India Daily, November 02, 2018 - Kotak Securities · 2018-11-02 · United Spirits: Solid quarter drives estimate upgrades; REDUCE stays on valuations Marico: Good quarter; on a strong

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

Kotak Institutional Equities Research [email protected] . Mumbai: +91-22-4336-0000

Contents

Daily Alerts

Results

HDFC: Challenging times

United Spirits: Solid quarter drives estimate upgrades; REDUCE stays on valuations

Marico: Good quarter; on a strong wicket. We remain positive

Cummins India: Uncertainty in the near term, potential in the long term

Dalmia Bharat: Weak quarter; group simplification complete

Kalpataru Power Transmission: Picture perfect

S H Kelkar and Company: Steadying ship

Results, Change in Reco

HPCL: Weak refining comes to the fore

Company alerts

IndusInd Bank: IL&FS impact - provisions to be higher

Sector alerts

Automobiles: Double-digit growth in CVs; subdued festive demand in passenger segments

Technology: 2QFY19 review: focus shifts to demand fulfillment

Telecom: Speed tracker 4.0: OpenSignal Oct 2018 update

Economy alerts

Economy: Fiscal deficit target remains under threat

INDIA DAILY November 2, 2018 India 1-Nov 1-day 1-mo 3-mo

Sensex 34,432 (0.0) (5.7) (7.4)

Nifty 10,380 (0.1) (5.7) (7.7)

Global/Regional indices

Dow Jones 25,381 1.1 (5.2) 0.2

Nasdaq Composite 7,434 1.8 (7.1) (4.7)

FTSE 7,115 (0.2) (4.8) (6.1)

Nikkei 21,972 1.3 (9.5) (2.4)

Hang Seng 25,416 1.7 (6.3) (8.3)

KOSPI 2,070 2.2 (10.4) (8.8)

Value traded – India

Cash (NSE+BSE) 405 386 390

Derivatives (NSE) 18,180 7,743 9,153

Deri. open interest 3,513 3,123 3,653

Forex/money market

Change, basis points

1-Nov 1-day 1-mo 3-mo

Rs/US$ 73.1 2 (19) 455

10yr govt bond, % 8.0 (3) (17) (9)

Net investment (US$ mn)

31-Oct MTD CYTD

FIIs (54) #N/A (5,758)

MFs 284 #N/A 17,324

Top movers

Change, %

Best performers 1-Nov 1-day 1-mo 3-mo

ARBP IN Equity 793 0.1 3.0 28.9

DIVI IN Equity 1,506 1.4 14.1 25.4

ICICIBC IN Equity 354 (0.4) 12.6 18.5

WPRO IN Equity 330 (0.5) (0.2) 18.1

KKC IN Equity 747 0.0 11.6 13.0

Worst performers

JPA IN Equity 7 5.5 (3.6) (54.5)

UT IN Equity 2 2.3 (13.7) (46.3)

YES IN Equity 204 8.5 1.6 (43.6)

RCAPT IN Equity 248 2.7 (13.2) (39.5)

TTMT/A IN Equity 98 (0.1) (19.3) (32.0)

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

18% growth in core earnings; several one-offs

HDFC reported 25% growth in PAT to `24.6 bn. Core PBT (PBT before capital gains, dividend

income, one-time loan assignment gains, other income, ESOP expenses and provisions) was up

18% yoy. AUM was up 17% yoy driven by 18% growth in individual loans; calculated NII was

almost flat yoy, down 15 bps qoq to 2.57%. Non-core items included (1) lower ESOP expenses

(`86 mn versus `2.8 bn), (2) capital gains of Rs9.5 bn from HDFC AMC, (3) low dividend income

of `58 mn (`5.36 in 2QFY18 due to recognition of dividend of HDFC Bank) and (4) provisions of

`4 bn (extra provisions of `2.6 bn) as compared to Rs616 mn write-back.

Challenges ahead

We find risk of compression on NIM due to rise in funding costs in bond markets and

HDFC/HFCs’ shift to bank loans and deposits; this may partially be offset by higher asset

yields post its recent rate hikes. HDFC has raised lending rates by 15 bps in retail loans last

month (65 bps in CY2018 YTD) and 65 bps in non-individual loans (120 bps in CY2018

YTD).

HDFC/other HFCs are taking a cautious stand in real estate lending due to liquidity challenges

of developers. This may lower business momentum in the industry, which can eventually

affect retail business as well; HDFC’s focus on the affordable segment somewhat helps.

We find risk to developer book NPLs in the current environment. HDFC’s stage 3 loans were

down marginally to `50.2 bn as compared to `51.5 bn in 1QFY18. While a large account of

`9 bn was sold to ARCs last quarter, the balance (`8 bn) was on account of slippages, mostly

in the non-individual segment.

Retain positive stance; ADD with TP of `1,980

HDFC has demonstrated ability to sail though macro challenges. Its strong credit standing in

debt markets and retail deposit franchise will ensure liquidity for the company even as its large

balance sheet size constrains a bit. While NII may be muted in the near term, lower competition,

especially in the non-individual segment, will improve its negotiating power. We are revising our

estimates to factor lower NII and higher provisions. HDFC’s recent migration to Ind-AS and

restatement of ECL reduces accuracy of our forecast. Retain ADD, with TP of `1,980.

HDFC (HDFC) NBFCs

Challenging times. HDFC’s 2QFY19 earnings were on track. However, we see near-

term challenges to the business, viz. (1) liquidity crunch in debt markets will put

pressure on NIM even as the recent rate hikes provide cushion, (2) pressure on growth

(in individual and non-individual segments) due to funding challenges for developers

and (3) increasing asset quality risk in the non-individual book. We remain assertive on

HDFC’s ability to sail though several macro challenges; retain ADD with TP of `1,980

(down from `2,020).

ADD

NOVEMBER 02, 2018

RESULT

Coverage view: Neutral

Price (`): 1,762

Target price (`): 1,980

BSE-30: 34,432

QUICK NUMBERS

PAT up 25% yoy

AUM up 17% yoy

ECL coverage on

overall portfolio

down 5 bps qoq to

1.3%

Nischint Chawathe

M B Mahesh CFA

Dipanjan Ghosh

HDFC

Stock data Forecasts/Valuations 2019E 2020E 2021E

52-week range (Rs) (high,low) EPS (Rs) 52.9 61.6 73.3

Market Cap. (Rs bn) EPS growth (%) (29.9) 16.6 18.9

Shareholding pattern (%) P/E (X) 33.3 28.6 24.0

Promoters 0.0 NII (Rs bn) 91.2 112.6 137.3

FIIs 72.9 Net profits (Rs bn) 90.5 105.6 125.5

MFs 6.8 BVPS 435.2 473.4 519.2

Price performance (%) 1M 3M 12M P/B (X) 4.0 3.7 3.4

Absolute (2.5) (10.6) 0.4 ROE (%) 13.1 13.6 14.8

Rel. to BSE-30 3.5 (2.6) (2.0) Div. Yield (%) 1.1 1.3 1.6

Company data and valuation summary

2,053-1,641

3,025.6

HDFC NBFCs

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

Exhibit 1: HDFC - quarterly data Mach fiscal year-ends, 1QFY18-1QFY19 (` mn)

Source: Company, Kotak Institutional Equities estimates

AUM growth stable qoq, up 17% yoy

AUM growth on track. HDFC reported 17% yoy AUM growth in 2QFY19 driven by

18% yoy growth in the individual home loan segment while the non-individual segment

saw slightly lower growth at14% yoy (down 1% qoq). Individual segment witnessed

robust growth for the fourth quarter in a row (>16% yoy growth).

Growth has mostly been driven by strong volume as average ticket size is broadly

constant at `2.7 mn (similar to average ticket size for individual loans for the past 7-8

quarters).

A large portion of the incremental growth is coming from tier-II and lower cities as the

company has increased focus on affordable housing.

Increasing contribution of the affordable housing segment continued to ramp up pace

of growth in this segment. HDFC has increased focus towards the economically weaker

section (EWS) and low income group (LIG) segments. These segments contributed

37% of home loans approved in volume terms and 18% in value terms during 2QFY19.

The company is approving and average of 8,300 loans on a monthly basis to the EWS

and LIG segments, with monthly such average approvals at approximately `13.5 bn.

The average home loan to the EWS and LIG segment stood at `1.01 mn and `1.76 mn,

respectively, stable qoq.

Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS IGAAP Ind-AS

2QFY19 2QFY19E 2QFY18 1QFY19 2QFY19E 2QFY18 1QFY19 1HFY19 1HFY18 (% chg.) 2019E 2018 (% chg.) 2020E

Operating income 112,455 105,502 90,032 99,474 7 25 13 211,929 172,889 23 427,390 404,421 6 508,162

Interest on loans 96,733 93,000 81,136 90,942 4 19 6 187,675 161,428 16 391,477 330,562 18 468,183

Fees and other charges 506 190 346 288 166 46 75 794 597 33 1,851 1,448 28 1,122

Dividend 58 60 5,366 5,859 (4) (99) (99) 5,916 5,965 (1) 12,412 10,793 15 14,894

Sale of investment 10,000 9,452 631 2 6 1,485 454,455 10,002 649 1,440 13,000 56,350 (77) 14,300

Income from securitisation 1,010 150 568 572 78 1,578 325 385 3,250 5,243 (38) 3,723

Income on de-recognized loans 3,973 2,257 1,415 76 181 5,388 3,628 48 5,400 5,940

Other op income 175 146 400 20 (56) 575 296 94

Interest expense 70,445 65,000 58,450 63,527 8 21 11 133,972 115,993 16 283,211 222,350 27 341,884

Net operating income 42,010 40,502 31,582 35,947 4 33 17 77,957 56,896 37 144,179 182,071 (21) 166,279

NII 27,298 28,000 22,837 27,983 (3) 20 (2) 55,281 45,761 21 111,516 113,455 (2) 130,023

Other income 114 120 42 46 (5) 173 145 160 85 88 463 463 — 463

Total income 42,123 40,622 31,624 35,993 4 33 17 78,116 56,981 37 144,642 182,534 (21) 166,742

Operating expenses 7,234 4,885 4,477 5,293 48 62 37 8,317 8,591 (3) 21,791 29,878 (27) 23,509

Employee expenses 1,276 3,000 3,872 3,243 4,518 5,947 (24) 6,929 4,255 63 8,269

Staff expenses 1,189 1,070 1,329 11 (11) 2,518 2,194 15 6,929 4,255 63 8,269

ESOP 86 2,802 1,914 (97) (95) 2,000 3,754 (47)

Other exp. 1,811 1,099 1,724 65 5 3,535 2,402 47 5,042 4,831 4 5,264

Depreciation 134 135 123 130 263 242 9 500 492 2 525

PPOP 38,903 26,531 30,897 47 26 69,800 48,390 44 132,170 172,956 (24) 152,683

Provisions 4,013 (616) 197 NM 1,937 4,210 1,020 313 9,320 20,300 (54) 9,450

PBT 34,890 35,737 27,147 30,700 (2) 29 14 65,590 47,370 38 122,851 152,656 (20) 143,233

Tax 10,220 8,661 7,365 8,800 18 39 16 19,020 13,344 43 32,310 31,000 4 37,670

PAT 24,670 27,076 19,782 21,900 (9) 25 13 46,570 34,027 37 90,541 121,656 (26) 105,563

Core PBT 24,845 26,105 21,037 25,489 18 (3) 50,334 41,817 20 100,896 105,325 (4) 117,086

Other details

AUM (Rs bn) 4,295 3,677 4,188 17 3 4,295 3,677 4,610 3,988 16 5,447

NIM-KS (%) 2.57 2.91 2.53 2.74 -34 bps 5 bps -16 bps 2.67 2.59 11.5 13.8 -238 bps 11.3

Gross NPL ratio (%) 1.13 1.14 1.18 -1 bps -5 bps 1.13 1.14 1.14 1.11 3 bps 1.15

CAR (%) 18.4 15.1 16.3 330 bps 210 bps 18.4 15.1

Tier I (%) 17.10 12.60 15.00 450 bps 210 bps 17.10 12.60

Avg spread - reported (%) 2.28 2.29 2.28 -1 bps 0 bps

Cost-income (%) 8 16 14 -846 bps -651 bps

Balance sheet (Rs bn)

Sharecapital 3,393 3,190 3,367 6 1 3,393 3,190 3,425 3,352 2 3,425

Loans 3,791 3,243 3,720 17 2 3,791 3,243 4,189 3,594 17 4,992

Individuals 2,652 2,242 2,570 18 3 2,652 2,242 2,933 2,515 17 3,494

Corporate bodies 1,075 950 1,090 13 (1) 1,075 950

Others 63 50 60 26 6 63 50

Loan book calculations

Loan on balance sheet 3,791 3,243 3,720 17 2 3,791 3,243 4,189 3,594 17 4,992

Loans outside balance sheet 504 434 468 16 8 504 434 421 394 7 455

Loans under management 4,295 4,279 3,677 4,188 17 3 4,295 3,677 4,610 3,988 16 5,447

Individual loans 3,156 2,676 3,038 18 4 3,156 2,676 3,353 2,908 15 3,950

Other loans 1,139 1,001 1,150 14 (1) 1,139 1,001 1,257 1,080 16 1,498

(% chg.)

NBFCs HDFC

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Non-individual AUM also recorded growth at 14% yoy in 1QFY19, lower than 18-23%

over the previous five quarters. Growth has slowed down likely towards the end of the

quarter.

Loan sell-down remain high, similar to 1QFY19. HDFC sold `61 bn of loans to HDFC

Bank (`35 bn in 2QFY18 and `97 bn in 1QFY19). The increase in the amount of loans

assigned to HDFC Bank in 1QFY19 and 2QFY19 was due to the fact that no loan

assignments were done during August 2017-March 2018. Thus, the entire loan

assignments during 1QFY19 and 2QFY19 pertained to the backlog under the

arrangement.

We forecast 17% AUM CAGR over FY2018-21E. We forecast 17% AUM CAGR over

FY2018-2021E as we retain our constructive medium-term view on the sector. We have

slightly moderated our estimates post recent turmoil in the sector and cautious stance of

the company on the developer loan space. As discussed earlier, slowdown in real estate

lending and slowdown in new launches might have a spillover impact on individual home

loans. This will be partially offset by rising demand in the affordable housing segment.

Exhibit 2: Average ticket size of individual loans is `2.7 mn; broadly constant over the past few

quarters HDFC individual segment loan size, 2QFY16-2QFY19 (` mn)

Source: Company

2.36

2.50

2.33

2.532.57 2.57 2.56

2.632.60 2.62 2.64

2.672.70

2.0

2.2

2.4

2.6

2.8

3.0

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

2Q

FY1

9

Average ticket size (Rs mn)

HDFC NBFCs


Exhibit 3: Individual loan growth maintains steady pace; up 18%

yoy in 2QFY19 March fiscal year-end, 2QFY14-2QFY19 (%)

Notes: (a) 1QFY18, 2QFY18, 1QFY19 and 2QFY19 numbers are based on Ind-AS.

Source: Company, Kotak Institutional Equities

Exhibit 4: Non-individual loan growth has dropped in past few

quarters March fiscal year-end, 2QFY14-2QFY19 (%)

Notes: (a) 1QFY18, 2QFY18, 1QFY19 and 2QFY19 numbers are based on Ind-AS.


Exhibit 5: Affordability has improved over the past few years Price-to-income trend in Bangalore, March fiscal year-ends, 2010-20E


15

17

19

21

23

25

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

3Q

FY17

4Q

FY17

1Q

FY18

2Q

FY18

3Q

FY18

4Q

FY18

1Q

FY19

2Q

FY19

5

9

13

17

21

25

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

3Q

FY17

4Q

FY17

1Q

FY18

2Q

FY18

3Q

FY18

4Q

FY18

1Q

FY19

2Q

FY19

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

Gross average household income In Bangalore (for households

with annual income > Rs200,000) (a)994,955 1,044,702 1,149,173 1,279,029 1,414,606 1,560,311 1,727,264 1,882,718 2,052,162 2,236,857 2,438,174

Income growth (%) (a) 5.0% 5.0% 10.0% 11.3% 10.6% 10.3% 10.7% 9.0% 9.0% 9.0% 9.0%

Blended average pricing of area sold (a) 3,339 3,542 4,618 4,865 5,668 5,920 5,626 5,738 5,853 5,970 6,090

Price of a 1,200 sq. ft house (Rs mn) (including taxes and incidentals) 5.0 5.3 7.0 7.3 8.4 8.7 8.3 8.5 8.6 8.8 8.9

Price/income ratio (X) 5.0 5.1 6.1 5.7 5.9 5.6 4.8 4.5 4.2 3.9 3.7

Notes:

(a) Media reports, studies and discussion with industry participants.

(b) Blended average pricing of Brigade, Prestige, Purvankara and Sobha.

Improving

affordability drives

our constructive

medium-term view

NBFCs HDFC


Exhibit 6: Sourcing through HDFC Bank has increased in past few years AUM origination mix, March fiscal year-ends, 2014-18, 1QFY19 (%)


Calculated NIM expands stable yoy

NIM stable yoy. Calculated NIM was broadly stable in 2QFY19 (up 4 bps yoy) at 2.6%.

On a qoq basis, calculated NIM dropped 17 bps as NIM expanded in base quarter as

surplus funds post capital issuance was parked as short-term investments leading to

higher income on liquid funds. Calculated yields on AUM saw 17 bps yoy expansion to

9.8%, offset by rise in funding cost. The cost of bank borrowings saw a steep increase in

2QFY19 (up 240 bps qoq) owing to fluctuations in foreign currency loans payouts; this

may be one-off due to INR depreciation and bank borrowing costs may come down next

quarter.

Rise in home loan rates to provide some comfort to yields. Despite a highly

competitive environment, most HFCs and banks have increased their home loan rate in

the past two months (HDFC raised its home loan rates by ~45-50 bps on the retail side

from March 2018-September 2018). The company has raised home loan rates by another

15 bps in October 2018. Going ahead, rise in home loan rates will provide comfort to

yields. As such impact of rise in home loan rates have not yet fully translated to yield

expansion. The company has guided for stable NIMs.

Bank term loans increase. Given the rising bond borrowing rates since 3QFY18, there is

increase (up 510 bps yoy and 210 bps qoq) in share of term loans in borrowing mix. Bank

borrowings have increased 58% yoy compared to 8% for NCDs and 5% for public

deposits. The company has raised additional `50 bn of bank loans last month. The share

of public deposits has dropped 210 bps qoq to 28% due to some lumpy corporate exits

but this is now a focus area for the company.

Raising bond, though at higher yields. Despite the challenges in bond markets, HDFC

has been able to raise `60 bn bonds since September 20 through two tranches. Its bond

borrowing cost increased by ~160 bps and 190 bps to 9.1% in October 2018 from

October 2017 and June 2018, respectively.

46 49 49 50 51 53

2424 26 25 27 27

1818 17 18 16 15

12 9 8 7 6 5

0

20

40

60

80

100

2014 2015 2016 2017 2018 1QFY19

HDFC sales HDFC bank Other direct selling agents Direct walk-ins

HDFC NBFCs


Strong market position augurs well for maintaining liquidity. HDFC has maintained

a positive ALM. Its last available ALM (March 2018) shows positive ALM gap in the first

bucket (1 year) of 15%. HDFC’s market instruments are rated ‘AAA’ and enjoy finest

pricing in the private sector NBFC space. Comfort of banks, debt markets and retail

depositors will likely ensure liquidity support even as its large size poses some challenges.

The company had CPs of `590 bn, which it will bring down to `540 bn this month.

About 40% of its CPs are with banks and 40% with mutual funds. It has recently

received approval for ECB of US$1.5 bn and Masala bond of `50 bn. The company

maintained cash of `100-120 bn on its balance sheet.

NIM compression in our forecasts. We expect pressure on NIM for HDFC, driven by rise

in cost of funds. We are building 15-20 bps lower NIM in 2HFY19 over 1HFY19. Rise in

lending rates will provide some comfort going ahead. HDFC has raised non-individual

rates by 65 bps (blended) in October 2018; 100 bps in wholesale, 75 bps in developer

loan portfolio and 65 bps in LRD segment. However, we expect the company to

moderate a bit in high-risk wholesale segments in case the liquidity stress continues.

Exhibit 7: HDFC has increased share of bank borrowings in the past few quarters Calculated rate of interest on borrowings, March fiscal year-ends, 2QFY17-2QFY19 (%)


Exhibit 8: Cost of bond borrowings increased since 3QFY18 Cost of bond borrowings, March fiscal year-ends, October 2013-October 2018 (%)

Source: Company, Kotak Institutional Equities, Prime database

IGAAP IGAAP IGAAP Ind-AS IGAAP IGAAP IGAAP Ind-AS Ind-AS

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

Total borrowings (Rs bn) 2,555 2,636 2,805 2,864 3,006 3,080 3,207 3,325 3,406

Term loans 296 314 373 332 390 409 468 534 616

Bonds/debentures/CPs 1,416 1,468 1,567 1,679 1,714 1,719 1,816 1,797 1,844

Deposits 843 854 866 853 902 951 922 994 946

% share

Term loans 11.6 11.9 13.3 11.6 13.0 13.3 14.6 16.0 18.1

Bonds/debentures/CPs 55.4 55.7 55.9 58.6 57.0 55.8 56.6 54.1 54.1

Deposits 33.0 32.4 30.9 29.8 30.0 30.9 28.8 29.9 27.8

Borrowing costs (%) 8.3 8.1 7.7 8.1 8.0 7.3 7.3 7.8 8.4

Term loans (%) 7.2 7.0 6.4 6.4 5.5 6.4 6.8 6.5 8.9

Bonds/debentures/CPs (%) 8.0 7.9 7.5 8.2 8.2 7.0 7.0 7.8 8.2

Deposits (%) 9.1 8.7 8.4 8.5 8.3 8.0 7.8 8.2 8.2

6.5

7.3

8.1

8.9

9.7

10.5

Oct

-13

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

NBFCs HDFC


Exhibit 9: Yields on AAA and AA rated bonds have increased in recent months Yield on 5-year AAA, AA corporate bonds and 10-year G-Sec bonds, November 2012-November 2018 (%)

Source: Bloomberg, Kotak Institutional Equities

Exhibit 10: Increase in home loan rates for most companies Home loan rates for loans below `7.5 mn (%)

Source: Company, Public documents, Kotak Institutional Equities

6

7

8

9

10

11

Nov-

12

Feb-1

3

May-

13

Aug

-13

Nov-

13

Feb-1

4

May-

14

Aug

-14

Nov-

14

Feb-1

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

Nov-

18

5-Year AAA 5-Year AA 10-Year G Sec

Jan-17 Apr-17 May-17 Jul-17 Oct-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18

HFCs - home loan rates

HDFC 8.70 8.50 8.30 8.30 8.35 8.35 8.35 8.35 8.35 8.45 8.45 8.55 8.75 8.80 8.80 9.00

LIC Housing Finance 8.70 8.60 8.50 8.25 8.35 8.35 8.35 8.35 8.35 8.55 8.55 8.65 8.65 8.80 8.80 8.95

PNBHF 8.60 8.55 8.50 8.60 8.50 8.50 8.50 8.50 8.60 8.60 8.60 8.75 8.85 8.95 8.99 9.10

Banks

ICICI Bank

Home loan rates 8.70 8.50 8.30 8.30 8.35 8.35 8.35 8.35 8.45 8.45 8.45 8.50 8.60 8.70 8.90 9.10

Base rate / 1 year MCLR 8.20 8.20 8.20 8.20 8.20 8.20 8.20 8.20 8.30 8.30 8.30 8.40 8.40 8.40 8.55 8.65

Spread 0.50 0.30 0.10 0.10 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.10 0.20 0.30 0.35 0.45

SBI

Home loan rates 8.65 8.65 8.30 8.30 8.35 8.35 8.35 8.35 8.40 8.40 8.40 8.50 8.50 8.70 8.70 8.90

Base rate / 1 year MCLR 8.00 8.00 8.00 8.00 8.00 7.95 7.95 7.95 8.15 8.15 8.15 8.25 8.25 8.25 8.45 8.50

Spread 0.65 0.65 0.30 0.30 0.35 0.40 0.40 0.40 0.25 0.25 0.25 0.25 0.25 0.45 0.25 0.40

Notes:

(a) For ICICI Bank and SBI base rate from April 2016 onwards refers to 1 year MCLR.

(b) Data for HDFC is for home loan rates of <Rs3 mn. The home loan rate for 0.3 mn-7.5 mn is 8.6% as of April 2018 (increased from 8.45% earlier).

HDFC NBFCs


Exhibit 11: 15% positive 1-year ALM gap ALM of HDFC, March fiscal year-ends, 2018 (` bn)

Source: Company

Asset quality stable qoq

Gross stage-3 loans at 1.3%. Gross stage 3 loans were down marginally to `50.2 bn as

compared to `51.5 bn in 1QFY19. Gross stage-3 loans were 1.31% compared to 1.37%

in 1QFY19 and 1.30% in 4QFY18. A large account of `9 bn was sold to ARCs in the last

quarter, the balance (`8 bn) was rise on account of slippages; mostly from the developer

loan portfolio. GNPL ratio (as per IGAAP) dropped 5 bps qoq (flay yoy) to 1.13% in

2QFY19. The company has revised its ECL classification and done away with stage 3A.

ECL coverage dropped 6 bps qoq to 1.3% of overall portfolio. The company

reported stage-1 and 2 loans of 98.69% of portfolio in 2QFY19. HDFC has ECL coverage

of 0.81% on these loans. The overall ECL coverage on the portfolio is 1.31% (down 6

bps qoq), higher than most peers.

Asset quality to remain stable going ahead. We forecast gross stage-3 loans to

remain stable around 1.3% over FY2019-21E. The company has started to maintain a

cautious stance on the developer loan portfolio given speculations over rising stress in this

space. ECL coverage on stage-3 loans is expected to drop marginally to ~39% in the

medium term from 42% in FY2018.

Exhibit 12: 1.3% coverage on overall portfolio March fiscal year-ends, 4QFY18-2QFY19 (` bn)

Source: Company

870

2,118

1,029 757

2,360

900

0

500

1,000

1,500

2,000

2,500

Upto 1 year >1-5 years Over 5 years

Assets Liabilities

QoQ

4QFY18 1QFY19 2QFY19 (%)

Gross stage 3 47 51 50 (2.4)

Gross stage-3 (%) 1.30 1.37 1.31 -6 bps

ECL provision stage 3 20 24 19 (17.6)

Net stage 3 27 28 31 10.5

Coverage on stage 3 loans (%) 41.9 45.9 38.7 -714 bps

Gross stage 1 and 2 3,580 3,695 3,774 2.2

Gross stage 1 and 2 (%) 98.70 98.63 98.69 6 bps

ECL provision on stage 1 and 2 32 28 31 11.4

Net stage 1 and 2 3,548 3,667 3,744 2.1

ECL provision on stage 1 and 3 (%) 0.88 0.75 0.81 7 bps

Overall ECL coverage (%) 1.42 1.37 1.31 -5 bps

NBFCs HDFC


Sharp drop in ESOP expenses

Drop in ESOP expenses lead to reduction in cost ratios. Cost-income ratio dropped to

7.6% in 2QFY19 from 16.1% in 2QFY18 and 14.2% in 1QFY19 driven by sharp drop in

employee expense. Employee expenses decreased 67% yoy on the back of steep decline in

ESOP expenses by 97% yoy to `86 mn in 2QFY19. Adjusting for ESOP employee expenses

were up 11% yoy. Cost-income ratio (adjusted) dropped 140 bps qoq to 7.4% (up 20 bps

yoy). Cost ratios for the company continued to be better than peers.

Exhibit 13: HDFC is trading at ~3.9X one-year forward book HDFC: Rolling PER and PBR, November 2011- November 2018 (X)

Source: Kotak Institutional Equities estimates, Company

Exhibit 14: HDFC’s core valuation is 2X FY2020E core book March fiscal year-ends, 2017-21E


0.0

1.4

2.8

4.2

5.6

7.0

10

16

22

28

34

40

Nov-

11

Nov-

12

Nov-

13

Nov-

14

Nov-

15

Nov-

16

Nov-

17

Nov-

18

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

Profit after

tax EPS EPS core P/E

PE on core

operations BVPS BVPS Core P/B

P/B on core

operations RoE Core RoE

Year (Rs mn) (Rs) (Rs) (X) (X) (Rs) (Rs) (X) (X) (%) (%)

2017 78,742 50 38 36 18.5 265 207 6.7 3.3 20.4 21.4

2018 126,356 75 35 23 19.6 380 327 4.6 2.1 23.9 16.9

2019E 90,541 53 38 33 18.2 435 307 4.0 2.3 13.1 12.9

2020E 105,563 62 45 29 15.5 473 346 3.7 2.0 13.6 14.2

2021E 125,518 73 53 24 13.1 519 392 3.4 1.8 14.8 14.9

HDFC NBFCs


Exhibit 15: Subsidiaries/investments add 53% to the SoTP Sum-of-total-parts of HDFC, March fiscal year-end, 2020E


Exhibit 16: HDFC – change in estimates March fiscal year-ends 2019- 21E (` mn)


HDFC's

holding

Value of

companies

Value per

share

Business/subsidiaries (%) (Rs bn) (Rs) Comments

HDFC 916 Based on residual growth model; 2.7X book

Value of subsidiaries and associates 1,037

HDFC Bank 21.7 5,714 652 Based on HDFC Bank's price target; 10% holding-company discount

Life insurance 51.4 770 208 3.5X EV; 10% holding company discount

Others 177

Equity investments 31

BVPS of non-strategic investments — — 4

Others 100 45 26 Recent capital issuance at 1X

Total value per share 1,984

New estimates Old estimates % change

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

NIM (post provisions - %) 3.07 3.08 3.12 3.08 3.09 3.16 -1 bps -1 bps -4 bps

Loan book (Rs bn) 4,189 4,992 5,912 4,301 5,147 6,133 (2.6) (3.0) (3.6)

Operating income 425,539 507,040 599,234 431,242 512,570 608,949 (1.3) (1.1) (1.6)

Interest income 374,401 454,466 539,751 386,898 467,696 558,381 (3.2) (2.8) (3.3)

Capital gains 13,000 14,300 17,303 9,000 9,900 11,979 44.4 44.4 44.4

Interest expense 283,211 341,884 402,457 289,791 346,065 409,221 (2.3) (1.2) (1.7)

Net operating income 142,328 165,157 196,777 141,451 166,505 199,728 0.6 (0.8) (1.5)

Net operating inc. excl. gains 129,328 150,857 179,474 132,451 156,605 187,749 (2.4) (3.7) (4.4)

Loan loss provisions 9,320 9,450 11,760 6,392 6,261 6,421 45.8 50.9 83.1

Fee income 1,851 1,122 746 3,099 2,738 2,712 (40.3) (59.0) (72.5)

Operating expenses 11,972 13,533 15,365 10,710 11,622 12,630 11.8 16.4 21.6

Employee expenses 6,929 8,269 9,869 5,667 6,359 7,134 22.3 30.1 38.3

PBT 122,851 143,233 170,310 127,411 151,297 183,300 (3.6) (5.3) (7.1)

Net profit 90,541 105,563 125,518 93,902 111,506 135,092 (3.6) (5.3) (7.1)

PBT bef cap gains 109,851 128,933 153,007 118,411 141,397 171,321 (7.2) (8.8) (10.7)

Ind-AS Ind-AS

NBFCs HDFC


Exhibit 17: HDFC – key ratios and growth rates March fiscal year-ends, 2016-2021E (%)


IGAAP IGAAP IGAAP Ind-AS Ind-AS Ind-AS

2016 2017 2018 2019E 2020E 2021E

Spread calculation

Average yield on assets (incl fees) 11.4 10.6 11.0 9.9 10.0 10.1

Average cost of funds 8.7 8.1 7.4 8.2 8.4 8.4

Overall spread 2.7 2.6 3.6 1.7 1.6 1.7

Spread on housing loans 2.2 2.4 2.2 1.4 1.5 1.5

NIM (pre provisions) 4.1 3.8 4.9 3.3 3.3 3.3

Other ratios

Tax rate 26.1 26.6 17.2 26.3 26.3 26.3

Tax rate (incl DTL) 31.3 31.9 20.7 26.3 26.3 26.3

Provisions to net loans 0.08 0.29 0.25 0.62 0.24 0.21

Divd payout ratio 37.9 38.4 27.5 38.0 38.0 38.0

Cost to income (%) 6.3 6.6 5.0 8.4 8.2 7.8

Provision / PBT (%) 7.1 6.5 13.3 7.6 6.6 6.9

Du Pont analysis

Net total income 4.1 3.8 4.9 3.3 3.3 3.3

Net interest income 3.2 3.2 3.1 2.7 2.7 2.7

Capital gains 0.6 0.3 1.5 0.3 0.3 0.3

Dividend income 0.3 0.3 0.3 0.3 0.3 0.3

Net other income 0.2 0.1 0.1 0.1 0.0 0.0

Operating expenses 0.3 0.3 0.3 0.3 0.3 0.3

ROA 2.6 2.3 3.3 2.1 2.1 2.1

Average assets/average equity 8.3 8.5 7.3 6.4 6.5 7.0

ROE 21.3 19.8 24.0 13.3 13.6 14.8

ROE before DTL/normalised 22.3 20.4 23.9 13.1 13.6 14.8

Growth (%)

Net loans 13.6 14.4 21.2 16.6 19.2 18.4

Total assets 13.7 16.5 19.4 16.2 17.2 16.8

PBT 17.2 6.1 42.3 (19.5) 16.6 18.9

PAT (before DTL/normalised) 17.6 5.4 60.5 (28.3) 16.6 18.9

HDFC NBFCs


Exhibit 18: HDFC - income statement and balance sheet March fiscal year-ends, 2016-21E (` mn)


IGAAP IGAAP IGAAP Ind-AS Ind-AS Ind-AS

2016 2017 2018 2019E 2020E 2021E

Income statement

Total income excluding fee income 305,309 327,665 402,973 425,539 507,040 599,234

Interest on Housing Loans 264,672 289,207 315,197 374,401 454,466 539,751

Dividends 8,069 9,091 10,793 12,412 14,894 17,873

Lease rentals/ de-recognized loan income 32 28 26 5,400 5,940 6,534

Other operating income 32,536 29,339 76,958 33,327 31,740 35,076

Income from investments 12,754 14,537 15,366 17,077 13,717 13,717

Capital gains 16,478 10,017 56,350 13,000 14,300 17,303

Interest payable 193,745 208,962 222,350 283,211 341,884 402,457

Net Income before provision 111,564 118,703 180,623 142,328 165,157 196,777

Provision 7,150 7,000 20,300 9,320 9,450 11,760

Fee income 3,742 3,462 1,448 1,851 1,122 746

Total income 309,051 331,128 404,421 427,390 508,162 599,980

Total expenses 7,047 7,808 9,086 11,972 13,533 15,365

Depreciation 543 560 492 500 525 551

Other income 515 468 463 463 463 463

Profit before tax 101,081 107,266 152,656 122,851 143,233 170,310

Tax 26,360 28,524 26,300 32,310 37,670 44,791

PAT 70,931 74,426 121,656 90,541 105,563 125,518

PAT (before DTL/normalised) 74,721 78,742 126,356 90,541 105,563 125,518

% growth 17.6 5.4 60.5 (28.3) 16.6 18.9

Dividend 26,857 28,596 33,457 34,406 40,114 47,697

Dividend tax 4,522 5,821 5,686 5,847 6,817 8,106

DPS 17.0 18.0 20.0 20.1 23.4 27.9

Wtdg. Avg. Equity 1579.9 1588.7 1675.9 1712.4 1712.4 1712.4

EPS 45 47 73 53 62 73

EPS (core) 32 38 35 38 45 53

BVPS 216 250 366 435 473 519

BVPS (core) 166 207 327 307 346 392

BVPS (before DTL/ normalised) 222 265 380 435 473 519

Balance sheet

Net loans 2,592,240 2,964,720 3,594,420 4,189,383 4,991,751 5,912,306

Total Investments 153,454 204,101 305,325 358,903 358,903 358,903

In equity 88,218 90,894 88,697 218,698 218,698 218,698

Fixed assets owned 6,656 6,382 6,445 6,961 7,517 8,119

Total assets 2,887,528 3,363,579 4,016,744 4,665,801 5,468,725 6,389,882

Total Borrowings 2,381,930 2,805,340 3,206,560 3,704,511 4,388,119 5,163,180

Current liabilities 155,366 137,899 172,823 216,029 270,036 337,545

Total borowings and CL 2,546,318 2,967,125 3,402,719 3,920,540 4,658,155 5,500,725

Share capital 3,160 3,177 3,352 3,425 3,425 3,425

Reserves 338,051 393,277 610,674 741,836 807,146 885,733

Shareholders fund 341,211 396,454 614,025 745,260 810,570 889,158


2QFY19 earnings print a solid one on all counts

UNSP reported strong results for 2QFY19 with EBITDA growing 36% off a good base (2-year

CAGR stood at 46%). EBITDA margins came in at a multi-year-high 19.4%. Even as we were

looking at a solid margin print, high base notwithstanding, the magnitude of yoy expansion

(312 bps) was a surprise. Key driver of the strong earnings print was topline performance. Net

revenues grew a healthy 14% yoy to `22.3 bn, 4% ahead of our estimate. Revenue

outperformance flowed down the P&L driving a 14% EBITDA and a 19% recurring PAT

outperformance. Quality of growth was healthy – it was volume-led (10.3% volume growth)

and mix improvement trend continued with P&A segment delivering 19% revenue growth (very

strong even as this was weaker than Pernod’s +34% yoy revenue growth print). The company

has delivered 35% growth in EBITDA and 52% growth in recurring PAT in 1HFY19 – solid

numbers.

Operating metrics suggest good demand and premiumization trends

Sep 2018 quarter has been a strong one for the alcobev players going by the results of UNSP

and peers reported thus far. Base was soft and aided yoy comps, of course. However, comps

were strong even adjusted for the base. UNSP saw overall volume grow 10.3% yoy to 20.4 mn

cases with P&A segment growing 15.4% (3rd

consecutive quarter of 13%+ growth) and the

popular segment arresting the trend of volume decline with 8% underlying growth.

Realizations in P&A and popular segments moved up around 3% each suggesting benefits of

mix improvement and favorable regulatory environment. Management called out ‘stable’

regulatory environment in the past 12 months as a key driver of strong performance.

Quarters too volatile to call out a trend; short-term growth prognosis is good

UNSP’s quarterly performance has been fairly volatile, especially on margin delivery. EBITDA

margins have ranged 5.7-19.4% in the past 16 quarters and yoy EBITDA margin delta has also

been in a fairly wide (640)-722 bps. Quarterly forecasting has been and remains a challenge. We

say this not to dilute the 2Q outperformance but we do believe it is an important aspect to keep

in mind. TTM (a slightly longer time-frame) growth smoothens quarterly volatility a tad. TTM

EBITDA growth for 2QFY19 stood at 16% yoy.

We raise EBITDA estimates for FY2019-21E by around 5% each. REDUCE stays on rich valuations.

United Spirits (UNSP) Consumer Products

Solid quarter drives estimate upgrades; REDUCE stays on valuations. UNSP

reported a solid quarter on all fronts – volumes surprised, mix improved, and cost-

rationalization measures took margins to multi-year-high levels. Management seemed

pretty upbeat on the call but chose not to raise either revenue growth (‘double-digits’)

or EBITDA margin (‘mid-to-high-teens’, 13-19%) guidance for the medium term. Our

EBITDA and EPS estimates go up by mid-single-digits and DCF-based valuation gets

revised up to `540/share. Retain REDUCE.

REDUCE

NOVEMBER 02, 2018

RESULT

Coverage view: Cautious

Price (`): 620

Target price (`): 540

BSE-30: 34,432

Rohit Chordia

Jaykumar Doshi

Aniket Sethi

United Spirits



Market Cap. (Rs bn) EPS growth (%) 42.8 28.1 25.5


Promoters 56.8 Sales (Rs bn) 93.0 102.7 112.4


MFs 4.1 EBITDA (Rs bn) 14.0 16.8 19.3

Price performance (%) 1M 3M 12M EV/EBITDA (X) 34.0 27.5 22.9

Absolute 20.0 4.5 1.4 ROE (%) 26.5 23.9 20.8

Rel. to BSE-30 27.3 13.9 (1.0) Div. Yield (%) 0.0 0.3 0.4


801-438

450.3

United Spirits Consumer Products


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


Exhibit 2: Key changes to standalone earnings model, UNSP, March fiscal year-ends, 2019-21E (Rs mn)


2QFY19 2QFY19E 2QFY18 1QFY19 KIE Est yoy qoq 1HFY19 1HFY18 % chng

Gross revenues 71,282 67,845 62,146 64,152 5 15 11 135,434 120,314 13

Less: excise duty (49,001) (46,388) (42,633) (44,033) 6 15 11 (93,034) (82,983) 12

Net operating income 22,281 21,456 19,513 20,119 4 14 11 42,400 37,331 14

Cost of materials (11,346) (10,959) (10,224) (10,232) 4 11 11 (21,578) (19,843) 9

Gross profit 10,935 10,497 9,289 9,887 4 18 11 20,822 17,488 19

Gross margin (%) 49.1 48.9 47.6 49.1 15 bps 147 bps -7 bps 49.1 46.8 226 bps

Staff cost (1,414) (1,690) (1,594) (1,688) (16) (11) (16) (3,102) (3,122) (1)

Advertising and promotion (2,005) (1,565) (1,449) (2,112) 28 38 (5) (4,117) (3,076) 34

Other expenditure (3,192) (3,437) (3,069) (3,804) (7) 4 (16) (6,996) (6,409) 9

Total other expenditure (6,611) (6,692) (6,112) (7,604) (1) 8 (13) (14,215) (12,607) 13

EBITDA 4,324 3,805 3,177 2,283 14 36 89 6,607 4,881 35

EBITDA margin (%) 19.4 17.7 16.3 11.3 167 bps 312 bps 805 bps 15.6 13.1 250 bps

Depreciation (350) (350) (326) (339) — 7 3 (689) (647) 6

Interest (415) (515) (659) (559) (19) (37) (26) (974) (1,362) (28)

Other income 249 351 305 214 (29) (18) 16 463 614 (25)

Pretax profits 3,808 3,291 2,497 1,599 16 53 138 5,407 3,486 55

Tax (1,221) (1,119) (822) (548) 9 49 123 (1,769) (1,088) 63

Recurring PAT 2,587 2,172 1,675 1,051 19 54 146 3,638 2,398 52

Extraordinary — 1,300 (144) (238) (238) (238)

Reported PAT 2,587 3,472 1,531 813 (25) 69 218 3,400 2,160 57

Recurring EPS 3.6 3.0 2.3 1.4 19 54 146 5.0 3.3 52

Excise as % of gross revenues 68.7 68.4 68.6 68.6 36 bps 14 bps 10 bps 68.7 69.0

Income tax rate (%) 32.1 34.0 32.9 34.3 -194 bps -86 bps -224 bps 32.7 31.2 150 bps

Cost as a % of sales

Cost of materials 50.9 51.1 52.4 50.9 -16 bps -148 bps 6 bps 50.9 53.2 -227 bps

Staff cost 6.3 7.9 8.2 8.4 -153 bps -183 bps -205 bps 7.3 8.4 -105 bps

Advertising and promotion 9.0 7.3 7.4 10.5 170 bps 157 bps -150 bps 9.7 8.2 147 bps

Other expenditure 14.3 16.0 15.7 18.9 -170 bps -141 bps -459 bps 16.5 17.2 -67 bps

(% change)

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

Revenues (Rs mn) 92,994 102,704 112,449 90,504 99,880 109,278 2.8 2.8 2.9

EBITDA (Rs mn) 13,978 16,817 19,328 13,339 16,054 18,437 4.8 4.8 4.8

EBITDA (%) 15.0 16.4 17.2 14.7 16.1 16.9

Recurring PAT (Rs mn) 7,891 10,110 12,686 7,447 9,749 12,136 6.0 3.7 4.5

Adj. EPS (Rs/share) 10.9 13.9 17.5 10.2 13.4 16.7 6.0 3.7 4.5

Revised Earlier Change (%)

Consumer Products United Spirits


Highlights from concall

Overall business performance. Management believes that regulatory challenges are

now largely behind and normative trends of the business are clearly visible. Growth in

2QFY19 was broad-based across states as well as brands. In the run-up to the general

elections, there should be some strong sales growth. However, they did caution that this

is not always the case. They also believe that the governments are now much more

receptive in terms of pricing and rational on tax issues; the governments do understand

that an arbitrary increase in taxes leads to lower sales volume, thus impacting total

collection. Secondly, management highlighted that there is still a lot of potential in the

P&A segment and the premiumization story remains strong.

