SHIPPING CORPORATION OF INDIA (SCI)

COMPANY UPDATE Amit Agarwal agarwal.amit@kotak.com +91 22 6218 6439 SHIPPING CORPORATION OF INDIA (SCI) PRICE: RS.81 RECOMMENDATION: BUY TARGET PRICE: RS.110 FY19E P/E: 11.4X Improved prospects - stratagic sale expected Shrinking global shipping order book, bottoming asset prices, lower crude prices (lower bunker) and stable shipping freight rates bodes well for shipping companies including SCI. From the above, we can infer that the freight rates to improve from here and operating cost to remain low with lower bunker cost which should translate into improvement in revenues, EBIDTA margin and return ratios for SCI. Also the Balance sheet (BS) of the company has improved over the last two years with debt prepayment and is expected to improve further going forward. Strategic sale by government is expected to remove government bound constraints and improve management of SCI which should add value to the company. Recommend BUY (from SELL) with a TP of Rs 110 with changing industry dynamics and expected change in management control. Global order book status has become favourable Summary table (Rs mn) FY17 FY18E FY19E Sales 34,618 36,673 39,110 Growth (%) (16.0) 5.9 6.6 EBITDA 7,570 8,138 9,198 EBITDA margin (%) 21.9 22.2 23.5 PBT 1,776 2,643 3,729 Net profit 1,598 2,379 3,356 EPS (Rs) 3.4 5.1 7.2 Growth (%) (68.5) 48.8 41.1 CEPS (Rs) 15.6 17.0 18.9 BV (Rs/share) 151.8 156.9 164.1 Dividend/share (Rs) - - 1.0 ROE (%) 2.3 3.3 4.4 ROCE (%) 3.1 3.6 4.5 Net cash (debt) (26,762) (24,585) (22,498) NW Capital (Days) 99.0 98.0 99.0 EV/EBITDA (x) 8.6 7.7 6.6 P/E (x) 23.9 16.1 11.4 P/Cash Earnings 5.3 4.8 4.3 P/BV (x) 0.5 0.5 0.5 Source: Company, Kotak Securities - Private Client Research Order book status across categories Jun-17 Jun-15 000 tonnes Tonnage Order book % Tonnage Order book % Crude 433,852 61,650 14.2 388,283 64,630 16.6 Products 41,517 4,363 10.5 44,842 5,825 13.0 Bulk 706,108 61,855 8.8 662,903 128,802 19.4 Containers 246,255 31,865 12.9 232,355 39,617 17.1 The above table clearly indicates that the global order book status has become very favourable with reduction in global order book across segments between 10 to 55% in the last 2 years. The sharpest reduction was seen in the bulk segment with global order book reducing from 1.28 mn tonnes to 0.62 mn tonnes in June 2017. The reduction in global order book bodes well for the shipping sector and SCI. Any improvement in global trade would further add to the recovery of shipping sector. What we believe about the shipping markets? Till date, the supply side was the source of most of the problems, which as per latest data is showing signs of easing. We see the current levels of shipping market to be the bottom of the cycle with improvement expected over the next two financial years Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited. Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 2

Baltic dry index 1600 1400 1200 1000 800 600 400 200 0 Baltic dirty tanker index 1200 1100 1000 900 800 700 600 500 400 Asset prices have stabilized 5 year old asset prices ($mn) Segment Jun-17 Sep-16 Jun-16 Dec-15 Aug-15 May-15 Tanker Aframax 30.5 34.5 40.0 45.0 46.5 42.0 Suezmax 42.0 47.0 53.0 60.0 60.0 54.0 VLCC 61.5 64.0 73.0 80.0 82.0 74.0 Clean 37000 DWT 20.5 20.0 25.0 23.5 23.5 23.5 45000 DWT 24.0 23.0 27.5 28.0 26.5 26.0 70000 DWT 28.0 31.5 36.0 36.5 36.0 32.5 Bulk Handy Size 14.5 9.8 9.0 10.0 13.0 18.0 Supramax 17.0 12.5 11.0 15.0 15.5 21.0 Panamax 20.0 13.8 13.0 17.0 17.0 21.0 Capesize 32.0 24.0 22.8 32.0 32.0 41.0 The table above indicates that the asset prices across segments have stabilized or improved in the last one year which vindicates our view that the shipping markets have bottomed out and expected to improve from here. Current fleet of SCI (as on June 2017) Category No DWT Crude Oil 17 2,175,902 Product 14 908,059 Gas 2 35,202 VLCC 5 1,590,809 Bulk Carriers 16 1,068,088 Liners 4 173,465 Offshore Supply 10 23,502 Passenger-cum-Cargo 1 5,140 Total 69 5,980,167 Source: Company Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 3

