Market Strategy - Kotak Securities · Kotak Securities – Private Client Group Please see the Disclosure/Disclaimer on the last page For Private Circulation 3 Market Strategy January

Kotak Securities – Private Client Group Please see the Disclosure/Disclaimer on the last page For Private Circulation 2

Market Strategy January 2020

MARKET OUTLOOK FOR JANUARY 2020

2019 – Year of positive returns for all asset classes CY19 has seen a broad based rally across all regions wherein Indian equities underperformed most of the developed markets and few of the emerging markets. CY19 was also a year where Gold price in INR terms outperformed Indian equities by ~1000 bps. The polarisation seen in CY18 continued in CY19 with only a handful of stocks contributing to the returns in Nifty-50. The entire Nifty-50 returns in this calendar year has come post the corporate tax cut announcements made in Sep’19. There has been a clear divide in economy and markets this year that has prevailed in many markets including India. In terms of market capitalization CY19 saw the Nifty-50 delivering 12% whereas the Nifty Mid Cap and Nifty Small Cap Indices ended in the red with -4% & -10%, respectively. Strong FPI flows and jump in earnings (due to cut in corporate tax rate) have been the key reasons for the outperformance of large caps over mid and small caps.

2020: Year of hope and revival of Indian economy We expect the divergence between Indian equities and economy to continue in CY20 because there may not be a quick recovery in the economy but market may do relatively better on account of strong earnings and favourable tax changes. High expectations from the budget could lead to a good start for Indian equities. To spur India’s economic growth, the market has high expectations of (1) reduction in personal income tax rate to boost consumption, (2) removal of DDT and (3) rationalization of LTCG to attract investors in the forthcoming FY21 union budget on February 1, 2020. Considering fiscal constraints, it remains to be seen if the government can meet these expectations.

India’s real GDP growth is expected to improve from 4.7% yoy in FY20E to 5.5% yoy in FY21E supported by better transmission of policy rates, government’s rural spending and low base effect. On account of higher food prices and telecom charges, CPI inflation is likely to stay well above the MPC’s comfort zone of 4% which may limit future rate cuts. We expect CPI inflation to average ~4.2% and ~4.5% in FY20 and FY21, respectively. We are building in GFD/GDP numbers to increase to 3.8% in FY20E and ~3.7% in FY21E. Considering the government’s fiscal deficit constrains, we believe the thrust will be on disinvestment to meet the fiscal maths. For FY20, disinvestment target is Rs.1.05 tn v/s Rs.850 bn and Rs 1.0 tn in FY19 and FY18, respectively. On the external front most factors like BOP, CAD/GDP are expected to remain stable and surplus global liquidity continuing to provide adequate capital flows. We expect the USD-INR to range within 70-73 and average 72.1 in FY21E.

To address the global slowdown, we expect Central Banks in the developed nations to follow a loose monetary policy in CY20. This could provide ample liquidity and scope for further flows into emerging markets. In CY19 till Nov, India has attracted USD 14.3 bn from FPIs and USD 7.5 bn from local mutual funds. We expect FPI flows could remain positive in CY20 and SIP flows to remain sticky with annualised run rate of ~USD 14-15 bn.

Earnings of Nifty-50 is expected to report a robust 19% compounded annual growth rate (CAGR) for the next three years, a sharp increase over the previous three years CAGR of 8%. Incremental earnings growth of Nifty-50 is expected to be skewed and mainly led by the banking sector. We expect Nifty-50 EPS to be ~Rs.532 for FY20E, Rs.687 for FY21E and Rs.816 for FY22E. The Nifty-50 is trading at 23x FY20E, 17.8x FY21E and 15x FY22E. On a one year Fw basis (i.e. Dec’20E) the Nifty-50 trades at 19.1x. We believe Indian market’s high valuations are supported by low global & domestic bond yields, developments on US-China trade talks, improved earnings trajectory and sustained global growth projections. The 10 year average Fw PE of Nifty-50 works to 15.5x. We have used a benchmark of 17.5x Fw PE, which is one standard deviation above the 10 year average to derive at our one year Nifty target. Our one

Sumit Pokharna

[email protected]

+91 22 6218 6438



year target of Nifty-50 and Sensex works to 13,400 and 45,500, respectively. This works to an upside of ~10% from current levels.

Two themes that could play out in 2020 are: Financialization (on a/c of real interest rates) and Privatisation (on a/c of high fiscal deficit). We see valuations attractive in sectors like capital goods, utilities, oil & gas, construction, metals & mining and auto ancillaries. Certain sectors with reasonable valuations could also outperform in CY20 due to specific reasons (i.e. agro chemicals, corporate banks, larger NBFCs, mid cap cement, and mid cap pharma). In terms of market cap orientation our preference for CY20 would be towards small caps as the Nifty Small Cap Index has come closer to its previous bottoms in terms of relative underperformance to Nifty-50 (i.e. fourth time in last 16 years). There is hardly any scope of re-rating left in the Nifty-50 as it is trading close to its previous peak valuations. Given today’s economic situation the Nifty Mid Cap Index seems to be fairly valued in relation to its performance and valuations with Nifty-50. One can go slow on richly valued sectors like consumers staples/discretionary/ durables. Probably, the beaten down sectors of CY19 could turn out to be the outperformers in CY20 based on recovery in earnings and suppressed prices/valuations.

1-year performance of benchmark global indices (%)

Source: Bloomberg dated 31 December 2019

Market performance – Sector wise (for the month of December 2019)

Source: Bloomberg dated 31 December 2019

35.9%

18.2%

29.6%

23.4%

25.8%

25.5%

12.7%

17.1%

11.0%

9.3%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%

Nasdaq Index

NIKKEI Index

S&P 500 Index

Dow Jones Index

MSCI World Index

DAX Index

FTSE Index

MSCI Asia Pacific

Hang Seng Index

MSCI India

1.1% 0.9%

-0.8%

1.0%

-2.8% -2.5%

1.3%

-1.7%-2.7%

2.1%

4.0%

-1.3%

6.6%

-6.0%

-3.0%

0.0%

3.0%

6.0%

9.0%



TOP INVESTMENT IDEAS Valuation Summary Company CMP Target Potential Mkt EPS (RS) EPS growth (%) PE/PBV# (x) RoE (%)

(Rs) Price Upside Cap FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E

(Rs) (%) (Rs mn)

MAHINDRA & MAHINDRA* 532 820 54.1 660,818 40.0 42.3 (16.0) 5.9 13.3 12.6 12.2 11.6

VEDANTA LTD* 152 180 18.4 566,686 13.3 18.9 (13.5) 42.2 11.5 8.1 8.0 11.5

STATE BANK OF INDIA#* 334 400 19.8 2,978,142 26.6 45.2 2,650.6 70.1 1.7 1.3 10.2 15.3

LARSEN & TOUBRO LTD* 1,298 1,560 20.1 1,821,786 70.5 75.4 14.9 6.9 18.4 17.2 15.8 14.5

VARROC ENGINEERING* 417 520 24.7 56,182 19.5 31.9 (41.5) 63.6 21.4 13.1 8.0 11.7

KNR CONSTRUCTION 250 305 22.0 35,055 17.1 21.5 (8.6) 25.7 14.6 11.6 15.7 16.9

SUVEN LIFE SCIENCES LTD 307 391 27.4 39,001 12.9 16.9 89.7 31.0 23.8 18.2 16.9 18.5

Source: Kotak PCG and KIE* (Kotak Institutional Equities); # State Bank of India is valued on PBV or Price/BV while rest of the stocks are valued on PE. Source: KIE India Daily dated 31 Dec’19 and Stock Reco report of Kotak PCG dated 31 Dec’19.



INTERNATIONAL MARKETS Global liquidity to support financial markets and economies We need to closely monitor the combined balance sheet (BS) expansion of the Federal Reserve (Fed), European Central bank (ECB) and Bank of Japan (BOJ). These central banks could continue to pump liquidity in CY20 also. Notably, ECB and BOJ is pumping liquidity to support economic growth whereas Fed is focused on easing strains in money markets.

