INDIA DAILY August 6, 2018 India 3-Aug 1-day 1-mo 3-mo

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1 Contents Daily Alerts Results Nestle India: Strong momentum sustains Titan Company: Watches pick up the jewelry slack Marico: 1Q a mixed bag; prognosis promising Godrej Properties: Moderating momentum KEC International: Telling quarter Laurus Labs: China cost push hurts performance JK Lakshmi Cement: Volumes disappoint Jagran Prakashan: Inexpensive valuations but triggers missing Results, Change in Reco Mahindra Logistics: Transient troubles, rich valuations Change in Reco PVR: A masterstroke Company alerts ICICI Bank: Getting better and better Sector alerts Technology: 1QFY19 review: The familiar story INDIA DAILY August 6, 2018 India 3-Aug 1-day 1-mo 3-mo Sensex 37, Nifty 11, Global/Regional indices Dow Jones 25, Nasdaq Composite 7, FTSE 7, Nikkei 22,513 (0.1) Hang Seng 27,676 (0.1) (2.3) (7.5) KOSPI 2, (6.8) Value traded India Cash (NSE+BSE) Derivatives (NSE) 4,722 5,749 11,81 3 Deri. open interest 3,568 3,286 3,902 Forex/money market Change, basis points 3-Aug 1-day 1-mo 3-mo Rs/US$ 68.5 (2) (27) yr govt bond, % (10) 9 Net investment (US$ mn) 2-Aug MTD CYTD FIIs (81) (121) (535) MFs (35) (35) 11,078 Top movers Change, % Best performers 3-Aug 1-day 1-mo 3-mo SBIN IN Equity RIL IN Equity 1, HUVR IN Equity 1, GCPL IN Equity 1, DABUR IN Equity Worst performers AL IN Equity 118 (1.7) (10.7) (27.9) UT IN Equity (26.1) TTMT/A IN Equity 143 (0.6) (9.1) (23.9) TTMT IN Equity 258 (0.9) (4.6) (22.7) HDIL IN Equity 25 (0.4) 23.3 (21.8) For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL.

2 Nestle India (NEST) Consumer Products Strong momentum sustains. Nestle reported another solid quarter with underlying domestic sales growth of 14.5%, EBITDA growth of 46%, and recurring PAT growth of 50% yoy. Two-year CAGRs were strong as well. Even as yoy comps are likely to moderate from here as the base catches up, we like the shape the business is in. The company s renewed volume focus is yielding good dividend. We raise our CY E EPS forecast by 1-4% and fair value target to `11,000 (from `9,500). ADD stays. ADD AUGUST 06, 2018 RESULT Coverage view: Cautious Price (`): 10,313 Target price (`): 11,000 BSE-30: 37,556 Company data and valuation summary Nestle India Stock data Forecasts/Valuations E 2020E 52-week range (Rs) (high,low) 10,951-6,501 EPS (Rs) Market Cap. (Rs bn) EPS growth (%) Shareholding pattern (%) P/E (X) Promoters 62.8 Sales (Rs bn) FIIs 11.9 Net profits (Rs bn) MFs 2.4 EBITDA (Rs bn) Price performance (%) 1M 3M 12M EV/EBITDA (X) Absolute ROE (%) Rel. to BSE-30 (0.7) Div. Yield (%) QCY18 earnings print a healthy set of numbers Revenues grew 12% yoy to `26.8 bn, broadly in line with our expected `26.9 bn. Domestic sales grew 12% on a reported basis and 14.5% on an underlying basis. Export revenues grew a solid 16% yoy, the highest yoy growth comp reported since March 2015 quarter. Gross margins expanded 455 bps to 59.3%, 184 bps ahead of our expectation and an all-time high. Even as part of the GM expansion was optical on account of GST-related accounting changes, we believe these reflect improvement in mix within as well as across segments. EBITDA for the quarter stood at `6.45 bn, +46% yoy and 4% above our estimate. EBITDA margin stood at 24.1%, +551 bps yoy and 109 bps ahead of our Street-high expectation. Staff and other expenses increased by 13% and 8%, respectively. Nestle does not disclose adspends on a quarterly basis but we believe the company is reinvesting a decent portion of gross margin expansion behind the brands. Recurring PAT grew 50% yoy to `3.95 bn, 5% ahead of expectation. Fixed asset impairment charges and provision for contingencies (both extremely volatile and tough-to-forecast numbers on quarterly basis) were both higher than our estimate. PAT, ex these charges, was 9% ahead of our estimate. EPS stood at `41/share taking 1HCY18 EPS to `85/share. Base-adjusted 2-year CAGRs healthy; reflect solid underlying business momentum Even as Nestle s base was not as favorable as some of its peers, it was favorable nonetheless. EBITDA and PAT had declined 6% and 3% yoy, respectively in the base quarter. For 2QCY18, 2-year CAGRs on revenues, EBITDA and recurring PAT stood at 10%, 17% and 21%, respectively. These are easily among the best 2-year comps we have seen in the sector so far and generate good confidence on our prognosis of the business being in a fairly healthy shape. Retain ADD; revise target price to `11,000/share We have tweaked our margin assumptions a tad driving a 1-4% increase in CY E EPS forecasts. Our DCF-based fair value target (baking in around 10% FCF CAGR through CY2040, TG of 6% and WACC of 10.2%) stands revised to `11,000/share (from `9,500). We retain ADD rating. Strong performance in the past 12 months (stock up nearly 60%) does not leave much upside on the table, however. We would accumulate on dips. 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.

3 Nestle India Consumer Products Exhibit 1: Key changes to estimates, Nestle India, CY E Revised Earlier Change (%) 2018E 2019E 2020E 2018E 2019E 2020E 2018E 2019E 2020E Revenues (Rs mn) 111, , , , , ,009 EBITDA (Rs mn) 27,713 31,832 35,928 27,601 31,115 35, EBITDA margin (%) Net income (Rs mn) 16,445 19,031 21,548 16,229 18,397 20, EPS (Rs/share) Source: Kotak Institutional Equities estimates Exhibit 2: Interim standalone results of Nestle India, calendar year-ends (Rs mn) 2QCY18 2QCY18E 2QCY17 1QCY18 vs KIE yoy qoq 1HCY18 1HCY17 %yoy 2QCY16 2-yr CAGR (%) Net domestic revenues 25,073 25,346 22,386 25,602 (1) 12 (2) 50,675 45, , Export revenues 1,712 1,598 1,479 1, (3) 3,479 3, , Net sales 26,786 26,944 23,865 27,368 (1) 12 (2) 54,154 48, , Material cost (10,890) (11,451) (10,791) (11,277) (5) 1 (3) (22,167) (21,729) 2 (9,495) 7.1 Gross Profit 15,896 15,493 13,075 16, (1) 31,987 26, , Gross margin (%) bps 455 bps 54 bps bps 57.5 Employee cost (2,849) (2,759) (2,531) (2,690) (5,539) (4,992) 11 (2,265) 12.1 Other expenditure (6,598) (6,542) (6,114) (6,487) (13,084) (12,361) 6 (5,853) 6.2 Total expenditure (20,337) (20,752) (19,436) (20,453) (2) 5 (1) (40,790) (39,083) 4 (17,614) 7.5 EBITDA 6,449 6,192 4,430 6, (7) 13,364 9, , EBITDA Margin (%) bps 551 bps -119 bps bps 21.1 Other income , Other operating income (3) Interest (283) (235) (229) (311) (9) (593) (457) 30 (220) Depreciation (817) (850) (854) (825) (4) (4) (1) (1,642) (1,721) (5) (889) (4.2) Pretax profits 6,150 5,765 3,915 6, (6) 12,698 8, , Tax (2,003) (1,943) (1,311) (2,157) 3 53 (7) (4,159) (2,739) 52 (1,186) 30.0 PAT 4,147 3,822 2,604 4, (6) 8,538 5, , Impairment of fixed assets (41) 0 (41) 0 Provision for contingencies (156) (50) 31 (151) 211 (610) 3 (306) (68) 353 (224) (16.7) Recurring PAT 3,950 3,772 2,634 4, (7) 8,191 5, , EO item (320) Reported PAT 3,950 3,772 2,634 4, (7) 8,191 5, , Recurring EPS (Rs/share) (7) Income tax rate (%) bps 40 bps -7 bps bps 30.3 Costs as a % of sales (% chg.) Material cost bps -456 bps -55 bps bps 42.5 Employee cost bps 2 bps 80 bps bps 10.1 Other expenditure bps -99 bps 93 bps bps 26.2 estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

4 Consumer Products Nestle India Exhibit 3: Nestle s net domestic revenue growth and EBITDA margin (%) 50 Net domestic revenue growth (LHS, %) EBITDA margin (RHS, %) (10) 20 (20) (30) 18 (40) 16 1QCY15 2QCY15 3QCY15 4QCY15 1QCY16 2QCY16 3QCY16 4QCY16 1QCY17 2QCY17 3QCY17 4QCY17 1QCY18 2QCY18 Exhibit 4: Nestle's 2QCY18 gross margins expanded 455 bps yoy QCY15 2QCY15 3QCY15 4QCY15 1QCY16 2QCY16 3QCY16 4QCY16 1QCY17 2QCY17 3QCY17 4QCY17 1QCY18 2QCY18 4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

5 Nestle India Consumer Products Exhibit 5: Nestle: Profit model, balance sheet, E, December calendar year-ends (Rs mn) IGAAP Ind-AS E 2019E 2020E Profit model Net sales 98,063 81,233 90,764 99, , , ,009 EBITDA 20,527 15,946 19,652 21,643 27,713 31,832 35,928 Other income 1,359 1,621 2,159 2,340 3,017 3,589 4,216 Interest expense (142) (33) (909) (919) (1,150) (1,269) (1,401) Depreciation (3,375) (3,473) (3,537) (3,423) (3,354) (3,566) (3,801) Pretax profits 18,368 14,062 17,365 19,642 26,225 30,585 34,942 Tax (5,897) (4,206) (5,440) (6,141) (8,472) (10,024) (11,603) Net income 12,472 9,855 11,924 13,500 17,754 20,561 23,339 Provision for contingencies/impairment losses (695) (917) (1,803) (1,248) (1,309) (1,530) (1,791) Net income after contingencies/impairment 11,777 8,938 10,121 12,252 16,445 19,031 21,548 EO items 70 (3,306) (108) Reported net income 11,847 5,633 10,014 12,252 16,445 19,031 21,548 Earnings per share (Rs) Balance sheet Total equity 28,372 30,359 32,823 34,206 37,189 40,555 44,232 Total borrowings Deferred tax liability 2,227 1,747 1,553 1,220 1,220 1,220 1,220 Total liabilities and equity 30,795 32,283 34,708 35,777 38,409 41,774 45,452 Cash 4,458 4,996 8,800 14,574 21,627 29,436 37,900 Investments 8,118 13,297 17,557 19,789 19,789 19,789 19,789 Net current assets (excl cash) (15,996) (17,296) (20,832) (25,689) (29,105) (32,602) (36,507) Net fixed assets (incl CWIP) 34,214 31,286 29,183 27,103 26,098 25,152 24,270 Total assets 30,795 32,283 34,708 35,777 38,409 41,774 45,452 Free cash flow Operating cash flow, excl. working capital 14,623 7,665 12,618 14,428 18,667 21,086 23,424 Working capital 1,818 3,316 2,040 3,750 3,416 3,497 3,905 Capital expenditure (4,146) (1,508) (2,070) (1,986) (2,349) (2,619) (2,919) Free cash flow 12,294 9,473 12,589 16,192 19,734 21,964 24,410 Key assumptions Revenue growth (%) 8.2 (17.2) EBITDA Margin (%) EPS Growth (%) 6.7 (24.1) RoE (%) RoCE (%) estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 5

6 Titan Company (TTAN) Consumer Products Watches pick up the jewelry slack. TTAN s 1QFY19 earnings print was a mixed bag; the jewelry segment underperformed the Street s expectations (before the company s post-quarter-pre-earnings update) as well as the management s own internal targets. The slack was picked up partly by primary sales boost in the watches segment. Management toned down its FY2019E jewelry sales growth target to the extent of 1QFY19 miss. There was enough in the earnings call to sustain the strong narrative, however. We tweak estimates a tad and retain SELL. TP raised to `840 (from `800). SELL AUGUST 06, 2018 RESULT Coverage view: Cautious Price (`): 919 Target price (`): 840 BSE-30: 37,556 Company data and valuation summary Titan Industries Stock data Forecasts/Valuations E 2020E 52-w eek range (Rs) (high,low ) 1, EPS (Rs) Market Cap. (Rs bn) EPS grow th (%) Shareholding pattern (%) P/E (X) Promoters 52.9 Sales (Rs bn) FIIs 20.7 Net profits (Rs bn) MFs 3.5 EBITDA (Rs bn) Price performance (%) 1M 3M 12M EV/EBITDA (X) Absolute 2.9 (4.2) 64.7 ROE (%) Rel. to BSE-30 (3.1) (10.4) 41.4 Div. Yield (%) An in-line-with-consensus quarter or a miss? We note that our estimates for TTAN, especially for the jewelry segment, were materially higher than consensus as we had published the same before the company released its post-quarterpre-earnings update. Consensus estimates were built on the toned-down management commentary and hence, the deviation versus consensus estimates is likely different from the deviation versus ours. That said, the important aspect to appreciate is that 1QFY19 earnings print, but for the adjustments made to published 1QFY19 forecasts by the Street, were weaker than expectations. TTAN management also indicated that 1QFY19 jewelry revenues were short of its own internal targets and revised down its FY2019E jewelry revenue growth guidance to the extent of 1QFY19 miss. Underlying financials weaker than reported, adjusted for watches primary sales boost TTAN reported standalone revenues of `43.19 bn for 1QFY19, +8% yoy and 6% below our estimates. EBITDA for the quarter stood at `4.95 bn, +27% yoy but again 6% below our estimate. EBITDA margin of 11.5% was marginally ahead of our estimated 11.4%. Recurring PAT stood at `3.49 bn, +26% yoy and 5% below our estimate. Other income was materially ahead of estimate on account of higher average cash balance as the company cut down instore jewelry inventory sharply. ETR stood at 28.3%. Segmental financials jewelry below estimate, watch segment surprises Jewelry revenues grew 6% yoy to `35.72 bn, 8% below our forecast. The slack was picked up to some extent by watches (+15% yoy, 8% above estimate) and eyewear (+16% yoy, 8% above estimate). Jewelry EBIT grew 16% yoy to `3.93 bn missing our estimate by 14%. Watches segment picked up the slack here too growing a strong 128% yoy, 50% above our estimate. Watches segment performance was boosted by higher-than-normal primary sales towards the end of the quarter in anticipation of upcoming activation. Retail sales were much lower. On the jewelry front, gold tonnage declined 2.6% yoy, first decline in seven quarters. Growth in jewelry segment was driven by gold price inflation and higher studded sales. Customer base for the jewelry segment was flattish reflecting poor industry growth. 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.

