INDIA DAILY April 10, 2017 India 7-Apr 1-day 1-mo 3-mo

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1 Contents Daily Alerts Company alerts Hindustan Unilever: Global mandate, local upside? Tata Motors: JLR's retail volumes surprise positively INDIA DAILY April 10, 2017 India 7-Apr 1-day 1-mo 3-mo Sensex 29,707 (0.7) Nifty 9,198 (0.7) Global/Regional indices Dow Jones 20,656 (0.0) (1.2) 4.0 Nasdaq Composite 5,878 (0.0) FTSE 7, Nikkei 18, (3.9) (2.3) Hang Seng 24, KOSPI 2,142 (0.5) Ashoka Buildcon: Testing waters not at the cost of core business Sector alerts Banks: New format; less exciting Consumer Products: 4QFY17 preview: back to normal in more ways than one Energy: 4QFY17E preview - weak for downstream, strong for GAIL, steady for RIL and other gas companies Telecom: Whose money is it anyway? Value traded India Cash (NSE+BSE) Derivatives (NSE) 3,040 2,273 2,563 Deri. open interest 2,858 2,943 2,429 Forex/money market Change, basis points 7-Apr 1-day 1-mo 3-mo Rs/US$ 64.3 (25) (239) (393) 10yr govt bond, % (1) 62 Net investment (US$ mn) 6-Apr MTD CYTD FIIs ,903 MFs 14 (74) 6,955 Top movers Change, % Best performers 7-Apr 1-day 1-mo 3-mo JSP IN Equity (2.8) RECL IN Equity (1.0) BHEL IN Equity (2.4) RCAPT IN Equity (2.1) TTAN IN Equity (0.4) Worst performers DIVI IN Equity (1.0) (18.3) (15.9) TTMT/A IN Equity (0.7) 1.6 (12.9) DRRD IN Equity (2.1) (2.0) (12.5) TTMT IN Equity (1.0) (0.2) (9.3) TECHM IN Equity (0.8) (6.9) (6.4) For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL.

2 Hindustan Unilever (HUVR) Consumer Products Global mandate, local upside? We would be wary of looking at Unilever s renewed aggressive focus (and stated targets) on operating margin expansion as a positive for HUVR, for two reasons (1) our (and presumably Street s) numbers for HUVR already bake in a healthy level of EBIT margin expansion (our estimate is a 260 bps EBIT margin expansion from FY2017E levels to 20% in FY2021E) and (2) margin focus, especially when driven as part of a global agenda i.e. without consideration for local factors, runs the risk of dilution in local competitive positioning. Nestle India is a good example. We retain our forecasts and retain our REDUCE rating with an unchanged TP of `860. REDUCE APRIL 10, 2017 UPDATE Coverage view: Cautious Price (`): 925 Target price (`): 860 BSE-30: 29,707 Company data and valuation summary Hindustan Unilever Stock data Forecasts/Valuations E 2019E 52-week range (Rs) (high,low) EPS (Rs) Market Cap. (Rs bn) 2,000.9 EPS growth (%) Shareholding pattern (%) P/E (X) Promoters 67.2 Sales (Rs bn) FIIs 13.1 Net profits (Rs bn) MFs 1.8 EBITDA (Rs bn) Price performance (%) 1M 3M 12M EV/EBITDA (X) Absolute ROE (%) Rel. to BSE (0.1) (10.7) Div. Yield (%) The event Unilever sets aggressive margin expansion targets; 360 bps expansion CY E Shaken perhaps by Kraft s takeover bid, Unilever announced a slew of shareholder value creation moves as an outcome of what it called a strategic review. Among these moves were (1) a fresh net-debt/ EBITDA target of 2X (up from 1.3X in CY2016) and share buyback of EUR5 bn in CY2017, (2) raising dividend by 12%, (3) exiting spreads business, (4) simplifying legal structure, (5) combining foods and refreshment, and (6) creating 20% underlying operating (EBIT) margin by 2020, +360 bps from CY2016 levels of 16.4%. OPM expansion target translates into absolute cost savings of EUR2 bn (net; gross savings of EUR6 bn less reinvestment of EUR4 bn) and bakes in the following segmental margin expansion targets (1) 100 bps improvement in personal care (to 21% from 20%), (2) 600 bps expansion in home care margins (to 16% from 10%), and (3) 500 bps expansion in food and refreshment segment margins to 21% from 16%. The nub for HUVR parent s target versus local dynamics, what trumps, in case of a conflict HUVR contributed ~8% to Unilever s overall sales in CY2016 while its EBIT contribution to the personal care, home care and food/refreshment segments was 16.3%, 13.2%, and 3.4% respectively. Essentially, HUVR is reasonably important to Unilever and by extension, improvement in HUVR s margins (overall as well as segmental, especially home care) is critical to the parent s aggressive commitments to the Street. It is also important to appreciate the human dimension here; a global assignment is the typical move up for local executives in the Unilever system and to that extent, the parent s targets can assume greater significance in cases where there is a conflict between what s good for the local business and what needs to be done to meet the parent s target. It may mean underinvesting in the local business to deliver on margin targets for that s what keeping the parent happy may mean. Negative implications on the local business health show up over time as Nestle India discovered in the past few years. Rohit Chordia Anand Shah Reiterate REDUCE on the stock; parent s target = near-term margin upside is a weak bull case We fully expect sections of the Street to use this development to create excitement on HUVR. We would be wary of falling for this rather simplistic narrative, for two reasons (1) a good level of margin expansion is already a part of HUVR s forward estimates, and (2) it s risky. For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

3 Hindustan Unilever Consumer Products Exhibit 1: HUVR accounts for ~8% of Unilever s revenues HUVR s segmental revenue salience in Unilever s revenues, December calendar year-ends, 2016 (%) Exhibit 2: HUVR accounts for ~10-11% of Unilever s profits HUVR s core operating profit salience in Unilever s profits, December calendar year-ends, 2016 (%) Home care Personal care Refreshment Foods Foods & Refreshment combined Total turnover Home care Personal care Refreshment Foods Foods & Refreshment combined Core operating profit PAT Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities Exhibit 3: HUVR s segmental margins are higher versus Unilever barring foods Segmental OPM comparison between HUVR and Unilever, December calendar year-ends, 2016 (%) 25 Unilever 23.5 HUVR Home care Personal care Refreshment Foods Foods & Refreshment combined Source: Company, Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