Segment-wise takeaways. Prestige segment posted 19% yoy growth in revenues (aided

by 15% volume growth) and now represents 51.5% of total volumes. Strong growth in

the Prestige segment was led by robust growth in its scotch portfolio – Jonnie Walker and

Black & White aided by activations. The first ever TV commercial of Black & White was

created while Jonnie Walker saw a new visual identity. Other key brands like Signature

and Royal Challenge also continued to deliver strong growth. The Popular segment

posted 8% yoy increase in net sales due to 5% yoy increase in volumes – underlying net

sales were up 10% yoy. The franchise income was also in line with expectations (expect

annual income of `1.5 bn).

Adspend guidance. Adspend in 2QFY19 increased 38% yoy (off a soft base) and stood

at 9% of net operating revenues. Management highlighted that they expect adspends to

remain in the range of 9-10% of revenues, which they believe is an essential investment

to enhance the long-term potential of its brands.

Comments on margin expansion. EBITDA margin for 2QFY19 expanded 313 bps yoy to

19.4%. After remaining weak for the past three quarters (11-12.6%), margins this time

were in the range of the management’s medium-term guidance of mid-high teens.

Management explained that they are relatively satisfied with the gross margins levels

(some inflationary RM pressure likely going ahead) and are also rationalizing some of their

overhead costs. However, bulk of the margin expansion going forward will be the back of

higher volume-led operating leverage benefits. Due to the new ethanol blending policy,

there has been some hardening of ENA prices. Management is closely watching this and

believes that the flexibility to switch from molasses to grain based ENA (currently at

70/30% for grain/molasses) can also be used to mitigate any major impact; reduced

attractiveness of ethanol blending due to lower crude prices could also help.

Management believes that they do not expect any major cost inflation to impact them at

least in FY2019.

Other takeaways. (1) Company’s ambition remains double-digit topline growth and

mid-to-high teens EBITDA margin in the medium term. (2) The state of UP continues to

see good off take growth. (3) Strong focus on efficient working capital management –

state limits have also been put for this and the company continues to take punitive

actions against defaulting channel partners. (4) Company expects to complete sale of

`15-20 bn worth of non-core assets in the next couple of years. (5) Salience of online

delivery model is likely to increase going forward and several states are considering

the same.

United Spirits Consumer Products


Exhibit 3: United Spirits - quarterly volume trends


Exhibit 4: TTM EBITDA (Rs mn) and growth (%yoy), March fiscal year-ends, 1QFY16-2QFY19


Exhibit 5: Our SoTP-based target price stands at Rs540/share


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

Volume breakup

Volumes (mn cases)

Prestige and above segments 9.2 8.9 10.2 8.5 8.4 9.1 9.9 9.8 9.5 10.5

Regular and below segments 13.0 13.1 14.4 12.9 9.6 9.4 11.2 11.1 8.7 9.9

Total 22.2 22.0 24.6 21.4 18.0 18.5 21.1 20.9 18.2 20.4

Growth, yoy (%)

Prestige and above segments 10 11 5 5 (9) 2 (3) 15 13 15

Regular and below segments (6) (5) (11) (15) (26) (28) (22) (14) (9) 5

Total (0) 1 (5) (8) (19) (16) (14) (2) 1 10

% of total volumes

Prestige and above segments 41.4 40.5 41.5 39.7 46.7 49.2 46.9 46.9 52.2 51.5

Regular and below segments 58.6 59.5 58.5 60.3 53.3 50.8 53.1 53.1 47.8 48.5

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

(15)

(10)

(5)

0

5

10

15

20

25

30

35

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

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

2Q

FY1

9

Trailing 12 months EBITDA (Rs mn) yoy growth (%) - RHS

Approach Multiple (X) Value (Rs bn)

Standalone business DCF 365

RCB franchise EV/ revenues 5.0 18

Total 383

# of shares (mn) (a) 709

Equity value (Rs/share) 540

Target price (Rs/share) 540

Note:

(a) Share count adjusted for shares held by USL benefit trust.

Consumer Products United Spirits


Exhibit 6: Standalone profit model, balance sheet, cash model of United Spirits (based on Ind-AS),

March fiscal year-ends, 2017-21E


2017 2018 2019E 2020E 2021E

Profit model

Net revenues 85,476 81,701 92,994 102,704 112,449

EBITDA 9,710 10,215 13,978 16,817 19,328

Other income 1,111 2,060 1,140 1,400 2,628

Interest expense (3,690) (2,611) (2,212) (1,741) (1,300)

Depreciation (1,323) (1,351) (1,039) (1,158) (1,288)

Pretax profits 5,808 8,313 11,866 15,318 19,367

Extraordinaries (2,273) 90 1,500 7,500 11,000

Tax (1,836) (2,786) (3,975) (5,208) (6,682)

Reported PAT 1,699 5,617 9,391 17,610 23,686

Adj. PAT 3,972 5,527 7,891 10,110 12,686

Adj. earnings per share (Rs) 5.5 7.6 10.9 13.9 17.5

Balance sheet

Total shareholder equity 19,378 25,038 34,429 50,289 71,788

Total borrowings 41,007 32,688 26,688 20,688 15,161

Deferred tax liability (1,241) (856) (856) (856) (856)

Total liabilities and equity 59,144 56,870 60,261 70,121 86,093

Net fixed assets 12,723 11,001 11,712 12,554 13,455

Total investments 9,354 9,354 9,354 9,354 9,354

Cash 523 1,198 1,131 8,371 22,070

Net current assets 36,544 35,317 38,064 39,843 41,214

Total assets 59,144 56,870 60,261 70,121 86,093

Free cash flow

Operating cash flow, excl. working capital 5,001 7,769 10,002 11,609 12,646

Working capital changes 1,732 1,694 (2,747) (1,779) (1,371)

Capital expenditure (2,037) (1,332) (1,750) (2,000) (2,190)

Free cash flow 4,696 8,131 5,505 7,831 9,085

Ratios

Gross revenue growth (%) 9.8 2.5 14.7 11.7 10.6

Net operating revenue growth (%) 3.6 (4.4) 13.8 10.4 9.5

EBITDA growth (%) 9.5 5.2 36.8 20.3 14.9

Recurring PAT growth (%) 59.0 39.1 42.8 28.1 25.5

Gross margin (%) 42.9 47.5 48.7 49.1 49.3

EBITDA margin(%) 11.4 12.5 15.0 16.4 17.2

RoAE (%) 21.8 24.9 26.5 23.9 20.8

RoACE (%) 14.4 15.3 22.1 24.0 23.1

Key assumptions

Total core volumes (mn cases) 90.1 78.5 83.3 87.5 91.7

-Prestige and Above 36.8 37.2 42.0 45.4 48.8

-Popular 53.3 41.3 41.3 42.1 42.9

Blended Realisation (Rs/case) 937 1,016 1,092 1,149 1,201


2QFY19 earnings print good, even on a base-adjusted basis

Consolidated financials – Marico reported revenue growth of 20% yoy to `18.4 bn, 4% ahead

of our expectations. India VAHO portfolio was the only segment that disappointed a tad.

Performance was broad-based and healthy across segments otherwise. EBITDA grew 13% yoy

to `2.94 bn, 6% above our estimate. Gross margin contraction (down 300 bps yoy) continued

as consumption costs of copra stayed higher than spot prices. EBITDA margin decline was

restricted to 86 bps (to 16%) on the back of strong operating leverage and control on staff

costs. Recurring PAT grew 18% yoy to `2.14 bn, 11% above estimate. 2-year CAGR –

revenues +13%, EBITDA +8%, and PAT 10%.1HFY19 financials – revenues up 20%, EBITDA

up 11%, and PAT up 14%. 1H EPS stood at `3.6/share.

Standalone financials – revenues up 20% yoy to `14.97 bn, 5% above our estimate. EBITDA

grew 13% yoy to `2.24 bn, 9% above estimate. Gross margins declined 332 bps to 40.9%,

broadly in line with our expectations. Even as copra inflation trended down, we note that other

parts of the RM basket have seen higher inflation. EBITDA margins declined 89 bps yoy to

14.9%, 57 bps above our estimate.

Segmental highlights – India VAHO volume growth the only disappointment

Domestic volume growth stood at 6%, a shade below our expected 6.5%. Parachute rigids

posted a volume growth of 8% off a strong +12% base while Saffola saw 5% volume growth.

VAHO portfolio grew a modest 5%, impacted by decline in the CSD channel. Other parts of the

India portfolio (premium hair nourishment, oats and male grooming) delivered very strong

growth rates with the company calling out strong performance in modern trade and e-commerce

channels. International business posted a healthy 11% c/c growth yoy.

Earnings growth trajectory set to accelerate; we remain positive

After a tough last couple of years, we believe the company is well-poised to return to healthy

levels of earnings growth led by (a) overall favorable RM trends, and (b) promising NPD pipeline,

including new products in the commercial pilot stage. We raise FY2019-21E EPS estimates by

3-9% and fair value target to `350/share (from `310). ADD stays.

Marico (MRCO) Consumer Products

Good quarter; on a strong wicket. We remain positive. Marico delivered an above-

expectations quarter led by strong revenue growth. We like Marico’s aggression on new

product launches; copra downcycle, that may have started, will provide the company

enough surplus to reinvest in accelerated portfolio premiumization via new products.

Earnings trajectory is set to improve after a couple of challenging years. We raise

FY2019-21E EPS estimates by 3-9%. ADD stays with a revised DCF-based fair value

target of `350/share (from `310).

ADD

NOVEMBER 02, 2018

RESULT


Price (`): 320


BSE-30: 34,432

Rohit Chordia

Jaykumar Doshi

Aniket Sethi

Marico







MFs 3.4 EBITDA (Rs bn) 12.7 15.7 18.6


Absolute (3.9) (13.1) 1.4 ROE (%) 34.4 39.5 41.7



388-283

413.5

Consumer Products Marico


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


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


2QFY19 2QFY19E 2QFY18 1QFY19 KIE Est yoy qoq 1HFY19 1HFY18 (chg %.)

Net operating income 18,368 17,614 15,363 20,268 4 20 (9) 38,636 32,178 20

Material cost (10,287) (9,791) (8,144) (11,696) 5 26 (12) (21,983) (16,926) 30

Gross profit 8,081 7,823 7,219 8,572 3 12 (6) 16,653 15,251 9

Gross Margin (%) 44.0 44.4 47.0 42.3 -42 bps -300 bps 170 bps 43.1 47.4 -430 bps

Employee cost (1,146) (1,154) (1,075) (1,147) (1) 7 (0) (2,292) (2,161) 6

Advertising and promotion (1,758) (1,812) (1,601) (1,657) (3) 10 6 (3,415) (3,214) 6

Other expenditure (2,237) (2,086) (1,951) (2,219) 7 15 1 (4,456) (4,043) 10

Total expenditure (15,428) (14,843) (12,772) (16,719) 4 21 (8) (32,147) (26,344) 22

EBITDA 2,941 2,771 2,591 3,549 6 13 (17) 6,490 5,834 11

OPM (%) 16.0 15.7 16.9 17.5 27 bps -86 bps -151 bps 16.8 18.1 -134 bps

Other income 292 175 214 240 67 36 22 532 443 20

Interest (57) (40) (35) (53) 42 61 7 (110) (70) 57

Depreciation (224) (232) (235) (224) (4) (5) (0) (448) (447) 0

Pretax profits 2,952 2,673 2,535 3,512 10 16 (16) 6,464 5,761 12

Tax (776) (698) (679) (913) 11 14 (15) (1,689) (1,545) 9

Minority Interest (34) (38) (42) (42) (10) — (19) (76) (82) (8)

Recurring PAT (after MI) 2,142 1,938 1,814 2,557 11 18 (16) 4,699 4,134 14

Extraordinary items — — — — — —

Net profit (reported) 2,142 1,938 1,814 2,557 11 18 (16) 4,699 4,134 14

EPS 1.7 1.5 1.4 2.0 11 18 (16) 3.6 3.2 14

Income tax rate (%) 26.3 26.1 26.8 26.0 18 bps -49 bps 29 bps 26.1 26.8 -69 bps

Costs as a % of sales

Material cost 56.0 55.6 53.0 57.7 41 bps 299 bps -171 bps 56.9 52.6 429 bps

Employee cost 6.2 6.6 7.0 5.7 -32 bps -77 bps 57 bps 5.9 6.7 -79 bps

Advertising and promotion 9.6 10.3 10.4 8.2 -72 bps -86 bps 139 bps 8.8 10.0 -115 bps

Other expenditure 12.2 11.8 12.7 10.9 33 bps -53 bps 123 bps 11.5 12.6 -103 bps

(% change)

2QFY19 2QFY19E 2QFY18 1QFY19 KIE Est yoy qoq 1HFY19 1HFY18 (chg %.)

Net operating income 14,968 14,305 12,463 16,846 5 20 (11) 31,814 26,191 21

Material cost (8,844) (8,412) (6,951) (10,248) 5 27 (14) (19,092) (14,473) 32

Gross Profit 6,123 5,894 5,512 6,599 4 11 (7) 12,722 11,718 9

Gross Margin (%) 40.9 41.2 44.2 39.2 -29 bps -332 bps 174 bps 40.0 44.7 -476 bps

Employee cost (748) (761) (708) (773) (2) 6 (3) (1,520) (1,438) 6

Advertising and promotion (1,328) (1,386) (1,221) (1,266) (4) 9 5 (2,595) (2,458) 6

Other expenditure (1,811) (1,691) (1,611) (1,810) 7 12 0 (3,620) (3,332) 9

Total expenditure (12,731) (12,250) (10,491) (14,096) 4 21 (10) (26,827) (21,702) 24

EBITDA 2,237 2,055 1,972 2,750 9 13 (19) 4,987 4,489 11

OPM (%) 14.9 14.4 15.8 16.3 57 bps -89 bps -139 bps 15.7 17.1 -147 bps

Other income 843 375 322 230 125 162 266 1,073 537 100

Interest (23) (20) (19) (24) 14 22 (6) (47) (39) 22

Depreciation (187) (193) (179) (190) (3) 4 (2) (377) (334) 13

Pretax profits 2,870 2,217 2,096 2,766 29 37 4 5,636 4,653 21

Tax (617) (516) (493) (617) 20 25 0 (1,234) (1,070) 15

PAT 2,252 1,702 1,603 2,149 32 40 5 4,402 3,583 23


Net profit (reported) 2,252 1,702 1,603 2,149 32 40 5 4,402 3,583 23

EPS 1.7 1.3 1.2 1.7 32 40 5 3.4 2.8 23

Income tax rate (%) 21.5 23.3 23.5 22.3 -174 bps -201 bps -80 bps 21.9 23.0 63 bps

Costs as a % of sales

Material cost 59.1 58.8 55.8 60.8 28 bps 331 bps -175 bps 60.0 55.3 0 bps

Employee cost 5.0 5.3 5.7 4.6 -33 bps -69 bps 41 bps 4.8 5.5 475 bps

Advertising and promotion 8.9 9.7 9.8 7.5 -82 bps -93 bps 135 bps 8.2 9.4 -72 bps

Other expenditure 12.1 11.8 12.9 10.7 27 bps -83 bps 135 bps 11.4 12.7 -123 bps

(% change)

Marico Consumer Products


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


Exhibit 4: New launch aggression encouraging


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

Revenues (Rs mn) 73,920 83,912 94,790 72,937 82,404 92,602 1.3 1.8 2.4

EBITDA (Rs mn) 12,740 15,739 18,618 12,531 15,072 17,407 1.7 4.4 7.0

EBITDA (%) 17.2 18.8 19.6 17.2 18.3 18.8

PAT (Rs mn) 9,046 11,260 13,175 8,807 10,571 12,107 2.7 6.5 8.8

EPS (Rs/share) 7.0 8.7 10.2 6.8 8.2 9.4 2.7 6.5 8.8




Key segmental highlights and takeaways from the earnings call

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

urban growth in 2QFY19 – rural grew 24% yoy while urban sales grew by 11% in value

terms. MT (~11% of turnover) grew by 39% while CSD (~7% of turnover) declined 3%

yoy.

Parachute CNO. Parachute rigids posted a decent quarter – volumes up 8% yoy, on a

high base of 12% yoy. Stronger off takes in non-core markets and higher category

growth led to this strong growth. Value growth in Parachute rigids was at 32% yoy due

to price hikes taken in the previous year. In the medium term, the company expects to

deliver 5-7% volume CAGR (guidance unchanged). Marico consolidated its volume

market share in the coconut oil franchise at 59% (Sep 2018 MAT). Given that copra

prices are expected to ease-off going ahead, management believes that their past

learnings will help them better operate in this deflationary cycle. They would continue to

invest behind brand building and will exercise a bias for franchise expansion as long as

margins (gross margins per unit) remain within a band.

Saffola. Saffola reported volume growth of 5% yoy (9% growth in value terms) after a

weak performance for the past few quarters. Management believes that the brand is

finally responding to the several initiatives taken by the company. However, the fixing is

not completely done yet. They have upped media investments behind the brand in the

quarter and have also included tactical inputs towards improving consumer value

proposition. The brand is now doing well in MT and e-commerce. Finally, management

said that double-digit growth in Saffola will take some time as they are still working on

brand repair.

Other food brands – the healthy foods franchise grew 35% in value terms during the

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

70% (September, 2018 MAT) in flavored oats category. The product continued to benefit

from the promotional campaign highlighting its health supremacy over instant fried

noodles. Marico has also launched the Mumbai Pav Bhaji variant of Saffola Masala Oats in

a few markets. Management believes that the healthy snacking market has a strong

growth potential.

Value added hair oils. Domestic VAHO portfolio saw a soft quarter, recording just 5%

volume growth and 12% in value terms. The segment was particularly impacted by a

steep decline in CSD sales – volume growth ex-CSD was at 10%. Management expects

VAHO volumes to grow in double digits in 2HFY19. Nihar Naturals Shanti Amla Badam

strengthened it volume market leadership in the Amla Hair Oil category. Recently, the

company has also launched Nihar Naturals Extra Care Hair Fall Control Oil, an innovative

light hair product, which brings back the age-old method of soaking seeds in oil.

Youth brands. Male grooming portfolio grew 32% yoy in value terms during the

quarter. Set Wet Hair Gels continued to grow strongly on the back of new advertisement

campaigns. Its affordable perfume spray – Set Wet Go – continues to gain traction across

all the launch markets. Company continues to see a good response to its first exclusively

digital brand, Set Wet Studio X and also Set Wet Hair Waxes.

International business. Marico’s international business posted 11% yoy growth in c/c

terms (volume growth of 8% yoy and reported growth of 18% yoy).



Bangladesh (45% of turnover) posted 10% c/c growth in revenues with volumes up

3%. Parachute CNO grew 1% (in c/c terms) and maintained its strong leadership

position with ~87% volume market share. Non-CNO portfolio grew by 40% in c/c

terms. Management continued to highlight that they continue to focus on expanding

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

in the quarter.

MENA (14% of turnover) posted strong 19% c/c growth with double-digit volume

growth in both Egypt and the Middle East businesses. However, the management

indicated that there could be some concerns in the region in the medium term given

the tough macros in the region.

Others – (1) SE Asia (26% of turnover) recovered to grow by 14% in constant

currency terms. Vietnam witnessed positive growth momentum (13% growth in c/c

terms) after a weak performance in the past five quarters. HPC category saw a strong

19% c/c growth in the region. The company has also launched a female grooming

range under a new brand ‘Sedure’ in the region. (2) South Africa (9% of turnover)

registered 18% c/c growth. However, the country is seeing some macro headwinds.

Exhibit 5: Domestic volume growth trends (yoy %)


8.0

5.0 3.0

6.0 5.5

10.5

8.4 8.0

3.4

(4.0)

10.0

(9.0)

8.0 9.4

1.0

12.4

6.0

(10)

(7)

(4)

(1)

2

5

8

11

14

17

20

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

2Q

FY1

9



Exhibit 6: Parachute (rigids) volume growth (%)

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

Exhibit 7: Value added hair oils volume growth trends (in %)


Exhibit 8: Saffola volume growth trends (in %)


7 8

5

8

11

4 6 7

(6)

(1)

15

(9)

12

15

(5)

9 8

(15)

(10)

(5)

-

5

10

15

20

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

3Q

FY17

4Q

FY17

1Q

FY18

2Q

FY18

3Q

FY18

4Q

FY18

1Q

FY19

2Q

FY19

13

10

5

14

8

21

11 9

11

(12)

10

(8)

12

8

11

15

5

(15)

(10)

(5)

-

5

10

15

20

25

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

3Q

FY17

4Q

FY17

1Q

FY18

2Q

FY18

3Q

FY18

4Q

FY18

1Q

FY19

2Q

FY19

10

3 (1) 4 4

17

13 11

8 6

6

(9)

3

-

(1)

10

5

(12)

(8)

(4)

-

4

8

12

16

20

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

3Q

FY17

4Q

FY17

1Q

FY18

2Q

FY18

3Q

FY18

4Q

FY18

1Q

FY19

2Q

FY19



Exhibit 9: Consolidated Profit model, balance sheet of Marico (based on Ind-AS), March fiscal year-ends, 2016-2021E


2016 2017 2018 2019E 2020E 2021E

Profit model

Net sales 60,173 59,178 63,222 73,920 83,912 94,790

EBITDA 10,514 11,593 11,378 12,740 15,739 18,618

Other income 933 973 846 870 1,121 1,407

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

Depreciation (949) (903) (891) (932) (1,067) (1,224)

Pretax profits 10,292 11,497 11,171 12,516 15,663 18,700

Tax (3,054) (3,377) (2,896) (3,317) (4,229) (5,330)

Minority Interest (124) (134) (131) (153) (174) (196)

Net income 7,115 7,986 8,145 9,046 11,260 13,175


Reported Net income 7,115 7,986 8,145 9,046 11,260 13,175

Earnings per share (Rs) 5.5 6.2 6.3 7.0 8.7 10.2

Balance sheet

Total shareholder's equity 20,174 23,257 25,429 27,117 29,857 33,350

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

Minority interest 143 133 125 278 452 648

Total liabilities and equity 23,623 25,778 28,647 29,988 32,401 35,590

Net fixed assets 5,917 5,883 5,613 6,012 6,426 6,841

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

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

Cash 3,171 2,273 2,001 3,344 6,614 8,680

Net current assets 3,720 6,590 10,140 9,739 8,469 9,178

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

Total assets 23,623 25,778 28,647 29,988 32,401 35,590

Free cash flow

Operating cash flow (excl. working capital) 8,373 8,901 8,610 9,423 11,510 13,289

Working capital changes (197) (2,785) (3,065) 401 1,270 (708)

Capital expenditure (878) (981) (1,280) (1,331) (1,480) (1,639)

Free cash flow 7,299 5,135 4,266 8,493 11,300 10,942

Ratios

Sales growth (%) NM (1.7) 6.8 16.9 13.5 13.0

EPS growth (%) 24.1 12.2 2.0 11.1 24.5 17.0

EBITDA margin (%) 17.5 19.6 18.0 17.2 18.8 19.6

Gross margin (%) 49.0 52.2 47.0 45.0 47.0 48.2

A&SP % of sales 11.5 11.1 9.3 8.8 9.4 9.7

ROE (%) 35.3 34.3 32.0 33.4 37.7 39.5

ROCE (%) 41.0 41.0 36.0 38.7 44.5 48.1


Strong quarter lifts 1HFY19 performance; sustainability of the same is yet to be seen

Cummins India reported 2QFY19 growth of 29%/50%/38% on revenue/EBITDA/PAT driven by

good performance in both domestic sales (+34%) and exports (+21%). Domestic growth was

broad-based across powergen, industrial and distribution segments and did not have supplier

constraints that had impacted sales in 1QFY19. Exports were driven by some recovery seen in

Middle East and Africa. Gross margin benefited from INR depreciation to the tune of 150 bps in

the quarter while higher effective tax rate pulled down PAT growth. The quarter has lifted

1HFY19 performance to 13%/28%/19% growth in revenue/EBITDA/PAT. Sustainability of this

performance is yet to be seen and the company has thus modestly increased guidance to

domestic growth of 10-12% (vs 8-10% earlier) and export growth of 3-5% (vs flat earlier).

Long-term business plans involve improving market share, new products and emission norms

Management’s long-term growth plans rest on the three pillars of market share, new products

and emission norms. The company seeks to increase market share through better penetration

and customer engagement. New product launches seek to offer innovation, better value and

content growth. Stringent emission norms provide another significant opportunity as per the

management. The parent’s global experience and technological capability put CIL in an

advantageous position. These efforts will likely increase R&D expenses of CIL for the next 2-3

years. We build related long-term growth benefit through valuation multiples.

EPS estimates broadly retained; marginally cut target price to `700

We increase revenue estimates by 3-4% in domestic powergen and 10-12% in industrial

segments to incorporate outperformance in 1HFY19 while reduce export estimates in view of

cautious management guidance. Higher tax rate of 28%, as reported in 1HFY19, indicates

reduction in Phaltan SEZ tax incentives as per the SEZ policy. Impact of new product launches

has been incorporated through higher R&D expenses over the next three years and 0.5X

increase in target multiple to capture value of corresponding long-term prospects. Higher 13%

cost of equity yields justified multiple of 20X (vs 21X previously), leading to one-year forward

target price of `700 (`710 previously). Retain REDUCE rating.

Cummins India (KKC) Industrials

Uncertainty in the near term, potential in the long term. Strong performance in

the quarter lifted Cummins India’s 1HFY19 performance, the sustainability of which is

yet to be seen. Long-term growth strategy for the company involves increasing market

share, launching new products and opportunity from stringent emission norms where

the parent has developed significant capability. We incorporate the outperformance, higher

tax rate, potential from new products and higher CoE in the revised TP of `700 (`710

earlier) at 20X September 2020E EPS (versus 21X earlier). Retain REDUCE rating.

REDUCE

NOVEMBER 02, 2018

RESULT


Price (`): 747


BSE-30: 34,432

Aditya Mongia

Ajinkya Bhat

Cummins India







MFs 15.8 EBITDA (Rs bn) 9.0 10.8 12.5


Absolute 11.6 11.8 (16.5) ROE (%) 18.3 20.7 22.0



984-612

207.1

Cummins India Industrials


2QFY19 earnings call takeaways

Strong 2Q has lifted 1HFY18 performance, yet management is cautious on

guidance. Cummins India reported a strong 2QFY19 lifting the performance for 1HFY19

to 12% growth in domestic sales and 16% growth in exports. The management has,

however, increased FY2019 guidance only modestly to 10-12% growth in domestic

(vs 8-10% guided earlier) and 3-5% growth in exports (vs flat yoy guided earlier). While

there is an upside risk to domestic growth guidance, the management is more cautious

on exports growth. A recovering market (Middle East and Africa in this case) typically

provides good sales growth for two quarters but its sustainability can only be judged

through 3-4 quarter trend. Further, we note here that against overall 16% export growth

in 1HFY19, HHP exports have grown at a slower pace of 7%. HHP exports contribute

more than 40% of exports and are thus an important variable to monitor.

Within the domestic market, the company expects 5-year growth CAGR of 9-11% driven

by infrastructure, manufacturing and commercial realty. Data centers is a small segment

at the moment yet an important one given its improving growth prospects.

Forex gains will partly reverse. CIL’s gross margin has benefited to the tune of 150 bps

in 2QFY19 and 50 bps in 1HFY19 on account of forex. This benefit will partly reverse in

3QFY19 as the forex rate agreement with the parent for exports does not allow CIL to

retain more than 5% benefit from currency move. The management has mentioned that

gross margins will thus normalize to ~35% levels seen historically. Some support may

come from 3-5% price increase in the domestic segment that the company has planned

to effect in the coming two quarters in order to pass on input cost increases.

Business growth to be driven by market share, new products and emission norms.

The management highlighted three pillars of its business growth in the coming years as

follows:

Market share improvement. The company seeks to achieve this through better

penetration, more customer engagement and value-adding products. In the analyst

meet conducted in June 2018, the company had shared greater details on this aspect.

Key focus markets are construction, hospitality and commercial realty. Another avenue

to improve market share is by helping and handholding new customers entering India.

New products. New product launches will seek to improve value proposition for the

customer. An example cited was that of an under-slung engine solution for railway

powercar that frees up space in an entire coach, which would otherwise house engine

in the traditional solution. This increased space can be used for more passenger

volumes thereby benefiting the client, i.e. Indian Railways in this case. New products

will also seek to increase content supplied by CIL to its clients. In the example of

railway powercar mentioned before, CIL is also providing acoustic systems, control

systems and alternators. The company has opened a new facility to serve this market.

Such value-adding new product launches are expected to provide long-term growth

benefits for CIL.

Emission norms. The management expects CIL to benefit materially from increasing

regulatory push towards more stringent emission norms. The parent’s global

experience and technological capability place CIL in an advantageous position versus

the competitors to cater to this market.

Industrials Cummins India


Exhibit 1: Strong growth seen in both domestic and export revenues while gross margin benefited 150 bps from forex in the quarter;

both these factors of growth and margin are expected to reduce in 2HFY19 Cummins – 2QFY19 standalone results – key numbers (Rs mn)


Exhibit 2: Performance was better across all segments with highest-ever quarterly sales in powergen and industrials; sustainability of

exports remains to be seen Trajectory of Cummins' segmental sales, March fiscal year-ends, 1QFY14-2QFY19


% change % change

2QFY19 2QFY19E 2QFY18 1QFY19 vs est. yoy qoq 1HFY19 1HFY18 yoy FY2019E FY2018 yoy

Sales 14,869 12,513 11,539 13,280 19 29 12 28,149 24,946 13 56,130 50,825 10

Expenses (12,360) (10,502) (9,864) (11,133) 18 25 11 (23,493) (21,319) 10 (47,147) (43,501) 8

Stock (59) (200) 55 360 301 (233) — (400)

Raw material (9,158) (7,610) (7,336) (8,690) (17,848) (15,771) (35,308) (32,181)

Employee (1,468) (1,265) (1,257) (1,265) (2,733) (2,482) (5,407) (4,979)

Other Exp (1,676) (1,426) (1,326) (1,538) (3,213) (2,833) (6,433) (5,940)

EBITDA 2,509 2,011 1,675 2,147 25 50 17 4,656 3,627 28 8,982 7,325 23

Other income 785 664 536 696 1,480 1,120 2,655 2,285

Interest (40) (37) (38) (36) (75) (80) (149) (148)

Depreciation (274) (300) (220) (271) (544) (429) (1,198) (938)

PBT 2,980 2,338 1,953 2,536 27 53 18 5,516 4,239 30 10,290 8,523 21

Tax (865) (585) (424) (706) (1,571) (926) (2,881) (1,856)

Net profit 2,116 1,754 1,529 1,830 21 38 16 3,946 3,313 19 7,409 6,667 11

Extraordinary items — — — — — 438 — 418

RPAT 2,116 1,754 1,529 1,830 21 38 16 3,946 3,751 5 7,409 7,085 5

Recurring EPS (RS) 7.6 6.3 5.5 6.6 21 38 16 14.2 12.0 19 26.7 24.1 11

Key ratios (%)

Raw material/Sales 62.0 62.4 63.1 62.7 62.3 64.2 62.9 64.1

Employee exp./Sales 9.9 10.1 10.9 9.5 9.7 10.0 9.6 9.8

Other exp./Sales 11.3 11.4 11.5 11.6 11.4 11.4 11.5 11.7

EBITDA margin 16.9 16.1 14.5 16.2 16.5 14.5 16.0 14.4

PBT Margin 20.0 18.7 16.9 19.1 19.6 17.0 18.3 16.8

Tax rate 29.0 25.0 21.7 27.8 28.5 21.8 28.0 21.8

PAT margin 14.2 14.0 13.3 13.8 14.0 13.3 13.2 13.1

% change

3.2

2.4

3.02.72.9

2.62.3

2.8

3.43.32.92.9

3.43.43.53.3

3.7

3.23.43.3

3.6

4.1

0.0

1.0

2.0

3.0

4.0

5.0

1Q

FY

14

2Q

FY

14

3Q

FY

14

4Q

FY

14

1Q

FY

15

2Q

FY

15

3Q

FY

15

4Q

FY

15

1Q

FY

16

2Q

FY

16

3Q

FY

16

4Q

FY

16

1Q

FY

17

2Q

FY

17

3Q

FY

17

4Q

FY

17

1Q

FY

18

2Q

FY

18

3Q

FY

18

4Q

FY

18

1Q

FY

19

2Q

FY

19

(Rs bn) Power generation

1.41.2

1.5

1.11.01.2

1.7

1.31.31.2

1.71.5

1.71.6

1.92.02.0

1.7

2.12.01.8

2.4

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1Q

FY

14

2Q

FY

14

3Q

FY

14

4Q

FY

14

1Q

FY

15

2Q

FY

15

3Q

FY

15

4Q

FY

15

1Q

FY

16

2Q

FY

16

3Q

FY

16

4Q

FY

16

1Q

FY

17

2Q

FY

17

3Q

FY

17

4Q

FY

17

1Q

FY

18

2Q

FY

18

3Q

FY

18

4Q

FY

18

1Q

FY

19

2Q

FY

19

(Rs bn)Industrials

2.6

2.32.4

2.02.2

2.42.42.1

2.52.42.6

2.42.6

2.8

3.3

2.9

3.4

2.5

3.6

2.7

3.23.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1Q

FY

14

2Q

FY

14

3Q

FY

14

4Q

FY

14

1Q

FY

15

2Q

FY

15

3Q

FY

15

4Q

FY

15

1Q

FY

16

2Q

FY

16

3Q

FY

16

4Q

FY

16

1Q

FY

17

2Q

FY

17

3Q

FY

17

4Q

FY

17

1Q

FY

18

2Q

FY

18

3Q

FY

18

4Q

FY

18

1Q

FY

19

2Q

FY

19

Distribution(Rs bn)

2.73.02.8

3.43.9

4.8

3.9

4.6

5.3

4.4

3.73.3

4.14.54.5

3.0

3.93.7

4.23.9

4.44.5

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1Q

FY

14

2Q

FY

14

3Q

FY

14

4Q

FY

14

1Q

FY

15

2Q

FY

15

3Q

FY

15

4Q

FY

15

1Q

FY

16

2Q

FY

16

3Q

FY

16

4Q

FY

16

1Q

FY

17

2Q

FY

17

3Q

FY

17

4Q

FY

17

1Q

FY

18

2Q

FY

18

3Q

FY

18

4Q

FY

18

1Q

FY

19

2Q

FY

19

(Rs bn) Exports



Exhibit 3: The company witnessed 150 bps improvement in gross margin in 2QFY19 due to forex

benefit, which will partially reverse in 3QFY19 as per the export agreement terms with parent Impact of raw material cost and currency on margin, March fiscal year-ends, 1QFY13-2QFY19

Source: Kotak Institutional Equities analysis

Exhibit 4: Export growth was led by some recovery seen in Middle East and Africa, the sustainability of which remains to be seen; key

monitorable will be the trend in HHP exports that grew 18% yoy in 2QFY19 Breakup of Cummins India's exports, March fiscal year-ends, 2QFY19 and 2QFY18


64

64 64 6

5

64

61

61

61

61 6

2

62

63 63

62 63

61

64 6

5

64 6

5

65

63

63

65

63

62

58

59

60

61

62

63

64

65

66

40

50

60

70

80

90

100

110

120

1Q

FY

13

2Q

FY

13

3Q

FY

13

4Q

FY

13

1Q

FY

14

2Q

FY

14

3Q

FY

14

4Q

FY

14

1Q

FY

15

2Q

FY

15

3Q

FY

15

4Q

FY

15

1Q

FY

16

2Q

FY

16

3Q

FY

16

4Q

FY

16

1Q

FY

17

2Q

FY

17

3Q

FY

17

4Q

FY

17

1Q

FY

18

2Q

FY

18

3Q

FY

18

4Q

FY

18

1Q

FY

19

2Q

FY

19

(%)(X) Raw material to sales (RHS, %) Pig iron index (LHS, X)

Inverse currency index (LHS, X)

LHP15%

Mid range29%

Heavy duty7%

HHP45%

Export sales breakup in 2QFY19 (Rs4.5 bn)

LHP16%

Mid range24%

Heavy duty7%

HHP46%

Spares7%

Export sales breakup in 2QFY18 (Rs3.7 bn)



Exhibit 5: Balance sheet details of Cummins India, March fiscal year-ends, 2014-1HFY19 (Rs mn)


Exhibit 6: Powergen revenues are expected to grow at 13% CAGR over FY2018-21E Breakup of powergen revenues of Cummins India, March fiscal year-ends, 2011-21E (Rs bn)


Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS

2014 2015 2016 1HFY17 2017 1HFY18 2018 1HFY19

Balance sheet

Shareholders' funds 25,652 28,865 34,813 35,558 37,422 38,180 39,861 40,447

Share Capital 554 554 554 554 554 554 554 554

Reserves & Surplus 25,097 28,311 34,259 35,003 36,867 37,626 39,306 39,892

Loan Funds — — — 2,500 2,508 2,518 2,515 2,552

Total souce of funds 25,652 28,865 34,813 38,058 39,930 40,698 42,376 42,998

Fixed assets and Capital WIP 10,149 14,046 18,086 18,417 16,954 17,728 13,261 13,349

Investments 4,954 4,650 3,336 6,247 10,208 10,074 12,839 10,872

Cash & Bank Balances 865 799 897 1,718 1,291 1,421 4,709 6,271

Current assets (ex cash) 21,760 23,723 21,985 22,663 21,956 23,528 24,503 28,259

Inventories 5,513 6,823 6,003 6,148 5,621 5,468 5,375 6,125

Sundry Debtors 7,820 9,355 9,506 9,222 9,557 10,957 13,263 13,517

Other Current Assets 22 73 2,527 2,615 4,890 5,816 3,835 5,056

Loans & Advances 8,405 7,472 3,949 4,679 1,889 1,287 2,031 3,561

Current liabilities and provisions (11,611) (13,721) (10,095) (11,626) (10,455) (11,895) (12,637) (15,007)

Current Liabilities (6,910) (8,520) (8,260) (9,726) (8,479) (10,071) (10,685) (12,882)

Provisions (4,701) (5,202) (1,835) (1,900) (1,976) (1,824) (1,952) (2,126)

Net current assets ex cash 10,149 10,001 11,890 11,037 11,501 11,632 11,866 13,252

Deferred Tax Asset, Net (465) (631) 604 638 (24) (156) (299) (745)

Total application of funds 25,652 28,865 34,813 38,058 39,930 40,698 42,376 42,998

Days of sales

Current assets (ex cash) 204 200 175 179 162 175 181 196

Inventories 52 58 48 49 41 41 40 42

Sundry Debtors 73 79 76 73 70 81 98 94

Other Current Assets 0 1 20 21 36 43 28 35

Loans & Advances 79 63 31 37 14 10 15 25

Current liabilities and provisions (109) (116) (80) (92) (77) (88) (93) (104)

Current Liabilities (65) (72) (66) (77) (62) (75) (79) (89)

Provisions (44) (44) (15) (15) (15) (14) (14) (15)

Net current assets ex cash 95 84 95 87 85 87 87 92

1312

16

1110

1213 14

15

17

19

0

4

8

12

16

20

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

<160 kVa 160-380 kVA 450-625 kVa >=750 kVA

13% CAGR



Exhibit 7: HHP revenues of the listed entity have declined even as overall India HHP revenues have

grown over the past six years India HHP revenues, bifurcated between listed and unlisted entities of Cummins, March fiscal year-ends, 2012-17 (Rs bn)


Exhibit 8: Industrial revenues are expected to grow at 18% CAGR over FY2018-21E Breakup of Industrial revenues of Cummins India, March fiscal year-ends, 2011-21E (Rs bn)


13

11

13

15

-

2

4

6

8

10

12

14

16

18

2012 2013 2014 2015 2016 2017

HHP India (listed) HHP india (unlisted) HHP India

5 5 5 5 5 6

7 8

9

11

13

0

2

4

6

8

10

12

14

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

Compressor Construction Mining Locomotives Others

18% CAGR



Exhibit 9: Export revenues are expected to grow at 12% CAGR over FY2018-21E Breakup of export revenues of Cummins India, March fiscal year-ends, 2011-21E (Rs bn)


10 12

13 12

17 17 16 16 17

19

22

0

5

10

15

20

25

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

LHP Mid-range Heavy Duty HHP Spares/others

12% CAGR



Exhibit 10: Comparison of segmental revenue CAGR projections to historical 5-year CAGR of CIL, March fiscal year-ends, 2011-29E (%)


18

9 9

2 0

(1)

1

(3)

15

(10)

-

10

20

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Deca

dal C

AG

R(2

01

9-2

9E)

Power generation

22

17

10 8

3 0

6 9

16

-

10

20

30

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Deca

dal C

AG

R(2

01

9-2

9E)

Industrial

4 4 6

11

7 6 9

7

10

-

10

20

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Deca

dal C

AG

R(2

01

9-2

9E)

Distribution

14 14 12

(1)

32

10 7 4

15

(10)

-

10

20

30

40

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Deca

dal C

AG

R(2

01

9-2

9E)

Exports

15

11 9

3

9

3 4

2

14

-

10

20

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Deca

dal C

AG

R(2

01

9-2

9E)

Total



Exhibit 11: Oil price rise has led to some recovery in exports to Middle East and Africa for CIL Trend in price of Brent crude, December calendar year-ends, Oct-2012 – Oct-2018 (US$/bbl)

Source: Bloomberg, Kotak Institutional Equities

Exhibit 12: Change in estimates for Cummins India, March fiscal year-ends, 2018-21E (Rs mn)