7 Titan Company Consumer Products A good narrative but not without risks; bullish case priced in. We remain cautious We like the narrative for TTAN; demonetization and GST have given the company a multiyear market share gain opportunity as unbranded jewelry segment struggles. Management s five-year growth outlook (2.5X jewelry sales in FY2023E versus FY2018) reflects the narrative. Our model bakes in similar levels of growth. Our discomfort on the stock is on two counts, related to each other perhaps (a) there is little appreciation for risks to the narrative; to be sure, no material risk is visible at this point. However, weaker-than-expected industry growth, a sharp fall or a sharp rise in gold price (both not good for demand), any increase in GST rate (jewelry is a luxury good, after all), the unbranded players finding a way to revive their competitiveness, etc. are all potential risks, and (b) rich valuations which as we said is related to the Street s upside-a-given, risks-not-even-an-afterthought construct for the stock (and the sector in general). We remain cautious and retain our SELL rating. Our forecasts see some minor tweaks and we raise our fair value target to `840 (from `800). Conference call highlights Jewelry segment. Jewelry business reported muted 6% yoy growth in revenues to `35.7 bn. Per management, industry declined 10-25% yoy and Titan gained market share in line with expectations even as reported growth was 10 percent points below internal expectations. Weakness was partly due lower than usual number of wedding days. Additionally, base quarter revenues were higher by about `2.5 bn due to advancement of sales ahead of GST implementation in the month of June Segmental EBIT grew 16% yoy to `3.94 bn (14% below our estimate) on 100 bps yoy jump in EBIT margin to 11% aided by better studded share, better mix overall and tight cost control. Management highlighted (1) growth in the month of July was 70% yoy+ partly aided by weak base, (2) gold procurement through exchange stood at 43% (versus 40% in 1QFY18), (3) 1Q revenues missed company s expectation by about 10% (or `3.2 bn); the company reduced its revenue guidance for FY2019 to the extent of this 1Q miss of `3.2 bn, (4) Jewelry inventory reduced by `4.5 bn sequentially due to rationalization of in-store inventory levels. Watches. Watches posted a good quarter with 15% yoy growth in revenues to `5.9 bn. Growth was partly boosted by stocking up ahead of rollout of schemes. Retail sales of world of Titan were muted at 3% yoy on account of activation phasing. Margin expansion of 930 bps to 18.8% was driven by a number of factors (1) product mix. Titan watches reported disproportionate growth on stocking up ahead of schemes. It was key contributor of margin expansion and is not sustainable, (2) Ecommerce segment is growing faster and profitability is higher on this channel for Titan. This trend can sustain, (3) cost control measures taken by the company and (4) non-recurrence of business conference expense of `110 mn. The management expects full year EBIT margin in double digits. Eyewear. Eyewear segment reported overall revenue growth of 19% and like-to-like growth of 8%. Sunglasses category grew 44% yoy on weak base. The company had 2.4 mn customers last year and it is targeting 3.7 mn this year. Other takeaways. (1) The company added 44 stores with retail space of 44,000 sq. ft in 1QFY19 (across formats) and (2) depreciation increased due to shift of corporate office to own premise from rented space and accelerated depreciation of furniture and fixtures. 1QFY19 depreciation is the new base going forward. KOTAK INSTITUTIONAL EQUITIES RESEARCH 7

8 Consumer Products Titan Company Exhibit 1: Interim results (standalone) - Titan Industries, March fiscal year-ends (Rs mn) (% chg.) 2-year 1QFY19 1QFY19E 1QFY18 4QFY18 KIE Est yoy qoq FY2019E FY2018 (% chg.) CAGR (%) Net operating revenue 43,189 46,080 39,921 39,168 (6) , , Material cost (31,587) (34,716) (29,783) (27,809) (9) 6 14 (139,976) (113,779) 23 Gross Profit 11,602 11,364 10,138 11, ,814 41, Gross Margin (%) bps 146 bps -214 bps bps Employee cost (2,065) (2,000) (1,797) (2,110) 3 15 (2) (8,877) (7,645) 16 Advertising and promotion (1,362) (1,100) (1,059) (1,022) (5,561) (4,486) 24 Other expenditure (3,221) (3,000) (3,395) (3,674) 7 (5) (12) (13,689) (12,117) 13 Total expenditure (38,236) (40,816) (36,033) (34,614) (6) 6 10 (168,103) (138,027) 22 EBITDA 4,953 5,264 3,888 4,554 (6) ,686 17, OPM (%) bps 172 bps -16 bps bps Other income , Interest (88) (110) (106) (124) (20) (17) (29) (369) (477) (23) Depreciation (351) (315) (248) (301) (1,476) (1,097) 35 Pretax profits 4,870 5,089 3,810 4,329 (4) ,909 16, Tax (1,378) (1,399) (1,038) (967) (2) (5,883) (4,345) 35 PAT 3,492 3,689 2,772 3,362 (5) ,026 12, Extraordinary items (103) (541) (650) Net profit (reported) 3,492 3,689 2,669 2,821 (5) ,026 11, Recurring EPS (Rs) (5) Income tax rate (%) bps 105 bps 596 bps bps Costs as a % of sales Material cost bps -147 bps 213 bps bps Employee cost bps 28 bps -61 bps bps Advertising and promotion bps 50 bps 54 bps bps Other expenditure bps -105 bps -193 bps bps Segmental Results Revenue break-up (incl OI) Jewelry 35,717 39,031 33,807 32,921 (8) , , Watches 5,935 5,482 5,167 4, ,490 21, Eyewear 1,316 1,217 1,130 1, ,772 4, Others (19) 32 (1) 1, Unallocated Total 43,545 46,330 40,542 39,368 (6) , , EBIT break-up (incl OI) Jewelry 3,934 4,586 3,388 4,519 (14) 16 (13) 19,763 15, Watches 1, ,266 2, Eyewear (59) (45) (24) Others (131) (120) (61) (127) 9 (115) (3) (468) (443) (6) Unallocated 25 (50) (33) (1,120) (150) (1,352) (656) 106 Total 4,958 5,199 3,813 3,646 (5) ,251 17, EBIT margin (%) Jewelry bps 99 bps -272 bps bps Watches bps 931 bps 1164 bps bps Eyewear bps -149 bps -80 bps bps Others (49.8) (36.9) (30.6) (48.0) bps bps -189 bps (37.7) (46.6) 893 bps Total bps 198 bps 212 bps bps 8 KOTAK INSTITUTIONAL EQUITIES RESEARCH

9 Titan Company Consumer Products Exhibit 2: Interim results (consolidated) - Titan Industries, March fiscal year-ends (Rs mn) (% chg.) 1QFY19 1QFY18 4QFY18 yoy qoq FY2019E FY2018 (% chg.) Net operating revenue 44,510 40,673 41, , , Material cost (32,333) (29,918) (29,003) 8 11 (139,976) (113,857) 23 Gross Profit 12,177 10,755 12, ,814 42, Gross Margin (%) bps -203 bps bps Employee cost (2,393) (2,085) (2,463) 15 (3) (8,877) (7,623) 16 Advertising and promotion (1,554) (1,197) (1,115) (5,561) (4,410) 26 Other expenditure (3,401) (3,823) (4,137) (11) (18) (13,689) (12,990) 5 Total expenditure (39,682) (37,024) (36,718) 7 8 (168,103) (138,880) 21 EBITDA 4,829 3,649 4, ,686 17, OPM (%) bps 24 bps bps Other income , Interest (109) (108) (167) 1 (35) (369) (477) (23) Depreciation (407) (295) (360) (1,476) (1,097) 35 Pretax profits 4,674 3,529 4, ,909 16, Tax (1,388) (1,073) (912) (5,883) (4,381) 34 PAT 3,286 2,456 3, ,026 12, Share of associate profits (5) (8) (19) (28) 0 PAT before EO items Extraordinary items (68) (38) (614) Net profit (reported) 3,282 2,380 3, ,998 11, Recurring EPS (Rs) Income tax rate (%) bps 695 bps bps Costs as a % of sales Material cost bps 202 bps bps Employee cost bps -62 bps bps Advertising and promotion bps 77 bps bps Other expenditure bps -244 bps bps Segmental Results Revenue break-up (incl OI) Jewelry 36,426 34,252 33, , , Watches 5,963 5,186 4, ,490 21, Eyewear 1,316 1,130 1, ,772 4, Others , (44) 1, Unallocated Total 44,872 41,317 41, , , EBIT break-up (incl OI) Jewelry 3,842 3,233 4, (10) 19,763 15, Watches ,266 2, Eyewear (45) (24) Others (97) (97) (468) (443) (6) Unallocated 20 (41) (361) (1,352) (656) 106 Total 4,778 3,525 4, ,251 17, EBIT margin (%) Jewelry bps -211 bps bps Watches bps 1315 bps bps Eyewear bps -80 bps bps Others (11.3) (18.9) bps bps (37.7) (46.6) 893 bps Total bps 70 bps bps KOTAK INSTITUTIONAL EQUITIES RESEARCH 9

10 Consumer Products Titan Company Exhibit 3: Titan - key changes to earnings model, March fiscal year-ends, E (Rs mn) Revised Earlier Change (%) 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2020E Net revenues 195, , , , , ,853 (1.4) (1.2) (0.9) EBITDA 21,186 26,466 32,046 21,559 26,848 32,399 (1.7) (1.4) (1.1) PAT 14,253 17,359 20,709 14,387 17,344 20,636 (0.9) EPS (Rs/share) (0.9) EBITDA margin (%) Net revenue break-up Jew ellery 162, , , , , ,053 (2.1) (1.8) (1.5) Watches 23,481 25,885 28,401 23,021 25,378 27, Exhibit 4: Store-wise sales growth and presence Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sales value growth (%) World of Titan (6) (3) 3 Tanishq (1) Goldplus (16) (5) (10) 2 NA NA NA NA NA NA Helios Fastrack 2 4 (1) 3 (3) LFS-Watches Titan Eye Like to Like growth (%) World of Titan (9) 6 (2) (4) 2 Tanishq (5) Goldplus (16) (1) (7) 8 NA NA NA NA NA NA Helios (3) 24 (9) 4 5 (2) Fastrack (5) (1) (5) 1 (1) (3) 2 6 (6) LFS-Watches (7) Titan Eye + 7 (2) No of stores (Total Presence) Zoya Helios World of Titan Fastrack Tanishq Titan Eye Gold Plus Total exclusive stores 1,283 1,293 1,316 1,333 1,365 1,395 1,413 1,437 1,478 1,517 Towns Sq ft 1.72mn+ 1.74mn+ 1.75mn+ 1.76mn+ 1.8mn+ 1.8mn+ 1.8mn+ 1.9mn+ 1.9mn+ 2mn+ Sevice Centres International Presence Countries No of Outlets 2,264 2,264 2,264 2,264 2,264 2,264 2,264 2,264 2,264 2,265 Source: Company 10 KOTAK INSTITUTIONAL EQUITIES RESEARCH

11 Titan Company Consumer Products Exhibit 5: Key segment-wise performance metrics Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Jewelry business Jewelry revenue growth (%) Jewelry volume growth (%) (32.0) (2.6) Implied price/mix change (%) (12.2) (2.1) (8.5) Average gold price (Rs/10 gm) 26,430 28,090 29,640 27,910 27,730 27,900 27,770 27,980 29,030 29,680 Change (%) (0.7) (6.3) Studded share (%) Distribution Tanishq (Incl Zoya) No Towns Sq ft ('000s) ,010 1,020 GoldPLus No Towns Sq ft ('000s) Watches business Watches revenue growth (%) (13.0) 2.2 (5.2) (1.7) 14.9 Watches volume growth (%) (19.0) 1.0 (9.0) (1.0) 10.0 Implied price change (%) (1.5) (0.1) (4.4) (0.7) 4.4 Distribution World of Titan No Towns Sq ft ('000s) Fastrack No Towns Sq ft ('000s) Helios No Towns Sq ft ('000s) Others Others revenue growth (%) 2.5 (71.9) (71.7) (66.9) (79.0) Eyewear revenue growth (%) (2.6) 16.4 Distribution No of outlets Towns Source: Company KOTAK INSTITUTIONAL EQUITIES RESEARCH 11

12 Consumer Products Titan Company Exhibit 6: Titan - key assumptions driving our earnings model, March fiscal year-ends, E (Rs mn) E 2020E 2021E Jewelry business Net revenues 86,274 94,206 87, , , , , ,494 Rev growth yoy (%) 7 9 (7) EBITDA 8,728 9,694 8,388 10,455 15,014 19,180 23,673 28,608 EBITDA grow th yoy (%) 4 11 (13) EBITDA margin (%) Total gold sold (tonnes) Change yoy (%) 12 7 (1) Average gold price (Rs/gm) 28,279 27,685 27,311 30,862 30,708 31,475 32,262 33,069 Change yoy (%) (6) (2) (1) 13 (1) Studded share (%) Total # of stores Revenue/store (Rs '000) 457, , , , , , , ,655 EBITDA/store (Rs '000) 46,302 47,636 38,476 44,773 59,816 68,015 74,677 83,650 Watches business Net revenues 17,889 19,188 19,744 20,355 21,315 23,481 25,885 28,401 Rev growth yoy (%) EBITDA 2,075 2,293 1,953 2,124 2,624 3,099 3,624 4,047 EBITDA grow th yoy (%) (4) 10 (15) EBITDA margin (%) Watches sold (mn) Change yoy (%) (6) 2 (6) Others Net revenues 5,111 2,421 3,124 3,806 4,415 4,991 5,640 6,506 Rev growth yoy (%) 24 (53) estimates 12 KOTAK INSTITUTIONAL EQUITIES RESEARCH

13 Titan Company Consumer Products Exhibit 7: Titan - Consolidated profit model, balance sheet, cash model, March fiscal year-ends, E (Rs mn) E 2020E 2021E Profit model (Rs mn) Net sales 119, , , , , , ,334 EBITDA 11,484 9,347 11,555 16,447 21,186 26,466 32,046 Other income ,093 1,362 1,628 Interest (807) (424) (377) (529) (449) (475) (516) Depreciation (896) (982) (1,105) (1,314) (1,716) (2,156) (2,663) Pretax profits 10,489 8,681 10,777 15,492 20,114 25,198 30,495 Tax (2,326) (1,916) (3,099) (4,334) (5,833) (7,811) (9,758) PAT 8,163 6,765 7,679 11,158 14,281 17,387 20,737 Share of associate earnings 0 (20) (18) (28) (28) (28) (28) PAT after Associates 8,163 6,745 7,661 11,131 14,253 17,359 20,709 Extraordinary items (688) (112) Net profit (reported) 8,163 6,745 6,973 11,019 14,253 17,359 20,709 Earnings per share (Rs) Balance sheet (Rs mn) Total equity 30,839 35,063 42,587 50,881 60,320 71,795 85,015 Total borrowings 998 1, Deferred tax liabilities (net) (193) 131 (33) (329) (329) (329) (329) Total liabilities and equity 31,643 37,027 43,165 51,342 60,531 71,466 84,686 Net fixed assets (Incl CWIP) 7,441 8,573 10,071 11,681 13,881 16,260 18,912 Intangible assets ,337 3,491 3,491 3,491 3,491 Investments 31 1,355 5, Cash 2,138 1,164 8,020 6,179 10,925 13,257 17,862 Net current assets (excl cash) 21,931 25,736 16,529 29,631 31,902 38,154 44,145 Total assets 31,643 37,027 43,165 51,342 60,531 71,466 84,686 Free cash flow (Rs mn) Operating cash flow (excl working capital) 9,178 7,392 8,034 12,096 15,325 18,627 22,260 Working capital (4,152) (1,631) 9,475 (12,501) (2,271) (6,252) (5,991) Capital expenditure (2,070) (2,522) (6,348) (3,923) (3,916) (4,535) (5,315) Free cash flow 2,956 3,239 11,161 (4,328) 9,138 7,840 10,954 Key assumptions, growth, % Net revenue growth 9.0 (5.4) EBITDA growth 10.0 (18.6) EPS growth 9.1 (17.4) EBITDA margin (%) Tax rate (% of PBT) Segment revenue assumptions, growth, % Jewellery 9.2 (7.4) Watches Others Ratios (%) ROE (%) ROCE (%) estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 13

14 Marico (MRCO) Consumer Products 1Q a mixed bag; prognosis promising. MRCO s earnings continue to be impacted by the high inflation in its RM basket. A reversal in copra (some moderation seen already; decline trends expected to continue) is important for (a) better earnings growth delivery and (b) the company to step up adspends that is now tracking contra to competition. Underlying demand environment is supportive of management s confident stance on volumes. We stay constructive and raise our fair value target to `375 (from `345). ADD. ADD AUGUST 06, 2018 RESULT Coverage view: Cautious Price (`): 353 Target price (`): 375 BSE-30: 37,556 Company data and valuation summary Marico 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 59.7 Sales (Rs bn) FIIs 27.4 Net profits (Rs bn) MFs 2.3 EBITDA (Rs bn) Price performance (%) 1M 3M 12M EV/EBITDA (X) Absolute ROE (%) Rel. to BSE-30 (2.6) 5.6 (7.7) Div. Yield (%) QFY19 in-line headline print but subpar internals MRCO s largely in-line consolidated operating profit print for 1QFY19 hides what we see as slightly weaker-than-expected internals. Lower-than-expected overheads aided in-line operating profit delivery even as gross profit fell 6% short of estimates on account of material miss in gross margins. In addition to the gross margin miss, we were also disappointed slightly with the Parachute (rigids) volume growth print of 9%. We note that this 9% volume growth print was on a -9% base. On the positive side, Saffola volume growth of 10% was materially above expectation; we do note that the management stopped short of calling Saffola revival complete. Consolidated revenues, EBITDA and recurring PAT grew +21% yoy (1% above), +9% yoy (2% below) and +10% yoy (6% below), respectively. Gross margins declined 554 bps yoy while EBITDA margin decline was restricted to 183 bps yoy. ETR stood at 26%. EBITDA and PAT were both lower than 1QFY17 levels. Standalone revenues, EBITDA and recurring PAT grew 23% yoy (3% above), +9% yoy (4% below) and +9% yoy (3% below), respectively. Gross margins declined 611 bps yoy while EBITDA margins declined 202 bps as the company kept overhead costs in control. Importantly, adspends were flat yoy on a reported basis and up only 9% on a GST-adjusted basis. We note that several peers have stepped up adspends quite meaningfully in 1QFY19. EBITDA and PAT were both lower than 1QFY17 levels for the standalone business as well. Segmental performance a mixed bag, again Parachute (rigids) volume growth of 9% yoy disappointed a tad, coming off a weak -9% base. VAHO volume growth was in line at 15% (-14% base). Saffola surprised with 10% yoy volume growth while other segments in India posted broadly in-line and healthy-off-a-low-base growth comps. Revenue surprise, both consol and standalone, was driven by higher-than-expected realization growth in Parachute. Rohit Chordia Jaykumar Doshi Aniket Sethi Stay constructive; see earnings growth acceleration ahead We expect earnings growth acceleration from 2HFY19 onwards on the back of improving underlying demand environment. Copra prices remain a risk but historical trends suggest favorable movement from here. Raise TP to `375 (from `345). ADD stays. For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