4 Consumer Products Hindustan Unilever Exhibit 4: We are modeling 260 bps expansion in HUVR s EBIT margin to 20% over FY E HUVR s EBIT margin trends, March fiscal year-ends, E (%) E 2018E 2019E 2020E 2021E Exhibit 5: Key assumptions for Hindustan Unilever, March fiscal year-ends (Rs mn) E 2018E 2019E 2020E Segmental Gross revenue (Rs mn) Home care 108, , , , ,332 Personal care 160, , , , ,080 Refreshments 44,820 48,315 53,434 59,119 65,197 Foods 10,957 11,322 12,518 13,803 15,183 Others 10,528 8,335 9,203 10,221 11,332 Total 334, , , , ,124 yoy growth (%) Home care Personal care Refreshments Foods Others (20.8) Total Segmental PBIT (Rs mn) Home care 10,527 11,506 12,987 15,111 16,572 Personal care 38,023 38,244 43,351 50,595 58,261 Refreshments 6,794 7,368 8,549 9,755 10,823 Foods 1, ,220 1,449 1,670 Others 93 (83) Total 56,544 57,941 66,199 77,037 87,496 yoy growth (%) Home care Personal care Refreshments Foods (18.2) Others NM NM NM NM Total Segmental PBIT Margin (%) Home care Personal care Refreshments Foods Others 0.9 (1.0) Total KOTAK INSTITUTIONAL EQUITIES RESEARCH

5 Hindustan Unilever Consumer Products Exhibit 6: HUVR: Condensed financials, (as per IGAAP) and E (as per Ind-AS), March fiscal year-ends (Rs mn) E 2018E 2019E 2020E Profit model (Rs mn) Net operating revenues 280, , , , , , ,261 EBITDA 44,753 51,043 57,491 59,227 68,165 79,478 90,121 Financial income 6,210 6,184 5,638 5,739 5,630 5,728 5,914 Interest (360) (168) (153) (195) (160) (177) (194) Depreciation (2,606) (2,867) (3,208) (3,937) (4,614) (5,445) (5,950) Pretax profits 47,997 54,192 59,769 60,834 69,022 79,585 89,891 Tax (12,444) (16,560) (18,334) (19,163) (21,397) (24,671) (28,316) Recurring Net profit 35,553 37,632 41,436 41,671 47,625 54,914 61,575 EO items 3,122 5,520 (70) 2,071 Reported Net Profit 38,675 43,153 41,365 43,742 47,625 54,914 61,575 Recurring EPS (Rs) Balance sheet (Rs mn) Total equity 32,771 37,248 62,791 62,552 63,607 64,190 64,966 Deferred tax liability (Net) (1,617) (1,960) (1,672) (1,672) (1,672) (1,672) (1,672) Total liabilities and equity 31,153 35,288 61,120 60,880 61,935 62,518 63,295 Net fixed assets (incl CWIP) 27,100 29,145 32,887 36,875 39,222 41,118 42,859 Intangible assets Cash 22,210 25,376 30,113 27,452 29,569 32,450 36,024 Investments 30,941 32,779 27,797 27,797 27,797 27,797 27,797 Net current assets (49,416) (52,232) (29,797) (31,364) (34,773) (38,967) (43,505) Total assets 31,153 35,288 61,120 60,880 61,935 62,518 63,295 Free cash flow (Rs mn) Operating cash flow, excl. working capital 32,476 34,875 40,679 42,135 46,768 54,806 61,805 Working capital 4,766 (2,156) (1,016) 1,566 3,409 4,194 4,538 Capital expenditure (5,112) (4,948) (7,355) (7,925) (6,961) (7,340) (7,691) Free cash flow 32,130 27,772 32,307 35,777 43,216 51,660 58,652 Key ratios Net operating revenue growth (%) NM Core EPS growth (%) Gross margins (%) EBITDA margin(%) A&SP (% of sales) ETR (% of PBT) RoE (%) RoCE (%) KOTAK INSTITUTIONAL EQUITIES RESEARCH 5

6 Tata Motors (TTMT) Automobiles JLR s retail volumes surprise positively. JLR reported 21% yoy growth in retail sales in March 2017 which was driven by strong double-digit growth across regions. UK volumes grew by 27% yoy led by the commencement of sales of new Discovery model. China, Europe and North America volumes also increased by 19-21% yoy. We expect volume growth momentum to remain strong over the next two years (11% CAGR over FY E) led by the ramp-up of Discovery and launch of new models. We believe that improvement in profitability over the next one year will be key for stock performance hereon. We maintain BUY rating with revised TP of `540 (from `550). BUY APRIL 10, 2017 UPDATE Coverage view: Cautious Price (`): 468 Target price (`): 540 BSE-30: 29,707 Company data and valuation summary Tata Motors Stock data Forecasts/Valuations E 2019E 52-week range (Rs) (high,low) EPS (Rs) Market Cap. (Rs bn) 1,496.7 EPS growth (%) (58.0) Shareholding pattern (%) P/E (X) Promoters 34.7 Sales (Rs bn) 2, , ,267.2 FIIs 42.7 Net profits (Rs bn) MFs 4.4 EBITDA (Rs bn) Price performance (%) 1M 3M 12M EV/EBITDA (X) Absolute 0.2 (5.9) 24.8 ROE (%) Rel. to BSE-30 (2.2) (15.3) 3.7 Div. Yield (%) JLR retail volumes up 21% yoy in March 2017; strong all-round performance JLR retail volumes increased by 21% yoy to 90,838 units in March Jaguar volumes increased by 83% yoy led by the launch of F-Pace while Land Rover volumes grew by 5% yoy. The company reported strong double-digit volume growth across regions. In particular, demand in UK was quite strong as retail sales grew by 27% yoy in March 2017 as compared to low single-digit growth over the last five months. China, Europe and North America volumes grew by 19-21% yoy. In China, volume growth was largely driven by the ramp-up of local production in the Chery JV (ex of JV, China volumes were down 2% yoy). China JV retail increased 47% yoy to 6,424 units in March In terms of models, volumes of Jaguar F-Pace and Discovery Sport continued to remain strong in March Discovery Sport volumes grew by 13% yoy even on a high base which is quite positive, in our view. The impact of run-down of old Discovery model moderated in March 2017 as retail sales of new Discovery has commenced and the company has retailed around 5,000 units so far. We expect Discovery volumes to ramp-up over the next 2-3 months as the model gets launched across all major markets. We note that Range Rover and Range Rover Sport volumes also increased by 20% and 12% yoy respectively. Overall, we expect JLR s volume performance to remain strong and the company to deliver 11% volume CAGR over FY E driven by (1) ramp-up of new Discovery volumes and (2) launch of mid-sized Range Rover Velar in 2HCY17. Lower our margin assumptions for JLR on higher hedge losses; maintain BUY with TP of 540 We lower our FY E EBITDA margin assumptions for JLR by bps as we build in higher forex losses in our estimates (refer to Exhibit 7). We still expect JLR s EBITDA margin to improve to 13.7%/15.6% in FY E (from 11.4% in FY2017E) led by platform consolidation benefits, non-recurrence of one-off warranty expenses incurred in FY2017 and operating leverage benefits. We also bake in lower profitability in the standalone business due to potential headwinds in the domestic MHCV industry. Consequently, we cut our consolidated FY E EPS estimates by 7-12%. We reiterate our positive stance on the stock and maintain BUY rating with SOTP-based target price of 540 (from `550 earlier) on roll over of target price to March Hitesh Goel Nishit Jalan For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

