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For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL.
Contents
Daily Alerts
Results
Asian Paints: Short-term earnings prognosis sketchy
TVS Motor: Good quarter but festive season off to a weak start
Oberoi Realty: Sales momentum maintained
Results, Change in Reco
HCL Technologies: Upgrade on attractive valuations
RBL Bank: Turning positive
Bayer Cropscience: Yet another disappointing year
INDIA DAILY October 24, 2018 India 23-Oct 1-day 1-mo 3-mo
Sensex 33,847 (0.8) (6.8) (8.1)
Nifty 10,147 (1.0) (7.5) (8.9)
Global/Regional indices
Dow Jones 25,191 (0.5) (5.2) (0.2)
Nasdaq Composite 7,438 (0.4) (7.0) (5.1)
FTSE 6,955 (1.2) (6.7) (9.8)
Nikkei 22,049 0.2 (7.6) (2.0)
Hang Seng 25,401 0.2 (7.6) (11.4)
KOSPI 2,097 (0.4) (10.3) (8.0)
Value traded – India
Cash (NSE+BSE) 349 419 389
Derivatives (NSE) 9,823 13,338 6,858
Deri. open interest 3,847 3,945 3,963
Forex/money market
Change, basis points
23-Oct 1-day 1-mo 3-mo
Rs/US$ 73.2 3 28 444
10yr govt bond, % 8.1 1 (18) (2)
Net investment (US$ mn)
22-Oct MTD CYTD
FIIs (60) (2,607
) (4,613)
MFs 111 1,874 15,714
Top movers
Change, %
Best performers 23-Oct 1-day 1-mo 3-mo
ARBP IN Equity 739 (2.7) 1.0 24.3
DRRD IN Equity 2,474 (1.8) (3.1) 19.1
ICICIBC IN Equity 323 (1.3) 4.6 17.7
DIVI IN Equity 1,250 (3.3) (8.2) 15.3
NMDC IN Equity 111 1.1 (1.6) 13.6
Worst performers
JPA IN Equity 6 (3.1) (20.5) (60.4)
UT IN Equity 2 (6.8) (26.8) (52.3)
YES IN Equity 213 0.8 (5.8) (44.5)
RCAPT IN Equity 237 (0.3) (25.4) (37.4)
IDEA IN Equity 35 0.7 (16.0) (37.2)
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
(1) FY2016/17 P&L and forecasts based on IND-AS and hence not strictly comparable to pre-FY2016 financials which were based on IGAAP.
IGAAP Ind-AS
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Bajaj Finance: Another quarter of strong performance
Bajaj Finance reported 54% growth in earnings as per Ind-AS. AUM growth was strong at 38%
yoy driven by momentum across various segments of consumer finance and business loans.
Calculated NIM was up 47 bps yoy to 11.1% (down 33 bps qoq owing to a rise in the cost of
funds). Efficient expense management curtailed expense growth to 25% yoy leading to 510 bps
improvement in the cost-income ratio to 36.5%. GNPL inched up 10 bps qoq to 1.5% in
2QFY19.
Bajaj Finserv and Bajaj Finance: Upgrade a notch
Post the sharp stock price correction (23-24% in the last three months) for both Bajaj Finance
and Bajaj Finserv, we upgrade both the stocks by a notch. We revise the rating of Bajaj Finserv
to ADD from REDUCE with TP of Rs5,650 (down from Rs6,100) and Bajaj Finance to REDUCE
from SELL with TP of Rs1,950 from Rs2,000. We value Bajaj Life at 1.4X EV, Bajaj General
Insurance and Bajaj Finance at 4.5X book FY2020E. We expect Bajaj Finance to deliver 37% EPS
CAGR and 22-24% medium-term RoE. We believe that Bajaj Finance, given its strong parentage
and robust performance will be well placed on the liquidity front though may moderate its
growth momentum a bit from its current high levels. Focus on profitable segments and
improving productivity will ensure superior earnings growth.
Bajaj Finance
Stock data Forecasts/Valuations 2019E 2020E 2021E
52-week range (Rs) (high,low) EPS (Rs) 65.9 87.8 113.6
Exhibit 6: 1.8% coverage on the overall portfolio GNPL, NNPL and ECL coverage, March fiscal year-ends, 1QFY19-2QFY19 (Rs mn)
Source: Company, Kotak Institutional Equities
Strong loan growth and robust cost control led to sharp rise in earnings
Bajaj Finance reported 54% growth in earnings as per Ind-AS in 2QFY19. Robust NII growth
and strong cost control were the key drivers. NII growth was driven by strong AUM growth
at 38% yoy to `1tn and marginal improvement in NIM (calculated) to 11.1% in 2QFY19
from 10.65% in 2QFY18. NIM was however down on qoq basis (30 bps) owing to rise in
cost of borrowings. Operating expenses growth was low at 25% yoy leading to
improvement in cost to average AUM by 25 bps qoq and 37 bps yoy to 4.1% in 2QFY19.
Asset quality performance deteriorated marginally. Reported stage-3 loans were up 10 bps
qoq to 1.5%. Total slippages in 2QFY19 were `4.8 bn in 2QFY19 compared to `3.8 bn in
1QFY19. The company has 86 bps coverage on stage-1 and 2 loans as compared to 89 bps
in 1QFY19. The coverage ratio for stage-3 loans dropped 400 bps qoq to 65%. The
company has Rs2-2.25 bn exposure to a lumpy infrastructure account; the loan is current
but Bajaj has made provision of 10% on the same.
Robust growth across all businesses; expect some moderation in 2H
Bajaj’s high loan growth was contributed by almost all business segments—consumer
businesses (38.6% of total loans) were up 39% yoy, mortgages (including LAP) was up 34%
yoy, SME lending saw strong increase at 34% yoy while rural and commercial lending
maintained momentum at 72% and 38% yoy growth respectively in 2QFY19. Within the
consumer B2B business, auto segment saw swift pace of growth at 42% yoy (38.2% of
consumer B2B business) while consumer B2C segment continued to deliver robust growth at
44% yoy (48.2% of overall consumer loans). The mortgage business (consolidated) saw
modest growth at 32% yoy in 2QFY19. Adjusting for loan against securities, the commercial
lending business saw sharp growth at 81% yoy in 2QFY19.
We are moderating our loan growth forecasts to 34% in FY2019E from 42% earlier to
reflect the current debt markets conditions. The company is well placed in the liquidity front
(discussed later) but a rise in the cost of funds may prompt the company to moderate its
trajectory and cherry pick relatively higher yield loans.
1QFY19 2QFY19 QoQ (%)
AUM break-up
Stage 1 and 2 920,340 987,238 7.3
Stage 3 12,800 14,932 16.7
Net AUM 933,140 1,002,170 7.4
ECL provisions
Stage 1 and 2 8,191 8,490 3.7
Stage 3 8,800 9,706 10.3
Net ECL provisions 16,991 18,196 7.1
ECL coverage (%)
Stage 1 and 2 0.89 0.86 -3 bps
Stage 3 68.75 65.00 -375 bps
Net ECL coverage 1.82 1.82 -1 bps
Bajaj Finserv NBFCs
KOTAK INSTITUTIONAL EQUITIES RESEARCH 13
Exhibit 7: AUM growth to remain strong over medium-term at 34% CAGR over FY2018-21E AUM mix, March fiscal year-ends, 2018-2021E (Rs bn)
Source: Company, Kotak Institutional Equities
2QFY19: segmental trends
Strong cross-sell franchise of 30 mn customers. Large part of Bajaj’s loan growth has
been driven by its ability to acquire customers. It has a total franchise of 30.1 mn
customers (addition of 7 mn new to Bajaj Finance customers in the past four quarters).
Cross-sell of high-margin personal loans has driven loan growth in this segment over the
past few quarters.
Card franchise continues to scale up. Bajaj Finance has an EMI card base of 15.4 mn
(14.2 mn as of 1QFY19), compared to 11.6 mn credit cards for HDFC Bank as of August
2018, with growth in transaction volumes across segments such as consumer durables,
digital, lifestyle, etc. Bajaj Finance has also tied up with RBL Bank for its co-branded credit
card distribution business (card base of 0.67 mn; up from 0.5 mn qoq). Additionally, the
company has access to 0.33 mn active users via the Mobikwik app.
Consumer business loans up 39% yoy. Consumer finance loans grew 39% yoy to ₹388
bn. Loan growth in consumer B2B businesses (consumer durables, digital products, etc.)
was 34% while consumer B2C (EMI card, personal loans cross sell, etc.) was 44% yoy.
Within the consumer B2B business, the auto finance segment (2-W/3-W) saw steep
growth at 42% yoy in 2QFY19.
Business loans pick pace. Bajaj Finance had slowed growth in the business loan
segment post demonetization but has picked pace off-late driven by improvement in
collections and greater availability of data owing to GST implementation. Unlike other
private players, the company does not find any signs of stress in this segment. Business
loans are now classified in three key buckets, viz. commercial loans, SME loans and
mortgages.
Commercial loans (13% of total AUMs) include relatively low-yield and higher-ticket
loans such as rental discounting, vendor finance, corporate and warehouse finance,
etc. These loans had zero NPLs as of September 2018. The average ticket size in this
segment is around `100 mn with an upper limit of `500 mn. Loan against securities
comprises 55% of overall commercial lending book (up 15% yoy). Out of the
remaining 45% (up 81% yoy), lending to auto component manufacturers and FIG’s
comprised major share at 27% and 9.3% of overall commercial lending respectively.
Mortgages (up 32% yoy, 29% of AUMs on consolidated basis) are now booked under
its new subsidiary. These loans include home loans, LAP, developer loans, etc. Being a
secured business, the business reported GNPLs of 0.56% in June 2018 but saw a rise
in GNPL to 0.8% in 2QFY19. A transition of the business to a separate subsidiary has
improved management concentration, results of which are reflected in superior
expense control.
CAGR (%)
2018 2019E 2020E 2021E (2018-2021E)
BFL (standalone) 804 912 1,143 1,465 22
Consumer business 367 404 485 572 16
SME loans 253 253 279 326 9
Commercial business 124 158 206 264 29
Rural business 60 96 173 303 71
BHFL 36 210 357 536 146
(% of consolidated AUM) 4.3 18.7 23.8 26.8 2250 bps
Total 840 1,122 1,500 2,000 34
NBFCs Bajaj Finserv
14 KOTAK INSTITUTIONAL EQUITIES RESEARCH
SME loans were up 33% yoy but just at about 13% of its AUMs. SME loans include
unsecured business loans and loans to professionals. GNPL in this segment continues
to be high at 1.9%. The company maintains a high coverage around 77% on this
portfolio.