15 Marico Consumer Products Exhibit 1: Interim consolidated results of Marico (based on Ind-AS), March fiscal year-ends (Rs mn) (% change) 1QFY19 1QFY19E 1QFY18 4QFY18 KIE Est yoy qoq 1QFY17 2-yr CAGR (%) Net operating income 20,268 20,024 16,815 14, ,523 8 Material cost (11,696) (10,870) (8,773) (7,896) (8,400) Gross Profit 8,572 9,154 8,042 6,905 (6) ,123 (3) Gross Margin (%) bps -554 bps -436 bps 52.1 Employee cost (1,147) (1,230) (1,086) (1,035) (7) 6 11 (1,052) 4 Advertising and promotion (1,657) (1,890) (1,639) (1,189) (12) 1 39 (2,091) (11) Other expenditure (2,219) (2,396) (2,066) (2,158) (7) 7 3 (2,241) (0) Total expenditure (16,719) (16,387) (13,564) (12,278) (13,784) EBITDA 3,549 3,637 3,251 2,523 (2) ,740 (3) OPM (%) bps -183 bps 46 bps 21.3 Other income (37) Interest (53) (40) (35) (53) (54) Depreciation (224) (225) (211) (231) (0) 6 (3) (208) Pretax profits 3,512 3,752 3,226 2,468 (6) ,753 (3) Tax (913) (1,005) (866) (642) (9) 5 42 (1,072) Minority Interest (42) (38) (40) (20) (40) Recurring PAT (after MI) 2,557 2,710 2,320 1,806 (6) ,641 (2) Extraordinary items Net profit (reported) 2,557 2,710 2,320 1,806 (6) ,641 (2) EPS (6) (2) Income tax rate (%) bps -85 bps -2 bps 28.6 Costs as a % of sales Material cost bps 553 bps 435 bps 47.9 Employee cost bps -81 bps -134 bps 6.0 Advertising and promotion bps -158 bps 14 bps 11.9 Other expenditure bps -134 bps -364 bps 12.8 Exhibit 2: Interim standalone results of Marico (based on Ind-AS), March fiscal year-ends (Rs mn) (% change) 1QFY19 1QFY19E 1QFY18 4QFY18 KIE Est yoy qoq 1QFY17 2-yr CAGR (%) Net operating income 16,846 16,401 13,728 12, ,525 8 Material cost (10,248) (9,349) (7,512) (6,747) (7,324) Gross Profit 6,599 7,052 6,215 5,390 (6) ,201 (4) Gross Margin (%) bps -611 bps -525 bps 49.6 Employee cost (773) (803) (730) (653) (4) 6 18 (652) 9 Advertising and promotion (1,266) (1,448) (1,264) (862) (13) 0 47 (1,542) (9) Other expenditure (1,810) (1,945) (1,704) (1,741) (7) 6 4 (1,869) (2) Total expenditure (14,096) (13,545) (11,211) (10,003) (11,387) EBITDA 2,750 2,856 2,517 2,135 (4) ,138 (6) OPM (%) bps -202 bps -127 bps 21.6 Other income (23) 7 (75) 223 Interest (24) (20) (20) (18) (34) Depreciation (190) (170) (155) (172) (147) Pretax profits 2,766 2,966 2,557 2,861 (7) 8 (3) 3,179 (7) Tax (617) (742) (577) (831) (17) 7 (26) (830) PAT 2,149 2,225 1,980 2,030 (3) 9 6 2,349 (4) Extraordinary items 0 (832) Net profit (reported) 2,149 2,225 1,980 1,198 (3) ,349 (4) EPS (3) (4) Income tax rate (%) bps -25 bps -675 bps 26.1 Costs as a % of sales Material cost bps 610 bps 524 bps 50.4 Employee cost bps -74 bps -80 bps 4.5 Advertising and promotion bps -170 bps 41 bps 10.6 Other expenditure bps -168 bps -360 bps 12.9 KOTAK INSTITUTIONAL EQUITIES RESEARCH 15

16 Consumer Products Marico Exhibit 3: Key changes to earnings model, Marico, March fiscal year-ends, E (Rs mn) Revised Earlier Change (%) 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E Revenues (Rs mn) 72,937 82,404 92,602 72,947 82,402 92,587 (0.0) EBITDA (Rs mn) 12,531 15,072 17,407 13,463 15,347 17,446 (6.9) (1.8) (0.2) EBITDA (%) PAT (Rs mn) 8,807 10,571 12,107 9,444 10,741 12,099 (6.7) (1.6) 0.1 EPS (Rs/share) (6.7) (1.6) 0.1 estimates Key segmental highlights and takeaways from the earnings call Rural growth outperforms urban growth. Marico s rural growth continued to outpace urban growth in 1QFY19 rural grew 28% yoy while urban sales grew by 16% in value terms. MT (11% of turnover) grew by 39% while CSD (7% of turnover) also recorded strong growth of 15% yoy. Parachute CNO. Parachute rigids posted a decent but slightly disappointing quarter volumes up 9% yoy, off a -9% base. Marico continued to gain market share (on a MAT basis) in the coconut oil segment. In the medium term, the company expects to deliver 5-7% volume CAGR (guidance unchanged). Value growth in Parachute rigids was at 38% yoy. Management explained that they operate in a band of gross margin per unit rather than % margins. Also, they will continue to focus on franchise expansion as long as absolute spreads remain within a band. Saffola. Saffola reported volume growth of 10% yoy (9% growth in value terms) after a weak performance in FY2018. Management highlighted that the challenges for the brand are still not completely over. While they have taken actions on promotional packs and modern trade channel for the brand, work remains to be done to fix issues in urban general trade. Intense competition continues in the segment and the company is taking measures to differentiate its communication. They have upped media investments behind the brand in the quarter. Management expects a healthy growth trajectory for Saffola over the next 2-3 quarters and expects double-digit growth in the medium term. Other food brands the healthy foods franchise grew 23% in value terms during the quarter. Saffola Masala Oats maintained it momentum and consolidated its value share to 69% (June, 2018 MAT) in flavored oats category. Marico has prototyped Saffola Masala Oats with Multigrain Crunchies and have also launched two new variants of Lemony Twist and Mint Chutney. With current vending machine network of 200, management believes that this initiative drives consumer trials and repeats. They continue to guide that they are aiming to grow the business first to `2 bn by next year (achieve a critical mass) and will then chalk out a future strategy. Value added hair oils. Domestic VAHO portfolio grew 15% in volume terms and 12% in value terms. Going forward, the company targets double-digit volume growth in VAHO. They also aim to defend both their volume and value market share in the segment. For fueling growth in the segment, Marico has launched `10 packs of several of its hair oil brands like Parachute Jasmine, Nihar Jasmine and Sarson. They would also target to grow premium end of its portfolio like Aloe Vera to negate any likely negative impact on margins. 16 KOTAK INSTITUTIONAL EQUITIES RESEARCH

17 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Marico Consumer Products Youth brands. Male grooming portfolio grew 44% yoy in value terms during the quarter. Given the strong response to its pocket spray, company plans to extend it to beyond the initial launch markets. They have also launched its first exclusively digital brand Set Wet Studio X introducing products across seven categories such as Shampoo, Bodywash, Facewash, etc. Company seeks to build a consistent value growth trajectory of 20%+ in the category in the medium term. International business. Marico s international business posted 7% yoy growth in c/c terms (volume growth of 3% yoy and reported growth of 9% yoy). Bangladesh (45% of turnover) posted 9% c/c growth in revenues despite flat volumes. Parachute CNO posted a flattish quarter (maintaining leadership position with ~87% market share) and non-cno portfolio grew by 50% in c/c terms. Management continued to highlight that they continue to focus on expanding their product base in the country. Saffola Edible Oil and Set Wet Gels responded well in the quarter. MENA (14% of turnover) posted strong 17% c/c growth, largely volume-driven. This was on the back of good growth in both Egypt and the Middle East businesses. However, the management indicated that there could be some concerns in the region in the medium term given the tough macros in the region. Others (1) SE Asia (26% of turnover) remained muted in c/c revenue terms. Weak performance in the foods business dragged overall performance of Vietnam. The bright spot in its Vietnam performance was the male shampoos, which grew at 9% in constant-currency terms. Management has taken definitive steps to correct its GTM strategy. Myanmar business was impacted by supply constraints. However, the near term prospects in the country remains strong. (2) South Africa (9% of turnover) registered 7% c/c growth aided by good progress in Isoplus. Exhibit 4: Domestic volume growth trends (yoy %) (1) (4) (4.0) (7) (10) (9.0) KOTAK INSTITUTIONAL EQUITIES RESEARCH 17

18 Consumer Products Marico Exhibit 5: Parachute (rigids) volume growth (%) (5) (10) (6) (1) 15 (9) (5) 9 (15) 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 estimates, Kotak Institutional Equities Exhibit 6: Value added hair oils volume growth trends (in %) (5) (10) (12) (8) (15) 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Exhibit 7: Saffola volume growth trends (in %) (4) (8) (1) (9) 3 - (1) 10 (12) 18 KOTAK INSTITUTIONAL EQUITIES RESEARCH

19 Marico Consumer Products Exhibit 8: Consolidated Profit model, balance sheet of Marico (based on Ind-AS), March fiscal year-ends, E Profit model E 2020E 2021E Net sales 60,173 59,178 63,222 72,937 82,404 92,602 EBITDA 10,514 11,593 11,378 12,531 15,072 17,407 Other income ,080 1,279 Interest expense (206) (166) (162) (162) (131) (101) Depreciation (949) (903) (891) (965) (1,103) (1,262) Pretax profits 10,292 11,497 11,171 12,270 14,918 17,322 Tax (3,054) (3,377) (2,896) (3,313) (4,177) (5,023) Minority Interest (124) (134) (131) (151) (170) (192) Net income 7,115 7,986 8,145 8,807 10,571 12,107 Extraordinary items Reported Net income 7,115 7,986 8,145 8,807 10,571 12,107 Earnings per share (Rs) Balance sheet Total shareholder's equity 20,174 23,257 25,429 26,877 28,928 31,353 Total borrowings 3,306 2,388 3,093 2,593 2,093 1,593 Minority interest Total liabilities and equity 23,623 25,778 28,647 29,746 31,467 33,584 Net fixed assets 5,917 5,883 5,613 5,961 6,312 6,651 Goodwill 5,261 5,075 5,463 5,463 5,463 5,463 Investments 5,132 6,082 5,724 5,724 5,724 5,724 Cash 3,171 2,273 2,001 3,283 5,946 7,075 Net current assets 3,720 6,590 10,140 9,610 8,317 8,966 Deferred tax asset (Net) 421 (125) (294) (294) (294) (294) Total assets 23,623 25,778 28,647 29,746 31,467 33,584 Free cash flow Operating cash flow (excl. working capital) 8,373 8,901 8,610 9,218 10,895 12,383 Working capital changes (197) (2,785) (3,065) 531 1,293 (649) Capital expenditure (878) (981) (1,280) (1,313) (1,454) (1,601) Free cash flow 7,299 5,135 4,266 8,435 10,734 10,134 Ratios Sales growth (%) NM EPS growth (%) EBITDA margin (%) Gross margin (%) A&SP % of sales ROE (%) ROCE (%) estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 19

20 Godrej Properties (GPL) Real Estate Moderating momentum. Godrej Properties had moderating sales at Rs8.2 bn, compared to quarterly sales of Rs11.3 bn clocked in FY2018. Cash collection remained strong, even as cash flows were supported by Rs10 bn of equity raise during the quarter. During the quarter GPL launched four new projects that accounted for the bulk of the sale activity, even as the team prepares to launch nine more projects during the current fiscal. Strong launch pipeline and improving cash generation are already factored in the rich valuations. Maintain SELL with TP of Rs400/share. SELL AUGUST 06, 2018 RESULT Coverage view: Neutral Price (`): 733 Target price (`): 400 BSE-30: 37,556 Company data and valuation summary Godrej Properties 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 74.9 Sales (Rs bn) FIIs 8.9 Net profits (Rs bn) MFs 2.5 EBITDA (Rs bn) (0.0) Price performance (%) 1M 3M 12M EV/EBITDA (X) ####### Absolute 2.6 (6.7) 46.6 ROE (%) Rel. to BSE-30 (3.3) (12.8) 25.9 Div. Yield (%) Sales momentum moderated in 1QFY19, equity issuance helped overall cash flows Collections for 1QFY19 stood at Rs11.3 bn though total sales at Rs8.2 bn, were below the average quarterly run-rate of Rs12,700 mn seen in FY2018. Bulk of the sales (64%) were reported from four new launches (of which two projects under DM model) in Mumbai, Pune and Delhi NCR. With total area sold during the quarter at 1.17 mn sq. ft, avg. realizations declined to Rs6,672/sq. ft. Overall net operating cash flows were negative at Rs1.6 bn. During the quarter GPL raised Rs10 bn selling 5.6% of its stake to GIC. With this equity issuance, the company s net debt/equity ratio improved to 0.7 (1.9 till March 2018) providing significant headroom for new business development opportunities as current borrowing cost remains low at 7.86%. More launches in the pipeline; however GPL s share continues to remain low As per the management, nine new term sheets have been signed in this quarter with most of them likely to see launches in this financial year. Of these nine projects signed, three are under the JV/DM model with two being in NCR and remaining one in Thane. We highlight that Godrej s economic interest in JV project format has traditionally remained low. In order to improve construction timelines, the company has set up a precast plant in Greater Noida. The plant has a capacity to construct 0.5 mn sq. ft per annum. Lower attributable sales, rich valuations GPL is recovering operations with the help of favorable project structures, concentrated market approach and strong pre-sales. We expect GPL to continue generating positive cash flow from operations. At 4.3X Mar 20 BV and with 50% of value for new projects and sales estimates running beyond 10 mn sq. ft (modeled from FY2019), GPL continues to be expensive versus sector peers. GPL s business model on JVs and hence its reporting structure for financials is complex. Murtuza Arsiwalla Samrat Verma For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

21 Godrej Properties Real Estate Exhibit 1: Cash flow post land payments were in black for 3QFY18 and 9MFY18 GPL: Gross OCF, March fiscal year-ends, 1QFY17-1QFY19 (Rs mn) 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Operating cash inflow 5,790 8,550 4,370 6,970 11,670 7,400 9,020 12,770 11,280 Construction and related outflow (3,760) (3,620) (3,160) (3,490) (2,590) (2,590) (2,640) (3,600) (5,050) Other project related outflow (1,570) (1,520) (1,280) (1,360) (2,490) (2,540) (3,260) (2,350) (3,470) Interest and related outflow (990) (1,110) (1,020) (1,590) (1,050) (1,120) (940) 350 (1,180) PE exits (2,490) - Operating cash flow (3,020) 2,300 (1,090) 530 5,540 1,150 2,180 7,170 1,580 Land and approval costs (530) (1,310) (1,370) (2,730) (860) (1,570) (1,240) (2,530) (3,110) Advance to JV partners (130) (120) (10) (340) (180) (290) (280) (1,460) (90) Net cash flow (3,680) 870 (2,470) (2,540) 4,500 (710) 660 3,180 (1,620) Equity raise 10,000 Ind-AS adjustments 2,000 (220) 160 (430) 410 (80) (990) 2,330 Net cash flow (1,680) 650 (2,470) (2,380) 4,070 (300) 580 2,190 10,710 Exhibit 2: High costs at Godrej BKC reflect in lower reported margins GPL: Revenue contribution, March fiscal year-ends, 1QFY16-1QFY19 (Rs mn) 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Godrej Trees Mumbai 3,350 2, ,000 3,410 Godrej Garden City Ahmedabad Godrej BKC Mumbai , ,770 1,090 1, ,890 4,240 8,400 Godrej Summit Gurgaon Other projects 1,253 1,174 1, , ,150 1, ,620 2,150 Total 2,633 14,814 4,500 5,330 3,038 3,296 5,183 4,313 2,487 4,923 6,270 8,490 10,550 Contribution (%) Godrej Trees Mumbai Godrej Garden City Ahmedabad Godrej BKC Mumbai Godrej Summit Gurgaon Other projects Gross margins (%) EBITDA margins (%) (7) 15 7 (21) 7 KOTAK INSTITUTIONAL EQUITIES RESEARCH 21

22 Real Estate Godrej Properties Exhibit 3: Sales at Godrej BKC drive recognition and lower margin recognition GPL: Results snapshot, March fiscal year-ends (Rs mn) % change 1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 FY2019E FY2018 % change Financials snapshot Net sales 9,967 6,760 2,487 5, ,049 18,892 1 Operating costs (9,298) (6,118) (2,669) (6,286) (18,490) (18,936) (2) EBITDA (183) (1,074) 4 (466) (162) 559 (44) Other income , (27) (79) 3,877 5,015 (23) Interest costs (590) (400) (315) (407) (1,168) (1,501) (22) Depreciation (33) (41) (36) (43) (20) (7) (23) (177) (161.3) 10 PBT ,750 (8) 73 (57) 3,091 3,308 Taxes (288) (266) (195) (343) 8 48 (16) (102) (1,019) (90) PAT ,407 (15) 95 (67) 2,989 2,289 EPS (Rs/share) Key ratios EBITDA margin (%) (7.4) (20.6) 2.9 (0.2) PAT margin (%) Effective tax rate (%) Operational (a) Resi. sales (mn sq. ft) Comm. sales (mn sq. f Sale value (Rs mn) 8,200 6,920 10,540 40,290 16,350 Collections (Rs mn) 11,280 11,670 12,770 28,090 18,710 estimates Exhibit 4:GPL selling inventory at its completed projects at discounted prices GPL: Sales and sales value, March fiscal year-ends, QFY QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Saes (mn sq. ft) Residential From new launches (a) From existing projects Total residential Commercial From new launches 0.05 From existing projects Total commercial Total sales Sales value (Rs mn) Residential 21,311 15,090 23,890 35,430 2,895 4,565 6,560 3,370 14,720 10,630 7,950 10,410 7,980 Commercial 6,322 9,250 2,890 14, , ,720 4, Total 27,633 24,340 26,780 50,370 3,645 5,785 6,920 3,400 14,740 13,350 12,200 10,540 8,200 Avg. realizations (Rs/sq. ft 6,776 8,221 6,879 11,665 6,267 7,970 5,813 5,771 8,190 8,180 7,854 7,003 6,672 estimates, Kotak Institutional Equities Exhibit 5: We have modeled strong sales for GPL GPL: Sales, March fiscal year-ends E E 2020E 2021E Sales (mn sq. ft) Sales value (Rs mn) 26,780 50,250 19,750 50,820 66,961 67,093 59,498 estimates 22 KOTAK INSTITUTIONAL EQUITIES RESEARCH

