India Daily, July 26, 2018 - Kotak Securities

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

Contents

Daily Alerts

Results

L&T: Reassuring guidance

JSW Steel: A good start to the year

Hero Motocorp: Results below estimates

Ambuja Cements: Strong quarter - mostly cost efficiencies

Canara Bank: First sign of reversals in NPL

Jubilant Foodworks: On a roll. SSG surprises again

Shriram City Union Finance: Incremental trends positive; higher standard loan provisions may partially offset

Jyothy Laboratories: 1QFY19 results - revenues miss but EBITDA in line

Karur Vysya Bank: SME concerns surface

IRB Infrastructure: In-line quarter

Results, Change in Reco

BHEL: Progress on diversification, upgrade a notch to REDUCE

Change in Reco

Tata Power: AR2018 - curtailed investment, higher coal contribution

Company alerts

Bharti Airtel: FY2018 AR analysis - in the middle of a perfect storm

GAIL (India): On track to tariffs unification, without unbundling

Sector alerts

Cement: CCI penalty - up to the last resort now

INDIA DAILY July 26, 2018 India 25-Jul 1-day 1-mo 3-mo

Sensex 36,858 0.1 3.9 6.8

Nifty 11,132 (0.0) 3.4 5.3

Global/Regional indices

Dow Jones 25,242 0.8 4.1 4.8

Nasdaq Composite 7,841 (0.0) 4.1 12.0

FTSE 7,661 (0.6) 2.0 3.8

Nikkei 22,614 0.5 1.2 1.8

Hang Seng 28,921 0.9 (0.1) (4.6)

KOSPI 2,273 (0.3) (3.6) (7.2)

Value traded – India

Cash (NSE+BSE) 380 317 327

Derivatives (NSE) 8,742 7,125 7,131

Deri. open interest 4,051 4,024 4,246

Forex/money market

Change, basis points

25-Jul 1-day 1-mo 3-mo

Rs/US$ 68.8 (6) 66 183

10yr govt bond, % 8.1 3 5 12

Net investment (US$ mn)

23-Jul MTD CYTD

FIIs 24 (305) (927)

MFs (29) 806 11,353

Top movers

Change, %

Best performers 25-Jul 1-day 1-mo 3-mo

APNT IN Equity 1,450 (1.2) 15.7 24.7

GCPL IN Equity 1,356 0.0 16.9 24.1

INFO IN Equity 1,384 0.5 8.7 20.2

YES IN Equity 383 (0.4) 14.6 17.7

NEST IN Equity 10,234 (0.6) 3.4 17.2

Worst performers

HDIL IN Equity 19 2.1 (10.6) (50.5)

AL IN Equity 110 (2.3) (16.6) (32.9)

UT IN Equity 4 0.0 (1.1) (25.9)

JPA IN Equity 15 (4.5) (14.3) (25.6)

VEDL IN Equity 219 1.2 (5.1) (24.6)

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

1QFY19 comforting on execution and order inflows, disconcerting on margin

Reported consolidated-ex-services revenues/EBITDA/PAT grew 12.5%/42%/50% yoy on a high

revenue base (last quarter prior to GST). Revenue growth was driven by the domestic segment

and reaffirms L&T’s comfort on current working capital levels. Margin improvement (up ~200

bps yoy) needs to be seen in the context of a low yoy margin base and the key driver of higher

real estate revenue booking. The key infrastructure segment margin declined 30 bps yoy in spite

of a 10% growth in execution and lower MMH losses. The management attributed the same to

job mix issues and increase in ECL provisions. Core E&C order inflows grew a healthy 35% yoy

again on a low base and provide comfort on 12% growth guidance for FY2019.

Quarter mired in one-offs, accounting changes and segment reclassification

Consolidated revenues grew faster at 17% yoy aided by gains from the sale of Kattupalli port.

L&T also booked gains on InvIT transaction in IDPL (associate income). Cost one-offs consisted

of provisions against advance and write-off of capital WIP of a sub judice real-estate project.

Accounting changes related to Ind AS 115 now require L&T to book ECL provisions against

both overdue receivables and on contracts assets on WIP. Lastly, L&T has made a new segment

in defence engineering to house its defence and shipbuilding operations. It has also moved the

MMH business into the infrastructure segment.

Upholds guidance and the strategy of improving RoE

L&T shared good ordering from the government in 1QFY19 and large Rs5.4 tn of pipeline from

related sectors of water, transmission, urban infrastructure and transportation infrastructure.

L&T (parent) would not be investing in IDPL for adding assets, thus limiting the scope of IDPL’s

asset addition to the quantum realized from the recent InvIT listing. We retain our operational

estimates and BUY rating and marginally increase our June-2020 EPS based SoTP to Rs1,600

(from Rs1,560) on higher valuation of service businesses.

L&T (LT) Industrials

Reassuring guidance. For a quarter mired in one-offs, accounting changes and

segment reclassification, we limit our assessment to (1) good uptick in execution at

steady working capital levels, (2) strong ordering and order pipeline dominated by

government spending and (3) sustained focus on improving RoE. We retain our core

business estimates and marginally increase SOTP to Rs1,600 on better performance of

the services businesses. BUY.

BUY

JULY 26, 2018

RESULT

Coverage view: Neutral

Price (`): 1,321

Target price (`): 1,600

BSE-30: 36,858

Aditya Mongia

Ajinkya Bhat

Larsen & Toubro

Stock data Forecasts/Valuations 2018 2019E 2020E

52-week range (Rs) (high,low) EPS (Rs) 51.7 63.0 69.8

Market Cap. (Rs bn) EPS growth (%) 22.4 21.7 10.9

Shareholding pattern (%) P/E (X) 25.5 21.0 18.9

Promoters 0.0 Sales (Rs bn) 1,196.8 1,358.5 1,556.8FIIs 20.5 Net profits (Rs bn) 72.5 88.2 97.8

MFs 14.4 EBITDA (Rs bn) 135.7 177.2 190.5

Price performance (%) 1M 3M 12M EV/EBITDA (X) 21.0 16.6 15.9

Absolute 4.1 (3.1) 12.8 ROE (%) 15.0 16.8 16.8

Rel. to BSE-30 0.2 (9.3) (1.4) Div. Yield (%) 1.2 1.7 1.9

Co mpan y d a ta an d va lua t io n s ummary

1,470-1,113

1,850.9

L&T Industrials

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

1QFY19 results – strong growth in Infrastructure, Hydrocarbon and Realty

Revenues up 12% yoy, 8% above estimates. L&T reported 1QFY19 core E&C revenues

of Rs204 bn, up 12.5% yoy and 8% above estimates. Growth was largely driven by

Infrastructure, Hydrocarbon and Realty businesses.

Infrastructure. The segment reported revenues of Rs121 bn, up 9.8% yoy driven by

heavy civil infrastructure, water and transportation infrastructure verticals. We

highlight that the growth has been achieved despite the segment’s yoy flat opening

backlog of Rs1.9 tn at the start of the quarter, indicating an overall acceleration in the

pace of execution. This segment now includes the Metallurgical and Material Handling

vertical in L&T’s restructured segmental classification.

Hydrocarbon. The segment reported revenues of Rs35 bn, up 39% yoy on the back

of a robust opening order book and efficient execution. International revenues

constituted 53% of the segmental revenues. Large order inflows from the Middle East,

notably from clients such as Saudi Aramco, have increased the segment’s share in

order backlog to 10% over the last couple of years.

Realty. Others segment of L&T reported revenues of Rs13.4 bn in 1QFY19, up over

52% yoy led by strong revenue booking of Rs7 bn in realty subsegment. The company

has adopted the new accounting standard Ind-AS 115 mandating revenue recognition

as per the method of completed contract performance (deliveries) unlike the earlier

method of percentage of completion method. Strong deliveries to customers led to the

sharp increase in revenue recognition in Realty.

Strong margin performance in Power, E&A and Realty. The company reported core

E&C EBITDA of Rs18 bn, up 42% yoy. EBITDA margin of 9% was up 200 bps yoy aided

by strong margin performance in Power, E&A and Realty. In Others segment, EBITDA

margin increased sharply to 32.5% (vs 19% in 1QFY18) due to a sharp increase in

revenue booking in the realty segment that has an inherently high margin.

High tax rate pulled down PAT growth. The company reported 41% PBT growth in

line with core E&C and consolidated EBITDA growth of 42%. Effective tax rate was

unusually high at 43% in the quarter, leading to 14% consolidated PAT growth to Rs12.1

bn. Including gain on InvIT transaction booked in associate income, the reported PAT of

Rs12.1 bn post minority interest and associate income was up 36% yoy.

Strong order inflow led by Infrastructure, Hydrocarbon and Heavy Engineering.

The company reported core E&C order inflow of Rs282 bn, up 35% yoy led by

Infrastructure (+30% yoy), Hydrocarbon (over 5X yoy) and Heavy Engineering (over 2.5X

yoy). Infrastructure ordering was driven by rural water supply and lift irrigation orders.

The outstanding order book of Rs2.7 tn was up 3% yoy.

Adjusted financials. The company booked several one-offs in the quarter including (1)

Rs3.5 bn of gain on divestment of Kattupalli port, (2) Rs4 bn of gain on roads InvIT

transaction, (3) Rs4.85 bn provision on advances paid in a sub judice realty project and (4)

Rs2.5 bn of CWIP writeoff on the same realty project. Adjusted for these one-offs, the

reported PAT before associate income and minority interest would have been Rs13.4 bn,

up 26% yoy and just about 2% below estimates.

Industrials L&T

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Exhibit 1: Strong revenue growth led by execution pickup, services business and realty revenue recognition under Ind-AS 115 Larsen & Toubro (consolidated) - 1QFY19 results - key numbers (Rs mn)

Source: Company, Kotak Institutional Equities estimates

1QFY19 1QFY19E 1QFY18 4QFY18 vs est. yoy qoq FY2018 FY2017 % chg. FY2019E FY2018 % chg.

Net sales 282,835 257,822 238,109 406,781 10 19 (30) 1,196,832 1,093,118 9 1,358,506 1,196,832 14

Expenses (253,702) (233,291) (217,541) (352,876) 9 17 (28) (1,061,118) (981,813) 8 (1,181,289) (1,061,118) 11

Total RM consumption (44,476) (38,990) (48,031) (178,897) (181,060) (178,897)

Subcontracting charges (50,950) (49,626) (94,848) (246,390) (225,605) (246,390)

Construction materials (46,151) (38,066) (95,886) (240,572) (207,170) (240,572)

Employee (42,815) (35,306) (41,284) (152,925) (138,540) (152,925)

Other mfg. expenses (31,129) (24,763) (30,681) (105,207) (105,950) (105,207)

Other S,G&A (21,631) (16,850) (26,379) (76,929) (69,867) (76,929)

Finance cost of financial services business and finance lease activity(16,550) (13,941) (15,767) (60,197) (53,621) - (60,197)

EBITDA 29,133 24,531 20,567 53,905 19 42 (46) 135,714 111,305 22 177,217 135,714 31

Other income 2,440 4,259 3,849 4,328 14,120 13,441 16,440 14,120

Interest (3,648) (4,907) (3,651) (4,181) (15,385) (13,387) (27,911) (15,385)

Depreciation (6,449) (5,087) (5,513) (4,924) (19,287) (23,699) (20,443) (19,287)

PBT 21,477 18,796 15,253 49,128 14 41 (56) 115,162 87,659 31 145,302 115,162 26

Tax (9,346) (5,091) (4,597) (14,580) (31,989) (20,066) 59 (47,352) (31,989) 48

Net profit 12,131 13,706 10,655 34,548 (11) 14 (65) 83,173 67,593 23 97,951 83,173 18

Share in profit/(loss) of JVs/associates (net)2,589 (273) (372) (1,168) (4,359) (3,953) (1,091) (4,359)

Minority interest (2,572) (1,985) (1,358) (1,705) (6,346) (4,443) (8,632) (6,346)

Adjusted recurring PAT 12,148 11,448 8,925 31,675 6 36 (62) 72,469 59,198 22 88,228 72,469 22

Order details

Order booking 361,420 263,520 495,570 37 (27) 1,529,080 1,429,740 7 1,735,329 1,529,080 13

Order backlog 2,717,320 2,628,600 2,631,070 3 3 2,631,070 2,613,410 1 3,007,823 2,631,070 14

Key ratios (%)

Raw materials/sales 32.0 32.4 35.4 35.0 35.5 57.4 35.0

Subcontracting charges 18.0 20.8 23.3 20.6 20.6 - 20.6

Other manufacturing exp. 11.0 10.4 7.5 8.8 9.7 - 8.8

Contribution margin 38.9 36.4 33.8 35.6 34.2 35.6

Employee expense/sales 15.1 14.8 10.1 12.8 12.7 - 12.8

SG&A expense/sales 7.6 7.1 6.5 6.4 6.4 - 6.4

EBITDA margin 10.3 9.5 8.6 13.3 11.3 10.2 13.0 11.3

PAT margin 4.3 5.3 4.5 8.5 6.9 6.2 7.2 6.9

Tax rate 43.5 27.1 30.1 29.7 27.8 22.9 32.6 27.8

Reported EPS (Rs) 8.7 8.2 6.4 22.6 52.6 43.1 22 64.3 52.6 22

% change

L&T Industrials


Exhibit 2: Core E&C business posted beat on both revenue and margin in 1QFY19 L&T (consolidated) - segmental sales and profitability break-up, 1QFY19 (Rs mn)


Exhibit 3: Consolidated order inflows posted a strong 37% growth; core E&C OI up 35%, backlog grew 3% yoy in 1QFY19 Quarterly trajectory of consolidated order inflows and backlog for L&T, March fiscal year-ends, 1QFY14-1QFY19 (Rs bn)

Source: Company, Kotak Institutional Equities

yoy change yoy change

1QFY19 1QFY19E 1QFY18 vs est yoy FY2018 FY2017 (%) FY2019E FY2018 (%)

Revenues

Consolidated (ex-services) 204,100 188,716 181,500 8.2 12.5 941,500 870,100 8.2 1,046,538 941,500 11.2

Infrastructure 121,400 109,848 110,600 9.8 590,700 528,500 11.8 658,347 590,700 11.5

Defence Engineering 7,300 5,300 37.7

Hydrocarbon 35,100 30,545 25,300 38.7 117,200 96,000 22.1 141,721 117,200 20.9

Power 10,800 11,593 17,600 (38.6) 62,000 69,400 (10.7) 43,092 62,000 (30.5)

Heavy Engineering 3,300 6,839 2,600 26.9 38,300 30,800 24.4 45,861 38,300 19.7

Electrical and Automation 12,800 12,995 11,300 13.3 51,400 46,400 10.8 60,261 51,400 17.2

Others 13,400 16,897 8,800 52.3 81,900 99,000 (17.3) 97,257 81,900 18.8

IT and Technology services 33,200 30,480 25,400 8.9 30.7 111,800 97,200 15.0 138,887 111,800 24.2

Financial services 30,635 25,546 22,909 19.9 33.7 100,632 87,326 15.2 120,758 100,632 20.0

Developmental projects 14,900 13,081 8,300 13.9 79.5 43,000 40,200 7.0 52,323 43,000 21.7

Total revenues 282,835 257,822 238,109 9.7 18.8 1,196,832 1,093,118 9.5 1,358,506 1,196,832 13.5

EBITDA

Consolidated (ex-services) 18,410 14,922 12,927 23.4 42.4 99,408 86,855 14.5 114,144 99,408 14.8

Infrastructure 8,255 8,953 7,853 5.1 59,118 53,730 10.0 65,888 59,118 11.5

Defence Engineering

Hydrocarbon 2,457 2,291 1,720 42.8 9,140 6,587 38.8 11,336 9,140 24.0

Power 443 232 229 93.5 2,078 2,450 (15.2) 1,875 2,078 (9.8)

Heavy Engineering 1,191 1,094 320 272.5 6,552 6,144 6.6 9,221 6,552 40.7

Electrical and Automation 1,702 1,338 1,164 46.3 8,227 7,000 17.5 10,248 8,227 24.6

Others 4,361 1,014 1,641 165.7 14,293 10,945 30.6 15,576 14,293 9.0

IT and Technology services 8,234 6,401 5,461 28.6 50.8 23,880 20,597 15.9 29,616 23,880 24.0

Financial services 7,500 2,555 2,800 193.6 167.9 12,000 5,920 102.7 21,765 12,000 81.4

Developmental projects 4,530 654 (340) 592.6 (1,431.1) 2,707 896 202.0 14,925 2,707 451.4

Total EBITDA 38,673 24,531 20,847 57.6 85.5 137,995 114,268 20.8 180,450 137,995 30.8

Less: Implied eliminations and adjustments (9,540) - (280) (2,472) (2,963) (3,233) (2,472)

Net EBITDA 29,133 24,531 20,567 18.8 41.6 135,522 111,305 21.8 177,217 135,522 30.8

EBITDA margin (%)

Consolidated (ex-services) 9.0 7.9 7.1 10.6 10.0 10.9 10.6

Infrastructure 6.8 7.1 10.0 10.2 10.0 10.0

Defence Engineering

Hydrocarbon 7.0 6.8 7.8 6.9 8.0 7.8

Power 4.1 1.3 3.4 3.5 4.4 3.4

Heavy Engineering 36.1 12.3 17.1 19.9 20.1 17.1

Electrical and Automation 13.3 10.3 16.0 15.1 17.0 16.0

Others 32.5 18.7 17.5 11.1 16.0 17.5

IT and Technology services 24.8 21.0 21.5 21.4 21.2 21.3 21.4

Financial services 24.5 10.0 12.2 11.9 6.8 18.0 11.9

Developmental projects 30.4 5.0 (4.1) 6.3 2.2 28.5 6.3

Total EBITDA 10.3 9.5 8.6 11.3 10.2 13.0 11.3

% change

86

%5

8%

68

%5

9%

56

% 84%

82% 76

%70

%6

1% 73%

69

%5

6%

76

%6

6% 8

1%

70

%6

4%

82%

82%

74%

30

0

340

29

0

342

334

39

8

346

476

26

0

28

2 3

87

429

29

7

311

349

473

26

4

28

7

48

1

49

6

36

1

-

100

200

300

400

500

1Q

FY14

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

3Q

FY17

4Q

FY17

1Q

FY18

2Q

FY18

3Q

FY18

4Q

FY18

1Q

FY19

Consolidated international order inflow

Consolidated domestic order inflow

88

%8

5%

85

%79

%71%

73%

75

%74%

74%

72%

73%

72%

71%

71%

71%

73%

74%

74%

75

%76

%77%

1,7

30

1,8

76

1,9

26

1,8

15

1,9

54

2,1

44

2,2

58

2,3

27

2,3

75

2,4

26

2,5

50

2,5

00

2,5

74

2,5

18

2,5

86

2,6

13

2,6

29

2,5

75

2,7

07

2,6

31

2,7

17

-

500

1,000

1,500

2,000

2,500

3,000

1Q

FY14

3Q

FY14

1Q

FY15

3Q

FY15

1Q

FY16

3Q

FY16

1Q

FY17

3Q

FY17

1Q

FY18

3Q

FY18

1Q

FY19

Consolidated international order backlog

Consolidated domestic order backlog

Industrials L&T


Exhibit 4: Infrastructure remains the dominant segment; overseas orders have increased the relevance of hydrocarbon segment Segmental break-up of L&T's order inflows and backlog in 1QFY19 (Rs bn)


Exhibit 5: L&T’s publicly disclosed orders were worth Rs362 bn in May-Jul period vs core E&C order inflow of Rs282 bn reported in

1QFY19, the rest will likely be booked in the next quarter L&T's disclosed order inflows in 1QFY19, March fiscal year-ends (Rs bn)


Infrastructure69%

Defence Engineering

0%

Heavy Engineering

5%

Electrical and Automation

5%

Hydrocarbons17%

Power0%

Other4%

E&C order inflow (1QFY19 - Rs282 bn)

Infrastructure78%

Defence Engineering

4%

Heavy engineering

2%

Electrical and Automation

1%

Hydrocarbons10%

Power3%

Other2%

Order backlog (1QFY19 - Rs2,717 bn)

Date Customer

Domestic/

International Sector Subsector

Order size

(Rs bn)

17-May-18 Saubhagya scheme related works Domestic Infrastructure Electrification/ T&D

17-May-18 Department of Disaster Management Domestic Infrastructure Electrification/ T&D

17-May-18 Alo Shree scheme Domestic Infrastructure Electrification/ T&D

17-May-18 A state in South India Domestic Infrastructure Electrification/ T&D

18-May-18 Cochin Shipyard Domestic Infrastructure Heavy Civil Infra

18-May-18 Kalinga International Coal Terminal Paradip Domestic Infrastructure Heavy Civil Infra

21-May-18 HURL Domestic Hydrocarbon Fertilizer 38.0

22-May-18 A reputed government client Domestic Infrastructure Buildings & Factories

22-May-18 A leading cement manufacturer Domestic Infrastructure Buildings & Factories

22-May-18 A government client in Patna (Bihar) Domestic Infrastructure Buildings & Factories

23-May-18 A prestigious client Domestic Infrastructure Transportation Infra 14.3

24-May-18 Airport Authority of India Domestic Infrastructure Buildings & Factories

24-May-18 A leading developer Domestic Infrastructure Buildings & Factories

24-May-18 A reputed client Domestic Infrastructure Electrification/ T&D 5.5

25-May-18 Dhaka Mass Transit Company International Infrastructure Railways 31.9

28-May-18 Narmada Valley Development Authority Domestic Infrastructure Water

28-May-18 Madhya Pradesh Jal Nigam Maryadit Domestic Infrastructure Water

11-Jun-18 Narmada Valley Development Authority Domestic Infrastructure Water

11-Jun-18 HPCL Domestic Infrastructure Water

11-Jun-18 Water Resources Department, Madhya Pradesh Domestic Infrastructure Heavy Civil Infra 1.7

12-Jun-18 Amaravati Development Corporation Limited (ADCL) Domestic Infrastructure Heavy Civil Infra 13.9

14-Jun-18 A prestigious client Domestic Hydrocarbon O&G Pipelines 7.5

14-Jun-18 Rural Water Supply and Sanitation, Odisha Domestic Infrastructure Water 4.3

14-Jun-18 Smart city project, Allahabad Domestic Infrastructure Smart World & Communication Business 2.1

12-Jul-18 Madhya Pradesh Jal Nigam Domestic Infrastructure Water

12-Jul-18 Tirunelveli Municipal Corporation Domestic Infrastructure Water

13-Jul-18 Andhra Pradesh Capital Region Development

Authority (APCRDA)

Domestic Infrastructure Buildings & Factories

13-Jul-18 A reputed client International Infrastructure Buildings & Factories

17-Jul-18 HPCL-Mittal Energy Ltd Domestic Hydrocarbon Refineries 0.0

20-Jul-18 Various clients International Heavy Engineering Heavy equipment 14.7

20-Jul-18 Various clients Domestic Heavy Engineering Heavy equipment 1.3

Total 362

20.4

23.9

30.0

15.7

24.4

15.0

40.3

57.0

L&T Industrials


1QFY19 earnings call takeaways

Rs5.4 tn of potential prospects for the rest of FY2019. The management sees

tendering prospects of Rs5.4 tn in the remaining nine months of FY2019. The tenders are

primarily expected across Infrastructure (Buildings & Factories, T&D, Water, Heavy Civil

Infra, Transportation Infra, Smart World & Communications) and domestic Hydrocarbon.

The company also cited that the Middle East is becoming a difficult geography to operate

due to requirements around local manufacturing and visa restrictions. The ordering is

expected to continue being driven by the domestic public sector even as private capex

remains weak.

Margin guidance remains unchanged. The management has maintained the earlier

provided guidance of 12-15% revenue growth and 25 bps EBITDA margin improvement

for FY2019. The key thrust of the management will be on improving return on equity for

the shareholders through operational excellence, working capital control, divestments

and dividend payouts.

Several reporting changes in 1QFY19. The quarter was marked by several changes on

financial reporting structure. These are elaborated below:

Segment structure. The company has changed the reporting segments by separating

defence & aerospace from Heavy Engineering and shipbuilding from others segment to

create the new Defence Engineering segment. The Metallurgical and Material Handling

subsegment has also been moved from others to infrastructure.

Gains on divestments. The company booked Rs3.5 bn of gain on completion of

Kattupalli port divestment. The income was booked in both topline and bottom-line

and did not have any tax implications. Similarly, a gain of Rs4 bn on IDPL’s books due

to the InvIT transaction is reflected in associate income.

Provisions and writeoffs in Realty segment. One of L&T’s real estate projects is

undergoing a court trial regarding dispute related to property title. The company has

thus booked Rs4.85 bn of provisions and taken CWIP writeoff of Rs2.5 bn regarding

this project and is reflected in the reported EBIT for the others segment.

Accounting standards. L&T Finance has adopted Ind-AS while the Realty segment

has shifted to a new revenue recognition standard based on the completion of

contract performance (versus percentage of completion method practiced earlier).

Exhibit 6: Revision in consolidated financials of L&T, March fiscal year-ends, 2018-21E (Rs mn)


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

Income statement

Revenues 1,196,832 1,358,506 1,556,808 1,748,061 1,328,192 1,519,608 1,708,433 2 2 2

Expenditure (1,061,118) (1,181,289) (1,366,310) (1,522,315) (1,164,912) (1,328,395) (1,488,675) 1 3 2

EBITDA 135,714 177,217 190,498 225,747 163,280 191,213 219,758 9 (0) 3

EBITDA margin (%) 11.3 13.0 12.2 12.9 12.3 12.6 12.9

Other income 14,120 16,440 19,680 22,036 17,958 21,915 24,481

Interest & finance charges 15,385 27,911 29,348 27,501 21,008 24,357 27,501

Depreciation 19,287 20,443 24,768 29,376 19,937 24,349 28,958

PBT 115,162 145,302 156,062 190,905 140,293 164,422 187,780 4 (5) 2

Tax 31,989 47,352 50,576 59,949 43,422 51,062 50,590

PAT 72,469 88,228 97,827 122,758 87,768 104,948 126,412 1 (7) (3)

EPS (Rs) 51.7 63.0 69.8 87.6 62.6 74.9 90.2 1 (7) (3)

Yoy growth (%)

Revenues 8.8 13.5 14.6 12.3 11.0 14.4 12.4

EBITDA 22.5 30.6 7.5 18.5 20.3 17.1 14.9

PAT 22.4 21.7 10.9 25.5 21.1 19.6 20.5

% revisionNew estimates Old estimates

Industrials L&T


Exhibit 7: Revision in estimates of consolidated (ex-services) business of L&T, March fiscal year-ends, 2018-21E


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

Consolidated (ex-services)

Orders received 1,273,657 1,423,361 1,591,038 1,772,647 1,423,361 1,591,038 1,772,647 - - -

% growth 6.0 11.8 11.8 11.4 11.8 11.8 11.4

Net sales 941,500 1,046,538 1,193,258 1,350,970 1,042,787 1,194,321 1,351,719 0.4 (0.1) (0.1)

% growth 8.2 11.2 14.0 13.2 10.8 14.5 13.2

Bill to book ratio (%) 30.7 33.4 33.4 33.5 33.3 33.5 33.6

EBITDA 99,408 114,144 130,849 151,499 111,936 130,554 151,077 2.0 0.2 0.3

EBITDA margin (%) 10.6 10.9 11.0 11.2 10.7 10.9 11.2 17 bps 3 bps 4 bps

EPS 38.8 45.8 55.7 66.2 46.2 55.7 66.3 (0.8) (0.1) (0.1)

Infrastructure

Orders received 873,059 969,095 1,075,696 1,194,023 969,095 1,075,696 1,194,023 - - -

% growth 11.0 11.0 11.0 11.0 11.0 11.0 11.0

Revenues 590,700 658,347 759,446 863,072 658,347 759,446 863,072 - - -

% growth 12 11 15 14 11 15 14

Bill to book ratio (%) 27 30 30 30 30 30 30

EBITDA margin (%) 10.0 10.0 10.1 10.2 10.1 10.2 10.3 -10 bps -10 bps -10 bps

Heavy engineering

Orders received 58,102 66,817 76,840 88,366 66,817 76,840 88,366 - - -

% growth (18.7) 15.0 15.0 15.0 15.0 15.0 15.0

Revenues 38,300 45,861 54,902 67,185 45,861 54,902 67,185 - - -

% growth 24 20 20 22 20 20 22



Electrical and automation

Orders received 56,573 65,059 74,818 86,040 65,059 74,818 86,040 - - -

% growth (1.1) 15.0 15.0 15.0 15.0 15.0 15.0

Revenues 51,400 60,261 69,349 79,762 63,509 70,412 80,510 (5.1) (1.5) (0.9)

% growth 11 17 15 15 24 11 14



Hydrocarbons

Orders received 157,487 181,110 208,277 233,270 181,110 208,277 233,270 - - -

% growth (15.3) 15.0 15.0 12.0 15.0 15.0 12.0

Revenues 117,200 141,721 172,035 192,530 141,721 172,035 192,530 - - -

% growth 22 21 21 12 21 21 12


EBITDA margin (%) 7.8 8.0 8.0 8.0 8.3 8.3 8.3 -30 bps -30 bps -30 bps

Power

Orders received 24,464 26,910 29,601 32,562 26,910 29,601 32,562 - - -

% growth (14.5) 10.0 10.0 10.0 10.0 10.0 10.0

Revenues 62,000 43,092 36,504 33,886 43,092 36,504 33,886 - - -

% growth (11) (30) (15) (7) (30) (15) (7)



Others

Orders received 103,972 114,369 125,806 138,387 114,369 125,806 138,387 - - -

% growth 45 10 10 10 10 10 10

Revenues 81,900 97,257 101,023 114,536 90,257 101,023 114,536 7.8 - -

% growth (17) 19 4 13 10 12 13



% changeNew estimates Old estimates

L&T Industrials


Exhibit 8: Consolidated ex-services business financials of L&T, March fiscal year-ends, 2014-21E (Rs mn)


2014 2015 2016 2017 2018 2019E 2020E 2021E

P&L statement

Net sales 719,000 728,700 802,600 870,100 941,500 1,046,538 1,193,258 1,350,970

% growth 12.2 1.3 10.1 8.4 8.2 11.2 14.0 13.2

EBITDA 79,280 67,940 76,130 86,855 99,408 114,144 130,849 151,499

EBITDA margin (%) 11.0 9.3 9.5 10.0 10.6 10.9 11.0 11.2

Other income 7,700 8,080 6,962 10,550 9,600 12,035 14,568 16,516

Depreciation (14,610) (18,080) (10,742) (19,950) (15,600) (15,921) (19,475) (23,296)

EBIT 72,370 57,940 72,349 77,455 93,408 110,258 125,942 144,719

EBIT margin (%) 10.1 8.0 9.0 8.9 9.9 10.5 10.6 10.7

Interest cost (18,510) (17,430) (9,140) (12,630) (14,600) (13,924) (12,532) (10,026)

PBT 53,860 40,510 63,209 64,825 78,808 96,334 113,410 134,694

Income tax (20,590) (15,680) (19,817) (15,590) (24,900) (32,376) (35,847) (42,575)

Tax rate (%) 38.2 38.7 31.4 24.0 31.6 33.6 31.6 31.6

Recurring PAT 33,270 24,830 43,392 49,235 53,908 63,958 77,563 92,119

PAT margin (%) 4.6 3.4 5.4 5.7 5.7 6.1 6.5 6.8

PAT for core E&C business (consolidated) 30,642 21,671 42,003 48,377 54,352 64,242 78,047 92,815

Net shares outstanding (current, mn) 1,401 1,401 1,401 1,401 1,401 1,401 1,401 1,401

EPS for core E&C business (Rs per share) 21.9 15.5 30.0 34.5 38.8 45.8 55.7 66.2

Industrials L&T


Exhibit 9: Consolidated ex-services business of L&T, March fiscal year-ends, 2016-21E


2016 2017 2018 2019E 2020E 2021E

Consolidated (ex-services)

Orders received 1,145,853 1,201,200 1,273,657 1,423,361 1,591,038 1,772,647

% growth (16.2) 4.8 6.0 11.8 11.8 11.4

Net sales 802,600 870,100 941,500 1,046,538 1,193,258 1,350,970

% growth 10.1 8.4 8.2 11.2 14.0 13.2

Order backlog - year end 2,500,000 2,613,000 2,631,000 3,007,823 3,405,603 3,827,279

% growth 7 5 1 14 13 12

Order execution days 977 975 962 865 869 868

Bill to book ratio (%) 30.0 30.1 30.7 33.4 33.4 33.5

EBITDA 76,130 86,855 99,408 114,144 130,849 151,499

EBITDA margin (%) 9.5 10.0 10.6 10.9 11.0 11.2

Infrastructure

Orders received 848,780 786,500 873,059 969,095 1,075,696 1,194,023

% growth (1.0) (7.3) 11.0 11.0 11.0 11.0

Revenues 488,500 528,500 590,700 658,347 759,446 863,072

% growth 13 8 12 11 15 14

Order backlog - year end 1,875,000 1,933,620 1,954,833 2,265,582 2,581,832 2,912,783

% growth 13 3 1 16 14 13

Order execution days 1,241 1,295 1,195 1,084 1,089 1,092

Bill to book ratio (%) 26 26 27 30 30 30

EBITDA 54,970 53,730 59,118 65,888 76,765 88,103

EBITDA margin (%) 11.3 10.2 10.0 10.0 10.1 10.2

Heavy engineering

Orders received 27,380 71,500 58,102 66,817 76,840 88,366

% growth (45.1) 161.1 (18.7) 15.0 15.0 15.0

Revenues 30,000 30,800 38,300 45,861 54,902 67,185

% growth (12) 3 24 20 20 22

Order backlog - year end 75,000 130,650 134,181 155,138 177,075 198,256

% growth (10.6) 74.2 2.7 15.6 14.1 12.0

Order execution days 1,020 889 1,245 1,068 1,031 962


EBITDA 185 6,144 6,552 9,221 9,941 12,165

EBITDA margin (%) 0.6 19.9 17.1 20.1 18.1 18.1

Electrical and automation

Orders received 47,915 57,200 56,573 65,059 74,818 86,040

% growth (23) 19 (1) 15 15 15

Revenues 46,300 46,400 51,400 60,261 69,349 79,762

% growth (3) 0 11 17 15 15


% growth (19) 5 21 15 15 15



EBITDA 5,789 7,000 8,227 10,248 11,794 13,564

EBITDA margin (%) 12.5 15.1 16.0 17.0 17.0 17.0

Hydrocarbons

Orders received 95,830 185,900 157,487 181,110 208,277 233,270

% growth (10.6) 94.0 (15.3) 15.0 15.0 12.0

Revenues 85,200 96,000 117,200 141,721 172,035 192,530

% growth 16 13 22 21 21 12


% growth 9.6 74.2 1.7 14.8 11.9 11.9

Order execution days 791 924 1,059 918 868 868


EBITDA 530 6,587 9,140 11,336 13,761 15,400

EBITDA margin (%) 0.6 6.9 7.8 8.0 8.0 8.0

Power

Orders received 27,380 28,600 24,464 26,910 29,601 32,562

% growth (82) 4 (14) 10 10 10

Revenues 64,300 69,400 62,000 43,092 36,504 33,886

% growth 479 8 (11) (30) (15) (7)


% growth (7) - - (17) (9) (2)

Order execution days 1,332 1,052 769 802 785 772


EBITDA 1,718 2,450 2,078 1,875 1,589 1,475

EBITDA margin (%) 2.7 3.5 3.4 4.4 4.4 4.4

Others

Orders received 98,568 71,500 103,972 114,369 125,806 138,387

% growth (29) (27) 45 10 10 10

Revenues 88,300 99,000 81,900 97,257 101,023 114,536


% growth (12) (25) 15 11 15 12



EBITDA 12,939 10,945 14,293 15,576 17,000 20,792

EBITDA margin (%) 14.7 11.1 17.5 16.0 16.8 18.2

L&T Industrials


Exhibit 10: EPS for core E&C business of L&T (consolidated), March fiscal year-ends (Rs)


Exhibit 11: L&T- SoTP-based target price of Rs1,600/share


15.5

30.0 34.5

38.8

45.8

55.7

66.2

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

2015 2016 2017 2018 2019E 2020E 2021E

EPS for core E&C business (consolidated)

March-20 March-21

Earnings/Book Target multiple Value Valuation basis Stake Value Per share Per share

(Rs mn) (X) (Rs bn) (%) (Rs bn) (Rs) (Rs)

Core E&C business (consolidated) 78,047 18.0 1,405 P/E 100.0 1,405 1,002 1,192

L&T Finance Holdings 379 (at KIE TP) 66.7 253 180 206

L&T Infotech 350 (at KIE TP) 84.3 295 211 240

L&T Technology Services 10,339 20.0 207 P/E 89.8 186 132 151

IDPL- Roads, Transmission 31,881 2.0 64 P/B 97.4 62 44 51

Hyderabad Metro 41,268 0.6 25 P/B 100.0 25 18 20

Kattupalli port (held for sale) 3,880 2.0 8 P/B 97.0 8 5 6

Power development 47 P/B 100.0 47 33 38

Total subsidiaries 917 15% holding co. disc. 744 531 604

Grand total 1,533 1,797

One-year-forward SoTP 1,599

Industrials L&T


Exhibit 12: Consolidated financials of L&T, March fiscal year-ends, 2012-21E (Rs mn)


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

Income statement

Revenues 643,131 744,980 851,284 906,546 1,019,753 1,100,110 1,196,832 1,358,506 1,556,808 1,748,061

Expenditure (555,711) (646,894) (743,986) (806,690) (915,125) (989,363) (1,061,118) (1,181,289) (1,366,310) (1,522,315)

EBITDA 87,420 98,087 107,298 99,856 104,628 110,747 135,714 177,217 190,498 225,747

EBITDA margin (%) 13.6 13.2 12.6 11.0 10.3 10.1 11.3 13.0 12.2 12.9

Other income 8,290 10,959 9,818 10,072 9,044 14,010 14,120 16,440 19,680 22,036

Interest & finance charges 11,019 20,950 31,380 28,507 16,551 13,398 15,385 27,911 29,348 27,501

Depreciation 15,523 16,371 14,458 26,225 17,867 23,699 19,287 20,443 24,768 29,376

PBT 69,167 71,725 71,277 55,195 79,254 87,659 115,162 145,302 156,062 190,905

Tax 22,826 23,855 26,284 20,876 24,848 20,066 31,989 47,352 50,576 59,949

PAT 47,151 48,976 45,468 32,631 41,387 59,198 72,469 88,228 97,827 122,758

EPS (Rs) 33.6 34.9 32.4 23.3 29.5 42.2 51.7 63.0 69.8 87.6

Reported PAT 47,719 53,124 49,020 47,648 42,329 60,412 73,699 90,037 99,636 125,157

Balance Sheet

Share holder's funds 311,402 365,126 408,908 459,077 470,732 537,801 612,820 665,359 723,500 796,534

Capital 1,225 1,231 1,854 1,859 1,863 1,866 2,803 2,803 2,803 2,803

Reserves and surplus 292,643 337,366 375,262 407,232 439,941 500,299 553,767 606,307 664,448 737,481

Minority interest 17,535 26,529 31,792 49,986 28,928 35,636 56,250 56,250 56,250 56,250

Loan funds 471,501 619,937 803,304 905,714 881,355 939,763 1,075,241 1,231,167 1,334,467 1,361,413

Deferred tax liability 818 1,837 3,375 (1,846) (7,364) (11,252) (14,941) (14,941) (14,941) (14,941)

Total sources of funds 827,898 986,900 1,250,405 1,393,267 1,344,861 1,481,268 1,687,740 1,896,206 2,057,646 2,157,626

Gross block 257,568 382,216 414,765 457,586 165,705 170,056 185,330 335,318 363,870 394,542

Acc. depreciation 63,560 77,884 90,790 110,206 23,948 39,317 58,604 79,048 103,816 133,192

Net block 194,008 304,332 323,975 347,381 141,757 130,739 126,726 256,271 260,054 261,350

Cash & bank balances 35,221 36,312 41,353 58,555 53,899 55,725 80,325 142,446 147,013 153,522

Investments 87,895 87,675 81,090 96,121 154,651 231,828 212,190 212,190 212,190 212,190

Loans & advances towards financing activities247,732 320,021 438,517 553,669 665,946 720,612 882,646 995,445 1,127,683 1,184,067

Net current assets 113,915 125,492 223,686 182,304 203,069 191,156 236,295 274,731 295,582 331,373

Total application of funds 827,898 986,900 1,250,405 1,393,267 1,344,861 1,481,268 1,687,740 1,896,206 2,057,646 2,157,626

Yoy growth (%)

Revenues 23.5 15.8 14.3 6.5 12.5 7.9 8.8 13.5 14.6 12.3

EBITDA 25.2 16.4 15.0 8.4 13.4 8.1 7.3 11.3 15.7 11.4

Recurring PAT 10.0 3.9 (7.2) (28.2) 26.8 43.0 22.4 21.7 10.9 25.5

Key ratios

EBITDA margin (%) 14.9 14.6 13.8 12.1 11.1 11.3 12.5 14.3 13.5 14.2

PAT margin (%) 7.3 6.6 5.3 3.6 4.1 5.4 6.1 6.5 6.3 7.0

Effective tax rate (%) 33.0 33.3 36.9 37.8 31.4 22.9 27.8 32.6 32.4 31.4

Net debt to equity (X) 1.4 1.6 1.9 1.8 1.8 1.6 1.6 1.6 1.6 1.5

RoE (%) 16.5 14.5 11.7 7.5 8.9 11.7 12.6 13.8 14.1 16.2

RoCE (%) 8.0 7.6 6.3 5.1 4.0 5.0 5.4 6.1 6.0 6.8

Book value per share (Rs) 209.7 241.6 269.1 291.9 315.3 358.3 397.2 434.7 476.1 528.3

Net Wcap (excl cash) as days of sales (#) 64.7 61.5 95.9 73.4 72.7 63.4 72.1 73.8 69.3 69.2


A good quarter aided by higher steel prices and other operating revenues

JSW Steel reported EBITDA of `51 bn (+95% yoy,-3% qoq), broadly in line with our estimate

(KIE: `49.8 bn). The standalone EBITDA increased to `48.2 bn (+119% yoy, -4% qoq) as

EBITDA/ton increased 5% qoq to `12,590/ton (+101% yoy) aided by (1) higher steel prices

(+6% qoq), partially offset by the increase in iron-ore and fuel cost, and (2) higher other

operating revenues of `5 bn (KIE: `3.1 bn) led by GST incentives of `3.1 bn.

Steel volumes increased 9% yoy to 3.83 mn tons (-9% qoq) led by increase in domestic sales by

27% yoy while export sales declined to 0.46 mn tons (from 0.79 mn tons in 1QFY18). Net

income increased to `23.7 bn (+278% yoy, -21% qoq), higher than our estimate, aided by

higher EBITDA and lower tax rate of ~31%.

Investments to start yielding returns over next 1-2 years

JSTL will commission a few projects over the next 3-6 months which can aid significant cost

efficiencies. These include (1) a 20 mtpa pipe conveyor system for transport of iron-ore from

mines to plant. This project will reduce the cost of transportation of iron-ore from `500/ton to

less than `100/ton—the company expects volumes to ramp-up to 10-12 mtpa over next 12

months and to reach full annualized capacity rate by FY2020E, (2) captive iron-ore mines with

4.3 mtpa capacity. JSTL also expects 7 to 8 iron-ore mines to be auctioned in Karnataka over

the next few months with close to 10 mtpa capacity—we believe the company may have a

good chance to bag a few mines due to its large presence in the state. Besides, the Dolvi

capacity expansion to 10 mtpa from 5 mtpa is on track to be commissioned by March 2020.

Net-debt increases due to MTM losses on Fx loan; we maintain ADD rating

JSTL’s net-debt increased by `11 bn to `391 bn in June 2018 largely due to MTM losses of `8.7

bn on Fx loans. We note that the company also invested `5.4 bn in Acero Junction, US during

the quarter. We expect the company’s net-debt to rise over FY2019-2021E by `120 bn due to

`400 bn of capex investment in India operations. However, we estimate net-debt/EBIDTA to

remain comfortable at 2.4X-2.9X led by volume/cost led EBITDA growth. We maintain our ADD

rating and revise target price to `350 (from `345 earlier).

JSW Steel (JSTL) Metals & Mining

A good start to the year. JSW Steel’s EBITDA increased to `51 bn (+95% yoy, -3%

qoq) aided by higher steel prices (+6% qoq) and GST incentives of `3.1 bn. JSTL’s

investment in cost improvement and expansion projects will start yielding results over

the next 1-2 years as it commissions pipe conveyor systems for ore transportation and

new mines over the next 3-6 months while capacity expansion is slated to be

commissioned by March 2020E—we expect a sharp improvement in operating EBITDA

led by higher volumes and lower costs. We maintain ADD rating and revise TP to `350

(`345 earlier).

ADD

JULY 26, 2018

RESULT

Coverage view: Attractive

Price (`): 317

Target price (`): 350

BSE-30: 36,858

Abhishek Poddar

Samrat Verma

JSW Steel



Market Cap. (Rs bn) EPS growth (%) 83.9 10.2 (8.7)


Promoters 41.7 Sales (Rs bn) 702.3 716.4 796.9

FIIs 19.9 Net profits (Rs bn) 64.8 71.4 65.2

MFs 2.4 EBITDA (Rs bn) 147.9 173.0 166.9


Absolute (4.5) (1.4) 47.4 ROE (%) 24.8 22.4 17.3

Rel. to BSE-30 (8.1) (7.7) 28.9 Div. Yield (%) 1.0 1.0 1.0

Company data and valuation summary

347-211

766.5

Metals & Mining JSW Steel


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


Changes in estimates

Exhibit 7 highlights key changes in our estimates.

We incorporate our economist’s revised Fx rate estimate of `68.7/US$, `69.5/US$ and

`70/US$ for FY2019E, FY2020E and FY2021E. We raise our India EBITDA/ton estimate by 1-

6% to `10,100/ton and `9,300/ton and `9,000/ton for FY2019E, FY2020E and FY2021E led

by higher steel price assumption and tweaking of our cost estimates. The stronger

EBITDA/ton for FY2019 reflects multi-year high steel prices that will aid earnings in

1HFY19—we expect prices to moderate later. We also incorporate JSTL’s overseas

investment in steel plants in the US, Italy in our estimates—we expect marginal changes in

our earnings due to this inclusion.

This results in increase in our consolidated EBITDA estimate by 3-7% to `173 bn, `167 bn

and `201 bn for FY2019E, FY2020E and FY2021E. Our EPS estimate increases by 5-11% to

`29.5, `27 and `30.1 for FY2019E, FY2020E and FY2021E. Note that we JSTL will now

commission a 6.7 mtpa expansion project at Dolvi steel plant by March 2020E and expect a

sharp increase in steel volumes, earnings over the next 3-4 years after commissioning.

Our SOTP of `350/share is based on 6.5X EBITDA on FY2020E financials. We also value the

investment in Dolvi steel plant at close to invested capital value.

(% change)

1QFY19 1QFY19E 1QFY18 4QFY18 KIE yoy qoq FY2019E FY2018 % chg.

Net sales 199,500 196,707 144,790 200,270 1 38 (0) 716,375 702,250 2

Operating other income 5,690 3,627 2,200 7,900 - -

Total expenditure (154,140) (150,518) (120,820) (155,270) 2 28 (1) (543,384) (554,310) (2)

Inc/(Dec) in stock 4,640 1,667 7,770 (580) — (2,440)

Raw materials (106,770) (107,309) (90,200) (107,610) (346,235) (387,810)

Power & Fuel (16,080) (14,814) (13,490) (15,150) — —

Staff cost (5,350) (5,188) (4,690) (4,710) (20,317) (18,430)

Other expenditure (30,580) (24,874) (20,210) (27,220) (176,832) (145,630)

EBITDA 51,050 49,816 26,170 52,900 2 95 (3) 172,991 147,940 17

Other income 580 637 410 450 (9) 41 29 3,165 1,670 90

Interest (8,870) (8,943) (9,450) (8,830) (1) (6) 0 (38,766) (37,010) 5

Depreciation (9,050) (8,690) (8,190) (8,650) 4 11 5 (34,852) (33,870) 3

Pretax profits 33,710 32,821 8,940 35,870 3 277 (6) 102,538 78,730 30

Extraordinaries — — — — — (2,640)

Tax (10,530) (11,308) (2,840) (7,150) (7) 271 47 (32,425) (15,380)

Net income 23,180 21,513 6,100 28,720 8 280 (19) 70,113 60,710 15

Minority interest (270) 100 (20) (1,170) 860 1,010

Share of profit from assoc. 210 70 140 70 424 420

PAT after minority interest 23,660 21,483 6,260 29,960 10 278 (21) 71,398 62,140 15

Adjusted PAT 23,660 21,483 6,260 29,960 10 278 (21) 71,398 64,780 10

Ratios

ETR (%) 31.2 34.5 31.8 19.9 31.6 20.2

EPS (Rs) 9.8 8.9 2.6 12.4 29.5 26.8

JSW Steel Metals & Mining


Exhibit 2: Interim results of JSW steel (standalone), March-fiscal year ends (Rs mn)

Note: (1) Due to Ind-AS 115, the company’s revenues for 1QFY19 was higher by close to Rs4 bn due to recognition of shipping freight to customers—this also led to increase in costs (other expenses) though impact on financial results were not significant as both the items netted each other. As such, per ton analysis is not comparable for revenues, other expenses from previous period to that extent.


Exhibit 3: JSTL's EBITDA/ton increased to Rs12,590 in 1QFY19 aided by higher steel prices Quarterly steel volumes and EBITDA/ton of JSW Steel, 1QFY15 - 1QFY19 (mn tons, Rs/ton)


(% change)

1QFY19 1QFY19E 1QFY18 4QFY18 KIE yoy qoq FY2019E FY2018 % chg.

Net sales 184,650 185,205 137,100 189,580 (0) 35 (3) 652,625 643,060 1

Other operating income 4,990 3,100 1,270 7,410 12,000 6,690

Total expenditure (141,420) (140,773) (116,390) (146,560) 0 22 (4) (502,201) (512,340) (2)

Inc/(Dec) in stock 3,300 — 3,830 (2,070) — (4,120)

Raw materials (100,910) (104,332) (88,280) (104,950) (356,975) (370,580)

Power & Fuel (13,770) (12,073) (10,970) (12,700) (50,810) (47,710)

Staff cost (3,560) (3,510) (3,250) (3,210) (14,308) (12,600)

Other expenditure (26,480) (20,857) (17,720) (23,630) (80,109) (77,330)

EBITDA 48,220 47,532 21,980 50,430 1 119 (4) 162,423 137,410 18

OPM (%) 25.4 25.2 15.9 25.6 24.4 21.1

Other income 1,670 737 480 730 3,625 2,130

Interest (8,660) (8,643) (9,070) (8,730) (37,601) (35,910)

Depreciation (8,190) (7,849) (7,320) (7,810) (31,023) (30,540)

Profit before tax 33,040 31,777 6,070 34,620 4 444 (5) 97,424 73,090 33

Extraordinaries - — — - — (2,340)

Tax (9,660) (10,995) (1,880) (12,270) (30,201) (24,500)

Net income 23,380 20,782 4,190 22,350 12 458 5 67,222 46,250 45

Adjusted PAT 23,380 20,782 4,190 22,350 12 458 5 67,222 47,780 41

Ratios

ETR (%) 29.2 34.6 31.0 35.4 31.0 34.6

EPS (Rs) 9.7 8.6 1.7 9.2 27.8 19.8

Per ton analyis (Rs/ton)

Realization (blended) 48,211 46,174 39,060 44,924 4 23 7 40,649 41,169 (1)

Other operating income 1,303 773 362 1,756 747 428

Raw material consumption (25,486) (26,012) (24,060) (25,360) (22,234) (23,988) (7)

Power & Fuel (3,595) (3,010) (3,125) (3,009) (3,165) (3,054) 4

Staff cost (930) (875) (926) (761) (891) (807) 10

Other expenditure (6,914) (5,200) (5,048) (5,600) (4,990) (4,951) 1

EBITDA 12,590 11,850 6,262 11,950 6 101 5 10,116 8,797 15

Steel deliveries ('000 tons) 3,830 4,011 3,510 4,220 (5) 9 (9) 16,055 15,620 3

2.93.1 3.0

3.1 3.1

3.2

2.6

3.3

3.33.8 3.6

4.0 3.513.92

3.97

3.83

12,590

-

1,500

3,000

4,500

6,000

7,500

9,000

10,500

12,000

0.0

0.8

1.6

2.4

3.2

4.0

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

Steel sales (mn tons) EBITDA/ton (Rs) [RHS]



Other key highlights from the results

EBIDTA for subsidiaries improve led by US operations. The EBITDA for all subsidiaries

combined increased to `2.8 bn in 1QFY19 from `2.5 bn in 4QFY18 (`4.2 bn in 1QFY18)

largely aided by US operations. Among subsidiaries:

JSW Coated reported decline in EBITDA to ` 1.2 bn (` 2 bn in 4QFY18) due to lagged

transmission of substrate costs (HR coils as input material). As per the company, higher

imports of coated products also led to some pricing pressure in the segment.

US plate and pipe mill’s EBITDA increased to US$10.7 mn from US$3.25 mn in

4QFY18. The improved performance was led by higher plant utilization and improving

spreads (tariffs aided the spreads too). We note that plate volumes increased by 26%

yoy to 65,800 tons in 1QFY19 while pipe volumes increased by 22% yoy to 14,600

tons.

Realizations increase by 6% qoq in 1QFY19. JSTL’s steel realizations improved 6%

qoq in 1QFY19; the NSR was also aided by quarterly pricing readjustments in June 2018

with the OEMs. In addition, the blended realization were aided by better mix of volumes

to the automotive and appliances sector. We note that sales to OEMs increased by 22%

yoy to 1.8 mn tons, to auto companies by 28% yoy to 0.53 mn tons while the retail

channel sales increased by 26% yoy to 0.96 mn tons. The share of value-added products

was 35% during the quarter.

Export sales declined to 12% of the overall sales as the company directed more volumes

in the domestic market which remains more profitable, per our estimate. Of the

consolidated sales of 3.76 mn tons (+11% yoy), exports declined 42% yoy to 0.46 mn

tons while domestic volumes increased 27% yoy to 3.3 mn tons ( see Exhibit 6).

Update on acquisitions. The company completed a few strategic acquisitions in the

quarter including:

Acero Junctions Holdings—the company acquired 100% shareholding in Acero,

USA for investment of US$81 mn and also assumed a liability of ~US$ 100mn—JSTL

paid cash consideration of `.5.4 bn on June 15, 2018. The facilities at Acero include a

1.5 MTPA Electric Arc Furnace (EAF), 2.8 mtpa continuous slab caster and a 3 mtpa

Hot Strip Mill (HSM). The company plans to start operations by October 2018. We also

note that JSTL has plans to add another 1.5 mtpa Electric Arc Furnace at this facility at

a later stage. The focus as of now is to stabilize the existing plants. The management

stated that together with the existing plate mills in US, the total steel capacity in the

US will increase to 4 mtpa.

