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TRANSCRIPT
February 28, 2012
ACTION
Sell Indra (IDR.MC)
Return Potential: (22%) Equity Research
De-rating likely reflecting lower returns; on to Conviction Sell List
Source of opportunity
In the long term, while we view Indra Sistemas as a relatively better
positioned vendor in the European IT Services space due to its unique IP
and increasing revenue mix of EM, we believe it will underperform in the
near term due to its high Spanish exposure and worsening earnings/cash-
returns profile. Further, we believe that the weak pricing environment and
increasing mix of services could delay operating margin recovery and
hence estimate that they will be at the low end of guidance. We remain
Sell rated and add the shares to our Conviction List. Our new 12-month
price target falls to €7.9 (from €9) implying 22% downside potential.
Catalyst
Indra Sistemas is due to report 1Q12 results in early May. In the interim,
we expect data points from IT services peers to indicate to continuing
tough market conditions in the key Spanish market which has negative
read-across for Indra. Following weak 2012 guidance, we lower our 2012-
13 PF EPS estimates by 13%-14% and add 2014 estimates. Our 2012-13
revenue/EPS estimates are 0%-2%/19%-25% below Bloomberg consensus
(not all estimates updated following 2011 results announcement).
Valuation
Our new 12-month P/E-based price target is €7.9 (from €9), valuing the
company on 9x 2013E PF EPS, in line with its significantly lowered cash-
returns profile and 25% discount to the sector’s mean P/E multiple of 12x
(since 2008). At our price target, the shares would trade at a 40% discount
to its historical P/E mean multiple of 15x reflecting the lowered revenues,
earnings and cash-returns profile of the company.
Key risks
Risks include: 1) greater resilience in the Spanish market; 2) large deals in
EMs including Latin America, Middle East; 3) faster-than-expected benefits
in LatAm from increased scale due to Politec acquisition.
INVESTMENT LIST MEMBERSHIP
Pan-Europe Sell List
Pan-Europe Conviction Sell List
Coverage View: Neutral
S.K.Prasad Borra +44(20)7552-2927 [email protected] Goldman Sachs International Goldman Sachs does and seeks to do business with companies
covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.
Mohammed Moawalla +44(20)7774-1726 [email protected] Goldman Sachs InternationalSuhasini Varanasi (212) 934-8376 [email protected] Goldman Sachs India SPL Jo Blackshaw +44(20)7552-3718 [email protected] Goldman Sachs International
The Goldman Sachs Group, Inc. Global Investment Research
Growth
Returns *
Multiple
Volatility Volatility
Multiple
Returns *
Growth
Investment Profile
Low High
Percentile 20th 40th 60th 80th 100th
* Returns = Return on Capital For a complete description of the
investment profile measures please refer to
the disclosure section of this document.
Indra (IDR.MC)
Europe Technology Peer Group Average
Key data Current
Price (€) 10.08
12 month price target (€) 7.90
Upside/(downside) (%) (22)
Market cap (€ mn) 1,552.8
Enterprise value (€ mn) 2,455.9
12/11 12/12E 12/13E 12/14E
Revenue (€ mn) New 2,688.5 2,838.7 2,879.1 2,939.7
Revenue revision (%) 1.4 2.2 2.1 --
EBIT (€ mn) New 250.2 226.1 237.0 255.2
EBIT revision (%) (5.0) (14.5) (10.4) --
EPS (€) New 1.12 0.87 0.87 0.92
EPS (€) Old 1.06 1.01 1.00 --
EV/EBITDA (X) 8.6 9.6 8.9 8.2
P/E (X) 11.4 11.6 11.5 11.0
Dividend yield (%) 4.8 4.0 4.4 5.0
FCF yield (%) (0.3) (3.7) 1.2 3.0
CROCI (%) 12.9 9.2 8.6 8.5
Price performance chart
9
10
11
12
13
14
15
16
Feb-11 Jun-11 Sep-11 Dec-11
260
280
300
320
340
360
380
400
Indra (L) FTSE World Europe (EUR) (R)
Share price performance (%) 3 month 6 month 12 monthAbsolute 3.5 (15.6) (28.3)
Rel. to FTSE World Europe (EUR) (13.0) (27.6) (22.2)
Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 2/27/2012 close.
