7February 2020_India_Daily - Kotak Securities

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

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Contents

Special Reports

Theme Report

Insurance: Product diversification augurs well for growth

Daily Alerts

Results

Sun Pharmaceuticals: In-line quarter

DLF: Sales momentum maintained

Eicher Motors: Volume outlook remains muted

Hero Motocorp: Impressive cost reduction efforts aid margins

Indraprastha Gas: Robust growth, priced in; rising capex a worry

NMDC: Strong quarter with dividend bonanza

Lupin: Quarter horribilis

Godrej Agrovet: Weakness persists; reasons change

Brigade Enterprises: Progressing well

Gujarat Pipavav Port: Mirroring market weakness

Sector alerts

Automobiles & Components: Auto Expo 2020: focus on green mobility and SUVs

Construction Materials: Nuvoco – Enters the top league in East

Diversified Financials: Two sides of the coin

Economy alerts

Economy: RBI policy: Transmission takes center stage

INDIA DAILY February 7, 2020 India 6-Feb 1-day 1-mo 3-mo

Sensex 41,306 0.4 1.1 1.6

Nifty 12,138 0.4 0.7 1.0

Global/Regional indices

Dow Jones 29,380 0.3 2.8 6.2

Nasdaq Composite 9,572 0.7 5.6 13.5

FTSE 7,505 0.3 (0.9) 1.3

Nikkei 23,795 (0.3) 0.9 2.0

Hang Seng 27,494 2.6 (2.9) (1.3)

KOSPI 2,209 (0.8) 1.5 3.0

Value traded – India

Cash (NSE+BSE) 490 408 172

Derivatives (NSE) 35,515 13,055 15,73

0

Deri. open interest 5,220 3,500 3,423

Forex/money market

Change, basis points

6-Feb 1-day 1-mo 3-mo

Rs/US$ 71.3 8 (65) (17)

10yr govt bond, % 6.9 (1) (10) (13)

Net investment (US$ mn)

5-Feb MTD CYTD

FIIs 74 463 1,835

MFs 9 91 (285)

Top movers

Change, %

Best performers 6-Feb 1-day 1-mo 3-mo

BHARTI IN Equity 547 2.5 22.8 47.1

IHFL IN Equity 319 15.3 3.5 33.8

TGBL IN Equity 392 (0.6) 24.5 30.3

SRCM IN Equity 25,013 0.5 13.9 24.8

TATA IN Equity 478 0.5 0.3 18.5

Worst performers

YES IN Equity 39 2.5 (14.4) (42.0)

BHEL IN Equity 40 (0.1) (8.9) (28.7)

ONGC IN Equity 107 0.4 (14.7) (24.5)

HPCL IN Equity 243 2.7 0.5 (21.6)

ITC IN Equity 214 (1.3) (9.3) (19.7)

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


Multiple strategies to manage growth; will auger well post 80C

The top four life insurance companies delivered 4% to 18% APE growth in 3QFY20. While

October was a weak month on APE, most companies bounced back in November and

December 2019. Interestingly, the drivers of growth were different across players. For example:

SBI Life delivered superior ULIP growth, mostly though agency channel, which pushed the

business to meet MDRT targets. While ICICI Prudential Life was in the positive after reporting

muted growth for the preceding six months), the demand seems to be driven by traditional

business- mostly par and protection business. HDFC Life’s yoy growth was driven by par (likely

its new product) and ongoing traction in the non-par business, though down qoq. Limited pay,

return of premium protection policies and non-par policies with regular income were key drivers

for Max Life. Thus, despite the absence of any significant catalyst (like high ULIPs or falling

interest rates), large players were able to use various strategies to deliver healthy growth.

The above trends, in our view, highlight the ability of life insurance companies to manage

growth through a combination of products and channels. These provide some comfort on the

ability of the top players to sail through potential near-term challenges like losing the 80C sales

pitch in FY2021E.

Is protection business losing sheen?

Most life insurers have reported a moderate pace of growth in the protection business led by

(1) competition on pricing in individual business, (2) muted growth in the credit life business,

either due to high distribution costs or slowdown at NBFCs and (3) transitioning towards

increasing share of limited pay policies.

Market sources suggest that reinsurers are planning to hike reinsurance rates on term policies.

Two likely reasons (1) adverse mortality experience due to aggressive pricing – this has however

not yet been reflected in the operating variance reported by large players in FY2019 and

(2) expansion into interiors/newer customer segments, with adverse mortality experience. In

case of the latter, the ability of insurance companies to differentiate and underwrite customers

will be crucial to drive profitability.

Are insurance companies assuming higher risks?

Strong VNB growth during the quarter was mostly driven by higher APE growth. VNB margin

expansion was about 60 to 250 bps yoy. This compares with significantly higher risk on balance

sheet -the share of non-par savings policies increased by ~500 to 1,700 bps yoy. Following

strong growth in HDFC Life’s non-par business in 1QFY20, other players seems to be catching

on. The share of non-par protection has increased albeit moderately. It appears that incremental

margins are lower due to ROP and LP products. Solvency has reduced yoy for ICICI Prudential

and Max Life.

Insurance India

Product diversification augurs well for growth. 3QFY20 trends of top four life

companies suggest that healthy APE and VNB growth, though moderating from 1H,

was driven by a variety of factors, without any common catalyst for the quarter. This

likely indicates multiple drivers of products and channels that insurance companies can

toggle with to deliver superior growth and in that sense reduce the impact of any

developments like the reduction of 80C benefits. However, VNB margin expansion was

moderate as compared to the rise in non-par business, likely indicating higher risk on

balance sheet.

ATTRACTIVE

FEBRUARY 06, 2020

THEME

BSE-30: 41,306

QUICK NUMBERS

APE up 4-18% yoy

for life insurers

VNB growth at 19-

33% yoy for most

life insurers

Protection APE at 7-

17% for most life

insurers

Nischint Chawathe

M B Mahesh, CFA

Dipanjan Ghosh

Venkat Madasu

Ashlesh Sonje

Insurance India

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

APE growth – Diverse trends, no common thread

Life insurers (except ICICI Prudential Life) reported APE growth in the range of 16-18% yoy

in 3QFY20. We don’t see any common trend or growth driver. (1) SBI Life and Max Life

picked up in ULIPs (18-19%) while HDFC Life and ICICI Prudential Life slowed down (-11%

to -35%). (2) Growth rate in protection APE was strong for Max Life (1.4X) and ICICI

Prudential (34%) but moderated (10-15%) for HDFC Life and SBI Life. (3) Non-par business

moderated for HDFC Life to 1.9X from 5.7X in 1HFY20, while it was stable/picked up for the

rest – ICICI Prudential Life (other segment) was up 1.9X (stable qoq), Max (1.9X from 4X)

and SBI Life (18X). The focus for most players was on non-core channels, digital and

strategic partnerships coupled with higher volumes from the agency business.

After a weak October, business bounced back in November and December. Three of

the players (excluding ICICI Prudential Life) had a weak October but bounced back in

November and December. ICICI Prudential Life was in the positive for the entire quarter after

being muted (-7% to +4%) for the preceding six months.

ULIPs: Down ICICI Life, UP SBI Life

ICICI Prudential: Life beyond ULIPs. ICICI Prudential Life’ reported 4% yoy growth in

APE in 3QFY20 after quarters of decline. Its ULIP business was down 11% yoy. This is due

to a slowdown in its high-ticket ULIP segment that is sluggish due to weak market

sentiment. ICICI Prudential Life management has made concerted efforts for delivering

stronger 3Q by (1) expanding product suite (increasing non-par annuities), (2) growing

agency channel (3QFY20 was the first quarter of 10%+ growth from agency) and

(3) focusing on new ecosystems such as digital partners, etc. Notably, its annuity business

increased 61% yoy (on a low base) in 3QFY20 (up 87% in 9MFY20).

ULIPs drive business for SBI Life. SBI Life reported overall APE growth of 16% yoy in

3QFY20. Calculated APE was muted at 8% yoy in October 2019 but revived to 23% yoy

in November 2019 and marginally moderate thereafter to 17% yoy in December 2019.

Push for ULIP business at the year-end, mostly by the agency channel (up 24% yoy), was

a volume driver. The company re-priced non-par savings products in 3QFY20, which

registered qoq lower volumes. Banking business was muted (at 9% yoy) as SBI has

achieved its 20% growth target.

Par: Down Max Life, Up HDFC Life

HDFC Life: Non-par slowed down in October, making way for par. HDFC Life’s

calculated APE dropped ~12% yoy in October 2019 as the company slowed down in the

fast growing non-par business. Growth however bounced back in November 2019 and

December 2019 at 49% yoy and 38% yoy respectively led by a pick-up in pace of the

newly launched participating product and gradual increase in protection and non-par

business. HDFC Life reported 18% yoy growth in APE in 3QFY20 to Rs18.2 bn on the

back of (1) 1.9X yoy growth in non-par savings business and (2) 15% yoy growth in the

protection business.

On a qoq basis, HDFC Life’s APE declined 24% for the non-par savings business. The

company had moderated growth in non-par savings from 2Q onwards post recording

a sharp increase in 1QFY20. Management guided that the company has broadly

achieved FY2020E target for this segment and non-par growth may further reduce in

4QFY20E.

Amid moderation in growth from non-par savings and moderate rise in protection,

strong volumes of the new product will support overall APE growth in 4QFY20E. As

such, share of participating policies will likely increase in the near term.

India Insurance

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Par down, non-par drives Max. Max Life reported 16% yoy growth in APE led by (1) a

sharp increase in protection business at 1.4X yoy and (2) 1.9X yoy rise in non-par savings

business. ULIPs were moderated at 19% yoy in 3QFY20. The big drag was in the par

segment – APE down 27% yoy, higher than 16% decline in 2QFY20.

Exhibit 1: 4-18% yoy APE growth in 3QFY20 for life insurers APE, March fiscal year-ends, 2018-2020E (%)

Source: Company

Exhibit 2: APE growth had slowed down for most players in August 2019-October 2019 Monthly APE, March fiscal year-ends, December 2018-December 2019 (%)

Source: LIC Council

Is protection business losing sheen?

Slower protection APE growth for HDFC Life and SBI Life. HDFC Life and SBI Life have

moderate pace of growth in the protection business led by (1) competition on pricing in

individual business, (2) muted growth in credit life business and (3) likely adverse mortality

experience. Management of most of the companies guided an increasing pricing pressure in

the retail protection segment driving slower growth during the quarter. HDFC Life will

increasingly focus on limited pay (LP) policies, which will likely pull down VNB margins but

drive growth. SBI Life has focused on LP in the past and is now launching a new protection

product. Strong growth in protection business for Max Life was led by an increase in

distribution of these products through the agency channel.

While most players reported growth in the retail protection, credit life was muted. For

example, credit life APE for SBI Life for 9MFY20 was ~Rs 0.9 bn compared to Rs1.1 bn in

FY2019; as such, the company may not report high growth in FY2020E. HDFC Life has

renegotiated a couple of its distribution relationships in the past one year. While ICICI

Prudential Life did not share the break-up of protection APE, management highlighted that

growth in individual business was higher than credit life in 9MFY20.

ICICI Prudential Life and Max Life reported high protection growth but VNB margin

accretion missing. ICICI Prudential Life reported 37% yoy growth in protection APE in

3QFY20, albeit lower than 85-88% yoy over 1QFY20 and 2QFY20. The share of protection

business increased 315 bps yoy to 13.1% in 3QFY20 (up 550 bps yoy to 14.1% in 9MFY20).

Management highlighted that retail protection grew at a faster pace in 9MFY20 and

dominates the overall protection mix. Retail and group business dominated

incremental growth in 9MFY20. ICICI Prudential Life is a key player in the retail

protection space; management estimates its market share at ~25-30% in this

segment.

Reported APE (Rs bn) YoY (%) Reported APE (Rs bn) YoY (%) APE (Rs bn) YoY (%) APE (Rs bn) YoY (%)

1QFY19 2QFY19 1QFY20 2QFY20 1QFY20 2QFY20 1HFY19 1HFY20 1HFY20 3QFY19 3QFY20 3QFY20 9MFY19 9MFY20 9MFY20

HDFC Life 10.3 14.8 17.1 17.6 66 19 25.1 34.7 38 15.4 18.2 18 40.5 53.0 31

ICICI Prudential Life 14.0 19.9 14.7 19.0 5 (4) 33.8 33.7 (0) 19.6 20.4 4 53.4 54.1 1

Max Life 5.6 8.6 6.9 10.5 23 21 14.2 17.3 22 8.7 9.9 16 22.9 27.2 19

SBI Life 13.2 23.8 18.7 28.1 42 18 37.0 46.8 26 28.9 33.6 16 65.9 80.4 22

Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19

HDFC Life 2 3 (6) 6 47 57 69 51 36 (17) (12) 49 38

ICICI Prudential Life (3) 11 11 17 7 4 3 1 (7) (4) 21 17 9

Max Life 7 35 27 15 27 23 19 48 28 2 3 17 23

SBI Life 25 0 32 25 62 37 25 20 15 18 8 23 17

Overall private sector 15 11 16 19 26 28 21 20 12 3 5 29 16

Insurance India


been higher than regular pay policies for ICICI Prudential Life. Persistency in limited pay

policies is higher than regular pay policies.

The company reported VNB margin expansion of 250 bps yoy, lower than growth in

share of protection APE. VNB margin in LP and ROP is likely about 2000 bps lower

than regular pay policies.

Max Life: Strong growth in protection APE; comparable VNB margin flat yoy. Max

Life reported 1.4X yoy growth in protection APE (similar across individual and group

business). The company has launched return of premium (RoP) and limited pay protection

products. While its reported pre-overrun VNB margins were up 120 bps to 23.8% in

3QFY20, these are not comparable yoy due to a difference in tax rate assumptions;

management highlighted that margins are almost flat yoy, on a comparable basis.

Exhibit 3: Share of protection business has increased for most; though moderated a bit in 2QFY20 and 3QFY20 Protection mix across life insurers, March fiscal year-ends, 1QFY19-3QFY20 (%)

Notes: (1) Data pertaining to 'individual protection' refers to overall protection business for ICICI Prudential Life.

Source: Company

A couple of new products across players

Most life insurers are focused on developing and deploying new products suited to customer

needs to drive incremental APE.

HDFC Life has been a pioneer in product development. The company focused on non-par

products in 1QFY20, including its flagship, Sanchay Plus which led to strong growth in

APE over 1QFY20-2QFY20. The company has recently launched Sanchay Par Advantage,

a non-par product with higher share of equity investments.

ICICI Prudential Life has launched three new products (ICICI Pru iProtect Smart, ICICI Pru

Savings Suraksha and ICICI Pru Lakshya Wealth) targeted at various customer cohorts.

Max Life has shifted focus to higher share of endowment products from regular income

products and has launched return of premium (RoP) and limited pay protection products

off-late.

SBI Life plans to launch a new protection product in 4QFY20E which the management

expects will drive its VNB.

7 5 8 5 4 6 7 8 8 10 11 15 15 13 7 7 5 6 7 7 9 2 3 4 5 6 4 3

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9

9 11 14 10

10 9

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8 6

4

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HDFC ICICI Max SBI

(Rs bn) Individual protection Group protection

India Insurance


Exhibit 4: Sharp growth in non-par business for HDFC Life; others follow suit Non-par savings mix across life insurers, March fiscal year-ends, 1QFY19-3QFY20 (%)

Notes: (1) Data reflects annuity business for ICICI Prudential Life.

Source: Company, Kotak Institutional Equities

Exhibit 5: Mixed trends in product mix Overall APE mix, March fiscal year-ends, 1QFY19-3QFY20 (% of total)

Notes: (1) For ICICI Prudential life, data pertaining to 'non-par savings' refers to annuity segment and data pertaining to 'individual protection' refers to overall protection business.


Moderate expansion in VNB margins- does this reflect higher balance sheet risk?

Most life insurers reported strong growth in VNB at 19-33% yoy in 3QFY20; albeit lower

than 20-57% yoy in 1HFY20 led by (1) strong APE growth of 4-18%(2) growth in protection

and non-par business (though lower than 1HFY20), (3) rising share of limited pay protection

policies which have lower margins, (4) increasing share of ULIPs (SBI Life) and par policies on

qoq basis (HDFC Life) and (5) improvement in operating leverage.

9 9 11 29 51 39 28 1 1 1 1 1 2 1 5 5 8 13 15 23 19 1 0 0 0 3 11 6 0

11

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HDFC ICICI Max SBI

(Rs bn) Non-par savings

44 53 48

40

21 22 27

80 84 79 77 71 67 68

41 41 40 43 37 34 39

65 71 73 71 66 66 74

23 17

16

9

5 10

17

10 7 9 9

10 11 12

38 43 45 36 33

30 27

25 20 17 17 14 11

10 7 5 8 5 4 6 7

8 8 10 11 15 15 13 7

7 5 6

7 7 9 2 3 4 5 6

4 3 12 9 9 11 14 10 10 - - - - -

9 5 2 3 8 6 4 3 3 3 3 5 3 4

0

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HDFC ICICI Max SBI

(%) ULIP Par Non-par savings Other savings Individual protection Group protection

Insurance India


Moderate margin expansion for HDFC Life. HDFC Life’s overall VNB margins

expanded 125 bps yoy (260 bps yoy in 9MFY20) despite an increase in the share of non-

par saving and protection businesses (1650 bps).This likely reflects (1) some margin

pressure in protection business (2) lower margins products in protection like LP. VNB

margins have been lower for past two quarters than peak of 29.8% in 1QFY20 and

25.4% in 2QFY20, due to higher share of non-par policies during 1HFY20.

Comparable VNB margins flat yoy for Max Life. Max Life reported VNB margin (post-

cost overrun) of 21% though dragged by continued large investments in proprietary

channels, pre-overrun VNB margins were higher at 23.8% in 3QFY20. Reported VNB

growth was strong at 20%, boosted by expansion in VNB margin; pre overrun VNB

margin was 22.6% in 3QFY19 (post overrun was 20.6%). However, VNB margins are not

comparable yoy due to a nominal tax rate considered by the company in 9MFY19 versus

effective tax rate considered this year. Management highlighted that VNB margin, on

comparable basis, were flat yoy.

SBI Life reported meager 6 bps yoy/10 bps qoq VNB margin expansion in 3QFY20.

VNB margins expanded 10 bps qoq to 18.5% in 3QFY20 despite 530 bps increase in

share of non-par savings. This may be due to reduction in share of protection APE by 50

bps yoy and (2)700 bps decline in share of par, losing share to low-margin ULIPs. Muted

VNB margin expansion is due to re-pricing of annuity products in 3QFY20. In 1HFY20, the

company delivered about 400 bps VNB margin expansion but it was offset by about 300

bps negative investment variance, leading to net reported VNB margin expansion of 80

bps yoy. Better hedging policies uplifted VNB margins qoq.

Strong VNB growth (up 33%) for ICICI Prudential Life. ICICI Prudential Life reported

strong VNB growth in 3QFY20 (up 25% yoy in 9MFY20) led by strong growth in high-

margin protection and non-par business. There was marginal drag in VNB on the back of

(1) rising share of low margin limited pay protection policies and (2) drop in persistency

during the quarter.

Exhibit 6: Strong VNB growth for most life insurers VNB, March fiscal year-ends, 2018-2020E

Source: Company

Exhibit 7: 60-250 bps yoy VNB margin expansion in 3QFY20 VNB margin, March fiscal year-ends, 2018-2020E

Source: Company

Focus on increasing business through non-core channels, bancassurance down

The top life insurers have focused on increasing share of non-core and agency business and

lower dependency on bancassurance over the past few quarters. The share of bancassurance

is down by 340-1000 bps yoy in 3QFY20 for the top three players; Max was flat.

Reported VNB (Rs bn) YoY (%) Reported VNB (Rs bn) YoY (%) VNB (Rs bn) YoY (%) VNB (Rs bn) YoY (%)


HDFC Life 2.5 3.6 5.1 4.5 104 24 6.1 9.6 57 3.6 4.5 25 9.7 14.1 45

ICICI Prudential Life 2.4 3.5 3.1 4.0 27 16 5.9 7.1 20 3.2 4.3 33 9.1 11.4 25

Max Life 1.0 1.9 1.3 2.3 33 22 2.9 3.6 26 1.8 2.1 20 4.7 5.8 24

SBI Life 2.2 4.2 3.3 5.2 52 23 6.4 8.5 33 5.2 6.2 19 11.6 14.7 27

VNB margin (%) YoY (bps) VNB margin (%) YoY (bps) VNB margin (%) YoY (bps) VNB margin (%) YoY (bps)


HDFC Life 24.3 24.3 29.8 25.4 549 109 24.3 27.6 325 23.4 24.7 210 24.0 26.6 259

ICICI Prudential Life 17.5 17.4 21.0 21.1 354 363 17.5 21.0 359 16.3 20.9 250 17.0 21.0 396

Max Life 18.1 21.9 19.6 22.0 146 8 20.4 21.0 62 20.2 21.0 60 20.3 21.0 68

SBI Life 17.0 17.0 17.9 18.4 86 136 17.3 18.1 80 17.9 18.5 80 17.5 18.3 78

India Insurance


This is led by (1) increasing investments in agency, (2) training programs to improve

productivity of agents (Max Life), (3) strategic tie-ups and partnerships (for example:

partnership between HDFC Life and Airtel), (4) pushing volumes through digital aggregators

and other digital channels and (5) developing proprietary tech platforms for smoother

customer on-boarding.

The overall individual agent base has however increased at a muted pace over 9MFY20 due

to high attrition despite high gross additions. Max Life highlighted that the decline in overall

agents reflects its focus on improving productivity of live agents.

HDFC Life continues to focus on direct and other channels- 31% of individual APE.

The share of direct and other channels has increased to 31% of individual APE from 23%

in FY2019. The company has tied-up with 270 partners across 40 ecosystems to drive

growth. Additionally, the company remains focused on growing the agency channel;

agency business was up 200 bps yoy to 15% of individual APE in 9MFY20; management

highlighted that the exit rate in December was higher and as such this ratio will improve

further hereon. Number of individual agents increased to 97,691 (up 10% yoy) from

93,627 in1QFY20 and 91,172 in FY2019. Consequently, share of bancassurance

continued its downward trajectory, although still dominant at 52% of individual APE

(down 1,650 bps yoy/up 190 bps qoq).

ICICI Prudential Life: Agency and others (including non-core and direct) drive 46%

of overall APE, up 340 bps yoy

Strong traction in direct channels and corporate agents led to increase in non-core

channels. Business generated through individual agents increased 11% yoy in 3QFY20

(down 8% yoy in 1HFY20) on the back of continued increase in overall agent base

(overall individual agents up 12% in 9MFY20).

ICICI Prudential Life has tied up with new web aggregators, payments bank (tied up

with Airtel Payments Bank in September 2019) and insurance managers to drive

growth in non-core channels. ICICI Prudential Life has tied up with PayTm to sell

‘iProtect’ policies (in-app purchase for KYC compliant customers).

In order to increase business through the agency channel, the company has

(1) increased connect with highly productive agents (closer mapping to sales team,

regular training, etc.) and (2) focused on increasing activation of other agents,

including newly added ones.

APE from the bancassurance channel declined 2% yoy in 3QFY20.

SBI Life: Weak momentum in SBI. SBI Life reported 9% growth in bancassurance

channel in 3QFY20, 18% in 9MFY20. Management highlighted that State Bank of India

has delivered its about 20% target and hence went soft during the quarter. The company

pushed the agency channel in the past two months of the quarter. APE growth was

strong at 24% yoy through the agency business. Management guided that push in high-

ticket ULIPs on the back of year-end targets for agents led to sharp APE growth from this

channel. ULIPs increased 24% yoy in the agency business. Further growth in other

channels was strong at 100% yoy (on a low base).

Max Life reports steady growth across channels. Continued investments in

proprietary agency business led to strong 16% yoy individual APE growth in this channel

during 3QFY20. Management is focused on retaining and incentivizing agents with

higher productivity (those generating APE of >Rs0.1 mn per month). Consequently,

growth has remained strong despite higher agent attrition driving marginal decline in the

overall individual agency base. Focus has been on the non-par segments-the share of

non-par savings business through this channel has increased to 11% in 9MFY20 from

<1% in 9MFY19. While business from Axis Bank increased by 18% yoy, other (mostly Yes

Bank) was muted at 4% yoy.

Insurance India


Exhibit 8: Share of bancassurance has dropped for most players Channel mix (based on total APE), March fiscal year-ends, 1QFY19-3QFY20 (%)

Notes: (1) Channel mix for HDFC Life is for individual APE.


11 11 11 16 15 15 12 22 22 20 22 21 20 22

35 34 30 26 33 33 30 31 27 26 31 28 26 28

65 69 67 58 56 52 57

56 57 57 54 52 53 54

64 63 68 73 66 66 69 64 68 70 64

63 67 66

24 20 22 26 29 33 31 23 21 22 24 26 27 24

1 3 1 1 1 1 1 5 5 4 5 9 7 7

0

20

40

60

80

100

1Q

FY19

2Q

FY19

3Q

FY19

4Q

FY19

1Q

FY20

2Q

FY20

3Q

FY20

1Q

FY19

2Q

FY19

3Q

FY19

4Q

FY19

1Q

FY20

2Q

FY20

3Q

FY20

1Q

FY19

2Q

FY19

3Q

FY19

4Q

FY19

1Q

FY20

2Q

FY20

3Q

FY20

1Q

FY19

2Q

FY19

3Q

FY19

4Q

FY19

1Q

FY20

2Q

FY20

3Q

FY20

HDFC ICICI Max SBI

(%) Agency Bancassurance Other

India Insurance


Exhibit 9: Continued investment in growing the agency base Individual agent base of life insurers, March fiscal year-ends, 2015-2019, 9MFY20

Source: LIC Council, Kotak Institutional Equities

Banks are weak in term business; needs focus

The contribution of protection business originated through bancassurance has been low at

~<5% for most players over the past two years. The business garnered through this channel

has however been increasing over the past few quarters.

HDFC Life. The company has focused on channel diversification in non-traditional

segments. Protection is just 2% of individual APE from the bancassurance channel.

ICICI Prudential Life. Contribution of protection through bancassurance has increased

to high-single digits (contribution share to overall bancassurance business), from

negligible earlier.

Max Life. Contribution of protection to overall bancassurance business is low at ~5%.

SBI Life. It has focused on protection though the bank. Its management guided that

protection business will ramp up through the agency channel in 4QFY20E owing to

increase in incentive schemes. Share of non-par (protection and savings) was 11% in

3QFY20.

HDFC Life ICICI Prudential Life

Max Life SBI Life

65 82 55 77 91 98

21

18 17

24

29

26

0

6

12

18

24

30

0

22

44

66

88

110

2015 2016 2017 2018 2019 9MFY20

(# 000')(# 000')Individual agents (LHS) Additions (RHS)

132 121 136 152 171 187

12

18

16

18

21

19

0

6

12

18

24

30

0

40

80

120

160

200

2015 2016 2017 2018 2019 9MFY20


44 45 54 57 51 42

22

26 26 25

30

24

0

7

14

21

28

35

0

12

24

36

48

60

2015 2016 2017 2018 2019 9MFY20


84 93 95 108 124 124

36

43 45

52

60

40

0

15

30

45

60

75

0

25

50

75

100

125

2015 2016 2017 2018 2019 9MFY20


Insurance India


Persistency ratios have generally improved

Persistency trends are generally improving. The exceptions are ICICI Prudential Life and Max

Life (in select higher buckets). Increased surrenders of ULIPs from a particular product cohort

led to a drop in persistency ratios for ICICI Prudential Life and Max Life (61st month). On the

back of weakness of capital markets and higher ULIP surrenders, trends in persistency were

mixed for most insurance companies, sequentially. Increase in limited pay protection policies

over the past few quarters with higher persistency, augurs well. Persistency ratios reported

by most companies are higher than the assumptions and as such should not result in any

negative operating variance.

High persistency ratios HDFC Life. HDFC Life’s overall persistency has improved across

most buckets on yoy basis in 3QFY20 (the company does not share persistency excluding

single premium and as such may not be comparable with ICICI Prudential Life and SBI

Life). 13th

month persistency increased 460 bps yoy to 88.8% and 25th month

persistency increased to 80.2% (up 160 bps yoy). On a sequential basis, persistency ratios

dropped marginally in early buckets most likely due to rising surrenders from ULIPs. HDFC

Life’s reported persistency ratios are higher compared to most peers across similar

buckets and above the company’s assumptions. As such, HDFC Life will likely report

positive operating persistency variance.

A tad weaker persistency for ICICI Prudential Life. ICICI Prudential Life reported 13th

month persistency (excluding single premium) of 83.1% in 8MFY20, down from 83.6%

in 5MFY20 and 84.1% in FY2019. Persistency dropped across other early buckets also

(25th and 37th). The rise in surrenders in high-ticket ULIPs on the back of weakness in

capital markets has led to a decline in persistency ratios. Persistency ratios improved

marginally in the 49th bucket. The current experience is just within the company’s

assumptions (82.5% 13 month persistency) and will not lead to any negative persistency

variance. Management guided that persistency ratios have held up well in other segments

and increased surrenders are only in select ULIP plans.

Mixed trends in persistency for Max Life. Max reported mixed trends in persistency in

3QFY20. The company does not share persistency excluding single premium and as such

may not be comparable with ICICI Prudential Life and SBI Life. While overall persistency

ratios were broadly stable in the 13th, 25th and 49th month buckets, it deteriorated in

37th month and 61st month (down ~400 bps yoy/200 bps qoq in 8MFY20 to 51%).

Management highlighted that increased surrenders from a particular ULIP cohort has led

to weak persistency. As such persistency in the non-par and protection business is broadly

stable.

SBI Life reports strong persistency trends across the board. SBI Life reported yoy

improvement in persistency (on regular premium basis) across all buckets in 3QFY20.

Lower redemptions in ULIPs largely led to improvement in persistency. On regular

premium basis, persistency ratios improved 150-400 bps across buckets in 9MFY20. On a

sequential basis, persistency improved across all buckets except 49th

(marginally down).

13th month persistency increased 150 bps yoy in 9MFY20 to 83.5% and 400 bps yoy in

the 49th month bucket to 76%.

India Insurance


Exhibit 10: Persistency has improved for most insurers (except ICICI Prudential Life) Persistency (based on premium) for life insurers, March fiscal year-ends, 1QFY19-3QFY20 (%)

Notes: (1) 3QFY20 data for Max Life refers to 8MFY20.


Cost ratios elevated

Calculated cost/APE ratio increased 30-250 bps yoy for most companies in 3QFY20 owing to

continued investment in technological initiatives, a widening distribution base (including

new strategic partnerships) and product diversification.

High new business strain for HDFC Life. HDFC Life’s cost/APE was up 60 bps yoy to

25.3%; albeit lower than 27-28% observed over the past two quarters; likely due to high

growth in non-par business. Operating expenses were up 15% yoy. New business strain

was high at Rs6.1 bn in 3QFY20 compared to Rs5.1 bn in 2QFY20 and Rs4.5 bn in

3QFY19.

Cost/APE up 250 bps yoy for ICICI Prudential Life in 3QFY20. Operating expenses

increased 32% yoy in 3QFY20 while APE growth was muted at 4% yoy. Growth in

protection APE was higher at 37% yoy. Calculated cost/APE increased 250 bps yoy/30

bps qoq in 3QFY20 to 16.5% (up 125 bps yoy in 9MFY20) owing to higher expenses in

the protection business, investment in business expansion and technology initiatives.

Employee expenses were up 25% yoy. Reported cost/TWRP (total cost including

commission/(total premium- 90% of single premium)) decreased 90 bps yoy to 11.1% in

9MFY20 in the savings business.

Operating expenses up 27% yoy for SBI Life. Overall operating expenses growth was

strong at 27% yoy. SBI Life continued to invest in (1) protection business, (2) agency

business and (3) digital initiatives. Calculated cost/APE ratio increased 30 bps yoy

(down100 bps qoq) to 12.2%. Sequential improvement in cost ratios was led by strong

growth in the high ticket ULIP segment.

Max Life will continue to have large overruns. Cost/average AUM increased 20 bps

yoy for Max Life to 5.1% in 3QFY20. Growth in operating expenses was high at 21%

driven by continued investments in proprietary channels, in order to reduce dependence

on Axis Bank. The company expects cost ratios to remain high till FY2022E.

85 85 84 87 89 89 89

84 81 81

87 82 81 80

84 84 85 83 86 85 85 82 80 80

85 84 83 82

64 65 65 68 67 65 64 63 63 62 65 63 64 64

58 57 57 58 60 60 60 61 65 66 66 68 66 65

0

20

40

60

80

100

1Q

FY19

2Q

FY19

3Q

FY19

4Q

FY19

1Q

FY20

2Q

FY20

3Q

FY20

1Q

FY19

2Q

FY19

3Q

FY19

4Q

FY19

1Q

FY20

2Q

FY20

3Q

FY20

1Q

FY19

2Q

FY19

3Q

FY19

4Q

FY19

1Q

FY20

2Q

FY20

3Q

FY20

1Q

FY19

2Q

FY19

3Q

FY19

4Q

FY19

1Q

FY20

2Q

FY20

3Q

FY20

HDFC ICICI Max SBI

(%) 13th month 49th month

Insurance India


Exhibit 11: Cost/APE increased for most companies in 3QFY20 Cost ratios, March fiscal year-ends, 2018-2020E


Solvency ratios comfortable

Most life insurers have comfortable solvency ratio in the range of 195%-230% as compared

to the regulatory requirement of 150%.

Exhibit 12: Comfortable solvency for most companies Solvency ratios, March fiscal year-ends, 2018-2019, 3QFY20 (%)


YoY YoY YoY

1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 (%) 9MFY20 9MFY19 (%) 2018 2019 (%)

Cost/APE (%)

HDFC Life 27.3 25.9 24.7 21.8 28.7 27.7 25.3 60 bps 27.1 25.8 128 bps 24.0 24.3 30 bps

ICICI Prudential Life 17.3 15.0 14.0 14.1 16.8 16.2 16.5 252 bps 16.5 15.3 123 bps 13.5 14.9 139 bps

Max Life 25.8 21.4 22.6 19.7 27.1 23.7 NA NA 23.0 21.8 21.7 -10 bps

SBI Life 16.5 12.8 10.9 10.8 14.0 12.2 11.2 31 bps 12.2 12.7 -56 bps 12.5 12.1 -39 bps

Cost/average AUM (%)

HDFC Life 3.4 4.3 4.1 5.3 3.8 4.5 4.2 11 bps 4.1 3.9 20 bps 4.3 4.2 -2 bps

ICICI Prudential Life 2.5 2.9 2.6 3.3 2.2 2.8 2.8 28 bps 2.6 2.6 -4 bps 2.6 2.8 16 bps

Max Life 4.1 4.7 5.0 6.7 4.1 5.1 5.1 18 bps 4.7 4.6 14 bps 5.2 5.1 -12 bps

SBI Life 2.2 2.7 2.7 3.2 2.1 2.7 2.8 3 bps 2.5 2.5 -3 bps 2.7 2.7 4 bps

2018 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20

HDFC Life 192 197 193 191 188 193 192 195

ICICI Prudential Life 253 235 234 224 215 217 211 207

Max Life 275 262 246 239 242 225 224 220

SBI Life 206 214 221 223 213 217 220 230

India Insurance


APPENDIX: CHANNEL WISE PRODUCT MIX AND PERSISTENCY

Exhibit 13: Share of non-par savings is high through bancassurance channel Channel-wise product mix based on individual APE for HDFC Life, March fiscal year-ends, 2017-2019, 1QFY20-3QFY20 (%)


2017 2018 2019 1QFY20 2QFY20 3QFY20

Bancassurance

ULIP 61 64 67 31 35 42

Participating 30 26 14 5 11 17

Non-par savings 8 8 5 60 52 40

Term 1 1 2 2 2 2

Annuity - 1 2 2 2 2

Agency

ULIP 26 33 26 7 9 21



Term 11 11 12 8 10 12

Annuity 2 3 5 2 2 5

Direct

ULIP 47 58 50 34 32 33



Term 6 5 6 4 4 4

Annuity 7 11 24 31 25 28

Online

ULIP 51 47 43 40 33 19

Participating 3 1 1 - 9 22

Non-par savings 1 - 15 28 26 24

Term 45 52 34 26 30 31

Annuity - - 6 6 2 1

Company

ULIP 53 57 55 26 26 31



Term 4 5 7 5 7 8

Annuity 1 2 5 5 3 4

Insurance India


Exhibit 14: Share of ULIPs has dropped across most channels Channel-wise product mix for ICICI Prudential Life, March fiscal year ends, 2016-2019 (%)


Exhibit 15: Strong growth in non-par business from bancassurance and agency channels during

9MFY20 Channel-wise product mix based on total APE for SBI Life, March fiscal year-ends, 2018-2019, 3QFY19-3QFY20 (%)


2016 2017 2018 2019

Bancassurance

ULIP 88.9 92.1 89.8 93.4

Par 9.1 5.3 7.3 2.1

Non-par - 0.4 0.2 0.6

Protection 2.0 2.2 2.7 3.9

Agency

ULIP 76.4 79.5 81.8 75.3

Par 19.6 14.2 13.5 18.1

Non-par 0.8 2.0 0.4 0.5

Protection 3.2 4.3 4.3 6.1

Direct

ULIP 84.3 85.3 88.0 79.3

Par 7.7 5.0 4.3 5.3

Non-par 3.6 3.2 2.4 6.4

Protection 4.4 6.5 5.3 9.1

Corporate agents and brokers

ULIP 47.4 46.5 36.8 28.2

Par 49.0 44.1 49.9 49.5

Non-par 0.5 0.4 0.5 0.6

Protection 3.1 9.0 12.8 21.8

YoY YoY YoY

3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 (%) 9MFY20 9MFY19 (%) 2017 2018 2019 (%)

APE mix across channels (%)

Bancassurance 71.4 69.8 67.3 70.5 67.6 -381bps 68.6 69.8 -123 bps 65.2 67.0 68.6 164 bps

Par 10.3 11.8 7.7 5.0 3.8 -645bps 5.1 11.8 -667 bps 8.9 16.7 10.9 -580 bps

Non-par 3.7 3.2 7.7 12.8 7.0 332bps 9.2 3.2 595 bps 1.7 1.1 3.9 271 bps

ULIP 57.5 54.8 51.8 52.7 56.8 -68bps 54.3 54.8 -51 bps 54.5 49.2 53.9 473 bps

Agency 27.8 29.4 31.0 28.3 29.8 200bps 29.6 29.4 15 bps 34.2 32.1 30.4 -175 bps

Par 7.7 8.7 7.7 6.2 6.3 -134bps 6.6 8.7 -211 bps 9.3 9.5 8.6 -90 bps

Non-par 0.4 0.5 1.2 3.9 1.9 154bps 2.4 0.5 194 bps 0.3 0.3 0.6 30 bps

ULIP 20.1 20.2 22.0 18.2 21.6 144bps 20.5 20.2 32 bps 24.6 22.4 21.2 -114 bps

Others 0.7 0.8 1.8 1.2 2.5 181bps 1.9 0.8 108 bps 0.7 0.9 1.0 11 bps

Par 0.4 0.3 0.6 0.4 0.6 27bps 0.5 0.3 22 bps 0.3 0.4 0.4 6 bps

Non-par - 0.2 0.6 0.4 1.0 95bps 0.7 0.2 51 bps 0.2 0.1 0.2 9 bps

ULIP 0.4 0.3 0.6 0.4 1.0 59bps 0.7 0.3 35 bps 0.2 0.4 0.3 -5 bps

India Insurance


Exhibit 16: Proprietary channels drive growth in traditional and

protection products Product mix for proprietary channels for Max Life, March fiscal year-ends, 2016-2019, 1QFY20, 1HFY20, 9MFY20 (%)


Exhibit 17: Strong increase in share of non-par business from

bancassurance channel Product mix for bancassurance channels for Max Life, March fiscal year-ends, 2016-2019, 1QFY20, 1HFY20, 9MFY20 (%)


Exhibit 18: Persistency has improved for most companies (except ICICI Prudential Life) Persistency (based on premium), March fiscal year-ends, 2011-2018, 1QFY19-3QFY20 (%)


72 73 60 58 54 49 48

7 10

11 14 17 16 17

4 2

- 3 4 12 11

17 15 29 26 25 23 24

0

20

40

60

80

100

20

16

20

17

20

18

20

19

1Q

FY

20

1H

FY2

0

9M

FY2

0

Participating Non-participating protection

Non-participating saving ULIP

51 48 39 34

26 24 23

1 1

2 2

3 3 4

14 12

11 12 23 27 26

34 39 49 52 49 46 47

0

20

40

60

80

100

20

16

20

17

20

18

20

19

1Q

FY

20

1H

FY2

0

9M

FY2

0

Participating Non-participating protection

Non-participating saving ULIP

YoY QoQ

2011 2012 2013 2014 2015 2016 2017 2018 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 (bps) (bps)

HDFC Life

13th month 81 82 78 69 73 79 84 87 85 85 84 87 89 89 89 460 bps -53 bps

25th month 52 54 76 78 69 64 67 75 78 81 79 81 78 78 80 160 bps 248 bps

37th month 34 29 33 60 67 65 60 65 71 70 69 72 71 74 72 300 bps -297 bps

49th month 30 25 20 31 55 64 63 60 64 65 65 68 67 65 64 -160 bps -156 bps

61st month 40 27 20 15 21 37 47 59 49 52 49 52 56 55 53 350 bps -195 bps

ICICI Prudential Life

13th month 76 77 72 71 79 82 86 87 84 81 81 87 82 81 80 -100 bps -70 bps

25th month 87 89 87 90 68 66 71 74 77 76 72 78 75 72 71 -60 bps -90 bps

37th month 37 30 32 36 57 64 62 67 67 68 68 71 69 68 65 -290 bps -280 bps

49th month 56 46 51 57 20 54 62 59 63 63 62 65 63 64 64 240 bps 0 bps

61st month 72 65 65 61 13 15 46 56 55 59 58 58 58 58 55 -250 bps -300 bps

Max Life

13th month 70 75 76 76 78 79 80 81 84 84 85 83 86 85 85 0 bps 0 bps

25th month 67 60 62 64 66 64 67 70 73 73 72 71 72 72 72 0 bps 0 bps

37th month 50 49 42 46 53 60 58 60 64 65 65 64 65 65 63 -200 bps -200 bps

49th month 45 40 39 32 38 49 56 55 58 57 57 58 60 60 60 300 bps 0 bps

61st month 60 39 31 26 23 32 43 53 54 55 56 53 54 53 51 -500 bps -200 bps

SBI Life

13th month 68 72 75 72 76 78 78 81 82 80 80 85 84 83 82 245 bps -67 bps

25th month 51 50 61 66 66 68 69 69 74 72 72 77 76 76 75 302 bps -45 bps

37th month 31 21 21 24 41 62 62 63 71 68 67 71 71 69 69 148 bps 0 bps

49th month 48 24 16 9 20 39 59 55 61 65 66 66 68 66 65 -113 bps -113 bps

61st month 52 41 23 8 7 10 17 44 58 55 60 57 56 60 61 151 bps 151 bps



Strong domestic show

SUNP’s 3QFY20 revenues were in line with our estimates, as strong domestic performance was

offset by weak performance in the Taro US business. The domestic business grew 13% yoy,

exceeding our estimates by ~3%. After several years, SUNP also announced 10% expansion of

its domestic field force to strengthen its domestic business. Taro sales declined US$13 mn qoq

to US$148 mn, largely attributable to the US topicals market. EMs disappointed with 3% yoy

growth, though, excluding South Africa tenders, the division reported strong 15% yoy growth.

Gross margins at 73% were 70 bps higher than estimates, given the geographical mix, with

EBITDA in line with our estimates, despite an 8% EBITDA miss in Taro. Despite sharply higher

amortization, PBT was largely in line with our estimates, though, a sharp increase in tax rate due

to one-off factors led to ~11% miss on EPS.

Sharp growth in global specialty segment, with 3QFY20 sales at US$118 mn

Global specialty sales were US$118 mn (+US$27 mn qoq), with bulk of growth attributed to

ordering patterns in Absorica and Levulan, with Ilumya likely to have moved up by further

US$2-3 mn qoq to US$8-10 mn (US$18-20 mn in FY2019), though it is now tracking US$45-50

mn on an annualized basis as per patient trends. We continue to expect Ilumya to reach

US$145 mn sales in FY2021, and further increase to US$177 mn in FY2022. The management

also provided R&D numbers for the specialty business, which at 24% of sales in 1QFY20 (US$25

mn for 1HFY20), are in line with the sharp ~45% drop in specialty R&D seen in FY2019, given

limited investments so far in label expansion trials for Ilumya. However, the management

guided to increase R&D costs from FY2021, due to pivotal trials for PsA, and Phase II trials for

other indications for Ilumya. SUNP launched Cequa during the quarter, and has seen good

initial feedback, with our estimates suggesting 2-3% market share within a quarter of launch.

SUNP has launched Absorica LD, to counter generic threat from 4QFY21, though the

effectiveness of such a switch strategy is questionable, and will depend on the payor

negotiations given Absorica generic entry in 4QCY20.

Market concerns on specialty pipeline adequately captured in the multiples - ADD

We believe market concerns on the specialty pipeline are now adequately captured in the

valuation with the stock trading at 10X FY2021 EV/EBITDA and 18.5X FY2021 P/E. We tweak

our FY2021/22 EPS by ~2% each. ADD stays.

Sun Pharmaceuticals (SUNP) Pharmaceuticals

In-line quarter. SUNP’s 3QFY20 results were broadly in line with estimates, helped by

strong performance in the domestic segment, which grew 13% yoy, offsetting weak

Taro performance. Global specialty sales increased US$27 mn qoq to US$118 mn partly

helped by ordering patterns for Absorica and Levulan, with 9MFY20 run-rate now at

US$303 mn. We believe Ilumya and Cequa are progressing well on the market roll-out,

with market concerns on specialty pipeline adequately captured in the multiples. ADD.

