Fintellect - The Annual Finance Magazine, 2021

ANNUAL MAGAZINE 2021

THE ERA OF DIGITAL VOGUE: FROM CRISIS TO SOLUTION

Fintellect

TABLE OF CONTENTS

FOREWORD

03

FINTELLECT ARTICLES Impact of moving from LIBOR to SONIA/SOFAR

05

What to look for while Investing in the Uncertain Economy ?

09

Strong Fundamentals or Growth Story

13

InsureTech: Oppurtunities & Challenges

16

STOCKATHON DECKS Economy Analysis

20

Industrials

23

Auto Ancilliaries

30

Pharmaceuticals

37

MEET THE TEAM

44

Foreword

Investments are the outcome of a forward-looking thought process,

and

the

ongoing

pandemic

has

accelerated

our

journey to a future we could not imagine was so close. What we are faced with is undeniably not a temporary crisis, but a perpetual disruption that is impacting the way we work, do business and engage with each other. Such changes otherwise may take decades to manifest. The devastation caused by the pandemic

on

notwithstanding,

economies, this

households,

adversity

has

created

and an

health

opportune

landscape for investors who can identify and capture the emerging structural themes. Trends point in the direction of increased focus on sustainability, and not surprisingly, the year just gone by has seen record investments in Environmental, Social, and Corporate Governance (ESG). The emergent trends also

include

a

visible

shift

toward

online

shopping

and

working from home, with the popularity of videoconferencing making us wonder why we did not explore its potential till a virus forced us to do that.

The technology that makes such a shift possible should continue to remain a pervasive investment theme. And if we stick our necks to see beyond the apparent, the uncertainty caused by the pandemic has made businesses and households more insecure, and the obvious beneficiary of this will be the insurance companies. In such a unique setting, the discussions on

Investment and M&A opportunities in the digital age

amidst the pandemic� during the National Finance Summit (part of Trade Winds 2021) are a timely nudge for investing enthusiasts

to

look

for

gainful

opportunities

amidst

the

unforeseen crisis.

Dr. Niti Nandini Chatnani, Professor of Finance, Indian Institute of Foreign Trade, New Delhi has been a part of the institution since July 2007. She has a rich teaching experience of over 25 years and has also written several research papers and books published in both international and national publications.

Dr. Niti has been a Member of FICCI Working Group on Commodities since 2013. She had been Empanelled as a Mentor with Bhartiya Yuva Shakti Trust, New Delhi, and as an Accredited Management Teacher with All India Management Association.

Impact of moving from LIBOR to SONIA/SOFAR - Anshi Dalmia & Amit Boradia

The Rise and Fall of LIBOR Fall of London Interbank

Offered Rate LIBOR rates: LIBOR serves as a globally accepted benchmark interest rate that indicates cost of borrowing between banks. It is an average add on rate calculated by estimates submitted from the leading banks for seven different maturities and is posted every day for five major currencies (Swiss Franc, Euro, Pond Sterling, Japanese Yen). It is used for various financial purposes like valuation, accounting and benchmarking. It is derived from the estimates of leading banks who have a significant presence in the derivates market and loan contracts which are priced using these LIBOR rates.

Due to this LIBOR rates are vulnerable to manipulation and have become increasingly unverifiable. The first instance of this was observed during the financial market crash of 2007-08 where there the LIBOR didn’t reflect the actual rates of borrowing. There were several reforms to remove the irregularities and at last the cessation period for LIBOR was decided to be December 2021.

Alternate reference rates (ARR’s): Unlike LIBOR, ARR’s provide

an accurate representation of reference interest rates which cannot be manipulated and thus can serve as a benchmark for term lending and funding. Several countries where LIBOR forms a component of the local benchmark rate are also switching to ARR’s. For example, Singapore Dollar Swap Offer Rate (SOR) which uses LIBOR as one of the components has identified Singapore Dollar Overnight Rate Average (SORA) as a credible alternative to LIBOR. Table 1 displays the alternative rates for LIBOR for five currencies.

Table 2 displays the key differences between LIBOR and Alternate reference rates.

Challenges in transition to ARR’s: The components on the basis of which

LIBOR is calculated are credit risk premium, term premium, and liquidity premium. Unlike this, ARR’s are overnight benchmark rates hence they lack a term structure and a credit risk component. Compounding overnight interest rates (i.e. compounding in arrears) would be the simplest construct of the term structure. Unlike the term structure of LIBOR which is a forward-looking estimate of rates, ARR’s term structure will be a backward-looking estimate of rates and will not reflect market expectations about future interest rates. The other major challenge is developing liquidity in contracts that use ARR’s as reference rates. Markets will develop liquidity only when new contracts have reference rates as ARR’s which is not the case right now. However, several regulatory initiatives are taken to boost liquidity in these markets.

Derivative & Hedging: There would be a cascading impact on the

valuation of derivative instruments which in turn would have a direct impact on the hedging strategies and the P&L of companies. Contracts outliving the cessation period will have to be renegotiated and fallback clauses will have to be inserted. Derivative markets are more standardized due to bodies like International Swaps and Derivatives (ISDA) associations whereas cash market contracts including loan contracts are customized and would require the renegotiation of each contract. Effects could also be seen in US GAAP and IFRS accounting.

Risk Assessment: ARR’s are not as standardized as LIBOR is and are

customized according to the currencies which could create difficulties in assessing risk since different reference rates will be used. · Tax implications:

A change in interest calculation for the debt

instruments which use floating interest rates as coupon rates would have a direct impact on the tax books of the firms. The changes in P&L on account of derivative valuation will also impact this.

SystemInfrastructure: The current system is accustomed to using LIBOR

as reference rates and modifications need to be made to include the ARR’s.

Process & Control: Frameworks and policies will have to be

updated by regulatory authorities.

The Indian Context of the Transition:

LIBOR-Linked exposures in India is as per Table 3. As new contracts referencing LIBOR aresigned, these figures are not static.

India will also face challenges similar to those of other jurisdictions

during

the

transition.

