,2/standard loans 2.60 2.50 2.30

Provisions on stage 1 and 2 26,657 30,435 32,934

Total provisions (stage 1-3) 60,840 66,163 73,930

Stage 1,2 provisions/stage 3 provisions (%) 44 46 45

Provisions for the year 4,345 5,323 7,767

ECL 60,840 66,163 73,930

AUM 1,126,670 1,323,262 1,556,416

ECL/AUM 5.4 5.0 4.8



Strong AUM growth at 22% yoy in 1QFY19; disbursements up 24% yoy

Disbursements up 24% yoy. STFC reported 24% yoy increase in disbursements to `134

bn in 1QFY19 driven by growth in new CV business on the back of strong vehicle sales.

Significant tailwinds in business. The primary drivers were increased efficiencies for the

CV business post implementation of GST as vehicles are able to cover larger distances due

to the removal of border check posts. Additionally, banning of overloading in select states

has also driven business. Demand has been particularly strong in the infrastructure space

as construction activity across the country picks up.

Rural penetration on the rise. STFC continues to grow its rural presence with share of

branches increasing to ~50% in 1QFY19 from 42% in 1QFY18. The proportionate share

of AUM for rural has remained stable at 33%. Though the average AUM per branch

remains lower in these areas (almost half that of urban areas), greater pricing power,

latent demand, pick-up in rural sentiment (expectation of a favorable monsoon) and

lower competition provide major stimulus for increasing penetration. STFC has guided for

focusing on expansion in the northern and eastern parts of India.

Business loan to supplement CV growth. Business loans comprise LAP cross-sell for its

customers that have diversified into segments like warehouses, petrol pumps etc. This

business started as a pilot about three years back and scaled up over the last year. Ticket

size is ~`2 mn though there are some high ticket loans in the range of `40-50 mn. This

book has shown a 150% yoy growth (on a low base) and stands at ~30bn in 1QFY19.

Healthy AUM growth at 22% yoy in 1QFY19. Overall AUM growth improved to 22%

yoy in 1QFY19 accelerating from 21% in 4QFY18 and 18% in 3QFY18. Segmental AUM

mix has broadly remained stable with M&LCVs and HCVs comprising 67%, passenger

vehicles at 24% and tractors at 4%.

We forecast 18% AUM CAGR in FY2018-21E. We are building in 18% AUM CAGR in

FY2018-21E. We expect STFC’s growth to be an interplay of (1) growth in demand for

HCVs owing to increased investment by government in infrastructure activities, (2)

favorable monsoon supporting rural sentiments, (3) pick up in e-commerce activity. There

will be marginal drag in loan growth owing to reduced demand for new vehicles on the

back of new axle load norms leading to a drop in growth estimates. Management has

indicated a marginal drop in demand for new vehicles in the near term though the

demand for old vehicles, which is core to the business, will remain unaffected.



Exhibit 5: AUM growth at 22% yoy in 1QFY18 Loan book break-up, March fiscal year-ends, 1QFY17-1QFY19

Note: 1) 1QFY19 numbers are based on Ind-AS method of accounting.


Exhibit 6: Increasing rural mix and penetration Geographic mix, March fiscal year-ends, 2QFY17-1QFY19

Note 1) 1QFY19 numbers are based on Ind-AS.


340 349 352 368 382 402 423 448 448

146 147 149 157 166 176 187

196 199 181 188 194 196 201

206 213

221 224

42 33 36 35

35 36

37 39 39

38 35 33 31

32 35

41 49 51

24

19

15

8 9

13

18 21

22

-

6

12

18

24

30

0

200

400

600

800

1,000

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

(%)(Rs bn)

HCVs (LHS) M&LCV (LHS) Passenger vehicles (LHS)

Tractors (LHS) Others (LHS) YoY (RHS)

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

AUM (Rs bn) 753 763 788 855 900 953 1,010

Rural 185 187 208 250 276 310 344

% of total 24 25 26 29 31 33 34

Urban 569 575 580 605 625 643 666

% of total 76 75 74 71 69 67 66

Branches 899 905 918 1,035 1,121 1,213 1,230

Rural 351 350 366 461 514 583 596

% of total 39 39 40 45 46 48 48

Urban 548 555 552 574 607 630 634

% of total 61 61 60 55 54 52 52

AUM per branch (Rs bn) 0.84 0.84 0.86 0.83 0.80 0.79 0.82

Rural 0.53 0.54 0.57 0.54 0.54 0.53 0.58

Urban 1.04 1.04 1.05 1.05 1.03 1.02 1.05



Exhibit 7: We expect 17-18% growth in AUMs AUM, March fiscal year-ends, 2011-2021E (%)

Note: 1) Numbers from FY2019E are based on Ind-AS.


NIM compression in the horizon

Improvement in margins in FY2018. STFC’s calculated NIM dropped 12 bps qoq to

7.5% in 1QFY19 driven by a drop in yields. The drop in yields is on the back of increasing

share of low-yielding new vehicle mix in the overall portfolio. There was additional

pressure from the cost of borrowings (calculated) which increased 50 bps yoy.

Margin compression in medium term. We expect NIM (calculated as NII/AUM) to

decline ~60 bps to 7.2% in FY2021E from 7.7% in FY2018, driven by mix shift towards

newer vehicles and non-CV vehicles where the company is likely to face stiff competition

from banks, SFBs and other aggressive NBFCs; rural penetration can provide some

comfort on yields. Market sources suggest that CV and auto loan rates have moved up,

responding to the rise in bond yields. This reduces downside risk to our NIM estimates.

FY2019E yields may be distorted. Adding back of loans sold to banks/securitized loans

(as prescribed by Ind-AS) leads to higher loan book in FY2019E but distorts the asset yield

ratio for the year; NIM ratio remains unchanged.

Cost pressure looms in medium-term due to continuous rapid expansion

Operating expenses increased 30% yoy in 1QFY19, driven by increase in staff cost at 37%

yoy as net employee additions remained high. The company had net addition of 268

branches and 20% yoy growth in staff base. Additionally, high promotional and

advertisement expenses have led the spike in operating expenses. Cost to average AUM

increased ~10 bps yoy to 1.8%.

We estimate cost-to-income ratio to remain high at ~25% in FY2019E and moderate slightly

to 24% by FY2021E driven by 19% CAGR in operating expenses during FY2019-21E. The

company added 295 branches in FY2018 and plans to add another 200 branches in

FY2019E. We forecast operating expenses to grow at 19% CAGR over FY2019-21E on the

back of 23% CAGR in employee expenses during the same period. Continuous investment

in rapid expansion in branches (focusing towards greater penetration in rural areas),

employees and field staff clearly reflect that operating expenses will remain high in medium-

term. Once these branches improve productivity going ahead, cost ratios are expected to

soften.

361 401 497 531

591

728 78 8

953

1,127

1,323

1,556

24

11

24

7 11

23

8

21 18 17 18

-

14

28

42

56

70

-

320

640

960

1,280

1,600

2011

2012

2013

2014

2015

2016

2017

2018

2019E

2020E

2021E

(%)(Rs bn)AUM (LHS) YoY (RHS)



Exhibit 8: Employee expenses growth dropped in 1QFY19 Employees, field staff and employee expenses, March fiscal year-ends, 1QFY17-1QFY19

Note: 1) Numbers from 1QFY19 onwards are based on Ind-AS.


Exhibit 9: Cost to income stood at 24% as per Ind-AS Branches, employees and cost-to-income, March fiscal year-ends, 1QFY17-1QFY19

Note: 1) Numbers for 1QFY19 and 1QFY18 are based on Ind-AS.


Exhibit 10: We expect reduction in credit cost to drive RoA improvement Asset quality trends, March fiscal year-ends, 2011-2021E


19.1 17.2 16.0

18.9 20.5

22.2

23.0

23.8 24.5

11.6 9.5 8.8 10.7 12.3 13.8 14.5 15.0 15.4

23.1

6.2

(11.0)

(32.7)

8.3

18.0 38.4

62.8

37.4

-44

-22

0

22

44

66

0

5

10

15

20

25

1Q

FY17

2Q

FY17

3Q

FY17

4Q

FY17

1Q

FY18

2Q

FY18

3Q

FY18

4Q

FY18

1Q

FY19

(%)(# 000')

Employes (LHS)Field staff (LHS)Employee expenses YoY (RHS)

879 899 905 918 962 1,035 1,121

1,213 1,230

787 906 903 854 857 907 930 862 854

24.5 23.1

20.3 20.3 21.6 20.9

22.1 21.2

23.6

0

6

12

18

24

30

0

250

500

750

1,000

1,250

1Q

FY17

2Q

FY17

3Q

FY17

4Q

FY17

1Q

FY18

2Q

FY18

3Q

FY18

4Q

FY18

1Q

FY19

(%)(#)

Branches (LHS) Rural centres (LHS)

Cost to income (RHS)

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

Du Pont analysis (% of AUM)

Net interest income 9.8 9.4 8.2 7.3 7.3 7.7 7.3 7.7 7.7 7.3 7.2

Adj. Net interest income 9.8 9.4 8.2 7.3 7.3 7.7 7.3 7.7 7.7 7.3 7.2

Loan loss provisions 1.6 2.0 1.9 2.2 2.3 3.1 3.2 3.6 2.1 1.9 1.9

Net other income 0.3 0.0 0.1 0.3 0.1 0.1 0.1 0.3 0.1 0.1 0.1

Operating expenses 2.8 2.5 1.8 1.8 1.9 2.0 1.6 1.7 1.9 1.8 1.7

(1- tax rate) 66.5 66.9 67.5 69.2 67.2 66.5 65.4 66.1 66.0 66.0 65.0

ROAUM 3.8 3.3 3.0 2.5 2.2 1.8 1.7 1.8 2.5 2.4 2.3

Average AUM/average equity 7.46 6.99 6.81 6.64 6.41 6.80 7.06 7.29 7.38 7.27 7.41

ROE 28.1 23.1 20.6 16.3 14.1 12.2 11.7 13.1 18.3 17.5 17.1

IGAAP Ind-AS



Exhibit 11: STFC trading at 2.1X 1-year forward book One-year forward PER and PBR, July 2013 – July 2018 (X)


Exhibit 12: Shriram Transport Finance – change in estimates March fiscal year-ends, 2019E-2021E (Rs mn)


-

0.7

1.4

2.1

2.8

3.5

0

5

10

15

20

25

Jul-13

Oct

-13

Jan-1

4

Apr-

14

Jul-14

Oct

-14

Jan-1

5

Apr-

15

Jul-15

Oct

-15

Jan-1

6

Apr-

16

Jul-16

Oct

-16

Jan-1

7

Apr-

17

Jul-17

Oct

-17

Jan-1

8

Apr-

18

Jul-18

Rolling PER (X) (LHS) Rolling PBR (X) (RHS)

New estimates Old estimates Change in estimates (%)

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

Net interest income (a) 79,688 89,820 103,010 76,598 86,754 101,426 4 4 2

Loans (incl. securitised loans) 1,126,670 1,323,262 1,556,416 1,134,686 1,329,835 1,561,805 (1) (0) (0)

NIM (%) 7.5 6.6 6.2 8.0 7.8 7.7 -53 bps-120 bps -143 bps

NII/ AUMs (%) 7.7 7.3 7.2 7.3 7.0 7.0 33 bps 29 bps 14 bps

NPL provisions 21,656 23,697 27,924 21,308 22,386 26,689 2 6 5

Operating expenses 20,104 22,632 25,149 20,281 22,636 25,149 (1) (0) -

Employee 9,499 11,412 13,346 9,671 11,412 13,346 (2) - -

Others 10,605 11,220 11,803 10,609 11,224 11,803 (0) (0) -

PBT 39,059 44,655 51,135 36,139 42,895 50,786 8 4 1

Tax 13,280 15,183 17,897 12,287 14,584 17,775 8 4 1

PAT 25,779 29,472 33,238 23,852 28,311 33,011 8 4 1

PBT+provisions 60,714 68,352 79,059 57,447 65,281 77,475 6 5 2

BVPS (Rs) 688 796 917 642 746 866 7 7 6

Ind-AS IGAAP



Exhibit 13: Shriram Transport Finance - key growth rates and financial ratios March fiscal year-ends, 2016-2021E (%)


IGAAP IGAAP IGAAP Ind-AS Ind-AS Ind-AS

2016 2017 2018 2019E 2020E 2021E

Growth in key parameters (%)

Loans under management 23.1 8.2 21.0 18.2 17.4 17.6

Total assets 14.6 9.5 18.9 41.2 19.7 20.9

Borrowings 12.4 6.7 19.2 42.3 19.4 20.9


Operating expenses 21.4 (6.1) 21.1 35.1 12.6 11.1

Key ratios(%)

NII/ AUMs(%) 7.7 7.3 7.7 7.7 7.3 7.2


Tax rate 33.5 34.6 33.9 34.0 34.0 35.0

Dividend payout ratio 19.3 18.0 15.9 14.0 14.0 15.0

Debt/ equity (X) 4.90 4.70 5.04 5.77 5.95 6.25

Du Pont Analysis

(% of average AUMs)



Net other income 0.1 0.1 0.3 0.1 0.1 0.1


(1- tax rate) 66.5 65.4 66.1 66.0 66.0 65.0

ROA 1.8 1.7 1.8 2.5 2.4 2.3

Average AUMs/average equity (X) 6.8 7.1 7.3 7.4 7.3 7.4

ROE 12.2 11.7 13.1 18.3 17.5 17.1



Exhibit14: Shriram Transport Finance - Income statement and balance sheet March fiscal year-ends, 2016-2021E (` mn)


IGAAP IGAAP IGAAP Ind-AS Ind-AS Ind-AS

2016 2017 2018 2019E 2020E 2020E

Income statement




Provisions and write/off 20,586 24,443 31,221 21,656 23,697 27,924

Net interest income (after prov.) 30,142 30,769 36,124 58,032 66,123 75,086

Other income 666 758 2,479 1,130 1,164 1,199



Depreciation 363 339 361 431 514 537

Advt and commission/brokerage 320 352 440 484 532 586

Sourcing and collection commission 30 30 30 30 30 30

Other expenses 6,485 6,084 6,900 9,660 10,143 10,650

Pretax income 17,719 19,239 23,718 39,059 44,655 51,135

Tax provisions 5,937 6,666 8,038 13,280 15,183 17,897

Net Profit 11,782 12,573 15,680 25,779 29,472 33,238

% growth (5) 7 25 64 14 13

EPS (Rs) 52 55 69 114 130 146

% growth (5) 7 25 64 14 13

BPS (Rs) 448 498 554 688 796 796

ABVPS (Rs) 430 473 521 640 749 749

Balance sheet

Total Loans 618,784 654,629 796,729 1,126,670 1,323,262 1,556,416

Investments 80 80 80 80 80 80

Cash & deposits 23,639 44,407 36,375 42,170 47,474 54,480

Loans and advances 19,561 25,113 31,315 53,236 90,500 153,851

Net fixed assets 1,011 838 1,200 2,145 2,011 1,569

Total assets 679,633 744,203 884,704 1,249,031 1,495,501 1,808,245

Total Borrowings 497,900 531,300 633,200 900,973 1,075,372 1,299,911

Current liabilities 51,764 60,942 67,016 112,667 132,326 155,642

Provisions 28,427 38,939 58,764 79,332 107,098 144,582

Total liabilities 578,092 631,181 758,981 1,092,971 1,314,797 1,600,135

Share capital 2,231 2,231 2,231 2,231 2,231 2,231

Reserves 99,272 110,753 123,454 153,791 178,435 205,841

Shareholders fund 101,541 113,022 125,723 156,060 180,705 208,110

Truck AUM 727,606 787,609 953,063 1,126,670 1,323,262 1,556,416


1QFY19—modest volume growth; tight leash on cost drives EBITDA outperformance

CLGT reported 7% yoy growth in revenues to `10.34 bn, 1% below our estimate; 2-year CAGR

stood at 1%. Volume growth at 4% was in line with our expectations but weak in view of a

low base (-5%). Price/mix contribution was 100 bps short of our expectation. GM expanded

255 bps yoy to 65.9% (KIE: 65.8%). EBITDA of `2.82 bn, +27% yoy, was 8% ahead of our

expectations on account of lower-than-expected ad spends (flat yoy), staff costs (up only 3%

yoy), and other expenses (up only 2% yoy). Even after factoring GST-led savings in input costs,

increase in costs was fairly muted. EBITDA margin expanded a sharp 436 bps yoy to 27%, 241

bps ahead of our estimate. Recurring PAT grew 30% yoy to `1.67 bn, 10% ahead of

expectation. Recurring EPS stood at `6.1/share.

Turnaround calls for some aggression, a sense of urgency and perhaps a change in mindset

Per Nielsen data, CLGT’s market share declined 100 bps sequentially to 52.4% in June 2018

quarter. While this does not perturb us (Nielsen trends catching up with reality with lag, in our

view), we are a tad disappointed with the progress CLGT is making in its journey of market

share defense and recovery. That Patanjali is either losing steam or just about holding fort is a

positive. Dabur and HUVR are witnessing pickup in oral care portfolio. We believe CLGT has all

ingredients (strong brand equity and distribution) to bounce back. A sense of urgency,

willingness to experiment (more nimble and agile product development) and aggression can go

a long way in market share recovery. To start with, we believe the company needs to stop

calling 4% volume growth on (-)5% base ‘solid’! It is not.

At attractive valuations relative to the sector, CLGT is a decent bet even though it may take time

We tweak our forecasts—reduce topline, raise margins and largely maintain estimates. At 34X

FY2020E, CLGT is among the most inexpensive stocks in our consumer coverage. We do believe

the company would need to show improved volume trajectory for the relatively inexpensive

valuations to become a trigger for stock performance. Even as the current visibility on market

share recovery is poor, we remain believers. Retain ADD with a revised DCF-based fair value

target of `1,250/share (`1,300 earlier).

Colgate-Palmolive (India) (CLGT) Consumer Products

Not out of the woods yet. CLGT reported modest 4% volume growth on a weak

base (-5%). Even as Patanjali is not gaining incremental market share anymore, CLGT is

not wresting back any of the lost share. Earnings came ahead of expectations led by

tight leash on costs including A&SP spends; we would rather prefer CLGT sacrifice

margins for market share recovery. For a company with stellar brand equity, CLGT’s

response to competition has been uninspiring. Strong brand equity and inexpensive

valuations (relative) underpin our positive stance. TP revised to `1,250 (from `1,300).

ADD

JULY 27, 2018

RESULT


Price (`): 1,085


BSE-30: 36,985

Rohit Chordia

Jaykumar Doshi

Aniket Sethi

Colgate-Palmolive (India)







MFs 5.0 EBITDA (Rs bn) 11.1 12.7 14.4


Absolute (8.8) (0.8) 2.7 ROE (%) 46.2 48.8 52.2



1,270-1,006

295.1

Colgate-Palmolive (India) Consumer Products


Exhibit 1: Interim results of Colgate Palmolive India (as per Ind-AS), March fiscal year-end (Rs mn)


Exhibit 2: Key changes to estimates (as per Ind-AS), Colgate, March fiscal year-ends, 2019-21E


2-Year

1QFY19 1QFY19E 1QFY18 4QFY18 KIE Est yoy qoq FY2019E FY2018 (% chg) 1QFY17 CAGR (%)

Net sales 10,336 10,470 9,694 10,851 (1) 7 (5) 44,973 41,594 8 10,056 1

Other operating income 78 92 87 66 (16) (11) 17 285 285 0 76

Net operating revenues 10,413 10,562 9,781 10,917 (1) 6 (5) 45,258 41,880 8 10,131 1

Material cost (3,550) (3,617) (3,584) (3,750) (2) (1) (5) (15,632) (14,901) 5 (3,818)

Gross profit 6,863 6,944 6,197 7,167 (1) 11 (4) 29,626 26,979 10 6,314 4

Gross margin (%) 65.9 65.8 63.4 65.7 16 bps 255 bps 25 bps 65.5 64.4 104 bps 62.32

Total expenditure (4,048) (4,344) (3,979) (4,092) (7) 2 (1) (16,945) (15,855) 7 (4,197)

Staff cost (749) (774) (727) (758) (3) 3 (1) (3,216) (3,059) 5 (739)

Advertising & sales promotion (1,435) (1,606) (1,434) (1,436) (11) 0 (0) (5,838) (5,268) 11 (1,556)

Other expenditure (1,863) (1,964) (1,818) (1,898) (5) 2 (2) (7,892) (7,528) 5 (1,901)

EBITDA 2,816 2,601 2,218 3,075 8 27 (8) 12,681 11,124 14 2,117 15

OPM (%) 27.0 24.6 22.7 28.2 241 bps 436 bps -113 bps 28.0 26.6 145 bps 20.90

Other income 92 140 125 85 (35) (26) 8 425 388 9 96

Depreciation (394) (415) (373) (405) (5) 6 (3) (1,694) (1,565) 8 (316)

Pretax profits 2,514 2,326 1,970 2,755 8 28 (9) 11,411 9,947 15 1,897 15

Tax (844) (814) (684) (967) 4 23 (13) (3,994) (3,480) 15 (640)

Recurring net income 1,670 1,512 1,286 1,788 10 30 (7) 7,417 6,467 15 1,257 15

Extraordinaries 225 — 78 100 229 267 -

Reported profits 1,895 1,512 1,364 1,888 25 39 0 7,646 6,734 14 1,257

Income tax rate (%) 30.8 35.0 33.4 33.9 -420 bps -260 bps -308 bps 34.3 34.1 24 bps 33.73

Recurring EPS (Rs/share) 6.1 5.6 4.7 6.6 10 30 (7) 27.3 23.8 15 5

Cost as a % of Net op revenues

Material cost 34.1 34.3 36.6 34.3 -17 bps -256 bps -26 bps 34.5 35.6 -105 bps 37.68

Staff cost 7.2 7.3 7.4 6.9 -14 bps -24 bps 24 bps 7.1 7.3 -20 bps 7.30

Advertising & sales promotion 13.8 15.2 14.7 13.1 -142 bps -88 bps 63 bps 12.9 12.6 32 bps 15.36

Other expenditure 17.9 18.6 18.6 17.4 -70 bps -70 bps 50 bps 17.4 18.0 -54 bps 18.77

(% chg)

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

Net operating revenues (Rs mn) 45,258 51,067 57,239 45,674 51,828 58,427 (0.9) (1.5) (2.0)

EBITDA (Rs mn) 12,681 14,448 16,464 12,517 14,450 16,477 1.3 (0.0) (0.1)

EBITDA margin (%) 28.0 28.3 28.8 27.4 27.9 28.2

Net income (Rs mn) 7,417 8,573 9,902 7,311 8,559 9,904 1.5 0.2 (0.0)

EPS (Rs/share) 27.3 31.5 36.4 26.9 31.5 36.4 1.5 0.2 (0.0)


Consumer Products Colgate-Palmolive (India)


Exhibit 3: Overall volumes up 4% yoy despite a low base Quarterly overall volume growth trend (%)

Source: Company

Exhibit 4: Toothpaste market share down 100 bps qoq Quarterly toothpaste market share trend (%)


Exhibit 5: Toothbrush market share down 20 bps qoq as well Quarterly toothbrushes market share trend (%)


5 7

5 5 3 3

1 3

5 4

(11)

(3) (5)

(1)

12

4 4

(16)

(12)

(8)

(4)

-

4

8

12

16

Jun-1

4

Sep-1

4

Dec

-14

Mar-

15

Jun-1

5

Sep-1

5

Dec

-15

Mar-

16

Jun-1

6

Sep-1

6

Dec

-16

Mar-

17

Jun-1

7

Sep-1

7

Dec

-17

Mar-

18

Jun-1

8

5757 57

58 58 5857

55

5656

5555

5454

5453

52

52

53

54

55

56

57

58

Jun-1

4

Sep-1

4

Dec

-14

Mar-

15

Jun-1

5

Sep-1

5

Dec

-15

Mar-

16

Jun-1

6

Sep-1

6

Dec

-16

Mar-

17

Jun-1

7

Sep-1

7

Dec

-17

Mar-

18

Jun-1

8

43 42 42

43

43 44

46

47 47 47

47

45 46

45 45 45

40

41

42

43

44

45

46

47

48

Sep-1

4

Dec

-14

Mar-

15

Jun-1

5

Sep-1

5

Dec

-15

Mar-

16

Jun-1

6

Sep-1

6

Dec

-16

Mar-

17

Jun-1

7

Sep-1

7

Dec

-17

Mar-

18

Jun-1

8

Colgate-Palmolive (India) Consumer Products


Exhibit 6: Colgate: Profit model, balance sheet and cash flow (based on Ind-AS), 2015-2021E, March fiscal year-ends (Rs mn)


2014 2015 2016 2017 2018 2019E 2020E 2021E

Profit model

Net sales 35,449 39,548 38,381 39,515 41,594 44,973 50,753 56,894

Other operating income 339 272 301 304 285 285 314 345

Net operating revenues 35,788 39,819 38,682 39,818 41,880 45,258 51,067 57,239

EBITDA 6,640 8,222 9,385 9,435 11,124 12,681 14,448 16,464

Other income 503 332 395 411 388 425 573 802

Interest — — — — — — — —

Depreciation (508) (750) (1,114) (1,332) (1,565) (1,694) (1,831) (2,032)

Pretax profits 6,636 7,804 8,666 8,514 9,947 11,411 13,190 15,234

Tax (1,730) (2,214) (2,541) (2,902) (3,480) (3,994) (4,616) (5,332)

PAT 4,906 5,590 6,125 5,613 6,467 7,417 8,573 9,902

Extraordinary items 492 — (313) 162 267 229— — —

Reported Net profit 5,399 5,590 5,812 5,774 6,734 7,646 8,573 9,902

Earnings per share (Rs) 18.0 20.6 22.5 20.6 23.8 27.3 31.5 36.4

Balance sheet

Total equity 5,999 7,703 10,310 12,738 15,246 15,134 17,733 20,434

Total borrowings — — — — — — — —

Deferred tax liabilities (net) (178) 26 97 275 355 355 355 355

Total liabilities and equity 5,821 7,729 10,407 13,013 15,601 15,489 18,088 20,789

Net fixed assets (Incl CWIP) 6,974 9,228 10,865 12,747 13,045 12,546 12,787 12,945

Investments 371 371 312 312 312 312 312 312

Cash 2,870 2,545 2,887 2,943 4,562 5,433 8,198 11,187

Net current assets (excl cash) (4,394) (4,414) (3,656) (2,989) (2,317) (2,573) (2,980) (3,426)

Total assets 5,821 7,729 10,407 13,013 15,601 15,718 18,317 21,017

Free cash flow

Operating cash flow (excl working capital) 4,937 6,333 6,732 6,569 7,828 8,915 9,832 11,132

Working capital (363) 49 156 311 (889) 256 407 446

Capital expenditure (3,235) (2,994) (2,713) (3,212) (2,087) (1,195) (2,072) (2,190)

Free cash flow 1,339 3,387 4,175 3,668 4,852 7,976 8,167 9,388

Key assumptions, growth (%)

Net operating revenue growth 13.1 11.3 NM 2.9 5.2 8.1 12.8 12.1

EBITDA growth 1.1 23.8 14.1 0.5 17.9 14.0 13.9 13.9

EPS growth (1.2) 13.9 9.6 (8.4) 15.2 14.7 15.6 15.5

EBITDA margin (%) 18.6 20.6 24.3 23.7 26.6 28.0 28.3 28.8

Gross margin (%) 60.8 63.1 61.8 62.9 64.4 65.5 65.1 65.3

A&SP (% of sales) 19.2 17.9 11.6 12.9 12.6 12.9 12.8 12.8

Tax rate (% of PBT) 26.1 28.4 29.3 34.1 35.0 35.0 35.0 35.0

Ratios (%)

ROE (%) 90.1 81.6 68.0 48.7 46.2 48.8 52.2 51.9

ROCE (%) 110.4 103.6 87.3 67.9 65.7 69.2 73.1 72.4

IGAAP Ind-AS


Coal continues to drive consolidated earnings, sequential drop in losses at Mundra

Tata Power’s consolidated earnings were aided by contribution from coal companies at Rs2.8

bn (-12% yoy) offset by losses of Rs4.3 bn at Mundra (Rs4.8 bn in 4QFY18) that were

sequentially lower on account of lagged indexation of tariffs. Lower other income and a rise in

interest cost (Rs1 bn of MTM losses) as well as lower-than-estimated improvement in coal

earnings led to the miss against estimates for consolidated earnings. Reported profits of Rs16.7

bn include profit of Rs19 bn (Rs15 bn on post-tax basis) from the sale of ownership in Tata

Communications and Panatone Finvest for a consideration of Rs21.5 bn.

Earnings for the quarter would have been better, but for the introduction of a new law in

Indonesia, which requires a 25% domestic sales commitment at capped coal prices.

Management estimates the impact of such a law at US$20 mn (Rs0.5/share) for the current

fiscal, though we highlight that DMO partially curtails the upside from coal prices as part of the

volumes are to be sold at capped prices.

Standalone earnings largely stable, lower unit sales impacted earnings

Tata Power reported standalone revenues of Rs18.4 bn (KIE Rs19.5 bn) and PAT of Rs2.3 bn

(KIE Rs2 bn). Revenue miss was offset by lower fuel cost, as generation for the standalone

business dropped 8% yoy to 3 BU (KIE 3.3 BU). Lower ETR at 13% offset led to the beat at PAT

level. Reported profits of Rs11.3 bn includes profits of Rs12 bn from the sale of telecom assets,

offset by Rs2.8 bn of taxes against the same.

Monetization of non-core investments, coal earnings help offset losses at Mundra

Monetization of non-core investments could yield as much as Rs28/share in cash, while the rise

in prices of imported coal, currently at US$102/ton is well above our sustainable coal price

assumption of US$80/ton and closer to the DMO committed price. While our current coal price

assumption at US$80/ton partly factors the impact of the new DMO, we do concede near-term

weakness on the stock as the potential upside from rising prices of coal is partially capped.

Earnings revision of 4.7 % in FY2019 and 3% in FY2020 is driven by capacity addition of 100

MW in the renewable portfolio. Maintain BUY rating with unchanged price target of

Rs90/share.

Tata Power (TPWR) Utilities

Coal earnings clipped by DMO. Rising prices of imported coal continued to aid Tata

Power’s consolidated earnings, although the domestic market obligation took some

sheen off earnings. Lagged indexation of tariffs helped to sequentially bring down

losses at Mundra to Rs4.3 bn (Rs4.8 bn in 4QFY18). Stable earnings from the regulated

business, coupled with improving contribution from coal and monetization of non-core

investments lead to our positive stance on Tata Power. BUY with PT of Rs90/share.

BUY

JULY 27, 2018

RESULT


Price (`): 71


BSE-30: 36,985

Murtuza Arsiwalla

Samrat Verma

Tata Power



Market Cap. (Rs bn) EPS growth (%) (9.6) 12.7 15.6




MFs 5.4 EBITDA (Rs bn) 59.5 56.2 54.7


Absolute (5.7) (17.7) (14.2) ROE (%) 10.7 10.1 10.6



102-67

191.6

Tata Power Utilities


Exhibit 1: Higher contribution from coal was offset by losses at Mundra Interim results for Tata Power (consolidated) , March fiscal year-ends (Rs mn)


Mundra UMPP—rising cost though six-monthly indexation of tariffs help

Mundra UMPP saw 12% yoy increase in the cost of production at Rs2.5/kwh (+9% qoq) due

to rising cost of imported coal. Fuel cost would have been higher but for discounts available

on spot-shipments. Revenues for the quarter were higher due to (1) higher plant availability

of 68% leading to an 11% yoy increase in generation to 5,908 MUs (2) change in

accounting standard to INDAS-115 and, (3) recognition of Rs700 mn on account of

differential capacity. Higher interest cost (+63% yoy) due to MTM losses of Rs980 mn on

account of currency depreciation and forex loss of Rs450 mn in 1QFY19 resulted in net loss

of Rs4.32 bn in 1QFY19 (Rs4.9 bn in 4QFY18 and Rs4.3 bn in 1QFY18).

Maithon—stable operational performance

Maithon reported revenues of Rs6.46 bn, an increase of 4% yoy due to 4% yoy increase in

realizations to Rs3.5/unit (Rs3.4/unit in 1QFY18) though sales for the quarter remained flat

at 1,842 MU. Increase in fuel cost led to an increase in the cost of production to Rs2.5/unit

(Rs2.2/unit in 1QFY18) resulting in a decline in EBITDA to Rs1.85 bn (-11% yoy). Interest

costs were lower at Rs480 mn due to refinancing of debt (Rs520 mn in 1QFY18). Regulated

equity for Maithon plant stands at Rs13.9 bn as of 1QFY19.

Coal—improved earnings, though DMO obligation curtails upside

Coal business was impacted by Domestic Market Obligation (DMO) regulation wherein 25%

of the output is reserved for domestic consumption (applicable till CY2019). This resulted in

contribution from the coal business declining to Rs2.46 bn in 1QFY19 compared to Rs3 bn

in 4QFY18. Besides this, the increase in production cost due to higher O&M and fuel prices

resulted in EBITDA declining 6% yoy to Rs6 bn (Rs6.4 bn in 1QFY18). Gross profit margins

declined 13% yoy to US$20/ton, though management highlighted higher cost of production

during the quarter at US$36/ton (US$33/ton in 1QFY18) that will likely moderate in

subsequent quarters.

Renewable—capacity addition continues to aid earnings improvement

TPREL added capacity of 301 MW in FY2018 taking its total renewable portfolio to 724 MW

from 423 MW. Subsequently, contribution increased to Rs 710 mn in 1QFY19 from 56 mn

in 1QFY18. Capacities at Walwhan reported net income of Rs1 bn (Rs 600 mn in 1QFY18).

The shareholders of TPWR have approved the transfer of 500 MW to Tata Power Renewable

Energy Ltd, and is awaiting necessary regulatory approvals.

(%

1QFY19 1QFY19E 1QFY18 4QFY18 vs est. yoy qoq FY2019E FY2018 (% chg.)

