morning insight - kotak securities€¦ · logistics with a dcf based tp of rs 250 implying an...

FEBRUARY 8, 2019

Morning Insight

Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group.

News Highlights The Reserve Bank of India (RBI) announced a reduction in its

benchmark repo rate by 25 basis points, taking it down to 6.25%. A reduction in policy rates could be read as a positive development for borrowers and a negative one for depositors. (mint)

In a move to improve liquidity flow to non-banking financial companies (NBFCs) in the country, the Reserve Bank of India (RBI) announced that banks assign differential risk-weights to their exposures to NBFCs, based on ratings assigned by credit rating agencies, as against the existing practice of a uniform risk weight of 100%. (mint)

Retail sales of passenger vehicles in India rebounded sharply in January as auto makers offered a range of discounts to clear unsold stocks while slowing dispatches of new vehicles to dealers to help trim inventory. (mint)

The Reserve Bank of India has allowed bidders of insolvent companies to raise extra commercial borrowings abroad and use those proceeds to repay the rupee loans of the targeted insolvent companies they are keen on acquiring. (mint)

India's cotton imports are likely to jump 80% from a year ago as production could fall to the lowest level in nine years due to low rainfall in key growing region. Higher imports by the world's biggest cotton producer could support global prices, trading near their lowest in more than a year. (mint)

Reliance Industries Ltd (RIL) will invest more than₹100 bn in West Bengal to expand operations of its telecom arm, Reliance Jio Infocomm. (mint)

Renowned cardiac surgeon Dr Ashutosh Raghuvanshi has been appointed as the chief executive officer (CEO) of Fortis Healthcare Ltd, replacing Bhavdeep Singh, who resigned from the troubled hospital chain in November, citing personal reasons. (mint)

Jet Airways has mopped up ₹2.50 bn from advance sale of tickets to its customer loyalty programme Jet Privilege, less than five months after raising money through the same route. (mint)

The Mumbai bench of the National Company Law Tribunal (NCLT) dismissed Standard Chartered Bank’s petition to reclassify it as a financial creditor to Ruchi Soya Industries Ltd, stating the lender is too late in seeking such a change. (mint)

Infrastructure Leasing and Financial Services (IL&FS) believes the group has only 22 fully-solvent entities, which can pay off their combined debt of ₹66.05 bn, according to an asset solvency test that its new management had commissioned. (mint)

Fortis Healthcare Ltd (FHL) told the Supreme Court that the question of restraining it from transferring ₹40bn received from Malaysia’s IHH Healthcare Berhad to RHT Health Trust, Singapore did not arise as the court had only ordered a status quo with regard to the "transaction between FHL and IHH" under its earlier order. (mint)

What’s Inside Initiating Coverage: Aegis Logistics Ltd

Result Update: Berger Paints Ltd, Greaves Cotton Ltd, Jindal Stainless (Hisar) Ltd, Arvind Ltd

Source: ET = Economic Times, BS = Business Standard, FE = Financial Express, IE = Indian Express, BL = Business Line, BQ = BloombergQuint, ToI: Times of India, BSE = Bombay Stock Exchange, MC = Moneycontrol

7-Feb 1 Day 1 Mth 3 Mths

Indian Indices SENSEX Index 36,971 (0.0) 3.1 4.9 NIFTY Index 11,069 0.1 2.8 4.4 NSEBANK Index 27,387 (0.1) 0.3 7.0 NIFTY 500 Index 9,146 0.3 0.7 2.4 CNXMcap Index 16,845 0.7 (4.6) (3.2) BSESMCAP Index 13,779 0.8 (5.6) (5.5) World IndicesDow Jones 25,170 (0.9) 5.8 (3.9) Nasdaq 7,288 (1.2) 5.7 (3.2) FTSE 7,094 (1.1) 3.4 (0.7) NIKKEI 20,751 (0.6) 1.0 (9.2) Hangseng 20,751 (0.6) 1.0 (9.2) Shanghai 27,990 0.2 8.3 7.0

Value traded (Rs cr)Cash BSE (20.3) Cash NSE (4.3) Derivatives 176.5

Net inflows (Rs cr) 6-Feb MTD YTD

FII 1,093 2,119 1,614Mutual Fund 459 4 7,165

Nifty Gainers & Losers Price Chg Vol7-Feb (Rs) (%) (mn)

GainersZee Entertainment 409 5.4 15.0 Sun Pharma 435 4.4 18.2 Eicher Motor 21,904 3.8 0.1 LosersJSW Steel 273 (2.2) 6.3 Reliance Ind 1,290 (1.5) 9.2 L&T 1,296 (1.4) 1.6

Advances / Declines (BSE)7-Feb A B T Total % total

Advances 265 626 38 929 100 Declines 160 400 65 625 67 Unchanged 5 26 6 37 4

Commodity7-Feb 1 Day 1 Mth 3 Mths

Crude (US$/BBL) 61.4 (0.3) 4.6 (13.1) Gold (US$/OZ) 1,310.1 0.3 1.9 7.0 Silver (US$/OZ) 15.7 0.4 0.3 8.7

Debt / forex market 7-Feb 1 Day 1 Mth 3 Mths

10 yr G-Sec yield % 7.3 7.4 7.6 7.8 Re/US$ 71.5 71.6 69.7 73.0

Nifty

Source: Bloomberg

% Chg

1,797,505

% Chg

% Chg Day7-Feb

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Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 2

FEBRUARY 8, 2019

AEGIS LOGISTICS LTD PRICE RS.198 TARGET RS.250 BUY

Riding on LPG demand LPG consumption in India has recorded a CAGR of 7.3 % over the past 7 years and a CAGR of 9% in the past three years. The higher demand has mainly been met by imports, as domestic LPG production has recorded a CAGR of just 3.8% in the past 7 years, while the import CAGR was 14.7%. We expect domestic production of LPG to record a CAGR of 5.2% over the next 12 years to FY30 at 25 mmtpa, while demand is estimated to grow at 6.5% CAGR to 50 mmtpa. This mathematics suggest that India would have to import 25 mmtpa of LPG by 2030 at an implied CAGR of 6.8%. Even liquid imports (POL) is a big opportunity. Aegis is well positioned to handle imported LPG and POL with its terminals at key ports. We believe the market is not pricing in the healthy LPG volume growth for Aegis. We expect Aegis to report strong revenue and earnings CAGR with improvement in return ratios as significant capex is completed. We initiate coverage of Aegis Logistics with a DCF based TP of Rs 250 implying an upside of 26% from current levels.

Strong domestic LPG story LPG consumption in India has recorded a CAGR of 7.3 % over the past 7 years and a CAGR of 9% in the past three years. The higher demand has mainly been met by imports as domestic LPG production has recorded a CAGR of just 3.8% in the past 7 years, while the import CAGR was 14.7%. Going forward, we estimate the demand for LPG to grow at 6.5% CAGR over the next 12 years to 50 mmtpa by 2030, while domestic production of LPG to record a CAGR of 5.2% over the next 12 years to FY30 at 25 mmtpa. These figures suggest, India would continue to rely on imports for 50% of its LPG needs. The sourcing will be primarily from Saudi Arabia, Qatar, and other middle-eastern countries, which supply 90% of India's regular LPG imports, while 10% of the imports would supplied by the US. Aegis, which captures the complete logistics value chain starting from sourcing, terminalling to distribution of LPG is set to benefit from the same

Liquid demand to remain robust Aegis's current liquid terminal capacity utilization is high due to advantageous positioning and long-term customer relationships. With petrochemical industry growing at ~9-10% per annum, this business continues to provide stable cash flows for the company. Unutilized capacity available at the Pipavav terminal and operational commencement of new terminals (Kandla and Mangalore) should drive growth for the business.

