axis acceleration

8/11/2019 Axis Acceleration

http://slidepdf.com/reader/full/axis-acceleration 1/46

Sustainability

Scalability

Profitability

De-risked

business models

September 3, 2014

Nandan Chakraborty

MD - Institutional Equity [email protected]+91 22 4325 1107

India StrategyMidcaps with accelerating trajectories

Sensex: 27019

Kashyap Pujara

Executive Director - [email protected]+91 22 4325 1146

Chirag Negandhi

MD & Co - Head of [email protected]+91 22 4325 1106



2

Thesis

In text-book style, valuations of typically cheaper sectors and cyclicals saluted the new trigger – Modi at helm! Defensivesunderperformed but then caught up. Midcaps frenzied to surpass Sensex multiples making stock selection a much more

challenging task now

October to set the short-term market direction: Festive season consumption (government revenue outlook) and importantreforms (especially in oil & gas sector) post Maharashtra/Haryana elections are the near-term triggers. Other factors that

influence are: US interest rate outlook and pipeline of issuances

Midcaps usually do well when GDP growth surprises, which a strong government promises. However, individual midcapshave their own long-term sustainability-shortcomings

We also assume, at current average midcap valuations, that immediate outlook is largely discounted

Hence, we selected midcaps (mkt cap<$ 2.5bn) whose trajectories would accelerate over FY14-18, in terms of sales/

EPS growth

and RoE expansion

. We have stated our key business assumptions over the period in each company section

We f urther filtered the midcap stocks using our SSPD framework and finally selected the MUST-OWN midcaps whose

stock prices could compound at least 18-20 p.a. based on FY17 target price. While each slide details the variousSSPD components, some indicative points are:

Sustainability: Pricing power, entry barriers, etc.

Scalability: Management bandwidth, platform scalability, etc.

Profitability: Ability to generate free cash, incremental RoI, etc.

De-risked business models: Corporate governance, minority treatment, succession plan, etc.

Our preferred picks that can gain significantly from change in trajectories are: Alstom T&D, Britannia Industries, CMC,

DB Corp, Finolex Industries, Gateway Distriparks, Info Edge, Shoppers Stop and Tube Investments

3 SEP 2014

INDIA STRATEGY



4

Midcaps set to outpace broader markets

3 SEP 2014

INDIA STRATEGY

Source: Bloomberg, Axis Capital

Midcap performance under various phases

Midcaps do well when: (1) GDP growth surprises and/or (2) when the broader market has run up and pauses

to catch its breath, and mid caps catch up

Midcap valuations

catch up

GDP surprise –

(50)

(40)

(30)

(20)

(10)

0

10

20

1,200

5,200

9,200

13,200

17,200

21,200

25,200

29,200

Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14

(Index) (%)

Sensex index CNX midcap index Midcap valuations premium/(discount) to Sensex (RHS)

GDP surprises +



5

When midcaps outpace broader markets

…making stock selection a much more challenging task now

3 SEP 2014

INDIA STRATEGY

Source: Bloomberg, Axis Capital

11

12

13

14

15

16

17

Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14

(x)Sensex index CNX midcap index

Midcaps frenzied to surpass Sensex valuations…



6

MUST-OWN midcaps

3 SEP 2014

INDIA STRATEGY

Fwd PE

(x )

Exit PE

(x )

FY09-

14

FY14-

18E

FY09-

14

FY14-

18E

FY09-

14

FY14-

18E

Avg 5

yr

Current

Target

PE (x)

FY18

Alstom T&D 1,396 331 597 27 9 21 (11) 51 17 20 34 30 25Shift to next gen technologies

in Power transmission

Britannia Inds 2,490 1,260 1,938 19 15 15 19 22 45 46 25 25 27Premiumisation-led margin

expansion and growth recovery

CMC 1,081 2,165 3,510 21 18 25 19 29 28 26 14 13 15Government sp end on

e-governance

DB Corp # 1,007 333 560 23 15 15 10 20 25 30 17 16 16Ad spend uptick and

turnaround regions

Finolex Industries 620 303 466 19 10 12 LP 22 20 28 9 15 15Transition from B2B to B2C to

drive RoE expansion

Gateway

Distriparks459 256 410 21 18 20 11 20 14 17 11 - SOTP

Asset uti l ization to improve

across b usiness segments

Infoedge 1,389 768 1,222 20 16 22 18 27 20 22 30 - SOTP Recruitment and realty up tick

Shopper Stop

(standalone) #635 463 863 28 18 21 (7) 61 10 15 - - SOTP

Reb ound in margins due to

pick up in SSS growth

Tube Investment

(proforma consol)872 283 504 26 26 17 72 27 14 20 - - SOTP

Automotive and financial

revival to drive RoE expansion

Note: # FY10-14

Sales CAGR

( )

PAT CAGR

( )

Avg ROE

( )

Driverompany

Mcap

(USDm)

CMP

(Rs)

FY17

TP (Rs)

Stock p rice

CAGR on

FY17 TP ( )

Source: Bloomberg, Axis Capital Prices as on Sept 2, 2014



7

Contents

Page

Alstom T&D 8

Britannia Industries 12

CMC 16

DB Corp 20

Finolex Industries 24

Gateway Distriparks 28

Info Edge 32

Shopper Stop 37

Tube Investments 41

3 SEP 2014

INDIA STRATEGY



8

0

5

10

15

20

25

30

Sales Growth ROIC

(%)FY09-14 FY14-18E

Alstom T&D – shift to next gen technologies in power transmission

Alstom T&D’s (ATD) parent identified India as the fastest-growing market in the world for next gen high voltagetransmission. Hence, it had transferred critical technologies to the Indian subsidiary and fast-tracked localization; thishelped the company lower costs and gain market share. ATD has an advantage of 3-5 years over other MNCs

Next gen technologies is expected to contribute 25% of revenues in FY15 from 5% in FY14. This will be led by PGCIL’s(50% of addressable market) reducing spend on transformers and increasing spend on next gen technologies (70% overFY14-16 from 30% over FY11-13). Alstom T&D has gained share in next gen technologies as it has won two large HVDC

orders. These technologies fetch 15-18% margin for Alstom T&D vs. 5-7% margin in conventional technologies

GE’s acquisition of Alstom would enable it to expand its geographic reach to the US where the former has strong networkand expand offering into energy management (especially oil & gas) domain

In the past 5 years (FY09-14), revenue CAGR has been 9% (average RoIC of 11%). In the next 5 years, we expectrevenues to post 20% CAGR and ROIC to improve to 25%. The RoIC expansion is driven by improving EBITDA margin,which stems from better mix and repayment of debt

ENGINEERING

ATD IN | Mcap: 1.4bn

Increasing share of next gen technologies in the revenue

Source: Company, Axis Capital Source: Company, Axis Capital

Shift in earnings trend

0

10

20

30

40

50

FY13 FY15E

(Rs bn)

HVDC GIS Switchgears TransformersAutomation Projects Services

Bhavin Vithlani

ED – Power & Cap Goods

[email protected] (91 22 4325 1144)

Charanjit Singh

SVP – Power & Cap Goods




9

Alstom T&D – why hold for long term?