Net sales 71,386 82,100 67,249 78,527 (13) 6 (9) 309,310 289,214 7

Employee cost (3,341) (3,502) (3,335) (3,473) (14,510) (13,819)

Cost of power purchased (17,283) (19,696) (18,954) (18,478) (99,106) (80,042)

Cost of fuel (25,578) (22,165) (21,258) (28,637) (104,404) (100,099)

Cost of raw material and components (3,358) (230) (1,492) (5,608)

Other expenditure (5,867) (20,634) (6,336) (7,879) (35,091) (35,782)

EBITDA 15,960 15,874 15,874 14,453 1 1 10 56,198 59,471 (6)

Depreciation (6,006) (6,262) (5,857) (6,454) (24,884) (23,981)

EBIT 9,954 9,612 10,017 7,999 31,314 35,490

Other income 898 1,104 313 641 4,344 4,327

Net interest (10,130) (9,407) (9,286) (8,975) (33,921) (37,230)

PBT 722 1,309 1,044 (335) (45) (31) (316) 1,737 2,587 (33)

Tax (1,553) (523) (2,630) 965 (5,539) (1,643)

Minority interest and share of associates 3,047 4,363 3,224 2,085 20,094 13,514

Net profit 2,216 5,148 1,638 2,714 (57) 35 (18) 16,293 14,458 13

Extraordinary 14,493 0 0 11,323 14,493 10,308

Reported profit 16,709 5,148 1,638 14,037 225 920 19 30,786 24,766 24

EPS (Rs/share) 1 1.9 0.6 1.0 6.0 5.3

EBITDA margin (%) 22 19 24 18 18 21

Effective tax rate (%) 215 40 252 288 319 64

(% Chg.)

Utilities Tata Power


Exhibit 2: Losses at Mundra were contained due to contribution from coal, as well as six-monthly indexation of tariffs Subsidiary-wise key financial and operational metrics (Rs mn)


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

Tata Power (Standalone)

Net sales 18,440 19,156 18,356 (4) 0 71,044 73,006 (3)

EBITDA 5,720 5,920 5,866 (3) (2) 20,412 23,581 (13)

PAT 2,374 1,882 5,041 26 (53) 7,248 13,586 (47)

Regulated equity 37,930 37,830 39,270 0 (3) 38,589 37,647 3

Tata Power Delhi Distribution

Net sales 20,280 17,450 14,210 16 43 68,502 69,297 (1)

EBITDA 2,690 2,700 2,730 (0) (1) 7,044 10,097 (30)

PAT 940 840 1,070 12 (12) 1,240 3,435 (64)

Regulated equity 13,480 12,130 12,720 11 6 13,620 12,720 7

Coastal Gujarat Power Ltd (Mundra UMPP)

Net sales 15,530 11,660 18,970 33 (18) 69,484 63,568 9

EBITDA 180 (940) (1,040) (119) (117) 3,731 (987) (478)

PAT (4,320) (4,310) (4,890) 0 (12) (8,182) (17,213) (52)

Sales (MU) 5,434 4,876 7,190 11 (24) 25,176 24,582 2

Realization (Rs/kwh) 2.7 2.4 2.6 13 4 2.8 2.5 10

Cost of Production (Rs/kwh) 2.4 2.6 2.7 (7) (13) 2.6 2.5 3

EBITDA incl. other income (Rs/kwh) 0.0 (0.2) (0.1) (117) (123) 0.1 (0.0) (469)

Maithon Power Ltd

Net sales 6,460 6,200 6,320 4 2 24,085 22,704 6

EBITDA 1,850 2,080 1,830 (11) 1 7,264 6,451 13

PAT 630 760 760 (17) (17) 2,589 1,817 43

Sales (MU) 1,842 1,842 1,920 - (4) 6,985 6,985 -

Realization (Rs/kwh) 3.5 3.4 3.3 4 7 3.4 3.3 6

Cost of Production (Rs/kwh) 2.5 2.2 2.3 12 7 2.4 2.3 3

EBITDA (Rs/kwh) 1.0 1.1 1.0 (11) 5 1.0 0.9 13

Coal

KPC

Volumes (mn tons) 14 14 14 (4) 3 58 57 2

Realizations (US$/ton) 65 64 71 1 (8) 75 68 10

COGS (US$/ton) 36 33 36 10 (1) 38 35 10

Gross profit (US$/ton) 20 23 24 (13) (19) 27 25 7

Coal companies

Net sales 20,050 19,710 20,380 2 (2) 91,019 83,310 9

EBITDA 5,380 5,670 6,580 (5) (18) 34,121 25,930 32

PAT 2,460 2,810 3,050 (12) (19) 16,815 12,340 36

Coal + Infra

Net sales 20,760 20,410 21,100 2 (2) 94,119 86,410 9

EBITDA 6,010 6,360 7,270 (6) (17) 37,081 28,890 28

PAT 2,830 3,240 3,490 (13) (19) 18,715 14,230 32

TPREL

Capacity (MW) 724 423 624 71 16 724 624 16

Generation (MU) 365 236 227 55 61 1,205 847 42

Tariff (Rs/kwh) 5.4 6.2 5.7 (13) (5) 6.3 6.0 5

Net sales 1,780 1,420 1,270 25 40 7,628 4,944 54

EBITDA 1,610 1,290 1,140 25 41 6,977 4,409 58

PAT 710 580 560 22 27 3,399 2,014 69

WREL

Capacity (MW) 1,153 1,153 1,153 - - 1,153 1,153 -

Generation (MU) 491 469 440 5 12 1,717 1,688 2

Tariff (Rs/kwh) 7.1 7.1 7.1 (0) (1) 7.0 7.0 0

Net sales 3,470 3,320 3,130 5 11 12,069 11,865 2

EBITDA 3,240 3,100 2,750 5 18 10,981 10,829 1

PAT 1,010 570 350 77 189 2,669 2,325 15

(% Chg.)

Tata Power Utilities


Exhibit 3: Lower tax rate boosted standalone earnings Interim results for Tata Power (standalone), March fiscal year-ends (Rs mn)


Exhibit 4: Tata Power sum-of-the-parts valuation


Exhibit 5: Change in estimates for Tata Power, March fiscal year-ends, 2019-20E (Rs mn)


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

Net sales 18,440 19,555 19,156 18,356 (6) (4) 0 71,044 73,006 (3)

Cost of electrical energy purchased (1,491) (838) (1,468) (821) (3,193) (4,121)

Cost of fuel (7,349) (7,916) (6,606) (6,650) (29,325) (27,764)

Personnel costs, other expenses and provisions (3,880) (4,844) (5,162) (5,020) (18,115) (17,541)

Total expenses (12,720) (13,598) (13,236) (12,490) (50,633) (49,425)

EBITDA 5,720 5,957 5,920 5,866 (4) (3) (2) 20,412 23,581 (13)

Depreciation (1,571) (1,873) (1,632) (1,887) (6,798) (6,632)

EBIT 6,178 6,376 6,200 6,691 23,781 26,242

Other income 2,029 2,291 1,912 2,712 10,167 9,293

Net interest (3,441) (3,379) (3,427) (3,327) (14,116) (14,314)

PBT 2,738 2,997 2,773 3,364 (9) (1) (19) 9,665 11,928 (19)

Tax (363) (899) (891) 1,677 (2,416) 1,658

Net profit 2,374 2,098 1,882 5,041 13 26 (53) 7,248 13,586 (47)

Extraordinary 8,963 — — (44,433) 8,963 45,091

Reported PAT after statutory appropriation 11,338 2,098 1,882 (39,391) 440 502 (129) 16,212 58,678 (72)

EPS (Rs/share) 0.9 0.8 0.7 1.9 2.7 5.0

EBITDA margin (%) 31 30 31 32 29 32

Effective tax rate (%) 13 30 32 (50) 25 (14)

Key operating parameters

Units generated (MU) 3,034 3,288 3,287 2,891 (8) (8) 5 12,391 12,237 1

Units sold (MU) 3,205 3,556 3,431 2,826 (10) (7) 13 14,454 12,258 18

Per unit price realization (Rs) 6.4 5.5 5.2 6.4 NM 21 0 0.0 5.8 (100)

Fuel cost per unit sold (Rs) 2.8 2.7 2.3 2.6 4 24 6 2.7 2.6 4

(% Chg.)

Multiple Ownership Value

Methodology (X) (%) (Rs mn) (Rs/share)

Mumbai Distribution P/B 1.5 100 59,102 22

Delhi Distribution P/B 1.5 51 10,962 4

Tala Transmission DCF 51 2,178 1

Mundra Generation DCF 100 (98,783) (37)

Maithon Generation DCF 74 8,818 3

IEL Generation DCF 74 8,289 3

Renewable Generation EV/EBITDA 8 100 9,281 3

Coal Coal EV/EBITDA 5 30 129,574 48

Solar Equipment EV/EBITDA 6 100 14,897 6

Investments 99,976 37

Total 244,294 90

Revised estimates Old estimates Change (%)

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

Revenues 309,310 318,668 330,756 308,256 317,614 329,702 0.3 0.3 0.3

EBITDA 56,198 54,663 56,677 55,144 53,609 55,624 1.9 2.0 1.9

Net profit 16,293 18,836 29,574 15,564 18,288 28,805 4.7 3.0 2.7

Utilities Tata Power


Exhibit 6: Tata Power: Profit model, balance sheet, cash model (consolidated), March fiscal year-ends, 2016-21E (Rs mn)


2016 2017 2018 2019E 2020E 2021E


Net sales 285,257 272,883 289,214 309,310 318,668 330,756

EBITDA 61,718 52,372 59,471 56,198 54,663 56,677

Other income 913 2,022 4,327 4,344 9,835 18,184

Interest (32,358) (31,140) (37,230) (33,921) (33,460) (32,278)

Depreciation (16,487) (19,886) (23,981) (24,884) (25,781) (26,208)

Pretax profits 13,786 3,369 2,587 1,737 5,258 16,375

Tax (6,803) 458 (1,643) (5,539) (6,348) (7,388)

Minority interest & profit from associates 1,860 12,173 13,514 20,094 19,926 20,588

Net profits 8,842 16,000 14,458 16,293 18,836 29,574

Extraordinary items (978) (6,515) 10,308 14,493 — —

Earnings per share (Rs) 3.3 5.9 5.3 6.0 7.0 10.9


Total equity 116,334 117,795 152,602 168,895 187,731 217,305

Deferred taxation liability 27,772 24,158 5,166 5,166 5,166 5,166

Total borrowings 403,486 503,154 426,836 463,671 454,723 444,429

Currrent liabilities 135,507 157,567 232,616 223,689 229,047 236,339

Capital contribution from Consumers

Minority interest 17,498 18,690 20,153 20,153 20,153 20,153

Total liabilities and equity 700,597 821,364 837,373 881,574 896,819 923,392

Cash 6,632 9,543 11,858 62,253 93,074 135,885

Current assets 107,264 114,888 102,131 128,483 131,159 135,227

Total fixed assets 395,499 511,634 535,217 502,670 484,418 464,113

Investments 117,828 119,570 124,289 124,289 124,289 124,289

Deferred expenditure 73,375 65,729 63,878 63,878 63,878 63,878

Total assets 700,597 821,364 837,373 881,574 896,819 923,392

Key ratios

Net debt / equity (X) 3.0 3.6 2.4 2.1 1.7 1.3

ROE (%) 6.8 13.7 10.7 10.1 10.6 14.6


19% revenue growth from a low base with highest-ever EBITDA margins at 27.6%

Bayer reported 19% yoy growth in revenues to `8.3 bn in 1QFY19 from a low base, which was

impacted due to pre-GST channel destocking; 2-year CAGR remained modest at 1%. The

company indicated two-thirds of the revenue increase to growth in volumes and one-third to

pricing escalations. The management attributed strength in the domestic business to strong

channel demand in anticipation of a good monsoon and higher MSP for Kharif crops. EBITDA

doubled yoy to `2.3 bn, sharply ahead of our estimates, driven by surprising ~10% sequential

jump in gross margins to 52.6% despite rising input costs for the industry. Net income

increased modestly by 32% yoy to `1.5 bn (EPS of `42.9), partly offset by higher tax rate.

Near-term challenges to margins, even as revenue growth contingent on monsoon

The management expects challenges to remain in FY2019 due to (1) increasing raw material

cost for the industry, (2) limited ability to pass on further price increases in a competitive

environment, (3) high base of 2QFY19 and (4) delayed distribution of monsoon season so far.

We believe the weakness may get exacerbated for Bayer due to plausible down-trading by

farmers from premium products amid industry-wide price escalations. The company remains on

track to launch 9-10 new products during FY2019.

Raise estimates by 3-5%; retain REDUCE with revised TP of `4,100

We raise FY2020-21 EPS estimates for Bayer by ~3-5% to `130 and `154, respectively,

factoring in (1) modestly higher margins versus our earlier assumptions, (2) a slower growth in

revenues and (3) other minor changes; our FY2019 EPS remains unchanged at `106. We retain

REDUCE rating with a revised DCF-based TP of `4,100 (`4,000 earlier). Even as we believe in

Bayer’s ability to leverage its parent’s portfolio in launching new products in India, the

disappointing performance over the past few years raises concerns on (1) rising competition

from local players, who are making inroads with expansion of distribution network and (2) likely

down-trading by farmers to increasingly accessible low-cost products.

Bayer Cropscience (BYRCS) Others

Strong start; expensive valuations. Bayer started FY2019 on a strong note, with

revenues growing 19% yoy albeit from a low base and gross margins improving nearly

10% sequentially—a bit surprising amid rising input costs for the industry. We raise

FY2020-21 EPS estimates by 3-5% and DCF-based TP to `4,100 from `4,000, primarily

on roll-forward. We retain REDUCE rating noting expensive valuations at 34X FY2020E

EPS, which is adequately pricing in potential long-term growth.

REDUCE

JULY 27, 2018

RESULT

Coverage view:

Price (`): 4,459


BSE-30: 36,985

Tarun Lakhotia

Akshay Bhor

Bayer Cropscience







MFs 10.1 EBITDA (Rs bn) 4.1 5.5 6.6


Absolute (3.9) (4.1) (5.1) ROE (%) 15.7 18.9 20.0



4,800-3,685

176.1

Others Bayer Cropscience


Exhibit 1: Strong results boosted by robust demand in anticipation of good monsoons and crop prices Interim results of Bayer CropScience, March fiscal year-ends (Rs mn)


Exhibit 2: Bayer’s performance has remained weak as compared to peers in domestic business in the recent years Trend in revenues growth of major ag-chem companies, March fiscal year-ends (Rs mn)

Source: Companies, Kotak Institutional Equities

1QFY19 1QFY19E 1QFY18 4QFY18 est. yoy qoq FY2019E FY2018 Change (%)

Sales 8,318 7,678 6,980 3,002 8 19 177 31,254 27,099 15

Raw material cost (3,946) (4,292) (3,832) (1,714) (8) 3 130 (17,897) (16,006) 12

Employee cost (729) (705) (665) (689) 3 10 6 (2,887) (2,639) 9

Other expenses (1,345) (1,407) (1,327) (762) (4) 1 77 (5,013) (4,360) 15

EBITDA 2,298 1,275 1,156 (163) 80 99 NA 5,456 4,094 33

Other income/forex gain/(loss) 111 160 163 63 (31) (32) 76 486 388 25

Depreciation and amortization (87) (88) (80) (88) (1) 9 (1) (363) (331) 10

Interest cost (23) (25) (17) (22) (8) 35 5 (100) (113) (12)

Profit before tax 2,299 1,322 1,222 (210) 74 88 NA 5,479 4,038 36

Extraordinaries — — — — — —

Tax (net) (827) (264) (105) 81 213 688 NA (1,863) (1,037) 80

Net income 1,472 1,057 1,117 (129) 39 32 NA 3,616 3,001 21

Adjusted net income 1,472 1,057 1,117 (129) 39 32 NA 3,616 3,001 21

Adjusted EPS (Rs) 42.9 30.8 31.6 (3.8) 39 36 NA 105.5 87.6 21

Key ratios

Gross margins 52.6 44.1 45.1 42.9 846 bps 746 bps 966 bps 42.7 40.9 180 bps

EBITDA 27.6 16.6 16.6 (5.4) 17.5 15.1 235 bps

Tax rate 36.0 20.0 8.6 38.6 34.0 25.7

Change (%)

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

Revenues

Bayer CropScience 7,614 10,109 5,476 4,491 8,212 11,038 6,625 2,153 6,980 12,320 4,797 3,002 8,318

Dhanuka 1,804 2,702 2,060 1,744 2,003 3,124 2,118 1,571 2,080 3,480 2,215 1,851 NA

PI Industries (a) 3,080 2,650 1,570 1,930 2,989 2,290 1,635 1,743 2,560 2,588 1,700 1,870 NA

Rallis (a) 2,549 4,211 2,854 3,268 2,603 5,036 3,090 3,277 2,436 5,485 3,573 3,491 3,524

UPL (b) 10,550 7,622 4,618 4,069 10,602 9,090 5,583 4,340 11,180 9,970 6,140 4,600 NA

Gross margins (%)

Bayer CropScience 42.4 37.9 38.0 33.7 44.3 35.1 30.1 28.2 39.5 38.2 40.7 42.9 52.6

Dhanuka 34.9 39.9 38.1 43.6 38.8 42.4 44.6 49.7 37.6 41.0 43.3 45.1 NA

PI Industries 40.8 41.7 44.1 44.0 47.9 49.6 48.5 49.7 50.7 48.1 47.5 48.4 NA

Rallis (a) 40.2 45.2 44.7 40.1 40.0 39.5 47.4 42.9 41.9 38.9 42.2 42.8 33.4

UPL (b) 53.0 51.7 54.9 48.4 54.4 53.0 54.0 48.1 55.8 56.1 54.5 49.0 NA

EBITDA margins (%)

Bayer CropScience 19.2 22.1 8.1 4.6 22.9 21.5 6.9 (27.0) 16.6 23.3 4.7 (5.4) 27.6

Dhanuka 13.9 20.0 15.9 17.3 14.3 22.3 18.3 20.8 11.8 21.5 15.9 17.0 NA

PI Industries 21.5 17.5 20.0 11.3 22.5 18.5 21.0 16.3 20.5 19.5 18.5 15.3 NA

Rallis (a) 8.2 22.4 14.5 15.2 9.8 21.8 15.9 15.4 3.5 23.1 13.1 12.2 5.1

UPL (b) 19.0 17.2 16.9 19.9 19.9 17.6 19.1 21.1 20.1 19.1 19.8 21.4 NA

Notes:

(a) Data pertains to domestic agri business segment.

(b) Data pertains to standalone business, which includes revenues from contract manufacturing operations.

(c) Data pertains to global operations.

Bayer Cropscience Others


Exhibit 3: Bayer’s under-patent products portfolio has grown strongly over the past three years List of new products launched by Bayer CropScience in the past three years, March fiscal year-ends


Exhibit 4: Bayer trades at a significant premium to the domestic peers in ag-chem business Comparative valuation of global/domestic ag-chem companies, March fiscal year-ends, 2018-20E

Source: Bloomberg, Kotak Institutional Equities estimates

Exhibit 5: DCF-based TP of `4,100 DCF-based valuation of Bayer CropScience, March fiscal year-ends (Rs mn)


2000-06 2006-14 2016-17 2018-21E

Confidor (Imidacloprid) Fame (Fludendiamide) Alion (Indaziflam) 20 under-patent molecules

Folicure (Tebuconazole) Nativo (Trifloxystrobin) Council (Triafamone)

Sencor (Metribuzin) Oberon (Spiromesifen) Infinitio (Fluopicolide)

Spintor (Spinosad) Regent (Fipronil) Laudis (Tembotrione)

Luna (Fluopyram)

Movento (Spirotetramat)

Previcur (Propamocarb)

Profiler (Fluopicolide)

Sivanto (Fuoupyradifurone)

Price Market cap. P/E (X) EV/EBITDA (X)

(LC) (US$ mn) 2018 2019E 2020E 2018 2019E 2020E

Global companies

BASF SE 85 90,626 12.9 12.8 11.9 7.3 7.5 6.9

Bayer AG 95 102,975 14.8 15.0 12.0 10.1 10.9 8.8

Dow DuPont 68 157,013 20.8 16.2 13.7 11.4 9.4 8.3

FMC Corp. 88 11,874 33.2 14.4 13.0 23.6 11.0 9.8

Nufarm Ltd 7 1,728 15.9 22.6 13.8 8.1 10.2 7.0

Indian companies

Bayer CropScience 4,451 2,558 50.8 42.2 34.3 40.4 42.0 32.8

Dhanuka Agritech 533 381 20.7 19.1 16.5 15.4 15.2 13.1

PI Industries 770 1,545 29.0 23.2 18.8 19.1 21.3 16.8

Rallis India 188 532 21.8 18.6 15.6 13.1 13.5 12.2

UPL 638 4,724 14.9 13.6 12.0 11.9 10.3 8.9

Godrej Agrovet 655 1,830 56.9 40.7 32.7 30.0 29.2 22.5

2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2035E

Net revenues 31,254 36,804 43,345 51,056 58,714 67,521 77,649 89,297 98,227 108,049 118,854 130,740 178,285

EBIT 5,093 6,217 7,404 8,817 10,139 11,660 13,409 15,421 16,963 18,659 20,525 22,577 30,788

EBIT margin (%) 16.3 16.9 17.1 17.3 17.3 17.3 17.3 17.3 17.3 17.3 17.3 17.3 17.3

EBIT*(1-tax rate) 3,354 4,096 4,881 5,816 6,688 7,691 8,845 10,171 11,189 12,307 13,538 14,892 20,308

Depreciation / amortisation 363 411 466 530 610 701 807 887 976 1,073 1,181 1,299 1,771

(Inc)/Dec in working capital (37) (1,522) (2,105) (2,485) (2,268) (2,583) (3,159) (3,632) (2,785) (3,063) (3,370) (3,707) (3,344)

Capital expenditure (500) (575) (661) (760) (943) (1,084) (1,247) (1,434) (1,099) (1,209) (1,330) (1,675) (1,337)

Free cash flows 3,179 2,410 2,582 3,100 4,087 4,725 5,246 5,992 8,280 9,108 10,019 10,809 17,397

Year for discounting — 0.7 1.7 2.7 3.7 4.7 5.7 6.7 7.7 8.7 9.7 10.7 15.7

Discounted cash flow 3,179 2,252 2,181 2,366 2,819 2,945 2,955 3,050 3,809 3,786 3,764 3,669 3,559

WACC (%) 10.7 NPV calculation

Terminal growth rate 6.0 Sum of free cash flow 52,872

Capitalization rate (%) 4.7 Terminal value 80,948

Date 31-Jul-19 Enterprise value 133,821

Terminal value calculation Net debt (6,755)

Cash flow in terminal year 17,397 Net present value-equity 140,575

Terminal value 395,727 Shares o/s (mn) 34

Discounted terminal value 80,948 NPV /share (Rs) 4,101

Others Bayer Cropscience


Exhibit 6: Summary financials of Bayer CropScience Profit and loss model, balance sheet and cash flow statement, March fiscal year-ends, 2014-21E (Rs mn)


2014 2015 2016 2017 2018 2019E 2020E 2021E


Sales 32,452 37,233 27,690 28,028 27,099 31,254 36,804 43,345

EBITDA 4,193 5,155 4,346 4,136 4,094 5,456 6,627 7,870

Other income 909 879 817 701 388 486 637 695

Interest (48) (46) (100) (69) (113) (100) (110) (121)

Depreciation (646) (253) (247) (289) (331) (363) (411) (466)

Profit before tax 4,408 5,735 4,816 4,479 4,038 5,479 6,744 7,978

Tax expenses (1,513) (1,905) (1,665) (1,569) (1,037) (1,863) (2,293) (2,713)

Extraordinary items — — — — — — — —

Reported PAT 2,895 3,830 3,151 2,910 3,001 3,616 4,451 5,265

Adjusted PAT 2,895 3,830 3,151 2,910 3,001 3,616 4,451 5,265

Adjusted EPS-fully diluted (Rs) 75 105 89 82 88 106 130 154


Equity 17,423 20,329 18,394 20,567 17,783 20,534 23,921 27,927

Total borrowings — — — — — — — —

Other long term liabilities — — — 20 156 156 156 156

Current liabilities and provisions 6,446 7,402 5,974 7,667 7,409 8,335 9,883 11,377


Net fixed assets 4,446 3,224 3,072 3,354 3,403 3,540 3,704 3,899

Investments/other long-term assets 173 130 338 307 302 302 302 302

Cash & cash equivalent 4,865 11,558 7,996 8,887 4,178 6,755 8,454 10,161

Current assets 14,385 12,819 12,962 15,706 17,465 18,428 21,499 25,097

Total assets 23,869 27,731 24,368 28,254 25,348 29,025 33,960 39,459


Operating cash flow 2,782 3,675 2,938 3,082 3,462 3,593 4,335 5,158

Working capital changes (2,067) 1,829 (873) (1,509) (2,248) (37) (1,522) (2,105)

Capital expenditure (net) (1,592) 970 (369) (493) (419) (500) (575) (661)

Free cash flow (877) 6,474 1,696 1,080 795 3,056 2,237 2,392

Ratios (%)

EBITDA margin 12.9 13.8 15.7 14.8 15.1 17.5 18.0 18.2

Net debt/equity (X) (0.3) (0.6) (0.4) (0.4) (0.2) (0.3) (0.4) (0.4)

Book value (R/share) 452 555 520 582 519 599 698 815

Adjusted RoAE 16.6 18.8 17.1 14.1 16.9 17.6 18.6 18.9

Adjusted RoACE 16.2 34.2 23.4 19.5 20.0 23.4 25.4 26.4


Revenue growth 5% below estimates leading to miss in EBITDA/net profit

Crompton reported 1QFY19 net profit of `1.04 bn (+30% yoy), which was 7% below our

estimates due to lower-than-expected revenue growth and lower other income. Reported

revenues grew by 14.1% yoy (KIE: 19% yoy); revenue growth was driven partly by low base

of last year (revenues down 4% yoy in 1QFY18). Adjusted for accounting changes post GST,

2-year revenue CAGR was only around 8%. We note that Havells reported much stronger

performance with 14% two-year revenue CAGR for the ex-Lloyd business in 1QFY19.

In terms of segments, adjusted revenues grew by (1) 23% yoy in electric consumer durable

segment (2-year CAGR of only 6%) led by strong growth in both fans (aided by market share

gains) and pumps segments and (2) 9% yoy in lighting segment (2-year CAGR of 6%). Lower

growth in lighting segment was due to steep decline in non-LED segment revenues (down

30% yoy) and negligible EESL revenues in 1QFY19; ex-EESL revenues grew by 15-16% yoy.

EBITDA margin came in at 13.9% (+160 bps yoy and down 60 bps qoq), which was in line

with our estimates. In terms of segments, EBIT margin in lighting segment was weak at 6.7%

(+150 bps yoy but down 440 bps qoq) due to pricing pressures in non-LED segment while

EBIT margin in ECD segment was strong at 19.5% (+150 bps yoy but down 220 bps qoq).

A&P spend was `240 mn; the company expects A&P spend to be flat yoy in FY2019 at `1

bn, which is surprising given double-digit revenue growth target and entry into newer

segments.

Fine-tune earnings estimates; maintain SELL on expensive valuations

We have cut our FY2019-21E EPS estimates by around 1%. We expect the company to deliver

13% revenue CAGR over FY2018-21E, which will be driven by (1) 11% CAGR in existing

categories driven by high single-digit industry growth and market share gains for the company

led by continued strong growth in premium fans and LED segments and (2) 2% additional

CAGR due to entry into new segments (air coolers and water heaters), which implies `3 bn of

additional revenues from new areas by FY2021E (implies 5% increase in market share in target

segments). Maintain SELL; DCF-based TP revised to `215 (from `210) due to rollover to June

2019E.

Crompton Greaves Consumer (CROMPTON) Industrials

Revenue growth below estimates. Crompton’s 1QFY19 EBITDA/PAT was 4%/7%

below our estimates due to (1) lower-than-expected revenue growth and (2) lower

other income. Two-year revenue/EBITDA CAGR of 8%/3% in 1QFY19 was disappointing

and much below that of Havells. Slower industry growth in key segments (fans and

pumps), competitive pressures in pumps segment and weakness in appliances segment

are key reasons for the company’s underperformance compared to Havells, in our view.

Maintain SELL; TP revised to `215 (from `210) on rollover to June 2019E.

SELL

JULY 27, 2018

RESULT


Price (`): 240


BSE-30: 36,985

Nishit Jalan

Hitesh Goel

Crompton Greaves Consumer







MFs 10.7 EBITDA (Rs bn) 5.3 6.1 7.1


Absolute 7.6 4.7 17.1 ROE (%) 49.5 40.4 35.8

Rel. to BSE-30 3.3 (1.7) 2.5 Div. Yield (%) 0.6 0.8 1.0


295-203

150.6

Industrials Crompton Greaves Consumer


Key takeaways from conference call

We note that yoy reported revenue growth numbers are not strictly comparable as

1QFY18 numbers are inclusive of excise duty on traded goods in both revenue and RM

cost while for the current quarter, the company has reported revenues and RM cost net

of GST on traded goods (reported EBITDA is comparable on yoy basis though). Adjusted

for accounting changes post GST, the company’s revenues increased by 19.5% yoy in

1QFY19 (due to low base of last year); two-year revenue CAGR, however, was only 8%.

The company continues to work towards implementing its ‘Go To Market’ strategy (GTM)

across different segments and geographies. As per the management, this will strengthen

the company’s quality, coverage and technology backbone of the distribution network,

which augurs well from medium-term perspective although there would be some

negative impact on revenue growth in the near term. The company believes that around

75-80% of its businesses will be covered over the next 12-18 months.

In the ECD segment, revenue growth was driven by strong performance in both fans

(aided by market share gains) and pumps segments. Within fans category, post successful

launch of anti-dust fans, the company’s newly launched Air 360 fans have received

positive initial response from customers; these new fans are driving 10-11% of the

company’s category growth. Crompton continues to expand its presence in premium fans

category (priced above `2,200), which now accounts for 20% of segment revenues.

Volumes in the pumps segment grew by 30% yoy in 1QFY19; however, revenue growth

was possibly much lower as growth is coming from lower-end segment (Crest mini

brand).

Revenues from air coolers grew by 22% in 1QFY19 (on extremely low base) despite

adverse industry conditions. We note that the company had launched a new cooler on

pilot basis last quarter, which offers 60% more cooling than the leading player in the

market. It plans to launch the products on pan-India basis in the next season. The

management highlighted that it is ready with its innovative range of water heaters, which

will be launched in winter season this year. To recall, Crompton has identified water

heaters and coolers as the key focus areas to drive higher growth over the coming years.

The company is targeting to be a top three player in these segments over the medium

term. We assume `3 bn of additional revenues from these new segments by FY2021E.

In the lighting segment, LED revenues for the company grew by around 40% yoy; LEDs

now represent 78% of segmental revenues compared to less than 60% in 1QFY18.

However, strong growth in LED portfolio was offset by (1) steep 30% revenue decline in

non-LED segment due to lower demand and price erosion and (2) negligible EESL revenues

this quarter (`400 mn in 4QFY18); we note that EESL revenues tends to be lumpy and

depends on government orders. Even for Havells, EESL revenues were only `10 mn in

1QFY19 (`545 mn in 1QFY18). Margins in the lighting segment were impacted by share

pricing erosion and volume decline in non-LED segment; as per the management, gross

margin in LED portfolio was higher on yoy basis.