Infrastructure is the key for Aegis Aegis currently has three operational LPG terminals with static capacity of around 63,000mt and throughput capacity of around 5.0 mmtpa. In FY18, Aegis doubled its static capacity to 63,300 MMT (and quadruple its throughput capacity to 5 mn MMT) with an investment of Rs 3.68 bn. The company intends to create further infrastructure on strategic locations, which would have a good water draft capable of handling a Very Large Gas Carrier (VLGC) and would have train and pipeline hinterland connectivity. We estimate the company to double its through-put capacity from here to 10 mmtpa with an investment of Rs 10-12 bn over the next 5/6 years. A capacity of 10 mmtpa would enable the company

Initiating Coverage

Stock Details Market cap (Rs mn) : 66065 52-wk Hi/Lo (Rs) : 300 / 170 Face Value (Rs) : 1 3M Avg. daily vol (Nos) : 113,588 Shares o/s (mn) : 334

Source: Bloomberg

Financial Summary Y/E Mar (Rs mn) FY18 FY19E FY20E

Revenue 47,910 56,676 65,244 Growth (%) 21.9 18.3 15.1 EBITDA 2,660 3,921 4,678 EBITDA margin (%) 5.6 6.9 7.2

PAT 2,142 2,599 3,192 EPS 6.4 7.8 9.6 EPS Growth (%) 61.2 21.3 22.8

BV (Rs/share) 53.3 62.5 72.9 Dividend/share (Rs) 0.9 1.0 1.0 ROE (%) 19.6 19.7 19.8 ROCE (%) 15.0 19.4 20.5

P/E (x) 32.7 27.0 22.0 EV/EBITDA (x) 26.1 17.8 15.0 P/BV (x) 6.1 5.1 4.2

Source: Company, Kotak Securities - PCG

Shareholding Pattern (%) (%) Dec-18 Jun-18 Mar-18

Promoters 60.6 60.6 60.6 FII 11.9 11.7 11.4 DII 2.7 2.7 2.7 Others 24.8 25.0 25.3

Source: Bloomberg, BSE

Price Performance (%) (%) 1M 3M 6M

Aegis Logistics Ltd (5.4) (10.3) (19.9) Nifty 2.8 4.4 (2.8)

Source: Bloomberg

Price chart (Rs)

Source: Bloomberg

Amit Agarwal [email protected] +91 22 6218 6439

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FEBRUARY 8, 2019

to capture a market share of around 40% in the LPG import business. Aegis is also a leading liquid terminal operator with six terminals strategically located Pan India with a total capacity of 689,000 KL. Strong infrastructure, locational advantage and strong customer relationship should enable the company to deliver healthy revenue growth.

Valuation Aegis would be one of the largest beneficiaries of LPG and POL demand in the country over the next few years. To sustain its historic growth momentum, the company has created massive infrastructure sufficient for 5 years of growth. Going forward we estimate the company to continue with its growth trajectory and record higher profitability and as significant capex is completed. With improvement in volumes and utilization of its new and existing terminals, we estimate the return ratios of the company to improve going forward implying sustainable premium multiples compared to global companies. We initiate coverage on Aegis Logistics with a Buy rating and a DCF based TP of Rs 250 implying an upside of 26% from current levels.

Company background Aegis Logistics is a leading liquid (oil & chemicals) and gas terminal operator engaged in the handling of oil & LPG products, and the sourcing, retailing and distribution of LPG. This requires specialized infrastructure at key ports such as specialized berths, fire-fighting equipment, pipelines, transit storage and handling facilities. The segment has high entry barriers in the form of government approvals, relationships with customers, available land parcels at key ports and operational complexity. The company has two key segments: liquid and gas. The revenue model is to charge handling, throughput and storage fees for both the gas and liquid segments. Aegis also offers services like gas sourcing, O&M and distribution.

Business structure of Aegis

Source: Company


FEBRUARY 8, 2019

Financials: Consolidated Profit and Loss Statement (Rs mn)

(Year-end March) FY18 FY19E FY20E FY21E

Revenues 47,910 56,676 65,244 75,296 % change YoY 21.9 18.3 15.1 15.4 Opex 43,545 50,596 58,162 67,067 Employee cost 471 608 670 791 Other expenses 1,234 1,552 1,733 2,031 Total Operating expd 45,250 52,756 60,566 69,889 EBITDA 2,660 3,921 4,678 5,407 Depreciation 340 473 489 518 EBIT 2,320 3,448 4,189 4,889 Other income 84 100 110 120 Interest expense 152 217 207 204 Profit before tax 2,252 3,332 4,092 4,805 Tax 110 733 900 1,057 ETR (%) 4.9 22.0 22.0 22.0 Profit after tax 2,142 2,599 3,192 3,748 Minorities& Associates 0 0 0 0 Net income 2,142 2,599 3,192 3,748 % change YoY 41.0 2.0 16.7 13.7 Shares outstanding (m) 334 334 334 334 EPS 6.4 7.8 9.6 11.2 Source: Company, Kotak Securities – Private Client Research

Cash Flow Statement (Rs mn) (Year-end March) FY18 FY19E FY20E FY21E

PAT 2,142 2,599 3,192 3,748 Non Cash 340 546 579 624 Change in working capital 317 428 1,218 (1,316) Cash flow from operations 2,799 3,573 4,989 3,056 Capex (3,803) (1,561) (1,000) (1,500) Investments (13) (9) - - Cash flow from investments (3,816) (1,570) (1,000) (1,500) Equity issuance - - - - Debt raised 786 (65) (190) (58) Dividend Paid (342) (402) (402) (402) Miscellanous items 405 3 - - Cash flow from financing 849 (464) (592) (460) Net cash flow (168) 1,539 3,397 1,096 Opening cash 3,069 2,901 4,440 7,837 Closing cash 2,901 4,440 7,837 8,933

Source: Company, Kotak Securities – Private Client Research

Balance sheet (Rs mn) (Year-end March) FY18 FY19E FY20E FY21E

Cash 2,901 4,440 7,837 8,933 Debtors 3,469 4,251 4,893 5,647 Inventory 260 305 356 408 Other current assets 2,020 2,634 2,934 3,285 Total current assets 5,749 7,190 8,183 9,341 LT investments 91 100 100 100 Net fixed assets 11,768 12,856 13,368 14,350 Total assets 20,509 24,586 29,488 32,724 Creditors 3,788 5,408 7,545 7,282 Provisions 135 150 150 150 Other current liabilities 545 780 854 959 Total current liabilities 4,468 6,337 8,548 8,391 LT debt 4,399 4,334 4,144 4,086 Minority Interest 697 700 700 700 Equity Capital 334 334 334 334 Reserves 10,611 12,881 15,761 19,213 Networth 10,945 13,215 16,095 19,547 Total liabilities 20,509 24,586 29,488 32,724 BVPS (Rs) 32.8 39.6 48.2 58.5 Source: Company, Kotak Securities – Private Client Research

Ratio Analysis (Year-end March) FY18 FY19E FY20E FY21E

EBITDA margin (%) 5.6 6.9 7.2 7.2 EBIT margin (%) 4.8 6.1 6.4 6.5 Net profit margin (%) 4.5 4.6 4.9 5.0 ROE (%) 19.6 19.7 19.8 19.2 ROCE (%) 15.0 19.4 20.5 20.6 DPS 0.9 1.0 1.0 1.0 Dividend payout (%) 16.0 15.5 12.6 10.7 Working capital turnover (days) 11.0 6.9 1.4 1.4 Debt Equity (x) 0.4 0.3 0.3 0.2 PER (x) 32.7 27.0 22.0 18.7 P/C (x) 28.1 22.3 18.6 16.0 Dividend yield (%) 0.4 0.5 0.5 0.5 P/B (x) 6.4 5.3 4.4 3.6 EV/Sales (x) 1.5 1.3 1.1 1.0 EV/ EBITDA (x) 26.1 17.8 15.0 13.0



FEBRUARY 8, 2019

BERGER PAINTS LIMITED (BERGER) PRICE RS.313 TARGET RS.280 SELL

Strong performance, valuations ahead of performance Strong volume growth in the decorative segment, stable volumes in the industrial segment, raw material price inflation were the highlights of the results for Berger during Q3FY19.

