INDIA DAILY August 10, 2018 India 9-Aug 1-day 1-mo 3-mo

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1 Contents Daily Alerts Results Eicher Motors: Compliance cost pressures could lead to slowdown Lupin: US collapses, dragging overall performance Page Industries: A league of its own MRF: Disappointing quarter INDIA DAILY August 10, 2018 India 9-Aug 1-day 1-mo 3-mo Bharat Forge: Cyclical rebound in key segments aiding revenue growth Sensex 38, Nifty 11, Global/Regional indices Dow Jones 25,509 (0.3) Nasdaq Composite 7, FTSE 7,742 (0.4) Nikkei 22,481 (0.5) 1.3 (0.1) Hang Seng 28, (0.3) (7.1) KOSPI 2,284 (0.8) (0.4) (7.3) Value traded India Cash (NSE+BSE) Derivatives (NSE) 16,703 4,563 6,509 Deri. open interest 4,329 3,471 3,943 GlaxoSmithKline Consumer: FY2019 off to a good start Whirlpool: In-line quarter Forex/money market Change, basis points 9-Aug 1-day 1-mo 3-mo PNB Housing Finance: Volumes versus margins dilemma Jindal Steel and Power: Broadly in line; turns profitable Varun Beverages: In-line topline, marginal EBITDA miss Thermax: Fails on both key acid tests Coffee Day Enterprises: Weaker-than-peers operating trends Gujarat Pipavav Port: Volatile trends beyond exim container HCG: Weakness in fertility business drives miss Company alerts HDFC Bank: Retail yields under pressure Rs/US$ 68.8 (6) yr govt bond, % 8.0 (2) (11) 11 Net investment (US$ mn) 8-Aug MTD CYTD FIIs (260) MFs ,140 Top movers Change, % Best performers 9-Aug 1-day 1-mo 3-mo RCOM IN Equity SBIN IN Equity RIL IN Equity 1, DABUR IN Equity NEST IN Equity 10, Worst performers TTMT/A IN Equity (9.3) (27.8) JPA IN Equity 14 (5.3) (13.1) (25.1) TTMT IN Equity (6.4) (22.7) HDIL IN Equity (20.5) AL IN Equity (3.5) (19.5) For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL.

2 Eicher Motors (EIM) Automobiles Compliance cost pressures could lead to slowdown. Eicher reported a strong quarter with 30% yoy growth in consolidated net profit in 1QFY19 (in line) led by robust volume growth in the Royal Enfield business. Performance of the VECV business was strong due to 45% yoy volume growth, the company s cost-reduction initiatives and a better product mix. Compliance cost pressures due to introduction of ABS in FY2020 and shift to BS-VI in FY2021 could lead to at least 10% cost increase for RE bikes, which could slow volume growth for RE. Maintain SELL; TP revised to 24,000 (from 26,000). SELL AUGUST 10, 2018 RESULT Coverage view: Neutral Price (`): 27,439 Target price (`): 24,000 BSE-30: 38,024 Company data and valuation summary Eicher Motors Stock data Forecasts/Valuations E 2020E 52-week range (Rs) (high,low) 33,480-26,000 EPS (Rs) ,180.4 Market Cap. (Rs bn) EPS growth (%) Shareholding pattern (%) P/E (X) Promoters 50.5 Sales (Rs bn) FIIs 31.0 Net profits (Rs bn) MFs 5.6 EBITDA (Rs bn) Price performance (%) 1M 3M 12M EV/EBITDA (X) Absolute (0.7) (9.5) (12.9) ROE (%) Rel. to BSE-30 (6.2) (15.9) (27.1) Div. Yield (%) QFY19 results largely in line with our estimates Eicher reported 1QFY19 standalone EBITDA of `8.2 bn (up 31% yoy), which was 2.5% higher than our estimates. Revenues increased by 27.3% yoy, which was led by 22.5% yoy volume growth and 3.9% yoy increase in net realizations (1.5% due to price increase and 2.4% due to a richer product mix). We note that net realizations increased by 1.3% qoq in 1QFY19 due to a better product mix. EBITDA margin came in at 32.3% (+90 bps yoy), which was 30 bps higher than our estimates. We note that EBITDA margin has remained range-bound at 31-32% over the past 8-9 quarters. Gross margin was in line with our estimates. Other expenses increased by 26% yoy in 1QFY19 (+28% yoy in FY2018) led by (1) higher marketing and promotion spend associated with launch of new 650cc models and (2) continued expenditure to expand business in the export markets. Employee cost increased by 42.5% yoy in 1QFY19 (+34% yoy in FY2018) as the company continues to invest in R&D and expand presence in international markets. The company reported standalone adjusted net profit of `5.9 bn (+20% yoy), which was 9% higher than our estimates due to higher-than-expected other income owing to dividend payment by VECV to standalone operations. The company maintained its production target of 950,000 units for RE in FY2019. Performance of VECV strong in 1QFY19 due to low base VECV business reported revenues of `26.1 bn (up 45% yoy) and EBITDA of `2.4 bn, up 61% yoy (EBITDA margin of 9.2%, +90 bps yoy). VECV net profit was `1.18 bn (+78% yoy). Maintain SELL; compliance cost increases could slow down RE volume growth We believe compliance cost (ABS implementation in FY2020 and shift to BS-VI) could lead to at least 10% cost increase for RE bikes, which in turn could lead to a slowdown in RE bike sales. We have cut consolidated EPS by 2-7% in FY2020/21E building lower volume growth in RE and decline in EBITDA margin. We maintain our SELL rating on the stock with a revised target price of 24,000 (from 26,000). The stock is expensive as volume growth for RE is slowing down and EBITDA margin is nearing its peak levels. 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.