Crompton Greaves Consumer Industrials


Exhibit 1: 1QFY19 net profit was 7% below our estimates on lower-than-expected revenue growth Interim results of Crompton Greaves Consumer, March fiscal year-ends (` mn)


Exhibit 2: We have fine-tuned our FY2019-20E earnings estimates Earnings revision table of Crompton Greaves Consumer, March fiscal year-ends, 2019-21E (` mn, %)


1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 FY2019E FY2018 Yoy (%)

Net revenues 12,039 12,612 10,555 11,263 (4.5) 14.1 6.9 45,753 40,797 12.1

Total expenditure (10,366) (10,863) (9,261) (9,618) (4.6) 11.9 7.8 (39,633) (35,486)

Material consumed (8,143) (8,655) (7,329) (7,704) (5.9) 11.1 5.7 (31,249) (27,996)

Employee expenses (718) (750) (686) (700) (4.2) 4.8 2.7 (2,892) (2,827)

Other expenses (1,505) (1,458) (1,246) (1,215) 3.2 20.8 23.9 (5,491) (4,664)

EBITDA 1,673 1,749 1,294 1,645 (4.4) 29.3 1.7 6,120 5,311 15.2

Margins (%) 13.9 13.9 12.3 14.6 13.4 13.0

Other income 88 115 97 109 (23) (9) (19) 460 308

Depreciation (31) (32) (32) (31) (3.1) (1.6) 0.6 (133) (126)

EBIT (including other income) 1,730 1,832 1,359 1,723 (5.6) 27.3 0.4 6,448 5,492 17.4

Margins (%) 14.4 14.5 12.9 15.3 14.1 13.5

Interest expenses (152) (155) (161) (161) (1.9) (5.8) (5.4) (599) (637)

PBT 1,578 1,677 1,198 1,562 (5.9) 31.7 1.0 5,849 4,855

Extraordinaries — — — — — —

Reported PBT 1,578 1,677 1,198 1,562 (5.9) 31.7 1.0 5,849 4,855

Tax (535) (553) (395) (530) (3.3) 35.4 1.0 (1,948) (1,617)

Tax rate (%) 33.9 33.0 33.0 33.9 33.3 33.3

Reported PAT 1,043 1,123 803 1,032 (7.2) 29.9 1.0 3,902 3,238

Adjusted PAT 1,043 1,123 803 1,032 (7.2) 29.9 1.0 3,902 3,238 20.5

Number of shares (mn) 627 627 627 627 632 632

Adjusted EPS (Rs) 1.7 1.8 1.3 1.6 (7.2) 29.9 1.0 6.2 5.1 20.5

Key ratios (%)

RM as % of sales 67.6 68.6 69.4 68.4 68.3 68.6

Employee cost as % of sales 6.0 5.9 6.5 6.2 6.3 6.9

Other expenditure as % of sales 12.5 11.6 11.8 10.8 12.0 11.4

Effective tax rate 33.9 33.0 33.0 33.9 33.3 33.3

Segmental

Revenues

Lighting products 2,791 3,166 2,683 3,379 (11.9) 4.0 (17.4) 14,230 12,705 12.0

Electric consumer durables 9,248 9,446 7,871 7,884 (2.1) 17.5 17.3 31,524 28,092 12.2

Total 12,039 12,612 10,555 11,263 (4.5) 14.1 6.9 45,753 40,797 12.1

EBIT

Lighting products 188 380 220 374 (50.6) (14.9) (49.9)

Electric consumer durables 1,802 1,842 1,414 1,711 (2.2) 27.4 5.3

Unallocables (259) (390) (275) (362) (33.5) (5.6) (28.3)

Total EBIT 1,730 1,832 1,359 1,723 (5.6) 27.3 0.4 6,448 5,492 17.4

EBIT margins (%)

Lighting products 6.7 12.0 8.2 11.1

Electric consumer durables 19.5 19.5 18.0 21.7

Unallocables (2.2) (3.1) (2.6) (3.2)

Total EBIT 14.4 14.5 12.9 15.3 14.1 13.5

Change (%)

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

Revenues 45,753 51,790 58,451 46,038 52,122 58,839 (0.6) (0.6) (0.7)

EBITDA 6,120 7,069 8,078 6,136 7,096 8,122 (0.3) (0.4) (0.6)

EBITDA (%) 13.4 13.6 13.8 13.3 13.6 13.8

PAT 3,902 4,710 5,595 3,915 4,734 5,639 (0.3) (0.5) (0.8)

EPS (Rs) 6.2 7.5 8.8 6.2 7.5 8.9 (0.3) (0.5) (0.8)

New estimates Old estimates Change (%)

Industrials Crompton Greaves Consumer


Exhibit 3: We expect company to deliver 13% revenue CAGR over FY2018-21E Key assumptions for Crompton Greaves Consumer, March fiscal year-ends, 2016-21E (` mn)


Exhibit 4: We value Crompton Greaves Consumer at Rs215/share on DCF basis DCF valuation of Crompton, March fiscal year-ends, 2018-35E (Rs mn)


Pro-forma

2016 2017 2018 2019E 2020E 2021E

Segmental revenue breakup (Rs mn)

Fans 15,852 17,098 17,781 19,915 21,907 23,878

Lighting 11,059 10,970 12,705 14,230 16,364 18,819

Pumps 7,742 8,500 8,160 8,813 9,606 10,471

Appliances 2,212 2,441 2,150 2,795 3,913 5,283

Total 36,865 39,009 40,797 45,753 51,790 58,451

Excise duty (995) — — — — —

Net sales 35,869 39,009 40,797 45,753 51,790 58,451

Segmental revenue growth assumptions (%)

Fans 7.2 11.0 4.0 12.0 10.0 9.0

Lighting 12.4 (0.8) 15.8 12.0 15.0 15.0

Pumps 17.6 13.0 (4.0) 8.0 9.0 9.0

Appliances 10.0 10.4 (11.9) 30.0 40.0 35.0

Overall 8.8 4.6 12.1 13.2 12.9

Other key assumptions

Raw material / sales (%) 69.8 70.1 68.6 68.3 68.1 68.0

Employee expenses (excl. ESOP) / sales (%) 5.3 6.0 6.9 6.3 6.2 6.2

Other expenses / sales (%) 12.9 11.6 11.4 12.0 12.1 11.9

Interest rate as % of average debt NA 10.1 9.8 10.0 10.0 10.0

Depreciation as % of average gross block NA 7.9 14.0 12.0 11.0 10.0

Tax rate (%) 32.8 33.2 33.3 33.3 33.3 33.3

DPS (Rs) NA — 1.5 1.5 2.0 2.5

Divident distribution tax rate (%) NA — 20.4 20.4 20.4 20.4

Notes:

(a) Certain ratios for pro-forma FY2016 are not available as the de-merged company started operations in 2HFY16

% CAGR

2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2035E (FY2018-35)

FCFF calculation

Net revenue 40,797 45,753 51,790 58,451 66,050 74,636 83,592 93,623 104,858 117,441 129,185 233,930 10.8

Revenue growth (%) 4.6 12.1 13.2 12.9 13.0 13.0 12.0 12.0 12.0 12.0 10.0 8.0

EBIT (excl. other income and ESOP expense) 5,755 6,308 7,165 8,157 9,246 10,446 11,698 13,102 14,669 16,417 18,040 32,403

EBIT margin (%) 14.1 13.8 13.8 14.0 14.0 14.0 14.0 14.0 14.0 14.0 14.0 13.9

Operating tax expense (1,916) (2,100) (2,386) (2,716) (3,051) (3,447) (3,861) (4,324) (4,841) (5,418) (5,953) (10,693)

NOPLAT 3,839 4,208 4,779 5,441 6,195 6,999 7,838 8,779 9,828 10,999 12,087 21,710 10.7

Depreciation 126 133 154 170 199 227 255 286 326 377 433 1,049

Change in working capital (933) 36 27 30 34 39 40 45 50 57 53 78

Capital expenditure (133) (300) (300) (300) (276) (277) (289) (324) (475) (554) (564) (1,294)

Free cash flow to the firm 2,899 4,076 4,661 5,341 6,152 6,987 7,845 8,786 9,729 10,879 12,009 21,543

Discounted cash flow 4,295 4,415 4,560 4,645 4,677 4,698 4,666 4,679 4,633 3,879

Key assumptions and value drivers

Tax rate (%) 33.3 33.3 33.3 33.3 33.0 33.0 33.0 33.0 33.0 33.0 33.0 33.0

NWC ex-cash as % of sales (0.4) (0.4) (0.4) (0.4) (0.4) (0.4) (0.4) (0.4) (0.4) (0.4) (0.4) (0.4)

DCF valuation

Terminal growth rate (%) 5.0

WACC (%) 11.5

EV and target price calculation

Sum of discounted FCF 71,103

PV of terminal value 62,662

Enterprise value 133,765

Net debt / (cash) (2,381)

Equity value 136,146

Target price (Rs/share) 216

Crompton Greaves Consumer Industrials


Exhibit 5: We expect Crompton to deliver 19% EPS CAGR over FY2018-21E led by revenue growth and deleveraging benefits Financial summary, March fiscal year-ends, 2016-21E (` mn)


Reported Pro-forma

2HFY16 2016 2017 2018 2019E 2020E 2021E

Income statement

Operating income 18,117 35,869 39,009 40,797 45,753 51,790 58,451

Total operating expenses (16,022) (31,589) (34,163) (35,486) (39,633) (44,721) (50,373)

EBITDA 2,095 4,281 4,847 5,311 6,120 7,069 8,078

Other income 39 77 195 308 460 570 680

Interest expense (355) (637) (655) (637) (599) (424) (199)

Depreciation (63) (121) (110) (126) (133) (154) (170)

Pre-tax profit 1,716 3,600 4,276 4,855 5,849 7,061 8,389

Tax (525) (1,179) (1,419) (1,617) (1,948) (2,351) (2,793)

Recurring net profits 1,191 2,421 2,857 3,238 3,902 4,710 5,595

Extraordinary items (139) (139) (25) — — — —

Reported PAT 1,052 2,281 2,832 3,238 3,902 4,710 5,595

Recurring EPS (Rs) 1.9 3.6 4.5 5.2 6.2 7.5 8.8

Balance sheet

Shareholders funds 2,287 2,287 5,178 7,895 11,443 14,883 19,733

Equity share capital 1,254 1,254 1,254 1,254 1,263 1,263 1,278

Reserves and surplus 1,034 1,034 3,924 6,641 9,202 12,642 15,784

Loan funds 6,445 6,445 6,478 6,486 5,486 2,986 986

Total sources of funds 8,732 8,732 11,656 14,381 16,929 17,868 20,719

Net block 758 758 758 760 927 1,073 1,203

Intangible assets 7,822 7,822 7,858 7,856 7,856 7,856 7,856

CWIP 1 1 1 6 6 6 6

Net current assets (excl. cash) (792) (792) (1,141) (169) (206) (233) (263)

Cash 900 900 3,886 5,450 7,866 8,687 11,438

Net deferred tax asset 43 43 295 479 479 479 479

Total application of funds 8,732 8,732 11,656 14,381 16,929 17,868 20,719

Free cash flow

Operating profit before wcap. changes 1,401 NA 3,669 4,093 4,493 4,968 5,534

Change in working capital / other adjustments 357 NA (548) (933) 36 27 30

Fixed assets (13) NA (148) (133) (300) (300) (300)

Free cash flow (CFO + net capex) 1,745 NA 2,973 3,027 4,229 4,695 5,264

Ratios

EBITDA margin (%) 11.6 11.9 12.4 13.0 13.4 13.6 13.8

Debt/equity 2.8 2.8 1.3 0.8 0.5 0.2 0.0

Net debt/equity 2.4 2.4 0.5 0.1 (0.2) (0.4) (0.5)

Book value per share (Rs) 3.6 8.3 12.6 18.3 23.7 31.5

RoAE (%) NM NM 76.5 49.5 40.4 35.8 32.3

RoACE (%) NM NM 32.3 28.1 27.5 28.7 29.7


Weaker mix and higher commodity prices impact 2QCY18 results

Schaeffler India reported 2QCY18 EBITDA of `850 mn (down 1% yoy), which was 18%

below our estimates on lower-than-expected profitability. Revenues increased by 12% yoy

(4% below estimates), which reflects (1) double-digit growth in domestic auto OEM

segment,

(2) strong pickup in industrial aftermarket segments and (3) steady growth in industrial

segments (excluding wind energy). Revenues of unlisted group entities (INA Bearings and LuK

India), increased by 16.6% yoy in 2QCY18 aided by (1) strong growth in commercial vehicle

and tractor segments and (2) recovery in aftermarket.

EBITDA margin came in at 16.5% (down 230 bps yoy and 120 bps qoq), which was 270 bps

below our estimates. Gross margin declined by 360 bps yoy due to (1) a weaker product mix

(higher traded goods and lower exports) and (2) timing difference between commodity costs

and price increases. The company reported PAT of `613 mn (+14% yoy), which was 12%

below our estimates. Full benefit of price increases in aftermarket segment and price

negotiations with OEMs should help profitability going ahead. Traded mix will come down

significantly in CY2019-20E with the commissioning of new facilities from end-CY2018.

Strong long-term growth prospects, particularly post-merger of unlisted entities

Schaeffler remains a play on (1) strong long-term growth prospects in domestic automotive

industry, (2) increase in content per vehicle due to the government’s focus on safety and

stringent emission norms and (3) shift towards automatic transmission in the domestic PV

industry. Profitability over the medium term will be underpinned by the company’s focus on

(1) higher localization (capex of EUR80 mn over the next two years) and (2) introduction of new

value-added products. On our calculations, the merger would be 6% EPS accretive by CY2020E

due to (1) cost synergy benefits and (2) potential improvement in EBITDA margin of INA and

LuK India led by increase in localization and operating leverage benefits (refer to Exhibit 10).

Lower CY2018-20E EPS estimates by 4-9%; maintain BUY with unchanged TP of `6,000

We lower our CY2018E EPS estimates by 9% as we build in the impact of higher traded mix on

the company’s profitability. We cut our CY2019-20E EPS estimates by ~4%. Maintain BUY with

unchanged TP of `6,000, which is based on 27.5X June 2020E EPS (from March 2020E earlier).

Schaeffler India (SCHFL) Automobiles

Look beyond the quarter. Schaeffler India reported weak 2QCY18 results with 1%

yoy decline in EBITDA even though revenues grew by 12% yoy. Profitability was

negatively impacted by (1) a weaker product mix (higher traded goods and lower

exports) largely due to capacity constraint and (2) timing difference between commodity

costs and price increases. We expect profitability to normalize over the next few quarters

led by (1) full benefit of price increases and (2) commissioning of new facilities. Long-

term growth outlook remains strong; maintain BUY with unchanged TP of `6,000.

BUY

JULY 27, 2018

RESULT


Price (`): 5,340


BSE-30: 36,985

Nishit Jalan

Hitesh Goel

Schaeffler India







MFs 25.9 EBITDA (Rs bn) 3.7 3.8 4.9


Absolute (0.1) (0.7) 14.2 ROE (%) 15.0 14.5 16.4



5,989-4,128

88.7

Schaeffler India Automobiles


Understanding reasons for yoy decline in gross margin

Gross declined by 360 bps yoy in 2QCY19 and was around 200 bps below our estimates

leading to miss at EBITDA level. Key reasons for weakness in EBITDA margin were:

Steep increase in traded revenues and decline in exports leading to weaker mix.

Revenues increased by 12% yoy in 2QCY18, which was driven by (1) 4% yoy growth in

domestic manufacturing revenues, (2) 46% yoy growth in traded goods led largely by

capacity constraint in India in certain segments and also recovery in industrial segments

and (3) 17% yoy decline in exports (partly due to capacity constraint). Consequently,

traded revenue mix increased to 37.4% in 2QCY18 as compared to 28.8% in 2QCY17,

while export mix declined to 12.7% from 17.2% in 2QCY18 (refer to Exhibit 2 for

details). We note that gross margin in traded goods is significantly lower than that of

manufactured goods (refer to Exhibit 3 for details); as per our calculations, this would

have impacted gross margin by around 200 bps in 2QCY18. Further, exports are higher-

margin business for the company as it largely caters to the distribution segment in the

overseas markets. The company is incurring capex of around EUR80 mn (for the pro

forma entity; possibly EUR40 mn for the currently listed entity) over the next two years

starting end-CY2018, this should help increase localization and exports.

Timing difference between commodity costs and price increases. RM costs for the

company have increased significantly led by steep increase in commodity costs (domestic

steel prices are up by more than 20%), while price increases come with a lag. We note

that the company increased its prices in the aftermarket by around 4% in May 2018,

which will have full benefit and aid margins in 3QCY18. With regards to the OEMs, the

company has got some price increases this quarter and is under negotiation for further

price hikes, which should come through over the next two quarters.

Strong performance of unlisted subsidiaries in 2QCY18

Revenues for the unlisted entities (INA Bearings and LuK India) increased by 16.6% yoy in

2QCY18 (17.6% in 1HCY18) – (1) Luk reported 29% yoy revenue growth aided by strong

growth in CV and tractor segments and possibly strong recovery in aftermarket segment

(2) INA’s revenues increased by 8.7% yoy, which was largely in line with production

growth in domestic passenger vehicle industry with a one-month lag (accounts for 60%

of company’s revenues). As per the management, the company is operating at almost full

utilization; commissioning of new capacity and higher content post implementation of

BS-VI norms should drive strong growth over the medium term.

EBITDA margin in LuK India improved to 18.5% in 2QCY18 (18% in 1HCY18) as

compared to 17.2% in CY2017 due to operating leverage benefits. While for INA,

EBITDA margin was largely steady at 13.8% in 2QCY18; higher import content and rupee

depreciation have an adverse impact on the company’s profitability. We expect

profitability to improve significantly over the next two years led by (1) increase in

localization with commissioning of new plants and (2) increase in share of value-added

products. We note that Schaeffler’s content per passenger vehicle is EUR33-34 in India

compared to EUR90-100 levels in Europe. Major OEMs will need to upgrade powertrains

for BS-VI norms, which is an opportunity for Schaeffler India.

Automobiles Schaeffler India


Exhibit 1: Schaeffler India: 2QCY18 EBITDA was 18% below our estimates due to lower profitability

Interim results, calendar year-ends (₹ mn)


Exhibit 2: Traded revenues grew by 45% yoy in 2QCY18 while exports declined by 17% yoy leading

to weaker mix

Breakdown of revenues by segments for Schaeffler, calendar year-ends, 2017-18 (₹ mn, %)


2QCY18 2QCY18E 2QCY17 1QCY18 2QCY18E 2QCY17 1QCY18 1HCY18 1HCY17 yoy (%) CY2018E

Net sales 5,149 5,373 4,592 5,212 (4.2) 12.1 (1.2) 10,361 9,205 12.6 21,517

Cost of materials consumed (1,650) (1,870) (2,140)

Purchase of stock-in-trade (2,455) (944) (1,067)

Changes in inventories 1,007 213 62

Net raw material cost (3,098) (3,145) (2,600) (3,145) (1.5) 19.1 (1.5) (6,243) (5,306) 17.7 (12,851)

Employee expenses (405) (400) (398) (391) 1.3 1.8 3.5 (796) (774) (1,663)

Other expenses (797) (795) (733) (752) 0.2 8.8 6.0 (1,548) (1,379) (3,191)

Total expenses (4,300) (4,340) (3,731) (4,288) (0.9) 15.2 0.3 (8,587) (7,458) 15.1 (17,706)

EBITDA 850 1,033 861 924 (17.7) (1.4) (8.1) 1,774 1,746 1.6 3,812

Depreciation (191) (190) (177) (188) 0.7 7.8 1.5 (380) (353) (782)

EBIT 658 843 684 736 (21.9) (3.8) (10.5) 1,394 1,393 0.1 3,030

Other income 288 200 158 246 44.1 82.5 17.0 535 314 875

Interest expense (1) (1) (5) (1) (2) (8) (5)

Profit before tax 946 1,042 837 981 (9.3) 12.9 (3.6) 1,927 1,699 13.4 3,900

Tax expense (333) (344) (298) (321) (3.1) 11.9 3.8 (654) (584) (1,307)

Profit after tax 613 698 540 660 (12.3) 13.5 (7.2) 1,273 1,115 14.2 2,594

No. of shares 16.6 16.6 16.6 16.6 16.6 16.6 16.6

EPS (Rs/share) 36.9 42.0 32.5 39.7 (12.3) 13.5 (7.2) 76.6 67.1 14.2 156.1

Tax rate (%) 35.2 33.0 35.5 32.7 33.9 34.4 33.5

As % of net revenues

Raw material 60.2 58.5 56.6 60.3 60.3 57.6 59.7

Staff costs 7.9 7.4 8.7 7.5 7.7 8.4 7.7

Other expenses 15.5 14.8 16.0 14.4 14.9 15.0 14.8

EBITDA margin 16.5 19.2 18.8 17.7 17.1 19.0 17.7

EBIT margin 12.8 15.7 14.9 14.1 13.5 15.1 14.1

change (%)

1QCY17 2QCY17 1HCY17 1QCY18 2QCY18 1HCY18

Revenues (Rs mn)

Domestic - Own manufacturing 2,537 2,480 5,017 3,023 2,572 5,595

Traded goods 1,264 1,323 2,586 1,392 1,924 3,316

Exports 812 790 1,602 797 653 1,451

Total revenues 4,612 4,592 9,205 5,212 5,149 10,361

Yoy growth (%)

Domestic - Own manufacturing 19.2 3.7 11.5

Traded goods 10.1 45.5 28.2

Exports (1.8) (17.3) (9.4)

Total 13.0 12.1 12.6

Revenue mix (%)

Domestic - Own manufacturing 55.0 54.0 54.5 58.0 50.0 54.0

Traded goods 27.4 28.8 28.1 26.7 37.4 32.0

Exports 17.6 17.2 17.4 15.3 12.7 14.0

Total 100.0 100.0 100.0 100.0 100.0 100.0



Exhibit 3: Schaeffler’s traded revenue mix will likely increase in CY2018E due to capacity constraint

Revenue mix and segmental revenues of Schaeffler India, calendar year-ends, 2010-20E (₹ mn, %)


Exhibit 4: Revenues of INA Bearings and LuK India grew by 9% and 28% yoy, respectively in 2QCY18

Interim results of pro forma entity, calendar year-ends (₹ mn)


Exhibit 5: We have cut our CY2018E EPS estimates by 9% on lower EBITDA margin assumptions; lower CY2019-20E EPS by 4-5% Earnings revision table of Schaeffler India, calendar year-ends, 2018-20E (` mn, %)


2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E

Revenues breakdown (Rs mn)

Domestic 9,437 11,518 12,458 11,805 13,399 14,271 15,016 15,671 18,282 21,553 25,239

Exports 997 1,568 2,008 2,219 2,923 2,973 2,947 3,517 3,235 3,721 4,167

Overall net revenues 10,434 13,086 14,467 14,024 16,322 17,244 17,963 19,187 21,517 25,273 29,406

Yoy growth (%)

Domestic 22.1 8.2 (5.2) 13.5 6.5 5.2 4.4 16.7 17.9 17.1

Exports 57.3 28.1 10.5 31.7 1.7 (0.9) 19.3 (8.0) 15.0 12.0

Overall net revenues 25.4 10.6 (3.1) 16.4 5.7 4.2 6.8 12.1 17.5 16.4

Revenues - Manufactured vs traded (Rs mn)

Manufactured goods 6,740 8,644 9,530 9,470 11,370 12,166 12,776 13,975 14,783 18,566 22,001

Traded goods 3,694 4,442 4,936 4,555 4,952 5,079 5,187 5,212 6,734 6,707 7,405

Overall net revenues 10,434 13,086 14,467 14,024 16,322 17,244 17,963 19,187 21,517 25,273 29,406

Yoy growth (%)

Manufactured goods 28.2 10.3 (0.6) 20.1 7.0 5.0 9.4 5.8 25.6 18.5

Traded goods 20.2 11.1 (7.7) 8.7 2.6 2.1 0.5 29.2 (0.4) 10.4

Overall net revenues 25.4 10.6 (3.1) 16.4 5.7 4.2 6.8 12.1 17.5 16.4

Revenue mix (%)

Manufactured goods 64.6 66.1 65.9 67.5 69.7 70.5 71.1 72.8 68.7 73.5 74.8

Traded goods 35.4 33.9 34.1 32.5 30.3 29.5 28.9 27.2 31.3 26.5 25.2

Gross margin (%)

Manufactured goods 51.7 51.0 48.4 47.0 46.9 48.1 46.7 48.8 48.5 48.5 48.0

Traded goods 21.4 23.6 15.1 11.5 19.3 27.4 18.5 24.9 20.0 20.0 20.0

Total 41.3 42.1 37.3 36.0 38.9 42.6 39.6 42.8 40.3 41.6 41.7

CY2017 1QCY18 2QCY18 1HCY18 CY2017 1QCY18 2QCY18 1HCY18 CY2017 1QCY18 2QCY18 1HCY18 CY2017 1QCY18 2QCY18 1HCY18 CY2017 1QCY18 2QCY18 1HCY18

Revenues 19,187 5,212 5,149 10,361 11,951 3,157 3,279 6,436 8,575 2,558 2,737 5,295 20,526 5,715 6,016 11,731 39,713 10,927 11,165 22,092

% yoy growth 6.8 12.1 (1.2) 12.6 14.0 10.6 8.7 9.6 17.3 30.2 27.7 28.9 15.3 18.6 16.6 17.6 10.6 15.9 14.8 15.2

EBITDA 3,665 924 850 1,774 1,668 435 452 887 1,478 447 507 954 3,146 882 959 1,841 6,811 1,806 1,809 3,615

% yoy growth 13.0 12.1 1.6 12.1 n/a n/a n/a 17.1 n/a n/a n/a 14.4 n/a n/a n/a 19.1 n/a n/a n/a

EBITDA margin (%) 19.1 17.7 16.5 17.1 14.0 13.8 13.8 13.8 17.2 17.5 18.5 18.0 15.3 15.4 15.9 15.7 17.2 16.5 16.2 16.4

PBT 3,623 981 946 1,927 1,155 309 331 640 1,124 365 427 792 2,279 674 758 1,432 5,902 1,655 1,704 3,359

PBT margin (%) 18.9 18.8 18.4 18.6 9.7 9.8 10.1 9.9 13.1 14.3 15.6 15.0 11.1 11.8 12.6 12.2 14.9 15.1 15.3 15.2

Net profit 2,380 660 613 1,273 743 201 216 417 773 250 295 545 1,516 451 511 962 3,896 1,111 1,124 2,235

% yoy growth 22.0 14.9 13.5 14.2 8.5 n/a n/a n/a 26.5 n/a n/a n/a 17.0 n/a n/a n/a 20.0 n/a n/a n/a

Schaeffler India INA Bearings LuK India LuK + INA Schaeffler India (proforma)

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

Net sales 21,517 25,273 29,406 22,039 25,983 30,249 (2.4) (2.7) (2.8)

EBITDA 3,812 4,929 5,827 4,215 5,114 6,085 (9.6) (3.6) (4.2)

Margin (%) 17.7 19.5 19.8 19.1 19.7 20.1

Net Profit 2,594 3,301 3,881 2,842 3,441 4,072 (8.7) (4.1) (4.7)

Standalone EPS 156.1 198.6 233.5 171.0 207.0 245.0 (8.7) (4.1) (4.7)

Old estimatesNew estimates % change



Exhibit 6: We expect Schaeffler India to deliver 18% earnings CAGR over CY2017-20E Schaeffler India, financial summary, calendar year-ends, 2011-20E (₹ mn)


Exhibit 7: The merger process will likely be complete by 4QCY18 Key events and timeline of merger of INA Bearings and LuK India


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


Net sales 13,086 14,467 14,024 16,322 17,244 17,963 19,187 21,517 25,273 29,406

EBITDA 2,540 2,204 1,836 2,417 3,053 2,969 3,665 3,812 4,929 5,827

Other income 309 446 459 410 562 683 679 875 931 1,038

Interest (13) (13) (8) (10) (21) (18) (10) (5) — —

Depreciation (226) (303) (433) (494) (655) (641) (711) (782) (896) (1,029)

Extraordinary income/(losses) — — — — — — — — — —

Profit before tax 2,610 2,335 1,854 2,324 2,938 2,993 3,623 3,900 4,964 5,836

Tax (850) (743) (636) (795) (963) (1,043) (1,243) (1,307) (1,663) (1,955)

Reported net profit 1,760 1,592 1,218 1,529 1,975 1,951 2,380 2,594 3,301 3,881

Adjusted net profit 1,760 1,592 1,218 1,529 1,975 1,951 2,380 2,594 3,301 3,881

Earnings per share (Rs) 105.9 95.8 73.3 92.0 118.8 117.4 143.2 156.1 198.6 233.5


Equity 7,300 8,795 9,896 11,075 12,892 14,752 16,953 18,919 21,422 24,364

Deferred tax liability 32 64 174 154 87 — — — — —

Other long-term liabilities 209 245 221 344 235 271 296 296 296 296

Total borrowings — — — — — — — — — —

Current liabilities 2,427 2,333 3,042 2,769 3,339 3,515 3,681 4,081 4,707 5,394

Total liabilities 9,968 11,437 13,333 14,342 16,554 18,537 20,930 23,296 26,425 30,054

Net fixed assets 2,352 3,927 4,123 3,904 3,976 4,103 4,126 4,844 5,448 6,419

Investments — 44 44 44 — — — — — —

Other long-term assets 1,202 759 1,770 999 1,283 1,440 1,175 1,175 1,175 1,175

Cash 2,334 1,948 2,377 3,295 4,704 6,406 8,306 9,358 10,701 12,062

Other current assets 4,081 4,759 5,020 6,101 6,591 6,588 7,323 7,919 9,101 10,398

Total assets 9,968 11,437 13,333 14,342 16,554 18,537 20,930 23,296 26,425 30,054

Cash flow (Rs mn)

Operating cash flow excl. working capital 1,727 2,091 1,546 1,910 1,897 2,049 2,636 2,630 3,397 4,009

Working capital changes (901) (725) 75 (732) (90) (121) (228) (197) (555) (610)

Capital expenditure (1,471) (1,407) (667) (401) (575) (930) (551) (1,500) (1,500) (2,000)

Free cash flow (645) (41) 954 777 1,231 998 1,857 934 1,342 1,399

Ratios

EBITDA margin (%) 19.4 15.2 13.1 14.8 17.7 16.5 19.1 17.7 19.5 19.8

PAT margin (%) 13.4 11.0 8.7 9.4 11.5 10.9 12.4 12.1 13.1 13.2

Net debt/equity (X) (0.3) (0.2) (0.2) (0.3) (0.4) (0.4) (0.5) (0.5) (0.5) (0.5)

Book value (Rs/share) 439 529 595 666 776 888 1,020 1,138 1,289 1,466

RoAE (%) 27.0 19.8 13.0 14.6 16.5 14.1 15.0 14.5 16.4 17.0

RoACE (%) 39.9 21.9 12.8 16.5 20.2 18.4 22.8 22.1 26.4 27.7

Key events and timeline of merger Expected date

BSE, NSE and SEBI approvals sought Done

BSE, NSE and SEBI approvals Done in 4QCY17

Applications to NCLT (Mumbai and Chennai benches) in India Done in 4QCY17

Notice to shareholders Done in 1QCY18

Shareholder approvals Done in 1QCY18

‒ Approval of majority public shareholders

‒ Approval of majority (in number) of shareholders and creditors representing 75% in value

NCLT approval (Received from Chennai NCLT, pending from Mumbai NCLT) 3QCY18

BSE, NSE and SEBI (final) approvals 4QCY18

Closing of transaction 4QCY18



Exhibit 8: Merger of LuK and INA will significantly expand the product portfolio of the listed Schaeffler entity in India Product portfolio of all the three Schaeffler entities in India in the automotive segment


Exhibit 9: Product offerings of listed Schaeffler entity in India will expand post the merger of INA Product portfolio of all the three Schaeffler entities in India in the industrial segment




Exhibit 10: The merger will be EPS neutral in CY2019E; merger can lead to 6% higher EPS of pro forma business in CY2020E Pro forma financials of Schaeffler India post-merger, calendar year-ends, 2017-20E (` mn, %)


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

Revenues 19,187 21,517 25,273 29,406 11,951 13,266 15,653 18,784 8,575 10,805 12,965 15,558 39,713 45,588 53,892 63,748

Yoy growth (%) 5.8 12.1 17.5 16.4 14.7 11.0 18.0 20.0 17.5 26.0 20.0 20.0 10.8 14.8 18.2 18.3

EBITDA 3,665 3,812 4,929 5,827 1,668 1,924 2,505 3,193 1,478 1,945 2,463 2,956 300 500 6,811 7,680 10,197 12,476

EBITDA margin (%) 19.1 17.7 19.5 19.8 14.0 14.5 16.0 17.0 17.2 18.0 19.0 19.0 17.2 16.8 18.9 19.6

PBT 3,623 3,900 4,964 5,836 1,155 1,393 1,910 2,592 1,124 1,567 2,061 2,536 300 500 5,902 6,860 9,236 11,464

Net profit 2,380 2,594 3,301 3,881 743 933 1,280 1,737 773 1,097 1,443 1,775 201 335 3,896 4,623 6,225 7,728

Yoy growth (%) 22.4 9.0 27.3 17.6 8.5 25.6 37.1 35.7 26.5 41.9 31.6 23.0 20.2 18.7 34.6 24.1

Number of shares (mn) 16.62 16.62 16.62 16.62 31.26 31.26

EPS 143.2 156.1 198.6 233.5 199.1 247.2

Cost synergy benefitsSchaeffler India INA Bearings LuK India Schaeffler India (proforma)


Lower margins in India and Australia security businesses lead to earnings miss

SIS’ 1QFY19 EBITDA of `745 mn came in 19% below estimates. The India security segment

EBITDA of `275 mn declined 28% qoq and was 32% below our estimates. Further, while the

revenue growth in the Australia business was ahead of estimates, timing difference between

minimum wage hikes in Australia and reworking of contracts with clients led to a 12% EBITDA

miss from this segment too.

India security: loss of contracts and provisioning impact EBITDA

India security business reported weak operating metrics: revenues were flat sequentially while

guard count declined 1% qoq (versus our estimates of growth). Further, EBITDA declined 28%

qoq on account of: (1) low value contracts given up in March 2018, which still had costs

associated to them in 1QFY19 of `35 mn, and (2) provisions for bad debts of `35 mn made for

receivables from companies under NCLT process. Adjusted for these items, EBITDA was still

lower than expected due to lower revenues. Management indicated that write-offs in

subsequent quarters will ease, and growth pipeline for the business is fairly strong.

Other businesses: Australia also disappoints, but facilities management healthy

Australia business reported healthy yoy revenue growth of 42%, which comprised 17% organic

growth and the remainder from SXP acquisition. Margins of this segment also, however,

disappointed due to minimum wage hike. This should normalize in 2HFY19 as wage hike gets

passed on to clients. Indian FM business is on a strong footing with healthy 30% yoy revenue

growth and 119% EBITDA growth driven by strong operating leverage.

Higher provisioning drives EPS cuts; retain REDUCE with TP of `1,130

We acknowledge the higher risk profile of security business as demonstrated by higher

provisioning taken in 1QFY19. We revise our EBITDA estimates of the Indian guarding segment

by 6-9%, and also revise down Australian business EBITDA by 3%, resulting in overall EBITDA

cut of 3-5%. EPS cut is higher as we build in higher working capital requirements, resulting in

higher interest outgo. As a result of these changes, SoTP-based TP moves to `1,130 from

`1,250. REDUCE stays.

SIS (SECIS) Others

Security business margins disappoint. SIS reported a weak quarter on account of

higher provisioning in the India security business and lower margins in the Australia

business. FM business continues to ramp up well on account of scale-led operating

leverage. Higher provisioning expense going forward and lower Australia business

margins drive a 5-7% cut in EPS. We like SIS’ exposure to large unorganized segments

in India, but would await a better entry point in the stock. REDUCE stays with a revised

SoTP-based TP of `1,130 (`1,250 earlier).

