InvestorsEye-July16 2021

Investor’s Eye
July 16, 2021
Index
Stock Update
Tata Elxsi Limited
L&T Infotech
HDFC Bank
Viewpoint
Gati Limited
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Update
Update
Tata Elxsi Limited
Stock
Healthy Q1; set to gallop ahead of peers
Stock
Powered by the Sharekhan 3R Research Philosophy IT & ITeS Sharekhan code: TATAELXSI Result Update
3R MATRIX + = - Summary
We retain a Buy on Tata Elxsi with a revised PT of Rs. 5,000, as revenue is set to grow
Right Sector (RS) ü at twice the industry average, margin profile is superior and company has differentiated
technological capabilities.
Right Quality (RQ) ü CC revenues grew by 37.4% y-o-y continuing strong outperformance seen in past four
quarters, but EBITDA margin lagged estimates owing to a one-time bonus; net staff
additions stayed strong.
Right Valuation (RV) ü
Growth momentum likely to continue given a strong order book, robust deal pipeline,
improving deal size, presence in high-growth verticals and hyper-digitisation and
+ Positive = Neutral - Negative technology adoption across industries.
EBITDA margin to remain in a narrow band in FY22 despite headwinds, given strong
What has changed in 3R MATRIX revenue growth, higher offshoring, and better realisations in complex projects. We expect
USD revenue/earnings to clock a 24%/26% CAGR over FY2021-FY2024E.
Old New
Q1FY22 revenue growth was strong, led entirely by volumes, while OPM lagged expectations owing to a
RS  special one-time bonus (Rs. 33 crore) offered to all employees. CC revenue grew by 6.4% q-o-q and 37.4%
y-o-y, beating our estimates, led by a strong 6.3% q-o-q/29.5% y-o-y and 11.8% q-o-q/128% y-o-y growth
RQ  in embedded product design (EPD) and industrial design and visualization (IDV) businesses, respectively.
Revenue growth in top five accounts accelerated to 17.2% q-o-q from 12.1% q-o-q in Q4FY2021, given
a better account mining strategy. EBITDA margin contracted by 554 bps q-o-q to 26.9%, owing to the
RV  special one-time bonus. Excluding the bonus effect, adjusted EBITDA margin was actually higher q-o-q
at 32.8%. The company rolled out its wage revision of 7-8% from July 1, 2021. Though Q2FY2022 margin
would be impacted by this, retention expenses and a gradual increase in discretionary expenses, we
Reco/View Change believe operating profitability in FY2022 would be in a narrow band, given strong revenue growth,
higher offshoring revenue, and better realisation in complex projects. The management indicated growth
Reco: Buy  momentum would continue in the subsequent quarters, given strong order book, a robust deal pipeline,
ramp-up of deals won earlier, strong deal wins, a continued recovery in the transportation vertical,
CMP: Rs. 4,303 and strong growth in other vertical. During Q1FY2022, the company won large and strategic deals in
segments such as EVs, autonomous technologies, digital health, OTT and video platform development,
Price Target: Rs. 5,000 á which indicates its strong digital engineering capability and participation in clients’ transformation
journey. Aggregate net staff additions remained at 1,098 (14% of Q3FY2021 employee base) for the past
á Upgrade  Maintain â Downgrade two quarters, which hints at anticipation of strong deal inflows, ramp-up of large deals and a strong deal
pipeline. We believe TEL’s growth is likely to remain strong in the coming years, as it focuses on high-
growth sectors (media and healthcare) and emerging technology areas (connected, autonomous, OTT,
Company details digital health, and medical devices, etc.), where the client allocates a higher budget.
Market cap: Rs. 26,795 cr Key positives
CC Revenue grew by 6.4% q-o-q, beating our estimates
52-week high/low: Rs. 4,572 / 893 Top 5/10 accounts grew by 17.2%/12.3% q-o-q, respectively
NSE volume: IDV business’ revenue growth continued to outrun EPD’s growth rate
4.8 lakh Healthcare and medical devices vertical’s revenue posted a 23% CQGR over the past four quarters
(No of shares)
Key negatives
BSE code: 500408 Attrition rate inched up by 280 bps q-o-q to 10.2%
SIS revenue declined by 15.7% q-o-q on a CC basis
NSE code: TATAELXSI
Our Call
Free float: Valuation – Strong growth outlook going ahead: We have raised earnings estimates for FY2022E/FY2023E/
3.5 cr FY2024E, factoring in strong revenue beat, order bookings across verticals, healthy deal pipeline, strong
(No of shares)
account mining, and shift of ER&D budget towards digital engineering. Although the management expects a
gradual recovery in the automotive segment in 2021, it expects increased hyper-digitisation and technology
Shareholding (%) adoption across industries, including media and communication and healthcare and medical devices
vertical. Operating profitability is expected to be impacted post the return of normalisation as discretionary
Promoters 45 expenses would come back. TEL’s USD revenue and earnings are likely to post a CAGR of 24% and 26%,
respectively, over FY2021-FY2024E. We continue to prefer TEL, given its differentiated technological
capabilities, investments in right capabilities, long-standing client relationships, and increasing deal sizes.
FII 7 At the CMP, the stock is trading at 53x/44x/37x its FY2022E/FY2023E/FY2024E earnings, which though
expensive is justified against anticipated 2x revenue growth as compared to industry’s average growth rate,
DII 14 superior margin, and solid execution. We maintain our Buy rating on TEL with a revised a price target (PT)
of Rs. 5,000, given a strong balance sheet, consistent dividend payout, improving cash generation and its
Others 35 status as a preferred partner for clients.
Key Risks
Price chart (1) Slowdown in the global economy especially in the automotive industry might affect growth momentum; (2)
currency risks; and (3) slower growth in the automotive and broadcast sectors.
5,500
4,250
Valuation (Consolidated) Rs cr
3,000
Particulars FY21 FY22E FY23E FY24E
1,750
Revenue 1,826.2 2,433.3 2,998.6 3,582.9
500 OPM (%) 28.6 28.0 27.9 27.7
Jul-20
Jul-21
Nov-20
Mar-21
Adjusted PAT 368.1 505.8 614.8 728.0

% YoY growth 43.7 37.4 21.5 18.4
Price performance Adjusted EPS (Rs.) 59.1 81.2 98.7 116.9
P/E (x) 72.8 53.0 43.6 36.8
(%) 1m 3m 6m 12m
P/B (x) 19.8 15.7 12.4 9.8
Absolute 13.9 45.2 73.1 370.9
EV/EBITDA (x) 50.3 38.6 31.4 26.4
Relative to RoNW (%) 27.2 29.7 28.4 26.6
12.7 36.4 65.9 325.2
Sensex
Sharekhan Research, Bloomberg
RoCE (%) 30.8 32.9 32.0 30.0
Source: Company; Sharekhan estimates
July 16, 2021 2

Stock Update
Powered by the Sharekhan
3R Research Philosophy
Strong revenue growth, margin below expectations

TEL impressed with reporting strong revenue growth, led by volume, while operating profitability remained below
expectations owing to a special one-time bonus to all employees. Strong sequential revenue growth was led
by strong growth in the healthcare and medical devices vertical within EPD business and IDV business. Both
transportation and broadcast verticals reported steady growth during the quarter. The company reported CC
revenue growth of 6.4% q-o-q and 37.4% y-o-y, ahead of our estimates. Revenue growth was driven by strong
growth in EPD (up 6.3% q-o-q in CC) and IDV (up 11.8% q-o-q in CC) businesses, while system integration and
support division’s revenue declined by 15.7% q-o-q during the quarter. USD revenue grew by 6.3% q-o-q and 43.3%
y-o-y to $75.7 million, above our estimates. Top account’s revenue growth accelerated to 11.9% q-o-q during the
quarter compared to 7.1% q-o-q revenue growth in Q4FY2021. Revenue in rupee terms grew by 7.7% q-o-q and
39.4% y-o-y to Rs. 558.3 crore. EBITDA margin contracted by 554 bps q-o-q to 26.9%, below our estimates, owing
to a special one-time bonus (Rs. 33 crore) to all employees and higher other expenses to revenue, which was
partially offset by revenue growth, increasing utilisation, and higher offshore revenue mix. Excluding one-time
bonus payment, adjusted EBITDA margin remained at 32.8%, which was better than its Q4FY2021 EBITDA margin
of 32.4%. Net profit of Rs. 113.4 crore (down 1.5% q-o-q, but up 64.6% y-o-y) was in-line with our estimates, aided
by strong beat in revenue and higher other income (156% q-o-q), partially offset by lower operating profitability.
Best-placed to capture opportunities in the digital engineering space
Management remains confident on delivering strong revenue growth with a stable operating margin in FY2022
due to strong demand tailwinds across its verticals, robust deal wins, healthy deal pipeline, ramp-up of deals won
earlier, and its differentiated capabilities. Management highlighted that its continued investments have helped
the company align itself to fulfil the demand in newer areas such as connected, autonomous, shared and electric
vehicles, and infotainment. The company secured large deals across core industries during Q1FY2022. The
company focuses on building adjacencies areas (rail, off-road, and digital health among others) under its existing
verticals to de-risk its business from any slowdown on any specific business and add more logos for growth going
ahead. During the quarter, the company’s top client in the media and communication vertical superseded its
earlier top account, which was in the transportation vertical. We believe the company’s investments in sales and
marketing, delivery, and capabilities would help the company gain market share and drive growth in top accounts
by increasing mining activities. Management believes operating profitability in FY2022 would be sustainable,
given higher offshoring, better realisation in complex projects, and longer-term projects.
Key result highlights from the earnings call
Growth was driven by EPD and IDV businesses: TEL reported broad-based growth across verticals and
geographies during the quarter. The company’s CC revenue growth was at 6.4% q-o-q and 29.5% y-o-y, led
entirely by volume. Revenue in rupee terms grew by 7.7% q-o-q and 39.4% y-o-y. The company’s growth was
driven by two business divisions - EPD and IDV. EPD, the largest contributor to its total revenue, grew by 6.3%
q-o-q and 29.5% y-o-y on CC terms. IDV’s revenue growth remained at 11.8% q-o-q and 128% y-o-y on CC basis
SIS’s CC revenue declined by 15.7% q-o-q, but was up 13% y-o-y.
Strong revenue growth across verticals in the EPD business segment: TEL reported positive revenue growth
across key verticals q-o-q under EPD business. The transportation vertical reported revenue growth of 2.2%
q-o-q on CC basis, led by new projects in the automotive sector. The broadcast and communications vertical
continued its revenue growth momentum, with CC revenue growth of 6.7% q-o-q. The healthcare and medical
devices vertical’s revenue growth accelerated by 18.5% q-o-q and 83.1% y-o-y, led by ramp-up of deals won
earlier.
Major markets reported strong growth: The company reported strong growth on a sequential basis across all
key geographies. Revenue growth in the US accelerated to 15.9% q-o-q (versus 22.5% q-o-q in Q4FY2021), while
Europe reported revenue growth of 3.9% q-o-q (versus 3.0% in Q4FY2021). Strong growth in the US was led by
the company’s higher exposure to growth verticals such as media and communications and healthcare and
medical devices in the US. Slower growth in Europe was due to its higher exposure towards the transportation
vertical in Europe. India growth moderated to 1.9% q-o-q from 22.6% q-o-q growth in Q4FY2021.
IDV business segment’s growth continued to outpace the EPD business: This business segment has remained
volatile in the past few quarters owing to management change, restructuring of sales team, and sharp focus
on design kind of projects. IDV business continued to outpace EPD business for the third consecutive quarter.
However, margin of this business currently remains lower than EPD. Management expects the margin to
improve once customer acquisitions are largely completed.
Outlook on the automotive sub-vertical: Management indicated that the automotive industry has been
showing sustained recovery for the third consecutive quarter. The outbreak of COVID-19 has worsened
July 16, 2021 3

