INDIA DAILY August 2, 2018 India 1-Aug 1-day 1-mo 3-mo

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1 Contents Daily Alerts Results Dabur India: Decisively positive management outlook but priced in Exide Industries: Revenue growth surprises positively INDIA DAILY August 2, 2018 India 1-Aug 1-day 1-mo 3-mo Sensex 37,522 (0.2) Nifty 11,346 (0.1) Global/Regional indices Dow Jones 25,334 (0.3) Nasdaq Composite 7, FTSE 7,653 (1.2) Nikkei 22,724 (0.1) Hang Seng 28,341 (0.8) (2.1) (7.8) KOSPI 2,306 (0.1) 1.5 (8.0) IIFL Holdings: Wealth and NBFC strong; broking yields down Astral Poly Technik: Results miss expectations; valuations remain expensive Orient Cement: A good quarter Results, Change in Reco Castrol India: Not worth the wait Company alerts NTPC: Emphasizing efficient growth Tata Steel: Management meeting notes Sector alerts Automobiles: Auto demand remains healthy Economy alerts Economy: GST: Revenues far from satisfactory Economy: RBI: Signaling a brief pause Value traded India Cash (NSE+BSE) Derivatives (NSE) 9,153 4,366 4,400 Deri. open interest 3,653 3,022 3,569 Forex/money market Change, basis points 1-Aug 1-day 1-mo 3-mo Rs/US$ (33) yr govt bond, % (7) 13 Net investment (US$ mn) 31-Jul MTD CYTD FIIs (414) MFs (29) - 11,353 Top movers Change, % Best performers 1-Aug 1-day 1-mo 3-mo RIL IN Equity 1, SBIN IN Equity GCPL IN Equity 1, HUVR IN Equity 1, DABUR IN Equity Worst performers HDIL IN Equity 24 (1.2) 18.7 (28.4) UT IN Equity 4 (1.2) 1.2 (27.0) AL IN Equity (6.6) (26.4) JPA IN Equity (4.5) (24.4) TTMT/A IN Equity 144 (0.2) (9.5) (24.1) For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL.

2 Dabur India (DABUR) Consumer Products Decisively positive management outlook but priced in. Better-than-expected volume growth print for 1QFY19 and the management s decisively positive volume outlook drive a 1-4% increase in our already-bullish FY E EPS forecasts for Dabur. Risk to consensus EPS estimates is on the downside in our view. Dabur now trades at a modest premium to HUVR on an EV/EBITDA basis, unsustainable and unjustifiable. Lofty valuations leave little room for disappointment in our view. Reiterate REDUCE with a revised fair value target of `390/share (from `350). REDUCE AUGUST 02, 2018 RESULT Coverage view: Cautious Price (`): 432 Target price (`): 390 BSE-30: 37,522 Company data and valuation summary Dabur India Stock data Forecasts/Valuations E 2020E 52-week range (Rs) (high,low) EPS (Rs) Market Cap. (Rs bn) EPS growth (%) Shareholding pattern (%) P/E (X) Promoters 68.1 Sales (Rs bn) FIIs 17.2 Net profits (Rs bn) MFs 4.3 EBITDA (Rs bn) Price performance (%) 1M 3M 12M EV/EBITDA (X) Absolute ROE (%) Rel. to BSE Div. Yield (%) QFY19 earnings print healthy headline comps but 2-year CAGRs just about fine Dabur reported consolidated revenue, EBITDA and PAT growth of 16%, 25% and 20%, respectively off a low base. Revenues were in line with our estimate while EBITDA and PAT missed our forecast by 11% each. Two-year CAGR stood at 3.2% on revenues, 5.1% on EBITDA and 6% on recurring PAT. Two-year CAGR comps are important to filter out the noise in yoy comps created by the low pre-gst 1QFY18 base. Standalone performance was healthier with net revenues up 19% yoy (just under 24% like-onlike), EBITDA up 35% and recurring PAT up 29%. Standalone revenue growth was volume-led with a strong 21% domestic FMCG volume growth print, higher than our expected 15%. Twoyear CAGR on revenues was 6.5% (8-8.5% like-on-like), 7.3% on EBITDA and 7.8% on recurring PAT. Decent numbers but not blockbuster by any means. Aggregate subsidiary performance improved from recent soft trends but remained much weaker than standalone performance. Aggregate revenues, EBITDA and PAT for subsidiaries grew 9% yoy (-3.6% 2-year CAGR), 9% yoy (+1.2% 2-year CAGR) and 4% yoy (+2.2% 2-year CAGR), respectively. Domestic FMCG segments good growth across the board Strong yoy growth in domestic FMCG business was broad-based with all categories growing in the 17-28% yoy band. Foods (+27%; led by Real), skin care (+27%; led by Gulabari and Fem), health supplements (+28%; led by honey and Chyawanprash), digestives (+22%; led by Hajmola tablets), and hair care (+20.5%; led by CNO and shampoos) led growth. Oral care growth at 17.3% yoy was healthy as well even as the low-price-brand Babool dragged performance a tad. On a 2-year CAGR basis, digestives, skin, and home care were the categories that saw double-digit growth. Rohit Chordia Jaykumar Doshi Aniket Sethi The narrative is in the numbers and multiples are rich. REDUCE We questioned ourselves hard (to see if we are missing the narrative), we struggled (to raise estimates materially) and we gave up (on the temptation to be creative). Remain cautious. For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