Aferpi (Italy based) for € 55 mn on cash free, debt free basis. This entity has rolling

mills (total capacity at 1.3 mtpa) comprising (1) 0.32 mtpa rail mill, (2) 0.4 mtpa Bar

mill, (3) 0.6 mtpa wire rod mill. The operations are expected to commence production

from next quarter. JSTL may plan to add another 3 mtpa of Hot Strip Mill at this

operation at a later stage which will increase the total capacity to 4 mtpa.

Monnet Ispat acquisition. The management did not comment on the acquisition of

Monnet Ispat through JSW Steel- AION Investments as final order from NCLT is still

awaited.



Other points:

Capex. The capex spend for the quarter was `20 bn. We note that full year capex

guidance for FY2019E is `100 bn.

Volume guidance. The management has kept its volume guidance for the year

unchanged—earlier, management had guided for steel volumes of 16 mn tons in

FY2019 which entails crude steel production of 16.75 mn tons. We highlight the

company produced 15.62 mn tons for FY2018, in-line with its earlier guidance.

Acceptances. The revenue acceptances were close to US$1.42 bn as on June 2018.

Net debt increased by `11 bn qoq to `391 bn in June 2018

JSTL’s net debt increased by `11 bn qoq to `391 bn in June 2018 primarily due to mark-to-

market losses of `8.7 bn on Fx loan. We note that the company earned cash profit of `33

bn during the quarter while cash outflows included (1) capex of `20 bn, (2) `5.4 bn

investment in Acero acquisition. The weighted average cost of debt increased to 7.1% from

7.04% during FY2018.

We estimate JSTL’s net debt to increase to `407 bn, `480 bn in FY2019E, FY2020E due to

higher capex spends for new growth projects. The company’s leverage ratios are

comfortable with net debt/EBITDA of 2.4 X/2.9X on FY2019E/FY2020E financials, per our

estimate.

Exhibit 4: JSTL's net debt increased by Rs 11 bn to Rs391 bn largely due to MTM losses on Fx loans Quarterly net debt (consolidated) of JSW Steel, 1QFY15 - 1QFY19 (Rs bn)


Exhibit 5: JSTL's net-debt will increase over next 2-3 years due to large capex spends in India JSW Steel's leverage ratios, March fiscal year-ends (Rs bn, X)


359 358 396 358 380 390 395 385

25 44

454 439

443 415

433 428 421

380 391

0

100

200

300

400

500

1Q

FY

15

2Q

FY

15

3Q

FY

15

4Q

FY

15

1Q

FY

16

2Q

FY

16

3Q

FY

16

4Q

FY

16

Ind

-AS

New

lo

an

s, F

x

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

Net debt (Rs bn)

2016 2017 2018 2019E 2020E 2021E

Net debt (Rs bn) 412 415 380 407 480 508

EBITDA (Rs bn) 64 122 148 173 167 201

Net debt/EBITDA (X) 6.4 3.4 2.6 2.4 2.9 2.5



Exhibit 6: JSTL's domestic sales reduced by 7% qoq to 3.3 mn tons while exports sales declined to 12% of overall sales (from 15%) Product-mix of JSW Steel including break-up of value added, retail and branded sales , 1QFY17- 1QFY19 ('000 tons)


Exhibit 7: JSW Steel, Change in estimates, March fiscal year-ends, 2019-21E (Rs mn)


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

Crude steel production 3,870 3,980 3,860 4,100 3,910 3,940 4,110 4,310 4,110

Sales:

Standalone sales 3,340 3,840 3,640 3,960 3,510 3,920 3,970 4,220 3,830

Flat 2,480 2,800 2,790 2,900 2,570 2,830 2,800 2,970 2,730

Long 740 810 730 780 750 860 900 1,040 870

Semis 120 230 120 270 180 240 270 210 230

Consolidated sales 3,300 3,820 3,610 3,950 3,390 3,960 4,030 4,180 3,760

Exports 620 990 760 1,430 790 1,040 1,190 630 460

Domestic 2,680 2,830 2,850 2,520 2,600 2,920 2,840 3,550 3,300

OEM 1,501 1,472 1,625 1,487 1,482 1,577 1,534 1,988 1,815

Retail 846 1,027 902 706 761 943 852 1,030 957

Auto 333 331 324 328 357 400 454 533 528

% of total sales

Value-added sales 35 34 37 33 38 37 34 35 35

Retail 26 27 25 18 22 24 21 25 25

Autos 10 9 9 8 11 10 11 13 14

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

Consolidated (Rs mn)

Net sales 716,375 796,896 994,235 672,388 689,432 864,173 7 16 15

EBITDA 172,991 166,942 200,918 162,092 158,937 194,326 7 5 3

PAT (reported) 71,398 65,193 72,824 64,312 60,638 69,285 11 8 5

PAT (adjusted) 71,398 65,193 72,824 64,312 60,638 69,285 11 8 5

EPS (a) 29.5 27.0 30.1 26.6 25.1 28.7 11 8 5

Standalone (Rs mn)

Net sales 172,991 166,942 200,918 162,092 158,937 194,326 7 5 3

EBITDA 162,423 153,699 186,709 152,516 149,315 184,658 7 3 1

PAT (reported) 67,222 59,720 66,734 60,386 56,695 65,319 11 5 2

PAT (adjusted) 67,222 59,720 66,734 60,386 56,695 65,319 11 5 2

EPS (a) 27.8 24.7 27.6 25.0 23.5 27.0 11 5 2

Steel volumes (mn tons) 16.1 16.6 20.7 16.1 16.6 20.7 — — —

HRC price (US$/ton) 540 495 495 540 500 500 — (1) (1)

Domestic HRC prices (Rs/ton) 39,444 38,584 38,862 38,107 37,842 38,403 4 2 1

EBITDA/ton (US$/ton) 147 134 129 143 134 130 3 (0) (1)

Standalone EBITDA/ton (Rs/ton) 10,116 9,278 9,014 9,499 9,014 8,915 6 3 1

INR: USD 68.7 69.5 70.0 66.4 67.5 68.5 4 3 2

Revised estimate Previous estimate Change (%)



Exhibit 8: JSW Steel, Key assumptions, March fiscal year-ends, 2016-21E (Rs mn)


Exhibit 9: JSW Steel, Valuation details, March 2020E basis (Rs mn)

Source: Kotak Institutional Equities estimates

2016 2017 2018 2019E 2020E 2021E

Assumptions (US$/ton)

Average HRC Price (US$/ton) 307 435 540 540 495 495

Average realization (Rs/ton) 30,269 35,393 41,597 41,396 40,733 40,900

Crude steel capacity ('000 tons) 18,000 18,000 18,000 18,000 18,000 24,700

Steel deliveries ('000 tons) 12,127 14,774 15,620 16,055 16,565 20,714

Standalone assumptions (Rs/ton)

Steel ASP (Rs/ton) 30,269 35,393 41,597 41,396 41,294 41,349

Iron ore cost (Rs/ton) 6,086 6,272 7,173 6,505 6,620 7,028

Coking coal cost (Rs/ton) 8,039 11,742 14,798 13,611 13,458 13,332

Other raw material (Rs/ton) 2,241 268 1,336 1,480 774 1,088

Raw material cost (Rs/ton) 16,366 18,282 23,308 21,596 20,852 21,449

Conversion cost (Rs/ton) 8,525 8,658 8,812 9,045 10,653 10,477

Employee costs 786 790 807 891 1,182 1,104

Power & fuel 2,551 2,773 3,054 3,165 3,280 3,606

Stores 1,742 1,600 1,568 1,568 1,568 1,568

Others 3,447 3,495 3,383 3,421 4,623 4,199

Total 24,891 26,940 32,120 30,642 31,504 31,926

Standalone EBITDA/ton (Rs) 5,252 7,813 8,797 10,116 9,278 9,014

Rs/US$ rate 65.4 67.1 64.5 68.7 69.5 70.0

EBITDA Multiple Value Value

(Rs bn) (X) (Rs bn) (Rs/share)

Consolidated EBITDA 167 6.5 1,077 445

Net debt* 480 199

CWIP of Dolvi plant (85% of invested value) 259 107

Arrived market capitalization for JSW 856 350

Target price (Rs) 350



Exhibit 10: JSW Steel (consolidated), Profit model, balance sheet and cash flow model, March fiscal year-ends, 2016-2021E (Rs mn)


2016 2017 2018 2019E 2020E 2021E

Profit model (Rs mn)

Net sales 415,462 556,046 702,250 716,375 796,896 994,235

EBITDA 64,010 121,742 147,940 172,991 166,942 200,918

Other income 1,805 1,521 1,670 3,165 5,809 5,274

Interest (36,012) (37,681) (37,010) (38,766) (42,993) (43,388)

Depreciation (33,226) (34,299) (33,870) (34,852) (35,941) (57,853)

Profit before tax (3,423) 51,284 78,730 102,538 93,816 104,952

Extra-ordinary items (21,254) — (2,640) — — —

Current tax (867) (1,518) (18,260) (21,708) (19,850) (21,994)

Deferred tax 20,529 (15,225) 2,880 (10,717) (9,521) (10,639)

Net profit (5,015) 34,541 60,710 70,113 64,446 72,319

Minority interest 1,452 559 1,010 860 318 73

Share of earnings from associates 208 132 420 424 428 433

Share of profit/(loss) of associates (3,354) 35,231 62,140 71,398 65,193 72,824

Adjusted PAT (2,545) 35,231 64,780 71,398 65,193 72,824

Earnings per share (Rs) (1.1) 14.6 26.8 29.5 27.0 30.1

Balance sheet (Rs mn)

Equity 189,655 226,476 279,980 341,789 397,393 460,628

Deferred tax liability 17,969 30,736 25,560 36,277 45,797 56,436

Total Borrowings 422,040 433,340 390,820 462,417 501,837 516,081

Current liabilities 196,935 192,312 227,980 233,135 236,524 293,778

Total liabilities 826,599 882,864 924,340 1,073,618 1,181,552 1,326,924

Net fixed assets 624,555 622,215 630,910 696,314 810,631 899,909

Goodwill on consolidation 9,549 8,717 7,070 7,070 7,070 7,070

Investments 11,946 13,671 14,690 32,121 32,549 32,982

Cash 10,204 14,851 10,630 55,873 22,004 7,888

Other current assets 168,397 220,953 256,400 276,740 303,479 373,183

Minority interest 1,948 2,457 4,640 5,500 5,818 5,892

Total assets 826,599 882,864 924,340 1,073,617 1,181,552 1,326,924

Free cash flow (Rs mn)

Operating cash flow excl. working capital 32,812 81,879 91,700 115,682 109,907 140,810

Working capital changes 4,911 (38,665) (1,070) (15,178) (23,350) (12,450)

Capital expenditure (51,617) (43,898) (42,749) (100,255) (150,258) (147,130)

Free cash flow (13,894) (684) 47,881 249 (63,701) (18,770)

Ratios

Debt/equity (X) 2.2 1.9 1.4 1.4 1.3 1.1

Net debt/equity (X) 2.2 1.8 1.4 1.2 1.2 1.1

P/B (X) 4.2 3.5 2.8 2.3 2.0 1.7

RoAE (%) (1.2) 16.9 25.6 23.0 17.6 17.0

RoACE (%) 5.8 11.2 14.8 14.5 12.1 11.9


1QFY19 EBITDA below our estimates due to lower ASPs and commodity cost pressures

Hero reported 1QFY19 net profit of `9.1 bn (-0.5% yoy), which was 10% below our estimates

due to lower-than-expected revenues, lower-than-expected other income and increase in tax

rate. Revenues increased by 14.9% yoy, adjusted for GST-related changes (3% below our

estimates due to lower-than-expected spare part sales). Revenues on a yoy basis are not

comparable while on a sequential basis revenues increased by only 3% even as volumes increased

by 5%, which was largely led by 20% qoq decline in spare part revenues and expiry of Haridwar

incentives. Vehicle ASP increased by `400/bike on a qoq basis. EBITDA increased by only 6%

yoy. Gross margin declined by 240 bps qoq due to – (1) increase in commodity costs (-130 bps),

(2) expiry of Haridwar incentives (-70 bps) and (3) lower share of spare part revenues (-30 bps).

Staff costs increased by 11% yoy in 1QFY19 but other expenses declined by 6% yoy. EBITDA

margin was 15.6% in 1QFY19 (KIE: 15.8%) versus 16.3% in 1QFY18. Other income also

declined by 12% yoy in 1QFY19. Tax rate increased to 32.3% due to expiry of tax incentives in

Haridwar plant. The company indicated tax rate will remain at 31-32% levels in FY2019.

The company highlighted that other expenses can be lumpy and it will increase on a yoy basis in

FY2019 as they expect double-digit volume growth.

Expect Hero to deliver 7% EPS CAGR over FY2018-21E

We expect Hero’s domestic volumes to grow at 7.4% CAGR over FY2018-21E as compared to

our domestic two-wheeler industry growth estimate of 9.3% (200 bps market share loss).

We note that decline in market share will be largely due to weaker presence in high growth

segments such as scooters and premium motorcycles. We expect Hero to maintain share in

economy and executive bike segments. We expect EBITDA margin to decline from FY2018 levels

(to ~15.5% levels) over the next two years led by increase in competitive intensity in the sector.

Maintain SELL; cut target price to `3,000 (from `3,500 earlier)

We have cut our FY2019-21 EPS estimates by 10-11% led by cut in EBITDA margin assumptions

factoring in rising competitive intensity in the sector and increase in tax rate. We have cut our

target price to `3,000 (`3,500 earlier), which is based on 14X March 2020 (15X earlier) core

EPS + `400 cash/share (including investments).

Hero Motocorp (HMCL) Automobiles

Results below estimates. Hero MotoCorp reported only 6% yoy EBITDA growth in

1QFY19 largely led by decline in gross margin on a yoy basis due to input cost pressures.

The company’s loss of market share in the scooter segment and marginal presence in

the premium motorcycle segment is a cause for concern, in our view. Maintain SELL

rating with a revised target price of `3,000 (`3,500 earlier) due to 10-11% cut in our

FY2019-21E earnings estimates.

SELL

JULY 26, 2018

RESULT


Price (`): 3,112


BSE-30: 36,858

Hitesh Goel

Nishit Jalan

Hero Motocorp



Market Cap. (Rs bn) EPS growth (%) 9.5 (0.9) 11.4




MFs 6.3 EBITDA (Rs bn) 52.8 53.8 60.1


Absolute (13.2) (16.3) (16.1) ROE (%) 33.8 29.3 29.1

Rel. to BSE-30 (16.5) (21.6) (26.6) Div. Yield (%) 2.7 2.9 3.3


4,092-3,034

621.5

Automobiles Hero Motocorp


Key takeaways from the conference call

Retail demand for the company has grown in line with the trend in volume growth in

wholesale dispatches and dealer inventory is around 4-6 weeks. Company expects

double- digit growth in two-wheeler industry in FY2019. Company believes it can

increase market share in scooter with the launch of 125cc scooters and premium

motorcycle segment in FY2019 led by new model launches. Rural segment has grown at

2-3% higher than urban segment for the industry.

Company believes 125cc scooter segment is growing at a significantly higher pace than

110cc segment, hence with products available in 125cc segment should improve

company’s market share in scooter segment. 125cc scooter segment is now 21% of

domestic scooter industry volumes versus 15-16% in FY2018. Company indicated 110cc

scooter segment is not growing; hence their market share is getting impacted. We believe

that it will be difficult for the company to maintain overall two-wheeler market share due

to weaker presence in high growth segments such as scooters and premium motorcycle

segment. We expect Hero MotoCorp’s domestic volumes to grow at 7.4% CAGR over

FY2018-21E as compared to our domestic two-wheeler industry growth estimate of

9.3% over this period (implies 200 bps market share loss).

Company has presence in 35 overseas markets; the company has recently entered

Argentina and Nigeria markets which will aid growth going ahead. The company expects

decent growth from markets such as Sri Lanka, Bangladesh and Nepal while markets such

as Colombia are facing headwinds due to weaker economic scenario. In the Bangladesh

market, company has achieved 30% market share in a short time frame and has gained

No. 1 position in the last two months. Company expects double-digit growth in export

market in FY2019.

Spare revenues for the company declined by 20% qoq in 1QFY19 to `6.02 bn (+23%

yoy). In FY2018, spare part revenues were `26.4 bn (+13%yoy) in FY2018.

Haridwar plant (currently enjoying excise duty benefits) accounted for 34% of company’s

total production in FY2018. Company has realized only 58% of the Haridwar benefit in

FY2018, which was part of central government while 42% compensation which has to

be borne by state government. Excise incentives at Haridwar plant used to add 140 bps to

company’s EBITDA margin, which got reduced to only 60-70 bps in FY2018. This

incentive was not available to the company from 1QFY19, which impacted gross margin

of the company. In FY2019, 60 bps negative impact on EBITDA margin due to expiry of

incentives in Haridwar plant will be partly offset by higher incentives due to increase in

production from Rajasthan and Halol plant.

Gujarat production was 300,000 units in FY2018, which will increase to 600,000 units in

FY2019 and 900,000 units in FY2020. In FY2018, `5.5 bn (10.5% of EBITDA) was added

to revenue due to incentives received by the company by government for production

done at Haridwar, Rajasthan and Gujarat plants. In FY2019, approximately `2.8 bn

incentive has expired due to expiry of incentives at Haridwar plant. However with increase

in production at Gujarat and Rajasthan plant, company can offset part of the benefits lost

in Haridwar plant. Sales volumes for Hero in Gujarat and Rajasthan volumes were around

1.1 mn units in FY2018.

CBS/ABS has become mandatory from April 1, 2018 for new models and will be

mandatory from April 1, 2019 for old models, which could lead to significant increase in

costs for the company. Company also gets incentives in Rajasthan and Halol plant which

have started production. The company is guiding for overall capex of `25 bn over the

next two years towards product development, capacity expansion in Gujarat and new

plants in Andhra Pradesh and Bangladesh. Company indicated cost of CBS would be

`500/bike while for ABS it would be `4,000/bike.

Hero Motocorp Automobiles


Hero FinCorp financed 13% of Hero sales in 1QFY19 and 11.5% of Hero sales in FY2018

(10.5% in FY2017). ~35% of Hero’s vehicles were financed in FY2018.

Company also gave out estimates of scooter mix in urban-rural market and similar figures

for motorcycles. Scooter mix in urban: rural is 75%-25% and motorcycle mix is

50%:50% in domestic two-wheeler industry in India as per the company.

The company made an investment of `1.3 bn in Ather Energy through compulsorily

convertible debentures. Further, the company has also participated in rights issue of Hero

FinCorp to maintain its existing stake (41.03%) in the entity.

Exhibit 1: Hero MotoCorp’s 1QFY19 EBITDA was in 4% below our estimates

Hero MotoCorp interim results, March fiscal year-ends (` mn)


(% chg.)

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

Volumes (units) 2,104,949 2,104,949 1,853,647 2,001,595 13.6 5.2 8,390,449 7,587,154 10.6

Net realisations (Rs/vehicle) 41,853 43,214 43,005 42,786 (3.1) (2.7) (2.2) 42,320 42,444 (0.3)

Net sales 88,098 90,963 79,716 85,640 (3.1) 10.5 2.9 355,088 322,031 10.3

Inc/dec in stock (333) — 727 (720) — 232

Raw materials (61,317) (62,128) (54,668) (57,211) (0.8) 14.3 6.4 (247,067) (218,304) 13.2

Staff costs (4,131) (4,200) (3,737) (3,809) (1.6) 10.6 8.5 (16,633) (15,401) 8.0

Other expenses (8,544) (10,300) (9,079) (10,195) (17.0) (5.9) (16.2) (37,572) (35,755) 5.1

Total expenses (74,325) (76,628) (66,757) (71,935) (3.0) 11.3 3.3 (301,273) (269,229) 11.9

EBITDA 13,773 14,335 12,959 13,706 (3.9) 6.3 0.5 53,815 52,802 1.9

Other income 1,157 1,700 1,317 1,665 (31.9) (12.1) (30.5) 5,454 5,258 3.7

Interest expense (net) (21) (15) (16) (15) (63) (63)

Depreciation expense (1,482) (1,485) (1,330) (1,483) (0.2) 11.4 (0.1) (6,100) (5,556) 9.8

Execptional expense — — — — — —

Profit before tax 13,427 14,535 12,931 13,872 (7.6) 3.8 (3.2) 53,106 52,442 1.3

Tax expense (4,336) (4,433) (3,790) (4,198) (2.2) 14.4 3.3 (16,463) (15,468) 6.4

Adj. net profit 9,092 10,102 9,140 9,674 (10.0) (0.5) (6.0) 36,643 36,974 (0.9)

Adj. EPS 45.5 50.6 45.8 48.4 (10.0) (0.5) (6.0) 183.5 185.1 (0.9)

Ratios (%)

Raw material cost to net sales 70.0 68.3 67.7 67.6 69.6 67.7

Staff cost to net sales 4.7 4.6 4.7 4.4 4.7 4.8

Other expenses to net sales 9.7 11.3 11.4 11.9 10.6 11.1

EBITDA margin (%) 15.6 15.8 16.3 16.0 15.2 16.4

No of shares 199.7 199.7 199.7 199.7 199.7 199.7

Tax rate (%) 32.3 30.5 29.3 30.3 31.0 29.5

Volume break up (units)

Economy 540,408 540,408 439,218 520,718 23.0 3.8 1,884,888

Executive 1,318,676 1,318,676 1,136,790 1,174,731 16.0 12.3 4,542,885

Premium 10,353 10,353 25,545 9,193 (59.5) 12.6 71,279

Domestic motorcycle 1,869,437 1,869,437 1,601,553 1,704,642 16.7 9.7 7,211,095 6,499,052 11.0

Domestic scooters 189,225 189,225 209,790 224,974 (9.8) (15.9) 945,524 883,667 7.0

Exports 46,287 46,287 42,304 71,979 9.4 (35.7) 233,830 204,435 14.4

Total volumes 2,104,949 2,104,949 1,853,647 2,001,595 13.6 5.2 8,390,449 7,587,154 10.6

Volume mix (%)

Economy 25.7 24.7 23.7 26.0 24.8

Executive 62.6 55.8 61.3 58.7 59.9

Premium 0.5 5.3 1.4 0.5 0.9

Domestic motorcycle 88.8 85.9 86.4 85.2 85.9 85.7

Domestic scooters 9.0 10.7 11.3 11.2 11.3 11.6

Exports 2.2 3.4 2.3 3.6 2.8 2.7

Total volumes 100.0 100.0 100.0 100.0 100.0 100.0



Exhibit 2: Hero’s market share in motorcycle segment declined by 110 bps on yoy basis in 1QFY19 Market share across two-wheeler segments, March fiscal year-ends, 1QFY15-1QFY19 (%)

Source: SIAM, Kotak Institutional Equities

Exhibit 3: We expect domestic two-wheeler volumes to grow at 9% CAGR over FY2018-21E Domestic two-wheeler volume and market share estimates, March fiscal year-ends, 2014-21E (mn units, %)

Source: SIAM, Kotak Institutional Equities estimates

1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19

Economy bike

Bajaj Auto 28.6 21.2 22.5 26.2 40.3 37.3 34.2 30.8 35.1 35.1 33.2 25.5 25.3 32.0 31.8 24.1 31.8

Hero Motocorp 51.0 54.6 55.0 54.0 43.8 46.2 47.6 55.1 51.4 50.9 54.1 65.3 59.8 56.0 56.5 65.8 58.1

Executive bike

Bajaj Auto 9.3 9.5 9.0 5.4 4.0 4.3 3.9 3.7 6.6 5.1 5.4 5.0 3.8 3.0 2.8 5.2 3.0

Hero Motocorp 66.8 63.6 65.5 69.9 72.6 70.6 70.8 72.3 66.9 68.2 71.0 72.9 69.3 69.0 69.6 69.6 71.0

HMSI 20.1 23.7 22.8 23.2 20.5 22.7 22.2 20.9 21.5 22.1 19.8 19.5 24.2 24.1 23.8 22.4 23.7

Premium bike

Bajaj Auto 35.1 36.1 35.3 34.0 33.9 34.3 37.0 36.7 34.1 34.9 31.0 31.5 26.1 31.3 28.3 28.3 28.3

Hero Motocorp 12.4 9.1 4.9 5.5 6.0 6.1 7.1 4.4 4.3 4.1 3.9 5.0 3.8 3.0 1.9 1.2 1.2

HMSI 15.6 12.7 10.0 13.3 11.9 8.2 5.4 10.5 12.9 9.1 11.1 12.8 15.9 14.5 11.8 13.9 16.0

Royal Enfield 14.4 15.3 17.2 18.5 20.5 22.6 22.8 22.9 23.8 23.6 28.3 27.8 26.3 25.0 31.3 28.7 25.5

Total bike segment

Bajaj Auto 17.7 16.7 16.6 15.1 17.9 17.7 17.9 17.5 18.6 18.8 18.5 16.1 14.0 16.9 16.4 15.3 16.3

Hero Motocorp 53.8 51.3 52.3 54.1 53.5 51.3 52.2 52.5 50.6 49.8 50.5 54.7 52.4 50.5 50.8 52.4 51.3

HMSI 15.4 16.4 15.9 16.7 14.1 14.5 13.2 13.8 14.9 14.1 12.8 13.4 16.5 15.7 14.7 15.0 15.8

Scooter segment

HMSI 52.1 57.2 54.6 57.7 58.6 58.3 51.7 53.7 58.1 59.7 53.0 55.9 59.1 58.2 53.9 55.7 61.2

Hero Motocorp 18.4 14.1 17.2 17.3 13.8 11.8 19.3 19.8 15.4 14.2 14.1 12.7 12.7 12.1 14.3 13.8 10.4

TVS 15.0 16.1 15.7 13.9 14.5 15.6 16.9 14.4 13.4 12.9 16.9 16.4 15.1 16.4 17.2 16.8 15.1

2014 2015 2016 2017 2018 2019E 2020E 2021E

Domestic volumes (mn units)

Scooters 3.6 4.5 5.0 5.6 6.7 7.7 8.9 10.0

Motorcycles 10.5 10.7 10.7 11.1 12.6 14.0 14.6 15.5

Mopeds 0.7 0.8 0.7 0.9 0.9 0.9 0.9 0.9

Total domestic volumes 14.8 16.0 16.5 17.6 20.2 22.6 24.4 26.4

Scooters

Honda 1.9 2.5 2.8 3.2 3.8 4.5 5.3 6.1

Hero Motocorp 0.7 0.8 0.8 0.8 0.9 0.9 1.1 1.2

TVS Motors 0.5 0.7 0.8 0.8 1.1 1.2 1.3 1.5

Others 0.6 0.6 0.7 0.8 0.9 1.1 1.2 1.1

Total scooter volumes 3.6 4.5 5.0 5.6 6.7 7.7 8.9 10.0

Motorcycles

Hero Motocorp 5.4 5.7 5.6 5.7 6.5 7.2 7.6 8.0

Bajaj 2.1 1.8 1.9 2.0 2.0 2.2 2.4 2.5

Honda 1.7 1.8 1.5 1.5 2.0 2.1 2.1 2.2

TVS Motors 0.6 0.7 0.7 0.9 0.9 1.0 1.1 1.1

Others 0.7 0.9 1.0 1.1 1.3 1.5 1.6 1.7

Total motorcycle volumes 10.5 10.7 10.7 11.1 12.6 14.0 14.6 15.5

Total two-wheelers

Hero Motocorp 6.1 6.4 6.4 6.5 7.4 8.2 8.6 9.1

Bajaj 2.1 1.8 1.9 2.0 2.0 2.2 2.4 2.5

Honda 3.6 4.3 4.3 4.8 5.8 6.6 7.4 8.3

TVS Motors 1.7 2.1 2.2 2.5 2.9 3.1 3.3 3.5

Others 1.3 1.4 1.6 1.8 2.2 2.6 2.8 2.8

Total two-wheeler volumes 14.8 16.0 16.5 17.6 20.2 22.6 24.4 26.4

Yoy growth (%)

Scooters 23.2 25.1 11.7 11.3 19.9 15.0 15.0 12.0

Motorcycles 3.9 2.5 (0.4) 3.7 13.7 11.0 4.6 6.0

Mopeds (8.3) 4.4 (4.1) 23.0 (3.5) 3.0 1.0 1.0

Domestic two wheelers 7.3 8.1 2.8 6.9 14.8 12.0 8.0 8.0

Market share (%)

Hero Motocorp 41.3 40.2 39.0 36.9 36.6 36.1 35.3 34.6

Bajaj 14.2 11.1 11.5 11.1 9.8 9.8 9.7 9.6

Honda 24.0 26.6 26.0 27.1 28.6 29.2 30.2 31.6

TVS Motors 11.8 13.2 13.4 14.5 14.2 13.6 13.4 13.4

Others 8.7 8.9 10.0 10.4 10.8 11.4 11.3 10.7



Exhibit 4: We expect premium motorcycle to outpace industry growth over FY2018-21E Domestic motorcycle volume and market share estimates, March fiscal year-ends, 2014-21E (mn units, %)

Source: SIAM, Kotak Institutional Equities estimates

2014 2015 2016 2017 2018 2019E 2020E 2021E

Economy 1.9 2.1 2.4 2.6 3.2 3.6 3.8 3.9

Executive 6.8 6.7 6.0 6.0 6.5 7.0 7.3 7.7

Premium 1.7 2.0 2.2 2.5 2.9 3.4 3.6 3.9

Total volumes 10.5 10.7 10.7 11.1 12.6 14.0 14.6 15.5

yoy change (%)

Economy (1.0) 8.9 16.0 6.2 23.0 14.0 4.0 5.0

Executive 6.0 (2.5) (9.3) (0.6) 9.3 7.4 3.7 5.5

Premium 5.5 15.3 12.1 12.6 14.7 16.0 7.0 8.0

Total 3.9 2.5 (0.4) 3.7 13.7 11.0 4.6 6.0

Player-wise volumes (mn units)

Economy 1.9 2.1 2.4 2.6 3.2 3.6 3.8 3.9

Hero Motocorp 1.1 1.1 1.2 1.4 1.9 2.1 2.2 2.3

Bajaj Auto 0.5 0.5 0.9 0.8 0.9 1.1 1.2 1.3

TVS 0.3 0.4 0.4 0.3 0.4 0.4 0.4 0.4

Executive 6.8 6.7 6.0 6.0 6.5 7.0 7.3 7.7

Hero Motocorp 4.2 4.4 4.3 4.2 4.5 5.0 5.3 5.5

Bajaj Auto 1.0 0.6 0.2 0.3 0.2 0.3 0.3 0.3

Honda 1.3 1.5 1.3 1.2 1.5 1.6 1.6 1.7

TVS 0.1 0.0 0.1 0.2 0.1 0.2 0.2 0.2

Others 0.2 0.2 0.1 0.1 0.1 0.0 0.0 0.0

Premium 1.7 2.0 2.2 2.5 2.9 3.4 3.6 3.9

Hero Motocorp 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.2

Bajaj Auto 0.6 0.7 0.8 0.8 0.8 0.9 0.9 1.0

Honda 0.3 0.3 0.2 0.3 0.4 0.5 0.5 0.5

Yamaha 0.2 0.3 0.3 0.3 0.3 0.3 0.4 0.4

Royal Enfield 0.2 0.3 0.5 0.7 0.8 0.9 1.0 1.1

TVS 0.1 0.2 0.3 0.3 0.4 0.5 0.5 0.6

Others 0.0 0.0 0.1 0.1 0.1 0.2 0.2 0.2

Total volumes 10.5 10.7 10.7 11.1 12.6 14.0 14.6 15.5

Hero Motocorp 5.4 5.7 5.6 5.7 6.5 7.2 7.6 8.0

Bajaj Auto 2.1 1.8 1.9 2.0 2.0 2.2 2.4 2.5

Honda 1.7 1.8 1.5 1.5 2.0 2.1 2.1 2.2

Domestic motorcycle market share (%)

Hero Motocorp 51.9 52.9 52.3 51.3 51.5 51.5 51.7 51.2

Bajaj Auto 20.0 16.5 17.7 17.7 15.7 15.8 16.2 16.4

Honda 15.8 16.3 14.0 13.8 15.5 14.9 14.1 14.3

TVS 5.5 6.3 6.6 7.0 7.3 7.1 7.3 7.2



Exhibit 5: We expect Hero Motocorp’s volumes to grow at 8% CAGR over 2018-21E Hero MotoCorp volumes estimates, March fiscal year-ends, 2012-21E (mn units, %)


Exhibit 6: We have cut our FY2019-21E EPS estimates by 10-11% largely due to lower EBITDA margin assumptions and increase in tax rate Earnings estimates revision, March fiscal year-ends, 2019-21E (` mn, %)


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

Motorcycles 5,779,621 5,499,245 5,538,291 5,799,695 5,735,854 5,834,260 6,677,207 7,415,975 7,817,506 8,245,259

Domestic 5,651,066 5,362,730 5,425,118 5,679,634 5,603,136 5,693,681 6,499,051 7,211,095 7,571,650 7,950,233

< 125 cc 5,320,330 5,165,222 5,278,537 5,553,921 5,497,840 5,595,382 6,427,773 7,134,828 7,491,569 7,866,148

> 125 cc 330,736 197,508 146,581 125,713 105,296 98,299 71,278 76,267 80,081 84,085

Exports 128,555 136,515 113,173 120,061 132,718 140,579 178,156 204,879 245,855 295,026

< 125 cc 114,308 122,015 99,946 95,364 101,039 119,532 139,786 160,754 192,905 231,486

> 125 cc 14,247 14,500 13,227 24,697 31,679 21,047 38,370 44,126 52,951 63,541

Scooters 455,584 574,336 707,604 832,008 896,298 829,786 909,986 974,475 1,090,833 1,221,096

Domestic 418,224 549,808 690,079 752,052 818,777 789,974 883,667 945,524 1,058,987 1,186,065

Exports 37,360 24,528 17,525 79,956 77,521 39,812 26,319 28,951 31,846 35,031

Total 2-wheelers 6,235,205 6,073,581 6,245,895 6,631,703 6,632,152 6,664,046 7,587,193 8,390,449 8,908,338 9,466,355

Growth (yoy %)

Motorcycles 14.7 (4.9) 0.7 4.7 (1.1) 1.7 14.4 11.1 5.4 5.5

Domestic 14.7 (5.1) 1.2 4.7 (1.3) 1.6 14.1 11.0 5.0 5.0

< 125 cc 15.9 (2.9) 2.2 5.2 (1.0) 1.8 14.9 11.0 5.0 5.0

> 125 cc (2.0) (40.3) (25.8) (14.2) (16.2) (6.6) (27.5) 7.0 5.0 5.0

Exports 12.2 6.2 (17.1) 6.1 10.5 5.9 26.7 15.0 20.0 20.0

< 125 cc 11.5 6.7 (18.1) (4.6) 6.0 18.3 16.9 15.0 20.0 20.0

> 125 cc 18.2 1.8 (8.8) 86.7 28.3 (33.6) 82.3 15.0 20.0 20.0

Scooters 26.0 26.1 23.2 17.6 7.7 (7.4) 9.7 7.1 11.9 11.9

Domestic 21.9 31.5 25.5 9.0 8.9 (3.5) 11.9 7.0 12.0 12.0

Exports 102.1 (34.3) (28.6) 356.2 (3.0) (48.6) (33.9) 10.0 10.0 10.0

Total 2-wheelers 15.4 (2.6) 2.8 6.2 0.0 0.5 13.9 10.6 6.2 6.3

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

Volumes (units) 8,390,449 8,908,338 9,466,355 8,379,263 8,901,021 9,463,739 0.1 0.1 0.0

Average net realization 42,320 43,929 45,598 43,102 44,741 46,440 (1.8) (1.8) (1.8)

Net sales 355,088 391,334 431,644 361,165 398,236 439,497 (1.7) (1.7) (1.8)

EBITDA 53,815 60,122 66,085 58,184 64,149 71,453 (7.5) (6.3) (7.5)

EBITDA margin (%) 15.2 15.4 15.3 16.1 16.1 16.3

Adjusted net profit 36,643 40,823 44,971 41,093 45,256 50,624 (10.8) (9.8) (11.2)

EPS 183.5 204.4 225.2 205.8 226.6 253.5 (10.8) (9.8) (11.2)

Old estimatesNew estimates change (%)



Exhibit 7: We expect Hero Motocorp’s EPS to grow at 7% CAGR over 2018-21E Hero MotoCorp profit model, balance sheet and cash flow model, March fiscal year-ends, 2012-21E (` mn)


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


Net sales 235,790 237,681 252,755 275,853 284,427 285,071 322,352 355,088 391,334 431,644

EBITDA 27,984 24,002 27,129 33,568 44,550 46,414 52,849 53,815 60,122 66,085

Other income 3,646 3,984 4,464 4,735 4,224 5,158 5,211 5,454 5,804 6,354

Interest (213) (119) (118) (111) (49) (61) (63) (63) (63) (63)

Depreciation (2,769) (2,575) (2,802) (3,354) (4,376) (4,927) (5,556) (6,100) (6,700) (7,200)

Profit before tax 28,648 25,292 28,673 34,839 44,349 46,585 52,441 53,106 59,163 65,176

Current tax (5,251) (4,869) (9,966) (9,432) (9,609) (10,821) (14,470) (16,463) (18,341) (20,205)

Deferred tax 385 759 2,384 — (3,138) (1,993) (999) — — —

Net profit 23,782 21,182 21,091 23,856 31,602 33,771 36,973 36,643 40,823 44,971

Earnings per share (Rs) 119.1 106.1 105.6 119.5 154.5 169.1 185.1 183.5 204.4 225.2


Equity 42,898 50,062 55,999 65,413 88,344 101,113 117,689 132,281 148,537 166,445

Deferred tax liability 2,083 1,324 (1,060) (735) 2,225 4,143 5,117 5,117 5,117 5,117

Total Borrowings — — — — — — — — — —

Current liabilities 43,794 42,008 44,730 39,490 34,936 41,686 44,583 49,182 52,183 56,903

Total liabilities 98,889 96,417 99,913 104,482 125,505 146,943 167,388 186,580 205,836 228,464

Net fixed assets 38,244 31,331 30,974 36,252 41,898 48,606 49,729 56,129 61,930 64,730

Investments 39,643 36,238 40,888 31,541 45,810 58,899 75,252 81,252 89,252 103,252

Cash 768 1,810 1,175 1,593 1,314 1,367 1,413 242 1,427 2,473

Other current assets 20,235 27,037 26,877 35,096 36,484 38,070 40,993 48,956 53,228 58,010

Total assets 98,889 96,417 99,913 104,482 125,505 146,943 167,388 186,580 205,836 228,464


Operating cash flow excl. working capital 30,504 26,777 29,089 25,859 34,719 36,287 38,208 37,352 41,781 45,880

Working capital changes (6,906) (7,872) 545 (3,359) 3,772 3,993 1,601 (3,363) (1,271) (62)

Capital expenditure (5,034) (6,004) (9,328) (11,530) (14,604) (11,491) (7,992) (12,500) (12,500) (10,000)

Free cash flow 18,564 12,900 20,307 10,970 23,888 28,790 31,816 21,489 28,010 35,818

Ratios

Gross margin (%) 26.7 26.8 27.9 28.4 32.1 33.2 32.3 30.4 30.4 30.2

EBITDA margin (%) 11.9 10.1 10.7 12.2 15.7 16.3 16.4 15.2 15.4 15.3

PAT margin (%) 10.1 8.9 8.3 8.6 11.1 11.8 11.5 10.3 10.4 10.4

Book Value (Rs/share) 225 257 275 324 454 527 615 688 769 859

RoAE (%) 61.8 44.0 39.7 39.9 40.7 34.5 32.4 28.2 28.1 27.7


2QCY18 results—cost efficiencies aid a strong quarter

Ambuja’s standalone earnings were higher than our estimates—the company reported

revenues of `30.2 bn (+7% yoy, +5% qoq), EBITDA of `6.2 bn (+2% yoy, +23% qoq) and net-

income of `5 bn, against our estimate of `30 bn, `5.1 bn and `3.1 bn, respectively, The

earnings beat was led by (1) higher-than-expected realizations which improved 3% qoq to

`4,740/ton (+1% yoy, KIE: `4,660/ton). We note that ACC reported improvement in realization

by +5% qoq while Ultratech reported +1% qoq increase—as per ACEM, revenues were

supported by higher sales of premium products, and (2) contained fuel costs and lower other

expenses.

Costs declined 1% qoq to `3,760/ton (+3% yoy) and were low due to (1) contained fuel costs

at `1,021/ton (+9% yoy, +1% qoq) despite sharp increase in pet-coke prices—per company,

improved efficiencies helped here, and (2) lower other expenses which declined by 7% qoq

despite increase in volumes by 2% qoq. The company’s EBITDA/ton improved 20% qoq to `977

(-4% yoy). The standalone net-income was aided by higher other income of `1.9 bn (`507 mn

in 4QFY18) led by dividend income from ACC (netted-off in consolidated accounts).

ACEM’s plant utilization improves to 86% and can constrain volume for next two years

ACEM’s volumes increased 5% yoy to 6.37 mn tons (+2% qoq) in 2QCY18 as its plant

operated at 87% utilization. Volume growth was aided by strong demand from individual

housing and infrastructure segments. We highlight that ACEM’s volume growth was lower than

those reported by ACC (+7% yoy) and Ultratech (close to 10% yoy for extant operations, per

our estimate). We believe high utilization may restrict volume growth over the next two years as

a new project in Rajasthan with 1.7 mtpa clinkerization capacity is only expected in 2HCY20.

NCLAT upholds CCI imposed penalty; maintain REDUCE, revise TP to `210 (`215 earlier)

NCLAT has upheld the CCI order which imposed a penalty of `11.6 bn on ACEM and `11.5 bn

on subsidiary ACC. We account for these liabilities in our valuation—the companies have stated

that they may appeal in the Supreme Court. We raise our EBITDA estimate by 2-5% for

CY2018-2020E on tweaking our realization and cost assumptions. However, we cut our target

price to `210 (`215 earlier) due to inclusion of penalty amount as assumed liability. We

maintain REDUCE on full valuations—stock trades at 11X CY2018E attributable EV/EBITDA.

Ambuja Cements (ACEM) Cement

Strong quarter—mostly cost efficiencies. ACEM’s earnings were higher than our

estimates aided by costs efficiencies—other expenses declined 7% qoq despite higher

volumes (+2%) while fuel costs were contained at +1% qoq despite the increase in pet-

coke prices. The improved cost efficiencies at ACEM and subsidiary ACC, have helped

narrow down the EBITDA/ton differential with other pan-India names though the plants

are now operating at capacity utilization of 86-89% which can constrain volume

growth. Post NCLAT order maintaining the penalty imposed by CCI, we assume the

amount due on ACEM, ACC as liability and cut TP to `210 (from `215 earlier).

REDUCE

JULY 26, 2018

RESULT

Coverage view: Cautious

Price (`): 208


BSE-30: 36,858

Abhishek Poddar

Murtuza Arsiwalla

Samrat Verma

Ambuja Cements







MFs 4.8 EBITDA (Rs bn) 38.6 42.5 48.6


Absolute 0.8 (15.2) (22.2) ROE (%) 7.4 8.1 9.5



292-189

413.9

Ambuja Cements Cement


Exhibit 1: Ambuja reported strong EBITDA aided by contained fuel costs and 3% qoq increase in realizations Quarterly results for Ambuja Cements (Standalone), December year-ends (Rs mn)


Changes in our estimates

Exhibit 5 highlights key changes in our estimates.

Ambuja standalone—raise EBITDA estimate by 3-7%. We cut our volume estimate by

1% to 24.6 mn tons, 26.5 mn tons and 28.4 mn tons for CY2018E, CY2019E and

CY2020E. We raise our realization assumption by 1% and tweak our cost assumptions—

this results in increase in our standalone EBITDA estimate by 3-7% to `23.1 bn, `27.1 bn

and `30.3 bn for CY2018E, CY2019E and CY2020E. We estimate standalone EPS of

`7.6, `9.4 and `10.7 for CY2018E, CY2019E and CY2020E.

Ambuja consolidated—estimate raised by 2-5% as incorporate revised estimates

of ACC. The above revision combined with our earlier change in ACC’s estimates results

in 2-5% increase in our consolidated EBITDA estimates. We estimate consolidated EBITDA

of `42.5 bn, `48.7 bn and `54.3 bn for CY2018E, CY2019E and CY2020E. We estimate

consolidated EPS of `8.6, `10.6 and `12.3 for CY2018E, CY2019E and CY202E.

Our target price of `210/share is based on March 2020E.

(% chg.)

2QCY18 2QCY18E 2QCY17 1QCY18 KIE yoy qoq 1HCY18 1HCY17 (% chg) CY2018E CY2017 (% chg)

Sales 30,169 29,899 28,233 28,626 1 7 5 58,795 53,567 10 116,663 104,469 12

Operating costs

Raw material costs (2,113) (2,405) (2,289) (2,118) (4,231) (4,643) (9,024) (8,465)

Employee costs (1,758) (1,744) (1,697) (1,696) (3,453) (3,374) (6,994) (6,614)

Freight costs (8,784) (8,642) (7,375) (8,288) (17,072) (14,786) (33,029) (28,720)

Power & fuel costs (6,547) (6,862) (5,647) (6,351) (12,898) (11,035) (25,281) (22,342)

Other costs (4,744) (5,153) (5,096) (5,102) (9,847) (9,948) (19,222) (18,927)

Total operating costs (23,946) (24,806) (22,102) (23,555) (47,501) (43,786) (93,549) (85,067)

EBITDA 6,223 5,092 6,131 5,071 22 2 23 11,294 9,781 15 23,114 19,401 19

EBITDA margin (%) 21 17 22 18 19 18 20 19

Other income 1,911 949 940 507 2,418 2,249 5,272 3,591

Interest (192) (255) (165) (257) (449) (542) (965) (1,072)

Depreciation (1,364) (1,420) (1,439) (1,393) (2,757) (2,899) (5,789) (5,729)

PBT 6,578 4,366 5,466 3,928 51 20 67 10,507 8,590 22 21,632 16,191 34

Current tax (expense)/income (1,586) (1,310) (1,544) (1,211) (2,796) (2,202) (6,490) (3,937)

Net income 4,993 3,056 3,922 2,718 63 27 84 7,710 6,388 21 15,143 12,255 24

Extraordinaries (net of taxes) — — — — — — — 241

Reported net income 4,993 3,056 3,922 2,718 63 27 84 7,710 6,388 21 15,143 12,496 21

EPS (Rs) 2.5 1.5 2.0 1.4 3.9 3.2 21 7.6 6.2

Per ton analysis

Despatches, '000 tons 6,370 6,413 6,050 6,220 (1) 5 2 12,590 12,070 4 24,270 22,950 6

Realization (Rs/ton) 4,736 4,662 4,667 4,602 2 1 3 4,670 4,438 5 4,807 4,552 6

Operating cost (Rs/ton) 3,759 3,868 3,653 3,787 3,773 3,628 3,855 3,707

Raw materials 332 375 378 340 336 385 372 369

Employee costs 276 272 280 273 274 280 288 288

Freight costs 1,379 1,348 1,219 1,333 1,356 1,225 1,361 1,251

Power & fuel costs 1,028 1,070 933 1,021 1,024 914 1,042 974

Other costs 745 804 842 820 782 824 792 825

Profitability (Rs/ton) 977 794 1,013 815 23 (4) 20 897 810 11 952 845 13

Cement Ambuja Cements


Key highlights from 2QCY18 results

Realizations—ACEM’s standalone realizations increased 3% qoq to `4,740/ton (+1%

yoy). We note that the company has large dependence on the North (40%) and West

markets (40%) and per our channel checks, cement prices improved 3% qoq in the West

region during the quarter while it declined by 3% qoq in North markets.

Profitability and costs—ACEM’s EBITDA/ton increased 20% qoq to `977/ton (+34%

yoy) in 2QCY18 largely aided by contained costs (-1% qoq). The total cost per ton

declined 1% qoq to `3,760/ton (+3% yoy). The company’s raw-material costs increased

by 14% yoy to `449/ton (from `434/ton in 1QCY18) due to increase in the cost of fly-ash

and gypsum. Freight costs increased by 13% yoy to `1,370/ton (`1,331/ton in 1QCY18)

due to increase in diesel prices and lead distance.

However, power & fuel costs was flat qoq at `1,021/ton (+9% yoy) aided by improved

efficiencies and productivity improvements, per company. The major cost saving though

was through lower-than-expected other expenses which declined 7% qoq even though

volumes increased by 2% qoq. The company attributed this to various cost saving

measures undertaken without any specific mentions.

Consolidated financials—strong improvement. Ambuja’s consolidated EBITDA

increased by 10% yoy to `12.5 bn (+25% qoq) aided by 6% yoy increase in volumes to

13.6 mn tons (+2% qoq) and EBITDA/ton improving to `918 (+3% yoy, +22% qoq). The

consolidated net-income increased 35% qoq to `5.3 bn (-5% yoy). The strong

improvement in consolidated earnings is in particular contributed by improved

performance at ACC discussed below.

Greenfield project in Rajasthan. Ambuja is investing in a new Greenfield project in

Rajasthan—the company will set up a 3.1 mtpa clinkerisation plant at Marwar Mundwa.

The project will be set-up in two phases, in the first phase Ambuja will invest `13.9 bn for

setting up a 1.7 mtpa clinkerization capacity expected to be commissioned by 2HCY20.

We highlight that Ambuja’s standalone capacities operated at close to 86% utilization in

1HCY18.

ACC—strong earnings led by higher-than-expected realizations, lower costs

ACC’ reported revenues of `37.7 bn (+14% yoy, +6% qoq), EBITDA of `5.4 bn (+10% yoy,

+28% qoq) and net-income of `3.3 bn (+1% yoy, +33% qoq), against our estimate of

`35.9 bn, `3.6 bn and `2.1 bn, respectively. EBITDA beat was led by (a) higher-than-

expected improvement in realization by 5% qoq to `4,840/ton (+5% yoy, KIE: `4,650/ton),

and (2) lower fuel costs. We note that 5% qoq (+`210/ton) increase in realization compares

to only +1% qoq increase reported by UTCEM which also stated that cement prices were

estimated to increase ~1-2% qoq for the sector in 1QFY19—this is in line with our channel

checks. We understand ACC’s improved realization likely reflects (1) change in geographical

mix as well as (2) higher sales of premium cement (see Exhibit 3).

ACC’s fuel costs declined by 1% qoq to `1,032/ton (+2% yoy) despite a sharp increase in

pet-coke prices and weaker INR/US$ rate. We believe cost should have also increased due to

limited linkage coal availability due to rake availability issues from railways. The contained

costs (`4,450/ton, +1% qoq) and higher realizations (`4,840/ton, +5% qoq) aided 30% qoq

increase in EBITDA/ton to `713/ton.



Exhibit 2: ACEM's consolidated EBITDA increased 25% qoq aided by higher realizations & contained costs, especially for fuel, other costs Quarterly results for Ambuja Cements (Consolidated), December year-ends (Rs mn)


(% chg.)

2QCY18 2QCY17 1QCY18 yoy qoq 1HCY18 1HCY17 (% chg) CY2018E CY2017 (% chg)

Sales 68,351 61,453 64,596 11 6 132,947 117,772 13 262,919 235,984 11

Operating costs

Raw material costs (7,466) (6,282) (7,703) (15,169) (13,259) (30,640) (27,760)

Employee costs (4,411) (3,951) (3,764) (8,174) (7,653) (16,217) (15,112)

Freight costs (19,122) (16,083) (18,275) (37,397) (31,763) (72,904) (63,075)

Power & fuel costs (14,067) (12,503) (13,850) (27,918) (24,379) (55,241) (49,529)

Other costs (10,785) (11,274) (10,989) (21,774) (22,085) (45,397) (41,932)

Total operating costs (55,851) (50,094) (54,581) (110,432) (99,138) (220,399) (197,409)

EBITDA 12,500 11,360 10,015 10 25 22,515 18,634 21 42,520 38,576 10

EBITDA margin (%) 18 18 16 17 16 16 16

Other income 820 2,354 864 1,684 3,916 5,195 3,226

Interest (464) (381) (442) (906) (1,000) (1,951) (2,058)

Depreciation (2,861) (3,076) (2,882) (5,743) (6,202) (12,095) (12,195)

PBT 9,996 10,257 7,555 (3) 32 17,550 15,347 14 33,669 27,550 22

Current tax (expense)/income (3,176) (3,104) (2,447) (5,623) (4,251) (10,774) (8,470)

Net income 6,820 7,153 5,108 (5) 34 11,928 11,097 7 22,895 19,080 20

Extraordinaries (net of taxes) 25 29 36 61 56 - 241

Minority interest 1,589 1,630 1,245 2,834 2,684 5,802 4,158

Reported net income 5,255 5,553 3,899 (5) 35 9,154 8,468 8 17,093 15,164 13

EPS (Rs) 2.6 2.8 2.0 4.6 4.3 8.6 7.5

Per ton analysis

Despatches, '000 tons 13,610 12,780 13,330 6 2 26,940 25,400 6 52,002 48,674 7

Realization (Rs/ton) 5,022 4,809 4,846 4 4 4,935 4,637 6 5,056 4,848 4

Operating cost (Rs/ton) 4,104 3,920 4,095 4,099 3,903 4,238 4,056

Raw materials 549 492 578 563 522 589 570

Employee costs 324 309 282 303 301 312 310

Freight costs 1,405 1,258 1,371 1,388 1,251 1,402 1,296

Power & fuel costs 1,034 978 1,039 1,036 960 1,062 1,018

Other costs 792 882 824 808 869 873 861

Profitability (Rs/ton) 918 889 751 3 22 836 734 14 818 793 3



Exhibit 3: ACC's earnings in 1QFY19 led by higher-than-expected improvement in realizations and lower costs, especially for fuel Quarterly results for ACC Limited (Standalone), December year-ends (Rs mn)


Exhibit 4: Ambuja's volumes increased 5% yoy to 6.37 mn tons in 2QCY18 Volume (mn tons) and raw material cost (Rs/ton), December year-ends


(% chg.)