Stock Update
the situation, which has impacted in terms of reduction in the research and development (R&D) budget of
customers and stagnation of sales. Management expects spends related to connected, autonomous, shared,
and EVs, and infotainment are expected to accelerate going ahead. Management stated that TEL’s capabilities
are aligned in these new-age technology areas, given its continued investments in the past few years. The
company won large and strategic deals with both OEM and suppliers in EV and autonomous technologies.
Further, a leading European innovator and system supplier awarded TEL their EV development programme.
Management indicated that five of the top 10 original equipment manufacturers (OEMs) and eight of top 20
supplier are its customers. Management expects the automotive sub-vertical to maintain its growth momentum
in the coming quarters.
Broadcast and communication vertical: The broadcast and communication vertical is the largest in terms of
revenue of the EPD segment. The vertical’s total contribution to overall EPD revenue remained at 45.9%. There
are three sub-segments in this vertical, i.e. (1) operator segment, (2) broadcasters, and (3) devices segment.
The top account in this vertical is a large multi-services operator based out of the US, and the company has a
relationship of over 12 years with that customer. Within media, the company highlighted that growth would be
driven by (1) OTT, led by higher consumption and (2) broadband and data-led services. During the quarter, TEL
licensed its OTT solution, TEPLAY, to an institution for arts and music towards the development and of their
OTT platform. Further, a leading US-based broadcaster selected TEL for its global OTT platform development.
Commentary on the healthcare and medical device business: Revenue growth in the healthcare and medical
device vertical remained strong at 15.8% q-o-q and 83.1% y-o-y. Management believes the growth trend in this
segment would continue in the coming quarters, as the company has been investing on delivery capabilities,
sales, and products. Healthcare and medical revenue accounted for 13.8% to its EPD revenue versus 10.1% in
Q1FY2021. Management expects the healthcare and medical vertical to contribute 20% to its total revenue
over the next 3-5 years. Within pharma, the company focuses on (1) drug delivery devices; (2) packaging and
leveling; and (3) regulatory sub-segments. A leading global healthcare provider selected TEL as its strategic
digital and development partner for its next-generation digital health platform.
Sharper focus on adjacencies: Management highlighted that its de-risking plan has been progressing well,
given its strong growth momentum in the medical devices vertical and improving revenue contribution from
adjacencies segments in the transportation vertical. Adjacencies such as rail and off-road vehicles are
expected to maintain strong growth momentum in the coming quarters, as management believes the skills are
complementary. Management focuses on acquiring premium logos in these adjacencies. Over the next 3-5
years, management expects contribution of the transportation, broadcast, and medical devices vertical to be
40:40:20.
Strong growth outlook in the subsequent quarters: Growth momentum would continue in the coming quarters
because of a strong order book and robust deal pipeline across markets and verticals, ramp-up of deals won
earlier, strong deal wins, and demand tailwinds across its verticals. The company’s differentiated capabilities
in product engineering, design, and digital have helped it to strengthen its market position. Management
indicated that the size of large multi-year deals has been increasing. The company has been investing in front-
end sales, consultants, and industry experts to drive its organic growth momentum by winning new logos,
new accounts, and large deals and retain the large accounts by providing value-added services. Top/top-5/
top-10 accounts during the quarter grew in double digits on a sequential basis (significantly higher than the
company’s sequential growth rate), given strong mining activities in these accounts. Management indicated
that the deal sizes have been improving and it was able to secure a large deal of $5 million+ during the quarter.
The company’s investments in adjacencies such as rail, digital health, and off-road vehicle are expected to
drive its growth going ahead. Aggregate net addition employees in the past two quarters remained at 1,098
(14% of Q3FY2021 employee base), which indicates the company’s preparedness to address the ramp-up of
large deals and deal pipeline. Management indicated the strong growth momentum would continue in the
medium term, given strong order book, robust deal pipeline, differentiated capabilities, excellent platforms
across sectors, and strong demand environment.
Margin likely to remain under pressure with the return of normalcy and wage revision: Excluding the one-
time special bonus to all employees, the company’s gross margin improved by 150 bps q-o-q during the quarter.
Improvement in adjusted operating profit margin (OPM) was led by higher offshoring, increasing utilisation,
higher revenue growth, forex gains, and WFH efficiencies. The company rolled-out its wage revision of 7-8%
(similar to earlier years) from July 1, 2021. Management sees some supply-side issues, given strong demand
environment. Management expects margins can be sustainable in FY2022 due to higher revenue growth and
operational efficiencies. The number of onsite employees remained at 10% of its total workforce. We believe
this number would go up once the normalcy returns, which would create margin pressure.
July 16, 2021 4

Stock Update
Strong growth in top accounts: Management indicated that its top account falls under the media and
communication vertical. Revenue from the top five and top 10 accounts grew by 17.2% q-o-q and 12.3% q-o-q,
respectively, given strong account mining.
Attrition and higher offshore mix: Attrition rate increased to 10.2% in Q1FY2022 versus 7.4% in Q4FY2021.
Net addition of employees stood at 552 q-o-q during the quarter. Offshore mix improved to 72.6% from
70.4%/63.5% in Q4FY2021/Q1FY2021. Management highlighted that onsite mix would not move to pre-COVID
era. Total onsite employees were 10% of total employee base. Management indicated that the number of
onsite employees would go up once travel restrictions are removed, but it would go to the pre-COVID level.
Utilisation rate during the quarter stood at 79% in Q1FY2022 compared to 77% in Q4FY2021. Improvement in
utilisation aided in margin improvement during the quarter.
Platform and licensing revenue contribution remained below 5% of its total revenue. Management indicated
that its platforms enable the company to win new customers and differentiate itself from competitors. The
platform’s capabilities help TEL to get new logos and strengthening relationships with existing customers.
Results Rs cr
Particulars Q1FY22 Q1FY21 Q4FY21 Y-o-Y % Q-o-Q %
Revenue ($ mn) 75.7 52.8 71.2 43.3 6.3
Net sales 558.3 400.5 518.4 39.4 7.7
Employee expenses 302.9 251.0 264.8 20.7 14.4
Total purchases 39.7 15.3 30.9 159.3 28.6
Other expenses 65.7 41.5 54.7 58.4 20.2
EBITDA 150.0 92.7 168.0 61.8 -10.7
Depreciation and amortisation 11.9 10.8 11.3 10.1 5.5
EBIT 138.1 81.9 156.7 68.6 -11.9
Other income 17.5 13.4 6.8 30.1 156.5
Finance cost 1.6 1.4 1.9 18.6 -13.4
PBT 153.9 93.9 161.6 63.8 -4.8
Tax provision 40.6 25.1 46.5 61.7 -12.8
Net profit 113.4 68.9 115.1 64.6 -1.5
EPS (Rs.) 18.2 11.1 18.5 64.6 -1.5
Margin (%) BPS BPS
EBITDA 26.9 23.1 32.4 372 -554
EBIT 24.7 20.4 30.2 428 -550
NPM 20.3 17.2 22.2 311 -190
Source: Company; Sharekhan Research
CC revenue growth trend (q-o-q)

12
10
10 9.1
8 6.9
6.4
%
0
Q2FY21 Q3FY21 Q4FY21 Q1FY22
July 16, 2021 5

Stock Update
Top accounts growth trend (q-o-q)

20 17.2
15 12.1
11.0
10 6.9 8.0
4.0 4.8
5
(0.3) 0.8
0
%
-5
-10
(14.3)
-15 (18.8)
-20
-25
Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY22
Top-5 growth (q-o-q %)
Healthcare and medical devices growth trend (q-o-q)

90 83.1
80
70 65.4
60
50.0
%
50
40 34.0
30
20
10
0
Q2FY21 Q3FY21 Q4FY21 Q1FY22
EBIT margin trend

35
30.2
30 27.8
24.8 24.7
23.9
25 22.7 22.3
19.6 20.4
20
%
16.4
15.4
15
10
0
Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY22
July 16, 2021 6

Stock Update
Outlook and Valuation

n Sector view – Large addressable market provides sustainable growth opportunities
Total global ERD spends are estimated at $1.4 trillion in 2019, of which the global addressable ERD market is
at $345 billion, while the share of Indian outsourcing in engineering remained at $29 billion in 2019. The share
of ESPs outsourcing to India is estimated at $14 billion in 2019 and is expected to reach $63 billion by 2025.
Further, the ERD services space is likely to grow faster among technology spends, led by higher adoption of digital
engineering. Digital engineering spends are accelerating across verticals. According to Zinnov, global ER&D is
expected to post a CAGR of 11% to $1.9 trillion by 2023 from $1.4 trillion in 2020. Digital engineering to ER&D spend
ratio is likely to reach 47% in 2023 from 36% in 2020. Further, digital engineering spend is expected to grow to
around $1.1 trillion by 2025 from $404 million in 2019.
n Company outlook – Promising outlook
TEL’s major verticals have a huge growth opportunity, considering an increase in R&D spends in automotive,
consumer electronics, and medical devices. The company has many growth opportunities given that TEL is a
specialist vendor for top OEMs and tier-I suppliers, recent re-allocation of R&D budgets towards electronics and
software, a large addressable market, and differentiated product offerings. However, we model TEL’s USD revenue
and earnings to register a CAGR of 24% and 26%, respectively, over FY2021-FY2024E.
n Valuation – Bright times ahead
We have raised earnings estimates for FY2022E/FY2023E/FY2024E, factoring in strong revenue beat, order
bookings across verticals, healthy deal pipeline, strong account mining, and shift of ER&D budget towards digital
engineering. Although the management expects a gradual recovery in the automotive segment in 2021, it expects
increased hyper-digitisation and technology adoption across industries, including media and communication and
healthcare and medical devices vertical. Operating profitability is expected to be impacted post the return of
normalisation as discretionary expenses would come back. TEL’s USD revenue and earnings are likely to post a
CAGR of 24% and 26%, respectively, over FY2021-FY2024E. We continue to prefer TEL, given its differentiated
technological capabilities, investments in right capabilities, long-standing client relationships, and increasing deal
sizes. At the CMP, the stock is trading at 53x/44x/37x its FY2022E/FY2023E/FY2024E earnings, which though
expensive is justified against anticipated 2x revenue growth as compared to industry’s average growth rate,
superior margin, and solid execution. We maintain our Buy rating on TEL with a revised a price target (PT) of Rs.
5,000, given a strong balance sheet, consistent dividend payout, improving cash generation and its status as a
preferred partner for clients.
One-year forward P/E (x) band
50
45
40
35
30
P/E (x)
25
20
15
10
5
0
Jul-15
Jul-21
Oct-13
Oct-19
Apr-11
May-16
Feb-12
Sep-14
Feb-18
Sep-20
Mar-17
Dec-12
Dec-18
P/E (x) Avg. P/E (x) Peak P/E (x) Trough P/E (x)
Source: Sharekhan Research
Peer valuation
CMP O/S P/E (x) EV/EBIDTA (x) P/BV (x) RoE (%)
MCAP
Particulars (Rs / Shares
(Rs Cr) FY22E FY23E FY22E FY23E FY22E FY23E FY22E FY23E
Share) (Cr)
Cyient 1,062 11 11,689 25.0 20.9 10.9 9.5 3.1 2.8 15.2 16.4
LTTS 3,399 11 35,710 38.5 31.3 24.8 20.9 8.5 7.1 24.5 25.3
Tata Elxsi 4,303 6 26,795 53.0 43.6 38.6 31.4 15.7 12.4 29.7 28.4
Source: Bloomberg; Sharekhan Research
July 16, 2021 7

