India Daily, August 09, 2018 - Kotak Securitiesexports from November 5, 2018 may upset India’s...

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

Contents

Special Reports

Strategy

Strategy: Iran, US and possible collateral damage

Daily Alerts

Results

BPCL: Weak refining performance

Cipla: In-line quarter, US execution key

HPCL: Weak underlying results

Siemens: Running into rough weather

NMDC: A good quarter aided by lower costs

Mphasis: Vaulations dim HP/DXC and Direct Core sheen

City Union Bank: NII comes under pressure

National Aluminium Co.: Strong quarter backed by high prices

SRF: Robust performance

Kalpataru Power Transmission: Steady on EPC front, turnaround in assets

Sobha: Healthy metrics, reported earnings distorted

Sector alerts

Automobiles: State-wise demand trends in 1QFY19

INDIA DAILY August 9, 2018 India 8-Aug 1-day 1-mo 3-mo

Sensex 37,888 0.6 5.4 7.3

Nifty 11,450 0.5 5.5 6.6

Global/Regional indices

Dow Jones 25,584 (0.2) 3.3 4.2

Nasdaq Composite 7,888 0.1 1.7 7.5

FTSE 7,777 0.8 1.2 1.5

Nikkei 22,541 (0.5) 2.2 0.6

Hang Seng 28,359 0.4 (1.1) (7.1)

KOSPI 2,298 (0.1) 0.6 (5.9)

Value traded – India

Cash (NSE+BSE) 347 352 333

Derivatives (NSE) 9,938 4,566 5,498

Deri. open interest 4,013 3,319 3,813

Forex/money market

Change, basis points

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

Rs/US$ 68.6 11 (6) 124

10yr govt bond, % 8.1 - (11) 17

Net investment (US$ mn)

7-Aug MTD CYTD

FIIs 16 20 (394)

MFs 2 23 11,140

Top movers

Change, %

Best performers 8-Aug 1-day 1-mo 3-mo

RIL IN Equity 1,218 2.8 22.1 24.7

SBIN IN Equity 309 1.5 18.0 24.5

DABUR IN Equity 445 0.4 18.7 22.4

RCOM IN Equity 18 10.5 34.3 22.3

GCPL IN Equity 1,304 0.4 3.6 19.6

Worst performers

TTMT/A IN Equity 142 1.5 (10.0) (28.1)

HDIL IN Equity 23 (0.4) 14.0 (27.0)

TTMT IN Equity 255 1.4 (6.7) (25.4)

JPA IN Equity 15 0.3 (8.5) (24.1)

UT IN Equity 4 0.0 (1.2) (22.9)

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

Nature of sanctions on oil exports from Iran will be biggest short-term variable for Indian market

The recent statements of the US President suggest that the US government may impose ‘hard’

sanctions on exports of oil from Iran, which may make it difficult for India to continue to import

oil from Iran (0.68 mn b/d out of 4.3 mn b/d of imports in June 2018). Under the pre-JCPOA US

sanctions on Iran, certain countries including India could still import oil from Iran. We note that

new US sanctions effective November 5, 2018 include (1) purchase of oil from National Iranian

Oil Company and other Iranian oil & gas companies and (2) transactions by foreign financial

institutions with the Central Bank of Iran and designated Iranian financial institutions. Thus,

it may be quite difficult for India to import oil from Iran without explicit US exemptions.

Global oil supply-demand balance will change dramatically without Iran oil

We note that any ‘hard’ sanctions by the US government on oil exports from Iran may result in

a dramatic decline in Iran oil exports, which will upset global oil supply-demand balance. Iran’s

oil exports of 2.2 mn b/d in 1HCY18 (see Exhibit 1 for Iran’s production and exports of oil since

January 2015) is quite large compared to available spare capacity of the OPEC (see Exhibit 2 for

global oil supply-demand balance and OPEC spare capacity). Other oil producers may find it

hard to offset any cut in Iran oil exports beyond 0.5 mn b/d. The continued decline in Venezuela

oil production (see Exhibit 3) may further aggravate global oil supply.

India’s macro is vulnerable to oil supply ‘shock’

India’s macro position would worsen if oil prices were to shoot above US$80/bbl. We note that

a US$10/bbl change in crude oil prices results in (1) 50 bps impact on CAD/GDP; we model

2.8% CAD/GFD at US$72.5/bbl Dated Brent crude price; see Exhibit 4, (2) 30 bps impact on

inflation; we model 4.6% average CPI inflation for FY2019; see Exhibit 5 and (3) modest impact

on GFD through higher subsidies on kerosene and LPG; we model gross under-recoveries at

`460 bn versus the government’s provision of `265 bn (see Exhibit 6); GFD could rise if the

government was to reduce taxes on diesel and gasoline in order to mitigate the impact of

higher oil prices.

No defense really against higher oil prices; portfolio positioning tricky

We do not see any mitigating factors for investors in a scenario of higher oil prices. (1) Interest

rates and bond yields are likely to stay high, if not move higher. The current gap between bond

and equity yields is already quite high (see Exhibit 7). (2) ‘Defensive’ stocks are either very

expensive (typical consumption stocks; see Exhibit 8) or are bond proxies (regulated utilities).

(3) Government-owned upstream oil stocks (the safest hedge in theory) face the risk of unfavorable

government action in the form of subsidies (we already assume some in our financial models for

the companies). (4) IT stocks are either expensive or have business-related challenges.

Strategy Market

Iran, US and possible collateral damage. (1) The restart of sanctions on Iran by the

US on the latter’s withdrawal from the Joint Comprehensive Plan of Action (JCPOA),

(2) the US President’s recent warning to other countries about doing business with Iran,

(3) Iran government’s intransigence stance and (4) re-imposition of sanctions on Iran oil

exports from November 5, 2018 may upset India’s delicate macroeconomic balance.

We do not see any mitigating factors for India and investors from higher oil prices.

INDIA

AUGUST 09, 2018

UPDATE

BSE-30: 37,888

QUICK NUMBERS

Iran oil exports at

2.21 mn b/d versus

OPEC spare capacity

of 3.24 mn b/d in

June 2018

India’s oil imports

from Iran at 0.68

mn b/d versus total

imports of 4.3 mn

b/d in June 2018

A US$10/bbl

increase in oil prices

impacts CAD/GDP

by 50 bps and CPI

inflation by 30 bps

Sanjeev Prasad

Sunita Baldawa

Anindya Bhowmik

Strategy India

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

Portfolio: Minor changes to large-cap. and mid-cap. recommended portfolios

Exhibit 9 is our recommended large-cap. portfolio. We add ONGC to the Model Portfolio

with a weight of 200 bps and trim positions in Cipla (50 bps to 280 bps), Dabur (50 bps to

200 bps) and MSIL (100 bps to 310 bps). The former two have performed quite strongly

over the past 2-3 months. They are trading above or near our 12-month forward fair

valuations and we would have trimmed positions in the stocks irrespective of our oil-related

concerns. We also increase weight on LT by 50 bps (5.2%) and trim position in HDFCB

(50 bps to 10.4%).

We would clarify that ONGC is not a structural play on volume growth but a short-term

hedge against any possible spike in oil prices. Of course, unfavorable government action in

the form of government-owned oil companies bearing some portion of the gross under-

recoveries on cooking fuels and even on auto fuels may blunt our short-term investment

case. Nonetheless, we note that ONGC stock price is discounting US$45/bbl currently (see

Exhibit 10 for reverse valuation exercise for ONGC). We anyway model US$55/bbl net

realized price for ONGC versus our crude price assumption of US$72.5/bbl for FY2019 and

US$67.5/bbl for FY2020. Lastly, we note that current marketing margins on diesel and

gasoline preclude any large subsidy burden with respect to auto fuels (see Exhibit 11).

Exhibit 12 is our recommended mid-cap. portfolio. We remove Balkrishna Industries (BIL)

noting the fact that the stock is trading above our fair valuation; the stock has delivered

20% return since inception of our mid-cap. portfolio. We replace the same with Jyothy

Laboratories (JYL; TP: `240).

Exhibit 1: Crude oil production from Iran declined by ~1 mn b/d post US-led sanctions over CY2013-15 Monthly production and exports from Iran, calendar year-ends, 2011-18 (mn b/d)

Source: OPEC, Kotak Institutional Equities

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Jun-1

1

Sep

-11

Dec-

11

Mar-

12

Jun-1

2

Sep

-12

Dec-

12

Mar-

13

Jun-1

3

Sep

-13

Dec-

13

Mar-

14

Jun-1

4

Sep

-14

Dec-

14

Mar-

15

Jun-1

5

Sep

-15

Dec-

15

Mar-

16

Jun-1

6

Sep

-16

Dec-

16

Mar-

17

Jun-1

7

Sep

-17

Dec-

17

Mar-

18

Jun-1

8

Iran oil production Exports

India Strategy

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Exhibit 2: OPEC implied spare capacity could decline sharply with lower Iran oil production Estimated global crude demand, supply and prices, calendar year-ends, 2010-22E

Source: IEA, Kotak Institutional Equities estimates

Exhibit 3: Sharp decline in oil production from Venezuela due to ongoing socioeconomic crisis Monthly production of crude oil in Venezuela, January 2016 onwards (mn b/d)

Source: OPEC, Kotak Institutional Equities

2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E

Demand (mn b/d)

Total demand 90.7 91.7 93.0 95.0 96.2 97.7 99.1 100.5 101.6 102.6 103.7

Yoy growth 1.2 1.1 1.2 2.0 1.2 1.5 1.4 1.4 1.2 1.0 1.1

Supply (mn b/d)

Non-OPEC 52.5 54.5 57.0 58.1 57.4 58.2 60.2 62.0 62.4 62.8 63.2

Yoy growth (0.4) 2.1 2.4 1.1 (0.7) 0.8 2.0 1.8 0.3 0.4 0.4

OPEC

Crude 32.1 30.6 30.5 31.8 32.8 32.3 32.0 32.0 32.0 32.0 32.0

NGLs 6.4 6.2 6.3 6.6 6.8 6.9 6.9 7.0 7.1 7.2 7.3

Total OPEC 38.4 36.8 36.8 38.4 39.6 39.2 38.9 39.0 39.1 39.2 39.3

Total supply 90.9 91.3 93.7 96.5 97.0 97.4 99.1 101.1 101.5 102.0 102.5

Total stock change 0.2 (0.5) 0.7 1.5 0.8 (0.3) 0.0 0.6 (0.1) (0.6) (1.2)

OPEC crude capacity 35.8 35.2 35.2 35.2 35.9 35.6 35.1 34.9 35.9 36.0 36.2

Implied spare capacity 3.9 4.1 5.5 4.8 3.9 2.9 3.1 3.5 3.7 3.4 3.0

Demand growth (yoy, %) 1.3 1.2 1.4 2.2 1.2 1.6 1.4 1.4 1.1 1.0 1.1

Supply growth (yoy, %)

Non-OPEC (0.8) 3.9 4.5 1.9 (1.2) 1.5 3.4 3.1 0.5 0.7 0.7

OPEC 7.4 (4.4) 0.0 4.5 3.1 (1.0) (0.7) 0.2 0.3 0.1 0.2

Total 2.5 0.4 2.7 2.9 0.5 0.5 1.8 1.9 0.4 0.5 0.5

Dated Brent (US$/bbl) 112 109 99 52 44 54 57 73 68 65 65

World GDP growth (%) 3.4 3.3 3.6 3.4 3.2 3.7 3.9 3.9 3.7 3.8 3.8

Notes:

(a) OPEC production data includes Indonesia in 2012 and Gabon from 2013 onwards.

-

0.5

1.0

1.5

2.0

2.5

3.0

Jan

-16

Feb-1

6

Mar-

16

Apr-

16

May-

16

Jun-1

6

Jul-1

6

Aug

-16

Sep

-16

Oct

-16

Nov-

16

Dec-

16

Jan

-17

Feb-1

7

Mar-

17

Apr-

17

May-

17

Jun-1

7

Jul-1

7

Aug

-17

Sep

-17

Oct

-17

Nov-

17

Dec-

17

Jan

-18

Feb-1

8

Mar-

18

Apr-

18

May-

18

Jun-1

8

Venezuela oil production

Strategy India


Exhibit 4: India's external vulnerabilities will be higher at higher oil prices India's balance of payments, March fiscal year-ends, 2014-19E (US$ bn)

Source: RBI, Kotak Institutional Equities estimates

2019E

2014 2015 2016 2017 2018 [email protected]/bbl [email protected]/bbl Oil@80/bbl

Current account (32.4) (26.8) (22.2) (15.3) (48.7) (70.8) (78.2) (89.5)

GDP 1,858 2,038 2,103 2,270 2,602 2,758 2,758 2,758

CAD/GDP (%) (1.7) (1.3) (1.1) (0.7) (1.9) (2.6) (2.8) (3.2)

Trade balance (147.6) (144.9) (130.1) (112.4) (160.0) (186.5) (194.0) (205.2)

Trade balance/GDP (%) (7.9) (7.1) (6.2) (4.9) (6.2) (6.8) (7.0) (7.4)

- Exports 319 317 266 280 309 331 334 337

- oil exports 63 57 31 32 39 41 43 47

- non-oil exports 255 260 236 249 270 290 290 290

- Imports 466 461 396 393 469 518 528 542

- oil imports 165 138 83 87 109 132 142 157

- non-oil imports 301 323 313 306 360 386 386 386

- gold imports 29 34 32 28 34 34 34 34

Invisibles (net) 115 118 108 97 111 116 116 116

- Services 73 77 70 67 78 80 80 80

- software 67 70 71 70 72 74 74 74

- non-software 6.0 6.2 (1.8) (2.6) 5.4 5.5 5.5 5.5

- Transfers 65 66 63 56 62 66 66 66

- Income (net) (23) (24) (24) (26) (29) (30) (30) (30)

Capital account 48.8 89.3 41.1 36.5 91.4 42.0 42.0 42.0

Percentage of GDP 2.6 4.4 2.0 1.6 3.5 1.5 1.5 1.5

Foreign investment 26 73 32 43 52 20 20 20

- FDI 22 31 36 36 30 30 30 30

- FPI 5 42 (4) 8 22 (10) (10) (10)

- Equities 14 15 (4) 9 2 (2) (2) (2)

- Debt (8) 26 (0) (1) 21 (8) (8) (8)

Banking capital 25 12 11 (17) 16 12 12 12

- NRI deposits 39 14 16 (12) 10 9 9 9

Short-term credit (5.0) (0.1) (1.6) 6.5 13.9 6.0 6.0 6.0

ECBs 11.8 1.6 (4.5) (6.1) (0.2) 2.0 2.0 2.0

External assistance 1.0 1.7 1.5 2.0 2.9 2.0 2.0 2.0

Other capital account items (10.8) 1.1 3.3 7.6 6.2 0.0 0.0 0.0

E&O (0.9) (1.1) (1.1) 0.4 0.9 0.0 0.0 0.0

Overall balance 15.6 61.4 17.9 21.6 43.6 (28.8) (36.2) (47.5)

Memo items

Average USD/INR 60.5 61.2 65.4 67.2 64.5 67.6 67.6 67.6

Average Brent (US$/bbl) 107.6 86.5 47.5 49.0 57.6 67.5 72.5 80.0

India Strategy


Exhibit 5: Upside risks to inflation from crude price, INR weakness and higher-than-usual MSP hikes Headline and core CPI inflation (%)

Source: CEIC, Kotak Institutional Equities

Exhibit 6: Our base-case scenario assumes 100% windfall tax on upstream PSUs above US$55/bbl Share of under-recoveries for various participants, March fiscal year-ends, 2010-20E (Rs bn)

Source: Companies, PPAC, Kotak Institutional Equities

0

2

4

6

8

10

Jan

-14

Apr-

14

Jul-1

4

Oct

-14

Jan

-15

Apr-

15

Jul-1

5

Oct

-15

Jan

-16

Apr-

16

Jul-1

6

Oct

-16

Jan

-17

Apr-

17

Jul-1

7

Oct

-17

Jan

-18

Apr-

18

Jul-1

8

Oct

-18

Jan

-19

CPI inflation Core CPI inflation

Mar-19: 5.1

Mar-19: 4.8

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E

Macro-assumptions

Dated Brent crude oil price (US$/bbl) 67.1 84.0 113.5 111.8 107.8 85.7 48.0 49.0 57.5 72.5 67.5

Exchange rate (Rs/US$) 47.4 45.6 47.9 54.4 60.5 61.1 65.5 67.1 64.5 67.5 68.0

Subsidy burden

Petrol 52 22 49 11 — — — — — — —

Diesel 93 344 812 921 628 109 — — — — —

LPG 143 220 300 396 503 406 161 121 210 401 373

Kerosene 174 196 274 294 306 248 115 76 47 59 31

Subsidy burden 461 782 1,434 1,621 1,437 763 276 197 256 459 404

Gross under-recoveries 491 814 1,465 1,651 1,468 793 276 197 256 459 404

Subsidy sharing

Payment by government (direct budgetary support) 30 32 31 31 31 31 — — — — —

Payment by government (oil bonds/cash) 260 410 835 1,000 746 313 263 197 256 264 264

Receipt from upstream companies 144 303 550 600 670 428 13 — — 196 139

Share of ONGC 116 249 445 494 564 363 11 — — 169 121

Share of Oil India 15 33 74 79 87 55 2 — — 26 18

Share of GAIL 13 21 32 27 19 10 — — — — —

Net under-recovery of OMCs 56 69 49 21 21 22 0 — — — —

Strategy India


Exhibit 7: Earnings yields have been broadly stable over the past several months despite a sharp

increase in bond yields Nifty earnings yield and bond yield, March fiscal year-ends, 2004-19 (%)

Source: Bloomberg, Kotak Institutional Equities

Exhibit 8: Most ‘consumption’ stocks in our coverage universe trade at rich multiples 12-m forward PE multiple and earnings growth of certain 'consumption' stocks in KIE universe, March fiscal year-ends, 2011-20E

Source: Companies, Kotak Institutional Equities estimates

(8)

(4)

0

4

8

12

16

Aug

-03

Aug

-04

Aug

-05

Aug

-06

Aug

-07

Aug

-08

Aug

-09

Aug

-10

Aug

-11

Aug

-12

Aug

-13

Aug

-14

Aug

-15

Aug

-16

Aug

-17

Aug

-18

Yield gap (%) Earnings yields (%) India 10-y G-Sec yields (%)

Company Sector Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Current

Eicher Motors Automobiles 15 14 16 25 70 33 33 36 26

Maruti Suzuki Automobiles 14 15 15 17 s 19 20 32 26

Bajaj Finance Banks/NBFCs 1.6 1.4 1.5 1.9 3.5 4.2 5.6 6.5 7.7

Cholamandalam Banks/NBFCs 1.6 1.6 1.8 1.6 2.6 2.8 3.2 4.8 3.4

HDFC Bank Banks/NBFCs 3.8 3.5 3.5 3.5 3.6 3.2 3.8 4.0 3.8

Indusind Bank Banks/NBFCs 2.8 2.8 2.5 2.6 3.8 2.9 3.7 4.6 4.0

Asian Paints Consumer Products 26 30 35 37 39 40 49 52 48

Colgate-Palmolive (India) Consumer Products 23 29 28 33 40 34 38 43 40

Dabur India Consumer Products 25 24 26 29 34 31 35 42 46

Glaxosmithkline Consumer Consumer Products 30 31 35 29 37 31 30 38 34

Hindustan Unilever Consumer Products 25 29 28 32 41 40 41 56 57

Jubilant Foodworks Consumer Products 37 49 38 39 58 53 53 77 51

Marico Consumer Products 25 26 28 24 33 35 42 49 49

Nestle India Consumer Products 35 33 36 38 42 46 63 63 59

Page Industries Consumer Products 24 26 26 35 61 45 47 75 70

United Breweries Consumer Products 47 54 58 68 74 55 55 65 55

United Spirits Consumer Products 22 14 29 56 58 68 46 79 52

12-m forward PB/PE multiple (X)

India Strategy


Exhibit 9: 'Barbell' portfolio of 'growth' and 'value' stocks KIE large-cap. Model Portfolio

Source: Kotak Institutional Equities estimates

Exhibit 10: ONGC stock is discounting US$45/bbl of net realization at current levels of crude price ONGC reverse valuation, March fiscal year-end, 2019E (Rs)


Price (Rs) KIE weight Price (Rs) KIE weight

Company 8-Aug-18 (%) 8-Aug-18 (%)

Automobiles ONGC 172 2.0

Mahindra & Mahindra 928 4.9 Reliance Industries 1,218 7.0

Maruti Suzuki 9,207 3.1 Energy 13.9

Tata Motors 255 2.1 Industrials/Construction

Automobiles 10.1 L&T 1,298 5.2

Private Banks and NBFCs Industrials/Construction 5.2

HDFC 1,985 8.2 Metals & Mining

HDFC Bank 2,136 10.4 Hindalco Industries 221 2.6

ICICI Bank 319 8.3 Vedanta 225 2.0

ICICI Prudential Life 413 1.9 Tata Steel 578 2.5

IndusInd Bank 2,001 2.3 Metals & Mining 7.1

LIC Housing finance 559 2.0 Others

Private Banks and NBFCs 33.0 InterGlobe Aviation 1,029 1.6

PSU Banks Others 1.6

Bank of Baroda 149 1.9 Pharmaceuticals

State Bank of India 309 4.8 Cipla 633 2.8

PSU Banks 6.7 Pharmaceuticals 2.8

Consumers Technology

Colgate-Palmolive (India) 1,149 2.1 Infosys 1,363 8.9

Dabur India 445 2.0 Tech Mahindra 654 1.9

Marico 362 2.2 Technology 10.8

Consumers 6.3 Utilities

Energy Power Grid 190 2.5

GAIL (India) 377 3.0 Utilities 2.5

Petronet LNG 228 1.8 BSE-30 37,888 100

55 60 65 70 75

45 124 136 149 161 174

50 142 154 167 179 192

55 160 172 185 197 210

60 190 203 215 228

65 221 233 246

70 251 264

75 282

Dated Brent crude price (US$/bbl)

Net crude

realization

(US$/bbl)

Strategy India


Exhibit 11: Marketing margins on auto fuels have recovered recently Gross marketing margin on diesel and gasoline, March fiscal year-ends, 2016-18 (Rs/liter)

Source: PPAC, Kotak Institutional Equities

Exhibit 12: We recommend mid-cap. stocks in automobile components, financials, industrials and power utilities KIE mid-cap. Model Portfolio

Source: Companies, Kotak Institutional Equities estimates

(1)

0

1

2

3

4

5

May-

15

Aug

-15

Nov-

15

Feb-1

6

May-

16

Aug

-16

Nov-

16

Feb-1

7

May-

17

Aug

-17

Nov-

17

Feb-1

8

May-

18

Aug

-18

Marketing margin on diesel Marketing margin on gasoline

Target

Price price Upside EPS (Rs)

Company Sector Rating (Rs) (Rs) (%) (Rs mn) (US$ mn) 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E

CESC Utilities BUY 931 1,180 26.7 123,457 1,798 87.1 114.8 128.1 10.7 8.1 7.3 0.8 0.8 0.7 7.9 10.0 10.4

Escorts Automobiles BUY 877 1,200 36.9 74,739 1,565 38.8 59.1 70.8 22.6 14.8 12.4 3.1 2.6 2.2 13.5 17.6 18.0

Federal Bank Banks BUY 88 130 47.3 174,750 2,546 4.4 5.7 7.9 20.2 15.6 11.2 1.6 1.4 1.3 8.2 8.8 11.4

Jyothy Laboratories Consumer Products ADD 220 240 9.0 80,044 1,166 4.4 5.6 6.6 50.0 39.1 33.5 7.0 6.0 5.3 14.4 16.6 16.8

Kalpataru Power Transmission Industrials BUY 369 560 51.8 56,596 824 18.3 23.0 32.1 20.2 16.0 11.5 2.1 1.9 1.6 11.0 12.5 15.2

Laurus Labs Pharmaceuticals ADD 440 500 13.5 46,690 680 15.9 16.2 29.2 27.8 27.1 15.1 3.1 2.8 2.4 11.9 10.9 17.1

Max Financial Services NBFCs ADD 499 650 30.3 133,859 1,950 4.6 6.3 6.4 108.8 79.5 78.1 — — — 6.5 8.3 8.0

Prestige Estates Projects Real Estate ADD 250 315 26.2 93,619 1,364 12.5 9.5 10.3 19.9 26.3 24.2 2.0 1.9 1.8 10.3 7.3 7.5

Sadbhav Engineering Infrastructure BUY 275 440 60.0 47,182 687 12.9 17.8 18.2 21.4 15.4 15.1 2.5 2.2 1.9 12.5 15.2 13.7

Shriram City Union Finance NBFCs ADD 1,940 2,250 16.0 127,979 1,864 100.7 141.4 173.6 19.3 13.7 11.2 2.4 2.2 1.9 12.5 15.8 16.9

Mkt cap. PER (X) PBR (X) RoE (%)


1QFY19 impacted by sharp decline in underlying refining and marketing margins

BPCL’s normalized EBITDA declined 42% qoq to `19 bn, adjusted for adventitious/forex gains,

led by sharp decline in refining margins to US$4.2/bbl and marketing margins to ~`4,552/ton.

Reported EBITDA at `38.8 bn and net income at `22.9 bn were well above our expectations

boosted by large adventitious gains of `26.8 bn across refining and marketing segments, which

was partly offset by (1) forex-related loss of `7.1 bn and MTM loss of `1.7 bn on oil bonds,

both accounted in other expenses, (2) lower other income and (3) sharp increase in interest

cost.

Lower normalized refining margins at US$4.2/bbl. Inventory-adjusted refining contribution

declined sharply to `15.6 bn from `20.6 bn in 4QFY18, led by lower normalized margins at

US$4.2/bbl. Normalized refining margins for Kochi refinery was further lower at US$3.1/bbl

as compared to US$5.3/bbl for Mumbai. Reported refining margins of US$7.5/bbl included

US$3.3/bbl of adventitious gains (`12.8 bn). Crude throughput declined 1% qoq to 7.7 mn

tons reflecting modestly lower utilization at both refineries.

Sharp decline in implied marketing margins. Inventory-adjusted implied marketing

contribution declined to `51.3 bn from `59 bn in 4QFY18, led by sharp 15% qoq decline in

realized marketing margins to `4,552/ton, modestly above our expectations.

Robust 9.3% growth in domestic volumes; modest 4% growth in auto fuels. BPCL’s

domestic volumes grew robustly by 9.3% yoy to 11 mn tons; exports remained low at 0.3

mn tons. Diesel sales volumes grew at 3.4% in line with growth in domestic consumption;

however, gasoline sales volumes increased by 5.9%, a tad slower than domestic demand.

3-5% cut in estimates; retain REDUCE with revised TP of `375

We revise our standalone EPS estimates to `37.6 (-3%) in FY2019 and `38.7 (-5%) in FY2020,

factoring in (1) lower underlying refining margins, (2) modestly lower marketing margins, (3) a

weaker rupee and (4) other minor changes; our FY2019 EPS includes 1QFY19 reported

adventitious gains and forex loss. Our TP reduces to `375 from `390 previously, based on 5.5X

March 2020E EBITDA plus value of investments. We remain cautious on OMCs’ earnings under

an adverse macro environment underpinned by higher crude prices, which has a bearing on

(1) refining margins due to falling Middle-East discounts and rising fuel and loss, (2) marketing

profitability due to possibility of subsidy sharing and less-than-desirable fuel price hikes and

(3) interest cost due to increase in working capital.

BPCL (BPCL) Energy

Weak refining performance. BPCL’s normalized EBITDA at `19 bn in 1QFY19 was

sharply below our estimate driven by weak normalized refining margin and lower crude

throughput; reported results were boosted by `26.8 bn of adventitious gains. We retain

REDUCE on the stock with a revised target price of `375 (`390 earlier), noting material

risk to earnings from uncertainty on cooking fuel subsidy-sharing mechanism and auto

fuel price hikes under an adverse global/local macro environment.

REDUCE

AUGUST 09, 2018

RESULT

Coverage view: Attractive

Price (`): 387

Target price (`): 375

BSE-30: 37,888

Tarun Lakhotia

Akshay Bhor

Bharat Petroleum

Stock data Forecasts/Valuations 2018 2019E 2020E

52-week range (Rs) (high,low) EPS (Rs) 40.3 37.6 38.7

Market Cap. (Rs bn) EPS growth (%) (1.5) (6.7) 3.1

Shareholding pattern (%) P/E (X) 9.6 10.3 10.0

Promoters 54.3 Sales (Rs bn) 2,363.1 2,999.5 2,928.3

FIIs 19.8 Net profits (Rs bn) 79.2 73.9 76.2

MFs 5.6 EBITDA (Rs bn) 116.7 121.1 126.6

Price performance (%) 1M 3M 12M EV/EBITDA (X) 7.8 7.5 7.1

Absolute 3.4 (1.3) (23.3) ROE (%) 24.8 20.5 19.1

Rel. to BSE-30 (2.7) (8.3) (35.2) Div. Yield (%) 5.4 3.9 4.0

Company data and valuation summary

552-360

840.1

BPCL Energy


Exhibit 1: Normalized results were below our estimates led by weaker underlying refining margins Calculation of normalized profitability (Rs bn)

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Refining margins declined sharply to US$4.2/bbl; marketing margins declined 15% qoq Calculation of segment-wise contribution, 1QFY17 onwards (Rs bn)


1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 1QFY19E

Gross contribution 53.6 77.1 75.8 84.1 93.7 76.5

Operating expenses 41.4 41.8 43.9 46.9 55.0 46.9

Reported EBITDA 12.3 35.3 31.9 37.2 38.8 29.6

Add: net under-recovery — — — — — —

Add: forex-related loss/(gain) — 0.9 (0.9) 0.1 7.1 3.5

Add: adventitious loss/(gain) 13.5 (6.8) (16.0) (4.5) (26.8) (7.7)

Normalized EBITDA 25.7 29.3 15.0 32.8 19.0 25.4

Other income 6.3 8.0 6.4 9.5 5.5 7.2

Interest expense 1.8 2.3 2.0 2.2 3.0 2.2

Depreciation 5.9 6.4 6.8 7.4 7.4 7.4

Normalized PBT 24.3 28.6 12.7 32.7 14.1 23.0

Effective tax 8.3 9.7 4.3 11.1 4.8 7.8

Reported net income 7.4 23.6 21.4 26.7 22.9 18.5

Normalized adjusted net income 16.0 18.9 8.4 21.6 9.3 15.2

Normalized adjusted EPS (Rs) 8.2 9.6 4.3 11.0 4.7 7.7


Segment-wise contribution



Add: one-off provision/charges — — — — — —


Normalized gross contribution 67.1 70.2 59.9 79.6 66.9 68.8

Refining segment 20.9 21.2 16.8 20.6 15.6 21.4

Marketing and other segments 46.2 49.0 43.1 59.0 51.3 47.4

Blended marketing margins (Rs/ton) 4,385 4,726 3,837 5,332 4,552 4,293

Reported refining margins (US$/bbl) 4.9 8.0 7.9 6.5 7.5 6.5

Normalized refining margins (US$/bbl) 6.9 6.5 4.9 5.6 4.2 5.5

Crude throughput (mn tons) 6.4 7.0 7.3 7.9 7.7 8.0

Domestic sales (mn tons) 10.0 9.8 10.7 10.7 11.0 10.5

Export sales (mn tons) 0.5 0.6 0.6 0.3 0.3 0.5

Exchange rate (Rs/US$) 64.5 64.3 64.7 64.4 67.0 67.0

Energy BPCL


Exhibit 3: Interim results of BPCL, March fiscal year-ends (Rs mn)


Exhibit 4: BPCL's growth in auto fuels was modestly below domestic consumption during 1QFY19 Growth in auto fuels volumes, 1QFY16 onwards

Source: Companies, PPAC, Kotak Institutional Equities

(% chg.) yoy

1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 FY2019E FY2018 (% chg.)

Net sales 716,967 728,023 571,258 652,393 (1.5) 25.5 9.9 2,999,492 2,363,131 26.9

Increase/(decrease) in stock 23,042 (24,689) 12,673 — (3,206)

Raw material (286,885) (297,486) (171,590) (254,300) (3.6) 67.2 12.8 (1,040,563) (814,675) 27.7

Trading purchase (359,387) (354,024) (321,363) (326,699) 1.5 11.8 10.0 (1,643,374) (1,254,627) 31.0

Staff cost (8,751) (8,471) (8,087) (9,571) 3.3 8.2 (8.6) (36,883) (34,310) 7.5

Other expenses (46,235) (38,392) (33,278) (37,280) 20.4 38.9 24.0 (157,534) (139,625) 12.8

Total expenditure (678,215) (698,373) (559,008) (615,178) (2.9) 21.3 10.2 (2,878,354) (2,246,442) 28.1

EBITDA 38,752 29,650 12,250 37,216 30.7 216.3 4.1 121,138 116,688 3.8

Other income 5,480 7,200 6,566 8,329 (23.9) (16.5) (34.2) 27,800 30,109 (7.7)

Interest (3,018) (2,237) (1,789) (2,194) 34.9 68.8 37.6 (9,822) (8,333) 17.9

Depreciation (7,392) (7,363) (5,892) (7,413) 0.4 25.5 (0.3) (29,450) (26,485) 11.2

Pretax profits 33,823 27,250 11,136 35,939 24.1 203.7 (5.9) 109,667 111,980 (2.1)

Extraordinary item — — — — — —

Current tax (6,620) (6,702) (2,220) (4,576) (27,706) (18,468) 50.0

Deferred tax (4,270) (2,018) (1,470) (4,627) (8,070) (14,318)

Net income 22,933 18,530 7,446 26,736 23.8 208.0 (14.2) 73,891 79,193 (6.7)

Adjusted net income 22,933 18,530 7,446 26,736 23.8 208.0 (14.2) 73,891 79,193 (6.7)

Adjusted EPS (Rs) 11.7 9.4 3.8 13.6 37.6 40.3

Other comprehensive income — (1,501) (1,394) — 91

Total comprehensive income 22,933 5,945 25,343 — 79,284

Tax rate (%) 32.2 32.0 33.1 25.6 32.6 29.3

Volume data

Crude throughput (mn tons) 7.7 8.0 6.4 7.9 (2.6) 20.6 (1.4) 30.3 28.5 6.1

Domestic sales volume (mn tons) 11.0 10.5 10.0 10.7 4.1 9.3 2.2 43.1 41.2 4.5

Exports sales volume (mn tons) 0.3 0.5 0.5 0.3 (38.0) (36.7) (8.8) 2.0 2.0 (0.0)

Reported refining margin (US$/bbl) 7.5 6.5 4.9 6.5 15.2 53.5 15.1 6.5 6.9 (5.2)

Normalized refining margin (US$/bbl) 4.2 5.5 6.9 5.6 (24.5) (39.5) (25.5) 5.7 6.0 (5.6)

Implied marketing margins (Rs/ton) 4,552 4,293 4,385 5,332 6.0 3.8 (14.6) 4,500 4,569 (1.5)

Adventitious gain/(loss) - refining 12,750 3,888 (6,160) 3,460 12,750 11,740

Adventitious gain/(loss) - marketing 14,040 3,831 (7,314) 1,020 14,040 1,210

Net over-recovery/(under-recovery) — — — — — —

Exchange gain/(loss) (7,050) (3,456) 292 (1,220) (7,050) (88)

(10)

(5)

0

5

10

15

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

(%) BPCL HPCL IOCL Consumption

BPCL Energy


Exhibit 5: We have assumed higher refining margins driven by Kochi upgradation and steady

marketing margins Key assumptions, March fiscal year-ends, 2014-21E


Exhibit 6: Earnings sensitivity of BPCL to refining margins and marketing margins, March fiscal year-ends (Rs mn)


Exhibit 7: We compute fair value of `375 for BPCL Fair valuation of BPCL, March 2020E (Rs/share)


2014 2015 2016 2017 2018 2019E 2020E 2021E

Key assumptions

Exchange rate (Rs/US$) 60.5 61.2 65.4 67.1 64.5 68.7 69.5 70.0

Effective tariff protection (%) 2.3 2.4 2.4 2.4 2.4 2.4 2.4 2.4

Crude throughput (mn tons) 23.4 23.4 24.1 25.4 28.5 30.3 30.8 31.0

Net refining margin (US$/bbl) 4.3 3.6 6.6 5.3 6.9 6.5 6.6 6.6

Sales volume (mn tons) 37.0 36.7 38.4 40.2 42.4 44.9 46.7 48.8

Marketing margin on auto fuels (Rs/liter) — — 1.9 1.8 1.8 1.6 1.8 1.8

Subsidy under-recoveries (Rs mn) (5,115) (4,874) — — — — — —

Fiscal 2019E Fiscal 2020E Fiscal 2020E

Downside Base case Upside Downside Base case Upside Downside Base case Upside

Refining margins

Refining margins (US$/bbl) 5.5 6.5 7.5 5.6 6.6 7.6 5.6 6.6 7.6

Net profits (Rs mn) 63,951 73,891 83,831 65,938 76,178 86,418 66,639 77,036 87,434

EPS (Rs) 32.5 37.6 42.6 33.5 38.7 43.9 33.9 39.2 44.5

% upside/(downside) (13.5) 13.5 (13.4) 13.4 (13.5) 13.5

Marketing margins

Auto fuels marketing margin (Rs/liter) 1.1 1.6 2.1 1.3 1.8 2.3 1.3 1.8 2.3

Net profits (Rs mn) 62,308 73,891 85,474 64,097 76,178 88,259 64,430 77,036 89,642

EPS (Rs) 31.7 37.6 43.5 32.6 38.7 44.9 32.8 39.2 45.6

% upside/(downside) (15.7) 15.7 (15.9) 15.9 (16.4) 16.4

EV/EBITDA based valuation

Refining and marketing business (Rs bn)

March 2020E standalone EBITDA 127

EV/EBITDA (X) 5.5

EV of refining and marketing business (Rs bn) 696

EV of refining and marketing business (Rs) (A) 354

Investments (Rs bn)

Numaligarh Refinery 66

Petronet LNG 42

Indraprastha Gas 32

Oil India Ltd 3

Others 75

Value of investments (Rs bn) 217

Value of investments (Rs) (B) 110

Net debt (Rs bn) 176

Net debt (Rs) (C) 89

Total equity value (A) + (B) - (C) 375

Energy BPCL


Exhibit 8: Profit model, balance sheet, cash model of BPCL, March fiscal year-ends, 2014-21E (Rs mn)


2014 2015 2016 2017 2018 2019E 2020E 2021E

Profit model (Rs mn)

Net sales 2,600,605 2,380,869 1,884,046 2,022,106 2,363,131 2,999,492 2,928,310 3,047,244

EBITDA 80,862 76,567 110,246 113,193 116,688 121,138 126,613 128,923

Other income 14,687 22,000 17,762 26,007 30,109 27,800 28,150 28,500

Interest (13,591) (5,831) (5,652) (4,959) (8,333) (9,822) (9,253) (8,687)

Depreciation (22,468) (25,160) (18,446) (18,913) (26,485) (29,450) (32,379) (34,304)

Pretax profits 59,490 67,576 103,910 115,328 111,980 109,667 113,132 114,432

Extraordinary items — 6,579 — (4,900) — — — —

Current tax (21,829) (19,836) (26,987) (20,988) (18,468) (27,706) (30,095) (31,461)

Deferred tax 2,948 (3,474) (6,360) (9,047) (14,318) (8,070) (6,859) (5,934)

Adjusted net profits 40,609 46,334 70,564 83,960 79,193 73,891 76,178 77,036

Adjusted EPS (Rs) 20.6 23.6 35.9 42.7 40.3 37.6 38.7 39.2

Balance sheet (Rs mn)

Total equity 194,588 224,675 273,230 296,684 341,520 379,838 419,341 459,290

Deferred taxation liability 13,609 17,083 35,118 36,182 50,924 58,994 65,853 71,788

Total borrowings 203,298 130,976 158,575 231,592 228,512 226,512 216,512 214,512

Currrent liabilities 312,780 324,555 286,651 355,439 381,269 428,129 428,467 439,974

Total liabilities and equity 724,274 697,289 753,574 919,896 1,002,225 1,093,473 1,130,173 1,185,563

Cash 2,038 13,602 20,674 647 881 1,136 923 837

Current assets 382,722 279,968 246,069 342,637 369,285 413,676 405,063 416,282

Total fixed assets 221,046 279,807 358,721 430,598 473,852 518,453 561,979 604,237

Investments 118,469 123,911 128,110 146,015 158,208 160,208 162,208 164,208

Total assets 724,274 697,289 753,574 919,896 1,002,225 1,093,473 1,130,173 1,185,563

Free cash flow (Rs mn)

Operating cash flow, excl. working capital 62,232 58,016 86,450 79,658 100,840 82,851 86,212 87,429

Working capital changes 7,086 117,160 7,522 (8,441) (818) 2,469 8,951 288

Capital expenditure (47,439) (80,349) (93,246) (89,824) (64,910) (73,292) (74,852) (75,216)

Investments (6,527) (9,092) 26 (29,314) (12,194) (2,000) (2,000) (2,000)

Other income 11,107 10,351 13,338 17,836 30,109 27,800 28,150 28,500

Free cash flow 26,459 96,085 14,090 (30,086) 53,026 37,828 46,461 39,002

Ratios (%)

Debt/equity 104.5 58.3 58.0 78.1 66.9 59.6 51.6 46.7

Net debt/equity 103.4 52.2 50.5 77.8 66.7 59.3 51.4 46.5

RoAE 20.8 22.6 25.7 25.1 21.8 17.8 16.5 15.2

RoACE 12.0 12.8 17.7 17.0 14.4 12.5 12.1 11.5

Key assumptions





Marketing margin on auto fuels (Rs/liter) 0.0 0.0 1.9 1.8 1.8 1.6 1.8 1.8

Subsidy under-recoveries (Rs mn) (5,115) (4,874) — — — — — —

Adventitious gain/(loss) (Rs mn) 15,770 (31,420) (23,710) 19,872 1,210 14,040 — —


In-line quarter, though US disappoints

Cipla’s 1QFY19 revenues at ~`39 bn were 2% higher than our estimates, driven by a 22%

growth in the domestic segment, helped by a favorable base effect (reported 2-year CAGR: 3%,

~10% adjusted for excise). US revenues at US$100 mn were US$5 mn below our estimates, as

new launches were unable to fully offset the negative impact of supply disruptions (US$5 mn

impact) as well as product rationalization (US$5 mn). However, we believe the 1QFY19 numbers

present a base, and expect material growth from 2QFY19 as several recent launches are likely to

meaningfully add to the base, with diclofenac gel, isoproterenol and testosterone cypionate

being the notable launches. South Africa was strong, growing at 23% yoy (14% on constant

currencies), EU disappointed declining 18% yoy (21% decline on constant currencies). Africa

business declined 2% yoy given the impact of tenders, while RoW reported muted 1% growth.