3 Eicher Motors Automobiles Exhibit 1: Standalone 1QFY19 EBITDA was largely in line with our estimates; higher other income led to higher PAT Eicher Motors interim results, March fiscal year-ends ( mn) (% chg.) 1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 FY2019E FY2018 Yoy (%) Volumes (units) 225, , , , (0.7) 943, , Net realizations (Rs/unit) 112, , , , , , Total revenues 25,449 25,092 19,999 25, ,646 89, Cost of materials consumed (13,530) (12,923) (10,591) (12,765) (55,484) (46,391) Changes in inventories 433 (224) 315 Employee benefit expenses (1,653) (1,580) (1,160) (1,436) (6,804) (5,479) 24.2 Other expenses (2,477) (2,568) (1,971) (2,703) (3.6) 25.7 (8.4) (10,894) (9,488) 14.8 Total expenses (17,227) (17,070) (13,722) (17,128) (73,182) (61,043) 19.9 EBITDA 8,222 8,022 6,278 8, ,465 28, Other income 1, , (2.7) ,500 3,324 Interest costs (7) (7) (7) (7) (30) Depreciation (698) (650) (450) (637) (3,003) (2,223) Exceptional items (3,120) Profit before tax 8,777 7,965 7,115 8, ,962 26, Tax expense (2,864) (2,549) (2,172) (2,653) (11,508) (9,354) Profit after tax 5,913 5,416 4,943 5, ,454 17, Adjusted PAT 5,913 5,416 4,943 5, ,454 20, Adjusted EPS Ratios (%) Raw material as % of sales Staff costs as % of sales Other expenses as % of sales EBITDA margin (%) No. of shares Tax rate (%) Standalone business performance strong in 1QFY19 Eicher reported 1QFY19 standalone EBITDA of `8.2 bn (up 31% yoy), which was 2.5% higher than our estimates. Revenues increased by 27.3% yoy, which was led by 22.5% yoy volume growth and 3.9% yoy increase in net realizations (1.5% due to price increase and 2.4% due to a richer product mix). We note that net realizations increased by 1.3% qoq in 1QFY19 due to a better product mix. EBITDA margin came in at 32.3% (+90 bps yoy), which was 30 bps higher than our estimates. We note that EBITDA margin has remained rangebound at 31-32% over the past 8-9 quarters. Gross margin was in line with our estimates. Other expenses increased by 26% yoy in 1QFY19 (+28% yoy in FY2018) led by (1) higher marketing and promotion spend associated with launch of new 650cc models and (2) continued expenditure to expand business in export markets. Employee cost increased by 42.5% yoy in 1QFY19 (+34% yoy in FY2018) as the company continues to invest in R&D and expand presence in international markets. The company reported standalone adjusted net profit of `5.9 bn (+20% yoy), which was 9% higher than our estimates due to higherthan-expected other income due to dividend payment by VECV to standalone operations. Other key highlights Royal Enfield The company will continue to expand dealer network in India and it will add 100 dealers annually over the next two years. The company had 825 dealers at end of FY2018 (675 in FY2017). The company opened six new exclusive outlets in export markets and Royal Enfield has 36 exclusive outlets currently. The company opened its first exclusive outlet in Mexico, New Zealand and Vietnam in FY2018. Export volumes for the company increased by 10% yoy in 1QFY19 (+25% yoy in FY2018). KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

4 1QCY12 2QCY12 3QCY12 4QCY12 1QCY13 2QCY13 3QCY13 4QCY13 1QCY14 2QCY14 3QCY14 4QCY14 1QCY15 2QCY15 3QCY15 4QCY15 1QCY16 2QCY16 3QCY16 4QCY16 1QCY17 2QCY17 3QCY17 4QCY17 1QCY18 2QCY18 Automobiles Eicher Motors Same-store sales growth was 10% yoy in 1QFY19 (+10% yoy in FY2018). The company considers stores with more than 2 years of operation for measuring same-store sales growth. This is a slowdown from 15% in FY2017. Royal Enfield volumes grew by 23% yoy in 1QFY19. RE volumes grew at a strong pace across all states except Maharashtra (-15% yoy) and Karnataka (-12% yoy). These two states form 13% of RE volumes. Among major states, UP (+64% yoy), Bihar (+74% yoy), MP (+51% yoy) and West Bengal (+37% yoy) were the strongest-growing states for RE. The company mentioned that RE bikes have reached saturation in Maharashtra while in Karnataka they felt that increase in road tax impacted RE volumes. Road tax increase was 5% in Karnataka, which led to a decline in RE volumes. We highlight that cost increase could be 10% in FY2020/21 due to increase in compliance costs, which could materially affect RE volume growth and operating margin. The company indicated that they can produce 950,000 units in FY2018 of RE bikes, which implies a growth of 16% yoy. The company unveiled two new 650 cc models Interceptor and Continental GT, which will be commercially launched by end of CY2018 (delayed by few months). The models have been jointly developed by the company s tech centers in both UK and Chennai. With these new models, the company is targeting strong traction in the export markets both in developed markets such as Europe and the US as well as in developing markets such as Colombia, Indonesia, etc. (will look to upgrade current cc bike users once they come up for replacement). We note that the company s last two models Continental GT 525cc and Himalayan have not been quite successful and therefore, success of new 650cc models is extremely critical for medium-term growth prospects of the company. The company will commission second phase of its technology center in the UK next month, with this, the company will have more than 100 engineers in the UK. Construction of tech center will get commissioned by end-fy2019. The company is also looking to set up a new tech plant in Chennai in FY2019. The company will spend `8 bn in capex in RE business in FY2019 to build a technical center in Chennai, increase capacity in Vallam Vadagal plant and product development capex for new products. Exhibit 2: RE volumes grew by 22% yoy in 1QFY19 Quarterly trend of RE volumes, March fiscal year-ends, ('000 units, %) ('000 units) Sales volumes [LHS] Yoy change [RHS] (%) Source: SIAM, Kotak Institutional Equities estimates 4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