Stock Update
About company
Bengaluru-based TEL is a global design and technology services company. The company was incorporated
in 1989 as Tata Elxsi (India) Limited. The company provides product design and engineering services and
systems integration and support services in India, the US, Europe, and Rest of the World. The company
also provides solutions and services for emerging technologies such as IoT, big data analytics, cloud,
mobility, virtual reality, and artificial intelligence and brings together domain experience across infotainment,
autonomous driving, telematics, powertrain, and body electronics. The company addresses the automotive,
broadcast and communications, consumer electronics, and healthcare industries supported by its worldwide
network of design studios, development centres, and offices. The company also works with leading OEMs and
suppliers in the automotive and transportation industries for R&D, design and product engineering services
from architecture to launch and beyond.
Investment theme
TEL is an integrated engineering services company with a strong expertise in the automotive and broadcast
and communication verticals. The complex innovation requirements for OEMs need to be cost-effective,
which makes a good case for offshoring to India due to its capabilities along with cost advantage. Change in
business mix would help in improving margins and return ratios. TEL has a strong, debt-free balance sheet,
and a robust cash balance that provide an inorganic growth opportunity, which is crucial in the fast-changing
technology landscape. The company has been generating return on equity in excess of 30% during the past
three years.
Key Risks
(1) Slowdown in the global economy, especially in the automotive industry and ongoing US-China global trade
might affect growth momentum; (2) currency risks; and (3) slower growth in the automotive and broadcast
sectors.
Additional Data
Key management personnel
NG Subramanian Non-Executive Chairperson
Manoj Raghavan Managing Director cum Chief Executive Officer
Nitin Pai CMO and Chief Strategy Officer
H.V. Muralidharan Chief Financial Officer
Girja Vaidyanathan Company Secretary and Compliance Officer
Source: Company Website
Top 10 shareholders
Sr. No. Holder Name Holding (%)
1 Axis Asset Management 3.56
2 Axis Equity Advantage Fund 3.16
3 Tata Investment Corp Limited 2.31
4 Vanguard Group Inc. 1.85
5 BlackRock Inc. 0.89
6 JPMorgan Chase & Co 0.59
7 Invesco Ltd 0.59
8 William Blair & Co LLC 0.55
9 Dimensional fund advisors LP 0.52
10 Norges Bank 0.43
Source: Bloomberg
Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.
July 16, 2021 8

Stock Update
L&T Infotech
Healthy Q1; poised to outrun peers
Powered by the Sharekhan 3R Research Philosophy IT & ITeS Sharekhan code: LTI Result Update
We maintain a Buy on LTI with a PT of Rs. 4,800 as it is well-placed to report revenue growth in
Right Sector (RS) ü the leadership quadrant in FY2022E. Strong sales & marketing practices would help it capture
opportunities.
Right Quality (RQ) ü Q1 revenue growth was strong, while EBIT margins missed estimates; deal pipeline stayed
healthy, new logos were added, and LTI saw broad-based demand across verticals. Cash
generation remained weak.
Right Valuation (RV) ü
Management confident of delivering top-quartile revenue growth in FY2022E, led by strong
large account management, addition of new logos, traction for cloud & data business and strong
+ Positive = Neutral - Negative demand.
Strong hiring, timely wage revisions, investments in sales and capabilities and strategies around
What has changed in 3R MATRIX on cloud & data would aid sustainable growth in coming years. We expect revenue to clock 17%
CAGR over FY2021-24.
Old New
Q1FY22 revenue growth beat expectations led-by broad-based demand across verticals, while
RS  OPM lagged our estimates owing to a second wage revision in 2021. Demand growth was seen
across verticals barring manufacturing, new must-have logos (F-500) were added, net employee
RQ  additions stayed strong and the deal pipeline was healthy. While cash generation remained
weak, the company did not announce any large deal wins during the quarter. Constant currency
RV  (CC) revenue grew by 4.8% q-o-q, led by strong growth in the hi-tech, media & entertainment,
BFS and insurance verticals. Revenue growth in the energy & utilities and insurance verticals
picked up after several quarters of soft performance. Reported USD revenue grew by 5.1% q-o-q
Reco/View Change and 20.4% y-o-y to $470.2 million, exceeding our estimates. EBIT margin declined 295 bps q-o-q
to 16.4%, below our estimates, owing to wage revisions and investments in sales & marketing,
Reco: Buy  which was partially offset by higher productivity and currency tailwinds. LTI rolled out two
wage hikes in 2021, the first salary increment in January 2021 and the second one in April
CMP: Rs. 4,288 2021. The management expects the growth in BFS vertical to continue led by higher adoption
of digital transformation, while growth in insurance space would continue because of a new
Price Target: Rs. 4,800  leadership driving opportunities in the marketplace and creating a partnership ecosystem. The
manufacturing vertical’s growth would bounce back in the coming quarters led by increasing
discrete expenses. Further, LTI has added 4,315 employees in the past two quarters to build
á Upgrade  Maintain â Downgrade
differentiated capabilities to cater to the accelerated demand. The management remains
confident of clocking top-quartile revenue growth in the industry in FY2022E, led by ramp-up of
Company details previous deals, strong large account management, addition of new logos, traction for its cloud
& data business, strong digital competencies, and rising spends on digital transformation. The
Market cap: Rs. 74,951 cr management also guided that FY2022 net profit margins would remain in the narrow band of
14% despite disproportionate investments in building capabilities in new-age technologies and
52-week high/low: Rs. 4,600 / 2,198 sales & marketing.
NSE volume: Key positives

2.9 lakh
(No of shares) CC revenue growth of 4.8% q-o-q was ahead of our estimate
Added one Fortune-500 logo
BSE code: 540005
Added one and three clients in $50 million+ and $10 million+ revenue categories
NSE code: LTI Key negatives
Free float: Revenue growth in the manufacturing vertical remained weak in Q1
4.4 cr Attrition inched up 290 bps q-o-q to 15.2%
(No of shares)
Our Call
Shareholding (%) Valuation – Focus on industry-leading growth: We have fine-tuned our earnings estimates for
FY2022E/FY2023E, factoring in revenue beat in Q1FY2022, increasing F-500 clients base, and
healthy deal pipeline while investments on building capabilities would impact operating profitability.
Promoters 74.3 LTI is expected to deliver strong revenue growth in the coming quarters led by its end-to-end
capabilities in core modernization, deep relationships with top accounts, higher cloud adoption
FII 14.4 and strong S&M practices. Strong hiring, timely wage revisions and investments in businesses
would place it in the top quartile of revenue growth in the industry in FY2022. We expect LTI to
DII 5.0 deliver USD revenue/earnings CAGR of 16.7%/17.4% over FY2021-FY2023E. At the CMP, the stock
is trading at 34x/29x/25x its FY2022E/FY2023E/FY2024E earnings, which, although expensive,
Others 6.4 is justified given possibilities of its strong revenue growth momentum with stable margins and a
robust business model. Hence, we maintain our Buy rating on LTI with an unchanged price target
(PT) of Rs. 4,800.
Price chart
Key Risks
4,500
4,000 Rupee appreciation or/and adverse cross-currency movements and macro pressures would affect
earnings.
3,500
3,000 Valuation Rs cr
2,500
2,000
1,500
Revenue 12,369.8 14,879.6 17,592.6 20,416.3
OPM (%) 22.0 20.1 19.8 19.6
Jul-20
Jul-21
Nov-20
Mar-21
Adjusted PAT 1,881.1 2,251.7 2,641.2 3,045.1

% YoY growth 23.7 19.7 17.3 15.3
Price performance Adjusted EPS (Rs.) 110.3 128.1 150.3 173.3
(%) 1m 3m 6m 12m P/E (x) 38.9 33.5 28.5 24.7
Absolute 1.9 4.8 -2.2 87.1 P/B (x) 10.3 7.9 6.2 4.9
EV/EBITDA (x) 27.2 24.7 21.2 18.5
Relative to
0.7 -4.0 -9.4 41.4 RoNW (%) 30.5 27.9 29.9 34.5
Sensex
RoCE (%) 37.2 33.7 36.1 41.6
July 16, 2021 9