February 28, 2012 Indra (IDR.MC)
Indra: Summary Financials
Analyst Contributors
S.K.Prasad Borra
Mohammed Moawalla
Suhasini Varanasi
Jo Blackshaw
Goldman Sachs Global Investment Research 2
Profit model (€ mn) 12/11 12/12E 12/13E 12/14E Balance sheet (€ mn) 12/11 12/12E 12/13E 12/14E
Total revenue 2,688.5 2,838.7 2,879.1 2,939.7 Cash & equivalents 83.2 67.4 151.5 271.0
Operating costs (2,476.5) (2,625.8) (2,648.8) (2,689.8) Accounts receivable 2,017.6 2,258.1 2,370.4 2,468.7
R&D 0.0 0.0 0.0 0.0 Inventory 0.0 0.0 0.0 0.0
Lease payments 0.0 0.0 0.0 0.0 Other current assets 317.9 357.9 397.9 437.9
Other operating profit/(expense) 83.8 70.0 70.0 70.0 Total current assets 2,418.7 2,683.4 2,919.8 3,177.5
EBITDA 295.8 305.0 311.6 319.9 Net PP&E 171.9 137.8 97.5 56.4
Depreciation & amortisation (45.6) (56.8) (63.3) (64.7) Net intangibles 867.8 920.4 973.6 1,028.0
EBIT 250.2 226.1 237.0 255.2 Total investments 66.4 66.4 66.4 66.4
Net interest income/(expense) (37.7) (44.0) (54.0) (63.0) Other long-term assets 0.0 0.0 0.0 0.0
Associates 3.2 3.0 3.0 3.0 Total assets 3,524.9 3,808.0 4,057.4 4,328.4
Profit/(loss) on disposals 0.0 0.0 0.0 0.0
Others (recurring) 0.0 0.0 0.0 0.0 Accounts payable 1,261.7 1,332.2 1,351.1 1,379.6
Pretax profits 215.8 185.1 186.0 195.2 Short-term debt 281.2 281.2 281.2 281.2
Income tax (52.2) (40.7) (40.9) (42.9) Other current liabilities 287.1 272.1 252.1 232.1
Tax rate (%) 24.2 22.0 22.0 22.0 Total current liabilities 1,830.0 1,885.5 1,884.5 1,892.9
Minorities (0.1) (7.0) (7.0) (7.0) Long-term debt 314.4 479.4 619.4 759.4
Preferred dividends 0.0 0.0 0.0 0.0 Other long-term liabilities 313.3 353.3 393.3 433.3
Net income (pre-exceptionals) 163.5 137.4 138.1 145.3 Total long-term liabilities 627.6 832.6 1,012.6 1,192.6
Other non-recurring items post tax 0.0 (22.1) (11.2) 0.0 Total liabilities 2,457.7 2,718.1 2,897.1 3,085.5
Net income 163.5 115.3 126.8 145.3
EPS (underlying) (€) 1.01 0.87 0.87 0.92 Preferred shares 0.0 0.0 0.0 0.0
EPS (basic, reported) (€) 1.01 0.73 0.80 0.92 Total common equity 1,045.8 1,068.5 1,138.9 1,221.4
Weighted shares outstanding (mn) 161.1 157.9 157.9 157.9 Minority interest 21.4 21.4 21.4 21.4
Common dividends declared 99.6 63.4 69.8 79.9 Total liabilities & equity 3,524.9 3,808.0 4,057.4 4,328.4
DPS (€) 0.62 0.40 0.44 0.51 Capitalised leases 0.0 0.0 0.0 0.0
Dividend payout ratio (%) 60.9 46.1 50.5 55.0 Capital employed 1,662.8 1,850.5 2,060.9 2,283.4
Dividend cover (X) 1.6 2.2 2.0 1.8
Growth & margins (%) 12/11 12/12E 12/13E 12/14E Adj for unfunded pensions & GW 0.0 0.0 0.0 0.0
Revenue growth 5.1 5.6 1.4 2.1 Adj capital employed 1,662.8 1,850.5 2,060.9 2,283.4
EBITDA growth (16.7) 3.1 2.1 2.7 Gross cash invested 2,199.0 2,499.2 2,728.9 2,936.6
EBIT growth (12.6) (9.6) 4.8 7.7
Net income growth (13.7) (29.5) 10.1 14.5 Ratios 12/11 12/12E 12/13E 12/14E
EPS growth (23.8) (14.2) 0.5 5.2 CROCI (%) 12.9 9.2 8.6 8.5
DPS growth (6.6) (35.0) 10.1 14.5 CROCI/WACC (X) 1.6 1.2 1.2 1.2
EBITDA margin 11.0 10.0 10.4 10.9 ROIC (%) 24.3 18.7 16.9 15.9
EBIT margin 9.3 8.0 8.2 8.7 ROIC/WACC (X) 3.0 2.5 2.3 2.2
ROA (%) 5.8 4.7 4.6 4.6
Cash flow statement (€ mn) 12/11 12/12E 12/13E 12/14E WACC (%) 8.0 7.4 7.3 7.2
Net income 163.5 137.4 138.1 145.3 Inventory days NM NM NM NM
D&A add-back (incl. ESO) 45.6 56.8 63.3 64.7 Asset turnover (X) 15.6 20.6 29.5 52.1
Minority interest add-back 0.1 7.0 7.0 7.0 Net debt/equity (%) 48.0 63.6 64.6 61.9
Net (inc)/dec working capital (101.9) (170.0) (93.4) (69.8) EBITDA interest cover (X) 7.8 6.4 5.6 5.1
Other operating cash flow (4.9) (15.0) (20.0) (20.0)
Cash flow from operations 119.9 16.1 95.1 127.1 Valuation 12/11 12/12E 12/13E 12/14E
EV/sales (X) 1.0 0.9 0.9 0.9
Capital expenditures (126.1) (75.2) (76.3) (77.9) EV/EBITDAR (X) 9.1 8.7 8.5 8.2
Acquisitions (26.7) 0.0 0.0 0.0 EV/EBITDA (X) 9.1 8.7 8.5 8.2
Divestitures 0.0 0.0 0.0 0.0 EV/EBIT (X) 10.8 10.8 10.8 10.2
Others (3.6) 0.0 0.0 0.0 P/E (X) 12.6 11.6 11.5 11.0
Cash flow from investing (156.4) (75.2) (76.3) (77.9) Dividend yield (%) 4.8 4.0 4.4 5.0
FCF yield (%) (0.3) (3.7) 1.2 3.0
Dividends paid (common & pref) (111.2) (99.6) (63.4) (69.8) EV/GCI (X) 1.2 1.0 0.9 0.9
Inc/(dec) in debt 191.8 165.0 140.0 140.0 EV/adj. capital employed (X) 1.7 1.4 1.3 1.3
Other financing cash flows (23.2) 0.0 0.0 0.0 Price/book (X) 1.5 1.5 1.4 1.3
Cash flow from financing 57.4 65.4 76.6 70.2
Total cash flow 20.9 (15.8) 84.1 119.4 Note: Ratios are adjusted for leases where appropriate. Only separately disclosed where significant and ongoing.