2QCY18 2QCY18E 2QCY17 1QCY18 KIE yoy qoq 1HCY18 1HCY17 (% chg) CY2018E CY2017 (% chg)

Sales 37,679 35,875 33,125 35,570 5 14 6 73,249 64,122 14 145,814 129,310 13

Operating costs

Raw material costs (5,243) (5,716) (4,016) (5,646) (10,888) (8,663) (21,730) (19,676)

Employee costs (2,565) (2,089) (2,182) (1,982) (4,547) (4,134) (8,913) (8,190)

Freight costs (10,380) (10,214) (8,753) (10,023) (20,403) (17,058) (40,030) (34,510)

Power costs (7,510) (7,924) (6,847) (7,488) (14,997) (13,323) (29,918) (27,145)

Purchased cement (248) (3) (3) (21) (268) (5) (275) (8)

Other expenditure (6,300) (6,299) (6,374) (6,175) (12,475) (12,571) (26,175) (24,226)

Total operating costs (32,244) (32,244) (28,175) (31,335) (0) 14 3 (63,579) (55,753) (127,042) (113,755)

EBITDA 5,435 3,631 4,951 4,235 50 10 28 9,670 8,369 16 18,772 15,555 21

EBITDA margin (%) 14.4 10.1 14.9 11.9 13.2 13.1 12.9 12.0

Other income 1,119 1,167 1,663 1,144 2,263 2,764 5,592 4,853

Interest (275) (195) (225) (193) (468) (477) (1,023) (1,023)

Depreciation (1,481) (1,548) (1,621) (1,474) (2,955) (3,271) (6,242) (6,401)

PBT 4,798 3,055 4,768 3,712 57 1 29 8,510 7,384 15 17,099 12,984 32

Current tax (1,543) (978) (1,550) (1,261) (2,804) (2,052) (5,130) (3,511)

Deferred tax — — — — (342) (318)

Net income 3,255 2,078 3,218 2,451 57 1 33 5,706 5,332 7 11,627 9,155 27

Extraordinaries (net of tax) — — — — — — — —

Reported net income 3,255 2,078 3,218 2,451 57 1 33 5,706 5,332 11,627 9,155

EPS - adjusted (Rs) 17.3 11.1 17.1 13.0 30.4 28.4 61.8 48.6

Sales (mn tons) 7.2 7.1 6.7 7.1 1 7 2 14.4 13.3 8 28.0 26.2 7

Realization (Rs/ton) 4,836 4,647 4,597 4,626 4 5 5 4,732 4,474 6 4,820 4,576 5

Operating costs (Rs/ton) 4,454 4,513 4,180 4,407 4,431 4,179 4,534 4,340

Raw materials 724 800 596 794 759 649 776 751

Employee costs 354 292 324 279 317 310 318 312

Freight costs 1,434 1,430 1,299 1,410 1,422 1,279 1,429 1,317

Power & fuel costs 1,037 1,109 1,016 1,053 1,045 999 1,068 1,036

Purchased cement 34 — — 3 19 — 10 —

Other expenditure 870 882 946 869 869 942 934 924

Profitability (Rs/ton) 713 508 711 550 40 0 30 632 598 6 670 593 13

400

600

800

1,000

1,200

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

2Q

CY14

3Q

CY14

4Q

CY14

1Q

CY15

2Q

CY15

3Q

CY15

4Q

CY15

1Q

CY16

2Q

CY16

3Q

CY16

4Q

CY16

1Q

CY17

2Q

CY17

3Q

CY17

4Q

CY17

1Q

CY18

2Q

CY18

Volumes- mn tons (LHS) Profitability- Rs/ton (RHS)



Exhibit 5: Ambuja Cements, Change in estimates, December year-ends, 2018-2020E (mn tons, Rs mn)


Exhibit 6: Our earnings assumptions factor 6-8% yoy growth in volumes and improved realizations Key assumptions in the profit model for Ambuja Cement, December year-ends, 2016-20E (Rs mn)


Revised estimate Previous estimate Change (%)

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

Ambuja Cement (Consolidated)

Volume and realizations (mn tons, Rs/ton)

Volumes (mn tons) 52.7 55.9 59.3 52.6 55.9 59.3 0 0 0

Realizations (Rs/ton) 4,993 5,111 5,222 4,933 5,084 5,212 1 1 0

EBITDA (Rs/ton) 807 869 915 771 854 912 5 2 0

Earnings estimates (Rs mn)

Revenue (Rs mn) 262,919 285,615 309,727 259,718 283,389 308,325 1 1 0

EBITDA (Rs mn) 42,520 48,569 54,247 40,565 47,062 53,432 5 3 2

PAT (Rs mn) 17,093 21,063 24,385 14,733 18,498 21,882 16 14 11

EPS (Rs/share) 8.6 10.6 12.3 7.4 9.3 11.0 16 14 12

Ambuja Cement (Standalone)

Volume and realizations (mn tons, Rs/ton)

Volumes (mn tons) 24.6 26.5 28.4 24.9 26.8 28.7 (1) (1) (1)

Realizations (Rs/ton) 4,807 4,924 5,000 4,781 4,857 4,933 1 1 1

EBITDA (Rs/ton) 952 1,038 1,082 911 958 1,004 5 8 8

Earnings estimates (Rs mn)

Revenue (Rs mn) 116,663 128,457 140,230 117,398 128,214 139,997 (1) 0 0

EBITDA (Rs mn) 23,114 27,077 30,348 22,376 25,292 28,494 3 7 7

PAT (Rs mn) 15,143 18,609 21,224 14,626 17,359 19,926 4 7 7

EPS (Rs/share) 7.6 9.4 10.7 7.4 8.7 10.0 4 7 7

2016 2017 2018E 2019E 2020E 2017 2018E 2019E 2020E

Ambuja—standalone (Rs mn)

Revenue 91,604 104,469 116,663 128,457 140,230 14 12 10 9

EBITDA 15,753 19,401 23,114 27,077 30,348 23 19 17 12

PAT 9,701 12,255 15,143 18,609 21,224 26 24 23 14

Key operating metrics

Volumes (mn tons) 21.1 23.0 24.3 26.1 28.0 9 6 8 8

Realization (Rs/ton) 4,267 4,480 4,735 4,855 4,935 5 6 3 2

Operating cost (Rs/ton) 3,520 3,634 3,782 3,817 3,853 3 4 1 1

Profitability (Rs/ton) 747 845 952 1,038 1,082 13 13 9 4

ACC—standalone (Rs mn)

Revenue 107,678 129,310 145,814 156,717 169,056 20 13 7 8

EBITDA 12,518 15,555 18,772 20,858 23,265 24 21 11 12

PAT 6,899 9,154 11,627 13,236 15,254 33 27 14 15

Key operating metrics

Volumes (mn tons) 23.0 26.2 28.0 29.4 30.9 14 7 5 5

Realization (Rs/ton) 4,684 4,934 5,204 5,327 5,472 5 5 2 3

Operating cost (Rs/ton) 4,139 4,340 4,534 4,618 4,719 5 4 2 2

Profitability (Rs/ton) 544 593 670 709 753 9 13 6 6

Consolidated

Revenue 200,940 235,984 262,919 285,615 309,727 17 11 9 8

EBITDA 28,693 38,576 42,520 48,569 54,247 34 10 14 12

PAT 11,509 14,922 17,093 21,063 24,385 30 15 23 16

Growth (%)



Exhibit 7: Our fair value of Rs210/share is based on March 2020E financials Fair value estimate of Ambuja Cement, March 2020E (Rs/share)

Note: (1) Ambuja’s penalty includes 50% share of ACC’s penalty post acquisition of majority stake.


Exhibit 8: Profit model, balance sheet, cash model of Ambuja Cement (consolidated), December year-ends, 2015-20E (Rs mn)


March-2020E

Attributable EBITDA (Rs mn) 38,625

EV/EBITDA (X) 10

Attributable EV (Rs mn) 374,663

Attributable net cash (Rs mn) 56,851

Equity value (Rs mn) 431,514

Potential CCI payment amount (Rs mn)* 17,350

Equity value - adjusted (Rs mn) 414,164

No. of shares 1,986

Target price 210

2015 2016 2017 2018E 2019E 2020E


Net sales 93,880 200,940 235,984 262,919 285,615 309,727

EBITDA 14,489 28,693 38,576 42,520 48,569 54,247

Other income 4,466 7,680 3,226 5,195 6,683 7,899

Interest (925) (1,405) (2,058) (1,951) (1,854) (1,767)

Depreciation (6,298) (14,632) (12,195) (12,095) (12,710) (13,325)

Pretax profits 11,733 20,336 27,550 33,669 40,688 47,054

Tax (3,654) (5,760) (8,470) (10,774) (13,020) (15,057)

Net profits before minority 8,079 14,576 19,080 22,895 27,668 31,996

Minority interest — (3,067) (3,916) (5,802) (6,605) (7,612)

Net profit 8,079 11,509 15,164 17,093 21,063 24,385

Earnings per share (Rs) 5.2 5.8 7.5 8.6 10.6 12.3


Total equity 102,715 195,455 206,722 215,208 227,665 243,443

Total borrowings 236 239 259 259 259 259

Minority interest 7 43,778 46,080 49,638 53,999 59,367


Currrent liabilities 32,714 77,325 90,551 94,264 102,564 110,479

Total liabilities and equity 141,328 327,330 355,004 370,454 395,164 423,765

Cash 28,532 16,962 62,316 73,068 93,782 118,605

Current assets 25,442 62,562 75,503 81,259 86,965 93,068

Total fixed assets 65,388 140,758 136,839 135,782 134,071 131,746

Goodwill 478 79,097 78,815 78,815 78,815 78,815

Investments 21,488 27,951 1,531 1,531 1,531 1,531

Total assets 141,328 327,330 355,004 370,455 395,164 423,765


Operating cash flow, excl. working capital 15,391 25,637 34,153 36,047 41,240 46,011

Working capital change 175 2,513 5,888 (1,456) 3,179 2,429

Capital expenditure (6,192) (8,853) (8,219) (11,038) (11,000) (11,000)

Free cash flow 9,374 19,298 31,821 23,553 33,419 37,440

Ratios

Book value (Rs/share) 66 98 104 108 115 123

RoAE (%) 8.5 7.7 7.4 8.1 9.5 10.4

RoACE (%) 8.4 5.9 7.4 8.0 8.9 9.5

CRoCI (%) 11.2 14.6 12.0 12.5 13.7 14.7


Moves back to black; albeit marginal

After reporting a large loss in 4QFY18, CBK reported a profit, a marginal one, although broadly

reporting a high loss due to provisions for bad loans. NII grew 43% yoy led by a large one-off

income reported on the resolution of a steel account. Loan growth was at 13% yoy with ~36%

yoy growth in retail loans (21% of loans). The bank has taken dispensation benefit on account

of MTM loss in the current quarter.

Gross NPLs shows the final sign of reversals; possibility of further improvement

Resolution in a few large cases has finally resulted in a much-awaited decline in outstanding

gross NPLs by 6% qoq. This makes the first meaningful decline in the past few years as two

large corporate loans (Bhushan Steel and Electrosteel Steels) were resolved this quarter.

Consequently, Canara Bank’s gross and net NPL ratios declined 80 bps qoq to 11.1% and 60

bps qoq 6.9%, respectively with provision coverage (calculated) of 40%. Slippages declined as

expected but still were high at 4.4% annualized with 40% of slippages arising from the

corporate loan book. SMA-2 is at 1.3% of loans, which gives comfort on the near-term

movement of NPLs. With a few more large NCLT cases likely to be resolved in FY2019, we are

likely to see further decline in this number. Along with the above, there are a few more cases

outside the NCLT process under Samadhan scheme (power assets) where the bank has

indicated that there has been some progress and announcements for a few loans are likely in

2QFY19.

Maintain ADD with TP of `300 (TP unchanged)

We have revised our earnings downwards as we are building higher provisions on account of

the higher NPLs reported in the current quarter. We maintain ADD rating and value the bank at

`300 (TP unchanged). At our TP, we value the bank at ~1X book and ~5X March 2020E EPS for

expected RoEs at ~10% through FY2020E, although earnings growth would be strong on a low

base. Canara Bank, similar to most other banks, would be a beneficiary of this entire corporate

NPL-recovery cycle. We expect the stock price to show a positive momentum as these events

unfold.

Canara Bank (CBK) Banks

First sign of reversals in NPL. CBK reported 6% decline in gross NPLs, which is the

first meaningful decline in many years as resolution in a few IBC cases was achieved in

the current quarter. With a few more large cases to be resolved in FY2019, we are

probably starting to see a steady decline in gross NPLs from here. Outstanding SMA-2 at

1.3% gives comfort on the near-term NPL performance. Recovery rates are still uncertain

but gradual shift in focus from slippages should aid valuation expansion, in our view.

Maintain ADD with TP at `300 (unchanged).

ADD

JULY 26, 2018

RESULT


Price (`): 259


BSE-30: 36,858

QUICK NUMBERS

NII up 43% yoy; net

profit increased

12% yoy

GNPL ratio and

NNPL ratio down 79

bps and 57 bps qoq

to 11% and 6.9%,

respectively

Maintain ADD

rating with TP at

`300 (unchanged)

M B Mahesh CFA

Nischint Chawathe

Dipanjan Ghosh

Canara Bank


52-week range (Rs) (high,low) EPS (Rs) (57.6) (4.8) 50.7

Market Cap. (Rs bn) EPS growth (%) (406.6) 91.6 1,147.0

Shareholding pattern (%) P/E (X) (4.5) (53.5) 5.1

Promoters 72.5 NII (Rs bn) 121.6 141.5 158.4

FIIs 5.1 Net profits (Rs bn) (42.2) (3.6) 37.2

MFs 6.9 BVPS 159.3 167.4 284.2

Price performance (%) 1M 3M 12M P/B (X) 1.6 1.5 0.9

Absolute 3.6 1.8 (27.5) ROE (%) (12.2) (1.0) 10.1



464-217

189.9

Banks Canara Bank


Exhibit 1: Canara Bank quarterly results March fiscal year-ends, 1QFY18-1QFY19 (` mn)


1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 2019E 2018 (% chg.) 2020E

Interest income 113,596 105,470 101,956 102,234 8 11 11 447,908 412,521 9 488,724

Interest on advances 83,260 76,593 72,485 72,525 9 15 15 329,322 290,964 13 372,856

Income from investments 26,184 26,575 27,334 25,524 (1) (4) 3 106,384 104,121 2 103,205

Others 4,152 2,302 2,137 4,186 80 94 (1) 12,203 17,435 (30) 12,663

Interest expense 74,767 74,168 74,824 72,358 1 (0) 3 306,375 290,888 5 330,354

Net interest income 38,829 31,302 27,132 29,876 24 43 30 141,533 121,633 16 158,370

Non-int.income 18,329 13,082 21,085 13,317 40 (13) 38 61,249 69,429 (12) 68,782

Sale of investments 610 500 8,840 670 22 (93) (9) 5,000 19,184 (74) 8,000

Fee income 3,460 3,159 3,670 2,430 10 (6) 42 12,958 11,998 8 14,513

Recoveries 5,000 2,013 1,830 1,830 148 173 173 12,000 9,360 28 12,000

Other income excl treasury 17,713 12,582 12,245 12,647 41 45 40 56,249 50,245 12 60,782

Total income 57,158 44,384 48,218 43,193 29 19 32 202,782 191,062 6 227,151

Op. expenses 27,830 24,589 23,494 25,546 13 18 9 111,459 95,579 17 121,538

Employee cost 15,169 13,982 13,518 13,067 8 12 16 61,584 54,441 13 66,554

Other cost 12,661 10,607 9,976 12,479 19 27 1 49,875 41,138 21 54,984

Profit pre provisions 29,328 19,795 24,724 17,647 48 19 66 91,323 95,482 (4) 105,613

Provisions and cont. 25,823 62,746 22,038 90,750 (59) 17 (72) 96,930 161,091 (40) 46,948

Investment depreciation 2,580 12,000 910 6,420 (79) 184 (60) 8,000 18,918 (58) 2,000

NPL provisions 23,240 50,598 21,000 84,330 (54) 11 (72) 88,430 142,380 (38) 44,448

PBT 3,505 (42,951) 2,686 (73,104) NM 30 NM (5,607) (65,609) (91) 58,666

Tax 690 (15,739) 170 (24,506) NM 306 NM (2,055) (23,386) (91) 21,472

Net profit 2,815 (27,212) 2,516 (48,598) NM 12 NM (3,552) (42,222) (92) 37,194

Tax rate (%) 20 NM 6 NM NM NM 37

PBT-gains+ prov - ex ordry 20,536 13,289 10,431 10,139 55 97 103 88,430 142,380 (38) 44,448

Key balance sheet items (Rs bn)

Deposits 5,333 5,353 4,859 5,248 (0) 10 2 5,643 5,248 8 6,065

CA 212 225 250 (6) (15) 269 250 8 289

SA 1,415 1,266 1,421 12 (0) 1,499 1,421 6 1,581

CASA ratio (%) 30.5 30.7 31.8 -18 bps -133 bps 31.3 31.8 -50 bps 30.8

Term deposits 3,706 3,368 3,577 10 4 3,875 3,577 8 4,195

Advances 3,863 3,855 3,428 3,817 0 13 1 4,222 3,817 11 4,667

Total retail loans 829 608 769 36 8 769

Priority sector 1,875 1,628 1,856 15 1 1,856

Agriculture advances 849 758 840 12 1 840

SME 831 753 821 10 1 821

Industrial loans 1,354 1,309 1,387 3 (2) 1,387

Investments 1,445 1,455 1,479 1,441 (1) (2) 0 1,399 1,441 (3) 1,364

AFS (%) 33.4 31.2 29.5 215 bps 390 bps 29.5

Duration (years) 5 5 5 (2) (3) 5

Key calculated ratios (%)

Yield on advances 8.7 8.5 7.7 21 bps 99 bps 8.2 8.0 15 bps 8.4

Yield on investment 7.3 7.3 7.1 -7 bps 12 bps 7.6 7.2 45 bps 7.6

Yield on earning assets 7.8 7.5 7.2 39 bps 68 bps 7.6 7.2 45 bps 7.6

Cost of deposits 5.7 6.1 5.6 -45 bps 3 bps 5.3 5.3 -2 bps 5.4

Cost fo funds 5.3 5.6 5.2 -34 bps 9 bps 5.2 5.3 -5 bps 5.3

NIM 3.0 2.3 2.3 75 bps 66 bps 2.4 2.2 22 bps 2.5

Cost to income 48.7 48.7 59.1 -3 bps -1046

bps 55.0 50.0 494 bps 53.5

Cost to average assets 1.8 1.6 1.7 18 bps 12 bps 1.7 1.6 16 bps 1.8

Credit cost 2.4 2.5 8.9 -3 bps -652

bps 2.2 3.9 -173 bps 1.0

RoA 0.2 0.2 (3.2) (0.1) (0.7) 0.5

RoE 3.1 3.0 (55.7) (1.0) (12.2) 10.1

Asset quality details

Gross NPLs (Rs bn) 447 377 475 19 (6) 451 475 (5) 373

Gross NPL ratio (%) 11.1 10.6 11.8 49 bps -79 bps 10.0 11.8 -182 bps 7.5

Net NPLs (Rs bn) 267 243 285 10 (6) 271 285 (5) 196

Net NPL ratio (%) 6.9 7.1 7.5 -18 bps -57 bps 6.4 7.5 -106 bps 4.2

Provision Coverage (%) 40.2 35.5 39.9 476 bps 36 bps 40.0 39.9 13 bps 47.4

Restructured assets (Rs bn) 180 211 185 (15) (3)

Restructured assets (%) 4.7 6.1 4.9 -149

bps -20 bps

Slippages (Rs bn) 42 55 133 (24) (68) 115 248 (54) 74

Slippage (%) 4.4 6.4 14.2 -204

bps

-983

bps 3.0 7.2 -424 bps 1.8

Capital adequacy details (%)

CAR 13.0 12.6 13.2 39 bps -22 bps

Tier I 10.1 9.6 10.3 57 bps -16 bps

Other key parameters (#)

Branches 6,299 6,097 6,204 3 2 6,354 6,204 2 6,504

ATM 9,221 10,559 9,395 (13) (2) 9,495 9,395 1 9,595

Clients (mn) 84 79 83 6 1

(% chg.)

Canara Bank Banks


Asset quality improves qoq

GNPL dropped 6% qoq to `447 bn (11% of loans, down 79 bps qoq). Slippages decreased

to `42 bn (4.4% of loans) driven by high slippages from the corporate, medium enterprise

and SME and agriculture book. Slippages from the “large industries” (corporate) book stood

at ~`18 bn. Out of this top 10 accounts accounted for ~14 bn. One major oil account worth

`4 bn is included in corporate slippages. Slippages from the agriculture sector which saw a

spike in 4QFY18 remain high at `6 bn (2.9% of loans). Out of the total exposure from

agriculture sector worth `849 bn, ~`400 bn is towards agriculture gold loans. NPLs from this

segment have been quite low. Slippages increased to `11.7 bn in the medium enterprise

and SME segment mainly led by slippages from 3 lumpy accounts. Most of these companies

are facing liquidity issues and the management expects recovery going ahead. The bank

maintains a healthy provision coverage ratio (including technical write-off) of 61% (up 263

bps qoq). The net stressed assets (GNPL + standard restructured) assets dropped 63 bps qoq

to 12.1% in 1QFY19. The bank has seen a drop in its SMA (1 and 2) book to ~`111 bn in

1QFY19 from `133 bn qoq.

With respect to accounts under NCLT, the bank has exposure to 10 accounts in list 1 (~`80

bn) and >15 accounts in list 2 (`50 bn). Out of the total exposure in list 1, ~`58 bn belongs

to the iron and steel sector. Management expects swift pace of recoveries in this segment.

The bank is positive that accelerated resolutions of large accounts will lead to fall in GNPLs in

FY2019E (two recoveries from NCLT 1 list with exposure of ~`22 bn have already been

resolved). As such, we build a gradual recovery in GNPL ratio to 7.5% by FY2020E and 5%

by FY2021E from ~12% in FY2018. Slippages are expected to moderate to 3% in FY2019E

and drop further to 1.5% by FY2021E.

Exhibit 2: Slippages dropped to 4.4% in 1QFY19 March fiscal year-ends, 2012-1QFY19 (` bn)


2012 2013 2014 2015 2016 2017 2018 1QFY19

SME 9.6 15.3 17.3 30.5 46.6 55.6 NA NA

Agriculture 6.7 8.9 9.8 14.1 21.6 27.6 38.5 41.4

Other priority segments 3.0 3.7 2.5 3.8 5.9 5.6 6.2 7.3

Medium industries 2.1 3.5 3.9 8.3 14.8 13.4 NA NA

MSME (SME+medium industries) 11.7 18.8 21.2 38.8 61.5 68.9 81.3 83.8

Large enterprises 12.3 15.2 32.8 58.2 180.4 182.9 233.0 199.0

Non-priority segments 6.6 16.1 9.5 15.6 47.1 57.1 115.7 115.2

Total gross NPL (Rs bn) 40.3 62.6 75.7 130.4 316.4 342.0 474.7 446.6

Gross NPL (%) 1.7 2.6 2.5 3.9 9.4 9.6 11.8 11.1

Slippages (%) 2.1 2.0 3.0 3.6 17.6 3.7 7.2 4.4

Write-off (%) 1.3 0.7 0.6 (0.5) 2.5 3.0 2.4 2.9

LLP (%) 0.9 1.0 1.0 1.2 7.4 3.1 4.2 2.4

Net NPL 33.9 52.8 59.7 87.4 208.3 216.5 285.4 266.9

Net NPL (%) 1.5 2.2 2.0 2.7 6.4 6.3 7.5 6.9

Coverage (%, without w/o) 16.0 15.7 21.2 33.0 34.2 36.7 39.9 40.2

Coverage (%, w/o) 67.6 61.4 60.1 57.3 50.1 55.6 58.1 60.7

Banks Canara Bank


Exhibit 3: Sharp drop in standard restructured loans yoy March fiscal year-ends, 2011-1QFY19 (` bn)


Retail loans drive credit growth

Loan growth was modest at 13% yoy in 1QFY19. Retail loan growth has picked pace since

2QFY18 recording 31%, 33% and 22% yoy growth in 4QFY18, 3QFY18 and 2QFY18

respectively. This growth further accelerated in 1QFY19 delivering 36% yoy increase in

1QFY19. The share of retail loans has increased to 21.5% (up 133 bps qoq) of loan mix in

1QFY19 from 13% in FY2015. Within retail loans, home loans witnessed strong growth at

19% yoy; a trend similar to previous quarters. Vehicle loan portfolio witnessed sharp spike in

growth at 28% yoy on a low base. Education loan growth was modest at 9% yoy. The

growth in other personal loans has started to gain momentum recording 56% yoy growth in

1QFY19. Agriculture and SME advances growth stood at 12% and 10% respectively in

1QFY19. Corporate loan growth was muted at 3.5% yoy but management remained

positive of gradual development of credit growth in this segment. The company is pushing

towards decreasing share of below investment grade loans (the share of BBB and above

loans in total portfolio has increased to 66% as of 1QFY19 from 50% a few quarters

earlier). Exposure to infrastructures segment however continued to ramp up at a fast pace

(up 11% yoy).

We expect loan growth to remain modest at around 10% CAGR for FY2019-2021E as

competition intensifies in the retail space and corporate loan growth broadly remains muted.

2011 2012 2013 2014 2015 2016 2017 2018 1QFY19

Agriculture 6.0 2.2 3.9 4.0 4.7 3.7 2.8 2.1 2.0

MSME 7.1 3.4 5.3 6.2 15.1 16.7 14.8 13.4 13.2

Housing 5.3 2.8 2.2 3.1 5.3 2.8 1.8 1.2 1.0

Large advances 49.2 45.5 91.5 128.3 254.7 207.2 194.3 166.8 161.3

Others 13.3 25.1 78.2 90.5 4.0 1.9 1.9 1.9 2.2

Total 80.8 79.0 181.1 232.1 283.7 232.3 215.6 185.3 179.7

% of loans 3.8 3.4 7.5 7.7 8.6 7.2 6.3 4.9 4.7

Standard restructured 74 75 150 202 226 130 102 37 42

% of loans 3.5 3.2 6.2 6.7 6.9 4.0 3.0 1.0 1.1

Canara Bank Banks


Exhibit 4: Share of retail loans has increased to 21.5% Loan book break-up, March fiscal year-ends, 2010-1QFY19 (%)


Exhibit 5: Loan growth showing signs of improvement Loans/deposit growth, March fiscal year-ends, 1QFY15-1QFY19 (%)


Exhibit 6: CD ratio dropped in 1QFY19 CD ratio, March fiscal year-ends, 1QFY15-1QFY19 (%)


2010 2011 2012 2013 2014 2015 2016 2017 2018 1QFY19

Loans (Rs bn) 1,693 2,125 2,325 2,422 3,011 3,300 3,247 3,420 3,817 3,863

Retail 239 253 248 231 335 423 541 589 769 829

Agriculture 251 263 319 408 488 589 672 741 840 849

SME 311 377 349 370 500 606 667 743 821 831

Corporate 893 1,232 1,365 1,413 1,687 1,683 1,368 1,347 1,387 1,354

Priority 593 621 674 790 978 1,182 1,456 1,603 1,856 1,875

Infrastructure 327 347 404 485 577 647 543 501 528 523

Power 221 302 383 452 456 301 311 305

SEBs 151 215 230 269 271 132 138 137

NBFCs 247 234 262 242 216 256 377 410

HFCs 78 69 81 74 60 100 135 172

Loan mix (%)

Retail 14.1 11.9 10.7 9.5 11.1 12.8 16.7 17.2 20.1 21.5

Agriculture 14.8 12.4 13.7 16.8 16.2 17.8 20.7 21.7 22.0 22.0

SME 18.4 17.7 15.0 15.3 16.6 18.4 20.5 21.7 21.5 21.5

Corporate 52.7 58.0 58.7 58.3 56.0 51.0 42.1 39.4 36.3 35.1

Priority sector 35.0 29.2 29.0 32.6 32.5 35.8 44.8 46.9 48.6 48.6

Infrastructure 19.3 16.3 17.4 20.0 19.2 19.6 16.7 14.7 13.8 13.5

Power — — 9.5 12.5 12.7 13.7 14.1 8.8 8.2 7.9

SEBs — — 6.5 8.9 7.6 8.1 8.4 3.9 3.6 3.5

NBFCs — — 10.6 9.7 8.7 7.3 6.6 7.5 9.9 10.6

HFCs — — 3.4 2.9 2.7 2.2 1.9 2.9 3.5 4.4

(8)

2

11

21

30

40

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

Loan growth Deposit growth

60

63

66

69

72

75

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

Banks Canara Bank


Income recognition from resolved account under NCLT list 1 and lower interest

reversals drive NIM

Calculated NIM (adjusted for income recognition from one of the resolved accounts under

NCLT list 1 and IT-refunds) was up 11 bps qoq to 2.4%. This was driven by 10 bps qoq rise

in yield on advances as interest reversals were lower in 1QFY19. The company recognized

additional income of ~`5.1 bn from one resolved account under NCLT list 1 and had `2.2 bn

of IT refund in 1QFY19. Calculated cost of funds was however up 10 bps qoq to 5.3% led

by drop in CASA ratio in 1QFY19.

As NPL resolutions pick pace in FY2019E leading to increased income recognition we expect

yields to show gradual improvement. Revival in loan growth will additionally boost NIM. .

There might be gradual drag from increase in share of low yielding retail loans in the overall

portfolio. We forecast NIM (calculated) to improve to 2.5% by FY2021E from 2.2% in

FY2018.

Other key highlights

Deposits growth was moderate at 10% yoy in 1QFY19. Reported domestic CASA ratio

dropped 185 bps qoq to 32% on the back of drop in CA. SA witnessed robust growth at

12% yoy. The growth in SA has been strong in the last few quarters barring 3QFY18

(high base impact of demonetization). CA dropped 6% yoy. Share of retail term deposits

to overall term deposits dropped for the third quarter in a row (down 334 bps qoq and

580 bps yoy to 63%). We forecast modest CASA growth at 5.5% CAGR over FY2019-

2021E.

Non-interest income dropped 13% yoy owing to drop in treasury gains by 93% yoy even

as income from recoveries remained high. The company had recoveries of `2.8 bn from

one resolved account NCLT list-1. Fee income witnessed lackluster performance (down

5% yoy) even when fees from bancassurance business continued to see strong traction at

65% yoy growth in 1QFY19.

Cost-to-income ratio was low at 49% mainly driven by strong NII growth. Growth in

operating expenses was high at 19% yoy in 1QFY19 driven by sharp rise in other

expenses at 27% yoy (`1.9 bn of GST related expense). The company pick pace of branch

expansion in 1QFY19 (net addition of 95 branches in 1QFY19). We forecast calculated

cost-to-income ratio to remain high at 55% in FY2019E and moderate slightly thereafter

as the bank continues to invest in business expansion and technology initiatives.

Operating expenses will grow at 11% CAGR over FY2018-2021E.

CAR stood comfortable at 13% with tier-I ratio at 10.1%. Growth in RWA at 4% yoy in

1QFY19 was lower than loan growth at 13% yoy.

Canara Bank Banks


Exhibit 7: CASA ratio decreased in 1QFY19 on the back of drop

in CA CASA, March fiscal year-ends, 2009-1QFY19 (%)


Exhibit 8: The bank picked pace in expansion Branches and growth, March fiscal year-ends, 2009-1QFY19


Exhibit 9: Canara Bank is trading at 1.3X on year forward book One-year rolling forward PER and PBR, July 2010-July 2018 (X)

Source: Company, Bloomberg, Kotak Institutional Equities

Exhibit 10: Canara Bank in-line with peers Canara Bank trading premium to peers, July 2010-July 2018 (X)

Source: Company, Bloomberg, Kotak Institutional Equities

7.7 7.8 8.3 4.5 4.2 4.2 4.2 4.1 4.6 4.8 4.0

22 21 20

20 20 20 20 2226 27

27

0

7

14

21

28

35

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

1Q

FY19

Current deposits Saving deposits

2.1

11.5

6.9

10.5

3.6

27.5

19.5

2.9 4.0

2.0

3.3

0

6

12

18

24

30

0

1,280

2,560

3,840

5,120

6,400

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

1Q

FY19

Branches (LHS) Growth (%) (RHS)(#)(%)

0.0

0.6

1.2

1.8

2.4

3.0

Jul-10

Jul-11

Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

Rolling PBR (X)

0.5

0.8

1.1

1.4

1.7

2.0

Jul-10

Jul-11

Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

Banks Canara Bank


Exhibit 11: Summary of estimate changes March fiscal year-end, 2019E-2021E (` mn)

Source: Kotak Institutional Equities

New estimates Old estimates (% change)

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

Net interest income 141,533 158,370 165,402 132,228 148,453 158,491 7.0 6.7 4.4

Loan growth (%) 11 11 10 10 11 10 102 bps 0 bps 0 bps

NIM (%) 2.4 2.5 2.5 2.2 2.3 2.3 16 bps 16 bps 11 bps

Loan loss provisions 88,430 44,448 29,429 88,000 35,229 29,156 0.5 26.2 0.9

Other income 61,249 68,782 76,279 66,249 70,782 76,281 (7.5) (2.8) (0.0)

Treasury income 5,000 8,000 12,000 13,000 13,000 13,001 (61.5) (38.5) (7.7)

Operating expenses 111,459 121,538 131,528 102,345 111,400 120,645 8.9 9.1 9.0

Employee expenses 61,584 66,554 72,637 58,834 63,582 69,394 4.7 4.7 4.7

Depreciation on investments 8,000 2,000 2,000 6,000 — 1

PBT (5,607) 58,666 78,225 1,632 72,105 84,470 NM (18.6) (7.4)

Net profit (3,552) 37,194 49,594 1,034 45,715 53,554 NM (18.6) (7.4)

PBT-treasury (10,607) 50,666 66,225 (11,368) 59,105 71,469 (6.7) (14.3) (7.3)

PBT-treasury + loan loss provisions 77,823 95,113 95,653 76,632 94,334 100,625 1.6 0.8 (4.9)

Canara Bank Banks


Exhibit 12: Canara Bank growth rates and key ratios March fiscal year-ends, 2016-2021E (%)


2016 2017 2018 2019E 2020E 2021E

Growth rates (%)

Net loan (1.6) 5.3 11.6 10.6 10.5 10.2

Customer assets (1.8) 5.5 11.9 10.4 10.3 10.0

Investments excld. CPs and debentures 0.8 5.1 (5.6) (3.1) (2.7) (7.5)

Total Asset 0.9 5.5 5.7 6.6 7.2 6.6

Deposits 1.3 3.2 6.0 7.5 7.5 6.6

Current (0.1) 13.9 10.6 7.5 7.5 6.6

Savings 10.7 22.6 11.7 5.6 5.5 4.6

Fixed (1.1) (3.0) 3.5 8.3 8.3 7.4

Net interest income 1.0 1.1 23.2 16.4 11.9 4.4

Loan loss provisions 145.1 (29.4) 100.6 (37.9) (49.7) (33.8)

Total other income 7.1 55.0 (8.1) (11.8) 12.3 10.9

Net fee income (1.2) 29.8 0.7 8.0 12.0 13.0

Net capital gains (5.3) 201.2 (35.6) (73.9) 60.0 50.0

Net exchange gains (14.4) 45.2 (44.6) — 6.0 7.0

Operating expenses 3.1 13.6 12.3 16.6 9.0 8.2

Employee expenses 4.0 10.6 10.8 13.1 8.1 9.1

Key ratios (%)

Yield on average earning assets 8.5 7.7 7.4 7.6 7.7 7.8

Yield on average loans 9.6 8.9 8.0 8.2 8.4 8.4

Yield on average investments 8.1 7.4 7.2 7.6 7.6 7.6

Average cost of funds 6.8 6.0 5.3 5.2 5.3 5.4

Interest on deposits 6.8 6.1 5.3 5.3 5.4 5.5

Difference 1.7 1.7 2.1 2.3 2.5 2.4

Net interest income/earning assets 1.9 1.8 2.2 2.4 2.5 2.5

New provisions/average net loans 3.1 2.1 3.9 2.2 1.0 0.6

Interest income/total income 66.7 56.6 63.7 69.8 69.7 68.4

Other income / total income 33.3 43.4 36.3 30.2 30.3 31.6

Operating expenses/total income 51.2 48.8 50.0 55.0 53.5 54.4

Operating expenses/assets 1.4 1.5 1.6 1.7 1.8 1.8

Operating profit /AWF (0.8) (0.3) (1.5) (0.2) 0.8 1.0

Tax rate 11.7 31.7 35.6 36.6 36.6 36.6

Dividend payout ratio — — — — — —

Share of deposits

Current 4.1 4.6 4.8 4.8 4.8 4.8

Fixed 74.3 69.8 68.2 68.7 69.2 69.7

Savings 21.6 25.7 27.1 26.6 26.1 25.6

Loans-to-deposit ratio 67.7 69.1 72.7 74.8 77.0 79.5

Equity/assets (EoY) 5.7 5.8 5.8 5.3 5.5 5.8

Asset quality trends

Gross NPL 9.4 9.6 11.8 10.0 7.5 5.0

Net NPL 6.4 6.3 7.5 6.4 4.2 2.3

Slippages 7.5 3.6 7.2 3.0 1.8 1.5

Provision coverage 34.2 36.7 39.9 40.0 47.4 57.2

Dupont analysis (%)


Loan loss provisions 1.8 1.2 2.4 1.4 0.7 0.4

Net other income 0.9 1.3 1.2 1.0 1.0 1.0


(1- tax rate) 88.3 68.3 64.4 63.4 63.4 63.4

ROA (0.5) 0.2 (0.7) (0.1) 0.5 0.7

Average assets/average equity 17.3 17.4 17.3 18.0 18.4 17.7

ROE (8.9) 3.4 (12.2) (1.0) 10.1 12.0

Banks Canara Bank


Exhibit 13: Canara Bank P&L and balance sheet March fiscal year-ends, 2016-2021E (` mn)


2016 2017 2018 2019E 2020E 2021E

Income statement

Total interest income 440,221 413,876 412,521 447,908 488,724 525,050

Total interest expense 342,588 315,159 290,888 306,375 330,354 359,647

Net interest income 97,634 98,718 121,633 141,533 158,370 165,402

Loan loss provisions 100,567 70,979 142,380 88,430 44,448 29,429

Net interest income (after prov.) (2,933) 27,738 (20,747) 53,103 113,922 135,974

Other income 48,752 75,544 69,429 61,249 68,782 76,279

Net fee income 9,175 11,912 11,998 12,958 14,513 16,400

Net capital gains 9,897 29,807 19,184 5,000 8,000 12,000

Net exchange gains 6,690 9,715 5,379 5,379 5,702 6,101

Operating expenses 74,919 85,123 95,579 111,459 121,538 131,528

Employee expenses 44,459 49,151 54,441 61,584 66,554 72,637

Depreciation on investments 2,678 1,610 18,918 8,000 2,000 2,000

Other Provisions 80 130 (207) 500 500 500

Pretax income (31,858) 16,419 (65,609) (5,607) 58,666 78,225

Tax provisions (3,730) 5,200 (23,386) (2,055) 21,472 28,630

Net Profit (28,128) 11,219 (42,222) (3,552) 37,194 49,594

% growth (204.1) (139.9) (476.3) (91.6) (1,147.0) 33.3

Operating profit 58,813 57,592 57,588 77,823 95,113 95,653

% growth (10.3) (2.1) (0.0) 35.1 22.2 0.6

Balance sheet

Cash and bank balance 567,337 588,255 499,123 517,765 537,479 556,516

Cash 20,119 18,464 26,492 27,816 29,207 30,667

Balance with RBI 186,522 180,761 194,509 209,172 224,816 239,686

Net value of investments 1,423,093 1,502,659 1,440,537 1,399,177 1,364,180 1,269,230

Govt. and other securities 1,268,824 1,356,642 1,276,122 1,234,777 1,199,780 1,104,831

Shares 17,182 19,068 25,404 25,404 25,404 25,404

Debentures and bonds 64,162 73,780 91,767 91,767 91,767 91,767

Net loans and advances 3,247,148 3,420,088 3,817,030 4,222,063 4,667,473 5,142,071

Fixed assets 71,981 71,683 83,186 62,707 57,404 70,290

Other assets 220,049 252,510 328,985 371,753 420,081 474,691

Total assets 5,529,608 5,835,194 6,168,861 6,573,465 7,046,616 7,512,798

Deposits 4,797,912 4,952,752 5,247,719 5,643,328 6,065,378 6,466,566

Borrowings and bills payable 281,436 408,593 401,038 414,483 429,272 445,540

Other liabilities 134,225 136,994 164,056 164,056 164,056 164,056

Total liabilities 5,213,572 5,498,339 5,812,813 6,221,866 6,658,706 7,076,161

Paid-up capital 5,430 5,973 7,332 7,332 7,332 7,332

Reserves & surplus 310,602 330,882 348,716 344,266 380,578 429,305

Total shareholders' equity 316,032 336,855 356,048 351,599 387,910 436,637


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

1QFY19—strong start to FY2019 with 25.9% SSG

Revenues grew 26% yoy to `8.55 bn, 5% ahead of our estimate led by solid 25.9% SSG (KIE

19%). Positive surprise came from stronger-than-anticipated consumer response to the recently

launched EDV-99 proposition. Management indicated that growth was driven by both new

customers as well as increase in ordering frequency. EBITDA was up 79% yoy to `1.42 bn, 11%

ahead; EBITDA margin expanded 489 bps yoy to 16.6% led by operating leverage and cost

efficiencies, especially in manpower and rent. GM was down 183 bps yoy to 74.5% but 62 bps

ahead of our estimate. Other expenses were up 21% yoy to `2.57 bn, 10% above estimate

largely due to increased marketing spends during IPL (including sponsorship of the Bangalore

franchise of IPL). Net profit jumped to `747 mn from `238 mn, 17% above estimate. JUBI

opened a gross of 13 new stores and shut 3 Domino’s stores taking total count to 1,144.

The story still has legs—store expansion, tech and efficiencies to drive the next leg of growth

Even as the benefit of low base and capture of low-hanging fruits would wane in the coming

quarters, we expect 17-18% revenue growth with margin expansion to continue over FY2019-

21E. The next leg of growth would be driven by (1) disciplined store expansion. Management

reiterated guidance of 75 new stores in FY2019E comprising store splits and expansion across

existing and new cities. Unlike past, location selection process for new stores is a lot more

rigorous and data-driven now; focus is on driving profitable growth, (2) JUBI has stepped up

investments in digital assets, the benefits have started to reflect and it will be a key growth

driver going forward, (3) continued efficiencies. While new management has driven a lot of

efficiencies (rent renegotiations, manpower and other cost efficiencies), the management sees

more room for productivity improvement, especially through automation.

Raise FY2019-21E EPS forecasts by 4-6%; maintain BUY

We like what we see in terms of operating trends. Success rate of the new management’s

interventions has been remarkably solid – EDV-199, EDV-99, product refresh, store opening

discipline, enhanced digital investments have all worked well. The stock, after the sharp run in

the past 12-15 months, reflects high but achievable expectations; we are positive on delivery

(pun not intended) continuing to match or top expectations. That the underlying QSR industry

momentum has turned positive helps. We raise our SSG forecast by 0.5-2.5% and upgrade

FY2019-21E EPS estimates by 4-6%. Raise TP to `1,650 (`1,500 earlier). BUY.

Jubilant Foodworks (JUBI) Consumer Products

On a roll. SSG surprises again. JUBI reported another above-expectations quarter on

the back of SSG surprise. New management’s interventions continue to drive strong

momentum in the business. Even as growth is likely to moderate from the recent heady

levels as base catches up, it is likely to remain fairly robust. We raise our EPS forecasts

for FY2019-21E by 4-6% and increase our fair value target to `1,650 from `1,500.

Reiterate BUY.

BUY

JULY 26, 2018

RESULT


Price (`): 1,401


BSE-30: 36,858

Rohit Chordia

Jaykumar Doshi

Aniket Sethi

Jubilant Foodworks







MFs 8.8 EBITDA (Rs bn) 4.4 6.4 8.2


Absolute 0.4 14.0 116.1 ROE (%) 21.7 28.9 29.5

Rel. to BSE-30 (3.4) 6.7 88.9 Div. Yield (%) 0.1 0.1 0.2


1,499-618

184.8

Consumer Products Jubilant Foodworks


Conference call highlights

Updates on anti-profiteering investigation. On July 21, JUBI informed exchanges that

the Director General of Anti Profiteering (DG) has submitted an investigation report to

National Anti-Profiteering Authority (NAA) that JUBI profiteered by not passing on the

reduction in GST. JUBI management clarified on this matter—while it is the duty of the

DG to carry an investigation and submit a report to NAA, final authority and decision-

making power lies with the NAA. JUBI will present its case and arguments before NAA.

This matter pertains to the period following GST rate reduction of November 2017. The

management has not disclosed any more information such as quantum of profiteering

alleged by the DG.

Promoter stake sale. JUBI promoters have categorically denied that there is no

immediate intention of any stake sale.

Commentary on demand environment. JUBI management indicated that the demand

environment improved after reduction of GST rate to 5% and it appears sustainable.

While underlying demand in QSR space is buoyant, JUBI has also benefited from market

share gains over the past few quarters driven by interventions of the new management. It

is witnessing higher tailwinds on the delivery side and expects online growth to be higher.

Store expansion. JUBI opened a gross of 13 new Domino’s stores and shut 3 stores

taking total count to 1,144. It shut 1 store each in Delhi, Baroda and Pimpri due to

profitability issues. The management indicated that the pace of store expansion will pick

up starting 2QFY19. JUBI management indicated that it is also considering opportunities

in university campuses and corporate parks.

Capacity utilization. JUBI management views capacity on two fronts—(1) backend. JUBI

has invested and enhanced backend capacity and it is not a constraint, and (2) frontend

stores. JUBI is adding capacity wherever required in terms of workforce and bikes and it is

also considering splitting stores at a few locations to serve the market better.

RM inflation. JUBI is witnessing benign RM cost environment in dairy ingredients and it

is likely to remain stable in the foreseeable future as per the management.

Tech investments. JUBI management emphasized on investing in technology and

highlighted that its recently re-launched app is lighter (12 MB) and materially better than

its older version. This has helped drive online growth. The company will continue to invest

in technology and enhance its digital assets.

Dunkin’ Donuts. DD’s drag on margins reduced to 55 bps for 1Q from 106 bps in

4QFY18 and 143 bps in 1QFY18. The company reiterated its target of DD break-even by

4QFY19E.

Bangladesh JV. Work is in progress in terms of finalizing launch mix and procuring

regulatory approvals.

Other data points—(1) Online sales accounted for 65% of delivery sales, (2) about 60%

of existing stores are in tier 1 markets, (3) EOP employee count was 30,279, (4) JUBI

witnessed a good pickup in sales during IPL partly due to higher marketing investments

on the property and sponsorship of the Royal Challenges Bangalore team. Pickup during

FIFA was negligible except for the final match, (5) all stores that were opened on or

before April 1, 2017 were considered for same store calculation in 1QFY19 and will be

considered for rest of the quarters in FY2019. There is no change in this computation

methodology over years, (6) incrementally, focus will be on avoiding 3rd

party delivery

partners to maintain and enhance delivery experience, (7) new store opens at 75-80% of

existing system-level store sales and payback period remains around 2.5-3 years.

Jubilant Foodworks Consumer Products


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

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

EOP # of stores (excluding DD) 1,144 1,149 1,125 1,134 1,197 1,134 6

# of cities present in 268 270 264 266 275 266 3

Same store sales growth (%) 25.9 19.0 6.5 26.5 690 bps 1940 bps -61 bps 15.5 13.9 160 bps

Net sales 8,550 8,141 6,787 7,797 5 26 10 35,115 29,800 18

Other operating income 1 1 1 1 0 0 0 4 4 0

Net operating revenues 8,551 8,142 6,788 7,798 5 26 10 35,119 29,804 18

Material cost (2,178) (2,125) (1,605) (2,004) 3 36 9 (9,025) (7,514) 20

Gross Profit 6,372 6,016 5,182 5,793 6 23 10 26,090 22,286 17

Gross margin (%) 74.5 73.9 76.3 74.3 62 bps -183 bps 23 bps 74.3 74.8 -49 bps

Employee cost (1,545) (1,542) (1,471) (1,421) 0 5 9 (6,510) (6,041) 8

Rent (840) (852) (789) (857) (1) 6 (2) (3,508) (3,157) 11

Other expenditure (2,566) (2,339) (2,127) (2,239) 10 21 15 (9,661) (8,628) 12

Total expenditure (7,130) (6,858) (5,992) (6,521) 4 19 9 (28,704) (25,340) 13

EBITDA 1,420 1,283 795 1,277 11 79 11 6,411 4,460 44

EBITDA margin (%) 16.6 15.8 11.7 16.4 84 bps 489 bps 23 bps 18.3 15.0 329 bps

Other income 71 70 30 127 2 138 (44) 372 227 64

Interest — — — — — — —

Depreciation (366) (380) (462) (378) (4) (21) (3) (1,543) (1,622) (5)

Pretax profits 1,126 974 364 1,027 16 210 10 5,244 3,069 71

Tax (380) (334) (125) (346) 14 203 10 (1,803) (1,047) 72

PAT 747 640 238 681 17 213 10 3,442 2,022 70

Extraordinary items — — 0 — — 42

Net profit (reported) 747 640 238 681 17 213 10 3,442 2,064 67

EPS 5.7 4.8 1.8 5.2 17 213 10 26.1 15.6 67

Income tax rate (%) 33.7 34.3 34.4 33.7 -60 bps -72 bps -1 bps 34.4 34.1 26 bps

Costs as a % of sales

Material cost 25.5 26.1 23.6 25.7 -63 bps 182 bps -24 bps 25.7 25.2 48 bps

Employee cost 18.1 18.9 21.7 18.2 -88 bps -360 bps -15 bps 18.5 20.3 -174 bps

Rent 9.8 10.5 11.6 11.0 -64 bps -180 bps -116 bps 10.0 10.6 -61 bps

Other expenditure 30.0 28.7 31.3 28.7 128 bps -133 bps 130 bps 27.5 28.9 -145 bps

(% chg.)


Exhibit 2: Key changes to model, Jubilant Foodworks (consolidated), March fiscal year-ends (Rs mn)

2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021ERevenues (Rs mn) 35,575 42,004 49,834 34,912 41,306 48,865 1.9 1.7 2.0

EBITDA (Rs mn) 6,365 8,220 10,444 6,211 8,076 10,163 2.5 1.8 2.8

EBITDA (%) 17.9 19.6 21.0 17.8 19.6 20.8

PAT (Rs mn) 3,348 4,620 6,135 3,164 4,420 5,823 5.8 4.5 5.4

EPS (Rs/share) 25.3 34.7 46.0 23.9 33.2 43.6 5.8 4.5 5.4

SSG (%) 15.5 11.3 11.0 12.7 11.0 10.5

Store count EOP 1,240 1,366 1,491 1,254 1,380 1,505

Revised Earlier Change (%)




Exhibit 3: SSG momentum sustained


Exhibit 4: EBITDA margin expands 490 bps yoy driven by SSG-led operating leverage and tight cost

controls


(2.4)

(5.3)

1.9

6.6 4.6

3.2 2.0 2.9

(3.2)

4.2

(3.3)

(7.5)

6.5 5.5

17.8

26.5 25.9

(10)

(6)

(2)

2

6

10

14

18

22

26

30

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

16.8

14.9 14.7

12.812.3 12.2

13.1 12.9

11.8

10.2

11.4 11.5

9.5 9.6 9.7 9.9

11.7

14.1

17.2

16.416.6

8

9

10

11

12

13

14

15

16

17

18

1Q

FY14

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

3Q

FY17

4Q

FY17

1Q

FY18

2Q

FY18

3Q

FY18

4Q

FY18

1Q

FY19

`



Exhibit 5: Per store quarterly cost/profit economics for Jubilant Foodworks


Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18

Per store basis analysis (Rs mn)

Net revenues 6.11 5.73 5.48 5.84 5.64 5.19 5.75 6.16 6.77 6.66 7.30

Cost of materials 1.41 1.35 1.27 1.47 1.41 1.20 1.36 1.59 1.73 1.71 1.85

Gross profit 4.70 4.38 4.20 4.37 4.23 3.99 4.39 4.57 5.05 4.95 5.42

Employee costs 1.48 1.35 1.26 1.32 1.30 1.21 1.25 1.33 1.35 1.21 1.31

Rent 0.63 0.63 0.65 0.64 0.63 0.68 0.67 0.62 0.67 0.73 0.72

Other expenses 1.90 1.74 1.78 1.85 1.75 1.59 1.80 1.76 1.86 1.91 1.98

EBITDA 0.70 0.66 0.52 0.56 0.55 0.51 0.67 0.87 1.17 1.09 1.21

D&A 0.30 0.30 0.29 0.32 0.33 0.37 0.39 0.33 0.33 0.32 0.31

EBIT 0.39 0.36 0.22 0.24 0.22 0.14 0.28 0.54 0.83 0.77 0.90

yoy % change

Net revenues (5.4) (4.1) (8.8) (1.3) (7.5) (9.4) 5.0 5.6 20.0 28.2 26.9

Cost of materials (13.5) (8.6) (12.9) 4.2 0.6 (10.7) 6.9 8.4 22.0 42.4 36.2

Gross profit (2.6) (2.7) (7.5) (3.0) (10.0) (8.9) 4.4 4.7 19.3 24.0 23.4

Employee costs 10.1 4.3 (6.0) (7.7) (11.8) (10.9) (1.1) 0.7 3.7 0.6 5.4

Rent 0.7 3.9 1.7 4.3 0.3 9.0 3.6 (3.4) 6.3 6.9 8.0

Other expenses (6.0) (4.8) (4.4) (0.5) (7.7) (8.8) 1.2 (4.7) 6.3 20.4 10.0

EBITDA (17.3) (14.5) (26.8) (7.1) (21.6) (22.3) 30.0 53.9 112.5 112.8 79.2

D&A 2.9 2.7 (4.5) 3.8 7.3 22.2 33.5 2.7 2.5 (13.0) (20.6)

EBIT (28.2) (25.3) (43.9) (18.5) (43.9) (60.3) 25.4 121.9 274.8 443.7 218.0



Exhibit 6: JUBI added 10 (net) Domino’s stores in 1QFY19

Source: Company

Exhibit 7: End-Jun 2018 store count at 1,144

Source: Company

Exhibit 8: Employee count


Exhibit 9: Average number of employees per store


35 36

41 38

35

39 40

36

23

32

26

10 8 - 2 7

10

-

10

20

30

40

50

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

`

761

797

838

876

911

950

990

1,0

26

1,0

49

1,0

81

1,1

07

1,1

17

1,1

25

1,1

25

1,1

27

1,1

34

1,1

44

-

200

400

600

800

1,000

1,200

1,400

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

`

25

.8 26

.8

29

.5

27.1

28

.7

29

.2 3

0.3

27.7

27.7

28

.3

28

.0

26

.6

27.4

29

.9

30

.2

27.5

30

.3

(10)

(5)

0

5

10

15

20

25

23

24

25

26

27

28

29

30

31

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

Employee count ('000s) - LHS

Change, yoy (%) - RHS

`

32.6

32.2

33.3

29.1

29.6

28.7

28.6

25.3

24.6

24.5

23.7

22.5

23.2

25.4

25.8

23.5

25.6

20

22

24

26

28

30

32

34

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

3Q

FY17

4Q

FY17

1Q

FY18

2Q

FY18

3Q

FY18

4Q

FY18

1Q

FY19

`



Exhibit 10: Profit model, balance sheet, cash model of Jubilant Foodworks (consolidated), March fiscal year-ends, 2015-2021E


2014 2015 2016 2017 2018 2019E 2020E 2021E

Profit model

Net revenues 17,363 20,928 24,380 25,834 30,184 35,575 42,004 49,834

EBITDA 2,496 2,551 2,637 2,411 4,401 6,365 8,220 10,444

Other income 94 75 116 147 231 376 622 887

Interest expense 0 0 0 0 0 0 0 0

Depreciation (787) (1,011) (1,282) (1,554) (1,664) (1,591) (1,707) (1,857)

Pretax profits 1,803 1,615 1,470 1,004 2,968 5,150 7,135 9,474

Tax (620) (504) (501) (346) (1,047) (1,803) (2,515) (3,340)

Net income 1,182 1,111 969 658 1,921 3,348 4,620 6,135

Extraordinary items — — — (80) 42 — — —

Reported Net income 1,182 1,111 969 578 1,962 3,348 4,620 6,135

Earnings per share (Rs) 9.0 8.4 7.4 5.0 14.6 25.3 34.7 46.0

- Standalone 9.6 9.4 8.7 5.7 15.7 26.5 35.8 47.3

- Subsidiary (0.6) (0.9) (1.3) (0.7) (1.2) (1.3) (1.0) (1.4)

Balance sheet

Total shareholder's equity 5,500 6,714 7,620 8,053 9,677 13,491 17,797 23,456

Total borrow ings — — — — — — — —

Deferred tax liability 375 624 729 693 550 550 550 550

Total liabilities and equity 5,875 7,338 8,350 8,746 10,227 14,041 18,347 24,006

Net fixed assets 5,660 7,572 8,546 8,939 8,034 7,836 8,182 8,513

Investments 937 746 908 936 2,631 2,631 2,631 2,631

Cash 242 389 332 354 1,290 5,819 10,381 16,427

Net current assets (965) (1,369) (1,436) (1,483) (1,729) (2,245) (2,847) (3,566)

Total assets 5,875 7,338 8,350 8,746 10,227 14,041 18,347 24,006

Free cash flow

Operating cash flow, excl. working capital 2,119 2,273 2,425 2,049 2,612 4,563 5,705 7,105

Working capital changes 132 488 (308) 4 548 517 602 718

Capital expenditure (2,479) (2,872) (2,273) (2,009) (759) (1,393) (2,052) (2,188)

Free cash flow (229) (111) (156) 44 2,401 3,686 4,255 5,635

Growth

Revenue growth 22.8 20.5 16.5 6.0 16.8 17.9 18.1 18.6

EBITDA growth 3.3 2.2 3.4 (8.6) 82.5 44.6 29.1 27.1

EPS growth (9.9) (6.1) (12.8) (32.2) 191.7 73.6 37.5 32.3

Ratios

Gross margin (%) 73.9 74.8 76.2 75.6 74.6 74.1 74.0 73.9

EBITDA margin (%) 14.4 12.2 10.8 9.3 14.6 17.9 19.6 21.0

Net profit margin (%) 6.8 5.3 4.0 2.5 6.4 9.4 11.0 12.3

ROE (%) 24.1 18.2 13.5 8.4 21.7 28.9 29.5 29.7

ROCE (%) 32.5 23.1 17.3 10.0 28.8 39.3 40.2 40.5

Key assumptions

No of stores 752 930 1,097 1,180 1,171 1,240 1,366 1,491

Store addition yoy 166 178 167 83 (9) 69 126 125

SSG (%) 2 0 3 (2) 14 15 11 11

No of employees 24,969 27,122 27,719 26,604 27,539 29,161 32,124 35,064


IGAAP PAT up 10% yoy

SCUF reported PAT (IGAAP) of Rs2.1 bn, up 10% yoy. NII was up 16% yoy on the back of 20%

loan growth and compression in NIM 13.4% (down 40 bps yoy) on the back of compression in

asset yields. Credit costs were high (up 25% yoy) due to yoy increase in GNPLs (8.9% in

1QFY19 versus 6.7% in 1QFY18) on account of the transition to 90 dpd from 120 dpd during

the period and SCUF’s policy of keeping provisions high at 62% (though lower than 74% in

1QFY18). Cost to income ratio was 39%, marginally higher than 38% in 1QFY18.