Mumbai

Interbank

Forward Outright Rate (MIFOR) is a key benchmark in the interest rate swap (IRS) markets and one its principal component is LIBOR and the other being USD forward premia. About a fifth of the IRS contracts are referenced to MIFOR. An alternate to MIFOR can be Market Repo Overnight Rate (MROR) which is a benchmark based on secured overnight transactions and it encompasses both bank and non-bank participants. The RBI has been active in monitoring global developments regarding LIBOR developments and has tasked Indian Bank Association (IBA) to consult on relevant issues. IBA is working on three fronts: ·

The transition agreements

·

Rate calculation methodology

·

Outreach to market participants

To

ensure

embedded

a

smooth

in

transition

financial

systems,

from it

a

benchmark

would

require

coordinated efforts from multiple stakeholders involving regulators,

government

agencies,

market

bodies

and

financial entities.

Team Pheonix from IIFT Delhi

What to look for while Investing in the Uncertain Economy ?

Strong Fundamentals or Growth Story

- Malika Asthana - Pratik Shetti

The Uncertainty Conundrum: Not able to be relied on, not known or definite It would not be wrong to say that 2020 has been quite easily one of the most uncertain years – and perhaps the longest one as well it seems. A year that has thrown curveballs at every one since January right from the Australian bushfires and the Coronavirus pandemic to a December where the year sees a possibility of a vaccine, and with it some added hope and optimism. But though uncertainty is an all-pervasive feature of human life,

2020

has

bought

uncertainty

to

an

unprecedented degree at the micro and macro levels of the economy as well.

Uncertainty on a micro-level revolves around the effect of an economy faced with a possible threat of recession or war on individual companies. As we continue to fight the war with the pandemic on an individual level, the threat of recession, one that has been looming over not only India but the world, is another war that needs talking.

As the lockdown ensued, along with record-high levels of unemployment reaching 23.52 % in April 20201, it affected businesses that thrived on physical interactions between the buyer and seller and had a direct effect on their financial performance.

The COVID pandemic brought out the true meaning of “Cash is King� with small businesses looking to the government to provide some liquidity as the stock markets tumbled with NIFTY reaching a record low of 8000 points. This uncertainty in the level of sales then extends to the stock market, which sometimes results in a stock sell-off.

Uncertainty on the macro level on the other hand, directly affects the economy. Investors attempt to move their currency away from unstable sources to stable ones.

Consider the 24% Y-o-Y GDP contraction in the second quarter (April-June) of the Indian economy. For the current year, the projected contraction stands at a -8.9%, revised by Moody’s from its earlier projection of a -9.6% contraction.

According to Moody’s, all of the G-20 countries have sustained severe output losses this year, sharper in some, which makes the pace of improvement asymmetric across countries.[1]All of this only adds to the already looming uncertainty in the world and poses the question: should one go for high growth stocks or stocks of companies with strong fundamentals.

Growth stocks are expected to rapidly grow sales with huge potential

expansion as there is something that sells their products better than their competitors. These companies usually focus on increasing sales in the earlier stage and later focus on maximizing profitability. A classic example would be ‘Uber’: who would imagine that a company having a market capitalization of $ 90bn is still yet to turn profitable? One should not expect any dividends from growth stocks as these companies usually reinvest the profits into the business to grow it further. Investors pay a high price for a growth stock based on their expectations, which if not met, can lead to a dramatic decline.

Fundamentally strong stocks represent firms with a sound business model, a strong

balance sheet, and efficient financial management. These businesses tend to sustain even the worst of times as compared to growth stocks. Jubilant Foodworks, the master franchiser of Domino’s Pizza in India is a great example of a fundamentally strong company. It has a sound business model with limited market triggers, and a cash giant at that, with no debt to worry as well. Its stock price grew by a monster 115% throughout the pandemic after having a modest drop of ~25% when the entire market crashed. Although the market did kind of recover, with the recent bull run aiding it further, this again goes on to show that a fundamentally strong stock will sustain even the toughest of times in the market.

Growth vs Fundamentals: Both of them are different investing styles. A popular quote from the TV replication of the 1992 Harshad Mehta scam: Risk hai toh Ishq hai. And herein lies the answer to our question: It totally depends on the investor’s investment style, their risk appetite, and their personal financial goals to decide which way to go. One should go for growth stocks if they 1) Want higher returns as growth stocks have the tendency to have really expensive valuations and thus, higher square off gains; 2) Have the ability to handle volatility because higher rewards come with even higher risks and an investor should be able to stomach the market fluctuations that a growth stock goes through and 3) are not looking for immediate gains as growth stocks do not pay out any significant dividends.

On the other hand, one should go for fundamentally strong stocks if they prefer 1) Constant cash flows in the form of dividends and 2) An extremely low risk appetite because these stocks have time and again proven that they possess the ability to ride out the toughest of economic conditions and eventually come out on top.

- Pikachu Warriors from IIFT Delhi

Strong Fundamentals or Growth Story What to look for while investing in the uncertain economy.

A tumbling economy is almost certainly

Since lockdowns began worldwide, and

accompanied by a strong correction in

in

financial markets, but the correlation

strengthened to its all-time high against

remains strong only for a short while.

the rupee at a little over 77.6. This was a

With Indian markets reaching record

natural response by investors worldwide,

highs in the middle of a pandemic, it has

as

never been clearer that

developing countries during uncertain

markets and the economy seldom move

times, and buy the US dollar, which is the

together.

reserve currency of the world. For an

India

they

in

late

sell

March,

weaker

the

dollar

currencies

of

Indian investor, this was an opportunity of Investing in these uncertain times, and

a lifetime. With a more than anticipated

with GDP forecasts going negative, one

rally of the dollar, a correction was due

must adopt a forward-looking approach.

once markets

A year down the line, when the economy

normalized. This was the perfect time to

starts recovering, what sectors or stocks

buy gold. Why is that?

will

benefit?