Exhibit 8: Bajaj Finance’s branch network continues to expand rapidly Branches of Bajaj Finance, March fiscal year-ends, 2015-2018,1QFY19-2QFY19 (#)
Source: Company, Kotak Institutional Equities
Exhibit 9: Rural presence continues to increase Geographic presence (via branches), March fiscal year-ends,2QFY16-2QFY19 (#)
Source: Company, Kotak Institutional Equities
Exhibit 10: Rapid growth in points of sale over the last few quarters Active points of distribution, March fiscal year-ends, 2011-2018, 1QFY19-2QFY19 (#)
Source: Company, Kotak Institutional Equities
Exhibit 11: Cross-selling remains big opportunity on a rapidly growing customer base Customer franchise of Bajaj Finance, March fiscal year-ends, 2QFY16-2QFY19 (#)
Source: Company, Kotak Institutional Equities
2015 2016 2017 2018 1QFY19 2QFY19 YoY (%)
Urban 161 262 377 730 793 862 83.0
Rural 232 397 538 602 693 751 34.1
of which rural lending business 50 105 177 219 291 308 57.9
of which rural lending franchises 182 292 361 383 402 443 21.4
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
HDFC Life reported 20% growth in earnings
HDFC Life reported PAT of Rs2.9 bn (up 20% yoy) in 2QFY19. Growth in underwriting profits
was strong at 15% to Rs2.3 bn. This absorbed modest (19% yoy) growth in new business strain
(Rs3.1 bn versus Rs3.2 bn in 1QFY19). ULIP, a segment in which new business strain is typically
high, was 53% of total APE, higher than 44% in 1QFY19.
Net flows remain strong in 2QFY19
HDFC Life reported 31% growth in new business premium and 26% growth in overall premium.
Coupled with control over benefit payouts (up 13% yoy) and management expenses (up 25%
yoy), net cash flows increased to Rs21 bn from Rs10.8 bn in 1QFY19. This trend may be volatile
and hence it may not be accurate to track the same on a quarterly basis.
VNB margin expands 66 bps yoy, flat qoq
HDFC Life’s VNB margins expanded 66 bps yoy to 24.3%, flat qoq. YoY margin expansion was
driven by an increase in the share of high margin products (non-par savings and protection).
Flat VNB margins qoq reflected an increase in the share of non-par savings to 9.4% (9% in
1QFY19) while protection business was down to 14.8% from 18.2% qoq.
Best in class margins; upgrade to ADD post significant stock correction
HDFC Life is the most profitable life insurance company with 21-22% operating RoEV and 22%
EVOP CAGR during FY2018-21E supported by best in class VNB margins of 24-25% and
favorable experience leading to positive operating variance. The company has focused on
innovating new products as required by the policyholders across savings, mortality/morbidity
and longevity. A new product can be copied by the market within a period of 18 months and
hence its strategy is to consistently add to its product suite. Recent additions include a deferred
annuity and joint life (ULIP) plan even as most competition is focusing on the protection
businesses.
HDFC Life has corrected by 25% in the last three months. Post the correction, the company
trades at 3.3X EV FY2020E. We are tweaking down our estimates to build in marginally lower
EV to reflect lower premium growth and negative investment variance in the last quarter. At our
revised price target of Rs380, the stock will trade at 3.6X FY2020E EV at our TP.
HDFC Standard Life Insurance (HDFCLIFE) NBFCs
Broadly on track. HDFC Life delivered 16% yoy VNB growth in 2QFY19 on the back of
13% APE growth and increase in its high-margin protection business to 14.8% of APE
from 12.2% in 2QFY18 but down from 18.2% qoq. RoEV was moderate at 15% yoy
due to lower volumes in 1H and large MTM losses in the debt book. While the medium-
term trends remain on track, the recent sharp stock correction provides an opportunity
to enter; upgrade to ADD from SELL with TP of Rs380 (down from Rs405).
ADD
OCTOBER 24, 2018
RESULT
Coverage view: Neutral
Price (`): 360
Target price (`): 380
BSE-30: 33,847
QUICK NUMBERS
PAT up 20% yoy in
2QFY19
VNB margins up 66
bps yoy in 2QFY19
to 24.3%
APE up 13% yoy in
2QFY19; individual
APE up 12.5% yoy
Nischint Chawathe
M B Mahesh CFA
Dipanjan Ghosh
Shrey Singh
HDFC Standard Life Insurance
Stock data Forecasts/Valuations 2019E 2020E 2021E
52-week range (Rs) (high,low) EPS (Rs) 6.5 8.1 9.8
Exhibit 2: 20% yoy growth in PAT in 2QFY19; similar to 1QFY19 PAT and solvency ratio for HDFC Standard Life, March fiscal year-ends, 2QFY18-2QFY19, 2016-18 (Rs bn)
Source: Company, Kotak Institutional Equities
Exhibit 3: 16% yoy growth in VNB March fiscal year-ends 2016-2018, 2QY18-2QFY19 (Rs bn)
Exhibit 9: Mixed trends in persistency for most products Product and channel-wise persistency, March fiscal year-ends, 2017-2QFY19 (%)
Source: Company, Kotak Institutional Equities
Exhibit 10: Share of bancassurance is high at 69% Channel-wise total individual new business premium, March fiscal year-ends, 2QFY18-2QFY19, 2015-18 (%)
Source: Company, Kotak Institutional Equities
Product-wise persistency Channel-wise persistency
Par
2017
13th month 75 75 89 82 86 81 80
25th month 65 73 86 72 79 72 74
37th month 59 70 81 62 55 65 66
49th month 56 75 95 58 56 59 61
61st month 56 74 93 56 52 58 58
2018
13th month 78 73 92 85 89 84 78
25th month 69 67 85 76 80 75 73
37th month 60 65 84 68 76 65 69
49th month 57 66 82 60 55 62 63
61st month 54 73 93 47 50 50 56
1QFY19
13th month 77 73 92 85 88 83 80
25th month 70 66 85 77 78 75 75
37th month 60 67 85 69 77 68 72
49th month 56 58 80 61 55 63 65
61st month 53 69 94 45 51 48 56
2QFY19
13th month 76 86 92 84 88 82 86
25th month 70 83 87 78 81 76 85
37th month 60 79 85 70 77 68 81
49th month 56 65 80 61 59 64 75
61st month 53 65 95 45 51 47 62
Direct and othersNon-par Non-par (others) ULIP Agency Banca
Exhibit 13: We expect 21-23% operating RoEV and VNB margin of 24-25% for HDFC Life Key metrics and RoEV movement, March fiscal year-ends, 2012-2021E (Rs bn)
Exhibit 14: We expect HDFC Standard Life to deliver overall VNB margin of 24% VNB margins in individual business, March fiscal year-ends, 2016-2021E (Rs bn)
Exhibit 15: HDFC Life will trade at 3.5X EV at our appraisal value-based price target Calculation of appraisal value for HDFC Standard Life, March fiscal year-ends, 2019-2021E (Rs bn)
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
2QFY19: reaffirms scope of outperformance
ADSEZ reported a strong 21% yoy growth in volumes on (1) rebound in crude (Mundra) and
coal (across portfolio) and (2) sustained growth momentum in container (across portfolio). INR
depreciation benefits further boosted port revenue/EBITDA that grew 26/30% yoy. Given the
static market share for ADSEZ in FY2018, 2QFY19 reaffirmed the scope of share gains. More
outperformance would be a function of (1) start of Ennore operations, (2) evacuation concerns
at Dhamra getting relieved and (3) start of operations beyond containers at Kattupalli.
Forex impact and buildup in receivables limit improvement in balance sheet
While a 2.75X net debt to annualized 1HFY19 EBITDA is comforting (happens on a base with
limited SEZ income), we had anticipated a decline in absolute levels. Despite the `30 bn 1HFY19
port EBITDA being >2X capex spent and some part of container JV receivables getting paid
back, gross debt levels increased by `13 bn. Key drivers for this were (1) forex MTM impact,
(2) large increase in other financial assets (have largely related to SEZ income in the past) and
(3) investments in gas assets (would get transferred to Adani-Total JV in 3QFY19).
Higher cost of equity warranted given higher G-Sec yields and uncertainty in port financials
We increase our cost of capital/equity estimate by 130/100 bps to 12.0%/13.5%. Stiffer cost of
equity bakes in (1) increase in 10-year G-Sec yields and (2) uncertainty in forecasting ADSEZ’s
port-based income and EBITDA. On the latter, we note recent instances of restatement of such
metrics, possibly reflecting the complexities associated with a large consolidated portfolio. We
also note the scope of certain non-recurring items such as SEIS income in such metrics.
Cash flow mismatch on forex has a disproportionate impact on EPS, muted impact on SoTP
In our analysis, we assess stiff requirement on retaining forex-related benefits on top-line to
obviate the impact of repayment and servicing of forex debt over all periods of time. Improving
but still low capacity utilization comes in way and may lead to a cash-flow impact when the
US$650 mn bullet repayment happens in CY2020. The impact is disproportionate on near-term
earnings estimates and modest on SoTP—3% cut required at 10% higher ~`80/US$ rate.
Adani Ports and SEZ (ADSEZ) Infrastructure
Outperformance continues. ADSEZ’s good operational results despite evacuation
constraints at Dhamra and impending start of Kattupalli’s port operations beyond
container boost the case for it to outperform the market. Increase in debt levels, partly
driven by forex, is worrying. While we broadly retain our operational estimates (ex-forex),
we still lower SoTP to `390 (from `460) primarily on higher cost of capital to factor in
(2) higher G-Sec yields and (2) volatility in port-level financials. We expect modest
impact of forex movement on our SoTP.
BUY
OCTOBER 24, 2018
RESULT
Coverage view: Attractive
Price (`): 319
Target price (`): 390
BSE-30: 33,847
Aditya Mongia
Ajinkya Bhat
Adani Port and SEZ
Stock data Forecasts/Valuations 2019E 2020E 2021E
52-week range (Rs) (high,low) EPS (Rs) 20.2 22.5 28.8
Revenue growth led by all-round cargo growth. Adani Ports reported 2QFY19
revenues of `26 bn, up 18% when yoy financials are adjusted for port development
income of `5 bn, which was absent in this quarter. Port volumes grew 21% to 52 mn
tons and on half yearly basis, the company crossed the milestone of 100 mn tons for the
first time. Coal volumes grew 35% in the quarter led by resumption of coal imports by
Mundra power plant of Adani Power; crude volumes grew 42% due to higher offtake by
HMEL (unlike maintenance shutdown in 1QFY18) and IOCL. Container volumes continued
their strong double-digit growth at 16% in the quarter.
Another quarter of market share gains. The flagship Mundra port volumes grew 20%
in 2QFY19 while other ports registered even faster growth except Dhamra that continues
to suffer from shortage of rakes for evacuation. Total volume growth of 21% across
ADSEZ portfolio was much higher than 6% growth registered by major ports. Similarly,
container volume growth of 16% across ADSEZ portfolio was higher than 9% container
growth reported by major ports in the quarter. The company has thus continued to gain
market share.
Port EBITDA margin up 100 bps yoy. ADSEZ has once again met its target of achieving
100 bps improvement in 2QFY19 and 1HFY19. Port EBITDA margin thus stood at 70%
led by automation, better cargo mix and sweating of existing capacity.
Comfortable position on forex borrowings. Management maintains that as long as
the company has natural hedge on account of USD-denominated container pricing, it will
continue to prefer forex debt over domestic debt in order to save on interest costs.
