EquityInvestmentStrategy 06052020 PDF

Axis Top Picks Idea
Equity Investment Strategy

Equities | 6th May 2020
Axis Securities Equity Research
OPPORTUNITIES DURING TIMES OF ADVERSITY: TOP PICKS
It is not strange that many stocks are trading at their lifetime high levels Re-alignment of Global supply chains: While competence of domestic
post the Covid19 crisis. Pharmaceutical company stocks like Alembic manufacturing and the new challenges on account of labour dislocation are real
and IPCA recently touched lifetime highs. Even globally many but India has solid competence in Chemicals space. Pharmaceuticals,
technology companies touched their lifetime highs. The opportunities Petrochemicals and Specialty Chemicals are the areas of strength for Indian
for some during times of adversities tend to much larger as the companies. We believe that the Indian chemical companies could be the biggest
magnitude of disruptions is of the highest order. Our endeavor is to beneficiaries of re-alignment of global supply chains.
identify the key areas of opportunity which are likely to see outsize
returns over the next one year. We believe there will be a wide of range
Rural and Agri related themes could benefit: The COVID crisis has had far
of opportunities for quality companies across sectors; however, we
lesser impact on the Indian agrarian economy. Also, the recent forecast of
believe that some themes are more likely to play out and benefit the
normal monsoon by IMD means the rural economy likely to perform much better
leader companies in that space disproportionately.
than the urban economy.
The following are the key themes:
Digital and data services will play a bigger role: Every company Essentials and small ticket discretionary could re-rate further: Essential
today wants to build a better digital business model or improve its consumer goods will recover from Q2FY21 and we are likely to witness further
disaster recovery plan or make provisions for a business sustenance formalization as unorganized market will see significant erosion. Lower input
plan which is location agnostic. The recent solid results by the Microsoft costs and competitive intensity will help aid margins. Thus, large FMCG and
Corporation are a testament to this trend gathering immense traction. small ticket consumer discretionary companies could see further re-rating.
We believe this will provide significant opportunities for both technology
companies and telecom service providers as demand will be ahead of
supply. Large private banks to gain ground: BFSI sector will be hit hard and the NBFC
space will be the hardest hit. We believe this provides lot of opportunities for the
large and high quality private banks to gain market share. However companies
Resurgence of the Pharmaceuticals sector: The Pharmaceuticals with strong collateral like Gold Finance are well placed and could see decent
sector has seen a significant re-rating post the crisis but the companies growth.
with higher domestic exposure have witnessed the maximum re-rating.
This trend is likely to sustain and companies with solid growth profile Based on the above themes we recommend the following stocks:
are likely to re-rate further and deliver robust returns over the next 12 ICICI Bank, Mind tree, HCL Tech, Manappuram, Biocon, Escorts, Minda
months. Industries, Bharti Airtel, Aarti Industries, Varun Beverages
Naveen Kulkarni | naveen.kulkarni@axissecurities.in | Important disclosures can be found in the Disclosures Appendix
Axis Top Picks Idea
Axis Securities Top Picks

Stock 12 Month 12 Month Dividend TR TR TR Consensus
Ticker Company Name Sector
price Fwd PE Fwd P/BV Yield 1M% 3M% YTD% Rating
ICBK.NS ICICI Bank Ltd Banks 343 14.5 1.9 0.3 15.4 -38.6 -38.6 1.5
MNFL.NS Manappuram Finance Ltd Finance 124 7.0 1.8 1.8 29.8 -28.4 -31.9 1.8
VARB.NS Varun Beverages Ltd FMCG 615 29.5 5.1 0.4 15.4 -22.9 -12.5 1.3
ESCO.NS Escorts Ltd Automobile 720 13.4 1.9 0.4 16.9 -19.1 10.0 2.1
MNDA.NS Minda Industries Ltd Auto Ancillaries 258 22.0 3.5 0.4 16.2 -34.9 -25.4 1.5
ARTI.NS Aarti Industries Ltd Chemicals 1100 30.2 6.3 0.5 44.0 15.8 37.4 1.9
MINT.NS MindTree Ltd IT - Software 907 19.4 3.9 1.1 24.8 -3.8 9.4 3.1
BION.NS Biocon Ltd Pharmaceuticals 354 34.2 5.9 0.1 20.0 18.3 18.9 2.4
BRTI.NS Bharti Airtel Ltd Telecomm-Service 547 137.4 3.4 0.9 24.6 -1.0 15.9 1.6
HCLT.NS HCL Technologies Ltd IT - Software 521 12.6 2.8 1.0 28.2 -12.6 -8.1 1.8
Source: Company, Axis Securities; Consensus Rating; 1-Strong; Buy,2-Buy,3-Hold, 4-Sell, 5-Strong Sell
Naveen Kulkarni |naveen.kulkarni@axissecurities.in | Important disclosures can be found in the Disclosures Appendix
Axis Top Picks Idea
Sector Outlook
Sector Current View Outlook
The Indian automobile sector will continue to witness immense pressure on volumes in FY21
and its revival seems unlikely before Q4FY21. CV cycle will continue to be under pressure for
Automobiles Underweight even more prolonged period. Two wheelers and Passenger vehicles are expected to revive
earlier but growth will remain sluggish. Rural demand is likely to be better than urban demand,
and tractors are expected to perform better than most segments.
During the Axis bank Q4FY20 earnings conference call, the management indicated that 28% of
all loans by value have been availed for RBI moratorium of 3 months. While other banks have
indicated a lower percentage, it’s quite clear that there are major concerns in the financial
services space. Bajaj Finance also provided scenarios for revival and considering the current
extension of lockdown, business revival is unlikely before Q3/Q4FY21. The challenges for
Banking and Financial services Underweight NBFCs, Microfinance and Small Finance banks will be very large and consolidation seems
inevitable. A significant number would need to raise capital. Thus, large private banks which
have solid capital adequacy are well placed in the current circumstances while allocation to other
financial services should be limited. We guide for a portfolio allocation of 25% (NIFTY BFSI
allocation is 37%) in BFSI space dominated by large private banks and Gold loan companies
where collateral is solid.
Private capex was seeing significant challenges because the capacity utilization has been
sluggish. With the marked slowdown because of COVID19, the demand scenario will witness a
Capital Goods Underweight
major slump. Thus, both government as well as private capex will be very sluggish. We
recommend underweight stance on the sector.
While the cement sector has had pricing power and it has managed to withstand tough times
better but the current challenges will have significant repercussions on the industry structure and
Cement Underweight pricing scenario. As capacity utilization of the industry will slump, pricing discipline will be tested
to the fullest. At this juncture we recommend underweight stance on the sector but will be closely
reviewing the pricing scenario post the complete lifting of lockdown.
Axis Top Picks Idea

The consumer staples sector will be one of the earliest to revive. Moreover, most companies in
the space are debt free and have solid balance sheet. Hindustan Unilever in the recent earnings
conference call indicated that their capacity utilization is closing in on 80%. HUL also indicated
that have gained market share in 80% of their portfolio indicating the trend of strong becoming
Consumer staples Overweight stronger. Also, low input costs and decline in competitive intensity translates to margins and
earnings visibility in the medium term. Valuations remain sky high and are a serious concern.
Notwithstanding the valuation challenges, the consumer staples space has consistently delivered
returns for shareholders. We believe the trend is sustainable for the next 12 months and
recommend an overweight stance on the sector.
The consumer discretionary space is a mixed bag with large ticket consumer discretionary will
take time to revive but the small ticket discretionary could revive faster. Segments like skin care,
Consumer Discretionary Equal weight beverages, apparels and others could revive while large ticket discretionary like white goods could
take longer. We recommend equal weight stance with positive outlook on small ticket
discretionary segment.
The information technology space is marked by companies with strong balance sheet and play on
the current trend of digitization. We believe this trend will gather traction. While there are
challenges in the IT sector as global discretionary spending on IT will reduce significantly but the
Information Technology Overweight sector will still see some benefits of currency tailwinds. In the near term, visibility on revenues is a
challenge but it is still better than many other sectors. TCS, the largest IT Company in India has
indicated that situation could normalize as early as Q3FY21. The IT sector valuations are also
reasonable at the current juncture. Thus, we recommend an overweight stance on the sector.
The metals and mining sector will be impacted by global challenges and the impact on the
Chinese economy. Pricing environment will remain subdued for a significant period and this will
Metals and Mining Underweight
have an impact on the companies in the space. We recommend an underweight stance on the
sector.
The benchmark of US oil, West Texas Intermediate (WTI) fell to negative $37.6 in March 2020
fearing storage will run out in May. This is the first time in history that oil prices have traded in
negative territory. Historically lower oil prices have provided limited support to GRMs which are
Oil and Gas Underweight
likely to be under pressure. Thus, both upstream and downstream will be under pressure because
of demand challenges. We are likely to witness a significant amount of volatility in the prices. We
recommend an underweight stance on the sector.
Axis Top Picks Idea