Key Highlights

Berger reported high double digit volume growth on a high base in the decorative segment. Mass end-products (distemper and putty) recorded higher growth due to market share gains from unorganized players. Growth in Industrial, Automotive, and Protective segments was also healthy in the quarter. This led to revenue of Rs 16.17 bn (highest ever and +21.7% YoY). The volume growth was ahead of peers Asian Paints and Kansai Nerolac implying market share gains for Berger.

Operating margins contracted marginally to 14.6% (-200 bps YoY and +70 bps QoQ) despite high input cost inflation in large part of the quarter. Consumption of high cost inventory, rupee depreciation and sticky prices in the industrial segment in large part of the quarter impacted the gross and Ebidta margins for the quarter. To mitigate input cost inflation, the company has taken a total price hike of 5.5% in 9MFY19 with the company expecting the margins to return to normal levels from Q4FY19

Depreciation, interest cost, other income and taxes were stable for the company during the quarter.

Consequently, company reported strong PAT of Rs 1.34 bn (+3.3% YoY) in a challenging quarter which is commendable.

Management is confident of strong volume and sales growth and further improvement operational performance in Q4FY19 and Q1FY20.

Quarterly Performance (consolidated)

(Rs mn) Q3FY18 Q2FY19 Q3FY19 QoQ (%) YoY (%)

Net Sales 13386 14900 16167 8.5 21.7 Raw material consumed 7759 9128 10056 10.3 31.4 Employee cost 871 1,048 1,006 -4.3 14.2 Other expenditure 2,532 2,656 2,744 3.4 8.3 Total expenditure 11,162 12,832 13,806 7.8 24.4 EBIDTA 2,224 2,068 2,361 12.9 6.9 EBIDTA margin 16.6 13.9 14.6 Depreciation 312 336 355 5.6 14.1 EBIT 1,912 1,732 2,006 14.2 5.6 Interest 78 79 109 78.9 40.8 Other income 101 120 151 18.9 49.5 PBT 1,935 1,773 2,048 13.4 6.6 Taxes 657 597 699 14.3 6.8 ETR (%) 34.0 33.7 34.1 Share of Associates/JVs 24 -4 -10 Reported PAT 1,302 1,172 1,339 12.4 3.3

Source: Company

Result Update

Stock Details Market cap (Rs mn) : 304808 52-wk Hi/Lo (Rs) : 350 / 237 Face Value (Rs) : 1 3M Avg. daily vol (Nos) : 1,051,870 Shares o/s (mn) : 971.0

Source: Bloomberg



PAT 4,652 5,759 6,583 EPS 4.8 5.9 6.8 EPS Growth (%) -2.3 23.8 14.3








Berger Paints (1.3) 4.9 (0.3) Nifty 2.8 4.4 (2.8)

Source: Bloomberg

Price chart (Rs)

Source: Bloomberg

Amit Agarwal [email protected] +91 22 6218 6439

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Valuation and Outlook We estimate that branded paint demand will remain robust in a country like India where per capita consumption is very low and 30% paint market is still unorganised. Management of Berger also indicated that the volume trends remain strong for the company and expect the trend to continue in medium term.

Berger’s performance has been better than peers and is indicative of continued market share gains. For Berger, we estimate 10% volume CAGR over FY18 – FY20E with improvement in operating margins and ROE of ~23.3% and ROCE of ~30.4% for FY20E. However, post factoring the growth prospects and post comparison with other big players, the current valuation is stretched for Berger. Maintain estimates and SELL recommendation with an unchanged TP of 280 at 41x FY20E.

Sales was driven by all the segments Management indicated the sales performance of Q2FY19 could be attributed to:

Decorative segment - The Company reported high double digit volume growth in the decorative segment for Q3FY19. The decorative business constitutes around 80% of Berger’s overall business and typically grows at 1.5x the GDP of the country. The current volume growth on a large base (~15% volume growth in Q2FY19 as well) and relatively slower volume growth for other players indicate market share gains for Berger. Berger is expecting healthy volume growth in the decorative segment on the back of low per-capita consumption in the country, strong urbanization trends, shortening re-painting cycles, up-trading and increased government spending in an election year. We also believe that the reduction in GST on Paints (from 28% to 18%) from 27th July, 2018 to further aid volumes for the company.

Industrial paints segment - In Industrial paints, Berger is primarily present in Automotive coating and Industrial coating. Automotive paints constitute around 10% of the overall revenues of the company and remains strong for the company with healthy demand of automobiles in the country. Berger is empanelled with all major automobile companies in the 2 wheeler and 3 wheeler segment. While general industrial coating constitute around 8% of the overall revenues of the company. Management expects general industrial segment to do well in Q4FY19 and Q1FY20, which should boost the overall performance of the company.

Performance of Subsidiaries Berger Paints has a total of 7 subsidiaries and 2 associates contributing about 10% of the overall revenues. Of these 7 subsidiaries the top 3 in terms of revenue are;

1) Berger Jenson and Nicholson, Nepal (~3% of overall revenues)

2) Bolix, Poland (~4% of overall revenues)

3) Saboo coatings (~1.5% of overall revenues)

Adverse currency movement and raw material price inflation led to Berger booking loss of Rs 10 mn from associates/subsidiaries.


FEBRUARY 8, 2019

Raw Material situation has improved, positive for paint industry Paint Industry uses two key raw material including crude derivatives (60%) and Titanium Dioxide (30%). The paint Industry was experiencing increase in prices of raw material for entire FY18 and till end of November 2018. Competition, time lag between RM price increase and product pricing and sticky nature of product prices for industrial customer’s impacted the gross margins of the company in Q3FY19.

However with correction in crude price to $60/barrel (-25% in the last 2 months), prices of crude derivatives have also decreased. Even prices of pigments like Titanium Dioxide, Iron oxide and Zinc oxide have shown softness in prices in the last two months. Correction in raw material prices is positive for paint companies and can provide an uptick to gross margins in Q4FY19 in a strong demand environment.

Prices of crude ($/barrel) Prices of Titanium dioxide ($/MT)

Source: Bloomberg Source: Bloomberg

Valuations ahead of performance: Maintain SELL We believe that Berger will continue to gain market share with aggressive expansion of its dealer network (5-10% increase each year), aggressive sales push, higher dealer margins and focus on improving geographical reach. Reduction in GST rates can drive further improvement in demand. Berger’s performance has been better than peers and is indicative of continued market share gains. For Berger, now we estimate 10% volume CAGR over FY18 – FY20E with improvement in operating margins and ROE of ~23.3% and ROCE of ~30.4% for FY20E. However, post factoring the growth prospects and post comparison with other big players, the current valuation is stretched for Berger. Maintain estimates and SELL recommendation with an unchanged TP of 280 at 41x FY20E.

Company background Berger Paint is the second largest decorative paint company in India and third largest in domestic industrial segment. It enjoys ~19% share of organized domestic decorative market. Berger also has a presence in overseas markets, prominent ones being Nepal (where it is a significant player in decorative market) and Poland (where it is second largest player in external insulation finishing system).Berger also has two JVs where Berger has 49% stake – a) Berger Becker Coatings Pvt Ltd catering to coil coatings – JV with Becker Industrifarg, Sweden which is a leading coil and special coatings player in Europe, and b) BNB Coatings India Ltd for manufacture of coatings for plastic substrates – JV with Nippon Bee Chemicals Co Ltd of Japan.