ADD

FEBRUARY 06, 2020

RESULT

Sector view: Neutral

CMP (`): 431

Fair Value (`): 480

BSE-30: 41,306

Chirag Talati, CFA

Kumar Gaurav

Sun Pharmaceuticals

Stock data Forecasts/valuations 2020E 2021E 2022E

52-week range (Rs) (high,low) EPS (Rs) 19.1 23.2 25.1

Mcap (bn) (Rs/US$) EPS growth (%) 18.3 21.7 8.2

ADTV-3M (mn) (Rs/US$) P/E (X) 22.6 18.5 17.1

Shareholding pattern (%) P/B (X) 2.3 2.1 1.9

Promoters 54.5 EV/EBITDA (X) 12.6 9.9 8.5

FIIs 14.7 RoE (%) 10.6 11.1 11.4

MFs/BFIs Div. yield (%) 0.9 1.1 1.2

Price performance (%) 1M 3M 12M Sales (Rs bn) 331 362 388

Absolute (1) (2) 3 EBITDA (Rs bn) 74 89 97

Rel. to BSE-30 (2) (4) (8) Net profits (Rs bn) 46 56 60

484-345

1,034/14.6

10.4/0

2,629/37

Pharmaceuticals Sun Pharmaceuticals


Exhibit 1: Sun Pharma – consolidated 2QFY20 interim results March fiscal year-ends, (Rs mn)

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Global specialty sales declined US$4 mn qoq due to

seasonality in ordering patterns for Absorica and Levulan Fiscal year-ends, 1QFY20-2QFY20 (US$ mn)

Note: Company

Exhibit 3: Skyrizi launch mimicking Tremfya initial trends Quarters post launch (US$ mn)


(% chg.) yoy yoy

3QFY20 3QFY20E 3QFY19 2QFY20 3QFY20E 3QFY19 2QFY20 9MFY20 9MFY19 (% chg.) FY2020E FY2021E (% chg.)

Sales 81,549 82,145 77,402 81,234 (0.7) 5.4 0.4 246,526 219,020 12.6 331,402 290,659 14.0

Gross profit 59,549 59,391 55,745 58,555 0.3 6.8 1.7 177,269 158,718 11.7 236,953 211,969 11.8

Staff costs (15,491) (16,290) (14,950) (16,209) (4.9) 3.6 (4.4) (47,105) (43,983) 7.1 (62,654) (59,671) 5.0

R&D (5,180) (5,500) (4,650) (4,800) (5.8) 11.4 7.9 (14,203) (14,019) 1.3 (20,349) (19,850) 2.5

SG&A (21,281) (20,128) (14,617) (19,734) 5.7 45.6 7.8 (60,597) (47,808) 26.8 (79,858) (69,373) 15.1

EBITDA 17,596 17,472 21,529 17,812 0.7 (18.3) (1.2) 55,364 52,908 4.6 74,092 63,076 17.5

Depreciation (5,470) (4,900) (4,711) (4,733) 11.6 16.1 15.6 (14,774) (12,992) 13.7 (20,078) (17,533) 14.5

Interest expense (630) (800) (1,448) (839) (21.3) (56.5) (25.0) (2,510) (4,052) (3,215) (5,553)

Other income 1,199 2,000 1,931 2,009 (40.1) (37.9) (40.3) 5,338 7,440 8,420 10,255

Exceptionals — — — — — — — (12,144)

Pretax profits 13,470 13,815 17,320 14,292 (2.5) (22.2) (5.8) 44,189 31,178 41.7 59,218 38,087 55.5

Tax (3,276) (2,210) (2,709) (2,660) 48.2 20.9 23.2 (7,397) (6,537) 13.2 (8,718) (6,009) 45.1

Minority interest (1,059) (1,396) (2,192) (991) (24.2) (51.7) 6.8 (3,141) (4,586) (4,599) (5,424)

Net income 9,135 10,208 12,419 10,641 (10.5) (26.4) (14.2) 33,651 20,055 67.8 45,901 26,654 72.2

Net income (adjusted) 9,135 10,208 12,419 10,641 (10.5) (26.4) (14.2) 33,651 32,199 4.5 45,901 38,798 18.3

EPS (Rs) 3.8 4.2 5.2 4.4 (10.5) (26.4) (14.2) 14.0 8.3 67.8 19.1 11.1 72.2

EPS adjusted (Rs) 3.8 4.2 5.2 4.4 (10.5) (26.4) (14.2) 14.0 13.4 4.5 19.1 16.1 18.3

Tax rate (%) 24.3 16.0 15.6 18.6 16.7 21.0 14.7 15.8

Divisional sales

US (US $ mn) 350 355 362 339 (1.4) (3.3) 3.2 1,113 1,084 2.7 1,487 1,526 (2.5)

- Taro US 118 134 144 131 (12.2) (18.5) (10.1) 380 394 483 536

- Ex-Taro US 232 221 218 208 5.1 6.8 11.6 733 690 1,004 990

Domestic formulations (Rs. mn) 25,170 24,363 22,351 25,148 3.3 12.6 0.1 73,454 62,468 17.6 96,780 73,483 31.7

RoW (Rs mn) 24,937 26,625 23,598 25,488 (6.3) 5.7 (2.2) 75,501 65,199 15.8 103,798 88,178 17.7

API 5,032 4,474 4,261 4,682 12.5 18.1 7.5 14,324 12,466 14.9 19,030 17,300 10.0

% margin

Gross margin 73.0 72.3 72.0 72.1 71.9 72.5 71.5 72.9

R&D 6.4 6.7 6.0 5.9 5.8 6.4 6.1 6.8

SG&A 45.1 44.3 38.2 44.2 43.7 41.9 43.0 44.4

EBITDA 21.6 21.3 27.8 21.9 22.5 24.2 22.4 21.7

94

-9

91

-16

118

-17

-40

-20

0

20

40

60

80

100

120

140

Global specialty revenues Global specialty R&D

1QFY20 2QFY20 3QFY20

0

100

200

300

400

500

600

700

Q1

Q3

Q5

Q7

Q9

Q11

Q13

Q15

Q17

Q19

Q21

Q23

Q25

Q27

Cosentyx Stelara Otezla

Taltz Trefmya Skyrizi

Sun Pharmaceuticals Pharmaceuticals


Exhibit 4: FY2021 to be a cliff year for SUNP – further in-licensing deals critical to drive incremental growth beyond FY2022 March fiscal year-ends, 2013-22E (US$ mn)

Source: Kotak Institutional Equities estimates

Exhibit 5: New product launches and specialty to drive US revenue growth

March fiscal year-ends, 2013-22E (Rs mn)


2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E

DUSA 55 72 111 105 130 92 92 99 103 106

Absorica 131 165 151 193 186 129 127 115 48

BromSite 4 25 32 38 46 23

Odomzo 4 12 17 27 40 49

Ilumya 13 43 145 177

Cequa 0 11 61 82

Yonsa 25 10 10 5

Xelpros 5 15 25 35

Key US brands 55 203 275 256 330 315 313 371 546 526

- as a % of US sales 4.9 12.5 12.3 12.4 16.1 23.3 20.5 25.0 33.4 32.0

- % growth 271 36 -7 29 -5 -1 18 47 -4

Ilumya milestone + royalties 9 17 24 29

Global specialty franchise 55 203 275 256 330 315 322 388 569 554

- % growth 271 36 -7 29 -5 2 20 47 -3

2015 2016 2017 2018 2019 2020E 2021E 2022E

Branded/specialty 275 256 330 315 313 371 546 526

Taro US 777 866 784 550 536 483 455 456

SUNP key opportunities 766 554 623 294 447 305 363 381

SUNP base business 425 390 318 195 230 328 272 281

Total US sales 2,244 2,066 2,056 1,354 1,526 1,487 1,636 1,644

yoy growth (%) 38.5 (7.9) (0.5) (34.1) 12.7 (2.5) 10.0 0.5

Branded/specialty 12 12 16 23 21 25 33 32

Taro US 35 42 38 41 35 32 28 28

SUNP key opportunities 34 27 30 22 29 20 22 23

SUNP base business 19 19 15 14 15 22 17 17

Pharmaceuticals Sun Pharmaceuticals


Exhibit 6: Sun Pharma – we expect US to drive revenue growth



Exhibit 7: Specialty R&D dipped in FY2019 and 9MFY20, though, likely to increase post initiation of pivotal trials for Ilumya in PsA



2014 2015 2016 2017 2018 2019 2020E 2021E 2022E

Domestic formulations 36,918 67,166 75,537 77,491 80,293 73,483 96,780 106,371 116,954

US (excluding Taro) 57,380 89,692 78,536 85,101 51,964 69,427 71,282 85,033 87,885

Taro (US) 40,465 47,506 56,634 52,487 35,502 37,286 34,312 32,735 33,775

RoW/EM 19,084 60,646 57,461 77,427 78,132 88,178 103,798 112,055 122,699

Total formulations 153,847 265,010 268,168 292,506 245,891 268,375 306,172 336,194 361,312

API 8,010 9,910 14,025 15,978 13,993 17,300 19,030 19,982 20,981

Others 138 792 752 454 432 1,000 950 903 857

Other income 740 1,469 5,256 13,142 4,235 3,796 5,250 4,500 4,500

Total 162,735 277,181 288,200 322,080 264,551 290,471 331,402 361,578 387,650

yoy growth, %

Domestic formulations 24 82 12 3 4 (8) 32 10 10

US (excluding Taro) 101 56 (12) 8 (39) 34 3 19 3

Taro 27 17 19 (7) (32) 5 (8) (5) 3

RoW 5 218 (5) 35 1 13 18 8 9

Total formulations 42 72 1 9 (16) 9 14 10 7

API 6 24 42 14 (12) 24 10 5 5

Total 39 70 4 12 (18) 10 14 9 7

% of sales

Domestic formulations 23 24 26 24 30 25 29 29 30

US (excluding Taro) 35 32 27 26 20 24 22 24 23

Taro 25 17 20 16 13 13 10 9 9

RoW 12 22 20 24 30 30 31 31 32

Total formulations 95 96 93 91 93 92 92 93 93

API 5 4 5 5 5 6 6 6 5

2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E

US Sales (Rs mn) 60,568 97,844 137,198 135,170 137,588 87,466 106,713 105,595 117,768 121,660

- Generics 21,362 39,744 67,594 56,701 56,628 24,342 38,376 34,908 35,549 38,414

- Specialty 2,972 12,240 16,844 16,765 22,102 20,364 21,779 26,347 39,283 38,902

- Taro 36,234 45,861 52,760 61,704 58,858 42,760 46,558 44,340 42,936 44,344

Sales 112,999 160,784 275,390 287,953 315,784 264,895 290,659 331,402 361,578 387,650

R&D expenses (Rs mn) (7,042) (10,169) (18,373) (23,025) (21,459) (20,669) (19,850) (20,349) (21,594) (24,220)

- Generics (4,504) (6,821) (11,455) (12,168) (10,934) (9,816) (11,864) (12,425) (12,240) (12,950)

- Specialty 0 0 (2,913) (6,238) (5,641) (6,304) (3,591) (3,664) (5,466) (7,674)

- Taro (2,538) (3,348) (4,005) (4,618) (4,884) (4,549) (4,395) (4,260) (3,888) (3,596)

R&D as a % of sales (6.2) (6.3) (6.7) (8.0) (6.8) (7.8) (6.8) (6.1) (6.0) (6.2)

- of which generics 64 67 62 53 51 47 60 61 57 53

- of which Specialty 0 0 16 27 26 31 18 18 25 32

- of which Taro 36 33 22 20 23 22 22 21 18 15

Sun Pharmaceuticals Pharmaceuticals


Exhibit 8: Sun Pharma - consolidated profit and loss, balance sheet, cash model



2014 2015 2016 2017 2018 2019 2020E 2021E 2022E

Net revenues 160,784 275,390 287,953 315,784 264,895 290,659 331,402 361,578 387,650

Gross Profit 132,990 207,998 223,121 234,477 190,648 211,969 236,953 261,306 281,105

Staff costs (20,744) (45,026) (47,971) (49,023) (53,671) (59,671) (62,654) (66,414) (70,399)

R&D expenses (10,169) (18,373) (23,025) (21,459) (20,669) (19,850) (20,349) (21,594) (24,220)

Other expenses (30,141) (64,462) (63,630) (63,103) (60,227) (69,373) (79,858) (84,469) (89,302)

EBITDA 71,936 80,136 88,494 100,893 56,081 63,076 74,092 88,829 97,184

Depreciation & amortisation (4,094) (11,947) (10,135) (12,648) (14,998) (17,533) (20,078) (22,024) (22,624)

EBIT 72,923 68,189 78,359 88,245 41,083 45,543 54,014 66,804 74,559

Net Interest (442) (5,790) (4,769) (3,998) (5,176) (5,553) (3,215) (2,403) (2,323)

Other income 5,081 4,008 914 6,232 8,388 10,255 8,420 8,201 7,552

Exceptional items (25,174) (2,378) (6,852) — (9,505) (12,144) — — —

Profit before tax 72,481 63,904 74,486 90,578 44,062 50,231 59,218 72,602 79,789

Tax & Deferred Tax (7,908) (9,147) (9,349) (12,116) (8,452) (6,009) (8,718) (12,225) (14,573)

Less: minority interest (7,375) (9,363) (11,126) (8,819) (4,468) (5,424) (4,599) (4,516) (4,750)

Net Income (adjusted) 57,198 45,394 54,011 69,644 33,665 38,798 45,901 55,861 60,467

EPS adjusted (Rs) 27.6 18.9 22.4 28.9 14.0 16.1 19.1 23.2 25.1

Balance sheet

Equity 204,461 293,582 354,901 404,305 419,847 427,736 473,655 527,376 585,249

Total borrowings 24,890 75,963 83,381 80,910 97,518 98,934 73,934 77,434 75,934

Deferred tax liability 2,757 985 616 3,148 2,190 1,043 1,043 1,043 1,043

Other liabilities 35,493 92,561 80,263 112,321 118,846 89,689 99,390 102,453 105,714

Total liabilities 293,708 490,279 542,196 614,102 643,028 646,938 677,558 737,843 797,477

Net fixed assets 58,242 110,201 133,606 149,403 157,111 172,919 162,841 150,817 138,193

Investments 7,876 5,989 5,933 16,062 31,572 39,518 39,518 39,518 39,518

Cash 95,886 131,155 147,045 153,717 140,200 112,263 120,016 176,839 234,471

Other current assets 121,192 215,576 225,287 287,360 286,061 283,535 316,480 331,966 346,592

Total assets 293,708 490,279 542,196 614,102 643,028 646,938 677,558 737,843 797,477

Cashflow statement

Operating profit before working capital 45,410 71,765 84,923 95,485 48,621 57,789 79,296 94,627 102,413

Tax paid (7,889) (17,404) (19,885) (20,571) (7,417) (8,864) (8,718) (12,225) (14,573)

Change in working capital 2,071 1,796 2,656 (4,092) (2,123) (26,960) (23,244) (12,423) (11,365)

Capital expenditure (9,060) (23,419) (33,825) (36,929) (19,608) (32,128) (10,000) (10,000) (10,000)

Free cash flow 30,532 32,739 33,869 33,894 19,473 (10,164) 37,334 59,979 66,476

Margins and ratios

Gross profit margin (%) 82.7 75.5 77.5 74.3 72.0 72.9 71.5 72.3 72.5

EBITDA margin (%) 44.7 29.1 30.7 31.9 21.2 21.7 22.4 24.6 25.1

Tax rate (%) 10.9 14.3 12.6 13.4 19.2 12.0 14.7 16.8 18.3

RoAE (%) 19.1 20.2 16.3 20.5 5.8 6.7 10.6 11.6 11.4

RoACE (%) 52.4 31.4 25.9 24.6 9.4 9.9 10.5 12.4 13.6



Residential sales supported by Ultima in 3QFY20; will need new avenues of sales from hereon

DLF continues to maintain sales momentum with pre-sales of Rs7.3 bn in 3QFY20 comfortable

to achieve sales of Rs27 bn for FY2020E. We highlight net sales for FY2019 were at Rs24.4 bn

exceeding the company’s target of Rs22.5 bn (+144% yoy) for the year. We note that sales

from Rest of Gurugram—Rs8.1 bn made good cancellations of Rs1.5 bn in Phase 5.

Outstanding completed inventory stands reduced to Rs94 bn (area of 10.14 mn sq. ft) as of

December 2019 while pending receivable from sold inventory now stands increased to Rs28 bn.

We note that near-completed inventory at Ultima and moderation of sales at Camelias do pose

a challenge for sales target in FY2021E (KIE Rs30 bn), though launch of a new 7 mn sq. ft low-

rise developments with ticket size of Rs10-35 mn could provide the boost needed by DLF.

Collections at Rs6 bn (-9% yoy) for 3QFY20 from residential sales were supplemented by rental

stream of Rs360 mn. Operational cash outflow of Rs6 bn comprised Rs1.8 bn towards

construction expenses, Rs1.8 bn towards finance cost and the balance towards taxes and

corporate overheads resulting in net cash flow of Rs390 mn in 3QFY20 which is the lowest

operation cash flow in the last seven quarters, since DLF turned operating cash flow positive.

DLF recognized Rs13 bn of revenues comprising sales of Rs10 bn from development business

comprising delivery of 2.38 mn sq. ft while rental income from DLF’s own rental portfolio was

at Rs606 mn. Net debt for DLF stands at Rs48 bn in 3QFY20 from Rs44 bn in 2QFY20.

Maintain ADD with revised fair value of Rs260/share

We maintain ADD rating with a revised fair value of Rs260/share (from Rs215/share) for DLF as

we roll-forward to a March 2022 based fair value estimate (from March 2021). We note that

our fair value estimate does not include the new proposed development of 7 mn sq. ft for the

development business that could add Rs33 bn of gross cash flows, and (2) proposed

development of DLF Downtown (5 mn sq. ft) in Chennai and Gurgaon that will entail a capex of

Rs27 bn.

Our fair value comprises (1) Rs155/share (Rs382 bn) for attributable ownership in DCCDL,

(2) Rs67/share (Rs166 bn) for land bank of 192 mn sq. ft, (3) Rs22/share (Rs54 bn) for ongoing

residential portfolio including inventory of Rs94 bn, and (4) Rs6/share (Rs15 bn) for two hotel

properties.

DLF (DLFU) Real Estate

Sales momentum maintained. DLF reported robust operational performance with

sales of Rs7.2 (+30% yoy) in 3QFY20 along with stable rental income of Rs7.6 bn from

DCCDL during the quarter. The sales performance should be seen in the context of

cancellations at Camelias that were made good with strong sales of Rs8 bn in Ultima.

Launch of new projects in the rental business as well as development portfolio remains

key for DLF. Maintain ADD rating with revised FV of Rs260/share (from Rs215/share).

ADD

FEBRUARY 07, 2020

RESULT


CMP (`): 246

Fair Value (`): 260

BSE-30: 41,306

Murtuza Arsiwalla

Samrat Verma

DLF



Mcap (bn) (Rs/US$) EPS growth (%) (23.7) 81.4 43.1

ADTV-3M (mn) (Rs/US$) P/E (X) 54.3 30.0 20.9



FIIs 16.6 RoE (%) 3.2 5.5 7.5



Absolute (5) 11 46 EBITDA (Rs bn) 13 16 22

Rel. to BSE-30 (7) 10 31 Net profits (Rs bn) 11 20 29

267-133

610/8.6

2.6/0

2,617/37

DLF Real Estate


Independent floors to fill in moderation in premium segment

In order to propel the next leg of growth to its residential sales, DLF is planning to develop 7

mn sq. ft by converting its existing plotted inventory into low-rise independent floors which

is expected to show better sales traction in the current market scenario. These floors would

have a ticket-size of Rs10-35 mn. Total sales value for these developments is expected at

Rs50 bn with construction cost of Rs17 bn. We note that this is a departure from DLF’s

extant strategy to develop only large premium apartments, and is reflective of challenges the

company may be facing in maintaining sales momentum in the higher ticket size

developments.

DCCDL continues its resilient earnings performance

DCCDL, the rental arm of DLF, reported EBITDA of Rs7.8 bn (Rs8.1 bn in 2QFY20) with

revenues of Rs10.8 bn (Rs11.6 bn in 2QFY20). During the quarter, the company achieved

net leasing of 0.43 mn sq. ft taking total leased area to 28.7 mn sq. ft. Overall occupancy

across the portfolio remained healthy at 94.7% in 3QFY20. For 3QFY20, DCCDL has gross

operating cash flows of Rs7.8 bn and net operating cash flows of Rs7.5 bn with annual

rental run-rate of Rs31 bn. We estimate DCCDL’s EBITDA to grow to Rs42 bn in FY2022E

from an estimated Rs36 bn in FY2020E on the back of commissioning of Cyber Park (2.5

mn sq. ft) and Chennai IT SEZ (0.8 mn sq. ft).

Expansion of rental portfolio to continue to boost earnings

DCCDL currently has an operational portfolio of 30.3 mn sq. ft with anticipated rental run-

rate of Rs38 bn for FY2020. The subsidiary will also add (1) DLF Downtown, Gurgaon with

leasable area of 3 mn sq. ft in Phase 1 (0.3 mn sq. ft pre-leased) to be eventually ramped up

to 11 mn sq. ft., (2) DLF Downtown, Chennai with leasable area of 2 mn sq. ft in Phase 1 to

be expanded to 7 mn sq. ft, and (3) Chennai IT SEZ (0.8 mn sq. ft).

Apart from this, DLF Cyber City, Gurugram has additional development potential of 11.5 mn

sq. ft thus taking total development potential in DCCDL to ~30 mn sq. ft.

Transfer of assets from DLF (Mall of India, Noida and DLF Avenue, Saket) along with

commencement of new assets i.e DLF Cyber Park (~2.5 mn sq. ft) and Chennai IT SEZ is

likely to increase rental income to Rs37 bn in FY2020. We highlight that as per

management, contractual escalation, improved occupancy as well as re-leasing of extant

contracts could add as much as Rs4.6 bn by FY2022 to extant rental income of Rs30 bn.

Other highlights from the earnings call

Management remains confident of achieving sales target of Rs27 bn for FY2020 even as

it faces slowdown in sales of luxury and super-luxury projects. The company witnessed

cancellation of eight units at its Camellias project which were made by fresh sales of four

units in January 2020, however, overall sales for the project are expected to remain

subdued.

DLF net debt increased to Rs48.7 bn on account of interest payout to DCCDL as well

capex for commercial developments. Net debt is expected to remain at the same level in

4QFY20 as well. DLF is planning to monetize its existing land parcels for rental

development by way of JV or new alliances to reduce net debt level to Rs25 bn over the

next 12-24 months. As per management, annuity assets in DLF which provide rentals of

Rs2.5 bn should be able to service its finance cost thereby reducing dependence on cash

flows from development business.

DLF is still on the drawing board for development of its prime land parcel in Tulsiwadi,

Mumbai (2 mn sq. ft). The company could look at either residential or commercial

development on lease/sales basis and may launch any project in 2QFY21. There is no

progress on development of land parcel in Chankya Puri, Delhi.

Real Estate DLF


Capital expenditure for 5 mn sq. ft in DLF Downtown, Gurgaon and Chennai would

require capex of Rs27 bn over the next 2-3 years.

Decline in revenues (including other income) to Rs15.3 bn was on account of a change in

the product mix as well as loss of rental income on account of transfer of assets to

DCCDL.

DCCDL reported rental income of Rs7.6 bn while other income was lower at Rs530 mn

82% yoy) on account of loss of interest income due to settlement of payables by DLF.

DLF reported corporate overhead expenses at Rs2.1 bn are expected to reduce to Rs1.5

bn in 4QFY20.

Ultima, Phase 5 which contributed to major sales for DLF in the past two quarters has a

six month payment schedule which will contribute to collections in 4QFY20 and 1QFY21.

Exceptional item of Rs2.3 bn during the quarter was on account of profit from transfer

of TIBCO, Chennai SEZ to DCCDL.

Exhibit 1: DLF had operating cash flows of Rs390 mn during the quarter Cash flow for DLF (ex-DCCDL), March fiscal year-ends, 2019-20 (Rs mn)


Exhibit 2: Settlement of payables to DCCDL led to increased cash requirement at DLF DLF: Movement of debt, March fiscal year-ends, 3QFY19 -3QFY20 (Rs bn)


1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20

Collections 8,100 8,540 6,710 8,000 6,320 6,690 6,120

Rentals 1,350 1,330 1,310 1,450 1,040 450 360

Inflows 9,450 9,870 8,020 9,450 7,360 7,140 6,480

Construction (3,950) (2,740) (2,320) (2,350) (1,960) (2,220) (1,850)

Finance (2,220) (2,210) (2,550) (2,400) (1,940) (1,910) (1,790)

Government/ Land Charges (1,540) (1,350) 1,110 30 450 30 50

Tax (600) (640) (580) (950) 510 330 (360)

Overheads (1,400) (1,550) (2,350) (2,280) (2,380) (2,260) (2,140)

Outflow (9,710) (8,490) (6,690) (7,950) (5,320) (6,030) (6,090)

Operating cash flow (260) 1,380 1,330 1,500 2,040 1,110 390

Capex (7,230) (660) (1,110) (1,400) (1,830) (2,500) (2,450)

Net cash flow (7,490) 720 220 100 210 (1,390) (2,060)

3QFY19 4QFY19 1QFY20 2QFY20 3QFY20

DLF DCCDL DLF DCCDL DLF DCCDL DLF DCCDL DLF DCCDL

Opening gross debt 90 103 101 62 71

(less) Repayment during the quarter (10.7) (4.6) (17.8) (7.8) (6.8)

(add) New loans 24 — — 21.0 7.5

Gross debt at the end of the quarter 104 98 84 75 71

(less) Equity shown as debt /JV co debt — (4) (22) (5) —

(less) Ind-AS impact (0.8) (0.9) — — —

Gross debt 102.9 93.4 62.1 70.5 71.2

(less) cash in hand (30.6) (48.6) (28.0) (25.9) (22.6)

Net debt 72.2 165.0 44.8 165.0 34.2 175.6 44.6 179.8 48.7 181.7

Increase /(Decrease) 0.9 (27.4) (10.7) 10.4 4.1

DLF Real Estate


Exhibit 3: Net sales stood at Rs7 bn in 3QFY20 in line with the company’s expectation of Rs27 bn for

FY2020 Quarterly sales (gross and net) for DLF, March fiscal year-ends, 1QFY16 - 3QFY20 (Rs bn)


Exhibit 4: Revenues of Rs13 bn comprised Rs10 bn from sale of residential units DLF: 3QFY20 results snapshot, March fiscal year-ends (Rs mn)


10

6

4

11

5 4

7

6

1

-

7

10

7

8 8 9 8

9

10

10

6

4

11

2 3 3

4

(1) (1)

5

8

6 6 6

7 7 7 7

(2)

-

2

4

6

8

10

12

1Q

FY

16

2Q

FY

16

3Q

FY

16

4Q

FY

16

1Q

FY

17

2Q

FY

17

3Q

FY

17

4Q

FY

17

1Q

FY

18

2Q

FY

18

3Q

FY

18

4Q

FY

18

1Q

FY

19

2Q

FY

19

3Q

FY

19

4Q

FY

19

1Q

FY

20

2Q

FY

20

3Q

FY

20

Gross sales Net sales

change (%)

3QFY20 3QFY20E 3QFY19 2QFY20 3QFY20E 3QFY19 2QFY20 9MFY20 9MFY19 chg (%) 2020E 2019 chg (%) 2021E

Net sales 13,419 19,290 22,193 17,155 (30) (40) (22) 43,886 58,657 (25) 60,717 83,661 (27) 65,177

Cost of goods sold (7,680) (10,609) (12,591) (8,852) (24,224) (33,966) (29) (33,471) (49,511) (34,492)

Employee costs (868) (917) (900) (858) (2,509) (2,498) 0 (3,587) (3,516) (3,658)

Other expenses (2,588) (2,872) (2,303) (3,942) (8,970) (6,114) 47 (11,062) (9,219) (11,394)

EBITDA 2,283 4,891 6,399 3,503 (53) (64) (35) 8,183 16,078 (49) 12,597 21,415 (41) 15,632

Other income 1,915 2,001 1,866 2,245 6,258 5,028 24 7,112 6,633 7,112

Interest costs (2,376) (3,543) (5,329) (4,181) (11,917) (15,268) (22) (14,372) (20,619) (9,390)

Depreciation (445) (451) (562) (446) (1,402) (1,679) (16) (1,840) (2,246) (1,605)

PBT 1,377 2,897 2,375 1,122 (52) (42) 23 1,122 4,160 (73) 3,496 5,183 (33) 11,749

Excecptional 2,309 — — 1,436 6,710 — — 1,273 —

Taxes (1,412) (1,014) (1,263) (742) (2,253) (2,396) (6) (2,797) (1,087) (4,163)

PAT 2,275 1,883 1,112 1,815 21 104 25 5,578 1,764 216 699 5,370 (87) 7,586

Minority interest — — — — — — — — —

Share of profit from associates 1,857 2,835 2,224 2,619 (35) (17) (29) 7,126 7,029 10,518 9,458 12,617

Net income 4,131 4,717 3,337 4,434 (12) 24 (7) 12,705 8,793 44 11,217 14,828 (24) 20,203

EPS (Rs/share) 2.3 2.6 1.9 2.5 7.1 5.1 6.3 8.3 11.3

Key ratios

EBITDA margin (%) 17.0 25.4 28.8 20.4 18.6 27.4 20.7 25.6 24.0

PAT margin (%) 17.0 9.8 5.0 10.6 12.7 3.0 1.2 6.4 11.6

Effective tax rate (%) 38.3 35.0 53.2 29.0 28.8 57.6 80.0 16.8 35.4

Real Estate DLF


Exhibit 5: DCCDL reported 19% yoy increase in net income in 3QFY20 on account to lower other income due to settlement of payables

with DLF DCCDL: 3QFY20 results snapshot, March fiscal year-ends (Rs mn)


Exhibit 6: Occupancy at DCCDL assets have remained flat at 94% in 3QFY20 Total area, area leased and occupancy for DCCDL, March fiscal year-ends (Rs mn)


3QFY20 3QFY19 2QFY20 3QFY19 2QFY20 9MFY20 9MFY19 chg. (%) 2020E 2019 chg. (%) 2021E

Net sales 10,780 9,820 11,660 10 (8) 32,500 29,700 9 44,746 39,590 13 49,901

Operating costs (2,940) (3,140) (3,550) (6) (17) (10,090) (9,510) (13,112) (12,940) (14,011)

EBITDA 7,840 6,680 8,110 17 (3) 22,410 20,190 11 31,634 26,650 19 35,890

Other income 530 3,020 2,240 (82) (76) 6,070 8,300 8,045 11,290 6,232

Interest costs (4,260) (4,630) (4,550) (8) (6) (13,070) (13,040) (17,168) (17,230) (13,830)

Depreciation (1,300) (1,120) (1,280) 16 2 (3,720) (3,230) (5,067) (4,300) (5,327)

PBT 2,810 3,950 4,520 (29) (38) 11,690 12,220 (4) 17,443 16,410 6 22,965

Excecptional items — — — — — — — —

Taxes (80) (600) (650) (87) (88) (1,200) (1,700) (1,744) (2,410) (4,134)

PAT 2,730 3,350 3,870 (19) (29) 10,490 10,520 (0) 15,699 14,000 12 18,831

EPS 1.6 1.9 2.2 5.9 5.9 8.8 7.8 10.6

Key ratios

EBITDA margin (%) 72.7 68.0 69.6 69.0 68.0 70.7 67.3 71.9

PAT margin (%) 25.3 34.1 33.2 32.3 35.4 35.1 35.4 37.7

Effective tax rate (%) 2.8 15.2 14.4 10.3 13.9 10.0 14.7 18.0

change (%)

31.00 31.00 31.00 33.22

30.37 30.37 30.37 31.29 30.30 30.30

26.90 27.18 27.18 27.32 27.51 28.40 28.70 29.51 28.60 28.70

76.00

78.00

80.00

82.00

84.00

86.00

88.00

90.00

92.00

94.00

96.00

-

5.00

10.00

15.00

20.00

25.00

30.00

35.00

3Q

FY

18

4Q

FY

18

FY2

01

8

1Q

FY

19

2Q

FY

19

3Q

FY

19

4Q

FY

19

1Q

FY

20

2Q

FY

20

3Q

FY

20

Total area (mn sq. ft) Leased area (mn sq. ft) Occupancy

DLF Real Estate


Exhibit 7: New leasing has improved occupancy at DCCDL’s rental assets Gross area and net area leased for DCCDL, March fiscal year-ends, 1QFY18-3QFY20 (mn sq. ft)


Exhibit 8: DLF has occupancy levels of 97% for its rentals assets generating Rs2.5 bn annually DLF: Leasable area and area leased, as on 3QFY20 (mn sq. ft)


1.30 1.75

1.49 1.99

6.53

0.91 1.22

1.81 1.80

0.82

1.40 1.30

0.20 0.37 0.13 0.28

0.98

0.14 0.27 0.81

0.30 0.03

0.67 0.43

-

1.00

2.00

3.00

4.00

5.00

6.00

7.00

1Q

FY

18

2Q

FY

18

3Q

FY

18

4Q

FY

18

FY2

01

8

1Q

FY

19

2Q

FY

19

3Q

FY

19

4Q

FY

19

1Q

FY

20

2Q

FY

20

3Q

FY

20

Gross area leased during quarter Net area leased during quarter

Leasable area (msf) Rent (psf/month)

Total Leased Occupancy (%) In-place Market WALE (months)

Office

Gateway Tower 0.11 0.11 100.0 118 116 28

Kolkata - II 0.99 0.96 97.0 34 30 76

DLF Centre 0.17 0.14 82.4 367 400 75

Amex 0.51 0.51 100.0 49 122 20

Sub-total 1.78 1.72 96.6

Retail

South square 0.06 0.06 95.0 117 51.0

Capital point 0.09 0.09 100.0 408 40.0

Chankya 0.19 0.18 94.7 202 133.0

Sub-total 0.34 0.33 96.2

Weighted average 2.12 2.05 96.6 99

Real Estate DLF


Exhibit 9: DCCDL currently has occupancy levels of 95% from completed projects DCCDL: Leasable area and area leased, as on 3QFY20 (mn sq. ft)


Exhibit 10: New developments would add another 30 mn sq. ft to existing portfolio of 30 mn sq. ft at DCCDL Under construction / new developments at DCCDL


Leasable area Rent (psf/month)

Completed Under construction Total Area leased Occupancy (%) In-place Market MTM WALE (years)

Office

Cyber City, Gurugram 10.2 - 10.2 10.0 98.0 103 120 17 4.8

Cyber SEZ, Gurugram 2.9 - 2.9 2.8 98.0 77 100 30 5.6

Silokhera SEZ, Gurugram 1.9 - 1.9 1.1 59.0 65 73 12 7.0

Chennai SEZ 6.6 - 6.6 6.4 98.0 64 75 17 5.8

Hyderabad SEZ 2.9 - 2.9 2.9 99.0 49 58 18 4.8

Kolkata IT Park 1.3 - 1.3 1.2 92.0 39 30 (23) 5.0

Chandigarh IT Park 0.7 - 0.7 0.6 88.0 52 39 (25) 5.1

Sub-total 26.4 - 26.4 25.0 94.8 78 91 16.81 5.3

Retail

Mall of India, Noida 2.0 - 2.0 1.9 99.0 106 7.8

DLF Avenue 0.5 - 0.5 0.5 97.0 65 -

Promenade, New Delhi 0.5 - 0.5 0.5 100.0 186 5.8

Cyber hub, Gurugram 0.4 - 0.4 0.5 99.0 127 5.6

Emporio, New Delhi 0.3 - 0.3 0.3 99.0 359 3.1

City Centre, Chandigarh 0.2 - 0.2 0.1 70.0 29 9.0

Sub-total 3.9 - 3.9 3.8 97.0 134 6.9

Weighted average 30.3 - 30.3 28.8 95.0 83 5.5

Under-construction

Cyber Park, Gurugram - 2.5 2.5 2.4 93.0 119 129 NA NA

DLF Downtown, Gurugram - 3.3 3.3 0.3 10.0 132 134 NA NA

Chennai, Block 11 & 12 - 0.8 0.8 0.6 72.0 65 72 NA NA

Weighted average - 6.7 6.7 3.3 49.2 83

Project Development potential Under-construction and status Expected rental

Cyber Park, Gurugram 2.35 mn sq. ft OC expected in 4QFY20 Rs 120 psf pm

Chennai IT Park (SEZ) 0.8 mn sq. ft OC-Block 11 received, Block 12 by FY2021 Rs 70 psf pm

DLF Downtown, Gurugram 11 mn sq. ft 3 msf; under-construction Rs 120 psf pm

DLF Downtown, Chennai 6.8 mn sq. ft 2 msf; under-construction Rs 85 psf pm

DLF Cyber City, Gurugram 11.5 mn sq. ft

DLF Real Estate


Exhibit 11: Current rental run-rate of Rs30 bn at DCCDL is expected to increase to Rs47 bn by FY2022 Build-up of rental portfolio at DCCDL (Rs bn)


Exhibit 12: Slow movement of legacy inventory could affect operating cash flows Cash flow profile for DLF’s development business, March fiscal year-ends (Rs mn)


Exhibit 13: 20.9 msf of projects under planning/development with DLF's share of value of Rs185 bn Upcoming projects of DLF (mn sq. ft)


30.2 2.0 0.7 1.9 3.7 0.9

2.0 41.3 5.7

47

-

10.0

20.0

30.0

40.0

50.0

60.0

Dec-

19

Co

ntr

act

ual

Vaca

ncy

Re-l

easi

ng

Cyb

er

Park

Ch

enn

ai N

ew

Sta

ge II

To

tal cu

rren

tp

orf

olio

Pro

po

sed

deve

lop

men

t

FY2

02

2 r

en

tal

4QFY19 1QFY20 2QFY20 3QFY20 2020 2021 2022

Sales

DLF 5 4,160 5,000 1,850 (1,540)

Rest of Gurugram 980 650 3,550 8,160

National Devco 1,360 1,400 1,850 700

Sales 6,500 7,050 7,250 7,320 27,200 30,400 32,000

Collections 8,000 6,320 6,690 6,120 19,530 28,470 33,120

Construction (2,350) (1,960) (2,220) (1,850) (8,000) (8,000) (5,500)

GCF (Annual) 5,650 4,360 4,470 4,270 11,530 20,470 27,620

Inventory

DLF 5 53,350 48,500 46,750 48,300

Rest of Gurugram 35,500 34,900 30,250 22,100

National Devco 27,650 26,300 24,450 23,750

Inventory 116,500 109,700 101,450 94,150 89,250 58,850 26,850

Receivables

DLF 5 12,900 13,460 12,850 8,730

Rest of Gurugram 4,300 4,040 4,200 10,670

National Devco 10,450 10,500 10,350 9,100

Receivables 27,650 28,000 27,400 28,500 35,320 37,250 36,130

Balance cost (21,500) (19,750) (17,500) (15,650) (13,500) (5,500) -

GCF (Outstanding) 122,650 117,950 111,350 107,000 111,070 90,600 62,980

Project Area (msf) DLF's share (%) Desciption Status Expected sales price

DLF Urban, Chankya Puri, New Delhi 1.9 50 GIC JV Construction Commenced Rs 20,000 per sq. ft

DLF Midtown, New Delhi 6 50 GIC JV Under design stage Rs 20,000 per sq. ft

Independent floors 7 100 Owned Plans being finalized Rs 8,000 per sq. ft

HSIIDC, 11.76 acres (67% share) 3 67 Hines JV JV Closed Rs 25,000 per sq. ft

Hyderabad SEZ 3 100 Transfer to DAL Under design stage Rs 58 psf per month

Real Estate DLF


Exhibit 14: Current land bank of DLF offers development potential of 201 msf Status of land bank as of 31st December 2019 (mn sq. ft)


Exhibit 15: Earnings from DCCDL are expected to grow upon commissioning of new projects Key assumptions for development and rental portfolio of DLF, March fiscal year-ends, 2018-22 (Rs mn)


Exhibit 16: Land bank valued at Rs233 bn constitutes 44% of the overall value DLF: Composition of NAV for DLF, March 2022E (Rs mn)


3QFY19 4QFY19 1QFY20 2QFY20 3QFY20

Gurgaon 108 107 106 104 104

Delhi Metropolitan Region 16 16 16 15 15

Chennai 18 18 18 12 12

Hyderabad 8 8 8 8 8

Chandigarh Tri-City 16 16 16 16 16

Kolkata 2 2 2 2 2

Others 36 35 35 35 35

Total 204 202 201 192 192

2018 2019 2020 2021 2022

Development

Sales 10,500 24,380 27,200 30,400 32,000

Inventory 160,000 116,450 89,250 58,850 26,850

GCF (Annual) NA 19,990 11,530 20,470 27,620

GCF (Outstanding) 150,000 122,600 111,070 90,600 62,980

Revenue 29,081 69,720 47,200 52,400 62,000

EBITDA 6,819 26,253 19,773 23,951 30,339

EBITDA (%) 23 38 42 46 49

DCCDL

Revenue 39,240 39,773 44,746 49,901 58,300

EBITDA 25,170 26,833 31,634 35,890 42,624

EBITDA (%) 64 67 71 72 73

Area (mn sq. ft) 31 31 34 35 38

Occupancy (%) 89 88 88 88 88

Rental (Rs/sq. ft pm) NA 82 89 94 102

Comments

DLF (ex-DCCDL)

Residential development 54,090 22 8 DLF currently has (1) unsold inventory of Rs94 bn, (2) receivables from past sales of Rs29 bn, and (3) cost of Rs15 bn to be incurred on ongoing

projects, yielding a gross cash flow of Rs107 bn valued at Rs55 bn on post tax NPV basis.

Land bank: Phase 5, Gurgaon 71,400 29 11 Area of 17 mn sq. ft valued at Rs4,000/sq. ft in Gurgaon Phase 5

Land bank: Rest of Gurgaon 43,500 18 7 Area of 87 mn sq. ft valued at Rs500/sq. ft for rest of Gurgaon including 2 mn sq. ft at Chankyapuri and 8 mn sq. ft in Central Delhi

Land bank: Rest of India 44,000 18 7 Area of 88 mn sq. ft valued at Rs500/sq. ft for land banks outside Gurgaon including 0.9 mn sq. ft at Tulsiwadi

Land: HSIIDC 7,500 3 1 Area of 2.5 mn sq. ft pruchased at Rs6000/sq. ft in Gurgaon

Lease Portfolio 49,752 20 8 Leasable area of 3.1 mn sq. ft that will likely earn rental income of Rs4 bn in FY2021E

Hotel (Lodhi, Hilton Saket) 15,000 6 2 —

Net debt (24,614) (10) (4) -

DLF (ex-DCCDL) 260,628 105 41

DCCDL

DCCDL 366,128 148 57 Operating portfolio of 30 mn sq. ft in DCCDL that will earn a revenue of Rs46 bn (67% attributable to DLF) in FY2020E

Land 74,290 30 12 Area of 26.4 mn sq. ft valued at Rs4,200/sq. ft with DCCDL (67% attributable for DLF)

Net debt (57,975) (23) (9) -

DCCDL 382,442 155 59 Value for attributable ownership in DCCDL

Fair Value (Rs mn) 643,071 260 100

Shares o/s (# mn) 2,475 0

Fair Value (Rs/share) 260

(%) (Rs/share)

NAV

(Rs mn)

DLF Real Estate


Exhibit 17: DLF net debt increased to Rs49 bn while DCCDL has net debt of Rs182 bn Balance sheet: DLF (3QFY18-3QFY20), DCCDL (3QFY18), March fiscal year-ends (Rs mn)


4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20

DLF

(consol.)

DCCDL

(consol.)

DLF

(consol.)

DLF

(consol.)

DLF

(consol.)

DLF

(consol.)

DLF

(consol.)

DLF

(consol.)

DLF

(consol.)

DLF

(consol.)