The demand for certain Pharmaceutical products shot up and companies in that space like IPCA
saw significant price rise. This led to an overall re-rating of the sector which had been under
pressure for the last couple of years because of FDA issues and pricing environment in the US
Pharmaceuticals Overweight
generics markets. While the challenges are significant for the sector but there is value in the
sector and many stocks offer solid growth potential. We believe the re-rating is likely to sustain
over the medium term and hence we recommend an Overweight stance on the sector.
Real estate would be one of the most impacted sectors as both residential and commercial real
estate will be impacted. Over the medium to long term, the impact on commercial real estate
Real Estate Underweight could be even more significant as companies bring sweeping changes to their business models or
significantly reduce expansion plans. The residential space was sluggish and the current
slowdown will further aggravate the challenges of the sector.
The specialty chemicals sector of India has been one of the sunrise sectors of India. India has
been gaining global market share in the space because of India’s capabilities in the space and
supply chain realignment from China to India. We believe that Indian companies could gain
ground further as companies would want to reduce dependence on China after the COVID19
pandemic and shift their supply chains. Apart from the long-term theme of shift in supply chain,
Specialty Chemicals Overweight
the manufacturing of many specialty chemicals is part of essentials and the facilities have started
opening up. The decline in raw materials prices could also help the margins and reduce working
capital needs, however, input costs are a pass through for most companies and benefits could be
limited. Overall the specialty chemicals industry is likely to continue to perform well in the medium
term. We recommend an overweight stance on the sector.
Telecom has become the most critical sector during the current challenging times to keep the
businesses up and running. Even before the COVID19 outbreak, the sector was seeing improved
Telecom Overweight pricing environment. Price growth in the sector has sustained unlike the past instances and more
likely to improve in the forthcoming quarters. The industry is highly consolidated with two strong
and one weak player in the wireless space. We recommend an overweight stance for the sector.
Axis Top Picks Idea
WHY INVEST IN EQUITY MARKETS DURING UNCERTAIN TIMES?
New adversity but similar outcomes seen instances of significant corrections like 2004 or 2011. Apart from
these challenges there have enough jolts and resets to Indian economy
Every new adversity brings bigger challenges but it also brings bigger
because of policy paralysis, demonetization and GST implementation.
opportunities. While every crisis is different but the outcomes in the equity
The memory of such corrections and reactions of the market post such
markets are quite similar. Asset prices decline, pessimism rises and lower
corrections does provide the market with some coping ability to weather
valuations become normal. Stocks marked by poor corporate governance,
the perfect storm which has built now. The coping ability also means that
balance sheet issues; weak accounting practices and poor management
the margin for error reduces and market recovery could be faster as
quality lose the most and mostly do not recover in the future.
investors are able to price the risks better.
Nifty 50
14,000
Nifty Returns
12,000
100 81
67 74
10,000 80
60
8,000 40 24 27
18 19
20
15 12 11 7 10 15
6,000 32% decline during 0
COVID 19
outbreak -20 -2 -9 -9
4,000
-13
41% decline during
-40 -25 -26
Dot.com bubble 55% decline during -60 -36
the 2008 Great
2,000 Financial Crisis
Mar-01
Mar-02
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-20
Mar-03
Mar-04
Mar-05
Mar-06
Mar-16
Mar-17
Mar-18
Mar-19
0
Dec-03
Dec-10
Dec-17
May-03
May-10
May-17
Apr-06
Apr-13
Apr-20
Jan-01
Mar-02
Jan-08
Mar-09
Jan-15
Mar-16
Jul-04
Jul-11
Jul-18
Oct-02
Feb-05
Oct-09
Feb-12
Oct-16
Feb-19
Nov-06
Nov-13
Sep-05
Jun-00
Sep-12
Sep-19
Jun-07
Jun-14
Aug-01
Aug-08
Aug-15
Source: NSE, Axis Securities
Source: Company, Axis Securities Resilient economy but recovery will be gradual
Markets have memory Indian economy has shown lot of resilience through various crises. For
However, as economies stabilize equity markets recover. Thus, as the FY21 the GDP growth rate is likely to be flattish with reasonable chances
near term outcomes of any adversity are similar, so are the long-term of a recession. While India needs a major boost through a stimulus
outcomes of market recovery, the only variable tends to be the time taken. package but our ability to print money like developed economies because
The current market has one big advantage of having most participants of inflation and deficit challenges are limited. Nonetheless, the government
who have witnessed 3 major bear cycles of 2000, 2008 and now 2020. has surprised in the past by providing windfall gains like the corporate tax
Apart from these three major bear markets, the Indian stock markets have rate cut in September 2019 notwithstanding a sluggish economy.
Axis Top Picks Idea
GDP Growth%
12.0
9.8 10.3
10.0 9.3 9.3
8.5
8.0 8.3
8.0 7.4 7.0
6.6 6.4 6.1
6.0 5.5
3.9 4.0
4.0
2.0 0.8
0.0
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Source: MOSPI, Axis Bank, Axis Securities
Source: Reuters, Axis Securities
Crude Bonanza
Even in the current global set up, low crude oil prices are a bonanza to
Indian market which brings forth much more tangible long-term benefits.
Interest rates are one of the lowest in India since 2004, commodity
prices are lower and corporate taxes have been lowered. Thus, the
broad framework for the Indian equity markets is quite encouraging.
Source: RBI, Axis Securities
Axis Top Picks Idea
Strong become stronger While the 2008 GFC crisis does not bear any similarity to the current market
Every adversity has brought forth far more opportunities than challenges but the fall in stock prices has been quite sharp and reactions
challenges for long-term investors. This market has also brought solid were quite similar. Table 1 illustrates the fall of top 10 stocks by market
opportunities for a whole host of Industries. Even as there are capitalization. While, we can debate on the extent of fall but the results have
challenges in BFSI, Cyclicals and large Consumer durables industries been quite similar. Even the best of the stocks see corrections as panic and
but so are the opportunities in the Digital and Telecom industry, for volatility increase the market risk premium.
large Private banks, Pharmaceuticals, Consumer staples, Global supply Table 1
chains and small ticket consumer discretionary. On long-term basis Sr. No. Company name 2008 fall (%) 2020 fall (%)
even the opportunities for Cyclicals seem quite encouraging as the 1 Reliance Industries Ltd -66.6 -45.1
current challenges have elements similar to 2000 bust and the ensuing
2 TCS -62.8 -27.9
investment cycle. Even in such a challenging market, Reliance
Industries has struck a deal with Facebook for its telecom subsidiary Jio 3 Hindustan Unilever Ltd -22.4 -32.4
of US$ 5.7bn for 9.9% equity stake. Bear markets provide valuation 4 HDFC Bank Ltd -54.0 -41.1
support to long term investors as PE re-rating provides almost half the
5 HDFC -59.4 -39.8
returns. Currently, the market is trading at 1 standard deviation below
its long term average. During stressed times of 2008 GFC the market 6 Bharti Airtel Ltd -52.3 -42.7
has toughed 2 standard deviations below its long-term average but 7 Infosys Ltd -48.1 -37.3
those corrections do not last very long and smart money moves very 8 ICICI Bank Ltd -77.4 -48.3
fast to capture such opportunities.
9 ITC Ltd -35.6 -47.5
Nifty PE Mean Mean+1Stdev 10 Kotak Mahindra Bank Ltd -79.2 -36.5
33 Mean+2Stdev Mean-1Stdev Mean-2Stdev
Source: Capital line, Axis Securities
28 Post the fall in 2008 the top ten companies by market capitalisation which
range from Consumer, IT, Oil and Gas, Telecom and financials have
23
delivered mean return of 20%. Table 2 illustrates the stock returns for top
18
10 stocks by market capitalisation post. The stock list is highly diversified
13 across industry and returns are quite superlative. Also, it is important to
8 note that even if these stocks were purchased 20%-30% from the bottom
Apr-09
Apr-10
Apr-12
Apr-13
Apr-15
Apr-16
Apr-18
Apr-11
Apr-14
Apr-17
Apr-19
Apr-20
then also the returns to investors would have been quite healthy of ~17%.
Source: Capital Line, Axis Securities
Axis Top Picks Idea
Table 2
Table 3
Sr. 2008 CAGR
Company name CMP
No fall returns 10 Year Returns
Sr. No. Co_Name Sector
(%)
1 Reliance Industries Ltd 255 1,450 17
1 Bajaj Fin. Finance 6,914
2 TCS 110 1,903 30
2 Eicher Motors Automobile 1,868
3 Hindustan Unilever 184 2,050 24 3 Britannia Inds. FMCG 1,503
4 HDFC Bank Ltd 82 940 25 4 Bajaj Finserv Finance 1,229
5 HDFC 257 1,721 19 5 Titan Company Diamond, Gems & Jew. 900
6 Hind. Unilever FMCG 846
6 Bharti Airtel Ltd 247 544 7
7 Asian Paints Paints/Varnish 693
7 Infosys Ltd 136 667 16 8 Shree Cement Cement 599
8 ICICI Bank Ltd 56 337 18 9 Kotak Mah. Bank Banks 533
9 ITC Ltd 49 164 12 10 Nestle India FMCG 478
10 Kotak Mahindra Bank 73 1,240 29
This time is no different!
Mean 20
There is no debate on that the current crisis is a very different humanitarian
and economic crisis, not experienced by most living people in the world but
economies recover with passage of time. While the economic recovery
Right assets; best returns
could be more gradual than some of the current predictions but the spirit of
While the top 10 companies by market capitalisation have delivered
human entrepreneurship knows no bounds. There will be innovations
solid returns but right asset allocation with a bend towards consumer
across sectors. Companies with strong balance sheets, high corporate
facing companies have delivered returns significantly above the market.
governance standards, and solid business models will gain and deliver
Table 3 highlights the top 10 companies in Nifty 50 index and their
double digit returns to shareholders.
returns in the last 10 years. Apart from these stocks there are many
other BFSI, Consumer and IT companies which have delivered So, this is the time to invest, own concentrated portfolios of strong
superlative returns. Needless to say some of the concentrated holding companies. The themes of Digital, Telecom, Supply chain realignment,
portfolios with solid business models have not just managed to beat the formalization, Staple, small ticket discretionary and large private banks will
index but create immense wealth for investors. continue to generate returns for shareholders.
ICICI BANK (ICBK.NS) – WELL POSITIONED FOR GROWTH
ICICI Bank (ICICIBC) is amongst the largest private sector bank in India with business operations spread across Retail, Industry view
Corporate, and Insurance etc. It is supported by a strong liability franchise and retail corporate mix of ~63/25%. It subsidiaries
ICICI Venture Funds, ICICI Pru AMC, ICICI Securities, ICICI Prudential and ICICI Lombard are amongst the leading companies
in their respective segments..
Key Rationale Key Rationale Underweight

 ICICIBC’s incremental additions to GNPAs, especially in  At Inflection point: We maintain our positive view on ICICI
corporate have come down in last couple of quarters. Its pool of Bank and believe that the recent price correction offers another
stressed loans has come off sharply to 2.8% vs. ~14% in FY16. attractive entry point into the stock. We believe ICICIBC offers CMP
Also, retail are broadly in line with best-in-class players, the best risk-reward among our bank coverage given a healthy, 343
reflecting cyclical rather than underwriting issues in FY20. The sustainable earnings outlook. Asset quality is likely to strengthen
bank has hiked NPA coverage to ~76% in Q3 and hence ageing following large NPA recognition in the past and limited exposure Target Price
related provisions are likely to reduce. This should aid a sharp to recent stressed loan cases. A strong liability profile, better
500
drop in credit cost to and hence a surge in earnings. asset mix, and healthy CAR could make ICICIBC well positioned
 ICICIBC has a robust funding franchise and its cost of funds at to come through this challenging period with relatively lower
Upside
~5% is amongst the lowest in its peer set, implying low risk of degree of stress
46%
adverse portfolio selection. Scale-up of unsecured portfolio and  Valuation: We expect lower cost of funds, steady NIM,
a higher share of domestic loans should support strong NIM improving cost to income to aid ROAA expansion to 1.55% by
 Key risks: Significant deterioration in retail asset quality, Delay FY22E. We lower estimates and value the core book at 1.8x
in resolution of stressed assets P/BV vs 2.2x earlier to factor in sector-wide Covid-19 concerns.
We arrive at target price of Rs 500 (on SOTP basis).
Key Financials (Standalone)

Y/E Mar NII PPOP PAT EPS ABV NNPA P/ABV RoAA
(Rs Cr) (Rs) (Rs) (Rs) (Rs) (Rs) (%) (x) (%)
FY19 27,015 23,438 3,363 5.2 138.2 2.1 2.0 0.4
FY20E 31,420 25,947 10,994 17.1 150.5 1.8 2.3 1.1
FY21E 36,053 27,078 16,749 26.0 168.8 1.8 2.0 1.4
FY22E 38,832 32,992 21,667 33.6 194.4 1.7 1.6 1.5
Source: Company, Axis Securities
This reflects the views of the Axis Securities Limited 10

Income Statement (Rs Cr) Balance Sheet (Rs Cr)