-

20

40

60

80

100

120

140

Oct

-12

Jan

-13

Apr-

13

Jul-1

3

Oct

-13

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

Crude Brent (US$/bbl)

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

Revenues 50,825 56,130 63,545 72,533 55,739 62,634 71,083 1 1 2

Power generation 13,540 15,080 16,774 19,290 14,585 16,205 18,635 3 4 4

Industrials 7,733 8,652 10,637 12,660 8,311 9,793 11,287 4 9 12

Auto — — — — — — — NA NA NA

Distribution 12,190 13,653 15,018 16,520 13,653 15,018 16,520 — — —

Exports 15,740 17,013 19,265 22,084 17,459 19,767 22,661 (3) (3) (3)

EBITDA 7,325 8,982 10,790 12,537 8,824 10,274 11,878 2 5 6

EBITDA margin (%) 14.4 16.0 17.0 17.3 15.8 16.4 16.7 17 bps 57 bps 57 bps

Other income 2,285 2,655 3,031 3,259 2,655 3,031 3,259

Interest (148) (149) (149) (149) (149) (149) (149)

Depreciation (938) (1,198) (1,147) (1,332) (1,198) (1,147) (1,328)

PBT 8,523 10,290 12,525 14,316 10,132 12,010 13,661 2 4 5

Tax rate (%) 22 28 28 28 25 25 25 300 bps 300 bps 300 bps

PAT 7,085 7,409 9,018 10,307 7,599 9,008 10,246 (2) 0 1

Adjusted PAT 6,695 7,520 9,074 10,366 7,710 9,063 10,305 (2) 0 1

EPS (Rs) 24.2 27.1 32.7 37.4 27.8 32.7 37.2 (2) 0 1

Growth (%)

Revenues 0.1 10.4 13.2 14.1

Power generation — 11.4 11.2 15.0

Industrials 8.0 11.9 22.9 19.0

Auto NA NA NA NA

Distribution 6.0 12.0 10.0 10.0

Exports (2.5) 8.1 13.2 14.6

EBITDA (8.7) 22.6 20.1 16.2

PAT (8.0) 12.3 20.7 14.2

% revisionOld estimatesNew estimates



Exhibit 13: Standalone balance sheet, profit model and cash flow statement of Cummins, March fiscal year-ends, 2012-21E (Rs mn)


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

Profit model

Net revenue 41,172 46,012 39,767 44,058 47,088 50,773 50,825 56,130 63,545 72,533

Total operating costs (34,200) (37,545) (32,799) (36,708) (39,337) (42,755) (43,501) (47,147) (52,755) (59,995)

EBITDA 6,972 8,467 6,967 7,351 7,751 8,018 7,325 8,982 10,790 12,537

Other operational income 651 922 776 847 1,212 1,192 1,307 1,402 1,504 1,614

Other income 1,233 1,949 1,777 2,040 2,259 2,080 2,285 2,655 3,031 3,259

PBDIT 8,206 10,416 8,744 9,390 10,010 10,098 9,609 11,637 13,821 15,797

Financial charges (54) (46) (42) (45) (96) (168) (148) (149) (149) (149)

Depreciation (420) (473) (528) (797) (810) (848) (938) (1,198) (1,147) (1,332)

Pre-tax profit 7,732 9,897 8,175 8,548 9,104 9,082 8,523 10,290 12,525 14,316

Taxation (2,282) (2,872) (2,175) (1,515) (1,561) (1,736) (1,876) (2,881) (3,507) (4,008)

PAT 5,913 7,641 6,000 7,859 7,543 7,346 7,085 7,409 9,018 10,307

Adjusted PAT 5,788 7,348 5,999 6,805 7,179 7,280 6,695 7,520 9,074 10,366

Balance sheet

Shareholders funds 20,432 23,867 25,652 28,865 34,813 37,422 39,861 42,385 45,458 48,969

Loan funds — — — — — 2,508 2,515 2,515 2,515 2,515

Total source of funds 20,432 23,867 25,652 28,865 34,813 39,930 42,376 44,900 47,973 51,485

Net block 4,649 4,934 9,192 12,340 12,894 12,322 12,882 14,419 16,024 16,940

Net fixed assets 6,273 8,066 12,215 14,763 18,086 16,954 13,261 14,799 16,404 17,320

Investments and goodwill 5,975 6,276 4,954 4,650 3,336 9,753 12,798 13,798 13,798 13,798

Cash balances 2,235 3,547 865 799 897 1,291 4,709 5,539 5,545 6,369

Net current assets excluding cash 5,879 6,307 8,083 9,284 12,246 11,501 11,866 11,064 12,525 14,297

Total application of funds 20,432 23,867 25,652 28,865 34,813 39,930 42,376 44,900 47,973 51,485

Cash flow statement

Operating profit before working capital changes 7,404 8,826 7,525 8,006 8,579 8,951 8,537 11,188 13,214 15,072

Change in working capital (825) (883) (1,607) (1,142) 33 371 (370) 803 (1,462) (1,772)

Tax paid (2,155) (2,657) (2,308) (1,853) (1,694) (1,867) (1,823) (2,881) (3,507) (4,008)

Cashflow from operating activites 4,425 5,286 3,611 5,012 6,918 7,456 6,344 9,110 8,245 9,292

Fixed assets (2,281) (2,148) (4,678) (3,304) (4,899) (2,315) (905) (2,695) (2,751) (2,249)

Investments 1,547 302 1,489 1,296 1,339 (3,655) (1,518) (1,000) — —

Cash (used) / realised in investing activities 77 (2,186) 552 (563) (2,121) (4,860) (1,327) (3,246) (2,145) (1,524)

Borrowings — — — — — — — — — —

Dividend paid (3,452) (3,544) (4,216) (4,216) (4,669) (4,663) (4,639) (4,885) (5,946) (6,796)

Cash (used) /realised in financing activities (3,506) (3,590) (4,258) (4,261) (4,677) (2,245) (4,731) (5,033) (6,094) (6,944)

Cash generated /utilised 996 (490) (95) 188 119 350 285 830 6 824

Cash at beginning of year 156 1,152 662 567 755 851 1,237 4,709 5,539 5,545

Cash at end of year (excl. other bank balances) 1,152 662 567 755 851 1,237 1,523 5,539 5,545 6,369

Growth (%)

Revenue growth 1.8 11.8 (13.6) 10.8 6.9 7.8 0.1 10.4 13.2 14.1

EBITDA growth (8.7) 21.4 (17.7) 5.5 5.4 3.4 (8.7) 22.6 20.1 16.2

Recurring PAT growth (7.5) 26.9 (18.4) 13.4 5.5 1.4 (8.0) 12.3 20.7 14.2

Key ratios (%)

EBITDA margin 16.9 18.4 17.5 16.7 16.5 15.8 14.4 16.0 17.0 17.3

PAT margin 13.2 15.3 15.1 16.0 16.0 14.5 13.1 13.2 14.2 14.2

RoE 28.3 31.7 24.2 25.8 23.7 20.3 17.2 18.2 20.5 21.8

RoCE 22.7 28.7 19.9 26.1 18.8 11.5 9.6 7.8 10.8 12.7

Debt / equity (X) 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.1

Adj. EPS (Rs) 20.9 26.5 21.6 24.5 25.9 26.3 24.2 27.1 32.7 37.4


Dalmia Bharat completes corporate restructuring, amalgamates with OCL India

Dalmia Bharat has approved the implementation of its amalgamation with OCL India (75%

subsidiary) to simplify its corporate structure and have one listed entity. As per the scheme,

Dalmia Bharat is amalgamating itself with OCL India (75% subsidiary) with a merger ratio of 2:1

i.e. two shares in OCL India for every one share of Dalmia Bharat. The shares of OCL India held

by DCBL (42 mn shares or 75% ownership) will be cancelled upon amalgamation and OCL India

will be renamed as Dalmia Bharat Ltd. The management expects Dalmia Bharat to be delisted by

December 2018 and the amalgamated entity to be listed by early January 2019.

This amalgamation will help by (1) increasing cash fungibility as OCL India has net cash reserves,

(2) improving tax efficiency, and (3) likely savings on administrative costs.

2QFY19 earnings—weak due to higher costs, muted realizations

Dalmia Bharat’s earnings were lower than our estimates—the company reported revenue of

`21.6 bn (+18% yoy, -9% qoq) and EBITDA of `3.9 bn (-12% yoy, -26% qoq) against our

estimates of `20.5 bn, `4.7 bn, respectively. Volumes increased 13% yoy to 4.1 mn tons (-8%

qoq) aided by strong demand in key markets in the South and East. EBITDA/ton declined 19%

qoq to `942/ton (-22% yoy) due to muted realizations and higher costs—the company’s

blended realizations were flat qoq at `5,225/ton (flat qoq) while costs increased by 5% qoq to

`4,283/ton (+12% yoy). The cost increase was largely on the back of an increase in slag and

pet-coke prices. The company reported net-income of `20 mn, against our estimate of `1.1 bn

due to higher depreciation and amortization costs (for goodwill from amalgamation).

We incorporate changes due to restructuring in our model

Shareholders of DBL (89 mn shares) will be issued two shares in OCL India for every one share

in DBL, resulting in issuance of 178 mn shares of OCL India—outstanding shares will increase to

192 mn in the eventual entity post cancellation of OCL shares held by Dalmia. We merge OCL

India’s financials with those of Dalmia, exclude minority interest, account for goodwill and its

amortization.

We cut our EBITDA estimate by 8-16% for FY2019-21E due to changes in realization, cost

assumptions. We cut our net-income estimate by 25-66% for FY2019-21E due to amortization

of goodwill. We reduce our fair value for Dalmia Bharat to `2,335 (`2,830 earlier). The fair

value of the merged entity will be `1,170/share—to be listed from January 2019 (Exhibit 6).

Dalmia Bharat (DBEL) Cement

Weak quarter; group simplification complete. Dalmia’s 2QFY19 earnings were

weak due to higher costs and muted realizations. The board has approved Dalmia’s

amalgamation with OCL India to simplify its corporate structure. Restructuring will

improve cash fungibility with OCL India (which has net cash reserves), improve tax

efficiencies and aid costs. We cut our EBITDA estimates by 8-16% for FY2019-21E due

to lower realizations, cost increases—our target price is cut to `2,335 (from `2,830

earlier)—the fair value for the merged entity will be `1,170. Maintain ADD rating.

ADD

NOVEMBER 02, 2018

RESULT


Price (`): 2,132


BSE-30: 34,432

Abhishek Poddar

Murtuza Arsiwalla

Prayatn Mahajan

Dalmia Bharat







MFs 4.4 EBITDA (Rs bn) 20.8 25.4 27.5


Absolute (8.0) (19.9) (28.4) ROE (%) 2.7 6.3 7.9

Rel. to BSE-30 (2.4) (12.8) (30.1) Div. Yield (%) 0.1 0.1 0.1

C ompany data and valuation summary

3,350-1,923

190.1

Dalmia Bharat Cement


Exhibit 1: Dalmia's EBITDA declined 12% yoy despite volume growth of 13% yoy due to subdued prices & increasing cost pressures Quarterly results for Dalmia Bharat Ltd, March fiscal year-ends, 2017 - 2019E (` mn)


Changes in our estimates

Exhibit 4 highlights the key changes in our estimates. We cut our FY2019E volume estimate

(3% to 18.8 mn tons) but maintain estimates for FY2020E, FY2021E at 21 mn tons, 21.6

mn tons. We cut our realization assumption and tweak cost estimates resulting in a cut in

our EBITDA/ton estimate by 8-13%—we estimate EBITDA/ton of `1,110, `1,210 and `1,270

for FY2019E, FY2020E and FY2021E. This results in a cut in our consolidated EBITDA

estimate by 8-16% to `20.8 bn, `25.4 bn and `27.5 bn for FY2019E, FY2020E and

FY2021E.

We estimate EPS of `15, `35.9 and `47.7 for FY2019E, FY2020E and FY2021E. The cut in

our EPS estimate (66-84%) reflects higher depreciation and amortization costs (of goodwill)

and the revised number of shares (increased for merged entity).

Dalmia Bharat to expand East capacity by 8 mtpa besides acquisitions

Dalmia through OCL India is setting up a new cement plant in Odisha with capacity of 8

mtpa at capital expenditure of `37.2 bn—the capex cost/ton works out to US$70/ton and is

lower than that of peers. The company has ordered major plant and machinery for the east

project. The project will be completed by FY2021/22E. As per the company, its total capacity

in the east will increase to 18.2 mtpa from 9.3 mtpa at present with (1) 8 mtpa from its new

project, and (2) 1.1 mtpa of acquired capacity of Kalyanpur Cement. The company expects

its market share to increase to 20% from 12% now.

Change (%)

2QFY19 2QFY19E 2QFY18 1QFY19 KIE yoy qoq 1HFY19 1HFY18 (% chg) FY2019E

Net sales 21,580 20,585 18,360 23,680 5 18 (9) 45,260 41,270 10 98,395

Raw materials (4,150) (3,810) (3,400) (4,400) (8,560) (6,540) (18,553)

Employee costs (1,650) (1,451) (1,610) (1,680) (3,324) (3,240) (6,688)

Power costs (4,290) (3,409) (3,080) (4,050) (8,330) (6,310) (18,425)

Freight costs (3,920) (4,014) (3,200) (4,650) (8,570) (6,820) (18,310)

Other costs (3,680) (3,228) (2,660) (3,650) (7,336) (8,390) (15,604)

EBITDA 3,890 4,672 4,410 5,250 (17) (12) (26) 9,140 9,970 (8) 20,815

EBITDA (%) 18.0 22.7 24.0 22.2 20.2 24.2 21.2

Other income 740 454 920 430 1,170 1,640 2,542

Interest (2,250) (1,628) (1,970) (1,620) (3,870) (4,100) (7,476)

Depreciation (3,030) (1,816) (2,930) (3,050) (6,080) (5,920) (12,216)

PBT (650) 1,683 430 1,010 360 1,590 3,665

Current tax 570 (555) (50) (460) 110 30 (553)

Deferred tax 100 — (200) (10) 90 (720) (180)

PAT 20 1,127 180 540 NM NM NM 560 900 (38) 2,932

Reported PAT 20 924 180 540 560 900 2,872

Effective tax rate (%) 103 33 58 47 (56) 43 20

Operational parameters

Consolidated

Cement volumes (mn tons) 4.1 3.9 3.6 4.5 5 13 (8) 8.6 7.6 13 18.8

Blended realization (Rs/ton) 5,225 5,243 5,044 5,251 (0) 4 (0) 5,238 5,409 (3) 5,236

Blended EBITDA/ton (Rs) 942 1,190 1,212 1,164 (21) (22) (19) 1,058 1,307 (19) 1,108

Cement Dalmia Bharat


Other highlights from the earnings call

Fiscal incentives—receipt of `1.8 bn in the quarter. The company received `1.8 bn

for outstanding incentives during the quarter. The total outstanding amount was `11 bn

and management highlighted further receipt of `1.3 bn in October 2018. The total fiscal

incentives accrued for the quarter stood at `400 mn—we note that fiscal incentives have

declined in FY2019 from `3.3 bn accrued in FY2018.

Net-debt increases due to acquisition of Kalyanpur Cement. The company’s net-

debt increased to `38.1 bn in September 2018 from `34.2 bn in June 2018 due to

consolidation of debt of Kalyanpur cement plant. The company’s net-debt/EBITDA

increased to 2X in September 2018 from 1.7X in June 2018.

Capex plans. Dalmia will incur capex of `37 bn for expanding its capacity by 8 mtpa in

the East and `1.4 bn for improvements at Kalyanpur cement. The capex spends in

1HFY19 was `3.5 bn—the company expects full year capex of `9-10 bn in FY2019E.

Capex will increase to `15-17 bn in FY2020E due to payments for its East capacity

expansion and to `14 bn in FY2021E.

Pet-coke prices have declined. Dalmia’s production cost increased 5% qoq to

`4,280/ton (+12% yoy) in 2QFY19 due to (1) slag costs increasing to `1,421/ton (+22%

yoy, +8% qoq), and (2) pet-coke costs rising to US$103/ton (+24% yoy, +4% qoq). As

per the company, pet-coke prices have declined to US$96/ton in October 2018 and will

aid costs.

Highlights of the amalgamation with OCL India

For amalgamation of DBL with OCL India, the shareholders of DBL (89 mn) will be issued

two shares in OCL India for every one share in DBL resulting in the issuance of 178 mn

shares of OCL India, over and above the existing shares of OCL India (57 mn shares).

OCL India will be renamed Dalmia Bharat Ltd, even as OCL India transfers its assets into

DCBL—the operating step-down subsidiary of DBL.

OCL India will also cancel 42.5 mn shares of itself currently held by DCBL for 75%

ownership in OCL India, resulting in net outstanding shares of 192 mn in the eventual

entity.

It will allow DBL to improve cash fungibility across operations, besides curtailing overall

administrative costs and improving tax efficiencies.



Exhibit 2: Scheme of Amalgamation into one listed entity DBL Limited Merger of OCL and Dalmia Bharat Limited


Exhibit 3: Dalmia’s EBITDA/ton declined due to rise in costs and lower realizations Quarterly cement realization of Dalmia Bharat, 2QFY15-2QFY19 (`/ton)


Listed entities Listed entities

Dalmia Bharat Ltd. (DBL)

Dalmia Cement Bharat Ltd

“DCBL” Dalmia Power Ltd.

OCL India Ltd. “OCL”

* Dalmia Cement East Limited

(DCEL) “Bokaro”

* Adhunik Cement Ltd.

“Adhunik”

* Calcom Cement India Ltd.

“Calcom”

DCBPVL (99 MW)

Pre Restructuring

100%

74%

26%

75%

100%

100%

76%

Dalmia Bharat Ltd. (DBL)


“DCBL”


"DCBL"

* Calcom Cement India Ltd.

“Calcom”

Eventual Structure

76%

100%

4,0

91

4,0

57

4,2

88

3,9

23

3,9

03

3,8

03

3,6

38

3,3

75

3,7

80

3,7

03

3,5

90

3,7

65

3,8

25

3,9

42

3,9

56

4,0

88

4,2

83

654

558

974

1,1

65

98

6

1,1

30

1,2

09

1,3

20

1,1

41

1,1

42

1,2

12

1,3

95

1,2

13

1,0

95

1,1

37

1,1

62

94

2

2,500

3,000

3,500

4,000

4,500

5,000

5,500

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

2Q

FY1

9

Costs (Rs/ton) EBITDA (Rs/ton)

Cement Dalmia Bharat


Exhibit 4: Dalmia Bharat, Changes in estimates, March fiscal year ends, FY2019-2021E


Exhibit 5: We expect Dalmia Bharat's EBITDA to grow at CAGR of 11% over FY2018-2021E Dalmia Bharat, Assumptions, March fiscal year-ends, 2016-2021E (` mn)


Exhibit 6: Our fair value for merged entity is `1,170/share; the value for Dalmia Bharat’s existing

shares works out to `2,335/share Dalmia Bharat Limited, Valuation details, March 2020E financials


Revised estimate Previous estimate Change (%)

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

Consolidated estimates (Rs mn)

Cement sales (mn tons) 18.8 21.0 21.6 19.4 21.0 21.6 (3) — —

Realization (Rs/ton) 5,236 5,412 5,580 5,278 5,444 5,606 (1) (1) (0)

EBITDA (Rs/ton) 1,108 1,212 1,271 1,271 1,333 1,387 (13) (9) (8)

Revenues (Rs mn) 98,395 113,457 120,712 102,358 114,131 121,272 (4) (1) (0)

EBITDA (Rs mn) 20,815 25,409 27,485 24,640 27,945 30,007 (16) (9) (8)

PAT (Rs mn) 2,872 6,903 9,152 8,347 10,792 12,387 (66) (36) (26)

EPS (Rs) 15.0 35.9 47.7 94.0 121.5 139.5 (84) (70) (66)

2016 2017 2018 2019E 2020E 2021E CAGR (%)

Consolidated financials

Revenue (Rs mn) 63,673 74,044 85,810 98,395 113,457 120,712 12

EBITDA (Rs mn) 15,079 19,019 20,290 20,815 25,409 27,485 11

PAT (Rs mn) 1,908 3,448 2,850 2,872 6,903 9,152 48

Operational details

Volumes (mn tons) 12.8 15.3 17.0 18.8 21.0 21.6 8

Realization (Rs/ton) 4,978 4,839 5,051 5,236 5,412 5,580 3

EBITDA (Rs/ton) 1,179 1,243 1,194 1,108 1,212 1,271 2

EV

Rs mn Rs mn Rs/share

Valuation

EBITDA (Rs mn) 25,409 9 229,190 1,193

Net Debt (Rs mn) (34,399) (179)

Value of listed investments 7,112 37

Value of CWIP (8 mtpa plant) 23,000 118

Equity value for merged entity (Rs mn) 224,902 1,170

TP for merged entity (Rs/share) 1,170

Workings for per share value of Dalmia Bharat (at present)

Equity value for OCL India minority shareholders (25.4%) 16,910

Equity value for Dalmia shareholders 207,992

Present number of shares outstanding (mn) 89

Equity value for Dalmia's current shareholders (Rs/share) 2,335

Multiple

(X)



Exhibit 7: Dalmia Bharat, Financial summary (Consolidated), March fiscal year-ends, 2016-2021E (` mn)


2016 2017 2018 2019E 2020E 2021E

Profit model (Rs mn)

Net sales 63,673 74,044 85,810 98,395 113,457 120,712

EBITDA 15,079 19,019 20,290 20,815 25,409 27,485

Other income 2,349 2,988 2,780 2,542 2,878 3,190

Interest (7,256) (8,900) (7,050) (7,476) (7,266) (6,741)

Depreciation (4,528) (6,027) (12,130) (12,216) (12,318) (12,420)

Pretax profits 5,644 7,080 3,890 3,665 8,703 11,515

Taxation (2,991) (2,762) (980) (733) (1,741) (2,303)

Less: Minority Interest 745 870 60 60 60 60

Net profits 1,908 3,448 2,850 2,872 6,903 9,152

Earnings per share (Rs) 21.5 38.8 14.8 15.0 35.9 47.7

Balance sheet (Rs mn)

Equity 178 178 384 384 384 384

Reserves and surplus 38,391 49,471 102,966 105,377 111,818 120,509

Borrowings 88,930 80,490 74,200 71,200 69,200 64,200

Deferred tax liability 5,674 15,764 14,220 14,400 14,580 14,760

Minority Interest 3,576 6,129 — — — —

Currrent liabilities 22,829 27,746 21,880 25,089 28,929 30,779

Total liabilities and equity 159,578 179,778 213,650 216,450 224,912 230,633

Gross block 105,113 131,259 139,825 141,505 143,505 145,505

Net fixed assets 74,696 94,814 91,250 85,714 80,397 74,977

Capital work in progress 4,123 1,325 1,680 10,000 23,000 35,000

Cash 2,483 1,750 3,540 1,052 721 1,949

Current assets 25,342 27,508 32,750 40,314 46,485 49,458

Investments 25,752 27,434 35,010 35,010 35,010 35,010

Goodwill 27,182 26,947 49,120 44,120 39,120 34,120

Minority Interest — — 300 240 180 120

Total assets 159,578 179,778 213,650 216,450 224,912 230,633

Free cash flow (Rs mn)

Operating cash flow, excl. working capital 7,489 10,613 12,341 12,786 16,582 18,621

Working capital 3,054 (2,163) (11,108) (4,355) (2,331) (1,123)

Capital expenditure (4,141) (3,366) (8,921) (10,000) (15,000) (14,000)

Free cash flow 6,401 5,083 (7,688) (1,569) (748) 3,499

Ratios

EBITDA margin (%) 23.7 25.7 23.6 21.2 22.4 22.8

PAT margin (%) 3.0 4.7 3.3 2.9 6.1 7.6

Net debt/equity (X) 1.6 1.1 0.4 0.3 0.3 0.2

Book value per share (Rs) 434 559 538 551 584 629

Net debt/EBITDA (X) 4.1 2.7 1.8 1.7 1.4 1.0

RoAE (%) 5.5 7.8 3.7 2.7 6.3 7.9

RoACE (%) 5.8 6.8 3.6 3.3 4.9 5.5

CRoCI (%) 9.4 11.6 12.9 12.4 14.3 15.0


KPTL: Delivers on key metrics of revenue growth, margin, working capital containment

KPTL reported a strong quarter with a 29/29/28% yoy growth in revenues/EBITDA/PAT in

2QFY19. The company leveraged its strong order backlog and support from government PSUs

towards execution to deliver such a performance. Order backlog is still up 47% yoy (two years

of visibility on forward revenues) and would help KPTL deliver revenue growth in FY2019 at the

upper end of its 15-20% guidance. Key drivers of ordering are railways and pipelines with T&D

segment being affected by a slowdown in PGCIL ordering. KPTL sees limited risks to margins in

FY2019 beyond the risk of commodity price inflation, which is unlikely to materially alter its

11% margin guidance.

JMC delivers a steady performance; turnaround in Shree Shubham Logistics continues

JMC reported a steady 11/18/19% yoy growth in revenues/EBITDA/PAT in 2QFY19. The pace of

increase in debt was contained with reducing support to road projects that have started

benefitting from traffic growth. Such funding support in the quarter was limited to debt

repayment for BOT projects as the portfolio has achieved cash breakeven traffic levels. Order

backlog gives more than three years of visibility on forward revenues. Shree Shubham Logistics

(SSL) also reported a strong result with yoy doubling of revenues and positive PAT for the

second consecutive quarter.

Marked improvement in consolidated PAT margin

Consolidated results in 18/29/103% yoy growth in revenues/EBITDA/PAT for 2QFY19 bring

about the benefits of deleveraging. Since FY2016, depreciation and interest cost has grown

between 0-10% against a CAGR of 18% in EBITDA. This has helped grow PAT margin to 4.5%

in 1HFY19 versus 1.6% in FY2016. Strong order backlog and improving performance of assets

can move its PAT margin towards 6% levels over time (KIE estimate of 5.3% by FY2021). Stock

trades at a reasonable valuation of 10X FY2020E consolidated PAT.

Broadly retain estimates; cut SoTP to Rs540 from Rs570 on higher cost of equity

We cut KPTL standalone FY2020/21 estimates by 3% on a 5% cut in ordering estimates. The

cut in SoTP is net of a 50/100 bps increase in the cost of equity across the EPC business/assets.

Kalpataru Power Transmission (KPP) Industrials

Picture perfect. Beyond a stellar 2QFY19, we note the steady growth across key

entities and benefits of operating/financial leverage driving a sharp improvement in the

consolidated PAT margin to 4.5% in 1HFY19 versus 1.6% three years ago. The strong

order backlog and stable history of profitability across key EPC segments would further

increase PAT margin to beyond 5% by FY2021. We broadly retain estimates and lower

SoTP by 4% to Rs540, net of higher cost of equity and roll-forward. BUY.

BUY

NOVEMBER 02, 2018

RESULT


Price (`): 360


BSE-30: 34,432

Aditya Mongia

Ajinkya Bhat

Kalpataru Power Transmission







MFs 19.1 EBITDA (Rs bn) 12.9 14.4 16.2


Absolute 11.0 (6.7) (4.8) ROE (%) 16.0 16.3 16.7



535-267

55.2

Kalpataru Power Transmission Industrials


2QFY19 earnings call takeaways

Infrastructure segment will drive growth at KPTL. In 1HFY19, T&D revenues at KPTL

grew less than 10% whereas revenues in Infrastructure segment nearly doubled yoy.

Infrastructure segment consists of railways (40% contribution) and oil & gas pipelines

(60% contribution). The management expects strong ordering from railway electrification

in railways segment as well as sees ordering from private players such as Cairn and

Reliance Industries in oil & gas pipelines segment. Management does not see any large

orders in the domestic T&D business. Given weak ordering by PGCIL, the company is

focusing on select states such as Karnataka, Tamil Nadu, Uttar Pradesh, Bihar and West

Bengal where some traction is visible. KPTL also sees good opportunity in international

T&D from Middle East, Africa, South East Asia, CIS and India’s neighboring countries.

Guidance for FY2019.

KPTL standalone. KPTL has maintained guidance of 15-20% revenue growth and

11% EBITDA margin in FY2019. The company has L1 position in excess of Rs20 bn,

80-85% of which is constituted by T&D. More than 60% of L1 position is in

international markets. T&D segment’s margin currently stands at ~11-12% whereas

that in Infrastructure segment stands at 9-11%. Existing order backlog in railways and

pipelines has been booked at a similar 9-11% margin.

JMP Projects. JMC has also retained revenue growth guidance of 15% in FY2019

with EBITDA margin of 10.5-10.7%. JMC Projects expect order inflow of Rs55 bn in

FY2019. The company has reached cash breakeven level of Rs4.9 mn of daily toll

collection in BOT assets. BOT assets will require Rs600 mn of funding this year which

will be largely used for debt repayments. The company is also attempting to refinance

two projects to reduce near-term debt repayment requirement.

No concern on debt, cash flows and liquidity. The management expects debt to be

contained at Rs10-11 bn at KPTL by end-FY2019. From a business perspective, most of

the projects by KPTL in the domestic market are funded by central/state governments

while international projects are funded by multilateral agencies. The company thus does

not see any liquidity issues and consequent hindrances to execution. JMC also explained

its strong clientele in real estate (Prestige, Brigade, Hiranandani) and low exposure to

NBFC funding to reassure investors of its comfortable situation on liquidity and revenue

collections.

Shree Shubham Logistics will get equity infusion in FY2019. The management

reiterated plans to infuse Rs700-800 mn of equity in Shubham Logistics. Most of the

funding will be utilized for debt repayment. The funding will be done by KPTL standalone

in 2HFY19.

Industrials Kalpataru Power Transmission


Exhibit 1: KPTL reported a strong quarter with 29/29/28% yoy growth in revenues/EBITDA/PAT KPTL (standalone) 2QFY19 – key numbers, March fiscal year-ends (Rs mn)


2QFY19 2QFY19E 2QFY18 1QFY19 vs est. yoy qoq 1HFY19 1HFY18 % change FY2019E FY2018 % change

Sales 15,741 14,526 12,228 13,249 8 29 19 28,990 23,924 21 68,916 57,412 20

Expenses (14,032) (12,919) (10,899) (11,679) 9 29 20 (25,711) (21,223) 21 (61,328) (51,100) 20

Stock - - 37 486 486 166 - 206

Raw material & mfg exp. (11,234) (10,531) (8,966) (10,077) 25 11 (21,311) (17,329) (50,163) (41,422) 21

Employee expenses (1,146) (1,080) (852) (1,026) 34 12 (2,172) (1,633) (4,480) (3,487) 28

Other operating expenses (1,652) (1,307) (1,117) (1,061) 48 56 (2,713) (2,427) (6,686) (6,397) 5

EBITDA 1,709 1,607 1,329 1,571 6 29 9 3,280 2,701 21 7,587 6,312 20

Other income 175 113 147 147 322 261 540 480

Interest (283) (306) (220) (279) (8) 28 2 (561) (440) (1,229) (1,033)

Depreciation (199) (194) (190) (194) (393) (379) (815) (766)

PBT 1,402 1,220 1,066 1,245 15 32 13 2,647 2,143 24 6,083 4,993 22

Tax (488) (426) (351) (435) (923) (724) 28 (2,089) (1,773)

Net profit 914 794 715 810 15 28 13 1,724 1,419 21 3,994 3,220 24

Order details (Rs mn)

Order inflows 20,540 10,810 26,980 90 (24) 47,520 32,110 48 94,393 93,410 1

Order backlog 141,790 96,200 137,420 47 3 141,790 96,200 47 149,517 124,040 21

Key ratios (%)

Raw material cost/sales 71.4 73.0 72.4 71.8 71.7 72.8 71.8

Employee expenses/sales 7.3 7.0 7.7 7.5 6.8 6.5 6.1

Other operating exp./sales 10.5 9.1 8.0 9.4 10.1 9.7 11.1

EBITDA margin 10.9 11.1 10.9 11.9 11.3 11.3 11.0 11.0

PBT margin 8.9 8.4 8.7 9.4 9.1 9.0 8.8 8.7

PAT margin 5.8 5.5 5.8 6.1 5.9 5.9 5.8 5.6

Tax rate 34.8 34.9 32.9 34.9 34.9 33.8 34.3 35.5

EPS (Rs) 6.0 5.2 4.7 5.3 11.2 9.2 26.0 21.0

% change

2QFY19 2QFY18 1QFY19 yoy qoq 1HFY19 1HFY18 % change FY2019E FY2018 % change

Revenues

T&D 11,000 10,200 10,300 7.8 6.8 21,300 19,776 7.7 51,323 47,300 8.5

Infrastructure 4,741 2,028 2,949 133.8 60.8 7,690 4,148 85.4 16,874 10,112 66.9

Income from operations 15,741 12,228 13,249 28.7 18.8 28,990 23,924 21.2 68,198 57,412 18.8

% change



Exhibit 2: Standalone balance sheet of KPTL, March fiscal year-ends, 2015-1HFY19 (Rs mn)


Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS Ind-AS

Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18

Shareholder's funds 20,708 21,721 22,149 23,501 24,787 25,897 27,700 28,954

Share Capital 307 307 307 307 307 307 307 307

Reserves & Surplus 20,401 21,414 21,842 23,194 24,480 25,590 27,394 28,648

Loan funds 9,106 7,198 5,586 6,150 6,954 6,206 7,742 9,297

Deferred Tax Liability, Net 54 23 (259) (280) (410) (353) (312) (315)

Total souce of funds 29,867 28,942 27,476 29,371 31,331 31,750 35,130 37,937

Net fixed assets and Capital WIP 5,590 5,274 5,426 5,251 5,237 5,120 5,434 5,518

Investments 3,939 3,945 5,178 5,986 7,160 7,164 7,849 9,807

Cash & Bank Balances 753 585 1,062 3,318 2,110 531 816 1,002

Current assets 37,661 39,208 40,525 43,326 46,081 50,610 58,374 59,326

Inventories 5,989 4,877 4,244 4,452 4,542 4,246 4,828 5,949

Sundry Debtors 17,836 19,979 23,046 25,023 28,480 30,858 33,805 32,399

Other Current Assets 5,033 6,012 8,419 9,259 8,205 10,415 14,351 17,090

Loans & Advances 8,803 8,340 4,816 4,592 4,854 5,091 5,390 3,887

Current liabilities and provisions 18,075 20,069 24,714 28,510 29,256 31,674 37,344 37,717

Current Liabilities 15,967 17,760 22,145 25,533 27,503 28,750 34,440 34,562

Provisions 2,108 2,309 2,569 2,977 1,752 2,925 2,904 3,155

Net current assets ex cash 19,586 19,139 15,811 14,816 16,825 18,935 21,030 21,609

Total application of funds 29,867 28,942 27,476 29,371 31,331 31,750 35,130 37,937

Days of sales

Current assets 311 314 344 353 344 368 371 347

Inventories 49 39 36 36 34 31 31 35

Sundry Debtors 147 160 196 204 212 224 215 189

Other Current Assets 42 48 71 76 61 76 91 100

Loans & Advances 73 67 41 37 36 37 34 23

Current liabilities and provisions 149 161 210 233 218 230 237 220

Current Liabilities 132 142 188 208 205 209 219 202

Provisions 17 19 22 24 13 21 18 18

Net current assets ex cash 162 153 134 121 125 138 134 126



Exhibit 3: JMC reported a steady performance across key business metrics JMC 2QFY19 – key numbers, March fiscal year-ends (Rs mn)


Exhibit 4: Key entities of KPTL group have reported reduction in debt levels qoq Balance sheet highlights of KPTL and JMC, March fiscal year-ends, 1QFY17-2QFY19 (Rs mn)


2QFY19 2QFY18 1QFY19 yoy qoq 1HFY19 1HFY18 % change FY2019E FY2018 % change

Sales 7,336 6,592 6,887 11.3 6.5 14,223 13,260 7.3 31,670 27,556 14.9

Expenses (6,561) (5,936) (6,178) 10.5 6.2 (12,740) (11,949) 6.6 (28,344) (24,709) 14.7

Stock - - - - - -

Raw material consumption (3,045) (2,836) (2,714) 7.4 12.2 (5,758) (5,560) (11,224)

Construction expenses (2,545) (2,142) (2,665) 18.8 (4.5) (5,210) (4,372) (9,302)

Employee expenses (752) (638) (716) 18.0 5.1 (1,468) (1,280) (2,664)

Other operating expenses (219) (320) (85) (31.5) 159.3 (304) (737) (1,520)

EBITDA 775 657 709 18.0 9.3 1,484 1,311 13.2 3,325 2,848 16.8

Other income 56 67 64 (16.1) (12.3) 120 106 13.2 183 176 3.7

Interest (242) (218) (241) 10.8 0.2 (483) (419) 15.2 (971) (858) 13.2

Depreciation (195) (170) (185) 14.9 5.6 (380) (330) 15.3 (799) (717) 11.6

PBT 394 336 347 17.4 13.5 741 668 10.9 1,738 1,450 19.9

Tax (93) (83) (81) 12.0 14.9 (174) (198) (11.9) (465) (388) 19.8

Net profit 301 252 266 19.2 13.1 567 470 20.5 1,272 1,061 19.9

Key ratios (%)

Direct expenses/sales 76.2 75.5 78.1 77.1 74.9 74.5

Employee expenses/sales 10.3 9.7 10.4 10.3 9.7 9.7

Other operating expenses/sales 3.0 4.8 1.2 2.1 5.6 5.5

EBITDA margin 10.6 10.0 10.3 10.4 9.9 10.5 10.3

PBT margin 5.4 5.1 5.0 5.2 5.0 5.5 5.3

Tax rate 23.7 24.8 23.4 23.5 29.6 26.8 26.8

PAT margin 4.1 3.8 3.9 4.0 3.5 4.0 3.9

% change

1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 yoy qoq

KPTL

Loan funds 5,298 7,615 7,154 6,955 7,869 7,553 8,666 7,741 10,691 9,658 2,105 (1,033)

Long-term borrowings 3,023 2,404 2,334 3,212 3,136 4,056 3,985 3,912 3,781 4,718 662 937

Short-term borrowings 1,829 3,746 3,420 2,315 2,365 2,150 3,351 2,497 6,527 4,579 2,429 (1,948)

Current maturities of LT debt 446 1,465 1,400 1,428 2,368 1,347 1,330 1,332 383 360 (987) (23)

JMC

Loan funds 7,526 6,729 7,067 6,373 6,687 7,773 7,314 7,367 8,045 6,968 (805) (1,077)

Long-term borrowings 2,675 2,431 2,155 2,313 2,319 3,127 3,149 3,143 3,258 4,143 1,016 885

Short-term borrowings 3,713 3,142 3,734 3,401 3,770 4,056 3,448 3,366 3,893 1,851 (2,205) (2,042)

Current maturities of LT debt 1,138 1,156 1,178 659 598 590 717 858 894 975 385 81

Shubham Logistics

Loan funds 4,487 4,253 4,282 4,248 4,178 4,105 4,186 4,283 4,385 4,331 226 (54)

Long-term borrowings 3,839 3,819 3,858 3,857 3,816 3,517 3,507 3,511 3,579 3,534 17 (45)

Short-term borrowings 79 121 103 65 28 30 160 207 225 20 (10) (205)

Current maturities of LT debt 569 313 321 326 334 558 519 565 581 597 39 16

Change



Exhibit 5: Geographical split of KPTL (standalone) backlog March fiscal year-ends, 2QFY18-2QFY19 (%)


Exhibit 6: Revision in estimates of KPTL standalone, March fiscal year-ends, 2018-21E (Rs mn)


Domestic67%

Africa16%

CIS5%

SAARC/MENA/others12%

Standalone 2QFY19-end backlog (Rs142 bn)

Domestic62%

Africa26%

CIS1%

Others0%

SAARC/MENA/others11%

Standalone 2QFY18-end backlog (Rs96 bn)

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

Income statement

New orders 91,452 94,393 107,903 123,578 99,403 113,319 129,422 (5) (5) (5)

Yoy growth (%) 62.5 3.2 14.3 14.5 8.7 14.0 14.2

Gross revenue 57,412 68,916 79,257 90,836 68,198 81,515 94,836 1 (3) (4)

Yoy growth (%) 17.3 20.0 15.0 14.6 18.8 19.5 16.3

EBITDA 6,312 7,587 8,719 10,042 7,599 9,037 10,548 (0) (4) (5)

EBITDA margin (%) 11.0 11.0 11.0 11.1 11.1 11.1 11.1 -14 bps -9 bps -7 bps

PBDIT 6,792 8,127 9,146 10,443 8,051 9,371 10,813

Interest & finance charges (1,033) (1,229) (1,294) (1,138) (1,229) (1,294) (1,138) - - -

Depreciation (766) (815) (982) (1,169) (897) (1,081) (1,286)

PBT 4,993 6,083 6,870 8,136 5,925 6,996 8,389 3 (2) (3)

Tax (1,773) (2,089) (2,359) (2,794) (2,035) (2,402) (2,881)

PAT 3,220 3,994 4,511 5,342 3,890 4,594 5,509 3 (2) (3)

Standalone EPS (Rs) 21.0 26.0 29.4 34.8 25.4 29.9 35.9 3 (2) (3)

% revisionNew estimates Old estimates



Exhibit 7: 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 8: BOT road projects of JMC have shown a marked improvement in toll collection; daily total

collection has reached 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, 1QFY18-2QFY19 (Rs mn/day)


2221

17

14 14 13 14

17 1719 19

2022

2119

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

4.95

-

1.00

2.00

3.00

4.00

5.00

6.00

0.60

0.80

1.00

1.20

1.40

1.60

1.80

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

Total (RHS) Kurukshetra (LHS) Brij Bhoomi (LHS)

Wainganga (LHS) Vindhyachal (LHS)



Exhibit 9: 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, 2014-2QFY19 (Rs mn)


Exhibit 10: We arrive at a Sep-2020E EPS-based SoTP of Rs540 for KPTL SoTP valuation of KPTL, March fiscal year-ends


1,030

1,430

884

709

450

234 150

-

200

400

600

800

1,000

1,200

1,400

1,600

2014 2015 2016 2017 2018 1QFY19 2QFY19

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)4,510 12.0 54,126 100.0 54,126 353 12X one-year fwd EPS

Investments (Ex-JMC)

Jhajjar KT Transco 1,331 49.7 662 4 one-year fwd valuation

Satpura Transco 2,281 100.0 2,281 15 one-year fwd valuation

Alipurduar Transco 3,327 100.0 3,327 22 one-year fwd valuation

Kohima Mariani Transco 5,532 74.0 4,093 27 one-year fwd valuation

Shubham Logistics 1,165 80.0 932 6 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 16,976 14,636 95

JMC valuation

Core construction business 19,165 67.2 12,879 84 12X one-year fwd earnings

Kurukshetra Expressway 3,064 33.6 1,030 7 one-year fwd valuation

Brij Bhoomi Expressway 676 67.2 455 3 one-year fwd valuation

Wainganga Expressway (2,509) 67.2 (1,686) (11) one-year fwd valuation

Vindhyachal Expressway 2,270 67.2 1,525 10 one-year fwd valuation

Internal loans to road SPVs 4,392 67.2 2,951 19 March-19E adjustment

JMC total 27,058 13,723 89 20% hold co. discount on SOTP

Total value 98,161 82,484 537



Exhibit 11: 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 68,916 79,257 90,836 17