Share Capital 352,950 74,490 353,104 301,500 303,524 302,340 335,765 362,400 361,761 365,900

Minority interest 580 — 488 480 439 420 406 240 217 210

Long-term debt 75,360 155,100 62,389 57,370 47,198 64,240 56,144 36,540 34,105 36,010

Other non-current financial liabilities 11,860 20,310 12,732 12,820 12,894 13,000 12,560 13,980 13,667 13,750

Other non-current liabilities 6,700 4,640 26,991 1,840 5,746 6,730 5,818 5,170 41,868 6,090

Non-current liabilities 93,920 180,050 102,112 72,030 65,837 83,970 74,521 55,690 89,640 55,850

Short-term debt 91,980 8,020 88,080 87,240 90,393 92,180 91,637 62,260 49,403 27,340

Trade payables 11,740 2,080 12,175 11,990 10,981 11,780 12,772 12,860 14,102 11,890

Other financial liabilities 51,460 10,760 38,652 46,560 48,131 40,790 41,134 27,430 21,835 17,110

Other current liabilities 42,490 4,100 31,951 141,060 137,394 125,720 112,989 110,100 104,140 108,840

Current liabilities 197,670 24,960 170,858 286,850 286,899 270,470 258,532 212,650 189,480 165,180

Equity and liabilities 645,120 279,500 626,562 660,860 656,699 657,200 669,225 630,980 641,097 587,140

Property, plant and equipment (a) 16,010 8,450 15,489 74,360 15,260 15,020 14,586 17,120 16,362 16,440

CWIP 1,373 — 1,450 1,490 1,029 870 1,170 850

Investment property (a) 56,000 147,310 53,607 — 57,579 57,900 36,958 37,240 26,022 25,990

Goodwill and intangible assets 11,730 700 11,727 11,710 11,700 11,680 11,673 11,860 11,729 10,970

Investments accounted for under equity method 193,540 — 197,206 200,360 202,927 200,490 208,682 204,650 178,337 178,020

Deferred tax assets — 10,080 20,717 22,380 25,314 25,020 23,769 23,420 59,274 21,540

Other non-current assets 32,140 18,810 31,896 33,000 34,804 34,730 34,689 34,320 33,260 33,720

Non-current assets 309,420 185,350 332,015 341,810 349,034 346,330 331,386 329,480 326,155 287,530

Inventories 206,260 80 197,529 245,330 238,152 229,900 220,086 216,500 223,536 218,730

Financial assets: Investments 1,580 — 9,996 10,250 6,763 5,970 342 10,220 271 9,720

Financial assets: Trade receivables 22,200 1,660 12,858 9,000 8,442 8,560 8,323 8,770 7,428 7,360

Financial assets: Cash and bank balances/other balances 68,600 5,060 22,779 11,190 11,830 24,960 48,554 18,020 28,237 18,740

Financial assets: Loans 13,150 85,690 12,980 16,280 18,447 17,190 19,643 28,320 20,900 25,400

Other current assets 23,910 1,660 38,406 26,990 24,033 24,270 40,892 19,670 34,572 19,660

Current assets 335,700 94,150 294,547 319,040 307,666 310,850 337,839 301,500 314,943 299,610

Assets 645,120 279,500 626,562 660,850 656,699 657,180 669,225 630,980 641,098 587,140

3QFY18

Real Estate DLF


Exhibit 18: DLF (Consolidated), Financial summary, March fiscal year ends, 2017-2022E (Rs mn)


2017 2018 2019 2020E 2021E 2022E

Profit model

Net sales 82,212 67,068 83,661 60,717 65,177 75,336

EBITDA 34,333 23,774 21,415 12,597 15,632 22,164

Other income 7,193 9,569 6,633 7,112 7,257 7,000

Interest (29,798) (29,507) (20,619) (14,372) (9,390) (9,390)

Depreciation (5,725) (5,335) (2,246) (1,840) (1,605) (1,660)

Pre-tax profits 6,003 (1,499) 5,183 3,496 11,894 18,115

Tax (2,293) (43,231) (1,087) (2,797) (4,163) (6,340)

Deferred taxation — — (1,565) — — —

Net income 3,710 (44,729) 2,531 699 7,731 11,775

Share of profit from associates 1,844 9,458 10,518 12,617 17,337

Extraordinary items 4,293 87,653 — — — —

Adjusted net income 6,942 44,768 13,108 11,217 20,348 29,112

Earnings per share (Rs) 4.0 25.1 6.0 4.5 8.2 11.8

Balance sheet

Total equity 245,728 353,104 335,765 364,212 378,753 402,058

Minority interests 1,239 488 406 406 406 406

Non-current liabilities 257,532 102,678 75,949 50,194 50,194 50,194

Current liabilities 138,809 170,292 257,104 151,938 160,606 111,781

Total liabilities and equity 643,308 626,562 669,224 566,749 589,958 564,438

Non-current assets

Net fixed assets 258,421 87,200 64,246 44,226 43,797 43,548

Other non-current assets and advances 84,236 51,499 57,435 30,987 30,992 30,982

Current assets 299,049 279,548 311,194 270,971 281,988 239,389

Investments 1,603 208,315 210,047 220,565 233,182 250,519

Total assets 643,308 626,562 642,922 566,749 589,958 564,438

Ratios (%)

Debt/equity 109 51 51 22 21 20

Net debt/equity 92 44 37 10 10 9

RoE (%) 2.9 14.3 3.7 3.2 5.5 7.5

RoCE (%) 3.5 132.2 3.1 0.6 2.4 3.1

Book value per share (Rs) 138 194 152 147 153 162



3QFY20 results: Volume decline impacted the operating performance

Eicher reported 3QFY20 standalone EBITDA of Rs5.95 bn (down 14% yoy), which was 4%

below our estimates. Revenues increased by 1% yoy which was led by 6% yoy decline in

volumes, which was offset by 7% increase in net realizations. Increase in ASPs was primarily

due to the addition of disc brakes and ABS in RE bikes. EBITDA margin came in at 25.2% (-430

bps yoy) led by lower gross margin, higher staff cost and other expenses resulting in negative

operating leverage. Gross profit per vehicle declined by 1% yoy while EBITDA per vehicle

declined by 8.5% yoy. Staff cost declined by 1% yoy while other expenses increased by 7%

yoy. The company reported standalone adjusted net profit of Rs4.9 bn (-2.5% yoy), which was

2% below our estimates. Tax rate stood at 22.9% versus our estimate of 26% in 3QFY20. Due

to a steep slowdown in urban areas, the company is aggressively expanding into the

hinterland as a part of its strategy to make inroads into under-penetrated areas. The

company has opened 500 small format stores by December-end and plans to open 250

more by March 2020 end.

Performance of VECV was weak in 3QFY20 due to volume decline

VECV reported revenues of Rs21.5 bn (-23% yoy) in 3QFY20 due by 27% yoy decline in

volumes. EBITDA margin came in at 6.2% (down 50 bps yoy) mainly due to higher discounting

and negative operating leverage. Hence, Eicher’s share of profits in VECV declined significantly

yoy in 3QFY20 to Rs305 mn (-60% yoy).

Maintain SELL; Compliance costs headwind and demand slowdown lead to margin pressure

The company posted an in-line quarter but sustainability of volume uptick in FY2021 is difficult

in our view. The company also did not reveal any plans to launch a new bike platform,

which could limit volume growth upside in FY2021. However we have increased our

FY2020-22E EPS estimates by 3% led by an increase in other income and lower tax rate.

Maintain SELL and revise fair value to Rs18,700 (from Rs17,000 earlier) as we roll over to

December 2021E.

Eicher Motors (EIM) Automobiles & Components

Volume outlook remains muted. Eicher Motors reported 13% yoy decline in

consolidated EBITDA in 3QFY20 led by weak volume growth and margin pressures in

both VECV and Royal Enfield businesses. Standalone revenues increased 1% yoy led by

6% yoy decline in volumes and 7% yoy increase in ASPs. Significant cost increase and

the economic slowdown led to a decline in RE volumes. We expect volume pressure to

persist in FY2021 due to (1) shift towards BS-VI engines and (2) increase in competitive

intensity. Maintain SELL; FV revised to Rs18,700 (from Rs17,000 earlier).

SELL

FEBRUARY 06, 2020

RESULT


CMP (`): 20,391

Fair Value (`): 18,700

BSE-30: 41,306

Hitesh Goel

Rishi Vora

Eicher Motors



Mcap (bn) (Rs/US$) EPS growth (%) (5.0) (4.6) 35.0

ADTV-3M (mn) (Rs/US$) P/E (X) 26.3 27.6 20.4



FIIs 31.9 RoE (%) 26.5 21.0 23.8



Absolute 1 (2) 20 EBITDA (Rs bn) 23 23 29

Rel. to BSE-30 (1) (4) 7 Net profits (Rs bn) 21 20 27

23,450-15,197

557/7.9

5.5/0

3,025/42

Automobiles & Components Eicher Motors


Exhibit 1: Standalone 3QFY20 EBITDA was 4% below our estimates led by higher-than-expected other expenses Eicher Motors interim results, March fiscal year-ends (Rs mn)


Standalone business: Staff costs decline yoy, protecting margins from sliding

further

Eicher reported 3QFY20 standalone EBITDA of Rs5.95 bn (down 14% yoy), which was 4%

below our estimates. Revenues increased by 1% yoy which was led by 6% yoy decline in

volumes, which was offset by 7% increase in net realizations. Increase in ASPs was primarily

due to addition of disc brakes and ABS in RE bikes and a richer product mix. EBITDA margin

came in at 25.2% (-430 bps yoy) led by lower gross margin, higher staff cost and other

expenses resulting in negative operating leverage. Gross profit per vehicle declined by 1%

yoy while EBITDA per vehicle declined by 8.5% yoy. Staff cost declined by 1% yoy while

other expenses increased by 7% yoy. The company reported standalone adjusted net profit

of Rs4.9 bn (-2.5% yoy), which was 2% below our estimates. Tax rate stood at 22.9%

versus our estimate of 26% in 3QFY20.

Gross margin deteriorated by 370 bps yoy despite the company passing on the increase in

cost plus the margins in 3QFY20. We note that the company’s ASPs have increased by

Rs8,673/bike yoy in 3QFY20 and raw material cost per bike has increased by Rs9,155/bike.

Sequentially, gross margins deteriorated by 370 bps as increase in raw material cost

outpaced increase in ASPs in 3QFY20 as the company did not take any price increases in this

quarter due to a steep slowdown in demand. In our previous notes, we have highlighted

that the company would not be able to sustain its margins in the current scenario of

declining volumes, which got reflected in this quarter.

EBITDA margin continued to remain under pressure. EBITDA margin was below 30% for the

fourth-consecutive quarter led by subdued demand and we expect EBITDA margin to remain

around 23.3% and 24.6% in FY2021E and FY2022E, respectively.

(% chg.)

3QFY20 3QFY20E 3QFY19 2QFY20 3QFY20E 3QFY19 2QFY20 9MFY20 9MFY19 Yoy (%) FY2020E FY2019 Yoy (%)

Volumes (units) 182,791 182,791 194,473 166,589 (6.0) 9.7 532,969 629,936 (15.4) 726,700 826,098 (12.0)

Net realizations (Rs/unit) 129,302 131,957 120,630 130,973 (2.0) 7.2 (1.3) 129,425 115,804 11.8 129,395 118,563 9.1

Total revenues 23,635 24,121 23,459 21,819 (2.0) 0.8 8.3 68,980 72,949 (5.4) 94,031 97,945 (4.0)

Cost of materials consumed (11,433) (13,200) (13,045) (11,885) (13.4) (12.4) (3.8) (36,152) (39,174) (51,216) (52,612)

Changes in inventories (1,493) — 1,073 (12) (1,396) 1,929 — 1,985

Employee benefit expenses (1,776) (1,800) (1,791) (1,783) (1.3) (0.8) (0.4) (5,600) (5,150) 8.7 (7,407) (6,795) 9.0

Other expenses (2,981) (2,893) (2,778) (2,679) 3.0 7.3 11.3 (8,327) (8,052) 3.4 (11,490) (11,078) 3.7

Total expenses (17,683) (17,893) (16,541) (16,359) (1.2) 6.9 8.1 (51,474) (50,447) 2.0 (70,113) (68,501) 2.4

EBITDA 5,952 6,228 6,918 5,460 (4.4) (14.0) 9.0 17,505 22,502 (22.2) 23,918 29,444 (18.8)

Other income 1,358 1,450 1,446 1,450 (6.3) (6.0) (6.3) 4,692 3,658 6,183 5,080

Interest costs (27) (27) (7) (27) (84) (22) — (30)

Depreciation (942) (890) (765) (890) 5.9 23.2 5.9 (2,700) (2,181) (3,732) (2,989)

Exceptional items — — — — — (175) — (175)

Profit before tax 6,341 6,760 7,592 5,993 (6.2) (16.5) 5.8 19,413 23,782 (18.4) 26,369 31,330 (15.8)

Tax expense (1,452) (1,758) (2,578) (288) (17.4) (43.7) 403.8 (3,836) (8,041) (5,538) (10,785)

Profit after tax 4,889 5,003 5,014 5,705 (2.3) (2.5) (14.3) 15,576 15,740 (1.0) 20,832 20,545 1.4

Adjusted PAT 4,889 5,003 5,014 5,705 (2.3) (2.5) (14.3) 15,576 15,916 (2.1) 20,832 20,720 0.5

Adjusted EPS 179.6 183.8 184.2 209.6 (2.3) (2.5) (14.3) 572.2 584.7 (2.1) 765.3 761.2 0.5

Key numbers (Rs/vehicle)

Gross profit per vehicle 58,587 59,744 59,069 59,561 (1.9) (0.8) (1.6) 58,975 56,678 58,917 57,278

EBITDA per vehicle 32,562 34,070 35,575 32,776 (4.4) (8.5) (0.7) 32,845 35,721 32,913 35,642

Ratios (%)

Raw material as % of sales 54.7 54.7 51.0 54.5 54.4 51.1 54.5 51.7

Staff costs as % of sales 7.5 7.5 7.6 8.2 8.1 7.1 7.9 6.9

Other expenses as % of sales 12.6 12.0 11.8 12.3 12.1 11.0 12.2 11.3

EBITDA margin (%) 25.2 25.8 29.5 25.0 25.4 30.8 25.4 30.1

No. of shares 27.2 27.2 27.2 27.2 27.2 27.2 27.2 27.2

Tax rate (%) 22.9 26.0 34.0 4.8 19.8 33.8 21.0 34.4

Eicher Motors Automobiles & Components


Other key highlights

The company continued to strengthen its presence in international markets. The company

entered South Korea by launching its first exclusive store in Seoul, and also added ten

new stores in Brazil, and one each in Argentina, Indonesia and Vietnam. The company

currently has >48 exclusive outlets currently in export markets and are present in 675

touchpoints in export markets. Export volume was 8,472 units (+150% yoy) in 3QFY20

and stood at 33,776 in April-January 2020 (+113% yoy).

The total inventory including factory, transit and dealer inventory is two weeks currently.

The company will match wholesale and retail volumes in the next few months till BS6

transition as they don’t want to keep much inventory.

The company has added 500 small format stores by December-end and plans to add 250

more such stores by March 2020 end. The company highlighted that existing dealers will

only add the small format stores through sub-dealers. As per the company, each outlet

will breakeven at 6-8 bikes per month and all dealers have broken even for the stores

launched uptil now. The company also highlighted that 60% of the market for RE brand

is outside the cities and small format stores will help in providing last-mile connectivity

and increase walk-ins.

The company had launched two new 650 cc models – Interceptor and Continental GT in

December 2018. The models have been jointly developed by the company’s tech center in

both UK and Chennai. In the UK, Interceptor 650 has emerged as the highest selling

motorcycle in the ‘Naked Street’ category. The company highlighted that for Twins, 50%

of the customers are RE customers and rest 50% are coming from outside the brand.

Waiting period for the Twins is around 3-4 months.

VECV unveiled India’s first BS VI-compliant CV range with the launch of Eicher Pro 2000

series. Pro 2000 has payload capacity ranging from 2.7 to 14 tons with advanced

telematics features. The company expects to gain market share in the Light Duty

segment.

Other key points: (1) 25% of the demand for RE bikes comes from top-20 cities,

(2) financing proportion of RE bikes went up to 59% in 2QFY20 versus 53-54% earlier,

(3) customer profile for RE bikes: 15% of the customers are first time buyers, 80% of the

customers are upgraders from other brands and remaining 5% of the customer are

upgraders from RE brands itself. The company also highlighted that 33% of the customers

are from the commuter segment (less than 150cc segment), (4) the company reduced 1,800

temporary employees in 2QFY20, and (5) added four new large stores in the past two

quarters increasing its large store count to 940 units.



Exhibit 2: RE volumes declined by 6% yoy in 3QFY20 Quarterly trend of RE volumes, March fiscal year-ends, 2012-20 ('000 units, %)


Exhibit 3: Domestic RE volumes declined by 9% yoy in 3QFY20 Quarterly mode-wise trend of RE domestic volumes, March fiscal year-ends, 2019-20 (units, %)

Source: SIAM, Kotak Institutional Equities

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Sales volumes [LHS] Yoy change [RHS]('000 units) (%)

3QFY19 2QFY20 3QFY20 Yoy (%) QoQ (%)

RE volumes modelwise (in units)

Bullet 350 38,118 32,903 40,823 7.1 24.1

Classic 350 119,498 82,248 104,008 (13.0) 26.5

Bullet Electra 350 4,189 11,723 12,882 207.5 9.9

Thunderbird 350 21,027 12,607 9,880 (53.0) (21.6)

Bullet 500 402 229 90 (77.6) (60.7)

Classic 500 3,959 1,918 745 (81.2) (61.2)

Thunderbird 500 600 235 228 (62.0) (3.0)

Himalayan 2,349 4,676 2,188 (6.9) (53.2)

Continental GT/650 Twin 954 6,253 3,475 264.3 (44.4)

Total volumes 191,096 152,792 174,319 (8.8) 14.1

RE volumes mix

Bullet 350 19.9 21.5 23.4

Classic 350 62.5 53.8 59.7

Bullet Electra 350 2.2 7.7 7.4

Thunderbird 350 11.0 8.3 5.7

Bullet 500 0.2 0.1 0.1

Classic 500 2.1 1.3 0.4

Thunderbird 500 0.3 0.2 0.1

Himalayan 1.2 3.1 1.3

Continental GT/650 Twin 0.5 4.1 2.0

Total volumes 100.0 100.0 100.0



Exhibit 4: Consolidated 3QFY20 EBITDA was in line with our estimates; share of profit of JV fell sharply by 60% yoy in 3QFY20 Eicher Motors consolidated interim results, March fiscal year-ends (Rs mn)


Exhibit 5: We have increased our FY2020-22E EPS estimates by 3% largely led by increase in other income and lower tax rate Earnings revision table, March fiscal year-ends, 2020-22E (Rs mn, %)


(% chg.)

3QFY20 3QFY20E 3QFY19 2QFY20 3QFY20E 3QFY19 2QFY20 9MFY20 9MFY19 Yoy (%) FY2020E FY2019 Yoy (%)

Total sales 23,710 24,121 23,411 21,925 (1.7) 1.3 8.1 69,454 72,970 (4.8) 94,031 97,971 (4.0)

Cost of materials consumed (10,964) (13,200) (12,523) (11,218) (12.5) (2.3) (34,482) (37,632) (8.4) (51,216) (54,792) (6.5)

Purchase of stock-in-trade (481) — (538) (723) (1,773) (1,588) — 2,102

Changes in inventories (1,455) — 1,145 93 (1,265) 1,998 — 2,117

Employee benefit expenses (1,846) (1,860) (1,849) (1,860) (0.2) (0.8) (5,822) (5,318) (7,657) (7,024)

Other expenses (3,042) (3,082) (2,851) (2,802) 6.7 8.6 (8,630) (8,246) (11,790) (11,341)

Total expenses (17,787) (18,142) (16,615) (16,510) 7.1 7.7 (51,972) (50,786) (70,663) (68,940)

EBITDA 5,923 5,979 6,795 5,414 (0.9) (12.8) 9.4 17,482 22,184 (21.2) 23,368 29,031 (19.5)

Other income 1,347 1,450 1,471 1,450 (8.4) (7.1) 4,001 3,007 33.1 6,183 4,434 39.4

Interest costs (43) (44) (19) (44) 126.6 (3.6) (134) (52) (73) (73)

Depreciation (952) (898) (768) (898) 23.9 6.0 (2,726) (2,192) (3,732) (3,003)

Exceptional items — — — — 23.9 6.0 — (175) — (175)

Profit before tax 6,275 6,487 7,479 5,922 (3.3) (16.1) 6.0 18,623 22,773 (18.2) 25,746 30,214 (14.8)

Tax expense (1,454) (1,661) (2,565) (278) (43.3) 422.6 (3,849) (8,023) (52.0) (5,538) (10,770) (48.6)

Share of profit/(loss) of joint ventures 166 120 415 83 (60.0) 99.6 457 1,829 (75.0) 895 2,584 (65.4)

Profit after tax 4,987 4,946 5,330 5,727 0.8 (6.4) (12.9) 15,232 16,579 (8.1) 21,103 22,027 (4.2)

Adjusted PAT 4,987 4,946 5,330 5,727 0.8 (6.4) (12.9) 15,232 16,754 (9.1) 21,103 22,150 (4.7)

Adjusted EPS 183.2 181.7 195.8 210.4 0.8 (6.4) (12.9) 559.6 615.5 (9.1) 775.3 813.7 (4.7)

Ratios (%)

Raw material as % of sales 54.4 54.7 50.9 54.0 54.0 51.0 54.5 51.6

Staff costs as % of sales 7.8 7.7 7.9 8.5 8.4 7.3 8.1 7.2

Other expenses as % of sales 12.8 12.8 12.2 12.8 12.4 11.3 12.5 11.6

EBITDA margin (%) 25.0 24.8 29.0 24.7 25.2 30.4 24.9 29.6

No. of shares 27.2 27.2 27.2 27.2 27.2 27.2 27.2 27.2

Tax rate (%) 23.2 25.6 34.3 4.7 20.7 35.2 21.5 35.6

2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E

Royal Enfield volumes (units) 726,700 758,420 872,270 723,425 738,523 851,757 0.5 2.7 2.4

Net sales 94,031 101,855 119,037 94,325 100,543 117,927 (0.3) 1.3 0.9

EBITDA 23,918 23,710 29,258 24,465 24,030 29,719 (2.2) (1.3) (1.6)

EBITDA margin (%) 25.4 23.3 24.6 25.9 23.9 25.2

Standalone PAT 20,832 20,031 24,768 20,271 19,412 24,086 2.8 3.2 2.8

Standalone EPS 765.3 735.9 909.9 744.7 713.2 884.9 2.8 3.2 2.8

Share of profit from JV 895 725 3,035 895 725 3,035 — — —

Consolidated PAT 21,103 20,133 27,180 20,543 19,514 26,498 2.7 3.2 2.6

Consolidated EPS 775.3 739.7 998.5 754.7 716.9 973.5 2.7 3.2 2.6

New estimates Old estimates % change



Exhibit 6: We expect RE volumes to increase by 2% CAGR over FY2019-22E due to compliance cost pressures Eicher Motors volume assumptions, March fiscal year-ends, 2010-22E (units)


Exhibit 7: We value Eicher Motors at Rs18,700 based on SOTP methodology Sum-of-the-parts valuation table for Eicher Motors (Rs mn)


2010 2011 2012 2013 2014 2016 2017 2018 2019 2020E 2021E 2022E

Sales volumes (units)

Standalone

Two-wheelers 52,576 74,626 113,432 178,121 302,611 601,000 666,490 820,492 826,098 726,700 758,420 872,270

VECV

Domestic

5-7.5 ton 4,904 6,387 5,372 5,242 5,389 8,337 8,525 11,062 11,757 9,993 9,494 11,393

7.5-12 ton 24,389 29,919 28,057 20,768 17,490 26,981 22,395 27,005 31,293 26,599 25,269 30,323

>12 ton 1,483 2,575 3,814 2,907 3,056 5,683 6,216 7,315 7,937 5,953 5,536 6,920

Buses 4,765 6,494 8,520 8,333 8,123 13,038 12,270 10,494 10,746 11,283 11,847 13,032

Exports

Cargo 2,073 2,340 1,671 2,382 4,460 5,060 6,005 7,405 8,744 6,558 7,345 8,079

Buses 643 424 679 799 1,364 2,452 2,030 1,596 1,266 950 1,063 1,170

Volvo trucks

Volvo trucks domestic 1,094 705 569 701 891 1,499 1,164 1,055 1,266 1,076 1,022 1,329

Total 39,351 48,844 48,682 41,132 40,773 63,050 58,605 65,932 73,009 62,412 61,577 72,246

Yoy change (%)

Standalone

Two-wheelers 1.2 41.9 52.0 57.0 69.9 98.6 10.9 23.1 0.7 (12.0) 4.4 15.0

VECV

Domestic

5-7.5 ton 59.3 30.2 (15.9) (2.4) 2.8 54.7 2.3 29.8 6.3 (15.0) (5.0) 20.0

7.5-12 ton 66.7 22.7 (6.2) (26.0) (15.8) 54.3 (17.0) 20.6 15.9 (15.0) (5.0) 20.0

>12 ton 148.0 73.6 48.1 (23.8) 5.1 86.0 9.4 17.7 8.5 (25.0) (7.0) 25.0

Buses 45.1 36.3 31.2 (2.2) (2.5) 60.5 (5.9) (14.5) 2.4 5.0 5.0 10.0

Exports

Cargo 1.8 12.9 (28.6) 42.5 87.2 13.5 18.7 23.3 18.1 (25.0) 12.0 10.0

Buses 2.4 (34.1) 60.1 17.7 70.7 79.8 (17.2) (21.4) (20.7) (25.0) 12.0 10.0

Volvo trucks

Volvo trucks domestic 21.6 (35.6) (19.3) 23.2 27.1 68.2 (22.3) (9.4) 20.0 (15.0) (5.0) 30.0

Total 56.4 24.1 (0.3) (15.5) (0.9) 54.6 (7.0) 12.5 10.7 (14.5) (1.3) 17.3

Notes:

(a) FY2016 is a 15 month period as company has changed its reporting to financial year

Multiple

(X) (Rs/share)

Standalone

Equity value per share 20 866 17,329

Eicher stake in VECV

Equity value per share 15 166 2,490

Eicher stake in VECV (%) 54.4

Eicher equity value in VECV 1,354

Equity value 18,683

Target price 18,700

Dec 2021 EPS Equity value

(Rs/share)



Exhibit 8: We estimate two-wheeler volumes to increase by only 9.6% CAGR over FY2020-22E Eicher Motors model wise volumes and revenues, March fiscal year-ends, 2017-22E (Rs mn)


2017 2018 2019 2020E 2021E 2022E

RE volumes modelwise (in units)

Bullet 350 143,833 156,709 166,243 192,000 201,600 231,840 9.9

Classic 350 416,693 555,513 526,442 405,000 425,250 489,038 9.9

Thunderbird 350 42,321 45,927 71,327 45,000 40,500 44,550 (0.5)

Bullet 500 9,210 6,644 2,737 800

Classic 500 24,333 27,509 19,282 5,000

Thunderbird 500 3,262 2,966 3,373 900

Himalayan 10,299 5,656 10,701 11,000 11,770 12,947 8.5

Continental GT 650/Interceptor 1,156 305 5,168 22,000 25,300 29,095 15.0

Exports 15,383 19,264 20,825 45,000 54,000 64,800 20.0

Total volumes 666,490 820,493 826,098 726,700 758,420 872,270 9.6

Two-wheeler revenues modelwise (in Rs mn)

Bullet 350 13,515 13,698 14,531 18,319 20,041 23,278 12.7

Classic 350 45,836 56,668 56,685 46,848 50,892 59,111 12.3

Thunderbird 350 4,952 4,999 7,763 5,213 4,853 5,392 1.7

Bullet 500 1,179 791 326 101

Classic 500 3,528 3,711 2,723 741

Thunderbird 500 476 403 458 129

Himalayan 1,359 695 1,314 1,428 1,575 1,750 10.7

Continental GT 650/Interceptor 176 43 789 3,513 4,141 4,810 17.0

Exports 1,770 2,135 2,135 6,165 7,620 9,418 23.6

Total two-wheeler revenues 72,793 83,142 86,724 82,456 89,122 103,758 12.2

2020-22E CAGR (%)



Exhibit 9: We estimate standalone earnings to grow at 6% CAGR over FY2019-22E Eicher Motors standalone financial summary, March fiscal year-ends, 2013-22E (Rs mn)


2013 2014 2016 2017 2018 2019 2020E 2021E 2022E

Profit model (Rs mn)

Net sales 17,025 30,312 61,880 70,380 89,575 97,945 94,031 101,855 119,037

EBITDA 3,137 7,336 17,082 22,058 28,532 29,444 23,918 23,710 29,258

Other income 801 1,163 2,835 2,273 3,324 5,080 6,183 7,683 9,183

Interest (3) (17) (21) (28) (30) (30) — — —

Depreciaton (304) (502) (1,366) (1,533) (2,223) (2,989) (3,732) (4,469) (5,150)


Current tax (782) (2,317) (5,247) (6,785) (9,354) (10,785) (5,538) (6,893) (8,522)

Deferred tax (64) (74) (191) (384) — — — — —

Net profit 2,786 5,589 13,092 15,601 17,129 20,544 20,832 20,031 24,768

Adjusted net profit 2,786 5,589 13,092 15,601 17,129 20,544 20,832 20,031 24,768

Adjusted Diluted EPS (Rs) 103.0 206.2 482.0 573.1 743.9 761.2 765.3 735.9 909.9

Balance sheet (Rs mn)

Equity 270 271 272 272 273 273 273 273 273

Reserves and Surplus 7,943 12,066 23,093 38,954 53,450 70,992 87,683 103,575 124,203

Deferred tax liability 126 201 408 792 1,430 2,765 2,765 2,765 2,765

Total borrowings 40 — 226 — — — — — —

Current liabilities 6,452 9,752 12,241 15,201 22,795 20,745 20,035 21,483 23,280


Net fixed assets 3,132 5,599 9,442 13,484 18,305 23,206 26,474 28,004 28,854

Investments 8,564 11,886 20,691 35,417 49,855 52,848 65,848 80,848 95,848

Cash 187 431 312 128 893 7,018 7,437 7,420 12,251


Miscellaneous expenditure 71 77 — — — — — — —

Total assets 14,832 22,289 36,239 55,218 77,947 94,774 110,756 128,096 150,521

Free cash flow (Rs mn)

Operating cash flow excl. working capital 2,378 5,131 12,188 15,757 20,534 20,606 18,381 16,818 20,736

Working capital changes 1,311 1,729 2,554 1,862 4,620 (4,499) (5) 622 53


Free cash flow 2,301 3,161 9,660 12,171 17,719 8,247 11,376 11,440 14,788

Ratios

Gross margin (%) 35.9 38.9 43.5 47.1 48.2 48.3 45.5 42.8 43.7

EBITDA margin (%) 18.4 24.2 27.6 31.3 31.9 30.1 25.4 23.3 24.6

Debt/equity (X) — — — — — — — — —

Net debt/equity (X) (1.1) (1.0) (0.9) (0.9) (0.9) (0.8) (0.8) (0.8) (0.9)

RoAE (%) 37.9 53.5 72.1 48.9 42.6 32.1 25.3 20.3 21.2

Book value/share (X) 301 452 860 1,441 1,974 2,618 3,231 3,815 4,573

Gross profit per vehicle (Rs) 36,079 40,434 45,654 49,984 53,016 57,278 58,917 57,477 59,648

EBITDA per vehicle (Rs) 17,613 24,241 28,422 33,096 34,775 35,642 32,913 31,263 33,542

Notes:

(a) FY2016 is a 15-month period as company has changed its reporting to financial year



Exhibit 10: We estimate consolidated earnings to grow at 7% CAGR over FY2019-22E Eicher Motors consolidated income statement, March fiscal year-ends, 2011-22E (Rs mn)


2011 2012 2013 2014 2016 2017 2018 2019 2020E 2021E 2022E


Net sales 56,775 63,899 68,098 87,383 61,735 70,334 89,650 97,971 94,031 101,855 119,037

EBITDA 5,551 5,490 7,132 11,148 16,896 21,740 28,076 29,031 23,368 23,160 28,708

Other income 1,768 1,366 953 1,074 1,781 2,273 2,801 4,434 6,183 7,683 9,183

Interest (77) (38) (79) (98) (21) (36) (53) (73) (73) (73) (73)

Depreciaton (640) (822) (1,300) (2,198) (1,366) (1,538) (2,233) (3,003) (3,732) (4,469) (5,150)

Profit before tax 6,602 5,997 6,706 9,926 17,290 22,439 28,591 30,389 25,746 26,301 32,667

Tax (1,628) (1,249) (1,452) (2,909) (5,389) (7,203) (9,359) (10,770) (5,538) (6,893) (8,522)

Minority Interest (1,886) (1,506) (1,314) (864) — — — — — — —

Share of profit/(loss) of joint ventures 1,479 1,435 2,566 2,584 895 725 3,035

Adjusted net profit 3,088 3,243 3,939 6,153 13,380 16,671 21,137 22,150 21,103 20,133 27,180

Adjusted Diluted EPS (Rs) 114.4 120.1 145.7 227.1 492.7 612.7 776.5 813.7 775.3 739.7 998.5

Notes:

(a) FY2016 is a 15-month period as company has changed its reporting to financial year.

(b) FY2010-16 financials are as per Indian GAAP, while FY2017-19E financials are in accordance with Ind-AS.

(c) VECV financials are accounted under equity method of accounting under Ind-AS as compared to line by line consolidation method under Indian GAAP.



3QFY20 EBITDA fell 6% yoy led by volume decline

Hero reported 3QFY20 EBITDA of Rs10.4 bn (down 6% yoy), which was 17% above of our

estimates due to higher-than-expected spare part revenues and improvement in gross margins

in 3QFY20. Revenues decreased by 11% yoy led by 14% yoy volume decline due to subdued

industry demand environment and partly due to efforts to correct inventory levels, which was

partly offset by 4% yoy increase in ASPs due to price hikes related to ABS/CBS norms in

3QFY20. EBITDA margin came in at 14.8% (+80 bps yoy and +30 bps qoq), which was 190 bps

above our estimates due to better-than-expected gross margins due to aggressive cost

reduction, raw material cost benefits and a better mix due to higher spare part sales. Gross

margin came in at 33.4% due to (1) savings from LEAP program, (2) softer raw material prices

and (3) some change in inventories of finished goods (+20-30 bps impact). Staff cost increased

by 8% yoy in 3QFY20 while other expenses declined by 9% yoy. The company reported PAT of

Rs8.8 bn (+14.5% yoy), which was 33% higher than our estimates due to a beat at EBITDA

level and lower tax rate. Tax rate for 3QFY20 stood at 13.0% (23.2% tax rate in 9MFY20) as

the company revalued its deferred tax liabilities as per the new corporate tax rate.

Increase our FY2020-21E EPS estimates by 5-6%; Upgrade to REDUCE (from SELL)

We have increased our FY2020-21E EPS estimates by 5-6% led by (1) 6-10% cut in our volume

estimates offset by (2) 100-170 bps improvement in EBITDA margin assumptions. We expect

two-wheeler industry volumes to be weak in FY2021 (-5% yoy decline) due to increase in cost

related to a shift towards BS-VI, which will hurt industry demand. We expect domestic two-

wheeler industry demand to revive only from FY2022 onwards. We are quite impressed by the

company’s ability to cut costs in a challenging environment and we bake in the cost reduction

efforts in our estimates to raise our margin assumptions but we remain concerned on industry

due to steep cost increase due to BS-VI. Upgrade to REDUCE (from SELL earlier) on fair

valuations. We raise our fair value to Rs2,550 (from Rs2,500 earlier), valuing the company at

14X December 2021 core EPS + Rs391 of cash/cash equivalent (includes investment of Rs68 in

Ather Energy and Hero Fincorp).

Hero Motocorp (HMCL) Automobiles & Components

Impressive cost reduction efforts aid margins. Hero MotoCorp’s 3QFY20 EBITDA

declined by 6% led by a steep demand slowdown. The company improved EBITDA

margin by 80 bps yoy in 3QFY20 led by aggressive cost reduction and material cost

reduction benefits. Hero MotoCorp will face headwinds in FY2021 due to (1)

regulatory-driven cost pressures and (2) aggressive pricing strategy by peers. Upgrade to

REDUCE (from SELL) with revised FV of Rs2,550 (from Rs2,500 earlier).

REDUCE

FEBRUARY 06, 2020

RESULT


CMP (`): 2,411

Fair Value (`): 2,550

BSE-30: 41,306

Hitesh Goel

Rishi Vora

Hero Motocorp



Mcap (bn) (Rs/US$) EPS growth (%) (1.5) (6.7) 22.5

ADTV-3M (mn) (Rs/US$) P/E (X) 14.5 15.5 12.6



FIIs 36.5 RoE (%) 24.4 20.8 23.4



Absolute (4) 2 (2) EBITDA (Rs bn) 44 41 50

Rel. to BSE-30 (5) 0 (13) Net profits (Rs bn) 33 31 38

3,023-2,226

482/6.8

7.4/0

1,952/27

Hero Motocorp Automobiles & Components


Key takeaways from the conference call

The company indicated that the current dealer inventory levels for BS-IV are around five

weeks. The company expects a couple of tail-winds in the near-term led by (1) good

monsoon due to high reservoir levels which augur well for Rabi sowing and (2) pre-buy in

4QFY20 before implementation of BS-VI compliant vehicles. However, the company

highlighted that the sustained recovery in the domestic two-wheeler industry will take

time. The company also highlighted that wholesale volumes will stay negative yoy in the

near term due to inventory correction.

The company has also launched a few BS-VI models and intends to stop production of

BS-IV models by mid-February. The company indicated they have gone with multipoint

fuel injection technology in BS-VI models while Bajaj Auto has launched electronic

carburetors in the economy segment models. The price difference between the two

models is not much, around Rs1,000-1,500.

Spare revenues for the company stood at Rs8 bn in 3QFY20 versus Rs7.2 bn in 2QFY20 as

against Rs7.3 bn in 3QFY19. Spare part revenues was 11.4% of net sales in 3QFY20

versus 9.5% in 2QFY20.

Overall financing for the company stood at 46% in 3QFY20 versus 37% in 1QFY20.

The company gained 200 bps market share in the domestic motorcycle segment yoy in

3QFY20 due to 590 bps yoy increase in market share in the economy segment.

In 2QFY20, the company had introduced a voluntary retirement scheme (VRS) and the

company has considered a provision of Rs601 mn for employees who have accepted to

be part of VRS as exceptional item in 2QFY20 results.

Debtor days for the company had increased by 8 days in 2QFY20 but have come down to

1QFY20 levels in 3QFY20 as per the company. Inventory days for the company have

increased by 3 days and creditor days have gone up by 10 days as on September 30,

2019 from March 2019 levels.

Other key points: (1) The company had taken price hikes of Rs200 per vehicle in July

2019 largely in order to mitigate cost increase, (2) the company has guided for capex of

Rs15 bn in FY2020 (which might be a tad lower) led by capacity expansion in Andhra

Pradesh plant (total capacity of 10 mn vehicles) and R&D cost related to BS-VI engines,

and (3) as per the company, the price increase due to BS-VI is 10-15%.

Automobiles & Components Hero Motocorp


Exhibit 1: 3QFY20 EBITDA was 17% above our estimates due to better than expected cost saving benefits Hero MotoCorp interim results, March fiscal year-ends (Rs mn)


Exhibit 2: EBITDA per vehicle stood at Rs6,743 per vehicle (+10% yoy) in 3QFY20

Hero MotoCorp’s quarterly EBITDA per vehicle, March fiscal year-ends, 2016-2020 (Rs per unit)


(% chg.)

3QFY20 3QFY20E 3QFY19 2QFY20 3QFY20E 3QFY19 2QFY20 9MFY20 9MFY19Yoy chg (%) FY2020E FY2019 Yoy chg (%)

Volumes (units) 1,540,876 1,540,868 1,798,905 1,691,420 (14.3) (8.9) 5,075,216 6,037,901 (15.9) 6,614,045 7,820,745 (15.4)

Net realisations (Rs/vehicle) 45,407 44,759 43,720 44,759 1.4 3.9 1.4 44,526 42,673 4.3 45,020 43,027 4.6

Net sales 69,967 68,968 78,648 75,707 1.4 (11.0) (7.6) 225,977 257,656 (12.3) 297,767 336,505 (11.5)

Inc/dec in stock 970 — 605 2,530 4,298 1,313 — 284

Raw materials (47,568) (47,243) (54,750) (53,787) (1.4) (13.9) (9.1) (158,073) (180,105) (12.2) (202,201) (233,461)

Staff costs (4,697) (4,700) (4,357) (4,689) (0.1) 7.8 0.2 (14,063) (12,830) 9.6 (18,725) (17,302)

Other expenses (8,282) (8,137) (9,098) (8,750) 1.8 (9.0) (5.3) (25,159) (27,427) (8.3) (33,250) (36,725)

Total expenses (59,578) (60,080) (67,601) (64,696) (0.8) (11.9) (7.9) (192,996) (219,048) (11.9) (254,176) (287,205)

EBITDA 10,390 8,888 11,048 11,011 16.9 (6.0) (5.6) 32,981 38,608 (14.6) 43,591 49,301 (11.6)

Other income 1,822 2,188 1,876 2,078 (16.7) (2.9) (12.3) 6,089 5,270 15.5 7,776 6,913

Interest expense (net) (59) (44) (22) (77) (180) (64) (200) (86)

Depreciation expense (2,037) (2,100) (1,518) (2,034) (3.0) 34.2 0.1 (6,433) (4,518) (8,458) (6,020)

Exceptional expense — — — (601) 6,774 — 6,774 —

Profit before tax 10,115 8,933 11,384 10,377 13.2 (11.1) (2.5) 39,231 39,296 (0.2) 49,484 50,107 (1.2)

Tax expense (1,311) (2,287) (3,693) (1,629) (42.7) (64.5) (19.5) (9,106) (12,751) (28.6) (11,612) (16,259)

Reported PAT 8,804 6,646 7,691 8,748 32.5 14.5 0.6 30,126 26,546 37,871 33,849

Adj. net profit 8,804 6,646 7,691 9,151 32.5 14.5 (3.8) 25,587 26,546 (3.6) 33,332 33,849 (1.5)

Adj. EPS 44.1 33.3 38.5 45.8 32.5 14.5 (3.8) 128.1 132.9 (3.6) 166.9 169.5 (1.5)

Ratios (%)

Raw material cost to net sales 66.6 68.5 68.8 67.7 68.0 69.4 67.9 69.3

Staff cost to net sales 6.7 6.8 5.5 6.2 6.2 5.0 6.3 5.1

Other expenses to net sales 11.8 11.8 11.6 11.6 11.1 10.6 11.2 10.9

EBITDA margin (%) 14.8 12.9 14.0 14.5 14.6 15.0 14.6 14.7

No of shares 199.8 199.8 199.8 199.8 199.8 199.8 199.8 199.8

Tax rate (%) 13.0 25.6 32.4 15.7 23.2 32.4 23.5 32.4

Gross profit per vehicle (Rs/unit) 15,166 14,099 13,621 14,455 7.6 11.3 4.9 14,226 13,061 14,449 13,212

EBITDA per vehicle (Rs/unit) 6,743 5,768 6,141 6,510 16.9 9.8 3.6 6,498 6,394 6,591 6,304

Volume break up (units)

Economy 484,246 534,762 525,409 (9.4) (7.8) 1,568,133 1,615,578

Executive 906,437 1,030,624 955,563 (12.0) (5.1) 2,987,755 3,671,603

Premium 12,097 13,891 16,787 (12.9) (27.9) 39,044 34,597

Domestic motorcycle 1,402,780 1,579,277 1,497,759 (11.2) (6.3) 4,594,932 5,321,778 (13.7) 5,998,749 6,893,602 (13.0)

Domestic scooters 102,211 174,418 138,127 (41.4) (26.0) 351,576 565,437 (37.8) 453,025 719,087 (37.0)

Exports 35,877 45,210 55,534 (20.6) (35.4) 128,700 150,686 (14.6) 162,271 208,056 (22.0)

Total volumes 1,540,868 1,798,905 1,691,420 (14.3) (8.9) 5,075,208 6,037,901 (15.9) 6,614,045 7,820,745 (15.4)

Volume mix (%)

Economy 31.4 29.7 31.1 30.9 26.8

Executive 58.8 57.3 56.5 58.9 60.8

Premium 0.8 0.8 1.0 0.8 0.6

Domestic motorcycle 91.0 87.8 88.6 90.5 88.1 90.7 88.1

Domestic scooters 6.6 9.7 8.2 6.9 9.4 6.8 9.2

Exports 2.3 2.5 3.3 2.5 2.5 2.5 2.7

Total volumes 100.0 100.0 100.0 100.0 100.0 100.0 100.0

6,332

6,957 6,690

6,910 7,048 7,507 7,326

5,904

6,991 7,196 6,775 6,847

6,543 6,461 6,141 6,003

6,283 6,510

6,743

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

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

2Q

FY19

3Q

FY19

4Q

FY19

1Q

FY20

2Q

FY20

3Q

FY20



Exhibit 3: We have increased our FY2020-21E EPS estimates by 6-8% led by increase in EBITDA margin and lower tax rate Earnings estimates revision, March fiscal year-ends, 2020-22E (Rs mn, units)


Exhibit 4: Hero’s market share in the scooter segment declined by 350 bps on yoy basis in 3QFY20 Market share across two-wheeler segments, March fiscal year-ends, 3QFY17-3QFY20 (%)

Source: SIAM, Kotak Institutional Equities

2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E

Volumes (units) 6,614,045 6,352,359 6,962,404 7,042,251 6,895,956 7,740,700 (6.1) (7.9) (10.1)

Average net realization 45,020 50,474 51,731 45,827 51,245 52,393 (1.8) (1.5) (1.3)

Net sales 297,767 320,627 360,170 322,725 353,381 405,562 (7.7) (9.3) (11.2)

EBITDA 43,591 41,021 50,066 43,766 39,120 52,470 (0.4) 4.9 (4.6)

EBITDA per vehicle 6,591 6,458 7,191 6,215 5,673 6,778

EBITDA margin (%) 14.6 12.8 13.9 13.6 11.1 12.9

Adjusted net profit 33,332 31,111 38,106 31,569 28,859 39,057 5.6 7.8 (2.4)

EPS 166.9 155.7 190.8 158.0 144.5 195.5 5.6 7.8 (2.4)

New estimates Old estimates change (%)

2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20

Economy bike

Bajaj Auto 35.1 33.2 25.5 25.3 32.0 31.8 24.1 31.8 37.2 37.4 33.8 33.4 32.4 36.1

Hero Motocorp 50.9 54.1 65.3 59.8 56.0 56.5 65.8 58.1 52.7 53.1 60.3 60.6 61.9 59.0

Executive bike

Bajaj Auto 5.1 5.4 5.0 3.8 3.0 2.8 5.2 3.0 2.1 1.7 1.2 1.1 0.6 0.3

Hero Motocorp 68.2 71.0 72.9 69.3 69.0 69.6 69.6 71.0 72.0 72.3 73.5 69.1 68.3 72.8

HMSI 22.1 19.8 19.5 24.2 24.1 23.8 22.4 23.7 22.8 20.7 19.2 23.9 26.2 22.8

Premium bike

Bajaj Auto 34.9 31.0 31.5 26.1 31.3 28.3 28.3 28.3 30.0 33.1 38.5 36.7 35.7 37.9

Hero Motocorp 4.1 3.9 5.0 3.8 3.0 1.9 1.2 1.2 1.5 1.9 0.9 1.3 2.5 1.9

HMSI 9.1 11.1 12.8 15.9 14.5 11.8 13.9 16.0 14.9 11.6 8.6 12.8 13.9 8.5

Royal Enfield 23.6 28.3 27.8 26.3 25.0 31.3 28.7 25.5 24.2 25.8 24.5 22.4 22.9 27.1