Lower provisions lead to higher earnings growth under Ind-AS

SCUF has reported 15% earnings growth under Ind-AS. This is largely due to yoy decline in

provisions to Rs440 mn from Rs590 mn in 1QFY18 under Ind-AS as compared to yoy increase in

provisions to Rs780 mn from Rs620 mn under IGAAP. We find two factors for the divergence:

Provisions adjusted with net worth during transition to Ind-AS- the adjustment was Rs373

mn for opening base of 1QFY18 and Rs462 mn for opening base of 1QFY19.

Overall expected credit losses have declined during the last four quarters which Ind-AS may

have picked up faster. Exhibit 6 shows that loss give default (LGD) declined to 43.4% in

1QFY19 from 46% in 4QFY18 and 46.7% in 1QFY18. Management highlighted that the

ratio for 1QFY18 was based on estimates under 120 dpd norms. Thus, stage 1 is currently

defined as loan overdue upto 30 days, stage 2 as loans that are 30-90 days overdue and

stage 3 is 90+ overdue. This definition was aligned to 120 dpd NPL norm in 1QFY18. The

positive trend in asset quality performance is the qoq movement in GNPLs to 8.9% from 9%

despite the fact that collections typically fall in 1Q and are at their best in 4Q.

Strong NII growth though standard loan provisions may rise as well; retain ADD

SCUF’s business seems to be back on a firm footing with 25% loan growth in ex-gold AUMs

even as competition may hit NIM. We are revising our estimates 1-5% to build in higher loan

growth and expenses, even as we tweak down NIM estimates. Near-term provision estimates

may be low as recovery trends improve. Higher standard loan provisions will however temper

medium-term RoE though reduce the volatility in earnings over the long-term. Retain ADD with

TP of Rs2,250; the stock will trade at 2.2X FY2020E book at our TP.

Shriram City Union Finance (SCUF) NBFCs

Incremental trends positive; higher standard loan provisions may partially offset.

SCUF’s yoy earnings growth under IGAAP was tempered by higher-than-expected credit

costs likely influenced by 90 dpd migration; the underlying trend was positive as GNPL

declined qoq despite seasonal headwinds. While the business gets back on a strong

trajectory, higher standard asset provisions under Ind-AS may temper earnings

momentum. We revise estimates and reduce price target to Rs2,250 (down from

Rs2,325); retain ADD.

ADD

JULY 26, 2018

RESULT


Price (`): 1,905


BSE-30: 36,858

QUICK NUMBERS

PAT up 10% yoy on

IGAAP basis; 15%

yoy based on Ind-AS

AUM up 20% yoy

based on IGAAP

GNPL ratio (90 dpd

basis) down 10 bps

qoq to 8.9% based

on IGAAP

Nischint Chawathe

M B Mahesh CFA

Dipanjan Ghosh

Shrey Singh

Shriram City Union Finance







MFs 5.3 BVPS 793.6 878.2 1,008.7


Absolute (7.5) (18.7) (17.2) ROE (%) 12.5 15.8 16.9



2,453-1,801

125.6

Shriram City Union Finance NBFCs


Exhibit 1: SCUF - quarterly results and balance sheet items March fiscal year-ends, 1QFY18-1QFY19 (` mn)

Note 1) The company clubbed depreciation expenses with other expenses in 1QFY19.


IGAAP IGAAP IGAAP IGAAP (% chg.) Ind-AS IGAAP Ind-AS

1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 2019E 2018 (% chg.) 2020E

Income statement (Rs mn)

Interest income 14,050 12,175 12,428 15 13 59,880 49,882 20.0 72,767

Interest expenses 4,600 4,019 4,310 14 7 21,129 16,677 26.7 26,729

Net interest income 9,450 9,505 8,156 8,118 (1) 16 16 38,750 33,205 16.7 46,038

Provisions 2,490 2,000 1,998 4,122 25 25 (40) 9,155 10,537 (13.1) 10,591

NII post provisions 6,960 7,505 6,158 3,996 (7) 13 74 29,596 22,668 30.6 35,447

Operating expenses 3,700 3,700 3,119 3,168 - 19 17 15,285 13,291 15.0 17,973

Employee expenses 2,070 2,200 1,581 1,834 (6) 31 13 8,091 7,035 15.0 9,628

Other operating expenses 1,630 1,500 1,538 1,334 9 6 22 7,194 6,256 15.0 8,345

Depreciation - 90 78 84 (100) (100) (100) 300 333 (9.8) 300

PBT 3,280 3,725 2,978 755 (12) 10 334 14,361 10,178 41.1 17,624

Tax 1,150 1,378 1,040 285 (17) 11 304 5,026 3,530 42.4 6,169

PAT 2,130 2,347 1,939 471 (9) 10 353 9,335 6,648 40.4 11,456

Tax rate (%) 35.1 37.0 34.9 37.7 35.0 34.7 35.0

EPS (Rs) 32 29 7 10 353 141 101 40.4 174

Key balance sheet line items (Rs mn)

Total AUM 289,280 288,636 240,530 274,610 20 5 338,475 274,610 23 409,734

Gold 34,193 36,680 32,459 (7) 5 34,415 33,740 2 37,856

Small business loans 165,092 131,340 156,720 26 5 195,345 154,720 26 238,673

Personal loans 23,200 16,810 22,024 38 5 29,184 21,400 36 39,603

Two wheelers 52,446 41,260 49,787 27 5 63,238 50,220 26 74,620

Auto loans 14,348 14,440 13,621 (1) 5 16,293 14,530 12 18,981

Total disbursements 64,100 57,990 66,320 11 (3) 226,833 249,210 (9) 274,693

Business loans 28,300 23,300 30,930 21 (9) 90,910

Gold loans 14,948 18,080 14,200 (17) 5 70,320

Two Wheelers 12,839 10,310 13,270 25 (3) 41,650

Auto Loans 1,949 2,130 2,270 (9) (14) 10,170

Personal Loan 6,051 4,170 5,660 45 7 14,510

Asset quality details (%)

GNPL (%) 8.9 6.8 9.0 214 bps -10 bps 8.6 9.0 -37 bps 8.2

NNPL (%) 3.4 1.8 3.4 163 bps -3 bps 4.0 3.4 57 bps 4.2

PCR (%) 61.8 73.8 61.9 -1202 bps -9 bps 53.6 61.9 -829 bps 49.3

Calculated ratios (%)

Yield on loans 19.9 20.6 18.6 -71 bps 136 bps 19.5 19.7 -19 bps 19.5

Cost of borrowings 8.7 9.3 8.7 -57 bps 3 bps 9.2 8.8 35 bps 9.5

Spread 11.2 11.3 9.9 -14 bps 133 bps 10.3 10.9 -54 bps 10.0

NIM 13.4 12.0 13.8 12.1 -42 bps 128 bps 12.6 13.1 -49 bps 12.3

Cost to income 39.2 38.2 39.0 91 bps 13 bps 39.4 40.0 -58 bps 39.0

Cost to average AUM 5.2 5.3 4.7 -4 bps 52 bps 5.0 5.3 -27 bps 4.8

Credit cost 3.5 3.4 6.2 14 bps -263 bps 3.0 4.2 -118 bps 2.8

RoA 2.9 3.1 0.7 -17 bps 227 bps 2.9 2.5 41 bps 2.9

RoE 15.3 15.2 3.4 6 bps 1191 bps 15.8 12.5 323 bps 16.9

Borrowing mix (Rs mn)

Net borrowings 216,760 175,000 204,210 23.9 6.1 255,122 204,210 25 307,598

Retail 36,849 38,990 34,777 (5.5) 6.0 34,777

Bank borrowings 127,888 98,368 122,261 30.0 4.6 122,261

Market borrowing 52,022 34,720 45,437 49.8 14.5 45,437

NBFCs Shriram City Union Finance


Exhibit 2: PAT up 15% yoy under Ind-AS Key financial under Ind-AS, March fiscal year-end, 1QFY18, 1QFY19 (Rs mn)


Exhibit 3: Comparison of profits under Ind-AS and IGAAP March fiscal year-end, 1QFY19 (Rs mn)


1QFY18 1QFY19 YoY (%)

Interest income 12,274 14,017 14

Interest expenses 4,040 4,640 15

Net interest income 8,234 9,377 14

Provisions/ write-offs 1,968 2,154 9

Provisions 590 440 (25)

Write-offs 1,378 1,714 24

Net interest income (post provisions) 6,266 7,223 15

Operating expenses 3,131 3,709 18

Employee expenses 1,588 2,047 29

Other operating expenses 1,543 1,662 8

Other income 16 17 8

Profit before tax 3,073 3,532 15

Tax 1,072 1,236 15

Profit after tax 2,001 2,296 15

Other items

AUM (Rs bn) 242 292 20

Yield on average AUM (%) 20.7 19.7 -96 bps

Interest expenses to average AUM (%) 6.8 6.5 -28 bps

NII/average AUM (%) 13.9 13.2 -68 bps

Cost-to-income 39.0 39.6 57 bps

Credit cost/average AUM (%) 3.3 3.0 -28 bps

IGAAP Ind-AS % change

Interest income 14,050 14,017 (0)

Interest expenses 4,600 4,640 1

Net interest income 9,450 9,377 (1)

Provisions/ write-offs 2,490 2,154 (13)

Net interest income (post provisions) 6,960 7,223 4

Operating expenses 3,700 3,709 0

Employee expenses 2,070 2,047 (1)

Other operating expenses 1,630 1,662 2

Other income 20 17 (14)

Profit before tax 3,280 3,532 8

Tax 1,150 1,236 7

Profit after tax 2,130 2,296 8

Other items

AUM (Rs bn) 289 292 1

Yield on average AUM (%) 19.9 19.7 -23 bps

Interest expenses to average AUM (%) 6.5 6.5 -1 bps

NII/average AUM (%) 13.4 13.2 -22 bps

Cost-to-income 39.1 39.6 44 bps

Credit cost/average AUM (%) 3.5 3.0 -51 bps



Exhibit 4: Reconciliation of profit under Ind-AS from IGAAP March fiscal year-end, 1QFY19 (Rs mn)


Exhibit 5: Reconciliation of reserves and surplus under Ind-AS March fiscal year-end, 4QFY17, 4QFY18 (Rs mn)


Multiple implications of migration to Ind-AS – marginal reduction in net worth

but lower volatility in profitability

Higher standard loan provisions under Ind-AS. SCUF reported 1.8% reduction in its

networth as an immediate impact of migration to Ind-AS- the single largest item in this

being impact of extra provisions on account of the migration. With this large provision,

we find some upside risk to our near-term estimates especially in the backdrop of an

improving macro. A lot depends on the trends in collections and expectation of losses

thereof. However, medium-term provisions will likely be higher as standard loan

provisions increase in the new regime - in 1QFY19 provision on standard loans was 2.3%

as per Ind-AS as compared to 0.4% in the previous regime. This is because Ind-AS

considers estimation of expected credit losses in case of non-delinquent loans and

performing but delinquent loans. Borrowers of SCUF have volatile cash flows leading to

higher short-term delinquencies for the company as compared to asset classes like

salaried home loans. As such, provision costs for SCUF in a high-loan growth phase will

be higher than the previous regime even if NPLs remain low.

High share of standard loan provisions. Exhibit 7 shows that SCUF’s provision on

standard loans as on June 2018 was 6% of total outstanding (credit and standard)

provisions under IGAAP and 29% of total outstanding (credit and standard) provisions

under Ind-AS; this is despite the fact that coverage on NPLs remains similar at about 60%

in both cases. This also indicates that there may not be an immediate case of dropping

Net profit after tax as per previous GAAP 1,939

Add/(less) adjustments for

Application of expected credit loss model 202

Recognition of borrowing cost at effective interest rate (22)

Recognition of investments at fair value through profit and loss (8)

Amortization of processing fees on loans and advances (26)

Recognition of income on assignment of assets and securitization (47)

Others (5)

Tax on above (33)

Other comphrehensive income (net of tax) 4

Total comphrehensive income as per Ind-AS 2,005

4QFY17 4QFY18

Opening reserves and surplus balance as per IGAAP 50,280 55,660

Ind-AS adjustments increasing / (decreasing) reserves and surplus (pre tax) - -

Provisions under ECL (15,750) (20,880)

IGAAP provisions 12,010 16,260

Impact on provisions (a) (3,730) (4,620)

Loans and advances 1,600 2,690

Investments - (20)

Others 360 290

Impact on other heads (b) 1,960 2,970

Total impact on reserves and surplus (pre tax) (a+b) (1,770) (1,660)

Net deferred tax on above 610 570

Total impact on reserves and surplus (post tax) (1,160) (1,080)

Reserves and surplus balance as per Ind-AS 49,130 54,580

% of impact on transition to opening networth as per IGAAP 2% 2%



coverage ratios below 60%; the improvement hence rests on reduction in absolute of

non-performing loans.

Lower volatility in earnings over the cycle. As a consequence of high standard asset

provisions, provision requirement on NPLs will subsequently be lower as we believe that

life-cycle provisions on loans will not change due to the change in accounting norms or

higher standard loan provisions. In other words, overall provisioning expenses will be less

volatile than in the past.

Gradual reduction in credit costs. We are revising our credit cost forecasts in line with

the new norms. We expect total ECL for SCUF to decline to 5.6% of loans by FY2021E

from 6.9% in FY2019E (7.3% in 1QFY19) to reflect the improving trends in asset quality.

We build in improvement in standard asset provisions to 2% by FY2021E from 2.3% in

1QFY19. The improvement in total ECL, under an improving business environment, would

have been sharper in the older accounting regime.

Exhibit 6: Loss given default is high for business loans and 2-W PD, LGD and ECL across segments under Ind-AS, March fiscal year-end, 1QFY19 (%)

Source: Company

Exhibit 7: Standard asset provisions are significantly higher under Ind-AS Break-up of loans and provisions under Ind-AS and IGAAP, March fiscal year-ends, 1QFY19 (Rs mn)


AUM growth of 20% yoy in 1QFY19; will increase further hereon

Strong growth in AUM at 20% yoy. SCUF reported strong growth in AUM at 20% yoy

to `289.2 bn based on IGAAP accounting standards in 1QFY19 driven by a sharp rise in

AUM on the business loans (MSME), 2-W and personal loan portfolio (on a low base).

MSME loans witnessed 21% yoy growth in AUM as disbursements picked up pace as

the impact of demonetization and GST gradually fades away. MSME disbursements

were high at 21% yoy in 1QFY19. Disbursements have been in the range of 25-29%

in the last two quarters. The company has been gradually increasing feet on street and

rapidly expanding into newer geographies to attract newer customers. There was a

Probability of default (%) Loss given default (%) Expected credit loss (Rs bn)


Small enterprise finance 2.8 4.0 4.0 57.2 51.3 49.3 10.1 12.6 13.5

Two wheelers 4.7 5.9 5.9 46.5 50.6 46.3 2.8 4.5 4.2

Auto loans 5.0 5.9 5.9 49.9 52.4 51.8 1.4 1.5 1.4

Personal loans 5.7 6.5 6.5 57.1 51.6 46.1 1.8 2.2 2.1

Loan against gold 2.4 2.5 2.5 3.5 8.1 3.6 0.1 0.1 0.1

Total 3.4 4.5 4.5 46.7 46.0 43.4 16.3 20.9 21.3

Sr. No Particulars Ind-AS Particulars IGAAP

1 Opening ECL (stage 1,2,3) 20,880 Opening provisions 16260

2 Provisions for 1QFY18 440 Provisions for 1QFY18 780

3=1-2 Closing ECL (stage 1,2,3) 21,320 Closing provisions 17040

4 AUM 289,280 AUM 291,930

5=3/4 ECL/AUM (%) 7.37 Closing provisions/AUMs (%) 5.84

6 Reported 90 dpd NPLs/stage 3 (%) 8.90% GNPL (90 dpd,%) 8.90%

7=4X6 Reported 90 dpd NPLs/stage 3 (Rs mn) 25,746 GNPL (90 dpd) 25,982

8=4-7 Stage 1 and 2 loans 263,534 Standard assets 263,534

9 Coverage on stage 1 and 2 loans 2.30% Standard asset provisions (%) 0.40%

10=8X9 Standard loan provisions 6,061 Standard asset provisions 1054

11=3-10 Provisions on stage 3 15,259 NPL provisions 15,986

12=11/7 Coverage on stage 3 (%) 59 NPL coverage (%) 62

13=10/3 Standard loan provisions/ECL (%) 28 Standard loan provisions/ECL (%) 6



drop in (calculated) repayment rate to 51% from 62% qoq and 59% yoy in 1QFY19

leading to higher growth. Higher stickiness of consumers is driving AUM growth.

2-W loans witnessed a steep growth of 25% yoy in disbursements leading to a 27%

yoy growth in AUM. This comes on the back of increased penetration in rural and

semi-urban markets. Shriram City Union Finance remains the market leader with

market share of 23% in 2-W loans. 72% of OEM exposure comes from leaders in the

2-W segment like Honda and Hero.

Personal loans picked up momentum in 1QFY19 witnessing 38% yoy AUM growth to

`23.2 bn coming on a low base. The share of personal loans to overall AUM has

increased to 8% from 5.4% in FY2016 (up ~100 bps yoy). Disbursements were high at

45% yoy in 1QFY19. The company is increasingly focusing on cross-selling loans to

existing customers with sound repayment records and this is expected to drive growth

going ahead (leads to cost benefits).

Gold loans continued to drag loan growth (down 7%) owing to problems related to

cash disbursements and shift in customer base towards personal loans as a substitute

for gold loans.

Growth rates to improve. We factor in 23% yoy AUM growth in FY2019E and 21%

CAGR over FY2019E-2021E driven by strong disbursements in business loans, personal

loans and 2-W loans with a slight revival in business in the gold loan space. We expect

momentum in disbursements (ex-gold) to accelerate at 20% CAGR over FY2019E-2021E.

While the majority of growth will be driven by the SME and 2-W segments, personal

loans are also expected to deliver strong growth on a low base. SME loans and 2-W loans

will deliver 21% and 19% AUM CAGR over FY2019-21E and personal loans will witness

27% CAGR over the same period. Gold loans will see marginal revival in growth at 2%

yoy AUM increase in FY2019E.

Exhibit 8: Share of small business loans continue to rise Loan book break-up under IGAAP, 1QFY17-1QFY19 (%)


55 56 55 55 55 57 57 57 57

16 14 15 15 15 12 12 12 12

18 18 18 18 17 18 18 18 18

6 6 6 6 6 5 5 5 5

6 6 6 7 7 8 8 8 8

-

20

40

60

80

100


Business loans Gold loans 2W Auto Personal



Exhibit 9: Gold loan disbursements regain momentum Disbursement break-up under IGAAP, 1QFY17-1QFY19 (%)


Asset compression shrinks margins

Calculated NIM dropped 42 bps yoy. Calculated margins dropped 42 bps yoy to

13.4%. NIM was marginally up qoq as the base quarter had the impact of higher interest

reversals owing to transition to 90 dpd GNPL recognition norms from 120 dpd earlier.

The yoy drop in margins was led by a sharp drop in calculated yield on advances by 71

bps yoy. The drop in yields is likely due to the drop in lending rates in select segments on

the back of rising competition. Notably, the rising share of high-yielding business loans

has not provided much support to NIM. Calculated cost of funds dropped 57 bps yoy but

was flat qoq indicating a reversal in cycle given the rising interest rate environment.

136 bps margin (calculated) compression over FY2018-2021E to 12.1%. We forecast

margin compression in the medium-term driven by rise in competition and pricing

pressure on the rapidly growing small business loans (57% of AUM as of 1QFY19). Entry

of new players including NBFCs, SFBs and the bank will continue to put pressure on yields

in this segment. Yields are expected to drop 53 bps over FY2019-2021E to 19.2%. There

will be additional pressure from cost of borrowing which will rise in an environment of

rising interest rates. Calculated cost of borrowings will rise 75 bps over the same period.

44 44 38 39 40 41 38 47 44

26 28 28

36 31 31 25

21 23

19 18 23

15 18 17 26 20 20

4 5 5 5 4 3 3 3 3

7 6 6 6 7 8 8 9 9

-

20

40

60

80

100


Business loans Gold loans 2W Auto Personal



Exhibit 10: Margin compression on yoy basis Calculated yield on loan, cost of borrowings and NIM under IGAAP, March fiscal year-end, 1QFY17-1QFY19 (%)


Exhibit 11: Share of bank borrowings was high at 59% in 1QFY19 Borrowing mix under IGAAP, March fiscal year-end, 1QFY17-1QFY19 (%)


21.0 21.3 21.0 19.4 20.6 21.0 21.0 18.6 19.9

10.1 10.1 9.8 9.4 9.3 9.3 9.1 8.7 8.7

13.7 14.0 13.9

12.5

13.8 14.3 14.4

12.1 13.4

0.0

3.5

7.0

10.5

14.0

17.5

0

6

12

18

24

30


Yield on loans-KS Cost of borrowings-KS NIM-KS

27 26 24 23 22 21 19 17 17

56 56 55 56 56 56 60 60 59

14 16 18 18 20 21 20 22 24

3 3 2 2 2 2 1 1 -

-

20

40

60

80

100


Retail Banks Market Public issue NCDs



Exhibit 12: SCUF maintains a higher coverage ratio in comparison to peers GNPLs and coverage ratio of key NBFCs, 1QFY15-1QFY19 (%)


Exhibit 13: GNPL increased in personal loans qoq Sectoral GNPL, NNPL and PCR under IGAAP, March fiscal year-end, 1QFY17-4QFY18 (%)


Exhibit 14: We expect ECL to reduce over time NPL and provisions, March fiscal year-end, 2018-2021E (%)


1QFY15 2QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19

Cholamandalam

GNPLs 2.4 2.6 3.1 3.3 4.4 4.3 3.5 3.6 3.5 3.8 4.7 4.7 4.5 3.7 2.9 NA

Coverage 54.2 46 35 38 30 37 40 42 43 39 32 32 35 37 44 NA

Recognition norm (dpd) 180 180 150 150 120 120 120 120 120 120 90 90 90 90 90 NA

Mahindra Finance

GNPLs 6.2 6.3 5.9 8.0 9.4 10.1 8.0 10.7 11.0 11.1 9.0 10.5 12.5 11.6 8.5 NA

Coverage 54 52 61 57 53 57 62 52 52 56 62 60 51 55 58 NA



GNPLs 2.9 2.9 3.1 3.2 3.3 3.4 5.2 5.1 5.0 4.5 6.7 6.8 6.9 6.8 9.0 8.9

Coverage 86 80 78 79 80 81 70 71 73 87 73 74 74 74 62 62

Recognition norm (dpd) 180 180 180 180 180 180 150 150 150 150 120 120 120 120 90 90

Shriram Transport Finance

GNPLs 3.7 3.7 3.8 4.1 4.2 4.3 6.2 6.4 6.6 6.6 8.2 8.0 8.1 8.0 9.2 NA

Coverage 79 79 80 79 78 80 70 70 70 75 69 71 71 71 71 NA


Notes:

(1) Cholamandalam shifted to 90 dpd from 4QFY17.

(2) Mahindra Finance migrated to 90 dpd norms from 2QFY18.

(3) SCUF and Shriram transport finance shifted to 90 dpd in 4QFY18.


NPA recognition norm (dpd) 150 150 150 120 120 120 120 90 90

GNPL (%)

Gold loans 3.6 2.4 2.5 2.7 2.7 2.8 2.8 2.6 1.7

SME loans 5.4 5.3 5.0 7.1 7.1 7.3 7.1 9.7 9.7

Personal loans 5.9 6.0 5.8 8.8 9.0 8.9 9.1 10.6 10.8

2W 4.9 4.9 4.0 7.4 7.4 7.6 6.9 10.0 9.9

Auto loans — 6.7 5.4 9.0 9.2 9.3 9.6 10.9 11.0

Overall GNPL 5.1 5.0 4.5 6.7 6.8 6.9 6.8 9.0 8.9

NNPL (%)

Gold loans 1.8 1.3 0.8 0.8 0.8 0.8 0.8 1.0 1.0

SME loans 1.5 1.5 0.6 2.1 2.1 2.2 2.1 3.8 3.8

Personal loans — — — — — — — — 1.0

2W 1.4 1.3 0.5 2.1 2.1 2.2 2.0 4.9 4.9

Auto loans 1.9 1.9 0.8 2.5 2.4 2.5 2.6 5.0 5.0

Overall NNPL 1.5 1.4 0.6 1.8 1.8 1.8 1.8 3.4 3.4

PCR (%)

Gold loans 51.0 45.0 70.0 70.0 70.2 NA NA 59.8 59.8

SME loans 72.0 73.0 88.0 70.0 70.4 NA NA 60.7 60.7

Personal loans 100.0 100.0 100.0 100.0 100.0 NA NA 100.0 100.0

2W 72.0 73.0 88.0 71.0 72.2 NA NA 51.0 51.0

Auto loans 70.0 71.0 86.0 73.0 73.3 NA NA 54.4 54.4

PCR 71.0 72.8 87.4 73.3 73.8 74.0 74.0 61.9 61.8

IGAAP Ind-AS Ind-AS Ind-AS

2018 2019E 2020E 2021E

GNPL/stage 3 (Rs mn) 24,640 29,109 33,598 39,093

GNPL (% of average AUM) 9.0 8.6 8.2 8.0

Credit provisions (Rs mn) 15,260 15,613 16,548 17,671

Coverage (%) 62 54 49 45

Standard asset provisions/stage 1 and 2 (Rs mn) 113 1,491 1,425 1,579

Standard asset provision rate (%) 0.4 2.3 2.0 2.0

ECL (Rs mn) 16,358 23,398 24,743 27,445

ECL (% of AUM) 6.0 6.9 6.0 5.6



Cost ratio to inch up

Cost-income ratio dropped 80 bps qoq (flat yoy) in 1QFY19 to 39.2%. Operating expense

growth at 16% yoy was led by a sharp rise in employee expenses at 31% yoy. The

company has been trying to improve productivity of existing branches which has led to

strict cost control.

We expect ~16% CAGR in operating expenses over FY2019-2021E driven by 18% CAGR

in employee expenses and 16% CAGR in other expenses. The company is investing in

business expansion, digital initiatives and analytics, which has pushed up employee

expenses. Cost-to-average AUM ratio will drop 30 bps over FY2019-2021E to 4.7%.

Exhibit 15: Cost to income ratio saw marginal improvement in 1QFY19 Cost ratios under IGAAP, March fiscal year-end, 1QFY17-1QFY19 (%)


Exhibit 16: We expect RoA to improve in FY2019E Du Pont analysis, March fiscal year-end, 2011-2021E (%)


Shriram Housing Finance – AUM growth on track; NPLs rise

AUM growth at 12% yoy based on Ind-AS. AUM increased 12% yoy (3% qoq).

Disbursements were up 63% yoy in 1QFY19. The company is gradually increasing its

retail disbursements and continues to de-focus on construction finance and LAP segments

with negligible new business. The rise in the share of low yielding products has led to the

110 bps yoy drop in NIM to 8.8% based on Ind-AS.

Asset quality deteriorates yoy. Gross NPL and net NPL increased ~130 bps and 140 bps

yoy to 6.4% and 4.6% respectively. We await further clarity from the management on

the reason for the increase in stress in this book.

39.9 38.5 38.9 39.4 39.1 38.0 41.5 40.0 39.1

5.5 5.4 5.4 4.9

5.4 5.4

6.1

4.9 5.2

0

2

4

6

8

10

0

10

20

30

40

50


Cost-to-income (LHS) Cost-to-average AUM (RHS)

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

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

Du Pont analysis (% of AUM)

Net interest income 11.1 10.1 11.3 12.1 13.7 13.5 13.6 13.5 12.7 12.4 12.1

Other income - 0.0 0.2 0.4 0.3 0.1 0.0 0.1 0.0 0.0 0.0

Credit costs 1.8 1.7 2.6 2.5 2.9 3.4 4.3 4.2 3.0 2.8 2.7

Operating expenses 3.9 3.5 4.3 4.8 5.7 5.7 5.3 5.4 5.1 4.9 4.7

PBT post extraordinaries 5.5 4.9 4.6 5.1 5.4 4.4 4.0 4.0 4.7 4.7 4.7

1-tax rate 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7

RoAUM 3.6 3.2 3.1 3.4 3.6 2.9 2.6 2.6 3.0 3.1 3.1

Average AUM / average equity (X) 6.0 7.2 7.3 5.9 4.4 4.1 4.4 4.8 5.2 5.5 5.7

RoE 22.0 23.4 22.6 20.2 15.8 12.1 11.6 12.5 15.8 16.9 17.6



Exhibit 17: Quarterly financial summary for Shriram Housing Finance March fiscal year-end, 1QFY18-1QFY19


Exhibit 18: Comparison of financials for Shriram Housing Limited under IGAAP and Ind-AS March fiscal year-end, 1QFY19 (Rs mn)


Ind-AS IGAAP IGAAP IGAAP Ind-AS

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

P&L (Rs mn)

Total income 739.0 659.0 629.0 741.0 691.0 (6) (7)

Interest expenses 318.0 281.0 268.0 268.0 296.0 (7) 10

Net income 421.0 378.0 361.0 473.0 395.0 (6) (16)

Provisions 121.0 39.0 14.0 90.0 43.0 (64) (52)

Income post provisions 300.0 339.0 347.0 383.0 352.0 17 (8)

Operating expenses 229.0 231.0 264.0 270.0 279.0 22 3

Employee expenses 58.0 106.0 121.0 137.0 152.0 162 11

Other operating expenses 171.0 125.0 143.0 133.0 127.0 (26) (5)

PBT 71.0 108.0 83.0 113.0 73.0 3 (35)

Loan book (Rs mn)

AUM 16,430 16,106 16,039 17,853 18,390 12 3

Disbursements 1,370 1,210 1,653 3,360 2,230 63 (34)

Key ratios (%)

NIM 9.9 9.1 8.9 11.4 8.8

Cost-income ratio 30.1 61.1 73.2 56.9 37.9

ROA 1.3 1.6 1.1 2.6 1.1

ROE 5.9 6.9 4.5 11.2 4.8

Debt / equity 3.3 2.8 2.7 3.3 3.4

Asset quality (%)

Gross NPL 5.1 4.9 5.8 5.0 6.4

Net NPL 3.2 3.5 4.3 3.7 4.6

Coverage 37.3 30.0 26.8 26.0 28.1

Credit cost NA 1.0 0.3 2.1 NA

IGAAP Ind-AS (% chg.)


Interest income 625 622 (0.5)

Interest expenses 298 296 (0.6)

NII 327 326 (0.3)

Other income 68 69 1.6

Total income 395 395 0.0

Operating expenses 275 279 1.5

Employee expenses 148 152 2.5

Others 127 127 0.4

PPOP 120 116 (3.4)

Provisions 59 43 (26.7)

PBT 61 73 18.9

Other key parameters

AUM (Rs bn) 18 18 -

Disbursements (Rs bn) 2 2 -

Networth (Rs bn) 4 4 0.2

Key ratios (%)

Yield on assets 15.3 15.3 -3 bps

Cost of funds 8.9 7.9 -100 bps

NIM 8.7 8.8 8 bps

Cost to income 69.6 37.9 -3168 bps

RoA 0.9 1.1 23 bps

RoE 3.9 4.8 90 bps

Debt/equity 3.4 3.4 5 bps

CAR 31.9 31.9 -3 bps

Asset qaulity (%)

GNPL 5.9 6.4 53 bps

NNPL 4.3 4.6 30 bps



Exhibit 19: Margins shrink yoy NIM break-up under IGAAP, March fiscal year-end, 1QFY17-1QFY19 (Rs mn)


Exhibit 20: SCUF is trading at 1.9X one-year forward book One-year forward rolling PER and PBR, March fiscal year-ends, July 2012- July 2018 (X)

Source: Company, Bloomberg, Kotak Institutional Equities estimates


NIM calculation


Interest income 10,530 11,150 11,560 11,071 12,175 12,849 13,381 12,428 14,050

Interest expenses 3,670 3,800 3,930 3,937 4,019 4,125 4,224 4,310 4,600

NII 6,860 7,350 7,630 7,134 8,156 8,724 9,157 8,118 9,450

AUM 204,730 213,900 225,440 231,320 240,530 248,980 260,767 274,610 289,280

NIM (calculated-%) 13.7 14.0 13.9 12.5 13.8 14.3 14.4 12.1 13.4

Shirram Housing Finance

Interest income 568 731 756 737 739 659 629 741 691

Interest expenses 219 295 335 324 318 281 268 268 296

NII 349 436 421 413 421 378 361 473 395

AUM 15,174 17,528 18,334 17,750 16,430 16,106 16,039 17,853 18,390

NIM (calc-%) 10.1 10.7 9.4 9.2 9.9 9.3 9.0 11.2 8.7

Consolidated

Interest income 11,098 11,881 12,316 11,808 12,914 13,508 14,010 13,169 14,741

Interest expenses 3,889 4,095 4,265 4,261 4,337 4,406 4,492 4,578 4,896

NII 7,209 7,786 8,051 7,547 8,577 9,102 9,518 8,591 9,845

AUM 219,904 231,428 243,774 249,070 256,960 265,086 276,806 292,463 307,670

NIM (calc-%) 13.5 13.8 13.6 12.3 13.6 13.9 14.1 12.1 13.1

0

1

2

3

4

5

0

3

6

9

12

15

18

21

24

27

30

Jul-12

Jan-1

3

Jul-13

Jan-1

4

Jul-14

Jan-1

5

Jul-15

Jan-1

6

Jul-16

Jan-1

7

Jul-17

Jan-1

8

Jul-18

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



Exhibit 21: SCUF – change in estimates Old and new estimates, March fiscal year-ends, 2019E-2021E (` mn)


New estimates Old estimates Change in estimates

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

NIM (%) 12.7 12.4 12.1 12.9 12.5 12.3 -16 bps -9 bps -11 bps

Loan book 338,475 409,734 488,667 332,455 403,247 485,492 1.8 1.6 0.7

NII 39,000 46,388 54,548 39,108 45,946 54,443 (0.3) 1.0 0.2

Provisions 9,155 10,591 12,135 9,170 10,381 11,639 (0.2) 2.0 4.3

Operating expenses 15,585 18,273 21,271 15,778 18,005 20,660 (1.2) 1.5 3.0

Employee expenses 8,091 9,628 11,457 7,387 8,643 9,939 9.5 11.4 15.3

PBT 14,361 17,624 21,243 14,260 17,660 22,243 0.7 (0.2) (4.5)

Tax 5,026 6,169 7,435 4,991 6,181 7,785 0.7 (0.2) (4.5)

PAT 9,335 11,456 13,808 9,269 11,479 14,458 0.7 (0.2) (4.5)

EPS (Rs) 141 174 209 140 174 219 0.7 (0.2) (4.5)



Exhibit 22: SCUF - growth rates, key ratios and Du Pont analysis March fiscal year-ends, 2016-2021E (%)


2016 2017 2018 2019E 2020E 2021E

Growth in key parameters (%)

Profit and loss statement - yoy (%)

Interest income 14 17 16 21 22 19

Interest costs 4 10 9 27 27 20

Net interest income 14 19 18 14 19 18

Net total income 13 18 18 14 19 18

Provisioning expenses 36 48 16 (13) 16 15

Net income (post provisions) 7 8 20 26 20 18

Operating expneses 17 9 20 14 17 16

Staff expenses 25 7 28 15 19 19

Other operating expenses 12 12 14 15 16 14

Depreciation expenses (12) (7) (4) (10) 0 0

PBT post extraordinaries (4) 6 19 41 23 21

Tax (2) 8 18 42 23 21

PAT (5) 5 20 40 23 21

Balance sheet - yoy (%)

Loans and Advances 21 20 20 24 21 19

Total loans (incl sell down) 17 18 19 23 21 19

Fixed assets 2 (7) 1 5 5 5

Other current assets (20) (6) (11) 15 15 15

Total assets 16 18 18 23 20 19

Borrowings 17 19 18 25 21 18

Current liabilities 0 0 33 30 30 30

Total liabilities 17 20 20 25 21 19

Share capital 0 (0) 0 0 0 0

Reserves and surplus 10 10 11 13 16 17

Shareholders funds 10 10 11 13 16 16

Key ratios (%)

Interest yield 21.0 20.5 19.8 19.6 19.5 19.2

Interest cost 10.3 9.7 8.8 9.2 9.5 9.6

Spreads 10.7 10.8 10.9 10.4 10.0 9.6

NII/ loans under management 13.5 13.6 13.5 12.7 12.4 12.1

Operating costs/ income 42.3 39.2 39.7 39.9 39.3 38.9

Cash/ total assets + loan sold down 0.0 0.0 0.0 0.0 0.0 0.0

Tax rate 34.4 34.9 34.5 34.5 34.5 34.5

Debt/ equity (X) 3.2 3.4 3.7 4.1 4.2 4.3

Du Pont analysis

(% of average assets including loans sold down)


Other income 0.1 0.0 0.1 0.0 0.0 0.0

Credit costs 3.40 4.27 4.17 2.99 2.83 2.70


PBT post extraordinaries 4.4 4.0 4.0 4.7 4.7 4.7

1-tax rate 0.7 0.7 0.7 0.7 0.7 0.7

RoAUM 2.9 2.6 2.6 3.0 3.1 3.1

Average AUM / average equity (X) 4.1 4.4 4.8 5.2 5.5 5.7

RoE 12.1 11.6 12.5 15.8 16.9 17.6



Exhibit 23: SCUF – financial statements March fiscal year-ends, 2016-2021E (` mn)


2016 2017 2018 2019E 2020E 2021E


Interest income 36,500 42,823 49,638 59,880 72,767 86,441

Income on loan securitization 660 439 244 - - -

Other interest income 1,189 1,050 951 250 350 300

Interest costs (13,910) (15,337) (16,677) (21,129) (26,729) (32,193)


Net total income 24,649 29,003 34,339 39,100 46,488 54,648

Provisioning expenses (6,166) (9,108) (10,537) (9,155) (10,591) (12,135)

Net income (post provisions) 18,483 19,895 23,801 29,946 35,897 42,514

Operating expneses (10,422) (11,358) (13,624) (15,585) (18,273) (21,271)

Staff expenses (5,131) (5,508) (7,035) (8,091) (9,628) (11,457)

Other operating expenses (4,918) (5,503) (6,256) (7,194) (8,345) (9,513)

Depreciation expenses (373) (346) (333) (300) (300) (300)

PBT post extraordinaries 8,061 8,537 10,178 14,361 17,624 21,243

Tax (2,772) (2,981) (3,530) (5,026) (6,169) (7,435)

PAT 5,289 5,556 6,648 9,335 11,456 13,808

No of shares (mn) 66 66 66 66 66 66

EPS (Rs) 80.1 84.2 100.7 141.4 173.6 209.2

DPS (Rs) 8.9 10.1 18.0 17.8 21.8 26.3

BVPS (Rs) 695.6 762.5 843.3 949.8 1,099.1 1,279.0


Loans and Advances 190,240 228,470 273,650 338,475 409,734 488,667

Investments 7,920 7,144 7,280 7,280 7,280 7,280

Fixed assets 840 782 790 830 871 915

Current assets 9,540 8,964 7,960 9,154 10,527 12,106

Total assets 208,540 245,360 289,680 355,738 428,412 508,967

Borrowings 144,919 172,855 204,210 255,122 307,598 363,084

Current liabilities 10,031 10,031 13,310 17,303 22,494 29,242

Provisions 7,680 12,190 16,500 20,625 25,781 32,227

Total liabilities 162,630 195,076 234,020 293,050 355,873 424,553

Share capital 660 659 660 660 660 660

Reserves and surplus 45,250 49,625 55,000 62,028 71,880 83,755

Shareholders funds 45,910 50,284 55,660 62,688 72,540 84,415

Aggregate loan book (incl sell down)

Loan on books 190,240 228,470 273,650 338,475 409,734 488,667

Loans outside books 5,510 2,850 960 - - -

Loans under management 195,750 231,320 274,610 338,475 409,734 488,667

Loans outside books./ total loans (%) 3 1 0 - - -

Total assets under management 214,050 248,210 290,640 355,738 428,412 508,967


*We note that JYL reverted to reporting only standalone quarterly financials. We had built our

estimates for the consolidated business. For comparison versus forecasts we have added our

aggregate subsidiaries’ estimates to the reported standalone financials to arrive at consolidated

estimates. We note that overall subsidiary contribution is marginal and hence, this approach

would yield ballpark-right comparable. As an aside, we would have appreciated continuity in

consolidated disclosures. Reduction in disclosures is generally avoidable as a good practice.

1QFY19 earnings print – a mixed bag

Revenues of `4.22 bn (+15% yoy) missed our estimate by 8%. Gross margin at 49% (-355 bps

yoy) was also 146 bps below estimate. Despite the 10% miss at the gross profit level, EBITDA

(`635 mn, +53% yoy) was broadly in line with our estimate on the back of lower-than-expected

adspends and other expenses. EBITDA margin of 15.1% (+375 bps yoy) was 120 bps ahead of

our estimate. Recurring PAT of `410 mn, +57% yoy, was 11% ahead.

Healthy headline yoy comps are misleading and more a function of the abysmal base; 1QFY18,

the pre-GST quarter, was particularly weak for JYL (revenue, EBITDA, and PAT had declined

16%, 48% and 47%, respectively). On a 2-year CAGR basis, 1QFY19 earnings reflect a 2% per

annum decline in revenues, 11% decline in EBITDA and 7% in recurring PAT. Pretty weak!

Management reiterates its bullish FY2019E outlook

Management remains fairly bullish on FY2019E and raised its revenue growth guidance to

15%+ from 12-14% earlier. Margin guidance stays at 16-17% and the management expects

recurring PAT to grow in the 25-30% ballpark. We note that our estimates are broadly in line

with the management outlook.

Tweak estimates marginally; raise fair value target to `240. Retain ADD

We have fine-tuned our model a tad and our FY2019-21E EPS forecasts change marginally. We

forecast an EPS of `5.6, `6.6, and `7.6 for FY2019E, FY2020E and FY2021E, respectively. At

around 34X FY2020E EPS, JYL no longer offers as much value as it did before the sharp 20%+

run up in the past three months. We stay constructive and would like to accumulate on dips.

JYL’s portfolio has tremendous promise; delivery on the promise has been an up-and-down

affair. Our TP stands revised up to `240/share (from `220). Reiterate ADD.

Jyothy Laboratories (JYL) Consumer Products

1QFY19 results – revenues miss but EBITDA in line. JYL’s consolidated* earnings

print for 1QFY19 was a mixed bag. EBITDA met our expectations despite a sharp miss

on the revenue front as well as lower-than-expected gross margin. Control on adspends

and other expenses aided in-line EBITDA delivery. 2-year CAGRs (to filter out the noise

in the base quarter) were weak. Management reiterated a bullish outlook. We tweak

forecasts marginally and raise fair value target to `240 (from `220). ADD stays.

ADD

JULY 26, 2018

RESULT


Price (`): 223


BSE-30: 36,858

Rohit Chordia

Jaykumar Doshi

Aniket Sethi

Jyothy Laboratories



Market Cap. (Rs bn) EPS growth (%) (26.4) 27.6 16.7




MFs 5.2 EBITDA (Rs bn) 2.7 3.1 3.6


Absolute 3.4 22.1 17.4 ROE (%) 14.4 16.6 16.8

Rel. to BSE-30 (0.5) 14.3 2.7 Div. Yield (%) 0.2 0.4 0.7


245-162

81.2

Consumer Products Jyothy Laboratories


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


1QFY19 1QFY18 4QFY18 yoy qoq 1QFY17

Net sales 4,046 3,432 4,766 18 (15) 4,220 (2)

Material cost (2,133) (1,728) (2,531) 23 (16) (2,208)

Gross profit 1,913 1,704 2,234 12 (14) 2,012 (3)

Gross margin (%) 47.3 49.7 46.9 -239 bps 38 bps 47.7

Staff cost (473) (414) (427) 14 11 (384)

Advertising & promotion (315) (307) (249) 3 27 (303)

Other expenditure (521) (553) (659) (6) (21) (541)

Total expenditure (3,443) (3,001) (3,867) 15 (11) (3,435)

EBITDA 603 430 899 40 (33) 785 (12)

OPM (%) 14.9 12.5 18.9 236 bps -396 bps 18.6

Other income 22 18 221 21 (90) 129

Other operating income 7 8 7 (13) — 4

Interest (77) (86) (127) (10) (39) (143)

Depreciation (138) (141) (146) (2) (6) (131)

Pretax profits 417 230 854 81 (51) 643 (20)

Tax (93) (22) (265) 317 (65) (125)

PAT 324 207 589 56 (45) 518 (21)

Extraordinaries — (1) 14 (10)

Reported PAT 324 206 604 57 (46) 509 (20)

Income tax rate (%) 22.3 9.7 30.5 1259 bps -818 bps 19.4

EPS (Rs/share) 1.8 1.1 3.3 56 (45) 2.9

Cost as a % of sales

Material cost 52.7 50.3 53.1 238 bps -39 bps 52.3

Staff cost 11.7 12.1 9.0 -36 bps 272 bps 9.1

Advertising & promotion 7.8 9.0 5.2 -116 bps 256 bps 7.2

Other expenditure 12.9 16.1 13.8 -324 bps -96 bps 12.8

Segment results of Jyothy Laboratories

Gross revenues

Dishwashing 1,335 1,108 1,368 20 (2) 1,254

Fabric care 1,767 1,701 1,835 4 (4) 2,009

Household insecticides 326 278 998 17 (67) 338

Personal care 534 441 481 21 11 545

Others 91 93 91 (2) (0) 80

Less: Intersegmental — (2) — (6)

Total gross revenues 4,053 3,618 4,773 12 (15) 4,220

EBIT

Dishwashing 141 67 252 109 (44) 189

Fabric care 329 301 463 9 (29) 416

Household insecticides (47) (55) 75 (14) (163) (11)

Personal care 98 16 16 504 520 85

Others (6) 15 3 (141) (282) (6)

EBIT margin (%)

Dishwashing 10.5 6.1 18.4 446 bps -787 bps

Fabric care 18.6 17.7 25.2 94 bps -660 bps

Household insecticides (14.5) (19.7) 7.5 521 bps -2199 bps

Personal care 18.3 3.7 3.3 1465 bps 1503 bps

Others (6.6) 15.8 3.6 -2242 bps -1022 bps

(% chg.) 2-year CAGR

(%)

Jyothy Laboratories Consumer Products


Exhibit 2: Interim consolidated results of JYL (as per Ind-AS), March fiscal year-end (Rs mn)


1QFY19 (a) 1QFY19E 1QFY18 4QFY18 KIE Est yoy qoq 1QFY17

Net sales 4,215 4,571 3,672 5,161 (8) 15 (18) 4,373 (2)

Material cost (2,148) (2,263) (1,741) (2,554) (5) 23 (16) (2,219)

Gross profit 2,068 2,308 1,931 2,607 (10) 7 (21) 2,154 (2)

Gross margin (%) 49.0 50.5 52.6 50.5 -146 bps -355 bps -147 bps 49.3

Staff cost (536) (530) (471) (479) 1 14 12 (446)

Advertising & promotion (330) (475) (437) (538) (31) (25) (39) (318)

Other expenditure (566) (670) (608) (713) (15) (7) (21) (585)

Total expenditure (3,580) (3,937) (3,256) (4,284) (9) 10 (16) (3,568)

EBITDA 635 634 416 877 0 53 (28) 805 (11)

OPM (%) 15.1 13.9 11.3 17.0 120 bps 375 bps -193 bps 18.4

Other income 22 35 21 38 (38) 1 (43) 29

Other operating income 5 9 8 7 (44) (38) (29) 4

Interest (92) (125) (101) (141) (26) (8) (35) (157)

Depreciation (78) (85) (78) (81) (8) 0 (4) (71)

Pretax profits 492 468 267 700 5 85 (30) 610 (10)

Tax (100) (117) (22) (199) (14) 363 (50) (146)

PAT 392 351 245 501 12 60 (22) 464 (8)

Minority interest 18 17 16 19 6 15 (3) 9

Recurring PAT 410 368 260 520 11 57 (21) 473 (7)

Extraordinaries — — (2) 259 (15)

Reported PAT 410 368 259 778 11 58 (47) 459 (6)

Income tax rate (%) 20.4 25.0 8.1 28.4 -459 bps 1226 bps -804 bps 24.0

EPS (Rs/share) 2.3 2.0 1.4 2.9 11 57 (21) 2.6

Cost as a % of sales

Material cost 51.0 49.5 47.4 49.5 145 bps 354 bps 146 bps 50.7

Staff cost 12.7 11.6 12.8 9.3 112 bps -11 bps 342 bps 10.2

Advertising & promotion 7.8 10.4 11.9 10.4 -257 bps -409 bps -260 bps 7.3

Other expenditure 13.4 14.7 16.5 13.8 -123 bps -312 bps -38 bps 13.4

Note:

(a) Estimated for comparison versus estimates; equal to reported standalone financials + our estimate for subsidiaries.

(% chg.) 2-year CAGR

(%)



Conference call takeaways

Rural demand. Management sounded positive on the pickup in rural demand.

Management also suggested that preference for natural and herbal products continues to

grow at a healthy pace; Margo is benefitting from this trend.

Inflationary RM scenario. Inflationary pressure in raw materials (mainly crude oil) along

with rupee depreciation is likely to exert cost pressures on FMCG companies.

Management expects price increases/reduced promotions & grammage in detergents by

most of the players soon. About 30% of JYL’s raw material is crude linked.

FY2019E outlook. Management expects ~15% revenue growth for FY2019E along with

some expansion in EBITDA margins to 16-17% (FY2018 EBITDA margin stood at 15.4%).

This should translate to a 25-30 recurring PAT growth for next year.

A strong quarter for Henko. Management highlighted Henko saw strong volume

growth of 18.1% yoy on the back of strong offtake of its newly launched `10 pack.

Management did acknowledge that margins in the `10 pack are marginally lower than

the overall margins for the brand.

Margo growing strong, riding the naturals wave. Margo, with its new positioning

“Goodness of 1,000 (neem) leaves”, seeing strong growth. Company has successfully

been able to diversify Margo from its erstwhile traditional core markets which now

contribute only 30%. Growth in non-core markets of Margo is currently 1.5X of growth

in its core market.