23 Godrej Properties Real Estate Exhibit 6: We will issue revised estimates post clarity on certain queries GPL: Profit model, balance sheet, cash flow model, March fiscal year-ends, E (Rs mn) E 2020E 2021E Profit model Net sales 21,226 15,829 18,892 19,049 20,264 14,002 EBITDA 1,366 2,504 (44) 559 1,106 1,322 Other income 1,295 1,254 5,015 3,877 4,143 4,281 Interest (406) (1,015) (1,501) (1,168) (1,172) (711) Depreciation (142) (145) (161) (177) (197) (222) Pre-tax profits 2,113 2,598 3,308 3,091 3,881 4,671 Tax (1,304) (777) (1,019) (102) (310) (549) Deferred tax (390) Net income 419 1,821 2,289 2,989 3,570 4,121 Adjusted net income 1,598 2,068 2,349 3,039 3,620 4,171 Earnings per share (Rs) Balance sheet Total equity 17,648 20,037 22,403 35,443 39,063 43,235 Gross borrowings 31,230 39,765 37,230 29,532 37,420 19,420 Non-current liabilities Current liabilities 12,657 9,909 9,403 7,099 5,782 7,964 Total liabilities and equity 61,590 69,785 69,155 72,187 82,379 70,732 Net fixed assets 1,072 1,021 1,841 1,104 1,111 1,143 Investments in Joint Ventures ,905 Non-current financial assets 3,405 3,891 7,701 4,171 4,119 4,086 Other non-current assets 2,191 2,900 2,925 2,925 2,925 2,925 Current assets 54,869 59,503 50,410 65,711 75,949 64,303 Investments 3,665 3,663 5,438 Total assets 65,784 71,791 71,222 73,912 84,103 72,457 Free cash flow Operating cash flow excl. working capita 1,758 2,054 2,290 3,210 3,817 4,393 Working capital changes 49 (10,040) 8,769 (2,426) (8,790) (1,452) Capital expenditure 300 (94) (982) 560 (203) (254) Free cash flow 2,108 (8,080) 10,077 1,343 (5,176) 2,688 Ratios (%) Debt/equity Net debt/equity RoE (%) RoCE (%) (0.2) Book value per share (Rs) estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 23

24 KEC International (KECI) Industrials Telling quarter. 1QFY19 reaffirmed the resilience of the KEC EPC business as it reported (1) steady margin despite sharp decline in T&D revenues and (2) a steady interest cost to sales ratio despite a hit on interest rate, payables and inventory. We defer the benefits of deleveraging for KEC by a year and moderate growth assumptions for order inflows given a weak start to the year; cut TP to Rs410 (from Rs430). BUY AUGUST 06, 2018 RESULT Coverage view: Neutral Price (`): 328 Target price (`): 410 BSE-30: 37,556 Company data and valuation summary KEC International Stock data Forecasts/Valuations E 2020E 52-week range (Rs) (high,low) EPS (Rs) Market Cap. (Rs bn) 84.4 EPS growth (%) Shareholding pattern (%) P/E (X) Promoters 51.0 Sales (Rs bn) FIIs 10.7 Net profits (Rs bn) MFs 18.3 EBITDA (Rs bn) Price performance (%) 1M 3M 12M EV/EBITDA (X) Absolute (1.5) (21.9) 7.9 ROE (%) Rel. to BSE-30 (7.2) (27.0) (7.3) Div. Yield (%) QFY19 steady on operations and weak on order inflows; working capital deteriorates Adjusted for forex gains, EBITDA for KEC at Rs2 bn was in line with our estimate and grew in sync with 13% growth in topline. EBITDA margin at 9.4% was flat yoy despite the sharp decline in T&D revenues. Essentially KEC leveraged uptick in margin across segments and benefits of cost control. Interest cost grew 9% yoy, slower than the revenue growth despite a worsening working capital, reduction in share of overseas in debt and higher interest cost. Working capital excluding acceptances was impacted by higher inventories (to correct incrementally) and lower payables (to partly correct over time). Change in mix of debt was sharp from being largely overseas to now becoming broadly equally split, in line with customer mix. The same has happened due to RBI disallowing usage of short-term buyer s credit on a rolling forward basis to fund debt requirements. Interest rates have stiffened meaningfully over the past one year both in India and overseas (unlikely to change in the near term). Higher other income (interest on tax refunds) and forex gains (Rs mn) more than compensated for the higher-than-expected interest cost, yielding a large outperformance versus our estimates. Adjusted for both these items, there was a modest 1%/3%/5% miss on revenues/ebitda/pat for 1QFY19. Retains guidance on revenues and margin; tightens guidance on interest cost and order inflows KEC expects revenue growth to strengthen from expected improvement in T&D revenues and strong growth across other business segments. On margin, it retained guidance of 10% (conservative in our view) while suggesting limited cost pressures and potential benefit of recent commodity price correction. KEC, however, does not envisage any improvement in interest cost as share of revenues (from 1Q level) and hinted at a modest growth expectation in order inflows (expects order backlog to grow in sync or better than revenue growth). Cut estimates by 4-8% on deferral of deleveraging and lower growth in orders Aditya Mongia Ajinkya Bhat We align interest cost estimate in line with revised guidance of the flattish yoy share of sales, deferring recovery by a year. We also reduce order inflow growth estimate for FY2019 to 6% (7% cut) based on flattish 1QFY19 ordering. This yields a revised TP of Rs410 on roll-forward. BUY. For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

25 KEC International Industrials Exhibit 1: Steady on operations and weak on order inflows; working capital deteriorates in 1QFY19 1QFY19 - key numbers for KEC (consolidated), March fiscal year-ends (Rs mn) % change 1QFY19 1QFY19E 1QFY18 4QFY18 vs est. yoy qoq FY2018 FY2017 % change FY2019E FY2018 % change Total operating income 21,047 21,334 18,568 36,642 (1) 13 (43) 100,580 85, , , Expenses (18,885) (19,308) (16,804) (32,943) (2) 12 (43) (90,518) (77,665) 17 (103,338) (90,518) 14 Raw material cost (14,729) (13,526) (28,332) 9 (48) (73,764) (59,580) 24 (84,088) (73,764) 14 Employee expenses (2,034) (1,913) (2,208) 6 (8) (7,984) (7,327) 9 (4,275) (7,984) (46) Other expenses (1,584) (2,282) (2,827) (31) (44) (9,819) (10,849) (9) (14,975) (9,819) 53 EBITDA 2,162 2,026 1,763 3, (42) 10,062 8, ,851 10, Other income (14) Interest (691) (605) (631) (656) (2,466) (2,536) (3) (2,949) (2,466) 20 Depreciation (298) (300) (272) (275) (1) 10 9 (1,097) (1,297) (15) (1,180) (1,097) 8 PBT 1,348 1, , (53) 6,902 4, ,072 6, Tax (480) (405) (329) (930) (48) (2,298) (1,587) 45 (2,688) (2,298) 17 Net profit , (56) 4,604 3, ,384 4, Key ratios (%) Raw material cost/ Sales Employee expenses/ Sales Other expenses/ Sales EBITDA margin PBT margin Tax rate PAT margin EPS (Rs) Order details Order inflows 27,480 27,900 57,871 (1.5) (52.5) 150, , , , Order backlog 177, , , , , , , estimates Exhibit 2: Slack in T&D revenues was compensated by a sharp ramp-up in railways and civil segments that also supported margin Segment-wise adjusted (a) revenues for KEC (consolidated) in 1QFY19, March fiscal year-ends (Rs mn) % change 1QFY19 1QFY18 4QFY18 yoy qoq FY2018 FY2017 % change FY2019E FY2018 % change T&D total 12,770 14,549 27,750 (12.2) (54.0) 78,200 68, ,161 78, Cables 2,590 2,155 2, (6.8) 10,090 10,329 (2.3) 7,878 10,090 (21.9) Railway 3,130 1,548 3, (12.8) 8,440 4, ,934 8, Civil, solar and water 2, , ,230 2, ,217 4,230 (0.3) Total revenues 21,050 18,567 36, (42.5) 100,960 85, , , Revenue contribution (%) Transmission & Distribition Cables Railway Civil, solar and water Notes: (a) Segmental revenues in pre-gst regime have been adjusted to net-off the excise duty by allocating as per the revenue mix. KOTAK INSTITUTIONAL EQUITIES RESEARCH 25

26 Industrials KEC International Exhibit 3: KEC s resilience is evident from yoy and qoq improvement in EBITDA margin despite a slowdown in T&D revenues Trends in EBITDA margin over the past few quarters, March fiscal year-ends, 1QFY14-1QFY19 (%) Gross margin EBITDA margin QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Exhibit 4: Interest cost as percentage of sales has not improved materially on yoy basis due to deterioration in working capital, reduction in share of forex debt and higher interest rate Interest cost as percentage of sales for KEC, March fiscal year-ends, 1QFY14-1QFY19 (%) QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 26 KOTAK INSTITUTIONAL EQUITIES RESEARCH

27 KEC International Industrials Exhibit 5: Based on 1QFY19 performance, KEC has hinted at moderation in order inflow growth for FY2019 Trends in order inflows and backlog of KEC, March fiscal year-ends, 1QFY14-1QFY19 (Rs bn) Order inflows 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY Order backlog 182 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Exhibit 6: Geographical and segmental breakup of backlog and inflow, March fiscal year-ends 1QFY19-end backlog (Rs182 bn) 1QFY19-end backlog (Rs182bn) Railways 26% Water 3% Cables 1% Transmission & Distribution 70% Overseas 46% India 54% 1QFY19 order inflows (Rs27 bn) Water 8% 1QFY19 order inflows (Rs27 bn) Transmission & Distribution 51% Overseas 39% Railways 34% India 61% Cables 7% Transmission - SAE 1% KOTAK INSTITUTIONAL EQUITIES RESEARCH 27

28 Industrials KEC International Exhibit 7: Net debt levels of KEC International, March fiscal year-ends, E (Rs bn) (Rs bn) Net debt E 2020E 2021E Notes: (a) Debt adjusted to include acceptances. Exhibit 8: Visibility on trailing revenues for KEC International, March fiscal year-ends, (number of years) (years) Visibility on trailing revenues Takeaways from the conference call KEC saw a marked deterioration in working capital, part of which is transitory. The payables went down given high starting point and inability of vendors to operate at such starting point due to tight liquidity conditions. Acceptances went down due to RBI disallowing the practice of rolling over debt for the international business. KEC used to avail low cost buyer s credit and then use the same on a roll-over basis to fund international debt. Thirdly inventories went up to safety stock of copper and steel to cushion against scenario of limited availability of these inputs. Receivables were also marginally impacted by delay in receiving money from contracts in Saudi Arabia. The increase in working capital and the increase in interest cost (both domestic and overseas) negated any gains natural deleveraging of a high-return EPC business growing at a steady rate. 28 KOTAK INSTITUTIONAL EQUITIES RESEARCH

29 KEC International Industrials Despite a sharp decline in T&D revenues, the company was able to report healthy EBITDA margin of 9.3% (adjusted for forex gain). The same was attributed to (1) improved margin in T&D, (2) improvement in margin for civil/cables/railways businesses and (2) costcontrol measures. Order inflows were weak in the first quarter largely on a decline in T&D order inflows. The company is confident of the order inflows picking up on the back of a large L1 position of Rs31.75 bn. This includes Rs10 bn of PGCIL orders and a couple of large railways orders. It remains positive on ordering from India (green energy corridor, SEB, TBCB orders, railways electrification). It expects Rs50 bn of tenders in T&D in 2QFY19. KEC has maintained its guidance of 10% EBITDA margin and of a 15% revenue growth. It is limited cost pressures and support in form of currency from here. It also such expects some benefit on the commodity price front if order won recently (at higher commodity cost estimate) were to be awarded now. On the interest cost, it has changed its guidance to a flattish interest cost to sales ratio on a yoy basis versus its earlier expectation of a modest improvement. Also on the order inflow front, it is now guiding for at least growing order backlog in line with sales. Exhibit 9: We arrive at a justified one-year forward P/E multiple of 14X for KEC International Justified multiple framework for KEC International, March fiscal year-ends Key inputs Inputs for growth and terminal phase Inputs for cash conversion Growth phase revenue CAGR (%) 13.4 PAT margin (%) 5.5 Growth phase PAT CAGR (%) 19.0 Interest rate (%) 8.4 No. of years in initial growth phase (Growth_years) 5.0 Marginal tax rate (%) 34.9 Terminal growth rate (Tg, %) 5.0 Gross FATR (X) 9.0 Cost of equity (COE, %) 12.5 Average asset life (years) 14.2 Steady state capital structure - debt mix (%) 50.0 Adjusted working capital as days of sales 125 Component of justified multiple calculation Formula Calculation One-year forward exit multiple on FCFE in terminal year 1 / (COE - Tg) 13.3 Terminal phase cash conversion ratio FCFE / PAT 0.71 One-year forward P/E multiple in terminal year 9.5 Discount factor for terminal year multiple to target year 1 / ((1+COE)^ growth 0.55 years) Bump up the multiple by the PAT jump over the growth 1 * ( (1 + growth CAGR) ^ 2.1 years (growth years-1)) * (1+Tg) Justified one-year forward P/E multiple for terminal 11.1 value component Value of growth period Value of growth period in terms of FCFE 4.7 Value of growth period in terms of P/E FCFE multiple * cash 3.4 conversion Justified one-year forward P/E multiple 14.4 Notes: (1) Working capital adjusted to include acceptances. analysis KOTAK INSTITUTIONAL EQUITIES RESEARCH 29

30 Industrials KEC International Exhibit 10: Sensitivity of justified P/E multiple for KEC, March fiscal year-ends No. of years of business growth Sensitivity of justified target P/E multiple PAT CAGR in initial high-growth period (%) Source: Kotak Institutional Equities analysis Exhibit 11: Consolidated estimates of KEC International, March fiscal year-ends, E (Rs mn) Revised estimates Previous estimates % change E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E Order inflows 123, , , , , , , ,392 (7) (7) (7) Yoy growth (%) Order backlog 126, , , , , , , ,478 (4) (5) (5) Revenues 85, , , , , , , ,486 (3) (6) (7) Yoy growth (%) EBITDA 8,179 10,062 11,851 14,623 17,049 12,102 15,454 18,417 (2) (5) (7) EBITDA margin (%) bps 4 bps -10 bps Interest cost (2,536) (2,466) (2,949) (3,156) (3,087) (2,660) (2,920) (3,225) 11 8 (4) Net PAT 3,048 4,604 5,384 6,982 8,586 5,616 7,549 9,167 (4) (8) (6) EPS (Rs) (4) (8) (6) Yoy growth (%) Working capital (days of sales) estimates 30 KOTAK INSTITUTIONAL EQUITIES RESEARCH

31 KEC International Industrials Exhibit 12: Key segmental financials of KEC (consolidated), March fiscal year-ends, E (Rs mn) E 2020E 2021E Total Order inflows 55,280 65,870 78,770 84,905 82,230 87, , , , , ,021 Yoy growth (%) (3.2) Revenues 44,742 58,147 69,795 79,018 84,678 85,178 85, , , , ,884 Yoy growth (%) Order backlog 78,000 85,720 94, ,000 95,080 94, , , , , ,853 Bill to book ratio (%) EBITDA 4,626 4,654 3,814 4,933 5,118 6,923 8,179 10,062 11,851 14,623 17,049 EBITDA margin (%) T&D total Inflows 46,090 47,873 57,506 59,544 55,916 63,612 76,620 81,529 78,565 87,377 96,974 Inflows growth (%) (6.1) (3.6) Revenues 35,490 41,480 49,980 61,160 64,840 62,800 60,300 67,950 75,148 80,630 87,648 Backlog 63,640 70,033 77,559 80,784 71,310 70,868 90, , , , ,278 Bill to book ratio (%) EBITDA 3,899 3,510 2,706 4,657 5,385 5,649 6,217 7,297 8,170 8,767 9,532 EBITDA margin (%) Cables Inflows 5,440 5,927 5,104 8,567 11,512 9,585 9,886 10,569 11,625 12,788 13,811 Inflows growth (%) (13.9) (16.7) Revenues 4,800 5,710 5,520 6,310 9,070 10,260 10,540 10,090 7,907 11,574 13,045 Backlog 1,240 1,457 1,042 2,448 5,705 4,725 1,263 3,460 7,178 8,392 9,157 Bill to book ratio (%) EBITDA (110) (316) (272) ,044 EBITDA margin (%) (2.0) (5.0) (3.0) Railways Inflows 3,440 1,179 3,627 2,375 2,467 2,614 14,830 39,255 43,586 51,145 58,816 Inflows growth (%) (65.7) (34.5) (25.0) Revenues 910 1,640 2,700 1,690 1,330 2,100 4,460 8,440 15,994 24,866 34,023 Backlog 3,890 3,429 4,356 4,488 4,754 5,669 15,157 41,515 69,107 95, ,179 Bill to book ratio (%) EBITDA (51) (40) ,519 2,487 3,402 EBITDA margin (%) (3.0) (3.0) Civil/solar Inflows 310 3,137 2,464 4,411-1,743 6,179 4,529 6,794 8,493 9,512 Inflows growth (%) (21.5) 79.0 (20.0) Revenues ,270 1,310 1,410 1,960 2,380 4,230 4,233 5,914 7,437 Backlog 310 3,257 4,451 5,712 3,803 2,268 6,316 5,189 7,750 10,329 12,404 Bill to book ratio (%) EBITDA (39) (42) EBITDA margin (%) (3.0) (3.0) SAE Inflows - 7,753 10,069 10,009 12,335 9,585 16,065 15,098 19,627 23,553 25,908 Inflows growth (%) (22.3) 67.6 (6.0) Revenues 3,540 9,130 10,320 8,540 8,030 8,300 10,020 10,250 12,342 18,585 23,353 Backlog 8,920 7,543 7,292 8,568 9,508 11,339 12,631 19,028 26,313 31,281 33,836 Bill to book ratio (%) EBITDA 496 1,096 1, ,172 1,858 2,335 EBITDA margin (%) estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 31

