[Kotak] India Daily, October 26, 2016 - Kotak Securities

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

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

Contents

Daily Alerts

Results

HDFC Bank: Stable trends

Axis Bank: The pain increases

Bharti Airtel: 2QFY17 ahead of estimates; takes Board approval for BHIN stake sale

Bharti Infratel: Remains a good compounding bet

Adani Port and SEZ: Stellar quarter

Dr Reddy's Laboratories: Marginal boost, though thesis intact

Zee Entertainment Enterprises: Steady ship

IDEA: Tough prognosis, tougher to value; we remain believers

Shriram Transport: In-line results, weak outlook

Mahindra & Mahindra Financial: Another weak quarter

Federal Bank: Another good quarter

Adani Power: Still struggling

Jyothy Laboratories: Mixed performance; revenue growth decelerates

Hexaware Technologies: Focus areas drive impressive outperformance

Rallis India: Improving growth outlook

Results, Change in Reco

Asian Paints: Healthy quarter, not much to read either way; downgrade to SELL

INDIA DAILY October 26, 2016 India 25-Oct 1-day 1-mo 3-mo

Sensex 28,091 (0.3) (0.7) 0.4

Nifty 8,691 (0.2) (0.4) 1.2

Global/Regional indices

Dow Jones 18,169 (0.3) 0.4 (1.6)

Nasdaq Composite 5,283 (0.5) 0.5 3.4

FTSE 7,018 0.4 2.9 4.4

Nikkei 17,317 (0.3) 4.7 5.7

Hang Seng 23,396 (0.7) 0.3 5.7

KOSPI 2,017 (1.0) (1.5) (0.5)

Value traded – India

Cash (NSE+BSE) 233 256 256

Derivatives (NSE) 4,628 3,370 4,472

Deri. open interest 3,149 3,268 2,937

Forex/money market

Change, basis points

25-Oct 1-day 1-mo 3-mo

Rs/US$ 66.8 (2) 18 (49)

10yr govt bond, % 7.0 2 (7) (38)

Net investment (US$ mn)

24-Oct MTD CYTD

FIIs (59) (148) 7,362

MFs 79 793 2,905

Top movers

Change, %

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

ADSEZ IN Equity 312.8 9.5 15.7 39.4

MSIL IN Equity 5781.5 1.2 3.8 29.3

ONGC IN Equity 288.8 (1.2) 15.7 28.7

RECL IN Equity 137.2 (0.2) 10.1 28.5

IDFC IN Equity 68.6 (1.9) 13.2 26.5

Worst performers

IDEA IN Equity 75.3 (2.0) (6.2) (30.2)

HDIL IN Equity 80.2 (0.7) (3.8) (21.0)

ABB IN Equity 1080.6 (1.1) (5.3) (16.0)

BHARTI IN Equity 311.8 1.7 (2.7) (15.7)

UT IN Equity 6.1 (2.4) 2.5 (12.9)

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

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

Stable performance aided by cost control and low credit cost

HDFC Bank reported another stable quarter with earnings growth of 20% yoy on the back of

18% revenue growth and benefit of operating leverage. NII growth (20% yoy) led by relatively

moderate loan growth (18% yoy) and stable NIM (20 bps lower qoq and stable yoy) aided this

performance, although there was a relatively subdued performance in non-interest income with

higher contribution from treasury income. Retail loans grew 22% yoy while non-retail grew

15% yoy. Asset quality was broadly stable qoq with gross and net NPL of 1.0% and 0.3%

respectively.

Retail loan growth momentum continues

Despite a fairly challenging environment on growth and high competition, HDFC Bank has been

gaining market share in the retail business while selectively building scale in the corporate

business. The bank continues to exhibit its strength in execution with retail growth for the

largest player growing ahead of industry average. We are yet to see our initial hypothesis of

some loss of market share due to rising competition. While growth was solid across products, it

is the unsecured loan portfolio (~27% of retail loans) that is still leading growth (32% yoy).

There are risks but stronger balance sheet of retail customers is giving greater comfort to cross-

sell these products.

Retain ADD with TP of ₹1,400 (from ₹1,350)

We value the bank at ₹1,400 (from ₹1,350 earlier), which implies 3.7X book and 20X FY2018E

EPS. Increase in target price is due to lower cost of equity. We expect the bank to deliver 20%

CAGR in earnings for FY2017-19E and RoEs in the range of 19-20%. The basic premise of a

strong compounding theme remains intact although the risk of time correction is reasonably

high, especially if we see stronger ideas emerging from other banks or the macro sees a

continuous improvement. We see HDFC Bank as a frontrunner in capturing the fast-growing

retail opportunity. Even as other banks are getting more active in retail, HDFC Bank’s strong

execution track-record of building a strong retail network underpinned by stable liability profile

provides comfort on growth and profitability.

HDFC Bank (HDFCB) Banks

Stable trends. HDFC Bank reported another quarter of stable performance with earnings

growth of 20% yoy on the back of similar operating profit growth supported by cost

control. Loan growth slowed down to 18% yoy led by retail loans growth (22% yoy),

especially in unsecured loan products (32% yoy). We continue to like HDFC Bank’s

strong market positioning in high-growth retail loans and calibrated growth in

corporate loans. Retain ADD with TP of ₹1,400 (from ₹1,350).

ADD

OCTOBER 26, 2016

RESULT

Coverage view: Attractive

Price (`): 1,250

Target price (`): 1,400

BSE-30: 28,091

QUICK NUMBERS

Earnings grew 20%

yoy; NII grew 20%

yoy

Core fee growth of

13% yoy; CASA

growth at 19% yoy

Retain ADD; TP

increased to ₹1,400

(from ₹1,350)

M B Mahesh CFA [email protected]

Mumbai: +91-22-4336-0886

Nischint Chawathe [email protected]

Mumbai: +91-22-4336-0887

Abhijeet Sakhare [email protected]

Mumbai: +91-22-4336-0889

HDFC Bank

Stock data Forecasts/Valuations 2016 2017E 2018E

52-week range (Rs) (high,low) EPS (Rs) 48.6 58.7 69.6

Market Cap. (Rs bn) EPS growth (%) 19.3 20.7 18.5

Shareholding pattern (%) P/E (X) 25.7 21.3 18.0

Promoters 21.4 NII (Rs bn) 275.9 328.8 374.6

FIIs 50.9 Net profits (Rs bn) 123.0 148.4 175.8

MFs 8.7 BVPS 284.1 328.5 380.3

Price performance (%) 1M 3M 12M P/B (X) 4.4 3.8 3.3

Absolute (4.8) 0.3 12.8 ROE (%) 18.3 18.9 19.3

Rel. to BSE-30 (2.8) 0.3 10.3 Div. Yield (%) 0.8 0.9 1.1

Company data and valuation summary

1,318-928

3,165.4

HDFC Bank Banks

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

Exhibit 1: HDFC Bank—quarterly performance March fiscal year-ends, 2QFY16-2QFY17 (` mn)

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Revenue growth is similar to loan growth Revenue and earnings growth, March fiscal year-ends, 2010-2QFY17 (%)

Source: Company, Kotak Institutional Equities

2QFY17 2QFY17E 2QFY16 1QFY17 2QFY17E 2QFY16 1QFY17 1HFY17 1HFY16 2017

Interest income 170,699 169,339 147,725 165,160 0.8 15.6 3.4 335,860 288,136 16.6 695,090

Interest on advances 129,014 125,314 109,483 124,708 3.0 17.8 3.5 253,722 213,955 18.6 522,168

Interest on investments 38,181 40,957 33,977 38,092 (6.8) 12.4 0.2 76,273 66,790 14.2 159,500

Other interest 3,505 3,068 4,265 2,360 14.3 (17.8) 48.5 5,865 7,391 (20.6) 13,421

Interest expense 90,764 90,829 80,916 87,346 (0.1) 12.2 3.9 178,109 157,439 13.1 366,376

Net interest income 79,936 78,510 66,809 77,814 1.8 19.6 2.7 157,750 130,697 20.7 328,714

Non interest income 29,010 31,487 25,518 28,066 (7.9) 13.7 3.4 57,076 50,137 13.8 121,981

- fee income 21,039 21,119 18,689 19,779 (0.4) 12.6 6.4 40,818 35,819 14.0 88,323

- exchange income 2,950 3,675 3,196 3,145 (19.7) (7.7) (6.2) 6,095 6,676 (8.7) 12,768

- sale of invts. 2,835 4,200 1,624 2,769 (32.5) 74.6 2.4 5,604 2,883 94.4 11,000

Non treasury income 26,175 27,287 23,894 25,297 (4.1) 9.5 3.5 51,472 47,254 8.9 110,981

Total income 108,945 109,997 92,327 105,881 (1.0) 18.0 2.9 214,826 180,833 18.8 450,696

Op. expenses 48,700 49,596 41,898 47,689 (1.8) 16.2 2.1 96,389 81,906 17.7 196,734

Employee cost 16,572 16,644 14,140 15,852 (0.4) 17.2 4.5 32,424 27,730 16.9 68,033

Other cost 32,128 32,952 27,758 31,837 (2.5) 15.7 0.9 63,965 54,176 18.1 128,701

Operating profit 60,246 60,401 50,429 58,192 (0.3) 19.5 3.5 118,437 98,928 19.7 253,962

Provisions and cont. 7,490 8,754 6,813 8,667 (14.4) 9.9 (13.6) 16,157 14,093 14.6 30,706

PBT 52,756 51,647 43,616 49,525 2.1 21.0 6.5 102,280 84,835 20.6 223,256

Tax 18,202 17,315 14,922 17,136 5.1 22.0 6.2 35,338 29,183 21.1 74,848

Net profit 34,553 34,332 28,695 32,389 0.6 20.4 6.7 66,942 55,652 20.3 148,407

Tax rate (%) 34.5 34.2 34.6 34.5 34.4 33.5

Op.profit excl treasury gains 57,411 56,201 48,805 55,423 2.2 17.6 3.6 112,833 96,045 17.5 242,962

EPS (Rs) 14 11 13 19.1 6.2 28 23 59

Key balance sheet items (Rs bn)

Total deposits 5,917 5,069 5,738 16.7 3.1

Savings deposits 1,600 1,315 1,527 21.6 4.7

Current deposits 792 698 761 13.4 4.0

Term deposits 3,526 3,056 3,450 15.4 2.2

CASA ratio (%) 40.4 39.7 39.9

Loans 4,944 4,185 4,706 18.1 5.1

Corporate and others 2,456 2,141 2,375 14.7 3.4

Retail credit 2,488 2,045 2,331 21.7 6.7

Housing loans 336 285 336 17.8 (0.1)

Car loans 565 460 522 22.8 8.2

Loan against sec 13 11 12 16.9 4.5

Personal loans 447 319 405 40.2 10.4

Two wheeler 58 47 55 23.1 4.9

Credit cards 213 180 213 18.5 0.4

Commercial vehicles 166 148 153 12.2 8.3

Business Banking 315 273 256 15.5 23.1

(% chg.)

(% chg.)

2010 2011 2012 2013 2014 2015 2016 1QFY17 2QFY17

Net interest income 13.0 25.7 22.2 22.7 16.9 21.2 23.2 21.8 19.6

Non interest income 15.7 13.9 33.4 18.5 15.6 13.6 19.5 14.0 13.7

Total revenue 13.8 22.0 25.5 21.4 16.5 18.9 22.1 19.6 18.0

Total operating expenses 4.2 24.1 29.7 21.1 7.2 16.2 21.4 19.2 16.2

Loans 27.3 27.1 22.2 22.7 26.4 20.6 27.1 23.2 18.1

Balance sheet 21.4 24.7 21.8 18.5 22.8 20.1 20.0 20.0 19.5

Earnings growth 31.4 33.2 31.6 30.2 26.0 20.5 20.4 20.2 20.4

Banks HDFC Bank

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Exhibit 3: HDFC Bank trading at 3.6X one-year forward book One-year forward PER and PBR, 2009-16 (X)

Source: Company, Bloomberg, Kotak Institutional Equities estimates

Exhibit 4: Valuation premium to ICICI Bank has decreased HDFC Bank PBR to ICICI Bank and Axis Bank PBR, 2009-16 (X)


Retail segment continues to drive strong loan growth

HDFC Bank reported 18% yoy loan growth, driven by 22% yoy growth in retail loans.

Contribution of retail loans is at 50% (up ~80 bps qoq). Wholesale segment grew at 15%

yoy. Bank has been focused on lending to high-rated corporates for driving the growth in

the wholesale segment. These growth rates are slower compared to 25-30% growth trends

over the past few quarters.

Unsecured loan growth remains high, contributing to 26% of retail loans

Unsecured loans have remained the mainstay of retail loan growth in past few quarters.

Personal loan and credit card loans together grew 32% yoy and 7% qoq. Contribution of

unsecured retail loans has grown to ~27% from ~22% in FY2014. With strong support

from low-cost funding and yield pressure emerging in the system elsewhere, the bank has

been aggressive in growing the unsecured book, thus providing support to the overall

margins. Given the strength of the retail balance sheets at the moment, the current level of

strong growth does not raise any red-flags at the moment.

Healthy growth continued in auto loans with car and two-wheeler loan growth at 23%. CV

loan growth was 12% yoy, while growth in business banking loans (which includes LAP)

was 15% yoy.

HDFC Bank has grown at ~25% yoy in the past four quarters, well above the industry loan

growth of 10-11%. The bank has indicated in the past that that they intend to grow at 3-6

percent points above the system loan growth and the excess growth over this alpha may

taper down. The bank does not explicitly target any share for retail, but the relative

slowdown in corporate have led to increase in share of retail loans. Our own state-wise

analysis suggests market share gains for HDFC Bank in both deposits and loans across most

states.

We are not too sure if the bank would be able to improve loan growth >25% in the

medium term considering that the underlying business environment remains challenging,

which implies near-term loan growth would be subdued for the industry and the bank is

expected to grow at a premium to industry average.

1.5

2.1

2.7

3.3

3.9

4.5

0

6

12

18

24

30

Oct

-09

Oct

-10

Oct

-11

Oct

-12

Oct

-13

Oct

-14

Oct

-15

Oct

-16

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

1.0

1.5

2.0

2.5

3.0

3.5

Oct

-09

Oct

-10

Oct

-11

Oct

-12

Oct

-13

Oct

-14

Oct

-15

Oct

-16

ICICI Bank Axis Bank

HDFC Bank Banks


Exhibit 5: Proportion of retail loans inched up in 2QFY17 Break-up of loan book, March fiscal year-ends, 2010-2QFY17 (%)


Asset quality broadly stable; coverage ratio stable qoq at 71%

Gross NPL and net NPL ratios were broadly stable qoq at 1.0% and 0.3% of loans

respectively. Provision coverage was stable qoq at 71%. We are less concerned on the NPL

cycle and believe that the risk of further deterioration looks unlikely, which implies that the

scope for provisions to remain at these levels would depend upon the change in the loan

profile (higher share of lending to the unsecured loan portfolio). We forecast 1.1%-1.2%

gross NPL ratio over next two years with credit costs of ~60 bps.

Exhibit 6: Provision coverage stable qoq at 70% Break-up of provisions made during a year, March fiscal year-ends, 2010-16 (Rs mn)

Notes: (a) Comparison with earlier years will be incorrect as FY2013 has seen a change in reporting where income from written-off loans have been shifted to non-interest income from the earlier practice of netting with provisions. FY2012 numbers restated as per the change in accounting policy.


Calculated NIM down ~10 bps qoq; growth in unsecured loans supporting

yields/spreads

Calculated NIM declined 10 bps qoq at 4.4%, with stable spreads declining by similar

quantum to 3.9%. Investment yields declined ~100 bps qoq due to mix towards short-term

papers. Lending yields remained broadly stable yoy. The bank is probably taking a conscious

call on the rate and economic cycle with focus on a high share of fixed-rate loans to give

greater comfort on NIM as we head in to the next couple of low interest rate environment.

We would be cautious at the bank’s NIM as we believe that we are currently at peak lending

spreads in the business and the high competition and shift to corporate loans would make it

challenging to expand NIM from current levels. We expect NII CAGR of ~16% in FY2017-

19E and expect it to lag ~18% loan CAGR. We forecast NIM (calculated) to decline by ~40

bps over FY2017-19E.

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1QFY17 2QFY17

Loan break-up (%)

Retail 60.6 60.3 61.9 61.8 50.2 50.1 54.8 56.9 48.0 47.3 48.2 49.5 50.3

Auto loans 33.1 29.4 26.9 25.7 20.4 20.2 21.5 20.9 16.5 15.7 15.1 15.5 16.0

Housing loans — — — 5.1 6.9 7.2 7.3 7.0 6.3 6.6 6.9 7.1 6.8

Commercial vehicles 14.0 10.2 9.4 8.1 4.8 5.1 6.7 6.7 4.3 3.5 3.2 3.3 3.4

Car loans 13.7 14.9 15.1 15.7 14.3 13.8 13.5 12.9 11.1 11.1 10.8 11.1 11.4

Two wheelers 5.4 4.3 2.4 1.9 1.3 1.2 1.3 1.3 1.1 1.1 1.2 1.2 1.2

Unsecured 13.4 13.6 15.5 12.8 10.0 9.5 10.7 11.5 11.1 11.5 12.4 13.1 13.4

Business loans 6.8 11.1 13.5 12.8 8.7 9.4 9.5 10.2 7.1 5.2 5.4 5.4 6.4

Others 7.2 6.2 6.1 10.4 11.1 11.0 13.1 14.3 13.2 14.9 15.2 15.5 14.6

Corporate 39.4 39.7 38.1 38.2 49.8 49.9 45.2 43.1 52.0 52.7 51.8 50.5 49.7

2010 2011 2012 2013 2014 2015 2016

NPAs 19,389 7,630 10,918 12,342 16,326 17,236 21,336

Standard assets — — 1,505 1,237 2,213 2,963 4,400

Investment depreciation — — 934 522 (41) (38) 152

Floating 500 6,700 7,000 4,000 300 — 1,150

Securitized assets (0) 26 98 59 (262) 46 (29)

Restructured assets 150 (44) (41) (64) (9) 179 (126)

Contingencies 1,361 4,749 (1,645) (1,332) (2,654) 365 373

Oustanding provisions 21,400 19,061 18,769 16,764 15,873 20,750 27,256

Banks HDFC Bank


Core fee growth of 13% yoy

Non-interest income growth of 14% yoy was supported by treasury gains (75% yoy),

exchange income declined 8% yoy. Core fee income growth was 13% yoy. Overall we see

non-interest income growth higher than NII growth as the opportunity for contribution from

treasury income is higher.

Cost growth at 16% yoy, lower than revenue growth

Cost-income ratio improved marginally qoq to 45%. Cost growth of 16% was lower than

18% revenue growth in the quarter. Employee cost growth was 17% while non-staff cost

growth was 16% yoy. Branch network grew 8% yoy to 4,548, adding 7 branches in

2QFY17. We expect cost-income ratio to decline to 43.6% in FY2017E and further decline

to ~40% by FY2019E as we believe that growth in fresh investments in infrastructure would

be modest as compared to balance sheet growth.

CASA ratio healthy at 40%; growth of 19% yoy

Overall deposit growth was lower at 17% yoy compared to nearly greater than 20% yoy

growth in the past few quarters. CASA growth was at 19% yoy was in line with recent

trends. Share of CASA as a % of total deposit and borrowings is stable qoq at 36%.

Other key highlights

Tier-1 ratio stands comfortable at 13.3% with overall CAR at 15.4% as per Basel-3

guidelines.

Exhibit 7: Network expansion was slower in 2QFY17 March fiscal year-ends, 2007-2QFY17 (#)


Exhibit 8: HDFC Bank has one of the highest opex to asset ratios among private sector banks Operating expenses to total assets, March fiscal year-ends, 2013-19E (%)

Notes: (a) 2015 figures are estimates for Axis Bank and ICICI Bank. (b) Opex to total assets not comparable for FY2009-10 as the bank has changed its policy with recognition of origination costs in retail loans.

Source: Companies, Kotak Institutional Equities estimates

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1QFY17 2QFY17

Branches 684 761 1,412 1,725 1,986 2,544 3,062 3,403 4,014 4,520 4,541 4,548

ATMs 1,605 1,977 3,295 4,232 5,471 8,913 10,743 11,176 12,000 12,000 12,013 12,016

Opex to total assets Employee costs to total assets

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

Axis Bank 2.2 2.2 2.2 1.8 2.0 2.0 1.9 0.8 0.7 0.7 0.7 0.7 0.6 0.6

HDFC Bank 3.0 2.6 2.6 2.6 2.5 2.4 2.3 1.1 0.9 0.9 0.9 0.9 0.9 0.8

ICICI Bank 1.8 1.9 1.9 1.9 1.9 1.9 1.8 0.8 0.8 0.8 0.7 0.8 0.8 0.7

IndusInd Bank 2.7 2.8 2.8 3.1 2.9 2.8 2.9 1.0 1.0 1.0 1.0 0.9 0.9 0.9

Yes Bank 1.5 1.7 1.9 2.0 1.9 1.9 2.0 0.8 0.8 0.8 0.9 0.8 0.7 0.8

HDFC Bank Banks


Exhibit 9: Earnings growth requires a strong and consistent improvement in cost-income ratio Cost-income ratio, March fiscal year-ends, 2011-19E (%)

Source: Companies, Kotak Institutional Equities estimates

Exhibit 10: Earnings growth better than revenue growth in

2QFY17 Earnings and revenue growth, March fiscal year-ends, 1QFY14-2QFY17 (%)

Notes: (a) Revenues not strictly comparable as the bank has changed its accounting for certain expenses and income.


Exhibit 11: Earning growth was better than loan growth Earnings and loan growth, March fiscal year-ends, 1QY14-2QFY17 (%)


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

Axis Bank 42.7 44.7 42.6 40.8 40.7 38.5 38.5 40.1 40.8

HDFC Bank 48.1 49.7 49.6 44.6 44.6 44.3 43.6 42.4 40.9

ICICI Bank 42.2 43.0 40.6 36.8 36.8 34.7 38.1 39.4 38.9

IndusInd Bank 48.2 49.4 48.8 46.8 46.8 47.0 47.0 47.1 47.9

Yes Bank 36.3 37.7 38.4 39.4 41.3 41.0 40.8 42.0 42.5

0

7

14

21

28

35

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

Revenue growth (LHS) Earnings growth (RHS)

0

8

16

24

32

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

Loan growth (LHS) Earnings growth (RHS)

Banks HDFC Bank


Exhibit 12: HDFC Bank—key parameters and balance sheet March fiscal year-ends, 2QFY16-2QFY17


2QFY16 3QFY16 4QFY16 1QFY17 2QFY17

Yield management measures (%)

NIM 4.2 4.3 4.3 4.4 4.2

Asset quality details

Gross NPL(Rs mn) 38,280 42,552 43,928 49,209 50,690

Gross NPL (%) 0.9 1.0 0.9 1.0 1.0

Net NPLs (Rs mn) 10,378 12,606 13,204 14,934 14,889

Net NPL (%) 0.3 0.3 0.3 0.3 0.3

Capital adequacy ratios (%)

CAR 15.5 15.9 15.5 15.5 15.4

Tier I 12.8 13.2 13.2 13.3 13.3

Tier II 2.7 2.7 2.3 2.2 2.1

Other key details

Branches 4,227 4,281 4,520 4,541 4,548

ATM network 11,686 11,843 12,000 12,013 12,016

Balance sheet snapshot (Rs bn)

Capital and liabilities

Capital 5 5 5 5 5

Reserves and surplus 4,844 6,514 6,514 8,323 6,407

Deposits 5,069 5,240 5,464 5,738 5,917

Borrowings 523 600 530 689 770

Other liabilities and provisions 325 319 367 361 395

Total 6,600 6,879 7,088 7,551 7,888

Assets

Cash and balances with RBI 257 268 301 284 286

Balances with banks, money at call and short notice 78 58 89 119 179

Investments 1,713 1,823 1,639 2,063 2,067

Advances 4,185 4,364 4,646 4,706 4,944

Fixed assets 32 32 33 35 35

Other assets 335 333 381 344 377

Total 6,600 6,879 7,088 7,551 7,888

HDFC Bank Banks


Exhibit 13: HDFC Bank—estimate changes March fiscal year-ends, 2017-19E (` bn)


Exhibit 14: We expect HDFC Bank to deliver ROEs of 19-20% in the medium term RoE breakup, March fiscal year-ends, 2012-19E (%)

Notes: (a) Net interest income includes income from mutual fund reported under income from investments.


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

Net loan growth (%) 17.4 17.9 18.4 19.6 19.0 18.4

Total assets 8,388 9,898 11,661 8,389 9,898 11,663 (0.0) (0.0) (0.0)

Total income 451 516 593 450 515 595 0.2 0.2 (0.3)

Net interest income 329 375 431 323 368 425 1.9 1.9 1.2

NIM (%) 4.5 4.3 4.2 4.4 4.2 4.1

Other income 122 141 163 127 147 170 (4.0) (4.1) (4.2)

Fee income 88 103 121 91 106 124 (2.4) (2.4) (2.5)

Expenses 197 219 243 195 217 240 1.0 0.9 0.9

Employee cost 68 78 89 68 78 89 - - -

Other cost 129 141 153 127 139 151 1.5 1.5 1.5

Loan loss provisions 30 36 46 31 37 47 (1.0) (2.3) (2.7)

PBT 223 261 304 224 261 307 (0.3) (0.2) (0.9)

PAT 148 176 208 149 176 210 (0.3) (0.2) (0.9)

PBT-treasury+provisions 243 285 338 245 287 343 (0.8) (0.8) (1.5)

EPS (Rs) 59 70 82 59 70 83 (0.3) (0.2) (0.9)

% changeNew estimates Old estimates

2012 2013 2014 2015 2016 2017E 2018E 2019E

Net interest income 4.2 4.3 4.1 4.1 4.2 4.2 4.1 4.0

Other income 1.9 1.9 1.7 1.7 1.7 1.6 1.5 1.5

Treasury (0.1) 0.0 0.1 0.1 0.1 0.1 0.1 0.1

Others 1.9 1.8 1.6 1.6 1.5 1.4 1.4 1.4

Total income 6.0 6.1 5.8 5.8 5.9 5.8 5.6 5.5

Operating expenses 3.0 3.0 2.6 2.6 2.6 2.5 2.4 2.3

Employees 1.1 1.1 0.9 0.9 0.9 0.9 0.9 0.8

Others 1.9 1.9 1.7 1.7 1.7 1.7 1.5 1.4

Pre provision income 3.1 3.1 3.2 3.2 3.3 3.3 3.2 3.2

Loan loss provisions 0.6 0.5 0.4 0.4 0.4 0.4 0.4 0.4

Pre -tax pre extraordinary income 2.4 2.6 2.8 2.8 2.9 2.9 2.9 2.8

RoA pre-tax/prov/treasury/extr. 3.1 3.1 3.1 3.1 3.2 3.1 3.1 3.1

(1- tax rate) 68.8 69.0 66.6 66.6 66.0 66.5 67.5 68.5

RoA 1.7 1.8 1.9 1.9 1.9 1.9 1.9 1.9

Avg assets/avg equity 11.1 11.2 10.3 10.3 9.6 9.9 10.1 10.2

RoE 18.7 20.3 19.4 19.4 18.3 18.9 19.3 19.7

Banks HDFC Bank


Exhibit 15: HDFC Bank growth rates and key ratios March fiscal year-ends, 2014-19E (%)


2014 2015 2016 2017E 2018E 2019E

Growth rates (%)

Net loan 26.4 20.6 27.1 17.4 17.9 18.4

Customer assets growth 26.7 19.7 28.3 17.2 17.7 18.3

Retail loans to Customer assets 47.1 47.6 47.6 48.0 47.6 46.8

Net fixed assets 8.8 0.1 (20.3) (2.6) (4.0) (5.6)

Cash and bank balance 45.1 (8.2) 7.1 31.4 31.8 33.5

Total Asset 22.8 20.1 20.0 18.3 18.0 17.8

Deposits 24.0 22.7 21.2 18.5 20.0 19.5

Current 17.5 19.6 20.2 13.5 20.0 19.5

Savings 30.2 24.5 22.9 18.9 20.6 20.0

Fixed 16.9 21.1 18.4 20.7 19.0 18.4

Net interest income 16.9 21.2 23.2 19.2 13.9 14.9

Loan loss provisions 7.1 8.5 30.9 13.4 17.7 28.0

Total other income 15.6 13.6 19.5 13.5 15.6 15.4

Net fee income 11.0 14.8 17.8 13.8 16.9 17.0

Net capital gains (31.5) 426.6 25.8 50.3 9.1 4.2

Net exchange gains 38.7 (26.6) 19.4 4.0 18.0 18.0

Operating expenses 7.2 16.2 21.4 15.9 11.2 10.8

Employee expenses 5.4 13.7 20.0 19.3 14.7 14.2

Key ratios (%)

Yield on average earning assets 9.8 9.5 9.9 9.5 9.0 8.5

Yield on average loans 11.7 11.1 10.8 10.3 9.7 9.1

Yield on average investments 7.8 7.2 8.9 8.7 8.7 8.6

Average cost of funds 6.1 5.7 5.9 5.5 5.2 4.8

Interest on deposits 5.7 5.7 5.9 5.5 5.1 4.8

Difference 3.7 3.8 4.0 4.0 3.8 3.7

Net interest income/earning assets 4.4 4.4 4.5 4.5 4.3 4.2

New provisions/average net loans 0.7 0.6 0.6 0.6 0.6 0.7

Interest income/total income 70.0 71.3 72.0 72.9 72.6 72.6

Fee income to total income 21.7 21.0 20.2 19.6 20.0 20.4

Fees income to PBT 44.9 43.0 41.6 39.6 39.6 39.8

Net trading income to PBT 0.9 3.8 3.8 4.9 4.6 4.1

Exchange inc./PBT 11.0 6.7 6.6 5.7 5.8 5.9

Operating expenses/total income 45.6 44.6 44.3 43.6 42.4 40.9

Operating expenses/assets 2.7 2.6 2.6 2.5 2.4 2.3

Operating profit /AWF 3.0 2.9 2.9 2.9 2.9 2.8

Tax rate 33.6 33.4 34.0 33.5 32.5 31.5

Dividend payout ratio 19.4 19.6 19.5 19.5 19.5 19.5

Share of deposits

Current 16.7 16.3 16.2 15.5 15.5 15.5

Fixed 55.2 56.0 56.8 56.9 57.2 57.4

Savings 28.1 27.7 27.1 27.6 27.3 27.1

Loans-to-deposit ratio 82.5 81.1 85.0 84.3 82.7 82.0

Equity/assets (EoY) 8.8 10.5 10.3 10.0 9.9 9.8

Asset quality trends (%)

Gross NPL 1.0 0.9 0.9 1.1 1.2 1.3

Net NPL 0.3 0.2 0.3 0.3 0.4 0.4

Slippages 1.9 1.6 1.6 1.7 1.7 1.7

Provision coverage (ex writeoff) 72.6 73.9 69.9 72.8 70.1 69.4

Dupont analysis (%)



Net other income 1.8 1.7 1.7 1.6 1.5 1.5


(1- tax rate) 66.4 66.6 66.0 66.5 67.5 68.5

ROA 1.9 1.9 1.9 1.9 1.9 1.9

Average assets/average equity 11.2 10.3 9.6 9.9 10.1 10.2

ROE 21.3 19.4 18.3 18.9 19.3 19.7

HDFC Bank Banks


Exhibit 16: HDFC Bank P&L and balance sheet March fiscal year-ends, 2014-19E (` mn)


2014 2015 2016 2017E 2018E 2019E

Income statement

Total interest income 411,355 484,699 602,214 695,196 782,641 880,108

Loans 316,869 371,808 448,279 522,168 575,353 639,997

Investments 90,368 98,585 141,200 159,606 189,477 217,446

Cash and deposits 4,118 14,306 12,736 13,421 17,811 22,664

Total interest expense 226,529 260,742 326,299 366,376 408,020 449,482

Deposits from customers 190,482 235,138 291,783 326,718 365,377 406,906

Net interest income 184,826 223,957 275,915 328,820 374,620 430,626

Loan loss provisions 18,829 20,424 26,732 30,306 35,668 45,672

Net interest income (after prov.) 165,997 203,533 249,184 298,514 338,952 384,954

Other income 79,196 89,964 107,517 121,981 141,065 162,725

Net fee income 57,349 65,842 77,590 88,323 103,268 120,792

Net capital gains 1,105 5,816 7,317 11,000 12,000 12,500

Net exchange gains 14,010 10,280 12,277 12,768 15,067 17,779

Operating expenses 120,422 139,875 169,797 196,734 218,827 242,567

Employee expenses 41,790 47,510 57,022 68,033 78,027 89,086

Other Provisions (2,915) 365 373 400 500 1,200

Pretax income 127,728 153,295 186,379 223,256 260,616 303,860

Tax provisions 42,944 51,136 63,417 74,848 84,767 95,794

Net Profit 84,784 102,159 122,962 148,407 175,848 208,066

% growth 26.0 20.5 20.4 20.7 18.5 18.3

Operating profit 142,537 168,267 206,167 242,962 284,784 338,232

% growth 27.1 18.1 22.5 17.8 17.2 18.8

Balance sheet

Assets

Cash and bank balance 395,836 363,315 389,188 511,316 673,936 899,728

Cash 38,505 53,215 55,695 83,542 125,313 187,969

Balance with RBI 214,951 221,890 244,889 294,866 349,261 412,716

Balance with banks 22,948 23,443 9,205 13,808 20,712 31,067

Net value of investments 1,209,511 1,518,201 1,648,817 2,009,442 2,371,641 2,714,909

Govt. and other securities 946,400 1,203,903 1,257,106 1,641,417 2,003,615 2,346,884

Shares 1,348 1,284 739 739 739 739

Debentures and bonds 27,144 11,255 48,874 48,874 48,874 48,874

Net loans and advances 3,030,003 3,654,950 4,645,940 5,456,204 6,433,167 7,619,605

Fixed assets 29,399 29,434 23,472 22,870 21,946 20,726

Net Owned assets 29,399 29,434 23,472 22,870 21,946 20,726

Other assets 251,246 339,131 381,038 388,587 396,890 406,023

Total assets 4,915,995 5,905,031 7,088,456 8,388,418 9,897,579 11,660,991

Liabilities

Deposits 3,673,375 4,507,956 5,464,242 6,476,094 7,774,504 9,291,277

Borrowings and bills payable 450,502 512,989 603,970 744,820 783,482 829,109

Other liabilities 357,332 263,991 293,466 326,232 362,657 403,148

Total liabilities 4,481,209 5,284,937 6,361,678 7,547,146 8,920,643 10,523,534

Paid-up capital 4,798 5,013 5,056 5,056 5,056 5,056

Reserves & surplus 429,988 615,081 721,721 836,216 971,880 1,132,401

Total shareholders' equity 434,786 620,094 726,778 841,272 976,937 1,137,457



Weak overall performance; positive trends on retail front

Axis Bank reported a sharp 83% yoy decline in earnings on the back of 5X yoy increase in

provisions. Operating profits grew 13% yoy as revenue growth of 16% yoy was offset by 19%

yoy growth in operating expenses. NII grew 11% yoy despite 17% yoy loan growth as NIM

declined 20bps yoy/qoq. CASA ratio improved qoq to 41% with strong 20% yoy growth in

savings balances. Retail loans grew 25% yoy while corporate loan growth slowed to 14% yoy

from 20-25% in the past few quarters. Non-interest income grew 24% yoy on a lower base,

despite lower-than-expected gains from the treasury.

Slippages from watchlist rises sharply; slippage also seen in foreign currency exposure

Axis Bank reported 10% (annualized) slippage ratio, with ~80% from the watch list. Overall

impaired loans increased ~150 bps qoq to 5.9% and ~9.5% including the watchlist. The

management has highlighted that macro factors such as slower pace of resolutions, lack of

success in implementing RBI tools (SDR, S4A, etc.) and financial stress at the borrowing entity

level have driven the bank to aggressively declare NPLs from the watchlist. It is a bit

disappointing that the bank has chosen to blame part of the slippages on extraneous factors

especially when a large share of these assets were reported as NPLs. The bank has further

indicated that earlier guidance of 60% slippage from the watch list will be revised upwards. The

pace of slippages in 2HFY17 will be slower, but credit cost will remain high towards improved

provisioning.

Operating profit growth to be under pressure; valuation discomfort leads to our negative view

We maintain our REDUCE rating (TP at ₹510 from ₹530 earlier) and value at ~2X book and 14X

September FY2018 EPS for RoEs in the range of 15% in the medium term. We have reduced

our earnings to factor in higher provisions and pressure emerging on operating profit growth.

The full impact of such sharp increase in NPLs in less than a few quarters would make it

challenging to forecast near term operating profit growth and we do see a fair bit of volatility in

these estimates. We are broadly comfortable valuing corporate balance sheet at 2X book which

implies that the risk of downside is still high for the bank. We see better opportunities in the

market and would continue to prefer ICICI Bank over Axis Bank at current levels.

Axis Bank (AXSB) Banks

The pain increases. Axis Bank’s performance was extremely weak with gross NPLs

increasing sharply by ~160bps to 4.2% after adjusting for the sale of loans to ARCs and

a similar reduction in the watch list. High slippages outside the watchlist and NPLs more

than doubling in foreign currency book are concerns. The management has indicated

that it has reached the peak of slippages, but we are assessing its negative impact on

revenue profile as we see weak operating profit growth in the next few quarters. We

believe that the valuations are still not comfortable to turn positive. Maintain REDUCE.

REDUCE

OCTOBER 26, 2016

RESULT


Price (`): 529

Target price (`): 510

BSE-30: 28,091

QUICK NUMBERS

83% yoy decline in

earnings; 13% yoy

growth in PPoP

5.9% total impaired

loans; 3.5%

remaining in the

watchlist

Maintain REDUCE

with TP at ₹510

(from ₹530 earlier)


Mumbai: +91-22-4336-0886


Mumbai: +91-22-4336-0887


Mumbai: +91-22-4336-0889

Axis Bank



Market Cap. (Rs bn) EPS growth (%) 11.2 (57.4) 110.4




MFs 9.1 BVPS 216.3 211.1 241.7


Absolute (5.1) (1.7) 0.7 ROE (%) 16.8 6.4 12.5

Rel. to BSE-30 (3.1) (1.7) (1.6) Div. Yield (%) 0.9 0.4 0.9


638-367

1,262.8

Axis Bank Banks


Exhibit 1: Axis Bank quarterly results, key parameters March fiscal year-ends, 2QFY16-2QFY17 (` mn)

Notes (A) Loan portfolio has been reclassified with exposure to agriculture split under retail and SME loans.


2QFY17 2QFY17E 2QFY16 1QFY17 2QFY17E 2QFY16 1QFY17 1HFY17 1HFY16 2017E

Interest income 111,591 111,495 99,596 111,139 0.1 12.0 0.4 222,730 198,958 11.9 452,396

Advances 83,862 83,018 73,440 83,198 1.0 14.2 0.8 167,060 144,178 15.9 340,364

Investments 23,806 24,664 21,889 24,363 (3.5) 8.8 (2.3) 48,169 46,640 3.3 96,716

Balance w ith RBI 768 691 916 576 11.1 (16.2) 33.3 1,343 1,797 (25.2) 15,316

Interest expenses 66,452 66,823 58,975 65,970 (0.6) 12.7 0.7 132,422 117,774 12.4 272,370

Net interest income 45,139 44,673 40,621 45,169 1.0 11.1 (0.1) 90,308 81,183 11.2 180,025

Non-interest income 25,397 22,864 20,414 27,383 11.1 24.4 (7.3) 52,779 43,397 21.6 107,002

Treasury income 5,357 10,021 1,675 9,110 (46.5) 219.8 (41.2) 14,467 8,135 77.8 20,000

Income excl treasury 20,040 12,843 18,739 18,273 56.0 6.9 9.7 38,313 35,262 8.7 87,002

Total income 70,535 67,537 61,035 72,552 4.4 15.6 (2.8) 143,087 124,580 14.9 287,028

Operating expenses 29,534 27,892 24,755 27,858 5.9 19.3 6.0 57,392 47,380 21.1 116,727

Employee cost 9,888 9,454 8,293 9,632 4.6 19.2 2.7 19,520 16,386 19.1 39,346

Other operating cost 19,645 18,438 16,462 18,227 6.5 19.3 7.8 37,872 30,994 22.2 77,381

Pre-prov profit 41,002 39,645 36,280 44,694 3.4 13.0 (8.3) 85,696 77,200 11.0 170,301

Provisions 36,227 18,033 7,072 21,172 100.9 412.3 71.1 57,399 18,289 213.8 117,607

Loan loss 36,480 17,993 6,190 18,940 102.7 489.3 92.6 55,420 16,930 227.3 116,507

Profit before tax 4,774 21,612 29,208 23,522 (77.9) (83.7) (79.7) 28,296 58,911 (52.0) 52,693

Tax 1,584 7,272 10,051 7,967 (78.2) (84.2) (80.1) 9,550 19,970 (52.2) 17,677

Profit after tax 3,191 14,340 19,156 15,555 (77.7) (83.3) (79.5) 18,746 38,941 (51.9) 35,017

Tax rate (%) 33.2 34 34.4 33.9 34 34

PBT- treasury gains (582) 11,591 27,533 14,412 (102.1) (104.0) 13,830 50,776 (72.8) 32,693

PBT- treasury gains+provisions 35,645 29,624 34,605 35,584 3.0 0.2 71,229 69,065 3.1 150,301

EPS (Rs) 1 8 7 (83.4) (79.5) 8 16 (52.1) 15

Key balance sheet items (Rs

bn)Deposits 3,802 3,241 3,579 17.3 6.2

Demand deposits 1,700 1,434 1,554 18.5 9.4

Savings 1,078 897 1,002 20.2 7.6

Current 621 537 552 15.7 12.5

Term deposits 2,102 1,807 2,024 16.3 3.8

CASA ratio (%) 44.7 44.2 43.4

Loans 3,532 2,981 3,449 18.5 2.4

Retail loans 1,493 1,194 1,432 25.0 4.3

Housing 806 669 773 20.5 4.3

Non-retail loans 2,039 1,786 2,018 14.1 1.1

SME loans 459 397 436 15.5 5.2

Corporate loans 1,580 1,385 1,582 14.1 (0.1)

Investments 1,246 1,137 1,233 9.6 1.1

Yield management

NIM 3.6 3.9 3.8

Cost of funds 5.7 6.0 5.8

Yield on advances (KS calc) 9.6 10.1 9.7

Yield on investments (KS calc) 7.7 7.9 7.9

Asset quality

Gross NPL (Rs bn) 163.8 44.5 95.5 268.0 71.4

Net NPL (Rs bn) 77.6 15.4 40.1 402.8 93.5

Gross NPL (%) 4.2 1.4 2.5

Net NPL (%) 2.0 0.5 1.1

Watchlist (FB + NFB) (Rs bn) 156.9 NA 228.6

Slippages (Rs bn) 87.7 26.0 36.4 237.0 141.1

Slippages (%) 10.2 3.7 4.3

Write-off (%) 2.3 3.4 0.2

Provision coverage (calc, %) 52.6 65.3 58.0

Restructured loans (%) 1.7 2.6 2.0

(% chg.)

(% chg.)

Banks Axis Bank


Exhibit 2: Balance sheet snapshot March fiscal year-ends, 2QFY15-2QFY17 (` bn)


Exhibit 3: Revenue growth slowdown to be more visible from hereon Revenue and earnings growth, March fiscal year-ends, 2010-2QFY17 (%)


2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17

Balance sheet

Capital 5 5 5 5 5 5 5 5 5

Reserves 413 433 442 464 484 506 527 544 533

Deposits 2,837 2,912 3,224 3,078 3,241 3,383 3,580 3,579 3,802

Borrowings 557 730 798 809 844 920 992 1,062 1,004

Other Liab & prov 138 131 151 170 154 150 151 157 232

Total liabilities 3,950 4,211 4,619 4,525 4,727 4,964 5,255 5,346 5,577

Cash 255 259 361 317 298 330 333 308 372

Investments 1,143 1,088 1,176 1,079 1,137 1,154 1,220 1,233 1,246

Loans 2,422 2,606 2,811 2,846 2,981 3,154 3,388 3,449 3,532

Fixed Assets 24 25 25 25 26 26 35 36 36

Other Assets 106 233 247 258 286 299 278 320 391

Total assets 3,950 4,211 4,619 4,525 4,727 4,964 5,255 5,346 5,577

RoE decomposition (%)

NIM 3.6 3.5 3.4 3.5 3.5 3.4 3.6 3.4 3.3


Total income 5.7 5.5 5.9 5.6 5.3 5.4 5.7 5.5 5.2

Opex 2.4 2.3 2.2 2.0 2.1 2.1 2.2 2.1 2.2

Provisions 0.7 0.5 0.6 1.0 0.6 0.6 0.9 1.6 2.7

PBT 2.5 2.8 3.0 2.6 2.5 2.7 2.5 1.8 0.3

Tax 0.9 0.9 1.0 0.9 0.9 0.9 0.8 0.6 0.1

RoA 1.7 1.9 2.0 1.7 1.7 1.8 1.7 1.2 0.2

Leverage 9.5 9.5 10.0 10.0 9.7 9.7 9.8 9.8 10.0

RoE 15.8 17.8 19.7 17.3 16.0 17.4 16.5 11.5 2.3

2010 2011 2012 2013 2014 2015 2016 1QFY17 2QFY17

Revenue growth

Net interest income 35.8 31.1 22.2 20.6 23.6 19.0 18.3 11.4 11.1


Total revenue 36.0 25.1 20.0 20.7 19.4 16.7 16.0 14.2 15.6

Loans 27.9 36.5 19.2 16.0 16.8 22.2 20.5 21.2 18.5

Balance sheet 22.3 34.4 17.7 19.2 12.5 20.5 13.8 18.1 18.0

Earnings growth 38.5 34.8 25.2 22.1 20.0 18.3 11.8 (21.4) (83.3)

Axis Bank Banks


Exhibit 4: NII growth could come under pressure from hereon NII growth, March fiscal year-ends, 2QFY15-2QFY17 (%)


Exhibit 5: Earnings growth lagging loan growth Earnings growth, March fiscal year-ends, 2QFY15-2QFY17 (%)


Slippages of 10%; 80% from the watchlist; NPLs rise in foreign currency loans

Overall impaired loans increased ~150 bps qoq to 5.9% as GNPL increased 170 bps qoq

to 4.2% while restructured loans declined 30 bps qoq to 1.7%. Calculated provision

coverage ratio declined slightly to 53% from 58% qoq.

Fresh impairment for the quarter increased ~600 bps qoq to 10.2%. About 80% of the

slippages resulted the watchlist. About 90% of the slippages from corporate loan book.

There was no fresh restructuring. SME slippages were 1.5% while retail was lower at

0.5%. We note that the NPLs in the foreign currency exposure more than doubled qoq

and we are not fully aware of the possible overlap with the watch list.

About 40% of the watchlist has already slipped to NPL and currently stands at ₹157 bn

from ~₹250 bn in March 2016.

Outstanding 5/25 stood at ₹51 bn and SDR stood at ₹11 bn at the end of the quarter.

Almost all of SDR and only 10% of 5/25 exposure falls under watchlist.

Management has indicated that 2H slippages will be materially lower than 1H but credit

cost will remain elevated in order to increase provision cover. We note that the critical

portfolios like iron and steel has seen very low provisions currently (~30% levels) which

implies that the improvement in coverage ratio would be more driven by the need to get

coverage levels closer to loss-given-default levels.

20 20 20 23

15 16 20

11 11

16

22 21

27

12

15

12 14

16

-

7

14

21

28

35

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

NII growth Revenue growth

20 23 22 23 23 21 21 21 18

18 18 18 19 19

14

(1)

(21)

(83) (100)

(75)

(50)

(25)

-

25

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

Loan growth Earnings growth

Banks Axis Bank


Exhibit 6: Top 10 sectors comprise 95% of watch list accounts


Exhibit 7: About 80% of watch list exposure was sanctioned in

FY2010-12


Exhibit 8: Nearly half of iron & steel and one-fourth of power sector loans under watch list or already

NPL March fiscal year-end, 2QFY17

Notes: (1) We have taken the fund-based exposure from Basel-3 disclosures and compared that with watch list details provided separately. As a result % exposure figures may differ from actual exposure.


-

9

18

27

36

45

Pow

er

Oil

and g

as

Iron &

ste

el

Infr

ast

ruct

ure

const

ruct

ion

Cem

ent

Indust

rial

s

Engin

eering

Infr

ast

ruct

ure

roa

ds

Const

ruct

ion o

ther

than in

fra

Tele

com

17

100

79

7

-3

-

20

40

60

80

100

FY09 andprior

FY10-FY12 FY13-14 FY15 orlater

Total

Fund based

exposure

Under watch

list Gross NPL

Exposure under

watch list

Exposure

under NPL

(Rs mn) (Rs mn) (Rs mn) (%) (%)

Power 212,345 59,293 5,420 27.9 2.6

Iron & steel 110,315 16,547 28,972 15.0 26.3

Infrastructure 270,801 11,031 8,543 4.1 3.2

Engineering 82,038 4,137 6,209 5.0 7.6

Construction 31,155 2,758 NA 8.9 NA

Cement 52,890 6,895 243 13.0 0.5

Petroleum and others 38,292 17,926 NA 46.8 NA

Axis Bank Banks


Exhibit 9: Weak assets could range from 4-8% of customer assets March fiscal year-end, 2QFY16


Exhibit 10: We expect gross NPLs to rise in the medium term Gross and net NPL ratios, March fiscal year-ends, 2010-19E (%)


Exhibit 11: Loan loss provisions to remain relatively high Slippages and LLP, March fiscal year-ends, 2010-19E (%)


Aboslute

Share of

customer assets

(Rs mn) (%)

Stress loans

Gross NPL 163,787 4.3

Watch list 137,890 3.6

Restructured loans 33,510 0.9

SDR 10,590 0.3

5/25 45,666 1.2

Remaining restructured 33,510 0.9

Remaining 5/25 restructuring 17,230 0.4

Provisioning done

Total provision 109,480 2.8

Specific provision 84,087 2.2

General provision 23,713 0.6

Unutilized contingent provision 1,680 0.0

Potential stress assets

Unprovided stress assets (full watch list) 242,937 6.3

Unprovided stress assets (80% of watch list) 215,359 5.6

Unprovided stress assets (100% of watch list, excl 5/25) 225,707 5.9

FY2018 NW 667,737 36

1.2 1.1 1.0 1.2 1.3 1.4 1.7

4.3

3.8

3.1

0.4 0.3 0.3 0.4 0.4 0.5 0.7

2.3

1.5

0.9

-

1.0

2.0

3.0

4.0

5.0

2010

2011

2012

2013

2014

2015

2016

2017E

2018E

2019E

Gross NPL Net NPL

2.2

1.4 1.3 1.2 1.3 1.2

2.6

2.0

1.5 1.5

0.9 0.7

1.0 1.0 0.9

1.5

3.2

1.8

1.0

-

0.7

1.4

2.1

2.8

3.5

2010

2011

2012

2013

2014

2015

2016

2017E

2018E

2019E

Slippages Loan loss provisions

Banks Axis Bank


Exhibit 12: Fresh additions to restructured loans were high for the quarter due to DCCO extension Movement of the restructured loans, March fiscal year-ends, 1QFY16-2QFY17 (` mn)

Notes: (1) The bank has adjusted outstanding provisions which is ~10% of the opening loans resulting in a higher-than-expected reduction in the restructured loans portfolio


Loan growth remains fairly strong at 17% yoy, retail loan growth at 25%

Loan growth for the bank remains fairly strong as both retail (25% yoy) and corporate (14%

yoy) growth rates remain better than overall industry. Share of retail loans which has been

growing over past few quarters now stands at 42%, up 80 bps qoq. Retail growth was

driven by unsecured loans (+50% yoy), housing loans including LAP (25% yoy) and auto

loan (41% yoy). Share of unsecured loans is low at 12% of retail book.