Stock Update
Revenue beat, margins below estimates

L&T Infotech (LTI) reported better-than-expected revenue performance, while margin missed our estimates
owing to wage revisions. CC revenue grew by 4.8% q-o-q and 17.8% y-o-y, led by strong growth in the hi-tech,
media & entertainment (up 13.2% q-o-q CC), BFS (up 8.8% q-o-q CC), and insurance (up 5% q-o-q CC) verticals.
Reported USD revenue grew by 5.1% q-o-q and 20.4% y-o-y to $470.2 million, exceeding our estimates. EBIT
margin declined 295 bps q-o-q to 16.4%, below our estimates, owing to wage revision (-340 bps), absence of
provision write-back (-120 bps), investment in sales and marketing (-60 bps). These margin headwinds were
partially offset by higher productivity (+140 bps) and currency tailwinds (+80 bps). LTI rolled-out two salary
increments in two consecutive quarters in 2021, the first in January and the second in April. Net profit came
at Rs. 496.8 crore (up 1.7% q-o-q and up 19.3% y-o-y) and was marginally ahead of our estimates, aided by
higher forex gains. OCF/net profit stood at 19% in Q1FY22 versus 146%/152% in Q4FY21/Q1FY21 respectively.
Expect strong revenue growth in FY2022; Deal pipeline remains strong
Despite nearly double-digit revenue growth in FY2021, the management remains confident of locking top-
quartile revenue growth in FY2022E as well. Growth would be driven by increasing spends on transformation
initiatives, prudent client mining, new account openings, ramp-up of large deals, and strong execution. Strong
client relationships, must-have logos (F-500 clients), superior digital competencies, and opportunities around
cloud & data products business would help the company outperform and help it stay in the leadership
quadrant of the industry in terms of revenue growth in FY2022.
Guided net profit margin likely to be in the narrow band of 14%
Given talent supply constraints, the company proactively recruited 4,315 employees (14.5% of total employee
base in FY2020) during FY2021. Further, the company focuses on getting the right set of people for sales,
marketing, and delivery of digital projects and co-create solutions with customers. We believe investments in
new technology areas, sales and marketing (S&M) team, go-to-market (GTM) strategy, infrastructure around
cloud and products, and wage revisions would impact margins in the coming quarters. Management has
retained its net profit margin guidance of 14% because of revenue growth, higher offshoring revenue, and
WFH efficiencies.
Key result highlights
Commentary on large deal win TCVs: The company did not announce any large new deal wins but
highlighted that the deal pipeline remained strong. The management remains optimistic of reporting
large deals in the coming quarters as it continues to invest in right capabilities. Management witnesses
deal across all sizes.
Revenue outlook and net profit margin guidance: Management indicated that it witnesses strong
acceleration of digital transformation program across each of its 400-plus customers. It also highlighted
that discretionary spend has been increasing with demand for projects to be executed at the offshore
location. The company plans to scale the supply by adding 4,500 freshers during the year. LTI has
added 4,315 employees over last two quarter in order to build differentiated capabilities to cater to the
accelerated demand. The company’s data products got a strong validation from the market and recognition
from the analyst community. With a healthy deal pipeline, sustained client mining strategies, ramp-up of
deals won earlier, and strong conversions with customers, management remains confident on delivering
industry-leading growth in FY2022E despite delivering strong growth in FY2021. Management reiterated
that the company would remain in the leaders’ quadrant of the industry in terms of revenue growth in
FY2022. LTI would continue to invest on building capabilities, sales and marketing, and infrastructure
around cloud and product units to drive its growth. Despite investments and wage revision, management
remains confident in maintaining net profit margin guidance at the narrow band of 14% in FY2022.
Strong growth in key verticals: During Q1FY2022, the BFS vertical reported strong CC revenue growth
of 8.8% q-o-q (versus +5.0% in Q4FY2021), while hi-tech, media & entertainment and insurance verticals
reported strong revenue growth of 13.2% q-o-q and 5.0% q-o-q respectively on a CC basis. The energy
& utilities and CPG, retail and pharma verticals reported a revenue growth of 4.6% q-o-q and 4.2% q-o-q
respectively. Manufacturing vertical revenue declined 6.7% q-o-q on a CC basis after a +5% q-o-q growth
in Q4FY2021, owing to absence of pass-through revenue. The company reported strong growth in the
insurance and energy & utilities verticals after several quarters of soft performance.
Strong growth across service offerings (except enterprise solutions): Revenue from ADM and testing,
analytics, AI & cognitive and enterprise integration & mobility reported strong sequential CC growth of
7.1% q-o-q, 10.3% q-o-q and 12% q-o-q, respectively on CC basis. Revenue from cloud infrastructure &
security services offerings grew by 2.8% q-o-q in CC terms. Revenue from enterprise solutions declined
by 0.5% q-o-q owing to the absence of pass-through revenue during the quarter.
July 16, 2021 10
Stock Update
Geography-wise performance: Rest-of-the-world (RoW), North America and Europe reported strong
revenue growth, registering CC revenue growth of 19.1% q-o-q, 6.2% q-o-q and 4.9% q-o-q. Revenue in
India declined by 19.9% q-o-q on CC.
Opportunities around cloud and data product businesses: The management highlighted that two areas
have emerged as new opportunity areas based on the conversion of market trends and its capabilities in
new-age technologies. These are - (1) cloud business – work along with hyperscalers (AWS, Azure, and
GCP) and (2) data product business with marketing platform (Mosaic and Lymbyc). The company had
carved out two separate units to focus on cloud and data products. On the cloud side, the company has
made significant progress, both in terms of setting up a dedicated organisation and in terms of market
success. The management indicated that it has started seeing traction in the cloud segment with new wins
and implementation across all geographies. Management highlighted that it has separate sales team for
its products at country level.
Strong growth in the BFS vertical, while the insurance vertical recovered: The BFS vertical’s revenue
grew by 8.8% q-o-q and 34.7% y-o-y in CC terms, led by ramp-up of deals and existing clients. Insurance
vertical’s revenue growth accelerated to 5% q-o-q and 0.4% y-o-y (up 0.6% q-o-q on CC and down 7%
y-o-y in Q4FY2021), led by new logos addition, ramp-up of large deals and mining of existing clients. The
insurance sector returned to a growth trajectory on expected lines. The management expects revenue
growth in the insurance sector would continue on the back of new leaderships who would be driving
opportunities in the marketplaces and partnership ecosystem.
Manufacturing vertical revenue growth remained weak: The manufacturing vertical’s revenue declined
6.7% q-o-q on a CC basis. Weak revenue growth in manufacturing was due to absence of pass-through
element in India business. The sequential decline in revenue growth in India and enterprise business
was also attributed to absence of pass-through element in India business. Management indicated that
demand environment remains healthy in manufacturing space given a rise in discrete spends.
The energy and utilities vertical: E&U vertical’s revenue grew by 4.6% q-o-q in Q1FY2022 on CC terms after
several quarters of muted performance, led by strong growth in utilities space. Management highlighted
that client budgets in this space continue to remain volatile. The company had won a large deal in this
space from a F-500 company during Q3FY2021, which is expected to ramp-up in coming quarters. Hence,
the growth momentum would continue in this vertical going ahead.
CPG, retail, and pharma: These verticals’ revenue grew by 4.2% q-o-q on CC terms and increased by
8.7% y-o-y during the quarter. Growth was driven by ramp-up of its large deals won earlier and its existing
logos as well.
Hi-tech, media and entertainment: Revenue grew by 13.2% q-o-q on CC terms and increased by 31.2%
y-o-y on CC during the quarter. The company’s large deal win momentum continues to progress in these
verticals.
Revenue growth accelerated in top accounts: Revenue from the top five accounts grew by 6.6% q-o-q
(versus a decline of 0.8% q-o-q in Q4FY2021). Revenue from the top 10/20 accounts grew by 5.9%/4.3%
q-o-q (versus growth of 2.1%/1.8% q-o-q in Q4FY2021).
Client metrics in large categories: LTI added 23 new clients (versus 14 new clients in Q4FY2021) across
all verticals in Q1FY2022. The company added one new F-100 logos during the quarter, taking total
F-500 logos to 72. The number of clients under the $100 million client buckets remained flat q-o-q,
while the number of clients under the $50 million, $10 million and $5 million increased by 1, 3 and 2
clients respectively, q-o-q. On a y-o-y basis, the number of clients under the $20 million client buckets
increased by 20, while the number of clients under the $10 million and $5 million category grew by 8 and
7, respectively.
Operating cash flow to net profit: Operating cash flow stood at Rs. 94.3 crore (up 87% q-o-q and down
85% y-o-y). Operating cash flow to net profit remained at 19% in Q1FY2022 versus 146% in Q4FY2021.
Cash flow generation was impacted owing to (1) payout of annual incentive, (2) increase in DSO, including
unbilled revenue and (3) cash outflow to licensed vendors.
DSO: Billed DSO improved by one day to 60 days. DSO including unbilled revenue stood at 98 days, an
increase of four days sequentially.
July 16, 2021 11

Stock Update
Results Rs cr
Particulars Q1FY22 Q1FY21 Q4FY21 y-o-y (%) q-o-q (%)
Revenue ($ mn) 470.2 390.3 447.4 20.5 5.1
Revenue (Rs. cr) 3,462.5 2,949.2 3,269.4 17.4 5.9
Direct costs 2,389.8 1,991.6 2,223.3 20.0 7.5
SG&A 424.9 365.6 330.6 16.2 28.5
EBITDA 647.8 592.0 715.5 9.4 -9.5
Depreciation 79.5 78.1 82.6 1.8 -3.8
EBIT 568.3 513.9 632.9 10.6 -10.2
Other income (including FX) 103.9 45.0 83.9 130.9 23.8
PBT 672.2 558.9 716.8 20.3 -6.2
Tax provision 175.4 142.5 171.1 23.1 2.5
Net profit 496.8 416.4 545.7 19.3 -9.0
EPS (Rs.) 28.3 23.7 31.0 19.1 -8.9
Margin (%) Bps bps

EBITDA 18.7 20.1 21.9 -136 -318
EBIT 16.4 17.4 19.4 -101 -295
NPM 14.3 14.1 16.7 23 -234
Operating metrics Rs cr
Revenues Contribution $ Growth (%) CC growth (%)
Particulars
($ mn) (%) Q-o-Q % Y-o-Y % Q-o-Q % Y-o-Y %
Revenue ($ mn) 470 100 5.1 20.4 4.8 17.8
Geographic mix
North America 315 67.0 6.4 14.0 6.2 13.5
Europe 78 16.6 5.7 38.9 4.9 27.5
ROW 45 9.6 20.1 46.4 19.1 42.1
India 32 6.7 -20.9 17.0 -19.9 14.6
Industry verticals
BFS 151 32.1 9.9 39.6 8.8 34.7
Insurance 68 14.5 5.1 1.6 5.0 0.4
Manufacturing 71 15.0 -6.7 14.4 -6.7 12.6
Energy & Utilities 43 9.1 5.1 1.5 4.6 -0.1
CPG, Retail and Pharma 50 10.7 4.1 12.1 4.2 8.7
High-Tech, Media and 60 12.7 13.1 31.9 13.2 31.2
Entertainment
Others 28 5.9 0.0 31.6 0.5 28.5
Service offerings
ADM and Testing 160 34.0 7.3 15.1 7.1 12.9
Enterprise Solutions 144 30.7 -0.1 24.5 -0.5 21.1
Cloud Infrastructure & Security 0 2.8 0.1 0.0 0.0 0.0
Analytics, AI and Cognitive 55 11.7 10.8 12.8 10.3 11.3
Enterprise Integration and 41 8.7 11.5 21.9 12.0 19.5
Mobility
Digital business
Digital 204 45.6 7.5 22.3 NA NA
Core 243 54.4 2.3 0.1 NA NA
July 16, 2021 12

Stock Update

n Sector view - Expect acceleration in technology spending going forward
The COVID-19 pandemic is estimated to drag the world output by 3.3% in CY2020, as advanced economies
see GDP shrink by 4.7%. As a result, global technology spend is estimated to have declined 3.2% to $1.4
trillion in 2020. Within that, IT services spending is likely to have declined 3.9%, while business process
management spends fell by 2.4%. After the initial dislocations led to contractions, the need for business
continuity, operational resilience and the switch to digital transactions has led to strong demand for IT services.
Industry analysts such as Gartner estimate that IT services spending would grow by 7-9% over CY2021-
CY2024E as compared to the average of 3.6% achieved over CY2010-CY2020. Forecasts indicate higher
demand for cloud infrastructure services, a potential increase in specialised software, potential investments
in transformation projects by clients, and increased online adoption across verticals.
n Company outlook - Superior execution likely to drive outperformance
We believe that LTI’s prudent strategies along with an efficient sales force would lead to market share gains
in large accounts and new deal wins. Hence, we expect LTI to deliver industry-leading revenue growth in the
long term on account of consistent large deal wins and pipeline, a higher digital mix, prudent account mining
strategies and a marquee client base. Further, LTI’s sharp focus on bringing new-age disruptive technologies
along with leveraging platforms (in-house and external) would help it transform the core business of enterprises
on a large scale.
n Valuation - Focus on industry-leading growth
We have fine-tuned our earnings estimates for FY2022E/FY2023E, factoring in revenue beat in Q1FY2022,
increasing F-500 clients base, and healthy deal pipeline while investments on building capabilities would
impact operating profitability. LTI is expected to deliver strong revenue growth in the coming quarters led by
its end-to-end capabilities in core modernization, deep relationships with top accounts, higher cloud adoption
and strong S&M practices. Strong hiring, timely wage revisions and investments in businesses would place it
in the top quartile of revenue growth in the industry in FY2022. We expect LTI to deliver USD revenue/earnings
CAGR of 16.7%/17.4% over FY2021-FY2023E. At the CMP, the stock is trading at 34x/29x/25x its FY2022E/
FY2023E/FY2024E earnings, which, although expensive, is justified given possibilities of its strong revenue
growth momentum with stable margins and a robust business model. Hence, we maintain our Buy rating on
LTI with an unchanged price target (PT) of Rs. 4,800.
One-year forward P/E (x) band
40
35
30
25
P/E (x)
20
15
10
0
Jul-16
Aug-19
Jul-21
Oct-20
Apr-17
Nov-18
May-20
Sep-17
Feb-18
Feb-21
Jan-20
Mar-19
Dec-16
Jun-18
P/E (x) Avg. P/E (x) Peak P/E (x) Trough P/E (x)
Peer comparison
CMP O/S P/E (x) EV/EBITDA (x) P/BV (x) RoE (%)
MCAP
Company (Rs / Shares
(Rs Cr) FY22E FY23E FY22E FY23E FY22E FY23E FY22E FY23E
Share) (Cr)
Persistent 2,843 8 21,730 35.8 28.7 24.8 19.8 6.9 6.0 20.3 22.3
TCS 3,195 370 11,81,717 29.8 26.3 21.1 18.8 12.2 10.7 42.6 43.4
LTI 4,288 17 74,951 33.5 28.5 24.7 21.2 7.9 6.2 27.9 29.9
Source: Bloomberg; Sharekhan Research
July 16, 2021 13