Notwithstanding the MTM loss on forex debt, the company’s cumulative forex earnings
are expected to be more than cumulative forex payments (forex debt service + repayments)
in each period of the next 12/24/36/48/60 months. The management considers net debt
to EBITDA level of 3X as the threshold for comfort. Current net debt to EBITDA of 2.75X
continues to be in the comfort zone. The company has also made progress on recovery of
related party receivables such as that from CT3/CT4 JVs for port development/asset
transfer (down to `4.5 bn from `15 bn as of end-FY2018) and that from Adani Power for
coal imports. The management expects to fully receive outstanding balance from
CT3/CT4 JVs by end-FY2019.
Strategy and outlook. The management mentioned that ADSEZ will continue to pursue
strategy of cargo diversification and will try to get greater share of long-term contracts.
The company has guided for SEZ income of `8-10 bn, capex of `23-25 bn and FCF of
`17-20 bn in FY2019. Port EBITDA margin is expected to improve further to 71% by year-
end. Most of the capex will be consumed by expansion of Dhamra, Kattupalli and
construction of Vizhinjam port. The company also mentioned progress on establishment
of new ICDs in the logistics business as well as procurement of 11 rakes to mitigate
shortage for cargo evacuation at Dhamra. The sale and transfer of Dhamra LNG assets to
the new JV with Total SA will be completed by Dec-2018/Jan-2019 and these assets will
be removed out of the ADSEZ portfolio. On the international front, the strategy remains
to pursue greenfield developments in partnership with local players but the management
clarified that there are no concrete proposals under consideration at the moment.
Infrastructure Adani Ports and SEZ
36 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 1: Strong 21% volume growth led by good performance across all cargo classes and across all the port assets Adani Port and SEZ, consolidated - 2QFY19 – reported key numbers (Rs mn)
Exhibit 3: Strong volume growth reported across most of the ports including the largest and flagship Mundra port; Dhamra port
continues to suffer from rake availability which will be mitigated after delivery of company owned rakes by Mar-2019 Quarterly trajectory of volumes of Adani’s port assets, March fiscal year-ends, 1QFY16-2QFY19 (mn tons)
Source: Company, Kotak Institutional Equities
Exhibit 4: Quarter after quarter, ADSEZ and Mundra continue to demonstrate outperformance to Indian ports Volumes handled at major ports in the country and by ADSEZ, March fiscal year-ends, 2QFY19 and 1HFY19
Source: Company, Indian Ports Association, Kotak Institutional Equities
Exhibit 5: Decline in share of coal and increase in share of high-value cargo handling (such as
containers and liquids) has been the sustained theme for the past three years Evolution of cargo handling composition for Adani Ports, March fiscal year-ends, 2015-1HFY19 (%)
Net current assets 62,485 49,636 114,655 73,440 93,899 75,451 80,003
Total application of funds 220,137 276,600 365,390 383,344 393,125 414,824 436,704
Net debt (debt-cash-investments) 111,166 142,613 198,643 178,569 176,336 155,606 173,625
Consolidated
Infrastructure Adani Ports and SEZ
40 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Stiff requirement for Adani Ports to maintain US$ pricing over time
In the exhibit below, we bring out the quantum of the benefits of depreciation on revenues
that ADSEZ would need to retain in order to obviate the impact of such currency movement
on servicing and repayment of debt. While it may be reasonable to assume that 100%
depreciation benefits can be retained in the near term (US$-denominated rate contracts
fixed for a year), shipping lines may end up negotiating hard whenever the rates are due for
revision. Capacity utilization for west coast container terminals is likely to improve in FY2019
though it would still be at weak sub-60% until FY2020E and will thus lower the bargaining
power of port operators.
Our analysis suggests that, depending on the period of cash flow hedge, ADSEZ would need
to retain up to 9% quantum of the recent 14% yoy INR depreciation in its US$-
denominated port handling charges. The analysis takes into account the timing of forex debt
repayments and interest payments. It does not assume any further depreciation in currency
beyond current USD-INR rate of ~`74.
Exhibit 9: ADSEZ needs to retain 9% quantum of the 14% yoy INR depreciation benefits at the top-
line to compensate the cash-flow impact on its forex debt INR depreciation benefit that needs to be retained by ADSEZ to obviate the negate impact on US$-denominated debt
Source: Kotak Institutional Equities estimates
Based on the repayment schedule of the company’s forex debt, FY2023, i.e. 5 years from
now will see a significant cash requirement. In order to meet that cash requirement in
FY2023, assuming INR does not depreciate further, Adani Ports will have to retain 9%
equivalent quantum out of the 14% yoy depreciation of INR vs USD seen in YTD FY2019.
While such benefits can be retained in the short term due to the fixed term of an ongoing
rate contract, shipping lines may drive a hard bargain when the contracts come up for
renewal. In such a scenario, weak capacity utilization of container ports on western coast
will reduce bargaining power of port operators including that of Adani Ports.
9%
0%
2%
4%
6%
8%
10%
12%
14%
1 2 3 4 5 6 7 8 9 10
Number of years considered for cumulative cash flow hedge starting FY2018
Adani Ports and SEZ Infrastructure
KOTAK INSTITUTIONAL EQUITIES RESEARCH 41
Exhibit 10: Capacity utilization will remain weak over the next two years and will reduce bargaining
power of port operators in tariff negotiations with shipping lines Capacity utilization for west coast container terminals (%)
Source: Kotak Institutional Equities estimates
The evidence so far suggests that there has already been a modest pass-through of INR
depreciation benefits by port operators to shipping lines. While INR has depreciated ~14%
yoy, the INR-denominated tariffs for a large shipping line have gone up by only 4-7%
indicating that port operators have likely reduced the dollar pricing.
Exhibit 11: There has already been a modest pass-through of INR depreciation on pricing by ports Movement in INR denominated terminal handling charges at key west coast terminals for a large shipping line
Notes:
(a) The above trend may belie the strength of tariffs at ports if it factors in a discount offered by shipping lines.
(b) Nhava Sheva – GTI has shown a higher tariff increase of 18% during this period. However, this increase
has been largely a result of commissioning of PSA’s container terminal at JNPT and subsequent one-time
upward revision of tariff at all the JNPT terminals.
Source: Industry, Kotak Institutional Equities
Cash-flow mismatch unlikely to impact SoTP
Below we put a sensitivity of SoTP and FY2020E EPS to the end-FY2019 US$/INR rate and to
the extent of related INR depreciation benefits that ADSEZ would be able to retain. Our
analysis suggests a limited 3% impact on SoTP for a 10% further depreciation in currency.
The impact is much more for near-term EPS estimates given the Ind-AS requirement to book
MTM impact on all forex debt issued after April 1, 2016. Out of ~US$2 bn of forex debt of
ADSEZ, 50% was borrowed after April 1, 2016.
80.976.9 75.2
67.7
55.059.8 59.3
0
20
40
60
80
100
2014 2015 2016 2017 2018 2019E 2020E
Capacity utilization for west coast container terminals (%)
7%
5%
NM
4%
0%
1%
2%
3%
4%
5%
6%
7%
8%
Mundra Hazira Nhava Sheva - GTI Pipavav
Yoy change in port handling charges as quoted by a large shipping line
Infrastructure Adani Ports and SEZ
42 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 12: USD-INR rate does not have a meaningful impact on ADSEZ's SoTP even though it can
materially alter near-term earnings estimates due to vagaries of Ind-AS accounting Impact of USD-INR rate and the realization benefits of INR depreciation that ADSEZ can retain on SoTP and FY2020E EPS
Total of key ports 131 149 153 171 179 201 231 257
Infrastructure Adani Ports and SEZ
44 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Revision in SoTP largely on account of a higher cost of capital
We increase our cost of capital/equity estimate by 130/100 bps to 12.0%/13.5%. Stiffer cost
of equity bakes in (1) increase in ten year G-Sec yields and (2) uncertainty in forecasting
ADSEZ’s port-based income and EBITDA. On the latter, we note recent instances of
restatement of such metrics, possibly reflecting the complexities associated with
consolidating a large portfolio of assets having business dependencies.
We also note the scope of certain non-recurring items within port income/EBITDA. For
instance, there is `4 bn asset related to export incentives and other receivables, a part of
which may be SEIS income included in the `73 bn port revenues and 70% port EBITDA
margin reported in FY2018. Another source of uncertainty in estimating port financials
relates to the income/PAT from container JVs that would not reflect in reported financials
due to Ind AS-related restrictions.
Exhibit 15: Restatements of previously announced port revenues and EBITDA make these difficult to
forecast Restatement seen in ADSEZ's announced port income for select few quarters, March fiscal year-ends (Rs mn)
Source: Company, Kotak Institutional Equities
14,500
15,000
15,500
16,000
16,500
17,000
17,500
18,000
18,500
Original reported value Implied from nextquarterly result
Implied from nextyear's quarterly result
Implied from nextyear's half yearly result
Port revenue
1QFY17 2QFY17 1QFY18
10,500
11,000
11,500
12,000
12,500
13,000
Original reported value Implied from nextquarterly result
Implied from next year'squarterly result
Implied from next year'shalf yearly result
Port EBITDA
1QFY17 2QFY17 1QFY18
Adani Ports and SEZ Infrastructure
KOTAK INSTITUTIONAL EQUITIES RESEARCH 45
Exhibit 16: We revise down our SoTP to Rs390 from Rs460 largely on change in cost of capital End-Sep-2019E DCF-based SoTP valuation of Adani Ports & SEZ
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Protection business at 7.7% of APE; comparable VNB growth at 16% yoy
ICICI Prudential Life continued to focus on the protection business (7.7% of APE in 2QFY19,
up 375 bps yoy but down 50 bps qoq). APE growth improved to 4% yoy versus 18% decline in
1QFY19. Expansion in VNB margin to 17.5% led to 41% yoy growth in VNB to `3.5 bn; this
was largely due to higher tax rate assumptions in 2QFY18—the company had factored in
nominal tax rate in 2QFY18 as compared to the effective tax rate in 2QFY19; assuming
comparable tax rates and VNB margin of 16% in 2QFY18, VNB growth was about 16% yoy.
Retain BUY with TP of `475 (from `500)
Tweaking down growth forecasts. We are revising down our EVOP forecasts to factor
lower APE growth in FY2019E and higher margins largely due to increasing share of the
protection business. The company struggled on APE growth in 1QFY19 but is gradually
picking up. We expect the APE trajectory to improve further over the next few quarters.
We expect our margin expansion thesis to play out. We expect VNB margins at 18.5%
in FY2020E from 17.5% in 1HFY19 due to the following: (1) Increasing share of the protection
business—up to 7.9% in 1HFY18, secular growth from 2.7% in FY2016; the company has
seen growth across all three segments of protection, viz. individual, group and credit life.
(2) Improvement in persistency assumptions—current experience for 13th month bucket is
running at 250-270 bps higher than its assumptions. With improvement in persistency across
buckets, we find scope for upgrade in persistency assumptions by March 2019.
Two factors lead to downgrade in our EV forecasts. (1) Lower-than-expected growth
and (2) large investment variance due to MTM hit on its bond portfolio (about 1.5% of
opening EV). About 100 bps rise in interest rate reduces its EV by 2.1%.