Capex/D&A (%) 276.5 132.5 120.5 120.5
Reinvestment rate (%) 56.9 40.4 40.5 39.6
Cash flow cover of dividends (X) 2.2 2.9 2.7 2.5 Note: Last actual year may include reported and estimated data.
Free cash flow cover of dividends (X) (0.1) (1.0) 0.3 0.6 Source: Company data, Goldman Sachs Research estimates.
February 28, 2012 Indra (IDR.MC)
Goldman Sachs Global Investment Research 3
Overview: Deteriorating earnings and cash profile NT and MT
We remain Sell rated on Indra Sistemas and add the stock to our Conviction List.
While we view the company as a relatively better positioned vendor in the European
IT services space due to its unique IP and increasing revenue mix of EM, we believe
it will underperform in the near term due to its high Spanish exposure and
worsening earnings/cash-returns profile. In addition, as incremental data points
from IT services peers emerge, we expect the shares to de-rate from its current
valuation of 11.5x 2013E PF EPS. We forecast -6% PF EPS CAGR over 2011-14 and
our new 12-month price target falls to €7.9 (from €9) implying 22% downside
potential. Our Sell case is based on the following key tenants:
Spanish exposure remains predominant theme in spite of increasing EM
mix: Following the acquisition of Politec and signing of several significant deals
in 2011, Indra’s emerging markets (EM) exposure has increased to c.25% of sales
which is significantly higher than any European IT services vendor. However,
Spain with c.57% of group revenues in 2011 continues to hold a predominant
share of the company’s revenues and profitability, and we see no near term
recovery. In spite of increasing wallet share at existing customers, we believe
incremental revenues are less profitable as reflected by increasing in headcount
in Spain despite shrinking revenues. We forecast Spanish revenues to decrease
by 3%, 2.5% and 2% in 2012, 2013 and 2014 respectively driven by significant
downward pressure on pricing. Additionally, we assume the company will focus
on improving the profitability mix (reducing infrastructure business) in its
Brazilian business which would be beneficial in the long term but could have
negative revenue implications near term.
Operating margin recovery to be prolonged due to pricing/mix: We expect
weak pricing and increasing mix of services revenues vs. solutions to keep
operating margin recovery in check and hence estimate operating margins of 8%
in 2012, at the low end of guidance. We believe that the company‘s objective of
achieving 10% EBIT margins by 2014 will be challenging given a lack of pricing
power and limited visibility on demand for higher value solutions business.
Hence, we forecast operating margins to only moderately recover to 8.2% in 2013
and 8.7% in 2014 despite the new restructuring measures announced by the
company. We believe that significant improvement in profitability mix of the
Brazilian revenues and decrease in subcontracting levels are key to better
operating margin recovery vs. our forecasts.
Cash flow to remain weak near term, stretching balance sheet: On our
estimates, Indra will have a net debt of €750 mn by the end of 2013 implying 2.5x
net debt/EBITDA, worsening from current net debt of €514 mn and net
debt/EBITDA of 1.6x. In addition, we expect working capital days to deteriorate
from 98 days in 2011 to 119 days in 2012 (above company guidance of 110-100
days) owing to its Spanish/public sector exposure, resulting in net cash outflow
of €81 mn in 2012. We forecast working capital days to further deteriorate to 129
days and 135 days in 2013 and 2014, respectively.
Despite a sizeable reduction of capex to €70-75 mn expected in 2012 (from €126
mn in 2011), which should help address cash outflow issues in the near term,
stabilization and improvement of working capital working days is key to a
healthier balance sheet, in our view. Incrementally, we expect higher debt levels
to result in higher finance servicing costs, negatively impacting earnings.
We expect Indra’s cash returns (CROCI) to remain at historically low levels of
c.9% over 2012-14 owing to worsening profitability and working capital days.
February 28, 2012 Indra (IDR.MC)
Goldman Sachs Global Investment Research 4
Exhibit 1: We are lowering our 2012-13E PF estimates by 13%-14% for new 2012 guidance € mn, except per share data
Source: Goldman Sachs Research estimates.
Our key model assumptions are as follows:
Indra’s core business grows at 1.4%, 1.4% and 2.1% in 2012, 2013 and 2014,
respectively, benefiting from increased volumes/wallet share at existing
customers and a high-speed train project in Saudi Arabia.
We forecast operating margins of 8% for 2012, at the low end of the 2012
guidance. We factor in the dilutive impact of acquisitions, increasing mix of
services revenues and downward pressure in pricing in our lowered forecasts.
Owing to increased working capital requirements and subsequent pressure on
cash flows impacting net debt levels, we forecast net financial expense of €44 mn,
€54 mn and €63 mn in 2012, 2013 and 2014, respectively. However we see further
downside risks if financing rates increase.