Total bike segment

Bajaj Auto 18.8 18.5 16.1 14.0 16.9 16.4 15.3 16.3 18.6 20.4 20.0 18.4 17.9 20.0

Hero Motocorp 49.8 50.5 54.7 52.4 50.5 50.8 52.4 51.3 50.4 49.8 51.4 50.9 51.4 51.8

HMSI 14.1 12.8 13.4 16.5 15.7 14.7 15.0 15.8 14.4 12.2 11.0 14.7 15.7 12.5

Scooter segment

HMSI 59.7 53.0 55.9 59.1 58.2 53.9 55.7 61.2 55.3 51.2 50.4 56.4 58.0 55.9

Hero Motocorp 14.2 14.1 12.7 12.7 12.1 14.3 13.8 10.4 10.4 11.1 11.2 7.3 9.1 7.6

TVS 12.9 16.9 16.4 15.1 16.4 17.2 16.8 15.1 19.1 21.5 18.7 18.6 20.9 19.7

Automobiles & Components Hero Motocorp


Exhibit 5: We expect Hero Motocorp’s volumes to grow at 3% CAGR over 2020-22E Hero MotoCorp volumes estimates, March fiscal year-ends, 2013-22E (mn units, %)


2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E

Motorcycles 5,499,245 5,538,291 5,799,695 5,735,854 5,834,260 6,677,207 7,080,787 6,148,497 5,863,535 6,449,138

Domestic 5,362,730 5,425,118 5,679,634 5,603,136 5,693,681 6,499,051 6,893,602 5,998,749 5,698,812 6,267,943

< 125 cc 5,165,222 5,278,537 5,553,921 5,497,840 5,595,382 6,427,773 6,849,749 5,959,282 5,661,318 6,227,449

> 125 cc 197,508 146,581 125,713 105,296 98,299 71,278 43,853 39,468 37,494 40,494

Exports 136,515 113,173 120,061 132,718 140,579 178,156 187,185 149,748 164,723 181,195

< 125 cc 122,015 99,946 95,364 101,039 119,532 139,786 153,714 122,971 135,268 148,795

> 125 cc 14,500 13,227 24,697 31,679 21,047 38,370 33,471 26,777 29,454 32,400

Scooters 574,336 707,604 832,008 896,298 829,786 909,986 739,958 465,547 488,825 513,266

Domestic 549,808 690,079 752,052 818,777 789,974 883,667 719,087 453,025 475,676 499,460

Exports 24,528 17,525 79,956 77,521 39,812 26,319 20,871 12,523 13,149 13,806

Total 2-wheelers 6,073,581 6,245,895 6,631,703 6,632,152 6,664,046 7,587,193 7,820,745 6,614,045 6,352,359 6,962,404

Growth (yoy %)

Motorcycles (4.9) 0.7 4.7 (1.1) 1.7 14.4 6.0 (13.2) (4.6) 10.0

Domestic (5.1) 1.2 4.7 (1.3) 1.6 14.1 6.1 (13.0) (5.0) 10.0

< 125 cc (2.9) 2.2 5.2 (1.0) 1.8 14.9 6.6 (13.0) (5.0) 10.0

> 125 cc (40.3) (25.8) (14.2) (16.2) (6.6) (27.5) (38.5) (10.0) (5.0) 8.0

Exports 6.2 (17.1) 6.1 10.5 5.9 26.7 5.1 (20.0) 10.0 10.0

< 125 cc 6.7 (18.1) (4.6) 6.0 18.3 16.9 10.0 (20.0) 10.0 10.0

> 125 cc 1.8 (8.8) 86.7 28.3 (33.6) 82.3 (12.8) (20.0) 10.0 10.0

Scooters 26.1 23.2 17.6 7.7 (7.4) 9.7 (18.7) (37.1) 5.0 5.0

Domestic 31.5 25.5 9.0 8.9 (3.5) 11.9 (18.6) (37.0) 5.0 5.0

Exports (34.3) (28.6) 356.2 (3.0) (48.6) (33.9) (20.7) (40.0) 5.0 5.0

Total 2-wheelers (2.6) 2.8 6.2 0.0 0.5 13.9 3.1 (15.4) (4.0) 9.6



Exhibit 6: We expect Hero Motocorp’s EPS to grow at 7% CAGR over 2020-22E Hero MotoCorp profit model, balance sheet and cash flow model, March fiscal year-ends, 2012-22E (Rs mn)


2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E


Net sales 237,681 252,755 275,853 284,427 285,071 322,352 336,505 297,767 320,627 360,170

EBITDA 24,002 27,129 33,568 44,550 46,414 52,849 49,301 43,591 41,021 50,066

Other income 3,984 4,464 4,735 4,224 5,158 5,211 6,913 7,776 8,376 9,051

Interest (119) (118) (111) (49) (61) (63) (86) (200) (200) (200)

Depreciation (2,575) (2,802) (3,354) (4,376) (4,927) (5,556) (6,020) (8,458) (7,382) (7,700)

Profit before tax 25,292 28,673 34,839 44,349 46,585 52,442 50,107 42,710 41,815 51,218

Current tax (4,869) (9,966) (9,432) (9,609) (10,821) (14,470) (16,010) (12,668) (10,705) (13,112)

Deferred tax 759 2,384 — (3,138) (1,993) (999) (248) 1,055 — —

Net profit 21,182 21,091 23,856 31,602 33,771 36,974 33,849 37,871 31,111 38,106

Earnings per share (Rs) 106.1 105.6 119.5 154.5 169.1 185.1 169.5 166.9 155.7 190.8


Equity 50,062 55,999 65,413 88,344 101,113 117,689 128,571 144,341 155,230 170,472

Deferred tax liability 1,324 (1,060) (735) 2,225 4,143 5,117 5,365 4,310 4,310 4,310

Total Borrowings — — — — — — — — — —

Current liabilities 42,008 44,730 39,490 34,936 41,686 44,583 42,476 36,875 36,563 43,430

Total liabilities 96,417 99,913 104,482 125,505 146,943 167,388 176,412 185,525 196,102 218,212

Net fixed assets 31,331 30,974 36,252 41,898 48,606 49,729 51,604 58,147 58,765 57,066

Investments 36,238 40,888 31,541 45,810 58,899 75,252 59,686 67,686 75,686 85,686

Cash 1,810 1,175 1,593 1,314 1,367 1,413 1,365 10,442 11,388 19,972

Other current assets 27,037 26,877 35,096 36,484 38,070 40,993 63,757 49,251 50,264 55,489

Total assets 96,417 99,913 104,482 125,505 146,943 167,388 176,412 185,525 196,102 218,212


Operating cash flow excl. working capital 26,777 29,089 25,859 34,719 36,287 38,208 28,979 37,697 30,316 36,954

Working capital changes (7,872) 545 (3,359) 3,772 3,993 1,601 (19,189) 8,905 (1,325) 1,642

Capital expenditure (6,004) (9,328) (11,530) (14,604) (11,491) (7,992) (9,179) (15,000) (8,000) (6,000)

Free cash flow 12,900 20,307 10,970 23,888 28,790 31,816 611 31,602 20,991 32,597

Ratios

Gross profit per vehicle (Rs/unit) 10,489 11,280 11,809 13,771 14,210 13,708 13,212 14,449 14,725 15,623

EBITDA per vehicle (Rs/unit) 3,952 4,343 5,062 6,717 6,965 6,966 6,304 6,591 6,458 7,191

Gross margin (%) 26.8 27.9 28.4 32.1 33.2 32.3 30.7 32.1 29.2 30.2

EBITDA margin (%) 10.1 10.7 12.2 15.7 16.3 16.4 14.7 14.6 12.8 13.9

PAT margin (%) 8.9 8.3 8.6 11.1 11.8 11.5 10.1 12.7 9.7 10.6

Book Value (Rs/share) 257 275 324 454 527 615 671 744 799 875

RoAE (%) 44.0 39.7 39.9 40.7 34.5 32.4 26.4 26.8 20.2 22.8

RoACE (%) 235.8 120.3 79.9 63.1 65.9 64.2 54.1 43.9 36.6 35.4



Results modestly above estimates, reflecting healthy growth in volumes and steady margins

IGL’s EBITDA increased 23% yoy to Rs3.9 bn in 3QFY20, modestly above our estimate, led by

robust 13.4% growth in volumes to 6.7 mcm/d and qoq steady unit EBITDA margins at

Rs6.4/scm. IGL’s net income jumped 43% yoy to Rs2.8 bn (EPS of Rs4.1), 6.5% above our

estimate, boosted by higher other income and lower tax rate at 24.6%. In 9MFY20, IGL

delivered a strong 24-43% jump in EBITDA and adjusted net income (EPS of Rs11.5) led by a

robust 12.6% growth in volumes and 10% increase in unit margins to Rs6.4/scm amid lower

gas prices. Income from associates, CUGL and MNGL, jumped 51% yoy to Rs1.1 bn in 9MFY20,

likely benefiting from a lower tax. IGL incurred capex of ~Rs7.5 bn in 9MFY20; the company

has raised its capex guidance to Rs12 bn in FY2020 and cumulative Rs30 bn over FY2021-22.

Slower growth in CNG volumes offset by uplift in industrial and commercial PNG volumes

IGL’s overall volumes grew by 13.4% yoy to 6.7 mcm/d in 3QFY20 reflecting (1) 9.2% growth

in CNG volumes to 318 mn kgs (~4.9 mcm/d); slowest since 1QFY17 perhaps reflecting a sharp

slowdown in addition to three-wheelers segment and a high base from the previous year, (2)

35% jump in industrial and commercial PNG off-take underpinned by policy-driven shift to

cleaner fuels and (3) 16.4% growth in residential PNG volumes with rising household

connections. Overall PNG volumes grew by 18.7% yoy to 164 mscm (~1.8 mcm/d), while supply

to other CGD entities in Gurugram and Faridabad region declined 1% yoy.

Raise estimates factoring in higher margins; reiterate SELL with revised FV of Rs365

We raise EPS estimates by 4-6% factoring in (1) higher unit EBITDA margins amid reset of PMT

gas price and expected decline in domestic gas price and (2) other minor changes. Our DCF-

based FV increases to Rs365 from Rs320 on higher long-term unit margins and rollover.

Reverse valuation implies 15% CAGR in volumes/EBITDA over next decade ignoring risks

Our reverse valuation exercise suggests that the current stock price is discounting 15% CAGR in

volumes/EBITDA over the next decade and 5% growth in perpetuity. We remain wary on the

incremental opportunity in new license areas, which may require significant capex outlay and

yield lower returns. We also see downside risks to volumes and/or unit margins in the medium

term from (1) progressive changes in regulations to enable competition and (2) accelerated

adoption of EVs in public transport for Delhi. Even as these concerns may take time to impact

earnings, incremental developments may drive de-rating of valuation multiple.

Indraprastha Gas (IGL) Gas Utilities

Robust growth, priced in; rising capex a worry. IGL delivered robust results in

3QFY20, modestly ahead of our expectations, led by 13% growth in volumes and qoq

steady unit margins. Network rollout in new license areas will drive an increase in capex,

which may be returns-dilutive. Our reverse valuation exercise suggests the stock is

already pricing in 15% CAGR in volumes/EBITDA for the next decade. SELL stays, with a

revised DCF-based FV of Rs365 (Rs320 earlier) on higher unit margins and rollover.

SELL

FEBRUARY 06, 2020

RESULT

Sector view: Attractive

CMP (`): 522

Fair Value (`): 365

BSE-30: 41,306

Tarun Lakhotia

Hemang Khanna

Indraprastha Gas




ADTV-3M (mn) (Rs/US$) P/E (X) 30.2 26.6 23.7



FIIs 23.8 RoE (%) 26.6 25.3 24.1



Absolute 3 27 68 EBITDA (Rs bn) 16 19 21

Rel. to BSE-30 1 25 51 Net profits (Rs bn) 12 14 15

527-258

366/5.2

7.2/0

1,114/16

Indraprastha Gas Gas Utilities


Exhibit 1: Interim results of IGL, March fiscal year-ends (Rs mn)


Exhibit 2: Growth in CNG volumes moderates in 3QFY20; PNG volumes jumps supported by higher I&C volumes Growth in CNG and PNG volumes, 1QFY13 onwards (%)


(% chg.) yoy

3QFY20 3QFY20E 3QFY19 2QFY20 3QFY20E 3QFY19 2QFY20 9MFY20 9MFY19 (% chg.) FY2020E

Net sales 16,642 16,580 15,103 16,925 0.4 10.2 (1.7) 49,327 42,192 16.9 66,542

Total expenditure (12,724) (12,728) (11,906) (12,998) (0.0) 6.9 (2.1) (37,898) (32,964) 15.0 (50,752)

Raw material (9,410) (9,431) (9,073) (9,905) (0.2) 3.7 (5.0) (28,532) (24,915) 14.5 (37,878)

Staff cost (437) (434) (347) (364) 0.7 25.7 20.1 (1,167) (959) 21.6 (1,597)

Other expenditure (2,878) (2,863) (2,486) (2,730) 0.5 15.8 5.4 (8,200) (7,090) 15.7 (11,277)

EBITDA 3,918 3,851 3,197 3,926 1.7 22.5 (0.2) 11,429 9,228 23.9 15,790

Other income 508 428 385 390 18.7 32.0 30.3 1,251 979 27.9 1,696

Finance cost (20) (29) (9) (18) (55) (20) (75)

Depreciation (641) (637) (513) (621) 0.6 25.1 3.2 (1,867) (1,488) 25.5 (2,544)

Pre-tax profits 3,764 3,613 3,060 3,677 4.2 23.0 2.4 10,758 8,698 23.7 14,867

Extraordinary income — — — 817 817 — 817

Tax (926) (949) (1,080) (684) (2,743) (3,086) (3,812)

Net income 2,839 2,664 1,980 3,810 6.5 43.4 (25.5) 8,832 5,612 57.4 11,872

Adjusted net income 2,839 2,664 1,980 2,993 6.5 43.4 (5.2) 8,015 5,612 42.8 11,055

Adjusted EPS (Rs) 4.1 3.8 2.8 4.3 6.5 43.4 (5.2) 11.5 8.0 42.8 15.8

Income from associates 294 380 327 424 (22.5) (9.8) (30.6) 1,055 695 51.7 1,304

Tax rate (%) 24.6 26.3 35.3 18.6 25.5 35.5 25.6

Other details

Volume (mcm/d) 6.7 6.6 5.9 6.6 1.0 13.4 1.8 6.5 5.8 12.6 6.6

Volume (mscm) 616 610 543 605 1.0 13.4 1.8 1,790 1,590 12.6 2,421

CNG (mn kgs.) 318 326 291 320 (2.5) 9.2 (0.7) 943 854 10.4 1,268

PNG (mscm) 164 154 138 152 6.5 18.7 7.8 461 403 14.3 633

Industrial/commercial 82 72 61 73 14.5 34.7 12.5 223 183 21.9 307

Domestic PNG 36 36 31 33 0.7 16.4 9.3 100 85 17.7 141

Natural gas 46 46 46 46 (1.6) (0.9) (0.9) 138 135 1.9 185

Net realization (Rs/scm) 27.0 27.2 27.8 28.0 (0.6) (2.9) (3.4) 27.6 26.5 3.9 27.5

Raw material cost (Rs/scm) 15.3 15.5 16.7 16.4 (1.2) (8.6) (6.7) 15.9 15.7 1.7 15.6

Gross margin (Rs/scm) 11.7 11.7 11.1 11.6 0.2 5.7 1.2 11.6 10.9 6.9 11.8

Other operating costs (Rs/scm) 5.4 5.4 5.2 5.1 (0.4) 3.1 5.2 5.2 5.1 3.4 5.3

Operating profit (Rs/scm) 6.4 6.3 5.9 6.5 0.8 8.0 (2.0) 6.4 5.8 10.0 6.5

(15)

(10)

(5)

0

5

10

15

20

25

30

1Q

FY13

2Q

FY13

3Q

FY13

4Q

FY13

1Q

FY14

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

3Q

FY17

4Q

FY17

1Q

FY18

2Q

FY18

3Q

FY18

4Q

FY18

1Q

FY19

2Q

FY19

3Q

FY19

4Q

FY19

1Q

FY20

2Q

FY20

3Q

FY20

(%) Overall CNG sales PNG sales

Gas Utilities Indraprastha Gas


Exhibit 3: IGL's gross margins on CNG and domestic PNG have jumped from end-December due to

reduction in gas price from PMT fields post expiry of its contract Estimated gross margins on CNG and domestic PNG for IGL, April 2018 onwards (Rs/scm)


Exhibit 4: We assume robust volume growth and higher per-unit margins in the medium term Key assumptions for IGL, March fiscal year-ends, 2014-22E


12.0

12.5

13.0

13.5

14.0

14.5

15.0

15.5

16.0

16.5

17.0

Apr-

18

May-

18

Jun-1

8

Jul-18

Aug-1

8

Sep-1

8

Oct

-18

Nov-

18

Dec

-18

Jan-1

9

Feb-1

9

Mar-

19

Apr-

19

May-

19

Jun-1

9

Jul-19

Aug-1

9

Sep-1

9

Oct

-19

Nov-

19

Dec

-19

Jan-2

0

Feb-2

0

(Rs/scm) CNG Domestic PNG

2014 2015 2016 2017 2018 2019 2020E 2021E 2022E

Sales volume (mn scm)

CNG 1,028 1,073 1,123 1,269 1,412 1,602 1,787 1,961 2,136

PNG 356 330 342 406 479 553 633 724 816

Domestic 68 70 86 94 109 120 141 161 179

Commercial/Industrial 288 158 160 174 204 252 307 369 433

Other CGD companies 102 96 138 166 181 185 194 204

Total volumes 1,384 1,404 1,465 1,675 1,891 2,155 2,421 2,685 2,952

CNG (mn kgs) 774 805 834 921 1,018 1,148 1,268 1,391 1,515

Average daily volumes (mcm/d) 3.8 3.8 4.0 4.6 5.2 5.9 6.6 7.4 8.1

Growth in volumes (%) 3.4 1.4 4.4 14.3 12.9 14.0 12.3 10.9 9.9

Operating metrics (Rs/scm)

Gross margin 9.0 9.5 9.6 10.3 11.1 11.0 11.9 12.2 12.7

Operating cost 3.3 3.9 4.3 4.6 5.2 5.2 5.3 5.3 5.5

Operating profit 5.7 5.7 5.3 5.8 5.9 5.8 6.5 6.9 7.2

Indraprastha Gas Gas Utilities


Exhibit 5: IGL stock is trading at expensive 27X 12-month forward EPS 12-month forward P/E for IGL (X)

Source: Bloomberg, Kotak Institutional Equities estimates

Exhibit 6: We value IGL stock at Rs365 using DCF methodology Calculation of equity value using discounted cash flow analysis (Rs mn)


-

5

10

15

20

25

30

35

Apr-

11

Oct

-11

Apr-

12

Oct

-12

Apr-

13

Oct

-13

Apr-

14

Oct

-14

Apr-

15

Oct

-15

Apr-

16

Oct

-16

Apr-

17

Oct

-17

Apr-

18

Oct

-18

Apr-

19

Oct

-19

(X) 12-month forward P/E for IGL (X)

2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E

Assumptions

Volumes (mcm/d) 6.6 7.4 8.1 8.8 9.5 10.2 10.8 11.4 11.9 12.5

Growth (%) 12.3 10.9 9.9 8.8 8.0 7.1 6.3 5.5 4.8 4.1

Unit margins (Rs/scm) 6.5 6.9 7.2 7.5 7.8 8.0 8.3 8.5 8.8 9.0

DCF model

EBITDA 15,790 18,547 21,218 24,002 26,795 29,529 32,591 35,462 38,095 40,972

Adjusted tax expense (2,992) (3,618) (4,138) (4,702) (5,304) (5,931) (6,688) (7,431) (8,120) (8,867)

Change in working capital 1,321 645 1,249 1,328 1,409 1,477 1,526 1,578 1,615 1,016

Operating cash flow 14,119 15,574 18,328 20,628 22,899 25,076 27,430 29,608 31,590 33,121

Capital expenditure (11,500) (13,500) (15,000) (13,500) (12,000) (9,925) (7,425) (6,468) (6,795) (7,138)

Free cash flow 2,619 2,074 3,328 7,128 10,899 15,151 20,005 23,141 24,795 25,983

Discounted cash flow-now 2,594 1,834 2,628 5,025 6,858 8,512 10,035 10,364 9,912 9,274

Discounted cash flow-1 year forward 2,054 2,943 5,628 7,684 9,534 11,239 11,608 11,105 10,387

Discounted cash flow-2 year forward 3,296 6,303 8,606 10,681 12,588 13,001 12,438 11,637

Now +1-year +2-years

Discount rate (%) 12.0% 12.0% 12.0%

Total PV of free cash flow 67,037 81,827 99,383

Terminal value assumption

Growth in perpetuity 4.0% 4.0% 4.0%

FCF in 2029E 25,983 25,983 25,983

Exit FCF multiple (X) 13.0 13.0 13.0 365 2.0% 3.0% 4.0% 5.0% 6.0%

Exit EV/EBITDA multiple (X) 8.2 8.2 8.2 11.0% 361 384 412 450 504

Terminal value 337,773 337,773 337,773 11.5% 344 363 387 419 462

PV of terminal value 120,563 120,563 120,563 12.0% 328 344 365 392 427

Value of extant CGD business 187,599 202,389 219,945 12.5% 313 328 346 368 398

Value of 50% stake in CUGL and MNGL 26,088 30,653 34,945 13.0% 300 313 328 348 372

Net debt (18,930) (20,732) (20,590)

Equity value 232,617 253,775 275,480

Shares outstanding (mn) 700 700 700

Fair value of IGL (Rs), including dividends 332 365 400

Sensitivity of 12-month fair value to WACC and perpetual growth

Perpetual growth (%)

WA

CC

(%

)

Gas Utilities Indraprastha Gas


Exhibit 7: Profit model, balance sheet, cash model March fiscal year-ends, 2014-22E (Rs mn)


2014 2015 2016 2017 2018 2019 2020E 2021E 2022E


Net sales 39,222 36,810 36,858 38,148 45,921 57,648 66,542 67,857 79,338

EBITDA 7,824 7,930 7,747 9,638 11,144 12,570 15,790 18,547 21,218

Other income 211 345 299 652 1,021 1,462 1,696 1,691 1,765

Finance cost (441) (298) (99) (12) (17) (21) (75) (79) (83)

Depreciation (2,195) (1,487) (1,563) (1,671) (1,813) (2,011) (2,544) (3,201) (3,922)

Pretax profits 5,398 6,490 6,385 8,607 10,335 12,000 14,867 16,959 18,978

Extraordinary items — — — — — — 817 — —

Current tax (1,676) (1,795) (1,812) (2,735) (3,169) (3,703) (3,407) (4,038) (4,575)

Deferred tax (119) (318) (382) (161) (448) (430) (405) (380) (355)

Adjusted net profits including associates 3,603 4,481 4,641 6,063 7,217 8,421 12,098 13,767 15,445

Adjusted EPS including associates (Rs) 5.1 6.4 6.6 8.7 10.3 12.0 17.3 19.7 22.1


Total equity 17,632 20,981 25,164 29,266 35,129 41,299 49,762 58,997 68,991

Deferred taxation liability 963 1,272 1,650 1,806 2,253 2,678 2,267 2,647 3,002

Borrowings 3,525 1,453 — — — — — — —

Customer deposits 3,104 3,681 4,252 4,826 5,577 6,625 7,825 8,950 9,734

Currrent liabilities 3,297 3,348 2,746 4,963 6,323 8,891 10,839 10,318 12,072

Total liabilities and equity 28,520 30,735 33,813 40,861 49,282 59,493 70,693 80,912 93,799

Cash 2,514 2,315 4,538 6,086 5,580 6,071 7,873 7,731 9,000

Current assets 3,257 3,413 3,822 3,316 4,044 4,433 4,874 4,936 5,477

Total fixed assets 21,576 22,099 22,861 24,689 28,181 33,549 42,506 52,805 63,883

Investments 1,174 2,909 2,592 6,770 11,477 15,440 15,440 15,440 15,440

Total assets 28,520 30,735 33,813 40,861 49,282 59,493 70,693 80,912 93,799


Operating cash flow, excl. working capital 5,729 5,927 5,833 7,018 7,952 8,846 12,308 14,430 16,559

Working capital 297 411 603 2,446 841 3,473 2,707 542 1,997


Free cash flow 3,544 4,194 4,115 6,755 4,095 5,014 3,515 1,472 3,557

Investments 252 (1,733) 317 (9,004) (3,430) (3,963) — — —

Other income 168 313 257 573 959 1,462 1,696 1,691 1,765

Ratios (%)

Net debt/equity 5.7 (4.1) (18.0) (20.8) (15.9) (14.7) (15.8) (13.1) (13.0)

RoAE 21.0 21.4 17.1 19.7 19.6 19.3 24.7 22.1 21.0

RoACE 16.2 17.4 14.6 17.1 17.1 16.8 20.1 19.3 18.5

Adjusted CRoCI 20.1 18.2 18.6 23.3 22.8 21.5 24.2 22.8 21.5



3QFY20: EBITDA beat led by lower costs

NMDC reported 3QFY20 revenue of Rs30 bn (-18% yoy, +34% qoq) with volumes at 8.4 mn

tons (-3% yoy, +45% qoq), impacted by lower realizations. Realization of Rs3,575/ton (-15%

yoy, -7% qoq) was impacted by domestic oversupply and weak steel demand. Cost/ton of

Rs1,682/ton declined by 17% qoq (-2% yoy) led by lower other expense due to operational

leverage and lower exports (7.4% of volume mix versus 10.1% in 2QFY20). Reported EBITDA of

Rs15.9 bn (-26% yoy, +50% qoq) or Rs1,892/ton (-24% yoy, +4% qoq) was above our

estimate of Rs15 bn. NMDC has shifted to the new tax regime and reported NPAT of Rs13.8bn

(-13%yoy, +96% qoq) includes deferred tax adjustment of Rs1.5bn. NMDC declared a DPS of

Rs5.29 implying a 50% payout for 9MFY20.

Domestic prices to remain elevated amidst auction led transition in Odisha

We expect majority of the mines put under auction in Odisha to be won by captive producers

who would likely secure more capacity than required. This would tighten the merchant market

and benefit existing miners like NMDC. Odisha government has concluded auction of seven

mines so far and only one mine has been won by a merchant miner. Domestic iron ore prices

during 9MFY20E traded at 20% discount to import parity (see Exhibit 3), versus historic range

of 8-10% discount, mainly due to higher iron ore production in Odisha. However, the balance

changed from January 2020E with restocking demand ahead of auctions. We note that after

two price hikes of total 23% during January 2020, domestic prices are now at 10% discount to

import parity. We expect domestic market to remain tight in FY2021E and see upside risk to

prices.

Maintain ADD with a revised fair value of Rs135 (from Rs140)

NMDC’s Donimalai mine (6 mtpa) remains shut pending state clearances with the case hearing

yet to be concluded at the mines tribunal. We revise our restart expectation from 1QFY21E to

3QFY21E and reduce FY2021E volumes by 2 mn tons. We increase FY2020E EBITDA by 1%

factoring higher prices and cut FY2021E EBITDA by 3% due to lower volumes. NMDC is well

poised for a strong FY2021E with extension on existing mining leases and a tighter market due

to auction led disruption. Higher dividend (50% payout assumption), timely commissioning of

steel plant and divestment or demerger of steel plant provides upside risk.

NMDC (NMDC) Metals & Mining

Strong quarter with dividend bonanza. NMDC’s 3QFY20 EBITDA was 6% higher

than our estimate led by lower costs. Restocking ahead of mines expiry is Odisha has

tightened the domestic market allowing recent price hikes and should keep prices

elevated in FY2021E. The Donimalai mine remains shut awaiting state clearance and we

delay the restart by six months to 2HFY21E in our estimates. We revise EBITDA by

+1%/-3% FY2020/21E, fair value to Rs135 (from Rs140) and maintain ADD.

ADD

FEBRUARY 07, 2020

RESULT


CMP (`): 116

Fair Value (`): 135

BSE-30: 41,306

Sumangal Nevatia

Prayatn Mahajan

NMDC



Mcap (bn) (Rs/US$) EPS growth (%) 14.6 2.4 (9.2)

ADTV-3M (mn) (Rs/US$) P/E (X) 6.9 6.7 7.4



FIIs 5.3 RoE (%) 19.2 18.3 15.5



Absolute (0) (10) 11 EBITDA (Rs bn) 67 70 64


140-75

357/5.1

1.6/0

950/13

Metals & Mining NMDC


Exhibit 1: Interim results of NMDC, March fiscal year-ends (Rs mn)


Exhibit 2: Iron-ore sales declined 3% yoy to 8.4 mn tons in 3QFY20; Karnataka volumes declined due to closure of Donimalai mines NMDC's iron ore production and sales details at Chhattisgarh and Karnataka mines, March fiscal year-ends (mn tons)


3QFY20 3QFY20E 3QFY19 2QFY20 KIE yoy qoq 9MFY20 9MFY19 (% chg.) FY2020E

Net revenues 30,064 30,586 36,494 22,418 (2) (18) 34 85,119 85,094 0 122,962

Change in stock/Raw material (449) 500 (992) 676 (190) (55) (166) 186 (175) (206) 338

Stores and spares 670 0 679 521 (1) 29 1,697 1,717 (1) 2,766

Employee costs 2,587 2,607 2,483 2,451 (1) 4 6 7,570 7,548 0 10,990

Royalty and cess 5,797 6,117 7,201 3,508 (5) (19) 65 15,122 15,017 1 21,923

SGA 1,942 1,191 1,697 1,150 63 14 69 4,993 2,353 112 5,024

Other expenses 3,602 5,151 3,883 3,510 (30) (7) 3 10,367 10,258 1 14,488

Total expenditure 14,150 15,566 14,951 11,816 (9) (5) 20 39,934 36,717 9 55,530

EBITDA 15,914 15,020 21,544 10,602 6 (26) 50 45,185 48,377 (7) 67,432

Depreciation 646 648 694 976 2,269 1,985 14 3,096

EBIT 15,268 14,372 20,850 9,626 6 (27) 59 42,915 46,392 (7) 64,336

Other income 1,302 1,253 1,361 1,275 4 (4) 2 3,805 3,922 (3) 4,983

Interest expense 98 117 96 97 312 301 364

Profit before taxes 16,473 15,508 22,115 10,805 6 (26) 52 46,409 50,013 (7) 68,954

Exceptional items 1,504 0 0 0 1,504 0 (1,504)

Current taxes 1,203 526 6,347 3,771 129 (81) (68) 12,311 18,127 (32) 17,267

Net income 13,766 14,982 15,768 7,034 (8) (13) 96 32,594 31,886 2 53,191

Adjusted net income 14,759 14,982 15,768 7,034 (1) (6) 110 33,587 31,886 5 51,687

Ratios

EBITDA margin (%) 53 49 59 47 53 57 55

ETR (%) 7 3 29 35 27 36 25

EPS (Rs) 5 5 5 2 (1) (6) 110 11 10 5 16

Volume details (mn tons)

Iron ore production 8.6 8.6 9.5 5.0 0 (10) 71 22.0 21.8 1 33.0

Iron ore sales 8.4 8.5 8.7 5.8 (1) (3) 45 22.9 22.2 3 32.8

Realization/Cost (Rs/ton)

Iron ore - blended 3,575 3,584 4,193 3,854 (0) (15) (7) 3,718 3,835 (3) 3,626

Cost 1,682 1,824 1,718 2,032 (8) (2) (17) 1,744 1,655 5 1,693

EBITDA/ton 1,892 1,760 2,475 1,823 8 (24) 4 1,974 2,180 (9) 2,056

(% chg.)

3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 qoq yoy

Iron ore production (mn tons)

Chhattisgarh 5.5 8.4 4.9 2.6 7.0 8.8 6.1 3.0 7.0 131 (1)

Karnataka 3.1 3.0 2.1 2.6 2.5 1.8 2.4 2.0 1.6 (18) (36)

Total 8.6 11.3 7.0 5.3 9.6 10.6 8.4 5.0 8.6 72 (10)

Iron ore sales (mn tons)

Chhattisgarh 5.1 7.2 5.9 3.8 6.3 7.4 6.6 4.0 6.7 68 7

Karnataka 3.0 3.4 0.9 2.9 2.4 2.8 2.1 1.9 1.7 (12) (29)

Total 8.1 10.5 6.8 6.7 8.7 10.2 8.7 5.9 8.4 42 (3)

%Change

NMDC Metals & Mining


Exhibit 3: NMDC's iron-ore prices are at a marginal discount to import parity post the recent

correction in global iron ore prices Comparison of iron ore cost from imports and NMDC's mines for west coast based steel mill, (Rs/ton)

Source: Bloomberg, Company, Kotak Institutional Equities estimates

Exhibit 4: NMDC's iron-ore prices have declined in the last few months with the decline in steel

demand NMDC's Chhattisgarh iron ore prices and global iron-ore prices, 2013-2019 (Rs/ton)

Source: Bloomberg, Company, Kotak Institutional Equities estimates

Exhibit 5: NMDC, changes in estimates, March fiscal year ends, FY2020-22E


-

20

40

60

80

100

120

140

160

180

4M

201

2

7M

201

2

10

M20

12

1M

201

3

4M

201

3

7M

201

3

10

M20

13

1M

201

4

4M

201

4

7M

201

4

10

M20

14

1M

201

5

4M

201

5

7M

201

5

10

M20

15

1M

201

6

4M

201

6

7M

201

6

10

M20

16

1M

201

7

4M

201

7

7M

201

7

10

M20

17

1M

201

8

4M

201

8

7M

201

8

10

M20

18

1M

201

9

4M

201

9

7M

201

9

10

M20

19

1M

202

0

Import Parity Price (Rs/Ton) NMDC Price (US$/ton)

-

40

80

120

160

200

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Jan

-15

Jul-

15

Jan

-16

Jul-

16

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

China iron-ore prices (US$/ton) [RHS] NMDC fines (Rs/ton) NMDC lumps (Rs/ton)

2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E

Price - incling royalty (Rs/ton)

China CFR Fe 62% (US$/ton) 90 70 68 90 70 68 0 0 0

Blended Realisation (Rs/ton) 3,626 3,503 3,121 3,578 3,452 3,121 1 1 0

Costs (Rs/ton) 1,571 1,653 1,594 1,558 1,634 1,594 1 1 0

EBITDA (Rs/ton) 2,056 1,850 1,527 2,021 1,818 1,527 2 2 0

Iron-ore volumes (mn tons)

Chhattisgarh 25.8 26.0 28.0 26.0 26.0 28.0 (1) 0 0

Karnataka 7.0 12.0 14.0 7.0 14.0 14.0 0 (14) 0

Total 32.8 38.0 42.0 33.0 40.0 42.0 (1) (5) 0

Earnings estimates (Rs mn)

Revenues 122,962 137,159 135,180 122,106 142,134 135,180 1 (4) 0

EBITDA 67,432 70,291 64,144 66,680 72,726 64,144 1 (3) 0

PAT 51,687 52,953 48,082 50,743 54,764 48,082 2 (3) 0

EPS (Rs) 16.9 17.3 15.7 16.6 17.9 15.7 2 (3) 0

Re/US$ rate 69.3 72.0 74.0 69.3 72.0 74.0 0 0 0

Revised Estimate Previous Estimate Change (%)

Metals & Mining NMDC


Exhibit 6: NMDC, Key assumptions, March fiscal year-ends, 2015-2022E


Exhibit 7: NMDC's has 10% of market cap as cash balance


Exhibit 8: 50% dividend payout results in 6-7% dividend yield


Exhibit 9: NMDC's FV changes by 1% for every 1% change in

volumes


Exhibit 10: NMDC's EPS changes by 1.3% for every 1% change in

iron ore prices


2015 2016 2017 2018 2019 2020E 2021E 2022E

Iron-ore volumes (mn tons)

Chhattisgarh 21 16 23 23 23 26 26 28

Karnataka 10 12 13 13 9 7 12 14

Total 31 29 36 36 32 33 38 42

% change yoy 0 (5) 23 1 (10) 1 16 11

Lumps 10 9 12 12 11 11 13 14

Fines 20 19 24 24 22 22 25 28

Cost per ton of ore (Rs/ton)

Chhattisgarh - domestic 1,061 1,083 1,202 1,400 1,498 1,523 1,545 1,492

Karnataka (including SPV) - domestic 1,360 1,242 1,439 1,712 1,858 1,870 1,889 1,796

Exports 7,379 3,871 3,185 2,838 3,277 3,277 3,373 3,444

EBITDA/ton (Rs) 2,547 952 1,011 1,610 2,100 2,056 1,850 1,527

0

5

10

15

20

25

30

35

40

45

50

20

15

20

16

20

17

20

18

20

19

20

20

E

20

21

E

20

22

E

Cash Per Share (Rs/share)

0%

2%

4%

6%

8%

10%

12%

0

2

4

6

8

10

1220

15

20

16

20

17

20

18

20

19

20

20

E

20

21

E

20

22

E

Dividend (Rs/share) Dividend Yield (%)

135 38 40 42 44 46

64 113 119 125 130 136

66 118 124 130 136 141

68 123 129 135 141 147

70 127 134 140 146 153

72 132 139 145 152 158 Iro

n O

re P

rice

s

(US$/T

on

)

Volumes (mn tons)

16 38 40 42 44 46

64 12.4 13.2 14.1 15.0 15.9

66 13.1 14.0 14.9 15.8 16.7

68 13.8 14.8 15.7 16.7 17.6

70 14.5 15.5 16.5 17.5 18.5

72 15.2 16.3 17.3 18.3 19.3 Iro

n O

re P

rice

s

(US$/T

on

)

Volumes (mn tons)

NMDC Metals & Mining


Exhibit 11: Our fair value is reduced to Rs135 (from Rs140) at 5X FY2022E Earnings NMDC, Valuation details, March 2022E year-ends


Exhibit 12: NMDC, Financial summary, March fiscal year ends, 2017-2022E (Rs mn)


Enterprise

EBITDA EV/EBITDA Value Rs/share

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

FY2022E 64,144 5.0 320,719 101.369

Net debt (70,969) 22

Steel Plant (35% of CWIP) 65,482 21

Equity Value (FY2022E) 457,171 144

Equity Value (Discounted to September 2021E) 430,070 135

Target price (Rs) 135

2017 2018 2019 2020E 2021E 2022E


Net sales 88,281 116,149 121,527 122,962 137,159 135,180

EBITDA 36,011 58,088 67,966 67,432 70,291 64,144

Other income 9,088 5,197 5,883 4,983 4,630 4,407

Depreciaton (1,962) (2,560) (2,789) (3,096) (3,383) (3,560)

Interest (208) (371) (403) (364) (364) (364)

Profit before tax 42,929 60,354 70,657 68,954 71,173 64,626

Extra-ordinary items — 1,443 1,334 (1,504) — —

Taxes (17,032) (23,733) (25,565) (17,267) (18,220) (16,544)

Net profit 25,897 38,064 46,425 50,183 52,953 48,082



Equity 225,189 243,538 259,515 278,582 299,658 318,794

Borrowings - 5,001 3,642 3,642 3,641 3,641


Total liabilities 258,761 286,091 297,820 316,544 337,814 356,923

Net fixed assets 19,528 26,717 27,207 28,611 27,227 25,667

Capital Work In Progress 118,314 125,199 137,925 155,925 180,925 205,925

Investments 7,270 7,865 9,393 9,393 9,393 9,393

Cash 52,893 54,382 46,077 35,348 28,828 24,093

Current assets 59,016 34,012 33,562 43,612 47,785 48,189

Other Non current assets 1,740 37,916 43,655 43,655 43,655 43,655

Total assets 258,761 286,091 297,819 316,544 337,813 356,923

Net Debt (52,893) (49,381) (42,436) (31,706) (25,187) (20,452)


Operating cash flow excl. WC 27,466 42,118 48,697 48,296 51,706 47,235

Working capital changes 4,753 (8,676) (8,629) (10,393) (3,978) (432)

Capital expenditure (23,390) (20,524) (19,972) (22,500) (27,000) (27,000)

Free cash flow 8,829 12,919 20,096 15,404 20,728 19,804

Ratios

EV/EBITDA 8.8 5.5 4.6 4.8 4.7 5.2

P/E 14.2 9.9 7.9 6.9 6.7 7.4

P/B 1.6 1.5 1.4 1.3 1.2 1.1

Net Debt/EBITDA - 0.1 0.1 0.1 0.1 0.1

Book value (Rs/share) 71 77 85 91 98 104

Dividend (Rs/share) 5.2 4.3 5.5 8.4 8.6 7.9

Net debt/equity (X) (0.2) (0.2) (0.2) (0.1) (0.1) (0.1)

RoAE (%) 10.0 16.2 18.5 18.7 18.3 15.5

RoACE (%) 9.8 16.2 18.2 18.5 18.2 15.5



Lack of clarity compounds poor performance

LPC’s 3QFY20 revenues were 16% lower than estimates primarily due to the de-consolidation

of Kyowa business for the full quarter versus our estimate of 75 days of consolidation.

Adjusting for Kyowa, revenue missed our estimate by 3%. India grew 9% yoy, 2.7% lower

than our expectations. US revenues, at US$186 mn grew US$2 mn qoq (-US$5 vs KIE), as there

was virtually no benefit of winter season stocking for its cephs portfolio. EU was ~10% lower

than our estimate, though RoW had another strong quarter with 20% yoy growth (+4% vs

KIE).

Adjusted for Kyowa divestment, gross profits were 3% lower than our estimates. EBITDA,

however, dropped to Rs4.3 bn, missing our estimates by ~29% (-18% adjusted for Kyowa),

with EBIDTA margin down to 11.4%. While EBITDA was also impacted by lumpiness in SG&A

costs of ~Rs500 mn, even adjusting for this, EBITDA missed estimates by ~9%, as the company

struggled to explain the lack of corresponding overheads reduction of from Kyowa divestment.

LPC chose to match Rs13 bn exceptional gain from Kyowa divestment by impairing Rs15.8 bn

Gavis intangibles (Rs1.7 bn annual reduction in amortization) along with Rs4.1 bn DTA reversal.

Levothyroxine ramp and operating leverage critical to FY2021 EBITDA

The key question for investors is how to forecast FY2021 EBITDA in light of Rs4.5 bn EBITDA

(adjusted for Rs500 mn lumpy costs) in 3QFY20. However, we do see several levers to drive the

EBITDA growth in FY2021, including incremental US$15-20 mn quarterly sales addition from

levothyroxine (15% contracted share with incremental capacities from 4QFY20), which along

with potential US$10-15 mn reduction in Solosec losses, can add Rs5-6 bn in annualized

EBITDA in FY2021. We also see significant room for operating leverage, given expected low

teens revenue growth from ex-US markets in FY2021, and mid-single digit growth in fixed costs

(including R&D), with any meaningful cost reduction program adding to profitability in FY2021

and beyond. Launches of ProAir (1HFY21 re-affirmed), Fostair EU (2HFY21), Enbrel (FY2021),

Suprep (exclusivity in FY2022) and Spiriva (FY2023) should help drive further earnings growth.

Valuations now reasonable, though progress on compliance is key – ADD

In many ways, 3QFY21 was a trough quarter for LPC, though, admittedly, Street will only gain

confidence in the earnings ramp once there is evidence of either operating leverage (led by levo)

or cost cuts visible in EBITDA. We cut FY2021/22 EBITDA by 10% and 7% and EPS by 4-6%.

Valuations remain compelling with the stock trading at 9.5X FY2021 EV/EBITDA at the bottom

of the earnings cycle, with domestic franchise value accounting for bulk of the market cap. ADD.

Lupin (LPC) Pharmaceuticals

Quarter horribilis. On a like-for-like basis, excluding Kyowa, LPC’s revenues missed

estimates by 3%, and EBITDA missed estimates by 18% as SG&A costs remained

elevated, despite Kyowa de-consolidation. However, we see 3QFY20 performance as

reflective of a trough quarter, and heading into FY2021, we expect sharp earnings

recovery, led by operating leverage with 4QFY20 likely to provide visibility on operating

leverage post ramp-up in levothyroxine. ADD.

ADD

FEBRUARY 07, 2020

RESULT


CMP (`): 722

Fair Value (`): 840

BSE-30: 41,306

Chirag Talati, CFA

Kumar Gaurav

Lupin




ADTV-3M (mn) (Rs/US$) P/E (X) 38.0 21.3 15.0



FIIs 25.7 RoE (%) 6.2 10.2 12.9



Absolute 1 (5) (4) EBITDA (Rs bn) 24 32 42


884-646

327/4.6

7.1/0

1,117/16

Lupin Pharmaceuticals


Exhibit 1: Lupin – interim results Lupin interim results, March fiscal year-end (Rs mn)


Exhibit 2: Sharp 10% cut on FY2021 EBITDA given the lack of cost reduction post Japan March fiscal year-ends, 2020-21E, (Rs mn)


Exhibit 3: LPC expects to invite the US FDA for a re-inspection of Goa in 1QCY19 March fiscal year-ends, 2020-21E, (Rs mn)


(% chg.)

3QFY20 3QFY20E 3QFY19 2QFY20 3QFY20E 3QFY19 2QFY20 9MFY20 9MFY19 (% chg.) FY2020E FY2019 (% chg.)