5 Eicher Motors Automobiles Exhibit 3: Consolidated 1QFY19 results were in line with our expectations Eicher Motors consolidated interim results, March fiscal year-ends ( mn) (% chg.) 1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 FY2019E FY2018 Yoy (%) Total sales 25,478 25,092 20,006 25, ,646 89, Cost of materials consumed (13,043) (12,923) (10,573) (12,285) (55,484) (45,574) 21.7 Purchase of stock-in-trade (498) (482) (861) Changes in inventories 426 (234) Employee benefit expenses (1,709) (1,580) (1,206) (1,540) (6,804) (5,569) Other expenses (2,558) (2,568) (2,021) (2,767) 26.6 (7.6) (10,894) (9,569) Total expenses (17,382) (17,070) (13,799) (17,308) (73,182) (61,574) EBITDA 8,096 8,022 6,207 7, ,465 28, Other income (23.3) (29.8) 4,000 2, Interest costs (15) (7) (11) (14) (53) (53) Depreciation (702) (650) (452) (640) (3,003) (2,233) Exceptional items (1,870) 55.1 (72.1) (1,974) Profit before tax 7,975 7,965 6,521 6, ,409 26,617 Tax expense (2,856) (2,549) (2,175) (2,645) (11,508) (9,359) 23.0 Share of profit/(loss) of joint ventures (33.2) 3,230 2, Profit after tax 5,762 5,966 4,596 4,615 (3.4) ,131 19, Adjusted PAT 5,762 5,966 4,596 6,486 (3.4) 25.4 (11.2) 27,131 21, Adjusted EPS (3.4) 25.4 (11.2) Ratios (%) Raw material as % of sales Staff costs as % of sales Other expenses as % of sales EBITDA margin (%) No. of shares Tax rate (%) Exhibit 4: We have cut our earnings estimates by 2-7% over FY2020/21 to factor in slowdown in volume growth and rising compliance costs Earnings revision table, March fiscal year-ends, ( mn, %) New estimates Old estimates 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E Royal Enfield volumes (units) 943,139 1,037,453 1,089, ,139 1,056,316 1,161,947 (1.8) (6.3) Net sales 107, , , , , , (2.0) EBITDA 34,465 39,629 43,855 34,196 40,641 46, (2.5) (6.3) EBITDA margin (%) % change Standalone PAT 24,454 28,861 32,374 24,491 29,499 34,413 (0.1) (2.2) (5.9) Standalone EPS 898 1,060 1, ,085 1,265 (0.2) (2.2) (6.0) Share of profit from JV 3,230 3,822 3,742 3,140 3,717 4, (15.3) Consolidated PAT 27,131 32,129 35,563 27,077 32,663 38, (1.6) (7.1) Consolidated EPS 997 1,180 1, ,201 1, (1.7) (7.2) Source: Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 5

6 Automobiles Eicher Motors Exhibit 5: Royal Enfield volumes are growing in strong double digits across states except Karnataka and Maharashtra (down yoy) Volumes and market share of Royal Enfield across major states, March fiscal year-ends, (units, %) 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 FY2016 FY2017 FY2018 Volumes (units) Kerala 15,352 19,201 19,389 22,022 19,108 24,264 23,524 23,891 23,855 52,950 75,964 90,787 Tamil Nadu 13,334 16,358 18,220 17,773 19,038 21,049 15,991 22,985 21,131 39,964 65,685 79,063 Uttar Pradesh 10,401 11,452 12,372 13,546 15,842 18,397 19,783 22,824 26,000 30,464 47,771 76,846 Maharashtra 18,604 20,074 20,763 19,238 17,964 16,827 19,592 20,309 15,318 76,214 78,679 74,692 Delhi 10,230 11,040 11,434 12,130 12,706 12,889 13,460 15,710 15,040 33,616 44,834 54,765 Karnataka 13,496 14,961 14,450 14,300 14,444 13,620 11,313 13,050 12,786 47,361 57,207 52,427 Punjab 8,511 8,988 9,790 10,436 10,421 10,857 11,040 13,512 10,987 32,782 37,725 45,830 Gujarat 6,882 7,806 8,308 8,123 8,533 9,477 9,607 9,423 9,053 24,306 31,119 37,040 Telangana 4,960 5,969 6,651 6,748 6,690 7,628 7,235 8,065 8,709 19,404 24,328 29,618 Bihar 4,176 4,900 4,362 4,828 5,595 6,370 7,798 7,964 9,736 13,395 18,266 27,727 West Bengal 4,399 5,242 5,149 5,131 5,789 6,903 7,273 7,150 7,928 15,432 19,921 27,115 Andhra Pradesh 4,392 5,156 5,350 5,359 5,915 6,717 6,463 7,485 7,391 15,723 20,257 26,580 Rajasthan 4,267 4,640 5,116 4,656 4,711 6,015 6,696 6,599 6,595 14,153 18,679 24,021 Haryana 3,766 4,642 4,372 4,574 5,112 5,203 5,924 7,235 6,320 14,386 17,354 23,474 Madhya Pradesh 2,883 3,466 3,993 3,919 4,234 5,045 5,811 6,345 6,379 10,331 14,261 21,435 Orissa 2,876 2,856 2,826 3,462 3,689 4,079 5,322 5,744 6,250 8,428 12,020 18,834 Others 13,950 16,363 17,873 16,962 18,985 23,479 23,843 22,932 25,596 49,392 65,148 89,239 Total 142, , , , , , , , , , , ,493 Yoy (%) Kerala Tamil Nadu (12.2) Uttar Pradesh Maharashtra (8.4) (3.4) (16.2) (5.6) 5.6 (14.7) 3.2 (5.1) Delhi Karnataka (9.0) (21.7) (8.7) (11.5) 20.8 (8.4) Punjab Gujarat Telangana Bihar West Bengal Andhra Pradesh Rajasthan Haryana Madhya Pradesh Orissa Others Total Motorcycle market share (%) Kerala Tamil Nadu Uttar Pradesh Maharashtra Delhi Karnataka Punjab Gujarat Telangana Bihar West Bengal Andhra Pradesh Rajasthan Haryana Madhya Pradesh Orissa Total Source: SIAM, Kotak Institutional Equities 6 KOTAK INSTITUTIONAL EQUITIES RESEARCH

7 Eicher Motors Automobiles Exhibit 6: We expect RE volumes to grow at 10% CAGR over FY E Eicher Motors volume assumptions, March fiscal year-ends, E (units) Sales volumes (units) Standalone E 2020E 2021E Two-wheelers 52,576 74, , , , , , , ,139 1,037,453 1,089,326 VECV Domestic ton 4,904 6,387 5,372 5,242 5,389 8,337 8,525 11,062 12,721 14,629 15, ton 24,389 29,919 28,057 20,768 17,490 26,981 22,395 27,078 31,140 35,811 34,020 >12 ton 1,483 2,575 3,814 2,907 3,056 5,683 6,216 7,238 8,324 9,988 9,289 Buses 4,765 6,494 8,520 8,333 8,123 13,038 12,270 10,494 10,494 11,753 12,341 Exports Cargo 2,073 2,340 1,671 2,382 4,460 5,060 6,005 7,405 8,886 9,952 11,147 Buses ,364 2,452 2,030 1,596 1,436 1,609 1,802 Volvo trucks Volvo trucks domestic 1, ,499 1,164 1,055 1,055 1,182 1,123 Total 39,351 48,844 48,682 41,132 40,773 63,050 58,605 65,928 74,056 84,925 85,082 Yoy change (%) Standalone Two-wheelers VECV Domestic ton (15.9) (2.4) ton (6.2) (26.0) (15.8) 54.3 (17.0) (5.0) >12 ton (23.8) (7.0) Buses (2.2) (2.5) 60.5 (5.9) (14.5) Exports Cargo (28.6) Buses 2.4 (34.1) (17.2) (21.4) (10.0) Volvo trucks Volvo trucks domestic 21.6 (35.6) (19.3) (22.3) (9.4) 12.0 (5.0) Total (0.3) (15.5) (0.9) 54.6 (7.0) Source: Kotak Institutional Equities estimates Exhibit 7: We value Eicher Motors at 24,000 based on SoTP methodology Sum-of-the-parts valuation table for Eicher Motors ( mn) Standalone Multiple June 2020 EPS Equity value (X) (Rs/share) (Rs/share) Equity value per share 20 1,093 21,851 Eicher stake in VECV Equity value per share ,129 Eicher stake in VECV (%) 54.4 Eicher equity value in VECV 2,246 Equity value 24,097 Target price 24,000 Source: Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 7