Future geographic growth engines. With south India now contributing 38% to JYL’s

topline, management seeks to consolidate their position in the region with other regions

likely to drive growth going forward.

Scrubbers – a big opportunity. Management sees scrubbers as a big opportunity for its

Exo brand and has launched differentiated product offering for the same. They are the

only major scrub brand having a good presence in the dishwash segment as well.

Ujala Crisp and Shine. JYL has launched its Ujala Crisp and Shine in the state of Tamil

Nadu and believes that strong investments are required initially to educate the

consumers.

Debt repayment. JYL would look to repay about `500-750 mn of debt (current gross

debt of ~`3,750 mn) in FY2019 with no major capex plans in the pipeline.

Jyothy Laboratories Consumer Products


Exhibit 3: JYL - key changes to earnings (consolidated, Ind-AS), March fiscal-year ends, 2019E-21E


Exhibit 4: Category-wise revenue break-up (Rs mn)


Exhibit 5: Brand-wise revenue break-up (Rs mn)


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

Net revenues (Rs mn) 19,982 22,603 25,453 19,857 22,416 25,198 0.6 0.8 1.0

EBITDA (Rs mn) 3,094 3,572 4,098 3,198 3,625 4,150 (3.2) (1.5) (1.3)

EBITDA margin (%) 15.5 15.8 16.1 16.1 16.2 16.5

Recurring PAT 2,045 2,386 2,754 2,008 2,352 2,761 1.9 1.4 (0.3)

EPS (Rs/share) 5.6 6.6 7.6 5.5 6.5 7.6 1.9 1.4 (0.3)

Effective tax rate (%) 22.5 25.5 28.0 25.0 26.5 28.0

Revised Earlier Change (%)

1QFY19 1QFY18 Chg. (%) 1QFY18 underlying Chg. (%)

Ujala 910 890 2.2 810 12.2

Exo 990 810 22.2 770 29.6

Maxo 330 280 17.9 250 28.0

Henko 460 460 0.0 420 10.9

Margo 480 390 23.1 370 29.5

Pril 350 300 16.7 280 23.2

Power brands 3,520 3,130 12.5 2,900 21.3

Others 540 490 10.2 460 16.3

Total gross revenues (before excise) 4,060 3,620 12.2 3,360 20.6

1QFY19 1QFY18 Chg. (%) 1QFY18 underlying Chg. (%)

Dishwashing 1,330 1,110 19.8 1,040 27.9

Fabric care 1,770 1,700 4.1 1,560 13.4

Household insecticides 330 280 17.9 250 28.0

Personal care 530 440 20.5 420 27.6

Others 90 90 0.0 80 8.1

Total 4,050 3,620 11.9 3,350 20.6



Exhibit 6: JYL: Consolidated profit model, balance sheet, cash flow (as per Ind-AS), March fiscal year-ends, 2015-2021E (Rs mn)


2015 2016 2017 2018 2019E 2020E 2021E


Net revenues 15,053 15,909 16,812 17,310 19,982 22,603 25,453

EBITDA 1,822 2,365 2,550 2,559 3,094 3,572 4,098

Other income 157 161 125 276 222 276 334

Interest expense (138) (618) (565) (481) (441) (399) (346)

Depreciation/Amortisation (325) (314) (301) (311) (326) (346) (367)

Pretax profits 1,516 1,594 1,810 2,043 2,549 3,104 3,718

Tax (35) (693) 326 (513) (573) (792) (1,041)

Minority Interest 1 43 40 72 70 74 77

Recurring Net Income 1,482 944 2,176 1,602 2,045 2,386 2,754

Extraordinary items (271) (163) (94) 258 — — —

Reported Net Income 1,211 781 2,081 1,861 2,045 2,386 2,754

Recurring EPS (Rs) 4.1 2.6 6.0 4.4 5.6 6.6 7.6

Adjusted EPS (Rs) 2.9 2.6 6.0 4.4 5.6 6.6 7.6


Total shareholder's equity 7,797 8,461 10,890 11,442 13,268 15,217 17,315

Total borrowings 5,537 6,067 4,983 5,441 4,941 4,441 3,691

Other long term liabilities 5 253 — — — — —

Minority Interest 14 17 (67) (139) (209) (283) (360)

Total liabilities and equity 13,354 14,798 15,806 16,744 18,000 19,375 20,646

Net fixed assets incl CWIP 10,902 10,757 11,058 11,060 10,984 10,915 10,853

Investments 1,935 835 285 1,132 1,132 1,132 1,132

Cash 767 612 1,034 1,367 2,114 3,224 4,220

Net current assets (251) 2,594 2,314 3,185 3,771 4,104 4,441

Total assets 13,354 14,798 14,691 16,744 18,000 19,375 20,646


Operating cash flow (excl working capital) 1,431 1,884 2,289 2,472 2,556 2,819 3,099

Working capital 232 32 (656) (38) (586) (333) (337)

Capital expenditure (164) (257) (567) 43 (250) (277) (305)

Free cash flow 1,499 1,658 1,067 2,478 1,720 2,210 2,456

Key ratios (%)

Sales growth 14.2 5.7 5.7 3.0 15.4 13.1 12.6

EPS growth 73.5 (36.4) 129.9 (26.4) 27.6 16.7 15.4

Adj. EPS growth 47.0 (9.5) 129.9 (26.4) 27.6 16.7 15.4

Gross margin 48.4 47.4 46.8 49.4 47.8 48.0 48.2

EBITDA margin 12.1 14.9 15.2 14.8 15.5 15.8 16.1

RoE 19.5 11.6 22.5 14.5 16.8 17.0 17.3

RoCE 10.2 13.6 14.5 13.6 15.6 17.0 18.3


Weak overall performance but an expected outcome due to high provisions for bad loans

KVB’s reported earnings declined by ~70% yoy, dragged by ~80% yoy increase in provisions.

Revenues grew 8% yoy led by similar growth in NII and non-interest income. PPoP growth was

modest at 2% yoy as operating costs grew 16% yoy. Loan growth has accelerated back to

~13% yoy from 8% yoy in the previous quarter. Most of the slowdown was seen in the

corporate segment, which grew 8% yoy while retail loan growth was solid at 25% yoy. The

bank has taken the benefit of investment depreciation amortization for the current quarter.

SME slippages a bit unexpected; overall concerns on NPLs gradually declining

Headline asset quality saw further deterioration with gross NPLs increasing ~80 bps qoq to

7.4% of loans and net NPLs increasing ~30 bps to 4.5% of loans – the highest levels since

FY2003. Slippages were high at ~7% of loans for the third consecutive quarter. However,

unlike the previous two quarters, which saw most of the NPLs coming from the corporate

segment, this quarter saw a similar contribution from the SME segment as well. This was not

anticipated by us and we understand that there have been some transitional issues and lagged

impact of GST/demonetization. We would probably wait for another couple of quarters to see if

this is becoming a structural issue as the focus is likely to shift towards recovery from these

NPLs. Issues on the large corporate book are declining as the bank has been aggressively

recognizing the pain. Share of loans under SDR, S4A, 5:25 is quite negligible.

Credit costs will remain elevated in the near term as KVB will need to absorb the impact of new

NPL formations and incremental provisions for NCLT accounts. Provision coverage (calculated) is

quite low around 38% and FY2019 would continue to see a catch-up on this front.

Maintain ADD: undemanding valuations give comfort

Our broad thesis on the bank remains unchanged and there is comfort on valuations at this

point. Near-term performance is likely to be driven by (1) SME performance, (2) path of RoE

improvement and (3) execution of the current team. We have cut our estimates resulting in a

marginal change to our TP (`110 from `120 earlier). We value the bank at 2X (adjusted) book

and 14X FY2020 EPS for RoEs, which can move closer to ~14-15% in the medium term.

Karur Vysya Bank (KVB) Banks

SME concerns surface. KVB reported ~70% yoy decline in earnings on account of

higher provisions for bad loans. Slippages were high for the third consecutive quarter at

~7% of loans with this quarter showing higher-than-expected impact from the SME

portfolio. We will await a couple of more quarters to see if the SME concerns are a bit

more structural or fallout of GST/demonetization. Risks on the large corporate loans are

dissipating. Valuations are undemanding. Maintain ADD (TP at `110 from `120 earlier).

ADD

JULY 26, 2018

RESULT


Price (`): 99


BSE-30: 36,858

QUICK NUMBERS

NII up 8% yoy; net

profits dropped

69% yoy

GNPL and NNPL

ratios up 88 bps and

34 bps qoq to 7.4%

and 4.5%,

respectively

Maintain ADD

rating with TP at

`110 (from `120)

M B Mahesh CFA

Nischint Chawathe

Dipanjan Ghosh

Shrey Singh

Karur Vysya Bank



Market Cap. (Rs bn) EPS growth (%) (52.2) (32.3) 306.7




MFs 15.2 BVPS 69.5 71.8 82.9


Absolute (6.1) (4.0) (23.2) ROE (%) 6.1 3.7 14.1



150-94

72.2

Banks Karur Vysya Bank


Exhibit 1: Karur Vysya Bank – Quarterly details March fiscal year-ends, 1QFY18-1QFY19 (` mn)


1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 FY2019E FY2018 (% chg.) FY2020E

Interest Earned 14,425 14,289 13,841 14,909 1.0 4.2 (3.2) 59,946 57,784 3.7 67,341

Interest on loans 11,343 11,100 10,886 11,049 2.2 4.2 2.7 46,882 44,208 6.0 54,169

Interest on Investment 2,895 2,925 2,742 2,939 (1.0) 5.6 (1.5) 11,914 11,229 6.1 11,898

Interest on balance with RBI and others 187 263 214 920 (28.7) (12.3) (79.6) 1,150 2,346 (51.0) 1,274

Interest expense 8,589 8,691 8,455 8,480 (1.2) 1.6 1.3 35,855 34,015 5.4 40,335

Net interest income 5,836 5,597 5,386 6,429 4.3 8.4 (9.2) 24,091 23,768 1.4 27,006

Other Income 2,549 2,127 2,363 2,087 19.8 7.9 22.2 9,732 8,999 8.1 11,204

Other Income exld treasury 2,479 2,087 1,893 2,007 18.8 30.9 23.5 9,232 7,989 15.6 10,204

Treasury 70 40 470 80 75.0 (85.1) (12.5) 500 1,011 (50.5) 1,000

Commission & exchange 1,910 1,607 1,700 1,530 18.9 12.4 24.8 6,974 6,171 13.0 7,671

Total Income 8,385 7,724 7,749 8,515 8.6 8.2 (1.5) 33,824 32,768 3.2 38,210

Operating Expenses 3,789 3,743 3,255 3,718 1.2 16.4 1.9 16,254 14,207 14.4 18,064

Employee expenses 1,786 1,742 1,515 1,792 2.5 17.9 (0.4) 7,336 6,391 14.8 8,391

Other operating expenses 2,003 2,001 1,740 1,926 0.1 15.1 4.0 8,918 7,816 14.1 9,673

Operating Profit Before Prov. & Cont. 4,596 3,981 4,494 4,797 15.4 2.3 (4.2) 17,570 18,560 (5.3) 20,146

Provisions & Contingencies 4,227 3,745 2,334 3,942 12.9 81.1 7.2 14,058 12,737 10.4 5,862

Loan loss provisions 3,850 3,239 2,280 3,810 18.9 68.9 1.0 13,208 11,904 10.9 5,312

Profit before tax 370 237 2,160 855 56.1 (82.9) (56.8) 3,512 5,823 (39.7) 14,284

Provision for Taxes (90) 79 680 350 (213.5) (113.2) (125.6) 1,172 1,580 (25.8) 4,766

Net Profit 459 158 1,480 506 191.1 (69.0) (9.2) 2,340 4,244 (44.9) 9,518

Tax rate (24.2) 33.4 31.5 40.9 33.4 27.1 33.4

PBT - treasury + investment dep. 740 697 1,730 1,105 6.1 (57.2) (33.1) 3,812 5,723 (33.4) 13,784

Key balance sheet items (Rs bn)

Deposits 576 580 547 569 (0.8) 5.3 1.2 623 569 9.5 700

Saving 114 101 110 12.6 3.4 122 110 11.2 140

Current 59 59 56 (0.4) 5.3 63 56 12.9 73

CASA (%) 30.0 29.2 29.1 76 bps 82 bps 29.7 29.1 60 bps 30.3

Advances 479 452 424 460 5.8 12.9 4.2 495 448 10.6 567

Retail 82 66 76 24.9 8.0

Agriculture 83 76 79 8.1 5.0

Commercial/SME 165 144 161 14.6 2.6

Corporate 149 138 144 8.2 3.4

Gold loans 74 64 71 14.9 4.2

Investment 163 162 153 160 1.2 6.9 2.2 161 158 1.7 169

AFS 51 47 47 8.2 7.4

Key calculated ratios (%)

Yield on advances 9.7 9.9 10.4 9.7 -72 bps -7 bps 9.9 10.3 -38 bps 10.2

Yield on investment 7.2 7.3 7.3 7.2 -11 bps -2 bps 7.5 7.4 15 bps 7.3

Cost of deposit 6.0 6.1 6.2 6.0 -24 bps 5 bps 5.7 6.0 -29 bps 5.8

NIM 3.4 3.3 3.4 3.8 -7 bps -42 bps 3.6 3.7 -12 bps 3.6

Cost-income 45.2 48.5 42.0 43.7 318 bps 152 bps 48.1 44.4 363 bps 47.3

CD ratio 83.2 78.0 77.6 80.8 564 bps 239 bps 79.5 78.7 76 bps 81.0

RoA 0.3 1.0 0.3 -68 bps -3 bps 0.3 0.5 -20 bps 1.2

Asset quality measures

Gross NPL (Rs mn) 35,634 18,070 30,158 97.2 18.2 31,903 30,158 5.8 29,026

Gross NPL (%) 7.4 4.3 6.6 317 bps 88 bps 6.3 6.5 -25 bps 5.0

Net NPL (Rs mn) 20,883 11,892 18,628 75.6 12.1 18,608 18,628 (0.1) 16,620

Net NPL (%) 4.5 2.9 4.2 165 bps 34 bps 3.8 4.2 -40 bps 2.9

Provision coverage ratio (%) 41.4 34.2 38.2 720 bps 316 bps 41.7 38.2 344 bps 42.7

PCR inc. technical write off (%) 56.5 57.0 56.5 -51 bps 0 bps

Slippages (Rs mn) 7,850 3,892 6,250 101.7 25.6 9,582 20,918 (54.2) 8,096

Slippages (%) 6.8 3.8 5.6 307 bps 125 bps 2.0 4.9 -288 bps 1.5

Restructured (Rs mn) 523 8,079 2,624 (93.5) (80.1)

Restructured loans (%) 0.1 1.9 0.6 -180 bps -46 bps

Capital adequacy details (%)

CAR 14.1 11.7 14.4 237 bps -35 bps

Tier-I 13.6 11.0 13.9 253 bps -35 bps

Tier-II 0.5 0.7 0.5 -16 bps 0 bps

Key parameters

Branches 790 719 799 9.9 (1.1) 840 790 6.3 890

ATMs 2,337 2,191 2,328 6.7 0.4 1,895 1,795 5.6 1,995

(% chg.)

Karur Vysya Bank Banks


Exhibit 2: NII growth lagged loan growth in 1QFY19 NII and loan growth, March fiscal year-ends, 1QFY14-1QFY19 (%)


Exhibit 3: Cost-income ratio was high at 45.2% Operating expenses growth and cost-income ratio, March fiscal year-ends, 1QFY14-1QFY19 (%)


Retail drives loan growth in 1QFY19

Headline loan growth was 13% yoy in 1QFY19. The growth was driven by 25% yoy growth

in the retail segment. Retail loan growth has been strong since 3QFY18. The share of retail

loans increased 164 bps yoy and 62 bps qoq to 17.2%. Within retail growth was primarily

driven by the home loans, LAP and vehicle loans. Home loans increased 23% yoy whereas

growth in LAP stood at 41% yoy. Growth in vehicle loans which was robust at 9% yoy in

1QFY19 was lower than that of peers. Personal loans and education loans saw a dip by 5%

yoy each in 1QFY19. SME loans witnessed modest growth at 15% yoy. Growth in

agriculture and corporate segment were relatively muted at 8% yoy each in 1QFY19.

We expect modest loan growth at 13% CAGR in FY2018-21E driven by growth in retail and

SME loans. KVB is aggressively pushing to convert its large retail customer base to asset

customers. The company has rolled new branch/individual sales incentive scheme to improve

origination. There has been further investment on the technology side to garner new

customers.

-

8

16

24

32

40

1Q

FY14

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

1Q

FY16

1Q

FY16

2Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

3Q

FY17

4Q

FY17

1Q

FY18

2Q

FY18

3Q

FY18

4Q

FY18

1Q

FY19

Loan NII

42 40

28 25

11 7 7 2

18

8 13

3 14

19

10 9 4

22 16

30

38

46

54

62

70

-

10

20

30

40

50

1Q

FY14

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

1Q

FY16

1Q

FY16

2Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

3Q

FY17

4Q

FY17

1Q

FY18

2Q

FY18

3Q

FY18

4Q

FY18

1Q

FY19

Opex (LHS) Cost-income (RHS)



Exhibit 4: Average ticket size in corporate and commercial space increased in 1QFY19 Average ticket size, March fiscal year-ends, 1QFY18-1QFY19 (Rs mn)


Exhibit 5: Share of retail loans continue to inch up Break-up of loan book, March fiscal year-ends, 2011-1QFY19 (%)


Corporate and SME slippages drive deterioration in asset quality

Reported GNPL increased 18% qoq to `36 bn and NNPL increased 12% qoq to `21 bn on

the back of rise in slippages. Slippages were high at `7.9 bn (6.8% of loans) in 1QFY19. The

majority of slippages were driven by corporate and SME segments. Corporate slippages were

high at `2.7 bn and SME slippages stood at `2.4bn. While the majority of slippages for the

former were likely from the previously guided watch-list, we await further clarity from the

management on the nature of slippages in the latter. Out of `12 bn (potential stress) guided

by the company as its watch-list in 2QFY18, ~`8.8 bn had slipped into NPL in 2HFY18 while

~`3.2 bn was left to be recognized in FY2019E. Most likely majority of the slippages were

from this watch-list (in the corporate segment).

FY2019E will see volatile movement in NPLs as higher slippages will be present during the

initial parts of the year followed by higher recovery and write-offs as well since the company

has quite a few large corporate exposures that are in various stages in the NCLT process.

Loan loss provisions are likely to remain higher in FY2019 as the bank still needs to catch up

on coverage ratio (excluding technical write-off) which is quite low at 41.4%. Provision

coverage ratio (including technical write-off) was flat qoq at ~56.5%. We forecast GNPL

ratio to be in the range of 1.5-2.5% over FY2019-21E.

352 349 350 333 353

360

4.7 4.7

4.9

4.1 3.9

4.0

3.0

3.4

3.8

4.2

4.6

5.0

200

240

280

320

360

400

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

Corporate (LHS) Commercial (RHS)

2011 2012 2013 2014 2015 2016 2017 2018 1QFY19

Agriculture 14.3 15.7 18.3 17.7 17.0 17.8 16.8 17.1 17.2

Retail 7.5 8.2 11.9 12.5 13.4 15.0 15.3 16.6 17.2

SME 13.4 34.0 32.3 32.5 32.4 32.3 35.0 35.0 34.5

Corporate and others 64.8 42.1 37.6 37.3 37.2 34.9 32.9 31.3 31.1

of which

Gold loans 16.2 21.5 26.3 23.4 19.6 16.1 14.9 15.4 15.4



Cost pressure remains high

Growth in operating expenses was high at 16% yoy in 1QFY19 driven by 18% yoy growth

in employee expenses and 15% yoy growth in other expenses. Cost-to-income ratio

increased 150 bps qoq and 320 bps yoy to 45% in 1QFY19. Growth in non-staff expense

reflects investments in branch expansion and investments towards digital initiatives.

We expect cost-income ratio to further increase to 48% by FY2019E from 44% in FY2018

(up 370 bps qoq) and further elevate to 49% by FY2021E. Our views are guided by (1)

continued investment in branch expansion (though expected to slow down going forward),

(2) increase in headcount and (3) investment in digital initiatives.

Other highlights in the quarter

Deposit growth remained muted at 5% yoy. CASA growth dropped to 8% yoy driven by

flat CA yoy. SA growth maintained momentum in 1QFY19 (up 13% yoy). We forecast

14% CASA CAGR in FY2018-21E with CASA ratio at 31% by FY2021E.

Non-interest income growth was muted at 8% yoy driven by drag in treasury gains (down

85% yoy). Core fee income growth was strong at ~12% yoy. Fee income is expected to

traverse on a stiff growth trajectory as the company also plans to focus on distribution of

insurance and other financial products.

Calculated margins dropped 8 bps yoy and 42 bps qoq to 3.4% on the back of drop in

yields. Calculated yields were down 6 bps qoq and 72 bps yoy as a result of rise in

interest reversals and shift in loan mix towards higher share of low yielding retail loans.

There was marginal relief from cost of deposits which dropped 24 bps yoy (up 5 bps qoq)

to 6%. NIM is expected to witness marginal compression to 3.5% by FY2021E from

3.7% in FY2018.

Tier-1 ratio comfortable to 13.6% with CAR of 14.1%.

Exhibit 6: KVB Change in estimates March fiscal year-ends, 2019E-2021E (` mn)


News estimates Old estimates Change (%)

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

Net interest income 24,091 27,006 29,205 23,354 26,230 28,351 3 3 3

Loan growth (%) 10.6 14.4 14.1 10.6 14.4 14.1 0 bps 0 bps 0 bps

NIM (%) 3.6 3.6 3.5 3.5 3.5 3.4 11 bps 11 bps 10 bps

Loan loss provisions 13,208 5,312 5,157 12,972 3,984 4,551 2 33 13

Other income 9,732 11,204 12,382 9,937 11,077 12,418 (2) 1 (0)

Fee income 6,974 7,671 8,515 6,788 7,467 8,289 3 3 3


PBT 3,512 14,284 15,583 4,014 15,209 15,869 (13) (6) (2)

Tax 1,172 4,766 5,199 1,339 5,227 5,612 (13) (9) (7)

Net profit 2,340 9,518 10,383 2,675 9,982 10,257 (13) (5) 1

PBT before treasury profits and

investment depreciation 3,812 13,784 15,083 3,014 14,009 14,469 26 (2) 4



Exhibit 7: KVB trading at 1.3X one-year forward adjusted book One-year forward PER and PBR, March fiscal year-ends, July 2009- July 2018


Exhibit 8: KVB trades at a discount to peers Trading premium to private banks, March fiscal year-ends, July 2009-July 2018


0.0

0.5

1.0

1.5

2.0

2.5

Jul-09

Jul-10

Jul-11

Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

0.0

0.2

0.4

0.6

0.8

1.0

Jul-09

Jul-10

Jul-11

Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18



Exhibit 9: KVB - Key ratios and growth rates March fiscal year-ends, 2016-2021E (%)


2016 2017 2018 2019E 2020E 2021E

Growth rates (%)

Net loan 8.2 4.7 9.5 10.6 14.4 14.1

Total asset 8.5 7.2 8.3 8.4 11.6 12.2

Deposits 12.1 7.2 5.9 9.5 12.3 13.0

Current 14.1 22.2 13.3 12.9 15.6 16.3

saving's 21.1 30.4 10.4 11.2 14.0 14.7

Fixed 10.2 1.1 3.9 8.6 11.4 12.0


Loan loss provisions (42.2) 100.2 86.6 10.9 (59.8) (2.9)

Total other income 21.7 10.7 15.0 8.1 15.1 10.5

Net fee income 15.7 4.5 28.5 13.0 10.0 11.0

Net capital gains 32.9 116.8 (50.6) (50.5) 100.0 -

Net exchange gains 24.5 (29.5) 13.2 15.0 15.0 16.0


Employee expenses 0.1 11.1 5.1 14.8 14.4 15.1

Key ratios (%)

Yield on Average earning assets 10.3 9.8 9.1 8.9 9.0 9.0

Yield on Average loans 11.5 11.0 10.3 9.9 10.2 10.2

Yield on Average investments 8.6 7.9 7.4 7.5 7.3 7.0

Average cost of funds 7.3 6.6 5.9 5.8 5.9 6.0

Interest on deposits 7.2 6.6 6.0 5.7 5.8 5.9

Spread 2.9 3.2 3.2 3.1 3.2 3.0

Net interest income/earning assets 3.4 3.6 3.7 3.6 3.6 3.5

Spreads on lending business 4.2 4.4 4.4 4.2 4.3 4.2

New provisions/Average net loans 0.8 1.6 2.8 2.8 1.0 0.9

Total provisions/gross loans 3.2 4.5 6.5 8.2 8.0 7.8

Interest income/total income 71.6 72.6 71.9 71.2 70.7 70.2

Other income / total income 28.4 27.4 28.1 28.8 29.3 29.8

Fee income to total income 18.5 16.8 19.3 20.6 20.1 20.5

Fee income to advances 1.2 1.2 1.4 1.5 1.4 1.4

Fees income to PBT 50.4 54.4 122.5 198.6 53.7 54.6

Net trading income to PBT 10.4 18.8 2.0 (8.5) 3.5 3.2

Exchange income to PBT 6.0 4.4 8.7 14.3 4.0 4.3

Operating expenses/total income 50.3 45.0 44.4 48.1 47.3 48.8

Operating expenses/assets 2.3 2.2 2.2 2.3 2.4 2.4

Tax rate 37.7 31.4 31.4 33.4 33.4 33.4

Dividend payout ratio 38.6 26.1 12.6 25.0 25.0 26.0

Share of deposits

Current 15.3 18.6 19.3 19.6 19.9 20.2

Fixed 76.7 72.3 70.9 70.3 69.7 69.1

savings 15.3 18.6 19.3 19.6 19.9 20.2

Loans-to-deposit ratio 78.0 76.2 78.7 79.5 81.0 81.8

Equity/assets (EoY) 7.9 8.1 9.4 8.9 8.8 8.6

Loan impairment ratios (%)

Gross NPL 1.3 3.5 6.3 5.9 4.7 4.1

Net NPL 0.6 2.5 4.2 3.8 2.9 2.4

Slippages 3.1 3.3 4.9 2.0 1.5 2.5

Provision coverage 57.7 30.4 38.2 41.7 42.7 47.1

Dupont analysis (%)


Loan loss provisions 0.6 1.1 1.8 1.9 0.7 0.6

Net other income 1.3 1.3 1.4 1.4 1.5 1.4


(1- tax rate) 62.3 68.6 68.6 66.6 66.6 66.6

ROA 1.0 1.0 0.5 0.3 1.2 1.2

Average assets/Average equity 12.6 12.4 11.4 11.0 11.3 11.5

ROE 12.9 12.6 6.1 3.7 14.1 13.9



Exhibit 10: KVB - financial statements March fiscal year-ends, 2016-2021E (` mn)


2016E 2017 2018 2019E 2020E 2021E

Income statement

Total interest income 54,434 56,224 56,997 59,946 67,341 75,518

Loans 43,294 44,017 44,208 46,882 54,169 61,921

Investments 10,958 11,060 11,229 11,914 11,898 12,220

Cash and deposits 182 1,146 1,559 1,150 1,274 1,378

Total interest expense 36,620 35,486 34,015 35,855 40,335 46,314

Deposits from customers 34,327 34,450 33,097 33,952 38,406 44,079


Loan loss provisions 3,186 6,379 11,904 13,208 5,312 5,157

Net interest income (after prov.) 14,628 14,358 11,077 10,884 21,694 24,047

Other income 7,068 7,822 8,999 9,732 11,204 12,382

Net fee income 4,595 4,802 6,171 6,974 7,671 8,515

Net capital gains 944 2,046 1,011 500 1,000 1,000

Net exchange gains 547 385 436 502 577 670


Employee expenses 5,474 6,080 6,391 7,336 8,391 9,657

Depreciation on investments (7) 389 911 800 500 501

Other provisions 59 107 (78) 50 50 50

Pretax income 9,116 8,835 5,036 3,512 14,284 15,583

Tax provisions 3,440 2,775 1,580 1,172 4,766 5,199

Net profit 5,676 6,060 3,457 2,340 9,518 10,383

% growth 25 7 (43) (32) 307 9

PBT - Treasury + Provisions 11,410 13,663 16,762 17,070 19,146 20,291

% growth 31 20 23 2 12 6

Balance sheet

Cash and bank balance 27,916 43,451 42,969 49,028 52,861 57,358

Cash 5,238 5,649 7,259 7,622 8,003 8,404

Balance with RBI 20,053 22,256 22,341 28,037 31,489 35,586

Net value of investments 132,217 148,575 158,032 160,751 169,258 183,899

Govt. and other securities 121,640 128,955 140,128 144,092 153,722 169,371

Shares 906 939 1,051 1,051 1,051 1,051

Debentures and bonds 5,742 7,985 12,459 11,213 10,092 9,082

Net loans and advances 390,844 409,077 448,001 495,410 566,891 646,638

Fixed assets 4,201 4,186 5,282 4,976 4,661 4,130

Net Owned assets 4,201 4,186 5,282 4,976 4,661 4,130

Other assets 21,459 12,787 15,007 15,307 15,613 15,925

Total assets 576,637 618,076 669,291 725,472 809,284 907,949

Deposits 500,789 536,998 568,901 623,055 699,750 790,796

Borrowings and bills payable 18,264 20,495 26,987 27,359 27,742 28,136

Other liabilities 11,855 10,226 10,761 10,761 10,761 10,761

Total liabilities 530,908 567,719 606,649 661,175 738,252 829,693

Paid-up capital 1,219 1,219 1,453 1,453 1,453 1,453

Reserves & surplus 44,511 49,138 61,189 62,844 69,578 76,803

Total shareholders' equity 45,730 50,357 62,642 64,297 71,032 78,257


S-curve helps accelerate execution; backlog mix to limit execution run-rate at 1Q levels

IRB reported a strong 11% qoq growth in construction revenues to Rs10.8 bn, or 15% of the

executable backlog in a single quarter. While a commendable feat, the same increases the

dependence on timely financial closures of recent project wins, which account for the majority

of the current order backlog. Based on the schedule of equity requirement pending as per IRB,

the company would likely be able to sustain/marginally grow the 1QFY19 run-rate through

FY2019. Current order backlog provides a visibility of more than three years on forward

revenues. IRB is well placed to win incremental HAM orders and grow its backlog given limited

consolidated debt:equity of sub-2X.

Traffic growth softens on diversions to competing assets

IRB reported flattish qoq toll revenues for comparable projects. The same was driven by traffic

diversions to competing stretches for two key projects in Ahmedabad Vadodara (revenues up

2% yoy) and Agra Etawah (revenues down 6.5% yoy) There was also limited improvement in

the other recent asset addition in Rajasthan Kaithal (partly under-construction asset impacting

potential). A total of Rs25 bn of pending equity requirement exists for funding the current set

of projects against Rs4 bn of quarterly cash profit.

1QFY19: in-line quarter as construction compensates for weakness in toll revenues

1QFY19 expectedly declined 15% yoy on the back of a sharp 24% yoy decline in construction

revenues and modest 8% growth in toll revenues. EBITDA margins of individual segments,

higher-than-expected depreciation and tax-rate led to a modest 5% miss in PAT versus our

estimate. We retain our estimates and rating. Key trigger for the stock would be the financial

closure of the pending BOT/HAM projects. Recent entry into HAM projects (would eventually

convert to AAA rated asset) and existing InvIT platform, bode well for IRB. IRB can also leverage

its balance sheet to bid for the Rs340 bn of near-term opportunity in ToT projects.

IRB Infrastructure (IRB) Infrastructure

In-line quarter. IRB reported steady performance in 1QFY19 with a stronger-than-

expected execution compensating for softness in toll revenues. Lean balance sheet

places IRB well for adding to its backlog that already provides more than three years of

visibility on forward revenues. We broadly retain our estimates and Rs320 target price.

Impending financial closures and normalization of traffic (presently getting diverted on

specific issues) would be key business triggers for IRB.

BUY

JULY 26, 2018

RESULT


Price (`): 194


BSE-30: 36,858

Aditya Mongia

Ajinkya Bhat

IRB Infrastructure







MFs 8.4 EBITDA (Rs bn) 26.8 31.6 33.4


Absolute (11.8) (23.5) (10.7) ROE (%) 14.5 17.6 16.3



286-184

68.2

Infrastructure IRB Infrastructure


Exhibit 1: IRB (consolidated) - 1QFY19 - key numbers, March fiscal year-ends (Rs mn)


Exhibit 2: IRB – key segmental numbers – 1QFY19, March fiscal year-ends (Rs mn)


1QFY19 1QFY19E 1QFY18 4QFY18 vs est. yoy qoq FY2018 FY2017 % change FY2019E FY2018 % change

Net Sales 15,380 14,980 18,169 13,822 3 (15) 11 56,941 55,072 3.4 66,983 56,941 17.6

Construction 9,899 9,424 13,088 8,685 5 (24) 14 38,047 34,675 9.7 43,833 38,047 15.2

BOT 5,481 5,556 5,081 5,137 (1) 8 7 18,894 20,397 (7.4) 23,150 18,894 22.5

Total Expenses (7,913) (9,991) (7,234) 9 (30,147) (27,976) 7.8 (35,426) (30,147)

Direct expenses (6,266) (8,467) (5,489) 14 (23,966) (22,867) 4.8 (23,966)

Employees cost (770) (572) (889) (13) (2,915) (2,726) 6.9 (2,915)

Other expenditure (876) (952) (856) 2 (3,267) (2,383) 37.1 (3,267)

EBITDA 7,467 7,306 8,178 6,588 2 (9) 13 26,794 27,562 (2.8) 31,557 26,794 17.8

Other income 452 631 535 499 (9) 1,687 588 186.9 2,838 1,687 68.3

PBDIT 7,919 7,936 8,713 7,087 12 28,480 16,241 75.4 34,395 28,480 20.8

Depreciation (1,344) (1,239) (1,816) (1,152) 17 (5,440) (4,067) 33.8 (5,575) (5,440) 2.5

EBIT 6,575 6,698 6,898 5,935 (2) (5) 11 23,040 12,174 89.2 28,820 23,040 25.1

Interest (2,477) (2,541) (2,854) (2,090) 19 (9,667) (6,650) 45.4 (11,435) (9,667) 18.3

PBT 4,098 4,156 4,044 3,845 (1) 1 7 13,373 9,578 39.6 17,385 13,373 30.0

Tax Expense (1,597) (1,521) (1,665) (1,447) 10 (5,444) (2,635) 106.6 (6,539) (5,444) 20.1

Net Profit 2,501 2,635 2,379 2,398 (5) 5 4 7,930 6,943 14.2 10,846 7,930 36.8

Key ratios (%)

Direct expenses/sales 40.7 46.6 39.7 42.1 41.5 - 42.1

Employees cost/sales 5.0 3.1 6.4 5.1 5.0 - 5.1

Other expenditure/sales 5.7 5.2 6.2 5.7 4.3 - 5.7

EBITDA margin 48.5 48.8 45.0 47.7 47.1 50.0 47.1 47.1

PBDIT margin 51.5 53.0 48.0 51.3 50.0 29.5 51.3 50.0

PBT margin 26.6 27.7 22.3 27.8 23.5 17.4 26.0 23.5

PAT margin 16.3 17.6 13.1 17.3 13.9 12.6 16.2 13.9

Effective tax rate 39.0 36.6 41.2 37.6 40.7 27.5 37.6 40.7

EPS (Rs) 6.6 7.5 5.4 5.5 21.6 19.7 30.9 21.6

%change


Revenues 15,380 14,980 18,169 13,822 3 (15) 11 56,941 55,072 3.4 66,983 56,941 17.6

Construction 9,899 9,424 13,088 8,685 5 (24) 14 38,047 34,675 9.7 43,833 38,047 15.2

BOT 5,481 5,556 5,081 5,137 (1) 8 7 18,894 20,397 (7.4) 23,150 18,894 22.5

EBITDA 7,465 7,306 8,178 6,588 2 (9) 13 26,793 27,562 (2.8) 31,557 26,793 17.8

Construction 2,550 2,639 3,813 2,275 (3) (33) 12 10,856 10,135 7.1 12,194 10,856 12.3

BOT 4,915 4,667 4,365 4,313 5 13 14 15,937 17,427 (8.6) 19,363 15,937 21.5

Margins (%) 48.5 48.8 45.0 47.7 47.1 50.0 47.1 47.1

Construction 25.8 28.0 29.1 26.2 28.5 29.2 27.8 28.5

BOT 89.7 84.0 85.9 84.0 84.3 85.4 83.6 84.3

PBT 4,098 4,044 3,845 1.3 6.6 14,640 9,578 52.9

Construction 2,169 3,187 2,024 (31.9) 7.2 9,948 6,957 43.0

BOT 1,929 857 1,821 125.1 5.9 4,692 2,621 79.0

PAT 2,501 2,379 2,398 5.1 4.3 9,196 6,943 32.5

Construction 1,421 2,117 1,285 (32.9) 10.6 6,932 4,602 50.6

BOT 1,080 261 1,113 313.4 (3.0) 2,264 2,341 (3.3)

%change

IRB Infrastructure Infrastructure


Exhibit 3: Majority of backlog comprises projects that are yet to commence under-construction

Break-up of the order backlog of IRB at end of 1QFY19, March fiscal year-ends


Exhibit 4: IRB - project-wise toll collection, March fiscal year-ends (Rs mn)


Ongoing BOT projects

42%

BOT projects -construction yet to

commence58%

Order backlog: Rs141 bn

1QFY19 1QFY18 4QFY18 yoy qoq FY2018 FY2017 adj. % change

Total toll collection 5,522 3,988 5,106 38.5 8.1 17,830 13,446 32.6

Pune - Solapur 63 64 63 (1.6) - 250 237 5.3

Pune - Nashik 83 79 82 5.1 1.2 326 299 8.9

Thane - Ghodbunder 195 84 102 132.1 91.2 456 322 41.4

Pathankot Amritsar - 320 - 598 1,152 (48.1)

Ahemdabad Vadodara 1,041 916 1,020 13.6 2.1 3,829 3,512 9.0

Mumbai - Pune 2,309 2,278 2,271 1.4 1.7 9,053 7,225 25.3

Agra Etawah 231 247 247 (6.5) 1,007 698

Udaipur-Gujarat Border 383 - 386 886 -

Kaithal-Rajasthan Border 166 - 161 375 -

Kishengarh Gulabpura 344 - 153

Chittorgarh – Gulabpura BOT 533 - 574 876 -

Solapur Yedeshi 174 - 47 174

% Change



Exhibit 5: Net debt levels are declining; InvIT proceeds led to a sharp decline in net-debt Consolidated net debt of IRB, March fiscal year-ends, 1QFY13-1QFY19 (Rs bn)


Exhibit 6: External debt has peaked out/is declining for all projects operational for more than one year Details of debt for IRB, March fiscal year-ends, 1QFY17-1QFY19 (Rs mn)


59 62 6673

8087 92 96

102106112110116

123129134

149146148151

112112108107105

(10)

10

30

50

70

90

110

130

150

170

1Q

FY13

2Q

FY13

3Q

FY13

4Q

FY13

1Q

FY14

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

3Q

FY17

4Q

FY17

1Q

FY18

2Q

FY18

3Q

FY18

4Q

FY18

1Q

FY19

(Rs bn) Consolidated net debt

Post InvIT

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

Road projects

Thane-Bhiwandi bypass 328 109 - - Paid off

Mumbai-Pune Expressway 3,635 3,163 2,592 2,027 1,459 896 342 - - Paid off

Pune-Solapur 513 513 513 513 513 513 511 511 511 Flat

Pune-Nashik 737 737 753 753 738 738 738 738 738 Flat

Thane-Ghodbunder 1,180 1,104 1,028 952 791 758 625 539 441 Declining

Integrated Road Dev. in Kolhapur 3,585 3,541 3,497 3,451 3,928 3,984 Out of portfolio

Pathankot-Amritsar 8,979 8,911 8,894 8,792 9,434 Out of portfolio

Ahmedabad-Vadodara Expressway 31,578 31,550 31,548 31,486 39,879 31,778 31,717 31,712 31,755 Flat

Goa Kundapur 11,093 12,004 13,091 13,092 13,093 13,093 13,093 13,093 13,085 Flat

Solapur Yedeshi 7,479 8,322 8,322 8,322 8,322 8,322 8,322 8,322 8,950 Flat

Yedeshi Aurangabad 10,328 11,671 13,356 15,140 15,988 15,988 15,988 16,975 17,017 Increasing

Kaithal Rajanthan 8,566 10,009 11,678 12,731 13,716 13,716 13,716 13,716 13,982 Flat

Agra Etawah 1,643 2,053 3,768 5,813 5,813 7,173 8,099 9,375 Increasing

Udaipur-Gujarat Border 2,208 2,649 3,734 4,429 Increasing

Gulabpura-Chittorgarh - - 2,267 3,131 Increasing

Kishangarh - Gulabpura - - 1,320 Yet to start

Subtotal - Road projects 88,001 93,277 97,325 101,027 113,674 97,807 94,874 99,706 104,734

IRB Infrastructure Infrastructure


Exhibit 7: We value IRB at Rs320 per share based on Jun-2019-based DCF price Sum-of-the-parts analysis of IRB


Value Stake

Value of IRB's

stake Per share

(Rs mn) (%) (Rs mn) (Rs) Comment

BOT FCFE 35,782 35,782 102 FCFE

Pune - Solapur 269 100.0 269 1 June-19 FCFE

Pune - Nashik 1,028 100.0 1,028 3 June-19 FCFE

Mumbai - Pune 14,049 100.0 14,049 40 June-19 FCFE

Thane - Ghodbunder (83) 100.0 (83) (0) June-19 FCFE

Ahmedabad Vadodara (2,490) 100.0 (2,490) (7) June-19 FCFE

Solapur-Yedeshi 3,196 100.0 3,196 9 June-19 FCFE

Yedeshi-Aurangabad 5,137 100.0 5,137 15 June-19 FCFE

Goa-Kundapur 5,596 100.0 5,596 16 June-19 FCFE

Rajasthan Kaithal (458) 100.0 (458) (1) June-19 FCFE

Agra Etawah (4,553) 100.0 (4,553) (13) June-19 FCFE

Kolhapur urban road project 3,210 100.0 3,210 9 Pending payment

Udaipur – Gujarat Border 1,192 100.0 1,192 3 June-19 FCFE

Gulabpura – Chittorgarh 7,854 100.0 7,854 22 June-19 FCFE

Kishengarh Gulabpura 1,371 100.0 1,371 4 June-19 FCFE

Related party L&A and investments 14,143 100.0 14,143 40

Construction 46,615 100.0 46,615 133 4XJune-20E EBITDA

Recent projects 15,709 100.0 15,709 45 1.1X book value less investment

Total 112,249 — 112,249 319 SOTP of existing business



Exhibit 8: Consolidated financials of IRB Infrastructure Developers, March fiscal year-ends, 2012-21E (Rs mn)


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

Income statement

Total operating income 31,330 36,872 37,319 38,475 51,279 58,459 56,941 66,983 80,490 83,653

Construction 22,002 25,988 25,364 20,029 30,049 34,675 38,047 43,833 60,860 66,377

Toll collection BOT 9,328 10,884 11,955 18,356 21,231 23,784 18,894 23,150 19,630 17,276

Total operating costs (17,637) (20,540) (19,782) (16,358) (24,676) (27,976) (30,147) (35,426) (47,132) (52,536)

Construction expenses (16,131) (19,126) (18,189) (13,871) (21,694) (24,540) (27,190) (31,639) (45,146) (50,567)

BOT expenses (1,506) (1,414) (1,593) (2,487) (2,983) (3,436) (2,957) (3,787) (1,985) (1,969)

EBITDA 13,694 16,333 17,537 22,117 26,603 30,483 26,794 31,557 33,358 31,117

Other income 1,252 1,301 1,214 1,130 1,271 1,232 1,687 2,838 3,427 3,095

Financial charges (5,464) (6,153) (7,561) (9,312) (10,639) (13,327) (9,667) (11,435) (13,074) (15,777)

Depreciation (2,970) (4,415) (4,770) (7,071) (8,533) (8,548) (5,440) (5,575) (5,107) (5,250)

Pre-tax profit 6,512 7,066 6,419 6,865 8,702 9,840 13,373 17,385 18,604 13,186

Taxation (1,501) (1,530) (1,823) (1,441) (2,306) (2,685) (5,444) (6,539) (6,983) (5,204)

Adjusted PAT 5,011 5,536 4,596 5,424 6,396 7,155 7,930 10,846 11,621 7,982

EPS (Rs) 15.1 16.7 13.8 15.4 18.2 20.4 22.6 30.9 33.1 22.7

Balance sheet

Share holder's funds 28,566 32,556 35,607 43,609 48,363 52,716 56,925 66,471 76,402 82,575

Minority interest 1,123 1,092 356 351 355 — — — — —

Loan funds 70,722 87,761 110,841 125,762 144,727 130,205 129,958 155,015 176,248 198,424

Total sources of funds 100,670 121,667 146,947 385,391 412,856 452,995 390,641 424,810 455,361 482,864

Net block 79,995 104,248 130,411 365,991 390,566 310,826 367,115 398,816 438,526 468,564

Investments 139 620 145 88 1,483 2,574 9,533 9,533 9,533 9,533

Cash & bank balances 18,208 14,710 15,012 15,798 15,008 13,077 12,678 15,564 9,261 7,121

Net current assets (ecl. cash) 2,328 2,089 1,379 3,515 5,799 (318) 1,315 896 (1,959) (2,353)

Total application of funds 100,670 121,667 146,947 385,391 412,856 452,995 390,641 424,810 455,361 482,864

Yoy growth (%)

Revenues 28.5 17.7 1.2 3.1 33.3 14.0 17.6 20.2 3.9 2.3

EBITDA 25.2 19.3 7.4 26.1 20.3 14.6 3.5 5.7 (6.7) 0.9

PAT 10.8 11.1 (17.5) 18.2 17.9 11.8 36.8 7.1 (31.3) (3.6)

Key ratios (%)

EBITDA margin 43.7 44.3 47.0 57.5 51.9 52.1 47.1 47.1 41.4 37.2

PAT margin 16.0 15.0 12.3 14.1 12.5 12.2 13.9 16.2 14.4 9.5

Net debt: Equity (X) 1.8 2.2 2.7 2.5 2.7 2.2 2.1 2.1 2.2 2.3

RoE 18.9 18.2 13.5 13.7 13.9 14.2 17.6 16.3 10.0 9.0

RoCE 10.7 9.3 7.5 4.8 3.6 3.9 4.4 4.5 3.7 3.7


Weaker-than-expected execution but lower other expenses led to margin and PAT beat.

BHEL’s 1QFY19 revenues of Rs58 bn were up 8% yoy and 8% below estimates led by weaker-

than-expected execution in the Power segment and in line execution in Industry segment.

Reported EBITDA of Rs2.8 bn was up 42% yoy, 19% above estimates despite higher raw

material and employee costs. The entire margin beat was led by lower-than-expected other

expenses. Adjusting for forex gains of Rs850 mn and provision writeback of Rs870 mn, other

expenses would have been 10% below estimates, led by cost control efforts on SG&A and

indirect material costs. The company reported order inflows of Rs44 bn in 1QFY19 (versus Rs17

bn yoy) while backlog stood at Rs1.1 tn, up 15% yoy and slightly down 1% qoq.

Diversification picking up pace; cost control efforts support profitability

BHEL has so far received Rs49 bn of FGD orders including change of scope in ongoing projects.

The company is also favorably placed on Rs29 bn of FGD tenders. 1QFY19 was also marked by

yoy doubling of Industry sector orders to Rs16 bn led by railways (electric propulsion, traction

motors and transformers), captive power plant, solar PV and Arun-3 Hydroelectric project in

Nepal. Accelerated execution and cost control efforts have led to improved profitability while

collection efforts have stabilized current receivables to 261 days. Given the weak macro in

thermal power, diversification and profitability improvement are required for BHEL to achieve

sustainable growth. Management commentary indicates meaningful progress on both these

fronts which should start reflecting in numbers in the coming quarters.

Cut estimates by 3-8%, roll-forward to revised TP of Rs78/share, upgrade a notch to REDUCE

We incorporate BHEL’s favorable placement in the near-term for FGD orders and international

orders while maintaining Industry sector estimate as it already assumed an uptick from FY2019.

Higher-than-expected RM cost, weak management guidance around the same and lower-than-

expected wage cost due to attrition lead to a net margin cut of 60-80 bps in FY2020-21. We

cut target multiple to 14X due to front-ended FGD ordering and roll-forward to June-2020 EPS

based target price of Rs78/share (Rs81 previously). Upgrade a notch to REDUCE.

BHEL (BHEL) Industrials

Progress on diversification, upgrade a notch to REDUCE. 1QFY19 results and

management commentary indicated progress on business diversification with increased

orders and prospects in FGD, railways and non-thermal power (solar, hydro). Higher RM

costs will be partly countered by lower employee count. Front-ended ordering of FGD

increases near-term estimates but results in a lower target multiple. We roll-forward to

a revised target price of Rs78/share (versus Rs81 previously) at 14X June-2020 EPS.

Upgrade a notch to REDUCE.

REDUCE

JULY 26, 2018

RESULT, CHANGE IN RECO.


Price (`): 72


BSE-30: 36,858

Aditya Mongia

Ajinkya Bhat

Bharat Heavy Electricals







MFs 3.0 EBITDA (Rs bn) 19.3 18.6 32.0


Absolute (2.3) (16.5) (26.2) ROE (%) 2.5 2.9 5.6



108-64

263.1

Industrials BHEL


1QFY19 earnings call takeaways

Strong ordering pipeline in sight. BHEL is currently favorably placed in Rs140 bn of

orders in the Power segment, Rs13 bn in Industry segment and Rs16 bn in international

markets. In total, the company is favorably placed in Rs170 bn of tenders which the

management expects to get converted into firm orders in FY2019.

Large ordering opportunity seen in emission control. BHEL sees large tendering

opportunity in FY2019 in emission control equipment for power plants. The company has

so far won Rs49 bn of FGD orders and is favorably placed in another Rs29 bn of orders.

The market is highly competitive and the pricing as seen from market trends and NTPC

bulk tenders has gone below the company’s expectations. NTPC bulk tenders for FGD

stipulate a maximum of three orders per contractor. BHEL has already won two orders

and is awaiting the third one.

Margin can be volatile, cost control efforts to continue. The management did not

provide firm guidance on margin but stated that raw material cost can be ~60% of sales

in FY2019, quarterly volatility aside. Profitability also depends on bulk ordering of raw

materials, job mix, composition and stage of execution. On staff expenses, the

management guided for Rs62 bn of total cost for FY2019 after the finalization of wage

negotiations (versus Rs60 bn in FY2018). Despite the significant wage hike expectation,

the overall cost will remain under control due to attrition in the company. BHEL’s

employee strength has reduced by over 2,000 persons over the last twelve months.

Other takeaways.

Working capital may face some pressure from change in payment terms for many of

the new contracts. Earlier, the company used to get 10-15% of order value as

customer advance. This figure has gone down in some cases or has become interest

bearing in some cases. The management, given BHEL’s large existing cash balance, is

opting to avoid any interest bearing advance and thus the working capital may go up

to that extent.

The locomotives order on the books is expected to start dispatches from September-

2018 onwards and thus will start reflecting in Industry segment revenues.

Some solar projects are slow moving as EESL is not picking up the manufactured

products. The management is hopeful of resolving such issues in the coming quarters.