Gross margins disappointed, missing our estimates by 240bps, though lower R&D spend (-11%

versus KIE), meant that EBITDA margins were largely in line with estimates. Adjusting for `850

mn one time other income, PAT exceeded estimates by 12%.

Approval trajectory strong – execution key to US scale-up

We expected Cipla to emerge as a beneficiary of the changing environment in the US, given its

low base, a solid pipeline expected to benefit from quicker review cycles, and limited portfolio

concentration. To this extent, Cipla has received several interesting approvals over the past

quarter, most notably, voltaren gel, isoproterenol, testosterone cypionate, azacitidine, and

decitabine, which should together contribute ~US$80 mn revenues in FY2019 (negligible

contribution in 1QFY19). The management proffered guidance on 15 launches in FY2019, and

we expect the launch momentum to sustain with further 4-5 injectable approvals in FY2019,

along with first inhaler approval in 2HFY19 (ProVentil). FY2020-22 will see continued

momentum given CiproDex, Flonase, Truvada/Atripla, as well as Advair and Abraxane inj.

launches.

Cut FY2019-21E EPS by ~8% – any correction could present buying opportunity

We cut our FY2019-21E EPS by 8-9% each, primarily due to lower revenue assumptions (-4 to

5%) and operating leverage with tax rate. Cipla is now trading at ~13X FY2020 EV/EBITDA and

~20X FY2020E EPS. We revise our target price to `680/share (from `650/share earlier) implying

21X June 2020E EPS (ex-exclusivities). We move away from SOTP valuation to a relative

valuation, given (1) FY2020 should see the first inhalation approval, and (2) US contribution will

likely increase to 22% by FY2020 (25% by FY2021), reflecting normalized profitability.

Cipla (CIPLA) Pharmaceuticals

In-line quarter, US execution key. Cipla’s 1QFY19 numbers were broadly in line with

estimates as an in-line revenue performance was largely offset by lower gross margins,

though, higher other income helped drive PAT outperformance. While US revenues

declined US$4 mn qoq, we believe recent approvals provide visibility towards US$500

mn revenue base for FY2019. We cut our FY2019-21E EPS by ~8% each, and revise our

target price to `680/share (from `650/share), as we move to 21X June 2020E EPS.

BUY

AUGUST 09, 2018

RESULT

Coverage view: Neutral

Price (`): 633


BSE-30: 37,888

Chirag Talati, CFA

Kumar Gaurav

Cipla



Market Cap. (Rs bn) EPS growth (%) 40.2 34.5 31.0


Promoters 36.7 Sales (Rs bn) 152.2 167.8 189.6


MFs 9.9 EBITDA (Rs bn) 28.3 34.2 41.9


Absolute 3.4 7.2 9.5 ROE (%) 10.2 12.4 14.6



663-507

510.0

Pharmaceuticals Cipla


Exhibit 1: Cipla interim results March fiscal year-ends (` mn)

Source: Company, Kotak Institutional Equities

Exhibit 2: Cipla changes to estimates March fiscal year-ends, 2019-20E (Rs mn)


(% chg.)


Sales 39,390 38,591 35,251 36,980 2.1 11.7 6.5 167,842 152,193 10.3

Raw material (14,239) (13,024) (11,767) (13,303) 9.3 21.0 7.0 (58,155) (54,384) 6.9

Staff cost (7,140) (7,234) (6,729) (6,990) (1.3) 6.1 2.1 (29,322) (26,901) 9.0

R&D costs (2,757) (3,100) (2,120) (2,810) (11.1) 30.1 (1.9) (13,028) (10,415) 25.1

Other expenditure (7,990) (8,250) (8,170) (8,308) (3.2) (2.2) (3.8) (33,124) (32,229) 2.8

Total expenditure (32,126) (31,609) (28,786) (31,411) 1.6 11.6 2.3 (133,628) (123,929) 7.8

EBITDA 7,264 6,982 6,465 5,569 4.0 12.4 30.4 34,213 28,264 21.1

Depreciation (2,410) (2,875) (2,134) (2,848) (9,889) (13,228)

Interest (351) (200) (279) (352) (914) (1,142)

Other income / exceptionals 1,701 550 1,514 (375) 3,000 2,801

Pretax profits 6,204 4,457 5,566 1,993 39.2 11.5 211.2 26,411 16,695 58.2

Tax (1,737) (1,070) (1,308) (462) (7,395) (2,501)

Minority interest/associates (11) (170) (170) (1) (50) (343)

Net income 4,456 3,218 4,088 1,531 38.5 9.0 191.0 18,966 13,851 36.9

Net income (adjusted) 4,456 3,218 4,088 2,525 38.5 9.0 76.5 18,966 15,526 22.2

Adjusted EPS (Rs) 5.6 4.0 5.1 3.2 38.5 9.0 76.5 23.7 19.3 22.9

Tax rate (%) 28.0 24.0 23.5 23.2 28.0 15.0

Segment wise sales (Rs mn)

Domestic (reported) 15,440 15,221 12,710 13,530 1.4 21.5 14.1 65,730 58,710 12.0

Exports 23,040 22,442 21,330 21,590 2.7 8.0 6.7 98,612 88,663 11.2

- US 6,700 7,236 6,460 6,750 (7.4) 3.7 (0.7) 34,533 25,890 33.4

- South Africa 5,750 5,466 4,670 5,330 5.2 23.1 7.9 24,289 20,465 18.7

- Europe 1,340 1,250 1,650 1,360 7.2 (18.8) (1.5) 5,511 6,197 (11.1)

- RoW 7,250 7,091 7,250 6,800 2.2 0.0 6.6 27,718 29,863 (7.2)

- Export API 2,000 1,400 1,300 1,350 42.9 53.8 48.1 6,561 6,249 5.0

Total 38,480 37,664 34,040 35,120 2.2 13.0 9.6 164,342 147,373 11.5

Other operating income 910 927 1,211 1,860 (1.9) (24.8) (51.1) 3,500 4,820 (27.4)

Net sales 39,390 38,591 35,251 36,980 2.1 11.7 6.5 167,842 152,193 10.3

Margins (%)

Gross margin 63.9 66.3 66.6 64.0 65.4 64.3

Staff cost to sales 18.1 18.7 19.1 18.9 17.5 17.7

R&D as % of sales 7.0 8.0 6.0 7.6 7.8 6.8

Other expenditure to sales 20.3 21.4 23.2 22.5 19.7 21.2

EBITDA margin 18.4 18.1 18.3 15.1 20.4 18.6

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

Sales 167,842 189,550 219,573 175,424 199,648 227,775 (4.3) (5.1) (3.6)

Gross profits 109,687 124,107 145,096 113,347 130,282 150,866 (3.2) (4.7) (3.8)

Staff cost (29,322) (32,548) (36,128) (28,919) (32,100) (35,631) 1.4 1.4 1.4

R&D (13,028) (15,244) (17,644) (13,161) (16,377) (18,385) (1.0) (6.9) (4.0)

Other expense (33,124) (34,446) (39,805) (34,148) (36,251) (41,271) (3.0) (5.0) (3.6)

EBITDA 34,213 41,869 51,518 37,120 45,554 55,579 (7.8) (8.1) (7.3)

PAT 18,966 24,851 32,167 20,693 27,393 34,874 (8.3) (9.3) (7.8)

EPS 23.5 30.9 39.9 25.7 34.0 43.3 (8.3) (9.3) (7.8)

Changes (%)Old estimatesNew estimates

Cipla Pharmaceuticals


Exhibit 3: Cipla – US revenues to double over FY2018-22E March fiscal year-ends, 2014-21E (US$ mn)


Exhibit 4: Cipla - revenues by segments March fiscal year-ends, 2014-21E (Rs mn)


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

Invagen base business 0 0 187 170 150 142 138 134

Invagen launches 0 3 33 40 51 50 57 57

Key product profit share (partnered) 10 155 29 28 21 52 146 40

Cipla own launches 6 6 16 32 143 154 200 192

Cipla base business (incl. partner) 109 100 102 96 96 101 124 156

US Dymista royalties 19 23 28 32 35 39 41 41

US inhalers 0 0 0 0 0 26 37 219

Total US sales 143 287 395 398 497 564 742 840

yoy growth (%) 16.6 100.3 37.6 0.7 24.8 13.5 31.7 13.1

Cipla + Invagen base business as a % of sales 76.0 34.8 73.1 66.9 49.6 43.0 35.3 34.6

Partner key launches as a % of sales 7.0 54.0 7.4 7.0 4.3 9.2 19.6 4.7

Cipla + Invagen key launches as % of sales 4.1 3.1 12.3 18.1 38.9 36.2 34.6 29.7

Dymista as a % of sales 12.9 8.1 7.2 8.0 7.1 6.9 5.5 4.9

Inhalers as a % of sales 0.0 0.0 0.0 0.0 0.0 4.6 5.0 26.1

2014 2015 2016 2017 2018 2019E 2020E 2021E

Net revenues 101,004 113,454 136,098 146,302 152,193 167,842 189,550 219,573

Domestic sales 39,740 46,830 50,220 55,300 58,710 65,730 73,913 83,257

Export formulations 49,844 54,988 75,539 82,239 82,550 92,051 105,248 125,582

South Africa 13,187 15,883 15,690 18,270 20,465 24,289 28,583 32,195

Europe 5,684 4,351 6,060 5,430 6,197 5,511 7,194 8,225

US 7,437 9,069 21,050 26,240 25,890 34,533 40,366 53,147

Others 23,535 25,685 32,739 32,299 29,998 27,718 29,104 32,015

Bulk exports 8,344 7,006 7,380 5,270 6,249 6,561 6,889 7,234

Licensing/other income 3,076 4,630 2,959 3,494 4,684 3,500 3,500 3,500

Growth %

Domestic sales 9 18 7 10 6 12 12 13

Export formulations 30 10 37 9 0 12 14 19

South Africa 116 20 (1) 16 12 19 18 13

Europe 8 (23) 39 (10) 14 (11) 31 14

US (32) 22 132 25 (1) 33 17 32

Others 46 9 27 (1) (7) (8) 5 10

Bulk exports 28 (16) 5 (29) 19 5 5 5

% of sales

Domestic sales 41 43 38 39 40 40 40 39

Export formulations 51 51 57 58 56 56 57 58

South Africa 13 15 12 13 14 15 15 15

Europe 6 4 5 4 4 3 4 4

US 8 8 16 18 18 21 22 25

Others 24 24 25 23 20 17 16 15

Bulk exports 9 6 6 4 4 4 4 3

Pharmaceuticals Cipla


Exhibit 5: Cipla profit and loss, balance sheet, cash model March fiscal year-ends, 2013-21E (Rs mn)


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

Net revenues 82,793 101,004 113,454 136,098 146,302 152,193 167,842 189,550 219,573

Gross Profit 53,267 62,256 71,557 85,199 93,131 97,808 109,687 124,107 145,096

Staff costs (10,360) (15,430) (19,737) (24,340) (26,338) (26,901) (29,322) (32,548) (36,128)

R&D expenses (3,638) (5,450) (7,034) (8,846) (10,741) (10,415) (13,028) (15,244) (17,644)

Other expenses (17,290) (20,046) (23,170) (27,257) (31,294) (32,229) (33,124) (34,446) (39,805)

EBITDA 21,979 21,331 21,617 24,755 24,758 28,264 34,213 41,869 51,518

Depreciation & amortisation (3,305) (3,726) (5,047) (7,159) (13,229) (13,228) (9,889) (10,344) (10,767)

EBIT 18,674 17,604 16,570 17,596 11,529 15,036 24,324 31,525 40,751

Net Interest (339) (1,457) (1,683) (2,062) (1,594) (1,142) (914) (401) 293

Other income 2,557 2,531 1,403 2,170 2,287 2,774 3,000 2,300 2,200

Profit before tax 20,892 18,677 16,290 17,704 12,222 16,667 26,411 33,424 43,244

Tax & Deferred Tax (5,443) (4,634) (4,000) (3,779) (1,798) (2,501) (7,395) (8,523) (11,027)

Net Income 15,449 13,884 11,808 13,504 10,064 14,105 18,966 24,851 32,167

EPS (Rs) 19.2 17.3 14.7 16.8 12.5 17.5 23.5 30.9 39.9

Balance sheet

Equity 90,187 100,999 109,820 120,149 129,637 145,816 160,609 179,993 205,084

Total borrow ings 9,669 12,283 17,018 51,991 41,126 40,980 29,359 22,859 16,359

Other liabilities 16,732 20,750 30,338 41,419 38,938 41,809 43,231 45,364 48,930

Total liabilities 116,588 134,032 157,175 213,558 209,701 228,606 233,200 248,216 270,372

Net fixed assets 48,748 77,519 81,261 125,052 121,471 120,465 117,575 114,231 109,964

Investments 8,871 8,136 7,156 9,483 9,922 11,160 11,160 11,160 11,160

Cash 22,598 4,866 9,543 14,532 14,477 20,678 21,004 29,371 42,759

Other current assets 45,242 51,648 66,372 73,974 73,752 87,463 94,621 104,614 117,650

Total assets 116,588 134,032 157,175 213,558 209,701 228,606 233,200 248,216 270,372

Cashflow statement

Operating profit before working capital 23,792 24,157 22,843 27,258 26,019 28,596 36,250 43,718 53,961

Tax paid (4,617) (5,619) (3,923) (5,077) (4,503) (2,501) (7,395) (8,523) (11,027)

Change in working capital (5,198) (5,619) (7,186) (4,242) 2,307 (8,156) (5,736) (7,861) (9,470)

Capital expenditure (6,201) (5,666) (6,262) (10,769) (11,360) (7,500) (7,000) (7,000) (6,500)

Free cash flow 6,404 7,254 5,472 7,170 12,464 10,439 16,119 20,335 26,964

Margins and ratios

Gross profit margin (%) 64.3 61.6 63.1 62.6 63.7 64.3 65.4 65.5 66.1

EBITDA margin (%) 26.5 21.1 19.1 18.2 16.9 18.6 20.4 22.1 23.5

Tax rate (%) 25.2 18.5 14.4 13.0 8.4 11.0 15.7 17.6 19.7

RoAE (%) 18.5 14.5 11.2 11.7 8.1 10.2 12.4 14.6 16.7

RoACE (%) 21.6 17.4 14.6 13.9 7.4 8.2 12.7 15.8 18.9


1QFY19 impacted by sharp decline in underlying refining and marketing margins

HPCL’s normalized EBITDA declined 36% qoq to `18.2 bn, adjusted for adventitious/forex

gains, led by sharp decline in refining margins to US$3.7/bbl and marketing margins to

~`4,960/ton. Reported EBITDA at `31.9 bn and net income at `17.2 bn were well above our

expectations boosted by large adventitious gains of `19.1 bn across refining and marketing

segments, which was partly offset by (1) forex-related loss of `5.4 bn and MTM loss of `1.7 bn

on oil bonds, both accounted in other expenses, (2) lower other income and (3) sharp increase

in interest cost.

Lower normalized refining margins at US$3.7/bbl. Inventory-adjusted refining

contribution declined sharply to `8.1 bn from `14.3 bn in 4QFY18, led by lower normalized

margins at US$3.7/bbl. Reported refining margins of US$7.1/bbl included US$3.4/bbl of

adventitious gains (`7.7 bn). Crude throughput declined 2% qoq to 4.5 mn tons. HPCL’s

reported segment EBITDA implied a surprising sharp increase in refining operating cost.

Sharp decline in implied marketing margins. Inventory-adjusted implied marketing

contribution declined to `48.2 bn from `54.6 bn in 4QFY18, led by sharp 14% qoq decline

in realized marketing margins to `4,960/ton, modestly above our expectations.

4.7% growth in domestic volumes and 3.8% growth in auto fuels, modestly below

growth in consumption. HPCL’s domestic volumes grew by 4.7% yoy to 9.6 mn tons;

exports remained low at 0.1 mn tons. HPCL’s diesel and gasoline sales volumes grew at

2.8% and 6.7% yoy, modestly below growth in domestic consumption. Pipeline throughput

increased 3.4% qoq to 5.5 mn tons.

Fine-tune estimates; retain REDUCE with revised TP of `285

We revise our standalone EPS estimates to `32.4 (+1%) in FY2019 and `31.7 (-4%) in FY2020,

factoring in (1) lower underlying refining margins, (2) modestly lower marketing margins, (3) a

weaker rupee and (4) other minor changes; our FY2019 EPS estimate has increased marginally

due to inclusion of reported adventitious gains in 1QFY19. We cut our TP to `285 from `320

previously, based on 5.5X March 2020E EBITDA plus value of investments. We remain cautious

on OMCs’ earnings under an adverse macro environment underpinned by higher crude prices,

which has a bearing on (1) refining margins due to falling Middle-East discounts and rising fuel

and loss, (2) marketing profitability due to possibility of subsidy sharing and less-than-desirable

fuel price hikes and (3) interest cost due to increase in working capital.

HPCL (HPCL) Energy

Weak underlying results. HPCL’s normalized EBITDA at `18.2 bn in 1QFY19 was 8%

below our estimate led by sharp weakness in underlying refining margins; reported

results were boosted by `19.1 bn of adventitious gains. We retain REDUCE rating on

the stock with a revised target price of `285 (`320 earlier), noting material risk to

earnings from uncertainty on cooking fuel subsidy-sharing mechanism and auto fuel

price hikes under an adverse global/local macro environment.

REDUCE

AUGUST 09, 2018

RESULT


Price (`): 283


BSE-30: 37,888

Tarun Lakhotia

Akshay Bhor

Hindustan Petroleum



Market Cap. (Rs bn) EPS growth (%) (3.2) (22.3) (2.2)


Promoters 0.0 Sales (Rs bn) 2,193.3 2,724.0 2,649.0


MFs 9.7 EBITDA (Rs bn) 106.7 94.3 94.5


Absolute 5.5 (7.9) (35.2) ROE (%) 28.7 19.6 17.4



493-251

430.8

Energy HPCL


Exhibit 1: Normalized results were below our estimates led by weaker underlying refining margins Calculation of normalized profitability


Exhibit 2: Refining margins declined sharply to US$3.7/bbl; marketing margins declined 14% qoq Calculation of segment-wise profitability




Operating expenses (34.5) (31.8) (34.5) (41.3) (43.5) (40.6)

Reported EBITDA 16.3 29.1 31.6 29.2 31.9 25.7


Add: forex-related loss/(gain) — — — 0.8 5.4 2.4

Add: inventory/adventitious loss/(gain) 15.8 (7.9) (14.8) (1.6) (19.1) (8.2)

Normalized EBITDA 32.0 21.1 16.8 28.5 18.2 19.9

Other income 4.6 5.0 2.0 3.4 3.1 3.5

Interest expense 1.4 1.6 0.9 1.8 1.9 1.3

Depreciation 6.7 6.8 6.8 7.3 7.1 7.3

Normalized PBT 28.5 17.8 11.1 22.9 12.3 14.8

Effective tax 9.7 6.0 3.8 7.8 4.2 5.0

Reported net income 9.2 17.3 19.5 17.5 17.2 13.7

Normalized net income 18.8 11.7 7.3 15.1 8.1 9.8

Normalized EPS (Rs) 12.3 7.7 4.8 9.9 5.3 6.4


Segment-wise contribution



Add: one-off provision/charges — — — — — —


Normalized gross contribution 66.5 53.0 51.3 69.0 56.3 58.1

Refining segment 18.5 12.0 12.9 14.3 8.1 12.4

Marketing and other segments 48.0 40.9 38.3 54.6 48.2 45.7

Blended marketing margins (Rs/ton) 5,184 4,689 4,062 5,782 4,960 4,682

Reported refining margins (US$/bbl) 5.9 7.6 9.0 7.1 7.2 6.6

Normalized refining margins (US$/bbl) 8.7 5.6 6.1 6.6 3.7 5.6

Crude throughput (mn tons) 4.5 4.6 4.5 4.6 4.5 4.5

Domestic sales (mn tons) 9.2 8.4 9.2 9.4 9.6 9.7

Export sales (mn tons) 0.1 0.4 0.2 0.1 0.1 0.1

Exchange rate (Rs/US$) 64.5 64.3 64.7 64.4 67.0 67.0

HPCL Energy


Exhibit 3: Interim results of HPCL, March fiscal year-ends (Rs mn)


Exhibit 4: HPCL's growth in auto fuels was modestly below domestic consumption during 1QFY19 Sales volumes, 1QFY18 onwards (mn tons)


(% chg.) yoy


Net sales 676,289 687,876 534,685 608,101 (1.7) 26.5 11.2 2,723,990 2,193,326 24.2

Increase/(decrease) in stock 19,342 (33,803) 9,399 — (8,045)

Raw materials (163,514) (168,003) (120,479) (148,984) (2.7) 35.7 9.8 (645,171) (511,863) 26.0

Product purchase (456,750) (453,566) (329,611) (397,957) 0.7 38.6 14.8 (1,824,950) (1,424,557) 28.1

Staff cost (7,353) (7,432) (6,984) (7,821) (1.1) 5.3 (6.0) (30,729) (28,585) 7.5

Other expenditure (36,107) (33,164) (27,528) (33,512) 8.9 31.2 7.7 (128,794) (113,556) 13.4

Total expenditure (644,382) (662,165) (518,405) (578,874) (2.7) 24.3 11.3 (2,629,644) (2,086,607) 26.0

EBITDA 31,907 25,711 16,280 29,226 24.1 96.0 9.2 94,346 106,719 (11.6)

Other income 3,056 3,516 5,703 3,427 (13.1) (46.4) (10.8) 16,314 18,495 (11.8)

Interest (1,909) (1,322) (1,430) (1,776) 44.4 33.5 7.5 (7,045) (5,667) 24.3

Depreciation (7,064) (7,258) (6,671) (7,254) (2.7) 5.9 (2.6) (28,781) (27,528) 4.6

Pretax profits 25,990 20,647 13,883 23,624 25.9 87.2 10.0 74,834 92,019 (18.7)

Extraordinaries — — — — —

Current tax (7,589) (5,393) (3,358) (5,704) (19,256) (25,710)

Deferred tax (1,209) (1,524) (1,277) (441) (6,180) (2,739)

Net income 17,192 13,730 9,247 17,479 25.2 85.9 (1.6) 49,398 63,571 (22.3)

Adjusted net income 17,192 13,730 9,247 17,479 25.2 85.9 (1.6) 49,398 63,571 (22.3)

Adjusted EPS (Rs) 11.3 9.0 6.1 11.5 32.4 41.7

Other comprehensive income (151) (1,297) (312) — 378

Total comprehensive income 17,041 7,950 17,167 — 63,949

Tax rate (%) 33.9 33.5 33.4 26.0 34.0 30.9

Other details

Crude throughput (mn tons) 4.5 4.5 4.5 4.6 0.0 0.7 (2.4) 18.3 18.3 (0.0)

Domestic sales volume (mn tons) 9.6 9.7 9.2 9.4 (0.2) 4.8 2.7 37.8 36.2 4.5

Export sales volume (mn tons) 0.1 0.1 0.1 0.1 0.8 0.7

Pipeline throughput (mn tons) 5.5 5.2 4.7 5.3 4.8 17.2 3.4 20.6 20.1 2.3

Reported refining margin (US$/bbl) 7.2 6.6 5.9 7.1 8.3 22.0 1.1 6.2 7.4 (15.9)

Normalized refining margin (US$/bbl) 3.7 5.6 8.7 6.6 (33.6) (57.3) (43.6) 5.4 6.7 (20.1)

Implied marketing margin(Rs/ton) 4,960 4,682 5,184 5,782 5.9 (4.3) (14.2) 4,802 4,948 (2.9)

Adventitious gains/(loss) on refining 7,700 2,211 (6,150) 1,040 7,700 5,790

Adventitious gain/(loss) on marketing 11,350 6,022 (9,600) 530 11,350 2,720

Net over-recovery/(under-recovery) — — — — — —

Exchange gain/(loss) (5,377) (2,380) 1,122 (840) (5,377) 3,233

0

2

4

6

8

10

12

14

1QFY18 2QFY18 3QFY18 4QFY18 1QFY19

(%)BPCL HPCL IOCL Consumption

Energy HPCL


Exhibit 5: Marketing margins on auto fuels curtailed in the recent months Marketing margins on auto fuels (Rs/liter)

Source: PPAC, Kotak Institutional Equities estimates

Exhibit 6: Key assumptions for HPCL, March fiscal year-ends, 2014-21E (Rs mn)


Exhibit 7: Earnings sensitivity of HPCL to refining margins and marketing margins (Rs mn)


2.7 2.5 2.6 2.7 2.7 2.4

3.6

2.5 3.1

2.3 2.2

1.3

2.5 2.6

4.1 3.8

2.2

0.8

2.0 2.5

2.7 2.7

4.0

2.7 2.8

2.1

3.3

2.9 3.1 3.1

2.4

1.2

2.6 2.6

3.7 3.4

2.1

(0.0)

1.4 1.4

(0.5)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Jan

-17

Feb-1

7

Mar-

17

Apr-

17

May-

17

Jun-1

7

Jul-1

7

Aug

-17

Sep

-17

Oct

-17

Nov-

17

Dec-

17

Jan

-18

Feb-1

8

Mar-

18

Apr-

18

May-

18

Jun-1

8

Jul-1

8

Aug

-18

Gross marketing margin on diesel Gross marketing margin on gasoline(Rs/liter)

2014 2015 2016 2017 2018 2019E 2020E 2021E

Key assumptions

Exchange rate (Rs/US$) 60.5 61.2 65.4 67.1 64.5 68.7 69.5 70.0






Subsidy under-recoveries (Rs mn) (4,818) (4,958) (78) — — — — —

Fiscal 2019E Fiscal 2020E Fiscal 2021E

Downside Base Case Upside Downside Base Case Upside Downside Base Case Upside

Refining margins

Refining margins (US$/bbl) 5.2 6.2 7.2 5.1 6.1 7.1 5.1 6.1 7.1

Net profits (Rs mn) 43,345 49,398 55,451 42,172 48,293 54,414 42,347 48,511 54,676

EPS (Rs) 28.4 32.4 36.4 27.7 31.7 35.7 27.8 31.8 35.9

% upside/(downside) (12.3) 12.3 (12.7) 12.7 (12.7) 12.7

Marketing margins

Auto fuels margins (Rs/liter) 1.2 1.7 2.2 1.3 1.8 2.3 1.3 1.8 2.3

Net profits (Rs mn) 39,035 49,398 59,761 37,479 48,293 59,107 37,222 48,511 59,801

EPS (Rs) 25.6 32.4 39.2 24.6 31.7 38.8 24.4 31.8 39.2

% upside/(downside) (21.0) 21.0 (22.4) 22.4 (23.3) 23.3

HPCL Energy


Exhibit 8: We compute fair value of Rs285 for HPCL Fair valuation of HPCL, March 2020E (Rs/share)


EV/EBITDA based valuation

Refining and marketing business (Rs bn)

March 2020E standalone EBITDA 94

EV/EBITDA (X) 5.5

EV of refining and marketing business (Rs bn) 520

C-WIP of Visakh expansion @ 0.5X BV (Rs bn) 37

EV of refining and marketing business (Rs) (A) 365

Investments (Rs bn)

HMEL (@2X BV) 79

MRPL 24

Oil India 3

Value of investments (Rs bn) 106

Value of investments (Rs) (B) 69

Net debt (Rs bn) 226

Net debt (Rs) (C) 148

Total equity value (A) + (B) - (C) 286

Energy HPCL


Exhibit 9: Profit model, balance sheet, cash model of HPCL, March fiscal year-ends, 2014-21E (Rs mn)


2014 2015 2016 2017 2018 2019E 2020E 2021E


Net sales 2,232,448 2,055,868 1,777,006 1,870,237 2,193,326 2,723,990 2,648,973 2,750,489

EBITDA 52,377 56,666 79,393 110,990 106,719 94,346 94,469 96,532

Other income 9,745 11,684 11,442 15,147 18,495 16,314 16,604 16,877

Interest (13,364) (7,066) (6,536) (5,357) (5,667) (7,045) (7,491) (7,350)

Depreciation (22,019) (19,788) (26,532) (25,353) (27,528) (28,781) (30,423) (32,568)

Pretax profits 26,739 41,497 57,766 95,428 92,019 74,834 73,160 73,491

Extraordinary items — — — (5,219) — — — —

Current tax (7,640) (12,257) (14,336) (22,362) (25,710) (19,256) (19,684) (20,813)

Deferred tax (1,178) (1,952) (7,373) (6,283) (2,739) (6,180) (5,183) (4,167)

Prior-period adjustment (584) 45 1,204 525 — — — —

Adjusted net profits 17,338 27,333 37,262 65,650 63,571 49,398 48,293 48,511

Earnings per share (Rs) 11.4 17.9 24.4 43.1 41.7 32.4 31.7 31.8


Total equity 150,122 160,221 179,698 203,474 239,483 264,647 289,248 313,961

Deferred tax liability 39,084 41,036 49,194 58,956 68,654 74,834 80,017 84,184

Total borrowings 321,646 203,353 211,675 212,497 209,910 276,910 314,910 361,910

Currrent liabilities 264,930 270,896 255,227 309,712 350,026 360,679 347,138 345,588

Total liabilities and equity 775,781 675,506 695,793 784,639 868,072 977,070 1,031,313 1,105,643

Cash 347 171 238 337 11,941 1,422 1,406 1,591

Current assets 361,857 237,549 240,166 295,693 325,509 388,849 374,293 379,556

Total fixed assets 304,978 325,373 349,603 379,424 419,571 478,998 551,063 623,194

Investments 108,599 112,415 105,786 109,186 111,051 107,801 104,551 101,301

Total assets 775,781 675,506 695,793 784,639 868,072 977,070 1,031,313 1,105,643


Operating cash flow, excl. working capital 39,134 46,279 75,478 88,488 82,300 64,981 62,576 61,810

Working capital changes 21,121 124,486 (14,397) 6,120 10,498 (52,687) 1,014 (6,813)

Capital expenditure (41,358) (41,762) (47,100) (58,890) (64,049) (85,144) (97,769) (98,140)

Investments (1,581) 3,063 1,484 1,368 (1,865) 3,250 3,250 3,250

Other income 4,906 4,688 4,715 4,473 18,495 16,314 16,604 16,877

Free cash flow 22,223 136,753 20,180 41,560 45,378 (53,285) (14,325) (23,016)

Ratios (%)

Debt/equity 170.0 101.0 92.5 81.0 68.1 81.6 85.3 90.9

Net debt/equity 169.8 101.0 92.4 80.8 64.2 81.1 84.9 90.5

RoAE 9.6 14.0 17.3 25.3 22.3 15.3 13.6 12.6

RoACE 5.3 7.0 9.5 15.0 13.6 9.5 8.2 7.4

Key assumptions






Subsidy under-recoveries (Rs mn) (4,818) (4,958) (78) — — — — —

Adventitious gain/(loss) (Rs mn) 7,770 (20,090) (12,300) 23,000 2,720 11,350 — —


3QFY18 results – another quarter of order book decline

Siemens reported 3QFY18 revenues of `31 bn, up 16% yoy and 2% below estimates. The

revenue growth was sustained by the backlog even as order inflow of `28 bn in the quarter

was flat yoy and down 3% qoq. As per the management commentary, order growth of base

business was robust across most divisions but the absence of large infrastructure tenders in

railways, power generation and power T&D kept total order inflows subdued beyond base

orders. The implied order backlog stood at `128 bn, down 9% yoy and down 1% qoq. This is

the second consecutive quarter of order book depletion. The company reported EBITDA of `3 bn,

up 33% yoy at 9.8% EBITDA margin, flat sequentially and in line with our estimates. Reported

PAT stood at `2 bn, up 25% yoy, 3% below estimates.

Energy management slowing down, digital factory ramping up, margins volatile as usual

After 27% and 26% yoy growth in FY2017 and 1HFY18, respectively, this quarter was a relative

disappointment on the energy management segment with 13% growth, 10% below estimates.

This may have been led by absence of large tenders in power T&D as the management

commentary suggests. Digital factory revenues increased 39% yoy, much faster than 25%

growth we estimated on the back of the company’s MindSphere platform. This is a focus area

for Siemens and forms the cornerstone of the company’s attempt to ride the wave of

digitalization, IOT and Industry 4.0. Power and gas segment revenues increased 18% yoy

against our estimates of flat yoy. Margin volatility across segments continued as usual, the

reasons for which remain a mystery.

Aligning estimates to YTD performance, target price revised to `1,000, retain SELL

We cut revenue estimates for FY2019/20 by 7-9% to reflect weaker-than-expected performance

in power & gas, slowdown in energy management, a depleting backlog and weak management

commentary beyond base orders. Better demonstrated margin performance in power & gas and

digital factory segments leads to a modest EPS cut of 0-2%. Roll-forward to June 2020E EPS

leads to a revised target price of `1,000 (`975 previously). Retain SELL.

Siemens (SIEM) Industrials

Running into rough weather. A few large orders won last year (HVDC, metro rail

signaling, railway propulsion) have supported Siemens’ execution growth over 9MFY18.

However, with large orders running out, base orders remaining stagnant, depleted

backlog and a patchy private sector recovery, Siemens is poised to run into rough

weather on execution in the coming quarters. EPS impact may still be cushioned by

margin improvement. We incorporate these factors for a net EPS estimate cut of 0-2%

and roll forward to a TP of `1,000 (`975 previously). Retain SELL.

SELL

AUGUST 09, 2018

RESULT


Price (`): 1,016

Target price (`): 1,000

BSE-30: 37,888

Aditya Mongia

Ajinkya Bhat

Siemens







MFs 3.3 EBITDA (Rs bn) 12.6 15.2 18.4


Absolute 4.0 (2.4) (24.5) ROE (%) 10.8 12.3 14.0



1,454-931

361.7

Industrials Siemens


Exhibit 1: 1QFY19 results 2% below estimates; key disappointment was weak order inflow and order book depletion Siemens (standalone) 3QFY18 - key numbers, September fiscal year-ends (Rs mn)


3QFY18 3QFY18E 3QFY17 2QFY18 vs est. yoy qoq 9MFY18 9MFY17 yoy (%) FY2018E FY2017 yoy (%)

Sales 29,644 25,871 31,631 14.6 (6.3) 84,907 76,819 10.5 116,903 107,266 9.0

Other operating income 1,086 638 1,203 70.3 (9.7) 2,952 1,910 54.5 2,910 2,881 1.0

Net operating income 30,730 31,356 26,508 32,834 (2.0) 15.9 (6.4) 87,859 78,729 11.6 119,813 110,148 8.8

Expenses (27,707) (28,269) (24,243) (29,606) (2.0) 14.3 (6.4) (78,884) (71,341) 10.6 (107,224) (99,635) 7.6

Stock 1,175 842 90 2,481 916 — (823)

Raw material (21,563) (18,314) (22,634) 17.7 (4.7) (61,457) (53,116) 15.7 (79,954) (72,681) 10.0

Employee (3,799) (3,522) (3,653) 7.9 4.0 (10,850) (10,226) 6.1 (14,828) (13,926) 6.5

Other Exp (3,520) (3,249) (3,409) 8.3 3.3 (9,058) (8,915) 1.6 (12,442) (12,205) 1.9

EBITDA 3,023 3,088 2,266 3,228 (2.1) 33.4 (6.4) 8,975 7,388 21.5 12,588 10,512 19.7

Other income 692 671 731 639 2,036 1,882 2,876 2,547

EBIDT 3,715 3,759 2,996 3,867 11,011 9,270 15,464 13,060

Interest (4) (19) (25) (11) (32) (66) (77) (77)

Depreciation (500) (508) (480) (490) (1,460) (1,464) (2,030) (1,967)

PBT 3,211 3,232 2,492 3,366 (0.6) 28.9 (4.6) 9,519 7,740 23.0 13,357 11,016 21.2

Tax (1,167) (1,129) (863) (1,169) (3,373) (2,712) (4,828) (3,982) 21.2

Net profit 2,044 2,103 1,629 2,197 (2.8) 25.5 (7.0) 6,146 5,028 22.2 8,529 7,034 21.2

Extraordinary items — — — — — 72 — 4,302

RPAT 2,044 2,103 1,629 2,197 (2.8) 25.5 (7.0) 6,146 5,099 20.5 8,529 11,336 (24.8)

Key ratios (%)

Raw material/Sales 66.3 65.9 68.7 67.1 66.3 66.7 66.7

Employee expenses/Sales 12.4 13.3 11.1 12.3 13.0 12.4 12.6

Other expenses/Sales 11.5 12.3 10.4 10.3 11.3 10.4 11.1

EBITDA margin 9.8 9.8 8.5 9.8 10.2 9.4 10.5 9.5

Tax rate 36.3 34.9 34.6 34.7 35.4 35.0 36.1 36.1

PAT margin 6.7 6.7 6.1 6.7 7.0 6.4 7.1 6.4

EPS (Rs) 5.7 5.9 4.6 6.2 (2.8) 25.5 (7.0) 17.3 14.1 23.9 19.8 21.2

Order details

Order booking 28,407 28,490 29,236 (0.3) (2.8) 90,213 107,970 (16.4) NA 135,010

Order backlog 127,936 139,906 129,173 (8.6) (1.0) 127,936 139,906 (8.6) NA 122,630

% change

Siemens Industrials


Exhibit 2: Power and gas and digital factory grew faster than expected; energy management is slowing down likely due to lack of large

orders in power T&D; margin performance was in line with estimates Segmental revenues and margins of Siemens for 3QFY18, September fiscal year-ends (Rs mn)

Notes:

(1) Segmental revenues have been adjusted by allocating excise duty in line with revenue mix for historical numbers in the pre-GST periods.


3QFY18 3QFY18E 3QFY17 2QFY18 vs est. yoy qoq 9MFY18 9MFY17 yoy (%) FY2018E FY2017 yoy (%)

Revenues

Power and gas 3,439 2,916 2,916 3,699 17.9 17.9 (7.0) 10,120 10,094 0.3 14,691 13,979 5.1

Energy management 13,136 14,587 11,669 14,842 (9.9) 12.6 (11.5) 38,343 31,701 21.0 53,931 45,126 19.5

Building technologies 1,251 1,183 1,075 1,245 5.8 16.4 0.5 3,386 3,073 10.2 4,795 4,270 12.3

Moblity 2,132 2,083 2,604 2,079 2.3 (18.1) 2.5 6,262 8,931 (29.9) 8,904 11,524 (22.7)

Digital factory 6,290 5,673 4,539 6,204 10.9 38.6 1.4 17,540 13,801 27.1 25,575 19,859 28.8

Process industies and drives 5,484 5,804 5,276 5,670 (5.5) 3.9 (3.3) 15,167 16,086 (5.7) 21,195 21,885 (3.2)

Healthcare — — — — — — — —

Metals Technologies — — — — — — — —

Others 359 417 347 445 (13.9) 3.4 (19.3) 1,074 952 12.8 1,443 1,285 12.3

Total 32,091 32,663 28,427 34,184 (1.8) 12.9 (6.1) 91,892 84,639 8.6 130,533 117,927 10.7

Less: Intersegmental (1,361) (1,307) (1,919) (1,350) 4.2 (29.1) 0.8 (4,033) (5,910) (31.8) (5,874) (7,779) (24.5)

Total revenues 30,730 31,356 26,508 32,834 (2.0) 15.9 (6.4) 87,859 78,729 11.6 124,659 110,148 13.2

Revenues (excl. Healthcare) 30,730 31,356 26,508 32,834 (2.0) 15.9 (6.4) 87,859 78,729 11.6 124,659 110,148 13.2

EBIT

Power and gas 671 350 163 441 91.7 312.7 52.2 1,651 1,377 19.9 2,351 2,014 16.7

Energy management 752 1,221 801 1,242 (38.4) (6.1) (39.5) 3,093 2,290 35.1 4,350 3,234 34.5

Building technologies 106 105 67 111 0.5 59.0 (4.5) 282 143 97.8 408 289 40.8

Moblity 161 156 253 156 3.0 (36.3) 3.2 432 657 (34.3) 650 903 (28.0)

Digital factory 614 398 336 435 54.4 82.8 41.1 1,457 865 68.5 2,124 1,230 72.7

Process industies and drives 122 255 84 249 (52.1) 45.9 (51.0) 329 306 7.6 530 545 (2.8)

Healthcare — — — — NA NA NA — — NA — — NA

Metals Technologies — — — — NA NA NA — — NA — — NA

Others 97 97 84 104 (0.4) 15.9 (6.7) 271 286 (5.4) 346 330 5.0

Total 2,523 2,582 1,786 2,738 (2.3) 41.3 (7.9) 7,515 5,924 26.9 10,759 8,546 25.9

Net interest income (4) (19) (25) (11) (79.3) (83.8) (63.6) (32) (66) (51.4) (77) (77) —

Unallocable income 692 669 731 639 3.5 (5.3) 8.3 2,036 1,882 8.2 2,675 2,547 5.0

Exceptional items — — — — — 72 (100.0) — 5,675 (100.0)

Total PBT 3,211 3,232 2,492 3,366 (0.6) 28.9 (4.6) 9,519 7,811 21.9 13,357 16,691 (20.0)

EBIT margin (%)

Power and gas 19.5 12.0 5.6 11.9 16.3 13.6 16.0 14.4

Energy management 5.7 8.4 6.9 8.4 8.1 7.2 8.1 7.2

Building technologies 8.5 8.9 6.2 8.9 8.3 4.6 8.5 6.8

Moblity 7.6 7.5 9.7 7.5 6.9 7.4 7.3 7.8

Digital factory 9.8 7.0 7.4 7.0 8.3 6.3 8.3 6.2

Process industies and drives 2.2 4.4 1.6 4.4 2.2 1.9 2.5 2.5

Healthcare NA NA NA NA NA NA NA NA

Metals Technologies NA NA NA NA NA NA NA NA

Others 27.0 23.4 24.1 23.4 25.2 30.1 24.0 25.7

Total 7.9 7.9 6.3 8.0 8.2 7.0 8.2 7.2

% change

Industrials Siemens


Exhibit 3: Revenue visibility remains low at less than one year on forward sales Order booking, order backlog & visibility trend for Siemens, September fiscal year-ends, 1QFY11-3QFY18


Exhibit 4: Quarterly adjusted segmental financials of Siemens, September fiscal year-ends, 1QFY16-3QFY18 (Rs bn)

Notes:

(1) Historical numbers have been adjusted for excise duty to make them comparable under GST regime.