ENGINEERING


Score:

Above Average: 3; Average: 2; Below Average:1Company:

Alstom T&D

Score Comment

Scalabi l i ty

1 Management dep th 3Alstom Grid is the parent and holds 75% stake. Globally GE to form a JV company with

Alstom Grid for T&D equipment which will provide best management support

2 Platform scalable - ability of company to scale up current/newproducts in existing/new markets 3 Technology support from Alstom Grid. Has been ahead of competitors to introduce next gentechnologies and indeginize them. GE's acquistion to provide further enhanced product offering

3 Market share - is the market share stable to rising? 3Market share rising in the next gen technologies where PGCIL spending the most and expect

the trend to continue

4Favorable market conditions - under-penetrated, large

unorganized presence2

Conventional products like transformers highly commoditized; hence it is focussing on next gen

technologies where there is less competition and better margin

5 Technology advantage 3Technology comparable with other MNC players like ABB & Siemens. However, localization

ahead of peers key advantage

Sustainabili ty

6Entry barriers – cost advantage, p roduct differentiation,

distribution network2

No barriers in conventional technologies; next gen technologies with few players require a lot

of R&D

7 Threat of substitutes 3 Low as these are unique technologies for specific applications

8 Bargaining power with consumers – pricing power 2 PGCIL is the key customer for the next gen tech and pricing determined in tenders

9 Bargaining power of suppliers 2 Better pricing in next gen technologies vs. oversupply in conventional technologies10 Competitive rivalry 2 Competition intense in conventional vs. next gen

Profi tabili ty

11 Defensible margins - gross/operating margin variability 3 Lowest cost due to localization, pricing improvement could provide further upside

12 Ability to generate free cash flows at normative growth levels 3 Has already added capacities with growing execution will generate FCF

13 High Asset turns and low working capital/capex requirements 3 Peak asset turns of 3.5x vs. 2x currently

14 Incremental ROI should be higher 3



10

Alstom T&D – why hold for long term?

Score Comment

De risked

15Business diversification – low client concentration, core business

across multiple markets1

PGCIL is the largest customer; Industrial and Powergen have been weak; could revive

from FY16

16 Succession plan 2 Professionally run management

17

Product life cycle risk – which phase is the company in? Is there

need for investing in new product development and does the

company have financial and human capital for the same

3 Net cash

18 Corporate governance and transparency 3 Regular post result concall

19 Accounting quality 3 Strong

20 Treatment to minority 3 No transaction in past has affected minority interest

ENGINEERING




11

Alstom T&D – 2 year scenario

12mth fwd PE (x)

Source: Bloomberg, Company, Axis Capital

2 year target price based on FY18E earnings

12mth fwd EV/EBITDA (x)


ENGINEERING


(Rs b n) FY15E FY16E FY17E FY18E

Order inflow 64 70 77 85

Order backlog 86 103 115 119

Revenues 43 53 65 81

Next gen products (% of sales) 9% 11% 16% 19%

EBITDA margin 11.4% 12.5% 12.4% 13.4%

Key assumption

FY 14 -18P ( )

Sales CAGR 21

EBITDA CAGR 26

APAT CAGR 51

Target price calculation

FY18E EPS 23.9

Multiple (x) 25.0

Target p rice (Rs/share) 597

CMP 334

Stock p rice CAGR (on FY17 TP) 26

Source: Axis Capital


Avg., 17

+1sd, 28

-1sd, 70

10

20

30

40

50

60

70

J u l - 0 2

M a y - 0

3

M a r - 0

4

F e

b - 0

5

D e c - 0

5

O c t - 0 6

S e p - 0

7

J u l - 0 8

M a y - 0

9

A p r - 1

0

F e

b - 1

1

J a n - 1

2

N o v - 1

2

S e p - 1

3

A u g - 1

4

(x)

Avg., 1.0

+1sd, 1.7

-1sd, 0.30

1

23

4

5

6

J u l - 0 2

M a y - 0

3

M a r - 0

4

F e

b - 0

5

D e c - 0

5

O c t - 0 6

S e p - 0

7

J u l - 0 8

M a y - 0

9

A p r - 1

0

F e

b - 1

1

J a n - 1

2

N o v - 1

2

S e p - 1

3

A u g - 1

4

(x)



12

Britannia – premiumization-led margin expansion

Britannia Industries, a Wadia group company, is India’s leading food processing company. It is the leading organizedbiscuits player in the country with ~35% market share. It markets well-known biscuit and dairy brands such as GoodDay, Nutrichoice, Britannia 50-50, Tiger, Little Hearts, Treat, Milk Bikis, Marie Gold and Milk Man

Despite intense competition, Britannia has managed to increase its share in biscuits segment from 34% to 35% in past5 years, primarily driven by cream biscuit segment and new biscuit positioned on health – ‘Nutrichoice’

Management is targeting ahead of market growth in core biscuits category (80% of revenues). It has a two-prongedstrategy: (a) revenue growth led by new premium launches, brand investments, improvement in depth/width ofdistribution and supply chain efficiency and (b) margin expansion led by mix improvement and cost saving initiatives

In the past 5 years (FY09-14), revenue CAGR has been 16% (average RoE of 45%). In the next 4 years, we expectrevenue to grow in a similar range (~15% CAGR) with average RoE improving to 46%. The RoE expansion will bedriven by EBITDA margin gain on the back of better sales mix (due to premiumization) and cost saving programs

FMCG

BRIT IN | Mcap: 2.5bn

Britannia has gained small share in competitive biscuits category

Source: Euromonitor, Axis Capital Source: Company, Axis Capital

Return ratios to improve led by margin expansion

6

45

10

46

0

10

20

30

40

50

Average EBITDA margin Average RoE

(%)FY09-14 FY14-18E

10

11

12

13

14

15

16

26

28

30

32

34

36

2009 2010 2011 2012 2013

(%)(%)

Britannia Industries Parle Products ITC Group (RHS)

Hemant Patel

ED – Consumer


Ajay Thakur

AVP – Consumer




13

Britannia – why hold for long term?

FMCG


Score : Above Average: 3; Average: 2; Below Average:1

Company

: Britannia

Score Comment

Scalabi l i ty

1 Management dep th 2New MD Mr. Varun Berry (ex-head of Pepsico Foods India). 50% of employees over

10 years with Britannia

2Platform Scalable - ability of co the scale up current/new products in

existing/new markets 3Scaling up presence in health and premium biscuits and dairy/bakery segment.

Category to grow by 15% p.a.

3 Market share - is the market share stable to rising? 3Re-gaining share aided by premium range of biscuits, stronger go to market strategy

& better supply chain efficeincy

4Favorable market conditions - under-penetrated, large unorganized

presence2 Unorganised players constitute one-third of the market

5 Technology advantage 2 Inhouse R&D for premium ranges

Sustainabili ty

6Entry barriers – cost advantage, product differentiation, distribution

network2

A strong distribution network with a reach of over 3.5 mn outlet but low product

differentiation (barring its health biscuits range)

7 Threat of substitutes 2 Low since a daily consumable product

8 Bargaining power with consumers – pricing power 2 Choice explosion and LPP driven segment

9 Bargaining power of suppliers 2 Scale to improve bargaining power vs. smaller players

10 Competitive rivalry 2 Competitive rivalry from both domestic and international players such as ITC, Parleand Mondelez

Profi tabili ty

11 Defensib le margins - gross/operating margin variab ility 2 Mix improvement-led gross margin gain over last 2-3 years

12 Ability to generate free cash flows at normative growth levels 2 Generated healthy cash flow averaging Rs 2 bn in past 5 years

13 High asset turns and low working capital/capex requirements 3 High asset turns at 4.3x and negative working capital cycle

14 Incremental ROI should be higher 3 Improving ROI driven by mix improvement



14

Britannia – why hold for long term?