Business trajectory to remain strong, retain BUY. Post the revision in estimates, we
expect the company to deliver 19% EVOP CAGR during FY2017-21E and 19% medium-term
operating RoEV. At our TP, the company will trade at 2.8X EV and 17X EVOP FY2020E.
Lower margins in the protection business due to heightened competition and increase in
surrenders due to prolonged weakness in capital markets are key risks.
ICICI Prudential Life (IPRU) NBFCs
Flat quarter. ICICI Prudential Life continued to focus on the protection business (7.7%
of its APE in 2QFY19) driving about 17.5% VNB margin even as premium growth was
muted; comparable VNB was up 16% yoy. Even as MTM losses hit its EV growth and
expenses ratios were a tad higher, secular margin expansion from the protection
business coupled with scope of expansion in margins due to better-than expected
persistency will support 19% EVOP CAGR during FY2017-21E. This drives our bullish
view on the stock. Retain BUY with TP of `475 (down from `500).
BUY
OCTOBER 24, 2018
RESULT
Coverage view: Neutral
Price (`): 324
Target price (`): 475
BSE-30: 33,847
QUICK NUMBERS
VNB margin of
17.5% in 2QFY19
APE up 6% yoy in
2QFY19
2% EV growth in
1HFY19
Nischint Chawathe
M B Mahesh CFA
Dipanjan Ghosh
Shrey Singh
ICICI Prudential Life
Stock data Forecasts/Valuations 2019E 2020E 2021E
52-week range (Rs) (high,low) EPS (Rs) 8.9 10.3 12.3
IEV 172.1 NA 187.9 NA 192.5 NA 172.1 192.5 11.8 139.4 161.8 187.9 16.1
NBFCs ICICI Prudential Life
50 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 3: ICICI Prudential Life will trade at 2.8X EV at our appraisal value-based target price Calculation of appraisal value for ICICI Prudential Life, March fiscal year-ends, 2020-2021E
Source: Kotak Institutional Equities estimates
Exhibit 4: ICICI Prudential Life trades at 1.9X price/EV FY2020E Valuation comparison across life insurance companies, March fiscal year-ends, 2018-2021E
Exhibit 8: ULIPs down 560 bps yoy to 84% while protection moved up 375 bps Product mix, March fiscal year ends, 2016-2018, 2QFY18-2QFY19 (%)
Source: Company
Exhibit 9: Share of bancassurance rises 280 bps yoy and 100 bps qoq to 56.7% of APE Channel-wise APE, March fiscal year ends, 2015-2018, 2QFY18-2QFY19 (%)
Exhibit 7: We expect protection business at 8-11% of APE Contribution of APE and VNB of the pure protection business, March fiscal year-ends, 2016-2021E
Exhibit 10: Share of ULIPs has dropped across most channels Channel-wise product mix, March fiscal year ends, 2015-2018 (%)
Source: Company
Exhibit 11: Persistency ratio improvement at ICICI Life across most buckets Retail persistency (including single premium), March fiscal year ends, 2014-2018, 5MFY19 (%)
Source: Company
Exhibit 12: Persistency ratio improved across most channels in FY2018 Channel-wise persistency, March fiscal year ends, 2014-2018 (%)
Source: Company
2015 2016 2017 2018
Bancassurance
ULIP 88.4 88.9 92.1 89.8
Par 10.0 9.1 5.3 7.3
Non-par 0.1 — 0.4 0.2
Protection 1.5 2.0 2.2 2.7
Agency
ULIP 78.5 76.4 79.5 81.8
Par 19.2 19.6 14.2 13.5
Non-par 1.0 0.8 2.0 0.4
Protection 1.3 3.2 4.3 4.3
Direct
ULIP 90.5 84.3 85.3 88.0
Par 2.8 7.7 5.0 4.3
Non-par 4.7 3.6 3.2 2.4
Protection 2.0 4.4 6.5 5.3
Corporate agents and brokers
ULIP 62.0 47.4 46.5 36.8
Par 2.4 0.5 0.4 0.5
Non-par 34.4 49.0 44.1 49.9
Protection 1.2 3.1 9.0 12.8
Persistency (%) 2014 2015 2016 2017 2018 5MFY19
13th month 71.5 79.0 82.4 85.7 86.8 86.3
25th month 68.4 65.9 71.2 73.9 78.3 79.4
37th month 57.3 64.3 61.6 66.8 68.8 69.3
49th month 20.3 54.4 62.2 59.3 64.2 65.1
61st month 12.7 14.5 46.0 56.2 54.5 55.7
2014 2015 2016 2017 2018 2014 2015 2016 2017 2018
Agency Bancassurance
13th
month 70 78 85 88 90 75 80 81 84 85
25th
month 65 63 69 NA NA 72 70 72 NA NA
37th
month 45 60 58 NA NA 76 68 65 NA NA
49th
month 20 42 58 56 59 18 75 66 63 65
61st
month 12 15 35 NA NA 13 12 64 NA NA
Corporate agency Direct sales
13th
month 62 71 80 80 89 75 86 88 88 88
25th
month 71 59 66 66 NA 70 70 79 79 NA
37th
month 42 68 56 56 NA 47 66 65 65 NA
49th
month 20 37 67 67 58 31 42 64 64 63
61st
month 14 14 30 30 NA 13 24 34 34 NA
ICICI Prudential Life NBFCs
KOTAK INSTITUTIONAL EQUITIES RESEARCH 53
Exhibit 13: Cost to average AUM ratio up ~25 bps yoy March fiscal year ends, 2QFY18-2QFY19 (Rs mn)
Source: Company
Exhibit 14: Debt maintains share in AUM mix yoy at 53% March fiscal year ends, 2016-2018, 2QFY18-2QFY19 (Rs bn)
Source: Company
Exhibit 15: Net individual agents continue to ramp up in scale Individual agents, March fiscal year ends, 2014-2018, 1QFY19-2QFY19 (# ‘000)
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
3QCY18 earnings—weak quarter due to increase in costs, muted realization
Ambuja’s standalone earnings were lower than our estimates—company reported revenues of
Rs26.1 bn (+13% yoy, -13% qoq), EBITDA of Rs3.5 bn (+1% yoy, -42% qoq) and net-income
of Rs1.8 bn (-34% yoy, -64% qoq), against our estimate of Rs25.5 bn, Rs5.2 bn and Rs2.9 bn,
respectively. The earnings miss was due to muted realizations (Rs4,790/ton, +1% qoq) and
increase in costs, especially other expenses—EBITDA/ton declined 33% qoq to Rs656/ton
(-7% yoy). We note that both ACC, Ambuja 3QCY18 earnings were weak relative to a strong
2QCY18 earnings print which was aided by improved realizations and contained costs.
Ambuja reported 2% qoq increase in costs (per ton) to Rs3,644/ ton (+4% yoy) largely due to
an increase in other expenses (Exhibit 4). Costs increased due to (1) 24% qoq increase in other
expenses to Rs917/ton (+5% yoy) due to higher packaging costs, annual maintenance costs and
weak seasonal volumes, partially offset by (2) 2-3% qoq decline in energy, logistics costs—the
company’s reported energy costs declined by 2% qoq compared to an increase reported by
peers.
Consolidated earnings—both standalone and ACC results were weak versus a strong 2Q
Ambuja reported consolidated revenues of Rs60.2 bn (+12% yoy, -12% qoq), EBITDA of Rs8 bn
(+4% yoy, -36% qoq) and net-income of Rs2.9 bn (+10% yoy, -45% qoq). Consolidated sales
volumes increased 9% yoy to 12 mn tons (-12% qoq) while EBITDA/ton declined 27% qoq to
Rs670/ton (-5% yoy). EBITDA/ton declined as cost (per ton) increased 6% qoq to Rs4,340/ ton
(+4% yoy) due to higher energy costs and other expenses
We maintain REDUCE rating with revised target price of Rs195 (Rs210 earlier)
In 9MCY18, ACEM’s consolidated volumes increased by 7% yoy to 39 mn tons as the plant
utilization improved to 82%. ACC at present is not investing in new projects while ACEM is
commissioning a 1.7 mtpa capacity in Rajasthan (by 2020). We believe the company’s volume
growth will be constrained in 1-2 years unless it drives more capacity additions. We have cut
our EBITDA estimate by 5-7% for CY2018-20E due to weak prices, cost pressures. Our target
price is revised to Rs195 (Rs210 earlier). We maintain REDUCE rating on expensive valuations.
The stock trades at 12X/10X CY2018-19E EBITDA (attributable).
Ambuja Cements (ACEM) Cement
Earnings disappoint. ACEM’s earnings were lower than our estimates—standalone
EBITDA declined 42% qoq to Rs3.6 bn (+1% yoy) due to 33% qoq decline in
EBITDA/ton to Rs660 on the back of cost increase, muted realization. ACEM as well as
ACC saw the improved cost performance of 2QCY18 weaken in 3Q resulting in 27%
qoq decline in consolidated EBITDA/ton. We cut our EBITDA estimate by 5-7% for
CY2018-20E and target price to Rs195 (Rs210 earlier). Maintain REDUCE rating on
expensive valuations—stock trades at 12X/10X CY2018/19E EBITDA (attributable).
REDUCE
OCTOBER 24, 2018
RESULT
Coverage view: Cautious
Price (`): 201
Target price (`): 195
BSE-30: 33,847
Abhishek Poddar
Murtuza Arsiwalla
Prayatn Mahajan
Ambuja Cements
Stock data Forecasts/Valuations 2019E 2020E 2021E
52-week range (Rs) (high,low) EPS (Rs) 7.7 9.7 11.3
Exhibit 3: ACC's volumes increased 10% yoy in 3QCY18; earnings miss was due to weaker-than-expected realizations and higher fuel costs Quarterly results for ACC Limited (Standalone), December year-ends (Rs mn)
Exhibit 4: Ambuja's EBITDA/ton declined 7% yoy due to subdued realization and rising energy, logistics and other costs Major cost item movement (as reported) for Ambuja cements; comparison of energy costs with Ultratech, ACC, 2016-2018 (Rs/ton)
Exhibit 7: Our earnings assumptions factor 6-8% yoy growth in volumes and improved realizations Key assumptions in the profit model for Ambuja Cement, December year-ends, 2016-20E (Rs mn)
Exhibit 8: We lower our fair value to Rs195/share (Rs210 earlier) due to cut in earnings estimate Fair value estimate of Ambuja Cement, March 2020E (Rs/share)
Note: (1) Ambuja’s penalty includes 50% share of ACC’s penalty post acquisition of majority stake.
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Strong quarter aided by strong volume growth; challenging times ahead in 2HFY19
TVS Motor reported net profit of `2.1 bn (-1 yoy), which was 5% below our estimates, in
2QFY19 due to lower other income and higher-than-expected interest and depreciation
expenses. Net sales of `49.9 bn (+23% yoy) in 2QFY19 were 1.9% above our estimates. The
company has changed accounting for booking interest income related to income from customer
contracts such as advance bookings and dealer advances, which are now classified under
operational income. Other income pertaining to interest income was `100 mn in 2QFY19;
adjusted for this, income revenue was higher than our estimates due to a better product mix
and higher-than-expected export realization.