SME loan growth was better than last few quarters at 16% yoy. Corporate loan growth has

slowed down to 14% yoy from 22-25% yoy growth seen over previous eight quarters. This

could reflect reducing refinancing opportunities in the market which drive loan growth for

few private sector banks.

We maintain our key argument that the portfolios of the large three private banks are likely

to remain broadly similar over the next few years with the exception that HDFC Bank would

not have a large exposure in the housing portfolio and would be replacing it with a

marginally higher share of unsecured and auto loan portfolio.

We expect loan growth to remain above industry average, ~16-17% CAGR in FY2017-19E.

Management has guided for 18-20% loan growth in FY2017.

Exhibit 13: Share of lending to retail has been rising in recent years Break-up of loans, March fiscal year-ends, 2010-2QFY17 (%)

Notes: (1) There has been a change in the definition of retail and SME loans in FY2015. Exposure in agriculture has been divided into SME and retail. Under retail, this has been included under others


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

Opening restructured loans 81,660 85,150 84,260 77,450 80,720 73,630

Fresh restructuring 7,400 4,630 1,260 9,270 5,440 -

Reductions 3,910 5,520 8,070 6,000 12,530 6,610

Closing balance 85,150 84,260 77,450 80,720 73,630 67,020

Fresh restructuring (% of opening loans) 9.1 5.4 1.5 12.0 6.7 -

Reductions (% of opening loans) 4.8 6.5 9.6 7.7 15.5 9.0

2010 2011 2012 2013 2014 2015 2016 1QFY17 2QFY17

Retail loans 20.0 19.5 22.1 27.4 32.7 39.8 40.9 41.5 42.3

Housing 14.1 13.3 16.6 19.7 22.1 21.9 21.7 22.4 22.8

Auto 2.6 2.1 2.9 3.8 3.3 3.2 3.7 3.7 3.8

Personal 1.9 2.7 1.3 1.9 2.4 3.6 4.5 4.6 5.1

Others 1.3 1.4 1.3 1.9 4.8 11.2 11.0 10.8 10.6

Non retail loans 80.0 80.5 77.9 72.6 67.3 60.2 59.1 58.5 57.7

SME 17.5 15.0 14.0 15.2 14.9 14.8 13.2 12.6 13.0

Corporate 50.3 53.3 53.6 49.9 46.1 45.4 45.9 45.9 44.7

Agriculture 12.2 12.2 10.2 7.5 6.3 — — — —

Axis Bank Banks


Exhibit 14: Axis Bank exposure to infrastructure has icreased in the current quarter Break-up of top exposure (funded), March fiscal year-ends, 2010-2QFY17 (%)


CASA ratio broadly stable at 41%; acceleration in deposit growth

Overall deposit growth was 17% yoy. CASA grew ~20% yoy with SA and CA growth of

20% and 16% yoy respectively. CASA ratio on daily average basis was 41%. Overall deposit

profile is fairly granular with CASA and retail term deposit comprises 81% of total deposits,

compared to 78% a year earlier. Saving account traction for Axis Bank has been quite strong

in the quarter.

Exhibit 15: Axis Banks’ savings account balances have been in line with peers Growth (absolute) in savings account balances, March fiscal year-ends, 2010-2QFY17 (` bn)


Exhibit 16: CASA ratio and cost of deposits across banks March fiscal year-ends, 2QFY15-2QFY17 (%)


Exhibit 17: Average ticket size of savings deposits is stable around `58,000 level Saving deposits and number of accounts, March fiscal year-ends, 2QFY15-2QFY17


2010 2011 2012 2013 2014 2015 2016 1QFY16 2QFY16

Chemicals — 3.3 1.8 1.6 — — — — —

Financial companies 11.0 14.3 12.7 7.0 4.4 4.7 4.6 4.5 5.1

Real Estate 5.4 — 3.2 2.6 2.8 3.2 4.1 3.4 3.0

Retail trade 6.5 4.5 3.2 2.9 3.8 3.4 3.3 3.2 3.2

Food processing 6.4 4.4 4.1 4.1 3.9 3.1 2.7 2.7 -

Metals and metal products (1) 6.0 7.4 4.3 4.2 4.7 5.9 NA 7.1 7.2

Power generation and distribution 5.1 5.7 4.7 4.9 5.5 6.0 6.2 6.1 5.8

Infrastructure 8.2 8.2 6.8 7.6 7.3 7.2 6.8 7.2 6.9

Telecom — 5.0 — — — 0.5 1.3 - -

Shipping and logistics — 2.9 2.5 2.3 2.4 — — — —

Engineering and electronics 2.9 3.7 3.4 3.5 3.6 3.2 3.3 3.1 3.1

Petrochemicals and petroleum products 2.7 — — — — 0.5 1.1 0.8 0.8

Total of 10 top sectors 58.7 59.3 46.6 40.7 39.2 37.6 33.2 38.0 35.0

2010 2011 2012 2013 2014 2015 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17

Axis Bank 80 70 108 121 58 105 102 98 128 175 154 181

HDFC Bank 150 136 106 142 149 218 193 207 231 230 278 284

ICICI Bank 122 137 92 96 135 157 140 151 164 194 215 NA

2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17

Axis 44.5 43.1 44.8 42.8 44.2 43.2 47.3 43.4 44.7 6.2 6.2 6.3 6.1 6.0 5.9 5.8 5.8 5.7

HDFCB 43.2 40.9 44.0 39.6 39.7 40.0 43.2 39.9 40.4 6.0 6.1 5.9 6.0 5.9 5.8 5.8 5.6 5.5

ICICI 43.7 44.0 45.5 44.1 45.1 45.2 45.8 45.1 NA 6.1 6.0 5.9 5.8 5.9 5.6 5.5 5.5 NA

IndusInd 33.9 34.1 34.1 34.7 34.7 35.0 35.2 34.4 36.5 8.0 7.8 7.7 7.6 7.4 7.2 7.1 6.9 6.6

Yes 22.5 22.6 23.1 23.4 25.5 26.6 28.1 29.6 30.3 8.3 8.1 7.8 7.6 7.3 7.1 7.0 7.0 6.8

CASA Cost of deposits


Saving Deposits (Rs bn) 799 800 883 848 897 928 1,058 1,002 1,078

No of accounts (# mn) 14 15 15 15 16 17 17 18 19

Estimated avg. ticket size of saving deposits (Rs) 57,054 55,140 59,256 55,409 56,426 55,878 61,508 55,388 57,846

Banks Axis Bank


Non-interest income up 24% yoy; core fees up 7% yoy

Non-interest income growth was strong at 24% yoy, supported by 3X yoy growth in

treasury income on a low base. Core fees were up 7% yoy with retail fee up 17%

contributing 43% of total fee income. Corporate fees declined 4% yoy despite strong loan

growth as the incremental growth is coming from well-rated clients where ability to

generate fee income is lower. Fee income growth in SME and transaction banking also

remained soft around 8-9%.

Exhibit 18: Contribution on retail banking to fee income increased in recent quarters Break-up of fee income, March fiscal year-ends, 2010-2QFY17 (%)

Notes:

(A) Part of FX fees were reclassified in 1QFY16, from treasury fees to transaction banking


Exhibit 19: Axis Bank’s share of fee income to assets has been declining in recent years Fee income to assets, March fiscal year-ends, 2010-19E (%)


Other highlights for the quarter

Cost-income for the quarter was at 42% ~350 bps higher qoq to pressure on revenues.

Expense growth at 19% yoy, with nearly 19% yoy growth in staff and non-staff

expenses. Management guidance on cost is 40% for 2HFY17 with targeted branch

additions at 350-400 branches in FY2017.

Overall capital adequacy stands comfortable at 15.2% with tier-1 at 12.0%, as per Basel-

3 guidelines (including net profits for the quarter). There was 80 bps capital consumption

on account of RWA growth in 1HFY17.

2010 2011 2012 2013 2014 2015 2016 1QFY17 2QFY17

Corporate banking/credit 28.0 31.8 33.7 30.7 26.8 27.0 25.8 25.0 25.0

Business/transaction Banking 12.0 9.4 8.5 7.7 7.3 8.3 19.7 27.0 26.0

Capital markets 1.6 1.7 1.1 1.0 — — — — —

Retail banking 27.3 24.5 25.1 29.4 29.3 38.4 40.3 42.0 43.0

Agri & SME banking 7.3 5.9 5.8 6.1 5.8 5.5 5.0 4.0 5.0

Treasury and debt capital mkts 17.5 18.6 19.1 20.2 20.0 20.8 8.8 2.0 1.0

Others 6.3 8.1 6.6 5.0 10.9 (0.1) 0.3 - -

Total (Rs bn) 31 41 51 58 67 68 75 17 19

% of average assets 1.9 2.0 1.9 1.9 1.8 1.6 1.5 1.4 1.5

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

Axis Bank 1.6 1.6 1.7 1.7 1.5 1.5 1.4 1.3 1.3 1.3

HDFC Bank 1.5 1.5 1.5 1.5 1.4 1.3 1.3 1.2 1.2 1.2

ICICI Bank 1.4 1.5 1.3 1.2 1.2 1.2 1.2 1.1 1.2 1.1

IndusInd Bank 0.7 0.7 1.4 1.5 1.5 1.8 1.9 1.8 1.7 1.6

Yes Bank 1.3 1.3 1.2 1.3 1.3 1.7 1.7 1.6 1.5 1.4

Axis Bank Banks


Exhibit 20: Axis Bank: estimate changes March fiscal year-ends, 2017-19E (` mn)


Exhibit 21: Axis bank trading at 2.2X one-year forward book One-year forward trading PER and PBR, October 2008-2016 (X)


Exhibit 22: Axis bank is trading at a discount to peers

Axis bank trading premium to peers, 2008-2016 (X)


New estimates Change (%)

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

Net interest income 180,025 203,967 231,886 185,833 208,017 236,342 (3.1) (1.9) (1.9)

NIM (%) 3.4 3.3 3.2 3.5 3.3 3.2

Customer assets 4,123 4,768 5,504 4,160 4,768 5,480 (0.9) (0.0) 0.4

Loan loss provisions 116,507 73,784 49,067 64,039 59,288 48,946 81.9 24.4 0.2

Other income 107,002 116,166 130,538 107,521 118,607 133,461 (0.5) (2.1) (2.2)

Fee income 68,753 78,378 89,351 71,771 81,819 93,274 (4.2) (4.2) (4.2)

Treasury income 20,000 17,000 17,500 17,500 16,000 16,500 14.3 6.3 6.1

Operating expenses 116,727 135,102 155,453 113,313 131,070 150,727 3.0 3.1 3.1

Employee expenses 39,346 43,961 48,712 37,767 42,119 46,580 4.2 4.4 4.6

PBT 52,693 110,048 156,705 114,901 135,067 168,930 (54.1) (18.5) (7.2)

Tax 17,677 36,367 51,002 38,545 44,635 54,981 (54.1) (18.5) (7.2)

Net profit 35,017 73,681 105,703 76,356 90,432 113,950 (54.1) (18.5) (7.2)

Old estimates

0

1

2

3

4

5

0

7

14

21

28

35

Oct

-08

Oct

-09

Oct

-10

Oct

-11

Oct

-12

Oct

-13

Oct

-14

Oct

-15

Oct

-16


0.5

0.7

0.9

1.1

1.3

1.5

Oct

-08

Oct

-09

Oct

-10

Oct

-11

Oct

-12

Oct

-13

Oct

-14

Oct

-15

Oct

-16

Banks Axis Bank


Exhibit 23: Axis Bank – key financial ratios and growth rates March fiscal year-ends, 2014-2019E (%)


2014 2015 2016 2017E 2018E 2019E

Growth rates (%)

Net loan 16.8 22.2 20.5 14.9 16.6 16.2

Total Asset 12.5 20.5 13.8 14.7 16.6 16.4

Deposits 11.2 14.8 11.0 18.2 18.7 17.9

Current 0.8 15.2 13.4 19.9 20.4 19.5

Savings 21.9 13.5 19.8 18.5 18.2 17.7

F ixed 9.9 15.3 5.9 17.5 18.5 17.4


Loan loss provisions 19.1 1.5 110.9 149.2 (36.7) (33.5)

Total other income 13.0 13.0 12.0 14.2 8.6 12.4

Net fee income 7.3 13.5 9.6 2.5 14.0 14.0

Net capital gains (44.1) 203.7 2.4 96.3 (15.0) 2.9

Net exchange gains 128.5 (35.2) 29.6 11.0 13.0 13.0


Employee expenses 9.4 19.7 8.4 16.5 11.7 10.8

Key ratios (%)





Interest on deposits 5.8 5.7 5.4 5.5 5.4 5.3

Difference 2.8 3.1 3.3 3.1 3.0 3.0




Fee income/total income 27.9 27.1 25.6 24.0 24.5 24.7


Tax rate 33.5 33.5 33.6 33.5 33.0 32.5

Div idend payout ratio 15.1 15.2 14.5 15.5 15.5 15.5

Share of deposits

Current 17.3 17.4 17.8 18.0 18.3 18.5

F ixed 55.0 55.2 52.7 52.3 52.2 52.0

Savings 27.7 27.4 29.6 29.6 29.5 29.5



Dupont analysis (%)



Net other income 2.0 2.0 1.9 1.9 1.8 1.7


(1- tax rate) 66.5 66.5 66.4 66.5 67.0 67.5

ROA 1.7 1.7 1.7 0.6 1.1 1.4


ROE 17.4 17.8 16.8 6.4 12.5 15.9

Axis Bank Banks


Exhibit 24: Axis Bank - income statement and balance sheet March fiscal year-ends 2014-2019E (` mn)


2014 2015 2016 2017E 2018E 2019E

Income statement (Rs mn)


Loans 219,504 258,678 300,406 340,364 387,746 447,093

Investments 83,431 84,478 93,776 96,716 109,223 124,926






Other income 74,052 83,650 93,715 107,002 116,166 130,538

Net fee income 53,938 61,211 67,076 68,753 78,378 89,351





Depreciation on investments (1,003) (510) 840— — — —

Other provisions 223 1,617 (10,498) 1,100 1,200 1,200

Pretax income 93,490 110,578 123,937 52,693 110,048 156,705

Tax provisions 31,314 36,999 41,700 17,677 36,367 51,002

Net Profit 62,177 73,578 82,237 35,017 73,681 105,703

% growth 20.0 18.3 11.8 (57.4) 110.4 43.5

PBT+provisions-treasury 111,285 123,905 150,850 150,301 168,031 189,471

% growth 29.5 11.5 13.0 -71.3 184.6 49.6

Balance sheet (Rs mn)


Cash 41,646 42,154 41,205 49,446 59,335 71,202

Balance w ith RBI 128,767 156,034 182,407 206,098 232,477 260,356

Balance w ith banks 2,218 1,941 1,956 2,348 2,817 3,381

Net value of investments 1,135,484 1,175,502 1,220,062 1,392,482 1,639,688 1,927,311

Govt. and other securities 690,967 812,460 850,430 1,025,568 1,272,187 1,559,078

Shares 6,118 7,390 12,439 12,439 12,439 12,439


Net loans and advances 2,300,668 2,810,830 3,387,737 3,893,973 4,538,438 5,274,881

F ixed assets 24,102 25,143 35,232 35,866 35,441 34,955

Net owned assets 24,102 25,143 35,232 35,866 35,441 34,955

Other assets 89,808 246,858 278,391 320,149 368,172 423,398

Total assets 3,832,449 4,619,324 5,254,676 6,029,586 7,031,436 8,181,565

Deposits 2,809,446 3,224,419 3,579,676 4,232,153 5,025,219 5,922,529

Borrow ings and bills payable 538,691 836,955 1,028,718 1,111,015 1,244,337 1,393,657


Total liabilities 3,450,244 4,172,559 4,723,027 5,469,265 6,410,785 7,474,363

Paid-up capital 4,698 4,741 4,766 4,766 4,766 4,766

Reserves & surplus 377,506 442,024 526,883 555,555 615,886 702,436

Total shareholders' equity 382,205 446,765 531,649 560,321 620,651 707,202



2QFY17 earnings print – fine on most counts

Headline consolidated financials. Consolidated revenues of ₹246.5 bn (+3.4% yoy) were

1.7% ahead of our estimates while consolidated EBITDA at ₹94.4 bn (+14.6% yoy) came in

4.6% ahead. The outperformance in EBITDA was driven by better-than-expected EBITDA

print across all business segments, especially India wireless and Africa. Recurring net income

of ₹13.7 bn (+79% yoy) was materially ahead of our estimate of ₹9.52 bn.

India wireless financials. India wireless revenues grew 7.9% yoy to ₹147.4 bn, 0.6%

ahead of our estimate; India wireless EBITDA growth of 19% yoy to ₹62.5 bn reflected sharp

control on costs, which grew only 1% yoy in absolute terms, driving a 390 bps yoy EBITDA

margin expansion. India wireless EBIT grew 8% yoy (after a few quarters of subdued growth

or decline) as the impact of higher spectrum amortization expenses starts to fade. Revenue

split – voice (70% of revenues) revenues saw a 3.6% qoq decline and grew 3.8% yoy while

data revenues (25% of total) grew a subdued 1.4% qoq and 24% yoy.

India wireless KPIs. Bharti delivered an impressive voice traffic growth of 11% yoy even as the

same came at the expense of voice RPM (down 3.2% qoq and 6.2% yoy to 32.4 paise/min;

still below Idea’s 33.1 paise/min for 2QFY17). Voice ARPU fell to an all-time-low

₹132/sub/month. Data performance was similar to Idea’s – strong 13% qoq and 55% yoy

volume growth (to 178 bn MB) coupled with a sharp 10% qoq and 20% yoy dip in

realization to 20.1 paise/MB; net result – a subdued 1.4% qoq growth in data revenues.

Board approval for monetization of stake in Bharti Infratel

Bharti has taken approval from its Board to explore monetization of a ‘significant’ stake in

Bharti Infratel. The Board has authorized a committee of Directors to evaluate potential options.

The company has not indicated what ‘significant stake’ means. We note that Bharti currently

owns 71.96% stake in Bharti Infratel (BHIN), which at BHIN’s current market cap, would be

worth ₹517 bn.

We shall revise our model post the earnings conference call.

Bharti Airtel (BHARTI) Telecom

2QFY17 ahead of estimates; takes Board approval for BHIN stake sale. For

whatever it is worth, and it may not be worth much given that full impact of Jio launch

would be felt from 3QFY17 onwards, Bharti reported a solid, ahead-of-expectations,

earnings print for 2QFY17 with 15% consolidated and 19% India wireless yoy EBITDA

growth. In a surprising development, the company’s Board has authorized a committee

of Directors to evaluate options for a significant stake sale in Bharti Infratel. We shall

update our earnings post the earnings conference call.

BUY

OCTOBER 26, 2016

RESULT

Coverage view: Cautious

Price (`): 312


BSE-30: 28,091

Rohit Chordia [email protected]

Mumbai: +91-22-4336-0885

Abhas Gupta [email protected]

Mumbai: +91-22-4336-0881

Bharti Airtel



Market Cap. (Rs bn) EPS growth (%) (35.3) (6.5) (12.9)


Promoters 66.7 Sales (Rs bn) 965.3 1,001.7 1,056.9


MFs 2.7 EBITDA (Rs bn) 339.8 358.2 356.1

Price performance (%) 1M 3M 12M EV/EBITDA (X) 6.4 6.3 6.4

Absolute (4.6) (16.2) (13.2) ROE (%) 6.1 5.4 4.6



385-282

1,246.4

Bharti Airtel Telecom


Other key highlights

India wireless EBITDA grew a strong 19% yoy as the company expanded margins by

390 bps yoy to 42.4% (flat qoq; healthy in a seasonally weak quarter), (2) South Asia

business reported positive EBITDA versus our expectation of a marginal loss, (3) Africa

EBITDA of ₹12.2 bn was 13% ahead of our estimate on the back of better-than-expected

margin delivery; revenues were marginally below our expectations, and (4) non-wireless

India businesses continued their strong momentum with home broadband (EBITDA up

28% yoy) and DTH (EBITDA up 29% yoy) doing particularly well.

We note that Idea’s yoy India wireless revenue growth was not materially different

(+7.2% yoy); the sharp delta in EBITDA growth (+19% for Bharti versus +2% for Idea)

reflects the timing difference in mobile broadband network rollouts between the two

companies in addition to Bharti’s improved cost execution in the past couple of years

(‘war on waste’ projects started under the new India CEO yielding results).

Data ARPU was stable at ₹200/sub/month. Active 3G/4G subs base at end-2Q stood at

41.3 mn, +4.7 mn qoq. The company rolled out around 10,500 3G/4G base stations to

take the total MBB base station count to 148,078; these sites are present at 110,382

distinct towers (69% of 2G site count of 158,934).

Consolidated capex for the quarter was ₹53 bn (₹46 bn India/SA, US$100 mn Africa)

taking 1HFY17 capex to ₹102 bn (₹88 bn India/SA, US$215 mn Africa) – broadly in line

with the company’s overall guidance for FY2017E, while recurring net income of ₹13.7

bn (+79% yoy) was materially ahead of our estimate of ₹9.52 bn.

Net debt at end-2QFY17 stood at ₹815 bn, down marginally from ₹835 bn at end-

1QFY17. Adjusted for October auction payouts, net debt would be around ₹958 bn, for a

net debt/ 2Q annualized EBITDA of 2.54X, fairly comfortable in our view.

Africa wireless performance, especially on the margin front, was a positive surprise. We

note that the company’s 2QFY17 Africa financials reflected divestment of operations in

two countries – Burkina Faso and Sierra Leone. Company’s disclosures suggest that these

two operations had TTM revenues and EBITDA of US$293 mn and US$115 mn,

respectively. Implied EBITDA margin of nearly 39% for the divested operations was

materially ahead of the overall margin of 21.5%, implying 20% TTM margins for the

continuing business. Versus this 20%, the company reported 23.1% for 2QFY17, an

impressive performance. We note that the company has shown good performance on the

margins front in Africa in the past four quarters; however, revenue growth still remains

subdued.

Thoughts on Bharti Infratel stake sale announcement. We are surprised with this

announcement and can only guess the possible motive given that Bharti does have any

pressing need to raise cash; we suspect the motive could be one or more of the following

– (1) sending a comfort signal to the rating agencies to ensure that debt ratings do not

fall post the increase in leverage after the company spent another US$2.1 bn in the

recent auction, or (2) sending a soft signal to RIL that Bharti has enough options to load

up on ammunition to fight a ‘battle of capital’ even if RIL makes it a stretched one.

Telecom Bharti Airtel


Exhibit 1: Bharti - 2QFY17 results, Ind-AS, March fiscal year-ends (Rs mn)


2QFY16 1QFY17 2QFY17 qoq yoy 2QFY17E Deviation (%)

Consolidated results

Revenues 238,357 255,465 246,515 (3.5) 3.4 242,365 1.7

Operating costs (156,014) (159,984) (152,113) (152,147)

EBITDA 82,343 95,481 94,402 (1.1) 14.6 90,218 4.6

EBITDA margin (%) 34.5 37.4 38.3 37.2

Depreciation and Amortization (42,390) (50,402) (49,560) (51,100)

EBIT 39,953 45,079 44,842 (0.5) 12.2 39,118 14.6

EBIT margin (%) 16.8 17.6 18.2 16.1

Net finance (cost)/income (19,448) (19,160) (20,186) (20,900)

PBT 20,505 25,919 24,656 (4.9) 20.2 18,218 35.3

Tax provision (14,454) (12,330) (12,074) (9,109)

PAT before minority interest 6,051 13,589 12,582 9,109

Minority interest (1,040) (2,335) (1,581) (2,335)

Equity in earnings of affiliates 2,625 2,548 2,697 2,750

Extraordinary items 7,728 818 909 —

Reported net income 15,364 14,620 14,607 (0.1) (4.9) 9,524 53.4

Adjusted net income 7,636 13,802 13,698 (0.8) 79.4 9,524 43.8

Reported EPS 3.84 3.66 3.65 (0.1) (4.9) 2.38

Segmental performance

Wireless - India 83,932 84,861

Revenues 136,556 150,526 147,353 (2.1) 7.9 146,533 0.6

EBITDA 52,624 63,875 62,492 (2.2) 18.8 61,349 1.9

OPM (%) 38.5 42.4 42.4 41.9

ARPU (Rs/sub/month) 193 196 188 (4.0) (2.7) 188 (0.0)

MOU (min/sub/month) 404 414 406 (2.0) 0.5 396 2.6

RPM (Rs/min) 0.478 0.473 0.463 (2.0) (3.1) 0.475 (2.5)

EPM (Rs/min) 0.187 0.203 0.199 (1.7) 6.9 0.20 (0.7)

Total minutes (bn) 282.1 314.8 313.4 (0.5) 11.1 305.4 2.6

Wireless - South Asia

Revenues 4,045 4,143 4,169 0.6 3.1 4,700 (11.3)

EBITDA (242) (26) 210 NM NM (100) (309.7)

OPM (%) (6.0) (0.6) 5.0 (2.1)

Bharti Africa

Revenues 62,721 62,493 53,048 (15.1) (15.4) 53,442 (0.7)

EBITDA 12,695 13,988 12,247 (12.4) (3.5) 10,849 12.9

EBITDA margin (%) 20.2 22.4 23.1 20.3

Home services

Revenues 6,149 6,644 7,063 6.3 14.9 6,744 4.7

EBITDA 2,618 2,914 3,347 14.9 27.8 2,967 12.8

OPM (%) 42.6 43.9 47.4 44.0

Airtel Business

Revenues 25,004 26,793 29,817 11.3 19.3 25,000 19.3

EBITDA 7,880 7,733 8,440 9.1 7.1 7,500 12.5

OPM (%) 31.5 28.9 28.3 30.0

Passive infra business

Revenues 13,724 14,557 14,962 2.8 9.0 14,775 1.3

EBITDA 6,126 6,838 7,106 3.9 16.0 7,018 1.2

OPM (%) 44.6 47.0 47.5 47.5

Others (incl DTH)

Revenues 7,740 9,141 9,276 7.5 21.4 9,414 (1.5)

EBITDA 2,153 2,540 2,957 30.1 54.0 2,655 11.4

OPM (%) 27.8 27.8 31.9 28.2

Change (%)



Exhibit 2: Bharti - quarterly P&L break-up, India/ Africa, March fiscal year-ends (Rs mn)

Source: Company

2QFY16 3QFY16 4QFY16 1QFY17 2QFY17

India/ South Asia business

Revenues 175,636 178,153 185,085 192,972 193,467

EBITDA 69,648 70,851 76,889 81,483 82,155

EBITDA margin (%) 39.7 39.8 41.5 42.2 42.5

D&A (30,911) (32,201) (34,916) (38,379) (38,416)

EBIT 38,737 38,650 41,973 43,104 43,739

Net interest cost (including FX gains/ (losses)) (8,643) (10,606) (14,570) (14,713) (12,924)

PBT 30,094 28,044 27,403 28,391 30,814

Provision for taxes (11,747) (9,824) (8,281) (9,258) (10,537)

ETR (%) 39.0 35.0 30.2 32.6 34.2

PAT before min int and share of assoc earnings 18,347 18,220 19,122 19,133 20,277

Minority interest (2,310) (2,196) (2,750) (2,675) (3,177)

Share of associates 2,625 2,722 2,915 2,548 2,697

Recurring PAT 18,662 18,746 19,288 19,006 19,797

EPS (Rs/share) 4.7 4.7 4.8 4.8 4.9

Africa business

Revenues 62,721 62,506 64,511 62,493 53,048

EBITDA 12,695 13,287 14,233 13,998 12,247

EBITDA margin (%) 20.2 21.3 22.1 22.4 23.1

D&A (11,479) (11,340) (13,247) (12,023) (11,144)

EBIT 1,216 1,947 986 1,975 1,103


PBT (9,589) (1,299) (1,240) (2,472) (6,158)


ETR (%) NA NA NA NA NA

PAT before min int and share of assoc earnings (12,296) (5,426) (4,371) (5,544) (7,695)

Minority interest 1,270 557 531 340 1,596

Share of associates

Recurring PAT (11,026) (4,869) (3,841) (5,204) (6,099)

EPS (Rs/share) (2.8) (1.2) (1.0) (1.3) (1.5)

Consolidated

Revenues 238,357 240,659 249,596 255,465 246,515

EBITDA 82,343 84,138 91,122 95,481 94,402

EBITDA margin (%) 34.5 35.0 36.5 37.4 38.3

D&A (42,390) (43,541) (48,163) (50,402) (49,560)

EBIT 39,953 40,597 42,959 45,079 44,842


PBT 20,505 26,745 26,163 25,919 24,656


ETR (%) 70.5 52.2 43.6 47.6 49.0

PAT before min int and share of assoc earnings 6,051 12,794 14,751 13,589 12,582

Minority interest (1,040) (1,639) (2,219) (2,335) (1,581)

Share of associates 2,625 2,722 2,915 2,548 2,697

Recurring PAT 7,636 13,877 15,447 13,802 13,698

Extraordinary items 7,728 (2,795) (2,252) 818 909

Reported PAT 15,364 11,082 13,195 14,620 14,607

EPS (Rs/share) 3.8 2.8 3.3 3.7 3.7



Exhibit 3: India wireless revenues and RPM by segment

Source: Company

Exhibit 4: Key India data business performance indicators shared by Bharti

Source: Company

Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16

Revenues (Rs mn)

India wireless 124,589 130,118 131,622 136,000 134,784 137,850 143,975 148,765 145,065

Voice 99,371 100,758 100,457 101,580 97,853 98,038 102,361 105,430 101,604

Non-voice 25,218 29,360 31,165 34,420 36,931 39,812 41,614 43,336 43,461

SMS and VAS 6,733 7,749 7,487 7,731 7,278 7,350 7,419 7,501 7,119

Data 18,032 21,138 23,191 26,090 28,979 31,839 33,552 35,250 35,760

Others 453 474 488 600 674 623 644 584 582

qoq growth (%)

India wireless (1.1) 4.4 1.2 3.3 (0.9) 2.3 4.4 3.3 (2.5)

Voice (3.6) 1.4 (0.3) 1.1 (3.7) 0.2 4.4 3.0 (3.6)

Non-voice 10.1 16.4 6.2 10.4 7.3 7.8 4.5 4.1 0.3

SMS and VAS (2.3) 15.1 (3.4) 3.3 (5.8) 1.0 0.9 1.1 (5.1)

Data 15.7 17.2 9.7 12.5 11.1 9.9 5.4 5.1 1.4

Others 6.6 4.7 3.1 22.8 12.4 (7.5) 3.3 (9.3) (0.4)

RPM (Rs/min)

India wireless 0.472 0.486 0.474 0.468 0.478 0.475 0.467 0.473 0.463

Voice 0.377 0.377 0.362 0.349 0.347 0.338 0.332 0.335 0.324

Non-voice 0.096 0.110 0.112 0.118 0.131 0.137 0.135 0.138 0.139

SMS and VAS 0.026 0.029 0.027 0.027 0.026 0.025 0.024 0.024 0.023

Data 0.068 0.079 0.083 0.090 0.103 0.110 0.109 0.112 0.114

Others 0.002 0.002 0.002 0.002 0.002 0.002 0.002 0.002 0.002

Contribution (%)

India wireless 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Voice 79.8 77.4 76.3 74.7 72.6 71.1 71.1 70.9 70.0

Non-voice 20.2 22.6 23.7 25.3 27.4 28.9 28.9 29.1 30.0

SMS and VAS 5.4 6.0 5.7 5.7 5.4 5.3 5.2 5.0 4.9

Data 14.5 16.2 17.6 19.2 21.5 23.1 23.3 23.7 24.7

Others 0.4 0.4 0.4 0.4 0.5 0.5 0.4 0.4 0.4

RPM growth qoq (%)

India wireless 1.5 3.0 (2.6) (1.3) 2.1 (0.7) (1.5) 1.1 (2.0)

Voice (1.1) 0.0 (4.0) (3.4) (0.7) (2.7) (1.5) 0.8 (3.2)

Non-voice 13.0 14.9 2.2 5.5 10.6 4.7 (1.4) 1.9 0.7

SMS and VAS 0.3 13.5 (7.0) (1.3) (3.0) (1.9) (4.8) (1.1) (4.7)

Data 18.7 15.7 5.6 7.5 14.5 6.7 (0.6) 2.8 1.9

Others 9.4 3.3 (0.8) 17.3 15.9 (10.1) (2.6) (11.2) 0.1


Data (2G & 3G) KPIs

Subs ('000s) 40,108 42,249 46,386 49,470 51,013 54,860 58,216 58,903 62,659

As % of total subs 18.9 19.5 20.5 21.4 21.7 23.3 23.2 23.0 24.1

Total volumes (mn MB) 67,668 77,281 86,627 102,015 114,960 133,946 146,768 158,035 178,125

qoq growth (%) 21.7 14.2 12.1 17.8 12.7 16.5 9.6 7.7 12.7

Usage per customer (MB) 563 622 656 706 765 843 859 904 1,000

Realization per MB (paise) 26.7 27.4 26.8 25.6 25.2 23.8 22.9 22.3 20.1

qoq growth (%) (4.9) 2.6 (2.0) (4.6) (1.6) (5.6) (3.8) (2.5) (10.0)

ARPU (Rs/sub/month) 150 170 176 181 193 200 196 202 201

Implied data revenue (Rs mn) 18,047 21,144 23,233 26,090 28,935 31,839 33,566 35,250 35,760

qoq growth (%) 15.7 17.2 9.9 12.3 10.9 10.0 5.4 5.0 1.4

yoy growth (%) 73.8 74.3 70.3 67.3 60.3 50.6 44.5 35.1 23.6

As % of India wireless revenues 14.5 16.2 17.7 19.2 21.5 23.1 23.3 23.7 24.7

3G + 4G KPIs

Active 3G subs ('000s) 15,445 16,940 19,441 21,360 23,985 28,094 35,460 36,572 41,335

As % of total data subs 38.5 40.1 41.9 43.2 47.0 51.2 60.9 62.1 66.0



Exhibit 5: Key operating metrics - India mobile and DTH

Source: Company


India mobile

Customer Base ('000s) 211,752 217,215 226,017 230,662 235,212 243,289 251,237 255,735 259,941

VLR (%) 95.8 96.1 95.8 95.8 96.2 96.0 97.0 97.5 97.4

Net Additions ('000s) 2,341 5,463 8,802 4,645 4,550 8,077 7,948 4,497 4,206

Pre-Paid (as % of total base) 94.68 94.63 94.60 94.43 94.20 94.10 94.00 93.88 93.70

Monthly Churn (%) 3.1 2.7 2.5 3.3 3.5 3.4 3.3 3.6 3.7

ARPU (Rs/month) 198 202 198 198 193 192 194 196 188

MOU (min/month) 418 416 418 424 404 405 415 414 406

RPM (Rs/min) 0.472 0.486 0.474 0.468 0.476 0.475 0.468 0.473 0.463

Voice

Minutes on network (mn mins) 263,905 267,485 277,869 290,802 282,138 290,459 307,988 314,831 313,403

Voice ARPU (Rs/month) 158 157 151 148 140 137 138 139 132

Voice RPM (Rs/min) 0.377 0.377 0.362 0.349 0.346 0.338 0.333 0.335 0.324

Voice as % of total 79.8 77.4 76.3 74.7 72.6 71.1 71.1 70.9 70.0

Non-voice

Non-voice as % of total 20.2 22.6 23.7 25.3 27.4 28.9 28.9 29.1 30.0

SMS & VAS 5.4 6.0 5.7 5.7 5.4 5.3 5.2 5.0 4.9

Data 14.5 16.2 17.6 19.2 21.5 23.1 23.3 23.7 24.7

Others 0.4 0.4 0.4 0.4 0.5 0.5 0.4 0.4 0.4

Data

Data subs ('000s) 40,108 42,249 46,386 49,470 51,013 54,860 58,216 58,903 62,659

- 3G subs 15,445 16,940 19,441 21,360 23,895 28,094 35,460 36,572 41,335

Total MBs on the network (mn MBs) 67,668 77,281 86,627 102,015 114,960 133,946 146,768 158,035 178,125

Data ARPU 150 170 176 181 193 200 196 202 201

Data Usage per customer (MB/month) 563 622 656 706 765 843 859 904 1,000

Data Realization per MB (Rs/MB) 0.267 0.274 0.268 0.256 0.252 0.238 0.229 0.223 0.201

Network

No. of cell sites 141,290 142,898 146,539 147,616 149,518 151,200 154,097 157,055 158,934

Of which Mobile Broadband towers 45,730 57,078 70,178 88,376 105,465 108,015 110,382

Total Mobile Broadband Base stations 54,381 66,322 80,432 99,297 118,197 137,567 148,078

Revenue per cell site per month (Rs) 295,645 305,283 303,748 308,227 301,435 305,630 314,570 318,741 306,055

DTH

Digital TV Customers ('000s) 9,540 9,810 10,073 10,412 10,576 11,106 11,725 12,149 12,405

Net additions 152 270 263 339 164 530 619 424 256

Average Revenue Per User (ARPU) 220 214 214 222 224 229 229 233 232

Monthly Churn 1.1 1.0 1.0 0.8 1.3 0.7 0.8 0.8 1.2



Exhibit 6: Key operating metrics - Africa

Source: Company


Africa

Customer Base ('000s) 71,367 74,599 76,263 78,323 80,835 82,070 80,564 76,986 78,145

VLR (%) 85.69 83.99 83.90 83.53 82.41 82.53 84.84 87.13 81.19

Net Additions 2,281 3,232 1,664 2,060 2,512 1,235 (1,505) (3,578) 1,159


Monthly Churn (%) 6.08 5.51 5.80 5.40 5.82 5.88 6.68 4.95 5.25

ARPU (US$/month) 5.4 5.1 4.4 4.3 4.3 4.2 4.2 3.8 3.9

MOU (min/month) 138 140 137 141 145 138 143 145 159

RPM (US cents/month) 3.94 3.63 3.21 3.02 2.94 3.05 2.94 2.65 2.45

Voice


Voice ARPU 4.1 3.9 3.3 2.9 2.8 2.8 2.7 2.6 2.7

Voice RPM 3.00 2.78 2.41 2.04 1.97 2.02 1.91 1.82 1.72

Voice as % of total 76.2 76.5 74.8 72.8 72.7 72.0 70.0 68.7 70.3

Non-voice

Non-voice 23.8 23.5 25.2 27.2 27.3 28.0 30.0 31.3 29.7

SMS & VAS 9.8 9.1 9.3 9.7 10.0 10.1 10.5 11.0 10.3

Data 10.1 10.5 11.5 12.9 13.5 14.3 15.5 16.5 16.3

Others 3.9 3.9 4.4 4.6 3.9 3.6 3.9 3.9 3.1

Data

Data subs ('000s) 11,049 11,242 12,289 13,039 14,292 15,406 15,788 16,425 18,071


Data ARPU 3.08 3.18 3.22 3.06 3.10 3.02 3.15 3.17 2.87

Data Usage per customer (MB/month) 253 290 321 359 403 453 507 585 670

Data Realization per MB (US cents/MB) 1.22 1.10 1.00 0.85 0.77 0.67 0.62 0.54 0.43

Network

No. of cell sites 17,935 18,347 18,819 19,146 19,330 19,712 20,196 19,793 19,866

Of which no. of 3G sites 21,283 20,095 17,781 17,196 17,449 17,321 13,128 13,186 13,280



Exhibit 7: Key operating metrics - South Asia

Source: Company

Exhibit 8: Africa performance trajectory

Source: Company


South Asia

Customer Base ('000s) 7,678 7,892 8,603 9,019 9,852 10,792 10,238 9,245 8,800

VLR (%) 87.8 89.6 88.8 88.1 85.4 84.9 90.4 97.0 96.5

Net Additions (972) 214 711 416 833 940 (554) (994) (444)


Monthly Churn (%) 7.30 4.10 3.10 3.84 3.92 3.93 4.37 6.36 4.14

ARPU (US$/month) 2.64 2.65 2.40 2.32 2.19 2.03 2.11 2.04 2.32

MOU (min/month) 351 358 351 345 336 326 321 310.07 329

RPM (US cents/month) 0.753 0.739 0.684 0.673 0.654 0.624 0.656 0.658 0.704

Voice


Voice ARPU 2.07 2.16 1.88 1.81 1.66 1.53 1.53 1.45 1.57

Voice RPM 0.589 0.603 0.536 0.523 0.494 0.469 0.475 0.467 0.477

Voice as % of total 78.3 81.5 78.3 77.8 75.6 75.1 72.5 71.0 67.7

Non-voice

Non-voice 21.7 18.5 21.7 22.2 24.4 24.9 27.5 29.0 32.3

SMS & VAS 8.6 6.2 5.7 5.6 5.8 5.5 6.1 6.2 6.8

Data 10.2 11.1 12.9 14.2 16.0 16.6 17.9 19.0 21.5

Others 2.9 3.1 3.1 2.4 2.6 2.8 3.6 3.8 4.0

Data

Data subs ('000s) 1,645 1,837 2,197 2,435 2,885 2,957 2,941 2,749 2,742


Data ARPU 1.30 1.33 1.27 1.22 1.22 1.19 1.32 1.33 1.08

Data Usage per customer (MB/month) 465 535 578 560 768 828 858 926 1,097

Data Realization per MB (US cents/MB) 0.28 0.25 0.22 0.22 0.16 0.14 0.15 0.14 0.10

Network

No. of cell sites 6,935 6,810 6,867 6,941 7,003 7,065 7,083 7,089 7,085

Of which no. of 3G sites 3,106 3,043 2,907 2,955 2,981 2,975 4,115 4,147 4,177


Revenues 1,140 1,103 1,000 970 967 949 953 936 790

EBITDA (A) 270 241 207 200 195 202 210 209 182

EBITDA margin (%) 23.7 21.9 20.7 20.6 20.2 21.2 22.0 22.4 23.1

Capex (B) (265) (284) (364) (150) (162) (184) (276) (112) (102)

Cash taxes (C) (56) (23) (7) (46) (22) (54) (38) (41) 1

Net interest cost (D) (132) (167) (249) (150) (166) (49) (33) (66) (108)

Cash funding gap = A - B - C - D (183) (232) (413) (146) (155) (86) (136) (10) (27)

Note:

(a) We have computed interest as EBIT less PBT; this includes some non-operating cash expenses charges below EBITDA (forex gains or losses, for example)

(b) We have not included changes in working capital in the above computations for lack of data.



Exhibit 9: Bharti - condensed consolidated balance sheet, March fiscal year-ends, 2QFY16-2QFY17

(Rs bn)

Source: Company

Sep-15 Dec-15 Mar-16 Jun-16 Sep-16

Assets

Net fixed assets 617 637 658 642 643

Intangible assets 936 1,071 1,122 1,157 1,149

Non-current Investments 84 86 90 81 112

Deferred tax assets 50 48 47 43 41

Other non-current assets 171 125 112 82 87

Total long-term assets 1,858 1,968 2,029 2,005 2,032

Current assets

Short term investments 16 16 16 47 16

Inventories 2 2 2 2 1

Receivables 68 67 66 67 68

Receivable from sale of tower assets 23 — — — —

Cash and equivalents 77 43 51 36 23

Other financial assets 22 23 27 20 23

Other current assets 56 67 60 63 56

Total current assets 263 218 222 235 188

Current assets ex-cash and inv 169 159 154 152 149

Current liabilities

Payables 251 260 256 271 279

Other current liabilities 209 218 211 208 205

ST provisions 2 2 2 2 3

Total current liabilities 462 480 469 481 486

Net current assets (200) (262) (248) (246) (299)

Net current assets ex-cash and inv (293) (321) (315) (329) (337)

Assets held for sale 6 4 7 11 3

Total Assets 1,665 1,710 1,788 1,770 1,736

Liabilities and shareholders' equity

Share capital 20 20 20 20 20

Reserves and surplus 621 632 648 623 621

Non-controlling interest 51 53 55 52 45

Total Equity 692 705 723 695 686

Borrowings 913 945 1,005 1,018 988

DTL 13 13 13 10 7

Other LT liabilities and provisions 46 46 48 48 55

Total liabilities and equity 1,665 1,710 1,788 1,770 1,736



Key changes to our earnings model

We have cut our service revenue estimates marginally to bake in lower growth in

rental/tenant/month for Indus; however, this gets offset by higher energy revenues driving a

0.8-1.6% increase in overall revenue forecasts for FY2017-19E. We have also increased our

EBITDA estimates slightly (0.3-1.2% over FY2017-19E) to reflect higher energy margins.

We have also increased capex assumption for FY2017 by about 3% to reflect higher-than-

expected capex in 2QFY17; this now stands revised to ₹19.5 bn.

Takeaways from the earnings call

The management highlighted the following during its 2QFY17 earnings call—(1) site rollouts

related to spectrum investments made by operators in the Oct 2016 auctions are expected to

accelerate the pace of tenancy addition in the second half of FY2017, (2) Bharti Infratel has

been awarded a Letter of Award for the Bhopal Smart City project, the company would need to

make investments over the next 12 months in towers, wifi hotspots, etc. after which it will look

at monetizing the investment, overall impact is expected to be minimal, (3) BHIN does not

expect entry/expansion by well-funded competitors to create a material impact as the company

has a geographically well-rounded portfolio of towers, high tenancy ratio (thereby lowering the

rentals for operators) and strong anchor relationships, and (4) on inorganic opportunities such

as GTL Infrastructure, the company said that they are currently not engaging with any player,

however, they would be open to looking at attractive opportunities.

Target price stands revised to ₹410/share on rollover to Sep 2018E, retain ADD

We believe that BHIN continues to offer good value at the current levels given its stable revenue

profile, improving margin (and hence return) profile and growth (in terms of tenancies, loading,

etc.) potential. The company currently trades at 10X Sep 2018E EBITDA, which we believe is

reasonably attractive. We have revised our target price to ₹410/share, primarily driven by

rollover to Sep 2018E; retain our positive stance.

Bharti Infratel (BHIN) Telecom

Remains a good compounding bet. BHIN delivered a good 2QFY17 posting robust

EBITDA growth, even though tenancy additions were weak. We believe that the current

market price provides a fair entry point for investors looking at investing in the stock from

a long-term perspective. We have broadly retained our estimates (1-2% changes in key

headline financials); however, our target price stands revised at ₹410/share, up from

₹400/share on rollover to Sep 2018E. We continue to like the franchise, retain ADD.

Open-offer speculation post Bharti’s announcement that it will consider selling significant

stake in BHIN could lead to the stock trading above fair value in the short term.

ADD

OCTOBER 26, 2016

RESULT


Price (`): 379


BSE-30: 28,091


Mumbai: +91-22-4336-0885


Mumbai: +91-22-4336-0881

Bharti Infratel





Promoters 71.7 Sales (Rs bn) 123.1 132.8 141.3


MFs 0.2 EBITDA (Rs bn) 53.7 59.2 64.0


Absolute 2.3 3.6 (2.4) ROE (%) 13.5 16.7 18.6

Rel. to BSE-30 4.4 3.7 (4.6) Div. Yield (%) 0.8 3.0 3.2


437-302

701.6

Telecom Bharti Infratel


Exhibit 1: Bharti Infratel – key changes to estimates, March fiscal year-ends, 2017-19E

Source: Kotak Institutional Equities estimates

Exhibit 2: SOTP-based valuation of Bharti Infratel


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

Consolidated financials

Revenues (Rs mn) 132,791 141,289 149,341 131,682 139,870 147,013 0.8 1.0 1.6

Service revenues (Rs mn) 84,456 90,564 96,465 85,215 91,191 96,546 (0.9) (0.7) (0.1)

EBITDA (Rs mn) 59,220 63,961 68,594 59,042 63,647 67,764 0.3 0.5 1.2

EBITDA margin (%, on service revenues) 70.1 70.6 71.1 69.3 69.8 70.2

PAT (Rs mn) 29,187 31,467 35,297 29,073 31,481 35,022 0.4 (0.0) 0.8

EPS (Rs/share) 15.8 17.0 19.1 15.7 17.0 18.9 0.4 (0.0) 0.8

Capex (Rs mn) 19,533 19,020 17,663 19,042 18,976 17,617 2.6 0.2 0.3

Operational metrics (standalone)

# of towers 39,358 40,258 41,008 39,458 40,358 41,108 (0.3) (0.2) (0.2)

Tenancy ratio (X) 2.19 2.28 2.34 2.21 2.28 2.34 (0.8) (0.0) (0.0)

Service rental/ tenant/ month (Rs) 37,794 38,142 38,524 37,579 37,926 38,301 0.6 0.6 0.6

Operational metrics (Indus)

# of towers 123,381 125,581 126,581 122,481 124,681 125,681 0.7 0.7 0.7

Tenancy ratio (X) 2.31 2.42 2.49 2.34 2.42 2.49 (1.4) 0.0 0.0

Service rental/ tenant/ month (Rs) 33,182 33,629 34,065 33,619 34,058 34,470 (1.3) (1.3) (1.2)

Revised Earlier Change (%)

Rs mn Sep-2018E

Bharti Infratel standalone

EV (DCF-based) 391,169

Net debt/ (cash) (72,442)

Equity value - A 463,611

Implied EV/tower (Rs mn) 9.6

Implied EV/EBITDA (X) 12.6

42% stake in Indus

Indus EV (DCF-based) 912,975

Net debt/ (cash) 38,961

Equity value 874,013

Attributable equity value for BIL's 42% stake - B 367,086

Implied EV/tower - Indus (adjusted) (Rs mn) 7.2

Implied EV/EBITDA - Indus (adjusted) (X) 10.9

Overall valuation

Total EV 697,929

Total EV (US$ mn) 10,575

Implied EV/EBITDA (X) 10.9

Total Equity value = A + B 757,279

Implied PE (X) 24.1

Total Equity value (US$ mn) 11,474

Fair value estimate (Rs/share) 409

Key assumptions

BIL (standalone) WACC (%) 10.0

BIL (standalone) terminal growth (%) 3.5

Indus WACC (%) 9.5

Indus terminal growth (%) 3.5

Bharti Infratel Telecom


Exhibit 3: Condensed financial statements, BIL consolidated, March fiscal year-ends, 2016-19E (Rs mn)


2016 2017E 2018E 2019E

Key financials

Income statement

Gross revenues 123,314 132,791 141,289 149,341

Service revenues 78,105 84,456 90,564 96,465

Power and fuel reimbursements 45,209 48,335 50,725 52,876

EBITDA 54,108 59,220 63,961 68,594

EBIT 31,872 36,565 41,000 45,471

PBT 35,766 44,009 47,024 52,863

PAT 22,474 29,187 31,467 35,297

OPM (on gross,%) 43.9 44.6 45.3 45.9

OPM (on net,%) 69.3 70.1 70.6 71.1

EPS (Rs/share) 11.85 15.78 17.01 19.08

Balance sheet

Total Equity 182,262 166,473 171,870 177,586

Borrowings 17,046 19,146 21,246 21,246

Other liabilities 45,469 47,735 49,588 51,263

Total equity and liabilities 244,777 233,354 242,704 250,095

Net fixed assets 142,019 138,897 134,956 129,495

Cash and equivalents 49,193 39,330 51,211 62,731

Other assets 53,565 55,127 56,537 57,869

Total assets 244,777 233,354 242,704 250,095

Cash flow statement

Operating cash flow 33,041 45,103 48,847 51,371

Capex (20,645) (19,533) (19,020) (17,663)

Free cash flow 12,396 25,570 29,827 33,709

Key operating metrics

End-period tower base (#) 88,808 91,178 93,002 94,172

End-period tenants (#) 195,035 205,846 219,125 228,284

Tenancy (X) 2.20 2.26 2.36 2.42

Rental/tenant/month (Rs) 34,499 35,113 35,518 35,935

Revenue/tower/annum 894,163 938,477 983,433 1,030,756

EBITDA/tower/annum 619,440 658,056 694,547 732,942

Telecom Bharti Infratel


Exhibit 4: Condensed financial statements, BIL standalone, March fiscal year-ends, 2016-19E


Exhibit 5: Condensed financial statements, Indus Towers, March fiscal year-ends, 2016-19E


2016 2017E 2018E 2019E

Key financials

Income statement

Gross revenues 55,584 60,200 63,919 67,608



EBITDA 24,884 27,827 29,939 32,084

EBIT 13,334 16,305 18,258 20,272

PBT 18,723 35,351 36,423 40,801

PAT 12,623 27,927 28,774 32,233

EPS (Rs/share) 13,274.00 29,204.37 28,774.00 32,232.66

Balance sheet

Total Equity 182,420 164,566 166,465 168,312

Borrowings ― ― ― ―



Net fixed assets 61,332 56,576 52,080 47,349


Other assets 73,433 74,139 74,707 75,271

Total assets 207,032 190,663 193,705 196,665




Tenancy (X) 2.12 2.19 2.28 2.34


Revenue/tower/annum 915,114 978,394 1,022,504 1,067,251


2016 2017E 2018E 2019E

Key financials

Income statement

Gross revenues 161,262 172,836 184,216 194,603



EBITDA 69,581 74,747 81,004 86,927

EBIT 44,138 48,239 54,146 59,996

PBT 40,576 47,607 50,887 57,900

PAT 26,350 29,992 32,059 36,477

Balance sheet

Total Equity 133,752 131,353 132,635 134,094

Borrowings 40,586 45,586 50,586 50,586



Net fixed assets 192,486 194,459 193,862 190,210


Other assets 28,395 30,433 32,437 34,266

Total assets 224,336 228,797 236,768 239,566




Tenancy (X) 2.25 2.31 2.42 2.49


Revenue/tower/annum 878,161 908,075 953,684 1,002,752




2QFY17: Share gains in container, SEIS income and sub-5% interest drive PAT outperformance

ADSEZ reported an in-line overall volumes of 43 mn tons, up 17% yoy and much ahead of 6%

growth for all-India ports. The large 15% revenue outperformance was primarily on account of

(1) one-off income from CT-4 and (2) income from Services Exports from India scheme (SEIS),

which would sustain incrementally as well. The latter, coupled with higher share of high-margin

assets (Dhamra) and cargo classes (container) propped up port-level EBITDA margin to 69% and

to 71% on an adjusted basis, ahead of our estimate. Interest cost contracted qoq and remained

below 5%, down 290 bps yoy and versus our estimate of 7%. All this led to a PAT of ₹10.9 bn,

up 61% yoy. Ind-AS adjustments had limited impact on financials.