Yoy growth (%) 5.5 10.0 21.6 9.1 (2.7) 13.8 17.3 20.0 15.0 14.6

Expenditure (27,035) (30,133) (36,690) (39,955) (38,489) (43,649) (51,100) (61,328) (70,539) (80,793)

Material cost (14,886) (16,492) (19,095) (19,253) (16,777) (20,343) (26,416) (32,150) (36,975) (42,376)

Manufacturing & operating exp. (7,347) (8,551) (10,414) (11,974) (12,360) (13,950) (15,006) (18,012) (20,715) (23,742)

Employee expenses (1,702) (2,006) (2,602) (3,136) (2,928) (2,918) (3,487) (4,480) (5,548) (6,358)

Admin and other expenses (2,956) (3,885) (5,011) (5,980) (5,386) (6,427) (6,397) (6,686) (7,300) (8,317)

EBITDA 3,292 3,221 3,863 4,267 4,531 5,291 6,312 7,587 8,719 10,042 17

EBITDA margin (%) 10.9 9.7 9.5 9.6 10.5 10.8 11.0 11.0 11.0 11.1

Other income 512 477 484 522 537 493 480 540 428 401

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) (815) (982) (1,169)

PBT 2,241 1,955 2,191 2,529 2,957 4,026 4,993 6,083 6,870 8,136

Tax (592) (579) (727) (873) (1,033) (1,335) (1,773) (2,089) (2,359) (2,794)

PAT 1,649 1,377 1,464 1,656 1,924 2,691 3,220 3,994 4,511 5,342 18

EPS (Rs) 10.7 9.0 9.5 10.8 12.5 17.5 21.0 26.0 29.4 34.8 18

Balance sheet

Shareholder funds 17,429 18,463 19,542 20,708 22,149 24,787 27,700 31,393 35,602 40,643

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 31,086 35,296 40,336

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 41,080 44,790 47,831

Total net fixed assets 4,529 5,386 5,918 5,590 5,426 5,237 5,434 6,219 6,987 7,818

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 1,771 3,033 2,813

Net current assets 12,636 15,186 17,129 20,193 16,211 16,825 21,030 23,536 24,016 26,446




Exhibit 12: 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 31,670 38,764 42,337

Yoy growth (%) 51.1 22.4 4.6 (9.7) 0.0 (3.0) 18.3 14.9 22.4 9.2

Total expenditure (19,222) (24,234) (25,186) (22,365) (21,872) (21,173) (24,709) (28,344) (34,694) (37,892)

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 3,325 4,070 4,445

EBITDA margin (%) 7.4 4.7 5.3 6.8 8.9 9.1 10.3 10.5 10.5 10.5

Other income 112 72 41 132 83 143 176 183 157 147

Interest and finance charges (539) (550) (551) (841) (1,051) (843) (858) (971) (1,027) (1,046)

Depreciation (471) (549) (589) (489) (517) (574) (717) (799) (973) (1,164)

PBT 644 159 302 436 651 838 1,450 1,738 2,228 2,383

Tax expenses (124) 24 (72) (138) (217) (255) (388) (465) (619) (686)

PAT 519 183 230 299 434 583 1,061 1,272 1,609 1,697

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 8,166 8,366

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 1,460 639 11 59

Net current asset (excl. cash) 2,924 3,658 3,722 6,077 7,638 7,092 5,059 7,441 9,213 10,650




Exhibit 13: 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 87,044 103,979 120,455 136,020

Expenditure (48,076) (56,106) (65,006) (64,939) (63,950) (66,451) (76,828) (91,094) (106,099) (119,796)

EBITDA 5,004 4,745 5,897 7,043 7,899 8,674 10,217 12,885 14,355 16,224

Other income 333 357 233 250 181 240 253 310 308 338

Interest & finance charges (1,576) (1,938) (2,488) (3,370) (4,140) (3,845) (3,777) (4,040) (3,916) (3,794)

Depreciation (986) (1,224) (1,490) (1,683) (1,862) (1,805) (1,915) (2,056) (2,337) (2,750)

PBT 2,774 1,940 2,153 2,241 2,078 3,264 4,778 7,099 8,410 10,019

Tax (735) (595) (914) (1,086) (954) (1,375) (1,827) (2,132) (2,426) (2,868)

Recurring PAT from operations 2,040 1,345 1,239 1,154 1,124 1,889 2,951 4,967 5,985 7,151

Share of JVs - - - - (366) (316) (168) (135) (95) (53)

Minority interest (153) (50) (17) 49 342 292 24 (355) (535) (645)

Recurring PAT for common shareholders 1,887 1,295 1,222 1,204 1,100 1,864 2,807 4,477 5,356 6,453

Recurring EPS for common shareholders (Rs) 12.3 8.4 8.0 7.8 7.2 12.1 18.3 29.2 34.9 42.0

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 1,819 2,354 2,999

Loan funds 12,812 18,313 27,314 36,841 29,222 28,486 33,200 36,372 36,830 33,172

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 7,218 15,647 14,538

Net current assets 14,929 14,559 17,986 23,007 19,190 18,421 18,946 21,058 22,400 25,721

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 11,063 12,238 13,695

Change in working capital/other adjustments (3,184) 370 (3,427) (5,021) 3,817 769 (525) (2,112) (1,342) (3,321)

Net cash flow from operating activities 1,418 4,877 1,789 1,186 10,943 8,308 8,119 8,951 10,895 10,374

Cash (used)/realised in investing activities (4,584) (8,668) (8,499) (7,014) 11,531 (1,351) (8,958) (3,216) 1,388 (3,675)

Free cash flow (3,686) (4,516) (6,720) (5,816) 22,986 6,779 (773) 5,735 12,283 6,698

Growth (%)

Revenue growth 21.9 14.6 16.5 1.5 (0.2) 4.6 15.9 19.5 15.8 12.9

EBITDA growth 3.6 (5.2) 24.3 19.4 12.2 9.8 17.8 26.1 11.4 13.0

EPS growth (5.7) (31.4) (5.6) (1.5) (8.6) 69.4 50.6 59.5 19.6 20.5

Key ratios

EBITDA margin (%) 9.4 7.8 8.3 9.8 11.0 11.5 11.7 12.4 11.9 11.9

PAT margin (%) 3.6 2.1 1.7 1.7 1.5 2.5 3.2 4.3 4.4 4.7

ROE (%) 11.7 7.1 6.1 5.3 5.0 8.1 11.6 17.2 17.9 18.3

ROCE (%) 10.9 7.5 6.0 5.2 6.0 7.8 9.3 12.2 12.4 13.1

Net debt/equity 0.6 0.9 1.2 1.6 1.2 1.1 1.1 0.9 0.6 0.4

Net debt/EBITDA 2.2 3.6 4.4 5.0 3.5 3.0 3.0 2.3 1.5 1.1

Book value per share (Rs) 121 127 137 144 146 158 174 201 234 274


Earnings ahead of estimate as revenue outperformance outweighs margin disappointment

SHK reported a strong 28% yoy growth in revenues partly aided by low base (2-year CAGR

8%). Gross margin contracted 580 bps to 42.5% due to continued high inflation in RM prices;

management indicated that its RM basket price was up 30% yoy (spot price in Sep 18 versus

Sep 17). EBITDA margin decline was restricted to 300 bps after absorbing one-time employee

rationalization costs of `40 mn (140 bps margin impact) in Europe. Net profit increased 53%

yoy to `284 mn aided by subdued base and lower taxes (ETR of 14.7% versus 35.8% in 1Q);

2-year PAT CAGR was 9%. Management indicated that it has taken price increase of about

10% in 1H implying modest 4% volume growth in 1H.

Fragrances segment (90% of revenues) reported 31% topline growth whereas flavors segment

grew 6% yoy. Domestic (70% of revenues) growth was 33% yoy and exports increased 18%

yoy. Fragrances PBIT declined 160 bps yoy to 14.4% and flavors PBIT was down 780 bps to 8.1%.

Outlook and execution improving but needs to be closely monitored

SHK management hinted at improving volume growth trajectory. Underpinning this confidence

is a robust order pipeline that can be better fulfilled with easing RM supply. SHK has ramped up

in-house production of select RMs to better fulfill demand even as RM supply challenges

continue. SHK has commissioned a large Tonalid (a key RM) manufacturing facility at Mahad

that would partially cater to its RM requirement and boost GM by 200 bps starting 4QFY19.

Even as base for 2H is not as favorable as 1H, we expect improvement in underlying revenue

growth trends and profitability in 2H. The extent of improvement is contingent on execution.

We tweak estimates, maintain TP of `240 and stay optimistic

We revise FY2019-21E EPS estimates by -6% to +3% range. Our EPS upgrade for FY2019 is

driven by revenue surprise that more than offsets margin disappointment whereas EPS cut for

FY2020-21 is led by margin cuts. We rollover to Sep 2019 and maintain DCF-based fair value TP

of `240. While we are a tad disappointed with the time lag between RM inflation and increase

in price of SHK’s products, we continue to believe that F&F business has pricing power. We stay

optimistic on gradual recovery in revenue growth and margins.

S H Kelkar and Company (SHKL) Consumer Products

Steadying ship. SHK’s 2Q earnings print suggests early signs of stabilization led by

acceleration in revenue growth. Revenues grew 28% yoy, EBITDA grew 4% yoy and net

profit growth was 53% yoy; all ahead of our estimates even as margin disappointment

continued. The management expressed confidence of pickup in volume growth starting

3Q driven by strong demand pipeline and better availability of RM partly aided by

commencement of in-house production of Tonalid, a key RM. While overall outlook

seems to be improving, we will keep a close eye on execution. BUY.

BUY

NOVEMBER 02, 2018

RESULT


Price (`): 179


BSE-30: 34,432

Rohit Chordia

Jaykumar Doshi

Aniket Sethi

S H Kelkar







MFs 1.1 EBITDA (Rs bn) 1.6 2.2 2.5


Absolute (14.2) (9.8) (33.3) ROE (%) 11.6 14.0 15.1



314-165

25.8

Consumer Products S H Kelkar and Company


Conference call takeaways

RM inflation and supply scenario. SHK management indicated that spot price of its RM

basket was up by 30% yoy in Sep 2018 (it includes RM inflation and impact of rupee

depreciation). RM cost inflation in Sep 2018 could be a bit lower on account of some

benefit of low-cost inventory. On supply situation for key raw materials, the management

indicated that BASF is expected to lift force majeure on a few select RMs in the next 3-6

months. SHK is closely monitoring supply situation. Overall, it is well-placed in view of

commissioning of in-house production of a key RM Tonalid at it recently inaugurated

Mahad facility.

Price increases and margin outlook. SHK took price increase of 10% in 1HFY19 but

the same was not sufficient to offset RM inflation. It continues to have a dialogue with

clients on pricing. Price discussions are now an ongoing phenomenon as once or twice a

year earlier. The management is hopeful of gradual improvement in margins led by (1) in-

house production of a key RM Tonalid, (2) pickup in volumes, and (3) further price

increases in view on ongoing price discussions.

Other highlights—(1) capex for Mahad facility was `400 mn and that for Anhui

transaction was `250 mn, and (2) effective tax rate was lower on account of transfer of IP

to India from Netherlands; full-year ETR would be around 30%.

Exhibit 1: Key changes to estimates (as per Ind-AS), FY2019-21E

Source: Kotak Institutional Equities estimates

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

Net revenues (Rs mn) 11,500 13,264 15,089 10,743 12,241 14,270 7.0 8.4 5.7

EBITDA (Rs mn) 1,568 2,157 2,518 1,626 2,240 2,657 (3.5) (3.7) (5.2)

EBITDA margin (%) 13.6 16.3 16.7 15.1 18.3 18.6

Net income (Rs mn) 1,035 1,370 1,649 1,004 1,425 1,755 3.1 (3.8) (6.0)

EPS (Rs/share) 7.2 9.5 11.4 6.9 9.9 12.1 3.1 (3.8) (6.0)


S H Kelkar and Company Consumer Products


Exhibit 2: Interim consolidated results of SHK (as per Ind-AS), March fiscal year-ends (Rs mn)


Exhibit 3: Interim standalone results of SHK (as per Ind-AS), March fiscal year-ends (Rs mn)


2QFY19 2QFY19E 2QFY18 1QFY19 KIE yoy qoq 1HFY19 1HFY18 % chg. 2QFY17

Net revenues 2,821 2,442 2,208 2,360 16 28 20 5,181 4,548 14 2,438 8

Other operating income 14 12 11 4 13 28 244 18 15 22 15

Net operating revenues 2,835 2,455 2,219 2,364 15 28 20 5,199 4,562 14 2,453 8

Material cost (1,629) (1,359) (1,146) (1,322) 20 42 23 (2,951) (2,367) 25 (1,363)

Gross Profit 1,206 1,096 1,074 1,042 10 12 16 2,248 2,195 2 1,090 5

Gross margin (%) 42.5 44.7 48.4 44.1 -212 bps -584 bps -156 bps 43.2 48.1 -487 bps 44.4

Employee cost (376) (313) (307) (291) 20 22 29 (667) (609) 10 (302)

Other expenditure (463) (443) (412) (422) 4 12 10 (885) (817) 8 (368)

Total expenditure (2,468) (2,115) (1,865) (2,035) 17 32 21 (4,502) (3,794) 19 (2,033)

EBITDA 367 340 355 329 8 4 11 697 769 (9) 420 (6)

EBITDA margin (%) 13.0 13.8 16.0 13.9 -89 bps -303 bps -99 bps 13.4 16.9 -346 bps 17.1

Other income 60 2 12 33 3927 421 84 93 62 50 25

Interest (19) (15) (11) (15) 26 77 25 (34) (17) — (22)

Depreciation (76) (68) (57) (68) 12 33 12 (144) (115) 25 (49)

Pretax profits 333 259 298 280 29 12 19 612 699 (12) 375 (6)

Tax (49) (84) (110) (100) (42) (56) (51) (149) (243) (39) (132)

PAT 284 175 189 180 62 51 58 464 457 2 243 8

4 12 — 7 11 —

Extraordinary items — — — — — — 0

Net profit (reported) 288 187 189 187 54 53 54 475 457 4 243 9

EPS 1.99 1.29 1.30 1.29 54 53 54 3.3 3.2 4 1.68 9

Income tax rate (%) 14.7 32.3 36.8 35.8 -1768 bps -2214 bps -2112 bps 24.3 34.7 -1039 bps 35.1

Costs as a % of net operating revenues

Material cost 57.5 55.3 51.6 55.9 211 bps 583 bps 155 bps 56.8 51.9 486 bps 55.6

Employee cost 13.3 12.8 13.8 12.3 49 bps -58 bps 95 bps 12.8 13.3 -52 bps 12.3

Other expenditure 16.3 18.0 18.6 17.8 -173 bps -225 bps -153 bps 17.0 17.9 -90 bps 15.0

% chg. 2-year CAGR

(%)

2QFY19 2QFY19E 2QFY18 1QFY19 KIE yoy qoq 1HFY19 1HFY18 % chg. 2QFY17

Net revenues 1,963 1,606 1,397 1,595 22 41 23 3,557 2,840 25 1,546 13

Other operating income 2 3 2 3 (24) (13) (16) 5 5 (4) 1

Net operating revenues 1,965 1,609 1,399 1,597 22 40 23 3,562 2,845 25 1,546 13

Material cost (1,177) (965) (809) (978) 22 45 20 (2,155) (1,612) 34 (949)

Gross Profit 788 644 590 619 22 33 27 1,407 1,233 14 597 15

Gross margin (%) 40.1 40.0 42.2 38.8 8 bps -209 bps 131 bps 39.5 43.3 -386 bps 38.6

Employee cost (253) (189) (172) (181) 34 47 40 (433) (323) 34 (153)

Other expenditure (322) (263) (240) (285) 22 34 13 (607) (465) 31 (173)

Total expenditure (1,752) (1,418) (1,220) (1,443) 24 44 21 (3,195) (2,400) 33 (1,276)

EBITDA 213 191 179 154 11 19 38 367 445 (18) 271 (11)

EBITDA margin (%) 10.8 11.9 12.8 9.6 -108 bps -196 bps 118 bps 10.3 15.6 -536 bps 17.5

Other income 32 22 34 32 48 (5) 0 64 67 (5) 21

Interest (9) (10) (6) (11) — 42 (18) (20) (12) — (7)

Depreciation (32) (31) (26) (31) 6 25 6 (63) (50) 25 (17)

Pretax profits 203 172 180 144 18 13 41 347 450 (23) 268 (13)

Tax (65) (58) (60) (46) 12 7 39 (111) (150) (26) (81)

PAT 138 115 120 98 21 16 42 236 299 (21) 187 (14)

Extraordinary items — — — — — — —

Net profit (reported) 138 115 120 98 21 16 42 236 299 (21) 187 (14)

EPS 1.0 0.8 0.8 0.7 21 16 42 1.6 2.1 (21) 1.3 (14)

Income tax rate (%) 31.9 33.5 33.5 32.2 -165 bps -169 bps -35 bps 32.0 33.4 -143 bps 30.3

Costs as a % of net operating revenues

Material cost 59.9 60.0 57.8 61.2 -9 bps 208 bps -132 bps 60.5 56.7 385 bps 61.4

Employee cost 12.9 11.7 12.3 11.3 113 bps 60 bps 155 bps 12.2 11.4 80 bps 9.9

Other expenditure 16.4 16.4 17.1 17.8 1 bps -73 bps -143 bps 17.0 16.3 69 bps 11.2

% chg. 2-year

CAGR (%)

Consumer Products S H Kelkar and Company


Exhibit 4: Net revenue breakup of SHK, March fiscal year-ends (Rs mn)


Exhibit 5: SHK: Consolidated profit & loss, balance sheet and cash flow (as per Ind AS), March fiscal year-ends, 2015-21E


2QFY19 2QFY18 1QFY19 yoy (%) qoq (%)

Net revenues (Rs mn)

Fragrance 2,539 1,943 2,113 31 20

Flavors 282 266 247 6 14

Total 2,821 2,208 2,360 28 20

Segment results (Rs mn)

Fragrance 366 311 295 18 24

Flavors 23 42 39 (46) (41)

Total 389 353 333 10 17

Margins (%)

Fragrance 14.4 16.0 14.0

Flavors 8.1 15.9 15.6

Blended 13.8 16.0 14.1

2015 2016 2017 2018 2019E 2020E 2021E


Net operating revenues 8,355 9,249 9,805 10,251 11,500 13,264 15,089

EBITDA 1,178 1,498 1,658 1,622 1,568 2,157 2,518

Other income 246 105 116 216 216 251 281

Interest expense (185) (202) (52) (40) (78) (101) (107)

Depreciation (293) (297) (194) (238) (308) (375) (418)

Pretax profits 945 1,103 1,528 1,560 1,398 1,932 2,274

Tax (241) (372) (480) (506) (420) (623) (752)

Minority Interest/share of profit from associates — — — 16 57 60 127

Recurring PAT 704 731 1,048 1,070 1,035 1,370 1,649

Extraordinary items — — — (129) — — —

Reported net income 704 731 1,048 942 1,035 1,370 1,649

Wtd average no. of shares - FD (mn) 132 138 145 145 145 145 145

Fully diluted EPS (Rs) 5.3 5.3 7.2 7.4 7.2 9.5 11.4


Total shareholder's equity 5,005 7,161 8,118 8,571 9,301 10,322 11,493

Preference share capital/ CCPS 92 — — — — — —

Total borrowings 2,417 846 734 1,933 3,272 3,472 3,672

Deferred tax liability (50) 10 33 82 82 82 82

Minority interest — — — — — — —

Total liabilities and equity 7,464 8,016 8,884 10,586 12,655 13,876 15,247

Net fixed assets incl CWIP 2,842 2,454 3,038 3,978 4,874 5,100 5,284

Investments — 354 497 1,108 1,108 1,108 2,108

Cash 759 822 555 239 590 830 249

Net current assets 3,864 4,386 4,795 5,262 6,083 6,838 7,606

Total assets 7,464 8,016 8,884 10,586 12,655 13,876 15,247


Operating cash flow (excl working capital) 993 1,126 1,260 1,326 1,405 1,824 2,159

Working capital (375) (275) (248) (467) (822) (755) (768)

Capital expenditure (218) (238) (1,008) (1,178) (1,204) (601) (602)

Free cash flow 400 613 4 (319) (621) 468 789

Key ratios (%)

Sales growth 9.7 10.6 5.9 4.5 12.2 15.3 13.8

EBITDA growth (14.1) 27.2 10.7 (2.2) (3.3) 37.6 16.7

PAT growth (11.0) 3.8 43.5 2.1 (3.4) 32.4 20.4

EBITDA margin 14.1 16.2 16.9 15.8 13.7 16.3 16.8

Gross margin 44.9 44.5 45.4 45.1 43.5 45.1 45.2

IGAAP Ind-AS


Results impacted by further decline in refining margins to abysmal levels

HPCL’s normalized EBITDA declined 5% qoq to `17.3 bn, adjusted for adventitious/forex gains,

led by a sharp decline in inventory-adjusted refining margins to US$2.7/bbl, which was partially

offset by modest 3% qoq increase in marketing margins to `5,093/ton; segment margins for

OMCs have been fairly volatile in the quarters of sharp fluctuation in crude prices. Reported

EBITDA at `21.2 bn and net income at `10.9 bn were boosted by adventitious gains of `12.8 bn

across refining and marketing segments, which was partly offset by forex loss of `8.9 bn.

Lower normalized refining margins at US$2.7/bbl. Inventory-adjusted refining

contribution declined to `6.5 bn from `8.1 bn in 1QFY19, led by US$1/bbl decline in

normalized margins to US$2.7/bbl. Reported refining margins of US$4.8/bbl included

US$2.1/bbl of adventitious gains (`5.3 bn). Throughput increased 5% qoq to 4.8 mn tons.

3% qoq increase in implied marketing margins. Inventory-adjusted implied marketing

contribution declined to `46.6 bn from `48.2 bn in 1QFY19, as 3% qoq increase in realized

marketing margins to `5,093/ton was offset by seasonally weaker volumes.

3.4% growth in auto fuels, modestly below growth in consumption. HPCL’s domestic

volumes grew by 5.4% yoy to 8.8 mn tons; exports increased to 0.3 mn tons. HPCL’s diesel

and gasoline sales volumes grew at 2.5% and 5.6% yoy, both modestly below growth in

domestic consumption in the same period.

Debt increased sharply to `178.5 bn as on September 30, 2018 from `148.4 bn a quarter

ago, led by likely increase in working capital amid higher crude/product prices.

5-6% cut in FY2020-21 EPS estimates

We cut FY2020-21 standalone EPS estimates by 5-6%, factoring in (1) lower refining margins,

(2) modestly higher marketing margins, (3) higher interest cost and (4) other minor changes;

our FY2019 EPS remains largely unchanged due to accounting of adventitious gains, net of

forex loss, reported during 1HFY19. We cut our rating a notch to SELL from REDUCE with an

unchanged TP of `185, noting HPCL’s surprising 15% outperformance versus BPCL stock post

the government’s intervention in fuel prices. 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 curtailment of margins on auto fuels and possibility of subsidy sharing on

cooking fuels and (3) interest cost due to increase in working capital and debt thereby.

HPCL (HPCL) Energy

Weak refining comes to the fore. HPCL’s results were marked by a sharp decline in

refining margins to US$2.7/bbl; reported results were boosted by adventitious gains. We

continue to see material risk to earnings from elevated crude prices, which impacts both

refining and marketing profitability; the latter may get exacerbated due to curtailment of

auto fuel margins and sharing of cooking fuels subsidies. We remain negative while

cutting our rating a notch to SELL from REDUCE with an unchanged TP of `185.

SELL

NOVEMBER 02, 2018

RESULT, CHANGE IN RECO.

Coverage view: Attractive

Price (`): 230


BSE-30: 34,432

Tarun Lakhotia

Hindustan Petroleum



Market Cap. (Rs bn) EPS growth (%) (32.8) (3.7) 7.6


Promoters 0.0 Sales (Rs bn) 3,045.3 2,935.1 2,889.0


MFs 10.5 EBITDA (Rs bn) 86.1 85.2 91.5


Absolute (5.6) (20.1) (48.2) ROE (%) 17.1 15.1 15.1



452-163

349.7

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 to US$2.7/bbl; marketing margins increased 3% qoq Calculation of segment-wise profitability


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

Gross contribution 50.8 60.9 66.0 70.6 75.4 65.8 64.9

Operating expenses (34.5) (31.8) (34.5) (41.3) (43.5) (44.6) (46.1)

Reported EBITDA 16.3 29.1 31.6 29.2 31.9 21.2 18.8

Add: net under-recovery — — — — — — —

Add: forex-related loss/(gain) — — — 0.8 5.4 8.9 6.5

Add: inventory/adventitious loss/(gain) 15.8 (7.9) (14.8) (1.6) (19.1) (12.8) (8.8)

Normalized EBITDA 32.0 21.1 16.8 28.5 18.2 17.3 16.5

Other income 4.6 5.0 2.0 3.4 3.1 4.1 3.3

Interest expense 1.4 1.6 0.9 1.8 1.9 2.0 2.0

Depreciation 6.7 6.8 6.8 7.3 7.1 7.4 7.2

Normalized PBT 28.5 17.8 11.1 22.9 12.3 12.1 10.6

Effective tax 9.7 6.0 3.8 7.8 4.2 4.1 3.6

Reported net income 9.2 17.3 19.5 17.5 17.2 10.9 8.6

Normalized net income 18.8 11.7 7.3 15.1 8.1 8.0 7.0

Normalized EPS (Rs) 12.3 7.7 4.8 9.9 5.3 5.2 4.6

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

Segment-wise contribution

Gross contribution 50.8 60.9 66.0 70.6 75.4 65.8 64.9

Add: net under-recovery — — — — — — —

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

Add: adventitious loss/(gain) 15.8 (7.9) (14.8) (1.6) (19.1) (12.8) (8.8)

Normalized gross contribution 66.5 53.0 51.3 69.0 56.3 53.0 56.1

Refining segment 18.5 12.0 12.9 14.3 8.1 6.5 11.0

Marketing and other segments 48.0 40.9 38.3 54.6 48.2 46.6 45.1

Blended marketing margins (Rs/ton) 5,184 4,689 4,062 5,782 4,960 5,093 4,950

Reported refining margins (US$/bbl) 5.9 7.6 9.0 7.1 7.2 4.8 6.0

Normalized refining margins (US$/bbl) 8.7 5.6 6.1 6.6 3.7 2.7 4.5

Crude throughput (mn tons) 4.5 4.6 4.5 4.6 4.5 4.8 4.8

Domestic sales (mn tons) 9.2 8.4 9.2 9.4 9.6 8.8 8.7

Export sales (mn tons) 0.1 0.4 0.2 0.1 0.1 0.3 0.4

Exchange rate (Rs/US$) 64.5 64.3 64.7 64.4 67.0 70.1 70.1

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 2QFY19 Sales volumes, 1QFY18 onwards (mn tons)


(% chg.) yoy

2QFY19 2QFY19E 2QFY18 1QFY19 2QFY19E 2QFY18 1QFY19 1HFY19 1HFY18 (% chg.) FY2019E

Net sales 675,180 692,077 475,226 676,289 (2.4) 42.1 (0.2) 1,351,468 1,009,911 33.8 3,045,303

Increase/(decrease) in stock 18,488 14,964 19,342 37,830 (18,839)

Raw materials (191,215) (198,487) (110,626) (163,514) (3.7) 72.8 16.9 (354,729) (231,105) 53.5 (749,310)

Product purchase (436,672) (428,680) (318,669) (456,750) 1.9 37.0 (4.4) (893,422) (648,280) 37.8 (2,042,005)

Staff cost (6,891) (7,432) (7,081) (7,353) (7.3) (2.7) (6.3) (14,245) (14,065) 1.3 (29,729)

Other expenditure (37,670) (38,709) (24,759) (36,107) (2.7) 52.1 4.3 (73,777) (52,287) 41.1 (138,202)

Total expenditure (653,960) (673,308) (446,170) (644,382) (2.9) 46.6 1.5 (1,298,342) (964,575) 34.6 (2,959,245)

EBITDA 21,220 18,769 29,056 31,907 13.1 (27.0) (33.5) 53,126 45,336 17.2 86,059

Other income 4,134 3,328 5,194 3,056 24.2 (20.4) 35.3 7,190 10,897 (34.0) 15,627

Interest (2,007) (2,011) (1,563) (1,909) (0.2) 28.4 5.1 (3,916) (2,993) 30.8 (7,560)

Depreciation (7,385) (7,195) (6,804) (7,064) 2.6 8.5 4.5 (14,449) (13,475) 7.2 (29,414)

Pretax profits 15,962 12,891 25,882 25,990 23.8 (38.3) (38.6) 41,952 39,765 5.5 64,711

Extraordinaries — — — — — —

Current tax (3,549) (2,773) (7,331) (7,589) (11,138) (10,689) (16,040)

Deferred tax (1,493) (1,545) (1,204) (1,209) (2,702) (2,481) (5,955)

Net income 10,920 8,572 17,347 17,192 27.4 (37.1) (36.5) 28,112 26,595 5.7 42,716

Adjusted net income 10,920 8,572 17,347 17,192 27.4 (37.1) (36.5) 28,112 26,595 5.7 42,716

Adjusted EPS (Rs) 7.2 5.6 11.4 11.3 18.4 17.4 28.0

Other comprehensive income 233 1,635 (151) 81 338

Total comprehensive income 11,153 18,983 17,041 28,193 26,933

Tax rate (%) 31.6 33.5 33.0 33.9 33.0 33.1 34.0

Other details

Crude throughput (mn tons) 4.8 4.8 4.6 4.5 0.2 2.6 5.3 9.3 9.1 1.6 18.3

Domestic sales volume (mn tons) 8.8 8.7 8.4 9.6 1.3 5.4 (8.5) 18.5 17.6 5.1 38.6

Export sales volume (mn tons) 0.3 0.4 0.4 0.1 0.4 0.4 0.8

Pipeline throughput (mn tons) 5.3 5.5 5.1 5.5 (4.5) 4.0 (3.7) 10.7 9.7 10.3 21.8

Reported refining margin (US$/bbl) 4.8 6.0 7.6 7.2 (19.8) (36.8) (32.7) 5.9 6.8 (12.1) 5.1

Normalized refining margin (US$/bbl) 2.7 4.5 5.6 3.7 (40.7) (51.6) (27.7) 3.0 7.1 (57.4) 3.7

Implied marketing margin (Rs/ton) 5,093 4,950 4,689 4,960 2.9 8.6 2.7 5,024 4,943 1.6 4,761

Adventitious gains/(loss) on refining 5,250 3,566 4,530 7,700 12,950 (1,620) 12,950

Adventitious gain/(loss) on marketing 7,510 5,257 3,390 11,350 18,860 (6,210) 18,860

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

Exchange gain/(loss) (8,866) (6,510) 202 (5,377) (14,244) 1,323 (14,244)

0

2

4

6

8

10

12

14

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

(%) 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 of 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

2.9 3.0

2.0

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

1.8

2.7

0.8

(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

Sep

-18

Oct

-18

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

2014 2015 2016 2017 2018 2019E 2020E 2021E

Refining assumptions

Exchange rate (Rs/US$) 60.5 61.2 65.4 67.1 64.5 69.9 72.0 73.0

Effective tariff protection (%) 2.6 2.5 2.6 2.6 2.6 2.7 2.8 2.8

Crude throughput (mn tons) 15.5 16.2 17.2 17.8 18.3 18.3 18.3 18.3

Net refining margin (US$/bbl) 3.4 2.8 6.7 6.2 7.4 5.1 4.8 5.1

Refining EBITDA (Rs bn) 12.0 8.2 41.0 39.5 48.7 30.7 28.0 29.6

Marketing assumptions

Sales volume (mn tons) 31.4 32.6 34.0 35.2 38.2 39.8 41.4 43.1

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

Subsidy under-recoveries (Rs bn) (4.8) (5.0) (0.1) — — — — —

Implied marketing EBITDA (Rs bn) 40.3 48.5 38.4 66.3 58.0 55.4 57.2 62.0

Fiscal 2019E Fiscal 2020E Fiscal 2021E

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

Refining margins

Refining margins (US$/bbl) 4.1 5.1 6.1 3.8 4.8 5.8 4.1 5.1 6.1

Net profits (Rs mn) 36,560 42,716 48,872 34,791 41,131 47,472 37,829 44,258 50,687

EPS (Rs) 24.0 28.0 32.1 22.8 27.0 31.1 24.8 29.0 33.3

% upside/(downside) (14.4) 14.4 (15.4) 15.4 (14.5) 14.5

Marketing margins

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

Net profits (Rs mn) 32,365 42,716 53,066 30,330 41,131 51,932 32,982 44,258 55,534

EPS (Rs) 21.2 28.0 34.8 19.9 27.0 34.1 21.6 29.0 36.4

% upside/(downside) (24.2) 24.2 (26.3) 26.3 (25.5) 25.5

HPCL Energy


Exhibit 8: We compute fair value of Rs185 for HPCL Fair valuation of HPCL, March 2020E (Rs/share)


Exhibit 9: HPCL has traded at lower multiples amid an environment of higher crude prices 12-month forward P/B for HPCL (X)

Source: Bloomberg, Kotak Institutional Equities estimates

P/B based valuation EV/EBITDA based valuation

Refining and marketing business (Rs bn) Refining and marketing business (Rs bn)

March 2019E book value 261 March 2020E standalone EBITDA 85

Less: investments valued separately 61 EV/EBITDA (X) 5.0

March 2019E adjusted book value 200 EV of refining and marketing business (Rs bn) 426

March 2019E adjusted BVPS (Rs) 131 EV of refining and marketing business (Rs) (A) 279

P/B multiple (X) 0.9 Investments (Rs bn)

Value of refining and marketing business (Rs) (A) 118 HMEL (@2X BV) 79

Investments (Rs bn) MRPL 24

HMEL 79 Oil India 3

MRPL 24 Value of investments (Rs bn) 105

Oil India 3 Value of investments (Rs) (B) 69

Value of investments (Rs bn) 105 Net debt (Rs bn) 249

Value of investments (Rs) (B) 69 Net debt (Rs) (C) 163

Total equity value (A) + (B) 187 Total equity value (A) + (B) - (C) 185

-

0.5

1.0

1.5

2.0

2.5

Apr-

10

Oct

-10

Apr-

11

Oct

-11

Apr-

12

Oct

-12

Apr-

13

Oct

-13

Apr-

14

Oct

-14

Apr-

15

Oct

-15

Apr-

16

Oct

-16

Apr-

17

Oct

-17

Apr-

18

Oct

-18

(X) 12-month forward P/B for HPCL (X) [LHS]

Energy HPCL


Exhibit 10: 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 3,045,303 2,935,141 2,889,038

EBITDA 52,377 56,666 79,393 110,990 106,719 86,059 85,189 91,539

Other income 9,745 11,684 11,442 15,147 18,495 15,627 15,917 16,189

Interest (13,364) (7,066) (6,536) (5,357) (5,667) (7,560) (8,006) (7,746)

Depreciation (22,019) (19,788) (26,532) (25,353) (27,528) (29,414) (30,788) (32,935)

Pretax profits 26,739 41,497 57,766 95,428 92,019 64,711 62,311 67,047

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

Current tax (7,640) (12,257) (14,336) (22,362) (25,710) (16,040) (16,136) (18,759)

Deferred tax (1,178) (1,952) (7,373) (6,283) (2,739) (5,955) (5,043) (4,030)

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

Adjusted net profits 17,338 27,333 37,262 65,650 63,571 42,716 41,131 44,258

Earnings per share (Rs) 11.4 17.9 24.4 43.1 41.7 28.0 27.0 29.0


Total equity 150,122 160,221 179,698 203,474 239,482 261,242 282,196 304,741

Deferred tax liability 39,084 41,036 49,194 58,956 65,692 71,647 76,691 80,721

Total borrowings 321,646 203,353 211,675 212,497 209,909 301,909 339,909 380,909

Currrent liabilities 264,930 270,896 255,227 309,712 352,989 388,205 371,934 358,984

Total liabilities and equity 775,781 675,506 695,793 784,639 868,072 1,023,004 1,070,729 1,125,355

Cash 347 171 238 337 11,941 6,027 6,701 8,284

Current assets 361,857 237,549 240,166 295,693 325,509 431,278 409,847 394,342

Total fixed assets 304,978 325,373 349,603 379,424 419,571 477,898 549,629 621,428

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 1,023,004 1,070,729 1,125,355


Operating cash flow, excl. working capital 39,134 46,279 75,478 88,488 95,781 59,894 56,327 58,474

Working capital changes 21,121 124,486 (14,397) 6,120 9,817 (70,553) 5,160 2,555

Capital expenditure (41,358) (41,762) (47,100) (58,890) (66,901) (85,176) (97,801) (98,175)

Investments (1,581) 3,063 1,484 1,368 (14,170) 3,250 3,250 3,250

Other income 4,906 4,688 4,715 4,473 7,159 15,627 15,917 16,189

Free cash flow 22,223 136,753 20,180 41,560 31,686 (76,959) (17,147) (17,706)

Ratios (%)

Debt/equity 170.0 101.0 92.5 81.0 68.8 90.7 94.7 98.8

Net debt/equity 169.8 101.0 92.4 80.8 64.9 88.9 92.8 96.7

RoAE 9.6 14.0 17.3 25.3 22.4 13.4 11.9 11.9

RoACE 5.3 7.0 9.5 15.0 13.6 8.3 7.0 6.7


Exposure to IL&FS is ~1.8% of loans

The management highlighted that the bank had an exposure of ~1.8% of loans towards IL&FS

group of which ~1.2% of loans was towards the holding company and 0.6% of loans was

towards specific SPVs and a small non-fund exposure. The bank would now make additional

provisions at the earliest. The risks were known at the time of taking the exposure and were

backed by a capital raising exercise which failed to materialize.

Additional sources of fee income carry significant tail risks that could be avoided

IIB and Yes Bank have been the only two banks which has been generating significantly higher

fee income from credit structuring products as most of the large frontline banks (ICICI Bank and

Axis Bank) have steadily shifted towards retail fees. The recent event has again highlighted that

the tail risks from such income streams are quite high. The loss on this transaction for IIB is

equal to three years of investment banking fees making it challenging to rationalize the

importance of these lines of fee income businesses.

Revise estimates to factor the loss; impact of tier-1 would be ~100bps

We are making a few changes to our estimates post this transaction: (1) We have revised our

estimates by factoring an additional provision of `20bn (includes a 10% haircut on the SPV).

The impact of tier-1 ratio is ~100bps but the bank is well capitalized to absorb this loss. We

treat this is as a normal business loss and not an exceptional item as the management was

aware of the possible downside risks at the time of undertaking the transaction. (2) We are

reducing our fee income further as we believe that there could be a slowdown in such

transactions. (3) It is likely that there could be cost controls given the slowdown in revenues.

Retain our positive view; our recent upgrade could have been better timed

We retain our recently upgraded positive view, which at hindsight could have been better

timed, on the stock. We revise our TP to `1750 (from `1850 earlier) which implies 3X book and

20X September 2020 EPS for RoEs in the range of ~16% levels in the short term. The recent

correction puts the valuation in a much more comfortable zone (even relatively) as it probably

captures the risk much better.

IndusInd Bank (IIB) Banks

IL&FS impact – provisions to be higher. The management of IIB hosted a call to

address some of the concerns on IL&FS. (1) Overall exposure is 1.8% of loans of which

1.2% of loans is at risk. (2) The bank would accelerate provisions as the planned

repayments have not come through and we are building a large part of this provision in

FY2019. We revise estimates accordingly and reduce our TP to `1,750 (`1,850) but

retain our recently upgraded positive rating as the risk-reward is still favorable.

BUY

NOVEMBER 02, 2018

UPDATE

Coverage view: Attractive

Price (`): 1,464


BSE-30: 34,432

QUICK NUMBERS

Exposure to IL&FS

group is 1.8% of

loans.

Cut EPS by ~33% for

FY2019 to factor

higher provisions.

Maintain BUY with

TP revised to `1,750

(from `1,850 earlier)

M B Mahesh CFA

Nischint Chawathe

Dipanjan Ghosh

IndusInd Bank





Promoters 15.0 NII (Rs bn) 97.9 132.6 163.8


MFs 8.8 BVPS 451.3 518.4 599.3

Price performance (%) 1M 3M 12M P/B (X) 3.2 2.8 2.4

Absolute (10.9) (26.9) (10.9) ROE (%) 12.0 16.9 17.3



2,038-1,333

880.8

Banks IndusInd Bank


Key takeaways from the call

IL&FS exposure is ~1.8% of loans

The relationship with IL&FS group is not new. It was initially taken on the road projects.

The total exposure is 1.2% at the holding company level (mainly unsecured), 0.6% of

loans at the SPV level and a negligible exposure of non-fund based limits (`250 mn).

The board of IL&FS had highlighted a cash flow problem of `80 bn at the group level a

few quarters and there was a short term lending opportunity for the bank as the board of

IL&FS had decided to bridge the shortfall through a rights issue at a later date (September

2019). The bank had spoken to the board and shareholders to ensure that the issue

would be completed within the prescribed timelines. The bank indicated that it had

assurances (not guarantees) from the shareholders that the rights issue would be

completed by September. After sufficient due-diligence, the bank entered into this short

term transaction. The subsequent events changed the course of action resulting in a

failure of the rights issue. The bank has pari-passu charge today on the overall assets

(mainly investments in group companies) and 100% cash flow against any rights issue or

50% in case of liquidity support from shareholders.

The valuation of the subsidiary where the bank had taken a large exposure (tunnel

project) has reasonably strong interest. The recent interest shown by a specific bidder

gives comfort that the underlying creditors (secured and unsecured) would be fully

covered. Hence the risk is quite low for this exposure.

The bank has done a full review on this exposure. The bank had internal norms that are

tighter than those of the regulator but indicated that it would further tighten its process

on the same post this incident. Also, it would look at large group exposures, if needed.

Others

Real estate. 75 projects with an average exposure is 100 crores. Cash flow is in control

and there is no dependency of take-off from NBFCs and focus is more on end-use retail

sales. Portfolio is diversified. It is monitored on a monthly basis.

NBFCs. Overall exposure is ~5% towards NBFCs and ~4% towards MFIs. The bank has

presented its NBFC exposure to the board and is comfortable with its portfolio. The bank

would continue to disburse loans to this sector. The bank has not pulled back lending.

The bank has indicated that it has no major problems with strong solvency, capital

adequacy or backed by strong promoters.

Gems and jewelry. No delinquency (no SMA-2) in this portfolio. The loans are short-

term loans and self-liquidating in nature within a period of 180 days (90 day pre-

shipment and 90 day post shipment credit).

Microfinance. Loan portfolio has no concerns with collection efficiency at 99.7-99.8%.

