India Daily, October 24, 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

Asian Paints: Short-term earnings prognosis sketchy

Bajaj Finserv / Bajaj Finance: Performance remains robust, upgrade a notch

HDFC Standard Life Insurance: Broadly on track

Adani Ports and SEZ: Outperformance continues

ICICI Prudential Life: Flat quarter

Ambuja Cements: Earnings disappoint

TVS Motor: Good quarter but festive season off to a weak start

Oberoi Realty: Sales momentum maintained

Results, Change in Reco

HCL Technologies: Upgrade on attractive valuations

RBL Bank: Turning positive

Bayer Cropscience: Yet another disappointing year

INDIA DAILY October 24, 2018 India 23-Oct 1-day 1-mo 3-mo

Sensex 33,847 (0.8) (6.8) (8.1)

Nifty 10,147 (1.0) (7.5) (8.9)

Global/Regional indices

Dow Jones 25,191 (0.5) (5.2) (0.2)

Nasdaq Composite 7,438 (0.4) (7.0) (5.1)

FTSE 6,955 (1.2) (6.7) (9.8)

Nikkei 22,049 0.2 (7.6) (2.0)

Hang Seng 25,401 0.2 (7.6) (11.4)

KOSPI 2,097 (0.4) (10.3) (8.0)

Value traded – India

Cash (NSE+BSE) 349 419 389

Derivatives (NSE) 9,823 13,338 6,858

Deri. open interest 3,847 3,945 3,963

Forex/money market

Change, basis points

23-Oct 1-day 1-mo 3-mo

Rs/US$ 73.2 3 28 444

10yr govt bond, % 8.1 1 (18) (2)

Net investment (US$ mn)

22-Oct MTD CYTD

FIIs (60) (2,607

) (4,613)

MFs 111 1,874 15,714

Top movers

Change, %

Best performers 23-Oct 1-day 1-mo 3-mo

ARBP IN Equity 739 (2.7) 1.0 24.3

DRRD IN Equity 2,474 (1.8) (3.1) 19.1

ICICIBC IN Equity 323 (1.3) 4.6 17.7

DIVI IN Equity 1,250 (3.3) (8.2) 15.3

NMDC IN Equity 111 1.1 (1.6) 13.6

Worst performers

JPA IN Equity 6 (3.1) (20.5) (60.4)

UT IN Equity 2 (6.8) (26.8) (52.3)

YES IN Equity 213 0.8 (5.8) (44.5)

RCAPT IN Equity 237 (0.3) (25.4) (37.4)

IDEA IN Equity 35 0.7 (16.0) (37.2)

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

2QFY19—lackluster quarter

Consolidated financials—revenues grew 9% yoy to `46.4 bn, 6% below our estimate

(2-year CAGR: 11.8%). Gross margins declined 148 bps yoy and 343 bps qoq to 39.8%.

EBITDA was down 2% yoy to `7.84 bn, 23% below our estimate and nearly 14-15% below

consensus (2-year CAGR: 5.4%). EBITDA margins declined 188 bps yoy and 302 bps qoq to

a 14-quarter-low 16.9%. Recurring PAT declined 3% yoy to `4.93 bn, 23% below our

estimate (2-year CAGR: 2.3%). TTM EPS stood at `21.8/share, up 13.2% yoy (2-year CAGR:

3.6%, multi-year low). This was the sixth consecutive quarter of single-digit 2-year CAGR in

TTM EPS.

Standalone financials—revenues grew 9% yoy (KIE 16%; 2-year CAGR: 12.3%). Revenue

growth was below volume growth (low double digit) despite 3.4% price increase; net

realization declined 2.2% yoy. The management attributed the big gap between pricing and

realization to (1) higher sales of distempers (inferior product mix), and (2) higher trade

discount ahead of GST rate cut implementation (July 27) to dispose stocks with higher MRP

and avoid logistical issues. Gross margins declined 143 bps yoy and 382 bps qoq to 40.8%.

EBITDA was up 1% yoy to `7.27 bn, 21% below our estimate (2-year CAGR: 7.3%). EBITDA

margins declined 141 bps yoy and 368 bps qoq to 18.6%. Recurring PAT was up 2% yoy to

`4.82 bn, 20% below our estimate (2-year CAGR: 5.2%).

Aggregate subsidiary performance (consolidated less standalone)—aggregate subsidiary

performance was weak again with double-digit EBITDA decline for the 4th consecutive

quarter. Aggregate subs’ PAT was the lowest 2Q PAT since FY2012.

Weaker-than-expected revenue growth and continued RM pressure lead to earnings cut

We cut our FY2019-21E EPS estimates by 9-12% as we trim our volume growth/realization

assumptions and bake in higher RM costs. APNT’s price hike of 2.35% in October 2018 was

lower than needed to offset RM inflation; the management is cautious in view of anti-

profiteering implications. We revise our DCF-based fair value target price to `1,140 (from `1,200).

Even as valuations have corrected, we do not see enough margin of safety yet. We would wait

for a better entry price to play what remains a solid medium-term story. REDUCE stays.

Asian Paints (APNT) Consumer Products

Short-term earnings prognosis sketchy. APNT delivered a disappointing 2QFY19 and

the driver of disappointment was not RM pressure. RM pressure is likely to keep

earnings growth in check in the near term. Management’s commentary in the earnings

call was more guarded than we have seen in a while and did not suggest confidence in

a quick earnings growth inflection. Earnings forecasts see sharp cuts. One-year forward

fair-value target stands revised down to `1,140/share (from `1,200). REDUCE stays.

REDUCE

OCTOBER 24, 2018

RESULT

Coverage view: Cautious

Price (`): 1,138

Target price (`): 1,140

BSE-30: 33,847

Rohit Chordia

Jaykumar Doshi

Aniket Sethi

Asian Paints

Stock data Forecasts/Valuations 2019E 2020E 2021E

52-week range (Rs) (high,low) EPS (Rs) 24.0 29.8 35.1

Market Cap. (Rs bn) EPS growth (%) 16.7 24.3 17.8

Shareholding pattern (%) P/E (X) 47.5 38.2 32.5

Promoters 52.8 Sales (Rs bn) 191.9 227.6 262.3

FIIs 14.6 Net profits (Rs bn) 23.0 28.6 33.7

MFs 3.0 EBITDA (Rs bn) 36.1 45.2 53.2

Price performance (%) 1M 3M 12M EV/EBITDA (X) 29.9 23.8 20.0

Absolute (12.7) (20.6) (3.0) ROE (%) 25.7 28.2 29.3

Rel. to BSE-30 (5.0) (13.8) (6.9) Div. Yield (%) 0.9 1.2 1.5

Company data and valuation summary

1,491-1,082

1,092.0

Asian Paints Consumer Products

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

Surprisingly subdued volume-adjusted (i.e. per unit) RM inflation

Even as APNT’s RM basket has non-crude-linked components as well, there has been a pretty

strong correlation between crude inflation in INR terms and APNT’s reported per-unit RM

inflation (see Exhibit 2 on the next page). We compute per-unit RM inflation or volume-

adjusted RM inflation simply as the gap between reported standalone COGS increase and

indicated domestic decoratives volume growth. APNT’s COGS (standalone) grew 11% yoy in

2QFY19 in absolute terms while indicated volume growth was ‘low double digits’. Assuming

volume growth in the 10-12% range, per-unit RM was flat yoy or there was zero volume-

adjusted RM inflation. This is surprising given the 59% increase in crude price in INR terms.

The last time INR crude inflation was this high (35-46% between 4QFY11 and 3QFY12), the

company saw volume-adjusted RM inflation of 12-22%.

We appreciate that mix movement could be at play here. HUVR-style UVG, which depicts

mix-adjusted volume growth, would have been very helpful here. However, even if we were

to assume a 500 bps mix impact, i.e. a UVG of 6%, volume-adjusted RM inflation would

have still been a low 5% yoy. We are not sure (1) whether low inflation reflects smart RM

forward and covers, and (2) if RM inflation impact will show up with a lag; if it does, price

increases taken thus far may not be enough to prevent gross margins from going down

further. Earnings call did not provide any insight to help us on this aspect.

Conference call takeaways

Explanation on net realization decline or price-realization delta gap—A 9% revenue

growth in standalone financials despite a low-double-digit volume growth (KIE 11%) in

decorative business and 3.4% price increase implies net realization decline of 2-3% yoy.

The management attributed net realization decline to (1) deterioration in product mix.

Higher sales of distemper in 2QFY19 and higher-than-usual contribution of emulsions in

the base quarter adversely impacted realization, (2) higher trade discounts to liquidate

about 170,000 KL of stock four days ahead of GST rate cut implementation. The

management indicated that it helped the company avoid a logistical issue of changing

MRP stickers on the stock, (3) some impact of discontinuation of Pthalic Anhydride sales

on revenues (present in the base quarter but discontinued thereafter). We appreciate

management’s disclosures but are not sure if these factors explain 100% of the large

(550 bps+) gap between price and realization delta.

Commentary on demand—APNT management indicated that the demand environment

is consistent with what they have seen over the past 18 months and they have not seen

any signs of uptick. GST rate cuts, monsoons and imminent election season, expected to

prop up volume growth, do not seem to be doing so yet. From a geographic standpoint,

East is growing well and the company is seeing some signs of recovery in the South (weak

for the past few years).

Pricing, RM inflation and margins—APNT management has increased prices by 2.35%

in October 2018 (cumulative price increase of 5.6%; first in March, second in May and

third in October). The management indicated that October price increase was sufficient to

offset the impact of high RM prices and weak rupee as of August 2018 levels. RM price

inflation and depreciation of rupee since then calls for another price increase. It is

considering another price increase in current quarter. Titanium dioxide is about 20-22%

of RM costs and crude derivatives account for 30% of RM costs. APNT expects monomer

(derivative of crude) prices to increase in the current quarter (usually follows crude

inflation with lag). APNT management expects margins to be under pressure in the near

term in view of timing gap between price increase and RM inflation.

Commissioning of new capacities—first phase of Mysore plant has been commercially

commissioned in September 2018. The upcoming facility at Vizag will be commissioned in

4QFY19. New facilities would reduce logistics costs and manufacturing costs to some

extent.

Consumer Products Asian Paints

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Capex—standalone capex for the year would be `10 bn including `8 bn pertaining to

Mysore and Vizag expansions. Consolidated capex would be `12 bn (no change from

previous guidance).

International business performance—(1) Sri Lanka suffered from incessant rains,

(2) Ethiopia continued to face challenges pertaining to currency availability for imports,

(3) Egypt market was weak due to sluggish economy and reduction in fuel subsidies

added to inflationary environment, (4) Dubai business was impacted from hyper-

competition as volume leader in that market reduced prices to absorb 5% increase in VAT

despite RM inflation, (5) greenfield operations in Indonesia are progressing as per plans

with a focus on expansion of retail network.

Industrial business—both JVs APPPG and PPGAP reported good growth in the industrial

segment but price increases taken were not adequate to offset RM pressure. The

management alluded to difficulty and delays in passing on RM costs to large B2B

customers.

Exhibit 1: Key changes to estimates, Asian Paints, March fiscal year-ends, 2019-21E

Source: Kotak Institutional Equities estimates

Exhibit 2: Surprising large gap between crude inflation and reported volume-adjusted RM inflation

Source: Company, Bloomberg, Kotak Institutional Equities

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

Revenues (Rs mn) 191,870 227,570 262,279 198,332 234,363 270,222 (3.3) (2.9) (2.9)

EBITDA (Rs mn) 36,122 45,226 53,244 41,203 49,542 58,105 (12.3) (8.7) (8.4)

EBITDA margin (%) 18.8 19.9 20.3 20.8 21.1 21.5 -195 bps -127 bps -121 bps

Net income (Rs mn) 22,978 28,563 33,650 26,007 31,277 36,996 (11.6) (8.7) (9.0)

EPS (Rs/share) 24.0 29.8 35.1 27.1 32.6 38.6 (11.6) (8.7) (9.0)

Other assumptions

Gross margin (%) 41.2 42.0 42.3 42.9 43.1 43.4 -170 bps -111 bps -105 bps

Volume growth (%) 11.0 14.5 12.0 13.5 14.5 12.0 -250 bps 0 bps 0 bps

Revised Earlier Change (%)

(60)

(40)

(20)

0

20

40

60

80

(15)

(10)

(5)

0

5

10

15

20

25

2Q

FY1

1

4Q

FY1

1

2Q

FY1

2

4Q

FY1

2

2Q

FY1

3

4Q

FY1

3

2Q

FY1

4

4Q

FY1

4

2Q

FY1

5

4Q

FY1

5

2Q

FY1

6

4Q

FY1

6

2Q

FY1

7

4Q

FY1

7

2Q

FY1

8

4Q

FY1

8

2Q

FY1

9Volume adjusted RM inflation (%) Crude inflation (% yoy, INR) - RHS



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

Source: Company, Kotak Institutional Equities

Exhibit 4: Interim standalone results of Asian Paints, March fiscal year-ends (Rs mn)


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

Net operating revenue 46,391 49,476 42,652 43,903 (6) 9 6 90,293 80,805 12

Material cost (27,924) (28,445) (25,042) (24,923) (2) 12 12 (52,847) (46,855) 13

Gross profit 18,467 21,032 17,610 18,980 (12) 5 (3) 37,447 33,950 10

Gross margin (%) 39.8 42.5 41.3 43.2 -271 bps -148 bps -343 bps 41.5 42.0 -55 bps

Employee cost (3,073) (3,176) (2,822) (3,064) (3) 9 0 (6,136) (5,683) 8

Other expenditure (7,553) (7,667) (6,777) (7,171) (1) 11 5 (14,724) (13,602) 8

Total expenditure (38,549) (39,288) (34,641) (35,158) (2) 11 10 (73,707) (66,140) 11

EBITDA 7,842 10,188 8,011 8,744 (23) (2) (10) 16,586 14,665 13

EBITDA margin (%) 16.9 20.6 18.8 19.9 -369 bps -188 bps -302 bps 18.4 18.1 22 bps

Other income 633 592 534 617 7 19 3 1,250 1,317 (5)

Interest (121) (90) (88) (88) 35 38 38 (209) (167) 25

Depreciation (947) (930) (889) (905) 2 7 5 (1,852) (1,794) 3

Pretax profits 7,406 9,760 7,569 8,368 (24) (2) (11) 15,774 14,021 13

Tax (2,427) (3,266) (2,459) (2,770) (26) (1) (12) (5,196) (4,619) 12

Recurring PAT 4,979 6,494 5,110 5,599 (23) (3) (11) 10,578 9,402 13

Extraordinary items — — 675 — 700

Minority interest/share of associates (52) (70) (26) (18) (26) 103 183 (70) (69) 2

Net profit (reported) 4,928 6,424 5,759 5,580 (23) (14) (12) 10,508 10,033 5

Recurring PAT post MI 4,928 6,424 5,084 5,580 (23) (3) (12) 10,508 9,333 13

Recurring EPS 5.14 6.70 5.30 5.82 (23) (3) (12) 10.95 9.73 13

Income tax rate (%) 32.8 33.5 32.5 33.1 -70 bps 27 bps -34 bps 32.9 32.9

Costs as a % of net operating revenue

Material cost 60.2 57.5 58.7 56.8 270 bps 147 bps 342 bps 58.5 58.0 54 bps

Employee cost 6.6 6.4 6.6 7.0 20 bps 0 bps -36 bps 6.8 7.0 -24 bps

Other expenditure 16.3 15.5 15.9 16.3 78 bps 39 bps -6 bps 16.3 16.8 -53 bps

(% change)

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

Net operating revenue 39,142 41,930 36,022 37,062 (7) 9 6 76,204 68,051 12

Material cost (23,169) (23,690) (20,809) (20,525) (2) 11 13 (43,694) (38,822) 13

Gross profit 15,973 18,239 15,213 16,537 (12) 5 (3) 32,510 29,229 11

Gross margin (%) 40.8 43.5 42.2 44.6 -270 bps -143 bps -382 bps 42.7 43.0 -29 bps

Employee cost (2,155) (2,263) (2,020) (2,157) (5) 7 (0) (4,312) (4,080) 6

Other expenditure (6,545) (6,741) (5,992) (6,132) (3) 9 7 (12,677) (11,976) 6

Total expenditure (31,869) (32,694) (28,821) (28,814) (3) 11 11 (60,683) (54,879) 11

EBITDA 7,273 9,236 7,201 8,248 (21) 1 (12) 15,521 13,172 18

EBITDA margin (%) 18.6 22.0 20.0 22.3 -345 bps -141 bps -368 bps 20.4 19.4 101 bps

Other income 717 702 638 689 2 12 4 1,405 1,500 (6)

Interest (66) (50) (50) (48) 33 33 39 (114) (93) 23

Depreciation (828) (815) (772) (790) 2 7 5 (1,617) (1,529) 6

Pretax profits 7,096 9,073 7,018 8,100 (22) 1 (12) 15,195 13,050 16

Tax (2,281) (3,040) (2,284) (2,673) (25) (0) (15) (4,954) (4,306) 15

Recurring PAT 4,815 6,034 4,735 5,426 (20) 2 (11) 10,241 8,744 17

Extraordinary items — — — — — —

Net profit (reported) 4,815 6,034 4,735 5,426 (20) 2 (11) 10,241 8,744 17

Recurring EPS 5.02 6.29 4.94 5.66 (20) 2 (11) 10.68 9.12 17

Income tax rate (%) 32.1 33.5 32.5 33.0 -136 bps -40 bps -87 bps 32.6 33.0 -40 bps

Costs as a % of net operating revenues

Material cost 59.2 56.5 57.8 55.4 269 bps 142 bps 381 bps 57.3 57.0 28 bps

Employee cost 5.5 5.4 5.6 5.8 10 bps -11 bps -32 bps 5.7 6.0 -34 bps

Other expenditure 16.7 16.1 16.6 16.5 64 bps 8 bps 17 bps 16.6 17.6 -97 bps

(% change)



Exhibit 5: APNT delivered ‘low double-digit volume growth’; 11%, per our estimate


Exhibit 6: Gross margin fell sharply due to sharp net realization decline; RM inflation yet to hit


11 12

3 4

10

7

17

14

12

12

3

10

2

9

6

10

13

11

-

2

4

6

8

10

12

14

16

18

1Q

FY1

5

2Q

FY1

5

3Q

FY1

5

4Q

FY1

5

1Q

FY1

6

2Q

FY1

6

3Q

FY1

6

4Q

FY1

6

1Q

FY1

7

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FY1

7

3Q

FY1

7

4Q

FY1

7

1Q

FY1

8

2Q

FY1

8

3Q

FY1

8

4Q

FY1

8

1Q

FY1

9

2Q

FY1

9

42.6

43.7 43.8

45.1

42.8 42.8 43.4

45.3

47.1

44.4 43.8 43.7

42.8

41.3

42.2

43.2 43.2

39.8

38

40

42

44

46

48

50

1Q

FY1

5

2Q

FY1

5

3Q

FY1

5

4Q

FY1

5

1Q

FY1

6

2Q

FY1

6

3Q

FY1

6

4Q

FY1

6

1Q

FY1

7

2Q

FY1

7

3Q

FY1

7

4Q

FY1

7

1Q

FY1

8

2Q

FY1

8

3Q

FY1

8

4Q

FY1

8

1Q

FY1

9

2Q

FY1

9



Exhibit 7: TTM EPS growth trended down, 2-year CAGR of 3.6% at multi-year low TTM EPS growth trend


Exhibit 8: Recurring PAT was significantly below consensus estimates this quarter Quarterly earnings surprise trend vs consensus estimates


(10)

(5)

-

5

10

15

20

25

30

-

5

10

15

20

25

Dec-

13

Mar-

14

Jun-1

4

Sep

-14

Dec-

14

Mar-

15

Jun-1

5

Sep

-15

Dec-

15

Mar-

16

Jun-1

6

Sep

-16

Dec-

16

Mar-

17

Jun-1

7

Sep

-17

Dec-

17

Mar-

18

Jun-1

8

Sep

-18

Trailing 12 months EPS (Rs/share) (LHS) yoy growth (%) (RHS)

(9)(6)

8

(19)

(11)

25

(13)

(2)

12

(9)(18)

(12)

11

(9)

14

(6)

4 (8) (9)

(1)

(23)

0 (0)

(13)

6

(17)

(30)

(20)

(10)

-

10

20

30

1Q

FY1

3

2Q

FY1

3

3Q

FY1

3

4Q

FY1

3

1Q

FY1

4

2Q

FY1

4

3Q

FY1

4

4Q

FY1

4

1Q

FY1

5

2Q

FY1

5

3Q

FY1

5

4Q

FY1

5

1Q

FY1

6

2Q

FY1

6

3Q

FY1

6

4Q

FY1

6

1Q

FY1

7

2Q

FY1

7

3Q

FY1

7

4Q

FY1

7

1Q

FY1

8

2Q

FY1

8

3Q

FY1

8

4Q

FY1

8

1Q

FY1

9

2Q

FY1

9



Exhibit 9: Asian Paints: Consolidated profit model, balance sheet (as per Ind-AS from 2016), March fiscal year-ends, 2015-21E

Source: Company, Kotak Institutional Equities estimates

2015 2016 2017E 2018 2019E 2020E 2021E

Profit model (Rs mn)

Net sales 141,828 142,715 150,620 168,246 191,870 227,570 262,279

EBITDA 22,354 27,692 29,864 31,976 36,122 45,226 53,244

Other income 1,697 2,134 2,624 2,206 2,389 2,706 3,272

Interest (348) (407) (300) (351) (361) (309) (268)

Depreciation (2,659) (2,756) (3,348) (3,605) (3,847) (4,705) (5,348)

Pretax profits 21,044 26,663 28,841 30,227 34,303 42,918 50,901

Tax (6,495) (8,445) (9,433) (10,410) (11,320) (14,378) (17,306)

Minority interest (322) (242) (272) (128) (4) 23 56

Extraordinary items (276) (525) 259 700 — — —

Net income 13,952 17,452 19,394 20,389 22,978 28,563 33,650

Recurring net income 14,227 17,976 19,136 19,689 22,978 28,563 33,650

Recurring EPS (Rs) 14.8 18.7 19.9 20.5 24.0 29.8 35.1

Balance sheet (Rs mn)

Total shareholder's equity 47,424 65,248 76,039 84,102 94,875 107,656 121,924

Total borrowings 4,099 3,037 5,455 5,208 4,424 3,924 3,424

Deferred tax liability 1,799 2,950 3,430 3,975 3,975 3,975 3,975

Minority interest 2,637 3,837 3,755 3,277 3,281 3,258 3,203

Total liabilities and equity 55,959 75,072 88,679 96,562 106,556 118,814 132,527

Net fixed assets 26,102 33,240 33,678 48,101 54,512 57,212 57,726

Goodwill 2,458 1,990 1,935 3,273 3,273 3,273 3,273

Investments 15,878 27,121 26,520 21,407 21,407 21,407 21,407

Cash 2,044 4,242 8,012 4,047 4,028 10,336 20,377

Net current assets 9,477 8,480 18,534 19,735 23,336 26,587 29,743

Total assets 55,959 75,072 88,679 96,562 106,556 118,814 132,527

Free cash flow (Rs mn)

Operating cash flow, excl. working capital 16,379 20,452 21,301 21,931 26,315 32,507 37,707

Working capital (4,502) 1,978 (6,028) (797) (3,601) (3,251) (3,157)

Capital expenditure (4,377) (8,022) (6,672) (14,088) (10,258) (7,405) (5,861)

Free cash flow 7,500 14,408 8,601 7,047 12,456 21,851 28,688

Growth

Revenue growth 11.5 NM 5.5 11.7 14.0 18.6 15.3

EBITDA growth 11.9 23.9 7.8 7.1 13.0 25.2 17.7

EPS growth 15.8 26.4 6.5 2.9 16.7 24.3 17.8

Ratios (%)

Gross margin (%) 43.8 43.6 44.7 42.4 41.2 42.0 42.3

EBITDA margin (%) 15.8 19.4 19.8 19.0 18.8 19.9 20.3

Net profit margin (%) 10.0 12.6 12.7 11.7 12.0 12.6 12.8

RoE (%) 32.4 31.9 27.1 24.6 25.7 28.2 29.3

RoCE (%) 34.7 34.2 28.5 24.4 24.4 27.8 31.0

Key assumptions (%)

Volume growth (%) 7.0 12.0 9.5 6.8 11.0 14.5 12.0

Realisation growth (%) 3.8 (3.4) (1.8) (4.8) 1.0 5.0 4.0

Note:

(1) FY2016/17 P&L and forecasts based on IND-AS and hence not strictly comparable to pre-FY2016 financials which were based on IGAAP.

IGAAP Ind-AS


Bajaj Finance: Another quarter of strong performance

Bajaj Finance reported 54% growth in earnings as per Ind-AS. AUM growth was strong at 38%

yoy driven by momentum across various segments of consumer finance and business loans.

Calculated NIM was up 47 bps yoy to 11.1% (down 33 bps qoq owing to a rise in the cost of

funds). Efficient expense management curtailed expense growth to 25% yoy leading to 510 bps

improvement in the cost-income ratio to 36.5%. GNPL inched up 10 bps qoq to 1.5% in

2QFY19.

Bajaj Finserv and Bajaj Finance: Upgrade a notch

Post the sharp stock price correction (23-24% in the last three months) for both Bajaj Finance

and Bajaj Finserv, we upgrade both the stocks by a notch. We revise the rating of Bajaj Finserv

to ADD from REDUCE with TP of Rs5,650 (down from Rs6,100) and Bajaj Finance to REDUCE

from SELL with TP of Rs1,950 from Rs2,000. We value Bajaj Life at 1.4X EV, Bajaj General

Insurance and Bajaj Finance at 4.5X book FY2020E. We expect Bajaj Finance to deliver 37% EPS

CAGR and 22-24% medium-term RoE. We believe that Bajaj Finance, given its strong parentage

and robust performance will be well placed on the liquidity front though may moderate its

growth momentum a bit from its current high levels. Focus on profitable segments and

improving productivity will ensure superior earnings growth.

Bajaj Finance





Promoters 55.1 NII (Rs bn) 114.3 153.4 202.7


MFs 7.5 BVPS 333.7 411.2 511.6

Price performance (%) 1M 3M 12M P/B (X) 6.2 5.1 4.1

Absolute (7.8) (23.2) 14.1 ROE (%) 21.6 23.6 24.6

Rel. to BSE-30 0.3 (16.7) 9.6 Div. Yield (%) 0.3 0.4 0.5

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

2,994-1,511

1,204.0

Bajaj Finserv / Bajaj Finance (BJFIN)/(BAF) NBFCs

Performance remains robust, upgrade a notch. Bajaj Finance delivered another

quarter of robust performance with assertive medium-term business outlook. We

expect its growth momentum to moderate a bit but remain superior to peers. Bajaj

General continues to lead on profitability parameters with 97.5% combined ratio,

despite deteriorating yoy. Bajaj life business reported strong (24%) APE growth though

continues to have a tall task on the profitability front. We remain positive on the

superior performance of the Bajaj twins and take the recent stock correction as an

opportunity to upgrade by a notch: Bajaj Finserv (ADD from REDUCE; TP of Rs5,650

from Rs6,100) and Bajaj Finance (REDUCE from SELL; TP of Rs1,950 from Rs2,000).

ADD / REDUCE

OCTOBER 24, 2018

RESULT

Coverage view: Neutral

Price (`): 5,168/2,083

Target price (`): 5,650/1,950

BSE-30: 33,847

QUICK NUMBERS

PAT up 54% yoy

and AUM up 38%

yoy for Bajaj

Finance

Combined ratio

(adjusted for Kerala

floods) up 480 bps

yoy for Bajaj

General Insurance

to 93.6%

Gross written

premium up 3% yoy

for Bajaj Life

Insurance to `20.8

bn

Nischint Chawathe

M B Mahesh CFA

Dipanjan Ghosh

Shrey Singh

Bajaj Finserv







MFs 4.1 BVPS 1,533.8 1,822.5 2,179.1


Absolute (14.8) (24.3) (1.6) ROE (%) 17.4 18.0 18.7


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

7,200-4,444

822.4

NBFCs Bajaj Finserv


Exhibit 1: We value Bajaj Finserv at `5,650/ share Sum-of-the-parts based valuation of Bajaj Finserv, March fiscal year-ends, FY2020E

Note:

(1) Bajaj Finance forecasts for FY2020E are on Ind-AS.


Bajaj General: Combined ratio rises yoy but remains lower than peers

Bajaj General Insurance reported muted 6% growth in net earned premium in 2QFY19 due

to a lower quantum of crop insurance written in the quarter owing to unfavorable pricing in

the Kharif season. Adjusting for the impact of the same, net earned premium was up 20%

yoy. Gross written premium was up 23% yoy in 2QFY19 (adjusted for crop insurance) largely

from motor (52% of gross written premium in 2QFY19 adjusted for crop insurance) business

generated during the quarter.

Combined ratio saw a sharp rise in 2QFY19 to 97.2% largely owing to high claims (`629

mn) from the unfortunate occurrence of floods in Kerala. Adjusting for the impact of the

same, combined ratio was up 480 bps yoy to 93.6%; this ratio still remains superior to the

rest of the industry. Claims ratio (un-adjusted for impact of Kerala floods) increased to

68.2% in 2QFY19 from 67.9% in 1QFY19. The rise in claims led to a 37% yoy drop in

earnings.

We expect the business to deliver 19-20% net premium growth, about 96-97% combined

ratio and 22-25% RoE over the medium term.

Bajaj Life: Individual business picked pace

Bajaj Life Insurance reported 24% growth in individual APE in 2QFY19 while overall new

business premium was down 5% yoy. The company has been shifting focus to traditional

policies—share of par increased (35% of individual APE in 2QFY19 from 23% yoy) while

ULIP was down (61% of individual APE from 72% yoy). Ticket size saw an increase of 37%

yoy in 2QFY19 to `54,636. While growth has been muted, persistency has seen an uptrend

in the first three buckets. 13th and 37th month persistency ratios improved by ~500 bps and

400 bps on a yoy basis to 78% and 49% respectively in 1HFY19 while the improvement was

maximum in the 25th

month bucket (up 1,100 bps yoy to 64%)

Exhibit 2: Bajaj Finserv- consolidated earnings March fiscal year-ends, 2QFY18-2QFY19 (Rs mn)


Value Value per share

(Rs mn) (Rs) Comments

Bajaj Allianz Life Insurance 221,218 74 924 1.4X EV

Bajaj Allianz General 326,829 74 1,365 4.5X book

Bajaj Finance 1,065,011 56 3,360 4.5X book

5,649

Share

(%)

2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 YoY (%) QoQ (%)

Standalone 1,161 110 1,413 60 2,916 151.2 4,760

Bajaj Life 1,857 1,629 1,711 1,462 1,315 (29.2) (10.1)

Bajaj General Insurance 2,596 2,617 1,866 2,911 1,820 (29.9) (37.5)

Bajaj Finance 5,979 8,669 7,484 8,359 9,235 54.5 10.5

Consolidated PAT 6,523 8,192 6,854 8,258 7,040 7.9 (14.7)

Note:

(1) For 1QFY19 and 2QFY19, Bajaj Finserv (standalone) and Bajaj Finance figures are as per Ind AS.

Bajaj Finserv NBFCs


Exhibit 3: Bajaj General Insurance - quarterly summary March fiscal year-ends, 2QFY18-2QFY19 (Rs mn)


Exhibit 4: Bajaj Life Insurance - quarterly summary March fiscal year-ends, 2QFY18-2QFY19 (Rs mn)


Exhibit 5: Bajaj Finance- quarterly summary March fiscal year-ends, 2QFY18-2QFY19 (Rs mn)


2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 YoY(%) QoQ (%)

Gross written premium 28,570 18,924 27,641 24,294 27,184 (5) 12

Net earned premium 15,890 14,861 16,499 16,121 16,794 6 4

Interest and capital gains 2,470 2,690 2,440 3,070 2,860 16 (7)

PBT 3,850 3,820 2,740 4,350 2,740 (29) (37)

PAT 2,596 2,617 1,866 2,911 1,821 (30) (37)

Combined ratio (%) 89 92 93 90 97 840 bps 700 bps

Claims ratio 68 62 68 66 68 30 bps 250 bps

2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 YoY(%) QoQ (%)

Gross business premium 20,156 17,392 26,700 13,614 20,825 3 53

New business premium 12,559 9,333 13,744 7,076 11,980 (5) 69

Individual APE 2,800 3,648 4,742 2,829 3,459 24 22

Group APE 9,759 5,685 9,002 4,247 8,521 (13) 101

Renewal premium 7,445 7,956 12,760 6,409 8,693 17 36

AUMs (Rs bn) 511 524 520 532 539 6 1

Ind-AS Ind-AS Ind-AS

(% chg.)

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

Operational income 42,964 42,000 30,660 39,413 2 40 9 82,377 59,000 40 180,411 127,480 42 241,573

Interest expenses 15,673 14,500 11,414 13,636 8 37 15 29,310 22,143 32 66,072 46,216 43 91,546

Net operational income 27,290 27,500 19,246 25,777 (1) 42 6 53,067 36,857 44 114,339 81,264 41 150,027

Provisions/ write-offs 3,146 3,500 2,205 3,268 (10) 43 (4) 6,413 5,256 22 13,470 10,349 30 18,214

Net operational income (post provisions) 24,145 24,000 17,041 22,509 1 42 7 46,654 31,601 48 100,868 70,915 42 131,813

Operating expenses 9,799 11,600 7,812 9,536 (16) 25 3 19,335 15,245 27 42,158 32,719 29 56,885

Employee expenses 4,600 5,500 3,483 4,471 (16) 32 3 9,071 6,653 36 21,848 14,566 50 29,932

Other operating expenses 4,866 5,800 4,088 4,776 (16) 19 2 9,642 8,132 19 19,435 17,133 13 25,953

Depreciation 334 300 241 289 11 39 16 623 460 35 875 1,021 (14) 1,000

Profit before tax 14,345 12,400 9,229 12,973 16 55 11 27,319 16,355 67 59,232 38,434 54 78,876

Tax 5,110 4,464 3,250 4,615 14 57 11 9,725 5,767 69 21,324 13,471 58 28,395

Profit after tax 9,235 7,936 5,979 8,359 16 54 10 17,594 10,588 66 37,908 24,963 52 50,481

EPS (Rs) 17 15 11 16 16 54 10 33 20 66 66 43 52 88

Tax rate (%) 36 36 35 36 36 35 36 35 36

Other operational data

Consolidated AUM 1,002 1,003 727 933 (0.1) 38 7 1,002 727 38 1,122 840 34 1,500

Consumers B2B 201 150 191 34 5

Consumers B2C 187 130 173 44 8

SME 134 101 67 33 100

Commercial 118 85 121 38 (3)

Rural 74 43 120 71 (38)

Mortgage 289 218 260 32 11

CAR (%) 22.1 25.4 23.0 -332 bps -94 bps

Tier I (%) 17.2 19.9 17.9 -266 bps -72 bps

Gross NPL(%) 1.5 1.7 1.4 -19 bps 10 bps

Net NPLs (%) 0.5 0.5 0.4 2 bps 9 bps

NIM (KS - calc- %) 11.1 11.4 10.6 11.4 -27 bps 47 bps -33 bps 11.3 10.8 50 bps 11.5 11.0 45 bps 11.3

Cost to income (%) 36.5 42.2 41.6 37.7 -567 bps -505 bps -114 bps 37.1 42.4 -533 bps 37.5 41.2 -371 bps 38.4

RoAUM - annualised (%) 3.8 3.3 3.4 3.8 44 bps 5 bps 3.8 3.2 63 bps 3.9 3.5 40 bps 3.9

Ind-AS Ind-AS

NBFCs Bajaj Finserv


Exhibit 6: 1.8% coverage on the overall portfolio GNPL, NNPL and ECL coverage, March fiscal year-ends, 1QFY19-2QFY19 (Rs mn)


Strong loan growth and robust cost control led to sharp rise in earnings

Bajaj Finance reported 54% growth in earnings as per Ind-AS in 2QFY19. Robust NII growth

and strong cost control were the key drivers. NII growth was driven by strong AUM growth

at 38% yoy to `1tn and marginal improvement in NIM (calculated) to 11.1% in 2QFY19

from 10.65% in 2QFY18. NIM was however down on qoq basis (30 bps) owing to rise in

cost of borrowings. Operating expenses growth was low at 25% yoy leading to

improvement in cost to average AUM by 25 bps qoq and 37 bps yoy to 4.1% in 2QFY19.

Asset quality performance deteriorated marginally. Reported stage-3 loans were up 10 bps

qoq to 1.5%. Total slippages in 2QFY19 were `4.8 bn in 2QFY19 compared to `3.8 bn in

1QFY19. The company has 86 bps coverage on stage-1 and 2 loans as compared to 89 bps

in 1QFY19. The coverage ratio for stage-3 loans dropped 400 bps qoq to 65%. The

company has Rs2-2.25 bn exposure to a lumpy infrastructure account; the loan is current

but Bajaj has made provision of 10% on the same.

Robust growth across all businesses; expect some moderation in 2H

Bajaj’s high loan growth was contributed by almost all business segments—consumer

businesses (38.6% of total loans) were up 39% yoy, mortgages (including LAP) was up 34%

yoy, SME lending saw strong increase at 34% yoy while rural and commercial lending

maintained momentum at 72% and 38% yoy growth respectively in 2QFY19. Within the

consumer B2B business, auto segment saw swift pace of growth at 42% yoy (38.2% of

consumer B2B business) while consumer B2C segment continued to deliver robust growth at

44% yoy (48.2% of overall consumer loans). The mortgage business (consolidated) saw

modest growth at 32% yoy in 2QFY19. Adjusting for loan against securities, the commercial

lending business saw sharp growth at 81% yoy in 2QFY19.

We are moderating our loan growth forecasts to 34% in FY2019E from 42% earlier to

reflect the current debt markets conditions. The company is well placed in the liquidity front

(discussed later) but a rise in the cost of funds may prompt the company to moderate its

trajectory and cherry pick relatively higher yield loans.

1QFY19 2QFY19 QoQ (%)

AUM break-up

Stage 1 and 2 920,340 987,238 7.3

Stage 3 12,800 14,932 16.7

Net AUM 933,140 1,002,170 7.4

ECL provisions

Stage 1 and 2 8,191 8,490 3.7

Stage 3 8,800 9,706 10.3

Net ECL provisions 16,991 18,196 7.1

ECL coverage (%)

Stage 1 and 2 0.89 0.86 -3 bps

Stage 3 68.75 65.00 -375 bps

Net ECL coverage 1.82 1.82 -1 bps

Bajaj Finserv NBFCs


Exhibit 7: AUM growth to remain strong over medium-term at 34% CAGR over FY2018-21E AUM mix, March fiscal year-ends, 2018-2021E (Rs bn)


2QFY19: segmental trends

Strong cross-sell franchise of 30 mn customers. Large part of Bajaj’s loan growth has

been driven by its ability to acquire customers. It has a total franchise of 30.1 mn

customers (addition of 7 mn new to Bajaj Finance customers in the past four quarters).

Cross-sell of high-margin personal loans has driven loan growth in this segment over the

past few quarters.

Card franchise continues to scale up. Bajaj Finance has an EMI card base of 15.4 mn

(14.2 mn as of 1QFY19), compared to 11.6 mn credit cards for HDFC Bank as of August

2018, with growth in transaction volumes across segments such as consumer durables,

digital, lifestyle, etc. Bajaj Finance has also tied up with RBL Bank for its co-branded credit

card distribution business (card base of 0.67 mn; up from 0.5 mn qoq). Additionally, the

company has access to 0.33 mn active users via the Mobikwik app.

Consumer business loans up 39% yoy. Consumer finance loans grew 39% yoy to ₹388

bn. Loan growth in consumer B2B businesses (consumer durables, digital products, etc.)

was 34% while consumer B2C (EMI card, personal loans cross sell, etc.) was 44% yoy.

Within the consumer B2B business, the auto finance segment (2-W/3-W) saw steep

growth at 42% yoy in 2QFY19.

Business loans pick pace. Bajaj Finance had slowed growth in the business loan

segment post demonetization but has picked pace off-late driven by improvement in

collections and greater availability of data owing to GST implementation. Unlike other

private players, the company does not find any signs of stress in this segment. Business

loans are now classified in three key buckets, viz. commercial loans, SME loans and

mortgages.

Commercial loans (13% of total AUMs) include relatively low-yield and higher-ticket

loans such as rental discounting, vendor finance, corporate and warehouse finance,

etc. These loans had zero NPLs as of September 2018. The average ticket size in this

segment is around `100 mn with an upper limit of `500 mn. Loan against securities

comprises 55% of overall commercial lending book (up 15% yoy). Out of the

remaining 45% (up 81% yoy), lending to auto component manufacturers and FIG’s

comprised major share at 27% and 9.3% of overall commercial lending respectively.

Mortgages (up 32% yoy, 29% of AUMs on consolidated basis) are now booked under

its new subsidiary. These loans include home loans, LAP, developer loans, etc. Being a

secured business, the business reported GNPLs of 0.56% in June 2018 but saw a rise

in GNPL to 0.8% in 2QFY19. A transition of the business to a separate subsidiary has

improved management concentration, results of which are reflected in superior

expense control.

CAGR (%)

2018 2019E 2020E 2021E (2018-2021E)

BFL (standalone) 804 912 1,143 1,465 22

Consumer business 367 404 485 572 16

SME loans 253 253 279 326 9

Commercial business 124 158 206 264 29

Rural business 60 96 173 303 71

BHFL 36 210 357 536 146

(% of consolidated AUM) 4.3 18.7 23.8 26.8 2250 bps

Total 840 1,122 1,500 2,000 34

NBFCs Bajaj Finserv


SME loans were up 33% yoy but just at about 13% of its AUMs. SME loans include

unsecured business loans and loans to professionals. GNPL in this segment continues

to be high at 1.9%. The company maintains a high coverage around 77% on this

portfolio.

Exhibit 8: Bajaj Finance’s branch network continues to expand rapidly Branches of Bajaj Finance, March fiscal year-ends, 2015-2018,1QFY19-2QFY19 (#)


Exhibit 9: Rural presence continues to increase Geographic presence (via branches), March fiscal year-ends,2QFY16-2QFY19 (#)


Exhibit 10: Rapid growth in points of sale over the last few quarters Active points of distribution, March fiscal year-ends, 2011-2018, 1QFY19-2QFY19 (#)


Exhibit 11: Cross-selling remains big opportunity on a rapidly growing customer base Customer franchise of Bajaj Finance, March fiscal year-ends, 2QFY16-2QFY19 (#)


2015 2016 2017 2018 1QFY19 2QFY19 YoY (%)

Urban 161 262 377 730 793 862 83.0

Rural 232 397 538 602 693 751 34.1

of which rural lending business 50 105 177 219 291 308 57.9

of which rural lending franchises 182 292 361 383 402 443 21.4

Total 393 659 915 1,332 1,486 1,613 56.5

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

Consumer presence 193 193 193 272 304 304 318 339 471 529 730 793 862

SME presence 157 206 262 283 294 296 296 366 365 NA NA NA NA

Rural presence 272 326 397 481 497 519 538 560 560 588 602 693 751

Net presence NA NA 659 753 801 823 915 926 1,031 1,117 1,332 1,486 1,613

2011 2012 2013 2014 2015 2016 2017 2018 1QFY19 2QFY19

CD retailer 2,500 2,800 3,500 4,900 7,000 9,400 14,000 15,500 16,600 17,400

Digital retailer 2,650 5,200 5,900 15,900 17,400 19,800

Lifestyle retailer 1,150 3,200 3,900 6,000 6,400 6,500

Retail EMI retailer — 5,600 12,100 12,100 15,000

2W Dealer/ASCs 150 220 260 2,600 3,000 3,000 3,200 3,900 4,100 4,300

SME DSA 250 250 400 700 700 800 1,500 2,100 2,500 2,500

Rural retailer 1,500 3,200 5,500 8,200 10,100 11,000

Gold loan — — 191 380 380 430

Total reach 16,000 24,800 39,700 64,300 69,600 76,900

Note:

1) Numbers are lower bound of the original values.


Credit segment filter 9.5 10.3 10.6 11.9 12.6 13.6 14.4 15.8 17.0 18.6 19.8 21.6 23.1

Overall cross sell franchise 8.9 9.7 10.3 11.2 11.9 12.9 13.7 15.0 16.1 17.7 18.9 20.7 22.2

Non delinquent customers 8.2 8.9 9.5 10.2 11.0 11.9 12.7 13.9 14.7 16.1 17.2 18.8 20.1

Cross sell franchise 7.1 7.9 8.5 9.2 9.8 10.3 11.0 12.2 13.2 14.4 15.4 16.6 17.8

Total franchise 14.3 15.3 16.1 17.2 18.0 19.2 20.1 21.7 23.0 24.8 26.2 28.3 30.1

Bajaj Finserv NBFCs


Higher yields to offset rise in borrowings cost over medium-term

NIM to remain flat. We forecast NIM (calculated) to remain flat at 11.8% over FY2019-

20E (up from 11.3% in FY2018) driven by a rise in yields which will offset the current rise

in the cost of funds.

Rise in loan yields last month. Diversification in product mix towards higher share of

high yielding unsecured loans (as growth moderates a bit in 2H) supported by 20-50 bps

rise in yields across most products last month will likely improve yields from here on.

Borrowing cost rising, liquidity may not be a concern. We forecast borrowings cost

to increase 40 bps yoy to 8.4% in FY2019E and continue to inch up to 8.6% by

FY2021E. Cost of funds has seen a modest rise over the last few months. Its comfortable

capital position (tier I at 17.2%), positive ALM, strong parentage coupled with a AAA

rating are likely to provide comfort to debt markets and banks. We don’t envisage any

liquidity issues for the company over the near-term though cost of funding poses risk of

upside in the current environment especially given its high growth trajectory.

Raising public deposits to improving financial flexibility. In order to reduce its

dependence on bond markets and banks, the company has increased its share of public

deposits (up to 15% of overall borrowings from 8% in FY2017 and 12% in FY2018)—

however, a large part of the deposits are corporate. The company guided at increasing

this mix to ~22-25% of overall borrowings by FY2020E.

Exhibit 12: Share of NCDs has seen a sharp dip since FY2018; public deposits continue to rise at a

steep pace Borrowings mix, March fiscal year-ends, 2015-2QFY19 (%)


Note:

1) Data for FY2012 and FY2013 for CPs include CBLO also.