7 Tata Motors Automobiles Exhibit 1: JLR retail volumes increased by 21% yoy in March 2017 Model wise retail volume breakup of JLR, March fiscal year-end, (units) Jaguar models Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 yoy (%) YTDFY17 YTDFY16 yoy (%) XE 6,521 2,201 3,172 3,836 3,472 2,792 4,912 3,426 3,417 4,035 3,364 3,309 7, ,469 36, XF 5,496 2,590 2,648 2,648 2,508 1,977 3,478 3,094 3,054 3,597 3,133 2,148 6, ,157 34, XJ 1, , , ,437 (9.1) 11,489 11,735 (2.1) XK F-Pace 13 1,531 3,068 4,868 5,476 4,460 7,221 6,206 6,526 6,604 5,893 5,323 10,779 67, F Type 1, , ,777 11,839 (9.0) Total Jaguar 15,175 8,002 10,633 13,171 13,198 10,868 17,640 14,402 14,613 16,349 13,949 12,203 27, ,848 94, Land Rover models Defender 1, ,380 22,504 (93.9) Discovery 7,518 4,354 3,836 4,197 3,923 3,534 5,806 2,740 2,623 2,646 1,589 1,535 5,240 (30.3) 42,023 51,072 (17.7) Discovery Sport 16,937 9,422 10,075 9,613 8,392 7,053 12,838 9,605 9,697 11,485 10,454 8,357 19, ,152 95, Freelander Range Rover 6,838 4,115 4,382 3,864 3,906 3,722 4,904 4,371 4,487 5,798 4,909 4,790 8, ,479 59,974 (4.2) Range Rover Evoque 15,904 8,293 8,511 8,959 8,208 6,098 11,761 9,012 8,777 9,899 9,090 7,806 17, , , Range Rover Sport 11,003 6,812 7,258 6,513 6,699 5,465 8,048 6,168 7,375 9,180 7,649 6,244 12, ,746 86, Total Land Rover 60,128 33,349 34,312 33,285 31,288 26,058 43,407 31,923 32,975 39,026 33,744 28,775 63, , , JLR Total 75,303 41,351 44,945 46,456 44,486 36,926 61,047 46,325 47,588 55,375 47,693 40,978 90, , , Source: Company, Kotak Institutional Equities Exhibit 2: Strong volume performance across regions in March 2017 Geographical retail volume breakup of JLR, March fiscal year-end, (units) Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 yoy (%) YTDFY17 YTDFY16 yoy (%) Geographic breakdown China Region 10,288 9,136 9,328 7,261 8,655 9,314 11,515 10,958 11,591 13,859 12,813 8,515 12, ,206 96, Europe 16,999 9,543 11,525 12,483 10,704 8,003 11,462 10,745 11,246 12,069 10,805 11,942 20, , , North America 12,440 7,061 7,918 9,587 10,469 10,330 9,429 9,736 10,137 13,757 9,908 10,162 15, ,527 99, UK 25,127 9,095 9,091 8,733 7,631 2,373 20,977 8,652 8,181 7,394 8,131 2,719 31, , , Rest of the world 10,449 6,516 7,083 8,392 7,027 6,906 7,664 6,234 6,433 8,296 6,036 7,640 11, ,477 93,629 (4.4) JLR Total 75,303 41,351 44,945 46,456 44,486 36,926 61,047 46,325 47,588 55,375 47,693 40,978 90, , , Source: Company, Kotak Institutional Equities Exhibit 3: China share will increase in FY E as JV production ramps up completely Geography-wise wholesale volume mix (includes China JV), March fiscal year-ends, E (units, %) E 2018E 2019E Geography N.A 58,327 64,885 71,000 79, , , , ,755 UK 61,796 68,054 76,000 88, , , , ,726 Europe (excl Russia and UK) 71,580 78,781 70,000 89, , , , ,492 Russia 15,201 16,721 13,000 10,400 6,000 6,000 6,000 6,000 China 54,532 79, , ,300 98, , , ,363 Asia Pac (excl China) 14,467 18,289 23,000 27,100 29,810 32,791 36,070 39,677 Rest of World 38,530 45,891 73,000 56,900 65,376 42,014 51,681 47,245 Total Volumes 314, , , , , , , ,258 Yoy growth (%) Geographical mix (%) N.A UK Europe (excl Russia and UK) Russia China Asia Pac (excl China) Rest of World Total Volumes KOTAK INSTITUTIONAL EQUITIES RESEARCH 7

8 Automobiles Tata Motors Exhibit 4: New model launches to drive volume growth for JLR over FY E JLR wholesale model-wise volume mix assumptions (includes China JV), March fiscal year-ends, E (units, %) Model E 2018E 2019E XF 33,651 37,984 47,000 45,900 36,200 38,000 41,400 42,600 XJ 15,843 15,816 19,000 16,300 12,200 9,500 10,640 10,640 XK 4,545 4,012 3,000 2, F type 10,000 12,200 12,600 11,300 11,865 11,865 Small Jaguar 39,200 48,000 48,000 48,000 F Pace 1,806 75,000 84,000 84,000 Jaguar 54,039 57,812 79,000 76, , , , ,105 Defender 19,290 15,089 17,000 20,000 20,200 Discovery 46,466 43,579 44,000 50,600 53,700 42,000 70,000 84,000 Freelander 46,977 52,150 57,000 38,700 Discovery Sport 13,600 97, , , ,640 Range Rover 31,209 29,835 46,000 61,400 60,100 55,000 55,000 57,750 RRSport 56,235 57,485 66,000 85,800 90,300 84,000 84,000 88,200 Evoque 60, , , , , , , ,563 New Range Rover SUV 30,000 60,000 Land Rover 260, , , , , , , ,153 Total Volumes 314, , , , , , , ,258 Model mix (%) XF XJ XK F type Small Jaguar F Pace Defender Discovery Freelander Discovery Sport Range Rover RRSport Evoque New Range Rover SUV Total Volumes KOTAK INSTITUTIONAL EQUITIES RESEARCH