All the bank’s partners are reasonably well diversified with reliance on NBFCs for funding

at ~6-7% of the overall funds. BHAFIN is extremely well positioned on ALM. Working on

a few pilot projects such as liabilities and recurring term deposits. The bank has sent a

notification to the exchanges yesterday that the date of shareholder approval would be

December 11, 2018. Post this, RBI would look at it before giving its final approval. The

overall progress has been slower-than-expected but the management highlighted that it

was not seeing any roadblocks for completion.

Succession planning. Succession planning has been in place for the past few years. The

board has laid down multiple successors not only at the MD level but also at one level

below the senior management. The grooming of the successors is already underway.

IndusInd Bank Banks


Exhibit 1: IndusInd Bank—change in estimates March fiscal year-ends, 2019-2021E (` mn)


Exhibit 2: IIB is trading at 3.9X one-year forward book March fiscal year-ends, October 2011 – October 2018 (X)

Source: Company, Bloomberg, Kotak Institutional Equities estimates

Exhibit 3: IndusInd banks’ trading at premium to peers IndusInd Bank premium to peers, October 2010 – October 2018 (X)


New estimates Old estimates % change

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

Net loan growth (%) 41.9 25.5 24.1 37.2 25.1 24.1 474 bps 39 bps 0 bps

Loans (Rs bn) 2,057 2,582 3,203 1,989 2,488 3,086 3.5 3.8 3.8

Total income 1,55,569 1,94,418 2,37,290 1,62,255 2,02,390 2,45,940 (4.1) (3.9) (3.5)

Net interest income 97,932 1,32,606 1,63,816 1,01,386 1,34,289 1,65,272 (3.4) (1.3) (0.9)

NIM (%) 4.0 4.1 4.1 4.1 4.1 4.1 -13 bps -3 bps -2 bps

Other income 57,636 61,812 73,474 60,868 68,100 80,668 (5.3) (9.2) (8.9)

Expenses 70,479 85,948 1,06,085 73,540 91,939 1,13,937 (4.2) (6.5) (6.9)

Employee cost 21,362 25,830 29,064 22,611 25,854 29,118 (5.5) (0.1) (0.2)

Other cost 49,117 60,119 77,021 50,928 66,085 84,819 (3.6) (9.0) (9.2)

Loan loss provisions 32,439 19,716 26,030 13,753 19,025 25,083 135.9 3.6 3.8

PBT 49,050 88,253 1,04,675 73,162 90,926 1,06,419 (33.0) (2.9) (1.6)

PAT 33,109 59,571 70,655 49,384 61,375 71,833 (33.0) (2.9) (1.6)

% growth yoy (8.2) 79.9 18.6 37.0 24.3 17.0

PBT-treasury+provisions 80,589 1,03,969 1,26,704 84,215 1,05,951 1,27,502 (4.3) (1.9) (0.6)

0

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

0.8

1.0

1.2

1.4

1.6

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Banks IndusInd Bank


Exhibit 4: IndusInd Bank - key growth rates and financial ratios March fiscal year-ends, 2016-2021E (%)


2016 2017 2018 2019E 2020E 2021E

Growth rates (%)

Net loan 28.5 27.9 28.2 41.9 25.5 24.1

Customer assets 28.1 28.1 29.3 40.4 24.8 23.6

Investments excl. CPs and debentures 41.1 24.9 28.6 37.0 26.2 26.2

Net fixed and leased assets 8.4 6.4 0.3 5.4 1.4 6.7

Cash and bank balance (6.2) 84.2 (29.1) 26.7 27.9 24.5

Total assets 27.8 25.0 24.1 36.5 24.3 23.4

Deposits 25.4 36.1 19.8 44.5 32.2 27.4

Current 25.3 26.7 6.3 42.4 36.1 31.0

Savings 33.2 56.8 69.7 43.5 34.4 29.5

Fixed 23.4 32.6 6.2 45.5 30.1 25.3


Loan loss provisions 38.7 72.6 (0.5) 207.6 (39.2) 32.0

Total other income 29.4 26.5 13.9 21.3 7.2 18.9

Net fee income 31.8 29.7 17.8 20.0 18.0 18.0

Net exchange gains 16.2 9.9 0.2 16.0 16.0 16.0


Employee expenses 26.1 23.1 17.1 20.0 20.9 12.5

Key ratios (%)

Yield on average earning assets 9.9 9.6 9.2 9.5 9.7 9.7

Yield on average loans 11.8 11.4 10.6 10.9 11.0 11.0

Yield on average investments 6.3 7.0 7.1 7.0 7.0 7.0

Average cost of funds 6.6 6.2 5.8 6.0 6.0 6.0

Interest on deposits 6.8 6.3 5.8 6.2 6.2 6.2

Difference 3.3 3.4 3.4 3.4 3.6 3.6

Net interest income/earning assets 3.8 4.0 4.0 4.0 4.1 4.1

New provisions/average net loans 0.8 1.1 0.8 1.9 0.9 0.9

Total provisions/gross loans 1.1 1.8 2.1 3.0 3.1 3.3

Fee income to total income 28.6 28.3 27.9 26.3 24.8 24.0

Net trading income to PBT 3.3 5.6 4.4 5.5 5.1 4.3

Exchange income to PBT 24.1 21.1 16.8 21.8 14.0 13.7

Operating expenses/total income 47.0 46.7 45.7 45.3 44.2 44.7

Operating expenses/assets 2.9 3.0 2.8 2.7 2.5 2.5

Tax rate 34.1 34.2 34.2 32.5 32.5 32.5

Dividend payout ratio 12.8 12.5 11.7 11.7 11.7 11.7

Share of deposits (%)

Current 16.6 15.5 15.5 15.9 16.3 16.7

Fixed 64.8 63.1 59.4 58.5 57.6 56.7

Savings 18.5 21.4 25.1 25.6 26.1 26.6

Loans-to-deposit ratio 95.1 89.3 95.6 93.9 89.1 86.8

Equity/assets (EoY) 12.4 11.6 10.8 10.9 10.2 9.5

Asset quality trends (%)

Gross NPL 0.9 0.9 1.2 1.1 1.4 1.6

Net NPL 0.4 0.4 0.5 0.5 0.6 0.7

Slippages 1.2 1.6 2.1 1.6 1.8 1.8

Provision coverage 58.6 58.4 56.3 57.9 58.2 59.3

Dupont analysis (%)


Loan loss provisions 0.5 0.7 0.5 1.2 0.6 0.6

Net other income 2.6 2.6 2.4 2.2 1.8 1.8


Invt. depreciation — — — — — —

(1- tax rate) 65.9 65.8 65.8 67.5 67.5 67.5

RoA 1.8 1.8 1.8 1.3 1.8 1.7

Average assets/average equity 9.5 8.8 9.5 9.5 9.6 10.3

RoE 17.1 15.7 17.1 12.0 16.9 17.3

IndusInd Bank Banks


Exhibit 5: IndusInd Bank – income statement and balance sheet March fiscal year-ends, 2016-2021E (` mn)


2016 2017 2018 2019E 2020E 2021E

Income statement

Total interest income 1,15,807 1,44,057 1,72,807 2,34,585 3,11,556 3,87,223

Loans 92,446 1,14,791 1,36,999 1,90,281 2,55,810 3,18,739

Investments 17,806 24,669 30,744 39,689 49,870 61,084

Cash and deposits 5,555 4,597 5,065 4,615 5,876 7,401

Total interest expense 70,641 83,431 97,833 1,36,653 1,78,950 2,23,407

Deposits from customers 57,088 69,313 80,460 1,15,713 1,58,394 2,03,655

Net interest income 45,166 60,626 74,974 97,932 1,32,606 1,63,816

Loan loss provisions 6,141 10,600 10,546 32,439 19,716 26,030

Net interest income (after prov.) 39,025 50,026 64,429 65,493 1,12,890 1,37,786

Other income 32,969 41,715 47,501 57,636 61,812 73,474

Net fee income 22,315 28,953 34,119 40,943 48,313 57,009

Net capital gains 1,453 2,769 3,638 4,500 4,500 4,500

Net exchange gains 8,370 9,195 9,210 10,684 12,393 14,376

Operating expenses 36,721 47,831 55,914 70,479 85,948 1,06,085

Employee expenses 12,361 15,210 17,807 21,362 25,830 29,064

Depreciation on investments 295 314 1,209 1,800 - -

Other provisions 286 - - 1,800 500 500

Pretax income 34,693 43,597 54,807 49,050 88,253 1,04,675

Tax provisions 11,828 14,918 18,747 15,941 28,682 34,019

Net profit 22,864 28,679 36,060 33,109 59,571 70,655

Growth (%) 27.5 25.4 25.7 (8.2) 79.9 18.6

PBT - Treasury + Provisions 39,962 51,741 62,923 80,589 1,03,969 1,26,704

Growth (%) 34.1 29.5 21.6 28.1 29.0 21.9

Balance sheet

Cash and bank balance 1,01,119 1,86,283 1,32,159 1,67,414 2,14,051 2,66,391

Cash 7,395 11,355 10,692 11,227 11,788 12,377

Balance with RBI 37,815 66,132 98,932 1,42,940 1,89,015 2,40,765

Balance with banks 55,908 26,578 9,287 13,248 13,248 13,248

Net value of investments 3,40,555 3,67,036 5,00,767 6,46,836 7,88,784 9,69,650

Government and other securities 2,52,680 3,14,523 4,03,660 5,54,206 7,00,182 8,84,674

Shares 413 1,612 2,919 2,919 2,919 2,919

Debentures and bonds 18,129 25,246 44,764 40,288 36,259 32,633

Net loans and advances 8,84,193 11,30,805 14,49,537 20,57,399 25,81,662 32,02,706

Fixed assets 12,553 13,352 13,388 14,112 14,307 15,260

Net owned assets 12,553 13,352 13,388 14,112 14,307 15,260

Other assets 90,561 89,023 1,20,412 1,38,473 1,59,244 1,83,131

Total assets 14,28,982 17,86,499 22,16,262 30,24,235 37,58,048 46,37,137

Deposits 9,30,003 12,65,722 15,16,392 21,90,926 28,97,150 36,90,357

Borrowings and bills payable 2,55,159 2,30,540 3,89,567 4,31,048 4,07,396 4,32,501

Other liabilities 66,848 83,760 71,886 71,886 71,886 71,886

Total liabilities 12,52,010 15,80,023 19,77,845 26,93,860 33,76,431 41,94,745

Paid-up capital 5,950 5,981 6,002 7,096 7,096 7,096

Reserves and surplus 1,71,022 2,00,495 2,32,268 3,23,278 3,74,520 4,35,296

Total shareholders' equity 1,76,972 2,06,476 2,38,271 3,30,375 3,81,616 4,42,393


Passenger vehicles: subdued start to festive season; expect demand environment to improve

As per our calculations, passenger vehicle industry volumes grew only marginally (+1-2% yoy) in

October 2018; festive demand has started on a muted note due to weaker consumer sentiment

led by higher fuel prices and interest rates. As per our checks, demand and customer footfalls

have started to improve, which should lead to some improvement going ahead. Maruti’s overall

volumes were flat yoy at 146,766 units in October 2018 led by (1) 1.5% yoy growth in

domestic volumes and (2) 17% yoy decline in exports. There was yoy decline in Ciaz and SUV

volumes while there was marginal growth in other segments. In terms of other OEMs, domestic

volumes of Hyundai/Toyota reported 5%/2% yoy growth, Honda’s volumes were flat yoy while

Ford’s volumes more than doubled on yoy basis partly due to low base. Tata Motors’ passenger

vehicle volumes grew by 11% yoy led by the success of Nexon.

M&M’s auto segment volumes grew by 13% yoy in October 2018

Mahindra reported 13% yoy volume growth in automotive segment, which was driven by

(1) 26% yoy growth in commercial vehicle volumes led by strong growth in pick-up segment,

(2) utility vehicle volumes were largely flat on yoy basis as launch of Marazzo offset decline in

volumes of existing models and (3) 31% yoy growth in exports. While M&M has not yet

reported tractor segment volumes, Escorts reported 29% yoy growth in tractor volumes, which

reflects strong underlying demand environment. Tractor industry volumes will likely grow in

double-digits in FY2019E.

MHCV industry volumes likely grew by around 14% yoy in October 2018

Overall demand in MHCV industry remained strong with around 14% yoy growth in domestic

industry volumes in October 2018. As per our checks, strong demand from construction

segments is aiding industry growth and there is not much impact from increase in new axle load

norms. In terms of OEMs, (1) Tata reported 22% yoy growth in domestic CV volumes led by

strong growth in both MHCV and LCV segments, (2) Ashok Leyland reported 7% yoy growth in

overall MHCV volumes and (3) VECV’s domestic MHCV volumes increased by 16% yoy.

Hero and TVS report strong double-digit volume growth in October 2018

As per our checks, festive demand in two-wheeler industry has been quite weak due to

(1) increase in vehicle prices post increase in insurance costs and (2) higher fuel costs. Strong

double-digit volume growth reported by Hero and TVS could be driven by inventory push on

expectations of improvement in demand around Diwali. Hero reported 16% yoy volume growth

in October 2018 while TVS’ two-wheeler volumes grew by 25% yoy. For TVS, volume growth

was driven by (1) 41% yoy growth in scooters aided by launch of Ntorq, (2) 20% yoy growth in

motorcycles and (3) 9% yoy growth in moped volumes. Eicher reported only 1% yoy volume

growth; as per the management, labor strike at company’s Oragadam plant impacted volumes.

Automobiles India

Double-digit growth in CVs; subdued festive demand in passenger segments.

Demand in domestic automotive industry is mixed with double-digit growth in

commercial vehicles and tractor segments while festive demand started on a muted

note in both passenger vehicles and two-wheeler segments. As per our checks, demand

and customer footfalls have started to improve in PV segment, which augurs well for

Maruti. Strong double-digit volume growth reported by Hero and TVS could be driven

by inventory push on expectations of improvement in demand around Diwali.

NEUTRAL

NOVEMBER 02, 2018

UPDATE

BSE-30: 34,432

Hitesh Goel

Nishit Jalan

Automobiles India


Exhibit 1: Maruti Suzuki reported flattish volumes (yoy) in October 2018 Maruti Suzuki monthly sales volume, March fiscal year-ends (units)


Exhibit 2: Mahindra & Mahindra: Auto segment volumes increased by 13% yoy in October 2018; tractor volumes not yet out Mahindra & Mahindra monthly sales volume, March fiscal year-ends (units)


Exhibit 3: Tata Motors reported 17% yoy volume growth in October 2018; domestic CV volumes increased by 22% yoy Tata Motors monthly sales volume, March fiscal year-ends (units)


YTD November-March

Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 2018 2019

Sales volume (units)

M800, Alto, A-Star, Wagon R 32,490 38,204 32,146 33,316 33,789 37,511 37,794 37,864 29,381 37,710 35,895 34,971 32,835 252,217 246,450

Swift, Baleno, Ritz, Celerio, Dzire 62,480 65,447 53,336 67,868 65,213 68,885 83,834 77,263 71,570 74,373 71,364 74,011 64,789 427,726 517,204

Gypsy, Ertiga, S-Cross, Brezza 23,382 23,072 19,276 20,693 20,324 22,764 20,804 25,629 19,321 24,505 17,971 21,639 20,764 147,630 150,633

Omni and Eeco 12,669 13,565 11,420 12,250 12,425 13,689 15,886 16,717 12,185 15,791 13,663 14,645 13,668 91,788 102,555

Ciaz 4,107 4,009 2,382 5,062 4,897 4,321 5,116 4,024 1,579 48 7,002 6,246 3,892 38,242 27,907

Light commercial vehicle 872 1,003 726 1,411 1,252 1,412 1,544 1,703 1,626 1,723 1,805 2,038 2,152 4,229 12,591

Total domestic 136,000 145,300 119,286 140,600 137,900 148,582 164,978 163,200 135,662 154,150 147,700 153,550 138,100 961,832 1,057,340

Exports 10,446 9,300 10,780 10,751 11,924 12,016 8,008 9,312 9,319 10,219 10,489 8,740 8,666 71,303 64,753

Total volumes 146,446 154,600 130,066 151,351 149,824 160,598 172,986 172,512 144,981 164,369 158,189 162,290 146,766 1,033,135 1,122,093

Yoy change (%)

M800, Alto, A-Star, Wagonr (4.2) (1.8) 2.0 (12.2) 2.1 21.1 (2.8) (3.1) 15.1 (10.9) 1.3 (9.1) 1.1 (2.3)

Swift, Baleno, Ritz, Celerio, Dzire 18.8 24.8 16.3 15.4 31.5 11.3 31.8 50.8 76.7 17.8 (3.6) 1.7 3.7 20.9

Gypsy, Ertiga, S-Cross, Brezza 29.8 34.0 19.9 26.8 13.8 24.3 0.8 13.4 39.2 (4.9) (16.2) 8.7 (11.2) 2.0

Omni and Eeco (0.9) 10.8 23.8 (13.6) (12.5) 17.7 14.0 32.7 32.3 0.5 (1.9) 6.6 7.9 11.7

Ciaz (35.4) (26.2) (35.8) (22.5) (16.8) (12.1) (27.2) (14.8) (60.0) (99.2) 8.4 11.5 (5.2) (27.0)

Total domestic 9.9 15.0 12.1 5.0 14.2 16.1 14.2 24.9 45.5 0.1 (2.8) 1.4 1.5 9.9

Exports 4.2 0.8 (6.2) 2.8 24.9 2.1 19.1 48.1 (29.0) (9.9) (10.4) (25.1) (17.0) (9.2)

Total volumes 9.5 14.1 10.3 4.8 15.0 14.9 14.4 26.0 36.3 (0.6) (3.4) (0.5) 0.2 8.6

YTD



Passenger UVs (incl. Verito) 23,903 16,030 15,543 23,686 22,389 26,555 21,927 20,715 18,137 19,781 19,758 21,411 24,066 145,368 145,795

Commercial Vehicles 19,284 15,554 17,542 21,002 20,946 25,496 18,963 18,748 19,229 19,284 20,326 22,917 24,353 116,257 143,820

3-wheelers 6,126 4,455 3,894 4,744 5,138 6,602 4,327 4,355 4,323 5,540 5,289 6,940 6,931 29,792 37,705

Exports (Auto sector) 2,343 2,531 2,221 2,626 2,654 3,424 2,880 3,031 3,466 2,594 2,951 3,754 3,066 14,791 21,742

Auto division 51,656 38,570 39,200 52,058 51,127 62,077 48,097 46,849 45,155 47,199 48,324 55,022 58,416 306,208 349,062

Yoy change (%)

Passenger Uvs (incl. Verito) (3.4) 17.6 (6.9) 17.9 8.7 4.7 13.1 2.1 12.2 (5.6) 2.2 (15.5) 0.7 0.3

Commercial vehicles 6.8 22.3 23.9 51.2 27.9 11.3 25.9 15.3 27.1 28.4 24.7 19.4 26.3 23.7

3-wheelers 3.3 12.7 12.6 55.2 50.0 30.4 25.9 7.3 68.9 46.7 35.4 17.1 13.1 26.6

Exports (Auto sector) (28.5) (9.5) 8.2 16.1 15.4 26.4 88.5 134.4 86.8 30.8 14.3 17.1 30.9 47.0

Auto division (0.7) 16.5 7.8 32.5 19.7 10.8 22.0 11.8 26.4 13.1 14.7 2.5 13.1 14.0

YTD November-March



MHCVs 15,508 17,621 21,851 18,431 20,706 24,321 18,271 17,565 17,456 16,143 19,698 23,292

LCVs 21,085 22,386 24,640 25,855 24,970 31,296 20,915 22,861 26,147 23,535 25,389 28,127

Total CVs 36,593 40,007 46,491 44,286 45,676 55,617 39,186 40,426 43,603 39,678 45,087 51,419 43,874 217,362 303,273

UVs 5,201 5,676 6,177 6,854 6,393 7,908 6,659 6,043 6,044 5,706 6,558 6,351

Cars 11,403 11,708 8,252 13,484 11,692 12,628 10,676 11,525 12,372 11,483 12,112 12,221

Total PVs 16,604 17,384 14,429 20,338 18,085 20,536 17,335 17,568 18,416 17,189 18,670 18,572 18,390 98,847 126,140

Total sales 53,197 57,391 60,920 64,624 63,761 76,153 56,521 57,994 62,019 56,867 63,757 69,991 62,264 316,209 429,413

Yoy change (%)

MHCVs (0.8) 53.2 57.6 11.7 19.1 20.1 208.9 70.8 59.4 26.2 31.5 37.0

LCVs 3.2 56.3 54.6 55.1 40.6 47.9 72.4 33.4 44.4 28.3 29.7 19.4

Total CVs 1.5 54.9 56.0 33.5 30.0 34.3 117.1 47.4 50.1 27.4 30.5 26.8 19.9 39.5

UVs 159.5 335.9 371.5 179.2 174.3 223.3 309.3 447.4 406.6 101.1 127.5 21.7

Cars (22.7) (0.5) (16.0) 25.7 15.8 (5.1) (5.5) 17.1 22.4 (6.2) 4.8 (0.9)

Total PVs (0.9) 33.0 29.5 54.3 45.5 30.4 34.1 60.5 62.9 14.0 29.3 5.8 10.8 27.6

Total sales 0.7 47.5 48.8 39.4 34.0 33.3 82.5 51.2 53.7 23.0 30.1 20.4 17.0 35.8

India Automobiles


Exhibit 4: Ashok Leyland reported 17% yoy volume growth in October 2018 led by strong growth in LCVs; MHCV volumes up 7% yoy Ashok Leyland monthly sales volume, March fiscal year-ends (units)


Exhibit 5: VECV reported 13% yoy volume growth in October 2018; domestic MHCV volumes increased by 16% yoy VECV monthly sales volume, March fiscal year-ends (units)


Exhibit 6: Escorts reported 29% yoy volume growth in October 2018 Escorts monthly sales volume, March fiscal year-ends (units)


Exhibit 7: Hero reported 16% yoy volume growth in October 2018 Hero MotoCorp monthly sales volume, March fiscal year-ends (units)


YTD



LCV 3,804 3,819 3,303 4,458 4,455 5,396 3,709 3,238 4,534 4,203 4,228 5,141 5,352 22,010 30,405

MHCV 9,140 10,641 15,950 13,643 13,726 17,057 8,968 10,421 11,257 10,996 13,158 14,232 9,797 60,449 78,829

Total CVs 12,944 14,460 19,253 18,101 18,181 22,453 12,677 13,659 15,791 15,199 17,386 19,373 15,149 82,459 109,234

Yoy change (%)

LCV 28.6 44.3 69.5 58.3 62.7 57.6 45.0 10.4 44.9 42.2 37.9 44.2 40.7 38.1

MHCV (4.5) 53.6 81.6 13.2 21.2 11.8 97.9 69.8 21.8 21.8 24.5 20.6 7.2 30.4

Total CVs 3.3 51.0 79.4 21.7 29.2 20.2 78.8 50.6 27.6 26.9 27.5 26.0 17.0 32.5

YTD


Domestic sales

LCV 1,228 1,018 1,410 1,664 1,499 2,193 1,124 1,864 1,857 1,731 1,423 1,536 1,369

MHCV 3,235 3,044 3,635 4,346 4,284 5,787 2,265 3,404 3,639 3,427 3,420 4,149 3,752

Total 4,463 4,062 5,045 6,010 5,783 7,980 3,389 5,268 5,496 5,158 4,843 5,685 5,121 26,992 34,960

Export sales

LCV 166 65 111 154 329 404 168 115 233 223 195 201 169

MHCV 537 600 799 548 684 861 382 491 586 535 910 692 536

Total 703 665 910 702 1,013 1,265 550 606 819 758 1,105 893 705 4,446 5,436

Total sales 5,166 4,727 5,955 6,712 6,796 9,245 3,939 5,874 6,315 5,916 5,948 6,578 5,826 31,438 40,396

Yoy change (%)

LCV 9.5 59.8 65.1 59.8 9.9 20.1 (8.6) 9.1 56.6 51.3 45.8 22.7 11.5

MHCV 18.4 71.9 50.5 57.7 23.7 26.2 68.0 51.6 65.7 33.3 20.3 8.3 16.0

Total domestic 15.8 68.7 54.3 58.3 19.8 24.5 31.5 33.3 62.5 38.9 26.8 11.8 14.7 29.5

Export sales

LCV (19.8) (75.0) 63.2 (29.4) 213.3 101.0 0.0 (19.6) 26.6 (4.7) (21.1) 24.1 1.8

MHCV 38.4 50.4 26.4 26.0 53.4 80.5 15.4 10.8 83.7 45.4 99.6 0.6 (0.2)

Total exports 18.2 0.9 30.0 7.5 83.8 86.6 10.2 3.4 62.8 25.9 57.2 5.1 0.3 22.3

Total sales 16.1 54.1 50.0 50.9 26.3 30.4 28.0 29.4 62.5 37.1 31.6 10.9 12.8 28.5

YTD



Escorts 10,205 5,119 3,606 5,316 6,462 11,790 6,186 8,325 9,983 5,626 4,812 10,617 13,140 48,124 58,689

Domestic 10,001 4,941 3,476 5,160 6,295 11,557 6,094 8,087 9,758 5,483 4,674 10,396 12,867 47,017 57,359

Exports 204 178 130 156 167 233 92 238 225 143 138 221 273 1,107 1,330

Yoy change (%)

Escorts 13.8 6.5 13.1 45.6 52.2 66.5 26.3 20.9 72.8 3.6 5.2 2.5 28.8 22.0

Domestic 12.9 5.2 14.2 47.1 53.4 64.8 28.0 19.5 72.1 3.9 6.3 2.5 28.7 22.0

Exports 83.8 64.8 (9.7) 7.6 16.8 258.5 (33.8) 105.2 110.3 (7.7) (22.0) 5.7 33.8 20.1

YTD November-March


Total sales 631,105 605,270 472,731 641,501 629,597 730,473 694,022 706,365 704,562 679,862 685,047 769,138 734,668 4,503,285 4,973,664

Yoy change (%) (4.8) 26.1 43.2 31.7 20.0 19.8 17.4 11.4 12.9 9.1 0.9 6.7 16.4 10.4

Automobiles India


Exhibit 8: Royal Enfield reported 1% yoy volume growth in October 2018 Royal Enfield monthly sales volume, March fiscal year-ends (units)


Exhibit 9: TVS Motor’s volumes increased by 26% yoy in October 2018 TVS Motors monthly sales volume, March fiscal year-ends (units)


Exhibit 10: Residual volume growth run-rate are negative for CV OEMs (potential upside risks to FY2019 volume estimates) Summary table of OEM volumes

Source: Companies, Kotak Institutional Equities estimates

YTD



Royal Enfield 69,492 70,126 66,968 77,878 73,077 76,087 76,187 74,697 74,477 69,063 69,377 71,662 70,451 457,659 505,914

Domestic 68,014 67,776 65,367 76,205 71,327 74,209 74,627 72,510 72,588 67,001 68,014 70,065 70,044 447,620 494,849

Exports 1,478 2,350 1,601 1,673 1,750 1,878 1,560 2,187 1,889 2,062 1,363 1,597 407 10,039 11,065

Yoy change (%)

Royal Enfield 17.5 22.4 16.7 30.5 25.0 26.6 26.7 23.1 17.9 5.0 2.1 1.7 1.4 10.5

Domestic 16.5 21.4 16.1 31.1 25.7 26.7 27.4 23.6 17.7 3.9 1.7 1.0 3.0 10.6

Exports 97.6 59.9 48.0 8.4 2.8 20.1 (1.1) 6.7 26.9 58.4 23.3 53.9 (72.5) 10.2

YTD November-March



Motorcycles 125,409 93,202 95,281 98,649 113,296 134,412 131,704 126,711 128,825 121,434 131,743 166,489 150,429 820,736 957,335

Scooters 106,910 78,397 83,640 85,521 93,573 100,972 89,245 95,879 102,763 118,996 126,676 142,562 151,040 692,815 827,161

Mopeds 76,045 71,724 68,709 78,825 74,073 80,381 72,469 75,545 69,613 67,426 71,657 101,645 82,838 503,220 541,193

Three-wheelers 9,047 8,642 9,279 8,806 9,731 10,894 11,377 11,730 12,413 13,323 13,141 13,282 14,120 51,332 89,386

Total sales 317,411 251,965 256,909 271,801 290,673 326,659 304,795 309,865 313,614 321,179 343,217 423,978 398,427 2,068,103 2,415,075

Yoy change (%)

Total motorcycles 3.2 37.3 63.7 63.7 92.0 40.5 31.8 7.4 14.9 11.0 17.7 15.7 20.0 16.6

Scooters 15.7 7.2 50.6 22.1 35.6 20.0 9.6 11.9 13.6 28.8 10.8 17.2 41.3 19.4

Mopeds (15.4) (8.1) 4.4 9.7 (5.3) 13.0 21.4 5.3 5.4 9.6 (13.5) 19.1 8.9 7.5

Total three-wheelers 88.3 46.9 72.1 81.6 86.3 103.2 114.5 78.2 140.9 70.0 56.1 47.6 56.1 74.1

Total sales 2.8 12.0 38.9 31.3 37.5 27.4 23.7 9.9 14.5 18.4 8.1 17.8 25.5 16.8

OEM Oct-18 Yoy chg (%) Mom chg (%) FYTD19 Yoy chg (%)

Residual monthly

volume run rate

Residual volume run rate

(Yoy growth)

Ashok Leyland 15,149 17.0 (21.8) 109,234 32.5 17,856 (3.3)

Eicher Motor (RE) 70,451 1.4 (1.7) 505,914 10.5 79,244 9.3

Eicher Motor (VECV) 5,826 12.8 (11.4) 40,396 28.5 4,076 (2.5)

Escorts 13,140 28.8 23.8 58,689 22.0 6,892 6.8

Hero Motocorp 734,668 16.4 (4.5) 4,973,664 10.4 589,406 (4.4)

Maruti Suzuki 146,766 0.2 (9.6) 1,122,093 8.6 162,576 8.9

Mahindra and Mahindra 102,704 11.7 10.9 572,179 11.7 85,411 20.4

Tata Motors (standalone) 62,264 17.0 (11.0) 429,413 35.8 64,349 (0.4)

TVS Motors 398,427 25.5 (6.0) 2,415,075 16.8 300,574 7.5


Strong quarter with acceleration in yoy growth rate; 2QFY19 net hiring up 20X yoy to 42,427

Tier-1 IT companies reported a strong quarter with acceleration in yoy growth rate on organic

basis, consistent with our expectations. Financial services, a vertical that faced challenges, has

shown signs of improvement. Growth from other verticals was equally strong. Deal signings

were strong across the board with Infosys in particular reporting its best-ever quarterly deal

signings of US$2.03 bn. Hiring picked up to fulfill demand since the bench is down to

miniscule level and companies are running extremely high utilization rate. Hiring by Tier-1 IT

stood at 67,080 in 1HFY19, as compared to decline of 5,278 in 1HFY18. Mid-tier companies

reported a good quarter but were outshone by stronger performance by the larger names.

EBIT margin improves sequentially powered by currency

EBIT margin increased across companies on sequential and yoy basis led by currency depreciation.

Margins do expand in the immediate quarter of rupee depreciation. In the normal course, rupee

depreciation benefits do get passed on to clients either through renegotiation of MSAs

(gradual) or adjustment of implied pricing (in short-duration fixed-price projects). It remains to

be seen whether the pricing gets readjusted in the current cycle noting increased onsite costs

resulting from constrained visa availability and select cases of staffing challenges. Our base EBIT

margin does not assume any material retention of rupee depreciation benefits.

Focus will shift to FY2020E demand; too early to call

FY2019E saw acceleration in demand led by strong macro, more deals and lesser headwinds.

Focus will now shift to FY2020E. An argument for a stronger demand environment is helped

by—(1) continued increase in digital sizes aided by shift in spending to core transformation and

integrated digital deals as opposed to consulting-heavy phase earlier and (2) continuing

momentum of deals signed that will flow into revenues in the early part of the year. Against the

argument is a potentially volatile start to CY2019E.

Demand fulfillment and onsite costs will be a focus area

Increased H-1B rejections and higher demand for request for evidence (RFE) combined with low

tech unemployment can increase cost of operations in the US and even impact demand

fulfillment. We recognize the localization initiatives undertaken by Indian IT with many having

local US headcount that is higher than visa workers. However, constrained availability of resources

is making its impact felt. Infosys attributed higher costs in the quarter to this dynamic, while

Hexaware missed consensus revenue expectation due to demand fulfillment challenges. The

challenges on talent availability have been contained up to now and managed efficiently by Indian

IT companies. We will monitor this dynamic closely, especially against the backdrop of further

series of administrative changes that are likely to be unveiled by the US administration next

year.

Technology India

2QFY19 review: focus shifts to demand fulfillment. September 2018 quarter was

strong for Tier-1 IT with acceleration in revenue growth, margin expansion, uptick in

hiring and upbeat demand commentary. Two points of focus after the quarterly results

are—(1) FY2020E: will demand accelerate or even stay steady? Deal momentum is

strong though macro is a lot more volatile and (2) whether companies can fulfill demand

without impacting margins in the light of talent shortage in the US and constrained

H-1B availability; we believe companies will have to use creative solutions to achieve the

same. Infosys, Tech Mahindra, Mindtree and L&T Infotech are our key picks.

CAUTIOUS

NOVEMBER 02, 2018

UPDATE

BSE-30: 34,432

Kawaljeet Saluja

Sathishkumar S

Technology India


Stock prices a lot more attractive after the recent correction

Indian IT stocks have corrected by up to 20% in the last month on broader global market

sell-off. The valuations are a lot more attractive after the recent correction. Infosys and Tech

Mahindra are our key picks in the large-cap segment. Infosys has impressed with key metrics

that are important for a turnaround, viz. defense of revenues from large clients and strong

TCV of large deals. Initial sign of progress is visible in strong growth in digital revenues.

Infosys would require time to build out and close out gap with larger competitors in some of

the areas. Chief among them are large multi-service deals and building muscle in BPO

offerings, a critical element to large integrated deals. However, this does not necessarily

mean revenue growth underperformance since low legacy drag in the overall portfolio

comes to the company’s rescue. Infosys can potentially close out gap with larger peer in

FY2020E. Attrition is the key risk factor to watch out for. The stock trades at 16X FY2020E

earnings, attractive.

Tech Mahindra is on course for a turnaround in telecom as portfolio drag fades away and

normal wins start reflecting in better growth numbers. Enterprise business is volatile due to

high contribution from implementation business but has done well enough through the

course of the year to grow in double digit. Margin expansion theme has played to large

extent in consensus EPS estimate. However, the inexpensive stock valuations indicate

concerns around sustainability of it. The stock is inexpensive and a good one to invest in.

Scale attributes are important for investments in mid-tier companies. Key scale attributes

are—pockets of differentiation and ability to win consistently against established players in

core areas of competence, quality of employee base, profile of clients and breadth of

offerings demonstrated through number of accounts that have accepted multiple services.

L&T Infotech has demonstrated through wins against well-established competitors and

strengths in core and digital offerings. Mindtree excels in quality of resource base, clients

and digital offerings. Despite the quarterly revenue miss, we back Mindtree to outperform

peers on growth. The stock has been unfairly punished in our view. Both the stocks are our

key picks in the mid-tier category.

Interesting data points—hiring uptick, BFSI recovery

Hiring up nearly 20 times for Tier-1 IT on yoy comparison. Net hiring for six large

companies, viz. TCS, Infosys, Wipro, HCLT, Tech Mahindra and CTSH stood at 42,427 in

September 2018 quarter as compared to 2,175 in the same period last year. Hiring

captures two facts—(1) a more positive view on demand and (2) companies were running

at record high utilization numbers (Exhibit 13).

BFS demand pickup. BFSI revenues grew in a range of 3.5-5.8% for TCS, Infosys and

Wipro in constant currency. On yoy comparison, BFSI demand increased to 6.1%, 4.1%

and 16% for TCS, Infosys and Wipro (constant currency for TCS and Wipro, US$ terms

for Infosys). Demand improvement is function of two factors—(1) a strong macro and

robust IT spending and (2) banks that have been insourcing in the past few two years

have developed strong enough digital competencies in-house and are now comfortable

partnering with IT companies for integrated digital programs.

Mid-tier companies had a relatively soft quarter. Relative to strong growth of earlier

quarters, mid-tier companies grew in a range of 2.1-3.5% in constant currency, soft

when compared to larger players. Reasons for mixed performance varied from demand

fulfillment challenges to inability to replenish programs on time. Structural growth drivers

for quality mid-tier companies have not changed a lot and remain strong.

India Technology


Exhibit 1: September 2018 quarter performance versus KIE estimates

Source: Companies, Kotak Institutional Equities

Revenues EBIT margin Net Income FY2019E/CY2018E FY2020E/CY2019E Pre-results Post results

TCS In-line In-line Miss — — 1,950 1,950

Infosys Beat In-line Beat — — 770 780

Wipro Beat Beat Miss ▼ — 325 325

HCL Tech In-line In-line Beat ▲ — 1,100 1,100

Tech Mahindra In-line Beat Beat ▲ ▼ 865 865

L&T Infotech In-line Beat Beat — ▼ 2,100 2,000

Mphasis Miss Miss Beat ▲ ▲ 900 900

Mindtree In-line In-line Beat — ▼ 1,225 1,080

Hexaware (b) Miss In-line Beat — ▼ 455 360

Notes.

(a) Revenue and net income beat/miss implies revenues/net income more/less than estimates by 1% or more.

Equivalent measure for EBIT margin estimates is 50 bps.

(b) Hexaware has calendar year-ends

vs KIE estimates Earnings changes Target price (Rs)

Technology India


Exhibit 2: September 2018 quarter financial performance of key companies under our coverage


Sep-18 qoq (%) yoy (%) Sep-18E versus est. (%)

TCS

Revenues (US$ mn) 5,215 3.2 10.0 5,202 0.3

Revenues (Rs mn) 368,540 7.6 20.7 366,711 0.5

EBIT (Rs mn) 97,710 13.9 27.6 97,204 0.5

Net income (Rs mn) 79,010 7.6 22.6 80,792 (2.2)

EBIT margin (%) 26.5 26.5 1 bps

Infosys

Revenues (US$ mn) 2,921 3.2 7.1 2,891 1.1

Revenues (Rs mn) 206,090 7.7 17.3 203,789 1.1

EBIT (Rs mn) 48,940 7.9 15.3 48,982 (0.1)

Net income (Rs mn) 41,100 13.8 10.3 39,779 3.3

EBIT margin (%) 23.7 24.0 (29)bps

Wipro

Revenues (US$ mn) - Global IT Services 2,041 1.4 0.7 2,021 1.0

Revenues (Rs mn) - Wipro Limited 146,627 8.9 4.3 144,541 1.4

EBIT (Rs mn) - Wipro Limited 25,488 10.6 22.7 23,800 7.1

Net income (Rs mn) 18,856 (14.0) (11.1) 21,653 (12.9)

Global IT EBIT margin (%) 18.0 16.5 153 bps

HCLT

Revenues (US$ mn) 2,099 2.1 8.8 2,100 (0.1)

Revenues (Rs mn) 148,610 7.1 19.5 148,072 0.4

EBIT (Rs mn) 29,660 8.7 21.0 29,377 1.0

Net income (Rs mn) 25,400 5.7 16.1 23,715 7.1


Tech Mahindra

Revenues (US$ mn) 1,218 (0.5) 3.3 1,229 (0.8)

Revenues (Rs mn) 86,298 4.3 13.5 86,002 0.3

EBIT (Rs mn) 13,242 23.1 57.6 12,313 7.5

Net income (Rs mn) 10,642 18.5 27.3 10,402 2.3

EBIT margin (%) 15.3 14.3 103 bps

L&T Infotech

Revenues (US$ mn) 329 21.4 (0.7) 331 (0.7)

Revenues (Rs mn) 23,312 33.2 (0.0) 23,314 (0.0)

EBIT (Rs mn) 4,422 108.9 6.5 4,152 6.5

Net income (Rs mn) 4,028 11.5 6.8 3,772 6.8

EBIT margin (%) 19.0 17.8 116 bps

Mphasis

Revenues (US$ mn) 276 2.6 13.7 279 (1.3)

Revenues (Rs mn) 19,149 5.2 19.3 19,544 (2.0)

EBIT (Rs mn) 3,145 4.1 36.0 3,358 (6.3)

Net income (Rs mn) 2,709 4.9 37.0 2,639 2.7

EBIT margin (%) 16.4 17.2 (76)bps

Mindtree

Revenues (US$ mn) 246 2.0 19.5 248 (0.7)

Revenues (Rs mn) 17,554 7.1 31.8 17,502 0.3

EBIT (Rs mn) 2,296 20.2 111.2 2,260 1.6

Net income (Rs mn) 2,063 30.4 65.4 1,775 16.2


Hexaware

Revenues (US$ mn) 171 1.7 11.1 176 (2.5)

Revenues (Rs mn) 12,096 6.4 21.8 12,373 (2.2)

EBIT (Rs mn) 1,864 17.1 18.4 1,892 (1.5)

Net income (Rs mn) 1,723 12.2 21.1 1,610 7.1


India Technology


Exhibit 3: Guidance issued by Indian IT companies


Exhibit 4: Estimate revision for our IT coverage universe

Source: Companies, Kotak Institutional Equities estimates

Actuals

Sep-18 Sep-18 qoq (%) yoy (%) Sep-18 qoq (%) yoy (%) FY2019/CY2018 yoy (%) FY2019/CY2018 yoy (%)

Infosys

Revenues (US$ mn) 2,921 11,705 7.0 11,924 9.0

Re/US$ rate 70.6

Wipro

Revenues IT services

(US$ mn) (a),(b)2,041 2,028 1.0 2.5 2,068 3.0 4.5

HCLT

Revenues (US$ mn) 2,099 8,481 8.2 8,637 10.2

Hexaware (c)

Revenues (US$ mn) 171 674 11.0 680 12.0

Notes:

(a) Global IT services.