As per Bloomberg, the combined “BS growth” of the three biggest central banks will reach ~US$100 bn a month by CY19 end. However, it will come down to ~US$ 50 bn by CY20 mid. Needless to say, the global liquidity has improved sentiment and supported the global equity markets in CY19. In fact, the MSCI World Index is up ~25% in CY19.

Liquidity taps on - Incremental liquidity infusion by three biggest central banks

Source: Bloomberg Economics and Bloomberg Intelligence.

Bank of Japan (BOJ): Japan’s stimulus measures is to support growth in an economy struggling with an export slump, natural disasters and the fallout from a recent sales tax increase. According to the government, the total stimulus package amounts to ~26 tn yen (US$239 bn) spread over the coming years, with fiscal measures around half that figure. Further, the stimulus is expected to boost growth in the economy by ~1.4%.

European Central bank (ECB): During CY07-19, the BS of ECB has grown aggressively by 4x to ~4.7 tn Euros (US$~5.2 tn). Notably, quantitative easing has supported majority of the balance sheet expansion. During CY15-18 ECB has spent 2.6 tn Euros and recently, again resumed pumping 20 bn Euros a month to combat renewed economic weakness.

Chart highlighting balance sheet expansion of key developed economies

Bank of Japan Assets - Yen (JPY bn) ECB Balance Sheet All Assets - EURO (bn)

Source: Bloomberg. Note: BoJ Assets tracks the aggregate assets and liabilities of banks within an economy (including private or commercial banks, central banks or both).

70000

170000

270000

370000

470000

570000

670000

700

1,200

1,700

2,200

2,700

3,200

3,700

4,200

4,700

5,200



US condition of All Federal Reserve Banks total assets – (US$ Bn)

Source: Bloomberg dated 31 Dec 2019

Federal Reserve (Fed): During CY08-15, Fed’s BS (total assets) ballooned from US$ 900 bn to US$ 4.5 tn (14th Jan’15). However, post that the central bank contracted its BS to US$ 3.76 tn. In response to demand for bank reserves, the Fed has recently again started expanding its BS by US$ 336 bn to US$ 4.095 tn but this time Fed officials stress that this is not QE4. The Fed started buying Treasuries in Sep’19 after the money markets went ballistic, sending overnight interest rates as high as 10%.

US overnight repo rate surges (%)

Source: Refinitiv, FE

We estimate that the combined balance sheets of Fed, ECB and BoJ may expand by around US$984 bn by the end of CY20. These developments bode well for EM economies though the upside may be capped for India given the weak domestic growth outlook.

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1,000

2,000

3,000

4,000

5,000



Fed kept interest rates unchanged, indicates no changes through CY20 The US Federal Reserve kept interest rates unchanged and signaled they would stay where they are for CY20. Just to highlight, the Fed has cut its benchmark overnight lending rate three times in CY19, taking it down to a range of 1.5%-1.75%. Fed Chair Jerome Powell said that economic outlook remains a favourable one, despite global developments and ongoing risks. Also, Fed leaders predict the economy will grow 2% in CY20, a downgrade from 2.2% growth in CY19 and 2.9% in CY18. We believe further rate cuts may not be warranted as growth begins to stabilize in CY20.

USA and China trade deal – Phase I On 13th Dec’19, China and the US have reached an initial deal (phase one) to resolve the trade war and aims to sign the agreement in Jan’20. As per the office of the United States Trade Representative (USTR), the agreement requires structural reforms and other changes to China’s economic and trade regime in the areas of intellectual property, technology transfer, agriculture, financial services, currency and foreign exchange.

The USTR fact sheet highlights several dimensions of the trade agreement. The key ones are as follows:

The US will be maintaining 25% tariffs on ~US$250 bn of Chinese imports,

However, on ~US$120 bn of imports, the tariff will be cut by half to 7.5%. The tariff reductionwill take effect 30 days after the agreement is signed.

On the other hand, China needs to import from the US over the next two years in a totalamount that exceeds China’s annual level of imports for those goods and services in CY17by no less than US$200 bn. It focuses on US manufactured goods, food, agriculture, seafoods, energy products and services.

Intellectual property (IP) chapter- China has agreed to “end” its long-standing practice offorcing foreign companies to transfer technology to Chinese companies as a condition forobtaining market access, administrative approvals or receiving advantages from thegovernment.

In agriculture, exports-employment linkages are sought to be ensured by expansion of USfood, agriculture and sea food product exports, by also tackling non-tariff barriers.

We believe markets will closely watch how the further progress takes place and it will have a significant bearing on the global markets.



Brexit on fast-track The British parliament has approved Prime Minister Boris Johnson’s Brexit deal; U.K. is set to exit the European Union (EU) in Jan’20. The deal got the support of 358 lawmakers against 234.

Just to highlight, the agreement highlights issues such as citizens’ rights, the settlement amount the U.K. has agreed to pay the EU and an arrangement to avoid physical barriers between the Northern Ireland (part of the U.K.), and the Republic of Ireland, an EU member.

Now, the agreement will be put in the House of Commons and then the upper chamber (the House of Lords) will vote on it. It is expected that the formalities in the U.K. will be over by early Jan’20 and the deal will then go to the EU Parliament. Post, EU lawmakers’ ratification it (which is expected on 29th Jan’20), the U.K. will formally exit the union. Notably, a formal exit, however, doesn’t mean that the tedious Brexit process is over. Even after 31st Jan’20, the U.K. will continue to remain in the EU single market and customs union, at least for 11 months i.e. trade will continue as usual.

The biggest challenge is to reach another agreement with the EU on the country’s future relationship with the bloc.

Notably, Prime Minister has ruled out extending talks beyond the 31st Dec’20 deadline.

German business outlook Germany’s Ifo expectations Index came in at 93.8 in Dec’19 (above the consensus estimate of 93.0) up from 92.3 in Nov’19. The Ifo expectations balance is among the best current growth indicators for Germany. Germany’s business outlook probably improved for a third month as manufacturers started to see a way out of a yearlong downturn that left Europe’s largest economy deeply scarred.

IFO Pan Germany Business Expectations- Expected to brighten for third month


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Japan Merchandise Trade Exports YoY NSA Japanese exports dropped for a 12th straight month in Nov’19. As per Ministry of Finance data, the value of shipments overseas fell 7.9% yoy, due to sliding exports of cars and construction and mining equipment. While the drop extended Japan’s longest streak of declining exports since CY16, the slightly-better-than-expected figures suggest the slump is at least bottoming.

Japan's exports have fallen for 12 straight months


Global crude oil demand-Supply outlook Due to global oil demand-supply mismatch, oil prices is expected to remain muted and range bound in the near term. IEA estimates an oil supply surplus of 0.7 mn b/d in Q1CY20 and 1 mn b/d in Q2CY20 before it declines to ~0.1 mn b/d in Q3CY20 and turns deficit during Q4CY20. IEA is still optimistic on oil demand recovery in CY20 estimating overall oil demand to grow by 1.2 mn b/d, predicated on IMF’s forecast of an increase in world GDP growth to 3.4% in CY20 from 3% in CY19. A trade deal may be crucial for a recovery in the global economy.