32 Industrials KEC International Exhibit 13: Key financials for KEC (consolidated), March fiscal year-ends, E (Rs mn) E 2020E 2021E Income statement Total operating income 44,742 58,147 69,795 79,018 84,678 85,178 85, , , , ,884 Total operating costs (40,116) (53,493) (65,981) (74,085) (79,560) (78,255) (77,665) (90,518) (103,338) (126,414) (147,834) Raw materials consumed (32,358) (43,173) (53,301) (59,594) (64,527) (61,798) (59,489) (72,716) (84,088) (102,957) (120,365) Employee expenses (2,832) (4,284) (4,829) (5,661) (5,865) (6,392) (7,327) (7,984) (4,275) (5,122) (6,035) Operating and other expenses (4,926) (6,037) (7,852) (8,831) (9,168) (10,064) (10,849) (9,819) (14,975) (18,335) (21,435) EBITDA 4,626 4,654 3,814 4,933 5,118 6,923 8,179 10,062 11,851 14,623 17,049 Other income , Interest expense (1,075) (1,448) (1,944) (2,633) (3,089) (2,794) (2,536) (2,466) (2,949) (3,156) (3,087) Depreciation (408) (479) (561) (705) (881) (1,318) (1,297) (1,097) (1,180) (1,265) (1,339) PBT 3,168 2,739 1,470 1,733 2,611 2,914 4,634 6,902 8,072 10,467 12,872 Taxes paid (1,111) (971) (818) (883) (1,001) (1,436) (1,587) (2,298) (2,688) (3,485) (4,286) Net PAT 2,057 1, ,610 1,478 3,048 4,604 5,384 6,982 8,586 Earnings per share (Rs) Balance sheet Shareholders funds 9,466 11,078 11,472 11,916 13,298 12,904 15,864 19,974 24,682 30,786 38,293 Equity share capital Reserves & surplus 8,952 10,564 10,958 11,402 12,784 12,390 15,349 19,460 24,168 30,272 37,779 Loan funds 14,322 12,392 16,690 21,273 21,894 32,212 20,957 17,663 22,663 21,663 21,663 Deferred tax liability ,034 1,240 1,007 1,007 1,007 1,007 Total source of funds 24,285 23,983 28,783 33,702 35,719 46,150 38,060 38,645 48,352 53,457 60,963 Net fixed assets 8,409 9,348 10,114 9,922 8,811 10,109 9,216 9,983 10,203 9,938 9,699 Goodwill on consolidation 2,812 3,209 3,424 3,778 3,943 1,952 1,910 1,920 1,920 1,920 1,920 Cash balances 1,614 2,102 1,556 1,440 2, ,080 2,313 3,925 2,706 3,513 Net current assets excluding cash 11,450 9,324 13,689 18,562 20,902 32,982 23,550 24,036 31,913 38,500 45,439 Total application of funds 24,285 23,983 28,783 33,702 35,719 46,150 38,060 38,645 48,352 53,457 60,963 Cash flow statement Operating profit before working capital changes 3,541 3,695 3,157 4,188 5,579 5,590 6,881 8,168 9,513 11,403 13,012 Change in working capital/other adjustments (3,149) 2,126 (4,365) (4,873) (2,340) (12,080) 9,432 (486) (7,876) (6,588) (6,938) Net cash flow from operating activites 392 5,821 (1,209) (686) 3,239 (6,490) 16,312 7,682 1,637 4,816 6,074 Cash (used)/realised in investing activities (4,429) (1,815) (1,542) (866) 65 (879) (1,412) (963) (1,400) (1,000) (1,100) Free cash flow (OCF + net capex) (4,067) 4,006 (2,751) (1,552) 3,305 (7,115) 15,950 5, ,816 4,974 Cash (used)/realised in financing activities 4,917 (3,858) 2,098 1,725 (2,695) 5,652 (13,880) (6,253) 1,374 (5,034) (4,166) Cash generated/utilised (546) (116) 623 (1,210) 1, ,612 (1,219) 807 Net cash at end of year 1,614 1,777 1,556 1,440 2, ,080 2,313 3,925 2,706 3,513 Key ratios EBITDA margin (%) PAT margin (%) Effective tax rate (%) Net debt to equity Return on Equity (%) ROCE (%) Book value per share (Rs) estimates 32 KOTAK INSTITUTIONAL EQUITIES RESEARCH

33 Laurus Labs (LAURUS) Pharmaceuticals China cost push hurts performance. Laurus 4QFY18 revenues were 7% higher than our expectations, led by the ARV segment. However, EBITDA missed our estimates by 14%, due to a combination of (1) ` mn gross profit compression due to >80% price hikes for 2 key ARV intermediates sourced from China and (2) `54 mn forex loss. We expect the China cost push impact to persist until 3QFY19E. We cut our FY2019E EPS by 25% and FY E EPS by ~14% each; cut TP to `500 (from `540 earlier). Company data and valuation summary Laurus Labs Stock data Forecasts/Valuations E 2020E 52-w eek range (Rs) (high,low ) EPS (Rs) Market Cap. (Rs bn) 49.8 EPS grow th (%) (11.9) Shareholding pattern (%) P/E (X) Promoters 30.6 Sales (Rs bn) FIIs 10.2 Net profits (Rs bn) MFs 7.8 EBITDA (Rs bn) Price performance (%) 1M 3M 12M EV/EBITDA (X) Absolute (0.8) (6.3) (18.6) ROE (%) Rel. to BSE-30 (6.6) (12.4) (30.1) Div. Yield (%) ARV strong; ingredients and synthesis drive a miss Laurus 4QFY18 revenues were 7% higher than our expectations, led by strong performance in the ARV segment (+28% vs KIE), and synthesis (+2% vs KIE). However, other segments disappointed with Hep-C down 69% yoy (-36% vs KIE). Other APIs declined 45% yoy (-55% vs KIE), largely due to customer delays, which will likely be recovered from 2QFY19 onwards. However, gross margins declined by 300 bps qoq, down to 45.2%, fully explained by ` mn impact due to China raw material price hikes, with emtricitabine and lamivudine intermediates witnessing 80% price hike. `50 mn forex loss further exacerbated the impact on EBITDA margins, which declined to 14.9%, down 590 bps qoq (-380 bps vs KIE). We expect the company to be able to partially offset the China impact in 2QFY19, which will still have partial sourcing from China (50% dependency) and expect it to be able to fully offset the impact from 3QFY19, largely through alternate sourcing and backward integration. Only a small benefit from price hikes is expected as a significant portion of its ARV supplies are locked in fixed-price contracts. Given lower other income, the miss on PAT was higher at 47%. Evolving business mix to drive revenues and margin growth over FY E Laurus presents a unique business model offering a hybrid of rapidly growing synthesis business, an emerging formulations business along with a steady ARV business. While the recent quarters have seen delays to the strategy on account of Hep-C declines and China cost push, we expect ARV revenues to continue to grow in high single digit over the next two years with increasing contribution from EU/US formulations, first supplies to ARV tenders in LMIC countries, as well as LMV/RTV API supplies from 2QFY19. This, along with strong scale-up of the synthesis business, particularly for Aspen and C2 Pharma, will likely drive profitability. Laurus has filed a total of 13 ANDAs, and is targeting 10 more ANDA filings in FY2019, with tenofovir having been launched in 4QFY18 (`51 mn revenues in 1QFY19) and three other ANDAs expected to be launched in FY2019. Over the past three years, Laurus has made meaningful investments in capacities with gross block of `8 bn yet to generate revenues (units 2, 4, 5 and 6) with operating costs of `1.4 bn in FY2018 (`274 mn in 1QFY19), including its formulations investments, which we expect to break even only in FY2020 (FY2018 loss of ~`1 bn). Laurus has now received approval for its TLD combination and we expect it to enter the LMIC tender market from 3QFY19, with ramp-up in FY2020, once TLE, TLE400 and TEE formulations are approved in key markets. Reasonable valuations to help minimize the impact of earnings cut ADD Our FY2019E EBITDA stands reduced by 10% given the China impact, though the hit on EPS is significant with FY2019 estimates down 25%. We also cut our FY2020/21E EBITDA by 5-6%, and EPS by ~14%. We cut our target price to `500 (vs `540 earlier), ~16X June 2020E EPS. ADD AUGUST 06, 2018 RESULT Coverage view: Neutral Price (`): 470 Target price (`): 500 BSE-30: 37,556 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.

34 Pharmaceuticals Laurus Labs Exhibit 1: Laurus - 1QFY19 interim results March fiscal year-ends (` mn) (% chg.) 1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 FY2019E FY2018 (% chg.) Sales 5,390 5,036 4,912 5, (3.8) 23,916 20, Raw material (2,951) (2,593) (2,457) (2,909) (12,737) (10,637) 19.7 Employee expenses (728) (690) (627) (672) (2,890) (2,580) 12.0 R&D expenses (345) (300) (229) (442) (21.9) (1,435) (1,196) 20.0 Other expenses (560) (510) (634) (410) 9.8 (11.7) 36.6 (2,315) (2,143) 8.0 EBITDA ,169 (14.5) (16.5) (31.1) 4,540 4, Other income Interest (223) (240) (191) (233) (810) (796) Depreciation (382) (355) (298) (346) (1,545) (1,255) Pretax profits (46.5) (59.0) (64.7) 2,335 2,374 (1.7) Tax (61) (110) (163) (190) (619) (698) Minority interest Net income - adjusted (47.1) (57.4) (63.3) 1,716 1, Adjusted EPS (Rs) (47.1) (57.4) (63.3) Tax rate (%) Segment wise sales ARV 3,710 2,892 2,702 3, ,982 13, Hepatitis C (35.7) (68.6) (38.5) 1,278 1,668 (23.4) Oncology (2.2) (0.2) ,762 1, Other APIs (54.8) (44.9) (51.6) 2,032 1, Ingredients (24.0) 29.3 (15.2) Synthesis ,472 1,483 Total 5,390 5,036 4,912 5, (3.8) 23,916 20, % margin Gross margin Staff cost R&D expenses Other expenditure EBITDA estimates Exhibit 2: Laurus - changes to estimates March fiscal year-ends, E (` mn) New estimates Old estimates Change (%) 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E Revenues 23,916 28,341 31,211 23,989 28,082 30,639 (0.3) EBITDA 4,540 6,493 7,194 5,060 6,804 7,672 (10.3) (4.6) (6.2) PBT 2,335 4,172 4,902 3,174 4,866 5,776 (26.4) (14.3) (15.1) PAT 1,716 3,087 3,627 2,301 3,552 4,216 (25.4) (13.1) (14.0) EPS (25.4) (13.1) (14.0) Source: Kotak Institutional Equities estimates 34 KOTAK INSTITUTIONAL EQUITIES RESEARCH

35 Laurus Labs Pharmaceuticals Exhibit 3: Laurus revenues by segments March fiscal year-ends, E (` mn) E 2020E 2021E Revenues (Rs mn) ARVs 9,302 10,776 12,619 12,212 13,655 14,982 16,214 17,315 Hep-C 231 1,971 2,509 1,655 1,278 1,223 1,019 Oncology 1,082 1,261 1,413 1,073 1,655 1,762 1,892 2,013 Other APIs ,498 1,655 2,032 2,546 2,921 APIs 10,907 12,534 16,517 17,292 18,621 20,055 21,874 23,269 Synthesis ,015 1,448 2,472 3,380 3,845 Ingredients ,044 Formulations ,152 3,053 Total revenues 11,480 13,266 17,817 18,919 20,690 23,932 28,355 31,211 As % of revenues ARVs Hep-C Oncology Other APIs APIs Synthesis Ingredients Formulations Total revenues yoy growth (%) ARVs (3.2) Hep-C NM 27.3 (34.0) (22.8) (4.3) (16.6) Oncology (24.1) Other APIs (49.3) APIs Synthesis Ingredients (31.6) Formulations NM Total revenues KOTAK INSTITUTIONAL EQUITIES RESEARCH 35

36 Pharmaceuticals Laurus Labs Exhibit 4: Laurus profit and loss, balance sheet, cash flow model March fiscal year-ends, E (` mn) E 2020E 2021E Net revenues 7,185 11,597 13,266 18,110 19,315 20,690 23,916 28,341 31,211 Gross profit 3,062 4,338 4,982 8,028 9,348 10,053 11,180 13,919 15,365 Adjusted EBITDA 1,448 2,089 2,002 3,622 4,076 4,133 4,540 6,493 7,194 Depreciation & amortisation (226) (329) (615) (864) (1,060) (1,255) (1,545) (1,724) (1,903) EBIT 1,222 1,760 1,387 2,758 3,017 2,879 2,995 4,769 5,292 Net interest (361) (551) (721) (1,067) (665) (505) (660) (597) (390) Profit before tax 861 1, ,690 2,352 2,374 2,335 4,172 4,902 Tax & deferred Tax 21 (236) 16 (349) (439) (698) (619) (1,085) (1,274) Minority interest 2 (4) (11) Net income (reported) ,337 1,903 1,676 1,716 3,087 3,627 EPS (FD) (reported) (Rs) Balance sheet Cash & equivalents (1,297) (1,559) (2,196) Debtors 1,567 1,949 2,851 4,449 5,676 5,706 7,028 8,328 9,172 Other current assets 1,599 3,317 4,871 5,291 5,617 6,739 6,475 7,213 7,838 Current assets 3,302 5,498 8,311 10,027 11,398 12,476 12,206 13,982 14,813 Fixed assets (incl. goodw ill) 3,083 6,153 9,107 10,906 13,732 16,440 17,645 18,671 19,518 Other non-current assets 624 1,080 1,465 1,302 1,404 1,252 1,252 1,252 1,252 Total assets 7,010 12,732 18,883 22,235 26,534 30,167 31,102 33,905 35,583 Short-term loans 1,778 3,122 4,316 4,814 6,442 8,382 6,500 5,000 3,000 Creditors and other liabilities 1,468 3,116 2,851 4,023 4,820 4,687 4,704 5,119 5,471 Current liabilities 3,247 6,238 7,167 8,837 11,262 13,069 11,204 10,119 8,471 Long-term loans 1,142 2,753 3,895 4,597 1,246 1,417 2,500 3,300 3,000 Other liabilities (incl. deferred) Total liabilities 4,417 9,148 11,662 13,667 13,230 15,341 14,559 14,275 12,326 Equity (inc. minority interest) 2,593 3,584 7,221 8,568 13,304 14,826 16,542 19,630 23,257 Total equity and liabilities 7,010 12,732 18,883 22,235 26,534 30,167 31,102 33,904 35,583 Cash flow CF from operations pre WC 1,287 1,805 1,860 3,409 3,844 3,880 4,071 5,558 6,070 Working capital (405) (593) (2,507) (1,476) (525) (1,368) (1,040) (1,623) (1,117) Capex (1,187) (3,091) (3,831) (3,370) (2,775) (3,500) (2,750) (2,750) (2,750) FCF (305) (1,879) (4,478) (1,437) 545 (988) 281 1,185 2,203 Ratios EBITDA margin (%) RoE (%) RoCE (%) Net debt to equity (X) KOTAK INSTITUTIONAL EQUITIES RESEARCH