FMCG


Score Comment

De risked

15Business diversification – low client concentration, core business across

multiple markets2

Non-biscuit categories ~19% of revenue. Biscuit portfolio has brands well-spread

across price points

16 Succession plan 2 Third generation at board level though less active involvement

17

Product life cycle risk – which phase is the co in? Is there need for

investing in new product development and does the company have

financial and human capital for the same

3Management plans to launch new products over next 6 months. Strenghtened

innovation funnel

18 Corporate governance and transparency 2 Low transparency to investor community vs. peers

19 Accounting quality 2 In-line with peers

20 Treatment to minority 2 Consistent dividend payout over last many years

Premiumization product ladder

Source: Company, Axis Capital

50-50Regular

11150-50MaskaChaska

156

Good-DayRegular

156NutriChoice

Digestive192

Good-DayChocochip

256 50-50Snackuits

300

NutriChoiceDFE Oats

388

Good-Day

Fresh Bake389

NutriChoiceMultigrain

Thins514

0

100

200

300

400

500

600(Price Index)



15

Britannia – 2 year scenario

FMCG


12mth fwd PE (x)



Premium over Sensex on 12mth fwd PE (x)


10

15

20

25

30

35

40

A u g - 0

9

D e c - 0

9

A p r - 1

0

A u g - 1

0

D e c - 1

0

A p r - 1

1

A u g - 1

1

D e c - 1

1

A p r - 1

2

A u g - 1

2

D e c - 1

2

A p r - 1

3

A u g - 1

3

D e c - 1

3

A p r - 1

4

A u g - 1

4

1 yr Fwd P/E Mean +1 SD -1 SD

0.8

1.3

1.8

2.3

2.8

A u g - 0

9

N o v - 0

9

F e

b - 1

0

M a y - 1

0

A u g - 1

0

N o v - 1

0

F e

b - 1

1

M a y - 1

1

A u g - 1

1

N o v - 1

1

F e

b - 1

2

M a y - 1

2

A u g - 1

2

N o v - 1

2

F e

b - 1

3

M a y - 1

3

A u g - 1

3

N o v - 1

3

F e

b - 1

4

M a y - 1

4

A u g - 1

4

1 yr Fwd P/E Mean +1 SD -1 SD

Key assumption

( ) FY14 FY15E FY16E FY17E FY18E

Biscuits value growth 13.7 14.0 15.0 15.0 15.0

Subsidiaries revenue growth 4.5 10.0 12.0 12.0 12.0

Raw material cost trend 60.5 60.9 60.3 60.0 59.8

A&P spends 8.7 8.4 8.5 8.5 8.5Source: Company, Axis Capital

We expect Britannia’sPE multiple tore-rate going forward(from 25x in FY16 to27x in FY18) in

tandem with structuralimprovement inmargin profile andrevenue growth rates

FY14- 18 ( )

Sales CAGR 15

EBITDA CAGR 19

Adj. PAT CAGR 22

Target Price calculation

FY18 EPS 71

Multiple (x) 27Target Price (Rs/share) 1,922

Target price inc. Dividend 1,938

CMP 1,260

Stock Price CAGR (on FY17 TP) 19




17

CMC – why hold for long term?

CMC IN | Mcap: 1.1bn

IT - SERVICES


Company: CMC

Score Comment

Scalabi l i ty

1 Management dep th 3 Strong TCS parentage

2Platform Scalable - ability of co the scale up current/new

products in existing/new markets3

Deep understanding and integration capabilities of hardware and software systems enable

CMC to leverage its IP portfolio and manage fixed-price contracts profitably

3 Market share - is the market share stable to rising? 3

Market share to rise due to expertise in Embedded Solutions and Systems Integration

business. Well-established ecosystem of alliances with industry leaders – CISCO, EMC, HP,

IBM, Microsoft, Oracle, SAP, etc. Major new initiatives in high growth areas include cloud

computing, mobile applications, Green IT, etc.



Spend under the new government of Rs 1.13 tn in e-governance projects will benefit CMC

as it is best-placed to garner a higher share on the back of its expertise in government/PSU

projects, flexible hiring and execution model and multi-locational delivery capabilities5 Technology advantage 2 Technology obsolescence remains a key risk

Sustainabili ty


distribution network2

In addition to traditional verticals such as BFSI, manufacturing, telecom and retail, CMC has

expertise in certain niche verticals – government, energy & utilities, transportation, shipp ing,

FMCG and defence & space

7 Threat of substitutes 2 Fragmented industry. However, in core areas of ITES and Systems Integration, CMC has acompetitive edge - like early adoption of sub-contracting model and a bouquet of

embedded/vertical solutions especially in e-governance, insurance, ports, etc.

8 Bargaining power with consumers – pricing power 3 Joint go-to-market strategy with TCS in some project b ids lends stab ility to pricing

9 Bargaining power of suppliers NA

10 Competitive rivalry 2

Increasing focus from other IT vendors to look at domestic market. However, CMC has

strongest domestic clientele: BPCL, BSNL, RBI, Election Commission, Indian

Railways,ONGC, and IOC



18

CMC – why hold for long term?

Score Comment

Profi tabili ty

11 Defensible margins - gross/operating margin variability 3

Gross and EBITDA margins to improve due to increase in offshore revenue and higher share

of embedded solutions.CMC has propagated the sub-contracting model for low-

end/maintenance/testing/ITES assignments

12 Ability to generate free cash flows at normative growth levels 3 High FCF generating model

13 High asset turns and low working capital/capex requirements 3 Generates 25%+ RoE and low capex model

14 Incremental ROI should be higher 2Government projects may entail equipment sales (gross margin is 2-4%) which would be

followed by services revenue. Thus, incremental RoI may vary from year to year

De risked

15Business diversification – low client concentration, core business

across multiple markets2 Presence across diverse verticals. However, TCS (parent) contributes ~50-55% of revenue

16 Succession plan 3 Tata Group has demonstrated good succession plans across sectors/companies

17

Product life cycle risk – which phase is the co in? is there need

for investing in new product development and does the


2Investments required in SMAC (high IT spend area). Parent balance sheet and lineage

enables deal wins

18 Corporate governance and transparency 3 Good

19 Accounting quality 3 Good20 Treatment to minority 3 Good


IT - SERVICES



19

CMC – 2 year scenario

12mth fwd PE (x)





0

510

15

20

25

30

J u l - 0 5

M a y - 0

6

M a r - 0

7

J a n - 0

8

N o v - 0

8

S e p - 0

9

J u l - 1 0

A p r - 1

1

F e

b - 1

2

D e c - 1

2

O c t - 1 3

A u g - 1

4

(x)

0

5

10

15

20

J u l - 0 5

M a y - 0

6

M a r - 0

7

J a n - 0

8

N o v - 0

8

S e p - 0

9

J u l - 1 0

A p r - 1

1

F e

b - 1

2

D e c - 1

2

O c t - 1 3

A u g - 1

4

(x)