3 Dabur India Consumer Products Exhibit 1: Interim consolidated results of Dabur (as per Ind-AS), March fiscal year-ends (Rs mn) 1QFY19 1QFY19E 1QFY18 4QFY18 KIE Est yoy qoq 1QFY17 2-Yr CAGR (%) Revenues 20,752 20,909 17,845 20,236 (1) , Material cost (incl excise) (10,486) (10,437) (9,145) (10,024) (9,613) Gross profit 10,472 10,472 8,700 10, , Gross margin (%) bps 171 bps -1 bps 50.6 Employee cost (2,241) (2,102) (2,035) (1,807) (2,115) 2.9 Advertising and promotion (1,990) (1,714) (1,500) (1,256) (1,965) 0.6 Other expenditure (2,229) (2,392) (2,131) (2,390) (7) 5 (7) (2,340) (2.4) Total expenditure (16,946) (16,645) (14,812) (15,477) (16,034) 2.8 EBITDA 3,806 4,264 3,034 4,758 (11) 25 (20) 3, OPM (%) bps 134 bps -518 bps 17.7 Other operating income (1) (41) 45 Other income (11) (9) Interest (149) (125) (133) (132) (118) Depreciation (427) (450) (391) (426) (5) 9 0 (343) Pretax profits 4,022 4,569 3,378 5,026 (12) 19 (20) 3, Tax (724) (872) (638) (1,052) (17) 13 (31) (701) Minority Interest (6) (10) (3) (12) (44) 107 (52) (8) Recurring PAT (after MI) 3,292 3,687 2,737 3,962 (11) 20 (17) 2, Extraordinary items (96) Net profit (reported) 3,292 3,687 2,641 3,962 (11) 25 (17) 2, EPS (Rs) (11) 20 (17) Income tax rate (%) bps -90 bps -294 bps 19.3 Costs as a % of sales (% chg.) Material cost bps -72 bps 99 bps 49.4 Employee cost bps -61 bps 186 bps 10.9 Advertising and promotion bps 118 bps 338 bps 10.1 Other expenditure bps -121 bps -107 bps 12.0 Segment results of Dabur Revenues Consumer care 16,561 14,251 16, (1) Foods 3,635 3,108 2, Retail Others (8) Total segment revenue 20,729 17,845 20, Segment PBIT Consumer care 3,789 3,202 4, (12) Foods (6) Retail Others 20 (15) 17 (234) 14 Total segment EBIT 4,341 3,517 4, (11) Segment PBIT margins, % Consumer care bps -268 bps Foods bps -459 bps Retail bps 261 bps Others 8.5 (7.0) bps 161 bps Capital employed Consumer care 22,529 21,441 21, Foods 3,231 4,577 3,559 (29) (9) Retail Others (8) 3 Unallocated corporate 34,416 22,122 27, Total capital employed 60,759 48,722 53, Source: Company, Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

4 Consumer Products Dabur India Exhibit 2: Interim standalone results of Dabur (as per Ind-AS), March fiscal year-ends (Rs mn) (% chg.) 1QFY19 1QFY19E 1QFY18 4QFY18 KIE Est yoy qoq 1QFY17 2-Yr CAGR (%) Revenues 14,701 14,160 12,313 15, (2) 12, Material cost (incl excise) (7,825) (7,434) (6,735) (7,742) (6,907) Gross profit 6,876 6,726 5,578 7, (6) 6, Gross margin (%) bps 147 bps -174 bps 46.7 Employee cost (1,380) (1,150) (1,192) (1,018) (1,131) Advertising and promotion (1,556) (1,353) (1,187) (817) (1,236) Other expenditure (1,405) (1,500) (1,327) (1,414) (6) 6 (1) (1,491) Total expenditure (12,166) (11,437) (10,441) (10,991) (10,765) 6.3 EBITDA 2,535 2,723 1,872 4,043 (7) 35 (37) 2, OPM (%) bps 204 bps -966 bps 17.0 Other operating income (52) 28 Other income (9) (9) (3) 547 Interest (59) (40) (58) (59) 46 1 (1) (24) Depreciation (260) (270) (245) (263) (4) 6 (1) (174) Pretax profits 2,932 3,193 2,349 4,491 (8) 25 (35) 2, Tax (626) (734) (557) (956) (15) 12 (34) (595) PAT 2,306 2,459 1,792 3,536 (6) 29 (35) 1, Extraordinary items (96) Net profit (reported) 2,306 2,459 1,696 3,536 (6) 36 (35) 1, EPS (Rs) (6) 29 (35) Income tax rate (%) bps -236 bps 8 bps 23.1 Costs as a % of sales Material cost bps -148 bps 173 bps 53.3 Employee cost bps -30 bps 261 bps 8.7 Advertising and promotion bps 94 bps 515 bps 9.5 Other expenditure bps -122 bps 15 bps 11.5 Segment results of Dabur Revenues Consumer care 11,384 9,533 12, (7) Foods 3,065 2,573 2, Others (8) Total segment revenue 14,678 12,313 15, (2) Segment EBIT Consumer care 2,825 2,304 3, (26) Foods (23) Others 20 (15) 17 (234) 14 Total segment EBIT 3,138 2,398 4, (26) Segment EBIT margins, % Consumer care bps -646 bps Foods bps -546 bps Others 8.5 (7.0) bps 161 bps Capital employed Consumer care 8,850 10,543 9,184 (16) (4) Foods (116) 2, (105) (128) Others (16) 5 Unallocated corporate 35,610 23,549 29, Total capital employed 44,516 36,579 38, Source: Company, Kotak Institutional Equities 4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