This

is

a

procyclical

approach, which is, when the economy is

The value of the US dollar and the price of

booming, so are these stocks. To identify

gold are inversely related. Since the dollar

what stocks will shoot up the highest if

is the reserve currency of the world, i.e.,

lockdowns were opened up, one must

most

identify what are the stocks that have

payments in dollars, countries like India

fallen the most since the pandemic

pay for imported gold in dollars.

began.

countries

make

and

receive

When the dollar gets stronger, gold becomes expensive, which cuts down its demand. The reduced demand pushes gold to become cheaper. This inverse relation is evident in the months following the first lockdown, where gold reached highs of Rs. 55,000/10g when the dollar stabilized, making it one of the best investments.

The Indian as well as American markets have been highly speculative and news-driven. Most bio-tech stocks have rallied over 30% on average since the start of the fiscal, yet none of them have released an effective vaccine for Covid-19. Speculation is a dangerous game; take the case of Pfizer. The day after it announced the success rate of their vaccine, the stock opened up 20% from the previous close and fell 13% within the first 2 hours of trading. All those who had placed orders to buy on opening faced huge, and easily avoidable losses.

Hence, while growth stocks seem more attractive, they are that much riskier and prone to new rumors.

Adani Green Energy has been the growth stock of the year, giving over 750% return-on-investment. The rally got a major push on account of its deals with TOTAL, the French oil company, and was helped on further when it was declared the largest green energy producer in the world. The most evidently hit was the petroleum and natural gas sector, which had to bear the brunt of restricted inter-state travel, abandonment of public transport and shutting down of factories. However, the government has helped public sector oil companies win oil fields in auctions held in the Middle East. Oil companies such as ONGC have strong fundamentals with a low debt to equity, owing to its governmentowned status. Since its low of Rs.50 in March, it trades between Rs.85-90 levels in the first week of December, which is a return of 75%. The company also has a good track record of paying dividends, and currently its dividend yield stands at 5.56%.

Blue chip IT companies are reliable investments, as their businesses remain largely unaffected, or even positively helped on by the pandemic. Tata Consultancy Services crossed the 2800 mark in October, up over 40% since its lows in April. It is a highly profitable company with the capability of paying dividends up to 3 times a year.

A more defensive portfolio would include sound financial institutions such as HDFC Bank or Kotak Mahindra Bank, with HDFC having a P/E ratio lower than the industry average. Both have low beta values, making them less sensitive to volatility and consequently less risky. However, one must take into consideration the provisions of the financial institution in question, as well as their existing NPAs, because even though the Reserve Bank has pushed NPA declaration till June-July of 2020, many debtors may never recover the loans and would taint the balance sheets of banks.

All this evidence goes to show that an ideal allocation would include only one or two growth stocks, given that they are a much riskier proposition, an argument that Nobel Prize winner Eugene Fama disagrees with. The rest of the portfolio should be full of high liquidity, low debt and high Debt Service Coverage Ratios (DSCR). This would ensure that the company has enough resources to finance its existing debt.

Arjun Tandon (Christ University, Bangalore)

InsureTech

Opportunities & Challenges - Anshita Bhargava

With a population of approximately 1.3 billion, there are only 24 life insurance companies while 30 P&C insurers aim to fulfill India’s insurance requirement, which is indeed a very small percentage as compared to its population. India’s Insurance industry is less than two decades old as the privatization in the industry took place in 2001, prior to that there was majorly Life Insurance Corporation of India.

Insurance companies have understood that the everyday lives of their customers are being transformed by new and advanced technologies, hence they are facing immense pressure to evolve and innovate before such a change hits the bottom line. Furthermore, InsureTech has now become a global trend. With more than half of all deals taking place in the US, markets in UK, Germany, China and India are also significant in their own right.

With the expected market growth rate in India at approximately 15%, the lowest penetration amongst major economies coupled with the digital transformation taking place, the technological and private insurance industry shall scale up at a very fast pace.

As per Accenture’s Tech Vision for Insurance 2016, it was found that approximately 83 percent of insurers consider that the digital economy will be leading to a major shift in power from supply-side economies of scale to demandside

economies

based

on

ecosystems.

Further,

approximately 94 percent of insurers view the adaptation of platform-based models and digital ecosystems as a critical aspect of the success of their business. There appears to have a shift in the entire process of evolving consumers, competitors, and also organizations that are challenging the traditional insurance business models which are in existence.

Large players in the Insuretech industry are providing integrated solutions such as usage-based insurance, use of the big data comparators, SaaS-based models, and different applications to increase the responsiveness for solving the current issues faced.

The four key levers in digital or technological insurance are product, price, distribution and claims. The first phase of evolution in digital insurance started in the past 4-5 years which dealt with acquiring the products available offline for agents, banks to sell and setting them up in the online mode.

The emergence of a cohort of startups in which the products leverage technologies such as analytics, artificial intelligence (AI) and the Internet of Things (IoT) have been the biggest drivers for the growth. In future with data, technology and online access merging together there will be a huge impact on the value chain in the industry. For example, if a player like Amazon decides sell auto insurance, they have the database of the consumers home and office shipping address which gives them the per day distance travelled, that is, the primary information which changes the dynamics of the product completely.

New innovative products, underwriting norms and information symmetry have started to evolve and the focus from only product manufacturing and its distribution has also changed.

Focus is on getting closer to the customer which is both an opportunity and risk for the industry. The biggest change in the third-generation technology is that those who are deep rooted in data and tech are making an effort to understand the domain and learn the regulations, finances.

Structurally there are many challenges in the insurance industry. Due to the absence of sufficient data, there is an existence of blanket underwriting based on what the distributors are willing to sell. The massive cost of distribution which is approximately 25-30 %, the main reason behind this is that every new company in the industry chases the same distributors, brokers, banks to acquire the market share.

Without the support of the large insurers, insurtechs shall find it hard to manage the unit economics of the policies they aim to sell which will create a hurdle in scaling Insurers shall also face several regulatory hurdles at each stage of the value chain.

Data and AI help insurers to determine risk on a more accurate basis but laws & regulations may prohibit the smooth implementation. Nonuniformity can be seen across many characteristics and different lines of insurance. The current complex system is very difficult to navigate for the established companies and it may prove even more difficult for the startups and newly formed companies.