Stock Update
About company
Promoted by Larsen & Toubro (L&T) in 1996, LTI is the sixth largest ($1,670 million in FY2021) IT services
company in India in terms of export revenue and is among the top-20 IT service providers globally. With
operations in 27 countries, LTI provides technology consulting and digital solutions to around 289 clients
across the globe. LTI provides services to 72 of the Fortune Global 500 companies. The company has 23
delivery centres and 43 sales offices, with employee strength of over 38,290+. LTI’s vertical focus is heavily
towards banking and financial services, insurance, and manufacturing, which together contribute ~62% to
total revenue.
Investment theme
A multitude of factors such as strong execution capabilities, a dynamic sales team, accelerating revenue
contribution from its digital business, leverage of domain experience, solid top account mining, and healthy
deal wins have been helping LTI to outpace the average industry growth rate. Further, the gradual increase
in digital deal sizes along with high volume digital deals and migration of the legacy business has helped
the company grow at a rapid pace compared to its peers. We believe the sharpened focus on large account
mining and new client additions augurs well for LTI to deliver above-industry average revenue growth.
Key Risks
1) Rupee appreciation or/and adverse cross-currency movements; 2) any hostile regulatory visa norms could
affect employee expenses; and 3) macro pressure would hit growth in key verticals.
Additional Data
A. M. Naik Founder Chairman
S. N. Subrahmanyan Non-Executive Vice Chairman
Sanjay Jalona CEO & MD
Sudhir Chaturvedi President sales
Source: Company
Top 10 shareholders
1 UTI Asset Management Co Ltd 1.82
2 Blackrock Inc 0.92
3 Wasatch advisors Inc 0.90
4 Vanguard Group 0.75
5 Aditya Birla Sun life Asset management 0.55
6 ICICI Prudential Asset Management 0.51
7 Mirae Asset Global Investments 0.19
8 Dimensional Fund Advisors 0.16
9 Nippon life India Asset Management 0.15
10 William Blair and CO LLC 0.15
Source: Bloomberg
July 16, 2021 14

Stock Update
HDFC Bank
Q1 a mixed bag as NPLs rise
Powered by the Sharekhan 3R Research Philosophy Banks & Finance Sharekhan code: HDFCBANK Result Update
Operational performance was mixed in Q1FY2022.NII growth at 8.6% y-o-y in Q1QFY22
Right Sector (RS) ü was lowest since Q1FY16 due to slower retail loan growth. NIM slid 10 bps lower q-o-q
to 4.1%. PAT met expectations despite higher provisions, but this provides bank adequate
cushions going ahead.
Right Quality (RQ) ü
Asset quality deteriorated q-o-q primarily due to subdued collections given the lockdowns
in April-May amid the second wave of COVID-19. Advances rose decently and an improved
Right Valuation (RV) ü CASA ratio helped sustain NIM q-o-q.
HDB financials earnings contracted 44% y-o-y in 1Q due to the end wave of pandemic.
+ Positive = Neutral - Negative GNPL to 7.75% in 1Q from 3.9% in 4QFY21
Stock currently trades at 3.9x/3.4x its FY2022E/FY2023E ABVPS, it has underperformed
What has changed in 3R MATRIX the broad BSE Sensex by 5% in the past 12 months, indicating a favourable risk-reward.
We retain a Buy with an unchanged price target (PT) of Rs. 1,810.
Old New
Q1FY2022 results saw steady operational performance, and Asset quality deteriorated (amid the
RS  second wave of COVID-19).NIM fell 10 bps q-o-q to 4.1% due to excess liquidity. Asset quality surprised
negatively, with GNPA deteriorating q-o-q. Meanwhile, a decent pick-up in advances and stable CASA
RQ  helped NIM sustain sequentially. PAT was in line with our expectations despite additional contingent
provisions of Rs.600 crore, mainly amid the second wave of COVID-19. However, we believe that the
bank is well-placed with adequate provisions, which provides a cushion for profitability, going forward.
RV  Total provisions at 146% of GNPL as of June shield the balance sheet. Retail credit growth remained
subdued at 9.3% y-o-y indicating continuing bank’s cautious stance aided further by the lockdown
in April-May. This impacted loan origination and sale of third party products. Corporate loan growth
Reco/View Change remains very strong, leading to retail share slipping to 45% from 47% in Mar-21. Bank has indicated its
strategy would continue to capture market share incorporate loans and has built a strong commercial
Reco: Buy  banking and rural portfolio (33% of the total portfolio). It expects thisto be a strong earnings driver,
going forward. NII stood at Rs. 17009 crore for Q1FY22, up 8.6% y-o-y (in line with expectations), while
CMP: Rs. 1,522 PAT stood at Rs. 7,730 crore, up 16.4% y-o-y,in line with expectations. NIMs came in at 4.1% (10 bps
lower sequentially and within the guidance range) due to healthy advances growth and high CASA
Price Target: Rs. 1,810  share. Retail collection efficiency (CE) and bounce rates were impacted severely in April-May-21
amid the second COVID-19 wave and the subsequent lockdowns. However the collection efficiencies
á Upgrade  Maintain â Downgrade have improved in June & July-21 basis is encouraging. This has led slippages at 2.54% in Q1FY22
higher than 1.66% seen in Q4FY2022.Asset Quality and profitability performance for subsidiaries,
deteriorated. GNPAs of its subsidiary HDB Financial, (a subsidiary of HDFC Bank) increased to 7.75%
Company details in 1QFY22 from 3.9% in Q4FY21. Going forward, we expect the bank to further leverage technology/
reach to gain market share across business lines, buoyed by better efficiencies and, thereby, deliver
Market cap: Rs. 841,001 cr superior RoAs. We expect HDFC Bank’s business quality and franchise strength will help it tide over
near-term challenges and to be well-placed to benefit from normalcy in business. We have fine-tuned
52-week high/low: Rs. 1,650/994 our estimates and the target multiple for the bank considering the dynamic environment. We retain a
Buy rating on the stock with an unchanged price target (PT) of Rs. 1,810.
NSE volume:
87.0 lakh Key positives
(No of shares)
Earnings rose 16% y-o-y despite a 24% y-o-y increase in provisions. The provision cushion would shield
BSE code: 500180 the balance sheet from any adverse economic downturn.
NSE code: HDFCBANK Growth traction was healthy as domestic advances rose by 14% y-o-y; indicating market share gains.
NIMs stable at 4.1%, in line with the long-term guidance range.
Free float:
409 cr Key negatives
(No of shares)
Gross NPLs increased 24% y-o-y to INR17099 cr in 1Q led by the 2nd wave of Covid. The subsequent
lockdown led to lower collections and recovery.
Shareholding (%) Slowest y-o-y growth in NII in Q1FY22 since Q1FY16
Promoters 26.0 Weak financial performance of HDB Financials with earnings contracting 44% y-o-y
Our Call
FII 39.8 HDFC Bank currently trades at 3.9x/3.4x its FY2022E/FY2023E ABVPS, and stock has underperformed the
broad indices by 5% over the past 1 year. The risk-reward is now favourable. Considering the challenging
DII 13.0 times, we expect resilience and a strong business model will be all the more important, as evident with
HDFC Bank which is well-capitalised and has a strong balance sheet. The bank’s consistency is buoyed
Others 23.3 by its robust underwriting capability, risk measurement standards and focused on high quality corporates,
which support the valuations. We find the management’s focus for stable NIMs, and a structurally
improving cost-income ratio encouraging, while the high provisioning buffer should support asset quality
Price chart and profitability. We have fine-tuned our estimates and the target multiple for the bank considering the
dynamic environment. We retain a Buy rating on the stock with a unchanged price target (PT) of Rs. 1,810.
Key Risks
Prolonged uncertainty due to intermittent lockdowns may impact growth and rise in NPAs in unsecured
and other retail segments can pose a risk to profitability.
Valuation Rs cr
Particulars FY20 FY21 FY22E FY23E FY24E
Net interest income 56,186 64,880 77,416 88,679 1,05,416
Net profit 26,257 31,117 36,258 43,006 52,773
Price performance EPS (Rs) 47.9 56.5 65.9 78.1 95.9
PE (x) 31.8 26.9 23.1 19.5 15.9
(%) 1m 3m 6m 12m
Adj book value (Rs/share) 299.8 348.3 392.1 445.5 511.3
Absolute 3 6.5 -4.1 38
P/ABV (x) 5.1 4.4 3.9 3.4 3.0
Relative to
1 -2 -12 -5 RoE (%) 16.4 16.7 16.9 17.6 18.9
Sensex
RoA (%) 1.9 1.9 1.9 2.0 2.0
July 16, 2021 15

