Covid Resilient 2.0 Portfolio

Call Success – Covid Resilient Portfolio FY21

2

Dear Investor,

For FY21, we had built and recommended a smallcase - IIFL Covid Resilient Portfolio for you. While building this smallcase, we had considered valuations and taken a bottom up approach in the light of sharp rally in broader markets.

We are glad to announce that our IIFL Covid Resilient Portfolio has performed well wherein almost all the stocks in the portfolio have achieved the desired targets and have given strong returns throughout the last year.

Based on the like to like period vs. NIFTY, the IIFL Covid Resilient Portfoliosmallcase is up ~84%, outperforming NIFTY by 26%.

Therefore, we recommend you to book profit in this smallcase and invest in ourCovid Resilient 2.0 Portfolio.

You can also understand the Covid Resilient 2.0 Portfolio by watching this video: Click here

INVEST NOW

Outlook

3

• The Indian economy has fared relatively better thanexpected in 2HFY2021. The efforts taken by the GoI in theFY22 Budget marked the clear path for driving growthwhilst compromising on fiscal prudence in order to drag theeconomy out of the Covid led slide. However, the currentCovid second wave has re-imposed fresh partial lockdowns,limiting the economic activities.

• As some economic & health indicators are already pointingtowards downward revision in the GDP forecast, investingin the covid resilient sectors would be an ideal strategy totide the second wave of Covid. We believe, sectors likeHealthcare, Pharma, Diagnostic & select FMCG willcontinue to thrive during the FY22.

Outlook

4

• Aided by increased global liquidity & defensive Covidresilience nature of our portfolio, we expect very limiteddownside risk for our portfolio stocks. We believe thesequality stocks have strong support given factors likeleadership position or balance sheet strength which willkeep these companies resilient.

• We are presenting opportunities that either have (1)resilient business models which has stood the test of timei.e. Apollo Hospital, JB Chemicals, Cipla, Dabur and SBI Life,and (2) are expected beneficiaries of the Covid secondwave viz. Metropolis, Lalpath Labs, Thyrocare and Cadila.

Covid Resilient 2.0 Portfolio

Sr. No. Stock CMP (₹) Weight

(%)Target Price

(₹)Upside

(%)

Multi-Caps

1 Cipla 911 15 1,050 15%

2 Metropolis 2385 15 2,880 21%

3 JB Chemicals 1437 15 1,680 17%

4 Apollo Hospital 3204 15 3,550 11%

5 Dabur 543 10 620 14%

6 SBI Life 959 10 1,230 28%

7 Cadila 581 10 670 15%

8 Thyrocare Tech 1061 5 1,250 18%

9 Dr Lal PathLabs 2929 5 3,390 16%

*Price as on May 03, 2021

5

• Cipla is one of the largest Indian pharma companies. It is a major player in the domesticformulations market, which contributes ~39% of its total revenue. Cipla makes drugs totreat cardiovascular disease, arthritis, diabetes, weight control, depression and manyother health conditions.

• Cipla is one of IIFL’s top large-cap picks for FY22, underpinned by a strong build-outexpected in the US business led by the inhalation portfolio, where we believe respiratoryproducts alone can add incremental sales of USD230-250mn (40-45%) to the US businessby FY25 and drive 12% cc Cagr (18% incl. Revlimid) in US sales over FY21ii-23ii.

• Sustained traction in chronic therapies will drive 7.5% Cagr in India sales over FY21ii-23ii,despite the higher base.

• We believe US respiratory launches, synergies from the One-India strategy and furthercost optimization would drive a sustainable increase in return ratios over the mediumterm, with RoIC (post-tax)/RoE improving to 19%/16% by FY23ii. Cumulative FCFgeneration should also double, to ~USD1bn over the next 3 years vs. USD500mngenerated over FY18-20

• We expect Cipla to register a FY23E EPS of 15% to factor in the Revlimid launch. Werecommend a Buy Rating with a target price of ₹1,050 based on ~24.5x FY23ii.

Cipla

*Price and valuations ratios as on December 24, 2020

CMP: ₹ 911 BUY TP: ₹1,050 Upside: 15%

6

• Metropolis is India's third-largest diagnostics player, with a strong B2C pathologyfranchise in five focus cities of Mumbai, Pune, Chennai, Bangalore, Surat and acombination of B2C & B2B business in >200 other cities in India. Metropolis’ asset-lightmodel of network expansion has enabled it to create a strong B2C pathology franchisewithin its focus cities.