Exhibit 2: We are 19%-26% below Bloomberg consensus EPS (unadjusted for 2011 results) Goldman Sachs estimates vs. Bloomberg consensus
Source: Bloomberg, Goldman Sachs Research estimates.
We remain significantly below consensus (consensus has not fully adjusted for the 2011
guidance) both on the top line/bottom line and believe that consensus underestimates the
impact of sustained weak pricing on the profitability of the business.
Year to December 2012E 2012E % 2013E 2013E % 2014EEUR mn OLD NEW Chg. OLD NEW Chg. NEWRevenues 2779 2839 2% 2820 2879 2% 2940YoY growth 4.8% 5.6% 1.5% 1.4% 2.1%YoY growth (Organic,ex-fx) -0.2% 1.4% 1.5% 1.4% 2.1%
EBIT (pre-exceptionals) 265 226 -15% 265 237 -10% 255EBIT Margins 9.5% 8.0% 9.4% 8.2% 8.7%YoY Growth 0.4% -15.6% 0.0% 4.8% 7.7%
PF EPS 1.01 0.87 -14% 1.00 0.87 -13% 0.92YoY Growth -5.0% -22.6% -0.9% 0.5% 5.2%
Reported EPS 1.01 0.73 -28% 1.00 0.80 -20% 0.92YoY Growth -5.0% -35.0% 0.0% 10.1% 14.5%
Indra ConsensusYear to December
In EUR mn GS Avg Low HighGS vs
Consensus GS Avg Low HighGS vs
Consensus GS Avg Low HighGS vs
Consensus
Total revenue 2,839 2,835 2,701 2,943 0% 2,879 2,930 2,773 3,101 -2% 2,940 3,080 2,872 3,207 -5%YoY Growth 5.6% 5.4% 0% 9% 1.4% 3.3% 3% 5% 2% 5% 4% 3%QoQ Growth
EBIT (ex exceptionals) 226 266 219 298 -15% 237 278 255 318 -15% 255 298 271 330 -14%EBIT Margin 8.0% 9.4% 8.1% 10.1% 8.2% 9.5% 9.2% 10.3% 8.7% 9.7% 9.4% 10.3%YoY Growth -16% -1% -18% 11% 5% 5% 16% 7% 8% 7% 6% 4%
Net Income (PF) 137 176 120 216 -22% 138 185 148 244 -25% 145 197 173 222 -26%Net Margin 4.8% 6.2% 4.4% 7.3% 4.8% 6.3% 5.3% 7.9% 4.9% 6.4% 6.0% 6.9%YoY Growth -24% -3% -34% 19% 0% 5% 23% 13% 5% 7% 17% -9%
Reported EPS 0.73 1.07 0.73 1.25 -32% 0.80 1.13 0.90 1.39 -29% 0.92 1.22 1.07 1.37 -25%YoY Growth -35% -5% -35% 11% 10% 6% 23% 11% 15% 8% 19% -1%
Pro Forma EPS (EUR) 0.87 1.08 0.73 1.34 -19% 0.87 1.16 0.90 1.51 -25% 0.92 1.25 1.07 1.37 -26%YoY Growth -23% -4% -35% 19% 0% 8% 23% 13% 5% 8% 19% -9%
FY14EFY12E FY13E
February 28, 2012 Indra (IDR.MC)
Goldman Sachs Global Investment Research 5
GS SUSTAIN framework – Indra has bottom-quartile cash returns
GS SUSTAIN is our long-term investment framework for identifying companies well
positioned to sustain high returns on capital relative to peers. It combines financial
analysis of companies’ returns with the structural drivers of those returns (‘industry
positioning’). We have updated our GS SUSTAIN framework to incorporate our revised
estimates for Indra Sistemas.
In the long term, we view Indra Sistemas as a relatively better positioned vendor in the
European IT services landscape due to its unique IP and increasing mix of emerging
markets exposure. However in the near to medium term, we believe that its industry
positioning will remain weak owing to lowered revenue prospects.
We capture industry drivers for the sector through our industry positioning metrics:
Segment growth: We weight each company’s segment exposures and blended
expected revenue growth based on industry forecasts that determine the
attractiveness of the categories. For all European IT services vendors, we use a sector
growth rate of 4.7% (IDC 2010-13 forecast) to reflect the growth prospects from
outsourcing, systems integration and consulting.
Relative market share: We analyze companies’ market shares in each of the
categories/segments in which they participate to determine potential scale and
pricing power, and whether these segments are concentrated or fragmented. We
calculate a relative market share score, which is defined as the company’s market
share relative to that of the top three players in the segment. Though Indra Sistemas
enjoys significant market share in its home Spanish market, it has limited scale on a
European and global basis.
Expected organic revenue growth. We use our forecasts for each company over the
next three calendar years, as these capture factors such as expected market share
gains/losses and company-specific fundamental strengths/weaknesses. We expect an
organic revenue CAGR of 1.6% for Indra Sistemas over 2011-14, in line with other
European peers, balancing the weakness in Spanish revenues with increasing
emerging market mix.
Risk adjustment. We measure risk associated with each company’s ability to
maintain its market position and returns, as well as deliver on growth. The two
metrics are: 1) percentage of recurring revenues to determine revenue predictability
and cash flow; and, 2) product diversification (the number of different
products/categories in which the company participates), to assess risks to the delivery
of growth. For comparative analysis, we consider outsourcing revenues for each
vendor to be recurring. We see upside bias to our risk assessment score as services
revenue may not fully reflect the proportion of recurring revenue.