0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

0

25

50

75

100

125

150

175

1Q

FY1

1

3Q

FY1

1

1Q

FY1

2

3Q

FY1

2

1Q

FY1

3

3Q

FY1

3

1Q

FY1

4

3Q

FY1

4

1Q

FY1

5

3Q

FY1

5

1Q

FY1

6

3Q

FY1

6

1Q

FY1

7

3Q

FY1

7

1Q

FY1

8

3Q

FY1

8

Order booking (Rs bn, LHS) Order backlog (Rs bn, LHS)

Visibility (X, RHS)

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

Revenues

Power and gas 2,842 3,363 3,165 4,348 3,326 3,851 2,916 3,879 2,982 3,699 3,439

Energy management 7,145 8,895 7,645 11,598 8,206 11,826 11,669 13,452 10,365 14,842 13,136

Building technologies 646 880 863 1,243 890 1,108 1,075 1,196 890 1,245 1,251

Moblity 2,395 2,442 2,389 3,298 2,796 3,531 2,604 2,562 2,051 2,079 2,132

Digital factory 3,868 4,275 4,315 5,626 4,238 5,025 4,539 6,073 5,046 6,204 6,290

Process industies and drives 4,334 5,376 4,917 6,820 5,246 5,563 5,276 5,779 4,013 5,670 5,484

Healthcare 3,281 4,233 4,780 — — — — — — — —

Metals Technologies — — — — — — — — — — —

Others 181 220 211 468 291 314 347 331 270 445 359

Total 24,692 29,684 28,283 33,402 24,994 31,218 28,427 33,272 25,617 34,184 32,091

Less: Intersegmental (1,550) (1,848) (2,079) (2,496) (2,061) (1,930) (1,919) (1,854) (1,322) (1,350) (1,361)

Total revenues 23,142 27,836 26,204 30,906 22,933 29,288 26,508 31,418 24,295 32,834 30,730

EBIT margin (%)

Power and gas 4.2 19.0 7.7 9.6 19.6 14.6 5.6 17.2 18.1 11.9 19.5

Energy management 5.9 9.7 5.3 7.2 7.0 7.7 6.9 7.2 10.6 8.4 5.7

Building technologies 4.6 6.3 7.0 7.9 6.0 2.1 6.2 12.3 7.3 8.9 8.5

Moblity 2.8 10.6 5.5 7.8 9.7 3.8 9.7 9.4 5.6 7.5 7.6

Digital factory 6.9 9.4 4.0 7.2 5.1 6.2 7.4 6.0 8.1 7.0 9.8

Process industies and drives 3.5 6.2 6.0 1.8 (0.9) 4.8 1.6 4.1 (1.0) 4.4 2.2

Healthcare 5.3 (0.2) 6.3 NA NA NA NA NA NA NA NA

Metals Technologies NA NA NA NA NA NA NA NA NA NA NA

Others 41.1 41.8 31.8 34.6 43.9 23.9 24.1 13.1 25.9 23.4 27.0

Total 5.3 8.9 5.9 6.9 7.4 7.3 6.3 8.0 8.8 8.0 7.9

Siemens Industrials


Exhibit 5: Reduced estimates on topline countered by better-than-expected demonstrated margin performance in power & gas and

digital factory, which we build into our estimates Change in estimates for Siemens, September fiscal year-ends, 2017-20E (Rs mn)


Exhibit 6: Modest downside to our target price exists from potential sale of mobility division to the

parent at a low valuation Sensitivity of target price for Siemens to the divestment valuation of mobility division (Rs/share)


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

Revenues 110,148 119,813 138,501 160,301 124,727 149,663 175,745 (3.9) (7.5) (8.8)

EBITDA 10,512 12,588 15,207 18,373 12,638 15,508 18,895 (0.4) (1.9) (2.8)

EBITDA margin (%) 9.5 10.5 11.0 11.5 10.1 10.4 10.8

PAT 7,034 8,529 10,355 12,601 8,438 10,410 12,860 1.1 (0.5) (2.0)

EPS (Rs) 19.8 23.9 29.1 35.4 23.7 29.2 36.1 1.1 (0.5) (2.0)

Growth (%)

Revenues 15.5 8.8 15.6 15.7 13.2 20.0 17.4

EBITDA 11.8 19.7 20.8 20.8 20.2 22.7 21.8

PAT 16.5 21.2 21.4 21.7 20.0 23.4 23.5

Revision (%)New estimates Old estimates

973 25 30 35 40 45

35 768 885 1,001 1,118 1,234

40 774 890 1,006 1,122 1,238

45 781 896 1,012 1,127 1,242

50 787 902 1,017 1,131 1,246

55 794 908 1,022 1,136 1,250

Exit EV/EBIT

multiple to

mobility and

drives business

Target multiple to March-2020 EPS

One year forward target price for Siemens (Rs/ share)

Industrials Siemens


Exhibit 7: Siemens’ (standalone) financials, September fiscal year-ends, 2012-20E (Rs mn)


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

Income statement

Sales 129,199 113,526 106,625 105,124 108,095 110,148 119,813 138,501 160,301

Expenses (120,286) (109,319) (100,683) (95,363) (97,892) (99,635) (107,224) (123,295) (141,928)

RM (98,478) (85,368) (75,542) (70,814) (71,812) (73,504) (79,954) (92,426) (106,973)

Other expenses (9,849) (10,427) (11,023) (10,607) (11,940) (12,205) (12,442) (14,040) (15,831)

Employee expenses (11,959) (13,524) (14,118) (13,942) (14,139) (13,926) (14,828) (16,829) (19,124)

EBITDA 8,913 4,207 5,942 9,761 10,203 10,512 12,588 15,207 18,373

Other income 575 345 1,039 1,604 1,645 2,547 2,876 3,188 3,600

Interest (270) (189) (82) (73) (91) (77) (77) (77) (77)

Depreciation (2,010) (2,502) (2,291) (2,156) (2,264) (1,967) (2,030) (2,101) (2,161)

PBT 7,208 1,861 4,608 9,137 9,493 11,016 13,357 16,217 19,735

Tax (2,379) (246) (2,403) (5,131) (3,148) (3,982) (4,828) (5,862) (7,134)

Net profit 4,830 1,615 2,205 4,006 6,345 7,034 8,529 10,355 12,601

Extraordinary items (1,399) 325 3,827 7,828 22,825 4,302 — — —

RPAT 3,430 1,940 6,032 11,834 29,171 11,336 8,529 10,355 12,601

EPS (Rs) 13.6 4.5 6.2 11.2 17.8 19.8 23.9 29.1 35.4

Balance sheet

Equity share capital 704 712 712 712 712 712 712 712 712

Reserves & surplus 38,922 39,591 43,044 50,554 65,107 76,335 80,678 85,951 92,368

Shareholders funds 39,626 40,303 43,756 51,266 65,819 77,047 81,390 86,663 93,080

Loan funds — — — — — — — — —

Total sources of funds 39,626 40,303 43,756 51,266 65,819 77,047 81,390 86,663 93,080

Gross block 24,356 26,852 28,114 28,802 27,757 30,034 32,534 35,034 37,534

Accumulated depreciation (10,234) (13,063) (14,558) (15,269) (15,802) (17,769) (19,799) (21,899) (24,060)

Net block 14,122 13,789 13,556 13,533 11,955 12,265 12,735 13,135 13,474

CWIP 850 889 409 321 791 1,430 1,430 1,430 1,430

Net fixed assets 14,972 14,678 13,965 13,854 12,746 13,695 14,165 14,564 14,904

Cash balances 9,768 6,038 11,210 20,959 35,094 40,713 53,767 60,525 68,561

Investments 410 432 82 1,764 1,647 1,629 1,647 1,647 1,647

Net current assets excl. cash 11,300 14,858 14,762 11,515 13,079 18,568 9,369 7,485 5,526

Net deferred tax assets 3,176 4,297 3,738 3,175 3,253 2,442 2,442 2,442 2,442

Total assets 39,626 40,303 43,756 51,266 65,819 77,047 81,390 86,663 93,080

Cash flow statement

Cash flow from operations 433 1,018 6,078 6,204 5,082 1,852 16,960 11,229 13,198

Capex (3,785) (1,874) 2,305 (2,188) (2,874) (2,916) (2,500) (2,500) (2,500)

Free cash flow (3,352) (856) 8,383 4,016 2,208 (1,064) 14,460 8,729 10,698

Cash flow from financing activities (2,593) (2,844) (2,204) (2,703) (16,121) (185) (4,263) (5,159) (6,261)

Net cash generated (2,116) (3,681) 5,512 10,077 (8,308) 5,954 13,389 7,093 8,371

Cash balance at start of year 11,625 9,767 6,038 11,210 20,959 12,316 17,934 30,989 37,747

Cash balance at end of year 9,767 6,038 11,210 20,959 12,316 17,934 30,989 37,747 45,783

Growth (%)

Revenue growth 6.7 (12.1) (6.1) (1.4) 2.8 1.9 8.8 15.6 15.7

EBITDA growth (34.0) (52.8) 41.2 64.3 4.5 3.0 19.7 20.8 20.8

Recurring PAT growth (42.9) (66.6) 36.5 81.7 58.4 10.9 21.2 21.4 21.7

Key ratios (%)

EBITDA margin 6.9 3.7 5.6 9.3 9.4 9.5 10.5 11.0 11.5

PAT margin 3.7 1.4 2.1 3.8 5.9 6.4 7.1 7.5 7.9

RoE 12.4 4.0 5.2 8.4 10.8 9.8 10.8 12.3 14.0

RoCE 12.0 3.6 5.2 8.4 10.7 9.8 10.7 12.3 14.0


Earnings beat led by lower other expenses

NMDC’s EBITDA declined 5% yoy to Rs14.2 bn (-25% qoq) but was higher than our estimate (KIE:

Rs12 bn). The EBITDA outperformance was led by a 40% yoy decline in other expenses to Rs2.4

bn (-62% qoq) on account of lower mine closure provisioning, KK line expenses and provisioning

for expected credit loss—the combined expenses on these accounts declined to Rs661 mn in

1QFY19 from Rs1.5 bn in 1QFY18. The company’s volumes declined 25% yoy to 6.8 mn tons

largely due to lower sales in Karnataka operations after few large steelmakers including JSW Steel

switched to imports citing high prices of NMDC. Karnataka volumes declined 74% yoy to 0.9 mn

tons and was the lowest in the last few years. Chhattisgarh sales increased 3% yoy to 6 mn tons.

NMDC’s blended realization declined 4% qoq to Rs3,525/ton (+14% yoy). EBITDA/ton increased

15% qoq to Rs2,070/ton (+27% yoy) mainly led by lower other expenses. The company reported

net-income of Rs9.8 bn (+1% yoy, -12% qoq), higher than our estimate.

We expect merchant iron-ore prices to be fall due to low cost imports, higher domestic supplies

Exhibit 3 compares NMDC’s iron-ore cost for a west coast based mill with that of iron-ore

imports. We highlight that cost of sourcing iron-ore for a west coast based steel mill in India

from NMDC’s Chhattisgarh mines is higher than the cost of imports. Domestic iron-ore prices

have remained firm over the last six months led by improved margins for downstream

steelmakers which have helped demand for the ore, especially from small and medium sized

steel mills. However, domestic merchant iron-ore supplies remain in surplus of close to 30 mtpa,

per our estimate. Given the lower net export realizations due to high freight cost and export

duty, the excess domestic supplies will exert pricing pressure on domestic iron-ore.

Maintain REDUCE, revise target price to Rs120 (from Rs125)

The lower sales of NMDC’s Karnataka mines in 1QFY19, as large steelmakers switched to

imports, reflects the high dependency of merchant miners on a few large steel mills. The

auctioning of iron-ore mines in India (with a preference to companies with end-use) will further

weaken the competitive positioning of merchant miners. We maintain our cautious stance and

revise our target price to Rs120 (from Rs125 earlier). The company is investing close to US$3 bn

in a steel plant where it has no operating experience.

NMDC (NMDC) Metals & Mining

A good quarter aided by lower costs. NMDC reported EBITDA of Rs14.2 bn (-5% yoy),

ahead our estimate (KIE: Rs12 bn) led by lower other expenses (-40% yoy). The other

costs declined on account of lower mine closure provisioning, KK line expenses and

provisioning for expected credit loss. Volumes declined by 25% yoy in 1QFY19 due to

lower offtake in Karnataka as large steelmakers switched to imports. The high

dependency of merchant miners on a few large steel mills, surplus domestic supplies and

auctioning of mines to steel mills underpins our cautious view on the stock. REDUCE.

REDUCE

AUGUST 09, 2018

RESULT


Price (`): 114


BSE-30: 37,888

Abhishek Poddar

Samrat Verma

NMDC



Market Cap. (Rs bn) EPS growth (%) 43.3 4.2 (14.3)




MFs 1.8 EBITDA (Rs bn) 58.1 56.8 49.3


Absolute 10.1 (5.0) (11.0) ROE (%) 15.8 15.3 12.4

Rel. to BSE-30 3.6 (11.7) (24.8) Div. Yield (%) 4.8 4.8 4.8


163-94

359.4

Metals & Mining NMDC


Exhibit 1: Interim results of NMDC, March fiscal year-ends (Rs mn)


Our cautious outlook on NMDC is due to (1) our expectation of subdued global iron-ore

prices on expectation of weakening demand in China and, (2) weakening demand of

merchant iron-ore in India as more mines are being auctioned by the government. In

particular, we highlight that opening of captive iron-ore mines in Karnataka post the

increase in the mining cap in the state (based on a Supreme Court order) can pressure prices

in the state—NMDC sells 36% of its volumes in Karnataka.

The company is investing close to US$3 bn in a steel plant where it has no operating

experience—it recently invited bids for operating and maintenance of the entire steel plant

from external parties. We believe the ramp-up of the steel plant can be delayed given the

lack of expertise of the company in running such complex operations.

Changes in our estimates

Exhibit 5 highlights key changes in our estimates.

We maintain our volume estimate at 38 mn tons, 40 mn tons and 42 mn tons for FY2019E,

FY2020E and FY2021E—this compares to 36.1 mn tons of volumes in FY2018. We increase

our realization assumption for FY2019E given strong prices in 1HFY18 resulting in 23%

increase in FY2019E EBITDA estimate to Rs56.8 bn. We maintain our EBITDA estimates for

FY2020E at Rs49.3 bn and for FY2021E at Rs52.2 bn.

Our target price of Rs120 is based on 5.5X FY2020E EBITDA. We value the investment in 3

mtpa steel plant at 50% of invested capital due (60% earlier) due to delay in commissioning

and expected slow ramp-up given NMDC’s inexperience in running a steel plant operation.


Net revenues 24,220 24,746 28,415 38,830 (2) (15) (38) 118,268 116,149 2

Change in stock/Raw material (126) 108 (278) (1,044) 175 (212)

Stores and spares 521 584 557 1,035 2,949 2,703 9

Employee costs 2,369 2,178 2,036 4,121 11,197 10,464 7

Royalty and cess 4,456 4,567 4,927 7,617 21,877 21,195 3

SGA 318 1,190 2,183 1,741 6,865 6,397 7

Other expenses 2,444 4,162 4,041 6,352 18,386 17,513 5

Total expenditure 9,981 12,791 13,466 19,820 (22) (26) (50) 61,448 58,061 6

EBITDA 14,239 11,955 14,949 19,010 19 (5) (25) 56,820 58,088 (2)

Depreciation 616 706 467 702 2,855 2,560 11

EBIT 13,623 11,249 14,482 18,308 21 (6) (26) 53,966 55,527 (3)

Other income 1,251 1,710 1,286 1,702 (27) (3) (26) 4,845 5,197 (7)

Interest expense 108 76 82 76 250 371

Profit before taxes 14,767 12,883 15,687 19,933 15 (6) (26) 58,561 60,354 (3)

Exceptional items 0 — 0 6 - (1,443)

Current taxes 5,013 4,457 5,994 8,867 12 (16) (43) 19,905 23,057 (14)

Net income 9,753 8,425 9,693 11,060 16 1 (12) 38,656 38,740 (0)

Adjusted net income 9,753 8,425 9,693 11,064 16 1 (12) 38,656 37,111 4

Ratios

EBITDA margin (%) 59 48 53 49 — — — 48 50 —

ETR (%) 35 35 38 44 — — — 34 38 —

EPS (Rs) 3.1 2.7 3.1 3.5 16 1 (12) 12.2 11.7 4

Volume details (mn tons)

Iron ore production 6.8 6.8 8.5 11.3 1 (19) (40) 38.0 35.6 7

Iron ore sales 6.9 7.0 9.2 10.5 (2) (25) (35) 38.0 36.1 5

Realization/Cost (Rs/ton)

Iron ore - blended 3,525 3,535 3,094 3,685 (0) 14 (4) 3,112 3,217 (3)

Cost 1,453 1,827 1,466 1,881 (20) (1) (23) 1,617 1,608 1

EBITDA/ton 2,073 1,708 1,628 1,804 21 27 15 1,495 1,609 (7)

(% chg.)

NMDC Metals & Mining


Exhibit 2: NMDC's iron-ore sales declined by 26% yoy due to lower off-take from its Karnataka mines NMDC's iron ore production and sales details at Chhattisgarh and Karnataka mines, March fiscal year-ends (mn tons)


Exhibit 3: The delivered cost of NMDC's iron-ore to west coast based mill is higher than import costs after recent price hike Comparison of iron ore cost from imports and NMDC's mines for west coast based steel mill, (Rs/ton)

Source: Company, Bloomberg, Kotak Institutional Equities estimates

1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY18 3QFY18 4QFY18 1QFY19 FY2017 FY2018 Change (%)

Iron ore production (mn tons)

Chhattisgarh 5.5 4.3 5.5 8.4 4.8 22 (17) 18 (13) 22.0 23.6 7

Karnataka 3.0 2.9 3.1 3.0 2.1 4 (1) (9) (31) 12.0 12.0 0

Total 8.5 7.2 8.6 11.3 6.9 14 (12) 9 (19) 34.0 35.6 5

Iron ore sales (mn tons)

Chhattisgarh 5.8 5.1 5.1 7.2 6.0 5 (24) 10 3 23.0 23.2 1

Karnataka 3.4 3.2 3.0 3.4 0.9 1 (12) 4 (74) 12.6 12.9 2

Total 9.2 8.3 8.1 10.5 6.8 4 (20) 8 (26) 35.6 36.1 1

Change (yoy %)

Jan 18 Feb 18 Mar 18 Apr 18 May 18 June 18 July 18 Aug 18

NMDC's iron-ore prices (Rs/ton)

Fines 2,760 2,760 2,660 2,560 2,660 2,660 2,810 2,810

Lumps (6-40 mm, 65% Fe) 3,100 3,100 3,000 2,900 3,050 3,050 3,200 3,200

Lumps (10-150 mm, 65% Fe) 2,850 2,850 2,760 2,660 2,810 2,810 2,950 2,950

DRCLO prices (10-40 mm, 67 Fe) 3,630 3,600 3,480 3,370 3,540 3,540 3,720 3,720

Imported ore cost for port based steel mill (West India)

Fines 63.5% Fe, CFR India (US$/ton) 76 78 70 66 67 67 65 67

Add: Port & other charges 2 2 2 2 2 2 2 2

Add: Import duty 2 2 2 2 2 2 2 2

Net import costs (US$/ton) - (DMT basis) 80 82 74 69 70 70 69 71

Net import costs (Rs/ton) - (DMT basis) 5,090 5,260 4,820 4,547 4,740 4,740 4,667 4,806

Net import costs (Rs/ton) - (WMT basis) 4,784 4,944 4,531 4,274 4,456 4,456 4,387 4,518

NMDC's iron ore cost for port based steel mill (West India)

NMDC's ex royalty iron ore fines prices (Rs/ton) 2,760 2,760 2,660 2,560 2,660 2,660 2,810 2,810

Add: royalty @ 19.5%, DMF Costs 538 538 519 499 519 519 548 548

NMDC's ex mine prices (Rs /ton) 3,298 3,298 3,179 3,059 3,179 3,179 3,358 3,358

Add: Inland freight cost 1,300 1,300 1,300 1,300 1,300 1,300 1,300 1,300

Add: Ocean freight from east to west coast 450 450 450 450 450 450 450 450

NMDC iron ore cost at west coast based steel mill (Rs/ton) 5,048 5,048 4,929 4,809 4,929 4,929 5,108 5,108

Premium/(Discount) of NMDC prices (Rs/ton) 264 104 398 535 473 473 721 590

INR:USD rate 63.7 64.5 65.0 65.7 67.5 67.5 68.0 68.0



Exhibit 4: NMDC's iron-ore prices have risen in last few months NMDC's Chhattisgarh iron ore prices and global iron-ore prices, 2012-2018 (Rs/ton)

Source: Bloomberg, Company, Kotak Institutional Equities estimates

Exhibit 5: NMDC, changes in estimates, March fiscal year ends, FY2019-21E


-

40

80

120

160

200

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Jul-13

Jan-1

4

Jul-14

Jan-1

5

Jul-15

Jan-1

6

Jul-16

Jan-1

7

Jul-17

Jan-1

8

Jul-18

China iron-ore prices (US$/ton) [RHS]

NMDC fines (Rs/ton)

NMDC lumps (Rs/ton)

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

Price - incling royalty (Rs/ton)

Domestic fines 2,771 2,448 2,480 2,428 2,443 2,481 14 0 (0)

Blended 3,066 2,735 2,760 2,712 2,723 2,757 13 0 0

Iron-ore volumes (mn tons)

Chhattisgarh 26.0 28.0 30.0 26.0 28.0 30.0 0 0 0

Karnataka 12.0 12.0 12.0 12.0 12.0 12.0 0 0 0

Total 38.0 40.0 42.0 38.0 40.0 42.0 0 0 0

Sales (tons)

Lumps 12.0 13.0 13.7 12.0 13.0 13.7 0 0 0

Fines 23.2 24.2 25.5 23.2 24.2 25.5 0 0 0

Exports 2.8 2.8 2.8 2.8 2.8 2.8 0 0 0

Earnings estimates (Rs mn)

Revenues 118,268 111,271 117,858 104,813 110,774 117,728 13 0 0

EBITDA 56,820 49,279 52,229 46,361 48,906 52,138 23 1 0

PAT 38,656 33,119 35,062 30,972 32,080 34,119 25 3 3

EPS (Rs) 12.2 10.5 11.1 9.8 10.1 10.8 25 3 3

Re/US$ rate 68.7 69.5 70.0 67.6 68.0 69.0 2 2 1

Revised Estimate Previous Estimate Change (%)

NMDC Metals & Mining


Exhibit 6: NMDC, Key assumptions, March fiscal year-ends, 2015-2021E


Exhibit 7: Our fair value of Rs120 for NMDC implies 11X FY2020E earnings NMDC, Valuation details, March 2020E year-ends


2015 2016 2017 2018 2019E 2020E 2021E

Iron-ore realization (Rs/ton)

Domestic lumps (including royalty) 4,800 2,840 2,778 3,443 3,271 2,848 2,880

Domestic fines (Including royalty) 3,150 1,800 2,033 2,871 2,771 2,448 2,480

Blended (Including royalty) 3,994 2,192 2,433 3,171 3,066 2,735 2,760

Export 4,340 3,402 4,111 4,448 4,639 4,691 4,725

Iron-ore volumes (mn tons)

Chhattisgarh 21.0 16.4 23.0 23.2 26.0 28.0 30.0

Karnataka 9.5 12.5 12.6 12.9 12.0 12.0 12.0

Total 30.5 28.9 35.6 36.1 38.0 40.0 42.0

Lumps 10 9 12 12 12 13 14

Fines 20 19 24 24 26 27 28

Cost per ton of ore (Rs/ton)

Chhattisgarh - domestic 1,064 1,104 1,259 1,382 1,375 1,330 1,352

Karnataka (including SPV) - domestic 1,363 1,262 1,488 1,689 1,669 1,589 1,614

Exports 7,383 3,892 3,242 3,354 3,342 3,301 3,326

EBITDA/ton (Rs) 2,547 952 1,011 1,609 1,495 1,232 1,244

Enterprise

EBITDA

EV/EBITDA Value Rs/share

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

EBITDA 49,279 5.5 268,571 85

Net debt 33,450 11

CWIP (value of steel plant CWIP @ 50% investment) 83,478 26

Market capitalization 385,499 120

Target price (Rs) 120



Exhibit 8: NMDC, Financial summary, March fiscal year ends, 2016-2021E (Rs mn)


2016 2017 2018 2019E 2020E 2021E


Net sales 64,558 88,281 116,149 118,268 111,271 117,858

EBITDA 27,497 36,011 58,088 56,820 49,279 52,229

Other income 18,093 9,088 5,197 4,845 4,112 4,244

Depreciaton (2,166) (1,962) (2,560) (2,855) (2,969) (3,106)

Interest (656) (208) (371) (250) (250) (250)

Profit before tax 42,768 42,929 60,354 58,561 50,173 53,117

Extra-ordinary items (1,848) — 1,443 — — —

Taxes (13,798) (17,032) (23,733) (19,905) (17,054) (18,054)

Net profit 27,122 25,897 38,063 38,656 33,119 35,062

Earnings per share (Rs) 7.2 8.2 11.7 12.2 10.5 11.1


Equity 291,176 225,189 243,538 261,243 273,411 287,522

Current liabilities 20,568 31,831 37,552 37,585 37,494 37,589

Total liabilities 326,713 257,021 286,091 298,828 310,904 325,111

Net fixed assets 116,413 137,842 151,916 182,061 196,093 204,987

Investments 6,954 7,270 7,865 7,865 7,865 7,865

Cash 147,636 52,893 54,382 34,710 33,450 38,467

Other current assets 55,711 59,016 71,929 74,193 73,497 73,792

Total assets 326,714 257,021 286,091 298,829 310,905 325,111


Operating cash flow excl. WC 9,808 27,466 34,447 37,732 33,042 34,991

Working capital changes 23,938 3,012 (4,791) (2,235) 600 (204)

Capital expenditure (26,855) (23,390) (16,635) (33,000) (17,000) (12,000)

Free cash flow 6,892 7,088 13,021 2,496 16,642 22,787

Ratios

Book value (Rs/share) 73 71 77 83 86 91

Dividend (Rs/share) 11.0 5.2 5.5 5.5 5.5 5.5

Net debt/equity (X) (0.5) (0.2) (0.2) (0.1) (0.1) (0.1)

RoAE (%) 8.8 10.0 16.2 15.3 12.4 12.5

RoACE (%) 8.8 9.8 16.2 15.2 12.5 12.6


HP channel and Direct Core drive growth; EBIT margin remains stable

Revenues increased 1.7% to US$269 mn (2.9% in c/c), 1.9% below our estimate. Adjusting for

one-off revenues in India government business in 4QFY18, revenues grew 3.6% in c/c. Revenue

growth was led by 4.5% increase in c/c terms from the HP/ DXC channel. The non-HP channel

grew 1.3% in US$ led by 3.2% c/c growth in Direct International. Direct Core business

comprising 78% of DI grew 4.2% in c/c terms sequentially. The company reported stable Digital

Risk revenues above guided band of US$28-30 mn. Despite the revenue miss, EBIT was in line

with estimates. EBIT margin stood at 16.6%, down 20 bps qoq and up 280 bps yoy. We note

that onsite revenues grew 4.8% qoq, while offshore revenues declined 2.1%. Net profit

increased 38% yoy and 8.7% qoq to ₹2.58 bn, beating our estimate by 3% aided by a lower-

than-expected tax rate.

Mphasis management optimistic on growth outlook; maintains 15-17% EBIT margin guidance

Management expects revenues to grow faster than industry in both—HP and Direct Core

segments. We note that the company exited FY2018 with strong 29.5 yoy c/c revenue growth

in the HP/DXC channel. Mphasis maintained FY2019E EBIT margin of 15-17%. Net new deal

wins of US$130 mn grew 32% qoq but declined 16% yoy (on high base; TCV of US$183 mn in

1QFY18). The management indicated that the deal pipeline is strong and is augmented by large

deal wins from third party advisory-led deals. Mphasis has announced buyback of 7.32 mn

shares (3.79% of the equity) at ₹1,350/share through the tender route. Blackstone owns

52.4% of the company and will participate in the offer. Total outlay for the buyback is ₹9.88

bn and represents 36% of cash balance.

Expensive valuation; maintain SELL

We tweak FY2019-21E estimates and incorporate our revised INR/USD estimates and buyback.

We value the stock at 14X June 2020E earnings resulting in a target price of ₹825, up from

₹760 (13X FY2020E earnings earlier). At 20X FY2020E earnings, Mphasis is trading at

par/premium to most Indian IT companies. Valuations are expensive even after acknowledging

near-term revenue momentum from the HP channel and Blackstone portfolio of clients.

Cautious stance stays in view of risks of high client concentration, weak legacy portfolio and

modest quality of revenue base.

Mphasis (MPHL) Technology

Vaulations dim HP/DXC and Direct Core sheen. Mphasis reported 2.9% sequential

revenue growth in c/c terms, 1.3% below our estimate. Growth was led by the

HP/DXC channel and Direct Core business, which grew 4.5% and 4.2% sequentially

in c/c terms. We broadly maintain FY2019-21E estimates, roll over to June 2020E and

raise our target price to `825 valuing the company at 14X earnings (13X FY2020E

earnings earlier). Maintain SELL rating; the stock is expensive at 20X FY2020E

earnings.

SELL

AUGUST 09, 2018

RESULT

Coverage view: Cautious

Price (`): 1,150


BSE-30: 37,888

Kawaljeet Saluja

Jaykumar Doshi

Mphasis







MFs 6.7 EBITDA (Rs bn) 10.6 13.0 14.5


Absolute 3.6 18.6 97.7 ROE (%) 14.6 18.7 19.9

Rel. to BSE-30 (2.5) 10.2 67.0 Div. Yield (%) 1.7 1.7 2.2


1,248-526

222.2

Technology Mphasis


EBIT margin stable despite hedge loss; muted hedge gains in FY2019

Mphasis reported cash flow hedge loss of `16 mn resulting from forward contracts as

compared to a gain of `412mn in the previous quarter and a gain of `484 mn in 1QFY18.

This resulted in an EBIT margin decline of 9 bps as compared to 236 bps boost in the

previous quarter. Yet EBIT margin increased 40 bps (adjusting for one-off revenue from India

government in 4QFY18) sequentially due to (1) 60 bps headwind from rupee depreciation

(including forex loss) offset by (2) 100 bps tailwind from operational efficiencies,

(3) tailwinds from better utilisation, (4) improvement in business mix (higher proportion of

fixed price contracts) and (5) pyramid corrections. The company hedges four quarters on a

rolling basis and partially hedges for the following two quarters. Mphasis hedges 40% of

revenues (US accounts for 80% of revenues). Management reported average forward rate

for cash flow hedges as INR 67.5/USD for FY2019. This implies muted hedge gains or losses

if spot rate increases above the hedge rate. Mphasis expects hedge gains to improve in

FY2020 as forward hedges are renewed at better forward rates.

Key highlights from earnings call

HP/DXC channel. The HP/DXC channel’s revenues (27% of revenues) grew 4.5% in c/c

sequentially to US$73 mn. Mphasis now has fairly broad based engagements with all

entities in the channel and has diversified revenues beyond BFSI vertical. As per the

management, long term partnerships, execution track record, deep understanding of

clients, customer segments and internal businesses of HP and its entities have helped

Mphasis post consistently strong growth in this channel.

Direct Core. Direct Core revenues (54.6% of revenues) grew 4.2% in c/c terms

sequentially to US$147 mn. Blackstone portfolio is delivering fairly consistent

performance with Mphasis leveraging the entire network for opportunities. Mphasis is

directing the sales effort and investment in Europe to expand footprint.

New gen services. Revenues from new gen services (24.2% of revenue) grew 46.1% in

US$ terms sequentially to US$65 mn. Mphasis expects margin profile of new gen services

to be in line with company average due to higher cost profile offsetting better pricing

ability.

Digital risk. Management reported that revenue in this segment was higher than US$30

mn above the guided range of US$28-30 mn. Mphasis is building adjacent lines of

business to counter headwinds from its core mortgage origination business. The company

expects revenues to be stable in the guided band.

Onsite revenues. Onsite revenues increased 4.8% qoq and accounted for 57% of

revenues (54% in June 2017). Management attributed the increase in onsite revenues

partly to increase in deals from new gen services. Onsite billing rates improved 6% yoy

for application services and 16% yoy for ITO services/IS. The company noted that

increased offshoring can provide a margin lever in the long term.

Operational efficiencies. Mphasis delivered operational efficiencies through an

improved business mix and productivity gains. Mphasis reported 27% of revenues from

fixed price contracts (21% in June 2017). Onsite headcount increased at a slower pace

than onsite revenues. Overall headcount growth lagged revenue growth.

Sales restructuring. Sales and marketing headcount was down 22% yoy. Reduction in

headcount was due to (1) significant rationalization in FY2017 and FY2018 to create right

sizing and focus in the right areas (2) development of an integrated approach to sales in

various units of Direct business by breaking down silos and removing duplication in sales

coverage and domain. The company continues to build sales presence in the right areas

and indicated that sales expenditure as a percentage of revenues will remain constant.

Mphasis Technology


Capital allocation. The company maintains a policy of returning 50% of earnings as

dividends including dividend distribution tax. The company intends to return excess cash

to shareholders on a case by case basis. Strong cash balance, continued cash generation

from operations and focus on improving efficiencies provides the company adequate

cushion to pursue its M&A strategy and other growth investments.

Exhibit 1: Mphasis' consolidated quarterly performance (Ind-AS) - quarter ending June 2018 (Rs mn)


% chg.

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

Revenues (US$ mn) 269 274 231 264 (1.8) 16.4 1.7 1,119 995 12.5

Effective Re/US$ 67.8 67.2 64.4 64.5 1.0 5.2 5.1 65.8 65.8

Revenues 18,202 18,374 15,360 17,445 (0.9) 18.5 4.3 77,238 65,459 18.0

Cost of revenues (12,945) (13,229) (11,162) (12,480) (2.1) 16.0 3.7 (55,603) (47,309) 17.5

Gross profits 5,257 5,145 4,198 4,965 2.2 25.2 5.9 21,635 18,150 19.2

SG&A expenses (2,056) (1,966) (1,798) (1,870) 4.6 14.3 9.9 (8,610) (7,525) 14.4

Provision for bad debts

EBITDA 3,201 3,179 2,295 3,095 0.7 39.5 3.4 13,025 10,625 22.6

Depreciation (179) (172) (181) (171) (732) (709) 3.3

EBIT 3,022 3,007 2,114 2,924 0.5 43.0 3.4 12,292 9,916 24.0

Forex gain/(loss), net 67 — 16 12 — 96

Other income/(loss) 382 400 453 410 (4.5) (15.7) (6.8) 1,158 1,524 (24.0)

Interest income / (expense) (42) (18) (21) (43) (78) (130) (40.0)

PBT 3,429 3,389 2,562 3,303 1.2 33.8 3.8 13,373 11,406 17.2

Provision for tax (846) (881) (690) (796) (3,544) (2,900) 22.2

PAT 2,583 2,508 1,872 2,507 3.0 38.0 3.0 9,829 8,506 15.6

Extraordinaries — — — (131) (131)

Reported PAT 2,583 2,508 1,872 2,376 3.0 38.0 8.7 9,829 8,375 17.4

Recurring EPS (Rs/share) 13.4 13.0 9.7 13.0 3.2 38.1 3.2 52.9 38.4 37.6

Margins (%)

Gross margin 28.9 28.0 27.3 28.5 28.0 27.7

EBITDA margin 17.6 17.3 14.9 17.7 16.9 16.2

EBIT margin 16.6 16.4 13.8 16.8 15.9 15.1

PAT margin 14.2 13.6 12.2 14.4 12.7 13.0

SG&A expenses (% of revenues) 11.3 10.7 11.7 10.7 11.1 11.5

Tax rate (as % of PBT) 24.7 26.0 26.9 24.1 26.5 25.4

Technology Mphasis


Exhibit 2: Key changes to FY2019-21E estimates (Rs mn)


Exhibit 3: Revenue growth by segments


Revised Old Change (%)

Mar-19E Mar-20E Mar-21E Mar-19E Mar-20E Mar-21E Mar-19E Mar-20E Mar-21E

Revenues (US$ mn) 1,119 1,246 1,360 1,128 1,247 1,341 (0.8) (0.1) 1.5

Revenue growth (%) 12.5 11.3 9.2 14.1 10.5 7.5

Revenues 77,238 86,566 94,539 76,151 84,791 92,508 1.4 2.1 2.2

EBITDA 13,025 14,468 15,397 12,901 14,170 15,115 1.0 2.1 1.9

Depreciation (732) (856) (1,046) (731) (852) (1,038) 0.2 0.5 0.8

EBIT 12,292 13,612 14,351 12,170 13,319 14,078 1.0 2.2 1.9

Net Profit 9,829 10,523 11,011 10,028 10,853 11,438 (2.0) (3.0) (3.7)

Recurring EPS (Rs/ share) 52.9 56.6 59.2 51.9 56.2 59.2 1.9 0.8 0.1

Margins (%)

EBITDA 16.9 16.7 16.3 16.9 16.7 16.3

EBIT 15.9 15.7 15.2 16.0 15.7 15.2

Re/US$ rate 69.0 69.5 69.5 67.5 68.0 69.0 2.2 2.2 0.7

Jun-18 Growth (%)

(US$ mn) (qoq) (yoy) % of total

Total revenues 269 1.7 16.4 100

by geography

Americas 213 1.8 15.8 79.1

EMEA 31 6.0 36.2 11.5

India 17 1.3 13.7 6.3

ROW 8 (11.3) (14.8) 3.1

by delivery location

Onsite 154 4.8 23.8 57.5

Offshore 114 (2.1) 7.6 42.5

by verticals

Banking and Capital market 126 1.3 11.5 47.0

Insurance 30 (1.6) (3.0) 11.3

IT, communication & Entertainment 46 3.6 60.8 17.2

Emerging industries 66 3.0 14.2 24.5

by Secondary market segment

Direct International 186 2.3 15.2 69.4

HP Business 74 3.0 23.4 27.4

Others 9 (17.0) (8.7) 3.2

by service line

Application maintenance & other serv ices 81 (1.8) (1.4) 30.2

Application development 74 6.9 29.7 27.5

Customer Serv ice 3 (7.8) (5.4) 1.2

Serv ice / Technical Help Desk 22 12.5 77.9 8.2

Transaction Processing Serv ice 18 (2.3) 9.7 6.6

Infrastructure Management Serv ices 40 (0.6) 25.6 14.8

Knowledge Processes 31 (0.9) 10.2 11.4

License Income 0 6.3 20.4 0.1

Mphasis Technology


Exhibit 4: Sharp growth in HP channel revenues


Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18

Revenues (US$ mn)

Total revenues 228 234 237 229 225 224 224 224 222 231 242 252 264 269

HP channel 71 67 63 55 55 52 53 54 54 60 63 65 71 74

Non-HP channel 157 167 174 174 170 172 170 170 167 171 179 186 193 195

Growth, qoq (%)

Total revenues 0.8 2.7 1.1 (3.3) (1.7) (0.3) (0.2) (0.3) (0.9) 4.3 4.9 3.8 5.0 1.7

HP channel (9) (5.5) (6.8) (11.8) (1.3) (4.2) 1.9 0.5 0.6 10.3 6.3 3.4 9.1 3.1

Non-HP channel 5.9 6.3 4.4 (0.3) (1.9) 1.0 (1.4) 0.1 (1.4) 2.3 4.5 4.0 3.5 1.2

Growth, yoy (%)

Total revenues 32.8 (6.2) (1.0) 1.1 (1.3) (4.3) (5.4) (2.4) (1.7) 2.9 8.1 12.6 19.2 16.4

HP channel 15 (25.0) (26.6) (29.2) (23.2) (22.2) (14.9) (3.1) (1.3) 13.6 18.4 21.8 32.1 23.5

Non-HP channel 43.0 4.2 13.2 17.2 8.6 3.2 (2.6) (2.2) (1.7) (0.4) 5.6 9.7 15.1 13.9

Contribution (%)

Total revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

HP channel 31.3 28.8 26.5 24.2 24.3 23.4 23.9 24.0 24.4 25.8 26.1 26.0 27.0 27.4

Non-HP channel 68.7 71.1 73.5 75.8 75.6 76.6 76.1 76.0 75.6 74.2 73.9 74.0 73.0 72.6

Technology Mphasis


Exhibit 5: Mphasis : Key metrics


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

Revenues by verticals (%)

Banking and Capital market 48.4 48.9 50.3 49.0 48.8 49.1 48.6 47.7 47.3 47.0

Insurance 16.1 15.2 14.5 15.0 14.6 13.5 12.9 12.8 11.6 11.3

IT, communication & Entertainment 10.7 10.2 9.6 9.7 10.7 12.5 14.1 14.4 16.9 17.2

Emerging industries 24.8 25.7 25.7 26.3 25.9 24.9 24.4 25.1 24.2 24.5

Revenues by delivery location (%)

Onsite 51.4 51.4 52.4 51.2 51.2 54.0 55.2 55.6 55.8 57.5

Offshore 48.6 48.6 47.6 48.8 48.8 46.0 44.8 44.4 44.2 42.5

Revenues by project type (%)

Time and Material 78.9 80.2 80.9 79.4 80.1 78.7 77.4 75.2 73.7 73.5

Fixed Price 21.1 19.8 19.1 20.6 19.9 21.3 22.6 24.8 26.3 26.5

Revenues by Secondary market segment (%)

Direct International 71.2 72.5 72.2 71.3 72.0 70.1 70.3 70.3 69.0 69.4

HP Business 24.3 23.4 23.9 24.0 24.4 25.8 26.1 26.0 27.0 27.4

Others 4.5 4.1 3.9 4.6 3.6 4.1 3.6 3.7 4.0 3.2

Revenues by geography (%)

Americas 76.9 77.1 77.6 78.0 79.1 79.5 80.1 80.2 79.1 79.1

EMEA 10.7 10.7 10.5 9.6 9.5 9.8 9.5 9.8 11.0 11.5

India 6.7 6.5 6.4 7.3 6.3 6.5 6.4 6.4 6.4 6.3

ROW 5.8 5.8 5.6 5.1 5.1 4.2 4.0 3.6 3.6 3.1

Revenues by service line (%)

Application maintenance & other services 34.1 35.8 35.4 37.0 36.9 35.6 34.6 33.1 31.2 30.2

Application development 24.5 23.2 23.9 23.1 24.5 24.7 24.0 26.3 26.2 27.5

Customer Service 2.0 1.9 1.8 1.9 1.8 1.5 1.7 1.4 1.3 1.2

Service / Technical Help Desk 2.3 2.1 2.4 2.3 2.2 5.4 7.2 7.6 7.4 8.2

Transaction Processing Service 7.1 7.0 7.0 6.2 6.5 7.0 6.8 7.0 6.9 6.6

Infrastructure Management Services 13.6 13.6 13.6 14.2 13.8 13.8 13.4 13.2 15.2 14.8

Knowledge Processes 16.3 16.2 15.7 15.0 13.8 12.0 12.2 10.8 11.7 11.4

License Income 0.1 0.2 0.3 0.4 0.6 0.1 0.1 0.6 0.1 0.1

Client metrics

Top client contribution to revenues (%) 11 11 12 11 11 12 12 12 13 13

Top 5 client contribution to revenues (%) 38 39 40 40 40 40 40 39 40 41

Top 10 client contribution to revenues (%) 51 53 54 55 55 55 54 55 56 56

US$20 mn clients 8 9 8 8 7 7 7 8 8 8

US$10 mn clients 14 15 14 14 14 15 15 17 17 18

Headcount mix (%)

Onsite 17.5 17.0 17.2 16.7 16.7 16.9 18.2 20.1 20.4 20.2

Offshore 76.9 77.5 77.3 77.6 77.6 77.2 76.1 74.5 74.4 74.7

Sales and Marketing 1.3 1.3 1.3 1.4 1.5 1.6 1.5 1.3 1.3 1.2

General and Administrative 4.3 4.2 4.2 4.3 4.3 4.3 4.2 4.0 4.0 4.0

Total employees 22,302 22,358 22,291 22,034 21,994 21,897 22,156 22,270 22,239 22,566

Utilization (%)

Utilization excluding trainees

- Application Services 84 85 82 82 82 81 83 82 86 85

- ITO Services / IS 91 94 94 93 90 89 89 89 94 93

- BPO Services 89 94 93 93 93 92 90 90 92 94

Utilization including trainees

- Application Services 80 80 81 81 77 79 81 81 85 83

- ITO Services / IS 88 91 89 90 89 88 89 88 93 92

- BPO Services 77 81 79 79 81 81 79 81 83 83

Notes:

(a) Client concentration is based on Trailing Twelve Months (TTM).