Proposed cut by OPEC+ to limit oil supply surplus to 0.3 mn b/d in CY20

Estimated global crude demand, supply and prices, Calendar year-ends, CY12-20E

Year 2012 2013 2014 2015 2016 2017 2018 2019E 2020E

Total demand 90.7 91.7 93.0 95.3 96.4 98.0 99.3 100.2 101.5 Yoy growth 1.2 1.1 1.2 2.3 1.1 1.5 1.3 1.0 1.2 Supply (mn b/d) Non-OPEC 52.5 54.5 57.0 59.8 59.1 59.9 62.9 64.8 67.0 Yoy growth (0.4) 2.1 2.4 2.9 (0.7) 0.8 3.1 1.9 2.1 OPEC Crude 32.1 30.6 30.5 31.4 32.4 32.0 31.9 29.9 29.3 NGLs 6.4 6.2 6.3 5.2 5.4 5.5 5.5 5.5 5.6 Total OPEC 38.4 36.8 36.8 36.6 37.8 37.5 37.4 35.4 34.9 Total supply 90.9 91.3 93.7 96.4 96.9 97.4 100.3 100.2 101.8 Total stock change 0.2 (0.5) 0.7 1.1 0.5 (0.6) 1.0 - 0.3 OPEC crude capacity 35.8 35.2 35.2 35.2 35.9 34.9 34.9 32.5 33.0 Implied spare capacity 3.9 4.1 5.5 4.9 4.0 2.3 4.0 2.6 4.1

Source: IEA, Kotak Institutional Equities estimates

We estimate an oil supply surplus of 0.3 mn b/d in CY20, assuming 1) IEA’s estimate of 1.2 mn b/d of growth in oil demand to 101.5 mn b/d and 2.1 mn b/d of growth in non-OPEC production supported by increase in production from the US, Norway, Canada, Brazil and Guyana and 2) OPEC+ cartel continuing oil production cuts through CY20.

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Gold – Shining Bright

In CY19, Gold prices moved up 18% in dollar terms supported by 1) Demand from global central banks which have been adding Gold to their reserves, 2) Fed reducing interest rates lowering cost, 3) China’s concern over trade deal boosted demand for safer havens and 4) Softer dollar.

Disappointing US economic data which strengthens the case that Fed may keep interest rate low has also supported Gold price along with investment demand for gold which saw an uptick. Gold holdings with SPDR ETF, the world's biggest gold-backed exchange traded fund, rose by 2.92 tons to 888.85 tons, the highest since 3rd Dec’19.

Gold Prices (US$/Ounce)


Yearly returns by Gold (%)


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(10)

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DOMESTIC MARKETS India’s GDP growth is expected to improve from 4.7% yoy in FY20E to 5.5% yoy (base effect will support ~0.5% yoy growth) in FY21E supported by 7% yoy growth in services sector, 3.8% yoy growth in Industry and 2.6% yoy growth in agriculture and allied sector in FY21E.

GDP growth rates for FY21E We estimate FY21E GDP growth at 5.5% after 4.7% in FY20E

Real GVA and components growth, March fiscal-year ends, CY14-21E (%)

Year 2014 2015 2016 2017 2018 2019 2020E 2021E

Real GVA 6.1 7.2 8 7.9 6.9 6.6 4.5 5.4 Agriculture and allied 5.6 -0.2 0.6 6.3 5 2.9 2.8 2.6 Industry 3.8 7 9.6 7.7 5.9 6.9 1.2 3.8 Mining 0.2 9.7 10.1 9.5 5.1 1.3 -0.8 2.2 Manufacturing 5 7.9 13.1 7.9 5.9 6.9 -0.2 3.6 Electricity 4.2 7.2 4.7 10 8.6 7 3.7 3.7 Construction 2.7 4.3 3.6 6.1 5.6 8.7 4.2 4.8 Services 7.7 9.8 9.4 8.4 8.1 7.5 6.9 7 Trade, hotel, transport, communication 6.5 9.4 10.2 7.7 7.8 6.9 5.5 6.4 Financial, real estate, professional service 11.2 11 10.7 8.7 6.2 7.4 5.9 6 Public admin, defence, and others 3.8 8.3 6.1 9.2 11.9 8.6 10.5 9.3 Real GDP 6.4 7.4 8 8.2 7.2 6.8 4.7 5.5

Source: CEIC, Kotak Economics Research estimates

Higher GDP growth rate of 5.5% yoy in FY21E will be supported by 1) Higher transmission of policy rates, 2) Focused government spending in the rural sector, and 3) Inventory buildup after a prolonged run down. Also, BS-VI implementation and related restocking in auto sector will contribute to some cyclical recovery in growth. Though the GDP is expected to improve but the possibility of a sharp growth recovery looks difficult as we believe the current slowdown being more structural than a cyclical as reflected in the degree of slowdown. Notably, the BS of - Corporate, Financial sector (including banks + NBFCs), Government and Quasi government agencies have become weak or marginally improved. Also, key infrastructure sectors are highly leveraged. In fact, funding for NBFCs has reduced significantly in the debt market.

Key infrastructure sectors in the economy are highly leveraged

Debt to equity ratio across sectors, March fiscal year-ends, CY13-19 (%)

Year 2013 2014 2015 2016 2017 2018 2019

Overall non-financial sector 114 116 116 111 106 99 70 Textiles 198 185 195 209 202 182 92 Metals & metal products 112 114 126 137 154 158 85 Steel 131 141 151 227 247 343 118 Electricity generation 150 149 166 173 175 171 138 Electricity transmission 236 218 224 200 203 226 243 Telecommunication services 153 151 158 147 131 110 175 Real estate 119 149 174 185 144 147 219 Industrial construction 95 101 111 121 93 81 46

Notes: (a) Data for FY2019 is based on a much smaller sample set and may not be strictly comparable to previous years. (b) Some of the companies would be in NCLT and may not be reported in FY2019. Source: CMIE, Kotak Economics Research

Further, central government and central PSE borrowings as a proportion of GDP is also at an elevated level. We expect total GFD to GDP to remain at an elevated level at 9%/8.7% in FY20E and FY21E, respectively.



Overall public sector borrowing is at an elevated level

Central government and central PSE borrowings as proportion of GDP, FY08-21E (%)

Source: CEIC, Kotak Economics Research. Note: March fiscal year-ends

Interestingly, gross NPA ratios in the banking sector have been trending down and this will likely continue through FY21E. However, despite surplus liquidity, there has not been a significant improvement in credit disbursement. Also, PSU bank balance sheets are unlikely to improve dramatically in FY21E. Though benefits from resolution of cases under IBC will be an incremental positive for the banking sector.

As we know that the government’s ability to push growth depends on tax revenue and the same is expected to remain weak even in FY21E resulting in constrained spending. To put things in perspective, almost 34% of the revenues and 17% of the expenditure of state governments depends on devolution and transfers from the central government. Notably, most of the weakness is due to GST collections and reduction in income tax will further reduce the government’s ability to spend. Interestingly, the multiplier of expenditure is higher than the multiplier of taxes. Even if we assume that invoice matching is made operational from Apr’20, it will take a few months to stabilize and GST collections may not immediately show a sharp increase.

States depend heavily on the center for revenues

Share of center's contribution to states' revenue and expenditure, March fiscal year-ends, FY20BE (%)

Source: RBI, CEIC, Kotak Economics Research

While the central government may continue to target divestment and non-tax revenues aggressively, much of the strength of the government BS stems from tax revenues. However, the prospects for tax revenues remains weak.

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5.94.9 4.5 4.1 3.9 3.5 3.5 3.4 3.8 3.7

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Grants in aid from central govtStates' own spending



India’s tax base has remained stagnant

Central government tax to GDP ratio (%)

Source: CEIC, Kotak Economics Research

There are challenges to a strong revival in GDP growth in FY21 (beyond 5.5%) in major components of GDP (1) private consumption will take time to recover given challenges to household income growth, which in turn will depend on new investment and jobs; declining household savings rate for the past 6-7 years can only mean that income growth has failed to keep up with consumption growth, (2) government consumption will likely decelerate from current high growth levels given fiscal challenges and (3) investment will continue to be subdued due to income and/or balance sheet challenges of all the three major segments (government, household and private). We can hope for some recovery from H2CY20 supported by low base effect for private consumption.