CROCI score. We include the impact of R&D capitalization (average of three years) as
part of the capital base for comparable analysis across sectors. For further details,
please refer to related research: GS SUSTAIN: Eurovision: European winners for a
global stage, November 22, 2010. Please note however for valuation analysis in the
European software/services space, we exclude impact of R&D capitalisation
February 28, 2012 Indra (IDR.MC)
Goldman Sachs Global Investment Research 6
Exhibit 3: Weaker sales growth profile and cash returns result in weak positioning on our GS SUSTAIN framework European software/IT services GS SUSTAIN framework
Please refer to related research: Eurovision: European winners for a global stage, November 22, 2010. Please note CROCI calculation here includes the impact of R&D capitalization and is an average across three years.
Source: IDC, Gartner, Company data, Goldman Sachs Research estimates.
Exhibit 4: Low market growth potential and relative market share result in weak industry positioning Market positioning, sales growth and risk assessment factors
Source: IDC, Gartner, Company data, Goldman Sachs Research estimates.
Company Global end market Percentile Company 2008-10 2011-2013E% change vs.
2008-102011-13E Percentile
Aveva Plant Design software 100% Aveva 36% 42% 6% 100%
Dassault PLM (includes CAD, BIM) 94% Dassault 27% 31% 4% 94%Fidessa Trading systems 84% Opera 48% 30% (18%) 89%SAP ERP, CRM, SCM, BI and DBMS 78% Fidessa 36% 29% (7%) 84%Blinkx Video Search 73% SAP 27% 27% 1% 78%Nemetschek PLM (includes CAD, BIM) 68% Micro Focus 27% 25% (3%) 73%Sage Enterprise resource planning 57% Blinkx 8% 24% 16% 68%Opera Web search and advertising 57% Exact 24% 24% (0%) 63%Software AG BPM/Middleware/Mainframe database 42% Nemetschek 18% 20% 2% 57%Micro Focus Application development 36% Software AG 23% 17% (6%) 52%Unit 4 Enterprise resource planning 31% Sage 13% 16% 2% 47%IFS Enterprise resource planning 15% IFS 14% 14% 0% 36%Cegid Enterprise resource planning 5% Unit 4 18% 14% (4%) 31%Exact Enterprise resource planning 0% Cegid 14% 11% (3%) 21%
Telecity Data Center Colocation 89% Telecity 20% 15% (4%) 42%Capgemini IT Services 52% AtoS 9% 12% 3% 26%AtoS IT Services 47% Tieto 14% 10% (4%) 15%Tieto IT Services 26% Capgemini 15% 9% (6%) 10%Logica IT Services 21% Logica 11% 5% (6%) 5%Indra IT Services 10% Indra 12% 3% (9%) 0%
Return on capital
CROCI (including R&D)Industry positioning
So
ftw
are
IT S
erv
ice
s
CompanyMarket
growth (2010-13E CAGR)
PercentileRelative
Market Share
PercentileOverall Industry
PercentileCompany
Sales growth (10-13E,
organic ex-fx)
Sales growth
PercentileCompany
Recurring Revenues
PercentileProduct
diversificationPercentile
Blended Risk Assessment
rank
Dassault 9.3% 85% 0.42 100% 100% Blinkx 31% 100% Fidessa 82% 95% 3 75% 100%Aveva 9.0% 80% 0.39 95% 94% Opera 27% 94% Dassault 65% 75% 4 95% 89%Fidessa 8.0% 65% 0.34 90% 84% Aveva 21% 89% Sage 61% 65% 3 75% 84%SAP 7.4% 60% 0.34 85% 78% SAP 12% 78% SAP 51% 50% 4 95% 78%Software AG 7.1% 55% 0.18 80% 73% Dassault 12% 73% Aveva 68% 80% 2 35% 73%
Blinkx 43.7% 100% 0.05 30% 68% Fidessa 7% 68% Micro Focus 53% 55% 2 35% 57%Nemetschek 9.3% 85% 0.05 40% 63% Nemetschek 5% 63% Software AG 34% 20% 3 75% 52%Sage 4.2% 5% 0.15 70% 47% IFS 4% 57% Exact 63% 70% 1 0% 47%Opera 8.4% 75% 0.01 0% 42% Sage 4% 52% Nemetschek 45% 35% 2 35% 42%Micro Focus 4.0% 0% 0.10 55% 31% Unit 4 3% 42% Cegid 50% 45% 1 0% 26%
Unit 4 4.2% 5% 0.06 45% 26% Micro Focus 2% 36% Unit 4 48% 40% 1 0% 21%
Cegid 4.2% 5% 0.04 25% 10% Cegid 2% 26% Opera 23% 5% 2 35% 10%IFS 4.2% 5% 0.04 20% 5% Software AG 1% 5% IFS 32% 10% 1 0% 5%Exact 4.2% 5% 0.04 15% 0% Exact 0% 0% Blinkx 0% 0% 1 0% 0%
Telecity 19.0% 95% 0.17 75% 89% Telecity 17% 84% AtoS 82% 90% 3 75% 94%
Capgemini 4.7% 30% 0.10 60% 57% Capgemini 3% 47% Telecity 90% 100% 1 0% 68%AtoS 4.7% 30% 0.09 50% 52% Tieto 2% 31% Tieto 60% 60% 2 35% 63%Logica 4.7% 30% 0.05 35% 36% Indra 2% 21% Logica 43% 30% 2 35% 36%Indra 4.7% 30% 0.03 10% 21% Logica 2% 15% Capgemini 36% 25% 2 35% 31%Tieto 4.7% 30% 0.02 5% 15% AtoS 1% 10% Indra 33% 15% 2 35% 15%
IT S
ervi
ces
Risk Assessment (20%)
So
ftw
are
Market Positioning (40%) Sales growth (40%)
February 28, 2012 Indra (IDR.MC)
Goldman Sachs Global Investment Research 7
Valuation: Deteriorating cash profile warrants further de-rating
Indra Sistemas shares have underperformed in recent months following the market rally
and weak 2012 guidance; however we see scope for further underperformance as the
stock de-rates to match its lowered cash-returns profile. Trading at 11.5x 2013E PF EPS,
valuation is attractive compared to historical levels; however we believe that it is a still
trading at a premium given its deteriorating revenues, earnings and cash-returns profile.