5 Dabur India Consumer Products Exhibit 3: Key changes to earnings model (consolidated), as per Ind-AS - Dabur India, March fiscal-year ends, E Revised Earlier Change (%) 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E Net revenues (Rs mn) 87,211 98, ,585 88,122 98, ,768 (1.0) EBITDA (Rs mn) 17,952 20,606 23,555 18,453 20,851 23,455 (2.7) (1.2) 0.4 EBIT (Rs mn) 16,181 18,691 21,470 16,739 19,006 21,474 (3.3) (1.7) (0.0) EBITDA margin (%) Net profit (pre-exceptionals, Rs mn) 16,056 18,132 20,596 15,895 17,751 19, EPS (Rs/share) Effective tax rate (%) Key category-wise highlights Hair care (23% of domestic sales). Within hair care business (1) hair oils category posted 18.8% yoy growth on the back of strong growth in Anmol Coconut Oil, Amla Hair Oil, Brahmi Amla Hair Oil and Dabur Almond Hair Oil; management highlighted that they have gained market share in hair oil (+70 bps). They now plan to accelerate spends on Dabur Amla and gain back the lost market share and (2) shampoos posted strong 31.3% yoy growth driven by focused marketing initiatives. Management highlighted that the growth was driven by expansion of rural distribution. They are currently looking to premiumize their portfolio for the urban consumer. They believe that the growth potential is enormous given that a lot of other herbal brands are currently suffering in this segment. Oral care (17% of domestic sales). Oral care posted strong growth of 17% yoy with toothpaste registering a 16.8% yoy growth. Management highlighted that the Red franchise grew at 30%+ and the company continues to gain market share. Its recent offering Red Gel is also doing reasonably well. However, its discount brand Babool is seeing high competitive pressures, particularly in the `10 price point. They have chalked out some plans for Babool as well and expect a revival in the next couple of quarters. Performance of Toothpowder was also robust growing 21.6% yoy. OTC & Ethicals (7% of domestic sales). OTC & Ethicals category grew by 13.3% yoy led by good growth in Honitus, Madhuvaani, Lal Tail and Mahabhringraj Hair Oil. Health supplements (12% of domestic sales) posted 27.5% yoy growth aided by strong growth in both Chyawanprash and Honey. Management highlighted that its market share is back to its highest level in both value and volume. They continue to benefit from the strong brand franchise in the category and expect strong growth to continue. Home care (7% of domestic sales). Home care category posted strong growth of 17.4% yoy. Management attributed this to strong performance of Odonil and Sanifresh. Skin care (5% of domestic sales) posted 27.1% yoy growth aided by strong growth in Gulabari, Fem bleaches and facial kits. KOTAK INSTITUTIONAL EQUITIES RESEARCH 5

6 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Consumer Products Dabur India Foods (22% of domestic sales). Beverages (bulk of the food business) grew 26.8% on the back of double-digit growth in Real and Active. Culinary business which forms ~10% of overall foods revenues grew 10.2% yoy led by strong growth in Hommade Coconut Milk and Nature s Best. In juices, company has launched three new variants Masala Guava, Masala Pomegranate and Alphonso Mango. Despite facing high competitive pressures in the recent times, company has taken several efforts including higher media spends as well as tactical promotions. NPDs contributed 3.8% growth in the segment for Dabur. One of its new launches Activ Coconut water has also registered good offtake. Company believes that they are well placed to capture trend of increasing awareness of high sugar content in several fruit-based drinks in the market. Dabur has also been able to enhance its margin profile in the segment on the back of lower import prices of fruit pulp and increasing production from Pantnagar plant leading to freight savings. International business (30% of consolidated sales). International business posted a strong 10.5% c/c growth. Among the international markets (1) GCC markets performed well delivering 17% c/c growth led by Saudi Arabia (up 54% yoy), (2) Egypt posted strong 31% yoy growth, (3) US business of Namaste reported 1% yoy growth in c/c revenues reversing the decline trend seen in recent years. Management sounded bullish on Namaste business in the US on profitability and in sub-saharan Africa on growth. They have put a new team in place for the same and have also made subtle changes to the business model. Management is positive about the strong potential of the naturals portfolio and believe that the top-line growth should accelerate to 5-10% along with strong margins expansion already seen in 1QFY19. Other takeaways from earnings concall Volume growth outlook. Management expects double-digit volume growth for the full year (FY2019E) given the pickup in underlying consumption trends and weakening of several headwinds. Margins. Management expects scope for expansion in gross margins to be limited given inflationary pressures in the broader RM basket. Focus remains on driving accelerate volume growth and let operating leverage take care of margin expansion. The company also indicated that it intends to keep media spending high for the rest of the fiscal. Exhibit 4: Volumes rose 21% yoy - 2-year CAGR at ~7.5% Dabur s domestic volume growth trends (%) (5) (2.5) (5.2) (4.4) (10) Source: Company, Kotak Institutional Equities 6 KOTAK INSTITUTIONAL EQUITIES RESEARCH

7 Dabur India Consumer Products Exhibit 5: Category growth trends for Dabur Growth rate, yoy (%) 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2Yr-CAGR - 1QFY19 Hair Care (2.0) (4.5) (20.0) (4.0) (11.0) Health Supplements 0.0 (10.0) (14.0) 5.0 (7.0) Oral Care (5.0) Digestives (1.0) 5.0 (10.0) (5.0) Skin Care (1.0) 7.0 (11.0) Home Care (5.0) (6.5) OTC & Ethicals (1.0) 3.0 (11.0) (4.0) (6.6) Foods (8.3) Notes: (1) Growth numbers for 3QFY18 are like-for-like, adjusted for GST. Source: Company, Kotak Institutional Equities Exhibit 6: Key revenue assumptions for Dabur, March fiscal year-ends, E (Rs mn) E 2020E 2021E Gross revenue breakup (Rs mn) Domestic Business 51,997 53,884 61,949 70,857 80,803 Consumer Care 40,382 43,183 49,086 55,732 63,088 Hair Care 10,858 11,050 12,100 13,431 14,834 Oral Care 7,953 9,147 10,793 12,736 14,971 Health Supplements 8,448 9,061 10,239 11,468 12,810 Digestives 2,782 2,962 3,347 3,715 4,113 Skin Care 2,645 2,773 3,189 3,699 4,276 Home Care 3,277 3,544 4,075 4,646 5,280 OTC & Ethicals 4,418 4,647 5,344 6,038 6,804 Foods 10,084 9,553 11,559 13,755 16,277 Misc 1,531 1,148 1,304 1,369 1,438 IBD 24,804 22,919 25,262 27,910 30,782 Total Gross revenue 76,801 76,803 87,211 98, ,585 yoy growth (%) Domestic Business (0.1) Consumer Care (3.1) Hair Care (6.7) Oral Care Health Supplements (3.6) Digestives (12.3) Skin Care Home Care OTC & Ethicals (10.5) Foods 12.4 (5.3) Misc 7.9 (25.0) IBD (6.2) (7.6) Total Gross revenue (2.2) % of total gross revenue Domestic Business Consumer Care Hair Care Oral Care Health Supplements Digestives Skin Care Home Care OTC & Ethicals Foods Misc IBD KOTAK INSTITUTIONAL EQUITIES RESEARCH 7