37 JK Lakshmi Cement (JKLC) Cement Volumes disappoint. JK Lakshmi reported flat volumes (2.3 mn tons, -1% qoq) on the back of lower non-trade sales. The price fall for certain sales mix in the non-trade segment led to the company restricting its sales volume since February 2018 this increased the trade sales mix to 54% (50% in last quarter). The company has a large presence in the North, East markets where we expect prices to improve led by higher industry utilization rates. The company s focus will be on improved asset sweating, cost efficiencies and deleveraging. Maintain ADD and revise TP to Rs370 (Rs425 earlier). ADD AUGUST 06, 2018 RESULT Coverage view: Cautious Price (`): 330 Target price (`): 370 BSE-30: 37,556 Company data and valuation summary JK Lakshmi Cement Stock data Forecasts/Valuations E 2020E 52-week range (Rs) (high,low) EPS (Rs) Market Cap. (Rs bn) 38.9 EPS growth (%) (35.7) Shareholding pattern (%) P/E (X) Promoters 45.9 Sales (Rs bn) FIIs 8.1 Net profits (Rs bn) MFs 15.6 EBITDA (Rs bn) Price performance (%) 1M 3M 12M EV/EBITDA (X) Absolute 5.2 (19.0) (27.2) ROE (%) Rel. to BSE-30 (0.9) (24.3) (37.5) Div. Yield (%) Earnings weak due to flat volumes, cost increases and muted realizations JKLC reported a weak quarter as EBITDA declined 22% yoy to Rs939 mn (-7% qoq) and netincome declined 51% yoy to Rs138 mn (-51% yoy, -59% qoq) earnings though weak were higher than our estimate (KIE EBITDA: Rs769 mn) led by better-than-expected realizations. The company s volumes were flat yoy at 2.3 mn tons (-1% qoq) largely due to lower non-trade sales. The management highlighted that some of the non-trade sales were not profitable due to lower prices and the company decided to exit those sales there is a pricing differential of Rs25-30/bag between trade and non-trade but for a few deals it was as high as Rs50-55/bag. JKLC s EBITDA/ton declined 7% qoq to Rs410 (-22% yoy) led by cost increases and muted realizations. The company s FoR sales increased during the quarter resulting in optically high realizations and freights costs realization improved 4% qoq to Rs4,038/ton (+2% yoy) and freight costs increased to Rs1,074/ton (+15% yoy, +4% qoq). The higher FoR sales enables buyers to claim input GST credit on freight costs as well. On costs, (1) the lead distance declined by 20 to 25 kms which saved Rs40/ton, but diesel cost increase offset these benefit, (2) power and fuel costs rose 12% yoy to Rs940 (-1% qoq). Limited capex for next couple of year and focus shifts to de-lever the balance sheet JKLC will spend close to Rs1 bn only in capex for the next two years as ongoing projects are limited to completion of 20 MW power plant commissioning at Durg, and (2) Odisha grinding unit. The company has a longer term plan for 7 mtpa brownfield expansion but will take a call on these projects based on improvement in demand in key markets. The company will take a pause from new projects for months and cash flows will be used to deleverage. The key focus areas for the next two years will include (1) stabilization of Udaipur Cement Works were costs are higher due to lower efficiencies, and (2) ramp-up of existing facilities, especially in east. We cut target price to Rs370 (Rs425 earlier) and maintain ADD rating We cut our target price to Rs370 (from Rs425 earlier) due to the 9-13% cut in our EBITDA estimates on lower volumes, realization assumption. Our positive view on the stock is led by (1) improvement in the company s balance sheet post large capex cycle aided by stabilization of capacities and limited sustenance capex, (2) Udaipur Cement Works, which will see earnings improvement and is loss making now, and (3) its large presence in North, East markets where we believe prices can improve led by higher utilization. The stock trades at 10X/6.6X FY2019/2020E EBITDA. We maintain our ADD rating. Abhishek Poddar Murtuza Arsiwalla Samrat Verma For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

38 Cement JK Lakshmi Cement Exhibit 1: JK Lakshmi's volumes were flat yoy in 1QFY19; EBITDA/ton declined 7% qoq to Rs410/ton led by cost increases Quarterly results for JK Lakshmi Cement (Standalone), March fiscal year-ends, E (Rs mn) Change (%) 1QFY19 1QFY19E 1QFY18 4QFY18 KIE yoy qoq FY2019E FY2018 (% chg) Net sales 9,234 9,164 9,011 8, ,446 34, Raw materials (2,206) (2,111) (2,325) (1,952) (9,064) (7,784) Employee costs (632) (615) (591) (607) (2,553) (2,350) Power costs (2,150) (2,353) (1,920) (2,194) (8,713) (7,959) Freight costs (2,456) (2,515) (2,140) (2,378) (8,567) (8,726) Other costs (852) (802) (832) (826) (3,415) (3,190) EBITDA ,203 1, (22) (7) 5,134 4, EBITDA (%) Other income Interest (451) (485) (492) (480) (1,661) (1,975) Depreciation (446) (464) (439) (459) (1,860) (1,793) PBT ,119 1,027 Tax (14) (26) (91) 1 (593) (188) PAT (51) (59) 1, Extraordinaries Reported PAT , EPS (Rs) Sales (mn tons) (5) 0 (1) Realization (Rs/ton) 4,038 3,820 3,944 3, ,137 3,977 4 Cost (Rs/ton) 3,627 3,499 3,417 3,456 3,570 3,497 Raw materials , , Employee costs Power & fuel costs Freight costs 1,074 1, , ,017 Other costs Profitability (Rs/ton) (22) (7) Tax rate (%) (0.3) estimates Changes in our estimates Exhibit 5 highlights key changes in our estimates. We cut our standalone volume estimates by 2% to 9.1 mn tons, 9.7 mn tons and 10.4 mn tons for FY2019E, FY2020E and FY2021E. We cut our cement realization assumption by 1-2% due to pricing weakness in the company s key markets and non-trade segment. We estimate cement realizations at Rs4,137/ton, Rs4,397/ton and Rs4,537/ton for FY2019E, FY2020E and FY2021E. Overall, we cut our EBITDA/ton estimate by 7-14% to Rs567, Rs742 and Rs785 for FY2019E, FY2020E and FY2021E.The net effect is a cut in our consolidated EBITDA estimate by 9-13% to Rs5.6 bn, Rs8.1 bn and Rs9.1 bn for FY2019E, FY2020E and FY2021E. We estimate consolidated EPS of Rs11.3, Rs28.1 and Rs36.7 for FY2019E, FY2020E and FY2021E. 38 KOTAK INSTITUTIONAL EQUITIES RESEARCH

39 JK Lakshmi Cement Cement Other highlights, key takeaways from the earnings call Subdued volumes due to lower sales by company in non-trade segment. JK Lakshmi s sales volume was flat yoy at 2.3 mn tons; sales volumes included clinker sales of 0.28 mn tons. Sales volumes were weak due to lower sales to non-trade segment due to lower prices as per the company, prices in some cases are at a five year low. The management stated that they sacrificed on volumes to improve overall profitability now the focus is only on profitable non-trade volumes. The trade sales mix improved to 54% in 1QFY19 from 50% earlier. We highlight that management earlier stated that demand from non-trade segment was strong but price fell sharply in February The usual pricing differential in non-trade segment is close to Rs25-30/bag (but costs are low as well) and this widened to as high as Rs50-55/bag on the sales that the company missed. Udaipur Cement Works expect improvement from cost efficiencies. UCWL is operating at close to 80% utilization and earned EBITDA/ton of Rs200 in 1QFY19. The profitability of this unit will improve aided by improvement in cost efficiencies. The management highlighted that there is no pricing difference between realizations with parent. Fuel costs increase due to higher pet-coke prices. JK Lakshmi uses 81% pet-coke in northern plants other fuel mix includes 13% coal and balance 6% other fuel sources. The pet-coke costs increased to Rs8,100/ton (from Rs6,400/ton in 1QFY18 & Rs7,500/ton in 4QFY18) resulting in an increase in fuel costs. Power & fuel costs (on per ton basis) increased 12% yoy to Rs940, but were steady qoq. The company highlighted also that power consumption dropped to 67 kwh/ton in 1QFY19 from 72 kwh/ton in 1QFY18. Lead distance also improved by kms which led to cost savings of Rs40/ton. However, freight costs still increased due to an increase in diesel costs (as well as higher FoR sales). Capex guidance at Rs1 bn. The management expects capex of Rs1 bn each for the next two years for completion of thermal power plant in Durg, Odisha grinding unit and sustenance capex. Management highlighted that it will take a pause for the next months from new projects and will prioritize stabilizing newly commissioned projects and use cash flows to deleverage. Sales of premium cement. The sales of premium cement are close to 20% for trade segment it works to only 12-14% on including non-trade sales. KOTAK INSTITUTIONAL EQUITIES RESEARCH 39

40 Cement JK Lakshmi Cement Exhibit 2: Udaipur Cement Works is in stabilization phase; profitability to improve from efficiencies Quarterly results for Udaipur Cement Works (Subsidiary), March fiscal year-ends, E (Rs mn) Change (%) 1QFY19 1QFY18 4QFY18 yoy qoq FY2019E FY2018 (% chg) Net sales 1, , (4) 4,592 3, Raw materials (315) (241) (291) (1,003) (864) Employee costs (72) (63) (63) (291) (269) Power costs (445) (149) (430) (1,387) (1,223) Freight costs (281) (92) (309) (955) (777) Other costs (112) (84) (144) (458) (416) EBITDA (34) EBITDA (%) Other income 9 7 Interest (84) (74) (73) (309) (303) Depreciation (169) (166) (153) (575) (674) PBT (186) (189) (125) (377) (759) Tax PAT (136) (189) 173 (28) (179) (377) (461) (18) Extraordinaries Reported PAT (109) (178) 174 (377) (434) estimates Exhibit 3: EBITDA/ton declined in 1QFY19 due to increase in fuel, freight costs & muted realizations Quarterly realizations and EBITDA/ton of JK Lakshmi Cement, 1QFY15-1QFY19 (Rs/ton) Cost (Rs/ton) EBITDA (Rs/ton) 4,500 4,000 3,500 3,000 2, , , , , , , , , , , , , , , , , ,627 2,000 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 estimates 40 KOTAK INSTITUTIONAL EQUITIES RESEARCH

41 JK Lakshmi Cement Cement Exhibit 4: JK Lakshmi's volumes were flat yoy in 1QFY19 due to lower non-trade sales Quarterly volumes of JK Lakshmi Cement, 1QFY15-1QFY19 (Rs/ton) Volumes (mn tons) Growth yoy (%) % 1QFY15 13% 2QFY15 6% 3QFY15-10% 4QFY QFY % 17% 15% 2QFY16 3QFY QFY16 39% 1QFY17 27% % 2QFY17 3QFY17 4% QFY17 6% 8% 1QFY % 15% 2QFY18 3QFY18 2% 4QFY18 1QFY19 50% 40% 30% 20% 10% 0% 0% -10% -20% estimates Exhibit 5: JK Lakshmi Cement, changes in estimates, March fiscal year ends, FY E Revised estimate Previous estimate Change (%) 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2020E Volume and realizations (mn tons, Rs/ton) Cement sales - standalone (mn tons) (2) (2) (2) Cement sales - Udaipur Cement (mn tons) Realization (Rs/ton) 4,137 4,397 4,537 4,217 4,457 4,597 (2) (1) (1) EBITDA (Rs/ton) (14) (8) (7) Earnings estimates (Consolidated) (Rs mn) Revenues 41,640 47,849 52,485 43,503 49,461 54,244 (4) (3) (3) EBITDA 5,625 8,100 9,065 6,820 8,904 9,935 (18) (9) (9) PAT 1,334 3,305 4,314 2,163 3,884 4,940 (38) (15) (13) EPS (38) (15) (13) estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 41

42 Cement JK Lakshmi Cement Exhibit 6: JK Lakshmi Cement, Assumptions, March fiscal year ends, E (mn tons, Rs mn) E 2020E 2021E CAGR (%) Standalone capacity (mn tons) Udaipur cement capacity (mn tons) Total capacity ( mn tons) Utilization (%) Standalone volumes (mn tons) Udaipur cement volumes (mn tons) Total volumes ( mn tons) Growth (%) Standalone realization (Rs/ton) 3,589 3,666 3,977 4,137 4,397 4,537 4 Growth (%) (7.8) EBITDA (Rs/ton) Growth (%) (37.2) Revenues (Rs mn) 26,352 29,216 37,484 41,640 47,849 52, EBITDA (Rs mn) 2,711 3,697 4,318 5,625 8,100 9, PAT (Rs mn) ,334 3,305 4, Net debt (Rs mn) 19,988 19,586 19,919 17,980 14,400 9,835 (21) estimates Exhibit 7: Our fair value of Rs370 is based on 7X FY2020E EBITDA JK Lakshmi Cement, Valuation details, March 2020E fiscal year ends Multiple EV (Rs mn) (X) (Rs mn) (Rs/share) Valuation EBITDA (Rs mn) 7, , Net Debt (Rs mn) (8,645) (73) Standalone valuations 42, Udaipur Cement Works Equity value (Rs mn) 43, TP (Rs/share) 370 estimates 42 KOTAK INSTITUTIONAL EQUITIES RESEARCH

43 JK Lakshmi Cement Cement Exhibit 8: JK Lakshmi Cement, Financial summary (consolidated), March fiscal year ends, E (Rs mn) E 2020E 2021E Profit model (Rs mn) Net sales 26,352 29,216 37,484 41,640 47,849 52,485 EBITDA 2,711 3,697 4,318 5,625 8,100 9,065 Other income 660 1, Interest (1,986) (2,444) (2,637) (2,225) (1,975) (1,725) Depreciation (1,656) (1,750) (2,073) (2,146) (2,203) (2,249) Pretax profits (270) ,771 4,583 5,984 Tax (465) (1,276) (1,669) Net profit before minority ,306 3,307 4,315 Less: Minority interest (120) (27) 1 2 Add: Profit of associates (1) Net profit after minority ,334 3,305 4,314 Extraordinary items (83) Reported net income ,334 3,305 4,314 Earnings per share (Rs) Balance sheet (Rs mn) Equity Reserves and surplus 12,903 13,421 13,847 14,870 17,895 21,928 Minority interest (15) (14) (12) Borrowings 22,730 24,825 24,674 22,174 19,674 17,174 Deferred tax liability 627 Currrent liabilities 9,513 12,860 11,889 11,900 12,482 12,906 Total liabilities and equity 46,525 51,827 51,011 49,519 50,626 52,585 Gross block 46,008 54,185 56,972 58,472 59,722 60,972 Net fixed assets 28,427 34,853 35,568 34,921 33,969 32,969 Capital work in progress 6,330 3,071 2,283 3,031 3,531 4,031 Goodwill Cash (208) 872 2,937 Current assets 8,112 7,871 7,603 6,570 7,051 7,444 Investments 2,610 5,224 4,728 4,500 4,500 4,500 Total assets 46,525 51,827 51,011 49,519 50,626 52,586 Free cash flow (Rs mn) Operating cash flow, excl. working capital 1,586 2,519 2,661 3,425 5,511 6,567 Working capital 1,014 3,587 (703) 1, Capital expenditure (5,534) (4,918) (1,999) (2,248) (1,750) (1,750) Free cash flow (2,935) 1,189 (41) 2,222 3,862 4,847 Ratios EBITDA margin (%) PAT margin (%) Net debt/equity (X) Book value per share (Rs) Net debt/ebitda (X) RoAE (%) RoACE (%) (3.2) CRoCI (%) estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 43

44 Jagran Prakashan (JAGP) Media Inexpensive valuations but triggers missing. Jagran s print ad revenues were flat yoy against our modest expectation of 2% growth. Even as we have been cautious on print media since July 2016, print ad growth deceleration has been sharper than our expectation. Any election-led uptick in 2HFY19E would not enthuse us. We prefer to stay cautious till there is a decisive improvement in print ad outlook or a sharp drop in newsprint prices. We cut FY E EPS by 12-14% and TP to Rs131 (from Rs168 earlier) valuing Jagran at 11X FY2020E earnings (12X earlier). REDUCE. REDUCE AUGUST 06, 2018 RESULT Coverage view: Attractive Price (`): 122 Target price (`): 131 BSE-30: 37,556 Company data and v aluation summary Jagran Prakashan Stock data Forecasts/Valuations E 2020E 52-w eek range (Rs) (high,low ) EPS (Rs) Market Cap. (Rs bn) 38.0 EPS grow th (%) (9.3) Shareholding pattern (%) P/E (X) Promoters 60.8 Sales (Rs bn) FIIs 7.3 Net profits (Rs bn) MFs 16.4 EBITDA (Rs bn) Price performance (%) 1M 3M 12M EV/EBITDA (X) Absolute (11.1) (27.3) (31.5) ROE (%) Rel. to BSE-30 (16.3) (32.1) (41.2) Div. Yield (%) QFY19 print ad revenue growth continues to disappoint; cost optimization in play Jagran reported 0.5% yoy decline in print ad revenues (KIE +2%). Circulation revenues grew at a modest 1% yoy partly due to pressure in Bihar given the rise in competitive intensity. Radio revenue growth of 7.7% yoy (KIE 12%) was a tad disappointing in view of some benefit from the new stations. Digital ad revenues grew 24% yoy to Rs96 mn. EBITDA at Rs1.6 bn (+1.4% yoy) was 3.5% above our estimate due to lower than estimated RM and other costs. We note that the price of imported newsprint has shot up 30-35% (domestic newsprint is pegged against landed cost of imported newsprint). Jagran's profitability was protected in 1QFY19 by low-cost inventory; about 3.3% growth in RM costs was due to 8-9% increase in newsprint price partly offset by 4-5% drop in consumption (reduction in copies and pagination tweaks). Full impact of newsprint price inflation will be felt starting 2QFY19; the management has guided for 13% increase in newsprint costs for FY2019 (18% inflation of which 5% will be offset by lower consumption). Net profit declined by 1.4% yoy to Rs854 mn. No visibility on sustainable recovery in print ad environment as yet Even as we have been underweight on regional print since July 2016, print ad growth has decelerated sharper than our expectations due to (1) impact of demonetization/gst on local/retail advertising, (2) weak rural consumption, (3) challenged categories such as real estate, education and government, and (4) share loss to other mediums. Some of these drags are cyclical and some structural (digital disruption); it is difficult to gauge the impact of cyclical versus structural. 2HFY19 would be a better year for print advertising on high political and government ad spends ahead of the elections. For a clearer view on sustainable print ad growth, one will have to wait till FY2020. There is no visibility on cyclical recovery as yet in our view. Inexpensive valuations offer trade; we stay cautious till we see signs of sustainable improvement Jagran s stock has corrected 27% over the past three months and is trading at 10X FY2020E earnings and 6% dividend yield. Election-led pick-up in print ad environment in 2HFY19 can drive some stock performance from current levels. We recommend investors to pass this trade opportunity and stay cautious till there is visibility on sustainable improvement in print ad environment and/or reversal in newsprint prices. Jaykumar Doshi For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