9 Tata Motors Automobiles Exhibit 5: We build in 4% yoy CAGR in domestic MHCV volumes over FY E Tata Motors standalone volume assumptions, March fiscal year-ends, E (units) E 2018E 2019E M&HCVs 221, , , , , , , ,673 M&HCVs-domestic 207, , , , , , , ,209 M&HCVs-exports 14,284 9,124 12,273 15,726 19,347 26,118 28,208 30,465 LCVs 363, , , , , , , ,404 LCVs-domestic 95, ,520 85,140 59,598 41,719 43,805 50,375 56,420 Ace 227, , , , , , , ,330 LCVs-exports 40,786 34,881 30,600 30,687 34,497 36,222 41,655 46,654 UVs 56,464 48,617 32,400 25,617 18,881 19,969 22,913 25,188 UVs-domestic 55,744 47,454 31,268 24,609 18,138 19,226 22,110 24,321 UVs-exports 720 1,163 1,132 1, Passenger vehicles 265, , , , , , , ,915 Passenger vehicles-domestic 183, ,845 85,648 92,569 92, , , ,838 Passenger vehicles-exports 7,288 5,663 5,707 2,512 3,264 3,525 3,807 4,112 Small car 74,527 53,847 21,539 16,901 15,000 16,500 18,150 19,965 Total domestic sales 843, , , , , , , ,083 Total export sales 63,078 50,831 49,712 49,933 57,851 66,608 74,473 82,097 Total vehicle sales 906, , , , , , , ,180 Volume growth (yoy %) M&HCVs 5.6 (31.1) (19.7) (0.8) M&HCVs-domestic 7.7 (30.7) (23.1) (5.2) M&HCVs-exports (17.9) (36.1) LCVs (30.3) (25.8) (7.5) LCVs-domestic (25.0) (30.0) (30.0) Ace (34.7) (28.1) (1.9) LCVs-exports 24.3 (14.5) (12.3) UVs 31.1 (13.9) (33.4) (20.9) (26.3) UVs-domestic 31.8 (14.9) (34.1) (21.3) (26.3) UVs-exports (6.0) 61.5 (2.7) (11.0) (26.3) Passenger vehicles 0.8 (32.0) (37.4) (0.8) (0.8) Passenger vehicles-domestic (1.3) (34.1) (29.1) Passenger vehicles-exports 3.0 (22.3) 0.8 (56.0) Small car 5.8 (27.7) (60.0) (21.5) (11.2) Total domestic sales 13.2 (10.0) (31.9) (12.5) Total export sales 8.7 (19.4) (2.2) Total vehicle sales 12.9 (10.7) (30.1) (11.4) KOTAK INSTITUTIONAL EQUITIES RESEARCH 9

10 Automobiles Tata Motors Exhibit 6: We expect JLR s EBITDA margin to improve in FY E driven platform consolidation and operating leverage Jaguar Land Rover income statement (excluding China JV), March fiscal year-ends, E (GBP mn) E 2018E 2019E Volumes (000s) Sales 13,512 15,784 19,386 21,866 22,208 25,633 29,341 31,690 Cost of sales 11,373 13,254 15,910 17,625 19,028 22,488 25,076 26,482 Materials 8,733 9,904 11,904 13,185 13,303 15,200 17,165 18,538 Labor 1,011 1,333 1,654 1,977 2,321 2,520 2,808 3,109 Manufacturing costs and SG&A 1,629 2,017 2,352 2,463 3,404 4,768 5,103 4,835 D&A ,051 1,418 1,618 1,868 2,118 Product dev EBIT 1,524 1,710 2,518 3,080 1,572 1,295 2,165 2,839 EBITDA 1,989 2,331 3,393 4,131 2,990 2,913 4,033 4,957 Other income Interest 69 (3) PBT 1,492 1,784 2,371 2,993 1,520 1,265 2,135 2,809 Tax Forex gains/(losses) (14) (108) 137 (373) (27) 160 PAT 1,481 1,216 1,886 2,044 1,248 1,046 1,580 2,079 EBITDA margin (%) Exhibit 7: We lower our consolidated EPS estimates on lower profitability assumptions in both standalone and JLR (higher forex losses) Earnings revision table, March fiscal year-ends, E (` mn, %) Standalone (Rs mn) New estimates Old estimates % change 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Volumes (units) 542, , , , , , (0.1) Net sales 422, , , , , , (0.3) (0.7) EBITDA 10,989 19,031 26,501 13,051 22,158 30,626 (15.8) (14.1) (13.5) EBITDA margin (%) Adjusted net profit (24,481) (18,016) (15,852) (21,019) (15,514) (12,552) EPS (7.2) (5.3) (4.7) (6.2) (4.6) (3.7) JLR (GBP mn) Volumes (units) 531, , , , , ,516 (0.9) Average realization 48,200 48,747 48,168 48,005 48,099 47, Net sales 25,633 29,341 31,690 25,769 28,802 31,158 (0.5) EBITDA 2,913 4,033 4,957 3,003 4,195 5,039 (3.0) (3.9) (1.6) EBITDA margin (%) Product development Depreciation 1,618 1,868 2,118 1,618 1,868 2,118 Hedged forex losses 1,465 1,600 1,000 1,450 1, Net profit 1,046 1,580 2,079 1,115 1,700 2,139 (6.2) (7.1) (2.8) EPS (pound) (6.2) (7.1) (2.8) Consolidated (Rs mn) Net sales 2,749,189 3,011,918 3,267,238 2,760,519 2,997,509 3,258,220 (0.4) EBITDA 278, , , , , ,184 (3.2) (5.1) (3.3) EBITDA margin (%) Reported net profit 61, , ,296 70, , ,826 (12.4) (12.2) (7.4) EPS (12.4) (12.2) (7.4) GBP:INR (1.2) (1.2) 10 KOTAK INSTITUTIONAL EQUITIES RESEARCH