Volume growth was 14.7% yoy in 2QFY19. Domestic volume growth was 11% yoy while
export volumes grew by 35.2% yoy. Gross margin came in at 24.2% in 2QFY19 (-260 bps yoy),
which was 40 bps below our estimates possibly due to the impact of increase in raw material
prices. Staff costs rose by 11% in 2QFY19 led by increase in minimum wages by Karnataka and
Tamil Nadu. Other expenses increased by only 5% yoy due to lower marketing expenses, which
led to operating leverage benefit. EBITDA margin was 8.6% in 2QFY19 (-30 bps yoy, +90 bps
qoq), which was in line with our estimates.
TVS’ domestic market share improves by 210 bps qoq in 2QFY19
Market share of TVS in the domestic two-wheeler industry was 15.0% in 2QFY19 (+210 bps
qoq) led by 400 bps qoq increase in market share in the scooter segment. Ntorq scooters have
been received well by customers and helped the company gain market share. Hero Motocorp
has launched Destiny 125 scooter to target Ntorq and Activa 125cc in October 2018. We
expect competitive intensity to escalate in the 125cc scooter segment.
Cut FY2019-21E standalone EPS estimates by 2-3%; reiterate SELL on expensive valuations
We have cut our FY2019-21E EPS estimates by 2-3% primarily due to increase in depreciation
and interest expenses. The stock is extremely expensive at 30X FY2020E EPS even after building
in 12% EPS CAGR over FY2018-21E. Reiterate SELL rating; SoTP-based target price is
unchanged at `350.
TVS Motor (TVSL) Automobiles
Good quarter but festive season off to a weak start. TVS reported strong 2QFY19
results as EBITDA grew by 18% yoy. EBITDA margin improved to 8.6% in 2QFY19 (+90
bps qoq) led by operating leverage benefit. We expect domestic two-wheeler industry
growth to slow down in 2HFY19 as the festive season has started off on a weak note.
We believe that valuations at 30X FY2020E EPS are unjustified as the company will find
it very difficult to gain market share in the two-wheeler industry. Double-digit EBITDA
margin is unlikely in FY2019-20E. SELL stays.
SELL
OCTOBER 24, 2018
RESULT
Coverage view: Neutral
Price (`): 535
Target price (`): 350
BSE-30: 33,847
Hitesh Goel
Nishit Jalan
TVS Motor
Stock data Forecasts/Valuations 2019E 2020E 2021E
52-week range (Rs) (high,low) EPS (Rs) 14.8 17.1 19.6
Slow start to festive season. The company highlighted that the festive season kicked off
to a slow start given increase in vehicle prices due to insurance cost and confusion around
the same. The company is hopeful of demand recovery going ahead and expects 10%
volume growth for the industry in FY2019E. We are more cautious on industry growth
outlook and expect 5% CAGR for industry growth over FY2018-21E. The company will
look to gain share in the domestic market led by success of new launches and continued
strong traction in the scooters segment. Dealer inventory levels are around 4-5 weeks.
Price increases and cost pressures. The company had taken another 0.5% price
increase in 1QFY19, 0.6% in 2QFY19 and another 40-50 bps in October 2018. But this
will be offset by further increase in commodity costs. The company expects RM cost to
inch higher in 2HFY18; import content for the company is around 14% of overall RM cost
currently, which it is targeting to reduce to 10% by end-FY2019. The company will look
to further reduce costs through value engineering, localization, platform consolidation,
other cost-reduction efforts (lower marketing spend to sales), etc. to improve profitability
going ahead.
Capex and investments in subsidiaries. The company increased its FY2019E capex
guidance to ₹8 bn (from `7 bn earlier); the capex will be largely incurred for product
development and upgrading products to meet new emission norms. The company has a
manufacturing capacity of 4.8 mn units; therefore, there is no need to invest on capacity
expansion next year. TVS has invested `553 mn in subsidiaries this quarter, which
includes `300 mn in TVS Credit Services and `253 mn in TVS Motor Singapore in 2QFY19
and `1.1 bn in 1HFY19.
Performance of TVS Credit Services. The loan book of TVS Credit Services (engaged in
financing of vehicles) was `70 bn at the end of September 2018 (`60 bn in March 2018);
profit before tax was `0.9 bn in 1HFY19 (`1.7 bn in FY2018). Net profit was `0.3 bn in
1QFY19 and `0.5 bn in 1HFY19 (`1.1 bn in FY2018). Networth of TVS Credit Services
was `8.9 bn in FY2018. TVS Motors holds around 85% stake in TVS Motor Credit.
Other key points. (1) Export revenues were `11.4 bn in 2QFY19 and export realization
(USD:INR) was 69.5 in 2QFY19 compared to 67 in 1QFY19 and (2) finance penetration for
the company is around 45%. TVS Credit accounts for 50% of financed vehicles of TVS
Motor.
TVS Motor Automobiles
KOTAK INSTITUTIONAL EQUITIES RESEARCH 65
Exhibit 1: 2QFY19 EBITDA was marginally ahead of our estimates but PAT was 5% below our estimates on lower other income TVS Motor, standalone interim results, March fiscal year-ends (₹ mn)
Exhibit 2: TVS’ market share in domestic two-wheeler industry improved in 2QFY19 Domestic two-wheeler industry mix and TVS’ market share across segments, March fiscal year-ends, 2010-19 (%)
TVS Motor Services 50 Valued at 2X equity invested by TVS Motor (parent entity)
Total value per share 343
Target price 350
TVS Motor Automobiles
KOTAK INSTITUTIONAL EQUITIES RESEARCH 67
Exhibit 5: We expect company’s volumes to grow at 8% CAGR over FY2018-21E TVS Motor, volume breakdown across segments, March fiscal year-ends, 2010-21E (units)
Exhibit 6: We expect overall revenues to grow at 14% CAGR over FY2018-21E TVS Motor, revenue breakdown across segments, March fiscal year-ends, 2010-21E (` mn, %)
Exhibit 7: We expect standalone net profit to grow at 12% CAGR over FY2018-21E TVS Motor, standalone financial summary, March fiscal year-ends, 2012-21E (` mn)
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Strong performance in residential business, steady metrics for annuity portfolio
Oberoi Realty had operating cash flows of Rs452 mn for 2QFY19 compared to cash flows of
Rs42 mn in 2QFY18 and negative cash flow of Rs2 bn for FY2018. Oberoi Realty continued to
report a robust performance with sales of Rs5.7 bn (+61% yoy) and collections of Rs5.6 bn
(+287% yoy) in 2QFY19. The operational performance kept up the momentum seen in 1QFY19
which cumulatively makes it the best performance for the company since the launch of Oberoi
Sky City in 3QFY16. Earnings from the rental business also grew 36% yoy to Rs782 mn owing
to higher occupancy of 63% at Commerz II, while the hotel business reported 10% yoy growth
in revenues at Rs321 mn aided by increase in RevPAR to Rs7,055/day from Rs6,416/day in
2QFY18.On a consolidated basis, Oberoi reported revenues of Rs5.9 bn (+95% yoy) and EBITDA
of Rs2.9 bn (+81% yoy) that yielded a PAT of Rs2.1 bn (+106% yoy). Lower-than-estimated
revenue was on account of lower revenue recognition in the residential business. Residential
business saw revenues of Rs4.7 bn with margins of 45%, while the rental business as well as
hotel segment saw margin expansion.
Residential business was supported by strong sales at Sky City, Exquisite and Three Sixty West
Oberoi Realty maintained the sales momentum first seen in 1QFY19, with sales of Rs5.7 bn
comprising among others (1) Rs2.2 bn (+194% yoy) at Three Sixty West, (2) Rs1.3 bn (+48%
yoy) at Oberoi Sky City, and (3) Rs1.1 bn (+7% yoy) at Esquire. Growth in collections should
also be seen in the context of the transition phase due to implementation of RERA and GST in
2QFY18. Blended realizations at Rs23,781/sq. ft were up 17% yoy owing to the higher
contribution of Three Sixty West in the overall sales mix. On an asset basis, prices firmed up at
Oberoi Sky City as well as Esquire, though sales at lower floors saw prices at Three Sixty West
drop to Rs43,402/sq. ft. On a reported basis (Ex-TSW), margins for the residential business
narrowed slightly to 45% compared to 50% in the preceding periods.
Oberoi has a liquid balance sheet well placed to capitalize on opportunities in the sector
Improved execution at the larger under construction projects, new launch activity at extant land
parcels and conclusion of the acquisition at Thane are likely triggers for Oberoi Realty going into
FY2019.
Oberoi Realty (OBER) Real Estate
Sales momentum maintained. Oberoi Realty maintained the pick-up in sales since
1QFY19, with sales of Rs5.7 bn in 2QFY19 with healthy growth at Oberoi Skycity and
Three Sixty West. Annuity portfolio will see a further step-up in earnings as Commerz II
will improve occupancy to 97% giving further stability to an already liquid balance
sheet. Maintain BUY rating though cut target price to Rs460/share (from Rs560/share)
as we prune realization estimates and prolong sales cycle across the portfolio while
eliminating premium to NAV on future asset build-up.
BUY
OCTOBER 24, 2018
RESULT
Coverage view: Neutral
Price (`): 395
Target price (`): 460
BSE-30: 33,847
Murtuza Arsiwalla
Samrat Verma
Oberoi Realty
Stock data Forecasts/Valuations 2019E 2020E 2021E
52-week range (Rs) (high,low) EPS (Rs) 46.4 34.1 56.7
Improving room rates for the hotel property as well as higher occupancy at Commerz II will
further supplement the contribution from the investment portfolio, while conclusion of
construction at TSW coupled with re-imbursement of construction cost (with interest) will
curtail incremental cash drain for the project. We have revised our target price to
Rs460/share (from Rs560/share) primarily as we remove option value for growth in the
current environment, as well as moderate sales and pricing assumptions.
Commerz II to hit 97% occupancy in 3QFY19E
Earnings from commercial and hospitality business remained stable as the company reported
revenues of Rs782 mn (+36% yoy) and Rs321 mn (+10% yoy) respectively. Operations at
Oberoi mall reported improvement in margins due to renewal of lease contracts at higher
rates even though occupancy declined by 182 bps yoy. Decline in revenues for Commerz I
was due to (1) decline in rentals by 5% yoy to Rs137 per sq. ft (Rs143 per sq. ft in 1QFY19)
and (2) occupancy by 440 bps to 77.7% in 2QFY19.
Commerz II (Phase 1) currently operating at lower occupancy of 63% is likely to see an
increase to 97% by 3QFY19E as the company leased additional space of 0.24 mn sq. ft
during the quarter.
In the hospitality segment, revenues and EBITDA at Westin Hotel increased to Rs321 mn
(+10% yoy) and Rs 107 mn (14% yoy) respectively. Occupancy improved to 81% in 2QFY19
(78% in 2QFY18) along with improvement in ARR to Rs8,715 per day from Rs8,224 per day
in 2QFY18.