8 Consumer Products Dabur India Exhibit 7: Dabur: Consolidated profit model, balance sheet, cash flow model, March fiscal year-ends, E (Rs mn) E 2020E 2021E Profit model (Rs mn) Net revenues 78,507 76,801 76,803 87,211 98, ,585 EBITDA 15,002 14,876 15,494 17,952 20,606 23,555 Other income 2,353 3,197 3,732 4,480 4,877 5,477 Interest expense (485) (540) (531) (606) (624) (594) Depreciation (1,332) (1,429) (1,622) (1,770) (1,915) (2,085) Pretax profits 15,538 16,104 17,074 20,055 22,944 26,353 Tax (2,999) (3,303) (3,354) (3,965) (4,775) (5,716) Minority Interest (28) (31) (31) (34) (38) (41) Net Income 12,512 12,769 13,689 16,056 18,132 20,596 Extraordinary items (145) Reported Net Income 12,512 12,769 13,544 16,056 18,132 20,596 Earnings per share (Rs) Balance sheet (Rs mn) Total shareholder's equity 41,706 48,474 57,065 57,034 65,625 74,560 Total borrowings 8,102 9,786 9,375 10,788 10,288 9,788 Deferred tax liability 882 1,080 1,091 1,091 1,091 1,091 Minority Interest Total liabilities and equity 50,907 59,588 67,796 69,213 77,341 85,818 Net fixed assets incl CWIP 17,728 20,005 20,696 21,032 21,869 22,754 Investments 26,301 32,402 38,052 38,052 38,052 38,052 Cash 2,198 3,048 3,061 3,564 10,251 17,212 Net current assets 4,680 4,134 5,987 6,565 7,170 7,800 Total assets 50,907 59,588 67,796 69,213 77,341 85,818 Free cash flow (Rs mn) Operating cash flow (excl working capital) 12,486 11,397 13,465 15,985 18,055 20,312 Working capital (752) 872 (2,575) (578) (605) (630) Capital expenditure (1,892) (4,858) (2,003) (2,106) (2,752) (2,970) Free cash flow 9,843 7,411 8,887 13,300 14,699 16,712 Key ratios (%) Sales growth 0.6 (2.2) EBITDA growth 15.8 (0.8) EPS growth EBITDA margin Gross margin A&SP % of sales KOTAK INSTITUTIONAL EQUITIES RESEARCH

9 Exide Industries (EXID) Automobiles Revenue growth surprises positively. Exide reported strong 1QFY19 results with 21% yoy EBITDA growth, which was 4% above our estimates. Revenues increased by 32% yoy led by (1) strong double-digit volume growth in the auto segment, (2) benefit of price hikes, (3) market share gains in the telecom segment and (4) increased presence in newer segments such as e-rickshaw and solar. Exide s execution has definitely improved over the past few quarters but valuations are expensive given concerns over long-term sustainability of growth in key industrial segments (35% of revenues). SELL stays. SELL AUGUST 02, 2018 RESULT Coverage view: Neutral Price (`): 270 Target price (`): 235 BSE-30: 37,522 C ompany data and valuation summary Exide Industries Stock data Forecasts/Valuations E 2020E 52-week range (Rs) (high,low) EPS (Rs) Market Cap. (Rs bn) EPS growth (%) Shareholding pattern (%) P/E (X) Promoters 46.0 Sales (Rs bn) FIIs 13.7 Net profits (Rs bn) MFs 14.3 EBITDA (Rs bn) Price performance (%) 1M 3M 12M EV/EBITDA (X) Absolute ROE (%) Rel. to BSE-30 (1.2) Div. Yield (%) QFY19 EBITDA 4% above estimates Exide reported 1QFY19 EBITDA of `3.9 bn (+21% yoy), which was 4% above our estimates. However, net profit grew by only 11% yoy to `2.1 bn (5% below our estimates) due to lower other income, higher depreciation expenses and tax rate. We note that capex intensity has gone up significantly over the past two years due to need to modernize existing plants (will likely remain higher in FY E as well), which has led to negative FCF over FY Revenues increased by 32% yoy to `27.7 bn (KIE: 20%); growth was strong even on twoyear basis (+17% CAGR). Revenue growth was possibly driven by (1) 24-26% yoy growth in the auto segment due to strong growth in industry production, double-digit volume growth in replacement segment on low base and benefit of price increases and (2) 40% revenue growth in the industrial segment aided by market share gains in the telecom segment (leading to additional 13-15% of growth) at the expense of profitability, increased presence in e-rickshaw segment and healthy double digit in core industrial segments (inverter and UPS). EBITDA margin came in at 14.1% (down 130 bps yoy), which was 80 bps below our estimates due to lower-than expected gross margin. Gross margin declined by 120 bps qoq despite 3.7% sequential reduction in LME lead prices, which was surprising. We expect some improvement going ahead given further decline in lead prices over the past two to three months (refer to Exhibit 3 below). Employee cost and other expenses grew by 13-21% yoy leading to operating leverage benefit. Fine-tune earnings estimates; maintain SELL, revise TP to `235 We have increased our FY E earnings estimates by 1-2% on slightly higher revenue and EBITDA margin assumptions as we factor in recent weakness in lead prices. We maintain our SELL rating on the stock; we believe that current valuation multiples don t factor in structural issues in major industrial segments such as home and commercial UPS (accounts for more than 35% of company s overall revenues) due to improving power situation in India. SoTP-based TP revised to `235 (from `225), value the core business at 17X FY2020E EPS (from 16X earlier). Nishit Jalan Hitesh Goel For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