11 Tata Motors Automobiles Exhibit 8: We value Tata Motors at `540/share based on SOTP methodology Tata Motors SOTP valuation, March fiscal year-ends, 2018E Standalone business Standalone book value 166,606 Less: Dividends received from JLR 69,068 Book value/ Net profit Multiple Value Value per share (Rs mn) (X) (Rs mn) (Rs) Comments Adjusted book value of standalone business 97, , based on 1X March 2019E book value JLR JLR UK 172, ,552, based on 9X March 2019 EPS JLR China JV valuation 37 based on 6X EV/EBITDA March 2019 Total standalone + JLR 523 Value of subsidiaries 22 SOTP-based value 545 Target price 540 Source: Kotak Institutional Equities estimates Exhibit 9: Standalone entity will likely incur losses in FY E Tata Motors standalone profit and loss, balance sheet and cash flow statement, March fiscal year-ends, E (` mn) Profit model (Rs mn) E 2018E 2019E Net sales 543, , , , , , , ,033 EBITDA 41,776 17,180 (9,112) (12,375) 23,155 10,989 19,031 26,501 Other income 2,104 17,046 18,669 18,814 21,329 9,500 8,000 8,000 Interest (8,550) (10,041) (13,375) (16,117) (14,811) (15,525) (17,721) (19,326) Depreciaton (16,067) (18,176) (20,703) (26,032) (24,538) (28,670) (31,830) (34,990) Profit before tax 19,263 6,008 (24,521) (35,710) 5,136 (23,706) (22,520) (19,815) Extra ordinary income/(expenses) 5,852 (8,642) 14,263 (4,038) (3,632) (1,500) Tax expense 6 13,603 (7,642) 885 (400) 4,504 3,963 Net profit 12,422 (1,354) 3,346 (47,390) 2,342 (25,606) (18,016) (15,852) Adjusted net profit 16,519 (3,031) (27,276) (52,240) 5,974 (24,481) (18,016) (15,852) Adjusted Diluted EPS (Rs) 4.9 (0.9) (8.0) (15.4) 1.8 (7.2) (5.3) (4.7) Balance sheet (Rs mn) Equity 6,348 6,381 6,438 6,438 6,792 6,792 6,792 6,792 Reserves and Surplus 189, , , , , , , ,814 Deferred tax liability 21,054 19, Total borrowings 158, , , , , , , ,873 Current liabilities 169, , , , , , , ,299 Total liabilities 545, , , , , , , ,777 Net fixed assets 190, , , , , , , ,958 Investments 204, , , , , , , ,755 Cash 18,410 4,629 2,262 9,650 21,881 15, (3,513) Other current assets 128, ,790 94, , , , , ,578 Miscellaneous expenditure 2,584 2,150 Total assets 545, , , , , , , ,777 Free cash flow (Rs mn) Operating cash flow excl. working capital 39,671 17,557 (9,949) (6,972) 27,195 20,989 31,535 38,464 Working capital changes (3,135) 5,028 34,583 (15,171) (3,733) (6,845) (3,870) (3,095) Capital expenditure (28,355) (25,884) (30,941) (30,548) (29,820) (40,000) (40,000) (40,000) Free cash flow (6,642) (21,394) (23,805) (71,140) (26,487) (41,381) (30,056) (23,957) Ratios EBITDA margin (%) (2.7) (3.4) Debt/equity (X) Net debt/equity (X) RoAE (%) 8.3 (1.6) (14.2) (30.7) 3.2 (11.5) (9.4) (9.1) Book value/share (Rs) KOTAK INSTITUTIONAL EQUITIES RESEARCH 11

12 Automobiles Tata Motors Exhibit 10: We expect consolidated earnings to grow at 15% CAGR over FY E Tata Motors consolidated profit and loss, balance sheet and cash flow statement, March fiscal year-ends, E (` mn) Profit model (Rs mn) E 2018E 2019E Net sales 1,656,545 1,888,176 2,328,337 2,627,963 2,755,611 2,749,189 3,011,918 3,267,238 EBITDA 223, , , , , , , ,258 Other income 6,618 8,115 8,286 8,987 9,817 10,590 7,350 7,700 Interest (29,822) (35,533) (47,338) (48,615) (46,234) (39,635) (43,490) (47,052) Depreciaton (56,254) (75,693) (110,782) (133,886) (170,142) (174,836) (192,274) (216,184) Profit before tax 143, , , , ,004 75, , ,722 Extra ordinary income/(expenses) (8,315) (6,027) (9,854) (1,847) (21,196) 6,550 Tax 400 (37,710) (47,648) (76,429) (28,726) (31,000) (43,737) (55,963) Minority Interest + Associate income (574) 301 (1,132) (734) (845) 11,043 11,294 12,537 Net profit 135,165 98, , , ,238 61, , ,296 EPS (Rs) Balance sheet (Rs mn) Equity 6,348 6,381 6,438 6,438 6,792 6,792 6,792 6,792 Reserves and Surplus 325, , , , , , ,647 1,155,943 Deferred tax liability 21,651 20,195 15,723 13,432 31,661 31,661 31,661 31,661 Minority Interest 3,071 3,705 4,207 4,333 8,883 9,728 10,573 11,418 Total borrowings 471, , , , , , , ,351 Current liabilities 626, , ,596 1,070,091 1,139,921 1,129,804 1,171,760 1,208,431 Total liabilities 1,453,826 1,711,603 2,199,983 2,386,580 2,692,976 2,765,508 2,953,690 3,198,595 Net fixed assets 562, , ,754 1,124,226 1,288,507 1,418,150 1,551,396 1,659,238 Goodwill 40,937 41,024 49,788 46,970 48,365 48,365 48,365 48,365 Investments 89,177 90, , ,367 12,532 12,532 12,532 12,532 Cash 182, , , , , , , ,819 Other current assets 574, , , , , , , ,377 Miscellaneous expenditure 4,514 11,339 23,471 23,471 27,264 27,264 27,264 27,264 Total assets 1,453,826 1,711,603 2,199,983 2,386,580 2,692,976 2,765,508 2,953,690 3,198,595 Free cash flow (Rs mn) Operating cash flow excl. working capital 206, , , , , , , ,377 Working capital changes (22,801) (680) 57,744 (36,718) 25,515 (31,951) (39,728) (37,810) Capital expenditure (138,756) (187,570) (269,252) (315,396) (326,232) (304,480) (325,520) (324,026) Free cash flow (including finance business debt) 11,351 (13,508) 30,554 (26,637) 8,396 (99,027) (48,239) 24,490 Ratios EBITDA margin (%) Debt/equity (X) Net debt/equity (X) Book value (Rs per share) ROAE (%) KOTAK INSTITUTIONAL EQUITIES RESEARCH