Liquid balance sheet, completed projects places Oberoi ahead of peers
Reinforcing its view highlighted earlier, Oberoi’s management expressed relief on the recent
credit-crisis in the sector, that it believes will bring a shift towards larger organized
developers. As per management, a credit crisis by local developers was long anticipated as
they piled on debt to buy land parcels with less definite plans to monetize the same. Such a
situation is likely to work in Oberoi’s favor as land parcels would now be available at the
“right” price as there would be fewer takers for the same.
According to the management, there is little or no finished inventory available with the
unorganized developers (in Mumbai region). As for Oberoi, the company has largely been
reliant on its cash flows for development of new projects and as such is unlikely to face any
delays on part of credit availability.
Oberoi and the growth path going forward
Oberoi, in-line with its prudent cash management policy, has slowly started to build up its
annuity portfolio. Upcoming mall in Borivali and Worli are likely to provide annual cash flows
of Rs 3 bn and Rs 3.5 bn respectively and construction for the same is to commence shortly.
These malls are expected to come up at a cost of Rs4,000 psf (on GLA basis).
The company has currently released Towers A-D for sale in Sky City and is constructing
Tower E. Construction at towers F-H is to commence post sales completion at Towers A-D.
With 97% of space at Commerz II leased out, Oberoi is likely to start construction of
Commerz III.
As per management, sales at Three Sixty West are likely to pick up (current inventory of 150
flats) as the company would release higher floors (above 48th
) for sale. All payments for land
parcel in Thane are now complete and a project launch is expected in 4QFY19 or early
1QFY20.
Real Estate Oberoi Realty
72 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 1: Oberoi continues to maintain the momentum on sales as well as collections in 2QFY19 Cash collections for Oberoi, March fiscal year-ends,1QFY17-2QFY19 (Rs mn)
Source: Company, Kotak Institutional Equities
Exhibit 2: Strong sales momentum at Goregaon, Mulund and Worli Oberoi: Select details from sales, collections, March fiscal year-ends, 2QFY15 - 2QFY19
Exhibit 4: Strong growth in revenue for residential business, margin expansion in hotels and rentals Segment-wise quarterly performance for Oberoi, March fiscal year-ends (Rs mn)
Exhibit 5: Operating cash flow remained low despite strong collections due to construction spend and payment of TDR Consolidated cash flows for Oberoi Realty, 1QFY17-2QFY19 (Rs mn)
Exhibit 6: Stable earnings from remaining rental assets; improved occupancy at Commerz II to reflect in earnings from 3QFY19 Quarterly occupancy and rentals from investment properties, March fiscal year-ends, 2017-19 (%, Rs per sq. ft)
Source: Company, Kotak Institutional Equities
Exhibit 7: Westin has been operating at high occupancy but is yet to see improvement in room rates Quarterly details of occupancy and room rates, March fiscal year-ends, 2017-18 (%.Rs per day)
Source: Company, Kotak Institutional Equities
Exhibit 8: Oberoi Realty, change in estimates, March fiscal year-ends; 2019-21E
Exhibit 9: Nearly 90% of value from visible projects Composition of NAV for Oberoi Realty, March 2020E (Rs mn)
Source: Kotak Institutional Equities estimates
Exhibit 10: Four projects to hit revenue recognition in FY2019 Oberoi: Profit model, balance sheet, cash flow model, March fiscal year-ends, 2016-2021E (Rs mn)
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Upgrade to ADD on attractive valuations; stock trades at 12X FY2020E earnings
We have been negative on HCLT’s business model for a fairly long time. These concerns emanate
from single-service line dependence (IMS) for growth, underinvested applications portfolio and
of late capital allocation. The concerns have not abated. In fact, slowing organic growth and
high acquisition appetite make the current EBIT margin guidance band of 19.5-20.5%
unsustainable (our FY2020-21E EBIT margin forecast stands at 18.5-19%). However, our
concerns are adequately captured in the stock price underperformance; in fact, the stock has
barely moved in the past 12 months despite sector-wide benefits from rupee depreciation and
acceleration in growth. The stock now trades at attractive12X FY2020E earnings. This combined
with good deal wins and likely pickup in growth rates in IMS in the near term creates an
opportunity to generate reasonable returns. Our EPS estimates and target price of `1,100
remain unchanged. Upgrade to ADD valuing the stock at 14X September 2020E earnings.
Results in line; IMS growth higher than earlier quarter
HCLT reported constant-currency revenue growth of 3%, in line with our estimate. Revenues
include ~US$21 mn contribution from Actian Corporation and some contribution from IP acquired
in the previous quarter. Organic constant-currency revenue growth rate stood below 2%.
Revenue growth in IMS picked up and grew 2.5% sequentially and 4.4% yoy. Application
services was weak and grew at modest 0.4% qoq and 1.8% yoy. EBIT margin of 19.9% increased
20 bps qoq on the back of rupee depreciation (+90 bps) and productivity improvements (+80
bps), offset to some extent by wage revision (-70 bps), higher SG&A (-50 bps) and other
operational factors (-30 bps). Net profit of `25.4 bn grew 5.7% qoq and 16.1% yoy and was
ahead of our estimate due to higher-than-expected other income and lower-than-expected tax
rate.
Revenue growth guidance scaled up to mid-point 9.5-11.5% range
Management is confident of a strong 2H as some of the large IMS deals (such as Nokia) flow
through revenues. Guidance implies 3% revenue CQGR over the next two quarters. Management
indicated that organic revenue growth contribution in FY2019 will be higher in the overall growth
composition compared to the assumption at the beginning of the year. The company has
retained EBIT margin guidance band of 19.5-20.5% and expects better EBIT margin in 2HFY19.
HCL Technologies (HCLT) Technology
Upgrade on attractive valuations. We upgrade HCLT to ADD from REDUCE on
attractive valuations with the stock trading at 12X FY2020E earnings. Our structural
concerns on the business model persist—continued deflationary pressure in IMS,
underinvestment in digital and questionable capital allocation. However, these concerns
are captured in the steep stock price underperformance. Reasonable deal wins and
likely step-up in organic revenue growth in the near term are comforting. We value
HCLT at 14X September 2020E earnings. Target price and EPS remain unchanged.
ADD
OCTOBER 24, 2018
RESULT, CHANGE IN RECO.
Coverage view: Cautious
Price (`): 952
Target price (`): 1,100
BSE-30: 33,847
Kawaljeet Saluja
Sathishkumar S
HCL Technologies
Stock data Forecasts/Valuations 2019E 2020E 2021E
52-week range (Rs) (high,low) EPS (Rs) 73.6 77.7 81.2
Exhibit 7: Weak growth in application services' revenues for past 6 years
Source: Company, Kotak Institutional Equities
Exhibit 8: HCLT's attrition rate trend
Source: Company, Kotak Institutional Equities
31.4 33.7
16.5
6.2 5.1
7.7 5.5 5.9
4.4
21.5
31.1
17.1
14.1 14.4 15.1
11.6 13.7
10.5
0
5
10
15
20
25
30
35
40
2010 2011 2012 2013 2014 2015 2016 2017 2018
Application services revenue growth (%) Total revenue growth (%)
25.2
10
15
20
25
30
35
40
Sep
-10
Mar-
11
Sep
-11
Mar-
12
Sep
-12
Mar-
13
Sep
-13
Mar-
14
Sep
-14
Mar-
15
Sep
-15
Mar-
16
Sep
-16
Mar-
17
Sep
-17
Mar-
18
Sep
-18
Consolidated attrition (%, quarterly annualized)
HCL Technologies Technology
KOTAK INSTITUTIONAL EQUITIES RESEARCH 83
Exhibit 9: Trends in segmental EBIT margins (%)
Source: Company, Kotak Institutional Equities
Exhibit 10: Trend in EBIT margin
Source: Company, Kotak Institutional Equities
20 21
12
5
10
15
20
25
30
Dec-
13
Mar-
14
Jun-1
4
Sep
-14
Dec-
14
Mar-
15
Jun-1
5
Sep
-15
Dec-
15
Mar-
16
Jun-1
6
Sep
-16
Dec-
16
Mar-
17
Jun-1
7
Sep
-17
Dec-
17
Mar-
18
Jun-1
8
Sep
-18
IMS Software services BPO
19.9
5
10
15
20
25
Sep
-11
Mar-
12
Sep
-12
Mar-
13
Sep
-13
Mar-
14
Sep
-14
Mar-
15
Sep
-15
Mar-
16
Sep
-16
Mar-
17
Sep
-17
Mar-
18
Sep
-18
EBIT margins (%)
Technology HCL Technologies
84 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 11: Acquisitions and investments announced by HCL Tech in the past 40 months
Source: Company, Kotak Institutional Equities
Exhibit 12: HCLT's SG&A expenses as % of revenues have declined considerably over the years
Source: Company, Kotak Institutional Equities
Date Target Country Business Description Consideration (mn) Sales (mn)
HCL Technologies
1 Jun-18 H&D International Group Germany Integrated IT and engineering service provider in German automotive industry $35.0 $86.3
2 Jun-18 IP deal NA IP partnership with undisclosed tech firm $177.0 NA
3 Apr-18 Actian Corporation USHybrid data management, analytics and integration company. HCLT will own 80% of the company
with 19.5% with a private equity player$330.0 $107.1
4 Apr-18 C3i Solutions (Telerx Marketing, Inc.) US Multi-channel customer engagement services for the life sciences and CPG vertials $65.0 $199.0
5 Jan-18 3 IP partnerships US 3 IP partnerships- One with IBM, one with DXC and one with undisclosed global tech firm $300.0 $105.0
6 Oct-17 Strategic IP partnership with IBM (6) US Extended IP partnership to include Notes, Domino, Smart Cloud Notes, Verse and Sametime products $60.0 $30.0
7 Sep-17 Datawave UK Data management platform NA NA
8 Jul-17 Strategic IP partnership with IBM (5) US Extended IP partnership to cover marketing automation area $140.0 $30-35
9 Apr-17 Urban Fulfillment Services LLC US Mortgage BPO provider wih 350 resources in US $30.0 $48.0
10 Apr-17 Strategic IP partnership with IBM (4) US Extended partnership to cover Information management and Database management systems $80.0 ~$25
11 Jan-17 Strategic IP partnership with IBM (3) USExtended partnership to cover Application security, B2B data transformation, testing automation and
Mainframe management tools$155.0 $50.0
12 Oct-16 Strategic IP partnership with IBM (2) US Extended IP partnership to cover API/web service enablement of mainframes $55.0 $15.0
13 Oct-16 Butler America Aerospace US Provider of engineering and design services to US aerospace and defense customers $85.0 $85.4
14 Jun-16 Strategic IP partnership (1) US To invest in and grow workload automation and DevOps software of a global tech major $350.0 $100.0
15 Apr-16 Geometric (share swap deal) India PLM and engineering services $195.0 $135.0
16 Feb-16 Volvo IT AB Sweden External IT services arm of Volvo $134.9 $190.0
17 Jan-16 Point to Point (P2P) UK Workplace engineering services $10.0 $11.5
18 Nov-15 Arrangement with CSC US To operate and expand the existing Core Banking business of CSC $53.4 NA
19 Oct-15 Powerteam LLC US Professional services for Microsoft Dynamics CRM $41.4 $37.00
20 Oct-15 C2SiS India Engineering services firm $1.9 NA
21 Aug-15 Trygstad Technical Services Inc US Turnkey solutions for a large ISV $9.9 NA
Total $2,308.4 $1,165+
Notes:
(1) Geometric acquisition is a share-swap deal
(2) HCLT has paid about US$330 mn for Strategic IP partnership and balance US$225 mn would be paid over CY2017.