FY15-18E

Revenie CAGR 25%

EBITDA CAGR 30%

PAT CAGR 29%

Target Price Calculation

FY18E EPS 234

Multiple (x) 15Target P r ice (Rs ) 3,510

CMP (Rs) 2,165

St ock P rice CAGR (on FY 17 TP ) 21


IT - SERVICES

Expect revenue CAGR of 25 driven by: (1) pick-up indomestic demand (32% of revenue) (2) e-governance

projects (including smart cities and defense) (3) IP products

EBITDA margin to improve by 200 bps (FY15-18) drivenby offshore transition of projects, recent wins in theembedded segment in EMEA (as gross margins are at50-60%) and pay-offs from investments

Key assumptions


Customer Services 15%

SI 35%

ITES 22%

Gross Revenue 27%

CAGR (FY11-FY14)

(Rs mn) FY15E FY16E FY17E FY18E

Revenue 26,891 31,951 39,939 52,522

EBITDA 4,341 5,611 6,989 9,454

PAT 3,280 4,162 5,192 7,090

NPM % 12.2% 13.0% 13.0% 13.5%



20

DB Corp – ad spend uptick and turnaround regions

DB Corp (DBCL), which is the second-largest Hindi print player in India, is one of the few print players which has

successfully scaled up its presence from one state (Madhya Pradesh) to multiple states (entire Hindi heartland, ex- UttarPradesh, Gujarat and Maharashtra) across multiple languages (Hindi, Gujarati, and Marathi) in the past decade

Aggressive expansion coupled with strong market research and consumer surveys facilitated the company to scale up itspresence and become either a strong No. 1 player or a dominant No. 2 in its respective territories

Given its strong geographical presence, DBCL recorded 15% revenue CAGR over FY10-14. We expect such revenuegrowth to continue over FY14-18 given the benefit from pick-up in national and local ad spends with macro recovery

Healthy revenue growth, coupled with operating leverage benefits (lower newsprint costs and lower losses fromemerging editions) will aid DBCL record 20% CAGR in its earnings over FY14-18. Such benefits, coupled with limitedcapex requirement, will boost DBCL’s return ratios (RoE) from ~25% during FY10-14 to ~30% over FY14-18E

MEDIA

DBCL IN | Mcap: 1.0bn

DB Corp increasing presence across northern, western and eastern India

Source: Company Note: DB Corp’s historical performance considered from FY10 given the company’s IPO in FY10

Chirag Negandhi

MD & Co Head of Research


Ankur Periwal

VP - Media & Logistics




21

DB Corp – why hold for long term?


Company

: DB Corp

Score Comment

Scalabi l i ty

1 Management depth 3 One of the biggest print media players in India

2Platform scalable - ability of company to scale up current/new products in

existing/new markets3

Only print company to have successfully expanded across Hindi speaking

markets

3 Market share - is the market share stable to rising? 2 Steady improvement in market share

4 Favorable market conditions - under-penetrated, large unorganized presence 3 Hindi print stil l underpenetrated in Hindi heartlands

5 Technology advantage 2 Technology not an entry barrier

Sustainabili ty

6 Entry barriers – cost advantage, product differentiation, distribution network 2 Limited entry barriers but localized content key to success

7 Threat of substitutes 2 Quality of the content is the key differentiator

8 Bargaining power with consumers – pricing power 3Increase in cover prices across markets; regular increase in ad yields from

advertisers

9 Bargaining power of suppliers 2 Limited as newsprint sourced from international and local markets

10 Competitive rivalry 2 Stiff competition in all geographies

Profi tabili ty

11 Defensible margins - gross/operating margin variability 2Profitability dependent on newsprint prices, given limited ability to pass

through higher raw material costs12 Ability to generate free cash flows at normative growth levels High as limited capex requirement in the business

13 High Asset turns and low working capital/capex requirements 3Limited working capital/capex requirement as internal accruals more than

suffice

14 Incremental ROI should be higher 3 RoCE to increase to >30 % from ~25% currently

MEDIA





22

DB Corp – why hold for long term?

Score Comment

De risked

15Business diversification – low client concentration, core business across multiple

markets3

Have presence in radio and event management; offers comprehensive

package to consumers

16 Succession plan 3 Not known

17

Product life cycle risk – which phase is the co in? Is there need for investing in

new product development and does the company have financial and human

capital for the same

3

Given the under-penetration of Hindi print media, DB Corp is in the midst of

its product life cycle. The company has already started investing in digital

properties to target youth

18 Corporate governance and transparency 2

19 Accounting quality 2

20 Treatment to minority 3 Steady dividend payout of >50%

MEDIA




23

DB Corp – 2 year scenario

12mth fwd PE (x)


Key assumptions and target price working



1214

16

18

20

22

24

J a n - 1

0

J u n - 1

0

N o v - 1

0

A p r - 1

1

S e p - 1

1

F e

b - 1

2

J u l - 1 2

D e c - 1

2

M a y - 1

3

O c t - 1 3

M a r - 1

4

A u g - 1

4

PE Avg +1 STD -1 STD

5

10

15

J a n - 1

0

J u n - 1

0

N o v - 1

0

A p r - 1

1

S e p - 1

1

F e

b - 1

2

J u l - 1 2

D e c - 1

2

M a y - 1

3

O c t - 1 3

M a r - 1

4

A u g - 1

4

EV/ EBITDA Avg +1 STD -1 STD

Shift in earnings trend

MEDIA

20

25

30

35

40

0

2

4

6

8

FY12 FY13 FY14 FY15E FY16E FY17E FY18E

(%)(Rs bn)

PAT RoE (RHS)

Source: Bloomberg, Company, Axis Capital Source: Bloomberg, Company, Axis Capital

Key assump tions ( ) FY15E FY16E FY17E FY18E

Ad revenue growth (%) 13 15 16 16

Circulaton revenue growth (%) 9 11 11 11

% increase in newsprint cost 8 10 11 9

EBITDA margin (%) 26.9 28.0 29.3 31.0

Capex (Rs bn) 0.8 0.7 0.7 0.7

FY18E target p rice workings

FY18E EPS (Rs/sh) 35

Target PE (x) 16

Target p rice (Rs/sh) 560

CMP (Rs/sh) 333

Stock Price CAGR (on FY17 TP) 23%

FNXP IN | Mcap: 0.6bn



24

Finolex Inds – transition from B2B to B2C to drive RoE expansion

Finolex Industries is a market leader in PVC pipes catering to agricultural and construction segments. It is backward

integrated, has pan-India distribution and is a very strong brand. It supplies pipes, only against 100% advance.Earnings are set to compound at 25% over FY14-18 with RoE of 30% compared to earnings growth of 16% andaverage RoE of 20% over the past 5 years. Finolex is expected to maintain its 50% dividend payout

A B2C player with focus on growth

: With backward integration benefit finally taking shape, Finolex is now poised totransition itself to a consumer-focused B2C business from a commodity-based B2B business. This is evident as it is using

raw materials internally to make PVC pipes rather than selling PVC resin externally. Interdivisional transfer of rawmaterials has moved up from 11% in FY08 to ~ 60% in FY14. We expect this to further improve to ~ 90% by FY16