Y/E March FY19 FY20E FY21E FY22E Y/E March FY19 FY20E FY21E FY22E
Interest Earned 63,401 74,466 83,641 94,982 SOURCES OF FUNDS
Interest Expended 36,386 43,046 47,588 56,149 Share Capital 1,289 1,289 1,289 1,289
Net Interest Income 27,015 31,420 36,053 38,832 Reserves 107,074 113,823 126,327 143,750
Other Income 14,512 15,762 12,211 19,346 Shareholder's Funds 108,363 115,112 127,617 145,039
Total Income 41,527 47,182 48,264 58,178 Savings 227,671 268,652 317,009 374,071
Total Operating Exp 18,089 21,235 21,186 25,186 Current 96,269 110,710 127,316 146,414
Employee Expense 6,808 7,780 8,039 8,275 Term Deposit 328,979 391,485 465,868 554,383
PPOP 23,438 25,947 27,078 32,992 Total Deposits 652,920 770,847 910,193 1,074,867
Provisions & Contingencies 19,661 11,482 4,746 4,103 Borrowings 165,325 186,301 210,048 236,947
PBT 3,777 14,465 22,332 28,890 Other Liabilities & Provisions 37,851 41,629 45,784 50,355
Provision for Tax 413 3,472 5,583 7,222 Total Liabilities 964,459 1,113,889 1,293,642 1,507,208
PAT 3,363 10,994 16,749 21,667
Interest Earned 63,401 74,466 83,641 94,982 APPLICATION OF FUNDS
Interest Expended 36,386 43,046 47,588 56,149 Cash & Bank Balance 80,296 106,165 168,427 236,849
Net Interest Income 27,015 31,420 36,053 38,832 Investments 207,733 253,943 290,280 333,031
Other Income 14,512 15,762 12,211 19,346 Advances 586,647 659,325 735,539 832,708
Total Income 41,527 47,182 48,264 58,178 Fixed Assets 7,931 8,130 8,333 8,541
Total Operating Exp 18,089 21,235 21,186 25,186 Other Assets 81,852 86,326 91,063 96,077
Employee Expense 6,808 7,780 8,039 8,275 Total Assets 964,459 1,113,889 1,293,642 1,507,208
PPOP 23,438 25,947 27,078 32,992 Source: Company, Axis Research
Provisions & Contingencies 19,661 11,482 4,746 4,103

PBT 3,777 14,465 22,332 28,890
Provision for Tax 413 3,472 5,583 7,222
PAT 3,363 10,994 16,749 21,667
Source: Company, Axis Research

Valuation ratios (%) Balance Sheet Structure Ratios (%)

EPS 5.2 17.1 26.0 33.6 Loan Growth (%) 14.5 12.4 11.6 13.2
Earnings growth (%) (50.4) 226.9 52.4 29.4 Deposit Growth (%) 16.4 18.1 18.1 18.1
C/D Ratio (%) 89.8 85.5 80.8 77.5
BVPS 168.1 178.5 197.9 225.0
Equity/Assets (%) 11.2 10.3 9.9 9.6
Adj. BVPS 138.2 150.5 168.8 194.4
Equity/Advances (%) 18.5 17.5 17.4 17.4
ROAA (%) 0.36 1.06 1.39 1.55
CASA (%) 49.6 49.2 48.8 48.4
ROAE (%) 3.2 9.8 13.8 15.9 Total Capital Adequacy Ratio
16.9 15.5 14.7 14.2
P/E (x) 53.3 19.9 13.0 9.2 (CAR)
Tier I CAR 15.1 13.9 13.3 13.1
P/ABV (x) 2.0 2.3 2.0 1.6
P/PPOP (x) 1.9 1.7 1.6 1.3
ASSET QUALITY
Dividend Yield (%) 0.3 0.6 0.6 0.6
Gross NPLs 46,290 43,240 45,585 47,266
Net NPLs 12,938 12,037 13,061 14,281
PROFITABILITY Gross NPLs (%) 6.7 6.6 6.2 5.7
Yield on Advances (%) 8.7 9.3 9.2 9.3 Net NPLs (%) 2.1 1.8 1.8 1.7
Yield on Investment (%) 6.2 5.0 5.0 5.0 Coverage Ratio (%) 72.1 72.2 71.3 69.8
Cost of Funds (%) 4.7 4.8 4.6 4.6 Provision/Avg. Loans (%) 3.1 1.8 0.7 0.5
Cost of Deposits (%) 4.4 4.0 3.6 3.7
ROAA TREE
NIM (%) 3.4 3.5 3.5 3.4
Net Interest Income 2.93% 3.02% 3.00% 2.77%

OPERATING EFFICIENCY
Non Interest Income 1.57% 1.52% 1.01% 1.38%
Cost/Avg. Asset Ratio (%) 2.0 2.0 1.8 1.8 Treasury Income 0.15% 0.13% 0.11% 0.10%
Cost-Income Ratio (Excl
45.0 46.3 45.1 44.3 Operating Cost 1.96% 2.04% 1.76% 1.80%
Treasury)
Provisions 2.13% 1.10% 0.39% 0.29%
Provisions for NPAs 1.82% 1.08% 0.37% 0.27%
Tax 0.04% 0.33% 0.46% 0.52%
ROAA 0.36% 1.06% 1.39% 1.55%
Leverage (x) 8.63 9.30 9.92 10.27
ROAE 3.15% 9.84% 13.80% 15.89%

MANNAPURAM FINANCE (MNFL.NS) – CONTINUE TO SHINE
Manappuram Finance (MGFL) is amongst the leading gold loan NBFCs in India and is well diversified into other business Industry view
segments like housing loan, vehicle loan and microfinance, with a branch network size of around 4,623 spread across the
country.

 For MGFL, online gold loan now make up 47% of the total gold  High ROE business: We believe MGFL can sustain its
book, which is a positive as collections/repayments would be performance in critical business environment which has been tough CMP
insulated from the complete branch-shutdown to a large extent. for most NBFCs due to its well matched ALM profile, strong liquidity, 124
Extending the same facility to offline gold loan customers should cost controls, stable asset quality and tailwind from high gold prices.
also augur well from an asset quality standpoint. Though the Even during in the ongoing uncertain environment, it has been able Target Price
Company has offered moratorium to its clients, it has not received to raise funds. at competitive rates. While there could be near term 168
any request for the same as disclosed in the management call. impact on the non-gold business, we expect that it will pick up as
 From a liquidity perspective, the balance sheet position is macros normalize. Upside
comfortable as of now. Quantum of undrawn bank lines stands at  Valuation: We expect asset quality to be slightly under pressure in 36%
~Rs1000cr. Besides this, the company has raised resources from FY21 due to non gold segment especially MFI portfolio but recovery
various avenues, including offshore markets, NCDs, banks and to happen in FY22. Management has reiterated that it wants to
financial institutions. Share of CPs stands at 15%. bring down the share of gold AUM to 50%. The stock has gained
 Key risks: Near term asset quality risk in MFI portfolio, Business post the recent correction and trades of 1.3x FY22E ABV. We
slowdown in non-gold portfolio due to Covid-19 believe for a potential high ROE business of ~25%, valuations are
attractive still and assign a target of Rs 168 (1.6x FY22E ABV)
Key Financials (Consolidated)

Y/E Mar NII PPOP PAT EPS ABV NNPA P/ABV RoAA
(Rs Cr) (Rs) (Rs) (Rs) (Rs) (Rs) (%) (x) (%)
2019 2,693 1,474 930 11.0 52.2 0.7 2.4 5.0
2020E 3,441 2,162 1,488 17.7 67.4 0.5 1.8 6.4
2021E 3,747 2,296 1,606 19.1 82.2 1.2 1.5 6.1
2022E 4,378 2,824 2,002 23.8 104.7 0.5 1.2 6.5

Income Statement (Rs Cr) Balance Sheet (Rs Cr)

Interest Earned 4,012 5,111 5,687 6,589 Sources of Funds
Interest Expended 1,319 1,671 1,940 2,212 Share Capital 169 169 169 169
Net Interest Income 2,693 3,441 3,747 4,378 Reserves 4,356 5,625 7,060 8,889
Other Income 167 243 252 301 Shareholder's Funds 452 579 723 906
Total Income 2,860 3,684 3,999 4,679 Borrowings 15,297 18,357 20,468 23,743
Total Operating Exp 1,386 1,521 1,702 1,855 Other Liabilities & Provisions 586 467 500 546
Employee Expense 720 822 934 1,008 Total Liabilities 2,045 2,467 2,823 3,340
Other Operating Expense 666 699 768 847
PPOP 1,474 2,162 2,296 2,824 Application of Funds
Provisions & Contingencies 46 154 155 153 Cash & Bank Balance 1,164 839 962 1,141
PBT 1,427 2,009 2,141 2,671 Investments 174 174 172 171
Provision for Tax 498 520 535 668 Advances 17,812 22,073 25,325 30,038
PAT 930 1,488 1,606 2,002 Fixed Assets 367 422 484 555
Source: Company, Axis Research Other Assets 937 1,160 1,290 1,495
Total Assets 2,045 2,467 2,823 3,340

Valuation ratios (%) Balance Sheet Structure Ratios (%)

EPS 11.0 17.7 19.1 23.8 Loan Growth (%) 16.8 23.9 14.7 18.6
Earnings growth (%) 37.5 60.5 7.9 24.7 Total Capital Adequacy Ratio
23.7 22.4 21.6 21.2
(CAR)
BVPS 53.7 68.7 85.8 106.5
Tier I CAR 23.3 21.9 21.1 20.8
Adj. BVPS 52.2 67.4 82.2 104.7
ROAA (%) 5.00 6.40 6.10 6.50
ASSET QUALITY
ROAE (%) 22.3 28.1 24.7 24.6
Gross NPLs (%) 1.2 1.0 2.4 1.2
P/E (x) 11.3 7.0 6.5 5.2
Net NPLs (%) 0.7 0.5 1.2 0.5
P/ABV (x) 2.4 1.8 1.5 1.2
Coverage Ratio (%) 40.8 45.9 51.1 55.2
Credit Cost(%) 0.3 0.8 0.7 0.6
PROFITABILITY Source: Company, Axis Research
Yield on Advances (%) 24.3 25.5 24.0 23.8
Cost of Funds (%) 9.5 10.0 10.0 10.0
NIM (%) 16.3 17.1 15.8 15.8
OPERATING EFFICIENCY
Cost/Avg. Asset Ratio (%) 48.5 41.7 42.6 39.6
Cost-Income Ratio (Excl
8.4 7.6 7.2 6.7
Treasury)

VARUN BEVERAGES LTD (VARB NS) – VALUATIONS ATTRACTIVE
VBL is the 2nd largest franchisee for PepsiCo in the world (outside USA). Products manufactured by VBL include Carbonated Industry view
Soft Drinks - Pepsi, Mountain Dew, Seven Up, Mirinda; Non Carbonated Beverages - Tropicana Slice, Tropicana Frutz; and
Bottled water – Aquafina. It operates in India and is also the exclusive bottler for PepsiCo in Nepal, Sri Lanka, Morocco,
Zambia and Zimbabwe.
Key Rationale Key Rationale Equal weight