REDUCE

JULY 27, 2018

RESULT

Coverage view:

Price (`): 1,099


BSE-30: 36,985

Garima Mishra

SIS







MFs 4.7 EBITDA (Rs bn) 3.1 3.9 4.5


Absolute (1.0) (2.6) 0.0 ROE (%) 20.1 21.8 21.7



1,379-705

80.4

Others SIS


Exhibit 1: Quarterly results snapshot of SIS, March fiscal year-ends (Rs mn)


xx

Yoy growth

1QFY19 1QFY19E 1QFY18 4QFY18 KIE yoy qoq FY2019 FY2018 (%)

Total operating income 16,114 15,584 12,435 15,922 3 30 1 67,062 58,334 15

Cost of materials consumed (57) (50) (53) (52) 13 6 9 (334) (204) 63

Purchases of stock in trade (10) - (13) (25) (23) (59) - (55) (100)

Change in inventory (56) - 6 (60) (1,075) (6) - (103) (100)

Employee expenses (13,272) (12,750) (10,567) (12,837) 4 26 3 (56,223) (47,661) 18

Other operational cost (1,974) (1,865) (1,137) (2,083) 6 74 (5) (6,640) (7,190) (8)

EBITDA 745 918 670 866 (19) 11 (14) 3,865 3,120 24

Other income 57 47 34 49 21 70 16 367 365 0

Financial charges (168) (191) (227) (277) (12) (26) (39) (658) (925) (29)

Depreciation (133) (146) (111) (183) (9) 19 (27) (665) (560) 19

Pre-tax profit 501 628 366 455 (20) 37 10 2,909 2,000 45

Taxation (63) (75) (99) (30) (16) (36) 112 (310) (244) 27

PAT (recurring) 438 553 266 425 (21) 64 3 2,599 1,756 48

Minority interest and associate profits (43) (19) (47) (57) 132 (9) (24) (117) (118) (1)

Exceptional items - -

Net profit 395 534 219 361 (26) 80 9 2,482 1,639 51

EPS (Rs) 5.4 7.3 3.2 4.9 (26) 69 9 33.9 22.4 51.5

EBITDA margin (%) 4.6 5.9 5.4 5.4 5.8 5.3

Tax rate (%) 12.6 12.0 27.1 6.5 10.7 12.2 (12.6)

Segment-wise revenues

Security services (India) 5,650 6,247 4,904 5,724 (10) 15 (1) 25,615 21,814 17

Security services (Australia) 8,497 7,362 6,004 8,405 15 42 1 33,106 30,186 10

Facilities management 1,998 1,975 1,539 1,829 1 30 9 8,341 6,707 24

Less: intersegment revenue (31) - (12) (36)

Total operating income 16,145 15,573 12,447 15,958 4 30 1 67,062 58,707 14

Segment-wise EBITDA

Security services (India) 275 406 359 379 (32) (24) (28)

Security services (Australia) 343 389 253 370 (12) 36 (7)

Facilities management 127 123 58 103 3 119 23

Total EBITDA 745 918 670 852 (19) 11 (13)

Other income and gains 55 32 41 74 35

Gains (losses) arising from business combination accounting(47) (21) (139) 123 (67)

Financial charges (140) (208) (170) (33) (18)

Depreciation (112) (107) (128) 4 (12)

PBT 501 366 455 37 10

Other operating metrics

Billed India security guard count (#) 106,860 111,246 107,746 (4) (1) 123,928 107,763 15

Billed Australia security guard count (#) 7,734 7,400 5

Facility management employee count (#) 44,669 42,148 6

Change (%)

SIS Others


Exhibit 2: Australia security and Indian facilities management have driven the sequential margin

improvement Segmental revenue and EBITDA snapshot of SIS, March fiscal year-ends (Rs mn)


xx

Exhibit 3: Steady sequential growth, though India security business disappointed Segmental operating metrics, March fiscal year-ends


1QFY18 2QFY18 3QFY18 4QFY18 1QFY19

Segmental revenues

India security 4,904 5,228 5,618 5,724 5,650

Australia security 6,004 7,729 8,047 8,405 8,497

India facility management 1,539 1,643 1,713 1,829 1,998

Total 12,447 14,600 15,377 15,958 16,145

Segmental EBITDA

India security 359 372 380 379 275

Australia security 253 290 368 370 343

India facility management 58 78 96 103 127

Total 670 740 844 852 745

Segmental EBITDA margin (%)

India security 7.3 7.1 6.8 6.6 4.9

Australia security 4.2 3.8 4.6 4.4 4.0

India facility management 3.8 4.7 5.6 5.6 6.3

Total 5.4 5.1 5.5 5.3 4.6

Qoq change

2QFY18 3QFY18 4QFY18 1QFY19 (%)

India security

Billed employees 102,839 108,572 107,746 106,860 (1)

Segment EBITDA (Rs mn) 372 380 379 275 (28)

EBITDA per employee (Rs) 3,617 3,500 3,522 2,570 (27)

Australia security

Billed employees 6,639 6,656 7,400 7,734 5

Segment EBITDA (Rs mn) 290 368 370 343 (7)

EBITDA per employee (Rs) 43,681 55,288 49,974 44,388 (11)

India facility management

Billed headcount 39,389 41,609 42,148 44,669 6

Segment EBITDA (Rs mn) 78 96 103 127 23

EBITDA per employee (Rs) 1,980 2,307 2,440 2,833 16

Others SIS


Key takeaways from earnings call

Security business. Total guard count declined by 1% sequentially as SIS gave up certain

low-margin contracts starting March 2019. The costs for some of these contracts,

however, continued into 1QFY19 also, and impacted reported EBITDA by `35 mn. SIS

evaluates contracts dynamically, and a call was taken to provision for receivables from

NCLT clients (another `35 mn). This provisioning was not on account of any one specific

client. SIS booked new orders worth `170 mn monthly revenue in 1QFY19, and expects

revenue growth to revive in future quarters.

Facilities management. SIS seeks to actively target B2G contracts, with railways seeking

to come up with large sized contracts, which SIS would bid for. Margin increase was

largely on account of scale benefits. Growth and not margin maximization will be the

company’s strategy in this segment.

Australia business. Australia business organic growth of 17% was very strong, and was

on account of certain clients recommencing operations and new contracts won.

MSS+SXP integration is proceeding well, and SIS is now in a position to offer integrated

contracts to clients. Margins should revive to ~5% levels by 2HFY19 as wage alignment

would be complete by then.

Cash logistics. SIS believes that given higher costs of doing business, consolidation is

imminent. While this will happen only over the next 1-2 years, this will be a key driver of

longer term profitability in the segment.

Exhibit 4: DCF-based valuation of the India business, March fiscal year-ends, 2018-35E (Rs mn)


xx

2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2035E

Net Sales 28,148 33,955 41,141 49,918 60,276 72,417 86,586 103,003 121,484 142,088 164,515 188,922 212,891 317,494

Yoy growth (%) 41 21 21 21 21 20 20 19 18 17 16 15 13 5

EBIT 1,333 1,685 2,183 2,464 3,075 3,801 4,660 5,670 6,827 8,103 9,454 10,939 12,423 18,390

EBIT margin (%) 4.7 5.0 5.3 4.9 5.1 5.2 5.4 5.5 5.6 5.7 5.7 5.8 5.8 5.8

Tax rate (%) (4.2) (6.7) (0.5) (1.3) 1.0 2.8 21.5 30.0 33.9 33.8 33.7 33.6 33.5 33.4

EBIT*(1-tax rate) 1,389 1,798 2,194 2,496 3,045 3,695 3,659 3,969 4,512 5,366 6,270 7,264 8,258 12,253

Add: Depreciation/amortisation 490 590 758 939 1,173 1,438 1,734 2,063 2,415 1,826 1,906 1,951 2,186 3,474

Change in working capital/ other adjustments (286) (153) 6 144 76 (4) 2,069 285 47 (22) (81) (149) (115) 330

Capital expenditure (2,779) (876) (980) (1,124) (1,285) (1,451) (1,620) (1,798) (1,933) (2,058) (2,141) (2,224) (2,292) (2,671)

Free cash flows (1,186) 1,359 1,978 2,454 3,009 3,678 5,842 4,519 5,042 5,113 5,954 6,842 8,036 13,387

Years discounted - 0.8 1.8 2.8 3.8 4.8 5.8 6.8 7.8 8.8 9.8 10.8 15.8

Discount factor 1.00 0.92 0.81 0.72 0.64 0.57 0.51 0.45 0.40 0.36 0.32 0.28 0.16

Discounted cash flow 1,019 1,811 1,997 2,176 2,364 3,339 2,296 2,277 2,052 2,125 2,170 2,265 2,094

WACC (%) 12.5

Terminal growth rate (%) 5.0

Sum of free cash flow (Rs mn) 37,019

Terminal value (Rs mn) 29,319

Enterprise value 66,338

SIS Others


Exhibit 5: SoTP–based target price of Rs1,130 (Rs mn)


Our EBITDA and PAT estimates get revised down as we incorporate lower margins for Indian

and Australian security businesses.

The revenue growth of facility management and others’ business earlier included revenues

from cash management also; with cash management business now accounted for as an

associate (SIS’ stake of 49%), we remove this business’ revenues from reported revenues.

Exhibit 6: Key estimate changes for SIS, March fiscal year-ends (Rs mn)


xx

Parameter Valuation

DCF based EV of Indian businesses - (1) 66,338

June 2020 EV/EBITDA multiple ascribed to Australian business (X) 10.0

June 2020 EBITDA of Australian business 1,590

EV of the Australian business - (2) 15,903

Consolidated EV - (1) + (2) 82,241

Net debt (1,972)

Equity value 84,212

Diluted share count (mn) 74

Equity value (Rs/sh) 1,130

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

Total

Sales (Rs mn) 67,062 75,571 85,382 67,879 77,213 87,685 (1.2) (2.1) (2.6)

Sales growth (%) 15.0 12.7 13.0 16.4 13.8 13.6

EBITDA (Rs mn) 3,865 4,514 5,224 3,986 4,729 5,497 (3.0) (4.6) (5.0)

EBITDA margin (%) 5.8 6.0 6.1 5.9 6.1 6.3

Net Profit (Rs mn) 2,482 3,006 3,543 2,663 3,212 3,740 (6.8) (6.4) (5.3)

EPS (Rs) 33.3 40.4 47.6 35.7 43.1 50.2 (6.8) (6.4) (5.3)

EPS growth (%) 48 21 18 58 21 16

India security

Security guard count (#) 121,753 138,190 156,154 123,928 140,658 158,943 (1.8) (1.8) (1.8)

Revenue (Rs mn) 25,130 30,347 36,574 26,772 32,608 39,321 (6.1) (6.9) (7.0)

EBITDA (Rs mn) 1,700 2,189 2,643 1,877 2,327 2,815 (9.4) (5.9) (6.1)

EBITDA margin (%) 6.8 7.2 7.2 7.0 7.1 7.2

Australia security

Revenue (Rs mn) 33,106 34,431 35,808 30,047 31,249 32,499 10.2 10.2 10.2

EBITDA (Rs mn) 1,591 1,573 1,643 1,555 1,623 1,695 2.3 (3.1) (3.1)

EBITDA margin (%) 4.8 4.6 4.6 5.2 5.2 5.2

Facility management + others

Revenue (Rs mn) 8,825 10,794 13,000 11,060 13,356 15,866 (20.2) (19.2) (18.1)

EBITDA (Rs mn) 574 752 939 554 779 987 3.7 (3.6) (4.9)

EBITDA margin (%) 6.5 7.0 7.2 5.0 5.8 6.2

New estimates Old estimates % revision

Others SIS


Exhibit 7: Consolidated financials of SIS, March fiscal year-ends, 2013-21E (Rs mn)


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

Profit model

Revenue from operations 26,437 30,977 35,506 38,362 43,872 58,334 67,062 75,571 85,382

EBITDA 1,244 1,478 1,593 1,694 2,204 3,120 3,865 4,514 5,224

Depreciation and amortisation expense (255) (305) (454) (432) (358) (560) (665) (839) (1,018)

EBIT 989 1,172 1,139 1,263 1,845 2,560 3,200 3,675 4,206

Other income 140 100 145 139 87 365 367 419 503

Finance costs (311) (256) (477) (475) (767) (925) (658) (545) (500)

Profit before tax 818 1,017 806 926 1,165 2,000 2,909 3,549 4,208

Taxation (286) (370) (331) (296) (8) (244) (310) (421) (539)

Profit after tax 533 647 476 630 1,158 1,756 2,599 3,128 3,670

Conversion to JV from Subsidiary 0 0 0 93 0 0 0 0 0

Minority interest in profit/(loss) for the year 39 40 151 34 (60) (118) (117) (122) (126)

Reported PAT 571 687 627 757 1,097 1,639 2,482 3,006 3,543

Diluted EPS (Rs/share) 8 10 9 11 16 23 33 40 48

Weighted average number of shares - diluted (mn) 68 68 68 68 70 73 74 74 74

Balance sheet

Shareholders' funds 3,319 3,919 3,968 4,492 5,906 10,283 12,497 15,179 18,339

Minority Interest 393 364 765 26 3 14 14 14 14

Loan funds 2,085 2,467 4,436 4,466 6,873 8,057 6,557 5,557 5,557

Total sources of funds 5,798 6,750 9,169 8,984 13,150 18,749 19,068 20,749 23,909

Net fixed assets 1,142 1,371 1,369 1,377 2,165 2,532 2,778 2,958 2,918

Goodwill 1,233 1,226 1,985 1,704 1,859 4,691 4,755 4,820 4,820

Investments 115 114 104 120 989 921 921 921 921

Cash balances 2,532 2,969 3,745 3,493 4,292 5,428 6,250 6,962 9,226

Net current assets excluding cash 484 690 1,565 1,817 2,258 3,073 3,892 4,617 5,553

Deferred tax assets 292 378 401 473 1,587 2,105 471 471 471

Total application of funds 5,798 6,750 9,169 8,984 13,150 18,749 19,068 20,749 23,910

Key ratios (%)

Revenue growth 10 17 15 8 14 33 15 13 13

EBITDA growth (25) 19 8 6 30 42 24 17 16

Net profit growth (33) 20 (9) 21 45 49 51 21 18

EBITDA margin 5 5 4 4 5 5 6 6 6

Tax rate 35 36 41 32 1 12 11 12 13

Net debt/equity (X) (0) (0) 0 0 0 0 0 (0) (0)

RoE 19 19 16 18 21 20 22 22 21

RoCE 14 14 11 12 17 15 16 18 18

Cash flow

Operating cash flow before WCchanges 980 1,221 1,354 1,587 2,283 3,241 3,922 4,512 5,188

Change in working capital/ other adjustments (185) (317) (569) (771) (441) (815) (819) (724) (937)

Capital expenditure (423) (525) (1,172) (603) (2,169) (3,691) (975) (1,084) (978)

Free cash flow 372 379 (387) 213 (328) (1,265) 2,127 2,704 3,273


Marginal profit, strong loan growth and improvement in impairment ratios

J&K Bank reported a marginal profit on the back of 50% decline in provisions. Revenues grew

11% yoy while operating expenses grew 24% yoy. NII grew 9% yoy on the back of 23% yoy

loan growth. Cost-income ratio was high at 62% yoy. Gross NPLs declined 20 bps qoq to 9.8%

of loans, the first time it has declined <10% since 2QFY17. Provision coverage ratio was stable

at 67%. Slippages were high at 5% of loans with ~60% of it coming from restructured loans

and nearly all of it from outside the state restructured loan portfolio. Restructured loans

declined 130 bps to 7% of loans with nearly all these coming from with J&K state. Total

stressed loans which include all dispensation formats declined 150 bps qoq to 7.5% of loans.

Decline in restructured loans to remain a key trigger for rerating

A few key concerns from the results: (1) Tier-1 ratio is at 10.5% with CET-1 at ~9% and the

bank has been grown its loans by ~20% when RoEs are ~0%. Dilution risk is quite high

considering that the bank is trading at a steep discount to reported book value. (2) Cost-income

ratio at 62% and operating expenses growth at ~25% yoy is hurting return ratios. (3)

Restructured loans at 7% of loans are entirely within J&K state being affected by floods and

unrest. Movement of this portfolio would be a key trigger for rerating as there is a fear that this

portfolio would slip into NPLs over the next few quarters.

Maintain BUY; concerns gradually easing which should help valuation expansion

We maintain BUY rating with a marginal change in TP to `100 (from `110 earlier) valuing the

bank at 1.1X adjusted book and 9X FY2020 EPS for RoEs at 7-9% and healthy earnings growth

of a low base. Apart from inexpensive valuation, we believe that the stressed loan formation

would significantly decline from 2QFY19 onwards. Given the pace of movement of restructured

loans within J&K, we believe that the residual risk in the loans in J&K state is likely to decline

which should address one of the key concerns on the stock. As these events unfold over the

next few quarters, we expect valuation multiples to expand for the bank.

J&K Bank (JKBK) Banks

Restructured loans in J&K stable. J&K Bank reported a marginal profit on the back of

~50% yoy decline in provisions. Gross NPLs declined 20bps qoq to <10% for the first

time since 2QFY17. Restructured loans declined 130 bps qoq to 7% of loans as the

portfolio outside J&K slipped while the portfolio within J&K was flat qoq. Loan growth

was strong at 23% and Tier-1 ratio at 10.5% is comfortable today. However, any

acceleration can lead to a capital dilution risk. Valuations are comfortable and hence we

maintain BUY with TP at `100 (from `105 earlier).

BUY

JULY 27, 2018

RESULT


Price (`): 53


BSE-30: 36,985

QUICK NUMBERS

NII grew 9% yoy;

loans grew 23% yoy

Gross NPLs declined

20bps qoq to 9.8%;

restructured loans

declined 130bps

qoq to 7% of loans

Maintain BUY with

TP at `100 (from

`105 earlier)

M B Mahesh CFA

Nischint Chawathe

Dipanjan Ghosh

Shrey Singh

J&K Bank







MFs 5.4 BVPS 78.0 84.2 88.9


Absolute 0.3 (6.1) (38.8) ROE (%) 3.4 5.9 9.1



91-44

29.6

Banks J&K Bank


Exhibit 1: J&K bank- quarterly summary J&K bank quarterly summary, March fiscal year-ends, 1QFY18-1QFY19 (` mn)


(% chg.)

1QFY19

1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 2019E 2018 (% chg.) 2020E

Interest income 17,629 16,969 16,802 15,917 3.9 4.9 10.8 71,985 66,214 (8.0) 80,658

Loans 13,272 13,200 12,072 12,200 0.5 9.9 8.8 55,581 49,777 (10.4) 63,628

Investments 3,935 3,390 3,860 3,388 16.1 2.0 16.2 14,533 14,316 (1.5) 15,080

Balance with RBI & banks 422 378 871 329 11.5 (51.6) 28.2 1,871 2,121 13.3 1,950

Interest expense 9,837 9,843 9,681 9,359 (0.1) 1.6 5.1 41,462 37,506 (9.5) 46,937

Net interest income 7,792 7,126 7,121 6,558 9.3 9.4 18.8 30,523 28,708 (5.9) 33,721

Non-interest income 1,344 1,113 1,102 1,723 20.7 21.9 (22.0) 5,251 4,953 (5.7) 5,942

Other income exld treasury 1,252 1,063 839 1,497 17.8 49.2 (16.3) 4,951 4,574 (7.6) 5,542

Treasury income 92 50 263 226 83.4 (65.1) (59.5) 300 379 26.3 400

Total income 9,136 8,239 8,223 8,280 10.9 11.1 10.3 35,774 33,661 (5.9) 39,663

Operating expenses 5,638 5,326 4,539 5,616 5.9 24.2 0.4 21,856 19,842 (9.2) 23,681

Employee cost 3,752 3,486 3,032 3,479 7.6 23.8 7.9 14,020 12,869 (8.2) 15,273

Other cost 1,886 1,839 1,508 2,137 2.5 25.1 (11.8) 7,836 6,973 (11.0) 8,408

Pre provisioning profit 3,498 2,913 3,684 2,665 20.1 (5.1) 31.3 13,918 13,819 (0.7) 15,982

Provisions and contingencies 2,550 3,390 5,168 2,511 (24.8) (50.7) 1.6 8,636 12,609 46.0 7,331

Provisions for NPA 2,348 2,347 4,712 3,353 0.0 (50.2) (30.0) 7,336 10,777 46.9 7,031

PBT 948 (477) (1,484) 154 NM NM 517.3 5,281 1,210 (77.1) 8,651

Tax 421 (143) (1,785) (131) NM NM NM 1,584 (818) (151.6) 2,595

Net profit 526 (334) 301 284 NM 74.9 85.2 3,697 2,027 (45.2) 6,055

Tax rate (%) 44 NM NM (85) 30 (68) 30

PBT-invt gains+ provisions 3,395 3,438 2,443 (1.3) 39.0 13,318 13,436 0.9 15,282

EPS (Rs) 1 1 1 74.9 85.2 7 4 (45.2) 11

Key balance sheet items (Rs bn)

Total Deposits 774 811 717 800 (4.5) 7.9 (3.2) 877 800 (8.8) 1,005

Savings deposits 297 287 294 3.6 0.8 323 294 (8.8) 368

Current deposits 97 78 113 23.6 (14.1) 124 113 (8.8) 141

Term deposits 381 353 393 8.0 (3.1) 431 393 (8.8) 497

CASA ratio (%) 51 51 51 -2 bps -5 bps 51 51 0 bps 51

Advances 598 560 487 569 6.8 22.8 5.1 654 569 (12.9) 753

Agriculture 60 49 51 22.8 16.8 51

Trade 60 49 57 22.8 5.1 57

Retail 126 97 120 28.9 5.1 120

SME 48 39 46 22.8 5.1 46

Corporate 287 244 290 17.9 (1.0) 290

Others 18 10 6 84.2 215.4 6

Investments 201 190 207 189 5.5 (2.9) 6.5 180 189 4.8 208

AFS 52 75 38 (30.2) 37.0 38

HTM 149 132 151 12.7 (1.4) 151

Asset quality details

Gross NPLs (Rs mn) 62,417 56,406 60,067 10.7 3.9 58,706 60,067 2.3 57,200

Gross NPL ratio (%) 9.8 10.8 10.0 -96 bps -13 bps 8.4 10.0 151 bps 7.1

Net NPLs (Rs mn) 27,817 22,672 27,911 22.7 (0.3) 27,030 27,911 3.3 30,102

Net NPL ratio (%) 4.7 4.7 4.9 0 bps -25 bps 4.1 4.9 77 bps 4.0

Provision coverage (%) 55.4 59.8 53.5 -437 bps 190 bps 54.0 53.5 -42 bps 47.4

Provision coverage inc. write-off (%) 67 70 66 -348 bps 95 bps

Restructured loans 60,875 64,154 61,330 (5.1) (0.7)

Restructured loans (%) 6.9 11.4 8.2 -450 bps -129 bps

Slippage (Rs mn) 7,699 5,055 17,477 52.3 (55.9) 15,677 31,047 98.0 10,422

Slippage (%) 5.4 4.1 12.1 135 bps -666 bps 2.6 5.7 306 bps 1.5


Yield on advances 9.1 9.8 8.5 -71 bps 60 bps 9.1 9.3 24 bps 9.0

Yield on investment 8.1 7.4 7.3 72 bps 83 bps 7.9 7.1 -75 bps 7.8

Cost of deposits 5.0 5.4 4.9 -37 bps 11 bps 4.9 4.9 -2 bps 5.0

CD ratio 77.3 67.9 71.1 937 bps 616 bps 74.5 71.1 -339 bps 74.9

Cost to income 61.7 55.2 67.8 651 bps -611 bps 61.1 58.9 -215 bps 59.7

Cost to average assets 2.5 2.2 2.6 29 bps -5 bps 2.3 2.3 -2 bps 2.3

Credit cost 1.7 4.2 1.7 -245 bps 0 bps 1.2 2.0 82 bps 1.0

RoA 0.2 0.1 0.1 0.4 0.2 0.6

RoE 3.4 2.1 1.9 5.9 3.4 9.1

Capital adequacy details (%)

CAR 12.4 11.1 11.4 132 bps 100 bps 11.4

Tier I 10.5 9.2 9.2 134 bps 126 bps 9.2

Tier II 1.9 1.9 2.2 -2 bps -26 bps 2.2

Key parameters (#)

Branches 916 904 909 1.3 0.8 949 909 (4.2) 989

ATM 1,211 1,119 1,199 8.2 1.0 1,299 1,199 (7.7) 1,399

J&K Bank Banks


Gross NPLs declined 20 bps qoq; slippages still high at ~5% of loans

GNPL ratio dropped 20 bps qoq to 9.8% of loans even when slippages were high at 5%

because of increased slippages from the restructured loan portfolio. The rise in slippages was

on the back of higher slippages from the restructured loan portfolio. Restructured loans

dropped 130 bps qoq to 7% of loans with nearly all of these loans coming from within the

state of J&K. There have been some more disbursements to the restructured loan portfolio

which could be due to drawdown of existing unutilized credit lines of customers. The

portfolio within the state has seen steady repayment and limited stress so far giving comfort

that the risk is probably not as bad as it was initially perceived given the performance of

restructured loans in general for the sector.

One of the key positives of the bank is the high coverage ratio it maintains. Reported PCR

(incl. write-offs) stood at ~67%, highest among peers.

Outstanding SDR, S4A and 5/25 dispensations dropped 20 bps qoq to 0.6% (S4A and 5/25

was flat qoq) and including the restructured loans, this is at 7.5% of loans. We forecast

GNPL to drop to 6% of loans by FY2021E driven by a sharp drop in slippages going forward

(2.6% in FY2019E and 1.5% in FY2020E).

Exhibit 2: Restructured loans dropped 80 bps qoq Movement of restructured loans, March fiscal year-ends, 1QFY17-1QFY19 (` mn)


Exhibit 3: NPLs within the state has been low Total advances within the state and corresponding NPLs for major players, March fiscal year-ends, 2010-2018

Source: Public documents, Kotak Institutional Equities

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

Movement of restructured loans (gross)

Opening 32,354 32,474 32,463 32,490 63,820 64,154 66,123 67,145 61,330

Additions 1,677 1,121 468 33,572 2,231 3,747 3,756 4,078 2,910

Repayments/Upgradations 1,557 1,132 441 2,242 1,897 1,778 2,733 9,893 3,365

Closing 32,474 32,463 32,490 63,820 64,154 66,123 67,145 61,330 60,875

Additions (% of opening loans) 1.3 0.9 0.4 29.8 1.8 3.1 2.9 2.8 2.0

Reductions (% of opening loans) 1.2 0.9 0.4 2.0 1.5 1.5 2.1 6.8 2.4

Reductions (% of opening restructured loans)4.8 3.5 1.4 6.9 3.0 2.8 4.1 14.7 5.5

Restructured loans outstanding (%) 6.6 6.8 7.2 12.8 13.2 12.9 11.6 10.8 10.2

Movement of NPLs

Opening 43,686 47,149 56,830 57,149 60,000 56,406 59,829 62,321 60,067

Additions 13,774 10,625 1,910 6,476 5,055 4,804 3,711 17,477 7,699

Repayments/Upgradations 8,321 945 1,590 3,625 8,649 1,382 1,219 19,731 5,149

Closing 49,139 56,830 57,149 60,000 56,406 59,829 62,321 60,067 62,617

Gross NPL (%) 9.3 11.3 11.8 11.2 10.8 10.9 10.1 10.0 9.8

Net NPL (%) 6.2 6.8 6.0 4.9 4.7 4.8 4.3 4.9 4.7

Additions (% of opening loans) 11.0 8.7 1.6 5.7 4.1 3.9 2.9 12.1 5.4

Reductions (% of opening loans) 6.6 0.8 1.3 3.2 6.9 1.1 0.9 13.6 3.6

Fresh impairment (%) 12.3 9.6 2.0 35.5 5.9 7.0 5.8 14.9 7.5

5:25 0.8 0.8 0.5 0.5 0.5 0.4 0.4 0.4

SDR 0.7 1.0 0.6 0.2 0.7 0.9 0.2 —

S4A — 0.3 0.7 0.5 0.5 0.2 0.2 0.2

Total impaired ratio (%, ex 5:25) 16 20 21 25 25 25 23 21 20

Total advances (Rs bn) NPA outstanding (Rs bn) NPA outstanding (%)

2011 2012 2013 2014 2015 2016 2017 2018 2011 2012 2013 2014 2015 2016 2017 2018 2011 2012 2013 2014 2015 2016 2017 2018

J&K Bank 110 127 159 196 229 256 268 321 2.9 3.6 4.4 4.2 5.6 8.8 10.3 11.1 2.6 2.9 2.8 2.1 2.4 3.4 3.8 3.5

SBI 16 19 22 27 31 40 45 59 1.3 1.7 1.8 2.1 1.4 1.3 1.0 1.1 8.1 9.2 8.1 7.8 4.5 3.3 2.2 1.8

PNB 8 9 9 9 10 11 11 12 1.0 1.1 1.5 1.5 1.6 1.6 1.5 1.5 11.9 13.3 17.1 16.7 16.6 15.5 13.7 12.6

HDFC Bank 1 2 4 7 9 13 15 18 0.0 0.0 0.1 0.2 0.3 0.3 0.5 0.4 3.4 1.0 1.7 2.5 3.7 1.9 3.3 2.1

ICICI Bank 0 1 1 2 2 3 3 4 - - - - - - 1.6 0.0 - - - - - - 50.2 0.6

Total 154 181 226 306 348 406 428 504 6.5 7.7 10.5 11.4 14.8 18.3 21.7 20.7 4.2 4.3 4.6 3.7 4.2 4.5 5.1 4.1

Banks J&K Bank


Exhibit 4: J&K bank has a high share of PSL loans in total loans within the state Share of priority sector advances to total advances within J&K, March fiscal year-ends, 2010-2018


Exhibit 5: Gross NPLs in the state is currently at 3.3% Key data points of loans and NPLs in J&K for the sector, March fiscal year-ends, 2018

Source: Public documents, websites

Loan growth accelerates back to ~20% levels driven by strong performance in

home state

Overall gross advances increased 23% yoy primarily on account strong loan growth within

J&K. Loan growth outside J&K was relatively muted at 13% yoy. Corporate loan book grew

12% yoy. The share of gross loans outside J&K remained in the range of 47-52% over the

last few quarters (currently at 48%). Overall growth in retail loans was strong at 22% yoy; a

trend similar to previous quarters. The growth in retail loans has been strong in the home

state at 27% yoy while outside J&K they grew 13% yoy. The share of retail loans has

increased to ~22% of loan mix. Growth in corporate loans was relatively slower at 18% yoy.

SME and agriculture loan growth was robust at 22% yoy and 23% yoy respectively.

Priority sector advances (Rs bn) Priority sector advances (%)

2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018

J&K Bank 55 65 68 85 103 122 136 135 163 45.4 59.2 53.5 53.6 52.6 53.1 53.0 50.3 50.9

SBI 11 12 14 16 18 19 21 20 26 75.5 74.6 72.7 70.8 66.3 61.9 53.4 45.1 44.7

PNB 6 6 8 8 8 8 8 7 8 69.6 72.2 87.5 94.3 82.7 81.0 72.2 67.0 65.8

HDFC Bank 0 0 1 2 3 5 7 8 8 19.8 19.7 31.5 37.2 45.7 52.2 53.0 53.6 40.7

ICICI Bank 0 0 0 1 1 1 1 1 1 2.6 26.4 22.2 44.5 43.3 34.0 27.6 25.7 26.2

Total 85 96 106 131 156 180 202 203 240 51.6 62.1 58.7 58.1 50.8 51.6 49.8 47.3 47.6

J&K Bank

District

Number of

branches Deposits

(% of

deposits) Loans

(% of

loans) Gross NPLs Gross NPL Loans

(% of

loans)

Gross

NPLs

Gross

NPL

(#) (Rs mn) (%) (Rs mn) (%) (Rs mn) (%) (Rs mn) (Rs mn) (%)

1 Srinagar 213 217,256 20.3 110,454 21.3 6,959 6.3 83,542 27.9 5,607 6.7

2 Ganderbal 42 11,601 1.1 7,833 1.5 225 2.9 6,186 2.1 161 2.6

3 Baramulla 158 46,453 4.3 33,511 6.5 1,500 4.5 23,210 7.7 436 1.9

4 Bandipora 43 11,497 1.1 7,437 1.4 237 3.2 5,545 1.8 51 0.9

5 Anantnag 135 43,574 4.1 31,144 6.0 368 1.2 19,717 6.6 93 0.5

6 Kulgam 53 13,021 1.2 9,813 1.9 155 1.6 7,429 2.5 16 0.2

7 Pulwama 84 26,132 2.4 20,139 3.9 970 4.8 15,561 5.2 751 4.8

8 Shopian 36 9,754 0.9 9,972 1.9 201 2.0 9,700 3.2 141 1.5

9 Budgam 100 23,333 2.2 18,633 3.6 366 2.0 13,797 4.6 187 1.4

10 Kupwara 86 22,086 2.1 16,905 3.3 769 4.5 11,046 3.7 196 1.8

Kashmir Region 950 424,705 39.7 265,841 51.2 11,750 4.4 195,733 65.3 7,640 3.9

11 Poonch 46 22,900 2.1 6,203 1.2 136 2.2 3,754 1.3 6 0.1

12 Rajouri 87 35,459 3.3 10,867 2.1 241 2.2 6,307 2.1 10 0.2

13 Jammu 428 361,839 33.8 109,872 21.2 8,983 8.2 40,354 13.5 1,942 4.8

14 Samba 89 38,398 3.6 18,770 3.6 384 2.0 9,757 3.3 83 0.8

15 Udhampur 85 38,976 3.6 12,700 2.4 172 1.4 5,638 1.9 25 0.4

16 Reasi 52 18,476 1.7 6,933 1.3 167 2.4 4,076 1.4 26 0.6

17 Kathua 109 48,825 4.6 20,357 3.9 604 3.0 10,700 3.6 43 0.4

18 Doda 56 17,589 1.6 6,805 1.3 114 1.7 4,197 1.4 27 0.6

19 Ramban 34 12,176 1.1 4,149 0.8 208 5.0 2,779 0.9 7 0.2

20 Kishtwar 27 13,091 1.2 3,768 0.7 103 2.7 2,723 0.9 21 0.8

Jammu region 1,013 607,730 56.7 200,423 38.6 11,110 5.5 90,284 30.1 2,174 2.4

21 Leh 45 26,480 2.5 7,706 1.5 84 1.1 3,597 1.2 2 0.1

22 Kargil 27 12,009 1.1 4,734 0.9 120 2.5 3,092 1.0 2 0.1

Ladakh region 72 38,489 3.6 12,440 2.4 204 1.6 6,690 2.2 4 0.1

Corporate and other lending

J&K Bank 3,932 0.8 4,485 1.5

SBI 24,595 4.7

PNB 11,913 2.3

Total others 40,440 7.8 4,485 1.5

Total 2,035 1,070,923 100.0 519,143 100.0 23,064 4.44 299,759 100.0 9,864 3.3

Note:

1) Number for J&K bank is as of 2QFY18.

All banks

J&K Bank Banks


We forecast 15% CAGR in net advances from FY2018-2021E as the management remains

positive on growth in advances within the state.

Exhibit 5: J&K state saw revival in loan growth at 18% yoy in FY2018 Key parameters for J&K state, March fiscal year-ends, 2010-2018 (Rs bn)

Source: Public documents, websites

Exhibit 6: Gross loan growth was strong at 19% yoy within J&K March fiscal year-ends, 4QFY17-4QFY18 (` bn)


Reported NIM expand 50 bps qoq to 3.7%

Reported NIM expanded 50 bps qoq to 3.7% on the back of sharp improvement in lending

yields. Reported yield on loans increased 70 bps qoq to 8.5% on the back of lower interest

reversals. There was no relief from the cost of deposits which increased 8 bps qoq to 4.8%.

We expect lending yields to remain under pressure in the medium term due to a change in

the loan mix to lower yielding retail products. J&K Bank however maintains a strong CD ratio

which provides some comfort to the NIM profile. Growth in CASA and a drop GNPL will

provide slight comfort to NIM. We forecast NIM (calculated) to drop ~10 bps to 3.5% in

FY2019E.