Stock Update
HDFC Bank Q1 FY2022 Concall Notes

On economy: High frequency data such as power demand, automobile sales and rural demand were severely
impacted in April-May 2021 due to localised lockdown led by second COVID-19 wave. It however picked in
June-21. Bank has improved its ranking to second place as debt arrangers. Efforts on franchise building
continue and balance sheet remains resilient.
Market share gains across board: Bank signed up 1.71 lakh village level entrepreneurs - 15,656 (from ~13,500
in Q3FY21) business correspondents. In its Healthcare initiative, has reached out to more than 200 hospitals
and has activated funding at hospitals in Q1FY22.Bank has successfully acquired 2.67mn corporate salary
accounts
Liquidity: Average liquidity coverage ratio stood at 126% and the excess liquidity has impacted NIMs by 10
bps.
CRAR: The CRAR is at 19.1% and CET-1 is at 17.9%
Technology-related outages: Card management, sourcing, activation – investments are continuously being
made. Three-fourths of sourcing comes from existing customers of the bank – they all have debit cards and
can give instalment or revolving facility on debit cards. Portfolio activation in cards were up. Bank is doing
independent Audit which is in final stage and will update more as it hears from the regulator. Looking to build
capabilities on core system, partnering with OEMs etc. Setting highest standards – recovery time, recovery
point, consolidation of data centers and enhancement in security.
Asset sales: The bank sold Rs. 1,800 crore worth of assets and will continue to do so wherever it finds a higher
economic value.
Asset quality: Gross NPLs increased 24% y-o-y to Rs. 17,099 crore. This was led by a decrease in – 1) loan
originations, 2) sale of third-party products, 3) use of credit and debit cards by customers and the lower
collection. This led to continued rise in the number of defaults and consequently higher NPLs and provisions.
HDFC Bank has made adequate and prudent provisions. Total provisions were 146% of total GNPLs as of
Q1FY22.
Recoveries: Recoveries were impacted due to the second wave of COVID-19 and lockdown has been at 14%
(versus 30% in Q4FY21)
Provision coverage: Loan loss provisions for Q1FY22 stood at Rs. 4219.7 crore out of total provision of Rs.
4,831 crore. The bank also held floating provisions of Rs. 1450 crore and contingent provision of Rs.6,596
crore.
Movement of NPLs: Core annualised slippages in Q4FY21 is 2.54% or Rs7300 crore. GNPLs excluding agri is
1.3%.Core credit cost is 1.47% (as compared to 1.11% in the previous quarter).
Business outlook: In the retail segment, the bank is seeing resilience in middle-class customers, who are
now coming back. We expect robust growth in personal loans, home loans, etc. We expect strong growth in
Q2FY2022 although the bank will have to be more careful and do more micro-issue focused, but the outlook
is positive.
Restructuring: Restructuring under the RBI’s resolution framework for COVID-19 was approximately 60 bps of
advances and was done as per the customers’ request.
Provision Coverage: In Q1FY22, the bank set aside higher provision because of anticipated stress due to
weak collections and COVID second wave. PCR (calculated) was stable at 67% and was lower than 70% in
Q4FY21
Risk assessment of Advances book: As externally rated, nearly 86% of the wholesale portfolio is AA & AAA.
In Q1FY21, the management has shared that the risk assessment is also done internally by scale of HDB - 1
to 10, which has served the bank well over the years and is time tested. As of Q1FY22, the weighted average
asset scale of 1 to 10 stood at 4.35 against 4.43 in Q4FY21. The unsecured books have a better underwriting
process in the absence of any collateral. The credit to top 20 borrowers are at a scale of 2.12. Around 65% of
the incremental portfolio are ‘AA or above’.
Deposits: Deposits stood at Rs13,45,829 crore and grew by 13.3% y-o-y and 0.8% q-o-q; CASA ratio stood at
45.5% against 43% in the previous quarter. Retail deposits contributed to 80% of total deposits.
HDB Financial: Loan book increased 1% y-o-y to Rs. 57,390 crore. Net income rose 3% to Rs. 1656 crore while
PPoP decreased 15% y-o-y to Rs. 644 crore. Net profit contracted 44% to Rs. 133 crore in Q1FY22 due to 4%
y-o-y increase in provisions. GNPA increased to 7.75% in Jun-21 from 3.9% in March 2021.
July 16, 2021 16
Stock Update
Results Rs cr
Particulars Q1FY22 Q1FY21 y-o-y % Q4FY21 q-o-q%
Interest income 30483 30377.97 0.35% 30423.59 0.2%
Interest expense 13474.00 14712.55 -8.42% 13303.44 1.3%
Net interest income 17009.00 15665.42 8.58% 17120.15 -0.6%
Non-interest income 6288.50 4075.31 54.31% 7593.91 -17.2%
Net total income 23297.50 19740.73 18.02% 24714.06 -5.7%
Operating expenses 8160.58 6911.46 18.07% 9181.29 -11.1%
Pre-provisioning profit 15136.92 12829.27 17.99% 15532.77 -2.5%
Provisions 4831.00 3891.52 24.14% 4693.70 2.9%
Profit before tax 10305.92 8937.75 15.31% 10839.07 -4.9%
Tax 2577.00 2279.00 13.08% 2652.56 -2.8%
Profit after tax 7728.92 6658.75 16.07% 8186.51 -5.6%
Asset Quality
Gross NPAs 17098.50 13773.46 24.14% 15086.00 13.3%
-Gross NPA (%) 1.47 1.36 11 bps 1.32 15 bps
Net NPAs 5819.12 3279.96 77.41% 4554.82 27.8%
-Net NPA (%) 0.48 0.33 15 bps 0.36 12 bps
Key reported ratios (%)
NIM (%) 4.10 4.20 -10 bps 4.30 20 bps
CASA (%) 45.50 40.00 5.5 ppt 46.00 0.5 ppt
Source: Company; Sharekhan Research; Note – ppt – percentage point
July 16, 2021 17

Stock Update

n Sector view - Credit growth yet to pick up, private banks are better placed
System-level credit offtake, which is still subdued, is now improving, with credit growth of over 5.8% in the latest
fortnight. On the other hand, deposits rose by ~10%, which indicate relatively healthy economic scenario. Moreover,
the accommodative stance of the Reserve Bank of India (RBI), resulting in surplus liquidity, provides succour in terms of
easy availability of funds and lower cost of funds for banks and financials. Going forward, collection efficiency is likely
to be a function of book quality, client profile, as well as economic pickup. At present, we believe the banking sector is
likely to see increased risk-off behaviour, with tactical market share gains for well-placed players. We believe private
banks which are retail focused, strong capital and superior asset quality (with high coverage and provisions buffers) are
structurally better placed to take-off once the situation normalises.
n Company outlook - strong fundamentals to continue
We believe structural drivers are in place for HDFC Bank, helping it gain market share, aided by operational efficiencies
and best-in-class asset quality. Going forward, we see growth outlook improving on credit cost and growth, even
though medium-term challenges remain. The bank has built strong provision buffer, which work as a strong bulwark
against probable future risks. Notably, the franchise continues to be one of the best-managed and strongest business
models and needs to be seen from a long-term perspective. Overall, asset quality looks sanguine, with its calibrated
growth and strong underwriting and assessment capabilities and healthy digitalisation benefits adding to the moat of
its business strength. HDFC Bank’s floating provision cushion of Rs. 1,451 crore and contingent provisions of Rs. 6,596
crore (June 2021) along with comfortable capitalisation levels (Tier-1 ratio at 17.9%) are additional positives. We believe
HDFC Bank’s business quality and franchise strength will help it tide over near-term challenges.
n Valuation - Maintain buy with an unchanged price target (PT) of Rs. 1,810
HDFC Bank currently trades at 3.9x/3.4x its FY2022E/FY2023E ABVPS, and stock has underperformed the broad indices
by 5% over the past 1 year. The risk-reward is now favourable. Considering the challenging times, we expect resilience
and a strong business model will be all the more important, as evident with HDFC Bank which is well-capitalised and
has a strong balance sheet. The bank’s consistency is buoyed by its robust underwriting capability, risk measurement
standards and focused on high quality corporates, which support the valuations. We find the management’s focus for
stable NIMs, and a structurally improving cost-income ratio encouraging, while the high provisioning buffer should
support asset quality and profitability. We have fine-tuned our estimates and the target multiple for the bank considering
the dynamic environment. We retain a Buy rating on the stock with a unchanged price target (PT) of Rs. 1,810.
One-year forward PBV (x) band
5.5
4.0
2.5
1.0
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
Jul-20
Jul-21
PBV +1 sd 3-yr Avg -1 sd
Peer Comparison
CMPP/BV (x) P/E (x) RoA (%) RoE (%)
Particulars
(Rs)
FY22E FY23E FY22E FY23E FY22E FY23E FY22E FY23E
HDFC Bank 1,522 3.9 3.4 23.1 19.5 1.9 2.0 16.9 17.6
ICICI Bank 660 2.0 2.7 22.4 18.1 1.0 1.6 12.7 14.0
Axis Bank 771 2.5 2.2 23.2 21.7 0.7 1.4 9.5 9.4
Source: Company, Sharekhan research
July 16, 2021 18

Stock Update
About company
HDFC Bank is the largest private sector bank with a pan-India presence. The bank has been designated by
the Reserve Bank of India (RBI) as a domestic systemically important bank (D-SIB), underlining its importance
in the financial system. HDFC Bank caters to a wide range of banking services covering commercial and
investment banking on the wholesale side and transactional/branch banking on the retail side. The bank’s
loan book is well balanced between retail and wholesale loans. As a business entity, HDFC Bank continues
to deliver steady performance with well-maintained margins and conservative asset-quality performance.
Investment theme
HDFC Bank is among the top performing banks in the country having strong presence in the retail segment
with strong asset quality and best-in-class margins. Not only the bank, but its strong and marquee parentage
enjoy arguably the strongest brand recall in the country, which is at a significant competitive advantage in
the Indian banking space. Buoyed by a strong brand appeal, impressive corporate governance, and strong
management team (consistency in performance and best-in-class granular clientele) has enabled HDFC bank
to be a long-term wealth creator for investors, and the above factors still hold true. The bank continues to
report consistent margins and advances growth over the years across various credit/interest rate cycles and
has been able to maintain its asset quality too, which is indicative of the strong business franchise strength
and leadership qualities. We believe the bank has a strong business model and is relatively well placed to
tide over near-term challenges.
Key Risks
Prolonged uncertainty due to intermittent lockdowns may impact growth and rise in NPAs in unsecured and
other retail segments can pose a risk to profitability.
Additional Data
Mr Sashidhar Jagdishan Managing Director/CEO
Mr Jimmy Tata Chief Risk Officer
Mr Srinivasan Vaidyanathan Group Chief Financial Officer
Mr Vinay Razdan Chief Human Resources Officer
Mr Ashish Partharsarthy Treasurer
Ms Ashima Bhat Head - Finance & Strategy
Source: Company
Top 10 shareholders
1 Capital Group Cos Inc/The 6.2
2 HDFC Investment Ltd 5.5
3 SBI-ETF NIFTY 50 3.3
4 EUROPACIFIC GROWTH FUND 3.6
5 LIFE INSURANCE CORPORATION OF INDIA 3.4
6 SBI Funds Management Pvt Ltd 2.9
7 Morgan Stanley 1.7
8 FIL Ltd 1.4
9 FMR LLC 1.1
10 ICICI PRUDENTIAL Life Insurance Co Ltd 1.0
Source: Bloomberg
July 16, 2021 19