Mphasis Technology


Exhibit 6: Condensed P&L and Balance Sheet for Mphasis (Rs mn)


Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19E Mar-20E Mar-21E

Profit model

Revenues 25,939 57,949 60,879 60,763 65,459 77,238 86,566 94,539

EBITDA 4,397 8,702 8,970 9,690 10,596 13,025 14,468 15,397

Depreciation (incl amortization of intangibles) (504) (980) (744) (793) (709) (732) (856) (1,046)

Other income 389 1,687 1,712 2,246 1,490 1,080 903 1,048

Pretax profits 4,282 9,409 9,938 11,143 11,377 13,373 14,515 15,400

Tax (1,191) (2,630) (2,696) (3,076) (2,900) (3,544) (3,992) (4,389)

Recurring profit after tax 3,091 6,779 7,242 8,067 8,477 9,829 10,523 11,011

Extraordinaries (64) (32) (548) (152) (131) — — —

Net income 3,027 6,747 6,694 7,915 8,346 9,829 10,523 11,011

Recurring diluted earnings per share (Rs) 14.7 32.3 34.5 38.3 43.9 52.9 56.6 59.2

Balance sheet

Total equity 51,150 54,798 62,930 61,524 54,818 50,286 55,213 59,507

Total borrow ings 5,555 7,662 5,338 2,758 3,949 50 50 50

Current liabilities 13,044 11,466 10,826 8,888 11,087 12,723 13,924 14,871

Total liabilities and equity 69,749 73,926 79,094 73,170 69,853 63,059 69,186 74,428

Cash 4,670 13,209 8,549 6,255 7,067 (4,098) (1,441) 739

Other current assets 21,852 21,805 23,815 22,743 25,046 28,991 32,017 34,707

Goodwill 21,865 21,781 22,942 14,069 17,015 17,015 17,015 17,015

Investments 18,154 14,431 21,118 23,956 17,821 17,821 17,821 17,821

Tangible fixed assets 2,240 1,874 1,728 2,620 1,848 2,274 2,717 3,089

Deferred tax assets 968 826 941 3,527 1,057 1,057 1,057 1,057

Total assets 69,749 73,926 79,094 73,170 69,853 63,059 69,186 74,428

Ratios (%)

EBITDA margin 17.0 15.0 14.7 15.9 16.2 16.9 16.7 16.3

EBIT margin 15.0 13.3 13.5 14.6 15.1 15.9 15.7 15.2

Cashflow statement

Operating cash flow excl. WC changes 4,406 6,487 7,054 7,489 7,651 9,481 10,476 11,008

Change in WC/other adjustments (4,647) (201) 281 (1,045) (1,502) (2,309) (1,826) (1,742)

Capital expenditure (including acquisitions) (339) (857) (1,054) (1,150) (313) (1,159) (1,298) (1,418)

Free cash flow (580) 5,429 6,281 5,294 5,836 6,014 7,351 7,848

Notes:

(1) Mphasis' accounting year-end has changed from October to March. Period ending Mar 2014 is for five months.


Margin compression drags earnings

Reported earnings increased 15% yoy in 1QFY19 driven by drop in credit cost and modest

growth in NII. NII was up 10% yoy though loan growth was robust at 17% yoy, as NIM

(reported) compressed12 bps qoq and 23 bps yoy to 4.2%. Drop in yields (down 33 bps qoq to

10.9%) owing to shift in the loan mix towards lower-yielding products was the primary driver.

Provisions dropped 33% yoy led by drop in slippages to 1.8% (down to <2% for the first time

in past eight quarters). Other income dropped 5% yoy owing to 50% yoy drop in treasury

gains; fee income maintained traction (up 9% yoy). Operating expense growth was modest at

13% yoy; cost-income ratio was up 90 bps qoq to 41%. Strong retail loan growth at 22% yoy

and SME at 17% yoy led to robust loan growth in 1QFY19. Housing loan growth was,

however, moderate at 10% yoy, similar to last quarter. Deposits increased 10% yoy; CASA saw

robust growth at 13% yoy. CASA ratio increased 60 bps yoy (down 30 bps qoq) to 24%.

Near-term headwind on NIM implies improvement in RoEs beyond 15% going to be a challenge

We remain fairly less sanguine on the argument that the historical RoEs of the bank can be

replicated. However, we do believe that the bank is well-positioned to deliver ~15% RoEs. Even

as CUBK has been delivering healthy loan growth, it is now seeing a challenge on NIM. Given

the nature of its business, where the bank has a higher share of term deposits, this would be a

challenge as interest rates have moved up in recent quarters. The two offsetting features would

be (1) credit costs, which is currently at 100-120 bps of loans, which could probably decline to a

much lower level and (2) increase in the share of SME loans, in which there is relatively higher

pricing power.

Valuations comfortable but upsides limited

We have maintained our TP at `190 (unchanged). At our TP, we are valuing the bank at 2.4X

book and 16X March 2020E EPS for RoEs in the range of 15% and ~15% earnings growth.

CUBK has seen a strong valuation expansion in recent years because of its steady execution of

strategy at a time when most regional banks have struggled with NPLs. However, RoEs have

declined from ~20% to ~15% and could remain closer to these levels, which is the only worry

as to whether multiples can sustain if there is disappointment on earnings growth.

City Union Bank (CUBK) Banks

NII comes under pressure. CUBK reported 15% yoy earnings growth led by 33% yoy

decline in provisions. Operating profit growth was at the slowest pace at 1% yoy as NII

growth slowed to 10% yoy despite stable loan growth at ~17% yoy. NIM declined for

the fourth consecutive quarter to 4.2% from a peak of 4.5% and would remain a near-

term headwind as cost increase can hurt banks with a lower CASA ratio. Asset quality

was stable and slippages were lower than trend levels, which is comforting. We maintain

our positive view on CUBK and retain TP at `190 (unchanged).

ADD

AUGUST 09, 2018

RESULT


Price (`): 178


BSE-30: 37,888

QUICK NUMBERS

NII up 10% yoy; PAT

increased 15% yoy

GNPL and NNPL

ratios stable qoq at

3% and 1.7%,

respectively

Maintain ADD

rating with TP at

`190 (unchanged)

M B Mahesh CFA

Nischint Chawathe

Dipanjan Ghosh

City Union Bank





Promoters 0.0 NII (Rs bn) 14.3 15.7 17.4


MFs 16.2 BVPS 58.0 60.6 69.6

Price performance (%) 1M 3M 12M P/B (X) 3.1 2.9 2.6

Absolute 4.5 2.6 16.6 ROE (%) 15.3 15.5 15.6



193-134

130.6

City Union Bank Banks


Exhibit 1: City Union Bank – quarterly March fiscal year-ends, 1QFY18-1QFY19 (` mn)


1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 2019E 2018 (% chg.) 2020E

Interest Earned 8,895 9,066 8,255 8,707 (1.9) 7.7 2.2 38,010 34,024 11.7 43,015

Interest/Discount on Advances/Bills 7,425 7,528 6,912 7,236 (1.4) 7.4 2.6 31,581 28,404 11.2 35,411

Interest on Investment 1,389 1,438 1,238 1,375 (3.4) 12.2 1.0 6,025 5,228 15.2 7,175

Interest on bal. with RBI & others 81 100 105 96 (19.2) (23.3) (15.6) 404 393 2.9 430

Interest expense 5,147 5,346 4,832 5,027 (3.7) 6.5 2.4 22,317 19,721 13.2 25,585

Net interest income 3,748 3,721 3,424 3,679 0.7 9.5 1.9 15,693 14,303 9.7 17,430

Other Income 1,291 1,191 1,353 1,198 8.4 (4.6) 7.8 5,673 5,321 6.6 6,594

Treasury 193 217 390 301 (10.9) (50.5) (35.9) 700 938 (25.4) 850

Total Income 5,039 4,912 4,777 4,878 2.6 5.5 3.3 21,366 19,624 8.9 24,025

Operating Expenses 2,045 1,993 1,807 1,935 2.6 13.1 5.7 8,584 7,546 13.7 9,897

Payments to / Provisions for employees 873 796 765 768 9.7 14.1 13.7 3,638 3,159 15.2 4,105

Other operating expenses 1,172 1,197 1,042 1,167 (2.1) 12.4 0.4 4,946 4,388 12.7 5,792

Pre-provisioning operating profit 2,994 2,919 2,970 2,943 2.6 0.8 1.7 12,782 12,078 5.8 14,127

Provisions & Contingencies 778 896 1,166 862 (13.2) (33.3) (9.7) 3,707 4,178 (11.3) 3,974

Loan loss provisions 673 578 1,090 550 16.5 (38.3) 22.3 3,007 3,037 (1.0) 3,474

Profit before tax 2,216 2,023 1,803 2,081 9.6 22.9 6.5 9,075 7,900 14.9 10,153

Provision for Taxes 600 530 400 560 13.1 50.0 7.1 2,184 1,980 10.3 2,342

Net Profit 1,616 1,493 1,403 1,521 8.3 15.2 6.3 6,892 5,920 16.4 7,811

PBT - treasury + investment dep. 2,168 2,006 1,586 1,928 8.1 36.7 12.5 8,575 7,919 8.3 9,303

Tax rate 27 26 22 27 85 bps 489 bps 16 bps 24 25 23

Key balance sheet items (Rs bn)

Deposits 336 343 305 329 (2.1) 10.3 2.3 381 329 15.9 435

Savings 53 46 52 14.0 2.1 58 52 12.2 64

Current 28 25 28 11.8 (1.0) 34 28 22.8 41

CASA (%) 24 23 24 63 bps -29 bps 24 24 0 bps 24

Advances 282 283 241 279 (0.2) 17.3 1.3 323 279 15.9 372

Agriculture 42 37 41 13.2 2.4

Retail 34 28 33 21.7 2.8

Gold loans 4 3 4 18.5 (2.6)

SME 96 82 96 16.5 (0.1)

Large industries 19 18 19 7.1 0.8

Traders (retail and wholesale) 48 41 51 18.2 (6.1)

Commercial real estate 14 12 14 12.6 (0.0)

Loans collateralized by deposits 5 4 5 13.4 (2.9)

Others 25 19 20 33.8 24.5

Investments 82 81 74 79 1.2 10.9 4.2 97 79 22.6 112

Key calculated ratios (%)

Yield on advances 10.6 11.5 10.7 -95 bps -14 bps 10.5 11.0 -49 bps 10.2

Yield on investment 6.9 6.9 7.1 4 bps -19 bps 6.9 7.0 -14 bps 6.9

Cost of deposit 6.2 6.4 6.3 -18 bps -7 bps 6.3 6.3 3 bps 6.3

NIM 3.8 4.0 3.9 -22 bps -8 bps 4.7 5.0 -29 bps 4.6

CD ratio 84.0 79.0 84.8 502 bps -80 bps 84.8 84.8 0 bps 85.6

Cost to income 40.6 37.8 39.7 275 bps 91 bps 40.2 38.5 172 bps 41.2

Cost to average assets 2.1 2.0 2.1 9 bps 4 bps 2.0 2.0 -2 bps 2.0

Credit cost 1.0 1.8 0.8 -86 bps 12 bps 1.1 1.3 -19 bps 1.1

Asset quality measures

Gross NPL (Rs mn) 8,511 7,350 8,566 15.8 (0.6) 8,748 8,566 2.1 8,574

Gross NPL (%) 3.0 3.1 3.0 -3 bps -1 bps 2.7 3.1 -36 bps 2.3

Net NPL (Rs mn) 4,735 4,260 4,748 11.2 (0.3) 4,301 4,748 (9.4) 3,684

Net NPL (%) 1.7 1.8 1.7 -9 bps 0 bps 1.3 1.7 -37 bps 1.0

Provision coverage (%) 44 42 45 232 bps -20 bps 51 45 626 bps 57

Provision coverage (inc write-offs) (%) 65 62 64 300 bps 100 bps

Restructured loans (Rs mn) 79 1,334 84 (94.1) (5.5)

Restructured loans (%) 0.0 0.6 0.0 -52 bps 0 bps

Slippages (Rs mn) 1,259 1,475 1,482 14.6 15.0 4,986 5,749 (13.3) 5,110

Slippage (%) 1.8 2.5 2.3 -67 bps -46 bps 1.7 2.3 -60 bps 1.5

Capital adequacy details (%)

CAR 16 16 16 19 bps -16 bps

Tier-I 16 15 16 24 bps -15 bps

Other key parameters (#)

ATM 1,634 1,515 1,621 7.9 0.8 1,721 1,621 6.2 1,821

Branches 601 550 600 9.3 0.2 650 600 8.3 700

Notes:

(1) Data for loan loss provisions in 1QFY19 is an approximate figure.

(% chg.)

Banks City Union Bank


Retail and SME drive robust loan growth at 17% yoy in 1QFY19

CUBK reported 17% yoy loan growth in 1QFY19 (up 1% qoq). SME loan growth was strong

at 17% yoy. The growth in this space had softened post demonetization but has picked

pace of late (since 3QFY18). SME loans now comprise ~34% of the loan book from ~30%

in FY2017. Retail loans, comprising 12% of loans (up ~45 bps yoy), grew ~22% yoy and

3% qoq. Housing loan growth was slow at 11% yoy and its share in retail loans has

dropped to 56% in 1QFY19 from 62% in 1QFY18.

Trade loans continued to record smooth growth at 18% yoy; a trend observed in the past

few quarters. Large industry loans continued to report muted growth at 7% yoy. The share

of these loans has been low at ~7% since FY2016. Gold loan portfolio grew 13% yoy on a

low base, but crucially has stopped declining. Retail gold loan growth was robust at 18% yoy.

We forecast 15% loan CAGR over FY2018-21E driven by sharp spike in retail and SME loans

and improvement of credit environment within the home state.

Exhibit 2: Share of retail loans continues to rise Break-up of loans; March fiscal year-ends, 2011-1QFY19 (%)


Margin compression continues; reported margins down 12 bps qoq to 4.2%

NIM declined 12 bps qoq to 4.2% (NIM was down for the fourth consecutive quarter in a

row). Reported yield on advances compressed 33 bps qoq to 10.9% (down ~90 bps yoy), a

trend observed over the past few quarters as the bank continues to increase share of low-

yielding retail loans. Increase in competition in preferred geographies will also put pressure

on yields. Cost of deposits dropped 7 bps qoq to 6.2%.

NIM is expected to see compression going ahead driven by increasing competition from

private players in the home market and share of low-yielding products in loan mix. We

forecast 50 bps yoy NIM (calculated) compression over FY2018-21E to 3.5%.

2011 2012 2013 2014 2015 2016 2017 2018 1QFY19

Retail 7.4 12.0 15.7 12.4 11.4 10.8 11.2 11.7 11.9

SME 29.7 26.7 26.0 30.1 33.7 34.3 30.1 34.4 33.9

Large industries 12.5 16.1 13.8 8.0 6.2 6.7 7.4 6.8 6.7

Agriculture 12.8 13.4 15.7 19.1 16.8 16.0 18.3 14.7 14.8

Traders (wholesale and retail) 21.1 20.4 18.4 17.9 17.8 17.9 18.0 18.4 17.1

Commercial real estate 8.2 5.3 5.1 5.4 5.3 5.5 5.2 5.0 4.9

Loans collateralized by deposits — 1.6 1.7 2.5 2.1 1.9 1.8 1.8 1.7

Others 8.3 4.5 3.6 4.6 6.6 6.9 8.1 7.2 8.9

Total loans (Rs bn) 93 121 152 162 181 213 238 279 282

Gold loans 14.5 22.3 18.3 13.8 9.6 9.0 8.4 8.7

Retail gold loans — — 9.1 5.0 2.3 1.2 1.2 1.3 1.3



Exhibit 3: NIM compression 12 bps qoq to 4.2% Reported YoA, CoF and NIM; March fiscal year-ends, 1QFY15-1QFY19 (%)


CASA ratio of 24%

CASA increased 13% yoy to `80 bn (up 1% qoq) led by 12% yoy growth in current

deposits and 14% yoy rise in savings deposits. CASA ratio improved 60 bps yoy to 24%

(down 30 bps qoq). Overall deposit growth was modest at 10% yoy. Deposit growth

continues to be concentrated in Tamil Nadu, contributing 79% of deposits as of 1QFY19.

City Union Bank continued to increase deposit share in Tamil Nadu (up 13 bps yoy to 3.6%)

in FY2018. Major private players such as HDFC Bank and ICICI Bank have increased deposit

share in the state by 67 bps and 37 bps yoy to 6.3% and 5%, respectively.

We forecast 15% CAGR in CASA over FY2018-21E and stable CASA ratio of ~24% over

FY2019-21E.

Exhibit 4: CASA ratio broadly stable qoq at 24% Break-up of deposits, March fiscal year-ends, 2009-18 (%)


13.0 13.6 13.1 13.1 13.0 13.0 12.7 12.6 12.4 12.2 12.1 11.9 11.8 11.5 11.4 11.2 10.9

7.3 7.2 7.2 7.1 6.8 6.7 6.5 6.4 6.2 6.0 5.8 5.7 5.5 5.3 5.3 5.2 5.2

3.3 3.5 3.5 3.4

3.6 3.7 3.8 4.0 4.1 4.2 4.2 4.2

4.5 4.5 4.4 4.4 4.2

-

1.0

2.0

3.0

4.0

5.0

-

3.5

7.0

10.5

14.0

17.5

1Q

FY1

5

2Q

FY1

5

3Q

FY1

5

4Q

FY1

5

1Q

FY1

6

2Q

FY1

6

3Q

FY1

6

4Q

FY1

6

1Q

FY1

7

2Q

FY1

7

3Q

FY1

7

4Q

FY1

7

1Q

FY1

8

2Q

FY1

8

3Q

FY1

8

4Q

FY1

8

1Q

FY1

9

Yield on advances (LHS) Cost of funds (LHS) NIM (RHS)

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

Current 8.5 10.7 8.4 7.4 6.6 6.5 6.9 7.1 8.0 8.5 8.2

Savings 10.4 11.2 11.2 10.8 10.2 11.2 12.3 13.3 15.4 15.7 15.7

CASA 18.9 21.9 19.6 18.2 16.8 17.8 19.2 20.4 23.4 24.2 23.9

Term deposits 81.1 78.1 80.4 81.8 83.2 82.2 80.8 79.6 76.6 75.8 76.1



Exhibit 5: Tamil Nadu contributes 69% of branches, 79% of deposits and 64% of loans Break-up of business across states, March fiscal year-end, 1QFY19 (%)


Exhibit 6: 79% of deposits originate in Tamil Nadu State-wise deposit mix, March fiscal year-ends, 1QFY17-1QFY19 (%)

Source: Public documents, Kotak Institutional Equities estimates

Exhibit 7: 64% of loans are based out of Tamil Nadu State-wise deposit mix, March fiscal year-ends, 1QFY17-1QFY19 (%)


Exhibit 8: Revival in growth in TN; asset quality concerns emerging Performance of banks in TN, March fiscal year-ends, 2012-18


LoansBranches Deposits

Tamin Nadu,

69

Andhra

Pradesh, 6

Telengana,

5

Karnataka,

6

Maharashtra

, 3

Kerala, 3 Gujarat, 2 Others, 6

Tamin Nadu,

79Andhra

Pradesh, 2

Telengana, 3

Karnataka, 6

Maharashtra

, 3

Kerala, 2Gujarat, 1

Others, 4

Tamin Nadu,

64Andhra

Pradesh, 9

Telengana, 6

Karnataka, 5

Maharashtra

, 3

Kerala, 2 Gujarat, 4 Others, 7

78 78 78 78 79 79 79 78 79

2 2 3 3 3 3 2 3 2

3 3 3 3 3 3 3 3 35 5 6 6 6 6 6 6 64 4 3 3 3 3 3 3 35 5 4 4 3 3 4 4 4

0

20

40

60

80

100

1Q

FY1

7

2Q

FY1

7

3Q

FY1

7

4Q

FY1

7

1Q

FY1

8

2Q

FY1

8

3Q

FY1

8

4Q

FY1

8

1Q

FY1

9

Tamil Nadu Andhra Paradesh Telengana

Karnataka Maharashtra Kerala

Gujarat Others

64 64 64 63 64 63 63 63 64

9 9 9 9 9 9 9 9 9

6 9 6 7 6 6 6 6 65 5 5 5 5 5 5 5 54 4 4 4 3 3 3 3 3

76

7 6 7 7 7 7 7

0

20

40

60

80

100

1Q

FY1

7

2Q

FY1

7

3Q

FY1

7

4Q

FY1

7

1Q

FY1

8

2Q

FY1

8

3Q

FY1

8

4Q

FY1

8

1Q

FY1

9

Tamil Nadu Andhra Paradesh Telengana

Karnataka Maharashtra Kerala

Gujarat Others

Key financial metrics (Rs bn) Performance in TN - Growth (%) Overall sector trends - Growth (%)

2012 2013 2014 2015 2016 2017 2018 2012 2013 2014 2015 2016 2017 2018 2012 2013 2014 2015 2016 2017 2018

Number of branches 7,402 8,041 8,841 9,496 9,971 10,501 10,612 10.5 8.6 9.9 7.4 5.0 5.3 1.1

Deposits 4,291 4,446 5,082 5,441 5,968 6,860 7,177 30.6 3.6 14.3 7.0 9.7 14.9 4.6 14.9 15.1 14.9 10.6 7.0 6.8 6.7

Loans 4,493 5,335 6,056 6,499 6,828 6,955 7,848 19.5 18.8 13.5 7.3 5.1 1.9 12.8 18.0 15.9 14.6 9.7 9.0 7.3 10.3

Priority sector 1,765 2,111 2,430 2,664 3,002 3,161 3,566 20.4 19.6 15.1 9.6 12.7 5.3 12.8 12.1 8.2 22.0 7.0 10.7 9.4 4.8

Agriculture 782 982 1,077 1,207 1,246 1,353 1,568 32.2 25.6 9.6 12.1 3.3 8.5 15.9 13.3 7.7 13.5 14.4 15.2 12.3 3.1

SME 587 686 869 962 1,178 1,244 1,403 11.7 16.8 26.7 10.8 22.4 5.6 12.8 12.3 12.5 33.6 6.6 5.9 6.4 10.5

Housing 239 262 293 304 320 320 306 13.2 9.7 12.1 3.7 5.2 (0.0) (4.3) 10.7 0.3 13.5 6.3 6.2 7.6 2.0

Others 157 181 191 191 258 244 289 14.1 15.1 5.8 0.1 34.9 (5.2) 18.1 8.5 10.6 28.1 (21.0) 26.1 13.7 (8.5)

Non priority sector 2,728 3,225 3,626 3,835 3,826 3,794 4,282 18.9 18.2 12.4 5.8 (0.2) (0.8) 12.9 19.2 15.8 10.4 8.3 8.1 6.2 5.4

NPL (%)

Priority sector 4.3 4.7 3.8 4.6 5.8 6.3 6.7

Housing 2.8 2.9 2.1 2.1 2.7 2.7 4.9

Agriculture 3.3 3.8 2.9 3.6 4.3 4.7 4.3

SME 4.7 5.3 4.4 5.6 7.5 7.9 9.0

SME (1 year lag) 5.3 6.1 5.5 6.2 9.1 8.3 10.1



Exhibit 9: Business landscape has changed with competition from new private banks picking pace Deposit and credit market share of various banks in Tamil Nadu, March fiscal year-ends, 2012-18 (%)

Source: Public documents, Kotak Institutional Equities

Slippages down 50 bps qoq and 70 bps yoy to 1.8% in 1QFY19

GNPL and NNPL ratios were flat qoq at 3% and 1.7%, respectively. Provision coverage ratio

(excluding technical write-off) increased 240 bps yoy to 44.4%. Slippages dropped to 1.8%

in 1QFY19 (slippages have been >2% for the past seven quarters). Slippages are granular in

nature and there is absence of any lumpy account. During 1QFY19, one account worth `1

mn slipped into NPL from restructured accounts. Restructured accounts continue to be low

at 0.03% (down 52 bps yoy) of advances (total of 10 accounts). The bank has SR book of

`3.4 bn (1.2% of loans). The bank maintains coverage of 42% on these accounts.

While overall impaired loans don’t raise an alarm, we need to keep check on the

performance on the swiftly growing SME book. We forecast 1.7% slippages in FY2019E,

dropping to ~1.3% by FY2021E.

2012 2013 2014 2015 2016 2017 2018 (% chg.)

Market share comparison in deposits

PSU banks

SBI Group 15.9 17.0 16.9 16.5 16.9 17.9 17.9 -1 bps

Indian Overseas Bank 10.0 11.0 10.4 10.5 9.8 9.7 9.0 -66 bps

Canara Bank 6.5 7.3 6.8 7.1 7.2 7.1 7.1 -7 bps

Indian Bank 11.4 13.2 13.2 11.8 11.3 9.8 10.2 41 bps

Private banks 0 bps

Axis Bank 2.3 3.1 2.4 2.7 2.9 3.0 3.2 16 bps

City Union Bank 2.7 3.2 3.2 3.4 3.5 3.4 3.6 13 bps

Federal Bank 0.4 0.6 0.5 0.5 0.5 0.7 0.6 -6 bps

HDFC Bank 3.4 3.7 4.0 4.6 5.5 5.6 6.3 67 bps

ICICI Bank 3.9 4.1 4.3 4.3 4.5 4.6 5.0 37 bps

Karur Vysya Bank 3.1 3.5 5.5 4.4 4.4 4.1 4.4 27 bps

Market share comparison in loans

PSU banks

SBI Group 18.1 21.1 19.9 19.1 18.9 17.9 18.7 79 bps

Indian Overseas Bank 8.7 8.6 8.1 7.7 6.9 6.1 5.9 -22 bps

Canara Bank 7.2 6.7 7.3 7.7 7.9 9.5 8.0 -151 bps

Indian Bank 7.8 7.8 7.6 7.1 7.8 7.3 7.7 40 bps

Private banks 0 bps

Axis Bank 2.6 2.8 3.9 4.1 3.1 4.9 5.1 27 bps

City Union Bank 1.9 2.1 1.9 1.9 2.0 2.2 2.3 13 bps

Federal Bank 0.9 0.9 0.9 0.9 0.9 1.2 1.4 17 bps

HDFC Bank 4.0 4.5 4.9 5.3 6.9 7.7 8.5 82 bps

ICICI Bank 4.5 4.2 3.3 3.3 3.5 4.1 3.9 -22 bps

Karur Vysya Bank 2.4 2.6 2.6 2.5 2.6 2.4 2.7 28 bps



Exhibit 10: Slippages dropped to 1.8% of loans GNPL ratio, NNPL ratio and slippage ratio (annualized), March fiscal year-ends, 1QFY15-1QFY19 (%)

Source: Public documents, Kotak Institutional Equities

Other highlights

Cost-income ratio increased ~90 bps qoq to ~41%. Growth in operating expenses was

modest at 13% yoy driven by robust rise in employee expenses at 14% yoy. The bank

slowed down expansion in 1QFY19. We expect cost-to-income ratio to increase to 41.3%

by FY2021E driven by 14% CAGR in operating expenses over FY2018-21E led by

investment in business expansion.

Non-interest income declined 5% yoy led by sharp drop in treasury gains at 50% yoy

(high mark to market losses). Core fee income growth was moderate at 9% yoy.

Capital position stands comfortable with CAR at 16% and tier-1 ratio at 15.6%.

Exhibit 11: CUBK trading at 2.5X book one-year forward PBR and PER, March fiscal year-ends, August 2008 –August 2018 (X)

Source: Company, Bloomberg, Kotak Institutional Equities

Exhibit 12: CUBK is trading broadly in line with peers PBR premium to peers, March fiscal year-ends, August 2008 –August 2018 (X)

Source: Company, Bloomberg, Kotak Institutional Equities

1.9 2.0 2.1 1.9

2.0 2.1 2.4 2.4

2.6 2.7 3.0

2.8 3.1 3.1

3.3 3.0 3.0

1.3 1.3 1.3 1.3 1.3 1.4 1.5 1.5 1.6 1.6 1.7 1.7 1.8 1.8 1.7 1.7 1.7

9.1

2.1 1.5

2.6

1.7 2.2

2.7 2.6

1.9 2.3 2.2

2.5 2.5 2.4 2.1 2.3

1.8

0

2

4

6

8

10

0

1

2

3

4

5

1Q

FY1

5

2Q

FY1

5

3Q

FY1

5

4Q

FY1

5

1Q

FY1

6

2Q

FY1

6

3Q

FY1

6

4Q

FY1

6

1Q

FY1

7

2Q

FY1

7

3Q

FY1

7

4Q

FY1

7

1Q

FY1

8

2Q

FY1

8

3Q

FY1

8

4Q

FY1

8

1Q

FY1

9

GNPL ratio (LHS) NNPL ratio (LHS) Slippages (RHS)

0.0

0.7

1.4

2.1

2.8

3.5

0

5

10

15

20

25

Aug

-08

Aug

-09

Aug

-10

Aug

-11

Aug

-12

Aug

-13

Aug

-14

Aug

-15

Aug

-16

Aug

-17

Aug

-18

PER (X) (LHS) PBR (X) (RHS)

0.3

0.5

0.7

0.8

1.0

1.2

Aug

-08

Aug

-09

Aug

-10

Aug

-11

Aug

-12

Aug

-13

Aug

-14

Aug

-15

Aug

-16

Aug

-17

Aug

-18



Exhibit 13: Change in estimates March fiscal year-ends, 2019E-21E (` mn)


New estimates Old estimates Old versus new (%)

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

Loans (Rs bn) 323 372 429 323 372 429 — — —

Loan growth (%) 15.9 15.2 15.2 15.9 15.2 15.2 0 bps 0 bps 0 bps

Net interest income 15,693 17,430 19,290 15,803 17,594 19,418 (0.7) (0.9) (0.7)

NIM (%) 3.4 4.4 5.4 3.4 4.4 5.4 0 bps 0 bps -3 bps

Other income 5,673 6,594 7,635 5,518 6,339 7,267 2.8 4.0 5.1

Net fee income 524 603 694 594 683 786 (11.7) (11.7) (11.7)

Net capital gains 700 850 1,000 1,300 1,450 1,600 (46.2) (41.4) (37.5)

Operating expenses 8,584 9,897 11,129 8,558 9,856 11,082 0.3 0.4 0.4

Employee expenses 3,638 4,105 4,624 3,638 4,105 4,624 0.0 0.0 0.0

Loan loss provisions 3,007 3,474 3,602 3,007 3,474 3,602 — — —

PBT 9,075 10,153 11,694 9,056 10,103 11,499 0.2 0.5 1.7

Tax 2,184 2,342 2,580 2,180 2,331 2,537 0.2 0.5 1.7

Net profit 6,892 7,811 9,114 6,876 7,773 8,961 0.2 0.5 1.7

% growth 16.4 13.3 16.7 16.2 13.0 0.0 23 bps 31 bps 1668 bps

PBT - Treasury + Provisions 12,082 13,277 14,797 11,463 12,628 14,002 5.4 5.1 5.7



Exhibit 14: City Union Bank – growth rates and key ratios March fiscal year-ends, 2016-21E (%)


2016 2017 2018 2019E 2020E 2021E

Growth rates (%)

Net loan 17.2 13.2 16.9 15.9 15.2 15.2

Total asset 14.1 10.9 13.2 15.9 14.5 14.1

Deposits 12.8 10.9 9.1 15.9 14.2 13.6

Current 15.1 25.5 15.6 22.8 20.5 19.6

Savings 22.0 28.1 11.7 12.2 10.4 9.7

Fixed 11.2 6.7 7.9 15.9 14.2 13.6

Net interest income 21.5 22.2 19.3 9.7 11.1 10.7

Loan loss provisions 34.0 19.2 18.2 (1.0) 15.5 3.7

Total other income 1.5 18.0 10.0 6.6 16.2 15.8

Net fee income 3.6 (1.4) 12.6 6.0 15.0 15.0

Net capital gains (24.8) 137.7 (12.9) (25.4) 21.4 17.6

Net exchange gains 17.0 21.4 (24.0) 12.0 18.0 18.0


Employee expenses 1.4 39.9 6.0 15.2 12.8 12.6

Key ratios (%)

Yield on average earning assets 10.4 9.9 9.4 9.2 9.0 8.8

Yield on average loans 12.1 11.5 11.0 10.5 10.2 9.9

Yield on average investments 8.5 7.8 7.0 6.9 6.9 6.9

Average cost of funds 7.5 6.7 6.0 5.9 5.9 5.8

Interest on deposits 7.5 6.8 6.1 6.1 6.1 6.1

Spread 2.9 3.2 3.4 3.2 3.1 2.9

Net interest income/earning assets 3.5 3.7 4.0 3.8 3.6 3.5

Spreads on lending business 4.6 4.8 5.0 4.6 4.3 4.0

New provisions/average net loans 1.1 1.1 1.2 1.0 1.0 0.9

Total provisions/gross loans 4.2 4.7 5.0 5.2 5.4 5.5

Interest income/total income 70.5 71.2 72.9 73.4 72.6 71.6

Other income / total income 29.5 28.8 27.1 26.6 27.4 28.4

Fee income to total income 3.2 2.6 2.5 2.5 2.5 2.6

Fee income to advances 0.2 0.2 0.2 0.2 0.2 0.2

Fees income to PBT 7.4 6.3 6.3 5.8 5.9 5.9

Net trading income to PBT 7.5 8.5 (0.2) 5.5 8.4 8.6

Exchange income to PBT 13.4 14.1 9.4 9.2 9.7 9.9

Operating expenses/total income 40.1 40.9 38.5 40.2 41.2 41.3

Operating expenses/assets 1.9 2.1 2.0 2.0 2.0 2.0

Operating profit /AWF 2.0 1.8 1.9 2.0 1.9 1.9

Tax rate 26.2 27.4 25.1 24.1 23.1 22.1

Dividend payout ratio 17.8 17.8 17.8 17.8 17.8 17.8

Share of deposits

Current 13.3 15.4 15.7 15.2 14.7 14.2

Fixed 79.6 76.6 75.8 75.8 75.8 75.8

Savings 13.3 15.4 15.7 15.2 14.7 14.2

Loans-to-deposit ratio 77.5 79.1 84.8 84.8 85.6 86.8

Equity/assets (EoY) 9.6 10.1 10.4 10.2 10.1 10.0

Loan impairment ratios (%)

Gross NPL 2.3 2.7 2.9 2.6 2.2 1.7

Net NPL 1.5 1.7 1.7 1.3 1.0 0.5

Slippage 2.3 2.2 2.3 1.7 1.5 1.3

Provision coverage 36.8 40.1 44.5 50.8 57.0 72.6

Dupont analysis (%)

Net interest income 3.3 3.6 3.8 3.6 3.5 3.4

Loan loss provisions 0.7 0.8 0.8 0.7 0.7 0.6

Net other income 1.4 1.4 1.4 1.3 1.3 1.3


(1- tax rate) 73.8 72.6 74.9 75.9 76.9 77.9

ROA 1.5 1.5 1.6 1.6 1.6 1.6

Average assets/average equity 10.4 10.1 9.7 9.7 9.9 10.0

ROE 15.5 15.2 15.3 15.5 15.6 16.0



Exhibit 15: City Union Bank – financial statements March fiscal year-ends, 2016-21E (` mn)


2016 2017 2018 2019E 2020E 2021E

Income statement

Total interest income 29,442 31,738 34,024 38,010 43,015 48,271

Loans 23,676 25,902 28,404 31,581 35,411 39,548

Investments 5,410 5,385 5,228 6,025 7,175 8,257

Cash and deposits 356 451 393 404 430 465

Total interest expense 19,632 19,750 19,721 22,317 25,585 28,981

Deposits from customers 19,230 19,418 19,271 21,619 24,774 28,111

Net interest income 9,810 11,988 14,303 15,693 17,430 19,290

Loan loss provisions 2,157 2,570 3,037 3,007 3,474 3,602

Net interest income (after prov.) 7,653 9,418 11,266 12,686 13,956 15,688

Other income 4,100 4,839 5,321 5,673 6,594 7,635

Net fee income 446 439 495 524 603 694

Net capital gains 453 1,078 938 700 850 1,000

Net exchange gains 806 978 744 833 983 1,160

Operating expenses 5,577 6,890 7,546 8,584 9,897 11,129

Employee expenses 2,132 2,981 3,159 3,638 4,105 4,624

Depreciation on investments — 490 957 200 — —

Other provisions 149 (50) 183 500 500 500

Pretax income 6,027 6,928 7,900 9,075 10,153 11,694

Tax provisions 1,580 1,900 1,980 2,184 2,342 2,580

Net profit 4,447 5,028 5,920 6,892 7,811 9,114

% growth 13 13 18 16 13 17

PBT - Treasury + Provisions 7,879 8,860 11,139 12,082 13,277 14,797

% growth 22 12 26 8 10 11

Balance sheet

Cash and bank balance 26,501 28,790 26,364 27,496 29,778 32,276

Cash 2,628 2,848 3,628 3,628 3,628 3,628

Balance with RBI 11,498 11,993 14,990 16,122 18,404 20,902

Net value of investments 68,265 70,315 78,791 96,579 112,335 128,158

Govt. and other securities 64,070 66,906 76,344 94,157 109,936 125,779

Shares 169 157 102 102 102 102

Debentures and bonds 303 211 252 227 204 184

Net loans and advances 210,569 238,327 278,528 322,860 372,034 428,504

Fixed assets 2,176 2,151 2,231 2,572 2,460 2,302

Net owned assets 2,176 2,151 2,231 2,572 2,460 2,302

Other assets 10,530 13,126 13,458 13,458 13,458 13,458

Total assets 318,040 352,708 399,372 462,966 530,066 604,697

Deposits 271,581 301,157 328,526 380,817 434,717 493,714

Borrowings and bills payable 8,429 7,623 20,336 24,403 29,283 35,140

Other liabilities 7,509 8,225 8,878 10,654 12,785 15,341


Paid-up capital 598 601 665 731 731 731

Reserves & surplus 29,922 35,101 40,968 46,361 52,550 59,770

Total shareholders' equity 30,520 35,702 41,632 47,092 53,281 60,501


Strong earnings aided by higher alumina realizations, better-than-expected sales

Nalco’s 1QFY19 earnings were ahead of our estimates—EBITDA increased to `10.1 bn (+106%

qoq, `2.3 bn in 1QFY18) while net-income increased to `6.9 bn (+167% qoq, `1.3 bn in

1QFY18). The earnings improvement was aided by (1) a sharp increase in alumina realizations.

We note that benchmark alumina prices increased 40% qoq to US$525/ton (per CRU) due to

supply disruption at Alunorte refinery in Brazil, and (2) higher-than-expected alumina shipments

of 320,000 tons (+24% yoy, KIE: 270,000 tons) on the back of 11% yoy increase in alumina

production to 583,000 tons. The aluminum shipments increased 18% yoy to 105,000 tons.

The company’s alumina EBIT increased 75% qoq to `11.3 bn (`1.9 bn in 1QFY18) while it

reported aluminum EBIT loss of `2.1 bn (`2 bn in 4QFY18). The higher EBIT loss in aluminum

segment reflects increase in inter-segment transfer price of alumina. The company reported net-

income of `6.9 bn (+167% qoq) which included a one-off gain of `0.9 bn.

Supply disruption aids alumina pricing; aluminum fundamentals continue to improve

The alumina prices increased to US$520/ton in August 2018 (from US$400/ton in March 2018)

as API Index hovers close to 25% (against long term average of 16-18%) given supply

disruption at Alunorte refinery in Brazil. This refinery is operating at close to 50% (6.3 mtpa

capacity) and the owner Norsk Hydro recently stated that timing remains uncertain for resuming

100% production due to legal/political issues. The high alumina prices led to pressure in

aluminum margins with close to 31% of global production being loss making led by (1) 21% of

World ex-China incurring losses, and (2) half of China’s aluminum production incurring losses.

Maintain ADD rating, revise target price to `80 (`85 earlier)

Our positive view on the stock is led by improving aluminum fundamentals. The widening

deficit in aluminum markets outside China’s markets, on the back of strong demand growth

and limited new supplies, continues to deplete inventories. Chinese aluminum markets are in

surplus but we expect limited new capacity additions post supply side reforms, especially from

CY2019.

Nalco expects Utkal D coal block to be commissioned by 2HFY20E which will aid costs. The

company continues to pursue 1 mtpa alumina refinery project (at capex of `55 bn) though the

progress has been slow. We maintain our ADD rating but revise target price to `80 (from `85

earlier).