On target to meet the higher end of volume growth guidance and of reduction in related L&A

Over 1HFY17, the company has grown its volume by 12%. The same has been driven by new

line additions in container segment and uptick in other cargo classes (coastal shipping of coal,

coking coal, rock phosphate, etc.). Recent commissioning of CT-4 and berth 3 at Dhamra as

well as impending commissioning of Ennore terminal berth 4 at Dhamra (by 4QFY17) bode well

for ADSEZ reaching/crossing the higher end of its 10-15% volume growth guidance. What also

enthuses is the decline in related party L&A and related ₹10 bn decline in net debt levels over

1HFY17. With this aim met, the company reaffirmed its guidance of reducing related-party L&A

(total ~₹25 bn) by end-March-2017.

Strategy: Long-term aim set high and wide

ADSEZ has set high aims for all its three key businesses. It aims to grow its port operations by

growing its container portfolio (aims to become #1 by volumes in FY2017) and adding new

cargo classes (container and fertilizers on the east coast, LPG at Mundra). For its SEZ business,

it cited renewed interest of private sector to leverage the Make in India and coastal shipping

themes; continues to add new clients. It also has big plans for its logistics business, as it builds

up its assets base (rakes, ICD); 2QFY17 terminal volumes of ~80,000 TEUs establish it as the

largest private-sector rail operator. We revise our estimates by 10-16% for FY17-19E on higher

volume and margin and lower interest cost estimates (Exhibit 9). Our one-year forward SoTP

based target price increases to ₹315 (earlier ₹255) led by higher estimates, roll-forward to Sep

2018E and lower cost of capital (to account for lower interest cost and risk-free rate).

Adani Ports and SEZ (ADSEZ) Infrastructure

Stellar quarter. 2QFY17 strong results reflect Adani Port’s ability to outperform in a

weak market while improving its margin profile; sub-5% interest cost further propped

up PAT. Based on 1HFY17 results, it is on track to meet its annual guidance of 10-15%

volume growth and ~₹25 bn reduction in related-party L&A. With a good portfolio of

assets across key businesses (containers, liquid, SEZ, logistics), it is well-placed to

establish leadership position in each and accelerate growth as market revives.

ADD

OCTOBER 26, 2016

RESULT


Price (`): 312


BSE-30: 28,091

Harish Bihani [email protected]

Mumbai: +91-22-4336-0884

Aditya Mongia [email protected]

Mumbai: +91-22-4336-0883

Ajinkya Bhat [email protected]

Mumbai: +91-22-4336-0888

Adani Port and SEZ



Market Cap. (Rs bn) EPS growth (%) 135.0 23.5 (16.1)




MFs 3.7 EBITDA (Rs bn) 46.5 53.8 59.8


Absolute 13.7 38.3 (0.4) ROE (%) 23.9 23.9 16.8

Rel. to BSE-30 16.0 38.3 (2.6) Div. Yield (%) 0.3 0.5 0.7


317-169

647.8

Infrastructure Adani Ports and SEZ


Strong results led by ramp-up at newer ports, containers and non-coal bulk

Strong growth in volumes, as expected. Adani Ports reported a strong 17% yoy

growth in volumes in 2QFY17 driven by the new ports while Mundra port volumes grew

4% yoy. Among the various cargo classes, container segment stood out with a 30% yoy

increase with new service additions happening at key ports (Mundra, Kattuppali and

Hazira). Overall volumes of 43 mn tons in 2QFY16 were in line with our estimate.

The same is much ahead of the 6% growth in volumes for all Indian ports, as per the

company (4% volume growth in major ports).

CT-4 related income boosts beat on revenues. The company reported revenues of ₹22

bn, up 21% yoy. The revenues include ₹1.9 bn income from project advisory services for

CT-4. On an adjusted basis, the revenues at ₹19.9 bn were up 10% yoy and 5% ahead

of our estimates.

Adjusted port-level EBITDA margin of 71% in 2QFY17. EBITDA for the quarter stood

at ₹14.5 bn, up 23% yoy, again propped up by project advisory income. Assuming an

80% margin booked on such income would imply a port-level EBITDA margin of ~65%

versus our estimate of 63.5%. Higher share of container cargo (36% in 2QFY17 versus

32% in FY2016) is supporting the improving margin profile. Port-level EBITDA calculated

as per the company’s preferred methodology has breached the 70% mark in 2QFY16

(71%, up 400 bps yoy). It excludes the low-margin logistics business and also adjusts for

the ₹640 mn expense charged off a the Kattupalli port.

Low interest expense further boosts PAT; up 61% yoy. Interest expense continues to

be low at ₹2.4 bn, further declining 11% qoq and down 32% yoy. On an annualized

basis it would amount to ~4.6% interest cost (versus ~5.5% in FY2016). Higher

realizations, lower interest cost and CT-4 related income led to a PAT of ₹10.9 bn, much

ahead of our estimate of ₹7 bn and up 61% yoy.

Non-operational L&A and net debt decline by over ₹10 bn in 1HFY17. Net debt has

declined by ₹13 bn in 1HFY17 in spite of ₹12 bn of capex incurred reflecting the benefits

of reduction in non-operational L&A. Adani Ports has thus met its target to reduce its

non-operational L&A by ₹10 bn by end-Sep-2016. It aims to reduce the entire portion by

end-March 2017. Based on our understanding, there were ~₹40 bn of non-operational

L&A as of end-March 2016. Such inflow of cash is more than sufficient to take care of

the capex spending for FY2017.

On track to meet higher end of volume-growth guidance. Overall, volumes have

grown 12% yoy in 1HFY17 and the company is on track to reach the higher end of its

10-15% volume growth guidance of 10-15%. We note commissioning of new terminals

(CT-4 - operational, Ennore – to become operational in 4QFY17), bottoming out of coal

volumes and impact of company’s effort to diversify cargo mix (iron-ore exports started

from Dhamra port). Container volumes have increased 30% yoy in 2QFY17 and 28% yoy

in 1HFY17.

Large CT-4 related income booked in the quarter. The operating income includes

~₹1.9 bn of revenues from project advisory services rendered for CT-4. The company has

completed the development of the terminal and is close to transferring the assets to the

JV entity (Adani CMA Mundra Terminal Private Limited). The transfer is pending

government clearances and related cargo income is presently getting booked as part of

the company’s income from operations.

Ind-AS adjustments had limited impact on reported financials for the quarter.

Adani Ports and SEZ Infrastructure


Exhibit 1: Adani Port and SEZ, consolidated - 2QFY17 - key numbers (Rs mn)


Exhibit 2: Overall volume growth was a strong 18% yoy for the quarter Quarterly trajectory of volumes of Adani’s port assets, March fiscal year-ends (mn tons)


Exhibit 3: Mundra Port’s overall volumes increased modestly by 4% yoy in 2QFY17 Volumes handled at major ports in the country

Source: Company, Indian Ports Association, Kotak Institutional Equities

2QFY17 2QFY17E 2QFY16 1QFY17 vs est. yoy qoq 1HFY17 1HFY16 % change FY2017E FY2016 % change

Net operating income 21,831 18,967 18,081 18,266 15 20.7 19.5 40,096 35,229 13.8 83,495 72,557 15.1

Operating expenses (5,530) — (4,121) (4,560) 34.2 21.3 (10,089) (8,528) — (17,918)

Employee costs (805) — (754) (774) 6.8 4.0 (1,578) (1,377) — (2,822)

Admin and other exp. (981) — (1,424) (1,235) (31.1) (20.5) (2,216) (2,372) — (5,312)

Total expenditure (7,316) (6,923) (6,299) (6,568) 6 16.1 11.4 (13,884) (12,277) 13.1 (29,672) (26,052) 13.9

EBITDA 14,515 12,044 11,783 11,698 21 23.2 24.1 26,212 22,952 14.2 53,823 46,505 15.7

Other income 2,337 2,229 1,479 2,571 5 58.1 (9.1) 4,909 3,054 60.7 9,651 6,848 40.9

Interest expense (2,967) (3,725) (3,495) (2,903) (20) (15.1) 2.2 (5,870) (6,816) (13.9) (13,357) (10,990) 21.5

Depreciation (2,823) (2,900) (2,683) (2,810) (3) 5.2 0.5 (5,633) (5,213) 8.0 (11,805) (10,794) 9.4

PBT 11,063 7,648 7,083 8,556 45 56.2 29.3 19,619 13,978 40.4 38,312 31,569 21.4

Tax expense (823) (646) (496) (610) 27 65.9 35.0 (1,433) (1,138) 25.9 (2,903) (3,269) (11.2)

PAT 10,240 7,002 6,587 7,946 46 55.5 28.9 18,186 12,839 41.6 35,409 28,299 25.1

Share of minority interest 69 32 190 179 249 326 16 374

Reported PAT 10,908 7,033 6,776 8,357 55 61.0 30.5 19,265 13,166 46.3 36,256 28,674 26.4

Other comprehensive income (15) — (6) (6) 169.6 174.5 (21) (11) 85.6 — —

Total comprehensive income 10,893 7,033 6,771 8,352 55 60.9 30.4 19,245 13,155 46.3 36,256 28,674 26.4

Key ratios (%)

Operating exp./ sales 25.3 — 22.8 25.0 25.2 24.2 — 24.7

Employee costs/ sales 3.7 — 4.2 4.2 3.9 3.9 — 3.9

Admin and other exp./ sales 4.5 — 7.9 6.8 5.5 6.7 — 7.3

EBITDA margin 66.5 63.5 65.2 64.0 65.4 65.2 64.5 64.1

PBT margin 50.7 40.3 39.2 46.8 48.9 39.7 45.9 43.5

PAT margin 46.9 36.9 36.4 43.5 45.4 36.4 42.4 39.0

Effective tax rate 7.4 8.4 7.0 7.1 7.3 8.1 7.6 10.4

EPS (Rs) 5.2 3.4 3.3 4.0 9.2 6.3 17.4 13.8

% change

1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 Yoy (%)

Mundra Port 28.9 26.6 28.7 26.8 29.9 27.0 26.1 26.0 28.9 28.3 4.7

Dahej port 2.9 3.3 3.5 2.8 2.5 1.5 2.4 1.8 1.5 2.0 30.1

Hazira port 1.6 1.5 1.6 2.6 2.9 2.9 3.3 3.2 3.4 4.0 35.8

Dhamra port 0.4 3.6 4.4 3.2 3.2 3.8 3.8 3.9 5.4 5.2 37.3

Others 0.1 0.3 0.7 1.0 1.0 1.3 2.4 2.7 3.2 3.6 188.0

Total 33.8 35.2 38.9 36.4 39.5 36.5 38.0 37.5 42.4 43.0 17.9

YoY(%) 26.8 25.3 33.3 26.1 16.8 3.8 (2.3) 3.2 7.3 17.9

2QFY17 2QFY16 % chg. 2QFY17 2QFY16 % chg. 1HFY17 1HFY16 % chg. 1HFY17 1HFY16 % chg. FY2016 FY2015 % chg. FY2016 FY2015 % chg.

Kolkata 4 4 (12.7) 166 155 7.1 8 8 (9.4) 331 282 17.4 17 15 9.2 577 528 9.3

Haldia 8 9 (7.5) 26 23 13.0 16 17 (5.6) 49 43 14.0 34 31 8.1 85 102 (16.7)

Paradip 22 18 23.9 — 2 NA 43 36 18.3 1 3 (66.7) 76 71 7.6 5 4 25.0

Visakhapatnam 15 14 5.3 101 71 42.3 31 28 11.0 188 134 40.3 57 58 (1.7) 293 248 18.1

Ennore 7 8 (13.4) — — NA 15 16 (6.8) — — NA 32 30 6.5 — — NA

Chennai 13 12 2.7 370 407 (9.1) 26 26 0.3 748 804 (7.0) 50 53 (4.7) 1,565 1,552 0.9

Tuticorin (Chidambarnar) 10 9 5.6 163 162 0.6 19 19 3.5 325 310 4.8 37 32 13.7 612 560 9.3

Cochin 6 6 1.3 122 107 14.0 12 11 5.2 242 201 20.3 22 22 2.3 421 366 15.0

New Mangalore 9 8 10.9 26 20 30.0 17 17 3.4 44 39 12.8 36 37 (2.7) 76 63 20.6

Mormugao 5 4 15.8 8 7 11.4 13 8 61.0 14 12 16.7 21 15 41.2 26 25 4.0

Mumbai 16 16 0.1 12 10 20.0 31 31 (1.0) 23 21 9.5 61 62 (0.9) 43 45 (4.4)

J.N.P.T 15 16 (6.6) 1,117 1,136 (1.7) 31 32 (4.5) 2,261 2,244 0.8 64 64 0.4 4,491 4,467 0.5

Kandla 28 26 8.4 1 1 NA 54 50 7.1 4 1 NA 100 92 8.2 3 — NA

Major ports total 156 150 4.2 2,112 2,101 0.5 315 300 5.2 4,230 4,094 3.3 606 581 4.3 8,197 7,960 3.0

Mundra 28 27 4.3 NA 732 NA 57 57 0.3 NA 1,480 NA 113 111 2.1 2,990 2,719 10.0

Container ('000 TEUs)Total cargo (MMT) Container ('000 TEUs) Total cargo (MMT) Container ('000 TEUs) Total cargo (MMT)



Exhibit 4: Volumes at Dahej port seen picking up in this quarter Quarterly trend of volumes at Dahej port, March fiscal year-ends, 1QFY13-2QFY17 (mn tons)


Exhibit 5: Hazira port’s volumes sharply improved in 2QFY17 largely due to liquids and containers Quarterly trend of volumes at Hazira port, March fiscal year-ends, 1QFY13-2QFY17 (mn tons)


1.8

1.2

2.6

2.0 2.2

2.5

1.7 1.5

2.9

3.3 3.5

2.8

2.5

1.5

2.4

1.8 1.5

2.0

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1Q

FY13

2Q

FY13

3Q

FY13

4Q

FY13

1Q

FY14

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

(mn tonnes) Dahej Port

0.1 0.1

0.8 0.9 1.0 1.0 0.9

1.6 1.5

1.6

2.6

3.0 2.9

3.3 3.2 3.4

4.0

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1Q

FY13

2Q

FY13

3Q

FY13

4Q

FY13

1Q

FY14

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

(mn tonnes) Hazira Port



Exhibit 6: Volumes at Dhamra improved significantly last quarter helped by coastal shipping volumes

of ~1 mn tons and have sustained at those levels in 2QFY17 Quarterly trend of volumes at Dhamra port, March fiscal year-ends, 1QFY13-2QFY17 (mn tons)


Exhibit 7: Key balance sheet details of Adani Ports & SEZ, March fiscal year-ends (Rs mn)


2QFY17 earnings call takeaways

Strong volume growth led by a bouquet of ports and cargo types. The company

mentioned that the strong volume growth witnessed in 2QFY17 and 1HFY17 had a

broad-based contribution from several ports and various cargo classes. The growth was

notably led by the smaller ports, viz. Dahej (up 30% yoy), Hazira (up 36% yoy) and

Dhamra (up 37% yoy). The growth at Dahej came from the diversified volumes such as

handling of rock phosphate and steel, Hazira port volumes were led by liquid and

containers while Dhamra was led by iron ore exports and coal (coastal shipping) volumes.

2.3 2.2

3.3 3.3 3.1

3.4 3.9 3.9 4.0

3.6

4.4

3.2 3.2

3.8 3.8 3.9

5.4 5.2

-

1.0

2.0

3.0

4.0

5.0

6.0

1Q

FY13

2Q

FY13

3Q

FY13

4Q

FY13

1Q

FY14

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

(mn tonnes) Dhamra cargo volumes

2014 1HFY15 2015 1HFY16 2016 1HFY17 2014 1HFY15 2015 1HFY16 2016 1HFY17

Shareholders funds 93,359 103,191 112,032 127,365 136,284 153,615 87,681 98,587 107,679 119,553 132,236 153,779

Share capital 4,168 4,168 4,168 4,170 4,170 4,142 4,168 4,168 4,168 4,170 4,170 4,142

Reserves & surplus 89,191 99,023 107,863 123,195 132,114 149,473 83,513 94,419 103,511 115,383 128,066 149,637

Loan funds 82,668 110,547 98,040 125,164 133,823 176,344 116,940 166,055 151,553 171,864 214,997 216,612

Deferred tax liability (net) 6,708 6,826 7,165 7,388 7,821 (14,010) 6,744 7,230 8,590 9,307 10,665 (13,183)

Others (infra usage lease) 8,863 8,579 8,316 8,023 7,419 7,061 7,336 7,960 7,188 9,143 6,064 10,271

Minority interest 1,437 1,554 1,590 1,442 1,429 1,294

Total sources of funds 191,598 229,143 225,552 267,941 285,347 323,009 220,137 281,385 276,600 311,309 365,390 368,773

Net fixed assets 91,987 91,471 91,251 93,243 93,762 99,287 151,475 186,728 192,027 200,665 208,384 211,382

Goodwill on consolidation 2,029 — 449 404 25,997 25,997 25,997 25,997 26,783

Investments 17,863 42,213 47,623 58,395 51,170 82,863 634 22,851 2,602 22,490 3,445 6,701

Cash & bank balance 3,998 13,435 4,958 6,927 9,376 10,594 5,139 15,446 6,338 8,081 12,910 14,819

Current assets 95,196 102,432 112,210 145,056 161,425 139,642 89,119 87,834 93,858 115,487 142,908 123,384

Inventories 1,430 1,146 1,795 2,162 1,248 5,209 1,694 1,743 2,592 3,088 2,137 6,151

Debtors 12,700 15,085 11,734 14,279 11,866 18,365 14,276 18,716 17,266 22,534 19,657 27,308

Loans & advances 71,667 74,627 87,246 111,950 128,534 94,066 63,327 55,950 62,339 71,650 100,327 57,031

Short-term 28,406 30,767 36,907 36,689 25,727 37,030 32,399 32,647 37,438 32,353 23,360 41,066

Long-term 43,261 43,860 50,340 75,261 102,808 57,037 30,928 23,303 24,901 39,297 76,968 15,965

Other current assets 9,398 11,575 11,435 16,665 19,776 22,002 9,822 11,425 11,660 18,216 20,787 32,894

Current liabilities & provisions 17,446 20,407 32,519 35,680 30,386 9,826 26,634 57,470 44,222 61,411 28,254 14,296

Current liabilities 11,594 16,078 25,841 32,356 28,924 9,456 19,690 52,144 36,495 57,773 26,524 13,887

Provisions 5,852 4,330 6,677 3,324 1,462 369 6,943 5,327 7,727 3,638 1,730 408

Net current assets 77,750 82,025 79,691 109,376 131,039 129,816 62,485 30,364 49,636 54,076 114,655 109,089

Total application of funds 191,598 229,143 225,552 267,941 285,347 323,009 220,137 281,385 276,600 311,309 365,390 368,773

Standalone Consolidated



Port EBITDA margin improvement to be sustainable. The company reported adjusted

port EBITDA margin of 71% in 2QFY17, up 400 bps yoy aided by margin improvement at

Dhamra as well as ₹650 mn of service export incentive income. Going forward, the

company expects this income to be recurring on quarterly basis. It thus mentioned that

the EBITDA margin improvement would be sustainable. The project service revenue income

of ₹1.9 bn booked in the quarter for CT-4 does not form a part of the port EBITDA. This

income is non-recurring in nature and is pooled with the SEZ income while reporting.

SEZ income seen to improve significantly from here. The company has leased out

~3,000 acres of SEZ land by now. The company mentioned that due to the “Make in

India” program of the Indian government and the coastal shipping theme, the Mundra

SEZ is attracting a lot of interest from large clients given its proximity to Mundra port.

The company has firmed up leasing of 50 acres of land so far in 1HFY17. It expects the

recurring lease income to cross ₹1 bn by the end of FY2017 that will keep increasing over

the next 20-30 years of lease period.

Slowly getting the balance sheet on track. The company has a stated target of

recovering all the related-party L&A by the end of FY2017. The year started with related-

party L&A of ~₹25 bn. The company has succeeded in reducing it by ₹10 bn in 1HFY17

and is confident of eliminating the remaining ~₹15 bn of related-party L&A by end-

FY2017. Consequently, the gross debt has also reduced to ₹214 bn as of Sep-2016 from

₹228 bn as of Mar-2016. Similarly, the company will also retrieve the related-party

receivables by end-FY2017 as per the deferment schedule.

Capex plan going as planned, new commissioning seen by 4QFY17. The company

had guided for a capex of ₹25-30 bn in FY2017 out of which it has incurred a capex of

₹12 bn in 1HFY17 (Vizhinjam – ₹2 bn, Dhamra – ₹4 bn, Hazira – ₹3 bn and Ennore – ₹1

bn). The company has maintained the capex guidance and expects to spend ₹12-15 bn in

2HFY17. The company plans to commission Ennore port by 4QFY17. It is also building the

berth 4 at Dhamra port as a multi-purpose (fertilizer, steel and container) berth to test the

market demand before creating dedicated facilities. Dhamra and Dahej ports are

expected to start handling fertilizer cargo from 4QFY17.

Medium-term strategy to focus on expanding geographies and cargo classes. The

company mentioned that the three C’s, namely Containers, Crude and Coal currently

form the mainstay of the firm’s earnings. However, in the medium term, the company is

planning expansion across newer cargo classes, services and geographies. The key

initiatives mentioned by the company include:

Focus on container cargo as it remains a high growth area.

The new multipurpose berth (berth 4) at Dhamra will help test the market for demand

before creating dedicated facilities to cater to the specific cargo. But the company

expects to gain market share from Haldia on the eastern coast by handling container

volumes at Dhamra. Another growth area is the coastal shipping of thermal coal from

Dhamra to Southern India, which has seen 20%+ yoy growth in the recent quarters. It

has not added new services in this segment citing lack of capacities and thus the same

is an opportunity once berth 4 gets commissioned.

The company also intends to add liquid handling terminals at Kattupalli (if the

transaction is completed), Dhamra and Vizhinjam.

It has started construction of LPG terminal at Mundra and expects to complete it by

June-2018 that will also open additional opportunities / target clients for Mundra SEZ.

It is also contemplating transshipment of LPG from Dhamra to Bangladesh among the

further expansion plans.



Other takeaways.

The company recently submitted a bid to develop a greenfield port at Bhavanapadu in

Andhra Pradesh. The final outcome remains to be seen as the company was the sole

bidder for the project. But apart from this port, the management remains open to

consider additional greenfield opportunities or acquisition based purely on commercial

considerations.

The company mentioned that it has addressed the key concerns of rating agencies

(especially regarding coal volumes) and expects to receive a stable outlook going

forward.

Exhibit 8: Volumes for Mundra and other related ports, March fiscal year-ends, 2014-20E


Exhibit 9: Change in estimates for Adani Ports and SEZ, March fiscal year-ends, 2016-19E


2014 2015 2016 2017E 2018E 2019E 2020E

Volumes (mn tons)

Mundra port

Bulk 47 52 46 46 48 49 50

Coal 36 39 34 35 36 37 37

Other bulk 10 13 11 11 12 13 13

Crude / POL / Liquid 23 22 26 28 29 30 32

Container ('000 TEUs) 2,391 2,718 3,035 3,387 3,946 4,474 4,977

Container (mn tons) 33 37 42 46 54 62 69

Mundra volumes 103 111 113 120 132 141 151

Other port assets

Dahej port 8 12 8 8 9 10 11

Hazira port 4 7 12 15 18 20 21

Mormugao port — 1 2 3 3 4 4

Vizag port — 1 1 1 1 2 2

Kandla port — 0 4 6 7 9 10

Dhamra port 14 15 15 21 25 27 30

Ennore port — — — 1 3 4 4

Total of key ports 129 148 155 176 198 215 234

2016 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E

Volumes (mn tons)

Mundra volume 113 120 132 141 120 131 141 0.5 0.5 0.5

Dahej port 8 8 9 10 8 9 10 - - -

Hazira port 12 15 18 20 15 17 19 2.1 2.3 2.3

Mormugao port 2 3 3 4 3 3 3 14.3 14.3 14.3

Vizag port 1 1 1 2 1 1 2 7.7 7.7 7.7

Kandla port 4 6 7 9 6 7 8 6.7 6.7 6.7

Dhamra port 15 21 25 27 20 23 25 3.7 8.2 8.2

Ennore — 1 3 4 3 4 5 (50.0) (28.6) (28.6)

Consolidated volumes 155 176 198 215 175 195 213 0.6 1.4 1.3

Consolidated financials

Revenues 72,557 83,495 93,888 98,615 83,548 94,175 96,923 (0.1) (0.3) 1.7

EBITDA 46,505 53,823 59,772 61,295 51,507 57,929 58,327 4.5 3.2 5.1

EBITDA margin (%) 64.1 64.5 63.7 62.2 61.6 61.5 60.2 281 bps 215 bps 197 bps

Net PAT 28,299 35,409 29,871 31,262 30,518 27,278 27,777 16.0 9.5 12.5

EPS (Rs) 13.6 17.0 14.3 15.0 14.6 13.1 13.3 16.0 9.5 12.5

% revisionPrevious estimatesNew estimates



Exhibit 10: We arrive at an SOTP-based target price of Rs315/share for ADSEZ Mar-2018 based Sum-Of-Total-Parts valuation of Adani Ports & SEZ


Exhibit 11: Consolidated financials of Adani Ports & SEZ, March fiscal year-ends, 2012-19E (Rs mn)


Entity EV (Rs mn) Net debt Implied equity value Stake (%)Equity Value of stake Value/share Method

Mundra Port (excl. SEZ) 291,320 12,217 279,104 100% 279,104 134 FCFF

SEZ 77,931 — 77,931 100% 77,931 37 FCFF

CT3 66,951 30,599 36,352 50% 18,176 9 FCFF

CT4 30,415 16,290 14,126 50% 7,063 3 FCFF

Vizag 2,478 3,591 (1,113) 100% (1,113) (1) FCFF

Ennore 12,124 10,083 2,041 100% 2,041 1 FCFF

Dhamra 130,623 43,425 87,198 100% 87,198 42 FCFF

Dahej 52,723 1,232 51,490 74% 38,103 18 FCFF

Hazira 134,941 14,016 120,925 100% 120,925 58 FCFF

Vizhinjam 15,620 8,773 6,848 100% 6,848 3 FCFF

Kandla 13,473 12,427 1,045 74% 774 0 FCFF

Murmugao 8,547 3,990 4,558 74% 3,373 2 FCFF

Adani Logistics 16,996 2,896 14,100 100% 14,100 7 15X EV/EBIDTA

Total 854,142 159,538 694,604 654,521 314

2012 2013 2014 2015 2016 2017E 2018E 2019E

Income statement

Net sales 32,708 35,766 48,240 61,520 72,557 83,495 93,888 98,615

Total operating costs (12,056) (12,007) (19,036) (22,497) (26,052) (29,672) (34,116) (37,319)

EBITDA 20,653 23,760 29,204 39,023 46,505 53,823 59,772 61,295

EBITDA margin (%) 63.1 66.4 60.5 63.4 64.1 64.5 63.7 62.2

Other income 596 2,644 6,836 6,856 6,848 9,651 9,198 9,966

Depreciation (4,630) (4,220) (6,495) (9,117) (10,794) (11,805) (13,508) (14,988)

Financial charges (4,796) (5,418) (9,768) (11,751) (10,990) (13,357) (14,427) (14,204)

Pre-tax profit 11,822 16,766 19,777 25,012 31,569 38,312 41,036 42,070

Taxation (896) (1,231) (2,367) (12,715) (3,269) (2,903) (11,164) (10,808)

Adjusted PAT (before exceptional items) 10,927 15,535 17,410 12,297 28,299 35,409 29,871 31,262

Reported PAT post-minority interest 11,021 16,232 17,396 12,196 28,674 36,256 29,715 30,918

EPS (Rs) 5.3 7.8 8.3 5.8 13.8 17.4 14.3 14.8

Balance sheet

Shareholders funds 48,385 63,963 87,681 107,679 132,236 164,750 189,103 213,548

Share capital 4,035 4,035 4,168 4,168 4,170 4,170 4,170 4,170

Reserves and surplus 44,350 59,928 83,513 103,511 128,066 160,580 184,933 209,378

Loan funds 175,650 115,858 128,895 177,313 228,328 217,806 231,574 234,674

Received/ receivable under LT lease 5,905 5,190 7,336 7,188 5,796 — — —

Deferred tax liability (net) 15,179 5,286 6,744 8,590 10,665 13,465 14,465 15,465

Total sources of funds 246,467 191,720 232,093 302,359 378,454 397,434 436,711 465,601

Total fixed assets 217,825 146,065 160,893 195,361 216,312 247,975 276,497 293,085

Investments 11,823 2,619 1,038 25,997 25,997 25,997 25,997 25,997

Cash and bank balance 11,184 8,306 4,694 8,940 16,354 10,742 24,833 43,867

Net current assests excl cash 5,635 34,730 65,468 72,061 119,791 112,719 109,384 102,652

Total application of funds 246,467 191,720 232,093 302,359 378,454 397,434 436,711 465,601

Cash flows

Cash flow from operations 11,997 13,791 11,319 30,651 25,786 61,623 52,943 58,219

Cash flow from investing activities (138,760) (46,898) (25,100) (24,931) (46,556) (33,818) (32,831) (21,610)

Free cash flows (33,475) (24,523) 297 18,361 664 18,154 10,914 26,644

Cash flow from financing activities 129,763 42,111 7,725 (2,366) 24,472 (33,417) (6,021) (17,576)

Cash generated /utilised 3,000 9,004 (6,056) 3,353 3,702 (5,612) 14,091 19,033

Net cash at start of year 748 3,747 7,558 1,502 4,855 8,557 2,945 17,036

Net cash at end of year (excl. other cash) 3,747 12,752 1,502 4,855 8,557 2,945 17,036 36,070



Good on revenues, poor on margins

Dr Reddy’s 2QFY17 numbers were a mixed bag with revenues beating our estimates by 11%,

though EBITDA margins disappointed by 100bps. US business grew by US$12 mn qoq (KIE:

US$10 mn growth), with the revenue boost largely driven by other geographies. Gross margin

missed our estimates by 120bps, which, along with 20% higher R&D costs, meant that EBITDA

beat was restricted to 4%, with margins down to 16.6%, while PAT beat our estimates by

~5%. We do note that the quarter reflects a one-off provision of ₹344 mn related to the NPPA

drug overpricing case, which offset some of the benefits of lower remediation costs in the

quarter.

Expect US business to remain under pressure in 2HFY17

As per the management, the US business has not seen any meaningful price erosion in 2QFY17,

with new launches leading to a US$12 mn qoq jump. While Vidaza has seen some price

erosion, DRRD has maintained its market share so far. We note that Shilpa Medicare’s partner

Wockhardt, has now launched azacitidine, making it the fifth player in the market now, with

our analysis indicating at least three more pending ANDAs for Vidaza. On similar lines, we are

also cautious on decitabine with our checks suggesting that at least five filers are awaiting

approval with Sandoz expected to re-enter in FY2018. We do note that while DRRD had earlier

guided for higher launches in 2HFY17 versus 1HFY17, some of the recent launches were in-

licensed ANDAs where products are already competitive and hardly sufficient to move the base.

In the past, the management guided for back-ended recovery in approval run-rate though we

see risk of delays, particularly for Aloxi (3QFY17 litigation outcome), propofol, Gleevec and

Exelon (all likely in FY2018). However, Nuvaring and Vytorin (Teva portfolio) will help support

earnings in FY2018. We also see a high likelihood of Copaxone launch slipping to FY2019.

Hopes high on FDA re-inspection, but the absence of a pipeline is more worrying - SELL

Despite the 2QFY17 beat, DRRD faces a tough task in meeting our FY2017 estimates, with

2HFY17 requiring a 100% qoq jump in EPS, which we believe is a tall order, even after

factoring in an improvement in the approval run-rate and back-ended recovery. The market was

recently excited with Health Canada’s approval of the Srikakulam facility, but we note that it

does not signal an imminent FDA re-inspection. We tweak our FY2017/19 EPS marginally (-2 to

+2%). DRRD is still trading at 26X and 21X FY2018/19 EPS. SELL.

Dr Reddy's Laboratories (DRRD) Pharmaceuticals

Marginal boost, though thesis intact. DRRD’s 2QFY17 results were ahead of our

estimates with revenues up 10% over our expectations (all ex-US), though gross and

EBITDA margins disappointed by 100-120bps. Management commentary on US

operations remains optimistic, but we see risks of delays to many new launches. We

also expect deterioration in competitive dynamics for existing products with continuing

disproportionate impact on profitability. SELL.

SELL

OCTOBER 26, 2016

RESULT


Price (`): 3,201


BSE-30: 28,091

Chirag Talati, CFA [email protected]

Mumbai: +91-22-4336-0871

Kumar Gaurav [email protected]

Mumbai: +91-22-4336-0872

Dr Reddy's Laboratories



Market Cap. (Rs bn) EPS growth (%) 2.7 (43.7) 55.3




MFs 2.8 EBITDA (Rs bn) 39.1 25.8 39.7


Absolute 0.6 (8.1) (23.6) ROE (%) 19.9 10.3 15.3

Rel. to BSE-30 2.6 (8.1) (25.3) Div. Yield (%) 0.7 0.4 0.6


4,379-2,750

530.3

Pharmaceuticals Dr Reddy's Laboratories


Exhibit 1: Dr.Reddy's interim results March fiscal year-ends (₹ mn)


Other updates from the call

R&D spend: R&D spend in this quarter was higher in absolute terms due to further

development activities in Xenoport/Eisai products as well as ANDA acquired from TEVA.

DRRD is guiding for US$25mn additional R&D in FY2017 for these two products.

Proprietary products: DRRD has witnessed gradual increase in volumes for the two

products launched. For Zembrace, the number of prescribers has doubled yoy (June-Sept),

and grew at 22% mom. Prescriptions per months have reached 1,000. For Sernivo,

prescriptions and prescribers have crossed 2000 mark of which 40% repeat customers.

Sernivo is witnessing 50% mom growth and the management expects higher volumes in

3Q due to seasonality impact. The management acknowledged that it has taken them

more than expected time to gain a foothold, though the company still expects peak sales

of US$50 mn from each of the products.

On the biosimilar front, DRRD is progressing as per management expectations in

emerging markets. The company will participate in Russia tenders in 3Q and hopes to

launch Reditux if it is successful in tender allocations.

(% chg.)

2QFY17 2QFY17E 2QFY16 1QFY17 2QFY17E 2QFY16 1QFY17 1HFY17 1HFY16 (% chg.) FY2017E

Sales 35,857 32,373 39,934 32,345 10.8 (10.2) 10.9 68,202 77,512 (12.0) 147,964

Cost of sales (15,760) (13,839) (15,421) (14,167) 13.9 2.2 11.2 (29,927) (30,052) (0.4) (62,487)

Gross profit 20,097 18,533 24,513 18,178 8.4 (18.0) 10.6 38,275 47,460 (19.4) 85,478

SG&A (11,774) (11,197) (11,058) (12,284) 5.2 6.5 (4.2) (24,058) (22,031) 9.2 (49,369)

R&D (5,214) (4,370) (4,473) (4,802) 19.3 16.6 8.6 (10,016) (8,860) 13.0 (21,859)

EBITDA 5,956 5,706 11,448 3,773 4.4 (48.0) 57.9 9,729 21,303 (54.3) 25,835

Depreciation (2,847) (2,740) (2,466) (2,681) (5,528) (4,734) 16.8 (11,585)

Other operating income 277 96 320 96 373 445 500

Income from associate companies 84 60 56 74 158 105 350

Interest / finance costs 365 400 (216) 445 810 0 1,600

Exceptional items 0 0 0 0 0 0 0

Pretax profits 3,835 3,522 9,142 1,707 8.9 (58.1) 124.7 5,542 17,119 (67.6) 16,700

Tax (885) (704) (1,879) (444) (1,329) (3,599) (3,674)

Minority interest 0 0 0 0 0 0 0

Net income 2,950 2,818 7,263 1,263 4.7 (59.4) 133.6 4,213 13,520 (68.8) 13,026

Net income (adjusted) 2,950 2,817 7,263 1,263 4.7 (59.4) 133.6 4,213 13,520 (68.8) 13,026

EPS (Rs) 17.8 17.0 42.5 7.4 4.7 (58.1) 140.7 25.2 79.0 (68.2) 78.4

Adjusted EPS (Rs) 17.8 17.0 42.5 7.4 4.7 (58.1) 140.7 25.2 79.0 (68.2) 78.4

Tax rate (%) 23.1 20.0 20.6 26.0 24.0 21.0 22.0

Segment wise sales

Domestic Formulation 6,251 5,901 5,464 5,233 5.9 14.4 19.5 11,484 10,220 12.4 24,061

Global generics 22,810 20,636 27,348 21,438 10.5 (16.6) 6.4 44,248 53,551 (17.4) 95,396

US 16,134 15,840 18,563 15,523 1.9 (13.1) 3.9 31,657 37,078 (14.6) 68,098

Total Europe 1,776 1,150 2,124 1,615 54.4 (16.4) 10.0 3,391 4,036 (16.0) 7,345

Russia 2,700 2,347 2,934 2,300 15.0 (8.0) 17.4 5,000 5,234 (4.5) 10,812

CIS 900 714 1,010 700 26.1 (10.9) 28.6 1,600 1,810 (11.6) 3,500

RoW 1,300 1,150 2,717 1,300 13.0 (52.2) 0.0 2,600 5,393 (51.8) 5,640

PSAI 5,784 4,800 5,918 5,502 20.5 (2.3) 5.1 11,286 11,532 (2.1) 23,219

Propreitary products and others 1,078 1,035 1,204 1,015 4.1 (10.5) 6.2 2,093 2,207 (5.2) 5,289

% margin

Cost of sales 44.0 42.8 38.6 43.8 43.9 38.8 42.2

SG&A (ex depreciation) 24.9 26.1 21.5 29.7 27.2 22.3 25.5

R&D 14.5 13.5 11.2 14.8 14.7 11.4 14.8

EBITDA 16.6 17.6 28.7 11.7 14.3 27.5 17.5

yoy

Dr Reddy's Laboratories Pharmaceuticals


Exhibit 2: R&D spend on proprietary products and biosimilars to overtake generics from FY2017 onwards March fiscal year-ends, 2012-19E, (Rs mn)


Exhibit 3: Dr. Reddy's ANDA filing run-rate remains poor ANDA filings and approvals, March fiscal year-ends, 1QFY13-2QFY17, (#)


2012 2013 2014 2015 2016 2017E 2018E 2019E

US Sales 31,889 37,846 55,303 64,723 75,445 64,562 77,822 86,431

Sales 96,925 116,266 132,170 148,189 154,708 146,537 169,525 187,403

R&D expenses 5,911 7,675 12,402 17,449 18,420 21,222 24,211 26,490

- Generics 4,197 4,605 7,689 10,644 11,317 11,621 11,673 12,965

- Propreitary products 1,714 3,070 4,713 6,805 7,103 9,601 12,538 13,525

R&D as a % of sales 6.1 6.6 9.4 11.8 11.9 14.5 14.3 14.1

- of which generics 71 60 62 61 61 55 48 49

- of which propreitary 29 40 38 39 39 45 52 51

Generics R&D as a % of US Sales 13.2 12.2 13.9 16.4 15.0 18.0 15.0 15.0

R&D expenses (US$ mn) 116 148 205 286 284 312 346 378

- Generics 82 89 128 174 174 171 167 185

- Propreitary products 34 59 79 111 109 141 179 193

1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17

Approvals

ANDA approvals - during the period 14 1 7 7 0 1 4 1 0 4 0 0 2 1 0 1 3

Cumulative ANDA approvals 113 127 128 135 142 142 143 147 148 148 152 152 152 154 154 154 155 158

Filings

ANDAs filed - during the period 4 4 4 6 2 4 2 5 9 2 2 0 6 2 3 2 1 0

Cumulative ANDAs filed 186 190 193 200 206 204 205 209 218 220 220 220 225 230 233 235 236 243

Pending approvals

ANDA - pending approval 73 63 65 65 64 62 62 62 70 72 68 68 73 76 79 79 78 85

Para IVs 36 33 35 38 38 39 38 39 42 45 43 43 47 50 52 52 52 58

- of which FTFs 6 7 8 8 8 9 8 9 8 11 13 13 16 18 18 18 18 19



Exhibit 4: Dr. Reddy's US pipeline is heavily concentrated towards few large bets Y-Axis: brand sales (US$ mn), X-Axis: Year of launch (March fiscal year-end, 2016-19)


FY2016 FY2017 FY2018 FY2019 ≥FY2019

>US$1 bn Nexium Gleevec tabs Copaxone Lovenox Copaxone 40mg

Gilenya Tecfidera

Strattera Zytiga

US$500 mn - US$1 bn Nuvaring Suboxone film

Renvela Amitiza

Alimta 505(b)(2)

Namenda XR

Vascepa

US$250 - US$500 mn Aloxi 505(b)(2) Pentasa Doxil TobraDex

Zegerid Vytorin Angiomax CiproDex

Diprivan Pristiq Emend

Xeloda Aloxi ANDA Dapsone

Exelon patch Perforomist

Temodar Effient

Pristiq

Aloxi ANDA

Kombiglyze XR

Treanda

US$100 - US$250 mn Namenda Integrilin Levothyroxine 505(b)(2) CiproDex

Vimovo Melphalan Picato

Zegerid OTC Clolar Velcade

Mozobil Androgel 1.62%

Uloric Dexilant

Jevtana Folotyn

Multaq

Treximet

Qsymia

Kuvan

<US$100 mn Intermezzo Ixempra

NitroStat Rozerem

Zyclara 3.75%

High

Medium

Low

> US$25 mn revenues in first 12 months of launch

US$10 - 25 mn revenues in first 12 months of launch

< US$10 mn revenues in first 12 months of launch

Dr Reddy's Laboratories Pharmaceuticals


Exhibit 5: Dr. Reddy's - segment-wise sales March fiscal year-ends, 2012-19E, (Rs mn)


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

Global generics 70,243 82,563 105,164 120,827 127,970 119,457 141,637 159,129

North America 31,889 37,846 55,303 64,723 75,445 68,098 83,030 92,088

Europe 8,259 7,716 6,970 7,193 7,732 7,345 7,713 8,098

India 12,931 14,560 15,713 17,756 21,293 24,061 26,948 30,182

Russia & CIS 13,260 16,908 19,819 18,879 14,100 14,312 17,461 21,302

Others 3,904 5,533 7,359 12,275 9,400 5,640 6,486 7,459

PSAI 23,813 30,702 23,974 25,795 22,379 23,219 23,903 23,399

North America 4,272 5,744 4,354 4,789 3,052 3,205 3,269 3,105

Europe 8,424 12,007 8,770 9,209 9,313 9,499 9,689 9,205

India 3,586 4,638 3,787 4,734 2,618 2,749 3,024 3,326

ROW 7,531 8,313 7,063 7,063 7,396 7,766 7,921 7,763

Propreitary products 2,869 3,001 3,032 2,880 4,394 5,289 6,731 7,662

Total 96,925 116,266 132,170 149,502 154,743 147,964 172,271 190,190

% yoy growth

Global generics 31.7 17.5 27.4 14.9 5.9 (6.7) 18.6 12.3

North America 67.9 18.7 46.1 17.0 16.6 (9.7) 21.9 10.9

Europe (2.0) (6.6) (9.7) 3.2 7.5 (5.0) 5.0 5.0

India 10.6 12.6 7.9 13.0 19.9 13.0 12.0 12.0

Russia & CIS 22.1 27.5 17.2 (4.7) (25.3) 1.5 22.0 22.0

Others 16.0 41.7 33.0 66.8 (23.4) (40.0) 15.0 15.0

PSAI 21.2 28.9 (21.9) 7.6 (13.2) 3.8 2.9 (2.1)

North America 34.8 34.5 (24.2) 10.0 (36.3) 5.0 2.0 (5.0)

Europe 20.0 42.5 (27.0) 5.0 1.1 2.0 2.0 (5.0)

India 36.9 29.3 (18.3) 25.0 (44.7) 5.0 10.0 10.0

ROW 10.1 10.4 (15.0) 0.0 4.7 5.0 2.0 (2.0)

Propreitary products 68.3 4.6 1.0 (5.0) 52.5 20.4 27.3 13.8

Total 29.8 20.0 13.7 13.1 3.5 (4.4) 16.4 10.4

% of sales

Global generics 72.5 71.0 79.6 80.8 82.7 80.7 82.2 83.7

North America 32.9 32.6 41.8 43.3 48.8 46.0 48.2 48.4

Europe 8.5 6.6 5.3 4.8 5.0 5.0 4.5 4.3

India 13.3 12.5 11.9 11.9 13.8 16.3 15.6 15.9

Russia & CIS 13.7 14.5 15.0 12.6 9.1 9.7 10.1 11.2

Others 4.0 4.8 5.6 8.2 6.1 3.8 3.8 3.9

PSAI 24.6 26.4 18.1 17.3 14.5 15.7 13.9 12.3

North America 4.4 4.9 3.3 3.2 2.0 2.2 1.9 1.6

Europe 8.7 10.3 6.6 6.2 6.0 6.4 5.6 4.8

India 3.7 4.0 2.9 3.2 1.7 1.9 1.8 1.7

ROW 7.8 7.1 5.3 4.7 4.8 5.2 4.6 4.1

Propreitary products 3.0 2.6 2.3 1.9 2.8 3.6 3.9 4.0



Exhibit 6: Dr. Reddy's - profit and loss, balance sheet, cash model (IFRS) March fiscal year-ends, 2012-19E, (Rs mn)


2012 2013 2014 2015 2016 2017E 2018E 2019E

Net revenues 97,690 118,745 133,586 149,106 155,582 148,464 172,771 190,690

Gross profit 54,258 63,058 77,217 86,320 93,155 85,978 105,700 119,560

Staff costs (16,927) (20,413) (24,936) (28,967) (30,364) (33,400) (36,740) (40,414)

R&D expenses (5,911) (7,673) (12,402) (17,449) (17,834) (21,859) (24,992) (27,339)

Other expenses (11,941) (13,171) (13,847) (13,618) (15,666) (15,969) (17,589) (18,783)

EBITDA 23,928 24,871 31,214 34,101 39,088 25,835 39,673 47,670

Depreciation & amortisation (5,214) (5,549) (6,598) (8,103) (10,343) (11,585) (13,794) (15,146)

EBIT 19,479 21,801 26,032 26,915 29,619 14,750 26,379 33,025

Net interest 160 460 400 1,682 (2,708) 1,600 (457) (274)

Other income 54 104 — 195 229 350 350 350

Exceptional items (1,040) (688) 497 (629) — — — —

Profit before tax 18,653 21,677 26,929 28,163 27,140 16,700 26,272 33,101

Tax & deferred Tax (4,204) (4,900) (5,094) (5,984) (7,127) (3,674) (6,043) (7,613)

Less: minority interest — — — — — — — —

Net income (adjusted) 15,489 17,464 21,338 23,004 23,827 13,026 20,230 25,488

EPS adjusted (Rs) 91.3 103 126 136 139 78.4 122 153

Balance sheet

Equity 57,444 73,105 90,800 111,302 128,336 123,672 140,802 162,385

Total borrow ings 32,210 36,760 44,742 43,126 33,403 31,403 29,403 27,403

Other liabilities 29,823 32,504 34,681 40,335 45,911 48,478 49,993 51,481

Total liabilities 119,477 142,369 170,223 194,762 207,650 203,553 220,198 241,268

Net fixed assets 49,525 56,655 66,476 74,924 87,962 111,827 110,033 101,387

Cash 18,152 22,099 33,534 39,654 39,955 13,115 23,925 48,105

Other current assets 51,800 63,615 70,213 80,184 79,733 78,611 86,241 91,776

Total assets 119,477 142,369 170,223 194,762 207,650 203,553 220,198 241,268

Cashflow statement

Operating profit before working capital 25,454 27,101 31,497 39,485 41,322 24,611 34,023 40,633

Change in working capital (8,960) (13,146) (10,389) (15,040) (188) 3,689 (6,114) (4,048)

Capital expenditure (8,462) (7,082) (10,598) (15,327) (22,727) (35,450) (12,000) (6,500)

Free cash flow 8,032 6,873 10,510 9,118 18,407 (7,150) 15,909 30,085

Margins and ratios

Gross profit margin (%) 55.2 52.1 57.4 57.6 59.6 57.8 61.1 62.6

EBITDA margin (%) 24.7 21.4 23.6 23.0 25.3 17.5 23.0 25.1

Tax rate (%) 22.5 22.6 18.9 21.2 26.3 22.0 23.0 23.0

RoAE (%) 27.0 23.9 23.5 20.7 18.6 10.5 14.4 15.7

RoACE (%) 25.6 24.6 22.4 20.6 20.7 10.7 17.2 19.0



2QFY17— steady operating performance

Zee reported 15.7% yoy growth in ad revenues powered by (1) industry growth (12-13%), (2)

India West Indies cricket (1-2%), and (3) market share gains in regional genres adjusted for

weakness of Zee TV (1-2%). Domestic subscription revenues grew 25% aided by some catch-up

pertaining to 1Q. EBITDA margin improved 290 bps yoy to 28.9%; EBITDA grew 36% yoy

partly led by broad-based improvement in profitability including sports and moderation in losses

of &TV. Net profit excluding impact of RPS at `3.3 bn (+32% yoy) was marginally below our

estimate due to higher depreciation. Sports business reported operating loss of `168 mn as

against our estimate of break-even.