13 Ashoka Buildcon (ASBL) Infrastructure Testing waters not at the cost of core business. Recent focus on yield generating assets beyond roads should be seen in the context of (1) related investments being a small share of annual EPC cash profits and (2) decent precedent set in T&D of ABL s approach to entering new businesses. These are unlikely to inhibit investments in roads given ABL s (1) strong balance sheet and (2) self-funding nature of HAM projects (support from NHAI, JV partner, EPC margin). The potential uptick in roads ordering would determine ABL s fortunes more than making small investments elsewhere. BUY APRIL 10, 2017 UPDATE Coverage view: Attractive Price (`): 205 Target price (`): 250 BSE-30: 29,707 Company data and valuation summary Ashoka Buildcon Stock data Forecasts/Valuations E 2019E 52-week range (Rs) (high,low) EPS (Rs) Market Cap. (Rs bn) 38.4 EPS growth (%) 71.3 (48.7) Shareholding pattern (%) P/E (X) Promoters 56.7 Sales (Rs bn) FIIs 7.7 Net profits (Rs bn) MFs 23.3 EBITDA (Rs bn) Price performance (%) 1M 3M 12M EV/EBITDA (X) Absolute ROE (%) Rel. to BSE Div. Yield (%) `2.3 bn of equity to lease commercial area near Mumbai airport; expects 20%+ returns ABL recently won the rights to develop and lease two land parcels for commercial activity near the Mumbai International Airport for 49 years. The MIAL project saw interest from ~17 bidders. Adjusted for total leasable area of `1.6 mn square feet, ABL would invest upfront a quantum of ~`6,000 per square feet (psf). Against this it would be earning an eventual annual rental of `1,700 psf beyond the construction period (based on occupancy) less annual lease rental of `100 psf (from year one). ABL expects to earn 20%+ returns over an equity investment of `2.3 bn, assuming a four year construction period and lease rentals at a discount to current rentals in comparable areas. Our preliminary analysis suggests ~18% equity return on this project excluding the EPC margin made. We would include such value into our SoTP once all approvals and financial closure happen. ABL has to obtain approval for changing the development plan and expects construction to start from October EPC operations generate `2 bn of annual cash profits The `2.3 bn of equity investment into the above land parcels and `0.3 bn in the recently won CGD project combined, yield an annual equity requirement of ` bn per annum. This is against `2 bn of EPC cash profits. (1) The standalone balance sheet of `20 bn has negligible leverage. (2) The BOT portfolio is also generating small cash profits. (3) Last, but not the least, the 30% share of equity in current and incremental HAM projects does not require material support from EPC cash flows; it can get funded through a combination of support from NHAI and contribution from new JV partner for the 39% stake in ACL it would take of SBI- Macquarie. Potential uptick in roads ordering the key determinant Ashoka Buildcon has been able to grow its order backlog by ~60%in FY2017E based on strong `50 bn order inflows in roads. This is against `~650 bn of potential orders awarded from NHAI in the year. NHAI is likely to cross this mark in FY2018 given government impetus and likely strong start to the year (based on `200 bn of active tenders). In addition, the port/hinterland connectivity projects from Sagarmala and trunk infrastructure projects from DMIC would provide further fillip to orders over FY2018E-22E of reasonably sized road projects. Ashoka Buildcon remains our preferred pick within the roads space. Aditya Mongia Ajinkya Bhat For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

14 Infrastructure Ashoka Buildcon Takeaways from the conference call Won the lease to develop a land parcel in the GVK Sky city project. In the bidding conducted by Mumbai International Airport Limited (MIAL), Ashoka Buildcon won the rights to develop two adjoining land parcels for commercial activity. The key features of the deal include: Total built up area of 1.17 mn sq. ft that can be developed into a leasable area of 1.3X-1.4X. The lease period of 49 years including 3-4 years of the construction period (19 years in the first concession period of MIAL and 30 years in the concession extension period). The company will pay `3.3 bn of refundable security deposit (interest-free) and an annual lease rental of `152 mn with an escalation of 15% every 3 years. Required funding to be raised through a combination of debt and internal accruals. The project will entail a capex of `8.5-9 bn (including refundable deposit) and would require equity contribution of `2.3 bn in the project entity / SPV. This equity component can further be funded by a combination of debt and internal accruals by the parent. The refundable security deposit has to be paid out within 60 days from the date of LOA while the equity components will be infused over years in the construction period. Lease rental payments to MIAL for the land parcel will start right from the first year of the lease period. The company will have to maintain at least 51% stake in the project until COD + 2 years post which it will be able to fully monetize and exit the project if it decides to do so. Lucrative IRR expected, company testing waters. The management mentioned that the land can be used for any purpose except residential use. The company has not finalized the mix of various offerings on the land (commercial, office space, hospitality, etc.) but plans to start construction by Oct The land is a clean and fenced and will have all land clearances in place except building plan which the company will have to get approved once finalized. The company expects to receive lease payments to the tune of ` /sq. ft once the project is complete that would provide 22%+ equity IRR as per the management. The company also mentioned that among the five land parcels bid out recently, only one other parcel has the permission to develop a commercial project and may potentially compete with Ashoka Buildcon for tenants. The competitive risk thus remains manageable. Given high IRR expectations, the company is currently testing waters in the real estate business and may gradually scale up this segment in the future. Focus on core road infra business reaffirmed. The management reassured investors that there has been no deviation from its focus on the core road infrastructure business. This real estate project is a diversification attempt similar to the city gas distribution project for Ratnagiri won in 2QFY17. The company sees increasing investor interest in yield generating assets and thus monetization of the real estate project would be an available option. Debt to be used only for working capital. The company mentioned a prudent leveraging policy of using debt only for working capital requirements. Incremental equity requirements (`2.5 bn in HAM projects and `2.3 bn in real estate project) will be funded through internal accruals and asset monetization. 14 KOTAK INSTITUTIONAL EQUITIES RESEARCH