Furthermore, innovations in the distribution channels and customer engagement shall cause problems for the existing brokers and agents.

To combat with the same, India has been

trying

to

develop

alternative

distribution channels, bringing more personalized

products,

better

data

acquisition, understanding consumer behaviour and double-sized trust score.

For a successful amalgamation with technology,

the

insuretechs

understand

the

market

should

and

the

problem they aim to solve, considering the broader insurance industry and not limit themselves to the personal nonlife

domain,

determining

the

boundaries between the solution and their

business

flexible

and

partnering

lastly,

adopt

approach

a

while

aiming to form broader ecosystems.

- Anshita Bhargava from IIFT Delhi

The Analysis of Indian Economy

ECONOMY ANALYSIS Ease of Doing Business Ranked 63 among 190 economies in the ease of doing business, as per the latest ratings of the World Bank.

Taxation For current fiscal, government has collection projection from budgeted Rs 24.61 lakh crore to Rs 21.63 lakh crore

Per Capita GDP The GDP per capita in India was last recorded at 2169.10 US dollars in 2019. It is equivalent to 17 percent of the world's average

IIP The Industrial production in India jumped 3.6 percent year-on-year in the month of October of 2020- strongest gain since Feb’19

Unemployment Rate Balance of Trade The Trade deficit widened to USD 15.71 billion in December of 2020 from USD 12.48 billion an year earlier

In India the rate decreased to 6.50 percent in November from 7 percent in October of 2020.

Foreign Exchange Reserves They are the foreign assets held or controlled by the country central bank. Foreign Exchange Reserves in India amounted to 580840 USD Million in December 2020

Covid’s Impact on Economy • Govt estimates approx. 0.3-0.5 % point hit to GDP in FY21 • Severe slowdown seen in Q1 and Q2- as low as 4- 4.5% • Tourism, Aviation and hospitality worst hit • Independent economists expect up to one percentage point hit in FY21 • Bat for fiscal and monetary stimuli

Inflation Rate Retail price inflation eased to 6.93 percent year-on-year in November 2020, from an over six-year high of 7.61 percent in the previous month.

Structural Reforms FISCAL EXPENDITURE The sum of government expenses, that is, fiscal expenditure rose 4.7 percent year-on-year to INR 19.06 trillion in April-November 2020-21

• Rs 20,000 cr. for fisherman through Pradhan Mantri Matsya Sampada Yojana.

• Animal Husbandry Infrastructure Development fund worth Rs. 15,000 cr.

• Rs. 500 crore scheme for infrastructure development related to bee-keeping.

• Amendments to Essential Commodities Act to enable better price realization for farmers.

• Agriculture marketing reforms to provide marketing choices to farmers.

• Extensions of 'Operation Greens' to all fruits and vegetables.

• Legal Framework to help farmers fix their own price for products.

Industrials

Pikachu Warriors -

Pratik Shetti Sanchi Soral Amit Boradia Ashim Nanda Naman Bhargava

Global presence in the crop protection market

Overview

UPL’s Geographic Presence EUROPE Products: 459 Plants: 13 R&D Facilities: 6

NORTH AMERICA Products: 211 Plants: 1 R&D Facilities: 3

Agro Activity Manufactures conventional agrochemical products, seeds and other agricultural implements

Non-Agro Activity LATIN AMERICA Products: 516 Plants: 10 R&D Facilities: 5

REST OF THE WORLD Products: 1088 Plants: 17 R&D Facilities: 11

Manufactures industrial chemical and other nonagricultural related products

REVENUE SHARE UPL % SALES BY REGION

UPL % SALES BY CATEGORY

19% 37%

KEY MANAGEMENT Executive Director Mr. Arun Ashar

33%

40%

Group CEO Mr. Jay Shroff

20% 24% Rest of the World Latin America North America Europe

27% Insecticides

Fungicides Herbicides

Chairman and MD Mr. Rajnikant Shroff

Overview

Strong financials with favourable future prospects Revenue (in INR bn)

171.4

216.1

FY18

FY19

354.8

375.4

398.0

FY20

FY21E

FY22E

EBITDA Margins 18.6%

FY18

15.9%

FY19

18.9%

19.8%

20.7%

FY20

FY21E

FY22E

EPS (INR) 34.1 26.5 19.5

18.5

FY16

• • •

FY17

FY18

FY19

23.2

FY20

FY18-22 EPS CAGR of 4.6% is driven by 18.3% revenue CAGR and with an industry leading EBITDA margin expansion from 18.6% to 20.7% The future looks promising for UPL as it is looking to expand in specialty and industry chemicals The company is investing in R&D centres to develop alternate use cases and applications of the chemicals as well as developing processes, which are technically viable and safe at large scale production

Industry Analysis

Crop protection market overview Conventional crop protection market(%) 4%

Global Market •

44%

The global market for conventional crop protection products is estimated to have decreased by 0.8% in CY2019 to $ 60 bn

•

In FY2020, weather played most influential part in the global agrochemical market, from severe flooding in North America to dry conditions and drought across major areas of Europe

•

The global agrochemical industry has undergone a major consolidation phase, with Bayer overtaking Syngenta as the industry leader and UPL acquiring Arysta Lifescience

25%

27% Insecticides

Fungicides

Herbicides

Others

Conventional crop market by region(%) 4% 20%

30%

19% 27%

Product sector performance in 2019 APAC

LatAm

NA

Europe

MENA

4%

21% 55% 20% Insecticides

Fungicides

Herbicides

Others

Food grain production hits record high in FY20 (mn tones) 296 285 285 275 252

FY16 FY17 FY18 FY19 FY20E

•

•

•

Indian Market In FY2020, food grain production increased by 3.7%, with production of most of the crops estimated to be higher than normal. Cumulative rainfall during the year was also higher than the Long Period Average After two consecutive years of strong harvest of over 285 mn tones, India’s grain production reached a new record in FY20 After rising by 9.6% in FY2019, India’s agricultural trade faced headwinds from increased volatility in the world markets, trade tensions and weak global commodity prices in FY2020

Industry Analysis

Agriculture Outlook Monsoon Forecast

• • •

The India Meteorological Department (IMD) in its second long range forecast update set this year’s Southwest monsoon at 102% of LPA, up from 100% Implying a normal outcome, it pegged over 100% rainfall in all geographical regions and expects a well distributed monsoon rainfall on a spatial and temporal basis The IMD continues to place the likelihood of a normal monsoon at 41%.