 Low per capita soft drink consumption in India of just 44 bottles as  Outlook: We believe VBL has multiple catalysts to grow given 1)
of 2016 as compared to 271 bottles in China, 1,496 bottles in USA low product ticket size should help faster recovery in volumes CMP
and 1,489 bottles in Mexico offers immense scope for growth from compared to other discretionary items, 2) highly underpenetrated 615
deeper penetration of soft drinks in India. soft drinks, juices category in India with immense scope to grow in
 Strong associates with PepsiCo of over 28 years. VBL is now a rural areas, 3) no major capex going ahead to result in debt
Target Price
critical partner in PepsiCo India’s growth aspirations as it now has reduction backed by healthy cash generation
80% share in PepsiCo’s India volumes from 45% in CY15.  Valuation. We expect VBL to register Revenues/Earnings CAGR of
804
 It is one of the leading players in the Indian CSD market owing to its 13%/30% respectively over CY19-21E. This growth will be driven by
end-to-end execution capabilities and presence across entire 1) consolidation in newly acquired territories, 2) market share gains Upside
beverage value chain. led by distribution, 4) cost efficiencies and 5) improving asset turns. 31%
 COVID-19 to impact near term sales given higher drag from OOH VBL’s EBITDA Margin stood at 20.3% in CY19 (highest in bottling
business, we believe there still are multiple medium term growth industry). The stock trades at 10.9x EV/EBITDA on CY21E basis.
catalysts 1) sustained gains from consolidation of South and West  Key risks: seasonality, change in concentrate pricing, lockdown
territories, 2) portfolio diversification with increased contribution extension to hurt peak season sales (50% OOH* consumption).
from NCB (juices/water) portfolio, 3) ability to sustain margins given
tailwinds from new Pathankot facility and lower input costs (drop in
crude prices).
Y/E Dec Net EBIDTA Net EPS PER EV/EBIDTA P/BV ROE
(Rs Cr) Sales (Rs C) Profit (Rs) (x) (x) (x) (%)
CY18 5,105 1,007 300 10.7 49.1 11.8 4.8 15.9
CY19 7,130 1,448 472 16.8 42.1 15.9 6.1 17.6
CY20E 6,895 1,400 440 15.3 40.8 14.4 4.7 12.4
CY21E 8,684 1,850 771 26.7 23.3 10.4 4.0 18.9
Source: Company, Axis Securities; * OOH – Out-of-Home

Profit & Loss (Rs Cr) Balance Sheet (Rs Cr)

Y/E DEC CY18 CY19 CY20E CY21E Y/E DEC CY18 CY19 CY20E CY21E
Share Capital 183 289 289 289
Total Net Sales 5,105 7,130 6,895 8,684
Reserves & Surplus 1,816 3,040 3,423 4,086
Total Raw material Consumption 2,244 3,219 3,020 3,786 Net Worth 2,006 3,359 3,742 4,405
Staff costs 583 811 848 1,025 Total Loan funds 2,358 2,823 2,523 2,223
Other Expenditure 1,272 1,652 1,627 2,023 Deferred Tax Liability 192 283 283 283
Long Term Provisions 105 170 160 200
Total Expenditure 4,099 5,682 5,495 6,834
Capital Employed 4,668 6,635 6,708 7,111
EBITDA 1,007 1,448 1,400 1,850 Net Block 3,860 5,893 5,837 5,742
Depreciation 385.1 488.6 546.0 574.2 Investments 32 45 44 55
Sundry Debtors 128 173 246 262
EBIT 622 959 854 1,276
Cash & Bank Bal 93 171 187 734
Interest 213 310 277 244 Inventory 578 882 662 830
Other Income 22 43 31 35 Other Current Assets 199 440 425 536
PBT 434 696 612 1,070 Total Current Assets 1,141 1,672 1,527 2,368
Curr Liab & Prov 1,363 1,753 1,571 1,962
Tax 134 224 171 300
Net Current Assets (222) (81) (44) 407
APAT 300 472 440 771 Total Assets 4,668 6,635 6,708 7,111
Source: Company, Axis Research Source: Company, Axis Research

Cash Flow (Rs Cr) Ratio Analysis (%)

Cash Flow CY18 FY19 CY20E CY21E Key Ratios CY18 CY19 CY20E CY21E
PBT 434 696 612 1,070 Growth (%)
Depreciation & Amortization 385 489 546 574 Net Sales 27.5% 39.7% -3.3% 25.9%
Provision for Taxes 199 295 277 244 EBITDA 20.4% 43.8% -3.3% 32.1%
Chg in Deferred tax 109 35 - - APAT 39.9% 57.5% -6.7% 75.0%
Chg in Working cap (50) (85) (31) 126 Per Share Data (Rs.)
Diret tax paid (73) (120) (171) (300) Adj. EPS 10.7 16.8 15.3 26.7
Cash flow from operations 1,003 1,310 1,233 1,715 BVPS 109.8 116.4 129.6 152.6
Profitability (%)
Chg in Gross Block (859) (754) (583) (515) EBITDA Margin 19.7% 20.3% 20.3% 21.3%
Chg in Investments (49) (1,625) - - Adj. PAT Margin 5.9% 6.6% 6.4% 8.9%
Chg in WIP 34 68 - - ROCE 14.3% 17.0% 12.8% 18.5%
Cash flow from investing (873) (2,311) (583) (515) ROE 15.9% 17.6% 12.4% 18.9%
Valuations (X)
Proceeds / (Repayment) of Short PER 49.1 42.1 40.3 23.0
1,400 560 - -
Term Borrowings (Net) P/BV 4.8 6.1 4.7 4.0
Repayment of Long Term
(1,246) 46 - - EV / EBITDA 11.8 15.9 14.4 10.4
Borrowings
Loans Repayment - - (300) (300) EV / Net Sales 2.3 3.2 2.9 2.2
Finance Cost paid (189) (301) (277) (244) Turnover Days
Dividends paid (46) (69) (57) (108) Asset Turnover 0.9 1.0 0.8 1.0
Dividend Distribution Tax paid (5) (9) - - Inventory days 82.7 82.8 93.3 71.9
Cash flow from financing (84) 1,110 (635) (652) Debtors days 9.9 7.7 11.1 10.7
Chg in cash 45 100 16 547 Creditors days 41.3 45.0 51.4 40.4
Cash at start 1 42 171 187 Working Capital Days 51.4 45.4 53.0 42.1
Cash at end 46 142 187 734 Gearing Ratio
Source: Company, Axis Research Debt: Equity (x) 1.2 0.8 0.7 0.5
Net Debt to Equity 1.1 0.8 0.6 0.3

ESCORTS LTD (ESCO.NS) – GEARED UP FOR GROWTH
Escorts Ltd is the 4th largest manufacturer of tractors in India with presence in three business segments, i.e. agri-machinery Industry view
(EAM), construction equipment (ECE) and railway equipment division (RED). It has a strong presence in north and central
regions and in 31-50HP (Horse Power) in the agri-machinery business.
Key Rationale Key Rationale Overweight

 Product overhaul of its premium farmtrac brand in terms of comfort,  Strong debt free balance sheet: Escorts has a strong debt free
look and performance will drive market share gains in its strong balance sheet with nearly Rs 300 cr of cash on books and with CMP
central and northern markets while its focus on network expansion Kubota deal, Escorts will have sufficient cushion to navigate near 720
in south will help it gain footing in southern markets term challenges and deploy capital for superior expansion
 Acquisition of10%equity stake (~Rs 1000 cr) by Kubota Japan, one  Outlook: We believe that 1) relative cushion from COVID-19 as its
Target Price
of the largest tractor producers in the world puts Escorts on a demand market is rural, 2) expectation of a normal monsoon, 3)
launch pad for significant exports and operational efficiencies. government’s focus on farmer support and income 4)its strategic
880
Moreover, Kubota’s expertise in southern markets would help partnership with Kubota and 5) its robust financials make it a strong
Escorts build a stronger footprint in its weaker regions contender for market share gain and outperformance in the tractor Upside
 Escorts’ 80% + revenue comes from agri-machinery segment and segment 22%
COVID 19’s limited impact in rural should provide a relative cushion  Valuation. We expect annual revenues to grow by 6% y/y and 14%
to overall demand of tractors. Moreover, with a record monsoon last y/y in FY21E and FY22E, respectively. EPS is expected to grow at
year and recent estimates given by IMD of normal monsoon in healthy 10% y/y and 19% y/y for FY21E and FY22E, respectively.
CY20, we expect growth in tractor sales for this year despite a The company has gained market share and improved EBITDA
month of lockdown margins significantly in past few years and has an RoCE of ~17%
 Key risks: Lockdown extension, weak monsoons and trades at 9.7x P/E on FY22E EPS

Y/E Mar Net EBIDTA Net FDEPS PER EV/EBIDTA P/BV RoCE
(Rs Cr) Sales (Rs C) Profit (Rs) (x) (x) (x) (%)
FY19 6,262 725 478 55.7 12.9 11.9 2.4 23.4
FY20E 5,759 654 482 56.2 12.8 12.9 2.1 17.8
FY21E 6,096 697 531 61.9 11.6 11.7 1.8 17.8
FY22E 6,938 845 630 73.5 9.8 9.3 1.5 18.3


Net sales 6,262 5,759 6,096 6,938 Total assets 2,790 3,210 3,698 4,283
Total income 6,262 5,759 6,096 6,938 Net Block 1,647.6 1,799.4 1,842.3 1,878.7
CWIP 56.6 51.0 50.0 50.0
Cost of goods sold 5,305 4,885 5,171 5,835 Investments & Other Assets 215.5 228.2 240.3 252.3
Contribution (%) 15.3% 15.2% 15.2% 15.9% Wkg. cap. (excl cash) 594 729 890 1,098
Advt/Sales/Distrn O/H 232.7 219.4 228.6 258.1 Cash / Bank balance 243.3 367.3 640.4 967.8
Misc. Assets 32.5 34.3 35.4 36.5
Operating Profit 725 654 697 845
Other income 92 78 128 113 Capital employed 2,790 3,210 3,698 4,283
Equity capital 122.6 122.6 122.6 122.6
PBIDT 817 732 825 958 Reserves 2,888 3,332 3,818 4,399
Depreciation 87 103 108 114 Treasury Stock (337.2) (337.2) (337.2) (337.2)
Interest & Fin Chg. 20 14 10 6 Minority Interests 5.6 5.6 5.6 5.6
E/o income / (Expense) 6 9 0 0 Long Term Debt 32 4 4 4
Pre-tax profit 716 625 707 839 Def tax Liabilities 52.9 57.1 60.1 63.1
Tax provision 237 144 177 210 Others 26 26 26 26
(-) Minority Interests (2) 0 0 0 Source: Company, Axis Research
Associates 1 1 1 1
Reported PAT 482 482 531 630
Adjusted PAT 478 475 531 630


Sources 789 404 568 669 Sales growth 23.8 (8.0) 5.9 13.8
Cash profit 585 597 648 749
(-) Dividends 29 37 45 47 OPM 11.6 11.4 11.4 12.2
Retained earnings 556 560 604 701 Oper. profit growth 30.9 (9.7) 6.5 21.2
Issue of equity 0.0 0.0 0.0 0.0 COGS / Net sales 84.7 84.8 84.8 84.1
Change in Oth. Reserves (31.5) 0.0 0.0 0.0 Overheads/Net sales 3.7 3.8 3.8 3.7
Borrowings 263 (158) (40) (40) Depreciation / G. block 3.4 3.6 3.6 3.6
Others 1 1 4 8 Effective interest rate 11.5 6.1 8.0 7.2
NPM 7.7% 8.4% 8.7% 9.1%
Applications 789 404 568 669 Net wkg.cap / Net sales 0.08 0.15 0.15 0.15
Capital expenditure 188.5 261.7 162.1 162.0 Net sales / Gr block (x) 2.4 2.0 2.0 2.2
Investments (51.2) (3.3) 75.5 105.9
Net current assets 725.9 21.4 57.1 73.7 RoCE 23.4 17.8 17.8 18.3
Change in cash (74.0) 124.0 273.1 327.4 Debt / equity (x) 0.12 0.05 0.03 0.02
Source: Company, Axis Research Effective tax rate 33.1 23.0 25.0 25.0
RoE 17.8 15.4 14.8 15.2
Payout ratio (Div/NP) 6.1 7.7 8.4 7.5
EPS (Rs.) 55.7 56.2 61.9 73.5

EPS Growth 37.9 0.9 10.2 18.6
CEPS (Rs.) 65.9 68.2 74.5 86.7
DPS (Rs.) 2.8 3.6 4.3 4.6

MINDA INDUSTRIES LTD (MNDA.NS) – BEST PLAY FOR INDUSTRY REVIVAL
Minda Industries (MNDA) is the largest supplier of switches, acoustics and alloy wheels (PV segment) and is a top 2 player in Industry view
lighting and safety air-bags in the automotive Industry. MNDA has 62 manufacturing plants and 8 R&D centres across the
globe. Group is headquartered in Manesar, Haryana, India.