We believe that near-term catalysts including results from IT services peers will have
negative read-across for the shares. In our view, financial performance, mainly operating
margin recovery, is key for share price outperformance in the near to medium term.
Exhibit 5: We expect valuation to de-rate further, in line with Indra’s lowered cash
returns profile, and value it at 9x 2013E PF EPS CROCI, P/E valuation
Source: Company data, I/B/E/S, Datastream, Goldman Sachs Research estimates.
Our new 12-month P/E-based price target is €7.9 (from €9), valuing the company on 9x
2013E PF EPS, in line with its significantly lowered cash returns profile (excludes impact
of R&D capitalization) and a c.25% discount to the sector’s mean P/E multiple of 12x (since
2008). At our price target, the share would trade at c.40% discount to its historical P/E
mean multiple of 15x reflecting the deteriorating revenues, earnings and cash profile.
We do not view Indra Sistemas as an M&A target owing to its strategic importance for
major defense projects and potential issues associated with any post acquisition
restructuring and hence do not include any M&A component in our valuation. However,
certain segments in the transportation segment could be an interesting asset for a
potential acquirer.
27x
19x
17x 17x
20x19x
18x
14x13x
11x 10x9x
12x
0%
5%
10%
15%
20%
25%
30%
35%
0x
5x
10x
15x
20x
25x
30x
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012E
2013E
CROCI
2 yr fw
d PE
P/E CROCI
February 28, 2012 Indra (IDR.MC)
Goldman Sachs Global Investment Research 8
Exhibit 6: Our new 12-month price target of €7.9 implies 22% downside potential Indra’s share price ; priced as of close February 27, 2012
Source: Datastream, Goldman Sachs Research estimates.
Exhibit 7: Indra trades at 11.5x 2013E PF EPS, a discount to its two-year forward P/E
mean of 15x reflecting lowered earnings growth potential near to medium term Indra’s two-year forward P/E valuation
Source: Datastream, Goldman Sachs Research estimates.
INDRA SISTEMAS SA - Mercado Continuo Espanol
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
1Jan2003 28Feb2012
First LastHigh Low
Mean Std
6.4893 10.0800 6Nov07 26Feb0320.7300 5.948514.2478 3.2645
2 yr valuation: €8.4, 9x 2014E PF EPS, 0.71x 2014E EV/Sales, 16% downside potential
Current share price implies 11.5x 2013E P/E, broadly inline with IT Services mean since 2008 despite poor cash returns
GS PT: €7.9, 9x 2013E PF EPS, 0.69x 2013E EV/Sales, 22% downside potential
IDR 2 yr fwd PE
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
1Jan2003 28Feb2012
First LastHigh Low
Mean Std
14.4220 8.386014Jul05 27Feb1221.7500 8.386014.9665 3.4788
Current share trading at 11.5x 2013E PF EPS
GS PT: €7.9, 9x 2013E PF EPS, 22% downside potential
Historic NormalisedLow 8.4 Low 8.4High 23.9 High 21.8Mean 15.2 Mean 15.0
2 yr fwd PE
February 28, 2012 Indra (IDR.MC)
Goldman Sachs Global Investment Research 9
Exhibit 8: Indra is currently trading at 0.6x 2013E EV/sales, a discount to its historical
valuation due to its lowered operating margin profile Indra Sistemas’ EV/sales valuation
Source: Datastream, Goldman Sachs Research estimates.
Exhibit 9: Indra is trading in line with European IT
services peers on a P/E basis … P/E valuation – Indra vs. European peers
Exhibit 10: … however trading at a significant premium
to European IT services on an EV/sales basis EV/sales – Indra vs. European peers
Source: I/B/E/S, Datastream.
Source: Datastream, Goldman Sachs Research.
evsales for idr.mc as of Feb 26 2012
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
2.2
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
1Jan2003 28Feb2012
First LastHigh Low
Mean Std
0.8816 0.957428Sep05 26Feb03
2.0340 0.81251.2738 0.2490
Current share trading at 0.81x 2013E EV/Sales
GS PT: €7.9, 0.69x 2013E EV/Sales, 22% downside potential
Historic NormalisedLow 0.7 Low 0.8High 2.1 High 2.0Mean 1.3 Mean 1.3
EV/Sales
European IT Services Indra Sistemas
IT Services
8
10
12
14
16
18
20
22
24
26
28
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
1Jun2002 28Feb2012
Eu
European IT Services Indra Sistemas
IT Services
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
2.2
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
1Jun2002 28Feb2012
Eu
February 28, 2012 Indra (IDR.MC)
Goldman Sachs Global Investment Research 10
Spain remains a significant drag on top-line growth
Unlike most European IT services vendors, whose earnings growth potential is dependent
on the broader macro recovery and capex/IT spending views, we believe Indra Sistemas’
earnings growth in the near to medium term will be driven by Spanish business recovery.