45 Media Jagran Prakashan Exhibit 1: Consolidated Ind-AS financials of Jagran Prakashan (JAGP), March fiscal year-ends (Rs mn) % chg. Consolidated financials 1QFY19 1QFY19E 1QFY18 4QFY18 KIE yoy qoq FY2019E FY2018 % chg. Total revenues 6,026 6,112 5,913 5,481 (1.4) ,873 23, Print advertising revenues 3,601 3,692 3,620 3,122 (2.5) (0.5) ,636 13, Circulation revenues 1,097 1,108 1,086 1,074 (1.0) ,524 4, Radio revenues (3.9) 7.7 (0.3) 3,399 2, Digital ad revenues Other operating revenues ,848 1, Total expenditure (4,390) (4,533) (4,301) (4,277) (3.1) (18,768) (17,204) 9.1 Raw material costs (1,754) (1,800) (1,698) (1,600) (2.6) (8,106) (7,115) 13.9 Employee expenses (1,041) (1,042) (992) (1,021) (0.1) (4,243) (4,003) 6.0 Other expenses (1,596) (1,691) (1,611) (1,655) (5.6) (0.9) (3.6) (6,419) (6,086) 5.5 EBITDA 1,636 1,580 1,613 1, ,105 5, EBITDA margin (%) Other income (62.4) (59.3) (56.8) (25.1) Interest expense (31) (45) (72) (49) (30.9) (56.6) (36.9) (150) (271) (44.6) D&A expenses (307) (350) (328) (350) (12.3) (6.4) (12.3) (1,375) (1,361) 1.0 Pretax profits 1,346 1,315 1, ,930 4, Extraordinaries Tax provision (463) (440) (446) (290) (1,652) (1,557) 6.1 Minority interest (29) (21) (37) (133) (111) Reported PAT (2.3) (1.4) ,145 3, EPS (Rs/share) (2.3) (1.4) Tax rate (%) estimates Exhibit 2: Revised earnings estimates of JAGP, March fiscal year-ends (Rs mn) New Old Change (%) 2019E 2020E 2019E 2020E 2019E 2020E Print ad revenue 14,636 15,294 14,913 15,674 (1.9) (2.4) Circulation revenue 4,524 4,753 4,524 4, Other operating revenue 2,314 2,518 2,314 2, Radio revenues 3,399 3,909 3,489 4,012 (2.6) (2.6) Total revenues 24,873 26,474 25,241 26,957 (1.5) (1.8) Total expenditure 18,768 19,753 18,593 19, EBITDA 6,105 6,721 6,648 7,339 (8.2) (8.4) Adjusted PAT 3,145 3,573 3,607 4,158 (12.8) (14.1) Adjusted EPS (Rs) (12.8) (14.1) Print ad revenue growth (%) EBITDA margin (%) estimates 2 KOTAK INSTITUTIONAL EQUITIES RESEARCH

46 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Jagran Prakashan Media Exhibit 3: Trends in print ad revenue growth of JAGP (yoy %) (5) (10) Notes: (a) Standalone ad revenue grow th for 1QFY12-4QFY13 and 2Q-4QFY17 and consolidated (incl. Mid-Day) for rest of the quarters. Exhibit 4: Trends in circulation revenue growth of JAGP (yoy %) (5) Notes: (a) Standalone circulation revenue grow th for 1QFY12-4QFY13 and 2Q-4QFY17 and consolidated (incl. Mid-Day) for rest of the quarters. KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

47 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Media Jagran Prakashan Exhibit 5: Trends in EBITDA margin of JAGP (%) Notes: (a) Standalone EBITDA margins for 1QFY12-4QFY13 and consolidated thereafter. 4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

48 Jagran Prakashan Media Exhibit 6: Financial summary of JAGP, March fiscal year-ends, FY E (Rs mn) E 2020E 2021E Profit model Net sales 15,255 17,027 17,698 21,065 22,830 23,040 24,873 26,474 28,314 EBITDA 2,952 3,664 4,464 5,896 6,396 5,836 6,105 6,721 7,364 Other income Interest (307) (345) (369) (523) (350) (271) (150) (200) (200) Depreciation (755) (789) (1,035) (1,044) (1,289) (1,361) (1,375) (1,365) (1,325) Pretax profits 2,096 3,158 3,380 4,674 5,169 4,671 4,930 5,656 6,489 Extraordinary items 949 (101) 803 1, Current tax (497) (795) (1,102) (1,390) (1,675) (1,557) (1,652) (1,923) (2,206) Deferred taxation Net income 2,551 2,262 3,080 4,447 3,476 3,003 3,145 3,573 4,091 Adjusted net income 1,602 2,337 2,538 3,400 3,476 3,003 3,145 3,573 4,091 Adjusted EPS (Rs) Balance sheet Total equity 9,324 9,616 11,342 15,812 21,548 20,515 19,084 20,140 21,389 Deferred taxation liability ,702 1,702 1,702 1,702 1,702 Total borrow ings 4,840 4,897 6,480 5,120 3,834 Current liabilities 3,144 3,889 4,005 4,028 5,032 6,630 7,165 7,480 7,820 Total liabilities and equity 18,009 19,253 22,534 25,686 32,116 28,846 27,951 29,322 30,911 Cash , , ,127 2,754 4,504 Other current assets 6,194 6,560 5,576 7,449 7,600 7,690 8,335 8,843 9,408 Total fixed assets 9,069 9,048 8,454 14,676 15,678 14,917 14,142 13,377 12,652 Investments (largely cash equivalent) 2,224 3,320 3,573 3,068 5,347 5,347 4,347 4,347 4,347 Total assets 18,009 19,253 22,534 25,686 32,116 28,846 27,951 29,322 30,911 Free cash flow Operating cash flow 3,655 3,681 4,819 5,669 4,721 3,293 4,453 4,798 5,158 Working capital changes (692) (120) (506) (1,839) (1,511) 1,508 (109) (194) (225) Capital expenditure (961) (497) (512) (7,670) (800) (800) (600) (600) (600) Other income Free cash flow 2,082 3,112 3,999 (3,495) 2,822 4,467 4,094 4,504 4,983 Key metrics and ratios (%) Print ad revenue growth (%) (1.3) EBITDA margin (%) Debt/equity Net debt/equity (17) 9 (22) (28) (26) (33) (38) ROAE (%) ROACE (%) Notes: (1) Financials as per Ind-AS from FY2017. Prior period financials are as per Indian GAAP. estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 5

49 Mahindra Logistics (MAHLOG) Infrastructure Transient troubles, rich valuations. 1QFY19 results highlighted structural (slow decision-making, resistance to tax compliance) and practical (technology integration) issues with various participants in the logistics value chain. These are, however, transient issues in our view. What s commendable is MLL s margin performance through operational efficiency and focus on warehousing/value-adding activities. On a net basis, EPS estimates increase by ~10-11% as topline growth plays catch-up along with higher margin in FY2020/21. Rich valuations force us to downgrade the stock to REDUCE (from BUY) with a revised target price of Rs565/share (Rs540 previously). REDUCE AUGUST 06, 2018 RESULT, CHANGE IN RECO. Coverage view: Attractive Price (`): 580 Target price (`): 565 BSE-30: 37,556 Company data and valuation summary Mahindra Logistics Stock data Forecasts/Valuations E 2020E 52-week range (Rs) (high,low) EPS (Rs) Market Cap. (Rs bn) 41.2 EPS growth (%) Shareholding pattern (%) P/E (X) Promoters 61.1 Sales (Rs bn) FIIs 10.1 Net profits (Rs bn) MFs 7.8 EBITDA (Rs bn) Price performance (%) 1M 3M 12M EV/EBITDA (X) Absolute ROE (%) Rel. to BSE-30 (4.0) Div. Yield (%) QFY19 results disappointing on non-m&m growth, commendable performance on margin Mahindra Logistics reported 1QFY19 revenues of Rs9.2 bn, up 9% yoy and 9% below estimates due to weak 6% growth in non-m&m SCM. Non-M&M SCM transportation was flat yoy. There were several reasons for such weakness such as (1) slow progress by clients on supply chain redesign post GST, (2) difficulty in technological integration with clients, (3) specific issue with large clients such as business stagnation and reduced transportation lead distance and (4) pricing pressure from startups leading MLL to forgo some business to protect profitability. The key positive was a strong 27% growth in warehousing and other value-added activities as well as operational efficiency improvement that lifted adjusted EBITDA margin to 4.4%, up 80 bps yoy, completely negating the impact of topline miss. Below-EBITDA items were in line and thus the adjusted PAT came out to Rs240 mn, up 36% yoy, 1% above estimates. Reality sets in; time to accept delays and tone down near-term growth expectations Fundamentally Mahindra Logistics remains a strong structural play on penetration of 3 rd party logistics (3PL) with key levers in GST, e-way bill, infrastructure status to logistics and increased government focus on the sector. However, 1QFY19 provided a window into several factors that will keep the pace of 3PL penetration slow, at least initially for the next months. These factors range from corporate anxiety on policy changes leading to a wait-and-watch approach, and resistance by transporters to formalization, to practical aspects such as difficulty in integration of IT systems with clients. We thus tone down our growth expectations in the near term. While growth was weak in the quarter, MLL has maintained a steady focus on profitability, with operational efficiency measures and increased warehousing revenues pushing up margins. Rich valuations lead us to downgrade to REDUCE despite better margin and EPS estimates Aditya Mongia Ajinkya Bhat We defer our growth expectations by ~18 months but expect a catch-up happening in FY2020/21. Sustainable margin improvement through operational efficiency measures and strong warehousing growth lead to a net 10-11% increase in EPS estimates. Based on annual report 2018, we model higher working capital for non-m&m. Revised one-year forward target price stands at Rs565 (Rs540 previously). Rich valuations force us to downgrade to REDUCE. For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

50 Infrastructure Mahindra Logistics Exhibit 1: Revenue miss was led by flat non-m&m transportation business; margin improvement led by strong growth in warehousing Quarterly income statement of Mahindra Logistics (consolidated), March fiscal year-ends, 1QFY19 (Rs mn) % change 1QFY19 1QFY19E 1QFY18 4QFY18 vs est. yoy qoq FY2018 FY2017 % change FY2019E FY2018 % change Net revenue 9,282 10,209 8,525 8,927 (9.1) ,161 26, ,889 34, Total expenses (8,877) (9,803) (8,259) (8,550) (9.4) (32,964) (25,903) 27.3 (38,081) (32,964) 15.5 Employee benefit expense (607) (676) (537) (598) (10.1) (2,291) (1,883) 21.7 (2,614) (2,291) 14.1 Fixed term consultant fees - - (39) (23) (82) (206) - (82) (100.0) Freight and other expenses (8,270) (9,128) (7,684) (7,929) (9.4) (30,591) (23,815) 28.5 (35,468) (30,591) 15.9 EBITDA (0.2) , ,808 1, Adjusted EBITDA (0.2) , ,808 1, Other income (39.3) Depreciation & Amortization (51) (56) (42) (53) 21.4 (3.6) (197) (146) 35.0 (223) (197) 13.1 EBIT , ,671 1, Interest expense (8) (7) (9) (9) (13.8) (9.4) (38) (35) 7.8 (26) (38) (30.3) PBT , ,645 1, Tax expense (133) (129) (83) (115) (368) (218) 69.4 (581) (368) 57.6 Recurring PAT , Exceptional items and prior period items (net) Reported PAT , Associate profits Minority interest (3) (3) (3) (4) (13) (5) (13) (13) Reported PAT for equity holders , Adjusted PBT (excluding consultant fees) , ,645 1, Adjusted PAT (excluding consultant fees) , Adjusted EPS (excluding consultant fees) Key ratios Employee expense / sales Other expenses / sales EBITDA margin (%) Adjusted EBITDA margin (%) Effective tax rate (%) PAT margin (%) Notes: (1) Adjusted EBITDA and adjusted PAT exclude the fixed-term consultancy fee expense from the reported numbers for the period; this expense ended in FY2018. estimates Exhibit 2: Gross margin miss was led by weak growth in non-m&m revenues, in spite of which EBITDA margin beat our estimates Quarterly segmental financials of Mahindra Logistics (consolidated), March fiscal year-end, 1QFY19 (Rs mn) % change 1QFY19 1QFY19E 1QFY18 4QFY18 vs est. yoy qoq FY2018 FY2017 % change FY2019E FY2018 % change Revenues from customers SCM 8,382 9,261 7,663 8,066 (9.5) ,757 23, ,088 30, PTS (5.1) ,405 2, ,801 3, Total 9,282 10,209 8,525 8,927 (9.1) ,161 26, ,889 34, Gross profit (Rs mn) SCM (15.0) ,422 1, ,128 2, PTS (3.6) Total (13.8) ,740 2, ,531 2, Gross margin (%) SCM PTS Total Notes: (1) Non-M&M revenues in SCM grew a weak 6% yoy in 1QFY19 contributing 38% of segmental sales, indicating that post-gst ramp up has not happened as expected by the management. (2) Revenues from warehousing and other value-added activities for non-m&m clients grew a strong 27% in 1QFY19. These are typically high-margin activities leading to yoy gross margin improvement. estimates 50 KOTAK INSTITUTIONAL EQUITIES RESEARCH

51 Mahindra Logistics Infrastructure Exhibit 3: SCM continues to account for ~90% of revenue and gross profit of Mahindra Logistics Segment-wise break-up of revenue and gross profit of Mahindra Logistics (consolidated), March fiscal year-end, 1QFY19 Revenue break-up Gross profit break-up PTS 10% PTS 12% SCM 90% SCM 88% Exhibit 4: Increase in share of non-m&m revenues has improved gross margin over the years Trend in share of non-mahindra Group clients in SCM revenues and corresponding segmental gross margin, March fiscal year-ends, E (%) Share of non-mahindra Group clients in SCM revenues (LHS, %) SCM gross margin (RHS, %) E 2020E 2021E 1QFY181QFY estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 51

52 Infrastructure Mahindra Logistics 1QFY19 earnings call takeaways Several reasons for weak non-m&m SCM growth. The company surprised negatively on revenue growth in 1QFY19, especially posting a weak 6% yoy growth in non-m&m revenues and even lower performance with flat transportation business which constituted 76% of non-m&m SCM business. The management mentioned several reasons for this underperformance as follows: GST and e-way bill. Corporates are still grappling with GST and relatively nascent e- way bill. The supply chain redesign, warehouse consolidation and other GST-related changes to the logistics chain are taking place slower than expected. As a result, new business acquisition has taken a hit in the quarter and will see only a slow pickup. Technological integration. The management acknowledged that the challenges with technological integration were perhaps underestimated. The company is pushing clients for technological integration with MLL s systems as it will not only improve the scope and level of service offered by MLL but will also increase switching cost for customer and will lead to more sticky, profitable business for MLL. However, interfacing with client systems, some of which are foreign companies and technologies, has proven harder than expected and has affected business growth in 1QFY19. Specific customer issues. The management mentioned that in the transportation business, one large customer faced stagnation in the quarter reducing the logistics business for MLL. Another customer undertook a restructuring of its distribution strategy due to which the average lead distance for material transportation came out much shorter than earlier, thereby impacting the topline. Barring these specific clients, the growth for the rest of the non-m&m clients was faster than the industry according to the management. Pricing pressure from startups. According to the management, some startups tried to undercut MLL on some vanilla pure transportation contracts. As per MLL s assessment, this is a bane of the startup ecosystem where investor funding and valuation is available at a multiple of the revenue growth. The founders of such startup then chase topline without paying any attention to profitability. MLL decided to favor profitability over growth and thus let go of some contracts instead of sacrificing profitability. According to the company s past experience, such contracts are not sustainable as the transporter may not be able to perform the contracted duties at the aggressive prices quoted and the customer may thus return to MLL s fold after a while. Guidance for FY2019. For FY2019, the management has guided for M&M SCM growth in line with the parent s growth, non-m&m SCM growth faster than the expected industry growth of 10-15% and 50 bps of margin improvement. The company also envisages 10-15% growth for PTS segment in FY2019 on the back of new technology deployment and rollout in 2QFY19 with help from a logistics sector startup. MLL has planned a capex of Rs mn for FY2019 which will be spent on technology and material handling equipment. Warehousing and non-transport value adding activities will be the focus area for MLL going forward. The company s Gurgaon warehouse has reached optimum utilization whereas Chakan warehouse is still ramping up and may support both growth and margin in FY2019. MLL is also planning to set up new warehouses at Delhi, Bangalore and Chennai. The management expects free cash flow (FCF) to turn positive in FY2019. New customer acquisitions. The company has won the contract to set up regional distribution center for L Oreal catering to NCR region. The company already provides distribution service to Mumbai region from its Chakan facilities. It has also received linefeed contracts for 2 manufacturing plants of an FMCG player adding to the list of KOTAK INSTITUTIONAL EQUITIES RESEARCH