Viewpoint
Gati Limited
On road to reclaim lost glory
Powered by the Sharekhan 3R Research Philosophy Logistics Sharekhan code: GATI New Idea
Right Sector (RS) ü We initiate viewpoint coverage on Gati Limited (Gati) with a positive view and expect an upside of 23-
25% considering strong earnings growth led by a turnaround and discounted relative valuation.
Gati is embarking on a high earnings growth path post its acquisition by Allcargo Logistics. Divestment
Right Quality (RQ) ü of unrelated business and sale of non-core assets would help company focus on core businesses.
Gati eyes a net cash surplus by FY2023, versus a highly leveraged balance sheet in FY2020 through
Right Valuation (RV) ü divestment of key subsidiaries, non-core asset sales and improvement in OCFs.
Company eyes double-digit revenue growth with OPM reverting to 10.5-11% over next two years. Focus
+ Positive = Neutral - Negative is regaining lost market share with asset-light capacity expansion.
The logistics industry had been one of the key sectors which showed a strong revival post COVID-19
pandemic. Domestic indicators like e-way bill generations, FASTag collections, Indian rail freight volume,
Reco/View domestic port volumes and foreign trade are showing clear signs of revival. Organised domestic logistics
players have been able to improve business led by user-industries’ preference towards credible supply
View: Positive chain management. Further, the third-party logistics (3PL) space has seen a faster improvement in
operations led by segments like e-Commerce, pharma and FMCG. The express logistics industry (~Rs.
CMP: Rs. 163 25,000 crore, ~2.5% of the Indian logistics industry) is slated to grow at 15% CAGR over FY2020-FY2025.
The B2B segment (~Rs. 13,500 crore, 50% organized market share) is expected to grow at a 13% CAGR over
Upside potential: 23-25% FY2020-FY2025. National logistics players are expected to clock a fast ~20% CAGR over FY2020-FY2025
compared to regional peers. Gati is on a high earnings growth trajectory for the next 2-3 years, which
began post the company’s acquisition by Allcargo logistics in March 2020. Gati, with a strong foothold
in the B2B segment has a strong double-digit growth opportunity going ahead which would be lead by
Company details market share gains from both existing players and new customer accounts. Allcargo partnered with
turnaround specialists Alvarez & Marshal and launched Project Avvashya to redefine Gati and restructure
its business processes. The restructuring involves divestment of subsidiaries (domestic and overseas)
Market cap: Rs. 2,005 cr
and fuel station businesses, which were unrelated businesses, sale of land & buildings, significant paring
of debt and contingent liabilities, deep rationalization of costs (manpower and overheads), streamlined
52-week high/low: Rs. 180/42 working capital (debtors & payables) and senior leadership changes which would going ahead lead to
asset-light focused approach on its two core businesses 1) B2B Express (Gati KWE), 2) B2C (e-commerce
NSE volume: business for Gati standalone). Gati had trimmed consolidated gross debt from Rs. 411 crore in FY2020
16.0 lakh
(No of shares) to Rs. 290 crore in FY2021 (aided by Rs. 57 crore from sale of properties) which is further reduced to
Rs. 185 crore with sale of Gati Kausar (cold chain subsidiary, 70% stake, ~Rs. 105 crore debt). Further,
BSE code: 532345 it has identified Rs. 170 crore worth of non-core assets, which will be monetised over next two years
which would lead to net cash surplus position by FY2023. Gati now being part of Allcargo has access
NSE code: GATI to a global network (300 offices in more than 160 countries). It will be tapping its parent’s global clients
for door-to-door service, potential business from customers which are engaged in the parent’s CFS and
Free float: ICD business and cross border e-commerce business. Gati had numero uno position in surface express
5.9 cr (almost 90% revenue share) with a market share of 12.5% in 2014 which got eroded to 7% currently with
(No of shares) a loss of customer accounts (200+ accounts left over few years). It is now on path to regain its leadership
positioning (Safe express with 11% market share is the current leader) through accelerated sales (in retail
& KEA), digitization (new sales CRM, Whatsapp Bot, PayTm-led digital payments) and capacity expansion
(six hubs in metros cities to be made built to suit super hubs with automation increasing overall capacity
Shareholding (%)
by more than 50%). Gati targets to grow its revenues in double-digit and achieve OPM of 10.5-11.5% over
the course of next two years.
Promoters 51.9
Our Call
FII 0.1
Valuation –Initiate with a positive view & upside potential of 23-25%: We believe Gati is undergoing a
transformational journey led by a strong new parentage. It has been able to strengthen its balance sheet,
DII 1.5 trim down unrelated businesses, exit from non-core assets, rationalise cost structure, which would further
continue in the next two years. At the same time, we expect consolidated profit to disproportionately multiply
Others 46.5 by FY2024 led by a healthy double-digit revenue growth and significant expansion in OPM. At CMP, the
stock is currently trading at a P/E of 30x/18x its FY2023E/FY2024E EPS, at a discount to most of its peers.
We expect valuation multiple gap vis-à-vis peers to narrow down as Gati ramps ups topline and operational
efficiencies. Hence, we initiate viewpoint coverage on the stock with an upside potential of 23-25%.
Price chart
180 Key risk
Inability to scale up business and OPM led by competitive pressures.
140
Non-fructification of non-core asset sale and rise in working capital leading to levered balance sheet.
100
Valuation (Consolidated) Rs cr
60
20 Revenue 1,314.2 1,403.8 1,559.3 1,755.1
Jul-20
Jul-21
Nov-20
Mar-21
OPM (%) 2.1 7.4 9.1 10.8

Adjusted PAT (23.0) 29.2 71.3 115.9
% Y-o-Y growth - - 144.4 62.5
Price performance Adjusted EPS (Rs.) (1.9) 2.4 5.5 8.9
(%) 1m 3m 6m 12m P/E (x) - 68.7 29.7 18.3
P/B (x) 3.6 3.3 2.9 2.5
Absolute 9.3 72.9 86.6 255.6
EV/EBIDTA (x) 78.1 20.5 14.9 11.2
Relative to RoNW (%) (3.6) 5.3 11.1 15.2
7.7 62.1 77.1 212.1
Sensex RoCE (%) 2.6 7.2 11.4 15.2
Sharekhan Research, Bloomberg Source: Company; Sharekhan estimates
July 16, 2021 20

Viewpoint
Acquisition by Allcargo shifts focus to core profitable express distribution & e-com business
Allcargo Logistics became the promoter (with a 46.86% stake) of Gati in 2020 by acquiring 26.03% stake
through open offer in March 2020, which was preceded by a preferential issue (10.93% stake for Rs. 100
crore at Rs. 75 per share) and open market purchase from a few promoters (5.16%) and from public (4.74%) in
January 2020. Further, in June 2021, Allcargo infused Rs. 80 crore by way of preferential issue (Rs. 10 crore
at Rs. 97.75 per share) and warrants (Rs. 70 crore at Rs. 97.75 per share), post which Allcargo will hold 50.2%
stake in Gati.
Allcargo being at the helm of Gati partnered with turnaround specialists Alvarez & Marshal and launched
Project Avvashya to redefine Gati to restructure its business processes that helps accelerate sales, reduce
inefficiencies and optimise operations. Gati is looking at ways to divest its subsidiaries viz. Gati Import-Export,
Gati Logistics park, Gati Project and Zen cargo, which together contributes Rs. 120 crore to the FY2020
revenue (~7% of FY2020 consolidated revenues) and net loss of Rs. 1 crore. It sold its cold chain subsidiary
Gati Kausar (2.4% of FY20 consolidated revenues and loss of Rs. 14 crore) in which it holds 70% stake to its
partner Mandala Capital (30% stake). Further, it intends to sell its non-core low profitable fuel station business
(~20% of FY21 consolidated revenues with OPM of ~2%). Going ahead, Gati would have only two businesses
1) B2B Express (Gati KWE), 2) B2C (e-Commerce business in Gati standalone).
Re-aligning to drive growth
Source: Company, Sharekhan Research
High leverage to net cash over FY2020-FY2023

Gati had trimmed down its consolidated gross debt from Rs. 411 crore in FY2020 to Rs. 290 crore in FY2021
which was aided by receipt of Rs. 57 crore from sale of properties and net cash flow from operations of Rs.
49 crore during FY2021. With the sale of Gati Kausar, gross debt gets further reduced to Rs. 185 crore. The
company is yet to receive Rs. 14 crore from non-core asset sale and has further identified non-core assets
worth Rs. 170 crore which will be monetized over the next two years. The company targets non-core asset
sales of close to Rs. 50 crore during FY2022. Hence, we expect the company to be net cash by FY2023. The
company has also reduced its contingent liabilities by Rs. 122 crore taking advantage of government’s tax
amnesty scheme with a settlement of Rs. 38.5 crore. It had made a net payment of Rs. 16 crore in FY2021 and
will be paying Rs. 22.5 crore in FY2022. The promoter fund receipt of Rs. 27.5 crore (Rs. 10 crore preferential
issue and 25% of Rs. 70 crore warrants) will be utilized in meeting the balance tax payment and further
reduction in debt.
July 16, 2021 21

Viewpoint
Consolidated debt reduction
Revenue growth + margin expansion + low leverage = multifold PAT growth

Gati had the numero uno position in the surface express market (almost 90% revenue share) with a market
share of 12.5% in 2014, which got eroded to 7% with loss of customer accounts (200+ accounts left over
few years). It is now on path to regain its leadership positioning (Safe Express with an 11% market share is
the current leader) through accelerated sales (in retail & KEA), digitization (new sales CRM, WhatsApp Bot,
PayTm-led digital payment) and capacity expansion (6 hubs in metros cities to be made built to suit super hubs
with automation increasing overall capacity by 50%+). Gati targets to grow its revenues in double digits and
achieve an OPM of 10.5-11.5% in the next two years. We expect its consolidated profit to disproportionately
multiply by FY2024 led by healthy double digit revenue growth and significant expansion in OPM.
Company’s Aspirations
Synergistic benefits from Allcargo

Gati now being part of Allcargo has access to a global network of over 300 offices in more than 160 countries.
Through Allcargo, Gati is uniquely positioned to give a door-to-door service in the world to India as global
multinationals are big customers of Allcargo. Further, it is looking at potential business from customers who
are engaged in the CFS and ICD business of Allcargo. Thirdly, it is looking at ways to collaborate for cross
border e-Commerce business.
July 16, 2021 22

Viewpoint
Integrated service offerings
Asset-light expansion plans

Gati is ramping up hub capacities along with automation after almost three years. It has identified six such hubs
in Delhi, Mumbai, Bangalore, Hyderabad, Nagpur and Indore. The company would not own the land but will be
taking it on operating lease while it will incur marginal capex of around Rs. 1 crore to Rs. 1.5 crore per location
for interiors, fit outs etc. The company has already signed up for three hubs which will be delivered during
H2FY2022. With the completion of these super hubs, its overall capacity is likely to increase by more than 50%.
Re-alignment of e-Commerce business

Apart from express business, the company is focused on e-Commerce logistics which is one of the core
businesses for the company. In the e-Commerce space, the company is a significant player in the white goods
category. The company is looking at expanding its customer base beyond bigger clients in the white goods
industry. In the e-Commerce space, the company had diversified into small weight segments over more than
a year back which created pressure on profit on account of pricing pressure in the industry. The company has
started to withdraw from unprofitable light weight segment and focus on traditional high weight white goods
segment. The re-alignment of e-commerce business will aid in profitable and sustained growth for the company.
Strong growth potential in express logistics industry

The express logistics industry size is estimated at ~Rs. 25,000 crore, which forms ~2.5% of the Indian logistics
industry. As per management and various industry estimates, the express logistics industry is expected to
grow at 15% CAGR over FY2020-FY2025. The B2B segment (organized market share of ~50%) estimated at
Rs. 13,500 crore is expected to grow at 13% CAGR over FY2020-FY2025. The B2C segment (almost entirely
organized) is estimated at Rs. 11,500 crore is expected to grow at a higher clip of 18% CAGR over the same
period. The national logistics players are expected to grow at a faster pace of ~20% CAGR over FY2020-
FY2025 compared to regional peers. Gati is having a strong foothold in B2B segment has a strong double
digit growth opportunity going ahead which would be led by market share gains from both existing players
and new customer accounts.
Express Logistics growth outlook B2B/B2C growth outlook