10 Automobiles Exide Industries Exhibit 1: 1QFY19 EBITDA was 4% above our estimates on stronger revenue growth; PAT was 5% below our estimates Interim results, March fiscal year-ends ( mn) 1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 FY2019E FY2018 Yoy (%) Net sales 27,725 25,156 21,029 24, ,155 91, Raw materials (18,419) (16,075) (13,232) (16,032) (68,864) (60,104) 14.6 Staff costs (1,620) (1,599) (1,430) (1,538) (6,569) (5,972) 10.0 Other expenses (3,777) (3,729) (3,124) (3,644) (14,401) (13,380) 7.6 Total expenses (23,815) (21,403) (17,786) (21,214) (89,834) (79,456) 13.1 EBITDA 3,909 3,753 3,243 3, ,321 12, Depreciation (719) (680) (563) (674) (2,916) (2,459) EBIT 3,190 3,073 2,680 2, ,405 9, Other income (75.3) (68.2) (79.3) Interest expense (11) (5) (16) (6) (50) (52) Profit before tax 3,221 3,238 2,796 2,903 (0.5) ,855 10, Tax expense (1,122) (1,020) (906) (1,007) (4,114) (3,378) Exceptional expenses - (418) Profit after tax 2,099 2,218 1,890 1,896 (5.4) ,742 6, Adjusted net profit 2,099 2,218 1,890 1,896 (5.4) ,742 6, No. of shares EPS (Rs/share) (5.4) Tax rate (%) As % of net revenues change (%) Raw material Staff costs Other expenses EBITDA margin EBIT margin Exhibit 2: Exide has outperformed Amara Raja on revenue growth over the past three quarters Comparison of revenue growth, gross margin and EBITDA margin of Amara Raja and Exide, March fiscal year-ends, 1QFY16-1QFY19 (%) Amara Raja 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Revenue growth (%) NA Gross margin (%) NA EBITDA margin (%) NA Exide Revenue growth (%) (5.3) (1.0) (1.4) Gross margin (%) EBITDA margin (%) Source: Companies, Kotak Institutional Equities 10 KOTAK INSTITUTIONAL EQUITIES RESEARCH

11 Exide Industries Automobiles Exhibit 3: LME lead prices have come off over the past 3-4 months Quarterly LME lead prices (assuming 1.5 quarter lag), March fiscal-year ends, 1QFY14-1QFY19 LME lead LME lead Qoq increase (US$/ton) USD:INR rate (Rs/ton) (%) 1QFY14 2, ,899 2QFY14 2, , QFY14 2, , QFY14 2, ,660 (1.4) 1QFY15 2, ,487 (3.9) 2QFY15 2, , QFY15 2, ,837 (1.1) 4QFY15 1, ,562 (7.3) 1QFY16 1, , QFY16 1, ,228 (3.4) 3QFY16 1, ,084 (3.6) 4QFY16 1, , QFY17 1, , QFY17 1, , QFY17 1, , QFY17 2, , QFY18 2, ,468 (3.9) 2QFY18 2, ,680 (3.3) 3QFY18 2, , QFY18 2, , QFY19 2, ,653 (3.7) July 2018 average 2, ,827 (3.1) Source: Bloomberg, Kotak Institutional Equities Exhibit 4: We expect 11% CAGR in automotive volumes over FY E Automotive sales volume breakdown of Exide Industries by segments, March fiscal year-ends, E (mn units, %) Four-wheeler volumes (mn units) E 2020E 2021E OEM Yoy change (%) (2.0) (4.0) 0.7 (0.3) Replacement Yoy change (%) 7.7 (1.3) Total four-wheeler volumes Yoy change (%) Replacement/OEM mix (X) Two-wheeler volumes (mn units) OEM Yoy change (%) Replacement Yoy change (%) (7.3) Total two-wheeler volumes Yoy change (%) Replacement/OEM mix (X) Automotive volumes (mn units) Total OEM volumes Total replacement volumes Total auto volumes Yoy change (%) KOTAK INSTITUTIONAL EQUITIES RESEARCH 11

12 Automobiles Exide Industries Exhibit 5: The company has gained presence in the telecom segment in FY2018E Revenue breakdown of Exide Industries by segments, March fiscal year-ends, E (` mn, %) Revenue (Rs mn) E 2020E 2021E Four-wheeler OEM 6,538 6,978 6,612 7,040 8,363 9,554 10,701 11,985 Four-wheeler replacement 15,157 17,207 18,928 21,456 25,490 29,441 32,091 34,979 Two-wheeler OEM 5,513 5,629 5,508 6,014 7,145 7,944 8,500 9,095 Two-wheeler replacement 3,242 3,688 4,204 5,028 6,527 7,856 9,034 10,389 Auto revenue 30,450 33,501 35,251 39,539 47,525 54,795 60,325 66,448 Inverter battery 17,632 21,933 20,377 21,997 23,584 25,942 27,499 29,149 Inverter 960 1, ,077 1,185 1,303 1,434 1,577 UPS 8,855 8,588 8,588 9,103 10,469 12,039 13,483 15,101 Telecom ,500 5,400 5,940 6,534 Submarine and others (such as E-rickshaw) ,100 1,650 2,475 3,713 Exports 730 2,461 2,324 2,672 3,501 4,026 4,630 5,324 Industrial revenue 29,192 35,241 33,387 36,296 44,338 50,360 55,461 61,398 Total revenues 59,642 68,742 68,537 75,835 91, , , ,846 Revenue breakup (%) Four-wheeler OEM Four-wheeler replacement Two-wheeler OEM Two-wheeler replacement Auto revenue Inverter battery Inverter UPS Telecom Submarine and others (such as E-rickshaw) Exports Industrial revenue Total Exhibit 6: We have fine-tuned our FY E earnings estimates Earnings revision table, March fiscal year-ends, (` mn, %) New estimates Old estimates % change 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E Net sales 105, , , , , , EBITDA 15,321 17,036 18,880 14,777 16,448 18, Margin (%) Net Profit 8,742 9,707 10,831 8,631 9,573 10, Standalone EPS Source: Kotak Institutional Equities estimates Life insurance business adds `42/share to our target price We value Exide Life Insurance at `42/share (`45/share earlier), i.e. 1.4X FY2018E (refer to Exhibit 8 for SoTP valuation). Exide Life reported EV of `20.4 bn in September 2018 with only 5% yoy growth. We are building in 9% EV CAGR between March 2018 and March 2020 in our forecasts. We note that a detailed EV walk (contribution of investment and economic assumption changes in EV growth) constrains our ability to value the business. 12 KOTAK INSTITUTIONAL EQUITIES RESEARCH