Total revenues 37,693 43,192 38,791 45,049 38,822 (12.7) (16.3) (2.9) 115,290 123,119 (6.4) 154,614 167,182 (7.5)

Gross profit 24,100 27,211 24,904 29,039 25,384 (11.4) (17.0) (5.1) 75,034 78,739 (4.7) 100,166 108,724 (7.9)

Employee expenses (7,407) (8,850) (8,058) (8,085) (7,602) (16.3) (8.4) (2.6) (22,233) (23,517) (5.5) (29,833) (31,513) (5.3)

R&D expenses (4,277) (3,950) (3,950) (4,257) (4,356) 8.3 0.5 (1.8) (12,419) (11,768) 5.5 (16,330) (15,731) 3.8

Other expenses (8,125) (8,350) (7,646) (9,172) (7,019) (2.7) (11.4) 15.7 (22,120) (25,163) (12.1) (29,770) (32,658) (8.8)

EBITDA 4,291 6,061 5,250 7,525 6,406 (29.2) (43.0) (33.0) 18,263 18,291 (0.2) 24,233 28,822 (15.9)

Other income 936 750 750 447 1,342 3,000 4,578 3,750 3,640

Exceptionals (2,887) 11,154 — (3,422) (5,465) (8,352) (3,422) (8,352) (3,400)

Interest (886) (856) (856) (798) (865) (2,607) (2,223) (3,400) (3,078)

Depreciation (2,532) (2,715) (2,715) (2,798) (3,215) (8,918) (8,042) (11,438) (10,850)

Pretax profits (1,078) 14,394 2,429 954 (1,796) NM (213.0) (40.0) 1,387 9,182 (84.9) 4,793 15,134 (68.3)

Pretax profits (adjusted) 1,809 3,240 2,429 4,376 3,669 (44.2) (58.7) (50.7) 9,739 12,604 13,144 18,534 (29.1)

Tax (7,670) (5,848) (972) (2,478) (343) (10,293) (6,019) (11,488) (9,017)

Minority interest 13 13 13 6 (36) (10) 6 (71) (71)

Net income - reported (8,735) 8,560 1,471 (1,518) (2,175) NM NM NM (8,916) 3,169 NM (6,766) 6,046 (211.9)

Net income - adjusted 1,176 2,231 1,471 1,905 2,385 (47.3) (38.3) (50.7) 6,330 3,169 99.7 8,544 9,446 (9.6)

Reported EPS (Rs) (19.4) 19.0 19.0 (3.4) (4.8) NM NM NM (19.8) 7.0 (381.3) (15.0) 13.4 (211.9)

Adjusted EPS (Rs) 2.6 5.0 3.3 4.2 5.3 (47.3) (38.3) (50.7) 14.1 14.6 (4.0) 19.0 21.0 (9.6)

Tax rate (%) (711) 40.6 40.6 259.7 (19.1)

Segment wise sales

Domestic formulation 12,969 13,330 11,902 13,419 (2.7) 9.0 (3.4) 39,465 35,858 10.1 51,252 46,382 10.5

North America 13,766 14,328 14,174 13,244 (3.9) (2.9) 3.9 42,422 38,519 10.1 57,574 55,924 2.9

Japan — 4,401 (100.0) 10,962 16,221 (32.4) — 21,790 (100.0)

Rest of Europe 1,528 1,694 1,332 1,729 (9.8) 14.8 (11.6) 4,673 4,273 9.4 6,634 6,171 7.5

RoW 5,724 5,489 4,776 5,022 4.3 19.9 14.0 15,011 12,908 16.3 22,218 17,860 24.4

API 3,173 3,250 3,624 3,052 (2.4) (12.4) 4.0 9,714 10,552 (7.9) 13,195 13,464 (2.0)

Others (853) 700 7,773 889 (10,996) 551 (2,109) (144)

Total 37,693 43,192 45,049 38,822 (12.7) (16.3) (2.9) 115,290 123,119 (6.4) 154,614 167,182 (7.5)

% margin

Gross margin 63.9 63.0 64.2 64.5 65.4 65.1 64.0 64.8 65.0

Staff cost 19.7 20.5 20.8 17.9 19.6 19.3 19.1 19.3 18.8

R&D expenses 11.3 9.1 10.2 9.4 11.2 10.8 9.6 10.6 9.4

Other expenditure 21.6 19.3 19.7 20.4 18.1 19.2 20.4 19.3 19.5

EBITDA adjusted 11.4 14.0 13.5 16.7 16.5 15.8 14.9 15.7 17.2

yoy3QFY20E

ex-Kyowa

2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E

Sales 154,614 172,586 196,690 170,856 176,893 199,628 NM (2.4) (1.5)

Gross profits 100,166 112,093 125,834 109,439 114,783 128,987 NM (2.3) (2.4)

EBITDA 24,233 32,119 41,672 29,632 35,649 44,579 NM (9.9) (6.5)

Adjusted PAT 8,544 15,272 21,720 11,836 16,324 22,793 NM (6.4) (4.7)

EPS (Rs) 19.0 33.9 48.3 26.3 36.3 50.7 NM (6.5) (4.8)

Changes %Old estimatesNew estimates

Unit name Business Operations Last inspected Status

Revenue

contribution

(%)

Key pending

products Comments

Unit 1 Nagpur Formulations Jan-20 2 observations 0-2 Injectables, oralsNew facility, incremental filings for oral and injectables

happening from this unit

Unit 1 Indore API, Formulations Jul-19 EIR 10-15 Hormones (incl. levothyroxine), high potent products

Unit 2, Indore Formulations Jan-19 WL 8-10 Oral solids and ophthal

Unit 3 Indore Formulations Oct-18 EIR 4-5 Proair, Spiriva Derma and inhalation

Goa Formulations May-19 WL 30-35 Oral solids

Aurangabad Formulations May-19 EIR 5-8 Oral solids

Somerset Formulations Dec-18 WL 10-15 Oral, derma and controlled substance

Unit 1 Mandideep API, Formulations Dec-18 WL Cephlosporins, no incremental filings

Unit 2 Mandideep API Dec-18 EIR Cephlosporins API plant

Tarapur API Sep-19 WL

Vadodara API

Pharmaceuticals Lupin


Exhibit 4: Levothyroxine, Solosec and ProAir key to US sales for FY2020/21 March fiscal year-ends, 2014-22E (US$ mn)

Source: Company

2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E

Key product sales (US$ mn)

Fortamet + Glumetza 426 135 80 33 28 17 18 19 19

OC basket 129 135 60 61 62 62 62 62 62

Gavis basket 100 132 87 86 93 133 113 112 112

Lisinopril family 46 40 60 75 75 77 79 81 83

Cephs family 83 78 71 80 72 64 64 64 64

Key new launches (US$ mn)

Solosec — — 9 17 36 52 70 89 110

Levothyroxine 26 77 68 62 63 64

ProAir — 18 77 67 69 72

Other new launches 14 30 81 88 165 125

Product concentration

Top-5 products 555 235 226 187 231 314 298 352 349

Top products (ex-Solosec) 555 235 217 170 195 263 229 263 239

Total sales 1,213 907 782 786 891 1,059 1,102 1,182 1,187

% of sales

Top-5 products 46 26 29 24 26 30 27 30 29

Top products (ex-Solosec) 46 26 28 22 22 25 21 22 20

Lupin Pharmaceuticals


Exhibit 5: Lupin – Segmental revenues March fiscal year-ends, 2014-2022E (Rs mn)

Source: Kotak Institutional Equities, Company

2014 2015 2016 2017 2018 2019 2020E 2021E 2022E

Domestic formulations 24,796 29,679 33,916 37,986 41,253 46,382 51,252 56,890 63,717

Export formulations 75,577 84,737 90,985 121,687 103,415 103,848 87,867 99,442 115,926

US 48,871 56,953 59,376 82,626 58,939 55,924 57,574 66,670 79,291

- Branded 4,887 4,980 2,941 6,439 4,645 1,196 1,566 2,837 3,916

- Generics 43,984 52,391 55,514 76,276 54,883 53,172 54,232 61,313 72,351

Japan 12,954 13,239 13,646 17,740 20,764 21,790 — — —

Europe 3,119 3,262 4,278 5,472 5,937 6,171 6,634 7,513 8,474

South Africa 3,800 4,218 3,956 4,644 5,314 5,735 5,850 6,435 7,078

RoW 6,333 7,065 9,729 11,205 12,461 12,125 16,369 18,824 21,083

Others 500 — — — — 2,103 1,441 — —

API 11,178 11,941 12,074 11,833 10,901 13,464 13,195 13,854 14,547

Other operating income 2,000 1,702 5,069 3,745 2,443 3,488 2,300 2,400 2,500

Total 112,866 127,699 142,085 174,943 158,042 167,182 154,614 172,586 196,690

% yoy growth


Export formulations 25 12 7 34 (15) 0 (15) 13 17

US 35 17 4 39 (29) (5) 3 16 19

- Branded (6) 2 (41) 119 (28) (74) 31 81 38

- Generics 42 19 6 37 (28) (3) 2 13 18

Japan (1) 2 3 30 17 5 (100) — NM

Europe 32 5 31 28 8 4 8 13 13

South Africa 18 11 (6) 17 14 8 2 10 10

RoW 43 12 38 15 11 (3) 35 15 12

Others (91) (100) (31) (100)

API 18 7 1 (2) (8) 24 (2) 5 5

Other operating income 11 (15) 198 (26) (35) 43 (34) 4 4

Total 17.1 13.1 11.3 23.1 (9.7) 5.8 (7.5) 11.6 14.0

% of sales


Export formulations 67 66 64 70 65 62 57 58 59

US 43 45 42 47 37 33 37 39 40

- Branded 4 4 2 4 3 1 1 2 2

- Generics 39 41 39 44 35 32 35 36 37

Japan 11 10 10 10 13 13 — — —

Europe 3 3 3 3 4 4 4 4 4

South Africa 3 3 3 3 3 3 4 4 4

RoW 6 6 7 6 8 7 11 11 11

Others 0 — — — — 1 1 — —

API 10 9 8 7 7 8 9 8 7

Other operating income 2 1 4 2 2 2 1 1 1

Pharmaceuticals Lupin


Exhibit 6: Lupin - Profit and loss, balance sheet and cash model March fiscal year-ends, 2014-2022E (Rs mn)

Source: Kotak Institutional Equities, Company

2014 2015 2016 2017 2018 2019 2020E 2021E 2022E

Net revenues 112,866 127,699 142,085 174,943 158,042 167,182 154,614 172,586 196,690

Gross profit 74,693 86,129 98,991 124,929 105,298 108,724 100,166 112,093 125,834

Staff costs (14,646) (17,473) (21,077) (28,495) (28,647) (31,513) (29,833) (31,921) (34,156)

R&D expenses (9,294) (10,998) (16,038) (23,101) (18,510) (15,731) (16,330) (16,200) (16,560)

Other expenses (20,724) (21,463) (24,341) (28,401) (26,665) (32,658) (29,770) (31,854) (33,446)

EBITDA 30,029 36,195 37,535 44,932 31,475 28,822 24,233 32,119 41,672

Depreciation & amortisation (2,610) (4,347) (4,635) (9,122) (10,859) (10,850) (11,438) (9,349) (10,069)

EBIT 27,419 31,848 32,900 35,810 20,616 17,972 12,794 22,770 31,603

Net interest (266) (98) (446) (1,525) (2,044) (3,078) (3,400) (2,047) (1,329)

Other income 1,165 2,397 1,877 1,147 (13,105) 240 (4,602) 3,250 3,250


Tax & deferred Tax (9,622) (9,704) (11,536) (9,785) (2,885) (9,017) (11,488) (8,630) (11,734)

Less: minority interest (331) (412) (88) (72) (71) (71) (71) (71) (71)

Net Income reported 18,365 24,031 22,707 25,575 2,513 6,046 (6,766) 15,272 21,720

Net Income adjusted 18,365 24,031 22,707 25,575 17,156 9,446 8,544 15,272 21,720

EPS reported (Rs) 40.8 53.4 50.5 56.8 5.6 13.4 (15.0) 33.9 48.3

EPS adjusted (Rs) 40.8 53.4 50.5 56.8 38.1 21.0 19.0 33.9 48.3

Balance sheet

Equity 69,985 88,982 110,165 135,321 136,171 137,891 137,220 150,202 168,664

Total borrowings 5,533 4,710 71,193 79,521 68,763 82,219 68,219 33,219 13,219

Other liabilities 26,542 37,686 43,020 51,231 58,120 59,384 60,226 63,471 68,147


Total liabilities and equity 102,060 131,377 224,378 266,073 263,054 279,494 265,666 246,892 250,030

Net fixed assets 36,597 49,442 116,677 131,660 129,602 127,264 82,183 78,834 74,765

Investments 4,459 3,612 10,564 14,884 11,357 13,694 9,640 9,640 9,640

Cash 9,739 21,372 8,379 28,123 16,429 30,971 72,602 47,655 40,589


Total assets 102,060 131,377 225,031 266,073 263,054 279,494 265,666 246,892 250,030

Cashflow statement

Operating profit before working capital 24,703 28,280 27,847 36,089 27,706 21,662 21,840 25,484 32,962

Tax paid (7,719) (9,436) (11,662) (11,490) (5,584) (9,394) (10,340) (7,767) (10,560)

Change in working capital (4,663) (949) (31,537) 5,059 (10,194) (5,002) 6,018 (7,140) (10,771)


Free cash flow 14,753 18,619 (15,440) 14,780 1,978 6,806 20,857 12,344 16,192

Margins and ratios

Gross profit margin (%) 66.2 67.4 69.7 71.4 66.6 65.0 64.8 64.9 64.0

EBITDA margin (%) 26.6 28.3 26.4 25.7 19.9 17.2 15.7 18.6 21.2

Tax rate (%) 34.1 31.2 32.2 29.1 29.6 59.6 239.7 36.1 35.1

RoAE (%) 30.0 30.2 22.8 20.8 1.9 4.4 (4.9) 10.6 13.6

RoACE (%) 29.6 32.1 17.4 14.5 9.5 3.8 (11.1) 10.5 14.3



Robust growth in revenues offset by weakness in margins across key segments except oil palm

Revenues increased 23% yoy to Rs17.8 bn in 3QFY20, 6% above our estimate, driven by robust

growth in animal feeds and recovery in the vegetable oil segment, which was partly offset by a

surprising decline in the crop protection business. EBITDA was flat yoy and 14% below our

estimate at Rs1 bn, with margins declining 130 bps yoy to 5.6% amid rising input costs and

sharp 21-22% jump in employee costs and other expenses. EBIT declined 15% yoy to Rs635

mn, 19% below our estimate, due to a sharp increase in depreciation expense. Adjusted net

income was 12% below our estimate at Rs509 mn (EPS of Rs2.7); however, it jumped 25% yoy

led by (1) reduction in tax rate to 28.2% from 35% in 3QFY19 and (2) lower profits attributed

to minority interest. In 9MFY20, GAVL delivered a healthy 18% growth in revenues; however,

EBITDA and EBIT declined 5% and 18% respectively led by contraction in margins across all

segments except animal feeds. Adjusted net income increased 7% yoy to Rs2 bn (EPS of

Rs10.4), primarily attributed to the reduction in effective tax rate to 25.5%.

Ag-chem declined due to credit controls; healthy growth in animal feed and oil palm volumes

In 3QFY20 conference call, the management indicated—(1) GAVL undertook channel correction

measures in crop protection business to enhance recoveries from debtors, which led to a decline

in revenues contrary to strong growth delivered by other domestic ag-chem players in the Rabi

season, (2) animal feed volumes grew 8% yoy to 1 mn ton and fresh fruit bunch arrivals for oil

palm grew 16% yoy to 530 ktons in 9MFY20, (3) animal feed margins were impacted due to

lower share of aqua feed and internal transfer of ~35 ktons to GTFL at nil margins; excluding

captive sale, EBIT margins were still muted at 4% compared to 4.6-5.5% realized over the past

three quarters, (4) recent sharp rise in oil palm prices may augur well for the next year, as it may

moderate modestly in the season given likely curtailment of global supplies due to Indonesia’s

biodiesel policy, (5) a new backward integration plant is expected to commission by July 2020

and (6) seven crop protection products have been launched in 9MFY20.

Cut FY2020-22 EPS estimates by 2-5%; reiterate sell with a revised FV of Rs470

We cut our consolidated EPS estimates to Rs11.8 (-5%) in FY2020, Rs16.4 (-3%) in FY2021 and

Rs19.9 (-2%) in FY2022, factoring in (1) lower margins for key businesses, (2) higher revenues

for animal feed segment and (3) other minor changes. Our SoTP-based fair value increases to

Rs470 (from Rs450 earlier), as we roll-forward to FY2022 estimates.

Godrej Agrovet (GOAGRO) Fertilizers & Agricultural Chemicals

Weakness persists; reasons change. Godrej Agrovet’s results were below estimates

yet again in 3QFY20, led by weak margins across all segments except oil palm, which

recovered from a blip. GAVL’s valuations remain expensive at 34X on our FY2021 EPS

estimate, which is predicated on a normal environment across business segments—

something not seen over the past several quarters, while resulting in flattish earnings

since FY2017. We reiterate SELL and revise FV to Rs470 (Rs450 earlier) on rollover.

SELL

FEBRUARY 06, 2020

RESULT


CMP (`): 559

Fair Value (`): 470

BSE-30: 41,306

Tarun Lakhotia

Hemang Khanna

Godrej Agrovet




ADTV-3M (mn) (Rs/US$) P/E (X) 47.4 34.1 28.1



FIIs 3.4 RoE (%) 10.5 13.3 14.3



Absolute (0) 6 30 EBITDA (Rs bn) 4 6 7


598-422

108/1.6

2.1/0

57/1

Fertilizers & Agricultural Chemicals Godrej Agrovet


Key highlights from 3QFY20 results

Qoq moderation in margins offsets robust revenue growth in animal feed. Animal

feed revenue grew 32% yoy and 8% qoq reflecting 8% yoy growth in volumes to 350.3

ktons and sharp increase in realizations. EBIT increased 48% yoy but declined 19% qoq

to Rs350 mn, with margins moderating 113 bps qoq to 3.5% amid firm input costs.

Weak performance of crop protection contrary to competition. Crop protection (ex-

Astec) revenues declined 16% yoy and EBIT declined 15% yoy to Rs185 mn with margins

increasing modestly by 20 bps to 20.3%. GAVL’s performance is worrying in the context

of strong growth in revenues and robust improvement in margins delivered by other

domestic ag-chem players during the Rabi season.

Modest growth in Astec’s revenues and EBITDA. Astec’s revenues grew 5% yoy to

Rs1.25 bn and EBITDA increased modestly by 2% yoy to Rs248 mn; the company

attributed weak performance to (1) lower realizations amid higher inputs costs and

(2) deferral of export orders.

Recovery in vegetable oil segment. Oil palm revenues increased 24% yoy led by

(1) higher volumes and (2) realizations. EBIT increased 37% yoy to Rs436 mn, with

margins increasing 177 bps yoy and 722 bps qoq to 19.4%.

Sharp decline in dairy margins. Dairy business revenues increased by 3% yoy, although

the company reported an EBIT loss of Rs7 mn due to increase in procurement costs.

EBITDA loss for Godrej Tyson Foods. GTFL’s revenues increased 24% yoy; however,

the company reported an EBITDA loss of Rs94 mn due to an increase in the cost of live

birds.

Godrej Agrovet Fertilizers & Agricultural Chemicals


Exhibit 1: Quarterly results, March fiscal year-ends (Rs mn)


3QFY20 3QFY20E 3QFY19 2QFY20 3QFY20E 3QFY19 2QFY20 9MFY20 9MFY19 (% chg.) FY2020E

Net sales 17,827 16,896 14,541 18,511 6 23 (4) 53,364 45,268 18 69,576

Raw materials (14,180) (13,263) (11,356) (14,497) 7 25 (2) (41,644) (34,921) 19 (54,687)

Employee costs (924) (916) (757) (943) 1 22 (2) (2,760) (2,241) 23 (3,663)

Other costs (1,717) (1,550) (1,419) (1,874) 11 21 (8) (5,337) (4,297) 24 (6,945)

EBITDA 1,006 1,166 1,010 1,197 (14) (0) (16) 3,622 3,810 (5) 4,280

Depreciation (371) (386) (264) (375) (4) 40 (1) (1,096) (725) 51 (1,466)

EBIT 635 780 746 823 (19) (15) (23) 2,526 3,085 (18) 2,814

Other income 93 117 49 113 (20) 92 (18) 309 126 146 424

Interest (108) (137) (98) (125) (22) 10 (14) (334) (264) 26 (444)

Pretax profits 621 759 696 811 (18) (11) (23) 2,500 2,946 (15) 2,794

Extraordinary income 7 — 0 320 327 299 327

Current tax (187) (134) (193) (176) (728) (916) (485)

Deferred tax 12 (60) (51) 68 90 (173) (232)

Income from associates 59 30 33 3 125 130 175

Non-controlling interest 5 (19) (76) 14 2 (133) 10

Net profit after minority 516 576 409 1,040 (10) 26 (50) 2,316 2,154 8 2,590

Adjusted net profits 509 576 409 720 (12) 25 (29) 1,989 1,855 7 2,263

Adjusted EPS (Rs) 2.7 3.0 2.1 3.7 (12) 25 (29) 10.4 9.7 7 11.8

Key ratios (%)

Gross margins 20.5 21.5 21.9 21.7 (104)bps (145)bps (123)bps 22.0 22.9 (90)bps 21.4

EBITDA margins 5.6 6.9 6.9 6.5 (126)bps (130)bps (82)bps 6.8 8.4 (163)bps 6.2

Effective tax rate 28.2 25.6 35.0 13.3 25.5 33.6 25.6

Segment sales

Animal feeds 10,130 9,475 7,660 9,387 7 32 8 28,367 22,147 28 38,690

Vegetable oil 2,250 2,021 1,812 2,366 11 24 (5) 6,070 6,159 (1) 6,861

Crop protection 2,180 2,451 2,305 3,416 (11) (5) (36) 8,463 8,065 5 10,509

Dairy 2,855 2,849 2,780 3,063 0 3 (7) 9,122 8,904 2 11,901

Others 1,652 1,000 22 1,140 4,298 170 5,578

Excise duty/elimination (1,240) (900) (37) (860) (2,956) (178) (3,964)

Net sales 17,827 16,896 14,541 18,511 6 23 (4) 53,364 45,268 18 69,576

Segment EBIT

Animal feeds 350 477 237 431 (27) 48 (19) 1,205 824 46 1,782

Vegetable oil 436 377 319 288 16 37 52 850 1,136 (25) 898

Crop protection 381 446 411 678 (15) (7) (44) 1,826 1,981 (8) 2,120

Dairy (7) (3) 113 (2) 135 (106) 272 58 111 54

Others (176) (100) (12) (174) (324) 288 (467)

Unallocated (258) (300) (277) (297) (800) (842) (1,081)

EBIT 726 897 791 924 (19) (8) (21) 2,814 3,497 (20) 3,306

Segment margins (%)

Animal feeds 3.5 5.0 3.1 4.6 (157)bps 36 bps (113)bps 4.2 3.7 53 bps 4.6

Vegetable oil 19.4 18.7 17.6 12.2 72 bps 177 bps 722 bps 14.0 18.4 (443)bps 13.1

Crop protection 17.5 18.2 17.8 19.8 (74)bps (39)bps (239)bps 21.6 24.6 (298)bps 20.2

Dairy (0.2) (0.1) 4.0 (0.1) (13)bps (428)bps (18)bps 0.6 1.2 (61)bps 0.5

EBIT margin 4.1 5.3 5.4 5.0 (124)bps (136)bps (92)bps 5.3 7.7 (245)bps 4.8

(% chg.)



Exhibit 2: EBIT margins decline yoy for crop protection and dairy in 3QFY20 Segment-wise performance, 1QFY18 onwards (Rs mn)


Exhibit 3: Segment break-up, March fiscal year-ends, 2016-22E (Rs mn)


1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20

Segment sales

Animal feeds 6,345 6,119 6,470 6,827 7,373 7,115 7,660 8,318 8,850 9,387 10,130

Vegetable oil 1,309 2,672 1,356 517 1,683 2,665 1,812 634 1,454 2,366 2,250

Crop protection 2,795 2,593 1,559 1,872 2,567 3,192 2,305 1,811 2,866 3,416 2,180

Dairy 3,082 2,928 2,825 2,742 3,129 2,996 2,780 2,707 3,204 3,063 2,855

Others 165 34 28 21 153 (4) 22 5 1,507 1,140 1,652

Excise duty/elimination (254) (87) (30) (31) (60) (81) (37) (34) (855) (860) (1,240)

Net sales 13,441 14,258 12,207 11,947 14,844 15,884 14,541 13,439 17,026 18,511 17,827

Segment EBIT

Animal feeds 398 284 389 488 361 225 237 461 424 431 350

Vegetable oil 214 616 253 40 358 458 319 (1) 127 288 436

Crop protection 713 647 359 351 762 808 411 331 768 678 381

Dairy 12 45 90 (17) 2 (4) 113 38 66 (2) (7)

Others 9 9 (28) (23) 11 (10) (12) (22) 25 (174) (176)

Unallocated (244) (266) (260) (225) (290) (274) (277) (229) (245) (297) (258)

EBIT 1,103 1,334 803 614 1,204 1,204 791 578 1,164 924 726

Segment EBIT margin

Animal feeds 6.3 4.6 6.0 7.1 4.9 3.2 3.1 5.5 4.8 4.6 3.5

Vegetable oil 16.3 23.0 18.7 7.7 21.3 17.2 17.6 (0.2) 8.7 12.2 19.4

Crop protection 25.5 25.0 23.0 18.7 29.7 25.3 17.8 18.3 26.8 19.8 17.5

Dairy 0.4 1.5 3.2 (0.6) 0.1 (0.1) 4.0 1.4 2.1 (0.1) (0.2)

Overall 8.2 9.4 6.6 5.1 8.1 7.6 5.4 4.3 6.8 5.0 4.1

2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E

Segment sales

Animal feeds 22,389 24,232 25,430 25,442 26,208 25,760 30,465 38,690 44,494 51,168

Vegetable oil 2,752 3,574 3,938 4,042 5,066 5,854 6,793 6,861 7,890 8,876

Crop protection 2,213 3,040 3,352 4,959 7,647 8,818 9,875 10,509 11,672 13,127

Dairy — — — 2,729 10,093 11,577 11,611 11,901 12,318 12,811

Others 255 178 398 377 243 248 175 5,578 6,228 7,013

Excise duty (4) — — (48) (153) (197) (212) (3,964) (4,452) (5,013)

Net sales 27,605 31,025 33,118 37,502 49,105 52,059 58,708 69,576 78,150 87,982

Sales growth (%)

Animal feeds 8.2 4.9 0.0 3.0 (1.7) 18.3 27.0 15.0 15.0

Vegetable oil 29.9 10.2 2.6 25.3 15.5 16.0 1.0 15.0 12.5

Crop protection 37.4 10.3 47.9 54.2 15.3 12.0 6.4 11.1 12.5

Dairy NA NA NA 269.9 14.7 0.3 2.5 3.5 4.0

Others (30.0) NA NA (35.6) 2.0 (29.4) NA 11.7 12.6

Sales yoy (%) 12.4 6.7 13.2 30.9 6.0 12.8 18.5 12.3 12.6

EBITDA

Animal feeds 1,502 1,876 2,314 2,077 1,926 1,856 1,595 2,207 2,650 3,175

Vegetable oil 616 732 747 734 1,157 1,270 1,319 1,146 1,475 1,682

Crop protection 503 659 859 1,012 1,825 2,216 2,506 2,397 2,664 2,949

Dairy NA NA NA 39 532 325 395 369 443 525

Others 6 (2) (15) (64) (45) 24 324 (266) 382 430

Unallocated (681) (849) (845) (831) (1,016) (1,262) (1,557) (1,572) (1,730) (1,903)

EBITDA 1,946 2,415 3,060 2,967 4,380 4,430 4,581 4,280 5,885 6,858

EBITDA margins (%)

Animal feeds 6.7 7.7 9.1 8.2 7.4 7.2 5.0 5.7 6.0 6.2

Vegetable oil 22.4 20.5 19.0 18.2 22.8 21.7 20.7 16.7 18.7 18.9

Crop protection 22.7 21.7 25.6 20.4 23.9 25.1 25.4 22.8 22.8 22.5

Dairy NA NA NA 1.4 5.3 2.8 3.4 3.1 3.6 4.1

Others 2.2 (1.3) NM (16.9) (18.4) 9.8 185.5 (4.8) 6.1 6.1

Unallocated NA NA NA (2.2) (2.1) (2.4) (2.7) (2.3) (2.2) (2.2)

EBITDA margin (%) 7.0 7.8 9.2 7.9 8.9 8.5 7.8 6.2 7.5 7.8

Godrej Agrovet Fertilizers & Agricultural Chemicals


Exhibits 4: We value GAVL at Rs470/share on SoTP of diversified business segments SoTP valuation of GAVL, September 2021E (Rs mn)


March 2022E EV/EBITDA (X) Stake (%) EV Net debt Equity value

Animal feed 3,175 11 100 34,927

Oil palm 1,682 15 100 25,226

Crop protection (ex-Astec) 1,810 15 100 27,149

Crop protection (Astec) 1,139 15 59 10,078 864 9,214

Creamline Dairy 525 15 52 4,088 74 4,013

ACI Godrej JV 813 11 50 4,474 206 4,268

Godrej Tyson Foods 205 15 51 1,569 458 1,112

Unallocated (1,472) 11 100 (16,197) 0 (16,197)

Fair value 90,166

Fair value (Rs/share) 470

Implied P/E multiple (X) 24

(454) 87,755



Exhibits 5: Consolidated financial summary of GAVL, March fiscal year-ends, 2015-22E (Rs mn)


2015 2016 2017 2018 2019 2020E 2021E 2022E


Net sales 33,118 37,502 49,111 51,853 58,707 69,576 78,150 87,982

EBITDA 3,060 2,967 4,380 4,430 4,581 4,280 5,885 6,858

Depreciation (370) (524) (747) (859) (982) (1,466) (1,642) (1,820)

EBIT 2,691 2,443 3,633 3,571 3,600 2,814 4,243 5,039

Other income 137 627 590 318 232 424 450 482

Interest (655) (977) (863) (453) (339) (444) (368) (206)

Pretax profits 2,173 2,093 3,360 3,436 3,493 2,794 4,325 5,315

Extraordinary items 364 946 200 121 1,159 327 — —

Current tax (551) (485) (761) (1,108) (1,073) (485) (852) (1,081)

Deferred tax (55) (270) (256) (100) (207) (232) (257) (282)

Share of income from associates 170 327 186 161 121 175 193 212

Reported net profits 2,101 2,611 2,729 2,510 3,493 2,580 3,409 4,164

Non-controlling interest — 29 (241) (218) (203) 10 (258) (347)

Reported net profit to shareholders 2,101 2,640 2,488 2,292 3,290 2,590 3,151 3,817

Adjusted net profit to shareholders 1,737 1,694 2,288 2,171 2,199 2,263 3,151 3,817

Adjusted EPS (Rs) 9.4 9.2 12.4 11.5 11.5 11.8 16.4 19.9


Total equity 6,404 10,155 12,641 16,807 20,499 22,432 25,053 28,263

Deferred tax liability 565 1,458 1,670 1,730 2,086 2,086 2,086 2,086

Borrowings 6,848 13,757 6,640 4,098 3,979 3,779 2,379 379

Currrent liabilities 3,711 5,862 11,197 12,890 15,771 18,691 20,994 23,636

Total liabilities and equity 17,529 31,232 32,149 35,525 42,336 46,988 50,513 54,364

Cash 175 420 623 318 299 309 329 494

Current assets 9,323 17,092 18,398 20,548 23,519 27,316 30,068 33,174

Total fixed assets 6,605 11,607 12,723 14,374 18,141 18,925 19,633 20,164

Investments 366 593 — — — — — —

Loans 1,060 1,520 405 285 378 438 483 532

Total assets 17,529 31,232 32,149 35,525 42,336 46,988 50,513 54,364

Cash flow statement

Operating cash flow, excl. working capital 1,709 1,758 3,019 3,555 3,489 3,622 4,601 5,502

Working capital (31) (1,046) 5,093 (471) 634 (938) (493) (514)

Capital expenditure (1,858) (1,302) (2,049) (2,461) (2,759) (2,250) (2,350) (2,350)

Free cash flow (181) (590) 6,063 622 1,365 434 1,758 2,637

Investments (68) 581 610 (131) 352 — — —

Other income (23) (622) 471 51 61 424 450 482

Ratios (%)

EBITDA margin 9.2 7.9 8.9 8.5 7.8 6.2 7.5 7.8

EBIT margin 8.1 6.5 7.4 6.9 6.1 4.0 5.4 5.7

Debt/equity 106.9 135.5 52.5 24.4 19.4 16.8 9.5 1—

Net debt/equity 104.2 131.3 47.6 22.5 18.0 15.5 8.2 (0.4)

Book value (Rs/share) 35 55 68 89 107 117 130 147

RoAE 30.0 20.5 20.1 14.7 11.8 10.5 13.3 14.3

RoACE 15.9 10.0 12.7 11.6 9.9 8.8 12.1 13.6

RoACE (adjusted for goodwill) 16.2 8.8 12.4 12.0 10.4 8.4 11.8 13.5



Cash collections improve from residential sales; debt remains elevated

Brigade Enterprises reported strong cash collections of Rs7.4 bn (+32% yoy) aided by growth

across business verticals—(1) 31% yoy increase in residential sales, adequately backed by

(2) growth in hospitality (+21% yoy) and (3) leasing business (+23% yoy). Project execution

sustained with construction spend of Rs3.7 bn (-0.5% yoy) for the residential business, coupled

with capex for commercial and hotel business (Rs2 bn) and payment towards land (Rs310 mn)

that offset the benefit of cash collection with negative cash flows of Rs1.6 bn, resulting in

increase in net debt to Rs34.2 bn (Rs28 bn attributable) in 3QFY20.

Consolidated revenues for BRGD declined 20% yoy to Rs5.5 bn yielding an EBITDA of Rs1.6 bn

(-12% yoy) and PAT of Rs405 mn (-33% yoy). Earnings performance was impacted by lower

revenue recognition for the real estate business, even as the other two business verticals

continued to report strong earnings.

Strong sales momentum to help achieve sales target of 4 mn sq. ft in FY2020

On the operational front, BRGD reported sales of 1.1 mn sq. ft (+40% yoy) for a consideration

of Rs6 bn (+35% yoy) yielding an average realization of Rs5,578 per sq. ft. We highlight that

management has set itself a target of 4 mn sq. ft of sales in FY2020 and has achieved sales of

3.23 mn sq. ft (+60% yoy) till 9MFY20. Additionally, the company launched area of 0.92 mn

sq. ft at Brigade Cornerstone Utopia and Brigade El Dorado-Helio.

Real estate segment reported revenues of Rs3.8 bn (-30% yoy) with EBITDA of Rs803 mn (-

33% yoy) yielding reduced margins of 21% in 3QFY20.

Maintain BUY with revised fair value of Rs280/share

We maintain our BUY rating on Brigade with revised fair value of Rs280/share (from

Rs235/share earlier) as we roll forward to March 2022 (from March 2021) based valuation

target. Our fair value comprises (1) residential development at Rs12.1 bn, (2) operational and

under construction lease assets valued at Rs48 bn, (3) hotel portfolio of 1,638 keys valued at

Rs21 bn (Rs9 mn/key), and (4) land bank valued at Rs10.5 bn. Brigade is on a strong ramp-up

phase across business segments, having delivered well across parameters in FY2020E, and the

full benefit of the current growth likely to yield by FY2022E.

Brigade Enterprises (BRGD) Real Estate

Progressing well. Brigade continued with its strong performance in 3QFY20 reporting

a 40% yoy increase in sales volumes at 1.1 mn sq. ft (sales value of Rs6 bn) tracking

ahead of its target of 4 mn sq. ft sales for FY2020. Continued lease momentum with

new leases of 0.9 mn sq. ft in 3QFY20 combined with stabilization of hospitality

portfolio (PBT break-even) helped post a strong quarter. Maintain BUY rating with

revised fair value of Rs280/share (from Rs235/share earlier).

BUY

FEBRUARY 07, 2020

RESULT


CMP (`): 240

Fair Value (`): 280

BSE-30: 41,306

Murtuza Arsiwalla

Samrat Verma

Brigade Enterprises




ADTV-3M (mn) (Rs/US$) P/E (X) 28.7 24.6 13.5



FIIs 12.5 RoE (%) 7.7 8.5 14.1



Absolute 0 10 32 EBITDA (Rs bn) 7 10 14


247-125

49/0.7

14.3/0

34/0

Real Estate Brigade Enterprises


Annuity portfolio continues to ramp up well

BRGD’s annuity portfolio of office and malls yielded rental income of Rs944 mn (+23% yoy)

in 3QFY20 with occupancies of 74% and average rentals of Rs94 per sq. ft per month.

Hospitality business reported positive PAT of Rs4 mn (from negative Rs98 mn in 2QFY20) as

recently commissioned hotels continue to stabilize operations. While overall occupancy from

the hospitality portfolio declined 100 bps to 64% in 3QFY20 (1,194 keys), blended ARR for

the hotels remained flat at Rs5,425 (from Rs5,410 in 3QFY19).

Exhibit 1: Collection of Rs7.4 bn remained strong even as construction spend of Rs3.7 bn led to positive operating cash flow of Rs742 mn Brigade: Cash flow construct, March fiscal year-ends, 3QFY18 - 3QFY20 (Rs mn)


Annuity-stable earnings, consistent execution

BRGD’s annuity portfolio of offices and malls yielded rental income of Rs944 mn (+23% yoy)

in 3QFY20 with occupancy at 74% yielding average rentals of Rs94 per sq. ft per month in

3QFY20. New area leased during the quarter was at 0.9 mn sq. ft taking the total area pre-

leased in 9MFY20 to 2.24 mn sq. ft (excluding hard option of 0.7 mn sq. ft) –0.7 mn sq. ft

in Brigade Tech Garden and 1.5 mn sq. ft in World Trade Centre, Chennai.

Exit rental from existing operational commercial area of 3.3 mn sq. ft is expected to be at

Rs3 bn while under-construction portfolio of another 5.4 mn sq. ft will add another Rs4.4

bn to rental income by March 2021.

We note that BRGD is currently implementing three commercial projects under various

stages of implementation with a total project cost of Rs20.4 bn, against which capex of

Rs13 bn has already been incurred.

Hotels—moving up the stabilization curve

BRGD reported PBT of Rs4 mn an improvement from negative PBT of Rs98 mn reported in

2QFY20 led by increase in EBITDA margin to 32%. On aggregate basis, ARR for current

hotel portfolio improved 4% qoq to Rs 5,031 in 3QFY20 (Rs 4,834 in 2QFY20) while

occupancy improved from 63% in 2QFY20 to 64% in 3QFY20. We highlight that Four

Points by Sheraton (218 keys) in Kochi improved its occupancy to 35% within a year from its

date of commissioning in January 2019.

In addition, the company also expects to launch two more hotels, Grand Mercure, Gift City

(159 keys) and Ibis Styles, Mysore (151 keys), to be commissioned by 4QFY20 and 1QFY21,

respectively for which an incremental capex of Rs652 mn would be required.

3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20

Collections (Resi+rentals+hotels GOP) 4,230 4,714 4,622 6,082 5,527 6,185 5,025 5,814 7,362

Construction costs (residential) (2,216) (2,532) (2,059) (3,021) (3,714) (2,726) (3,191) (2,858) (3,698)

Land owner payments (JDA) (72) (81) (147) (120) (134) (207) (178) (274) (341)

Employee and administration expenses (578) (695) (784) (675) (709) (628) (668) (1,004) (851)

Sales and marketing expenses (305) (273) (139) (154) (170) (241) (172) (251) (273)

Statutory payments (including taxes) (661) (774) (493) (392) (372) (763) (517) (430) (520)

Other expenses and payments (a) (18) (20) (10) (49) (33) (173) (21) (19) (1)

Interest expenses (gross for all verticals) (646) (632) (676) (744) (788) (792) (803) (941) (936)

Operating cash flow before land and capex (266) (293) 314 927 (393) 655 (525) 37 742

Dividend payments (358) — — (319) — — — (322) 30

Post dividends (payments should be from OCF) (624) (293) 314 608 (393) 655 (525) (285) 772

Capex (1,538) (1,984) (1,172) (1,677) (916) (1,562) (1,884) (1,881) (2,016)

Land /JD /JV /TDR (2,435) (415) (31) (52) (155) (714) (21) (602) (310)

Investment in subsidiaries — — — — — — — — —

Free cash flow (4,597) (2,692) (889) (1,121) (1,464) (1,621) (2,430) (2,768) (1,554)

Brigade Enterprises Real Estate


Other highlights from the earnings call

Management highlighted that the company will continue to increase its presence in the

southern markets of Bengaluru, Hyderabad and Chennai and will refrain from entering

MMR and NCR market. As per the company, Bengaluru market continues to grow on a

higher base and on an industry wide basis has seven quarters of unsold inventory.

On divestment of stake in hospitality portfolio, the company has finalized the valuation

with one of the PE players however it is yet to get through legal clauses for the

transaction to be consummated.

While the company had expectations of some demand simulation to be provided in the

affordable housing space, the company will continue to focus its strategy on affordable

housing with 30% of the upcoming launches. Also, the company sees very good market

in mid-income housing as well (Rs6-15 mm).

Contribution in sales for 3QFY20 is as follows—ongoing projects (62%), new launches

(25%) and completed inventory (13%).