Brace for some softness in advertising and subscription against steep expectations

FMCG ad spends (50% of TV ad revenues) have not picked up this festive season to the extent

expected despite good monsoon given weak rural consumption. This will put pressure on TV

industry’s ad growth; we expect it to be 13-14% in FY2017E (12-13%/13-15% in 1H/2H) as

against 18% in FY2016. Acceleration in FY2018E is contingent on pick-up in FMCG volumes

(rural consumption). We believe Zee is well-placed to maintain its 2-4% growth outperformance

over industry: (1) market-share gain story (esp. in regional genres) has more legs and is led by

Zee Tamil, and (2) weakness in ratings of Zee TV could drag ad growth in 3Q but we expect

recovery starting 4Q led by increase in programming to 30 from 25 hours/week.

Broadcaster’s domestic subscription revenue growth faces headwinds from (1) delays in phase

III-IV digitization, and (2) implementation of TRAI’s tariff structure as per draft order. We cut our

forecast of 19% domestic subscription revenue growth for Zee in FY2018 to 15% as we factor

point 1. We will closely watch developments on regulatory front.

Zee’s outperformance versus industry and comfort on profitability stays

Zee’s outstanding performance over the past three years was driven by industry tailwinds and its

outperformance led by market share gain in regional genres and improving profitability. Even as

industry tailwinds may be absent in the near-term, we expect Zee’s outperformance versus

industry to continue. This, along with comfort on profitability and capital allocation deserve

premium valuations. We value Zee at 28X Sep 2018E EPS (ex-RPS impact).

Zee Entertainment Enterprises (Z) Media

Steady ship. Zee reported 16%, 36% and 32% yoy growth in ad revenues, EBITDA

and adjusted net profit. The near-term outlook for TV industry is a tad weak given

FMCG-led softness in ad spends, delays in phase III-IV digitization and uncertainty

around TRAI’s draft tariff order. Regardless, Zee is charting its path to long term growth

outperformance by augmenting content capabilities, enhancing regional footprint and

expanding in new verticals and markets and more importantly executing with solid

profitability and capital allocation. We trim FY2018-19E EPS by 4% as we cut domestic

subscription revenue forecast. Roll-over to Sep-16 and maintain TP. BUY.

BUY

OCTOBER 26, 2016

RESULT


Price (`): 514


BSE-30: 28,091

Jaykumar Doshi [email protected]

Mumbai: +91-22-4336-0863

Zee Entertainment Enterprises







MFs 3.7 EBITDA (Rs bn) 15.1 19.3 23.3


Absolute (2.0) 8.3 18.9 ROE (%) 15.3 15.3 16.5



590-350

493.6

Media Zee Entertainment Enterprises


2QFY17 results—

Robust ad revenue growth in a soft environment. Zee reported 16% yoy (KIE 15%)

growth in ad revenues. Break-up as per our estimate: (1) industry growth (12-13%), (2)

India West Indies cricket (1-2%), and (3) market share gains in regional genres adjusted

for weakness of Zee TV (1-2%). We estimate non-sports ad revenue growth at about

14%.

Domestic subscription revenue growth aided by catch-up revenues. Domestic

subscription revenues grew 25% yoy, way ahead of our expectation of 16% largely on

account of catch-up revenues pertaining to 1Q. The management indicated that domestic

subscription revenues would be balanced across 1H and 2H as against back-ended in

previous years. Zee is on track to achieve about 15% growth in domestic subscription

revenues in FY2017E in line with guidance of mid-teen growth.

Overseas subscription revenues grew 4% yoy (KIE 7%)

EBITDA increased 36% yoy to `4.9 bn (KIE `4.8 bn). EBITDA margin increased 290 bps

yoy to 28.9% (KIE 29.4%) and non-sports operating margin stood at 31.9% (KIE 33.7%).

Programming and other direct costs increased 17% qoq, significantly ahead of our

estimates partly due to higher than expected syndication and sports costs. Whereas, other

expenses were 21% below our estimate and declined 12% sequentially partly due to

decline in carriage fees

Sports business. Sports business reported operating loss of `168 mn as against our

estimate of break-even.

International ad revenues grew 8% yoy to `792 mn.

Other sales were boosted by success of Hindi movie Rustom (co-produced by Zee) and

sports syndication sales.

Net profit (excluding RPS impact) at `3.3bn grew 32% yoy but was 4% short of our

estimate due to higher depreciation (up 24% qoq and 70% yoy to `336 mn). Note that

depreciation increase pertains to new facilities including studios and acquisition.

Note that, under Ind-AS, change in PV of redeemable preference shares (RPS) is charged to

P&L (referred as Fair value through P&L) and dividend tax on the same is included in finance

costs. 2QFY16 and 1QFY17 financials in exhibit 1 have been restated for like-to-like

comparison. We modeled RPS impact of `363 mn, in-line with RPS dividend

Key highlights from results and conference call

TRAI tariff order. Zee management and broadcasting industry has engaged with TRAI to

discuss concerns and implementation challenges. The management indicated that it has

option to contest the tariff framework in case of any material adverse impact. That said, it

is presently working with TRAI to address certain issues and possibly push back timelines

in view of implementation challenges.

Ad revenue growth. Zee management hinted at some softness in advertising led by

weak ad spends growth in FMCG and ecommerce categories. We note that Zee’s non-

sports ad revenue growth (organic) has already moderated to 14% in the September

quarter from 17-18% in the June quarter. The management mentioned that growth

would moderate in the coming quarters as compared to high growth in past without

categorically stating whether it would decelerate further. Our industry interactions and

check suggest that TV industry’s ad revenue growth would pick up 1-2% in the

December quarter (versus September quarter) but is tracking below initial expectations of

strong accelerations. Accordingly, we expect modest acceleration in Zee’s ad revenue

growth in 2H from 2Q level.

Zee Entertainment Enterprises Media


Hindi GEC ratings. Zee management attributed weakness in Zee TV’s ratings to poor

performance of recently launched programs which was partly impacted due to leadership

change. The management expects ratings to improve in the March as it plans to take

back original programming to 30 hours/week by FY2017-end from 25 at present.

Likewise, the management expects &TV’s original programming to touch 24 hours/week

from 21 at present.

New channel launches. Zee has launched three new channels in domestic market - Zee

Anmol Cinema, a Hindi movie channel for FTA audience; Zee Yuva, a youth focused

Marathi GEC and Zee Cinemalu, a movie channel in Telugu language.

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


chg (%)

2QFY17 2QFY17E 2QFY16 1QFY17 2QFY17E 2QFY16 1QFY17 1HFY17 1HFY16 chg (%)

Total revenues 16,954 16,349 13,786 15,716 3.7 23.0 7.9 32,671 27,053 21

Advertising revenues 9,592 9,656 8,290 9,120 (0.7) 15.7 5.2 18,711 15,943 17

Subscription revenues 5,833 5,444 4,791 5,282 7.2 21.7 10.4 11,115 9,417 18

--Domestic subscription 4,675 4,334 3,752 4,179 7.9 24.6 11.9 8,854 7,434 19

--International subscription 1,158 1,110 1,039 1,103 4.3 11.5 5.0 2,261 1,984 14

Others (incl. syndication) 1,529 1,250 705 1,315 22.4 117.0 16.3 2,844 1,693 68

Total expenditure (12,062) (11,547) (10,200) (11,185) 4.5 18.3 7.8 (23,247) (20,321) 14

Content and other direct costs (7,688) (6,761) (6,032) (6,575) 13.7 27.5 16.9 (14,263) (12,073) 18

Employee costs (1,533) (1,457) (1,197) (1,499) 5.2 28.1 2.2 (3,032) (2,511) 21

Advt. and publicity costs (1,153) (1,200) (1,170) (1,197) (3.9) (1.5) (3.7) (2,350) (2,137) 10

Other expenses (1,688) (2,129) (1,801) (1,913) (20.7) (6.3) (11.8) (3,601) (3,601) 0

EBITDA 4,892 4,802 3,586 4,532 1.9 36.4 8.0 9,424 6,732 40

EBITDA margin (%) 28.9 29.4 26.0 28.8 28.8 24.9

Other income 432 650 595 734 (33.5) (27.3) (41.1) 1,166 1,281 (9)

Fair value through P&L (RPS) (829) (303) (543) (1,132) (1,961) (1,146) 71

Finance costs (86) (100) (82) (75) (14.5) 3.9 14.0 (161) (159) 1

D&A expenses (336) (270) (197) (251) 24.4 70.9 33.8 (587) (364) 61

Pretax profits 4,074 4,779 3,359 3,808 (14.8) 21.3 7.0 7,882 6,345 24

Extraordinaries — — (331) — — (331)

Tax provision (1,634) (1,748) (1,127) (1,626) (6.5) 45.0 0.5 (3,260) (2,316) 41

Minority interest (56) 20 (25) (12) (68) (39) 72—

PAT (pre RPS impact) 3,273 3,414 2,479 3,362 (4.1) 32.0 (2.7) 6,635 4,924 35

PAT (post RPS impact) 2,384 3,051 1,876 2,170 (21.9) 27.0 9.9 4,554 3,658 24

EPS post RPS impact (Rs) 3.4 3.6 2.6 3.5 (4.1) 32.0 (2.7) 6.9 5.1 35

EPS pre RPS impact (Rs) 2.5 3.2 2.0 2.3 (21.9) 27.0 9.9 5 4

Tax rate (%) 32.9 34.0 31.0 32.5 32.7 31.8

Additional data

Zee consolidated

Total revenues 16,954 16,349 13,786 15,716 4 23 8 32,671 27,053 21

Operating profit 4,556 4,532 3,389 4,280 1 34 6 8,837 6,368 39

Entertainment business

Total revenues 14,829 14,249 12,571 14,016 4 18 6 28,846 24,256 19

Operating profit 4,724 4,802 3,327 4,107 (2) 42 15 8,832 6,695 32

Operating Margin (%) 31.9 33.7 26.5 29.3 30.6 27.6

Sports business

Total revenues 2,125 2,100 1,278 1,700 1 66 25 3,825 2,797 37

Operating profit (168) — 22 173 5 37 (86)

Notes:

(1) Prior period financials have been restated as per Ind-AS for like-to-like comparison. Key accounting changes are:

(a) Change in accounting of IWPL (a JV) to equity accounting from line by line consolidation. It has led to small changes in revenues and costs.

(b) Change in PV of RPS has been charged to P&L (referred as Fair value through P&L) and associated div idend tax is included in finance costs.



Exhibit 2: Revised earnings estimates of Zee, FY2017E-19E (Rs mn)


Exhibit 3: Robust growth in ad revenue given softness in ad spends environment Ad revenue growth, March fiscal year-ends (yoy %)


Change (%)

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

Consolidated

Ad revenues 39,492 44,713 51,245 40,813 46,094 52,828 (3.2) (3.0) (3.0)

Subscription revenues 23,327 22,410 25,553 23,288 23,747 27,094 — (5.6) (5.7)

Other operating revenues 4,600 2,200 2,750 4,600 1,925 2,393 — 14.3 14.9

Total revenues 67,419 69,323 79,548 68,701 71,766 82,314 (1.9) (3.4) (3.4)

Direct costs 29,514 26,210 31,727 29,823 26,339 31,885 (1.0) (0.5) (0.5)

Employee cost 5,964 5,964 6,561 5,964 5,964 6,561 — - -

SG&A expenses 12,631 13,827 15,159 13,783 14,898 16,318 (8.4) (7.2) (7.1)

Total expenditure 48,110 46,001 53,447 49,571 47,202 54,764 (2.9) (2.5) (2.4)

EBITDA 19,309 23,322 26,101 19,130 24,564 27,551 0.9 (5.1) (5.3)

PAT 35,233 16,323 18,732 35,197 17,126 19,651 0.1 (4.7) (4.7)

Adj PAT (excl. RPS impact) 13,475 17,756 19,873 13,438 18,559 20,792 0.3 (4.3) (4.4)

EPS (Rs) 36.7 17.0 19.5 36.6 17.8 20.5 0.1 (4.7) (4.7)

Adj EPS (Rs) (excl. RPS impact) 14.0 18.5 20.7 14.0 19.3 21.6 0.3 (4.3) (4.4)

Sports

Sports revenues 7,386 — — 7,386 — — — — —

Sports operating profit (200) — — (200) — — — — —

&TV

&TV revenues 3,500 6,100 8,250 3,500 6,100 8,250 — — —

EBITDA (2,200) (500) 600 (2,200) (500) 600 — — —

Key assumptions

Ad revenue growth (%) 17.5 18.0 14.6 19.0 17.0 14.6

Domestic subscription growth (%) 14.5 15.0 16.5 14.0 19.0 16.5

International subscription growth (%) 9.0 5.0 3.0 10.0 5.0 3.0

EBITDA margin (%) 28.6 33.6 32.8 27.8 34.2 33.5

Revised Previous

0

5

10

15

20

25

30

35

1Q

FY13

2Q

FY13

3Q

FY13

4Q

FY13

1Q

FY14

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

Ad revenue growth (yoy %) Non-sports ad revenue growth (yoy %)



Exhibit 4: Domestic subscription revenue growth aided by catch-up revenues Subscription revenue growth, March fiscal year-ends (yoy %)


Exhibit 5: Sports business operating profit, March fiscal year-ends (Rs mn)


19

28

19

23

16 16

11

2

10

6

12

26

4

13

17 16 14

22

21

33

24

28 26

19

12

(1)

9 7

11

33

14 11

21

12 14

25

(10)

-

10

20

30

40

1Q

FY13

2Q

FY13

3Q

FY13

4Q

FY13

1Q

FY14

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

Subscription revenue growth (yoy %) Domestic subscription revenue growth (yoy %)

(210)(169)(86)

(405)

(95)(191)

(1,041)

351

12

(250)(270)

242

15 22

(150)(236)

173

(168)

(1,200)

(800)

(400)

0

400




Exhibit 6: Operating profit and operating margin suppressed by &TV losses Non-sports operating profit and operating margins, March fiscal year-ends (Rs mn, %)


Exhibit 7: BARC ratings market share, 09-Oct-15 to 14-Oct-16 (Week 41, 2015 to Week 41, 2016) (%)

Source: BARC ratings, Kotak Institutional Equities

2.2 2.1 2.4 2.2 2.6 2.7 2.9 3.1 3.8 2.6 2.9 3.3 3.6 2.3 2.9 3.3 4.3 4.1 4.1 4.7

32.1 29.6

32.9

29.2 31.4 31.7

34.1 33.0 38.3

26.7

30.1

33.2 32.6

19.4

24.7 26.5

30.3 29.9 29.3 31.9

10

15

20

25

30

35

40

1.5

2.0

2.5

3.0

3.5

4.0

4.5

3Q

FY12

4Q

FY12

1Q

FY13

2Q

FY13

3Q

FY13

4Q

FY13

1Q

FY14

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

Zee non-sports operating profit (LHS, Rs bn)Zee non-sports EBIT margin (RHS, %) (%)(Rs bn)

Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16

Hindi GEC- Ratings market share (Urban + Rural) in top 7 channels (%)

Star Plus 23.1 22.4 20.4 21.0 21.0 21.1 21.0 20.7 21.3 21.7 22.0 21.9 21.6

Colors 20.0 20.1 21.4 21.5 20.6 20.0 20.7 20.8 20.4 18.2 17.0 17.9 19.7

Zee TV 18.2 18.7 19.7 19.8 19.3 18.5 16.9 17.9 17.5 19.0 18.2 16.9 15.2

Life Ok 14.5 13.8 12.7 12.5 13.1 14.3 14.9 14.2 12.9 13.0 13.1 13.1 13.2

Sony TV 10.4 10.5 10.5 9.7 9.6 8.9 9.3 9.8 11.2 11.6 11.4 12.8 13.1

SAB 9.7 10.2 9.7 10.0 10.6 11.4 11.4 11.3 11.6 11.2 11.7 11.4 11.6

&TV 4.1 4.4 5.6 5.6 5.7 5.8 5.8 5.2 5.0 5.3 6.6 6.1 5.8

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Zee TV's market share in Urban and Rural markets (%)

Urban 16.6 16.4 17.2 17.0 17.0 16.2 14.4 15.0 14.8 15.6 15.4 14.6 13.0

Rural 21.5 23.3 24.9 25.6 24.2 23.0 22.3 23.3 22.9 24.7 24.1 21.4 19.4

Network market share (Urban + Rural) in Hindi GEC (%)

Zee 22.2 23.1 25.3 25.3 25.1 24.2 22.7 23.1 22.5 24.3 24.8 23.0 20.9

Star 37.6 36.1 33.1 33.4 34.1 35.4 35.9 34.9 34.3 34.7 35.1 35.0 34.7

Sony 20.2 20.7 20.2 19.7 20.2 20.4 20.7 21.1 22.8 22.8 23.1 24.2 24.7

TV18 20.0 20.1 21.4 21.5 20.6 20.0 20.7 20.8 20.4 18.2 17.0 17.9 19.7

Free-to-Air Hindi GEC- Ratings market share (Urban + Rural) in top 4 channels (%)

Zee Anmol 39.6 39.3 40.2 34.9 33.0 27.2 26.7 25.7 26.4 29.1 29.4 28.3 30.2

Star Utsav 29.4 28.1 28.3 24.1 24.2 24.6 23.3 26.5 27.7 27.8 30.8 27.0 24.1

Colors Rishtey 17.0 15.5 16.7 21.3 19.4 22.0 22.9 19.6 19.3 17.8 16.6 20.5 21.9

Sony PAL 13.9 17.1 14.8 19.7 23.4 26.3 27.1 28.2 26.6 25.3 23.2 24.2 23.7

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Hindi movies- Ratings market share (Urban + Rural) in top 5 channels (%)

Sony Max 28.4 27.9 25.2 25.2 25.7 23.8 40.8 39.7 26.8 23.6 24.8 25.3 25.9

Zee Cinema 23.5 24.2 23.6 24.0 22.1 26.5 20.4 18.2 20.1 21.4 21.8 20.8 21.8

Star Gold 23.8 21.0 22.2 24.5 26.9 22.8 17.9 18.4 20.9 19.8 19.8 20.9 19.3

Movies OK 13.7 16.6 16.6 15.0 13.6 14.5 11.3 8.6 11.3 11.7 11.1 10.8 10.6

& Pictures 10.6 10.3 12.4 11.3 11.7 12.4 9.6 9.2 9.9 10.7 11.2 11.0 11.5

Rishtey Cineplex 5.8 11.0 12.7 11.2 11.1 11.0

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Network market share (Urban + Rural) in Hindi movies (%)

Zee 34.1 34.5 36.0 35.4 33.8 39.0 30.0 27.4 29.9 32.1 33.1 31.9 33.3

Star 37.5 37.6 38.8 39.5 40.5 37.3 29.3 27.1 32.2 31.5 30.9 31.8 29.8

Sony 28.4 27.9 25.2 25.2 25.7 23.8 40.8 39.7 26.8 23.6 24.8 25.3 25.9

TV18 — — — — — — — 5.8 11.0 12.7 11.2 11.1 11.0

Notes:

(a) Sharp jump in Sony Max ratings in April and May 2016 is due to IPL.



Exhibit 8: BARC ratings in key regional markets, 09-Oct-15 to 14-Oct-16 (Week 41, 2015 to Week 41, 2016) (%)

Source: BARC ratings, Kotak Institutional Equities

Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16

Marathi- Ratings market share in top 5 channels (%)

Zee Marathi 39.0 40.2 43.9 41.6 35.2 38.0 39.3 39.5 39.1 40.1 42.8 44.7 51.5

Zee Talkies 19.2 18.8 18.3 17.6 19.1 18.0 18.1 16.4 16.6 17.2 17.3 17.5 15.0

Colors Marathi 21.5 20.6 21.9 23.0 25.5 26.3 26.4 28.1 27.8 24.4 21.5 19.3 17.6

Star Pravah 11.1 13.1 10.1 12.1 11.6 8.8 7.8 7.9 9.3 8.7 9.4 9.9 9.0

Maiboli / Fakt Marathi 9.2 7.4 5.7 5.8 8.6 8.9 8.4 8.1 7.1 9.6 9.0 8.6 6.9

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Network market share in top 5 Marathi channels (%)

Zee 58.2 59.0 62.3 59.2 54.3 56.1 57.4 55.9 55.8 57.3 60.1 62.2 66.5

Bangla- Ratings market share in top 5 channels (%)

Zee Bangla 28.7 27.0 28.8 29.1 27.6 29.8 30.1 30.9 31.7 34.7 33.2 30.3 30.2

Star Jalsha 46.8 46.5 45.6 46.3 46.2 44.8 44.0 42.3 43.6 41.2 45.1 49.4 46.9

Jalsha movies 12.2 14.3 13.7 12.2 13.2 12.1 11.9 14.0 12.6 12.8 11.2 10.4 12.9

Colors Bangla 6.5 6.1 5.9 5.9 6.2 6.3 6.6 5.8 5.7 5.1 4.1 3.9 3.8

Zee Bangla Cinema 5.7 6.0 6.0 6.5 6.9 7.1 7.3 7.0 6.4 6.1 6.4 6.0 6.2

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Network market share in top 5 Bangla channels (%)

Zee 34.4 33.1 34.8 35.6 34.5 36.8 37.5 37.9 38.1 40.8 39.6 36.3 36.4

Star 59.1 60.8 59.3 58.4 59.3 56.9 55.9 56.3 56.1 54.1 56.3 59.8 59.9

Telugu- Ratings market share in top 5 channels (%)

Zee Telugu 19.3 21.6 20.9 22.6 23.5 24.8 25.0 26.0 23.9 22.8 21.5 22.1 21.6

Maa TV 24.5 21.1 23.0 22.4 22.1 22.3 22.0 21.7 21.8 20.0 20.1 19.5 19.0

Gemini TV 19.5 19.1 17.9 18.9 17.7 17.5 19.9 18.7 20.2 23.7 25.5 27.1 27.8

ETV Telugu 25.1 26.1 26.1 24.8 25.5 24.4 23.2 23.3 23.2 22.8 22.8 22.3 22.8

Gemini Movies 11.6 12.0 12.0 11.2 11.2 11.0 9.8 10.4 10.9 10.7 10.2 9.0 8.8

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Kannada- Ratings market share in top 5 channels (%)

Colors Kannada 29.9 34.1 34.6 33.0 28.6 29.5 29.1 27.5 30.3 30.2 31.0 32.5 30.4

Zee Kannada 14.3 15.5 15.7 16.9 18.3 18.2 17.9 20.3 18.7 19.1 20.1 18.5 20.4

Udaya TV 19.1 15.5 16.1 16.1 16.3 14.8 16.4 15.6 17.4 16.7 15.9 16.1 12.3

Suvarna 17.9 16.5 16.5 16.4 20.3 20.6 19.0 17.1 15.0 16.2 17.7 17.3 19.7

Udaya Movies 18.7 18.5 17.1 17.6 16.5 16.9 17.6 19.5 18.6 17.8 15.4 15.6 17.2

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Tamil- Ratings market share in top 5 channels (%)

Sun TV 60.9 60.2 58.9 60.5 62.1 61.3 61.1 58.4 56.6 56.5 57.1 56.4 59.8

STAR V ijay 10.9 10.3 12.8 12.3 11.2 11.4 10.1 10.9 11.7 12.6 11.7 11.7 9.1

KTV 19.4 20.0 18.5 17.1 16.6 16.2 17.0 18.7 18.2 16.1 15.0 15.4 13.2

Polimer 5.6 6.2 6.4 5.5 5.0 4.9 4.7 5.2 4.9 4.4 4.6 4.4 4.4

Zee Tamizh 3.2 3.4 3.5 4.5 5.1 6.2 7.2 6.9 8.6 10.3 11.7 12.2 13.4

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0



Exhibit 9: Consolidated financial summary of Zee Entertainment, March fiscal year-ends, 2013-19E (Rs mn)


Profit model (Rs mn)

Total revenues 36,996 44,217 48,837 58,514 67,419 69,323 79,548

EBITDA 9,543 12,033 12,538 15,094 19,309 23,322 26,101

Other income 1,461 1,807 2,278 2,016 949 3,309 4,134

Interest (86) (158) (103) (123) (128) (133) (138)

Depreciation (399) (501) (673) (840) (1,204) (1,258) (1,389)

Pretax profits 10,519 13,181 14,040 16,147 18,926 25,240 28,708

Extraordinary items — — — (331) 25,795 — —

Taxes (3,337) (4,291) (4,284) (5,528) (9,467) (8,895) (9,955)

Minority interest 14 21 20 (22) (22) (22) (22)

RPS div idends (incl tax) 0 (101) (1,453) (1,457)

PAT 7,196 8,810 8,323 8,810 35,233 16,323 18,732

Adj PAT (pre-exceptional; excl RPS impact) 7,196 8,911 9,776 10,482 13,475 17,756 19,873

EPS (Rs) 7.5 9.2 8.7 9.2 36.7 17.0 19.5

Adj EPS (Rs) - (excl RPS impact) 7.5 9.3 10.2 10.9 14.0 18.5 20.7


Total Equity 39,115 27,207 35,306 42,181 74,487 86,763 100,869

Preference capital 0 20,169 20,192 20,169 20,169 16,136 12,102

Minority interest 33 61 4 85 85 85 85

Total borrow ings 28 29 12 9 9 9 9

Currrent liabilities 11,382 12,850 14,544 16,532 18,819 18,935 21,807

Total capital 39,176 47,467 55,514 62,444 94,751 102,992 113,065

Cash and cash eq 14,353 16,051 20,044 20,302 50,045 53,662 59,439

Inventories 8,745 11,736 11,878 13,160 14,522 16,467 18,673

Receivables 9,890 10,281 10,692 13,245 14,777 15,194 17,435

Loans and advances 6,014 7,645 11,627 12,972 14,831 16,969 19,428

Other current assets 664 1,243 1,706 2,127 2,327 2,627 2,927

Net fixed assets 9,975 11,730 12,254 14,960 14,856 14,798 14,758

Investments 601 1,304 1,314 1,646 1,646 1,646 1,646

Deferred tax assets 288 298 531 556 556 556 556

Total assets 39,176 47,467 55,514 62,444 94,751 102,992 113,065

Free cash flow (Rs mn)

Operating cash flow, excl. W-cap, ex-taxes 9,884 12,976 13,209 15,713 45,056 23,310 26,089

Working capital (2,342) (4,904) (2,236) (2,632) (2,667) (4,684) (4,334)

Taxes paid (3,669) (4,242) (4,164) (5,827) (9,467) (8,895) (9,955)

Capital expenditure (757) (1,482) (1,147) (4,064) (1,100) (1,200) (1,350)

Other income (net) 853 1,108 1,126 1,003 2,278 4,609 5,138

Free cash flow (prior to RPS dividends) 3,969 3,456 6,788 4,193 34,101 13,140 15,588

RPS div idends — (101) (1,453) (1,457) (1,457) (1,433) (1,141)

Free cash flow to equity holders 3,969 3,355 5,335 2,736 32,644 11,707 14,447

Key assumptions / metrics

Ad revenue growth (%) 24.0 21.2 11.8 28.9 17.5 18.0 14.6

Domestic subscription revenue growth (%) 26.2 13.2 8.0 14.5 14.5 15.0 16.5

Overseas subscription revenue growth (%) 14.0 5.5 (23.6) 15.7 9.0 5.0 3.0

Content cost as % of revenue 37.5 37.7 38.6 41.2 42.2 41.7 35.7

Effective tax rate (%) 31.7 32.6 30.5 34.2 50.0 35.2 34.7

EBITDA margin (%) 25.8 27.2 25.7 25.8 28.6 33.6 32.8

ROAE 19.6 26.6 26.6 22.7 60.4 20.2 20.0

ROACE 23.4 24.9 21.8 21.6 14.9 17.9 18.4

Sports operating profit (870) (976) (266) (349) (200) — —

&TV operating profit - - (1,250) (2,600) (2,200) (500) 600



Key changes to our earnings model

We have cut our revenue estimates by 0.4-2% over FY2017-19E as we build in continued

pressure on the realizations front on both voice and data, which more than offsets higher

volumes on both fronts. On the EBITDA front, we have built in slight contraction in margins for

FY2017E due to negative operating leverage, FY2018E and FY2019E margins have been largely

retained. These cuts together with increasing amortization and interest (driven by spectrum

purchases in the Oct 2016 auctions) lead to sharper cuts in EPS forecasts. On the capex front,

we have increased the total outlay for FY2017E in line with the management’s revised

guidance.

Read-through from Bharti’s results

Directionally speaking, Bharti reported similar trends (from a topline perspective) as Idea.

Bharti’s data volumes growth came in at 13% on a qoq basis similar to Idea’s 15%, data

realizations for both fell by close to 10%. From a ‘wireless revenue’ perspective both delivered

close to 2% decline qoq and about 7-8% growth yoy. It is clear that both operators focused on

a volume-led strategy (perhaps a tactical response to the R-Jio threat) in 2QFY17 and we expect

the same to continue going forward as well.

However, the major difference between the two was Bharti maintaining its EBITDA margins qoq

at 42.4%, while Idea’s margins declined close to 200 bps qoq. While it is difficult to assess the

exact reason (Bharti does not provide detailed cost break-up for its wireless operations), Idea’s

higher network operating costs (driven by increasing 2G and 3G/4G site rollouts) and lower

scale are perhaps the main drivers for its relative underperformance. We believe pressure on

Idea’s margins would continue in the near future.

Overall view: brace for challenges ahead

The next few quarters are going to be a challenge for the incumbents as the full impact of R-Jio’s

launch starts weighing in on operators’ financials. However, we believe that the company’s

renewed focus on volumes and subscriber acquisition will hold it in good stead. Moreover, we

believe that the company’s current stock level more than prices in these risks. Our target price

stands revised at ₹100/share (post change in estimates) from ₹105/share earlier, BUY stays. We

value the standalone business at 7X Sep 2018E EBITDA and our Indus stake value is DCF-based.

IDEA (IDEA) Telecom

Tough prognosis, tougher to value; we remain believers. Idea delivered a decent

quarter in a challenging environment; these challenges are likely to amplify in the near

term. We believe that the company is focusing on the right things now and should be

able to hold fort. Moreover, we believe that current valuations amply price in risks. Our

target price stands revised to ₹100/share (₹105 earlier) on cuts in estimates. We remain

positive on the stock; reiterate BUY.

BUY

OCTOBER 26, 2016

RESULT


Price (`): 75


BSE-30: 28,091


Mumbai: +91-22-4336-0885


Mumbai: +91-22-4336-0881

IDEA


52-week range (Rs) (high,low) EPS (Rs) 8.6 0.5 (4.8)

Market Cap. (Rs bn) EPS growth (%) (2.8) (94.4) #######

Shareholding pattern (%) P/E (X) 8.8 156.1 (15.7)


FIIs 25.7 Net profits (Rs bn) 30.8 1.7 (17.3)

MFs 2.3 EBITDA (Rs bn) 130.3 113.6 105.3


Absolute (8.7) (29.9) (46.4) ROE (%) 12.6 0.7 (7.9)



150-71

271.1

Telecom IDEA


Key takeaways from the earnings call

Minutes growth trajectory. In Jan 2016, the company experimented with increasing

effective voice rates (cut down in promotions) in order to bring much-needed discipline

with respect to pricing, however, other operators did not follow suit as a result of which

the company lost subscribers/failed to acquire subscribers, which has resulted in its yoy

volume growth taking a hit. Idea’s focus going forward would be a volume-led strategy

and the company has set a target of increase its subscriber base by 20-25 mn subscribers

on an annual basis as compared to 15 mn subscribers added over the trailing 12 months.

The company said that they are fairly confident of achieving this target and hence expect

minutes growth to improve to double digits (yoy basis) going forward.

Data growth versus investments. Idea (like other operators) has been rolling out mobile

broadband sites very aggressively; this has led to coverage expanding substantially.

However, asset utilization is currently extremely low, with pricing pressure to boot.

Currently, 4G average realizations are much lower than the average data realization (due

to more freebies), 2G is the highest and 3G is in between 2G and 4G. With respect to

competition from R-Jio, the management said that their primary focus is ring fencing their

existing customer base.

Capex guidance. The company’s initial capex guidance of ₹65-70 bn for FY2017 was

calculated with a target of deploying 103,000 MBB sites. However, post the auctions the

company re-assessed its site requirements (from a two-three year perspective) and now

plans to deploy 2G data sites on 85% of all 2G sites, 3G on 80% of all 2G sites and 4G

sites on 50% of all 2G sites which results in an approximate deployment of 200,000 sites.

Of the incremental 97,000 sites the company plans to deploy about 10,000 sites in

FY2017 itself resulting in an additional capex outlay of ₹10 bn over their initial guidance

leading to a revised guidance of ₹75-80 bn. Moreover, over the next two years the

company plans to deploy another 87,000 sites at an approximate outlay of ₹130 bn.

POI fine recommended by TRAI. The management categorically stated that Idea is not

violating any regulations, they have sought out a legal opinion and there is no case of any

violation. Having said that, the company also stated that POI has to be given to all

operators, and the company has gone out of the way to break the current practice for R-

Jio by increasing their POI by 20X, and an additional 2,000 POIs are in execution stage.

However, the management did mention that R-Jio’s voice tariffs are below the agreed

predatory tariffs (i.e. below IUC cost).

Spectrum payments and capitalization. Idea has paid close to ₹64 bn as upfront

payment for spectrum bid by the company in the Oct-16 auctions; the rest will be paid

over ten years after a moratorium of two years. On the impact on P&L from the acquired

spectrum, the company mentioned that the impact would be marginal in 2HFY17E as

most of the interest on the new spectrum would be capitalized.

Providence stake in Indus. The management stated that they are figuring out an

arrangement through which Providence can convert its indirect 4.85% stake in Indus

(through ABTL), into a direct stake.

IDEA Telecom


Exhibit 1: Key changes to Idea earnings model, March fiscal year-ends, 2017-19E (Rs mn)


Exhibit 2: Idea - SOTP


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

Consolidated

Revenues (Rs mn) 373,417 373,827 415,780 374,801 381,559 424,324 (0.4) (2.0) (2.0)

EBITDA (Rs mn) 113,588 105,340 120,522 116,982 107,754 121,781 (2.9) (2.2) (1.0)

Net income (Rs mn) 1,737 (17,300) (10,864) 3,963 (9,571) (8,888) (56.2) NM NM

EPS (Rs/share) 0.48 (4.80) (3.02) 1.10 (2.66) (2.47) (56.2) NM NM

EBITDA margin (%) 30.4 28.2 29.0 31.2 28.2 28.7 -80 bps -3 bps 28 bps

Capex (Rs bn) 205 71 64 167 71 84 22.5 (0.3) (23.6)

Ex-spectrum capex (Rs bn) 77 71 64 67 71 74 14.4 (0.3) (13.3)


Wireless business

Sep-2018E EBITDA (Rs bn) 108

Multiple (X) 7.0

Enterprise value (Rs bn) 758

Towers - owned

# of towers (nos) 9,885

Total tenancy (X) 1.73

Tenancies (nos) 17,101

Revenue per tenancy (Rs mn/ annum) 0.4

EBITDA margin (%) 65

EBITDA (Rs bn) 4.7

EV/EBITDA (X) 12.0

Enterprise value (Rs bn) 56

Implied EV/tower (Rs mn) 5.7

Idea (wireless + owned towers) business

Total Enterprise value (Rs bn) 814

Net debt (Rs bn) 533

Equity value (Rs bn) 281

Indus

Enterprise value (DCF-based, Rs bn) 913

Net debt (Rs bn) 39

Equity value (Rs bn) 874

Proportionate equity value (@11.152%, Rs bn) 97

Overall workings

Idea business' equity value (Rs bn) 281

Equity value of Idea's share in Indus (Rs bn) 97

Total equity value (Rs bn) 378

Equity value per share (Rs/share) 105

One-time spectrum charge (Rs/share) 6

Targer price (Rs/share) 99

Telecom IDEA


Exhibit 3: Key assumptions driving Idea model, March fiscal year-ends, 2014-19E


2014 2015 2016 2017E 2018E 2019E

Subscriber base ('000s) 135,788 157,808 175,100 181,700 188,300 200,300

Net adds per month ('000s) 1,182 1,835 1,441 550 550 1,000

Voice traffic (bn mins) 588 683 786 786 762 801

Change (%) 10.5 16.3 15.0 - (3.0) 5.0

Voice RPM (Rs/min) 0.370 0.356 0.327 0.332 0.322 0.318

Change (%) 5.8 (3.8) (8.3) 1.7 (3.0) (1.3)

Overall RPM (Rs/min) 0.442 0.455 0.453 0.469 0.484 0.514

Change (%) 7.3 2.9 (0.5) 3.7 3.2 6.0

Data revenues (Rs mn) 23,105 45,404 69,163 80,183 96,233 129,481

Change (%) 90.3 96.5 52.3 15.9 20.0 34.6

Data volumes (bn MB) 79 173 298 434 640 1,013

Change (%) 112.4 117.3 72.7 45.7 47.5 58.2

Data realization (Rs/MB) 0.291 0.263 0.232 0.185 0.150 0.128

Change (%) (10.4) (9.6) (11.8) (20.4) (18.6) (15.0)

SMS, VAS, ICR revenues (Rs mn) 18,914 21,758 29,669 27,592 27,152 26,721

Change (%) (8.5) 15.0 36.4 (7.0) (1.6) (1.6)

ARPU (Rs/sub/month) 168 176 178 172 166 176

Change (%) 7.9 4.9 1.0 (3.2) (3.5) 6.0

MOU (min/sub/month) 381 388 393 367 343 343

Change (%) 0.6 1.9 1.4 (6.7) (6.5) (0.0)

EBITDA per minute (Rs/min) 0.126 0.143 0.151 0.145 0.138 0.151

Change (%) 24.5 13.5 6.2 (4.6) (4.4) 9.0

Capex (Rs mn)

Standalone (ex-spectrum) 35,282 40,500 77,700 77,002 71,249 64,079

As % of revenues 13.3 12.8 21.6 20.6 19.1 15.4

Consolidated (including spectrum) 68,421 347,675 82,401 209,539 75,451 67,804

As % of revenues 25.8 110.1 22.9 56.1 20.2 16.3

IDEA Telecom


Exhibit 4: Idea Cellular's condensed financial statements, March fiscal year-ends, 2016-19E


2016 2017E 2018E 2019E


Revenue 359,621 373,417 373,827 415,780

EBITDA 119,048 113,588 105,340 120,522

EBIT 56,726 33,817 16,290 27,243

Net interest income / (expense) (15,763) (36,497) (48,402) (50,315)

Tax (15,837) (915) 9,112 5,722

Recurring Net profit 29,671 1,737 (17,300) (10,864)

Fully diluted EPS 8.24 0.48 (4.80) (3.02)


Cash 7,691 21,415 48,702 90,537

Other current assets 41,769 47,579 49,404 49,458

Fixed assets 218,495 245,982 265,437 273,493

Other long term assets 511,736 609,460 572,204 534,948

Short tem debt — — — —

Other current liabilities 109,512 143,456 156,407 164,407

Long term debt 405,413 555,413 585,413 620,413

Other long term liabilities 19,539 19,539 19,539 19,539

Shareholders funds (incl. minorities) 235,504 232,921 206,979 183,153

Net debt 397,722 533,998 536,711 529,876


EBITDA 119,048 113,588 105,340 120,522

Change in working capital 61,387 (3,149) 11,126 7,946

Cash tax (paid) (15,837) (915) 9,112 5,722

Capex on PP&E and intangibles (69,944) (204,982) (71,249) (64,079)

Miscellaneous items (39,848) 0 0 0

Free cash flow 54,806 (95,458) 54,329 70,112

Ratios (%)

Sales growth 13.9 3.8 0.1 11.2

EBITDA growth 10.3 (4.6) (7.3) 14.4

EPS growth (6.4) (94.1) (1,095.9) (37.2)

FCF growth (122.1) (274.2) (156.9) 29.1

EBITDA margin 33.1 30.4 28.2 29.0

Net margin 8.3 0.5 (4.6) (2.6)

RoAE 12.7 0.7 (7.9) (5.6)

ROAE (excl. cash and int. income) 14.0 0.3 (9.6) (10.6)

RoACE 8.6 4.9 2.5 4.2

ROACE (excl. cash and int. income) 8.9 4.8 2.3 4.0

Net debt/EBITDA (X) 3.3 4.7 5.1 4.4



Weak outlook

Shriram Transport Finance (STFC) has guided for 13-15% loan growth in FY2017E as compared

19% in 2QFY17 and 24% in 1QFY17.

CV sales have been weak for last few months likely due to the following: (1) weak demand for

tipper/ loaders in monsoon; this may likely pick up in 2H and (2) weak haulage demand; this

may pick up moderately, largely for transportation of agricultural commodities.

Our recent interactions with market sources indicated the following—(1) strong CV sales,

largely in the higher tonnage vehicles have added capacity in a significant manner and CV

operators are awaiting improvement in freight demand before adding new capacity, (2)

discount on CVs for bulk buyers/ large CV operators has increased in the last quarter, (3)

interestingly, lenders (banks and select NBFCs) have increased LTV in the large fleet operator

segment and (4) early delinquencies (1-2 months) have increased in select segment, mainly

more of tippers/ loaders.

Incrementally, STFC will focus on newer used CVs. Currently, about 5-7% of its portfolio

comprises CVs over 10 year, about 20-22% of CVs up to 5 years and the balance (70-75%) is

for CV between 5 and 10 years. Likely restrictions on older used CV have prompted the

company to shift to newer CVs. With competition from banks and NBFCs in the 5-7 year CV

segment, STFC’s NIM will likely remain under pressure.

Lower estimates and price target; management changes may weigh in

We are reducing our estimate for Shriram Transport Finance by 7-10% for FY2017-19E to

factor lower NIM (reflecting its shift to more competitive newer used CVs) and marginally lower

loan growth. Will signs of moderation in freight transport; we expect delinquencies to remain

high for a while though may come down as the portfolio shifts to newer used CVs.

Post our revision in estimates, we reduce our RGM-based price target to ₹1,250 (i.e. 2X book)

from ₹1,385, even as we roll over to September 2018. We expect the stock to remain range-

bound. A softening business outlook and recent management change may put pressure on

stock performance though lower valuations as compared to NBFC peers may provide some

support. Sharp movements in CV cycle remain a key sensitivity for the stock.

Shriram Transport (SHTF) NBFCs

In-line results, weak outlook. Shriram Transport Finance 2QFY17 results were broadly

in line with estimates. However, focus on newer used CVs and likely moderation in

freight demand will put pressure on near-term performance. We cut estimates, retain

ADD with price target of ₹1,250 (down from ₹1,385).

ADD

OCTOBER 26, 2016

RESULT

Coverage view: Neutral

Price (`): 1,157


BSE-30: 28,091

QUICK NUMBERS

15% yoy earnings

growth; 13% yoy

net operational

income growth

19% AUM growth;

12% yoy

disbursements

growth

Gross NPLs up ~20

bps qoq to 6.6%


Mumbai: +91-22-4336-0887


Mumbai: +91-22-4336-0886


Mumbai: +91-22-4336-0889

Shriram Transport



Market Cap. (Rs bn) EPS growth (%) (4.8) 32.2 20.0




MFs 2.4 BVPS 437.1 474.6 521.5


Absolute (2.5) (3.5) 22.2 ROE (%) 12.2 14.4 15.3

Rel. to BSE-30 (0.5) (3.5) 19.5 Div. Yield (%) 0.6 0.8 1.0


1,324-737

262.5

Shriram Transport NBFCs


Earnings in line

STFC reported PAT of ₹3.87 bn, up 15% yoy and in line with estimates. Loan book up 19%

yoy (24% in 1QFY17), 2% below estimates. However, NIM (calculated) declined to 7.45%

from 7.54% in 1QFY17 and 7.72% in 2QFY16 due to higher reversals and shift to lower

yield loans. This translated to 13% growth in net operational income. GNPLs inched up to

6.4% from 6.2% qoq. Cost to income ratio decline to 23.4% from 24.8% in 1QFY17 and

25.1% in 2QFY16.

Frequent management changes is a concern

Umesh Revankar has been reinstated as the CEO of the company. He exited the company in

May 2016 to be replaced by Mr Gujral. However, he has now been reappointed as the CEO

of the company. The company/ promoters have not shared any reasons for the sharp move

and raises concerns on management instability.

Exhibit 1: Shriram Transport Finance – quarterly data March fiscal year-ends, 2QFY16-2QFY17 (` mn)


(% chg.)

2QFY17 2QFY17E 2QFY16 1QFY17 2QFY17E 2QFY16 1QFY17 1HFY17 1HFY16 (% chg.) FY2017E

Total operational income 26,888 27,000 23,997 26,627 (0) 12 1 53,515 47,474 13 112,131

Income on securitised loans 2,262 1,900 1,595 1,864 19 42 21 4,126 3,058 35 8,377

Total interest expense 13,358 13,250 12,059 13,165 1 11 1 26,523 24,030 10 56,266

Net operational income (before provisions) 13,530 13,750 11,938 13,462 (2) 13 1 26,992 23,444 15 55,865

Net interest income 11,268 11,850 10,343 11,598 (5) 9 (3) 22,866 20,386 12 47,488

Provision and credit costs 4,591 4,500 3,984 4,591 2 15 (0) 9,182 7,942 16 18,136

Net operational income after provisions 8,939 9,250 7,954 8,871 (3) 12 1 17,810 15,502 15 37,729

Other income 169 150 190 167 (11) 1 336 336 (0) 600

Total income 13,699 13,900 12,128 13,629 (1) 13 1 27,327 23,780 15 56,465

Operating expenses 3,168 3,500 3,001 3,341 (9) 6 (5) 6,509 5,905 10 14,728

Pretax income 5,940 5,900 5,142 5,697 1 16 4 11,637 9,932 17 23,601

Tax provisions 2,063 2,006 1,761 1,956 3 17 6 4,019 3,340 20 8,024

Net Profit 3,877 3,894 3,381 3,741 (0) 15 4 7,618 6,592 16 15,576

PBT (excl provisions and extraordinaties) 10,531 10,400 9,127 10,288 1 15 2 20,818 17,875 16 41,737

Tax rate (%) 35 34 34 35 34 34

EPS (Rs) 17 15 16 34 29 16 69

Other details

Disbursements ( Rs mn) 106,630 95,062 106,630 12 —

Pre-owned 90,000 85,384 94,030 5 (4)

New 5,000 9,678 12,600 (48) (60)

Securitisation during the period (Rs mn) — 15,617 —

O/s Truck assets ( Rs mn) 636,888 550,877 639,619 16 (0)

Off balance sheet truck assets (Rs mn) 116,338 81,652 108,465 42 7

Total truck assets (Rs mn) 753,226 771,686 632,530 748,084 (2) 19 1

Used vehicle / truck assets (%) 90 92 89

New vehicle / truck assets (%) 10 8 11

NIMs (KS calc - %) 7.2 7.7 7.5

RoA (%) 2.2 2.2 2.2

RoE (%) 14.5 13.9 14.5

Cost to income (%) 23.4 25.1 24.8

Gross NPLs(%) 6.6 4.2 6.4

Gross NPL (Rs mn) 42,420 23,386 41,259 81 3

Net NPLs(%) 2.0 0.9 2.0

Net NPL (Rs mn) 12,518 5,029 12,202 149 3

Debt equity ratio (X) 4.75 4.65 4.84

Balance Sheet

Fixed assets 936 990 987 (6) (5)

Loans and advances 547 215 184 155 198

Cash and bank 35,029 27,189 26,609 29 32

Investments 16,615 23,347 13,222 (29) 26

Truck receivables 636,888 550,877 639,619 16 (0)

Current assets 24,932 19,127 22,524 30 11

Total 714,946 621,745 703,144 15 2

Shareholders funds 109,159 98,967 105,283 10 4

Equity capital 2,269 2,269 2,269 — —

Reserves 106,890 96,698 103,014 11 4

Loans 518,300 459,800 509,500 13 2

Current liabilities 84,261 60,201 85,228 40 (1)

Total 714,946 621,745 703,144 15 2

NBFCs Shriram Transport


Loan growth moderating

AUM growth moderated. STFC delivered 19% yoy and 1% qoq. Disbursement growth

was 12% yoy but lower than 15-31% yoy in last two quarters. Disbursements for the

quarter were ₹106 bn, up 12% yoy. Used CV disbursements (85% of total) were up 5%

yoy.

Sharp slowdown in new CVs. STFC had increased share of new CV loans to 11% in

1QFY17 from 8% in 1QFY16. With sharp slowdown in new CV (on the back of weak CV

sales), share of new CVs inched back to 10%. New CV disbursements declined by 48% yoy

and 60% qoq. One of the reasons for weak new CV sales would be lower infrastructure

activity during heavy monsoon (last year was a dry spell) and may pick up in 2H.

Future growth depends on increase in economic activity. We believe that pickup in

economic activity (typically construction activity picks up post monsoon) from 2H will

drive freight demand. According to market sources, in addition to loader and tippers,

demand of CV for haulage is weak as well. According to the management, monsoon is

also crucial for STFC as a large part of its transportation fright is related to agri-

commodities. However, increase in economic activity will be the key driver of higher

haulage demand and crucial for medium-term demand in the CV industry.

5-7% of loans for 10 year+ CV. STFC highlighted that about 5-7% of the loans are

financing vehicles over 10 years and about 75% finance vehicles that are 5-10 year old

segment. In case the government bans 10 year+ vehicles, management believes that the

activity in the 5-10 year segment will pick up and make up for the loss in the 10 year +

segment. We would however be watchful of NPLs from 10 year+ CVs, in such a scenario.

This will impact NIMs as well.

Forecast 15% AUM CAGR in FY2017-19E. We forecast 15% AUM growth in FY2017E.

We are reducing our forecast of AUM growth to 15% for STFC from 17-18% earlier

given the absence of medium-term growth drivers for CVs. Likely overcapacity in the

system due to strong sales, particularly of higher tonnage vehicles, in anticipation of

demand will likely put pressure on business. Sharper recovery in infrastructure spending

coupled with recovery in rural/agri demand can provide upside to our growth estimate.