8 Automobiles Eicher Motors Exhibit 8: We estimate standalone earnings to grow at 17% CAGR over FY E Eicher Motors standalone financial summary, March fiscal year-ends, E ( mn) Profit model (Rs mn) E 2020E 2021E Net sales 6,665 10,493 17,025 30,312 61,880 70,380 89, , , ,091 EBITDA 765 1,454 3,137 7,336 17,082 22,058 28,532 34,465 39,629 43,855 Other income ,163 2,835 2,273 3,324 4,500 6,586 8,186 Interest (20) (3) (3) (17) (21) (28) (30) Depreciaton (130) (172) (304) (502) (1,366) (1,533) (2,223) (3,003) (3,773) (4,433) Profit before tax 1,418 1,738 3,632 7,980 18,530 22,770 29,603 35,962 42,442 47,608 Current tax (178) (293) (782) (2,317) (5,247) (6,785) (9,354) (11,508) (13,581) (15,235) Deferred tax 6 3 (64) (74) (191) (384) Net profit 1,246 1,448 2,786 5,589 13,092 15,601 17,129 24,454 28,861 32,374 Adjusted net profit 1,246 1,448 2,786 5,589 13,092 15,601 17,129 24,454 28,861 32,374 Adjusted Diluted EPS (Rs) , ,189.3 Balance sheet (Rs mn) Equity Reserves and Surplus 5,131 6,021 7,943 12,066 23,093 38,954 53,450 74,082 98, ,037 Deferred tax liability ,430 1,430 1,430 1,430 Total borrowings Current liabilities 2,209 3,683 6,452 9,752 12,241 15,201 22,795 24,352 26,504 28,422 Total liabilities 7,819 10,242 14,832 22,289 36,239 55,218 77, , , ,161 Net fixed assets 1,276 1,980 3,132 5,599 9,442 13,484 18,305 23,302 25,529 27,096 Investments 5,180 6,494 8,564 11,886 20,691 35,417 49,855 64,855 84, ,855 Cash ,755 4,653 11,681 Other current assets 1,276 1,671 2,879 4,297 5,795 6,190 8,894 10,224 11,972 13,529 Miscellaneous expenditure (0) (0) (0) Total assets 7,819 10,242 14,832 22,289 36,239 55,218 77, , , ,161 Free cash flow (Rs mn) Operating cash flow excl. working capital 572 1,127 2,378 5,131 12,188 15,757 20,534 22,957 26,048 28,621 Working capital changes ,311 1,729 2,554 1,862 4, Capital expenditure (651) (1,073) (1,388) (3,699) (5,082) (5,448) (7,435) (8,000) (6,000) (6,000) Free cash flow ,301 3,161 9,660 12,171 17,719 15,184 20,452 22,982 Ratios Gross margin (%) EBITDA margin (%) Debt/equity (X) Net debt/equity (X) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.1) RoAE (%) Book value/share (X) ,441 1,974 2,732 3,640 4,677 Notes: (a) FY2016 is a 15-month period as company has changed its reporting to financial year 8 KOTAK INSTITUTIONAL EQUITIES RESEARCH

9 Eicher Motors Automobiles Exhibit 9: We expect consolidated earnings to grow at 18% CAGR over FY E Eicher Motors consolidated income statement, March fiscal year-ends, E ( mn) Profit model (Rs mn) E 2020E 2021E Net sales 56,775 63,899 68,098 87,383 61,735 70,334 89, , , ,091 EBITDA 5,551 5,490 7,132 11,148 16,896 21,740 28,076 34,465 39,629 43,855 Other income 1,768 1, ,074 1,781 2,273 2,801 4,000 6,086 7,686 Interest (77) (38) (79) (98) (21) (36) (53) (53) (53) (53) Depreciaton (640) (822) (1,300) (2,198) (1,366) (1,538) (2,233) (3,003) (3,773) (4,433) Profit before tax 6,602 5,997 6,706 9,926 17,290 22,439 28,591 35,409 41,889 47,055 Tax (1,628) (1,249) (1,452) (2,909) (5,389) (7,203) (9,359) (11,508) (13,581) (15,235) Minority Interest (1,886) (1,506) (1,314) (864) Share of profit/(loss) of joint ventures 1,479 1,435 2,339 3,230 3,822 3,742 Adjusted net profit 3,088 3,243 3,939 6,153 13,380 16,671 21,571 27,131 32,129 35,563 Adjusted Diluted EPS (Rs) , ,306.5 Notes: (a) FY2016 is a 15-month period as company has changed its reporting to financial year. (b) FY financials are as per Indian GAAP, while FY E financials are in accordance with Ind-AS. (c) VECV financials are accounted under equity method of accounting under Ind-AS as compared to line by line consolidation method under Indian GAAP. KOTAK INSTITUTIONAL EQUITIES RESEARCH 9