National Aluminium Co. (NACL) Metals & Mining

Strong quarter backed by high prices. Nalco’s EBITDA increased 106% qoq to `10.1

bn and was ahead of our estimate. The earnings improvement was led by the alumina

segment as realizations increased by 40% qoq and the company reported higher-than-

expected shipments of 320,000 tons (+24% yoy). The supply disruption at Alunorte

refinery in Brazil continues to aid alumina prices and near-term earnings. Our positive

view on the stock is also led by improving aluminum fundamentals due to large world

ex-China deficit and falling inventories. Maintain ADD with revised TP of `80 (`85

earlier).

ADD

AUGUST 09, 2018

RESULT


Price (`): 67


BSE-30: 37,888

Abhishek Poddar

Samrat Verma

National Aluminium Co.



Market Cap. (Rs bn) EPS growth (%) 12.7 125.8 (21.1)




MFs 9.8 EBITDA (Rs bn) 14.0 28.8 22.7


Absolute 10.9 (14.6) (3.6) ROE (%) 7.7 16.8 13.0

Rel. to BSE-30 4.4 (20.6) (18.5) Div. Yield (%) 8.5 8.9 8.9


98-57

130.3

National Aluminium Co. Metals & Mining


Exhibit 1: Nalco’s strong earnings in 1QFY19 were led by higher alumina prices; alumina shipments were higher than our estimates Interim results of NALCO, March fiscal year-ends (Rs mn)


Changes in our estimates

Exhibit 6 highlights key changes in our estimates.

We incorporate our economist’ revised Fx rate assumption of `68.7/US$, `69.5/US$ and

`70/US$ for FY2019E, FY2020E and FY2021E. We cut our aluminum price assumption to

US$457/ton, US$380/ton and US$387/ton for FY2019E, FY2020E and FY2021E. raise our

alumina price assumption by 21% to US$457/ton due to continued strength in alumina

prices given supply disruption. The net-effect is a 36% increase in our EBITDA estimate for

FY2019E to `28.8 bn but a cut in our FY2020-2021E estimates by 2-3% to `22.7 bn, `23

bn for FY2020E, FY2021E.

We revise our fair value to `80 (from `85 earlier) due to lower earnings estimate/cut in EBIT

multiple to 9X from 10X earlier. The stock will trade at 11X FY2020E P/E based on our target

price.

(% chg.)

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

Net sales 29,733 26,499 18,027 28,632 12 65 4 111,513 96,183 16

Total expenditure (19,622) (19,394) (15,752) (23,735) 1 25 (17) (82,711) (82,209) 1

Inc/(Dec) in stock 1,186 - 2,129 (1,674) — (474)

Raw materials (5,089) (4,210) (2,984) (4,180) (15,644) (14,653)

Power & Fuel (7,347) (7,234) (6,201) (7,163) (29,076) (27,479)

Staff cost (4,651) (4,473) (4,301) (6,403) (19,496) (22,612)

Other expenditure (3,722) (3,477) (4,394) (4,315) (18,496) (16,990)

EBITDA 10,111 7,105 2,275 4,897 42 344 106 28,801 13,975 106

Other income 621 766 859 573 3,225 2,997

Interest (6) (6) (4) (6) — (20)

Depreciation (1,217) (1,280) (1,170) (1,268) (4,713) (4,804)

Pretax profits 9,509 6,585 1,960 4,261 44 385 123 27,313 12,148 125

Extraordinaries 910 — - 64 — 8,241

Tax (3,549) (2,278) (670) (1,690) (9,287) (6,964)

Net income 6,871 4,307 1,289 2,571 60 433 167 18,027 13,424 34

Adjusted net income 6,270 4,307 1,289 2,571 46 386 144 18,027 7,985 126

Ratios

EBITDA margin (%) 34.0 26.8 12.6 17.1 25.8 14.5

ETR (%) 34.1 34.6 34.2 39.7 34.0 57.3

EPS (Rs) 3.2 2.2 0.7 1.3 9.3 6.9

Production ('000 tons)

Alumina 583,000 530,000 526,000 555,000 11 5 2,120,400 2,106,000 0

Aluminum 110,000 109,787 100,695 109,000 9 1 441,600 426,000 10

Alumina sales 320,000 270,000 259,000 441,000 24 (27) 1,250,684 1,279,293 (1)

Aluminum sales 105,000 110,000 88,752 112,000 18 (6) 441,600 426,000 10

Segmental revenue

Chemicals 20,526 — 9,415 17,415 118 18 — 51,620 28

Aluminium 17,719 — 12,778 16,952 39 5 — 62,999 14

Segmental PBIT

Chemicals 11,259 — 1,887 6,424 — 497 75 — 15,208 56

Aluminium (2,110) — (256) (2,015) — 724 5 — (3,671) 63

Segmental PBIT (%)

Chemicals 55 — 20 37 — — — — 29

Aluminium (12) — (2) (12) — — — — (6)

Metals & Mining National Aluminium Co.


Other highlights from the results

Alumina EBIT increases on higher prices. The company reported a sharp increase in

alumina EBIT to `11.3 bn (+75% qoq) aided by higher realizations. We estimate blended

alumina realizations increased to US$565/ton in 1QFY19 from US$415/ton in 4QFY18

(this calculation includes captive transfer at market prices). We note that benchmark

alumina prices (per CRU) rose to US$525/ton in 1QFY19 versus US$384/ton in 4QFY18.

The strong alumina prices largely indicate supply disruption caused due to restricted

output at Alunorte refinery in Brazil.

Aluminum segment reports EBIT loss. The aluminum segment reported EBIT loss of

`2.1 bn (`2 bn EBIT loss in 4QFY18). The lower profitability in aluminum segment over

the last two quarters reflects increased costs on account of higher alumina transfer price.

Exception gain of `0.9 bn. The company reported net-income of `6.9 bn (+167% qoq)

which included a one-off gain of `0.9 bn pertaining to write back of excess provision for

renewable purchase obligations.

Exhibit 2: Nalco's valuation has high sensitivity to changes in

alumina, aluminum prices Fair value sensitivity of Nalco for changes in alumina, aluminum prices (Rs)

Exhibit 3: Nalco's earnings have high sensitivity to changes in

alumina, aluminum prices FY2020E EPS sensitivity of Nalco for changes in alumina, aluminum prices (Rs)

Source: Kotak Institutional Equities estimates Source: Kotak Institutional Equities estimates

Exhibit 4: We expect global aluminum markets deficit to increase in 2018E due to large world ex-China deficit, lower Chinese surplus Aluminum demand supply for China and World ex-China ('000 tons)

Source: CRU, Kotak Institutional Equities estimates

Fair value (Rs/share)

80 1,800 1,950 2,100 2,250 2,400

340 37 53 68 84 100

360 42 58 74 90 106

380 48 64 80 95 111

400 54 69 85 101 117

420 59 75 91 107 122

LME aluminum prices (US$/ton)

Alumina

prices

(US$/ton)

FY2020E EPS (Rs)

7 1,800 1,950 2,100 2,250 2,400

340 3.0 4.6 6.2 7.8 9.4

360 3.6 5.2 6.8 8.4 10.0

380 4.2 5.8 7.4 9.0 10.5

400 4.7 6.3 7.9 9.5 11.1

420 5.3 6.9 8.5 10.1 11.7

LME aluminum prices (US$/ton)

Alumina

prices

(US$/ton)

2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E

China capacity 21,789 23,210 26,140 29,470 34,287 37,690 40,960 45,202 47,700 48,500

World ex-China capacity 30,413 31,357 31,881 33,132 33,751 33,402 33,157 32,554 33,054 33,554

Global capacity ('000 tons) 52,202 54,567 58,021 62,602 68,038 71,092 73,840 77,756 80,754 82,054

World ex-China production (000' tons) 24,965 26,395 25,758 25,685 25,834 26,294 26,962 27,222 27,875 28,375

World ex-China consumption (000' tons) 24,097 25,513 25,789 26,123 26,813 27,256 28,234 29,242 30,294 31,355

World ex-China Surplus/(Deficit) (000' tons) 869 882 (31) (438) (979) (962) (1,273) (2,020) (2,419) (2,979)

China production (000' tons) 16,968 19,251 21,548 24,453 28,108 31,191 31,824 36,305 37,000 38,900

China consumption (000' tons) 16,834 19,421 21,153 23,904 26,864 28,990 31,492 34,469 36,261 38,074

China Surplus/(Deficit) (000' tons) 134 (170) 395 548 1,244 2,201 332 1,836 739 826

Global production (000' tons) 41,933 45,646 47,306 50,138 53,942 57,485 58,786 63,527 64,875 67,275

Global consumption (000' tons) 40,931 44,934 46,942 50,028 53,677 56,246 59,726 63,711 66,556 69,429

Global Surplus/(Deficit) (000' tons) 1,002 711 363 110 265 1,239 (940) (183) (1,680) (2,154)

Utilization rates (%)

Utilization—world ex-China (%) 82 84 81 78 77 79 81 84 84 85

Utilization—China (%) 78 83 82 83 82 83 78 80 78 80

Growth rates (%)

World ex-China production 4 6 (2) (0) 1 2 3 1 2 2

World ex-China demand 18 6 1 1 3 2 4 4 4 3

China production 24 13 12 13 15 11 2 14 2 5

China demand 21 15 9 13 12 8 9 9 5 5

Global production 11 9 4 6 8 7 2 8 2 4

Global demand 19 10 4 7 7 5 6 7 4 4

National Aluminium Co. Metals & Mining


Exhibit 5: Long term API index at 16-18%; recent spike in alumina prices led by supply disruptions Metallurgical grade alumina prices (US$/t, FOB), 2012 – 2018

Source: CRU, Kotak Institutional Equities estimates

Exhibit 6: Nalco, changes in estimates, March fiscal year-ends, 2019-20E (Rs mn)


Exhibit 7: Nalco, Key assumptions sheet, March fiscal year-ends, 2016-21E


0

5

10

15

20

25

30

35

100

200

300

400

500

600

700

Jul-98

Jul-99

Jul-00

Jul-01

Jul-02

Jul-03

Jul-04

Jul-05

Jul-06

Jul-07

Jul-08

Jul-09

Jul-10

Jul-11

Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

Australian alumina (LHS) API Index (%) [RHS} LT average (%)

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

Net sales 111,513 108,005 110,662 103,511 108,121 111,283 8 (0) (1)

EBITDA 28,801 22,705 22,946 21,206 23,069 23,531 36 (2) (2)

PAT 18,027 14,220 14,555 13,014 14,460 14,941 39 (2) (3)

EPS (Rs) 9.3 7.4 7.5 6.7 7.5 7.7 39 (2) (3)

Aluminium deliveries (tons) 441,600 441,600 441,600 441,600 441,600 441,600 — — —

Aluminium price (US$/ton) 2,200 2,225 2,275 2,275 2,300 2,325 (3) (3) (2)

Alumina deliveries (tons) 1,250,684 1,251,336 1,251,336 1,250,684 1,251,336 1,251,336 — — —

Alumina price (US$/ton) 457 380 387 376 381 385 21 — 1

Re/US$ rate 68.7 69.5 70.0 66.4 67.5 68.5 3 3 2

Revised estimates Old estimates Change (%)

2016 2017 2018 2019E 2020E 2021E

ALUMINIUM

Aluminium metal sales ('000 tons) 372,000 388,500 426,000 441,600 441,600 441,600

Average LME aluminium price (US$/ton) 1,719 1,789 2,167 2,200 2,225 2,275

ALUMINA

Alumina production ('000 tons) 1,953,000 2,100,100 2,106,000 2,120,400 2,120,400 2,120,400

Alumina sales ('000 tons) 1,219,926 1,294,900 1,279,293 1,250,684 1,251,336 1,251,336

Average Alumina price (US$/ton) 295 300 368 457 380 387

Metals & Mining National Aluminium Co.


Exhibit 8: Our fair value of Rs80/share is based on 9X FY2020E core earnings Nalco, Valuation details, March 2020E (Rs mn)


Exhibit 9: NALCO, Profit model, balance sheet and cash flow model, March fiscal year-ends, 2016-2021E (Rs mn)


Multiple

(Rs mn) (X) (Rs mn) Rs/share

EBIT (post tax) 11,823 9 106,403 55

Cash reserves (47,414) (25)

Equity value 153,817 80

Target price (Rs/share) 80

EV

2016 2017 2018 2019E 2020E 2021E


Net sales 68,170 75,430 96,183 111,513 108,005 110,662

EBITDA 9,595 10,797 13,975 28,801 22,705 22,946

Other income 6,051 4,083 2,997 3,225 3,632 3,978

Interest (33) (27) (20) — — —

Depreciaiton (4,261) (4,804) (4,804) (4,713) (4,792) (4,871)

Profit before tax 11,352 10,049 12,148 27,313 21,545 22,052

Current tax (3,669) (2,195) (6,964) (8,194) (6,464) (6,616)

Deferred tax (346) (767) - (1,093) (862) (882)

Net profit 7,871 6,685 13,424 18,027 14,220 14,555

Adjusted net profit 7,518 7,087 7,985 18,027 14,220 14,555



Equity 131,947 102,058 105,048 109,111 109,368 109,959

Deferred tax liability 11,641 12,456 11,515 12,607 13,469 14,351



Net fixed assets 72,834 77,104 80,547 79,966 81,439 82,927

Investments 10,104 12,607 7,106 12,607 12,607 12,607

Cash 51,032 22,872 27,690 24,422 23,605 24,315

Other current assets 33,133 32,433 30,796 35,525 36,939 36,966

Total assets 167,102 145,018 146,138 152,520 154,592 156,815


Operating cash flow excl. working capital 7,787 9,430 15,251 22,647 16,241 16,330

Working capital changes 1,021 4,929 451 (3,053) (462) 724

Capital expenditure (5,986) (7,781) (6,037) (6,172) (6,265) (6,359)

Free cash flow 2,822 6,578 9,665 13,422 9,514 10,695

Ratios

Net debt/equity (X) (0.5) (0.3) (0.4) (0.3) (0.3) (0.3)

RoAE (%) 5.8 6.1 7.7 16.8 13.0 13.3

RoACE (%) 2.7 3.6 5.8 14.8 10.8 10.9


49% yoy growth in EBITDA reflecting strong operating performance across segments

SRF’s 1QFY19 results were well ahead of our expectations led by strong performance in packaging

film business and gradual recovery in the chemicals and polymers segment. Reported revenues

jumped 35% yoy and 8% qoq to `17.4 bn largely led by ramp-up of the new packaging film

facility and higher operating rates in the BOPET facilities. EBITDA increased sharply by 49% yoy

to `3.1 bn led by lower-than-expected employee costs and operating leverage. Net income

increased 29% yoy to `1.34 bn (EPS of `23.3), being impacted by lower other income, higher

finance cost and depreciation for new projects. SRF plans to incur `7.5-8 bn of capex in FY2019

for expansion projects in packaging films and specialty chemicals.

Packaging films benefited from strong BOPET performance. Packaging revenues

increased sharply by 52% yoy and 20% qoq to `6.32 bn led by ramp-up in utilization of the

newly commissioned BOPET and BOPP facilities. EBIT margins improved further to 15.4%, up

170 bps qoq, reflecting improved supply-demand balance in the BOPET films. The company

has approved second BOPET facility and associated resin plant in Thailand at a total cost of

US$60 mn with incremental capacity of 40k mtpa. The company’s BOPET project in Hungary

remains on track. The company expects the supply overhang in the BOPP films to continue

due to two new capacity additions in the current year.

Chemicals business growth driven by refrigerant gas and expansion in CMS. Chemicals

revenues grew robustly by 34% yoy to `4.77 bn, albeit from a low pre-GST base. Segment

EBIT increased 32% yoy to `787 mn reflecting steady yoy EBIT margins at 16.5%.

Fluorochemicals business benefited from strong vehicles sales, which offset subdued demand

from weakness in AC sales. The US business remains subdued due to inventory overhang.

Technical textiles boosted by currency depreciation and cost cuts. Revenues were

flattish yoy at `5 bn; however, EBIT improved 22% yoy to `721 mn reflecting benefits from

recent depreciation in rupee, cost savings and inventory-related gains due to rising crude

prices. EBIT margins remained sequentially steady at 14.4%.

Raise FY2019-21 EPS estimates by 7-8%

We raise FY2019-21E EPS estimates by 7-8% to factor in (1) robust growth in the packaging

business and new capacity additions and (2) robust recovery in 2HFY19 in the specialty

chemicals business. Our SoTP-based TP increases to `2,200 (`2,110 previously).

SRF (SRF) Others

Robust performance. SRF exhibited strong operating performance led by ramp-up of

new projects amid strength in packaging and domestic refrigerant business. We remain

positive on the stock expecting (1) its well-established specialty chemicals franchise to

benefit from gradual recovery in global ag-chem cycle and (2) strong capabilities in the

refrigerants and packaging business to drive growth led by expansion projects. BUY

stays with a revised TP of `2,200 (`2,110 previously).

BUY

AUGUST 09, 2018

RESULT

Coverage view:

Price (`): 1,853

Target price (`): 2,200

BSE-30: 37,888

Tarun Lakhotia

Akshay Bhor

SRF



Market Cap. (Rs bn) EPS growth (%) (10.4) 23.8 32.2




MFs 10.1 EBITDA (Rs bn) 9.1 12.5 15.4


Absolute 12.8 (22.8) 19.8 ROE (%) 13.7 15.0 17.3

Rel. to BSE-30 6.1 (28.3) 1.2 Div. Yield (%) 0.7 0.7 0.8


2,447-1,415

106.4

Others SRF


Exhibit 1: Interim results of SRF, consolidated, March fiscal year-ends (Rs mn)


Exhibit 2: Segment-wise performance of SRF, consolidated, 1QFY16 onwards (Rs mn)


1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 FY2019E FY2018 Change (%)

Net sales 17,413 14,297 12,926 16,123 22 35 8 68,944 55,890 23

Raw material (9,709) (7,506) (7,177) (8,875) 29 35 9 (36,196) (30,320) 19

Employee costs (1,199) (1,289) (1,162) (1,249) (7) 3 (4) (5,653) (4,740) 19

Power and fuel (1,496) (1,354) (1,198) (1,329) 11 25 13 (5,500) (5,008) 10

Exchange fluctuation gain/(loss) (152) — 114 64 NA (233) (336) (152) 463

Other expenses (1,745) (1,603) (1,413) (1,944) 9 24 (10) (8,923) (7,223) 24

EBITDA 3,112 2,545 2,091 2,790 22 49 12 12,520 9,062 38

EBITDA margins (%) 17.9 17.8 16.2 17.3 18.2 16.2

Other income 38 150 203 130 (74) (81) (71) 481 1,151 (58)

Interest cost (443) (445) (271) (425) (1) 64 4 (1,898) (1,239) 53

Depreciation (886) (900) (758) (861) (2) 17 3 (3,479) (3,158) 10

Exceptionals — — — — — —

PBT 1,823 1,350 1,266 1,634 35 44 12 7,623 5,817 31

Tax (484) (338) (228) (395) 43 113 22 (1,906) (1,200) 59

PAT 1,338 1,013 1,038 1,239 32 29 8 5,718 4,617 24

Adjusted PAT 1,338 1,013 1,038 1,239 32 29 8 5,718 4,616 24

Adjusted EPS (Rs) 23.3 17.6 18.1 21.6 32 29 8 99.6 80.4 24

Segment-wise sales

Technical textiles business 5,014 5,815 5,073 4,622 (14) (1) 8 20,039 18,388 9

Chemicals business 4,774 4,603 3,567 5,066 4 34 (6) 21,358 16,114 33

Packaging film business 6,318 4,969 4,148 5,267 27 52 20 22,437 17,823 26

Others 1,322 — 1,116 1,182 18 12 5,181 4,573 13

Total 17,427 15,387 13,903 16,136 13 25 8 69,015 56,898 21

Segment-wise EBIT

Technical textiles business 721 756 591 668 (5) 22 8 2,836 2,529 12

Chemicals business 787 714 594 924 10 32 (15) 3,997 2,694 48

Packaging film business 973 646 450 723 51 116 35 3,184 2,298 39

Others 117 — 73 105 62 11 503 444 13

Total 2,599 2,115 1,708 2,420 23 52 7 10,520 7,964 32

EBIT margins (%)

Technical textiles business 14.4 13.0 11.7 14.4 14.2 13.8

Chemicals business 16.5 15.5 16.7 18.2 18.7 16.7

Packaging film business 15.4 13.0 10.9 13.7 14.2 12.9

Others 8.9 NA 6.5 8.9 9.7 9.7

Overall EBIT margins 14.9 13.7 12.3 15.0 15.2 14.0

Change (%)

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

Segment revenues

Technical textiles 4,925 5,024 4,319 4,326 5,073 4,805 4,892 5,332 5,073 4,759 5,151 4,622 5,014

Chemicals and polymers 3,798 3,852 3,989 4,531 4,466 3,864 3,822 5,063 3,567 4,011 4,529 5,066 4,774

Packaging films 3,528 3,561 3,360 2,993 3,467 3,494 3,352 3,779 4,148 4,107 4,302 5,267 6,318

Others — — — — — — — — 1,116 — — 1,182 1,322

Total 12,231 12,417 11,652 11,833 12,994 12,154 12,055 14,164 13,891 12,864 13,971 16,123 17,413

Yoy growth (%)

Technical textiles (8) (3) (14) (10) 3 (4) 13 23 (0) (1) 5 (13) (1)

Chemicals and polymers 18 21 30 43 18 0 (4) 12 (20) 4 18 0 34

Packaging films 17 1 10 5 (2) (2) (0) 26 20 18 28 39 52

Total 6 4 5 9 6 (2) 3 20 7 6 16 14 25

Segment EBIT

Technical textiles 564 462 213 481 715 610 654 536 591 567 767 668 721

Chemicals and polymers 943 857 1,053 1,052 1,126 676 622 841 594 527 752 924 787

Packaging films 603 490 431 384 601 527 477 366 450 496 608 723 973

Others — — — — — — — — 73 — — 105 117

Total 2,109 1,809 1,697 1,917 2,442 1,813 1,753 1,742 1,708 1,590 2,127 2,420 2,599

EBIT margins (%)

Technical textiles 11.4 9.2 4.9 11.1 14.1 12.7 13.4 10.0 11.7 11.9 14.9 14.4 14.4

Chemicals and polymers 24.8 22.2 26.4 23.2 25.2 17.5 16.3 16.6 16.7 13.1 16.6 18.2 16.5

Packaging films 17.1 13.8 12.8 12.8 17.3 15.1 14.2 9.7 10.9 12.1 14.1 13.7 15.4

Overall EBIT margins 17.2 14.6 14.6 16.2 18.8 14.9 14.5 12.3 12.3 12.4 15.2 15.0 14.9

SRF Others


Exhibit 3: We value SRF at `2,200 SoTP valuation of SRF, March 2020E


Exhibit 4: Consolidated profit model, balance sheet and cash flow statement for SRF, March fiscal year-ends (Rs mn)


Technical textiles business 31 10 307

Chemicals and polymers business 58 22 1279

Packaging films business 37 15 559

Other business 6 10 55

Target price 2,200

Consolidated EPS (March 2020E) 131.6

Implied target P/E multiple (X) 16.7

March 2020E EPS P/E (X) Value per share

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


Sales 37,829 40,181 45,398 45,927 48,218 55,890 68,944 77,025 82,813

EBITDA 6,143 5,053 7,175 9,625 9,970 9,062 12,520 15,449 17,541

Other income 420 235 646 278 455 1,151 481 550 377

Interest (998) (961) (1,376) (1,305) (1,018) (1,239) (1,898) (1,900) (1,735)

Depreciation (2,089) (2,247) (2,450) (2,750) (2,834) (3,158) (3,479) (4,023) (4,535)

Profit before tax 3,476 2,080 3,994 5,849 6,572 5,817 7,623 10,076 11,648

Tax expenses (946) (455) (966) (1,551) (1,422) (1,200) (1,906) (2,519) (3,029)

Extraordinary items — — — — — — — — —

Reported PAT 2,530 1,625 3,028 4,299 5,150 4,617 5,718 7,557 8,620

Adjusted PAT 618 1,625 3,027 4,298 5,149 4,616 5,718 7,557 8,620

Year-end number of shares 57 57 57 57 57 57 57 57 57

Fully diluted number of shares 57 57 57 57 57 57 57 57 57

Adjusted EPS-fully diluted (Rs) 11 28 53 75 90 80 100 132 150


Equity 19,689 20,667 22,963 27,630 31,827 35,645 40,442 46,987 54,493

Total borrowings 17,040 21,753 24,349 21,297 19,774 31,418 32,918 30,418 27,418

Other long term liabilities 2,818 3,422 4,761 4,321 5,702 3,695 3,695 3,695 3,695

Current liabilities and provisions 6,343 9,344 7,466 12,288 14,510 12,871 15,553 17,330 18,705

Total liabilities 45,890 55,186 59,540 65,536 71,813 83,631 92,609 98,430 104,312

Net fixed assets 29,022 36,536 40,230 42,142 46,586 56,763 61,051 63,906 65,045

Investments/other long-term assets 1,856 1,499 2,147 3,558 4,532 3,019 3,019 3,019 3,019

Cash & cash equivalent 3,324 1,089 2,015 5,498 2,669 2,184 2,499 2,512 4,920

Current assets 11,687 16,062 15,148 14,338 18,026 21,664 26,039 28,994 31,327

Total assets 45,890 55,186 59,540 65,537 71,813 83,630 92,609 98,430 104,311


Operating cash flow 4,674 3,705 5,058 7,382 8,000 7,449 8,716 11,030 12,778

Working capital changes (1,484) (1,199) (1,011) 2,214 (2,564) (1,693) (1,694) (1,178) (958)

Capital expenditure (6,779) (7,900) (4,423) (5,729) (6,867) (12,829) (7,768) (6,877) (5,674)

Free cash flow (3,589) (5,394) (375) 3,867 (1,430) (7,072) (745) 2,975 6,146

Ratios (%)

EBITDA margin 16.2 12.6 15.8 21.0 20.7 16.2 18.2 20.1 21.2

Net debt/equity (X) 0.7 1.0 1.0 0.6 0.5 0.8 0.8 0.6 0.4

Book value (R/share) 343 360 400 481 554 621 704 818 949

Adjusted RoAE 3.2 8.1 13.9 17.0 17.3 13.7 15.0 17.3 17.0

Adjusted RoACE 1.9 6.9 8.9 12.3 12.9 8.9 11.5 13.2 14.2


Steady performance for EPC business; backlog provides good visibility

KPTL standalone reported a steady 13%/14%/15% yoy growth in adjusted revenues/EBITDA/PAT

in 1QFY19, benefitting from broad-based growth across segments. The results were weak on

execution given a low base (flat yoy), possibly on issues related to working capital. Net debt has

increased by `1.5 bn in 4MFY19 largely on delay in collections from clients. JMC reported a

tepid 3%/8%/4% yoy growth in revenues/EBITDA/PBT reflecting delays in start of infrastructure

projects, which now account for 37% of its order backlog. Both EPC entities, however, now

boast of a strong order backlog on the back of recent orders, giving visibility of 2-3 years of

over one-year-forward revenues that build in 15-19% yoy growth.

Road projects report cash profit; SSL reports positive PAT

The steady recovery in toll collections across the road projects of JMC has led to cash profit for

these projects. The next step is refinancing of these projects, in which the company indicated

good progress being made. The same can take care of repayment for the year and materially

limit requirement of funding from JMC. Delay in bidding for the six-laning of Wainganga

project, delays prospects of a positive outcome for JMC (not built in our SoTP). SSL benefited

from a sharp increase in its capacity utilization, leading to a positive PAT for the quarter.

Management is hopeful of a positive PAT for the year as well and may go ahead with its

pending equity infusion of `750-800 mn in FY2019.

Broadly retain estimates; revise SoTP to `560 from `530 largely on roll-forward

We marginally revise our estimates for KPTL based on in-line results. For JMC, we do revise

estimates meaningfully to factor in the recent large lift irrigation order it has won. Overall SoTP

increases to `560 from `530 largely on roll-forward to June 2020E EPS; we value both EPC

businesses at 13X ex-other income earnings and ascribe a multiple to the book value of other

assets. We find limited downside risks to our estimates from commodity price movement based

on past margin track-record, although we note increase in share of fixed-price contracts to 60%

from 40-50% earlier. Strong execution required to do justice to the EPC backlog and equity

investments pending in recently won T&D BOOT assets would defer the deleveraging expected

from an EPC business generating 25% adjusted pre-tax RoCE, by a year.

Kalpataru Power Transmission (KPP) Industrials

Steady on EPC front, turnaround in assets. KPTL benefitted from a steady

performance of its EPC business, road assets turning cash positive and Shubham turning

PAT positive. Working capital build-up, though worrying, would likely recede over time.

A healthy backlog and pending equity commitments in BOOT projects would likely

defer the benefits of deleveraging by a year for the high-RoCE-generating EPC business

(25%+ for FY2018 adjusted). We increase SoTP to `560 on roll-forward. Retain BUY.

BUY

AUGUST 09, 2018

RESULT


Price (`): 369


BSE-30: 37,888

Aditya Mongia

Ajinkya Bhat

Kalpataru Power Transmission







MFs 19.3 EBITDA (Rs bn) 10.2 12.7 14.9


Absolute (8.7) (26.1) 3.6 ROE (%) 11.0 12.5 15.2



535-333

56.6

Kalpataru Power Transmission Industrials


Exhibit 1: T&D grew 12% in 1QFY19, infrastructure revenues grew 18% led by pipeline business and contributed to strong order inflows KPTL (standalone) 1QFY19 – key numbers, March fiscal year-ends (Rs mn)

Notes:

(1) Segmental numbers are approximate numbers based on broad yoy segmental growth rates shared by the management in the earnings call.

1QFY18 segmental revenues are thus restated to reflect like-for-like number net of indirect taxes in the pre-GST regime.


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

Sales 13,249 14,389 11,696 19,314 (8) 13 (31) 57,412 48,941 17 68,198 57,412 19

Expenses (11,679) (12,807) (10,324) (17,223) (9) 13 (32) (51,100) (43,649) 17 (60,599) (51,100) 19

Stock 486 — 129 (32) 206 (11) — 206

Raw material & mfg exp. (10,077) — (8,363) (13,756) 21 (27) (41,422) (34,294) (49,640) (41,422) 20

Employee expenses (1,026) — (780) (1,000) 32 3 (3,487) (2,918) (4,433) (3,487) 27

Other operating expenses (1,061) — (1,310) (2,435) (19) (56) (6,397) (6,427) (6,526) (6,397) 2

EBITDA 1,571 1,582 1,372 2,092 (1) 14 (25) 6,312 5,291 19 7,599 6,312 20

Other income 147 102 114 109 480 493 452 480

Interest (279) (255) (220) (310) (1,033) (982) (1,229) (1,033)

Depreciation (194) (204) (188) (191) (766) (777) (897) (766)

PBT 1,245 1,225 1,078 1,699 2 16 (27) 4,993 4,026 24 5,925 4,993 19

Tax (435) (428) (373) (651) (1,773) (1,335) 33 (2,035) (1,773)

Net profit 810 797 704 1,048 2 15 (23) 3,220 2,691 20 3,890 3,220 21

Order details (Rs mn)

Order inflows 26,980 21,300 33,180 27 (19) 93,410 62,000 51 99,403 93,410 6

Order backlog 137,420 97,530 124,040 41 11 124,040 90,000 38 155,246 124,040 25

Key ratios (%)

Raw material cost/sales 72.4 70.4 71.4 71.8 70.1 72.8 71.8

Employee expenses/sales 7.7 6.7 5.2 6.1 6.0 6.5 6.1

Other operating exp./sales 8.0 11.2 12.6 11.1 13.1 9.6 11.1

EBITDA margin 11.9 11.0 11.7 10.8 11.0 10.8 11.1 11.0

PBT margin 9.4 8.5 9.2 8.8 8.7 8.2 8.7 8.7

PAT margin 6.1 5.5 6.0 5.4 5.6 5.5 5.7 5.6

Tax rate 34.9 34.9 34.6 38.3 35.5 33.2 34.3 35.5

EPS (Rs) 5.3 5.2 4.6 6.8 21.0 17.5 25.4 21.0

% change

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

Revenues

T&D 10,300 9,196 16,482 12.0 (37.5) 47,300 43,000 10.0 51,323 47,300 8.5

Infrastructure 2,949 2,499 2,832 18.0 4.1 10,112 5,941 70.2 16,874 10,112 66.9

Income from operations 13,249 11,696 19,314 13.3 (31.4) 57,412 48,941 17.3 68,198 57,412 18.8

% change

Industrials Kalpataru Power Transmission


Exhibit 2: Like-for-like adjusted revenue growth was 9.7% for JMC in 1QFY19 and is expected to pick up in 2HFY19 as some large

infrastructure orders achieve clearances and become executable by end of current quarter JMC 1QFY19 – key numbers, March fiscal year-ends (Rs mn)


Exhibit 3: Debt increased for KPTL due to delays in collections but has started normalizing and has reduced to Rs85 bn as of July 2018 Balance sheet highlights of KPTL and JMC, March fiscal year-ends, 1QFY17-1QFY19 (Rs mn)


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

Sales 6,887 6,667 7,230 3.3 (4.7) 27,556 23,284 18.3 31,156 27,556 13.1

Expenses (6,178) (6,014) (6,396) 2.7 (3.4) (24,709) (21,173) 16.7 (27,822) (24,709) 12.6

Stock — — — — 28 —

Raw material consumption (2,714) (2,725) (2,927) (0.4) (7.3) (11,224) (8,444) (11,224)

Construction expenses (2,665) (2,229) (2,204) 19.5 20.9 (9,302) (8,950) (9,302)

Employee expenses (716) (642) (730) 11.4 (2.0) (2,664) (2,358) (2,664)

Other operating expenses (85) (418) (535) (79.8) (84.2) (1,520) (1,450) (1,520)

EBITDA 709 654 834 8.4 (15.0) 2,848 2,111 34.9 3,334 2,848 17.1

Other income 64 39 39 63.3 62.4 176 143 23.3 188 176 6.8

Interest (241) (201) (214) 20.1 12.6 (858) (843) 1.8 (971) (858) 13.2

Depreciation (185) (160) (214) 15.6 (13.8) (717) (574) 24.9 (830) (717) 15.8

PBT 347 332 445 4.4 (22.1) 1,450 838 73.0 1,721 1,450 18.8

Tax (81) (115) (103) (29.2) (20.9) (388) (256) 52.0 (478) (388) 23.2

Net profit 266 218 343 22.1 (22.4) 1,061 583 82.2 1,243 1,061 17.1

Key ratios (%)

Direct expenses/sales 78.1 74.3 71.0 74.5 74.6 74.5

Employee expenses/sales 10.4 9.6 10.1 9.7 10.1 9.7

Other operating expenses/sales 1.2 6.3 7.4 5.5 6.2 5.5

EBITDA margin 10.3 9.8 11.5 10.3 9.1 10.7 10.3

PBT margin 5.0 5.0 6.2 5.3 3.6 5.5 5.3

Tax rate 23.4 34.5 23.0 26.8 30.5 27.8 26.8

PAT margin 3.9 3.3 4.7 3.9 2.5 4.0 3.9

% change

1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 yoy qoq

KPTL

Loan funds 5,298 7,615 7,154 6,955 7,869 7,553 8,666 7,741 10,691 2,822 2,950

Long-term borrowings 3,023 2,404 2,334 3,212 3,136 4,056 3,985 3,912 3,781 645 (131)

Short-term borrowings 1,829 3,746 3,420 2,315 2,365 2,150 3,351 2,497 6,527 4,162 4,030

Current maturities of LT debt 446 1,465 1,400 1,428 2,368 1,347 1,330 1,332 383 (1,985) (949)

JMC

Loan funds 7,526 6,729 7,067 6,373 6,687 7,773 7,314 7,367 8,045 1,358 678

Long-term borrowings 2,675 2,431 2,155 2,313 2,319 3,127 3,149 3,143 3,258 939 115

Short-term borrowings 3,713 3,142 3,734 3,401 3,770 4,056 3,448 3,366 3,893 123 527

Current maturities of LT debt 1,138 1,156 1,178 659 598 590 717 858 894 296 36

Shubham Logistics

Loan funds 4,487 4,253 4,282 4,248 4,178 4,105 4,186 4,283 4,385 207 102

Long-term borrowings 3,839 3,819 3,858 3,857 3,816 3,517 3,507 3,511 3,579 (237) 68

Short-term borrowings 79 121 103 65 28 30 160 207 225 197 18

Current maturities of LT debt 569 313 321 326 334 558 519 565 581 247 16

Change



Exhibit 4: Geographical split of KPTL (standalone) backlog March fiscal year-ends, 1QFY18-1QFY19 (%)


1QFY19 earnings call takeaways

Guidance retained for FY2019.

KPTL standalone. The company has retained the 15%+ revenue growth guidance for

FY2019 for KPTL standalone on the back of revenue visibility offered by the strong

order backlog. The company expects `90-100 bn of order inflow in FY2019. This

compares well against YTD FY2019 (Apr-Jul) order inflow of `36 bn and L1 position in

excess of `23 bn achieved so far. The management expects 60% of the order inflow

to be received from T&D and 40% from infrastructure segments. The management

expects FY2019 EBITDA margin at ~11% on a conservative basis. Pipeline business

profitability is similar to T&D while railways is still catching up and expects to reach

double-digit margin profile by end-FY2019. Working capital currently stands at ~90

days of sales, which the company targets to bring down to 80-85 days by end-FY2019.

JMC Projects. For JMC Projects, the management has retained 15% growth guidance.

The company is guiding for order inflow of `50 bn in FY2019, which compares well

against YTD FY2019 order inflow of `35 bn and L1 position in excess of `10 bn. The

execution growth is expected to improve in 2HFY19 by which time some of the large

infrastructure orders would have achieved all clearances and would have become

executable. Margin is expected to remain stable as well.

Shree Shubham Logistics. Shree Shubham Logistics (SSL) will continue to pursue

lease-based model of operations (currently 40% of revenue contribution from leased

warehouses). The company will strive to achieve PAT breakeven in FY2019 and greater

improvement in FY2020. The company plans to complete the targeted equity infusion

of `750-800 mn in SSL in FY2019.

Increase in debt levels due to timing mismatch, retains interest cost guidance. The

management explained that the increase in debt in 1QFY19 for KPTL standalone was

mainly due to payment delays from customers. This has already started correcting and the

current standalone debt as of Jul 2018 stands at `8.5 bn. Apart from planned equity

infusion of `750-800 mn in SSL in FY2019, the outstanding equity commitment on BOOT

projects stands at `2.3 bn to be contributed in the next two years (`700-800 mn in

FY2019 and the rest in FY2020). The standalone debt will thus go up and the company

targets to keep it at ~`10 bn by end-FY2019. The management has retained its guidance

of achieving interest cost at 1.8% of sales for the year.

Domestic

66%

Africa

20%

CIS

3%

SAARC/ME

NA/others11%

Standalone 1QFY19-end backlog (Rs137 bn)

Domestic

57%Africa

23%

CIS

2%

Others

0%

SAARC/ME

NA/others18%

Standalone 1QFY18-end backlog (Rs97 bn)



For JMC Projects, BOT assets have reached daily revenue of `5.5 mn as JMC’s share,

above the breakeven figure of `4.9 mn/day. Thus, the loss funding for JMC will remain

low as envisaged by the management to `100-150 mn. Another `500 mn of funding will

be provided by JMC to BOT SPVs for debt repayment.

Outlook on end markets.

Power T&D. KPTL is witnessing good growth from states such as Bihar, West Bengal,

Karnataka and Tamil Nadu. The company has done sufficient due diligence on states

and SEBs to ensure that revenues will be realized from them. Based on the winners of

TBCB orders, corresponding tenders from PGCIL or private developers are also

expected in FY2019. The company currently has tower manufacturing capacity of

180,000 tons per annum.

Infrastructure. Railways business is expected to ramp up in the coming quarters and

reach double-digit margin. The company also plans to set up new manufacturing

capacity, specifically targeted at railway electrification orders. The company also sees

good international opportunities, especially in the neighboring countries (Bangladesh

and Sri Lanka) for the infrastructure business.

Real estate. The real estate market remains weak as of now. JMC Projects has

exposure of `39 bn to private residential projects. The management is working with

only quality developers where the cash flow risk for JMC is minimal. With RERA

implementation and increasing investments by private equity players in the sector, the

management thinks that the client base can be expanded while ensuring minimal risk.

Buildings & factories. In the first four months of FY2019, JMC received only one B&F

order for a government building. The order inflow guidance for FY2019 envisages the

rest of the orders for JMC in the next three quarters to largely emanate from buildings

& factories. The company also mentioned that with tighter liquidity situation in the

credit market, especially for the smaller contractors, clients have started to prefer tier-1

contractors such as JMC and are also willing to pay a premium for it.

Exhibit 5: Revision in estimates of KPTL standalone, March fiscal year-ends, 2018-21E (Rs mn)


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

Income statement

New orders 91,452 99,403 113,319 129,422 99,403 111,331 123,379 — 2 5

Yoy growth (%) 62.5 8.7 14.0 14.2 8.7 12.0 10.8

Gross revenue 57,412 68,198 81,515 94,836 68,520 83,769 95,506 (0) (3) (1)

Yoy growth (%) 17.3 18.8 19.5 16.3 19.3 22.3 14.0

EBITDA 6,312 7,599 9,037 10,548 7,533 9,204 10,565 1 (2) (0)

EBITDA margin (%) 11.0 11.1 11.1 11.1 11.0 11.0 11.1 14 bps 9 bps 6 bps

PBDIT 6,792 8,051 9,371 10,813 7,942 9,551 10,861

Interest & finance charges (1,033) (1,229) (1,294) (1,138) (1,122) (1,209) (1,118) 9 7 2

Depreciation (766) (897) (1,081) (1,286) (899) (1,086) (1,301)

PBT 4,993 5,925 6,996 8,389 5,921 7,256 8,442 0 (4) (1)

Tax (1,773) (2,035) (2,402) (2,881) (2,033) (2,491) (2,899)

PAT 3,220 3,890 4,594 5,509 3,888 4,764 5,543 0 (4) (1)

Standalone EPS (Rs) 21.0 25.4 29.9 35.9 25.3 31.0 36.1 0 (4) (1)

% revisionNew estimates Old estimates



Exhibit 6: We envisage pre-tax RoACE to reach 20% in the next three years even on an unadjusted basis Comparison of pre-tax RoACE for KPTL on reported and adjusted basis, March fiscal year-ends, 2010-21E (%)

Notes: (a) Adjusted RoACE excludes investments and L&A support given to subsidiaries and any corresponding related income booked in P&L.