NIM declines further

30 bps NIM decline qoq. STFC’s calculated NIM declined ~30 bps qoq and 50 bps yoy

to 7.21%. There are two factors, viz. (1) interest reversal (non-recognition of income) on

NPLs (GNPLs increase to 6.6% from 4.2% yoy; strictly not comparable due to merger of

equipment finance business in 4QFY16) and (2) lower yields in new vehicles and relatively

newer used vehicles with lower vintage of around 6 years.

Loan mix shift will lead to lower yields. Incremental growth will likely be driven by

new vehicles and relatively newer used vehicles which will put pressure on the overall

yields. Vintage-wise yields are as follows: (1) new CV are around 14-14.5%, (2) used CVs

which are more than 6 years old have ~18-19% yields on average, (3) low vintage CVs of

around 4-6 years age have yields of ~16%. STFC expects to offset part of the decline by

growing the 3W segment where yields are higher than CVs.

Downward pressure on NIM. We expect NIM (calculated as NII/AUM) to decline 80 bps

over FY2016-19E from 7.7% (higher base due to CE finance merger) in FY2016 to 7.1%

in FY2017E and 6.9% in FY2019E. This is despite facing 80 bps reductions in cost of

borrowing as a consequence of (1) lower bank base rates and bond borrowing costs and

(2) increasing share of low-yield loan securitization. Yield on loans will likely moderate to

14-14.5% by FY2019 from 16.2% in FY2016 and 15% in FY2017E.



NPLs remain high

GNPLs rise to 6.6%; absolute addition low. STFC reported gross NPL of 6.6% on 150

dpd basis and 4.8% on 180 dpd; this compares to 4.2% (180 dpd) in 2QFY16 and 6.4%

in 1QFY17 (150 dpd). Rise in NPLs on absolute basis was lowest in last seven quarters at

₹1.16 bn.

Shifting loan book will reduce NPLs overtime. STFC’s shifting focus on newer used

CVs (discussed above) will overtime reduce its NPLs. It is too early to accurately build the

same in our forecasts.

We expect NPLs to rise to reflect NPL transition. We model about 150 bps rise in

GNPLs in FY2017E to reflect the transition to 120 dpd NPL norms (120-150 bps indicated

by the management). Further, in FY2018E, we build in rise of 200 bps to reflect transition

to 90 dpd NPLs. We are dropping coverage ratio by 10% for every bucket of transition.

Thus, we expect coverage to drop to 50% by FY2018E.

Early delinquencies rise, credit cost to decline moderately. According to market

sources, early (30-60 day) delinquencies have increased in 2QFY17 for the industry. This

may be due to low infrastructure activity and may reverse in 2HFY17. Our credit cost to

loans ratio declines to 2.0% in FY2019E from 3% in FY2017E, 2.5% from 3.1% in FY2016.

This factors-in the rise in NPLs offset by reduction in coverage ratio. We continue to build

in write-offs about 2-2.4% of loans (1.95% in FY2016). Higher recoveries from the

equipment finance business will provide an upside to our estimates. We also think with

more clarity on growth and credit quality coverage ratio could see a drop to 40-50%.

Exhibit 2: Credit cost (for write-offs and securitized loans) increased in 2QFY17 March fiscal year-ends, 2QFY15-2QFY17 (Rs mn)


Cost-income ratio declines; but unlikely to persist

We forecast stable cost-income ratio of 26% as a result of operating leverage benefit due to

AUM growth. Higher share of large fleets and new CVs will marginally reduce this ratio.

Cost-income ratio declined ~150 bps qoq to 23.4% in 2QFY17. Operating costs grew 6%

yoy. Employee cost increased by 6% yoy while non-staff costs increased 7% yoy.


Gross NPLs 16,745 17,797 18,941 21,303 23,386 25,357 38,702 41,259 42,420

Net NPLs 3,492 3,561 3,791 4,578 5,029 5,023 11,437 12,202 12,518

Provisions 13,254 14,236 15,150 16,725 18,357 20,335 27,265 29,057 29,902

Credit costs 3,153 3,268 3,241 3,958 3,984 4,199 8,567 4,591 4,591

QoQ increase in provisions 923 982 914 1,575 1,632 1,978 6,931 1,792 845

Others 2,230 2,286 2,327 2,383 2,353 2,221 1,636 2,799 3,746

Others/ average loans (%) 1.62 1.62 1.60 1.59 1.52 1.37 0.94 1.52 2.00



Exhibit 3: STFC trading at 2.1X 1-year forward book One-year forward PER and PBR, October 2012 – October 2016 (X)


Exhibit 4: Shriram Transport Finance – change in estimates March fiscal year-ends, 2017E-19E (Rs mn)


-

0.8

1.6

2.4

3.2

0

5

10

15

20

25

Oct

-12

Jan

-13

Apr-

13

Jul-1

3

Oct

-13

Jan

-14

Apr-

14

Jul-1

4

Oct

-14

Jan

-15

Apr-

15

Jul-1

5

Oct

-15

Jan

-16

Apr-

16

Jul-1

6

Oct

-16


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

Net interest income (a) 55,865 64,638 71,369 60,264 71,725 81,070 (7) (10) (12)

Loans (incl. securitised loans) 839,205 961,341 1,107,593 839,205 983,895 1,154,640 — (2) (4)

YoY(%) 15.34 14.55 15.21 15.3 17.2 17.4

NIM (%) 7.6 7.5 7.1 8.2 8.2 7.8

NII/ AUMs (%) 7.1 7.2 6.9 7.7 7.9 7.6

NPL provisions 18,136 20,732 20,448 19,785 22,190 23,056 (8) (7) (11)

Operating expenses 14,728 16,177 17,858 15,701 18,414 21,180 (6) (12) (16)

Employee 6,808 7,837 9,076 6,808 7,837 9,076 — — —

Others 7,920 8,340 8,782 8,893 10,578 12,104 (11) (21) (27)

PBT 23,601 28,328 33,663 25,378 31,721 37,434 (7) (11) (10)

Tax 8,024 9,632 11,445 8,629 10,785 12,728 (7) (11) (10)

PAT 15,576 18,697 22,218 16,750 20,936 24,706 (7) (11) (10)

PBT-provisions 41,737 49,061 54,111 45,163 53,911 60,490 (8) (9) (11)

BVPS (Rs) 513 583 667 518 596 689 (1) (2) (3)

Notes

(a) Includes income on securitised assets

New estimates Old estimates % change



Exhibit 5: Shriram Transport Finance - key growth rates and financial ratios March fiscal year-ends, 2014-19E (%)


2014 2015 2016 2017E 2018E 2019E

Growth in key parameters (%)

Loans under management 6.9 11.3 23.1 15.3 14.6 15.2

Total assets 9.8 20.5 14.6 17.2 17.3 15.1

Borrowings 15.9 23.3 12.4 15.2 17.1 14.3



Key ratios(%)

NII/ AUMs(%) 7.3 7.3 7.7 7.1 7.2 6.9


Tax rate 30.8 32.8 33.5 34.0 34.0 34.0


Debt/ equity (X) 4.34 4.79 4.90 5.01 5.16 5.16

Du Pont Analysis

(% of average AUMs)



Net other income 0.3 0.1 0.1 0.1 0.1 0.1


(1- tax rate) 69.2 67.2 66.5 66.0 66.0 66.0

ROA 2.5 2.2 1.8 2.0 2.1 2.1

Average AUMs/average equity (X) 6.6 6.4 6.8 7.3 7.4 7.4

ROE 16.3 14.1 12.2 14.4 15.3 15.9



Exhibit 6: Shriram Transport Finance - Income statement and balance sheet March fiscal year-ends, 2014-19E (` mn)


2014 2015 2016 2017E 2018E 2019E

Income statement




Provisions and write/off 11,488 12,630 20,586 18,136 20,732 20,448


Other income 1,646 707 666 600 600 600



Depreciation 292 405 363 405 433 461

Advt and commission/brokerage 264 320 320 352 387 426

Sourcing and collection commission — 30 30 30 30 30

Other expenses 4,574 5,733 6,485 7,134 7,490 7,865

Pretax income 18,280 18,424 17,719 23,601 28,328 33,663

Tax provisions 5,639 6,046 5,937 8,024 9,632 11,445

Net Profit 12,641 12,378 11,782 15,576 18,697 22,218

% growth (7) (2) (5) 32 20 19

EPS (Rs) 57 55 53 70 84 100

% growth (7) (2) (5) 32 20 19

BPS (Rs) 371 414 455 513 583 667

ABVPS (Rs) 366 408 437 475 521 597

Balance sheet

Total Loans 364,737 492,271 618,784 700,221 807,567 896,393

Investments 80 80 80 80 80 80

Cash & deposits 70,859 47,234 23,639 40,803 42,021 46,747

Loans and advances 25,888 16,923 19,561 33,254 56,531 96,103

Net fixed assets 1,006 1,007 1,011 886 605 429

Other current assets — — — — — —

Total assets 492,253 593,272 679,633 796,795 934,843 1,076,227

Total Borrowings 359,245 442,800 497,900 573,830 672,077 767,867

Current liabilities 34,589 42,227 51,764 70,022 80,757 89,639

Provisions 15,690 15,865 28,427 38,377 51,809 69,942

Total liabilities 409,524 500,892 578,092 682,228 804,642 927,447

Share capital 2,231 2,231 2,231 2,231 2,231 2,231

Reserves 80,463 90,111 99,272 112,297 127,932 146,510

Shareholders fund 82,732 92,379 101,541 114,566 130,201 148,779



Strong growth was the only positive

Mahindra Finance (MMFS) reported 29% growth in disbursements translating into 14% growth

in loans under management to `439 bn from 11% in 1QFY17. With early signs of pick up in

festive season demand and a normal monsoon, loan growth will likely remain strong.

NPLs continue to trend up

MMFS’ performance was marred by high provisions, interest reversals and operational expenses.

GNPLs (on 120 dpd basis) increased to 11% from 10.7% qoq and 9.4% (135 days) yoy. On a

high base (provisions were up 50% in 2QFY16), provisions increased further 10% yoy. A sharp

compression in NIM due to high interest reversals led to 2% growth in NII despite moderate

loan growth. MMFS recently concluded operational restructuring (moving to a product structure

from a branch structure) which led to higher initial-period expenses. All the above led to 35%

decline in earnings.

Retain REDUCE with TP of `315

Estimates down 5-10%. Seasonal performance tends to be weak in 1H and picks up in 2H.

We hence do expect NPL to swing back over the next few quarters as normal monsoon plays

out. However, weak non-farm income may constrain the improvement; we cannot ignore

current deterioration in our forecasts. We are hence increasing our provision estimates for

FY2018E and FY2019E. We are also raising our operating expenses forecasts.

High earnings growth, medium-term RoE will be low. MMFS’s business is highly volatile both

seasonally and cyclically and among the most challenging to forecast among NBFCs under

coverage. Post the revision in earnings, we expect MMFS to deliver 11-15% near-term RoE

and 25% EPS CAGR during FY2018-19E, on a low base.

Retain REDUCE. We retain REDUCE rating with our RGM-based price target of `315 (2.3X

book) as we roll over to September 2018. We would await signs of improvement in non-

farm/ infrastructure activity in rural India to turn bullish even as normal monsoon leads to

better performance.

Mahindra & Mahindra Financial (MMFS) NBFCs

Another weak quarter. Mahindra Finance (MMFS) continued to report weak

performance (GNPLs at 11%) even as normal monsoon raises hope of a strong 2HFY17.

On the back of consistently weak performance which likely indicates the extent of

deterioration in rural India and no visibility of improvement in non-farm income, we do

not expect RoE to cross mid-teens in the medium-term. We cut estimates and retain

REDUCE with a price target of `315 (`320 earlier).

REDUCE

OCTOBER 26, 2016

RESULT


Price (`): 356


BSE-30: 28,091

QUICK NUMBERS

PAT down 35% yoy

Disbursements up

29% yoy

GNPLs at 11%


Mumbai: +91-22-4336-0887


Mumbai: +91-22-4336-0886


Mumbai: +91-22-4336-0889

Mahindra & Mahindra Financial







MFs 7.9 BVPS 100.7 108.6 120.7


Absolute 0.7 11.0 50.2 ROE (%) 11.4 10.7 12.5

Rel. to BSE-30 2.8 11.0 46.9 Div. Yield (%) 1.1 0.9 1.1


405-173

202.5

NBFCs Mahindra & Mahindra Financial


Exhibit 1: Mahindra Finance, Quarterly results March fiscal year-ends, 2QFY15-2QFY16 (` mn)


(% chg.)

2QFY17 2QFY17E 2QFY16 1QFY17 2QFY17E 2QFY16 1QFY17 1HFY17 1HFY16 FY2017E

Total interest income 14,916 - 14,200 13,664 9 5 9 28,580 27,808 3 64,393

Total interest expense 7,086 - 6,542 6,910 3 8 3 13,995 12,987 8 30,011

Net interest income 7,831 7,500 7,658 6,754 4 2 16 14,585 14,822 (2) 34,382

Provisions and write/off 3,042 1,750 2,772 2,245 74 10 35 5,287 6,000 (12) 9,585

Net interest income (after prov.) 4,789 5,750 4,886 4,509 (17) (2) 6 9,298 8,821 5 24,797

Other income 241 100 183 93 141 32 160 333 259 29 50

Total income pre provisions 8,071 7,600 7,841 6,847 6 3 18 14,918 15,080 (1) 34,432

Operating expenses 3,567 3,350 2,808 3,260 6 27 9 6,827 5,443 25 14,646

Employee expenses 1,710 1,750 1,384 1,675 (2) 24 2 3,386 2,678 26 6,600

Depreciation 107 100 101 106 7 6 1 214 199 7 677

Other expenses 1,749 1,500 1,323 1,479 17 32 18 3,228 2,566 26 7,369

Pretax income 1,462 2,500 2,261 1,341 (42) (35) 9 2,804 3,637 (23) 10,201

Tax provisions 514 875 799 472 (41) (36) 9 986 1,285 (23) 3,427

Net Profit 948 1,625 1,462 870 (42) (35) 9 1,818 2,352 (23) 6,774

Tax rate (%) 35 35 35 35 35 35 34

PBT before provisions 4,504 4,250 5,033 3,587 6 (10) 26 8,091 9,637 (16) 19,786

EPS (Rs) 1.7 2.6 1.5 (35) 9 3 4 (23) 12

Other operational details

Value of asset financed (Rs bn) 75 59 66 29 15

Outstanding assets (Rs bn) 427 370 405 15 5

Managed loan assets (Rs bn) 439 384 417 14 5

NIMs - KS calculations (%) 8.1 7.9 9.0 7.3

Cost to income (%) 44.2 35.8 47.6

Exp/ ave assets (%) 3.5 3.1 3.4

Total income/ average assets (%) 14.7 16.1 14.3

Interest / average assets (%) 7.1 7.4 7.2

Difference (%) 7.6 8.7 7.1

Credit costs/ AUMs (%) 2.8 2.9 2.2 (2) 31

Gross NPLs (Rs mn) 47,481 35,283 44,146 35 8

Gross NPL ratio (%) 11.0 9.4 10.7

Net NPLs (Rs mn) 22,862 16,453 21,060 39 9

Net NPL ratio (%) 5.6 4.6 5.7

CAR (%) 18.1 18.2 19.5

Tier I (%) 13.2 15.5 14.3

Segment-wise disbursements (%)

Auto/ utility vehicles 28 31 29

Tractors 17 15 17

Cars 22 23 22

Commercial vehcles 12 11 13

Refinance and others 21 20 19

Segment-wise AUMs (%)

Auto/ utility vehicles 28 31 29

Tractors 17 15 17

Cars 22 23 22

Commercial vehcles/CEs 12 11 13

Refinance and others 21 20 19

Funding Mix, excluding assignments (%)

Banks 46 48 40

Insurance 8 17 22

Mutual funds 21 18 19

Others 25 17 20

(% chg.)

Mahindra & Mahindra Financial NBFCs


Exhibit 2: Mahindra Finance : Balance sheet March fiscal year-ends, 2QFY15-2QFY17 (` mn)


Exhibit 3: MMFS's performance has been cyclical Key parameters of MMFS, March fiscal year-ends, 2007-2019E


Normal monsoon in FY2017 is a positive

Exhibit 4 shows that MMFS’s GNPLs have strong linkages to monsoon. Its NPLs have

increased sharply in year of high deficit in monsoon. On the back of two consecutive years

of 13% deficit in monsoon, improvement in FY2017 (3% deficit) is positive and will likely

lead to decline in NPLs on a comparable basis and boost growth as well.


Balance sheet

Sharecapital 1,128 1,128 1,128 1,128 1,128 1,128 1,128 1,128 1,128

Reserves 53,418 54,851 55,566 56,498 58,002 58,718 59,752 60,417 61,402

Total Borrowings 263,524 271,385 262,538 283,890 291,000 303,000 308,456 311,952 333,933

Current Liabilities 18,952 20,885 31,509 20,974 19,976 26,353 26,458 31,553 30,062

Total liabilities and 337,022 348,249 350,741 362,490 370,106 389,199 395,795 405,051 426,526

Loans & Avd 318,000 329,040 329,260 336,020 344,760 363,300 366,580 373,870 399,120

Investments 6,752 7,227 8,536 8,851 10,413 10,723 14,833 12,528 10,002

Deferred tax 3,517 3,718 4,153 4,280 4,490 4,586 5,853 6,133 6,579

Current Assets 7,696 7,202 7,692 12,233 9,350 9,483 7,394 11,359 9,509

Fixed assets 1,057 1,062 1,100 1,106 1,093 1,107 1,135 1,161 1,316

Total assets 337,022 348,249 350,741 362,490 370,106 389,199 395,795 405,051 426,526

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E

Disbusements (% yoy) 22 8 7 42 62 35 22 7 (5) 10 23 19 19

Loan growth (% yoy) 32 13 3 22 49 40 37 23 11 11 18 17 18

NIM (%) 8.1 9.9 10.6 10.9 10.6 8.2 8.1 7.8 7.4 7.1 6.5 6.7 6.7

Credit cost/ assets (%) 2.2 3.7 3.9 2.7 1.4 1.0 1.3 1.8 2.5 2.8 2.2 2.2 2.0

Opex/ assets (%) 3.5 3.8 3.7 3.9 4.3 3.7 3.4 3.2 3.0 3.2 3.4 3.3 3.2

Gross NPLs (%) 5.5 7.6 9.6 7.0 4.2 3.1 3.1 4.4 5.9 8.0 8.0 7.0 7.0

Net NPLs (%) 2.5 2.9 2.9 1.0 0.6 0.7 1.1 1.9 2.5 3.4 3.0 2.1 2.3

RoA (%) 2.4 2.7 3.0 4.2 4.1 3.8 4.1 3.1 2.5 1.8 1.6 1.7 1.9

RoE (%) 18.1 16.9 15.4 21.5 22.0 22.8 24.5 18.6 15.5 11.4 10.7 12.5 14.8



Exhibit 4: MMFS's NPLs have been high in years of large deficit in monsoon Monthly deficit during monsoons, gross NPLs of MMFS in following financial years, 2002-17

Source: IMD, Kotak Institutional Equities

Exhibit 5: Volatile QoQ performance of MMFS Key quarterly highlights, 2QFY15-2QFY17


No other signs of income buoyancy in rural India

Monsoon may be normal in FY2017, but other factors like weak cash crop prices and

subdued infrastructure development activity are leading to low rural wage inflation. We do

take cognizance of the fact that the improvement in profitability can be sharp when the

cycle turns upwards (600 bps improvement in RoE) but this may be too early to expect at

this stage, until other factors driving rural incomes pick up

Management commentary of its business

MMFS has provided a positive outlook on its business. Typically, 2H, mostly 4Q, tends to be

strong. Festive sales, if an indication, were modestly strong last month. Farming activity in

most of its key states is much better yoy – (1) Soya production was normal with stable prices

in MP, (2) Maharashtra is better placed after the severe drought last year, (3) south India

(except the mining belt of Karnataka) reported improvement in collections, and (4) western

India (mostly Gujarat and Rajasthan) will likely remain stable. Monsoon was normal and will

lead to stronger farm income, but infrastructure activities in most states (except Andhra and

Telengana) are yet to pick up.

AUM growth picks up to 14%

Growth picked up in the quarter as the MMFS benefitted from the positive sentiments of a

normal monsoon. Disbursements for the quarter were ₹75 bn, up 29% yoy.

AUM growth at 14% (up from 11% in 1QFY17) was driven by refinance loans which grew

21% yoy, followed by cars which grew 12% yoy and CVs 24% on a low base.

Disbursement growth for the quarter was driven by tractors, cars and refinance.

June July August September June-Sept

(cumulative)

Gross NPLs

of MMFS

Year (%) (%) (%) (%) (%) (%)

2002 32.4 (10.5) (23.5) (42.3) (15.4) 7.4

2003 12.5 (46.1) (18.1) (5.3) (19.2) 7.8

2004 1.6 2.7 (1.0) 2.8 1.3 8.1

2005 18.0 (34.4) 1.2 (44.1) (18.9) 6.8

2006 (43.6) 11.0 (17.6) 0.6 (6.8) 4.9

2007 (1.8) (7.1) 13.5 (4.6) 0.0 5.5

2008 5.7 (0.4) (1.6) 9.5 2.8 7.6

2009 22.3 (24.6) 0.3 0.6 (2.2) 9.6

2010 (50.8) (3.1) (30.5) (11.3) (21.6) 7.0

2011 (10.6) (4.1) 3.2 25.8 3.2 4.2

2012 11.0 (10.3) 2.8 21.0 3.0 3.1

2013 (24.0) (21.8) (1.1) 76.7 4.3 3.1

2014 38.1 6.8 (1.3) (13.5) 4.9 4.4

2015 (38.2) (17.2) (5.1) (0.6) (13.5) 5.9

2016 20.0 (13.2) (25.6) (21.7) (13.8) 8.0

2017 (10.6) 7.8 (8.1) (3.2) (3.0) NA


AUM (Rs bn) 356 365 369 376 384 403 409 417 439

Gross NPL ratio (%) 6.3 7.1 5.9 8.0 9.4 10.1 8.0 10.7 11.0

Provisions and write/off 1,841 2,690 1,493 3,228 2,772 3,406 1,089 2,245 3,042

Net Profit 2,073 1,365 3,334 890 1,462 672 3,702 870 948

NIMs - KS calculations (%) 9.5 9.1 10.7 8.6 9.0 8.3 11.0 7.3 8.1



We expect MMFS’s loan growth to move up to 17-18% over the next two years. We expect

normal monsoon to be supportive of growth expectation; pay commission-related payouts

will also boost car finance in semi-urban India. Our auto analyst expects tractor industry to

grow by 8-10% in FY2017E (declined in FY2016) and cars to grow by 10% in FY2017 (5%

in FY2016). As such, the share of tractors (declining over the last two years) will remain

steady.

Some medium-term growth drivers for MMFS are - (1) growth in car loans as OEMs (beyond

Maruti) expand their presence in rural markets, with introductions of new models also

helping to achieve higher growth; (2) opportunity in pre-owned vehicle loan arising from

MMFS’s existing customers who look to sell their older vehicles; (3) MMFS is also looking to

expand its network by 0.1 mn villages over the existing coverage of 0.4 mn villages.

Exhibit 6: Share of auto and refinance has increased AUM break-up, March fiscal year-ends, 2012-1QFY17 (Rs bn)


Exhibit 7: Loan growth has slowed in last three years Loans and yoy growth, March fiscal year-ends, 2010-19E (Rs bn)


Exhibit 8: High QoQ growth in old vehicles AUM break-up, March fiscal year-ends, 2QFY14-2QFY17 (` bn)


Sharp decline in NIM, partly led by mix change

NIM declined sharply by 90 bps yoy to 8.1% in the quarter. The decline may be due to

higher NPLs (11% versus 9.4% in 2QFY16) and non-recognition of income thereon.

62 81 99 114 127 129 132 64

89 82 85

98 100 101

25

36 51

48 49 54 57

41

53 65

66 70 71 75

14

20

44 55

65 62 75

0

96

192

288

384

480

2012 2013 2014 2015 2016 1QFY17 2QFY17

Refinance and others Tractors

Commercial vehcles/CEs Cars

Auto/ utility vehicles

-

10

20

30

40

50

60

-

120

240

360

480

600

720

2010

2011

2012

2013

2014

2015

2016

2017E

2018E

2019E

Loans (Rs bn) (LHS) YoY growth (%) (RHS)

2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 YoY (%) QoQ (%)

Total 356 365 369 376 384 403 409 417 439 14 5

Auto/ utility vehicles 103 110 114 116 119 125 127 129 132 10 2

Tractors 64 69 66 68 69 68 70 71 75 8 5

Cars 82 84 85 86 88 97 98 100 101 14 1

Commercial vehcles 50 47 48 49 46 48 49 54 57 24 5

Refinance and others 57 55 55 56 61 64 65 62 75 21 19

YoY (%) 14 11 8 10 8 10 11 11 14



With incremental focus on cars and higher ticket MUVs, NIMs are trending down. One of

the reasons for lower margin has also been lower share of tractor loans over the past few

quarters which typically carry 400-500 bps higher interest rates.

Calculated cost of borrowings declined 10 bps qoq. The share of bank term loans grew

sharply as banks reduced benchmark lending rates. Borrowings from MFs were up 30% yoy;

the company will incrementally raise bonds.

We estimate NIM to inch up to 6.7-6.8% over FY2018-19E from 6.5% in FY2017. Better

collections will drive higher NIM though offset by transition to 90 dpd NPL norm.

Exhibit 9: We expect NIM to remain stable Yield on loans, cost of funds and NIM, March fiscal year-ends, 2010-2019E (%)


Exhibit 10: Gross NPLs have increased in 2QFY17 NPLs and credit costs, March fiscal year-ends, 2QFY08 -2QFY17


NPL and provisions increase qoq

MMFS had poor quarter on asset quality as gross NPL (120 dpd) increased to 11% from

10.7% qoq. The company reported interest reversals of `1.5 bn. It has focused on recoveries

in the past 1-2 months mainly for NPLs that are provided over 50%; the stock of

repossessed vehicles increased to about 11,000 from 6,000 earlier. This exercise will drive

collections in 2H.

18.5 18.0 16.3 16.4 16.5

15.9 15.3 14.5 14.4 14.4

8.6 8.2 9.3 9.6 9.9 9.8 9.2 8.9 8.6 8.6

10.9 10.7

8.2 8.1

7.8 7.4 7.2

6.5 6.7 6.7

6.0

7.2

8.4

9.6

10.8

12.0

-

4.0

8.0

12.0

16.0

20.0

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

Yield on average earning assets Average cost of funds NIM

0

2

5

7

10

12

-

5

10

15

20

25

30

35

40

45

50

2Q

FY08

4Q

FY08

2Q

FY09

4Q

FY09

2Q

FY10

4Q

FY10

2Q

FY11

4Q

FY11

2Q

FY12

4Q

FY12

2Q

FY13

4Q

FY13

2Q

FY14

4Q

FY14

2Q

FY15

4Q

FY15

2Q

FY16

4Q

FY16

2Q

FY17

Gross NPLs (Rs bn) (LHS) Gross NPLs (%) (RHS)



We maintain our view that forecasting NPL and credit cost is challenging for the nature of

business MMFS is engaged in. We forecast 2.2% credit cost in FY2017E, lower than 3.0% in

FY2016 helped by better collections in 2H. We expect GNPL ratio to remain high at 8.0% in

FY2017E and expect write-offs of 1.55%, lower than FY2016 (1.8%). We believe MMFS’s

localized and deep presence in rural areas renders greater effectiveness in improving

collections as soon as customer cash flows start to improve.

Operating expenses high

MMFS has reported 27% growth in operating expenses on the back of (1) high costs of

collections/ recoveries, (2) legal charges. The company restructured its operations to follow a

product-driven structure from branch-driven structure; this has entailed recruitment of new

employees.

Performance of subsidiaries

High growth in rural housing finance

Strong business momentum. Mahindra Rural Housing Finance continues to deliver high

growth: ~50% yoy loan growth to `39 bn on the back of 38% growth in loan contracts.

Over the past three years, the company reported ~50% CAGR in its loan book, on a low

base.

Focusing on affordable housing. Mahindra Housing now proposes to diversify into

affordable in semi-urban India (i.e. tier 4/5 towns) with ticket size of `0.5-1.0 mn –

marginally lower than Dewan and REPCO. The company will initially work on synergies with

Mahindra Lifespaces. This segment will contribute to about 25% of its business over the

next few quarters; current focus is on low ticket (`1,00,000-1,50,000) rural housing, similar

to loans offered by the NBFC subsidiaries/ affiliates of some of the MFIs.

High RoEs. We see this business to be in a sweet spot where large opportunity size and its

small base provides tremendous opportunity for multi-year growth. The company is able to

charge high (about 17%) loan yields on the back of high cost of distribution to reach out in

rural India. Its RoE in FY2016 was 31% with RoA of 2.3%. Quarterly performance remains

fairly volatile.

Moderate performance of insurance distribution

Mahindra Insurance Brokers (MIBL) reported moderate results with PAT of ₹85 mn in

2QFY17, down 6% yoy due to high costs; net premium growth was very strong at 46% yoy,

which supported 22% yoy income growth.

MIBL operates as a composite broker, i.e. offers broking in both direct insurance and re-

insurance. Although MIBL operates across the retail and corporate segments in both life and

non-life, we believe major business is generated from credit term plan (life product covering

outstanding loan) and motor insurance. Our positive view on this business is more longer

term given the nascent stage of the insurance business itself in India. We see the reinsurance

segment as uniquely positioned to grow once there is an active re-insurance market in India.

MIBL has an aspirational goal of being in the top hundred insurance brokers in the world.



Exhibit 11: Mahindra Rural Housing Finance - summary financials March fiscal year-end, 2QFY15-2QFY17


Exhibit 12: Mahindra Insurance Brokers Ltd. - summary financials March fiscal year-end, 2QFY15-2QFY17 (Rs mn)


Exhibit 13: Mahindra Finance trading at 2.9X one-year forward book Rolling one-year forward PER and PBR, July 2008 – July 2016 (X)


2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 YoY (%)

Disbursements (Rs mn) 2,156 2,160 3,465 3,392 3,417 3,411 5,305 4,050 4,535 33

Customers (#) 15,646 17,540 33,517 25,048 24,967 27,468 47,591 28,654 34,428 38

Loan per customer (Rs) 137,799 123,147 103,380 135,420 136,861 124,181 111,471 141,342 131,724 (4)

Loan book (Rs mn) 16,815 18,312 20,983 23,646 26,224 28,584 32,645 35,576 38,818 48

Total income (Rs mn) 768 826 1,016 996 1,135 1,273 1,550 1,437 1,680 48

PBT (Rs mn) 149 124 321 105 151 259 452 124 306 103

PAT (Rs mn) 98 76 216 68 99 161 299 81 199 101

RoA (%) 2 2 4 1 2 2 4 1 2 35

Networth - calculated (Rs mn) 966 1,042 1,258 1,326 1,425 1,586 1,885 1,966 2,165 52

RoE (%) 43 30 75 21 29 43 69 17 39 -

Asset/ equity (X) 17 18 17 18 18 18 17 18 18 -

2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 YoY (%)

Premium 1,868 2,295 3,038 2,499 1,916 2,785 3,670 2,680 2,797 46

Income 295 345 356 317 309 407 459 365 378 22

Expenses 159 153 160 171 170 189 210 211 246 45

PBT 136 192 196 146 139 218 249 154 132 (5)

PAT 90 126 128 96 90 140 159 101 85 (6)

Policies (#) 270,871 300,211 312,156 300,483 291,400 368,298 370,748 360,128 339,838 17

-

6

12

18

24

30

0.0

0.8

1.6

2.4

3.2

4.0

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

Rolling PBR (X) (LHS) Rolling ROE (%) (RHS)



Exhibit 14: MMFS - change in estimates March fiscal year-ends, 2017-19E (` mn)


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

Net interest income 28,049 33,631 39,461 28,474 33,442 38,633 (1) 1 2

Loan book (Rs bn) 432 507 597 417 482 565 4 5 6

Loan growth (%) 18 17 18 14 16 17

NIM (%) 6.5 6.7 6.7 6.8 7.0 6.9

NPL provisions 9,585 11,039 11,597 9,795 10,568 10,995 (2) 4 5

Other income 6,383 6,702 7,708 6,332 7,249 8,246 1 (8) (7)

Securitization - - - - 600 600

Operating expenses 14,646 16,429 18,914 13,757 15,863 18,419 6 4 3

Employee 6,600 7,679 8,708 6,350 7,388 8,553 4 4 2

Others 8,046 8,750 10,206 7,407 8,474 9,866 9 3 3

PBT 10,201 12,865 16,659 11,255 14,261 17,467 (9) (10) (5)

Tax 3,427 4,295 5,527 3,766 4,742 5,782 (9) (9) (4)

PAT 6,774 8,570 11,132 7,488 9,519 11,685 (10) (10) (5)

PBT+provisions 19,786 23,904 28,256 21,050 24,829 28,461 (6) (4) (1)

EPS (Rs) 12 15 20 13 17 21 (10) (10) (5)

% change New estimates Old estimates



Exhibit 15: Mahindra Finance - key assumptions, ratios and growth rates March fiscal year-ends, 2014-2019E (%)


2014 2015 2016 2017E 2018E 2019E

Growth in key parameters (%)

Total interest income 30 12 7 9 17 17

Total interest expense 35 14 6 14 14 17

Net interest income 25 10 8 5 20 17

Loan loss provisions 79 64 27 (9) 15 5

Total income 18 12 6 5 17 17

Operating expenses 23 10 17 24 12 15

Employee expenses 33 54 22 18 16 13

Net loans 23 11 11 18 17 18

Total assets 24 11 13 17 17 17

Total Borrowings 27 7 17 19 18 18

Shareholders fund 14 11 7 8 9 11

Asset management measures (%)



Difference 6.5 6.0 6.0 5.6 5.9 5.9


Spreads on lending business 6.5 6.0 6.0 5.6 5.9 5.9

Net interest income/EA (after prov) 6 5 4 4 5 5

Tax rate 34 34 35 34 33 33

Dividend payout ratio 24 28 26 26 26 26

Profitability measures (%)

Interest income/total income 81 80 82 81 83 84

Other income / total income 19 20 18 19 17 16

Operating expenses/total income 33 33 36 43 41 40

Payout ratio 24 28 34 26 26 26

Equity/assets (EoY) 16 16 15 14 13 13

ROA decomposition - % of avg. assets



Net other income 1.9 1.9 1.6 1.5 1.3 1.3

Gains on securitization 0.0 0.0 0.0 0.0 0.0 0.0


(1- tax rate) 65.9 66.3 64.8 66.4 66.6 66.8

ROA 3.1 2.5 1.8 1.6 1.7 1.9

Average assets/average equity (X) 6.0 6.2 6.3 6.8 7.3 7.8

ROE 18.6 15.5 11.4 10.7 12.5 14.8



Exhibit 16: Mahindra Finance - income statement & balance sheet March fiscal year-ends, 2014-2019E (` mn)


2014 2015 2016 2017E 2018E 2019E

Income statement




Provisions and write/off 5,058 8,275 10,495 9,585 11,039 11,597

Other income 5,343 6,270 5,978 6,383 6,702 7,708


Pretax income 13,458 12,536 10,381 10,201 12,865 16,659

Tax provisions 4,586 4,219 3,656 3,427 4,295 5,527

Net Profit 8,872 8,317 6,725 6,774 8,570 11,132

PBT - securitization income + provisioning expense 18,516 20,811 20,876 19,786 23,904 28,256

EPS (Rs) 16 15 12 12 15 20

BPS (Rs) 90 101 108 116 127 140

ABVPS (Rs) 87 96 101 109 121 133

Balance sheet

Net loans 296,000 329,260 366,580 432,189 507,325 597,114

Total Investments 8,692 8,536 14,833 15,575 16,353 17,171

Cash & deposits 3,829 4,794 5,890 6,538 7,257 8,055

Loans and advances and other assets 3,790 2,898 1,467 1,467 1,467 1,467

Deferred tax assets 3,151 4,153 5,890 6,185 6,494 6,818

Net fixed assets 913 768 753 1,128 821 637

Capital work in progress 282 332 382 432 482 532

Total assets 316,657 350,741 395,795 463,514 540,199 631,795

Liabilities

Total loans and bonds 237,654 254,680 301,383 359,807 430,544 506,772

Total Borrowings 246,386 262,538 308,460 366,173 430,544 506,772



Share capital 1,127 1,128 1,129 1,129 1,129 1,129

Reserves 49,815 55,566 59,752 64,467 70,432 78,181

Shareholders fund 50,942 56,694 60,881 65,596 71,561 79,310



Earnings growth led by healthy growth in operating profits

FB reported a reasonably impressive quarter with most key metrics in the right direction.

Earnings grew 25% yoy on the back of ~20% NII and non-interest income growth of 44% yoy.

NIM was stable qoq, supported by improving CD ratio, while loan growth was impressive at

27% yoy. Cost-income ratio is showing an improving trend, reducing to 52%. High treasury

income boosted non-interest income, but core fee income grew ~20% yoy. Asset quality was

stable qoq with gross NPLs and restructured loans unchanged at 2.8% and 2.3% respectively.

Many positive takeaways

We like the bank’s performance in a few key areas. (1) Loan growth has picked up momentum

at ~25% yoy giving comfort on strong revenue growth for FY2017. Growth was a bit skewed

with corporate loan growth of 47% yoy, but retail (ex-gold) growth of 24% yoy and SME

growth of 17% yoy give comfort. We see strong growth in business both outside and within

Kerala. (2) NIM has been stable at 3.3% levels and low CD ratio provides comfort (3) gross NPLs

were flat and restructured loans declined qoq. The bank has not materially reduced provision

coverage ratio (4) there is good progress towards reducing cost-income ratio.

The two areas of concern are (1) current quarter’s performance benefitted from treasury gains

growth tailwinds and stable NIMs, but the main concern is the need for cost ratios to decline

from 2.1-2.2%. Visibility on improvement is an extremely slow process led by loan growth and

better productivity of employees (2) SME and retail slippages have been low this quarter but we

are yet to see the full impact of the slowdown in the Middle East.

Maintain BUY rating; good performance raises expectations of better times ahead

We maintain our positive view with TP of ₹95 (from ₹80), valuing the bank at 1.8X book and

14X FY2018E EPS for RoEs in the range of ~13% in the medium term and strong earnings

growth ~40% CAGR in FY2017-19E (off a low base). Federal Bank is taking the right steps by

moving the business model closer to that of new private sector banks, even though it is unlikely

to shed its old private sector bank image in the near-term. The bank needs to create a path

towards to 15%+ sustainable RoE over the medium- to- long-term to enable greater confidence

in higher multiples. The higher TP is on account of lower cost of equity.

Federal Bank (FB) Banks

Another good quarter. FB reported an impressive quarter with earnings growth of

25% yoy on the back of ~40% yoy growth in operating profits. Recent changes

effected by the management are shaping up well when we look at growth in loans and

revenues and commitment to reduce cost ratios. Stable asset quality offers strong

comfort. We see steady improvement in return ratios which makes it an attractive bank

to own at these levels. Maintain BUY with TP at ₹95 (from ₹80 earlier).

BUY

OCTOBER 26, 2016

RESULT


Price (`): 81


BSE-30: 28,091

QUICK NUMBERS

25% yoy earnings

growth; 19% yoy

NII growth

Impaired loans

decline ~10 bps qoq

to 5.1%

Retain BUY with ₹95

TP (from ₹80)


Mumbai: +91-22-4336-0886


Mumbai: +91-22-4336-0887


Mumbai: +91-22-4336-0889

Federal Bank







MFs 24.9 BVPS 43.5 46.4 51.4


Absolute 11.4 22.8 42.3 ROE (%) 6.0 10.4 12.6



82-41

139.5

Federal Bank Banks


Exhibit 1: Federal Bank quarterly results March fiscal year-ends, 1QFY16-1QFY17 (` mn)


Strong loan growth driven by wholesale advances

Federal Bank reported very strong 27% yoy loan growth, driven by growth in wholesale

advances, which grew 47% yoy. Including credit substitutes, corporate loan growth was

stronger at 65% yoy. Retail advances (ex-gold) grew strongly by 24% yoy and 14% qoq on

account of the purchase of ₹15 bn loans in the mortgage category. Within retail, housing

loans grew 14% yoy; LAP growth was strong at 30% yoy while gold loan book continued to

decline at ~18% yoy.

Growth in wholesale banking is a result of the recent initiatives (talent hiring) by the bank to

grow the high-rated exposure – share of A and above-rated loans has increased to 72%

from 42% about one year ago.

We look forward to further progress on this initiative in coming quarters. We forecast ~19%

loan CAGR in FY2017-19E.

2QFY17 2QFY17E 2QFY16 1QFY17 2QFY17E 2QFY16 1QFY17 1HFY17 1HFY16 FY2017E

Interest earned 20,663 20,322 19,023 20,138 1.7 8.6 2.6 40,800 38,159 6.9 84,250

Interest/discount on advances/bills 15,688 15,380 14,001 15,242 2.0 12.1 2.9 30,930 28,143 9.9 64,031

Income on Investments 4,355 4,325 4,236 4,308 0.7 2.8 1.1 8,664 8,544 1.4 17,531

Interest on balances / inter bank 159 128 191 122 24.1 (16.8) 30.3 280 321 (12.9) 2,687

Interest expended 13,401 13,337 12,939 13,211 0.5 3.6 1.4 26,612 26,023 2.3 54,591

Net interest income 7,262 6,985 6,083 6,927 4.0 19.4 4.8 14,189 12,136 16.9 29,659

Other Income 2,616 2,944 1,823 2,370 (11.1) 43.5 10.4 4,987 3,757 32.7 10,089

Total income 9,878 9,929 7,906 9,297 (0.5) 24.9 6.3 19,175 15,893 20.7 39,748

Operating Expenses 5,128 5,119 4,540 5,039 0.2 12.9 1.8 10,167 8,855 14.8 20,547

Staff costs 2,916 2,863 2,489 2,894 1.9 17.1 0.8 5,810 5,012 15.9 11,779

Other operating expenses 2,212 2,256 2,051 2,144 (2.0) 7.8 3.2 4,357 3,843 13.4 8,768

Operating profit 4,750 4,810 3,366 4,259 (1.2) 41.1 11.5 9,009 7,038 28.0 19,201

Other Provisions and Contingencies 1,684 1,961 873 1,685 (14.1) NM (0.0) 3,369 2,404 40.1 6,230

NPL 1,259 1,461 1,270 1,260 (13.8) (0.8) (0.0) 2,519 2,440 3.3 5,430

PBT 3,066 2,850 2,493 2,574 7.6 23.0 19.1 5,640 4,634 21.7 12,971

Provision for Taxes 1,053 937 880 901 12.4 19.6 16.9 1,954 1,607 21.5 4,265

Net Profit 2,013 1,913 1,613 1,673 5.3 24.8 20.3 3,687 3,027 21.8 8,706

Tax rate (%) 34 35 35 35 35 33

PBT before provisions 4,750 4,810 3,366 4,259 (1.2) 41.1 11.5 9,009 7,038 28.0 19,201

Key balance sheet items (Rs bn)

Deposits 863 819 738 811 17.0 6.4

CASA ratio (%) 31.0 31.9 32.8

Advances 647 603 509 591 27.2 9.4

Retail 268 225 238 18.8 12.2

SME and agri 162 139 153 17.0 5.9

Others 217 145 200 50.0 8.7

Investments 242 232 229 4.1 5.7

Asset management details

Gross Non-performing loans (Rs mn) 18,197 14,987 17,473 21.4 4.1

Gross NPL ratio (%) 2.8 2.9 2.9

Net Non-performing loans (Rs mn) 10,397 6,748 9,945 54.1 4.5

Net NPL ratio (%) 1.6 1.3 1.7

Slippages 2,660 4,050 2,830 (34.3) (6.0)

Slippage ratio (%) 1.8 3.3 1.9

Capital Adequacy details (%)

Capital Adequacy ratio 12.9 14.7 13.6

Tier I 12.2 14.1 13.0

(% chg.)

(% chg.)

Banks Federal Bank


Exhibit 2: Contribution of SME loans has increased in the recent quarters Break-up of loans, March fiscal year-ends, 2010-2QFY17 (%)

Notes: (A) The bank has reclassified select exposure FY2015 between retail, SME and agriculture. Part of the agriculture exposure is classified under retail similar to most new private banks


Impaired loans decline ~10 bps qoq to 5.1%

Asset quality movement was fairly positive with gross NPLs declining 10 bps qoq to 2.8%

and net NPLs at 1.6%. Even on an absolute basis qoq growth was low at ~5%. Restructured

loans remained stable qoq at 2.3%. Provision coverage was stable qoq at 43% and

including technical write off at 72%. Slippages are trending positively for past two quarters

with slippages of 1.3-1.4% compared to 2-4% range over the past few quarters.

Slippages in the retail and SME segments stable qoq. The management indicated that the

SME sector in Kerala, linked to sectors such as rubber, cashew and hospitality need to be

watched closely for weakness.

We expect GNPL to trend down to 2.4% by FY2019E. We expect 85 bps credit cost in

FY2017E that could decline to 65-60 bps in FY2018-19E.

Exhibit 3: Slippages have declined qoq across segments Sectoral break-up of slippages, 2QFY14-2QFY17 (%)


2010 2011 2012 2013 2014 2015 2016 1QFY17 2QFY17

Retail 32.0 29.5 28.1 30.2 32.5 43.8 41.3 40.3 41.4

Housing 17.9 17.4 14.9 11.6 13.6 13.4 13.6 13.6 12.9

Gold loans 3.2 3.2 6.9 9.7 8.3 6.6 4.0 3.8 3.5

LAP 1.3 1.0 0.8 2.3 3.8 4.7 5.4 5.6 5.4

Others 9.6 7.9 5.5 6.7 6.8 19.1 18.2 17.3 19.5

SME 17.7 18.9 18.6 18.4 25.4 12.9 14.7 15.1 25.1

Agriculture 11.0 12.8 11.9 10.7 11.8 12.3 11.4 10.8 -

Others 39.3 38.8 41.3 40.7 30.3 31.0 32.6 33.8 33.5

2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17

Retail 1.3 1.2 0.8 1.5 1.4 0.8 0.6 0.8 1.0 1.1 1.4 1.1 0.9

SME and agri 2.4 2.1 2.3 2.1 2.8 1.8 3.5 3.9 5.0 3.8 5.2 4.4 4.0

Corporate 0.6 0.7 2.1 2.4 — 3.3 0.8 3.8 4.8 5.1 5.8 0.9 0.8

Overall 1.5 1.4 1.9 2.1 1.6 1.9 1.5 2.5 3.3 4.5 4.1 1.9 1.8

Federal Bank Banks


Exhibit 4: Coverage ratio is stable qoq March fiscal year-ends, 2QFY14-2QFY17 (%)


Exhibit 5: Slippages declined to ~1.8% of loans March fiscal year-ends, 2QFY14-2QFY17 (%)


CASA growth at 14% yoy; non-resident deposits grow 19% yoy

Federal Bank delivered CASA growth of 14% yoy with overall deposit growth of 17%. Term

deposit growth was 18%, which could be higher than required given the liquid nature of

the balance sheet (CD ratio of 75%). NRI deposit growth was very strong at 19% yoy.

There is marginal but addressable risk of high reliance on NR deposits

The share of NRI deposits is fairly high at 40% of total deposits. The bank has a higher share

of NR deposits which is a bit risky considering recent economic developments in the middle-

east which is the bank’s primary geography for these deposits.

With falling crude prices resulting in a slowdown in their respective economies, the risk of

unemployment for non-resident Indians is likely to increase. Growth in these deposits has

been strong this quarter, but we see this flow to be an expected outcome post which we

could see a slowdown. There are two risks that emerge from a slowdown in NR deposits: (1)

from the funding side, the bank has high reliance on these deposits. However, the impact is

felt a lot more on savings deposits than term deposits as the domestic term deposits and NR

term deposit rates are broadly similar at ~7.5%. On savings, the share of NR deposits is high

at 45%. (2) The secondary impact would be on loans taken where inherent cash flow is

dependent on NR incomes on various asset products. However, we are still not seeing a

massive slowdown in these economies and believe that the liability side of the balance sheet

can be addressed quite easily.

40

50

60

70

80

90

-

0.9

1.8

2.7

3.6

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

Gross NPL (LHS) Net NPL (LHS)

Coverage ratio (RHS)

1.5 1.4

1.9 2.1

1.6 1.9

1.5

2.5

3.3

4.5 4.1

1.9 1.8

(1)

-

1

2

3

4

5

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

Slippages LLP

Banks Federal Bank


Exhibit 6: NRI deposits led growth in total deposits March fiscal year-ends, 2012-2QFY17 (` mn)


Exhibit 7: Strong deposit traction from branches inside Kerala Total branches and deposits per branch inside Kerala, March fiscal year-ends, 2011-16

Source: Company, Public documents, Kotak Institutional Equities

Exhibit 8: Deposit growth/branch outside Kerala is weak Total branches and deposits per branch outside Kerala, March fiscal year-ends, 2011-16

Source: Company, Public documents, Kotak Institutional Equities

Exhibit 9: Kerala is a big beneficiary of NR deposit flows from gulf countries Share of NRI deposits across regions, March fiscal year-ends (%)

Source: RBI, Kotak Institutional Equities

2012 2013 2014 2015 2016 1QFY17 2QFY17

Total deposits 489 576 597 708 792 811 863

NRE deposits 80 132 206 242 307 307 303

(% of total deposits) 16.3 22.8 34.6 34.2 38.8 37.8 35.1

Savings deposits 127 153 177 214 227 224

NRE savings 55 67 80

(% of saving deposits) 42.9 43.8 45.4 — — —

-

180

360

540

720

900

250

330

410

490

570

650

2011

2012

2013

2014

2015

2016

Branches (LHS) Deposit/branch (RHS)Non-NR deposit/branch

(#) (Rs mn)

300

420

540

660

780

900

100

220

340

460

580

700

2011

2012

2013

2014

2015

2016

Branches (LHS)

Deposit/branch (RHS)(#) (Rs mn)

Gulf countries North America South America Europe Africa East Asia Others Total (US$ bn)

2007 29 33 4 17 2 6 9 30,835

2008 29 33 4 17 2 6 9 43,507

2009 31 29 4 20 3 4 9 46,903

2010 31 30 4 19 3 4 9 53,636

2011 37 34 3 12 3 7 4 55,619

2012 37 34 3 12 3 7 4 66,130

2013 37 34 3 12 3 7 4 67,627

Federal Bank Banks


Exhibit 5: Top five banks have nearly 75% market share of NRI deposits in Kerala Market share in NRI deposits, March fiscal year-end, 4QFY16 (%)

Source: Public documents, Kotak Institutional Equities

NIM stable qoq at 3.3%

Reported NIM improved to 3.3%, up 20 bps yoy and was stable qoq. Decline in cost of

deposits (5 bps qoq and 60 bps yoy) has helped absorb some pressure on the yield on loans

(50 bps yoy and stable qoq). The bank has aggressively grown the corporate loan book,

mainly to the A and above rated entities. Growth in SME and retail will provide comfort on

lending yields in future even as further decline in cost of deposits will be limited. Improving

CD ratio has provided support to the NIM due to better fund utilization. The management

targets to improve it to 80%.