CASA ratio stable qoq to 51%

CASA increased 8% yoy and the ratio was stable qoq at 51%. CASA ratio within J&K was

strong at ~55%. The growth in CASA was led by a sharp rise in CA deposits at 31% yoy

and a modest rise in SA at 5% yoy. Overall deposit growth stood at 8% yoy. Growth in SA

within J&K was modest at 5% yoy in (stable qoq). The growth in SA within the home state

remains a sign of concern for the bank. The bank can focus on low cost deposits as it has a

fairly liquid balance sheet. We forecast a modest 12% CAGR in CASA from FY2018-2021E

stable CASA ratio of ~50% over the same period.

2010 2011 2012 2013 2014 2015 2016 2017 2018

Branches 1,038 1,082 1,205 1,371 1,562 1,661 1,718 1,723 1,749

Growth (%) 4.2 11.4 13.8 13.9 6.3 3.4 0.3 1.5

Deposits 363 436 527 617 692 758 829 958 1,064

Growth (%) 20.0 20.9 17.1 12.2 9.5 9.3 15.6 11.1

Loans 164 154 181 226 306 348 406 428 504

Growth (%) (5.9) 17.1 25.0 35.5 13.7 16.7 5.4 17.6

1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 YoY (%) QoQ (%)

Deposits (Rs bn) 717 704 732 800 774 7.9 (3.2)

In J&K 618 617 632 690 677 9.5 (1.9)

Outside J&K 99 87 99 110 98 (1.9) (11.6)

Gross Loans (Rs bn) 487 513 579 569 598 22.8 5.1

In J&K 277 295 307 318 333 20.3 4.9

Outside J&K 211 218 272 252 265 26.0 5.5

Banks J&K Bank


Exhibit 7: J&K Bank’s market share in total deposits dropped 70 bps in 9MFY18 March fiscal year-ends, 2010-2018 (%)


Other highlights for the quarter

Non-interest income jumped 22% yoy on the back of a sharp rise in miscellaneous

income at ~100%. Growth in fee income was moderate at 5% yoy. Insurance

distribution income grew 17% yoy. Treasury income dropped 25% yoy.

Cost-income ratio was high at 68% yoy in 4QFY18 driven by a sharp rise in employee

expenses at 16% yoy in 4QFY18 and flat NII. Operating expenses increased 12% yoy in

4QFY18. Cost-to-income ratio has been high in the range of 55-65% over the last few

quarters. We forecast cost to income ratio to moderate to ~56% by FY2021E from 59%

in FY2018 driven by modest 9% CAGR in operating expenses from FY2018-2021E.

CAR increased 100 bps qoq to 12.4% with tier I ratio at 9.2% (CET-1).

Exhibit 8: CD ratio improved in the current quarter Credit growth and deposit growth, CD ratio, March year-ends, 1QFY16-1QFY19 (%)


Exhibit 9: Gross NPL ratio dropped ~20 bps qoq to <10% Gross NPL, net NPL and provision coverage (ex write-off), March year-ends, 1QFY16-1QFY19


Branch market share (%) Loans market share (%) Deposits market share (%)

2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018

J&K Bank 38.4 41.1 41.2 42.1 42.4 42.3 43.1 43.4 44.5 74.2 71.0 70.2 70.3 64.1 65.8 63.1 62.6 63.7 63.6 66.2 67.0 66.2 65.3 64.2 63.6 64.1 64.8

SBI 14.7 13.4 12.7 12.0 11.6 11.0 10.9 10.8 11.1 8.8 10.1 10.5 9.9 8.9 8.9 9.8 10.5 11.7 15.9 14.4 13.9 13.6 13.6 13.7 14.0 14.4 14.4

PNB 8.4 7.8 7.4 6.6 6.2 6.1 6.1 6.1 6.1 5.0 5.3 4.7 3.9 3.0 2.8 2.6 2.6 2.4 6.9 6.6 6.5 6.2 6.5 6.8 6.9 6.7 6.3

HDFC Bank 1.0 0.9 2.8 4.3 4.2 4.4 4.2 4.2 4.2 0.6 0.8 1.2 2.0 2.3 2.7 3.3 3.5 3.7 0.9 1.0 1.1 1.7 2.0 2.4 2.6 2.7 2.7

ICICI Bank 0.5 0.6 0.7 0.8 1.7 2.0 2.1 2.1 2.1 0.3 0.2 0.4 0.6 0.5 0.5 0.7 0.8 0.9 0.5 0.5 0.5 0.5 0.5 0.6 0.8 0.8 0.9

30

40

50

60

70

80

-10

0

10

20

30

40

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

Credit growth (LHS) Deposits growth (LHS)CD ratio (RHS)

-

20

40

60

80

5

17

29

41

53

65

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 NPA (LHS) Net NPA (LHS)Provision (RHS)

(Rs bn) (%)

J&K Bank Banks


Exhibit 10: Provision coverage ratio (calculated) improved in 1QFY19 Break-up of gross NPL within and outside J&K, March fiscal year-ends, 2011-1QY19

Source: Public documents, Company, Kotak Institutional Equities

Exhibit 11: J&K Bank trading at 0.5X one-forward book One-year forward rolling trading multiples, July 2010-July 2018 (X)

Source: Company, Bloomberg, Kotak Institutional Equities

Exhibit 12: J&K bank continues to trade at steep discount to

peers Trading premium to private banks, July 2010- July 2018 (X)

Source: Company, Bloomberg, Kotak Institutional Equities

2011 2012 2013 2014 2015 2016 2017 2018 1QFY19

Gross NPLs (Rs bn) 5 5 5 8 28 44 60 60 62

Gross NPLs (%) 2.0 1.5 2.0 1.7 6.0 8.3 11.2 10.0 9.8

Net NPLs (Rs bn) 1 0 1 1 12 22 24 28 28

Net NPLs (%) 0.2 0.2 0.2 0.2 2.8 4.3 4.9 4.9 4.7

Restructured loans (Rs bn) 20.0 13.7 14.9 15.8 24.7 32.4 63.8 61.3 60.9

Restructured loans (%) 7.6 4.1 3.8 3.3 5.5 5.2 11.1 8.2 6.9

Provision coverage (%) 89.7 90.4 89.0 87.0 55.3 50.5 59.6 53.5 55.4

Within Jammu and Kashmir

Gross NPL (Rs bn) 3 4 4 4 6 9 10 11 12

Gross NPL (%) 2.6 2.9 2.8 2.1 2.4 3.4 3.9 3.5 3.5

Outside Jammu and Kashmir

Gross NPL (Rs bn) 2 2 1 4 22 35 50 49 51

Gross NPL (%) 1.2 0.8 0.3 1.3 9.3 12.7 17.6 17.2 16.9

0.0

0.4

0.8

1.2

1.6

2.0

Jul-10

Jul-11

Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

0.0

0.2

0.4

0.6

0.8

1.0

Jul-10

Jul-11

Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

Banks J&K Bank


Exhibit 13: Break-up of balance sheet Quarterly balance sheet, March Fiscal year-ends, 1QFY18-1QFY19 (` mn)


Exhibit 14: Key changes in estimates March fiscal year-ends, 2019E-2021E (` mn)


1QFY18 2QFY18 3QFY18 4QFY18 1QFY19

Balance sheet snapshot (Rs mn)

Capital 557 557 557 557 557

Reserves and surplus 59,293 59,973 60,661 61,055 61,581

Deposits 717,445 703,846 731,551 800,065 774,196

Borrowings 12,761 11,305 40,045 16,283 36,227

Total 808,945 793,605 850,645 896,876 890,931

Cash and balance with RBI 32,542 31,582 30,898 43,284 34,315

Balance with banks etc 30,225 9,100 2,290 39,245 474

Investments 207,040 189,054 184,959 188,800 201,016

Advances 487,332 513,413 579,287 569,128 598,411

Fixed assets 15,505 15,528 15,872 16,146 16,096

Other assets 36,301 34,929 37,339 40,274 40,620

Total 808,945 793,605 850,645 896,876 890,931

New estimates Old estimates % change

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

Net Interest income 30,523 33,721 39,270 30,568 34,113 39,718 (0.1) (1.2) (1.1)

NIM (%) 3.5 3.4 3.5 3.5 3.5 3.5 0 bps -4 bps -4 bps

Loan (Rs bn) 654 753 869 654 753 869 - - -

Other income 5,251 5,942 6,733 5,304 6,067 6,727 (1.0) (2.1) 0.1

Total income 35,774 39,663 46,003 35,872 40,181 46,445 (0.3) (1.3) (1.0)

Operating expense 21,856 23,681 25,881 21,856 23,681 25,881 - - -

Employee expense 14,020 15,273 16,790 14,020 15,273 16,790 - - -

Other expense 7,836 8,408 9,090 7,836 8,408 9,090 - - -

Provisions 8,636 7,331 8,410 7,636 7,331 8,410 13.1 - -

NPLs 7,336 7,031 8,109 7,336 7,031 8,109 - - -

PBT 5,281 8,651 11,712 6,379 9,168 12,154 (17.2) (5.6) (3.6)

Tax 1,584 2,595 3,631 1,914 2,750 3,768 (17.2) (5.6) (3.6)

PAT 3,697 6,055 8,081 4,465 6,418 8,386 (17.2) (5.6) (3.6)

PBT - treasury + provisions13,318 15,282 19,321 13,215 15,499 19,563 0.8 (1.4) (1.2)

J&K Bank Banks


Exhibit 15: Jammu and Kashmir Bank – Key growth rates and financial ratios March Fiscal year-ends, 2016-2021E (%)


2016 2017 2018 2019E 2020E 2021E

Growth rates (%)

Net loan 12.6 (0.8) 14.2 14.8 15.2 15.5

Customer assets 11.7 (4.2) 14.2 14.8 15.1 15.5

Investments excld. CPs and debentures growth (11.8) 6.3 (8.5) (4.8) 16.1 18.9

Net fixed and leased assets 10.9 102.1 4.6 0.5 0.3 (0.0)

Cash and bank balance (14.2) 68.2 53.2 4.8 7.5 8.5

Total Asset 5.7 2.2 9.4 8.9 13.6 14.6

Deposits 5.5 4.4 10.4 9.6 14.6 15.5

Current 10.2 32.6 17.9 9.6 13.8 11.4

Savings 11.8 19.2 5.5 9.6 14.0 14.9

Fixed 1.3 (9.7) 12.3 9.6 15.3 17.1

Net interest income 2.2 (7.3) 14.3 6.3 10.5 16.5

Loan loss provisions (4.7) 163.6 (56.8) (31.9) (4.2) 15.3

Total other income (15.1) (2.2) 0.5 6.0 13.2 13.3

Net fee income 16.4 (12.4) 13.0 6.0 8.0 9.0

Net capital gains 30.0 (7.3) (72.0) (20.8) 33.3 25.0

Net exchange gains (18.2) (17.1) (17.1) 10.0 10.0 10.0


Employee expenses 14.0 10.1 14.6 8.9 8.9 9.9

Key ratios (%)

Yield on average earning assets 9.5 8.9 8.3 8.2 8.2 8.3

Yield on average loans 10.6 9.6 9.3 9.1 9.0 9.2

Yield on average investments 7.7 8.7 7.2 8.0 7.9 7.9

Average cost of funds 5.9 5.7 4.8 4.8 4.9 5.0

Interest on deposits 5.9 5.8 4.7 4.8 4.9 4.9

Difference 3.6 3.2 3.5 3.4 3.3 3.3

Net interest income/earning assets 3.8 3.4 3.6 3.5 3.4 3.5

Spreads on lending business 4.7 3.8 4.5 4.3 4.2 4.2

Spreads on lending business (incl. Fees) 5.1 4.2 4.9 4.6 4.5 4.5

New provisions/average net loans 2.0 5.0 2.0 1.2 1.0 1.0

Total provisions/gross loans 5.4 9.3 5.6 5.9 6.0 6.1

Interest income/total income 84.3 83.6 85.3 85.3 85.0 85.4

Other income / total income 15.7 16.4 14.7 14.7 15.0 14.6

Fee income to total income 6.4 6.0 6.0 6.0 5.8 5.5

Fee income to advances 0.4 0.4 0.4 0.4 0.3 0.3

Fees income to PBT 29.6 (11.9) 167.2 40.6 26.8 21.6

Net trading income to PBT 17.2 10.9 (119.8) (13.3) 4.6 4.3

Exchange income to PBT 3.2 (1.2) 1.5 0.4 0.3 0.2


Operating expenses/assets 2.0 2.1 2.3 2.3 2.3 2.2

Operating profit /AWF 0.8 (2.2) 0.1 0.6 0.8 1.0

Tax rate 39.9 (8.4) (67.6) 30.0 30.0 31.0

Dividend payout ratio 21.0 - - 20.0 20.0 20.0

Share of deposits

Current 10.4 13.2 14.1 14.1 14.0 13.5

Savings 33.7 38.5 36.8 36.8 36.6 36.4

Loans-to-deposit ratio 72.3 68.7 71.1 74.5 74.9 74.9

Equity/assets (EoY) 8.0 6.9 6.9 6.6 6.2 5.9

Dupont analysis (%)



Net other income 0.6 0.6 0.6 0.6 0.6 0.6


Invt. depreciation 0.0 0.4 0.2 0.1 - -

(1- tax rate) 60.1 108.4 167.6 70.0 70.0 69.0

ROA 0.5 (2.0) 0.2 0.4 0.6 0.7

Average assets/average equity 12.5 13.4 14.5 14.9 15.6 16.5

ROE 6.6 (27.0) 3.4 5.9 9.1 11.2

Banks J&K Bank


Exhibit 16: Jammu and Kashmir Bank - Income statement and balance sheet March Fiscal year-ends, 2016-2021E (` mn)


2016 2017 2018 2019E 2020E 2021E

Income statement


Loans 50,277 47,844 49,777 55,581 63,628 74,325

Investments 16,467 17,826 14,316 14,533 15,080 17,606

Cash and deposits 1,693 1,188 2,121 1,871 1,950 2,058


Deposits from customers 39,868 40,792 36,123 40,308 45,779 53,557



Net interest income (after prov.) 17,641 181 17,931 23,187 26,690 31,160

Other income 5,040 4,929 4,953 5,251 5,942 6,733

Net fee income 2,044 1,791 2,023 2,144 2,316 2,524

Net capital gains 1,461 1,354 379 300 400 500

Net exchange gains 225 186 18 20 22 24



Depreciation on investments 273 2,992 1,828 1,000 - -

Other Provisions 30 73 4 300 300 301

Pretax income 6,917 (15,060) 1,210 5,281 8,651 11,712

Tax provisions 2,757 1,263 (818) 1,584 2,595 3,631

Net Profit 4,160 (16,323) 2,027 3,697 6,055 8,081

% growth (18.2) (492.3) (112.4) 82.4 63.8 33.5

PBT - Treasury + Provisions 15,218 11,590 13,440 13,618 15,582 19,622

% growth (11.7) (23.8) 16.0 1.3 14.4 25.9

Balance sheet

Cash and bank balance 32,030 53,859 82,529 86,454 92,977 100,889

Cash 2,779 2,654 2,997 2,997 2,997 2,997

Balance with RBI 28,488 33,255 40,287 44,162 50,626 58,468

Balance with banks 461 359 246 295 354 425

Net value of investments 203,536 212,909 188,800 180,186 207,626 245,136

Govt. and other securities 139,480 163,252 171,970 167,629 195,110 232,657

Shares 1,753 2,730 3,295 3,295 3,295 3,295

Debentures and bonds 18,116 457 457 411 370 333

Net loans and advances 501,933 498,161 569,127 653,589 752,657 869,239

Fixed assets 7,637 15,433 16,145 16,232 16,275 16,273

Net Owned assets 7,637 15,433 16,145 16,232 16,275 16,273

Other assets 57,544 39,824 40,274 40,274 40,274 40,274

Total assets 802,681 820,187 896,875 976,735 1,109,808 1,271,811

Deposits 693,902 724,631 800,065 877,035 1,005,402 1,161,132

Borrowings and bills payable 25,261 15,284 19,205 19,262 19,330 19,412


Total liabilities 738,441 763,422 835,264 912,291 1,040,726 1,196,538

Paid-up capital 485 521 557 557 557 557

Reserves & surplus 63,755 56,243 61,055 63,887 68,526 74,716

Total shareholders' equity 64,240 56,765 61,612 64,444 69,083 75,273


Marginally lower realizations and lower other income lead to earnings miss

CESC reported steady operational performance with net income of `1.8 bn (KIE `2.1 bn)

missing estimates on account of weaker realizations and drop in other income (58% qoq).

Unit sales remained flat at 2,840 MU. Realization improved 6.5% yoy to ` 7.43/unit though

were lower than our estimate of `7.6/kwh. We note that the tariff petition for FY2019 has

been submitted although approval of revised tariffs may still be a few months away. We note

the continued dependence on purchased power, with 45% of the purchase power (1,110 MU)

coming from Haldia out of the 1,608 MU of power purchased.

Strong generation at new projects; Spencer reports improved margins

Power generation at Haldia was up 7.8% yoy to 1,110 MUs with the plant operating at PLF of

92.5% in 1QFY19 (85.4% in 1QFY18). Improvement in generation was largely on the back of

rising demand from standalone business. Additionally, the company signed PPA of 185 MW for

its Chandrapur plant in March 2018 resulting in improved generation (967 MU in 1QFY19

compared to 650 MUs in 1QFY18). Chandrapur currently has PPAs for sale of 472 MW of

power, out of a total capacity of 600 MW. On the retail front, Spencer reported improved

metrics with same-stores sales and EBITDA of `1,629/sq. ft per month (+3.6% yoy) and

`102/sq. ft per month. We note improving same-store sales as well as new expansions for the

retail business. Losses at Spencer were down to `300 mn in FY2018 (`1 bn in FY2017).

Restructuring on course, improving retail metrics will further aid re-rating

Restructuring of CESC into individual business entities will likely result in re-rating of valuation

multiples, as cash flows from the power business will not be utilized in non-related business

interest of the promoter group. CESC has already secured shareholder approval for the

proposed restructuring in December 2017, as well as clearance from NCLT. The company is

now awaiting regulatory clearance from WBERC for separating the generation and distribution

arms of the standalone business into separate legal entities. We maintain our target price of

`1,180/share and revise our rating to BUY (from ADD). Revision in earnings for FY2018

(+12.8%) and FY2019 (+9%) is on account of lower retail losses and improved utilization at

Chandrapur.

CESC (CESC) Utilities

Reducing losses at Chandrapur and Spencer prompt upgrade. CESC continues to

report stable performance from extant operations in Kolkata as well as Haldia, even as

improving PLFs at Chandrapur will likely help improve consolidated earnings in

FY2019E. Spencer Retail turned PAT-positive in FY2018 itself and the company will

likely report a better performance on the back of improving operational metrics. We

upgrade CESC to BUY (from ADD) with an unchanged target price of `1,180/share

noting inexpensive valuations and improving earnings trajectory.

BUY

JULY 27, 2018

RESULT, CHANGE IN RECO.


Price (`): 909


BSE-30: 36,985

Murtuza Arsiwalla

Samrat Verma

CESC







MFs 20.7 EBITDA (Rs bn) 33.8 38.4 39.8


Absolute (5.2) (14.6) 1.2 ROE (%) 7.9 10.0 10.4



1,190-860

120.5

Utilities CESC


Exhibit 1: Healthy growth in unit sales were offset by high-cost power purchases Quarterly results for CESC, March fiscal year-ends (Rs mn)


Exhibit 2: Financial performance of key subsidiaries of CESC, March fiscal year-ends, 2015-18 (Rs mn)


(% chg.)

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

Net sales 21,090 21,963 19,900 20,810 (4.0) 6.0 1.3 80,726 79,820 1.1

Operating costs

Cost of electrical energy purchased (8,370) (8,046) (7,770) (6,420) (30,767) (29,580)

Cost of fuel (3,870) (3,783) (3,900) (3,290) (13,656) (14,020)

Personnel costs (2,360) (2,662) (2,110) (2,610) (8,453) (8,650)

Other expenses and provisions (2,040) (2,766) (1,990) (2,980) (8,991) (8,950)

Total operating expense (16,640) (17,257) (15,770) (15,300) (61,866) (61,200)

EBITDA 4,450 4,706 4,130 5,510 (5.4) 7.7 (19.2) 18,859 18,620 1.3

EBITDA margin (%) 21.1 21.4 20.8 26.5 23.4 23.3

Depreciation (1,110) (1,110) (1,050) (1,110) (4,577) (4,330)

EBIT 3,340 3,596 3,080 4,400 (7.1) 8.4 (24.1) 14,282 14,290 (0.1)

Other income 200 402 400 480 1,669 1,660

Interest (1,200) (1,170) (1,210) (1,160) (4,681) (4,840)

PBT 2,340 2,828 2,270 3,720 (17.2) 3.1 (37.1) 11,270 11,110 1.4

Tax (520) (650) (490) (800) (2,171) (2,400)

Net profit 1,820 2,177 1,780 2,920 (16.4) 2.2 (37.7) 9,099 8,710 4.5

Extraordinary income/ (expenses) — — — — — —

EPS (Rs/share) 14 16 13 22 69 66

Key operating parameters

Units sold (MU) 2,840 2,890 2,853 2,393 (1.7) (0.5) 18.7 10,484 10,350 1.3

Units generated - gross (MU) 1,709 1,720 1,736 1,506 (0.6) (1.6) 13.5 6,825 6,337 7.7

Units purchased (MU) 1,608 1,518 1,605 1,202 5.9 0.2 33.8 5,333 5,638 (5.4)

Overall PLF (%) 70 — 71 — 62 64

T&D loss (%) 10 — 11 — 6 10

Tax rate (%) 22 23 22 22 19 22

Tariff (Rs/kwh) 7.43 7.60 6.98 8.70 (2.3) 6.5 (14.6) 7.70 7.71 (0.2)

Fuel cost(Rs/kwh) 2.26 2.20 2.25 2.18 2.9 0.8 3.7 2.00 2.21 (9.6)

Power purchased (Rs/kwh) 5.21 5.30 4.84 5.34 (1.8) 7.5 (2.5) 5.77 5.25 10.0

Revenue EBITDA PAT

2015 2016 2017 2018 yoy (%) 2015 2016 2017 2018 yoy (%) 2015 2016 2017 2018 yoy (%)

Standalone 61,322 64,344 74,100 79,820 8 14,923 15,396 18,110 18,620 3 6,977 7,070 8,630 8,710 1

Firstsource Solutions Ltd 30,034 31,747 34,569 34,315 (1) 3,495 3,492 3,393 3,552 5 2,345 2,654 2,792 3,266 17

Haldia Energy Ltd 1,716 17,040 18,879 22,610 20 810 8,850 9,173 10,940 19 (308) 2,326 2,965 3,130 6

Dhariwal Infrastructure Ltd 1,264 1,050 4,451 8,960 101 (688) (690) 109 2,290 1,993 (4,575) (5,894) (4,840) (1,990) (59)

Spencer`s Retail Ltd 16,657 18,588 20,124 20,910 4 (733) (596) (260) 170 (165) (1,516) (1,423) (1,076) (300) (72)

Crescent Power Ltd 1,391 1,560 1,671 1,750 5 700 806 872 840 (4) 405 474 476 470 (1)

Quest Properties India Ltd 796 894 1,130 1,270 12 383 434 430 560 30 44 95 81 250 209

Others (3,455) (17,482) (15,893) (8,025) (50) (886) (466) (257) (3,162) 1,131 (1,387) (1,598) (2,119) (1,986) (6)

Consolidated 109,726 117,740 139,030 161,610 16 18,004 27,228 31,570 33,810 7 1,985 3,704 6,910 11,550 67

CESC Utilities


Exhibit 3: Retail operating metrics have shown sequential improvement in 3QFY18 Store-level sales and EBITDA for Spencer Retail (Rs/sq. ft per month)


Exhibit 4: Our fair value estimate for CESC is Rs1,180/share Sum-of-the-parts valuation for CESC


Exhibit 6: Change in estimates for CESC, March fiscal year-ends, 2019-21E (Rs mn)


1,349

1,477 147114921452

1,578 1,588

1714

157615301507

16071528

157562

92

8389

85

97

108

121

10194

98

50

60

70

80

90

100

110

120

130

1,250

1,350

1,450

1,550

1,650

1,750

FY2

01

5

1Q

FY

16

2Q

FY

16

3Q

FY

16

FY2

01

6

1Q

FY

17

2Q

FY

17

3Q

FY

17

FY2

01

7

1Q

FY

18

2Q

FY

18

3Q

FY

18

FY2

01

8

1Q

FY

19

Sales (LHS) EBITDA (RHS)

Value

Methodology (Rs/share)

Standalone DCF-to-equity Business enjoys very high predictability of cash flows and profitability (>20% RoE) 578

Cash Book value Marketable securities & cash on books (Rs bn) 16

Chandrapur DCF-to-equity 287 MW tied-up so far with Tamil Nadu and Noida Power 101

Haldia DCF-to-equity 600 MW sold to Kolkatta distribution business 125

Crescent Power DCF-to-equity 40 MW capacity based on coal rejects available for merchant sale 13

Retail EV/Sales Valued the retail business at 0.7X sales, at a steep discount to listed peers 189

Firstsource Solutions Market Price 30% discount to CMP of Firstsource 145

CESC Properties DCF-to-equity 425,000 sq.ft of mall area leased out at a rental of Rs130/sq/ft 12

Total 1,180

Revised estimates Old estimates Change (%)

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

Revenue 168,588 180,063 188,551 169,082 180,209 188,697 (0.3) (0.1) (0.1)

EBITDA 38,385 39,841 41,011 36,966 38,687 39,857 3.8 3.0 2.9

Net profit 15,214 16,976 18,690 13,492 15,588 17,357 12.8 8.9 7.7

Utilities CESC


Exhibit 7: Profit model, balance sheet and cash model of CESC, March fiscal year-ends, 2016-21E (Rs mn)


2016 2017 2018 2019E 2020E 2021E


Net sales 117,740 139,030 161,610 168,588 180,063 188,551

EBITDA 27,228 31,570 33,810 38,385 39,841 41,011

Other income 3,446 2,990 2,800 3,110 3,365 3,632

Interest (14,856) (14,970) (13,740) (12,145) (11,384) (10,544)

Depreciation (7,725) (8,160) (8,740) (8,909) (9,057) (9,182)

Pretax profits 8,092 11,430 14,130 20,441 22,765 24,917

Minority interest (1,301) (710) 1,160 (1,399) (1,493) (1,589)

Tax (3,087) (3,810) (3,740) (3,828) (4,296) (4,638)

Net profits 3,704 6,910 11,550 15,214 16,976 18,690

Extraordinary items (40) — — — — —

Earnings per share (Rs) 27.9 52.1 87.1 114.8 128.1 141.0


Total equity 62,677 106,230 111,880 125,098 140,092 156,722

Total borrowings 149,053 139,940 137,500 126,865 120,740 114,405

Consumer security deposits 15,746 16,780 15,070 15,231 15,833 16,532

Advance against depreciation 10,097 (12,930) (14,460) (18,511) (20,251) (21,992)

Deferred tax liability 795 34,620 35,150 34,870 34,590 34,310

Minority interest 11,497 12,100 14,460 15,859 17,352 18,941

Total liabilities and equity 249,865 296,740 299,600 299,413 308,355 318,919

Cash 11,977 16,070 15,300 46,173 58,802 73,680

Net current assets 11,943 (600) (1,860) (25,714) (25,380) (25,513)

Total fixed assets 218,939 250,070 251,390 244,184 240,163 235,982

Investments 7,007 11,090 13,060 13,060 13,060 13,060

Deferred Expenditure — 20,110 21,710 21,710 21,710 21,710

Total assets 249,865 296,740 299,600 299,413 308,355 318,919


Operating cash flow, excl. working capital 28,304 15,820 18,850 25,242 27,246 29,181

Working capital (4,025) 12,543 1,260 23,854 (334) 133

Capital expenditure (12,249) (39,291) (10,060) (1,703) (5,036) (5,001)

Investments (134) (4,083) (1,970) — — —

Free cash flow 11,896 (15,012) 8,080 47,393 21,876 24,314


Hindalco acquires Aleris for US$2.58 bn

Hindalco signed a definitive agreement for purchase of 100% equity stake in Aleris at an EV of

US$2.58 bn. The purchase consideration involves cash payment of US$775 mn and assumption

of debt of US$1.8 bn at Aleris. In addition there is an earn-out of up to US$50 mn linked to

Aleris delivering EBITDA beyond the business case plan for CY2018-2020 (>US$360 mn for

CY2020E)---the incremental EBITDA will be shared in a 50:50 ratio. The management expects

to close the deal in 9 to 15 months. The earnings improvement at Aleris can be large, led by:

Ramp-up of Lewisport ABS facility in the US: HNDL expects incremental EBITDA of

US$120 mn from Automotive-finishing capacity at Lewisport, USA by CY2020E—this will aid

in EBITDA growing to US$360 mn by CY2020E (post the year of deal closing) from US$240

mn now (adjusted for outages). The company expects US$65 mn of this incremental EBITDA

from already contracted capacity and US$55 mn from new contracts which should be led by

high demand and supply tightness in the US for auto body sheets. Also, the US$360 mn

EBITDA expectation does not include the potential from improvement in Aerospace

operation earnings—this can be another US$20-30 mn opportunity.

Synergies of US$150 mn annually from 3 to 5 years. The synergy benefits of US$150 mn

a year will accrue from 3 to 5 years. Of this, close to 50% (US$70-75 mn) will be led by the

integration of Novelis’ Asia auto facility with Aleris’ China hot mill capacity, which requires

an investment of US$250-300 mn. The other 50% synergies will be led by procurement

efficiencies, supply chain, IT integration, etc.

A promising story---can be a good fit; we maintain BUY rating on the stock

Hindalco’s preference for growth in downstream value-added segment reflects high demand

growth potential for this segment as well as better returns on investment. The company

continues to earn higher RoCE at Novelis while returns in the upstream smelting operations are

subdued. We like the potential from this acquisition especially given Novelis’ operating

expertise. We expect (1) HNDL’s leverage ratio to be comfortable post acquisition—while net-

debt/EBITDA will initially increase to 3.7X from 2.8X, we expect a decline to 3.1X/2.5X over

FY2019/2020E, and (2) we believe the transaction can be earnings accretive in 2-3 years (Exhibit

1 & 2). We revise our TP to Rs305 (from Rs315) to reflect an increase in leverage. Maintain BUY.

Hindalco Industries (HNDL) Metals & Mining

Aleris acquisition—a good opportunity. HNDL’s acquisition of Aleris for US$2.58 bn

reflects investment in the high growth rolled product segment with better return

prospects (higher than upstream smelting operations). The execution capabilities of

Novelis can help deliver EBITDA potential that Aleris is yet to realize despite the large

investment—HNDL expects EBITDA to increase to US$360 mn by CY2020E (from

US$240 mn). We believe the acquisition can be earnings accretive in a short span and

HNDL’s leverage to be comfortable. We maintain BUY and revise TP to Rs305 (from

Rs315 earlier).

BUY

JULY 27, 2018

UPDATE


Price (`): 207


BSE-30: 36,985

Abhishek Poddar

Samrat Verma

Hindalco Industries





Promoters 34.7 Sales (Rs bn) 1,151.7 1,277.4 1,317.3


MFs 11.1 EBITDA (Rs bn) 139.2 158.5 167.6


Absolute (7.4) (11.7) (6.8) ROE (%) 9.7 10.5 10.7



284-192

463.8

Metals & Mining Hindalco Industries


Other highlights from the analyst meet

Borrowing cost of Aleris to decline. The cost of debt for Aleris is as high as 10.75%

and Novelis’ is close to 5.85%. Aleris’ borrowing cost will decline as either company re-

negotiates the terms (there may be a clause in loans terms for change in control) or re-

financing.

Capex at Aleris. The sustenance capex at Aleris is only US$90-100 mn. However, the

company will also invest US$250-300 mn in the China facility for integrating Aleris’ hot

mill capacity with Novelis’ auto-finishing line.

EBITDA potential of US$360 mn does not include Aerospace opportunity. The

US$360 mn EBITDA does not include potential improvement in earnings from Aerospace

operations which can add US$20-30 mn. We note that in the Aerospace business, there

were renewals of long-term contracts with major aircraft OEMs during 2016 and 2017

with higher share of business/value-added business. As per Aleris, this can aid EBITDA by

US$20 to 30 mn beginning CY2019 though the full annual benefit of these contracts is

not expected to be realized until 2022.

Tax benefits (due to carry forward of losses). The company believes that tax benefits

will be available in some geographies, as due to the change in control the realization of

such benefits may not be available in all geographies. The management did not share the

specific amounts of such tax efficiencies.

Pension liability of US$200 mn. The unfunded liability of US$200 mn could entail

annual payments in the range of US$15 mn. However, we highlight that pension

liabilities remain a function of actuary assumptions as well as assumptions on discounting

rates used for valuing future liabilities. The hardening of interest rates will result in lower

present value of future liabilities. In such a case, based on asset returns for the amount

invested, pension liabilities can changes (at times for good). The payment plans thus

agreed with sponsors (which will be Aleris) keeps on changing from time to time based

on re-computed deficits or no payments in case computations throws up a funded status.

Valuation at 7.2X EBITDA, leverage to be comfortable. Assuming US$360 mn of

EBITDA, the EV/EBITDA multiple works out to 7.2X. The company expects consolidated

leverage to increase to ~3.5X which should decline to <3X in two years.

Leverage—to remain comfortable

Hindalco’s net-debt/EBITDA was 2.8X in March 2018 (trailing) as the company’s balance has

de-levered by close to Rs150 bn in the last two years. We expect the pro-forma consolidated

net-debt/EBITDA to increase initially to 3.7X based on FY2018 financials due to the

acquisition but then fall to 3.1X/2.5X over FY2020E.

We highlight that HNDL continues to earn strong FCF due to its low cost operations even on

LME aluminum price assumption of US$2,075-2,150/ton.

Hindalco Industries Metals & Mining


Exhibit 1: We expect HNDL's leverage ratio to be comfortable even if it acquires Aleris Pro-forma leverage details of Hindalco post Aleris acquisition, March fiscal year-ends (Rs mn)

Note: (1) We have assumed EBITDA of US$330 mn in FY2021E, lower than management guidance of US$360 mn for CY2020E.