Exhibit 7: BOT road projects of JMC have shown a marked improvement in toll collection; daily total

collection has crossed the breakeven level of Rs4.9 mn/day Trend in JMC's share of daily toll collection for BOT road projects, March fiscal year-ends, 1QFY18-1QFY19 (Rs mn/day)


2221

17

14 14 1314

17 1718 19

2022

21

19

17 17 16

21

24

2726

28 28

0

5

10

15

20

25

30

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Unadjusted Adjusted for investments/L&A and income from subsidiaries

4.85

4.41

5.11 5.33 5.45

0.0

1.0

2.0

3.0

4.0

5.0

6.0

0.6

0.8

1.0

1.2

1.4

1.6

1.8

1QFY18 2QFY18 3QFY18 4QFY18 1QFY19

Total (RHS) Kurukshetra (LHS) Brij Bhoomi (LHS)

Wainganga (LHS) Vindhyachal (LHS)



Exhibit 8: Improving health of road SPVs is reflected in reduction in additional funding provided by

JMC to road project SPVs by way of equity and loans Trend in JMC's funding contribution to BOT road SPVs by way of equity and loans, March fiscal year-ends, 2014-1QFY19 (Rs mn)


Exhibit 9: We arrive at a June-2020E EPS-based SoTP of Rs560 for KPTL SoTP valuation of KPTL, March fiscal year-ends


1,030

1,430

884

709

450

234

-

200

400

600

800

1,000

1,200

1,400

1,600

2014 2015 2016 2017 2018 1QFY19

Earnings

/book

Valn

multiple Value

KPTL

share

Value for

KPTL share

Per share

value

(Rs mn) (X) (Rs mn) (%) (Rs mn) (Rs) Valuation basis

Kalpataru valuation

Core construction business (Ex-other income from subs) 4,406 13.0 57,280 100.0 57,280 373 13X one-year fwd EPS

Investments (Ex-JMC)

Jhajjar KT Transco 1,272 49.7 632 4 one-year fwd valuation

Satpura Transco 2,591 100.0 2,591 17 one-year fwd valuation

Alipurduar Transco 3,440 100.0 3,440 22 one-year fwd valuation

Kohima Mariani Transco 5,766 74.0 4,267 28 one-year fwd valuation

Shubham Logistics 163 80.0 130 1 one-year fwd book value

Energylink (Indore commercial-residential project) 2,251 100.0 2,251 15 0.7X investment

Amber Real Estate (Thane commercial project) 10 100.0 10 0 1X investment

Other investments (incl. recent BOOT wins) 440 100.0 440 3 0.8 X book

Internal loans to subsidiaries (Shubham and others) 639 100.0 639 4 1 X loan

Investments total 16,572 14,400 94

JMC valuation

Core construction business 21,134 67.2 14,202 93 13X one-year fwd earnings

Kurukshetra Expressway 3,263 33.6 1,096 7 one-year fwd valuation

Brij Bhoomi Expressway 532 67.2 358 2 one-year fwd valuation

Wainganga Expressway (2,454) 67.2 (1,649) (11) one-year fwd valuation

Vindhyachal Expressway 1,598 67.2 1,074 7 one-year fwd valuation

Internal loans to road SPVs 4,091 67.2 2,749 18 March-19E adjustment

JMC total 28,164 14,264 93 20% hold co. discount on SOTP

Total value 102,015 85,944 560



Exhibit 10: Standalone income statement of KPTL, March fiscal year-ends, 2012-21E (Rs mn)


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

FY2018-21

CAGR (%)

Income statement

Net revenue 30,327 33,354 40,553 44,223 43,020 48,941 57,412 68,198 81,515 94,836 18

Yoy growth (%) 5.5 10.0 21.6 9.1 (2.7) 13.8 17.3 18.8 19.5 16.3

Expenditure (27,035) (30,133) (36,690) (39,955) (38,489) (43,649) (51,100) (60,599) (72,479) (84,288)

Material cost (14,886) (16,492) (19,095) (19,253) (16,777) (20,343) (26,416) (31,815) (38,028) (44,243)

Manufacturing & operating exp. (7,347) (8,551) (10,414) (11,974) (12,360) (13,950) (15,006) (17,825) (21,306) (24,787)

Employee expenses (1,702) (2,006) (2,602) (3,136) (2,928) (2,918) (3,487) (4,433) (5,706) (6,639)

Admin and other expenses (2,956) (3,885) (5,011) (5,980) (5,386) (6,427) (6,397) (6,526) (7,439) (8,620)

EBITDA 3,292 3,221 3,863 4,267 4,531 5,291 6,312 7,599 9,037 10,548 19

EBITDA margin (%) 10.9 9.7 9.5 9.6 10.5 10.8 11.0 11.1 11.1 11.1

Other income 512 477 484 522 537 493 480 452 334 265

Interest & finance charges (1,082) (1,220) (1,460) (1,409) (1,274) (982) (1,033) (1,229) (1,294) (1,138)

Depreciation (481) (523) (696) (852) (837) (777) (766) (897) (1,081) (1,286)

PBT 2,241 1,955 2,191 2,529 2,957 4,026 4,993 5,925 6,996 8,389

Tax (592) (579) (727) (873) (1,033) (1,335) (1,773) (2,035) (2,402) (2,881)

PAT 1,649 1,377 1,464 1,656 1,924 2,691 3,220 3,890 4,594 5,509 20

EPS (Rs) 10.7 9.0 9.5 10.8 12.5 17.5 21.0 25.4 29.9 35.9 20

Balance sheet

Shareholder funds 17,429 18,463 19,542 20,708 22,149 24,787 27,700 31,289 35,581 40,788

Share capital 307 307 307 307 307 307 307 307 307 307

Reserves & surplus 17,122 18,156 19,235 20,401 21,842 24,480 27,394 30,982 35,275 40,481

Loan funds 4,721 5,911 7,850 9,714 5,987 6,954 7,742 10,000 9,500 7,500

Deferred tax liabilities 98 118 138 54 (259) (410) (312) (312) (312) (312)

Total sources of funds 22,248 24,492 27,529 30,475 27,877 31,331 35,130 40,977 44,769 47,976

Total net fixed assets 4,529 5,386 5,918 5,590 5,426 5,237 5,434 6,137 6,806 7,520

Investments 4,049 3,351 3,836 3,939 5,178 7,160 7,849 9,555 10,754 10,754

Cash and bank balance 1,034 569 647 753 1,062 2,110 816 1,017 1,471 884

Net current assets 12,636 15,186 17,129 20,193 16,211 16,825 21,030 24,268 25,738 28,817

Total application of funds 22,248 24,492 27,530 30,475 27,877 31,331 35,130 40,977 44,769 47,976



Exhibit 11: JMC Projects’ standalone financials, March fiscal year-ends, 2012-21E (Rs mn)


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

Income statement

Total revenue 20,764 25,419 26,588 23,999 24,007 23,284 27,556 31,156 38,980 44,803

Yoy growth (%) 51.1 22.4 4.6 (9.7) 0.0 (3.0) 18.3 13.1 25.1 14.9

Total expenditure (19,222) (24,234) (25,186) (22,365) (21,872) (21,173) (24,709) (27,822) (34,810) (40,009)

Increase/(decrease) in WIP 373 147 175 241 — —

Cost of materials (8,131) (8,506) (8,824) (8,593) (8,588) (8,444) (11,224)

Construction and mining expenses (8,849) (13,127) (13,495) (10,776) (9,866) (8,922) (9,302)

Employee expenses (1,421) (1,480) (1,689) (2,003) (2,256) (2,357) (2,664)

Other operational expenses (1,193) (1,268) (1,353) (1,235) (1,162) (1,450) (1,520)

EBITDA 1,542 1,185 1,402 1,634 2,136 2,111 2,848 3,334 4,171 4,794

EBITDA margin (%) 7.4 4.7 5.3 6.8 8.9 9.1 10.3 10.7 10.7 10.7

Other income 112 72 41 132 83 143 176 188 160 134

Interest and finance charges (539) (550) (551) (841) (1,051) (843) (858) (971) (997) (946)

Depreciation (471) (549) (589) (489) (517) (574) (717) (830) (1,010) (1,208)

PBT 644 159 302 436 651 838 1,450 1,721 2,324 2,774

Tax expenses (124) 24 (72) (138) (217) (255) (388) (478) (669) (826)

PAT 519 183 230 299 434 583 1,061 1,243 1,655 1,948

Balance sheet


Share capital 261 261 261 261 336 336 336 336 336 336


Loan funds 2,884 4,010 4,294 6,688 7,360 6,363 7,366 8,166 7,666 7,166

Deferred tax liability (net) (78) (175) (166) (153) (449) (363) (352) (352) (352) (352)



Investments 1,178 1,707 1,878 1,891 1,797 1,797 4,172 4,172 4,172 4,172

Cash & bank balance 186 245 240 147 345 259 1,460 946 (156) (537)

Net current asset (excl. cash) 2,924 3,658 3,722 6,077 7,638 7,092 5,059 7,135 8,964 10,425




Exhibit 12: Profit and loss, balance sheet and cash-flow statement of KPTL (consolidated), March fiscal year-ends, 2012-21E (Rs mn)


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

Income statement

Net reveneus 53,080 60,850 70,903 71,982 71,849 75,125 87,044 102,679 123,327 142,870

Expenditure (48,076) (56,106) (65,006) (64,939) (63,950) (66,451) (76,828) (89,996) (108,437) (125,696)

EBITDA 5,004 4,745 5,897 7,043 7,899 8,674 10,217 12,683 14,890 17,173

Other income 333 357 233 250 181 240 253 228 217 190

Interest & finance charges (1,576) (1,938) (2,488) (3,370) (4,140) (3,845) (3,777) (4,180) (4,011) (3,795)

Depreciation (986) (1,224) (1,490) (1,683) (1,862) (1,805) (1,915) (2,890) (3,187) (3,629)

PBT 2,774 1,940 2,153 2,241 2,078 3,264 4,778 5,842 7,908 9,939

Tax (735) (595) (914) (1,086) (954) (1,375) (1,827) (2,044) (2,472) (2,997)

Recurring PAT from operations 2,040 1,345 1,239 1,154 1,124 1,889 2,951 3,798 5,436 6,942

Share of JVs — — — — (366) (316) (168) (135) (95) (53)

Minority interest (153) (50) (17) 49 342 292 24 (126) (420) (603)

Recurring PAT for common shareholders 1,887 1,295 1,222 1,204 1,100 1,864 2,807 3,537 4,921 6,286

Recurring EPS for common shareholders (Rs) 12.3 8.4 8.0 7.8 7.2 12.1 18.3 23.0 32.1 41.0

Balance sheet


Share capital 307 307 307 307 307 307 307 307 307 307


Minority interest 1,286 1,316 1,436 1,422 1,539 1,507 1,464 1,590 2,010 2,613

Loan funds 12,812 18,313 27,314 36,841 29,222 28,486 33,200 35,419 34,373 30,069

Deferred tax liabilities 30 (24) 96 90 (799) (1,070) (1,304) (1,304) (1,304) (1,304)



Investments 836 112 102 113 625 447 514 514 514 514

Goodwill on consolidation 202 202 202 201 202 202 202 202 202 202

Cash and bank balance 1,720 1,029 1,172 1,381 1,525 2,630 2,787 3,038 8,616 6,310

Net current assets 14,929 14,559 17,986 23,007 19,190 18,421 18,946 23,898 26,569 30,946

Miscellaneous expenditure — — — — — — — — — —


Cash flow statement

Operating cash before working capital changes 4,602 4,506 5,216 6,207 7,126 7,539 8,643 10,867 12,634 14,366

Change in working capital/other adjustments (3,184) 370 (3,427) (5,021) 3,817 769 (525) (4,953) (2,671) (4,377)

Net cash flow from operating activities 1,418 4,877 1,789 1,186 10,943 8,308 8,119 5,915 9,963 9,989

Cash (used)/realised in investing activities (4,584) (8,668) (8,499) (7,014) 11,531 (1,351) (8,958) (3,266) 1,068 (3,842)

Free cash flow (3,686) (4,516) (6,720) (5,816) 22,986 6,779 (773) 2,648 11,031 6,147

Growth (%)

Revenue growth 21.9 14.6 16.5 1.5 (0.2) 4.6 15.9 18.0 20.1 15.8

EBITDA growth 3.6 (5.2) 24.3 19.4 12.2 9.8 17.8 24.1 17.4 15.3

EPS growth (5.7) (31.4) (5.6) (1.5) (8.6) 69.4 50.6 26.0 39.1 27.7

Key ratios

EBITDA margin (%) 9.4 7.8 8.3 9.8 11.0 11.5 11.7 12.4 12.1 12.0

PAT margin (%) 3.6 2.1 1.7 1.7 1.5 2.5 3.2 3.4 4.0 4.4

ROE (%) 11.7 7.1 6.1 5.3 5.0 8.1 11.6 13.4 16.8 18.5

ROCE (%) 10.9 7.5 6.0 5.2 6.0 7.8 9.3 10.4 12.1 13.5

Net debt/equity 0.6 0.9 1.2 1.6 1.2 1.1 1.1 1.1 0.7 0.6

Net debt/EBITDA 2.2 3.6 4.4 5.0 3.5 3.0 3.0 2.6 1.7 1.4

Book value per share (Rs) 121 127 137 144 146 158 174 195 225 264


Cash-flows buoyant though not as strong as 4QFY18, land payment leads to cash outflows

Collections from real estate operations for the quarter were at `5 bn (`5.9 bn in 4QFY18 and

`5.7 bn in 1QFY18) with net cash inflows of `2 bn. Contract operations had gross cash inflows

of `2.3 bn and net cash inflows of `418 mn. Post financial outflow of `807 mn, net operating

cash flows for the quarter were at `800 mn. Net cash flow for the quarter was negative at

`634 mn due to payment for land parcel leading to cash outflow of `1.3 bn. Net debt for the

company has remained largely unchanged at `22 bn over the trailing four quarters, and is up

from `20 bn as of June 2018.

Sales momentum maintained, through incremental sales from lower value projects

Sobha sold 0.96 mn sq. ft of area in 1QFY19 for a value of `7.6 bn (value of Sobha’s share of

sales was `6.1 bn). Sobha’s share of realization was lower by 8% yoy at `6,372/ sq. ft in

1QFY19. Bangalore continues the dominance on sales, though with a lower contribution of

64% in 1QFY19 compared to 74% in 4QFY18 and 73% in 1QFY18. Change in sales mix likely

reflects in the lower blended realizations, even as group housing projects in Gurgaon and Kochi

did well. Sales grew 18% yoy on volumes and nearly 9% in value terms, highlighting more sales

from tier-2 cities in 1QFY19. Sobha launched one new project during the quarter—‘Sobha

Meadows’ in Mysore with total saleable area of 0.13 mn sq. ft. The company also received

RERA approval for its Bangalore project name ‘Sobha Lake Gardens’ situated at Old Madras

Road with total saleable area of 0.89 mn sq. ft. This project is scheduled for sale in July 2018.

Sobha also announced an investment of `5 bn in Gujarat International Finance Tech-City (GIFT

City) along with a few other launches slated for later quarters.

Sales momentum maintained; continued investment in land minimizes debt reduction

Sobha’s strength lies on consistent sales from ongoing projects during construction phase.

We maintain our growing sales momentum for Sobha, especially with more clarity from the

forthcoming launches. But at CMP, we believe the stock is fairly valued. Although operating

cash flow before land has been positive, new land payments and capex have consistently

increased debt.

Sobha (SOBHA) Real Estate

Healthy metrics, reported earnings distorted. Sobha maintains high sales (0.96 mn

sq. ft in 1QFY19), though lower contribution from the higher value market of Bangalore

led to lower blended realizations of `6,372/sq. ft (-8% yoy). OCF before land payments

at `800 mn remained healthy, though payment for land (`1.3 bn) implied a marginal

increase in net debt to `22.6 bn. Healthy sales and cash flow generation as well as

improving sales prospects from new launches are already factored in the CMP. Maintain

REDUCE rating and target price of `510.

REDUCE

AUGUST 09, 2018

RESULT


Price (`): 497


BSE-30: 37,888

Murtuza Arsiwalla

Samrat Verma

Sobha Developers







MFs 10.0 EBITDA (Rs bn) 5.2 5.3 7.1


Absolute 0.9 (6.7) 31.3 ROE (%) 8.0 9.0 14.8

Rel. to BSE-30 (5.0) (13.3) 11.0 Div. Yield (%) 1.4 1.4 1.4


695-345

47.1

Sobha Real Estate


Impact of Ind-AS 115—Sobha moves to project completion method

Sobha has adopted the project completion method of accounting for revenues from the real

estate projects. Consequently the company has written back revenues of aggregating `32

bn (which will now be accounted upon completion) leading to reduction in retained

earnings by `7.5 bn. We note that adoption of Ind-AS 115 led to revenue recognition of

`3.6 bn in 1QFY19 that would have been `5.6 bn under the erstwhile method of accounting.

PAT for 1QFY19 came in at `534 mn instead of `706 mn under the erstwhile system of

accounting. We note that adoption of Ind-AS 115 led to downward revision in net worth by

`7.5 bn, while the revenue reversal would lead to increase in inventories (~`25 bn) as well as

customer advances by `32.6 bn. We note that the change in accounting would have no

impact on cash flows, and is only a change in the system of accrual accounting. We note

that our EPS estimates for FY2019 and FY2020 now stands at `23.5 (from `20) and `35.6

(from `23) owing to change in accounting to project completion method.

Land bank increases so does quantum of completed projects

Sobha’s land bank increased by 1.55 mn sq. ft on a net basis with net addition of 1.3 mn sq.

ft at Thirissur. The value of the land bank (at cost) now stands at `27 bn and has been

increasing from `22.5 bn in 1QFY17 and `23.7 bn in 1QFY18. Management highlighted

during the call that they believe in continuing in investing in new land projects.

Sobha’s net cash flows from ongoing and completed residential projects stands at `61.8 bn,

largely unchanged from `62 bn as of 1QFY18. However, the quantum of ongoing projects is

down to 23.67 mn sq. ft (26.22 mn sq. ft as of 1QFY18) while the share of completed

projects increased to 13.17 mn sq. ft (9.46 mn sq. ft as of 1QFY18). At the current quarterly

cash flow of `2 bn in 1QFY19, the current cash flows will likely accrue over 8 years.

Exhibit 1: Lower cash inflows and land payments led to sequential drop in free cash generation Sobha: Cash flow analysis, March fiscal year-ends, 2016-1QFY19


2016 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19

Real estate sales 20,119 4,698 5,182 3,732 5,048 5,627 5,927 6,105 8,118 7,624

Operational cash inflows 22,549 5,408 5,926 5,729 6,948 7,295 6,936 6,744 9,107 7,371

Real estate 15,591 3,731 4,129 3,880 4,856 5,738 4,338 4,874 5,980 5,030

Contractual 6,958 1,677 1,797 1,849 2,092 1,557 2,598 1,870 3,127 2,341

Operational cash outflows

Real estate project expenses (9,544) (2,220) (2,289) (2,408) (2,573) (2,960) (2,910) (3,247) (3,516) (3,044)

Contract project expenses (5,078) (1,359) (1,416) (1,423) (1,662) (1,585) (1,572) (1,312) (2,329) (1,923)

Statutory dues and other taxes (1,120) (241) (340) (394) (436) (372) (275) (160) (15) (55)

Corpus repayment (117) (38) (42) (63) (44) (53) (23) (68) (74) (67)

COH (1,464) (348) (343) (339) (317) (399) (454) (415) (496) (425)

Advertising and marketing (455) (176) (131) (329) (117) (113) (138) (153) (200) (250)

Financial outflows

Interest (2,671) (615) (786) (587) (729) (704) (785) (633) (717) (660)

Income tax (609) (107) (169) (169) (285) (273) (184) (203) (161) (147)

OCF before land payments 1,491 304 410 17 785 836 595 553 1,599 800

Dividend payout (b) (826) — (814) — — — (290) (624) — —

Cash flow post payouts 665 304 (404) 17 785 836 305 (71) 1,599 800

Monetization of land — 400 430 — — — — — — —

Land payments (1,671) (240) (503) (227) (344) (361) (2,794) (241) (209) (1,309)

Investment in subsidiaries — — — — (347) — — — — —

Operating cash flow (1,006) 464 (477) (210) 94 475 (2,489) (312) 1,390 (509)

Capex (864) (25) (15) (13) (22) (12) (13) (22) (12) (8)

Capex - commercial real estate (316) (48) (35) (45) (52) (88) (43) (71) (86) (59)

CSR (73) (58) (36) (35) (22) (48) (38) (42) (7) (58)

Free cash flow (2,259) 333 (563) (303) (2) 327 (2,583) (447) 1,285 (634)

Net debt 20,604 20,250 20,602 20,838 20,736 20,247 22,832 23,276 21,991 22,625

Real Estate Sobha


Exhibit 2: Net debt remained largely unchanged due to land payments during the quarter Sobha: Debt, March fiscal year-ends, 2012-1QFY19


Exhibit 3: Earnings are not comparable due to adoption of Ind-AS 115 from 1QFY19 Sobha: 1QFY19 results snapshot, March fiscal year-ends (Rs mn)


2012 2013 2014 2015 2016 2017 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19

Interest rate (%) 13.9 13.5 12.8 12.6 12.1 12.5 10.1 9.9 9.7 9.4 9.3

Interest payments (Rs mn) 2,002 2,022 2,031 2,495 2,822 2,785 704 785 716 706 713

Gross debt (Rs mn) 12,408 13,787 14,044 20,588 22,049 22,395 21,635 24,700 24,465 23,346 23,489

Net debt (Rs mn) 11,820 13,118 12,989 18,957 20,592 20,736 20,247 22,832 23,276 21,991 22,625

Notes:

(a) Quarterly cost of debt, as given by the management presentation.

(b) Yearly cost of debt is derived from from the finance statements, includings cost of raising monies.

(c) Gross interest payments include fees for raising monies. For 1HFY18 net of interest earned.

% change

1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 FY2019E FY2018 % chg.

Financials snapshot

Net sales 5,977 7,327 6,789 7,696 (18) (12) (22) 29,291 27,870 5

Operating costs (4,671) (6,000) (5,574) (6,332) (22) (16) (26) (23,960) (22,672) 6

EBITDA 1,306 1,326 1,215 1,364 (2) 7 (4) 5,331 5,198 3

Other income 124 102 97 196 22 28 (37) 417 496 (16)

Interest costs (541) (517) (449) (518) 5 20 4 (1,719) (1,978) (13)

Depreciation (149) (144) (135) (135) 3 10 10 (660) (544) 21

PBT 740 767 728 907 (4) 2 (18) 3,368 3,172 6

Taxes (214) (245) (251) (253) (13) (15) (15) (1,142) (1,003) 14

PAT 526 522 477 654 1 10 (20) 2,226 2,170 3

Consolidated PAT 526 522 477 654 2,226 2,170

EPS (Rs/share) 5.6 5.5 4.9 6.9 — —

Key ratios

EBITDA margin (%) 21.9 18.1 17.9 17.7 18.2 18.7

PAT margin (%) 8.8 7.1 7.0 8.5 7.6 7.8

Effective tax rate (%) 28.9 32.0 34.5 27.9 33.9 31.6

Operations snapshot (only real estate vertical)

Area sold (mn sq. ft) 0.96 0.82 1.02 18 (5)

Value (Rs mn) 6,118 5,627 6,558 9 (7)

Collections (Rs mn) 5,030 5,738 5,980 (12) (16)

Sobha Real Estate


Exhibit 4: Sales volumes remain robust, though changing mix with lower contribution from Bangalore led to drop in realizations Sobha: Sales details, March fiscal year-ends, 2011-1QFY19


Exhibit 5: Increase in land bank during the quarter was on account of addition of land at Thirissur Details of land bank of Sobha, March fiscal year-ends (mn sq. ft, Rs mn)


Sales 2011 2012 2013 2014 2015 2016 2017 1QFY18 2QFY18 3QFY18 4QFY18 FY2018 1QFY19

Bangalore 2.11 2.26 2.38 2.41 2.44 2.59 2.26 0.59 0.61 0.64 0.75 2.60 0.61

Thrissur 0.38 0.30 0.34 0.36 0.12 0.10 0.08 0.01 0.02 0.02 0.01 0.06 0.03

Coimbatore 0.13 0.09 0.06 0.07 0.05 0.02 0.03 0.02 0.01 0.01 0.03 0.07 0.03

Pune 0.15 0.13 0.14 0.08 0.11 0.05 0.05 (0.01) 0.01 — 0.01 0.00 0.00

Mysore — 0.09 0.03 0.08 0.09 0.12 0.08 0.01 0.02 0.02 0.01 0.07 0.05

Gurgaon — 0.32 0.51 0.13 0.08 0.07 0.23 0.12 0.08 0.08 0.08 0.36 0.10

Chennai — 0.09 0.29 0.30 0.20 0.30 0.18 0.03 0.03 0.03 0.02 0.10 0.05

Kozhikode — — — 0.13 0.09 0.09 0.03 0.01 0.02 0.01 0.00 0.05 0.01

Kochi — — — 0.02 0.10 0.04 0.07 0.03 0.06 0.11 0.12 0.32 0.08

Total 2.78 3.28 3.76 3.59 3.28 3.38 3.00 0.82 0.86 0.93 1.02 3.63 0.96

Value 11,335 17,019 22,446 23,424 20,949 20,118 18,660 5,627 5,927 6,105 6,558 24,217 6,118

Realizations 4,082 5,182 5,977 6,534 6,389 5,946 6,216 6,902 6,883 6,541 6,457 6,680 6,372

Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19

Saleable area (mn sq. ft) 202.4 201.3 201.6 201.9 203.2 204.5 204.5 204.0 205.5

Gurgaon 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

Bangalore 75.9 75.6 75.6 75.6 75.6 75.1 75.1 74.7 73.7

Pune 1.7 1.7 1.7 1.7 2.2 2.2 2.2 2.2 2.2

Mysore 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.3

Thrissur 4.4 4.4 4.4 4.6 4.6 4.6 4.6 4.6 5.9

Hosur 34.8 34.8 34.8 34.8 34.8 34.8 34.8 34.8 34.8

Chennai 36.8 36.8 37.2 37.3 37.3 38.7 38.7 38.7 38.7

Coimbatore 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0

Cochin 43.9 43.1 43.1 43.1 43.9 44.2 44.2 44.2 44.2

Land cost (Rs mn) 22,531 20,734 21,108 21,721 23,704 24,363 24,782 24,792 27,035

Land cost paid (Rs mn) 20,280 18,487 18,861 19,199 21,195 23,519 23,938 24,100 25,442

Land bank (acres) 2,334 2,326 2,333 2,347 2,358 2,394 2,395 2,384 2,409

Real Estate Sobha


Exhibit 6: Sobha expects positive cash flows of Rs62 bn from ongoing and completed projects Details of potential cash flows from ongoing and completed projects, March fiscal year-ends (mn sq. ft, Rs mn)


Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19

Ongoing

Sobha Share of SBA (mn sq. ft) 26.22 25.61 26.46 26.31 23.67

Sold till end of period (mn sq. ft) 10.46 10.71 11.49 11.89 10.01

Unsold Area (mn sq. ft) 15.76 14.90 14.97 14.42 13.66

Cost to be spent (Rs mn) 74,240 74,450 74,800 72,430 69,000

Receivable for sales (Rs mn) 32,540 33,900 35,780 35,890 35,410

Value of unsold stock (Rs mn) 101,320 95,860 96,840 95,090 93,420

Positive CF expected (Rs mn) 59,620 55,310 57,820 58,550 59,830

Completed




Cost to be spent (Rs mn) 270 270 240 350 420




Ongoing + Completed




Cost to be spent (Rs mn) 74,510 74,720 75,040 72,780 69,420




Sobha Real Estate


Exhibit 7: Earnings estimates are not comparable to past periods owing to adoption of Ind-AS 115 from 1QFY19 Sobha: Profit model, balance sheet, cash flow model, March fiscal year-ends, 2016-21E (Rs mn)


2016 2017 2018 2019E 2020E 2021E

Profit model

Net sales 19,566 22,462 27,870 29,291 33,646 36,199

EBITDA 4,429 4,198 5,198 5,331 7,054 5,484

Other income 343 386 496 417 429 442

Interest (1,637) (1,497) (1,978) (1,719) (1,702) (1,748)

Depreciation (597) (638) (544) (660) (671) (735)

Pre-tax profits 2,538 2,449 3,172 3,368 5,110 3,442

Tax (1,188) (970) (764) (1,142) (1,732) (1,167)

Net income 1,350 1,479 2,170 2,226 3,378 2,275

Adjusted net income 1,383 1,607 2,174 2,226 3,378 2,275


Balance sheet

Total equity 25,648 26,445 27,699 21,578 24,179 25,677

Gross debt 21,803 22,219 23,313 24,445 24,880 25,796

Non-current liabilities 2,523 2,446 2,706 2,707 2,833 2,899


Total liabilities and equity 80,687 88,930 90,249 117,643 117,449 116,922

Fixed assets 6,181 5,952 6,103 5,590 5,913 6,074

Non-current financial assets 1,167 681 1,650 1,552 1,541 1,524

Other non-current assets/taxes 4,078 4,179 4,348 4,252 4,249 4,254

Current assets 69,262 78,118 78,147 106,248 105,745 105,071

Total assets 80,687 88,930 90,248 117,643 117,449 116,922

Ratios (%)

Debt/equity 85 84 84 113 103 100

Net debt/equity 81 79 80 90 90 78

RoE (%) 8.1 5.7 7.4 8.2 13.3 8.2

RoCE (%) 3.9 2.5 3.9 3.8 6.2 3.7

Book value per share (Rs) 262 275 292 228 255 271


PVs: Maruti Suzuki gains 210 bps yoy market share in 1QFY19

Maruti Suzuki gained 210 bps market share across India on a yoy basis in 1QFY19 with

strong gains across India. Honda, Hyundai and Renault lost market share to Maruti Suzuki.

Baleno and Vitara Brezza models have been very successful across India, which has boosted

Maruti Suzuki’s market share.

PV demand was strong across states due to a low base. AP, UP, MP, Kerala, Rajasthan and

West Bengal were the fastest-growing states in 1QFY19.

Two-wheelers: Scooterization trend temporarily slows down in 1QFY19

Scooter mix in two-wheeler volumes declined to 32.1% in 1QFY19 (33.5% in 1QFY18); we

note that scooter mix has increased in southern states despite an already higher mix. Scooter

mix declined in northern and western regions in 1QFY19.

Bajaj Auto gained 180 bps market share in the domestic two-wheeler industry in 1QFY19 led

by a strong push by the company to sell economy segment motorcycles to gain market

share. Hero, TVS and Honda lost market share; however, we believe market share gain for

Bajaj Auto is not sustainable.

Royal Enfield volumes grew by 23% yoy in 1QFY19. RE volumes grew at a strong pace across

all states except Maharashtra (-15% yoy) and Karnataka (-12% yoy). These two states form

13% of RE volumes. Among major states, UP (+64% yoy), Bihar (+74% yoy), MP (+51% yoy)

and West Bengal (+37% yoy) were the strongest-growing states for RE. TVS volumes grew

by 16% yoy in FY2018, largely in line with industry growth.

TVS domestic volumes grew by 9% yoy in 1QFY19, which was below 16% yoy growth in

two-wheeler industry volumes leading to 90 bps market share loss on yoy basis. For the

company, volumes in Andhra Pradesh, Gujarat, Karnataka and Tamil declined by 3-14% yoy

due to a decline in moped volumes, while it posted strong growth in rest of the states

(volumes in Bihar, Kerala and West Bengal grew by 27-42% yoy).

MHCVs: Demand strong across states in 1QFY19

MHCV volumes rose by 84% yoy in 1QFY19 due to a low base. In terms of regions, volumes

in northern India grew by 78% yoy while demand in southern India grew by 65% yoy.

Volumes in UP, Rajasthan and Haryana grew by 50-113% yoy. LCV volumes increased by

33% in 1QFY19.

Market share of Tata Motors increased by 680 bps yoy in the MHCV segment in 1QFY19,

gaining from Ashok Leyland and Eicher. In the LCV segment, Tata Motors gained 580 bps

market share from M&M.

Automobiles India

State-wise demand trends in 1QFY19. Our analysis of state-wise demand trends for

1QFY19 reflects that – (1) auto demand recovered sharply on a low base across segments,

(2) scooter volume mix declined by 140 bps yoy in 1QFY19 and (3) Bajaj Auto, Maruti

Suzuki and Tata Motors posted maximum gain in market share in 1QFY19.

NEUTRAL

AUGUST 09, 2018

UPDATE

BSE-30: 37,888

Hitesh Goel

Nishit Jalan

Automobiles India


Exhibit 1: Passenger vehicles: Strong growth across regions in 1QFY19 Passenger vehicle volumes and growth in key states and regions, March fiscal year-ends, 2016-19 (units, %)

Source: SIAM, Kotak Institutional Equities

Exhibit 2: Maruti has gained 210 bps market share (yoy) in 1QFY19 with strong gains across states; Renault and Hyundai have lost share Market share of passenger vehicle OEMs in India and key states, March fiscal year-ends, 2016-19 (%)


1QFY18 1QFY19 FY2016 FY2017 FY2018 FY2017 FY2018 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 FY2017 FY2018

Key states

Maharashtra 83,533 90,281 354,503 396,428 372,662 13.0 11.3 (5.0) 1.0 (13.8) (5.9) 8.1 11.8 (6.0)

UP + Uttaranchal 74,182 93,187 271,878 282,916 338,422 9.3 10.3 10.0 29.6 20.4 18.8 25.6 4.1 19.6

Karnataka 52,434 59,478 217,988 238,549 224,966 7.8 6.8 (11.2) (2.6) (5.9) (3.5) 13.4 9.4 (5.7)

Gujarat 61,687 74,480 230,353 258,455 285,547 8.5 8.7 10.8 20.1 7.7 3.4 20.7 12.2 10.5

Tamil Nadu 51,613 58,754 177,211 213,220 219,638 7.0 6.7 0.0 4.9 1.8 4.8 13.8 20.3 3.0

Delhi 49,516 53,447 199,436 200,797 202,025 6.6 6.2 (0.2) 7.1 2.1 (5.6) 7.9 0.7 0.6

AP + Telengana 47,052 58,863 180,930 207,381 216,199 6.8 6.6 (0.7) 10.8 (0.9) 7.0 25.1 14.6 4.3

Kerala 52,605 65,242 195,381 229,683 252,019 7.5 7.7 12.5 6.1 12.9 9.7 24.0 17.6 9.7

Haryana 39,978 48,831 157,881 168,531 174,586 5.5 5.3 (2.9) 8.8 7.1 2.0 22.1 6.7 3.6

Rajasthan 36,201 43,247 142,588 145,392 161,192 4.8 4.9 10.5 21.4 6.3 6.3 19.5 2.0 10.9

Madhya Pradesh 26,467 35,099 93,299 98,590 124,031 3.2 3.8 16.9 40.5 19.9 26.3 32.6 5.7 25.8

West Bengal 23,280 28,502 94,786 95,878 105,817 3.1 3.2 9.9 12.7 10.0 8.8 22.4 1.2 10.4

Regional performance

North 214,788 258,608 827,572 852,428 953,336 28.0 29.0 5.8 19.9 14.1 8.3 20.4 3.0 11.8

East 84,749 107,497 311,336 340,578 398,786 11.2 12.1 11.8 22.0 13.7 20.4 26.8 9.4 17.1

West 222,201 261,552 873,009 956,978 1,012,488 31.4 30.8 5.1 14.2 0.3 3.6 17.7 9.6 5.8

South 205,322 244,253 776,455 895,147 919,804 29.4 28.0 (0.5) 4.7 1.8 4.3 19.0 15.3 2.8

Overall India 727,060 871,910 2,788,372 3,045,131 3,284,414 4.4 13.4 6.1 7.1 19.9 9.2 7.9

Volume mix (%) Yoy growth (%)Volumes (units)

1QFY18 1QFY19 FY2016 FY2017 FY2018 1QFY18 1QFY19 FY2016 FY2017 FY2018 1QFY18 1QFY19 FY2016 FY2017 FY2018

Overall Karnataka Delhi

Maruti 50.5 52.6 46.8 47.4 50.0 Maruti 48.3 50.3 41.7 44.0 48.1 Maruti 53.4 54.5 48.2 49.2 50.9

Hyundai 17.1 15.7 17.4 16.7 16.3 Hyundai 17.2 15.9 16.9 15.5 15.6 Hyundai 13.9 14.5 17.3 17.1 14.9

M&M 7.7 7.0 8.5 7.8 7.6 M&M 5.5 4.6 6.6 6.0 5.2 M&M 5.1 3.3 4.5 5.4 4.4

Honda 5.3 4.9 6.9 5.2 5.2 Honda 5.1 4.7 5.8 4.4 5.1 Honda 8.3 7.0 10.3 7.5 7.8

Tata Motors 5.5 6.6 5.4 5.7 6.4 Tata Motors 5.6 6.7 8.7 7.1 6.6 Tata Motors 5.3 5.0 2.9 5.0 5.7

Toyota 3.6 4.5 4.6 4.7 4.3 Toyota 6.0 6.9 8.1 9.2 7.2 Toyota 4.1 5.3 4.7 3.8 5.0

Renault 3.4 2.4 2.6 4.4 3.1 Renault 4.7 3.6 3.2 5.3 4.0 Renault 1.6 1.5 2.2 3.3 1.9

Maharashtra Gujarat AP + Telengana



M&M 4.7 4.6 6.5 5.4 4.9 M&M 4.7 4.1 5.5 4.7 4.5 M&M 7.8 8.0 8.4 8.1 7.7





UP + Uttaranchal Tamil Nadu Kerala



M&M 13.6 11.1 15.2 14.2 12.9 M&M 5.7 5.0 6.6 5.9 5.6 M&M 3.5 4.8 3.9 3.3 4.5





India Automobiles


Exhibit 3: Two-wheelers: Strong double-digit volume growth across regions in 1QFY19 Two-wheeler volumes, yoy growth and scooter mix in key states and regions, March fiscal-year ends, 2016-19 (units, %)


Exhibit 4: Two-wheelers: Scooter mix declined by 140 bps yoy in 1QFY19 Scooter mix in key states and regions, March fiscal year-ends, 2016-19 (%)



Key states

UP + Uttaranchal 811,931 966,913 2,285,374 2,372,200 2,915,113 13.6 14.5 16.8 19.9 23.6 33.2 19.1 3.8 22.9

Maharashtra 407,735 446,664 1,853,745 1,909,293 2,026,261 11.0 10.1 (1.8) 1.3 10.0 15.3 9.5 3.0 6.1

AP + Telengana 431,656 486,255 1,372,980 1,509,666 1,757,947 8.7 8.7 5.2 20.3 19.0 22.3 12.6 10.0 16.4

Tamil Nadu 401,822 463,203 1,347,986 1,601,649 1,672,924 9.2 8.3 (3.8) 0.8 (1.8) 23.3 15.3 18.8 4.5

Gujarat 314,955 355,859 1,123,140 1,174,075 1,383,903 6.7 6.9 8.6 9.8 25.5 31.9 13.0 4.5 17.9

Rajasthan 253,708 280,340 1,039,273 1,000,962 1,114,821 5.7 5.5 11.5 13.6 0.7 23.1 10.5 (3.7) 11.4

Karnataka 312,391 331,001 1,125,740 1,163,797 1,235,280 6.7 6.1 1.1 1.4 0.3 23.9 6.0 3.4 6.1

Madhya Pradesh 255,366 335,200 851,065 887,518 1,127,140 5.1 5.6 13.3 26.7 24.4 46.3 31.3 4.3 27.0

West Bengal 244,460 324,849 744,444 846,891 988,044 4.9 4.9 2.8 10.5 22.8 41.0 32.9 13.8 16.7

Kerala 183,255 203,719 603,844 657,310 751,904 3.8 3.7 12.3 4.4 20.5 25.4 11.2 8.9 14.4

Punjab 156,921 174,449 594,793 622,310 679,085 3.6 3.4 3.1 11.3 7.9 14.4 11.2 4.6 9.1

Bihar 274,630 317,918 651,983 744,861 951,141 4.3 4.7 20.9 16.6 35.9 40.3 15.8 14.2 27.7


North 1,278,790 1,470,635 3,964,111 4,150,258 4,875,834 23.8 24.2 13.6 15.7 16.3 25.4 15.0 4.7 17.5

East 926,053 1,150,973 2,602,788 2,915,723 3,626,868 16.7 18.0 12.6 18.1 30.8 40.8 24.3 12.0 24.4

West 1,343,533 1,551,384 5,291,245 5,398,370 6,202,372 31.0 30.8 6.5 11.9 15.1 27.4 15.5 2.0 14.9

South 1,339,713 1,491,739 4,480,485 4,968,930 5,454,784 28.5 27.1 2.3 7.2 7.5 23.3 11.3 10.9 9.8

Overall India 4,888,089 5,664,731 16,338,629 17,433,281 20,159,858 8.2 12.4 15.9 27.9 15.9 6.7 15.6

Volumes (units) Volume mix (%) Yoy growth (%)

1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 FY2016 FY2017 FY2018

Key states

UP + Uttaranchal 15.4 22.4 18.5 16.4 16.8 22.2 20.2 16.2 15.3 16.9 18.1 18.7

Maharashtra 41.2 42.9 41.2 39.7 45.1 43.4 41.6 40.4 44.6 38.4 41.3 42.5

AP + Telengana 29.4 33.7 31.7 29.7 34.7 34.2 33.2 32.6 35.9 30.3 31.1 33.7

Tamil Nadu 34.5 36.5 34.7 37.5 44.4 41.5 43.0 44.8 44.5 36.2 35.8 43.4

Gujarat 41.4 41.3 40.3 42.2 47.1 43.7 40.7 39.4 45.7 40.9 41.3 42.7

Rajasthan 21.6 21.6 19.5 19.8 23.0 23.0 21.6 23.3 22.9 18.7 20.7 22.7

Karnataka 40.8 40.3 40.4 42.6 45.5 43.9 45.0 42.9 46.3 39.4 41.0 44.2

Madhya Pradesh 21.8 26.5 22.3 21.4 22.1 23.8 23.4 18.7 18.9 22.6 23.2 22.1

West Bengal 20.7 21.4 23.3 26.7 28.1 25.1 25.6 29.7 26.1 21.6 22.6 27.0

Kerala 62.7 65.2 58.2 59.7 66.6 63.4 64.1 63.4 64.4 62.3 61.9 64.3

Punjab 45.6 42.0 37.6 41.2 50.5 42.9 43.1 43.0 48.4 38.6 41.7 44.7

Bihar 6.1 9.8 9.7 6.8 7.7 9.7 10.4 7.8 6.7 7.1 7.9 8.8


North 25.8 30.8 26.9 24.7 27.0 30.6 27.9 24.2 24.4 25.6 27.1 27.5

East 19.2 23.3 23.4 21.4 23.0 25.1 24.8 23.5 22.5 20.9 21.7 24.1

West 33.3 35.1 32.8 33.6 36.0 34.9 33.6 32.5 34.1 32.1 33.8 34.2

South 37.9 40.9 38.3 39.0 44.6 42.8 43.3 42.9 44.8 38.7 39.1 43.4

Overall India 30.2 33.8 31.3 31.1 33.5 34.4 33.0 32.0 32.1 30.5 31.7 33.2

Scooter mix (%)