The management expects steady state NIM of 3.2-3.25% for FY2017. We expect calculated

NIM to increase in FY2017E and decline by ~25 bps over next two years.

Cost-income ratio shows improvement

Cost-income ratio was 52% compared to 54% in the last quarter. Operating costs grew by

13% yoy with employee cost growth of 17% yoy, while non-staff costs grew 8% yoy on a

lower base.

We believe that this ratio can move back to 50% levels by the end of FY2017 as action has

been taken on both sides (costs and revenues). We expect moderation in operating expenses

growth. Expansion has slowed and we think that the focus is moving towards improving

productivity of existing branches. Staff costs which grew 22% yoy in FY2014 declined to

~16% yoy in FY2015 and 14% in FY2016. We see a strong tailwind on staff costs from now

as employees have largely been unchanged and the base reflects the one-time charges taken

for the previous wage settlement. On the other hand, we think revenue growth should

show better traction on the back of better loan growth and higher contribution from non-

interest income sources.

Other operational highlights for the quarter

Non-interest income increased 44% yoy, driven by 3X yoy growth in treasury gains. Core

fee growth was moderate at 11% yoy, but processing fee and exchange and commission

fee grew 20%. However, there was drag from forex income which declined 20% yoy.

Tier-1 stands comfortable at 12.2% as per Basel-3 norms, with overall capital adequacy at

12.9%. Bank has room to raise non-equity capital bonds before looking for an equity

capital raise.

Rural Semi-urban Urban Total

State Bank group 1.1 23.0 12.1 36.2

State Bank of India 0.2 5.4 6.7 12.3

State Bank of Travancore 0.8 17.5 5.3 23.7

Others — 0.0 0.1 0.1

Nationalized banks 0.5 13.1 6.8 20.4

Canara Bank 0.2 4.8 1.4 6.4

Others 0.4 8.3 5.4 14.0

Private-sector banks 1.7 28.4 13.0 43.1

Federal Bank 1.1 16.6 4.0 21.7

South Indian Bank 0.4 6.2 2.9 9.5

Axis Bank 0.0 0.8 1.1 1.9

HDFC Bank 0.0 1.3 2.1 3.4

ICICI Bank 0.0 1.1 1.1 2.2

Others 0.2 2.5 1.7 4.4

Others (RRB and foreign banks) 0.1 0.3 0.0 0.4

Total 3.4 64.7 31.9 100.0

Banks Federal Bank


Exhibit 10: Bank is slowing fresh expansion in branches Total branches, March fiscal year-ends, 2010-2QFY17 (#)


Exhibit 11: Cost-income ratio trending downwards Cost-income ratio, March fiscal year-ends, 2QFY12-2QFY17 (%)


Exhibit 12: We marginally change our near-term earnings estimates Old and new estimates, March fiscal year-ends, 2017-2019E (` mn)


672 743

950

1,103 1,174

1,247 1,252 1,252

-

240

480

720

960

1,200

1,440

2010

2011

2012

2013

2014

2015

2016

1Q

FY17

-

8

16

24

32

30

36

42

48

54

60

2Q

FY12

4Q

FY12

2Q

FY13

4Q

FY13

2Q

FY14

4Q

FY14

2Q

FY15

4Q

FY15

2Q

FY16

4Q

FY16

2Q

FY17

Cost-income ratio (LHS) Cost growth (RHS)

New estimates Old estimates % change

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

Net interest income 29,659 32,723 37,100 29,129 31,774 36,120 1.8 3.0 2.7

NIM (%) 3.2 3.1 3.0 3.3 3.1 3.0

Loan growth (%) 20.0 18.2 17.9 16.5 18.0 17.7

Loan loss provisions 5,430 4,942 5,384 5,659 5,163 6,085 (4.0) (4.3) (11.5)

Other income 10,089 11,321 11,633 10,209 11,705 11,915 (1.2) (3.3) (2.4)

Treasury income 2,700 2,600 2,800 2,500 2,600 2,800 8.0 - -

Operating expenses 20,547 21,155 23,058 19,618 20,239 22,062 4.7 4.5 4.5

Employee expenses 11,779 11,473 12,342 11,137 10,847 11,669 5.8 5.8 5.8

Net profit 8,706 11,509 13,082 8,901 11,596 12,811 (2.2) (0.8) 2.1

PBT-treasury+provisions 16,501 20,289 22,875 17,220 20,640 23,172 (4.2) (1.7) (1.3)

Federal Bank Banks


Exhibit 13: Federal Bank trading at 1.3X one-year forward book

Rolling PER and PBR, 2010-16 (X)


Exhibit 14: Federal Bank’s premium has declined

Trading premium to peers, 2010-17 (X)


0.0

0.4

0.8

1.2

1.6

2.0

0

5

10

15

20

25

Oct

-10

Oct

-11

Oct

-12

Oct

-13

Oct

-14

Oct

-15

Oct

-16


0.3

0.4

0.5

0.5

0.6

0.7

Oct

-10

Oct

-11

Oct

-12

Oct

-13

Oct

-14

Oct

-15

Oct

-16

Banks Federal Bank


Exhibit 15: Federal Bank - key growth rates and financial ratios March fiscal year-ends, 2013-2018E (%)


2014 2015 2016E 2017E 2018E 2019E

Growth rates (%)

Net loan (1.5) 18.1 13.3 20.0 18.2 17.9

Customer assets (0.5) 16.6 14.8 19.1 17.6 17.4

Investments excluding CPs and debentures 7.7 6.3 0.7 6.6 14.5 23.0

Net fixed and leased assets 6.9 9.8 11.4 (15.0) 7.6 6.3

Cash and bank balance 21.8 5.5 13.4 5.4 10.3 12.0

Total assets 5.0 11.1 10.4 14.0 15.2 16.9

Deposits 3.7 18.6 11.8 14.4 16.1 17.9

Current 16.2 13.1 21.1 10.7 16.1 17.9

Savings 19.9 16.0 20.8 15.3 17.0 18.7

Fixed (2.1) 20.0 7.8 14.4 15.8 17.5


Loan loss provisions (47.3) 19.5 233.1 (13.0) (9.0) 9.0

Total other income 4.4 26.6 (10.5) 28.3 12.2 2.8

Net fee income 9.6 14.2 9.0 15.0 17.0 17.0

Net exchange gains 57.6 (7.1) 12.3 - 20.0 20.0


Employee expenses 22.2 15.6 18.0 11.9 (2.6) 7.6

Key ratios (%)





Difference 2.6 2.8 2.8 3.0 2.8 2.7




Fee income to total income 11.4 11.7 12.6 12.0 12.7 13.4

Fees income to PBT 27.5 25.1 57.7 36.8 32.6 33.6

Net trading income to PBT 3.7 22.1 6.5 14.6 10.5 10.3

Exchange income to PBT 10.3 7.6 18.1 10.1 9.1 9.6


Operating expenses/assets 2.0 2.1 2.1 2.1 1.9 1.8

Operating profit /AWF 1.5 1.7 0.7 1.1 1.4 1.3

Tax rate 30.8 33.9 33.9 32.9 32.9 32.9


Share of deposits

Current 5.7 5.4 5.8 5.7 5.7 5.7

Fixed 68.8 69.6 67.1 67.1 66.9 66.7

Savings 25.6 25.0 27.1 27.3 27.5 27.7



Asset quality trends (%)

Gross NPL 2.5 2.0 2.8 2.8 2.6 2.4

Net NPL 0.7 0.7 1.6 1.6 1.3 1.0

Slippages 1.2 1.8 3.7 2.0 1.6 1.5

Provision coverage 70.4 64.7 43.0 42.0 50.2 57.3

Dupont analysis (%)



Net other income 1.0 1.1 0.9 1.0 1.0 0.9


Invt. depreciation 0.2 (0.1) 0.1 0.1 0.1 0.1

(1- tax rate) 69.2 66.1 66.1 67.1 67.1 67.1

RoA 1.2 1.3 0.5 0.9 1.0 1.0


RoE 12.6 13.7 6.0 10.4 12.6 13.1

Federal Bank Banks


Exhibit 16: Federal Bank - income statement and balance sheet March fiscal year-ends, 2013-2018E (` mn)


2014 2015 2016E 2017E 2018E 2019E

Income statement


Loans 50,111 54,468 56,693 64,031 73,031 83,669

Investments 17,768 16,497 17,601 17,531 18,653 21,167

Cash and deposits 1,582 3,230 3,158 2,687 2,686 2,610






Other income 6,938 8,783 7,864 10,089 11,321 11,633

Net fee income 3,338 3,811 4,155 4,778 5,590 6,540





Depreciation on investments 1,116 (806) 802 800 800 800

Other Provisions — 0 - - - -

Pretax income 12,120 15,210 7,201 12,971 17,148 19,491

Tax provisions 3,731 5,153 2,440 4,265 5,639 6,409

Net Profit 8,389 10,057 4,761 8,706 11,509 13,082

% growth 0.1 19.9 (52.7) 82.8 32.2 13.7

PBT - Treasury + Provisions 13,242 13,721 12,971 16,501 20,289 22,875

% growth 6.0 3.6 (5.5) 27.2 23.0 12.7

Balance sheet

Assets


Net value of investments 241,179 205,688 222,175 232,006 257,565 305,396

Govt. and other securities 158,231 168,761 170,040 181,570 208,658 257,865

Shares 1,758 1,579 1,554 1,554 1,554 1,554


Net loans and advances 434,361 512,850 580,901 696,794 823,697 971,022

Fixed assets 4,250 4,666 5,200 4,420 4,755 5,053

Other assets 20,859 57,500 51,826 51,826 51,826 51,826

Total assets 745,941 828,505 914,300 1,042,193 1,200,891 1,403,887

Liabilities

Deposits 597,313 708,250 791,717 905,776 1,051,619 1,239,710

Borrowings and bills payable 57,108 23,272 21,859 29,462 34,080 39,622


Total liabilities 676,436 751,123 833,388 955,050 1,105,511 1,299,145

Paid-up capital 1,711 1,713 3,438 3,438 3,438 3,438

Reserves & surplus 67,795 75,668 77,474 83,705 91,942 101,304

Total shareholders' equity 69,506 77,381 80,912 87,143 95,380 104,742



Tiroda generation ramps up, though losses remain

Adani Power sold 15 BU in 2QFY17, an 8% qoq improvement owing to resumption of operations

at Tiroda (Maharashtra) that had curtailed generation in 1QFY17 owing to water scarcity in the

state of Maharashtra. Realizations at ₹3.5/kwh were down 4% qoq and below our estimate of

₹3.8/kwh. Reported losses of ₹1 bn include (1) compensatory tariffs of ₹5.1 bn, and (2) deferred

tax credit of ₹617 mn. Cash EBITDA of ₹13 bn would fall short of interest cost of ₹14.3 bn.

Imported coal prices have risen 46% since June 2016, will increase cash cost of generation

Prices of imported coal have spiked up in the past two months, after having remained subdued

for an extended period of time. We highlight that APL uses imported coal at Mundra (4.6 GW)

and Udupi (1.2 GW), which together account for 56% of its total portfolio. While Udupi

operates under the cost-plus regime and the rise in prices of imported coal will be passed on to

the beneficiary state, Mundra will have to bear the cost burden of higher imported coal.

Reported earnings at Mundra may not be impacted as the company will likely accrue a higher

compensatory tariff for under-recovery of coal, continued delay on the issue of compensatory

tariff may further impair cash earnings.

Maintain SELL with target price of ₹26/share

APL’s consolidated profit of ₹4.9 bn for FY2016 was aided by accruing compensatory tariff of

₹29.7 bn. A turnaround of fortunes is contingent on cash receipt of tariff although the

management is more confident post the APTEL ruling in April 2016. Maintain SELL with a target

price of ₹26/share. Our revised earnings factor compensatory tariffs across most plants as

accounted for by the management as well as takes into consideration the lower realizations and

interest cost as seen during the quarter. We now factor earnings of ₹2.3/share (₹2.8/share

previously) for FY2017E and ₹4.7/share (unchanged) for FY2018E.

Adani Power (ADANI) Utilities

Still struggling. Adani Power continues to report weak earnings, despite accruing

compensatory tariffs of ₹5 bn that are still contingent on the outcome of the hearing by

the regulator. Recovery of plant utilization at Tiroda and lower interest cost due to debt

refinancing are not enough positives, especially in the context of rising prices of imported

coal in recent times. Maintain SELL rating with target price of ₹26/share—our fair value

estimate assumes a favorable outcome on the issue of compensatory tariffs.

SELL

OCTOBER 26, 2016

RESULT


Price (`): 26


BSE-30: 28,091

Murtuza Arsiwalla [email protected]

Mumbai: +91-22-4336-0870

Ajinkya Bhat [email protected]

Mumbai: +91-22-4336-0888

Adani Power







MFs 0.8 EBITDA (Rs bn) 85.2 86.7 96.7


Absolute (7.2) (9.3) (15.8) ROE (%) 7.5 9.9 17.6



36-22

88.2

Adani Power Utilities


Another quarter of support from compensatory tariffs and loan refinancing

Revenues remain largely unchanged. Adani Power reported consolidated revenues of

₹58 bn, flat yoy but 5% below estimates. Consolidated net generation for the quarter

stood at 15 BU, flat yoy. Average realization for the quarter was ₹3.5/kwh. Plant-wise

gross generation in 2QFY17 stood as follows:

Mundra plant generated 7.9 BU, down 1% yoy (PLF 78%)

Tiroda plant generated 4.5 BU, down 6% yoy (PLF 62%)

Kawai plant generated 2.3 BU, up 25% yoy (PLF 80%)

Udupi plant (UPCL) generated 1.5 BU, down 8% yoy (PLF 55%)

EBITDA under pressure on account of higher coal prices. Consolidated EBITDA in

2QFY17 stood at ₹18 bn, up 1.3% yoy but down 5.5% qoq. Cost of fuel for the quarter

was down 1.7% yoy but up 11% qoq likely led by the recovery seen in the imported coal

prices from the start of CY2016. The company mentioned that with this recovery in coal

prices, the variable cost will increase in the next few quarters and consequently the

compensatory tariff will also go up.

Large losses of ₹6.2 bn without compensatory tariff. As seen in the past few

quarters, the company continued the practice of booking large compensatory income as

they remain confident of a favorable outcome in the ongoing regulatory proceedings. The

company booked compensatory tariff of ₹5.1 bn during the quarter that helped contain

the net loss to ₹1.1 bn. The net loss was also contained by a large reduction in interest

expense at ₹14 bn, down 13% yoy during the quarter. The reduction was achieved

through refinancing of the company’s loans through the 5/25 scheme and the average

interest cost currently stands at 10.5%.

Realization of compensatory tariffs holds the key. For the past several quarters, the

company has been banking upon the compensatory tariffs to reduce the reported

accounting losses. If the tariffs are approved, then apart from receiving the cash flows,

the company mentioned that it would also be able to work with the rating agencies and

replace bank debt with bonds for a further reduction in the effective interest cost.

Compensatory tariffs thus currently hold the key to the company’s future. In the

meanwhile, promoters have been supporting the firm through periodic equity infusions

(83 mn warrants converted to equity in this quarter that were issued to promoter group

entities in 1QFY17). Current external debt of Adani Power stands at ₹399 bn.

Utilities Adani Power


Exhibit 1: Net loss reduced yoy due to loan refinancing and consequent large reduction in interest expense Interim results for Adani Power (consolidated), March fiscal year-ends (Rs mn)


Exhibit 2: Yoy revenue decline in 2QFY17 is composed of 1% yoy decline in generation and 2.8% yoy decline in realizations Interim results for Adani Power (standalone), March fiscal year-ends (Rs mn)


(% Chg.)

2QFY17 2QFY17E 2QFY16 1QFY17 2QFY17E 2QFY16 1QFY17 1HFY17 1HFY16 (% Chg.) FY2017E FY2016 (% Chg.)

Net sales 57,643 60,739 57,433 55,773 (5.1) 0.4 3.4 113,416 116,475 (2.6) 263,062 251,983 4.4

Operating costs

Cost of fuel (34,617) (33,567) (35,222) (31,195) 3.1 (1.7) 11.0 (65,812) (72,617) (154,046) (147,263) 4.6

O&M (4,934) (5,454) (4,356) (5,427) (9.5) 13.3 (9.1) (10,361) (10,143) (22,342) (19,523) 14.4

EBITDA 18,093 21,719 17,855 19,151 (16.7) 1.3 (5.5) 37,243 33,715 10.5 86,674 85,197 1.7

EBITDA margin (%) 31 36 31 34 33 29 33 34

Other income 1,056 491 406 419 1,475 874 2,760 2,350

Interest & finance charges (14,337) (15,086) (16,505) (14,515) (13.1) (28,852) (31,439) (57,764) (59,642)

Depreciation (5,977) (6,025) (5,938) (5,985) (11,961) (11,506) (23,948) (23,362)

PBT (1,165) 1,099 (4,181) (929) (206.0) (72) 25 (2,094) (8,357) (75) 7,722 4,544 70

Provision for tax (net) 31 — 134 617 648 134 — 341

Net profit (1,134) 1,099 (4,047) (312) (203.2) (72) 263 (1,446) (8,223) (82) 7,722 4,885 58

Extraordinary — — — — 0 0 — —

EPS (Rs/share) (0) 0 (1) (0) (0.4) (2.9) 2 2

EBITDA margin (%) 31 36 31 34 33 29 33 34

Tax rate (%) 3 — 3 66 31 2 — (8)

Key operating parameters

Units sold (mn units) 15,040 15,742 15,100 13,960 (4.5) (0.4) 7.7 29,000 30,960 (6.3)

Average realization (Rs/kwh) 3.5 3.8 3.5 3.7 (6.6) 0.5 (4.3) 3.9 3.8 4.0

Fuel cost (Rs/kwh) 2.1 2.1 2.2 2.1 1.5 (1.5) 2.7 3.0 4.6 (35.4)

O&M (Rs/kwh) 0.3 0.3 0.3 0.4 (11.0) 13.5 (15.9) 0.5 0.6 (27.2)

(% Chg.)

2QFY17 2QFY16 1QFY17 2QFY16 1QFY17 1HFY17 1HFY16 (% Chg.) FY2017E FY2016 (% Chg.)

Net sales 28,279 29,396 28,666 (3.8) (1.4) 56,945 59,939 (5.0) 118,820 126,856 (6.3)

Operating costs

Cost of fuel (16,715) (16,677) (15,115) (31,830) (34,380) (66,946) (68,185)

O&M (4,944) (5,852) (6,102) (11,047) (11,641) (25,588) (25,086)

EBITDA 6,619 6,867 7,449 (3.6) (11.1) 14,068 13,917 1.1 26,286 33,585 (21.7)

EBITDA margin (%) 23 23 26 25 23 22 26

Other income 2,001 1,388 1,445 3,446 2,751 5,844 5,414

Interest & finance charges (7,566) (7,758) (7,386) (14,952) (15,170) (26,843) (29,515)

Depreciation (2,409) (2,381) (2,393) (4,802) (4,734) (10,084) (9,769)

PBT (1,355) (1,885) (885) (28.1) 53.0 (2,240) (3,236) (30.8) (4,798) (285) 1,584.7

Provision for tax (net) — — 833 833 — — 341

Net profit (1,355) (1,885) (53) (28.1) 2,466.1 (1,408) (3,236) (56.5) (4,798) 56 (8,637.5)

Extraordinary — — — — — — —

EPS (Rs/share) (0) (1) (0) (0) (1) (1) 0

EBITDA margin (%) 23 23 26 25 23 22 26

Tax rate (%) — — 94 37 — — 120

Adani Power Utilities


Exhibit 3: Balance sheet for Adani Power, March fiscal year-ends (Rs mn)


Exhibit 4: Valuation of power project portfolio of Adani Power


Exhibit 5: We have revised earnings to factor weak performance during the current quarter Change in estimates for Adani Power, March fiscal year-ends, 2017-19E (Rs mn)


Standalone Consolidated

Mar-15 Sep-15 Sep-16 Mar-15 Sep-15 Sep-16

Share capital 28,719 29,358 34,175 28,719 29,358 34,175

Reserves and surplus 48,442 47,574 60,926 28,527 22,698 45,293

Net worth 77,162 76,932 95,101 57,246 52,056 79,468

Borrowings 209,376 241,620 251,489 413,845 484,774 495,475

Trade payables 41,547 36,617 34,862 56,847 58,071 64,911


Provisions 3,266 1,454 129 4,294 2,378 477



Fixed assets 201,589 206,880 198,379 452,641 506,257 493,462

Goodwill 70 7,361 1,906

Investments 56,274 77,010 76,622 3,573 397 3,702

Inventories 9,820 8,931 9,059 16,291 15,829 16,189

Receivables 14,487 41,533 38,495 34,895 78,451 95,210

Cash 3,691 3,479 3,094 8,563 7,250 6,185

Loans and advances 47,743 48,521 54,041 11,824 13,448 9,530

Others 43,660 24,992 38,147 56,887 35,336 68,605

Current assets 119,401 127,456 142,836 128,459 150,315 195,719

Total assets 377,264 411,347 417,837 584,742 664,329 694,789

Capacity Cost Value

Project Type (MW) (Rs bn) (Rs mn / MW) (Rs bn)

Mundra Thermal 4,620 240 52 11

Tiroda 1 Thermal 3,300 186 56 42

Kawai Thermal 1,320 81 62 2

Udupi Thermal 1,200 63 52 10

Total 10,440 570 55 66

Cash 20

Total value 86

No. of Shares 3

Value per share 26

Old New Revision (%) Old New Revision (%) Old New Revision (%)

Revenue 267,307 263,062 (1.6) 285,584 285,584 0.0 285,652 285,652 0.0

EBITDA 90,919 86,674 (4.7) 96,740 96,740 0.0 95,720 95,720 0.0

PAT 9,467 7,722 (18.4) 15,550 15,752 1.3 15,154 15,291 0.9

EPS 2.8 2.3 (18.4) 4.7 4.7 1.3 4.5 4.6 0.9

2019E2018E2017E

Utilities Adani Power


Exhibit 6: Profit model, balance sheet, cash model of APL, March fiscal year-ends, 2012-19E (Rs mn)


2012 2013 2014 2015 2016 2017E 2018E 2019E

Profit model

Net revenues 40,898 67,748 157,681 187,962 251,983 263,062 285,584 285,652

EBITDA 13,252 10,634 46,726 51,318 85,197 86,674 96,740 95,720

Other income 1,980 1,952 1,863 2,690 2,350 2,760 1,777 2,071

Interest (expense)/income (7,375) (16,464) (40,100) (48,635) (59,642) (57,764) (58,816) (55,027)

Depreciation (5,904) (12,897) (22,185) (18,182) (23,362) (23,948) (23,948) (23,948)

Pretax profits 1,952 (16,774) (13,696) (12,809) 4,544 7,722 15,752 18,815

Tax — — — — — — — (3,475)

Deferred taxation (2,948) (4,768) 10,790 — 341 — — (50)

Minority interest 72 — — — — — — —

Net income (924) (21,542) (2,906) (12,809) 4,885 7,722 15,752 15,291

Extraordinary items (1,949) (1,409) (7,400) 4,653 — — — —

Reported profit (2,873) (22,950) (10,306) (8,156) 4,885 7,722 15,752 15,291

Earnings per share (Rs) (0.4) (9.0) (1.0) (4.5) 1.5 2.3 4.7 4.6

Balance sheet

Paid-up common stock 21,800 23,933 28,719 28,719 33,339 33,339 33,339 33,339

Total shareholders' equity 60,413 42,934 65,434 57,246 73,765 81,487 97,239 112,530

Deferred taxation liability 6,023 10,790 — — 1,851 1,851 1,851 1,901

Minority interest 5,590 — — — — — — —

Total borrowings 386,003 399,569 441,502 447,420 530,517 506,693 476,222 437,752

Total liabilities and equity 458,030 453,293 506,936 504,666 606,133 590,030 575,312 552,182

Net fixed assets 158,042 290,817 463,576 450,727 496,818 471,035 447,087 423,139

Capital work-in progress 267,215 189,765 36,598 1,913 880 880 880 880

Investments 190 224 1,153 3,573 1 1 1 1

Goodwill — 70 70 70 7,367 7,367 7,367 7,367

Cash 32,408 17,181 8,306 8,563 8,687 4,554 20,177 21,133

Net current assets (excl. cash) 175 (44,762) (2,767) 39,820 92,381 106,194 99,801 99,664

Net current assets (incl. cash) 32,583 (27,581) 5,539 48,383 101,068 110,748 119,979 120,797

Total assets 458,030 453,293 506,936 504,666 606,133 590,030 575,312 552,182

Free cash flow

Operating cash flow, excl. working capital 6,539 (5,285) 1,089 10,026 27,906 31,670 39,701 39,289

Working capital changes (20,524) 44,937 (41,995) (42,587) (52,561) (13,813) 6,393 137

Capital expenditure (107,045) (67,641) (41,701) 34,145 (79,484) 1,835 — —

Free cash flow (121,029) (27,989) (82,607) 1,583 (104,140) 19,691 46,094 39,426

Ratios

Net debt/equity (%) 535.7 890.6 662.0 766.6 707.4 616.2 469.0 370.2

Return on equity (%) (1.5) (41.7) (5.4) (20.9) 7.5 9.9 17.6 14.6

Book value per share (Rs) 30.5 22.4 22.8 19.9 22.7 25.0 29.7 34.3

ROCE (%) (0.3) (4.7) (0.6) (2.5) 0.9 1.3 2.7 3.3



2QFY17 print – revenue growth disappoints; EBITDA/PAT growth healthy

JYL’s 2QFY17 performance was a tad disappointing largely dragged by weaker-than-expected

topline – revenues grew 6% yoy to ₹4.1 bn (4% below estimates), EBITDA grew 16% yoy to

₹638 mn (in line with estimates) and recurring PAT grew 27% yoy to ₹325 mn (4% below

estimates). Revenue growth was led by 8% volume growth; deflation in dishwash/fabric care

continues to drag value growth. EBITDA margin expanded 140 bps yoy led by 110 bps yoy

expansion in GMs (down 30 bps qoq) and lower investments in A&SP (up just 4% yoy; down 10

bps yoy). Recurring PAT growth was partly aided by 520 bps decline in ETR (high base).

Reported PAT growth was higher at 61% yoy due to lower ESOP-related charges (clubbed in EO

expenses). For 1HFY17, JYL reported revenue, EBITDA and recurring PAT growth of 7%, 17%

and 28% yoy respectively; EPS stood at ₹4.4/share.

Ujala, Maxo and Margo disappoint; dishwash and Henko continue to deliver

Overall power brands posted 5.8% yoy revenue growth aided by 7.2% yoy volume growth

(down from 9.6% volume growth in 1QFY17). Growth was mixed across segments - (1) brands

which disappointed include – Ujala (flat growth yoy, fabric whitener saw 5% yoy decline),

Margo (5% decline) and Maxo (posted 5% growth; disappointing given expectations of a

strong season for HI due to good monsoon – growth was dragged by 4% decline in coils (70%

of HI portfolio). Henko (11% yoy growth) and dishwash (12% yoy growth) performed well.

Profitability improved across segments barring HI and JFSL (laundry business) – (1) dishwash and

fabric care posted robust 30% and 25% yoy growth in EBIT aided by 170 bps and 325 bps yoy

expansion respectively, (2) personal care EBIT also grew sharply by 44% aided by 580 bps

expansion in margins and (3) HI and JFSL (laundry services) posted margin contraction yoy.

Henkel ‘call’ renders fundamentals irrelevant. Retain Not Rated rating

JYL is a tricky stock for a fundamental analyst at this point. Henkel call option (to buy up to

26% stake in JYL) has vested on April 1, 2016 and the stock price continues to value the

potential upside from a likely open offer in case Henkel exercises this option. We tried hard but

failed to figure out any fundamental basis of estimating this ‘value upside’. Retain our Not

Rated coverage view on the stock.

Jyothy Laboratories (JYL) Consumer Products

Mixed performance; revenue growth decelerates. JYL’s 2QFY17 print was a mixed

bag despite robust EBITDA/PAT growth (aided by margin expansion and lower ETR) as

revenue growth disappointed across several power brands (Ujala, Maxo and Margo).

Our EPS estimates remain broadly unchanged. Management indicated that a non-

disclosure agreement has been signed with Henkel with respect to the call option that

Henkel holds to buy up to 26% stake in JYL. Stock remains not rated.

NR

OCTOBER 26, 2016

RESULT


Price (`): 357

Target price (`): -

BSE-30: 28,091


Mumbai: +91-22-4336-0885

Anand Shah [email protected]

Mumbai: +91-22-4336-0882


Mumbai: +91-22-4336-0881

J yothy Laboratories







MFs 5.9 EBITDA (Rs bn) 2.4 2.8 3.2


Absolute 4.1 23.2 15.8 ROE (%) 21.6 27.5 23.8



370-252

64.8

Consumer Products Jyothy Laboratories


Exhibit 1: Interim consolidated results of Jyothy Laboratories (as per Ind-AS), March fiscal year-end (Rs mn)


2QFY17 2QFY17E 2QFY16 1QFY17 KIE Est yoy qoq 1HFY17 1HFY16 (% chg.)

Gross revenues 4,335 4,065 4,540 7 (5) 8,875 8,258 7

Excise (218) (172) (167) 27 31 (384) (339) 13

Excise (% of gross revenues) 5.0 4.2 3.7 80 bps 135 bps 4.3 4.1 22 bps

Net sales 4,117 4,280 3,894 4,373 (4) 6 (6) 8,490 7,933 7

Material cost (2,101) (2,192) (2,029) (2,219) (4) 4 (5) (4,320) (4,125) 5

Gross profit 2,016 2,089 1,865 2,155 (3) 8 (6) 4,170 3,808 10

Gross margin (%) 49.0 48.8 47.9 49.3 16 bps 107 bps -31 bps 49.1 48.0 111 bps

Staff cost (437) (455) (410) (446) (4) 7 (2) (883) (815) 8

Advertising & promotion (316) (322) (304) (318) (2) 4 (1) (635) (604) 5

Other expenditure (625) (681) (604) (585) (8) 3 7 (1,209) (1,155) 5

Total expenditure (3,479) (3,650) (3,346) (3,568) (5) 4 (2) (7,047) (6,699) 5

EBITDA 638 631 548 806 1 16 (21) 1,444 1,235 17

OPM (%) 15.5 14.7 14.1 18.4 76 bps 142 bps -293 bps 17.0 15.6 143 bps

Other income 31 35 35 29 (12) (11) 7 60 85 (29)

Other operating income 4 5 7 4 (16) (36) 8 8 10 (19)

Interest (164) (150) (151) (157) 10 9 5 (321) (316) 2

Depreciation (73) (75) (72) (71) (2) 2 3 (144) (140) 3

Pretax profits 436 446 366 611 (2) 19 (29) 1,046 874 20

Tax (119) (108) (121) (146) 11 (1) (19) (266) (270) (2)

PAT 316 338 246 464 (6) 29 (32) 780 604 29

Minority interest 9 10 10 19 19 1

Recurring PAT 325 338 255 474 (4) 27 (31) 799 622 28

Extraordinaries (5) (15) (57) (15) (20) (166) (88)

Reported PAT 320 323 199 459 (1) 61 (30) 779 456 71

Income tax rate (%) 27.7 25.0 32.9 24.6 272 bps -520 bps 315 bps 25.9 38.2 -1227 bps

EPS (Rs/share) 1.8 1.9 1.4 2.6 (4) 27 (31) 4.4 3.4 28

Cost as a % of sales

Material cost 51.0 51.2 52.1 50.7 -17 bps -108 bps 30 bps 50.9 52.0 -112 bps

Staff cost 10.6 10.6 10.5 10.2 -2 bps 9 bps 41 bps 10.4 10.3 13 bps

Advertising & promotion 7.7 7.5 7.8 7.3 14 bps -13 bps 40 bps 7.5 7.6 -15 bps

Other expenditure 15.2 15.9 15.5 13.4 -73 bps -33 bps 180 bps 14.2 14.6 -32 bps

Segment results of Jyothy Laboratories

Gross revenues

Dishwashing 1,299 1,158 1,341 12 (3) 2,639 2,384 11

Fabric care 1,760 1,704 2,070 3 (15) 3,830 3,580 7

Household insecticides 676 645 372 5 82 1,048 1,060 (1)

Personal care 365 360 559 1 (35) 924 863 7

Laundry services 126 118 125 7 1 251 234 8

Others 112 80 79 41 43 191 140 37

Less: Intersegmental (3) — (6) (8) (2)

Total gross revenues 4,335 4,065 4,540 7 (5) 8,875 8,258 7

EBIT

Dishwashing 161 124 216 30 (25) 377 271 39

Fabric care 331 266 473 25 (30) 805 625 29

Household insecticides 34 34 (9) (1) (491) 25 8 225

Personal care 71 49 108 44 (34) 179 159 13

Laundry services (34) (28) (25) 20 34 (59) (56) 4

Others 33 16 (6) 107 (651) 27 11 133

EBIT margin (%)

Dishwashing 12.4 10.7 16.1 168 bps -371 bps 14.3 11.4 291 bps

Fabric care 18.8 15.6 22.9 325 bps -403 bps 21.0 17.5 355 bps

Household insecticides 5.0 5.3 (2.3) -32 bps 728 bps 2.4 0.7 165 bps

Personal care 19.5 13.7 19.4 576 bps 12 bps 19.4 18.4 101 bps

Laundry services (26.6) (23.8) (20.0) -284 bps -662 bps (23.3) (24.0) 70 bps

Others 28.9 19.7 (7.5) 919 bps 3643 bps 13.9 8.2 577 bps

(% chg.)

Jyothy Laboratories Consumer Products


Exhibit 2: JYL - key changes to earnings model (consolidated) – as per IGAAP, March fiscal-year ends, 2015E-16E


Key brand-wise takeaways

Ujala – After a strong 1QFY17, Ujala brand growth was nearly flattish this quarter (up

5.4% yoy for 1HFY17) – (1) Ujala fabric whitener posted a 5% decline in revenues;

management remains confident of accelerating growth in 2H through its communication

targeting new users and has rolled out on-ground activation in select states., (2) Ujala

detergent growth also decelerated (flattish growth yoy this quarter, up 2.7% in 1HFY17)

and (3) Ujala Crisp & Shine continued to perform well registered 36.5% yoy growth (39%

yoy growth in core Kerala market); management highlighted that the brand has become

over 20%+ of Ujala fabric whitener in TN within 1 year of launch and it expects this to be

the next mega brand in JYL’s portfolio.

Henko – Henko continued to post modest growth in a challenging and highly

competitive laundry market – revenues were up 11.3% yoy for the quarter and 10.3%

for 1HFY17. Management highlighted that is now looking to increase its focus on the

bucket wash segment (larger part of laundry category).

Dishwash – (1) After a sluggish growth in 1QFY17, Exo bar growth accelerated to 17.7%

yoy (volume growth higher at 32%), (2) growth in Exo scrubber decelerated to ~1% yoy

from 17% yoy growth in 1QFY17 (was aided by relaunch of Exo Bactoscrub), (3) Pril

liquids posted another modest quarter with 11.5% yoy growth aided by market share

gains and stronger growth in small packs (225 ml and pouches; ~50% of the market).

Overall dishwash portfolio posted 12% yoy growth for the quarter aided by sustained

market share gains and strong innovations.

Maxo – After a weak 1QFY17, Maxo posted a modest recovery (albeit below our

estimates given a strong season for HI) delivering just 4.8% yoy growth in revenues aided

by market share gains in both LVs and coils. We note LVs posted strong growth of 19%

yoy for the quarter (aided by a favorable season due to good monsoons); however, coils

(~70% of HI business) dragged overall growth posting 4% decline for the quarter. Maxo

Magic card continued to grow strongly registering ₹22.8 mn revenue during the quarter

(up 2X+ both qoq and yoy); however, interestingly category growth (as per Nielsen data

shared by company) has flattened this quarter.

Margo – Margo’s performance remains volatile; after a robust 1QFY17 it posted sharp

deceleration in growth posted 5% revenue decline. Management highlighted that Margo

remains a core focus brand and it is planning to relaunch the core to significantly

modernize the brand and bring in new users.

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

Net revenues (Rs mn) 17,842 20,121 22,627 18,550 21,017 23,646 (3.8) (4.3) (4.3)

EBITDA (Rs mn) 2,777 3,153 3,521 2,712 3,146 3,593 2.4 0.2 (2.0)

EBIT (Rs mn) 2,457 2,825 3,183 2,394 2,822 3,262 2.6 0.1 (2.4)

EBITDA margin (%) 15.6 15.7 15.6 14.6 15.0 15.2

Recurring PAT 2,265 1,999 2,033 2,227 2,000 2,079 1.7 (0.1) (2.2)

EPS (Rs/share) 12.5 11.0 11.2 12.3 11.1 11.5 1.6 (0.1) (2.3)

Adjusted EPS (Rs/share) 10.1 11.0 11.2 9.9 11.1 11.5 2.1 (0.1) (2.3)

Effective tax rate (%) 19.7 24.7 32.8 20.6 25.5 33.9


Consumer Products Jyothy Laboratories


Exhibit 3: Brand-wise gross revenue break-up (Rs mn)


2QFY17 2QFY16 Chg. (%) 1HFY17 1HFY16 Chg. (%)

Ujala 1,005 1,000 0.5 2,187 2,074 5.4

- Ujala Supreme 646 681 (5.1) 1,432 1,395 2.6

- Ujala Crisp & Shine 142 104 36.6 284 221 28.3

- Ujala Detergent 208 207 0.4 453 441 2.7

Exo 951 841 13.1 1,963 1,768 11.0

- Dishwash bar 718 610 17.7 1,456 1,305 11.6

- Scrubber 233 231 0.9 507 463 9.4

Maxo 676 645 4.8 1,048 1,060 (1.1)

- Coils/LVs 648 634 2.2 1,006 1,048 (4.0)

- Card 23 10 126.0 38 10 273.0

Henko 447 402 11.2 937 850 10.2

Margo 301 316 (4.7) 797 772 3.2

Pril 352 323 9.0 683 627 8.9

- Liquid 263 236 11.5 505 452 11.7

- Bars 89 87 2.2 178 175 1.8

Power brands 3,732 3,527 5.8 7,615 7,151 6.5

Others 478 420 13.8 1,009 874 15.4

Total 4,210 3,947 6.7 8,624 8,025 7.5

Laundry services 126 118 6.8 251 234 7.3

Total gross revenues (before excise) 4,336 4,065 6.7 8,875 8,259 7.5

Jyothy Laboratories Consumer Products


Exhibit 4: Jyothy Labs: Consolidated profit model, balance sheet, cash flow (as per IGAAP), March fiscal year-ends, 2013-19E (Rs mn)


2013 2014 2015 2016 2017E 2018E 2019E


Net revenues 11,042 13,184 15,053 16,447 17,842 20,121 22,627

EBITDA 1,281 1,517 1,822 2,358 2,777 3,153 3,521

Other income 68 136 157 164 124 87 87

Interest expense (682) (553) (138) (60) (152) (260) (246)

Depreciation/Amortisation (224) (243) (325) (314) (321) (328) (338)

Pretax profits 442 858 1,516 2,148 2,428 2,653 3,024

Tax 149 (6) (35) (393) (163) (654) (991)

Minority Interest 35 2 1 0 0 0 0

Recurring Net Income 626 854 1,482 1,755 2,265 1,999 2,033

Extraordinary items (430) (40) (271) (175) (1,599) — —

Reported Net Income 196 814 1,211 1,580 666 1,999 2,033

Recurring EPS (Rs) 3.9 4.7 8.2 9.7 12.5 11.0 11.2

Adjusted EPS (Rs) 3.9 3.9 5.8 7.3 10.1 11.0 11.2


Total shareholder's equity 6,386 7,344 7,797 8,461 8,040 8,735 9,247

Total borrowings 6,277 5,268 5,537 6,067 5,627 5,327 5,077

Deferred tax liability 9 11 5 253 253 253 253

Minority Interest 49 16 14 17 17 17 17

Total liabilities and equity 12,721 12,639 13,354 14,798 13,937 14,332 14,593

Net fixed assets incl CWIP 10,697 10,983 10,902 10,757 10,621 10,522 10,437

Investments 15 610 1,935 835 150 150 150

Cash 463 698 767 612 541 764 805

Net current assets 1,546 348 (251) 2,594 2,625 2,895 3,201

Total assets 12,721 12,639 13,354 14,798 13,937 14,332 14,593


Operating cash flow (excl working capital) 1,154 1,355 1,431 1,883 2,634 2,522 2,554

Working capital (877) (56) 232 32 (30) (271) (306)

Capital expenditure (274) (232) (164) (257) (185) (229) (252)

Free cash flow 4 1,067 1,499 1,658 2,419 2,022 1,996

Key ratios (%)

Sales growth 21.0 19.4 14.2 9.3 8.5 12.8 12.5

EPS growth 40.5 21.4 73.5 18.4 29.1 (11.8) 1.7

Adj. EPS growth 40.5 0.8 47.0 26.1 38.8 9.5 1.7

Gross margin 47.1 47.3 48.4 51.4 52.0 51.7 51.4

EBITDA margin 11.6 11.5 12.1 14.3 15.6 15.7 15.6

RoE 9.9 12.4 19.5 21.5 27.4 23.8 22.6

RoCE 8.5 9.4 10.2 13.6 16.9 19.7 21.7



Strong quarter; revenue growth of 4.8% (c/c) led by top 5 accounts

Hexaware reported a strong quarter with c/c revenue growth of 4.8% qoq (KIE 3.2%) and 190

bps qoq expansion in EBITDA margin to 17.4%. Revenues growth was driven by top 5 accounts

(+13.7% qoq), largely onsite-centric and powered by North America, BFSI, travel and transport,

IMS, BPO and ADM. While we are impressed with strong revenue outperformance, we will keep

a close eye on increasing client concentration; revenues from top 5 clients increased to 47% of

revenues, up 390 bps qoq. EBITDA margin expanded 190 bps qoq to 17.4% (KIE 16.3%)

largely due to 400 bps improvement in utilization, lower visa and branding costs. Net profit at

₹1.1 bn (+12% qoq, flat yoy) was 9% above our estimate largely on account of EBITDA

outperformance. TCV from new clients was solid at US$42 mn.

Growth led by strategic focus areas

Hexaware has made sharp bets through alliances and partnerships with disruptive product

companies in niche areas and in BPO/IMS. These bets are consistent with being a full service

provider to mid-tier clients and niche provider to large clients. Benefits of these investments are

showing up—(1) IMS grew 11.2% qoq and 29.7% yoy and (2) BPO grew 9.6 qoq and 28.4%

yoy. Additionally, Hexaware’s investments in sales and marketing bring in the right leadership

profile and sharp go-to-market approach (through Shrink IT, Grow Digital positioning) is

showing in healthy build of TCV and order book. This shows in growth from large accounts and

buildup of TCVs from new clients (U$218 mn in seven quarters). We expect Hexaware to

comfortably outpace industry on revenue growth backed by stable profitability.

Announces a small buyback. Maintain positive view

Hexaware has announced buyback of 5.7 mn shares at a price of ₹240/share. This is in addition

to ₹1/ share of quarterly dividend. We expect free cash generation to increase materially in

CY2017 after a rather high capex of US$42-44 mn in CY2016. We broadly maintain

CY2017/18E revenues. EPS estimates decline marginally due to change in Re/USD assumption

and below-EBITDA line adjustments. We maintain ADD rating and value the stock at 14X Mar

2018E earnings. Our ascribed premium multiple captures strong growth prospects and efficient

capital allocation.

Hexaware Technologies (HEXW) Technology

Focus areas drive impressive outperformance. Hexaware impressed with strong

revenue growth and EBITDA margin expansion. More importantly, the growth was led

by focus areas of IMS and BPO. New order wins were impressive. Hexaware’s

differentiated focus on IMS and BPO, smart market and customer segmentation and

bets on niche areas in key verticals are yielding dividends. We expect the company to

report strong 14% growth in US$ revenues in CY2017/18E backed by margin expansion.

Maintain estimates; TP increases to ₹225 (from ₹215) on rollover to Mar 2018 earnings.

ADD

OCTOBER 26, 2016

RESULT


Price (`): 203


BSE-30: 28,091

Kawaljeet Saluja [email protected]

Mumbai: +91-22-4336-0860

Jaykumar Doshi [email protected]

Mumbai: +91-22-4336-0863

Hexaware Technologies







MFs 6.1 EBITDA (Rs bn) 5.4 5.7 6.8


Absolute 3.5 (10.7) (19.9) ROE (%) 28.9 26.3 27.1

Rel. to BSE-30 5.6 (10.7) (21.6) Div. Yield (%) 4.3 2.8 3.9


274-178

61.3

Hexaware Technologies Technology


Key highlights from the earnings call

Management expects volume growth in 4QCY16. The company expects to get back to

healthy yoy revenue growth and net profit growth trajectory starting Dec 2016 quarter.

Hexaware expects new deal wins from new clients to stay/exceed CY2015 number of

US$120 mn.

Capex spend in 4QCY16 will be US$18-20 mn. This will complete large part of the

offshore capex program.

Management expects some SG&A leverage in CY2017. It expects G&A spend to grow

slower than revenue growth in the next year.

Portfolio of business in financial services is different from peers. The primary exposure of

the company is in capital markets and mortgages. Capital markets segment has stabilized

after some concerns at the beginning of the year.