13 Exide Industries Automobiles Exhibit 7: We value Exide Industries at `235/share SoTP of Exide Industries (`) EPS Multiple Value per share (Rs) (X) (Rs) Comments March 2020E EPS ING Vysya (100% stake value) 42 SOTP based value 236 Price target 235 We build in 9% CAGR in Embedded Value (EV) over FY E and assign 1.4X multiple to March 2020E EV Source: Kotak Institutional Equities estimates Exhibit 8: Exide Life insurance adds `42/share to our target price EV and RoEV, March fiscal year-ends, 2HFY16-2HFY20E 2HFY16 1HFY17 2HFY17 1HFY18 2HFY18 1HFY19E 2HFY19E 1HFY20E 2HFY20E Embedded Value (Rs bn) RoEV (%) Multiple to EV (X) 1.4 Valuation (Rs bn) 36 Value per share of Exide (Rs/share) 41.9 Source: Kotak Institutional Equities estimates Exhibit 9: APE of Exide Life Insurance grew by only 2% yoy in FY2018 as against industry growth of 16% yoy Adjusted premium equivalent of life insurance players, March fiscal year-ends, (Rs bn) APE (Rs bn) YoY (%) Market share (%) Bajaj Allianz Life (29) (2) (17) (18) (2) Birla Sunlife (24) (11) (17) (7) (3) DHFL Pramerica (17) Exide (5) (15) (3) (12) HDFC Life (7) 16 (22) ICICI Prudential Life (23) 14 (5) Max Life (12) Reliance Life (44) (12) 19 8 (26) (24) SBI Life (27) Private players (22) 2 (3) Private (ex. SBI, ICICI) (21) (3) (7) LIC (5) 1 (23) Total industry (3) (3) (0) (9) Source: Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 13

14 Automobiles Exide Industries Exhibit 10: We expect EPS to grow at 16% CAGR during FY E Financial summary of Exide Industries, March fiscal year-ends, E (` mn) Profit model (Rs mn) E 2020E 2021E Net sales 45,536 51,070 60,714 59,642 68,742 68,537 75,835 91, , , ,846 EBITDA 8,633 6,839 7,841 8,145 9,077 10,161 10,825 12,408 15,321 17,036 18,880 Other income 1, , Interest (57) (48) (36) (12) (17) (17) (43) (52) (50) (40) (40) Depreciation (835) (1,007) (1,135) (1,256) (1,395) (1,579) (2,063) (2,459) (2,916) (3,286) (3,653) Profit before tax 8,780 6,452 7,423 7,231 7,985 9,082 9,757 10,480 12,855 14,275 15,928 Tax expense (2,740) (1,840) (2,195) (2,360) (2,526) (2,837) (2,821) (3,378) (4,114) (4,568) (5,097) Adjusted net profit 6,180 4,612 5,228 4,871 5,459 6,245 6,936 6,976 8,742 9,707 10,831 Adjusted earnings per share (Rs) Balance sheet (Rs mn) Equity 27,425 30,573 34,236 37,315 40,546 45,114 49,636 53,893 59,575 65,712 72,463 Total borrowings 22 1,025 1,702 Deferred Tax Liability ,051 1,259 1,270 1,552 1,405 1,405 1,405 1,405 Current liabilities 7,964 9,546 10,271 11,201 12,046 13,975 14,866 18,671 20,148 22,175 24,446 Total liabilities 36,085 40,944 45,484 49,566 53,851 61,384 67,756 73,969 81,128 89,292 98,313 Net fixed assets 9,018 9,932 10,532 10,490 11,728 14,512 16,874 21,918 25,002 27,716 30,063 Investments 13,780 15,546 16,401 19,670 18,957 26,978 26,739 19,690 19,690 19,690 19,690 Cash , ,417 4,951 Other current assets 13,140 14,889 17,803 18,207 22,868 19,155 23,947 31,489 35,865 39,469 43,609 Total assets 36,085 40,944 45,484 49,566 53,851 61,384 67,756 73,969 81,128 89,292 98,313 Free cash flow (Rs mn) Operating cash flow 6,959 5,769 6,514 6,201 7,062 7,615 8,150 8,732 11,658 12,993 14,484 Working capital changes (2,015) (168) (2,188) 526 (3,804) 5,783 (3,840) (3,563) (2,899) (1,577) (1,870) Capital expenditure (2,708) (1,921) (1,735) (1,214) (2,633) (3,948) (4,158) (7,714) (6,000) (6,000) (6,000) Free cash flow 2,237 3,680 2,591 5, , (2,545) 2,759 5,416 6,615 Ratios Gross margin (%) EBITDA margin (%) PAT margin (%) Book Value (Rs/share) RoAE (%) KOTAK INSTITUTIONAL EQUITIES RESEARCH