10 Lupin (LPC) Pharmaceuticals US collapses, dragging overall performance. LPC s 1QFY19 revenues missed our estimates, led by a sharp US$56 mn qoq fall in the US, owing to a mix of competitive pressures (Methergine), market changes (Fortamet and Glumetza volume loss) and lack of specific market opportunities (Tamiflu). The US disappointment led to a big miss on EBITDA and PAT, despite strong cost control and lower R&D costs. We expect US revenues to remain under pressure and expect a recovery from 2HFY19; the strength of the recovery remains contingent on levothyroxine/proair approvals, as well as Solosec ramp-up. REDUCE AUGUST 10, 2018 RESULT Coverage view: Neutral Price (`): 821 Target price (`): 800 BSE-30: 38,024 Company data and valuation summary Lupin Stock data Forecasts/Valuations E 2020E 52-week range (Rs) (high,low) 1, EPS (Rs) Market Cap. (Rs bn) EPS growth (%) (32.9) (28.9) 44.0 Shareholding pattern (%) P/E (X) Promoters 47.0 Sales (Rs bn) FIIs 25.4 Net profits (Rs bn) MFs 6.4 EBITDA (Rs bn) Price performance (%) 1M 3M 12M EV/EBITDA (X) Absolute (10.0) 7.7 (13.9) ROE (%) Rel. to BSE-30 (14.9) 0.0 (28.0) Div. Yield (%) US business collapses, driving a big underperformance LPC posted 1QFY19 revenues of `38.5 bn, 6.5% below our estimate. Notably, the US business at US$168 mn has declined sharply by US$56 mn qoq, US$52 mn below our estimates, reflecting (1) loss of Tamiflu opportunity given seasonality (KIE: US$15-20 mn), (2) erosion in Fortamet and Glumetza (KIE: US$20 mn), (3) lower-than-expected revenues from cephs due to seasonality (KIE: US$10 mn) and (4) high single-digit price erosion in the base business (KIE: US$15 mn). The domestic formulations segment was up 28% yoy, 3% ahead of our estimates. Other divisions were mixed, with Japan missing our estimates while Europe and South Africa displayed strong performance. Given the US erosion, gross margins contracted sharply by 370 bps to 62.2% versus our estimate of 67% adjusting for US$15 mn milestone income, which was not recognized in the quarter. R&D costs surprised positively, declining to `3.75 bn, 10% lower than our estimates. Despite strong control on SG&A costs, EBITDA declined sharply to `5.27 bn versus our estimate of `8.2 bn (`7.3 bn adjusted), with an EBITDA margin of 13.7% (KIE adjusted: 18%). Higher tax resulted in PAT missing our estimate by 47% (33% on adjusted basis). FY2019 to be a blank year for generics; Solosec launch execution key for specialty strategy Given the sharp erosion in Fortamet/Glumetza in FY2018, product concentration has come down dramatically. The near-term launch pipeline remains weak, with Ranexa exclusivity being the key launch generic expected in FY2019, while levothyroxine remains a key wild-card with potential to generate US$ mn sales in FY2020. LPC filed a P-IV ANDA on Spiriva in 1QFY19, its first DPI filing in the US, though we believe a launch is unlikely before CY2026 as compared to management expectations of FY2023 launch. LPC spent `100 mn on Solosec promotional costs in the quarter, with the management confident of 25% market share at US$170 net price, based on initial trends, and given a successful managed care strategy that has seen Solosec receiving access in 65% of commercial lives. We believe a combination of (1) once-dosing (versus twice daily for seven days for metro), (2) comparably efficacy (~46% cure rate based on Nugent score, stronger than tinidazole and similar to metro) and (3) niche prescribing base (75% TRx by Ob/Gyn specialists) should help the company achieve 15-20% market share at peak, translating into US$ mn peak sales. Valuations reasonable, though estimates factor in a full recovery We cut our FY2019E EPS by 20% and FY2020/21E EPS by 13-15%, driven by lower US revenues as well as revised margin assumptions. LPC is trading at 22X FY2020E and 17X FY2021E EPS, though EV/EBITDA multiples are now reasonable at ~11X FY2019E and ~8X FY2020E EV/EBITDA. Chirag Talati, CFA Kumar Gaurav For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

11 Lupin Pharmaceuticals Exhibit 1: Lupin interim results Lupin interim results, March fiscal year-end (` mn) (% chg.) 1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 FY2019E FY2018 (% chg.) Total revenues 38,559 41,235 38,696 40,338 (6.5) (0.4) (4.4) 162, , Gross profit 24,118 27,959 26,370 26,713 (13.7) (8.5) (9.7) 104, ,566 (1.3) Employee expenses (7,494) (7,500) (7,180) (7,287) (0.1) (30,366) (28,647) 6.0 R&D expenses (3,753) (4,200) (4,999) (4,015) (10.6) (24.9) (6.5) (16,320) (18,510) (11.8) Other expenses (7,601) (8,000) (6,507) (8,323) (5.0) 16.8 (8.7) (29,787) (28,224) 5.5 EBITDA 5,270 8,259 7,684 7,088 (36.2) (31.4) (25.6) 27,756 30,185 (8.0) EBITDA adjusted 5,270 8,259 7,684 7,088 (36.2) (31.4) (25.6) 27,756 30,185 (8.0) Other income/exceptionals 1, (13,182) 3,000 (11,854) Interest (687) (600) (439) (585) (2,475) (2,044) Depreciation (2,590) (2,700) (2,605) (2,728) (10,750) (10,859) Pretax profits 3,812 5,256 4,937 (9,408) (27.5) (22.8) NM 17,530 5, Tax (1,811) (1,472) (1,368) 1,632 (5,259) (2,885) Minority interest (59) (71) (47) Net income - reported 2,001 3,784 3,581 (7,835) (47.1) (44.1) NM 12,200 2, Net income - adjusted 2,001 3,784 3,581 3,991 (47.1) (44.1) (49.9) 12,200 14,684 (16.9) Adjusted EPS (Rs) (47.1) (44.1) Nm (16.9) Tax rate (%) Segment wise sales Domestic formulation 11,924 11,576 9,324 9, ,441 41, US 11,858 14,606 16,018 14,990 (18.8) (26.0) (20.9) 52,612 58,940 (10.7) Japan 5,032 5,278 4,979 5,098 (4.7) 1.1 (1.3) 20,972 20, Rest of Europe 1,416 1,444 1,256 1,808 (2.0) 12.8 (21.7) 6,234 5, South Africa 1,344 1,124 1,003 1, (21.2) 5,952 5, RoW 2,591 2,964 2,695 3,729 (12.6) (3.8) (30.5) 13,084 12, API 3,581 2,737 2,793 2, ,991 10, Others 813 1, ,796 2,741 Total 38,559 41,235 38,696 40,338 (6.5) (0.4) (4.4) 162, , % margin Raw material Staff cost R&D expenses Other expenditure EBITDA adjusted yoy Exhibit 2: We cut our FY2019E EPS by ~20%, FY E by 13-15% each March fiscal year-ends, E (` mn) New estimates Old Estimates Changes % 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E Sales 162, , , , , ,318 (5.2) (2.3) (3.5) Gross profits 104, , , , , ,910 (7.6) (3.5) (4.9) Staff cost (30,366) (33,706) (37,751) (30,079) (33,087) (37,058) R&D (16,320) (18,612) (20,445) (20,400) (22,605) (25,688) (20.0) (17.7) (20.4) Other expense (29,787) (32,535) (35,586) (29,332) (31,772) (35,585) EBITDA 27,756 37,489 44,919 33,024 39,368 47,580 (16.0) (4.8) (5.6) PAT 12,200 17,564 22,378 15,500 20,176 26,355 (21.3) (12.9) (15.1) EPS (Rs) (21.2) (12.9) (15.1) Source: Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 11