(b) Wipro's growth guidance excludes revenues from India PSU and India govt business. Qoq and yoy growth rates are on a comparable basis

(c) Hexaware has calendar year-ends

9.5-11.5% constant currency (8.2-10.2% in USD terms) revenue growth

in FY2019

11-12% US$ revenue growth in CY2018

Guidance

(upper-end)

6-8% constant currency revenue growth in FY2019

Guidance

(lower-end)

Guidance

(upper-end)

Guidance

(lower-end)

FY2019E/ FY2020E/ FY2021E/ FY2019E/ FY2020E/ FY2021E/ FY2019E/ FY2020E/ FY2021E/

CY2018E CY2019E CY2020E CY2018E CY2019E CY2020E CY2018E CY2019E CY2020E

TCS

Revenues (US$ mn) 20,951 22,894 24,782 20,881 22,721 24,702 0.3 0.8 0.3

EPS (Rs) 81.8 94.5 103.0 84.5 94.1 101.1 (3.3) 0.4 1.9

EBIT margin (%) 26.5 26.5 26.4 26.5 26.5 26.4 -5 bps -7 bps -5 bps

Infosys

Revenues (US$ mn) 11,705 12,777 13,977 11,640 12,680 13,869 0.6 0.8 0.8

EPS (Rs) 36.7 41.2 45.5 36.5 41.3 45.0 0.6 (0.3) 1.0

EBIT margin (%) 23.7 23.9 24.0 24.1 24.3 24.3 -40 bps -45 bps -36 bps

Wipro

IT Services Revenues (US$ mn) 8,200 8,620 9,128 8,217 8,695 9,201 (0.2) (0.9) (0.8)

EPS (Rs) 18.9 22.9 24.8 19.1 22.8 24.6 (1.0) 0.4 0.8

EBIT margin (%) - IT 16.7 18.1 18.0 16.6 17.8 17.8 4 bps 27 bps 29 bps

HCLT

Revenues (US$ mn) 8,557 9,288 9,914 8,540 9,249 9,886 0.2 0.4 0.3

EPS (Rs) 73.6 77.7 81.2 71.4 77.8 81.6 3.1 (0.1) (0.5)

EBIT margin (%) 20.0 19.0 18.5 19.8 19.3 18.7 21 bps -30 bps -19 bps

Tech Mahindra

Revenues (US$ mn) 4,978 5,396 5,865 5,034 5,445 5,889 (1.1) (0.9) (0.4)

EPS (Rs) 47.7 56.3 64.3 46.2 56.6 64.0 3.3 (0.5) 0.5

EBIT margin (%) 14.8 15.7 15.9 14.0 15.5 15.7 79 bps 18 bps 26 bps

L&T Infotech

Revenues (US$ mn) 1,334 1,529 1,738 1,341 1,527 1,734 (0.5) 0.1 0.2

EPS (Rs) 83.0 94.6 109.7 82.9 95.8 113.2 0.1 (1.3) (3.1)


Mphasis

Revenues (US$ mn) 1,121 1,250 1,361 1,116 1,242 1,356 0.4 0.6 0.4

EPS (Rs) 55.4 62.8 64.5 53.5 59.9 62.7 3.7 4.9 2.8


Mindtree

Revenues (US$ mn) 993 1,123 1,266 972 1,102 1,247 2.1 1.9 1.5

EPS (Rs) 43.1 53.3 61.8 42.6 52.4 61.5 1.3 1.7 0.5

EBIT margin (%) 12.9 14.2 14.5 13.1 14.3 14.5 -13 bps -12 bps 9 bps

Hexaware (a)

Revenues (US$ mn) 677 761 849 687 787 884 (1.6) (3.4) (4.0)

EPS (Rs) 19.9 22.6 25.4 19.8 24.0 27.1 0.7 (5.9) (6.2)

EBIT margin (%) 14.3 15.4 15.2 14.4 15.3 15.1 -5 bps 9 bps 13 bps

Note

(a) Hexaware has calendar year-ends

Revised Earlier Change (%)/(bps)

Technology India


Exhibit 5: US$ and constant currency revenue growth of Indian IT companies


Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18

Revenues (US$ mn)

TCS 4,156 4,145 4,207 4,362 4,374 4,387 4,452 4,591 4,739 4,787 4,972 5,051 5,215

Cognizant 3,187 3,233 3,202 3,370 3,453 3,462 3,546 3,670 3,766 3,828 3,912 4,006 4,078

Infosys 2,392 2,407 2,446 2,501 2,587 2,551 2,569 2,651 2,728 2,755 2,805 2,831 2,921

Wipro IT 1,832 1,838 1,882 1,931 1,916 1,903 1,955 1,972 2,014 2,013 2,062 2,027 2,041

HCL Tech 1,545 1,566 1,587 1,691 1,722 1,745 1,817 1,884 1,928 1,988 2,038 2,055 2,099

Tech M 1,011 1,015 1,023 1,032 1,072 1,116 1,131 1,138 1,179 1,209 1,244 1,224 1,218

L&T Infotech 224 225 230 231 240 245 254 259 271 294 309 320 329

Mphasis 237 229 225 224 224 224 222 231 242 252 264 269 276

Mindtree 180 184 196 199 193 192 196 200 206 214 226 242 246

Hexaware 125 124 122 130 135 139 145 153 154 156 162 168 171

Total 14,889 14,966 15,119 15,670 15,917 15,964 16,286 16,749 17,227 17,495 17,995 18,192 18,594

US$ - sequential growth (%)

TCS 3.0 (0.3) 1.5 3.7 0.3 0.3 1.5 3.1 3.2 1.0 3.9 1.6 3.2

Cognizant 3.3 1.4 (0.9) 5.2 2.5 0.3 2.4 3.5 2.6 1.6 2.2 2.4 1.8

Infosys 6.0 0.6 1.6 2.2 3.4 (1.4) 0.7 3.2 2.9 1.0 1.8 0.9 3.2

Wipro IT 2.1 0.3 2.4 2.6 (0.8) (0.7) 2.7 0.9 2.1 (0.0) 2.4 (1.7) 0.7

HCL Tech 0.4 1.4 1.3 6.5 1.9 1.3 4.1 3.7 2.3 3.1 2.5 0.8 2.1

Tech M 2.2 0.4 0.7 0.9 4.0 4.1 1.4 0.6 3.6 2.5 2.9 (1.6) (0.5)

L&T Infotech 7.3 0.4 2.1 0.6 3.7 2.3 3.7 2.0 4.4 8.5 5.3 3.5 2.7

Mphasis (3.3) (1.7) (0.3) (0.2) (0.3) (0.9) 4.3 4.9 3.8 5.0 1.7 2.6

Mindtree 16.4 2.3 6.1 1.7 (3.0) (0.4) 1.8 2.3 3.0 3.9 5.6 6.8 2.0

Hexaware 3.1 (0.8) (1.9) 6.6 4.3 2.7 4.1 5.5 0.9 1.3 3.9 3.8 1.7

Total 3.3 0.5 1.0 3.6 1.6 0.3 2.0 2.8 2.9 1.6 2.9 1.1 2.2

YoY growth (%)

TCS 5.8 5.4 7.9 8.1 5.2 5.8 5.8 5.2 8.3 9.1 11.7 10.0 10.0

Cognizant 23.5 17.9 10.0 9.2 8.4 7.1 10.7 8.9 9.1 10.6 10.3 9.2 8.3

Infosys 8.7 8.5 13.3 10.9 8.2 6.0 5.0 6.0 5.5 8.0 9.2 6.8 7.1

Wipro IT 3.4 2.4 6.1 7.6 4.6 3.5 3.9 2.1 5.1 5.8 5.5 2.8 1.4

HCL Tech 7.7 5.1 6.5 9.9 11.5 11.4 14.5 11.4 11.9 13.9 12.2 9.0 8.9

Tech M 12.3 9.8 3.9 4.3 6.1 10.0 10.6 10.3 10.0 8.3 10.0 7.6 3.3

L&T Infotech 10.8 7.1 9.0 10.6 12.2 12.9 19.7 21.6 23.4 21.4

Mphasis 1.1 (1.3) (4.3) (5.4) (2.4) (1.7) 2.9 8.1 12.6 19.2 16.4 13.7

Mindtree 22.6 25.4 33.0 28.5 7.0 4.2 - 0.6 6.8 11.5 15.6 20.7 19.5

Hexaware 13.7 8.4 5.9 6.9 8.1 12.0 18.9 17.7 13.9 12.3 12.1 10.3 11.1

Total 10.2 8.5 8.6 8.7 6.9 6.7 7.7 6.9 8.2 9.6 10.5 8.6 7.9

Constant currency - sequential growth (%)

TCS 3.9 0.5 2.1 3.1 1.0 2.0 1.0 2.0 1.7 1.3 2.0 4.1 3.7

Infosys 6.9 1.1 1.9 1.7 3.9 (0.3) - 2.7 2.2 0.8 0.6 2.3 4.2

Wipro IT 3.1 1.4 2.7 2.0 0.9 0.6 1.7 0.2 0.3 0.9 1.1 0.1 2.8

HCL Tech 1.2 2.1 1.7 6.0 2.8 3.0 3.8 2.6 2.3 3.3 1.2 2.7 3.0

Tech M 3.0 1.2 1.3 0.4 5.0 5.4 0.9 (0.6) 2.3 2.4 1.7 0.3 0.4

L&T Infotech (0.3) 3.6 3.8 2.4 1.5 3.5 8.3 4.5 5.1 3.5

Mphasis NA NA NA NA NA NA NA 4.8 3.7 3.7 4.4 2.9 3.0

Mindtree 16.5 3.0 7.1 1.1 1.7 0.4 2.0 1.2 2.1 3.9 4.6 8.2 2.4

Hexaware 3.4 (0.5) (1.8) 6.3 4.8 3.4 4.0 4.9 0.4 1.3 3.3 4.7 2.1

Constant currency - yoy growth (%)

TCS 12.0 9.9 10.4 10.1 7.0 8.6 7.5 6.3 7.1 6.2 7.2 9.3 11.5

Cognizant 19.8 11.2 10.0 9.7 8.7 11.2 9.3 8.3 8.9 8.1 8.2 9.0

Infosys 8.7 8.5 13.3 10.9 8.2 6.0 5.0 6.0 5.4 8.0 9.2 6.8 8.1

Wipro IT 8.4 6.3 7.8 9.5 7.2 6.2 5.2 3.4 2.8 3.0 2.5 2.4 5.1

HCL Tech NA NA 8.1 11.2 12.8 13.8 16.1 12.2 10.6 11.2 8.2 8.5 10.5

L&T Infotech 12.1 7.2 10.3 10.2 11.8 11.7 16.4 18.7 22.9 22.9

Hexaware 16.4 10.1 6.5 NA 8.9 13.2 19.9 18.2 13.3 10.9 10.1 9.9 11.8

Local currency - yoy growth (%)

Accenture 12.0 10.0 12.0 10.0 9.0 7.0 6.0 7.0 8.0 10.0 10.0 11.0 11.0

India Technology


Exhibit 6: Digital contribution to revenues and digital revenue growth for select Indian IT companies


Exhibit 7: Mid-tier IT outperforming Tier-1 IT on growth


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

Digital Revenues (as a % of total revenues)

TCS 16.1 16.8 17.9 18.9 19.7 22.1 23.8 25.0 28.1

Infosys NA NA NA 23.9 25.2 26.1 26.8 28.4 31.0

Wipro IT 19.6 21.7 22.1 22.5 24.1 25.1 26.7 28.0 31.3

L&T Infotech NA NA 28.0 29.0 32.0 33.0 33.0 34.0 37.0

Mindtree 40.0 39.4 39.6 42.3 42.6 43.9 45.0 47.5 48.1

Digital revenues (US$ mn)

TCS 704 737 797 868 934 1,058 1,183 1,263 1,465

Infosys NA NA NA 634 687 719 752 804 906

Wipro IT 376 413 432 444 485 505 551 567 639

L&T Infotech NA NA 71 75 87 97 102 109 122

Mindtree 77 76 77 85 88 94 102 115 119

Digital revenues - sequential growth (%)

TCS 1.5 4.7 8.1 8.9 7.6 13.3 11.9 6.7 16.0

Infosys 8.5 4.6 4.5 7.0 12.6

Wipro IT 8.7 9.9 4.6 2.7 9.4 4.1 9.0 3.1 12.6

L&T Infotech 5.7 15.2 11.9 5.3 6.7 11.7

Mindtree (2.8) (1.9) 2.3 9.3 3.8 7.1 8.2 12.7 3.3

YoY growth (%)

TCS 27.4 29.8 22.2 25.1 32.6 43.5 48.5 45.5 57.0

Infosys 26.9 31.7

Wipro IT 28.4 29.2 22.4 27.5 27.9 31.7

L&T Infotech 43.3 44.7 40.4

Mindtree 16.7 13.4 2.3 6.6 13.8 24.2 31.4 35.5 34.9

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

QoQ % in USD revenues

TCS 3.7 0.3 0.3 1.5 3.1 3.2 1.0 3.9 1.6 3.2

CTSH 5.2 2.5 0.3 2.4 3.5 2.6 1.6 2.2 2.4 1.8

Infosys 2.2 3.4 (1.4) 0.7 3.2 2.9 1.0 1.8 0.9 3.2

Wipro 2.6 (0.8) (0.7) 2.7 0.9 2.1 (0.0) 2.4 (1.7) 0.7

HCL Tech 6.5 1.9 1.3 4.1 3.7 2.3 3.1 2.5 0.8 2.1

Tech Mahindra 0.9 4.0 4.1 1.4 0.6 3.6 2.5 2.9 (1.6) (0.5)

Tier 1 IT 3.8 1.6 0.3 2.0 2.8 2.8 1.4 2.7 0.9 2.2

QoQ % in USD revenues

L&T Infotech 0.6 3.7 2.3 3.7 2.0 4.4 8.5 5.3 3.5 2.7

Mindtree 1.7 (3.0) (0.4) 1.8 2.3 3.0 3.9 5.6 6.8 2.0

Hexaware 6.6 4.3 2.7 4.1 5.5 0.9 1.3 3.9 3.8 1.7

L&T Tech 1.1 2.3 (2.4) 1.0 5.3 9.1 8.4 7.5 4.0 4.9

Cyient 5.3 9.5 (0.5) 3.8 (0.3) 6.8 1.3 8.6 (2.5) 5.0

NIIT Tech (0.7) 2.3 (0.5) 7.4 (0.4) 4.3 1.7 4.7 1.7 5.3

Mphasis (2.0) (0.2) (0.3) (0.9) 4.3 4.9 3.8 5.0 1.7 2.6

Mid-Tier IT 1.4 2.2 0.3 2.6 2.7 4.6 4.5 5.7 2.9 3.2

YoY% in USD revenues

TCS 8.1 5.2 5.8 5.8 5.2 8.3 9.1 11.7 10.0 10.0

CTSH 9.2 8.4 7.1 10.7 8.9 9.1 10.6 10.3 9.2 8.3

Infosys 10.9 8.2 6.0 5.0 6.0 5.5 8.0 9.2 6.8 7.1

Wipro 7.6 4.6 3.5 3.9 2.1 5.1 5.8 5.5 2.8 1.4

HCL Tech 9.9 11.5 11.4 14.5 11.4 11.9 13.9 12.2 9.0 8.8

Cognizant 4.3 6.1 10.0 10.6 10.3 10.0 8.3 10.0 7.6 3.3

Tier 1 IT 8.7 7.1 6.8 7.8 6.9 8.1 9.3 10.1 8.1 7.4

YoY % in USD revenues

L&T Infotech 10.8 7.1 9.0 10.6 12.2 12.9 19.7 21.6 23.4 21.4

Mindtree 28.5 7.0 4.2 — 0.6 6.8 11.5 15.6 20.7 19.5

Hexaware 6.9 8.1 12.0 18.9 17.7 13.9 12.3 12.1 10.3 11.1

L&T Tech 3.5 1.3 2.0 6.2 13.3 25.8 33.9 32.3 27.2

Cyient 9.1 15.3 14.7 19.1 12.8 10.0 11.9 17.0 14.4 12.5

NIIT Tech (0.1) (1.3) (0.5) 8.6 8.9 11.0 13.4 10.6 13.0 14.1

Mphasis (1.6) (4.4) (5.7) (3.3) 2.9 8.1 12.6 19.2 16.4 13.7

Mid-Tier IT 4.5 4.3 6.6 8.0 10.6 15.3 18.7 18.9 17.3

Technology India


Exhibit 8: Revenues by industry verticals (US$ mn)


Sep-18 quarter

Revenue % of revenues qoq yoy

TCS

BFSI 1,627 31.2 3.6 5.3

Retail & CPG 866 16.6 3.2 14.9

Communication & Media 360 6.9 0.3 6.9

Manufacturing 375 7.2 1.8 7.1

Life sciences & healthcare 391 7.5 6.1 14.6

Energy & Utilities 240 4.6 (1.1) 20.5

Technology & Services 396 7.6 1.9 4.5

Regional markets and others 960 18.4 5.0 15.0

Total 5,215 100.0 3.7 11.5

Cognizant

Financial Services 1,464 35.9 (0.3) 2.6

Healthcare 1,189 29.2 2.9 9.6

Products and resources 863 21.2 2.7 11.5

Comm, Media and Tech (TMT) 562 13.8 3.9 17.1

Total 4,078 100.0 1.8 8.3

Infosys

Financial Services 941 32.2 4.6 4.1

Retail 491 16.8 4.6 12.7

Communications 359 12.3 (0.1) 5.9

Energy, Utilities, Resources and Servcies 359 12.3 2.3 12.4


Hi Tech 219 7.5 4.1 11.4

Life Sciences 187 6.4 0.3 1.1

Others 85 2.9 1.9 (9.0)

Total 2,921 100.0 3.2 7.1

Wipro

Communications 116 5.7 2.5 (11.1)

Consumer 333 16.3 2.6 3.9

Energy, Natural Resources & Utilities 257 12.6 1.5 (5.4)

Finance Solutions 627 30.7 3.1 12.8

Healthcare, Life Sciences & Services 261 12.8 (3.8) (5.3)

Manufacturing 167 8.2 (0.5) (4.5)

Technology 280 13.7 (2.8) (1.5)

Total 2,041 100.0 0.7 1.4

HCL Tech

Financial services 483 23.0 (1.3) 0.1

Manufacturing 378 18.0 0.5 (6.3)

Technology&Services 382 18.2 2.1 36.6

Retail & CPG 210 10.0 12.2 17.0

Telecom, media, publishing, entertainment 151 7.2 0.7 (0.8)

Life sciences 271 12.9 2.9 20.0

Energy-utilities-public sector 225 10.7 4.1 9.9

Total 2,099 100.0 2.1 8.8

Growth (%)Sep-18 quarter

Revenues % of revenues qoq yoy

Tech Mahindra

Telecom 506 41.5 4.3 (1.9)

Manufacturing 245 20.1 (0.5) 9.2

Tech, Media & Entertainment 89 7.3 0.9 27.4

BFSI 164 13.5 (1.2) (1.2)

Retail, transport, logistics 79 6.5 6.0 (6.9)

Others 136 11.2 (16.8) 16.7

Total 1,219 100.0 (0.5) 3.3

L&T Infotech

Banking and financial services 98 29.9 (0.6) 33.0

Insurance 59 17.9 1.0 5.5


Energy & utilities 35 10.7 8.8 8.2

CPG retail and pharma 34 10.2 15.1 37.6

High-Tech, Media & Entertainment 37 11.2 1.8 22.5

Others 15 4.7 7.3 42.6

Total 329 100.0 2.7 21.4

Mphasis

Banking and financial services 127 46.0 0.3 7.7

Insurance 31 11.3 2.8 (0.7)


Energy & utilities 71 25.7 7.6 19.7

Total 276 100.0 2.6 13.7

Mindtree

Hi-Tech & Media Services 97 39.3 3.1 24.2

BFSI 55 22.4 2.5 7.9

Retail, CPG & Manufacturing 53 21.7 (4.2) 13.2

Travel & Hospitality 41 16.7 7.8 37.6

Total 247 100.0 2.0 19.5

Hexaware

Banking and Financial services 73 42.5 1.0 8.8

Travel & Transportation 18 10.5 (3.8) (11.6)

Healthcare & Insurance 32 18.8 11.8 25.8

Mfg, consumer & others 25 14.9 (5.9) 23.5

Professional services 23 13.3 4.8 10.3

Total 171.1 100.0 1.7 11.1

Growth (%)

India Technology


Exhibit 9: Revenues by geographies (US$ mn)


Sep-18 quarter


TCS

North America 2,665 51.1 3.4 8.3

Latin America 104 2.0 8.7 0.0

UK 814 15.6 3.9 22.6

Continental Europe 730 14.0 3.2 15.0

India 292 5.6 (0.3) (2.2)

Asia Pacific 501 9.6 3.2 7.8

MEA 110 2.1 (1.4) (3.7)

Total 5,215 100.0 3.2 10.0

Cognizant

North America 3,107 76.2 1.3 7.5

Europe 723 17.7 4.8 15.1

Asia 248 6.1 (0.4) 0.4

Total 4,078 100.0 1.8 8.3

Infosys

North America 1,761 60.3 3.7 6.5

Europe 701 24.0 1.9 10.8

India 73 2.5 (0.8) (18.9)

Rest of the world 386 13.2 4.0 9.6

Total 2,921 100.0 3.2 7.1

Wipro

US 1,127 55.2 1.3 4.4

Europe 516 25.3 (0.5) 2.2

India and Middle east business 165 8.1 (5.1) (28.0)

Other emerging markets 233 11.4 5.3 16.7

Total 2,041 100.0 0.7 1.4

HCL Tech

America 1,381 65.8 4.2 14.8

Europe 562 26.8 (2.6) 0.2

Rest of the world 155 7.4 0.8 (5.2)

Total 2,099 100.0 2.1 8.8



Tech M

North America 573 47.0 (3.0) 7.2

Europe 361 29.6 (1.8) 1.9

Rest of the world 285 23.4 6.3 (2.1)

Total 1,218 100.0 (0.5) 3.3

L&T Infotech

North America 221 67.3 3.9 16.2

Europe 56 17.1 (1.9) 18.6

India 21 6.4 2.7 41.3

RoW 30 9.2 3.8 66.7

Total 329 100.0 2.7 21.4

Mphasis

Americas 221 67.2 3.9 13.8

EMEA 30 9.0 (3.4) 29.7

India 16 4.9 (5.7) 3.1

ROW 9 2.7 7.2 (8.2)

Total 276 83.8 2.6 13.7

Mindtree

North America 181 73.6 3.3 30.3

Europe 46 18.7 (5.1) (2.0)

India 8 3.3 8.6 12.7

Rest of the world 11 4.4 6.9 (16.5)

Total 246 100.0 2.0 19.5

Hexaware

Americas 132 77.4 2.2 8.7

Europe 23 13.3 6.5 30.7

Asia Pacific 16 9.3 (8.2) 7.6

Total 171 100.0 1.7 11.1

Growth (%)

Technology India


Exhibit 10: Revenues by service lines (US$ mn)



Exhibit 11: EBIT margin trajectory of Indian IT companies



Infosys

Services 2,772 94.9 2.9 7.2

Digital 844 28.9 11.7 31.1

Core 1,928 66.0 (0.6) (0.7)

Products & platforms 149 5.1 9.6 5.0

Digital 61 2.1 27.5 40.5

Core 88 3.0 (0.1) (10.8)

Total 2,921 100.0 3.2 7.1

Digital 906 31.0 12.6 31.7

Core 2,015 69.0 (0.6) (1.2)

Total revenues 2,921 100.0 3.2 7.1

Wipro

Global Infrastructure Services 541 26.5 (2.6) (5.4)

Wipro Analytics 159 7.8 10.7 11.4

Business Process Services 259 12.7 5.7 6.4

Product Engineering 149 7.3 0.7 7.2

Application Services 933 45.7 (0.2) 1.8

Total revenues 2,041 100.0 0.7 1.4

HCL Tech

Application services 695 33.1 (0.6) 0.4

Engineering and R&D services 535 25.5 6.3 26.2

Infrastructure services 755 36.0 1.6 1.8

BPO services 113 5.4 6.1 63.3

Total revenues 2,099 100.0 2.1 8.8

Tech Mahindra

IT services 1,124 92.3 (0.8) 2.3

BPO 94 7.7 3.3 16.8

Total revenues 1,218 100.0 (0.5) 3.3



L&T Infotech

ADM 105 32.0 (3.4) 12.3

Enterprise solutions 83 25.2 (1.6) 26.9

IMS 38 11.7 4.5 30.3

Testing 26 7.9 0.2 7.8

Analytics, AI and Cognitive 40 12.2 21.6 35.9

Enterprise integration and mobility 26 8.0 26.4 42.8

Platform based solutions 10 3.0 (0.6) (4.2)

Total revenues 329 100.0 2.7 21.4

Mphasis

Application maintenance & other services 95 34.4 17.1 13.1

Application development 76 27.7 3.4 31.4

Customer Service 3 1.0 (13.6) (30.6)

Service / Technical Help Desk 18 6.5 (19.3) 2.4

Transaction Processing Service 17 6.3 (2.4) 5.1

Infrastructure Management Services 39 14.2 (2.1) 19.9

Knowledge Processes 27 9.8 (11.5) (8.4)

License Income 0 0.1 21.2 9.6

Total revenues 276 100.0 2.6 13.7

Mindtree

ADM 125 50.8 2.2 21.4

Consulting 8 3.1 (7.0) (7.4)

Package implementation 22 8.8 (15.3) (6.1)

IP led revenue 2 0.8 36.0 (4.4)

Independent testing 32 13.1 2.0 29.4

IMS & Tech support 58 23.4 10.5 28.3

Total revenues 246 100.0 2.0 19.5

Hexaware

ADM 62 36.0 (0.0) 10.2

EAS 17 9.7 (6.1) (4.6)

Testing / QATS 30 17.7 (2.2) (1.7)

Business intelligence & analytics 25 14.5 9.2 16.7

BPO 13 7.4 4.5 12.6

IMS 25 14.7 8.3 44.5

Total revenues 171 100.0 1.7 11.1

Sep-18 quarter Growth (%)

Sep-17 Jun-18 Sep-18 qoq (bps) yoy (bps)

TCS 25.1 25.0 26.5 148 bps 143 bps

CTSH 20.0 22.0 21.1 -88 bps 112 bps

Infosys 24.2 23.7 23.7 3 bps -42 bps

Wipro - IT services 17.3 15.6 18.1 250 bps 80 bps

HCL Tech 19.7 19.7 19.9 22 bps 18 bps

Tech Mahindra 11.0 13.0 15.3 234 bps 430 bps

L&T Infotech 14.5 17.7 19.0 129 bps 448 bps

Mphasis 14.4 16.6 16.4 -18 bps 202 bps

Mindtree 8.9 7.6 8.2 59 bps -78 bps

Hexaware 15.8 14.0 15.4 141 bps -44 bps

Notes:

(1) Non-GAAP EBIT margin for CTSH

(2) Wipro's EBIT margin in Sep-18 is adjusted for a one-time loss in the quarter

India Technology


Exhibit 12: Attrition has firmed up for most of the companies


Exhibit 13: Utilization rates for various IT companies


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

TCS (a) 14.7 13.6 12.9 12.2 11.5 11.6 11.3 11.1 11.0 10.9 10.9

CTSH (e) 14.6 17.1 16.6 15.6 14.7 23.6 22.5 17.9 20.3 22.6 22.3

Infosys (b) 12.6 15.8 15.7 14.9 13.5 16.9 17.2 15.8 16.6 20.6 19.9

Infosys (e) 17.3 21.0 20.0 18.4 17.1 21.0 21.4 18.7 19.5 23.0 22.2

Wipro (c ) 14.9 17.9 17.2 15.4 14.8 16.1 16.7 16.2 17.5 17.7 17.4

HCL Tech (d) 17.3 17.8 18.6 17.9 16.9 16.2 15.7 15.2 15.5 16.3 17.1

HCL Tech (e) 31.0 28.0 26.7 26.0 20.2 26.2 25.0 23.0 25.7 27.9 25.2

Tech Mahindra (g) 21.0 21.0 19.0 18.0 17.0 17.0 16.0 17.0 18.0 19.0 20.0

L&T Infotech (a) 18.4 19.5 18.5 18.1 16.9 14.7 15.0 14.6 14.8 15.1 15.3

Mindtree (a) 15.7 16.5 16.4 16.1 15.1 14.0 13.0 12.6 12.5 12.2 13.0

Mindtree (e) 15.6 17.7 15.7 14.6 13.3 13.4 12.1 13.3 13.3 14.5 14.9

Hexaware (f) 16.0 16.6 16.5 16.1 14.9 13.8 13.7 13.1 13.4 14.4 15.7

Notes:

(a) LTM attrition for IT services.

(b) Standalone attrition numbers for last twelve months, ex BPO/subsidiaries.

(c) Wipro Technologies only, quarterly annualized attrition, excludes involuntary attrition.

(d) For IT services only, excludes involuntary attrition.

(e) Quarterly annualized attrition computed (includes BPO).

(f) LTM attrition

(g) For organic business only

Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18

TCS 80.9

Cognizant (d) 76.0 75.0 73.0 73.0 74.0 74.0 76.0 79.0 80.0 80.0 79.0 80.0

Infosys (b) 74.2 74.7 76.5 77.7 77.8 78.2 80.2 81.8 82.1 80.8 81.5 80.2

Wipro (a) 66.4 68.1 69.9 71.2 71.6 73.1 72.0 72.9 71.0 73.1 74.5 74.4

HCL Tech (b) 84.7 85.6 85.8 85.3 84.6 85.7 86.0 86.0 85.8 85.9 85.5 86.7

Tech Mahindra 77.0 77.0 78.0 78.0 77.0 77.0 77.0 81.0 83.0 84.0 81.0 81.0

L&T Infotech 74.0 75.9 77.4 78.7 78.1 78.3 77.7 79.6 80.3 79.9 79.7 80.4

Mindtree 68.5 69.4 71.4 71.4 71.3 70.9 73.2 73.2 72.8 73.8 75.4 74.5

Hexaware 69.7 69.6 70.0 74.1 78.6 78.9 80.8 79.7 80.9 81.3 78.2 79.0

Notes:

(a) Wipro IT Services gross utilization excl BPS, IFOX, cellent, HPS, Appirio and I&ME

(b) Blended utilization (including trainees) for all segments.

(c ) TCS discontinued disclosing utilization starting March 2016 quarter.

(d) Offshore utilization including trainees.

Technology India


Exhibit 14: Hiring environment has improved notably in the past couple of quarters

Source: Company(TCS, Infosys, Wipro(IT services), HCLT, TechM and CTSH), Kotak Institutional Equities

Exhibit 15: Kotak Institutional Equities: valuation summary of key Indian technology companies


(10,000)

0

10,000

20,000

30,000

40,000

50,000

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

Sep

-18

Net hiring by Tier-I Indian offshore pureplays

1-Nov-18 EPS (Rs) P/E (X) EV/EBITDA (X) RoE (%)

Company Price (Rs) Rating (Rs m) (US$ m) 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E

HCL Technologies 1,009 ADD 1,404,915 19,092 73.6 77.7 81.2 13.7 13.0 12.4 9.0 8.1 7.5 25.1 22.1 20.5

Hexaware Technologies 321 REDUCE 95,203 1,294 19.9 22.6 25.4 16.1 14.2 12.6 12.0 9.3 8.1 27.8 27.1 26.3

Infosys 667 ADD 2,912,410 39,578 36.7 41.2 45.5 18.2 16.2 14.7 12.5 10.9 9.7 23.5 24.1 23.9

L&T Infotech 1,763 ADD 305,593 4,153 83.0 94.6 109.7 21.3 18.6 16.1 15.5 12.9 11.0 33.9 31.3 29.6

Mindtree 827 ADD 135,776 1,845 45.0 55.4 63.1 18.4 14.9 13.1 11.6 9.1 7.8 24.8 26.0 25.2

Mphasis 973 SELL 188,176 2,557 55.4 62.8 64.5 17.6 15.5 15.1 12.2 11.0 10.2 18.5 19.8 20.1

TCS 1,935 REDUCE 7,259,363 98,649 84.7 94.5 103.0 22.8 20.5 18.8 16.2 14.5 13.4 33.8 33.7 34.8

Tech Mahindra 721 ADD 636,090 8,644 47.7 56.3 64.3 15.1 12.8 11.2 8.9 7.2 6.1 20.8 21.0 20.3

Wipro 330 REDUCE 1,491,373 20,267 18.9 22.9 24.8 17.4 14.4 13.3 11.2 9.3 8.5 16.4 17.7 17.6

Technology 14,428,900 196,078 19.3 17.2 15.8 13.2 11.6 10.5 24.0 24.5 24.3

KIE universe 103,267,266 1,403,101 21.1 16.2 14.0 10.6 9.3 8.2 12.4 14.5 15.2

Target O/S shares EPS CAGR (%) Sales (Rs mn)

Company Price (Rs) (mn) 2019-21E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E

HCL Technologies 1,100 1,409 9.2 18.1 5.6 4.5 101,360 105,763 110,639 141,687 149,881 155,446 601,744 668,704 713,826

Hexaware Technologies 360 302 15.3 20.3 13.6 12.3 6,010 6,827 7,665 7,341 9,193 10,241 46,385 54,680 61,137

Infosys 780 4,350 12.1 13.5 12.3 10.4 159,525 179,173 197,829 214,343 240,870 264,025 822,279 919,979 1,006,314

L&T Infotech 2,000 175 20.0 30.5 14.0 16.0 14,721 16,855 19,553 18,477 21,606 24,660 93,830 110,076 125,128

Mindtree 1,080 165 22.3 30.2 23.1 14.0 7,389 9,092 10,365 10,759 13,359 14,946 69,993 80,495 90,471

Mphasis 900 193 13.7 26.4 13.4 2.7 10,712 11,684 11,997 13,515 15,459 16,429 78,446 89,976 98,025

TCS 1,950 3,829 15.1 25.6 11.6 8.9 320,497 354,776 386,412 411,614 459,367 494,365 1,473,839 1,648,377 1,784,302

Tech Mahindra 865 891 14.6 11.9 18.0 14.1 42,547 50,667 57,803 63,824 73,966 81,236 350,034 388,542 422,310

Wipro 325 4,507 13.5 11.7 21.2 7.9 85,300 103,391 111,571 112,836 131,011 138,476 590,438 636,200 673,083

Technology 748,060 838,228 913,834 994,395 1,114,714 1,199,825 4,126,988 4,597,031 4,974,595

KIE universe 19.8 29.8 15.7

Notes:

(a) Hexaware Technologies is December year-ending.

Mkt cap.

EPS growth (%) Net Profit (Rs mn) EBITDA (Rs mn)


LTE availability: Jio continues to lead by a wide margin even as the BVI pack is catching up

Jio’s LTE availability score stood at 96.7% for the period under consideration (Jun-Aug 2018)

for the Oct 2018 update. This marks a modest improvement over Apr 2018’s 96.41% print.

Bharti, Vodafone, and Idea continue to stack close to each other with their individual scores in

the 72-74% range, up from 67-69% in the Apr 2018 update and 57-64% in the Oct 2017

update.

Idea and Vodafone were operating as separate companies/networks till end-Aug 2018 and the

next version of the report would provide a sense on the combined network’s availability metric;

we would expect the same to be around 80%, marginally ahead of Bharti but still meaningfully

below Jio. We note that this metric is a proxy but not an accurate indicator of LTE coverage.

There is a capacity element to the metric as well. For example, during periods of heavy load on

the LTE network, a customer of BVI can get pushed down to their 3G or 2G network. Despite

having LTE coverage, the availability metric would suffer in this case. The best way to look at

this metric is from a consumer experience lens. The sample set is large enough for this

statement to hold true – “three out of four data sessions on the BVI networks are happening

on LTE; this is an improvement from around two out of four around 18 months back”.

Network speeds – Bharti and Jio show improvement; sharp dip for Idea

On LTE speed metric, the Oct 2018 update pegs Bharti as the leader again with an average LTE

download speed of 9.96 Mbps, up from 9.31 Mbps in the previous iteration. Speed score has

improved for Jio as well (to 5.47 Mbps from 5.13 Mbps); we do note that Jio continues to rank

last on this metric, a reflection of the heavy volumes on its network, to some extent. Vodafone

and Idea both saw a dip in their LTE download speed scores. Decline for Idea (to 6.29 Mbps

from 7.27 Mbps) was sharper than that for Vodafone (to 6.59 Mbps from 6.98 Mbps). In the

past one year, Bharti has improved its speed score by around 9% while Vodafone and Idea have

seen the same dip by 12% and 15%, respectively. Bharti’s higher capex intensity seems to

reflect here; however, it hasn’t really resulted in any meaningful acceleration in pace of LTE sub

adds yet. Vodafone and Idea should see an improvement here once network integration is done

and the force of their combined spectrum holding shows up. Next update will be interesting.

TRAI’s mySpeed App findings remain at odds with the other three sources

We have been tracking the network speed metrics from four different sources – (a) OpenSignal

reports, (b) Ookla reports, (c) TRAI’s independent city-level drive tests and (d) TRAI’s mySpeed

app findings. The first three sources are consistent with each of them pegging Bharti the

highest on download speeds. OpenSignal and independent drive tests peg Jio last on speed

scores while Ookla pegs Jio third and Idea last. TRAI’s mySpeed app, however, differs from the

other three sources – (a) it pegs Jio’s speeds at nearly 3-3.5X what the other sources suggest,

and (b) it suggests that Jio’s speeds are materially higher (2X Bharti’s and nearly 3X

Vodafone/Idea) than the BVI pack; this is at complete contrast to the results of the other

sources. We are just presenting the findings as is; we have no way to say which is more

accurate.

Telecom India

Speed tracker 4.0: OpenSignal Oct 2018 update. OpenSignal’s biannual Oct 2018

mobile network experience report for India suggests – (a) sharp increase in LTE

availability metrics for Bharti, Vodafone and Idea; gap versus Jio on this metric remains

high, however, and (b) improvement in average LTE download speeds for Bharti

(remains the leader on this metric by a wide margin) as well as Jio; download speed

metric shows a sharp downtick for Vodafone and a marginal one for Idea.

CAUTIOUS

NOVEMBER 02, 2018

UPDATE

BSE-30: 34,442

Rohit Chordia

Aniket Sethi

Telecom India


Exhibit 1: Pan-India results, OpenSignal

Source: OpenSignal, Kotak Institutional Equities

Oct-18

10.5 bn measurements, 1.77 mn

devices, Jun 2018-Aug 2018 Availability (%)

Average download speed

(Mbps) Latency (ms)

Bharti 73.99 9.96 68.33

Vodafone 72.59 6.59 70.19

Idea 73.17 6.29 76.88

Reliance Jio 96.70 5.47 72.20

Apr-18

8.4 bn measurements, 736,571

devices, Dec 2017-Feb 2018 Availability (%)


(Mbps) Latency (ms)

Bharti 66.81 9.31 70.31

Vodafone 68.83 6.98 66.44

Idea 68.15 7.27 72.58

Reliance Jio 96.41 5.13 79.31

Oct-17


devices, Jun 2017-Aug 2017 Availability (%)


(Mbps) Latency (ms)

Bharti 57.16 9.15 62.98

Vodafone 61.72 7.45 60.71

Idea 63.60 7.40 73.30

Reliance Jio 95.59 5.81 75.40

Apr-17


devices, Dec 2016-Feb 2017 Availability (%)


(Mbps) Latency (ms)

Bharti 54.72 11.53 63.86

Vodafone 59.05 8.59 54.27

Idea 59.49 8.34 61.34

Reliance Jio 91.57 3.92 86.61

Notes:

(1) Availability: higher the better, speed: higher the better, latency: lower the better.

(2) NA: respective network not available.

4G

4G

4G

4G

India Telecom


Exhibit 2: Circle-wise speed test results (Part 1) from OpenSignal's country reports (Apr 2018 and Oct 2018)


Availability (%)Average download

speed (Mbps)Latency (ms) 4G Availability (%)

Average download

speed (Mbps)Latency (ms)

Delhi

Bharti 71.84 11.61 51.00 75.19 7.96 67.91

Vodafone 81.09 6.68 50.57 81.85 6.03 73.45

Idea NA NA NA 52.65 3.73 86.26

Reliance Jio 96.54 4.59 69.34 96.67 5.34 56.68

Mumbai

Bharti 74.61 11.98 63.94 80.24 8.15 81.30

Vodafone 74.13 7.49 55.40 74.88 6.28 67.82

Idea 72.33 5.47 45.96 75.53 3.85 65.67

Reliance Jio 95.90 5.97 57.63 96.29 5.64 54.71

Karnataka

Bharti 72.84 9.73 53.92 79.20 6.79 67.65

Vodafone 79.20 5.12 57.08 79.46 3.70 75.27

Idea 77.09 4.36 62.20 81.06 4.22 68.84

Reliance Jio 95.15 6.06 71.06 95.86 6.56 60.10

Tamilnadu

Bharti 63.85 9.47 52.83 74.51 8.34 64.31

Vodafone 62.29 11.23 74.89 69.43 7.50 82.15

Idea 76.84 7.37 55.17 81.35 6.46 64.67

Reliance Jio 95.88 6.67 68.90 96.44 6.50 63.40

Kerala

Bharti 71.30 9.77 77.64 76.39 8.60 82.54

Vodafone 61.48 9.78 71.22 65.73 6.64 82.41

Idea 70.31 8.51 73.59 70.93 5.98 83.01

Reliance Jio 95.26 7.43 77.19 95.11 7.64 66.26

Kolkata

Bharti 74.77 12.05 61.47 80.99 7.91 86.37

Vodafone 74.87 10.85 72.11 75.47 6.79 64.22

Idea NA NA NA NA 5.00 107.90

Reliance Jio 97.05 6.66 61.67 97.23 6.05 63.16

Haryana

Bharti 66.31 12.42 61.28 73.57 8.00 76.49

Vodafone 72.29 5.39 66.83 78.36 3.77 84.51

Idea 66.36 7.88 63.13 73.72 5.96 76.24

Reliance Jio 96.67 4.51 77.70 97.49 4.95 69.84

Madhya Pradesh

Bharti 62.42 14.41 74.43 73.07 9.77 94.70

Vodafone NA NA NA NA NA NA

Idea 64.95 8.22 61.03 74.79 6.49 75.73

Reliance Jio 96.23 5.99 77.00 97.07 5.67 73.65

Andhra Pradesh

Bharti 66.91 7.99 64.40 72.41 9.86 73.31

Vodafone NA NA NA 65.62 3.44 119.33

Idea 76.13 3.86 106.70 79.74 2.98 128.77

Reliance Jio 96.29 5.90 75.95 96.39 6.11 71.56

Notes:

(1) Availability: higher the better, average speed: higher the better, latency: lower the better.

(2) NA: LTE network not launched yet; hence, not applicable.