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Financials: Consolidated

Profit and Loss Statement (Rs mn) (Year-end Mar) FY17 FY18 FY19E FY20E

Revenues 45,524 51,657 57,676 64,332 % change YoY -1.8 13.5 11.7 11.5 Raw material cost 26,259 29,858 33,199 36,923 Employee cost 2,492 2,833 3,150 3,504 Other expenses 9,584 10,897 12,117 13,476 Total Operating expd 38,335 43,588 48,466 53,902 EBITDA 7,189 8,069 9,210 10,430 Depreciation 1,081 1,243 1,200 1,200 EBIT 6,108 6,826 8,010 9,230 Other income 1,088 459 500 500 Interest expense 162 200 200 225 Profit before tax 7,034 7,085 8,310 9,505 Tax 2,295 2,440 2,576 2,947 ETR (%) 32.6 34.4 31.0 31.0 Profit after tax 4,739 4,645 5,734 6,558 Minorities& Associates 23 7 25 25 Net income 4,762 4,652 5,759 6,583 % change YoY 41.0 2.0 24.5 13.9 Shares outstanding (m) 970 970 970 970 EPS 4.9 4.8 5.9 6.8 Source: Company, Kotak Securities – Private Client Research

Cash flow Statement (Rs mn) (Year-end Mar) FY17 FY18 FY19E FY20E

PAT 4,762 4,652 5,759 6,583 Non Cash items 1,311 1,487 1,458 1,495 Change in working capital 119 (889) (873) (965) Cash flow from operations 6,192 5,250 6,344 7,113 Capex (2,500) (2,500) (2,000) (2,000) Investments (798) (94) - - Cash flow from investments (3,298) (2,594) (2,000) (2,000) Equity issuance - - 0 - Debt raised 918 (174) (207) (186) Dividend Paid (2,003) (2,004) (2,004) (2,005) Miscellanous items - - - - Cash flow from financing (1,086) (2,178) (2,210) (2,191) Net cash flow 1,808 478 2,134 2,922 Opening cash 1,841 3,649 4,128 6,261 Closing cash 3,649 4,128 6,261 9,184 Source: Company, Kotak Securities – Private Client Research

Balance sheet (Rs mn) (Year-end Mar) FY17 FY18 FY19E FY20E

Cash 3,649 4,128 6,261 9,184 Debtors 5,645 6,405 7,152 7,977 Inventory 8,650 9,815 10,958 12,223 Other current assets 1,730 1,963 2,192 2,445 Total current assets 16,024 18,183 20,302 22,645 LT investments 906 1,000 1,000 1,000 Net fixed assets 12,017 13,274 14,074 14,874 Total assets 32,597 36,585 41,637 47,702 Creditors 5,918 6,715 7,498 8,363 Provisions 1,229 1,395 1,557 1,737 Loans and advances 2,276 2,583 2,884 3,217 Total current liabilities 9,423 10,693 11,939 13,317 LT debt 4,239 4,065 3,859 3,673 Equity Capital 970 970 970 970 Reserves 17,964 20,857 24,870 29,743 Networth 18,935 21,827 25,840 30,713 Total liabilities 32,597 36,585 41,637 47,702 BVPS (Rs) 19.5 22.5 26.6 31.7 Source: Company, Kotak Securities – Private Client Research

Ratio Analysis (Year-end Mar) FY17 FY18 FY19E FY20E

EBITDA margin (%) 15.8 15.6 16.0 16.2 EBIT margin (%) 13.4 13.2 13.9 14.3 Net profit margin (%) 10.5 9.0 10.0 10.2 ROE (%) 27.3 22.8 24.2 23.3 ROCE (%) 33.9 29.7 30.6 30.4 DPS 1.8 1.8 1.8 1.8 Dividend payout (%) 42.1 43.1 34.8 30.5 Working capital turnover (days) 53.4 49.8 50.2 50.2 Debt Equity (x) 0.2 0.2 0.1 0.1 PER (x) 63.8 65.3 52.7 46.1 P/C (x) 50.0 49.5 42.1 37.6 Dividend yield (%) 0.6 0.6 0.6 0.6 P/B (x) 16.0 13.9 11.8 9.9 EV/Sales (x) 6.7 5.9 5.3 4.7 EV/ EBITDA (x) 36.7 35.6 31.2 27.8 Source: Company, Kotak Securities – Private Client Research


FEBRUARY 8, 2019

GREAVES COTTON LTD PRICE RS.120 TARGET RS.146 BUY Greaves Cotton (GCL) reported good numbers, which were a tad below our estimates. A notable highlight is that this was the highest profit growth in last seven quarters.

Key Highlights EBITDA margins largely stable despite commodity cost pressures.

The company’s OEMs are currently field testing its CNG engine and if found satisfactory would result in engine sourcing deals in the future, the management informed. This would plug a major product gap in the company’s portfolio.

M&M has partnered with Greaves to source BS-VI emission norms compliant powertrain solutions. As a part of this partnership, Greaves Cotton Limited will provide affordable last mile mobility solutions through BS-VI powertrain solutions to M&M. These powertrains will be used in Mahindra 3 wheelers

Valuation and Outlook The company’s largest revenue segment ie three-wheeler engines business has been going through a prolonged phase of slowdown due to 1) Shift from diesel to CNG engines and 2) Emergence of electric vehicles. GCL is responding to this challenge by positioning itself as a fuel-agnostic engine maker including electric mobility. GCL is currently trading at 14.5x and 12.4x FY19 and FY20 earnings respectively, which is attractive compared to peers in the capital goods and manufacturing sector stocks. However, considering the moderate growth profile of the business, we are according it a lower target PE. We value the stock at 15x FY20E, thus arriving at a price target of Rs 146 (unchanged). We maintain BUY.

Financial performance

Rs mn Q3FY19 Q3FY18 YoY (%) Q2FY19 QoQ (%)

Net Revenues 5065 4473 13.2 4951 2.3 Expenditure 4359 3850 13.2 4218 3.3 Raw Material costs 3152 2849 10.6 3113 1.3 Purchase of traded goods 311 167 85.9 233 33.6 Staff costs 425 424 0.1 434 -2.1 Other costs 472 410 15.0 439 7.4 EBITDA 706 622 13.4 733 -3.7 Depreciation 121 132 -8.2 125 -3.7 Other income 101 90 12.3 127 -20.7 EBIT 685 581 18.1 734 -6.6 Interest 10 2 426.3 13 -24.2 PBT 675 579 16.7 721 -6.3 Tax 198 249 -20.2 227 -12.8 PAT before exceptional items 477.1 330.0 44.6 493.6 -3.3 exceptional items -50 226 0 Reported PAT 427 556 494 -13.5 EBITDA (%) 13.9 13.9 14.8 RM costs to sales (%) 68.4 67.4 67.6 Other exp to sales (%) 9.3 9.2 8.9 Tax rate (%) 29.4 43.0 31.5 EPS (Rs) 2.0 1.4 2.0

Source: Company

Result Update

Stock Details Market cap (Rs mn) : 29256 52-wk Hi/Lo (Rs) : 165 / 111 Face Value (Rs) : 2 3M Avg. daily vol (Nos) : 406,592 Shares o/s (mn) : 244

Source: Bloomberg



PAT 1,536 2,026 2,370 EPS 6.3 8.3 9.7 EPS Growth (%) (13.9) 31.9 17.0








Greaves Cotton 1.1 (2.8) (20.1) Nifty 2.8 4.4 (2.8)

Source: Bloomberg

Price chart (Rs)

Source: Bloomberg

Sanjeev Zarbade [email protected] +91 22 6218 6424

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Reported Vs Estimated performance

(Rs mn) Reported Estimated

Revenue 4359 4700 EBITDA % 13.9 15.0 PAT 477 482

Source: Kotak Securities – Private Client Research

Result Highlights The company reported 13.2% y-o-y growth in revenue, aided by 3% y-o-y

growth in engine volumes and accompanied by ~ 7% increase in average realisation.