Exhibit 1: Hexaware – consolidated quarterly results, December year-ends (Rs mn)


Exhibit 2: Key changes in CY2016-18E estimates


Change

3QCY16 3QCY16E 3QCY15 2QCY16 3QCY16E 3QCY15 2QCY16 9MCY16 9MCY15 (%) CY2016E

Revenue (US$ mn) 135.2 133.6 125.1 129.7 1.2 8.1 4.2 386.6 361.3 7.0 522.6

Revenues 9,041 8,941 8,184 8,696 1.1 10.5 4.0 25,939 23,040 12.6 35,114

Software development costs (5,766) (5,789) (5,186) (5,645) (0.4) 11.2 2.1 (16,787) (14,716) 14.1 (22,684)

Gross profit 3,275 3,152 2,998 3,051 3.9 9.2 7.3 9,152 8,324 9.9 12,430

Total SG&A expenses (1,699) (1,692) (1,538) (1,699) 0.4 10.5 - (5,030) (4,271) 17.8 (6,759)

EBITDA 1,576 1,459 1,460 1,352 8.0 7.9 16.6 4,122 4,053 1.7 5,671

Depreciation (142) (150) (121) (139) (5.3) 17.4 2.2 (419) (351) 19.4 (569)

EBIT 1,434 1,309 1,339 1,213 9.5 7.1 18.2 3,703 3,702 0.0 5,101

Other income 67 71 97 132 (5.9) (30.9) (49.2) 254 85 328

Profit before tax 1,501 1,381 1,436 1,345 8.7 4.5 11.6 3,957 3,787 4.5 5,430

Provision for tax (387) (358) (321) (347) (1,003) (849) (1,411)

Net profit 1,114 1,023 1,115 998 8.9 (0.1) 11.6 2,954 2,938 0.5 4,019

Extraordinary items — — — — — — —

Net profit - reported 1,114 1,023 1,115 998 8.9 (0.1) 11.6 2,954 2,938 0.5 4,019

Recurring EPS (Rs/share) 3.7 3.4 3.7 3.3 8.9 (0.1) 11.6 9.7 9.7 0.3 13.2

No. of shares outstanding (mn) 304 304 304 304 304 304 304

As % of revenues

Gross margin 36.2 35.2 36.6 35.1 35.3 36.1 35.4

EBITDA margin 17.4 16.3 17.8 15.5 15.9 17.6 16.1

EBIT margin 15.9 14.6 16.4 13.9 14.3 16.1 14.5

SG&A expenses 18.8 18.9 18.8 19.5 19.4 18.5 19.3

Change (%)

CY2016E CY2017E CY2018E CY2016E CY2017E CY2018E CY2016E CY2017E CY2018E

Revenues (US$ mn) 523 597 679 522 596 677 0.1 0.0 0.4

Revenue growth (%) 7.7 14.2 13.8 7.6 14.2 13.5

EBITDA (Rs mn) 5,671 6,819 7,781 5,631 6,883 7,746 0.7 (0.9) 0.5

EBITDA Margin (%) 16.1 16.8 16.9 ou 15.9 16.8 16.8

Recurring EPS (Rs/ share) 13.2 15.3 17.4 13.2 15.7 17.6 (0.0) (2.3) (1.2)

Re/ US$ rate 67.2 67.9 68.0 67.7 68.5 68.2 (0.7) (0.9) (0.3)

Change (%)OldNew

Technology Hexaware Technologies


Exhibit 3: Revenue growth across geographies, verticals and service lines (June 2016)


Exhibit 4: Strong growth from top 5 accounts


Exhibit 5: Onsite-centric growth continues


Revenues Contribution to

(US$ mn) qoq yoy revenues (%)

Total revenues 135.2 4.2 8.1 100

Geographical split of revenues

Americas 110.9 5.7 9.7 82.0

Europe 15.7 (3.3) (9.2) 11.6

Asia Pacific 8.7 1.1 28.1 6.4

Vertical split of revenues

Banking and F inancial serv ices 56.2 8.4 19.6 41.6

Travel & Transportation 19.6 4.2 (6.2) 14.5

Healthcare & Insurance 21.6 (2.5) 5.4 16.0

Mfg, consumer & others 37.7 2.4 2.9 27.9

Service line split of revenues

ADM 50.4 5.4 8.1 37.3

EAS 16.5 (3.7) (9.7) 12.2

Testing / QATS 27.3 4.8 5.0 20.2

Business intelligence & analytics 20.6 2.2 11.7 15.2

BPO 9.2 9.1 28.9 6.8

IMS 11.2 10.9 30.0 8.3

Growth (%)

8 qtr

Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 CQGR (%)

Revenues (US$ mn)

Top client 16 17 17 18 17 NA NA NA

Top-5 clients 42 46 49 54 53 52 52 56 64 5.3

Top-10 clients 57 61 64 68 68 68 67 72 79 4.2

Non Top-10 accounts 53 54 51 53 57 56 54 58 56 0.7

Growth (%)

Top client 15.9 7.7 0.3 6.3 (6.5) NA NA NA NA

Top-5 clients 10.1 9.0 7.4 9.5 (0.8) (2.0) (0.3) 7.1 13.7

Top-10 clients 8.9 7.5 4.9 6.7 0.0 (0.3) (0.9) 6.4 10.1

Non Top-10 accounts 6.7 0.4 (4.8) 4.1 7.1 (1.5) (3.2) 6.8 (3.0)

8 qtr

Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 CQGR (%)

Revenues (US$ mn)

Onsite 62 66 68 74 76 77 77 83 89 4.6

Offshore 48 49 47 47 49 47 45 47 47 (0.4)

Growth (%)

Onsite 10.6 6.7 2.6 9.7 2.5 1.6 (0.7) 7.9 7.0

Offshore 4.5 0.8 (2.7) (0.3) 4.2 (4.6) (4.0) 4.3 (0.7)



Exhibit 6: Strong growth from IMS and BPO service offerings


Exhibit 7: Yoy growth accelerated a bit


Exhibit 8: EBIT margin to steady out and improve from here


Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16

IMS revenues (US$ mn) 7 7 7 7 8 9 9 9 10 11

IMS as % of revenues 6.9 6.5 6.4 6.0 6.7 6.9 7.3 7.3 7.8 8.3

Grow th in IMS (qoq) 18 2 2 (6) 18 6 5 (2) 14 11

BPO revenues (US$ mn) 4 5 5 6 6 7 7 7 8 9

BPO as % of revenues 4.0 4.2 4.3 4.8 5.2 5.7 5.7 5.8 6.5 6.8

Grow th in BPO (qoq) 15 13 7 12 14 13 (1) (0) 19 9

6.8

3.9

6.5 8.3

1.9

7.6

11.3

14.4

19.9 18.9

13.7

8.4

5.9 6.9

8.1

0

5

10

15

20

25

25

50

75

100

125

150

Mar-

13

Jun-1

3

Sep-1

3

Dec

-13

Mar-

14

Jun-1

4

Sep-1

4

Dec

-14

Mar-

15

Jun-1

5

Sep-1

5

Dec

-15

Mar-

16

Jun-1

6

Sep-1

6

Revenues (LHS, US$ mn) Growth (RHS, yoy %)

15.9

0

5

10

15

20

25

Mar-

11

Jun-1

1

Sep-1

1

Dec

-11

Mar-

12

Jun-1

2

Sep-1

2

Dec

-12

Mar-

13

Jun-1

3

Sep-1

3

Dec

-13

Mar-

14

Jun-1

4

Sep-1

4

Dec

-14

Mar-

15

Jun-1

5

Sep-1

5

Dec

-15

Mar-

16

Jun-1

6

Sep-1

6

EBIT margin (%)

Technology Hexaware Technologies


Exhibit 9: Hexaware: key operational metrics



Revenues (US$ mn) 110 115 115 121 125 124 122 130 135

qoq growth (%) 7.8 4.1 0.3 5.6 3.1 (0.8) (1.9) 6.6 4.2

Revenues (Rs mn) 6,706 7,118 7,134 7,722 8,184 8,195 8,202 8,696 9,041

Exchange rate 60.96 62.17 62.09 63.66 65.42 66.04 67.40 67.05 66.87

Revenue by verticals (%) - new classification

Banking and F inancial serv ices 36.3 36.9 37.4 36.7 37.6 37.5 39.2 40.0 41.6

Travel & Transportation 16.1 15.6 16.5 17.4 16.7 16.6 15.3 14.5 14.5

Healthcare & Insurance 15.9 15.5 15.6 15.7 16.4 17.4 17.5 17.1 16.0

Mfg, consumer & others 31.7 32.0 30.5 30.2 29.3 28.5 28.0 28.4 27.9

Revenue by service lines (%) - new classification

ADM 36.8 36.4 37.6 37.8 37.3 38.1 37.8 36.9 37.3

EAS 17.1 16.6 15.5 14.3 14.6 14.3 13.7 13.2 12.2

Testing / QATS 20.2 20.9 20.7 20.9 20.8 20.6 20.2 20.1 20.2

Business intelligence & analytics 15.2 15.4 15.4 15.1 14.7 14.0 15.2 15.5 15.2

BPO 4.2 4.3 4.8 5.2 5.7 5.7 5.8 6.5 6.8

IMS 6.5 6.4 6.0 6.7 6.9 7.3 7.3 7.8 8.3

Revenue by geographies (%) - new classification

Americas 78.8 78.8 80.8 81.0 80.8 81.3 81.4 80.9 82.0

Europe 14.3 15.1 13.1 13.4 13.8 13.1 12.0 12.5 11.6

Asia Pacific 6.9 6.1 6.1 5.6 5.4 5.6 6.6 6.6 6.4

Onsite-Offshore mix (%)

Onsite 56.2 57.6 58.9 61.2 60.8 62.3 63.1 63.9 65.6

Offshore 43.8 42.4 41.1 38.8 39.2 37.7 36.9 36.1 34.4

Client metrics

Repeat business (%) 95.7 95.5 95.2 96.2 95.3 95.7 94.7 95.2 95.4

Clients billed 233 236 227 225 223 226 229 226 222

Clients added 10 10 10 9 9 9 10 6 7

Revenue concentration (%)

Top 1 client 14.4 14.9 14.9 15.0 13.6

Top 5 clients 38.2 40.0 42.8 44.4 42.7 42.2 42.9 43.1 47.0

Top 10 clients 51.4 53.1 55.5 56.1 54.4 54.7 55.3 55.2 58.3

Client size (ttm)

> US$1 mn 61 61 62 62 65 69 73 76 77

Between US$1 mn - US$5 mn 42 40 42 43 48 53 58 62 63



> US$20 mn 4 5 5 4 4 4 4 5 5

Employee metrics

Total employees (consolidated) 9,697 10,016 10,100 11,009 11,341 11,375 11,599 11,875

Billable personnel (%)

Onsite (%) 20.4 21.1 22.1 20.8 20.6 20.5 21.8 23.5 25.0

Offshore (%) 71.7 71.1 69.3 70.0 69.7 69.2 69.2 66.7 65.4

Marketing (incl sales support - %) 2.1 2.1 3.1 3.4 3.7 3.9 4.2 4.9 4.7

Others (incl tech support - %) 5.8 5.7 5.5 5.8 6.0 6.4 4.8 4.9 4.9

Utilization (%) 70.3 73.0 73.6 72.1 70.4 69.7 69.6 70.0 74.1

Attrit ion rate (%) LTM 13.0 14.1 16.6 17.1 17.4 16.9 16.0 16.6 16.5

DSO - Billed 47 47 51 47 54 49 49 46 50

DSO - including unbilled accruals 68 63 77 74 80 72 78 74 75



Exhibit 10: Consolidated financials for Hexaware, December year-ends, 2012-18E (Rs mn)


2012 2013 2014 2015 2016E 2017E 2018E

Profit model

Total income 19,482 22,854 25,817 31,235 35,114 40,493 46,179

EBITDA 4,074 5,124 4,776 5,355 5,671 6,819 7,781

Depreciation and ammortisation (324) (386) (434) (482) (569) (738) (840)

Other income 290 58 (90) 173 328 241 285

Pretax profits 4,041 4,797 4,253 5,047 5,431 6,322 7,227

Tax (764) (1,004) (980) (1,114) (1,411) (1,664) (1,927)

Profit after tax 3,277 3,793 3,273 3,933 4,020 4,658 5,300

Diluted recurring EPS (Rs/share) 11.0 12.6 10.8 12.9 13.2 15.3 17.4

Balance sheet

Total equity 12,039 11,992 12,906 14,332 16,288 18,024 20,402

Deferred taxation liability (73) 48 (175) (256) (256) (256) (256)

Current liabilities 3,616 6,044 4,630 5,873 5,551 6,047 6,552


Cash 1,969 6,389 4,716 4,428 4,085 4,863 6,214

Other current assets 6,058 6,320 7,151 8,989 9,041 10,150 11,333

Tangible fixed assets 5,199 5,371 5,489 6,489 8,413 8,759 9,107

Total assets 15,581 18,084 17,361 19,949 21,583 23,815 26,698

Free cash flow

Operating cash flow, excl. WC 3,409 3,337 4,454 4,865 4,373 5,239 5,954

Working capital changes (1,186) 140 (309) (595) (374) (613) (678)

Capital expenditure (744) (393) (604) (1,482) (2,494) (1,085) (1,188)

Free cash flow 1,480 3,084 3,542 2,789 1,505 3,542 4,088

Ratios (%)

EBITDA margin 20.9 22.4 18.5 17.1 16.1 16.8 16.9

ROE 29.5 31.6 26.3 28.9 26.3 27.1 27.6

ROCE 27.4 31.2 26.8 27.9 24.7 26.1 26.5



Ag-chem business returns to strong growth path

Standalone business revenues, at ₹5.5 bn, were up 19% yoy, led by a 12% yoy growth in

domestic revenues and a strong jump in exports, as per our estimates. Standalone EBITDA

margins contracted 50 bps yoy, leading to EBITDA growing by 16% yoy to ₹1.1 bn. The

management took steep price correction in generic molecules (particularly of acephate) to align

with market prices, leading to a sharp 490 bps yoy contraction in gross margins. However,

savings in energy cost along with internal efficiencies reduced the impact at EBITDA level.

Seeds business reported a strong 59% yoy growth in revenues, although the growth came at

the expense of margins (down 969 bps yoy) as realizations dropped in the hybrid rice segment

due to poor demand. Consolidated PAT was up 28% yoy to ₹0.7 bn, led by a decline in

depreciation (down 14% yoy) and interest cost (down 60% yoy). 2QFY16 EBITDA was revised

down by 8% under Ind-AS, leading to Rallis’ standalone and consolidated EBITDA and PAT

falling short of our estimates, despite robust yoy growth.

Improved growth outlook in domestic and export markets

Improved performance of domestic ag-chem business and exports business segments is

heartening in our view, as slow growth in these segments had been a pain point for the

company in the past two years. Management expects to maintain growth, expecting healthy

growth in the upcoming rabbi season due to adequate monsoon progress, and improving

growth outlook in the exports markets, particularly in Brazil. The management launched two

products in the quarter, (including an exclusive insecticide) taking its tally of new product

launches to 11 in the past two years. Margins are expected to remain steady, as cost

rationalization in the ag-chem business will cushion fall in gross margins. Rallis’ encouraging

fundamentals keep us confident of its medium-term earnings growth trajectory (expect 27%

EPS CAGR in FY2016-19E).

Valuation: Reduce estimates slightly but increase TP to ₹250 (₹240 earlier), maintain ADD

We have aligned our estimates with 1HFY17 results and Ind-AS accounting, leading to ~4% cut

in our FY2017-19E EPS estimates. Maintain ADD with revised TP of ₹250 (₹240 earlier), on 18X

September 2018 EPS. Continued strength in exports revenues in 2HFY17 along with steady

margins should drive further upsides in the stock price in our view.

Rallis India (RALI) Others

Improving growth outlook. Rallis reported in-line yoy growth in its consolidated

EBITDA and PAT in 2QFY17, as both the domestic ag-chem and exports segments

benefitted from improved demand in key markets. Absolute financials were slightly

below estimates though, due to sharp downward revision in base numbers under Ind-

AS. Management expects to maintain traction on account of healthy industry demand

and heightened product launches. Maintain ADD; TP ₹250 (from ₹240).

ADD

OCTOBER 26, 2016

RESULT

Coverage view:

Price (`): 232


BSE-30: 28,091

Mohan Lal [email protected]

Mumbai: +91-22-4336-0879

Rallis India







MFs 10.6 EBITDA (Rs bn) 2.3 2.8 3.5


Absolute 4.4 6.6 9.9 ROE (%) 16.7 18.6 19.6



246-142

45.1

Rallis India Others


Exhibit 1: Both ag-chem and seeds businesses recorded strong revenues growth in 2QFY17, margins declined slightly due to pricing pressures Interim results of Rallis, consolidated, March fiscal year-ends (Rs mn)


Exhibit 2: Rallis finished 2016 kharif season with a healthy 12% yoy revenue growth Interim results of Rallis, standalone, March fiscal year-ends (Rs mn)


2QFY17 2QFY17E 1QFY17 2QFY16 est qoq yoy 1HFY16 1HFY17 % change FY2017E

Sales 5,966 6,238 4,677 4,924 (4) 28 21 9,297 10,643 14 18,209

Raw material cost (3,778) (3,627) (2,607) (2,857) (5,336) (6,385) 20 (10,642)

Employee cost (363) (403) (374) (328) (653) (738) 13 (1,292)

Other expenses (783) (1,036) (943) (857) (1,831) (1,727) (6) (3,514)

EBITDA 1,042 1,172 752 882 (11) 39 18 1,476 1,794 22 2,762

Other income/forex gain/(loss) 38 33 20 30 45 57 28 149

Depreciation and amortization (110) (132) (124) (128) (242) (235) (3) (426)

Interest cost (11) (23) (23) (29) (69) (34) (50) (84)

Extraordinaries — — 1,584 — — 1,584 — 1,584

Profit before tax 958 1,051 2,208 756 (9) (57) 27 1,209 3,166 162 3,985

Tax (net) (293) (327) (466) (248) (278) (759) 173 (905)

PAT 665 724 1,742 508 (8) (62) 31 932 2,407 158 3,080

Minority interest (2) — — (15) 55 (2) (103) —

Net income 667 724 1,742 523 (8) (62) 28 987 2,405 144 3,080

Adjusted PAT 667 724 634 523 (8) 5 28 987 1,297 31 1,892

Adjusted EPS (Rs) 3.4 3.7 3.3 2.7 (8) 5 28 5.1 6.7 31 9.7

Key ratios (%)

Gross margins 36.7 44.3 42.0 42.6 40.0 41.6

Emp. cost/sales 6.1 8.0 6.7 7.0 6.9 7.1

Other exp/sales 13.1 20.2 17.4 19.7 16.2 19.3

EBITDA margins 17.5 18.8 16.1 17.9 15.9 16.9 15.2

Notes:

(a) Estimated financials are as per Indian GAAP.

% change

2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 Yoy (%) H1FY16 H1FY17 Yoy (%)

Net sales from operations 5,784 3,500 2,807 2,705 4,629 2,774 3,072 2,729 5,428 17 7,334 8,157 11

Other operating income 59 47 66 33 10 39 62 51 85 763 42 136 221

Total income 5,844 3,547 2,873 2,738 4,639 2,813 3,134 2,780 5,513 19 7,377 8,293 12

Raw material cost (3,661) (1,948) (1,644) (1,714) (2,738) (1,528) (1,852) (1,738) (3,524) 29 (4,452) (5,262) 18

Employee cost (246) (279) (247) (245) (257) (246) (264) (290) (283) 10 (502) (573) 14

Other expenditure (704) (748) (542) (570) (700) (638) (558) (498) (609) (13) (1,271) (1,107) (13)

EBITDA 1,233 572 440 209 944 402 461 255 1,098 16 1,153 1,352 17

Depreciation (113) (112) (124) (100) (111) (123) (50) (111) (97) (12) (211) (208) (2)

Other income/forex gain/(loss) 3 6 1 8 25 4 9 16 30 24 33 46 39

Interest (net) (15) (12) (12) (21) (18) (22) (19) (11) (6) (65) (39) (17) (56)

Exceptional items — — — — — — — 1,584 — — — 1,584 NM

PBT 1,107 453 306 95 841 261 401 1,733 1,025 22 936 2,757 194

Tax (346) (128) (69) (30) (248) 4 (97) (466) (293) 18 (278) (759)

PAT 761 325 237 66 593 265 304 1,267 732 23 659 1,998 203

Adjusted PAT 761 325 237 66 593 265 304 158 732 23 659 890 35

Ratio analysis (%)

Gross margin 37.3 45.1 42.8 37.4 41.0 45.7 40.9 37.5 36.1 39.7 36.6

EBITDA margin 21.1 16.1 15.3 7.6 20.4 14.3 14.7 9.2 19.9 15.6 16.3

Employee cost/sales 4.2 7.9 8.6 8.9 5.5 8.7 8.4 10.4 5.1 6.8 6.9

Other expenditure/sales 12.0 21.1 18.8 20.8 15.1 22.7 17.8 17.9 11.0 17.2 13.3

Notes:

(a) All financials except for 1QFY16, 2QFY16, 1QFY17, 2QFY17, 1HFY16 and 1HFY17 are as per Indian GAAP.

Others Rallis India


Exhibit 3: Seeds business recorded strong uptick in revenues, though margins fell sharply due to pricing pressure in hybrid rice seed segment Consol-standalone numbers for Rallis, March fiscal year-ends (Rs mn)

Notes: (a) All financials except for 1QFY16, 2QFY16, 1QFY17, 2QFY17, 1HFY16 and 1HFY17 are as per Indian GAAP.


Exhibit 4: 2QFY16 EBITDA and PAT were revised 8% down under Ind-AS


Exhibit 5: Balance sheet of Rallis, consolidated, March fiscal year-ends (Rs mn)

Notes: (a) 2QFY16 balance sheet is as per Indian GAAP.


2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 Yoy (%) 1HFY16 1HFY17 Yoy (%)

Income 576 348 346 1,635 285 290 348 1,897 453 59 1,920 2,350 22

EBITDA (14) (67) 4 386 (62) (50) (42) 497 (55) (11) 324 442 37

PBT (33) (92) (10) 358 (85) (77) 17 475 (66) (22) 273 409 50

PAT (before minority int) (33) (92) (25) 358 (85) (77) 17 475 (66) (22) 273 409 50

EBITDA (%) (2.4) (19.4) 1.1 23.6 (21.9) (17.2) (11.9) 26.2 (12.2) 16.8 18.8

1QFY16 2QFY16 1QFY16 2QFY16 1QFY16 2QFY16

Revenues 2,474 4,642 2,738 4,639 11 —

EBITDA 181 1,031 209 944 15 (8)

PAT 45 647 66 593 47 (8)

Indian GAAP Ind-AS Change (%)

2QFY16 2QFY17

Liabilities

Share capital 195 195

Reserves and surplus 8,854 10,500

Shareholders funds 9,049 10,695

Minority interest 156 40

Deferred tax liability/others 379 290

Total debt 1,556 591

Current liabilities 5,618 6,171

Provisions 490 290

Total liabilities 17,248 18,077

Assets

Fixed assets 4,432 4,038

Goodwill on consolidation 1,959 1,958

Investments 187 1,644

Current assets

Cash 134 1,671

Trade receivables 3,769 4,424

Inventories 5,170 3,842

Loans and advances 1,571 —

Other current assets 26 500

Total current assets (excl. cash) 10,536 8,766

Total assets 17,248 18,077

Net working capital 4,428 2,306

Rallis India Others


Other highlights

Generic molecules faced sever pricing pressures in the quarter, which forced Rallis also to

take sharp price cuts in its generic products, to align pricing with competition. There was

a sharp correction in realization of acephate, the active ingredient in Rallis’ best-selling

insecticide—Asataf, both in domestic and exports markets. The management expects

pricing pressures to continue for the rest of the fiscal.

The company launched ‘Epic’, a broad spectrum fungicide for paddy, and Quest, an exclusive

insecticide for cotton crop, in the quarter. With this, the company’s tally of new products

launched in the past two years has increase to 11, which should enable higher revenues

growth and innovation index in its domestic ag-chem business, in the medium term.

The management expects demand sentiments in 2HFY17 to remain healthy, on account

of record kharif production and improved reservoir levels. It also noted improving demand

environment in Brazil, which played an important role in strong growth in Rallis’ exports

business.

The standalone business reported 13% yoy decline in other operating expenses in 1HFY17,

leading to a strong margins improvement of 70 bps yoy, despite pressure on gross margins.

The management noted (1) savings in power and fuel cost from operationalization of its

solar power plant in its production facilities in Dahej and (2) internal efficiencies as the

main drivers of the savings, and expected these to sustain in coming quarters.

Ind-AS accounting implementation led to an 8% downward revision in Rallis’ standalone

2QFY17 EBITDA and PAT, due to higher product returns last year. Revenues of seeds

division were also revised downward by 26%, on account of netting-off of cash discounts

from topline, along with change in accounting for expected seeds returns, as per the

management.

Rallis’ 1HFY17 performance was satisfactory; consolidated revenues increased 14% yoy,

while EBITDA and adjusted PAT were up 22% and 31% yoy, respectively, on account of

100 bps improvement in margins, and lower interest and depreciation expenses.

Increase estimates to align with 1HFY17 performance

Despite robust and in-line yoy growth in Rallis’ 2QFY17 financials, the topline and PAT were

4% and 8% lower versus our estimates, as the growth came from a lower base, due to Ind-

AS implementation. While 2HFY17 will benefit from low base and continued strength in

topline growth, we have revised our estimates down slightly in anticipation of the trend seen

in 1HFY17. We continue to build robust 17% and 27% CAGR in Rallis’ FY206-19E revenues

and PAT.

Exhibit 6: Change in estimates for Rallis, consolidated, March fiscal year-ends (Rs mn)


2017 2018 2019 2017 2018 2019 2017 2018 2019

Revenue 18,209 21,797 26,168 19,322 22,926 26,969 (6) (5) (3)

EBITDA 2,762 3,484 4,280 2,991 3,739 4,502 (8) (7) (5)

Adjusted PAT 1,892 2,382 2,971 1,984 2,496 3,060 (5) (5) (3)

Change (%)New Old

Others Rallis India


Assumptions

Exhibit 7: Our assumptions for Rallis, consolidated, March fiscal year-ends (Rs mn)


Exhibit 8: Summary financials: Rallis Profit and loss model, cash flow statement and balance sheet for Rallis, consolidated, March fiscal year-ends (Rs mn)


2013 2014 2015 2016 2017E 2018E 2019E

Sales 14,582 17,466 18,218 16,279 18,209 21,797 26,168

Standalone 13,238 15,308 14,846 12,801 15,177 17,856 21,044

Metahelix (a) 1,344 2,157 3,373 3,478 3,032 3,942 5,124

EBITDA 2,106 2,613 2,772 2,302 2,762 3,484 4,280

Standalone 2,032 2,473 2,195 1,819 2,398 2,893 3,409

Metahelix 73 140 576 483 364 591 871

EBITDA (%)

Standalone 15.4 16.2 14.8 14.2 15.8 16.2 16.2

Metahelix 5.5 6.5 17.1 13.9 12.0 15.0 17.0

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


Sales 10,934 12,749 14,582 17,466 18,218 16,279 18,209 21,797 26,168

EBITDA 1,991 2,030 2,106 2,613 2,771 2,302 2,762 3,484 4,280

Other income 69 69 117 64 42 137 149 199 231

Interest (40) (146) (185) (126) (101) (136) (84) (48) (36)

Depreciation (175) (287) (315) (407) (496) (446) (426) (470) (514)

Extraordinardy items — (172) — — — — 1,584 — —

Profit before tax 1,845 1,494 1,723 2,144 2,216 1,857 3,985 3,164 3,961

Tax expense (580) (487) (535) (617) (618) (390) (905) (782) (991)

Minority interest — 15 (2) 8 26 37 — — —

Reported PAT 1,264 992 1,190 1,519 1,572 1,430 3,080 2,382 2,971

Adjusted PAT 1,264 1,126 1,190 1,519 1,572 1,430 1,892 2,382 2,971

Adjusted EPS 6.5 5.8 6.1 7.8 8.1 7.4 9.7 12.2 15.3


Equity 5,049 5,530 6,207 7,180 8,145 8,990 11,368 12,978 15,099

Total borrowings 1,172 1,523 1,314 768 1,106 898 698 498 298

Deferred tax liability/minority interest 54 145 328 420 457 425 388 388 388

Current liabilities and provisions 3,891 4,028 4,047 4,603 4,650 4,733 5,311 5,752 6,905

Total liabilites 10,167 11,226 11,897 12,972 14,358 15,046 17,765 19,617 22,690

Net fixed assets 4,009 4,236 4,223 4,393 4,260 4,579 4,953 5,283 5,569

Goodwill 1,236 1,533 1,676 1,859 1,958 2,591 2,591 2,591 2,591

Investments 256 227 197 187 187 187 187 187 187

Cash 146 112 258 157 127 171 2,087 2,537 3,746

Other current assets and miscellaneous 4,520 5,118 5,542 6,376 7,826 7,518 7,947 9,017 10,596

Total assets 10,167 11,226 11,897 12,972 14,358 15,046 17,765 19,617 22,690


Operating cash flow 1,232 1,315 1,585 1,906 2,143 1,888 3,710 2,297 3,436

Working capital changes (284) (507) (321) (274) (1,563) 314 (203) (273) (607)

Capital expenditure (1,378) (570) (349) (584) (431) (739) (800) (800) (800)

Free cash flow (430) 237 915 1,048 150 1,463 2,707 1,224 2,028

Ratios

EBITDA margin (%) 18.2 15.9 14.4 15.0 15.2 14.1 15.2 16.0 16.4

Net debt/equity (X) 0.20 0.26 0.17 0.09 0.12 0.08 (0.12) (0.16) (0.23)

Book value (Rs/share) 26.0 28.4 31.9 36.9 41.9 46.2 58.5 66.7 77.6

RoAE (%) 26.2 20.4 18.9 22.1 20.5 15.9 17.1 18.3 19.9

RoACE (%) 23.6 17.4 16.4 19.4 18.2 14.6 15.9 17.2 19.1



2QFY17 earnings print – decent quarter albeit a tad below estimates

Headline consolidated results – APNT posted a decent quarter with net operating revenues

of ₹37.6 bn (+10% yoy), EBITDA of ₹7.13 bn (+17% yoy) and recurring PAT of ₹4.81 bn

(+17% yoy); however, both revenue and PAT were 4% below our estimates. EBITDA growth

was aided by 120 bps yoy expansion in EBITDA margin, led by expansion in GMs (up 170 bps

yoy); however, 40 bps jump in employee costs curtailed EBITDA margin expansion. We note

while sustained RM tailwinds did drive GM expansion, the pace of same has narrowed and GMs

contracted 270 bps qoq. Below-EBITDA line items (depreciation, other income, interest cost,

ETR) were broadly in line with our expectations. For 1HFY17, APNT delivered revenue, EBITDA

and PAT growth of 9%, 19% and 17% yoy respectively; EPS stood at ₹10.5.

Headline standalone results – standalone net operating revenues grew 9% yoy (partly aided

by low base); we estimate volume growth in domestic paints business stood at 12% yoy (below

our estimates of ~15% volume growth) – however, price cut of ~2% and 60 bps jump in excise

dragged reported revenue growth. Standalone EBITDA margin expanded 140 bps yoy to 20.3%

led by 210 bps expansion in GMs (down 280 bps qoq).

TTM EPS came in at ₹20.3, up a robust 24.3% yoy. The outperformance-miss cycle continued

with APNT missing consensus EPS estimates this time by 7%.

Estimates broadly unchanged; continue to find valuations rich – downgrade to SELL

APNT’s 2QFY17 earnings print, while robust on headline growth numbers, needs to be seen in

the context of the earlier onset of festive season this fiscal versus FY2016. We note that timing

of Diwali was favorable for 2Q volumes this time (versus 3Q in last fiscal). High 2HFY16 base

(16-17% volume growth in 3QFY16 and 13-14% in 4QFY16) may mean challenges to volume

growth acceleration going forward, hopes of an improvement in macro notwithstanding (we

note our estimates do build in a robust ~11% volume growth in 2HFY17).

We remain cautious on the stock as we continue to find valuations rich (trading at 45X

FY2018E; at ~25% premium to sector average P/E, ex-ITC). Downgrade the stock to SELL (from

REDUCE) with revised target price of ₹1,000 (from ₹950) as we roll over to Sep 2018E (based

on 37X target P/E multiple). Our estimates remain broadly unchanged.

Asian Paints (APNT) Consumer Products

Healthy quarter, not much to read either way; downgrade to SELL. APNT

reported a healthy quarter with robust headline growth numbers. However, 2Q and 3Q

performance should always be seen as a composite given the festive season timing

impact on phasing of volumes (festive sales were in 2Q this year). Net net, not much to

read through either way from the 2Q print; while a miss, it wasn’t weak enough for the

lofty valuations to correct. Rich valuations have become richer in recent months;

downgrade the stock to SELL (from REDUCE) with a revised TP of ₹1,000 (from ₹950).

SELL

OCTOBER 26, 2016

RESULT, CHANGE IN RECO.


Price (`): 1,140


BSE-30: 28,091


Mumbai: +91-22-4336-0885

Anand Shah [email protected]

Mumbai: +91-22-4336-0882


Mumbai: +91-22-4336-0881

Asian Paints







MFs 1.8 EBITDA (Rs bn) 27.7 31.6 37.3


Absolute (4.3) 6.5 32.7 ROE (%) 34.7 33.5 33.7



1,227-784

1,093.2

Consumer Products Asian Paints


Exhibit 1: Interim consolidated results of Asian Paints (as per Ind-AS), March fiscal year-ends (Rs mn)


Exhibit 2: Key changes to consolidated estimates (as per Ind-AS), Asian Paints, March fiscal year-ends, 2017-19E



Gross revenue 41,897 37,991 40,348 10 4 82,245 74,602 10

Excise (4,691) (4,047) (4,447) 16 6 (9,138) (7,735) 18

Excise as % of sales 11.2 10.7 11.0 54 bps 17 bps 11.1 10.4 74 bps

Net revenue 37,205 38,771 33,944 35,902 (4) 10 4 73,107 66,867 9

Other operating income 428 505 406 472 (15) 6 (9) 901 825 9

Net operating revenue 37,633 39,277 34,349 36,374 (4) 10 3 74,007 67,692 9

Material cost (20,876) (21,334) (19,641) (19,191) (2) 6 9 (40,067) (38,729) 3

Gross profit 16,758 17,942 14,708 17,183 (7) 14 (2) 33,941 28,962 17

Gross margin (%) 44.5 45.7 42.8 47.2 -116 bps 170 bps -272 bps 45.9 42.8 307 bps

Employee cost (2,794) (2,792) (2,417) (2,774) 0 16 1 (5,568) (4,800) 16

Other expenditure (6,834) (7,581) (6,211) (6,206) (10) 10 10 (13,040) (11,296) 15

Total expenditure (30,503) (31,707) (28,269) (28,172) (4) 8 8 (58,675) (54,826) 7

EBITDA 7,130 7,570 6,080 8,203 (6) 17 (13) 15,332 12,866 19

EBITDA margin (%) 18.9 19.3 17.7 22.6 -33 bps 124 bps -361 bps 20.7 19.0 171 bps

Other income 791 765 629 719 3 26 10 1,510 1,238 22

Interest (60) (70) (92) (64) (14) (34) (5) (124) (182) (32)

Depreciation (844) (870) (677) (855) (3) 25 (1) (1,698) (1,340) 27

Pretax profits 7,017 7,395 5,940 8,003 (5) 18 (12) 15,020 12,583 19

Tax (2,207) (2,401) (1,843) (2,603) (8) 20 (15) (4,810) (3,891) 24

Recurring PAT 4,810 4,994 4,096 5,400 (4) 17 (11) 10,210 8,692 17

Extraordinary items — — — — — —

Minority interest/share of associates (51) (108) (59) (50) (53) (15) 2 (100) (118) (15)

Net profit (reported) 4,759 4,886 4,037 5,351 (3) 18 (11) 10,110 8,574 18

Recurring PAT post MI 4,759 4,886 4,037 5,351 (3) 18 (11) 10,110 8,574 18

Recurring EPS 5.0 5.1 4.2 5.6 (3) 18 (11) 10.5 8.9 18

Income tax rate (%) 31.5 32.5 31.0 32.5 -101 bps 42 bps -108 bps 32.0 30.9

Costs as a % of net operating revenue

Material cost 55.5 54.3 57.2 52.8 115 bps -171 bps 271 bps 54.1 57.2 -308 bps

Employee cost 7.4 7.1 7.0 7.6 31 bps 38 bps -21 bps 7.5 7.1 43 bps

Other expenditure 18.2 19.3 18.1 17.1 -115 bps 7 bps 109 bps 17.6 16.7 93 bps

(% change)

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

Revenues (Rs mn) 157,019 183,983 213,135 158,551 185,483 214,521 (1.0) (0.8) (0.6)

EBITDA (Rs mn) 31,606 37,287 43,157 31,938 37,619 43,462 (1.0) (0.9) (0.7)

EBITDA margin (%) 20.1 20.3 20.2 20.1 20.3 20.3 -2 bps -2 bps -2 bps

Net income (Rs mn) 20,505 24,238 27,968 20,637 24,368 28,083 (0.6) (0.5) (0.4)

EPS (Rs/share) 21.4 25.3 29.2 21.5 25.4 29.3 (0.6) (0.5) (0.4)

Other assumptions

Gross margin (%) 45.0 45.0 44.9 44.4 44.4 44.3 60 bps 60 bps 60 bps

Volume growth (%) 12.0 14.0 13.0 13.0 14.0 13.0 -100 bps 0 bps 0 bps

Realisation growth (%) (1.0) 3.5 3.0 (1.3) 3.5 3.0 25 bps 0 bps 0 bps


Asian Paints Consumer Products


Exhibit 3: Interim standalone results of Asian Paints (as per Ind-AS), March fiscal year-ends (Rs mn)


Key takeaways from the management concall

Comments on demand environment. Demand trends were uniform and witnessed

robust growth across segments. However, prolonged monsoon did impact demand in

west and central India for the quarter. Rural continues to outperform urban market

growth rates. Overall, management expects to sustain its growth momentum led by

support from good monsoons and stimuli-led demand boost (especially in 2HFY17).

International business performed well led by good growth in Nepal, Fiji and certain

units in the Middle East. APNT has received some approvals in Indonesia and has begun

sale of paints on a small scale (getting it processed in outside units). It expects Indonesia

plant to commence operations by March 2017 (versus earlier guidance of January 2017).

Other takeaways. (1) Industrial business performed well (led by good demand

conditions in Auto OEM and GI business and industrial liquid paints segment), (2) home

décor (Sleek and Ess Ess bath fitting) registered good growth during the quarter, (3) most

RMs have started inching up including Tio2; APNT may resort to price hikes in 2HFY17 if

input costs harden further, (4) capex guidance for FY2017 (on a standalone basis) is ₹6

bn – largely initial spends on large greenfield facilities at Mysore and Vizag (will come up

in phases).


Gross revenue 35,054 31,796 33,612 10 4 68,665 62,310 10

Excise (4,512) (3,898) (4,240) 16 6 (8,752) (7,401) 18

Excise as % of sales 12.9 12.3 12.6 61 bps 25 bps 12.7 11.9 86 bps

Net sales 30,541 32,142 27,898 29,372 (5) 9 4 59,913 54,909 9

Other operating income 479 490 446 466 (2) 7 3 945 864 9

Net operating revenue 31,020 32,632 28,344 29,837 (5) 9 4 60,858 55,773 9

Material cost (16,859) (17,388) (15,992) (15,376) (3) 5 10 (32,235) (31,522) 2

Gross profit 14,161 15,244 12,352 14,462 (7) 15 (2) 28,623 24,251 18

Gross margin (%) 45.7 46.7 43.6 48.5 -107 bps 207 bps -282 bps 47.0 43.5 355 bps

Employee cost (1,927) (1,898) (1,623) (1,890) 2 19 2 (3,817) (3,244) 18

Other expenditure (5,922) (6,675) (5,360) (5,270) (11) 10 12 (11,192) (9,549) 17

Total expenditure (24,708) (25,961) (22,975) (22,536) (5) 8 10 (47,244) (44,315) 7

EBITDA 6,313 6,671 5,370 7,301 (5) 18 (14) 13,614 11,458 19

EBITDA margin (%) 20.3 20.4 18.9 24.5 -10 bps 140 bps -413 bps 22.4 20.5 182 bps

Other income 848 825 663 788 3 28 8 1,635 1,334 23

Interest (44) (40) (45) (42) 10 (3) 5 (86) (73) 17

Depreciation (731) (755) (574) (740) (3) 27 (1) (1,471) (1,140) 29

Pretax profits 6,386 6,701 5,413 7,307 (5) 18 (13) 13,693 11,578 18

Tax (2,033) (2,138) (1,706) (2,295) (5) 19 (11) (4,328) (3,595) 20

Recurring PAT 4,353 4,563 3,708 5,012 (5) 17 (13) 9,365 7,983 17

Extraordinary items — — — — — —

Net profit (reported) 4,353 4,563 3,708 5,012 (5) 17 (13) 9,365 7,983 17

Recurring EPS 4.5 4.8 3.9 5.2 (5) 17 (13) 9.8 8.3 17

Income tax rate (%) 31.8 31.9 31.5 31.4 -8 bps 32 bps 42 bps 31.6 31.1 55 bps

Costs as a % of net operating revenues

Material cost 54.3 53.3 56.4 51.5 106 bps -208 bps 281 bps 53.0 56.5 -356 bps

Employee cost 6.2 5.8 5.7 6.3 39 bps 48 bps -13 bps 6.3 5.8 45 bps

Other expenditure 19.1 20.5 18.9 17.7 -137 bps 18 bps 142 bps 18.4 17.1 127 bps

(% change)

Consumer Products Asian Paints


Exhibit 4: TTM EPS growth remained 20%+ for fourth consecutive quarter TTM EPS growth trend


Exhibit 5: Recurring PAT missed our and consensus estimates this quarter Quarterly earnings surprise trend vs. consensus estimates


Exhibit 6: Volume growth was robust at 12% yoy; below our estimates of 15% growth


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10

15

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10

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25

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Sep

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Dec-

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Mar-

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Jun-1

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Sep

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Jun-1

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Sep

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Dec-

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Mar-

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Jun-1

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Sep

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

51 56

36

18 14

(9) (4) (7)

9

(15)

6 19

(9) (6)

8

(19)

(11)

25

(13)

(2) 12

(9)

(18)(12)

11

(9)

14

(6)

4

(7)

(30)

(20)

(10)

-

10

20

30

40

50

60

1Q

FY1

0

2Q

FY1

0

3Q

FY1

0

4Q

FY1

0

1Q

FY1

1

2Q

FY1

1

3Q

FY1

1

4Q

FY1

1

1Q

FY1

2

2Q

FY1

2

3Q

FY1

2

4Q

FY1

2

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

(3)

8

14

3

10

13

7

15

11

12

3 4

10

7

17

14

12 12

(5)

-

5

10

15

20

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

Asian Paints Consumer Products


Exhibit 7: Asian Paints: Consolidated profit model, balance sheet (as per Ind-AS from 2016), March fiscal year-ends, 2013-19E


2013 2014 2015 2016 2017E 2018E 2019E


Net sales 109,386 127,148 141,828 142,811 157,019 183,983 213,135

EBITDA 17,320 19,979 22,354 27,685 31,606 37,287 43,157

Other income 1,145 1,342 1,697 2,134 2,700 3,282 3,912

Interest (367) (422) (348) (407) (270) (219) (207)

Depreciation (1,546) (2,457) (2,659) (2,756) (3,480) (3,989) (4,609)

Pretax profits 16,552 18,442 21,044 26,656 30,556 36,361 42,253

Tax (4,957) (5,715) (6,495) (8,444) (9,778) (11,817) (13,944)

Minority interest (456) (440) (322) (250) (273) (306) (342)

Extraordinary items — (100) (276) (525) — — —

Net income 11,139 12,188 13,952 17,438 20,505 24,238 27,968

Recurring net income 11,139 12,288 14,227 17,962 20,505 24,238 27,968

Recurring EPS (Rs) 11.6 12.8 14.8 18.7 21.4 25.3 29.2


Total shareholder's equity 33,843 40,392 47,424 56,053 66,198 77,774 90,779

Total borrowings 2,372 2,400 4,099 3,060 2,211 2,111 2,011

Deferred tax liability 1,544 1,878 1,799 2,171 2,171 2,171 2,171

Minority interest 1,608 2,460 2,637 2,942 3,215 3,521 3,863


Net fixed assets 24,560 24,918 26,102 33,162 37,287 43,041 48,964

Goodwill 442 1,414 2,458 1,977 1,977 1,977 1,977

Investments 2,957 14,236 15,878 20,982 20,982 20,982 20,982

Cash 7,367 2,290 2,044 4,204 10,277 15,996 23,043

Net current assets 4,040 4,274 9,477 3,901 3,272 3,582 3,858

Total assets 39,366 47,131 55,959 64,225 73,795 85,577 98,823


Operating cash flow, excl. working capital 13,455 15,705 16,379 20,816 23,158 27,029 31,020

Working capital (1,587) (1,685) (4,502) 2,517 628 (310) (276)

Capital expenditure (6,367) (2,354) (4,377) (8,059) (7,605) (9,743) (10,533)

Free cash flow 5,501 11,667 7,500 15,274 16,181 16,976 20,211

Growth (%)

Revenue growth 13.6 16.2 11.5 NM 9.9 17.2 15.8

EBITDA growth 14.8 15.4 11.9 23.8 14.2 18.0 15.7

EPS growth 12.7 10.3 15.8 26.3 14.2 18.2 15.4

Ratios (%)

Gross margin (%) 41.4 42.3 43.8 43.6 45.0 45.0 44.9

EBITDA margin (%) 15.8 15.7 15.8 19.4 20.1 20.3 20.2

Net profit margin (%) 10.2 9.7 10.0 12.6 13.1 13.2 13.1

RoE (%) 36.3 33.1 32.4 34.7 33.5 33.7 33.2

RoCE (%) 39.1 36.1 34.7 38.3 40.2 42.8 43.8

Key assumptions (%)

Volume growth (%) 6.0 10.5 7.0 12.0 12.0 14.0 13.0

Realisation growth (%) 8.2 3.8 3.8 (3.5) (1.0) 3.5 3.0

Notes:

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

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September 2016: Results calendar

Source: Bloomberg, NSE India

Mon Tue Wed Thu Fri Sat Sun

24-Oct 25-Oct 26-Oct 27-Oct 28-Oct 29-Oct 30-Oct

Adani Enterp. Adani Ports Ajanta Pharma A B B Bajaj Auto J K Cements

Adani Pow er Alembic Pharma Cadila Healthcare Bajaj Finance Bajaj Holdings

Bharti Infra. Arvind Ltd Canara Bank Bajaj Finserv Bharat Financial

Idea Cellular Asian Paints Cummins India Bharat Electron Carborundum Universal

Mahindra CIE Automotive Axis Bank Dabur India Castrol India Century Textiles

Rallis India Bharti Airtel Dalmia Bharat Cholaman.Inv.&Fn Colgate-Palmolive

Reliance Capital Dr Reddy's Labs Exide Industries Emami Dish TV

HDFC Bank H D F C Glaxosmit Pharma Eicher Motors

Hexaw are Tech. Hero Motocorp Glenmark Pharma. Grasim Inds

IDBI Bank Hind. Unilever I O C L I D F C

IDFC Bank IIFL Holdings Info Edge (India) Kansai Nerolac

Jyothy Laboratories ITC JSW Steel Marico

Kotak Mah. Bank JK Lakshmi Cement Jubilant Life NTPC

L&T Fin.Holdings JSW Energy Karur Vysya Bank SPARC

M & M Fin. Services Jubilant Foodw orks Maruti Suzuki Strides Shasun

Ortel Communications Just Dial MRF UPL

P I Inds. Torrent Pharma. O N G C Vedanta

Shriram Trans. Piramal Enterp.

Zee Entertainmen PVR

Shri.City Union.

Supreme Inds.

Tata Elxsi

Tech Mahindra

Torrent Pow er

TVS Motor Co.

United Spirits

31-Oct 1-Nov 2-Nov 3-Nov 4-Nov 5-Nov 6-Nov

Ambuja Cem. Max Financial Amara Raja Batteries

Berger Paints Pfizer Punjab Natl.Bank

Dr Lal Pathlabs Titan Company

MphasiS Union Bank (I)

United Brew eries

7-Nov 8-Nov 9-Nov 10-Nov 11-Nov 12-Nov 13-Nov

Britannia Inds. Ashok Leyland Apollo Tyres Aditya Bir. Nuv. Ipca Labs. Hindalco Inds. Suprajit Engineering

GlaxoSmith C H L WABCO India Godrej Properties Minda Corp. M & M

Godrej Consumer Lupin Motherson Sumi

ICICI Bank Pidilite Inds. Page Industries

Sanofi India Rural Elec.Corp. Sun Pharma.Inds.

Shree Cement The Ramco Cement TeamLease Services

Thermax

14-Nov 15-Nov 16-Nov 17-Nov 18-Nov 19-Nov 20-Nov

Godrej Inds. Container Corporation

Welspun India

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Kotak Institutional Equities: Valuation summary of KIE Universe stocks


Target O/S

Price (Rs) price Upside Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) ADVT-3mo

Company Rating 25-Oct-16 (Rs) (%) (Rs mn) (US$ mn) (mn) 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E (US$ mn)

Automobiles

Amara Raja Batteries SELL 1,032 800 (22.5) 176,330 2,638 171 34.0 38.6 44.3 18.8 13.3 14.9 30.3 26.8 23.3 17.5 15.7 14.0 6.9 5.8 4.9 0.7 0.7 0.9 25.0 23.6 22.7 6.3

Apollo Tyres BUY 212 230 8.5 107,939 1,615 509 20.7 22.6 28.5 2.8 9.0 26.2 10.2 9.4 7.4 6.4 5.9 4.6 1.6 1.4 1.2 0.9 1.0 1.3 16.1 15.5 16.9 12.5

Ashok Leyland SELL 88 75 (14.4) 249,441 3,731 2,846 4.5 5.2 5.7 29.6 14.1 10.1 19.4 17.0 15.4 10.6 9.6 9.0 3.9 3.4 3.0 1.5 1.8 1.9 21.7 21.6 20.8 15.5

Bajaj Auto REDUCE 2,802 2,850 1.7 810,676 12,127 289 141.2 160.1 189.2 11.9 13.4 18.2 19.8 17.5 14.8 14.1 12.1 9.8 5.6 4.8 4.1 2.0 2.3 2.7 30.5 29.5 29.8 12.3

Balkrishna Industries ADD 1,088 950 (12.7) 105,208 1,574 97 63.3 72.5 84.2 6.2 14.6 16.2 17.2 15.0 12.9 10.5 8.9 7.4 3.2 2.7 2.2 0.6 0.6 0.7 20.0 19.2 18.9 1.5

Bharat Forge SELL 876 835 (4.7) 203,998 3,052 237 25.3 34.6 44.1 (7.6) 37.0 27.3 34.7 25.3 19.9 17.1 13.4 10.8 5.2 4.5 3.9 0.7 0.9 1.2 15.8 19.1 21.0 15.7

Eicher Motors SELL 24,631 14,500 (41.1) 669,007 10,008 27 646.6 736.0 835.2 37.4 13.8 13.5 38.1 33.5 29.5 30.1 26.3 22.5 18.7 12.9 9.5 0.1 0.1 0.1 49.8 45.5 37.1 18.7

Exide Industries SELL 204 155 (23.8) 172,975 2,588 850 7.8 8.5 9.2 6.5 8.5 8.6 26.1 24.1 22.2 15.6 14.4 12.9 3.6 3.3 3.0 1.2 1.5 1.5 14.3 14.2 14.2 11.0

Fag Bearings BUY 4,355 5,000 14.8 72,372 1,083 17 132.3 162.5 197.5 11.4 22.8 21.6 32.9 26.8 22.0 19.4 16.1 13.0 4.9 4.3 3.8 0.3 0.7 1.4 15.9 17.0 18.3 0.3

Hero Motocorp SELL 3,356 2,950 (12.1) 670,061 10,023 200 183.8 194.6 205.3 17.2 5.8 5.5 18.3 17.2 16.3 12.1 11.3 10.6 7.1 6.1 5.3 2.7 2.9 3.1 42.3 38.2 34.8 22.3

Mahindra & Mahindra REDUCE 1,304 1,370 5.1 809,842 12,114 569 65.2 74.2 83.6 12.5 13.8 12.8 20.0 17.6 15.6 13.4 11.8 10.5 3.0 2.6 2.4 1.2 1.4 1.6 15.6 15.9 16.0 23.6

Maruti Suzuki BUY 5,781 6,500 12.4 1,746,461 26,125 302 240.2 312.2 372.8 58.7 30.0 19.4 24.1 18.5 15.5 14.1 10.7 8.8 5.4 4.5 3.8 1.0 1.3 1.6 24.6 26.7 26.4 57.3

Minda Corp. REDUCE 114 110 (3.7) 23,903 358 209 5.5 6.9 8.9 19.6 24.9 28.1 20.6 16.5 12.9 10.3 8.5 6.9 3.6 3.0 2.5 0.5 0.5 0.6 18.8 19.7 21.0 0.8

Motherson Sumi Systems SELL 330 260 (21.2) 463,260 6,930 1,323 11.8 14.6 17.1 21.8 23.8 17.7 28.1 22.7 19.3 11.8 9.6 8.2 8.3 6.7 5.5 1.1 1.3 1.6 32.8 32.8 31.3 15.0

SKF REDUCE 1,410 1,400 (0.7) 74,353 1,112 53 48.1 56.0 64.8 (0.2) 16.4 15.7 29.3 25.2 21.8 19.3 16.4 13.9 4.3 3.9 3.5 1.0 1.2 1.4 15.4 16.2 16.8 0.2

Suprajit Engineering REDUCE 210 190 (9.7) 27,627 413 131 7.6 9.1 10.8 39.5 18.9 19.0 27.5 23.2 19.5 15.4 13.2 11.4 5.3 4.5 3.8 0.7 0.8 1.0 20.6 20.8 21.1 0.3

Tata Motors BUY 554 650 17.4 1,783,638 26,681 3,396 47.6 57.9 66.7 22.9 21.7 15.3 11.6 9.6 8.3 4.7 3.9 3.3 1.9 1.6 1.4 - - - 18.2 18.4 17.7 61.4

Timken ADD 593 630 6.3 40,293 603 68 16.2 21.2 26.4 17.4 30.5 24.7 36.5 28.0 22.5 21.1 16.3 13.3 6.5 5.4 4.7 0.3 0.4 1.3 19.3 21.1 22.4 0.3

TVS Motor SELL 408 235 (42.4) 193,693 2,897 475 11.6 14.3 16.8 50.7 24.1 17.4 35.3 28.4 24.2 20.1 16.7 14.5 9.9 8.0 6.5 0.7 0.9 1.0 31.0 31.0 29.5 11.7

WABCO India BUY 5,620 7,200 28.1 106,596 1,595 19 158.1 182.2 209.0 46.5 15.2 14.8 35.6 30.9 26.9 22.8 19.4 16.5 8.0 6.5 5.3 0.2 0.3 0.3 25.2 23.3 21.8 0.8

Automobiles Neutral 8,570,493 128,205 24.2 19.5 15.8 19.1 16.0 13.8 9.6 8.1 6.9 3.8 3.2 2.7 0.9 1.1 1.3 19.9 20.0 19.6 288.5

Banks

Axis Bank REDUCE 529 510 (3.6) 1,262,834 18,891 2,383 14.7 30.9 44.4 (57.4) 110.4 43.5 36.0 17.1 11.9 — — — 2.5 2.2 1.9 0.4 0.9 1.3 6.4 12.5 15.9 102.7

Bank of Baroda REDUCE 157 150 (4.2) 360,716 5,396 2,310 6.7 18.4 25.0 128.7 174.0 36.2 23.3 8.5 6.2 — — — 1.6 1.6 1.4 0.9 2.3 3.2 4.2 10.9 13.5 22.5

Bank of India ADD 114 120 5.2 120,288 1,799 817 (8.4) 32.3 42.7 88.8 486.9 32.2 (13.6) 3.5 2.7 — — — 1.0 0.7 0.5 (1.5) 5.7 7.5 (2.6) 9.9 12.0 10.5

Canara Bank REDUCE 324 260 (19.6) 175,658 2,628 543 17.5 56.2 55.8 133.8 221.4 (0.6) 18.5 5.8 5.8 — — — 1.6 1.4 1.0 — — — 3.0 9.4 8.9 20.9

City Union Bank ADD 144 135 (6.2) 86,110 1,288 598 8.7 10.2 11.5 17.5 16.7 12.4 16.5 14.1 12.6 — — — 2.6 2.3 2.0 1.0 1.1 1.3 16.0 16.4 16.1 1.2

DCB Bank ADD 128 140 9.2 36,503 546 284 6.7 8.0 10.8 (2.0) 18.6 36.0 19.1 16.1 11.9 — — — 2.0 1.8 1.6 — — — 10.4 11.1 13.3 2.9

Equitas Holdings REDUCE 178 180 1.2 59,663 892 270 5.3 7.1 8.8 (13.9) 33.8 22.8 33.4 24.9 20.3 — — — 2.8 2.5 2.3 — — — 1.9 1.9 1.7 5.3