Exhibit 2: Consolidated earnings were weak on account of lower recognition in development business Quarterly results for Brigade Enterprises, March fiscal year-ends, 3QFY19-3QFY20 (Rs mn)


3QFY20 3QFY20E 3QFY19 2QFY20 3QFY20E 3QFY19 2QFY20 9MFY20 9MFY19 chg (%) 2020E 2019 chg (%) 2021E

Financials snapshot

Net sales 5,523 8,024 6,877 7,353 (31) (20) (25) 19,962 22,127 (10) 28,007 29,728 (6) 31,510

Operating costs (3,967) (5,739) (5,118) (5,451) (14,682) (16,385) (10) 20,723 (21,831) 21,760

EBITDA 1,556 2,285 1,759 1,902 (32) (12) (18) 5,281 5,743 (8) 7,283 7,897 (8) 9,750

Other income 164 184 103 163 410 367 12 526 545 483

Interest costs (863) (957) (697) (940) (2,598) (2,022) 28 (3,437) (2,785) (5,456)

Depreciation (501) (482) (320) (473) (1,357) (975) 39 (1,934) (1,400) (2,546)

PBT 356 1,030 845 653 (65) (58) (46) 1,735 3,112 (44) 2,438 4,256 (43) 2,231

Taxes 49 (361) (251) (281) (501) (1,027) (51) (780) (1,455) (758)

PAT 405 670 594 372 (40) (32) 9 1,234 2,085 (41) 1,658 2,801 (41) 1,472

Consolidated PAT 325 635 487 374 (49) (33) (13) 1,106 1,805 1,704 2,399 1,992

EPS (Rs/share) 2.0 3.3 4.4 1.8 6.0 15.3 8.3 11.7 9.7

Key ratios

EBITDA margin (%) 28.2 28.5 25.6 25.9 26.5 26.0 26.0 26.6 30.9

PAT margin (%) 7.3 8.3 8.6 5.1 6.2 9.4 5.9 9.4 4.7

Effective tax rate (%) (13.7) 35.0 29.7 43.1 28.9 33.0 32.0 34.2 34.0

% change



Exhibit 3: BRGD sold 1.1 mn sq. ft during the quarter achieving sales value of Rs6 bn Brigade: Sales, March fiscal year-ends, 3QFY17-3QFY20


Exhibit 4: Brigade achieved leasing of 0.9 mn sq. ft in 3QFY20 at Brigade Tech Gardens and WTC, Chennai Area for lease, area leased, occupancy and rentals for Brigade Enterprises, March fiscal year-ends, 3QFY17-3QFY20 (mn sq. ft)


3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20

Sales (mn sq. ft)

Residential 0.23 0.36 0.28 0.34 0.42 0.35 0.40 0.80 0.74 0.86 1.09 0.96 0.98

Commercial 0.07 0.01 0.04 0.03 0.04 0.07 0.03 — 0.03 0.10 0.04 0.04 0.10

Total 0.30 0.37 0.31 0.37 0.46 0.43 0.43 0.80 0.78 0.96 1.13 1.00 1.08

Sales (Rs mn)

Residential 1,313 2,100 1,554 1,938 2,309 1,763 1,990 4,597 4,224 4,637 5,552 5,005 5,157

Commercial 550 90 276 227 312 584 195 — 234 561 381 283 878

Total 1,863 2,190 1,830 2,165 2,621 2,347 2,185 4,597 4,458 5,198 5,933 5,288 6,035

Realizations (Rs /sq. ft)

Residential 5,759 5,801 5,630 5,717 5,459 4,994 4,963 5,725 5,677 5,373 5,075 5,219 5,268

Commercial 7,639 9,000 7,667 8,407 7,800 8,000 7,500 — 7,313 5,905 10,026 7,447 8,524

Blended 6,210 5,887 5,865 5,915 5,661 5,509 5,117 5,725 5,745 5,426 5,241 5,304 5,578

3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20

Area for lease 2.4 2.4 2.4 2.6 2.6 3.3 3.3 4.5 4.5

Area leased 2.3 2.3 2.3 2.2 2.2 2.5 2.5 3.3 3.3

Occupancy (%) 95.3 95.3 95.2 84.9 86.2 77.2 76.5 73.7 74.0

Lease rentals (Rs mn) (a) 748 718 768 867 765 805 841 905 944



Exhibit 5: Lease portfolio will provide rentals up to Rs5.3 bn by FY2022 Exit rental for FY2022 for commercial and retail portfolio for Brigade Enterprises (Rs mn)


Commercial projects

Operational projects Leasable area Rent per annum Brigade's economic interest

WTC Bengaluru 628 800 800

Brigade Bhuwalka Icom 188 95 95

Brigade Opus 301 290 290

Brigade Broadway 25 15 15

Brigade Financial Centre @ GIFT City 290 130 130

WTC Kochi 768 370 370

Others 33 20 20

Under-construction

Brigade Tech Gardens 2998 2,235 1,140

WTC Chennai 1997 1,920 980

Brigade Southfield 157 105 105

Retail projects

Operational projects Rent per annum Brigade's economic interest

Orion Mall Brigade Gateway 829 1,125 1,125

Orion Avenue Mall 148 70 70

Brigade Vantage Chennai 57 40 40

Under-construction

Orion Uptown Mall 270 150 150

Total operational 3,267 2,955 2,955

Total under-construction 5,422 4,410 2,375

Total (office+ retail) 8,689 7,365 5,330



Exhibit 6: Expansion of leasing portfolio has slowly led to increase in contribution to overall revenues Operational performance across different verticals of Brigade, March fiscal year-ends, 3QFY19-3QFY20 (Rs mn)


Exhibit 7: Real estate revenues declined by 30% yoy on account of lower delivery with EBITDA margin of 21% Operational performance of real estate vertical of Brigade, March fiscal year-ends, 3QFY19-3QFY20 (Rs mn)


Growth (%) Composition (%)

3QFY20 3QFY19 2QFY20 3QFY19 2QFY20 9MFY20 9MFY19 (% change) FY2020 FY2019 (% change) 3QFY20 3QFY19 2QFY20 FY2019

Revenue

Real estate 3,778 5,417 5,786 (30) (35) 15,117 17,914 (16) 21,263 23,979 (11) 66 78 77 79

Hospitality 964 798 825 21 17 2,565 2,180 18 3,554 3,089 15 17 11 11 10

Leasing 944 765 905 23 4 2,690 2,400 12 3,716 3,205 16 17 11 12 11

Revenue 5,686 6,980 7,516 (19) (24) 20,372 22,494 (9) 28,533 30,273 (6) 100 100 100 100

EBITDA

Real estate 803 1,206 1,308 (33) (39) 3,269 4,032 (19) 4,365 5,504 (21) 47 65 63 65

Hospitality 305 171 212 78 44 718 501 43 1,076 817 32 18 9 10 10

Leasing 611 485 545 26 12 1,703 1,576 8 2,368 2,121 12 36 26 26 25

EBITDA 1,719 1,862 2,065 (8) (17) 5,690 6,109 (7) 7,809 8,442 (7) 100 100 100 100

PBT

Real estate 488 895 888 (45) (45) 2,176 3,142 (31) 2,898 4,264 (32) 137 106 136 100

Hospitality 4 (72) (98) (106) NM (205) (251) (18) (255) (256) (1) 1 (9) (15) (6)

Leasing (137) 23 (136) (696) 1 (236) 221 (207) (206) 249 (183) (39) 3 (21) 6

PBT 355 846 654 (58) (46) 1,735 3,112 (44) 2,438 4,257 (43) 100 100 100 100

Growth (%)

3QFY20 3QFY19 2QFY20 3QFY19 2QFY20 9MFY20 9MFY19 chg (%) 2020E 2019 chg (%) 2021E

Net sales 3,778 5,417 5,786 (30) (35) 15,117 17,914 (16) 21,263 23,979 (11) 21,838

Operating costs (2,561) (3,424) (3,515) (9,815) (11,567) (13,788) (15,345) (14,200)

Gross profit 1,217 1,993 2,271 (39) (46) 5,302 6,347 (16) 7,474 8,634 (13) 7,638

Gross profit margin (%) 32 37 39 35 35 35 36 35

Admin expenses 54 (421) (472) (659) (1,217) (1,313) (1,584) (390)

Selling costs (211) (164) (199) (527) (396) (742) (608) (757)

Employee costs (257) (202) (292) (847) (702) (1,053) (938) (952)

EBITDA 803 1,206 1,308 (33) (39) 3,269 4,032 (19) 4,365 5,504 (21) 5,539

EBITDA margin (%) 21 22 23 22 23 21 23 25

Interest costs (310) (289) (400) (1,032) (834) (1,387) (1,123) (1,305)

Depreciation (5) (22) (20) (61) (56) (80) (117) (277)

PBT 488 895 888 (45) (45) 2,176 3,142 (31) 2,898 4,264 (32) 3,957

Operational metrics

Sales (Rs mn) 6,035 4,458 5,288 35 14 15,714 10,811 45 23,100 16,438 41 19,250

Area sold (msf) 1.08 0.78 1.00 39 9 3.21 2.01 60 4.20 2.96 42 3.50

Realizations (Rs/sq. ft) 5,578 5,745 5,304 (3) 5 4,894 5,389 (9) 5,500 5,546 (1) 5,500



Exhibit 8: Contribution from new hotels in Chennai leading to drop in blended metrics Operational performance of hospitality vertical of Brigade, March fiscal year-ends, 3QFY19-3QFY20 (Rs mn)


Exhibit 9: Rental income increased 23% yoy on the back of 49% yoy increase in leased area Brigade: Operational performance of leasing vertical, March fiscal year-ends, 3QFY19 - 3QFY20 (Rs mn)


Growth (%)


Net sales 964 798 825 21 17 2,565 2,180 18 3,554 3,089 15 4,505

Operating costs (159) (147) (135) (421) (377) (580) (505) (767)

Gross profit 805 651 690 24 17 2,144 1,803 19 2,974 2,584 15 3,738


Admin expenses (253) (288) (253) (737) (733) (926) (998) (1,052)

Selling costs (39) (33) (17) (82) (81) (122) (87) (124)

Employee costs (208) (159) (208) (607) (488) (850) (682) (1,123)

EBITDA 305 171 212 78 44 718 501 43 1,076 817 32 1,439

EBITDA margin (%) 32 21 26 28 23 30 26 32

Interest costs (129) (109) (131) (393) (308) (578) (441) (586)

Depreciation (172) (134) (179) (530) (444) (753) (632) (842)

PBT 4 (72) (98) (106) NM (205) (251) (18) (255) (256) (1) 10

Operational metrics

Keys (#) 1,194 976 1,194 1,194 976

Occupancy (%) 64 66 63 (4) 1 62 61 2

ARR (Rs/day) 5,031 5,410 4,834 (7) 4 5,033 5,358 (6)

RevPAR (Rs/day) 3,199 3,593 3,033 (11) 5 3,112 3,245 (4)

Note:

(a) Four Points by Sheraton with 218 keys (commissioned in Jan 2019) did not seperately report financials for 4QFY19.

(b) Computation of operational metrics for the quarter is estimated based on YTD data provided by the company.

Growth (%)


Net sales 944 765 905 23 4 2,690 2,400 12 3,716 3,205 16 5,650

Operating costs (13) (21) (31) (70) (89) (114) (97) (174)

Gross profit 931 744 874 25 7 2,620 2,311 13 3,602 3,108 16 5,475


Admin expenses (198) (156) (205) (569) (444) (761) (614) (1,739)

Selling costs (44) (49) (41) (95) (101) (140) (114) (143)

Employee costs (78) (54) (83) (253) (190) (333) (259) (339)

EBITDA 611 485 545 26 12 1,703 1,576 8 2,368 2,121 12 3,255

EBITDA margin (%) 65 63 60 63 66 64 66 58

Interest costs (424) (298) (407) (1,173) (880) (1,472) (1,221) (3,565)

Depreciation (324) (164) (274) (766) (475) (1,101) (651) (1,427)

PBT (137) 23 (136) (696) 1 (236) 221 (207) (206) 249 (183) (1,737)

Operational metrics

Area (msf) 4.5 2.6 4.5 74 0 4.1 2.5 4.9 2.7 8.5

Leased (msf) 3.3 2.2 3.3 49 1 3.1 2.2 36 3.2 2.3 4.7

Occupancy (%) 74 86 74 (14) 0 75 89 (16) 65 85 55

Rate (Rs/sq. ft) 94 114 91 (17) 4 147 178 (18) 98 115 (15) 101

Note:

(a) Computation of operational metrics for the quarter is estimated based on YTD data provided by the company.



Exhibit 10: Brigade has sold off its land parcel in Mangalore for an estimated value of Rs200 mn in 2QFY20 Brigade Enterprises: Land bank details, March fiscal year-ends, 3QFY17-3QFY20 (acres, Rs mn)


Exhibit 11: Real estate business has potential cash flows of Rs23 bn from ongoing projects Brigade: Receivables profile, March fiscal year-ends, 3QFY18 - 3QFY20 (mn sq. ft)


Exhibit 12: BRGD has balance capex of Rs8 bn to be incurred for completion of commercial and hotel assets Composition of project cost and capex incurred, March fiscal year-ends (Rs mn)


3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20

Land bank (acres) 544 542 508 508 510 510 522 488 465 431 413 381 372

Bengaluru 397 400 378 378 391 391 390 360 337 284 267 264 255

Chennai 72 72 60 60 49 49 49 49 49 54 54 54 54

Kochi 18 18 18 18 18 18 18 18 18 18 18 18 18

Mangalore 29 29 29 29 29 29 29 29 29 29 29 — —

GIFT, Gujrat 9 4 4 4 4 4 4 2 2 2 2 2 2

Mysore 19 19 19 19 19 19 19 17 17 17 16 16 16

Hyderabad — — — — — — 13 13 13 13 13 13 13

Thiruvananthapuram — — — — — — — — — 14 14 14 14

Land cost (Rs mn) 17,681 17,382 15,755 15,755 13,978 13,978 14,090 12,841 12,470 13,814 13,537 13,311 13,162

Land cost paid (Rs mn) 15,520 13,745 12,401 12,458 10,682 10,707 10,793 10,527 10,156 10,909 10,593 10,128 10,449

Land cost payable (Rs mn) 2,161 3,637 3,354 3,297 3,296 3,271 3,297 2,314 2,314 2,905 2,944 3,183 2,713

1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 2020 2021 2022

Balance collection from sold units 7,977 7,985 7,963 8,908 10,979 12,860 13,830 15,147 13,883 11,383

Balance collection from unsold units 32,219 31,013 32,959 38,900 38,473 35,898 35,224 37,800 18,550 1,050

Cost to be incurred 13,586 13,875 17,730 22,128 24,596 25,813 25,553 20,330 13,109 4,444

Gross operating cash flows 26,610 25,123 23,192 25,680 24,856 22,945 23,501 32,616 19,323 7,989

Present borrowings 5,971 7,087 6,636 6,856 6,807 7,139 6,975

Net operating cash flows 20,639 18,036 16,556 18,824 18,049 15,806 16,526

4QFY19 1QFY20 2QFY20 3QFY20

Est. cost Incurred Balance Est. cost Incurred Balance Est. cost Incurred Balance Est. cost Incurred Balance

Office Space

Brigade Southfield — — — 1,144 368 776 1,144 467 677 1,144 573 571

Retail Space

Brigade Uptown Mall/ Holiday Inn Express 1,935 749 1,186 1,935 810 1,125 1,935 1,058 877 1,935 1,280 655

Brookfields Real Estates and Projects (51% SPV)

Brigade Tech Gardens 11,300 5,514 5,786 11,300 6,061 5,239 11,300 6,726 4,574 11,300 7,923 3,377

Perungudi Real Estates Pvt. Ltd. (51% SPV)

World Trade Center, Chennai 8,000 2,649 5,351 8,000 3,440 4,560 8,000 4,222 3,778 8,000 4,629 3,371

21,235 8,912 21,235 10,311 21,235 12,006 21,235 13,832

Hotels

Ibis Styles, Gift City 1,140 710 430 1,160 776 384 1,160 914 246 1,160 1,050 110

Ibis Styles Mysore 730 155 575 730 167 563 730 552 178 730 542 188



Exhibit 13: We currently factor moderate improvement in sales over the next few years Key segment wise assumptions, March fiscal year-ends, 2018-22 (Rs mn)


Exhibit 14: Annuity portfolio contributes over 50% of the value for Brigade Enterprises Brigade: NAV, March 2021E


2018 2019 2020 2021 2022

Residential

Sales (area) 1.57 2.96 4.20 3.50 3.50

Value (Rs mn) 8,963 16,438 23,100 19,250 17,500

Inventory (area) 6.38 7.41 7.21 3.71 0.21

Value (Rs mn) 32,935 38,900 37,800 18,550 1,050

Collections 12,692 16,122 16,862 20,514 20,000

GCF (Rs mn) 2,688 4,602 3,864 13,293 11,335

GCF outstanding (Rs mn) 27,235 25,680 32,616 19,323 7,989

Leasing

Completed area (msf) 2.41 3.29 4.86 8.49 8.76

Under construction (msf) - 5.47 3.90 0.27 (0.00)

Area leased 2.29 2.54 3.16 4.67 6.13

Rental (Rs mn) 2,859 3,205 4,492 7,216 9,829

In-place rent (Rs/sf) 104 105 118 129 134

Hotels

Operational Keys 976 1,194 1,487 1,638 1,638

Revenues

Residential 14,225 23,979 19,984 20,580 20,591

Commercial 2,859 3,205 3,692 5,616 9,829

Hotels 2,371 3,089 3,454 4,405 4,961

EBITDA

Residential 6,211 8,634 6,196 6,380 6,384

Commercial 1,974 2,121 2,344 3,221 6,859

Hotels 589 817 976 1,339 1,738

Margins (%)

Residential 44 36 31 31 31

Commercial 69 66 63 57 70

Hotels 25 26 28 30 35

Value Inventory / Area Receivables Cost GCF

Project (Rs mn) (Rs/share) (%) (mn sq. ft) (Rs/sq. ft) (Rs mn) (Rs mn) (Rs mn) (Rs mn)

Residential 12,127 59 13 4 5,000 18,550 13,883 13,109 19,323

Land 10,449 51 11 29 355 10,449

Commercial + Retail 47,948 235 52 6 134 9,829

Hotel 20,852 102 23

Total 91,376 447 100

Net debt 34,140 167 37

Equity Value 57,236 280 63



Exhibit 15: Brigade: Profit model, balance sheet, cash flow model, March fiscal year-ends, 2017-22E

(Rs mn)


2017 2018 2019 2020E 2021E 2022E

Profit model

Net sales 20,241 18,972 29,728 28,007 31,510 36,333

EBITDA 5,744 5,545 7,897 7,283 9,750 14,004

Other income 342 483 545 526 483 514

Interest (2,465) (2,594) (2,785) (3,437) (5,456) (5,492)

Depreciation (1,226) (1,377) (1,400) (1,934) (2,546) (3,205)

Pre-tax profits 2,396 2,057 4,256 2,438 2,231 5,821

Tax (927) (978) (1,029) (780) (758) (1,979)

Deferred taxation 195 350 (427) — — —

Net income 1,664 1,429 2,801 1,658 1,472 3,842

Adjusted net income 1,531 1,507 2,399 1,704 1,992 3,617


Balance sheet

Total equity 16,954 22,870 21,694 22,782 24,157 27,158

Minority interests 2,269 2,231 1,884 1,846 1,334 1,567

Gross borrowings 25,760 33,897 37,855 51,215 45,978 36,206

Non-current liabilities 1,767 2,106 1,686 1,680 1,657 1,670


Total liabilities and equity 63,520 78,219 107,999 105,572 107,417 96,896

Fixed assets 29,943 39,339 42,864 51,060 56,505 54,438

Other non-current assets 4,431 6,439 6,035 6,635 6,635 6,635

Current assets 28,000 29,228 57,205 46,395 42,795 34,342

Investments 1,146 3,205 1,895 1,482 1,482 1,482

Total assets 63,520 78,212 107,999 105,572 107,417 96,896

Free cash flow

Operating cash flow, excl. working capital 2,862 2,336 2,326 4,004 4,537 6,822

Working capital changes (166) (1,737) 2,001 (15,483) 12,992 3,295

Capital expenditure (4,613) (10,773) (4,924) (10,131) (7,991) (1,138)

Investments (382) (2,059) 1,310 413 — —

Free cash flow (2,299) (12,232) 713 (21,196) 9,538 8,979

Ratios (%)

Debt/equity 151.9 148.2 174.5 224.8 190.3 133.3

Net debt/equity 145.6 141.8 164.3 252.3 203.1 149.0

RoE (%) 9.4 7.4 10.7 7.6 8.4 13.9

RoCE (%) 3.0 1.6 4.8 1.9 1.6 5.2

Book value per share (Rs) 99.4 112.1 106.2 111.5 118.3 133.0



3QFY20 results: Bulk drives growth as exim container flattens; margin sustains at ~60% levels

GPPV reported a healthy 4% yoy growth in volumes, all driven by scale-up in bulk (fertilizer)

volumes. Container volumes declined 8% yoy with gateway volumes growing a modest 1%

yoy. This mirrors the flattish yoy market on the west coast. Overall container realizations were

steady qoq, helping sustain ~60% EBITDA margin. Note that the same is a function of a price

increase taken in April 2019 and will get partly negated by higher depreciation once the rail-

front capex (reason for the price hike) reflects in higher depreciation expense. Metrics beyond

volumes are not comparable yoy on account of reversal of volumes rebates that happened in

3QFY19. PAT for the current quarter was boosted by GPPV restating its deferred tax liability as

per the change in the corporate tax rate. It would likely continue with the old tax rate for

FY2021 and utilize the remaining MAT credit; will shift to lower tax rate from FY2022.

Status quo on most other potential developments

On DFCC, the management shared expectation of partial commissioning till Gujarat by

December 2020. Here, PRCL is progressing well to integrate its offering with that of DFC. There

have been no further developments on the concession agreement and the management shared

the absence of red flags in discussions with GMB on this subject. Competitive intensity on the

west coast remains unchanged, helping GPPV sustain realization levels. The management also

shared the absence of pressure from shipping lines to lower realization on account of a lower

tax rate.

Lower FV to Rs118 from Rs124 on ~4% cut in estimates and higher CoE, net of roll forward

We lower our estimates for GPPV for FY2021/22 by ~4% on account of weakness in container

and roro volumes. Increase in FY2020E EPS is more a result of restatement of deferred tax

liability. Estimate revision leads to modest cut in fair value to Rs118 (from Rs124) with benefit of

roll-forward getting negated by higher cost of equity (14% versus 13.5% earlier. Higher cost of

equity is driven by two factors. (1) We note large reliance on the parent for business at 45%

share of container volumes versus 30-35% levels a year back (contribution at a revenue/EBITDA

level would be lower). (2) Global parent’s impetus towards decarbonisation may put at risk

GPPV ending its coal handling business (2-4% of overall volumes at present for GPPV).

Gujarat Pipavav Port (GPPV) Transportation

Mirroring market weakness. GPPV reported a weak container volume print (exim up

1% yoy) with strong performance on bulk volumes yielding a 4% beat versus our

estimates. GPPV maintained status quo on most other variables of relevance (DFC

commissioning by Dec-20, no movement on decision to extend concession, static

competitive intensity). We lower our fair value to Rs118 from Rs124 on account of

weak container volumes and higher cost of equity, net of roll-forward.

BUY

FEBRUARY 06, 2020

RESULT


CMP (`): 90

Fair Value (`): 118

BSE-30: 41,306

Aditya Mongia

Teena Virmani

Gujarat Pipavav Port



Mcap (bn) (Rs/US$) EPS growth (%) 44.9 (8.2) 26.7

ADTV-3M (mn) (Rs/US$) P/E (X) 14.5 15.8 12.5



FIIs 23.2 RoE (%) 14.7 13.4 16.9



Absolute 3 (1) 17 EBITDA (Rs bn) 5 5 6

Rel. to BSE-30 2 (2) 4 Net profits (Rs bn) 3 3 3

104-74

44/0.7

24.2/0

32/0

Transportation Gujarat Pipavav Port


Exhibit 1: GPPV reported a 4% beat in volumes as scale-up in fertilizer volumes masked weakness in container volumes GPPL - 3QFY20 - key numbers, March fiscal year-ends (Rs mn)


Exhibit 2: Container volumes declined 8% yoy lower transshipment volumes; exim volumes grew 1% yoy in flattish market Quarterly and annual trajectory of container volumes for Gujarat Pipavav, March fiscal year-ends


3QFY20 3QFY20E 3QFY19 2QFY20 vs est. yoy qoq 9MFY20 9MFY19 % change FY2020E FY2019

Net operating income 1,966 1,897 1,747 1,992 4 13 (1) 5,734 5,218 10 7,572 7,020 8

Total expenditure (795) (772) (760) (725) 3 5 10 (2,272) (2,343) (3) (3,045) (3,149) (3)

Operating expenses (372) (327) (335) 14 11 (1,017) (1,064) (4) (1,390) (1,442) (4)

Employee costs (144) (145) (136) (1) 6 (425) (447) (5) (567) (597) (5)

Admin and other exp. (280) (287) (254) (3) 10 (830) (832) (0) (1,089) (1,109) (2)

EBITDA 1,171 1,125 987 1,267 4 19 (8) 3,462 2,876 20 4,527 3,872 17

Other income 114 110 103 116 4 10 (2) 391 359 9 496 470 6

Interest expense (19) — (0) (18) (54) (2) (72) (4)

Depreciation (333) (338) (275) (327) (2) 21 2 (976) (818) 19 (1,318) (1,128) 17

PBT 932 897 815 1,038 4 14 (10) 2,823 2,414 17 3,633 3,210 13

Tax expense 271 (313) (292) (360) (193) (175) (377) (867) (57) (652) (1,153) NA

PAT 1,204 584 522 677 106 130 78 2,445 1,547 58 2,981 2,057 45

Extraordinary items — — — — — — NA — — NA

Reported PAT 1,204 584 522 677 106 130 78 2,445 1,547 58 2,981 2,057 45

Key ratios (%)

Operating exp./sales 18.9 — 18.7 16.8 17.7 20.4 18.4 20.5

Employee costs/sales 7.3 — 8.3 6.8 7.4 8.6 7.5 8.5

Admin and other exp./sales 14.2 — 16.4 12.7 14.5 16.0 14.4 15.8

EBITDA margin 59.5 59.3 56.5 63.6 60.4 55.1 59.8 55.1

PBT margin 47.4 47.3 46.6 52.1 49.2 46.3 48.0 45.7

PAT margin 61.2 30.8 29.9 34.0 42.6 29.6 39.4 29.3

Effective tax rate (29.1) 34.9 35.9 34.7 13.4 35.9 17.9 35.9

EPS (Rs) 2.5 1.2 1.1 1.4 5.1 3.2 6.2 4.3

Volumes

Bulk ('000 tons) 735 422 333 674 74 121 9 1,919 1,484 29.3 2,410 2,008 20.0

Container ('000 TEUs) 231 240 251 224 (4) (8) 3 676 684 (1.2) 903 903 —

Liquid ('000 tons) 194 208 149 235 (7) 30 (17) 626 403 55.3 818 639 28.0

Ro-ro ('000) 9 21 20 20 (57) (55) (55) 44 58 (24.1) 68 76 (10.0)

Total ('000 tons) 4,174 4,014 4,020 4,069 4 4 3 12,062 11,533 4.6 15,952 15,380 3.7

Avg. realization (Rs/ton) 471 473 435 490 (0) 8 (4) 475 452 5.1 475 456 4.0

% change

% change

(30)

(20)

(10)

-

10

20

30

40

50

60

-

50

100

150

200

250

300

Dec

-12

Jun-1

3

Dec

-13

Jun-1

4

Dec

-14

Jun-1

5

Dec

-15

Jun-1

6

Dec

-16

Jun-1

7

Dec

-17

Jun-1

8

Dec

-18

Jun-1

9

Dec

-19

(%)('000 TEUs) Quarterly container cargo

Container quarterly volumes ('000 TEU)yoy growth (%)

135 192 196

321

466

610 570661

793 695 663 703

903 903 957

1,015

(20)

0

20

40

60

80

0

200

400

600

800

1,000

1,200

2006

2007

2008

2009

2010

2011

2012

2013

12M

FY15

2016

2017

2018

2019

2020E

2021E

2022E

(%)('000 TEUs) Annual container cargo

Container volumes ('000 TEU)yoy growth (%)

Gujarat Pipavav Port Transportation


Exhibit 3: 9MFY20 realization have improved on account of recent price increase and lower share of

transshipment volumes Average realization at Pipavav port, CY2009-FY2022E (Rs per ton)


Exhibit 4: Change in estimates for GPPL, March fiscal year-ends, 2018-22E


280 289

319

364

423 448

512

541

507

456 475 475

489 504

250

300

350

400

450

500

550

600

CY

2009

CY

2010

CY

2011

CY

2012

CY

2013

FY2015

FY2016

FY2017

FY2018

FY2019

9M

FY20

FY2020E

FY2021E

FY2022E

Average realizations

New estimates Old estimates % change

2018 2019 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E

Volumes

Container volumes (TEUs) 703,000 903,000 903,000 957,180 1,014,611 948,150 1,005,039 1,065,341 (5) (5) (5)

Yoy growth (%) 6.0 28.4 — 6.0 6.0 5.0 6.0 6.0

Bulk volumes (tons) 1,820,000 2,008,000 2,409,600 2,530,080 2,656,584 2,108,400 2,213,820 2,324,511 14 14 14

Yoy growth (%) (13.8) 10.3 20.0 5.0 5.0 5.0 5.0 5.0

Liquid volumes (tons) 1,020,000 639,000 817,920 940,608 1,081,699 830,700 955,305 1,098,601 (2) (2) (2)

Yoy growth (%) 49 (37) 28 15 15 30 15 15

Ro/ro volumes 98,000 76,000 68,400 82,080 90,288 83,600 100,320 110,352 (18) (18) (18)

Yoy growth (%) 17.2 (22.4) (10.0) 20.0 10.0 10.0 20.0 10.0

Total volumes (mn tons) 13 15 16 17 18 16 17 18 (2) (2) (2)

Yoy growth (%) 5.0 20.2 3.7 6.4 6.4 6.1 6.4 6.4

Tariffs (blended rate)

Container (Rs/TEU) 6,286 5,657 5,884 6,060 6,242 5,884 6,060 6,242 — — —

yoy increase (%) (6.0) (10.0) 4.0 3.0 3.0 4.0 3.0 3.0

Bulk (Rs/ton) 435 435 435 435 435 448 461 475 (3) (6) (8)

yoy increase (%) (10.0) — — — — 3.0 3.0 3.0

Liquid (Rs/ton) 457 411 452 470 489 452 470 489 — — —

yoy increase (%) (10.0) (10.0) 10.0 4.0 4.0 10.0 4.0 4.0

Ro/ro realization 3,150 3,150 3,308 3,473 3,647 3,308 3,473 3,647 — — —

yoy increase (%) — — 5.0 5.0 5.0 5.0 5.0 5.0

Overall realization (Rs / ton) 510 458 475 489 504 478 495 511 (1) (1) (1)

yoy increase (%) (5.8) (10.2) 3.7 3.1 2.9 4.3 3.6 3.3

Revenues (Rs mn)

Container 4,419 5,109 5,313 5,801 6,333 5,579 6,091 6,650 (5) (5) (5)

Bulk 792 873 1,048 1,100 1,155 945 1,021 1,105 11 8 5

Liquid 466 263 370 442 529 376 449 537 (2) (2) (2)

Ro/ro 309 239 226 285 329 277 348 402 (18) (18) (18)

Total revenues 6,529 7,043 7,572 8,305 9,091 7,790 8,586 9,439 (3) (3) (4)

yoy increase (%) (1.0) 7.9 7.5 9.7 9.5 10.6 10.2 9.9

EBITDA 3,741 3,872 4,527 5,044 5,565 4,583 5,176 5,750 (1) (3) (3)

EBITDA margin (%) 57.3 55.0 59.8 60.7 61.2 58.8 60.3 60.9

PBT 3,072 3,210 3,633 4,104 4,635 3,703 4,259 4,827 (2) (4) (4)

Tax (1,087) (1,153) (652) (1,367) (1,167) (1,233) (1,418) (1,215)

Tax rate (%) 35.4 35.9 17.9 33.3 25.2 33.3 33.3 25.2

PAT 1,985 2,057 2,981 2,737 3,469 2,470 2,841 3,612 21 (4) (4)

EPS 4.1 4.3 6.2 5.7 7.2 5.1 5.9 7.5 21 (4) (4)



Exhibit 5: Key assumptions for the standalone operations of Gujarat Pipavav Port, March fiscal year-ends, 2018-22E


Exhibit 6: SoTP-based fair value of Rs118/share Sum-of-the-parts valuation of GPPL


2012 2013 15M2015 2016 2017 2018 2019 2020E 2021E 2022E

Volumes

Container volumes (TEUs) 570,489 660,729 980,689 694,614 663,380 703,000 903,000 903,000 957,180 1,014,611

Yoy growth (%) (6.5) 15.8 15.7 (10.8) (4.5) 6.0 28.4 — 6.0 6.0

Bulk volumes (tons) 3,010,500 3,106,000 4,643,675 2,478,743 2,112,078 1,820,000 2,008,000 2,409,600 2,530,080 2,656,584

Yoy growth (%) (18.2) 3.2 22.2 (28.0) (14.8) (13.8) 10.3 20.0 5.0 5.0

Liquid volumes (tons) — — 304,548 706,877 685,960 1,020,000 639,000 817,920 940,608 1,081,699

Yoy growth (%) — — NA 132 (3) 49 (37) 28 15 15

Ro/ro volumes — — — 19,644 83,607 98,000 76,000 68,400 82,080 90,288

Total volumes (mn tons) 11 12 19 13 12 13 15 16 17 18

Yoy growth (%) (10.0) 12.4 24.5 (15.9) (5.8) 5.0 20.2 3.7 6.4 6.4

Tariffs (blended rate)

Container (Rs/TEU) 4,707 5,177 5,695 6,492 6,687 6,286 5,657 5,884 6,060 6,242

yoy increase (%) 15.0 10.0 10.0 14.0 3.0 (6.0) (10.0) 4.0 3.0 3.0

Bulk (Rs/ton) 438 460 483 483 483 435 435 435 435 435

yoy increase (%) 15.0 5.0 5.0 — — (10.0) — — — —

Liquid (Rs/ton) — 500 500 500 508 457 411 452 470 489

yoy increase (%) — — — — 1.5 (10.0) (10.0) 10.0 4.0 4.0

Ro/ro realization — — — 3,000 3,150 3,150 3,150 3,308 3,473 3,647

Overall realization (Rs / ton) 364 423 467 504 541 510 458 475 489 504

yoy increase (%) 14.1 16.1 10.5 7.9 7.3 (5.8) (10.2) 3.7 3.1 2.9

Revenues (Rs mn)

Container 2,685 3,421 5,585 4,510 4,436 4,419 5,109 5,313 5,801 6,333

Bulk 1,320 1,430 2,244 1,198 1,021 792 873 1,048 1,100 1,155

Liquid — — 152 353 348 466 263 370 442 529

Ro/ro — — — 59 263 309 239 226 285 329

Total revenues 4,005 5,224 8,729 6,524 6,597 6,529 7,043 7,572 8,305 9,091

yoy increase (%) 2.7 30.5 36.1 (8.2) 1.1 (1.0) 7.9 7.5 9.7 9.5

Value Stake GPPL stake value

(Rs bn) (%) (Rs bn) Method of valuation

Pipavav port 50,397 100.0 50,397 104 One-year forward FCFE valuation

Pipavav Rail Corporation Ltd (PRCL) 16,882 38.8 6,550 14 16X two'-year forward EPS

Total value for GPPV 67,279 56,947 118

Per share

(Rs)

Gujarat Pipavav Port Transportation


Exhibit 7: GPPV trades at 6X FY2020E EV/EBITDA, about half the valuation multiple for ADSEZ Key numbers and valuation metrics of GPPL versus Adani Ports and SEZ, March fiscal year-ends, 2018-22E


2018 2019 2020E 2021E 2022E 2018 2019 2020E 2021E 2022E

Volumes

Total (mn tons) 13 15 16 17 18 179 208 224 302 326

Financial summary (Rs mn)

Revenues 6,489 7,020 7,572 8,305 9,091 113,230 109,254 118,706 158,783 177,685

EBIDTA 3,741 3,872 4,527 5,044 5,565 70,621 65,916 77,069 96,772 108,133

PAT 1,985 2,057 2,981 2,737 3,469 36,736 39,902 45,385 47,614 57,328

Net debt (4,315) (5,337) (5,408) (5,807) (6,951) 184,645 212,206 204,934 282,852 253,365

Book value 20,141 20,210 20,340 20,461 20,614 210,688 245,382 257,986 296,258 343,278

Key ratios (%)

Revenue growth (5.0) 8.2 7.9 9.7 9.5 34.2 (3.5) 8.7 33.8 11.9

PAT growth (20.6) 3.6 44.9 (8.2) 26.7 (6.1) 8.6 13.7 4.9 20.4

EBIDTA margin 57.6 55.1 59.8 60.7 61.2 62.4 60.3 64.9 60.9 60.9

RoE 9.8 10.2 14.7 13.4 16.9 19.8 17.8 19.9 18.2 17.9

RoCE 9.9 10.2 14.9 13.6 17.0 14.9 11.3 11.3 12.4 12.6

Per share (Rs)

EPS 4.1 4.3 6.2 5.7 7.2 18.1 19.6 22.3 23.4 28.2

BVPS 41.7 41.8 42.1 42.3 42.6 103.7 120.8 127.0 145.8 169.0

Key valuation ratios at MP (X)

P/E 16.3 15.8 10.9 11.8 9.3 20.5 18.8 16.6 15.8 13.1

P/B 1.6 1.6 1.6 1.6 1.6 3.6 3.1 2.9 2.5 2.2

P/Sales 8.8 8.1 7.5 6.9 6.3 6.6 6.9 6.3 4.7 4.2

EV/EBITDA 7.5 7.0 6.0 5.3 4.6 13.3 14.6 12.4 10.7 9.3

Valuation at TP (X)

P/E 25.4 24.5 16.9 18.4 14.5 26.3 24.2 21.3 20.3 16.8

P/B 2.5 2.5 2.5 2.5 2.4 4.6 3.9 3.7 3.3 2.8

P/Sales 7.8 7.2 6.7 6.1 5.5 8.5 8.8 8.1 6.1 5.4

EV/EBITDA 12.3 11.6 9.9 8.8 7.8 16.3 17.9 15.2 12.9 11.3

Adani Ports and SEZ (consolidated)Pipavav Port



Exhibit 8: Profit, balance sheet and cash model of GPPL, CY2012 - FY2022E (Rs mn)


CY2012 CY2013 15MFY15 FY2016 FY2017 FY2018 FY2019 FY2020E FY2021E FY2022E

Profit model

Net sales 4,160 5,179 8,670 6,600 6,831 6,489 7,020 7,572 8,305 9,091

Total operating costs (2,342) (2,611) (3,656) (2,839) (2,645) (2,748) (3,149) (3,045) (3,261) (3,526)

EBITDA 1,819 2,568 5,015 3,761 4,186 3,741 3,872 4,527 5,044 5,565

EBITDA margin (%) 43.7 49.6 57.8 57.0 61.3 57.6 55.1 59.8 60.7 61.2

Other income 154 168 401 258 354 370 470 496 512 576

Financial charges (684) (374) (262) (2) (4) (3) (4) (72) (58) (46)

Depreciation (549) (756) (833) (964) (1,065) (1,036) (1,128) (1,318) (1,394) (1,459)

Pre-tax profit 740 1,605 4,321 3,054 3,470 3,072 3,210 3,633 4,104 4,635

Adjusted PAT 740 1,605 4,321 1,661 2,499 1,985 2,057 2,981 2,737 3,469

EPS (Rs) 1.5 3.3 8.9 3.4 5.2 4.1 4.3 6.2 5.7 7.2

Balance sheet

Shareholders' funds 12,117 14,035 17,908 19,164 20,195 20,141 20,210 20,340 20,461 20,614

Equity share capital 4,834 4,834 4,834 4,834 4,834 4,834 4,834 4,834 4,834 4,834

Reserves and surplus 7,283 9,201 13,073 14,329 15,361 15,306 15,376 15,506 15,627 15,780

Loan funds 3,207 2,819 — — — — — — — —

Total sources of funds 15,325 16,854 17,908 19,164 20,195 20,141 20,210 20,340 20,461 20,614

Total fixed assets 14,039 14,639 14,046 17,309 17,684 17,186 16,354 15,914 15,626 14,803

Investments 830 830 830 830 830 830 830 830 830 830

Cash and bank balances 511 2,023 2,439 2,898 3,522 4,315 5,337 5,408 5,807 6,951

Net current assets excl. cash (56) (638) 593 (599) (2,258) (2,187) (1,849) (1,787) (1,777) (1,945)

Total application of funds 15,325 16,854 17,908 19,164 20,195 20,141 20,210 20,340 20,461 20,614

Cash flow statement

Cash flow from operations 2,621 2,900 4,435 3,894 4,020 3,035 2,879 3,697 4,164 4,744

Cash flow from investing activities (1,751) (909) (1,137) (3,648) (1,430) (533) (297) (878) (1,106) (637)

Free cash flows 870 1,991 3,298 246 2,590 2,502 2,582 2,820 3,058 4,107

Cash flow from financing activities (888) (544) (3,316) (2) (2,272) (2,222) (2,231) (3,177) (2,944) (3,688)

Cash generated /utilised 105 598 (953) 1,036 (661) 851 1,074 436 948 1,388

Net cash at start of year 405 511 1,108 155 1,195 534 1,385 2,460 2,896 3,844

Net cash at end of year 511 1,108 155 1,191 534 1,385 2,460 2,896 3,844 5,231



Passenger vehicles: lackluster launches by Maruti Suzuki and Hyundai India

Maruti launched the petrol version of BS-VI compliant Brezza in the Auto Expo equipped with a

1.5-litre petrol engine. The new Vitara Brezza comes with a revamped front fascia. Vitara Brezza

facelift gets dual front airbags, ABS with EBD, driver and co-driver seat belt reminder, rear

parking assist, high-speed warning alert and reverse parking sensors as standard across all

variants. Hyundai also unveiled the second-generation Creta, with different powertrain options

of 1.4 turbo petrol engine, 1.5 litre petrol and diesel engines. The second generation Creta is

expected to be priced under Rs1 mn and is expected to launch by March 2020. Apart from

these models, none of the launches by the top-two players in the domestic market were

exciting. Tata Motors (HBX concept, Gravitas and Aura) and MG Motors (Hector Plus, RC6

Sedan, MG3 premium hatch) showcased a variety of products across segments in Auto Expo.

Competitive intensity to increase in the SUV segment

Compact SUV segment has been consistently outperforming the passenger vehicle over the past

few years. As a result, most of the OEMs are focusing on these segments, which can be seen in

the line-up of Auto Expo 2020. Kia Motors (Seltos X-Trail), MG Motors (Hector plus, HS

compact Crossover), Tata Motors (HBX, Gravitas), Volkswagen (Taigun), Skoda (Karoq) and

Haval (F5) were some of the models unveiled by major OEMs in the SUV segment during Auto

Expo 2020. We believe, this could be a major threat for Maruti Suzuki going forward.

Focus on EVs takes a front seat in both PV and two-wheeler segment

As the global automobile industry is moving towards green mobility, most of the PV OEMs

showcased a bunch of electric and hybrid vehicles during Auto Expo 2020. Maruti Suzuki

showcased Futuro E concept and Swift Hybrid, whereas Tata Motors unveiled Altroz EV.

Mahindra also showcased eXUV300 (will be launched in 2HCY20E) and eKUV100 (most

affordable EV at a price of Rs0.83 mn) during the expo. MG Motors, Kia Motors and Hyundai

also showcased electric vehicles at the expo. Also, in the two-wheeler space, EV theme

continued to dominate. Piaggio unveiled its first electric scooter Vespa Electtrica during the

expo. Also, Hero Electric, Okinawa, Eeve, Bird Electric, Devot Motors and Evolet showcased their

electric portfolio in the expo. However, launches in the traditional two-wheeler space remained

lack luster with only Suzuki Motorcycle and Piaggio showcasing their portfolio in the expo.

Maruti Suzuki needs to fill product gaps in the compact SUV segment

Maruti Suzuki has lost around 1,500 bps market share yoy in the compact SUV segment in

9MFY20. With only one launch in the compact SUV segment by Maruti and competition

becoming more aggressive in this segment, we believe Maruti Suzuki needs to address product

gaps in the compact SUV segment to regain its lost market share.

Automobiles & Components India

Auto Expo 2020: focus on green mobility and SUVs. Overall there were very few

exciting new model launches in 2020 except in the SUV and EV segment. OEMs also

showcased electric vehicle concepts. Key highlights: (1) Maruti launched its BS-VI Brezza

petrol while Hyundai launched second-generation Creta, (2) Tata Motors, MG Motors,

Kia Motors and Haval showcased a few SUV models, (3) M&M, Maruti Suzuki, Tata

Motors and MG Motors unveiled their electric portfolio and (4) launches in 2W were

directed towards electric mobility space and overall lack-luster launches in the

traditional 2W space.

NEUTRAL

FEBRUARY 06, 2020

UPDATE

BSE-30: 41,306

Hitesh Goel

Rishi Vora

India Automobiles & Components


PV MODEL LAUNCHES AND CONCEPTS SHOWCASED BY OEMs

Maruti Suzuki – Nothing exciting

Maruti Suzuki showcased various models during the Auto Expo 2020. However, most of the

product pipeline consisted of BS-VI version of the existing models. The company launched

the most anticipated petrol-version of Vitara Brezza with the new 1.5-litre K16 BS-VI petrol

engine that outputs 103hp and 138Nm of torque. Maruti Suzuki also showcased CNG

version of S-Presso, which will be launched later this year. The company also showcased

Swift Hybrid (Japan spec-model), which consists of electric motor coupled with 1.2 litre

engine and has a mileage of 32kmpl (claimed). The company also unveiled its first electric

SUV coupe concept ‘Futuro-e’, which will debut sometime next year.

Exhibit-1: Maruti Futuro E electric concept


Exhibit-2: Maruti BS-VI compliant Vitara Brezza




Exhibit-3: Maruti Swift Hybrid




Hyundai India – More focus on refreshes

Hyundai India unveiled the second-generation Hyundai Creta 2020 during the Auto Expo

2020. The model will be officially launched in March 2020. Hyundai also showcased Tucson

facelift with 2.0 litre BS-VI petrol and diesel engines. Apart from these models, the company

had showcased Hyundai Aura (new compact Sedan), Hyundai Venue (compact SUV) and

Hyundai Kona (electric SUV).

Exhibit-4: Hyundai Creta


Exhibit-5: Hyundai Tucson




Exhibit-6: Hyundai Aura




Tata Motors – focus on electric mobility

Tata Motors recently launched the BS-VI version of Tata Nexon, Tata Tiago and Tata Tigor,

hence the company decided to focus on electric mobility during Auto Expo 2020. The

company showcased Altroz EV and Tata Sierra EV, which is an electric SUV. Tata Sierra

concept is based on the modular and adaptable ALFA platform which Tata recently debuted

with the Altroz premium hatchback. Tata Motors has unveiled a near-production version of

the H2X Concept, called the HBX, at Auto Expo 2020. Apart from these, the company

launched the automatic version of Harrier. The company also showcased the 7-seater

Gravitas (based on Harrier platform), which will be launched during Diwali.

Exhibit-7: Tata Altroz EV


Exhibit-8: Tata Sierra concept




Exhibit-9: Tata H2X concept


Exhibit-10: Tata Gravitas




Mahindra & Mahindra – launches across categories

Mahindra & Mahindra launched a wide range of concept vehicles, EVs, passenger and

commercial vehicles during Auto Expo 2020. The company showcased the Atom EV, electric

XUV300 and e-KUV100 in the EV segment. Apart from EVs, the company showcased two-

variants of Treo, the Li-ion battery electric three-wheeler.

Exhibit-11: Mahindra e XUV300


Exhibit-12: Mahindra e KUV100




Kia Motors – continues to focus on UV segment

Kia Motors officially launched Carnival during the Auto Expo 2020. The Carnival comes with

a 2.2-litre, VGT diesel engine that gives out 200PS of power and a peak torque of

440Nm. Kia Motors India will launch the Carnival in three trims, base, prestige and

limousine. Kia Motors also unveiled their third offering in India, Sonet compact, which is

based on Hyundai Venue. Kia Motors unveiled Seltos X-line concept during the Expo.

Exhibit-13: Kia Carnival


Exhibit-14: Kia Seltos X-trail




MG Motors – showcases a line-up of 14 products

MG Motors showcased a huge line-up of products ranging from autonomous cars, EVs to

sedan, hatchback and cross overs. After success of MG e-ZS, the company will also bring in

the petrol and diesel variants of the model. Some of the products unveiled by the company

include MG RC6 Sedan, MG3 premium hatch, E200 electric vehicle, e-MG6 sedan, MarvelX

SUV autonomous car and MG Hector plus.

Exhibit-15: MG Hector plus


Exhibit-16: MG Marvel X – an autonomous car




Great Wall – enters the Indian market

Great Wall Motor is set to enter the Indian market with a range of SUVs including the Haval

F5, Havel F7 and Haval F7X. Haval H5 is a compact SUV equipped with 1.5 litre turbo-petrol

engine. Great Wall plans to invest around Rs70 bn in India in a phased manner, covering

manufacturing plant, vehicle research and development, production of power batteries and

electric drives, vehicle and component manufacturing.

Exhibit-17: Haval F5


Exhibit-18: Haval F7




Other OEMs – slew of launches in the SUV and EV segment

Skoda India showcased five cars during Auto Expo 2020, which includes the much-awaited

Karoq compact SUV. Volkswagen also showcased its Taigun SUV and Tiguan Allspace (MPV)

during the Auto Expo 2020. Renault showcased Triber Automatic variant and also

showcased Zoe and Kwid K-ZE EV during the Expo.

Exhibit-19: Skoda Karoq


Exhibit-20: Volkswagen Taigun




TWO-WHEELER MODEL LAUNCHES SHOWCASED BY OEMs

No major launches in traditional 2W space; more focus on EV space

The line-up for two-wheeler models was rather disappointing with Suzuki and Piaggio being

the only player with launches in the tradition two-wheeler space. Suzuki Motorcycle

showcased 23 products during the Auto Expo 2020, which includes the BS-VI editions of the

all New Access 125, Gixxer series, Burgman Street and Intruder. Also, Piaggio unveiled its

premium scooter SXR160 and showcased its electric scooter called Vespa Electtrica.

However, electric two-wheeler space continues to gain traction with a host of new launches

by Hero Electric, Okinawa, Eeve, Bird Electric, Devot Motors, Evolet etc.

Exhibit-21: Suzuki Gixxer


Exhibit-22: Piaggio Vespa Electtrica




Emami: Quality asset in East but partially short of clinker

Emami has a total grinding capacity of 8.3 mtpa spread across Bihar (1.3 mtpa), Odisha (2.5

mtpa), Chattisgarh (2.5 mtpa) and West Bengal (2 mtpa). It commissioned its first integrated

unit in Risda, Chattisgarh with a clinker unit of 3.2 mn tons in Dec 2016 backed by limestone

leases expiring in 2059. The company also has mining leases in Andhra Pradesh and Rajasthan.