Growth and margin comfort with attractive valuation

Volumes: PVC pipes demand is likely to maintain its growth trajectory (11% volume CAGR over FY08-13), driven by strongdemand from agriculture and housing. Incremental asset turns for Finolex are expected to improve as capex is going only

towards pipe expansion (as pipe capacity finally matches its in-house resin capacity). Over one-third of the 1.5 mn ton PVCpipe industry is unorganized and GST implementation would also benefit the company. Also, it sells pipes against advancesfrom dealers resulting in virtually zero receivable days

Margin to expand as Finolex captures incremental margins from PVC pipes

EBIT/ton to improve to Rs 18,000 in FY16 (Rs 13,000 in FY13) as Finolex uses in-house resin to make pipes

Spread can further firm up, as global capacities of its key raw material ethylene dichloride (EDC) is expected to rise

2x over FY16, putting further pressure on raw material prices

Downside cushion: (1) Dividend payout of 50 expected to continue with dividend yield of ~ 3 for FY16 and

(2) Underlying assets (70 acres of non-core land in Pune; 1,200 acres of land at Ratnagiri with own cryogenic jetty;46% in unlisted Finolex Plasson and 15% in the listed Finolex Cables)

MIDCAP

Kashyap Pujara

ED – Midcaps


Farzan Madon

VP - Midcaps





25

Finolex Industries – why hold for long term?


Company: Finolex Industries

Score Comment

Scalabi l i ty

1 Management dep th 3 Pioneers in PVC p ipes

2Platform scalable - ability of co the scale up current/new products in

existing/new markets3 Expanding fittings component and improving sles mix to high margin fittings

3 Market share - is the market share stable to rising? 3 Maintained leadership position

4 Favorable market conditions - under-penetrated, large unorganized presence 3 Only 45% of cultivated land is irrigated. GST implementation to benefit Finolex

5 Technology advantage 2 Technology not an entry barrier

Sustainabili ty

6 Entry barriers – cost advantage, product differentiation, distribution network 3 Created a wide distribution network and a strong brand

7 Threat of substitutes 3 Low

8 Bargaining power with consumers – pricing power 3 Has been able to price product at a premium and sells 100% of PVC pipesagainst advance. Ability to pass on cost increase to channel

9 Bargaining power of suppliers 3 Integrated plant. Raw material prices structurally downward

10 Competitive rivalry 3 Disciplined pricing among competition

Profi tabili ty

11 Defensib le margins - gross/operating margin variab ility 3 Integrated p lant. Raw material prices structurally downward

12 Ability to generate free cash flows at normative growth levels 3 Free cash flow yield of over 5%13 High Asset turns and low working capital/capex requirements 3 No further investments in capex intensive PVC resin business

14 Incremental ROI should be higher 3 RoIC to increase to 21% (13% currently)

MIDCAP




26

Finolex Industries – why hold for long term?

Score Comment

De risked


multiple markets3 Hidden assets like land, jetty, investments in subsidiaries

16 Succession plan 2 Second generation in business

17

Product life cycle risk – which phase is the co in? Is there need for investing in

new product development and does the company have financial and human


3Expnding geographical footp rint in untapped markets and increasing fittings

range

18 Corporate governance and transparency 2


20 Treatment to minority 3 50% payout ratio

MIDCAP




27

Finolex Industries – 2 year scenario

12mth fwd PE (x)





FY14-18P

EBITDA CAGR 20

APAT CAGR 22


FY18E EPS 31

Multiple (x) 15

Target p rice (Rs) 466

CMP (Rs) 303


MIDCAP

Key assumptions


FY14 FY15E FY16E FY17E FY18E

PVC

Volume (tons) 255,387 260,000 260,000 260,000 260,000

Margin (Rs/ ton) 7,862 9,500 9,500 9,500 9,500

PVC p ipes

Volume (tons) 176,899 207,856 239,035 274,890 316,123

Margin (Rs/ ton) 7,465 8,500 9,000 9,500 10,000


0

5

10

15

20

J u l - 0 9

F e

b - 1

0

S e p - 1

0

A p r - 1

1

O c t - 1 1

M a y - 1

2

D e c - 1

2

J u n - 1

3

J a n - 1

4

A u g - 1

4

(x)

2

4

6

8

10

J u l - 0 9

F e

b - 1

0

S e p - 1

0

A p r - 1

1

O c t - 1 1

M a y - 1

2

D e c - 1

2

J u n - 1

3

J a n - 1

4

A u g - 1

4

(x)

GDPL IN | Mcap: 0.5bn



28

406

600

264

414

0

20

40

60

80

100

0

100

200

300

400

500

600

700

FY12 FY15E

('000 pallets)('000 teu)

CFS Rail Cold chain (RHS)

Gateway Distriparks – asset utilization to improve across segments

Gateway Distriparks (GDL) is one of the leading private logistics players with strong diversified presence across

Container Freight Station (CFS), container rail freight (through subsidiary Gateway Rail) and cold chain logistics(through subsidiary Snowman)

During the last three years, GDL has expanded its capacity across CFS (inorganic expansion in Chennai), rail (newrail terminal) and cold chain (four-fold rise in pallet capacity), which will help it capitalize on the uptick on domesticand Exim trade volumes going ahead

Given the adverse macro (resulting in lower volume growth), GDL’s revenue growth slowed to 18% over FY09-14.However with an expected macro recovery, we expect recovery across domestic and Exim trade volumes, which willdrive 20% CAGR in GDL’s revenue during FY14-18

Higher trade volumes will facilitate GDL to improve its asset utilization across businesses and garner benefits fromoperating leverage. We expect GDL’s RoCE to improve from ~14% during FY09-14 to >20% by FY18E

LOGISTICS

Increasing capacities across businesses


Better asset utilization to boost return ratios

12

14

16

18

20

0.0

0.5

1.0

1.5

2.0

2.5

3.0

FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E

(%)(Rs bn)

PAT RoE (RHS)

Ankur Periwal

VP - Media & Logistics


30 CAGR in PBT; but 15 CAGR in

PAT due to higher tax/ minority




29

Gateway Distriparks – why hold for long term?

Score

: Above Average: 3; Average: 2; Below Average:1

Company

: Gateway Distriparks (GDL)

Score Comment

Scalabi l i ty

1 Management depth 3 One of the biggest private logistics player across CFS, rail and cold chain in India

2Platform scalable - ability of co the scale up current/new products in


Capacities in place across the three business verticals; macro uptick to drive volume

growth

3 Market share - is the market share stable to rising? 2 Steady improvement in market share

4Favorab le market conditions - under-penetrated, large unorganized

presence3 Large unorganized and under-penetrated market in rail and cold chain business

5 Technology advantage 3 Technology key in cold chain; not much advantage in CFS and rail business

Sustainabili ty

6Entry barriers – cost advantage, p roduct differentiation, distribution

network2

High entry barriers given asset heavy business model; strong distribution network in

key trade geographies across business verticals7 Threat of substitutes 2 Unorganized/road logistics are the key substitutes

8 Bargaining power with consumers – Pricing power 2 Limited bargaining power given the possib le switchover to road/unorganized p layers

9 Bargaining power of suppliers 2 Limited as newsprint sourced from international and local markets

10 Competitive rivalry 2 Healthy competition across businesses

Profi tabili ty

11 Defensib le margins - gross/operating margin variab ility 2 Margins vary with volumes as operating leverage benefits kick in12 Ability to generate free cash flows at normative growth levels 2 High, given the limited capex requirement for existing operations; FCF yield of ~3.5%

13 High Asset turns and low working cap ital/capex requirements 2Asset turns to improve with volume/macro recovery; working capital requirement

remains limited

14 Incremental ROI should be higher 3Limited incremental investment required as most of the capex is in p lace; key

benefeciary of volume pick-up

LOGISTICS

Gateway Distriparks – why hold for long term?