Aleris—can be earnings accretive in short span

Aleris has the potential to increase EBITDA to US$360 mn by CY2019 from US$200 mn. We

also note that the company expects adjusted EBITDA in CY2018 to be substantially higher

than CY2017. Aleris’ CY2019 EBITDA, after such improvements will still not fully capture

the entire potential from (1) 30-40% of ABS facility at Lewisport which is yet to be

contracted, (2) China aerospace capacity. We note that China volumes are very low at

27,000 tons (CY2017) versus 225 ktpa capacity—company has spent US$350 mn in this

capacity and has close to 200 kt of uncommitted hot metal capacity. This can improve over

the next few years.

2016 2017 2018 2019E 2020E 2021E

Leverage at existing operations

Net debt - consolidated 554,557 466,045 393,112 361,906 293,462 225,370

EBITDA - consolidated 88,149 124,474 139,206 158,495 167,566 174,216

Net debt/EBITDA (X) 6.3 3.7 2.8 2.3 1.8 1.3

Total equity 409,879 460,650 548,604 605,431 670,477 742,536

Debt/Equity (X) 1.4 1.0 0.7 0.6 0.4 0.3

Aleris acquisition---assumptions

Aleris acquisition debt (US$ mn) 2,580 2,580 2,580 2,580

Aleris EBITDA---assumed (US$ mn) 200 250 300 330

INR:US$ 68.7 69.5 70.0 70.0

Leverage post Aleris acquisition

Net debt (including Aleris acquisition) 570,435 541,216 474,062 405,970

EBITDA (including Aleris acquisition) 152,952 175,870 188,566 197,316

Net debt/EBITDA (X) 3.7 3.1 2.5 2.1



Exhibit 2: We estimate that Aleris acquisition can be earnings accretive led by ramp-up of Lewisport

ABS facility from FY2021E (post acquisition in 9 to 15 months) Hindalco---proforma financials assuming Aleris acquisition, FY2021E (Rs bn, US$ mn)

Note: (1) We have assumed Aleris’ adjusted EBITDA in our computation. Initially, there can difference between adjusted and reported EBIDTA during the start-up phase. However, we highlight that over the years, Novelis’ the differential between Novelis’ adjusted EBITDA and reported EBITDA has shrunk as new capacities have stabilized. (2) We have assumed Aleris’ EBITDA of US$330 mn, lower than US$360 mn of management guidance based on the ramp-up of ABS facility ramp-up at Lewisport, US.


Aleris—leveraged play, banking on growth

Aleris is a manufacturer of rolled aluminum products (similar to Novelis) with manufacturing

sites in North America (automotive, transport, building & construction), Europe (aerospace,

automotive) and China (aerospace). In CY2017, Aleris earned adjusted EBITDA of US$200

mn had a net debt of US$1.68 bn. The CY2017 EBITDA was also impacted by US$30 mn

extended plant outages in Lewisport—this should normalize the details of operations,

financials are as below:

Smaller scale of operations compared to Novelis. Aleris’ rolled product shipments in

CY2017 stood at 803,000 tons (Novelis is close to 3.2 mn tons) of which larger sales

were in North America (462,000 tons) and Europe (317,000 tons). The shipments in Asia

Pacific were only 27,000 tons from a hot mill (225 ktpa) in China.

The details of major capacities are:

Europe. Aleris has two rolling mills in Europe and has the leading position in (1)

Aerospace plates and sheets, (2) Auto body sheets, and (3) Clad Brazing sheets. The

operations are located in Germany and Belgium. The company has ample hot metal

capacity to support 2nd

CALP.

North America. Aleris has leading position in North America in (1) Building and

construction, (2) Truck trailer, and (3) Distribution. The operations in the US are located

in Lewisport, Richmond, Cleveland, Clayton, Ashville, Davenport, etc. The company

has also invested in an Auto body sheet plant in Lewisport which can aid a sharp jump

in EBITDA in CY2018-2019E.

Existing operations Aleris Aleris Combined entity

(Rs bn) (US$ mn) (Rs bn) (Rs bn)


Net sales 1,367 3,420 239 1,606

EBITDA 174 330 23 197

Other income 12 — — 12

Interest (31) (163) (11) (42)

Depreciation (53) (120) (8) (61)

Profit before tax 102.1 48 3.3 105.4

Extraordinaries — — — —

Taxes (27) (14) (1) (28)

Profit after tax 74.8 33 2.3 77.1

Minority interest — — — —

Share in profit/(loss) of associates 1 — — 1

Reported net income 75.6 — — 77.9

Adjusted net income 75.6 — — 77.9

Fully diluted EPS (Rs) 33.9 — — 35.0

No. of shares (mn) 2,229 — — 2,229

INR:US$ rate 70.0 70.0 70.0 70.0

FY2021E



Asia. Aleris has a rolling mill in Zhenjiang, China. This is the first plate mill in China

with Aerospace shipments to western OEMs. The company has large uncommitted hot

metal capacity here (200 ktpa)—this can be converted to CALP (Continuous Annealing

Line with Pre-Treatment) as well.

Product mix—differs from Novelis. The company’s sales includes (1) 11% to

aerospace, (2) 15% to automotives, (3) 24% to building and construction in North

America, (4) 15% to Distribution, and (5) 5% to North America Truck trailers. The

product profile differs from Novelis which has close to 58-60% shipments to the

beverage can segment and ~20% in automotive sheets.

Investment and expansion projects by Aleris. The major recent investments include:

North America—automotive body sheet. Aleris has invested US$425 mn in the

auto body sheet facility at Lewisport (220 ktpa). This plant was commissioned in

November 2017. The company has committed 50% of ABS capacity through 2025

under long-term agreements; receiving advance payments of US$80 mn to reserve

capacity. The company has commitment for >50% ABS capacity through 2025 under

LTA with fixed conversion prices. Also, additional customer wins have added 10% to

committed volumes through 2025. The company expects adjusted EBITDA of North

America ABS project could range from US$65 mn to US$75 mn annually during 2019.

The full ramp-up will occur over the next four years

This operation has large growth potential as the company expects 27% of all body and

closure parts for light vehicles in America to be made of aluminum by 2025 (at 11%

CAGR based on Ducker report).

Asia Pacific—aerospace in China. Aleris has invested US$350 mn in China to

capture aerospace growth and shift in demand to Asia. The EBITDA from China facility

was only US$13 mn for CY2017. This plant has 250 ktpa of hot mill capacity and 35

ktpa of plate capacity. Hence, there is large optionality for growth in various end uses

(>200 ktpa). The shipment from China facility was only 27,000 tons for the last 12

months. As per the company, the combined order backlog of Airbus and Boeing

increased to 13,000 planes in 2017 from 10,500 planes in 2015.

Europe—auto body sheet at Duffel. The company has invested US$85 mn in this

capacity in Duffel, Belgium. This has the widest ABS capabilities in Europe and the

company is working with global OEM customers. The current financials only reflect 75%

of expected EBITDA run-rate from this facility.

North America—building and construction. The company acquired for US$110 mn

(Nichols)—this investment is expected to benefit from housing recovery in the US. Aleris is

the largest supplier of aluminum sheets to the building and construction industry in North

America.

Aleris financials—leveraged due to growth investments

In CY2017, the company’s revenues were US$2.9 bn and adjusted EBITDA was US$200 mn

(after mill outage impact of US$30 mn). The company had net-debt of US$1.7 bn as on

December 2017 with net-debt/EBITDA (LTM) of 8.4 X.

Growth capex in last four years. Aleris has invested close to US$850 mn in growth

capex over 2013-2017 (additionally sustenance capex was US$400 mn). A large amount

of capex was spent in North America ABS projects and China facility.



Large earnings improvement expected in North America and Asia. At present, the

European operations contribute a higher share to EBITDA (US$128 mn for CY2017) while

North America adjusted EBITDA was US$97 mn. Asian operations are small for the

company with EBITDA of only US$13 mn. The company earned EBITDA/ton of US$402

(Shipments: 317,000 tons) in Europe in CY2017 while North America EBITDA/ton was

US$209 (Shipments: 462,000 tons).

The ramp-up of capacities in North America and China will see a large improvement in

earnings from those geographies.

Exhibit 3: Aleris—share of automotive & aerospace products to rise in revenue mix Aleris—2018 revenues by end use product segment (%)


Exhibit 4: Aleris earned US$202 mn of adjusted EBITDA during trailing 12 months Aleris—segment details, 1QCY16 - 1QCY18 ('000 tons, US$ mn, US$/ton)


North America building and

construction, 24

Distibution, 15

Automotive, 15Aerospace, 11

Truck tailer, 5

Heat exchanger, 8

Other, 8

Plate and sheet (Europe), 14

1QCY16 2QCY16 3QCY16 4QCY16 1QCY17 2QCY17 3QCY17 4QCY17 1QCY18 CY2015 CY2016 CY2017

Shipments ('000 tons)

North America 120 130 128 110 115 132 115 102 120 493 486 462

Europe 82 87 82 76 80 83 78 77 85 314 327 317

Asia Pacific 5 5 7 5 6 7 7 7 6 22 23 27

Intra-company (1) (1) (2) (2) (1) (2) (2) 0 (2) (6) (6) (3)

Total shipments 205 221 214 189 199 220 199 186 209 822 830 803

Revenues (US$ mn)

North America 334 362 359 311 352 417 364 334 415 1,533 1,365 1,468

Europe 313 323 305 282 309 336 324 332 365 1,335 1,223 1,301

Asia Pacific 21 25 29 25 24 31 32 35 32 97 101 122

Intra-company (6) (5) (9) (4) (11) (8 ) (8 ) (7) (9) (47) (24) (34)

Total revenues (US$ mn) 663 705 683 613 674 776 713 694 802 2,918 2,664 2,857

Adjusted EBITDA (US$ mn)

North America 21 28 18 14 23 36 21 15 34 109 81 97

Europe 33 43 42 34 37 35 28 27 27 149 151 128

Asia Pacific 1 3 3 4 1 4 4 4 2 0 10 13

Intra-company (10) (9) (9) (10) (10) (9) (8 ) (9) (10) (36) (38) (36)

Total Adjusted EBITDA (US$ mn) 45 65 53 43 52 66 45 37 54 223 205 200

Revenues/ton (US$)

North America 2,789 2,792 2,813 2,838 3,063 3,167 3,160 3,295 3,469 3,110 2,807 3,177

Europe 3,813 3,700 3,740 3,711 3,877 4,065 4,143 4,316 4,275 4,259 3,741 4,099

Asia Pacific 4,347 4,667 4,171 4,698 4,400 4,478 4,535 4,730 4,938 4,427 4,451 4,546

Total EBITDA/ton (US$ mn) 3,227 3,188 3,192 3,244 3,395 3,531 3,584 3,733 3,833 3,548 3,211 3,558

EBITDA/ton (US$)

North America 173 219 143 130 203 276 186 152 285 221 167 209

Europe 398 487 512 453 468 429 363 345 315 476 463 402

Asia Pacific 184 463 400 792 164 522 521 595 328 5 460 468

Total EBITDA/ton (US$ mn) 217 292 249 226 261 302 228 198 256 271 247 250



Exhibit 5: Aleris is loss making due to large investment which are yet to contribute meaningfully to earnings Aleris—income statement, 1QCY15 - 1QCY18 (US$ mn)


Exhibit 6: Aleris had net-debt of US$1.75 bn as on March 2018 Aleris—Balance sheet, 2015 - 2018(US$ mn)


1QCY16 2QCY16 3QCY16 4QCY16 1QCY17 2QCY17 3QCY17 4QCY17 1QCY18 CY2015 CY2016 CY2017

Shipments ('000 tons) 205 221 214 189 199 220 199 186 209 822 829 804

Revenues 663 705 683 613 674 776 713 694 802 2,918 2,664 2,857

Commercial margin 293 314 303 284 294 326 289 290 326 1,204 1,194 1,199

Margin (%) 44 45 44 46 44 42 41 42 41 41 45 42

Cost of sales 589 626 611 550 589 691 675 643 740 2,703 2,376 2,598

Gross profit 74 79 73 63 85 86 38 51 63 216 288 259

Selling and admin expenses 50 50 59 59 53 51 50 67 51 204 219 221

Restructuring expenses 1 1 0 (0) 0 1 1 1 1 10 1 3

(Gains) losses on derivative instruments (1) 4 0 9 28 (13) 15 14 (34) 7 12 45

Other operating expense 0 1 1 1 1 1 2 2 1 3 4 6

Interest 18 21 19 24 27 31 32 34 34 94 83 124

Other expense 3 6 (2) (4) 0 4 2 29 0 (7) 2 35

Income/(loss) before taxes 2 (4) (5) (26) (25) 10 (64) (95) 10 (94) (32) (174)

Tax 9 9 12 10 11 13 2 15 5 (23) 40 40

Net income/(loss) (6) (13) (17) (36) (35) (3) (66) (111) 5 (72) (72) (214)

Adjusted EBITDA 45 65 53 43 52 66 45 37 54 222 206 200

Segment income 58 70 62 56 65 71 53 41 72 241 246 230

Net profit/(loss) (6) (13) (17) (36) (35) (2) (66) (107) 5 (85) (72) (214)

CY2015 CY2016 Jun-17 Sep-17 Dec-17 Mar-18

Current Assets

Cash and cash equivalents 62 56 52 72 102 79

Accounts receivable (net of allowances of $7.6 and $7.7 at December 31, 2016 and 2015, respectively)216 219 300 298 246 364

Inventories 480 539 622 621 631 676

Prepaid expenses and other current assets 29 33 45 40 36 81

Total Current Assets 787 847 1,019 1,030 1,015 1,200

Property, plant and equipment, net 1,139 1,346 1,433 1,467 1,471 1,471

Intangible assets, net 39 37 36 35 35 34

Deferred income taxes 113 88 92 92 71 70

Other long-term assets 83 72 68 70 53 55

Total Assets 2,161 2,390 2,648 2,694 2,644 2,829

Current Liabilities

Accounts payable 223 247 282 297 299 342

Accrued liabilities 234 201 191 215 197 200

Current portion of long-term debt 9 28 19 16 9 10

Total Current Liabilities 466 476 492 528 506 552

Long-term debt 1,110 1,439 1,648 1,694 1,771 1,819

Deferred income taxes 3 3 18 17 4 6

Accrued pension benefits 149 158 168 172 170 174

Accrued postretirement benefits 39 34 33 33 34 34

Other long-term liabilities 68 64 66 67 66 124

Total Long-Term Liabilities 1,368 1,698 1,933 1,983 2,046 2,156

Stockholders' Equity

Equity 422 428 428 428 436 436

Retained earnings 88 12 (31) (96) (203) (196)

Accumulated other comprehensive loss (183) (224) (174) (149) (141) (120)

Total Equity 327 216 224 183 92 120

Total Liabilities and Equity 2,160 2,390 2,648 2,694 2,644 2,828

Net debt 1,056 1,411 1,615 1,638 1,678 1,750



Capital allocation—choice of upstream versus downstream investment?

The capital allocation for an aluminum producer is a choice between (1) upstream aluminum

smelting operations, versus (2) downstream value added products. We highlight that

investment returns in the first case (smelting) have remained low due to China

overcapacity—we estimate post tax RoIC of close 3-4% at the spot aluminum prices &

capital costs; such has been the case for last 4-5 years resulting in limited investment in

smelting capacities, outside China. We also highlight that acquiring captive raw-material

presents another challenge in India, despite government led reforms in the sector.

The downstream rolling operations offer superior returns on two counts (1) higher earning

potential based on the spot economics given that the impact of China overcapacity in the

rolling industry is limited to Asian region and (2) growth opportunity from emerging end-

user sectors such as automotive rolled products. We highlight that per our estimate,

Hindalco’s investment in Novelis in CY2007 earned it average return of 10% per annum till

date—our calculations assumes Novelis’ present valuation at 7X 1 year forward EBITDA and

also account dividends.

Exhibit 7: HNDL's EPS changes by 2% for 1% price change EPS sensitivity of HNDL to aluminum prices, FY2020E (Rs)


Exhibit 8: HNDL's fair value changes by 2% for 1% price change Fair value sensitivity of HNDL to aluminum prices, FY2020E (Rs/share)


Exhibit 9: Hindalco Industries, Key assumptions, March fiscal-year ends, 2016-2021E (Rs mn)


31 1,800 1,950 2,100 2,250 2,400

66.5 17.7 22.1 26.5 31.0 35.4

68.0 19.6 24.2 28.7 33.2 37.7

69.5 21.6 26.2 30.8 35.4 40.0

71.0 23.5 28.2 32.9 37.6 42.3

72.5 25.4 30.2 35.0 39.8 44.6

LME aluminum prices (US$/ton)

INR: USD

rate

Fair value (Rs/share)

305 1,800 1,950 2,100 2,250 2,400

66.5 173 216 260 304 348

68.0 193 236 283 327 372

69.5 213 259 305 351 396

71.0 233 281 327 374 420

72.5 253 302 350 397 443

LME aluminum prices (US$/ton)

INR: USD

rate

2016 2017 2018 2019E 2020E 2021E

Aluminium

Aluminium all-in price (US$/ton) 1,719 1,789 2,167 2,200 2,225 2,275

Metal sales volume (tons) 1,138,600 1,266,000 1,290,775 1,291,000 1,291,000 1,291,000

Blended realization (Rs/ton) 126,660 136,062 153,418 169,760 174,691 179,901

Alumina sales volume (tons) 368,880 309,280 325,000 325,000 325,000 325,000

Standalone EBITDA (and Utkal) (Rs mn) 40,599 54,855 62,058 69,813 74,512 78,409

Novelis

Average realization (US$/ton) 3,161 3,127 3,595 3,659 3,700 3,766

Conversion premium (US$/ton) 1,567 1,439 1,553 1,584 1,600 1,616

Shipments ('000 tons) 3,123 3,067 3,188 3,236 3,284 3,334

Adjusted EBITDA/ton (US$/ton) 253 354 381 392 401 404

Adjusted EBITDA (US$ mn) 791 1,085 1,215 1,268 1,316 1,348

EBITDA (Rs mn) 44,752 73,542 76,719 86,886 91,267 94,026

Adjusted EBITDA (Rs mn) 51,752 72,804 78,331 87,129 91,485 94,349

Copper

Copper cathode volumes (tons) 230,000 218,000 252,000 252,000 252,000 262,000

Copper rods volumes (tons) 158,000 150,000 156,420 156,420 156,420 156,420



Exhibit 10: Our fair value of Rs305/share is based on March 2020E financials Hindalco Industries, Valuation, March 2020E basis (Rs mn)


Multiple

(Rs mn) (X) (Rs mn) (Rs/share)

Hindalco EBITDA 74,512 6 444,838 200

Novelis EBITDA 90,433 6 538,982 242

Total Enterprise Value 164,945 6 983,820 442

Add: Listed investments 30,570 14

Less: Net debt (293,462) (293,462) (132)

Aleris acquisiiton:

Aleris (EV based on US$330 mn EBITDA) 137,610 62

Net-debt (179,310) (81)

Arrived market capitalization 305

Target price (Rs) 305

Value



Exhibit 11: Hindalco (consolidated), Profit model, balance sheet and cash flow model, March fiscal year-ends, 2016-2021E (Rs mn)


2016 2017 2018 2019E 2020E 2021E


Net sales 987,589 1,001,838 1,151,717 1,277,398 1,317,291 1,366,930

EBITDA 88,149 124,474 139,206 158,495 167,566 174,216

Other income 11,888 11,110 11,046 9,141 10,055 11,597

Interest (51,338) (57,424) (39,107) (35,760) (33,671) (30,943)

Depreciation (45,074) (44,688) (46,065) (48,312) (51,370) (52,806)

Profit before tax 3,624 33,472 65,080 83,564 92,579 102,064

Extraordinaries (7,371) (71) 17,742 — — —

Taxes (6,114) (18,399) (20,742) (24,028) (24,824) (27,295)

Profit after tax (8,730) 19,074 62,080 59,537 67,756 74,769

Minority interest 4,508 174 1 344 348 350

Share in profit/(loss) of associates 1,715 (251) (1,251) 500 500 500

Reported net income (2,507) 18,997 60,829 60,380 68,603 75,619

Adjusted net income 2,652 19,069 48,742 60,380 68,603 75,619

Fully diluted EPS (Rs) 1.3 8.6 21.9 27.1 30.8 33.9


Equity 406,066 460,588 548,517 605,688 671,082 743,491

Deferred tax liability 29,376 28,666 37,766 43,916 51,120 51,120

Total Borrowings 675,519 638,175 512,724 491,752 459,520 425,232

Current liabilities 305,093 337,614 377,477 402,193 404,658 408,945

Minority interest 3,813 62 86 — — —

Total liabilities 1,419,866 1,465,104 1,476,571 1,543,550 1,586,380 1,628,788

Net fixed assets 679,377 675,518 672,590 694,736 697,591 692,285

Capital work in progress 42,138 18,139 20,629 16,000 16,000 16,000

Goodwill 177,353 171,350 178,294 178,294 178,294 178,294

Investments 124,378 151,569 107,813 108,313 108,813 109,313

Cash 44,073 82,612 80,578 90,812 127,023 160,828

Other current assets 352,548 365,918 416,667 455,137 458,054 471,113

Minority interest — — — 257 605 955

Total assets 1,419,867 1,465,105 1,476,571 1,543,549 1,586,380 1,628,788


Operating cash flow excl. working capital 31,731 64,390 113,032 113,999 126,330 127,575

Working capital changes 41,083 6,691 (10,886) (13,754) (452) (8,773)

Capital expenditure (42,452) (29,376) (37,019) (65,829) (54,225) (47,500)

Free cash flow 30,362 41,705 65,127 34,416 71,653 71,302

Ratios

EBITDA margin (%) 8.9 12.4 12.1 12.4 12.7 12.7

EBIT margin (%) 4.4 8.0 8.1 8.6 8.8 8.9

Debt/equity (X) 1.7 1.4 0.9 0.8 0.7 0.6

Net debt/equity (X) 1.4 1.0 0.7 0.6 0.4 0.3

Net debt/EBITDA (X) 6.3 3.7 2.8 2.3 1.8 1.3

RoAE (%) 0.7 4.4 9.7 10.5 10.7 10.7

RoACE (%) 4.9 5.9 6.7 7.8 8.0 8.0


Synergy guidance may drive UPL’s EBITDA margins ahead of top innovators—difficult to achieve

UPL’s guidance of potential US$200+ mn of synergy benefits from the proposed transaction, in

effect translates into an optimistic margin accretion of 10%+ on acquired revenues from Arysta

or ~4% on the revenues of the combined entity. UPL and Arysta have managed to deliver

robust EBITDA margins of 20-22% in the recent year, already comparable to the top global ag-

chem innovators, partly through cost-rationalization efforts amid a weak global ag-chem

environment. Hence, any material reduction in overall costs from here may be difficult to

achieve, in our view.

Quantum of synergies may depend on capital cost or other associated cost to business

A few areas where UPL can derive synergies form the acquisition are (1) backward integration

to produce active ingredients and formulations for Arysta, (2) rationalization of R&D expenses,

(3) economies of scale in procurement and distribution and (4) reduction in corporate

overheads. However, certain synergies may entail upfront costs. For example, backward

integration or in-house sourcing may require incremental capital costs to raise production

capacity. Further, rationalization of R&D may come at a cost of Arysta’s focus on late-stage R&D

formulations or specialty applications. We detail our thoughts on these aspects in the

subsequent page.

Synergy gains ≠ EPS accretion, given currency hedging and intangible amortization

Even if we assume that the entire synergies of ~US$200 mn flow through UPL’s EBITDA, this

quantum may not translate fully into earnings. Quick lessons from Platforms’ recent history

suggest that currency hedging and intangible amortization may potentially negate synergy

benefits for UPL, posing downside risks to pro forma estimates.

Platform’s synergy benefits from acquisitions in agri-business were negated by

weaker local currencies and rising inputs costs. Platform realized US$85 mn of synergy

benefits within two years from the acquisition of Arysta and two other ag-chem companies

during end-CY2014. However, its margins remained largely unchanged around 20-21%

during CY2014-16 as the company faced headwinds from weakness in local currencies and

rising input costs—both issues are relevant in the current environment as well. We note that

UPL may hedge in line with its business policy, which albeit will come at a cost to margins.

Platform’s D&A for agri-business has been higher than recurring capex. Platform’s

depreciation and amortization cost for agri-business has been around 3X of capital

expenditure over the past three years; higher D&A is attributed to amortization of fair value

of intangibles recognized at the time of acquisition of agri-business. We note that UPL may

also recognize intangibles at a certain fair value, resulting in incremental amortization

expense, which may offset the synergy gains on net income.

UPL (UPLL) Others

Too good, if true. UPL’s guidance of US$200+ mn of synergy benefits from the

proposed acquisition of Arysta is certainly encouraging—however, conviction around it

may only increase if the management provides bottom-up inputs that may drive these

gains. Further, the translation of synergy gains into EPS accretion for UPL may be

contingent on incremental costs related to currency hedging and intangible

amortization—Platform’s history on both does not provide much comfort.

ADD

JULY 27, 2018

UPDATE

Coverage view:

Price (`): 638


BSE-30: 36,985

Tarun Lakhotia

Akshay Bhor

UPL







MFs 9.5 EBITDA (Rs bn) 35.2 39.4 44.3


Absolute (0.4) (15.0) (27.0) ROE (%) 26.4 23.6 22.4



903-537

324.7

Others UPL


Exhibit 1: Margins of UPL and Arysta are comparable to top global innovators, except Monsanto Financials of top global ag-chem companies, calendar year-ends, 2015-17 (%)


Exhibit 2: Platform’s synergy benefits from acquisitions in agri-business were negated by weaker local currencies and rising inputs costs Movement in Platform’s agri-business EBITDA, calendar year-ends, 2014-16 (US$ mn)


CY2015 CY2016 CY2017

Revenue

Arysta (US$ mn) 1,741 1,818 1,897

BASF (EUR mn) 5,820 5,569 5,696

Bayer (EUR mn) 10,128 9,915 9,577

Dow-DuPont (US$ mn) 9,798 9,516 14,342

FMC (US$ mn) 2,253 2,275 2,531

Monsanto (US$ mn) 15,001 13,502 14,640

Nufarm (AUD mn) 2,578 2,648 2,943

UPL (US$ mn) (a) 2,193 2,491 2,714

EBITDA

Arysta (US$ mn) 358 368 388

BASF (EUR mn) 1,321 1,305 1,282

Bayer (EUR mn) 2,406 2,421 2,043

Dow-DuPont (US$ mn) 2,099 2,175 2,611

FMC (US$ mn) 424 481 576

Monsanto (US$ mn) 5,339 3,877 4,205

Nufarm (AUD mn) 324 380 399

UPL (US$ mn) (a) 366 446 543

EBITDA margin (%)

Arysta 20.6 20.2 20.5

BASF 22.7 23.4 22.5

Bayer 23.8 24.4 21.3

Dow-DuPont 21.4 22.9 18.2

FMC 18.8 21.1 22.8

Monsanto 35.6 28.7 28.7

Nufarm 12.6 14.4 13.6

UPL (a) 16.7 17.9 20.0

Notes:

(a) March fiscal year-ends; e.g. CY2017 represents FY2018.

434

358 368

38

114

47 37

0

50

100

150

200

250

300

350

400

450

500

2014EBITDA

Synergybenefits

FX impact andhigher costs

2015EBITDA

Synergybenefits

FX impact andhigher costs

2016EBITDA

(US$ mn)

20%

19.6% 20.3%

UPL Others


Exhibit 3: Arysta’s D&A is much higher than recurring capex… Arysta’s capex and D&A, calendar year-ends, 2015-17 (US$ mn)


Exhibit 4: …while UPL’s D&A is lower than capex UPL’s capex and D&A, March fiscal year-ends, 2016-18 (US$ mn)


Where can the synergies come from?

Backward integration. UPL may manufacture a portion of Arysta’s active ingredients

and formulations in-house instead of outsourcing, driving incremental gains on margins.

However, any such margin accretion may come at an incremental capital cost for new

production facilities, which will be required to cater to Arysta’s requirements.

Procurement. UPL may be able to derive economies of scale benefits in sourcing of basic

raw materials and solvents. However, the extent of savings, in our view, may be limited

given the global commodity nature of these chemicals.

Distribution. UPL may be able to reduce distribution costs by optimizing warehousing

and logistics, and leveraging its enhanced bargaining power with distributors in otherwise

subscale markets currently. However, UPL’s identifiable distribution costs are less than 8%

of revenues, half of which comes from transport expenses wherein there may be limited

savings. We are not sure if there can be material reduction on remaining expenses, ~4%

of revenues, which may not swing the needle anyway.

Exhibit 5: UPL’s distribution-related costs are around 8% of revenues, half of which pertains to

transport charges Key line items pertaining to UPL’s distribution costs, March fiscal year-ends, 2016-17 (Rs mn)


0

50

100

150

200

250

CY2015 CY2016 CY2017

(US$ mn) Depreciation and amortization Capex

0

50

100

150

200

250

FY2016 FY2017 FY2018

(US$ mn) Depreciation and amortization Capex

FY2016 FY2017

(Rs mn) % of revenue (Rs mn) % of revenue

Transport charges 5,240 3.7% 6,360 3.9%

Advertising and sales promotion 2,220 1.6% 2,760 1.7%

Sales commission 1,550 1.1% 1,300 0.8%

Warehousing costs 620 0.4% 900 0.6%

Other miscellaneous expenses 1,280 0.9% 1,510 0.9%

Distribution-related expenses 10,910 7.8% 12,830 7.9%

Others UPL


R&D. UPL may rationalize R&D costs by removing redundancies in research/registration

teams, facilities and research focus areas. We highlight that Arysta’s R&D expenses are

1.5X of UPL’s spends, perhaps reflecting the former’s focus on late-stage R&D

formulations and specialty applications; any material reduction thereby may come at a

cost of growth in these formulations.

Exhibit 6: Possible synergies in the R&D spend by combining resources R&D expenditure of UPL and Arysta (US$ mn)


Overheads. UPL may be able to rationalize costs related to general and administrative

expenses between the two entities. However, Arysta’s comparable adjusted EBITDA

included in pro forma financials already excludes corporate overheads of ~US$30 mn.