Oct 2018 report (Jun 2018 to Aug 2018)

Blended

Apr 2018 report (Dec 2017 to Feb 2018)

4G

Telecom India


Exhibit 3: Circle-wise speed test results (Part 2) from OpenSignal's country reports (Apr 2018 and Oct 2018)


Availability (%)Average download

speed (Mbps)Latency (ms) 4G Availability (%)

Average download

speed (Mbps)Latency (ms)

Bihar

Bharti 57.13 7.73 125.25 66.75 6.93 134.56

Vodafone NA NA NA 27.01 3.88 118.19

Idea 67.63 6.97 69.95 72.59 4.12 83.90

Reliance Jio 96.75 3.81 91.47 97.36 4.18 80.79

Gujarat

Bharti 71.14 5.87 91.33 73.90 4.76 101.29

Vodafone 72.53 9.52 63.34 80.06 6.82 74.45

Idea 64.30 8.30 60.31 73.71 5.45 76.08

Reliance Jio 96.79 4.04 79.73 97.32 5.13 67.82

Maharashtra

Bharti 63.25 9.27 76.75 69.76 9.03 93.18

Vodafone 57.22 6.27 68.54 59.81 4.42 83.96

Idea 63.44 7.39 61.65 66.61 4.49 85.60

Reliance Jio 95.42 4.86 88.69 96.25 4.65 85.98

Orissa

Bharti 59.15 13.39 75.13 71.78 9.88 107.55

Vodafone 41.58 8.49 63.29 49.43 3.83 80.28

Idea 68.73 8.31 117.46 71.35 6.06 110.37

Reliance Jio 95.93 5.42 87.47 96.81 5.25 89.11

Punjab

Bharti 67.93 10.25 71.48 76.22 7.38 89.34

Vodafone 60.56 5.50 58.68 68.31 4.44 74.95

Idea 76.23 8.35 111.09 83.67 6.71 111.55

Reliance Jio 97.18 5.54 69.72 97.71 5.71 60.31

Rajasthan

Bharti 55.81 10.66 64.23 71.80 6.63 98.41

Vodafone 59.89 4.88 74.68 67.61 3.80 74.03

Idea 67.92 5.71 77.92 68.98 4.22 86.46

Reliance Jio 96.43 5.44 74.70 97.33 5.37 68.11

UP (East)

Bharti 57.56 4.63 89.70 64.37 4.37 106.61

Vodafone 58.18 4.76 82.02 66.26 3.09 106.09

Idea 58.88 6.16 89.58 62.36 3.46 113.45

Reliance Jio 96.54 3.61 89.73 97.26 4.66 83.23

UP (West)

Bharti 65.45 5.70 69.76 67.70 4.21 75.23

Vodafone 59.14 3.24 74.76 63.84 2.45 87.39

Idea 60.59 10.34 78.90 68.78 5.41 96.03

Reliance Jio 96.35 4.38 80.62 97.01 5.32 70.63

West Bengal

Bharti 56.71 7.38 106.64 68.58 6.44 123.91

Vodafone 58.15 8.51 83.91 66.15 5.48 88.83

Idea 68.58 9.61 103.16 69.91 6.29 111.76

Reliance Jio 95.99 5.38 91.01 96.88 4.82 83.44

Assam

Bharti 62.93 7.44 116.63

Vodafone 70.67 4.57 69.87

Idea 65.80 4.83 107.41

Reliance Jio 97.37 4.95 77.82

North East

Bharti 55.23 4.96 131.22

Vodafone 54.93 2.52 110.05

Idea 70.61 3.06 128.03

Reliance Jio 95.84 4.11 128.53

Notes:

(1) Availability: higher the better, average speed: higher the better, latency: lower the better.

(2) NA: LTE network not launched yet; hence, not applicable.

Apr 2018 report (Dec 2017 to Feb 2018) Oct 2018 report (Jun 2018 to Aug 2018)

4G Blended

India Telecom


Exhibit 4: TRAI's mySpeed app results

Source: TRAI, Kotak Institutional Equities

Exhibit 5: Pan-India speed test results, Ookla

Source: Ookla, Kotak Institutional Equities

Download speeds (Mbps) Bharti Idea Jio Vodafone

Andhra Pradesh 12.8 3.6 21.9

Assam 12.5 17.9 5.5 6.9

Bihar 6.9 6.8 34.3

Chennai 9.5 9.3 9.8 11.7

Delhi 11.4 10.6 7.5

Gujarat 6.4 10.1 21.5 8.5

Haryana 13.2 6.9 18.3 6.2

Himachal Pradesh 10.7 4.6 21.5

Jammu & Kashmir 12.3 6.8 9.2

Karnataka 8.4 4.8 16.1 4.8

Kerala 11.1 6.0 11.5 7.4

Kolkata 9.6 18.4 9.1

Madhya Pradesh 12.0 7.4 25.0

Maharashtra 10.8 5.9 18.1 7.3

Mumbai 10.3 5.4 10.0 7.2

North East 7.8 4.0 5.2 5.0

Orissa 12.0 7.1 20.8 12.9

Punjab 11.5 7.0 22.3 5.2

Rajasthan 9.4 5.5 24.9 5.4

Tamil Nadu 9.4 7.1 11.2 9.1

UP East 5.8 3.9 18.2 4.0

UP West 5.1 6.1 20.2 3.7

West Bengal 6.7 9.2 18.8 7.3

Pan-India (past six months) 9.5 6.6 19.0 6.8

Pan-India - current month 9.6 6.5 20.6 6.4

Observations

(mn)

% of

total

Overall speed

score

Download

tri-mean

90th

percentile

50th

percentile

10th

percentile

Upload tri-

mean

90th

percentile

50th

percentile

10th

percentile

1QCY18

Airtel 7.05 32.8 10.15 10.92 24.98 8.57 1.56 3.20 7.19 2.57 0.46

Vodafone 2.97 13.8 8.31 8.75 21.40 6.32 0.95 4.38 9.92 3.46 0.66

Jio 9.63 44.8 6.95 7.38 18.33 5.23 0.73 3.04 6.74 2.51 0.39

Idea 1.86 8.6 6.66 6.75 15.52 5.28 0.93 5.78 12.76 4.73 0.89

2QCY17

Airtel 6.57 30.5 9.06 9.69 24.26 6.74 1.00 3.41 7.93 2.68 0.35

Vodafone 2.36 11.0 8.02 8.44 20.79 6.05 0.87 4.20 9.93 3.22 0.41

Jio 10.85 50.5 7.33 7.85 21.82 4.63 0.31 2.71 6.71 2.01 0.12

Idea 1.90 8.8 7.52 7.75 18.88 5.71 0.70 5.42 13.12 4.03 0.48

1QCY17

Airtel 4.47 20.8 8.99 9.60 22.86 7.29 0.96 3.51 8.16 2.77 0.34

Vodafone 2.05 9.5 7.17 7.57 17.29 6.11 0.78 3.57 8.59 2.73 0.23

Jio 15.18 70.6 6.37 6.77 19.25 3.79 0.25 2.78 7.01 2.01 0.09

Idea 1.26 5.9 7.64 8.04 19.51 6.04 0.57 4.03 9.92 2.99 0.20

Mpbs

Telecom India


Exhibit 6: City-wise independent drive test results

Source: TRAI, Kotak Institutional Equities

Download speeds (Mbps) Bharti Idea Jio Vodafone

Bhiwani 11.2 2.6 3.3 9.1

Raipur 8.9 11.5 3.8 —

Ranchi 10.7 2.6 9.5 2.2

Coimbatore 18.9 8.7 9.6 20.7

Aizwal 1.6 3.8 10.5 0.2

Kozhikode 6.6 7.9 9.4 8.9

Itanagar 10.9 9.9 0.8 0.7

Pondicherry 6.9 4.8 8.0 9.9

Kota 12.9 4.6 3.9 6.1

Guwahati 10.2 8.3 2.7 8.9

Vijayawada 11.1 3.2 6.1 0.0

Kanpur 3.2 9.1 11.0 8.5

Patna 10.4 6.4 4.2 —

Surat 3.3 6.5 4.5 —

Jodhpur 7.5 — 7.1 6.9

Dehradun 4.1 5.7 5.4 3.2

Warangal 8.9 9.4 6.8 —

Thrissur 13.2 5.0 15.0 8.6

Dhanbad 4.3 11.4 5.4 —

Allahabad 4.9 8.3 4.7 6.6

Jabalpur 13.5 4.0 10.4 5.1

Agartala 8.8 1.9 1.8 3.9

Asansol 6.9 6.8 5.9 10.5

Bangalore 5.0 4.8 5.1 5.0

Chennai 7.8 7.4 2.1 13.1

Goa 7.2 3.6 7.8 7.7

Pune 8.2 0.4 3.8 3.6

Vadodara 11.6 13.4 5.3 3.4

Indore 8.7 8.3 7.1 8.6

Bhubaneswar 9.1 6.7 4.7 6.9

Nagpur 9.6 6.1 2.2 6.8

Mysore 5.1 3.9 7.4 6.7

Aurangabad 6.0 4.2 1.1 8.6

Belgaum 6.9 3.0 3.7 3.7

Jamshedpur 6.1 11.2 6.3 6.2

Kolkata 6.7 — 7.8 6.5

Rajkot 6.1 8.4 7.2 6.0

Agra 2.0 5.0 7.1 2.1

Lucknow 4.5 6.3 8.9 5.7

Imphal 3.6 1.9 4.5 6.6

Trivandrum 11.9 4.4 7.1 8.4

Nashik 6.5 4.7 2.1 6.3

Ahmedabad 7.8 4.8 6.6 9.5

Delhi-NCR 8.9 — 7.3 4.9

Gwalior 9.9 1.0 5.5 —

Hisar 9.0 2.9 5.1 2.5

Kohima 0.0 0.2 3.4 1.7

Ludhiana 5.3 2.6 8.2 2.6

Meerut 2.2 4.0 7.9 1.7

Shillong 7.4 4.2 4.2 3.0

Cochin 15.0 4.9 5.1 3.6

Jaipur 4.4 4.3 7.3 4.9

Madurai 16.8 4.9 8.6 10.6

Mangalore 7.6 2.6 4.4 7.9

Trichy 13.0 6.3 5.6 9.5

Vizag 10.9 3.5 12.0 —

Ajmer 4.7 6.7 5.3 5.2

Bokaro 8.8 4.9 5.9 4.4

Dewas 10.1 2.6 4.9 3.3

Weighted average 7.9 5.7 6.5 6.7

Notes:

(1) Population from census 2011 is considered to determine weighted average.

For Private Circulation Only.

September 2018 GST revenues at `1,007 bn

Based on the monthly PIB release, total GST collection was at `1,007 bn in September

compared to `944 bn in August. The increase in the GST revenues can be attributed to the

festive season sale (October could see similar collections) and may not sustain beyond it. CGST

collection amounted to `165 bn (August: `153 bn), SGST was at `228 bn (`211 bn), IGST at

`534 bn (`501 bn), and compensation cess was at `80 bn (`80 bn) (see Exhibit 1). After

allocations from the IGST, CGST for September was at `490 bn (August: `306 bn) and SGST

was `529 bn (August: `350 bn). We note that these numbers are prior to refunds and the final

numbers will be released at month-end by the CGA (cash-accounting basis). The number of

returns filed in September was at 6.7 mn.

Required run-rate now at `1.24 tn

Accounting for refunds, on a cash accounting basis, September collections would likely be

around `939 bn implying a 7MFY19 run-rate of around `900 bn (see Exhibit 2). For 7MFY19,

CGST would be around `2.6 tn with unallocated IGST at `128 bn. SGST would likely be around

`3 tn. We note that the required run-rate for the rest of FY2019 is around `1.24 tn. We note

the government can achieve the GST budget estimates if the mom growth in CGST, SGST and

IGST can be sustained for the rest of FY2019. However, this will be an extremely optimistic

scenario. In a more realistic scenario of (1) 1-5% mom increase in rest of FY2019, (2) higher

IGST allocation to the center and (3) distribution of unallocated compensation cess equally

between center and states, the center’s shortfall would likely be around `500-600 bn.

Fiscal math: sticking to budgeted fiscal deficit remains a challenge

The government has reiterated its commitment to stick to the budgeted GFD/GDP of 3.3%.

However, the GST run-rate poses significant challenges to the fiscal math. The government is

looking to bridge the shortfall through higher-than-budgeted (1) direct taxes (somewhat

possible) and (2) divestments (difficult). Exhibits 3-4 compare the buoyancy in second half

collections across past few years. Given the 1HFY19 collections, the required 2HFY19 collections

are already at significantly higher clip than usual. We believe that without expenditure cuts, it

will be difficult to stick to the budgeted target. We maintain our GFD/GDP estimate at 3.5%

factoring in reduction in capital expenditure and some increase in revenue expenditure to factor

for higher food and fuel subsidy (see Exhibit 5). From a macro-prudential perspective, we have

been advocating that a slowdown in aggregate consumption is required to structurally improve

the external sector (Economic growth at any cost?, September 11). The government needs to

keep its expenditure in check through reduction in revenue expenditure in order to maintain the

GFD/GDP at 3.3%. However, gross borrowing through dated securities may not necessarily

increase (managed through further reduction in buybacks and higher utilization of NSSF) unless

divestments disappoint too.

Economy Public Finance

Fiscal deficit target remains under threat. We maintain our long-held view that the

fiscal deficit target is unlikely to be met in FY2019 without expenditure cuts. Trends in

GST revenues lend further strength to our belief, particularly as divestments as well as

direct taxes revenues do not seem to indicate significant upside compared to budget

estimates. While our FY2019 GFD/GDP estimate may not necessarily translate into

higher borrowing through dated securities, the specter will continue to loom large.

We retain our 10-year yield expectation in range of 7.75-8.25% for the rest of FY2019.

INDIA

NOVEMBER 02, 2018

UPDATE

BSE-30: 34,432

QUICK NUMBERS

September GST

collections at

`1,007 bn

7MFY19 run-rate at

`900 bn; required

rate at `1.24 tn for

rest of FY2019

Maintain our

FY2019 GFD/GDP

estimate at 3.5%

Suvodeep Rakshit

Upasna Bhardwaj

Avijit Puri

Economy India

KOTAK ECONOMIC RESEARCH 91

Exhibit 1: September GST revenue at Rs1,007 bn Breakup of monthly GST collection (Rs bn)

Source: PIB, Kotak Economics Research estimates

Exhibit 2: GST run-rate significantly below budgeted run-rate Summary of GST collections, March fiscal year-ends (Rs bn)

Notes:

(a) Monthly collections are inclusive of monthly IGST transfers.

(b) FYTD collections for Jun-18 are based on our estimates of refunds and IGST settlements.

Source: PIB, CGA, Kotak Economics Research estimates

Total

CGST SGST IGST IGST (imports) Total GST filings (mn)

Jul-17 151 230 481 213 73 936 5.9

Aug-17 148 216 486 238 80 930 5.9

Sep-17 145 219 505 247 82 951 5.7

Oct-17 157 230 448 223 79 913 5.0

Nov-17 136 193 428 218 81 837 5.3

Dec-17 145 205 453 231 86 889 5.6

Jan-18 145 204 447 229 85 880 5.8

Feb-18 157 214 445 232 77 893 6.0

Mar-18 187 257 505 212 86 1,035 6.0

Apr-18 159 217 491 244 73 940 6.2

May-18 160 220 495 245 81 956 6.5

Jun-18 159 223 500 249 84 965 6.6

Jul-18 153 212 499 265 76 940 6.7

Aug-18 153 211 501 253 80 944 6.7

Sep-18 165 228 534 269 80 1,007 6.7

Compensation

cess

Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18

Monthly collections (PIB press releases)

Center 325 288 316 579 370 306 490

Center GST (CGST) 187 159 160 159 153 153 165

Centre's share of IGST (C-IGST) 138 129 157 420 217 153 325

States 403 340 367 638 411 350 529

States' GST (SGST) 257 217 220 223 212 211 228

States' share of IGST (S-IGST) 146 123 147 415 200 140 301

Unallocated IGST 222 239 192 (335) 82 209 (92)

Compensation cess 86 73 81 84 76 80 80

Total 1,035 940 956 965 940 944 1,007

FYTD collections (post refund adjustments)

Centre 521 971 1,383 1,563 1,975 2,421 2,762

- CGST 321 602 911 1,490 1,851 2,149 2,634

- Unallocated IGST 200 369 471 72 124 272 128

State 399 732 1,092 1,730 2,132 2,473 2,993


Total 1,004 1,860 2,712 3,609 4,498 5,364 6,303

FY2019BE

Centre 6,539

- Unallocated IGST 500

State 5,078

Compensation cess 900

Total 12,517

Required run rate to meet FY2019BE

Centre 547 557 573 622 652 686 755


State 425 435 443 418 421 434 417


Total 1,047 1,066 1,089 1,113 1,145 1,192 1,243

FYTD19 run rate

Centre 521 486 461 391 395 404 395


State 399 366 364 432 426 412 428


Total 1,004 930 904 902 900 894 900

India Economy

92 KOTAK ECONOMIC RESEARCH

Exhibit 3: Corporate tax may not see much upside if demand

conditions are constrained in 2HFY19 Trend of 1H, 2H collections (LHS, Rs bn) and increase in 2H over 1H (RHS, Rs bn), March fiscal year-ends

Notes:

(a) 2HFY19 data is the difference between FY2019BE and 1HFY19

collections as reported in CGA.

Source: CGA, Kotak Economics Research estimate

Exhibit 4: Significant buoyancy already budgeted in the 2HFY19

collections for personal income tax Trend of 1H, 2H collections (LHS, Rs bn) and increase in 2H over 1H (RHS, Rs bn), March fiscal year-ends

Notes:

(a) STT is not included in income tax collections.

(b) 2HFY19 data is the difference between FY2019BE and 1HFY19

collections as reported in CGA.

Source: CGA, Kotak Economics Research estimate

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Economy India


Exhibit 4: Expenditure cuts are likely in order to maintain GFD/GDP at 3.3% Major central government budgetary items, March fiscal year-ends, 2014-19E (Rs bn)

Source: Union Budget, Kotak Economics Research estimates

2017/ 2018P/ 2019BE/ 2019E/

2014 2015 2016 2017 2018P 2019BE 2019E 2016 2017 2018P 2018P

Receipts

1. Revenue receipts (2d + 3) 10,147 11,014 11,950 13,742 14,352 17,257 16,850 15 4 20 17

2. Gross tax revenues (a + b ) 11,388 12,449 14,556 17,158 19,192 22,712 22,088 18 12 18 15

2.a. Direct taxes 6,418 6,989 7,458 8,539 10,077 11,552 11,552 14 18 15 15

2.a.1. Corporation tax 3,947 4,289 4,532 4,849 5,712 6,210 6,210 7 18 9 9

2.a.2. Income tax 2,353 2,583 2,876 3,646 4,082 5,290 5,290 27 12 30 30

2.a.3. Other taxes 118 117 50 43 283 52 52 (13) 553 (81) (81)

2.b. Indirect taxes 4,971 5,459 7,098 8,620 9,115 11,160 10,536 21 6 22 16

2.b.1. Goods and Services Tax — — — — 4,347 7,439 6,920 71 59

2.b.1.1. CGST — — — — 2,033 6,039 5,520 197 172

2.b.1.2. IGST — — — — 1,688 500 500 (70) (70)

2.b.1.3. Compensation cess — — — — 626 900 900 44 44

2.b.2. Customs duty 1,721 1,880 2,103 2,254 1,369 1,125 1,125 7 (39) (18) (18)

2.b.2.1. Basic duties 470 526 572 646 808 963 963 13 25 19 19

2.b.2.2. Others 1,251 1,354 1,532 1,608 562 162 162 5 (65) (71) (71)

2.b.3. Excise duty 1,702 1,900 2,881 3,821 2,586 2,596 2,491 33 (32) 0 (4)

2.b.4. Service tax 1,548 1,680 2,114 2,545 812 — — 20 (68)

2.c Transfers to states, UTs and national funds 3,230 3,413 5,119 6,145 6,765 7,906 7,689 20 10 17 14

2.d Net tax revenues 8,159 9,036 9,438 11,014 12,427 14,806 14,399 17 13 19 16

3. Non-tax revenues 1,989 1,978 2,513 2,728 1,925 2,451 2,451 9 (29) 27 27

3.a. RBI's transfer of surplus 330 527 659 659 407 400 400 (0) (38) (2) (2)

4. Non-debt capital receipts (a + b) 419 515 630 654 1,158 922 922 4 77 (20) (20)

4.a Recovery of loans 125 137 208 176 156 122 122 (15) (11) (22) (22)

4.b Other receipts (disinvestments) 294 377 421 477 1,002 800 800 13 110 (20) (20)

5. Total receipts (1 + 4) 10,566 11,529 12,580 14,396 15,510 18,179 17,772 14 8 17 15

Expenditure

6. Revenue expenditure 13,718 14,670 15,378 16,906 18,790 21,418 21,603 10 11 14 15

6.a. Interest payments 3,743 4,024 4,417 4,807 5,292 5,758 5,758 9 10 9 9

6.b. Subsidies 2,546 2,583 2,641 2,348 2,242 2,928 3,114 (11) (5) 31 39

6.b.1. Food 920 1,177 1,394 1,102 1,003 1,693 1,843 (21) (9) 69 84

6.b.2. Fertilizer 673 711 724 663 664 701 701 (8) 0 5 5

6.b.3. Oil 854 603 300 275 244 249 285 (8) (12) 2 17

6.b.4. Other subsidies 99 92 223 308 331 285 285 38 7 (14) (14)

6.c. Pay, allowances and pensions 2,589 3,091 3,301 3,996 4,414 4,791 4,791 21 10 9 9

6.c.1.a. Pay and allowances 1,840 2,155 2,334 2,682 2,940 3,107 3,107 15 10 6 6

6.c.1.b. Pensions 749 936 967 1,314 1,474 1,685 1,685 36 12 14 14

6.d. Agriculture and farmers' welfare 104 193 153 369 374 467 467 141 1 25 25

6.e. Education 711 689 672 720 800 850 850 7 11 6 6

6.f. Health and family welfare 259 306 322 377 514 528 528 17 36 3 3

6.g. Rural development 587 673 774 951 1,086 1,124 1,124 23 14 4 4

6.h. Others 3,180 3,111 3,097 3,338 4,069 4,971 4,970 8 22 22 22

7. Capital expenditure 1,877 1,967 2,530 2,846 2,637 3,004 2,798 12 (7) 14 6

7. a. Defence 802 831 836 915 955 996 896 9 4 4 (6)

7. b. Railways 271 301 350 452 434 531 504 29 (4) 22 16

7. c. Roads and Highways 149 166 275 412 508 594 594 50 23 17 17

7. d. Housing and urban affairs 67 74 106 165 153 164 156 56 (7) 7 2

7. e. Others 588 595 963 902 587 720 648 (6) (35) 23 10

8. Total expenditure (6 + 7) 15,594 16,637 17,908 19,752 21,427 24,422 24,401 10 8 14 14

Deficit

Primary deficit (PD) 1,286 1,084 911 549 624 485 871 (55) 14 (22) 39

Revenue deficit (RD) 3,570 3,656 3,427 3,164 4,438 4,160 4,752 3 40 (6) 7

Gross fiscal deficit (GFD) 5,029 5,108 5,328 5,356 5,917 6,243 6,629 0 10 6 12

Gross borrowings (dated securities) 5,637 5,920 5,840 5,830 5,451 5,350 5,350 3 (7) (2) (2)

Net market borrowing 4,536 4,531 4,406 4,082 4,055 3,916 3,915 (4) (1) (3) (3)

Net market borrowing (adjusted for buyback) 4,041 3,497 3,485 3,651 3,887 5 (0) 5 12

Short-term borrowing (T-bills) 77 92 507 55 775 170 320

Nominal GDP at market prices 112,335 124,680 137,640 152,537 167,731 187,223 187,188 10.8 10.0 11.6 11.6

PD/GDP (%) 1.1 0.9 0.7 0.4 0.4 0.3 0.5

RD/GDP (%) 3.2 2.9 2.5 2.1 2.6 2.2 2.5

GFD/GDP (%) 4.5 4.1 3.9 3.5 3.5 3.3 3.5

Change (%)


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September 2018: Results calendar

Source: NSE, Kotak Institutional Equities

Mon Tue Wed Thu Fri Sat Sun

29-Oct 30-Oct 31-Oct 1-Nov 2-Nov 3-Nov 4-Nov

BPCL 3M India Adani Pow er Arvind Aditya Birla Fashion Adani Transmission

Carborundum Universal ABB AIA Engineering Berger Paints Alkem Laboratories Ashoka Buildcon

Century Textile Bank of Baroda Ajanta Pharma DLF Axis Bank Cadila Healthcare

Colgate-Palmolive (India) Cholamandalam Canara Bank GlaxoSmithkline Consumer Bharat Forge Endurance Technologies

GRUH Finance Container Corporation Castrol India Godrej Properties City Union Bank GSPL

Just Dial Cummins India Cholamandalam HDFC Equitas Holdings J K Cement

LIC Housing Finance Dalmia Bharat Dabur India HPCL Gillette India ONGC

Supreme Industries Emami Escorts IIFL Holdings Godrej Consumer Products Reliance Infrastructure

Tata Pow er Gatew ay Distriparks Gujarat Pipavav Port Laurus Labs Hindalco Industries Torrent Pharmaceuticals

Union Bank Info Edge Jagran Prakashan Mahindra Logistics IOCL

IRB Infrastructure Kalpataru Pow er Transmission Marico JSW Energy

Manpasand Beverages L&T S H Kelkar and Company KEC International

Motilal Osw al Financial Services Lupin SRF Magma Fincorp

Pidilite Industries Narayana Hrudayalaya Tata Communications NTPC

Prestige Estates Projects Reliance Nippon Life Asset Management Oracle Financial Services

Tata Global Beverages Tata Motors P&G Hygiene

TeamLease Services United Spirits Petronet LNG

Tech Mahindra Vedanta PFC

The Ramco Cement Punjab National Bank

Torrent Pow er Reliance Pow er

Vakrangee SAIL

Sun TV Netw ork

Tata Chemicals

TCNS Clothing Co.

Whirlpool

5-Nov 6-Nov 7-Nov 8-Nov 9-Nov 10-Nov 11-Nov

Balkrishna Industries Dr Lal Pathlabs MRF Amara Raja Batteries National Aluminium Co.

Bosch Voltas HCG

Cipla India Cements

Exide Industries Indian Bank

GAIL (India) Sobha

Godrej Agrovet Titan Company

Indraprastha Gas

Natco Pharma

Orient Cement

PNB Housing Finance

Pow er Grid

State Bank of India

Timken

WABCO India

12-Nov 13-Nov 14-Nov 15-Nov 16-Nov 17-Nov 18-Nov

Aster DM Healthcare Ashok Leyland Apollo Hospitals

Aurobindo Pharma Dilip Buildcon Astral Poly Technik

Britannia Industries Engineers India CESC

Coal India GIC Coffee Day Enterprises

Eicher Motors Grasim Industries Future Retail

Godrej Industries Lemon Tree Hotels JK Lakshmi Cement

New India Assurance Mahanagar Gas Mahindra & Mahindra

NMDC Sun Pharmaceuticals Motherson Sumi Systems

Oil India Tata Steel NBCC

Shree Cement Varroc Engineering NHPC

Page Industries

Thermax

United Brew eries


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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 1-Nov-18 (Rs) (%) (Rs bn) (US$ bn) (mn) 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E (US$ mn)

Automobiles

Amara Raja Batteries REDUCE 746 780 4.5 128 1.7 171 32 37 43 17.1 15.9 14.5 23.1 19.9 17.4 12.3 10.5 9.1 3.8 3.3 2.8 17.4 17.5 17.4 0.6 0.8 0.9 6.1

Apollo Tyres BUY 218 340 55.7 125 1.7 541 19 23 28 38.9 26.1 18.1 11.7 9.3 7.9 7.4 6.2 5.1 1.2 1.1 1.0 10.4 12.0 12.7 1.4 1.4 1.4 11.9

Ashok Leyland BUY 113 160 41.2 333 4.5 2,926 6.2 8.9 9.4 15.3 43.2 6.1 18.3 12.8 12.0 9.2 6.7 6.2 4.0 3.3 2.8 23.4 28.4 25.4 1.6 2.4 2.5 36.6

Bajaj Auto REDUCE 2,599 2,500 (3.8) 752 10.2 289 149 169 178 6.0 13.8 5.0 17.5 15.4 14.6 11.9 10.0 9.2 3.5 3.1 2.8 21.3 21.6 20.4 2.3 2.6 2.7 20.9

Balkrishna Industries BUY 1,135 1,180 3.9 219 3.0 193 50 61 69 32.7 23.3 12.3 22.9 18.6 16.5 12.6 10.4 9.1 4.4 3.7 3.1 21.3 21.7 20.2 0.5 0.5 0.6 15.9

Bharat Forge SELL 581 600 3.3 270 3.7 466 23 27 29 44.4 14.6 7.1 24.8 21.7 20.2 14.2 12.4 11.4 5.0 4.2 3.7 21.5 21.0 19.4 0.9 0.9 1.0 12.5

CEAT ADD 1,158 1,280 10.5 47 0.6 40 79 97 101 22.8 22.1 4.3 14.6 11.9 11.4 8.6 7.7 7.0 1.6 1.4 1.3 11.7 12.8 12.0 0.7 0.8 0.8 10.8

Eicher Motors SELL 21,992 21,500 (2.2) 600 8.1 27 981 1,124 1,251 23.7 14.6 11.3 22.4 19.6 17.6 15.9 13.8 11.7 8.1 6.2 4.8 41.8 35.8 30.8 0.1 0.1 — 31.4

Escorts BUY 674 1,050 55.7 58 1.1 89 58 67 74 49.9 15.0 10.9 11.6 10.1 9.1 6.7 5.7 4.7 2.0 1.7 1.5 17.4 17.2 16.5 1.3 1.5 1.7 15.4

Exide Industries SELL 255 235 (7.7) 216 2.9 850 10 11 13 25.3 11.0 11.6 24.8 22.3 20.0 14.1 12.6 11.2 3.6 3.3 3.0 15.4 15.5 15.7 1.2 1.4 1.6 8.4

Hero Motocorp SELL 2,792 2,600 (6.9) 558 7.6 200 174 182 196 (6.1) 4.7 7.6 16.1 15.3 14.3 9.3 8.7 7.9 4.2 3.8 3.5 27.9 26.2 25.4 3.1 3.3 3.5 21.0

Mahindra CIE Automotive ADD 266 280 5.3 101 1.4 378 14 16 17 44.4 12.1 9.0 19.2 17.1 15.7 9.7 8.6 7.7 2.4 2.1 1.8 13.2 13.0 12.4 — — — 2.2

Mahindra & Mahindra BUY 756 1,125 48.8 940 12.8 1,138 45 54 56 18.8 19.0 4.2 16.8 14.1 13.5 10.8 9.0 8.4 2.5 2.2 2.0 15.8 16.6 15.4 1.2 1.4 1.5 37.0

Maruti Suzuki BUY 6,710 8,200 22.2 2,027 27.5 302 281 349 392 9.8 24.4 12.4 23.9 19.2 17.1 12.7 9.9 8.3 4.3 3.7 3.2 19.0 20.5 20.0 1.0 1.3 1.5 92.8

Motherson Sumi Systems SELL 159 185 16.2 503 6.8 3,158 8 9 11 40.2 21.5 13.8 20.8 17.2 15.1 8.5 7.1 6.1 4.3 3.7 3.1 22.5 23.2 22.3 1.2 1.4 1.5 17.6

MRF REDUCE 64,742 69,000 6.6 275 3.7 4 3,425 3,932 4,411 28.3 14.8 12.2 18.9 16.5 14.7 8.8 7.6 6.5 2.5 2.1 1.9 13.9 13.9 13.7 0.1 0.1 0.1 7.9

Schaeffler India BUY 5,095 5,700 11.9 85 1.2 17 148 192 237 3.6 29.7 23.0 34.3 26.5 21.5 9.8 7.3 5.7 5.8 4.8 4.0 20.9 19.9 20.3 0.2 0.2 0.2 0.7

SKF ADD 1,789 1,900 6.2 92 1.2 51 68 82 97 17.8 20.5 18.1 26.3 21.9 18.5 16.6 13.7 11.3 4.3 3.8 3.2 16.5 17.2 17.5 0.7 0.8 0.9 0.4

Tata Motors BUY 179 300 67.2 609 7.7 3,396 1 21 31 (94.8) 1,935.5 46.5 173.2 8.5 5.8 4.0 3.0 2.5 0.6 0.6 0.5 0.4 7.2 9.7 — — — 55.5

Timken SELL 521 570 9.5 39 0.5 68 19 24 28 41.7 25.1 18.0 27.1 21.7 18.4 16.5 13.3 11.1 4.2 3.5 2.9 16.9 17.5 17.2 0.2 0.2 0.2 0.2

TVS Motor SELL 546 350 (35.9) 259 3.5 475 15 17 20 6.2 15.2 14.7 36.8 32.0 27.9 18.5 16.2 14.4 7.8 6.7 5.8 22.7 22.6 22.4 0.8 0.9 1.1 16.2

Varroc Engineering BUY 750 1,250 66.6 101 1.4 135 39 47 51 52.3 19.9 10.2 19.3 16.1 14.6 15.3 12.9 11.1 3.0 2.5 2.0 15.3 15.3 13.5 — — — —

WABCO India SELL 6,414 6,350 (1.0) 122 1.7 19 169 222 225 17.8 31.3 1.0 37.9 28.8 28.6 24.5 18.5 18.2 6.7 5.5 4.7 19.2 20.9 17.7 0.2 0.2 0.2 0.4

Automobiles Neutral 8,457 115 (2.4) 36.7 14.8 22.0 16.1 14.0 9.0 7.2 6.2 2.8 2.5 2.2 12.6 15.3 15.4 1.1 1.3 1.4 422.0

Banks

Axis Bank REDUCE 602 600 (0.4) 1,547 21.0 2,567 19 41 46 1,635.7 118.8 12.3 32.3 14.8 13.1 — — — 2.6 2.2 1.9 7.3 14.3 14.3 0.5 1.0 1.1 111.3

Bank of Baroda ADD 108 130 — 285 3.9 2,652 17 26 29 289.0 48.7 11.2 6.2 4.2 3.8 — — — 0.9 0.7 0.6 10.8 14.2 13.7 — — — 43.4

Canara Bank ADD 252 280 11.2 185 2.5 733 1 54 68 102.3 3,946.4 26.1 188.1 4.6 3.7 — — — 1.3 0.9 0.6 0.3 10.6 11.9 — — — 26.5

City Union Bank ADD 168 185 9.9 123 1.7 665 9 11 12 5.8 13.3 16.7 17.9 15.8 13.5 — — — 2.8 2.4 2.1 15.5 15.6 16.0 1.0 1.1 1.3 2.0

DCB Bank BUY 159 185 16.4 49 0.7 308 10 12 17 25.3 23.4 38.6 15.9 12.9 9.3 — — — 1.8 1.6 1.4 11.4 12.6 15.4 0.6 0.7 1.0 4.0

Equitas Holdings BUY 113 160 41.0 39 0.5 340 4.4 8.4 11.4 378.4 89.9 35.6 25.6 13.5 9.9 — — — 1.6 1.5 1.3 6.4 11.2 13.4 — — — 7.8

Federal Bank BUY 83 105 27.0 164 2.2 1,972 6.0 8.0 9.7 35.3 32.4 21.8 13.7 10.3 8.5 — — — 1.4 1.3 1.1 9.4 11.5 12.8 1.6 2.2 2.6 16.7

HDFC Bank ADD 1,911 2,100 9.9 5,194 70.6 2,595 78 96 113 15.9 23.6 17.5 24.5 19.8 16.9 — — — 3.6 3.2 2.8 16.7 16.7 17.2 0.8 1.0 1.1 90.5

ICICI Bank BUY 353 410 16.0 2,274 30.9 7,072 8 27 32 (14.1) 223.4 19.7 42.9 13.3 11.1 — — — 2.4 2.0 1.7 4.9 14.8 15.8 0.5 1.5 1.8 109.3

IDFC Bank NR 35 — — 120 1.6 3,404 0.9 2.9 4.2 (63.5) 215.5 45.1 38.2 12.1 8.4 — — — 0.8 0.7 0.7 2.0 6.2 8.5 0.5 1.7 2.4 6.7

IndusInd Bank BUY 1,464 1,750 19.5 881 12.0 600 47 84 100 (22.3) 79.9 18.6 31.4 17.4 14.7 — — — 3.2 2.8 2.4 12.0 16.9 17.3 — 0.7 0.8 54.4

J&K Bank BUY 42 90 116.9 23 0.3 557 5 8 16 48.7 41.1 109.3 7.7 5.4 2.6 — — — 0.5 0.5 0.4 4.8 6.5 12.6 2.6 3.7 7.7 0.3

Karur Vysya Bank ADD 78 110 40.7 63 0.9 727 3 13 14 (32.6) 317.8 7.0 24.4 5.8 5.5 — — — 1.2 1.0 0.9 3.7 14.4 13.9 1.0 4.3 4.8 2.1

Punjab National Bank ADD 74 80 7.7 228 3.1 2,761 (27) 12 18 40.4 145.3 46.9 (2.8) 6.2 4.2 — — — 3.7 1.2 0.7 (23.4) 10.7 13.8 — — — 39.3

RBL Bank ADD 523 500 (4.4) 223 3.0 420 21 29 34 40.5 34.3 20.0 24.6 18.3 15.3 — — — 3.1 2.7 2.4 12.7 15.1 16.0 0.6 0.8 1.0 15.6

State Bank of India BUY 286 370 29.5 2,550 34.6 8,925 8 37 53 204.8 380.5 42.7 37.2 7.7 5.4 — — — 1.9 1.4 1.0 3.1 13.6 16.7 — 0.1 0.2 115.3

Ujjivan Financial Services BUY 221 360 62.9 27 0.4 121 19 28 32 3,033.9 47.3 15.1 11.8 8.0 7.0 — — — 1.4 1.2 1.0 12.1 15.8 15.8 0.8 1.2 1.6 7.2

Union Bank ADD 77 90 16.4 90 1.2 1,169 8 31 43 117.6 294.3 39.2 9.8 2.5 1.8 — — — 1.1 0.6 0.4 4.0 14.4 17.5 1.5 6.1 8.4 11.7

YES Bank SELL 204 190 (6.9) 472 6.4 2,303 18 19 24 (2.8) 6.5 24.6 11.4 10.7 8.6 — — — 1.7 1.5 1.3 15.0 14.2 15.7 1.5 1.5 1.9 161.1

Banks Attractive 14,536 198 771.1 158.2 26.6 30.7 11.9 9.4 1.8 1.6 1.4 5.8 13.2 14.6 0.5 0.9 1.1 825.4

Dividend yield (%)P/B (X) RoE (%)


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NBFCs

Bajaj Finance REDUCE 2,418 1,950 (19.4) 1,397 19.0 575 66 88 114 51.9 33.2 29.5 36.7 27.6 21.3 — — — 7.2 5.9 4.7 21.6 23.6 24.6 0.3 0.4 0.5 99.6

Bajaj Finserv ADD 5,387 5,650 4.9 857 11.6 159 240 303 375 36.6 26.3 23.9 22.5 17.8 14.4 — — — 3.5 3.0 2.5 17.4 18.0 18.7 0.3 0.3 0.3 22.9

Bharat Financial Inclusion NA 911 — — 128 1.7 139 53 63 77 63.5 18.5 22.2 17.1 14.4 11.8 — — — 3.3 2.7 2.1 21.8 20.5 20.1 — — — 14.7

Cholamandalam ADD 1,334 1,425 6.8 209 2.8 156 75 91 114 28.4 21.2 24.8 17.7 14.6 11.7 — — — 3.6 3.0 2.5 21.0 21.2 22.0 0.7 0.8 1.0 7.0

HDFC ADD 1,762 1,980 12.4 3,026 41.1 1,676 53 62 73 (29.9) 16.6 18.9 33.3 28.6 24.0 — — — 4.0 3.7 3.4 13.1 13.6 14.8 1.1 1.3 1.6 90.1

HDFC Standard Life Insurance ADD 373 380 2.0 750 10.2 2,007 7 8 10 18.3 23.8 21.0 57.0 46.0 38.0 — — — 14.2 12.6 11.1 26.2 29.0 31.1 0.4 0.5 0.7 7.3

ICICI Lombard SELL 851 650 (23.6) 386 5.2 454 26 31 37 34.9 22.7 16.4 33.2 27.1 23.3 — — — 7.2 6.0 5.1 23.4 24.1 23.6 0.7 0.8 1.0 6.1

ICICI Prudential Life BUY 346 475 37.1 497 6.8 1,436 9 10 12 (21.0) 15.6 19.8 38.9 33.6 28.1 — — — 6.5 5.7 4.9 18.1 18.1 18.7 0.4 0.5 0.6 6.6

IIFL Holdings SELL 490 625 27.6 156 2.1 319 38 45 52 31.5 18.6 16.0 13.0 11.0 9.5 — — — 2.3 2.0 1.7 20.5 20.0 20.0 1.6 1.9 2.3 2.5

L&T Finance Holdings ADD 136 145 6.7 271 3.7 1,996 12 14 15 63.3 13.4 13.7 11.3 10.0 8.8 — — — 2.0 1.7 1.5 18.1 18.4 18.0 1.5 1.8 1.8 23.3

LIC Housing Finance BUY 421 560 33.0 212 2.9 505 42 52 66 (3.5) 22.7 26.8 10.0 8.1 6.4 — — — 1.4 1.2 1.1 15.0 15.6 17.3 1.6 1.9 2.4 18.9

Magma Fincorp BUY 107 165 54.9 29 0.4 237 13 17 21 34.0 31.8 23.0 8.2 6.2 5.0 — — — 1.0 0.9 0.8 13.9 15.8 17.0 1.8 2.4 3.0 0.8

Mahindra & Mahindra Financial ADD 420 450 7.2 259 3.5 614 24 27 33 35.7 14.0 20.2 17.7 15.5 12.9 — — — 2.6 2.4 2.1 14.7 14.9 16.0 1.3 1.5 1.8 13.3

Max Financial Services ADD 401 650 62.2 108 1.5 268 6 6 6 36.9 1.8 1.8 63.9 62.7 61.6 — — — — — — 8.3 8.0 7.8 0.5 0.6 0.6 5.6

Muthoot Finance ADD 427 480 12.3 171 2.3 400 40 42 48 (7.8) 6.0 14.8 10.8 10.2 8.9 — — — 1.9 1.7 1.5 19.0 17.6 17.8 2.1 2.3 2.6 7.9

PNB Housing Finance REDUCE 827 1,200 45.1 138 1.9 167 62 75 92 25.3 20.9 22.4 13.3 11.0 9.0 — — — 1.9 1.7 1.4 15.2 15.9 17.0 0.4 0.4 0.4 5.0

SBI Life Insurance BUY 564 715 26.9 564 7.7 1,000 13 14 16 10.8 12.4 12.1 44.2 39.3 35.1 — — — 7.4 6.4 5.6 18.0 17.5 17.0 0.4 0.4 0.5 3.7

Shriram City Union Finance ADD 1,570 1,875 19.4 104 1.4 66 142 158 189 40.8 11.8 19.1 11.1 9.9 8.3 — — — 1.8 1.6 1.4 15.8 15.6 16.2 1.1 1.3 1.5 1.4

Shriram Transport BUY 1,213 1,450 19.5 275 3.7 227 107 124 143 54.6 16.1 15.6 11.4 9.8 8.5 — — — 1.9 1.6 1.4 16.7 16.8 16.9 1.2 1.4 1.8 24.8

NBFCs Neutral 9,538 130 8.6 19.5 20.6 25.6 21.4 17.7 3.9 3.4 3.0 15.3 16.0 16.8 0.8 0.9 1.1 825.4

Cement

ACC SELL 1,405 1,250 (11.0) 264 3.6 188 58 67 78 19.0 16.3 15.7 24.2 20.9 18.0 12.7 10.8 9.1 2.6 2.4 2.2 11.2 12.0 12.7 1.2 1.2 1.2 16.2

Ambuja Cements REDUCE 200 195 (2.5) 397 5.4 1,986 8 10 11 1.8 26.2 16.7 26.1 20.7 17.7 8.3 6.7 5.6 1.9 1.8 1.7 7.2 8.8 9.7 1.8 1.8 1.8 13.7