12 Pharmaceuticals Lupin Exhibit 3: FY2020 to see a pick-up in launches March fiscal year-ends, E (US$ mn) E 2020E 2021E 2022E Branded business Limited competition/p-iv's/stfs Gavis acquisition (ex-methergine) LPC Base business Total sales , ,069 1,217 Grow th % (3) 33 (26) (14) Branded as a % of sales Limited competition as % of sales Base business as % of sales Source: Company Exhibit 4: Filing momentum expected to continue Number of ANDAs 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Approvals ANDA approvals - during the period Cumulative ANDA approvals Filings ANDA filed - during the period Cumulative ANDAs filed Pending ANDA - pending approval Source: Company Exhibit 5: Lupin segmental revenues March fiscal year-ends, E (` mn) E 2020E 2021E Domestic formulations 23,643 24,796 29,679 33,916 37,986 41,253 47,441 53,608 60,577 Export formulations 60,016 75,077 84,737 90, , ,415 98, , ,151 US 36,234 48,871 56,953 59,376 82,626 58,939 52,612 66,982 78,047 - Branded 5,184 4,887 4,980 2,941 6,439 5,794 4,800 7,326 9,940 - Generics 31,050 43,984 52,391 55,514 76,276 53,058 47,812 59,656 68,107 Japan 13,040 12,954 13,239 13,646 17,740 20,764 20,972 21,811 22,683 Europe 2,357 3,119 3,262 4,278 5,472 5,937 6,234 6,857 7,543 South Africa 3,210 3,800 4,218 3,956 4,644 5,314 5,952 6,666 7,466 Others 5,175 6,333 7,065 9,729 11,205 12,461 13,084 14,654 16,412 API 9,498 11,178 11,941 12,074 11,833 10,901 11,991 12,591 13,220 Total 93, , , , , , , , ,949 % yoy growth Domestic formulations Export formulations (15) (4) US (29) (11) Branded (24) (6) 2 (41) 119 (10) (17) Generics (30) (10) Japan 52 (1) Europe South Africa (6) Others API (2) (8) Total (9.3) % of sales Domestic formulations Export formulations US Branded Generics Japan Europe South Africa Others API Source: Kotak Institutional Equities, Company 12 KOTAK INSTITUTIONAL EQUITIES RESEARCH

13 Lupin Pharmaceuticals Exhibit 6: Lupin - profit and loss, balance sheet and cash model March fiscal year-ends, E (` mn) E 2020E 2021E Net revenues 96, , , , , , , , ,699 Gross profit 60,933 74,693 86,129 98, , , , , ,700 Staff costs (12,488) (14,646) (17,473) (21,077) (28,495) (28,647) (30,366) (33,706) (37,751) R&D expenses (7,098) (9,294) (10,998) (16,038) (23,101) (18,510) (16,320) (18,612) (20,445) Other expenses (18,647) (20,724) (21,463) (24,341) (28,401) (26,665) (29,787) (32,535) (35,586) EBITDA 22,700 30,029 36,195 37,535 44,932 31,475 27,756 37,489 44,919 Depreciation & amortisation (3,322) (2,610) (4,347) (4,635) (9,122) (10,859) (10,750) (11,960) (13,170) EBIT 19,378 27,419 31,848 32,900 35,810 20,616 17,005 25,529 31,749 Net interest (411) (266) (98) (446) (1,525) (2,044) (2,475) (2,191) (1,631) Other income 279 1,165 2,397 1,877 1,147 (13,105) 3,000 1,500 1,500 Profit before tax 19,246 28,318 34,147 34,330 35,432 5,468 17,530 24,838 31,618 Tax & deferred Tax (5,842) (9,622) (9,704) (11,536) (9,785) (2,885) (5,259) (7,203) (9,169) Less: minority interest (262) (331) (412) (88) (72) (71) (71) (71) (71) Net Income 13,142 18,365 24,031 22,707 25,575 2,513 12,200 17,564 22,378 EPS (Rs) Balance sheet Equity 52,636 69,985 88, , , , , , ,492 Total borrowings 6,030 5,533 4,710 71,193 79,521 68,763 54,763 40,763 26,763 Other liabilities 30,472 26,542 37,686 43,020 51,231 58,120 61,494 65,033 68,988 Total liabilities 36,502 32,075 42, , , , , ,796 95,750 Total liabilities and equity 89, , , , , , , , ,243 Net fixed assets 33,109 36,597 49, , , , , , ,721 Investments 4,599 4,459 3,612 10,564 14,884 11,357 11,357 11,357 11,357 Cash 4,349 9,739 21,372 8,379 28,123 16,429 28,633 25,469 28,104 Other current assets 47,082 51,265 56,951 89,411 91, ,667 93, , ,061 Total assets 89, , , , , , , , ,243 Cashflow statement Operating profit before working capital 23,443 32,422 37,716 39,509 47,579 33,290 28,209 36,728 44,718 Tax paid (5,439) (7,719) (9,436) (11,662) (11,490) (5,584) (4,733) (6,483) (8,252) Change in w orking capital (5,494) (4,663) (949) (31,537) 5,059 (10,194) 14,558 (6,774) (6,474) Capital expenditure (5,511) (5,286) (8,712) (11,750) (26,368) (15,534) (10,000) (10,000) (10,000) Free cash flow 6,999 14,753 18,619 (15,440) 14,780 1,978 28,034 13,471 19,992 Margins and ratios Gross profit margin (%) EBITDA margin (%) Tax rate (%) RoAE (%) RoACE (%) Source: Kotak Institutional Equities, Company KOTAK INSTITUTIONAL EQUITIES RESEARCH 13