On a YTD basis, revenue growth stood at 12% y-o-y and indicates that after several years of near stagnation, growth has started to look up.

Pent-up demand on account of 3 years of stagnation and open permits issued by a few major cities shored up 3W demand. Implementation of GST had a temporary negative impact on the Company’s business in the H1 of FY 2017-18. However, the situation has been improving since then.

The company’s revenue mix comprised 49% of engine sales, 25% of after market sales and the balance 26% being Genset, Agri equipment and Trading.

Revenue from “New business” (CNG engines and Ampere Electric 2W) accounted for 9% of YTD FY19 revenue (as against 3% in 9MYTD FY18).

Sale of CNG engines doubled to 2500 Nos as against 1250 Nos on a y-o-y in the corresponding quarter of the previous fiscal.

Revenue (Rs mn)

Source: Company, KotaK Securities – Private Client Research

Product volumes

(Nos) Q3FY19 Q3FY18 YoY (%)

3W Engine 69097 66650 3.7 4W Engines 12525 10224 22.5 DG sets 1516 1096 38.3 Pumpsets 17356 19989 -13.2 Tillers 665 324 105.2

Source: Company

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FEBRUARY 8, 2019

Client OEMs of GCL in 3W

Corporate Brand Fuel Engine

Piaggio Ape Xtra and City CNG, Diesel, LPG 4 stroke single cylinder M&M Alfa and Champion Diesel and CNG 4 stroke single cylinder TVS King Diesel 4 stroke single cylinder Atul Auto Shakti, Gem and Gemini Diesel 4 stroke single cylinder

Source: Company

EBITDA margins largely stable EBITDA margins remained stable on a y-o-y basis at 13.9%. However, gross

margins declined 100 bps due to commodity cost pressure.

The company had taken price hikes of 3-4% in Q2FY19 to accommodate the commodity price inflation, which may have enabled the company to preserve margins.

Efficient currency hedging and value engineering also helped the company contain the decline in margins.

EBITDA margins (%)


PAT before exceptional items rose 44% y-o-y PAT before exceptional items rose 44% on a y-o-y basis led by moderate

growth in revenues and lower tax charges.

The notable thing is that this is the highest profit growth achieved by the company in the past seven quarters.

Fuel mix shifting towards CNG engines from diesel/petrol engines: In the Automotive Engine segment, the company provides fuel agnostic powertrain solutions to three-wheeled passenger & cargo vehicles and four-wheeled mini-trucks.

The company has a 75% market share in the 3-wheeler Diesel engines market. While earlier, diesel engines were the preferred mode for last mile connectivity, stricter environmental norms is driving sales of CNG engines even as the share of diesel engines have been reducing in recent years. In urban markets, replacement demand has been an important growth driver where in improving network of CNG fuel stations is driving replacement of older petrol or diesel powered 3Ws with ones based on CNG. In FY18, around 50% of the three wheeler sales were of CNG engines.

As the Government has set April 2020 deadline for the implementation of BS-VI norms, demand for conventional 3W diesel engines is likely to be affected in the future, the management opines.

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FEBRUARY 8, 2019

GCL’s weak product positioning in CNG 3W engines has led to underperformance in the 3W sales growth GCL’s focus as well as its forte has been on light diesel engines (75% market share in light diesel engines), which is also aligned with the positioning of its prime client Piaggio Vehicles (PVPL), who is a leader in the 3W cargo segment. In Cargo, diesel engines are better suited than their CNG counterparts on account of higher load carrying capacity and lack of CNG pump infrastructure in rural/semi rural areas. Given the focus of GCL on diesel engine segment, it appears that the company has been late in having a strong product in the CNG engine space.

GCL currently has a larger engine (400 cc) in CNG 3W market which is mainly being used in the 5+1 passenger 3W segment. However, the major market for passenger 3W is in the 2+1 category where a smaller engine (200-230 cc) is fitted. GCL has been largely missing in this segment and even its existing diesel engine customers like Atul/Piaggio are not fully sourcing CNG engines from the company.

To address this, GCL has entered into technical collaboration with Pinnacle Engines for CNG and Petrol segments. The Pinnacle engine are BS-VI compliant and come with revolutionary piston technology that offers 25-30% fuel efficiency over the conventional ones.

The company’s OEMs are currently field testing this engine and if found satisfactory would result in engine sourcing deals in the future, the management informed. This would plug a major product gap in the company’s portfolio.

Conference call highlights Greaves Cotton recently announced that they have entered into definitive agreements as per which it will acquire a majority stake in Electric Vehicle manufacturer - Ampere Vehicles Pvt. Ltd. Ampere is one of the leading brands in the last mile mobility electric vehicles segment. It has strong in-house capabilities in designing, developing, manufacturing & marketing electric vehicles with a wide range of applications. Through this acquisition, Ampere can benefit from Greaves’ distribution, aftermarket and service strengths to grow more rapidly. The company completed acquisition of majority stake (67%) in Oct 2018. The financial numbers of Ampere will be shared in the future investor interactions. The company is currently the number two player in electric two wheelers. Its current product offering is in the low speed segment but is coming out with a higher speed 2W in the current quarter.

The company’s aftermarket (spares) business accounted for around ~ 25% of revenues (including spares for Auto, DG sets and Farm). Apart from the ongoing aftermarket sales (including Auto, DG and Farm) through the company’s distribution outlets, GCL has also forayed into sale of multibrand spares through “Greaves care” outlets. It works on a franchise based model as per which the Greaves Cotton collects fee from the franchisee. In addition to this, Greaves benefits from manufacturing of spare parts sold through Greaves Care. The company now has 115 “Greaves Care” outlets and is servicing 15000 customers on a monthly basis.

M&M has partnered with Greaves to source BS-VI emission norms compliant powertrain solutions. As a part of this partnership, Greaves Cotton Limited will provide affordable last mile mobility solutions through BS-VI powertrain solutions to M&M. These powertrains will be used in Mahindra 3 wheelers


FEBRUARY 8, 2019

The company is increasing investments in last mile e-mobility solutions, supported by a strong network of 250+ Greaves Retail outlets and 5000+ spares outlet across the country.

The management expects the EBITDA margins to remain stable.

Valuation and Target price GCL is currently trading at 14.5x and 12.4x FY19 and FY20 earnings respectively, which is attractive compared to peers in the capital goods and manufacturing sector stocks. However, considering the moderate growth profile of the business, we are according it a lower target PE. We now value the stock at 15x FY20E (earlier 16x FY20E), thus arriving at a price target of Rs 146 (unchanged). We maintain BUY.

PE chart

Source: Kotak Securities – Private Client Research

Company Background Greaves Cotton Limited, established in 1859, is into manufacturing of Diesel / Petrol Engines, Gensets and Pumpsets. Greaves has a strong knowledge base in single cylinder diesel engines used for low cost transportation and its engines are extensively used in the three wheeler segment. Mr. Karan Thapar, who is Non-Executive Chairman of the company. The day-to-day management is vested with Mr. Mr. Nagesh Basavanhalli, Managing Director and CEO of the company, who is a professional and has joined the company in 2016.