BHEL Industrials


Exhibit 1: Weaker than expected execution in 1QFY19; margin beat led by cost control efforts in other expenses BHEL’s 1QFY19 results – key numbers (Rs mn)


Exhibit 2: FGD and replacement demand contributing to power ordering, railway orders contributing to Industry segment performance BHEL’s 1QFY19 segmental result - key numbers (Rs mn)



Net Sales 57,901 63,006 53,806 98,319 (8.1) 7.6 (41.1) 279,632 275,876 1.4 326,218 279,632 16.7

Other operational income 1,454 1,985 2,028 3,151 (26.8) (28.3) (53.8) 9,626 6,346 51.7 7,941 9,626 (17.5)

Net revenues 59,355 64,991 55,834 101,470 (8.7) 6.3 (41.5) 289,257 283,767 1.9 334,158 289,257 15.5

(Inc)/Dec in WIP 2,127 (2,120) (834) (4,182) (355.0) (150.9) (7,361) (9,945) (26.0) (8,504) (7,361)

Raw material cost (35,804) (33,839) (32,120) (47,107) 5.8 11.5 (24.0) (154,074) (161,405) (4.5) (188,349) (154,074) 22.2

Staff cost (14,180) (15,066) (14,088) (18,805) (5.9) 0.7 (24.6) (60,265) (53,999) 11.6 (62,675) (60,265) 4.0

Other items (8,626) (11,555) (6,762) (19,060) (25.4) 27.6 (54.7) (48,229) (50,106) (3.7) (56,009) (48,229) 16.1

Total Expenditure (56,483) (62,580) (53,805) (89,154) (9.7) 5.0 (36.6) (269,928) (275,455) (2.0) (315,537) (269,928) 16.9

EBITDA 2,872 2,411 2,029 12,316 19.1 41.6 (76.7) 19,329 8,312 132.5 18,621 19,329 (3.7)

Other income 1,786 1,892 1,710 1,979 (5.6) 4.5 (9.8) 6,931 9,961 (30.4) 7,569 6,931 9.2

Interest (639) (700) (657) (726) (2.8) (12.0) (2,546) (3,506) (27.4) (2,802) (2,546) 10.1

Depreciation (1,761) (2,353) (2,001) (2,171) (25.2) (12.0) (18.9) (7,864) (8,488) (7.4) (8,235) (7,864) 4.7

PBT 2,259 1,251 1,080 11,399 80.5 109.1 (80.2) 15,850 6,278 152.5 15,153 15,850 (4.4)

Tax (703) (313) (272) (6,827) 158.3 (89.7) (7,784) (1,320) 489.8 (5,758) (7,784) (26.0)

PAT 1,556 938 808 4,572 65.8 92.5 (66.0) 8,066 4,959 62.7 9,395 8,066 16.5

Key ratios (%)

Raw material/sales 56.7 55.3 59.0 50.5 55.8 60.4 58.9 55.8

Staff cost/sales 23.9 23.2 25.2 18.5 20.8 19.0 18.8 20.8

Other exp./sales 14.5 17.8 12.1 18.8 16.7 17.7 16.8 16.7

EBITDA margin 4.8 3.7 3.6 12.1 6.7 2.9 5.6 6.7

PBT margin 3.9 2.0 2.0 11.6 5.7 2.3 4.6 5.7

Effective tax rate 31.1 25.0 25.2 59.9 49.1 21.0 38.0 49.1

PAT margin 2.7 1.5 1.5 4.6 2.9 1.8 2.9 2.9

EPS (Rs) 0.4 0.3 0.2 1.2 2.2 1.4 2.6 2.2

Order (Rs bn)

Order backlog 1,170 1,014 1,181 NA 15.4 (1.0) 1,181 1,052 12.3 1,376 1,181 16.5

Order inflow 44 17 252 NA 150.6 (82.6) 409 235 74.3 522 409 27.5

%change


Revenues

Power 46,362 51,468 41,606 83,109 (9.9) 11.4 (44.2) 229,531 218,510 5.0 260,196 229,531 13.4

Industry 11,539 11,538 12,200 15,210 0.0 (5.4) (24.1) 50,100 57,998 (13.6) 66,021 50,100 31.8

EBIT

Power 4,878 4,386 9,094 11.2 (46.4) 27,921 25,346 10.2 - 27,921

Industry 585 802 572 (27.1) 2.3 1,796 2,442 (26.5) - 1,796

Revenue mix (%)

Power 80.1 77.3 84.5 82.1 79.0 79.8 82.1

Industry 19.9 22.7 15.5 17.9 21.0 20.2 17.9

EBIT margin (%)

Power 10.5 10.1 10.9 12.1 11.1 12.1

Industry 5.1 6.3 3.8 3.6 4.0 3.6

Yoy change (%)

Industrials BHEL


Exhibit 3: Order backlog provides visibility of nearly four years on forward four-quarter revenues Order booking, order backlog & visibility trend for BHEL, March fiscal year-ends, 1QFY11-1QFY19


Exhibit 4: A significant portion of L1 position has moved into order backlog with firm orders received for Patratu, Bhusawal, Udangudi

and Panki power projects Details of projects where L1 position has been announced


Exhibit 5: Supply far exceeds potential total demand of ~10 GW per annum over the next few years Details of manufacturing capacity of various players

Source: Companies, Kotak Institutional Equities

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

-

300

600

900

1,200

1,500

1,800

1Q

FY11

3Q

FY11

1Q

FY12

3Q

FY12

1Q

FY13

3Q

FY13

1Q

FY14

3Q

FY14

1Q

FY15

3Q

FY15

1Q

FY16

3Q

FY16

1Q

FY17

3Q

FY17

1Q

FY18

3Q

FY18

1Q

FY19

(# of years)(Rs bn) Order booking (LHS) Order backlog (LHS)

Years of visibility (RHS)

Company Project name

Contract

type

Size

(MW)

Contract size for

BHEL (Rs bn) Remarks Status

Thermal projects

NTPC Pudimadaka,

Visakhapatnam

TG 4X1000 35 Doosan is L1 for bolier and

BHEL is L1 for TG

No further progress reported, project likely to be scrapped

Hydroelectric projects

Telangana State Palamuru Rangareddy NA 2,600 21 BHEL is L1 Matter is subjudice

NHPC Pakal Dul TG 4x250 10 BHEL is L1 Matter is subjudice

BHEL-L1 7,600 66

Boiler capacity Turbine capacity

Structure (MW/ annum) (MW/ annum)

BHEL 20,000 20,000

L&T - Mitsubishi 51:49 4,000 4,000

JSW - Toshiba 25:75 — 3,000

Bharat Forge - Alstom 49:51 — 4,000

Doosan 100 3,000 —

Thermax - B&W PCG 51:49 3,000 —

Others 5,000 4,000

Total supply 35,000 35,000

BHEL Industrials


Exhibit 6: Details of project awards in power generation over the past three years


Capacity Contract size

Company Project name Contract type (MW) Configuration (MW) (Rs bn) Awarded to Date of award

UPRVUNL Panki EPC 660 1X660 44 BHEL 2-Apr-18

NPCIL Gorakhpur TG 700 1X700 7 BHEL 12-Mar-18

NTPC Patratu EPC 2,400 3X800 117 BHEL 9-Mar-18

MAHAGENCO Bhusawal EPC 660 1X660 28 BHEL 17-Jan-18

TANGEDCO Udangudi EPC 1,320 2X660 73 BHEL 15-Dec-17

NTPC Maitree (Bangladesh) EPC 1,320 2x660 100 BHEL 25-Apr-17

UPRVUNL Jawaharpur (Etah) EPC 1,320 2x660 106 Doosan Power Systems India 27-Dec-16

UPRVUNL Obra-C EPC 1,320 2x660 104 Doosan Power Systems India 27-Dec-16

NLC Bikaner (Barsingsar and Bithnok) EPC 500 2x250 37 Reliance Infrastructure 21-Nov-16

NUPPL Ghatampur TG 1,980 3x660 39 L&T 3-Aug-16

NTPC Karimnagar TG 1,600 2X800 15 Bharat Forge-Alstom 7-Jun-16

NSPCL Rourkela EPC 250 1x250 16 BHEL 16-May-16

NTPC Mandsaur EPC 50 - 3 BHEL 14-Apr-16

SPIC Tuticorin BTG 525 1X525 12 BHEL 1-Mar-16

TANGEDCO Uppur BTG 1,600 2x800 56 BHEL 1-Mar-16

NTPC Karimnagar Boiler 1,600 2x800 35 BHEL 11-Feb-16

TANGENCO North Chennai BTG 800 1x800 28 BHEL 5-Feb-16

APGENCO Damodaram Sanjeevaiah, Nellore BTG 800 1x800 23 BHEL 6-Nov-15

APGENCO Narla Tata Rao BTG 800 1x800 23 BHEL 6-Nov-15

UPRVUNL Harduagunj EPC 660 1x660 35 JSW-Toshiba 10-Sep-15

TSGENCO Yadadri EPC 4,000 5x800 204 BHEL 2-Jun-15

TSGENCO Manuguru EPC 1,080 4x270 50 BHEL 1-Apr-15

NTPC Khargone EPC 1,320 2x660 56 L&T 1-Apr-15

Total Sub-total since FY2016 27,265 1,210

Industrials BHEL


Exhibit 7: Key orders announced by BHEL in the past few years


Capacity Value

Order, Client Fuel (MW) (Rs mn) Nature of work

Apr-18 Panki, UPRVUNL Coal 660 44,000 EPC

Mar-18 Gorakhpur, NPCIL Coal 700 7,360 TG

Mar-18 Patratu, NTPC Coal 2,400 117,000 EPC

Feb-18 Visakhapatnam, HPCL (captive) Gas NA 10,340 TG

Jan-18 Bhusawal, MAHAGENCO Coal 660 28,000 EPC

Dec-17 Udangudi, TANGEDCO Coal 1,320 73,000 EPC

Total (FY2018) 5,740 279,700

Apr-17 Maitree Bangladesh, BIFPLC (NTPC JV) Coal 1,320 100,000 EPC

Oct-16 OHPC (Odisha) and NHPC Hydro 540 4,300 Renovation and Modernisation

Aug-16 West Bengal State Electricity Distribution Corporation Solar 30 1,690 EPC

Jul-16 Neyveli Lignite (65 MW) & Bharat Electronics (15 MW) Solar 80 4,370 EPC

May-16 NTPC-SAIL (Rourkela) Coal 250 16,000 EPC

Apr-16 Mandsaur, NTPC Solar 50 2,820 EPC

Total (FY2017) 2,270 129,180

Mar-16 Lift irrigation project Hydro 2,610 2,100 EPC

Mar-16 Spic Electrical Power Corp, Tuticorin Coal 525 12,000 BTG

Mar-16 Uppur, TANGEDCO Coal 1,600 56,000 BTG

Feb-16 Karimnagar, NTPC Coal 1,600 35,000 Bolier

Feb-16 North Chennai, TANGENCO Coal 800 27,590 BTG

Nov-15 Nellore, APGENCO Coal 800 23,070 BTG

Nov-15 Narla Tata Rao, APGENCO Coal 800 23,070 BTG

Jun-15 Yadadri, TSGENCO Coal 4,000 204,000 EPC

Total (FY2016) 12,735 382,830

Mar-15 Manuguru, TSGENCO Coal 1,080 50,000 EPC

Mar-15 Rammam Hydro, NTPC Hydro 120 2,250 Hydro generating sets and associated electro-mechanical works

Jan-15 Karanataka Power Corporation Limited Gas 370 12,020 EPC for Combined Cycle Power Plant

Jan-15 Kothagundam, TSGENCO Coal 800 38,100 EPC contract for 800 MW

Dec-14 Electricity Generation Company , Turkey NA NA 1,357 3 units of Electrostatic Precipitators (ESPs)

Nov-14 Darlipalli, NTPC Coal 1,800 2,200 ESP package

Oct-14 Vishnugad Pipalkoti HEP, THDCIL Hydro 444 4,220 Setting up of hydro generating sets and associated electro-mechanical works

Oct-14 Ennore SEZ, TANGENCO Coal 1,320 78,000 EPC for 1,320 MW project

Oct-14 Nagamer, NMDC NA NA 3,590 Plant power distribution package on turnkey basis

Sep-14 Wanakbori, GSECL Coal 800 35,360 EPC for 1X800MW plant

Jul-14 Karnataka Power Corporation Limited (KPCL) Solar 68 680 KPCL- 10 MWp Grid connected Solar Power Plant

Total (FY2015) 6,802 227,777

Not announced NTPC/Lara (ESP Pkg) Coal 1,600 2,000 ESP package; our estimate

Not announced NTPC/Gadarwara (ESP Pkg) Coal 1,600 2,000 ESP package; our estimate

Mar-14 Uttarakhand Jal Vidyut Nigam Limited Hydro 120 1,250 Electromechanical equipment for Uttrakhand HEP

Mar-14 NTPC, Darlipalli Coal 1,600 30,000 Steam generator order

Mar-14 NTPC,North Karanpura Coal 1,980 79,000 EPC

Feb-14 Punjab State Power Corporation Limited Hydro 206 3,210 Seven hydro generating sets located in two Power Houses

Dec-13 NLC, TN Coal 1,000 10,230 TG order

Nov-13 NTPC, Unchahar Coal 500 13,000 Main plant package

Nov-13 NLC, Turicorin Coal 1,000 25,690 SG package

Aug-13 BPCL, Kochi Refinery NA 104 2,650 Gas turbines

Jun-13 NTPC Solar 20 1,320 Setting up the Solar PhotoVoltaic power plants

Jun-13 World Bank Service 4,500 Renovation and Modernisation Contract for Koradi TPS

Total (FY2014) 9,730 174,850

BHEL Industrials


Exhibit 8: Revised estimates for BHEL, March fiscal year-ends, 2018-21E (Rs mn)


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

Order inflows 409,320 521,957 551,560 617,818 512,073 547,886 614,795 1.9 0.7 0.5

Power 333,420 430,877 442,264 486,663 420,993 443,144 494,341 2.3 (0.2) (1.6)

Industry 75,900 91,080 109,296 131,155 91,080 104,742 120,453 - 4.3 8.9

Revenues 289,257 334,158 393,654 458,655 333,165 394,705 459,050 0.3 (0.3) (0.1)

Power 333,420 430,877 442,264 486,663 420,993 443,144 494,341 2.3 (0.2) (1.6)

Industry 75,900 91,080 109,296 131,155 91,080 104,742 120,453 - 4.3 8.9

EBITDA 19,329 18,621 31,970 46,265 19,004 34,401 49,985 (2.0) (7.1) (7.4)

EBITDA margin (%) 6.7 5.6 8.1 10.1 5.7 8.7 10.9 (13) bps (59) bps (80) bps

Other income 6,931 7,569 8,147 8,126 7,569 8,147 8,126

Depreciation (7,864) (8,235) (8,605) (8,976) (8,235) (8,605) (8,976)

Interest expense (2,546) (2,802) (3,279) (3,499) (2,798) (3,280) (3,505)

PBT 15,850 15,153 28,232 41,916 15,541 30,664 45,630 (2.5) (7.9) (8.1)

Net PAT 8,066 9,395 18,351 27,245 9,635 19,932 29,660 (2.5) (7.9) (8.1)

EPS (Rs) 2.2 2.6 5.0 7.4 2.6 5.4 8.1 (2.5) (7.9) (8.1)

Yoy growth (%)

Inflows 74.3 27.5 5.7 12.0 25.1 7.0 12.2

Revenues 2.5 15.5 17.8 16.5 15.2 18.5 16.3

EBITDA 132.5 (3.7) 71.7 44.7 (1.7) 81.0 45.3

Net PAT 62.7 16.5 95.3 48.5 19.5 106.9 48.8

Revision (%)Old estimatesNew estimates

Industrials BHEL


Exhibit 9: Segment-wise inflow and execution for BHEL, March fiscal year-ends, 2012-21E (Rs bn)


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

Power

Utility order inflow (GW) 3.9 7.9 5.4 5.3 9.2 3.6 6.0 7.0 7.0 7.4

Realization (Rs mn / MW) 29.9 28.7 31.4 42.8 39.4 45.2 49.2 49.2 51.7 53.2

Utility order inflow 118 226 170 225 363 164 295 345 362 391

Spare orders 23 29 34 24 22 27 30 34 38 42

International orders 2 20 26 7 1 100 8 16 9 10

Emission control orders — — — — — — — 37 34 44

Order inflows 142 274 230 256 386 173 333 431 442 487

% growth (71.6) 92.6 (16.2) 11.3 50.8 (55.2) 92.6 29.2 2.6 10.0

Revenues 379 396 325 240 202 228 231 261 306 353

% growth 14.2 4.5 (17.9) (26.2) (15.7) 12.7 1.2 13.4 16.9 15.6

Order backlog 1,175 1,053 930 941 1,036 975 1,079 1,248 1,385 1,518

Bill to book ratio (%) 25 30 28 23 18 20 20 20 21 22

Industry

Order inflows 79 41 50 52 51 62 76 91 109 131

% growth (24.3) (47.9) 22.5 4.3 (1.8) 20.6 22.8 20.0 20.0 20.0

Revenues 117 106 79 70 58 60 50 66 82 99

% growth 14.1 (9.0) (25.9) (11.3) (16.3) 3.7 (16.7) 31.8 23.1 21.4

Order backlog 176 116 86 70 71 77 103 128 156 188


Total

Order inflows 221 315 280 308 437 235 409 522 552 618

% growth (63.5) 42.7 (11.2) 10.0 41.9 (46.3) 74.3 27.5 5.7 12.0

Revenues 495 502 403 309 261 288 281 328 387 452

% growth 14.2 1.3 (19.6) (23.3) (15.8) 10.7 (2.6) 16.7 18.1 16.8

Order backlog 1,350 1,169 1,015 1,010 1,107 1,052 1,181 1,376 1,541 1,706


Net revenues & EBITDA

Net revenues 480 484 391 302 255 282 289 334 394 459

Direct costs (286) (286) (238) (180) (171) (180) (170) (207) (244) (284)

Gross profit 194 199 153 122 84 102 119 127 150 175

Contribiution margin (%) 39.1 39.6 38.1 39.4 32.2 35.4 42.5 38.9 38.8 38.7

Employee expenses (55) (58) (59) (55) (54) (54) (60) (63) (66) (69)

Other fixed costs (40) (47) (49) (47) (44) (40) (40) (46) (52) (60)

EBITDA 99 94 45 21 (14) 8 19 19 32 46

EBITDA margin (%) 20.6 19.4 11.6 7.0 (5.4) 2.9 6.7 5.6 8.1 10.1

Net profit

Other income 13 11 16 12 15 10 7 8 8 8

Depreciation (8) (10) (10) (11) (9) (8) (8) (8) (9) (9)

PBT 103 94 50 22 (12) 6 16 15 28 42

Tax expenses (33) (28) (19) (10) (4) (3) (8) (6) (10) (15)

Net PAT 71 66 35 14 (7) 5 8 9 18 27

EPS (Rs) 28.8 27.0 14.2 5.8 (2.9) 2.0 2.2 2.6 5.0 7.4

BHEL Industrials


Exhibit 10: BHEL’s income statement, balance sheet and cash flow, March fiscal year-ends, 2012-21E (Rs mn)


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

Income Statement

Total net revenues 479,789 484,247 391,088 301,830 254,826 282,222 289,257 334,158 393,654 458,655

Cost of goods sold (380,713) (390,348) (345,890) (280,843) (268,493) (273,910) (269,928) (315,537) (361,684) (412,390)

EBIDTA 99,076 93,898 45,199 20,986 (13,667) 8,312 19,329 18,621 31,970 46,265

Other income 12,656 11,217 16,160 12,205 14,977 9,961 6,931 7,569 8,147 8,126

Interest (513) (1,253) (1,326) (917) (3,595) (3,506) (2,546) (2,802) (3,279) (3,499)

Depreciation (8,000) (9,534) (9,829) (10,773) (9,357) (8,488) (7,864) (8,235) (8,605) (8,976)

Pre-tax Profit 103,219 94,329 50,203 21,501 (11,642) 6,278 15,850 15,153 28,232 41,916

Tax (32,770) (28,222) (19,000) (10,053) (3,911) (2,984) (7,784) (5,758) (9,881) (14,670)

Recurring PAT 70,596 66,152 34,668 14,294 (7,096) 4,959 8,066 9,395 18,351 27,245

Extraordinary items (193) (4) (60) (101) — — — — — —

Reported PAT 70,404 66,147 34,608 14,193 (7,096) 4,959 8,066 9,395 18,351 27,245

Recurring EPS (Rs) 28.8 27.0 14.2 5.8 (2.9) 2.0 2.2 2.6 5.0 7.4

Balance sheet

Shareholders' equity 253,732 304,441 330,471 340,846 321,811 322,944 326,011 326,300 326,865 327,705

Loan funds 1,234 14,903 27,225 1,178 1,263 896 572 — — —

Total source of funds 254,966 319,344 357,695 342,024 323,074 323,840 326,583 326,300 326,865 327,705

Net block 42,968 44,585 46,929 41,405 39,625 35,959 30,688 25,047 19,036 12,653

WIP 13,246 11,335 6,220 5,005 3,095 1,595 1,945 1,945 1,945 1,945

Investments 4,617 4,292 4,202 4,177 6,642 6,614 6,907 6,907 6,907 6,907

Net current assets (excl cash) 111,723 165,173 161,725 170,930 136,176 136,252 137,789 129,330 122,171 140,822

Cash and bank balance 66,720 78,071 118,729 98,127 100,860 104,918 112,912 126,729 140,465 129,035

Deferred Tax Assets 15,462 15,507 19,690 22,207 36,592 38,414 36,259 36,259 36,259 36,259

Total applications 254,966 319,344 357,696 342,025 323,074 323,840 326,583 326,300 326,865 327,705

Cash flow statement

Net cashflow from operating activites (8,136) 18,648 45,181 7,755 3,469 5,620 10,008 21,321 29,248 12,943

Net cashflow from investing activites (3,297) (3,381) (1,681) 4,643 511 3,136 3,694 4,975 5,554 5,532

Free cash flow (OCF + net capex) (21,115) 8,890 38,484 3,187 (2,056) 2,262 7,065 18,727 26,655 10,349

Net cashflow from financing activites (18,149) (4,667) (2,092) (33,000) (1,239) (4,699) (10,687) (12,480) (21,065) (29,905)

Cash generated /utilised (29,582) 10,601 41,409 (20,602) 2,741 4,058 3,015 13,817 13,737 (11,430)

Net cash at end of year 66,720 78,071 118,729 98,127 100,860 104,918 112,912 126,729 140,465 129,035

Growth (%)

Revenue 13.6 0.9 (19.2) (22.8) (15.6) 10.8 2.5 15.5 17.8 16.5

EBITDA 15.4 (5.2) (51.9) (53.6) (165.1) (160.8) 132.5 (3.7) 71.7 44.7

Recurring PAT 17.4 (6.3) (47.6) (58.8) (149.6) (169.9) 62.7 16.5 95.3 48.5

Key ratios

EBITDA margin (%) 20.6 19.4 11.6 7.0 (5.4) 2.9 6.7 5.6 8.1 10.1

PAT margin (%) 14.7 13.7 8.9 4.7 (2.8) 1.8 2.8 2.8 4.7 5.9

Effective tax rate (%) 31.6 29.9 30.9 33.5 39.0 21.0 49.1 38.0 35.0 35.0

Net debt to equity (X) (0.3) (0.2) (0.4) (0.4) (0.4) (0.4) (0.4) (0.5) (0.6) (0.5)

RoE (%) 31.0 23.7 10.9 4.3 (2.1) 1.5 2.5 2.9 5.6 8.3

RoCE (%) 31.0 23.3 10.5 4.3 (1.5) 2.4 2.9 3.4 6.3 9.0

Book value per share (Rs) 69.1 82.9 90.0 92.8 87.7 88.0 88.8 88.9 89.0 89.3

Net Wcap (excl cash) as days of sales (#) 85 124 151 207 195 176 174 141 113 112


Non-recurring accounting adjustments distort reported earnings, coal plays the lead once again

Against a reported profit of Rs24.7 bn (176% yoy), Tata Power’s adjusted consolidated PAT

declined 11% yoy to Rs13.7 bn (-Rs1.7 bn) in FY2018 led by (1) higher contribution from coal

JVs (+Rs7.2 bn), (2) growth from renewable assets (+Rs2.5 bny), and (3) increased contribution

from standalone earnings (Rs3 bn). Earnings drag was led by deeper losses of Rs14 bn at

Mundra, (2) drop of Rs740 mn at Maithon, and (3) loss of profits from discontinued operations

(Rs720 mn). During FY2018, TPWR accounted for exceptional earnings of Rs11 bn (Rs6.5 bn of

loss in FY2017). The key contributors to the exceptional earnings were (1) reversal of Rs18 bn

for valuation of coal mines, (2) provisions for investments in Georgia (Rs5.2 bn) and Trombay

(Rs2.5 bn).

Liquidation of regulatory asset, higher dividends augur well for consolidated cash flow

TPWR had operational cash flows (before working capital) that were largely unchanged at Rs54

bn. However, unlike FY2017 that saw Rs16 bn of cash inflows primarily due to increase in

current liabilities, FY2018 saw inflows from working capital of Rs9.5 bn including reduction in

receivables and regulatory assets that yielded cash inflows of Rs13.4 bn. Capex remained range

bound at Rs35 bn (Rs33 bn in FY2017) though overall cash flows from investments were

curtailed at Rs15 bn of outflows compared to Rs74 bn of outflows in FY2017. Higher outflows

in FY2017 were on account of the acquisition of renewable assets of Welspun. Welspun

acquisition had also led to increase in debt by Rs50 bn in FY2017 compared to limited change

in gross debt position in FY2018 (+Rs4.3 bn).

Monetization of non-core investments, improved coal earnings outweigh concerns for Mundra

Monetization of non-core investments could yield as much as Rs28/share in cash, while the rise

in prices of imported coal, currently at US$102/ton is well above our sustainable coal price

assumption of US$80/ton. We note that US$10/ton increase in coal prices improves fair value

by Rs10/share. Incrementally, cost management initiatives at Mundra could yield another

Rs0.8/share (Rs2 bn). Accordingly, we upgrade Tata Power to BUY (from ADD) with a target

price of Rs90/share (from Rs97/share earlier). The revision in target price is on account of lower

value ascribed to the investment as well as renewable portfolio of the company.

Tata Power (TPWR) Utilities

AR2018—curtailed investment, higher coal contribution. We upgrade Tata Power

to BUY (from ADD) and revise target price to Rs90/share (from Rs97/share previously).

Rising coal prices augur well for the company’s consolidated earnings even after

factoring increased losses at Mundra as can be seen from the results of FY2018. Sale of

non-core investments over the course of the next twelve months will help the company

de-leverage their balance sheet even as regulated business gives stability to earnings.

BUY

JULY 26, 2018

CHANGE IN RECO.


Price (`): 68


BSE-30: 36,858

Murtuza Arsiwalla

Samrat Verma

Tata Power



Market Cap. (Rs bn) EPS growth (%) (9.6) 7.7 17.5




MFs 5.4 EBITDA (Rs bn) 59.5 55.1 53.6


Absolute (11.2) (21.2) (18.3) ROE (%) 10.7 9.7 10.3



102-67

183.4

Tata Power Utilities


Exhibit 1: Increased losses at Mundra were offset by higher coal earnings, part of associates Growth in adjusted PAT in FY2018 over FY2017 (Rs mn)


Exhibit2: Stable operational cash fows, lower investment activity in FY2018 Cash flow statement for Tata Power, March fiscal year-ends 2017-18 (Rs mn)


Understanding Tata Power’s investment portfolio and potential asset sales

Tata Power owns 1.7% in Tata Sons—the holding company of the Tata group which gives it

indirect ownership to various listed entities. Outside of the ownership in Tata Sons, TPWR

had also invested in the telecom business of Tata Power, besides various other listed/unlisted

group entities. Tata Power has so far announced sales aggregating Rs50 bn (Rs18/share).

The assets sales announced so far include Rs2 bn from Indian Energy Exchange, Rs21.5 bn

from Tata Communications and another Rs22.3 bn from sale of strategic engineering

division. Of the proposed divestments, Rs25 bn has been realized till date. TPWR has also set

aside Tata Projects as assets held for sale. We highlight that TPWR also has another US$300

mn of cash receivable from the sale of coal mines in Indonesia.

15

.5

3.1

5.5

0.7

0.5

1.3

1.2

1.9 3

.3 2.2

0.8

13.8

10

12

14

16

18

20

2017

Stan

dal

one

Mundra

Maithon

Del

hi

TPREL

WREP

L

Oth

ers

Ass

oci

ate

s

Elim

ination

s

Dis

countinued

2018

2017 2018 2017 2018

Cash flow from operations Cash flow from investing

Profit before tax 14,635 28,293 Capex (33,064) (35,040)

Depreciation 19,886 24,293 Current investment (5,432) 6,937

Non cash adjustments (1,199) (13,136) Non-current investment (34,491) 1,002

Finance cost paid 33,706 37,318 Payment under contractual obligation (7,900) 315

Other income/ expenses 4,812 (1,156) Other income 6697.3 11607.7

Profit from associates (12,258) (15,539) Cash flow from investing (74,190) (15,179)

59,581 60,073 Cash flow from financing

Taxes (5,799) (6,019) Equity 9 2

Cash flow from operation before WC 53,781 54,054 Service contribution 1,564 846

Working capital Acquisition (2,667)

Inventories (2,049) (1,468) Debt raised 222,428 343,301

Receivables (519) 7,152 Debt repaid (172,821) (338,932)

Unbilled revenues (2,366) (433) Interest (incl. perpetual securities) (34,354) (47,414)

Regulatory assets 3,237 6,300 Dividend (4,785) (5,067)

Other assets 3,119 (3,542) Cash flow from financing 9,373 (47,263)

Trade payables 11,079 864 Net cash flow 5,325 1,197

Regulatory liabilities (244) (1,710)

Other liabilities 4,103 2,421

Working capital 16,361 9,584

Cash flow from operations 70,142 63,639

Utilities Tata Power


Exhibit 3: TPWR's value of investments in various Tata Group companies is quite large Investments of Tata Power in Tata group companies (Rs mn)


Mumbai—PPA extended by a year, see likelihood of sustained resolution

Tata Power has extended the PPA with BEST for sale of power from its Mumbai assets, and

the arrangement now stands valid till March 31, 2019. We note that regulated equity for

the generation business would be ~Rs20 bn (out of total regulated equity of Rs37 bn), and

the regulated equity attributable to generation assets feeding to BEST would be Rs10 bn.

We note that non-renewal of PPA will have only a marginal savings for BEST, though both

Tata Power and BEST will likely have to incur incremental transmission cost, while under-

mining the islanding of the distribution network in Mumbai city.

Mundra UMPP—losses remain high, curtailment needs innovative solutions

Mundra reported losses of Rs14 bn in FY2018 (Rs8,5 bn in FY2017) on the back of

increasing prices of imported coal. The rise in prices of imported coal led to increase in fuel

cost to Rs2.43/kwh (+19% yoy) leading to under-recoveries of Rs20 bn (Rs0.8/kwh). We

highlight that the tariff framework has a lagged effect on earnings of Mundra UMPP, and

therefore exaggerates the losses in an environment of increasing coal prices. We note that

Mundra UMPP will likely see improvement in tariffs in FY2019 on the back of indexation of

2HFY18. Mundra UMPP had a net debt of Rs158 bn as of March 2018.

Management at their recently concluded analyst meet highlighted measures to curtail losses

such as (1) blending with low calorific value eco-coal, (2) sourcing of coal from Russia,

and/or (3) part merchant sales from the Mundra power plant.

Shares Price

Investments (#) (Rs) (Rs mn) (Rs/share)

Voltas 233,420 585 137 0.1

TCS 1,223,608 1,997 2,444 0.9

Tata Teleservices 137,263,174 4 604 0.2

Tata Communications 47,732,699 589 28,115 10.4

Trent 387,714 340 132 0.0

Tata Motors 357,159 259 93 0.0

Tata Motors (DVR) 51,022 143 7 0.0

Tata Investment Corp. 857,143 802 687 0.3

Total 32,217 12

Investment in Tata Sons 6,673 108,700 40

Investment in Defense 22,300 8

Market value



Exhibit 4: Losses at Mundra increased due to rising prices of imported coal Key financial and operational data for CGPL, March fiscal year-ends, 2016-18


Coal earnings remain healthy; net equation favors rising coal prices

Rising coal prices in FY2018, allowed TPWR to report a healthy 67% yoy growth in PAT at

Rs14.2 bn from coal and infrastructure companies. Realizations for the coal subsidiaries

increased 27% yoy to US$60/ton (form US$47/ton in FY2017). We note that ownership in

coal mines off-sets the exposure to coal at Mundra, especially considering that part of the

tariffs of Mundra are already indexed to movement in international coal prices.

Exhibit 5: PAT of coal and infrastructure companies increased by Rs5.7 bn Key financial and operational data for KPC, March fiscal year-ends, 2016-18 (Rs mn)


Renewable—continued momentum on asset addition

TPWRs renewable assets remain the key growth segment for the company, with addition of

305 MW of capacities in FY2018 leading to 6% yoy growth in EBITDA at Rs14.2 bn and net

debt of Rs118 bn. We highlight that part of the debt for renewable assets includes Rs35 bn

in the standalone balance sheet that was drawn to fund the acquisition of Welspun Power.

Maithon—stable performance, base year had a large non-recurring income

Maithon continues to operate its 1 GW capacity with stable operations (81% PLF). The drop

in earnings for FY2018 should be seen in the context of non-recurring tariff adjustment

related to prior periods accounted for in FY2017. Adjusted profits at Rs1.8 bn are yielding a

stable RoE of 13% on regulated equity of Rs14 bn.

2016 2017 2018

CGPL

Revenue (Rs mn) 59,783 60,549 63,568

Fuel cost (Rs mn) 41,262 50,061 59,835

EBITDA (Rs mn) 12,964 5,403 (987)

PAT (Rs mn) (9,984) (8,497) (14,104)

Capacity (MW) 4,000 4,000 4,000

Generation (MU) 23,679 24,502 24,582

PLF (%) 73 78 76

Tariff (Rs/unit) 2.4 2.3 2.5

Fuel cost (Rs/unit) 1.74 2.04 2.43

Coal (US$/ton) 47 50 62

Under-recovery 0.4 0.7 0.8

Net debt 139,600 144,236 157,868

2016 2017 2018

KPC

Volumes 57 59 57

Net realization 45 47 60

Cost 33 31 35

Gross profit 11 16 25

Coal + Infrastructure (attributable)

Revenue 78,500 78,620 86,410

EBITDA 10,170 19,580 28,890

PAT 1,890 8,540 14,240

Utilities Tata Power


Exhibit 7: Maithon had prior period revenues in FY2017 that resulted in an optical decline in PAT Key financial and operational data for MPL, March fiscal year-ends, 2016-18 (Rs mn)


Exhibit 8: Tata Power sum-of-the-parts valuation


Exhibit 9: Change in estimates for Tata Power, March fiscal year-ends, 2019-20E (Rs mn)


2016 2017 2018

MPL

Revenue (Rs mn) 23,115 24,046 22,704

Fuel cost (Rs mn) 12,676 13,522 13,504

EBITDA (Rs mn) 7,871 8,023 6,451

PAT (Rs mn) 1,898 2,558 1,817

Capacity (MW) 1,050 1,050 1,050

Generation (MU) 6,745 6,939 6,985

PLF (%) 78 80 81

Tariff (Rs/unit) 3.4 3.4 3.4

Fuel cost (Rs/unit) 1.88 1.95 1.93

Multiple Ownership Value

Methodology (X) (%) (Rs mn) (Rs/share)

Mumbai Distribution P/B 1.5 100 59,102 22

Delhi Distribution P/B 1.5 51 10,962 4

Tala Transmission DCF 51 2,178 1

Mundra Generation DCF 100 (98,783) (37)

Maithon Generation DCF 74 8,818 3

IEL Generation DCF 74 8,289 3

Renewable Generation EV/EBITDA 8 100 6,064 2

Coal Coal EV/EBITDA 5 30 129,574 48

Solar Equipment EV/EBITDA 6 100 14,897 6

Investments 101,195 37

Total 242,295 90

Revised estimates Old estimates Change (%)

2019E 2020E 2019E 2020E 2019E 2020E

Revenues 308,256 317,614 303,186 313,001 1.7 1.5

EBITDA 55,144 53,609 66,038 67,353 (16.5) (20.4)

Net profit 15,564 18,288 21,118 23,487 (26.3) (22.1)



Exhibit 10: Tata Power: Profit model, balance sheet, cash model (consolidated), March fiscal year-ends, 2016-21E (Rs mn)


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


Net sales 332,315 358,812 343,682 285,257 272,883 289,214 308,256 317,614 329,702

EBITDA 55,865 69,158 69,393 61,718 52,372 59,471 55,144 53,609 55,624

Other income 3,835 2,288 4,179 913 2,022 4,327 4,344 9,798 17,893

Interest (26,417) (34,399) (36,993) (32,358) (31,140) (37,230) (33,868) (33,318) (32,136)

Depreciation (20,517) (27,296) (21,742) (16,487) (19,886) (23,981) (24,712) (25,438) (25,866)

Pretax profits 12,767 9,751 14,837 13,786 3,369 2,587 908 4,651 15,514

Tax (11,780) (10,084) (10,749) (6,803) 458 (1,643) (5,438) (6,289) (7,297)

Minority interest & profit from associates (1,842) (2,267) (2,410) 1,860 12,173 13,514 20,094 19,926 20,588

Net profits (854) (2,600) 1,678 8,842 16,000 14,458 15,564 18,288 28,805

Extraordinary items (28) (6) (190) (978) (6,515) (10,308) — — —

Earnings per share (Rs) (0.4) (1.1) 0.6 3.3 5.9 5.3 5.8 6.8 10.6


Total equity 123,358 124,011 143,189 116,334 117,795 152,602 168,166 186,454 215,260

Deferred taxation liability 39,259 44,067 51,534 27,772 24,158 5,166 5,166 5,166 5,166

Total borrowings 378,823 401,725 408,419 403,486 503,154 426,836 458,871 449,923 439,629

Currrent liabilities 139,733 154,135 163,881 135,507 157,567 232,616 222,741 228,098 235,390

Capital contribution from Consumers

Minority interest 20,646 22,733 24,926 17,498 18,690 20,153 20,153 20,153 20,153

Total liabilities and equity 701,819 746,671 791,948 700,597 821,364 837,373 875,096 889,794 915,597

Cash 19,899 15,550 15,009 6,632 9,543 11,858 62,757 92,687 134,386

Current assets 184,357 200,268 222,084 107,264 114,888 102,131 127,331 130,007 134,074

Total fixed assets 437,109 467,823 483,896 395,499 511,634 535,217 496,842 478,933 458,970

Investments 31,201 30,193 33,381 117,828 119,570 124,289 124,289 124,289 124,289

Deferred expenditure 29,254 32,838 37,578 73,375 65,729 63,878 63,878 63,878 63,878

Total assets 701,819 746,671 791,948 700,597 821,364 837,373 875,096 889,794 915,597

Key ratios

Net debt / equity (X) 2.5 2.6 2.3 3.0 3.6 2.4 2.1 1.7 1.3

ROE (%) (0.7) (2.1) 1.3 6.8 13.7 10.7 9.7 10.3 14.3


FY2018 – a year of several new lows and a few new highs

12% yoy decline in consolidated revenues, 15% decline in EBITDA, 29% decline in EBIT, 71%

decline in PAT, fresh lows on already-below-cost-of-capital ROCE and ROE, wireless EBIT below

FY2007 levels – FY2018 was a year of several new lows on financials for Bharti. To make things

worse, there were new highs in areas like ex-spectrum capex, net debt, leverage ratios, etc. A

perfect storm, as the headline notes. In a nutshell, FY2018 was a year of –

Tremendous Jio-led competitive pressure on the India wireless segment; wireless EBIT (`21 bn

for FY2018) declined 80% yoy and stood at just 16% of pre-Jio peak annual levels of `128

bn hit in FY2016. Exit (4QFY18) EBIT (and ROCE, by extension) of the segment was in fact in

the negative zone. India wireless segment contributed <50% to consolidated EBITDA for the

first time ever.

Highest-ever absolute voice traffic addition (+607 bn minutes yoy) as well as data traffic. At

3.9 bn GB, data traffic was up 5.24X versus FY2017 levels and stood higher than the

cumulative data carried on Bharti’s India wireless networks till FY2017. To be sure, Bharti’s

annual data volumes still stood around 20% lower than what Jio carried in a single quarter in

4QFY18. Bharti stepped up its LTE capacity expansion to support this volume growth. We

discuss network aspects later in the note.

Sustained improvement in Africa financials driven by sharp (+942 bps yoy) EBITDA margin

improvement. Africa like-on-like wireless revenues, EBITDA and EBIT grew 5%, 46%, and

306% to US$3,036 mn, 1,014 mn, and 551 mn, respectively.

Balance sheet – asset monetization prevents a sharp rise in leverage ratios

Bharti ended FY2018 with a net debt (including finance lease obligations and accrued interest)

of just over `1 tn (US$15 bn), flattish yoy. Funding gap (OCF less capex less cash interest outgo)

was broadly met by proceeds from sale of 8.14% stake in Bharti Infratel in two tranches. EOP

net-debt-to-trailing-EBITDA stood at 3.3X versus 2.8X at end-FY2017.

Bharti Airtel (BHARTI) Telecom

FY2018 AR analysis – in the middle of a perfect storm. FY2018 marked fresh lows

for Bharti on operating profit decline, absolute PAT and return ratios. That Jio is the

toughest competitive challenge Bharti has faced in its history would perhaps be an

understatement. To its credit, Bharti has sharpened its execution on (a) belt tightening

as well as (b) enhancing LTE network competitiveness. Timing of inflection in wireless

ARPU, profitability, and return ratios is tricky to call and fundamentals could weaken

further before they become better. Become better they will, however, in our view.

Constructive view stays.

ADD

JULY 26, 2018

UPDATE


Price (`): 352


BSE-30: 36,858

Rohit Chordia

Aniket Sethi

Bharti Airtel


52-week range (Rs) (high,low) EPS (Rs) 4.7 (4.1) 0.2

Market Cap. (Rs bn) EPS growth (%) (42.9) (187.4) 104.6

Shareholding pattern (%) P/E (X) 74.3 (85.0) 1,862.2


FIIs 18.4 Net profits (Rs bn) 18.9 (16.5) 0.8

MFs 6.6 EBITDA (Rs bn) 300.8 275.7 342.6


Absolute (6.0) (16.2) (17.8) ROE (%) 2.8 (2.4) 0.1



565-331

1,406.5

Bharti Airtel Telecom


Exhibit 1: Bharti’s consolidated revenues (Rsbn)


Exhibit 2: Bharti’s consolidated EBITDA (Rsbn)


Exhibit 3: Bharti’s consolidated EBIT (Rsbn)


Exhibit 4: Bharti’s consolidated PAT (Rsbn)


(20)

(10)

0

10

20

30

40

50

60

-

200

400

600

800

1,000

1,200

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Revenues (Rs bn) %yoy - RHS

(20)

(10)

0

10

20

30

40

-

50

100

150

200

250

300

350

400

2009

2010

2011

2012

2013

2014

2015

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2017

2018

EBITDA (Rs bn) %yoy - RHS

(40)

(30)

(20)

(10)

0

10

20

30

40

-

20

40

60

80

100

120

140

160

180

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

EBIT (Rs bn) %yoy - RHS

(80)

(60)

(40)

(20)

0

20

40

60

80

100

-

10

20

30

40

50

60

70

80

90

100

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

PAT (Rs bn) %yoy - RHS

Telecom Bharti Airtel


Exhibit 5: Bharti's consolidated cumulative cash invested (Rs bn) and revenue/average CCI (x)


Exhibit 6: Bharti’s Return on Equity (%)


Exhibit 7: Bharti’s Return on Capital Employed (%)


603 714

1,603 1,777 1,862

2,159 2,266

2,727 2,912

3,119

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

-

500

1,000

1,500

2,000

2,500

3,000

3,500

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Cumulative cash invested (Rs bn) Revenue/average CCI (x) - RHS

32.5

25.0

13.4

8.6

4.5 5.0

8.5 9.5

5.7

1.6

0

5

10

15

20

25

30

35

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Average ROE, post-tax (%)

32.3

24.2

12.8

9.3 8.5 10.6

12.7 11.7

9.7

6.6

0

5

10

15

20

25

30

35

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Average ROCE, pre-tax (%)



India wireless operating KPIs – ARPU decline of 26% yoy, voice/data volume

surge and data capacity expansion the key highlights

Bharti’s India wireless ARPU went down as much as 26% yoy to `133/sub/month (from

`180) in FY2018 even as (a) MOU per sub went up 32% to 561 minutes/month from 425,

(b) mobile broadband (MBB) subs base (EOP) expanded 79% yoy to 77 mn subs from 43

mn, and (c) data subs consumed an average 4.53 GB/month versus 1.07 GB in FY2017.

Lower-spends-for-higher-consumption is what FY2018 was all about for the Indian wireless

consumers, in other words. Importantly, exit (4QFY18) ARPU (Rs116) was much lower than

the FY2018 average, while MOU (670 minutes/sub) and data usage per sub (6.59

GB/month) were much higher. Revenues and ARPU, we note, were also impacted by (a)

mid-fiscal reduction in MTR (mobile termination rate) to 6 paise/min from 14 paise/min and

(b) increase in indirect tax incidence under the GST regime (18%) versus that under the

erstwhile service tax regime (15%).

Total voice traffic grew 45% yoy to 1.95 tn minutes, highest-ever absolute traffic addition in

a single year and highest yoy growth in traffic since FY2009. On the data front, total data

volumes stood at 3.9 bn GB, +424% yoy. Bharti carried more data on its networks in

FY2018 than the cumulative historical data volumes till FY2017. To be sure, Bharti’s annual

data volumes still stood around 20% lower than what Jio carried in a single quarter in

4QFY18.

Exhibit 8: Bharti India’s wireless revenues (Rs bn)


Exhibit 9: Bharti India’s wireless EBITDA (Rs bn)


(30)

(20)

(10)

0

10

20

30

40

50

-

100

200

300

400

500

600

2009

2010

2011

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2018

Revenues (Rs bn) %yoy - RHS

(40)

(30)

(20)

(10)

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30

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50

100

150

200

250

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

EBITDA (Rs bn) %yoy - RHS



Exhibit 10: Bharti India’s wireless EBIT (Rs bn)


Exhibit 11: Bharti India’s wireless cumulative cash invested (Rs bn) and revenue/average CCI (x)


68.5 69.4

85.4 82.2

70.7

90.9

124.1 127.7

105.5

20.8

(100)

(80)

(60)

(40)

(20)

0

20

40

60

0

20

40

60

80

100

120

140

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

EBIT (Rs bn) %yoy - RHS

603 714

1,603 1,777 1,862

2,159 2,266

2,727 2,912

3,119

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

-

500

1,000

1,500

2,000

2,500

3,000

3,500

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Cumulative cash invested (Rs bn) Revenue/average CCI (x) - RHS



Exhibit 12: Bharti India's mobile subscribers (mn)


Exhibit 13: Bharti India's mobile ARPU (Rs/sub/month)


94

128

162 181 188

206 226

251 274

304

0

10

20

30

40

50

60

0

50

100

150

200

250

300

350

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Subscribers (mn) - EoP % yoy - RHS

325

243

201 188 188 198 201 196

180

133

(30)

(25)

(20)

(15)

(10)

(5)

0

5

10

0

50

100

150

200

250

300

350

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Mobile ARPU (Rs) % yoy - RHS



Exhibit 14: Minutes of use (MoU) and voice traffic (bn minutes)


Exhibit 15: Data subscribers (mn) as a % of total mobile subscribers


-

500

1,000

1,500

2,000

2,500

-

100

200

300

400

500

600

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

MoU (mins/sub/month) Voice Traffic (bn minutes) - RHS

36

43

36

46

58 57

86

-

5

10

15

20

25

30

-

10

20

30

40

50

60

70

80

90

100

2012 2013 2014 2015 2016 2017 2018

Data subs (mn) Data subs as a % of total subs (%) - RHS



Exhibit 16: Mobile broadband subscribers (mn) as a % of total data subscribers


Exhibit 17: Total data volumes (bn MB) and data usage/subscriber (MB/month)


3 6

10

20

35

43

77

-

20

40

60

80

100

-

10

20

30

40

50

60

70

80

90

2012 2013 2014 2015 2016 2017 2018

Mobile broadband subs (mn) MBB subs as a % of data subs - RHS

72 147 287

498 744

3,902

-

1,000

2,000

3,000

4,000

5,000

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2013 2014 2015 2016 2017 2018

Total data volumes (bn MB) Data usage/sub (MB/month) - RHS



Tight control on costs helps mitigate the impact of revenue pressure a tad

Cost control is a natural response to incessant pressure on revenues. Bharti did so, too, and

did a commendable job in FY2018, in our view. We call it commendable as the company

had to control costs while enhancing its competitiveness by investing in expanding coverage

and capacity of its LTE networks. Jio’s pricing-paradigm-shifting high-data-allowance,

unlimited-voice bundles unleashed unprecedented volume elasticity in both voice and data.

Bharti had to keep costs under control while working on enhancing the 3Cs of its network –

coverage, capacity, and capability (speed/ consumer experience). We believe the company

did a reasonable job.

Consolidated ex-interconnect, ex-regulatory-charges costs (essentially network, employee

and SG&A costs) went down by 9% yoy to `370 bn driven by (a) 2.7% decline in these

costs in India, and (b) 22% decline ex-India. Ex-India cost reduction partly reflects the full-

year impact of sale of a couple of Africa opcos (Burkina Faso and Sierra Leone) to Orange in

1Q/2QFY17 and deconsolidation of Ghana operations for part of FY2018.

The 2.7% yoy ex-IC, ex-LF/SUC cost decline in India was driven by a 3.1% yoy decline in

network opex and 3.3% decline in SG&A costs. We do not get (a) detailed schedules of

India costs, or (b) any break-up of India wireless costs. To that extent, it is difficult to

comment on what drove network cost reduction in India in a year which saw Bharti step up

its network investments quite sharply. The available consolidated network cost break-up

suggests that the decline was driven primarily by a sharp 24% yoy decline in repairs and

maintenance costs (to `35 bn from `46 bn). Power and fuel expenses also declined around

5% yoy while passive infrastructure charges grew 1.5% yoy; passive infra charges likely

grew higher for the India wireless segment.

On the SG&A front, the key costs that saw a sharp decline were (a) advertising expenses –

down 26% yoy, and (b) IT expenses – down 22% yoy. Content costs were flat yoy at around

`21 bn; this is a tad surprising as Bharti enhanced its content offerings to the consumers

substantially across its digital content platforms Wynk Music and Airtel TV and saw good

growth in overall content consumption on these platforms. We do note that Bharti

continues with its content aggregator strategy for these platforms; it is not buying content

outright.

Bharti could (and should, in our view) have been bolder and more decisive on

cost control

Even as we find Bharti’s cost control measures commendable, it is interesting to note that

the single-largest cost line item on Bharti’s P&L went up in a year that saw unprecedented

revenue pressure. Passive infra charges is what we are talking about. As highlighted above,

equally critical costs like R&M (annual maintenance contracts with network OEMs and other

vendors), IT, and advertising (discretionary but critical to brand equity) saw a sharp decline in

response to the revenue pressure. Passive infra charges, on the other hand, went up as the

incumbents (including Vodafone and Idea) stayed shy of seeking rental cuts from towercos

(primarily Bharti Infratel and Indus).

Even as we appreciate the short-term valuation imperative (that of protecting valuations of

the tower assets you are trying to monetize), we believe a bolder right-for-the-long-term

decision (seeking rental cuts) would have reflected a more decisive mindset.



Exhibit 18: Bharti’s consolidated cost structure, March fiscal year-ends (Rs bn)


2014 2015 2016 2017 2018

Rs bn

Consolidated revenues 857 920 965 955 837

Costs

Interconnect charges 112 113 109 103 90

License and spectrum fee 76 87 95 93 76

Network operating costs 197 203 202 209 198

Of which

Passive infra charges 75 78 80

Power and fuel 69 73 69

R&M 50 46 35

Employee expenses 46 47 49 43 40

SG&A 149 157 170 154 133

Of which

Channel commissions 51 44 40

Advertising 21 14 11

IT expenses 7 10 8

Content cost 23 22 21

Total costs 580 607 625 601 536

Costs ex-interconnect 468 495 516 499 446

Costs ex-IC, ex-LF/SUC 392 407 421 406 370

EBITDA 277 313 340 353 301

EBITDA margin (%) 32.3 34.0 35.2 37.0 35.9

Change yoy (%)

Interconnect charges 0.7 (3.0) (6.1) (12.0)

License and spectrum fee 15.0 8.6 (2.3) (18.5)

Network operating costs 3.1 (0.9) 3.8 (5.6)

Employee expenses 1.9 4.2 (12.4) (7.6)

SG&A 5.3 8.7 (9.9) (13.6)

Total costs 4.7 3.0 (3.9) (10.9)

Costs ex-interconnect 5.6 4.3 (3.4) (10.6)

Costs ex-IC, ex-LF/SUC 3.8 3.4 (3.6) (8.8)

As % of revenues

Interconnect charges 13.1 12.3 11.3 10.8 10.8

License and spectrum fee 8.9 9.5 9.8 9.7 9.0

Network operating costs 23.0 22.1 20.9 21.9 23.6

Employee expenses 5.4 5.1 5.1 4.5 4.8

SG&A 17.4 17.0 17.7 16.1 15.9

Total costs 67.7 66.0 64.8 63.0 64.1

Costs ex-interconnect 54.6 53.7 53.5 52.2 53.3

Costs ex-IC, ex-LF/SUC 45.8 44.3 43.6 42.5 44.2



Exhibit 19: Bharti India's cost structure, March fiscal year-ends (Rs bn)


2014 2015 2016 2017 2018

Rs bn

India revenues 576 645 708 734 641

Costs





SG&A 74 76 85 96 93

Total costs 372 394 421 433 405



EBITDA 204 251 287 301 235

EBITDA margin (%) 35.4 38.9 40.6 41.0 36.7

Change yoy (%)

Interconnect charges 8.3 (0.1) (0.2) (6.4)

License and spectrum fee 15.4 11.3 0.0 (19.6)

Network operating costs 3.2 5.4 1.2 (3.1)

Employee expenses 2.9 9.2 (3.0) 1.6

SG&A 2.8 11.7 13.5 (3.3)

Total costs 6.1 6.8 2.9 (6.4)

Costs ex-interconnect 5.6 8.5 3.7 (6.5)

Costs ex-IC, ex-LF/SUC 3.0 7.7 4.8 (2.7)

As % of revenues





SG&A 12.8 11.8 12.0 13.1 14.5

Total costs 64.6 61.1 59.4 59.0 63.3


Costs ex-IC, ex-LF/SUC 41.3 37.9 37.2 37.6 41.9



Exhibit 20: Bharti ex-India (consol – India) cost structure, March fiscal year-ends (Rs bn)


2014 2015 2016 2017 2018

Rs bn

Ex-India revenues 282 275 257 220 196

Costs





SG&A 75 81 86 58 40

Total costs 209 213 204 168 131



EBITDA 73 62 52 52 66

EBITDA margin (%) 26.0 22.5 20.4 23.8 33.4

Change yoy (%)

Interconnect charges (13.4) (9.6) (21.2) (30.4)

License and spectrum fee 13.6 (2.5) (13.3) (13.0)

Network operating costs 3.0 (17.1) 12.0 (12.9)

Employee expenses 1.1 (0.3) (21.7) (19.0)

SG&A 7.8 5.9 (32.9) (30.8)

Total costs 2.2 (4.1) (17.9) (22.2)

Costs ex-interconnect 5.8 (3.1) (17.3) (20.9)

Costs ex-IC, ex-LF/SUC 5.1 (3.1) (17.7) (21.7)

As % of revenues





SG&A 26.6 29.4 33.4 26.1 20.3

Total costs 74.0 77.5 79.6 76.2 66.6





Network investments – focus shifts to LTE capacity creation

Bharti discloses the following data points on the state of its India wireless network –

Network towers (165,748 at end-FY2018; +3,702 yoy) – this is the number of unique

towers that Bharti’s active infrastructure, 2G and/or 3G and/or LTE, is present on. We

believe Bharti has 2G equipment on all of these towers. To that extent, this number

depicts Bharti’s 2G coverage. Population coverage, per Bharti, stood at 95.3% at end-

FY2018. From a towerco standpoint, an additional network tower for Bharti results in an

additional tenancy.

Mobile broadband (MBB) towers (144,708 at end-FY2018, +27,991 yoy) – this is a subset

of the overall network towers and depicts the number of towers Bharti has equipped with

3G and/or LTE equipment. Essentially, 87% of Bharti’s towers are now equipped with 3G

and/or LTE BTS. This metric is an indicator of Bharti’s 3G/LTE coverage. From a towerco

perspective, an additional MBB tower reported by Bharti is really an additional loading

(and not an additional tenancy).

MBB base stations (BTS; 298,014 at end-FY2018; +107,154 yoy) – this metric represents

the aggregate number of 3G and LTE base stations. For example, an MBB tower can have

one 3G-900 BTS and one LTE-1800 BTS; this is counted as two MBB base stations. We do

note that an LTE-1800 base station would be counted as one irrespective of the number

of carriers (or quantum of spectrum; say 5 MHz or 10 MHz) deployed. Essentially, this

metric provides a sense of the data capacity of Bharti’s mobile broadband (3G/LTE)

network. Given that the number or carriers per BTS and capacity per carrier are still not

known, it is difficult to compute exact data capacity of the network. However, relative

comparisons can be done and we had done so in our March 20, 2018 note (link); the

note has comparable BTS counts for Bharti, R-Jio and Voda-Idea. From a towerco

perspective, an additional BTS may or may not yield incremental revenues depending on

the incremental space required for the additional BTS.