In spite of increasing revenue mix in emerging markets following significant deal wins in
2011 and the strategic acquisition of Politec, Spain with c.57% of group revenues in 2011
continues to hold a predominant share of the company’s revenues and profitability.
Exhibit 11: We estimate -6% PF EPS CAGR over 2011-14 Indra Sistemas KPIs
Source: Company data, Goldman Sachs Research estimates.
Owing to weak macro conditions and subsequent issues on services capacity, pricing in
Spain remains under severe pressure and we do not expect any near to medium term
recovery in this geography. We expect any medium term recovery in Spanish commercial
sector business to be negated by weakness in the public sector business (c.25% of group
revenues) which continues to suffer from depressed spending at all levels (central, local
governments). As a result, we forecast Spain revenues to decrease by 3%, 2.5% and 2% in
2012, 2013 and 2014, respectively.
We expect emerging market business to continue to do well and help Indra maintain a
positive revenue growth trajectory. We expect the key focus on the Brazilian business
near term to be on improving profitability mix by lowering infrastructure related sales
which should have a positive impact in the long term, but with possible negative revenue
implications near term.
Year to Dec 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2011-14E Eur mn Year Year Year Year Year Year Year Year Year CAGR
Total Revenues 1,407 2,168 2,380 2,513 2,557 2,689 2,839 2,879 2,940 3%Y/Y Growth 17.0% 54.1% 9.8% 5.6% 1.7% 5.1% 5.6% 1.4% 2.1%Y/Y Growth (organic, ex-fx) 17.0% 54.1% 9.8% 5.6% 1.7% 2.7% 1.4% 1.4% 2.1% 2%
EBIT ex-exceptionals & ESO 164 240 270 285 285 268 226 237 255 -2%% of revenues 11.6% 11.1% 11.4% 11.4% 11.2% 10.0% 8.0% 8.2% 8.7%
EBIT reported 164 224 270 285 252 268 198 223 255 -2%% of revenues 11.6% 10.3% 11.4% 11.4% 9.8% 10.0% 7.0% 7.7% 8.7%
Interest -1.4 -12.7 -22.9 -24.9 -19.1 -37.7 -44.0 -54.0 -63.0
Net Profit 114 148 182 196 189 181 115 127 145 -7%Y/Y Growth 10% 30% 23% 7% -4% -4% -36% 10% 15%
Net Profit (ex-exceptionals) 115 160 182 196 215 181 137 138 145 -7%Y/Y Growth 9% 39% 14% 7% 10% -16% -24% 0% 5%
PF EPS 0.80 0.99 1.14 1.21 1.33 1.12 0.87 0.87 0.92 -6%Y/Y Growth 13% 24% 15% 6% 10% -15% -23% 0% 5%
Free Cash Flow 101.2 81.9 133.9 129.9 20.0 -29.2 -81.2 7.5 49.2Y/Y Growth 105% -19% 63% -3% -85% -246% 178% -109% 553%
Net cash -58.8 -150.1 -148.8 -134.7 -274.8 -513.6 -694.4 -750.2 -770.8 14%
Working capital days 60.2 72.8 76.4 79.6 93.0 98.0 119.1 129.2 135.2 11%
February 28, 2012 Indra (IDR.MC)
Goldman Sachs Global Investment Research 11
Exhibit 12: We expect Spain to significantly underperform the international business Organic revenue growth chart – group, Spain, International segments
Source: Company data, Goldman Sachs Research estimates.
Exhibit 13: In spite of improving EM mix, Spain remains the predominant geography and
drives the majority of revenue and earnings growth Geographical mix, 2000-14E
Source: Company data, Goldman Sachs Research estimates.
‐10%
‐5%
0%
5%
10%
15%
20%
25%
30%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E
Organic revenue growth %
yoy
Spain International Group
60%66% 69% 67% 65% 65% 65% 68% 66% 64% 61%
57%52% 50% 48%
14%
16%18% 20% 24% 23% 21% 16%
16% 18%17%
17%16%
15%15%
5%
5%
5% 5% 3% 3% 3%3%
2% 1%1%
1%
1%1%
1%
18%10%
5% 4% 4% 5% 4% 9%10% 11%
15%18%
23% 25% 27%
3% 3% 3% 4% 3% 4% 6% 4% 6% 6% 6% 7% 8% 8% 9%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012E
2013E
2014E
Spain Europe North America LatAm Others
February 28, 2012 Indra (IDR.MC)
Goldman Sachs Global Investment Research 12
Exhibit 14: Order intake indicates continued weakness in
Spanish growth prospects Order intake growth chart – group, Spain, international
segments
Exhibit 15: Spanish orders are still majority of the order
inflow Geographical mix
Source: Company data
Source: Company data
Exhibit 16: We expect decreasing importance of the defense business to have a
disproportionately negative impact on profitability and cash returns End markets as % of sales
Source: Company data, Goldman Sachs Research estimates.