(3) For other acquisitions, the consideration is agreed amount and it includes earnouts.
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Consistent performance on most operating metrics
RBL Bank reported a solid performance on most operating metrics. Earnings grew 36% yoy on
the back of 40% yoy revenue growth led by healthy NII growth of 41% yoy and 38% yoy
growth in non-interest income. Gross and net NPL ratios were stable qoq at 1.4% and 0.7%
with credit costs at ~1% of loans. Slippages were low at 1.3% of loans but agriculture remains
the key area of concern. Cost-income ratio was stable qoq at ~51%.
Dependence on unsecured business to drive revenue growth remains high
As we have been highlighting in our previous notes, the bank is building a balance sheet that is
different from other private banks. Revenues are being built on two risky pillars—(1) MFI
business and (2) credit cards. The revenues from these two businesses will aid investments and
RoE improvement. The MFI business is back on track after having gone through a tough phase
post demonetization while the credit card business is yet to reach peak profitability due to high
acquisition costs. The bank has indicated that it would like to see its card base closer to 3 mn by
FY2021 from 1.2 mn currently (0.6 mn in 2QFY18). RoEs/earnings risks are quite high and may
have to be revised sharply given the duration of these loans, in case of cycle reversal.
Investments at the bank level beyond these two businesses seem below normalized trends
The growth in operating expenses (33% yoy) shows greater emphasis on non-staff expenses
(52% yoy) as compared to staff costs (5% yoy) as there was negligible growth in headcount
(3% yoy) and branch addition (22 yoy and two branches qoq). While the management has
highlighted that investments on other businesses have not slowed but moved towards alternate
channels, we believe asset-side expenses are taking a higher share than estimated earlier.
Upgrade to ADD from REDUCE earlier; TP unchanged
We upgrade RBL Bank to ADD from REDUCE with an unchanged TP of `500 valuing the bank
at 2.3X book and 16X September 2020E EPS for RoEs in the range of 13-15% in the short
term. Recent underperformance gives us an opportunity to turn positive after being negative
since our initiation. RoE improvement is likely to be gradual as the pace of growth in balance
sheet implies capital infusion is needed to maintain its current pace of loan growth.
RBL Bank (RBK) Banks
Turning positive. RBL Bank delivered a solid performance on most operating metrics
with earnings growth of ~36% yoy on the back of 40% yoy revenue growth. Loan
growth was strong at 37% yoy and NIM saw a marginal improvement partly reflecting
the shift in asset mix. RoE improvement is steady but the bank needs capital to sustain
the current pace of growth. We upgrade the stock to ADD (TP unchanged) from REDUCE,
post the recent underperformance, after being negative on the stock since our initiation.
ADD
OCTOBER 24, 2018
RESULT, CHANGE IN RECO.
Coverage view: Attractive
Price (`): 465
Target price (`): 500
BSE-30: 33,847
QUICK NUMBERS
NII grew 41% yoy;
earnings grew 36%
yoy
Loans grew 37%
yoy; gross NPLs
stable at 1.4% of
loans
Upgrade to ADD
from REDUCE (TP
unchanged at `500)
M B Mahesh CFA
Nischint Chawathe
Dipanjan Ghosh
RBL Bank
Stock data Forecasts/Valuations 2019E 2020E 2021E
52-week range (Rs) (high,low) EPS (Rs) 21.3 28.6 34.3
AAA/ AA+/AA AA- A+/ A A-/ BBB+ BBB BBB- BB+ and below
3,240 8,390
14,830
21,690
35,740 39,400
-
8,000
16,000
24,000
32,000
40,000
2014 2015 2016 2017 2018 1HFY18
Microbanking portfolio
RBL Bank Banks
KOTAK INSTITUTIONAL EQUITIES RESEARCH 93
Exhibit 14: Diversified distribution network for micro-banking across 19 states Proportion of micro-banking portfolio across states, March fiscal year ends, 2QFY19 (%)
Source: Company, Kotak Institutional Equities
The importance of the two lines of business: ~35% of revenues
We are making marginal modifications to the table that we have reported last quarter.
Exhibit 16 shows the contribution of the credit card and MFI business. This is a pure
hypothetical exercise based on external and internal inputs. The management has not given
us any specific number on any line item and we have used the performance of other MFI for
the bank’s MFI business and the performance of SBI Cards and Payment Services for the
credit card business of RBL. Based on this exercise we probably see the importance of these
two businesses, which contribute ~15% of the overall loan book. We believe that the card
and MFI business contributes 16-17% of revenues each.
The management highlighted that the portfolio is generating returns better than the bank’s
reported numbers. The throughputs of the cards business have been quite impressive when
we look at the number of transactions, spends and average transaction/card (see Exhibit
below). The conversion to term loans is quite stable at ~20% and these loans are for less
than 6 months. Fees are quite healthy with ~40% from interchange and the balance split
between annual, processing and others fees (late payment, penal, forex, write-back, etc.).
We estimate that these two businesses could be contributing 30% of the overall expenses of
the bank. The management indicated that it would want a substantial increase in its credit
card base in FY2019 (1.8 mn from 1.2 mn currently) and 3 mn by FY2020 and 5 mn by
FY2021. This would entail quite a lot of expenses upfront as most of it would be origination
costs. We don’t have the contractual details that the bank has with Bajaj Finance.
On the other hand, the MFI business is seeing two good tailwinds. Growth has picked up
and NPL risk is receding. This implies one could see significant contribution to profits from
this business in the next few quarters.
15 1513
108
65 5 5
43
2 2 21 1 1 1 10
3
6
9
12
15
Bih
ar
Tam
il N
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Mahara
shtr
a
Karn
atak
a
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Raja
sth
an
Madhya
Pra
desh
Guja
rat
Wes
t Beng
al
Jhark
hand
Pun
jab
Hary
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Chatt
isgarh
Utt
arakh
and
Ass
am
Kera
la
Goa
Utt
ar P
rad
esh
Tripu
ra
Banks RBL Bank
94 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 15: Market share in cards space continues to march upwards Debit and credit cards, March fiscal year-ends, 2014-1QFY19 (%)
Transaction value (Rs mn) 5,328 9,622 13,520 16,099 27,869 15,113
Average spend per transaction (Rs) 3,649 3,420 2,803 2,812 2,705
Average spend per card (Rs) 43,141 25,127 24,267 39,141 41,632
Notes:
(a) Average spend are annualized numbers.
(b) YTD 2019 is as of August 2018.
RBL Bank Banks
KOTAK INSTITUTIONAL EQUITIES RESEARCH 95
Exhibit 16: Credit card and MFI business probably contributes ~35% of revenues and ~30% of operating expenses for the bank Credit card and MFI business contribution to the overall business, March fiscal year-ends, 1HFY18 (` mn)
Notes:
(a) We have used a card base of 950,000 for our estimates. The outstanding credit card loans are at 6.2% of loans on average basis.
(b) Interest on loans in credit card is ~35%. However, we have used 20% in our estimates as the “receivables”, which is reported as loans in the
credit cards also include customers who repay on time. The implied rollover rate is ~55% when we take an average yield of 20%. We have used
a provision charge of ~3% of loans.
(c) We have used revenue and opex/card based on SBI Cards. This is a separate arm of SBI which is into the credit card business of the group.
(d) Operating expenses for the MFI business is at 5% of loans.
Source: Company, Kotak Institutional Equities
Exhibit 17: Card base has more than doubled in the past 1 year Total spends and card base, March fiscal year ends, 2QFY18-2QFY19 (` mn)
Source: Company, Kotak Institutional Equities
Bank Credit card Contribution MFI Contribution Total Contribution
(% of loans) 6.2 8.2 14.5
Average loans 426,371 26,495 6.2 35,153 8.2 61,648 14.5
Revenues 18,048 3,130 17.3 2,956 16.4 6,086 33.7
Interest income 28,277 2,875 10.2 3,815 13.5 6,691 23.7
Interest on loans 22,508 2,517 11.2 3,339 14.8 5,857 26.0
Interest on investments 5,222 325 6.2 431 8.2 755 14.5
(Rs mn)(# mn) Cards in force (LHS) Total spends (RHS)
Banks RBL Bank
96 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 18: Steady conversion of credit card transactions into short term loans Consumer loans booked in the credit card business, March fiscal year ends, 2QFY18-2QFY19
Source: Company, Kotak Institutional Equities
Exhibit 19: Non-term loans have shown strong growth in recent years within the card business Break-up of the credit card business, 2QFY18-2QFY19 (%)
Source: Company
CASA ratio stable at 25%; growth in CA has been stronger
RBL reported ~30% yoy growth in deposits, driven by 35% yoy growth in CASA balance.
Traction is SA was modest at ~11% yoy (up 4% qoq) growth while CA growth was
relatively stronger at 77% yoy (up 9% qoq). CASA ratio was stable qoq at 25% of deposits.
Currently CA and SA have similar shares in CASA at ~50% each. The average cost of savings
account balances was broadly unchanged at 6.3% with the deposits greater than `10 mn
maintained at ~40%.
We estimate ~27% CASA ratio by FY2020E driven by ~40% CAGR increase in SA balances
Other liabilities 12,870 17,713 20,031 22,272 24,785 25,470
Total liabilities 361,719 443,392 551,668 709,808 920,777 1,154,499
Paid-up capital 3,247 3,752 4,197 4,197 4,197 4,197
Reserves and surplus 26,645 39,604 62,643 69,998 79,879 91,735
Total shareholders' equity 29,892 43,356 66,840 74,195 84,076 95,931
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Weak results in 2QFY19 with the management attributing it to erratic monsoon
Bayer reported 10% yoy decline in revenues to `11 bn, 24% decline in EBITDA to `2.19 bn and
25% decline in net income to `1.43 bn (EPS of `41.6), well below our expectations in 2QFY19.
The company attributed the weakness to erratic monsoon season with (1) uneven distribution
of rainfall and (2) hailstorms that impacted the standing crops in several regions. We note that
Rallis, the only other agro-chemicals company that has reported results so far, exhibited a
healthy 11% yoy growth in revenues during 2QFY19 suggesting insignificant impact from the
erratic monsoon season. Bayer management remains optimistic on 2HFY19 based on available
opportunities in product categories catering to fruits, vegetables and rice; however, we note
that 2H, being seasonally weak, has contributed ~30% to the company’s full-year revenues and
negligible amount to its EBITDA and net income over the past two years.
Bleak results in 1HFY19 as well post three consecutive years of uninspiring performance
Bayer’s 1HFY19 results were also uninspiring, as has been the past three years, with flat revenues
at `19.4 bn, moderate 11% increase in EBITDA to `4.48 bn and 4% decline in net income to
`2.9 bn (EPS of `84.5). EBITDA margins showed some signs of improvement during 1HFY19
increasing ~230 bps yoy to 23.2%, albeit at a slower pace than ~465 bps increase in gross
margins; however, lower other income and rise in tax rate to 35% negated the benefit. We
note that Bayer’s revenues, EBITDA and net income have remained largely steady in a narrow
range during FY2016-18 with the company showing evident signs of weakness, particularly in
revenue growth, as compared to its domestic counterparts.