15 Ashoka Buildcon Infrastructure Exhibit 1: Our preliminary analysis of deal suggests a 17% return on investment, excluding EPC returns Preliminary analysis of land parcel deal, March fiscal year-ends (Rs mn) 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2036E 2046E 2056E 2066E Real estate projections Leasable area (mn sq. ft) Cumulative area leased (mn sq. ft) Area leased during the year (mn sq. ft) Project phasing (%) Equity capital 2, ,380 2,070 2,300 2,300 2,300 2,300 2,300 2,300 2,300 2,300 2,300 2,300 Debt 6,700 3,334 4,020 6,030 6,700 6,644 6,586 6,510 6,401 6,248 1, (0) Refundable security deposit received from tenents Cash balance 500 1,586 3,632 3,720 3,220 3,358 4,208 5,848 8,003 36,876 95, , ,481 Refundable security deposit given to MIAL 3,294 3,294 3,294 3,294 3,294 3,294 3,294 3,294 3,294 3,294 3,294 3,294 3,294 Lease projections Upfront deposit (infra+refundable components, Rs mn) Upfront deposit rate per sq. ft (Rs) Upfront deposit rate inflation (%) Recurring lease income 398 1,045 1,976 2,996 3,681 5,996 9,767 15,909 25,914 Lease rate per sq. ft (Rs) 1,991 2,091 2,195 2,305 2,420 3,942 6,421 10,459 17,037 Lease rate inflation (%) Refundable security deposit payment (3,294) Lease payments (152) (152) (152) (175) (175) (175) (202) (202) (202) (353) (536) (815) (1,426) Lease payout escalation (%) Interest rate (%) Interest payment (333) (368) (503) (637) (667) (662) (655) (646) (632) (211) Other income Cash flow from operations (486) (520) (655) (812) (444) ,749 2,308 4,376 7,414 12,105 19,620 Cash flow from investments (3,294) Cash flow from financing 3,794 1,607 2, (56) (58) (76) (109) (153) (742) - - (0) Net change in cash 14 1,086 2, (500) ,640 2,154 3,634 7,414 12,105 19,620 FCFE (446) 166 1,355 (142) (500) ,640 2,154 3,634 7,414 12,105 19,620 Final year cash flow 3,294 Total FCFE (446) 166 1,355 (142) (500) ,640 2,154 3,634 7,414 12,105 22,914 MIRR 17% Source: Kotak Institutional Equities estimates Exhibit 2: EPC business generates Rs2 bn of cash profits; BOT business is also cash generated Movement of cash profits for the EPC and BOT business of Ashoka Buildcon (consolidated), March fiscal yearends, (Rs bn) EPC BOT Source: Company, Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH 15

16 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 Infrastructure Ashoka Buildcon Exhibit 3: Ashoka has utilized EPC cash flows and debt to fund investments into BOT assets Details of cash outflows, inflows and leftover cash for Ashoka Buildcon (standalone) over the past five years, March fiscal year-ends, (Rs bn) Equity raise Post-tax Op. CF before WC changes (5.0) (4.4) Working capital changes (7.4) LT investments (10.0) (15.0) (1.8) (2.3) (0.6) (12.1) Capex Interest payout Dividend payout Cash inflows Cash outflows Change in debt Notes" (a) BOT cash flows in standalone enityt have been excluded for the above analysis Exhibit 4: EPC margin have not changed materially over the period over which T&D have contributed majority share of revenues Trends in share of T&D revenues and EBIT margin of EPC business of Ashoka Buildcon, March fiscal year-ends (%) Share of power in EPC revenues (LHS, %) EBIT margin of EPC business (RHS, %) KOTAK INSTITUTIONAL EQUITIES RESEARCH

17 Ashoka Buildcon Infrastructure Exhibit 5: Execution should see a major fillip in FY2018E Segmental break-up of standalone financials of Ashoka Buildcon, March fiscal year-ends, E (Rs mn) E 2018E 2019E 2020E Total Order inflows 13,775 28,250 44,488 42,361 44,097 50,261 Order backlog 31,050 41,110 66,632 82,722 93, ,984 Revenues 19,666 19,541 20,666 28,173 34,801 38,240 Yoy growth (%) 26 (1) EBITDA 2,504 2,674 2,731 3,347 4,222 4,601 Yoy growth (%) EBITDA margin (%) Roads Order inflows 2,410 28,250 32,488 37,361 41,097 47,261 Order backlog 13,620 32,910 51,488 71,576 86, ,978 Revenues 12,460 8,955 13,909 17,272 26,405 31,552 EBITDA 1,558 1,343 1,739 1,986 3,169 3,786 EBITDA margin (%) Power T&D Order inflows 11, ,000 5,000 3,000 3,000 Order backlog 17,430 8,200 15,144 11,145 7,696 6,006 Revenues 5,725 9,230 5,056 8,998 6,449 4,690 EBITDA 458 1, EBITDA margin (%) Sales Revenues 929 1,100 1,320 1,452 1,597 1,756 EBITDA EBITDA margin (%) BOT Revenues EBITDA EBITDA margin (%) KOTAK INSTITUTIONAL EQUITIES RESEARCH 17