Exhibit 7: Arysta has reported slower revenues growth and steady margins over the past three years Comparative financial performance of Arysta and UPL (US$ mn)


Arysta UPL

CY2016 CY2017 FY2017 FY2018

R&D expensed 39 52 38 49

R&D capitalized 36 41 7 11

R&D total 76 93 45 60

CY2015 CY2016 CY2017

Arysta

Net sales 1,741 1,818 1,897

Cost of sales 1,138 1,086 1,122

Gross profit 603 732 775

SG&A expenses and overheads 223 334 356

Reported EBITDA 358 368 388

Corporate costs 24 33 32

Adjusted EBITDA 382 401 420

EBITDA margins (%) 21.9 22.1 22.1

Depreciation 171 186 199

Adjusted EBIT 211 216 221

Capital expenditure 57 59 69

Net working capital 382 501 718

FY2016 FY2017 FY2018

UPL Ltd

Net sales 2,193 2,491 2,714

Cost of sales 1,037 1,167 1,257

Gross profit 1,157 1,324 1,456

SG&A expenses and overheads 790 878 913

Adjusted EBITDA 366 446 543

EBITDA margins (%) 16.7 17.9 20.0

Depreciation 103 101 103

Adjusted EBIT 263 345 440

Capital expenditure 155 188 219

Net working capital 595 621 608

UPL Others


Exhibit 8: UPL’s acquisition of Arysta LifeScience to result in negligible earnings accretion, modest

increase in FCF and sharp jump in leverage, assuming no synergy benefit Pro forma financials of UPL + Arysta, March fiscal year-ends, 2018-22E


2018 2019E 2020E 2021E 2022E

UPL Corp. (US$ mn)

Sales 2,140 2,300 2,461 2,609 2,766

EBITDA 393 430 471 504 537

EBITDA margin (%) 18 19 19 19 19

Adjusted PAT 212 232 271 303 339

Arysta (US$ mn)

Sales 1,956 2,015 2,075 2,137 2,201

EBITDA 424 443 457 470 484

EBITDA margin (%) 22 22 22 22 22

Adjusted PAT 205 211 217

UPL Corp. + Arysta (US$ mn)

Sales 4,315 4,537 4,746 4,967

EBITDA 873 928 974 1,021

EBITDA margin (%) 20 20 21 21

Adjusted PAT 348 395 444

UPL Corp. + Arysta (Rs mn)

Sales 286,694 306,217 325,134 345,217

EBITDA 58,029 62,633 66,704 70,950


Adjusted PAT 23,510 27,043 30,880

UPL's India business (Rs mn)

Sales 35,756 39,692 45,613 51,605 56,438

EBITDA 9,824 10,851 12,486 14,044 15,312

EBITDA margin (%) 27 27 27 27 27

Adjusted PAT 8,222 8,484 8,820 9,080 9,615

UPL Ltd + Arysta (Rs mn)

Sales 326,386 351,830 376,739 401,655

EBITDA 68,880 75,118 80,748 86,262


Adjusted PAT 27,039 29,949 33,432

Adjusted EPS (Rs) 53.0 58.7 65.6

Net debt 227,351 201,273 171,239 135,033

Net debt/EBITDA (x) 3.3 2.7 2.1 1.6

FCF 28,498 31,745 37,228

UPL Ltd (Rs mn)

Sales 173,780 192,530 211,759 230,329 248,651

EBITDA 35,160 39,432 44,303 48,538 52,601

EBITDA margin (%) 20 20 21 21 21

Adjusted PAT 20,220 23,868 27,099 29,869 33,143

Adjusted EPS (Rs) 42.9 46.8 53.1 58.6 65.0

Net debt 36,130 28,031 10,947 (8,756) (33,373)

Net debt/EBITDA (x) 1.0 0.7 0.2 (0.2) (0.6)

FCF 2,784 10,108 20,097 23,319 28,705

Contribution from synergies (Rs mn)

Potential synergy benefit (US$ mn) 25 50 100

Incremental EBITDA 1,688 3,425 6,950

Incremental PAT 1,402 2,807 5,691

Incremental EPS (Rs) 2.7 5.5 11.2

Others UPL


Exhibit 9: UPL is trading at a modest discount to global ag-chem players Peer valuation of UPL, March fiscal year-ends, 2018-20E

Source: Bloomberg, Kotak Institutional Equities estimates

Exhibit 10: Consolidated financial summary for UPL, March fiscal year-ends, 2016-22E (Rs mn)


Price Market cap. P/E (X) EV/EBITDA (X)

(LC) (US$ mn) 2018 2019E 2020E 2018 2019E 2020E

Global companies

Dow DuPont 68 156,723 20.7 16.1 13.7 11.4 9.4 8.3

Bayer AG 94 102,735 14.7 14.9 11.9 10.0 10.9 8.7

BASF SE 85 91,041 12.9 12.8 11.9 7.3 7.5 6.9

FMC Corp. 88 11,781 32.9 14.3 12.9 23.5 10.9 9.7

UPL 638 4,728 16.1 13.8 12.0 10.4 9.1 7.2

Nufarm Ltd 7 1,737 15.9 22.6 13.8 8.1 10.2 7.0

2016 2017 2018 2019E 2020E 2021E 2022E


Sales 140,480 163,120 173,780 192,530 211,759 230,329 248,651

EBITDA 23,950 29,850 35,160 39,432 44,303 48,538 52,601

Other income 3,160 4,440 4,140 3,970 3,669 3,665 3,904

Interest (7,040) (7,350) (6,470) (5,929) (4,642) (3,612) (2,582)

Depreciation (6,760) (6,720) (6,750) (8,152) (9,637) (11,060) (12,359)

Extraordinary items (1,290) (810) (1,670) — — — —

Profit before tax 12,020 19,410 24,410 29,321 33,694 37,532 41,565

Tax expense (1,650) (1,890) (3,180) (4,563) (5,705) (6,773) (7,532)

Minority interest (120) (60) (90) (90) (90) (90) (90)

Income from associates (850) (190) (920) (800) (800) (800) (800)

Adjusted PAT 10,690 18,080 21,890 23,868 27,099 29,869 33,143

Adjusted EPS (Rs) 24.9 35.5 42.9 46.8 53.1 58.6 65.0


Equity 58,887 73,974 91,690 110,378 131,596 154,983 180,934

Total borrowings 47,710 60,580 65,070 50,070 40,070 30,070 20,070

Deferred tax liability/minority interest (4,507) (6,164) (5,860) (5,770) (5,680) (5,590) (5,500)

Current liabilities and provisions 60,690 66,480 72,030 74,520 81,852 88,932 95,918

Total liabilities 162,780 194,870 222,930 229,198 247,838 268,396 291,422

Net fixed assets 26,000 31,160 39,640 43,488 45,851 45,791 43,432

Goodwill/Intangible assets 17,460 17,470 17,920 17,920 17,920 17,920 17,920

Investments 3,350 3,780 10,340 10,340 10,340 10,340 10,340

Cash 11,890 28,950 28,940 22,039 29,123 38,826 53,443

Other current assets and miscellaneous 104,080 113,510 126,090 135,412 144,604 155,518 166,287

Total assets 162,780 194,870 222,930 229,198 247,838 268,396 291,422


Operating cash flow 16,880 19,010 15,494 28,940 33,957 38,153 42,488

Working capital changes (8,780) (270) (2,300) (6,832) (1,860) (3,834) (3,783)

Capital expenditure (10,140) (12,590) (10,410) (12,000) (12,000) (11,000) (10,000)

Free cash flow (2,040) 6,150 2,784 10,108 20,097 23,319 28,705

Ratios

EBITDA margin (%) 17.0 18.3 20.2 20.5 20.9 21.1 21.2

Net debt/equity (X) 0.61 0.43 0.39 0.25 0.08 (0.06) (0.18)

Book value (Rs/share) 137 146 181 218 260 306 357

ROAE (%) 13.5 21.1 22.0 20.4 20.0 18.9 17.9

ROACE (%) 17.0 22.2 22.0 20.4 20.9 21.6 22.6


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June 2018: Results calendar

Source: NSE, Kotak Institutional Equities

Mon Tue Wed Thu Fri Sat Sun

23-Jul 24-Jul 25-Jul 26-Jul 27-Jul 28-Jul 29-Jul

ACC Asian Paints Ambuja Cements Bharat Financial Inclusion Bank of Baroda J K Cement

Hindustan Zinc GlaxoSmithkline Pharmaceuticals Bharti Infratel Bharti Airtel Coromandel International NTPC

Indiabulls Ventures Hexaw are Technologies BHEL Biocon Equitas Holdings

L&T Infotech ICICI Prudential Life Canara Bank CESC HCL Technologies

United Spirits Info Edge Crompton Greaves Consumer Cholamandalam ICICI Bank

PFC GRUH Finance City Union Bank JSW Energy

TeamLease Services Hero Motocorp Colgate-Palmolive (India) Jubilant Life Science

IRB Infrastructure Container Corporation Mahindra & Mahindra Financial

JSW Steel Dr Reddy's Laboratories Prestige Estates Projects

Jubilant Foodw orks ITC Reliance Industries

30-Jul 31-Jul 1-Aug 2-Aug 3-Aug 4-Aug 5-Aug

Avenue Supermarts Ajanta Pharma Aditya Birla Fashion Godrej Properties Berger Paints Divi's Laboratories P I Industries

Axis Bank Astral Poly Technik Apollo Tyres Indiabulls Housing Carborundum Universal

Central Bank of India Bank of India Emami JK Lakshmi Cement CG Pow er and Industrial

Century Textile Bharat Electronics Exide Industries Mahindra Logistics KEC International

Escorts Castrol India Gatew ay Distriparks Manpasand Beverages Laurus Labs

GIC Dabur India Orient Cement Marico SAIL

Godrej Consumer Products IIFL Holdings Pidilite Industries Narayana Hrudayalaya Titan Company

GSPL Jagran Prakashan Reliance Infrastructure ONGC

HDFC Mahanagar Gas Tata Global Beverages The Ramco Cement

Idea Pow er Grid Torrent Pow er Torrent Pharmaceuticals

IDFC Bank Supreme Industries

Interglobe Aviation Tata Motors

New India Assurance UPL

NHPC Vedanta

Oberoi Realty

Piramal Enterprises

Shree Cement

Tech Mahindra

6-Aug 7-Aug 8-Aug 9-Aug 10-Aug 11-Aug 12-Aug

Adani Port and SEZ Adani Transmission BPCL Coffee Day Enterprises Apollo Hospitals Amara Raja Batteries

Adani Pow er AU Small Finance Cipla Gujarat Pipavav Port Dhanuka Agritech IOCL

Britannia Industries GlaxoSmithkline Consumer HPCL HCG Dr Lal Pathlabs NBCC

Max Financial Services Kalpataru Pow er Transmission Lupin Page Industries Endurance Technologies

Ujjivan Financial Services Mahindra & Mahindra NMDC S H Kelkar and Company GAIL (India)

Motherson Sumi Systems PNB Housing Finance Hindalco Industries

Mphasis Thermax Timken

Sobha Union Bank

SRF Voltas

TVS Motor

13-Aug 14-Aug 15-Aug 16-Aug 17-Aug 18-Aug 19-Aug

Cadila Healthcare Grasim Industries

Dew an Housing Finance Sun Pharmaceuticals

Godrej Industries


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Kotak Institutional Equities: Valuation summary of KIE Universe stocks


Target O/S ADVT

Price (Rs) price Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) 3mo

Company Rating 26-Jul-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 793 780 (1.6) 135 2.0 171 28 33 39 (1.6) 21.2 15.5 28.7 23.7 20.5 15.3 12.6 10.8 4.6 4.0 3.4 17.0 18.0 18.0 0.5 0.6 0.7 5.9

Apollo Tyres BUY 287 340 18.3 164 2.4 541 13 20 25 (38.0) 48.3 25.0 21.5 14.5 11.6 11.9 8.5 7.1 1.6 1.5 1.4 8.5 11.1 12.5 1.0 1.0 1.0 10.0

Ashok Leyland BUY 112 160 42.9 329 4.8 2,926 5.4 6.2 8.9 8.0 15.3 43.2 20.8 18.0 12.6 12.0 9.1 6.6 4.6 3.9 3.3 23.7 23.4 28.4 2.2 1.7 2.4 45.4

Bajaj Auto SELL 2,619 2,500 (4.6) 758 11.0 289 140 148 161 6.0 5.4 9.0 18.7 17.7 16.2 12.6 12.1 10.7 4.0 3.6 3.2 22.9 21.2 20.7 2.3 2.3 2.5 30.1

Balkrishna Industries REDUCE 1,226 1,260 2.8 237 3.5 193 37 50 63 4.8 34.8 25.0 32.8 24.3 19.5 17.4 13.4 10.7 5.8 4.8 3.9 19.0 21.6 22.2 0.4 0.5 0.5 8.4

Bharat Forge SELL 629 600 (4.7) 293 4.3 466 16 23 27 10.1 43.0 16.8 38.9 27.2 23.3 18.7 15.4 13.3 6.4 5.4 4.6 17.3 21.5 21.4 0.7 0.8 0.9 10.5

CEAT ADD 1,351 1,500 11.0 55 0.8 40 65 99 108 (29.5) 53.7 8.3 20.9 13.6 12.6 10.2 8.7 7.5 2.1 1.8 1.6 10.4 14.4 13.8 0.9 0.7 0.7 14.4

Eicher Motors SELL 28,266 26,000 (8.0) 771 11.2 27 792 995 1,200 29.3 25.5 20.6 35.7 28.4 23.6 25.7 20.7 16.8 14.3 10.3 7.7 46.4 42.3 37.5 0.1 0.1 0.1 17.9

Escorts BUY 889 1,170 31.6 76 1.6 89 39 56 69 71.3 43.6 23.6 22.9 16.0 12.9 13.1 9.7 7.6 3.1 2.7 2.3 13.5 16.8 17.7 0.4 0.9 1.2 16.0

Exide Industries SELL 273 225 (17.6) 232 3.4 850 8 10 11 0.6 23.7 10.9 33.3 26.9 24.3 18.6 15.6 13.9 4.3 3.9 3.5 13.5 15.2 15.3 0.9 1.1 1.3 8.4

Hero Motocorp SELL 3,137 3,000 (4.4) 626 9.1 200 185 183 204 9.5 (0.9) 11.4 16.9 17.1 15.3 10.4 10.1 8.9 5.3 4.7 4.2 33.8 29.3 29.1 2.7 2.9 3.3 21.1

Mahindra CIE Automotive ADD 246 290 18.0 93 1.4 378 10 14 16 107.0 45.0 12.7 25.6 17.7 15.7 12.6 8.9 7.8 2.5 2.2 1.9 10.4 13.2 13.1 — — — 2.9

Mahindra & Mahindra BUY 914 1,015 11.1 1,136 16.5 1,138 38 44 50 22.0 15.6 14.8 24.1 20.8 18.1 15.8 13.5 11.7 3.4 3.0 2.7 15.1 15.4 15.7 0.8 1.0 1.1 32.3

Maruti Suzuki ADD 9,397 10,000 6.4 2,839 41.3 302 256 323 393 5.1 26.4 21.8 36.8 29.1 23.9 20.6 16.9 13.3 6.8 5.8 5.0 19.8 21.6 22.5 0.9 0.9 1.0 64.4

Motherson Sumi Systems SELL 309 265 (14.3) 651 9.5 2,105 8 11 14 6.1 37.7 21.7 37.8 27.4 22.6 14.2 10.9 9.1 6.6 5.6 4.8 19.0 22.1 22.9 0.7 0.9 1.0 13.5

MRF REDUCE 78,645 76,000 (3.4) 334 4.9 4 2,669 3,896 4,447 (23.9) 46.0 14.1 29.5 20.2 17.7 13.4 9.9 8.5 3.4 2.9 2.5 12.3 15.7 15.4 0.1 0.1 0.1 7.3

Schaeffler India BUY 5,340 6,000 12.4 89 1.3 17 143 156 199 22.0 9.0 27.3 37.3 34.2 26.9 21.9 20.8 15.8 5.2 4.7 4.1 15.0 14.5 16.4 0.3 0.6 0.7 0.6

SKF REDUCE 1,635 1,700 4.0 84 1.2 51 58 70 81 24.6 20.8 16.4 28.3 23.5 20.2 17.5 15.0 12.5 4.6 4.0 3.5 16.1 17.0 17.2 0.7 0.9 1.0 0.4

Tata Motors BUY 258 445 72.3 877 11.9 3,396 20 23 38 (28.0) 15.9 63.8 12.9 11.2 6.8 3.8 3.5 2.9 0.9 0.8 0.8 8.8 7.9 11.7 — — — 57.6

Timken SELL 718 660 (8.1) 49 0.7 68 14 19 25 (5.3) 42.3 27.5 53.1 37.3 29.2 29.6 20.6 16.4 7.0 5.9 5.0 13.9 17.1 18.5 0.1 0.1 0.1 0.4

TVS Motor SELL 522 410 (21.5) 248 3.6 475 14 18 22 18.7 26.8 21.8 37.5 29.6 24.3 22.9 17.3 14.4 8.6 7.3 6.1 25.1 26.7 27.3 0.6 1.0 1.2 11.5

WABCO India SELL 6,937 6,350 (8.5) 132 1.9 19 144 169 222 27.8 17.8 31.3 48.2 40.9 31.2 31.3 26.7 20.2 8.6 7.2 5.9 19.5 19.2 20.9 0.1 0.1 0.2 0.5

Automobiles Neutral 10,206 148 (0.9) 20.4 26.2 26.1 21.7 17.2 11.6 9.8 8.1 3.7 3.3 2.9 14.2 15.2 16.7 0.9 0.9 1.1 379.5

Banks

Axis Bank ADD 542 600 10.8 1,391 20.3 2,567 1 20 39 (92.6) 1,735.5 100.1 504.3 27.5 13.7 — — — 2.6 2.3 2.0 0.5 7.7 13.8 0.9 0.5 1.1 59.5

Bank of Baroda NR 139 — — 367 5.3 2,652 (9) 20 23 (253.2) 323.2 10.5 (15.1) 6.8 6.1 — — — 1.7 1.2 0.9 (5.8) 12.6 12.3 — — — 29.5

Bank of India ADD 96 120 25.5 167 2.4 1,744 (35) (6) 16 (134.7) 82.2 366.7 (2.8) (15.5) 5.8 — — — 1.4 1.8 1.1 (21.3) (3.6) 9.5 — (1.3) 3.4 11.0

Canara Bank ADD 279 300 7.6 205 3.0 733 (58) (5) 51 (406.6) 91.6 1,147.0 (4.8) (57.6) 5.5 — — — 1.8 1.7 1.0 (12.2) (1.0) 10.1 — — — 27.3

City Union Bank ADD 169 190 12.4 124 1.8 665 9 10 12 6.4 16.2 13.0 19.0 16.3 14.5 — — — 2.9 2.5 2.2 15.3 15.5 15.5 0.2 1.1 1.2 2.0

DCB Bank ADD 167 205 23.0 51 0.7 308 8 10 12 13.8 28.2 21.0 20.9 16.3 13.5 — — — 2.1 1.9 1.7 10.9 11.7 12.7 — 0.6 0.7 4.7

Equitas Holdings BUY 140 190 35.8 48 0.7 340 0.9 4.4 8.3 (80.4) 374.7 88.2 151.2 31.9 16.9 — — — 2.2 2.0 1.8 1.4 6.4 11.0 — — — 4.7

Federal Bank BUY 88 130 47.3 175 2.5 1,972 4.4 5.7 7.9 (9.3) 29.5 39.5 20.2 15.6 11.2 — — — 1.6 1.4 1.3 8.2 8.8 11.4 1.1 1.5 2.0 20.2

HDFC Bank REDUCE 2,193 2,000 (8.8) 5,710 83.1 2,595 67 77 93 18.7 14.1 21.1 32.5 28.5 23.5 — — — 5.4 4.2 3.7 17.9 16.5 16.2 0.6 0.7 0.8 82.2

ICICI Bank BUY 286 400 40.0 1,837 26.8 6,429 11 15 25 (31.1) 46.5 64.1 27.1 18.5 11.3 — — — 2.2 1.9 1.6 6.6 9.1 13.7 0.5 1.1 1.8 85.7

IDFC Bank NR 38 — — 130 1.9 3,404 2.5 1.6 3.3 (16.0) (38.5) 109.8 15.1 24.6 11.7 — — — 0.9 0.8 0.8 5.7 3.4 6.9 1.3 0.8 1.7 9.3

IndusInd Bank REDUCE 1,960 1,900 (3.1) 1,177 17.1 600 60 71 87 25.3 17.5 23.6 32.6 27.8 22.5 — — — 5.1 4.2 3.6 17.1 17.6 16.8 — 0.4 0.5 30.6

J&K Bank BUY 53 100 88.1 30 0.4 557 4 7 11 111.6 82.4 63.8 14.6 8.0 4.9 — — — 0.7 0.6 0.6 3.4 5.9 9.1 — 2.5 4.1 0.3

Karur Vysya Bank ADD 98 110 12.0 72 1.0 727 5 3 13 (52.2) (32.3) 306.7 20.7 30.5 7.5 — — — 1.4 1.4 1.2 6.1 3.7 14.1 0.6 0.8 3.3 1.8

Punjab National Bank ADD 81 90 11.3 223 3.2 2,761 (44) (39) 9 (814.7) 13.4 124.1 (1.8) (2.1) 8.7 — — — 4.8 (3.7) (13.8) (32.4) (31.3) 8.2 — (10.3) 2.5 30.0

RBL Bank SELL 567 475 (16.3) 239 3.5 420 15 22 29 27.3 48.1 31.5 37.5 25.3 19.2 — — — 3.7 3.3 2.9 11.5 13.3 15.5 0.4 0.6 0.8 13.3

State Bank of India BUY 287 370 29.1 2,559 37.3 8,925 (7) 18 37 (155.8) NM 106.1 NM 15.9 7.7 — — — 2.3 1.8 1.3 (3.2) 7.1 13.2 - 0.1 0.1 73.8

Ujjivan Financial Services REDUCE 391 420 7.5 47 0.7 121 1 22 29 (96.5) 3,564.0 30.0 647.3 17.7 13.6 — — — 2.8 2.4 2.1 0.4 14.2 16.1 0.0 0.5 0.8 6.8

Union Bank ADD 85 130 52.9 99 1.4 1,169 (45) 1 24 (655.5) 101.4 3,896.2 (1.9) 138.9 3.5 — — — 1.4 1.3 0.8 (23.6) 0.3 11.8 — 0.1 4.3 9.5

YES Bank SELL 370 335 (9.4) 852 12.4 2,303 18 20 22 25.7 8.1 9.5 20.1 18.6 17.0 — — — 3.4 3.0 2.6 17.7 16.6 15.9 0.6 0.9 1.0 64.6

Banks Attractive 15,502 226 (101.3) 9,660.2 103.6 (2,482.4) 26.0 12.8 2.0 1.8 1.6 (0.1) 6.9 12.5 0.4 0.4 0.9 566.6

P/B (X) RoE (%) Dividend yield (%)


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Target O/S ADVT



NBFCs

Bajaj Finance SELL 2,682 2,000 (25.4) 1,550 22.6 575 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 54.4

Bajaj Finserv REDUCE 7,035 6,100 (13.3) 1,120 16.3 159 176 245 307 10.3 39.7 25.2 40.1 28.7 22.9 — — — 5.6 4.5 3.8 15.6 17.5 18.1 0.2 0.2 0.2 17.9

Bharat Financial Inclusion NA 1,191 — — 166 2.4 139 33 43 54 55.5 31.1 27.2 36.4 27.8 21.9 — — — 5.5 4.5 3.7 16.7 17.9 18.5 — — — 9.8

Cholamandalam REDUCE 1,544 1,510 (2.2) 241 3.5 156 62 76 92 35.5 22.3 20.8 24.8 20.3 16.8 — — — 4.9 4.1 3.4 20.6 21.0 21.2 0.4 0.6 0.7 7.3

HDFC BUY 2,023 2,075 2.6 3,420 49.8 1,676 75 58 67 52.1 (23.1) 15.2 26.8 34.9 30.3 — — — 5.3 4.6 4.2 23.9 14.3 14.5 1.0 1.0 1.2 70.7

HDFC Standard Life Insurance SELL 489 405 (17.2) 985 14.3 2,007 6 6 7 24.4 14.8 10.9 88.5 77.1 69.5 — — — 22.9 20.4 18.2 27.3 28.0 27.7 0.3 0.3 0.4 12.9

ICICI Lombard SELL 782 620 (20.7) 355 5.2 454 19 26 32 22.0 37.1 21.5 41.2 30.1 24.7 — — — 7.8 6.6 5.5 20.8 23.8 24.2 0.5 0.8 0.9 2.4

ICICI Prudential Life BUY 413 500 20.9 593 8.6 1,436 11 12 13 (3.7) 10.1 7.0 36.6 33.3 31.1 — — — 9.0 7.4 6.2 25.0 24.5 21.8 1.4 0.5 0.5 12.1

IIFL Holdings SELL 667 625 (6.2) 213 3.1 319 29 34 41 32.4 17.3 21.4 23.3 19.9 16.4 — — — 4.2 3.6 3.1 19.0 19.3 20.0 0.9 1.1 1.3 1.4

L&T Finance Holdings ADD 178 190 6.7 355 5.2 1,996 7 13 14 23.7 70.9 12.3 24.3 14.2 12.6 — — — 2.8 2.6 2.2 14.2 18.9 18.8 1.0 1.1 1.4 12.0

LIC Housing Finance BUY 525 610 16.2 265 3.9 505 44 50 58 3.2 13.8 17.5 12.0 10.6 9.0 — — — 2.0 1.7 1.4 14.5 14.3 14.4 1.3 1.5 1.7 12.7

Magma Fincorp BUY 152 200 31.3 41 0.6 237 10 12 15 1,014.5 24.6 25.8 15.7 12.6 10.0 — — — 1.6 1.5 1.3 10.2 12.9 14.1 0.5 1.2 1.5 1.6

Mahindra & Mahindra Financial REDUCE 512 475 (7.2) 316 4.6 614 15 22 26 105.0 53.5 16.6 35.3 23.0 19.7 — — — 3.6 3.2 2.9 11.3 14.0 14.8 0.8 1.2 1.4 11.0

Max Financial Services BUY 472 650 37.9 127 1.8 268 5 6 6 (20.4) 36.9 1.8 102.9 75.2 73.8 — — — — — — 6.5 8.3 8.0 — 0.5 0.5 4.3

Muthoot Finance ADD 408 480 17.6 163 2.4 400 43 38 40 45.6 (10.8) 4.0 9.5 10.6 10.2 — — — 2.1 1.8 1.6 24.1 18.4 16.9 2.4 2.2 2.2 4.7

PNB Housing Finance REDUCE 1,333 1,375 3.1 223 3.3 167 50 61 77 57.8 23.0 25.3 26.8 21.8 17.4 — — — 3.5 3.2 2.8 14.0 15.2 16.8 0.7 0.3 0.3 10.1

SBI Life Insurance ADD 673 785 16.6 673 9.8 1,000 12 15 18 20.8 26.0 22.9 58.4 46.3 37.7 — — — 10.5 8.8 7.4 19.4 20.6 21.3 0.3 0.3 0.4 4.6

Shriram City Union Finance ADD 1,910 2,250 17.8 126 1.8 66 101 141 174 19.6 40.4 22.7 19.0 13.5 11.0 — — — 2.4 2.2 1.9 12.5 15.8 16.9 0.9 0.9 1.1 0.7

Shriram Transport ADD 1,411 1,550 9.9 320 4.7 227 69 114 130 24.7 64.4 14.3 20.4 12.4 10.9 — — — 2.7 2.2 1.9 13.1 18.3 17.5 0.8 1.1 1.3 28.1

NBFCs Neutral 11,253 164 36.9 12.6 18.4 32.9 29.2 24.7 5.5 4.7 4.1 16.8 16.1 16.6 0.6 0.7 0.8 566.6

Cement

ACC SELL 1,523 1,270 (16.6) 286 4.2 188 49 62 70 32.7 27.0 13.8 31.3 24.6 21.6 16.7 13.6 11.7 3.1 2.8 2.6 10.1 11.9 12.5 1.1 1.1 1.1 14.2

Ambuja Cements REDUCE 224 210 (6.2) 444 6.5 1,986 8 9 11 29.7 14.5 23.2 29.8 26.0 21.1 9.9 8.7 7.2 2.1 2.1 2.0 7.4 8.1 9.5 1.6 1.6 1.6 10.3

Dalmia Bharat ADD 2,602 2,900 11.4 232 3.4 89 60 98 128 55.4 62.6 30.3 43.1 26.5 20.3 13.4 10.2 8.3 3.8 3.3 2.9 9.7 13.4 15.2 0.1 0.1 0.1 5.0

Grasim Industries BUY 1,024 1,275 24.5 673 9.8 657 47 52 69 (30.1) 9.1 32.8 21.6 19.8 14.9 12.2 7.5 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 113 135 19.3 35 0.5 308 3 5 9 (42.5) 56.2 84.4 34.7 22.2 12.0 9.6 8.3 6.5 0.7 0.7 0.6 2.0 3.0 5.3 0.9 0.9 0.9 7.2

J K Cement REDUCE 796 1,000 25.7 56 0.8 70 43 51 83 25.1 17.0 65.0 18.4 15.7 9.5 9.7 10.4 8.4 2.8 2.5 2.0 16.2 16.7 23.2 1.0 1.0 1.0 0.6

JK Lakshmi Cement ADD 333 425 27.7 39 0.6 118 4 18 33 (35.7) 311.2 79.6 74.4 18.1 10.1 13.7 8.2 5.9 2.7 2.4 2.0 3.7 14.1 21.5 0.6 0.6 0.6 0.4

Orient Cement ADD 127 165 29.8 26 0.4 205 2 8 12 237.8 250.7 64.8 58.9 16.8 10.2 12.6 8.0 5.9 2.5 2.3 1.9 4.4 14.3 20.6 0.6 1.2 1.6 0.2

Shree Cement SELL 17,480 12,700 (27.3) 609 8.9 35 397 486 662 3.4 22.3 36.2 44.0 36.0 26.4 23.7 17.9 14.0 6.8 5.9 4.9 16.7 17.6 20.2 0.3 0.3 0.3 5.0

UltraTech Cement SELL 4,143 2,950 (28.8) 1,138 16.6 275 88 126 162 (7.8) 42.7 28.9 47.0 32.9 25.6 23.2 17.2 14.2 4.4 3.9 3.4 9.7 12.6 14.3 0.2 0.2 0.2 19.0

Cement Cautious 3,538 52 5.9 27.1 31.8 34.2 26.9 20.4 15.3 10.8 9.1 2.6 2.4 2.2 7.5 8.9 10.6 0.6 0.6 0.6 76.3



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Consumer products

Asian Paints REDUCE 1,434 1,325 (7.6) 1,375 20.0 959 21 27 33 2.9 32.1 20.3 69.9 52.9 44.0 42.7 33.2 27.4 16.4 14.3 12.5 24.6 28.8 30.3 0.6 0.8 1.0 21.2

Bajaj Corp. ADD 403 470 16.8 59 0.9 148 14 15 17 (9.4) 7.8 10.3 28.1 26.1 23.7 22.2 20.8 17.8 12.1 12.1 12.1 42.8 46.3 51.2 3.0 3.2 3.5 0.4

Britannia Industries ADD 6,450 6,000 (7.0) 774 11.3 120 84 104 126 13.5 24.4 21.5 77.1 62.0 51.0 51.0 40.0 33.0 22.7 18.0 14.6 32.9 32.4 31.6 0.4 0.5 0.7 9.6

Coffee Day Enterprises REDUCE 263 340 29.2 56 0.8 211 3 8 13 49.1 149.7 59.4 78.7 31.5 19.8 13.4 — — 2.3 2.2 2.0 3.1 7.2 10.4 — — — 1.1

Colgate-Palmolive (India) ADD 1,085 1,250 15.2 295 4.3 272 24 27 32 15.2 14.7 15.6 45.6 39.8 34.4 26.1 22.8 19.9 19.4 19.5 16.6 46.2 48.8 52.2 2.2 1.5 1.8 7.9

Dabur India REDUCE 373 350 (6.2) 659 9.6 1,762 8 9 10 7.2 16.1 11.7 48.0 41.4 37.0 40.6 35.2 30.8 11.5 11.6 10.1 25.9 27.9 29.1 2.0 1.0 1.2 10.1

GlaxoSmithKline Consumer ADD 6,369 6,750 6.0 268 3.9 42 166 189 211 6.6 13.3 11.9 38.3 33.8 30.2 26.3 22.5 19.4 7.7 7.0 6.4 21.2 21.7 22.2 1.2 1.4 1.6 2.0

Godrej Consumer Products REDUCE 1,336 1,020 (23.6) 910 13.2 681 21 25 28 11.5 17.6 13.3 62.6 53.2 46.9 44.3 37.7 32.9 14.5 12.6 10.9 25.2 25.4 24.9 0.5 0.6 0.7 9.0

Hindustan Unilever REDUCE 1,670 1,570 (6.0) 3,615 52.6 2,160 25 29 33 25.0 19.5 13.2 68.1 57.0 50.3 48.8 39.4 34.7 51.0 44.6 37.9 78.1 83.5 81.4 1.2 1.3 1.4 34.1

ITC ADD 287 330 14.9 3,509 51.1 12,275 9 10 11 7.8 8.2 12.3 32.2 29.8 26.5 21.1 19.2 16.9 6.9 6.4 6.1 19.4 20.4 22.2 1.8 2.0 2.3 42.5

Jubilant Foodworks BUY 1,396 1,650 18.2 184 2.7 132 15 25 35 191.7 73.6 37.5 95.9 55.3 40.2 41.0 27.6 20.8 19.0 13.7 10.4 21.7 28.9 29.5 0.1 0.1 0.2 39.6

Jyothy Laboratories ADD 225 240 6.8 82 1.2 364 4 6 7 (26.4) 27.6 16.7 51.0 40.0 34.3 31.3 26.7 22.7 7.1 6.2 5.4 14.4 16.6 16.8 0.2 0.4 0.7 1.6

Marico ADD 365 345 (5.3) 471 6.9 1,291 6 7 8 7.4 16.7 13.7 58.2 49.8 43.8 41.0 34.5 30.0 18.5 17.1 15.8 33.2 35.7 37.5 1.1 1.3 1.5 9.6

Nestle India ADD 10,324 9,500 (8.0) 995 14.5 96 127 168 191 21.1 32.5 13.4 81.2 61.3 54.1 44.7 34.8 30.6 29.1 26.8 24.6 36.6 45.5 47.3 0.8 1.1 1.3 8.5

Page Industries SELL 28,747 21,000 (26.9) 321 4.7 11 311 392 482 32.5 26.1 22.9 92.4 73.3 59.6 58.9 46.5 38.3 37.8 29.6 23.6 45.9 45.3 44.0 0.5 0.6 0.7 7.9

Pidilite Industries REDUCE 1,114 1,050 (5.8) 566 8.2 508 18 22 26 7.5 20.4 20.4 61.8 51.3 42.6 41.3 34.4 28.4 15.8 13.3 11.1 26.0 28.2 28.5 0.5 0.6 0.7 13.6

S H Kelkar and Company BUY 200 315 57.5 29 0.4 145 7 8 11 2.1 11.8 28.4 27.0 24.2 18.8 18.9 15.8 12.3 3.4 3.1 2.7 12.8 13.3 15.3 0.9 0.9 1.0 0.2

Tata Global Beverages REDUCE 239 285 19.2 151 2.2 631 7 10 11 20.7 29.4 19.1 32.5 25.1 21.1 17.1 14.4 12.3 2.1 2.0 1.9 7.0 8.3 9.4 1.0 1.3 1.5 13.4

Titan Company SELL 855 800 (6.4) 759 11.0 888 13 16 20 43.3 26.7 20.6 66.8 52.7 43.7 45.8 34.9 28.0 14.9 12.5 10.5 24.3 25.8 26.2 0.4 0.5 0.6 35.5

United Breweries SELL 1,095 1,000 (8.7) 289 4.2 264 15 19 24 71.6 29.7 23.4 73.4 56.6 45.8 32.3 26.9 23.2 10.8 9.2 7.9 15.7 17.6 18.6 0.2 0.3 0.4 10.4

United Spirits REDUCE 579 590 1.9 421 6.1 727 8 10 13 39.1 34.7 30.9 76.1 56.5 43.2 43.9 32.9 26.6 16.8 11.5 8.5 24.9 24.2 22.7 — — 0.3 19.0

Varun Beverages ADD 690 750 8.8 126 1.8 183 12 17 22 377.8 45.4 29.8 59.9 41.2 31.7 18.5 14.9 12.8 7.1 6.1 5.2 12.1 16.0 17.7 — — 0.1 1.6

Consumer products Cautious 15,926 232 14.6 18.1 15.7 52.6 44.5 38.5 34.3 28.6 24.6 12.9 11.6 10.4 24.5 26.1 26.9 1.1 1.2 1.4 302.5

Energy

BPCL REDUCE 389 390 0.3 844 12.3 1,967 40 39 41 (1.5) (3.6) 5.3 9.7 10.0 9.5 7.8 7.4 6.8 2.2 2.0 1.8 24.8 21.1 20.0 5.4 4.0 4.2 32.0

Castrol India ADD 165 215 30.3 163 2.4 989 7 8 9 3.3 13.6 10.9 24.0 21.1 19.1 15.0 13.2 11.9 16.0 15.1 14.8 67.9 73.6 78.6 2.9 3.6 4.2 4.0

GAIL (India) BUY 370 410 10.8 834 12.1 2,255 20 25 27 21.8 23.2 8.3 18.1 14.7 13.6 11.3 9.4 8.7 2.1 1.9 1.8 11.7 13.5 13.5 2.0 2.3 2.4 21.9

GSPL SELL 194 170 (12.5) 110 1.6 564 12 11 11 34.5 (7.0) (4.6) 16.4 17.6 18.5 8.4 7.0 7.0 2.2 2.0 1.8 14.0 11.7 10.2 0.9 0.9 0.8 1.6

HPCL REDUCE 277 320 15.6 422 6.1 1,524 42 32 33 (3.2) (23.4) 3.4 6.6 8.7 8.4 5.8 7.6 7.7 1.8 1.6 1.5 28.7 19.3 18.2 6.1 4.7 4.9 30.5

Indraprastha Gas SELL 295 240 (18.7) 207 3.0 700 10 12 13 19.0 16.5 12.0 28.6 24.6 21.9 18.0 15.7 13.9 5.9 5.1 4.4 22.4 22.2 21.5 0.7 0.8 1.0 10.6

IOCL REDUCE 159 160 0.8 1,542 22.5 9,479 21 17 18 (24.8) (17.9) 7.4 7.7 9.4 8.8 4.5 5.3 4.8 1.4 1.3 1.2 18.5 14.0 14.0 7.2 4.2 4.6 25.4

Mahanagar Gas ADD 898 850 (5.4) 89 1.3 99 48 52 54 21.5 6.5 5.3 18.6 17.4 16.6 11.3 10.1 9.4 4.2 3.8 3.4 24.3 22.8 21.4 2.1 2.3 2.4 4.3