SCI has not added any ship in the last one year primarily due to weak shipping markets. Many vessels are currently placed in the spot market and are competing with other shipping companies for the same business. These vessels are working at less than 50% utilization. Long term contracts are limited under current environment. We believe that the current fleet has the potential to capture the near term improvement in business and hence we estimate the near term capex to be minimal for the company, which should lead to improvement in balance sheet. Improvement in BS metrics for the company (Rs mn) FY15 FY16 FY17 FY18E FY19E Gross Debt 59,240 45,981 40,518 40,367 40,224 Networth 65,336 69,104 70,702 73,081 76,437 Cash 12,561 12,862 13,756 15,782 17,725 Net Debt/equity (x) 0.71 0.48 0.38 0.34 0.29 Capex -700 5,000 2,500 2,500 2,500 Source: Company, Kotak Securities - Private Client Research Bunker (fuel) situation is very favourable for the company Crude has fallen to seven-month low at $47 per barrel with rising crude production in the United States, Libya and Nigeria and minimal cut in production by OPEC. Low crude prices translate into low bunker prices which is positive for shipping companies with bunker forming an average of 20% of total sales for the last 3 years.(current bunker is $279 per tonne) Bunker (fuel) cost for SCI (Rs mn) FY12 FY13 FY14 FY15 FY16 FY17 Sales 38,208 41,525 43,260 42,301 41,122 34,618 Fuel cost 15,543 15,816 14,778 11,843 6,375 6,200 % of Sales 40.7 38.1 34.2 28.0 15.5 17.9 Avg bunker ($/tonne) 710 608 580 308 162 226 Source: Company, Kotak Securities - Private Client Research Near term performance expected to improve for SCI Performance of any shipping company is a function of freight rates, placement of ships (mix of spot and contracted revenues) and bunker prices. For SCI, Freight rates is expected to improve (positive for SCI) Company has more ships in the spot market ( neutral for SCI) Asset prices have either shown upward movement or stabilized (positive for SCI) Decreasing bunker (fuel) prices (positive for SCI) Government may go for a strategic sale in SCI NITI Aayog has proposed a strategic sale of about 26% stake in Navratna PSU Shipping Corporation of India (SCI). The government currently holds 63.75 % stake in SCI. We estimate that after the sale of 26% stake, the government holding in the company will come down to 37.75 %. The strategic partner would have to give an open offer for another 25% stake which would increase the stake of the strategic player to beyond 50% making it the majority shareholder in the company. Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 4

We expect the stake sale to shift control of the company to the strategic player, which is expected to make SCI a) more professional; b) well managed; c) constrain free with PSUs working under severe government restrictions and; d) more profitable. All of the above would be healthy for the minority shareholders of the company. We recommend BUY on Shipping Corporation with a price target of Rs.110 Valuation and recommendation: We estimate business environment and sentiments to improve going forward with improvement in revenues, EBIDTA margin, return ratios and BS for SCI. Strategic sale is estimated to add further value to the company. We are valuing the company based on book value which equates to book value of all the assets minus the liabilities. The current cycle does not capture the true earnings potential of the company and hence we are not using any earnings to metrics to value the company. We value the stock at 0.67 (two/third) of its FY19 book value. The one-third discount to book value reflects the discount required for a cyclical stock in the current state of the shipping cycle. Recommend BUY (from SELL) with a TP of Rs 110 (from Rs 66) at an implied PE of 15.2 x FY19E. Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 5