• B2C segment will drive 16% organic revenue Cagr over FY21- 23ii: Increasing focus onthe high-margin B2C segment, through 6x expansion in its collection center network, hasallowed Metropolis to enhance its B2C revenue share in 5 focus cities from 43% in FY16 to59% in 9MFY21. We believe Metropolis is well-positioned to sustain its B2C growthmomentum, as two-thirds of its expanded service network is relatively young & increasingmaturity of these centers would drive higher volume growth and aid in further expandingB2C revenue share in focus cities to ~65% over the next two years.

• Specialized tests drive higher realizations for Metropolis: Metropolis has the highestrealizations in the industry (~5% realizations Cagr for Metropolis over FY16-20 vs. ~1% forDLPL), backed by its strong presence in specialized tests which account for 40% ofMetropolis’ revenue. Though we expect Metropolis’ non-Covid realizations to stay flat overFY21-23ii, expanding revenue share from specialized, wellness and home collectionsegment will aid realizations.

• Metropolis is also likely to lead the consolidation wave in the diagnostics industry, as theHitech deal demonstrates company’s aggressive appetite for inorganic growth.

• We expect a 21% revenue and 20% EPS Cagr for Metropolis over FY21-23ii. Werecommend a Buy Rating on the stock with a target of ₹2,880.

Metropolis

CMP: ₹ 2,385 BUY TP: ₹2,880 Upside: 21%

7

• JB Chemicals & Pharmaceuticals (JBCP) is a 40-year old pharma company with several wellestablished brands in the domestic market and wide geographical presence in the bothregulated and semi-regulated markets.

• India business outperformance to sustain: While JBCP has created strong brands in the cardiac& gastro segments in India, focus ahead will be to diversify into diabetes, nephrology,paediatrics and respiratory. Expansion into these therapies will not entail an additional salesforce, as mgmt. is re-aligning the GTM strategy for its rep team, by combining existing divisions.JBCP also intends leveraging its relationships with 0.3m doctors, to drive penetration in newtherapies. Mgmt. is targeting 12-14% growth in its India PCPM over medium term, driven by 6-8annual launches & increasing contribution from chronic therapies.

• CMO and branded generics will be key focus areas for Exports: Incremental R&D investmentsand BD opportunities will help JBCP augment its product portfolio and drive better growth in itsbranded generics businesses. Two new product launches are also planned in Russia in FY22,while JBCP intends to ramp-up its US ANDA filings to 4-6 from 1-2 pa, going forward.

• India formulations will remain the priority for inorganic transactions: Although JBCP will look tocomplement its organic growth through acquisitions, management stated that 50% of theincremental capital allocation will be dedicated to the India business, where it will look toacquire brands/mid-size companies and, possibly, enter into inlicensing deals with MNCcompanies for the cardio-diabetes on FY21E EV/EBITDA.

• With enough capacities available to drive organic growth and limited capex investment over themid-term, we expect RoIC (post-tax) to improve to 36% by FY23E and strong FCF generation tosustain. We recommend a Buy Rating on the stock with a target price of ₹1,680.

JB Chemicals & Pharmaceuticals

CMP: ₹ 1,437 BUY TP: ₹1,680 Upside: 17%

8

• Apollo Hospitals is an integrated healthcare provider, with services ranging fromhospitals, retail pharmacies, health insurance, clinics etc. The company is a pioneer incorporate hospitals and forms the largest hospital chain & organized retail pharmacychain in India.

• Hospital occupancies are on track to reach pre-Covid levels: Apollo’s overall hospitaloccupancies improved to 63% in 3Q from 56% in 2Q. While non-Covid occupancy stood at60% in 3Q, it was already at 67% in Dec-20. Mgmt. indicated that occupancies shouldreach pre-Covid levels of 68-70% by 1Q/2QFY22, led by pick-up in international patients,domestic travel and improving surgical volumes.

• Ebitda margins (pre-Ind AS) to improve on all fronts: Healthcare services marginsimproved QoQ, from 11.5% to 18.5%, led by higher ARPOB and increase in surgicalvolumes. Mgmt. targets expanding margins for mature hospitals to 23-24% (current 20-21%) and for new hospitals to 15% (current 13-14%) over the next 12-18 months, led byinternational patients and high-end surgeries. Kolkata hospital expected to contributeRs800-850mn Ebitda in FY22ii (vs. nil in FY21ii). Pharmacy margins are also expected toimprove, to 7% in FY22ii from 6.5% in 3Q.