Automobiles India


Exhibit 5: Bajaj has gained 180 bps market share (yoy) in 1QFY19 with gain across most major states; marginal share loss for other OEMs Market share of two-wheeler OEMs in Indian and key states, March fiscal year-ends, 2016-19 (%)



Overall Maharashtra Gujarat

Hero 37.0 36.3 39.2 37.2 36.6 Hero 23.4 23.2 30.9 27.6 25.2 Hero 31.3 28.7 39.3 35.3 34.4


TVS 13.8 13.0 13.5 14.2 14.3 TVS 11.9 12.0 10.7 11.5 13.4 TVS 6.7 5.8 6.6 6.5 6.6

Bajaj 8.7 10.5 11.6 11.5 9.8 Bajaj 7.2 7.8 10.2 10.0 8.3 Bajaj 6.4 7.4 7.9 9.0 6.8

Yamaha 3.9 3.4 3.4 4.3 3.8 Yamaha 3.3 2.8 3.0 3.8 3.0 Yamaha 1.9 1.8 2.2 2.6 2.0

Royal Enfield 3.7 3.9 3.0 3.7 4.0 Royal Enfield 4.4 3.4 4.1 4.1 3.7 Royal Enfield 2.7 2.5 2.2 2.7 2.7

UP + Uttaranchal AP + Telengana West Bengal

Hero 53.4 55.3 50.0 49.5 51.0 Hero 30.4 28.2 37.2 34.1 30.9 Hero 38.8 36.1 46.1 44.8 39.5


TVS 14.4 13.6 15.0 15.3 15.4 TVS 16.5 12.6 14.7 17.0 16.9 TVS 14.4 15.4 15.3 13.3 14.1




Tamil Nadu Karnataka Rajasthan

Hero 16.5 19.0 22.9 21.3 19.3 Hero 23.2 19.9 27.1 23.3 22.1 Hero 54.1 50.9 54.0 54.7 53.8


TVS 27.5 22.7 26.8 28.1 26.1 TVS 17.1 15.3 16.9 18.4 18.7 TVS 11.4 10.3 12.6 11.4 11.9




India Automobiles


Exhibit 6: Royal Enfield volumes are growing in strong double digits across states except Karnataka and Maharashtra (down yoy) Volumes and market share of Royal Enfield across major states, March fiscal year-ends, 2016-19 (units, %)


1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 FY2016 FY2017 FY2018

Volumes (units)

Kerala 15,352 19,201 19,389 22,022 19,108 24,264 23,524 23,891 23,855 52,950 75,964 90,787

Tamil Nadu 13,334 16,358 18,220 17,773 19,038 21,049 15,991 22,985 21,131 39,964 65,685 79,063

Uttar Pradesh 10,401 11,452 12,372 13,546 15,842 18,397 19,783 22,824 26,000 30,464 47,771 76,846

Maharashtra 18,604 20,074 20,763 19,238 17,964 16,827 19,592 20,309 15,318 76,214 78,679 74,692

Delhi 10,230 11,040 11,434 12,130 12,706 12,889 13,460 15,710 15,040 33,616 44,834 54,765

Karnataka 13,496 14,961 14,450 14,300 14,444 13,620 11,313 13,050 12,786 47,361 57,207 52,427

Punjab 8,511 8,988 9,790 10,436 10,421 10,857 11,040 13,512 10,987 32,782 37,725 45,830

Gujarat 6,882 7,806 8,308 8,123 8,533 9,477 9,607 9,423 9,053 24,306 31,119 37,040

Telangana 4,960 5,969 6,651 6,748 6,690 7,628 7,235 8,065 8,709 19,404 24,328 29,618

Bihar 4,176 4,900 4,362 4,828 5,595 6,370 7,798 7,964 9,736 13,395 18,266 27,727

West Bengal 4,399 5,242 5,149 5,131 5,789 6,903 7,273 7,150 7,928 15,432 19,921 27,115

Andhra Pradesh 4,392 5,156 5,350 5,359 5,915 6,717 6,463 7,485 7,391 15,723 20,257 26,580

Rajasthan 4,267 4,640 5,116 4,656 4,711 6,015 6,696 6,599 6,595 14,153 18,679 24,021

Haryana 3,766 4,642 4,372 4,574 5,112 5,203 5,924 7,235 6,320 14,386 17,354 23,474

Madhya Pradesh 2,883 3,466 3,993 3,919 4,234 5,045 5,811 6,345 6,379 10,331 14,261 21,435

Orissa 2,876 2,856 2,826 3,462 3,689 4,079 5,322 5,744 6,250 8,428 12,020 18,834

Others 13,950 16,363 17,873 16,962 18,985 23,479 23,843 22,932 25,596 49,392 65,148 89,239

Total 142,479 163,114 170,418 173,207 178,776 198,819 200,675 221,223 219,074 498,301 649,218 799,493

Yoy (%)

Kerala 41.8 38.9 55.1 39.3 24.5 26.4 21.3 8.5 24.8 43.5 19.5

Tamil Nadu 56.1 58.5 95.8 50.7 42.8 28.7 (12.2) 29.3 11.0 64.4 20.4

Uttar Pradesh 85.7 58.6 54.9 40.2 52.3 60.6 59.9 68.5 64.1 56.8 60.9

Maharashtra 10.8 6.2 6.3 (8.4) (3.4) (16.2) (5.6) 5.6 (14.7) 3.2 (5.1)

Delhi 64.1 26.0 39.4 16.4 24.2 16.7 17.7 29.5 18.4 33.4 22.2

Karnataka 30.5 24.8 27.8 4.2 7.0 (9.0) (21.7) (8.7) (11.5) 20.8 (8.4)

Punjab 19.6 8.8 17.8 14.8 22.4 20.8 12.8 29.5 5.4 15.1 21.5

Gujarat 37.6 29.9 35.8 13.2 24.0 21.4 15.6 16.0 6.1 28.0 19.0

Telangana 8.5 19.5 43.0 30.1 34.9 27.8 8.8 19.5 30.2 25.4 21.7

Bihar 33.5 48.1 40.5 25.2 34.0 30.0 78.8 65.0 74.0 36.4 51.8

West Bengal 40.6 38.5 24.5 17.1 31.6 31.7 41.3 39.3 36.9 29.1 36.1

Andhra Pradesh 26.3 27.1 44.4 19.5 34.7 30.3 20.8 39.7 25.0 28.8 31.2

Rajasthan 68.7 34.4 32.2 8.3 10.4 29.6 30.9 41.7 40.0 32.0 28.6

Haryana 17.7 44.3 10.5 14.1 35.7 12.1 35.5 58.2 23.6 20.6 35.3

Madhya Pradesh 54.3 37.7 45.4 22.5 46.9 45.6 45.5 61.9 50.7 38.0 50.3

Orissa 88.2 48.5 29.3 24.0 28.3 42.8 88.3 65.9 69.4 42.6 56.7

Others 35.2 31.0 39.5 23.2 36.1 43.5 33.4 35.2 34.8 31.9 37.0

Total 36.7 30.5 37.0 19.7 25.5 21.9 17.8 27.7 22.5 30.3 23.1

Motorcycle market share (%)

Kerala 25.9 26.7 35.5 37.4 31.9 30.5 41.4 35.4 33.3 23.6 31.1 34.4

Tamil Nadu 6.5 7.5 10.6 9.4 10.9 9.5 10.4 10.8 9.8 5.9 8.4 10.4

Uttar Pradesh 2.3 2.8 3.2 3.3 2.5 3.8 4.2 4.1 3.5 1.9 2.9 3.6

Maharashtra 7.9 6.3 8.4 6.8 8.3 5.3 7.2 6.4 6.4 6.9 7.3 6.6

Delhi 17.5 16.8 20.0 17.4 20.1 17.9 20.9 20.8 21.9 14.0 17.8 19.9

Karnataka 8.3 8.5 11.2 10.9 9.6 8.2 9.4 8.0 8.0 7.8 9.6 8.7

Punjab 10.4 8.3 10.4 14.1 13.7 9.1 12.0 16.5 12.4 9.1 10.5 12.4

Gujarat 4.1 3.7 5.6 5.5 5.2 4.2 5.1 4.6 4.8 3.7 4.6 4.7

Telangana 5.7 7.9 10.9 7.9 8.2 6.4 7.8 7.2 6.5 6.2 7.8 7.3

Bihar 2.0 3.1 3.3 3.0 2.3 3.5 4.4 3.6 3.4 2.3 2.8 3.3

West Bengal 2.4 2.6 3.8 4.6 3.4 3.2 4.4 4.8 3.4 2.7 3.1 3.9

Andhra Pradesh 2.7 3.1 5.0 3.7 3.7 4.0 5.7 4.7 5.0 2.9 3.5 4.4

Rajasthan 2.5 1.9 2.5 3.3 2.5 2.2 3.3 3.9 3.2 1.7 2.4 2.9

Haryana 4.6 4.6 4.6 5.4 5.8 4.9 5.6 7.1 6.1 4.0 4.8 5.8

Madhya Pradesh 1.7 1.9 2.5 2.7 2.2 2.1 3.0 2.9 2.4 1.6 2.2 2.5

Orissa 2.8 3.3 4.0 3.7 3.3 3.5 5.6 4.7 4.7 2.5 3.4 4.2

Total 4.9 5.3 6.9 6.8 5.9 5.8 7.1 6.8 6.0 4.7 5.9 6.4

Automobiles India


Exhibit 7: MHCVs: Strong double-digit growth across states on a low base in 1QFY19 MHCV volumes and growth in key states and regions, March fiscal year-ends, 2016-19 (units, %)


Exhibit 8: Tata Motors has significant market share across most major states (except Maharashtra) Market share of MHCV OEMs in India and key states, March fiscal year-ends, 2016-19 (%)



Key states

Maharashtra 5,750 9,130 37,108 38,189 43,644 12.7 12.8 (31.3) 1.1 56.2 24.4 58.8 2.9 14.3

Tamil Nadu 3,861 7,631 26,033 24,276 22,670 8.1 6.6 (44.0) 3.9 22.6 3.3 97.6 (6.7) (6.6)

Rajasthan 3,870 6,371 25,625 24,700 30,795 8.2 9.0 (35.3) 53.4 63.3 25.4 64.6 (3.6) 24.7

Haryana 4,554 7,646 25,739 22,188 28,124 7.4 8.2 (21.3) 38.4 80.6 28.0 67.9 (13.8) 26.8

Gujarat 2,514 6,744 20,891 21,891 18,311 7.3 5.4 (54.7) (17.6) 1.7 4.0 168.3 4.8 (16.4)

West Bengal 2,849 6,024 18,942 18,394 20,169 6.1 5.9 (41.5) 20.5 57.1 13.6 111.4 (2.9) 9.6

Andhra Pradesh 2,974 4,606 21,923 21,291 21,331 7.1 6.3 (37.4) (21.7) 27.5 23.1 54.9 (2.9) 0.2

Uttar Pradesh 3,944 8,386 19,533 22,114 31,493 7.4 9.2 (15.7) 54.2 88.5 39.7 112.6 13.2 42.4

Karnataka 2,965 4,388 15,287 14,796 18,111 4.9 5.3 (18.8) 28.1 53.0 30.2 48.0 (3.2) 22.4

Delhi 1,756 2,062 14,459 17,017 14,282 5.7 4.2 (41.9) (0.6) (6.0) (20.4) 17.4 17.7 (16.1)

Madhya Pradesh 1,536 2,315 12,683 13,232 15,339 4.4 4.5 (45.9) 51.4 51.8 11.3 50.7 4.3 15.9

Orissa 2,084 3,620 8,550 9,667 12,146 3.2 3.6 (11.9) 90.9 17.2 26.7 73.7 13.1 25.6


North 13,234 23,555 77,470 77,940 92,777 25.9 27.2 (25.3) 30.8 56.1 17.7 78.0 0.6 19.0

East 7,828 16,951 46,217 46,979 53,611 15.6 15.7 (31.4) 32.9 38.0 18.7 116.5 1.6 14.1

West 15,279 28,430 105,405 106,246 119,702 35.3 35.1 (37.3) 18.1 47.5 19.7 86.1 0.8 12.7

South 11,989 19,763 71,577 69,429 75,051 23.1 22.0 (30.3) 6.2 36.1 21.0 64.8 (3.0) 8.1

Overall India 48,330 88,699 300,669 300,594 341,141 (31.6) 21.0 45.7 19.3 83.5 (0.0) 13.5

Volumes (units) Volume mix (%) Yoy (%)


Overall Rajasthan West Bengal


Ashok Leyland 34.8 30.3 32.9 34.0 34.2 Ashok Leyland 30.6 28.4 25.1 26.6 31.7 Ashok Leyland 28.7 26.0 23.3 28.3 26.3

Eicher 11.9 10.4 10.4 11.3 11.4 Eicher 3.4 2.9 2.7 3.8 4.4 Eicher 5.0 3.7 3.3 3.3 3.6

Mahindra 3.9 4.1 2.3 2.7 3.2 Mahindra 3.6 1.8 1.4 1.7 1.9 Mahindra 2.7 4.9 1.2 1.7 3.3

SML Isuzu 2.8 1.8 2.0 2.4 2.0 SML Isuzu 1.4 0.6 0.5 0.8 0.6 SML Isuzu 1.1 0.6 1.0 1.0 0.9

Maharashtra Haryana Andhra Pradesh






Tamil Nadu Gujarat Uttar Pradesh






India Automobiles


Exhibit 9: LCVs: Strong double-digit volume growth across regions in 1QFY19 LCV volumes and growth in key states and regions, March fiscal year-ends, 2016-19 (units, %)


Exhibit 10: M&M has lost 430 bps market share (on yoy basis) to Tata Motors in 1QFY19 Market share of LCV OEMs in India and key states, March fiscal year-ends, 2016-19 (%)



Key states

Maharashtra 12,361 14,349 53,664 59,178 69,817 14.4 13.7 (2.9) 13.8 16.5 41.2 16.1 10.3 18.0

Uttar Pradesh 9,767 14,413 34,541 37,371 49,257 9.1 9.7 11.2 31.6 32.9 47.4 47.6 8.2 31.8

Tamil Nadu 8,480 12,676 28,874 35,106 39,893 8.6 7.8 0.0 2.7 17.3 33.6 49.5 21.6 13.6

Karnataka 7,102 10,618 34,171 31,139 37,837 7.6 7.4 (10.2) 6.7 42.7 49.0 49.5 (8.9) 21.5

Andhra Pradesh 6,728 8,250 27,808 27,001 31,504 6.6 6.2 (5.8) 6.0 30.7 39.5 22.6 (2.9) 16.7

Gujarat 6,432 10,001 25,215 27,579 31,639 6.7 6.2 2.8 9.6 25.9 19.6 55.5 9.4 14.7

Rajasthan 6,272 6,366 24,354 24,863 26,071 6.1 5.1 3.5 (0.1) 4.1 11.1 1.5 2.1 4.9

West Bengal 4,943 6,795 16,821 20,718 24,857 5.0 4.9 8.5 18.4 23.9 26.8 37.5 23.2 20.0

Assam 4,646 6,959 15,419 17,298 23,625 4.2 4.6 8.7 42.6 44.5 49.0 49.8 12.2 36.6

Kerala 4,364 6,420 16,281 16,227 20,464 4.0 4.0 9.0 5.9 43.4 51.5 47.1 (0.3) 26.1

Haryana 4,153 5,493 15,246 14,963 20,501 3.6 4.0 5.0 32.9 54.7 55.7 32.3 (1.9) 37.0

Madhya Pradesh 3,529 4,426 13,985 16,308 20,223 4.0 4.0 10.6 35.4 2.9 45.9 25.4 16.6 24.0


North 25,057 32,341 86,610 89,927 117,208 21.9 23.1 12.0 27.8 38.4 41.4 29.1 3.8 30.3

East 17,378 23,891 59,680 67,506 88,878 16.5 17.5 14.9 35.1 36.9 37.2 37.5 13.1 31.7

West 31,006 38,899 127,215 138,605 160,865 33.8 31.7 2.5 13.9 14.7 30.1 25.5 9.0 16.1

South 28,710 40,589 108,949 114,230 141,266 27.8 27.8 2.5 11.9 34.8 45.3 41.4 4.8 23.7

Overall India 102,151 135,720 382,454 410,268 508,217 6.7 19.3 28.5 38.0 32.9 7.3 23.9

Volumes (units) Yoy (%)Volume mix (%)


Overall Tamil Nadu Gujarat

M&M 43.6 39.3 41.8 42.1 40.5 M&M 28.1 25.0 29.1 29.9 26.9 M&M 57.1 42.7 54.9 54.9 52.8



Force Motors 4.6 3.8 6.0 5.8 4.4 Force Motors 5.1 3.1 6.4 6.4 3.8 Force Motors 2.0 1.8 5.1 5.3 2.6


Maharashtra Karnataka Rajasthan

M&M 39.8 37.5 40.2 40.0 39.3 M&M 30.5 31.2 28.7 30.8 31.9 M&M 55.4 50.3 68.2 59.2 52.4





Uttar Pradesh Andhra Pradesh West Bengal

M&M 45.0 40.1 41.3 42.6 41.6 M&M 49.9 47.2 48.1 46.9 49.1 M&M 44.3 38.0 36.7 41.1 38.5






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June 2018: Results calendar

Source: NSE, Kotak Institutional Equities

Mon Tue Wed Thu Fri Sat Sun

6-Aug 7-Aug 8-Aug 9-Aug 10-Aug 11-Aug 12-Aug

Adani Port and SEZ Adani Transmission BPCL 3M India Alkem Laboratories Amara Raja Batteries

Adani Pow er AU Small Finance Cipla AIA Engineering Apollo Hospitals Balkrishna Industries

Arvind Edelw eiss Financial Services City Union Bank Aurobindo Pharma Bosch Coal India

Britannia Industries GlaxoSmithkline Consumer HPCL Bharat Forge Dhanuka Agritech Dalmia Bharat

Gatew ay Distriparks Kalpataru Pow er Transmission Indian Bank Coffee Day Enterprises DLF India Cements

Max Financial Services Mahindra & Mahindra Lupin Cummins India Dr Lal Pathlabs IOCL

Punjab National Bank Motherson Sumi Systems Natco Pharma Eicher Motors Endurance Technologies MRPL

Ujjivan Financial Services Mphasis National Aluminium Co. Engineers India GAIL (India) NBCC

Punjab National Bank NMDC Future Retail Glenmark Pharmaceuticals

Sobha PNB Housing Finance Godrej Agrovet Hindalco Industries

SRF Siemens Gujarat Pipavav Port Indian Hotels Co.

TVS Motor Thermax HCG Indraprastha Gas

Jindal Steel and Pow er NHPC

Kaveri Seed PC Jew eller

MRF State Bank of India

Page Industries Sun TV Netw ork

S H Kelkar and Company Timken

Tata Communications Union Bank

Varun Beverages United Brew eries

Whirlpool Vakrangee

Voltas


Ashoka Buildcon Brigade Enterprises

Cadila Healthcare Dilip Buildcon

Dew an Housing Finance GMR Infrastructure

Godrej Industries Grasim Industries

Oil India IDBI

Oracle Financial Services Rajesh Exports

Sadbhav Engineering Sun Pharmaceuticals

Sunteck Realty

Tata Chemicals

Tata Steel

Vardhman Textiles


Magma Fincorp P&G Hygiene Britannia Industries

Gillette India


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Kotak Institutional Equities: Valuation summary of KIE Universe stocks


Target O/S ADVT

Price (Rs) price Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) 3mo

Company Rating 8-Aug-18 (Rs) (%) (Rs bn) (US$ bn) (mn) 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E (US$ mn)

Automobiles

Amara Raja Batteries REDUCE 821 780 (5.0) 140 2.0 171 28 33 39 (1.6) 21.2 15.5 29.8 24.5 21.2 15.8 13.1 11.2 4.8 4.1 3.6 17.0 18.0 18.0 0.5 0.6 0.7 5.7

Apollo Tyres BUY 273 340 24.7 156 2.3 541 13 20 25 (38.0) 46.9 25.7 20.4 13.9 11.0 11.4 8.4 7.0 1.5 1.5 1.3 8.5 11.0 12.5 1.0 1.1 1.1 11.3

Ashok Leyland BUY 126 160 27.3 369 5.4 2,926 5.4 6.2 8.9 8.0 15.3 43.2 23.4 20.3 14.2 13.5 10.4 7.5 5.1 4.4 3.7 23.7 23.4 28.4 1.9 1.5 2.1 47.5

Bajaj Auto SELL 2,661 2,500 (6.0) 770 11.2 289 140 148 161 6.0 5.4 9.0 19.0 18.0 16.5 12.8 12.3 10.9 4.0 3.6 3.2 22.9 21.2 20.7 2.3 2.2 2.4 31.6

Balkrishna Industries REDUCE 1,248 1,260 1.0 241 3.5 193 37 50 63 4.8 34.8 25.0 33.4 24.8 19.8 17.7 13.6 10.9 5.9 4.9 4.0 19.0 21.6 22.2 0.4 0.5 0.5 8.1

Bharat Forge SELL 639 600 (6.2) 298 4.3 466 16 23 27 10.1 43.0 16.8 39.5 27.6 23.7 18.9 15.6 13.5 6.5 5.5 4.7 17.3 21.5 21.4 0.7 0.8 0.9 10.9

CEAT ADD 1,398 1,500 7.3 57 0.8 40 65 99 108 (29.5) 53.7 8.3 21.6 14.1 13.0 10.5 8.9 7.7 2.2 1.9 1.7 10.4 14.4 13.8 0.8 0.7 0.7 13.7

Eicher Motors SELL 27,593 26,000 (5.8) 752 11.0 27 792 995 1,200 29.3 25.5 20.6 34.8 27.7 23.0 25.1 20.2 16.4 14.0 10.1 7.5 46.4 42.3 37.5 0.1 0.1 0.1 19.2

Escorts BUY 877 1,200 36.9 75 1.6 89 39 59 71 71.3 52.3 19.9 22.6 14.8 12.4 12.9 9.0 7.3 3.1 2.6 2.2 13.5 17.6 18.0 0.5 1.0 1.2 16.9

Exide Industries SELL 285 235 (17.7) 243 3.5 850 8 10 11 0.6 25.3 11.0 34.8 27.8 25.0 19.5 15.8 14.1 4.5 4.1 3.7 13.5 15.4 15.5 0.8 1.1 1.2 9.6

Hero Motocorp SELL 3,299 3,000 (9.1) 659 9.6 200 185 183 204 9.5 (0.9) 11.4 17.8 18.0 16.1 11.0 10.7 9.5 5.6 5.0 4.4 33.8 29.3 29.1 2.6 2.8 3.1 22.1

Mahindra CIE Automotive ADD 258 290 12.4 98 1.4 378 10 14 16 107.0 45.0 12.7 26.9 18.5 16.4 13.2 9.3 8.2 2.6 2.3 2.0 10.4 13.2 13.1 — — — 3.0

Mahindra & Mahindra BUY 928 1,085 16.9 1,154 16.8 1,138 38 45 51 22.0 18.5 14.4 24.5 20.6 18.0 16.1 13.4 11.6 3.5 3.1 2.7 15.1 15.8 16.0 0.8 1.0 1.1 32.8

Maruti Suzuki ADD 9,207 10,000 8.6 2,781 40.5 302 256 323 393 5.1 26.4 21.8 36.0 28.5 23.4 20.1 16.5 13.0 6.7 5.7 4.9 19.8 21.6 22.5 0.9 0.9 1.1 63.8

Motherson Sumi Systems SELL 305 280 (8.3) 643 9.4 2,105 8 11 14 6.1 40.0 21.5 37.4 26.7 22.0 14.0 10.7 8.7 6.5 5.5 4.7 19.0 22.4 23.1 0.7 0.9 1.1 14.8

MRF REDUCE 76,650 76,000 (0.8) 325 4.7 4 2,669 3,896 4,447 (23.9) 46.0 14.1 28.7 19.7 17.2 13.1 9.6 8.3 3.3 2.9 2.5 12.3 15.7 15.4 0.1 0.1 0.1 6.4

Schaeffler India BUY 5,290 6,000 13.4 88 1.3 17 143 156 199 22.0 9.0 27.3 36.9 33.9 26.6 21.7 20.6 15.7 5.2 4.6 4.1 15.0 14.5 16.4 0.3 0.6 0.8 0.6

SKF ADD 1,701 1,800 5.8 87 1.3 51 58 69 82 24.6 19.7 18.5 29.5 24.6 20.8 18.2 15.7 13.0 4.8 4.1 3.6 16.1 16.7 17.1 0.6 0.7 0.8 0.4

Tata Motors BUY 255 425 66.6 866 11.8 3,396 20 22 36 (28.0) 10.7 62.7 12.8 11.5 7.1 3.8 3.5 3.0 0.9 0.8 0.8 8.8 7.6 11.2 — — — 59.7

Timken SELL 728 660 (9.3) 50 0.7 68 14 19 25 (5.3) 42.3 27.5 53.8 37.8 29.6 30.0 20.9 16.7 7.0 6.0 5.0 13.9 17.1 18.5 0.1 0.1 0.1 0.3

TVS Motor SELL 533 405 (24.0) 253 3.7 475 14 16 20 18.7 13.9 23.0 38.2 33.5 27.2 23.3 18.5 15.3 8.8 7.5 6.4 25.1 24.2 25.4 0.6 0.9 1.1 14.0

WABCO India SELL 6,725 6,350 (5.6) 128 1.9 19 144 169 222 27.8 17.8 31.3 46.8 39.7 30.2 30.3 25.8 19.5 8.4 7.0 5.8 19.5 19.2 20.9 0.1 0.2 0.2 0.5

Automobiles Neutral 10,232 149 (0.9) 19.8 25.7 26.2 21.9 17.4 11.6 9.8 8.1 3.7 3.3 2.9 14.2 15.1 16.6 0.9 0.9 1.1 393.1

Banks

Axis Bank ADD 596 600 0.6 1,532 22.3 2,567 1 18 40 (92.6) 1,577.6 122.3 555.2 33.1 14.9 — — — 2.9 2.6 2.2 0.5 7.1 14.1 0.8 0.5 1.0 56.6

Bank of Baroda NR 149 — — 393 5.7 2,652 (9) 21 26 (253.2) 323.7 26.4 (16.2) 7.2 5.7 — — — 1.6 1.3 1.0 (5.8) 12.7 14.0 — — — 34.2

Canara Bank ADD 288 300 4.0 212 3.1 733 (58) (5) 51 (406.6) 91.6 1,147.0 (5.0) (59.5) 5.7 — — — 1.8 1.7 1.0 (12.2) (1.0) 10.1 — — — 29.1

City Union Bank ADD 178 190 6.5 131 1.9 665 9 9 11 6.5 5.8 13.3 20.0 18.9 16.7 — — — 3.1 2.9 2.6 15.3 15.5 15.6 0.2 0.9 1.1 1.8

DCB Bank ADD 166 205 23.9 51 0.7 308 8 10 12 13.8 28.2 21.0 20.8 16.2 13.4 — — — 2.1 1.9 1.7 10.9 11.7 12.7 — 0.6 0.7 4.5

Equitas Holdings BUY 146 190 30.4 50 0.7 340 0.9 4.4 8.4 (80.3) 378.4 89.9 157.0 32.8 17.3 — — — 2.3 2.1 1.9 1.4 6.4 11.2 — — — 4.5

Federal Bank BUY 88 130 47.3 175 2.5 1,972 4.4 5.7 7.9 (9.3) 29.5 39.5 20.2 15.6 11.2 — — — 1.6 1.4 1.3 8.2 8.8 11.4 1.1 1.5 2.0 20.1

HDFC Bank REDUCE 2,136 2,000 (6.4) 5,707 83.1 2,595 67 77 93 18.7 14.1 21.1 31.7 27.8 22.9 — — — 5.3 4.1 3.6 17.9 16.5 16.2 0.6 0.7 0.8 86.2

ICICI Bank BUY 319 400 25.5 2,050 29.9 6,429 11 8 26 (31.1) (19.6) 209.1 30.2 37.6 12.2 — — — 2.5 2.2 1.8 6.6 5.1 14.5 0.5 0.5 1.6 94.0

IDFC Bank NR 41 — — 139 2.0 3,404 2.5 1.2 2.9 (16.0) (52.7) 146.7 16.2 34.3 13.9 — — — 0.9 0.9 0.9 5.7 2.6 6.3 1.2 0.6 1.4 9.3

IndusInd Bank REDUCE 2,001 1,900 (5.0) 1,201 17.5 600 60 71 87 25.3 17.5 23.6 33.3 28.3 22.9 — — — 5.2 4.2 3.7 17.1 17.6 16.8 — 0.4 0.5 31.5

J&K Bank BUY 57 100 74.5 32 0.5 557 4 7 11 111.6 82.4 63.8 15.7 8.6 5.3 — — — 0.7 0.7 0.6 3.4 5.9 9.1 — 2.3 3.8 0.4

Karur Vysya Bank ADD 104 110 5.5 76 1.1 727 5 3 13 (52.2) (32.3) 306.7 21.9 32.4 8.0 — — — 1.5 1.5 1.3 6.1 3.7 14.1 0.6 0.8 3.1 2.0

Punjab National Bank ADD 80 90 11.9 222 3.2 2,761 (44) (27) 12 (814.7) 40.4 145.3 (1.8) (3.0) 6.7 — — — 5.2 4.0 1.3 (32.5) (23.4) 10.7 — - - 37.9

RBL Bank SELL 571 475 (16.9) 241 3.5 420 15 22 29 27.3 48.1 31.5 37.8 25.5 19.4 — — — 3.7 3.3 3.0 11.5 13.3 15.5 0.4 0.6 0.8 12.3

State Bank of India BUY 309 370 19.9 2,755 40.1 8,925 (7) 18 37 (155.8) NM 106.1 NM 17.1 8.3 — — — 2.5 1.9 1.4 (3.2) 7.1 13.2 — 0.1 0.1 84.1

Ujjivan Financial Services REDUCE 380 420 10.6 46 0.7 121 1 19 28 (96.6) 3,033.9 47.3 636.4 20.3 13.8 — — — 2.7 2.4 2.0 0.4 12.1 15.8 0.1 0.4 0.7 6.9

Union Bank ADD 85 130 52.8 99 1.4 1,169 (45) 1 24 (655.5) 101.4 3,896.2 (1.9) 139.0 3.5 — — — 1.4 1.3 0.8 (23.6) 0.3 11.8 — 0.1 4.3 9.9

YES Bank SELL 383 335 (12.5) 883 12.9 2,303 18 20 22 25.7 8.1 9.5 20.9 19.3 17.6 — — — 3.5 3.1 2.7 17.7 16.6 15.9 0.6 0.9 0.9 57.5

Banks Attractive 15,994 233 (89.4) 973.7 108.4 295.1 27.5 13.2 2.1 1.9 1.7 0.7 7.0 13.0 0.4 0.5 0.8 582.8

Dividend yield (%)P/B (X) RoE (%)


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NBFCs

Bajaj Finance SELL 2,813 2,000 (28.9) 1,626 23.7 575 43 68 90 29.2 56.6 31.9 64.8 41.4 31.4 — — — 10.3 8.4 6.8 19.7 22.4 24.0 0.1 0.2 0.3 56.8

Bajaj Finserv REDUCE 7,052 6,100 (13.5) 1,122 16.3 159 176 245 307 10.3 39.7 25.2 40.2 28.8 23.0 — — — 5.6 4.6 3.8 15.6 17.5 18.1 0.2 0.2 0.2 18.9

Bharat Financial Inclusion NA 1,211 — — 169 2.5 139 33 43 54 55.5 31.1 27.2 37.0 28.3 22.2 — — — 5.6 4.6 3.7 16.7 17.9 18.5 — — — 10.3

Cholamandalam REDUCE 1,455 1,500 3.1 228 3.3 156 62 90 110 35.5 44.8 22.1 23.4 16.1 13.2 — — — 4.6 3.8 3.0 20.6 24.5 24.3 0.4 0.7 0.9 7.8

HDFC ADD 1,985 2,075 4.6 3,354 48.9 1,676 75 56 67 52.1 (25.8) 19.0 26.3 35.5 29.8 — — — 5.2 4.5 4.1 23.9 13.8 14.5 1.0 1.1 1.3 70.2

HDFC Standard Life Insurance SELL 468 405 (13.5) 942 13.7 2,007 6 6 7 24.4 14.8 10.9 84.6 73.7 66.5 — — — 21.9 19.5 17.4 27.3 28.0 27.7 0.3 0.3 0.4 11.4

ICICI Lombard SELL 770 620 (19.5) 350 5.1 454 19 26 32 22.0 37.1 21.5 40.6 29.6 24.3 — — — 7.7 6.5 5.4 20.8 23.8 24.2 0.5 0.8 0.9 2.2

ICICI Prudential Life BUY 413 500 21.1 593 8.6 1,436 11 12 13 (3.7) 10.1 7.0 36.6 33.2 31.1 — — — 9.0 7.4 6.2 25.0 24.5 21.8 1.4 0.5 0.5 10.3

IIFL Holdings SELL 709 625 (11.9) 226 3.3 319 29 38 45 32.4 31.5 18.6 24.8 18.9 15.9 — — — 4.5 3.4 2.9 19.0 20.5 20.0 0.9 1.1 1.3 1.5

L&T Finance Holdings ADD 175 190 8.8 349 5.1 1,996 7 13 14 23.7 70.9 12.3 23.8 13.9 12.4 — — — 2.7 2.5 2.2 14.2 18.9 18.8 1.0 1.1 1.4 12.5

LIC Housing Finance BUY 559 610 9.2 282 4.1 505 44 50 58 3.2 13.8 17.5 12.8 11.2 9.6 — — — 2.1 1.8 1.5 14.5 14.3 14.4 1.2 1.4 1.6 12.8

Magma Fincorp BUY 150 200 33.3 40 0.6 237 10 12 15 1,014.5 24.6 25.8 15.4 12.4 9.9 — — — 1.5 1.5 1.3 10.2 12.9 14.1 0.5 1.2 1.5 1.6

Mahindra & Mahindra Financial REDUCE 498 500 0.3 308 4.5 614 15 23 28 105.0 58.4 23.2 34.3 21.7 17.6 — — — 3.5 3.1 2.8 11.3 14.3 15.8 0.8 1.3 1.6 10.7

Max Financial Services ADD 499 650 30.3 134 2.0 268 5 6 6 (20.4) 36.9 1.8 108.8 79.5 78.1 — — — — — — 6.5 8.3 8.0 — 0.4 0.4 4.8

Muthoot Finance ADD 420 480 14.3 168 2.4 400 43 38 40 45.6 (10.8) 4.0 9.8 10.9 10.5 — — — 2.2 1.9 1.7 24.1 18.4 16.9 2.4 2.1 2.2 4.8

PNB Housing Finance REDUCE 1,303 1,375 5.5 218 3.2 167 50 61 77 57.8 23.0 25.3 26.2 21.3 17.0 — — — 3.4 3.1 2.7 14.0 15.2 16.8 0.7 0.3 0.3 9.9

SBI Life Insurance ADD 677 785 15.9 677 9.9 1,000 12 15 18 20.8 26.0 22.9 58.7 46.6 37.9 — — — 10.5 8.8 7.4 19.4 20.6 21.3 0.3 0.3 0.4 3.9

Shriram City Union Finance ADD 1,940 2,250 16.0 128 1.9 66 101 141 174 19.6 40.4 22.7 19.3 13.7 11.2 — — — 2.4 2.2 1.9 12.5 15.8 16.9 0.9 0.9 1.1 1.3

Shriram Transport ADD 1,427 1,550 8.6 324 4.7 227 69 114 130 24.7 64.4 14.3 20.6 12.6 11.0 — — — 2.7 2.2 1.9 13.1 18.3 17.5 0.8 1.1 1.3 30.7

NBFCs Neutral 11,238 164 36.9 14.8 19.6 32.8 28.6 23.9 5.5 4.6 4.0 16.8 16.1 16.8 0.6 0.7 0.8 582.8

Cement

ACC SELL 1,536 1,270 (17.3) 288 4.2 188 49 62 70 32.7 27.0 13.8 31.5 24.8 21.8 16.9 13.7 11.8 3.1 2.8 2.6 10.1 11.9 12.5 1.1 1.1 1.1 15.4

Ambuja Cements REDUCE 231 210 (9.1) 459 6.7 1,986 8 9 11 29.7 14.5 23.2 30.7 26.8 21.8 10.3 9.1 7.5 2.2 2.1 2.0 7.4 8.1 9.5 1.6 1.6 1.6 11.7

Dalmia Bharat ADD 2,657 2,900 9.1 237 3.5 89 60 98 128 55.4 62.6 30.3 44.0 27.1 20.8 13.6 10.4 8.5 3.9 3.4 2.9 9.7 13.4 15.2 0.1 0.1 0.1 4.8

Grasim Industries BUY 1,009 1,275 26.4 664 9.7 657 47 52 69 (30.1) 9.1 32.8 21.3 19.5 14.7 12.1 7.4 6.8 1.2 1.1 1.0 7.0 5.8 7.2 0.5 0.5 0.5 14.1

India Cements REDUCE 117 135 15.6 36 0.5 308 3 5 9 (42.5) 56.2 84.4 35.8 22.9 12.4 9.8 8.4 6.6 0.7 0.7 0.6 2.0 3.0 5.3 0.9 0.9 0.9 7.9

J K Cement ADD 767 890 16.0 54 0.8 70 43 45 79 59.3 3.7 75.4 17.7 17.1 9.8 9.8 10.1 8.3 2.7 2.4 2.0 16.2 15.0 22.3 1.0 1.0 1.0 0.6

JK Lakshmi Cement ADD 321 370 15.1 38 0.6 118 4 11 28 (35.7) 153.5 147.9 71.9 28.4 11.4 13.4 9.9 6.4 2.6 2.4 2.0 3.7 8.9 19.5 0.6 0.6 0.6 0.4

Orient Cement ADD 120 145 20.4 25 0.4 205 2 7 11 237.8 212.9 58.7 55.8 17.8 11.2 12.1 8.2 6.3 2.4 2.2 1.9 4.4 12.9 18.2 0.6 1.2 1.7 0.2

Shree Cement SELL 17,228 12,500 (27.4) 600 8.7 35 397 421 630 3.4 6.0 49.7 43.4 40.9 27.3 23.3 19.0 14.3 6.7 5.9 4.9 16.7 15.4 19.7 0.3 0.3 0.3 5.3

UltraTech Cement SELL 4,244 2,950 (30.5) 1,166 17.0 275 88 126 162 (7.8) 42.7 28.9 48.2 33.8 26.2 23.7 17.6 14.5 4.5 4.0 3.5 9.7 12.6 14.3 0.2 0.2 0.2 19.5

Cement Cautious 3,565 52 6.5 23.6 33.7 34.4 27.8 20.8 15.4 11.0 9.3 2.6 2.4 2.2 7.5 8.6 10.5 0.6 0.6 0.6 80.0



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Consumer products

Asian Paints REDUCE 1,425 1,325 (7.0) 1,367 19.9 959 21 27 33 2.9 32.1 20.3 69.4 52.6 43.7 42.5 33.0 27.3 16.3 14.2 12.4 24.6 28.8 30.3 0.6 0.8 1.0 22.1

Bajaj Corp. ADD 408 470 15.2 60 0.9 148 14 15 17 (9.4) 7.8 10.3 28.5 26.5 24.0 22.5 21.1 18.0 12.2 12.3 12.2 42.8 46.3 51.2 2.9 3.2 3.4 0.4

Britannia Industries ADD 6,299 6,700 6.4 756 11.0 120 84 104 127 13.5 24.5 22.2 75.3 60.5 49.5 49.8 39.6 32.4 22.2 17.6 14.2 32.9 32.5 31.8 0.4 0.6 0.7 11.5

Coffee Day Enterprises REDUCE 272 340 24.9 58 0.8 211 3 8 13 49.1 149.7 59.4 81.4 32.6 20.5 13.7 — — 2.4 2.3 2.0 3.1 7.2 10.4 — — — 0.9

Colgate-Palmolive (India) ADD 1,149 1,250 8.8 312 4.6 272 24 27 32 15.2 14.7 15.6 48.3 42.1 36.4 27.7 24.2 21.1 20.5 20.6 17.6 46.2 48.8 52.2 2.1 1.4 1.7 8.2

Dabur India REDUCE 445 390 (12.4) 786 11.5 1,762 8 9 10 7.2 17.3 12.9 57.3 48.8 43.2 48.6 40.9 35.3 13.7 13.7 11.9 25.9 28.1 29.6 1.7 0.8 1.0 13.9

GlaxoSmithKline Consumer ADD 6,739 6,750 0.2 283 4.1 42 166 189 211 6.6 13.3 11.9 40.5 35.7 31.9 28.0 24.1 20.7 8.1 7.4 6.8 21.2 21.7 22.2 1.1 1.3 1.6 2.1

Godrej Consumer Products SELL 1,304 1,100 (15.7) 889 12.9 681 21 25 29 11.5 18.8 13.7 61.1 51.4 45.2 43.3 36.5 31.7 14.2 12.1 10.5 25.2 25.4 24.8 0.5 0.7 0.7 10.0

Hindustan Unilever REDUCE 1,757 1,570 (10.7) 3,804 55.4 2,160 25 29 33 25.0 19.5 13.2 71.6 59.9 53.0 51.4 41.5 36.5 53.6 46.9 39.8 78.1 83.5 81.4 1.1 1.2 1.4 35.7

ITC ADD 301 330 9.7 3,677 53.6 12,275 9 10 11 7.8 8.2 12.3 33.7 31.2 27.8 22.2 20.1 17.8 7.2 6.7 6.4 19.4 20.4 22.2 1.7 1.9 2.2 48.6

Jubilant Foodworks BUY 1,499 1,650 10.0 198 2.9 132 15 25 35 191.7 73.6 37.5 103.0 59.3 43.2 44.1 29.8 22.5 20.4 14.7 11.2 21.7 28.9 29.5 0.1 0.1 0.2 41.6