The Business Divisions are:

Business Division Product Lines

Agricultural Equipment Petrol / Kerosene Engines: 1 to 5 HP, Pumpsets and Power Tillers Automotive Light Diesel Engines: Auxiliary Power Large Diesel Generating Sets Range: 2.5 KVA to 500 kVA single unit and upto 2500 kVA in parallel running Industrial Engines Diesel Engines: 1.4 to 1000 HP range

Source: Company

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FEBRUARY 8, 2019



Revenues 16,344 17,921 20,157 21,388 % change YoY 1.3 9.6 12.5 6.1 EBITDA 2,436 2,553 2,933 3,255 % change YoY (8.8) 4.8 14.9 11.0 Other Income 502 453 431 695 Depreciation 467 524 492 600 EBIT 2,471 2,482 2,872 3,350 % change YoY (11.2) 3.1 20.2 8.8 Net interest 8.1 8.1 38.1 11.0 Profit before tax 2,463 2,474 2,834 3,339 % change YoY (8.2) 0.5 14.5 17.8 Tax 680 939 808 968 as % of PBT 27.6 37.9 28.5 29.0 Profit after tax 1,783 1,536 2,026 2,370 % change YoY 2.0 (13.9) 31.9 17.0 Exceptional items 60 482 (50) - Reported PAT 1,842 2,017 1,976 2,370 Shares outstanding (m) 244 244 244 244 EPS (before exp items) (Rs) 7.3 6.3 8.3 9.7 CEPS (Rs) 9.2 8.4 10.3 12.2 DPS (Rs) 5.5 5.5 5.5 5.5 Source: Company, Kotak Securities – Private Client Research


PBDIT 2,436 2,553 2,933 3,255 Direct tax paid (736) (919) (808) (968) Adjustments 41 28 - - Cash flow from operations 1,740 1,663 2,125 2,287 Net Change in Working Capital 301 689 430 (55) Net Cash from Operations 2,040 2,352 2,555 2,231 Capital Expenditure (271) (241) (1,000) (500) Cash from investing (43) (505) 380 694 Net Cash from Investing (314) (746) (620) 194 Interest paid (8) (8) (38) (11) Issue of Shares/(buyback) - - - - Dividends Paid (1,617) (1,472) (1,571) (1,571) Debt Raised (74) 72 1 1 Net cash from financing (1,699) (1,408) (1,608) (1,581) Net change in cash 27 198 327 844 Free cash flow 1,769 2,111 1,555 1,731 Cash at end 100 298 625 1,469 Source: Company, Kotak Securities – Private Client Research


Cash and cash equivalents 100 298 625 1,469 Accounts receivable 2,702 2,527 3,037 3,223 Inventories 1,294 1,094 1,377 1,461 Loans and Adv & Others 303 152 152 152 Current assets 4,399 4,071 5,191 6,305 Intangible assets 446 536 536 536 Other assets 394 419 420 421 LT investments 4,228 5,186 5,186 5,186 Net fixed assets 2,583 2,475 2,983 2,883 Def tax assets 0 0 0 0 Total assets 6,187 7,396 8,502 9,651 Payables 2,862 3,304 4,527 4,741 Others 0 0 0 0 Current liabilities 2,862 3,304 4,527 4,741 Provisions 189 233 233 233 LT debt 0 0 0 0 Other liabilities 175 275 276 277 Equity 488 488 488 488 Reserves 8,721 9,116 9,520 10,320 Total liabilities 6,187 7,396 8,502 9,651 BVPS (Rs) 36 37 39 42 Source: Company, Kotak Securities – Private Client Research


EBITDA margin (%) 14.9 14.2 14.5 15.2 EBIT margin (%) 12.0 11.3 12.1 12.4 Net profit margin (%) 10.9 8.6 10.0 11.1 Receivables (days) 60.3 51.5 55.0 55.0 Inventory (days) 28.9 22.3 24.9 24.9 Sales/gross assets(x) 4.9 5.2 4.5 4.3 Interest coverage (x) 300.7 315.2 77.0 295.9 Debt/equity ratio(x) - - - - ROE (%) 19.7 16.3 20.7 22.8 ROCE (%) 17.7 17.1 18.9 20.8 EV/ Sales 1.7 1.4 1.2 1.1 EV/EBITDA 10.3 9.4 8.1 7.0 Price to earnings (P/E) 16.4 19.1 14.5 12.4 Price to book value (P/B) 3.4 3.2 3.1 2.8 Source: Company, Kotak Securities – Private Client Research


FEBRUARY 8, 2019

JINDAL STAINLESS HISAR LTD (JSHL) PRICE RS.82 TARGET RS.110 BUY JSHL’s 3QFY19 numbers were a mixed bag, with revenue higher than estimates, EBITDA margin was lower due to increase in raw material costs. However, PAT came in line with estimates, due to forex gain of Rs217.9 bn. Increase in raw material costs, offset the benefit of higher realisation, resulting in 130bps QoQ decline in margin to 9%.

Key Highlights

Volume during the quarter declined sequentially to 158,000 tonnes, due to subdued demand across the segments, continuous focus on value added products (+19% YoY) helped the company to garner better realisation. Imports during the quarter declined marginally and remained in the range of 30-35kt/monthly. Realisation during the quarter stood at Rs141,349/tonne.

EBITDA/t during the quarter declined to Rs12,734/tonne from Rs13,840/tonne in 2QFY19, due to increase in input costs. During the quarter, the company reported inventory loss of Rs432 mn, on account of fall in nickel prices. On an average the company has ~25kt of nickel inventory as open position.

Both the subsidiary reported the strong operating performance during the quarter, with JSL Lifestyle reporting EBITDA of Rs340 mn and Rs100 mn at JSSL.

Management indicated that Q4FY19, likely to see an improvement given the strong order book and marginal uptick in the nickel prices (management expects nickel prices to stable at the current levels).

The company is incurring capex of Rs2 Bn to expand its presence in the long product segment by setting up an additional line of 50,000 tonnes capacity (long product segment), expected to come on stream by end of FY19 and strengthening its downstream production (precision strips) which is expected to come on stream in FY20.

Quarterly performance table

(Rs mn) 3QFY19 3QFY18 YoY (%) 2QFY19 QoQ (%)

Net Sales 22,333 24,386 (8.4) 22,294 0.2 Raw Materials 14,693 16,091 (8.7) 14,493 1.4 Power & fuel 2,283 2,115 8.0 2,308 (1.1) Employee 408 419 (2.7) 413 (1.3) Other Expenses 2,938 2,510 17.0 2,781 5.6 Total Expenses 20,321 21,135 (3.8) 19,996 1.6 EBITDA 2,012 3,251 (38.1) 2,298 (12.4) EBITDA Margin (%) 9.0 13.3 10.3 Depreciation 693 675 2.6 682 1.6 EBIT 1,319 2,576 1,616 Interest 900 968 (7.0) 846 6.4 Other Income 229 278 (17.6) 238 (3.9) Extraordinary 218 196 11.2 58 278.3 EBT 866 1,690 950 Tax 315 746 (57.8) 334 (5.7) PAT 551 944 (41.7) 616 (10.6)


Result Update

Stock Details Market cap (Rs mn) : 19252 52-wk Hi/Lo (Rs) : 225 / 75 Face Value (Rs) : 2 3M Avg. daily volume : 428,566 Shares o/s (mn) : 236

Source: Bloomberg



PAT 5,912 3,267 3,476 EPS 25.1 13.8 14.7 EPS Growth (%) 106.1 -44.7 6.4

BV (Rs/share) 62 76 91 ROE (%) 40.1 18.1 16.2 ROCE (%) 27.8 21.4 22.9







Jindal Stainless Hisar (4.6) (19.0) (40.5) Nifty 2.8 4.4 (2.8)

Source: Bloomberg

Price chart (Rs)

Source: Bloomberg

Jatin Damania [email protected] +91 22 6218 6440

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Valuation & outlook We believe, an increasing share of value added products in the overall product mix coupled with strong performance at JSL Lifestyle (backed by railway order), shall support the earnings. However, given the subdued demand across the verticals, open inventory position and factoring 3QFY19 performance, we revised our estimates lower for FY19E and FY20E to Rs13.8 (earlier Rs16.1) and Rs14.7 (earlier Rs20.2), respectively. Upside risks: Upticks in nickel prices can act as a major tailwind. The stock has corrected sharply in the recent past, and we believe at current valuation of 3.1x/2.4x FY19E/FY20E EV/EBITDA, the stock factors in all the potential negatives. Though we continue to maintain our BUY rating, with a revised target price of Rs110 (earlier Rs205), lowering our valuation multiple to 4.5x EV/EBITDA.