Key initiatives by the government In the Union Budget FY21

• • • •

Increased allocation across schemes to boost irrigation Reduced taxes on farm equipment and other products, Set up Farmer Producer Organisations (FPO) Provided crop insurance, continued fertiliser subsidy and interest subsidies on farm credit.

Increase in Cultivation

•

Sowing for summer crops is up with the total acreage under cultivation rising ~44% y-o-y as on July 10, 2020, covering ~55% of the total kharif area sown

Export and Import Trends SHARE IN INDIA’S EXPORTS(%)

Agricultural exports fell 6.6% y-o-y to ₹ 1.93 trillion in April-December 2019

17%

68%

China Germany

11% 4%

ORGANIC CHEMICALS India's exports represent 4.5% of world exports for this product, its ranking in world exports is 8

USA Rest of World

Agricultural imports increased 4.9% y-o-y to ₹ 1.3 trillion in April-December 2019 India’s imports represent 4.6% of world imports for this product, its ranking in world imports is 5.

SHARE IN INDIA’S EXPORTS (%)

40%

45%

6% 9%

China Germany

USA Rest of World

Huge potential upside to UPL’s stock price

Valuation

FCFF based Intrinsic Valuation

Final Valuation

BLEND OF

DCF Price: INR 775

WACC 9.5% Adjusted Beta: 1.233

TV as a % of EV: 62.11%

Cost of Debt: 5.34%

DCF

Cost of equity: 15.89%

Relative Implied P/E: 32.6

Upside: 59.7% (CMP of INR 474)

Relative Valuation Competitor Companies

Market cap (cr INR)

EV (Cr INR)

EV/ EBITDA

EV/ EBIT

EV/ Sales

P/ Sales

P/E

PI Industries

28,219

28,593

37.3

45.3

7.8

7.7

56.4

Raalis India

5,786

5,817

19.8

25.1

2.5

2.5

28.3

Bharat Rasayan

3,958

4,205

17.3

19.0

3.5

3.3

25.0

Dhanuka Agritech

3,637

3,619

18.3

20.0

2.8

2.9

20.4

Sharda Caprochem

2,537

2,384

7.4

12.8

1.2

3.8

14.9

Peers selected: Indian listed Agrochemical companies

Relative valuation price: INR 738

Investment Risks

Risk

Key factors that could affect our investment

Description

Mitigation Strategies

Climate Risk

• Frequent weather changes: drought, dry weather & flood

• Presence in key agricultural markets in Asia, Africa, Latin America, Europe and North America helps in reducing dependence on a particular country/region

Foreign Currency Fluctuations

• Sells its products in 138+ countries in multiple currencies, exposing it to the risk of fluctuating exchange rates

• Remaining fully hedged through forward covers and natural hedge

Product Pricing Risk

• Competitors’ pricing strategy could put a dent into the company’s margins

• Invested in backward and forward integration in terms of manufacturing capabilities to improve margins

Supply Chain Risk

• Procurement of raw materials in terms of supplies and costs, can be impacted if there are disruptions at vendor level

• Using ERP system to build sufficient safety stocks and procuring appropriate insurance cover and reducing dependency on smaller number of vendors

Pest Resistance

• Due to natural evolution and over-usage, pests are developing resistance to crop protection products

• Developing and launching differentiated and innovative product profile – combinations/mixtures

Tax Risks

• The Company has 225 • Regular monitoring of the tax subsidiaries globally, and framework and ensuring strictly adheres to local tax rules compliance of respective tax and regulations rules and regulations

Auto Ancillaries

Team Stonks -

Anirudh Sagar Avinash Kumar Gautam Munot R. Sanjay Singh Soumyadeep Baidya

Auto Ancillary Sector Auto Ancillary Engine Parts

Transmission & Steering Parts

Industry & Exports Growth

Suspension & Braking Parts

Equipment

Electrical Parts

Aggregate Turnover $Bn

Lowered GST for EV %

7.6

2019

6

Others

39.1 43.6

51.2 56.5 49.3

2020

12 5

CAGR (%)

Domestic Industry

GST Rate

FY 16 FY 17 FY 18 FY 19 FY 20

Indian Auto Ancillary Industry is expected to grow to $200Bn by 2026 and the capital expenditure is expected around $33.26 Bn in FY19 & FY20 The demand for the industry's products is expected to grow at a pace of 23.9% 100% Foreign Direct Investment has been allowed for this industry.

Government has earmarked Rs. 10000 crore for the Faster Adoption and Manufacturing of Electric and Hybrid vehicle (FAME) scheme to promote the sale of EVs and setting up infrastructure

Production of 2 wheelers, passenger, commercial & 3 wheeler vehicles has reached 21.03 mn, 3.43 mn, 0.75 mn, & 1.13 mn respectively The Indian Govt is providing various Income Tax and GST incentives to promote the usage of the EV. The production-linked incentive (PLI) scheme announced by the Union government could spur the companies to start local manufacturing of batteries in the next couple of years

% Share in GDP and Manuf. GDP

Turnover Share %

Domestic Market FY Potential $Bn 115

21E 97.7 2.3

75

GDP

Manufacturing GDP

Auto Anc.