• New growth frontiers are on track: Of the Rs11.7bn QIP proceeds, Rs4.1bn will be utilizedfor acquisition of 50% stake in Kolkata hospital and Rs1.5bn each for Apollo 24/7 and thediagnostics business Apollo aims to achieve preventive healthcare revenue of Rs10bn inthe next 3 years, from Rs2.5bn currently. It also aims to scale diagnostics revenues toRs5bn from Rs1.6bnpa, by deepening presence in South/East market.

• We recommend a Buy rating on the stock with a target of Rs ₹3,550.

Apollo Hospitals

CMP: ₹ 3,204 BUY TP: ₹3,550 Upside: 11%

9

• Dr. Lal PathLabs Limited (DLPL) is one of India's largest diagnostics service providerswith a dominant presence in North India. DLPL operates on a hub and spoke modelthrough its 2 National Reference Labs in Delhi & Kolkata and 200 clinical labs which areserviced by 2,569 Patient Service Centres and 6,426 Pick-up Points. Over the past 3 years,DLPL's number of patient samples processed has grown at 17% Cagr while revenues havegrown at 15% Cagr.

• Focused on organic growth in non-core markets: DLPL intends to deepen its penetrationin North & East India through addition of 12- 15 clinical labs annually, while expansion inWest & South India through recently announced RRLs in Mumbai & Bangalore (likely tobegin operations during 1HCY21) remains an eminent priority. DLPL will also invest inbuilding a network of additional satellite labs and collection centers to contribute asfeeders to these new RRLs.

• Network expansion, specialized testing and bundled packages will drive 13% revenueCagr over FY21-23ii: Establishment of Mumbai and Bangalore RRLs will help DLPL toenhance its specialized testing capabilities and B2B business in these markets. Covid-19testing has also led to increased brand awareness for DLPL in noncore markets, which willaid company’s overall volumes including wellness packages.

• We forecast 15% EPS Cagr for DLPL over FY21-23ii & expect strong near-term momentumin the Covid business. We recommend a Buy rating on the stock with a target of ₹3,390.

Dr. Lal PathLabs

CMP: ₹ 2,929 BUY TP: ₹3,390 Upside: 16%

10

• Dabur India is one of the largest FMCG companies in India, with interest in health care,personal care and food products. Building on its legacy of quality and experience of over100 years, Dabur has a number of powerful brands like Dabur Amla, Dabur Chyawanprash,Vatika, Hajmola, Real, etc. The company primarily operates in four segments i.e.consumer care, international business, foods and retail. Its international business spansacross Southeast Asia, MENA and USA, and contributes around 30% to its total revenue

• Covid tailwinds resulted in acceleration in the healthcare portfolio, the momentum hassustained at a high level for the third consecutive quarter in categories such as honey,chyawanprash, OTC and ethicals. Growth is likely to settle at a lower, but robust level inthis portfolio. Dabur is ticking the right boxes in terms of riding the healthcare momentumand has accordingly stepped up ad-spends intensity. Recovery in hair care, juices andinternational has further sweetened the performance.

• The management highlighted that input cost inflation has inched up to 5- 6% in categoriessuch as honey, amla, herbs and spices and the company would look to pass it on toconsumers. Also, management indicated that ad-spend intensity would remain high tosupport brand investments and new launches. Dabur aspires to increase its ad-spends asa percentage of sales to ~11.5-12%, similar to HUL.

• We upgrade our EPS estimate for FY21 by 2% & recommend a Buy rating on the stockwith a TP of ₹620.

Dabur

CMP: ₹ 543 BUY TP: ₹620 Upside: 14%

11

• Thyrocare is the largest B2B diagnostics player in India primarily serving smallerstandalone labs, hospitals, nursing homes and doctors. Thyrocare operates a CentralisedProcessing Laboratory (CPL) at Navi Mumbai, which is supported by 11 RegionalProcessing Laboratories (RPLs). B2B segment accounts 80-85% of Thyrocare’s pathologyrevenue, while Thyrocare has also created a strong brand for itself through ‘Aarogyam’test profiles in the wellness segment.