Share of private consumption has increased as savings rate has fallen

Share of private domestic consumption expenditure and household savings in GDP, March fiscal year-ends, FY06-19 (%)

Source: CEIC, Kotak Economics Research estimates

India’s recent growth phase of rising consumption despite low income growth through lower savings and easy credit needs more structural changes. Measures should aim to broaden demand base and enhance income potential.

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Private consumption/GDP (%) Household savings/GDP (%)



Fiscal Deficit remains a key concern

States' weak revenue growth will weigh on ability to spend aggressively - Trend in states' revenue and expenditure components (Rs bn and %)

FY2018 FY2019RE Growth (%) FYTD19 FYTD20 Growth (%)

Revenue receipts 23,212 28,621 23.3 10,469 11,085 5.9 - Tax revenue 17,356 20,280 16.8 8,219 8,370 1.8 - Non-tax revenue 1,796 2,231 24.2 690 676 (2.1) - Grants-in aid 4,060 6,109 50.5 1,560 2,039 30.7 Capital receipts 396 520 31.3 95 129 35.2 Total receipts 23,609 29,142 23.4 10,564 11,214 6.1 Total expenditure 27,715 34,699 25.2 12,495 13,471 7.8 - Revenue expenditure 23,401 28,749 22.9 10,832 11,756 8.5 - Capital expenditure 4,315 5,950 37.9 1,663 1,714 3.1 Fiscal deficit (4,107) (5,557) (1,930) (2,257)

Notes: (a) Data for FY18-19 is for all states & data for FYTD19-20 (April-Oct’19) is for 14 large states. Source: CAG, CMIE, Kotak Economics Research

We expect FY20 GFD (Gross fiscal deficit)/GDP (Gross domestic product) at ~3.8% without any expenditure cuts given a net tax revenue shortfall of Rs.2.2 tn (partly met through higher RBI dividend and higher disinvestment). However, if government reduces revenue expenditure in few social schemes (like PM-KISAN) along with shifting of food subsidy to the FCI then GFC/GFD should be lower around 3.4% for FY20.

For FY21E, gross tax revenue growth is expected at 10%, non-tax revenues at Rs.3.4 tn and divestments at Rs.1 tn. On the other hand, overall expenditure growth modeled at 4%. The FY21 gross market borrowing in dated securities is likely to be Rs.2 tn higher than the budgeted number of Rs.7.1 tn for FY20, given Rs. 3.1 tn of redemptions and Rs. 6 tn of net market borrowings. Based on the same, we expect GFD/GDP at 3.7% for FY21E.

In order to increase employment opportunities, the government should focus on promoting investment side. Additionally, there should be focused spending in the rural economy and possibly fiscal incentives to boost demand in real estate and construction.

Inflation expected to remain above RBI’s comfort level On account of higher food prices and telecom charges, the headline CPI inflation to stay well above the MPC’s comfort zone of 4% over the next few months. With a modest growth recovery in FY21E, we expect CPI inflation to trend towards 4.4% by Mar’21. Average FY21E CPI inflation will likely be 4.5% against 4.2% in FY20E.

Going deeper, food inflation is expected between 5.7-9.7% in FY20E and in 1.4-5.6% in FY21E. Recent supply disruptions on account of floods in certain states have led to a sharp spike in prices of vegetables and pulses. Typically, December onwards food prices moderate due to the arrival of Kharif produce. Additionally, high rainfall in the monsoon season is auguring well for the rabi crop which has seen a string sowing pattern.



Adequate reservoir levels resulting in strong sowing of rabi

Trend in sowing of rabi crops (mn hectares and % growth)

"FYTD20 "FYTD19 "Change area sown" area sown" (%)"

Foodgrains 27.8 27.6 0.7 Cereals 18.9 17.7 6.6 Rice 0.8 0.7 10.9 Wheat 15.1 14.1 6.7 Coarse cereals 3.0 2.8 5.2 Pulses 8.9 9.9 (10.0) Gram 6.2 6.8 (10.0) Other pulses 0.3 0.3 (10.1) Oilseeds 6.0 6.4 (5.3) All Crops 33.8 34.0 (0.5)

Source: Weather watch, Kotak Economics Research

Coming to core inflation, the trend is expected towards 4.5% by Mar’20 considering subdued demand and on-offs adjustment to telecom charges in December. Notably, mobile phone charges have a weightage of 1.84% in CPI. In FY21E, core inflation to inch higher towards 4.9% by Mar’21.

Monetary Policy - Interest rates The December policy minutes reflected the limited flexibility the monetary policy committee (MPC) has in addressing the growth slowdown at a time of rising inflation. In fact, most members chose to keep the repo rate on hold before the budget, hoping that the government would do the heavy lifting in an attempt to revive the economy.

Meanwhile, core CPI inflation will likely increase from December/January due to recent telecom tariff hikes pushing headline CPI inflation trend closer to 6% in the near term.

We expect CPI inflation to moderate towards 4.9% by March as food prices moderate in Q1CY20. On the policy front, our projections suggest that inflation would likely remain 90-185 bps higher than the MPC’s comfort zone till Mar’20. We believe that the MPC will find it difficult to cut the repo rate through H1CY20.

While the short end of the yield curve is expected to be aligned with the policy rate given the comfortable liquidity position, fiscal concerns will keep the longer end of the curve on the upside. We expect the 10-year G-Sec yield to trade in the range of 6.25-7% through most of CY20.

The RBI will buy Rs100 bn worth of bonds maturing in 2029 (6.45% GS2029), and sell Rs100 bn worth of bonds maturing in 2020. We currently expect FY20 GFD/GDP at 3.8%, which could potentially result in an incremental borrowing of Rs.700-800 bn. The operation twist, if sustained, can provide some relief to the markets that already remains wary of the extra supply. In case this announcement is for a single such operation, we cannot completely rule out the possibility of outright OMO purchase as liquidity surplus will begin to fade gradually in Q4FY20 amidst build-up of cash balances, CIC leakages, and RBI’s reduced spot intervention. Overall, we expect yields at the long end of the curve to come down by 5-10 bps in the near term.



Rupee outlook We expect rupee to depreciation by 2.1% (average) against the USD in FY21E and likely to be in a range of 70-73 against the USD in CY20 and average of 72.10 in FY21E. Our INR outlook is shaped by (1) the government’s policy responses to domestic growth slowdown, (2) extent of easing by DM central banks, (3) US-China trade dispute, (4) geopolitical developments, and (5) oil price trajectory.

Notably, despite the recent strong capital flows into India, the lackluster moves in INR can be attributed to RBI’s aggressive FX intervention.

INR is likely to range within 70-73 against the USD in FY21E

USD/INR and other major currency exchange rates; appreciation/depreciation (%)

2019 2020E 2021E Q1FY20 Q2FY20 Q3FY20E Q4FY20E Q1FY21E Q2FY21E Q3FY21E Q4FY21E

USD/INR 69.80 70.61 72.13 69.57 70.35 71.25 71.25 71.50 72.00 72.50 72.50 EUR/USD 1.16 1.11 1.14 1.12 1.11 1.10 1.10 1.12 1.13 1.15 1.15 GBP/USD 1.31 1.27 1.32 1.29 1.23 1.30 1.27 1.29 1.31 1.33 1.35 USD/JPY 110.9 108.8 106.8 110.0 107.3 108.5 109.5 108.0 107.0 107.0 105.0 Depreciation (-)/appreciation (+) against USD INR (7.6) (1.1) (2.1) 1.3 (1.1) (1.3) 0.0 (0.3) (0.7) (0.7) 0.0 EUR (1.0) (4.3) 2.6 (1.1) (1.0) (1.1) 0.0 1.8 0.9 1.8 0.0 GBP (0.5) (3.2) 3.9 (1.2) (4.1) 5.0 (1.9) 1.6 1.6 1.5 1.5 JPY 0.0 1.9 1.9 0.1 2.5 (1.1) (0.9) 1.4 0.9 0.0 1.9

Source: Bloomberg, Kotak Economic Research estimates

Disinvestment Considering the government’s fiscal deficit constrains, we believe the thrust will be on disinvestment to meet the fiscal maths. The government has set disinvestment target of Rs 1.05 tn for FY20 as against Rs 850 bn in FY19 and Rs 1.0 tn in FY18. The government is focusing on reaping economic potential from disinvestments and privatizations.