With availability of fly ash and slag, Emami has high blending ratio with only 20% of OPC

cement sales. At cement clinker ratio of 1.8X, we calculate integrated capacity at 5.6 mtpa and

2.7 mtpa as surplus grinding capacity. Further, we understand that Emami has applied for EC

clearance for brownfield expansion of 3 mtpa clinker and 2.7 mtpa grinding capacity. The

company has the potential to become a 11 mtpa integrated cement company in 2-3 years.

Acquisition at US$120/ton EV is pricey but valuation in line with past deals in sector

The binding agreement for Rs55bn implies an EV of US$120/ton for the integrated 5.6 mtpa

capacity adjusting for the surplus grinding capacity as US$35/ton. The current profitability

suggests a 6% ROCE and would require a 10% price hike in the region to justify a 12% ROCE.

East is the fastest growing market in the country with demand growing at 1.5X industry.

However, a 9% CAGR capacity addition in next three years keeps utilization stable and would

restrict pricing strength. Brownfield expansion should be value accretive however, given high

leverage at Nuvoco (net debt/EBITDA 2.7X in 1HFY20), it might be some time away.

Dalmia – Attractive proxy to play the East consolidation

In the absence of a sizeable pure East play, we see Dalmia Bharat as an attractive proxy with

60% of capacity and ~70% of sales in the East market in FY2021E. The company offers strong

growth visibility with 8 mtpa or 30% addition to capacity over FY2021-22E. Dalmia Bharat is

trading at attractive 7X EV/EBITDA FY2022E or US$64/ton EV, 25% lower than the past five

year average. We have an ADD rating with a fair value of Rs1,050/share.

Construction Materials India

Nuvoco – Enters the top league in East. The Nirma group has emerged victorious in

yet another sizeable M&A battle with a bidding agreement for Emami’s 8.3 mtpa for

Rs55bn. The acquisition at US$120/ton adjusting for surplus grinding is pricey given the

subdued profitability in the East, however in line with past deals in the sector. Nirma

group post acquisition displaces Holcim in the top three club of East and joins Dalmia

and Ultratech. Incumbents would welcome the consolidation in the region as it could

improve pricing discipline in an otherwise fragmented market. Dalmia with strong

growth visibility is an attractive proxy to play the improving East region dynamics.

CAUTIOUS

FEBRUARY 06, 2020

UPDATE

BSE-30: 41,306

Sumangal Nevatia

Murtuza Arsiwalla

Prayatn Mahajan



Exhibit 1: Nuvoco becomes the largest player in the Eastern market with a market share of 15% in FY2020 Cement grinding capacities in East India for major players (mn tons, FY2020-22E)

Source: Industry, Emami DRHP, Kotak Institutional Equities estimates

Exhibit 2: Nuvoco becomes the second largest clinker player in the Eastern market with a market share of 15% in FY2020 Cement clinker capacities in East India for major players (mn tons, FY2020-22E)

Source: Industry, Emami DRHP ,Kotak Institutional Equities estimates

Exhibit 3: Nuvoco has paid an EV/Ton of US$120 for the integrated asset

Source: Industry, Kotak Institutional Equities estimates

Cement Grinding capacities

Capacity Rank Capacity Rank Capacity Rank

Ultratech Cement Limited 16.0 1.0 16.0 3.0 19.4 2.0

Holcim Group 15.5 2.0 15.5 4.0 15.5 4.0

Dalmia Bharat 14.0 3.0 18.0 1.0 21.8 1.0

Shree Cement 11.1 4.0 14.1 5.0 14.1 5.0

Emami Cement Limited 8.3 5.0 0.0 0.0

Nirma Group 7.8 6.0 16.1 2.0 16.1 3.0

Total top 5 (mn tons) 64.9 79.7 86.9

Total cement Capacity in East India (mn tons) 105.0 115.0 121.0

Market share of Top 5 players 62% 69% 72%

FY2020 FY2021E FY2022E

Clinker Capacties

Capacity Rank Capacity Rank Capacity Rank

Ultratech Cement Limited 5.9 2.0 5.9 4.0 5.9 4.0

Holcim Group 10.2 1.0 10.2 1.0 10.2 1.0

Dalmia Bharat 5.8 3.0 8.6 2.0 8.6 2.0

Shree Cement 5.2 4.0 5.2 5.0 5.2 5.0

Emami Cement Limited 3.2 0.0 0.0

Nirma Group 5.3 5.0 8.5 3.0 8.5 3.0

Total top 5 (mn tons) 32.4 38.4 38.4

Total cement Capacity in East India (mn tons) 47.0 49.0 49.0

Market share of Top 5 players 69% 78% 78%

FY2022EFY2020 FY2021E

Grinding Capacity mtpa 8.3

Clinker Capacity mtpa 3.2

Clinker factor mtpa 1.8

Integrated Cement Capacity mtpa 5.8

Surplus Grinding Capacity mtpa 2.5

Total EV Paid Rs Bn 55

Value Surplus GU @ US$30/ton Rs Bn 5

Implied EV for Cement Rs Bn 49.6

Implied EV for Cement Rs/ton 8,609

Implied EV for Cement US$/ton 121

US$/INR 71.0

India Construction Materials


Exhibit 4: ROCE ask of 12% requires a substantial price hike in the Eastern market from current levels


Exhibit 5: Nuvoco becomes highly leveraged with acquisition of Emami assets at 5X in FY2021 Leverage details for Nuvoco post Emami acquisition, (Rs mn, mn tons, FY2017-21E)

Source: Industry, Emami DRHP, Kotak Institutional Equities estimates

Exhibit 6: All-India prices increased 3% mom in January pan India after seven months of price decline Monthly cement prices across regions in India, January 2019 – 2020 (Rs per 50 kg bag)


ROCE % 12.0

EBIT*(1-t) Rs bn 6.6

EBIT Rs bn 8.8

EBITDA Rs bn 11.6

Volume mn tons 7.0

EBITDA Rs/ton 1,650

Current EBITDA in East Rs/ton 1,000

Hike Required Rs/ton 650

Hike Required Rs/bag 33

Current Price Rs/bag 340

Hike Required % 10

Emami

Cement

FY2021E 2017 2018 2019 1HFY202021E (Including

EMAMI)

Financials

Capacity (mn tons) 8.3 10.9 10.9 10.9 10.9 19.2

Volumes (mn tons) 7.0 9.8 10.8 11.4 6.9 18.4

EBITDA (Rs mn) 7,398 10,427 9,539 6,498 17,960

EBITDA/ton (Rs) 756 966 835 948 975

Net-debt (Rs mn) 38,253 34,857 34,299 35,605 90,605

Net-debt/EBITDA 5.2 3.3 3.6 2.7 5.0

Nuvoco Financials

Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20

North 304 308 306 343 363 358 356 348 345 346 347 343 354

Central 333 339 328 362 372 367 364 357 354 352 345 339 350

East 330 326 332 357 372 365 358 349 345 339 337 331 342

West 302 316 314 340 356 345 336 329 324 319 318 308 318

South 316 357 365 381 372 364 355 349 347 343 339 333 340

All India average 317 334 335 360 368 361 354 347 344 340 338 331 341

Change per bag (%, mom)

North 1 1 (1) 12 6 (1) (1) (2) (1) 0 0 (1) 3

Central 2 2 (3) 10 3 (1) (1) (2) (1) (1) (2) (2) 3

East (0) (1) 2 8 4 (2) (2) (2) (1) (2) (1) (2) 4

West (1) 5 (0) 8 5 (3) (2) (2) (2) (1) (0) (3) 3

South (1) 13 2 4 (2) (2) (3) (2) (1) (1) (1) (2) 2

All India average (0) 5 0 8 2 (2) (2) (2) (1) (1) (1) (2) 3

Change per bag (%, yoy)

North (2) (0) 1 14 23 21 15 15 14 15 14 14 16

Central 4 3 3 12 16 13 6 8 8 6 5 3 5

East (1) (3) (2) 6 10 9 4 1 3 4 2 (0) 4

West (2) 3 4 9 10 7 4 4 5 3 5 1 5

South (10) 1 8 10 4 5 5 1 2 1 3 4 8

All India average (3) 1 4 11 11 10 7 5 6 5 6 4 8



Exhibit 7: Cement comparative valuation


Market cap. CMP (Rs) Target price

Company (US$ mn) 6-Feb (Rs) 2019 2020E 2021E 2022E 2019 2020E 2021E 2022E

Large-cap. stocks

ACC 3,962 1,490 1,500 80 80 81 86 19 19 18 17

Ambuja Cements 5,825 208 200 7 11 12 13 29 19 17 16

Grasim Industries 5,192 801 950 63 81 78 90 13 10 10 9

Shree Cement 12,319 25,013 15,200 323 421 572 717 77 59 44 35

UltraTech Cement 17,336 4,465 3,800 87 144 168 197 51 31 27 23

Mid-cap. stocks

Dalmia Bharat 1,024 892 1,050 16 17 23 34 94 87 66 43

JK Cement 1,378 1,394 1,275 34 78 99 125 44 19 15 12

JK Lakshmi Cement 597 359 325 4 23 25 29 368 66 60 52

Orient Cement 233 80 90 2 5 7 8 642 301 211 193

Company 2019 2020E 2021E 2022E 2019 2020E 2021E 2022E 2019 2020E 2021E 2022E

Large-cap. stocks

ACC 12.3 9.6 9.3 8.6 106 101 99 82 24 22 21 21

Ambuja Cements 12.5 10.2 9.5 8.4 111 109 106 94 12 13 14 15

Grasim Industries 21.1 12.4 11.2 10.3 NA NA NA NA 11 18 19 20

Shree Cement 32.9 23.7 19.4 16.0 326 302 258 252 31 26 27 28

UltraTech Cement 19.1 13.3 11.9 10.6 224 190 183 170 15 17 17 17

Mid-cap. stocks

Dalmia Bharat 10.4 9.6 8.5 7.0 74 76 72 64 15 17 17 17

JK Cement 16.1 11.1 8.9 7.7 156 141 120 119 11 11 14 14

JK Lakshmi Cement 13.2 7.0 6.5 5.9 69 61 59 58 10 8 11 11

Orient Cement 9.3 7.2 5.8 5.0 51 49 47 45 14 9 12 14

SELL

ADD

EV/EBITDA (X) CRoCI (%)

EPS (Rs) P/E (X)

EV/ton of capacity (US$)

SELL

ADD

ADD

REDUCE

Rating

ADD

REDUCE

ADD



A longer rope

Extension of DCCO for bank in commercial real estate loans. RBI has decided to permit

extension of date of commencement of commercial operations (DCCO) of project loans for

commercial real estate for delays for reasons beyond the control of promoters, by another

one year without downgrading the asset classification, in line with treatment accorded to

other project loans for the non-infrastructure sector. Detailed instructions are awaited. The

DCCO norms are applicable to banks but we would expect a similar set of relaxations for

HFCs and NBFCs.

A longer rope for stressed developers. We believe that the RBI’s above measure would

provide a longer rope to the real estate sector to complete unfinished projects, in turn

supporting recoveries on real estate loans as well. This should be used as an opportunity by

developers to accelerate project completion and monetize projects, which could in turn

improve recoveries for the lenders. A longer rope however also poses risk of increase in

hoarding and speculation, which, the lenders would need to monitor and control. The

current regulations allow banks to push the DCCO by one year; the above provision will add

one more year to the same. A project stuck for approvals, liquidity or with sluggish sales

poses risk of delinquency post completion of moratorium. An NPL classification by one bank

may have cascading effects. As such, managing liquidity becomes the primary focus of the

developer over acceleration of project completion. The likely aim of the provision is to help

developers focus on the latter.

Debt market may retain cautious stance on select real estate heavy non-banks. We

however believe debt markets will continue to remain cautious on select wholesale-focused

NBFCs after this move. Debt markets has been concerned about the asset quality of the real

estate lending book of NBFCs that reflects low NPLs despite high loan growth in the past

four years, sluggish real estate sales and stuck projects (Exhibit 1). A large proportion of

projects are stuck in moratorium and hence the true asset quality picture is not yet visible.

With increase in the moratorium period for banks (and likely similar set of regulations for

non-banks), the true picture of the quality of book will take longer to emerge. Till this period,

we expect debt market players to remain cautious towards these lenders. On the other hand,

select real estate –focused NBFCs are working on shrinking their loan books, improving

capitalization, liquidity and re-calibrating their business models. These are some of the steps

that may provide comfort to the regulator and other stakeholders, even as the overhang of

the real estate loan book remains.

Diversified Financials India

Two sides of the coin. We believe that the RBI’s decision to permit extension in DCCO

for commercial real estate projects will provide a longer rope to stressed developers and

lenders alike. However, the focus should be on completion and monetization of

projects. Debt markets may however take longer to get comfort on the inherent asset

quality of weak real-estate heavy NBFCs and may remain focused on select larger ones.

This (debt market) consolidation has led to a sharp decline in the funding cost for large

HFCs which will help alleviate concerns on NIM of HFCs, even if RBI norms get tighter.

This will be further augmented by LTROs. HDFC remains our preferred pick in HFCs.

NEUTRAL

FEBRUARY 06, 2020

UPDATE

BSE-30: 41,306

Nischint Chawathe

M B Mahesh, CFA

Dipanjan Ghosh

Venkat Madasu

Ashlesh Sonje



Concerns of competition in retail loans

RBI will review the extant regulatory framework applicable to HFCs and issue revised

regulations, since the sector is now under the purview of the RBI.

RBI has been keen on effective monitory transmission by banks and hence has introduced

base rate, MCLR and recently external-benchmark linked loan pricing for retail loans. HFCs

continue with PLRs and to some extent have differential pricing between new and old

borrowers.

The Street has expressed concerns on RBI nudging to reduce this gap, which could affect

HFC’s NIMs. HFCs have argued that a part of their funding carries fixed rates, banks

borrowings are linked to 1-year MCLR (and not re-priced immediately) and hence there is

some delay in transmitting lower rates to existing borrowings. A market-linked lending

benchmark will nudge HFCs for increasing shorter/market borrowings, exposing them to

vagaries in the bond markets.

The cost of funding for large HFCs like HDFC and LICHF has declined significantly (Exhibits 2

and 3), reflecting consolidation in debt markets. These HFCs are hence competing effectively

with frontline private banks. Introduction of LTRO (explained below) will further bring down

cost of funding for these select non-banks.

Banks – incremental regulations are less likely to spur demand in the near-term

Long term repo operations to reduce the cost of borrowing for borrowers. The RBI

announced 1-year and 3-year tenor LTROs of up to Rs1 tn at the repo rate. While the

details are awaited, prima facie, it provides an arbitrage opportunity for banks to borrow

for 1-year/3-year at the repo rate and invest in higher yielding assets such as GSec,

corporate bonds or forwards. While this may not immediately lead to higher credit

growth, it would reduce the short term borrowing costs for commercial and financial

sector. We would wait to see its impact though a reduction in interest rates helps if

transmission is efficient.

Relaxation of CRR requirements for incremental retail and MSME loans. The RBI

announced that banks will be allowed to deduct the equivalent of incremental credit

disbursed by them as retail loans for automobiles, residential housing and loans to

MSMEs for loans originated between January 31, 2020 and July 31, 2020, from their net

demand and time liabilities for maintenance of cash reserve ratio (CRR). We are less

optimistic on the impact, as the reduction in interest rates is unlikely to be meaningful. It

is useful, at the margin, to have lower interest rates but it is one of the many factors to

take loan and buy a product.

External benchmarking of new floating loans to MSME. The external benchmarking

of floating rate loans has been extended to medium enterprises. This, in our view, was

expected considering that RBI had already introduced it for retail loans and micro and

small enterprises. The near term impact should not be too high given that demand for

credit is quite low. We have highlighted the risk of this product in our earlier notes as

well. In the short term, we expect deposit rates to fall for banks while repo rates to hold

at current levels, which implies negligible near term impact, if any.

Extension of one-time restructuring for MSME by a year. The one-time restructuring

scheme for loans to stressed MSMEs was available to MSMEs that were in default but

‘standard’ as on January 1, 2019 with March 31, 2020 as the cut-off date for

implementation. This has now been extended to standard accounts of GST registered

MSMEs that were in default as on January 1, 2020, with a cut-off date of December 31,

2020. The scheme has so far not seen the same level of acceptance as loans that were

restructured in the past given the eventual negative experiences then. We have seen that

banks have offered this product to customers but the level of restructuring is far lower.

India Diversified Financials


Extension of DCCO for commercial real estate. The direct impact for banks is likely to

be negligible as very few banks have direct exposure to commercial real estate. We

expect this to be positive for banks like Yes Bank.

Exhibit 1: Real estate exposure of NBFCs increased at a sharp pace over FY2015-2018 Real estate exposure for banks and NBFCs, March fiscal year ends, 2015-2019, 2QFY20 (Rs bn)

Source: Companies, Rating agencies, RBI, Kotak Institutional Equities estimates

Exhibit 2: Bond borrowings rate for HDFC have declined from peak levels HDFC –Yields on various bonds, January 2012-January 2020 (%)

Source: Bloomberg, Prime database

-

1,000

2,000

3,000

4,000

5,000

2015 2016 2017 2018 2019 1QFY20 2QFY20

NBFCs Banks (RBI)

5.0

6.5

8.0

9.5

11.0

12.5

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Jul-

16

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20



Exhibit 3: Bond borrowings rate for LICHF has declined LICHF –Yields on 1-5 year bonds, January 2012-January 2020 (%)

Source: Bloomberg, Prime database

6

7

8

9

10

11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Jul-

16

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

For Private Circulation Only.


Status quo on repo rate and policy stance

The MPC unanimously kept the repo rate unchanged at 5.15% and stance at ‘accommodative’.

As part of the Developmental and Regulatory Policies, certain bold decisions are of note: (1)

revised liquidity management framework including Long Term Repo Operations (LTRO), and

withdrawal of overnight fixed rate repo and four 14-day term repos every fortnight, (2) CRR

relaxation linked to incremental bank lending to autos, residential housing, and MSMEs, (3)

permit extension of date of commencement of commercial operations of commercial real estate

project loans, delayed for reasons beyond the control of promoters, by another one year

without downgrading asset classification, and (4) extension of one-time restructuring benefit for

MSMEs without an asset classification downgrade.

LTROs and visibility of adequate liquidity provides scope for lower market rates

Along with the revised liquidity management framework (details on next page), the RBI

announced 1-year and 3-year tenor LTROs of Rs1 tn at repo rate. While the details are awaited,

prima facie, it provides an arbitrage opportunity for banks to borrow for 1-year/3-year at the

repo rate and invest in higher yielding assets such as GSec and corporate bonds. While this may

not immediately lead to higher credit growth, it would reduce the short term borrowing costs

for the commercial and financial sector. To provide impetus to credit to select sectors, RBI has

allowed banks to reduce their NDTL for CRR maintenance to the extent of their incremental

retail loans (between January 31 and July 31, 2020) to automobiles, housing and MSMEs. We

expect these measures to aid transmission in lending rates eventually.

RBI MPC revised FY2021 inflation estimate higher, growth estimate marginally lower

The MPC expects food inflation to moderate in the near term but highlighted risks to core

inflation through higher mobile tariff, medicine price increases, and impact of new emission

norms. It revised up its inflation estimates with 4QFY20 CPI inflation at 6.5% (Kotak: 6.6%) and

1HFY21 inflation at 5.4-5.0% (4.0-3.8% earlier) and 3QFY21 inflation at 3.2%, with risks

evenly balanced (same as earlier). The MPC observed that the economy remains weak and the

output gap remains negative. The outlook would be shaped by the impulses from FY2021

budget, agriculture sector, and risks to global growth and trade. The MPC estimates 1HFY21

growth at 5.5-6% (5.9-6.3% earlier), 6.2% in 3QFY21, and 6% for FY2021 (Kotak: 5.5%).

Expect repo rate on hold in near term

Despite weak growth momentum, we maintain our call of a pause in rates in the near term

given that (1) favorable inflation prints (closer to 4%), if any, will be visible only in 3QFY21, and

(2) inflation expectations will be on the higher side given its adaptive nature. Given our GDP

and inflation estimates over the medium term, space for lower rates still remain but a strict

adherence to the inflation targeting framework will restrict an action immediately. However,

status quo on policy rate will, to some extent, be compensated by the liquidity announcements

and comfortable liquidity conditions leading to lower market interest rates.

Economy Monetary Policy

RBI policy: Transmission takes center stage. An expected status quo in repo rate was

offset by unexpected positive liquidity measures. The introduction of LTROs and

assurance to remain accommodative will be positive for short term rates; creating

greater chances of better transmission. With inflation remaining well above the 4%

mark till 1HFY21, we see limited scope for a rate cut in the near term. Liquidity will

continue to shape market rates which will be beneficial for financial/commercial sector.

INDIA

FEBRUARY 06, 2020

UPDATE

BSE-30: 41,306

QUICK NUMBERS

MPC keeps the repo

rate unchanged at

5.15%

CPI inflation

estimated at 6.5%

in 4QFY20; 3.2% in

3QFY21

FY2021 GDP growth

at 6%; we estimate

it at 5.5%

No further rate cuts

in the near term

Suvodeep Rakshit

Upasna Bhardwaj

Avijit Puri

Economy India

KOTAK ECONOMIC RESEARCH 107

Revised liquidity management framework (as outlined in the RBI’s Statement on

Developmental and Regulatory Policies)

Following the Internal Working Group’s report on the liquidity management the RBI set out

the key elements of the revised framework as follows (emphasis is added by us):

Liquidity management is the operating procedure of monetary policy; the weighted

average call rate (WACR) will continue to be its operating target.

The liquidity management corridor is retained, with the marginal standing facility (MSF)

rate as its upper bound (ceiling) and the fixed rate reverse repo rate as the lower bound

(floor), with the policy repo rate in the middle of the corridor.

The width of the corridor remains unchanged at 50 basis points – the reverse repo

rate being 25 basis points below the repo rate and the MSF rate 25 basis points above

the repo rate.

With the WACR being the single operating target, the need for specifying a one-sided

target for liquidity provision of one percent of net demand and time liabilities (NDTL) does

not arise. Accordingly, the daily fixed rate repo and four 14-day term repos every

fortnight being conducted, at present, are being withdrawn. However, the Reserve

Bank will ensure adequate provision/absorption of liquidity as warranted by underlying

and evolving market conditions - unrestricted by quantitative ceilings - at or around the

policy rate.

Instruments of liquidity management will include fixed and variable rate

repo/reverse repo auctions, outright open market operations (OMOs), forex swaps

and other instruments as may be deployed from time to time to ensure that the system

has adequate liquidity at all times.

A 14-day term repo/reverse repo operation at a variable rate and conducted to

coincide with the cash reserve ratio (CRR) maintenance cycle would be the main

liquidity management tool for managing frictional liquidity requirements.

The main liquidity operation would be supported by fine-tuning operations, overnight

and/or longer, to tide over any unanticipated liquidity changes during the reserve

maintenance period.

In addition, the Reserve Bank will conduct, if needed, longer-term variable rate

repo/reverse repo operations of more than 14 days.

The current requirement of maintaining a minimum of 90 per cent of the

prescribed CRR on a daily basis will continue.

Standalone Primary Dealers (SPDs) would be allowed to participate directly in all overnight

liquidity management operations.

The margin requirements under the Liquidity Adjustment Facility (LAF) would be reviewed

on a periodic basis; the margin requirement for reverse repo transactions, however,

would continue to be ‘Nil’.

In order to improve communication on the Reserve Bank’s liquidity management

framework and procedures, the following measures are being introduced (1) the Press

Release detailing Money Market Operations (MMO) would be modified suitably to show

both the daily flow impact as well as the stock impact of the Reserve Bank’s liquidity

operations; (2) a quantitative assessment of durable liquidity conditions of the banking

system on a fortnightly basis would be published with a lag of one fortnight; and (3)

periodic consultations will be conducted with market participants and other stakeholders.

108 KOTAK ECONOMIC RESEARCH

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December 2019 : Results calendar

Source: BSE, NSE, Kotak Institutional Equities

Mon Tue Wed Thu Fri Sat Sun

3-Feb 4-Feb 5-Feb 6-Feb 7-Feb 8-Feb 9-Feb

Dr Lal Pathlabs Adani Port and SEZ Adani Enterprises Adani Pow er ACC J K Cement

GlaxoSmithkline Pharmaceuticals Bharti Airtel Adani Gas Aditya Birla Fashion Alkem Laboratories Mahindra & Mahindra

Godrej Properties Exide Industries Ajanta Pharma Aurobindo Pharma Ashoka Buildcon

Honeyw ell Automation JSW Energy Apollo Tyres Bata India Britannia Industries

MRPL Mahindra Logistics Berger Paints Dalmia Bharat Container Corporation

Shriram Transport Oracle Financial Services Bosch Eicher Motors Emami

SRF Piramal Enterprises Brigade Enterprises Endurance Technologies KEC International

Tata Chemicals Punjab National Bank Cadila Healthcare GlaxoSmithkline Consumer Mahanagar Gas

Ujjivan Financial Services REC Cipla Gujarat Pipavav Port NHPC

Tata Global Beverages Divi's Laboratories Hero Motocorp NTPC

Thermax DLF Indraprastha Gas Oberoi Realty

Titan Company Godrej Agrovet Lupin S H Kelkar and Company

TVS Motor Gujarat Gas Metropolis Healthcare Tata Steel

HPCL Mphasis Timken

Indiabulls Housing NMDC UPL

Jyothy Labs SKF Varun Beverages

Max Financial Services Sun Pharmaceuticals Voltas

TCNS Clothing Whirlpool


Bajaj Consumer Care 3M India ABB Adani Transmission Balkrishna Industries

Bharat Forge Aster DM Healthcare Ashok Leyland Apollo Hospitals Glenmark Pharmaceuticals

Dilip Buildcon Astral Poly Technik City Union Bank BPCL Muthoot Finance

GAIL (India) BHEL HCG Dhanuka Agritech Pfizer

GIC CESC Hindalco Industries Gillette India Sadbhav Engineering

Grasim Industries Coal India Info Edge GMR Infrastructure SAIL

Kalpataru Pow er Transmission Cochin Shipyard Ipca Laboratories Godrej Industries Shree Cement

Motherson Sumi Systems Hexaw are Technologies Natco Pharma GSPL Sun TV Netw ork

MRF IDBI NBCC Lemon Tree Hotels

National Aluminium Co. Siemens P&G Hygiene Page Industries

Oil India PFC Vardhman Textiles

Petronet LNG PI Industries Varroc Engineering

Rajesh Exports Schaeffler India Vodafone Idea

Union Bank Sunteck Realty

Torrent Pow er


Ambuja Cements

24-Feb 25-Feb 26-Feb 27-Feb 28-Feb 29-Feb 1-Mar

Sanofi India Mahindra CIE Automotive


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Kotak Institutional Equities: Valuation summary of KIE Universe stocks

Source: Company, Bloomberg, Kotak Institutional Equities estimates

Fair O/S ADVT

Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) 3mo

Company Rating 6-Feb-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E (US$ mn)

Automobiles & Components

Amara Raja Batteries ADD 784 780 (1) 134 1.9 171 40 44 50 39.9 11.8 13.3 20 17.7 15.6 11.5 10.0 8.6 3.5 3.1 2.7 18.9 18.6 18.5 1.3 1.4 1.6 8.3

Apollo Tyres ADD 165 180 9 94 1.3 572 10.2 10.3 14.9 (29.0) 1.3 44.4 16.2 16.0 11.1 7.7 7.1 5.5 0.9 0.9 0.8 5.7 5.6 7.7 1.8 1.8 1.8 6.7

Ashok Leyland BUY 81 95 17 238 3.3 2,936 3.9 3.3 7.0 (43.7) (15.4) 110.9 20.7 24.4 11.6 12.7 12.5 6.9 2.6 2.5 2.2 13.3 10.5 20.0 1.4 1.2 2.6 22

Bajaj Auto REDUCE 3,150 3,150 0 911 13 289 178 183 214 16.4 2.6 16.9 17.6 17.2 14.7 13.5 12.7 10.2 3.7 3.3 3.0 22 20 21 2.3 2.3 2.7 19.2

Balkrishna Industries REDUCE 1,102 850 (23) 213 3.0 193 42 44 50 5.3 4.8 14.9 26.4 25.2 21.9 16.2 14.1 11.8 4.1 3.6 3.2 16.3 15.2 15.6 0.8 0.9 1.0 10.5

Bharat Forge SELL 511 375 (27) 238 3.3 466 17 18 24 (25.0) 9.1 32.6 30.7 28.2 21.2 16.7 15.8 13.0 4.1 3.7 3.3 13.8 13.9 16.6 1.1 1.2 1.2 11.0

CEAT REDUCE 979 960 (2) 40 0.6 40 59 63 81 (4.9) 8.1 28.8 16.7 15.5 12.0 9.0 8.3 7.1 1.3 1.3 1.2 8.3 8.4 10.0 1.2 1.2 1.2 1.8

Eicher Motors SELL 20,391 18,700 (8) 557 7.8 27 775 740 999 (5.0) (4.6) 35.0 26.3 27.6 20.4 20.9 20.4 15.8 6.3 5.3 4.5 27 21 24 0.1 — — 42

Endurance Technologies SELL 1,096 915 (17) 154 2.2 141 47 52 62 30.3 10.4 18.8 23 21.1 17.7 11.7 10.4 8.6 4.9 4.1 3.5 21 19.6 19.5 0.7 0.8 1.0 0.5

Escorts BUY 856 1,080 26 76 1.5 89 54 63 75 (1.6) 16.9 19.7 16.0 13.7 11.4 11.0 9.2 7.3 2.2 2.0 1.7 13.9 14.4 15.1 0.9 1.1 1.3 26

Exide Industries SELL 183 180 (2) 156 2.2 850 10.3 10.2 10.9 14.1 (0.7) 6.7 17.7 17.9 16.7 10.4 9.6 8.7 2.4 2.2 2.1 14.1 13.0 12.9 1.9 2.2 2.2 6.6

Hero Motocorp REDUCE 2,411 2,550 6 482 6.8 200 167 156 191 (1.5) (6.7) 22.5 14.5 15.5 12.6 9.3 9.6 7.5 3.3 3.1 2.8 24 21 23 3.8 4.2 4.7 27

Mahindra CIE Automotive ADD 175 170 (3) 66 0.9 378 11.9 13.5 15.9 (18.2) 14.0 17.8 14.7 12.9 11.0 7.8 6.7 5.5 1.4 1.3 1.1 10.0 10.3 10.9 — — — 1.0

Mahindra & Mahindra BUY 580 820 41 721 10.1 1,138 40 42 47 (16.0) 5.9 10.8 14.5 13.7 12.4 10.1 9.2 8.2 1.7 1.5 1.4 12.2 11.6 11.7 1.4 1.5 1.6 26

Maruti Suzuki SELL 7,022 5,800 (17) 2,121 29.8 302 203 234 296 (18.2) 14.9 27.0 35 30 24 20.0 16.2 12.1 4.2 3.8 3.4 12.7 13.3 15.3 0.7 0.8 1.1 86

Motherson Sumi Systems SELL 137 110 (20) 432 6.1 3,158 5.4 7.0 8.0 6.2 29.2 14.6 25.2 19.5 17.0 9.2 7.0 6.0 3.6 3.2 2.8 14.9 17.2 17.5 1.1 1.3 1.5 18.4

MRF SELL 71,636 54,000 (25) 304 4.3 4 2,750 3,051 3,749 3.1 10.9 22.9 26 23.5 19.1 12.0 10.6 8.6 2.5 2.3 2.1 10.2 10.3 11.4 0.1 0.1 0.1 6.1

Schaeffler India REDUCE 4,746 3,800 (20) 148 2.1 31 120 150 186 (16.8) 25.0 24.0 40 32 26 21.7 18.3 14.7 4.9 4.3 3.7 13.0 14.3 15.5 — — — 0.5

SKF REDUCE 2,181 1,950 (11) 108 1.5 49 66 79 95 0.5 20.4 19.4 33 28 23 23.9 19.7 15.9 5.5 4.8 4.1 16.7 17.4 17.8 0.6 0.7 0.8 0.4

Tata Motors BUY 179 215 20 607 8.3 3,598 (3.4) 7.7 18.1 36.3 325.1 134.5 NM 23.1 9.9 4.6 3.5 3.0 1.0 1.0 0.9 NM 4.5 9.7 — — — 97

Timken SELL 986 825 (16) 74 1.0 75 29 34 40 45.6 17.0 18.9 34 29 25 20.2 17.0 14.1 4.8 4.1 3.6 15.0 15.2 15.5 0.1 0.1 0.1 0.5

TVS Motor SELL 474 350 (26) 225 3.2 475 14.4 13.8 21.8 1.8 (3.8) 58.0 33 34 22 16.5 16.2 11.8 5.9 5.4 4.6 19.1 16.4 23 0.9 0.9 1.4 11.1

Varroc Engineering BUY 450 520 16 61 0.9 135 20 32 42 (41.5) 63.6 31.5 23.0 14.1 10.7 7.8 6.0 4.8 1.8 1.7 1.5 8.0 11.7 13.6 — — — 0.4

Automobiles & Components Neutral 8,160 114.8 (6.3) 20.3 32.7 25.9 21.5 16.2 10.4 8.7 7.0 2.8 2.5 2.3 10.8 11.7 14.0 1.1 1.2 1.4 430

Banks

AU Small Finance Bank SELL 1,094 625 (43) 332 4.7 302 24.4 28.5 36.2 86.7 17.0 27.0 45 38 30 — — — 7.5 6.3 5.2 19.0 17.1 18.2 0.0 — — 9.2

Axis Bank REDUCE 737 740 0 2,078 29.2 2,806 17.5 49 62 (3.9) 183.2 25.1 42 14.9 11.9 — — — 2.7 2.3 2.0 6.4 15.1 16.6 0.2 1.0 1.3 92

Bandhan Bank REDUCE 425 540 27 685 9.6 1,610 20.3 25.4 31.2 24.0 25.2 23.0 21.0 16.7 13.6 — — — 4.4 3.5 2.8 23.9 23 22 0.0 0.0 0.0 17.8

Bank of Baroda ADD 92 105 15 423 5.9 4,582 0.8 23.4 27 (50.0) 2,763.0 13.9 112 3.9 3.4 — — — 0.9 0.8 0.7 0.7 15.5 15.6 0.2 5.1 5.8 36

City Union Bank ADD 233 225 (4) 172 2.4 735 10.6 12.1 14.1 14.0 14.0 16.7 22 19.3 16.6 — — — 3.4 3.0 2.6 15.1 15.3 15.8 0.8 0.9 1.1 2.5

DCB Bank BUY 177 230 30 55 0.8 310 12.8 16.9 22.2 22.1 32.0 30.8 13.8 10.5 8.0 — — — 1.8 1.6 1.3 13.0 15.2 17.2 0.7 0.9 1.2 2.0

Equitas Holdings BUY 115 160 39 39 0.6 342 8.0 10.5 14.5 26.0 32.1 37.5 14.4 10.9 7.9 — — — 1.4 1.2 1.1 9.9 11.2 13.6 — — — 8.0

Federal Bank BUY 93 120 30 184 2.6 1,985 8.4 9.9 12.6 33.6 18.8 26.3 11.0 9.3 7.4 — — — 1.4 1.2 1.1 12.0 12.9 14.7 2.0 2.4 3.0 13.6

HDFC Bank ADD 1,240 1,350 9 6,790 95.4 5,447 48 56 67 24.9 16.6 18.5 26 22 19 — — — 4.0 3.5 3.1 16.5 16.9 17.5 0.8 0.9 1.0 111

ICICI Bank BUY 542 615 14 3,504 49.2 6,447 18.4 32 38 287.4 73.1 18.8 29 17.0 14.3 — — — 3.2 2.8 2.4 10.5 16.4 17.1 0.7 1.2 1.4 172

IndusInd Bank ADD 1,334 1,600 20 925 13.0 712 73 104 121 34.0 42.3 15.4 18 12.8 11.1 — — — 2.6 2.2 1.9 16.6 18.1 17.9 0.8 1.1 1.2 92

Karur Vysya Bank BUY 51 80 56 41 0.6 799 3.4 7 13 27.2 104.1 95.1 15 7.5 3.8 — — — 0.8 0.7 0.6 4.1 8.0 14.5 1.6 3.5 6.8 0.7

Punjab National Bank NR 59 NR — 395 5.6 4,604 2 6 10 110.2 149.0 80.1 27 10.7 5.9 — — — 1.2 0.9 0.7 2.4 7.0 10.2 0.0 0.0 0.0 18.6

RBL Bank ADD 332 375 13 162 2.3 509 9.5 32 41 (53.3) 233.4 30.0 35 10.5 8.1 — — — 1.7 1.5 1.3 5.3 14.0 16.0 0.4 1.3 1.6 65

State Bank of India BUY 322 420 30 2,873 40.4 8,925 24 45 55 2,356.7 87.9 23.3 14 7.2 5.9 — — — 1.6 1.3 1.0 9.2 15.2 16.0 0.1 0.1 0.1 170

Ujjivan Financial Services BUY 403 490 — 49 0.7 121 26.9 34 44 117.0 24.9 31.6 15 12.0 9.1 — — — 2.2 1.9 1.7 15.7 17.0 19.3 0.8 1.0 1.5 12.8

Ujjivan Small Finance Bank SELL 57 45 (21) 98 1.4 1,714 2 3 3 48.2 33.3 26.9 28 20.8 16.4 — — — 3.4 3.1 2.7 15.1 14.9 16.7 0.7 1.0 1.2 0.0

Union Bank RS 49 — — 168 2.4 3,756 (2) 11 16 87.8 662.6 35.6 NM 4.3 3.2 — — — 0.7 0.6 0.5 NM 13.6 13.5 0.0 3.5 4.8 8.2

YES Bank SELL 39 40 4 98 1.4 2,546 (11.6) (4) 10 (255.6) 64.2 351.6 NM NM 3.7 — — — 0.5 0.6 0.5 NM NM 10.2 0.0 0.0 0.0 177

Banks Attractive 19,268 270.7 169.2 93.1 27.0 25 12.7 10.0 2.0 1.7 1.5 8.3 13.0 14.5 0.5 0.9 1.1 1,036

P/B (X) RoE (%) Dividend yield (%)


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Building Products

Astral Poly Technik SELL 1,198 680 (43) 180 2.5 150 19.5 23 26 19.0 16.8 15.3 62 53 46 34.4 30.2 26.1 11.6 9.6 8.0 21 19.9 19.1 0.1 0.1 0.1 3.0

Building Products Cautious 180 2.5 48.8 16.8 15.3 62 53 46 34.4 30.2 26.1 11.6 9.6 8.0 18.8 18.2 17.5 0.1 0.1 0.1 3.0

Capital goods

ABB SELL 1,339 940 (30) 284 4.0 212 18 24 31 49.7 33.8 29.2 75 56 43 44.0 35.3 27.6 6.4 5.7 5.0 9.0 10.8 12.3 0.4 0.5 0.6 1.4

Ashoka Buildcon BUY 114 180 58 32 0.4 281 12.4 13.3 15.0 4.3 7.5 12.9 9.2 8.6 7.6 7.1 6.6 5.8 1.3 1.1 1.0 14.8 14.1 14.2 1.7 1.8 2.1 1.3

Bharat Electronics BUY 87 113 30 212 3.0 2,437 6.2 7.5 7.0 (20.2) 20.9 (6.9) 14.1 11.7 12.5 8.4 7.2 6.9 2.1 2.0 1.8 15.7 17.6 15.2 3.1 3.8 3.5 14.8

BHEL SELL 40 46 18 138 1.9 3,482 1.8 2.2 4.0 (49.8) 26.6 79.4 23 17.8 9.9 7.8 6.3 4.5 0.4 0.4 0.4 1.9 2.4 4.3 2.2 2.5 4.0 11.4

Carborundum Universal ADD 328 345 5 62 0.9 189 13.7 16.3 19.0 4.7 19.2 16.1 24 20 17.3 14.7 11.9 10.1 3.3 3.0 2.7 14.4 15.6 16.3 1.3 1.5 1.7 0.4

Cochin Shipyard BUY 354 600 70 47 0.7 132 44 48 38 21.1 7.9 (19.8) 8.0 7.4 9.2 2.8 4.3 4.1 1.2 1.1 1.0 16.5 15.9 11.6 3.1 3.4 3.7 1.4

Cummins India REDUCE 568 590 4 157 2.2 277 27 29 32 1.0 8.1 11.7 21 19.7 17.7 21.1 18.7 16.6 3.6 3.4 3.2 17.4 17.7 18.7 2.4 2.6 2.9 7.4

Dilip Buildcon BUY 393 645 64 54 0.8 137 39 45 54 (30.0) 15.2 19.7 10.1 8.8 7.3 5.2 4.8 3.8 1.4 1.2 1.0 15.4 15.2 15.5 0.2 0.2 0.3 1.7

IRB Infrastructure BUY 109 137 25 38 0.5 351 25 19 14 3.4 (24.0) (26.8) 4.4 5.7 7.8 7.2 7.3 7.2 0.5 0.5 0.5 13.1 9.1 6.2 2.5 2.2 1.8 2.8

Kalpataru Power Transmission BUY 451 625 39 70 1.0 153 35 40 50 16.2 12.3 26.6 12.8 11.4 9.0 6.0 5.0 4.0 1.9 1.7 1.4 16.2 15.8 17.3 0.9 0.9 1.2 0.6

KEC International BUY 348 322 (7) 89 1.3 257 24.0 27 31 26.6 13.2 14.4 14.5 12.8 11.2 8.1 7.1 6.3 3.0 2.5 2.1 23 21 20 0.7 0.8 1.0 1.5

L&T BUY 1,318 1,550 18 1,849 26.0 1,403 70 68 86 13.8 (3.0) 27.6 18.9 19.5 15.2 18.2 15.5 13.3 3.0 2.6 2.3 16.9 14.3 16.0 0.8 3.0 2.0 68

Sadbhav Engineering BUY 117 167 43 20 0.3 172 11.4 14.1 15.7 4.7 24.3 11.1 10.2 8.2 7.4 6.6 5.8 5.1 0.9 0.8 0.8 9.2 10.5 10.6 — — — 0.4

Siemens SELL 1,511 1,260 (17) 538 7.6 356 36 42 48 18.9 15.6 14.0 42 36 32 29.7 26.0 22.5 5.4 4.9 4.5 13.6 14.4 14.9 0.7 0.8 0.9 15.1

Thermax BUY 1,056 1,140 8 126 1.8 113 26 39 47 (28.5) 48.4 20.8 40 27 22 25.0 21.4 17.9 25.0 21.4 17.9 9.5 13.1 14.3 0.7 0.9 1.0 1.2

Capital goods Neutral 3,716 52.2 3.1 4.8 19.8 20 19.1 15.9 2.4 2.2 2.0 12.2 11.4 12.6 1.1 2.2 1.9 1,036

Commercial & Professional Services

SIS REDUCE 533 870 63 78 1.1 75 37 41 48 27.5 11.9 16.0 14.5 13.0 11.2 15.7 13.4 11.5 2.7 2.2 1.9 19.9 18.8 18.5 0.6 0.7 0.8 0.4

TeamLease Services SELL 2,440 2,300 (6) 42 0.6 17 68 89 112 18.6 29.8 26.9 36 28 22 31.2 23.5 17.9 6.4 5.2 4.2 19.5 21 21 — — — 1.0

Commercial & Professional Services Cautious 120 1.7 24.7 17.3 19.6 31 26 22 18.8 15.6 13.0 5.6 4.7 3.9 18.2 17.8 17.8 0.2 0.2 0.3 1.4

Commodity Chemicals

Asian Paints REDUCE 1,857 1,825 (2) 1,781 25.0 959 28.9 34.2 40.5 28.5 18.2 18.3 64 54 46 40.7 35.5 30.6 16.7 14.9 13.3 27 29 31 0.8 0.9 1.1 31

Berger Paints SELL 575 410 (29) 558 7.8 971 7.6 8.5 10.0 48.5 11.9 17.3 76 68 58 48.6 42.7 36.7 19.4 16.7 14.4 28 27 27 0.5 0.5 0.6 15.4

Kansai Nerolac REDUCE 507 530 5 273 3.8 539 10.6 11.8 14.0 22.1 11.8 18.6 48 43 36 32.4 27.9 23.6 7.3 6.6 6.0 15.9 16.2 17.4 0.7 0.8 1.0 1.8

Tata Chemicals ADD 753 775 3 192 2.7 255 33.0 37.1 40.5 (23.1) 12.4 9.3 23 20 18.6 9.4 8.4 7.6 1.5 1.4 1.3 6.7 7.1 7.4 1.2 1.4 1.5 7.9

Commodity Chemicals Neutral 2,804 39.4 16.8 15.5 16.7 57 49 42 33.4 29.4 25.6 9.3 8.5 7.8 16.3 17.2 18.4 0.7 0.9 1.1 57

Construction Materials

ACC REDUCE 1,490 1,500 1 280 3.9 188 79.9 81.4 86.0 50.1 1.9 5.7 18.6 18.3 17.3 9.6 9.2 8.6 2.4 2.2 2.0 13.6 12.6 12.2 1.3 1.4 1.4 14.9

Ambuja Cements REDUCE 208 200 (4) 412 5.8 1,986 10.9 11.9 13.1 50.5 8.9 9.5 19.0 17.4 15.9 6.6 5.9 4.9 1.7 1.6 1.4 9.3 9.4 9.5 0.7 0.7 0.7 9.0

Dalmia Bharat ADD 892 1,050 18 172 2.4 192 17.1 22.7 34.5 7.5 33.1 51.7 52 39 26 9.2 8.2 6.7 1.6 1.5 1.4 3.0 3.9 5.7 — — — 2.6

Grasim Industries ADD 801 950 19 527 7.4 657 81.4 85.4 97.3 30.1 4.9 14.0 9.8 9.4 8.2 5.3 4.1 3.1 0.9 0.8 0.7 9.2 8.9 9.3 0.9 0.9 0.9 23