 New product lines to aid margin and growth. Increasing  Long-term industry outperformance to continue. We are bullish
contributions from high margin, new product lines like sensors & on MNDA’s ability to comprehensively outperform the industry 1) CMP
controllers, air bags, telematics and alloy wheels will fare well and leveraging the broader vehicular trends of industry like EV, 258
ride on the premiumization trend that both the 2W and PV segment premiumization, automation 2) strategic inorganic acquisition to
have been witnessing for the past few years enhance product offering and gain market share 3) maintaining Target Price
balance sheet discipline and maintain optimal leverage,4) investing
318
 Strategic acquisitions have enhanced its offerings. The recent
acquisition at an attractive 12X FY19 P/E of Harita Seatingis is a In R&D to bring technological change 5) tap on its deep rooted
Upside
strategic fit for MNDA as it enhances its product offering while relationship with OEM’s to increase kit value
23%
helping it to make inroads into Harita’s clientele. The Delvis  Valuation. We expect annual revenue to grow at14.5% CAGR over
acquisition provides a much needed expertise in the LED head light FY20E-22E. Expect EPS to grow robustly at 35% y/y and 32% y/y
technology to make inroads in new PV models of leading OEMs for FY21E and FY22E. The company trades at 23.8x FY22E P/E
 Key risks: Subdued demand for PV and 2W, rising interest burden multiples and will continue to command premium valuation due to
and elongated global supply chain disruption an unmatched product offering among auto ancillaries and long
history of superior growth

Y/E Mar Net Sales EBIDTA Net EPS PER EV/EBIDTA P/BV ROE
(Rs Cr) (Rs Cr) (Rs Cr) Profit (Rs) (x) (x) (x) (%)
2019 5,908 752 285 10.9 23.7 9.6 4.0 19.7
2020E 5,468 619 174 6.6 38.8 11.8 3.7 10.5
2021E 6,274 720 200 7.6 33.8 10.0 3.4 11.2
2022E 7,179 861 309 11.8 21.9 8.2 3.1 15.6


Other operating income 27 27 31 36 Net Block 1,861.2 2,127.3 2,174.4 2,213.6
Net Revenue 5,935 5,495 6,305 7,215 CWIP 150.1 172.5 120.0 120.0
Investments 386.5 386.5 386.5 386.5
Cost of goods sold 4,952 4,648 5,340 6,074 Wkg. cap. (excl cash) 572 463 541 626
Contribution (%) 16.2% 15.0% 14.9% 15.4% Cash / Bank balance 132.1 254.6 443.7 644.7
Other operating costs 230.7 228.0 244.7 280.0 Misc. Assets 0.0 0.0 0.0 0.0
EBITDA 752 619 720 861 Capital employed 3,102 3,404 3,666 3,991
Other income 0 0 0 0 Equity capital 52.4 52.4 52.4 52.4
Reserves 1,652 1,771 1,909 2,153
PBIDT 752 619 720 861 Pref. Share Capital 0.0 0.0 0.0 0.0
Depreciation 234 309 353 361 Minority Interests 266.7 278.8 292.7 314.2
Interest & Fin Chg. 63 87 107 99 Borrowings 1,131 1,301 1,411 1,471
E/o income / (Expense) 0 0 0 0 Def tax Liabilities 0.6 0.8 0.9 1.0
Pre-tax profit 455 223 261 402 Source: Company, Axis Research
Tax provision 134 51 65 100

(-) Minority Interests 54 12 14 21
Associates 19 12 16 24
Adjusted PAT 286 172 197 304
Other Comprehensive Income (1) 3 3 5
Reported PAT 285 174 200 309


Sources 1,036 610 615 686 Sales growth 29.9 (7.5) 14.7 14.4
Cash profit 618 567 655 761
(-) Dividends 67 52 58 58 OPM 12.7 11.3 11.4 11.9
Retained earnings 551 515 597 703 Oper. profit growth 32.6 (17.8) 16.4 19.6
Issue of equity 35.0 0.0 0.0 0.0 COGS / Net sales 83.8 85.0 85.1 84.6
Change in Oth. Reserves 80.1 12.1 13.9 21.5 Overheads/Net sales 3.9 4.2 3.9 3.9
Borrowings 413 170 110 60 Depreciation / G. block 10.5 11.0 11.0 10.0
Others (43) (87) (107) (99) Effective interest rate 8.4 8.3 9.0 7.8
Applications 1,036 610 615 686 Net wkg.cap / Net sales 0.06 0.08 0.06 0.07
Capital expenditure 694.3 597.4 347.5 400.0 Net sales / Gr block (x) 2.6 1.9 2.0 2.0
Investments 199.9 0.0 0.0 0.0
Net current assets 187.0 (109.5) 78.1 85.0 RoCE 21.8 10.6 11.4 14.3
Change in cash (45.3) 122.5 189.1 201.0 Debt / equity (x) 0.61 0.67 0.68 0.63
RoE 19.7 10.5 11.2 15.6
EPS (Rs.) 10.9 6.6 7.6 11.8

EPS Growth (9.5) (38.9) 14.9 54.1
CEPS (Rs.) 19.8 18.4 21.1 25.5
DPS (Rs.) 2.2 2.0 2.2 2.2

AARTI INDUSTRIES LTD (ARTI.NS) – A PREFERRED PARTNER OF CHOICE
Aarti Industries Ltd. (AARTO) is the largest producers of Benzene based basic and intermediate chemicals in India. AARTO is Industry view
a preferred partner of choice for +1000 customers globally. It has a product basket of +200 products and operates through 17
manufacturing plants and 4 R&D centres in India. In terms of revenues mix Specialty Chemicals form 83% and Pharma 17% as
of 9MFY20 with exports forming 40% of revenues.

 Manufacturing operations at some plants that provide intermediates  Outlook: We believe acceleration of shift in supply chain
to AgroChem and Pharma continued during lockdown. As on April independent of China global chemical majors, long customer CMP
23, utilization across its plants improved and stood between 50- approval cycles, execution of multi-year deals, huge export 1,100
80%. Pharma segment contributed to 15-17% of total revenues. opportunities for organic and inorganic bulk chemicals &
 Phase 1 of the new Dahej project commissioned during Q4FY20 pharmaceuticals, large domestic opportunity augur well for specialty
Target Price
with few shipments exported to its global customers during the chemical companies in India including Aarti which could be a key
quarter. This along with other upcoming expansions is an beneficiary.
1,253
advantage to Aarti given its fully integrated operations.  Valuation. While, FY21E earnings would be impacted by COVID-
 4th R&D centre became operational in March and will enhance 19, we expect Aarti to report Revenue decline of 0.9% in FY21E Upside
Aarti’s reaction capabilities, expand product portfolio into Chloro and 24% growth in FY22E. Lower crude prices could partially offset 14%
Toulene products and additional downstream chemistries like photo the weak operating leverage thereby help protect Op. Margins in the
chlorination etc. With this R&D centre focus will be on supply chains near term. As a result we expect Aarti to report earnings de-growth
for value added products requiring multiple levels of synthesis and of 2.7% in FY21E and a growth of 36% in FY22E on the back of a
completely independent of intermediate supplies from China strong recovery in volumes. We expect a strong improvement in
 Key risks: Delay in commissioning of multiyear contracts, sharp FY22E ROE to 19% from a dip in FY21E owing to COVID-19 impact
slowdown in key end user industries, lockdown extension. on overall business.
FY19 4,706 967 492 28.2 26.8 15.0 5.0 22.8
FY20E 4,712 1,036 551 31.6 34.8 19.2 6.4 19.2
FY21E 4,670 1,045 536 30.8 35.8 19.1 5.6 16.5
FY22E 5,782 1,323 728 41.8 26.3 14.9 4.7 19.2


Total assets 5,217 5,621 6,167 6,851
Net sales 4,706 4,712 4,670 5,782 Net Block 2,147 2,963 3,614 3,985
Other operating income 2 9 9 11 CWIP 794.6 758.0 541.5 564.9
Total income 4,708 4,721 4,679 5,793 Investments 33.2 33.2 33.2 33.2
Wkg. cap. (excl cash) 1,438 256 372 387
Cost of goods sold 3,500 3,427 3,377 4,161 Cash / Bank balance 804.2 1,610.2 1,605.9 1,881.5
Contribution (%) 25.6% 27.3% 27.7% 28.0% Misc. Assets 0.0 0.0 0.0 0.0
Advt/Sales/Distrn O/H 240.9 257.2 256.4 308.8
Capital employed 5,217 5,621 6,167 6,851
Operating Profit 967 1,036 1,045 1,323 Equity capital 87.1 87.1 87.1 87.1
Other income 0 0 0 0 Reserves 2,543 2,896 3,342 3,977
Pref. Share Capital 0.2 0.0 0.0 0.0
PBIDT 967 1,036 1,045 1,323 Minority Interests 84.0 84.0 84.0 84.0
Depreciation 163 220 266 306 Borrowings 2,309 2,553 2,653 2,703
Interest & Fin Chg. 183 141 123 125 Def tax Liabilities 193.0 0.0 0.0 0.0
E/o income / (Expense) 0 0 0 0 Source: Company, Axis Research
Pre-tax profit 622 675 657 893

Associates 0 0 0 0
Other Comprehensive Income 0.0 0.0 0.0 0.0
Adjusted PAT 492 551 536 728