14 Page Industries (PAG) Consumer Products A league of its own. Page delivered another quarter of margin-led EBITDA and PAT surprise even as volume and revenue growth were a tad softer than expected. EBITDA margins in recent quarters have been ahead of the management s indicated target range of 20-21%; we now model a margin table shift and this drives a 5-7% increase in our FY E EPS forecasts. The stock s strength is understandable but we remain uncomfortable with its lofty valuations. SELL stays. SELL AUGUST 10, 2018 RESULT Coverage view: Cautious Price (`): 32,404 Target price (`): 25,000 BSE-30: 38,024 Company data and valuation summary PAGE Industries Stock data Forecasts/Valuations E 2020E 52-week range (Rs) (high,low) 32,682-15,089 EPS (Rs) Market Cap. (Rs bn) EPS growth (%) Shareholding pattern (%) P/E (X) Promoters 49.0 Sales (Rs bn) FIIs 36.1 Net profits (Rs bn) MFs 5.2 EBITDA (Rs bn) Price performance (%) 1M 3M 12M EV/EBITDA (X) Absolute ROE (%) Rel. to BSE Div. Yield (%) Another margin-led surprise Page reported another solid quarter. Revenues grew 17% yoy to `8.15 bn, 2% below our expectations. Revenue growth was driven by 9% growth in overall volumes to 50.4 mn pieces (KIE: 50.9 mn) and 8% growth in blended realization to `160/piece (KIE: `161). Gross margins expanded 70 bps yoy to 54.9% (KIE: 54.5%). EBITDA margin expanded 360 bps yoy to 23.2%, 200 bps ahead of expectations as employee and other expenses grew only 7% and 8% yoy, respectively. EBITDA was up 39% yoy to `1.89 bn, 8% above estimate. Recurring PAT for the quarter stood at `1.24 bn, +46% yoy, 12% ahead of estimate. EPS was `112/share. ETR declined 127 bps yoy to 32.8%. We note that unlike most other companies in our coverage universe, Page did not have the benefit of a soft base; it had a fairly strong pre-gst 1QFY18 as well. On a two-year CAGR basis, Page s volume growth stands at around 11%, revenues have grown at 20%, EBITDA at 32% and recurring PAT at 35%. Page s operating performance is in a league of its own, at this point. Operating KPIs leisure wear shines again Overall volumes grew 9% yoy to 50.4 mn pieces led by leisure wear (including socks; volumes up 18% yoy). Volume growth in other segments was modest (versus the trend line) 6% in men s wear, 7% in women s, 4% in brassiere, and 4% in swim wear. Blended realization grew 8% yoy to `160/piece. Speedo s (swim wear) performance remains patchy; 1QFY19 volumes were lower than 1QFY17 levels. We factor the new margin table into our model and raise EPS forecasts by 5-7% Page s earnings surprise in the past couple of quarters has primarily been driven by better-thanexpected margin delivery. Margins at 24.1% in 4QFY18 and 23.2% in 1QFY19 have been ahead of the management s expectation of 20-21%. We believe GST-led input tax savings have taken the margin table up sustainably. In any case, margins are generally a function of competition, which remains benign as ever for Page. Our EPS forecasts for FY E go up 5-7%, fair value target stands revised to `25,000/share (from 21,000). Lofty valuations (60X FY2020E EPS) keep us cautious. Rohit Chordia Jaykumar Doshi Aniket Sethi For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

15 Page Industries Consumer Products Exhibit 1: Key changes to estimates, FY E, March fiscal year-ends Revised Earlier Change (%) Rs mn 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E Revenues 30,585 36,443 43,137 30,645 36,599 43,422 (0.2) (0.4) (0.7) EBITDA 7,133 8,602 10,252 6,810 8,238 9, EBITDA margin (%) Net income 4,660 5,668 6,774 4,377 5,378 6, EPS (Rs/share) Source: Kotak Institutional Equities estimates Exhibit 2: 1QFY19 interim results, Rs mn, March fiscal year-ends (% chg.) 2-year 1QFY19 1QFY19E 1QFY18 4QFY18 KIE Est yoy qoq FY2019E FY2018 (% chg.) 1QFY17 CAGR (%) Net operating income 8,153 8,277 6,962 6,084 (2) ,585 25, , Cost of materials (3,674) (3,768) (3,187) (2,275) (2) (12,927) (10,873) 19 (2,570) Gross profit 4,479 4,509 3,775 3,809 (1) ,657 14, , Gross margin (%) bps 70 bps -768 bps Employee expense (1,078) (1,161) (1,010) (986) (7) 7 9 (4,588) (4,065) 13 (832) Other expenditure (1,508) (1,597) (1,400) (1,355) (6) 8 11 (5,937) (5,168) 15 (1,192) Total Expenditure (6,260) (6,526) (5,597) (4,616) (4) (23,452) (20,107) 17 (4,593) EBITDA 1,893 1,751 1,365 1, ,133 5, , EBITDA (%) bps 360 bps -92 bps bps 19.2 Depreciation (72) (78) (67) (76) (7) 9 (4) (313) (280) 12 (59) Interest (40) (32) (45) (44) 23 (11) (11) (142) (166) (15) (39) Other income (1) PBT 1,852 1,688 1,294 1, ,955 5, , Tax expense (608) (574) (441) (479) (2,295) (1,705) 35 (373) PAT 1,244 1, ,660 3, EO items Reported PAT 1,244 1, ,660 3, Income tax rate (%) bps -127 bps -87 bps EPS (Rs/share) Margins (as % of sales) Cost of materials bps -71 bps 767 bps bps 45.2 Employee cost bps -129 bps -299 bps bps 14.6 Other expenditure bps -162 bps -378 bps bps 21.0 KOTAK INSTITUTIONAL EQUITIES RESEARCH 15