J K Cement ADD 1,394 1,275 (9) 108 1.5 77 78.4 98.7 124.8 129.9 25.8 26.4 17.8 14.1 11.2 11.5 9.3 8.0 3.4 2.8 2.3 21 22 22 0.7 0.7 0.7 1.5

JK Lakshmi Cement REDUCE 359 325 (9) 42 0.6 118 19.2 23.9 28.4 374.8 24.2 19.2 18.7 15.0 12.6 7.2 6.4 5.8 2.5 2.2 1.9 14.3 15.6 16.1 0.6 0.6 0.6 1.0

Orient Cement ADD 80 90 12 16 0.2 205 4.7 6.2 6.8 102.0 32.0 9.8 17.1 13.0 11.8 7.2 6.0 5.2 1.5 1.4 1.3 8.9 11.1 11.4 2.5 2.5 2.5 0.2

Shree Cement SELL 25,013 15,200 (39) 902 12.7 36 431.6 542.9 672.6 33.5 25.8 23.9 58 46 37 24.1 20.7 17.5 6.8 6.0 5.3 13.6 13.8 15.1 0.2 0.2 0.2 8.0

UltraTech Cement SELL 4,465 3,800 (15) 1,289 18.1 289 140.9 169.5 201.7 54.1 20.3 18.9 32 26 22 13.9 12.3 10.8 3.4 3.1 2.7 11.4 12.3 13.0 0.3 0.3 0.3 34

Construction Materials Cautious 3,748 52.7 46.5 13.0 16.6 24 21 17.9 9.4 8.0 6.8 2.3 2.1 1.9 9.7 10.0 10.5 0.5 0.5 0.5 93



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Consumer Durables & Apparel

Crompton Greaves Consumer SELL 284 210 (26) 178 2.5 627 7.1 8.4 9.5 19.1 18.3 13.6 40 34 30 25 22 19 12.6 10.0 8.0 35 33 30 0.9 0.9 0.0 6.3

Havells India SELL 632 520 (18) 395 5.6 625 13.2 17.1 20.4 4.8 29.4 19.8 48 37 31 30 23 19 8.4 7.4 6.5 18.5 21 22 0.7 0.9 1.1 14.9

Page Industries REDUCE 24,047 22,900 (5) 268 3.8 11 434 527 629 22.9 21.5 19.3 55 46 38 38 32 27 28.3 21.9 17.4 56 54 51 0.8 1.0 1.3 10.2

Polycab BUY 1,057 700 (34) 157 2.2 149 37 44 49 9.0 19.1 11.3 29 24 22 16 14 12 4.2 3.7 3.2 16.6 16.3 15.7 0.3 0.4 0.5 4.7

TCNS Clothing Co. ADD 579 770 33 36 0.5 65 9 12 16 (54.3) 31.7 26.0 61 47 37 15 12 9.9 5.3 4.7 4.1 9.2 10.7 11.9 1.5 2.1 2.1 0.1

Vardhman Textiles ADD 1,018 1,000 (2) 59 0.8 56 92 120 130 (28.9) 30.0 8.5 11.1 8.5 7.8 7.6 6.0 5.3 1.0 0.9 0.8 9.0 11.0 11.0 2.9 2.9 2.9 0.2

Voltas SELL 683 500 (27) 226 3.2 331 16.9 20.7 24.2 7.8 22.3 16.7 40 33 28 30 26 22 5.0 4.5 4.0 13.0 14.3 14.9 0.5 0.6 0.7 11.7

Whirlpool SELL 2,492 1,260 (49) 316 4.4 127 38 44 52 17.9 16.8 18.6 66 56 48 41 35 31 12.6 11.0 9.8 21 21 22 0.3 0.5 0.8 3.1

Consumer Durables & Apparel Cautious 1,635 23.0 2.6 23.3 42 34 29 25 21 18 6.7 5.9 16.0 17.4 17.8 0.7 0.9 51

Consumer Staples

Bajaj Consumer Care BUY 219 350 60 32 0.5 148 16.0 16.4 18.4 6.5 2.2 12.6 13.7 13.4 11.9 10.6 10.3 9.0 6.2 5.5 4.9 48 43 43 4.6 4.6 5.0 0.6

Britannia Industries REDUCE 3,252 3,050 (6) 782 11.0 240 58 68 82 21.1 16.9 20.6 56 48 39 41 36 30 17.4 14.0 11.5 32 32 32 0.6 0.8 0.9 16.6

Colgate-Palmolive (India) ADD 1,385 1,600 16 377 5.3 272 30 36 41 12.5 18.5 14.6 46 39 34 29.0 24.9 21.9 25.6 25.2 24.7 56 65 74 1.9 2.2 2.5 16.2

Dabur India REDUCE 510 440 (14) 901 12.7 1,766 9.5 11.0 12.0 16.8 15.5 9.7 54 46 42 45 39 34 14.0 12.5 11.3 28 28 28 0.9 1.1 1.3 13.7

GlaxoSmithKline Consumer RS 9,219 — — 388 5.4 42 294 333 376 26 13.1 13.0 31 28 25 26 23 20 8.2 7.1 6.1 28 27 27 1.2 1.4 1.6 2.6

Godrej Consumer Products REDUCE 652 720 10 666 9.4 1,022 15.4 17.7 20.6 6.2 15.3 16.2 42 37 32 29 25 22 7.9 7.1 6.3 20.0 20 21 1.0 1.1 1.3 10.1

Hindustan Unilever REDUCE 2,156 1,900 (12) 4,668 65.6 2,160 34 40 47 19.8 18.4 16.5 64 54 46 44 38 33 51.3 41.6 33.4 87 85 80 1.1 1.3 1.4 41

ITC BUY 214 300 40 2,625 36.9 12,300 11.9 12.6 13.9 17.0 5.9 10.1 18.0 17.0 15.4 12.5 11.8 10.6 4.1 3.8 3.6 21 22 23 3.0 4.2 4.7 44

Jyothy Laboratories ADD 144 170 18 53 0.7 367 5.8 6.5 7.4 4.7 11.9 13.0 25 22 19.4 17.1 15.5 13.8 3.8 3.6 3.3 15.8 16.7 17.8 2.4 2.8 3.1 0.7

Marico ADD 306 365 19 395 5.5 1,290 8.2 8.8 10.0 13.5 7.1 13.7 37 35 31 26 24 21 12.3 11.7 11.1 34 34 37 1.8 2.0 2.3 10.3

Nestle India SELL 16,285 13,200 (19) 1,570 22.1 96 206 239 281 23.5 15.9 17.8 79 68 58 53 46 40 82.2 69.1 58.5 71 110 109 2.0 1.0 1.2 16.3

Tata Global Beverages ADD 392 400 2 247 3.5 631 8.8 10.3 11.5 25.1 18.2 11.1 45 38 34 25 22 20 3.2 3.1 2.9 7.4 8.3 8.8 0.8 0.9 1.1 26

United Breweries ADD 1,343 1,400 4 355 5.0 264 18.7 29.2 36.9 (12.1) 56.2 26.3 72 46 36 37 26 22 9.9 8.2 6.9 14.6 19.6 21 0.1 0.3 0.4 9.1

United Spirits REDUCE 654 670 2 475 6.7 727 13.7 16.7 20.7 44.8 22.5 23.6 48 39 32 30 25 22 12.2 8.1 5.8 28 25 21 0.3 0.4 0.5 16.4

Consumer Staples Cautious 13,759 193.3 18.1 13.2 14.2 40 35 31 28 25 22 11.1 9.9 8.9 28 28 29 1.5 1.7 2.0 227

Diversified Financials

Bajaj Finance REDUCE 4,666 3,850 (17) 2,808 39.4 599 101 135 163 46 33 21 46 34 29 — — — 8.3 6.9 5.7 23 22 22 0.2 0.3 0.3 83

Bajaj Finserv ADD 9,620 10,200 6 1,531 21.5 159 304 394 475 50 30 21 32 24 20 — — — 4.5 3.9 3.3 16.8 17.1 17.5 0.1 0.1 0.1 32

Cholamandalam ADD 340 340 (0) 266 3.7 782 17.9 22.0 25.8 18 23.0 17.4 19.0 15.5 13.2 — — — 3.7 3.1 2.6 21 21 21 0.6 0.7 0.8 8.9

HDFC BUY 2,436 2,680 10 4,213 59.2 1,721 107 72 85 88.2 (33) 17.4 23 34 29 — — — 4.8 4.4 4.1 22 13.7 14.8 1.7 1.1 1.3 109

IIFL Wealth REDUCE 1,366 1,200 (12) 119 1.7 85 34.7 45.6 66.8 (23) 31.4 46.5 39 30 20 — — — 4.0 3.8 3.7 10.1 13.0 18.4 1.9 2.2 3.2 0.5

L&T Finance Holdings REDUCE 128 115 (10) 256 3.6 1,999 9 13 16 (15.7) 35 27.8 13.6 10.1 7.9 — — — 1.7 1.5 1.3 13.2 15.7 17.4 1.0 1.1 1.3 17.8

LIC Housing Finance ADD 437 475 9 221 3.1 505 53.2 72.1 83.1 16 35.6 15.2 8.2 6.1 5.3 — — — 1.4 1.2 1.0 15.4 18.2 18.1 2.0 2.7 3.1 23

Mahindra & Mahindra Financial ADD 391 405 3 242 3.4 615 24.5 32.5 40.6 (3) 32.5 24.8 15.9 12.0 9.6 — — — 2.2 2.0 1.8 13.2 15.8 17.5 1.6 2.1 2.7 10.6

Muthoot Finance ADD 764 740 (3) 306 4.3 401 64 72 81 29.4 12 13.0 12.0 10.7 9.4 — — — 2.6 2.2 1.9 24 23 22 2.0 2.2 2.5 11.6

PNB Housing Finance NR 445 — — 75 1.1 169 66.9 77.6 88.6 (6) 16.0 14.2 6.6 5.7 5.0 — — — 0.9 0.8 0.7 14.1 14.6 14.8 1.7 1.9 2.2 7.1

Shriram City Union Finance BUY 1,401 1,975 41 92 1.3 66 171 191 214 14.0 12 12.0 8.2 7.3 6.6 — — — 1.4 1.2 1.0 16.4 15.9 15.6 1.5 1.7 1.9 0.2

Shriram Transport BUY 1,219 1,525 25 277 3.9 227 134.4 136.2 162.2 19 1.3 19.1 9.1 8.9 7.5 — — — 1.6 1.4 1.2 17.8 15.7 16.4 1.5 1.7 2.0 16.3

Diversified Financials Neutral 10,405 146.2 44.3 1.4 19.1 23 23 19.3 3.0 2.7 2.4 13.0 11.7 12.4 1.0 0.9 1.0 320



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Fair O/S ADVT

Price (Rs) Value Upside shares 3mo


Electric Utilities

CESC BUY 722 840 16 96 1.3 133 87 104 114 (3) 18.4 9.9 8.3 7.0 6.3 5.3 4.8 4.3 0.7 0.7 0.6 9.2 10.1 10.3 2.0 2.1 2.1 3.4

JSW Energy ADD 63 75 19 103 1.5 1,640 6.4 5.7 5.2 53 (10) (8.5) 9.9 11.0 12.0 5.2 4.4 3.7 0.8 0.7 0.7 8.5 7.0 6.0 — — — 0.8

NHPC ADD 24 27 11 244 3.4 10,045 3.1 3.3 3.5 24.1 5 7.1 7.7 7.4 6.9 6.1 6.3 5.8 0.8 0.7 0.7 10.1 10.2 10.5 7.2 7.6 8.1 2.7

NTPC BUY 112 160 43 1,108 15.6 9,895 12.4 13.6 15.6 10.9 9.5 14.2 9.0 8.2 7.2 9.4 7.8 6.6 1.0 0.9 0.8 11.1 11.3 11.9 3.3 3.7 4.2 17.1

Power Grid BUY 193 235 22 1,009 14.2 5,232 20.2 23 25 6 13.5 11.1 9.5 8.4 7.6 7.2 6.7 6.3 1.5 1.4 1.3 17.0 17.4 17.5 3.7 4.2 4.6 30

Tata Power BUY 58 72 25 156 2.2 2,705 3.6 5.4 7.2 72 48 33.4 15.9 10.7 8.0 7.7 7.4 6.8 0.9 0.8 0.7 5.7 7.9 9.7 — — — 7.0

Electric Utilities Attractive 2,717 38.2 12.0 11.4 12.4 9.3 8.3 7.4 1.1 1.0 0.9 11.4 11.8 12.2 3.4 3.8 4.2 61

Fertilizers & Agricultural Chemicals

Bayer Cropscience SELL 4,500 3,000 (33) 202 2.8 45 103.8 119.4 138.3 32.3 15.1 15.8 43 38 33 32 27 23 8.0 6.9 6.0 19.6 19.7 19.7 0.5 0.5 0.6 0.9

Dhanuka Agritech ADD 514 350 (32) 24 0.3 48 24.2 25.9 28.3 2.4 6.9 9.2 21.2 19.9 18.2 16.1 14.3 12.6 3.4 3.0 2.6 16.8 15.9 15.4 0.9 1.0 1.1 0.3

Godrej Agrovet SELL 559 470 (16) 107 1.5 192 11.8 16.4 19.9 2.9 39.2 21 47 34 28 26 19 16 4.8 4.3 3.8 10.5 13.3 14.3 0.6 0.7 0.9 0.8

PI Industries SELL 1,546 1,280 (17) 213 3.0 138 37.2 46.1 56.1 25.3 24 22 42 33 28 28 23 19 7.9 6.7 5.6 21 22 22 0.4 0.5 0.7 2.8

Rallis India ADD 236 230 (3) 46 0.6 195 10.9 12.5 14.4 29.4 14.8 14.8 21.7 18.9 16.4 15.0 12.7 10.9 3.2 2.9 2.5 15.6 16.0 16.4 1.2 1.3 1.4 1.6

UPL SELL 537 520 (3) 410 5.8 765 28.4 39.8 45.1 14.5 40.1 13.3 19 13.5 11.9 9.6 7.7 6.8 2.6 2.3 2.0 14.8 17.9 17.9 1.3 2.1 2.4 25

Fertilizers & Agricultural Chemicals Attractive 1,004 14.1 20.7 29.3 15.2 26 20 17.8 13.7 11.1 9.7 3.9 3.4 3.0 14.8 16.8 17.0 0.8 1.2 1.4 31

Gas Utilities

GAIL (India) BUY 124 175 41 558 7.8 4,510 13.5 14.8 15.9 (3.2) 9.9 7.4 9.2 8.3 7.8 6.5 5.8 5.2 1.2 1.1 1.0 13.3 13.5 13.4 3.6 4.0 4.4 19.5

GSPL SELL 246 200 (19) 138 1.9 564 17.7 16.2 14.9 25.8 (8.6) (7.8) 13.8 15.2 16.4 6.5 6.8 7.0 2.1 1.9 1.7 16.1 12.9 10.8 1.1 1.0 1.2 1.9

Indraprastha Gas SELL 522 365 (30) 366 5.1 700 17.3 19.7 22.1 43.7 13.8 12.2 30.2 26.6 23.7 22.7 19.3 16.8 7.3 6.2 5.3 27 25 24 0.8 0.9 1.1 15.7

Mahanagar Gas ADD 1,191 1,080 (9) 118 1.7 99 74.5 78.9 81.8 32.7 5.8 3.7 16.0 15.1 14.6 10.4 9.6 9.1 4.3 3.8 3.4 29 27 25 2.3 3.0 3.4 13.9

Petronet LNG BUY 273 320 17 409 5.7 1,500 18.5 21.0 23.3 22.8 14.0 10.7 14.8 13.0 11.7 8.6 7.5 6.7 3.5 3.2 2.9 28 26 26 3.0 3.9 4.7 8.4

Gas Utilities Attractive 1,589 22.3 13.1 7.4 7.4 13.2 12.3 11.5 8.7 7.8 7.1 2.2 2.0 1.8 16.3 16.0 15.7 2.5 2.9 3.4 59

Health Care Services

Apollo Hospitals ADD 1,645 1,700 3 229 3.2 139 27.2 35 49 61 27 43 60.4 47.6 33.4 16.2 16.1 13.8 6.4 6.0 5.4 11.0 13.0 17.0 0.6 0.7 1.0 16.4

Aster DM Healthcare BUY 165 240 46 83 1.2 505 6.6 9.1 10.8 (1) 38.7 18 25.0 18.0 15.2 8.4 7.2 6.3 3.0 2.6 2.3 12.8 15.6 16.0 — — — 0.8

Dr Lal Pathlabs SELL 1,612 1,080 (33) 134 1.9 83 31.5 36.6 42.1 31.9 16.2 15.2 51.2 44.1 38.3 33.7 28.9 24.8 11.9 10.0 8.5 25 25 24 0.6 0.7 0.8 2.9

HCG BUY 118 205 74 10 0.1 85 (7.1) (4.3) (3.4) (104) 39 21 NM NM NM 9.0 7.6 6.5 2.0 2.1 2.3 NM NM NM — — — 0.1

Metropolis Healthcare SELL 1,586 1,100 (31) 80 1.1 50 30.9 37.5 43.3 29.1 21.4 15 51.3 42.2 36.6 30.9 26.0 22.7 15.0 11.8 9.4 33 31 29 0.4 0.5 0.5 0.9

Narayana Hrudayalaya BUY 356 410 15 73 1.0 204 6.7 8.8 11.2 131.2 31 27 53.2 40.5 31.9 18.3 15.6 13.2 6.0 5.2 4.5 11.9 13.7 15.1 — — — 2.6

Health Care Services Attractive 609 8.6 31 31 27 50.5 38.6 30.5 16.1 14.5 12.6 6.3 5.6 4.9 12.4 14.5 16.1 0.4 0.5 0.6 24

Hotels & Restaurants

Jubilant Foodworks ADD 1,863 1,900 2 246 3.5 132 27 38 52 12 42.1 36 69.3 48.8 35.9 25.2 20.2 16.2 19.8 14.9 11.4 28 35 36 0.3 0.5 0.9 21

Lemon Tree Hotels BUY 55 70 27 44 0.6 789 1.0 1.8 2.2 44 83 23 57.0 31.2 25.4 19.6 13.6 10.3 4.6 4.2 3.8 8.3 14.0 15.7 — 1.0 1.4 0.9

Hotels & Restaurants Attractive 289 4.1 17 50 33 66.9 44.7 33.5 23.9 18.4 14.6 13.2 10.7 8.7 19.7 24 26 0.3 0.6 0.9 22

Insurance

HDFC Life Insurance ADD 594 590 (1) 1,198 16.8 2,009 7.2 8.4 9.8 12.6 17.9 16.1 82.9 70.3 61 — — — 19.1 17.2 15.4 24 26 27 0.3 0.4 0.4 25

ICICI Lombard SELL 1,378 825 (40) 626 8.8 454 26.8 33.4 38.9 16 25 16 51.3 41.2 35 — — — 10.1 8.5 7.2 21 22 22 0.4 0.5 0.6 10.1

ICICI Prudential Life BUY 488 580 19 701 9.8 1,436 8.2 9.0 10.3 4 9.0 15.3 59.3 54.4 47 — — — 9.0 7.9 7.0 16.1 15.5 15.7 0.3 0.3 0.4 21

Max Financial Services ADD 481 550 14 130 1.8 417 6.9 9.9 14.4 275 44 45 70.0 48.5 33 — — — — — — 13.7 17.9 23 0.5 0.7 1.1 17.4

SBI Life Insurance ADD 920 1,010 10 920 12.9 1,000 13.7 16.1 17.7 3.5 17.5 9.4 67.0 57.0 52 — — — 10.7 9.2 8.0 17.1 17.4 16.5 0.2 0.3 0.3 42

Insurance Attractive 3,574 50.2 13.5 18.8 16.2 65.0 54.7 47 11.5 10.1 8.8 17.7 18.4 18.7 0.2 0.3 0.3 117

Mkt cap. EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%)


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Internet Software & Services

Info Edge SELL 3,071 2,130 (31) 376 5.3 122.0 34.3 42.2 50.7 32.7 23.2 20.1 89.6 72.7 60.6 78.7 63.2 52.4 14.3 12.6 11.0 16.9 18.4 19.4 0.3 0.3 0.4 16.9

Just Dial REDUCE 530 570 7 34 0.5 64.8 40.0 40.9 42.4 25.4 2.2 3.5 13.2 13.0 12.5 7.2 5.9 5.0 2.8 2.4 2.0 23 19.7 17.4 0.8 0.8 0.8 20

Internet Software & Services Attractive 411 5.8 29.8 15.2 14.4 60.6 52.6 46.0 52.2 44.2 38.6 10.7 9.3 8.0 17.6 17.6 17.5 0.3 0.4 0.4 37

IT Services

HCL Technologies ADD 600 650 8 1,627 22.9 2,702 39.9 43.5 48.0 9.0 8.9 10.4 15.0 13.8 12.5 9.5 8.5 7.4 3.3 2.9 2.5 24 22 21 2.6 2.7 2.7 27

Hexaware Technologies REDUCE 376 375 (0) 112 1.6 302 21.5 24.5 27.7 11.4 14.0 12.8 17.5 15.3 13.6 12.8 10.8 9.2 4.1 3.6 3.2 25 25 25 2.1 2.7 2.7 2.5

Infosys ADD 771 865 12 3,285 46.2 4,256 38.7 42.5 47.3 9.3 9.9 11.3 19.9 18.1 16.3 13.9 12.1 10.9 5.2 4.9 4.5 26 28 29 2.9 3.4 3.9 87

L&T Infotech ADD 1,914 2,060 8 333 4.7 175 84.5 102.1 120.6 (2) 20.8 18.2 22.6 18.7 15.9 15.5 12.7 10.6 5.8 4.9 4.1 28 29 28 1.6 1.7 1.9 4.1

Mindtree REDUCE 902 830 (8) 149 2.1 165 38.5 55.6 63.9 (16) 44 15 23.5 16.2 14.1 12.9 9.5 8.1 4.4 3.8 3.2 19.1 25 25 3.3 1.8 2.1 10.0

Mphasis REDUCE 943 925 (2) 176 2.5 186 59.7 64.2 69.0 6 7.5 7.4 15.8 14.7 13.7 9.8 8.8 8.0 3.1 2.9 2.7 20 20 20 3.2 3.6 3.8 2.7

TCS REDUCE 2,128 2,020 (5) 7,986 112.2 3,752 87.1 95.1 104.3 5 9.2 9.6 24.4 22.4 20.4 17.6 15.7 14.1 8.3 7.7 7.1 35 36 36 2.9 2.9 3.2 103

Tech Mahindra ADD 818 890 9 726 10.2 880 47.8 54.4 62.6 0.1 13.9 15.0 17.1 15.0 13.1 11.0 8.8 7.5 3.2 2.8 2.5 19.5 19.7 20 2.0 2.3 2.5 25

Wipro REDUCE 244 265 9 1,392 19.6 5,827 17.2 18.9 20.7 14.8 10.2 9.4 14.2 12.9 11.8 8.7 7.5 6.7 2.6 2.1 2.0 17.9 18.0 17.4 0.6 0.8 3.5 10.7

IT Services Cautious 15,786 221.8 4.7 10.0 10.6 20.2 18.4 16.6 13.8 12.2 10.9 5.2 4.7 4.2 26 25 25 2.6 2.7 3.2 272

Media

DB Corp. REDUCE 132 135 2 23 0.3 175 18.0 18.7 18.6 14.6 4.1 (0.5) 7.3 7.1 7.1 3.8 3.5 3.6 1.2 1.2 1.2 16.9 17.4 17.4 9.5 11.4 12.9 0.2

Jagran Prakashan REDUCE 70 60 (14) 21 0.3 296 8.7 9.9 10.7 (0.9) 14 NA 8.0 7.0 NA 3.4 3.2 NA 1.1 1.1 NA 13.7 15.4 16.7 12.9 12.9 12.9 0.6

PVR REDUCE 2,052 1,850 (10) 105 1.5 51 43.0 59.8 69.1 (0) 39 15 47.8 34.3 29.7 16.4 14.1 12.1 5.4 4.8 4.2 13.9 14.8 15.0 0.2 0.3 0.3 10.7

Sun TV Network REDUCE 490 510 4 193 2.7 394 37.7 41.1 43.5 4 9.0 5.9 13.0 11.9 11.3 9.1 8.1 7.4 3.0 2.7 2.4 25 24 22 2.6 3.1 3.5 15.6

Zee Entertainment Enterprises ADD 236 340 44 226 3.2 960 17.2 18.4 21.0 4.4 6.9 13.7 13.7 12.8 11.3 8.7 7.9 6.8 2.3 2.1 1.9 17.8 17.3 17.6 1.9 2.3 2.3 93

Media Attractive 569 8.0 4.8 9.7 9.5 14.5 13.2 12.0 8.8 8.0 7.1 2.6 2.4 2.1 18.1 18.0 17.8 2.5 3.0 3.2 120

Metals & Mining

Hindalco Industries BUY 194 240 24 436 6.1 2,224 21.5 25.4 28.2 (13.1) 18.4 11 9.0 7.6 6.9 5.4 4.8 4.1 0.7 0.6 0.6 8.0 8.7 8.9 0.6 0.6 0.6 25

Hindustan Zinc REDUCE 193 210 9 814 11.4 4,225 16.4 16.9 18.4 (13.1) 3.3 9.0 11.8 11.4 10.5 7.2 7.0 6.5 2.7 2.9 3.2 22 24 29 10.4 10.4 10.4 1.9

Jindal Steel and Power BUY 198 240 21 202 2.8 1,016 2.7 33.2 23.2 259 1,112 (30) 72.2 6.0 8.5 7.1 4.4 4.7 0.6 0.6 0.5 0.9 9.8 6.3 — — — 57

JSW Steel ADD 276 290 5 668 9.4 2,402 8.7 21.6 28.8 (72.8) 150 32.9 31.9 12.8 9.6 9.9 7.0 5.7 1.8 1.6 1.4 5.8 13.3 15.7 1.5 1.5 1.5 29

National Aluminium Co. SELL 44 35 (21) 83 1.2 1,866 1.0 2.3 2.2 (89) 134 (3.0) 45.7 19.5 20.1 10.5 7.4 9.1 0.8 0.8 0.8 1.7 4.1 4.0 2.2 5.1 5.0 5.5

NMDC ADD 116 135 16 356 5.0 3,062 16.9 17.3 15.7 14.6 2.4 (9) 6.9 6.7 7.4 4.8 4.7 5.2 1.3 1.2 1.1 19.2 18.3 15.5 7.3 7.4 6.7 13.4

Tata Steel BUY 478 600 26 543 7.6 1,146 33.6 75.3 95.8 (63) 124 27 14.2 6.3 5.0 6.8 5.3 4.4 0.8 0.7 0.6 5.7 12.3 13.7 2.1 2.1 2.1 99

Vedanta BUY 144 175 22 535 7.5 3,717 10.4 17.7 20.1 (32) 71 13.5 13.9 8.1 7.2 6.1 5.1 4.8 0.9 0.9 0.9 6.2 10.7 12.3 12.5 12.5 12.5 31

Metals & Mining Attractive 3,637 51.1 (37.1) 58.2 11.3 13.4 8.5 7.6 6.8 5.5 5.0 1.1 1.0 1.0 8.2 12.1 12.7 5.6 5.7 5.6 53



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Oil, Gas & Consumable Fuels

BPCL SELL 495 420 (15) 1,074 15.1 1,967 32 39 40 (10.5) 18.9 3.8 15.3 12.8 12.4 10.9 9.4 9.0 2.5 2.3 2.2 16.8 18.6 18.0 3.8 4.1 4.2 50.5

Coal India BUY 180 285 58 1,109 15.6 6,163 27 31 31 (3) 14.3 (2.2) 6.6 5.7 5.9 5.9 5.0 4.7 4.4 4.2 4.0 65.3 74.4 69.7 13.9 13.9 13.9 22.2

HPCL SELL 243 225 (8) 371 5.2 1,524 23 26 26 (43.2) 16.9 0.2 10.8 9.2 9.2 9.4 9.3 9.4 1.2 1.1 1.1 11.8 12.9 12.0 3.7 4.3 4.3 16.5

IOCL ADD 117 130 11 1,102 15.5 9,181 9.5 15.2 15.5 (46.9) 59.7 2.0 12.3 7.7 7.5 6.1 5.2 5.0 1.0 0.9 0.9 7.9 12.1 11.8 4.4 6.5 6.6 26.2

Oil India BUY 135 210 55 147 2.1 1,084 30 27 29 (1) (9.4) 4.4 4.5 4.9 4.7 2.7 2.7 2.4 0.5 0.5 0.4 11.4 9.8 9.7 8.9 8.1 8.5 2.6

ONGC BUY 107 170 59 1,349 19.0 12,580 22 21 22 (8) (4.7) 7.4 4.9 5.2 4.8 2.9 2.7 2.5 0.5 0.5 0.5 11.1 10.0 10.0 7.0 7.2 7.5 20.0

Reliance Industries BUY 1,458 1,850 27 8,640 121.4 5,927 76 93 107 14.9 22.8 15.4 19.2 15.6 13.6 12.5 9.6 8.0 2.0 1.8 1.6 11.0 12.2 12.6 0.5 0.5 0.5 193.9

Oil, Gas & Consumable Fuels Attractive 13,792 193.8 (7.1) 16.3 8.3 12.4 10.7 9.9 7.8 6.7 6.0 1.5 1.4 1.3 12.1 13.0 12.8 2.9 3.1 3.2 331.9

Pharmaceuticals

Aurobindo Pharma ADD 511 500 (2) 299 4.2 584 50 56 57 23.0 12 3.0 10.3 9.1 8.9 7.5 6.4 5.8 1.8 1.5 1.3 17.7 16.9 15.2 1.2 1.5 1.8 25.3

Biocon SELL 296 200 (32) 355 5.0 1,202 7.5 9.0 10.1 24 20 12.1 39 33 29 19.3 14.7 13.0 4.5 4.1 3.7 12.3 12.3 12.5 0.9 1.1 1.2 16.5

Cipla BUY 440 570 30 354 5.0 806 21.2 27 33 11.5 27 23 21 16.4 13.4 10.6 9.1 7.3 2.1 1.9 1.7 10.7 11.8 13.0 1.0 1.3 1.6 19.9

Dr Reddy's Laboratories REDUCE 3,159 2,800 (11) 525 7.4 166 110 139 185 11 26 32.6 29 22.7 17.1 12.8 12.1 9.3 3.4 3.0 2.7 12.0 13.4 15.5 0.6 0.8 1.0 27.1

Laurus Labs BUY 438 500 14 47 0.7 107 23.5 34.0 37 114.8 44 8 19 12.9 12.0 10.5 7.9 7.0 2.6 2.2 1.8 14.9 16.7 15.3 — — — 1.0

Lupin ADD 722 840 16 327 4.6 450 19 34 48 (9.6) 79 42 38 21 15.0 12.7 9.5 7.1 2.4 2.2 1.9 6.2 10.2 12.9 0.7 0.7 1.0 15.7

Sun Pharmaceuticals ADD 431 480 11 1,033 14.5 2,406 19.1 23.2 25 18.3 22 8 23 19 17.1 12.6 9.9 8.5 2.3 2.1 1.9 10.6 11.1 11.4 0.9 1.1 1.2 36.9

Torrent Pharmaceuticals ADD 2,001 2,250 12 339 4.8 169 55 69 86 113.0 25 26 36 29 23 16.5 13.9 11.9 6.4 5.7 4.8 17.7 19.4 20.9 1.2 1.3 1.4 7.1

Pharmaceuticals Neutral 3,279 46.1 19.9 25 17 23 19 16.1 12.1 10.0 8.4 2.7 2.4 2.1 11.4 12.7 13.2 0.9 1.1 1.2 149.5

Real Estate

Brigade Enterprises BUY 240 280 17 49 0.7 204 8.3 10 18 (29) 17 82 28.7 24.6 13.5 14.6 10.1 6.4 2.1 2.0 1.8 7.7 8.5 14.1 1.0 1.0 1.0 0.5

DLF ADD 246 260 6 610 8.6 2,475 4.5 8.2 11.8 (24) 81 43 54 30.0 20.9 50.4 40.8 28.6 1.7 1.6 1.5 3.2 5.5 7.5 0.8 0.8 0.8 36.8

Embassy Office Parks REIT ADD 428 410 (4) 330 4.6 772 12.7 15.6 18.0 7,843 23 15 34 27 24 21.4 18.7 16.7 1.5 1.5 1.6 4.3 5.5 6.6 5.4 6.2 7.1 2.9

Godrej Properties SELL 1,169 735 (37) 295 4.1 252 11.3 10.6 19.3 2.4 (7) 82.6 103 111 61 100.9 #### 67.7 6.1 5.8 5.3 7.8 5.3 9.1 — — — 4.4

Oberoi Realty ADD 538 560 4 196 2.7 364 22 48 49 (4.1) 120.7 2 25.0 11.3 11.1 17.2 9.1 8.1 2.2 1.9 1.6 9.4 18.1 15.8 0.4 0.4 0.4 2.5

Prestige Estates Projects ADD 381 410 8 148 2.1 378 15.4 15.7 16 76.8 2 3 25 24 23.6 9.4 8.9 8.3 2.8 2.6 2.4 12.4 11.2 10.5 0.4 0.4 0.4 2.8

Sobha ADD 412 515 25 39 0.5 95 33 34 40 6 3.9 15.6 12.5 12.0 10.4 6.2 5.6 5.7 1.6 1.4 1.3 13.3 12.6 13.2 1.7 1.7 1.7 1.5

Sunteck Realty REDUCE 397 400 1 58 0.8 140 23.6 32.3 44 45.5 37 35 17 12.3 9.1 12.4 8.7 6.4 1.8 1.6 1.3 11.1 13.5 15.7 0.3 0.3 0.3 1.3

Real Estate Neutral 1,724 24.2 19.0 49.4 25.0 38 25 20.2 21.4 17.1 14.3 2.0 1.9 1.8 5.3 7.6 9.0 1.5 1.6 1.8 52.7

Retailing

Aditya Birla Fashion and Retail BUY 254 230 (10) 197 2.8 773 1.8 2.8 4.6 (57.5) 58.0 65.7 144 91 55 16.4 14.2 12.5 12.6 11.0 9.2 9.1 12.9 18.2 — — — 1.9

Avenue Supermarts SELL 2,294 1,400 (39) 1,440 20.2 626 22.0 28 36 52.1 25.9 29.8 104 83 64 66 50 39 20.3 16.3 13.0 21.7 21.9 22.7 — — — 20.7

Titan Company ADD 1,259 1,475 17 1,118 15.7 888 18.1 24 30 7.4 30.7 26.8 70 53 42 43 34 28 15.9 13.3 11.0 24.5 27.1 28.6 0.5 0.6 0.8 42.1

Retailing Cautious 2,755 38.7 14.7 30.0 30.2 88 68 52 45 36 29 17.6 14.5 11.8 19.9 21.3 22.6 0.2 0.3 0.3 64.7

Speciality Chemicals

Castrol India BUY 148 180 22 146 2.1 989 8.4 9.4 10.1 16.8 12.0 8.2 17.7 15.8 14.6 11.9 10.7 9.8 10.7 9.4 8.4 65.3 63.5 60.9 3.7 5.1 5.6 4.5

Pidilite Industries REDUCE 1,550 1,425 (8) 788 11.1 508 24.8 28 33 40.1 14.0 17.2 62 55 47 46 40 35 16.0 13.6 11.6 27.9 26.9 26.9 0.5 0.6 0.7 13.4

S H Kelkar and Company BUY 111 145 31 16 0.2 141 5.7 7.5 8.8 (6.4) 31.7 16.2 19.4 14.7 12.7 11.7 9.5 8.4 1.8 1.7 1.6 9.4 12.1 13.1 1.8 2.5 3.2 0.1

SRF ADD 4,009 3,900 (3) 230 3.2 57 144 174 207 28.6 21.2 18.8 27.9 23.0 19.4 17.0 13.9 11.6 4.6 3.9 3.3 18.1 18.4 18.6 0.4 0.4 0.5 15.0

Speciality Chemicals Neutral 1,180 16.6 28.1 15.9 15.2 39 34 29.5 26.2 22.4 19.5 9.7 8.4 7.2 24.7 24.6 24.4 0.9 1.2 1.3 32.9



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Telecommunication Services

Bharti Airtel BUY 547 600 10 2,983 41.9 5,455 (5.5) 6.0 13.5 NM NM NM NM 90.8 40.6 11.2 8.3 6.9 3.7 3.7 3.6 NM 4.1 9.0 0.7 1.1 1.1 126.8

Bharti Infratel REDUCE 245 230 (6) 453 6.4 1,850 15.3 15.7 17.8 16.9 2.4 13.1 16.0 15.6 13.8 7.9 7.3 6.6 3.0 2.9 2.9 19.0 18.8 20.9 3.9 4.9 5.6 43.6

Vodafone Idea RS 5 — — 148 2.1 28,736 (22.3) (4.0) (6.2) NM NM NM NM NM NM 19.7 9.6 8.9 0.6 1.3 (2.4) NM NM NM — — — 34

Tata Communications ADD 420 500 19 120 1.7 285 11.0 14.0 17.9 38.0 26.5 28.0 38.0 30.0 23.5 6.9 6.3 5.7 227.6 27.2 12.8 NM 162 74.1 1.8 1.8 1.8 1.3

Telecommunication Services Cautious 3,704 52.0 NM 65.3 47.2 NM NM NM 11.7 8.4 7.2 3.1 3.4 3.9 NM NM NM 1.1 1.5 1.6 205.9

Transportation

Adani Ports and SEZ BUY 370 475 28 752 10.6 2,032 24.6 24.8 28.2 23.1 0.8 13.8 15.0 14.9 13.1 12.4 10.7 9.3 2.9 2.5 2.2 19.9 18.2 17.9 4.2 1.2 1.3 23.1

Container Corp. SELL 585 510 (13) 356 5.0 609 17.4 21.3 27.8 6.7 22.4 30.6 34 27 21 19.5 16.2 12.6 3.4 3.2 3.0 10.2 12.0 14.7 0.2 1.6 2.0 10.1

Gateway Distriparks BUY 128 162 26 14 0.2 109 3.9 6.0 9.2 (42.8) 55.9 51.7 33.1 21.3 14.0 7.6 6.3 5.2 0.9 0.8 0.8 2.9 4.1 6.0 2.3 2.3 2.3 0.5

Gujarat Pipavav Port BUY 90 118 31 43 0.6 483 6.2 5.7 7.2 44.9 (8.2) 26.7 14.5 15.8 12.5 8.4 7.4 6.5 2.1 2.1 2.1 14.7 13.4 16.9 6.0 5.6 7.0 0.4

InterGlobe Aviation REDUCE 1,405 1,535 9 540 7.6 383 70.0 97.8 115.1 1,615.5 39.8 17.7 20 14 12.2 5.0 3.7 3.0 5.5 4.1 3.2 32.1 32.8 29.4 — 0.7 0.8 30

Mahindra Logistics ADD 415 415 (0) 30 0.4 71 10.5 15.4 18.6 (16.4) 47.0 20.7 40 27 22 17.7 13.2 11.0 5.4 4.6 4.0 14.3 18.5 19.2 — — — 0.2

Transportation Attractive 1,736 24.4 64.1 15.0 17.9 19 16 14.0 9.8 8.0 6.7 3.5 3.0 2.6 18.2 18.1 18.3 2.1 1.2 1.4 65

KIE universe 122,148 1716.3 9.6 33.9 18.2 24 18.1 15.3 11.6 9.8 8.6 2.7 2.4 2.2 11.3 13.5 14.4 1.6 1.8 2.0

Notes:

(a) We have used adjusted book values for banking companies.

(b) 2020 means calendar year 2019, similarly for 2021 and 2022 for these particular companies.

(c) Exchange rate (Rs/US$)= 71.18


Disclo

sure

s

Disclosures

Ratings and other definitions/identifiers

Definitions of ratings

BUY. We expect this stock to deliver more than 15% returns over the next 12 months.

ADD. We expect this stock to deliver 5-15% returns over the next 12 months.

REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.

SELL. We expect this stock to deliver <-5% returns over the next 12 months.

Our Fair Value estimates are also on a 12-month horizon basis.

Our Ratings System does not take into account short-term volatility in stock prices related to movements in the market. Hence, a particular Rating may not

strictly be in accordance with the Rating System at all times.

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 fair value, 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 fair value, if any, for this stock, because there is not a sufficient

fundamental basis for determining an investment rating or fair value. The previous investment rating and fair value, 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 December 31, 2019

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 31/12/2019 Kotak

Institutional Equities Investment Research had

investment ratings on 202 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.

29.7%27.7%

20.3%22.3%

2.5% 2.5% 1.5% 1.0%

0%

10%

20%

30%

40%

50%

60%

70%

BUY ADD REDUCE SELL

Corporate Office Overseas Affiliates

Kotak Securities Ltd.

27 BKC, Plot No. C-27, “G Block”

Bandra Kurla Complex, Bandra (E)

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155-157 Minories

London EC3N 1LS

Tel: +44-20-7977-6900

Kotak Mahindra Inc

369 Lexington Avenue

28th Floor, New York

NY 10017, USA

Tel:+1 212 600 8856

Copyright 2020 Kotak Institutional Equities (Kotak Securities Limited). All rights reserved. 1. Note that the research analysts contributing to this report may not be registered/qualified as research analysts with FINRA; and

2. Such research analysts may not be associated persons of Kotak Mahindra Inc and therefore, may not be subject to NASD Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

3. Any U.S. recipients of the research who wish to effect transactions in any security covered by the report should do so with or through Kotak Mahindra Inc and (ii) any transactions in the securities covered by the research by U.S. recipients must be effected only through Kotak Mahindra Inc at [email protected].

This report is distributed in Singapore by Kotak Mahindra (UK) Limited (Singapore Branch) to institutional investors, accredited investors or expert investors only as defined under the Securities and Futures Act. Recipients of this analysis / report are to contact Kotak Mahindra (UK) Limited (Singapore Branch) (16 Raffles Quay, #35-02/03, Hong Leong Building, Singapore 048581) in respect of any matters arising from, or in connection with, this analysis / report. Kotak Mahindra (UK) Limited (Singapore Branch) is regulated by the Monetary Authority of Singapore. Kotak Securities Limited and its affiliates are a full-service, integrated investment banking, investment management, brokerage and financing group. We along with our affiliates are leading underwriter of securities and participants in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationships with a significant percentage of the companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. Investors should assume that Kotak Securities Limited and/or its affiliates are seeking or will seek investment banking or other business from the company or companies that are the subject of this material and that the research professionals who were involved in preparing this material may participate in the solicitation of such business. Our research professionals are paid in part based on the profitability of Kotak Securities Limited, which include earnings from investment banking and other business. Kotak Securities Limited generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. Additionally, Kotak Securities Limited generally prohibits its analysts and persons reporting to analysts from serving as an officer, director, or advisory board member of any companies that the analysts cover. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additionally, other important information regarding our relationships with the company or companies that are the subject of this material is provided herein. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. It is for the general information of clients of Kotak Securities Limited. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, clients should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Kotak Securities Limited does not provide tax advise to its clients, and all investors are strongly advised to consult with their tax advisers regarding any potential investment. Certain transactions -including those involving futures, options, and other derivatives as well as non-investment-grade securities - give rise to substantial risk and are not suitable for all investors. The material is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions expressed are our current opinions as of the date appearing on this material only. We endeavor to update on a reasonable basis the information discussed in this material, but regulatory, compliance, or other reasons may prevent us from doing so. We and our affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this material, may from time to time have "long" or "short" positions in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. Kotak Securities Limited and its non US affiliates may, to the extent permissible under applicable laws, have acted on or used this research to the extent that it relates to non US issuers, prior to or immediately following its publication. Foreign currency denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of or income derived from the investment. In addition, investors in securities such as ADRs, the value of which are influenced by foreign currencies affectively assume currency risk. In addition options involve risks and are not suitable for all investors. Please ensure that you have read and understood the current derivatives risk disclosure document before entering into any derivative transactions. Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house. Kotak Securities Limited is a corporate trading and clearing member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE), Metropolitan Stock Exchange of India Limited (MSE), National Commodity and Derivatives Exchange (NCDEX) and Multi Commodity Exchange(MCX). Our businesses include stock broking, services rendered in connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management. Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Kotak Securities Limited is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old Mutual Life Insurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI). Kotak Securities Limited is registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014. We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in last five years. However SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise letters or levied minor penalty on KSL for certain operational deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has our certificate of registration been cancelled by SEBI at any point of time. We offer our research services to primarily institutional investors and their employees, directors, fund managers, advisors who are registered with us Details of Associates are available on website i.e. www.kotak.com Research Analyst has served as an officer, director or employee of subject company(ies): No We or our associates may have received compensation from the subject company(ies) in the past 12 months. We or our associates have managed or co-managed public offering of securities for the subject company(ies) in the past 12 months. YES. Visit our website for more details We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received compensation or other benefits from the subject company(ies) or third party in connection with the research report. Our associates may have financial interest in the subject company(ies). Research Analyst or his/her relative's financial interest in the subject company(ies): No Kotak Securities Limited has financial interest in the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: Eicher Motors, Sun Pharma, NMDC, DLF - YES Nature of Financial interest: Holding equity shares or derivatives of the subject company. Our associates may have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report. Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No Kotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No Subject company(ies) may have been client during twelve months preceding the date of distribution of the research report. A graph of daily closing prices of securities is available at https://www.moneycontrol.com/india/stockpricequote/ and http://economictimes.indiatimes.com/markets/stocks/stock-quotes. (Choose a company from the list on the browser and select the"three years" icon in the price chart).

Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. CIN: U99999MH1994PLC134051, Telephone No.: +22 43360000, Fax No.: +22 67132430. Website: www.kotak.com / www.kotaksecurities.com. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Telephone No: 42856825. SEBI Registration No. INZ000200137(Member of NSE, BSE, MSE, MCX & NCDEX). Member Id: NSE-08081; BSE-673; MSE-1024; MCX-56285; NCDEX-1262. 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 / 1860 266 9191 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 Managing Director / CEO (Mr. Jaideep Hansraj) 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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http://economictimes.indiatimes.com/markets/stocks/stock-quotes

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