Sources 1,362 458 750 959 Sales growth 23.6 0.1 (0.9) 23.8
Cash profit 849 911 924 1,158
(-) Dividends 98 93 90 93 OPM 20.5 22.0 22.3 22.8
Retained earnings 752 818 834 1,065 Oper. profit growth 36.8 7.2 0.9 26.6
Issue of equity 46.5 (0.0) 0.0 0.0 COGS / Net sales 74.4 72.7 72.3 72.0
Change in Oth. Reserves 735.2 (104.7) 0.0 0.0 Overheads/Net sales 5.1 5.5 5.5 5.3
Borrowings 46 78 38 19 Depreciation / G. block 4.8 5.0 5.0 5.1
Others (217) (334) (123) (125) Effective interest rate 9.1 6.3 5.1 5.1
Applications 1,362 458 750 959 Net wkg.cap / Net sales 0.23 0.11 0.00 0.01
Capital expenditure 700.7 1,000.0 700.0 700.0 Net sales / Gr block (x) 1.4 1.1 0.9 1.0
Investments (14.1) 0.0 0.0 0.0
Net current assets (225.8) (1,348.4) 54.0 (16.1) RoCE 17.8 15.1 13.2 15.6
Change in cash 901.0 806.0 (4.3) 275.6 Debt / equity (x) 0.8 0.8 0.7 0.6
RoE 22.8 19.3 16.5 19.2
EPS (Rs.) 28.2 31.6 30.7 41.8

EPS Growth (31.1) 12.0 (2.7) 35.9
CEPS (Rs.) 37.6 44.2 46.0 59.3
DPS (Rs.) 5.1 4.4 4.3 4.4

MINDTREE LTD (MINT.NS) – STRONG DEAL WINS, BETTER EXECUTION
Mindtree Ltd.(MTCL.IN) is Indian IT services company headquartered in Bangalore. Mindtree provides specialized IT solutions, Industry view
ER&D services to various industries like Hi-Tech, Manufacturing, BFSI, Travel and Hospitality. Mindtree also specialized in
providing digital transformation services and solutions.
Key Rationale Key Rationale

 Mindtree is going through transition post its management change.  For Q4 FY20 operating margins stood at 12.5% up 45 bps. Overweight
The new management has key focus to aligning its execution, its However adjusted operating margins stood at 14.8% gaining 175
operations and its business portfolios. The management ‘s key bps QoQ. Management has initiated strong cost control measures CMP
focus on new deal wins, digital transformation business to attain the like reducing the subcontractors, better service mix and higher 907
desired operating margins with high top line growth momentum. execution which will help to gain long term sustainable operating
 Mindtree has successfully managed to get higher deal wins even in margins.
Target Price
this unprecedented event of COVID 19 outbreak. The order book for  The management is confident in gaining the momentum and has
Q4 FY20 remained all time high at $393 mn. The new deal wins worked efficiently with zero productivity loss. While in Capital good
1,088
also demonstrated robust growth (137% QoQ). This also reflects and Digital initiatives is expected to remain strong, Hi-Tech and
the company’s new strategy to focus on the long term annuity base automation is expected to gain pace post Covid-19. However, some Upside
business model. The new management has well transitioned the top near-term challenges in terms of softness in revenue growth and 20%
clients and has accelerated its growth. Offerings within top clients pressure on Q1 operating margin is likely.
remain well-diversified. Company reiterated its focus on key  Valuation. We expect annual revenue to grow by 11% y/y and 11%
customers and planned rationalization of smaller accounts. y/y in FY21E and FY22E, respectively. EPS is expected to grow at
 Solid execution and well defined strategies will help to gain healthy healthy 16% y/y and 15% y/y for FY21E and FY22E, respectively.
operating margins even in the unhealthy conditions. We recommend BUY and assign 21x P/E multiple to its FY22E
earnings of Rs. 50.6 which gives a TP of Rs. 1088 per share, an
upside of 19%.
Y/E Mar Net Sales EBIDTA Net FDEPS PER EV/EBIDTA P/BV RoE
(Rs Cr) (Rs Cr (Rs Cr) Profit (Rs) (x) (x) (x) (%)
FY19 7,022 1,065 754 46 16 11 4 25
FY20 7,746 1,090 546 38 24 12 3 16
FY21E 8,628 1,235 730 44 21 9 3 19
FY22E 9,606 1,415 832 51 18 8 3 20


Employee Expenses 4,421 5,340 5,698 6,331 Net Block 376 248 89 -15
Other Expenses 1,536 1,610 1,694 1,861 CWIP 29.7 29.7 29.7 29.7
EBITDA 1,065 1,090 1,235 1,415 Investments & Other Assets 120 125 125 125
Margin 15.16% 14.07% 14.32% 14.73% Wkg. cap. (excl cash) 1,912 2,349 2,842 3,285
Depreciation 164 275 310 345 Cash / Bank balance 256 490 813 1,060
EBIT 900 814 926 1,070 Misc. Assets 189 189 189 189
Margin 13% 11% 11% 11%
0 0 0 0 Equity capital 164.2 164.6 164.6 164.6
EBIT 99 88 106 121 Reserves 3,142 3,451 3,786 4,124
0 0 0 0 Long term debt 19 676 676 676
Interest & Fin Chg. 2 52.9 53.6 56 Provisions 140 56 93 117
E/o income / (Expense) 0 0 0 0 Others 17.4 17.4 17.4 17.4
Pre-tax profit 987 829 1,000 1,156 Source: Company, Axis Research

Associates 0 0 0 0
Reported PAT 754 631 730 832
Adjusted PAT 754 631 730 832


Pre-tax profit 987 745 1,000 1,156 Per Share data
Depreciation 164 282 310 345 EPS (INR) 45.9 38.3 44.4 50.6
Chg in working capital -236 -203 -171 -196 Growth, % 14% -16% 16% 14%
Total tax paid -23 -20 -27 -32 Book NAV/share (INR) 201.4 220.2 240.6 261.2
Cash flow from operating FDEPS (INR) 35 39 42 46
886 825 1,139 1,305
activities CEPS (INR) 55.9 50.4 63.3 71.7
Capital expenditure 171 154 151 240
CFPS (INR) 28.1 36.5 43.8 42.8
Cash flow from investing
-193 -154 -151 -240 DPS (INR) 33 13 13 15
activities
Free cash flow 72 67 99 106 Return ratios
Dividend (incl. tax) 591 237 395 494 Return on assets (%) 18% 12% 15% 15%
Cash flow from financing Return on equity (%) 25% 16% 19% 20%
0 0 0 0
activities Return on capital employed
23% 15% 18% 19%
Net chg in cash -73 234 323 247 (%)
Source: Company, Axis Research Turnover ratios
Asset turnover (x) 18.7 31.1 96.8 -629.7
Receivables Days 5.3 5.1 5 4.9
Inventory turnover 1 1 1 1
Cash conversion cycle 34 36 35 35
Liquidity ratios
Current ratio (x) 3.2 3.7 3.9 4
Quick Ratio 1.7 2 2.1 2.2
Net debt/Equity (%) -0.1 -0.1 -0.2 -0.2

Valuation
PER (x) 16.2 24 21.2 18.5
Price/Book (x) 3.7 3.4 3.1 2.8
EV/Net sales (x) 3.6 3.4 3.1 2.9
EV/EBITDA (x) 11.5 12.2 9.4 8.1
Dividend Yeild 4.2 1.7 1.7 1.9

BIOCON LTD (BION.NS) – BIOSIMILARS TO DRIVE GROWTH

Biocon has created a niche in the business of custom research in pharmaceuticals space; it operates in four broad business verticals, viz., Industry view
small molecules & generic formulations, research services, biologics and branded formulations, each contributing 32%, 32%, 24% and 12%
of revenues respectively. Biocon’s subsidiary Biocon Biologics has entered into partnership with Mylan (who has exclusive marketing rights
for developed markets viz., EU, US, Japan etc) for developing 11 products, and with Sandoz for few undisclosed assets on cost share and
50:50 profit share arrangement; overall, the company has been working on around 28 assets to be developed and monetized in near future.

 Recently launched Semglee (insulin glargine), Ogivir (Trastuzumab)  The contract research segment (Syngene) is expected to post
and Hulio (adalimumab) are gaining market share in EU while revenue growth in low teens while the branded formulations CMP
Fulphila and Ogivir (market size $2.9bn) are being ramped up in business is expected to grow at low single digit driven by additional 354
US. Driven by market share gains and new launches in these high capacity and entry into newer markets.
margin biosimilars, the Biologics segment is expected to post robust  Biocon is expected to invest aggressively thereby plough back
Target Price
revenue growth (approx. in mid-twenties) over next 2/3 years; substantial capital over next couple of years to build its product
Biocon management has set an ambitious target to cross $1 bn portfolio, conduct trials and support it with adequate manufacturing
474
revenues for Biologics over next couple of years (from around $300 capacities which would limit free cash flow generation.
plus mn in FY20). PE firm Truenorth has recently invested Rs 536  Valuation. We expect annual revenue to grow by 21% CAGR over Upside
cr for 2.44% stake in the Bioligics division. FY20-22E, EBIDTA to expand by 25% CAGR and PAT by 30% 34%
 New product launch include a) Insulin Glargine to be launched in CAGR over the same period. The EBIDTA margins are expected to
US by H2CY20 (market size: $4 bn, competition Sanofi and Eli Lilly expand from ~27% in FY20 to 29% by FY22E driven by increased
b) Humira (adalimumab) (market size $18 bn with 9 competitors) is contribution from high margin Biologics segment. Given the
undergoing phase 3 trials in US, tentatively planned for launch in prospects of earnings growth over next couple of years, we value
FY23. Biocon is also in advanced stage of development for Avastin the company at 35x FY22 earnings to arrive at target of Rs 474
(Bevacizumab), Enbrel (Etanercept) and NovoLog (Insulin Aspart)  Key risks: aggressive competition to protect market share, tepid
expected to launch over the next 3-5 years. response for key molecules planned for launch
Y/E Mar Net Net FDEPS Change PER RoE RoCE
EBIDTA
(Rs Cr) Sales Profit (Rs) (%) (x) (%) (%)
FY19 5,514 1,394 905 7.5 143.1 41.1 14.8 9.2
FY20E 6,827 1,858 961 8.0 6.1 44.2 13.3 10.6
FY21E 8,302 2,328 1,246 10.4 29.7 34.1 15.0 12.4
FY22E 9,970 2,917 1,626 13.6 30.5 26.1 16.6 14.0


Other operating income 0 0 0 0 Net Block 4,445 5,125 5,750 6,250
Total income 5,514 6,827 8,302 9,970 CWIP 1,899 1,899 1,899 1,899
COGS 1,897 2,316 2,796 3,284 Wkg. cap. (excl cash) (714) (441) (137) 214
Employee Exp. 1,165 1,417 1,704 2,039 Cash / Bank balance 2,499 2,562 2,488 2,769
Other Expenses 1,059 1,237 1,474 1,730 Other LT assets incl. Goodwill 1,026 1,026 1,026 1,026
EBIDTA 1,394 1,858 2,328 2,917
PBIDT 1,538 1,986 2,453 3,027 Equity capital 300 600 600 600
Depreciation 448 549 620 697 Reserves 5,798 6,618 7,723 9,208
Interest & Fin Chg. 71 70 63 51 Borrowings 3,057 2,952 2,703 2,350
Pre-tax profit 1,019 1,367 1,770 2,280 Source: Company, Axis Research