• Thyrocare’s strong B2B model and industry leadership in wellness testing allows it toprocess high volumes of routine tests which, along with lower sample acquisition costs,drive significant operational efficiencies and 40% margins for Thyrocare. While its revenuegrowth had slowed during FY17- 20, mgmt. is striving to drive improved accessibility forthe brand by doubling company’s network of branded collection centers to ~1,000 TSPsby the end of CY21. While network expansion will contribute significantly to company’sgrowth from FY23E, it will also help Thyrocare to expand its customer base, improve TATand further optimize logistics costs

• Thyrocare trades at 30-50% discount to its B2C peers owing to higher pricing pressures inB2B/wellness segment, Thyrocare’s unparalleled focus on operating efficiencies enablesit to offset such pricing impact.

• We expect 12% revenue and 23% EPS Cagr for Thyrocare over FY21-23ii. We recommend aBuy rating on the stock with a target of ₹1,250.

Thyrocare Tech

CMP: ₹ 1,061 BUY TP: ₹1,250 Upside: 18%

12

• SBI Life Insurance Company (SBI Life) is India’s largest private life insurer on a retail APEbasis. The company has a product mix of participating, non-participating and linkedpolicies, with the mix skewed towards linked products. The company leverages a strongagency network of over 100,000 independent agents and bancassurance partners (StateBank group) to source business.

• SBI Life marginally underperformed peers last year due to higher impact from pandemic-led lockdowns, we expect it to deliver strong growth in FY22, as its distribution channelcomes back full force and the product mix stabilizes with rise in share of protection. Webelieve SBI Life will deliver top-quartile growth helped by a favorable base, backed by well-diversified distribution, rational cost structure, and an under-penetrated mass customerbase. It trades at 2.4x FY22ii P/EV, at ~45% discount to HDFC Life.

• Getting its act together, with a surge in retail protection: Retail protection APE continuedto surge at 100% YoY growth, with SBI Life taking share away from peers, after lagging in2020.. VNB margin expanded 170bps YoY and VNB grew 13% YoY.

• Distribution analysis reaffirms SBILI’s reach and headroom: SBI Life generated 89% of itsbusiness from outside Delhi/Maharashtra vs. 64/68/ 82% for HDFC Life/IPRU/LIC.Further, rural contributed 14% of its FY20 premiums vs. 10/9/13% for HDFC Life/IPRU/LIC,suggesting a much wider reach. On retail protection, sum assured/premium is 12x vs.28x/34x for HDFCLI/IPRU, while sum assured/policy is 0.9/2.6/3.5mn respectively,indicating significant room to sell more protection products.

• We recommend a Buy Rating on the stock with a target price of ₹1,230 (3x 2YF P/EV,offering 16%/25% EV/VNB Cagr over FY21ii-23ii).

SBI Life

CMP: ₹ 959 BUY TP: ₹1,230 Upside: 28%

13

• Cadila Healthcare (Cadila) is a fully integrated, pharmaceutical company withstrong presence in the formulations and CRAMS businesses globally. Itsformulations business spans India, US, Europe and emerging markets

• With India experiencing a second wave of Covid infections, Cadila may continue tosee benefit on its Covid-drugs portfolio in FY22. Cadila’s Remdesivir is the lowest-priced variant in the India market. Management expects the strong double-digitgrowth in the India business to sustain for the next couple of quarters. WhileCadila has historically underperformed market growth in India, its recent initiativesaround portfolio rationalisation and focusing separately on mass/chronicsegments are showing initial signs of traction..

• Since early CY20, Cadila’s market share in gLialda has increased from 40% to 55%,even as other competitors (Mylan, Teva, Sun) have faced difficulties in scaling-upthe product due to manufacturing challenges. A similar situation could play out ingAsacol HD as well, when incremental competition enters this product. Whileinjectables will drive medium-term growth in the US business, we believe recentgDoxil launch can contribute USD20m annualised sales to Cadila.

• Cadila has already started conducting the Phase 3 trials of its covid vaccine. Giventhat Cadila’s vaccine is based on the DNA platform (as compared to mRNAvaccines being developed by MNCs, which is a novel technology), itsmanufacturing can be easily scaled-up and it does not entail low cold-chainrequirements. Any positive development on the same could potentially providefurther upside. We recommend a Buy rating on the stock with a target of ₹670.

Cadila Healthcare

CMP: ₹ 581 BUY TP: ₹670 Upside: 15%

14