53.8 47.6 34.6 31.0 29.8 33.7

33.4 38.0

40.2 42.6 36.5

35.3

3.7 3.5 6.8 6.4

5.8 5.3

3.7 6.1 8.4 12.3

14.0 14.9

5.4 4.4 9.3 6.0 11.6 8.8

- 0.5 0.7 1.7 2.3 1.9

0

20

40

60

80

100

2015

2016

2017

2018

1Q

FY19

2Q

FY19

CBLO CPs Deposits Subordinated debt NCDs Banks

NBFCs Bajaj Finserv


Exhibit 13: Positive ALM gap for most buckets Behaviouralised ALM, March fiscal year-ends, 2QFY19 (Rs mn)


Exhibit 14: Disciplined ALM management March fiscal year-ends, 2012-1HFY19 (%)


Particulars 0-1 month 1-2 months 2-3 months 3-6 months 6-12 months 12-36 months 36-60 months >60 months Total

Cash and investments 39,670 10 10 1,960 2,380 2,640 610 27,730 75,030

Advances 75,860 51,690 51,260 117,930 168,500 279,390 77,310 51,360 873,280

Trade receivable and others 20,350 510 90 5,380 2,010 18,300 570 10,230 57,440

Total inflows (A) 135,880 52,210 51,360 125,270 172,890 300,330 78,490 89,320 1,005,750

Cumulative total inflows (B) 135,880 188,090 239,450 364,720 537,610 837,940 916,430 1,005,750

Borrowings repayment 20,470 30,460 47,280 42,640 126,210 300,710 97,190 75,260 183,110

Capital reserves and surplus - - - - - - - 183,110 82,410

Other outflows 43,390 1,580 2,540 5,840 4,500 9,170 380 15,020 1,005,750

Total outflows (C) 63,860 32,040 49,820 48,480 130,710 309,880 97,570 273,390

Cumulative total outflows (D) 63,860 95,900 145,720 194,200 324,910 634,790 732,360 1,005,750

Gap (A - C) 72,020 20,170 1,540 76,790 42,180 (9,550) (19,080) (184,070)

Cumulative gap (B-D) 72,020 92,190 93,730 170,520 212,700 203,150 184,070 -

Cumulative gap/ cumulative total outflows 113 288 188 352 163 66 189 -

Permissible cumulative GAP (%) (15) (15)

Additional borrowings possible 96,000 307,550

0

30

60

90

120

150

2012

2013

2014

2015

2016

2017

2018

1H

FY19

Cumulative gap upto 1m Cumulative gap upto 12m

Bajaj Finserv NBFCs


Exhibit 15: Comfortable ALM position CAR, tier-I and tier-II, March fiscal year-ends, 2012-1HFY19 (%)


Flat qoq collection trends; rise in slippages qoq

Bajaj Finance continued to demonstrate robust asset quality driven by strong collections

across most buckets except the 2-W/3-W portfolio (though collections have been gradually

improving in this segment on a sequential basis). Collection efficiency in this segment has

increased to 88.3% as of 2QFY19 from 87.6% in 1QFY19 and 85.8% in 2QFY18. This

segment was impacted by demonetization as the end customer is below mass segment.

However, it bounced back significantly in the past few quarters prior to trend reversal in

1QFY19. Most segments now have collection efficiency of >98.5%.

Reported stage-3 loans however increased 10 bps qoq to 1.5% owing to a rise in slippages.

Total slippages were high at `4.8bn in 2QFY19 compared to `3.8 bn in 1QFY19.

Exhibit 16: Broadly stable collections qoq Collection efficiency of Bajaj Finance, 2QFY16-2QFY19 (%)

Source: Company

0

5

10

15

20

25

2012

2013

2014

2015

2016

2017

2018

1H

FY19

Tier 1 Tier 2 Total capital adequacy


Consumer durables 98.1 98.4 98.1 98.1 97.7 98.1 97.8 98.4 98.6 98.8 98.9 99.0 98.9

2-wheeler portfolio 88.8 89.8 89.9 89.3 89.2 83.9 85.7 85.9 85.8 87.9 88.8 87.6 88.3

Personal loans cross sell 97.1 97.1 97.3 97.2 97.2 97.8 97.3 97.2 97.3 97.5 97.6 97.6 97.7

Small business 99.0 98.9 99.0 98.7 98.8 98.9 98.7 98.5 98.6 98.6 98.7 98.8 98.8

Loan against property 98.7 99.3 99.2 99.2 99.3 99.1 99.2 99.1 98.6 98.3 99.2 99.3 99.2

Home loans 99.2 99.2 99.0 99.0 99.0 99.4 99.0 98.9 98.8 99.0 99.5 99.5 99.4

Rural lending 98.7 98.9 98.9 98.4 98.5 98.8 99.2 99.2 99.2 99.2 99.1 99.1 99.0

Note:

1) Numbers for busines loans were restated as professional loans were added. Prior period numbers starting from 4QFY16 are adjusted.

NBFCs Bajaj Finserv


Exhibit 17: Rise in GNPL in the mortgage business GNPL, NNPL and PCR, March fiscal year-ends, 2QFY16-2QFY19 (%)

Source: Company

Exhibit 18: Bajaj Finance is trading at 5.1X one year forward PBR PER and PBR, March fiscal year-ends, October 2008 - October 2018 (X)


2QFY18 3QFY18 4QFY18 1QFY19 2QFY19

GNPL

Consumer business 2.10 2.12 2.09 NA NA

Consumer B2B 2.73 NA

Auto Finance 5.76

Sales Finance 1.08

Consumer B2C 1.64 1.66

SME business 1.89 1.82 1.31 1.84 1.88

Commercial business 0.04 0.03 - - -

Rural business 0.85 1.09 1.17 1.25 1.26

Mortgage 0.56 0.79

NNPL

Consumer business 0.58 0.63 0.57 NA NA

Consumer B2B 0.89 NA

Auto Finance 2.24

Sales Finance 0.30

Consumer B2C 0.46 0.46

SME business 0.67 0.64 0.25 0.42 0.44

Commercial business 0.03 0.02 - - -

Rural business 0.25 0.47 0.43 0.61 0.64

Mortgage 0.22 0.46

PCR

Consumer business 73 71 73 NA NA

Consumer B2B 68 NA

Auto Finance 63

Sales Finance 73

Consumer B2C 72 73

SME business 65 65 81 78 77

Commercial business 23 29 48 - -

Rural business 71 58 64 51 49

Mortgage 60 42

Note:

1) Asset quality ratios are for the consolidated business.

Ind-ASIGAAP

0.0

1.5

3.0

4.5

6.0

7.5

0

7

14

21

28

35

Oct

-08

Apr-

09

Oct

-09

Apr-

10

Oct

-10

Apr-

11

Oct

-11

Apr-

12

Oct

-12

Apr-

13

Oct

-13

Apr-

14

Oct

-14

Apr-

15

Oct

-15

Apr-

16

Oct

-16

Apr-

17

Oct

-17

Apr-

18

Oct

-18

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

Bajaj Finserv NBFCs


Exhibit 19: Bajaj Finance - Change in estimates March fiscal year-ends, 2019E-2021E (` mn)


Ind-AS Ind-AS

New estimates Old estimates Old versus new (%)

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

Net interest income 114,339 153,429 202,733 113,388 151,456 198,105 1 1 2

Loan growth (%) 34 34 33 42 35 34 -878 bps -104 bps -64 bps

NIM (%) 11.8 11.8 11.6 11.5 11.2 10.9 32 bps 58 bps 70 bps

NPL provisions 13,470 18,214 24,479 12,223 16,821 20,908 10 8 17

Operating expenses 42,158 56,885 76,756 41,379 55,818 75,294 2 2 2

Employee 21,848 29,932 41,007 21,557 29,533 40,460 1 1 1

Others 20,310 26,953 35,748 19,822 26,285 34,833 2 3 3

PBT 59,232 78,876 102,116 60,129 79,310 102,521 (1) (1) (0)

Tax 21,324 28,395 36,762 21,045 27,759 36,908 1 2 (0)

PAT 37,908 50,481 65,354 39,084 51,552 65,614 (3) (2) (0)

NBFCs Bajaj Finserv


Exhibit 20: Bajaj Finance – key growth rates and ratios March fiscal year-ends, 2016-2021E (%)


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

2016 2017 2018 2019E 2020E 2021E

Income statement growth (%)

Total interest income 35.7 36.6 27.8 41.5 35.8 34.1

Total interest expense 30.2 30.0 21.5 43.0 38.6 37.5

Net interest income 39.7 41.0 31.6 40.7 34.2 32.1

Loan loss provisions 3.7 50.7 26.5 30.2 35.2 34.4

Income post provisions 39.5 39.7 32.4 42.2 34.1 31.8

Net pre-prov income 40.6 39.2 31.4 40.9 34.1 32.1

Operating expenses 36.5 31.7 27.4 28.8 34.9 34.9

Employee expenses 39.7 48.0 56.3 50.0 37.0 37.0

Other Expenditure 39.6 21.0 (2.2) 27.0 37.0 37.0

Balance sheet growth (%)

Net loans 36.5 36.1 39.6 33.5 33.7 33.4

Investments 211.3 294.0 (23.0) 15.0 30.0 30.0

Current Assets 156.8 (0.6) (36.9) 6.4 7.6 8.8

Net fixed assets 15.2 25.8 30.2 15.0 15.0 15.0

Total assets 41.6 37.2 33.1 33.3 34.6 33.0

Total borrowings 37.0 33.0 35.1 36.4 37.3 34.9

Shareholders funds 52.6 31.1 65.1 21.1 23.2 24.4

Asset management measures (%)

Yield on assets 19.8 20.0 18.8 19.4 19.5 19.5

Yield on loans 18.8 18.6 17.5 18.1 18.3 18.3

Average cost of funds 9.1 8.8 8.0 8.4 8.5 8.6

Difference 10.6 11.2 10.8 11.0 11.0 10.9

Net interest income/earning assets 11.4 11.6 11.3 11.8 11.8 11.6

Tax rate 34.7 34.7 35.7 36.0 36.0 36.0

Profitability measures (%)

Interest income/total income 98.2 99.5 99.7 99.5 99.6 99.7

Operating expenses/NII 43.7 41.4 40.1 36.7 36.9 37.7

Operating expenses/assets 4.9 4.7 4.4 4.3 4.3 4.3

Credit cost/average loans 1.4 1.6 1.4 1.5 1.5 1.5

Payout ratio 10.5 10.7 9.2 10.0 10.0 10.0

Equity/assets (EoY) 15.8 15.1 18.7 17.0 15.5 14.5

Debt equity ratio (X) 5.1 5.1 4.2 4.7 5.3 5.7

Du Pont analysis

% of average assets


Adj. net interest income 11.0 11.2 10.9 11.6 11.6 11.4



(1- tax rate) 65.1 65.2 65.0 64.0 64.0 64.0

RoA 3.2 3.3 3.4 3.8 3.8 3.7

Average assets/average equity 6.5 6.5 5.8 5.6 6.2 6.7

RoE 21.1 21.7 19.6 21.6 23.6 24.6

Bajaj Finserv NBFCs


Exhibit 21: Bajaj Finance – income statement and balance sheet March fiscal year-ends, 2016-2021E (` mn)


Exhibit 22: Low operating RoEV for Bajaj Allianz Life RoEV movement, March fiscal year-ends, 2016-2021E (Rs bn)


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

2016 2017 2018 2019E 2020E 2021E

Income statement

Total interest income 73,043 99,774 127,480 180,411 244,975 328,627

Total interest expense 29,269 38,037 46,216 66,072 91,546 125,894

Net interest income 43,775 61,737 81,264 114,339 153,429 202,733

Provisions and write/off 5,429 8,182 10,349 13,470 18,214 24,479

Net interest income (after prov.) 38,346 53,555 70,915 100,868 135,215 178,254

Net income pre loan loss provision 44,566 62,028 81,503 114,860 153,975 203,351

Operating expenses 19,492 25,672 32,719 42,158 56,885 76,756

Employee expense 6,296 9,317 14,566 21,848 29,932 41,007

Other expenditure 10,301 12,464 12,188 15,478 21,205 29,051

Pretax income 19,646 28,174 38,434 59,232 78,876 102,116

Tax provisions 6,861 9,810 13,471 21,324 28,395 36,762

Net Profit 12,785 18,364 24,963 37,908 50,481 65,354

Dividends 1,339 1,969 2,301 3,791 5,048 6,535

Dividend tax 228 335 391 644 858 1,111

Balance sheet

Net loans 427,560 568,320 791,025 1,066,934 1,445,335 1,931,121

Investments 10,341 40,747 31,394 36,103 46,934 61,014

Current Assets 20,997 20,877 13,168 14,017 15,078 16,404

Deferred tax assets 2,800 3,691 7,675 7,675 7,675 7,675

Net fixed assets 2,870 3,611 4,703 5,408 6,219 7,152

Total assets 464,568 637,246 847,964 1,130,136 1,521,241 2,023,366

Liabilities

Total borrowings 370,250 492,500 665,572 907,578 1,246,456 1,681,309

Current liabilities 17,389 35,793 23,913 29,891 37,364 46,705

Provisions 3,682 12,949 622 715 894 1,118

Total liabilities 391,322 541,243 689,485 938,185 1,284,714 1,729,132

Shareholders funds 73,246 96,003 158,479 191,952 236,526 294,234

Note:

1) We build in equity issuance of Rs45 bn in FY2018E.

2016 2017 2018 2019E 2020E 2021E

Opening Embedded value (EV) 93.0 98.8 112.7 118.6 134.0 151.3

Methodology changes 0.5 0.3 0.6 0.5 0.5 0.5

Assumption change

NBV (before over-run) 1.6 1.7 2.2 3.4 4.0 4.6

Acquisition expense overrun (1.9) (2.2) (2.4) (2.2) (2.0) (1.5)

Expected return in force 7.4 6.7 7.7 8.7 9.8 11.0

Operating variance

Tax changes

Investment varinace

Dividend payout

Closing EV 99 113 119 134 151 171

EVOP 10 7 9 13 15 18

RoEV (%) 6 14 5 13 13 13

Operating RoEV (%) 10 8 8 11 11 12

NBFCs Bajaj Finserv


Exhibit 23: We expect Bajaj Life to deliver pre-overrun margin of 16% NBAP margins, March fiscal year-ends, 2016-2021E (Rs bn)


Exhibit 24: Bajaj General Insurance – key growth rates and ratios March fiscal year-ends, 2016-2021E (%)


2016 2017 2018 2019E 2020E 2021E

APE 9.7 12.9 17.8 21.4 25.0 28.7

NBV 1.6 1.7 2.2 3.4 4.0 4.6

NBAP margins pre overrun (%) 16.6 12.9 12.5 16.0 16.0 16.0

NBV post overrun (0.3) (0.5) (0.2) 1.2 2.0 3.1

NBAP margins post overrun (%) (3.1) (4.2) (1.0) 5.7 8.0 10.8

2016 2017 2018 2019E 2020E 2021E

YoY growth (%)

Net premium income 10 17 36 19 19 19

Premium earned- net 10 17 23 19 19 19

Claims 11 14 16 20 23 19

Net commission paid (39) (62) 793 19 (12) 19

Operating expenses 39 19 4 17 13 22

Investment income 23 21 6 42 22 21

PBT (1) 40 26 37 21 18

Tax (4) 69 23 38 21 18

PAT 0 29 27 37 21 18

Key ratios (%)

Claims ratio 72 66 55 55 57 57

Commission ratio 2 1 5 5 4 4

Operating expenses ratio 27 28 21 21 20 21

Combined ratio 102 99 96 96 96 96

Yield on investment 10 10 9 10 10 10

Tax rate 27 32 32 32 32 32

RoE 22 23 23 25 24 22

Bajaj Finserv NBFCs


Exhibit 25: Bajaj General Insurance – financial summary March fiscal year-ends, 2016-2021E (Rs mn)


Exhibit 26: Bajaj Finserv – consolidated financial ratios March fiscal year-ends, 2016-2021E (%)


2016 2017 2018 2019E 2020E 2021E

Key financial highlights (Rs mn)

Net premium income 42,236 49,370 67,325 80,117 95,339 113,454

Premium earned- net 42,236 49,370 60,586 72,097 85,795 102,097

Claims 30,538 34,762 40,426 48,476 59,784 71,142

Net commission paid 939 356 3,180 3,784 3,337 3,971


Investment income 8,533 10,357 10,941 15,573 18,933 22,826

PBT 7,714 10,781 13,530 18,585 22,540 26,551

Tax 2,074 3,503 4,317 5,947 7,213 8,496

PAT 5,640 7,278 9,214 12,638 15,327 18,055


Paid-up capital 1,103 1,103 1,102 1,102 1,102 1,102

Reserves 26,794 34,243 43,561 56,199 71,526 89,581

Total liabilities 99,304 121,229 124,713 113,831 146,141 186,727


Investments 92,110 108,290 139,907 171,549 207,104 249,416

Fixed assets 2,887 2,887 3,123 3,123 3,123 3,123

Other current assets 32,204 45,398 26,347 (3,538) 8,543 24,872

Total assets 127,201 156,575 169,376 171,133 218,770 277,410

2016 2017 2018 2019E 2020E 2021E

Growth in key parameters (%)

Total income (17) 43 14 31 23 23

Premium 3 10 23 12 13 14

Investment income (73) 205 (18) 58 14 14

Expenses (23) 46 13 29 21 23

PBT 20 31 20 41 28 25

PAT (post minority interest) 20 30 10 37 26 24

EPS 20 30 10 37 26 24

Loan book 37 33 39 35 35 34

Investments 9 14 8 46 15 15

Total assets 18 21 22 21 25 25

Policyholders funds (1) 11 5 7 6 6

Shareholders funds 22 18 23 26 19 20

Key ratios (%)

PBT margin 20 18 19 20 21 22

Debt-equity (X) 2.8 3.1 3.4 3.7 4.3 4.8

RoA 2.9 3.2 3.0 3.4 3.5 3.5

RoE 16.0 17.3 15.8 17.4 18.0 18.7

NBFCs Bajaj Finserv


Exhibit 27: Bajaj Finserv – consolidated financial summary March fiscal year-ends, 2016-2021E


2016 2017 2018 2019E 2020E 2021E

Profit and loss (Rs mn)

Total income 200,098 285,596 326,796 428,931 526,189 648,843

Interest income 75,062 101,313 129,878 182,156 246,683 330,363

Bajaj Finance 73,043 99,774 127,480 180,411 244,975 328,627

Others 2,019 1,539 2,398 1,745 1,708 1,736

Insurance premium 100,553 110,591 135,759 151,666 171,434 195,838

Investment income 23,571 71,813 59,035 92,980 105,932 120,502

Other income 912 1,879 2,125 2,130 2,140 2,140

Expenses 160,466 233,749 264,767 341,274 414,129 508,583

Interest expenses 29,269 38,037 46,216 66,072 91,546 125,894

Provisions 5,429 8,182 10,349 13,470 18,214 24,479


Commission expenses 2,513 1,820 5,212 5,029 4,754 5,607

Depreciation 13 15 14 15 15 15

Benefits paid 80,663 96,760 122,048 145,706 170,220 195,506

Change in reserve (1,508) 36,308 17,528 29,366 28,634 29,652

PBT 39,633 51,847 62,028 87,657 112,060 140,260

Tax 11,034 14,744 18,947 29,032 37,482 47,284

PAT 28,599 37,103 43,081 58,625 74,579 92,976

Minority interest 9,058 11,779 15,156 20,485 26,411 33,296

PAT post minority interest 19,542 25,324 27,926 38,140 48,167 59,680

Shares (mn) 159 159 159 159 159 159

EPS (Rs) 122.8 159.1 175.5 239.7 302.7 375.1

BVPS (Rs) 842 995 1220 1534 1823 2179

Balance sheet

Fixed assets 8,716 9,456 10,954 11,757 12,672 13,713

Loan book 427,560 568,320 791,025 1,066,934 1,445,335 1,931,121

Total assets 1,066,293 1,289,304 1,570,488 1,893,971 2,372,625 2,975,596

Borrowings 370,250 492,500 665,572 907,578 1,246,456 1,681,309

Policyholders funds 365,202 406,027 425,150 454,516 483,150 512,802

Total liabilities 875,042 1,094,967 1,269,372 1,537,992 1,947,987 2,465,712


Equity capital 7,956 7,956 7,956 7,956 7,956 7,956

Reserves 125,956 150,324 186,249 236,099 282,047 338,786

Minority interest 58,760 72,008 106,911 111,924 134,635 163,142


HDFC Life reported 20% growth in earnings

HDFC Life reported PAT of Rs2.9 bn (up 20% yoy) in 2QFY19. Growth in underwriting profits

was strong at 15% to Rs2.3 bn. This absorbed modest (19% yoy) growth in new business strain

(Rs3.1 bn versus Rs3.2 bn in 1QFY19). ULIP, a segment in which new business strain is typically

high, was 53% of total APE, higher than 44% in 1QFY19.

Net flows remain strong in 2QFY19

HDFC Life reported 31% growth in new business premium and 26% growth in overall premium.

Coupled with control over benefit payouts (up 13% yoy) and management expenses (up 25%

yoy), net cash flows increased to Rs21 bn from Rs10.8 bn in 1QFY19. This trend may be volatile

and hence it may not be accurate to track the same on a quarterly basis.

VNB margin expands 66 bps yoy, flat qoq

HDFC Life’s VNB margins expanded 66 bps yoy to 24.3%, flat qoq. YoY margin expansion was

driven by an increase in the share of high margin products (non-par savings and protection).

Flat VNB margins qoq reflected an increase in the share of non-par savings to 9.4% (9% in

1QFY19) while protection business was down to 14.8% from 18.2% qoq.

Best in class margins; upgrade to ADD post significant stock correction

HDFC Life is the most profitable life insurance company with 21-22% operating RoEV and 22%

EVOP CAGR during FY2018-21E supported by best in class VNB margins of 24-25% and

favorable experience leading to positive operating variance. The company has focused on

innovating new products as required by the policyholders across savings, mortality/morbidity

and longevity. A new product can be copied by the market within a period of 18 months and

hence its strategy is to consistently add to its product suite. Recent additions include a deferred

annuity and joint life (ULIP) plan even as most competition is focusing on the protection

businesses.

HDFC Life has corrected by 25% in the last three months. Post the correction, the company

trades at 3.3X EV FY2020E. We are tweaking down our estimates to build in marginally lower

EV to reflect lower premium growth and negative investment variance in the last quarter. At our

revised price target of Rs380, the stock will trade at 3.6X FY2020E EV at our TP.

HDFC Standard Life Insurance (HDFCLIFE) NBFCs

Broadly on track. HDFC Life delivered 16% yoy VNB growth in 2QFY19 on the back of

13% APE growth and increase in its high-margin protection business to 14.8% of APE

from 12.2% in 2QFY18 but down from 18.2% qoq. RoEV was moderate at 15% yoy

due to lower volumes in 1H and large MTM losses in the debt book. While the medium-

term trends remain on track, the recent sharp stock correction provides an opportunity

to enter; upgrade to ADD from SELL with TP of Rs380 (down from Rs405).

ADD

OCTOBER 24, 2018

RESULT


Price (`): 360

Target price (`): 380

BSE-30: 33,847

QUICK NUMBERS

PAT up 20% yoy in

2QFY19

VNB margins up 66

bps yoy in 2QFY19

to 24.3%

APE up 13% yoy in

2QFY19; individual

APE up 12.5% yoy

Nischint Chawathe

M B Mahesh CFA

Dipanjan Ghosh

Shrey Singh

HDFC Standard Life Insurance







MFs 1.6 BVPS 26.3 29.6 33.6


Absolute (2.5) (25.0) 0.0 ROE (%) 26.2 29.0 31.1

Rel. to BSE-30 6.1 (18.7) 0.0 Div. Yield (%) 0.5 0.6 0.7


548-307

724.9

NBFCs HDFC Standard Life Insurance


ULIP growth moderate, non-par savings and protection rise

HDFC Life reported 13% growth in APE in 2QFY19 to Rs14.8 bn on the back of (1) 37% yoy

growth in protection business and (2) 55% growth in non-par savings. Individual ULIP APE

was up 20% yoy. Non-par savings (individual) increased to 9.4% (up 40 bps qoq) from

6.8% in 2QFY18 while its share of par policies declined by 700 bps to 16.7% in 2QFY19

(down 610 bps qoq). HDFC Life increased its protection business to 16.2% from 14.8% in

1QFY19 and 12.2% in 2QFY18. Within the protection business, growth in individual

protection was strong; the share of group protection APE dropped to 63.6% of protection

APE from 65.1% in 2QFY18.

Bancassurance maintains dominance

Bancassurance business continues to be strong at 69% of individual APE in 2QFY19 (up 380

bps qoq; down 120 bps yoy). Share of direct business which increased to 19% in 1QFY19

has moderated to 16.1% (up 230 bps yoy). HDFC Life continues to invest rapidly in the

agency business with the number of individual agents increasing to 91,179 in 1HFY19 from

66,372 in 1HFY18.

MTM losses hit EV growth; operating RoEV moderate at 18%, in line with

seasonal trends

HDFC Life reported annualized RoEV of 15% in 1HFY19. Operating RoEV was strong at

18.9%. Typically, the business has lower volumes in 1H and hence lower VNB; as such RoEV

accelerates towards the second half. During the quarter, the company has reported positive

variances on persistency, mortality and expenses. EV growth was weak due to investment

variance of Rs2.8 bn (1.8% of EV) on account of MTM losses on movement in interest rates.

About its annuity product

HDFC Life believes that annuity will be the next big product and has worked on this segment

for the last 30 months. Under the recently-launched deferred annuity product, the

policyholder pays a one-time lump sum (it's a single premium product) and gets an annuity

post completion of the deferment period, as chosen by the policyholder; the minimum age

of the policyholder should be 45. The company has worked hard for getting a full hedge by

tying up with marquee corporates. As such, EV sensitivity to change in interest rates remains

low at -/+2.1% for 1% rise/fall in interest rates. Margins are lower than protection but

higher than ULIP and par.

HDFC Standard Life Insurance NBFCs


Exhibit 1: HDFC Standard Life- quarterly summary March fiscal year-ends, 2QFY18-2QFY19, 2015-2018 (Rs mn)


Exhibit 2: 20% yoy growth in PAT in 2QFY19; similar to 1QFY19 PAT and solvency ratio for HDFC Standard Life, March fiscal year-ends, 2QFY18-2QFY19, 2016-18 (Rs bn)


Exhibit 3: 16% yoy growth in VNB March fiscal year-ends 2016-2018, 2QY18-2QFY19 (Rs bn)

Source: Company

YoY YoY YoY

2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 (%) 1HFY18 1HFY19 (%) 2017 2018 (%)

Policyholder's account (Rs mn)

Premium 54,366 54,677 89,564 50,577 68,405 26 91,403 118,982 30 194,455 235,644 21

First 10,837 12,024 17,356 8,124 12,064 11 18,005 20,189 12 36,570 47,385 30

Renewal 26,525 28,052 46,722 23,801 32,308 22 47,374 56,109 18 108,245 122,148 13

Single 17,004 14,601 25,487 18,652 24,033 41 26,024 42,685 64 49,640 66,112 33

Net premium 53,894 54,200 89,000 50,013 67,776 26 90,510 117,788 30 192,749 233,710 21

Commissions (I) 2,475 2,625 4,087 1,982 2,637 7 4,037 4,619 14 7,920 10,749 36

First 2,032 2,126 3,253 1,418 1,874 (8) 3,323 3,292 (1) 6,469 8,702 35

Renewal 349 361 588 340 444 27 600 784 31 1,377 1,550 13

Single 94 138 245 223 319 241 114 543 376 74 497 569

Operating expenses (II) 7,189 7,769 10,998 7,246 9,458 32 12,826 16,703 30 23,853 31,593 32

Expenses of management (I+II) 9,663 10,394 15,085 9,228 12,094 25 16,864 21,322 26 31,773 42,342 33

Other income and trf. to shareholders a/c 321 113 1,714 594 326 1 858 920 7 1,389 2,685 93

Provisions and service taxes 725 780 2,459 1,125 1,431 97 1,476 2,556 73 3,743 4,715 26

Benefits paid 29,649 31,200 44,111 29,425 33,625 13 55,804 63,050 13 100,004 131,114 31

Net flows 14,179 11,939 29,060 10,830 20,951 48 17,224 31,781 85 58,618 58,222 (1)

Income on investments 25,061 42,531 (9,368) 17,967 10,902 (56) 52,783 28,870 (45) 111,406 85,946 (23)

Change in liabilities 37,070 52,673 15,725 25,409 29,908 (19) 64,825 55,317 (15) 160,548 133,223 (17)

Surplus/deficit 2,169 1,797 3,967 3,389 1,946 (10) 5,182 5,334 3 9,477 10,946 16

Appropriations

Transfer to shareholders account 2,012 1,499 3,965 3,200 2,341 16 4,558 5,540 22 7,864 10,022 27

FFA 158 298 2 189 (395) (350) 623 (206) (133) 1,613 924 (43)

Shareholders account

Transfer from policyholders 2,012 1,499 3,965 3,200 2,341 16 4,558 5,540 22 7,864 10,022 27

Total income 537 618 974 881 733 37 1,342 1,614 20 2,269 2,933 29

Investment income 537 618 974 788 733 37 1,211 1,521 26 2,269 2,803 24

Other expenses 50 7 6 24 54 8 112 78 (31) 680 126 (82)

Any other item 49 (53) 1,543 139 57 16 72 196 173 310 1,562 403

PBT 2,450 2,162 3,389 3,918 2,963 21 5,716 6,881 20 9,142 11,267 23

Tax 65 89 (79) 116 93 44 168 210 25 220 177 (19)

PAT 2,385 2,073 3,468 3,802 2,870 20 5,548 6,672 20 8,921 11,090 24

Tax rate (%) 2.6 4.1 (2.3) 3.0 3.2 2.9 3.0 2.4 1.6

YoY YoY YoY

2QFY18 1QFY19 2QFY19 (%) 1HFY18 1HFY19 (%) 2016 2017 2018 (%)

PAT 2.4 3.8 2.9 20 5.5 6.7 20 8.1 8.9 11.1 24

Underwriting profits 2.0 3.1 2.3 15 4.5 5.4 20 6.8 7.5 8.5 13

New business strain (2.6) (3.2) (3.1) 19 (4.8) (6.3) 31 14.5 14.6 19.1 31

Existing business surplus 4.6 6.3 5.4 17 9.3 11.7 26 (7.7) (7.1) (10.6) 49

Shareholder's surplus 0.4 0.7 0.6 48 1.0 1.3 21 1.3 1.4 2.6 82

Solvency (%) 201 197 193 201 193 198 192 192

2QFY18 1QFY19 2QFY19 (% chg.) 1HFY18 1HFY19 (% chg.) 2016 2017 2018 (% chg.)

APE 13.1 10.3 14.8 13.0 21.3 25.1 17.8 37.2 41.9 55.3 32.0

Savings APE 11.5 8.4 12.6 9.7 18.8 21.0 12.0 34.5 38.6 49.1 27.0

Protection APE 1.6 1.9 2.2 36.7 2.5 4.1 61.8 2.7 3.3 6.2 91.2

% of APE 12.2 18.2 14.8 257 bps 11.8 16.2 440 bps 7.3 7.8 11.3 350 bps

VNB 3.1 2.5 3.6 16.1 4.8 6.1 27.1 7.4 9.2 12.8 39.1

VNB margin (%) 23.7 24.3 24.3 66 bps 22.5 24.3 177 bps 19.9 22.0 23.1 115 bps

EV 140.1 156.9 163.8 16.9 140.1 163.8 16.9 102.3 124.7 152.1 22.0



Exhibit 4: Focus on protection business March fiscal year-ends, 2QFY18-2QFY19, 2015-18 (% of total APE)


Exhibit 5: Share of ULIPs via agency channels has increased Product mix based on individual APE, March fiscal year-ends, 2016-2018, 1HFY18-1HFY19 (%)


2QFY18 1QFY19 2QFY19 YoY (%) 1HFY18 1HFY19 YoY (%) 2015 2016 2017 2018 YoY (%)

Product-wise break-up of APE (Rs bn)

Individual savings 10.6 7.8 11.7 10.9 17.6 19.5 11.1 28.0 34.5 35.9 46.0 28.0

ULIP 6.6 4.5 7.9 19.6 10.7 12.4 15.5 18.7 18.6 19.4 27.9 43.3

PAR 3.1 2.4 2.5 (20.1) 5.4 4.8 (10.0) 6.2 10.0 13.1 13.7 4.6

Non-par 0.9 0.9 1.4 54.7 1.5 2.3 56.1 3.3 3.0 3.4 4.4 30.7

Group savings 0.9 0.6 0.9 (4.2) 1.2 1.5 24.1 (0.2) 2.8 2.7 3.1 13.1

Protection 1.6 1.9 2.2 36.7 2.5 4.1 61.8 2.0 2.7 3.3 6.2 91.2

Individual protection 0.6 0.7 0.8 42.5 0.9 1.5 58.9

Group protection 1.0 1.2 1.4 33.6 1.6 2.6 63.4

Share of total APE (%)

Individual savings 80.7 75.8 79.2 -1 bps 82.5 77.8 -470 bps 93.3 92.7 85.7 83.1 -3 bps

ULIP 50.1 44.0 53.1 3 bps 50.4 49.4 -101 bps 62.4 50.1 46.4 50.4 4 bps

PAR 23.7 22.8 16.7 -7 bps 25.2 19.2 -594 bps 20.8 26.9 31.2 24.8 -6 bps

Non-par 6.8 9.0 9.4 3 bps 6.9 9.2 225 bps 10.9 8.1 8.0 8.0 0 bps

Group savings 7.1 6.0 6.0 -1 bps 5.7 6.0 30 bps (0.7) 7.6 6.5 5.6 -1 bps

Protection 12.2 18.2 14.8 3 bps 11.8 16.2 440 bps 6.7 7.3 7.8 11.3 4 bps

Change Change

2016 2017 2018 (bps) 1HFY18 1HFY19 (bps)

Bancassurance

ULIP 66 61 64 300 bps 66 72 600 bps

Participating 24 30 26 -400 bps 25 18 -700 bps

Non-participating protection 2 1 1 0 bps 1 2 100 bps

Non-participating others 9 8 9 100 bps 8 8 0 bps

Agency

ULIP 25 26 33 700 bps 26 23 -300 bps


Non-participating protection 13 11 11 0 bps 13 12 -100 bps


Direct

ULIP 45 48 54 600 bps 56 47 -900 bps




Overall

ULIP 56 52 57 500 bps 58 59 100 bps






Exhibit 6: Cost to average AUM increased Quarterly summary, March fiscal year-ends, 2QFY18-2QFY19, 2015-18 (Rs mn)


Exhibit 7: Improvement in persistency in most buckets March fiscal year-ends. 9MFY17-2QFY19 (%)


Exhibit 8: Higher EV growth in 2H March fiscal year-ends. 1HFY18-2HFY19E (Rs bn)


YoY YoY YoY

2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 (%) 1HFY18 1HFY19 (%) 2015 2016 2017 2018 (%)

Key financials (Rs mn)

Premium 54,366 54,677 89,564 50,577 68,405 26 91,403 118,982 30 148,299 163,130 194,455 235,644 21

First year 10,837 12,024 17,356 8,124 12,064 11 18,005 20,189 12 36,570 47,385 30

Renewal 26,525 28,052 46,722 23,801 32,308 22 47,374 56,109 18 108,245 122,148 13

Single 17,004 14,601 25,487 18,652 24,033 41 26,024 42,685 64 49,640 66,112 33

APE 12,537 13,484 19,905 9,990 14,468 15 20,607 24,457 19 41,534 53,996 30

Commissiosn (I) 2,475 2,625 4,087 1,982 2,637 7 4,037 4,619 14 6,235 7,019 7,920 10,749 36

First year 2,032 2,126 3,253 1,418 1,874 (8) 3,323 3,292 (1) 6,469 8,702 35

Renewal 349 361 588 340 444 27 600 784 31 1,377 1,550 13

Single 94 138 245 223 319 241 114 543 376 74 497 569

Operating expenses (II) 7,189 7,769 10,998 7,246 9,458 32 12,826 16,703 30 14,888 18,718 23,853 31,593 32

Expenses of management (I+II) 9,663 10,394 15,085 9,228 12,094 25 16,864 21,322 26 21,123 25,737 31,773 42,342 33

AUM (Rs bn) 995 1,044 1,066 1,096 1,132 14 995 1,132 14 671 743 917 1,066 16

Key calculated ratios (%)

Cost/APE 25 25 23 27 26 112 bps 25 26 166 bps 21 24 283 bps

Cost/average AUM 4.0 4.1 5.7 3.4 4.3 36 bps 3.5 3.9 35 bps 3.6 3.6 3.8 4.3 44 bps

Net commission ratio 6.3 6.3 6.1 5.9 5.6 -70 bps 5.9 5.7 -21 bps 5.3 6.1 81 bps

First year 18.7 17.7 18.7 17.5 15.5 -322 bps 18.5 16.3 -215 bps 17.7 18.4 68 bps

Renewal 1.3 1.3 1.3 1.4 1.4 6 bps 1.3 1.4 13 bps 1.3 1.3 0 bps

Single 0.5 0.9 1.0 1.2 1.3 78 bps 0.4 1.3 83 bps 0.1 0.8 60 bps

9MFY17 FY2017 2QFY18 9MFY18 FY2018 1QFY19 2QFY19

13th month 83.0 84.0 86.2 86.4 87.1 85.0 84.8

25th month 73.2 75.4 74.0 76.9 77.4 77.8 80.6

37th month 62.7 65.2 68.2 68.9 70.9 71.2 69.8

49th month 60.2 58.9 60.6 60.4 62.2 63.6 65.4

61st month 60.2 56.8 50.5 53.5 51.0 49.5 52.4

1HFY18 2HFY18 1HFY19 YoY(%) 2HFY19E YoY(%)

Opening EV 124.6 140.1 152.1 22.0 163.8 16.9

Methodology changes

VNB (before over-run till FY2015) 6.1 9.9

Acquisition expense ovcerrun

Expected return in force 7.0 7.0

Operating variance 1.3 2.7

Tax changes

Investment variance (2.8) 0.0

Dividend payout (2.2)

Closing EV 140.1 152.1 163.8 16.9 181.1 19.1

EVOP 14.4 19.6

RoEV 15 21

Operating RoEV 18.9 23.9

Other details

APE 21.3 34.0 25.1 17.8 40.2 18.1

VNB 4.8 8.0 6.1 27.1 9.9 23.6

VNB margins (%) 22.5 23.5 24.3 24.6



Exhibit 9: Mixed trends in persistency for most products Product and channel-wise persistency, March fiscal year-ends, 2017-2QFY19 (%)


Exhibit 10: Share of bancassurance is high at 69% Channel-wise total individual new business premium, March fiscal year-ends, 2QFY18-2QFY19, 2015-18 (%)


Product-wise persistency Channel-wise persistency

Par

2017

13th month 75 75 89 82 86 81 80

25th month 65 73 86 72 79 72 74

37th month 59 70 81 62 55 65 66

49th month 56 75 95 58 56 59 61

61st month 56 74 93 56 52 58 58

2018

13th month 78 73 92 85 89 84 78

25th month 69 67 85 76 80 75 73

37th month 60 65 84 68 76 65 69

49th month 57 66 82 60 55 62 63

61st month 54 73 93 47 50 50 56

1QFY19

13th month 77 73 92 85 88 83 80

25th month 70 66 85 77 78 75 75

37th month 60 67 85 69 77 68 72

49th month 56 58 80 61 55 63 65

61st month 53 69 94 45 51 48 56

2QFY19

13th month 76 86 92 84 88 82 86

25th month 70 83 87 78 81 76 85

37th month 60 79 85 70 77 68 81

49th month 56 65 80 61 59 64 75

61st month 53 65 95 45 51 47 62

Direct and othersNon-par Non-par (others) ULIP Agency Banca

2QFY19 1QFY19 2QFY19 (change) 1HFY18 1HFY19 (change) 2015 2016 2017 2018 (change)

Individual agents 10 11 11 100 bps 10 11 100 bps 13 12 12 11 -100 bps

Bancassurance 70 65 69 -131 bps 69 67 -200 bps 73 75 72 71 -100 bps

Direct 14 19 16 232 bps 14 17 300 bps 9 9 11 14 300 bps

Brokers and others 6 5 4 -201 bps 6 4 -200 bps 5 4 5 5 0 bps



Exhibit 11: Individual agent addition regained momentum in 1HFY19 Individual agents for HDFC Standard Life, March fiscal year-ends, 2014-2QFY19 (# 000')

Source: LIC Council, Company

Exhibit 12: Interest rate sensitivity increased in 1HFY19 Sensitivity of VNB and EV, March fiscal year-ends, 2017-1HFY19 (%)


22.5 21.517.9 17.3

24.0

6.3

14.5

54.8

65.2

82.4

54.5

77.083.1

91.2

0

20

40

60

80

100

0

10

20

30

40

50

2014 2015 2016 2017 2018 1QFY19 2QFY19

Additions Agents

2017 2018 1HFY19

VNB EV VNB EV VNB EV

Interest rates and assets

Interest and discount rates up 100 bps 0.4 (1.9) 0.3 (1.8) 0.9 (2.0)

Interest an discount rates down 100 bps (1.4) 1.9 (1.7) 1.9 (2.3) 2.1

Interest and discount rates up 200 bps 0.0 (3.8)

Interest an discount rates down 200 bps (4.1) 3.7

Equity values up 10% (1.4) (2.0)

Equity values down 20% (2.6) (4.1)

Implied swaption volatilities up 25% (0.2) (0.1)

Implied equity volatilities up 25% (0.5) (0.1)

Expenses

Maintenance expense up 10% (2.2) (0.8) (2.2) (0.6) (2.2) (0.6)

Maintenance expense down 10% 2.2 0.8 2.2 0.6 2.2 0.6

Acquisition expense up 10% (15.1) NA (14.2) NA (15.3) NA

Acquisition expense down 10% 15.1 NA 14.2 NA 15.3 NA

Policy/ premium discontinuance rates

Discontinuance rate up 10% (5.8) (1.8) (3.5) (1.6)

Discontinuance rate down 10% 6.2 1.9 3.7 1.7

Discontinuance rate up 50% (25.9) (7.9)

Discontinuance rate down 50% 36.1 11.2

Insurance risk

Mortality and morbidity rates up 5% (4.3) (0.7) (5.2) (0.8) (6.0) (0.9)

Mortality and morbidity rates down 5% 4.3 0.7 5.2 0.8 6.0 0.9

Required capital

Set equal to MRC less FFA in participating fund 0.8 0.1

Taxation

Assumed tax rate up 25% (13.0) (6.9) (14.4) (7.6) (14.0) (6.4)

Assumed tax rate up 34.6% (24.8) (13.2)



Exhibit 13: We expect 21-23% operating RoEV and VNB margin of 24-25% for HDFC Life Key metrics and RoEV movement, March fiscal year-ends, 2012-2021E (Rs bn)


Exhibit 14: We expect HDFC Standard Life to deliver overall VNB margin of 24% VNB margins in individual business, March fiscal year-ends, 2016-2021E (Rs bn)


Exhibit 15: HDFC Life will trade at 3.5X EV at our appraisal value-based price target Calculation of appraisal value for HDFC Standard Life, March fiscal year-ends, 2019-2021E (Rs bn)


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

APE 27.9 32.8 25.4 29.5 36.1 41.9 55.3 65.3 78.3 94.0

YoY (%) 17.6 (22.6) 16.1 22.4 16.1 32.0 18.0 20.0 20.0

VNB 4.7 6.0 6.6 7.4 7.4 9.2 12.8 16.0 18.8 22.6

YoY (%) 27.7 10.0 12.1 24.3 39.1 24.9 17.6 20.0

EV movement

Opening EV 42.1 48.2 58.7 69.9 88.9 102.3 124.7 152.1 181.1 220.2

Methodology changes (0.1) 0.6 1.6 3.5

Assumption change 0.1 1.2 1.6

VNB 4.7 6.0 6.6 7.4 7.4 9.2 12.8 16.0 18.8 22.6

Acquisition expense overrun (1.9) (1.5) (2.5) (1.5)

Expected return in force 3.0 3.9 4.4 6.1 8.1 9.6 10.4 14.0 16.7 20.3

Operating variance 1.2 0.6 (0.1) (0.3) 3.2 2.2 2.0 4.0 4.2 4.4

Tax changes 0.2 1.1

EVOP 6.9 9.6 11.1 15.3 18.7 22.2 26.8 34.0 39.7 47.2

Investment variance (1.0) 0.9 1.3 4.6 (3.1) 2.5 2.6 (2.8) 2.0 2.0

Dividend payout (1.2) (1.7) (2.2) (2.4) (2.0) (2.2) (2.5) (2.9)

Closing EV 48.2 58.7 69.9 88.1 102.3 124.6 152.1 181.1 220.2 266.5

Key ratios (%)

VNB margins 10.4 13.2 16.4 17.4 20.5 22.0 23.1 24.5 24.0 24.0

RoEV 21.8 19.1 26.0 16.2 21.8 22.0 19.1 21.6 21.0

Operating RoEV 19.9 18.9 21.9 21.2 21.7 21.5 22.3 21.9 21.4

2016 2017 2018 2019E 2020E 2021E

APE 36.1 41.9 55.3 65.3 78.3 94.0

Protection 2.5 3.4 6.2 7.8 9.8 11.7

Savings 33.6 38.5 49.1 57.4 68.5 82.2

VNB post overrun 7.4 9.2 12.8 16.0 18.8 22.6

VNB margins post overrun (%) 20.5 22.0 23.1 24.5 24.0 24.0

Protection (assumed) 100 80 80 75 75 75

Savings 14.5 16.9 15.9 17.6 16.7 16.7

2019E 2020E 2021E

Embedded value (EV, Rs bn) 181 220 267

Value of new business (VNB, Rs bn) 16 19 23

New business multiple (NBM, X) 28.8 28.8 28.8

Structural value (SV= VNB X NBM, Rs bn) 461 542 650

Appraisal value (AV= EV + SV, Rs bn) 642 762 916

Appraisal value/ EV (X) 3.5 3.5 3.4

Appraisal value/ VNB (X) 40.1 40.5 40.6

Value of HDFC at 51.7% stake and 10% holding company discount (Rs bn) 299 354 426

Value of HDFC (Rs/ share) 180 213 256

Value of HDFC Standard Life (Rs/ share) 320 380 458



Exhibit 16: HDFC Life trades at 3.3X FY2020E EV Valuation comparison of life insurance companies in India, March fiscal year-ends, 2018-2021E (Rs bn)


TP Price

Market

cap. EVOP (Rs bn) Embedded value (Rs bn) VNB margin (%) Price/EV (X) Price/EVOP (X) Operating RoEV (%)

Rating (Rs) (Rs) (Rs bn) 2017 20182019E2020E2021E 2017 2018 2019E 2020E 2021E 2017 2018 2019E 2020E 2021E 2017 2018 2019E 2020E2021E 2017 2018 2019E 2020E2021E 2017 2018E 2019E 2020E 2021E

HDFC Life ADD 380 359 723 22 27 34 40 47 125 152 181 220 267 22 23 25 24 24 5.8 4.8 4.0 3.3 2.7 33 27 21 18 15 22 22 22 22 21

ICICI Prudential Life BUY 475 324 465 23 37 33 39 45 161 188 211 244 282 10 17 18 19 19 2.9 2.5 2.2 1.9 1.7 20 13 14 12 10 17 23 18 19 19

Max Life ADD 650 378 102 11 14 15 18 20 66 75 87 101 116 19 20 20 20 20 2.3 2.0 1.7 1.5 1.3 14 11 10 9 7 20 21 20 20 20

SBI Life BUY 715 564 564 29 30 35 43 50 165 191 217 257 304 15 16 18 18 18 3.4 3.0 2.6 2.2 1.9 20 19 16 13 11 23 18 18 20 20


2QFY19: reaffirms scope of outperformance

ADSEZ reported a strong 21% yoy growth in volumes on (1) rebound in crude (Mundra) and

coal (across portfolio) and (2) sustained growth momentum in container (across portfolio). INR

depreciation benefits further boosted port revenue/EBITDA that grew 26/30% yoy. Given the

static market share for ADSEZ in FY2018, 2QFY19 reaffirmed the scope of share gains. More

outperformance would be a function of (1) start of Ennore operations, (2) evacuation concerns

at Dhamra getting relieved and (3) start of operations beyond containers at Kattupalli.

Forex impact and buildup in receivables limit improvement in balance sheet

While a 2.75X net debt to annualized 1HFY19 EBITDA is comforting (happens on a base with

limited SEZ income), we had anticipated a decline in absolute levels. Despite the `30 bn 1HFY19

port EBITDA being >2X capex spent and some part of container JV receivables getting paid

back, gross debt levels increased by `13 bn. Key drivers for this were (1) forex MTM impact,

(2) large increase in other financial assets (have largely related to SEZ income in the past) and

(3) investments in gas assets (would get transferred to Adani-Total JV in 3QFY19).