Federal Bank BUY 81 95 17.0 139,517 2,087 1,719 5.1 6.7 7.6 82.8 32.2 13.7 16.0 12.1 10.7 — — — 1.7 1.6 1.4 1.6 2.1 2.4 10.4 12.6 13.1 9.0

HDFC Bank ADD 1,250 1,400 12.0 3,165,436 47,351 2,528 58.7 69.6 82.3 20.7 18.5 18.3 21.3 18.0 15.2 — — — 3.8 3.3 2.8 0.9 1.1 1.3 18.9 19.3 19.7 26.0

ICICI Bank BUY 289 340 17.5 1,682,545 25,169 5,849 17.5 24.7 28.6 5.4 41.1 15.7 16.5 11.7 10.1 — — — 2.1 1.8 1.6 1.8 2.6 3.0 11.0 14.3 15.0 72.0

IDFC Bank ADD 78 75 (4.2) 265,647 3,974 - 2.6 4.0 5.6 113.4 54.9 40.7 30.5 19.7 14.0 — — — 1.9 1.7 1.6 0.7 1.0 1.4 6.2 9.1 11.8 11.4

IndusInd Bank ADD 1,209 1,350 11.6 720,533 10,778 595 49.3 56.8 65.6 28.4 15.2 15.4 24.5 21.3 18.4 — — — 3.7 3.2 2.8 0.5 0.6 0.7 16.0 15.9 16.1 19.8

J&K Bank BUY 69 85 23.7 33,304 498 485 4.9 13.0 16.2 (42.9) 166.3 24.2 14.0 5.3 4.2 — — — 0.8 0.6 0.4 1.5 3.9 4.8 3.6 9.2 10.6 3.1

Karur Vysya Bank BUY 500 600 20.0 60,431 904 122 52.2 56.3 79.2 12.0 8.0 40.5 9.6 8.9 6.3 — — — 1.3 1.1 1.0 2.6 2.8 4.0 13.3 13.0 16.5 1.5

Oriental Bank of Commerce ADD 134 120 (10.4) 46,352 693 321 12.8 27.1 45.5 163.6 111.9 67.6 10.5 4.9 2.9 — — — 1.2 1.0 0.7 1.9 4.1 6.8 2.7 5.6 8.9 9.2

Punjab National Bank REDUCE 146 125 (14.6) 311,322 4,657 1,964 3.8 23.2 26.0 118.8 509.6 11.8 38.4 6.3 5.6 — — — 2.1 1.2 0.9 0.5 3.2 3.6 2.1 11.9 12.1 32.2

Ujjivan Financial Services REDUCE 452 400 (11.4) 53,386 799 101 18.9 15.0 14.9 7.7 (20.4) (1.1) 23.9 30.1 30.4 — — — 3.0 2.8 2.6 0.3 0.3 0.3 15.1 9.7 8.8 13.4

State Bank of India BUY 261 280 7.1 2,029,578 30,360 7,763 16.7 31.7 41.4 30.6 89.6 30.6 15.6 8.2 6.3 — — — 1.4 1.2 1.0 1.1 1.1 1.2 7.9 12.5 14.4 75.2

Union Bank ADD 148 145 (1.9) 101,569 1,519 687 22.0 37.6 46.3 11.8 71.2 23.1 6.7 3.9 3.2 — — — 0.8 0.7 0.5 1.5 2.5 3.1 7.2 11.2 12.4 12.1

YES Bank REDUCE 1,308 1,275 (2.6) 550,855 8,240 421 69.6 77.5 93.1 15.3 11.4 20.1 18.8 16.9 14.1 — — — 3.5 3.0 2.6 0.9 1.0 1.2 19.6 18.7 19.2 79.5

Banks Attractive 11,262,247 168,470 79.0 68.4 24.4 20.2 12.0 9.7 1.6 1.5 1.3 0.9 1.4 1.7 8.1 12.3 13.6 530.5

NBFCs

Bajaj Finserv REDUCE 3,249 2,440 (24.9) 516,954 7,733 159 144.4 169.4 199.5 18.0 17.3 17.8 22.5 19.2 16.3 — — — 3.6 3.1 2.7 0.4 0.4 0.4 16.5 17.3 17.6 9.8

Cholamandalam REDUCE 1,176 1,010 (14.1) 183,605 2,747 156 47.5 58.2 71.6 31.3 22.5 23.0 24.7 20.2 16.4 — — — 4.5 3.8 3.2 0.5 0.6 0.8 18.7 19.4 20.2 6.5

HDFC ADD 1,340 1,430 6.7 2,118,651 31,693 1,580 52.3 58.0 66.7 10.7 10.8 15.0 25.6 23.1 20.1 — — — 5.2 4.6 3.8 1.4 1.5 1.8 21.9 21.2 20.8 53.7

IDFC BUY 69 80 16.7 109,402 1,637 1,594 4.5 6.2 8.4 176.1 39.2 35.7 15.4 11.0 8.1 — — — 1.0 0.9 0.8 0.4 0.5 0.6 10.1 13.6 17.0 7.6

IIFL Holdings ADD 287 310 7.9 91,005 1,361 317 19.2 23.3 27.4 18.9 21.3 17.8 15.0 12.3 10.5 — — — 2.1 1.9 1.6 0.9 1.0 1.2 20.2 19.1 19.7 1.2

L&T Finance Holdings ADD 103 90 (12.5) 180,337 2,698 1,754 5.2 6.4 7.9 6.0 24.6 23.2 19.9 16.0 13.0 — — — 2.2 2.0 1.8 0.5 0.7 0.9 11.9 13.0 14.3 12.6

LIC Housing Finance ADD 598 670 12.1 301,713 4,513 505 42.3 51.7 62.1 16.5 22.3 20.0 14.1 11.6 9.6 — — — 2.6 2.1 1.8 1.1 1.3 1.6 19.4 22.2 22.2 18.0

Mahindra & Mahindra Financial REDUCE 356 315 (11.5) 202,509 3,029 565 12.0 15.2 19.7 0.7 26.5 29.9 29.7 23.5 18.1 — — — 3.3 3.0 2.7 0.9 1.1 1.4 10.7 12.5 14.8 10.7

Max Financial Services NR 555 - - 148,278 2,218 267 7.0 7.1 7.2 62.8 1.5 1.5 79.1 77.9 76.7 — — — 0.5 0.5 0.5 10.9 10.5 10.0 6.2

Muthoot Finance ADD 370 370 0.0 147,571 2,207 399 28.1 30.4 35.2 38.6 8.2 15.5 13.2 12.2 10.5 — — — 2.3 2.1 1.8 2.3 2.5 2.9 18.8 18.0 18.5 7.5

PFC REDUCE 126 100 (20.9) 333,706 4,992 2,640 16.5 20.7 25.6 (28.7) 25.5 23.5 7.7 6.1 4.9 — — — 1.3 1.1 0.9 2.6 3.3 4.1 10.9 12.5 13.9 8.9

Rural Electrification Corp. ADD 137 130 (5.2) 270,959 4,053 1,975 23.9 17.2 19.4 (16.1) (27.9) 12.9 5.7 8.0 7.1 — — — 1.0 1.4 1.3 3.7 2.7 3.0 16.0 10.8 11.2 17.2

Shriram City Union Finance REDUCE 2,337 1,900 (18.7) 154,072 2,305 66 94.1 127.1 160.7 17.4 35.0 26.5 24.8 18.4 14.5 — — — 3.1 2.9 2.5 0.4 0.6 0.8 12.8 15.3 16.8 1.3

Shriram Transport ADD 1,157 1,250 8.0 262,537 3,927 223 69.8 83.8 99.6 32.2 20.0 18.8 16.6 13.8 11.6 — — — 2.4 2.2 1.9 0.8 1.0 1.2 14.4 15.3 15.9 11.6

NBFCs Neutral 5,146,843 76,991 7.3 11.5 20.0 16.9 15.1 12.6 2.6 2.3 2.0 1.3 1.4 1.6 15.5 15.5 16.1 530.5

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Target O/S



Cement

ACC SELL 1,552 1,350 (13.0) 291,380 4,359 188 39.1 56.7 77.9 (1.1) 44.8 37.4 39.6 27.4 19.9 19.7 14.5 10.9 3.3 3.1 2.8 1.1 1.1 1.1 8.5 11.7 14.6 8.3

Ambuja Cements SELL 248 230 (7.4) 493,135 7,377 1,552 8.2 10.9 14.4 47.7 32.3 32.1 30.2 22.8 17.3 12.7 9.2 7.0 2.1 2.0 1.9 1.4 1.4 1.4 9.6 9.2 11.4 9.7

Dalmia Bharat ADD 1,991 1,600 (19.6) 176,782 2,644 89 57.1 91.9 112.9 165.8 60.9 22.9 34.9 21.7 17.6 11.3 9.1 7.8 4.1 3.4 2.9 0.1 0.1 0.1 12.4 17.2 17.8 3.2

Grasim Industries RS 973 — — 454,158 6,794 467 79.3 94.8 105.9 44.3 19.5 11.8 12.3 10.3 9.2 5.7 4.4 3.4 1.5 1.4 1.2 0.5 0.5 0.5 13.4 14.1 13.8 14.6

India Cements REDUCE 159 92 (42.0) 48,688 728 307 6.6 9.0 11.1 43.7 36.3 23.5 NM 17.6 14.3 8.9 7.8 6.9 1.3 1.2 1.1 1.3 1.3 1.3 5.5 7.1 8.3 11.8

J K Cement BUY 937 850 (9.3) 65,382 978 70 40.0 74.9 97.8 368.4 87.2 30.6 23.4 12.5 9.6 10.7 7.6 6.2 3.5 2.8 2.2 0.4 0.4 0.4 16.0 24.7 25.4 0.5

JK Lakshmi Cement ADD 500 480 (4.1) 58,888 881 118 20.2 33.4 48.0 921.6 65.3 44.0 24.8 15.0 10.4 12.1 8.0 6.1 3.8 3.1 2.4 0.4 0.4 0.4 16.3 22.6 25.8 0.8

Orient Cement ADD 175 230 31.3 35,893 537 205 6.8 16.6 21.0 124.3 143.9 26.1 25.7 10.5 8.4 12.0 7.1 5.8 3.2 2.5 2.0 1.0 1.0 1.0 13.1 27.0 26.8 0.9

Shree Cement SELL 17,237 12,000 (30.4) 600,505 8,983 35 625.3 719.9 825.4 442.0 15.1 14.7 27.6 23.9 20.9 18.3 14.4 12.2 7.3 5.6 4.5 0.1 0.1 0.1 30.2 26.5 23.9 3.6

UltraTech Cement SELL 4,017 3,000 (25.3) 1,102,431 16,491 274 123.8 149.3 175.7 56.3 20.6 17.7 32.4 26.9 22.9 18.0 15.2 12.9 4.6 4.0 3.4 0.2 0.2 0.2 15.3 15.9 16.2 15.0

Cement Cautious 3,327,241 49,772 80.1 27.6 20.4 25.6 20.0 16.7 12.4 9.7 8.0 3.1 2.8 2.4 0.5 0.5 0.5 12.3 13.8 14.5 68.4

Consumer products

Asian Paints SELL 1,140 1,000 (12.3) 1,093,246 16,354 959 21.4 25.3 29.2 14.2 18.2 15.4 53.3 45.1 39.1 33.8 28.5 24.5 16.5 14.1 12.0 0.8 1.0 1.1 33.5 33.7 33.2 17.0

Bajaj Corp. BUY 402 475 18.1 59,302 887 148 17.6 19.7 21.7 10.7 12.0 10.4 22.9 20.4 18.5 19.1 16.4 14.0 11.8 11.3 10.7 3.1 3.7 4.1 52.6 56.3 59.2 0.8

Britannia Industries ADD 3,295 3,650 10.8 395,362 5,914 120 79.5 99.3 118.6 16.9 24.9 19.4 41.4 33.2 27.8 27.6 21.9 18.3 16.7 12.7 9.8 0.8 0.9 1.1 46.2 43.4 39.7 10.3

Coffee Day Enterprises ADD 224 290 29.3 46,206 691 206 2.6 6.2 7.3 809.8 138.0 18.2 86.3 36.2 30.7 12.3 10.6 9.6 2.1 2.0 1.9 — — — 2.5 5.6 6.3 0.4

Colgate-Palmolive (India) ADD 944 1,060 12.3 256,782 3,841 272 23.6 27.9 33.5 11.2 18.4 20.0 40.1 33.8 28.2 23.9 20.3 16.9 20.0 15.7 12.5 1.2 1.3 1.6 55.7 52.0 49.4 4.6

Dabur India REDUCE 285 305 7.0 501,531 7,502 1,759 7.8 8.9 10.2 10.9 14.6 14.4 36.7 32.0 28.0 30.0 25.5 22.0 10.2 8.6 7.4 1.0 1.1 1.3 30.1 29.2 28.4 7.0

GlaxoSmithKline Consumer ADD 6,107 6,650 8.9 256,814 3,842 42 171.5 195.3 220.3 10.9 13.9 12.8 35.6 31.3 27.7 23.8 20.7 17.8 9.3 8.3 7.4 1.3 1.6 1.8 27.7 28.0 28.2 0.9

Godrej Consumer Products SELL 1,623 1,375 (15.3) 552,516 8,265 341 39.9 45.9 52.1 13.4 15.0 13.6 40.7 35.4 31.1 29.3 24.9 21.5 9.4 7.7 6.4 0.4 0.4 0.4 24.7 23.9 22.5 5.3

Hindustan Unilever REDUCE 832 885 6.3 1,801,410 26,947 2,164 21.0 23.3 25.7 8.8 11.1 10.4 39.7 35.7 32.4 27.3 24.0 21.3 29.2 29.9 31.2 2.2 2.4 2.7 73.0 82.7 94.3 18.1

ITC ADD 239 270 13.1 2,881,906 43,110 12,104 8.6 9.7 10.9 11.0 13.1 12.9 27.9 24.6 21.8 18.0 15.9 13.9 8.1 7.6 7.2 2.2 2.6 3.2 27.3 29.9 32.8 35.3

Jubilant Foodworks REDUCE 1,147 1,000 (12.8) 75,517 1,130 66 20.4 29.3 39.7 28.0 43.8 35.6 56.3 39.2 28.9 21.8 16.2 12.5 9.1 7.8 6.5 0.3 0.5 0.7 17.2 21.4 24.5 12.8

Jyothy Laboratories NR 357 — — 64,805 969 181 10.1 11.0 11.2 38.8 9.5 1.7 35.4 32.3 31.8 24.9 21.8 19.4 8.0 7.4 7.0 1.4 1.7 2.0 27.5 23.8 22.6 0.9

Manpasand Beverages REDUCE 726 630 (13.2) 41,517 621 50 15.3 20.4 28.7 51.8 33.2 40.8 47.3 35.6 25.3 25.8 20.0 14.8 5.4 4.8 4.1 0.2 0.3 0.4 12.1 14.3 17.5 1.0

Marico REDUCE 285 270 (5.3) 367,763 5,501 1,290 6.8 7.9 8.8 19.9 15.2 12.5 41.8 36.3 32.2 28.5 24.7 21.8 14.6 12.3 10.5 1.1 1.2 1.4 38.2 36.9 35.2 5.2

Nestle India SELL 6,792 5,650 (16.8) 654,846 9,796 96 121.3 149.8 173.3 30.9 23.5 15.6 56.0 45.3 39.2 31.2 26.1 23.1 20.4 17.9 15.9 1.0 1.3 1.5 38.9 42.1 42.9 3.3

Page Industries SELL 16,719 11,500 (31.2) 186,484 2,790 11 251.5 309.7 382.9 20.6 23.2 23.6 66.5 54.0 43.7 41.8 34.2 27.7 28.3 21.6 16.2 0.6 0.6 0.6 48.2 45.4 42.5 2.8

PC Jeweller ADD 509 450 (11.6) 91,153 1,364 179 26.2 30.7 37.5 22.0 17.3 22.3 19.4 16.6 13.6 10.2 8.1 6.8 3.1 2.6 2.2 0.8 0.9 1.1 17.7 17.6 17.6 2.5

Pidilite Industries REDUCE 713 690 (3.3) 365,640 5,470 513 17.6 20.1 23.1 19.4 14.1 15.2 40.5 35.5 30.8 26.3 22.9 19.8 10.8 9.0 7.6 0.7 0.8 1.0 29.2 27.6 26.7 6.9

S H Kelkar and Company REDUCE 311 260 (16.4) 44,999 673 145 8.8 10.1 11.5 51.2 15.6 13.4 35.5 30.7 27.1 22.7 19.7 17.3 5.3 4.7 4.3 0.7 0.9 1.0 15.7 16.3 16.5 0.7

Speciality Restaurants SELL 89 75 (16.1) 4,198 63 47 (0.3) 0.8 1.9 (642.3) 373.3 136.1 (297.7) 108.9 46.1 20.8 12.2 9.3 1.4 1.4 1.3 — — — (0.5) 1.2 2.9 0.1

Tata Global Beverages ADD 150 150 - 94,669 1,416 631 6.1 7.0 8.2 22.3 14.6 17.0 24.6 21.5 18.4 12.5 11.1 9.6 1.6 1.5 1.5 1.5 1.7 2.0 6.6 7.3 8.1 6.4

Titan Company REDUCE 373 380 1.8 331,411 4,958 888 9.9 12.2 13.9 26.5 23.9 13.7 37.8 30.5 26.8 25.3 20.1 17.2 8.2 7.0 6.1 0.9 1.0 1.2 23.3 24.9 24.2 7.6

United Breweries SELL 886 730 (17.6) 234,144 3,503 264 13.5 17.3 21.4 20.4 28.3 23.9 65.8 51.3 41.4 29.4 24.8 21.2 9.8 8.4 7.2 0.2 0.3 0.4 15.8 17.6 18.8 5.3

United Spirits ADD 2,374 2,800 17.9 345,030 5,161 145 34.4 53.8 73.1 180.9 56.4 35.8 NM 44.1 32.5 30.3 22.8 18.3 11.4 7.5 6.1 — — — 20.7 20.6 20.8 14.9

Consumer products Cautious 10,747,252 160,767 15.3 16.3 14.6 37.4 32.2 28.1 24.0 20.6 17.8 10.8 9.5 8.5 1.4 1.6 1.9 28.7 29.5 30.2 170.1

Energy

BPCL REDUCE 685 660 (3.7) 991,276 14,828 1,446 57.3 54.6 58.3 11.5 (4.7) 6.7 12.0 12.5 11.8 7.7 7.5 7.0 3.1 2.6 2.3 2.5 2.4 2.6 27.8 22.6 21.0 28.2

Cairn India ADD 231 260 12.8 432,250 6,466 1,875 12.8 15.8 20.0 11.7 24.0 26.1 18.0 14.6 11.5 8.4 7.9 5.7 0.9 0.8 0.8 1.5 2.0 3.0 4.8 5.8 7.0 11.9

Castrol India ADD 468 450 (3.9) 231,628 3,465 495 14.3 15.4 16.5 19.1 7.7 6.8 32.7 30.3 28.4 21.5 20.0 18.7 36.7 33.9 30.6 2.3 2.6 2.7 117.4 116.2 113.3 19.9

GAIL (India) ADD 435 480 10.3 551,851 8,255 1,268 27.3 33.0 37.5 52.4 20.7 13.6 15.9 13.2 11.6 9.8 8.2 7.3 1.7 1.5 1.4 1.7 2.3 2.8 10.8 12.0 12.7 14.3

GSPL ADD 167 170 2.0 93,915 1,405 563 9.0 11.1 12.2 14.4 23.5 9.3 18.5 15.0 13.7 9.3 7.6 6.9 2.2 2.0 1.9 1.5 2.0 2.9 12.3 13.9 14.0 1.1

HPCL REDUCE 463 460 (0.6) 470,353 7,036 1,017 48.8 42.0 43.0 28.4 (13.9) 2.4 9.5 11.0 10.8 6.9 7.8 7.8 2.2 1.9 1.7 3.2 2.7 2.8 24.9 18.7 17.1 32.3

Indraprastha Gas ADD 865 870 0.6 121,121 1,812 140 47.0 51.0 55.1 41.8 8.4 8.1 18.4 17.0 15.7 10.7 9.7 8.9 4.3 3.8 3.4 1.5 1.9 2.3 25.3 23.9 23.0 11.7

IOCL ADD 327 365 11.7 1,587,395 23,746 4,856 32.3 30.8 32.0 65.4 (4.7) 4.0 10.1 10.6 10.2 6.2 6.0 5.7 1.9 1.7 1.5 3.0 2.9 3.0 19.9 16.9 15.8 28.0

Mahanagar Gas ADD 769 715 (7.0) 75,970 1,136 99 40.1 42.5 45.0 28.2 6.2 5.9 19.2 18.1 17.1 11.3 10.5 9.8 4.4 4.0 3.6 2.3 2.5 2.9 24.3 23.1 22.1 -

ONGC SELL 289 230 (20.3) 2,470,398 36,954 8,556 19.8 22.6 26.8 (2.2) 14.0 18.6 14.6 12.8 10.8 5.7 5.1 4.5 1.3 1.2 1.1 2.4 2.8 3.3 8.8 9.6 10.7 22.5

Oil India SELL 415 370 (10.8) 249,411 3,731 601 35.9 37.9 43.0 (7.5) 5.6 13.7 11.6 11.0 9.6 6.7 6.3 5.7 1.1 1.0 1.0 3.0 3.6 4.1 9.4 9.4 10.2 3.1

Petronet LNG ADD 382 370 (3.1) 286,275 4,282 750 19.0 24.0 26.8 69.4 26.1 11.7 20.1 15.9 14.3 12.5 9.9 8.4 3.8 3.3 2.9 1.0 1.7 2.4 20.6 22.3 21.7 10.8

Reliance Industries ADD 1,061 1,150 8.4 3,123,618 46,726 3,240 91.1 98.7 102.4 7.7 8.3 3.7 11.6 10.8 10.4 10.5 8.4 7.6 1.3 1.2 1.1 1.1 1.3 1.5 11.7 11.5 10.9 66.5

Energy Attractive 10,685,461 159,842 16.2 5.8 8.8 12.3 11.6 10.7 7.8 6.9 6.3 1.5 1.4 1.3 2.1 2.3 2.6 12.0 11.7 11.8 250.2


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Industrials

ABB SELL 1,081 950 (12.1) 228,988 3,425 212 18.4 27.6 36.9 29.7 50.3 33.7 58.9 39.2 29.3 28.3 21.5 17.0 7.0 6.2 5.4 0.5 0.6 0.8 12.4 16.8 19.7 0.8

BHEL SELL 140 100 (28.6) 342,909 5,130 2,448 2.3 5.0 7.8 161.2 118.6 55.4 61.3 28.1 18.0 28.6 11.6 5.8 1.0 1.0 1.0 0.3 0.9 1.4 1.7 3.6 5.4 21.8

Carborundum Universal REDUCE 284 250 (12.0) 53,500 800 188 10.4 13.6 16.8 36.7 30.5 23.7 27.3 20.9 16.9 14.6 11.6 9.6 4.1 3.6 3.2 1.1 1.4 1.8 15.7 18.3 20.0 1.1

Crompton Greaves REDUCE 76 75 (1.6) 47,789 715 627 2.4 3.8 5.7 3.4 57.9 50.1 31.6 20.0 13.3 10.4 7.2 5.7 1.0 1.0 0.9 0.6 0.8 1.5 3.2 5.0 7.2 4.8

Cummins India REDUCE 867 850 (2.0) 240,388 3,596 277 28.5 32.6 36.1 7.7 14.4 10.6 30.4 26.6 24.0 28.3 24.4 21.2 6.9 6.2 5.6 1.7 1.9 2.1 23.7 24.6 24.6 4.2

Havells India REDUCE 408 370 (9.3) 254,910 3,813 624 10.2 11.8 13.5 31.8 15.1 14.8 39.9 34.6 30.2 26.8 22.6 19.3 8.0 7.1 6.4 1.0 1.1 1.5 21.1 21.7 22.3 10.2

Kalpataru Power Transmission BUY 255 300 17.7 39,117 585 153 12.5 13.8 21.9 63.8 10.3 58.3 20.3 18.4 11.6 7.4 6.8 5.3 1.6 1.5 1.3 0.6 0.6 0.6 8.0 8.2 11.9 0.7

KEC International ADD 128 160 25.4 32,804 491 257 9.4 13.1 16.3 26.5 38.6 24.9 13.5 9.8 7.8 6.7 5.7 5.0 1.9 1.6 1.4 1.0 1.4 1.7 15.0 18.1 19.3 0.9

L&T REDUCE 1,484 1,500 1.1 1,383,193 20,691 930 55.5 72.8 87.8 9.0 31.1 20.6 26.7 20.4 16.9 19.5 17.2 14.9 3.5 3.1 2.8 1.5 1.5 1.8 13.4 16.1 17.4 36.6

Siemens SELL 1,212 900 (25.8) 431,725 6,458 356 26.6 32.3 40.3 45.2 21.8 24.5 45.6 37.5 30.1 28.3 23.2 18.4 6.1 5.7 5.3 1.1 1.3 1.7 13.8 15.8 18.3 4.1

Thermax REDUCE 850 770 (9.4) 101,319 1,516 119 25.8 28.4 35.7 11.7 9.9 25.9 33.0 30.0 23.8 21.5 19.2 16.2 3.9 3.6 3.2 0.7 0.7 0.9 12.5 12.5 14.2 0.8

Voltas ADD 398 360 (9.4) 131,543 1,968 331 12.6 15.7 17.8 21.0 24.6 13.1 31.5 25.3 22.3 25.1 19.5 16.8 4.9 4.4 4.0 1.0 1.4 1.8 16.5 18.4 18.8 9.4

Industrials Cautious 3,288,185 49,188 38.6 32.8 24.9 32.9 24.8 19.9 20.3 16.9 14.0 3.1 2.9 2.6 1.1 1.3 1.6 9.4 11.6 13.3 95.4

Infrastructure

Adani Port and SEZ ADD 313 315 0.7 647,794 9,690 2,085 17.0 14.3 14.8 23.5 (16.1) 4.0 18.4 21.9 21.1 15.9 14.3 13.7 4.0 3.4 3.1 0.5 0.7 0.8 23.9 16.8 15.4 21.1

Ashoka Buildcon BUY 167 220 31.6 31,282 468 188 4.7 3.5 3.5 49.6 (24.3) 0.5 35.9 47.5 47.2 9.3 8.7 7.9 1.6 1.6 1.6 0.8 1.1 1.3 4.6 3.4 3.4 0.7

Container Corporation REDUCE 1,350 1,350 0.0 263,147 3,936 195 42.7 49.5 57.7 5.7 16.0 16.6 31.6 27.3 23.4 20.4 16.7 14.0 3.1 2.9 2.7 1.1 1.2 1.4 10.0 10.9 11.8 3.6

Gateway Distriparks ADD 253 305 20.4 27,552 412 109 10.8 12.3 16.4 7.2 13.7 33.6 23.4 20.6 15.4 10.5 8.1 6.0 2.1 2.0 1.8 1.3 1.5 1.9 9.2 9.9 12.3 0.6

Gujarat Pipavav Port ADD 169 200 18.0 81,919 1,225 483 5.3 6.5 9.0 55.1 22.8 37.9 31.8 25.9 18.8 17.8 13.9 10.9 4.1 3.9 3.5 1.9 2.3 2.1 13.2 15.5 19.8 2.5

IRB Infrastructure BUY 247 275 11.5 86,650 1,296 351 19.7 19.5 22.9 8.6 (0.7) 17.2 12.5 12.6 10.8 7.3 7.5 6.6 1.4 1.3 1.3 1.5 1.5 — 12.7 10.7 11.9 9.7

Sadbhav Engineering ADD 276 315 14.1 47,343 708 172 11.1 12.8 13.9 37.8 15.8 8.0 24.9 21.5 19.9 16.1 13.1 11.1 2.9 2.6 2.3 — — — 12.2 12.7 12.3 0.6

Infrastructure Attractive 1,185,686 17,737 20.0 (6.3) 10.8 20.7 22.1 20.0 13.5 12.2 10.9 3.1 2.8 2.6 0.8 1.0 1.0 15.1 12.7 13.0 38.8

Internet

Info Edge ADD 881 960 9.0 106,509 1,593 121 16.2 21.3 27.2 38.3 31.3 27.7 54.4 41.4 32.4 40.4 28.7 21.4 5.6 5.1 4.6 0.5 0.6 0.8 10.7 12.9 15.0 1.2

Just Dial REDUCE 448 460 2.6 31,139 466 69 18.4 20.8 22.6 (9.7) 12.7 8.8 24.3 21.6 19.8 16.1 11.7 10.0 4.0 3.4 3.0 — 0.5 0.5 17.6 17.0 16.0 15.9

Internet Attractive 137,648 2,059 14.3 24.0 20.9 42.5 34.3 28.4 31.3 22.6 17.8 5.1 4.6 4.1 0.4 0.6 0.7 12.1 13.4 14.4 17.2

Media

DB Corp. REDUCE 386 380 (1.6) 70,996 1,062 184 22.2 25.2 29.7 37.5 13.4 17.8 17.4 15.3 13.0 9.4 8.3 7.0 4.7 4.2 3.8 2.8 3.6 4.4 28.5 28.9 30.7 0.5

DishTV BUY 100 115 15.6 106,050 1,586 1,066 2.5 3.6 5.0 (61.9) 45.4 38.6 NM 27.6 19.9 9.5 8.1 7.1 6.4 6.4 6.4 — — 1.0 15.8 23.0 31.9 10.0

Jagran Prakashan REDUCE 199 195 (2.0) 65,039 973 327 12.6 14.1 16.4 21.0 11.7 16.9 15.8 14.1 12.1 9.3 7.9 6.8 3.7 3.4 3.0 3.0 3.5 3.5 24.7 24.9 25.9 0.8

Ortel Communications BUY 149 190 27.5 4,524 68 30 5.0 6.7 13.6 28.5 33.9 102.4 29.6 22.1 10.9 8.3 6.9 5.3 2.9 2.6 2.1 — — — 10.4 12.4 21.1 0.0

PVR BUY 1,224 1,175 (4.0) 57,193 856 47 26.3 35.0 44.6 (2.2) 33.4 27.3 46.6 34.9 27.4 16.2 13.4 11.2 5.8 5.1 4.4 0.2 0.3 0.4 13.3 15.6 17.2 3.3

Sun TV Network ADD 532 500 (6.1) 209,791 3,138 394 27.0 29.9 34.2 15.3 10.6 14.6 19.7 17.8 15.6 12.4 10.8 9.3 5.4 4.9 4.5 2.8 3.2 3.6 28.7 29.0 30.1 13.9

Zee Entertainment Enterprises BUY 514 560 9.0 493,623 7,384 960 14.0 17.8 20.5 48.9 27.4 14.7 36.7 28.8 25.1 23.2 17.9 15.7 5.2 4.8 4.3 0.5 0.7 0.8 17.1 17.3 18.0 17.2

Media Attractive 1,007,217 15,067 10.3 20.7 18.2 27.8 23.0 19.5 14.6 12.1 10.5 5.2 4.8 4.3 1.2 1.5 1.8 18.7 20.7 22.1 45.8

Metals & Mining

Coal India REDUCE 320 315 (1.5) 2,019,026 30,202 6,316 22.1 25.6 28.6 (2.5) 15.8 11.7 14.5 12.5 11.2 9.2 8.2 7.4 5.5 5.1 4.7 4.8 5.6 6.3 38.0 42.6 44.0 18.1

Hindalco Industries SELL 151 110 (26.9) 310,780 4,649 2,065 9.0 10.9 12.6 230.6 21.4 15.6 16.8 13.8 12.0 7.6 7.0 6.5 0.8 0.7 0.7 0.7 0.7 0.7 4.7 5.5 6.0 25.5

Hindustan Zinc ADD 255 265 4.1 1,075,978 16,095 4,225 19.4 21.6 23.2 0.3 11.0 7.7 13.1 11.8 11.0 8.6 6.7 5.4 2.5 2.1 1.9 1.7 1.7 1.7 20.4 19.5 18.2 8.1

Jindal Steel and Power SELL 77 60 (21.9) 70,265 1,051 915 (13.2) (0.5) 5.2 27.7 96.3 1,151.0 (5.8) (156.6) 14.9 10.8 7.9 6.8 0.2 0.2 0.2 — — — (4.4) (0.1) 1.3 21.1

JSW Steel ADD 1,709 2,015 17.9 413,200 6,181 242 150.6 170.9 211.3 1,530.8 13.4 23.7 11.3 10.0 8.1 6.7 6.0 5.2 1.9 1.6 1.3 0.5 0.5 0.5 16.6 17.2 18.0 17.6

National Aluminium Co. SELL 50 36 (27.9) 96,550 1,444 2,577 2.2 2.9 3.2 (20.1) 33.6 10.5 23.2 17.3 15.7 4.7 3.2 2.7 1.0 0.9 0.9 2.0 2.0 2.0 4.3 5.6 5.9 0.8

NMDC SELL 123 75 (38.9) 487,065 7,286 3,965 7.2 7.6 8.0 (9.5) 5.5 5.3 17.1 16.2 15.4 11.8 10.5 9.7 1.6 1.6 1.6 4.9 4.9 4.9 9.5 10.0 10.4 5.6

Tata Steel ADD 415 470 13.2 403,297 6,033 971 26.2 54.8 61.7 211.8 109.3 12.6 15.9 8 6.7 8.1 6.2 5.8 1.5 1.3 1.1 1.9 1.9 1.9 9.2 18.5 17.9 43.4

Vedanta ADD 204 230 12.8 604,649 9,045 2,965 16.3 21.4 26.2 107.9 30.8 22.5 12.5 9.5 7.8 6.4 5.1 4.2 1.2 1.1 1.0 1.4 1.4 1.4 11.5 12.4 13.7 34.6

Metals & Mining Cautious 5,480,810 81,987 53.6 26.4 14.7 14.2 11.3 9.8 8.0 6.7 5.9 1.8 1.6 1.5 3.0 3.3 3.5 12.5 14.5 15.1 174.8

Pharmaceutical

Apollo Hospitals REDUCE 1,320 1,270 (3.8) 183,701 2,748 139 22.6 32.0 42.1 4.0 41.6 31.7 58.5 41.3 31.4 25.4 20.6 17.0 5.0 4.6 4.2 0.4 0.6 0.8 8.8 11.6 13.9 4.1

Biocon SELL 940 585 (37.7) 187,900 2,811 200 28.7 27.5 32.1 43.8 (4.3) 16.9 32.7 34.2 29.2 19.4 15.9 12.9 3.9 3.6 3.3 1.1 1.0 1.2 12.6 11.0 11.8 19.8

Cipla BUY 585 590 0.9 469,686 7,026 805 20.6 27.8 37.4 23.1 34.8 34.6 28.3 21.0 15.6 18.2 13.1 9.9 3.5 3.1 2.7 0.7 1.0 1.4 13.0 15.7 — 16.6

Dr Lal Pathlabs REDUCE 1,151 925 (19.6) 95,212 1,424 83 19.0 22.4 26.3 19.2 18.0 17.8 60.7 51.5 43.7 37.0 31.2 26.3 15.1 12.1 9.9 0.2 0.3 0.3 27.7 26.1 25.0 2.2

Dr Reddy's Laboratories SELL 3,201 2,500 (21.9) 530,332 7,933 171 78.4 121.8 153.5 (43.7) 55.3 26.0 40.8 26.3 20.9 21.2 13.5 10.7 4.3 3.8 3.3 0.4 0.6 0.7 10.3 15.3 16.8 18.8

HCG BUY 242 250 3.3 20,580 308 85 1.9 1.9 4.0 1,171.4 0.7 117.1 130.5 129.7 59.7 24.0 19.1 14.6 3.7 3.6 3.4 — — — 2.9 2.8 5.9 0.5

Lupin REDUCE 1,526 1,600 4.8 688,094 10,293 450 62.1 69.5 81.4 23.0 12.0 17.1 24.6 22.0 18.8 15.3 13.3 11.1 5.1 4.3 3.6 0.6 0.7 0.8 22.9 21.2 20.8 28.3

Sun Pharmaceuticals SELL 747 715 (4.3) 1,798,763 26,907 2,406 29.6 32.6 37.5 33.9 10.1 15.2 25.2 22.9 19.9 14.6 12.8 10.7 4.7 4.0 3.4 0.8 0.9 1.0 20.5 18.8 18.3 33.9

Torrent Pharmaceuticals REDUCE 1,601 1,260 (21.3) 270,897 4,052 169 59.0 66.1 80.6 (42.4) 12.1 21.9 27.1 24.2 19.9 17.3 15.5 13.2 6.5 5.4 0.8 1.0 1.2 26.5 24.4 22.5 5.5

Pharmaceuticals Cautious 4,245,164 63,503 7.6 17.4 20.3 28.4 24.2 20.1 16.8 13.8 11.3 4.7 4.0 3.4 0.7 0.8 1.0 16.4 16.5 17.0 129.8


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Real Estate

DLF BUY 154 180 16.8 274,876 4,112 1,801 2.8 1.5 3.0 (9.2) (44.6) 98.7 55.6 100.5 50.6 17.1 15.6 14.0 1.0 1.0 1.0 1.3 1.3 1.3 1.7 1.0 1.9 21.0

Godrej Properties REDUCE 365 280 (23.2) 78,838 1,179 216 9.7 10.3 11.3 (9.3) 6.2 9.8 37.6 35.4 32.3 62.0 49.1 29.8 3.4 3.2 2.9 — 0.7 0.7 9.3 9.2 9.5 1.1

Oberoi Realty BUY 342 350 2.3 116,042 1,736 339 10.8 30.9 43.2 (13.7) 185.2 39.9 31.6 11.1 7.9 20.8 6.9 7.1 2.1 1.8 1.5 0.6 0.6 0.6 6.7 17.3 20.2 1.6

Prestige Estates Projects BUY 192 250 29.9 72,150 1,079 375 7.0 8.4 8.9 (24.8) 18.7 6.3 27.3 23.0 21.6 13.0 12.5 12.0 1.7 1.6 1.5 0.8 0.8 0.8 6.2 7.0 7.1 1.4

Sobha BUY 286 440 53.9 27,538 412 98 14.1 17.3 21.2 (9.9) 22.7 22.8 20.3 16.5 13.5 11.6 10.6 9.3 1.1 1.0 1.0 2.4 2.4 2.4 5.3 6.4 7.5 0.4

Sunteck Realty BUY 275 360 30.9 17,316 259 60 82.0 53.3 — 201.9 (34.9) (100.0) 3.4 5.2 - 2.5 0.6 — 0.8 0.7 0.7 0.7 — 26.2 14.1 — 0.5

Real Estate Attractive 586,760 8,777 5.1 19.3 19.2 29.8 25.0 20.9 15.6 12.7 12.6 1.3 1.2 1.2 1.0 1.0 1.0 4.3 4.9 5.9 26.1

Technology

HCL Technologies REDUCE 805 800 (0.6) 1,135,024 16,979 1,413 58.1 59.6 63.0 48.0 2.6 5.8 13.9 13.5 12.8 9.8 9.2 8.4 3.5 3.1 2.9 3.1 3.6 4.1 27.2 24.5 23.5 24.7

Hexaware Technologies ADD 203 225 10.9 61,252 916 304 13.2 15.3 17.4 2.0 15.9 13.8 15.4 13.3 11.7 10.1 8.3 7.1 3.8 3.4 3.0 2.8 3.9 3.9 26.3 27.1 27.6 3.2

Infosys ADD 1,017 1,175 15.5 2,336,452 34,951 2,286 61.8 69.2 76.7 4.8 12.0 10.8 16.5 14.7 13.3 10.5 9.1 8.0 3.6 3.2 2.9 2.7 2.9 3.4 23.1 23.1 23.0 57.7

Mindtree REDUCE 455 460 1.1 76,346 1,142 168 27.0 34.6 41.3 (24.7) 28.1 19.4 16.8 13.2 11.0 9.5 7.5 6.0 2.8 2.5 2.1 1.6 2.1 2.5 17.8 20.1 20.9 5.7

Mphasis SELL 507 460 (9.2) 106,475 1,593 210 38.1 40.0 41.1 10.7 4.9 2.7 13.3 12.7 12.3 7.9 7.2 6.8 1.6 1.5 1.5 3.8 4.0 4.1 12.4 12.4 12.1 1.0

TCS REDUCE 2,398 2,325 (3.1) 4,725,973 70,695 1,970 132.4 142.3 156.4 7.8 7.4 9.9 18.1 16.9 15.3 13.0 11.6 10.3 5.4 4.7 4.0 2.2 2.4 2.6 32.6 29.8 28.2 48.4

Tech Mahindra BUY 434 540 24.4 421,379 6,303 872 36.3 41.5 47.2 1.5 14.2 13.9 12.0 10.5 9.2 8.0 6.6 5.4 2.3 2.0 1.7 2.8 1.4 1.7 20.7 20.3 19.6 15.6

Wipro REDUCE 481 485 0.7 1,170,152 17,504 2,467 34.4 38.5 41.3 (4.6) 12.1 7.2 14.0 12.5 11.7 8.4 7.3 6.2 2.3 2.1 1.8 1.0 1.0 1.0 17.2 17.3 16.4 14.8

Technology Neutral 10,033,053 150,083 8.1 8.8 9.5 16.3 15.0 13.7 11.0 9.7 8.5 3.8 3.4 3.0 2.3 2.5 2.8 23.5 22.6 21.8 171.1

Telecom

Bharti Airtel BUY 312 365 17.1 1,246,389 18,645 3,997 9.1 7.9 12.5 (6.5) (12.9) 57.7 34.2 39.2 24.9 6.3 6.4 5.5 1.8 1.8 1.8 0.7 0.8 1.5 5.4 4.6 7.2 19.9

Bharti Infratel ADD 379 410 8.1 701,649 10,496 1,897 15.8 17.0 19.1 25.7 7.8 12.2 24.0 22.3 19.9 11.5 10.5 9.6 4.2 4.1 4.0 3.0 3.2 3.6 16.7 18.6 20.2 11.5

IDEA BUY 75 100 32.8 271,141 4,056 3,601 0.5 (4.8) (3.0) (94.4) ###### 37.2 156.1 (15.7) (25.0) 6.9 7.4 6.3 1.2 1.3 1.5 1.4 2.7 4.1 0.7 (7.9) (5.6) 14.5

Tata Communications ADD 655 515 (21.4) 186,704 2,793 285 11.2 17.3 23.5 584.3 54.4 35.4 58.3 37.8 27.9 8.7 7.8 7.1 (98.9) 60.9 19.1 1.0 1.0 1.0 (105.4) 838.2 104.2 10.9

Telecom Cautious 2,405,882 35,989 (25.0) (27.9) 59.6 34.1 47.3 29.6 7.1 7.1 6.2 2.2 2.2 2.2 1.4 1.6 2.3 6.5 4.7 7.6 56.8

Utilities

Adani Power SELL 26 26 0.8 88,170 1,319 3,334 2.3 4.7 4.6 58.1 104.0 (2.9) 11.1 5.5 5.6 6.8 5.6 5.3 1.1 0.9 0.8 — — — 9.9 17.6 14.6 2.7

CESC ADD 617 685 10.9 81,827 1,224 133 56.2 72.6 93.9 101.1 29.2 29.3 11.0 8.5 6.6 7.0 6.5 5.7 0.9 0.8 0.7 1.6 1.7 1.8 8.1 9.9 11.8 3.4

JSW Energy ADD 70 80 14.3 114,804 1,717 1,640 7.4 8.7 7.9 (2.4) 17.5 (8.8) 9.4 8.0 8.8 5.6 5.0 4.9 1.2 1.1 1.0 2.9 2.9 2.9 13.6 14.4 12.0 3.8

NHPC REDUCE 26 24 (7.3) 286,730 4,289 11,071 2.8 3.4 3.6 4.1 22.1 7.2 9.4 7.7 7.1 7.6 6.1 5.3 0.9 0.9 0.8 6.1 7.5 7.9 9.6 11.3 11.7 1.8

NTPC BUY 152 180 18.4 1,253,311 18,748 8,245 11.5 14.3 15.8 (0.2) 24.7 10.2 13.2 10.6 9.6 11.2 9.2 7.5 1.3 1.2 1.1 2.3 2.8 3.1 10.3 12.0 12.2 9.8

Power Grid BUY 178 210 17.7 933,054 13,957 5,232 13.8 15.1 17.8 20.7 10.0 17.9 13.0 11.8 10.0 9.5 8.2 7.2 1.9 1.7 1.5 1.6 1.7 2.0 15.8 15.5 16.1 13.5

Reliance Power SELL 48 36 (25.2) 135,067 2,020 2,805 4.8 5.3 5.9 (1.1) 11.1 10.1 10.0 9.0 8.2 9.1 7.9 7.6 0.6 0.6 0.5 - - - 6.2 6.5 6.7 2.8

Tata Power ADD 82 80 (2.9) 222,861 3,334 2,800 5.5 6.2 6.8 0.9 12.1 9.6 14.9 13.2 12.1 9.2 8.6 7.9 1.4 1.3 1.2 1.5 1.5 1.5 10.0 10.4 10.5 6.7

Utilities Attractive 3,115,825 46,609 8.4 20.9 10.8 12.3 10.2 9.2 9.1 7.9 6.9 1.3 1.2 1.1 2.2 2.6 2.9 10.5 11.7 11.9 44.6

Others

Astral Poly Technik REDUCE 435 425 (2.3) 52,091 779 120 11.1 14.8 19.1 31.7 34.2 28.5 39.3 29.3 22.8 19.8 15.5 12.2 5.7 4.8 4.0 0.1 0.1 0.2 15.7 17.9 19.3 0.4

Cera Sanitaryware REDUCE 2,587 2,050 (20.7) 33,640 503 13 73.7 93.2 112.2 14.9 26.4 20.4 35.1 27.8 23.1 20.5 16.3 13.6 6.7 5.5 4.6 0.3 0.4 0.4 20.8 21.8 21.7 0.8

Dhanuka Agritech BUY 654 780 19.3 32,700 489 50 25.9 31.0 38.0 19.9 19.6 22.7 25.2 21.1 17.2 18.7 15.5 12.5 5.7 4.8 4.0 1.0 1.2 1.5 24.7 24.8 25.5 0.7

Godrej Industries REDUCE 449 390 (13.1) 150,709 2,254 336 17.6 20.6 21.7 22.4 17.0 5.0 25.4 21.7 20.7 19.6 17.5 17.4 3.8 3.3 2.9 0.4 0.4 0.4 15.8 16.1 14.7 3.0

HSIL ADD 347 345 (0.6) 25,087 375 72 14.6 19.1 25.7 18.9 30.6 34.3 23.7 18.2 13.5 9.7 8.0 6.7 1.7 1.6 1.5 1.2 1.2 1.2 7.5 9.2 11.4 0.7

InterGlobe Aviation ADD 926 1,020 10.2 333,510 4,989 351 53.2 73.9 93.4 (6.2) 38.8 26.4 17.4 12.5 9.9 11.4 8.0 6.3 13.5 9.4 6.8 2.9 4.0 5.0 92.0 88.4 79.4 7.3

Kaveri Seed BUY 441 460 4.4 30,419 455 69 28.9 39.7 48.4 15.2 37.4 22.0 15.2 11.1 9.1 12.1 8.4 6.5 2.9 2.5 2.2 2.0 2.7 3.8 20.5 24.4 25.6 4.3

PI Industries ADD 829 840 1.3 113,740 1,701 136 28.6 33.4 39.9 26.5 16.9 19.4 29.0 24.8 20.8 21.1 17.5 14.6 7.7 6.1 4.9 0.5 0.6 0.7 29.6 27.3 26.1 1.1

Rallis India ADD 232 250 7.8 45,117 675 194 9.7 12.2 15.3 32.3 25.9 24.7 23.8 18.9 15.2 15.8 12.4 9.7 4.0 3.5 3.0 1.3 1.4 1.6 18.6 19.6 21.2 1.4

SRF BUY 1,875 1,980 5.6 107,675 1,611 57 94.2 106.5 123.6 27.9 13.1 16.0 19.9 17.6 15.2 11.5 10.2 9.0 3.4 2.9 2.5 0.6 0.6 0.7 18.6 18.0 17.9 8.1

Tata Chemicals ADD 567 560 (1.2) 144,358 2,159 255 40.9 54.4 50.5 33.5 33.0 (7.0) 13.9 10.4 11.2 8.2 6.8 6.1 2.1 1.6 1.5 1.8 1.8 1.8 16.3 17.8 13.9 9.1

TeamLease Services ADD 1,000 1,175 17.5 17,103 256 16 22.2 29.3 37.6 39.2 32.2 28.3 45.2 34.1 26.6 33.3 22.4 16.5 4.9 4.3 3.7 — — — 11.5 13.4 14.9 0.5

UPL ADD 713 660 (7.4) 361,382 5,406 429 36.2 43.5 51.4 13.9 20.1 18.1 19.7 16.4 13.9 12.0 10.1 8.6 3.8 3.1 2.6 0.6 0.7 0.8 22.4 20.7 20.2 18.1

Whirlpool REDUCE 1,126 900 (20.0) 142,813 2,136 127 24.6 29.8 35.8 26.8 21.1 20.3 45.8 37.8 31.4 28.4 23.9 20.1 9.7 8.1 6.8 — 0.5 0.6 23.6 23.3 23.4 0.8

Others 1,601,448 23,956 19.2 25.1 15.7 20.0 16.0 13.8 12.4 10.3 8.7 4.3 3.5 3.0 1.2 1.5 1.8 21.3 21.9 21.4 55.8

KIE universe 82,885,941 1,239,879 22.9 20.9 16.0 19.0 15.7 13.5 10.6 9.2 8.1 2.5 2.3 2.0 1.5 1.7 2.0 13.2 14.5 15.1

KIE universe (ex-energy) 72,200,480 1,080,037 24.7 24.6 17.6 20.6 16.5 14.1 11.5 9.9 8.6 2.8 2.5 2.2 1.4 1.7 1.9 13.6 15.2 16.0

Notes:

(a) We have used adjusted book values for banking companies.

(b) 2017 means calendar year 2016, similarly for 2018 and 2019 for these particular companies.

(c) Exchange rate (Rs/US$)= 66.85

Dividend yield (%)Price/BV (X) RoE (%)

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Economy India

"Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Kawaljeet Saluja, Rohit Chordia, Chirag Talati, Murtuza Arsiwalla, M.B. Mahesh, Nischint Chawathe, Harish Bihani, Jaykumar Doshi, Mohan Lal."

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

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Kotak Institutional Equities Research coverage universeDistribution of ratings/investment banking relationships

Source: Kotak Institutional Equities As of September 30, 2016

Percentage of companies covered by Kotak Institutional

Equities, within the specified category.

* The above categories are defined as follows: Buy = We

expect this stock to deliver more than 15% returns over the

next 12 months; Add = We expect this stock to deliver 5-15%

returns over the next 12 months; Reduce = We expect this stock

to deliver -5-+5% returns over the next 12 months; Sell = We

expect this stock to deliver less than -5% returns over the next

12 months. Our target prices are also on a 12-month horizon

basis. These ratings are used illustratively to comply with

applicable regulations. As of 30/09/2016 Kotak Institutional

Equities Investment Research had investment ratings on 186

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.

18.8%

34.9%

29.0%

17.2%

0.5%

4.8% 4.3%

0.5%

0%

10%

20%

30%

40%

50%

60%

70%

BUY ADD REDUCE SELL

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[Kotak] India Daily, October 26, 2016 - Kotak Securities

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