18 Infrastructure Ashoka Buildcon Exhibit 6: Standalone financial snapshot of Ashoka Buildcon, March fiscal year-ends (Rs mn) E 2018E 2019E 2020E Profit model Total sales 13,380 16,376 15,566 19,667 19,358 20,861 28,368 34,996 38,435 Expenditure (11,445) (14,354) (13,582) (17,169) (16,706) (18,129) (25,021) (30,775) (33,834) Operating expenses (10,797) (13,489) (12,726) (16,075) (15,516) (16,659) (23,022) (28,309) (31,126) Employee cost (372) (431) (492) (614) (722) (882) (1,199) (1,479) (1,625) Other expenses (276) (434) (365) (481) (468) (588) (800) (987) (1,084) EBITDA 1,935 2,022 1,984 2,498 2,652 2,731 3,347 4,222 4,601 PBT 1,369 1,711 1,690 1,939 2,333 2,610 3,266 4,189 4,860 Tax (325) (533) (499) (517) (644) (585) (817) (1,173) (1,458) PAT 1,045 1,178 1,191 1,422 1,689 2,025 2,450 3,016 3,402 Weighted diluted number of shares EPS based on diluted shares (Rs) Balance sheet Shareholders funds 7,817 8,539 9,328 10,543 16,798 18,393 20,322 22,698 25,377 Share capital Reserves & surplus 7,264 8,013 8,538 9,750 15,862 17,457 19,387 21,762 24,442 Loan funds 3,122 2,733 2,240 4,447 3,870 2,391 2,045 1, Deferred tax liabilities (net) 10 (7) (20) (99) (199) (199) (199) (199) (199) Total sources of funds 10,949 11,265 11,547 14,891 20,469 20,585 22,169 24,183 25,648 Net fixed assets 2,728 2,416 2,267 1,871 1,510 1,719 1,865 1,948 1,968 Investments 4,424 7,454 9,757 10,904 11,376 11,376 11,376 11,376 11,376 Cash & bank balances ,000 2,000 4,000 Net current assets (excl. cash) 3,412 1,057 (782) 1,861 7,313 6,990 7,928 8,858 8,304 Total application of funds 10,949 11,265 11,547 14,891 20,469 20,585 22,169 24,183 25,648 Cash flow statement Cash flow from operating activities Operating profit before working capital changes 2,161 2,332 2,055 2,772 2,939 3,070 3,734 4,675 5,257 Adjustments for working capital changes 912 2,345 1,803 (3,030) (5,787) 322 (937) (931) 555 Income tax paid (310) (453) (478) (489) (696) (585) (817) (1,173) (1,458) Net cash flow from operating activities 2,763 4,271 3,380 (747) (3,544) 2,808 1,980 2,571 4,354 Purchase of fixed assets (430) (517) (367) (199) (314) (700) (700) (700) (700) Purchase of non-current investments (1,522) (2,789) (2,306) (1,014) (360) Net cash flow from investing activities (1,871) (3,243) (2,337) (913) (167) (358) (358) (358) (358) FCF 890 1,026 1,039 (1,660) (3,740) 2,449 1,622 2,213 3,995 Proceeds from issue of shares , Proceeds from borrowings (418) (493) (475) 2,380 (64) (1,479) (346) (362) (1,214) 18 KOTAK INSTITUTIONAL EQUITIES RESEARCH

19 Ashoka Buildcon Infrastructure Exhibit 7: We value Ashoka buildcon ar Rs250 per share on march 2019 basis Value Stake Proportional value Per share value (Rs mn) (%) (Rs mn) (Rs) Methodology Ashoka Concession Limited (ACL) 61 14, Bhandara Mar-19 FCFE valuation Durg 1, Mar-19 FCFE valuation Jaora - Nayagaon 15, , Mar-19 FCFE valuation Belgaum Dharwad Mar-19 FCFE valuation Pimpalgaon-Nasik-Gonde 1, Average of FCFE valuation and claim on NHAI Sambalpur Baragarh 1, Mar-19 FCFE valuation Dhankuni- Kharagpur 10, , Mar-19 FCFE valuation Chennai ORR upside 3, Mar-19 FCFE valuation Kharar Ludhiana 1, Mar-19 FCFE valuation less investment Ranastalam to Anandpuram Mar-19 FCFE valuation less investment 23 days of lost revenues Less value to make good 12% IRR (1) (2,118) (11) Mar-19E valuation Core construction business 23, , X Mar-19E EBITDA less debt Value of ABL projects 42 ABL asset portfolio (including 23 days of revenues) 1, , NPV of remaining year EBITDA less debt Jaora - Nayagaon (including 23 days of revenues) 15, , Mar-19 FCFE valuation Chennai ORR Investment 1, X book KSHIP-II Mar-19 FCFE valuation Bagewadi Saundatti Mar-19 FCFE valuation less investment Hungund Talikot Mar-19 FCFE valuation less investment Other investments 3, , Land investments 2, , X investments Other investments X investments Total 46, KOTAK INSTITUTIONAL EQUITIES RESEARCH 19

20 Banks India ATTRACTIVE APRIL 10, 2017 UPDATE BSE-30: 29,707 New format; less exciting. RBI s discussion paper on Wholesale and Long-Term Finance Banks (WLTF) is scant on details but looks at building niche banking for project financing. India s prior experience through DFI (Development Finance Institutions) has not been encouraging and we do not see any new arguments favoring this change of view. However, it might be appealing for foreign banks which could look to setting up these formats to service specific customer requirements. PFC and REC can potentially apply for wholesale bank licenses but we do not see this as a big advantage. Wholesale and Long Term Banks is the new type of bank that is likely to be introduced The paper on WLTF is a discussion on the fundamental need and merits/ demerits, if any. These banks would look to lend in the infrastructure and core industries segment; assets with long gestation periods. WLTF may also offer investment banking services in equity/debt/forex markets. They would be funded primarily though large ticket deposits (`100 mn and above)/bonds and not focused on savings deposits. The minimum capital prescribed is `10 bn. Cyclicality of the business makes it a challenge to build a positive view to this format India s experience with Development Finance Institutions (DFIs) leaves clear lessons on the difficulties with such concentrated business models. High capital consumption in a few sectors like infrastructure, metals and textiles offer limited comfort in WLTF s ability to manage a crisis making these formats pro-cyclical in nature. RBI should look to introduce dynamic provisions to reduce this risk. Experience suggests that such institutions (ICICI, IDBI and IDFC) have preferred migrating to banking models. We do not see the proposed structure presenting a compelling case for a new wholesale banking format or a threat to traditional universal banks. Building a deeper corporate bond market can be a useful alternative to WLTF Instead of a bank-led model, it would be useful if we could look to build a stronger corporate bond market. This would entail project financing risks taken by banks as they have the requisite expertise to evaluate viability/construction related risks while the bond market would be able to lower the cost of projects post construction. Further, corporates are expected to keep a much stronger discipline on their capital expenditure programs if disproportionate financing comes through bond markets. Continuous exchange of information between universal banks, rating agencies, credit information bureaus like CRILIC and bond markets can offer a strong feedback loop critical to reduce the risks in the business. RBI s own study of banks that offer similar services shows that (1) such institutions have not seen too many players in recent years, (2) they are owned by the government and were established decades back to promote specific industrial development (3) business models have changed over time. Foreign banks which look to fund specific local corporates in India could look at this model. No big significant impact for PFC and REC PFC and REC can potentially apply for WLTF. In the light of restrictions on diversifications to retail/short tenure loans and time deposits, we do not think that a wholesale bank will be a game changer. Notably, both enjoy AAA-credit rating on the back of their government ownership and relative importance to the power sector. As such, access to diversified funding sources is a concern. Exhibit 3 shows REC has a well-diversified funding base with just 1% of borrowings from bank loans. In the light of their strong financial flexibility, these NBFCs do not have substantial cash on the balance sheet; in that sense, the CRR requirement may be a drag. M B Mahesh CFA Nischint Chawathe Abhijeet Sakhare For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.