Higher raw material cost offset the benefit of value added products The price of key raw materials, nickel and ferro chrome declined during the quarter, but the benefit of the same will accrue in the coming quarters. As company still has high cost inventory on its books, on which it reported Rs430 mn of inventory loss. Management indicated, at any given point, the company has 25kt of open inventory position.

The raw material costs increased by Rs3,012/tonne QoQ to Rs88,511/tonne, due to high cost inventory. This coupled with increase in power costs (both coal and propane) and electrodes prices (up 5x) offset the benefit of a higher share of value added products in overall basket (sales +19% YoY and volume +10% YoY). EBITDA/t during the quarter declined to Rs12,734/tonne. Realisation during the quarter continued to remain strong (+5% QoQ) to Rs141,349/tonne, supported by an increase in value added products. Imports continue to remain high (monthly average of 35kt (excluding pipes and tubes), despite the countervailing duty), though declined marginally which is being routed through Free Trade Agreement countries. Imports from Indonesia is up 9x YoY.

Nickel and Ferro Chrome price trend Raw Material cost/tonne (Rs)

Source: Company Source: Company

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FEBRUARY 8, 2019

Sales volume and realisation trend EBITDA and EBITDA/t

Source: Company Source: Company

Company Background JSHL was formerly a part of JSL. Pursuant to the approval of the composite Scheme of Arrangement by the Hon’ble High Court of Punjab & Haryana at Chandigarh, the plant was transferred from JSL to JSHL. Jindal Stainless (Hisar) Limited has integrated its operations on a strategy of both, backward and forward integration, starting from melting, casting, hot rolling to cold rolling and other value additions. Hisar plant is an integrated Stainless Steel plant with a capacity of 8,00,000 tpa. JSHL is the world’s largest SS producer strips for razor blades and India’s largest producer of coin blanks, catering to Indian and International mint needs. JSHL was first in popularizing the 200 series throughout the world. JSHL caters to a diversified market and no single customer accounts for over 5% of total sales. Specialty product division caters to the high end precision and specialty stainless steel requirements of reputed Indian and International customers.

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FEBRUARY 8, 2019



Net Sales 77,745 103,571 105,355 106,310 % Growth 7.5 33.2 1.7 0.9 Raw Materials 50,013 69,846 71,946 73,390 % of Net Sales 64.3 67.4 68.3 69.0 Employee Cost 1,761 2,087 2,179 2,312 % of Net Sales 2.3 2.0 2.1 2.2 Power & Fuel 6,338 8,044 8,804 8,415 % of Net Sales 8.2 7.8 8.4 7.9 Other Expenses 9,824 11,287 11,973 11,401 % of Net Sales 12.6 10.9 11.4 10.7 EBITDA 9,809 12,306 10,453 10,793 EBITDA Margin (%) 12.6 11.9 9.9 10.2 Depreciation 2,852 2,843 3,005 3,093 EBIT 6,956 9,464 7,447 7,699 Interest Exps. 4,314 4,082 3,884 3,551 EBT 2,642 5,382 3,563 4,149 Exceptional Items 283 -196 -218 0 Other Income 650 1,161 1,102 1,047 PBT 3,575 6,347 4,447 5,196 Tax-Total 1,171 2,335 1,616 1,720 Profit after tax 2,404 4,012 2,831 3,476 PAT after M.I/Asso. Share 2,869 5,912 3,267 3,476 PAT Margin (%) 3.1 3.9 2.7 3.3 Source: Company, Kotak Securities – Private Client Research


Net profit before tax 4,078 5,186 3,345 4,149 Depreciation 5,697 2,843 3,005 3,093 Interest 4,297 4,082 3,884 3,551 Others (2,929) 36 - - Opt Profit before WC Chgs 11,143 12,147 10,235 10,793 WC Changes (2,874) 5,807 (5,796) 433 Cash Gene from Op. 8,269 17,954 4,439 11,226 Direct Taxes Paid (1,368) (2,335) (1,616) (1,720) Cash from Ope act 6,901 15,619 2,822 9,506 Purchases of F.A (1,392) (1,681) (1,039) (1,177) Investment (16,351) (3,996) - - Others - 1,161 1,102 1,047 Cash from Inv Act (17,744) (4,517) 64 (129) Proc from Issue of Eq Shares - 294 436 0 Net loans 15,108 (7,391) 543 (5,700) Interest paid (4,297) (4,082) (3,884) (3,551) Dividend paid & Others - 91 - - Cash from Fin Act 10,811 (11,088) (2,905) (9,251) Net Increase in Cash (31) 15 (19) 126 Cash at Beginning 168 137 152 132 Cash at End 137 152 132 259 Source: Company, Kotak Securities – Private Client Research


Sources of Funds Equity Capital 472 472 472 472 Reserves and Surplus 8,459 14,274 17,541 21,017 Shareholders’ Funds 8,931 14,746 18,013 21,489 Minority Interest 218 315 315 315 Total Loan Funds 35,535 28,511 28,294 22,594 Total Liabilities 44,684 43,572 46,621 44,397 Appl. Of Funds 33,243 34,167 35,243 36,243 Gross Block 9,808 12,134 15,165 18,282 Accumulated Depn. 23,435 22,033 20,078 17,961 Net Fixed Assets 421 662 650 850 Capital WIP 863 863 863 863 Goodwill 9,530 14,999 14,999 14,999 Investment 17,161 16,742 17,141 17,276 Inventories 10,497 8,466 12,450 12,450 Sundry Debtors 136 152 132 259 Cash and Bank Bal 4,777 3,650 3,650 3,650 Loans and Advances 32,572 29,004 33,368 33,629 Total Current Assets 22,137 23,993 23,341 23,909 Current Liabilities 10,435 5,011 10,027 9,720 Net Current Assets Total assets 44,684 43,572 46,621 44,397 Source: Company, Kotak Securities – Private Client Research


O/s Shares (mn) 236 236 236 236 Per Share (Rs) EPS 12.2 25.1 13.8 14.7 Cash EPS 24.2 37.1 26.6 27.8 Book value 37.9 62.5 76.3 91.1 Valuation (x) P/E 6.7 3.3 5.9 5.6 Price/Book value 2.2 1.3 1.1 0.9 EV/EBITDA 4.6 2.7 3.1 2.5 EV/Sales 0.6 0.3 0.3 0.3 Profit ratios (%) RoE 32.1 40.1 18.1 16.2 RoCE 22.2 27.8 21.4 22.9 Margin (%) EBITDA 12.6 11.9 9.9 10.2 EBIT 8.9 9.1 7.1 7.2 PAT 3.1 3.9 2.7 3.3 Turnover Days Inventory 81 59 59 59 Debtors 49 30 43 43 Debt/Equity 4.0 1.9 1.6 1.1 Source: Company, Kotak Securities – Private Client Research


FEBRUARY 8, 2019

RATING SCALE Definitions of ratings BUY – We expect the stock to deliver more than 15% returns over the next 12 months ADD – We expect the stock to deliver 5% - 15% returns over the next 12 months REDUCE – We expect the stock to deliver -5% - +5% returns over the next 12 months SELL – We expect the stock to deliver < -5% returns over the next 12 months NR – Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. SUBSCRIBE – We advise investor to subscribe to the IPO. RS – Rating Suspended. Kotak Securities has suspended the investment rating and price target

for this stock, either because there is not a sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.

NA – Not Available or Not Applicable. The information is not available for display or is not applicable

NM – Not Meaningful. The information is not meaningful and is therefore excluded. NOTE – Our target prices are with a 12-month perspective. Returns stated in the rating scale are our

internal benchmark.