COMPANY VISIT NOTE Jatin Damania jatin.damania@kotak.com +91 22 6218 6440 Summary table (Rs mn) CY14 CY15 CY16* Sales 12,175 11,510 21,778 Growth (%) 12.9-5.5 89.2 EBITDA 1,112 1,203 2,472 EBITDA margin (%) 9.1 10.4 11.4 PBT 813 675 1,401 Net profit 666 491 851 EPS (Rs) 9.2 6.8 11.6 Growth (%) 18.5-26.3 73.4 CEPS (Rs) 15.2 12.2 24.0 BV (Rs/share) 78.0 80.7 64.6 Dividend/share (Rs) 2.8 2.8 3.0 ROE (%) 13.9 13.0 15.6 ROCE (%) 8.7 11.2 10.1 Net cash (debt) -304-5,074-4,045 Net WC (Days) 47.0 45.0 54.0 EV/EBITDA (x) 17.0 11.8 6.5 P/E (x) 28.7 38.8 22.7 P/Cash Earnings 17.3 21.6 11.0 P/BV (x) 3.4 3.3 4.1 Source: Company, Kotak Securities - Private Client Research; * Consolidated HUHTAMAKI PPL LTD (HPPL) PRICE: RS.264 RECOMMENDATION: NOT RATED Huhtamaki PPL Ltd (HPPL), a leading consumer packaging company is known for its pioneering efforts in flexible packaging. The company is India's leading manufacturer of primary consumer packaging and labelling materials with annual consolidated revenue of Rs21.8 bn. It is the largest manufacturer in volume of finished flexible packaging in India and Asia Pacific region. HPPL offers a wide portfolio of packaging solutions that include flexible packaging, including a variety of pouching solutions, labelling technologies, shrink sleeve solutions, specialized cartons, packaging machines, tube laminates, promotional, holographic & security solutions, cylinders & specialized films for high barrier. HPPL's 90% of the revenue comes from FMCG sector and the remaining from pharma and other industries. Top 15 customers account for 60-65% of the business. HPPL's revenue clocked a CAGR of 26% over CY13-16. Strong legacy and deep understanding of Indian FMCG market, combined with the global footprint of parent should help the company to drive future growth. Integrated facilities provides complete control HPPL has fourteen state of the art facility, with an installed capacity of 96KT - 100KT. The company is currently operating at 75-80% utilisation and maximum it can go up to 85-90%, as per management. Due to its integrated facility, the company is capable of working with the end user from product inception to the retail outlets. Given its diversified locations, product portfolio and technology know-how, we believe that company stands to gain with the growth in food & beverages and healthcare industries globally. Expansion to focus on promising market In order to ensure the growth in the coming years, the company commenced two new facilities, one each in Guwahati and Sikkim (Pressure Sensitive Labels), adding 3,000-4,000 tonnes to the overall capacity. Sikkim unit, will be manufacturing labels and would be largely focused on Pharmaceutical industry, to service its customers based in North East India. Guwahati unit would be focusing on FMCG sector. The capex incurred for the Assam and Sikkim units was around Rs 430-440 mn. The company would be spending Rs120 mn in 2017, of which part of the capex is allocated for value added products. Parent's global presence to derive benefits Huhtamaki Oyj (HOJ), HPPL's parent company, based out of Finland has a presence in six continents, 34 countries, 23 sales offices, 69 manufacturing units and over 16,000 employees. HOJ is one of the top 10 consumer packaging companies in the world and is known as a global specialist in packaging for FMCG products. Increased focus and commitment of global FMCG players like Unilever and Nestle to expand footprints in emerging markets, would benefit HPPL as it is the leading packaging player in India and HOJ's strong relationship with the global players. Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited. Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 6