16 Consumer Products Page Industries Exhibit 3: Key operating metrics, 1QFY17-1QFY19, March fiscal year-ends 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Volume (mn pieces) Men's Women's Brassiere Leisure wear Speedo Volume growth (%) Men's (0) (1) 6 Women's Brassiere Leisure wear Speedo (19) (11) Revenues (Rs mn) 5,568 5,216 5,212 4,919 6,885 6,177 6,135 5,990 8,058 Men's 2,671 2,607 2,386 2,325 3,239 2,999 2,766 2,713 3,758 Women's Brassiere Leisure wear 1,590 1,509 1,807 1,559 2,029 1,840 2,178 2,023 2,461 Speedo Revenue growth (%) Men's Women's Brassiere Leisure wear Speedo (24) Product mix (%) Men's Women's Brassiere Leisure wear Speedo Realisation per piece (Rs) Men's Women's Brassiere Leisure wear Speedo Realization growth (%) Men's Women's Brassiere 7 (0) Leisure wear Speedo 6 (2) (0) (7) (8) 7 COGS 2,575 2,156 2,131 1,766 3,187 2,651 2,760 2,275 3,674 COGS per piece (Rs) Source: Company, Kotak Institutional Equities 16 KOTAK INSTITUTIONAL EQUITIES RESEARCH

17 Page Industries Consumer Products Exhibit 4: Condensed financials, FY E, Rs mn, March fiscal year-ends IGAAP IndAS E 2020E 2021E Profit model (Rs mn) Net Sales 15,434 17,956 21,301 25,514 30,585 36,443 43,137 EBITDA 3,194 3,752 4,132 5,407 7,133 8,602 10,252 Other income Interest (167) (178) (180) (166) (142) (126) (111) Depreciation (176) (241) (247) (280) (313) (380) (460) Profit before tax 2,933 3,431 3,903 5,175 6,955 8,523 10,264 Tax expense (972) (1,116) (1,285) (1,705) (2,295) (2,855) (3,490) Exceptional items (1) 45 PAT 1,960 2,315 2,663 3,470 4,660 5,668 6,774 Recurring EPS (Rs/share) Balance sheet (Rs mn) Equity 3,868 5,299 6,658 8,473 11,026 13,913 17,318 Total borrowings 1, Other long-term liabilities Current liabilities 2,123 3,271 3,983 4,915 5,945 7,149 8,540 Total liabilites 8,235 9,461 11,541 14,124 17,674 21,731 26,492 Net fixed assets 2,174 2,170 2,602 2,965 3,417 3,930 4,505 Other LT assets Cash and equivalents ,849 4,370 6,087 8,183 Other current assets 5,563 6,750 7,605 7,701 9,247 11,036 13,084 Total assets 8,235 9,461 11,541 14,124 17,674 21,731 26,492 Cash flow (Rs mn) Operating cash flow 2,239 2,736 2,800 3,856 4,838 5,746 6,762 Working capital changes (569) (572) (64) 690 (536) (611) (688) Capital expenditure (549) (264) (621) (570) (765) (893) (1,035) Free cash flow 1,121 1,901 2,114 3,976 3,538 4,242 5,039 Ratios EBITDA margin (%) ETR (%) Book value (Rs/share) ,247 1,553 RoAE (%) RoACE (%) KOTAK INSTITUTIONAL EQUITIES RESEARCH 17

18 MRF (MRF) Automobiles Disappointing quarter. MRF reported weak 1QFY19 results with EBITDA 19% below our estimates due to miss on both revenue growth and margin. Two-year revenue CAGR at 5% was significantly below that of Apollo and reflects (1) loss of market share in the MHCV segment due to radialization and (2) subdued growth in the two-wheeler segment due to entry of new players. Valuations are rich at 20X FY2020E EPS and don t factor in risk to market share and/or profitability over the medium term. REDUCE stays; TP revised to `69,000 (from `77,000) due to cut in earnings estimates. REDUCE AUGUST 10, 2018 RESULT Coverage view: Neutral Price (`): 75,995 Target price (`): 69,000 BSE-30: 38,024 Company data and valuation summary MRF Stock data Forecasts/Valuations E 2020E 52-week range (Rs) (high,low) 81,426-61,000 EPS (Rs) 2, , ,932.2 Market Cap. (Rs bn) EPS growth (%) (23.9) Shareholding pattern (%) P/E (X) Promoters 27.5 Sales (Rs bn) FIIs 8.0 Net profits (Rs bn) MFs 9.7 EBITDA (Rs bn) Price performance (%) 1M 3M 12M EV/EBITDA (X) Absolute 0.6 (0.0) 15.2 ROE (%) Rel. to BSE-30 (4.9) (7.1) (3.6) Div. Yield (%) QFY19 results: Weak quarter as both revenue growth and profitability disappoint MRF reported 1QFY19 EBITDA of `5.9 bn (+117% yoy), which was 19% below our estimates due to weaker-than-expected revenue growth and EBITDA margin. Despite low base, revenues increased by only 8% yoy (KIE 15%); we note that on a two-year basis, revenue CAGR was 5% in 1QFY19. This compares with 7% and 16% two-year revenue CAGR for Apollo (India business) and CEAT (standalone), respectively. This implies that (1) MRF has not been able to participate in the shift towards radial tires in the MHCV segment due to lack of investment in technology and capacity and (2) pressure on market share in the two-wheeler segment due to entry of new players. EBITDA margin came in at 15.4% (up 770 bps yoy but down 230 bps qoq), which was 250 bps below our estimates. Gross margin declined by 100 bps qoq led by RM cost pressures and lack of price increases in the 2W segment. Other expenses increased by 8% qoq (+7% yoy) and were 4% above our estimates. We note that other expenses tend to be volatile due to lumpiness of A&P spends and we expect normalization going ahead. Net profit at `2.6 bn (+145% yoy) was 31% below our estimates due to lower other income and higher tax rate. Sustaining high market share and profitability a challenge over the medium term We believe that it will be difficult for MRF to sustain its 28% domestic market share and still sustain significantly superior profitability over peers over the medium term due to (1) the shift towards radial tires in the MHCV segment and increase in mix of higher-sized tires in the PV segment where MRF is underinvested and has weaker presence compared to Apollo and (2) increase in competitive intensity in the 2W segment due to entry of new players. We build in 9% revenue CAGR over FY E (industry: 10% CAGR) and 17-18% EBITDA margin over this period. Cut EPS estimates by 10-12%; reiterate REDUCE, revise TP to `69,000 (from `77,000) Nishit Jalan Hitesh Goel We cut our FY E EPS estimates by 10-12% on bps cut in EBITDA margin assumptions. We believe that valuations are rich and don t factor in risk to market share and/or profitability. REDUCE stays; TP revised to `69,000, valuing the stock at 17X June 2020E EPS. For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.