Dalmia Bharat ADD 2,132 2,335 9.5 190 2.6 192 15 36 48 0.8 140.4 32.6 142.6 59.3 44.7 10.9 8.8 7.9 3.9 3.6 3.4 2.7 6.3 7.9 0.1 0.1 0.1 3.7

Grasim Industries BUY 845 1,170 38.4 556 7.6 657 46 55 70 (2.5) 18.8 28.0 18.3 15.4 12.0 6.8 6.5 6.1 0.9 0.9 0.8 5.2 5.9 7.1 0.7 0.7 0.7 18.3

India Cements REDUCE 92 118 28.6 28 0.4 308 4 8 12 28.0 102.6 41.3 22.0 10.8 7.7 7.8 6.1 5.1 0.5 0.5 0.5 2.5 4.8 6.5 1.1 1.1 1.1 9.3

J K Cement ADD 673 890 32.3 47 0.6 70 45 79 78 3.7 75.4 (0.8) 15.0 8.5 8.6 9.3 7.7 6.3 2.1 1.7 1.5 15.0 22.3 18.5 1.2 1.2 1.2 0.4

JK Lakshmi Cement ADD 267 370 38.6 31 0.4 118 11 28 37 153.5 147.9 30.5 23.6 9.5 7.3 8.8 5.7 4.6 2.0 1.7 1.4 8.9 19.5 21.0 0.7 0.7 0.7 0.4

Orient Cement ADD 85 145 69.8 17 0.2 205 7 11 15 212.9 58.7 41.3 12.6 8.0 5.6 6.5 4.9 3.6 1.6 1.4 1.1 12.9 18.2 21.8 1.8 2.3 2.3 0.2

Shree Cement SELL 13,984 12,500 (10.6) 487 6.6 35 421 630 760 6.0 49.7 20.6 33.2 22.2 18.4 15.2 11.3 9.1 4.8 4.0 3.3 15.4 19.7 19.8 0.4 0.4 0.4 5.8

UltraTech Cement SELL 3,590 2,760 (23.1) 986 13.4 275 103 148 187 17.1 43.2 26.8 34.8 24.3 19.2 16.3 12.8 10.5 3.5 3.1 2.7 10.4 13.4 14.9 0.3 0.3 0.3 18.9

Cement Cautious 3,004 41 8.3 37.9 23.8 27.4 19.9 16.1 9.9 8.4 7.3 2.0 1.8 1.7 7.3 9.2 10.4 0.7 0.7 0.7 86.8



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Consumer products

Asian Paints REDUCE 1,218 1,140 (6.4) 1,168 15.9 959 24 30 35 16.7 24.3 17.8 50.8 40.9 34.7 32.1 25.5 21.4 12.3 10.9 9.6 25.7 28.2 29.3 0.9 1.1 1.4 24.7

Bajaj Corp. ADD 355 405 14.1 52 0.7 148 15 17 18 6.3 9.7 9.7 23.3 21.3 19.4 18.5 15.9 13.8 10.8 10.8 10.7 45.9 50.8 55.6 3.7 3.9 4.2 0.5

Britannia Industries ADD 5,583 5,875 5.2 671 9.1 120 104 127 152 24.5 22.2 19.2 53.6 43.9 36.8 35.1 28.6 23.9 15.6 12.6 10.3 32.5 31.8 30.9 0.6 0.8 1.0 16.8

Coffee Day Enterprises REDUCE 269 265 (1.4) 57 0.8 211 8 10 12 129.9 30.0 21.2 35.0 26.9 22.2 11.8 10.3 9.6 2.2 2.1 1.9 6.6 8.0 8.9 — — — 1.1

Colgate-Palmolive (India) ADD 1,112 1,185 6.6 302 4.1 272 27 32 37 15.6 15.4 16.1 40.4 35.1 30.2 23.4 20.3 17.6 17.7 15.3 13.4 46.3 46.9 47.4 1.4 1.7 2.1 7.8

Dabur India REDUCE 371 345 (6.9) 655 8.9 1,762 9 10 11 11.8 15.2 14.8 42.6 37.0 32.2 35.7 30.4 26.3 11.6 10.1 8.9 27.0 29.2 29.5 1.0 1.2 1.5 23.3

GlaxoSmithKline Consumer REDUCE 7,050 6,325 (10.3) 296 4.0 42 199 223 246 19.5 12.1 10.1 35.4 31.6 28.7 24.7 21.3 18.7 7.7 6.9 6.3 22.8 23.0 23.1 1.3 1.5 1.8 2.1

Godrej Consumer Products REDUCE 705 645 (8.6) 721 9.8 1,022 17 19 22 18.8 13.7 12.7 41.7 36.7 32.6 29.6 25.6 22.3 9.8 8.5 7.4 25.3 24.7 24.2 0.8 0.9 1.0 13.8

Hindustan Unilever REDUCE 1,608 1,430 (11.1) 3,480 47.3 2,160 29 34 38 18.9 16.0 13.0 55.1 47.5 42.0 38.9 33.4 29.6 43.1 36.0 30.5 83.2 82.6 78.6 1.3 1.5 1.7 35.9

ITC ADD 277 330 19.0 3,396 46.1 12,275 10 11 12 9.9 12.8 12.5 28.3 25.1 22.3 18.2 15.9 14.0 6.2 5.8 5.5 20.5 22.4 24.5 2.1 2.4 2.8 54.0

Jubilant Foodworks BUY 1,104 1,370 24.0 146 2.0 132 24 33 43 67.2 36.9 30.2 45.4 33.2 25.5 22.5 17.0 13.0 10.9 8.4 6.5 28.0 28.7 28.7 0.2 0.3 0.4 28.3

Jyothy Laboratories ADD 193 210 8.8 70 1.0 364 6 6 7 27.4 13.8 16.2 34.4 30.2 26.0 23.7 20.4 17.2 5.3 4.6 4.1 16.5 16.4 16.7 0.5 0.8 1.0 0.8

Marico ADD 320 350 9.3 413 5.6 1,291 7 9 10 11.8 24.5 17.0 45.7 36.7 31.4 32.0 25.7 21.6 15.2 13.8 12.4 34.4 39.5 41.7 1.5 1.7 2.0 10.4

Nestle India ADD 9,970 10,600 6.3 961 13.1 96 171 200 230 34.5 16.8 15.1 58.3 49.9 43.4 33.4 28.9 25.0 25.8 23.6 21.5 46.2 49.4 51.9 1.2 1.4 1.6 12.3

Page Industries SELL 28,643 22,300 (22.1) 319 4.3 11 418 508 607 34.3 21.6 19.5 68.6 56.4 47.2 44.2 36.5 30.4 29.0 23.0 18.4 47.8 45.5 43.4 0.6 0.8 0.9 19.8

Pidilite Industries REDUCE 977 915 (6.4) 496 6.7 508 20 24 28 6.2 22.1 18.3 50.0 40.9 34.6 32.2 27.2 22.9 12.0 10.2 8.7 25.7 27.0 27.1 0.7 0.8 1.0 8.2

S H Kelkar and Company BUY 179 240 34.4 26 0.4 145 7 9 11 (3.4) 32.4 20.4 25.0 18.9 15.7 18.2 13.2 11.6 2.8 2.5 2.2 11.6 14.0 15.1 1.0 1.1 1.5 0.5

Tata Global Beverages ADD 218 230 5.6 137 1.9 631 8 9 10 4.7 16.6 13.1 28.3 24.3 21.5 16.3 14.3 12.6 1.9 1.8 1.7 6.8 7.6 8.3 1.4 1.6 1.8 10.0

Titan Company REDUCE 854 760 (11.1) 759 10.3 888 16 20 23 25.6 21.8 19.3 53.2 43.7 36.6 35.3 28.2 23.1 12.6 10.6 8.9 25.6 26.3 26.4 0.5 0.6 0.8 40.0

United Breweries REDUCE 1,236 1,040 (15.9) 327 4.4 264 21 26 31 39.2 23.6 20.6 59.5 48.1 39.9 29.4 25.2 21.6 10.3 8.7 7.4 18.7 19.6 20.0 0.3 0.3 0.5 16.2

United Spirits REDUCE 620 540 (12.9) 450 6.1 727 11 14 17 42.8 28.1 25.5 57.1 44.5 35.5 34.0 27.5 22.9 13.1 9.0 6.3 26.5 23.9 20.8 — — 0.4 11.4

Varun Beverages ADD 779 700 (10.1) 142 1.9 183 15 20 25 29.2 31.5 25.4 52.4 39.8 31.8 17.4 14.9 13.0 7.2 6.2 5.3 14.5 16.7 18.0 — — 0.3 0.9

Consumer products Cautious 15,046 204 16.8 17.0 15.0 42.6 36.5 31.7 27.7 23.6 20.4 11.1 9.9 8.8 26.0 27.1 27.7 1.2 1.4 1.7 339.0

Energy

BPCL REDUCE 283 275 (3.0) 615 8.4 1,967 30 33 36 (25.0) 10.0 8.1 9.4 8.5 7.9 7.0 6.3 5.7 1.5 1.4 1.3 16.6 16.8 16.6 4.3 4.7 5.1 32.7

Castrol India SELL 145 140 (3.3) 143 1.9 989 7 7 8 0.6 7.3 8.9 21.0 19.5 17.9 13.0 12.0 11.0 13.7 13.8 13.8 66.1 70.3 77.1 3.8 4.3 4.7 3.4

GAIL (India) BUY 368 455 23.7 830 11.3 2,255 29 31 33 41.7 6.4 8.0 12.7 12.0 11.1 8.0 7.5 6.8 1.9 1.7 1.6 15.4 14.9 14.7 2.6 2.7 2.9 30.2

GSPL SELL 180 185 2.8 101 1.4 564 16 12 13 31.3 (25.1) 12.1 11.6 15.4 13.8 4.6 5.6 4.9 1.8 1.6 1.5 16.2 10.9 11.1 1.3 1.0 1.1 1.5

HPCL SELL 230 185 (19.4) 350 4.8 1,524 28 27 29 (32.8) (3.7) 7.6 8.2 8.5 7.9 7.5 8.0 7.9 1.3 1.2 1.1 17.1 15.1 15.1 5.0 4.8 5.2 30.0

Indraprastha Gas SELL 279 240 (14.1) 195 2.7 700 12 13 15 16.4 12.3 10.7 23.3 20.7 18.7 14.7 13.0 11.5 4.8 4.2 3.7 22.1 21.5 20.9 0.9 1.1 1.5 9.1

IOCL REDUCE 142 120 (15.4) 1,378 18.7 9,479 16 15 17 (24.1) (1.8) 12.3 9.1 9.3 8.3 5.3 5.1 4.6 1.1 1.1 1.0 12.9 11.9 12.6 4.4 4.3 4.8 20.3

Mahanagar Gas ADD 846 965 14.1 84 1.1 99 56 60 64 16.1 7.6 5.4 15.1 14.0 13.3 8.7 7.9 7.3 3.5 3.1 2.8 24.8 23.5 22.0 2.6 2.9 3.0 12.6

ONGC ADD 154 200 29.7 1,980 26.9 12,833 22 21 21 24.6 (1.3) (4.0) 7.1 7.2 7.5 3.6 3.5 3.4 0.8 0.8 0.7 11.9 11.0 10.0 4.4 4.5 4.5 18.9

Oil India SELL 198 200 0.8 225 3.1 1,135 24 25 26 (2.0) 4.1 4.5 8.2 7.9 7.5 5.4 5.2 5.0 0.8 0.7 0.7 9.6 9.5 9.5 4.9 5.1 5.3 2.7

Petronet LNG BUY 225 280 24.3 338 4.6 1,500 16 18 20 16.7 13.1 9.4 13.9 12.3 11.2 9.3 7.8 6.9 3.0 2.7 2.4 23.3 23.2 22.7 2.5 3.3 4.0 9.8

Reliance Industries SELL 1,057 1,070 1.2 6,255 85.0 5,922 67 78 88 13.9 16.5 12.7 15.7 13.5 12.0 11.0 9.2 7.7 1.9 1.7 1.5 11.8 12.3 12.3 0.6 0.6 0.7 171.8

Energy Attractive 12,493 170 4.1 6.7 7.5 11.6 10.9 10.1 7.2 6.6 6.0 1.5 1.3 1.2 12.6 12.3 12.2 2.2 2.3 2.5 342.9



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Price (Rs) price Upside shares 3mo


Industrials

ABB SELL 1,319 1,040 (21.1) 279 3.8 212 28 31 38 38.9 12.5 21.6 47.9 42.6 35.0 28.3 25.7 21.6 7.0 6.4 5.6 15.4 15.7 17.0 0.7 0.7 0.7 2.6

BHEL REDUCE 70 76 8.9 258 3.5 3,482 3.0 5.0 6.7 27.6 70.0 34.2 23.7 14.0 10.4 11.7 7.0 5.1 0.8 0.8 0.8 3.2 5.6 7.3 2.6 4.4 5.9 10.6

Carborundum Universal SELL 358 315 (11.9) 68 0.9 189 14 17 20 25.6 20.8 14.5 25.0 20.7 18.0 14.0 11.3 9.7 3.9 3.5 3.1 16.4 17.8 18.2 1.2 1.5 1.7 0.5

CG Power and Industrial BUY 36 62 74.1 22 0.3 627 1.4 3.6 5.7 71.6 157.3 57.0 25.3 9.8 6.3 6.7 4.9 3.8 0.8 0.8 0.8 3.3 8.4 12.5 — — — 3.2

Cummins India REDUCE 747 700 (6.3) 207 2.8 277 27 33 37 12.3 20.7 14.2 27.5 22.8 20.0 22.2 18.4 15.8 4.9 4.6 4.2 18.3 20.7 22.0 2.0 2.4 2.7 6.2

Kalpataru Power Transmission BUY 360 540 50.1 55 0.8 153 30.1 35.5 42.4 55.0 18.2 19.4 12.0 10.1 8.5 6.5 5.3 4.6 1.8 1.5 1.3 16.0 16.3 16.7 0.5 0.5 0.5 0.7

KEC International BUY 296 410 38.5 76 1.0 257 21 27 33 16.9 29.7 23.0 14.1 10.9 8.9 8.0 6.5 5.5 3.1 2.5 2.0 24.1 25.2 24.9 0.8 1.0 1.2 2.7

L&T BUY 1,327 1,530 15.3 1,860 25.3 1,401 68.9 69.3 78.8 33.3 0.6 13.6 19.2 19.1 16.8 17.0 16.5 14.6 3.3 3.0 2.7 18.2 16.5 16.9 1.7 1.7 2.0 49.5

Siemens SELL 944 1,000 6.0 336 4.6 356 29 35 — 21.4 21.7 — 32.4 26.7 - 18.1 14.6 — 3.9 3.6 — 12.3 14.0 — 1.3 1.5 — 4.1

Thermax REDUCE 1,020 1,065 4.4 122 1.7 113 27.8 38.7 43.8 34.7 39.2 13.2 36.7 26.4 23.3 23.3 17.3 14.8 4.0 3.6 3.3 11.1 14.3 14.7 0.9 1.1 1.2 0.9

Industrials Neutral 3,283 45 30.9 12.2 8.7 22.3 19.9 18.3 16.3 14.6 12.6 2.8 2.6 2.6 12.6 13.1 14.1 1.6 1.8 1.9 81.1

Infrastructure

Adani Ports and SEZ BUY 318 390 22.5 659 9.0 2,071 20 23 29 9.3 11.5 27.6 15.7 14.1 11.1 12.0 10.0 8.8 2.7 2.4 2.0 18.6 18.0 19.5 0.3 0.6 0.5 17.7

Ashoka Buildcon BUY 117 220 88.8 33 0.4 282 9 10 10 4.1 17.8 (1.3) 13.3 11.3 11.4 8.8 7.4 6.9 1.5 1.3 1.2 11.8 12.3 11.0 1.4 1.1 1.1 0.5

Container Corp. SELL 662 630 (4.8) 322 4.4 487 22 27 31 18.3 24.5 15.3 30.7 24.7 21.4 18.2 14.5 12.4 3.2 3.0 2.8 10.8 12.4 13.3 1.6 2.0 1.9 6.3

Dilip Buildcon BUY 436 1,240 184.3 60 0.8 137 56 71 85 19.8 27.5 20.1 7.8 6.1 5.1 4.7 3.8 3.2 1.8 1.4 1.1 26.7 26.2 24.4 — — — 3.5

Gateway Distriparks BUY 133 230 73.4 14 0.2 109 5 8 11 (29.4) 46.7 39.1 24.7 16.8 12.1 18.6 7.7 6.3 2.6 2.3 1.9 7.4 14.3 17.1 — 2.3 2.3 0.2

Gujarat Pipavav Port BUY 99 140 41.8 48 0.6 483 5.3 6.5 7.8 28.9 23.7 18.7 18.7 15.1 12.7 9.7 7.9 6.6 2.3 2.3 2.2 12.6 15.3 17.7 4.5 5.5 6.4 0.6

IRB Infrastructure BUY 144 260 80.1 51 0.7 351 30 32 20 31.6 6.8 (36.3) 4.9 4.6 7.1 6.2 6.8 8.3 0.8 0.7 0.6 17.0 15.7 9.1 2.1 2.6 2.8 5.3

Mahindra Logistics REDUCE 540 565 4.6 38 0.5 71 15 21 25 50.7 39.3 23.7 36.5 26.2 21.2 20.3 14.7 11.6 7.6 6.1 4.9 22.7 25.8 25.8 — — — 0.4

Sadbhav Engineering BUY 210 370 76.1 36 0.5 172 17 22 22 31.7 27.9 2.9 12.4 9.7 9.4 9.5 7.4 6.3 1.7 1.5 1.3 14.5 16.2 14.5 — — — 1.3

Infrastructure Attractive 1,261 17 15.0 15.9 15.3 15.8 13.6 11.8 10.5 8.9 8.1 2.5 2.1 1.9 15.6 15.7 15.8 0.9 1.2 1.2 35.9

Internet

Info Edge ADD 1,491 1,660 11.3 182 2.5 122 26 33 40 16.3 27.7 20.9 57.0 44.6 36.9 43.2 32.6 26.3 6.8 6.2 5.5 13.4 14.5 15.8 0.6 0.6 0.7 2.9

Just Dial ADD 502 610 21.4 34 0.5 67 28 30 32 33.2 5.1 8.2 17.8 16.9 15.6 10.3 9.0 7.8 3.5 3.0 2.6 19.3 19.1 17.6 0.6 0.6 0.6 17.6

Internet Cautious 216 3 20.2 19.5 16.8 43.1 36.1 30.9 31.3 25.4 21.3 6.0 5.4 4.7 14.0 14.9 15.3 0.6 0.6 0.7 20.5

Media

DB Corp. ADD 165 210 27.3 30 0.4 184 16 20 23 (6.4) 23.8 14.9 10.0 8.1 7.0 5.4 4.3 4— 1.6 1.5 — 15.5 19.1 20.4 2.4 6.1 7.6 0.4

DishTV ADD 44 51 16.2 81 1.1 1,925 1.0 2.4 3.2 329.2 139.8 31.6 NM 18.1 13.8 4.2 3.5 3.0 15.9 11.9 8.3 40.2 75.0 71.2 — — — 4.4

Jagran Prakashan REDUCE 107 168 56.6 32 0.4 311 11 12 14 10.0 12.2 14.6 10.1 9.0 7.9 4.3 3.8 3.3 1.7 1.6 1.5 15.9 18.3 20.2 4.7 8.4 8.4 0.4

PVR BUY 1,369 1,500 9.6 64 0.9 47 37 51 65 38.5 37.2 27.6 36.8 26.8 21.0 13.9 10.8 9.1 5.4 4.6 3.8 15.5 18.3 19.8 0.3 0.4 0.5 8.6

Sun TV Network REDUCE 672 660 (1.8) 265 3.6 394 35 37 41 20.6 6.6 10.3 19.4 18.2 16.5 13.0 12.1 10.5 5.3 4.9 4.5 28.4 27.9 28.6 3.0 3.3 3.7 17.5

Zee Entertainment Enterprises REDUCE 447 430 (3.8) 429 5.8 960 17 20 22 11.4 17.1 12.6 26.7 22.8 20.3 15.6 13.7 12.1 5.0 4.4 3.9 19.9 20.6 20.5 1.0 1.2 1.6 19.5

Media Attractive 901 12 21.9 20.5 14.8 22.8 18.9 16.5 10.4 9.1 8.0 4.7 4.2 3.8 20.7 22.5 23.1 1.6 2.1 2.4 50.8

Dividend yield (%)P/B (X) RoE (%)Mkt cap. EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X)


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Target O/S ADVT



Metals & Mining

Coal India ADD 261 320 22.6 1,621 22.0 6,207 25 25 27 120.4 2.2 6.6 10.5 10.3 9.6 7.9 6.7 6.2 6.4 7.1 7.5 62.7 65.9 76.0 7.7 9.6 9.6 16.2

Hindalco Industries BUY 231 330 42.7 519 7.1 2,229 28 33 35 28.1 17.8 6.4 8.3 7.0 6.6 5.5 4.6 4.1 0.8 0.8 0.7 10.8 11.4 10.9 0.5 0.5 0.5 35.6

Hindustan Zinc REDUCE 264 265 0.5 1,114 15.1 4,225 20 21 24 (6.5) 4.6 13.3 13.1 12.5 11.1 7.8 7.1 6.0 3.3 2.9 2.7 24.2 24.7 25.3 7.6 4.0 4.5 5.7

Jindal Steel and Power REDUCE 175 215 23.0 169 2.3 968 8 14 22 195.9 68.5 60.8 21.5 12.7 7.9 6.5 5.9 5.0 0.6 0.5 0.5 2.7 4.3 6.5 — — — 33.9

JSW Steel SELL 343 325 (5.2) 829 11.3 2,406 34 25 30 27.7 (25.9) 17.0 10.0 13.4 11.5 6.7 8.1 7.2 2.5 2.1 1.8 27.0 17.0 17.2 1.0 1.0 1.0 38.6

National Aluminium Co. BUY 70 87 25.2 134 1.8 1,933 10 8 9 238.9 (16.0) 3.6 7.1 8.4 8.1 3.3 3.9 3.8 1.2 1.2 1.2 17.6 14.4 14.6 8.6 8.6 8.6 12.1

NMDC REDUCE 114 120 5.0 361 4.9 3,164 12 10 11 4.2 (14.3) 5.9 9.4 10.9 10.3 5.8 6.7 6.2 1.4 1.3 1.3 15.3 12.4 12.5 4.8 4.8 4.8 6.7

Tata Steel ADD 557 660 18.6 635 8.6 1,205 76 85 94 12.8 12.1 10.9 7.3 7 5.9 5.8 6.1 5.7 1.0 0.9 0.8 14.3 14.3 14.4 1.8 1.8 1.8 69.5

Vedanta BUY 213 330 55.1 791 10.7 3,717 23 33 34 4.3 47.1 3.9 9.5 6.4 6.2 5.3 4.2 3.8 1.2 1.1 1.0 12.9 17.5 16.5 3.8 4.7 4.8 52.1

Metals & Mining Attractive 6,173 84 33.1 7.1 9.6 9.9 9.2 8.4 6.2 5.9 5.3 1.7 1.6 1.5 17.4 17.3 17.3 4.7 4.7 4.8 270.3

Pharmaceutical

Apollo Hospitals ADD 1,171 1,090 (6.9) 163 2.2 139 20 27 33 133.5 36.7 21.6 59.4 43.5 35.7 20.6 17.4 15.3 4.7 4.4 4.0 8.2 10.5 11.8 0.4 0.6 0.7 15.9

Aster DM Healthcare BUY 157 240 52.5 79 1.1 505 5 8 12 74.4 62.0 51.4 32.7 20.2 13.3 11.9 9.3 7.3 2.6 2.3 2.0 8.3 12.2 16.3 — — — 0.2

Aurobindo Pharma ADD 793 760 (4.1) 464 6.3 584 42 57 64 1.0 35.8 12.3 18.8 13.8 12.3 12.5 9.3 8.2 3.3 2.8 2.3 19.3 19.9 18.6 0.7 0.8 0.9 44.9

Biocon SELL 645 345 (46.5) 387 5.3 601 10 15 19 53.4 61.0 21.1 67.8 42.1 34.8 32.8 21.9 18.7 6.2 5.6 5.0 9.6 13.9 14.3 0.5 0.8 1.0 25.2

Cipla BUY 615 680 10.5 496 6.7 805 24 31 40 34.2 31.5 28.0 26.2 19.9 15.6 14.9 11.6 9.2 3.1 2.8 2.4 12.2 14.7 15.6 0.8 1.1 1.4 23.6

Dr Lal Pathlabs REDUCE 870 900 3.5 72 1.0 83 24 29 34 18.9 17.5 18.8 35.8 30.4 25.6 21.7 18.2 14.8 7.7 6.4 5.4 23.4 23.0 22.9 0.6 0.7 0.8 1.1

Dr Reddy's Laboratories REDUCE 2,462 2,300 (6.6) 409 5.6 166 100 123 154 69.0 22.8 25.4 24.7 20.1 16.0 13.8 9.7 7.6 2.9 2.6 2.3 12.4 12.9 14.2 0.6 0.8 1.0 33.9

HCG BUY 228 270 18.3 20 0.3 85 2 4 7 28.8 87.5 73.4 113.3 60.4 34.9 17.4 14.4 11.3 3.6 3.4 3.1 3.3 5.9 9.4 — — — 0.1

Laurus Labs ADD 356 500 40.4 38 0.5 106 16 29 34 2.4 79.9 17.5 21.9 12.2 10.4 10.6 7.3 6.4 2.3 1.9 1.6 10.9 17.1 15.6 — — — 0.8

Lupin REDUCE 852 830 (2.6) 385 5.2 450 27 37 48 (30.4) 38.5 30.0 32.1 23.2 17.8 16.0 11.0 8.7 2.6 2.4 2.1 8.5 10.8 12.0 0.5 0.6 0.8 44.2

Narayana Hrudayalaya ADD 240 265 10.4 49 0.7 204 3 6 9 23.0 103.2 40.7 77.6 38.2 27.1 22.1 15.5 12.4 4.5 4.0 3.5 5.9 11.0 13.7 — — — 0.2

Sun Pharmaceuticals SELL 572 540 (5.6) 1,372 18.6 2,406 16 24 29 7.5 45.5 21.6 35.1 24.1 19.8 18.7 13.4 11.1 3.3 3.0 2.6 9.8 12.9 13.2 0.6 0.8 1.0 64.0

Torrent Pharmaceuticals NR 1,712 — — 290 3.9 169 47 61 80 18.0 29.9 30.7 36.2 27.9 21.3 15.8 13.5 11.2 5.5 4.8 4.1 15.3 17.2 19.2 0.6 0.8 1.1 8.2

Pharmaceuticals Neutral 4,224 57 12.9 38.8 23.1 31.4 22.6 18.4 16.6 12.2 10.1 3.5 3.1 2.7 11.0 13.5 14.6 0.6 0.8 1.0 262.3

Real Estate

Brigade Enterprises BUY 176 290 65.2 24 0.3 136 9 15 17 (17.0) 59.2 15.8 19.1 12.0 10.4 12.8 10.0 8.0 1.0 0.9 0.9 5.4 8.1 8.8 1.4 1.4 1.4 0.3

DLF RS 172 — — 307 4.2 1,784 5.3 23.9 14.1 (74.4) 354.6 (41.0) 32.7 7.2 12.2 48.2 8.5 15.8 0.9 0.8 0.7 2.6 11.3 6.2 1.2 1.2 1.2 22.7

Godrej Properties SELL 600 400 (33.3) 138 1.9 216 12.9 15.1 18.2 (32.9) 16.3 20.8 46.3 39.8 33.0 755.7 215.0 116.2 4.8 4.3 3.2 10.9 11.4 10.1 — — — 1.6

Lemon Tree Hotels ADD 69 76 10.6 54 0.7 786 — 1 2 147.2 174.0 66.8 154.0 56.2 33.7 34.5 21.0 15.7 6.4 5.7 5.3 4.2 10.7 16.3 — — 1.4 —

Oberoi Realty BUY 429 460 7.1 156 2.1 340 46 34 57 264.9 (26.6) 66.3 9.2 12.6 7.6 10.2 15.4 5.3 1.7 1.5 1.3 21.4 12.5 18.0 0.5 0.5 0.5 2.9

Prestige Estates Projects ADD 191 270 41.7 71 1.0 375 6 7 8 (35.1) 16.6 — 29.6 25.4 23.6 10.3 10.7 10.8 1.5 1.4 — 5.0 5.6 5.8 0.8 0.8 0.8 0.6

Sobha REDUCE 452 510 12.7 43 0.6 95 20 23 24 (7.5) 14.8 3.5 22.4 19.5 18.9 12.9 12.1 11.4 1.5 1.4 1.7 6.8 7.4 9.1 1.5 1.5 1.5 1.4

Sunteck Realty REDUCE 339 360 6.3 50 0.7 140 19 19 39 22.4 1.6 106.6 18.1 17.8 8.6 15.9 15.5 6.5 1.7 1.5 1.3 9.5 8.9 16.2 0.3 0.3 0.3 2.0

Real Estate Neutral 843 11 (33.1) 86.2 (6.9) 23.0 12.4 13.3 21.8 12.0 12.2 1.4 1.3 1.2 6.0 10.1 8.7 0.7 0.7 0.8 31.5

Dividend yield (%)Mkt cap. EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%)


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Technology

HCL Technologies ADD 1,009 1,100 9.0 1,405 19.1 1,409 74 78 81 18.1 5.6 4.5 13.7 13.0 12.4 9.0 8.1 7.5 3.1 2.7 2.4 25.1 22.1 20.5 0.8 3.1 3.3 32.4

Hexaware Technologies REDUCE 321 360 12.3 95 1.3 302 20 23 25 20.3 13.6 12.3 16.1 14.2 12.6 12.0 9.3 8.1 4.2 3.6 3.1 27.8 27.1 26.3 2.5 2.5 3.1 19.4

Infosys ADD 667 780 17.0 2,912 39.6 4,350 37 41 45 13.5 12.3 10.4 18.2 16.2 14.7 12.5 10.9 9.7 4.1 3.7 3.3 23.5 24.1 23.9 3.3 2.9 3.1 85.6

L&T Infotech ADD 1,763 2,000 13.4 306 4.2 175 83 95 110 30.5 14.0 16.0 21.3 18.6 16.1 15.5 12.9 11.0 6.5 5.3 4.3 33.9 31.3 29.6 1.4 1.5 1.7 9.8

Mindtree ADD 827 1,080 30.6 136 1.8 165 45 55 63 30.2 23.1 14.0 18.4 14.9 13.1 11.6 9.1 7.8 4.2 3.6 3.1 24.8 26.0 25.2 1.6 2.0 2.3 22.7

Mphasis SELL 973 900 (7.5) 188 2.6 193 55 63 65 26.4 13.4 2.7 17.6 15.5 15.1 12.2 11.0 10.2 3.1 3.2 2.9 18.5 19.8 20.1 2.1 2.6 3.1 8.6

TCS REDUCE 1,935 1,950 0.8 7,259 98.6 3,752 85 95 103 25.6 11.6 8.9 22.8 20.5 18.8 16.2 14.5 13.4 7.2 6.7 6.4 33.8 33.7 34.8 1.8 3.4 3.7 75.8

Tech Mahindra ADD 721 865 20.0 636 8.6 891 48 56 64 11.9 18.0 14.1 15.1 12.8 11.2 8.9 7.2 6.1 2.9 2.5 2.1 20.8 21.0 20.3 1.3 1.4 1.6 40.4

Wipro REDUCE 330 325 (1.4) 1,491 20.3 4,507 19 23 25 11.7 21.2 7.9 17.4 14.4 13.3 11.2 9.3 8.5 2.7 2.4 2.2 16.4 17.7 17.6 0.5 3.0 3.3 21.7

Technology Cautious 14,429 196 16.8 12.1 9.0 19.3 17.2 15.8 13.2 11.6 10.5 4.6 4.2 3.8 24.0 24.5 24.3 1.8 3.1 3.4 316.3

Telecom

Bharti Airtel ADD 294 360 22.7 1,173 15.9 3,997 (8) (9) (4) (278.8) (8.6) 54.5 (34.7) (31.9) (70.2) 9.2 8.3 7.0 2.0 2.2 2.5 (5.2) (6.5) (3.3) 2.0 2.0 2.0 28.8

Bharti Infratel REDUCE 261 270 3.4 483 6.6 1,850 13 13 14 (4.1) (2.7) 11.6 19.8 20.4 18.2 7.4 7.5 6.9 3.0 3.0 2.9 14.7 14.6 16.0 4.1 4.0 4.5 10.2

IDEA REDUCE 39 45 15.8 339 4.6 4,359 (17) (17) (15) (75.6) (2.4) 11.4 (2.3) (2.3) (2.6) 39.8 33.4 20.5 0.8 1.2 2.2 (29.7) (41.1) (59.4) — — — 13.9

Tata Communications ADD 499 660 32.3 142 1.9 285 0 3 7 (77.5) 694.2 123.5 1,346 169.5 75.9 10.3 9.0 8.1 (61.9) (84.1) (1,630.0) 7.8 (42.1) (211.0) 1.3 1.5 1.5 3.0

Telecom Cautious 2,138 29 (2,723.8) (5.5) 37.2 (25.9) (24.5) (39.1) 10.9 9.9 8.4 2.2 2.6 3.0 (8.4) (10.4) (7.6) 2.1 2.0 2.2 55.9

Utilities

CESC BUY 690 1,180 71.1 91 1.2 133 115 128 141 31.7 11.6 10.1 6.0 5.4 4.9 4.9 4.3 3.7 0.6 0.5 0.5 10.0 10.4 10.5 1.9 1.9 1.9 11.0

JSW Energy REDUCE 65 70 7.2 107 1.5 1,640 5.1 6.5 6.6 65.9 26.8 2.9 12.8 10.1 9.8 5.6 4.6 4.2 0.9 0.8 0.8 7.2 8.5 8.0 — — — 1.2

NHPC ADD 25 30 22.4 251 3.4 10,260 3.1 3.2 3.4 26.9 1.8 8.0 7.9 7.8 7.2 7.3 7.1 7.6 0.8 0.8 0.7 10.4 10.2 10.6 7.1 7.2 6.0 1.2

NTPC BUY 157 190 21.1 1,293 17.6 8,245 15 16 18 18.8 4.4 16.5 10.5 10.1 8.7 8.6 8.0 6.7 1.2 1.1 1.0 11.6 11.3 12.2 2.9 3.0 3.5 13.5

Power Grid BUY 189 250 32.4 988 13.4 5,232 19 21 23 19.3 13.6 7.6 10.0 8.8 8.2 7.2 6.6 6.3 1.6 1.5 1.3 17.1 17.5 17.0 3.3 3.8 4.1 12.1

Tata Power BUY 76 90 17.9 207 2.8 2,705 6.3 6.9 9.7 17.0 10.6 39.7 12.2 11.0 7.9 9.8 9.9 9.3 1.2 1.1 1.0 10.5 10.5 13.0 — — — 6.7

Utilities Attractive 2,937 40 21.3 8.6 13.1 10.0 9.2 8.2 7.7 7.2 6.5 1.2 1.1 1.0 11.9 12.0 12.4 3.0 3.2 3.5 45.7

P/B (X) RoE (%) Dividend yield (%)Mkt cap. EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X)


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Others

Aditya Birla Fashion and Retail BUY 188 220 17.3 145 2.0 773 2 4 6 50.6 59.1 53.5 81.7 51.4 33.5 24.0 18.7 15.1 11.4 9.3 7.3 15.0 20.0 24.5 — — — 5.5

Astral Poly Technik SELL 1,000 640 (36.0) 120 1.6 120 19 25 29 30.2 28.8 16.1 52.4 40.7 35.0 28.2 22.4 19.0 9.2 7.6 6.3 19.8 20.5 19.7 0.1 0.1 0.1 1.1

Avenue Supermarts SELL 1,366 890 (34.9) 853 11.6 624 16 20 26 29.8 27.3 27.9 84.9 66.7 52.2 49.2 38.2 30.0 15.0 12.3 9.9 19.4 20.2 21.0 — — — —

Bayer Cropscience SELL 3,882 3,550 (8.5) 133 1.8 34 94 114 135 7.4 21.0 18.8 41.3 34.1 28.7 25.0 20.8 17.3 6.6 5.7 5.0 17.0 18.0 18.6 0.5 0.6 0.7 0.5

Crompton Greaves Consumer SELL 215 190 (11.7) 135 1.8 627 6 7 8 15.6 21.3 17.0 36.0 29.7 25.4 22.3 18.8 16.0 12.0 9.3 7.1 39.3 35.3 32.0 0.9 1.2 — 2.8

Dhanuka Agritech ADD 363 650 79.2 18 0.2 49 27 31 34 3.9 15.4 10.8 13.6 11.8 10.6 9.6 7.8 6.6 2.4 2.1 1.8 19.2 19.2 18.5 1.6 1.8 2.0 0.1

Godrej Agrovet ADD 523 640 22.5 100 1.4 189 15 19 23 28.9 28.8 21.1 35.2 27.3 22.6 19.1 15.0 12.5 5.2 4.4 3.7 15.7 17.4 17.9 — 0.5 0.7 0.9

Godrej Industries RS 466 — — 157 2.1 336 16 20 — 8.9 24.2 — 29.3 23.6 - 25.7 27.9 — 3.8 3.4 — 13.9 15.1 — 0.4 0.4 — 3.7

Havells India SELL 645 490 (24.0) 403 5.5 625 13 17 19 19.7 24.8 17.7 48.7 39.0 33.1 31.2 24.7 20.7 9.6 8.4 7.3 20.9 22.9 23.6 0.7 0.9 1.1 13.6

InterGlobe Aviation BUY 925 950 2.7 356 4.8 383 (42) 40 73 (171.5) 194.3 84.7 (22.1) 23.4 12.7 (15.8) 11.2 5.8 6.4 5.0 3.6 (25.4) 23.9 33.3 (0.2) — 0.4 22.3

Kaveri Seed SELL 498 515 3.5 33 0.4 66 34 34 37 7.3 0.1 8.3 14.5 14.5 13.4 11.7 11.0 9.7 3.5 3.0 2.6 26.4 22.4 21.0 1.6 2.0 2.0 5.0

PI Industries BUY 789 850 7.7 109 1.5 138 30 38 46 11.5 29.9 19.2 26.6 20.5 17.2 19.0 14.5 11.9 4.8 4.1 3.4 19.6 21.5 21.5 0.6 0.7 0.9 2.2

Rallis India ADD 170 220 29.3 33 0.4 195 10 12 13 16.6 20.0 9.7 16.9 14.1 12.9 11.2 9.4 8.3 2.5 2.3 2.1 15.7 17.1 16.9 2.1 2.3 2.6 0.6

SIS REDUCE 838 855 2.0 61 0.8 73 28 34 41 26.0 21.4 19.1 29.6 24.4 20.5 17.9 14.6 12.2 5.1 4.3 3.6 18.8 19.2 19.3 0.3 0.4 0.4 0.2

SRF BUY 1,958 2,200 12.3 113 1.5 57 100 132 150 23.8 32.2 14.1 19.7 14.9 13.0 11.4 9.1 7.7 2.8 2.4 2.1 15.0 17.3 17.0 0.7 0.7 0.8 11.2

Tata Chemicals ADD 688 760 10.5 175 2.4 255 44 51 56 (15.3) 14.6 11.5 15.6 13.6 12.2 6.4 5.4 4.6 1.4 1.4 1.3 9.7 10.3 10.8 2.2 2.5 2.5 6.7

TCNS Clothing Co. BUY 607 760 25.1 37 0.5 64 18 23 27 15.3 27.5 20.8 34.4 27.0 22.3 18.4 13.8 10.9 6.8 5.3 4.1 22.7 22.2 20.9 — — — —

TeamLease Services SELL 2,593 1,925 (25.7) 44 0.6 17 59 76 99 36.6 29.0 29.7 44.0 34.1 26.3 44.6 33.9 25.8 8.2 6.6 5.3 20.5 21.4 22.3 — — — 1.0

UPL ADD 696 650 (6.6) 354 4.8 507 47 54 60 9.5 14.7 11.4 14.8 12.9 11.6 9.8 8.3 7.2 3.2 2.7 2.3 23.9 22.9 21.5 1.3 1.6 1.8 23.7

Vardhman Textiles ADD 996 1,300 30.5 57 0.8 56 118 130 142 14.8 9.7 9.8 8.4 7.7 7.0 6.5 5.9 5.2 1.0 1.0 0.9 13.1 13.0 13.0 2.0 3.0 3.0 0.5

Voltas SELL 533 530 (0.5) 176 2.4 331 17 21 25 0.4 18.8 18.9 30.7 25.8 21.7 22.9 18.7 15.5 4.1 3.6 3.2 13.9 14.8 15.7 0.7 0.8 0.9 11.6

Whirlpool SELL 1,375 1,350 (1.8) 174 2.4 127 37 46 56 33.9 24.7 20.2 37.1 29.8 24.8 22.3 17.6 14.3 8.1 6.7 5.7 23.7 24.5 24.8 0.5 0.7 1.2 1.6

Others 3,787 51 (22.3) 57.8 18.7 40.5 25.7 21.6 22.4 15.3 11.8 5.1 4.4 4.0 12.7 17.2 18.4 0.5 0.7 0.7 114.7

KIE universe 103,267 1,403 19.4 30.1 15.7 21.1 16.2 14.0 10.6 9.3 8.2 2.6 2.4 2.1 12.3 14.5 15.2 1.5 1.8 2.0

KIE universe (ex-energy) 90,775 1,233 24.5 36.6 17.4 23.8 17.4 14.8 11.8 10.2 9.0 2.9 2.6 2.4 12.2 15.1 16.0 1.4 1.8 1.9

Notes:

(a) We have used adjusted book values for banking companies.

(b) 2019 means calendar year 2018, similarly for 2020 and 2021 for these particular companies.

(c) Exchange rate (Rs/US$)= 73.59

Mkt cap. EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%)

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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 September 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 30/06/2018 Kotak

Institutional Equities Investment Research had

investment ratings on 201 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.

27.6%

31.0%

22.2%19.2%

2.5%5.4%

3.4%0.0%

0%

10%

20%

30%

40%

50%

60%

70%

BUY ADD REDUCE SELL

Corporate Office Overseas Affiliates

Kotak Securities Ltd.

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Tel:+1 212 600 8856

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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. 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This report has been prepared by the Institutional Equities Research Group of Kotak Securities Limited. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Private Client Group. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additionally, other important information regarding our relationships with the company or companies that are the subject of this material is provided herein. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. It is for the general information of clients of Kotak Securities Limited. 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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 website i.e. www.kotak.com Research Analyst has served as an officer, director or employee of subject company(ies): No We or our associates may have received compensation from the subject company(ies) in the past 12 months. We or our associates have managed or co-managed public offering of securities for the subject company(ies) in the past 12 months. YES. Visit our website for more details We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received compensation or other benefits from the subject company(ies) or third party in connection with the research report. Our associates may have financial interest in the subject company(ies). 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