FUNDAMENTAL RESEARCH TEAM

Rusmik Oza Arun Agarwal Amit Agarwal Nipun Gupta Deval Shah Head of Research Auto & Auto Ancillary Transportation, Paints, FMCG Information Tech, Midcap Research Associate [email protected] [email protected] [email protected] [email protected] [email protected] +91 22 6218 6441 +91 22 6218 6443 +91 22 6218 6439 +91 22 6218 6433 +91 22 6218 6423

Sanjeev Zarbade Ruchir Khare Jatin Damania Cyndrella Carvalho Ledo Padinjarathala, CFA Cap. Goods & Cons. Durables Cap. Goods & Cons. Durables Metals & Mining, Midcap Pharmaceuticals Research Associate [email protected] [email protected] [email protected] [email protected] [email protected] +91 22 6218 6424 +91 22 6218 6431 +91 22 6218 6440 +91 22 6218 6426 +91 22 6218 7021

Teena Virmani Sumit Pokharna Pankaj Kumar Krishna Nain K. Kathirvelu Construction, Cement, Buildg Mat Oil and Gas, Information Tech Midcap M&A, Corporate actions Support Executive [email protected] [email protected] [email protected] [email protected] [email protected] +91 22 6218 6432 +91 22 6218 6438 +91 22 6218 6434 +91 22 6218 7907 +91 22 6218 6427

TECHNICAL RESEARCH TEAM

Shrikant Chouhan Amol Athawale Faisal Shaikh, CFTe Siddhesh Jain [email protected] [email protected] Research Associate Research Associate +91 22 6218 5408 +91 20 6620 3350 [email protected] [email protected] +91 22 62185499 +91 22 62185498

DERIVATIVES RESEARCH TEAM Sahaj Agrawal Malay Gandhi Prashanth Lalu Prasenjit Biswas, CMT, CFTe [email protected] [email protected] [email protected] [email protected] +91 79 6607 2231 +91 22 6218 6420 +91 22 6218 5497 +91 33 6625 9810

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FEBRUARY 8, 2019

Disclosure/Disclaimer Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house. Kotak Securities Limited is a corporate trading and clearing member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE), Metropolitan Stock Exchange of India Limited (MSE), National Commodity and Derivatives Exchange (NCDEX) and Multi Commodity Exchange (MCX). Our businesses include stock broking, services rendered in connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management. Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Kotak Securities Limited is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old Mutual Life Insurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI). We are registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014. We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in last five years. However SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise/warning/deficiency letters/ or levied minor penalty on KSL for certain operational deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has our certificate of registration been cancelled by SEBI at any point of time. We offer our research services to clients as well as our prospects. This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions. This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of clients of Kotak Securities Ltd. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable though its accuracy or completeness cannot be guaranteed. Neither Kotak Securities Limited, nor any person connected with it, accepts any liability arising from the use of this document. The recipients of this material should rely on their own investigations and take their own professional advice. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance. Certain transactions -including those involving futures, options and other derivatives as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. Reports based on technical analysis centers on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company's fundamentals. Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. We and our affiliates/associates, officers, directors, and employees, Research Analyst(including relatives) worldwide may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company/company (ies) discussed herein or act as advisor or lender / borrower to such company (ies) or have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of Research Report or at the time of public appearance. Kotak Securities Limited (KSL) may have proprietary long/short position in the above mentioned scrip(s) and therefore may be considered as interested. The views provided herein are general in nature and does not consider risk appetite or investment objective of particular investor; readers are requested to take independent professional advice before investing. This should not be construed as invitation or solicitation to do business with KSL. Kotak Securities Limited is also a Portfolio Manager. Portfolio Management Team (PMS) takes its investment decisions independent of the PCG research and accordingly PMS may have positions contrary to the PCG research recommendation. Kotak Securities Limited does not provide any promise or assurance of favourable view for a particular industry or sector or business group in any manner. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and take professional advice before investing. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. No part of this material may be duplicated in any form and/or redistributed without Kotak Securities' prior written consent. Details of Associates are available on www.kotak.com 1. “Note that the research analysts contributing to the research report may not be registered/qualified as research analysts with FINRA; and 2. Such research analysts may not be associated persons of Kotak Mahindra Inc and therefore, may not be subject to NASD Rule 2711 restrictions on communications

with a subject company, public appearances and trading securities held by a research analyst account Any U.S. recipients of the research who wish to effect transactions in any security covered by the report should do so with or through Kotak Mahindra Inc. (Member FINRA/SIPC) and (ii) any transactions in the securities covered by the research by U.S. recipients must be effected only through Kotak Mahindra Inc. (Member FINRA/SIPC)at 369 Lexington Avenue 28th Floor NY NY 10017 USA (Tel:+1 212-600-8850). Kotak Securities Limited and its non US affiliates may, to the extent permissible under applicable laws, have acted on or used this research to the extent that it relates to non US issuers, prior to or immediately following its publication. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. This research report and its respective contents do not constitute an offer or invitation to purchase or subscribe for any securities or solicitation of any investments or investment services. Accordingly, any brokerage and investment services including the products and services described are not available to or intended for Canadian persons or US persons.” Research Analyst has served as an officer, director or employee of subject company(ies): No We or our associates may have received compensation from the subject company(ies) in the past 12 months. We or our associates have managed or co-managed public offering of securities for the subject company(ies) in the past 12 months: No We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received compensation or other benefits from the subject company(ies) or third party in connection with the research report. Our associates may have financial interest in the subject company(ies). Research Analyst or his/her relative's financial interest in the subject company(ies): No Kotak Securities Limited has financial interest in the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No Nature of financial interest is holding of equity shares or derivatives of the subject company. Our associates may have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report. Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No. Kotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No

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FEBRUARY 8, 2019

By referring to any particular sector, Kotak Securities Limited does not provide any promise or assurance of favourable view for a particular industry or sector or business group in any manner. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and take professional advice before investing. Such representations are not indicative of future results. Subject company(ies) may have been client during twelve months preceding the date of distribution of the research report. "A graph of daily closing prices of securities is available at https://www.nseindia.com/ChartApp/install/charts/mainpage.jsp and http://economictimes.indiatimes.com/markets/stocks/stock-quotes. (Choose a company from the list on the browser and select the "three years" icon in the price chart)." Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. CIN: U99999MH1994PLC134051, Telephone No.: +22 43360000, Fax No.: +22 67132430. Website: www.kotak.com/www.kotaksecurities.com. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Telephone No: 42856825. SEBI Registration No: INZ000200137 (Member of NSE, BSE, MSE, MCX & NCDEX), AMFI ARN 0164, PMS INP000000258 and Research Analyst INH000000586. NSDL/CDSL: IN-DP-NSDL-23-97. Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing. Investments in securities market are subject to market risks, read all the related documents carefully before investing. Derivatives are a sophisticated investment device. The investor is requested to take into consideration all the risk factors before actually trading in derivative contracts. Compliance Officer Details: Mr. Manoj Agarwal. Call: 022 - 4285 8484, or Email: [email protected]. In case you require any clarification or have any concern, kindly write to us at below email ids: Level 1: For Trading related queries, contact our customer service at '[email protected]' and for demat account related queries contact us at

[email protected] or call us on: Toll free numbers 18002099191 / 1860 266 9191 Level 2: If you do not receive a satisfactory response at Level 1 within 3 working days, you may write to us at [email protected] or call us on 022-42858445

and if you feel you are still unheard, write to our customer service HOD at [email protected] or call us on 022-42858208. Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Mr. Manoj Agarwal) at

[email protected] or call on 91- (022) 4285 8484. Level 4: If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach CEO (Mr. Kamlesh Rao) at [email protected] or

call on 91- (022) 4285 8301.

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