53 Mahindra Logistics Infrastructure manufacturing plants across India where MLL handles line-feed for various clients. From the industry perspective, the company expects automotive and consumer goods industries to grow strongly, especially in rural India, on the back of third consecutive year of normal monsoon and improving sentiment. E-commerce clients will continue to put pricing pressure on MLL as they undertake cost control efforts. Key priorities for MLL remain intact. Key priorities for MLL are three fold: Building strong client relationships. MLL has continued client engagement to deepen the business relationships and has been able to achieve a 92% retention rate among the top-20 customers. Investing in technology. The company has created a new post and appointed a digital transformation officer to push technology adoption. For PTS segment, the company is also collaborating with a startup to deploy new technologies. Improve business partner engagement. MLL had previously mentioned the cloud platform for business partner onboarding. The company has also started a joint forum with representatives of transporters to undertake mutually beneficial initiatives. Other takeaways. The company is facing some resistance from both clients and transporters on its attempt to move to forward charge mechanism (FCM) under GST from currently prevalent reverse charge mechanism (RCM). Some clients have enough input tax credit and thus do not wish to pay higher GST under FCM whereas the resistance from transporters is arising from their fear of coming into the GST net unlike RCM where the client pays the indirect tax. The company has seen good success with clients as 90% of them have agreed to FCM while success rate with transporters has been limited at 50% so far. Given the prospective nature of the new axle load norms, the company sees limited and slow benefits in terms of trucking capacity as new trucks with allowed higher axle load limit get gradually pressed into service by transporters. Further, the usage of the higher limit depends on the type of cargo carried. Low-density voluminous cargo may anyway not be able reach even current axle load allowance. For high density cargo, however, the company intends to take advantage of the new norms. The company has decided to acquire additional 8.7% stake in its freight forwarding subsidiary Lords for a sum of Rs19 mn. This will increase MLL s shareholding to 68.7%. The company has received tax refund of Rs177 mn including interest of Rs19 mn in 1QFY19. As per MLL s petition to the assessing officer, the TDS rate on transportation has been reduced to 1.04% (from 2% earlier) and that on warehousing, rental and interest income has been reduced to 2.5% (vs 10% earlier). TDS reduction will prevent further buildup of income tax assets and will help normalize the working capital. KOTAK INSTITUTIONAL EQUITIES RESEARCH 53

54 Infrastructure Mahindra Logistics Exhibit 5: Note that topline estimates for FY2020/21 have not been reduced as we believe that growth is getting deferred, not denied Change in estimates of Mahindra Logistics (consolidated), March fiscal year-ends, E (Rs mn) New estimates Old estimates Revision (%) E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E Segmental financials Revenues SCM segment 30,761 36,088 44,036 52,081 36,717 44,068 52,120 (1.7) (0.1) (0.1) Yoy growth (%) Mahindra group 18,177 20,359 22,802 25,538 20,359 22,802 25, Yoy growth (%) Non-Mahindra group 12,583 15,729 21,234 26,543 16,358 21,266 26,582 (3.8) (0.1) (0.1) Yoy growth (%) PTS segment 3,400 3,801 4,249 4,750 3,808 4,265 4,777 (0.2) (0.4) (0.6) Yoy growth (%) Gross profit SCM segment 2,422 3,128 4,073 5,003 3,103 3,902 4, Gross margin (%) bps 39 bps 50 bps Assumed M&M margin (%) Implied non-m&m margin (%) PTS segment Gross margin (%) bps 65 bps 55 bps Key financials Net revenue 34,161 39,889 48,285 56,831 40,525 48,333 56,898 (1.6) (0.1) (0.1) EBITDA 1,197 1,808 2,455 3,025 1,721 2,223 2,703 Adjusted EBITDA 1,279 1,808 2,455 3,025 1,721 2,223 2, Adjusted EBITDA margin (%) bps 48 bps 57 bps Depreciation (197) (223) (284) (352) (234) (294) (364) PBT 1,021 1,645 2,269 2,801 1,566 2,061 2,532 Tax expense (368) (581) (792) (978) (547) (719) (884) Effective tax rate (%) Reported PAT 640 1,052 1,464 1,811 1,007 1,329 1,635 Adjusted PAT 698 1,052 1,464 1,811 1,007 1,329 1, Adjusted EPS Operating working capital cycle (days of sales) (a) Yoy growth (%) Net sales Adjusted EBITDA Adjusted PAT Adjusted EPS Notes: (a) The first published annual report FY2018 indicates much higher receivable days required for non-m&m client business which has been incorporated in our revised working capital estimates. estimates 54 KOTAK INSTITUTIONAL EQUITIES RESEARCH

55 Mahindra Logistics Infrastructure Exhibit 6: Trade receivables for non-m&m clients stand at much higher level than the M&M business Trend in receivables of M&M and non-m&m clients and operating working capital, March fiscal year-ends, E (days of sales) (Days of sales) Operating working capital M&M receivables Non-M&M receivables (20) (7) (7) (3) E 2020E 2021E Notes: (a) The first published annual report 2018 indicates this split of receivables which has been incorporated into our revised working capital estimates to reflect increasing share of non-m&m business in revenue mix. estimates Exhibit 7: We derive a DCF-based target price of Rs565/share for Mahindra Logistics; valuation impact from higher EPS estimates has been moderated due to increased working capital estimates DCF valuation of Mahindra Logistics (consolidated), March fiscal year-ends, E (Rs mn) E 2020E 2021E 2022E 2023E 2024E 2025E 2026E FCFF calculation Net revenue 26,666 34,161 39,889 48,285 56,831 65,765 75,630 86, , ,023 Revenue growth (%) EBIT (excluding other income) 616 1,000 1,585 2,171 2,673 3,178 3,655 4,203 4,833 5,558 EBIT margin (%) Operating tax expense (238) (370) (559) (758) (933) (1,109) (1,275) (1,467) (1,687) (1,940) NOPLAT ,025 1,413 1,740 2,069 2,379 2,736 3,146 3,618 Depreciation Change in working capital (1,087) (600) 485 (416) (637) (618) (561) (645) (742) (853) Capital expenditure (266) (230) (281) (466) (351) (573) (659) (758) (871) (1,002) Free cash flow to the firm (829) (3) 1, ,104 1,307 1,652 1,900 2,185 2,513 Key assumptions and value drivers Tax rate (%) Depreciation as % of sales Net working capital excluding cash as % of sales DCF valuation Terminal growth rate (%) 5.0 WACC (%) 12.0 EV and target price calculation Sum of discounted FCF 20,086 22,810 PV of terminal value 16,749 17,586 Enterprise value 36,835 40,396 Investments Net debt/(cash) (1,711) (2,333) Equity value 39,090 43,273 Implied share price (Rs/share) One-year forward target price (Rs/share) 564 estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 55

56 Infrastructure Mahindra Logistics Exhibit 8: Income statement of Mahindra Logistics (consolidated), March fiscal year-ends, E (Rs mn) I-GAAP Ind-AS E 2020E 2021E Net revenue 15,321 17,507 19,309 20,639 26,666 34,161 39,889 48,285 56,831 Total expenses (14,956) (16,994) (18,739) (20,116) (25,903) (32,964) (38,081) (45,831) (53,806) Employee benefit expenses (688) (882) (1,228) (1,509) (1,883) (2,291) (2,614) (3,097) (3,693) Fixed term consultant fees (25) (62) (206) (82) Other expenses (1) (14,268) (16,112) (17,486) (18,546) (23,815) (30,591) (35,468) (42,733) (50,113) Freight and other related expenses (13,111) (14,862) (15,889) (16,555) (20,940) (26,785) (31,276) (37,860) (44,560) Labor and other related expenses (584) (592) (775) (967) (1,421) (1,872) (2,185) (2,645) (3,113) Rent including lease rentals (157) (228) (295) (337) (399) (645) (753) (912) (1,073) Warehouse and related expenses (123) (102) (125) (169) (265) (241) (282) (341) (401) Legal and other professional costs (35) (52) (78) (137) (285) (172) (201) (243) (286) Miscellaneous expenses (257) (275) (324) (382) (505) (876) (770) (732) (679) EBITDA ,197 1,808 2,455 3,025 Adjusted EBITDA ,279 1,808 2,455 3,025 Other income Depreciation & amortization (31) (32) (60) (83) (146) (197) (223) (284) (352) EBIT ,059 1,671 2,295 2,828 Interest expense (7) (1) (4) (13) (35) (38) (26) (26) (26) PBT ,021 1,645 2,269 2,801 Tax expense (117) (177) (207) (200) (218) (368) (581) (792) (978) Current tax (115) (196) (224) (216) (261) (378) (581) (792) (978) Deferred tax (2) MAT credit entitlement 3 Reported PAT prior to associated income and minority interest ,064 1,477 1,824 Associate profits Minority interest 7 6 (5) (13) (13) (13) (13) Reported PAT ,052 1,464 1,811 Adjusted PAT ,052 1,464 1,811 Adjusted EPS Key ratios Employee expenses/sales Other expenses/sales EBITDA margin (%) Adjusted EBITDA margin (%) Effective tax rate (%) PAT margin (%) Yoy growth (%) Net sales NA Adjusted EBITDA NA (1.7) Adjusted PAT NA (0.5) Notes: (1) Breakup of other expenses in FY2018 are KIE estimates. estimates 56 KOTAK INSTITUTIONAL EQUITIES RESEARCH

57 Mahindra Logistics Infrastructure Exhibit 9: Balance sheet and cash flow details of Mahindra Logistics (consolidated), March fiscal year-ends, E (Rs mn) I-GAAP Ind-AS E 2020E 2021E Shareholders' funds 859 1,243 2,646 3,018 3,477 4,196 5,063 6,270 7,764 Share capital Reserves & surplus ,048 2,420 2,797 3,485 4,352 5,559 7,052 Minority interest Debt Total sources of funds 859 1,243 2,721 3,283 3,805 4,527 5,407 6,627 8,133 Net block Investments and goodwill 1, Cash and bank balances ,121 1, ,973 2,595 3,464 Net working capital (ex-cash) ,953 2,553 2,068 2,484 3,121 Deferred tax assets Non-current assets held for sale Total application of funds 859 1,243 2,721 3,283 3,805 4,527 5,407 6,627 8,133 Free cash flow Cash flow from operations before wcap. changes ,214 1,650 2,035 Change in working capital / other adjustments (171) (645) (589) (483) 485 (416) (637) Net cashflow from operating activites (479) (293) 119 1,699 1,234 1,397 Fixed assets (52) (99) (108) (353) (243) (376) (281) (466) (351) Cash (used) / realised in investing activities (18) (39) (1,648) (189) (341) (197) Free cash flow (CFO + net capex) (832) (536) (257) 1, ,046 Ratios Debt/equity Net debt/equity (0.6) (0.7) (0.4) (0.3) (0.1) (0.1) (0.3) (0.4) (0.4) Book value per share (Rs) RoAE (%) NA RoAE (adj., %) NA NA RoACE (%) NA Notes: (1) RoAE (adjusted): Return on Equity adjusted for fixed-term consultant fees (post-tax) and surplus funds. Surplus funds include cash and cash equivalents, bank deposits with more than 12 months maturity, investments in mutual funds and loans and advances to certain related parties. estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 57

58 PVR (PVRL) Media A masterstroke. PVR has renewed its deals with bookmyshow (BMS) and Paytm for three years for an aggregate amount of ~`4.1 bn (2.5-3X that earned over FY ). We raise our aggregate convenience fee forecast for FY E by 45% to `3.9 bn; it results in 5-7% EBITDA upgrade. We like PVR s swift rollout of offers to improve the price-value equation of its F&B offerings. We value PVR at 11X June 2020E EV/EBITDA, factoring in uncertainty in the F&B business even as we believe that the outcome will be benign relative to concerns. Upgrade to BUY from ADD, revise TP to `1,360 (from `1,210 earlier). BUY AUGUST 06, 2018 CHANGE IN RECO. Coverage view: Attractive Price (`): 1,102 Target price (`): 1,360 BSE-30: 37,165 Company data and valuation summary PVR Stock data Forecasts/Valuations E 2020E 52-week range (Rs) (high,low) 1,568-1,063 EPS (Rs) Market Cap. (Rs bn) 51.5 EPS growth (%) Shareholding pattern (%) P/E (X) Promoters 19.9 Sales (Rs bn) FIIs 48.0 Net profits (Rs bn) MFs 9.9 EBITDA (Rs bn) Price performance (%) 1M 3M 12M EV/EBITDA (X) Absolute (19.4) (21.8) (20.0) ROE (%) Rel. to BSE-30 (23.5) (26.0) (30.1) Div. Yield (%) Event PVR s deal renewal with BMS and Paytm PVR has renewed its arrangements with bookmyshow (BMS) and Paytm for three years w.e.f. July 15, As per the new agreement, BMS and Paytm will pay PVR an aggregate amount of `4.1 bn (minimum guarantee+refundable deposit; `3.6 bn + `0.5 bn per KIE) for allowing them to book PVR tickets. Of this amount, PVR will receive `3.5 bn upfront. At present, BMS and Paytm charge a convenience fee of ~`30/ticket to consumers and pass on ~`14 to PVR. PVR s share would now increase to ~`22/ticket (KIE). In our view, BMS and Paytm s rationale, for offering a sweet deal to PVR, could be (1) high dependence on PVR, (2) monetization potential (besides movie tickets) of PVR s consumer base, (3) higher F&B sales through their platform along with movie tickets booking. We note that PVR has a separate deal with these platforms for F&B sales whereby PVR pays some commission on F&B sales that happen through third-party platforms. As per this deal, PVR cannot sign up with any other third-party platform but can continue ticket booking on its own website/app. Implications: 5-7% EBITDA upgrade and reduction in net debt While we were aware of the impending deal renewals with BMS and Paytm and we had built some upside, we are positively surprised by the quantum. We increase our aggregate convenience fee forecast for FY E by 45% to `3.9 bn (upside of `1.2 bn). Sample this, PVR earned about `1.3 bn as convenience fees from third-party platforms over FY and it now has minimum guarantee of about `3.6 bn over the next three years from these two platforms. In addition, we expect PVR to earn convenience fee of about `100 mn/year from its own website/app. This deal renewal results in 5-7% upside to our FY2020E EBITDA and reduction in net debt (`8 bn as at March 2018 end) thanks to an upfront advance of `3.5 bn. We raise EBITDA estimates by 5-7%, TP to `1,360 ( from `1,210); Upgrade to BUY from ADD That PVR could pull off such a sweet deal is a reflection of the scale and quality of its consumer base. We are happy that the management has given due weightage to consumer goodwill and swiftly rolled out price interventions to improve the price-value equation of its F&B offerings (see Exhibit 5). We value PVR at 11X June 2020E EV/EBITDA, factoring in uncertainty in the F&B business in view of pending PIL/government policy even as we believe that the outcome will be benign relative to concerns. Jaykumar Doshi For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

59 PVR Media Exhibit 1: Revised earnings estimates of PVR, FY2019E-21E (Rs mn) Revised Previous Change (%) 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E Ticket sales (net) 14,655 17,274 20,108 14,655 17,274 20, F&B sales 7,153 8,351 10,088 7,153 8,351 10, Ad revenues 3,527 4,197 4,885 3,527 4,197 4, Convenience fees 1,044 1,370 1, , Other operating income 1,310 1,376 1,445 1,310 1,376 1, (0.0) (0.0) Total revenues 27,689 32,568 38,006 27,413 32,103 37, Film hire charges (6,350) (7,502) (8,753) (6,350) (7,502) (8,753) F&B consumption (1,913) (2,297) (2,724) (1,913) (2,297) (2,724) Employee costs (2,958) (3,412) (3,928) (2,958) (3,412) (3,928) Rent (4,918) (5,815) (6,821) (4,918) (5,815) (6,821) Other operating costs (6,529) (7,504) (8,583) (6,473) (7,414) (8,499) Total operating costs (22,669) (26,529) (30,808) (22,613) (26,440) (30,724) EBITDA 5,020 6,039 7,198 4,800 5,663 6, PAT 1,770 2,342 2,866 1,522 1,943 2, EPS (Rs/share) Key assumptions EBITDA margin (%) Screen additions (#) Footfalls (mn) ATP gross (Rs) SPH gross (Rs) Ad revenue grow th (%) Occupancy (%) F&B revenue grow th (%) F&B gross margin (%) F&B gross profit (Rs mn 5,239 6,055 7,364 5,239 6,055 7, estimates Exhibit: PVR: Online ticket bookings as % of total tickets (admits) Total admits (LHS, mn) Online admits as % of total admits (RHS) E 2020E 2021E 0.0 estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 59

60 Media PVR Exhibit: PVR: Online ticket bookings as % of total tickets (admits) Convenience fee/ticket from 3rd party platforms (Rs) E 2020E 2021E Notes: (1) We have used our estimate of footfalls over FY E and assumed (a) increase in online bookings to 70% of total tickets by FY2021E from 51% in FY2018 (b) about 5-10% of online bookings from PVR's ow n w ebsite/app (c) convenience fee of about Rs3.6 bn from BMS and Paytm estimates Exhibit 5: PVR has rolled out attractive deals to improve price-value equation of its F&B offerings 60 KOTAK INSTITUTIONAL EQUITIES RESEARCH