Higher cost of equity warranted given higher G-Sec yields and uncertainty in port financials

We increase our cost of capital/equity estimate by 130/100 bps to 12.0%/13.5%. Stiffer cost of

equity bakes in (1) increase in 10-year G-Sec yields and (2) uncertainty in forecasting ADSEZ’s

port-based income and EBITDA. On the latter, we note recent instances of restatement of such

metrics, possibly reflecting the complexities associated with a large consolidated portfolio. We

also note the scope of certain non-recurring items such as SEIS income in such metrics.

Cash flow mismatch on forex has a disproportionate impact on EPS, muted impact on SoTP

In our analysis, we assess stiff requirement on retaining forex-related benefits on top-line to

obviate the impact of repayment and servicing of forex debt over all periods of time. Improving

but still low capacity utilization comes in way and may lead to a cash-flow impact when the

US$650 mn bullet repayment happens in CY2020. The impact is disproportionate on near-term

earnings estimates and modest on SoTP—3% cut required at 10% higher ~`80/US$ rate.

Adani Ports and SEZ (ADSEZ) Infrastructure

Outperformance continues. ADSEZ’s good operational results despite evacuation

constraints at Dhamra and impending start of Kattupalli’s port operations beyond

container boost the case for it to outperform the market. Increase in debt levels, partly

driven by forex, is worrying. While we broadly retain our operational estimates (ex-forex),

we still lower SoTP to `390 (from `460) primarily on higher cost of capital to factor in

(2) higher G-Sec yields and (2) volatility in port-level financials. We expect modest

impact of forex movement on our SoTP.

BUY

OCTOBER 24, 2018

RESULT

Coverage view: Attractive

Price (`): 319


BSE-30: 33,847

Aditya Mongia

Ajinkya Bhat

Adani Port and SEZ







MFs 1.7 EBITDA (Rs bn) 69.2 81.6 86.8


Absolute (7.8) (18.7) (21.5) ROE (%) 18.6 18.0 19.5

Rel. to BSE-30 0.4 (11.9) (24.6) Div. Yield (%) 0.3 0.5 0.5


452-294

660.6

Adani Ports and SEZ Infrastructure


2QFY19 results – all-round performance across volumes, margin and leverage

Notes: Exhibit 1– reported financials, Exhibit 2 – adjusted financials

Revenue growth led by all-round cargo growth. Adani Ports reported 2QFY19

revenues of `26 bn, up 18% when yoy financials are adjusted for port development

income of `5 bn, which was absent in this quarter. Port volumes grew 21% to 52 mn

tons and on half yearly basis, the company crossed the milestone of 100 mn tons for the

first time. Coal volumes grew 35% in the quarter led by resumption of coal imports by

Mundra power plant of Adani Power; crude volumes grew 42% due to higher offtake by

HMEL (unlike maintenance shutdown in 1QFY18) and IOCL. Container volumes continued

their strong double-digit growth at 16% in the quarter.

Another quarter of market share gains. The flagship Mundra port volumes grew 20%

in 2QFY19 while other ports registered even faster growth except Dhamra that continues

to suffer from shortage of rakes for evacuation. Total volume growth of 21% across

ADSEZ portfolio was much higher than 6% growth registered by major ports. Similarly,

container volume growth of 16% across ADSEZ portfolio was higher than 9% container

growth reported by major ports in the quarter. The company has thus continued to gain

market share.

Port EBITDA margin up 100 bps yoy. ADSEZ has once again met its target of achieving

100 bps improvement in 2QFY19 and 1HFY19. Port EBITDA margin thus stood at 70%

led by automation, better cargo mix and sweating of existing capacity.

Comfortable position on forex borrowings. Management maintains that as long as

the company has natural hedge on account of USD-denominated container pricing, it will

continue to prefer forex debt over domestic debt in order to save on interest costs.

Notwithstanding the MTM loss on forex debt, the company’s cumulative forex earnings

are expected to be more than cumulative forex payments (forex debt service + repayments)

in each period of the next 12/24/36/48/60 months. The management considers net debt

to EBITDA level of 3X as the threshold for comfort. Current net debt to EBITDA of 2.75X

continues to be in the comfort zone. The company has also made progress on recovery of

related party receivables such as that from CT3/CT4 JVs for port development/asset

transfer (down to `4.5 bn from `15 bn as of end-FY2018) and that from Adani Power for

coal imports. The management expects to fully receive outstanding balance from

CT3/CT4 JVs by end-FY2019.

Strategy and outlook. The management mentioned that ADSEZ will continue to pursue

strategy of cargo diversification and will try to get greater share of long-term contracts.

The company has guided for SEZ income of `8-10 bn, capex of `23-25 bn and FCF of

`17-20 bn in FY2019. Port EBITDA margin is expected to improve further to 71% by year-

end. Most of the capex will be consumed by expansion of Dhamra, Kattupalli and

construction of Vizhinjam port. The company also mentioned progress on establishment

of new ICDs in the logistics business as well as procurement of 11 rakes to mitigate

shortage for cargo evacuation at Dhamra. The sale and transfer of Dhamra LNG assets to

the new JV with Total SA will be completed by Dec-2018/Jan-2019 and these assets will

be removed out of the ADSEZ portfolio. On the international front, the strategy remains

to pursue greenfield developments in partnership with local players but the management

clarified that there are no concrete proposals under consideration at the moment.

Infrastructure Adani Ports and SEZ


Exhibit 1: Strong 21% volume growth led by good performance across all cargo classes and across all the port assets Adani Port and SEZ, consolidated - 2QFY19 – reported key numbers (Rs mn)


Exhibit 2: ADSEZ reported a strong 18% adjusted revenue growth and >300 bps improvement in EBITDA margin in 2QFY19 Adani Port and SEZ, consolidated - 2QFY19 – reported key numbers (Rs mn)

Notes:

(a) Adjusted financials move the port development income in 2QFY18 and 1HFY18 from revenue line to extraordinary items.


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

Net operating income 26,080 26,131 27,061 24,110 (0.2) (3.6) 8.2 50,190 54,513 (8) 109,028 113,230 (4)

Operating expenses (6,409) (6,196) (5,803) 3 10 (12,212) (15,488) — (31,995)

Employee costs (1,311) (1,027) (1,189) 28 10 (2,500) (2,207) — (4,473)

Admin and other exp. (1,325) (1,208) (1,234) 10 7 (2,559) (2,520) — (5,307)

Total expenditure (9,045) (9,628) (8,430) (8,226) (6) 7 10 (17,272) (20,215) (15) (39,811) (41,776) (5)

EBITDA 17,035 16,503 18,632 15,884 3 (9) 7 32,919 34,298 (4) 69,217 71,454 (3)

Other income 3,143 2,626 2,560 2,928 20 23 7 6,071 4,705 29 10,012 10,109 (1)

Interest expense (3,478) (3,587) (2,946) (3,206) (3) 18 8 (6,684) (6,245) 7 (13,630) (12,574) 8

Depreciation (3,520) (3,357) (3,000) (3,225) 5 17 9 (6,745) (5,958) 13 (14,099) (11,884) 19

PBT 13,180 12,185 15,246 12,381 8 (14) 6 25,562 26,800 (5) 51,500 57,106 (10)

Tax expense (1,853) (3,046) (3,809) (2,250) (39) (4,103) (7,102) (42) (9,518) (15,442) (38)

PAT 11,327 9,139 11,437 10,131 24 (1) 12 21,459 19,698 9 41,982 41,664 1

Extraordinary items (5,185) (5,750) (1,467) (3,158) (8,343) (2,099) (9,944) (4,765)

Share of minority interest (87) (23) (50) (67) (154) (71) (122) (163)

Reported PAT 6,055 3,366 9,921 6,907 (39) (12) 12,962 17,528 (26) 31,916 36,736 (13)

Other comprehensive income 2 — (3) (0) 2 (14) (115) — 94

Total comprehensive income 6,057 3,366 9,918 6,907 (39) (12) 12,964 17,514 (26) 31,916 36,830 (13)

Reported port volume (mn tonnes) 52 48 43 48 9 21 9 100 87 15 201 180 12

Reported port revenue 22,750 19,918 18,080 19,650 14 26 16 42,400 35,060 21 81,661 73,930 10

Reported port EBITDA 15,950 NA 12,260 13,800 30 16 29,750 24,060 24 57,544 52,070 11

Port EBITDA margin (%) 70.1 NA 67.8 70.2 70.2 68.6 70.5 70.4

Key ratios (%)

Operating exp./ sales 24.6 22.9 24.1 24.3 28.4 28.3

Employee costs/ sales 5.0 3.8 4.9 5.0 4.0 4.0

Admin and other exp./ sales 5.1 4.5 5.1 5.1 4.6 4.7

EBITDA margin 65.3 63.2 68.9 65.9 65.6 62.9 63.5 63.1

PBT margin 50.5 46.6 56.3 51.4 50.9 49.2 47.2 50.4

PAT margin 43.4 35.0 42.3 42.0 42.8 36.1 38.5 36.8

Effective tax rate 14.1 25.0 25.0 18.2 16.1 26.5 18.5 27.0

EPS (Rs) 5.4 4.4 5.5 4.9 10.3 9.5 20.2 20.0

% change

Adjusted Adjusted

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

Net operating income 26,080 26,131 22,021 24,110 (0.2) 18.4 8.2 50,190 42,863 17.1 109,028 113,230 (3.7)

Operating expenses (6,409) (5,803) 10.4 (12,212) — (31,995)

Employee costs (1,311) (1,189) 10.3 (2,500) — (4,473)

Admin and other exp. (1,325) (1,234) 7.4 (2,559) — (5,307)

Total expenditure (9,045) (9,628) (8,430) (8,226) (6.1) 7.3 10.0 (17,272) (16,405) 5.3 (39,811) (41,776) (4.7)

EBITDA 17,035 16,503 13,592 15,884 3.2 25.3 7.2 32,919 26,458 24.4 69,217 71,454 (3.1)

Other income 3,143 2,626 2,560 2,928 19.7 22.8 7.3 6,071 4,705 29.0 10,012 10,109 (1.0)

Interest expense (3,478) (3,587) (2,946) (3,206) (3.0) 18.1 8.5 (6,684) (6,245) 7.0 (13,630) (12,574) 8.4

Depreciation (3,520) (3,357) (3,000) (3,225) 4.9 17.3 9.1 (6,745) (5,958) 13.2 (14,099) (11,884) 18.6

PBT 13,180 12,185 10,206 12,381 8.2 29.1 6.5 25,562 18,960 34.8 51,500 57,106 (9.8)

Tax expense (1,853) (3,046) (2,050) (2,250) (39.2) (4,103) (4,366) (6.0) (9,518) (15,442) (38.4)

PAT 11,327 9,139 8,156 10,131 23.9 38.9 11.8 21,459 14,594 47.0 41,982 41,664 0.8

Extraordinary items (5,185) (5,750) 1,815 (3,158) (8,343) 3,005 (9,944) (4,765)

Share of minority interest (87) (23) (50) (67) (154) (71) (122) (163)

Reported PAT 6,055 3,366 9,921 6,907 (39.0) (12.3) 12,962 17,528 (26.0) 31,916 36,736 (13.1)

Other comprehensive income 2 — (3) (0) 2 (14) (114.8) — 94

Total comprehensive income 6,057 3,366 9,918 6,907 (38.9) (12.3) 12,964 17,514 (26.0) 31,916 36,830 (13.3)

Reported port volume (mn tonnes) 52 48 43 48 8.8 21.4 8.6 100 87 15.3 201 180 11.5

Reported port revenue 22,750 19,918 18,080 19,650 14.2 25.8 15.8 42,400 35,060 20.9 81,661 73,930 10.5

Reported port EBITDA 15,950 NA 12,260 13,800 30.1 15.6 29,750 24,060 23.6 57,544 52,070 10.5

Port EBITDA margin (%) 70.1 NA 67.8 70.2 70.2 68.6 70.5 70.4

Key ratios (%)

Operating exp./ sales 24.6 24.1 24.3 28.3

Employee costs/ sales 5.0 4.9 5.0 4.0

Admin and other exp./ sales 5.1 5.1 5.1 4.7

EBITDA margin 65.3 63.2 61.7 65.9 65.6 61.7 63.5 63.1

PBT margin 50.5 46.6 46.3 51.4 50.9 44.2 47.2 50.4

PAT margin 43.4 35.0 37.0 42.0 42.8 34.0 38.5 36.8

Effective tax rate 14.1 25.0 20.1 18.2 16.1 23.0 18.5 27.0

EPS (Rs) 5.4 4.4 3.9 4.9 10.3 7.0 20.2 20.0

% change



Exhibit 3: Strong volume growth reported across most of the ports including the largest and flagship Mundra port; Dhamra port

continues to suffer from rake availability which will be mitigated after delivery of company owned rakes by Mar-2019 Quarterly trajectory of volumes of Adani’s port assets, March fiscal year-ends, 1QFY16-2QFY19 (mn tons)


Exhibit 4: Quarter after quarter, ADSEZ and Mundra continue to demonstrate outperformance to Indian ports Volumes handled at major ports in the country and by ADSEZ, March fiscal year-ends, 2QFY19 and 1HFY19

Source: Company, Indian Ports Association, Kotak Institutional Equities

Exhibit 5: Decline in share of coal and increase in share of high-value cargo handling (such as

containers and liquids) has been the sustained theme for the past three years Evolution of cargo handling composition for Adani Ports, March fiscal year-ends, 2015-1HFY19 (%)


1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 Yoy (%)

Mundra Port 29.9 27.0 26.1 26.0 28.9 28.3 27.8 28.6 30.2 29.3 32.4 29.8 32.0 35.0 19.6

Dahej port 2.5 1.5 2.4 1.8 1.5 2.0 1.1 1.9 1.6 1.7 2.1 1.6 2.2 2.2 33.5

Hazira port 2.9 2.9 3.3 3.2 3.4 4.0 3.9 4.0 4.0 4.1 4.3 4.5 4.6 5.4 31.5

Dhamra port 3.2 3.8 3.8 3.9 5.4 5.2 5.4 5.5 5.3 5.0 5.4 5.8 4.4 4.6 (7.4)

Others 1.0 1.3 2.4 2.7 3.2 3.6 2.8 2.5 2.9 3.0 3.8 3.7 4.9 5.0 65.3

Total 39.5 36.5 38.0 37.5 42.4 43.0 41.0 42.3 44.0 43.0 48.0 45.4 48.1 52.2 21.3

YoY(%) 16.8 3.8 (2.3) 3.2 7.3 17.9 8.0 12.8 3.8 (0.0) 17.1 7.2 9.3 21.3

2QFY19 2QFY18 % chg. 2QFY19 2QFY18 % chg. 1HFY19 1HFY18 % chg. 1HFY19 1HFY18 % chg.

Kolkata 5 4 4.0 171 163 4.9 9 9 3.8 337 320 5.3

Haldia 10 10 6.7 45 37 21.6 21 19 10.1 90 70 28.6

Paradip 26 23 13.4 3 2 NA 53 48 11.1 6 3 100.0

Visakhapatnam 16 15 3.5 115 99 16.2 32 30 5.4 227 189 20.1

Ennore 8 6 30.1 — — NA 17 14 19.7 — — NA

Chennai 14 14 2.4 422 396 6.5 27 26 3.4 834 790 5.6

Tuticorin (Chidambarnar) 8 8 (3.3) 188 171 9.9 17 17 (2.9) 371 337 10.1

Cochin 8 7 15.2 140 132 5.9 16 14 11.5 279 268 4.1

New Mangalore 10 10 (0.7) 35 29 20.7 20 20 3.2 68 51 33.3

Mormugao 4 4 (12.1) 11 7 57.1 9 13 (27.1) 18 14 28.6

Mumbai 15 16 (7.0) 7 10 (30.0) 29 31 (5.9) 14 23 (39.1)

J.N.P.T 17 16 6.7 1,279 1,201 6.5 35 33 6.5 2,520 2,403 4.9

Kandla (Deendayal) 30 26 13.0 47 17 NA 59 53 10.0 103 49 NA

Major ports total 169 159 6.4 2,463 2,264 8.8 343 327 5.1 4,867 4,517 7.7

Mundra (bulk, crude, CT 1-4) 35 29 19.6 1,109 983 12.8 67 60 12.6 2,262 1,985 14.0

Total cargo (MMT) Container ('000 TEUs) Total cargo (MMT) Container ('000 TEUs)

47

41

36

35 33 33 3330

32

29

32

37

41 41 41 4143

41

1012 12

10 11 11 1113 13

1415 15 14 15 15 15 14 14

0

5

10

15

20

25

30

35

40

45

50

2015 2016 2017 1QFY18 1HFY18 9MFY18 FY2018 1QFY19 1HFY19

Coal Container Crude Others



Exhibit 6: Select port-specific issues arrested the trend of increasing market share for ADSEZ in

FY2018 Trend in Adani Ports' cargo handling volumes and market share, March fiscal year-ends, 2010-18

Notes:

(1) Acquisition of Kattupalli port drove market share gains in FY2017.

Source: Company, Indian Ports Association, Kotak Institutional Equities

Exhibit 7: Adani Ports portfolio can sustain outperformance in spite of west coast share stagnating; we estimate 400 bps of share gains

over FY2019E-24E Movement in market share of Adani Ports and SEZ across regions (%)

Source: Ministry of Shipping, company, Kotak Institutional Equities estimates

40 52

64 82.1

113

144 152 169

180

4.7

5.9

7.0

8.8

11.6

13.7 14.1

14.9 14.9

0

4

8

12

16

-

40

80

120

160

200

2010 2011 2012 2013 2014 2015 2016 2017 2018

Adani Ports volumes (LHS, mn tonnes) Market share (RHS, %)

21 22 22 22 22 23 24 25 25 25 25 25

38 39 42

47 47 48 49 50 50 50 50 49

-

10

20

30

40

50

60

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

West West - container

- - -

2 3 3

4 5 5 6

7 8

- - -

9

12 14

15 16 17 17 18

19

-

4

8

12

16

20

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

South South - container

8 8

8

10 9

7 8

9 11

11 12 13

- - - - -

2

6

11

15

17 18 19

-

4

8

12

16

20

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

East East - container

13 14 14 15 15 15 16 17 18 18 19 19

23 24 26

31 32 34 35 36 37 37 37 37

-

8

16

24

32

40

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

Overall Overall - container



Exhibit 8: Consolidated balance sheet for Adani Ports, March fiscal year-ends, 2014-1HFY19 (Rs mn)


Natural hedge against INR depreciation may not be enough; impact more on

estimates than on SoTP

Our analysis of the forex depreciation impact on Adani Ports throws some interesting

considerations. There are primarily three ways in which recent INR depreciation affects the

company:

Benefit on dollar-denominated container pricing. Globally, ports price their container

offerings in USD terms. Recent sharp depreciation of INR vs USD thus provides a benefit

to Adani Ports on topline. Adani Ports will have ~US$400 mn of dollar-denominated

revenues in FY2019E.

Impact on forex debt due to MTM losses as well as interest cost. Adani Ports has a

forex debt to the tune of US$2 bn on its balance sheet. INR depreciation thus affects

financials through (1) one-time exceptional marked-to-market loss on this forex debt and

(2) natural hedge available to interest payments will dampen the topline benefit on

container pricing to that extent.

Competitive pressure. A secondary impact could occur from lower pricing that can be

offered by competition; e.g. Gujarat Pipavav is a debt-free asset and thus does not suffer

from INR depreciation the way Adani Ports does due to its forex debt. Such a port can

potentially exert pricing pressure by lowering its USD pricing thereby passing on some of

the INR depreciation benefit to shipping lines.

2014 2015 2016 2017 1HFY18 2018 1HFY19

Shareholders funds 87,681 107,679 132,236 175,260 191,119 210,688 216,595

Share capital 4,168 4,168 4,170 4,142 4,142 4,142 4,142

Reserves & surplus 83,513 103,511 128,066 171,118 186,977 206,546 212,453

Loan funds 116,940 151,553 214,997 224,450 214,842 214,322 228,259

Deferred tax liability (net) 6,744 8,590 10,665 (17,759) (14,235) (11,681) (9,865)

Others (infra usage lease) 7,336 7,188 6,064 — — — —

Minority interest 1,437 1,590 1,429 1,392 1,399 1,496 1,715

Total sources of funds 220,137 276,600 365,390 383,344 393,125 414,824 436,704

Net fixed assets 151,475 192,027 208,384 237,319 234,049 253,986 273,962

Goodwill on consolidation 404 25,997 25,997 26,704 26,672 26,671 28,105

Investments 634 2,602 3,445 26,114 17,561 29,039 10,443

Cash & bank balance 5,139 6,338 12,910 19,768 20,944 29,677 44,192

Foreign currency translation diff.

Current assets 89,119 93,858 142,908 106,031 142,145 121,273 137,033

Inventories 1,694 2,592 2,137 6,571 2,582 5,203 7,652

Debtors 14,276 17,266 19,657 19,784 25,838 35,401 35,386

Loans & advances 63,327 62,339 100,327 35,545 40,408 33,053 26,191

Other current assets 9,822 11,660 20,787 44,131 73,317 47,617 67,804

Current liabilities & provisions 26,634 44,222 28,254 32,591 48,246 45,822 57,031

Current liabilities 19,690 36,495 26,524 31,609 47,240 44,798 56,016

Provisions 6,943 7,727 1,730 982 1,006 1,024 1,015

Net current assets 62,485 49,636 114,655 73,440 93,899 75,451 80,003

Total application of funds 220,137 276,600 365,390 383,344 393,125 414,824 436,704

Net debt (debt-cash-investments) 111,166 142,613 198,643 178,569 176,336 155,606 173,625

Consolidated



Stiff requirement for Adani Ports to maintain US$ pricing over time

In the exhibit below, we bring out the quantum of the benefits of depreciation on revenues

that ADSEZ would need to retain in order to obviate the impact of such currency movement

on servicing and repayment of debt. While it may be reasonable to assume that 100%

depreciation benefits can be retained in the near term (US$-denominated rate contracts

fixed for a year), shipping lines may end up negotiating hard whenever the rates are due for

revision. Capacity utilization for west coast container terminals is likely to improve in FY2019

though it would still be at weak sub-60% until FY2020E and will thus lower the bargaining

power of port operators.

Our analysis suggests that, depending on the period of cash flow hedge, ADSEZ would need

to retain up to 9% quantum of the recent 14% yoy INR depreciation in its US$-

denominated port handling charges. The analysis takes into account the timing of forex debt

repayments and interest payments. It does not assume any further depreciation in currency

beyond current USD-INR rate of ~`74.

Exhibit 9: ADSEZ needs to retain 9% quantum of the 14% yoy INR depreciation benefits at the top-

line to compensate the cash-flow impact on its forex debt INR depreciation benefit that needs to be retained by ADSEZ to obviate the negate impact on US$-denominated debt


Based on the repayment schedule of the company’s forex debt, FY2023, i.e. 5 years from

now will see a significant cash requirement. In order to meet that cash requirement in

FY2023, assuming INR does not depreciate further, Adani Ports will have to retain 9%

equivalent quantum out of the 14% yoy depreciation of INR vs USD seen in YTD FY2019.

While such benefits can be retained in the short term due to the fixed term of an ongoing

rate contract, shipping lines may drive a hard bargain when the contracts come up for

renewal. In such a scenario, weak capacity utilization of container ports on western coast

will reduce bargaining power of port operators including that of Adani Ports.

9%

0%

2%

4%

6%

8%

10%

12%

14%

1 2 3 4 5 6 7 8 9 10

Number of years considered for cumulative cash flow hedge starting FY2018



Exhibit 10: Capacity utilization will remain weak over the next two years and will reduce bargaining

power of port operators in tariff negotiations with shipping lines Capacity utilization for west coast container terminals (%)


The evidence so far suggests that there has already been a modest pass-through of INR

depreciation benefits by port operators to shipping lines. While INR has depreciated ~14%

yoy, the INR-denominated tariffs for a large shipping line have gone up by only 4-7%

indicating that port operators have likely reduced the dollar pricing.

Exhibit 11: There has already been a modest pass-through of INR depreciation on pricing by ports Movement in INR denominated terminal handling charges at key west coast terminals for a large shipping line

Notes:

(a) The above trend may belie the strength of tariffs at ports if it factors in a discount offered by shipping lines.

(b) Nhava Sheva – GTI has shown a higher tariff increase of 18% during this period. However, this increase

has been largely a result of commissioning of PSA’s container terminal at JNPT and subsequent one-time

upward revision of tariff at all the JNPT terminals.

Source: Industry, Kotak Institutional Equities

Cash-flow mismatch unlikely to impact SoTP

Below we put a sensitivity of SoTP and FY2020E EPS to the end-FY2019 US$/INR rate and to

the extent of related INR depreciation benefits that ADSEZ would be able to retain. Our

analysis suggests a limited 3% impact on SoTP for a 10% further depreciation in currency.

The impact is much more for near-term EPS estimates given the Ind-AS requirement to book

MTM impact on all forex debt issued after April 1, 2016. Out of ~US$2 bn of forex debt of

ADSEZ, 50% was borrowed after April 1, 2016.

80.976.9 75.2

67.7

55.059.8 59.3

0

20

40

60

80

100

2014 2015 2016 2017 2018 2019E 2020E

Capacity utilization for west coast container terminals (%)

7%

5%

NM

4%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Mundra Hazira Nhava Sheva - GTI Pipavav

Yoy change in port handling charges as quoted by a large shipping line



Exhibit 12: USD-INR rate does not have a meaningful impact on ADSEZ's SoTP even though it can

materially alter near-term earnings estimates due to vagaries of Ind-AS accounting Impact of USD-INR rate and the realization benefits of INR depreciation that ADSEZ can retain on SoTP and FY2020E EPS


ADSEZ likely to gain share beyond west coast from FY2020 onwards

Specific factors at play in FY2018 and FY2019 have deferred the benefits of market share

gains that would have come ADSEZ’s way in a good growth environment. These factors

have largely impacted growth in liquid cargo (HMEL shutdown issue in FY2018) and coal

cargo (Mundra plant shutdown, limited rake availability for Dhamra). Modest

outperformance in container and impact of select new bulk cargo contracts with key

customers have helped ADSEZ grow market share by 50 bps/150 bps over the past 2/4

years. Beyond an in-line growth for ADSEZ on the west coast in FY2019, Dhamra and

Katupalli port should drive overall market share gains. We anticipate a 400 bps improvement

in market share to 19% over FY2019E-24E.

Broadly retain operational estimates; higher interest cost and MTM forex losses

lead to an optically large cut

We broadly retain our volume and EBITDA estimates for ADSEZ. Higher interest outgo

reflects the impact of a higher forex rate of `72/US$ (KIE estimate FY2019E) versus `65 in

FY2018. The Ind-AS treatment of INR depreciation on forex debt leads to a higher cut in

reported PAT. Excluding such impact, we bring down our EPS estimates by 1-2%.

SOTP

385 70 72 74 76 78 80

0% 0 — (0) (1) (1) (2)

20% 1 0 0 (0) (1) (1)

40% 1 1 1 0 0 (0)

60% 1 1 1 1 1 1

80% 2 2 2 2 2 2

100% 2 2 2 2 2 3

FY2020E EPS

385 70 72 74 76 78 80

0% 4 — (4) (8) (12) (16)

20% 4 0 (3) (7) (11) (15)

40% 4 1 (3) (7) (10) (14)

60% 5 1 (3) (6) (10) (13)

80% 5 1 (2) (6) (9) (13)

100% 5 2 (2) (5) (8) (12)

Depreciation

benefits

retained by

ADSEZ

Stabilizing USDINR rate

Depreciation

benefits

retained by

ADSEZ

Stabilizing USDINR rate



Exhibit 13: Change in estimates for Adani Ports and SEZ, March fiscal year-ends, 2018-21E

Notes:

(a) Note that recurring EPS estimate change is small at 1-4%. However, large INR depreciation adds MTM loss on forex debt leading to 27% cut in

reported PAT for FY2019E.


Exhibit 14: Volumes estimates for Mundra and other related ports, March fiscal year-ends, 2014-21E


2017 2018 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E

Volumes (mn tons)

Mundra volume 116 120 134 146 157 128 140 152 5 5 4

Dahej port 6 7 9 10 11 8 10 11 4— 4— 4—

Hazira port 15 17 20 23 25 19 22 24 4— 4— 4—

Mormugao port 2 2 3 4 5 3 4 5 — — —

Vizag port 1 1 1 1 1 1 1 1 NA NA NA

Kandla port 4 4 6 7 7 6 7 8 — — (5)

Dhamra port 21 21 19 23 29 22 27 32 (15) (13) (9)

Ennore + Kattupalli 5 7 9 13 15 9 14 16 3— (10) (5)

Vizhingam — — — 4 6 — 3 7 NA 50 (10)

Consolidated volumes 171 179 201 231 257 196 227 255 2 2 1

Consolidated financials

Revenues 84,394 113,230 109,028 131,413 144,520 109,427 133,021 148,709 (0) (1) (3)

Port revenues 62,948 69,647 81,661 96,900 112,628 79,563 94,721 111,063 3 2 1

EBITDA 54,147 70,621 69,217 81,635 86,799 67,995 80,640 86,523 2 1 0

Port EBITDA 43,506 47,739 57,544 68,071 78,880 56,038 66,636 77,953 3 2 1

Port EBITDA margin (%) 69 69 70 70 70 70 70 70 3 bps -11 bps -16 bps

Interest expense (11,157) (14,954) (13,630) (15,498) (14,517) (13,293) (13,738) (11,849) 3 13 23

PBT 41,789 53,893 51,500 59,856 72,531 51,434 61,601 75,397 0 (3) (4)

Recurring PAT 39,115 38,288 41,860 46,667 59,556 38,745 46,931 60,910 8 (1) (2)

Recurring EPS (Rs) 18.9 18.5 20.2 22.5 28.8 18.7 22.7 29.4 8 (1) (2)

Extraordinary items - (1,552) (9,944) (3,015) (3,015) - - -

Reported PAT 39,115 36,736 31,916 43,651 56,541 38,745 46,931 60,910 (18) (7) (7)

Reported EPS (Rs) 18.9 17.7 15.4 21.1 27.3 18.7 22.7 29.4 (18) (7) (7)

New estimates Previous estimates % revision

2014 2015 2016 2017 2018 2019E 2020E 2021E

Volumes (mn tons)

Mundra port

Bulk 47 52 46 42 39 41 43 44

Coal 36 39 34 31 27 29 29 30

Other bulk 10 13 11 11 12 13 13 14

Crude / POL / Liquid 23 22 26 28 28 31 33 36

Container ('000 TEUs) 2,642 2,913 3,238 3,459 3,970 4,684 5,299 5,831

Container (mn tons) 35 38 40 46 53 62 71 78

Mundra volumes 105 111 112 116 120 134 146 157

Other port assets

Dahej port 8 12 8 6 7 9 10 11

Hazira port 4 7 12 15 17 20 23 25

Mormugao port — 1 2 2 2 3 4 5

Vizag port — 1 1 1 1 1 1 1

Kandla port — 0 4 4 4 6 7 7

Dhamra port 14 15 15 21 21 19 23 29

Ennore + Kattupalli port — — — 5 7 9 13 15

Vizhingam — — — — — — 4 6

Total of key ports 131 149 153 171 179 201 231 257



Revision in SoTP largely on account of a higher cost of capital

We increase our cost of capital/equity estimate by 130/100 bps to 12.0%/13.5%. Stiffer cost

of equity bakes in (1) increase in ten year G-Sec yields and (2) uncertainty in forecasting

ADSEZ’s port-based income and EBITDA. On the latter, we note recent instances of

restatement of such metrics, possibly reflecting the complexities associated with

consolidating a large portfolio of assets having business dependencies.

We also note the scope of certain non-recurring items within port income/EBITDA. For

instance, there is `4 bn asset related to export incentives and other receivables, a part of

which may be SEIS income included in the `73 bn port revenues and 70% port EBITDA

margin reported in FY2018. Another source of uncertainty in estimating port financials

relates to the income/PAT from container JVs that would not reflect in reported financials

due to Ind AS-related restrictions.

Exhibit 15: Restatements of previously announced port revenues and EBITDA make these difficult to

forecast Restatement seen in ADSEZ's announced port income for select few quarters, March fiscal year-ends (Rs mn)


14,500

15,000

15,500

16,000

16,500

17,000

17,500

18,000

18,500

Original reported value Implied from nextquarterly result

Implied from nextyear's quarterly result

Implied from nextyear's half yearly result

Port revenue

1QFY17 2QFY17 1QFY18

10,500

11,000

11,500

12,000

12,500

13,000

Original reported value Implied from nextquarterly result

Implied from next year'squarterly result

Implied from next year'shalf yearly result

Port EBITDA

1QFY17 2QFY17 1QFY18



Exhibit 16: We revise down our SoTP to Rs390 from Rs460 largely on change in cost of capital End-Sep-2019E DCF-based SoTP valuation of Adani Ports & SEZ


Entity EV (Rs mn) Net debt Implied equity value Stake (%) Equity Value of stake Value/share Method

Mundra Port (excl. SEZ) 284,399 62,320 222,080 100% 222,080 107 FCFF

SEZ 93,455 — 93,455 100% 93,455 45 FCFF

CT3 (incl. CT-3 extension) 59,729 54,638 5,090 50% 2,545 1 FCFF

CT4 23,341 18,818 4,522 50% 2,261 1 FCFF

Dahej 53,431 472 52,959 74% 39,190 19 FCFF

Dhamra 150,985 42,434 108,551 100% 108,551 52 FCFF

Hazira 110,734 9,827 100,907 100% 100,907 49 FCFF

Vizhinjam 26,008 24,130 1,878 100% 1,878 1 FCFF

Kandla 11,056 14,165 (3,109) 100% (3,109) (2) FCFF

Murmugao 7,683 4,001 3,681 100% 3,681 2 FCFF

Ennore 6,547 8,537 (1,990) 100% (1,990) (1) FCFF

Kattupalli 34,594 13,404 21,191 97% 20,555 10 FCFF

Adani Logistics 26,091 1,333 24,757 100% 24,757 12 14X EV/EBIDTA

Adani Harbour (marine revenues) 175,141 (18,662) 193,804 100% 193,804 94 14X EV/EBITDA

Total 1,063,194 235,418 827,776 808,565 390



Exhibit 17: Consolidated financials of Adani Ports & SEZ, March fiscal year-ends, 2012-21E (Rs mn)


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

Income statement

Net sales 32,708 35,766 48,240 61,520 71,087 84,394 113,230 109,028 131,413 144,520

Total operating costs (12,056) (12,007) (19,036) (22,497) (24,843) (30,247) (42,608) (39,811) (49,778) (57,720)

EBITDA 20,653 23,760 29,204 39,023 46,243 54,147 70,621 69,217 81,635 86,799

Other income 596 2,644 6,836 6,856 7,327 10,401 10,109 10,012 9,918 18,058

Depreciation (4,630) (4,220) (6,495) (9,117) (10,630) (11,602) (11,884) (14,099) (16,199) (17,809)

Financial charges (4,796) (5,418) (9,768) (11,751) (11,746) (11,157) (14,954) (13,630) (15,498) (14,517)

Pre-tax profit 11,822 16,766 19,777 25,012 31,194 41,789 53,893 51,500 59,856 72,531

Taxation (896) (1,231) (2,367) (12,715) (2,828) (2,866) (15,442) (9,518) (12,805) (12,378)

Adjusted PAT (before exceptional items) 10,927 15,535 17,410 12,297 28,366 38,922 38,451 41,982 47,051 60,152

Extraordinary items 94 697 — — — — (1,552) (9,944) (3,015) (3,015)

Minority interest — — — — 413 100 (163) (122) (384) (596)

Share of profit from associates — — (14) (102) 193 93 — — — —

Reported PAT post-minority interest 11,021 16,232 17,396 12,196 28,972 39,115 36,736 31,916 43,145 56,541

Adjusted EPS (Rs) 5.3 7.5 8.4 5.9 13.7 18.8 18.6 20.3 22.7 29.0

Balance sheet

Shareholders funds 48,385 63,963 87,681 107,679 135,055 175,260 210,688 239,877 279,156 331,539

Share capital 4,035 4,035 4,168 4,168 4,142 4,142 4,142 4,142 4,142 4,142

Reserves and surplus 44,350 59,928 83,513 103,511 130,913 171,118 206,546 235,735 275,014 327,397

Loan funds 175,650 115,858 128,895 177,313 189,535 214,860 214,322 205,378 208,264 227,191

Received/ receivable under LT lease 5,905 5,190 7,336 7,188 — — — 2,990 2,990 2,990

Deferred tax liability (net) 15,179 5,286 6,744 8,590 (12,015) (17,759) (11,681) (11,849) (12,044) (12,249)

Total sources of funds 246,467 191,720 232,093 302,359 313,814 373,754 414,824 438,014 480,368 552,070

Total fixed assets 217,825 146,065 160,893 195,361 236,427 264,023 280,657 295,475 317,326 313,075

Investments 11,823 2,619 1,038 25,997 5,452 26,114 29,039 29,039 29,039 29,039

Cash and bank balance 11,184 8,306 4,694 8,940 12,782 19,768 29,677 34,862 51,396 122,189

Net current assests excl cash 5,635 34,730 65,468 72,061 59,153 63,850 75,451 78,638 82,607 87,766

Total application of funds 246,467 191,720 232,093 302,359 313,814 373,754 414,824 438,014 480,368 552,070

Cash flows

Cash flow from operations 11,997 13,791 11,319 30,651 23,805 40,019 56,081 46,400 61,650 66,042

Cash flow from investing activities (138,760) (46,898) (25,100) (24,931) (41,532) (25,794) (38,458) (18,905) (28,131) 4,499

Free cash flows (33,475) (24,523) 297 18,361 2,703 3,148 29,104 17,484 23,601 52,483

Cash flow from financing activities 129,763 42,111 7,725 (2,366) 21,704 (13,247) (18,890) (22,310) (16,985) 253

Cash generated /utilised 3,000 9,004 (6,056) 3,353 3,978 978 (1,267) 5,185 16,534 70,794

Net cash at start of year 748 3,747 7,558 1,502 4,452 8,430 9,502 8,235 13,420 29,954

Net cash at end of year (excl. other cash) 3,747 12,752 1,502 4,855 8,430 9,408 8,235 13,420 29,954 100,748

Growth (%)

Revenue growth 9.4 34.9 27.5 15.6 18.7 34.2 (3.7) 20.5 10.0

EBITDA growth 15.0 22.9 33.6 18.5 17.1 30.4 (2.0) 17.9 6.3

Recurring PAT growth 42.2 12.1 (29.4) 130.7 37.2 (1.2) 9.2 12.1 27.8

Key ratios

EBITDA margin (%) 63.1 66.4 60.5 63.4 65.1 64.2 62.4 63.5 62.1 60.1

Recurring PAT margin (%) 33.4 43.4 36.1 20.0 39.9 46.1 34.0 38.5 35.8 41.6

Effective tax rate (%) 7.6 7.3 12.0 50.8 9.1 6.9 28.7 18.5 21.4 17.1

Net debt to equity (X) 3.4 1.7 1.4 1.6 1.3 1.1 0.9 0.7 0.6 0.3

BVPS (Rs) 24 32 42 52 65 85 102 116 135 160

RoE (%) 24.2 27.7 22.9 12.5 23.9 25.2 19.8 18.6 18.0 19.5

RoCE (%) 8.8 8.3 9.4 5.5 10.5 12.4 14.9 12.9 14.3 13.4


Protection business at 7.7% of APE; comparable VNB growth at 16% yoy

ICICI Prudential Life continued to focus on the protection business (7.7% of APE in 2QFY19,

up 375 bps yoy but down 50 bps qoq). APE growth improved to 4% yoy versus 18% decline in

1QFY19. Expansion in VNB margin to 17.5% led to 41% yoy growth in VNB to `3.5 bn; this

was largely due to higher tax rate assumptions in 2QFY18—the company had factored in

nominal tax rate in 2QFY18 as compared to the effective tax rate in 2QFY19; assuming

comparable tax rates and VNB margin of 16% in 2QFY18, VNB growth was about 16% yoy.

Retain BUY with TP of `475 (from `500)

Tweaking down growth forecasts. We are revising down our EVOP forecasts to factor

lower APE growth in FY2019E and higher margins largely due to increasing share of the

protection business. The company struggled on APE growth in 1QFY19 but is gradually

picking up. We expect the APE trajectory to improve further over the next few quarters.

We expect our margin expansion thesis to play out. We expect VNB margins at 18.5%

in FY2020E from 17.5% in 1HFY19 due to the following: (1) Increasing share of the protection

business—up to 7.9% in 1HFY18, secular growth from 2.7% in FY2016; the company has

seen growth across all three segments of protection, viz. individual, group and credit life.

(2) Improvement in persistency assumptions—current experience for 13th month bucket is

running at 250-270 bps higher than its assumptions. With improvement in persistency across

buckets, we find scope for upgrade in persistency assumptions by March 2019.

Two factors lead to downgrade in our EV forecasts. (1) Lower-than-expected growth

and (2) large investment variance due to MTM hit on its bond portfolio (about 1.5% of

opening EV). About 100 bps rise in interest rate reduces its EV by 2.1%.

Business trajectory to remain strong, retain BUY. Post the revision in estimates, we

expect the company to deliver 19% EVOP CAGR during FY2017-21E and 19% medium-term

operating RoEV. At our TP, the company will trade at 2.8X EV and 17X EVOP FY2020E.

Lower margins in the protection business due to heightened competition and increase in

surrenders due to prolonged weakness in capital markets are key risks.

ICICI Prudential Life (IPRU) NBFCs

Flat quarter. ICICI Prudential Life continued to focus on the protection business (7.7%

of its APE in 2QFY19) driving about 17.5% VNB margin even as premium growth was

muted; comparable VNB was up 16% yoy. Even as MTM losses hit its EV growth and

expenses ratios were a tad higher, secular margin expansion from the protection

business coupled with scope of expansion in margins due to better-than expected

persistency will support 19% EVOP CAGR during FY2017-21E. This drives our bullish

view on the stock. Retain BUY with TP of `475 (down from `500).

BUY

OCTOBER 24, 2018

RESULT


Price (`): 324


BSE-30: 33,847

QUICK NUMBERS

VNB margin of

17.5% in 2QFY19

APE up 6% yoy in

2QFY19

2% EV growth in

1HFY19

Nischint Chawathe

M B Mahesh CFA

Dipanjan Ghosh

Shrey Singh

ICICI Prudential Life



Market Cap. (Rs bn) EPS growth (%) (21.0) 15.6 19.8




MFs 3.7 BVPS 52.9 61.2 71.1


Absolute (3.2) (16.0) (16.6) ROE (%) 18.1 18.1 18.7

Rel. to BSE-30 5.4 (8.9) (19.9) Div. Yield (%) 0.5 0.5 0.6


461-302

464.9

NBFCs ICICI Prudential Life


PAT down 29% yoy

ICICI Prudential Life reported PAT of `3 bn, down 29% yoy, largely on the back of new

business strain, MTM hit on investments and higher expenses during the period. Cash flows

to business (post expenses and commissions) improved to `28.6 bn from `14.6 bn in 2QFY18;

it would, however, be inaccurate to track this on a qoq basis.

Higher expense ratio in 2QFY19

ICICI Prudential Life reported expense-to-premium ratio of 15% in 2QFY19 as compared to

13.9% in 2QFY18 (17.3% in 1QFY19). Lower volume during the period coupled with

elevated expenses (publicity and marketing) led to rise in expense ratios. The cost/premium

of the savings business increased marginally (12.7% in 2QFY19 from 12.4% in 2QFY18,

11.8% in FY2018). Rising share of protection business will keep the ratio at elevated levels

though higher volumes in 2H will lead to some improvement.

Persistency remains high

ICICI Prudential Life reported stable persistency (retail, excluding single premium) of 85.2%

in the 13th month bucket in 5MFY19. Persistency improved across all other buckets over

1HFY18. The company has currently built in 13th

month persistency of 82.5% in its

assumptions; it achieved persistency of 85% in FY2018 and 1HFY19. With improving trends

continuing in FY2019E, we find upside to persistency assumptions, leading to higher VNB

margins.

EV growth weak due to investment variance and dividend payouts

ICICI Prudential Life reported 2% growth in EV in 1HFY19 to `192 bn. While VNB growth

was high at 41% (discussed above) leading to `13 bn of EVOP (7.1% of EV), large investment

variance of `3 bn (KS estimate) and dividend payout of `5.8 bn pulled down EV growth.

Capital consumption high; dividend payouts may decline

ICICI Prudential Life’s solvency ratio remained stable qoq at 234% in 2QFY19 but declined

from 276% in 2QFY18 on the back of high growth in protection business. The company has

two tools to manage solvency—(1) stop special dividend payouts and (2) raise tier-II capital

up to 25% of net worth. As of now, the company does not envisage capital issuance.

ICICI Prudential Life NBFCs


Exhibit 1: ICICI Prudential Life – quarterly summary March fiscal year-ends, 2QFY18-2QFY19 (Rs mn)


Exhibit 2: Share of protection business up 375 bps yoy to 7.7% in 2QFY19 APE break-up, March fiscal year-ends, 2QFY18-2QFY19, 2016-2018 (Rs bn)

Source: Company

(% change)

2QFY19 2QFY18 1QFY19 2QFY18 1QFY19 1HFY19 1HFY18 YoY(%) 2018

Premium 76,819 65,994 55,179 16 39 114,842 131,998 (13) 270,688

First 18,394 17,862 12,587 3 46 34,009 30,981 10 73,562

Renewal 51,027 43,194 37,476 18 36 71,704 88,503 (19) 178,570

Single 7,399 4,939 5,116 50 45 9,129 12,514 (27) 18,556

APE 19,133 18,356 13,099 4 46 34,922 32,232 8 75,417

Net premium 76,012 65,395 54,378 16 40 113,597 130,390 (13) 268,107

Commissions (I) 3,951 3,632 2,796 9 41 5,794 6,747 (14) 14,033

First 2,851 2,733 1,996 4 43 4,239 4,847 (13) 10,245

Renewal 995 823 713 21 40 1,435 1,708 (16) 3,441

Single 105 77 87 37 22 120 192 (37) 347

Operating expenses (II) 6,585 4,921 5,952 34 11 9,040 12,537 (28) 20,299

Expenses of management (I+II) 10,536 8,553 8,748 23 20 14,835 19,283 (23) 34,332

Other income and trf. to shareholders (21) 168 1,122 (113) (102) 334 1,100 (70) 1,453

Provisions and service taxes 1,884 1,704 1,759 11 7 3,091 3,643 (15) 6,928

Benefits paid 35,014 40,711 29,395 (14) 19 80,401 64,409 25 172,808

Net cash flows 28,557 14,596 15,598 96 83 15,604 44,155 (65) 55,492

Income on investments 12,278 28,130 23,212 (56) (47) 63,307 35,490 78 112,615

Change in liabilities 38,833 39,172 35,801 (1) 8 71,392 74,634 (4) 154,475

Surplus/deficit 2,003 3,554 3,009 (44) (33) 7,519 5,012 50 13,632

Appropriations

Transfer to shareholders 1,479 2,850 2,464 (48) (40) 6,184 3,943 57 10,892

FFA 524 704 545 (26) (4) 1,335 1,069 25 2,740

Shareholders account

Transfer from policyholders 1,479 2,850 2,464 (48) (40) 6,184 3,943 57 10,892

Total income 1,431 1,727 1,400 (17) 2 2,767 2,831 (2) 7,444

Investment income 1,426 1,725 1,396 (17) 2 2,763 2,822 (2) 7,396

Other expenses 85 88 99 (4) (15) 179 184 (3) 388

Any other item (208) (2) 925 12,875 (122) — 717 (100) 753

PBT 3,032 4,491 2,840 (32) 7 8,772 5,872 49 17,196

Tax 24 279 24 (92) 1 500 47 960 997

PAT 3,009 4,212 2,816 (29) 7 8,271 5,825 42 16,198

Tax rate (%) 1 6 1 6

2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 (% chg.) 1HFY18 1HFY19 (% chg.) 2016 2017 2018 (% chg.)