With 87% of total towers now being equipped with 3G and/or LTE BTS (total BTS count

suggests most of these have both 3G and LTE now), we believe (a) incremental network

investments will be primarily geared towards capacity enhancement by putting up more

base stations; we note that Bharti still has a lot of un-deployed spectrum and the Telenor

and TTSL acquisitions will only add to the spectrum bank, and (b) towercos will start to see

deceleration in loading revenue growth as well. Exhibits 21 and 22 capture the annual

trends in the above metrics as well as two derived metrics – (a) MBB towers as % of 2G sites

reflects 3G/LTE coverage relative to 2G (which stood at 95.3% of population at end-FY2018)

and (b) MBB BTS per MBB tower, a proxy of 3G/LTE capacity per 3G/LTE site.

https://kie.kotak.com/kinsite/?module=download&action=report&id=20606



Exhibit 21: Mobile broadband sites (#) as a % of total mobile sites


Exhibit 22: Data Capacity - Mobile broadband BTS as a % of mobile broadband sites


13

87

-

20

40

60

80

100

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

2012 2013 2014 2015 2016 2017 2018

2G sites MBB sites MBB sites as a % of total sites - RHS

1.0 1.0 1.0

1.2 1.1

1.6

2.1

-

0.5

1.0

1.5

2.0

2.5

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

2012 2013 2014 2015 2016 2017 2018

MBB BTS MBB sites MBB sites BTS/MBB sites (x) - RHS



Net debt position – comfortable but just about

Bharti’s gross and net debt stood at `1.14 tn and `1 tn at end-FY2018. Net debt was

broadly flat on a yoy basis. Net-debt-to-EBITDA did go up to 3.3X from 2.8X as EBITDA

declined. Of the gross debt of `1.14 tn – (a) spectrum liabilities stood at `456 bn, (b) finance

lease obligations stood at `49 bn, (c) ST borrowings (including accrued interest) stood at

`292 bn and (d) LT borrowings stood at `345 bn. Net debt, including capex creditors, stood

at `1.08 tn. We do note that at round 30% of current annual capex, the capex creditors

outstanding is not an abnormal figure.

Currency-wise, 54% of gross debt was INR-denominated at end-FY2018 (75% of this is

deferred spectrum liabilities) while 30% (around US$5 bn) was US$-denominated. Roughly

12.5% was denominated in EUR. We note that the bulk of the gross debt increase in the

past few years has been in INR and can largely be attributed to spectrum purchases (upfront

payment plus deferred liabilities). The company has funded the ex-spectrum cash flow gaps

via sale of assets (towers and opcos in Africa) and stake sale in Bharti Infratel.

From a tenure perspective, `264 bn (23.6% of gross debt) falls due in FY2019, `59 bn

(5.3%) in FY2020, `299 bn (26.6%) between FY2021-23 and the balance `500 bn (44.5%)

beyond FY2023. Refinancing may lead to an increase in blended borrowing costs given the

rise in global interest rates and deterioration in Bharti’s own leverage ratios. We note that

Bharti has availed of the relaxation in payment term of deferred spectrum liabilities to 16

years from 10 years earlier.

Exhibit 23: Bharti's gross debt profile, IFRS, March fiscal year-ends, 2012-2018


Gross debt (Rs mn) FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018

Maturity profile

<1 year 193,210 98,535 210,163 212,184 82,135 178,928 264,253

1-2 years 81,927 171,181 123,589 32,108 27,533 128,393 59,169

2-5 years 406,009 340,942 301,480 187,904 186,240 207,068 298,655

>5 years 11,820 59,764 132,612 232,435 303,654 562,742 499,576

Total 692,966 670,422 767,844 664,631 599,562 1,077,131 1,121,653

Short-term (<1 year) 193,210 98,535 210,163 212,184 82,135 178,928 264,253

Long-term (>1 year) 499,756 571,887 557,681 452,447 517,427 898,203 857,400

Currency-wise exposure

INR 133,822 96,501 64,913 35,226 22,397 542,731 603,522

USD 483,661 481,716 460,859 403,878 369,054 372,361 337,319

EUR — — 111,917 135,796 136,356 121,037 139,954

NGN 48,301 60,529 70,460 31,864 6,490 — —

XAF 10,008 10,493 12,082 11,077 9,438 5,893 4,691

XOF 5,345 6,077 8,434 7,710 5,831 5,180 7,047

Others 11,829 15,106 39,179 39,080 49,996 29,929 29,121

Total 692,966 670,422 767,844 664,631 599,562 1,077,131 1,121,654

Fixed-floating break-up

Floating rate 632,935 581,286 537,618 332,325 173,078 180,061 169,090

Fixed rate 60,031 89,136 230,226 332,306 426,484 897,070 952,564

Total 692,966 670,422 767,844 664,631 599,562 1,077,131 1,121,654



Exhibit 24: Debt maturity profile (FY2017)


Exhibit 25: Debt maturity profile (FY2018)


Exhibit 26: Currency-wise exposure of gross debt (FY2017)


Exhibit 27: Currency-wise exposure of gross debt (FY2018)


<1 year, 16.6

1-2 years, 11.9

2-5 years, 19.2

>5 years, 52.2

<1 year, 23.6

1-2 years, 5.3

2-5 years, 26.6

>5 years, 44.5

INR, 50.4

USD, 34.6

EUR, 11.2

Others, 3.81

INR, 53.8

USD, 30.1

EUR, 12.5

Others, 3.64



Exhibit 28: Fixed-floating break-up of gross debt (FY2017)


Exhibit 29: Fixed-floating break-up of gross debt (FY2018)


Other random observations and thoughts

Apps/ content ecosystem: Bharti’s music app Wynk Music had 90 mn+ app installs at

end-FY2018 and monthly song-plays crossed the 1.4 bn mark. The company has an

aggregated song library in 14 Indian languages and regional language streams saw a

100% yoy growth in CY2017. Airtel TV, the company’s movies/TV platform had 50 mn+

installs at end-FY2018 and now offers 350+ live TV channels and a library of 10,000+ on-

demand movies and TV shows in 14 languages.

Airtel payments bank – the company did not disclose the number of payment bank

customers. Customer touch points touched 0.54 mn while merchant establishments

covered crossed the 2.3 mn mark. Domestic remittances increased 68% yoy to `66.6 bn

while payments using the semi-closed wallet grew 66% to `23.6 bn. Restricted cash

balance (cash received from customers of the company’s m-commerce services) stood at

`15.3 bn at a consolidated level; we believe this figure would include balances of Africa

mobile money customers as well.

From the Chairman’s letter to shareholders –

“Even though the transition (in the Indian wireless industry) is turning out to be

stressful entailing massive dislocation in the short run, the new (consolidated) industry

structure will ultimately prove beneficial for the sector”,

“We have done well to capitalize on emergent opportunities from this industry

shakeup. While we completed the acquisitions of Tikona and Telenor, the proposed

merger with the consumer business of Tata Teleservices Maharashtra and Tata

Teleservices is under regulatory approval” and

“Acceleration in non-wireless businesses remained an unmistakable bright spot for us

during the year. DTH and B2B businesses registered healthy double-digit topline

growth, thus highlighting the inherent advantages of a diversified business portfolio. In

Africa, it turned out to be a defining year for us.”

Floating rate, 16.7

Fixed rate, 83.3

Floating rate, 15.1

Fixed rate, 84.9



Exhibit 30: Segmental revenue break-up (Rs mn), March fiscal year-ends, 2014-2018


Exhibit 31: Segmental EBITDA break-up (Rs mn), March fiscal year-ends, 2014-2018


(Rs mn) 2014 2015 2016 2017 2018

Wireless - India and South Asia 484,231 535,395 577,272 577,704 466,684

% yoy 10.0 10.6 7.8 0.1 (19.2)

Telemedia services 39,352 44,324 25,066 27,518 25,265

% yoy 3.1 12.6 (43.4) 9.8 (8.2)

Enterprise 63,361 67,130 96,993 109,430 113,218

% yoy 19.1 5.9 44.5 12.8 3.5

Passive Infra 51,086 54,282 55,589 60,829 66,284

% yoy (50.5) 6.3 2.4 9.4 9.0

DTH 20,771 24,759 29,177 34,306 37,570

% yoy NM 19.2 17.8 17.6 9.5

Wireless - Africa 272,512 269,070 251,332 219,568 201,564

% yoy 13.3 (1.3) (6.6) (12.6) (8.2)

Others 3,100 2,910 3,045 3,096 4,009

% yoy (84.3) (6.1) 4.6 1.7 29.5

Gross revenues 934,414 997,870 1,038,475 1,032,450 914,594

% yoy 4.4 6.8 4.1 (0.6) (11.4)

Inter-segment eliminations (76,953) (77,476) (73,154) (77,767) (77,715)

Net revenues 857,461 920,394 965,321 954,683 836,879

% yoy 6.7 7.3 4.9 (1.1) (12.3)

Note: Gross revenue includes inter-segment eliminations

Rs mn 2014 2015 2016 2017 2018

Wireless - India and South Asia 158,600 193,513 218,346 227,031 150,895

margin (%) 32.8 36.1 37.8 39.3 32.3

Telemedia services 14,771 17,974 10,648 12,998 11,803

margin (%) 37.5 40.6 42.5 47.2 46.7

Enterprise 13,807 13,924 30,327 33,884 42,295

margin (%) 21.8 20.7 31.3 31.0 37.4

Passive Infra 22,850 25,669 26,196 29,177 32,546

margin (%) 44.7 47.3 47.1 48.0 49.1

DTH 3,338 6,751 9,976 12,219 14,226

margin (%) 16.1 27.3 34.2 35.6 37.9

Wireless - Africa 71,279 61,122 52,889 52,256 66,529

margin (%) 26.2 22.7 21.0 23.8 33.0

Others (2,161) (1,109) (1,557) (2,903) (4,280)

Intersegment eliminations (5,228) (4,918) (6,978) (11,365) (13,223)

Total EBITDA 277,256 312,926 339,847 353,298 300,791

margin (%) 32.3 34.0 35.2 37.0 35.9



Exhibit 32: Segmental EBITDA contribution (%), March fiscal year-ends, 2014-2018


Exhibit 33: Bharti Airtel - consolidated profit and loss statement, IFRS, March fiscal year-ends, 2014-2018


57.2 61.8 64.2 64.3 50.2

5.3 5.7 3.1 3.7

3.9

8.2 8.2

7.7 8.3 10.8

25.7 19.5 15.6 14.8 22.1

(10)

10

30

50

70

90

110

2014 2015 2016 2017 2018

Wireless - India and South Asia Telemedia services Enterprise

Passive Infra DTH Wireless - Africa

Others/eliminations

Rs mn FY2014 FY2015 FY2016 FY2017 FY2018 Change (%)

Revenues 858,635 921,351 966,192 955,889 839,367 (12)

Operating expenses

Interconnect expenses (111,923) (112,759) (109,423) (102,786) (90,446) (12)

License and spectrum charges (75,971) (87,391) (94,928) (92,760) (75,558) (19)

Network opex (197,202) (203,372) (201,567) (209,154) (197,520) (6)

Employee expenses (46,228) (47,123) (49,108) (43,032) (39,771) (8)

SG&A expenses (148,881) (156,823) (170,453) (153,653) (132,793) (14)

Total opex (580,205) (607,468) (625,479) (601,385) (536,088) (11)

EBITDA 278,430 313,883 340,713 354,504 303,279 (14)

EBITDA margin (%) 32.4 34.1 35.3 37.1 36.1

Depreciation (132,118) (128,932) (135,280) (142,585) (132,963) (7)

Amortization (24,378) (26,379) (39,218) (55,145) (59,468) 8

Total D&A (156,496) (155,311) (174,498) (197,730) (192,431) (3)

EBIT 121,934 158,572 166,215 156,774 110,848 (29)

EBIT margin 14.2 17.2 17.2 16.4 13.2

Interest income 10,408 24,788 16,326 18,492 12,540 (32)

Finance cost (59,448) (74,921) (86,485) (96,785) (93,396) (4)

Of which

Net forex loss (15,684) (30,172) (18,164) (3,624) (100)

Other finance charges (6,174) (5,672) (11,352) (11,480) (100)

PBT 72,894 108,439 96,056 78,481 29,992 (62)

Current tax (42,069) (57,436) (44,690) (21,240) (18,230)

Deferred tax (6,380) 3,389 (14,843) (13,579) 7,395

Total tax provision (48,449) (54,047) (59,533) (34,819) (10,835) (69)

Effective tax rate (%) 66.5 49.8 62.0 44.4 36.1

PAT before associate profits and minority interest 24,445 54,392 36,523 43,662 19,157 (56)

Share of profit/(loss) from associates 5,211 7,223 10,666 10,449 10,609

Minority interest (2,467) (1,248) (8,163) (4,416) (10,845)

Extraordinary items 538 (8,532) 21,741 (11,697) (7,931)

Reported PAT 27,727 51,835 60,767 37,998 10,990 (71)

Shares outstanding 3,997 3,997 3,997 3,997 3,997

EPS (Rs/share) 6.9 13.0 15.2 9.5 2.7 (71)

Recurring EPS (Rs/share) 6.8 15.1 9.8 12.4 4.7 (62)

IFRS IndAS



Exhibit 34: Bharti Airtel - consolidated balance sheet, IFRS, March fiscal year-ends, 2013-2018


Rs mn 2013 2014 2015 2016 2017 2018

Assets

Non-current assets

PP&E - net 638,277 596,429 543,936 610,508 620,088 706,079

CWIP 48,702 47,304 23,942 52,089

Net intangible assets 648,386 809,716 341,718 684,039 824,181 837,855

Intangible assets under development 118,487 9,716 84,443 45,423

Goodwill 414,823 428,381 338,082 328,070

Investment in JVs/ associates 11,552 56,702 51,936 60,990 82,277 86,839

Non-current investments — 36,341 31,310 28,622 44,187 5,769

Derivative financial assets 3,566 2,761 7,303 13,999 4,732 2,031

Other financial assets 16,326 17,330 9,529 10,441 9,630 9,703

Other non - financial assets 18,749 26,009 83,715 87,942 66,528 42,133

Deferred tax asset 58,491 62,627 59,502 46,738 26,262 29,330

Total non-current assets 1,395,347 1,607,915 1,710,961 2,028,680 2,124,352 2,145,321

Current assets

Inventories 1,109 1,422 1,339 1,692 488 693

Trade and other receivables 67,824 62,441 51,961 55,039 49,838 58,830

Derivative financial assets 1,097 819 1,207 4,765 2,060 8,941

Prepayments and other assets 30,860 29,656 57,367 81,338 96,210 130,842

Of which, taxes recoverable 13,524 74,004

Income tax recoverable 10,093 9,319 5,721 11,570 21,454 25,505

Short term investments 69,845 70,392 84,017 16,159 16,923 68,978

Cash and cash equivalents 16,078 49,808 20,544 50,987 16,177 66,706

Total current assets 196,906 223,857 222,156 221,550 203,150 360,495

Assets of disposal group classified as held for sale 32,618 7,002 — —

Total assets 1,592,253 1,831,772 1,965,735 2,257,232 2,327,502 2,505,816

Equity and liabilities

Equity

Issued capital 18,988 19,987 19,987 19,987 19,987 19,987

Treasury shares (674) (342) (114) (524) (367) (642)

Share premium 56,499 123,456

Retained earnings / (deficit) 414,027 437,167

Foreign currency translation reserve (32,571) (16,777) — (11,149) (60,685) (75,249)

Other components of equity 46,948 34,069 610,717 659,379 715,628 751,248

Equity attributable to equity holders of parent 503,217 597,560 630,590 667,693 674,563 695,344

Non-controlling interest 40,886 42,102 51,613 54,981 68,750 88,139

Total equity 544,103 639,662 682,203 722,674 743,313 783,483

Non-current liabilities

Borrowing (b) 569,137 549,919 448,408 551,262 457,168 393,818

Deferred spectrum liabilities — 1,026 143,167 341,424 439,205 455,602

Deferred revenue 9,685 14,010 17,917 17,787 22,335 22,117

Provisions 9,744 10,044 7,648 7,350 7,471 7,212

Derivative financial liabilities 893 4,313 164 8 2,726 5,409


Other financial liabilities 23,204 26,438 14,537 16,084 15,681 44,547

Finance lease liabilities — —

Other non - financial liabilities 2,384 1,460 1,466 1,527 727 623

Total non-current liabilities 627,603 624,060 646,384 947,954 954,742 939,934

Current liabilities

Borrowing 98,226 209,039 212,046 111,840 177,908 292,256

Deferred spectrum liabilities — —

Deferred revenue 39,560 44,899 50,074 51,336 48,785 48,666

Other financial liabilities (a) 127,306 131,180 88,808 112,264

Provisions 1,768 1,725 2,066 2,332 2,215 2,384

Other non-financial liabilities 13,245 15,277 15,898 21,844 34,770 37,813

Derivative financial liabilities 219 1,097 628 1,931 2,335 283

Income tax liabilities 7,627 12,032 9,271 9,296 6,089 11,058

Trade & other payables 259,902 283,981 215,896 255,806 268,537 277,675

Total current liabilities 420,547 568,050 633,185 585,565 629,447 782,399

Liabilities of disposal group classified as held for sale 3,963 1,039 — —

Total liabilities 1,048,150 1,192,110 1,283,532 1,534,558 1,584,189 1,722,333

Total equity and liabilities 1,592,253 1,831,772 1,965,735 2,257,232 2,327,502 2,505,816

IFRS Ind AS



Exhibit 35: Bharti Airtel - consolidated cash flow statement, IFRS, March fiscal year-ends, 2013-2018


2013 2014 2015 2016 2017 2018

Cash flows from operating activities

Profit before tax 49,820 78,643 107,130 120,705 77,233 32,670

Adjustments for:

Depreciation and amortization 154,964 156,496 155,311 174,498 197,730 192,431

Finance income (5,633) (10,408) (24,788) (16,177) (18,492) (12,540)

Finance cost 49,477 58,788 73,252 85,042 95,466 93,255

Share of associates' profits 76 (5,211) (7,223) (9,654) (10,449) (10,609)

Amortization of stock based compensation 403 8 (4) 248 338 413

Other items 392 (172) 18,783 (24,110) 7,634 10,735

Changes in working capital:

Trade & other receivables and prepayments (5,718) 2,072 (11,144) (4,714) 5,366 (24,474)

Inventories 268 (147) (2) (872) 948 (202)

Trade and other payables 23,776 16,818 14,203 4,635 7,640 15,122

Provisions 1,100 2,511 1,144 (273) (26) 154

Other financial and non financial liabilities 73 10,506 (99) 1,811 3,558 51,205

Other financial and non financial assets (3,978) (14,227) (5,741) (4,759) (52,550) (35,899)

Income tax paid (32,611) (35,039) (46,111) (46,836) (32,587) (13,723)

Cash flows from operating activities 232,409 260,638 274,711 279,544 281,809 298,538

Cash flows from investing activities

Purchase of property, plant and equipment (133,167) (114,159) (146,411) (193,313) (223,030) (245,259)

Proceeds from sale of property, plant and

equipment1,513 4,360 2,595 3,798 4,909 5,655

Purchase of intangible assets (5,788) (64,860) (65,970) (81,452) (165,477) (27,658)

Short term investments (net) (45,685) (30,840) (11,281) 68,195 (731) (13,764)

Investment in subsidiary, net of cash acquired 102 (6,044) (358) (135) (283) (19,498)

Proceeds from disposal of subsidiary — (8,009) 1,021 56,821 66,724 4,869

Investment in associates (5,902) (2) (10) (250) (60)

Loan to associates (130) — (154) (19)

Loan repayment received from associates — (30,179) 87 69

Cash flows from investing activities (189,057) (249,733) (220,481) (146,036) (318,138) (295,715)

Cash flows from financing activities

Proceeds from issuance of borrowings 312,800 361,215 344,586 187,265 258,584 197,664

Repayment of borrowings (328,443) (348,425) (429,498) (309,656) (274,608) (130,717)

Short term borrowings (net) (7,282) 1,462 3,288 4,558 25,377 (26,874)

Purchase of treasury stock (762) (424)

Interest paid (39,443) (37,620) (33,887) (32,890) (62,465) (47,973)

Proceeds from exercise of stock options 68 98 552 55 65 13

Interest received 2,421 1,688 1,307 3,661 12,094 16,039

Dividend paid (including tax) (4,412) (4,439) (16,034) (10,679) (9,168) (32,652)

Dividend paid (including tax) to non -

controlling interests(1,126) (2,296) (5,365) (4,625) — —

Proceeds from issuance of equity shares to

non-controlling interests32,303 67,956 — 984 1,245 21

Share issue expenses of subsidiary (579) — 40,412 — — —

Proceeds from sale and lease back of towers/

sale of interest in subsidiary— — — 45,527 68,140 60,147

Payment of long term liability/acquisition of

non-controlling interest(12,782) (10,207) (624) — (10,684) —

Cash flows from financing activities (47,237) 29,432 (95,263) (115,800) 8,580 35,244

Net change in cash and cash equivalents (3,885) 40,337 (41,033) 17,708 (27,749) 38,067


PNGRB’s open house discussion suggests near-unanimous support to unified tariff framework

PNGRB’s recent open house discussion on ‘Integrated authorization of unified/pooled tariffs’,

suggests nearly a unanimous support to the implementation of unified tariffs for interconnected

gas pipelines, with 14 out of 16 participants supporting the regulator’s proposal.

IOCL and Torrent Power are the only ones, who have opposed unified tariff framework given

a significant increase in cost of LNG for former’s three refineries and latter’s power plant.

Half of the participants suggested that unified tariffs should be adopted for interconnected

pipelines of all entities. However, PNGRB has earlier indicated that unification across multiple

entities may entail complexities pertaining to operations as well as sharing of cost/revenues.

ONGC, RIL and Shell have suggested inclusion of bid-out pipelines as well. However, PNGRB

has clarified that bid-out pipeline entities will realize quoted tariff only even if they were

included for unification and implied tariff for other pipelines will be adjusted accordingly.

BP, IOCL and Shell have suggested legal unbundling of transmission and marketing segments

as a prerequisite to unification in order to ensure that the benefit is available to all marketers.

However, a recent media article suggests that the government seems to concur with GAIL

that the gas market has not developed adequately so far to implement unbundling currently.

Gas transmission may move to a subsidiary, as unbundling seems to be some time away

A recent media article suggests that the government requires GAIL to (1) hive off the gas

pipelines segment in a subsidiary, instead of its earlier consideration of unbundling from the

marketing business in a separate unrelated entity and (2) transparently deal with other gas

marketers by setting up a web portal with real-time data on availability of pipeline capacity. The

new proposal, if accepted, may delay full-scale unbundling of GAIL by a few years at least, which

was otherwise acting as an overhang on the stock over the past six months. We acknowledge

that unbundling is the way forward for the gas market to operate efficiently in future once it

has adequate accessibility of gas sourcing and transmission infrastructure. We anyway expect

unbundling to have a limited impact on GAIL’s profitability even if it is adopted now.

Expect sharp increase in GAIL’s tariffs over the next few years

We expect GAIL’s transmission tariffs to increase by ~33% over the next three years driven by

(1) finalization of tariffs for extant pipelines with lower volume divisors under current regulation

in the coming months and (2) implementation of unified tariff framework by FY2020; GAIL has

submitted ~55% jump in tariff to `57/mn BTU for its interconnected network under unification

based on PNGRB’s recent tariff calculations, as compared to `37/mn BTU realized currently.

GAIL (India) (GAIL) Energy

On track to tariffs unification, without unbundling. We reiterate BUY on GAIL

seeking comfort from (1) near-unanimous support to unified tariffs in an open house

discussion organized by PNGRB and (2) likely relief from the overhang of unbundling in

near term, with the government requiring GAIL to hive off the transmission business in

a subsidiary. We expect GAIL to benefit meaningfully from overhaul of pipeline tariffs

framework and see limited impact from unbundling, even if it were to go through now.

BUY

JULY 26, 2018

UPDATE


Price (`): 366


BSE-30: 36,825

Tarun Lakhotia

Akshay Bhor

GAIL (India)







MFs 12.2 EBITDA (Rs bn) 76.4 93.6 101.5


Absolute 6.9 11.3 30.2 ROE (%) 11.7 13.5 13.5

Rel. to BSE-30 2.8 4.2 13.9 Div. Yield (%) 2.0 2.3 2.5


390-267

822.3

Energy GAIL (India)


Exhibit 1: Majority of participants have supported unified tariffs for interconnected gas pipelines Outcome of open house discussion on integrated authorization of unified/pooled tariffs

Source: PNGRB, Kotak Institutional Equities

Exhibit 2: GAIL has submitted unified tariff of Rs57/mn BTU for its major interconnected pipelines

versus Rs37/mn BTU charged currently Details of GAIL's interconnected cross-country pipeline network, March fiscal year-end, 2018

Source: Company, PNGRB, Kotak Institutional Equities estimates

Exhibit 3: GAIL has proposed even higher tariffs seeking further overhaul of regulatory framework

to yield 12% return on actual volumes Excerpt from GAIL’s proposal based on overhaul of regulatory framework

Source: Company, PNGRB, Kotak Institutional Equities

Support

unified

tariffs

Integration of all inter-

connected pipelines of

all entities

Inclusion

of bid-out

pipelines

Suggest

unbundling as

a pre-requisite Other comments

BP India

CESC Lower cost of gas for its power plant

East West Pipeline Tariff may be calculated based on cost of service method

GAIL India X Future capex should be included in DCF calculation

GMR Energy X Lower cost of gas for its power plants in east coast

GSPL Consumers near to source may lay dedicated pipelines

Hazira LNG X Contractual implications from changing tariff for bid out pipelines

IOCL X Higher cost of gas for three of its refineries

JSPL Lower cost of gas for its steel plant

Matix Fertilisers and Chemicals

ONGC Integration of all inter-connected pipelines

PPCL

Reliance Industries

Shell India Future capex should not be included in tariff calculation

Torrent Power X Higher cost of LNG for its power plant, which is near the source

Zuari Agro Chemicals

Volumes (mcm/d) Utilization Tariffs Capex Length

Capacity 2018 (%) (Rs/mn BTU) (Rs bn) (km)

GAIL's inter-connected network

HVJ-GREP-DVPL 53 36 68 25 36 4,659

DVPL-II-VDPL up-gradation 54 30 55 54 92 1,119

Dahej-Dabhol 20 14 70 24 25 875

Dadri-Bawana-Nangal 23 5 24 14 27 835

Chainsa-Hissar 9 1 11 8 13 265

Dabhol-Bengaluru 16 1 8 41 29 1,097

Blended metrics of inter-connected network (a) 143 81 56 37

JHBDPL (under construction) 16 — — 116 78 2,540

Notes:

(a) Excluding secondary pipelines of Dadri-Bawana-Nangal and Chainsa-Hissar to prevent double counting.

GAIL (India) Energy


Exhibit 4: We expect gradual improvement in operating performance Key assumptions behind GAIL model, March fiscal year-ends, 2014-21E


Exhibit 5: We expect robust growth in EBITDA across key segments, except gas marketing Segment breakdown of GAIL's EBITDA, March fiscal year-ends, 2014-21E (Rs mn)


2014 2015 2016 2017 2018 2019E 2020E 2021E

Volumes

Natural gas (mcm/d)

Transmission 96 92 92 100 105 111 118 126

Sales 79 72 74 81 85 91 98 106

LPG/LHC ('000 tons)

Transmission 3,145 3,094 2,819 3,363 3,721 3,725 3,750 3,775

Sales 1,307 1,277 1,085 1,082 1,276 1,323 1,360 1,395

Petrochemicals ('000 tons)

Polyethylene 445 441 334 578 673 750 813 855

Prices/Margins

Natural gas (Rs/scm)

Blended transmission tariffs 1.17 1.00 1.13 1.26 1.32 1.39 1.59 1.75

Blended marketing margins 0.55 0.21 0.52 0.45 0.40 0.37 0.36 0.38

LPG

LPG price (US$/ton) 910 745 452 415 502 603 571 563

Transmission charges (Rs/kg) 1.3 1.4 1.7 1.5 1.5 1.6 1.6 1.6

Other assumptions

Polyethylene, HDPE (US$/ton) 1,585 1,540 1,390 1,275 1,179 1,293 1,237 1,216

Import tariff, Polyethylene 7.4% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7%

Import tariff, LPG 0% 0% 0% 0% 0% 0% 0% 0%

Subsidy losses (Rs mn) 19,000 10,000 — — — — — —

2014 2015 2016 2017 2018 2019E 2020E 2021E

EBITDA

Gas transportation 25,371 19,647 25,384 31,702 34,575 42,129 51,805 62,595

LPG transportation 2,619 2,886 3,106 3,087 3,241 3,001 2,939 2,926

Gas marketing 15,803 5,609 13,950 13,486 12,561 12,316 12,761 14,803

LPG production 29,994 29,662 7,848 12,926 23,506 28,659 26,088 23,473

Petrochemicals 15,326 2,092 (4,438) 8,920 6,865 9,419 9,724 10,662

Others (3,053) 1,625 (3,386) (4,538) (4,343) (1,879) (1,817) (2,348)

Subsidy loss (19,000) (10,000) — — — — — —

Total 67,059 51,520 42,463 65,584 76,403 93,645 101,500 112,111

Energy GAIL (India)


Exhibit 6: We value GAIL stock at `410 per share Sum-of-the-parts valuation of GAIL, March 2020E basis


EV (Rs bn)

Valuation base (Rs bn) Multiples (X) EBITDA Valuation

Other EBITDA Other EV/EBITDA Other basis (Rs/share)

Utility

Natural gas transportation 50.9 7.5 382 169

Natural gas marketing 12.5 6.5 81 36

LPG transportation 2.9 6.5 19 8

Total utility businesses 66.3 482 214

Commodity

LPG production 25.6 6.5 167 74

Petrochemicals 9.5 6.5 62 28

Total commodity businesses 35.2 229 101

Investments

ONGC 65 0.8 52 23

Others 259 0.8 207 92

Investments 323 259 115

Total enterprise value 430

Net debt/(cash) 45 20

Equity value 410

GAIL (India) Energy


Exhibit 7: Profit model, balance sheet, cash model of GAIL, March fiscal year-ends, 2014-21E (Rs mn)


2014 2015 2016 2017 2018 2019E 2020E 2021E


Net sales 575,079 571,913 516,875 481,489 537,419 664,795 739,162 822,958

EBITDA 67,059 51,520 42,463 65,584 76,403 93,645 101,500 112,111

Other income 8,985 8,609 8,916 10,063 9,870 11,100 11,821 13,009

Interest (3,662) (3,613) (7,999) (4,794) (2,751) (4,021) (3,566) (3,593)

Depreciation (11,809) (9,807) (13,098) (13,968) (14,151) (15,333) (17,273) (19,609)

Pretax profits 60,574 46,708 30,282 56,886 69,371 85,391 92,482 101,918

Current tax (17,607) (4,578) (1,355) (13,345) (16,333) (24,839) (26,035) (25,890)

Deferred tax (2,663) (7,874) (7,001) (5,734) (7,066) (3,824) (5,034) (8,407)

Net profits 43,753 30,392 22,264 35,029 46,184 56,728 61,413 67,621

Adjusted net profits 41,395 33,133 22,019 37,807 46,043 56,728 61,413 67,621

Adjusted EPS (Rs) 18.4 14.7 9.8 16.8 20.4 25.2 27.2 30.0


Total equity 270,723 291,195 350,946 381,494 403,281 436,939 473,925 514,404

Deferred taxation liability 25,664 33,087 40,714 46,559 46,309 50,134 55,168 63,575

Total borrowings 102,680 116,601 80,601 50,630 57,356 55,356 58,356 56,356

Current liabilities 99,046 88,049 85,714 84,017 73,875 79,719 86,170 93,280

Total liabilities and equity 498,113 528,932 557,974 562,700 580,822 622,148 673,619 727,615

Cash 26,510 11,416 17,939 13,419 25,294 9,522 8,888 12,469

Other current assets 118,822 153,095 142,704 138,523 112,959 124,678 132,432 141,087

Total fixed assets 311,751 321,197 311,484 315,662 343,038 388,418 432,767 474,529

Investments 41,030 43,224 85,847 95,096 99,531 99,531 99,531 99,531

Total assets 498,113 528,932 557,974 562,700 580,822 622,148 673,619 727,615


Operating cash flow, excl. working capital 46,367 36,551 34,594 52,698 55,979 64,076 70,709 81,431

Working capital changes (8,171) (19,567) (2,326) (1,939) 4,973 (5,875) (1,304) (1,544)

Capital expenditure (38,550) (18,676) (12,138) (16,947) (41,460) (60,003) (60,433) (60,173)

Investments (4,084) (540) 4,500 (4,173) (4,434) — — —

Other income 6,291 6,522 6,541 8,164 9,870 11,100 11,821 13,009

Free cash flow 1,854 4,290 31,172 37,804 24,928 9,298 20,794 32,722

Ratios (%)

Debt/equity 34.6 36.0 20.6 11.8 12.8 11.4 11.0 9.8

Net debt/equity 25.7 32.4 16.0 8.7 7.1 9.4 9.3 7.6

ROAE (%) 15.6 9.8 6.2 8.5 10.5 12.1 12.1 12.2

ROACE (%) 11.6 8.5 6.1 8.6 9.7 11.3 11.3 11.5

Key assumptions

Gas transmission volumes (mcm/d) 96 92 92 100 105 111 118 126

Petrochemical sales volumes ('000 tons) 496 482 334 578 673 750 813 855

LPG/LHC sales volumes ('000 tons) 1,307 1,277 1,085 1,082 1,276 1,323 1,360 1,395

LPG transmission volumes ('000 tons) 3,145 3,094 2,819 3,363 3,721 3,725 3,750 3,775

Subsidy losses (Rs mn) 19,000 10,000 — — — — — —


NCLAT upholds Rs 67 bn CCI fine on cement companies

The National Company Law Appellate Tribunal stated that it finds no merit in the plea filed by

the cement companies challenging the Competition Commission of India’s (CCI) decision to

penalize the manufacturers for cartelization. The NCLAT held that, “the Commission has

imposed mere minimum penalty, no interference is called for against the same”. We note many

of the cement companies have stated that they will now appeal in the Supreme Court.

CCI first released its order in July 2012 imposing a penalty aggregating to Rs67 bn on 11

companies, for observed price collusion for the period May 2009 to March 2011. The penalty

was imposed at 0.5X the net profits earned for the two-year period—even though it could

impose penalties up to 10% of turnover or 3X net profits, whichever is higher.

CCI had released its first order in July 2012 and reiterated the penalties in August 2016

We also note that CCI had earlier reiterated its order in August 2016 upon referral by

Competition Appellate Tribunal (COMPAT). CCI had first released its order in July 2012, and

was referred the case back by COMPAT in December 2015 as one of the observations of

COMPAT in its order of December 2015 was that Chairperson of the CCI did not hear

arguments of the appellants but become a party to the final order passed, which found

companies in violation.

Penalty amount at 1-4% of market cap for Ultratech, ACC and Ambuja

Among the large cement companies—ACC (Rs11.5 bn), Ambuja Cement (Rs11.6 bn), Ultratech

(Rs11.8 bn) and Jaiprakash (Rs13.2 bn) contribute the bulk of the penalties. In terms of impact,

the quantum of penalty accounts for 1-4% of the market cap of most pan-India companies,

though it is a substantial part of the market cap of Jaiprakash Associates. We note that

Jaiprakash’s assets have been subsequently acquired by other companies including Ultratech—

the acquisitions need to be hedged to protect buyer’s interests as part of the purchase

agreements.

Key excerpts from CCI’s orders earlier

We note following key excerpts from CCI’s earlier orders:

As per CCI, cement companies were interacting using CMA (Cement Manufacturer’s

Association) as a platform. The interactions included discussions on costs, prices, production

and capacities thereby facilitating in determining prices and production in a concerted rather

than competitive manner. As per CCI, evidence is available from minutes and meeting of

CMA as well as there was parallel conduct exhibited by companies in determining prices.

CCI used economic and circumstantial evidence to determine that cement companies used

CMA for sharing details of prices, capacity utilization, production and dispatch and thereby

restricted production and supplies in the market. The conduct of cement companies reflects

price parallelism and the evidence also establishes that they were acting in concert to fix

cement prices. CCI also found that capacity utilization of cement companies declined in

2009-10 and 2010-11 but concerted effort of cement companies led to the rise in cement

prices.

Cement India

CCI penalty—up to the last resort now. The National Company Law Appellate

Tribunal (NCLAT) has upheld the Competition Commission of India’s (CCI) earlier order

which imposed a penalty of Rs67 bn on 11 cement companies. We highlight that the

order pertains to potential price collusion for the period May 2009 to March 2011. The

companies may file an appeal with the Supreme Court now—we estimate the quantum

of penalty accounts for 1-4% of the market cap of pan-India companies.

CAUTIOUS

JULY 26, 2018

UPDATE

BSE-30: 36,858

Abhishek Poddar

Murtuza Arsiwalla

Samrat Verma

Cement India


CCI has directed cement companies to desist from indulging in any activity relating to

agreement, understanding or arrangement on prices, production and supply of cement in

the market. CMA is also directed to disengage and disassociate from collecting wholesale

and retail cement prices through the member cement companies.

CCI imposed a penalty of 0.5X of net profit of cement companies for 2009-10 (from May

20, 2009) and 2010-11 in case of 11 cement companies amounting to `67 bn and `7.3

mn on CMA. CCI has directed cement companies to deposit the penalty amount within

60 days of the order.

Exhibit 1: CCI has imposed penalty of Rs67 bn on 11 cement companies Penalty levied by CCI on cement companies and comparison with market capitalization (Rs bn)

Note: (a) Ambuja’s penalty as % of market cap includes 50% share of ACC’s penalty post acquisition of majority stake,

Source: CCI, Kotak Institutional Equities estimates

Net income per

CCI order

0.5X of net

profit

Net income per

CCI order

0.5X of net

profit

Company (Rs bn) (Rs bn) (Rs bn) (Rs bn) (Rs bn) (Rs bn) (%)

Ultratech 9.5 4.7 14.0 7.0 11.8 1,112 1

ACC 9.7 4.8 13.3 6.6 11.5 275 4

Ambuja 10.6 5.3 12.6 6.3 11.6 416 4

Shree Cement 5.9 2.9 2.1 1.0 4.0 609 1

Lafarge India 5.7 2.8 4.1 2.1 4.9 NA NA

Century Textiles 3.1 1.5 2.4 1.2 2.7 101 3

Ramco Cements 3.1 1.5 2.1 1.1 2.6 163 2

Binani Cement 2.4 1.2 0.9 0.5 1.7 NA NA

India Cements 3.1 1.5 0.7 0.3 1.9 35 5

JK Cements 1.9 1.0 0.6 0.3 1.3 38 3

Jaiprakash Associates 14.8 7.4 11.7 5.8 13.2 36 37

Total 67.1

Total penalty

amount

Market

cap.

As % of

Market cap

2010 2011


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June 2018: Results calendar

Source: NSE, Kotak Institutional Equities

Mon Tue Wed Thu Fri Sat Sun

23-Jul 24-Jul 25-Jul 26-Jul 27-Jul 28-Jul 29-Jul

ACC Asian Paints Ambuja Cements Bharat Financial Inclusion Bank of Baroda J K Cement

Hindustan Zinc GlaxoSmithkline Pharmaceuticals Bharti Infratel Bharti Airtel Coromandel International NTPC

Indiabulls Ventures Hexaw are Technologies BHEL Biocon Equitas Holdings

L&T Infotech ICICI Prudential Life Canara Bank CESC HCL Technologies

United Spirits Info Edge Crompton Greaves Consumer Cholamandalam ICICI Bank

PFC GRUH Finance City Union Bank JSW Energy

TeamLease Services Hero Motocorp Colgate-Palmolive (India) Jubilant Life Science

IRB Infrastructure Container Corporation Mahindra & Mahindra Financial

JSW Steel Dr Reddy's Laboratories Prestige Estates Projects

Jubilant Foodw orks ITC Reliance Industries

Jyothy Laboratories J&K Bank

Karur Vysya Bank Maruti Suzuki

L&T Petronet LNG

PVR SBI Life Insurance

Reliance Nippon Life Asset Management Schaeffler India

Rural Electrif ication Corp. Shriram Transport

Shriram City Union Finance Tata Pow er

SIS WABCO India

SKF Yes Bank

30-Jul 31-Jul 1-Aug 2-Aug 3-Aug 4-Aug 5-Aug

Avenue Supermarts Ajanta Pharma Aditya Birla Fashion Godrej Properties Berger Paints Divi's Laboratories P I Industries

Axis Bank Astral Poly Technik Apollo Tyres Indiabulls Housing Carborundum Universal

Central Bank of India Bank of India Emami JK Lakshmi Cement CG Pow er and Industrial

Century Textile Bharat Electronics Exide Industries Mahindra Logistics SAIL

Escorts Castrol India Gatew ay Distriparks Marico Titan Company

GIC Dabur India Orient Cement ONGC

Godrej Consumer Products IIFL Holdings Pidilite Industries The Ramco Cement

GSPL Jagran Prakashan Reliance Infrastructure Torrent Pharmaceuticals

HDFC Mahanagar Gas Tata Global Beverages

Idea Pow er Grid Torrent Pow er

IDFC Bank Supreme Industries

Interglobe Aviation Tata Motors

New India Assurance UPL

NHPC Vedanta

Oberoi Realty

Piramal Enterprises

Shree Cement

Tech Mahindra

6-Aug 7-Aug 8-Aug 9-Aug 10-Aug 11-Aug 12-Aug

Adani Port and SEZ AU Small Finance Cipla Coffee Day Enterprises Apollo Hospitals Amara Raja Batteries

Adani Pow er GlaxoSmithkline Consumer HPCL Gujarat Pipavav Port Dr Lal Pathlabs IOCL

Britannia Industries Kalpataru Pow er Transmission Lupin HCG Endurance Technologies NBCC

Ujjivan Financial Services Mahindra & Mahindra NMDC Page Industries Hindalco Industries

Motherson Sumi Systems PNB Housing Finance S H Kelkar and Company Timken

Mphasis Thermax Voltas

SRF

TVS Motor

13-Aug 14-Aug 15-Aug 16-Aug 17-Aug 18-Aug 19-Aug

Cadila Healthcare Grasim Industries

Dew an Housing Finance

Godrej Industries


Ind

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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 25-Jul-18 (Rs) (%) (Rs bn) (US$ bn) (mn) 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E (US$ mn)

Automobiles

Amara Raja Batteries REDUCE 790 780 (1.3) 135 2.0 171 28 33 39 (1.6) 21.2 15.5 28.6 23.6 20.4 15.2 12.6 10.8 4.6 4.0 3.4 17.0 18.0 18.0 0.5 0.6 0.7 5.9

Apollo Tyres BUY 277 340 22.9 158 2.3 541 13 20 25 (38.0) 48.3 25.0 20.7 13.9 11.1 11.5 8.2 6.9 1.5 1.5 1.3 8.5 11.1 12.5 1.0 1.1 1.1 9.9

Ashok Leyland BUY 110 160 45.3 323 4.7 2,926 5.4 6.2 8.9 8.0 15.3 43.2 20.5 17.8 12.4 11.8 8.9 6.4 4.5 3.9 3.2 23.7 23.4 28.4 2.2 1.7 2.4 45.4

Bajaj Auto SELL 2,639 2,500 (5.3) 764 11.1 289 140 148 161 6.0 5.4 9.0 18.8 17.8 16.4 12.7 12.2 10.8 4.0 3.6 3.2 22.9 21.2 20.7 2.3 2.2 2.4 29.5

Balkrishna Industries REDUCE 1,200 1,260 5.0 232 3.4 193 37 50 63 4.8 34.8 25.0 32.1 23.8 19.1 17.0 13.1 10.4 5.7 4.7 3.9 19.0 21.6 22.2 0.4 0.5 0.5 8.4

Bharat Forge SELL 621 600 (3.4) 289 4.2 466 16 23 27 10.1 43.0 16.8 38.4 26.8 23.0 18.4 15.2 13.1 6.3 5.3 4.5 17.3 21.5 21.4 0.7 0.8 0.9 10.4

CEAT ADD 1,357 1,500 10.5 55 0.8 40 65 99 108 (29.5) 53.7 8.3 21.0 13.6 12.6 10.2 8.7 7.5 2.1 1.9 1.6 10.4 14.4 13.8 0.8 0.7 0.7 14.2

Eicher Motors SELL 27,288 26,000 (4.7) 744 10.8 27 792 995 1,200 29.3 25.5 20.6 34.4 27.4 22.7 24.8 19.9 16.2 13.8 10.0 7.4 46.4 42.3 37.5 0.1 0.1 0.1 17.8

Escorts BUY 886 1,170 32.0 76 1.6 89 39 56 69 71.3 43.6 23.6 22.9 15.9 12.9 13.0 9.7 7.6 3.1 2.7 2.3 13.5 16.8 17.7 0.5 0.9 1.2 15.9

Exide Industries SELL 274 225 (17.8) 233 3.4 850 8 10 11 0.6 23.7 10.9 33.3 26.9 24.3 18.7 15.7 13.9 4.3 3.9 3.6 13.5 15.2 15.3 0.9 1.1 1.3 8.3

Hero Motocorp SELL 3,112 3,000 (3.6) 621 9.0 200 185 183 204 9.5 (0.9) 11.4 16.8 17.0 15.2 10.3 10.0 8.8 5.3 4.7 4.2 33.8 29.3 29.1 2.7 2.9 3.3 20.7

Mahindra CIE Automotive ADD 245 290 18.3 93 1.3 378 10 14 16 107.0 45.0 12.7 25.5 17.6 15.6 12.6 8.9 7.8 2.5 2.2 1.9 10.4 13.2 13.1 — — — 3.0

Mahindra & Mahindra BUY 909 1,015 11.6 1,131 16.4 1,138 38 44 50 22.0 15.6 14.8 24.0 20.7 18.1 15.8 13.4 11.6 3.4 3.0 2.7 15.1 15.4 15.7 0.8 1.0 1.1 32.5

Maruti Suzuki ADD 9,758 9,700 (0.6) 2,948 42.9 302 256 330 395 5.1 29.2 19.6 38.2 29.5 24.7 21.5 16.8 13.6 7.1 6.0 5.2 19.8 22.0 22.6 0.7 0.8 1.0 64.1

Motherson Sumi Systems SELL 299 265 (11.4) 630 9.2 2,105 8 11 14 6.1 37.7 21.7 36.6 26.6 21.8 13.8 10.6 8.8 6.4 5.4 4.6 19.0 22.1 22.9 0.8 0.9 1.1 13.6

MRF REDUCE 78,209 76,000 (2.8) 332 4.8 4 2,669 3,896 4,447 (23.9) 46.0 14.1 29.3 20.1 17.6 13.3 9.8 8.4 3.4 2.9 2.5 12.3 15.7 15.4 0.1 0.1 0.1 7.3

Schaeffler India BUY 5,290 6,000 13.4 88 1.3 17 143 171 207 22.0 19.4 21.1 36.9 30.9 25.6 21.7 18.6 15.1 5.2 4.6 4.0 15.0 15.8 16.9 0.3 0.6 0.8 0.7

SKF REDUCE 1,622 1,700 4.8 83 1.2 51 58 70 81 24.6 20.8 16.4 28.1 23.3 20.0 17.3 14.8 12.4 4.5 4.0 3.4 16.1 17.0 17.2 0.7 0.9 1.0 0.3

Tata Motors BUY 257 445 72.9 874 11.8 3,396 20 23 38 (28.0) 15.9 63.8 12.9 11.1 6.8 3.8 3.5 2.9 0.9 0.8 0.8 8.8 7.9 11.7 — — — 57.9

Timken SELL 720 660 (8.4) 49 0.7 68 14 19 25 (5.3) 42.3 27.5 53.2 37.4 29.3 29.7 20.7 16.5 7.0 5.9 5.0 13.9 17.1 18.5 0.1 0.1 0.1 0.4

TVS Motor SELL 540 410 (24.1) 257 3.7 475 14 18 22 18.7 26.8 21.8 38.8 30.6 25.1 23.6 17.8 14.9 8.9 7.5 6.3 25.1 26.7 27.3 0.6 1.0 1.2 11.4

WABCO India SELL 6,795 6,350 (6.5) 129 1.9 19 144 169 222 27.8 17.8 31.3 47.2 40.1 30.5 30.7 26.1 19.8 8.4 7.1 5.8 19.5 19.2 20.9 0.1 0.1 0.2 0.5

Automobiles Neutral 10,242 149 (0.9) 21.1 25.7 26.2 21.7 17.2 11.6 9.8 8.1 3.7 3.3 2.9 14.2 15.2 16.7 0.8 0.9 1.1 377.8

Banks

Axis Bank ADD 532 600 12.7 1,367 19.9 2,567 1 20 39 (92.6) 1,735.5 100.1 495.5 27.0 13.5 — — — 2.6 2.3 1.9 0.5 7.7 13.8 0.9 0.6 1.1 59.6

Bank of Baroda NR 132 — — 349 5.1 2,652 (9) 20 23 (253.2) 323.2 10.5 (14.4) 6.4 5.8 — — — 1.6 1.2 0.8 (5.8) 12.6 12.3 — — — 29.1

Bank of India ADD 88 120 36.1 154 2.2 1,744 (35) (6) 16 (134.7) 82.2 366.7 (2.5) (14.3) 5.4 — — — 1.3 1.7 1.0 (21.3) (3.6) 9.5 — (1.4) 3.7 11.0

Canara Bank ADD 259 300 15.9 190 2.8 733 (58) (5) 51 (406.6) 91.6 1,147.0 (4.5) (53.5) 5.1 — — — 1.6 1.5 0.9 (12.2) (1.0) 10.1 — — — 27.2

City Union Bank ADD 168 190 13.1 123 1.8 665 9 10 12 6.4 16.2 13.0 18.9 16.2 14.4 — — — 2.9 2.5 2.2 15.3 15.5 15.5 0.2 1.1 1.2 2.0

DCB Bank ADD 160 205 28.2 49 0.7 308 8 10 12 13.8 28.2 21.0 20.1 15.7 12.9 — — — 2.0 1.8 1.7 10.9 11.7 12.7 — 0.6 0.7 4.7

Equitas Holdings BUY 140 190 36.2 48 0.7 340 0.9 4.4 8.3 (80.4) 374.7 88.2 150.9 31.8 16.9 — — — 2.2 2.0 1.8 1.4 6.4 11.0 — — — 4.6

Federal Bank BUY 87 130 49.6 172 2.5 1,972 4.4 5.7 7.9 (9.3) 29.5 39.5 19.9 15.4 11.0 — — — 1.5 1.4 1.3 8.2 8.8 11.4 1.2 1.5 2.1 20.1

HDFC Bank REDUCE 2,170 2,000 (7.8) 5,652 82.2 2,595 67 77 93 18.7 14.1 21.1 32.2 28.2 23.3 — — — 5.4 4.1 3.6 17.9 16.5 16.2 0.6 0.7 0.8 81.8

ICICI Bank BUY 275 400 45.6 1,767 25.7 6,429 11 15 25 (31.1) 46.5 64.1 26.1 17.8 10.8 — — — 2.1 1.8 1.6 6.6 9.1 13.7 0.5 1.1 1.8 85.5

IDFC Bank NR 38 — — 131 1.9 3,404 2.5 1.6 3.3 (16.0) (38.5) 109.8 15.2 24.7 11.8 — — — 0.9 0.8 0.8 5.7 3.4 6.9 1.3 0.8 1.7 9.3

IndusInd Bank REDUCE 1,965 1,900 (3.3) 1,180 17.2 600 60 71 87 25.3 17.5 23.6 32.7 27.8 22.5 — — — 5.1 4.2 3.6 17.1 17.6 16.8 — 0.4 0.5 30.5

J&K Bank BUY 48 105 116.9 27 0.4 557 4 8 11 111.6 116.7 44.4 13.3 6.1 4.3 — — — 0.6 0.5 0.4 3.4 6.9 9.4 — 3.3 4.7 0.3

Karur Vysya Bank ADD 99 110 11.3 72 1.0 727 5 3 13 (52.2) (32.3) 306.7 20.8 30.7 7.5 — — — 1.4 1.4 1.2 6.1 3.7 14.1 0.6 0.8 3.3 1.7

Punjab National Bank ADD 79 90 13.6 219 3.2 2,761 (44) (39) 9 (814.7) 13.4 124.1 (1.8) (2.1) 8.5 — — — 4.7 (3.6) (13.5) (32.4) (31.3) 8.2 — (10.5) 2.5 29.9

RBL Bank SELL 570 475 (16.6) 240 3.5 420 15 22 29 27.3 48.1 31.5 37.6 25.4 19.3 — — — 3.7 3.3 3.0 11.5 13.3 15.5 0.4 0.6 0.8 13.1

State Bank of India BUY 272 370 36.1 2,426 35.3 8,925 (7) 18 37 (155.8) NM 106.1 NM 15.1 7.3 — — — 2.2 1.7 1.2 (3.2) 7.1 13.2 - 0.1 0.1 73.4

Ujjivan Financial Services REDUCE 386 420 8.7 47 0.7 121 1 22 29 (96.5) 3,564.0 30.0 640.0 17.5 13.4 — — — 2.8 2.4 2.0 0.4 14.2 16.1 0.0 0.6 0.8 6.8

Union Bank ADD 82 130 58.8 96 1.4 1,169 (45) 1 24 (655.5) 101.4 3,896.2 (1.8) 133.7 3.3 — — — 1.4 1.2 0.8 (23.6) 0.3 11.8 — 0.1 4.5 9.4

YES Bank SELL 383 325 (15.1) 883 12.8 2,303 18 19 21 25.7 4.6 11.0 20.9 20.0 18.0 — — — 3.5 3.1 2.7 17.7 16.0 15.7 0.6 0.8 0.9 65.3

Banks Attractive 15,190 221 (101.3) 9,644.3 103.7 (2,431.7) 25.5 12.5 1.9 1.8 1.6 (0.1) 6.9 12.5 0.5 0.4 0.9 565.6

Dividend yield (%)P/B (X) RoE (%)


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NBFCs

Bajaj Finance SELL 2,705 2,000 (26.1) 1,563 22.7 575 43 68 90 29.2 56.6 31.9 62.3 39.8 30.2 — — — 9.9 8.1 6.5 19.7 22.4 24.0 0.1 0.3 0.3 53.4

Bajaj Finserv REDUCE 6,950 6,100 (12.2) 1,106 16.1 159 176 245 307 10.3 39.7 25.2 39.6 28.3 22.6 — — — 5.5 4.5 3.8 15.6 17.5 18.1 0.2 0.2 0.2 17.3

Bharat Financial Inclusion NA 1,191 — — 166 2.4 139 33 43 54 55.5 31.1 27.2 36.5 27.8 21.9 — — — 5.5 4.5 3.7 16.7 17.9 18.5 — — — 9.9