Strong clientele and focus on innovations would help in sustaining EBITDA margin The company commands higher market share (~15% followed by Uflex) in the high end flexible packaging in India and its clientle includes some of the heavyweights of Indian FMCG players like HUL, Colgate, Nestle etc. Some of its overseas clients include subsidiaries of Unilever in Srilanka and Bangladesh. Even though the company does not face any immediate threat from competition, the demand growth is inextricably linked to the demand growth in the FMCG and the food segment. In order to sustain the market share, the company focusses more on innovation (20-30% of the revenue should come from the innovative products). Innovative products means it could be absolutely a brand new product completely or it could be product, which is an improvisation on an existing product, which basically gives better productivity to the customer or better cost-efficiency to the customer. Strong customer base and increasing share of innovative products should help the company to sustain its EBITDA margin at the current levels of ~11%. NASP helps out in innovation HPPL's NASP programme supports its strategy to stand out with better efficiency and innovations across industries. NASP's (New applications, Structures and Products/Processes) objective is to create new business by finding new applications and markets for existing structures and technological processes and also to introduce new packaging products, structures and processes for new applications, markets and providing technologically superior solutions. HPPL has innovated the one rupee sachet for products like tea, coffee, shampoo, confectionery, pickle and many more by considering the price and cost sensitivity of Indian customers and companies. NASP is a continuous process and there are many products in the pipeline. Webtech Labels compliments product portfolio In November 2012, HPPL acquired 51% stake in Webtech Labels for EUR7mn. With a production capacity of over 5mn labels per day, Webtech is the leader in self-adhesive labels in roll form. It is specialised in manufacturing high-end pressure sensitive labels, especially to pharmaceutical customers. Webtech has a state-of-the-art manufacturing facility at Navi Mumbai; in 2014, it set up a new unit at leased premises in Hyderabad. Outlook HPPL has positioned itself well with good growth in topline and bottomline in the domestic flexible packaging with zero debt on books (prior to acquisition). To further strengthen its presence in the established markets, HPPL acquired PPIL and Webtech. With the latest technologies, a culture of innovation, a strong customer base and financial stability should aid its future growth in a dynamic and ever-challenging environment. At current market price the stock is trading at 22.7x CY16 earnings. We do not have rating on the stock. Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 7

Bulk deals Trade details of bulk deals Date Scrip name Name of client Buy/ Quantity Avg. Sell of shares price (Rs) 21-Jun ALORA Sykes And Ray Equities (India) Ltd B 164,000 31.9 21-Jun CAPPIPES Kushal Jayesh Khandwala B 24,000 90.0 21-Jun GEETANJ Anilkumarjadala B 26,003 3.7 21-Jun GEETANJ Akshay Jitendrakumar Brahambhatt S 23,323 3.7 21-Jun GPTINFRA Gpt Sons Pvt Ltd B 100,000 249.5 21-Jun GPTINFRA Atul Tantia S 99,808 249.6 21-Jun HINDTIN Prarthna Pvt Ltd B 76,752 61.5 21-Jun HINDTIN Stemcor Mesa Dmcc S 100,000 61.6 21-Jun IRBINVIT Reliance Mutual Fund B 4,900,000 100.5 21-Jun ISHANCH Ashok Mittal B 61,474 53.0 21-Jun ISHANCH Adroit Tradelink Pvt Ltd S 336,500 53.0 21-Jun KRISHFAB Kiran Kumar Hema S 50,000 8.0 21-Jun KRISHFAB Akram Dushani B 50,000 8.0 21-Jun LT State Bank Of India B 4,905,000 1,764.2 21-Jun LT Uti Unitscheme64 S 5,838,000 1,764.2 21-Jun MITSU Aryaman Broking Ltd S 18,000 186.0 21-Jun PACL Vijay Kumar Aggarwal S 183,500 24.1 21-Jun PURSHOTTAM Sunima Steel Marketing Pvt Ltd S 34,500 22.7 21-Jun PURSHOTTAM Sunfast Tradecomm Pvt Ltd S 50,000 22.7 21-Jun PURSHOTTAM Karabi Vinimay Pvt Ltd S 57,500 22.7 21-Jun PURSHOTTAM Ashish Begwani B 150,000 22.7 21-Jun RCSL Shalu S Rana S 17,300 29.0 21-Jun RCSL Suresh Doulatram Adnani B 17,300 29.0 21-Jun RNBDENIMS Hen Securities Ltd Investment A/C B 100,000 45.0 21-Jun RNBDENIMS Indu Jain S 100,000 45.0 21-Jun SFLINTER Sarita Kunwar Singh B 30,000 16.8 21-Jun SFLINTER Sisodiya Pahadsinh Dolatsinh S 27,058 16.8 21-Jun STARLITE Mbm Financial Services B 100,000 44.6 21-Jun SUMEDHA Lukman Munavar Patel S 60,000 28.9 21-Jun TIGERLOGS Manoj Gupta S 63,046 205.1 21-Jun VETO Veto Electropowers India Pvt Ltd S 260,000 176.0 Source: bseindia.com Gainers & Losers Nifty Gainers & Losers Price (Rs) chg (%) Index points Volume (mn) Gainers Hindustan Unilever 1,123 2.8 NA 1.4 Kotak Mahindra Bank 992 0.9 NA 1.1 Maruti Suzuki 7,268 0.9 NA 0.5 Losers Hindalco 197 (2.7) NA 10.8 ONGC 165 (2.5) NA 8.4 Tata Motors 457 (2.2) NA 5.4 Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 8