APE 18.7 20.1 22.1 14.0 19.9 6.1 35.7 33.8 (5.4) 51.7 66.3 77.9 17.6

Savings APE 18.0 19.3 20.0 12.8 18.3 2.0 34.2 31.1 (9.0) 50.3 63.6 73.5 15.4

Protection APE 0.7 0.8 2.2 1.1 1.5 106.8 1.5 2.7 76.2 1.4 2.6 4.5 71.3

% of APE 4.0 3.9 9.8 8.2 7.7 375 bps 4.2 7.9 364 bps 2.7 3.9 5.7 180 bps

VNB 2.4 3.5 4.2 2.4 3.5 47.2 4.2 5.9 41.5 4.1 6.7 12.9 93.1

VNB margin (%) 12.6 17.5 18.9 17.5 17.4 486 bps 11.7 17.5 578 bps 8.0 10.1 16.5 645 bps

IEV 172.1 NA 187.9 NA 192.5 NA 172.1 192.5 11.8 139.4 161.8 187.9 16.1



Exhibit 3: ICICI Prudential Life will trade at 2.8X EV at our appraisal value-based target price Calculation of appraisal value for ICICI Prudential Life, March fiscal year-ends, 2020-2021E


Exhibit 4: ICICI Prudential Life trades at 1.9X price/EV FY2020E Valuation comparison across life insurance companies, March fiscal year-ends, 2018-2021E


Exhibit 5: We expect 18-19% operating RoEV for ICICI Prudential Life Key metrics and RoEV movement, March fiscal year-ends, 2015-2021E (Rs bn)


2020E 2021E

Embedded value (EV, Rs bn) 244 282

New business value (NBV, Rs bn) 17.9 21.1

New business multiple (NBM, X) 24 24

Structural value (SV= NBV X NBM,Rs bn) 429 506

Appraisal value (AV= EV+SV, Rs bn) 672 787

Appraisal value/EV (X) 2.8 2.8

Value of ICICI Prudential Life (Rs/share) 468 548

TP Price

Market

cap. EVOP (Rs bn) Embedded value (Rs bn) VNB margin (%) Price/EV (X) Price/EVOP (X) Operating RoEV (%)

Rating (Rs) (Rs) (Rs bn) 2017 20182019E2020E2021E 2017 2018 2019E 2020E 2021E 2017 2018 2019E 2020E 2021E 2017 2018 2019E 2020E2021E 2017 2018 2019E 2020E2021E 2017 2018E 2019E 2020E 2021E

HDFC Life ADD 380 359 723 22 27 34 40 47 125 152 181 220 267 22 23 25 24 24 5.8 4.8 4.0 3.3 2.7 33 27 21 18 15 22 22 22 22 21

ICICI Prudential Life BUY 475 324 465 23 37 33 39 45 161 188 211 244 282 10 17 18 19 19 2.9 2.5 2.2 1.9 1.7 20 13 14 12 10 17 23 18 19 19

Max Life ADD 650 378 102 11 14 15 18 20 66 75 87 101 116 19 20 20 20 20 2.3 2.0 1.7 1.5 1.3 14 11 10 9 7 20 21 20 20 20

SBI Life BUY 715 564 564 29 30 35 43 50 165 191 217 257 304 15 16 18 18 18 3.4 3.0 2.6 2.2 1.9 20 19 16 13 11 23 18 18 20 20

2015 2016 2017 2018 2019E 2020E 2021E

APE 47.4 51.7 66.3 77.9 81.8 96.5 113.9

Yoy growth (%) 9.0 28.1 17.6 5.0 18.0 18.0

VNB 2.7 4.1 6.7 12.9 14.7 17.9 21.1

Yoy growth (%) 52.7 61.5 93.1 14.5 21.3 18.0

EV movement

Opening Embedded Value (EV) 117.8 137.0 138.8 161.8 187.9 211.4 243.6

Methodology changes 1.6 1.8 0.0 7.6 0.0 0.0 0.0

Economic assumption change (4.2) (0.7) 0.0 0.0 0.0 0.0 0.0

VNB (before over-run) 6.4 4.1 6.7 12.9 14.7 17.9 21.1

Acquisition expense overruns (3.7) 0.0 0.0 0.0 0.0 0.0 0.0

Expected return in force 11.7 12.6 12.2 13.7 16.3 18.8 21.7

Operating variance 2.1 4.5 4.1 2.6 2.0 2.5 2.5

Tax changes 0.0 0.0 — — — — —

Investment variance 15.1 (6.2) 5.8 1.1 (3.0) 1.0 2.0

Dividend payout (9.8) (14.4) (6.3) (11.9) (6.6) (7.9) (9.2)

Closing EV 137.0 138.8 161.2 187.9 211.4 243.6 281.6

Ratios (%)

VNB margins 5.7 8.0 10.1 16.5 18.0 18.5 18.5

RoEV 16.4 1.3 16.2 16.5 12.5 15.3 15.6

Operating RoEV 15.4 16.7 16.5 22.7 17.6 18.5 18.6



Exhibit 6: Sensitivities have dropped in FY2018 Sensitivity to VNB and EV, March fiscal year-ends, 2015-2018 (%)


Exhibit 8: ULIPs down 560 bps yoy to 84% while protection moved up 375 bps Product mix, March fiscal year ends, 2016-2018, 2QFY18-2QFY19 (%)

Source: Company

Exhibit 9: Share of bancassurance rises 280 bps yoy and 100 bps qoq to 56.7% of APE Channel-wise APE, March fiscal year ends, 2015-2018, 2QFY18-2QFY19 (%)

Source: Company

VNB EV

2015 2016 2017 2018 2015 2016 2017 2018

Reference rate up 100 bps 1.7 (5.7) (5.2) (4.9) (2.4) (2.5) (2.0) (2.1)

Reference rate down 100 bps (3.0) 5.7 5.5 5.2 2.6 2.6 2.1 2.2

Discontinuance rate up 10% (16.0) (12.3) (10.6) (8.6) (1.0) (1.1) (1.1) (1.3)

Discontinuance rate down 10% 18.0 12.7 10.9 9.1 1.2 1.2 1.2 1.4

Management expenses up 10% (5.8) (6.4) (5.5) (3.5) (0.8) (1.1) (1.1) (1.0)

Management expenses down 10% 5.8 6.4 5.4 3.5 0.8 1.0 1.1 1.0

Mortality up 10% (5.9) (3.2) (6.1) (5.4) (0.7) (0.4) (0.8) (1.0)

Mortality down 10% 5.9 3.2 6.1 5.5 0.7 0.4 0.8 1.0

2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 (bps change) 1HFY18 1HFY19 (bps change) 2016 2017 2018 (bps change)

Savings 96.1 96.0 90.2 91.8 92.3 -375 bps 95.8 92.1 -367 bps 97.3 96.1 94.3 -180 bps

ULIP 78.3 84.9 79.4 79.8 83.8 557 bps 81.8 82.2 36 bps 80.8 84.1 81.9 -217 bps

PAR 15.9 10.1 9.2 9.7 6.8 -912 bps 12.3 8.0 -428 bps 14.1 9.6 10.9 123 bps

Non-par 0.3 0.3 0.9 0.9 0.7 37 bps 0.4 0.8 37 bps 0.6 1.1 0.5 -57 bps

Group 1.6 0.7 0.8 1.4 1.1 -57 bps 1.3 1.2 -12 bps 1.8 1.3 1.0 -28 bps

Protection 3.9 4.0 9.8 8.2 7.7 373 bps 4.2 7.9 367 bps 2.7 3.9 5.7 180 bps

Notes:

(1) Protection includes retail and group protection products.

(2) Group excludes group protection products.

2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 (bps change) 1HFY18 1HFY19 (bps change) 2017 2018 (bps change)

Agency 23.9 25.1 23.0 21.8 22.3 -161 bps 27.1 22.1 -504 bps 23.3 23.8 51 bps

Bancassurance 53.9 53.5 52.8 55.6 56.7 282 bps 51.3 56.2 493 bps 56.9 57.3 43 bps

Corporate agents and brokers 14.6 14.6 11.1 11.7 11.9 -270 bps 14.4 11.8 -257 bps 6.1 9.9 384 bps

Direct 5.8 5.6 7.3 6.5 5.1 -73 bps 5.5 5.7 18 bps 12.0 7.0 -502 bps

Group 2.1 1.1 5.8 4.4 4.1 202 bps 1.8 4.2 240 bps 1.7 1.9 23 bps

Exhibit 7: We expect protection business at 8-11% of APE Contribution of APE and VNB of the pure protection business, March fiscal year-ends, 2016-2021E


2016 2017 2018 2019E 2020E 2021E

Protection APE (%) 2.7 3.9 5.7 7.9 9.5 10.9

Protection APE (Rs bn) 1.4 2.6 4.5 6.5 9.2 12.4

YoY (%) 83.9 86.3 71.5 44.9 41.6 35.7

Protections VNB (Rs bn) 1.2 2.2 3.8 5.2 7.3 9.9

YoY (%) 95.4 86.3 71.5 36.4 41.6 35.7

Protection VNB/total VNB (%) 28.8 33.2 29.5 35.1 41.0 47.1



Exhibit 10: Share of ULIPs has dropped across most channels Channel-wise product mix, March fiscal year ends, 2015-2018 (%)

Source: Company

Exhibit 11: Persistency ratio improvement at ICICI Life across most buckets Retail persistency (including single premium), March fiscal year ends, 2014-2018, 5MFY19 (%)

Source: Company

Exhibit 12: Persistency ratio improved across most channels in FY2018 Channel-wise persistency, March fiscal year ends, 2014-2018 (%)

Source: Company

2015 2016 2017 2018

Bancassurance

ULIP 88.4 88.9 92.1 89.8

Par 10.0 9.1 5.3 7.3

Non-par 0.1 — 0.4 0.2

Protection 1.5 2.0 2.2 2.7

Agency

ULIP 78.5 76.4 79.5 81.8

Par 19.2 19.6 14.2 13.5

Non-par 1.0 0.8 2.0 0.4

Protection 1.3 3.2 4.3 4.3

Direct

ULIP 90.5 84.3 85.3 88.0

Par 2.8 7.7 5.0 4.3

Non-par 4.7 3.6 3.2 2.4

Protection 2.0 4.4 6.5 5.3

Corporate agents and brokers

ULIP 62.0 47.4 46.5 36.8

Par 2.4 0.5 0.4 0.5

Non-par 34.4 49.0 44.1 49.9

Protection 1.2 3.1 9.0 12.8

Persistency (%) 2014 2015 2016 2017 2018 5MFY19

13th month 71.5 79.0 82.4 85.7 86.8 86.3

25th month 68.4 65.9 71.2 73.9 78.3 79.4

37th month 57.3 64.3 61.6 66.8 68.8 69.3

49th month 20.3 54.4 62.2 59.3 64.2 65.1

61st month 12.7 14.5 46.0 56.2 54.5 55.7

2014 2015 2016 2017 2018 2014 2015 2016 2017 2018

Agency Bancassurance

13th

month 70 78 85 88 90 75 80 81 84 85

25th

month 65 63 69 NA NA 72 70 72 NA NA

37th

month 45 60 58 NA NA 76 68 65 NA NA

49th

month 20 42 58 56 59 18 75 66 63 65

61st

month 12 15 35 NA NA 13 12 64 NA NA

Corporate agency Direct sales

13th

month 62 71 80 80 89 75 86 88 88 88

25th

month 71 59 66 66 NA 70 70 79 79 NA

37th

month 42 68 56 56 NA 47 66 65 65 NA

49th

month 20 37 67 67 58 31 42 64 64 63

61st

month 14 14 30 30 NA 13 24 34 34 NA



Exhibit 13: Cost to average AUM ratio up ~25 bps yoy March fiscal year ends, 2QFY18-2QFY19 (Rs mn)

Source: Company

Exhibit 14: Debt maintains share in AUM mix yoy at 53% March fiscal year ends, 2016-2018, 2QFY18-2QFY19 (Rs bn)

Source: Company

Exhibit 15: Net individual agents continue to ramp up in scale Individual agents, March fiscal year ends, 2014-2018, 1QFY19-2QFY19 (# ‘000)

Source: LIC Council

2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 YoY (%) 1HFY18 1HFY19 YoY (%) 2016 2017 2018 YoY (%)

Key financials (Rs mn)

Premium 65,994 68,556 87,289 55,179 76,819 16 114,842 131,998 15 191,644 223,540 270,688 21

First year 17,862 19,339 20,213 12,587 18,394 3 34,009 30,981 (9) 49,244 63,446 73,562 16

Renewal 43,194 45,390 61,476 37,476 51,027 18 71,704 88,503 23 123,986 144,907 178,570 23

Single 4,939 3,827 5,600 5,116 7,399 50 9,129 12,514 37 18,414 15,187 18,556 22

APE 18,356 19,722 20,773 13,099 19,133 4 34,922 32,232 (8) 51,085 64,965 75,417 16

Commission (I) 3,632 3,773 4,466 2,796 3,951 9 5,794 6,747 16 6,200 7,589 14,033 85

First year 2,733 2,828 3,178 1,996 2,851 4 4,239 4,847 14 3,744 4,601 10,245 123

Renewal 823 845 1,161 713 995 21 1,435 1,708 19 2,402 2,903 3,441 19

Single 77 100 127 87 105 37 120 192 60 53 85 347 308

Operating expenses (II) 4,921 5,211 6,048 5,952 6,585 34 9,040 12,537 39 18,884 23,572 20,299 (14)

Expenses of management (I)+(II) 8,553 8,984 10,513 8,748 10,536 23 14,835 19,283 30 25,083 31,161 34,332 10

AUM (Rs bn) 1,306 1,383 1,395 1,427 1,461 12 1,306 1,461 12 1,039 1,229 1,395 14


Cost/premium 13.90 13.80 12.78 17.30 15.02 112 bps 13.91 15.97 206 bps 14.33 14.85 13.52 -133 bps

Cost/average AUM 2.66 2.67 3.03 2.48 2.92 26 bps 2.34 2.70 36 bps 2.46 2.75 2.62 -13 bps

Net commission ratio 5.90 5.79 5.43 5.53 5.63 -27 bps 5.43 5.59 15 bps 3.54 3.62 5.52 191 bps

First year 20.34 19.51 22.09 22.21 21.48 114 bps 17.04 21.78 474 bps 12.59 11.96 19.08 711 bps

Renewal 1.91 1.86 1.89 1.90 1.95 4 bps 2.00 1.93 -7 bps 1.94 2.00 1.93 -8 bps

Single 1.55 2.62 2.27 1.69 1.42 -13 bps 1.32 1.53 22 bps 0.29 0.56 1.87 131 bps

Notes:

(1) Net commission ratio: commission/(total premium-0.9 X single premium).

(2) Cost/average AUM: annualised expenses of management/average AUM during the period.

2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 YoY (%) 2016 2017 2018 YoY (%)

Linked mix 1,306 1,383 1,395 1,427 1,461 12 1,039 1,229 1,395 14

Linked 923 983 975 997 1,016 10 753 879 975 11

Non linked 382 400 420 429 445 16 286 350 420 20

Equity mix 1,306 1,383 1,395 1,427 1,461 12 1,039 1,229 1,395 14

Equity 705 719 656 671 687 (3) 481 575 656 14

Debt 601 664 740 756 774 29 558 654 740 13

36

12 18 16 18

5 12

12 51 30 1 3 1 2

172

132 121

136 152 156 162

-

70

140

210

280

350

-

12

24

36

48

60

2014 2015 2016 2017 2018 1QFY19 2QFY19

Additions (LHS) Deletions (LHS) Agents (RHS)



Exhibit 16: Higher EV growth in 2H EV movement, March fiscal year-ends, 2018-2019E (Rs bn)


Exhibit 17: New and old estimates Comparison of old and new EV estimates, March fiscal year-ends, 2019-2021E (Rs bn)


1HFY18 2HFY18 1HFY19 YoY(%) 2HFY19E YoY (%)

Opening Embedded value (EV) 161 172 188 17 192 12

NBV (before over-run) 6 9

Expected return in force 8 9

Operating variance (0)

Economic/investment variance (3) 0

Dividend payout (6) (1)

Closing EV 172 188 192 12 211 12

EVOP

RoEV (%) 7 9 2 10

Operating RoEV (%)

Other details

APE 35.7 42.2 33.8 (5) 48.0 14

VNB 4.2 8.7 5.9 41 8.8

VNB margin (%) 12 21 17.5 18.4

New estimates Old estimates New versus old (%)

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

Opening Embedded value (EV) 188 211 244 188 214 246 0 (1) (1)

Methodology/ assumption changes

Economic assumption change

VNB 15 18 21 15 20 24 (3) (8) (13)

Expected return in force 16 19 22 16 19 21 0 1 1

Operating variance 2 3 3 2 2 2 0 25 25

Tax changes 0 0 0 0 0 0

Economic/investment variance (3) 1 2 1 1 1 (400) 0 100

Dividend payout (7) (8) (9) (9) (9) (10) (23) (14) (7)

Closing EV 211 244 282 214 246 285 (1) (1) (1)

EVOP 33 39 45 34 40 48 (1.5) (2.4) (5.0)

RoEV (%) 12 15 16 14 15 16 -134 bps 35 bps -16 bps

Operating RoEV (%) 18 19 19 18 19 19 -27 bps -23 bps -81 bps

APE 82 97 114 90 108 131 (9) (11) (13)

VNB post overrun 15 18 21 15 20 24 (3) (8) (13)

VNB margins post overrun (%) 18 19 19 17 18 19 100 bps 50 bps 0 bps


3QCY18 earnings—weak quarter due to increase in costs, muted realization

Ambuja’s standalone earnings were lower than our estimates—company reported revenues of

Rs26.1 bn (+13% yoy, -13% qoq), EBITDA of Rs3.5 bn (+1% yoy, -42% qoq) and net-income

of Rs1.8 bn (-34% yoy, -64% qoq), against our estimate of Rs25.5 bn, Rs5.2 bn and Rs2.9 bn,

respectively. The earnings miss was due to muted realizations (Rs4,790/ton, +1% qoq) and

increase in costs, especially other expenses—EBITDA/ton declined 33% qoq to Rs656/ton

(-7% yoy). We note that both ACC, Ambuja 3QCY18 earnings were weak relative to a strong

2QCY18 earnings print which was aided by improved realizations and contained costs.

Ambuja reported 2% qoq increase in costs (per ton) to Rs3,644/ ton (+4% yoy) largely due to

an increase in other expenses (Exhibit 4). Costs increased due to (1) 24% qoq increase in other

expenses to Rs917/ton (+5% yoy) due to higher packaging costs, annual maintenance costs and

weak seasonal volumes, partially offset by (2) 2-3% qoq decline in energy, logistics costs—the

company’s reported energy costs declined by 2% qoq compared to an increase reported by

peers.

Consolidated earnings—both standalone and ACC results were weak versus a strong 2Q

Ambuja reported consolidated revenues of Rs60.2 bn (+12% yoy, -12% qoq), EBITDA of Rs8 bn

(+4% yoy, -36% qoq) and net-income of Rs2.9 bn (+10% yoy, -45% qoq). Consolidated sales

volumes increased 9% yoy to 12 mn tons (-12% qoq) while EBITDA/ton declined 27% qoq to

Rs670/ton (-5% yoy). EBITDA/ton declined as cost (per ton) increased 6% qoq to Rs4,340/ ton

(+4% yoy) due to higher energy costs and other expenses

We maintain REDUCE rating with revised target price of Rs195 (Rs210 earlier)

In 9MCY18, ACEM’s consolidated volumes increased by 7% yoy to 39 mn tons as the plant

utilization improved to 82%. ACC at present is not investing in new projects while ACEM is

commissioning a 1.7 mtpa capacity in Rajasthan (by 2020). We believe the company’s volume

growth will be constrained in 1-2 years unless it drives more capacity additions. We have cut

our EBITDA estimate by 5-7% for CY2018-20E due to weak prices, cost pressures. Our target

price is revised to Rs195 (Rs210 earlier). We maintain REDUCE rating on expensive valuations.

The stock trades at 12X/10X CY2018-19E EBITDA (attributable).

Ambuja Cements (ACEM) Cement

Earnings disappoint. ACEM’s earnings were lower than our estimates—standalone

EBITDA declined 42% qoq to Rs3.6 bn (+1% yoy) due to 33% qoq decline in

EBITDA/ton to Rs660 on the back of cost increase, muted realization. ACEM as well as

ACC saw the improved cost performance of 2QCY18 weaken in 3Q resulting in 27%

qoq decline in consolidated EBITDA/ton. We cut our EBITDA estimate by 5-7% for

CY2018-20E and target price to Rs195 (Rs210 earlier). Maintain REDUCE rating on

expensive valuations—stock trades at 12X/10X CY2018/19E EBITDA (attributable).

REDUCE

OCTOBER 24, 2018

RESULT


Price (`): 201


BSE-30: 33,847

Abhishek Poddar

Murtuza Arsiwalla

Prayatn Mahajan

Ambuja Cements







MFs 5.1 EBITDA (Rs bn) 39.6 46.2 51.8


Absolute (8.3) (5.7) (28.9) ROE (%) 7.2 8.8 9.7

Rel. to BSE-30 (0.1) 2.3 (31.7) Div. Yield (%) 1.8 1.8 1.8

C ompany data and valuation summary

289-189

398.3

Cement Ambuja Cements


Exhibit 1: Ambuja's standalone volumes increased 9% yoy; earnings were weak due to cost increase, muted realizations Quarterly results for Ambuja Cements (Standalone), December year-ends (Rs mn)


Changes in our estimates

Exhibit 6 highlights key changes in our estimates.

Ambuja standalone—lower EBITDA estimate by 8-12%. We keep our volume

estimate unchanged at 24.6 mn tons, 26.5 mn tons and 28.4 mn tons for CY2018E,

CY2019E and CY2020E. We cut our realization assumption by 1-2% and tweak our cost

assumptions—this results in a decline in our standalone EBITDA estimate by 8-12% to

`20.4 bn, `24.9 bn and Rs28 bn for CY2018E, CY2019E and CY2020E. We estimate

standalone EPS of `6.6, `8.1 and `9.4 for CY2018E, CY2019E and CY2020E.

Ambuja consolidated—EBITDA estimate cut by 5-7% as we incorporate revised

estimates of ACC. The above revision combined with our earlier change in ACC’s

estimates results in a 5-7% cut in our consolidated EBITDA estimates. We estimate

consolidated EBITDA of `39.6 bn, `46.2 bn and Rs51.8 bn for CY2018E, CY2019E and

CY2020E. We estimate consolidated EPS of `7.7, Rs9.7 and `11.3 for CY2018E,

CY2019E and CY202E.

Our target price of Rs195/share is based on March 2020E financials.

(% chg.)

3QCY18 3QCY18E 3QCY17 2QCY18 KIE yoy qoq 9MCY18 9MCY17 (% chg) CY2018E CY2017 (% chg)

Sales 26,139 25,535 23,196 30,169 2 13 -13 84,934 76,764 11 114,815 104,469 10

Operating costs

Raw material costs (3,080) (1,818) (2,709) (2,113) (7,310) (7,352) (9,335) (8,465)

Employee costs (1,633) (1,677) (1,613) (1,758) (5,087) (4,987) (6,895) (6,614)

Freight costs (7,311) (7,151) (6,118) (8,784) (24,384) (20,904) (33,029) (28,720)

Power & fuel costs (5,498) (5,660) (4,860) (6,547) (18,396) (15,894) (25,044) (22,342)

Other costs (5,035) (4,053) (4,353) (4,744) (14,882) (14,301) (20,058) (18,927)

Total operating costs (22,558) (20,359) (19,653) (23,946) (70,059) (63,438) (94,361) (85,067)

EBITDA 3,582 5,176 3,544 6,223 -31 1 -42 14,876 13,325 12 20,454 19,401 5

EBITDA margin (%) 14 20 15 21 18 17 18 19

Other income 482 533 1,531 1,911 2,900 3,780 4,102 3,591

Interest (192) (190) (313) (192) (641) (855) (858) (1,072)

Depreciation (1,360) (1,378) (1,403) (1,364) (4,116) (4,302) (5,517) (5,729)

PBT 2,512 4,141 3,359 6,578 -39 -25 -62 13,019 11,949 9 18,181 16,191 12

Current tax (expense)/income (726) (1,159) (635) (1,586) (3,522) (2,837) (5,091) (3,937)

Net income 1,786 2,981 2,724 4,993 -40 -34 -64 9,496 9,112 4 13,091 12,255 7

Extraordinaries (net of taxes) — — — — — — — 241

Reported net income 1,786 2,981 2,724 4,993 -40 -34 -64 9,496 9,112 4 13,091 12,496 5

EPS (Rs) 0.9 1.5 1.4 2.5 4.8 4.6 4 6.6 6.2

Per ton analysis

Despatches, '000 tons 5,460 5,346 5,020 6,370 2 9 -14 18,050 17,090 6 24,270 22,950 6

Realization (Rs/ton) 4,787 4,776 4,621 4,736 0 4 1 4,706 4,492 5 4,731 4,552 4

Operating cost (Rs/ton) 4,131 3,808 3,915 3,759 3,881 3,712 3,888 3,707

Raw materials 564 340 540 332 405 430 385 369

Employee costs 299 314 321 276 282 292 284 288

Freight costs 1,339 1,338 1,219 1,379 1,351 1,223 1,361 1,251

Power & fuel costs 1,007 1,059 968 1,028 1,019 930 1,032 974

Other costs 922 758 867 745 824 837 826 825

Profitability (Rs/ton) 656 968 706 977 -32 -7 -33 824 780 6 843 845 (0)

Ambuja Cements Cement


Key highlights from 3QCY18 results

Realizations—ACEM’s standalone realizations increased 1% qoq to Rs4,790/ ton

(+4% yoy). We note that the company has large dependence on North (40%) and West

markets (40%) and per our channel checks, cement prices improved by 3% qoq in North

markets but declined 1% qoq in the Western region during the quarter.

Profitability and costs—ACEM’s EBITDA/ton declined 33% qoq to Rs656/ton (-7% yoy)

in 3QCY18 largely due to an increase in costs. Exhibit 4 highlights major costs (on per ton

basis) reported by the company, which increased by 4% yoy to Rs3,640/ ton (+4% yoy,

+2% qoq). We highlight that ACEM’s energy cost has only increase by 4% yoy to

Rs1,002/ton (-2% qoq), much lower than 19% yoy cost increase reported by Ultratech

(Rs,1099/ton, +7% qoq). The company has highlighted that improved efficiency

parameters have aided in containing energy costs.

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 Rs13.9 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 81%

utilization in 9MCY18.

ACC—realizations disappoint, energy cost increases after stellar 2QCY18

ACC’s earnings missed our and consensus estimates—the company reported revenues of

Rs33.6 bn (+10% yoy, -11% qoq), EBITDA of Rs3.7 bn (+6% yoy, -31% qoq) and net-

income of Rs2.1 bn (+16% yoy, -37% qoq) against our estimate of Rs34.5 bn, Rs5.5 bn and

Rs3.3 bn respectively. Volumes increased 10% yoy to 6.6 mn tons (-10% qoq) and were

higher than our estimate of 6.4 mn tons. EBITDA/ton declined 25% qoq to Rs538/ton

(-4% yoy) largely due to a 2% qoq decline in realizations and cost increase. The company’s

3QCY18 earnings are weak compared to strong earnings reported in 2QCY18.

Realizations decline 2% qoq in 3QCY18. The earning miss was largely due to lower-

than expected realizations, which declined 2% qoq to Rs4,760/ton against our estimate

of a marginal increase. As per our checks, in 3QCY18 cement prices were up in Central

and North region (40% of volumes) but declined in South, West (40% of volumes). We

highlight that ACC’s 2QCY18 realizations increased 5% qoq to `4,840/ton and were

higher than those of peers and our estimate.

Energy cost rises after a decline in 2QCY18. Energy cost increased by 8% qoq to

Rs1,110/ton in 3QCY18. We note that in 2QCY18, ACC’s fuel cost had declined by

1% qoq to Rs1,032/ton (+2% yoy) in contrast to the increase in pet-coke prices, weaker

INR/US$. We believe ACC may have gained from low priced contracts, inventory in

2QCY18. ACC’s total cost increased 3% qoq to Rs4,570/ton (+1% yoy) due to high

energy costs, other expenses.



Exhibit 2: Ambuja’s consolidated volumes increased 9% yoy but EBITDA/ton declined 5% yoy due to cost increase, subdued realizations Quarterly results for Ambuja Cements (Consolidated), December year-ends (Rs mn)


(% chg.)

3QCY18 3QCY17 2QCY18 yoy qoq 9MCY18 9MCY17 (% chg) CY2018E CY2017 (% chg)

Sales 60,176 53,769 68,351 12 -12 193,123 171,541 13 260,474 235,984 10

Operating costs

Raw material costs (7,702) (6,925) (7,466) (22,871) (20,184) (30,279) (27,760)

Employee costs (3,836) (3,702) (4,411) (12,010) (11,354) (16,198) (15,112)

Freight costs (16,651) (14,117) (19,122) (54,048) (45,879) (73,284) (63,075)

Power & fuel costs (12,811) (11,601) (14,067) (40,728) (35,980) (55,648) (49,529)

Other costs (11,137) (9,697) (10,785) (32,912) (31,782) (45,515) (41,932)

Total operating costs (52,137) (46,041) (55,851) (162,569) (145,179) (220,924) (197,409)

EBITDA 8,039 7,728 12,500 4 -36 30,554 26,362 16 39,551 38,576 3

EBITDA margin (%) 13 14 18 16 15 15 16

Other income 800 725 820 2,483 4,641 4,025 3,226

Interest (392) (516) (464) (1,298) (1,516) (1,718) (2,058)

Depreciation (2,874) (2,971) (2,861) (8,616) (9,173) (11,516) (12,195)

PBT 5,573 4,967 9,996 12 -44 23,123 20,314 14 30,341 27,550 10

Current tax (expense)/income (1,643) (1,487) (3,176) (7,266) (5,738) (9,709) (8,470)

Net income 3,930 3,480 6,820 13 -42 15,857 14,577 9 20,632 19,080 8

Extraordinaries (net of taxes) 30 - 25 91 56 - 241

Minority interest 1,083 874 1,589 3,917 3,558 5,436 4,158

Reported net income 2,877 2,606 5,255 10 -45 12,031 11,074 9 15,196 15,164 0

EPS (Rs) 1.4 1.3 2.6 6.1 5.6 7.7 7.5

Per ton analysis

Despatches, '000 tons 12,010 10,980 13,610 9 -12 38,950 36,380 7 52,267 48,674 7

Realization (Rs/ton) 5,010 4,897 5,022 2 -0 4,958 4,715 5 4,984 4,848 3

Operating cost (Rs/ton) 4,341 4,193 4,104 4 6 4,174 3,991 4,227 4,056

Raw materials 641 631 549 587 555 579 570

Employee costs 319 337 324 308 312 310 310

Freight costs 1,386 1,286 1,405 1,388 1,261 1,402 1,296

Power & fuel costs 1,067 1,057 1,034 1,046 989 1,065 1,018

Other costs 927 883 792 845 874 871 861

Profitability (Rs/ton) 669 704 918 -5 -27 784 725 8 757 793 -5



Exhibit 3: ACC's volumes increased 10% yoy in 3QCY18; earnings miss was due to weaker-than-expected realizations and higher fuel costs Quarterly results for ACC Limited (Standalone), December year-ends (Rs mn)


Exhibit 4: Ambuja's EBITDA/ton declined 7% yoy due to subdued realization and rising energy, logistics and other costs Major cost item movement (as reported) for Ambuja cements; comparison of energy costs with Ultratech, ACC, 2016-2018 (Rs/ton)

Source: Companies, Kotak Institutional Equities estimates

(% chg.)

3QCY18 3QCY18E 3QCY17 2QCY18 KIE yoy qoq 9MCY18 9MCY17 (% chg) CY2018E CY2017 (% chg)

Sales 33,640 34,553 30,545 37,679 -3 10 -11 106,889 94,667 13 145,218 129,310 12

Operating costs

Raw material costs (4,487) (4,847) (4,452) (5,243) (15,375) (13,115) (21,059) (19,676)

Employee costs (2,120) (2,127) (2,008) (2,565) (6,667) (6,142) (8,994) (8,190)

Freight costs (9,378) (9,051) (8,034) (10,380) (29,781) (25,091) (40,409) (34,510)

Power costs (7,305) (6,760) (6,732) (7,510) (22,302) (20,055) (30,562) (27,145)

Purchased cement (249) (255) (3) (248) (517) (8) (275) (8)

Other expenditure (6,368) (6,018) (5,787) (6,300) (18,843) (18,358) (25,457) (24,226)

Total operating costs (29,906) (29,058) (27,015) (32,244) 3 11 -7 (93,485) (82,768) (126,755) (113,755)

EBITDA 3,734 5,495 3,530 5,435 -32 6 -31 13,404 11,899 13 18,463 15,555 19

EBITDA margin (%) 11.1 15.9 11.6 14.4 12.5 12.6 12.7 12.0

Other income 1,005 1,130 858 1,119 3,269 3,622 4,509 4,853

Interest (201) (267) (213) (275) (669) (689) (897) (1,023)

Depreciation (1,499) (1,496) (1,551) (1,481) (4,454) (4,823) (5,935) (6,401)

PBT 3,040 4,863 2,624 4,798 -37 16 -37 11,549 10,009 15 16,139 12,984 24

Current tax (984) (1,556) (847) (1,543) (3,788) (2,899) (4,842) (3,511)

Deferred tax — — — — — — (403) (318)

Net income 2,056 3,307 1,777 3,255 -38 16 -37 7,762 7,109 9 10,894 9,155 19

Extraordinaries (net of tax) — — — — — — — —

Reported net income 2,056 3,307 1,777 3,255 -38 16 -37 7,762 7,109 10,894 9,155

EPS - adjusted (Rs) 10.9 17.6 9.5 17.3 41.3 37.8 57.8 48.6

Sales (mn tons) 6.6 6.4 6.0 7.2 3 10 -10 20.9 19.3 8 28.3 26.2 8

Realization (Rs/ton) 4,756 4,906 4,733 4,836 -3 0 -2 4,740 4,554 4 4,759 4,576 4

Operating costs (Rs/ton) 4,566 4,556 4,533 4,454 4,473 4,288 4,481 4,340

Raw materials 685 760 747 724 736 680 744 751

Employee costs 324 334 337 354 319 318 318 312

Freight costs 1,432 1,419 1,348 1,434 1,425 1,300 1,429 1,317

Power & fuel costs 1,115 1,060 1,130 1,037 1,067 1,039 1,080 1,036

Purchased cement 38 40 — 34 25 — 10 —

Other expenditure 972 944 971 870 902 951 900 924

Profitability (Rs/ton) 538 819 557 713 -34 -4 -25 603 586 3 653 593 10

Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18

Ambuja—per ton costs (Rs/ton) yoy qoq

Raw material cost 349 334 393 450 410 434 449 393 (13) (12)

Energy cost 817 892 933 967 1,098 1,020 1,021 1,002 4 (2)

Logistics cost 1,136 1,227 1,215 1,218 1,331 1,331 1,370 1,332 9 (3)

Other expenses 962 798 829 871 806 820 740 917 5 24

Sub-total (Rs/ton) 3,264 3,251 3,370 3,506 3,645 3,605 3,580 3,644 4 2

Other cement companies—per ton energy costs

ACC 969 976 1,011 1,124 1,019 1,048 1,032 1,110 (1) 8

Ultratech 785 840 871 925 949 987 1,028 1,099 19 7

Change (%)



Exhibit 5: Ambuja's volumes increased 9% yoy to 5.5 mn tons in 3QCY18 Volume (mn tons) and raw material cost (Rs/ton), December year-ends


Exhibit 6: Ambuja Cements, Change in estimates, December year-ends, 2018-2020E (mn tons, Rs mn)


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

3Q

CY

14

4Q

CY

14

1Q

CY

15

2Q

CY

15

3Q

CY

15

4Q

CY

15

1Q

CY

16

2Q

CY

16

3Q

CY

16

4Q

CY

16

1Q

CY

17

2Q

CY

17

3Q

CY

17

4Q

CY

17

1Q

CY

18

2Q

CY

18

3Q

CY

18

Volumes- mn tons (LHS) Profitability- Rs/ton (RHS)

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) 52.9 56.2 59.6 52.7 55.9 59.3 1 — —

Realizations (Rs/ton) 4,921 5,061 5,172 4,993 5,111 5,222 (1) (1) (1)

EBITDA (Rs/ton) 747 823 868 807 869 915 (7) (5) (5)

Earnings estimates (Rs mn)

Revenue (Rs mn) 260,474 284,209 308,247 262,919 285,615 309,727 (1) (0) (0)

EBITDA (Rs mn) 39,551 46,220 51,757 42,520 48,569 54,247 (7) (5) (5)

PAT (Rs mn) 15,196 19,171 22,380 17,093 21,063 24,385 (11) (9) (8)

EPS (Rs/share) 7.7 9.7 11.3 8.6 10.6 12.3 (11) (9) (8)

Ambuja Cement (Standalone)

Volume and realizations (mn tons, Rs/ton)

Volumes (mn tons) 24.6 26.5 28.4 24.6 26.5 28.4 — — —

Realizations (Rs/ton) 4,731 4,868 4,944 4,807 4,924 5,000 (2) (1) (1)

EBITDA (Rs/ton) 843 953 997 952 1,038 1,082 (12) (8) (8)

Earnings estimates (Rs mn)

Revenue (Rs mn) 114,815 127,001 138,667 116,663 128,457 140,230 (2) (1) (1)

EBITDA (Rs mn) 20,454 24,866 27,974 23,114 27,077 30,348 (12) (8) (8)

PAT (Rs mn) 13,091 16,150 18,604 15,143 18,609 21,224 (14) (13) (12)

EPS (Rs/share) 6.6 8.1 9.4 7.6 9.4 10.7 (14) (13) (12)



Exhibit 7: 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)


Exhibit 8: We lower our fair value to Rs195/share (Rs210 earlier) due to cut in earnings estimate 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.


2016 2017 2018E 2019E 2020E 2017 2018E 2019E 2020E

Ambuja—standalone (Rs mn)

Revenue 91,604 104,469 114,815 127,001 138,667 14 10 11 9

EBITDA 15,753 19,401 20,454 24,866 27,974 23 5 22 12

PAT 9,701 12,255 13,091 16,150 18,604 26 7 23 15

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 4,660 4,800 4,880 5 4 3 2

Operating cost (Rs/ton) 3,520 3,634 3,817 3,847 3,882 3 5 1 1

Profitability (Rs/ton) 747 845 843 953 997 13 -0 13 5

ACC—standalone (Rs mn)

Revenue 107,678 129,310 145,218 156,766 169,139 20 12 8 8

EBITDA 12,518 15,555 18,463 20,720 23,149 24 19 12 12

PAT 6,899 9,154 10,894 12,665 14,648 33 19 16 16

Key operating metrics

Volumes (mn tons) 23.0 26.2 28.3 29.7 31.2 14 8 5 5

Realization (Rs/ton) 4,684 4,934 5,134 5,278 5,424 5 4 3 3

Operating cost (Rs/ton) 4,139 4,340 4,481 4,581 4,681 5 3 2 2

Profitability (Rs/ton) 544 593 653 698 742 9 10 7 6

Consolidated

Revenue 200,940 235,984 260,474 284,209 308,247 17 10 9 8

EBITDA 28,693 38,576 39,551 46,220 51,757 34 3 17 12

PAT 11,509 14,922 15,196 19,171 22,380 30 2 26 17

Growth (%)

March-2020E

Attributable EBITDA (Rs mn) 36,307

EV/EBITDA (X) 10

Attributable EV (Rs mn) 352,174

Attributable net cash (Rs mn) 49,777

Equity value (Rs mn) 401,951

Potential CCI payment amount (Rs mn)* 17,350

Equity value - adjusted (Rs mn) 384,601

No. of shares 1,986

Target price 195



Exhibit 9: Profit model, balance sheet, cash model of Ambuja Cement (consolidated), December year-ends, 2015-20E (Rs mn)


2015 2016 2017 2018E 2019E 2020E


Net sales 93,880 200,940 235,984 260,474 284,209 308,247

EBITDA 14,489 28,693 38,576 39,551 46,220 51,757

Other income 4,466 7,680 3,226 4,025 5,003 6,152

Interest -925 -1,405 -2,058 -1,718 -1,632 -1,555

Depreciation -6,298 -14,632 -12,195 -11,516 -12,104 -12,693

Pretax profits 11,733 20,336 27,550 30,341 37,486 43,661

Tax -3,654 -5,760 -8,470 -9,709 -11,996 -13,972

Net profits before minority 8,079 14,576 19,080 20,632 25,490 29,690

Minority interest — -3,067 -3,916 -5,436 -6,320 -7,309

Net profit 8,079 11,509 15,164 15,196 19,171 22,380

Earnings per share (Rs) 5.2 5.8 7.5 7.7 9.7 11.3


Total equity 102,715 195,455 206,722 213,312 223,876 237,649

Total borrowings 236 239 259 259 259 259

Minority interest 7 43,778 46,080 49,272 53,348 58,414

Deferred tax liability 5,656 10,534 11,392 10,887 10,567 10,201

Currrent liabilities 32,714 77,325 90,551 92,121 100,721 108,520

Total liabilities and equity 141,328 327,330 355,004 365,850 388,771 415,044

Cash 28,532 16,962 62,316 68,467 86,518 108,395

Current assets 25,442 62,562 75,503 80,677 86,651 92,740

Total fixed assets 65,388 140,758 136,839 136,361 135,257 133,564

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 141,328 327,330 355,004 365,851 388,771 415,044


Operating cash flow, excl. working capital 15,391 25,637 34,153 33,334 38,622 43,276

Working capital change 175 2,513 5,888 -3,577 2,911 2,006

Capital expenditure -6,192 -8,853 -8,219 -11,038 -11,000 -11,000

Free cash flow 9,374 19,298 31,821 18,719 30,533 34,282

Ratios

Book value (Rs/share) 66 98 104 107 113 120

RoAE (%) 8.5 7.7 7.4 7.2 8.8 9.7

RoACE (%) 8.4 5.9 7.4 7.4 8.6 9.3

CRoCI (%) 11.2 14.6 12.0 11.6 12.9 13.9


Strong quarter aided by strong volume growth; challenging times ahead in 2HFY19

TVS Motor reported net profit of `2.1 bn (-1 yoy), which was 5% below our estimates, in

2QFY19 due to lower other income and higher-than-expected interest and depreciation

expenses. Net sales of `49.9 bn (+23% yoy) in 2QFY19 were 1.9% above our estimates. The

company has changed accounting for booking interest income related to income from customer

contracts such as advance bookings and dealer advances, which are now classified under

operational income. Other income pertaining to interest income was `100 mn in 2QFY19;

adjusted for this, income revenue was higher than our estimates due to a better product mix

and higher-than-expected export realization.

Volume growth was 14.7% yoy in 2QFY19. Domestic volume growth was 11% yoy while

export volumes grew by 35.2% yoy. Gross margin came in at 24.2% in 2QFY19 (-260 bps yoy),

which was 40 bps below our estimates possibly due to the impact of increase in raw material

prices. Staff costs rose by 11% in 2QFY19 led by increase in minimum wages by Karnataka and

Tamil Nadu. Other expenses increased by only 5% yoy due to lower marketing expenses, which

led to operating leverage benefit. EBITDA margin was 8.6% in 2QFY19 (-30 bps yoy, +90 bps

qoq), which was in line with our estimates.

TVS’ domestic market share improves by 210 bps qoq in 2QFY19

Market share of TVS in the domestic two-wheeler industry was 15.0% in 2QFY19 (+210 bps

qoq) led by 400 bps qoq increase in market share in the scooter segment. Ntorq scooters have

been received well by customers and helped the company gain market share. Hero Motocorp

has launched Destiny 125 scooter to target Ntorq and Activa 125cc in October 2018. We

expect competitive intensity to escalate in the 125cc scooter segment.

Cut FY2019-21E standalone EPS estimates by 2-3%; reiterate SELL on expensive valuations

We have cut our FY2019-21E EPS estimates by 2-3% primarily due to increase in depreciation

and interest expenses. The stock is extremely expensive at 30X FY2020E EPS even after building

in 12% EPS CAGR over FY2018-21E. Reiterate SELL rating; SoTP-based target price is

unchanged at `350.

TVS Motor (TVSL) Automobiles

Good quarter but festive season off to a weak start. TVS reported strong 2QFY19

results as EBITDA grew by 18% yoy. EBITDA margin improved to 8.6% in 2QFY19 (+90

bps qoq) led by operating leverage benefit. We expect domestic two-wheeler industry

growth to slow down in 2HFY19 as the festive season has started off on a weak note.

We believe that valuations at 30X FY2020E EPS are unjustified as the company will find

it very difficult to gain market share in the two-wheeler industry. Double-digit EBITDA

margin is unlikely in FY2019-20E. SELL stays.

SELL

OCTOBER 24, 2018

RESULT


Price (`): 535


BSE-30: 33,847

Hitesh Goel

Nishit Jalan

TVS Motor







MFs 8.6 EBITDA (Rs bn) 14.8 16.6 18.5


Absolute (9.8) (1.3) (22.0) ROE (%) 22.7 22.6 22.4



794-479

254.3

Automobiles TVS Motor


Conference call takeaways

Slow start to festive season. The company highlighted that the festive season kicked off

to a slow start given increase in vehicle prices due to insurance cost and confusion around

the same. The company is hopeful of demand recovery going ahead and expects 10%

volume growth for the industry in FY2019E. We are more cautious on industry growth

outlook and expect 5% CAGR for industry growth over FY2018-21E. The company will

look to gain share in the domestic market led by success of new launches and continued

strong traction in the scooters segment. Dealer inventory levels are around 4-5 weeks.

Price increases and cost pressures. The company had taken another 0.5% price

increase in 1QFY19, 0.6% in 2QFY19 and another 40-50 bps in October 2018. But this

will be offset by further increase in commodity costs. The company expects RM cost to

inch higher in 2HFY18; import content for the company is around 14% of overall RM cost

currently, which it is targeting to reduce to 10% by end-FY2019. The company will look

to further reduce costs through value engineering, localization, platform consolidation,

other cost-reduction efforts (lower marketing spend to sales), etc. to improve profitability

going ahead.

Capex and investments in subsidiaries. The company increased its FY2019E capex

guidance to ₹8 bn (from `7 bn earlier); the capex will be largely incurred for product

development and upgrading products to meet new emission norms. The company has a

manufacturing capacity of 4.8 mn units; therefore, there is no need to invest on capacity

expansion next year. TVS has invested `553 mn in subsidiaries this quarter, which

includes `300 mn in TVS Credit Services and `253 mn in TVS Motor Singapore in 2QFY19

and `1.1 bn in 1HFY19.

Performance of TVS Credit Services. The loan book of TVS Credit Services (engaged in

financing of vehicles) was `70 bn at the end of September 2018 (`60 bn in March 2018);

profit before tax was `0.9 bn in 1HFY19 (`1.7 bn in FY2018). Net profit was `0.3 bn in

1QFY19 and `0.5 bn in 1HFY19 (`1.1 bn in FY2018). Networth of TVS Credit Services

was `8.9 bn in FY2018. TVS Motors holds around 85% stake in TVS Motor Credit.

Other key points. (1) Export revenues were `11.4 bn in 2QFY19 and export realization

(USD:INR) was 69.5 in 2QFY19 compared to 67 in 1QFY19 and (2) finance penetration for

the company is around 45%. TVS Credit accounts for 50% of financed vehicles of TVS

Motor.