Cut estimates by 11-12%; downgrade to SELL from REDUCE with revised TP of `3,550
We cut FY2019-21 EPS estimates for Bayer by 11-12% to `94, `114 and `135, respectively,
factoring in (1) slower growth in revenues, (2) lower margins versus our earlier assumptions and
(3) other minor changes. We downgrade the stock to SELL rating from REDUCE earlier with
revised DCF-based TP of `3,550 (`4,100 earlier). Bayer’s parent portfolio may certainly enable
launching of new products in India in the long run; however, the persisting disappointment in
domestic performance over the past few years raises concerns on (1) rising competition from
the local players, who are evidently making inroads with expansion of distribution network and
(2) likely down-trading by the farmers to low-cost products.
Bayer Cropscience (BYRCS) Others
Yet another disappointing year. Bayer’s 1HFY19 results with flat revenues, 11%
growth in EBITDA and 4% decline in net income reflected continued weakness in the
company’s performance over the past four years contrary to the industry. We cut our
FY2019-21E EPS by 11-12% and downgrade the stock to SELL from REDUCE with a
revised DCF-based TP of `3,550 (`4,100 previously). We believe expensive valuation at
37X FY2020E EPS is unlikely to sustain as persisting disappointment raises concerns on
realizable gains from the perceived superiority of Bayer’s product portfolio.
SELL
OCTOBER 24, 2018
RESULT, CHANGE IN RECO.
Coverage view:
Price (`): 4,236
Target price (`): 3,550
BSE-30: 33,847
Tarun Lakhotia
Bayer Cropscience
Stock data Forecasts/Valuations 2019E 2020E 2021E
52-week range (Rs) (high,low) EPS (Rs) 94.0 113.8 135.2
Exhibit 2: Bayer’s performance has remained weak as compared to peers in domestic business in the recent years Performance of domestic agri-chem segment for key companies, 1QFY17 onwards (Rs mn)
(a) Data pertains to domestic agri business segment.
(b) Data pertains to standalone business, which includes revenues from contract manufacturing operations.
(c) Data pertains to global operations.
Quarterly Annual
Bayer Cropscience Others
KOTAK INSTITUTIONAL EQUITIES RESEARCH 105
Exhibit 3: Bayer trades at a significant premium to the domestic peers in ag-chem business Comparative valuation of global/domestic ag-chem companies, March fiscal year-ends, 2018-20E
Terminal growth rate (%) 6.0 Terminal value 66,025
Capitalization rate (%) 5.0 Enterprise value 114,256
Terminal value calculation Net debt (7,264)
Cash flow in terminal year 15,563 Equity value 121,520
Terminal value 329,943 Shares o/s (# mn) 34
Discounted terminal value 66,025 NPV /share (Rs) 3,543
Others Bayer Cropscience
106 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 5: Summary financials of Bayer CropScience Profit and loss model, balance sheet and cash flow statement, March fiscal year-ends, 2014-21E (Rs mn)
BUY. We expect this stock to deliver more than 15% returns over the next 12 months.
ADD. We expect this stock to deliver 5-15% returns over the next 12 months.
REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.
SELL. We expect this stock to deliver <-5% returns over the next 12 months.
Our target prices are also on a 12-month horizon basis.
Other definitions
Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following
designations: Attractive, Neutral, Cautious.
Other ratings/identifiers
NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s)
and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction
involving this company and in certain other circumstances.
CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.
NC = Not Covered. Kotak Securities does not cover this company.
RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient
fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock
and should not be relied upon.
NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
NM = Not Meaningful. The information is not meaningful and is therefore excluded.
Kotak Institutional Equities Research coverage universe
Distribution of ratings/investment banking relationships
Source: Kotak Institutional Equities As of June 30, 2018
Percentage of companies covered by Kotak Institutional
Equities, within the specified category.
* The above categories are defined as follows: Buy = We
expect this stock to deliver more than 15% returns over
the next 12 months; Add = We expect this stock to
deliver 5-15% returns over the next 12 months; Reduce
= We expect this stock to deliver -5-+5% returns over
the next 12 months; Sell = We expect this stock to deliver
less than -5% returns over the next 12 months. Our
target prices are also on a 12-month horizon basis.
These ratings are used illustratively to comply with
applicable regulations. As of 31/03/2018 Kotak
Institutional Equities Investment Research had
investment ratings on 207 equity securities.
Percentage of companies within each category for
which Kotak Institutional Equities and or its affiliates has
provided investment banking services within the
previous 12 months.
21.4%
31.3%
25.4%21.9%
2.0%5.0% 4.5%
0.5%
0%
10%
20%
30%
40%
50%
60%
70%
BUY ADD REDUCE SELL
Corporate Office Overseas Affiliates
Kotak Securities Ltd.
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Tel:+1 212 600 8856 Copyright 2018 Kotak Institutional Equities (Kotak Securities Limited). All rights reserved.
1. Note that the research analysts contributing to this report may not be registered/qualified as research analysts with FINRA; and
2. Such research analysts may not be associated persons of Kotak Mahindra Inc and therefore, may not be subject to NASD Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
3. Any U.S. recipients of the research who wish to effect transactions in any security covered by the report should do so with or through Kotak Mahindra Inc and (ii) any transactions in the securities covered by the research by U.S. recipients must be effected only through Kotak Mahindra Inc at [email protected].
This report is distributed in Singapore by Kotak Mahindra (UK) Limited (Singapore Branch) to institutional investors, accredited investors or expert investors only as defined under the Securities and Futures Act. Recipients of this analysis / report are to contact Kotak Mahindra (UK) Limited (Singapore Branch) (16 Raffles Quay, #35-02/03, Hong Leong Building, Singapore 048581) in respect of any matters arising from, or in connection with, this analysis / report. Kotak Mahindra (UK) Limited (Singapore Branch) is regulated by the Monetary Authority of Singapore. Kotak Securities Limited and its affiliates are a full-service, integrated investment banking, investment management, brokerage and financing group. We along with our affiliates are leading underwriter of securities and participants in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationships with a significant percentage of the companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. Investors should assume that Kotak Securities Limited and/or its affiliates are seeking or will seek investment banking or other business from the company or companies that are the subject of this material and that the research professionals who were involved in preparing this material may participate in the solicitation of such business. Our research professionals are paid in part based on the profitability of Kotak Securities Limited, which include earnings from investment banking and other business. Kotak Securities Limited generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. Additionally, Kotak Securities Limited generally prohibits its analysts and persons reporting to analysts from serving as an officer, director, or advisory board member of any companies that the analysts cover. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Institutional Equities Research Group of Kotak Securities Limited. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Private Client Group. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additionally, other important information regarding our relationships with the company or companies that are the subject of this material is provided herein. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. It is for the general information of clients of Kotak Securities Limited. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, clients should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Kotak Securities Limited does not provide tax advise to its clients, and all investors are strongly advised to consult with their tax advisers regarding any potential investment. Certain transactions -including those involving futures, options, and other derivatives as well as non-investment-grade securities - give rise to substantial risk and are not suitable for all investors. The material is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions expressed are our current opinions as of the date appearing on this material only. We endeavor to update on a reasonable basis the information discussed in this material, but regulatory, compliance, or other reasons may prevent us from doing so. We and our affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this material, may from time to time have "long" or "short" positions in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. Kotak Securities Limited and its non US affiliates may, to the extent permissible under applicable laws, have acted on or used this research to the extent that it relates to non US issuers, prior to or immediately following its publication. Foreign currency denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of or income derived from the investment. In addition, investors in securities such as ADRs, the value of which are influenced by foreign currencies affectively assume currency risk. In addition options involve risks and are not suitable for all investors. Please ensure that you have read and understood the current derivatives risk disclosure document before entering into any derivative transactions. Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house. Kotak Securities Limited is a corporate trading and clearing member of BSE Limited (BSE), National Stock Exchange of India Limited (NSE), MSEI a. Our businesses include stock broking, services rendered in connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management. Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Kotak Securities Limited is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old Mutual Life Insurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI). Kotak Securities Limited is registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014. We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in last five years. However SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise letters or levied minor penalty on KSL for certain operational deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has our certificate of registration been cancelled by SEBI at any point of time. We offer our research services to primarily institutional investors and their employees, directors, fund managers, advisors who are registered with us Details of Associates are available on website i.e. www.kotak.com Research Analyst has served as an officer, director or employee of subject company(ies): No We or our associates may have received compensation from the subject company(ies) in the past 12 months. We or our associates have managed or co-managed public offering of securities for the subject company(ies) in the past 12 months. YES. Visit our website for more details We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received compensation or other benefits from the subject company(ies) or third party in connection with the research report. Our associates may have financial interest in the subject company(ies). Research Analyst or his/her relative's financial interest in the subject company(ies): No Kotak Securities Limited has financial interest in the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: YES
Nature of financial interest is investment banking and/or other businesss relationships Our associates may have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report. Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No Kotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No Subject company(ies) may have been client during twelve months preceding the date of distribution of the research report. A graph of daily closing prices of securities is available at https://www.moneycontrol.com/india/stockpricequote/ and http://economictimes.indiatimes.com/markets/stocks/stock-quotes. (Choose a company from the list on the browser and select the"three years" icon in the price chart). Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. CIN: U99999MH1994PLC134051, Telephone No.: +22 43360000, Fax No.: +22 67132430. Website: www.kotak.com / www.kotaksecurities.com. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Telephone No: 42856825. SEBI Registration No: INZ000200137 (Member of NSE, BSE & MSE) AMFI ARN 0164, PMS INP000000258 and Research Analyst INH000000586. NSDL/CDSL: IN-DP-NSDL-23-97. Compliance Officer Details: Mr. Manoj Agarwal. Call: 022 - 4285 8484, or Email: [email protected]. Investments in securities market are subject to market risks, read all the related documents carefully before investing. In case you require any clarification or have any concern, kindly write to us at below email ids: Level 1: For Trading related queries, contact our customer service at ‘[email protected]’ and for demat account related queries contact us at [email protected] or call us
on: Toll free numbers 18002099191 / 1800222299 and 18002099292 Level 2: If you do not receive a satisfactory response at Level 1 within 3 working days, you may write to us at [email protected] or call us on 022-42858445 and if you feel you
are still unheard, write to our customer service HOD at [email protected] or call us on 022-42858208. Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Name: Mr. Manoj Agarwal) at
Level 4: If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach CEO (Mr. Kamlesh Rao) at [email protected] or call on 91-(022) 4285 8301.
First Cut notes published on this site are for information purposes only. They represent early notations and responses by analysts to recent events. Data in the notes may not have been verified by us and investors should not act upon any data or views in these notes. Most First Cut notes, but not necessarily all, will be followed by final research reports on the subject. There could be variance between the First cut note and the final research note on any subject, in which case the contents of the final research note would prevail. We accept no liability for the contents of the First Cut Notes.
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