In CY20, the focus will be on strategic disinvestments of

Company Disinvestment of GoI holding (%)

BPCL (excluding 61.65% in Numaligarh Refinery Limited) 53.29 Shipping Corporation of India Ltd 63.75 Container Corporation of India Ltd. 30.8 out of 54 8% equity held by GoI Tehri Hydro Development Corporation India Limited (THDCIL) 74.23 North Eastern Electric Power Corporation Limited (NEEPCO) to National Thermal Power Corporation (NTPC). 100

Source: Kotak Institutional Equities



Primary market recovery likely in CY20 in India In CY19, 16 Indian corporates raised Rs 123.62 bn in IPOs (initial public offering), surprisingly the lowest in five years. Some of the star performer IPOs includes IRCTC, Affle India, and IndiaMART Inter-MESH. Interestingly, the S&P BSE IPO index, which measures the performance of companies listed at the BSE after the completion of their IPOs, has surged ~40% in CY19, outperforming broader indexes such as NSE Nifty 50 and BSE Sensex (12%).

S&P BSE IPO index

Source: Bloomberg

Market performance of recent equity issuances

Company Amount (Rs. mn) Issue month Perf. (%)

Vishwaraj Sugar 600 Sep’19 46 IRCTC 6,380 Sep’19 183 Sterling & Wilson Solar 28,496 Aug’19 -63 Spandana Sphoorty Financial 11,898 Aug’19 40 Affle India 4,590 Jul’19 114 Indiamart Intermesh 4,755 Jun’19 114 Polycab India 13,453 Apr’19 79 Metropolis Healthcare 12,043 Apr’19 55 Rail Vikas Nigam 4,769 Mar’19 24 MSTC 2,110 Mar’19 25 Chalet Hotels 16,412 Jan’19 20 Xelpmoc Design 231 Jan’19 -7

Source: Bloomberg, Media reports

Interesting IPOs lined up in CY20

In CY20, we believe IPO recovery is likely on the back of potential government reforms likely to boost stock markets. Notably, IPO recovery and tone will be led by sector leaders/differentiated businesses in Q1/Q2 as investors will be selective in their investment themes. Sectorally, Financials will play important part in IPO revival with deals viz SBI Cards, UTI AMC, HFFC, CAMS, Fincare, etc. Nevertheless, Consumer, Real Estate and Aviation could see significant IPOs as well. We also expect second REIT IPO and first REIT QIP in H1CY20.

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Forthcoming key equity issuances

Company Issue

Angel Broking IPO Annai Infra Developers IPO Antony Waste Handling Cell IPO Bajaj Energy IPO Burger King India IPO Chartered Speed IPO Chemcon Speciality Chemicals IPO Coldex IPO Easy Trip Planners IPO Emami Cement IPO Equitas Small Finance Bank IPO Heranba Industries IPO Home First Finance Co.India IPO Indian Renewable Energy Development Agency IPO ITI IPO Mazagon Dock Shipbuilders IPO Montecarlo IPO Mukesh Trends Lifestyle IPO Narmada Bio-Chem IPO Penna Cement Industries IPO Powerica IPO Puranik Builders IPO Rossari Biotech IPO Route Mobile IPO Samhi Hotels IPO Satyasai Pressure Vessels IPO Sbi Cards & Payment Services IPO Shri Bajrang Power & Ispat IPO Shriram Properties IPO Shyam Steel Industries IPO Stove Kraft IPO T&T Infra IPO Uniparts India IPO UTI Asset Management Co. IPO

Source: SEBI, DRHP filed with SEBI

FPI flows India-focused listed foreign funds with a total AUM of US$174 bn (October 2019 data) saw outflows of US$5 bn in 10MCY19. These funds account for about 41% of total FPI AUM in India (US$419 bn as of September 30, 2019 based on FPI holdings in BSE-200 stocks; this figure may be moderately higher). Similarly, India-focused foreign ETF funds have seen marginal outflows (US$84 mn) in 10MCY19, which is quite contrary to the conventional wisdom of large passive flows into the Indian market ‘supporting’ the Indian market’s rich valuations. The diminished flows into ETFs could simply reflect (1) India’s broadly unchanged weight in major benchmarks, (2) relatively low inflows into passive funds (apart from in active funds) and (3) India’s middling performance versus other EM markets and its weaker performance versus the larger EM markets, which would have ‘capped’ its overall weight in various benchmark indices.

Outflows from listed FPI funds (both active and passive) are in sharp contrast to large FPI inflows into India. SEBI data shows around US$14 bn of FPI inflows CYTD19 into India with the flows being particularly strong in Q1CY19 and Q4CY19. This would suggest that certain unlisted funds (long-term investors such as PFs, SWFs) continue to have strong faith in India’s long-term prospects and have invested accordingly.



Net investments by FIIs and MFs in the cash market (US$ bn)

Source: Bloomberg, Kotak Institutional Equities

Equity market outlook Investors are puzzled with India’s GDP growth rate declining continuously and benchmark index making new highs. Interestingly, the entire Nifty-50 return in CY19 has come post the corporate tax cut announcement in Sept’19. More precisely, Nifty-50 Index is up 14% in the past three and half months and 12% CY19.

Nifty-50 Index performance

Source: Bloomberg

Going ahead in CY20, we expect the market to do relatively ‘better’ due to (1) likely strong earnings growth and (2) possible favorable tax changes in budget.

The market has high expectations of (1) reduction in personal income tax rate, (2) removal of DDT (dividend distribution tax) and (3) rationalization of LTCG in the forthcoming FY21 union budget on 1st Feb’20. It remains to be seen if the government can meet the market’s expectations in light of its fiscal constraints. FY21 could be potentially more challenging as it may not have ‘special’ dividends from the RBI and large privatization-related income.

We expect FY21 net profits of the market to grow strongly led by higher profits of financials and telecom companies (including telecom part of RIL).

We expect one-year forward earnings per share of NIFTY-50 to be Rs.767 (i.e. Dec’20) which when valued at 17.5x gives one-year Nifty-50 target of 13,400. Similarly, the target for BSE Sensex would work to 45,500 by Dec’20.

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SECTORAL SNIPPETS Sector likely to do well in CY20

Sectors Outlook for CY20

Agro Chemicals This year's above normal rainfall and healthy reservoir levels bodes well for rabi crop. Based on Bloomberg estimates industry will report healthy earnings growth in FY20-21. Sector RoE ~18%.

Corporate Banks Earnings could go up in multiples between FY19-22E. Their slippage ratio is declining & loan recoveries will play out. Return on Equity can go to 15-16% in next two years leading to re-rating.

Larger NBFCs/HFCs Post NBFC Liquidity crisis, larger Housing Finance companies and NBFCS with strong parentage will garner higher market share. Valuations of larger HFCs are way below their 10 yr averages.

Mid Cap Cement Most mid cap cement companies are trading at far lower valuations than larger peers on various parameters. Healthy earnings growth and improving RoEs will lead to re-rating in mid cap cos.

Construction Companies are having healthy order book position although pace of new order intake has slowed down. Valuations are undemanding for RoEs of ~15% and likely free cash flows in FY20-21E.

Healthcare Revenue growth has been healthy at ~18% for last many quarters. Expect earnings growth to remain above 30% for next two years. Fw EV/EBITDA of 12x looks attractive for the high growth.

Oil & Gas After a poor show in FY19-20, earnings growth to be very healthy in FY21. More bullish on Gas companies as revenue & earnings visibility is high. Valuations are reasonable for RoEs of ~16%.