TVS Motor Automobiles


Exhibit 1: 2QFY19 EBITDA was marginally ahead of our estimates but PAT was 5% below our estimates on lower other income TVS Motor, standalone interim results, March fiscal year-ends (₹ mn)


Exhibit 2: TVS’ market share in domestic two-wheeler industry improved in 2QFY19 Domestic two-wheeler industry mix and TVS’ market share across segments, March fiscal year-ends, 2010-19 (%)

Source: SIAM, Kotak Institutional Equities

(% chg.)

2QFY19 2QFY19E 2QFY18 1QFY19 2QFY19E 2QFY18 1QFY19 1HFY18 1HFY17 Yoy (%) FY2019E FY2018 Yoy (%)

Volumes (units) 1,088,374 1,088,374 948,584 928,274 14.7 17.2 2,016,648 1,750,692 15.2 3,917,944 3,466,410 13.0

Net realisations (Rs/vehicle) 45,880 45,034 42,850 44,905 1.9 7.1 2.2 45,431 42,636 6.6 45,862 43,646 5.1

Net sales 49,935 49,014 40,647 41,685 1.9 22.8 19.8 91,619 74,642 22.7 179,686 151,296 18.8

Inc/dec in stock (224) 1,000 1,490 1,470 1,246 1,543

Raw materials (37,616) (38,352) (31,225) (33,113) 1.3 27.3 19.6 (70,728) (56,633) 24.9 (135,124) (111,330) 21.4

Staff costs (2,449) (2,400) (2,199) (2,375) 2.1 11.4 3.1 (4,824) (4,290) 12.5 (9,635) (8,680) 11.0

Other expenses (5,363) (5,123) (5,086) (4,455) 4.7 5.4 20.4 (9,819) (9,523) 3.1 (20,153) (19,995) 0.8

Total expenses (45,653) (44,876) (37,021) (38,472) 1.7 23.3 18.7 (84,125) (68,902) 22.1 (164,912) (140,005) 17.8

EBITDA 4,282 4,138 3,626 3,212 3.5 18.1 33.3 7,494 5,740 30.5 14,774 11,291 30.8

Depreciation expense (1,016) (933) (836) (933) 8.8 21.5 8.8 (1,949) (1,620) (3,973) (3,387)

EBIT 3,266 3,205 2,790 2,279 1.9 17.1 43.3 5,544 4,121 34.5 10,801 7,904 36.7

Other income 7 200 333 26 (96.3) (97.8) (71.2) 33 904 140 1,448

Interest expense (212) (180) (155) (180) 17.4 36.7 17.4 (392) (262) 49.5 (742) (566) 31.1

Profit before tax 3,062 3,225 2,968 2,124 (5.1) 3.2 44.1 5,186 4,762 8.9 10,199 8,785 16.1

Tax expense (949) (1,000) (836) (658) (5.1) 13.4 44.1 (1,607) (1,336) (3,162) (2,161)

Profit after tax 2,113 2,225 2,132 1,466 (5.0) (0.9) 44.1 3,579 3,426 4.5 7,037 6,625 6.2

EPS 4.4 4.7 4.5 3.1 (5.0) (0.9) 44.1 7.5 7.2 4.5 14.8 13.9 6.2

Ratios (%)

Raw material cost to net sales 75.8 76.2 73.2 75.9 75.8 73.8 75.2 73.6

Staff cost to net sales 4.9 4.9 5.4 5.7 5.3 5.7 5.4 5.7

Other expenses to net sales 10.7 10.5 12.5 10.7 10.7 12.8 11.2 13.2

Gross margin (%) 24.2 23.8 26.8 24.1 24.2 26.2 24.8 26.4

EBITDA margin (%) 8.6 8.4 8.9 7.7 8.2 7.7 8.2 7.5

No of shares 475.1 475.1 475.1 475.1 475.1 475.1 475.1 475.1

Tax rate (%) 31.0 31.0 28.2 31.0 31.0 28.1 31.0 24.6

Volume break up (units)

Motorcycles 277,034 277,034 252,373 251,015 9.8 10.4 528,049 483,019 9.3 1,026,898 916,811 12.0

Scooters 369,590 369,590 317,285 275,430 16.5 34.2 645,020 568,557 13.4 1,231,031 1,099,135 12.0

Mopeds 237,582 237,582 227,442 207,566 4.5 14.5 445,148 420,091 6.0 859,820 859,820 —

Three-wheelers 4,706 4,706 3,952 4,276 19.1 10.1 8,982 6,266 43.3 18,400 16,429 12.0

Total domestic sales 888,912 888,912 801,052 738,287 11.0 20.4 1,627,199 1,477,933 10.1 3,136,149 2,892,195 8.4

Motorcycles 142,632 142,632 112,904 136,225 26.3 4.7 278,857 212,308 31.3 570,395 438,765 30.0

Scooters 18,644 18,644 11,048 12,457 68.8 49.7 31,101 17,348 79.3 53,675 35,783 50.0

Mopeds 3,146 3,146 2,284 10,061 37.7 (68.7) 13,207 7,084 86.4 26,118 17,412 50.0

Three-wheelers 35,040 35,040 21,296 31,244 64.5 12.1 66,284 36,019 84.0 131,608 82,255 60.0

Total export sales 199,462 199,462 147,532 189,987 35.2 5.0 389,449 272,759 42.8 781,795 574,215 36.2

Volume mix (%)

Motorcycles 25.5 25.5 26.6 27.0 26.2 27.6 26.2 26.4

Scooters 34.0 34.0 33.4 29.7 32.0 32.5 31.4 31.7

Mopeds 21.8 21.8 24.0 22.4 22.1 24.0 21.9 24.8

Three-wheelers 0.4 0.4 0.4 0.5 0.4 0.4 0.5 0.5

Total domestic sales 81.7 81.7 84.4 79.5 80.7 84.4 80.0 83.4

Motorcycles 13.1 13.1 11.9 14.7 13.8 12.1 14.6 12.7

Scooters 1.7 1.7 1.2 1.3 1.5 1.0 1.4 1.0

Mopeds 0.3 0.3 0.2 1.1 0.7 0.4 0.7 0.5

Three-wheelers 3.2 3.2 2.2 3.4 3.3 2.1 3.4 2.4

Total export sales 18.3 18.3 15.6 20.5 19.3 15.6 20.0 16.6

2010 2011 2012 2013 2014 2015 2016 2017 2018 1QFY19 2QFY19

Domestic two-wheeler industry mix (%)

Motorcycles 78.3 76.5 75.2 73.1 70.8 67.1 65.0 63.1 62.5 64.3 63.1

Scooters 15.6 17.6 19.0 21.2 24.3 28.2 30.6 31.9 33.3 32.0 32.9

Mopeds 6.0 5.9 5.8 5.7 4.9 4.7 4.4 5.1 4.3 3.7 4.1

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Market share of TVS (%)

Motorcycles 6.7 7.0 6.2 5.5 5.5 6.2 6.7 7.0 7.3 6.9 7.4

Scooters 20.5 21.6 19.5 14.5 12.7 15.2 15.4 14.7 16.4 15.1 19.1

Mopeds 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Overall two-wheeler industry 14.5 15.1 14.2 12.8 11.8 13.2 13.4 14.2 14.2 12.9 15.0



Exhibit 3: We have fine-tuned our EPS estimates Earnings revision table for standalone entity, March fiscal year-ends, 2019-21E (₹ mn)


Exhibit 4: We value TVS Motor at `350/share SoTP valuation, March fiscal year-end, 2020E


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

Standalone

Volumes (units) 3,917,944 4,144,502 4,393,724 3,826,600 4,045,477 4,286,201 2.4 2.4 2.5

Net sales 179,686 199,897 223,085 176,079 195,898 218,596 2.0 2.0 2.1

EBITDA 14,774 16,608 18,455 13,829 15,608 17,499 6.8 6.4 5.5

EBITDA margin (%) 8.2 8.3 8.3 7.9 8.0 8.0

Adjusted net profit 7,037 8,107 9,301 7,180 8,266 9,555 (2.0) (1.9) (2.7)

EPS 14.8 17.1 19.6 15.1 17.4 20.1 (2.0) (1.9) (2.7)

New estimates Old estimates % change

EPS Multiple Value per share

(Rs) (X) (Rs) Comments

September 2020 standalone EPS 18.3 16.0 293

TVS Motor Services 50 Valued at 2X equity invested by TVS Motor (parent entity)

Total value per share 343

Target price 350



Exhibit 5: We expect company’s volumes to grow at 8% CAGR over FY2018-21E TVS Motor, volume breakdown across segments, March fiscal year-ends, 2010-21E (units)


2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Volumes (units)

Domestic volumes

Motorcycles 493,396 632,150 621,738 558,468 572,732 667,624 712,002 776,934 916,811 1,026,898 1,059,664 1,094,069

Economy (Star City) 345,395 422,733 466,745 392,931 343,960 432,620 384,545 324,877 383,065 371,573 371,573 371,573

Executive (Victor & Phoenix) 38,258 66,239 10,185 43,475 88,357 37,660 65,828 155,703 133,067 122,422 128,543 134,970

Premium (Apache) 109,743 143,178 144,808 122,062 140,415 197,344 261,629 296,354 400,679 532,903 559,548 587,526

Scooters 299,370 446,776 496,584 424,183 456,975 684,569 773,597 826,291 1,099,135 1,231,031 1,317,203 1,409,408

Mopeds 564,584 697,778 776,916 788,761 722,920 755,503 723,767 890,367 859,820 859,820 859,820 859,820

Total domestic 2W 1,357,350 1,776,704 1,895,238 1,771,412 1,752,627 2,107,696 2,209,366 2,493,592 2,875,766 3,117,749 3,236,687 3,363,296

3 Wheelers 13,400 22,357 14,172 15,616 12,515 17,606 15,536 12,277 16,429 18,400 19,321 20,287

Total domestic 1,370,750 1,799,061 1,909,410 1,787,028 1,765,142 2,125,302 2,224,902 2,505,869 2,892,195 3,136,149 3,256,008 3,383,583

Export volumes

Motorcycles 148,443 205,103 219,624 191,338 220,747 292,935 304,805 299,388 438,765 570,395 655,954 754,347

Scooters 9,192 18,156 32,199 17,369 18,693 22,457 38,930 44,572 35,783 53,675 59,042 64,946

Mopeds 6,905 6,295 9,076 3,308 7,252 9,679 14,780 20,152 17,412 26,118 28,730 31,603

Total exports 2W 164,540 229,554 260,899 212,015 246,692 325,071 358,515 364,112 491,960 650,187 743,725 850,896

3 Wheelers 1,716 17,503 25,567 33,574 68,327 90,773 95,285 56,977 82,255 131,608 144,769 159,246

Total exports 166,256 247,057 286,466 245,589 315,019 415,844 453,800 421,089 574,215 781,795 888,494 1,010,141

Total volumes 1,537,006 2,046,118 2,195,876 2,032,617 2,080,161 2,541,146 2,678,702 2,926,958 3,466,410 3,917,944 4,144,502 4,393,724

YoY growth (%)

Domestic volumes

Motorcycles 7.8 28.1 (1.6) (10.2) 2.6 16.6 6.6 9.1 18.0 12.0 3.2 3.2

Economy (Star City) — 22.4 10.4 (15.8) (12.5) 25.8 (11.1) (15.5) 17.9 (3.0) 0.0 0.0

Executive (Victor & Phoenix) — 73.1 (84.6) 326.9 103.2 (57.4) 74.8 136.5 (14.5) (8.0) 5.0 5.0

Premium (Apache) — 30.5 1.1 (15.7) 15.0 40.5 32.6 13.3 35.2 33.0 5.0 5.0

Scooters 23.8 49.2 11.1 (14.6) 7.7 49.8 13.0 6.8 33.0 12.0 7.0 7.0

Mopeds 30.9 23.6 11.3 1.5 (8.3) 4.5 (4.2) 23.0 (3.4) 0.0 0.0 0.0

Total domestic 2W 20.0 30.9 6.7 (6.5) (1.1) 20.3 4.8 12.9 15.3 8.4 3.8 3.9

3 Wheelers — 66.8 (36.6) 10.2 (19.9) 40.7 (11.8) (21.0) 33.8 12.0 5.0 5.0

Total domestic 20.8 31.2 6.1 (6.4) (1.2) 20.4 4.7 12.6 15.4 8.4 3.8 3.9

Export volumes

Motorcycles (16.6) 38.2 7.1 (12.9) 15.4 32.7 4.1 (1.8) 46.6 30.0 15.0 15.0

Scooters 10.6 97.5 77.3 (46.1) 7.6 20.1 73.4 14.5 (19.7) 50.0 10.0 10.0

Mopeds (1.9) (8.8) 44.2 (63.6) 119.2 33.5 52.7 36.3 (13.6) 50.0 10.0 10.0

Total exports 2W (14.9) 39.5 13.7 (18.7) 16.4 31.8 10.3 1.6 35.1 32.2 14.4 14.4

3 Wheelers — — 46.1 31.3 103.5 32.9 5.0 (40.2) 44.4 60.0 10.0 10.0

Total exports (14.0) 48.6 16.0 (14.3) 28.3 32.0 9.1 (7.2) 36.4 36.2 13.6 13.7

Total volumes 15.7 33.1 7.3 (7.4) 2.3 22.2 5.4 9.3 18.4 13.0 5.8 6.0



Exhibit 6: We expect overall revenues to grow at 14% CAGR over FY2018-21E TVS Motor, revenue breakdown across segments, March fiscal year-ends, 2010-21E (` mn, %)


2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Revenues (Rs mn)

Domestic revenues

Motorcycles 15,854 22,215 21,477 20,410 21,564 24,676 28,018 32,215 37,716 44,696 50,258 55,333

Economy 9,412 12,682 13,539 11,871 10,307 11,329 11,387 9,584 10,917 10,590 10,961 11,519

Executive 1,339 2,517 407 1,826 3,534 1,506 2,765 6,540 5,477 5,039 5,419 5,893

Premium 5,103 7,016 7,530 6,713 7,723 11,841 13,866 16,092 21,322 29,067 33,877 37,921

Scooters 7,945 12,880 16,164 14,062 15,080 23,618 28,932 31,399 40,932 45,844 49,543 54,602

Mopeds 9,389 12,281 14,412 16,564 15,181 16,621 15,138 19,143 18,116 18,116 18,298 18,846

Total domestic 2W 33,188 47,375 52,052 51,036 51,826 64,915 72,088 82,757 96,764 108,656 118,099 128,781

3 Wheelers 1,051 1,568 941 1,379 1,198 1,581 1,395 1,105 1,449 1,639 1,721 1,861

Total domestic 34,239 48,944 52,994 52,415 53,024 66,496 73,484 83,862 98,213 110,295 119,820 130,642

Export revenues

Motorcycles 4,608 6,312 7,753 8,071 9,751 13,475 14,344 13,922 26,326 34,566 40,546 47,560

Scooters 275 527 1,055 680 761 915 1,617 1,872 1,473 2,231 2,479 2,754

Mopeds 136 120 194 85 193 253 410 574 486 737 819 909

Total exports 2W 5,019 6,959 9,002 8,836 10,706 14,643 16,371 16,368 28,285 37,534 43,843 51,224

3 Wheelers 154 1,575 2,301 3,022 6,491 8,179 8,844 6,272 8,873 14,338 16,088 18,050

Total exports 5,173 8,534 11,303 11,858 17,197 22,821 25,214 22,639 37,158 51,872 59,931 69,274

Total vehicle revenues 39,412 57,478 64,297 64,273 70,221 89,317 98,698 106,502 135,371 162,167 179,751 199,917

Accessories and spare parts 4,218 5,402 6,966 7,417 9,473 10,931 12,384 14,861 15,926 17,518 20,146 23,168

Total revenues 43,631 62,880 71,264 71,690 79,694 100,248 111,082 121,362 151,297 179,686 199,897 223,085

YoY growth (%) 44.1 13.3 0.6 11.2 25.8 10.8 9.3 24.7 18.8 11.2 11.6

Revenue mix (%)

Motorcycles 36.3 35.3 30.1 28.5 27.1 24.6 25.2 26.5 24.9 24.9 25.1 24.8

Economy 21.6 20.2 19.0 16.6 12.9 11.3 10.3 7.9 7.2 5.9 5.5 5.2

Executive 3.1 4.0 0.6 2.5 4.4 1.5 2.5 5.4 3.6 2.8 2.7 2.6

Premium 11.7 11.2 10.6 9.4 9.7 11.8 12.5 13.3 14.1 16.2 16.9 17.0

Scooters 18.2 20.5 22.7 19.6 18.9 23.6 26.0 25.9 27.1 25.5 24.8 24.5

Mopeds 21.5 19.5 20.2 23.1 19.0 16.6 13.6 15.8 12.0 10.1 9.2 8.4

Total domestic 2W 76.1 75.3 73.0 71.2 65.0 64.8 64.9 68.2 64.0 60.5 59.1 57.7

3 Wheelers 2.4 2.5 1.3 1.9 1.5 1.6 1.3 0.9 1.0 0.9 0.9 0.8

Total domestic 78.5 77.8 74.4 73.1 66.5 66.3 66.2 69.1 64.9 61.4 59.9 58.6

Export revenues

Motorcycles 10.6 10.0 10.9 11.3 12.2 13.4 12.9 11.5 17.4 19.2 20.3 21.3

Scooters 0.6 0.8 1.5 0.9 1.0 0.9 1.5 1.5 1.0 1.2 1.2 1.2

Mopeds 0.3 0.2 0.3 0.1 0.2 0.3 0.4 0.5 0.3 0.4 0.4 0.4

Total exports 2W 11.5 11.1 12.6 12.3 13.4 14.6 14.7 13.5 18.7 20.9 21.9 23.0

3 Wheelers 0.4 2.5 3.2 4.2 8.1 8.2 8.0 5.2 5.9 8.0 8.0 8.1

Total exports 11.9 13.6 15.9 16.5 21.6 22.8 22.7 18.7 24.6 28.9 30.0 31.1

Total vehicle revenues 90.3 91.4 90.2 89.7 88.1 89.1 88.9 87.8 89.5 90.3 89.9 89.6

Accessories and spare parts 9.7 8.6 9.8 10.3 11.9 10.9 11.1 12.2 10.5 9.7 10.1 10.4

Total revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0



Exhibit 7: We expect standalone net profit to grow at 12% CAGR over FY2018-21E TVS Motor, standalone financial summary, March fiscal year-ends, 2012-21E (` mn)


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


Net sales 71,262 71,693 79,659 100,423 111,047 121,353 151,296 179,686 199,897 223,085

EBITDA 4,694 4,090 4,822 6,066 8,099 8,571 11,291 14,774 16,608 18,455

Other income 217 238 302 303 1,039 1,734 1,448 140 190 220

Interest (571) (480) (254) (274) (487) (440) (566) (742) (757) (542)

Depreciation (1,175) (1,304) (1,317) (1,533) (2,361) (2,878) (3,387) (3,973) (4,291) (4,653)

Exceptional income — (908) (28) — — — — — — —

Profit before tax 3,165 1,636 3,525 4,562 6,289 6,987 8,785 10,199 11,749 13,480

Tax expense (674) (476) (909) (1,083) (1,397) (1,406) (2,161) (3,162) (3,642) (4,179)

Reported PAT 2,491 1,160 2,616 3,478 4,893 5,581 6,625 7,037 8,107 9,301

Adjusted net profit 2,491 1,804 2,637 3,478 4,893 5,581 6,625 7,037 8,107 9,301

Earnings per share (Rs) 5.2 3.8 5.6 7.3 10.3 11.7 13.9 14.8 17.1 19.6


Equity 11,693 12,247 14,153 16,454 19,583 24,083 28,804 33,308 38,496 44,449

Deferred tax liability 976 931 1,247 1,528 1,437 1,257 1,482 1,482 1,482 1,482

Total Borrowings 8,311 6,345 5,276 9,705 7,585 10,851 10,370 14,370 10,870 7,194

Current liabilities 9,363 10,767 13,760 16,869 19,932 21,719 29,981 31,877 34,923 38,417

Other liabilities 1,063 1,066 1,211 1,488 985 1,137 1,158 1,158 1,158 1,158

Total liabilities 31,405 31,356 35,647 46,042 49,522 59,047 71,795 82,194 86,929 92,699

Net fixed assets 10,781 10,476 11,738 14,190 17,506 20,462 25,030 29,057 29,766 30,113

Investments 9,309 8,688 8,959 10,125 12,149 15,879 20,354 21,589 22,789 23,989

Cash 130 175 826 54 327 85 109 274 366 1,454

Other current assets 11,185 12,017 14,124 21,674 19,540 22,622 26,302 31,275 34,008 37,144

Total assets 31,405 31,356 35,647 46,042 49,522 59,047 71,795 82,194 86,929 92,699


Operating cash flow excl. working capital 3,783 3,685 3,625 4,699 6,658 7,754 8,848 11,612 12,966 14,276

Working capital changes 626 643 1,613 (3,851) 2,753 (514) 3,668 (3,077) 312 358

Capital expenditure (1,768) (995) (2,580) (4,052) (4,872) (6,122) (7,698) (8,000) (5,000) (5,000)

Free cash flow 2,640 3,333 2,658 (3,203) 4,539 1,118 4,818 535 8,278 9,634

Ratios

Gross margin (%) 26.2 27.5 28.8 27.3 28.1 27.0 26.4 24.8 24.5 24.5

EBITDA margin (%) 6.6 5.7 6.1 6.0 7.3 7.1 7.5 8.2 8.3 8.3

PAT margin (%) 3.5 2.5 3.3 3.5 4.4 4.6 4.4 3.9 4.1 4.2

Net debt/equity (X) 0.7 0.5 0.3 0.6 0.4 0.4 0.4 0.4 0.3 0.1

Book Value (Rs/share) 24.6 25.8 29.8 34.6 41.2 50.7 60.6 70.1 81.0 93.6

RoAE (%) 23.0 15.1 20.0 22.7 27.2 25.6 25.1 22.7 22.6 22.4

RoACE (%) 14.8 10.3 14.1 15.5 16.9 14.7 16.1 17.2 17.6 19.2


Strong performance in residential business, steady metrics for annuity portfolio

Oberoi Realty had operating cash flows of Rs452 mn for 2QFY19 compared to cash flows of

Rs42 mn in 2QFY18 and negative cash flow of Rs2 bn for FY2018. Oberoi Realty continued to

report a robust performance with sales of Rs5.7 bn (+61% yoy) and collections of Rs5.6 bn

(+287% yoy) in 2QFY19. The operational performance kept up the momentum seen in 1QFY19

which cumulatively makes it the best performance for the company since the launch of Oberoi

Sky City in 3QFY16. Earnings from the rental business also grew 36% yoy to Rs782 mn owing

to higher occupancy of 63% at Commerz II, while the hotel business reported 10% yoy growth

in revenues at Rs321 mn aided by increase in RevPAR to Rs7,055/day from Rs6,416/day in

2QFY18.On a consolidated basis, Oberoi reported revenues of Rs5.9 bn (+95% yoy) and EBITDA

of Rs2.9 bn (+81% yoy) that yielded a PAT of Rs2.1 bn (+106% yoy). Lower-than-estimated

revenue was on account of lower revenue recognition in the residential business. Residential

business saw revenues of Rs4.7 bn with margins of 45%, while the rental business as well as

hotel segment saw margin expansion.

Residential business was supported by strong sales at Sky City, Exquisite and Three Sixty West

Oberoi Realty maintained the sales momentum first seen in 1QFY19, with sales of Rs5.7 bn

comprising among others (1) Rs2.2 bn (+194% yoy) at Three Sixty West, (2) Rs1.3 bn (+48%

yoy) at Oberoi Sky City, and (3) Rs1.1 bn (+7% yoy) at Esquire. Growth in collections should

also be seen in the context of the transition phase due to implementation of RERA and GST in

2QFY18. Blended realizations at Rs23,781/sq. ft were up 17% yoy owing to the higher

contribution of Three Sixty West in the overall sales mix. On an asset basis, prices firmed up at

Oberoi Sky City as well as Esquire, though sales at lower floors saw prices at Three Sixty West

drop to Rs43,402/sq. ft. On a reported basis (Ex-TSW), margins for the residential business

narrowed slightly to 45% compared to 50% in the preceding periods.

Oberoi has a liquid balance sheet well placed to capitalize on opportunities in the sector

Improved execution at the larger under construction projects, new launch activity at extant land

parcels and conclusion of the acquisition at Thane are likely triggers for Oberoi Realty going into

FY2019.

Oberoi Realty (OBER) Real Estate

Sales momentum maintained. Oberoi Realty maintained the pick-up in sales since

1QFY19, with sales of Rs5.7 bn in 2QFY19 with healthy growth at Oberoi Skycity and

Three Sixty West. Annuity portfolio will see a further step-up in earnings as Commerz II

will improve occupancy to 97% giving further stability to an already liquid balance

sheet. Maintain BUY rating though cut target price to Rs460/share (from Rs560/share)

as we prune realization estimates and prolong sales cycle across the portfolio while

eliminating premium to NAV on future asset build-up.

BUY

OCTOBER 24, 2018

RESULT


Price (`): 395


BSE-30: 33,847

Murtuza Arsiwalla

Samrat Verma

Oberoi Realty



Market Cap. (Rs bn) EPS growth (%) 264.9 (26.6) 66.3




MFs 3.2 EBITDA (Rs bn) 16.0 9.3 22.0


Absolute (8.6) (18.3) (15.4) ROE (%) 21.4 12.5 18.0



610-351

143.5

Oberoi Realty Real Estate


Improving room rates for the hotel property as well as higher occupancy at Commerz II will

further supplement the contribution from the investment portfolio, while conclusion of

construction at TSW coupled with re-imbursement of construction cost (with interest) will

curtail incremental cash drain for the project. We have revised our target price to

Rs460/share (from Rs560/share) primarily as we remove option value for growth in the

current environment, as well as moderate sales and pricing assumptions.

Commerz II to hit 97% occupancy in 3QFY19E

Earnings from commercial and hospitality business remained stable as the company reported

revenues of Rs782 mn (+36% yoy) and Rs321 mn (+10% yoy) respectively. Operations at

Oberoi mall reported improvement in margins due to renewal of lease contracts at higher

rates even though occupancy declined by 182 bps yoy. Decline in revenues for Commerz I

was due to (1) decline in rentals by 5% yoy to Rs137 per sq. ft (Rs143 per sq. ft in 1QFY19)

and (2) occupancy by 440 bps to 77.7% in 2QFY19.

Commerz II (Phase 1) currently operating at lower occupancy of 63% is likely to see an

increase to 97% by 3QFY19E as the company leased additional space of 0.24 mn sq. ft

during the quarter.

In the hospitality segment, revenues and EBITDA at Westin Hotel increased to Rs321 mn

(+10% yoy) and Rs 107 mn (14% yoy) respectively. Occupancy improved to 81% in 2QFY19

(78% in 2QFY18) along with improvement in ARR to Rs8,715 per day from Rs8,224 per day

in 2QFY18.

Liquid balance sheet, completed projects places Oberoi ahead of peers

Reinforcing its view highlighted earlier, Oberoi’s management expressed relief on the recent

credit-crisis in the sector, that it believes will bring a shift towards larger organized

developers. As per management, a credit crisis by local developers was long anticipated as

they piled on debt to buy land parcels with less definite plans to monetize the same. Such a

situation is likely to work in Oberoi’s favor as land parcels would now be available at the

“right” price as there would be fewer takers for the same.

According to the management, there is little or no finished inventory available with the

unorganized developers (in Mumbai region). As for Oberoi, the company has largely been

reliant on its cash flows for development of new projects and as such is unlikely to face any

delays on part of credit availability.

Oberoi and the growth path going forward

Oberoi, in-line with its prudent cash management policy, has slowly started to build up its

annuity portfolio. Upcoming mall in Borivali and Worli are likely to provide annual cash flows

of Rs 3 bn and Rs 3.5 bn respectively and construction for the same is to commence shortly.

These malls are expected to come up at a cost of Rs4,000 psf (on GLA basis).

The company has currently released Towers A-D for sale in Sky City and is constructing

Tower E. Construction at towers F-H is to commence post sales completion at Towers A-D.

With 97% of space at Commerz II leased out, Oberoi is likely to start construction of

Commerz III.

As per management, sales at Three Sixty West are likely to pick up (current inventory of 150

flats) as the company would release higher floors (above 48th

) for sale. All payments for land

parcel in Thane are now complete and a project launch is expected in 4QFY19 or early

1QFY20.

Real Estate Oberoi Realty


Exhibit 1: Oberoi continues to maintain the momentum on sales as well as collections in 2QFY19 Cash collections for Oberoi, March fiscal year-ends,1QFY17-2QFY19 (Rs mn)


Exhibit 2: Strong sales momentum at Goregaon, Mulund and Worli Oberoi: Select details from sales, collections, March fiscal year-ends, 2QFY15 - 2QFY19


4,0

98

5,1

34

2,6

75

3,4

54

2,8

70

3,5

33

4,0

63

2,6

33

6,2

35

5,6

75

2,3

74

2,9

54

3,2

17

4,6

27

1,0

26

1,4

56

4,3

01 5

,46

6

5,6

66

5,6

37

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

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

Sales (Rs mn) Collections (Rs mn)

Growth (%)

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

Oberoi Exquisite, Goregaon (E) (a)

Sales (sq ft) 18.2 16.9 1.8 6.9 13.9 5.3 17.6 3.6 5.1 17.0 220 236

Sales value 401 407 44 162 331 128 412 90 120 400 212 233

Collections 297 631 141 150 235 244 408 123 133 364 49 173

(%) received 97 97 97 97 97 98 98 98 98 98 0 (0)

Oberoi Esquire, Goregaon (E) (a)

Sales 8.0 25.1 28.0 21.1 12.3 50.1 24.4 42.2 129.6 52.3 5 (60)

Sales value 168 535 537 382 265 1,030 481 921 2,674 1,105 7 (59)

Collections 649 572 778 887 193 367 2,083 2,062 2,789 1,942 429 (30)

(%) received 53 54 55 58 58 57 62 67 69 72 27 4

Oberoi Prisma

Sales (sq ft) 20.2 11.4 2.6 12.4 3.2 9.0 8.6 8.8 14.6 8.4 (6) (42)

Sales value 348 195 45 223 55 161 152 161 263 173 7 (34)

Collections 237 305 151 138 45 21 160 401 603 619 2,836 3

(%) received 56 63 67 67 67 65 66 74 85 96 49 14

Oberoi Eternia, Mulund (W)

Sales (sq ft) 5.0 15.4 6.2 13.1 3.1 21.3 6.7 6.9 30.2 24.2 14 (20)

Sales value 83 237 99 207 46 321 103 101 423 346 8 (18)

Collections 27 53 360 353 52 140 384 278 318 483 245 52

(%) received 30 30 35 39 39 39 44 47 49 52 33 8

Oberoi Enigma, Mulund (W)

Sales (sq ft) 13.5 10.7 3.1 10.1 2.1 16.9 — 5 14 8 (55) (45)

Sales value 226 178 53 169 31 253 — 83 200 109 (57) (45)

Collections 88 33 63 419 65 101 284 271 163 298 196 83

(%) received 29 29 30 37 38 38 44 48 50 54 40 9

Oberoi Sky City, Borlivali (E)

Sales (sq ft) 27.0 28.5 35.8 26.4 31.9 55.9 47.0 54.6 58.0 77.5 39 34

Sales value 463 458 586 433 522 880 769 848 891 1,304 48 46

Collections 694 229 995 1,063 313 489 884 849 884 1,133 132 28

(%) received 28 28 33 38 38 39 42 44 46 48 24 5

Three Sixty West, Worli (a)

Sales (sq ft) 55.3 68.3 28.7 45.4 29.1 15.0 47.5 9.6 35.3 51.6 243 46

Sales value 2,410 3,097 1,311 1,878 1,467 761 2,147 430 1,664 2,239 194 35

Collections 383 1,105 728 1,617 113 40 97 1,482 777 798 1,880 3

(%) received 45 43 44 49 46 44 40 46 46 45 3 (2)



Exhibit 3: Lower-than-estimated revenue recognition in the residential business led to miss in earnings, though underlying business

performance remains strong Quarterly results for Oberoi Realty, March fiscal year-ends, 2017-2019E (Rs mn)


Exhibit 4: Strong growth in revenue for residential business, margin expansion in hotels and rentals Segment-wise quarterly performance for Oberoi, March fiscal year-ends (Rs mn)


Exhibit 5: Operating cash flow remained low despite strong collections due to construction spend and payment of TDR Consolidated cash flows for Oberoi Realty, 1QFY17-2QFY19 (Rs mn)


% change % change

2QFY19 2QFY19E 2QFY18 1QFY19 2QFY19E 2QFY18 1QFY19 1HFY19 1HFY18 % change FY2019E FY2018 % change

Financials snapshot

Net sales 5,921 7,559 3,035 8,883 (22) 95 (33) 14,804 5,643 162 34,927 12,654 176

Operating costs (2,963) (3,716) (1,398) (4,266) (20) 112 (31) (7,228) (2,650) 173 (18,926) (5,902) 221

EBITDA 2,958 3,843 1,638 4,617 (23) 81 (36) 7,576 2,993 153 16,000 6,753 137

Other income 277 28 50 71 348 146 139 106 266 (60)

Interest costs (58) (41) (16) (49) (108) (32) 238 (113) (69) 65

Depreciation (109.8) (113) (127.5) (106.1) (216) (251) (14) (525) (491) 7

PBT 3,067 3,717 1,544 4,533 (17) 99 (32) 7,600 2,855 166 15,469 6,459 139

Taxes (940) (1,115) (509) (1,450) (2,390) (915) 161 (5,105) (1,907) 168

PAT 2,127 2,602 1,035 3,083 (18) 106 (31) 5,210 1,941 168 10,364 4,552 128

EPS (Rs/share) 6.3 7.7 3.0 9.1 15.3 5.7 30.5 13.4

Key ratios

EBITDA margin (%) 50.0 50.8 54.0 52.0 51 53 45.8 53.4

PAT margin (%) 35.9 34.4 34.1 34.7 35 34 29.7 36.0

Effective tax rate (%) 30.7 30.0 33.0 32.0 31.4 32.0 33.0 29.5

Operations snapshot

Area sold (mn sq. ft) 0.24 0.10 0.13

Value (Rs mn) 5,675 2,870 2,633

Collections (Rs mn) 5,637 1,026 5,466

Growth (%) Composition (%)

2QFY19 2QFY18 1QFY19 2QFY18 1QFY19 2QFY19 2QFY18 1QFY19

Revenue

Residential 4,707 2,063 7,724 128 (39) 79 68 87

Commercial 782 575 727 36 7 13 19 8

Hotel 321 292 309 10 4 5 10 3

Others 112 105 95 7 17 2 3 1

Total 5,921 3,035 8,856 95 (33) 100 100 100

EBITDA

Residential 2,123 1,023 3,859 107 (45) 72 63 84

Commercial 739 535 684 38 8 25 33 15

Hotel 118 93 95 27 24 4 6 2

Others (22) (14) (22) 59 (0) (1) (1) (0)

Total 2,958 1,637 4,617 81 (36) 100 100 100

Margins

Residential 45 50 50

Commercial 95 93 94

Hotel 37 32 31

Others (19) (13) (23)

Total 50 54 52

1QFY17 2QFY17 3QFY17 4QFY17 FY2017 1QFY18 2QFY18 3QFY18 4QFY18 FY2018 1QFY19 2QFY19

Opening cash and cash equivalents 3,863 4,514 2,981 5,307 3,863 4,942 1,207 693 1,097 4,942 1,325 13,881

Operating cash flows (356) 79 1,305 799 1,827 (416) 46 (3,747) 2,059 (2,058) 2,330 452

Investing cash flows (3,623) (575) (848) (2,637) (7,683) (2,991) (2,218) (2,188) (1,196) (8,592) (8,826) (8,330)

Financing cash flows 4,630 (1,038) (377) 48 3,264 (328) 1,658 5,931 (751) 6,510 11,066 (630)

Closing cash and bank balance 4,514 2,981 3,061 3,517 1,271 1,207 693 690 1,208 801 5,895 5,372

Add: Short term liquid investments 2,395 1,872 2,246 1,425 7,938 411 425 407 117 1,361 7,986 7,517

Total 6,909 4,853 5,307 4,942 9,209 1,618 1,119 1,097 1,325 2,162 13,881 12,889

Real Estate Oberoi Realty


Exhibit 6: Stable earnings from remaining rental assets; improved occupancy at Commerz II to reflect in earnings from 3QFY19 Quarterly occupancy and rentals from investment properties, March fiscal year-ends, 2017-19 (%, Rs per sq. ft)


Exhibit 7: Westin has been operating at high occupancy but is yet to see improvement in room rates Quarterly details of occupancy and room rates, March fiscal year-ends, 2017-18 (%.Rs per day)


Exhibit 8: Oberoi Realty, change in estimates, March fiscal year-ends; 2019-21E


1QFY17 2QFY17 3QFY17 4QFY17 FY2017 1QFY18 2QFY18 3QFY18 4QFY18 FY2018 1QFY19 2QFY19

Oberoi Mall

Occupancy (%) 90.8 90.9 99.9 99.7 95.3 99.1 98.7 99.4 99.4 99.1 97.3 96.9

Rental (Rs/ sq. ft) 162 164 152 155 158 162 164 170 176 168 220 233

Commerz

Occupancy (%) 88.5 88.5 88.5 88.5 88.5 88.5 82.1 82.1 82.1 83.7 78.5 77.7

Rental (Rs/ sq. ft) 141 140 142 142 142 142 142 141 142 142 143 136

Commerz II

Occupancy (%) 13.0 27.1 29.9 29.9 20.3 44.7 44.7 44.7 47.5 44.9 63.4 63.4

Rental (Rs/ sq. ft) 122 125 114 126 123 119 116 117 123 127 120 134

6,3

10

6,1

73

7,2

55

7,3

12

6,7

63

6,4

56

6,4

16

7,5

82

7,6

15

7,0

40

7,0

52

7,0

55

60

65

70

75

80

85

90

95

100

5,000

5,500

6,000

6,500

7,000

7,500

8,000

1Q

FY17

2Q

FY17

3Q

FY17

4Q

FY17

FY2017

1Q

FY18

2Q

FY18

3Q

FY18

4Q

FY18

FY2018

1Q

FY19

2Q

FY19

RevPAR (Rs) Occupancy (%)

Revised estimates Old estimates Change (%)

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

Revenues 34,927 19,620 46,203 37,128 25,450 52,099 -6 -23 -11

EBITDA 16,000 9,265 22,009 17,822 13,291 25,774 -10 -30 -15

Net profit 13,120 8,814 17,208 16,351 11,834 19,811 -20 -26 -13



Exhibit 9: Nearly 90% of value from visible projects Composition of NAV for Oberoi Realty, March 2020E (Rs mn)


Exhibit 10: Four projects to hit revenue recognition in FY2019 Oberoi: Profit model, balance sheet, cash flow model, March fiscal year-ends, 2016-2021E (Rs mn)


(Rs mn) (Rs /share) (%) Remarks

Ongoing 82,541 227 54

Forthcoming 57,733 159 38 New phases of ongoing projects + Thane

Planned 13,341 37 9 Mainly, Commerz-2 Phase 2

Net debt 13,641 38

Total 167,256 460

NAV

2016 2017 2018 2019E 2020E 2021E

Profit model

Net sales 14,161 11,137 12,654 34,927 19,620 46,203

EBITDA 6,763 5,701 6,753 16,000 9,265 22,009

Other income 428 473 266 106 262 1,021

Interest -68 -56 -81 -113 -83 -55

Depreciation -490 -495 -491 -525 -524 -532

Pre-tax profits 6,632 5,623 6,447 15,469 8,921 22,443

Tax -2,165 -1,868 -2,128 -5,105 -2,944 -7,406

Deferred taxation (123) (1) — — — —

Net income 4,344 3,754 4,320 10,364 5,977 15,037

Adjusted net income 4,353 3,788 4,320 13,120 8,814 17,208

Earnings per share (Rs) 12.8 11.1 12.7 38.4 25.8 50.3

Balance sheet

Total equity 53,411 57,260 60,924 87,759 98,588 1,17,144

Total borrowings 4,734 8,686 16,941 14,209 8,241 5,494

Non-current liabilities 547 799 1,130 945 964 955


Total liabilities and equity 74,838 84,541 1,01,839 1,07,296 1,20,358 1,31,892

Net fixed assets 10,258 10,545 10,890 11,799 15,105 18,612

Other non-current assets and advances 16,197 18,446 26,614 33,201 20,375 8,825

Current assets 47,638 53,325 64,199 62,296 84,878 1,04,455

Investments 745 2,225 135 — — —

Total assets 74,838 84,541 1,01,839 1,07,296 1,20,358 1,31,892

Free cash flow

Operating cash flow excl. working capital 4,836 4,315 4,720 16,400 12,176 19,911

Working capital changes 68 -3,793 -6,850 -11,067 1,024 -1,827

Capital expenditure -2,873 -4,514 -6,793 -7,902 9,003 7,512

Free cash flow 2,031 -3,991 -8,923 -2,569 22,203 25,596

Ratios (%)

Debt/equity 8.9 15.2 27.8 16.2 8.4 4.7

Net debt/equity 4.9 11.4 26.5 8.8 (13.8) (32.8)

RoE (%) 8.6 6.8 7.3 17.6 9.5 16.0

RoCE (%) 4.2 3.2 3.6 7.3 3.7 9.4

Book value per share (Rs) 157 169 179 257 288 343


Upgrade to ADD on attractive valuations; stock trades at 12X FY2020E earnings

We have been negative on HCLT’s business model for a fairly long time. These concerns emanate

from single-service line dependence (IMS) for growth, underinvested applications portfolio and

of late capital allocation. The concerns have not abated. In fact, slowing organic growth and

high acquisition appetite make the current EBIT margin guidance band of 19.5-20.5%

unsustainable (our FY2020-21E EBIT margin forecast stands at 18.5-19%). However, our

concerns are adequately captured in the stock price underperformance; in fact, the stock has

barely moved in the past 12 months despite sector-wide benefits from rupee depreciation and

acceleration in growth. The stock now trades at attractive12X FY2020E earnings. This combined

with good deal wins and likely pickup in growth rates in IMS in the near term creates an

opportunity to generate reasonable returns. Our EPS estimates and target price of `1,100

remain unchanged. Upgrade to ADD valuing the stock at 14X September 2020E earnings.

Results in line; IMS growth higher than earlier quarter

HCLT reported constant-currency revenue growth of 3%, in line with our estimate. Revenues

include ~US$21 mn contribution from Actian Corporation and some contribution from IP acquired

in the previous quarter. Organic constant-currency revenue growth rate stood below 2%.

Revenue growth in IMS picked up and grew 2.5% sequentially and 4.4% yoy. Application

services was weak and grew at modest 0.4% qoq and 1.8% yoy. EBIT margin of 19.9% increased

20 bps qoq on the back of rupee depreciation (+90 bps) and productivity improvements (+80

bps), offset to some extent by wage revision (-70 bps), higher SG&A (-50 bps) and other

operational factors (-30 bps). Net profit of `25.4 bn grew 5.7% qoq and 16.1% yoy and was

ahead of our estimate due to higher-than-expected other income and lower-than-expected tax

rate.

Revenue growth guidance scaled up to mid-point 9.5-11.5% range

Management is confident of a strong 2H as some of the large IMS deals (such as Nokia) flow

through revenues. Guidance implies 3% revenue CQGR over the next two quarters. Management

indicated that organic revenue growth contribution in FY2019 will be higher in the overall growth

composition compared to the assumption at the beginning of the year. The company has

retained EBIT margin guidance band of 19.5-20.5% and expects better EBIT margin in 2HFY19.

HCL Technologies (HCLT) Technology

Upgrade on attractive valuations. We upgrade HCLT to ADD from REDUCE on

attractive valuations with the stock trading at 12X FY2020E earnings. Our structural

concerns on the business model persist—continued deflationary pressure in IMS,

underinvestment in digital and questionable capital allocation. However, these concerns

are captured in the steep stock price underperformance. Reasonable deal wins and

likely step-up in organic revenue growth in the near term are comforting. We value

HCLT at 14X September 2020E earnings. Target price and EPS remain unchanged.

ADD

OCTOBER 24, 2018

RESULT, CHANGE IN RECO.


Price (`): 952


BSE-30: 33,847

Kawaljeet Saluja

Sathishkumar S

HCL Technologies







MFs 5.6 EBITDA (Rs bn) 141.7 149.9 155.4


Absolute (13.2) (4.0) 4.0 ROE (%) 25.1 22.1 20.5



1,125-825

1,325.1

HCL Technologies Technology


IMS growth picks; however, deflationary pressures persist

IMS revenues grew 2.5% sequentially and 4.4% yoy. Growth rates have recovered from a

low of 2.0% yoy in 1QFY19 to 4.4% in the current quarter and can improve further. We

note that IMS growth slowed down over the past 18 months due to a mix of things—impact

from shift of workloads to public cloud, renewals of its own deals, a more aggressive

competition and increasing trend of bundling of deals.

Management indicated that impact on revenues from renewals of old IMS deals will continue

in FY2020E albeit at marginally lower than FY2019. The company expects most of the deals

to be reconfigured to cloud and next-gen services by FY2021E.

Application services—the struggle continues

Application services grew at insipid 0.4% qoq and 1.8% yoy. The company attributed weak

numbers to continued pressure in traditional areas such as SAP and a couple of client-

specific issues.

Weak application is not a new concern. In fact, this service offering has not grown in double

digits in the past 6 years (Exhibit 7) and has seen growth rates slide down progressively.

Reason? The company has been underinvested in the offerings for many years and has done

little to address this issue. It is interesting to note that out of the 21 inorganic initiatives, the

company has barely acquired anything in application services. It is not as if this segment is

short of acquisition candidates. HCLT’s competitors have snapped up many small digital

companies in the cloud apps, digital studios and customer experience management space.

It is surprising to see that an acquisitive company like HCLT Is missing from that list of

acquirers.

Acquisitions of IP likely to continue

HCLT’s revenues from Mode 3 offerings have hit the US$1 bn run-rate. The company is

investing heavily in own platforms and products. The company has started investing in

products and platforms sales program. The company will also aggressively pursue licensing

of IPs from product vendors where the core product needs transformation to be relevant in

future, is in the focus areas and is available at the right price.

… and so does our concern on acquisition strategy of the company

At the risk of repetition, our discomfort with HCLT’s acquisition strategy continues. We favor

acquisitions to augment digital capabilities or the ones that can provide meaningful revenue

synergies. HCLT has demonstrated risk-taking appetite through 10 IP deals and 12 acquisitions

in the past three years. A few ERD acquisitions are encouraging, though the broader emphasis

on IP deals and certain non-strategic acquisitions are disappointing. We are especially

disappointed with three recent acquisitions, viz. C3i, Actian and H&D. These acquisitions will

provide revenue kicker but does not help bring in anything differentiated or new.

We do hope that aggressive acquisitions do not lead to slowdown of organic growth

endeavors and will be an important element to focus on. And so does the implications for

profitability of the strategy.

Technology HCL Technologies


Key highlights from earnings call

Margin walk-through. HCLT’s EBIT margin increased 20 bps sequentially to 19.9% due

to (1) 70 bps headwind from wage increments, (2) 50 bps headwind from SG&A costs

and (3) 30 bps negative impact from seasonality and other headwinds offset by (4) 90 bps

tailwind from rupee depreciation net of cross-currency movements and (5) 80 bps

tailwind from productivity benefits.

Guidance. HCLT retained constant-currency revenue growth guidance of 9.5%-11.5%.