30

Score Comment

De risked


multiple markets3

Diversified from core CFS business to rail and cold chain, both offering immense

growth potential

16 Succession plan 3 Dedicated professional management for all the three companies

17

Product life cycle risk – which phase is the co in? Is there need for

investing in new product development and does the company have

financial and human capital for the same

3

Matured phase for CFS; emerging for Rail and Cold chain. Incremental investments

needed only to develop new capacities. Funds through Snowman IPO (for cold chain)

and debt for rail business

18 Corporate governance and transparency 3 Shares business-wise detailed performance


20 Treatment to minority 3 Steady dividend payout of 60-70%

LOGISTICS

Gateway Distriparks – 2 year view




31

12mth fwd PE (x)


SoTP based target price workings



05

10

15

20

25

30

A p r - 0

6

N o v - 0

6

J u n - 0

7

D e c - 0

7

J u l - 0 8

F e

b - 0

9

A u g - 0

9

M a r - 1

0

O c t - 1 0

A p r - 1

1

N o v - 1

1

M a y - 1

2

D e c - 1

2

J u l - 1 3

J a n - 1

4

A u g - 1

4

1 yr fwd EV/E Avg EV/E +1 STD +1 STD

LOGISTICS

Key assumptions


FY15E FY16E FY17E FY18E

CFS volume growth (%) 15 10 14 11

CFS EBITDA margin (Rs/teu) 3,262 3,478 3,828 4,182

Rail volume growth (%) 15 21 16 20

Rail EBITDA margin (%) 22 23 24 24

Capex (Rs bn) 2.2 2.0 1.7 1.8

Business Valuation criterion

GDL's

s take

Rs p er

share

CFS business 15x P/E FY18E EPS 100% 198

Rail (Gateway Rail Freight)* 12x EV/EBITDA FY18E 53% 158

Cold chain (Snowman)15x EV/EBITDA FY18E;20% holding company

discount

40% 54

Aggregate target p rice (Rs) 410

CMP 256


Source: Axis Capital *Assuming Blackstone stake at 47%

05

10

15

20

25

30

A p r - 0

6

N o v - 0

6

J u n - 0

7

D e c - 0

7

J u l - 0 8

F e

b - 0

9

A u g - 0

9

M a r - 1

0

O c t - 1 0

A p r - 1

1

N o v - 1

1

M a y - 1

2

D e c - 1

2

J u l - 1 3

J a n - 1

4

A u g - 1

4

1 yr fwd PER Avg PER +1 STD -1 STD

Info Edge – recruitment and realty uptick

INFOE IN | Mcap: 1.4bn



32

90 of standalone revenue is sensitive to economic growth: Info Edge will significantly benefit from improvement ineconomic growth. In an environment of higher economic growth, kick-start in hiring (75% of revenue) and turnaround inreal estate activity (15% of revenue) will lead to material improvement in revenue growth and expand margin

We forecast revenue/PAT CAGR of 22%/27% over FY14-18, much higher than 16%/4% witnessed over FY12-14

With higher revenue growth, expect standalone margin to increase 450 bps over the next four years

Push in real estate classifieds to accelerate revenue growth: Info Edge has recently announced that it may raiseRs 7.5 bn in QIP to strengthen real estate classifieds business (opportunity is 4x the size of recruitment classifieds inIndia). We believe this push is justified as further investments in this fast-growing vertical will not only acceleraterevenue growth, but will also help widen the gap with competitors

Expect investee companies also to gain further scale (trajectory intact) and witness a quantum jump in valuations

Revenue growth set to accelerate from FY15…

…driving consistent margin improvement


16 16

22

2423

22

10

15

20

25

FY13 FY14 FY15E FY16E FY17E FY18E

(YoY %)

3434

3434

36

38

32

34

36

38

40

FY13 FY14 FY15E FY16E FY17E FY18E

(%)

Margin

TELECOM

Stable government athelm, prospects of bettereconomic growth

Priya Rohira

Executive Director – IT & [email protected] (91 22 4325 1104)

Nivedan Reddy

VP – Telecom


Info Edge – why hold for long term?




33

TELECOM


Company: Info Edge

Score Comment

Scalabi l i ty

1 Management dep th 3

Significant management depth and well-developed middle management layer.

Sanjiv (Promoter and Vice Chairman) oversees investee companies while Hitesh

(CEO) oversees standalone companies, clearly outlining responsibilities with no

overlap2

Platform scalable - ability of company to scale up current/new products in


Scalab le in Naukri and 99acres (together account for 90% revenue). Consistently

launching new products in both of them

3 Market share - is the market share stable to rising? 3

Material market share gains in Naukri (traffic share has gone up 15 ppts in the last

5 years). Market share in 99acres (15% of revenue) has been volatile but it

continues to be the leader in this segment

4 Favorable market conditions - under-penetrated, large unorganized presence 3Online classifieds is a highly under-penetrated market as internet penetration

continues to be low at 10% in India (world average 40%)

5 Technology advantage 2 Comparable to other online classifieds firms

Sustainabili ty

6 Entry barriers – cost advantage, product differentiation, distribution network 3High entry barrier due to network effect in Naukri.com (Info Edge has the highest

resumes which drives high traffic and vice versa)

7 Threat of substitutes 2 Low for Naukri.com and medium for other verticals

8 Bargaining power with consumers – pricing power 3 High for Naukri.com - due to highest number of resumes/active jobseekers

9 Bargaining power of suppliers 3 NA

10 Competitive rivalry 2

High across standalone businesses but Naukri will not get impacted due to

formidable database while others (99acres, Jeevansathi, etc.) face high competitive

intensity

Info Edge – why hold for long term?