Mid Cap Pharma Most mid cap pharma companies have a good mix of domestic & exports business. Earnings likely to grow at a CAGR of ~15% in next two years. RoEs of mid cap cos. to be better than larger peers.

Source: Kotak Securities – Private Client Group

IT Services Large retailers in the US and Europe indicate very strong propensity to continue investments in digital technologies in the face of rapid disruption caused by ecommerce players. Pace of disruption is high for department and apparel retailers; moderate for grocery and specialty/luxury goods retailers and less for discount retailers. Retailers have increased focus on in-store customer experience and on omni-channel capabilities to remain relevant to customers.

While maturity of digital spends augurs well for medium term growth delays/decline in spends of challenged clients can create near term headwinds. Tier 1 IT has provided cautious outlook on near term growth in spends from the vertical.

Real Estate As per the latest data released by PropEquity, all-India real estate sales across major cities in India declined 15% yoy to 40.4 mn sq. ft in Oct’19 resulting in 30% yoy decline in launches across India in Oct’19. The decline in launch was pervasive over all key metro cities—particularly in MMR which saw a sharp decline of 61% yoy in Oct’19.

As a result of declining launches and improving sales momentum have continued to aid draw-down of inventory, with all-India inventory declining 11% yoy to ~1.27 bn sq. ft. Interestingly, on a trailing twelve months basis, outstanding inventory is expected to be liquated in 33 months. Prices across India increased 3% yoy to Rs.5,880 per sq. ft in Oct’19. Sales activity in NCR increased by an impressive 45% mom in Oct’19 with sales of 5.3 mn sq. ft (+9% yoy) with major contribution coming from Gurugram (1.9 mn sq. ft) and Greater Noida (1.3 mn sq. ft.).



Cement Our channel checks (cement companies and dealers) suggest that cement demand continues to remain muted which is the biggest concern area in the medium term. Intense winters, delays in various government projects, and tight liquidity in the markets is restricting demand growth. As per DIPP, demand declined by 8% yoy in October and we do not expect any significant improvement in the near term. Given the fiscal challenges of the government and slowdown in the economy, we see FY20E to end with no demand growth against market expectations of 5-6% yoy demand growth in H2FY20E.

Further, our dealer checks suggest that all-India cement prices declined 2% mom to Rs.331/bag in Dec’19 continuing the 1% mom fall in November. December would be the seventh consecutive month of price correction after peak prices in May’19. We note that the current cement prices are down 10% from May’19 peak whereas Q3FY20E prices are expected to decline 3% qoq on a pan-India basis. Our dealer checks indicate further risks to price cuts as non-trade segment has seen sharper price cuts than trade due to weak demand during the quarter.

Oil and Gas In CY19, Brent crude oil price has increased by 23% due to supply cut by OPEC and fading concern of trade war. This is beneficial for upstream companies like ONGC, OIL India, etc. The sector has been in limelight due to continuous news flow such as privatization, Saudi Aramco investment in RIL, etc. From 1st Jan’20, International Maritime Organization (IMO) mandates shipping vessels to use low-sulphur fuel. Hence, ships are banned from using high-sulphur fuel oil resulting in higher demand for low-sulphur fuel oil and diesel.

In CY20, it is expected that Asian oil refiners may face slower than expected margin growth on decelerating demand for key products and excess global refining capacity. They are unlikely to be offset by rising orders for low-sulfur fuel oil from IMO 2020 regulations. With rising crude oil prices, refiners' raw material cost will increase, resulting in higher operating cost, increase in working capital and finance cost. Additionally, an influx of U.S. shale oil will increase light crude volumes, likely eroding cost advantages by complex refiners which process heavier grades.

Despite a faltering oil product demand outlook, global refining capacity will increase by more than 11 mn b/d until 2030. Further, as majority of these capacity additions will be greenfield projects in Asia and hence will have high NCI. To conclude, weakening oil product demand in China and India, along with continued capacity addition, may further weigh on Asia's oversupply situation.

Metals & Mining

In CY20E, we expect both Aluminium and Zinc market to turn to surplus and low cost supply addition to keep prices under pressure. Hence, we expect Indian steel companies to have better fundamentals than base metals led by rising utilisation and tariff certainty, besides other factors. With gradual recovery in domestic demand and regional international prices, domestic steel prices have increased by 4-6% from the lows in Oct’19. Further, a warm winter in China has resulted in better demand from construction as reflected in inventory de-stocking and low exports.

Domestic HRC prices have recovered by 4% or Rs.1,500/ton and long prices have increased by 6% or Rs1,800/ton in the past two months from Oct’19 lows. We note that despite the recent hikes, average prices in Q3FY20E continue to be Rs500-1,000/ton lower than Q2FY20 average levels.



Our channel checks (steel traders and steel companies) indicated that domestic inventory has peaked in Sept’19 at ~14mn tons whereas October and November witnessed 2-3 mn tons of de-stocking.

We expect market tightness to slightly ease in the near term due to winter led demand slowdown however sluggish costs should keep margins intact.

We expect margins to recover partially in Q3FY20E and considerably in Q4FY20E (due to the inventory lag) led by higher prices and coking coal led cost deflation.

Indian steel companies is expected to have better fundamentals than base metals led by rising utilization and tariff certainty, higher leverage to China stimulus given steel intensity in infra and China’s dependence on raw material imports and improved global balance with China’s utilization at 85% (70% in 2015) after supply side reforms.



One Year Rolling Fw PE chart of Nifty-50

Source: Bloomberg

One Yr Fw PE chart: Nifty-50 Vs Mid Cap 100 Index

Source: Bloomberg

Bond PE Vs Fw Equity PE of Nifty-50

Source: Bloomberg

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Bond PE Nifty 50 Fw PE

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MAHINDRA & MAHINDRA: BUY

CMP: Rs.532 Fair Value: Rs.820 Market Cap: Rs. 660.81 bn

KIE expects overall volume to grow at a CAGR of 1% and EPS to decline by 1% CAGR overFY19-22E. KIE expects automotive volumes to remain under pressure over the mediumterm due to regulatory cost pressures.

2QFY20 M&M + MVML result - Revenues declined by 15% yoy led by 16% yoy decline involumes partly offset by 2% yoy increase in ASPs. M&M + MVML reported 2QFY20 EBITDAof Rs15.4 bn (down 17% yoy) and EBITDA margin came in at 14.1% (down 40 bps yoy andup 10 bps qoq). Adjusted net profit came in at Rs13.6 bn (down 20% yoy).

The company expects tractor industry to decline by 7-8% yoy in FY20E. This implies low-single digit decline on a yoy basis in 2HFY20 for the overall domestic industry. Thecompany expects demand in the tractor industry to be tepid till Jan’20 and post that thecompany expects some recovery.

The company expects domestic passenger vehicle industry to decline by 5% yoy and CVindustry to decline by 25% in 2HFY20. The company will launch three new vehicles from1QCY20 onwards over a span of 5-6 quarters. The company will launch electric KUV100 in4QFY20 followed by electric CUV in 2QFY21. The company will also launch electric XUV300in 1QFY22.

Post BS-VI, the diesel mix in compact SUV will come down to 40% from 60% currently. Also,the company expects 10-15% of the vehicles will shift towards petrol in the large SUVsegment.

KIE maintains BUY rating on the stock; SoTP-based FV reduces to Rs820 (from Rs770earlier) due to increase in value of subsidiaries. KIE has reduced the EPS multiple from 14Xto 13X for M&M+MVML entity due to capital allocation issues as subsidiaries lossescontinue to mount.