The company expects to deliver in the midpoint of the guided range, i.e. 10.5%. EBIT

margin guidance was also unchanged at 19.5%-20.5%. The company plans to reinvest

gains from rupee depreciation.

Mode 2 & Mode 3 margins. HCLT reported 400 bps sequential decline in Mode 2 EBIT

margin to 10.8%. Volatility in Mode 2 margins will continue in the short term due to

investments. The company expects margin expansion as Mode 2 revenues scale up. HCLT

expects Mode 3 margins to stay in the 24-25% range on an annualized basis.

Application services outlook. Management reported that while traditional services such

as SAP faced pressure, the company has been able to defend share during renewals by

helping clients migrate to digital.

IMS. HCLT expects vendor consolidation trend to continue in IMS. Management is of the

view that the company is well-positioned to benefit from the trend, especially among US

clients. HCLT is able to offset revenue loss from pricing pressure during renewals by

offering additional services.

Europe outlook. Europe geography revenues declined 0.9% sequentially in c/c terms.

Management reported that the weak growth was due to softness in a couple of financial

services clients in the geography (HCLT reported weak financial services revenue growth

of 0.1% in c/c terms). Though HCLT expects the weakness in the client accounts to

continue in the near term, it is optimistic on better revenue growth in Europe in the next

couple of quarters based on order flows.

Client metrics. US$100 mn client bucket was flat at 9 while number of US$50 mn clients

decreased by 1 to 31 sequentially. Number of US$20 mn clients was up by 3 sequentially

to 90.

Tax rate. HCLT reported a tax rate of 21.1%, which was lower than our estimate of

23.0%. The company has guided for a tax rate of 22-23% for the rest of the fiscal.

Capital allocation. HCLT completed share buyback of `40 bn announced in the previous

quarter on October 11, 2018. The company has declared an interim dividend of `2/share

for the quarter.



Exhibit 1: HCL Technologies’ Sep 2018 quarter financial performance under US GAAP (Rs mn)


Exhibit 2: Key changes to estimates, March fiscal year-ends, 2019E-21E (Rs mn)


2QFY19 2QFY19E 2QFY18 1QFY19 KIE yoy qoq 1HFY19 1HFY18 % chg. FY2019E FY2018 % chg.

Revenues (US$ mn) 2,099 2,100 1,928 2,055 (0.1) 8.8 2.1 4,153 3,812 8.9 8,557 7,838 9.2

Revenues 148,610 148,072 124,340 138,780 0.4 19.5 7.1 287,390 245,830 16.9 601,744 505,700 19.0

Cost of Revenues (95,890) (95,978) (82,073) (91,056) (0.1) 16.8 5.3 (186,946) (162,649) 14.9 (390,245) (332,367) 17.4

Gross profit 52,720 52,094 42,267 47,724 1.2 24.7 10.5 100,444 83,181 20.8 211,499 173,333 22.0

SG&A expenses (17,730) (17,518) (14,675) (15,463) 1.2 20.8 14.7 (33,193) (28,788) 15.3 (69,812) (58,937) 18.5

EBIDTA 34,990 34,576 27,592 32,262 1.2 26.8 8.5 67,252 54,393 23.6 141,687 114,396 23.9

Depreciation (5,330) (5,199) (3,084) (4,965) 2.5 72.8 7.4 (10,295) (5,448) 89.0 (21,139) (14,532) 45.5

EBIT 29,660 29,377 24,508 27,297 1.0 21.0 8.7 56,957 48,945 16.4 120,548 99,865 20.7

Other Income 2,520 1,422 2,973 2,961 5,481 5,664 9,425 11,104

PBT 32,180 30,799 27,481 30,258 4.5 17.1 6.4 62,438 54,609 14.3 129,973 110,968 17.1

Provision for Tax (6,780) (7,084) (5,609) (6,227) (4.3) 20.9 8.9 (13,007) (11,037) 17.8 (28,100) (23,162) 21.3

PAT before share of earnings in affiliates 25,400 23,715 21,872 24,031 7.1 16.1 5.7 49,431 43,571 101,872 87,807

Share of income (loss) of equity investees — — — — — — —

Minority Interest — — — — — (14) —

Net Income (before extraordinaries) 25,400 23,715 21,872 24,031 7.1 16.1 5.7 49,431 43,558 13.5 101,360 87,807 15.4

EPS (Rs/share) 18 17.0 15.7 17.3 6.9 15.9 5.5 35.5 30.8 15.0 73.6 62.8 17.2

No of shares outstanding 1,356 — 1,393 1,393 1,356 1,393 1,378 1,398

Segmental revenues (US$ mn)

Software 1,230 1,116 1,203 10.2 2.3 2,433 2,206 10.3 5,004 3,391 47.5

Infrastructure 755 742 745 1.7 1.3 1,499 1,469 2.0 3,102 2,199 41.1

BPO 114 70 107 62.7 6.2 221 137 61.5 452 210 114.9

Margins (%)

Gross Profit margin 35.5 35.2 34.0 34.4 35.0 33.8 35.1 34.3

SG&A as % of revenues 11.9 11.8 11.8 11.1 11.5 11.7 11.6 11.7

EBITDA Margin 23.5 23.4 22.2 23.2 23.4 22.1 23.5 22.6

EBIT Margin 20.0 19.8 19.7 19.7 19.8 19.9 20.0 19.7

NPM 17.1 16.0 17.6 17.3 17.2 17.7 16.8 17.4

% chg.

US$ mn 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E

Revenues 8,557 9,288 9,914 8,540 9,249 9,886 0.2 0.4 0.3

Revenue growth yoy (%) 9.2 8.5 6.7 9.0 8.3 6.9

EBITDA 2,015 2,082 2,159 1,992 2,099 2,169 1.2 (0.8) (0.5)

EBIT 1,714 1,767 1,834 1,693 1,787 1,847 1.3 (1.1) (0.7)

Net Income 1,441 1,469 1,537 1,400 1,467 1,541 3.0 0.1 (0.3)

EBITDA margin (%) 23.5 22.4 21.8 23.3 22.7 21.9

EBIT 20.0 19.0 18.5 19.8 19.3 18.7

Re/ US$ rate 70.3 72.0 72.0 70.1 72.0 72.0

EPS Rs/ share 73.6 77.7 81.2 71.4 77.8 81.6 3.1 (0.1) (0.5)

New Old Change (%)



Exhibit 3: Revenue growth across geographies, verticals and service lines (Sep 2018 quarter)


Exhibit 4: Mode 1-2-3 metrics in Sep 2018 quarter

Source: Company

Revenues Contribution to C/C growth (%)

(US$ mn) qoq yoy revenues (%) qoq yoy

Total revenues 2,099 2.1 8.8 100 3.0 10.5

Geographical split of revenues

US 1,381 4.2 14.8 65.8 4.4 15.1

Europe 562 (2.6) 0.2 26.8 (0.9) 3.5

Asia Pacific 155 0.8 (5.2) 7.4 4.9 0.7

Vertical split of revenues

Financial services 483 (1.3) 0.1 23.0 0.1 2.3

Manufacturing 378 0.5 (6.3) 18.0 1.7 (3.9)

Technology&Services 382 2.1 36.6 18.2 2.2 36.3

Retail & CPG 210 12.2 17.0 10.0 13.0 19.2

Telecom, media, publishing, entertainment 151 0.7 (0.8) 7.2 1.1 (0.8)

Life sciences 271 2.9 20.0 12.9 3.2 19.8

Energy-utilities-public sector 225 4.1 9.9 10.7 5.3 13.3

Service line split of revenues

Application services 695 (0.6) 0.4 33.1 0.4 1.8

Engineering and R&D services 535 6.3 26.2 25.5 6.3 26.3

Infrastructure services 755 1.6 1.8 36.0 2.5 4.4

BPO services 113 6.1 63.3 5.4 7.3 64.8

Notes:

(1) Manufacturing (including hitech) vertical has been segregated as manufacturing and technology & services verticals from 1QFY19

Growth (%)

Revenue Revenue mix EBIT margin Growth

(US$ mn) (%) (%) (qoq c/c %)

Mode 1 1,512 72.0 21.2 1.4

Mode 2 336 16.0 10.8 5.3

Mode 3 251 11.9 24.4 10.4

Total 2,099 100.0 19.9 3.0



Exhibit 5: Application services decelerates further while IMS growth picks up


Exhibit 6: Engineering and R&D services growth has come off multi-quarter highs


1.8

4.4

0

5

10

15

20

25

30

35

Jun-1

5

Sep

-15

Dec-

15

Mar-

16

Jun-1

6

Sep

-16

Dec-

16

Mar-

17

Jun-1

7

Sep

-17

Dec-

17

Mar-

18

Jun-1

8

Sep

-18

Application Services (yoy c/c %) Infrastructure Services (yoy c/c %)

26

0

10

20

30

40

50

60

Jun-1

2

Sep

-12

Dec-

12

Mar-

13

Jun-1

3

Sep

-13

Dec-

13

Mar-

14

Jun-1

4

Sep

-14

Dec-

14

Mar-

15

Jun-1

5

Sep

-15

Dec-

15

Mar-

16

Jun-1

6

Sep

-16

Dec-

16

Mar-

17

Jun-1

7

Sep

-17

Dec-

17

Mar-

18

Jun-1

8

Sep

-18

ERD growth (yoy %)



Exhibit 7: Weak growth in application services' revenues for past 6 years


Exhibit 8: HCLT's attrition rate trend


31.4 33.7

16.5

6.2 5.1

7.7 5.5 5.9

4.4

21.5

31.1

17.1

14.1 14.4 15.1

11.6 13.7

10.5

0

5

10

15

20

25

30

35

40

2010 2011 2012 2013 2014 2015 2016 2017 2018

Application services revenue growth (%) Total revenue growth (%)

25.2

10

15

20

25

30

35

40

Sep

-10

Mar-

11

Sep

-11

Mar-

12

Sep

-12

Mar-

13

Sep

-13

Mar-

14

Sep

-14

Mar-

15

Sep

-15

Mar-

16

Sep

-16

Mar-

17

Sep

-17

Mar-

18

Sep

-18

Consolidated attrition (%, quarterly annualized)



Exhibit 9: Trends in segmental EBIT margins (%)


Exhibit 10: Trend in EBIT margin


20 21

12

5

10

15

20

25

30

Dec-

13

Mar-

14

Jun-1

4

Sep

-14

Dec-

14

Mar-

15

Jun-1

5

Sep

-15

Dec-

15

Mar-

16

Jun-1

6

Sep

-16

Dec-

16

Mar-

17

Jun-1

7

Sep

-17

Dec-

17

Mar-

18

Jun-1

8

Sep

-18

IMS Software services BPO

19.9

5

10

15

20

25

Sep

-11

Mar-

12

Sep

-12

Mar-

13

Sep

-13

Mar-

14

Sep

-14

Mar-

15

Sep

-15

Mar-

16

Sep

-16

Mar-

17

Sep

-17

Mar-

18

Sep

-18

EBIT margins (%)



Exhibit 11: Acquisitions and investments announced by HCL Tech in the past 40 months


Exhibit 12: HCLT's SG&A expenses as % of revenues have declined considerably over the years


Date Target Country Business Description Consideration (mn) Sales (mn)

HCL Technologies

1 Jun-18 H&D International Group Germany Integrated IT and engineering service provider in German automotive industry $35.0 $86.3

2 Jun-18 IP deal NA IP partnership with undisclosed tech firm $177.0 NA

3 Apr-18 Actian Corporation USHybrid data management, analytics and integration company. HCLT will own 80% of the company

with 19.5% with a private equity player$330.0 $107.1

4 Apr-18 C3i Solutions (Telerx Marketing, Inc.) US Multi-channel customer engagement services for the life sciences and CPG vertials $65.0 $199.0

5 Jan-18 3 IP partnerships US 3 IP partnerships- One with IBM, one with DXC and one with undisclosed global tech firm $300.0 $105.0

6 Oct-17 Strategic IP partnership with IBM (6) US Extended IP partnership to include Notes, Domino, Smart Cloud Notes, Verse and Sametime products $60.0 $30.0

7 Sep-17 Datawave UK Data management platform NA NA

8 Jul-17 Strategic IP partnership with IBM (5) US Extended IP partnership to cover marketing automation area $140.0 $30-35

9 Apr-17 Urban Fulfillment Services LLC US Mortgage BPO provider wih 350 resources in US $30.0 $48.0

10 Apr-17 Strategic IP partnership with IBM (4) US Extended partnership to cover Information management and Database management systems $80.0 ~$25

11 Jan-17 Strategic IP partnership with IBM (3) USExtended partnership to cover Application security, B2B data transformation, testing automation and

Mainframe management tools$155.0 $50.0

12 Oct-16 Strategic IP partnership with IBM (2) US Extended IP partnership to cover API/web service enablement of mainframes $55.0 $15.0

13 Oct-16 Butler America Aerospace US Provider of engineering and design services to US aerospace and defense customers $85.0 $85.4

14 Jun-16 Strategic IP partnership (1) US To invest in and grow workload automation and DevOps software of a global tech major $350.0 $100.0

15 Apr-16 Geometric (share swap deal) India PLM and engineering services $195.0 $135.0

16 Feb-16 Volvo IT AB Sweden External IT services arm of Volvo $134.9 $190.0

17 Jan-16 Point to Point (P2P) UK Workplace engineering services $10.0 $11.5

18 Nov-15 Arrangement with CSC US To operate and expand the existing Core Banking business of CSC $53.4 NA

19 Oct-15 Powerteam LLC US Professional services for Microsoft Dynamics CRM $41.4 $37.00

20 Oct-15 C2SiS India Engineering services firm $1.9 NA

21 Aug-15 Trygstad Technical Services Inc US Turnkey solutions for a large ISV $9.9 NA

Total $2,308.4 $1,165+

Notes:

(1) Geometric acquisition is a share-swap deal

(2) HCLT has paid about US$330 mn for Strategic IP partnership and balance US$225 mn would be paid over CY2017.

(3) For other acquisitions, the consideration is agreed amount and it includes earnouts.

11.9

10

12

14

16

18

Sep

-08

Mar-

09

Sep

-09

Mar-

10

Sep

-10

Mar-

11

Sep

-11

Mar-

12

Sep

-12

Mar-

13

Sep

-13

Mar-

14

Sep

-14

Mar-

15

Sep

-15

Mar-

16

Sep

-16

Mar-

17

Sep

-17

Mar-

18

Sep

-18

SG&A as % of revenues



Exhibit 13: HCLT: Quarterly metrics


Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18

Revenues (US$ mn) 1,566 1,587 1,691 1,722 1,745 1,817 1,884 1,928 1,988 2,038 2,055 2,099

Revenues (Rs mn) 103,410 106,980 113,360 115,190 118,140 120,530 121,490 124,340 128,080 131,790 138,780 148,610

Exchange rate 66.0 67.4 67.1 66.9 67.7 66.3 64.5 64.5 64.4 64.7 67.5 70.8

Geographical mix

US 61.0 62.5 59.9 61.9 61.9 62.6 62.8 62.4 63.5 61.6 64.5 65.8

Europe 29.9 28.4 31.4 29.3 29.6 27.7 27.4 29.1 28.7 30.0 28.1 26.8

Asia Pacific 9.1 9.1 8.7 8.8 8.5 9.7 9.8 8.5 7.9 8.5 7.5 7.4

Revenues by service offering

Application services 40.4 39.9 38.3 37.8 37.5 36.8 36.3 35.9 35.3 34.7 34.0 33.1

Engineering and R&D services 18.6 18.7 17.7 17.8 18.6 20.5 21.5 22.0 24.2 24.1 24.5 25.5

Infrastructure services 35.5 36.2 39.8 40.3 39.8 38.8 38.6 38.5 36.7 37.3 36.2 36.0

BPO services 5.5 5.2 4.1 4.1 4.0 3.9 3.6 3.6 3.7 3.9 5.2 5.4

Revenue by contract type

Time and Material 43.0 43.2 39.1 38.7 36.8 38.4 40.2 60.4 60.8 61.6 38.0 38.2

Fixed price 57.0 56.8 60.9 61.3 63.2 61.6 59.8 39.6 39.2 38.4 62.0 61.8

Revenue by vertical (new classification)

Financial services 25.9 25.0 23.6 24.1 24.3 24.2 24.9 25.0 24.6 25.0 23.8 23.0

Manufacturing 31.5 31.4 33.2 32.2 33.9 34.6 34.9 35.4 36.5 36.0 36.5 36.2

Retail & CPG 9.5 9.2 10.0 10.4 9.4 9.2 9.5 9.3 9.6 9.6 9.1 10.0

Telecom, media, publishing, entertainment 9.7 9.9 9.1 9.4 8.9 8.4 7.9 7.9 7.4 7.4 7.3 7.2

Life sciences 12.2 12.8 11.9 12.6 12.0 11.5 11.8 11.7 11.7 11.5 12.8 12.9

Energy-utilities-public sector 10.6 11.1 11.7 10.9 11.2 11.7 11.1 10.6 10.2 10.6 10.5 10.7

Others 0.6 0.5 0.5 0.4 0.4 0.3 — — —

Number of million dollar clients (LTM)

50 Million dollar + 19 19 20 20 24 25 25 25 25 28 32 31

10 Million dollar + 140 144 146 146 148 153 154 157 156 160 162 165

5 Million dollar + 227 233 237 235 241 246 249 259 261 264 267 269

1 Million dollar + 494 482 482 494 496 506 508 536 552 561 571 575

Client contrubution to revenue

Top 5 clients 13.6 13.6 13.9 13.8 14.2 14.7 14.4 15.1 15.8 16.3 17.0 17.3

Top 10 clients 21.7 21.8 21.8 21.6 21.7 22.1 22.4 22.9 23.5 23.8 24.6 24.8

Top 20 clients 32.4 32.2 31.7 31.8 31.9 32.9 33.0 33.2 33.5 33.7 34.2 34.2

Utilization (consol)

Blended utilization 84.7 85.6 85.8 85.3 84.6 85.7 86.0 86.0 85.8 85.9 85.5 86.7

Manpower details

Consolidated manpower 103,696 104,896 107,968 109,795 111,092 115,973 117,781 119,040 119,291 120,081 124,121 127,875

Total gross addition 6,234 9,280 10,515 9,083 8,467 10,605 9,462 8,645 7,113 8,476 12,558 11,683

Total net addition (1,875) 1,200 3,072 1,827 1,297 4,881 1,808 1,259 251 790 4,040 3,754

Attrition - IT services (%) 16.7 17.3 17.8 18.6 17.9 16.9 16.2 15.7 15.2 15.5 16.3 17.1

Attrition - consol quarterly annualized (%) 31.0 31.0 28.0 26.7 26.0 20.2 26.2 25.0 23.0 25.7 27.9 25.2



Exhibit 14: Condensed consolidated US GAAP financials for HCL Technologies, June/March fiscal year-ends, 2014-21E (Rs mn)


2014 2015 2016 2017 2018 2019E 2020E 2021E

Profit model

Revenues 329,180 370,620 311,360 467,220 505,700 601,744 668,704 713,826

EBITDA 86,667 86,947 66,900 103,087 114,392 141,687 149,881 155,446

Depreciation (incl amortization of intangibles) (7,329) (4,505) (4,451) (8,349) (14,529) (21,139) (22,637) (23,377)

Other income (168) 9,114 7,978 9,339 11,101 8,912 11,008 14,472

Pretax profits 79,169 91,556 70,428 104,077 110,964 129,461 138,252 146,542

Tax (15,482) (19,074) (14,786) (19,516) (23,167) (28,100) (32,489) (35,903)

Profit after tax 63,688 72,483 55,641 84,562 87,797 101,360 105,763 110,639

Diluted earnings per share (Rs) 45.1 51.3 39.4 59.2 62.6 73.6 77.7 81.2

Balance sheet

Total equity 204,918 242,116 278,180 344,011 364,401 444,417 511,639 569,797

Deferred taxation liability 1,132 784 1,061 — 341 372 381 381

Total borrowings 7,662 4,584 9,734 5,593 4,326 — — —

Minority interest 5 6 2,115 1,786 — — — —

Other non-current liabilities 14,206 11,783 11,576 9,513 12,197 12,195 13,481 14,334

Current liabilities 83,215 90,058 95,106 115,095 98,118 126,780 134,438 140,781

Total liabilities and equity 311,138 349,329 397,773 475,998 479,383 583,764 659,939 725,294

Cash 95,826 107,805 113,184 119,105 73,437 129,728 185,567 245,611

Other current assets 100,337 115,661 131,361 142,333 146,226 183,098 203,472 217,202

Goodwill and intangible assets 52,544 50,905 64,206 117,965 142,598 168,702 163,580 154,987

Tangible fixed assets 32,108 37,363 43,239 48,325 51,323 59,389 61,084 58,659

Investments 6,382 7,604 6,985 13,481 28,660 459 470 470

Other non-current assets 23,941 29,992 38,796 34,788 37,138 42,388 45,765 48,365

Total assets 311,138 349,329 397,773 475,998 479,383 583,764 659,939 725,294

Free cash flow

Operating cash flow, excl. working capital 71,049 67,092 53,975 84,125 89,566 113,586 117,392 119,544

Working capital changes (3,446) (10,661) (14,689) 240 (13,842) (6,897) (12,740) (9,133)

Capital expenditure (4,861) (12,111) (7,311) (12,077) (10,140) (15,100) (13,758) (12,359)

Acquisitions — — (11,787) (30,762) (44,567) (22,783) — —

Other income (168) 9,114 7,978 9,339 11,082 8,912 11,008 14,472

Free cash flow 62,574 53,435 28,165 50,865 32,098 77,718 101,902 112,524

Key assumption and ratios (%)

US$ revenue growth (b) 14.4 11.1 6.4 11.9 12.4 9.2 8.5 6.7

EBITDA margin 26.3 23.5 21.5 22.1 22.6 23.5 22.4 21.8

EBIT margin 24.1 22.2 20.1 20.3 19.7 20.0 19.0 18.5


Consistent performance on most operating metrics

RBL Bank reported a solid performance on most operating metrics. Earnings grew 36% yoy on

the back of 40% yoy revenue growth led by healthy NII growth of 41% yoy and 38% yoy

growth in non-interest income. Gross and net NPL ratios were stable qoq at 1.4% and 0.7%

with credit costs at ~1% of loans. Slippages were low at 1.3% of loans but agriculture remains

the key area of concern. Cost-income ratio was stable qoq at ~51%.

Dependence on unsecured business to drive revenue growth remains high

As we have been highlighting in our previous notes, the bank is building a balance sheet that is

different from other private banks. Revenues are being built on two risky pillars—(1) MFI

business and (2) credit cards. The revenues from these two businesses will aid investments and

RoE improvement. The MFI business is back on track after having gone through a tough phase

post demonetization while the credit card business is yet to reach peak profitability due to high

acquisition costs. The bank has indicated that it would like to see its card base closer to 3 mn by

FY2021 from 1.2 mn currently (0.6 mn in 2QFY18). RoEs/earnings risks are quite high and may

have to be revised sharply given the duration of these loans, in case of cycle reversal.

Investments at the bank level beyond these two businesses seem below normalized trends

The growth in operating expenses (33% yoy) shows greater emphasis on non-staff expenses

(52% yoy) as compared to staff costs (5% yoy) as there was negligible growth in headcount

(3% yoy) and branch addition (22 yoy and two branches qoq). While the management has

highlighted that investments on other businesses have not slowed but moved towards alternate

channels, we believe asset-side expenses are taking a higher share than estimated earlier.

Upgrade to ADD from REDUCE earlier; TP unchanged

We upgrade RBL Bank to ADD from REDUCE with an unchanged TP of `500 valuing the bank

at 2.3X book and 16X September 2020E EPS for RoEs in the range of 13-15% in the short

term. Recent underperformance gives us an opportunity to turn positive after being negative

since our initiation. RoE improvement is likely to be gradual as the pace of growth in balance

sheet implies capital infusion is needed to maintain its current pace of loan growth.

RBL Bank (RBK) Banks

Turning positive. RBL Bank delivered a solid performance on most operating metrics

with earnings growth of ~36% yoy on the back of 40% yoy revenue growth. Loan

growth was strong at 37% yoy and NIM saw a marginal improvement partly reflecting

the shift in asset mix. RoE improvement is steady but the bank needs capital to sustain

the current pace of growth. We upgrade the stock to ADD (TP unchanged) from REDUCE,

post the recent underperformance, after being negative on the stock since our initiation.

ADD

OCTOBER 24, 2018


Coverage view: Attractive

Price (`): 465


BSE-30: 33,847

QUICK NUMBERS

NII grew 41% yoy;

earnings grew 36%

yoy

Loans grew 37%

yoy; gross NPLs

stable at 1.4% of

loans

Upgrade to ADD

from REDUCE (TP

unchanged at `500)

M B Mahesh CFA

Nischint Chawathe

Dipanjan Ghosh

RBL Bank







MFs 16.4 BVPS 170.5 191.3 217.1


Absolute (16.9) (18.8) (9.9) ROE (%) 12.7 15.1 16.0



652-443

199.2

Banks RBL Bank


Exhibit 1: Quarterly results summary March fiscal year-ends, 2QFY18-2QFY19 (` mn)


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

Interest income 14,634 14,528 10,913 13,642 0.7 34.1 7.3 28,277 21,341 32.5 61,417 45,076 36 79,321

Interest on advances 11,734 11,564 8,191 10,774 1.5 43.3 8.9 22,508 15,900 41.6 49,333 34,309 44 65,585

Interest on investments 2,614 2,691 2,529 2,608 (2.9) 3.4 0.2 5,222 5,031 3.8 11,136 9,982 12 12,468

Other interest 287 273 193 260 5.0 48.3 10.3 547 410 33.4 947 785 21 1,267

Interest expense 8,705 8,808 6,711 8,115 (1.2) 29.7 7.3 16,820 13,355 25.9 37,102 27,413 35 48,338

Net interest income 5,930 5,720 4,202 5,527 3.7 41.1 7.3 11,457 7,985 43.5 24,315 17,663 38 30,983

Non-int.income 3,331 3,206 2,411 3,260 3.9 38.2 2.2 6,591 4,980 32.3 13,792 10,682 29 18,760

Treasury 81 381 370 (78.7) (78.1) 451 1,120 (59.7) 800 1,665 (52) 1,100

Commission & exchange 665 568 694 16.9 (4.2) 1,358 1,136 19.6 10,694 7,226 48 14,758

General banking 405 305 347 32.9 16.7 751 579 29.8

Forex profit 347 345 347 0.5 — 694 693 0.1 1,934 1,511 28 2,437

Distribution 1,243 589 1,272 111.1 (2.3) 2,514 1,065 136.2

Others 591 2,960 223 231 (80.0) 164.8 155.7 822 388 112.0 363 279 30 465

Total income 9,261 8,927 6,612 8,787 3.7 40.1 5.4 18,048 12,965 39.2 38,107 28,345 34 49,744

Op. expenses 4,770 4,762 3,581 4,464 0.2 33.2 6.9 9,234 6,820 35.4 19,782 15,034 32 25,482

Employee cost 1,509 1,651 1,435 1,530 (8.6) 5.1 (1.4) 3,039 2,766 9.9 6,491 5,507 18 8,129

Other cost 3,261 3,111 2,145 2,934 4.8 52.0 11.2 6,195 4,054 52.8 13,291 9,527 40 17,352

Operating profit 4,491 4,165 3,032 4,323 7.8 48.1 3.9 8,814 6,145 43.4 18,325 13,311 38 24,262

Provisions and cont. 1,397 1,053 749 1,404 32.7 86.5 (0.5) 2,800 1,694 65.4 4,748 3,645 30 6,296

PBT 3,094 3,112 2,283 2,920 (0.6) 35.5 6.0 6,013 4,452 35.1 13,576 9,665 40 17,966

Tax 1,048 1,067 776 1,019 (1.8) 35.0 2.8 2,068 1,536 34.7 4,656 3,315 40 5,981

Net profit 2,045 2,045 1,506 1,900 0.0 35.8 7.6 3,946 2,916 35.3 8,920 6,351 40 11,984

Tax rate (%) 33.9 34.3 34.0 34.9 -41 bps -13 bps -103 bps 34.4 34.5 -11 bps 34.3 34.3 0 bps 33.3

Asset quality

GNPL (Rs mn) 6,450 4,872 5,959 32.4 8.2 8,765 5,667 55 13,276

NNPL (Rs mn) 3,386 2,608 3,158 29.8 7.2 4,079 3,126 30 6,278

GNPL (%) 1.4 1.4 1.4 -4 bps 0 bps 1.6 1.3 24 bps 1.8

NNPL (%) 0.7 0.8 0.8 -4 bps -1 bps 0.8 0.8 -2 bps 0.9

PCR (%) 47 46 46 131 bps 71 bps 53 45 862 bps 53

Slippages (Rs mn) 1,420 920 1,480 54.3 (4.1) 2,900 2,440 19 6,152 5,692 8 8,786

Slippages-KS (%) 1.3 1.2 1.3 16 bps 6 bps 1.4 1.7 -22 bps 1.5 1.9 1.6

Restructured-KS (Rs mn) 321 1,377 422 (76.7) (23.9)

Restructured (%) 0.1 0.4 0.1 -34 bps -3 bps

Key balance sheet items (Rs bn)

Total deposits 478 512 366 450 (6.7) 30.7 6.3 585 439 33 783

Current deposits 57 32 52 76.7 9.1 73 53 36 99

Saving deposits 60 54 58 10.5 3.8 77 53 44 111

CASA ratio (%) 25 24 25 80 bps 0 bps 25.6 24.3 26.8

Loans 459 447 336 422 2.7 36.6 8.7 537 403 33 712

Corporate & IB 188 139 171 35.5 9.8 162

Commercial banking 83 65 78 27.2 5.9 75

Branch banking 124 85 114 45.3 9.2 89

DB&FI 63 46 59 37.3 8.3 57

Investment 137 160 133 142 (13.8) 3.4 (3.5) 168 154 9 198


Yield on advances 10.7 10.1 10.5 53 bps 21 bps 10.5 10.1 36 bps 10.5 9.8 66 bps 10.5

Yield on investment 7.5 7.6 7.0 -12 bps 44 bps 7.2 7.5 -36 bps 7.0 7.0 1 bps 6.9

Cost of funds 6.3 6.2 6.1 8 bps 19 bps 6.1 6.2 -9 bps 6.1 5.7 36 bps 6.1

NIM 3.8 3.4 3.7 36 bps 13 bps 3.7 3.3 41 bps 3.6 3.3 26 bps 3.5

Cost to income 51.5 54.2 50.8 -264 bps 71 bps 51.2 52.6 -144 bps 51.9 53.0 -113 bps 51.2

Cost to average assets 2.9 2.8 2.9 11 bps 7 bps 2.9 2.7 16 bps 2.8 2.7 10 bps 2.8

CD ratio 96.0 91.8 93.9 417 bps 211 bps 96.0 91.8 417 bps 91.7 91.7 0 bps 91.0

RoA 1.3 1.2 1.2 7 bps 4 bps 1.2 1.2 7 bps 1.3 1.1 12 bps 1.3

RoE 11.7 11.2 11.2 57 bps 55 bps 11.5 11.0 52 bps 12.7 11.5 112 bps 15.1

Capital adaquacy details (%)

CAR 13.7 16.6 14.6 -290 bps -90 bps 15.3

Tier- I 12.5 14.5 13.1 -200 bps -60 bps 13.6

Other key parameters (#)

Branches 268 246 266 8.9 0.8 285 265 8 315

Customers (mn) 5.3 3.5 4.9 50.6 8.6 4.5

Employees 5,539 5,397 5,374 2.6 3.1 5,944 5,194 14 7,444

(% chg.)

(% chg.)

RBL Bank Banks


Exhibit 2: RoA remains broadly stable at ~1.2% for the past few quarters RoE decomposition, March fiscal year-ends, 2QFY17-2QFY19 (%)


Stable trends on asset quality; NPLs in the agriculture portfolio peak

RBL Bank reported stable gross NPL and net NPL of 1.4% and 0.7%, respectively in

2QFY19. The net stressed assets are quite negligible. Slippages marginally declined by 20

bps qoq to 1.3% in 2QFY19. MFI portfolio saw improvement in GNPL as it declined to

1.5% of loans from 2% of loans in 1QFY19. Provision coverage (calculated) increased to

47% (up ~70 bps qoq).

RBL’s GNPL saw stable performance in the corporate segment at 0.5%. GNPL in the

commercial banking space marginally increased to 3% (up ~30 bps qoq). Additionally,

there was marginal deterioration in asset quality for the retail portfolio by ~15 bps qoq

(GNPL at 1.6% of loans). GNPL in the agriculture portfolio has observed a very sharp

increase of 200%. Write-offs have been primarily in the credit cards and MFI portfolio.

As the company rapidly expands its card base, retail asset quality needs to be monitored

going ahead. The bank has a negligible exposure of `150 mn to IL&FS through a

guarantee and a minor derivative position which the bank currently needs to pay to the

client. The exposure to NBFC and real estate is towards better-rated companies where the

management indicated that the risk of default is quite low.

In line with our conservative stance, we expect gross NPL of around 1.6-2% and credit

costs of 100 bps over the medium term (FY2018-20E).

Exhibit 3: Asset quality of the MFI portfolio continues to improve Segmental gross NPL, March fiscal year-ends, 2QFY17-2QFY19


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

Net interest income 3.0 3.0 3.0 3.1 3.3 3.5 3.4 3.6 3.7

Other income 1.7 1.7 2.0 2.1 1.9 1.9 2.1 2.1 2.1

Total income 4.7 4.7 5.1 5.2 5.2 5.4 5.5 5.6 5.7

Operating expenses 2.5 2.5 2.6 2.7 2.8 2.9 2.9 2.9 2.9

Employees 1.2 1.1 1.0 1.1 1.1 1.1 0.9 1.0 0.9

Others 1.4 1.4 1.7 1.6 1.7 1.8 2.0 1.9 2.0

PPOP 2.2 2.2 2.4 2.6 2.4 2.5 2.6 2.8 2.8

Provisions and contingencies 0.8 0.3 0.7 0.8 0.6 0.6 0.8 0.9 0.9

Loan loss provisions 0.7 0.3 0.4 0.8 0.5 0.5 0.5 0.6 0.7

Other provisions 0.1 0.0 0.3 0.0 0.1 0.1 0.3 0.3 0.1

PBT 1.4 1.9 1.7 1.8 1.8 1.9 1.8 1.9 1.9

(1-tax rate) 63.7 64.7 65.2 65.0 66.0 65.8 65.9 65.1 66.1

ROA 0.9 1.2 1.1 1.2 1.2 1.2 1.2 1.2 1.3

Average assets/ equity 11.1 10.4 10.9 11.1 9.4 8.4 8.9 9.2 9.3

ROE 10.1 12.5 12.2 12.8 11.2 10.4 10.8 11.2 11.7

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

Corporate and IB

Gross NPL (Rs mn) 266 378 378 1,038 1,030 1,028 1,422 831 923 921

Gross NPL (%) 0.3 0.4 0.3 0.8 0.8 0.7 0.9 0.5 0.5 0.5

Commercial banking

Gross NPL (Rs mn) 1,589 1,592 1,604 1,394 1,487 1,279 1,057 1,786 2,187 2,551

Gross NPL (%) 0.3 3.4 3.3 2.5 2.5 2.0 1.6 2.4 2.8 3.1

Branch & business banking

Gross NPL (Rs mn) 472 550 617 763 1,050 1,258 1,108 1,423 1,675 2,007

Gross NPL (%) 1.3 1.3 1.3 1.4 1.3 1.5 1.4 1.6 1.5 1.6

Devpt banking & financial inclusion

Gross NPL (Rs mn) 98 119 131 197 1,012 1,307 1,635 1,628 1,174 970

Gross NPL (%) 0.3 0.3 0.4 0.5 2.4 2.8 3.4 2.9 2.0 1.5

Banks RBL Bank


Exhibit 4: Marginal improvement in provision coverage qoq Asset quality, March fiscal year-ends, 2QFY17-2QFY19 (%)


Exhibit 5: Slippages marginally declined to 1.3% Slippages, March fiscal year-ends, 2QFY17-2QFY19


Exhibit 6: Expect credit costs to moderate going forward Slippages and loan-loss provisions, March fiscal year-ends, 2011-21E (%)


Exhibit 7: We expect gross NPL to remain high in medium term NPLs and provision coverage, March fiscal year-ends, 2011-21E (%)


Robust loan growth at ~37% yoy; retail dominates growth at 45% yoy

RBL’s 37% yoy and ~9% qoq loan growth was driven by 33% yoy growth in the wholesale

book while the non-wholesale book has grown by 23% yoy. Last quarter saw a change in

the loan portfolio definition with the agriculture portfolio now getting distributed between

commercial banking and retail assets.

Within the non-wholesale book, retail assets were solid at 45% yoy followed by DB&FI

which witnessed 37% yoy growth. Within the retail book, credit cards and personal loans

witnessed highest growth. A total of 0.26 mn new credit cards (total outstanding of 1.2 mn

cards) were issued in 2QFY19. Within DB&FI, micro-banking and MSME business (on a low

base) saw rapid growth at 55-60% yoy. The company is swiftly increasing its BC network to

grow this book at a fast pace. Additionally, geographic diversification remains paramount

for this business (the company is present in 19 states with no state contributing more than

15% of the business).

1.1 1.1 1.2

1.5 1.4 1.6

1.4 1.4 1.4

0.6 0.5 0.6 0.8 0.8 1.0 0.8 0.8 0.7

50.0 50.9 46.7

44.5 45.8

38.3

44.3 46.4 47.1

0

12

24

36

48

60

-

0.4

0.8

1.2

1.6

2.0

2Q

FY1

7

3Q

FY1

7

4Q

FY1

7

1Q

FY1

8

2Q

FY1

8

3Q

FY1

8

4Q

FY1

8

1Q

FY1

9

2Q

FY1

9

GNPL (LHS) NNPL (LHS) PCR-KS (%) (RHS)

380 220 4,050 1,520 920 2,100 1,150 1,480 1,420

0.7 0.4

6.1

2.1

1.2

2.5

1.2 1.5 1.3

0.0

1.4

2.8

4.2

5.6

7.0

0

900

1,800

2,700

3,600

4,500

2Q

FY1

7

3Q

FY1

7

4Q

FY1

7

1Q

FY1

8

2Q

FY1

8

3Q

FY1

8

4Q

FY1

8

1Q

FY1

9

2Q

FY1

9

(%)(Rs mn) Slippages (LHS) Slippages (RHS)

0.4 0.9 1.0 1.0

0.5

1.4

2.5

1.9 1.5 1.6 1.6

0.00

0.25

0.50

0.75

1.00

1.25

0.0

0.6

1.2

1.8

2.4

3.0

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

E

20

20

E

20

21

E

Slippages (LHS) Loan loss provisions (RHS)

1.1

0.8

0.4

0.8 0.8 1.0

1.2 1.4

1.6 1.8

2.0

0.4 0.2 0.1 0.3 0.3 0.6 0.6 0.8 0.8 0.9 1.0

80 8084

66 68

56

47 45

53 53 51

0

20

40

60

80

100

-

0.4

0.8

1.2

1.6

2.0

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

E

20

20

E

20

21

E

Gross NPL Net NPL Provision coverage (RHS)

RBL Bank Banks


Wholesale segment loan growth was robust at 33% yoy. Within the wholesale book,

corporate and institutional banking grew at 36% yoy whereas commercial banking

increased by 27% yoy. RBL is targeting to reach a 50:50 split between wholesale and non-

wholesale segments, compared to 60:40 split now. Our forecasts build 25-30% loan CAGR

over FY2017-20E.

Exhibit 8: Marginal change in loan mix Loan book break-up, March fiscal year-ends, 2011-2QFY19 (%)

Notes: (a) Agribusiness has been restructured with inclusion of ‘agri value chain’ in commercial banking and others under retail assets.


Exhibit 9: Robust increase in micro banking business DB&FI break-up, March fiscal year-ends, 3QFY17-2QFY19 (` bn)


Exhibit 10: Yields remain broadly stable in 1HFY19 Yield break-up, March fiscal year-ends, 2016-1HFY19 (%)


Exhibit 11: Loan growth to drop going ahead Loan book and yoy growth, March fiscal year-ends, 2011-21E


27 39 43

36 36 39 42 40 41 41

51 42 31

27 24 22 19 19 19 18

9 5 11

17 16 16 18 22 27 27

- - 3 6 9 8 7 5 - -

13 14 11 13 14 15 14 14 14 14

0

20

40

60

80

100

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

1Q

FY1

9

2Q

FY1

9

C&IB CB BBB Agribusiness banking DB&FI

15 22 22 25

29 36 37 39

18

16 16 16

14

15 15 17

3

3 4 5 5

6 6

8

-

12

24

36

48

60

3Q

FY1

7

4Q

FY1

7

1Q

FY1

8

2Q

FY1

8

3Q

FY1

8

4Q

FY1

8

1Q

FY1

9

2Q

FY1

9

Micro banking IFI MSME

10.910.2 10.1 10.0 9.9

9.2 9.1 8.9 8.8 8.5 8.6

13.4 13.4 13.3 13.5 13.412.8

13.3 13.3 13.414.0 14.1

11.511.2 11.3 11.310.8 10.6 10.6 10.4 10.5

10.8 10.9

5

7

9

11

13

15

FY20

16

1Q

FY1

7

1H

FY1

7

9M

FY1

7

FY20

17

1Q

FY1

8

1H

FY1

8

9M

FY1

8

FY20

18

1Q

FY1

9

1H

FY1

9

Wholesale book Non-wholesale book Overall

19 41 64 98 144 212 294 403 537 712 897

63

117

54 54 47 47 39 37 33 33

26

-

30

60

90

120

150

-

180

360

540

720

900

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

E

20

20

E

20

21

E(%)(Rs bn)

Banks RBL Bank


Exhibit 12: Slight deterioration in the rating profile Break-up of rated exposure, March fiscal year-ends, 2QFY17-2QFY19 (%)


Exhibit 13: Micro-banking portfolio has shown strong growth over the years March fiscal year ends, 2014-1HFY19 (` mn)


5.2 6.8 8.1 8.3 8.1 7.8 7.5 7.9 6.0 4.6 5.3 6.8 6.9 6.6 7.1 7.7 6.7 7.5

16.9 15.0 13.6 12.5 14.1 13.5 14.6 14.2 14.1

19.0 18.7 16.7 17.3 17.7 18.1 17.7 19.8 19.2

25.9 24.6 24.4 24.5 22.5 23.9 22.4 21.1 23.0

21.7 22.0 22.5 22.3 23.5 23.3 24.6 24.6 24.5

6.8 7.6 7.9 8.3 7.5 6.3 5.5 5.7 5.7

0

20

40

60

80

100


AAA/ AA+/AA AA- A+/ A A-/ BBB+ BBB BBB- BB+ and below

3,240 8,390

14,830

21,690

35,740 39,400

-

8,000

16,000

24,000

32,000

40,000

2014 2015 2016 2017 2018 1HFY18

Microbanking portfolio

RBL Bank Banks


Exhibit 14: Diversified distribution network for micro-banking across 19 states Proportion of micro-banking portfolio across states, March fiscal year ends, 2QFY19 (%)


The importance of the two lines of business: ~35% of revenues

We are making marginal modifications to the table that we have reported last quarter.

Exhibit 16 shows the contribution of the credit card and MFI business. This is a pure

hypothetical exercise based on external and internal inputs. The management has not given

us any specific number on any line item and we have used the performance of other MFI for

the bank’s MFI business and the performance of SBI Cards and Payment Services for the

credit card business of RBL. Based on this exercise we probably see the importance of these

two businesses, which contribute ~15% of the overall loan book. We believe that the card

and MFI business contributes 16-17% of revenues each.

The management highlighted that the portfolio is generating returns better than the bank’s

reported numbers. The throughputs of the cards business have been quite impressive when

we look at the number of transactions, spends and average transaction/card (see Exhibit

below). The conversion to term loans is quite stable at ~20% and these loans are for less

than 6 months. Fees are quite healthy with ~40% from interchange and the balance split

between annual, processing and others fees (late payment, penal, forex, write-back, etc.).

We estimate that these two businesses could be contributing 30% of the overall expenses of

the bank. The management indicated that it would want a substantial increase in its credit

card base in FY2019 (1.8 mn from 1.2 mn currently) and 3 mn by FY2020 and 5 mn by

FY2021. This would entail quite a lot of expenses upfront as most of it would be origination

costs. We don’t have the contractual details that the bank has with Bajaj Finance.

On the other hand, the MFI business is seeing two good tailwinds. Growth has picked up

and NPL risk is receding. This implies one could see significant contribution to profits from

this business in the next few quarters.

15 1513

108

65 5 5

43

2 2 21 1 1 1 10

3

6

9

12

15

Bih

ar

Tam

il N

adu

Mahara

shtr

a

Karn

atak

a

Odis

ha

Raja

sth

an

Madhya

Pra

desh

Guja

rat

Wes

t Beng

al

Jhark

hand

Pun

jab

Hary

ana

Chatt

isgarh

Utt

arakh

and

Ass

am

Kera

la

Goa

Utt

ar P

rad

esh

Tripu

ra

Banks RBL Bank


Exhibit 15: Market share in cards space continues to march upwards Debit and credit cards, March fiscal year-ends, 2014-1QFY19 (%)

Source: RBI, Kotak Institutional Equities

2014 2015 2016 2017 2018 YTD 2019

Market share in volume (%)

Credit cards 0.72 0.42 0.61 0.94 2.13 2.72

Debit cards 0.03 0.06 0.11 0.07 0.10 0.09

Market share based on transaction value (%)

Credit cards 0.07 0.26 0.45 0.89 1.50 2.62

Debit cards 0.03 0.04 0.05 0.06 0.08 0.10

Market share based on transaction volume (%)

Credit cards 0.07 0.22 0.32 0.69 1.32 2.02

Debit cards 0.03 0.03 0.04 0.05 0.08 0.10

Summary of credit card business

Outstanding cards (#) 138,426 88,405 149,820 281,236 799,962 1,116,951

Transaction volume (#) 337,960 1,341,578 2,528,528 7,533,407 18,613,461 14,140,384

Transaction value (Rs mn) 1,043 4,952 10,937 29,469 69,354 61,760

Average spend per transaction (Rs) 3,691 4,326 3,912 3,726 4,368

Average spend per card (Rs) 43,663 91,823 136,727 128,291 154,648

Summary of debit card business

Outstanding cards (#) 110,764 335,314 740,805 586,004 838,017 904,402

Transaction volume (#) 1,822,383 2,636,782 3,952,634 5,743,691 9,909,278 5,586,021

Transaction value (Rs mn) 5,328 9,622 13,520 16,099 27,869 15,113

Average spend per transaction (Rs) 3,649 3,420 2,803 2,812 2,705

Average spend per card (Rs) 43,141 25,127 24,267 39,141 41,632

Notes:

(a) Average spend are annualized numbers.

(b) YTD 2019 is as of August 2018.

RBL Bank Banks


Exhibit 16: Credit card and MFI business probably contributes ~35% of revenues and ~30% of operating expenses for the bank Credit card and MFI business contribution to the overall business, March fiscal year-ends, 1HFY18 (` mn)

Notes:

(a) We have used a card base of 950,000 for our estimates. The outstanding credit card loans are at 6.2% of loans on average basis.

(b) Interest on loans in credit card is ~35%. However, we have used 20% in our estimates as the “receivables”, which is reported as loans in the

credit cards also include customers who repay on time. The implied rollover rate is ~55% when we take an average yield of 20%. We have used

a provision charge of ~3% of loans.

(c) We have used revenue and opex/card based on SBI Cards. This is a separate arm of SBI which is into the credit card business of the group.

(d) Operating expenses for the MFI business is at 5% of loans.