Jyothy Laboratories ADD 220 240 9.0 80 1.2 364 4 6 7 (26.4) 27.6 16.7 50.0 39.1 33.5 30.6 26.1 22.2 7.0 6.0 5.3 14.4 16.6 16.8 0.2 0.5 0.7 1.6

Marico ADD 362 375 3.7 467 6.8 1,291 6 7 8 7.4 8.9 20.0 57.7 53.0 44.2 40.7 36.8 30.4 18.4 17.4 16.1 33.2 33.7 37.9 1.1 1.3 1.5 9.8

Nestle India ADD 10,771 11,000 2.1 1,039 15.1 96 127 171 197 21.1 34.2 15.7 84.8 63.2 54.6 46.7 36.2 31.3 30.4 27.9 25.6 36.6 46.1 49.0 0.8 1.1 1.3 8.6

Page Industries SELL 30,254 21,000 (30.6) 337 4.9 11 311 392 482 32.5 26.1 22.9 97.3 77.1 62.7 62.0 49.0 40.3 39.8 31.1 24.9 45.9 45.3 44.0 0.4 0.6 0.7 8.2

Pidilite Industries REDUCE 1,120 1,080 (3.6) 569 8.3 508 18 21 26 7.5 16.8 21.8 62.1 53.2 43.7 41.6 35.4 29.2 15.9 13.5 11.3 26.0 27.4 28.2 0.5 0.6 0.7 13.6

S H Kelkar and Company BUY 197 315 59.5 29 0.4 145 7 8 11 2.1 11.8 28.4 26.7 23.9 18.6 18.6 15.6 12.2 3.3 3.0 2.7 12.8 13.3 15.3 0.9 0.9 1.0 0.3

Tata Global Beverages REDUCE 236 250 5.8 149 2.2 631 7 8 9 20.7 7.7 17.0 32.2 29.9 25.5 16.9 16.4 14.4 2.1 2.0 2.0 7.0 7.0 7.9 1.1 1.3 1.5 13.7

Titan Company SELL 935 840 (10.2) 830 12.1 888 13 16 20 43.3 25.6 21.8 73.1 58.2 47.8 50.1 38.7 30.9 16.3 13.8 11.6 24.3 25.6 26.3 0.4 0.5 0.6 38.9

United Breweries SELL 1,161 1,000 (13.9) 307 4.5 264 15 19 24 71.6 29.7 23.4 77.8 60.0 48.6 34.3 28.5 24.7 11.4 9.8 8.4 15.7 17.6 18.6 0.2 0.2 0.3 11.0

United Spirits REDUCE 605 590 (2.5) 440 6.4 727 8 10 13 39.1 34.7 30.9 79.5 59.0 45.1 45.8 34.3 27.8 17.6 12.1 8.9 24.9 24.2 22.7 — — 0.3 18.4

Varun Beverages ADD 763 750 (1.7) 139 2.0 183 12 17 22 377.8 45.4 29.8 66.2 45.5 35.1 20.1 16.2 13.9 7.9 6.8 5.8 12.1 16.0 17.7 — — 0.1 1.6

Consumer products Cautious 16,576 241 14.5 17.6 16.1 54.9 46.7 40.2 35.8 30.1 25.8 13.5 12.2 10.9 24.6 26.1 27.1 1.0 1.1 1.3 320.6

Energy

BPCL REDUCE 387 375 (3.2) 840 12.2 1,967 40 38 39 (1.5) (6.7) 3.1 9.6 10.3 10.0 7.8 7.5 7.1 2.2 2.0 1.8 24.8 20.5 19.1 5.4 3.9 4.0 31.5

Castrol India SELL 159 155 (2.6) 157 2.3 989 7 7 8 3.3 2.9 10.1 23.2 22.5 20.4 14.5 14.1 12.7 15.4 14.8 14.4 67.9 67.1 71.5 3.0 3.5 3.9 4.1

GAIL (India) BUY 377 410 8.8 850 12.4 2,255 20 25 27 21.8 23.2 8.3 18.5 15.0 13.8 11.5 9.6 8.9 2.1 1.9 1.8 11.7 13.5 13.5 1.9 2.3 2.4 22.5

GSPL SELL 203 175 (13.7) 114 1.7 564 12 11 11 34.5 (6.5) (0.5) 17.1 18.3 18.4 8.8 7.0 7.0 2.3 2.1 1.9 14.0 11.7 10.7 0.9 0.8 0.8 1.6

HPCL REDUCE 283 285 0.8 431 6.3 1,524 42 32 32 (3.2) (22.3) (2.2) 6.8 8.7 8.9 5.9 7.5 7.9 1.8 1.6 1.5 28.7 19.6 17.4 6.0 4.7 4.6 29.2

Indraprastha Gas SELL 291 240 (17.6) 204 3.0 700 10 12 13 19.0 16.5 12.0 28.3 24.3 21.7 17.8 15.5 13.7 5.8 5.0 4.4 22.4 22.2 21.5 0.7 0.9 1.1 11.5

IOCL REDUCE 166 160 (3.6) 1,611 23.5 9,479 21 17 18 (24.8) (17.9) 7.4 8.1 9.8 9.2 4.7 5.5 5.0 1.4 1.3 1.2 18.5 14.0 14.0 6.9 4.1 4.4 25.3

Mahanagar Gas ADD 953 965 1.2 94 1.4 99 48 56 60 21.5 16.0 7.6 19.7 17.0 15.8 12.0 9.9 9.1 4.5 4.0 3.5 24.3 24.8 23.5 2.0 2.3 2.5 5.0

ONGC ADD 172 200 16.3 2,206 32.1 12,833 17 20 20 3.1 16.8 0.3 9.9 8.5 8.4 5.2 4.0 3.8 1.0 0.9 0.9 9.9 11.2 10.6 3.8 3.9 4.1 18.9

Oil India SELL 216 220 1.7 245 3.6 1,135 25 24 24 22.6 (1.3) (0.7) 8.8 8.9 8.9 6.8 6.1 6.1 0.9 0.8 0.8 9.8 9.7 9.2 4.8 5.1 5.0 3.1

Petronet LNG BUY 228 280 23.1 341 5.0 1,500 14 16 18 22.1 16.7 13.1 16.4 14.0 12.4 10.9 9.4 7.9 3.5 3.1 2.7 23.3 23.3 23.2 2.0 2.5 3.2 12.5

Reliance Industries SELL 1,218 985 (19.1) 7,206 105.0 5,922 59 69 78 16.9 17.6 12.4 20.6 17.5 15.6 14.9 11.8 10.1 2.5 2.2 1.9 11.6 12.2 12.1 0.5 0.5 0.6 120.9

Energy Attractive 14,301 208 1.0 5.9 6.8 13.9 13.1 12.3 8.9 7.9 7.2 1.8 1.7 1.5 13.3 12.8 12.6 2.4 2.0 2.1 286.1



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Target O/S ADVT

Price (Rs) price Upside shares 3mo


Industrials

ABB SELL 1,212 1,020 (15.8) 257 3.7 212 20 26 29 12.1 30.1 14.2 61.1 47.0 41.2 33.7 27.5 24.7 7.1 6.5 5.9 12.2 14.5 15.1 0.3 0.7 0.7 1.2

BHEL REDUCE 74 78 6.1 270 3.9 3,671 2.2 2.6 5.0 62.7 16.5 95.3 33.5 28.7 14.7 8.2 7.7 4.1 0.8 0.8 0.8 2.5 2.9 5.6 2.5 2.9 5.6 10.3

Carborundum Universal SELL 353 322 (8.8) 67 1.0 189 11 14 17 22.8 25.0 21.4 30.9 24.8 20.4 16.7 13.6 11.1 4.3 3.8 3.4 14.6 16.3 17.8 0.5 1.2 1.5 0.4

CG Power and Industrial BUY 58 65 12.7 36 0.5 627 0.8 3.1 4.3 (72.2) 275.7 40.5 70.6 18.8 13.4 10.5 7.9 6.5 1.3 1.4 1.4 1.5 7.3 10.4 — — — 7.6

Crompton Greaves Consumer SELL 263 215 (18.2) 165 2.4 627 5.2 6.2 7.5 13.3 19.5 20.7 50.8 42.5 35.2 31.2 26.5 22.5 20.9 14.5 11.2 49.5 40.4 35.8 0.6 0.8 1.0 2.8

Cummins India REDUCE 680 680 0.0 188 2.7 277 24 28 32 (7.8) 16.1 13.9 28.1 24.2 21.2 24.7 21.2 17.6 4.7 4.4 4.1 17.4 18.9 20.1 2.2 2.1 2.5 3.9

Havells India SELL 681 485 (28.8) 426 6.2 625 11 14 17 16.6 26.6 20.5 61.5 48.6 40.3 39.4 31.2 25.4 11.4 10.1 8.8 19.8 22.0 23.2 0.5 0.7 0.9 13.3

Kalpataru Power Transmission BUY 369 560 51.8 57 0.8 153 18 23 32 50.6 26.0 39.1 20.2 16.0 11.5 8.5 7.0 5.5 2.1 1.9 1.6 11.0 12.5 15.2 0.4 0.4 0.4 0.5

KEC International BUY 308 410 33.0 79 1.2 257 18 21 27 51.1 16.9 29.7 17.2 14.7 11.4 9.4 8.3 6.7 4.0 3.2 2.6 25.7 24.1 25.2 0.6 0.7 0.9 3.0

L&T BUY 1,298 1,600 23.2 1,820 26.5 1,401 52 63 70 22.4 21.7 10.9 25.1 20.6 18.6 20.7 16.4 15.8 3.6 3.3 3.0 15.0 16.8 16.8 1.2 1.8 1.9 43.5

Siemens SELL 1,016 1,000 (1.5) 362 5.3 356 24 29 35 21.2 21.4 21.7 42.4 34.9 28.7 24.5 19.8 16.0 4.4 4.2 3.9 10.8 12.3 14.0 1.0 1.2 1.4 3.1

Thermax REDUCE 1,144 1,065 (6.9) 136 2.0 113 21 30 42 (3.6) 44.2 42.8 55.5 38.5 26.9 33.8 24.0 17.1 4.7 4.4 3.9 8.8 11.8 15.3 0.5 0.7 0.8 0.7

Voltas SELL 592 525 (11.3) 196 2.9 331 17 19 22 12.6 8.3 15.6 34.2 31.6 27.3 28.5 24.2 20.1 5.0 4.5 4.0 15.9 15.0 15.5 0.7 0.7 0.8 13.8

Industrials Neutral 4,058 59 19.9 22.4 20.4 31.6 25.9 21.5 20.7 16.8 14.6 3.4 3.2 2.9 10.8 12.3 13.7 1.1 1.4 1.8 104.1

Infrastructure

Adani Ports and SEZ BUY 375 460 22.8 776 11.3 2,071 18 19 23 (2.1) 1.2 21.1 20.3 20.0 16.5 13.6 13.6 11.3 3.7 3.2 2.7 19.8 17.0 17.7 0.5 0.5 0.5 24.5

Ashoka Buildcon BUY 146 210 43.6 41 0.6 282 8 8 9 34.6 0.5 5.2 17.4 17.3 16.4 14.0 11.9 10.5 2.1 1.8 1.7 13.0 11.4 10.7 0.7 1.1 0.8 0.7

Container Corp. SELL 644 635 (1.5) 314 4.6 487 18 21 25 7.1 17.4 20.9 36.5 31.1 25.7 24.1 19.1 15.2 3.3 3.1 2.9 9.4 10.3 11.6 2.7 1.4 1.6 7.5

Dilip Buildcon BUY 842 1,220 44.9 115 1.7 137 46 54 69 76.5 16.1 28.0 18.1 15.6 12.2 10.1 7.3 6.0 4.7 3.6 2.8 29.5 25.9 25.4 — — — 8.8

Gateway Distriparks BUY 180 250 38.8 20 0.3 109 8 7 8 11.2 (5.8) 15.2 23.7 25.1 21.8 22.5 11.2 9.3 1.9 3.4 3.0 8.2 9.8 14.5 3.9 — 1.7 0.8

Gujarat Pipavav Port BUY 116 170 47.0 56 0.8 483 4.1 5.9 7.2 (20.6) 43.7 22.5 28.2 19.6 16.0 13.8 11.4 9.0 2.8 2.7 2.7 9.8 14.0 16.8 2.9 4.2 5.1 0.8

IRB Infrastructure BUY 196 320 63.6 69 1.0 351 23 31 33 10.8 36.8 7.1 8.7 6.3 5.9 6.9 6.6 7.1 1.2 1.0 0.9 14.5 17.6 16.3 1.2 1.6 2.0 6.4

Mahindra Logistics REDUCE 568 565 (0.4) 40 0.6 71 10 15 21 16.2 50.7 39.3 57.9 38.4 27.6 33.4 21.4 15.5 9.6 8.0 6.4 18.2 22.7 25.8 — — — 0.8

Sadbhav Engineering BUY 275 440 60.0 47 0.7 172 13 18 18 17.4 38.4 2.2 21.4 15.4 15.1 14.9 11.9 9.2 2.5 2.2 1.9 12.5 15.2 13.7 — — — 0.8

Infrastructure Attractive 1,478 22 5.9 11.4 18.8 21.3 19.1 16.1 13.1 11.9 10.1 3.2 2.8 2.5 15.1 14.8 15.3 1.1 0.8 1.0 51.1

Internet

Info Edge ADD 1,473 1,425 (3.3) 180 2.6 122 23 26 33 33.3 14.9 27.5 65.4 57.0 44.7 55.2 43.2 32.7 8.5 6.7 6.1 13.4 13.2 14.3 0.4 0.6 0.6 2.5

Just Dial ADD 575 610 6.1 39 0.6 67 21 26 30 21.7 23.0 15.0 27.1 22.0 19.1 16.2 12.5 10.2 4.0 3.4 3.0 15.2 16.7 16.6 — 0.5 0.5 48.3

Internet Cautious 218 3 28.0 17.6 23.0 52.4 44.5 36.2 41.3 32.6 25.7 7.1 5.8 5.1 13.5 12.9 14.2 0.3 0.5 0.6 50.8

Media

DB Corp. REDUCE 248 270 9.0 46 0.7 184 18 20 23 (14.1) 14.9 12.3 14.1 12.2 10.9 7.5 6.7 5.9 2.7 2.5 2.4 19.9 20.7 22.3 5.2 6.8 8.5 0.6

DishTV ADD 68 90 32.4 125 1.8 1,925 (0.4) 1.8 3.4 (143.0) 514.6 88.2 NM 37.2 19.8 11.2 5.8 4.7 1.9 1.8 1.7 (2.3) 5.1 8.9 — — — 7.8

Jagran Prakashan REDUCE 117 131 11.6 35 0.5 311 10 11 12 (9.3) 10.0 13.6 12.2 11.1 9.7 4.9 4.8 4.1 1.8 1.8 1.7 14.3 15.9 18.2 2.6 4.3 6.4 0.5

PVR BUY 1,245 1,360 9.3 58 0.8 47 27 38 50 25.5 41.2 32.3 46.4 32.8 24.8 15.7 12.7 10.8 5.4 4.7 4.0 12.3 15.3 17.6 0.2 0.3 0.4 9.7

Sun TV Network REDUCE 819 925 12.9 323 4.7 394 29 35 39 10.2 20.7 10.9 28.4 23.6 21.3 19.1 16.0 14.0 7.0 6.3 5.6 26.3 28.1 27.9 1.2 2.1 2.4 21.6

Zee Entertainment Enterprises ADD 528 600 13.5 508 7.4 960 15 17 20 7.8 11.3 17.0 35.2 31.6 27.0 22.8 19.7 16.6 6.7 5.9 5.2 20.3 19.9 20.6 0.5 0.9 1.0 18.0

Media Attractive 1,094 16 (1.8) 28.7 21.0 33.7 26.2 21.7 16.2 12.5 10.7 4.6 4.3 3.8 13.7 16.3 17.7 0.9 1.4 1.8 58.1

Dividend yield (%)P/B (X) RoE (%)Mkt cap. EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X)


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Metals & Mining

Coal India ADD 276 326 18.0 1,715 25.0 6,207 11 27 28 (24.2) 138.2 3.0 24.4 10.3 10.0 18.3 6.6 6.2 7.1 6.5 6.7 26.7 66.1 66.4 6.0 7.2 9.0 14.8

Hindalco Industries BUY 221 305 38.3 495 7.2 2,229 22 27 31 155.4 23.9 13.6 10.1 8.1 7.2 6.4 5.4 4.7 0.9 0.8 0.7 9.7 10.5 10.7 0.5 0.5 0.5 35.6

Hindustan Zinc ADD 286 290 1.4 1,209 17.6 4,225 22 22 26 9.3 3.7 14.7 13.3 12.8 11.2 8.2 7.4 6.1 3.4 2.9 2.5 27.2 24.4 24.2 2.8 2.8 2.8 8.1

Jindal Steel and Power REDUCE 217 255 17.5 210 3.1 968 (8) 8 18 59.3 194.2 129.1 (25.6) 27.1 11.8 9.7 7.0 6.0 0.7 0.7 0.7 (2.7) 2.6 5.7 — — — 30.4

JSW Steel ADD 342 350 2.2 828 12.1 2,417 27 30 27 83.9 10.2 (8.7) 12.8 11.6 12.7 8.2 7.1 7.8 2.9 2.4 2.0 24.8 22.4 17.3 1.0 1.0 1.0 20.5

National Aluminium Co. ADD 67 80 18.7 130 1.9 1,933 4 9 7 12.7 125.8 (21.1) 16.3 7.2 9.2 6.9 3.2 4.1 1.2 1.2 1.2 7.7 16.8 13.0 8.5 8.9 8.9 9.3

NMDC REDUCE 114 120 5.6 359 5.2 3,164 12 12 10 43.3 4.2 (14.3) 9.7 9.3 10.9 5.3 5.7 6.6 1.5 1.4 1.3 15.8 15.3 12.4 4.8 4.8 4.8 4.3

Tata Steel ADD 578 700 21.2 661 9.6 1,205 67 69 82 62.6 3.1 18.4 8.6 8 7.0 6.3 6.2 6.3 1.2 1.0 1.0 17.2 13.1 13.9 1.6 1.7 1.7 71.0

Vedanta BUY 225 370 64.6 836 12.2 3,717 22 32 39 9.6 49.1 19.7 10.4 7.0 5.8 5.7 4.7 3.8 1.3 1.2 1.1 12.9 18.0 19.4 3.6 4.3 5.1 51.9

Metals & Mining Attractive 6,443 94 32.3 39.9 9.2 13.6 9.7 8.9 7.6 6.0 5.6 1.9 1.7 1.6 14.3 17.8 17.9 3.4 3.8 4.4 245.9

Pharmaceutical

Apollo Hospitals ADD 972 1,090 12.2 135 2.0 139 8 19 26 (46.9) 124.3 38.0 115.1 51.3 37.2 21.0 17.9 15.1 4.2 3.9 3.7 3.4 7.9 10.2 0.2 0.5 0.7 7.6

Aster DM Healthcare BUY 167 240 43.7 84 1.2 505 3 5 7 163.1 64.2 59.2 60.6 36.9 23.2 16.8 12.5 10.0 3.0 2.8 2.5 5.9 7.8 11.4 - - - 0.4

Aurobindo Pharma ADD 611 640 4.8 358 5.2 584 42 45 51 6.0 7.0 13.5 14.6 13.7 12.0 10.2 9.5 8.2 3.1 2.5 2.2 23.2 20.3 17.9 0.7 0.8 1.0 20.8

Biocon SELL 566 330 (41.7) 340 4.9 601 6 8 15 (39.2) 35.9 75.7 91.4 67.2 38.3 41.0 29.3 19.6 6.0 5.6 5.1 6.9 8.7 13.9 0.2 0.5 0.9 22.6

Cipla BUY 633 680 7.4 510 7.4 805 18 24 31 40.2 34.5 31.0 36.2 26.9 20.5 18.8 15.2 12.0 3.5 3.2 2.8 10.2 12.4 14.6 0.6 0.8 1.0 24.7

Dr Lal Pathlabs REDUCE 939 865 (7.9) 78 1.1 83 20 25 29 7.0 20.8 18.5 45.9 38.0 32.1 27.9 23.4 19.6 9.9 8.3 6.9 23.5 23.7 23.4 0.5 0.5 0.6 1.6

Dr Reddy's Laboratories REDUCE 2,246 2,150 (4.3) 373 5.4 166 59 89 118 (18.5) 50.2 32.8 38.0 25.3 19.1 17.6 12.8 9.1 2.9 2.7 2.4 7.8 11.1 12.6 1.1 0.6 0.8 36.5

HCG REDUCE 275 305 11.0 24 0.4 85 2 3 5 (40.0) 120.9 57.3 175.7 79.6 50.6 23.2 18.1 15.4 4.5 4.3 4.0 2.8 5.5 8.1 — — — 0.2

Laurus Labs ADD 440 500 13.5 47 0.7 106 16 16 29 (11.9) 2.4 79.9 27.8 27.1 15.1 13.7 12.6 8.7 3.1 2.8 2.4 11.9 10.9 17.1 — — — 0.5

Lupin REDUCE 826 800 (3.1) 373 5.4 450 38 36 48 (32.9) (5.1) 33.7 21.7 22.8 17.1 13.4 11.5 9.1 2.7 2.5 2.2 12.6 11.4 13.7 1.1 0.7 0.9 37.1

Narayana Hrudayalaya ADD 252 265 5.1 52 0.8 204 3 3 6 (38.1) 23.0 103.2 100.3 81.6 40.1 27.6 23.1 16.2 5.0 4.7 4.2 5.1 5.9 11.0 — — — 0.4

Sun Pharmaceuticals REDUCE 574 500 (12.9) 1,377 20.1 2,406 15 17 24 (47.5) 12.0 42.0 37.8 33.8 23.8 22.4 18.4 13.5 3.6 3.3 3.0 9.8 10.2 13.1 0.3 0.6 0.8 52.3

Torrent Pharmaceuticals NR 1,720 — — 291 4.2 169 40 47 61 (27.4) 18.0 29.6 42.9 36.4 28.1 23.6 15.9 13.6 6.3 5.6 4.8 15.1 15.3 17.2 0.9 0.6 0.8 6.4

Pharmaceuticals Neutral 4,042 59 (25.8) 17.3 34.4 33.9 28.9 21.5 18.6 15.2 11.8 3.6 3.3 2.9 10.7 11.4 13.6 0.6 0.6 0.8 211.0

Real Estate

Brigade Enterprises BUY 192 340 77.1 26 0.4 136 11 9 9 (17.7) (15.1) (1.6) 17.3 20.4 20.8 10.8 11.0 10.8 1.1 1.1 1.1 7.6 5.5 5.2 1.3 1.3 1.3 0.3

DLF RS 189 — — 337 4.9 1,784 19.6 6.5 3.9 403.9 (66.9) (39.6) 9.6 29.1 48.2 28.7 12.5 12.3 1.0 0.9 0.9 11.7 3.2 1.9 1.1 1.1 1.1 16.4

Godrej Properties SELL 718 400 (44.3) 165 2.4 216 10.9 13.3 15.8 13.5 22.1 19.1 66.2 54.2 45.5 (4,407.7) 318.7 165.9 6.9 4.6 4.2 11.1 10.5 9.7 — — — 2.6

Oberoi Realty BUY 480 560 16.8 174 2.5 340 13 62 44 14.0 385.4 (28.0) 37.7 7.8 10.8 28.2 10.7 13.4 2.7 1.8 1.5 7.3 27.4 15.2 0.4 0.4 0.4 2.5

Prestige Estates Projects ADD 250 315 26.2 94 1.4 375 13 10 10 24.3 (24.2) 8.4 19.9 26.3 24.2 14.2 14.7 14.8 2.0 1.9 1.8 10.3 7.3 7.5 0.6 0.6 0.6 1.1

Sobha REDUCE 497 510 2.6 47 0.7 95 23 23 36 37.5 2.4 51.7 21.7 21.2 13.9 13.3 12.4 9.7 1.7 2.2 1.9 8.0 9.0 14.8 1.4 1.4 1.4 1.5

Sunteck Realty REDUCE 435 330 (24.1) 64 0.9 140 15 18 20 4.8 20.2 6.9 28.5 23.7 22.2 18.2 19.8 18.4 2.3 2.1 1.9 9.7 9.4 9.2 0.3 0.2 0.2 1.6

Real Estate Neutral 907 13 139.8 (13.0) (18.3) 17.4 20.0 24.5 24.9 14.7 14.9 1.6 1.5 1.4 9.3 7.4 5.8 0.7 0.7 0.7 25.9

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Technology

HCL Technologies REDUCE 965 1,025 6.3 1,343 19.6 1,409 62 70 74 5.3 12.8 5.0 15.5 13.7 13.1 10.9 9.0 8.1 3.7 3.1 2.7 24.8 24.2 21.8 0.8 0.9 3.2 31.4

Hexaware Technologies SELL 478 435 (9.1) 142 2.1 302 17 20 23 20.2 18.4 18.0 28.9 24.4 20.7 20.8 18.2 14.5 7.2 6.3 5.3 26.6 27.4 27.8 0.8 1.7 1.7 13.7

Infosys ADD 1,363 1,400 2.7 2,977 43.4 2,175 65 71 78 3.0 9.7 10.4 21.1 19.2 17.4 14.6 13.2 11.8 4.6 4.3 3.9 21.8 23.0 23.5 2.0 3.2 2.9 79.8

L&T Infotech ADD 1,712 2,000 16.8 296 4.3 175 64 83 94 13.9 30.5 13.0 26.9 20.6 18.3 23.7 15.8 13.3 7.8 6.2 5.1 31.8 33.5 30.7 1.0 1.4 1.5 4.4

Mindtree ADD 961 1,115 16.0 158 2.3 165 35 43 53 37.8 24.9 23.6 27.8 22.3 18.0 20.2 13.9 11.2 5.8 4.9 4.2 21.4 23.9 25.2 1.1 1.3 1.7 24.0

Mphasis SELL 1,150 825 (28.2) 222 3.2 193 44 53 57 14.4 20.5 7.1 26.2 21.7 20.3 19.0 16.0 14.2 4.1 4.3 3.9 14.6 18.7 19.9 1.7 1.7 2.2 11.4

TCS REDUCE 1,975 1,790 (9.3) 7,560 110.1 3,829 67 82 89 1.1 21.2 8.8 29.3 24.1 22.2 21.8 17.7 16.3 8.7 7.6 7.5 29.4 33.4 33.8 1.3 2.1 3.6 97.2

Tech Mahindra ADD 654 785 20.0 577 8.4 891 43 46 55 33.1 8.3 18.2 15.3 14.2 12.0 11.2 8.4 6.8 3.1 2.6 2.3 21.5 20.2 20.5 2.2 1.4 1.6 36.0

Wipro REDUCE 279 295 5.9 1,260 18.4 4,507 17 19 22 (3.1) 11.8 14.6 16.4 14.7 12.8 10.4 9.2 8.0 2.6 2.2 2.1 16.0 16.4 16.8 0.4 0.5 3.6 12.5

Technology Cautious 14,535 212 1.6 13.1 9.7 22.7 20.1 18.3 16.5 13.8 12.4 5.4 4.8 4.4 23.7 23.8 24.2 1.3 2.0 3.2 310.4

Telecom

Bharti Airtel ADD 385 445 15.5 1,540 22.4 3,997 5 (6) (4) (42.9) (221.5) 28.8 81.4 (67.0) (94.1) 8.5 9.9 8.3 2.2 2.3 2.4 2.8 (3.4) (2.5) 1.4 0.3 (0.2) 30.6

Bharti Infratel REDUCE 290 285 (1.9) 537 7.8 1,850 14 13 12 (7.4) (4.8) (8.5) 21.1 22.2 24.2 7.7 8.3 8.8 3.2 3.3 3.3 15.7 14.6 13.7 5.0 3.6 3.3 12.0

IDEA REDUCE 55 45 (18.7) 241 3.5 4,359 (10) (17) (17) (656.8) (75.6) (2.4) (5.8) (3.3) (3.2) 12.4 35.3 29.9 0.9 1.1 1.7 (16.0) (29.7) (41.1) — — — 17.0

Tata Communications ADD 582 725 24.6 166 2.4 285 2 4 8 (84.3) 121.9 117.7 353 159.3 73.2 10.7 9.5 8.4 33.2 26.8 19.4 4.5 18.6 30.7 1.1 1.1 1.3 4.1

Telecom Cautious 2,485 36 (94.7) (2,354.7) 5.7 790.0 (35.0) (37.2) 9.0 11.1 9.7 2.2 2.4 2.6 0.3 (6.8) (7.0) 1.9 0.9 0.6 63.7

Utilities

CESC BUY 931 1,180 26.7 123 1.8 133 87 115 128 67.1 31.7 11.6 10.7 8.1 7.3 7.7 5.7 5.1 0.8 0.8 0.7 7.9 10.0 10.4 1.3 1.4 1.4 5.8

JSW Energy REDUCE 68 70 3.6 111 1.6 1,640 3.1 5.1 6.5 (19.2) 65.9 26.8 22.0 13.3 10.5 6.9 5.7 4.7 1.0 0.9 0.9 4.7 7.2 8.5 - - - 1.7

NHPC ADD 25 30 22.0 252 3.7 10,260 2.4 3.1 3.2 (17.3) 26.9 1.8 10.1 7.9 7.8 9.3 7.3 7.1 0.8 0.8 0.8 8.5 10.4 10.2 5.7 7.1 7.1 2.0

NTPC BUY 158 190 20.1 1,305 19.0 8,245 11 15 16 (7.6) 30.9 4.4 13.9 10.6 10.2 11.2 8.7 8.0 1.3 1.2 1.1 9.5 11.6 11.3 3.6 2.8 2.9 14.1

Power Grid BUY 190 250 31.9 991 14.4 5,232 16 19 21 9.6 19.3 13.6 12.0 10.1 8.9 8.5 7.2 6.6 1.8 1.6 1.5 15.8 17.1 17.5 2.8 3.3 3.8 30.5

Reliance Power SELL 34 43 27.4 95 1.4 2,805 3.5 5.1 5.2 (16.4) 45.6 2.7 9.7 6.7 6.5 7.9 6.8 6.6 0.4 0.4 0.4 4.5 6.1 5.9 — — — 4.0

Tata Power BUY 69 90 29.6 188 2.7 2,705 5.3 6.0 7.0 (9.6) 12.7 15.6 13.0 11.5 10.0 10.1 10.5 10.1 1.2 1.1 1.0 10.7 10.1 10.6 — — — 4.9

Utilities Attractive 3,065 45 (2.4) 26.8 8.6 12.7 10.0 9.2 9.4 7.8 7.2 1.2 1.1 1.1 9.7 11.4 11.4 2.9 2.9 3.1 63.0

P/B (X) RoE (%) Dividend yield (%)Mkt cap. EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X)


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Others

Astral Poly Technik SELL 1,087 640 (41.1) 130 1.9 120 15 19 25 20.8 30.2 28.8 74.2 57.0 44.2 41.7 30.6 24.3 12.8 10.0 8.3 18.8 19.8 20.5 0.1 0.1 0.1 1.1

Avenue Supermarts SELL 1,628 860 (47.2) 1,016 14.8 624 13 16 20 47.9 28.6 26.4 129.5 100.8 79.7 75.9 58.1 45.6 21.9 18.0 14.7 18.5 19.6 20.3 — — — —

Bayer Cropscience REDUCE 4,192 4,100 (2.2) 166 2.4 34 88 106 130 6.4 20.5 23.1 47.9 39.7 32.3 39.4 29.1 23.7 8.1 7.0 6.0 15.7 18.9 20.0 0.4 0.5 0.6 0.5

Dhanuka Agritech ADD 613 690 12.6 30 0.4 49 26 28 32 7.7 8.9 15.4 23.8 21.9 19.0 17.5 15.1 12.7 4.7 4.1 3.5 21.9 20.1 20.0 0.9 1.0 1.1 0.2

Godrej Agrovet ADD 650 650 0.0 125 1.8 189 12 16 20 6.9 39.8 24.6 56.4 40.4 32.4 29.0 22.4 18.1 7.3 6.3 5.4 14.7 16.9 17.9 0.3 0.4 0.5 1.4

Godrej Industries RS 619 — — 208 3.0 336 15 16 20 6.8 8.9 24.2 42.4 39.0 31.4 37.6 31.8 34.7 5.8 5.1 4.5 14.4 13.9 15.1 0.3 0.3 0.3 4.7

InterGlobe Aviation BUY 1,029 1,220 18.5 396 5.8 383 61 50 83 32.1 (17.9) 65.3 16.9 20.6 12.5 9.6 11.6 6.6 5.6 4.5 3.4 42.9 24.1 31.1 0.6 0.5 0.8 22.2

Kaveri Seed SELL 594 470 (20.9) 39 0.6 66 32 31 33 18.4 (3.7) 6.1 18.6 19.3 18.2 15.8 16.3 14.8 5.1 4.3 3.7 23.6 24.0 21.9 1.0 1.3 1.7 5.2

PI Industries BUY 773 875 13.2 107 1.6 138 27 31 40 (20.0) 17.9 26.8 29.1 24.7 19.5 21.4 17.5 13.7 5.6 4.7 3.9 20.7 20.5 21.7 0.4 0.5 0.6 1.5

Rallis India ADD 206 220 7.0 40 0.6 195 9 10 12 (1.5) 17.2 19.4 23.9 20.4 17.0 14.8 13.4 11.3 3.4 3.1 2.8 14.6 15.8 17.1 1.6 1.8 1.9 0.8

SIS REDUCE 1,075 1,130 5.1 79 1.1 73 22 33 40 43.3 48.5 21.1 47.9 32.3 26.6 25.8 20.2 16.9 7.6 6.4 5.3 20.1 21.8 21.7 0.2 0.3 0.3 0.7

SRF BUY 1,853 2,200 18.7 106 1.6 57 80 100 132 (10.4) 23.8 32.2 23.0 18.6 14.1 15.0 10.9 8.7 3.0 2.6 2.3 13.7 15.0 17.3 0.7 0.7 0.8 11.7

Tata Chemicals ADD 672 760 13.2 171 2.5 255 51 46 52 6.5 (11.2) 13.6 13.1 14.7 12.9 7.2 6.1 5.1 1.5 1.4 1.3 13.8 10.0 10.5 3.3 2.2 2.5 7.3

TeamLease Services SELL 2,502 1,785 (28.7) 43 0.6 17 43 58 75 28.0 34.2 29.0 58.0 43.2 33.5 60.2 43.7 33.2 9.7 7.9 6.4 18.2 20.1 21.1 — — — 1.5

UPL ADD 648 660 1.9 330 4.8 507 43 49 55 20.9 14.0 12.1 15.1 13.2 11.8 10.4 8.9 7.6 3.6 3.0 2.5 26.4 24.6 22.9 1.2 1.5 1.7 22.5

Vardhman Textiles ADD 1,216 1,400 15.2 70 1.0 56 103 130 140 (8.0) 26.4 7.4 11.8 9.3 8.7 9.9 7.4 6.6 1.4 1.3 1.1 12.7 14.3 13.8 1.2 1.6 2.5 1.0

Whirlpool SELL 1,750 1,240 (29.1) 222 3.2 127 28 37 45 13.0 33.9 22.5 63.3 47.3 38.6 37.7 29.1 23.5 12.4 10.3 8.5 21.4 23.7 24.1 0.2 0.4 0.5 1.1

Others 3,277 48 16.1 7.9 26.5 31.8 29.5 23.3 20.7 18.1 14.3 5.8 5.0 4.2 18.3 16.9 18.2 0.5 0.5 0.7 83.4

KIE universe 113,509 1,653 (5.2) 27.5 24.7 27.8 21.8 17.5 13.0 10.9 9.7 3.1 2.8 2.6 11.2 13.0 14.6 1.3 1.3 1.7

KIE universe (ex-energy) 99,207 1,445 (7.1) 34.8 29.5 32.4 24.1 18.6 14.4 12.0 10.6 3.5 3.1 2.8 10.7 13.0 15.2 1.1 1.2 1.6

Notes:

(a) We have used adjusted book values for banking companies.

(b) 2018 means calendar year 2017, similarly for 2019 and 2020 for these particular companies.

(c) Exchange rate (Rs/US$)= 68.65

Mkt cap. EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%)

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Economy India

Ratings and other definitions/identifiers

Definitions of ratings

BUY. We expect this stock to deliver more than 15% returns over the next 12 months.

ADD. We expect this stock to deliver 5-15% returns over the next 12 months.

REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.

SELL. We expect this stock to deliver <-5% returns over the next 12 months.

Our target prices are also on a 12-month horizon basis.

Other definitions

Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following

designations: Attractive, Neutral, Cautious.

Other ratings/identifiers

NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s)

and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction

involving this company and in certain other circumstances.

CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.

NC = Not Covered. Kotak Securities does not cover this company.

RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient

fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock

and should not be relied upon.

NA = Not Available or Not Applicable. The information is not available for display or is not applicable.

NM = Not Meaningful. The information is not meaningful and is therefore excluded.

Kotak Institutional Equities Research coverage universe

Distribution of ratings/investment banking relationships

Source: Kotak Institutional Equities As of June 30, 2018

Percentage of companies covered by Kotak Institutional

Equities, within the specified category.

* The above categories are defined as follows: Buy = We

expect this stock to deliver more than 15% returns over

the next 12 months; Add = We expect this stock to

deliver 5-15% returns over the next 12 months; Reduce

= We expect this stock to deliver -5-+5% returns over

the next 12 months; Sell = We expect this stock to deliver

less than -5% returns over the next 12 months. Our

target prices are also on a 12-month horizon basis.

These ratings are used illustratively to comply with

applicable regulations. As of 31/03/2018 Kotak

Institutional Equities Investment Research had

investment ratings on 207 equity securities.

Percentage of companies within each category for

which Kotak Institutional Equities and or its affiliates has

provided investment banking services within the

previous 12 months.

21.4%

31.3%

25.4%21.9%

2.0%5.0% 4.5%

0.5%

0%

10%

20%

30%

40%

50%

60%

70%

BUY ADD REDUCE SELL

Corporate Office Overseas Affiliates

Kotak Securities Ltd.

27 BKC, Plot No. C-27, “G Block”

Bandra Kurla Complex, Bandra (E)

Mumbai 400 051, India

Tel: +91-22-43360000

Kotak Mahindra (UK) Ltd

8th Floor, Portsoken House

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 2018 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. Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Institutional Equities Research Group of Kotak Securities Limited. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Private Client Group. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additionally, other important information regarding our relationships with the company or companies that are the subject of this material is provided herein. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. It is for the general information of clients of Kotak Securities Limited. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, clients should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Kotak Securities Limited does not provide tax advise to its clients, and all investors are strongly advised to consult with their tax advisers regarding any potential investment. Certain transactions -including those involving futures, options, and other derivatives as well as non-investment-grade securities - give rise to substantial risk and are not suitable for all investors. The material is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions expressed are our current opinions as of the date appearing on this material only. We endeavor to update on a reasonable basis the information discussed in this material, but regulatory, compliance, or other reasons may prevent us from doing so. We and our affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this material, may from time to time have "long" or "short" positions in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. Kotak Securities Limited and its non US affiliates may, to the extent permissible under applicable laws, have acted on or used this research to the extent that it relates to non US issuers, prior to or immediately following its publication. Foreign currency denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of or income derived from the investment. In addition, investors in securities such as ADRs, the value of which are influenced by foreign currencies affectively assume currency risk. In addition options involve risks and are not suitable for all investors. Please ensure that you have read and understood the current derivatives risk disclosure document before entering into any derivative transactions. Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house. Kotak Securities Limited is a corporate trading and clearing member of BSE Limited (BSE), National Stock Exchange of India Limited (NSE), MSEI a. Our businesses include stock broking, services rendered in connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management. Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Kotak Securities Limited is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old Mutual Life Insurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI). Kotak Securities Limited is registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014. We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in last five years. However SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise letters or levied minor penalty on KSL for certain operational deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has our certificate of registration been cancelled by SEBI at any point of time. We offer our research services to primarily institutional investors and their employees, directors, fund managers, advisors who are registered with us Details of Associates are available on our website i.e. www.kotak.com Research Analyst has served as an officer, director or employee of subject company(ies): No We or our associates may have received compensation from the subject company(ies) in the past 12 months. We or our associates have managed or co-managed public offering of securities for the subject company(ies) in the past 12 months. YES We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received compensation or other benefits from the subject company(ies) or third party in connection with the research report. Our associates may have financial interest in the subject company(ies). Research Analyst or his/her relative's financial interest in the subject company(ies): No Kotak Securities Limited has financial interest in the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: YES Our associates may have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report. Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No Kotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No Subject company(ies) may have been client during twelve months preceding the date of distribution of the research report. A graph of daily closing prices of securities is available at www.nseindia.com and http://economictimes.indiatimes.com/markets/stocks/stock-quotes. (Choose a company from the list on the browser and select the"three years" icon in the price chart). Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. CIN: U99999MH1994PLC134051, Telephone No.: +22 43360000, Fax No.: +22 67132430. Website: www.kotak.com / www.kotaksecurities.com. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Telephone No: 42856825. SEBI Registration No: NSE INB/INF/INE 230808130, BSE INB 010808153/INF 011133230, MSE INE 260808130/INB 260808135/INF 260808135, AMFI ARN 0164, PMS INP000000258 and Research Analyst INH000000586. NSDL/CDSL: IN-DP-NSDL-23-97. Compliance Officer Details: Mr. Manoj Agarwal. Call: 022 - 4285 8484, or Email: [email protected]. Investments in securities market are subject to market risks, read all the related documents carefully before investing. In case you require any clarification or have any concern, kindly write to us at below email ids: Level 1: For Trading related queries, contact our customer service at ‘[email protected]’ and for demat account related queries contact us at [email protected] or call us on:

Toll free numbers 18002099191 / 1800222299 and 18002099292 Level 2: If you do not receive a satisfactory response at Level 1 within 3 working days, you may write to us at [email protected] or call us on 022-42858445 and if you feel you are

still unheard, write to our customer service HOD at [email protected] or call us on 022-42858208. Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Name: Mr. Manoj Agarwal) at

[email protected] or call on 91- (022) 4285 8484.

Level 4: If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach CEO (Mr. Kamlesh Rao) at [email protected] or call on 91-(022) 4285 8301.

First Cut notes published on this site are for information purposes only. They represent early notations and responses by analysts to recent events. Data in the notes may not have been verified by us and investors should not act upon any data or views in these notes. Most First Cut notes, but not necessarily all, will be followed by final research reports on the subject. There could be variance between the First cut note and the final research note on any subject, in which case the contents of the final research note would prevail. We accept no liability for the contents of the First Cut Notes.

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