15 Wealth most attractive post demerger IIFL Holdings (IIFL) NBFCs Wealth and NBFC strong; broking yields down. IIFL Holdings reported 36% growth in PAT before minority interest (Ind-AS) at `3.45 bn. Capital market-related income (broking) business was subdued at 2% yoy growth. IIFL Finance reported 30% growth in IGAAP PAT on the back of 44% loan growth. 25% growth in wealth assets has driven 25% earnings growth for the wealth management business. We revise estimates; retain SELL with TP of `625 (unchanged). Company data and valuation summary India Infoline Stock data Forecasts/Valuations E 2020E 52-week range (Rs) (high,low) EPS (Rs) Market Cap. (Rs bn) EPS growth (%) Shareholding pattern (%) P/E (X) Promoters 29.0 NII (Rs bn) FIIs 23.0 Net profits (Rs bn) MFs 2.5 BVPS Price performance (%) 1M 3M 12M P/B (X) Absolute 2.1 (10.9) 16.6 ROE (%) Rel. to BSE-30 (3.6) (16.5) 1.2 Div. Yield (%) SELL AUGUST 02, 2018 RESULT Coverage view: Neutral Price (`): 684 Target price (`): 625 BSE-30: 37,522 QUICK NUMBERS Consolidated PAT up 36% yoy in 1QFY19 AUM increased 31% yoy in 1QFY19 for IIFL Finance Post the demerger of IIFL Holdings, we believe that IIFL Wealth will emerge as the most attractive stock given its strong franchise in a niche segment, increasing and innovative bouquet of products, investments in business by consistently adding new RMs and buoyancy in financial savings in general. High growth and improving operating and financial leverage will drive earnings even as agency realizations trend down over time. We expect IIFL Wealth to deliver 28% earnings CAGR during FY E and 20% RoE on the back of 25% CAGR in AUMs. At our target price, the business will trade at 20X PER and 3.5X book FY2020E. Wealth AUM up 25% yoy in 1QFY19 We expect IIFL Finance to deliver 16-17% medium-term RoE on the back of 25% loan book CAGR, translating into 20% CAGR in earnings. It delivered 31% earnings growth in FY2018 (30% IGAAP PAT growth in 1QFY19) on the back of about 40% loan book growth translating into 2.2% RoA and 15% RoE in FY2018. While multiple growth drivers help maintain momentum, absence of identifiable niche will likely put pressure on valuation multiples. The capital market-linked business is relatively small and exposed to the volatility in capital markets. Falling commission yields and questionable prospects of a standalone broking business will put pressure on its valuations. Mixed trends in various businesses; await better entry point; SELL We are revising up our earnings estimates by 8-10% on the back of higher income in the wealth business and align the NBFC with the new accounting norms. We expect the company to deliver 22% medium-term RoE and 22% EPS CAGR during FY E. A strong and growing franchise of the wealth business drives its valuations while concerns on long-term prospects of the broking business will put pressure on the broking business multiples; high loan book growth will support near-term valuations of IIFL Finance even as long-term concerns on its differentiators remain. We retain our March 2020E-based TP for IIFL Holdings at `625 to reflect (1) 2.1X book to IIFL Finance (down from 2.25X), (2) 20X earnings for the wealth business (51% stake post recent capital issuance) and (3) 10X earnings for the broking business (down from 12X). Nischint Chawathe M B Mahesh CFA Dipanjan Ghosh Shrey Singh For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

16 NBFCs IIFL Holdings Exhibit 1: IFL Holdings quarterly financial statements March fiscal year-ends, 1QFY18-1QFY19 (` mn) Ind-AS IGAAP Ind-AS IGAAP Ind-AS IGAAP Ind-AS (% chg.) 1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY E 2018 (% chg.) 2020E (% chg.) Quarterly financials Total income 18,064 17,385 14,346 17, ,181 64, , Broking and related income 2,078 2,098 2,045 1,886 (1) ,132 7,197 (1) 8, Equity brokerage 2,048 1,914 2,015 1, ,784 6, , Distribution/wealth 2,453 2,365 1,923 2, (11) 10,235 9, , Financing income 12,978 12,861 9,994 13, (2) 66,654 47, , Other income (290) NM 160 (0) NM 160 NM Operating expenses 5,155 6,282 4,379 6,229 (18) 18 (17) 25,354 21, , Direct expenses 301 2, (86) (53) (61) 6,052 5, , Employees expenses 3,107 3,130 2,206 3,099 (1) ,199 10, , Administration expneses 1,747 1,000 1,529 2, (26) 7,102 4, , EBDITA 12,908 11,103 9,967 11, ,827 43, , Depreciation EBITA 12,714 10,990 9,817 11, ,089 42, , Interest 7,573 6,280 6,052 6, ,933 25, , PBT 5,141 4,710 3,766 4, ,156 16, , Taxation 1,681 1,492 1,221 1, ,647 5, , PAT bef. minority interest 3,446 3,224 2,528 3, ,509 11, , Minority interest ,524 2, , PAT 2,663 2,598 1,976 2, ,985 9, , Tax rate (%) bps 28 bps 359 bps bps bps Average daily volumes and market share IIFL - F&O (Rs bn) (3) Market - F&O (Rs bn) 8,373 5,367 8, Market share - F&O (%) bps -8 bps IIFL - cash (Rs bn) (22) Market - cash (Rs bn) (13) Market share - cash (%) bps -44 bps Overall margins (%) bps 27 bps Loan under management (Rs bn) Segmental results (Rs mn) PBT 5,127 3,749 4, ,113 8,392 (17) 11, Broking and related income Finance 3,419 2,385 3, Distribution and marketing Exhibit 2: IIFL Holdings: NBFC and Wealth drive value SoTP-based valuation, March fiscal year-end, March 2020E Valuation (Rs mn) (Rs/ share) Comments Broking 23, X PER NBFC (85% stake) 107, X PBR Wealth management (51% stake) 67, X PER Total 197, KOTAK INSTITUTIONAL EQUITIES RESEARCH