Exhibit 17: Card base has more than doubled in the past 1 year Total spends and card base, March fiscal year ends, 2QFY18-2QFY19 (` mn)


Bank Credit card Contribution MFI Contribution Total Contribution

(% of loans) 6.2 8.2 14.5

Average loans 426,371 26,495 6.2 35,153 8.2 61,648 14.5

Revenues 18,048 3,130 17.3 2,956 16.4 6,086 33.7

Interest income 28,277 2,875 10.2 3,815 13.5 6,691 23.7

Interest on loans 22,508 2,517 11.2 3,339 14.8 5,857 26.0

Interest on investments 5,222 325 6.2 431 8.2 755 14.5

Others 547 34 6.2 45 8.2 79 14.5

Interest expenses 16,820 1,045 6.2 1,387 8.2 2,432 14.5

Net interest income 11,457 1,830 16.0 2,428 21.2 4,259 37.2

Non-interest income 6,591 1,300 19.7 527 8.0 1,827 27.7

Operating expenses 9,234 1,797 19.5 879 9.5 2,676 29.0

PPOP 8,814 1,333 15.1 2,077 23.6 3,410 38.7

Provisions 2,800 477 17.0 658 23.5 1,135 40.5

PBT 6,013 856 14.2 1,419 23.6 2,275 37.8

Tax 2,068 306 14.8 508 24.6 814 39.4

PAT 3,946 549 13.9 911 23.1 1,460 37.0

Number of cards (mn) 1.0

Revenue/card (Rs) 13,064

NII/card 7,639

Non-interest income/card 5,425

Opex/card (Rs) 3,750

0.5 0.6

0.8 1.0

1.2

-

9,000

18,000

27,000

36,000

45,000

-

0.3

0.6

0.9

1.2

1.5


(Rs mn)(# mn) Cards in force (LHS) Total spends (RHS)

Banks RBL Bank


Exhibit 18: Steady conversion of credit card transactions into short term loans Consumer loans booked in the credit card business, March fiscal year ends, 2QFY18-2QFY19


Exhibit 19: Non-term loans have shown strong growth in recent years within the card business Break-up of the credit card business, 2QFY18-2QFY19 (%)

Source: Company

CASA ratio stable at 25%; growth in CA has been stronger

RBL reported ~30% yoy growth in deposits, driven by 35% yoy growth in CASA balance.

Traction is SA was modest at ~11% yoy (up 4% qoq) growth while CA growth was

relatively stronger at 77% yoy (up 9% qoq). CASA ratio was stable qoq at 25% of deposits.

Currently CA and SA have similar shares in CASA at ~50% each. The average cost of savings

account balances was broadly unchanged at 6.3% with the deposits greater than `10 mn

maintained at ~40%.

We estimate ~27% CASA ratio by FY2020E driven by ~40% CAGR increase in SA balances

during FY2017-20E.


Number of loans (# '000) 120 170 214 285 382

Loans booked (Rs mn) 2,060 3,250 4,120 5,440 7,900

Average ticket size (Rs '000) 17 19 19 19 21

72 71

31 32 36

28 29

69 68 64

-

20

40

60

80


Term Non-term

RBL Bank Banks


Exhibit 15: Robust improvement in CASA ratio going forward Break-up of CASA, March fiscal year-ends, 2011-2021E (%)


Exhibit 16: Reliance on top 20 depositors shows a declining

trend Top 20 depositors, March fiscal year-ends, 2011-2018 (%)


Other highlights for the quarter

NIM improves yoy. NIM improved ~10 bps qoq to 4.1%. Yield on advances increased

20 bps qoq to 10.9% in 2QFY19 though this was offset by a marginal increase in cost of

funds to 6.4% in 2QFY19. The yield on wholesale book remained stable during the

quarter. In light of the change in the loan mix we are building a NIM to remain at

elevated levels though there is likely to be some pressure on the back of rise in wholesale

cost of deposits. A faster build out of retail loans coupled with improved CASA ratio will

provide upside to our margin assumptions.

Cost pressure was stable but investments in business to remain high. Cost-income

ratio was high at 52% in 2QFY19 but it was an improvement of 300 bps yoy. Operating

expenses increased 33% yoy whereas employee expenses were up 5% yoy while non-

staff expenses grew 54% yoy. Overall employee base grew by 3% yoy for a loan book

that is growing at ~35% CAGR. The management highlighted that it has shifted some of

its employees from the bank to its subsidiary as it was cost efficient. Non-staff costs

growth has been much faster indicating the shift in the mix of loan book towards

businesses where there is greater outsourcing through its own subsidiary (Swaadhar) and

to external clients (Bajaj Finance and DSA) for the credit card business.

Capital position remains comfortable. Capital position remains stable with CAR of

13.7% (down 90 bps qoq) and tier-1 of 12.5% (down 60 bps qoq). RWA growth was at

33% yoy.

17 12 13 15 13 11 11 12 12 13 13

17

9 6 6

6 7 11

12 13 14 15

35

22 20 20

18 19

22 24

26 27

28

-

8

16

24

32

40

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

E

20

20

E

20

21

E

Current account Savings account CASA

16

31

36

24

27

2321

19

0

8

16

24

32

40

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Banks RBL Bank


Exhibit 17: Calculated NIM remains broadly stable qoq Key calculated ratios, March fiscal year-ends, 2QFY17-2QFY19 (%)


Exhibit 18: Branch expansion has slowed down in recent

quarters Geography wise branch break-up, March fiscal year-ends, 2QFY17-2QFY19 (#)


Exhibit 19: Continuous expansion of the BC network BC branches (including BOs), March fiscal year-ends, 2QFY17-2QFY19 (#)


11.0 10.7 10.2 10.2 10.1 10.1 9.9 10.5 10.7

6.9 6.9 6.3 6.2 6.2 6.0 5.8 6.1 6.3

3.1 3.1 3.1 3.23.4

3.6 3.53.7

3.8

0.0

0.8

1.6

2.4

3.2

4.0

0.0

2.5

5.0

7.5

10.0

12.5


Yield on advances (LHS) Cost of funds (LHS) NIM (RHS)

67 73 78 82 83 83 92 93 93

32 39 40 41 41 41

43 43 44 58

59 68 67 67 68

76 76 76 44 44

53 54 55 54 54 54 55

-

60

120

180

240

300

2Q

FY1

7

3Q

FY1

7

4Q

FY1

7

1Q

FY1

8

2Q

FY1

8

3Q

FY1

8

4Q

FY1

8

1Q

FY1

9

2Q

FY1

9

Metro Urban Semi-urban Rural

447 505

568 616 677

757 807 847

900

-

180

360

540

720

900

2Q

FY1

7

3Q

FY1

7

4Q

FY1

7

1Q

FY1

8

2Q

FY1

8

3Q

FY1

8

4Q

FY1

8

1Q

FY1

9

2Q

FY1

9

RBL Bank Banks


Exhibit 20: Cost to income has remained stable Cost ratios, March fiscal year-ends, 2QFY17-2QFY19 (%)


Exhibit 21: RWA growth at 33% yoy is similar to loan growth in 2QFY19 Capital adequacy details, March fiscal year-ends, 2QFY17-2QFY19


53.6 53.3 52.1 51.0 54.2 54.0 52.8 50.8 51.5

2.5 2.5

2.6 2.7

2.8

2.9 2.92.9

2.9

2.0

2.2

2.4

2.6

2.8

3.0

40

44

48

52

56

60


Cost to income (LHS) Cost to average assets (RHS)

15.1 14.6 13.7 13.4

16.6 15.9 15.3 14.6 13.7

12.5 12.1 11.4 11.1 14.5 14.1 13.6 13.1 12.5

320341

372393

431453

481512

572

0

120

240

360

480

600

0

4

8

12

16

20


(Rs bn)(%) CAR (LHS) Tier-I (LHS) RWA (RHS)

Banks RBL Bank


Exhibit 22: RBL Bank is trading at 2.4X one-year forward book RBL Bank PBR and PER, March fiscal year-ends, October 2016-October 2018 (#)


Exhibit 23: RBL bank trading marginally lower to its peers RBL Bank PBR to peers, March fiscal year-ends, October 2016- October 2018 (X)


Exhibit 24: Change in estimates New and old estimates, March fiscal year-ends, 2019-21E (` mn)


0

1

2

3

4

5

15

21

27

33

39

45

Oct

-16

Dec-

16

Feb-1

7

Apr-

17

Jun-1

7

Aug

-17

Oct

-17

Dec-

17

Feb-1

8

Apr-

18

Jun-1

8

Aug

-18

Oct

-18

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

0.5

0.7

0.9

1.1

1.3

1.5

Oct

-16

Dec-

16

Feb-1

7

Apr-

17

Jun-1

7

Aug

-17

Oct

-17

Dec-

17

Feb-1

8

Apr-

18

Jun-1

8

Aug

-18

Oct

-18

New estimates Old estimates New vs Old (%)

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

Net interest income 24,315 30,983 37,444 24,471 30,801 36,946 (1) 1 1

Loans (Rs bn) 537 712 897 528 689 868 2 3 3

NIM (%) 3.6 3.5 3.4 3.6 3.5 3.4 -2 bps -2 bps -7 bps

Non-interest income 13,792 18,760 24,336 13,508 17,846 23,389 2 5 4

Operating expenses 19,782 25,482 32,129 20,121 25,816 32,440 (2) (1) (1)

Loan loss provisions 4,698 6,246 8,047 3,491 3,957 5,060 35 58 59

PBT 13,576 17,966 21,556 14,317 18,825 22,784 (5) (5) (5)

PAT 8,920 11,984 14,379 9,407 12,369 14,971 (5) (3) (4)

RBL Bank Banks


Exhibit 25: Key financial ratios March fiscal year-ends, 2016-21E (%)


2016 2017 2018 2019E 2020E 2021E

Growth rates (%)

Net loan 47 39 37 33 33 26

Total asset 44 24 27 27 28 24

Deposits 42 42 27 33 34 28

Current 26 35 42 36 36 31

Fixed 42 36 23 31 31 26

Savings 84 119 39 44 44 37

Net interest income 47 49 45 38 27 21

Loan loss provisions 177 90 52 57 33 29

Total other income 22 54 41 29 36 30

Net fee income 834 43 43 48 38 33

Net capital gains 4 99 40 (52) 38 -

Net exchange gains 16 42 30 28 26 24

Operating expenses 28 38 42 32 29 26

Employee expenses 23 21 23 18 25 23

Key ratios (%)

Yield on average earning assets 8.5 8.7 8.4 9.0 9.0 8.9

Yield on average loans 10.9 10.4 9.8 10.5 10.5 10.3

Yield on average investments 6.1 7.1 7.0 7.0 6.9 6.8

Average cost of funds 6.5 6.4 5.7 6.1 6.1 6.1

Interest on deposits 7.3 6.7 6.0 6.1 6.2 6.2

Spread 2.0 2.3 2.7 2.9 3.0 2.8

Net interest income/earning assets 2.5 2.9 3.3 3.6 3.5 3.4

Spreads on lending business 4.4 4.0 4.1 4.4 4.4 4.2

New provisions/average net loans 0.6 0.8 0.9 1.0 1.0 1.0

Total provisions/gross loans 1.1 1.5 1.8 2.2 2.5 2.9

Interest income/total income 62.5 61.8 62.3 63.8 62.3 60.6

Other income / total income 37.5 38.2 37.7 36.2 37.7 39.4

Fee income to advances 1.9 1.9 2.1 2.3 2.4 2.4

Fees income to PBT 80.4 72.1 74.8 78.8 82.1 91.1

Net trading income to PBT 10.9 12.3 12.8 5.5 5.8 4.9

Exchange income to PBT 18.6 16.6 15.6 14.2 13.6 14.0

Operating expenses/total income 58.6 53.4 53.0 51.9 51.2 52.0

Operating expenses/assets 2.3 2.4 2.7 2.8 2.8 2.8

Tax rate 31.7 34.5 34.3 34.3 33.3 33.3

Dividend payout ratio 17.0 15.1 13.9 15.0 15.0 15.0

Share of deposits (%)

Current 11.4 10.9 12.2 12.4 12.7 12.9

Fixed 81.4 78.0 75.7 74.4 73.2 71.9

Savings 7.2 11.1 12.2 13.2 14.2 15.2

Loans-to-deposit ratio 87.2 85.1 91.7 91.7 91.0 89.4

Equity/assets (EoY) 7.6 8.9 10.8 9.5 8.4 7.7

Loan impairment ratios (%)

Gross NPL 1.0 1.2 1.4 1.6 1.8 2.0

Net NPL 0.6 0.6 0.8 0.8 0.9 1.0

Slippage 1.4 2.5 1.9 1.5 1.6 1.6

Provision coverage 40.2 46.8 44.8 53.5 52.7 51.3

Dupont analysis (%)



Net other income 1.5 1.7 1.9 2.0 2.1 2.2


(1- tax rate) 68.3 65.5 65.7 65.7 66.7 66.7

RoA 0.9 1.0 1.1 1.3 1.3 1.3

Average assets/average equity 12.7 12.0 10.0 9.9 11.3 12.5

RoE 11.2 12.2 11.5 12.7 15.1 16.0

Banks RBL Bank


Exhibit 26: P&L and balance sheet March fiscal year-ends, 2016-21E (` mn)


2016 2017 2018 2019E 2020E 2021E

Income statement

Total interest income 27,443 37,132 45,076 61,417 79,321 99,448

Loans 19,528 26,394 34,309 49,333 65,585 82,880

Investments 7,454 9,815 9,982 11,136 12,468 15,016

Total interest expense 19,251 24,918 27,413 37,102 48,338 62,003

Net interest income 8,192 12,213 17,663 24,315 30,983 37,444

Other income 4,905 7,555 10,682 13,792 18,760 24,336

Net fee income 3,440 4,912 7,226 10,694 14,758 19,628

Net Capital Gains 599 1,189 1,665 800 1,100 1,100

Net exchange gains 798 1,130 1,511 1,934 2,437 3,022

Net other income 69 323 279 363 465 586

Total revenues 13,097 19,768 28,345 38,107 49,744 61,781

Loan loss provisions 1,039 1,975 2,995 4,698 6,246 8,047


Pretax income 4,280 6,815 9,665 13,576 17,966 21,556

Tax provisions 1,355 2,354 3,315 4,656 5,981 7,177

Net profit 2,925 4,460 6,351 8,920 11,984 14,379

Balance sheet

Cash and bank balance 24,499 41,936 42,844 63,707 78,832 95,698

Net value of investments 144,360 134,817 154,475 167,640 198,356 242,518

Net loans and advances 212,291 294,490 402,678 537,006 712,239 897,082

Fixed assets 1,773 2,587 3,340 480 255 (38)

Other assets 8,688 12,917 15,170 15,170 15,170 15,170

Total assets 391,611 486,748 618,508 784,003 1,004,852 1,250,430

Deposits 243,487 345,881 439,023 585,474 782,994 1,003,351

Borrowings 105,362 79,798 92,614 102,062 112,998 125,678

Other liabilities 12,870 17,713 20,031 22,272 24,785 25,470

Total liabilities 361,719 443,392 551,668 709,808 920,777 1,154,499

Paid-up capital 3,247 3,752 4,197 4,197 4,197 4,197

Reserves and surplus 26,645 39,604 62,643 69,998 79,879 91,735

Total shareholders' equity 29,892 43,356 66,840 74,195 84,076 95,931


Weak results in 2QFY19 with the management attributing it to erratic monsoon

Bayer reported 10% yoy decline in revenues to `11 bn, 24% decline in EBITDA to `2.19 bn and

25% decline in net income to `1.43 bn (EPS of `41.6), well below our expectations in 2QFY19.

The company attributed the weakness to erratic monsoon season with (1) uneven distribution

of rainfall and (2) hailstorms that impacted the standing crops in several regions. We note that

Rallis, the only other agro-chemicals company that has reported results so far, exhibited a

healthy 11% yoy growth in revenues during 2QFY19 suggesting insignificant impact from the

erratic monsoon season. Bayer management remains optimistic on 2HFY19 based on available

opportunities in product categories catering to fruits, vegetables and rice; however, we note

that 2H, being seasonally weak, has contributed ~30% to the company’s full-year revenues and

negligible amount to its EBITDA and net income over the past two years.

Bleak results in 1HFY19 as well post three consecutive years of uninspiring performance

Bayer’s 1HFY19 results were also uninspiring, as has been the past three years, with flat revenues

at `19.4 bn, moderate 11% increase in EBITDA to `4.48 bn and 4% decline in net income to

`2.9 bn (EPS of `84.5). EBITDA margins showed some signs of improvement during 1HFY19

increasing ~230 bps yoy to 23.2%, albeit at a slower pace than ~465 bps increase in gross

margins; however, lower other income and rise in tax rate to 35% negated the benefit. We

note that Bayer’s revenues, EBITDA and net income have remained largely steady in a narrow

range during FY2016-18 with the company showing evident signs of weakness, particularly in

revenue growth, as compared to its domestic counterparts.

Cut estimates by 11-12%; downgrade to SELL from REDUCE with revised TP of `3,550

We cut FY2019-21 EPS estimates for Bayer by 11-12% to `94, `114 and `135, respectively,

factoring in (1) slower growth in revenues, (2) lower margins versus our earlier assumptions and

(3) other minor changes. We downgrade the stock to SELL rating from REDUCE earlier with

revised DCF-based TP of `3,550 (`4,100 earlier). Bayer’s parent portfolio may certainly enable

launching of new products in India in the long run; however, the persisting disappointment in

domestic performance over the past few years raises concerns on (1) rising competition from

the local players, who are evidently making inroads with expansion of distribution network and

(2) likely down-trading by the farmers to low-cost products.

Bayer Cropscience (BYRCS) Others

Yet another disappointing year. Bayer’s 1HFY19 results with flat revenues, 11%

growth in EBITDA and 4% decline in net income reflected continued weakness in the

company’s performance over the past four years contrary to the industry. We cut our

FY2019-21E EPS by 11-12% and downgrade the stock to SELL from REDUCE with a

revised DCF-based TP of `3,550 (`4,100 previously). We believe expensive valuation at

37X FY2020E EPS is unlikely to sustain as persisting disappointment raises concerns on

realizable gains from the perceived superiority of Bayer’s product portfolio.

SELL

OCTOBER 24, 2018


Coverage view:

Price (`): 4,236


BSE-30: 33,847

Tarun Lakhotia

Bayer Cropscience







MFs 10.6 EBITDA (Rs bn) 5.0 6.0 7.1


Absolute 1.0 (4.8) 13.3 ROE (%) 17.0 18.0 18.6

Rel. to BSE-30 9.9 3.2 8.8 Div. Yield (%) 0.4 0.5 0.6


4,800-3,691

145.4

Others Bayer Cropscience


Exhibit 1: Weak results impacted by erratic monsoon, as per the management Interim results of Bayer CropScience, March fiscal year-ends (Rs mn)


Exhibit 2: Bayer’s performance has remained weak as compared to peers in domestic business in the recent years Performance of domestic agri-chem segment for key companies, 1QFY17 onwards (Rs mn)

Source: Companies, Kotak Institutional Equities

2QFY19 2QFY19E 2QFY18 1QFY19 est. yoy qoq 1HFY19 1HFY18 Yoy (%) FY2019E

Sales 11,041 13,552 12,320 8,318 (19) (10) 33 19,359 19,300 0 28,865

Raw material cost (6,638) (7,589) (7,617) (3,946) (13) (13) 68 (10,584) (11,449) (8) (15,894)

Employee cost (731) (740) (647) (729) (1) 13 0 (1,460) (1,312) 11 (2,903)

Other expenses (1,486) (1,450) (1,181) (1,345) 2 26 10 (2,831) (2,508) 13 (5,030)

EBITDA 2,186 3,773 2,875 2,298 (42) (24) (5) 4,484 4,031 11 5,037

Other income/forex gain/(loss) 98 120 133 111 (18) (26) (12) 209 296 (29) 410

Depreciation and amortization (84) (88) (79) (87) (5) 6 (3) (171) (159) 8 (363)

Interest cost (36) (23) (22) (23) 57 64 57 (59) (39) 51 (125)

Profit before tax 2,164 3,782 2,907 2,299 (43) (26) (6) 4,463 4,129 8 4,959

Extraordinaries — — — — — — —

Income tax (737) (1,324) (1,001) (827) (44) (26) (11) (1,564) (1,106) 41 (1,735)

Net income 1,427 2,458 1,906 1,472 (42) (25) (3) 2,899 3,023 (4) 3,224

Adjusted net income 1,427 2,458 1,906 1,472 (42) (25) (3) 2,899 3,023 (4) 3,224

Adjusted EPS (Rs) 41.6 71.7 55.6 42.9 (42) (25) (3) 84.5 88.1 (4) 94.0

Key ratios (%)

Gross margins 39.9 44.0 38.2 52.6 (412)bps 170 bps (1,268)bps 45.3 40.7 465 bps 44.9

EBITDA 19.8 27.8 23.3 27.6 (804)bps (354)bps (783)bps 23.2 20.9 228 bps 17.5

Tax rate 34.1 35.0 34.4 36.0 35.0 26.8 35.0

Change (%)

1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 FY2015 FY2016 FY2017 FY2018

Revenues

Bayer CropScience 8,212 11,038 6,625 2,153 6,980 12,320 4,797 3,002 8,318 11,041 37,233 27,690 28,028 27,099

Dhanuka 2,003 3,124 2,118 1,571 2,080 3,480 2,215 1,851 2,130 7,902 8,310 8,816 9,626

PI Industries (a) 2,989 2,290 1,635 1,743 2,560 2,588 1,700 1,870 3,149 7,985 9,230 8,657 8,718

Rallis (b) 2,603 5,036 3,090 3,277 2,436 5,485 3,573 3,491 3,524 6,132 15,185 12,880 14,005 14,984

UPL (a) 10,602 9,090 5,583 4,340 11,180 9,970 6,140 4,600 12,480 26,220 26,859 29,615 31,890

Growth (%)

Bayer CropScience 7.9 9.2 21.0 (52.1) (15.0) 11.6 (27.6) 39.4 19.2 (10.4) (25.6) 1.2 (3.3)

Dhanuka 11.0 15.6 2.8 (9.9) 3.9 11.4 4.6 17.8 2.4 5.2 6.1 9.2

PI Industries (a) (3.0) (13.6) 4.1 (9.7) (14.4) 13.0 4.0 7.3 23.0 15.6 (6.2) 0.7

Rallis (b) 2.1 19.6 8.3 0.3 (6.4) 8.9 15.6 6.5 44.7 11.8 (15.2) 8.7 7.0

UPL (a) 0.5 19.3 20.9 6.7 5.5 9.7 10.0 6.0 11.6 2.4 10.3 7.7

Gross margins (%)

Bayer CropScience 48.5 40.2 35.0 38.7 45.1 38.2 40.7 42.9 52.6 39.9 35.2 42.8 41.3 40.9

Dhanuka 38.8 42.4 44.6 49.7 37.6 41.0 43.3 45.1 35.2 37.7 39.1 43.4 41.6

PI Industries (a) 47.9 49.6 48.5 49.7 50.7 48.1 47.5 48.4 46.6 42.6 42.3 48.8 48.8

Rallis (b) 40.0 39.5 47.4 42.9 41.9 38.9 42.2 42.8 33.4 41.1 41.3 42.8 42.2 41.1

UPL (c) 54.4 53.0 54.0 48.1 55.8 56.1 54.5 49.0 55.5 50.7 52.3 53.0 54.6

EBITDA margins (%)

Bayer CropScience 22.9 21.5 6.9 (27.0) 16.6 23.3 4.7 (5.4) 27.6 19.8 13.8 15.7 14.8 15.1

Dhanuka 14.3 22.3 18.3 20.8 11.8 21.5 15.9 17.0 7.4 17.3 17.1 19.3 17.3

PI Industries (a) 22.5 18.5 21.0 16.3 20.5 19.5 18.5 15.3 17.0 17.4 18.0 19.9 18.7

Rallis (b) 9.8 21.8 15.9 15.4 3.5 23.1 13.1 12.2 5.1 21.1 16.7 16.0 16.8 15.0

UPL (c) 19.9 17.6 19.1 21.1 20.1 19.1 19.8 21.4 20.5 19.1 18.2 19.2 19.9

Notes:

(a) Data pertains to domestic agri business segment.

(b) Data pertains to standalone business, which includes revenues from contract manufacturing operations.

(c) Data pertains to global operations.

Quarterly Annual

Bayer Cropscience Others


Exhibit 3: Bayer trades at a significant premium to the domestic peers in ag-chem business Comparative valuation of global/domestic ag-chem companies, March fiscal year-ends, 2018-20E

Source: Bloomberg, Kotak Institutional Equities estimates

Exhibit 4: DCF-based TP of `3,550 DCF-based valuation of Bayer CropScience, March fiscal year-ends (Rs mn)


Price Market cap. P/E (X) EV/EBITDA (X)

(LC) (US$ mn) FY2018 FY2019E FY2020E FY2018 FY2019E FY2020E

Global companies

BASF SE 67 70,318 10.2 10.6 9.8 6.0 7.0 6.3

Bayer AG 70 74,437 10.9 12.0 9.3 7.6 10.6 7.6

Dow DuPont 54 124,183 16.5 12.9 11.3 9.3 7.9 7.0

FMC Corp. 78 10,450 29.2 12.8 11.4 21.3 10.2 8.9

Nufarm Ltd 6 1,493 12.9 19.5 13.7 7.5 9.7 6.5

Indian companies

Bayer CropScience 4,236 1,980 48.4 45.1 37.2 34.5 27.4 22.8

Dhanuka Agritech 380 254 14.8 14.2 12.3 10.6 10.1 8.2

Godrej Agrovet 504 1,318 43.8 34.0 26.4 22.7 18.5 14.5

PI Industries 733 1,377 27.6 23.4 18.5 20.3 16.6 13.0

Rallis India 180 475 20.8 17.8 14.9 12.9 11.7 9.9

UPL 615 4,266 14.3 12.5 11.2 9.9 8.5 7.2

2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2035E

Net revenues 33,149 38,072 43,728 50,287 57,830 66,505 76,481 84,129 92,541 101,796 111,975 152,697

EBIT 5,564 6,608 7,831 9,006 10,357 11,910 13,697 15,066 16,573 18,230 20,053 27,346

EBIT margin (%) 16.8 17.4 17.9 17.9 17.9 17.9 17.9 17.9 17.9 17.9 17.9 17.9

EBIT*(1-tax rate) 3,615 4,295 5,093 5,856 6,735 7,745 8,907 9,798 10,777 11,855 13,041 17,783

Tax 1,949 2,312 2,739 3,149 3,622 4,165 4,790 5,269 5,796 6,375 7,013 9,563

Depreciation / amortisation 411 466 530 610 701 807 887 976 1,073 1,181 1,299 1,771

(Inc)/Dec in working capital (1,125) (1,571) (1,808) (1,929) (2,197) (2,687) (3,090) (2,369) (2,606) (2,867) (3,154) (2,845)

Capital expenditure (575) (661) (760) (943) (1,084) (1,247) (1,434) (1,099) (1,209) (1,330) 665 (1,146)

Free cash flows 2,326 2,529 3,055 3,595 4,155 4,618 5,270 7,305 8,035 8,839 11,851 15,563

Year for discounting 0.4 1.4 2.4 3.4 4.4 5.4 6.4 7.4 8.4 9.4 10.4 15.4

Discounted cash flow 2,227 2,182 2,374 2,517 2,621 2,624 2,698 3,369 3,338 3,308 3,996 3,114

Key assumptions NPV calculation

WACC (%) 11.0 NPV of free cash flow 48,231

Terminal growth rate (%) 6.0 Terminal value 66,025

Capitalization rate (%) 5.0 Enterprise value 114,256

Terminal value calculation Net debt (7,264)

Cash flow in terminal year 15,563 Equity value 121,520

Terminal value 329,943 Shares o/s (# mn) 34

Discounted terminal value 66,025 NPV /share (Rs) 3,543

Others Bayer Cropscience


Exhibit 5: Summary financials of Bayer CropScience Profit and loss model, balance sheet and cash flow statement, March fiscal year-ends, 2014-21E (Rs mn)


2014 2015 2016 2017 2018 2019E 2020E 2021E


Sales 32,452 37,233 27,690 28,028 27,099 28,865 33,149 38,072

EBITDA 4,193 5,155 4,346 4,136 4,094 5,037 5,975 7,074

Other income 909 879 817 701 388 410 576 677

Interest (48) (46) (100) (69) (113) (125) (138) (151)

Depreciation (646) (253) (247) (289) (331) (363) (411) (466)

Profit before tax 4,408 5,735 4,816 4,479 4,038 4,959 6,002 7,134

Extraordinary items — — — — — — — —

Tax expenses (1,513) (1,905) (1,665) (1,569) (1,037) (1,735) (2,100) (2,496)

Reported PAT 2,895 3,830 3,151 2,910 3,001 3,224 3,902 4,638

Adjusted PAT 2,895 3,830 3,151 2,910 3,001 3,224 3,902 4,638

Adjusted EPS (Rs) 75 105 89 82 87 94 114 135


Equity 17,423 20,329 18,394 20,567 17,783 20,236 23,205 26,733

Borrowings — — — — — — — —

Long-term liabilities — — — 20 156 156 156 156

Current liabilities and provisions 6,446 7,402 5,974 7,667 7,409 7,933 9,238 10,445

Total liabilities 23,869 27,731 24,368 28,254 25,348 28,325 32,598 37,334

Net fixed assets 4,446 3,224 3,072 3,354 3,403 3,540 3,704 3,899

Investments/other long-term assets 173 130 338 307 302 302 302 302

Cash and cash equivalent 4,865 11,558 7,996 8,887 4,178 7,264 8,943 10,706

Current assets 14,385 12,819 12,962 15,706 17,465 17,219 19,648 22,427

Total assets 23,869 27,731 24,368 28,254 25,348 28,325 32,598 37,334


Operating cash flow 2,782 3,675 2,938 3,082 3,462 3,302 3,875 4,578

Working capital change (2,067) 1,829 (873) (1,509) (2,248) 770 (1,125) (1,571)

Capital expenditure (net) (1,592) 970 (369) (493) (419) (500) (575) (661)

Free cash flow (877) 6,474 1,696 1,080 795 3,572 2,175 2,346

Ratios (%)

EBITDA margin 12.9 13.8 15.7 14.8 15.1 17.5 18.0 18.6

Net debt/equity (X) (0.3) (0.6) (0.4) (0.4) (0.2) (0.4) (0.4) (0.4)

Book value (Rs/share) 452 555 520 581 518 590 677 779

Adjusted RoAE 16.6 18.8 17.1 14.1 16.9 15.9 16.8 17.3

Adjusted RoACE 16.2 34.2 23.4 19.5 20.0 22.7 24.3 25.7


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September 2018: Results calendar

Source: NSE, Kotak Institutional Equities

Mon Tue Wed Thu Fri Sat Sun

22-Oct 23-Oct 24-Oct 25-Oct 26-Oct 27-Oct 28-Oct

Asian Paints Adani Port and SEZ Bajaj Auto Bharti Airtel Bharat Electronics Divi's Laboratories

GlaxoSmithkline Pharmaceuticals Ambuja Cements Bajaj Holding & Investment BHEL Coromandel International

Hindustan Zinc Bajaj Corp. Bharat Financial Inclusion Biocon Dr Reddy's Laboratories

Jubilant Life Science Bajaj Finance Bharti Infratel CEAT Edelw eiss Financial Services

Kansai Nerolac Bajaj Finserv Hexaw are Technologies Crompton Greaves Consumer ICICI Bank

Oberoi Realty HCL Technologies IDFC Bank DB Corp. ITC

Schaeffler India HDFC Standard Life Interglobe Aviation DishTV PI Industries

ICICI Prudential Life Jubilant Foodw orks JSW Steel UPL

Rallis India Jyothy Laboratories Maruti Suzuki

RBL Bank Karur Vysya Bank Piramal Enterprises

TVS Motor Kotak Mahindra Bank PVR

L&T Finance Holdings Shriram City Union Finance

L&T Infotech Shriram Transport

Mahindra & Mahindra Financial Varun Beverages

SIS Yes Bank

SKF

Wipro

29-Oct 30-Oct 31-Oct 1-Nov 2-Nov 3-Nov 4-Nov

BPCL 3M India Adani Pow er Arvind Aditya Birla Fashion Cadila Healthcare

Carborundum Universal ABB AIA Engineering Berger Paints Axis Bank Endurance Technologies

Century Textile Bank of Baroda Ajanta Pharma GlaxoSmithkline Consumer Bharat Forge GSPL

Colgate-Palmolive (India) Cholamandalam Canara Bank Godrej Properties Equitas Holdings J K Cement

GRUH Finance Container Corporation Dabur India HDFC Gillette India ONGC

Just Dial Cummins India Escorts HPCL Godrej Consumer Products Torrent Pharmaceuticals

LIC Housing Finance Dalmia Bharat Gujarat Pipavav Port IIFL Holdings Hindalco Industries

Supreme Industries Emami Jagran Prakashan Laurus Labs IOCL

Tata Pow er Gatew ay Distriparks Kalpataru Pow er Transmission Mahindra Logistics JSW Energy

Union Bank Info Edge L&T Marico Magma Fincorp

Motilal Osw al Financial Services Lupin SRF P&G Hygiene

Pidilite Industries Tata Motors PFC

Prestige Estates Projects United Spirits SAIL

Tata Global Beverages Vedanta Tata Chemicals

TeamLease Services Reliance Nippon Life Asset Management Alkem Laboratories

Tech Mahindra

The Ramco Cement

Torrent Pow er

Vakrangee

IRB Infrastructure

5-Nov 6-Nov 7-Nov 8-Nov 9-Nov 10-Nov 11-Nov

Cipla Voltas Amara Raja Batteries

Exide Industries Titan Company

Orient Cement

PNB Housing Finance

Timken

WABCO India

GAIL (India)

Indraprastha Gas

12-Nov 13-Nov 14-Nov 15-Nov 16-Nov 17-Nov 18-Nov

Britannia Industries Mahanagar Gas Mahindra & Mahindra

Godrej Industries Sun Pharmaceuticals Motherson Sumi Systems

Shree Cement Grasim Industries

Oil India Lemon Tree Hotels


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Kotak Institutional Equities: Valuation summary of KIE Universe stocks

Source: Company, Bloomberg, Kotak Institutional Equities estimates

Target O/S ADVT

Price (Rs) price Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) 3mo

Company Rating 23-Oct-18 (Rs) (%) (Rs bn) (US$ bn) (mn) 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E (US$ mn)

Automobiles

Amara Raja Batteries REDUCE 747 780 4.4 128 1.7 171 32 37 43 17.1 15.9 14.5 23.1 19.9 17.4 12.3 10.5 9.1 3.8 3.3 2.8 17.4 17.5 17.4 0.6 0.8 0.9 6.3

Apollo Tyres BUY 196 340 73.2 112 1.5 541 19 23 28 38.9 26.1 18.1 10.6 8.4 7.1 6.8 5.8 4.7 1.1 1.0 0.9 10.4 12.0 12.7 1.5 1.5 1.5 12.6

Ashok Leyland BUY 111 160 43.6 327 4.5 2,926 6.2 8.9 9.4 15.3 43.2 6.1 18.0 12.5 11.8 9.0 6.5 6.1 3.9 3.3 2.8 23.4 28.4 25.4 1.7 2.4 2.5 38.1

Bajaj Auto SELL 2,587 2,600 0.5 748 10.2 289 155 168 180 10.8 8.1 7.4 16.6 15.4 14.3 11.2 10.0 8.9 3.5 3.1 2.8 22.2 21.4 20.6 2.4 2.6 2.8 24.6

Balkrishna Industries BUY 1,003 1,180 17.6 194 2.6 193 50 61 69 32.7 23.3 12.3 20.2 16.4 14.6 11.1 9.1 8.0 3.9 3.2 2.7 21.3 21.7 20.2 0.5 0.6 0.6 15.8

Bharat Forge SELL 554 600 8.4 258 3.5 466 23 27 29 44.4 14.6 7.1 23.7 20.7 19.3 13.6 11.8 10.9 4.7 4.0 3.5 21.5 21.0 19.4 0.9 1.0 1.1 12.7

CEAT ADD 1,033 1,500 45.2 42 0.6 40 99 108 116 53.7 8.3 7.9 10.4 9.6 8.9 7.1 6.2 5.6 1.4 1.2 1.1 14.4 13.8 13.2 1.0 1.0 1.0 11.1

Eicher Motors SELL 22,258 21,500 (3.4) 607 8.3 27 981 1,124 1,251 23.7 14.6 11.3 22.7 19.8 17.8 16.1 14.0 11.9 8.2 6.2 4.9 41.8 35.8 30.8 0.1 0.1 — 31.2

Escorts BUY 573 1,200 109.5 49 1.0 89 59 71 78 52.3 19.9 10.2 9.7 8.1 7.3 5.6 4.4 3.5 1.7 1.5 1.3 17.6 18.0 17.1 1.5 1.9 2.0 16.0

Exide Industries SELL 250 235 (5.9) 212 2.9 850 10 11 13 25.3 11.0 11.6 24.3 21.9 19.6 13.8 12.3 11.0 3.6 3.2 2.9 15.4 15.5 15.7 1.2 1.4 1.6 8.5

Hero Motocorp SELL 2,724 2,600 (4.6) 544 7.4 200 174 182 196 (6.1) 4.7 7.6 15.7 15.0 13.9 9.1 8.5 7.7 4.1 3.7 3.4 27.9 26.2 25.4 3.2 3.3 3.6 24.3

Mahindra CIE Automotive ADD 267 280 5.1 101 1.4 378 14 16 17 44.4 12.1 9.0 19.2 17.1 15.7 9.7 8.6 7.7 2.4 2.1 1.8 13.2 13.0 12.4 — — — 2.7

Mahindra & Mahindra BUY 730 1,125 54.1 907 12.4 1,138 45 54 56 18.8 19.0 4.2 16.2 13.6 13.1 10.4 8.7 8.1 2.4 2.1 1.9 15.8 16.6 15.4 1.2 1.5 1.5 36.4

Maruti Suzuki ADD 6,771 9,200 35.9 2,045 27.8 302 298 362 408 16.7 21.2 12.9 22.7 18.7 16.6 12.2 9.6 8.1 4.3 3.7 3.2 20.1 21.1 20.5 1.1 1.3 1.5 92.4

Motherson Sumi Systems SELL 249 280 12.5 524 7.1 2,105 11 14 16 40.2 21.5 13.8 21.7 17.9 15.7 8.9 7.3 6.3 4.5 3.8 3.2 22.5 23.2 22.3 1.1 1.3 1.4 17.1

MRF REDUCE 61,724 69,000 11.8 262 3.6 4 3,425 3,932 4,411 28.3 14.8 12.2 18.0 15.7 14.0 8.3 7.2 6.1 2.3 2.0 1.8 13.9 13.9 13.7 0.1 0.1 0.1 8.2

Schaeffler India BUY 4,839 6,000 24.0 80 1.1 17 156 199 233 9.0 27.3 17.6 31.0 24.4 20.7 18.6 14.1 11.7 4.3 3.8 3.3 14.5 16.4 17.0 0.6 0.8 1.0 0.7

SKF ADD 1,674 1,800 7.5 86 1.2 51 69 82 97 19.7 18.5 18.2 24.2 20.5 17.3 15.4 12.7 10.5 4.1 3.5 3.0 16.7 17.1 17.4 0.7 0.8 1.0 0.5

Tata Motors BUY 171 425 149.0 580 7.4 3,396 22 36 39 10.7 62.7 8.0 7.7 4.7 4.4 2.8 2.3 2.1 0.6 0.5 0.5 7.6 11.2 10.8 — — — 55.3

Timken SELL 535 570 6.6 40 0.5 68 19 24 28 41.7 25.1 18.0 27.9 22.3 18.9 16.9 13.7 11.4 4.3 3.6 3.0 16.9 17.5 17.2 0.2 0.2 0.2 0.2

TVS Motor SELL 535 350 (34.6) 254 3.5 475 15 17 20 6.2 15.2 14.7 36.1 31.4 27.3 18.2 15.9 14.1 7.6 6.6 5.7 22.7 22.6 22.4 0.8 1.0 1.1 16.4

Varroc Engineering BUY 748 1,250 67.2 101 1.4 135 39 47 51 52.3 19.9 10.2 19.2 16.0 14.5 15.2 12.9 11.1 2.9 2.5 2.0 15.3 15.3 13.5 — — — —

WABCO India SELL 6,556 6,350 (3.1) 124 1.7 19 169 222 225 17.8 31.3 1.0 38.7 29.5 29.2 25.1 19.0 18.7 6.8 5.6 4.8 19.2 20.9 17.7 0.2 0.2 0.2 0.4

Automobiles Neutral 8,326 113 17.3 25.0 9.6 18.0 14.4 13.1 8.0 6.6 5.9 2.7 2.3 2.1 14.8 16.2 15.6 1.1 1.3 1.4 431.7

Banks

Axis Bank REDUCE 563 600 6.6 1,446 19.7 2,567 19 41 46 1,635.7 118.8 12.3 30.2 13.8 12.3 — — — 2.4 2.0 1.7 7.3 14.3 14.3 0.5 1.1 1.2 106.9

Bank of Baroda ADD 102 130 — 269 3.7 2,652 21 26 29 323.7 26.4 12.1 5.0 3.9 3.5 — — — 0.9 0.7 0.5 12.7 14.0 13.7 — — — 44.9

Canara Bank ADD 208 280 34.6 153 2.1 733 (5) 51 68 91.6 1,147.0 33.3 (43.0) 4.1 3.1 — — — 1.2 0.7 0.5 (1.0) 10.1 12.0 — — — 27.0

City Union Bank ADD 172 185 7.3 126 1.7 665 9 11 12 5.8 13.3 16.7 18.3 16.1 13.8 — — — 2.8 2.5 2.1 15.5 15.6 16.0 1.0 1.1 1.3 2.1

DCB Bank BUY 156 185 18.5 48 0.7 308 10 12 17 25.3 23.4 38.6 15.6 12.7 9.2 — — — 1.8 1.6 1.4 11.4 12.6 15.4 0.6 0.7 1.0 4.0

Equitas Holdings BUY 121 160 32.1 41 0.6 340 4.4 8.4 11.4 378.4 89.9 35.6 27.3 14.4 10.6 — — — 1.8 1.6 1.4 6.4 11.2 13.4 — — — 5.4

Federal Bank BUY 80 105 31.9 158 2.1 1,972 6.0 8.0 9.7 35.3 32.4 21.8 13.2 10.0 8.2 — — — 1.3 1.2 1.1 9.4 11.5 12.8 1.7 2.3 2.7 17.2

HDFC Bank ADD 1,985 2,100 5.8 5,393 73.4 2,595 78 96 113 15.9 23.6 17.5 25.4 20.6 17.5 — — — 3.7 3.3 2.9 16.7 16.7 17.2 0.8 0.9 1.1 84.7

ICICI Bank BUY 323 400 23.9 2,078 28.3 7,072 8 26 31 (17.6) 227.0 18.6 40.9 12.5 10.5 — — — 2.2 1.8 1.6 4.7 14.4 15.2 0.5 1.6 1.9 102.9

IDFC Bank NR 34 — — 117 1.6 3,404 1.2 2.9 4.3 (52.7) 146.7 44.8 28.8 11.7 8.1 — — — 0.8 0.7 0.7 2.6 6.3 8.6 0.7 1.7 2.5 6.8

IndusInd Bank BUY 1,473 1,850 25.6 886 12.1 600 67 83 97 10.8 24.3 17.3 22.1 17.8 15.2 — — — 3.1 2.8 2.4 16.7 16.1 16.4 1— 0.7 0.8 49.5

J&K Bank BUY 43 90 109.5 24 0.3 557 5 8 16 48.7 41.1 109.3 7.9 5.6 2.7 — — — 0.5 0.5 0.4 4.8 6.5 12.6 2.5 3.6 7.4 0.4

Karur Vysya Bank ADD 75 110 46.0 61 0.8 727 3 13 14 (32.3) 306.7 9.1 23.4 5.8 5.3 — — — 1.0 0.9 0.8 3.7 14.1 13.9 1.1 4.3 4.9 2.2

Punjab National Bank ADD 65 80 23.6 199 2.7 2,761 (27) 12 18 40.4 145.3 46.9 (2.4) 5.4 3.7 — — — 3.2 1.1 0.6 (23.4) 10.7 13.8 — — — 41.5

RBL Bank ADD 465 500 7.6 197 2.7 420 21 29 34 40.5 34.3 20.0 21.9 16.3 13.6 — — — 2.7 2.4 2.1 12.7 15.1 16.0 0.7 0.9 1.1 14.9

State Bank of India BUY 256 370 44.7 2,282 31.1 8,925 8 37 53 204.8 380.5 42.7 33.2 6.9 4.9 — — — 1.7 1.2 0.9 3.1 13.6 16.7 — 0.2 0.2 115.5

Ujjivan Financial Services BUY 219 360 64.7 26 0.4 121 19 28 32 3,033.9 47.3 15.1 11.7 7.9 6.9 — — — 1.4 1.2 1.0 12.1 15.8 15.8 0.8 1.3 1.6 5.7

Union Bank ADD 63 90 43.7 73 1.0 1,169 8 33 40 117.1 330.8 22.5 8.2 1.9 1.5 — — — 0.9 0.5 0.3 3.9 15.2 16.3 1.8 7.9 9.7 10.5

YES Bank SELL 213 200 (6.2) 492 6.7 2,303 18 19 25 (4.4) 10.6 28.2 12.2 11.0 8.6 — — — 1.8 1.5 1.4 14.7 14.5 16.4 1.4 1.5 1.9 153.9

Banks Attractive 14,070 192 800.2 148.8 26.3 28.7 11.6 9.1 1.7 1.5 1.3 6.0 13.1 14.5 0.6 1.0 1.1 796.1

Dividend yield (%)P/B (X) RoE (%)


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Target O/S ADVT



NBFCs

Bajaj Finance REDUCE 2,083 1,950 (6.4) 1,204 16.4 575 66 88 114 51.9 33.2 29.5 31.6 23.7 18.3 — — — 6.2 5.1 4.1 21.6 23.6 24.6 0.3 0.4 0.5 93.3

Bajaj Finserv ADD 5,168 5,650 9.3 822 11.2 159 240 303 375 36.6 26.3 23.9 21.6 17.1 13.8 — — — 3.4 2.8 2.4 17.4 18.0 18.7 0.3 0.3 0.3 22.5

Bharat Financial Inclusion NA 899 — — 126 1.7 139 43 54 69 31.1 27.2 25.8 21.0 16.5 13.1 — — — 3.4 2.8 2.3 17.9 18.5 19.0 — — — 13.9

Cholamandalam ADD 1,112 1,425 28.2 174 2.4 156 74 92 113 19.4 23.8 23.1 15.0 12.1 9.8 — — — 3.0 2.5 2.1 20.6 21.3 21.7 0.8 1.0 1.2 7.7

HDFC ADD 1,687 2,020 19.8 2,897 39.4 1,676 55 65 79 (27.3) 18.7 21.2 30.8 25.9 21.4 — — — 3.9 3.5 3.2 13.6 14.2 15.7 1.2 1.5 1.8 86.6

HDFC Standard Life Insurance ADD 360 380 5.6 725 9.9 2,007 7 8 10 18.3 23.8 21.0 55.0 44.5 36.7 — — — 13.7 12.2 10.7 26.2 29.0 31.1 0.5 0.6 0.7 7.6

ICICI Lombard SELL 791 650 (17.8) 359 4.9 454 26 31 37 34.9 22.7 16.4 30.9 25.2 21.6 — — — 6.7 5.6 4.7 23.4 24.1 23.6 0.7 0.9 1.1 6.1