FY 19

57

FY 18

51.2

FY 17

43.55

25

Others

OEMs

Exports

Aftermarket

Sources: Delloite, KPMG, IBEF, Motilal Oswal

Policy changes and major EV battery makers

Current EV penetration levels

Two wheeler

Three wheeler

Passengers vehicles

FY20–152000 Units (0.9%) FY19-126000 Units (0.6%)

FY20–90000 Units (14.1%) FY19-126000 Units (0.6%)

FY20–3400 Units (0.12%) FY19-126000 Units (0.11%)

Commercial vehicles FY20–600 Units (0.08) FY19-400 Units (0.11%)

Prospects of Electric Vehicle

Policy Changes to Promote Electric Vehicle

Electrical vehicles are projected to be USD 206 Billion industry by the year of 2030.

The Union budget has announced a number of measures to promote EVs, including tax incentives for manufacturers and buyers.

GST would drive consolidation in the replacement market of automotive and inverter batteries, leading to strong growth of 16-17% for the organized players.

New segments in industrial batteries – erickshaw, motive power, and solar applications – would drive growth, as conventional drivers of this segment stabilize.

The e-rickshaw battery market is estimated to grow at ~16% CAGR over FY17-20 to ~INR41b.

Those buying electric vehicles will get an additional income tax deduction of Rs1.5 lakh on the interest paid on loans taken to buy EVs under Section 80EEB. The GST Council has cut the GST rate on the electric vehicle from 12% to 5%.

The GST council has also reduced GST rates on the batteries of the Electric Vehicle from 12% to 5%.

Major EV Battery Market Players Amara Raja and Exide are the major companies which produces the batteries for EV. It is expected that the organized players like AMRJ/EXID to grow faster in auto replacement segment at ~16.7% CAGR over FY17-22E New vehicle volume grew at a CAGR of 9.7% over FY08-17. This results in the increase in the demand of the replacement battery

Sources: Delloite, KPMG, IBEF, Motilal Oswal

Amara Raja Batteries Ltd.

Indian storage battery industry in both industrial and automotive applications is dominated by Amara Raja Batteries Limited (ARBL). It is the largest manufacturers of lead-acid batteries and the technology leader in the market.

Product Portfolio

Automotive Batteries Amaron

PowerZon e

Key Clients

Industrial Batteries Segments: Passenger vehicles, 3 wheelers, 2 wheelers, commercial vehicles, farm vehicles & home inverters.

Industrial Applications: UPS, Telecom, Solar, Railways, Motive, Defence

Business Strategy Geographical expansion in identified markets in the Indian Ocean Rim and moving towards internationalization of the export business Forging International tie-ups to expand and hedge existing business operations Catering to the growing demand for energy storage solution from the renewable energy sector Expand product offering by venturing in in e-space; E-Rickshaws & E-Autos Continue to grow in India by Strengthen brand equity, as a vehicle for future growth

Recent News Amara Raja and Gridtential Energy agreed to collaborate on Bipolar Battery Technology which combines the traditional benefits of lead batteries with the performance and life cycle of lithium-ion batteries Amara Raja has set up EV battery charging and swapping stations in Tirupati in Andhra Pradesh along with a fleet of electric autorickshaws Analysts say that growth of lithium ion batteries may not hit Exide, Amara Raja demand Amara Raja among 42 Global Organizations Agree on Guiding Principles for Batteries to Power Sustainable Energy Transition

Sources: Annual Reports of Amara Raja Batteries

Technical Analysis

The 50 days Exponential Moving Average crossed 200 days Exponential Moving Average on 14th Sept, 20, indicating Golden Cross-over. Currently the price is greater than 50 days moving average indicating bullish trend and giving a strong buy signal which can be confirmed through various Indicators

Indicator

Value

Analysis

Exponential Moving Averages

820.34

Buy

68.9

Buy

71.3 %

Buy

61.01

Neutral

RSI Normalized Momentum Score Average Directional Index

Indicator

Value

Analysis

Stochastic Oscillator

73.01

Neutral

MACD

28.43

Buy

0.9

Low Volatility

881.75

Neutral

Beta Ichimoku Cloud Base Line

20000000

1100

18000000

1000

16000000

900

14000000

800

12000000

700

10000000

600

8000000

500

6000000

400

4000000

300

2000000

200

0

100

Volume

50 per. Mov. Avg. (Close)

200 per. Mov. Avg. (Close)

Price

Volume

The trend line (in image) is acting as a strong support, the average return (Slope of the trend line) is around +22 %

100 per. Mov. Avg. (Close)

Source: https://www.moneycontrol.com/india/stockpricequote/auto-ancillaries/amararajabatteries/ARB

EV / EBITDA

ROE

Valuation Motherson Sumi

10000

Enduranc e Varro c

5000 0 2018 2019 2020 2021* Revenue

Amar Exid a Raja e

Net Profit

Bosch

WABC O

Mean

We have selected a group of companies to form a sector based on Market Cap and performed the Analysis to find out the best company to invest in PE of 28.27 (Sector Mean = 130) Amara Raja Batteries is a bit under-valued, at the same time the EV / EBITDA of 7 (Sector mean = 13.5) is very healthy indicating low debts and substantial revenue coupled with negligible interest expense making a perfect blend for a impending high growth company with the proliferating of Electric Vehicles Return on Equity (ROE) is 18.7% is the highest in the sector, Amara Raja Batteries efficiently manages the funds with a net positive cash flow maintaining ideal liquidity to generate high returns 451.23

Considering long term Solvency, Amara Raja Batteries has excellent standing with Debt / EBIDTA = 0.03, Debt / Equity = 0.01 with no threat in near future

PE Ratios Motherso n Sumi

85.52 25.85 28.27 Exide

Amara Raja pays regular dividends with the dividend yield of 3.6% in FY 19-20 and an average of 1.2 % over the period of 2016-20

WABCO

130.02 146.11 111.48 61.71 Bosc h Endurance

Varroc

Mean

Amara Raja

Rise in revenue since 2018 with +9.8% CAGR, with an expected revenue of 7.5 K Cr. in 2021, whereas Net Profit is growing at +7.8% CAGR with an expected Net Profit of 712 Cr. in 2021 Liquidity of the company is maintained ideally with negligible debt and current ratio of 2.02

The company is almost debt free, thus saving in interest expense are retained for dividends and future investments in the contemporary battery technology The net cash flow from operating activities is positive and growing at an astonishing +21% CAGR which company is rightly utilizing in Investing (Innovation) and Financing (Paying off debts) making it an ideal bet for a potential multi bagger in coming years.