34

TELECOM

Score Comment

Profi tabili ty

11 Defensible margins - gross/operating margin variability 3Operating margin is sticky as majority revenue (75% of total) is accounted from

Naukri, which has high predictability

12 Ability to generate free cash flows at normative growth levels 3 High FCF model due to low capex

13 High Asset turns and low working capital/capex requirements 3 Working capital is negative due to up front payment from clients

14 Incremental ROI should be higher 3 Peak capex already behind, which should result in higher incremental RoI

De risked


multiple markets3 Low client, grography dependence

16 Succession plan 3 Significant management depth and well developed middle management layer

17Product life cycle risk – which phase is the co in? Is there need for investingin new product development and does the company have financial and

human capital for the same

2Consistent innovation in product p latform for Naukri and other standalone

businesses. Experienced management can handle the technology shifts well

18 Corporate governance and transparency 3 Best-in-class

19 Accounting quality 3 Best-in-class

20 Treatment to minority 3

Info Edge – 2 year scenario




35



FY14 FY18 CAGR Target

multiple (x)

INFOE's

stake

Value

(Rs/sh)

Standalone business FY14 EPS (Rs) 12 32 27 30 100.0% 957

99acres FY14 Sales (Rs mn) 759 3,097 42 5 100.0% 142

Zomato Last transaction (Rs mn) 9,479 18,957 19 50.1% 87

Other investee companies Invested amount (Rs mn) 1,930 3,860 19 35

SoTP value/sh 1,222

CMP 768

Stock Price CAGR (on FY17 TP) 20%

TELECOM

By FY18, we believe thevalue of investeecompanies will become

2x FY14 value, as eachis gaining scale riding onits competitive advantage

FY13 FY14 FY15E FY16E FY17E

Naukri rev (% YoY) 11 10 16 18 17

99acres (% YoY) 49 47 51 46 39

Jeevansathi (% YoY) 27 11 10 11 10

Margin (%) 34.3 33.6 34.0 34.3 36.4

Key assumptions


Expect Naukri to witnesssignificantly better growthrate going forward

Info Edge – band charts

TELECOM




36

12mth fwd PE (x) 12mth fwd EV/Sales (x)


0

2

4

6

8

10

12

14

N o v - 1

0

F e

b - 1

1

M a y - 1

1

A u g - 1

1

N o v - 1

1

F e

b - 1

2

M a y - 1

2

A u g - 1

2

N o v - 1

2

F e

b - 1

3

M a y - 1

3

A u g - 1

3

N o v - 1

3

F e

b - 1

4

M a y - 1

4

A u g - 1

420

2530

35

40

45

50

55

N o v - 1

0

F e

b - 1

1

M a y - 1

1

A u g - 1

1

N o v - 1

1

F e

b - 1

2

M a y - 1

2

A u g - 1

2

N o v - 1

2

F e

b - 1

3

M a y - 1

3

A u g - 1

3

N o v - 1

3

F e

b - 1

4

M a y - 1

4

A u g - 1

4

(x)Standalone PE is optically high asEPS includes operating losses fromall other standalone verticals apartfrom Naukri


Shoppers Stop – rebound in margins due to pick up in SSS growth

RETAIL

SHOP IN | Mcap: 0.6bn



37

Apart from being the largest departmental chain (69 stores) and hyper market chain (15 stores) in India, Shoppers Stop has diversified

in other specialized stores (MAC, Estee, Home Shop, Mother Care, Crossword, etc.) having a reach of 226 stores in33 cities with 5.5 mn sq. ft. of retail space. They retail more than 400 international and national brands across categories and arelooking for exclusive marquee brand tie-ups, targeting India’s fast growing middle and upper classes

Improvement in urban discretionary demand led by changing consumer sentiments in the first phase, followed by increase indisposable income in the next phase, would lead to recovery in same-store sales growth and margin improvement. Along with thematuring store base, we expect 3x increase in departmental store profitability by FY16

We also expect HyperCity to break even on EBITDA by FY15 and PAT to break even in FY16, driven by improving sales mix towardshigh margin apparels leading to sharp improvement in store level EBITDA

In the past four years (FY10-14), standalone revenue CAGR was ~18% while average RoE was ~10%. However, in the next four years(FY14-18), we expect revenue CAGR to increase to 21% driven by pick-up in economy and RoE to improve to 15%. RoE expansion is

driven by improvement in EBITDA margin due to operating leverage and marginal improvement in same store sales growth

Improvement in standalone EBITDA margin and SSS growth Shift in RoE trend

2

4

6

8

10

(11)

(6)

(1)

4

9

14

F Y 1 0

F Y 1 1

F Y 1 2

F Y 1 3

F Y 1 4

F Y 1 5 E

F Y 1 6 E

F Y 1 7 E

F Y 1 8 E

(%)(%)

Same store sales growth EBITDA margin (RHS)

0

5

10

15

20

25

30

FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E

(%)

RoE (standalone)

Hemant Patel

ED – Consumer


Mihir P. Shah

AVP – Consumer



Shoppers Stop – why hold for long term?

RETAIL




38


Company: Shoppers Stop

Score Comment

Scalabi l i ty

1 Management depth 3 Professionally driven since inception. Senior mgt team present with company for over a decade

2Platform scalable - ability of co the scale up current/new

products in existing/new markets3

Only bridge to luxury departmental store in India present on only 33 cities (50% in top 8 cities).

Can increase branded retailing through tie-ups

3 Market share - is the market share stable to rising? 3 Strong preference to the brand and services aiding in gaining market share



Modern retailing continues to gain share. Cyclical weakness consumption environment, but

structural growth intact.

5 Technology advantage 2 In-house IT and loyalty programs, ahead of competition, in our opinion

Sustainabili ty


distribution network

2Strong brand recall, loyalty program members (72% of revenue). Scale advantage and anchor

tenant status give sourcing and operational cost advantage.

7 Threat of substitutes 2Only pan-india departmental store with bridge to luxury positioning. Online retailing could have

marginal impact on strore productivity in a few years from now

8 Bargaining power with consumers – pricing power 1 Essentially remains a buyers market. Discounting period remains unchanged

9 Bargaining power of suppliers 3 High given the scale advantage

10 Competitive rivalry 2Low as only comparable competition is from Lifestyle and Central. Many affordable fashion

departmental stores such as Westside and Pantaloons

Shoppers Stop – why hold for long term?

RETAIL




39

Score Comment

Profi tabili ty

11 Defensib le margins - gross/operating margin variab ility 2Gross and EBITDA margins to improve as operating leverage kicks in led by pick-up in SSS

growth. Margins remains cycl ical to consumption environment

12 Ability to generate free cash flows at normative growth levels 2 Departmental store can growth at 15% p.a. through internal cash generation

13 High asset turns and low working capital/capexrequirements

2 Overall productivity to improve as store base matures. Core working capital to sales at 3%. Thus,capital requirement only for store expansion and to fund HyperCity

14 Incremental ROI should be higher 3 Improvement in store productivity to drive margin expansion and RoI

De risked

15Business diversification – low client concentration, core

business across multiple markets2

Stores fairly distributed and company entering new tier II and tier III cities. Bought out merchandise

at 44%

16 Succession plan 3 Professionally run management with span of control distributed

17

Product life cycle risk – which phase is the co in? Is there

need for investing in new product development and does the


3Departmenal store concept is more prevalent in top eight cities. With rise of middle class, increase

in income and aspirational levels, this format has tremendous growth potential

18 Corporate governance and transparency 3 Is the retail industry benchmark

19 Accounting quality 3 Conservative

20 Treatment to minority 3 Fair

Shoppers Stop – 2 year scenario

RETAIL




40

12mth fwd PE



12mth fwd EV/EBITDA


25

3545

55

65

75

85

95

105

Aug-10 Aug-11 Aug-12 Aug-13 Aug-14

(x) 1 yr fwd PE 3 yr Avg PE +1 STD -1 STD

10

13

16

1922

25

28

31

34

Aug-10 Aug-11 Aug-12 Aug-13 Aug-14

(x)1 yr fwd EV/EBITDA 3 yr Avg EV/EBITDA

+1 STD -1 STD

FY 14 -18P ( )