RATING SCALE Definitions of ratings BUY We expect the stock to deliver more than 12% returns over the next 9 months ACCUMULATE We expect the stock to deliver 5% - 12% returns over the next 9 months REDUCE We expect the stock to deliver 0% - 5% returns over the next 9 months SELL We expect the stock to deliver negative returns over the next 9 months NR Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. RS Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA Not Available or Not Applicable. The information is not available for display or is not applicable NM Not Meaningful. The information is not meaningful and is therefore excluded. NOTE Our target prices are with a 9-month perspective. Returns stated in the rating scale are our internal benchmark. Fundamental Research Team Sanjeev Zarbade Capital Goods, Engineering sanjeev.zarbade@kotak.com +91 22 6218 6424 Teena Virmani Construction, Cement teena.virmani@kotak.com +91 22 6218 6432 Arun Agarwal Auto & Auto Ancillary arun.agarwal@kotak.com +91 22 6218 6443 Ruchir Khare Capital Goods, Engineering ruchir.khare@kotak.com +91 22 6218 6431 Ritwik Rai FMCG, Media ritwik.rai@kotak.com +91 22 6218 6426 Sumit Pokharna Oil and Gas sumit.pokharna@kotak.com +91 22 6218 6438 Amit Agarwal Logistics, Paints, Transportation agarwal.amit@kotak.com +91 22 6218 6439 Jatin Damania Metals & Mining jatin.damania@kotak.com +91 22 6218 6440 Pankaj Kumar Midcap pankajr.kumar@kotak.com +91 22 6218 6434 Nipun Gupta Information Technology nipun.gupta@kotak.com +91 22 6218 6433 Jayesh Kumar Economy kumar.jayesh@kotak.com +91 22 6218 5373 K. Kathirvelu Production k.kathirvelu@kotak.com +91 22 6218 6427 Technical Research Team Shrikant Chouhan shrikant.chouhan@kotak.com 91 22 6218 5408 Amol Athawale amol.athawale@kotak.com +91 20 6620 3350 Derivatives Research Team Sahaj Agrawal sahaj.agrawal@kotak.com +91 79 6607 2231 Malay Gandhi malay.gandhi@kotak.com +91 22 6218 6420 Prashanth Lalu prashanth.lalu@kotak.com +91 22 6218 5497 Prasenjit Biswas prasenjit.biswas@kotak.com +91 33 6625 9810 Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 9

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