Cholamandalam REDUCE 1,497 1,510 0.8 234 3.4 156 62 76 92 35.5 22.3 20.8 24.0 19.7 16.3 — — — 4.8 4.0 3.3 20.6 21.0 21.2 0.4 0.6 0.7 7.6

HDFC BUY 2,000 2,075 3.7 3,381 49.2 1,676 75 58 67 52.1 (23.1) 15.2 26.5 34.5 30.0 — — — 5.3 4.6 4.2 23.9 14.3 14.5 1.0 1.0 1.2 70.6

HDFC Standard Life Insurance SELL 494 405 (18.1) 995 14.5 2,007 6 6 7 24.4 14.8 10.9 89.4 77.9 70.2 — — — 23.1 20.6 18.4 27.3 28.0 27.7 0.3 0.3 0.4 13.0

ICICI Lombard SELL 790 620 (21.5) 359 5.2 454 19 26 32 22.0 37.1 21.5 41.6 30.4 25.0 — — — 7.9 6.6 5.6 20.8 23.8 24.2 0.5 0.8 0.9 2.3

ICICI Prudential Life BUY 404 500 23.7 580 8.4 1,436 11 12 13 (3.7) 10.1 7.0 35.8 32.5 30.4 — — — 8.8 7.2 6.1 25.0 24.5 21.8 1.4 0.5 0.6 12.5

IIFL Holdings SELL 668 625 (6.5) 213 3.1 319 29 34 41 32.4 17.3 21.4 23.4 19.9 16.4 — — — 4.2 3.6 3.1 19.0 19.3 20.0 0.9 1.1 1.3 1.4

L&T Finance Holdings ADD 184 190 3.1 368 5.3 1,996 7 13 14 23.7 70.9 12.3 25.1 14.7 13.1 — — — 2.9 2.7 2.3 14.2 18.9 18.8 1.0 1.1 1.4 11.5

LIC Housing Finance BUY 526 610 16.0 265 3.9 505 44 50 58 3.2 13.8 17.5 12.0 10.6 9.0 — — — 2.0 1.7 1.4 14.5 14.3 14.4 1.3 1.5 1.7 13.0

Magma Fincorp BUY 141 200 41.8 38 0.6 237 10 12 15 1,014.5 24.6 25.8 14.5 11.6 9.3 — — — 1.4 1.4 1.2 10.2 12.9 14.1 0.6 1.3 1.6 1.7

Mahindra & Mahindra Financial REDUCE 486 475 (2.3) 300 4.4 614 15 22 26 105.0 53.5 16.6 33.5 21.8 18.7 — — — 3.4 3.1 2.8 11.3 14.0 14.8 0.8 1.3 1.5 10.9

Max Financial Services BUY 461 650 41.0 124 1.8 268 5 6 6 (20.4) 36.9 1.8 100.6 73.5 72.2 — — — — — — 6.5 8.3 8.0 — 0.5 0.5 4.5

Muthoot Finance ADD 393 480 22.1 157 2.3 400 43 38 40 45.6 (10.8) 4.0 9.1 10.2 9.9 — — — 2.0 1.8 1.6 24.1 18.4 16.9 2.5 2.2 2.3 4.6

PNB Housing Finance REDUCE 1,281 1,375 7.3 215 3.1 167 50 61 77 57.8 23.0 25.3 25.7 20.9 16.7 — — — 3.4 3.1 2.7 14.0 15.2 16.8 0.7 0.3 0.3 10.1

SBI Life Insurance ADD 660 815 23.5 660 9.6 1,000 12 15 18 20.8 26.0 22.9 57.2 45.4 36.9 — — — 10.3 8.6 7.2 19.4 20.6 21.3 0.3 0.4 0.4 4.8

Shriram City Union Finance ADD 1,905 2,250 18.1 126 1.8 66 101 141 174 19.6 40.4 22.7 18.9 13.5 11.0 — — — 2.4 2.2 1.9 12.5 15.8 16.9 0.9 0.9 1.1 0.7

Shriram Transport ADD 1,284 1,400 9.1 291 4.2 227 69 105 125 24.7 52.1 18.7 18.6 12.2 10.3 — — — 2.5 2.1 1.8 13.1 17.6 18.0 0.9 1.1 1.4 28.2

NBFCs Neutral 11,141 162 36.9 12.0 18.7 32.5 29.1 24.5 5.5 4.7 4.1 16.8 16.1 16.6 0.6 0.7 0.8 565.6

Cement

ACC SELL 1,470 1,270 (13.6) 276 4.0 188 49 62 70 32.7 27.0 13.8 30.2 23.8 20.9 16.0 13.1 11.2 2.9 2.7 2.5 10.1 11.9 12.5 1.2 1.2 1.2 13.7

Ambuja Cements REDUCE 208 210 0.7 414 6.0 1,986 8 9 11 29.7 14.5 23.2 27.7 24.2 19.7 9.1 8.0 6.6 2.0 1.9 1.8 7.4 8.1 9.5 1.7 1.7 1.7 10.0

Dalmia Bharat ADD 2,579 2,900 12.5 230 3.3 89 60 98 128 55.4 62.6 30.3 42.7 26.3 20.2 13.2 10.1 8.2 3.8 3.3 2.9 9.7 13.4 15.2 0.1 0.1 0.1 5.0

Grasim Industries BUY 986 1,275 29.3 648 9.4 657 47 52 69 (30.1) 9.1 32.8 20.8 19.1 14.3 12.0 7.3 6.7 1.1 1.1 1.0 7.0 5.8 7.2 0.6 0.6 0.6 14.3

India Cements REDUCE 113 135 19.2 35 0.5 308 3 5 9 (42.5) 56.2 84.4 34.7 22.2 12.0 9.6 8.3 6.5 0.7 0.7 0.6 2.0 3.0 5.3 0.9 0.9 0.9 7.1

J K Cement REDUCE 759 1,000 31.7 53 0.8 70 43 51 83 25.1 17.0 65.0 17.6 15.0 9.1 9.4 10.1 8.2 2.7 2.3 1.9 16.2 16.7 23.2 1.1 1.1 1.1 0.6

JK Lakshmi Cement ADD 327 425 30.0 38 0.6 118 4 18 33 (35.7) 311.2 79.6 73.1 17.8 9.9 13.5 8.1 5.8 2.7 2.4 1.9 3.7 14.1 21.5 0.6 0.6 0.6 0.4

Orient Cement ADD 120 165 37.0 25 0.4 205 2 8 12 237.8 250.7 64.8 55.8 15.9 9.6 12.1 7.7 5.7 2.4 2.2 1.8 4.4 14.3 20.6 0.6 1.2 1.7 0.2

Shree Cement SELL 17,492 12,700 (27.4) 609 8.9 35 397 486 662 3.4 22.3 36.2 44.0 36.0 26.4 23.7 17.9 14.0 6.8 5.9 4.9 16.7 17.6 20.2 0.3 0.3 0.3 4.9

UltraTech Cement SELL 4,045 2,950 (27.1) 1,111 16.2 275 88 126 162 (7.8) 42.7 28.9 45.9 32.2 25.0 22.7 16.8 13.9 4.3 3.8 3.3 9.7 12.6 14.3 0.2 0.2 0.2 19.1

Cement Cautious 3,439 50 5.9 27.1 31.8 33.2 26.1 19.8 15.0 10.5 8.9 2.5 2.3 2.1 7.5 8.9 10.6 0.6 0.6 0.6 75.3



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Consumer products

Asian Paints REDUCE 1,450 1,325 (8.6) 1,391 20.2 959 21 27 33 2.9 32.1 20.3 70.6 53.5 44.5 43.2 33.5 27.7 16.5 14.4 12.6 24.6 28.8 30.3 0.6 0.8 1.0 19.8

Bajaj Corp. ADD 402 470 16.9 59 0.9 148 14 15 17 (9.4) 7.8 10.3 28.1 26.1 23.6 22.1 20.8 17.8 12.0 12.1 12.1 42.8 46.3 51.2 3.0 3.2 3.5 0.4

Britannia Industries ADD 6,444 6,000 (6.9) 774 11.3 120 84 104 126 13.5 24.4 21.5 77.0 61.9 51.0 50.9 40.0 32.9 22.7 18.0 14.6 32.9 32.4 31.6 0.4 0.5 0.7 9.5

Coffee Day Enterprises REDUCE 265 340 28.4 56 0.8 211 3 8 13 49.1 149.7 59.4 79.2 31.7 19.9 13.4 — — 2.4 2.2 2.0 3.1 7.2 10.4 — — — 1.2

Colgate-Palmolive (India) ADD 1,125 1,300 15.6 306 4.4 272 24 27 32 15.2 14.6 16.9 47.3 41.3 35.3 27.1 23.7 20.4 20.1 20.2 17.2 46.2 48.8 52.6 2.1 1.4 1.7 7.9

Dabur India REDUCE 372 350 (5.8) 656 9.5 1,762 8 9 10 7.2 16.1 11.7 47.8 41.2 36.9 40.5 35.1 30.7 11.5 11.5 10.1 25.9 27.9 29.1 2.0 1.0 1.2 10.0

GlaxoSmithKline Consumer ADD 6,556 6,750 3.0 276 4.0 42 166 189 211 6.6 13.3 11.9 39.4 34.8 31.1 27.2 23.3 20.1 7.9 7.2 6.6 21.2 21.7 22.2 1.1 1.4 1.6 2.0

Godrej Consumer Products REDUCE 1,356 1,020 (24.8) 924 13.4 681 21 25 28 11.5 17.6 13.3 63.5 54.0 47.7 45.0 38.3 33.5 14.8 12.8 11.1 25.2 25.4 24.9 0.5 0.6 0.7 9.0

Hindustan Unilever REDUCE 1,653 1,570 (5.0) 3,578 52.0 2,160 25 29 33 25.0 19.5 13.2 67.4 56.4 49.8 48.3 39.0 34.3 50.5 44.1 37.5 78.1 83.5 81.4 1.2 1.3 1.5 33.8

ITC ADD 286 315 10.1 3,495 50.8 12,275 9 10 11 7.8 7.8 12.4 32.1 29.8 26.5 21.0 19.3 17.0 6.8 6.4 6.1 19.4 20.3 22.2 1.8 2.0 2.3 42.1

Jubilant Foodworks BUY 1,401 1,650 17.8 185 2.7 132 15 25 35 191.7 73.6 37.5 96.2 55.4 40.3 41.1 27.7 20.9 19.1 13.8 10.5 21.7 28.9 29.5 0.1 0.1 0.2 37.2

Jyothy Laboratories ADD 223 240 7.5 81 1.2 364 4 6 7 (26.4) 27.6 16.7 50.7 39.7 34.0 31.1 26.5 22.5 7.1 6.1 5.3 14.4 16.6 16.8 0.2 0.4 0.7 1.5

Manpasand Beverages SELL 109 132 20.6 13 0.2 114 9 11 13 37.6 21.3 26.5 12.5 10.3 8.2 6.2 4.1 3.3 1.0 0.9 0.8 8.3 9.3 10.7 0.5 0.5 0.5 3.8

Marico ADD 358 345 (3.6) 462 6.7 1,291 6 7 8 7.4 16.7 13.7 57.1 48.9 43.0 40.3 33.9 29.5 18.2 16.8 15.5 33.2 35.7 37.5 1.1 1.3 1.5 9.4

Nestle India ADD 10,234 9,500 (7.2) 987 14.4 96 127 168 191 21.1 32.5 13.4 80.5 60.8 53.6 44.3 34.5 30.3 28.8 26.5 24.4 36.6 45.5 47.3 0.8 1.1 1.3 8.6

Page Industries SELL 28,360 21,000 (26.0) 316 4.6 11 311 392 482 32.5 26.1 22.9 91.2 72.3 58.8 58.1 45.9 37.8 37.3 29.2 23.3 45.9 45.3 44.0 0.5 0.6 0.7 7.9

Pidilite Industries REDUCE 1,117 1,050 (6.0) 567 8.2 508 18 22 26 7.5 20.4 20.4 61.9 51.4 42.7 41.4 34.5 28.4 15.9 13.3 11.2 26.0 28.2 28.5 0.5 0.6 0.7 13.5

S H Kelkar and Company BUY 200 315 57.8 29 0.4 145 7 8 11 2.1 11.8 28.4 27.0 24.1 18.8 18.8 15.8 12.3 3.4 3.1 2.7 12.8 13.3 15.3 0.9 0.9 1.0 0.2

Tata Global Beverages REDUCE 237 285 20.1 150 2.2 631 7 10 11 20.7 29.4 19.1 32.3 25.0 21.0 17.0 14.3 12.2 2.1 2.0 1.9 7.0 8.3 9.4 1.1 1.3 1.5 13.4

Titan Company SELL 865 800 (7.5) 768 11.2 888 13 16 20 43.3 26.7 20.6 67.6 53.3 44.3 46.3 35.3 28.3 15.1 12.7 10.7 24.3 25.8 26.2 0.4 0.5 0.6 35.5

United Breweries SELL 1,111 1,000 (10.0) 294 4.3 264 15 19 24 71.6 29.7 23.4 74.4 57.4 46.5 32.8 27.3 23.6 10.9 9.4 8.0 15.7 17.6 18.6 0.2 0.3 0.4 10.3

United Spirits REDUCE 579 590 2.0 420 6.1 727 8 10 13 39.1 34.7 30.9 76.1 56.5 43.1 43.9 32.9 26.6 16.8 11.5 8.5 24.9 24.2 22.7 — — 0.3 19.1

Varun Beverages ADD 695 750 7.9 127 1.8 183 12 17 22 377.8 45.4 29.8 60.3 41.5 32.0 18.6 15.0 12.9 7.2 6.2 5.2 12.1 16.0 17.7 — — 0.1 1.6

Consumer products Cautious 15,913 231 14.6 18.0 15.7 52.5 44.5 38.5 34.2 28.7 24.7 12.9 11.6 10.4 24.5 26.0 26.9 1.1 1.2 1.4 297.6

Energy

BPCL REDUCE 396 390 (1.4) 858 12.5 1,967 40 39 41 (1.5) (3.6) 5.3 9.8 10.2 9.7 7.9 7.5 6.9 2.3 2.0 1.8 24.8 21.1 20.0 5.3 3.9 4.1 32.3

Castrol India ADD 164 215 31.4 162 2.4 989 7 8 9 3.3 13.6 10.9 23.8 21.0 18.9 14.9 13.1 11.8 15.9 15.0 14.7 67.9 73.6 78.6 2.9 3.7 4.3 4.1

GAIL (India) BUY 365 410 12.4 822 12.0 2,255 20 25 27 21.8 23.2 8.3 17.9 14.5 13.4 11.2 9.3 8.6 2.0 1.9 1.7 11.7 13.5 13.5 2.0 2.3 2.5 21.8

GSPL SELL 194 170 (12.4) 109 1.6 564 12 11 11 34.5 (7.0) (4.6) 16.4 17.6 18.5 8.4 7.0 7.0 2.2 2.0 1.8 14.0 11.7 10.2 0.9 0.9 0.8 1.6

HPCL REDUCE 282 320 13.5 430 6.2 1,524 42 32 33 (3.2) (23.4) 3.4 6.8 8.8 8.5 5.9 7.7 7.8 1.8 1.6 1.5 28.7 19.3 18.2 6.0 4.6 4.8 30.6

Indraprastha Gas SELL 294 240 (18.4) 206 3.0 700 10 12 13 19.0 16.5 12.0 28.5 24.5 21.9 18.0 15.6 13.8 5.9 5.0 4.4 22.4 22.2 21.5 0.7 0.8 1.0 10.4

IOCL REDUCE 163 160 (2.0) 1,585 23.1 9,479 21 17 18 (24.8) (17.9) 7.4 8.0 9.7 9.0 4.6 5.4 4.9 1.4 1.3 1.2 18.5 14.0 14.0 7.0 4.1 4.4 25.5

Mahanagar Gas ADD 877 850 (3.1) 87 1.3 99 48 52 54 21.5 6.5 5.3 18.1 17.0 16.2 11.0 9.9 9.2 4.1 3.7 3.3 24.3 22.8 21.4 2.2 2.4 2.5 4.2

ONGC ADD 159 200 25.7 2,041 29.7 12,833 17 21 21 3.1 19.6 (1.3) 9.1 7.6 7.7 4.9 3.9 3.7 0.9 0.8 0.8 9.9 11.5 10.7 4.1 4.4 4.4 18.1

Oil India SELL 205 220 7.2 233 3.4 1,135 25 24 24 22.6 (1.3) (0.7) 8.3 8.4 8.5 6.5 5.9 5.8 0.8 0.8 0.8 9.8 9.7 9.2 5.0 5.3 5.3 3.3

Petronet LNG BUY 221 280 26.6 332 4.8 1,500 14 16 18 22.1 17.3 13.2 15.9 13.6 12.0 10.6 9.1 7.7 3.4 3.0 2.6 23.3 23.4 23.3 2.0 2.6 3.3 12.2

Reliance Industries REDUCE 1,115 930 (16.6) 6,599 96.0 5,922 59 68 77 16.9 14.9 13.9 18.9 16.4 14.4 13.9 11.2 9.4 2.3 2.0 1.8 11.6 11.9 12.1 0.5 0.6 0.6 118.4

Energy Attractive 13,464 196 1.0 5.8 7.3 13.1 12.3 11.5 8.5 7.6 6.9 1.7 1.6 1.5 13.3 12.8 12.6 2.5 2.2 2.3 282.4



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Price (Rs) price Upside shares 3mo


Industrials

ABB SELL 1,174 1,020 (13.1) 249 3.6 212 20 26 29 12.1 30.1 14.2 59.2 45.6 39.9 32.6 26.6 23.9 6.9 6.3 5.7 12.2 14.5 15.1 0.3 0.8 0.8 1.4

BHEL REDUCE 72 78 8.9 263 3.8 3,671 2.2 2.6 5.0 62.7 16.5 95.3 32.6 28.0 14.3 7.8 7.3 3.8 0.8 0.8 0.8 2.5 2.9 5.6 2.5 3.0 5.8 9.2

Carborundum Universal SELL 357 310 (13.2) 68 1.0 189 11 14 17 22.8 25.4 20.2 31.3 25.0 20.8 16.9 12.5 10.8 4.3 3.9 3.5 14.6 16.4 17.6 0.6 1.2 1.4 0.3

CG Power and Industrial BUY 62 65 4.8 39 0.6 627 0.8 3.1 4.3 (72.2) 275.7 40.5 76.0 20.2 14.4 11.2 8.4 6.9 1.4 1.5 1.5 1.5 7.3 10.4 — — — 7.1

Crompton Greaves Consumer SELL 236 210 (11.2) 148 2.2 627 5.2 6.2 7.5 13.3 20.0 20.9 45.8 38.1 31.5 28.1 23.8 20.1 18.8 13.0 10.0 49.5 40.5 35.9 0.6 0.8 1.1 2.6

Cummins India REDUCE 670 680 1.5 186 2.7 277 24 28 32 (7.8) 16.1 13.9 27.7 23.8 20.9 24.4 20.9 17.3 4.7 4.4 4.0 17.4 18.9 20.1 2.2 2.2 2.5 3.9

Havells India SELL 603 485 (19.5) 377 5.5 625 11 14 17 16.6 26.6 20.5 54.4 43.0 35.7 34.7 27.4 22.3 10.1 8.9 7.8 19.8 22.0 23.2 0.6 0.8 1.0 12.1

Kalpataru Power Transmission BUY 371 530 42.8 57 0.8 153 19 24 34 36.5 24.3 39.8 19.1 15.4 11.0 8.2 6.8 5.4 2.1 1.9 1.7 11.7 13.1 16.1 0.7 0.7 0.7 0.6

KEC International BUY 349 430 23.4 90 1.3 257 18 22 29 51.1 22.0 34.4 19.5 16.0 11.9 10.4 8.7 6.9 4.5 3.6 2.9 25.7 25.2 27.1 0.7 0.8 1.1 3.0

L&T BUY 1,321 1,600 21.1 1,851 26.9 1,401 52 63 70 22.4 21.7 10.9 25.5 21.0 18.9 21.0 16.6 15.9 3.7 3.3 3.0 15.0 16.8 16.8 1.2 1.7 1.9 42.5

Siemens SELL 961 975 1.4 342 5.0 356 24 30 37 22.5 23.0 23.2 39.7 32.3 26.2 22.4 17.9 14.3 4.2 3.9 3.7 10.9 12.6 14.5 1.0 1.3 1.6 3.6

Thermax REDUCE 1,113 1,065 (4.3) 133 1.9 113 21 30 42 (3.6) 44.2 42.8 54.0 37.4 26.2 32.9 23.3 16.6 4.6 4.3 3.8 8.8 11.8 15.3 0.5 0.7 0.8 0.7

Voltas SELL 571 525 (8.0) 189 2.7 331 17 19 22 12.6 8.3 15.6 33.0 30.5 26.4 27.4 23.3 19.4 4.8 4.3 3.9 15.9 15.0 15.5 0.7 0.8 0.9 14.0

Industrials Neutral 3,990 58 19.8 22.7 20.7 31.0 25.3 21.0 20.3 16.5 14.4 3.4 3.1 2.9 10.8 12.4 13.8 1.1 1.5 1.8 101.0

Infrastructure

Adani Ports and SEZ BUY 398 470 18.2 823 12.0 2,071 20 20 23 6.1 (0.2) 14.7 19.8 19.9 17.3 14.0 13.5 11.9 3.9 3.3 2.9 21.5 18.1 17.9 0.5 0.6 0.8 24.9

Ashoka Buildcon BUY 149 210 40.8 42 0.6 282 8 8 9 34.6 0.5 5.2 17.7 17.6 16.8 14.3 12.1 10.7 2.2 1.9 1.7 13.0 11.4 10.7 0.7 1.1 0.8 0.8

Container Corp. SELL 647 635 (1.8) 315 4.6 487 18 21 26 7.3 20.0 21.4 36.6 30.5 25.1 24.2 18.8 14.9 3.4 3.1 2.9 9.4 10.6 11.9 2.6 1.4 1.7 8.6

Dilip Buildcon BUY 693 1,220 76.0 95 1.4 137 46 54 69 76.5 16.1 28.0 14.9 12.9 10.0 8.6 6.2 5.1 3.9 2.9 2.3 29.5 25.9 25.4 — — — 8.2

Gateway Distriparks BUY 168 250 48.8 18 0.3 109 8 8 9 12.1 (1.2) 17.5 22.0 22.2 18.9 20.9 10.5 8.8 1.8 3.5 3.2 8.2 10.8 17.6 4.2 — 1.8 0.8

Gujarat Pipavav Port BUY 119 170 42.4 58 0.8 483 4.1 5.9 7.2 (20.6) 43.7 22.5 29.1 20.2 16.5 14.3 11.8 9.3 2.9 2.8 2.7 9.8 14.0 16.8 2.8 4.1 4.9 0.8

IRB Infrastructure BUY 194 320 64.9 68 1.0 351 23 31 33 10.8 36.8 7.1 8.6 6.3 5.9 6.9 6.6 7.0 1.2 1.0 0.9 14.5 17.6 16.3 1.2 1.6 2.1 8.2

Mahindra Logistics BUY 603 540 (10.4) 43 0.6 71 10 14 18 16.2 42.8 31.2 61.5 43.0 32.8 35.5 23.8 18.1 10.2 8.5 7.0 18.2 21.6 23.5 — — — 0.8

Sadbhav Engineering BUY 271 440 62.5 46 0.7 172 13 18 18 17.4 38.4 2.2 21.0 15.2 14.9 14.7 11.7 9.1 2.5 2.2 1.9 12.5 15.2 13.7 — — — 0.8

Infrastructure Attractive 1,509 22 10.9 10.5 15.5 20.8 18.8 16.3 13.2 11.7 10.3 3.3 2.9 2.5 15.8 15.4 15.5 1.1 0.9 1.1 54.0

Internet

Info Edge ADD 1,474 1,425 (3.3) 180 2.6 122 23 26 33 33.3 14.9 27.5 65.5 57.0 44.7 55.2 43.2 32.7 8.5 6.7 6.1 13.4 13.2 14.3 0.4 0.6 0.6 1.9

Just Dial ADD 557 610 9.5 38 0.5 67 21 26 30 21.7 23.0 15.0 26.2 21.3 18.5 15.5 11.9 9.6 3.8 3.3 2.9 15.2 16.7 16.6 — 0.5 0.5 50.5

Internet Cautious 217 3 28.0 17.6 23.0 52.1 44.3 36.0 41.0 32.4 25.5 7.0 5.7 5.1 13.5 12.9 14.2 0.3 0.5 0.6 52.5

Media

DB Corp. REDUCE 268 270 0.7 49 0.7 184 18 20 23 (14.1) 14.9 12.3 15.2 13.2 11.8 8.1 7.3 6.4 3.0 2.7 2.6 19.9 20.7 22.3 4.9 6.3 7.9 0.6

DishTV ADD 70 90 28.8 129 1.9 1,925 (0.4) 1.8 3.4 (143.0) 514.6 88.2 NM 38.2 20.3 11.5 6.0 4.8 2.0 1.9 1.7 (2.3) 5.1 8.9 — — — 7.7

Jagran Prakashan REDUCE 135 168 24.5 42 0.6 311 10 12 14 (6.0) 21.7 15.3 13.5 11.1 9.6 6.1 5.5 4.8 2.0 2.1 2.0 14.8 18.1 20.9 2.2 3.7 6.7 0.4

PVR REDUCE 1,139 1,425 25.2 53 0.8 47 27 38 50 25.5 39.8 33.2 42.4 30.3 22.8 14.5 12.0 9.9 4.9 4.3 3.7 12.3 15.2 17.5 0.2 0.3 0.4 9.2

Sun TV Network REDUCE 765 925 20.8 302 4.4 394 29 35 39 10.2 20.7 10.9 26.6 22.0 19.9 17.8 14.9 13.0 6.5 5.9 5.3 26.3 28.1 27.9 1.3 2.3 2.6 21.7

Zee Entertainment Enterprises ADD 521 600 15.2 500 7.3 960 15 17 20 7.8 11.3 17.0 34.7 31.2 26.6 22.5 19.4 16.4 6.6 5.9 5.1 20.3 19.9 20.6 0.5 0.9 1.1 16.1

Media Attractive 1,075 16 (1.5) 29.6 21.1 33.0 25.5 21.1 15.9 12.2 10.4 4.5 4.2 3.8 13.7 16.4 17.9 0.9 1.5 1.8 55.8

Dividend yield (%)P/B (X) RoE (%)Mkt cap. EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X)


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Metals & Mining

Coal India ADD 265 326 23.2 1,643 23.9 6,207 11 27 28 (24.2) 138.2 3.0 23.4 9.8 9.5 17.3 6.2 5.9 6.8 6.2 6.4 26.7 66.1 66.4 6.2 7.6 9.4 13.7

Hindalco Industries BUY 209 315 50.8 469 6.8 2,229 22 27 31 155.4 23.9 13.6 9.6 7.7 6.8 6.2 5.2 4.5 0.8 0.8 0.7 9.7 10.5 10.7 0.6 0.6 0.6 35.0

Hindustan Zinc ADD 282 290 2.9 1,191 17.3 4,225 22 22 26 9.3 3.7 14.7 13.1 12.6 11.0 8.0 7.3 6.0 3.3 2.9 2.5 27.2 24.4 24.2 2.8 2.8 2.8 8.5

Jindal Steel and Power REDUCE 200 255 27.3 194 2.8 968 (8) 8 18 59.3 194.2 129.1 (23.6) 25.0 10.9 9.5 6.8 5.8 0.6 0.6 0.6 (2.7) 2.6 5.7 — — — 29.2

JSW Steel ADD 317 350 10.4 767 11.1 2,417 27 30 27 83.9 10.2 (8.7) 11.8 10.7 11.8 7.8 6.8 7.5 2.7 2.2 1.9 24.8 22.4 17.3 1.0 1.0 1.0 19.4

National Aluminium Co. ADD 63 85 34.6 122 1.8 1,933 4 7 7 12.7 63.0 11.1 15.3 9.4 8.4 6.3 4.2 3.8 1.2 1.2 1.1 7.7 12.4 13.6 9.0 8.7 8.7 10.0

NMDC REDUCE 102 125 22.5 323 4.7 3,164 12 10 10 43.3 (16.5) 3.6 8.7 10.4 10.1 4.7 6.3 6.1 1.3 1.3 1.2 15.8 12.5 12.4 5.4 5.4 5.4 3.5

Tata Steel ADD 535 700 31.0 610 8.9 1,205 67 69 82 62.6 3.1 18.4 7.9 8 6.5 6.1 6.0 6.1 1.1 0.9 0.9 17.2 13.1 13.9 1.8 1.9 1.9 69.8

Vedanta BUY 219 415 89.5 814 11.8 3,717 22 37 43 9.6 71.9 16.9 10.1 5.9 5.0 5.6 4.1 3.4 1.3 1.2 1.0 12.9 20.6 21.4 3.7 5.1 5.9 53.7

Metals & Mining Attractive 6,132 89 32.3 41.1 10.9 13.0 9.2 8.3 7.3 5.8 5.3 1.9 1.7 1.5 14.3 18.0 18.3 3.5 4.1 4.7 242.8

Pharmaceutical

Apollo Hospitals ADD 942 1,090 15.8 131 1.9 139 8 19 26 (46.9) 124.3 38.0 111.6 49.7 36.0 20.5 17.5 14.7 4.0 3.8 3.5 3.4 7.9 10.2 0.2 0.5 0.7 7.3

Aurobindo Pharma ADD 586 640 9.2 343 5.0 584 42 45 51 6.0 7.0 13.5 14.0 13.1 11.5 9.8 9.2 7.9 2.9 2.4 2.1 23.2 20.3 17.9 0.7 0.9 1.1 20.6

Biocon SELL 553 300 (45.8) 332 4.8 601 6 8 15 (39.2) 27.5 84.6 89.3 70.0 37.9 40.1 29.5 19.4 5.9 5.5 5.0 6.9 8.1 13.8 0.2 0.5 0.9 22.6

Cipla BUY 624 650 4.2 502 7.3 805 18 24 32 40.2 36.3 35.1 35.6 26.1 19.3 18.5 14.4 11.3 3.4 3.1 2.8 10.2 12.5 15.2 0.6 0.8 1.1 23.4

Dr Lal Pathlabs REDUCE 940 865 (8.0) 78 1.1 83 20 25 29 7.0 20.8 18.5 45.9 38.0 32.1 27.9 23.4 19.6 9.9 8.3 6.9 23.5 23.7 23.4 0.5 0.5 0.6 1.5

Dr Reddy's Laboratories REDUCE 2,089 2,150 2.9 347 5.0 166 59 100 134 (18.5) 69.8 33.2 35.4 20.8 15.6 16.4 10.3 7.7 2.7 2.5 2.2 7.8 12.5 13.9 1.2 0.7 1.0 34.2

HCG REDUCE 279 305 9.3 25 0.4 85 2 3 5 (40.0) 120.9 57.3 178.4 80.8 51.3 23.5 18.3 15.6 4.6 4.4 4.0 2.8 5.5 8.1 — — — 0.2

Laurus Labs ADD 451 540 19.9 48 0.7 106 16 22 34 (11.9) 37.3 54.4 28.4 20.7 13.4 13.9 11.4 8.3 3.2 2.8 2.3 11.9 14.4 18.8 — — — 0.5

Lupin REDUCE 800 800 - 362 5.3 450 38 36 48 (32.9) (5.1) 33.7 21.0 22.1 16.5 13.0 11.2 8.8 2.6 2.4 2.1 12.6 11.4 13.7 1.1 0.7 0.9 34.2

Narayana Hrudayalaya ADD 246 275 11.8 50 0.7 204 3 4 7 (38.1) 52.2 76.9 97.8 64.2 36.3 27.0 20.4 14.9 4.9 4.5 4.0 5.1 7.3 11.7 — — — 0.4

Sun Pharmaceuticals REDUCE 558 500 (10.4) 1,339 19.5 2,406 15 17 24 (47.5) 12.0 42.0 36.8 32.8 23.1 21.7 17.8 13.1 3.5 3.2 2.9 9.8 10.2 13.1 0.4 0.6 0.9 52.8

Torrent Pharmaceuticals NR 1,480 — — 250 3.6 169 40 46 62 (27.4) 16.0 33.3 36.9 31.8 23.9 20.6 14.7 12.2 5.4 4.8 4.1 15.1 15.0 17.4 1.1 0.7 1.0 5.2

Pharmaceuticals Neutral 3,807 55 (27.6) 18.8 34.7 32.4 27.2 20.2 18.0 14.4 11.2 3.5 3.2 2.8 10.9 11.7 13.9 0.6 0.6 0.9 202.9

Real Estate

Brigade Enterprises BUY 187 340 81.7 25 0.4 136 11 9 9 (17.7) (15.1) (1.6) 16.9 19.9 20.2 10.7 10.9 10.7 1.1 1.1 1.0 7.6 5.5 5.2 1.3 1.3 1.3 0.4

DLF RS 184 — — 327 4.8 1,784 19.6 6.5 3.9 403.9 (66.9) (39.6) 9.4 28.3 46.8 28.1 12.2 12.1 0.9 0.9 0.9 11.7 3.2 1.9 1.1 1.1 1.1 16.9

Godrej Properties SELL 677 400 (40.9) 155 2.3 216 11.6 16.8 19.2 21.9 43.9 14.9 58.1 40.4 35.1 146.3 104.0 74.0 6.5 5.6 4.8 11.8 14.9 14.7 — — — 2.8

Oberoi Realty BUY 463 560 20.8 168 2.5 340 13 62 44 14.0 385.4 (28.1) 36.4 7.5 10.4 27.3 10.4 13.0 2.6 1.7 1.5 7.3 27.4 15.2 0.4 0.4 0.4 3.1

Prestige Estates Projects ADD 267 315 17.8 100 1.5 375 13 10 10 24.3 (24.2) 8.4 21.3 28.1 25.9 14.8 15.3 15.4 2.1 2.0 1.9 10.3 7.3 7.5 0.6 0.6 0.6 1.1

Sobha REDUCE 459 510 11.2 43 0.6 95 22 20 23 30.9 (7.5) 14.8 21.0 22.7 19.8 12.8 13.0 12.2 1.6 1.5 1.4 7.6 6.8 7.4 1.5 1.5 1.5 1.6

Sunteck Realty REDUCE 402 330 (17.9) 59 0.9 140 15 18 20 4.8 20.2 6.9 26.3 21.9 20.5 16.9 18.5 17.2 2.1 2.0 1.8 9.7 9.4 9.2 0.3 0.2 0.2 1.7

Real Estate Neutral 879 13 140.1 (12.6) (20.2) 16.8 19.3 24.1 23.6 14.4 14.7 1.6 1.4 1.4 9.3 7.5 5.7 0.7 0.7 0.7 27.4

Dividend yield (%)Mkt cap. EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%)


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Technology

HCL Technologies REDUCE 964 1,010 4.7 1,343 19.5 1,409 62 68 71 5.3 9.0 5.0 15.5 14.2 13.5 10.9 9.2 8.4 3.7 3.1 2.8 24.8 23.8 21.9 0.8 3.0 3.2 34.4

Hexaware Technologies SELL 456 435 (4.7) 135 2.0 302 17 20 23 20.2 18.4 18.0 27.6 23.3 19.7 19.8 17.4 13.8 6.9 6.0 5.1 26.6 27.4 27.8 0.9 1.8 1.8 14.6

Infosys ADD 1,384 1,400 1.2 3,022 44.0 2,175 65 71 78 3.0 9.7 10.4 21.4 19.5 17.7 14.9 13.4 12.0 4.6 4.4 4.0 21.8 23.0 23.5 2.0 3.1 2.8 78.6

L&T Infotech ADD 1,805 2,000 10.8 312 4.5 175 64 83 94 13.9 30.5 13.0 28.4 21.8 19.3 25.0 16.7 14.0 8.2 6.6 5.4 31.8 33.5 30.7 0.9 1.3 1.4 4.6

Mindtree ADD 957 1,115 16.5 157 2.3 165 35 43 53 37.8 24.9 23.6 27.7 22.2 18.0 20.1 13.9 11.1 5.8 4.9 4.2 21.4 23.9 25.2 1.1 1.4 1.7 29.6

Mphasis SELL 1,175 760 (35.3) 227 3.3 193 44 52 56 14.4 18.3 8.2 26.8 22.6 20.9 19.5 15.8 14.1 4.1 3.8 3.4 14.6 17.4 17.1 1.7 1.7 1.7 11.4

TCS REDUCE 1,979 1,790 (9.6) 7,578 110.2 3,829 67 82 89 1.1 21.2 8.8 29.3 24.2 22.2 21.9 17.7 16.3 8.7 7.6 7.5 29.4 33.4 33.8 1.3 2.1 3.6 109.8

Tech Mahindra ADD 631 775 22.8 557 8.1 891 43 45 53 33.1 6.6 15.8 14.8 13.9 12.0 10.8 8.3 6.8 3.0 2.6 2.2 21.5 19.9 19.7 2.3 1.5 1.6 35.1

Wipro REDUCE 275 295 7.4 1,243 18.1 4,507 17 19 22 (3.1) 11.8 14.6 16.2 14.5 12.7 10.3 9.1 7.9 2.6 2.2 2.1 16.0 16.4 16.8 0.4 0.5 3.6 13.5

Technology Cautious 14,575 212 1.6 12.7 9.7 22.8 20.2 18.4 16.5 13.9 12.5 5.4 4.8 4.4 23.7 23.7 24.1 1.3 2.2 3.2 331.6

Telecom

Bharti Airtel ADD 352 470 33.6 1,406 20.5 3,997 5 (4) 0 (42.9) (187.4) 104.6 74.3 (85.0) 1,862.2 7.9 9.1 7.3 2.0 2.1 2.1 2.8 (2.4) 0.1 1.5 0.3 0.0 33.5

Bharti Infratel REDUCE 287 285 (0.7) 531 7.7 1,850 14 13 11 (7.4) (8.7) (9.0) 20.9 22.8 25.1 7.6 8.2 8.7 3.1 3.3 3.3 15.7 14.0 13.1 5.0 3.5 3.2 13.6

IDEA REDUCE 55 75 36.5 240 3.5 4,359 (10) (15) (14) (656.8) (54.9) 6.4 (5.7) (3.7) (4.0) 12.3 22.6 16.8 0.9 1.2 1.6 (16.0) (26.9) (34.0) — — — 16.7

Tata Communications ADD 578 725 25.5 165 2.4 285 2 4 8 (84.3) 121.9 117.7 351 158.1 72.6 10.6 9.5 8.3 33.0 26.6 19.2 4.5 18.6 30.7 1.1 1.1 1.3 4.7

Telecom Cautious 2,341 34 (94.7) (1,906.6) 36.2 744.4 (41.2) (64.5) 8.6 10.2 8.5 2.0 2.2 2.4 0.3 (5.5) (3.7) 2.1 1.0 0.7 68.5

Utilities

CESC ADD 915 1,180 29.0 121 1.8 133 87 102 118 67.1 16.8 15.5 10.5 9.0 7.8 7.6 5.6 4.9 0.8 0.8 0.7 7.9 8.8 9.4 1.3 1.1 1.1 5.9

JSW Energy REDUCE 64 80 24.7 105 1.5 1,640 3.1 5.9 8.2 (19.2) 92.2 38.7 20.9 10.9 7.8 6.7 5.3 4.3 0.9 0.9 0.8 4.7 8.5 11.0 3.1 3.1 3.1 1.7

NHPC ADD 24 30 22.7 251 3.6 10,260 2.4 3.1 3.2 (17.3) 26.9 1.8 10.0 7.9 7.8 9.2 7.3 7.1 0.8 0.8 0.8 8.5 10.4 10.2 5.7 7.1 7.2 2.1

NTPC BUY 151 190 25.8 1,245 18.1 8,245 11 15 16 (7.6) 30.9 4.4 13.3 10.1 9.7 10.9 8.5 7.8 1.2 1.1 1.1 9.5 11.6 11.3 3.7 3.0 3.1 13.3

Power Grid BUY 176 250 42.3 919 13.4 5,232 16 19 21 9.6 19.3 13.6 11.2 9.3 8.2 8.2 7.0 6.4 1.7 1.5 1.4 15.8 17.1 17.5 3.0 3.6 4.1 30.0

Reliance Power SELL 32 43 35.4 89 1.3 2,805 3.5 5.1 5.2 (16.4) 45.6 2.7 9.1 6.3 6.1 7.8 6.7 6.5 0.4 0.4 0.4 4.5 6.1 5.9 — — — 4.1

Tata Power BUY 68 90 32.7 183 2.7 2,705 5.3 5.8 6.8 (9.6) 7.7 17.5 12.7 11.8 10.0 10.1 10.5 10.1 1.2 1.1 1.0 10.7 9.7 10.3 — — — 5.3

Utilities Attractive 2,914 42 (2.4) 26.3 9.2 12.0 9.5 8.7 9.2 7.6 7.0 1.2 1.1 1.0 9.7 11.3 11.5 3.2 3.2 3.4 62.5

P/B (X) RoE (%) Dividend yield (%)Mkt cap. EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X)


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Others

Astral Poly Technik SELL 1,095 625 (42.9) 131 1.9 120 15 19 23 20.8 28.0 23.0 74.7 58.3 47.4 41.9 32.5 26.5 12.9 10.7 8.8 18.8 20.0 20.3 0.1 0.1 0.1 1.0

Avenue Supermarts SELL 1,564 860 (45.0) 976 14.2 624 13 16 20 47.9 28.6 26.4 124.4 96.8 76.6 72.9 55.8 43.8 21.0 17.3 14.1 18.5 19.6 20.3 — — — —

Bayer Cropscience REDUCE 4,475 4,000 (10.6) 177 2.6 34 86 105 124 4.4 22.7 17.5 52.1 42.5 36.2 42.2 32.9 26.4 8.6 7.5 6.5 15.4 18.8 19.2 0.4 0.5 0.6 0.5

Dhanuka Agritech ADD 524 690 31.7 26 0.4 49 26 28 32 7.7 8.9 15.4 20.4 18.7 16.2 14.9 12.8 10.7 4.1 3.5 3.0 21.9 20.1 20.0 1.1 1.1 1.3 0.1

Godrej Agrovet ADD 647 650 0.4 124 1.8 189 12 16 20 6.9 39.8 24.6 56.2 40.2 32.3 28.9 22.3 18.0 7.3 6.3 5.3 14.7 16.9 17.9 0.3 0.4 0.5 1.6

Godrej Industries RS 609 — — 205 3.0 336 15 16 20 6.8 8.9 24.2 41.8 38.4 30.9 37.2 31.4 34.3 5.7 5.0 4.4 14.4 13.9 15.1 0.3 0.3 0.3 4.5

InterGlobe Aviation BUY 1,022 1,430 39.9 393 5.7 383 59 71 98 27.2 21.8 37.5 17.5 14.3 10.4 9.7 7.9 5.4 5.5 4.1 3.1 41.3 33.0 33.8 0.6 0.7 1.0 24.6

Kaveri Seed SELL 591 470 (20.5) 39 0.6 66 32 31 33 18.4 (3.7) 6.1 18.5 19.2 18.1 15.7 16.2 14.7 5.0 4.3 3.7 23.6 24.0 21.9 1.0 1.4 1.7 4.9

PI Industries BUY 761 900 18.3 105 1.5 138 27 33 41 (20.0) 25.0 23.2 28.6 22.9 18.6 21.1 16.6 13.2 5.5 4.5 3.8 20.7 21.7 22.1 0.4 0.5 0.6 1.5

Rallis India ADD 189 220 16.2 37 0.5 195 9 10 12 (1.5) 17.2 19.4 22.0 18.7 15.7 13.6 12.3 10.4 3.1 2.8 2.6 14.6 15.8 17.1 1.7 1.9 2.1 0.8

SIS REDUCE 1,141 1,250 9.5 84 1.2 73 23 36 43 44.0 58.5 20.6 50.6 31.9 26.5 27.1 20.6 17.0 8.1 6.8 5.6 20.2 23.4 23.3 0.3 0.5 0.6 0.8

SRF BUY 1,665 2,110 26.7 96 1.4 57 80 92 123 (10.4) 14.4 33.6 20.7 18.1 13.5 12.7 10.1 8.2 2.7 2.4 2.1 13.7 14.0 16.4 0.7 0.8 0.9 11.0

Tata Chemicals ADD 672 760 13.1 171 2.5 255 51 46 52 6.5 (11.2) 13.6 13.1 14.7 13.0 7.2 6.1 5.1 1.5 1.4 1.3 13.8 10.0 10.5 3.3 2.2 2.5 8.7

TeamLease Services SELL 2,672 1,785 (33.2) 46 0.7 17 43 58 75 28.0 34.2 29.0 62.0 46.2 35.8 64.5 46.8 35.6 10.3 8.5 6.8 18.2 20.1 21.1 — — — 1.9

UPL ADD 638 640 0.4 325 4.7 510 43 47 53 20.9 9.0 13.5 14.9 13.6 12.0 10.3 8.9 7.6 3.5 2.9 2.5 26.4 23.6 22.4 1.3 1.5 1.7 21.3

Vardhman Textiles ADD 1,195 1,400 17.2 69 1.0 56 103 130 140 (8.0) 26.4 7.4 11.6 9.2 8.5 9.8 7.3 6.5 1.4 1.2 1.1 12.7 14.3 13.8 1.3 1.7 2.5 1.0

Whirlpool SELL 1,666 1,240 (25.6) 211 3.1 127 28 37 45 13.0 33.9 22.5 60.3 45.0 36.7 35.8 27.6 22.3 11.8 9.8 8.1 21.4 23.7 24.1 0.2 0.4 0.5 1.1

Others 3,214 47 15.0 15.7 22.8 31.5 27.2 22.2 20.3 16.8 13.6 5.7 4.8 4.1 18.1 17.8 18.5 0.5 0.6 0.7 85.1

KIE universe 110,043 1,600 (6.3) 30.4 24.8 27.3 20.9 16.8 12.6 10.6 9.4 3.0 2.7 2.5 11.0 13.0 14.7 1.3 1.4 1.7

KIE universe (ex-energy) 96,579 1,404 (8.5) 38.9 29.3 32.2 23.2 17.9 14.1 11.7 10.3 3.3 3.0 2.7 10.4 13.0 15.2 1.1 1.3 1.7

Notes:

(a) We have used adjusted book values for banking companies.

(b) 2018 means calendar year 2017, similarly for 2019 and 2020 for these particular companies.

(c) Exchange rate (Rs/US$)= 68.76

Mkt cap. EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%)

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Disclosures

Ratings and other definitions/identifiers

Definitions of ratings

BUY. We expect this stock to deliver more than 15% returns over the next 12 months.

ADD. We expect this stock to deliver 5-15% returns over the next 12 months.

REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.

SELL. We expect this stock to deliver <-5% returns over the next 12 months.

Our target prices are also on a 12-month horizon basis.

Other definitions

Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following

designations: Attractive, Neutral, Cautious.

Other ratings/identifiers

NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s)

and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction

involving this company and in certain other circumstances.

CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.

NC = Not Covered. Kotak Securities does not cover this company.

RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient

fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock

and should not be relied upon.

NA = Not Available or Not Applicable. The information is not available for display or is not applicable.

NM = Not Meaningful. The information is not meaningful and is therefore excluded.

Kotak Institutional Equities Research coverage universe

Distribution of ratings/investment banking relationships

Source: Kotak Institutional Equities As of June 30, 2018

Percentage of companies covered by Kotak Institutional

Equities, within the specified category.

* The above categories are defined as follows: Buy = We

expect this stock to deliver more than 15% returns over

the next 12 months; Add = We expect this stock to

deliver 5-15% returns over the next 12 months; Reduce

= We expect this stock to deliver -5-+5% returns over

the next 12 months; Sell = We expect this stock to deliver

less than -5% returns over the next 12 months. Our

target prices are also on a 12-month horizon basis.

These ratings are used illustratively to comply with

applicable regulations. As of 31/03/2018 Kotak

Institutional Equities Investment Research had

investment ratings on 207 equity securities.

Percentage of companies within each category for

which Kotak Institutional Equities and or its affiliates has

provided investment banking services within the

previous 12 months.

21.4%

31.3%

25.4%21.9%

2.0%5.0% 4.5%

0.5%

0%

10%

20%

30%

40%

50%

60%

70%

BUY ADD REDUCE SELL

Corporate Office Overseas Affiliates

Kotak Securities Ltd.

27 BKC, Plot No. C-27, “G Block”

Bandra Kurla Complex, Bandra (E)

Mumbai 400 051, India

Tel: +91-22-43360000

Kotak Mahindra (UK) Ltd

8th Floor, Portsoken House

155-157 Minories

London EC3N 1LS

Tel: +44-20-7977-6900

Kotak Mahindra Inc

369 Lexington Avenue

28th Floor, New York

NY 10017, USA

Tel:+1 212 600 8856

Copyright 2018 Kotak Institutional Equities (Kotak Securities Limited). All rights reserved.

1. Note that the research analysts contributing to this report may not be registered/qualified as research analysts with FINRA; and

2. Such research analysts may not be associated persons of Kotak Mahindra Inc and therefore, may not be subject to NASD Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

3. Any U.S. recipients of the research who wish to effect transactions in any security covered by the report should do so with or through Kotak Mahindra Inc and (ii) any transactions in the securities covered by the research by U.S. recipients must be effected only through Kotak Mahindra Inc at [email protected].

This report is distributed in Singapore by Kotak Mahindra (UK) Limited (Singapore Branch) to institutional investors, accredited investors or expert investors only as defined under the Securities and Futures Act. Recipients of this analysis / report are to contact Kotak Mahindra (UK) Limited (Singapore Branch) (16 Raffles Quay, #35-02/03, Hong Leong Building, Singapore 048581) in respect of any matters arising from, or in connection with, this analysis / report. Kotak Mahindra (UK) Limited (Singapore Branch) is regulated by the Monetary Authority of Singapore. Kotak Securities Limited and its affiliates are a full-service, integrated investment banking, investment management, brokerage and financing group. We along with our affiliates are leading underwriter of securities and participants in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationships with a significant percentage of the companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. Investors should assume that Kotak Securities Limited and/or its affiliates are seeking or will seek investment banking or other business from the company or companies that are the subject of this material and that the research professionals who were involved in preparing this material may participate in the solicitation of such business. Our research professionals are paid in part based on the profitability of Kotak Securities Limited, which include earnings from investment banking and other business. Kotak Securities Limited generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. Additionally, Kotak Securities Limited generally prohibits its analysts and persons reporting to analysts from serving as an officer, director, or advisory board member of any companies that the analysts cover. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Institutional Equities Research Group of Kotak Securities Limited. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Private Client Group. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additionally, other important information regarding our relationships with the company or companies that are the subject of this material is provided herein. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. It is for the general information of clients of Kotak Securities Limited. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, clients should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Kotak Securities Limited does not provide tax advise to its clients, and all investors are strongly advised to consult with their tax advisers regarding any potential investment. Certain transactions -including those involving futures, options, and other derivatives as well as non-investment-grade securities - give rise to substantial risk and are not suitable for all investors. The material is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions expressed are our current opinions as of the date appearing on this material only. We endeavor to update on a reasonable basis the information discussed in this material, but regulatory, compliance, or other reasons may prevent us from doing so. We and our affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this material, may from time to time have "long" or "short" positions in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. Kotak Securities Limited and its non US affiliates may, to the extent permissible under applicable laws, have acted on or used this research to the extent that it relates to non US issuers, prior to or immediately following its publication. Foreign currency denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of or income derived from the investment. In addition, investors in securities such as ADRs, the value of which are influenced by foreign currencies affectively assume currency risk. In addition options involve risks and are not suitable for all investors. Please ensure that you have read and understood the current derivatives risk disclosure document before entering into any derivative transactions. Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house. Kotak Securities Limited is a corporate trading and clearing member of BSE Limited (BSE), National Stock Exchange of India Limited (NSE), MSEI a. Our businesses include stock broking, services rendered in connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management. Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Kotak Securities Limited is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old Mutual Life Insurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI). Kotak Securities Limited is registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014. We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in last five years. However SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise letters or levied minor penalty on KSL for certain operational deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has our certificate of registration been cancelled by SEBI at any point of time. We offer our research services to primarily institutional investors and their employees, directors, fund managers, advisors who are registered with us Details of Associates are available on our website i.e. www.kotak.com Research Analyst has served as an officer, director or employee of subject company(ies): No We or our associates may have received compensation from the subject company(ies) in the past 12 months. We or our associates have managed or co-managed public offering of securities for the subject company(ies) in the past 12 months. YES We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received compensation or other benefits from the subject company(ies) or third party in connection with the research report. Our associates may have financial interest in the subject company(ies). Research Analyst or his/her relative's financial interest in the subject company(ies): No Kotak Securities Limited has financial interest in the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: YES Our associates may have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report. Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No Kotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No Subject company(ies) may have been client during twelve months preceding the date of distribution of the research report. A graph of daily closing prices of securities is available at www.nseindia.com and http://economictimes.indiatimes.com/markets/stocks/stock-quotes. (Choose a company from the list on the browser and select the"three years" icon in the price chart). Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. CIN: U99999MH1994PLC134051, Telephone No.: +22 43360000, Fax No.: +22 67132430. Website: www.kotak.com / www.kotaksecurities.com. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Telephone No: 42856825. SEBI Registration No: NSE INB/INF/INE 230808130, BSE INB 010808153/INF 011133230, MSE INE 260808130/INB 260808135/INF 260808135, AMFI ARN 0164, PMS INP000000258 and Research Analyst INH000000586. NSDL/CDSL: IN-DP-NSDL-23-97. Compliance Officer Details: Mr. Manoj Agarwal. Call: 022 - 4285 8484, or Email: [email protected]. Investments in securities market are subject to market risks, read all the related documents carefully before investing. In case you require any clarification or have any concern, kindly write to us at below email ids: Level 1: For Trading related queries, contact our customer service at ‘[email protected]’ and for demat account related queries contact us at [email protected] or call us on:

Toll free numbers 18002099191 / 1800222299 and 18002099292 Level 2: If you do not receive a satisfactory response at Level 1 within 3 working days, you may write to us at [email protected] or call us on 022-42858445 and if you feel you are

still unheard, write to our customer service HOD at [email protected] or call us on 022-42858208. Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Name: Mr. Manoj Agarwal) at

[email protected] or call on 91- (022) 4285 8484.

Level 4: If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach CEO (Mr. Kamlesh Rao) at [email protected] or call on 91-(022) 4285 8301.

First Cut notes published on this site are for information purposes only. They represent early notations and responses by analysts to recent events. Data in the notes may not have been verified by us and investors should not act upon any data or views in these notes. Most First Cut notes, but not necessarily all, will be followed by final research reports on the subject. There could be variance between the First cut note and the final research note on any subject, in which case the contents of the final research note would prevail. We accept no liability for the contents of the First Cut Notes.

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India Daily, July 26, 2018 - Kotak Securities