Note: The above is brief note on the company, based on the research report and update available (dated: 8th Nov’19) on our website at: https://www.kotaksecurities.com/research_report/recommendation/indiadaily.html



VEDANTA LTD: BUY

CMP: Rs.152 Fair Value: Rs.180 Market Cap: Rs.566.68 bn

VEDL reported 2QFY20 consolidated EBITDA of Rs44 bn (-15% yoy, -15% qoq), 9% below KIEestimate mainly led by aluminum division (higher costs) and partially led by weak steelmargins. PBT at Rs15.4 bn was down 33% yoy and 26% qoq while reported NPAT includesdeferred tax credit of Rs25 bn and Rs5 bn impairment charge against Rs25 bn investmentmade in AvanStrate, a Japanese glass substrate manufacturer.

VEDL reported an EBITDA loss of Rs1.1 bn in aluminum operations due to a sharp surge inpower costs sequentially and lower LME prices. Production costs increased as a result ofa sharp surge in prices as coal mines remained shut due to excessive rains.

VEDL continues to struggle with growth in both oil and zinc divisions and is forced tomoderate its growth guidance given at the start of year like in the past two years. RevisedGuidelines i) Oil & Gas: Gross volumes of 190-200 kboepd with an exit run-rate of 225kbpoed from 200-220 kpoed earlier. ii) Zinc International: BMM and Skorpio: Production at130 kt from 170kt earlier at US$1,850 (US$1,400 earlier) Gamsberg: Production at 150ktfrom 200kt earlier at US$1,250 (US$1,000 earlier). iii) HZ: Mined Metal: Production at950,000 tons from 1 mn tons earlier at <US$1,030 (<US$1000 earlier). Silver Metal:Production at 650,000 tons from 750-800,000 tons earlier.

The company has reduced its capex guidance for FY20E at US$1.2 bn from US$1.4 bnearlier. The capex shall be utilized primarily for expansion at oil & gas (US$0.6 bn) and zincoperations (US$0.4 bn). Net debt declined by Rs83 bn qoq through release of workingcapital and cash flow from operations.

KIE cut EBITDA estimate by 17%/6%/4% for FY20/21/22E due to lower volumes in oil andzinc divisions and factor higher costs in aluminum.

High parent debt should keep dividend payout high and KIE estimate a 13% dividend yieldat CMP. KIE cut fair value to Rs180 (Rs200 earlier) on lower earnings at 5.1X attributableEV/EBITDA FY21E versus stock at 4.4X (as on report date 14th Nov, 2019) and maintainBUY.

Note: The above is brief note on the company, based on the research reports dated 14th Nov’19 and available on our website at: https://www.kotaksecurities.com/ksweb/ResearchCall/Fundamental



STATE BANK OF INDIA: BUY

CMP: Rs.334 Fair Value: Rs.400 Market Cap: Rs. 2,978.14 bn

Q2FY20 update: SBI reported a 3.2x growth in earnings on the back of 21% yoy growth inrevenues, ~30% yoy operating profit growth and 8% yoy growth in provisions. NII grew 18%yoy but loan growth was modest at 10% yoy. Reported NIM improved 10 bps qoq at 2.9%.Deposit growth was muted at 8% yoy. CASA ratio was broadly stable qoq at ~45%.

Retail segment constitutes ~30% of the loan book and has been witnessing strong growthrates driven by home loans (up ~18% yoy) and Xpress credit (personal loans) (up 42% yoy)while auto loan growth remains weak (~3% yoy). Corporate book constitutes 40% of theloan book (down ~200 bps yoy). KIE is building ~11% loan CAGR over FY19-22E.

The bank has seen recovery and upgradation trends sustaining and KIE is optimistic thatthis trend could accelerate in 2HFY20. Slippages declined to 1.7% of loans withimprovement in all segments. Gross NPL ratio declined 35 bps qoq to 7.2% while net NPLratios declined ~30 bps to 2.8%. Coverage ratio improved to ~200 bps to 62% (82%including write-off).

KIE is optimistic that FY20 should see far better performance than FY19. It believes thatthe bank is well-poised to show sharp improvement in return ratios by FY21-22 on the backof recovery in loan growth, healthy operating profit growth and sharp reduction in creditcosts.

A solid low-cost franchise, ability to shift gears such as retail business, healthy capitaladequacy ratios leading to lower risk of below book dilution, solid performance bysubsidiaries and an inexpensive valuation drive our positive view on the bank.

KIE maintains BUY rating on SBI with fair value of Rs400, valuing the bank at 1x book and6x Sep’21E EPS for RoEs in the range of ~15% in the medium term. The broad thesis on thebank remains unchanged and the stock remains KIE’s preferred idea among public sectorbanks.

Note: The above is brief note on the company, based on the research report and update available (dated: 25th Oct’19 & 31st Oct’19 ) on our website at: https://www.kotaksecurities.com/research_report/recommendation/indiadaily.html



LARSEN & TOUBRO LTD: BUY

CMP: Rs.1298 Fair Value: Rs.1560 Market Cap: Rs.1,821.78 bn

L&T reported a healthy and ahead of estimates 12% yoy growth in core E&C EBITDA withsupport from settlement of claims in Hydrocarbon segment and a material real estate sale.L&T reported a healthy 16/14% yoy growth in core E&C orders for 2Q/1HFY20.

Despite a healthy start to order inflows in 1HFY20, L&T has maintained the revenue growthguidance of 12-15% for FY20 owing to delays in commencement of the coastal road projectand AP projects as well as sluggishness seen in private and industrial capex.

The company mentioned ordering prospects worth Rs5.2 tn for FY20 with strong tractionexpected to be visible in infrastructure worth Rs4.5 tn, metallurgical Rs100 bn, heavyengineering Rs100 bn, power Rs200 bn.

L&T’s strategy of diversifying beyond the Middle East region on the international side isalso playing well and its inflows from international moved up to Rs167 bn during Q2FY20.

L&T has contained receivable days over the past few quarters. Consolidated RoE continuesto benefit from increasing business exposure to the Hydrocarbon segment, income againstpayables and limited losses thus far from Metro project.

We marginally cut our estimates for order inflows and margin for FY21/22 (Rs70 per shareSoTP impact). This coupled with a cut in KIE’s fair value for L&T Finance Holdings (Rs10per share) and conversion of CCPS in L&T IDPL (Rs10 per share) yields a fair value ofRs1,560 (from Rs1,650).

Note: The above is brief note on the company, based on the research report and update available (dated: 24th Oct’19) on our website at: https://www.kotaksecurities.com/research_report/recommendation/indiadaily.html



VARROC ENGINEERING: BUY


Growth in the domestic 2W and global auto industry will likely be weak in the near term andKIE expect the company to deliver double-digit revenue growth from FY21E onwards, led bynew order wins from VW & Renault and ramp-up of the new plants. Profitability in VLS willimprove with backward integration, improvement in operational efficiency and scalebenefits. (page 1, para 1) KIE estimates Varroc Engineering’s earnings to increase at 8%CAGR over FY19-22E period.

Q2FY20 result - Consolidated revenues came in at Rs27.1 bn (-10% yoy) and consolidatedEBITDA came in at Rs2.3 bn (-28% yoy). EBITDA margin for Indian operations (includingother income) came in at 10.2%, down 190 bps yoy and EBITDA margin for VLS came in at7.2%, down 130 bps yoy. Reported PAT came in at Rs229 mn (-77% yoy).

The company continues to win new orders from India business. Varroc won Rs122 mnworth of new orders and Rs68 mn worth of re-order from Bajaj Auto in Q2FY20. Thecompany won its first order for IP FSS (Full System Supplier) design order from M&M.Varroc also won Rs180 mn worth of new order for polymer body parts and metallic partsfrom Yamaha India and won Rs200 mn worth of new orders for polymer tools from variouscustomers.

KIE expects India revenues to grow by 12% yoy in FY21E. KIE expects EBITDA margin in thestandalone operations to improve to 11.1% by FY21E led by operating leverage benefits.

Consolidated net debt stood at Rs25.2 bn (excluding impact of IND AS-116) as on Sept’19versus Rs20.75 bn in Sept’18 and the company will incur capex of Rs7.5-8 bn in FY20E andRs6-6.2 b in FY21E.