Source: https://www.moneycontrol.com/india/stockpricequote/auto-ancillaries/amararajabatteries/ARB

RECOMMENDATION

Fibonacci Values 932.51

Support 1

BUY

Support 2

SELL

928.11 920.98

Support 3

With a STOP-LOSS of the support level of the Trend Line and the Pivot levels of Fibonacci Retracements

Promoters have decreased the Pledged Shares to 0% with constant shareholding Both the Technical Analysis & Fundamental Analysis result in a strong BUY signal with the minimum growth of +11 %

Categ ory

30 SEP 2020

30 JUN 2020

31 MAR 2020

31 DEC 2019

Promo ters

28.06

28.06

28.06

28.06

Pledge

0.00

0.00

5.93

5.93

Strengths     

Strong rise in Profit After tax Low Debt Structure has been maintained Maintained a Current Ratio over 2 for the past 5 years Technological tie-up with Johnson Controls It has a strong leadership in segments like Telecom and UPS

Weakness      

Increasing Operating cost structure Fast increasing Interest Expenses Decreasing Cash Flow structure is alarming Slower growth in net profits MFs have decreased their shareholding in the company Dependent on Johnson Controls for New Technology

Opportunities     

Increasing Trend in Sales Revenue and Profits EV industry in India is growing physically and sentiment wise and can be capitalized Lowered GST rates for the EV industry RSI indicated increasing pricing strengths JV with Blaze Technologies to foray into IoT sector

Threats  Changing government policies affect consumer sentiments  Pullback situation may arise due to high RSI and stochastic oscillator

Source(s): Economic Times, Annual Report, Money Control

Pharmaceuticals Team Ecuties -

Karan Advani Malika Asthana Himanshu Gupta Lakshya Malhotra Yashwant Deshwal

INDUSTRY ANALYSIS

India Pharma Market: Annual Turnover ($B)

• Pharma Market Turnover: $20.03B (2019), 9.8% YoY • Medicine Spending: 9-12% over next 5 years (Top 10) • Cost of production: US and Europe

20.03

than

17.87

18.12

2017

2018

16.41

• Pharma Sales (May 2020): $1.4B, 9% Y-o-Y

15.53

• New opportunities: Rural penetration, health insurance coverage on medicines

2015

2016

2019

Segments Of Indian Pharmaceutical Market

Threat of new entrants

Competitive Rivalry

Bargaining power of suppliers

Threat of new substitutes

Bargaining power of customers

Formulations: • 14% market share 12th in terms of export value • 8-11% CAGR over the next 5 years

Biosimilar: • Domestic market to reach $40B by 2030 • Government allocation: $70M for local players

Active Pharmaceutical Ingredients (APIs) • Domestic API consumption $18.8B by FY21.

Contract Research And Manufacturing Services (CRAMs) • 48% CAGR (FY15-18) Expected strong growth of over 25% over 2018-21

Revenue Streams Discovery and Sales: • Bulk/Generic Drugs • Drug formulation • Herbal

R&D: • Attractive returns • Profits through discovery of innovative drugs

Patents: Fixed high price of drugs Incentives for R&D

Strategic Alliances: • Co-promoting 3rd party products

Sources: IBEF | Statista | ITC Trade Map | Annual Reports

INDUSTRY ANALYSIS Segment Wise Annual Turnover 2018 ($B) 2.58

2.34

2.17

1.78

1.61

1.43

Government Policies • Pharma Vision 2020 : Make India a hub for end-to-end drug discovery • Production Linked Incentive: Scheme for pharmaceutical industry worth ₹15,000 crore to promote indigenous manufacturing of complex generics • Union Budget 2020-21 : The is the largest Government funded healthcare programme - National Health Mission Scheme expected to benefit 7.31 million poor families by providing a cover of up to Rs. 5 lakh/family

Impact of COVID 19 • • • •

Shift towards Telemedicine Fast-tracking R&D Growth in Health Insurance Relatively strong market valuations

• • •

Disrupted supply of raw materials and packing materials Import dependency from China Earnings cut for companies

Exports Russia 6% UK 6% South Africa 6%

Imports Nigeria 4%

USA 12%

Belgium 9%

Switzerland 8%

USA 78%

• Total Exports: $16.12B • Largest provider of generic medicine (20% of global exports)

China 63%

German y 8%

Total Imports: $2.3B Major Imports: Bulk drugs and APIs 2/3 of total imports are from China

Sources: IBEF | Statusta | ITC Trade Map | Annual Reports

COMPANY ANALYSIS NSE: SUNPHARMAEQ About Sun Pharma • • • • • • • • •

Key Management

Headquartered in Mumbai, Maharashtra Manufacturer and seller of pharmaceutical formulations, APIs, Specialty Generic and OTC drugs 2nd in the India’s most Reputed Pharmaceutical Brands Reported Net Profit for Q2FY21 +70% over Q2FY20 Ranked 1st and holds approximately 8.1% market share with a market cap of $19B Ranked 4th among global generic specialty companies Promoter Shanghvi Finance pledged 10 lakh shares in favour of Deutsche Investments India Formulations in India for Q2FY21 +1% over Q2FY20, +6% over Q1FY21 For Q2FY21, the company launched 22 new products in the Indian market.

Revenue Distribution

RoW 14%

BSE: 524715

API and Others 6% US Business 33%

Emerging Markets 17% Indian Branded…

Mr. Dilip Sanghvi

MD & CEO

Mr. Israel Makov

Chairman

Mr. C S Muralidharan

CFO

Mr. Kirti Ganorkar

CEO- India Business

Mr. Abhay Gandhi

CEO- USA & Canada

Product Segments Formulations in various therapeutic areas: Cardiology, Psychiatry, Neurology, and more APIs and CRAMs: Vital drugs like Warfarin, Carbamazepine, Etodolac, Clorazepate, and more OTC: Top selling OTC drugs like Revital, Volini, Olesan Oil, etc.