PAT 807 1,066 1,364 1,756
(-) Minority Interests (97) (106) (118) (131)
Associates 1 1 1 1
Adjusted PAT 711 961 1,247 1,627
Extraordinary adj. (195) 0 0 0
Reported PAT 905 961 1,247 1,627


Sources 2202 1244 1152 1432 Sales growth 33.7 23.8 21.6 20.1
Issue of equity 0 300 0 0 EBIDTA Margins 25.3 27.2 28.0 29.3
Change in Oth. Reserves 917 820 1105 1485 EBIDTA growth 68.1 33.3 25.3 25.3
Borrowings 390 (105) (249) (353) COGS / Net sales 34.4 33.9 33.7 32.9
Others 896 229 296 301 Overheads/Net sales 19.2 18.1 17.8 17.4
Depreciation / G. block 6.2 6.5 6.4 6.4
Applications 2202 1244 1152 1432 Effective interest rate 7.5 6.8 6.9 7.0
Capital expenditure 1368 680 625 500 Net wkg.cap / Net sales 0.20 0.20 0.21 0.21
Investments 161 0 0 0 Net sales / Gr block (x) 0.8 0.8 0.9 0.9
Net current assets 674 564 527 932 RoCE 9.2 10.6 12.4 14.0
Source: Company, Axis Research Debt / equity (x) 0.30 0.24 0.17 0.11
Effective tax rate 20.8 22.0 23.0 23.0
RoE 14.8 13.3 15.0 16.6
FDEPS (Rs.) 7.5 8.0 10.4 13.6
EPS Growth 143.1 6.1 29.7 30.5

BHARTI AIRTEL (BRTI.NS) – OPERATING METRICS TO GAIN SOLID TRACTION

Bharti Airtel is one of the largest telecom companies in the world with operations spanning 18 countries and a subscriber base of more than Industry view
419 mn subscribers. It is the second largest wireless telecom operator in terms of revenue after Reliance Jio. Bharti Airtel is a well
capitalized telecom operators with offerings across the telecom spectrum of enterprise and fixed line broadband services.

 Telecom services will be one of lesser impacted sectors in the  Apart from improvement in revenues, annual capex for the business
COVID19 outbreak. Post the outbreak the demand for broadband has started reducing from the heightened levels of 2017-18, when
and data has increased. While recharges in the month of April the business was in a significant ramp-up mode. Network capex for
would have been impacted but we believe that the impact will be domestic wireless business is past the peak of the cycle and with CMP
mitigated over the quarter. Q2FY21 onwards the sector should see pick up in revenue growth the capex challenges will reduce further. 547
normalization of business but demand for broadband services will  Regulatory challenges are well known and Bharti Airtel is well
continue to see further uptick. capitalized to deal with the payouts as it has raised enough capital Target Price
 The Indian telecom industry has seen a major consolidation with (Rs 450bn equity in FY20) and has access to debt as there are no
most of the weaker players exiting business. The current market major business solvency risks associated with it. 610
structure is marked by two strong players Reliance Jio and Bharti  We forecast for 13%/17% CAGR for Revenue/EBIDTA over the
Airtel while Vodafone Idea can be considered as a weak player period FY20-23E. Profit growth will be even more significant Upside
amongst the private operators. The top 3 players constitute more considering FY20E was a loss for the company. Our forecast is
than 90% of revenue market share. The highly concentrated market based on significant ARPU improvement from current Rs
12%
structure offers immense long-term growth potential for the strong 135/subs/month to Rs 200/subs/month by end of Q4FY23. While
players. the ARPU improvement seems significant but our FY23 ARPU
 Indian telecom market has seen a major round of tariff hikes in the forecast is similar to Q4FY15. Thus, our estimates are conservative
month of December with all the telecom operators taking tariff hikes. considering the concentrated industry structure and far greater level
The full impact of tariff hikes will be seen Q4FY20 revenues but of value provided to the customer.
considering the industry structure further tariff hikes cannot be ruled  Valuation: We value the company based on SOTP valuation at Rs
out in the forthcoming quarters which will lead to consistent EBIDTA 610. The value could increase by a further Rs 40/share if Vodafone-
improvement. Idea shuts down. Our SOTP valuation implies an EV/EBIDTA of
9.5x on FY22E EBIDTA.
Y/E Mar Net Sales EBIDTA Net EPS PER EV/EBIDTA P/BV ROE Debt/Equity
(Rs Cr) (Rs Cr) (Rs Cr) Profit (Rs) (x) (x) (x) (%) (%)
FY19 81,068 25,819 -2,330 (5.8) (90.9) 11.0 3.0 (3.3) 122.2
FY20E 86,776 36,279 -27,243 (49.9) (10.6) 9.9 3.2 (29.9) 118.0
FY21E 101,203 44,796 2,733 5.0 105.8 7.8 3.1 2.9 107.8
FY22E 113,361 51,528 8,609 15.8 33.6 6.7 2.8 8.4 93.0


Net sales 81,068 86,776 101,203 113,361 Cash & bank 14,923 39,203 40,009 41,415
Growth, % -2 7 17 12 Marketable securities at cost 0 0 0 0
Total income 81,068 86,776 101,203 113,361 Debtors 0 0 0 0
Raw material expenses -9,352 -10,734 -11,225 -12,130 Inventory 0 0 0 0
Employee expenses -3,798 -3,807 -4,314 -4,668 Loans & advances 0 0 0 0
Other Operating expenses -53,934 -49,043 -54,853 -60,153 Other current assets 20,177 60,957 60,123 59,989
EBITDA (Core) 25,819 36,279 44,796 51,528 Total current assets 35,100 100,160 100,131 101,404
Growth, % (14.2) 40.5 23.5 15.0 Investments 0 0 0 0
Margin, % 31.8 41.8 44.3 45.5 Gross fixed assets 219,359 239,088 234,883 233,554
Depreciation -21,348 -27,652 -27,760 -26,269 Less: Depreciation 0 0 0 0
EBIT 4,471 8,627 17,036 25,259 Add: Capital WIP 0 0 0 0
Growth, % (58.7) 92.9 97.5 48.3 Net fixed assets 219,359 239,088 234,883 233,554
Margin, % 5.5 9.9 16.8 22.3 Non-current assets 20,738 35,396 37,568 38,131
Interest paid -9,589 -11,947 -10,554 -9,368 Total assets 275,198 375,860 373,798 378,854
Other Non-Operating Income 291 288 289 289
Non-recurring Items -189 -33,343 0 0 Current liabilities 93,055 144,889 142,860 141,285
Pre-tax profit -4,661 -35,627 7,344 16,617 Provisions 0 0 0 0
Tax provided 3,419 10,076 -2,571 -5,816 Total current liabilities 93,055 144,889 142,860 141,285
Profit after tax -1,241 -25,551 4,774 10,801 Non-current liabilities 97,195 117,277 112,470 108,300
Others (Minorities, Associates) -1,278 -1,691 -2,041 -2,192 Total liabilities 190,250 262,166 255,330 249,585
Net Profit -2,519 -27,243 2,733 8,609 Paid-up capital 1,999 2,729 2,729 2,729
Growth, % (222.2) 1,069.3 (110.0) 215.0 Reserves & surplus 69,424 88,241 90,974 99,583
Net Profit (adjusted) (2,330) (27,243) 2,733 8,609 Shareholders’ equity 84,948 113,694 118,467 129,269
Unadj. shares (bn) 399.7 545.7 545.7 545.7 Total equity & liabilities 275,198 375,860 373,798 378,854
Wtd avg shares (bn) 399.7 545.7 545.7 545.7 Source: Company, Axis Research


Per Share data (5.8) (49.9) 5.0 15.8
Pre-tax profit -4,661 -35,627 7,344 16,617
EPS (INR) (222.2) 756.5 (110.0) 215.0
Depreciation 21,348 27,652 27,760 26,269 Growth, % 178.7 166.7 171.7 187.5
Chg in working capital -9,261 -51,087 -115 1,090 Book NAV/share (INR) (5.8) (49.9) 5.0 15.8
Total tax paid 3,488 9,798 -2,387 -5,593 FDEPS (INR) 48.0 0.7 55.9 63.9
Other operating activities 0 0 0 0 CEPS (INR) 87.4 58.6 67.2
CFPS (INR) - - - -
Cash flow from operating
10,890 -53,343 32,686 38,397 DPS (INR)
activities
Return ratios 1.8 (5.7) 2.9 4.4
Capital expenditure -35,071 -26,033 -23,554 -24,940
Return on assets (%) (3.3) (29.9) 2.9 8.4
Chg in investments 0 0 0 0 Return on equity (%) 2.6 (8.9) 4.8 6.9
Chg in marketable securities -246 -40,780 834 134 Return on capital employed (%)
Other investing activities 18,867 28,523 -2,603 -6,560 Turnover ratios 0.6 0.6 0.7 0.8
Cash flow from investing Asset turnover (x) 0.3 0.3 0.3 0.3
-15,849 3,238 -25,584 -31,063 Sales/Total assets (x) 0.4 0.4 0.4 0.5
activities
Free cash flow -4,960 -50,105 7,102 7,334 Sales/Net FA (x) (0.9) (1.0) (0.8) (0.7)
Working capital/Sales (x) 2.6 2.6 2.2 2.0
Equity raised/(repaid) 0 46,790 0 0
Fixed capital/Sales (x) (328.1) (353.0) (298.4) (261.8)
Debt raised/(repaid) 2,303 20,089 -6,297 -5,927 Working capital days
Dividend (incl. tax) 0 0 0 0 Liquidity ratios 0.4 0.7 0.7 0.7
Other financing activities 0 0 0 0 Current ratio (x) 0.4 0.7 0.7 0.7
Cash flow from financing Quick ratio (x) 0.5 0.7 1.6 2.7
5,737 74,385 -6,297 -5,927 Interest cover (x) 122.2 118.0 107.8 93.0
activities
Net chg in cash 778 24,280 805 1,407 Total debt/Equity (%) 101.3 74.9 65.1 52.5
Net debt/Equity (%)
Opening cash balance 14,145 14,923 39,203 40,009
Valuation (93.8) (11.0) 109.2 34.7
Closing cash balance 14,923 39,203 40,009 41,415 PER (x) 3.1 3.3 3.2 2.9
Source: Company, Axis Research Price/Book (x) 3.6 4.2 3.6 3.1
EV/Net sales (x) 11.3 10.1 8.0 6.8
EV/EBITDA (x) 65.1 42.5 21.1 13.9

HCL TECHNOLOGIES (HCLT.IN) – BETTER PRODUCT MIX, STRONG EXECUTION

HCL Technologies Limited, an Indian Information technology (IT) service and consulting company headquartered in Noida, UP is a next- Industry view
generation global technology company that helps enterprises reimaging their businesses for the digital age. HCL technologies products,
services and engineering are built on strong innovation making more sustainable business model even in uncertainties.
Key Rationale Key Rationale