ONGC ADD 163 200 23.0 2,086 30.4 12,833 17 21 21 3.1 19.6 (1.3) 9.3 7.8 7.9 5.0 3.9 3.8 0.9 0.9 0.8 9.9 11.5 10.7 4.1 4.3 4.3 18.1

Oil India SELL 209 220 5.5 237 3.4 1,135 25 24 24 22.6 (1.3) (0.7) 8.4 8.6 8.6 6.5 6.0 5.9 0.8 0.8 0.8 9.8 9.7 9.2 5.0 5.3 5.2 3.2

Petronet LNG BUY 231 280 21.1 347 5.1 1,500 14 16 18 22.1 17.3 13.2 16.7 14.2 12.5 11.0 9.5 8.0 3.6 3.1 2.8 23.3 23.4 23.3 1.9 2.5 3.2 12.3

Reliance Industries REDUCE 1,111 930 (16.3) 6,573 95.7 5,922 59 68 77 16.9 14.9 13.9 18.8 16.4 14.4 13.9 11.2 9.4 2.2 2.0 1.8 11.6 11.9 12.1 0.5 0.6 0.6 118.0

Energy Attractive 13,452 196 1.0 5.8 7.3 13.0 12.3 11.5 8.5 7.5 6.9 1.7 1.6 1.4 13.3 12.8 12.6 2.5 2.2 2.3 281.9



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Price (Rs) price Upside shares 3mo


Industrials

ABB SELL 1,176 1,020 (13.3) 249 3.6 212 20 26 29 12.1 30.1 14.2 59.3 45.6 39.9 32.6 26.6 23.9 6.9 6.3 5.8 12.2 14.5 15.1 0.3 0.8 0.8 1.4

BHEL REDUCE 71 78 10.3 260 3.8 3,671 2.2 2.6 5.0 62.7 16.5 95.3 32.2 27.6 14.1 7.6 7.1 3.7 0.8 0.8 0.8 2.5 2.9 5.6 2.6 3.0 5.9 10.0

Carborundum Universal SELL 350 310 (11.5) 66 1.0 189 11 14 17 22.8 25.4 20.2 30.7 24.5 20.4 16.6 12.3 10.6 4.2 3.8 3.4 14.6 16.4 17.6 0.6 1.2 1.5 0.3

CG Power and Industrial BUY 62 65 4.1 39 0.6 627 0.8 3.1 4.3 (72.2) 275.7 40.5 76.5 20.4 14.5 11.2 8.4 6.9 1.4 1.5 1.5 1.5 7.3 10.4 — — — 7.3

Crompton Greaves Consumer SELL 240 215 (10.5) 151 2.2 627 5.2 6.2 7.5 13.3 19.5 20.7 46.5 38.9 32.2 28.5 24.2 20.5 19.1 13.3 10.2 49.5 40.4 35.8 0.6 0.8 1.0 2.6

Cummins India REDUCE 676 680 0.6 187 2.7 277 24 28 32 (7.8) 16.1 13.9 27.9 24.0 21.1 24.6 21.1 17.5 4.7 4.4 4.1 17.4 18.9 20.1 2.2 2.2 2.5 3.9

Havells India SELL 615 485 (21.1) 385 5.6 625 11 14 17 16.6 26.6 20.5 55.5 43.8 36.4 35.4 28.0 22.8 10.3 9.1 7.9 19.8 22.0 23.2 0.6 0.8 1.0 12.5

Kalpataru Power Transmission BUY 367 530 44.4 56 0.8 153 19 24 34 36.5 24.3 39.8 18.9 15.2 10.9 8.2 6.8 5.4 2.1 1.9 1.6 11.7 13.1 16.1 0.7 0.7 0.7 0.6

KEC International BUY 351 430 22.4 90 1.3 257 18 22 29 51.1 22.0 34.4 19.6 16.1 12.0 10.5 8.7 6.9 4.5 3.7 2.9 25.7 25.2 27.1 0.7 0.8 1.1 3.0

L&T BUY 1,306 1,600 22.5 1,830 26.6 1,401 52 63 70 22.4 21.7 10.9 25.3 20.7 18.7 20.8 16.5 15.8 3.7 3.3 3.0 15.0 16.8 16.8 1.2 1.8 1.9 43.0

Siemens SELL 968 975 0.7 345 5.0 356 24 30 37 22.5 23.0 23.2 40.0 32.5 26.4 22.5 18.0 14.4 4.2 4.0 3.7 10.9 12.6 14.5 1.0 1.3 1.5 3.5

Thermax REDUCE 1,106 1,065 (3.7) 132 1.9 113 21 30 42 (3.6) 44.2 42.8 53.6 37.2 26.0 32.7 23.2 16.5 4.6 4.2 3.8 8.8 11.8 15.3 0.5 0.7 0.8 0.7

Voltas SELL 569 525 (7.7) 188 2.7 331 17 19 22 12.6 8.3 15.6 32.9 30.4 26.3 27.3 23.2 19.3 4.8 4.3 3.9 15.9 15.0 15.5 0.7 0.8 0.9 14.0

Industrials Neutral 3,978 58 19.8 22.7 20.7 31.0 25.2 20.9 20.3 16.4 14.3 3.4 3.1 2.9 10.8 12.4 13.8 1.1 1.5 1.8 102.8

Infrastructure

Adani Ports and SEZ BUY 400 470 17.5 828 12.1 2,071 20 20 23 6.1 (0.2) 14.7 20.0 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 25.1

Ashoka Buildcon BUY 146 210 43.6 41 0.6 282 8 8 9 34.6 0.5 5.2 17.4 17.3 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 0.8

Container Corp. SELL 648 635 (1.9) 316 4.6 487 18 21 26 7.3 20.0 21.4 36.6 30.5 25.2 24.2 18.8 14.9 3.4 3.1 2.9 9.4 10.6 11.9 2.6 1.4 1.7 8.5

Dilip Buildcon BUY 728 1,220 67.6 100 1.4 137 46 54 69 76.5 16.1 28.0 15.7 13.5 10.5 9.0 6.5 5.4 4.1 3.1 2.4 29.5 25.9 25.4 — — — 8.2

Gateway Distriparks BUY 173 250 44.8 19 0.3 109 8 8 9 12.1 (1.2) 17.5 22.6 22.8 19.4 21.5 10.6 8.9 1.9 3.6 3.3 8.2 10.8 17.6 4.1 — 1.7 0.8

Gujarat Pipavav Port BUY 116 170 46.4 56 0.8 483 4.1 5.9 7.2 (20.6) 43.7 22.5 28.3 19.7 16.1 13.9 11.5 9.0 2.8 2.7 2.7 9.8 14.0 16.8 2.9 4.2 5.1 0.9

IRB Infrastructure BUY 206 320 55.2 72 1.1 351 23 31 33 10.8 36.8 7.1 9.1 6.7 6.2 7.1 6.7 7.2 1.3 1.1 0.9 14.5 17.6 16.3 1.1 1.5 1.9 8.2

Mahindra Logistics BUY 606 540 (10.9) 43 0.6 71 10 14 18 16.2 42.8 31.2 61.8 43.3 33.0 35.7 23.9 18.2 10.3 8.6 7.1 18.2 21.6 23.5 — — — 0.8

Sadbhav Engineering BUY 269 440 63.5 46 0.7 172 13 18 18 17.4 38.4 2.2 20.9 15.1 14.8 14.7 11.7 9.1 2.5 2.2 1.9 12.5 15.2 13.7 — — — 0.8

Infrastructure Attractive 1,521 22 10.9 10.5 15.5 21.0 19.0 16.4 13.3 11.8 10.3 3.3 2.9 2.6 15.8 15.4 15.5 1.1 0.9 1.1 54.1

Internet

Info Edge ADD 1,395 1,425 2.1 170 2.5 122 23 26 33 33.3 14.9 27.5 62.0 54.0 42.3 52.0 40.6 30.7 8.0 6.4 5.8 13.4 13.2 14.3 0.4 0.6 0.6 2.1

Just Dial ADD 568 610 7.4 38 0.6 67 21 26 30 21.7 23.0 15.0 26.7 21.7 18.9 15.9 12.3 10.0 3.9 3.4 2.9 15.2 16.7 16.6 — 0.5 0.5 50.7

Internet Cautious 208 3 28.0 17.6 23.0 50.0 42.5 34.5 39.1 30.8 24.2 6.8 5.5 4.9 13.5 12.9 14.2 0.3 0.6 0.6 52.8

Media

DB Corp. REDUCE 259 270 4.2 48 0.7 184 18 20 23 (14.1) 14.9 12.3 14.7 12.8 11.4 7.8 7.0 6.2 2.9 2.6 2.5 19.9 20.7 22.3 5.0 6.5 8.1 0.6

DishTV ADD 67 90 33.7 124 1.8 1,925 (0.4) 1.8 3.4 (143.0) 514.6 88.2 NM 36.8 19.6 11.1 5.8 4.6 1.9 1.8 1.7 (2.3) 5.1 8.9 — — — 7.7

Jagran Prakashan REDUCE 126 168 33.4 39 0.6 311 10 12 14 (6.0) 21.7 15.3 12.6 10.4 9.0 5.7 5.0 4.4 1.9 1.9 1.8 14.8 18.1 20.9 2.4 4.0 7.1 0.4

PVR REDUCE 1,119 1,425 27.3 52 0.8 47 27 38 50 25.5 39.8 33.2 41.7 29.8 22.4 14.3 11.8 9.8 4.9 4.2 3.6 12.3 15.2 17.5 0.2 0.3 0.4 9.4

Sun TV Network REDUCE 767 925 20.6 302 4.4 394 29 35 39 10.2 20.7 10.9 26.6 22.1 19.9 17.8 14.9 13.0 6.6 5.9 5.3 26.3 28.1 27.9 1.3 2.3 2.6 21.8

Zee Entertainment Enterprises ADD 518 600 15.8 498 7.2 960 15 17 20 7.8 11.3 17.0 34.5 31.0 26.5 22.4 19.3 16.3 6.6 5.8 5.1 20.3 19.9 20.6 0.5 0.9 1.1 17.6

Media Attractive 1,063 15 (1.5) 29.6 21.1 32.7 25.2 20.8 15.7 12.0 10.3 4.5 4.1 3.7 13.7 16.4 17.9 0.9 1.5 1.9 57.5

Mkt cap. EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%)


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Metals & Mining

Coal India ADD 265 326 23.0 1,646 24.0 6,207 11 27 28 (24.2) 138.2 3.0 23.4 9.8 9.6 17.4 6.2 5.9 6.8 6.2 6.5 26.7 66.1 66.4 6.2 7.5 9.4 13.7

Hindalco Industries BUY 207 305 47.7 464 6.8 2,229 22 27 31 155.4 23.9 13.6 9.4 7.6 6.7 6.2 5.2 4.5 0.8 0.8 0.7 9.7 10.5 10.7 0.6 0.6 0.6 33.8

Hindustan Zinc ADD 275 290 5.5 1,161 16.9 4,225 22 22 26 9.3 3.7 14.7 12.8 12.3 10.7 7.8 7.1 5.8 3.2 2.8 2.4 27.2 24.4 24.2 2.9 2.9 2.9 8.6

Jindal Steel and Power REDUCE 195 255 30.6 189 2.8 968 (8) 8 18 59.3 194.2 129.1 (23.0) 24.4 10.7 9.4 6.7 5.7 0.6 0.6 0.6 (2.7) 2.6 5.7 — — — 29.7

JSW Steel ADD 312 350 12.1 755 11.0 2,417 27 30 27 83.9 10.2 (8.7) 11.7 10.6 11.6 7.7 6.7 7.4 2.6 2.2 1.9 24.8 22.4 17.3 1.1 1.1 1.1 19.7

National Aluminium Co. ADD 62 85 36.9 120 1.7 1,933 4 7 7 12.7 63.0 11.1 15.0 9.2 8.3 6.1 4.1 3.7 1.1 1.1 1.1 7.7 12.4 13.6 9.2 8.9 8.9 9.6

NMDC REDUCE 102 125 22.5 323 4.7 3,164 12 10 10 43.3 (16.5) 3.6 8.7 10.4 10.1 4.7 6.3 6.1 1.3 1.3 1.2 15.8 12.5 12.4 5.4 5.4 5.4 3.7

Tata Steel ADD 535 700 30.9 610 8.9 1,205 67 69 82 62.6 3.1 18.4 7.9 8 6.5 6.1 6.0 6.1 1.1 0.9 0.9 17.2 13.1 13.9 1.8 1.9 1.9 69.9

Vedanta BUY 217 415 91.7 805 11.7 3,717 22 37 43 9.6 71.9 16.9 10.0 5.8 5.0 5.5 4.1 3.4 1.3 1.1 1.0 12.9 20.6 21.4 3.7 5.1 6.0 53.4

Metals & Mining Attractive 6,072 88 32.3 41.1 10.9 12.8 9.1 8.2 7.3 5.7 5.3 1.8 1.6 1.5 14.3 18.0 18.3 3.6 4.1 4.7 242.0

Pharmaceutical

Apollo Hospitals ADD 937 1,090 16.3 130 1.9 139 8 19 26 (46.9) 124.3 38.0 111.1 49.5 35.9 20.4 17.4 14.6 4.0 3.8 3.5 3.4 7.9 10.2 0.2 0.5 0.7 7.3

Aster DM Healthcare BUY 165 240 45.4 83 1.2 505 3 5 7 163.1 64.2 59.2 59.9 36.5 22.9 16.7 12.4 9.9 2.9 2.7 2.5 5.9 7.8 11.4 - - - 0.4

Aurobindo Pharma ADD 582 640 9.9 341 5.0 584 42 45 51 6.0 7.0 13.5 13.9 13.0 11.5 9.8 9.1 7.8 2.9 2.4 2.0 23.2 20.3 17.9 0.7 0.9 1.1 20.3

Biocon SELL 558 300 (46.3) 335 4.9 601 6 8 15 (39.2) 27.5 84.6 90.1 70.7 38.3 40.4 29.7 19.6 5.9 5.6 5.0 6.9 8.1 13.8 0.2 0.5 0.9 21.8

Cipla BUY 628 650 3.5 506 7.4 805 18 24 32 40.2 36.3 35.1 35.9 26.3 19.5 18.6 14.5 11.4 3.5 3.1 2.8 10.2 12.5 15.2 0.6 0.8 1.1 23.2

Dr Lal Pathlabs REDUCE 936 865 (7.6) 78 1.1 83 20 25 29 7.0 20.8 18.5 45.8 37.9 32.0 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 2,133 2,150 0.8 354 5.2 166 59 89 118 (18.5) 50.2 32.8 36.1 24.1 18.1 16.8 12.1 8.6 2.8 2.5 2.3 7.8 11.1 12.6 1.1 0.6 0.8 34.1

HCG REDUCE 275 305 10.8 24 0.4 85 2 3 5 (40.0) 120.9 57.3 176.0 79.7 50.6 23.3 18.1 15.4 4.5 4.3 4.0 2.8 5.5 8.1 — — — 0.2

Laurus Labs ADD 448 540 20.7 47 0.7 106 16 22 34 (11.9) 37.3 54.4 28.2 20.6 13.3 13.8 11.3 8.3 3.2 2.8 2.3 11.9 14.4 18.8 — — — 0.5

Lupin REDUCE 813 800 (1.6) 368 5.4 450 38 36 48 (32.9) (5.1) 33.7 21.3 22.5 16.8 13.2 11.4 9.0 2.7 2.4 2.2 12.6 11.4 13.7 1.1 0.7 0.9 34.1

Narayana Hrudayalaya ADD 250 275 10.0 51 0.7 204 3 4 7 (38.1) 52.2 76.9 99.4 65.3 36.9 27.4 20.7 15.1 4.9 4.6 4.1 5.1 7.3 11.7 — — — 0.4

Sun Pharmaceuticals REDUCE 555 500 (10.0) 1,333 19.4 2,406 15 17 24 (47.5) 12.0 42.0 36.6 32.7 23.0 21.6 17.7 13.0 3.5 3.2 2.9 9.8 10.2 13.1 0.4 0.6 0.9 52.7

Torrent Pharmaceuticals NR 1,495 — — 253 3.7 169 40 46 62 (27.4) 16.0 33.3 37.3 32.2 24.1 20.8 14.8 12.3 5.5 4.8 4.2 15.1 15.0 17.4 1.0 0.7 1.0 5.0

Pharmaceuticals Neutral 3,903 57 (25.8) 17.8 35.1 32.8 27.8 20.6 18.0 14.6 11.3 3.5 3.2 2.8 10.7 11.4 13.7 0.6 0.6 0.9 201.7

Real Estate

Brigade Enterprises BUY 186 340 82.8 25 0.4 136 11 9 9 (17.7) (15.1) (1.6) 16.8 19.8 20.1 10.7 10.9 10.7 1.1 1.1 1.0 7.6 5.5 5.2 1.3 1.3 1.3 0.3

DLF RS 190 — — 339 4.9 1,784 19.6 6.5 3.9 403.9 (66.9) (39.6) 9.7 29.3 48.5 28.9 12.5 12.4 1.0 0.9 0.9 11.7 3.2 1.9 1.1 1.1 1.1 16.9

Godrej Properties SELL 682 400 (41.3) 156 2.3 216 11.6 16.8 19.2 21.9 43.9 14.9 58.5 40.7 35.4 147.2 104.7 74.5 6.5 5.6 4.9 11.8 14.9 14.7 — — — 2.7

Oberoi Realty BUY 480 560 16.7 175 2.5 340 13 62 44 14.0 385.4 (28.1) 37.7 7.8 10.8 28.2 10.8 13.5 2.7 1.8 1.5 7.3 27.4 15.2 0.4 0.4 0.4 2.8

Prestige Estates Projects ADD 267 315 17.9 100 1.5 375 13 10 10 24.3 (24.2) 8.4 21.3 28.1 25.9 14.8 15.3 15.4 2.1 2.0 1.9 10.3 7.3 7.5 0.6 0.6 0.6 1.1

Sobha REDUCE 462 510 10.5 44 0.6 95 22 20 23 30.9 (7.5) 14.8 21.1 22.9 19.9 12.9 13.1 12.3 1.6 1.5 1.4 7.6 6.8 7.4 1.5 1.5 1.5 1.6

Sunteck Realty REDUCE 405 330 (18.5) 59 0.9 140 15 18 20 4.8 20.2 6.9 26.5 22.1 20.7 17.1 18.7 17.3 2.2 2.0 1.8 9.7 9.4 9.2 0.3 0.2 0.2 1.7

Real Estate Neutral 899 13 140.1 (12.6) (20.2) 17.2 19.7 24.7 24.0 14.6 15.0 1.6 1.5 1.4 9.3 7.5 5.7 0.7 0.7 0.7 27.1

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 953 1,010 6.0 1,326 19.3 1,409 62 68 71 5.3 9.0 5.0 15.3 14.0 13.4 10.7 9.0 8.3 3.7 3.1 2.8 24.8 23.8 21.9 0.9 3.0 3.2 34.6

Hexaware Technologies SELL 452 435 (3.8) 134 2.0 302 17 20 23 20.2 18.4 18.0 27.3 23.1 19.6 19.6 17.2 13.6 6.8 5.9 5.0 26.6 27.4 27.8 0.9 1.8 1.8 15.4

Infosys ADD 1,375 1,400 1.8 3,004 43.7 2,175 65 71 78 3.0 9.7 10.4 21.3 19.4 17.6 14.8 13.3 11.9 4.6 4.3 3.9 21.8 23.0 23.5 2.0 3.2 2.8 78.6

L&T Infotech ADD 1,810 2,000 10.5 313 4.6 175 64 83 94 13.9 30.5 13.0 28.5 21.8 19.3 25.1 16.7 14.1 8.2 6.6 5.4 31.8 33.5 30.7 0.9 1.3 1.4 4.7

Mindtree ADD 947 1,115 17.7 155 2.3 165 35 43 53 37.8 24.9 23.6 27.4 22.0 17.8 19.9 13.7 11.0 5.7 4.9 4.1 21.4 23.9 25.2 1.2 1.4 1.7 29.0

Mphasis SELL 1,125 760 (32.5) 218 3.2 193 44 52 56 14.4 18.3 8.2 25.7 21.7 20.0 18.6 15.0 13.4 4.0 3.6 3.3 14.6 17.4 17.1 1.8 1.8 1.8 11.5

TCS REDUCE 1,963 1,790 (8.8) 7,517 109.4 3,829 67 82 89 1.1 21.2 8.8 29.1 24.0 22.1 21.7 17.6 16.2 8.6 7.6 7.4 29.4 33.4 33.8 1.3 2.1 3.6 107.3

Tech Mahindra ADD 632 775 22.6 558 8.1 891 43 45 53 33.1 6.6 15.8 14.8 13.9 12.0 10.8 8.3 6.8 3.0 2.6 2.2 21.5 19.9 19.7 2.3 1.5 1.6 35.1

Wipro REDUCE 271 295 8.7 1,228 17.9 4,507 17 19 22 (3.1) 11.8 14.6 16.0 14.3 12.5 10.1 8.9 7.8 2.5 2.2 2.0 16.0 16.4 16.8 0.4 0.6 3.7 13.4

Technology Cautious 14,453 210 1.6 12.7 9.7 22.6 20.0 18.3 16.4 13.8 12.4 5.4 4.8 4.4 23.7 23.7 24.1 1.3 2.2 3.2 329.6

Telecom

Bharti Airtel ADD 358 470 31.4 1,429 20.8 3,997 5 (4) 0 (42.9) (187.4) 104.6 75.5 (86.4) 1,892.6 8.0 9.1 7.3 2.1 2.1 2.2 2.8 (2.4) 0.1 1.5 0.3 0.0 33.3

Bharti Infratel REDUCE 287 285 (0.6) 531 7.7 1,850 14 13 12 (7.4) (4.8) (8.5) 20.9 21.9 23.9 7.5 8.1 8.6 3.1 3.3 3.3 15.7 14.6 13.7 5.0 3.7 3.4 13.7

IDEA REDUCE 57 75 31.7 248 3.6 4,359 (10) (15) (14) (656.8) (54.9) 6.4 (6.0) (3.8) (4.1) 12.5 22.8 16.9 0.9 1.2 1.7 (16.0) (26.9) (34.0) — — — 16.8

Tata Communications ADD 571 725 27.1 163 2.4 285 2 4 8 (84.3) 121.9 117.7 347 156.2 71.8 10.5 9.4 8.2 32.6 26.3 19.0 4.5 18.6 30.7 1.1 1.1 1.3 4.7

Telecom Cautious 2,371 35 (94.7) (1,875.4) 36.9 753.8 (42.5) (67.2) 8.7 10.2 8.5 2.1 2.3 2.4 0.3 (5.4) (3.6) 2.0 1.0 0.8 68.4

Utilities

CESC BUY 909 1,180 29.7 121 1.8 133 87 115 128 67.1 31.7 11.6 10.4 7.9 7.1 7.6 5.7 5.0 0.8 0.8 0.7 7.9 10.0 10.4 1.4 1.4 1.4 5.8

JSW Energy REDUCE 64 80 25.2 105 1.5 1,640 3.1 5.9 8.2 (19.2) 92.2 38.7 20.8 10.8 7.8 6.7 5.3 4.3 0.9 0.9 0.8 4.7 8.5 11.0 3.1 3.1 3.1 1.7

NHPC ADD 24 30 23.7 249 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 2.1

NTPC BUY 153 190 23.9 1,264 18.4 8,245 11 15 16 (7.6) 30.9 4.4 13.5 10.3 9.9 11.0 8.5 7.9 1.2 1.2 1.1 9.5 11.6 11.3 3.7 2.9 3.0 13.7

Power Grid BUY 182 250 37.5 951 13.9 5,232 16 19 21 9.6 19.3 13.6 11.5 9.7 8.5 8.3 7.1 6.5 1.7 1.6 1.4 15.8 17.1 17.5 2.9 3.4 3.9 30.1

Reliance Power SELL 32 43 32.7 91 1.3 2,805 3.5 5.1 5.2 (16.4) 45.6 2.7 9.3 6.4 6.2 7.8 6.7 6.5 0.4 0.4 0.4 4.5 6.1 5.9 — — — 4.1

Tata Power BUY 71 90 27.0 192 2.8 2,705 5.3 6.0 7.0 (9.6) 12.7 15.6 13.3 11.8 10.2 10.2 10.6 10.1 1.3 1.1 1.0 10.7 10.1 10.6 — — — 5.3

Utilities Attractive 2,972 43 (2.4) 27.3 9.0 12.3 9.6 8.8 9.2 7.7 7.1 1.2 1.1 1.0 9.7 11.4 11.5 3.1 3.1 3.3 62.9

Dividend yield (%)Mkt cap. EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%)


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Others

Astral Poly Technik SELL 1,108 625 (43.6) 133 1.9 120 15 19 23 20.8 28.0 23.0 75.5 59.0 48.0 42.4 32.9 26.8 13.0 10.8 8.9 18.8 20.0 20.3 0.1 0.1 0.1 1.0

Avenue Supermarts SELL 1,557 860 (44.8) 971 14.1 624 13 16 20 47.9 28.6 26.4 123.8 96.3 76.2 72.6 55.6 43.6 20.9 17.2 14.0 18.5 19.6 20.3 — — — —

Bayer Cropscience REDUCE 4,459 4,100 (8.0) 176 2.6 34 88 106 130 6.4 20.5 23.1 50.9 42.3 34.3 42.0 31.0 25.3 8.6 7.4 6.4 15.7 18.9 20.0 0.4 0.5 0.6 0.5

Dhanuka Agritech ADD 533 690 29.3 26 0.4 49 26 28 32 7.7 8.9 15.4 20.7 19.1 16.5 15.2 13.1 10.9 4.1 3.6 3.1 21.9 20.1 20.0 1.0 1.1 1.3 0.2

Godrej Agrovet ADD 655 650 (0.8) 126 1.8 189 12 16 20 6.9 39.8 24.6 56.9 40.7 32.7 29.2 22.5 18.2 7.4 6.4 5.4 14.7 16.9 17.9 0.3 0.4 0.5 1.5

Godrej Industries RS 611 — — 206 3.0 336 15 16 20 6.8 8.9 24.2 41.9 38.5 31.0 37.3 31.5 34.4 5.7 5.0 4.4 14.4 13.9 15.1 0.3 0.3 0.3 4.5

InterGlobe Aviation BUY 1,009 1,430 41.8 388 5.6 383 59 71 98 27.2 21.8 37.5 17.2 14.1 10.3 9.5 7.8 5.3 5.5 4.1 3.0 41.3 33.0 33.8 0.6 0.7 1.0 24.7

Kaveri Seed SELL 596 470 (21.1) 39 0.6 66 32 31 33 18.4 (3.7) 6.1 18.6 19.3 18.2 15.9 16.4 14.8 5.1 4.3 3.7 23.6 24.0 21.9 1.0 1.3 1.7 5.0

PI Industries BUY 770 900 16.9 106 1.5 138 27 33 41 (20.0) 25.0 23.2 29.0 23.2 18.8 21.3 16.8 13.3 5.5 4.6 3.8 20.7 21.7 22.1 0.4 0.5 0.6 1.5

Rallis India ADD 188 220 17.1 37 0.5 195 9 10 12 (1.5) 17.2 19.4 21.8 18.6 15.6 13.5 12.2 10.3 3.1 2.8 2.5 14.6 15.8 17.1 1.8 1.9 2.1 0.8

SIS REDUCE 1,099 1,130 2.8 80 1.2 73 22 33 40 43.3 48.5 21.1 49.0 33.0 27.2 26.3 20.6 17.3 7.8 6.5 5.4 20.1 21.8 21.7 0.2 0.3 0.3 0.8

SRF BUY 1,645 2,110 28.3 94 1.4 57 80 92 123 (10.4) 14.4 33.6 20.5 17.9 13.4 12.6 10.0 8.1 2.6 2.4 2.1 13.7 14.0 16.4 0.7 0.8 0.9 11.1

Tata Chemicals ADD 675 760 12.5 172 2.5 255 51 46 52 6.5 (11.2) 13.6 13.1 14.8 13.0 7.2 6.2 5.2 1.5 1.4 1.3 13.8 10.0 10.5 3.3 2.2 2.5 8.7

TeamLease Services SELL 2,633 1,785 (32.2) 45 0.7 17 43 58 75 28.0 34.2 29.0 61.1 45.5 35.3 63.5 46.1 35.0 10.2 8.3 6.7 18.2 20.1 21.1 — — — 1.9

UPL ADD 638 640 0.4 325 4.7 510 43 47 53 20.9 9.0 13.5 14.9 13.6 12.0 10.3 8.9 7.6 3.5 2.9 2.5 26.4 23.6 22.4 1.3 1.5 1.7 21.6

Vardhman Textiles ADD 1,202 1,400 16.5 69 1.0 56 103 130 140 (8.0) 26.4 7.4 11.7 9.2 8.6 9.8 7.3 6.5 1.4 1.2 1.1 12.7 14.3 13.8 1.2 1.7 2.5 1.0

Whirlpool SELL 1,670 1,240 (25.7) 212 3.1 127 28 37 45 13.0 33.9 22.5 60.4 45.1 36.8 35.9 27.7 22.4 11.8 9.8 8.1 21.4 23.7 24.1 0.2 0.4 0.5 1.0

Others 3,205 47 15.1 15.5 23.0 31.4 27.2 22.1 20.2 16.7 13.6 5.7 4.8 4.1 18.1 17.8 18.5 0.5 0.6 0.7 85.8

KIE universe 110,524 1,609 (6.2) 30.5 24.8 27.4 21.0 16.8 12.6 10.6 9.4 3.0 2.7 2.5 11.0 13.0 14.7 1.3 1.4 1.7

KIE universe (ex-energy) 97,071 1,413 (8.4) 38.9 29.3 32.3 23.3 18.0 14.1 11.7 10.3 3.3 3.0 2.7 10.3 13.0 15.2 1.1 1.3 1.7

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$)= 68.68

Mkt cap. EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%)

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Economy India

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

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This report has been prepared by the Institutional Equities Research Group of Kotak Securities Limited. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Private Client Group. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additionally, other important information regarding our relationships with the company or companies that are the subject of this material is provided herein. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. It is for the general information of clients of Kotak Securities Limited. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, clients should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Kotak Securities Limited does not provide tax advise to its clients, and all investors are strongly advised to consult with their tax advisers regarding any potential investment. Certain transactions -including those involving futures, options, and other derivatives as well as non-investment-grade securities - give rise to substantial risk and are not suitable for all investors. The material is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions expressed are our current opinions as of the date appearing on this material only. We endeavor to update on a reasonable basis the information discussed in this material, but regulatory, compliance, or other reasons may prevent us from doing so. We and our affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this material, may from time to time have "long" or "short" positions in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. Kotak Securities Limited and its non US affiliates may, to the extent permissible under applicable laws, have acted on or used this research to the extent that it relates to non US issuers, prior to or immediately following its publication. Foreign currency denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of or income derived from the investment. In addition, investors in securities such as ADRs, the value of which are influenced by foreign currencies affectively assume currency risk. In addition options involve risks and are not suitable for all investors. Please ensure that you have read and understood the current derivatives risk disclosure document before entering into any derivative transactions. Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house. Kotak Securities Limited is a corporate trading and clearing member of BSE Limited (BSE), National Stock Exchange of India Limited (NSE), MSEI a. Our businesses include stock broking, services rendered in connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management. Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Kotak Securities Limited is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old Mutual Life Insurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI). Kotak Securities Limited is registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014. We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in last five years. However SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise letters or levied minor penalty on KSL for certain operational deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has our certificate of registration been cancelled by SEBI at any point of time. We offer our research services to primarily institutional investors and their employees, directors, fund managers, advisors who are registered with us Details of Associates are available on our website i.e. www.kotak.com Research Analyst has served as an officer, director or employee of subject company(ies): No We or our associates may have received compensation from the subject company(ies) in the past 12 months. We or our associates have managed or co-managed public offering of securities for the subject company(ies) in the past 12 months. YES We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received compensation or other benefits from the subject company(ies) or third party in connection with the research report. Our associates may have financial interest in the subject company(ies). Research Analyst or his/her relative's financial interest in the subject company(ies): No Kotak Securities Limited has financial interest in the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: YES Our associates may have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report. Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No Kotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No Subject company(ies) may have been client during twelve months preceding the date of distribution of the research report. A graph of daily closing prices of securities is available at www.nseindia.com and http://economictimes.indiatimes.com/markets/stocks/stock-quotes. (Choose a company from the list on the browser and select the"three years" icon in the price chart). Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. CIN: U99999MH1994PLC134051, Telephone No.: +22 43360000, Fax No.: +22 67132430. Website: www.kotak.com / www.kotaksecurities.com. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Telephone No: 42856825. SEBI Registration No: NSE INB/INF/INE 230808130, BSE INB 010808153/INF 011133230, MSE INE 260808130/INB 260808135/INF 260808135, AMFI ARN 0164, PMS INP000000258 and Research Analyst INH000000586. NSDL/CDSL: IN-DP-NSDL-23-97. Compliance Officer Details: Mr. Manoj Agarwal. Call: 022 - 4285 8484, or Email: [email protected]. Investments in securities market are subject to market risks, read all the related documents carefully before investing. In case you require any clarification or have any concern, kindly write to us at below email ids: Level 1: For Trading related queries, contact our customer service at ‘[email protected]’ and for demat account related queries contact us at [email protected] or call us on:

Toll free numbers 18002099191 / 1800222299 and 18002099292 Level 2: If you do not receive a satisfactory response at Level 1 within 3 working days, you may write to us at [email protected] or call us on 022-42858445 and if you feel you are

still unheard, write to our customer service HOD at [email protected] or call us on 022-42858208. Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Name: Mr. Manoj Agarwal) at

[email protected] or call on 91- (022) 4285 8484.

Level 4: If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach CEO (Mr. Kamlesh Rao) at [email protected] or call on 91-(022) 4285 8301.

First Cut notes published on this site are for information purposes only. They represent early notations and responses by analysts to recent events. Data in the notes may not have been verified by us and investors should not act upon any data or views in these notes. Most First Cut notes, but not necessarily all, will be followed by final research reports on the subject. There could be variance between the First cut note and the final research note on any subject, in which case the contents of the final research note would prevail. We accept no liability for the contents of the First Cut Notes.

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india daily, july 27, 2018 - kotak securities · 2018. 7. 27. · overview exhibit 1: key...

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