SUNP v/s CNX Pharma 52-week chart 700

14,000 13,000 12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000

600 500 400 300 200 100 Sun Pharma

CNX Pharma

Sources: Bloomberg | Annual Reports | Investor Presentation | Money Control

FINANCIAL ANALYSIS Financial Overview  Sun Pharma reported its highest ever revenue of ₹85.5bn for Q2 ( YoY)

5.29%

 Consolidated Profit Before Tax (PBT) soared 33.75% Q2 Sept. 2020 as against Q2 Sept. 2019  Specialty revenue recovered sharply (38% QoQ) with revenues in the US reaching pre-COVID levels  R&D spends during the quarter stood at ₹613 crore, 7.2% of sales ( QoQ)

150bps

 EBITDA margins improved by 497bps YoY and ~375bps QoQ Key Indicators Net Income Margin (%)

Revenue (₹B) 273

FY18

334

300

FY19

FY20

8.0

9.3

11.7

FY18

FY19

FY20

ROCE (%)

EBITDA Margin (%)

22.0 21.6

FY18

FY19

21.6

5.6

6.7

FY20

FY18

FY19

8.7

FY20

Competitive Landscape Net EBITDA Op Margin Debt/EBITD Margin (%) (%) A

Particulars

P/E Ratio (TTM)

ROE (%)

Sun Pharma

36.18

8.95

-0.38

21.53

15.18

Dr. Reddy’s

42.65

20.75

-0.08

25.41

18.27

Cipla

39.39

9.94

0.34

19.68

12.64

Aurobindo

18.57

18.61

0.60

21.56

17.30

Cadila Healthcare

40.61

10.94

2.10

20.26

15.22

Glenmark

19.18

13.31

2.40

16.34

12.33

Sources: Bloomberg | Annual Reports | Investor Presentation

VALUATION SUMMARY DCF Valuation (in ₹ millions) Particulars

FY20

FY21E

FY22E

FY23E

FY24E

FY25E

FY26E

Revenue

3,28,375

3,78,584

4,33,478

4,89,830

5,48,610

6,03,471

6,51,749

Growth (%)

12.98%

15.29%

14.50%

13.00%

12.00%

10.00%

8.00%

EBITDA

69,583

95,284

1,09,100

1,23,283

1,65,693

1,82,262

1,96,843

EBITDA Margin (% of Revenue)

21.19%

25.17%

25.17%

25.17%

30.20%

30.20%

30.20%

D/A

20,528

23,448

26,848

30,338

27,183

29,902

32,294

Depreciation (% of Capex)

133.12%

65.78%

65.78%

65.78%

65.78%

65.78%

65.78%

EBIT

49,055

71,836

82,252

92,945

1,38,509

1,52,360

1,64,549

Tax Rate

17.14%

17.14%

17.14%

17.14%

17.14%

17.14%

17.14%

NOPAT [EBIT(1-t)]

40,649

59,526

68,157

77,018

1,14,775

1,26,252

1,36,352

WC

1,59,477

2,16,989

2,48,452

2,80,751

2,82,997

3,11,297

3,36,200

WC (% of Sales)

48.57%

57.32%

57.32%

57.32%

51.58%

51.58%

51.58%

Change in WC

22,182

57,512

31,463

32,299

2,246

28,300

24,904

Capex

15,420

35,644

40,813

46,118

41,322

45,454

49,091

Capex (% of Sales)

4.70%

9.42%

9.42%

9.42%

7.53%

7.53%

7.53%

FCFF

23,575

49,344

90,887

1,05,957

2,13,164

2,08,652

2,31,004

Trading Comps

Football Field Analysis

Multiple

LTM

Average

Median

PE

36.4x

34.7x

40.6x

₹479

EV/Sales

₹420

P/Sales

18.5x

21.3x

19.0x

EV/EBIT

27.6x

24.7x

26.7x

Price/Sales

4.2x

3.4x

3.4x

₹513

300

3.6x

₹717

₹587

DCF

4.1x

₹701

₹574

P/E

EV/Sales

₹662

₹542

EV/EBITDA

EV/EBITDA

₹585

400

500

600

700

800

3.7x Sources: Bloomberg | Annual Reports | Investor Presentation | Statista

RECOMMENDATION AND RATIONALE Recommendation: Current Market Price - ₹568 Equity Value/Share (DCF) - ₹652 Equity Value/Share (Comps) - ₹553

We initiate a BUY recommendation for Sun Pharma with a target price of ₹602 with an upside of 6% over it's market price of ₹568 as on December 11, 2020.

Rationale: 1. Strong Specialty Business o Geographical Expansion and increasing penetration for specialty portfolios is an added growth aid o Two of existing specialty products- Ilumya and Cequa are witnessing a rise in prescription numbers and surpassed pre-COVID levels o Increasing R&D to focus on regeneration efforts

2. Improving Financial Performance o Net Profit (Q2FY21) - ₹1590 crore, 39% compared to Q1FY21 and 70% as compared to Q2FY20 o Consolidated RFO at ₹8459 crore, 6% over Q2FY20 and 13% over Q1FY21 o Strong Piotroski Score of 8 and focus to improve RoE and EBIDTA margins

3. Increasing Institutional Holding 20.46% 20.11%

19.56% 19.07%

18.54%

September 2019

December 2019

March 2020

June 2020

September 2020

4. Strong Historical Record Sales CAGR 25%

CAGR 21%

12

39

FY05

FY10

273

323

FY15

FY20

4 FY05

Operating Cash Flows 4

8

FY05

FY10

56

66

FY15

FY20

EBITDA 72 14 FY10

FY15

65

CAGR 20%

FY20

Free Cash Flows 323 2

5

33

FY05

FY10

FY15

CAGR 23%

FY20

Sources: Annual Reports | Investor Presentation | Live Mint

SENIOR COORDINATORS

Nikita

Sai

Venkatesh

Shivam

Vikas

JUNIOR COORDINATORS

Anshita

Mandira

Karan

Pratik

Virat

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