17 IIFL Holdings NBFCs Exhibit 3: Reconciliation of profits under Ind-AS and IGAAP Particulars 1QFY18 1QFY19 Remarks Net profit after tax as per IGAAP 2,519 2,971 Add/(less) Fair valuation of investments MTM gain on investments. Effective interest rate on financial assets 51 (23) Amortisation of upfront fees, acquisition cost. Effective interest rate on financial liabilities (22) (2) Amortisation of cost incurred on borrowings. Expected credit loss (336) 441 Release in Q1FY19 is due to resolution of old cases. Interest strip amortization Recognition of interest spread on NPV basis for large loan sell down in 1QFY19. Reclassification of actuarial gains/losses on employment benefits 11 (46) Gain/(loss) on actuarial valuation of retiral benefits to employees. Incremental cost on fair valuation of ESOP (23) NA Others (33) (19) Includes goodwill, interest expense on preference shares, ESOP compensation etc Deferred tax impact on above adjustments 20 (263) Net profit after tax as per Ind-AS 2,527 3,445 Other comprehensive income (net of tax) (7) 32 Gain/(loss) on actuarial valuation of retiral benefits to employees. Total comprehensive income as per Ind-AS 2,520 3,477 Source: Company IIFL Wealth: Agency income strong; pressure on lending business PBT growth of 21% yoy. IIFL Wealth delivered 21% PBT growth in 1QFY19 on the back of 34% growth in agency income and 25% growth in wealth AUMs under Ind-AS. 27% yoy decline in NII and higher cost-to-income ratio (35% versus 33% in 1QFY19) partially offset high growth in agency income. Fee income growth of 34% yoy; yields inch up in 1QFY19; may moderate over time. Agency fee income growth was 34% yoy on the back of 25% growth in AUMs and marginal improvement in agency yield to 70 bps from 69 bps yoy. We expect agency realizations to moderate to 64 bps by FY2020E from 71 bps in FY2018 as margins across financial distribution businesses reduce over time. Net new money down in 1QFY19. Net new money (NNM) in 1QFY19 was down 54% yoy. The company had large issuance last year. Slowdown in overseas mobilization due to change in regulations for NRIs to invest through the AIF route and general slowdown in market were the key reasons for low inflows in 1QFY19. The company is awaiting regulatory clarity on the new policy for NRI investments in AIF; we hence believe that AIF mobilizations will remain subdued in the near term. AUM growth of 25%; we expect 22% CAGR during FY E. IIFL reported 25% growth in AUMs to `1.4 tn during the quarter. Post regrouping of some of its mutual funds (direct) assets with mutual funds distribution assets, this segment was up 30% yoy (on like to like basis). Discretionary assets were up 53% in line with its policy to shift focus to this segment. Offshore discretionary assets were down qoq and will likely remain muted in the near term as discussed above. Pressure in NBFC over the medium term. Wealth NBFC loan book grew 56% yoy but down 16% qoq to `56 bn. NII from this business was down 27% yoy. According to the management, the company had booked one-off income of `150 mn in 1QFY18 leading to a high base; excluding the one-off, NII decline would be about 6%. Rise in borrowing rates and competition on the asset side has put pressure on NIM, prompting the company to go slow in the current quarter. In terms of pricing, the company targets RoE of 18-20%, including agency and NBFC income. It has maintained its guidance that lending book would be 5-6% of total wealth AUM from 4% currently; we forecast wealth NBFC loan book at % of AUMs with pressure on calculated spreads continuing at 1.8-2% from 3% in FY2018. KOTAK INSTITUTIONAL EQUITIES RESEARCH 17

18 NBFCs IIFL Holdings Growth capital of `7.4 bn; leverage of 3-4X over the medium term. IIFL Wealth has raised capital of `7.45 bn in 1QFY19 to support growth in its NBFC and seed investments in various funds (currently at `3 bn; total investments of `10 bn in 4QFY18). This transaction values the business at `146 bn. On a post-money basis, we forecast its leverage (asset/equity) at X and RoE of 19-21%. Expense growth remains high in 1QFY19; we expect operating leverage to play out. Operating costs increased 22% yoy, compared with ~25% growth in 1QFY19; cost to income ratio (as a consequence of low NII) inched up to 49% from 47% in 1QFY18. Staff expense grew 26% yoy. The company continues to add relationship managers (RM) number of RMs increased to 348 from 330 in 4QFY18, 226 at FY2017 and 195 at FY2016; total employees including the investment team are about 700. Agency fees/rm was `6.8 mn in 1QFY18, up from `6.37 mn in 4QFY18 but marginally lower than `7 mn in 1QFY18. Non-staff expense growth was 11% yoy, driving some operating leverage. We continue to build in improvement in cost-to-income ratio to 44% from 52% in FY2018 as balance sheet growth and RM productivity matures this is key sensitivity to earnings as agency realizations reduce over time. Exhibit 4: IIFL Wealth AUA up 25% yoy Quarterly P&L summary, March fiscal year-end, 1QFY17-1QFY19 (` mn) IGAAP IGAAP IGAAP IGAAP Ind-AS IGAAP IGAAP IGAAP Ind-AS 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 YoY (%) QoQ (%) Income statement Income from operations 1,721 2,435 2,668 3,454 3,494 4,034 4,552 4,300 4, (4) Agency 1,266 1,292 1,270 1,748 1,781 2,105 2,025 2,103 2, Interest income 455 1,143 1,398 1,706 1,713 1,929 2,527 2,197 1,731 1 (21) Other income Total income 1,721 2,435 2,825 3,454 3,494 4,034 4,552 4,300 4, (4) Total expenses ,195 1,219 1,168 1,409 1,499 1,580 1, (10) Employee expenses ,056 1,094 1, (5) Other expenses (21) EBITDA 911 1,510 1,630 2,235 2,326 2,625 3,053 2,720 2, (1) Interest ,090 1,027 1,422 1,724 1,431 1, (14) Provisions (44) (194) (216) PBT ,119 1,252 1,180 1,288 1,251 1, Tax PAT before minority interest ,001 1,032 1, Assets under advice (Rs bn) ,126 1,175 1,282 1,318 1, Cost-income ratio (%) bps -217 bps PAT margin (%) bps 194 bps No. of RMs Source: Company, Kotak Institutional Equities Exhibit 5: IIFL Wealth earned net commission of 70 bps in 1QFY19 Wealth assets and commission yields, March fiscal-year ends, 1QFY17-1QFY19 IGAAP IGAAP IGAAP IGAAP Ind-AS IGAAP IGAAP IGAAP Ind-AS 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Wealth assets (Rs bn) ,126 1,175 1,282 1,318 1,409 (% of total) Distribution AMC/Discretionary Advisory Discretionary (offshore) Retention yield ex-fpi assets- KS (%) Net commission/fees Including fund based activities Source: Company, Kotak Institutional Equities 18 KOTAK INSTITUTIONAL EQUITIES RESEARCH