Sales CAGR (standalone) 21

EBITDA CAGR 36

APAT CAGR 61


Standalone (25x P/E) 745

HyperCity (0.8x EV/S) 118

Target Price (Rs/share) 863

CMP 463


Key assumption


We haveassigned a lowerPE multiple (25xfor FY18 vs. 27xfor FY16) forShoppers Stop as

we expect meanrevision in PEmultiples goingforward

( ) FY14 FY15E FY16E FY17E FY18E

Net department store additions

(numbers) 12 8 8 7 7

SSS Growth (5) 8 10 11 11

Standalone EBITDA margin 5.3 6.5 7.2 8.0 8.3

HyperCity EBITDA margin (5.6) (1.3) 1.0 1.9 2.7


Tube Investments: Automotive, financial services revival to drive RoEs

MIDCAP

TI IN | Mcap: 0.9bn



41

Tube Investments (TI) is the flagship company of the Murugappa group with operations spanning across threedivisions – cycles, engineering, and metal formed products. In addition, the company owns 74% of CholaMS general insurance business, has ~ 50 % stake in the listed Cholamandalam Finance & Investments Ltd(CIFC) and 70% stake in Shanthi Gears

Revenue : Rs 1.6 bn

PAT : Rs 0.2 bn

RoCE : 10%

Shanthi Gears

Revenue : Rs 35 bn

EBIT : Rs 2.6 bn

RoCE : 20%

Revenue : Rs 16 bn

PAT : Rs 0.7 bn

RoE : 12%

Revenue : Rs 32 bn

PAT : Rs 3.6 bn

RoE : 17%

FY14

(Rs bn)

C yc les Engineering Meta l F ormed Products

Sales 12 16 8

EBIT 0.4 1.4 0.7

RoCE (%) 62 22 14

Standalone Non – life Insurance Cholamandalam Finance

Tube Investments (consolidated) – FY14

Revenue : Rs 88 bn

PAT : Rs 3 bn

RoE : 16%

Significant value derived from financial services alone

MIDCAP

TI IN | Mcap: 0.9bn



42

TI has invested ~Rs 10 bn in financial services business…

(1) CIFC

: Rs 6 bn invested with TI holding 50% stake; valued at ~Rs 30 bn at CMP of Rs 410

(2) Chola MS General Insurance: Besides abolishment of third-party motor pool losses, there are other positives likeindustry-wide increase in premiums and Chola MS’ rising focus on the profitable retail segment. ~Rs 4 bn has beeninvested for 74% stake in the unlisted Cholamandalam MS Gen Insurance (Chola MS); we value the stake at ~ Rs 19 bnbased on 15x FY16E PAT of Rs 1.7 bn. Adjusting for third-party motor‐pool related losses, FY14 PAT stood at over

Rs 1.5 bn. Chola MS has the potential to clock over Rs 2 bn in PAT FY17 onwards as it focuses on profitableretail segment

…implying that efficient core engineering business with FY16E revenue of Rs 45 bn is available for free

Tube Investments is a market leader across three key business segments with FY14 revenue of ~ Rs 35 bn and EBIT of

Rs 2.6 bn. RoCE for its core operations are ~20% even in a down cycle (62% for cycles, 22% for engineering division,and 14% for metal formed). Upcycle RoCE were ~ 35%. Capex of ~ Rs 5 bn incurred over last three years will startcontributing to revenue FY16 onwards

Proforma earnings (Rs mn) FY13 FY14 FY15E FY16E FY17E FY18E

Revenue 76,216 88,345 101,500 115,500 129,000 146,250 PAT

2,885 3,113 4,100 5,250 7,000 8,300

RoE (%) 17% 16% 19% 21% 23% 23%

P/E (x)

19 17 13 10 8 7

P/B (x) 3.3 2.8 2.4 2.0 1.7 1.4


Implied consolidated proforma snapshot

Tube Investments – why hold for long term?

MIDCAP

TI IN | Mcap: 0.9bn



43


Company: Tube Investments

Score Comment

Scalabi l i ty

Management depth 3 Each business vertical is professionally run

Platform scalable - ability of company to scale up current/new products in


TI has invested in setting up a large diameter tube mill, which will cater to a new

product segment

Market share - is the market share stable to rising? 3 Leader or dominant market share in most segments

Favorable market conditions - under-penetrated, large unorganized presence 2

Technology advantage 3 Spends on R&D and on newer designs

Sustainabili ty

Entry barriers – cost advantage, product differentiation, distribution network 3 Created an manufacturing hub which is very difficult to replicate

Threat of substitutes 3 Large diameter pipes are an import substitute

Bargaining power with consumers – Pricing power 2 Cost pass through for most productsBargaining power of suppliers 2 Benefits from economies of scale

Competitive rivalry 3 Minimal, as not many vendors included by auto and auto ancilliary companies

Profi tabili ty

Defensible margins - gross/operating margin variability 2 Margin has been resilient even during a downturn

Ability to generate free cash flows at normative growth levels 3 Consistently generated free cash

High Asset turns and low working cap ital/capex requirements 3 Tube has used the downturn to augment its capacitiesIncremental ROI should be higher 3 Higher profitability and lower capital requirement to drive return ratios

Tube Investments – why hold for long term?

MIDCAP

TI IN | Mcap: 0.9bn



44

Score Comment

De risked

Business diversification – low client concentration, core business across

multiple markets3 Various products sold across geographies and absence of client concentration risk

Succession plan 3

Product life cycle risk – which phase is the co in? Is there need for investing innew product development and does the company have financial and human


3

Corporate governance and transparency 3 One of the best business groups

Accounting quality 3 Complete disclosures and clean accounting practices

Treatment to minority 3 Regular dividends paid

Tube Investments – 2 year scenario

MIDCAP

TI IN | Mcap: 0.9bn



45



Significant value derived from financial services business

… implying that the efficient core business is available for free

Key assumptions


SOTP valuation - FY18E (Rs mn) Per share value (R s)

Standalone b usiness

Core PAT 2,504

Multiple assigned (x) 12.0

Value of standalone b usiness 30,050 160

FY18 TP of CIFC 83,141TI's stake 50%

Holding co discount 20%

Value of CIFC 33,522 179

General Insurance

PAT 2,327

Multiple assigned (x) 15

TI's stake 74%

Value of General Insurance 25,827 138

Shanthi Gears 5,042 27

Value of Tub e Investments 94 ,441 504


Chola Investment and Finance (CIFC)

FY14 FY15E FY16E FY17E FY18E

Cycle division

Revenue growth (%) -6% 5% 7% 7% 7%

EBIT Margin (%) 3% 5% 5% 5% 5%

Engineering divisio n

Volume (tons) 213,665 249,072 270,072 304,478 343,085

EBIT margin (Rs/ ton) 6,360 6,000 6,200 6,400 6,500

Metal formed division

Revenue growth (%) 6% 10% 10% 10% 15%EBIT Margin (%) 8% 9% 11% 13% 13%

GWP growth (%) 13% 15% 15% 15% 15%

PAT (Rs mn) 705 1,396 1,672 2,124 2,327

PAT (Rs mn) 3,640 4,545 5,441 6,824 8,961

Chola Investment and Finance

Chola MS General Insurance

axis acceleration

Documents