KIE maintains BUY with revised FV of Rs520 (from Rs675), valuing the company at 14XSeptember 2021E EPS (from 15X March 2021E EPS). Stock is trading at attractivevaluations and FCF yield and most of the capex for growth till FY23E has already beenincurred




KNR CONSTRUCTION: BUY


KNR constructions is broadly present in construction of roads and highways with presencein irrigation space. KNR has track record of generating positive operating cash flows whichwould help it in meeting capital for future growth.

KNR continues to remain selective in terms of bidding of projects and focusses on biddingof projects with over 16% EBITDA margin. It is mostly focused on southern region (98% ofits order book) where they have competitive edge.

KNR has robust order book of Rs 66.8 bn at the end of Q2FY20. This includes Rs 15.3 bnestimated EPC component of two HAM projects where appointed dates have not beenreceived. The order book gives strong revenue growth visibility for the next two years.

The company targets to add Rs 10-15 bn of new orders in H2FY20 based on its projectpipeline from roads, irrigation and flyover space. As per management, it will be difficult forNHAI to meet its targeted road project awarding in FY20 on account of slow pace ofawarding in H1FY20, but expects pick up in project awarding in road space from December2019 onwards based on pipeline of projects.

The company has maintained guidance of Rs 23-24 bn revenue in FY20E and further targets~Rs 27-28 bn revenue in FY21E. The company targets EBITDA margin for FY20 to be above20% based on contribution from high margin irrigation projects and arbitration claim award.

We maintain our BUY rating on the stock with sum of the parts based target price of Rs 305,which includes Rs 258/share for construction business and Rs 47/ share for BOT/HAMprojects.




SUVEN LIFE SCIENCES LTD: BUY


Suven Lifesciences SUVN 502 molecule failed to meet the primary endpoints, which wasclearly a negative, however, the drug was safe and well tolerated with no significant adverseevents.

We believe that although the outcome was clearly negative for stock, but the findingspresent an important step forward in further exploration of the potential therapeutic effectsof SUVN-502 (out-licensing potential of which is uncertain) in Alzheimer's Disease (AD) andBehavioral & Psychological Symptoms in Dementia (BPSD).

Company will work with regulators and potential partnering companies in the design andconduct of future studies for further exploration of the potential of Masupirdine (SUVN-502).

Demerger Benefit: Another adjustment that we have not incorporated in our numbers (butcan have significant positive impact) is demerger of current business into two, namely, R&Darm (SLSL) and core CRAMS business (SPL). Management expects the demerger tocomplete by end of FY20.

Post de-merger, we expect the R&D expenses to reduce to ~4-5% of sales for FY21E andFY22E resulting in EBIDTA margins for core CRAMS business improving from current 35%and 36% to ~ 42% and 43% for FY21E and FY22E, respectively. The potential jump inearnings clubbed with higher return ratios could lead to upside risk to our target price, whichwe are not factoring as of now.

Post the failure of SUVN 502, we have deduced Rs 54, as the potential of out-licensing isout of picture. Thus we arrive at our revised target price of Rs 391 (vs. earlier target priceof Rs 445), valuing the stock at 19x FY22E EPS of Rs.19.4 arriving at price of Rs.369 (forbase business). We have added the value of other 3 molecules put together at Rs 22.

Note: The above is brief note on the company, based on the research report and update available (dated: 3rd Dec’19) on our website at: https://www.kotaksecurities.com/research_report/recommendation/indiadaily.html


RATING SCALE (KOTAK SECURITIES – PRIVATE CLIENT GROUP) / KOTAK INSTITUTIONAL EQUITIES Definitions of ratings BUY – We expect the stock to deliver more than 15% returns over the next 12 months ADD – We expect the stock to deliver 5% - 15% returns over the next 12 months REDUCE – We expect the stock to deliver -5% - +5% returns over the next 12 months SELL – We expect the stock to deliver < -5% returns over the next 12 months NR – Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for

information purposes only. SUBSCRIBE – We advise investor to subscribe to the IPO. RS – Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there

is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.

NA – Not Available or Not Applicable. The information is not available for display or is not applicable NM – Not Meaningful. The information is not meaningful and is therefore excluded. NOTE – Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark.

FUNDAMENTAL RESEARCH TEAM (PRIVATE CLIENT GROUP) Rusmik Oza Arun Agarwal Amit Agarwal, CFA Krishna Nain Head of Research Auto & Auto Ancillary Transportation, Paints, FMCG M&A, Corporate actions [email protected] [email protected] [email protected] [email protected] +91 22 6218 6441 +91 22 6218 6443 +91 22 6218 6439 +91 22 6218 7907

Sanjeev Zarbade Jatin Damania Purvi Shah Priyesh Babariya Cap. Goods & Cons. Durables Metals & Mining, Midcap Pharmaceuticals Research Associate [email protected] [email protected] [email protected] [email protected] +91 22 6218 6424 +91 22 6218 6440 +91 22 6218 6432 +91 22 6218 6433

Sumit Pokharna Pankaj Kumar Deval Shah K. Kathirvelu Oil and Gas, Information Tech Midcap Research Associate Support Executive [email protected] [email protected] [email protected] [email protected]+91 22 6218 6438 +91 22 6218 6434 +91 22 6218 6425 +91 22 6218 6427

TECHNICAL RESEARCH TEAM (PRIVATE CLIENT GROUP) Shrikant Chouhan Amol Athawale Faisal Shaikh, FRM, CFTe Siddhesh Jain [email protected] [email protected] Research Associate Research Associate +91 22 6218 5408 +91 20 6620 3350 [email protected] [email protected]

+91 22 62185499 +91 22 62185498

DERIVATIVES RESEARCH TEAM (PRIVATE CLIENT GROUP) Sahaj Agrawal Malay Gandhi Prashanth Lalu Prasenjit Biswas, CMT, CFTe [email protected] [email protected] [email protected] [email protected] +91 79 6607 2231 +91 22 6218 6420 +91 22 6218 5497 +91 33 6625 9810

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Disclosure/Disclaimer (Private Client Group)

Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house. Kotak Securities Limited is a corporate trading and clearing member of BSE Limited (BSE), National Stock Exchange of India Limited (NSE), Metropolitan Stock Exchange of India Limited (MSE), National Commodity and Derivatives Exchange (NCDEX) and Multi Commodity Exchange (MCX). Our businesses include stock broking, services rendered in connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management. Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Kotak Securities Limited is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old Mutual Life Insurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI). We are registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014. We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in last five years. However SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise/warning/deficiency letters/ or levied minor penalty on KSL for certain operational deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has our certificate of registration been cancelled by SEBI at any point of time. We offer our research services to clients as well as our prospects. This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions. This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of clients of Kotak Securities Ltd. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable though its accuracy or completeness cannot be guaranteed. Neither Kotak Securities Limited, nor any person connected with it, accepts any liability arising from the use of this document. The recipients of this material should rely on their own investigations and take their own professional advice. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance. Certain transactions -including those involving futures, options and other derivatives as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. Reports based on technical analysis centers on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company's fundamentals. Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. We and our affiliates/associates, officers, directors, and employees, Research Analyst(including relatives) worldwide may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company/company (ies) discussed herein or act as advisor or lender / borrower to such company (ies) or have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of Research Report or at the time of public appearance. Kotak Securities Limited (KSL) may have proprietary long/short position in the above mentioned scrip(s) and therefore may be considered as interested. 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The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. No part of this material may be duplicated in any form and/or redistributed without Kotak Securities' prior written consent. Details of Associates are available on www.kotak.com 1. “Note that the research analysts contributing to the research report may not be registered/qualified as research analysts with FINRA; and2. Such research analysts may not be associated persons of Kotak Mahindra Inc and therefore, may not be subject to NASD Rule 2711 restrictions on communications

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