60,000 30,000
26,400
51,000
24,600
50,000 25,000
40,000 20,000
30,000 15,000 13,500

25,000
11,500
20,000 10,000
10,000 5,000
0 0
FY20 FY25 FY20 FY25
Express logistics (Rs cr) B2B (Rs cr) B2C (Rs cr)
Source: Company, Sharekhan Research Source: Company, Sharekhan Research
July 16, 2021 23

Viewpoint
Ground/Air logistics growth outlook Regional/National players growth outlook

25,000 20,000
21,769 17,719
20,000 16,000
15,000 12,000
11,500 8,768
10,000 8,000 6,856
4,732
5,000 2,805 4,000
2,000
0 0
FY20 FY25 FY20 FY25
Air (Rs cr) Ground (Rs cr) Regional (Rs cr) National (Rs cr)
Financials in charts
Revenue Trend Operating Profit/OPM Trend
2,000 60 200 12
50
10
1,500 40 150
30 8
20
1,000 100 6
10
0 4
500 -10 50
2
-20
0 -30 0 0
FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22E FY23E FY24E FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22E FY23E FY24E
Revenues (Rs cr) YoY growth (%) Operating profit (Rs cr) OPM (%)
Net Profit Trend Net Debt Trend

150 500 1.0
400 0.8
100
300
0.6
50 200
0.4
100
0.2
0 0
0.0
-100
-50
-200 -0.2
-100 -300 -0.4

Net profit (Rs cr) Net Debt (Rs cr) Net Debt/Equity (x)
RoE Trend RoCE Trend

20 20
15 16
10
12
5
8
0
4
-5
0
-10
-15 -4
RoE (%) RoCE (%)
July 16, 2021 24

Viewpoint
n Sector View – Strong growth outlook led by changing consumer preferences & macro pick-up
The logistics industry had been one of the key sectors which showed strong revival post COVID-19 pandemic
that affected the overall trade environment both domestically and globally. Domestic indicators like e-way
bill generations, FASTag collections, Indian Rail volume, domestic ports volume and foreign trade are showing
clear signs of revival. Further, organised domestic logistics players have been able to improve their business
led by user-industries’ preference towards credible supply chain management in wake of impact of COVID-19
on supply chain operations. Further, the third-party logistics (3PL) industry has seen a faster improvement in
operations led by segments like e-Commerce, pharma and FMCG.
n Company Outlook – Strong earnings growth outlook led by business restructuring

Gati is on a high earnings growth trajectory for the next 2-3 years, which got initiated post acquisition of
the company by Allcargo logistics in March 2020. The restructuring involves divestment of subsidiaries and
unrelated businesses, sale of land and buildings, significant reduction in debt and contingent liabilities,
deep rationalization of costs, streamlined working capital and senior leadership changes which would going
ahead lead to asset light focused approach on its core businesses. It is now on path to regain its leadership
positioning through accelerated sales, digitization and capacity expansion. Gati targets to grow its revenues
in double digit and achieve OPM of 10.5-11.5% over the course of next two years.
n Valuation – Initiate with a positive view & upside potential of 23-25%

We believe Gati is undergoing a transformational journey led by a strong new parentage. It has been able
to strengthen its balance sheet, trim down unrelated businesses, exit from non-core assets, rationalise cost
structure, which would further continue in the next two years. At the same time, we expect consolidated profit to
disproportionately multiply by FY2024 led by a healthy double-digit revenue growth and significant expansion
in OPM. At CMP, the stock is currently trading at a P/E of 30x/18x its FY2023E/FY2024E EPS, at a discount to
most of its peers. We expect valuation multiple gap vis-à-vis peers to narrow down as Gati ramps ups topline and
operational efficiencies. Hence, we initiate viewpoint coverage on the stock with an upside potential of 23-25%.
One-year forward EV/EBITDA (x) band

40
30
20
10
0
Oct-20
Oct-17
Oct-14
Jul-21
Jul-18
Apr-19
Jul-15
Apr-16
Apr-13
Jan-20
Jan-17
Jan-14
1yr fwd EV/EBITDA Peak 1yr fwd EV/EBITDA Trough 1yr fwd EV/EBITDA Avg 1yr fwd EV/EBITDA
Peer Comparison
P/E (x) EV/EBITDA (x) P/BV (x) RoE (%)
Particulars
FY23E FY24E FY23E FY24E FY23E FY24E FY23E FY24E
Gati Limited 29.7 18.3 14.9 11.2 2.9 2.5 11.1 15.2
Mahindra Logistics 51.2 41.6 18.1 15.8 5.3 4.7 12.2 13.2
TCI Express 35.1 29.8 25.1 21.2 8.6 6.8 27.6 25.8
Transport Corporation of India 15.2 13.1 9.0 7.8 2.0 1.8 14.3 14.6
Gateway Distriparks 21.7 15.6 10.5 8.4 2.3 2.0 10.4 13.4
July 16, 2021 25

Viewpoint
About company
Gati, incorporated in 1989 as an Express Distribution service provider, provides multiple services and solutions
in logistics and distribution business. It offers services to 19,800 pincodes, covering 735 out of 739 districts
in India, operating in more than 1,900+ scheduled routes. Its integrated multi-modal transportation network
comprises air and road. After strategically acquiring Gati in 2020, Allcargo Logistics is now the promoter and
the single largest shareholder of Gati with more than 50% ownership, followed by Japan’s Kintetsu World
Express (KWE) with about 3.5% shares in the company. Gati-Kintetsu Express Private Limited (Gati-KWE) is a
Joint Venture between Gati and KWE where KWE holds 30% stake and Gati holds the remaining 70%.
Investment theme
Gati is on the path of high earnings growth trajectory over the next two to three years, which got initiated
post acquisition of the company by Allcargo logistics in March 2020. The restructuring involves divestment of
subsidiaries and unrelated businesses, sale of land and buildings, significant parring of debt and contingent
liabilities, deep rationalization of costs, streamlined working capital and senior leadership changes which
would going ahead lead to asset light focused approach on its core businesses. It is now on path to regain its
leadership positioning through accelerated sales, digitization and capacity expansion. Gati targets to grow its
revenues in double digit and achieve OPM of 10.5-11.5% over the course of next two years.
Key Risks
Inability to scale up business and OPM led by competitive pressures.
Non-fructification of non-core asset sale and rise in working capital leading to levered balance sheet.
Additional Data
Mr. Shashi Kiran Janardhan Shetty Chairman (Executive Director)
Mr. Adarsh Hegde Managing Director, Gati-KWE
Mr. Bala Aghoramurthy Deputy Managing Director, Gati-KWE
Mr. Rohan Mittal Chief Financial Officer
Mrs. T. S. Maharani Company Secretary & Compliance Officer
Source: Company Website
Top 10 shareholders
1 Allcargo Logistics 46.86
2 Agrawal Mukul 5.17
3 Kintetsu group 3.55
4 Neera and children trust 1.90
5 Agarwal Mahendra Kumar 1.29
6 TCI Finance Ltd 0.74
7 Bearers Office 0.54
8 Investor Education & Protection Fund 0.46
9 Mahendra Kumar & Sons 0.45
10 Bunny Investment and Finance Pvt Ltd 0.22
Source: Bloomberg
July 16, 2021 26

Understanding the Sharekhan 3R Matrix
Right Sector
Positive Strong industry fundamentals (favorable demand-supply scenario, consistent
industry growth), increasing investments, higher entry barrier, and favorable
government policies
Neutral Stagnancy in the industry growth due to macro factors and lower incremental
investments by Government/private companies
Negative Unable to recover from low in the stable economic environment, adverse
government policies affecting the business fundamentals and global challenges
(currency headwinds and unfavorable policies implemented by global industrial
institutions) and any significant increase in commodity prices affecting profitability.
Right Quality
Positive Sector leader, Strong management bandwidth, Strong financial track-record,
Healthy Balance sheet/cash flows, differentiated product/service portfolio and
Good corporate governance.
Neutral Macro slowdown affecting near term growth profile, Untoward events such as
natural calamities resulting in near term uncertainty, Company specific events
such as factory shutdown, lack of positive triggers/events in near term, raw
material price movement turning unfavourable
Negative Weakening growth trend led by led by external/internal factors, reshuffling of
key management personal, questionable corporate governance, high commodity
prices/weak realisation environment resulting in margin pressure and detoriating
balance sheet
Right Valuation
Positive Strong earnings growth expectation and improving return ratios but valuations
are trading at discount to industry leaders/historical average multiples, Expansion
in valuation multiple due to expected outperformance amongst its peers and
Industry up-cycle with conducive business environment.
Neutral Trading at par to historical valuations and having limited scope of expansion in
valuation multiples.
Negative Trading at premium valuations but earnings outlook are weak; Emergence of
roadblocks such as corporate governance issue, adverse government policies
and bleak global macro environment etc warranting for lower than historical
valuation multiple.

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EMISPDF us-neu from 155.33.31.132 on 2021-10-17 08:30:30 BST. DownloadPDF.

Adjusted PAT 368.1 505.8 614.8 728.0

July 16, 2021 2

Strong revenue growth, margin below expectations

July 16, 2021 3

July 16, 2021 4

CC revenue growth trend (q-o-q)

July 16, 2021 5

Top accounts growth trend (q-o-q)

Healthcare and medical devices growth trend (q-o-q)

EBIT margin trend

July 16, 2021 6

Outlook and Valuation

July 16, 2021 7

July 16, 2021 8

NSE volume: Key positives

Adjusted PAT 1,881.1 2,251.7 2,641.2 3,045.1

July 16, 2021 9

Revenue beat, margins below estimates

July 16, 2021 11

Margin (%) Bps bps

July 16, 2021 12

Outlook and Valuation

One-year forward P/E (x) band

Source: Sharekhan Research

July 16, 2021 13

July 16, 2021 14

July 16, 2021 15

HDFC Bank Q1 FY2022 Concall Notes

July 16, 2021 17

Outlook and Valuation

One-year forward PBV (x) band

PBV +1 sd 3-yr Avg -1 sd

Source: Sharekhan Research

July 16, 2021 18

July 16, 2021 19

OPM (%) 2.1 7.4 9.1 10.8

July 16, 2021 20

Re-aligning to drive growth

Source: Company, Sharekhan Research

High leverage to net cash over FY2020-FY2023

July 16, 2021 21

Consolidated debt reduction

Source: Company, Sharekhan Research

Revenue growth + margin expansion + low leverage = multifold PAT growth

Source: Company, Sharekhan Research

Synergistic benefits from Allcargo

July 16, 2021 22

Integrated service offerings

Source: Company, Sharekhan Research

Asset-light expansion plans

Re-alignment of e-Commerce business

Strong growth potential in express logistics industry

Express Logistics growth outlook B2B/B2C growth outlook

30,000 15,000 13,500

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

July 16, 2021 23

Ground/Air logistics growth outlook Regional/National players growth outlook

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

Net Profit Trend Net Debt Trend