 Robust business structure in global uncertainties: HCL Technologies  Recent deal trend continues to be healthy for HCL tech and is Overweight
may see short term impact of COVID 19 outbreak but the company can reflective of traction in Retail & CPG, Manufacturing and BFSI
efficiently manage from remote systems to ensure timely delivery of the verticals. HCL Tech has received various digital transformational CMP
outsourced business. Management has indicated that 90% of the onsite deals worth more than $2.4bn in Q3 FY20. We believe that COVID
employees and 72% of offshore employees are working efficiently from outbreak will create huge opportunity across geographies for HCL
521
home. The COVID impact has been seen majorly on consulting business Tech to post strong organic growth over different verticals.
while outsourcing business and ER&D business still remain robust. HCL  Healthy growth aided by Product and Platform business: HCL Target Price
tech also has strong product business structure with high profit margins. Tech had reported better than expected Q3FY20 numbers on both 653
We believe that large transformational deal wins and ramp up in large margin and revenue front. Strong revenue growth in Mode 3 business
deals will help HCL tech to generate more sustainable revenues as (72% YoY) helps HCL Tech to achieve higher growth momentum on Upside
compared to its peers even in uncertain times. longer term with more advance technologies. Better business matrix
25%
 Digital transformation business is intact for HCL tech even in global will help to generate higher operating business even if there is pricing
lockdown: IT service provider’s engagement with its partner network has pressure across verticals. We believe better business matrix and
expanded beyond certifications into setup of co-innovation centers, large long term contracts makes HCL Tech a promising investment
building industry solutions, ISV partnerships and joint sourcing of deals. as compared to its Indian peers.
These partnerships play a significant role in implementation, rollouts &  Valuations We believe HCLT has a resilient business structure from
upgrades, validation and support services. a long term perspective. We recommend BUY and assign 13x P/E
multiple to its FY22E earnings of Rs. 50.3, which gives a TP of Rs.
653 per share
2019 60,427 13,966 10,122 36.8 15 11 4 23
2020E 69,779 15,524 10,346 39.4 13 9 3 19
2021E 77,781 17,306 11,694 45.0 12 8 3 19
2022E 85,994 19,079 12,888 50.3 10 8 3 19


Net sales 60,427 69,779 77,781 85,994 Cash & bank 9,171 16,501 12,690 9,405
Growth, % 8.5 15% 11% 11% Debtors 11,706 13,727 15,939 18,092
Other income 895 925 1,165 1,156 Other current assets 3,716 3,716 3,716 3,716
Total income 6,132 7,070 7,895 8,715 Total current assets 29,717 39,977 39,240 39,306
Employee expenses 39,268 45,707 51,141 56,166 Goodwill and Intangible Assets 0 0 0 0
Other Operating expenses 7,193 8,548 9,334 10,749 Net fixed assets 5,270 4,846 4,098 3,372
EBITDA 13,966 15,524 17,306 19,079 CWIP 531 531 531 531
Growth, % 7% 11% 11% 10% Other Noncurrent assets 355 355 355 355
Margin, % 23% 22% 22% 22% Total Non Current Assets 2,623 2,946 2,998 3,080
Depreciation 2,147 2,517 2,693 2,876 0 0 0 0
EBIT 1,182 1,301 1,578 1,736 Total assets 58,897 74,421 78,623 83,651
Growth, % 8% 10% 21% 10% 0 0 0 0
Margin, % 2% 2% 2% 2% Creditors 1,803 1,927 1,983 2,011
Interest paid 90 290 262 148 Provisions 3,316 8,000 7,500 7,500
Pre-tax profit 12,624 13,641 15,517 17,212 Total current liabilities 11,149 19,754 19,237 19,157
Tax provided 2,481 3,274 3,802 4,303 Other liabilities 1,538 1,538 1,538 1,538
Profit after tax 10,143 10,367 11,715 12,909 Paid-up capital 542 542 542 542
Net Profit 10,122 10,346 11,694 12,888 Reserves & surplus 41,495 47,014 52,271 57,918
Growth, % 8% 2% 13% 10% Total equity & liabilities 58,897 74,421 78,623 83,651
Net Profit (adjusted) 10,122 10,346 11,694 12,888 Source: Company, Axis Research


Pre-tax profit 12,624 13,643 15,518 17,214 Per Share data
Depreciation 2,147 2,517 2,693 2,876 EPS (INR) 36.8 39.4 45 50.3
Growth, % 14% 2% 13% 10%
Chg in working capital -2,177 5,675 -3,591 -3,431
Book NAV/share (INR) 303.6 343.7 381.9 423
Total tax paid 248 327 380 430
FDEPS (INR) 35 39 42 46
Cash flow from operating activities 12,594 18,939 15,397 17,436 CEPS (INR) 88.6 92.9 104 114
Capital expenditure 2,763 2,093 1,945 2,150 CFPS (INR) 28.1 36.5 43.8 42.8
Cash flow from investing activities -4,158 -7,781 -7,632 -7,837 DPS (INR) 21.5 23 25 27
Free cash flow 567 906 582 745 Return ratios
Return on assets (%) 26% 23% 23% 23%
Dividend (incl. tax) 5,100 4,828 6,437 7,241
Return on equity (%) 23% 19% 19% 19%
Cash flow from financing activities 4,769 4,274 -1,339 -1,339
Return on capital employed (%) 17% 14% 15% 15%
Net chg in cash 5,624 7,330 -3,812 -3,285
Turnover ratios
Asset turnover (x) 1 0.9 1 1
Sales/Total assets (x) 1.1 1.2 1.2 1.3
Receivables Days 70.4 70.4 70.4 70.4
Cash conversion cycle 34 36 35 35
Liquidity ratios
Current ratio (x) 3.1 2.4 2.6 2.8
Interest cover (x) 0 0 112 132
Net debt/Equity (%) -0.15 -0.2 -0.13 -0.08

Valuation
PER (x) 15.4 13.2 11.5 10.3
Price/Book (x) 3.7 3.3 3 2.7
EV/Net sales (x) 3.6 3.4 3.1 2.9
EV/EBITDA (x) 10.7 9.2 8.4 7.8
Dividend Yeild 3.3 4.3 4.3 4.3

Disclosures:
The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations).
1. Axis Securities Ltd. (ASL) is a SEBI Registered Research Analyst having registration no. INH000000297. ASL, the Research Entity (RE) as defined in the Regulations, is engaged in the business of providing Stock
broking services, Depository participant services & distribution of various financial products. ASL is a subsidiary company of Axis Bank Ltd. Axis Bank Ltd. is a listed public company and one of India’s largest private
sector bank and has its various subsidiaries engaged in businesses of Asset management, NBFC, Merchant Banking, Trusteeship, Venture Capital, Stock Broking, the details in respect of which are available on
www.axisbank.com.
2. ASL is registered with the Securities & Exchange Board of India (SEBI) for its stock broking & Depository participant business activities and with the Association of Mutual Funds of India (AMFI) for distribution of
financial products and also registered with IRDA as a corporate agent for insurance business activity.
3. ASL has no material adverse disciplinary history as on the date of publication of this report.
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2 Pankaj Bobade Research Head pankaj.bobade@axissecurities.in
3 Suvarna Joshi Research Analyst suvarna.joshi@axissecurities.in
4 Siji Philip Research Analyst siji.philip@axissecurities.in
5 Omkar Tanksale Research Analyst omkar.tanksale@axissecurities.in
6 Ankit Suchanti Research Associate ankit.suchanti@axissecurities.in
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8 Tanvi Shetty Research Associate Tanvi.shetty@axissecurities.in
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Axis Securities Limited, Corporate office: Unit No. 2, Phoenix Market City, 15, LBS Road, Near Kamani Junction, Kurla (west), Mumbai-400070, Tel No. – 022-40508080/ 022-61480808, Regd. off.- Axis House, 8th Floor,
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Axis Top Picks Idea

Equity Investment Strategy

OPPORTUNITIES DURING TIMES OF ADVERSITY: TOP PICKS

Axis Securities Top Picks

Sector Current View Outlook

Sector Current View Outlook

WHY INVEST IN EQUITY MARKETS DURING UNCERTAIN TIMES?

Source: NSE, Axis Securities

Source: Reuters, Axis Securities

Source: RBI, Axis Securities

Source: Capital Line, Axis Securities

ICICI BANK (ICBK.NS) – WELL POSITIONED FOR GROWTH

Key Rationale Key Rationale Underweight

Key Financials (Standalone)

This reflects the views of the Axis Securities Limited 10

Income Statement (Rs Cr) Balance Sheet (Rs Cr)

Provisions & Contingencies 19,661 11,482 4,746 4,103

This reflects the views of the Axis Securities Limited 11

Valuation ratios (%) Balance Sheet Structure Ratios (%)

Net Interest Income 2.93% 3.02% 3.00% 2.77%

This reflects the views of the Axis Securities Limited 12

MANNAPURAM FINANCE (MNFL.NS) – CONTINUE TO SHINE

Key Rationale Key Rationale Underweight

Key Financials (Consolidated)

This reflects the views of the Axis Securities Limited 13

Income Statement (Rs Cr) Balance Sheet (Rs Cr)

This reflects the views of the Axis Securities Limited 14

Valuation ratios (%) Balance Sheet Structure Ratios (%)

This reflects the views of the Axis Securities Limited 15

VARUN BEVERAGES LTD (VARB NS) – VALUATIONS ATTRACTIVE

Key Rationale Key Rationale Equal weight

This reflects the views of the Axis Securities Limited 16

Profit & Loss (Rs Cr) Balance Sheet (Rs Cr)

This reflects the views of the Axis Securities Limited 17

Cash Flow (Rs Cr) Ratio Analysis (%)

This reflects the views of the Axis Securities Limited 18

ESCORTS LTD (ESCO.NS) – GEARED UP FOR GROWTH

Key Rationale Key Rationale Overweight

Key Financials (Consolidated)

This reflects the views of the Axis Securities Limited 19

Profit & Loss (Rs Cr) Balance Sheet (Rs Cr)

This reflects the views of the Axis Securities Limited 20

Cash Flow (Rs Cr) Ratio Analysis (%)

EPS (Rs.) 55.7 56.2 61.9 73.5

This reflects the views of the Axis Securities Limited 21

MINDA INDUSTRIES LTD (MNDA.NS) – BEST PLAY FOR INDUSTRY REVIVAL

Key Rationale Key Rationale Underweight

Key Financials (Consolidated)

This reflects the views of the Axis Securities Limited 22

Profit & Loss (Rs Cr) Balance Sheet (Rs Cr)

Tax provision 134 51 65 100

This reflects the views of the Axis Securities Limited 23

Cash Flow (Rs Cr) Ratio Analysis (%)

EPS (Rs.) 10.9 6.6 7.6 11.8

This reflects the views of the Axis Securities Limited 24

AARTI INDUSTRIES LTD (ARTI.NS) – A PREFERRED PARTNER OF CHOICE

Key Rationale Key Rationale Overweight

This reflects the views of the Axis Securities Limited 25

Profit & Loss (Rs Cr) Balance Sheet (Rs Cr)

Pre-tax profit 622 675 657 893

This reflects the views of the Axis Securities Limited 26

Cash Flow (Rs Cr) Ratio Analysis (%)

EPS (Rs.) 28.2 31.6 30.7 41.8