ICICI Prudential Life BUY 324 475 46.7 465 6.3 1,436 9 10 12 (21.0) 15.6 19.8 36.3 31.4 26.2 — — — 6.1 5.3 4.6 18.1 18.1 18.7 0.5 0.5 0.6 8.6

IIFL Holdings SELL 353 625 77.0 113 1.5 319 38 45 52 31.5 18.6 16.0 9.4 7.9 6.8 — — — 1.7 1.4 1.2 20.5 20.0 20.0 2.3 2.7 3.1 2.4

L&T Finance Holdings ADD 123 165 34.7 245 3.3 1,996 13 14 16 70.9 12.3 12.8 9.8 8.7 7.7 — — — 1.8 1.5 1.3 18.9 18.8 18.3 1.6 2.0 1.9 24.1

LIC Housing Finance BUY 416 580 39.5 210 2.9 505 48 55 66 10.9 13.9 19.8 8.6 7.5 6.3 — — — 1.4 1.2 1.0 17.0 16.2 16.9 1.8 2.1 2.5 17.8

Magma Fincorp BUY 96 165 71.9 26 0.4 237 13 17 21 34.0 31.8 23.0 7.4 5.6 4.5 — — — 0.9 0.8 0.7 13.9 15.8 17.0 2.0 2.7 3.3 0.9

Mahindra & Mahindra Financial ADD 374 450 20.2 231 3.1 614 23 28 34 58.4 23.2 18.6 16.3 13.2 11.1 — — — 2.4 2.1 1.9 14.3 15.8 16.7 1.7 2.1 2.5 13.5

Max Financial Services ADD 378 650 71.9 102 1.4 268 6 6 6 36.9 1.8 1.8 60.3 59.2 58.2 — — — — — — 8.3 8.0 7.8 0.6 0.6 0.6 5.9

Muthoot Finance ADD 396 480 21.1 159 2.2 400 40 42 48 (7.8) 6.0 14.8 10.0 9.4 8.2 — — — 1.8 1.6 1.4 19.0 17.6 17.8 2.3 2.4 2.8 7.9

PNB Housing Finance REDUCE 715 1,200 67.8 120 1.6 167 62 75 92 25.3 20.9 22.4 11.5 9.5 7.7 — — — 1.7 1.5 1.3 15.2 15.9 17.0 0.5 0.5 0.5 4.9

SBI Life Insurance BUY 579 715 23.4 579 7.9 1,000 13 14 16 10.8 12.4 12.1 45.5 40.4 36.1 — — — 7.6 6.6 5.7 18.0 17.5 17.0 0.4 0.4 0.4 3.7

Shriram City Union Finance ADD 1,533 2,120 38.3 101 1.4 66 139 171 206 38.1 22.6 20.5 11.0 9.0 7.5 — — — 1.7 1.5 1.3 15.5 16.7 17.4 1.1 1.4 1.7 1.4

Shriram Transport BUY 1,005 1,450 44.2 228 3.1 227 109 127 143 57.8 16.2 12.5 9.2 7.9 7.1 — — — 1.6 1.4 1.2 17.6 17.2 16.8 1.5 1.8 2.1 27.6

NBFCs Neutral 8,885 121 10.7 20.2 20.4 23.4 19.5 16.2 3.6 3.2 2.8 15.5 16.3 17.0 0.8 1.0 1.2 796.1

Cement

ACC SELL 1,381 1,250 (9.5) 259 3.5 188 58 67 78 19.0 16.3 15.7 23.8 20.5 17.7 12.4 10.6 8.9 2.6 2.4 2.2 11.2 12.0 12.7 1.2 1.2 1.2 18.6

Ambuja Cements REDUCE 201 195 (2.8) 398 5.4 1,986 8 10 11 1.8 26.2 16.7 26.2 20.8 17.8 8.3 6.7 5.6 1.9 1.8 1.7 7.2 8.8 9.7 1.8 1.8 1.8 12.2

Dalmia Bharat ADD 2,038 2,830 38.8 182 2.5 89 94 122 139 55.8 29.3 14.8 21.7 16.8 14.6 8.5 6.8 5.7 2.6 2.3 2.0 12.9 14.6 14.5 0.1 0.1 0.1 4.1

Grasim Industries BUY 826 1,170 41.7 543 7.4 657 46 55 70 (2.5) 18.8 28.0 17.9 15.0 11.8 6.7 6.4 6.0 0.9 0.9 0.8 5.2 5.9 7.1 0.7 0.7 0.7 17.1

India Cements REDUCE 84 118 40.8 26 0.4 308 4 8 12 28.0 102.6 41.3 20.1 9.9 7.0 7.5 5.9 4.8 0.5 0.5 0.4 2.5 4.8 6.5 1.2 1.2 1.2 10.1

J K Cement ADD 673 890 32.3 47 0.6 70 45 79 78 3.7 75.4 (0.8) 15.0 8.5 8.6 9.3 7.7 6.3 2.1 1.7 1.5 15.0 22.3 18.5 1.2 1.2 1.2 0.4

JK Lakshmi Cement ADD 264 370 40.2 31 0.4 118 11 28 37 153.5 147.9 30.5 23.3 9.4 7.2 8.7 5.6 4.5 2.0 1.7 1.4 8.9 19.5 21.0 0.8 0.8 0.8 0.4

Orient Cement ADD 86 145 68.7 18 0.2 205 7 11 15 212.9 58.7 41.3 12.7 8.0 5.7 6.5 4.9 3.6 1.6 1.4 1.1 12.9 18.2 21.8 1.7 2.3 2.3 0.3

Shree Cement SELL 13,809 12,500 (9.5) 481 6.5 35 421 630 760 6.0 49.7 20.6 32.8 21.9 18.2 15.0 11.2 9.0 4.7 4.0 3.3 15.4 19.7 19.8 0.4 0.4 0.4 5.7

UltraTech Cement SELL 3,344 2,760 (17.5) 918 12.5 275 103 148 187 17.1 43.2 26.8 32.4 22.6 17.8 15.2 12.0 9.8 3.2 2.9 2.5 10.4 13.4 14.9 0.3 0.3 0.3 19.8

Cement Cautious 2,903 40 10.9 34.7 22.8 25.3 18.8 15.3 9.5 8.1 7.0 2.0 1.8 1.6 7.8 9.7 10.7 0.7 0.7 0.7 88.6



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Target O/S ADVT



Consumer products

Asian Paints REDUCE 1,138 1,140 0.1 1,092 14.9 959 24 30 35 16.7 24.3 17.8 47.5 38.2 32.5 29.9 23.8 20.0 11.5 10.1 9.0 25.7 28.2 29.3 0.9 1.2 1.5 26.0

Bajaj Corp. ADD 361 405 12.3 53 0.7 148 15 17 19 7.8 10.3 9.5 23.4 21.2 19.4 18.6 15.8 13.8 10.9 10.8 10.6 46.3 51.2 55.4 3.6 3.9 4.2 0.5

Britannia Industries ADD 5,485 5,875 7.1 659 9.0 120 104 127 152 24.5 22.2 19.2 52.7 43.1 36.1 34.4 28.1 23.5 15.3 12.4 10.1 32.5 31.8 30.9 0.6 0.8 1.0 16.4

Coffee Day Enterprises REDUCE 268 265 (1.0) 57 0.8 211 8 10 12 129.9 30.0 21.2 34.8 26.8 22.1 11.8 10.3 9.5 2.2 2.1 1.9 6.6 8.0 8.9 — — — 1.1

Colgate-Palmolive (India) ADD 1,135 1,120 (1.3) 309 4.2 272 27 32 36 14.7 15.6 15.5 41.6 36.0 31.2 23.8 20.7 18.0 18.2 15.8 13.8 46.0 46.9 47.3 1.4 1.7 2.0 7.5

Dabur India REDUCE 401 345 (13.9) 708 9.6 1,762 9 10 12 17.3 12.9 13.6 43.9 38.9 34.3 36.8 31.7 27.5 12.4 10.8 9.5 28.1 29.6 29.4 0.9 1.1 1.4 22.5

GlaxoSmithKline Consumer REDUCE 6,947 6,325 (9.0) 292 4.0 42 199 223 246 19.5 12.1 10.1 34.9 31.1 28.3 24.3 20.9 18.4 7.6 6.8 6.2 22.8 23.0 23.1 1.3 1.5 1.8 2.2

Godrej Consumer Products REDUCE 743 645 (13.2) 759 10.3 1,022 17 19 22 18.8 13.7 12.7 43.9 38.6 34.3 31.1 27.0 23.5 10.3 8.9 7.8 25.3 24.7 24.2 0.8 0.9 1.0 14.6

Hindustan Unilever REDUCE 1,552 1,430 (7.9) 3,360 45.7 2,160 29 34 38 18.9 16.0 13.0 53.2 45.9 40.6 37.6 32.2 28.5 41.6 34.8 29.4 83.2 82.6 78.6 1.4 1.5 1.7 36.1

ITC ADD 286 310 8.4 3,501 47.7 12,275 10 11 12 8.2 12.3 11.7 29.6 26.4 23.6 19.1 16.9 15.0 6.4 6.0 5.7 20.4 22.2 24.2 2.0 2.3 2.7 60.9

Jubilant Foodworks BUY 1,199 1,430 19.3 158 2.2 132 25 35 46 74.7 37.6 32.4 47.2 34.3 25.9 23.4 17.6 13.2 11.8 8.9 6.8 29.0 29.7 29.9 0.2 0.3 0.3 28.6

Jyothy Laboratories ADD 178 210 17.7 65 0.9 364 6 7 8 27.6 16.7 15.4 31.7 27.2 23.5 21.3 18.0 15.3 4.9 4.3 3.7 16.6 16.8 16.9 0.6 0.8 1.1 0.9

Marico ADD 312 310 (0.5) 402 5.5 1,291 7 8 9 8.9 20.0 14.5 45.7 38.0 33.2 31.7 26.1 22.5 15.0 13.9 12.8 33.7 37.9 40.2 1.5 1.8 2.0 10.4

Nestle India ADD 9,352 9,950 6.4 902 12.3 96 171 197 223 34.2 15.7 13.2 54.8 47.4 41.8 31.3 27.0 23.7 24.2 22.2 20.4 46.1 49.0 50.8 1.2 1.4 1.6 10.9

Page Industries SELL 28,244 22,300 (21.0) 315 4.3 11 418 508 607 34.3 21.6 19.5 67.6 55.6 46.5 43.6 36.0 30.0 28.6 22.6 18.2 47.8 45.5 43.4 0.6 0.8 0.9 19.5

Pidilite Industries REDUCE 924 960 3.9 469 6.4 508 21 26 31 16.8 21.8 20.2 43.9 36.0 29.9 29.0 23.9 19.8 11.1 9.3 7.8 27.4 28.2 28.4 0.8 0.9 1.0 8.6

S H Kelkar and Company BUY 191 240 25.4 28 0.4 145 7 10 12 (6.2) 41.9 23.2 27.6 19.4 15.8 17.9 12.8 11.1 3.0 2.7 2.4 11.3 14.5 16.0 0.9 1.0 1.4 0.6

Tata Global Beverages ADD 218 230 5.4 138 1.9 631 8 9 10 7.7 17.0 12.9 27.6 23.6 20.9 15.0 13.2 11.6 1.9 1.8 1.7 7.0 7.9 8.5 1.4 1.6 1.8 9.8

Titan Company REDUCE 778 760 (2.3) 691 9.4 888 16 20 23 25.6 21.8 19.3 48.5 39.8 33.4 32.1 25.6 21.0 11.5 9.6 8.1 25.6 26.3 26.4 0.6 0.7 0.9 39.7

United Breweries REDUCE 1,174 1,040 (11.4) 310 4.2 264 21 26 31 39.2 23.6 20.6 56.5 45.7 37.9 27.9 23.9 20.4 9.8 8.3 7.0 18.7 19.6 20.0 0.3 0.4 0.5 15.8

United Spirits REDUCE 512 470 (8.2) 372 5.1 727 10 13 17 34.7 30.9 24.5 50.0 38.2 30.7 29.2 23.6 19.8 10.2 7.5 5.8 24.2 22.7 21.3 — — 0.5 11.9

Varun Beverages REDUCE 754 700 (7.2) 138 1.9 183 15 20 26 29.8 34.5 30.7 50.5 37.5 28.7 16.8 14.3 12.1 7.0 6.0 5.0 14.6 17.1 19.0 — — 0.3 1.1

Consumer products Cautious 14,777 201 16.6 16.7 14.7 42.0 36.0 31.4 27.2 23.2 20.2 10.9 9.7 8.7 25.9 27.0 27.7 1.2 1.5 1.7 345.7

Energy

BPCL REDUCE 270 275 2.0 585 8.0 1,967 33 33 36 (19.2) 2.6 7.5 8.3 8.1 7.5 6.3 6.0 5.5 1.4 1.3 1.2 17.9 16.8 16.5 4.8 5.0 5.3 31.4

Castrol India SELL 138 155 12.4 136 1.9 989 7 8 9 2.9 10.1 9.7 19.5 17.7 16.2 12.1 10.9 9.9 12.8 12.5 12.1 67.1 71.5 76.0 4.0 4.5 4.9 3.7

GAIL (India) BUY 340 455 33.8 767 10.4 2,255 29 31 33 41.7 6.4 8.0 11.8 11.1 10.2 7.4 6.9 6.3 1.7 1.6 1.4 15.4 14.9 14.7 2.8 2.9 3.1 28.0

GSPL SELL 167 185 10.8 94 1.3 564 16 12 13 31.3 (25.1) 12.1 10.7 14.3 12.8 4.2 5.0 4.4 1.6 1.5 1.4 16.2 10.9 11.1 1.4 1.0 1.2 1.5

HPCL REDUCE 218 185 (15.1) 332 4.5 1,524 28 29 31 (32.3) 1.7 6.6 7.7 7.6 7.1 7.4 7.6 7.6 1.3 1.2 1.1 17.2 16.1 15.8 5.3 5.4 5.7 29.1

Indraprastha Gas SELL 239 240 0.6 167 2.3 700 12 13 15 16.4 12.3 10.7 19.9 17.7 16.0 12.5 10.9 9.6 4.1 3.6 3.2 22.1 21.5 20.9 1.0 1.3 1.7 9.4

IOCL REDUCE 130 120 (7.7) 1,263 17.2 9,479 16 15 17 (24.1) (1.8) 12.3 8.3 8.5 7.6 4.9 4.7 4.2 1.0 1.0 0.9 12.9 11.9 12.6 4.8 4.7 5.3 19.8

Mahanagar Gas ADD 808 965 19.4 80 1.1 99 56 60 64 16.0 7.6 5.4 14.4 13.4 12.7 8.3 7.6 6.9 3.4 3.0 2.6 24.8 23.5 22.0 2.7 3.0 3.2 13.1

ONGC ADD 155 200 28.7 1,994 27.1 12,833 22 21 21 24.6 (1.3) (4.0) 7.2 7.3 7.6 3.6 3.5 3.4 0.8 0.8 0.7 11.9 11.0 10.0 4.3 4.5 4.5 17.7

Oil India SELL 193 200 3.5 219 3.0 1,135 24 25 26 (2.0) 4.1 4.5 8.0 7.7 7.3 5.3 5.1 4.9 0.7 0.7 0.7 9.6 9.5 9.5 5.0 5.2 5.5 2.6

Petronet LNG BUY 212 280 31.9 318 4.3 1,500 16 18 20 16.7 13.1 9.4 13.1 11.6 10.6 8.8 7.4 6.5 2.9 2.5 2.3 23.3 23.2 22.7 2.7 3.5 4.3 10.4

Reliance Industries SELL 1,055 1,070 1.5 6,242 85.0 5,922 67 78 88 13.9 16.5 12.7 15.7 13.5 11.9 11.0 9.2 7.7 1.9 1.7 1.5 11.8 12.3 12.3 0.6 0.6 0.7 165.7

Energy Attractive 12,197 166 4.6 6.5 7.5 11.3 10.6 9.9 7.1 6.5 5.9 1.4 1.3 1.2 12.7 12.4 12.2 2.3 2.4 2.5 332.5



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Target O/S ADVT

Price (Rs) price Upside shares 3mo


Industrials

ABB SELL 1,245 1,020 (18.1) 264 3.6 212 26 29 36 30.1 14.2 23.5 48.3 42.3 34.2 28.3 25.4 21.0 6.7 6.1 5.4 14.5 15.1 16.7 0.7 0.7 0.7 2.4

BHEL REDUCE 74 89 20.5 271 3.7 3,671 3.3 5.5 7.6 47.9 69.3 38.0 22.7 13.4 9.7 7.1 4.4 3.2 0.8 0.8 0.8 3.6 6.1 8.2 2.7 4.6 6.4 10.1

Carborundum Universal SELL 365 322 (11.8) 69 0.9 189 14 17 20 25.0 21.4 13.8 25.6 21.1 18.5 14.0 11.5 9.9 4.0 3.6 3.2 16.3 17.8 18.1 1.2 1.4 1.6 0.5

CG Power and Industrial BUY 37 62 67.4 23 0.3 627 1.4 3.6 5.7 71.6 157.3 57.0 26.3 10.2 6.5 6.9 5.1 3.9 0.9 0.8 0.8 3.3 8.4 12.5 — — — 4.0

Cummins India REDUCE 656 710 8.3 182 2.5 277 28 33 37 15.2 17.5 13.7 23.6 20.0 17.6 19.7 16.9 14.5 4.3 4.0 3.7 18.7 20.6 21.8 2.3 2.7 3.1 5.4

Kalpataru Power Transmission BUY 289 560 94.0 44 0.6 153 23.9 32.7 41.3 23.4 36.6 26.4 12.1 8.8 7.0 6.0 4.7 4.0 1.5 1.3 1.1 13.0 15.5 16.9 0.6 0.6 0.6 0.7

KEC International BUY 276 410 48.5 71 1.0 257 21 27 33 16.9 29.7 23.0 13.2 10.2 8.3 7.6 6.2 5.2 2.9 2.3 1.9 24.1 25.2 24.9 0.8 1.1 1.3 2.8

L&T BUY 1,201 1,600 33.3 1,683 22.9 1,401 62.8 67.1 83.3 21.5 6.8 24.1 19.1 17.9 14.4 15.5 14.8 12.9 3.0 2.7 2.5 16.7 16.1 18.0 1.7 1.9 2.3 51.9

Siemens SELL 860 1,000 16.2 306 4.2 356 29 35 — 21.4 21.7 — 29.6 24.3 - 16.2 12.9 — 3.5 3.3 — 12.3 14.0 — 1.4 1.7 — 4.2

Thermax REDUCE 961 1,065 10.8 115 1.6 113 27.8 38.7 43.8 34.7 39.2 13.2 34.6 24.9 22.0 21.9 16.2 13.9 3.7 3.4 3.1 11.1 14.3 14.7 1.0 1.2 1.3 0.9

Industrials Neutral 3,028 41 23.8 17.8 15.7 21.7 18.5 16.0 14.6 12.9 10.8 2.6 2.4 2.3 11.8 12.9 14.7 1.6 1.9 2.2 82.9

Infrastructure

Adani Ports and SEZ BUY 319 390 22.3 661 9.0 2,071 20 23 29 9.3 11.5 27.6 15.8 14.2 11.1 12.0 10.0 8.8 2.8 2.4 2.0 18.6 18.0 19.5 0.3 0.5 0.5 17.0

Ashoka Buildcon BUY 111 220 99.0 31 0.4 282 9 10 10 4.1 17.8 (1.3) 12.6 10.7 10.9 8.3 7.1 6.6 1.4 1.2 1.1 11.8 12.3 11.0 1.5 1.2 1.2 0.6

Container Corp. SELL 577 635 10.1 281 3.8 487 21 25 29 17.4 20.9 15.0 27.8 23.0 20.0 17.0 13.4 11.0 2.8 2.6 2.4 10.3 11.6 12.3 1.5 1.8 1.7 5.5

Dilip Buildcon BUY 403 1,240 207.5 55 0.8 137 56 71 85 19.8 27.5 20.1 7.2 5.7 4.7 4.5 3.6 3.1 1.7 1.3 1.0 26.7 26.2 24.4 — — — 3.6

Gateway Distriparks BUY 139 250 79.8 15 0.2 109 7 8 11 (5.8) 15.2 37.5 19.4 16.8 12.2 9.4 7.8 6.4 2.6 2.3 1.9 9.8 14.5 17.1 — 2.2 2.2 0.2

Gujarat Pipavav Port BUY 100 150 49.8 48 0.7 483 5.3 6.5 7.8 29.7 22.9 19.3 18.8 15.3 12.8 9.9 8.1 6.7 2.4 2.3 2.2 12.7 15.3 17.8 4.4 5.4 6.3 0.6

IRB Infrastructure BUY 123 320 159.8 43 0.6 351 31 33 23 36.8 7.1 (31.3) 4.0 3.7 5.4 5.8 6.3 7.5 0.7 0.6 0.5 17.6 16.3 10.0 2.5 3.2 3.5 5.5

Mahindra Logistics REDUCE 537 565 5.2 38 0.5 71 15 21 25 50.7 39.3 23.7 36.3 26.1 21.1 20.2 14.6 11.6 7.5 6.1 4.9 22.7 25.8 25.8 — — — 0.4

Sadbhav Engineering BUY 210 370 76.2 36 0.5 172 17 22 22 31.7 27.9 2.9 12.4 9.7 9.4 9.5 7.4 6.3 1.7 1.5 1.3 14.5 16.2 14.5 — — — 1.3

Infrastructure Attractive 1,209 16 15.8 15.2 15.6 15.1 13.1 11.3 10.1 8.6 7.8 2.3 2.0 1.8 15.6 15.6 15.7 0.9 1.1 1.1 34.7

Internet

Info Edge ADD 1,493 1,425 (4.6) 182 2.5 122 26 33 40 14.9 27.5 20.6 57.7 45.3 37.6 43.8 33.2 26.9 6.8 6.2 5.5 13.2 14.3 15.6 0.6 0.6 0.7 3.1

Just Dial ADD 465 610 31.3 31 0.4 67 26 30 33 23.0 15.0 9.4 17.8 15.5 14.1 8.7 6.8 5.5 2.8 2.4 2.1 16.7 16.6 15.7 0.6 0.6 0.7 18.4

Internet Cautious 213 3 17.6 23.0 16.8 43.5 35.4 30.3 31.7 24.9 20.8 5.6 5.0 4.5 12.9 14.2 14.7 0.6 0.6 0.7 21.5

Media

DB Corp. REDUCE 164 270 64.7 30 0.4 184 20 23 26 14.9 12.3 14.8 8.1 7.2 6.3 4.1 3.6 — 1.6 1.6 — 20.7 22.3 25.2 10.3 12.8 15.4 0.4

DishTV ADD 43 70 63.2 79 1.1 1,925 1.8 2.9 3.7 514.6 57.8 27.2 NM 14.9 11.7 3.9 3.2 2.6 15.5 11.6 8.2 72.7 89.3 81.9 — — — 4.1

Jagran Prakashan REDUCE 106 168 58.4 31 0.4 311 11 12 14 10.0 12.2 14.6 10.0 8.9 7.8 4.3 3.7 3.2 1.6 1.6 1.5 15.9 18.3 20.2 4.7 8.5 8.5 0.4

PVR BUY 1,280 1,430 11.7 60 0.8 47 38 50 61 41.2 32.3 22.4 33.8 25.5 20.8 13.0 11.1 9.4 4.9 4.2 3.5 15.3 17.6 18.3 0.3 0.4 0.5 8.9

Sun TV Network REDUCE 632 660 4.4 249 3.4 394 35 37 41 20.6 6.6 10.3 18.2 17.1 15.5 12.2 11.3 9.9 5.0 4.6 4.3 28.4 27.9 28.6 3.2 3.6 4.0 17.7

Zee Entertainment Enterprises REDUCE 438 430 (1.7) 420 5.7 960 17 20 22 11.4 17.1 12.6 26.1 22.3 19.8 15.3 13.4 11.8 4.9 4.3 3.8 19.9 20.6 20.5 1.0 1.3 1.6 20.5

Media Attractive 870 12 28.7 17.0 14.4 20.8 17.8 15.6 9.7 8.6 7.4 4.6 4.1 4.0 22.0 23.2 25.8 1.9 2.4 2.8 52.0

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 277 320 15.4 1,722 23.4 6,207 25 25 27 120.4 2.2 6.6 11.1 10.9 10.2 8.5 7.2 6.6 6.8 7.5 8.0 62.7 65.9 76.0 7.2 9.0 9.0 14.9

Hindalco Industries BUY 220 330 50.3 493 6.7 2,229 28 33 35 28.1 17.8 6.4 7.8 6.7 6.2 5.3 4.5 4.0 0.8 0.7 0.6 10.8 11.4 10.9 0.5 0.5 0.5 37.6

Hindustan Zinc REDUCE 279 265 (5.0) 1,178 16.0 4,225 20 21 24 (6.5) 4.6 13.3 13.9 13.3 11.7 8.4 7.6 6.4 3.4 3.1 2.8 24.2 24.7 25.3 7.2 3.8 4.3 5.8

Jindal Steel and Power REDUCE 170 215 26.5 165 2.2 968 8 14 22 195.9 68.5 60.8 20.9 12.4 7.7 6.4 5.8 5.0 0.5 0.5 0.5 2.7 4.3 6.5 — — — 34.8

JSW Steel SELL 348 350 0.7 840 11.4 2,406 31 26 31 16.1 (16.2) 17.2 11.1 13.3 11.3 6.7 7.8 7.0 2.4 2.1 1.8 23.5 16.6 16.8 1.0 1.0 1.0 39.0

National Aluminium Co. BUY 67 87 29.3 130 1.8 1,933 10 8 9 238.9 (16.0) 3.6 6.9 8.2 7.9 3.2 3.8 3.6 1.2 1.2 1.1 17.6 14.4 14.6 8.9 8.9 8.9 12.1

NMDC REDUCE 111 120 8.5 350 4.8 3,164 12 10 11 4.2 (14.3) 5.9 9.1 10.6 10.0 5.6 6.4 6.0 1.3 1.3 1.2 15.3 12.4 12.5 5.0 5.0 5.0 6.7

Tata Steel ADD 546 660 21.0 623 8.5 1,205 76 85 94 12.8 12.1 10.9 7.2 6 5.8 5.8 6.0 5.7 0.9 0.9 0.8 14.3 14.3 14.4 1.8 1.8 1.8 69.6

Vedanta BUY 210 360 71.1 782 10.6 3,717 27 38 39 26.7 39.0 2.2 7.7 5.5 5.4 5.0 3.8 3.4 1.1 1.0 0.9 15.4 19.4 17.7 3.9 5.4 5.5 51.6

Metals & Mining Attractive 6,282 86 35.3 8.5 9.1 9.9 9.1 8.3 6.3 5.8 5.2 1.7 1.6 1.5 17.6 17.6 17.5 4.6 4.7 4.8 272.0

Pharmaceutical

Apollo Hospitals ADD 1,143 1,090 (4.7) 159 2.2 139 20 27 33 133.5 36.7 21.6 58.0 42.4 34.9 20.1 17.0 15.0 4.6 4.3 3.9 8.2 10.5 11.8 0.4 0.6 0.7 15.7

Aster DM Healthcare BUY 158 240 51.6 80 1.1 505 5 8 12 74.4 62.0 51.4 32.9 20.3 13.4 11.9 9.4 7.3 2.6 2.4 2.0 8.3 12.2 16.3 — — — 0.2

Aurobindo Pharma ADD 739 760 2.9 433 5.9 584 42 57 64 1.0 35.8 12.3 17.5 12.9 11.5 11.7 8.7 7.7 3.1 2.6 2.1 19.3 19.9 18.6 0.7 0.8 1.0 43.2

Biocon SELL 626 330 (47.3) 375 5.1 601 8 15 18 35.9 75.7 21.7 74.3 42.3 34.8 32.3 21.6 18.4 6.2 5.6 5.0 8.7 13.9 14.3 0.5 0.8 1.0 25.5

Cipla BUY 622 680 9.3 501 6.8 805 24 31 40 34.5 31.0 29.4 26.4 20.2 15.6 14.9 11.8 9.2 3.1 2.8 2.4 12.4 14.6 15.7 0.8 1.0 1.4 23.0

Dr Lal Pathlabs REDUCE 896 900 0.5 75 1.0 83 24 29 34 19.0 17.9 18.4 36.8 31.2 26.4 22.4 18.7 15.3 7.9 6.6 5.6 23.4 23.1 22.9 0.5 0.6 0.8 1.0

Dr Reddy's Laboratories REDUCE 2,474 2,150 (13.1) 411 5.6 166 89 118 141 50.2 32.8 19.3 27.9 21.0 17.6 14.0 10.0 8.3 3.0 2.6 2.3 11.1 12.6 13.3 0.5 0.7 0.9 32.6

HCG BUY 230 270 17.2 20 0.3 85 2 4 7 28.8 87.5 73.4 114.4 61.0 35.2 17.5 14.5 11.4 3.7 3.5 3.2 3.3 5.9 9.4 — — — 0.2

Laurus Labs ADD 375 500 33.3 40 0.5 106 16 29 34 2.4 79.9 17.5 23.1 12.8 10.9 11.0 7.6 6.7 2.4 2.0 1.7 10.9 17.1 15.6 — — — 0.7

Lupin REDUCE 851 800 (6.0) 385 5.2 450 27 39 50 (28.9) 44.0 27.4 31.4 21.8 17.1 14.7 10.7 8.6 2.6 2.4 2.1 8.6 11.4 12.4 0.5 0.7 0.9 44.3

Narayana Hrudayalaya ADD 210 265 26.1 43 0.6 204 3 6 9 23.0 103.2 40.7 68.0 33.4 23.8 19.7 13.7 11.0 3.9 3.5 3.0 5.9 11.0 13.7 — — — 0.2

Sun Pharmaceuticals SELL 576 540 (6.2) 1,382 18.8 2,406 16 24 29 7.5 45.5 21.6 35.3 24.3 20.0 18.8 13.5 11.2 3.3 3.0 2.6 9.8 12.9 13.2 0.6 0.8 1.0 62.5

Torrent Pharmaceuticals NR 1,596 — — 270 3.7 169 47 61 81 18.0 29.6 32.1 33.7 26.0 19.7 14.8 12.7 10.4 5.2 4.5 3.8 15.3 17.2 19.3 0.7 0.9 1.2 8.1

Pharmaceuticals Neutral 4,173 57 11.3 40.7 22.6 31.5 22.4 18.2 16.2 12.0 10.0 3.4 3.0 2.7 10.9 13.5 14.6 0.6 0.8 1.0 257.1

Real Estate

Brigade Enterprises BUY 186 290 56.2 25 0.3 136 9 15 17 (17.0) 59.2 15.8 20.2 12.7 11.0 13.0 10.1 8.1 1.1 1.0 0.9 5.4 8.1 8.8 1.3 1.3 1.3 0.3

DLF RS 153 — — 274 3.7 1,784 5.3 23.9 14.1 (74.4) 354.6 (41.0) 29.2 6.4 10.9 44.8 7.9 14.6 0.8 0.7 0.7 2.6 11.3 6.2 1.3 1.3 1.3 23.0

Godrej Properties SELL 522 400 (23.3) 120 1.6 216 12.9 15.1 18.2 (32.9) 16.3 20.8 40.3 34.6 28.7 670.7 191.7 102.6 4.2 3.7 2.8 10.9 11.4 10.1 — — — 1.6

Lemon Tree Hotels ADD 67 76 13.4 53 0.7 786 — 1 2 147.2 174.0 66.8 150.2 54.8 32.9 33.8 20.6 15.3 6.2 5.6 5.2 4.2 10.7 16.3 — — 1.4 —

Oberoi Realty BUY 395 460 16.6 143 2.0 340 46 34 57 264.9 (26.6) 66.3 8.5 11.6 7.0 9.4 14.0 4.8 1.5 1.4 1.2 21.4 12.5 18.0 0.5 0.5 0.5 2.8

Prestige Estates Projects ADD 193 315 63.4 72 1.0 375 10 10 11 (24.2) 8.4 — 20.3 18.7 18.1 12.8 12.8 12.7 1.4 1.4 — 7.3 7.5 7.3 0.8 0.8 0.8 0.6

Sobha REDUCE 421 510 21.3 40 0.5 95 20 23 24 (7.5) 14.8 3.5 20.8 18.1 17.5 12.3 11.5 10.9 1.4 1.3 1.6 6.8 7.4 9.1 1.7 1.7 1.7 1.4

Sunteck Realty REDUCE 311 360 15.8 45 0.6 140 19 19 39 22.4 1.6 106.6 16.6 16.4 7.9 14.8 14.4 6.0 1.5 1.4 1.2 9.5 8.9 16.2 0.3 0.3 0.3 2.0

Real Estate Neutral 773 11 (32.2) 83.3 (6.9) 20.5 11.2 12.0 21.1 11.6 11.7 1.3 1.1 1.1 6.2 10.2 8.8 0.8 0.8 0.9 31.8

Dividend yield (%)Mkt cap. EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%)


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Technology

HCL Technologies ADD 952 1,100 15.6 1,325 18.0 1,409 74 78 81 18.1 5.6 4.5 12.9 12.2 11.7 8.4 7.6 6.9 2.9 2.5 2.3 25.1 22.1 20.5 0.9 3.2 3.5 32.1

Hexaware Technologies SELL 356 455 28.0 106 1.4 302 20 24 27 19.5 21.6 12.7 18.0 14.8 13.1 13.1 9.9 8.6 4.6 3.9 3.3 27.6 28.7 27.5 2.2 2.2 2.8 20.1

Infosys ADD 658 780 18.6 2,873 39.1 4,350 37 41 45 13.5 12.3 10.4 17.9 16.0 14.5 12.3 10.8 9.6 4.1 3.7 3.3 23.5 24.1 23.9 3.3 3.0 3.2 85.5

L&T Infotech ADD 1,697 2,100 23.7 294 4.0 175 83 96 113 30.5 15.6 18.1 20.5 17.7 15.0 15.4 12.4 10.4 6.2 5.0 4.1 33.5 31.3 30.0 1.4 1.5 1.8 10.2

Mindtree ADD 809 1,080 33.4 133 1.8 165 45 55 63 30.2 23.1 14.0 18.0 14.6 12.8 11.4 8.9 7.6 4.1 3.5 3.0 24.8 26.0 25.2 1.7 2.1 2.3 22.7

Mphasis SELL 1,065 900 (15.5) 206 2.8 193 55 63 65 26.4 13.4 2.7 19.2 17.0 16.5 13.5 12.2 11.3 3.4 3.5 3.2 18.5 19.8 20.1 1.9 2.3 2.8 8.0

TCS REDUCE 1,844 1,950 5.8 6,918 94.2 3,752 85 95 103 25.6 11.6 8.9 21.8 19.5 17.9 15.4 13.7 12.7 6.8 6.4 6.1 33.8 33.7 34.8 1.8 3.6 3.9 75.1

Tech Mahindra ADD 668 865 29.4 590 8.0 891 46 57 64 8.4 22.4 13.0 14.5 11.8 10.4 8.5 6.6 5.6 2.7 2.3 2.0 20.2 21.2 20.3 1.4 1.5 1.7 39.3

Wipro REDUCE 309 325 5.1 1,398 19.0 4,507 19 23 25 12.8 19.5 7.5 16.2 13.5 12.6 10.3 8.7 7.9 2.5 2.3 2.1 16.5 17.6 17.4 0.5 3.2 3.6 20.8

Technology Cautious 13,842 188 16.7 12.2 8.9 18.5 16.5 15.2 12.6 11.1 10.1 4.4 4.0 3.7 24.0 24.5 24.3 1.9 3.2 3.5 313.9

Telecom

Bharti Airtel ADD 286 445 55.6 1,143 15.6 3,997 (6) (4) 5 (221.5) 28.8 215.1 (49.7) (69.9) 60.7 8.4 7.1 5.6 1.7 1.8 1.8 (3.4) (2.5) 2.9 0.3 (0.3) 0.4 27.8

Bharti Infratel REDUCE 266 285 7.3 491 6.7 1,850 13 12 13 (4.8) (8.5) 7.7 20.3 22.2 20.6 7.5 7.9 7.5 3.0 3.0 3.0 14.6 13.7 14.6 4.0 3.7 3.9 10.5

IDEA REDUCE 35 45 27.1 309 4.2 4,359 (17) (17) (15) (75.6) (2.4) 11.4 (2.1) (2.1) (2.3) 38.4 32.3 19.9 0.7 1.1 2.0 (29.7) (41.1) (59.4) — — — 15.9

Tata Communications ADD 453 660 45.6 129 1.8 285 0 3 7 (77.5) 694.2 123.5 1,223 154.0 68.9 9.7 8.5 7.7 (56.3) (76.4) (1,480.9) 7.8 (42.1) (211.0) 1.4 1.7 1.7 2.9

Telecom Cautious 2,072 28 (2,384.5) 5.0 68.0 (28.8) (30.4) (95.0) 10.1 8.9 7.3 2.0 2.2 2.3 (6.9) (7.2) (2.4) 1.2 0.7 1.2 57.0

Utilities

CESC BUY 868 1,180 35.9 115 1.6 133 115 128 141 31.7 11.6 10.1 7.6 6.8 6.2 5.5 4.9 4.3 0.7 0.7 0.6 10.0 10.4 10.5 1.5 1.5 1.5 9.4

JSW Energy REDUCE 64 70 10.1 104 1.4 1,640 5.1 6.5 6.6 65.9 26.8 2.9 12.5 9.8 9.6 5.5 4.5 4.1 0.9 0.8 0.7 7.2 8.5 8.0 — — — 1.3

NHPC ADD 24 30 25.0 246 3.4 10,260 3.1 3.2 3.4 26.9 1.8 8.0 7.8 7.6 7.0 7.2 7.0 7.4 0.8 0.8 0.7 10.4 10.2 10.6 7.3 7.3 6.2 1.3

NTPC BUY 165 190 15.2 1,361 18.5 8,245 15 16 18 18.8 4.4 16.5 11.1 10.6 9.1 8.9 8.2 6.9 1.2 1.2 1.1 11.6 11.3 12.2 2.7 2.8 3.3 11.2

Power Grid BUY 191 250 30.9 999 13.6 5,232 19 21 23 19.3 13.6 7.6 10.2 8.9 8.3 7.2 6.6 6.3 1.7 1.5 1.3 17.1 17.5 17.0 3.3 3.7 4.0 13.3

Tata Power BUY 69 90 29.6 188 2.6 2,705 6.0 7.0 10.9 12.7 15.6 57.0 11.5 10.0 6.4 10.5 10.1 8.8 1.1 1.0 0.9 10.1 10.6 14.6 — — — 5.7

Utilities Attractive 3,013 41 21.1 8.8 14.1 10.3 9.5 8.3 7.9 7.3 6.6 1.2 1.1 1.0 11.9 12.0 12.5 3.0 3.2 3.4 42.2

P/B (X) RoE (%) Dividend yield (%)Mkt cap. EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X)


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Others

Aditya Birla Fashion and Retail BUY 173 220 27.4 133 1.8 773 2 4 6 50.6 59.1 53.5 75.3 47.3 30.8 22.3 17.3 14.0 10.5 8.6 6.7 15.0 20.0 24.5 — — — 5.4

Astral Poly Technik SELL 870 640 (26.5) 104 1.4 120 19 25 29 30.2 28.8 16.1 45.6 35.4 30.5 24.6 19.5 16.5 8.0 6.6 5.5 19.8 20.5 19.7 0.1 0.1 0.2 1.0

Avenue Supermarts SELL 1,134 890 (21.5) 708 9.6 624 16 20 26 29.8 27.3 27.9 70.5 55.4 43.3 40.8 31.7 24.9 12.5 10.2 8.2 19.4 20.2 21.0 — — — —

Bayer Cropscience SELL 4,236 3,550 (16.2) 145 2.0 34 94 114 135 7.4 21.0 18.8 45.1 37.2 31.3 27.4 22.8 19.0 7.2 6.3 5.4 17.0 18.0 18.6 0.4 0.5 0.6 0.6

Crompton Greaves Consumer SELL 198 215 8.6 124 1.7 627 6 7 9 19.5 20.7 17.4 32.1 26.5 22.6 19.9 16.7 14.1 10.9 8.4 6.4 40.4 35.8 32.3 1.0 1.3 — 3.1

Dhanuka Agritech ADD 380 650 71.1 19 0.3 49 27 31 34 3.9 15.4 10.8 14.2 12.3 11.1 10.1 8.2 7.0 2.6 2.2 1.9 19.2 19.2 18.5 1.5 1.7 1.9 0.2

Godrej Agrovet ADD 504 640 26.9 97 1.3 189 15 19 23 28.9 28.8 21.1 34.0 26.4 21.8 18.5 14.5 12.0 5.0 4.2 3.6 15.7 17.4 17.9 — 0.6 0.7 0.9

Godrej Industries RS 447 — — 150 2.0 336 16 20 — 8.9 24.2 — 28.2 22.7 - 24.9 27.1 — 3.7 3.2 — 13.9 15.1 — 0.4 0.4 — 4.0

Havells India SELL 599 490 (18.2) 375 5.1 625 13 17 19 19.7 24.8 17.7 45.2 36.2 30.8 28.9 22.9 19.2 8.9 7.8 6.8 20.9 22.9 23.6 0.8 1.0 1.1 16.1

InterGlobe Aviation BUY 804 980 21.9 309 4.2 383 (11) 42 75 (118.1) 496.4 79.4 (75.7) 19.1 10.6 (43.7) 9.0 4.8 4.6 3.7 2.8 (5.9) 21.5 29.9 (0.1) - 0.5 21.1

Kaveri Seed SELL 470 515 9.7 31 0.4 66 34 34 37 7.3 0.1 8.3 13.7 13.7 12.6 10.9 10.2 9.0 3.3 2.9 2.5 26.4 22.4 21.0 1.7 2.1 2.1 5.3

PI Industries BUY 733 875 19.3 101 1.4 138 31 40 48 17.9 26.8 21.5 23.4 18.5 15.2 16.6 13.0 10.4 4.4 3.7 3.0 20.5 21.7 21.9 0.5 0.7 0.8 2.1

Rallis India ADD 180 220 22.5 35 0.5 195 10 12 13 17.2 19.4 9.7 17.8 14.9 13.6 11.7 9.9 8.7 2.7 2.4 2.2 15.8 17.1 16.9 2.0 2.2 2.4 0.6

SIS REDUCE 887 1,130 27.4 65 0.9 73 33 40 48 48.5 21.1 17.8 26.6 22.0 18.7 16.7 13.9 11.6 5.3 4.4 3.6 21.8 21.7 21.1 0.3 0.4 0.5 0.3

SRF BUY 1,709 2,200 28.8 98 1.3 57 100 132 150 23.8 32.2 14.1 17.2 13.0 11.4 10.3 8.2 6.9 2.4 2.1 1.8 15.0 17.3 17.0 0.8 0.9 0.9 11.4

Tata Chemicals ADD 672 760 13.2 171 2.3 255 44 51 56 (15.3) 14.6 11.5 15.2 13.3 11.9 6.3 5.2 4.4 1.4 1.3 1.2 9.7 10.3 10.8 2.2 2.5 2.5 6.6

TCNS Clothing Co. BUY 552 760 37.6 34 0.5 64 18 23 27 15.3 27.5 20.8 31.3 24.5 20.3 16.6 12.5 9.8 6.2 4.8 3.7 22.7 22.2 20.9 — — — —

TeamLease Services SELL 2,418 1,785 (26.2) 41 0.6 17 60 77 100 38.9 29.2 28.7 40.4 31.2 24.3 40.7 30.8 23.6 7.6 6.1 4.9 20.8 21.7 22.4 — — — 1.0

UPL ADD 615 660 7.3 313 4.3 507 49 55 60 14.6 11.9 9.5 12.5 11.2 10.2 8.5 7.2 6.2 2.8 2.3 2.0 24.7 22.9 21.1 1.6 1.8 2.0 28.4

Vardhman Textiles ADD 1,009 1,300 28.8 58 0.8 56 118 130 142 14.8 9.7 9.8 8.5 7.8 7.1 6.5 6.0 5.3 1.1 1.0 0.9 13.1 13.0 13.0 2.0 3.0 3.0 0.5

Voltas SELL 510 530 4.0 169 2.3 331 17 21 25 0.4 18.8 18.9 29.4 24.7 20.8 21.9 17.8 14.8 3.9 3.5 3.1 13.9 14.8 15.7 0.7 0.8 1.0 11.8

Whirlpool SELL 1,469 1,350 (8.1) 186 2.5 127 37 46 56 33.9 24.7 20.2 39.7 31.8 26.5 24.0 19.0 15.5 8.6 7.1 6.1 23.7 24.5 24.8 0.5 0.6 1.1 1.8

Others 3,467 47 (10.7) 39.6 18.3 32.3 23.1 19.6 18.9 13.8 10.7 4.6 4.0 3.6 14.3 17.2 18.2 0.6 0.7 0.8 122.2

KIE universe 100,101 1,362 22.7 28.6 15.4 19.9 15.5 13.4 10.1 8.9 7.9 2.5 2.3 2.0 12.6 14.7 15.3 1.5 1.9 2.1

KIE universe (ex-energy) 87,904 1,196 28.7 34.6 17.1 22.3 16.5 14.1 11.2 9.7 8.6 2.8 2.5 2.3 12.6 15.3 16.1 1.4 1.8 2.0

Notes:

(a) We have used adjusted book values for banking companies.

(b) 2019 means calendar year 2018, similarly for 2020 and 2021 for these particular companies.

(c) Exchange rate (Rs/US$)= 73.47

Mkt cap. EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%)

Disclo

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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

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This report is distributed in Singapore by Kotak Mahindra (UK) Limited (Singapore Branch) to institutional investors, accredited investors or expert investors only as defined under the Securities and Futures Act. Recipients of this analysis / report are to contact Kotak Mahindra (UK) Limited (Singapore Branch) (16 Raffles Quay, #35-02/03, Hong Leong Building, Singapore 048581) in respect of any matters arising from, or in connection with, this analysis / report. Kotak Mahindra (UK) Limited (Singapore Branch) is regulated by the Monetary Authority of Singapore. Kotak Securities Limited and its affiliates are a full-service, integrated investment banking, investment management, brokerage and financing group. We along with our affiliates are leading underwriter of securities and participants in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationships with a significant percentage of the companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. Investors should assume that Kotak Securities Limited and/or its affiliates are seeking or will seek investment banking or other business from the company or companies that are the subject of this material and that the research professionals who were involved in preparing this material may participate in the solicitation of such business. Our research professionals are paid in part based on the profitability of Kotak Securities Limited, which include earnings from investment banking and other business. 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 website i.e. www.kotak.com Research Analyst has served as an officer, director or employee of subject company(ies): No We or our associates may have received compensation from the subject company(ies) in the past 12 months. We or our associates have managed or co-managed public offering of securities for the subject company(ies) in the past 12 months. YES. Visit our website for more details We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received compensation or other benefits from the subject company(ies) or third party in connection with the research report. Our associates may have financial interest in the subject company(ies). Research Analyst or his/her relative's financial interest in the subject company(ies): No Kotak Securities Limited has financial interest in the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: YES

Nature of financial interest is investment banking and/or other businesss relationships Our associates may have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report. Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No Kotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No Subject company(ies) may have been client during twelve months preceding the date of distribution of the research report. A graph of daily closing prices of securities is available at https://www.moneycontrol.com/india/stockpricequote/ and http://economictimes.indiatimes.com/markets/stocks/stock-quotes. (Choose a company from the list on the browser and select the"three years" icon in the price chart). Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. CIN: U99999MH1994PLC134051, Telephone No.: +22 43360000, Fax No.: +22 67132430. Website: www.kotak.com / www.kotaksecurities.com. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Telephone No: 42856825. SEBI Registration No: INZ000200137 (Member of NSE, BSE & MSE) 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, October 24, 2018 - Kotak Securities