3%
‐3%
‐1%
9%
23%
5%5%
7%
2%
‐5%
0%
5%
10%
15%
20%
25%
2009 2010 2011
Order intake
growth (organic) % yoy
Spain International Group
56% 53%
44% 47%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2010 2011
Spain International
18% 20% 22% 22% 24% 25% 23% 18% 18% 20% 22% 22% 24% 27% 29%
15%20% 18% 14% 13% 13% 12%
10% 10% 11%13% 15%
14%14%
14%6%
6% 5%5% 5% 6% 7% 12% 13%
13%14%
12% 11%11%
10%
6%
6% 6%6% 7% 8% 8%
13% 13%13%
14% 14% 13%13%
12%38%
41% 44%46% 46% 45%
42%
29% 29% 27%23% 19%
15% 13% 11%
13%3% 0% 3% 2% 1% 6% 1% 1% 1% 0% 4%
8% 8% 8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012E
2013E
2014E
Transport and traffic Telecom and Media P. A. and Healthcare
Financial and Insurance Defense, Security & Logistics Others
February 28, 2012 Indra (IDR.MC)
Goldman Sachs Global Investment Research 13
Operating margin recovery to be prolonged We forecast 2012 operating margins of 8%, at the low end of the guidance range. We
factor in the dilutive impact of acquisitions, increasing mix of services revenues and
downward pressure in pricing in the lowered forecasts.
Spain: In spite of increasing wallet share at existing commercial customers in Spain, we
believe incremental revenues are coming in at lower profitability. We continue to see
significant downward pressure on pricing in the medium term and hence do not see
Spanish operating margins recovering to their historical levels.
International: We expect the low operating margin profile of the LatAm business (dilutive
acquisitions) having a negative impact on operating margins in the near term. We believe
that recovery in LatAm margins is an important factor for sustainable recovery in
operating margins in the medium term.
While the acquisition of Politec was strategically important, we believe that integration
remains a key challenge. Given the weak profitability (flat EBIT for Politec+Galyleo) of the
Politec business, we estimate incremental dilution of operating margins from the Brazilian
business. In our view, planned reduction of low margin infrastructure related sales is key
for the turnaround of the business and we expect to see further evidence on these
measures in 2012. We believe increased scale of the Brazil operations could have
additional benefits on margins, however we view the reduction of low margin business to
hold the key to sustainable operating margins.
We believe that the company‘s objective of achieving 10% EBIT margins by 2014 will be
challenging, given the lack of pricing power and limited visibility on demand for higher
value solutions business. Hence, we forecast operating margins to only moderately
recover to 8.2% in 2013 and 8.7% in 2014 despite the new restructuring measures
announced by the company. We believe that subcontracting levels continue to remain at
high levels to support higher volumes and thus negatively impacting profitability.
Exhibit 17: We forecast operating margins to be at the low end of 2012 guidance
EBIT margins (ex-restructuring)
Source: Company data, Goldman Sachs Research estimates.
0%
2%
4%
6%
8%
10%
12%
14%
0
50
100
150
200
250
300
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E
Operating margin %
Operating profit, €mn
Operating profit Operating Margin (Guidance) Operating Margin (GSe)
February 28, 2012 Indra (IDR.MC)
Goldman Sachs Global Investment Research 14
Exhibit 18: Headcount is outgrowing revenue growth
Revenues (bar chart), revenues per head (line)
Exhibit 19: Increasing headcount in Spain suggests gains
in volume at the cost of profitability Spain revenues, headcount till 2011 d
Source: Company data, Goldman Sachs Research estimates.
Source: Company data, Goldman Sachs Research estimates.
Exhibit 20: We expect growth of the high margin solution
business to remain anemic, impairing margin recovery Revenue growth – group, solutions, services
Exhibit 21: We expect the increasing mix of low margin
services revenues will have a structurally negative
impact on group margins Solutions, services as % of sales
Source: Company data, Goldman Sachs Research estimates.
Source: Company data, Goldman Sachs Research estimates.
0
20
40
60
80
100
120
140
160
180
0
500
1,000
1,500
2,000
2,500
3,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Revenue/h
ead, €
thousands
Revenues, €mn
Revenues Revenue/head
1.0%
3.7%
5.0%
2.9%
‐2.9%‐2.6%
‐4.0%
‐3.0%
‐2.0%
‐1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
2009 2010 2011
% yoy growth
Spain headcount Spain revenues
‐2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E
Revenue growth %
yoy reported
Solutions Services Group
77% 77% 74% 74% 74% 73% 71% 67% 65% 66% 67%
23% 24% 26% 26% 26% 27% 29% 33% 35% 34% 33%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2004
2005
2006
2007
2008
2009
2010
2011
2012E
2013E
2014E
Solutions Services
February 28, 2012 Indra (IDR.MC)
Goldman Sachs Global Investment Research 15
Cash flow to remain weak near term, stretching the balance sheet
We believe that Indra’s balance sheet will be stretched over 2012-14 as worsening working
capital days puts incremental pressure on the company’s limited cash flow.
While a sizeable reduction of capex to €70-75 mn expected in 2012 (from €126 mn in 2011)
should help address cash outflow issues in the near term, we believe that stabilization and
improvement of working capital days is the key to sustainable cash returns. In the near term,
owing to tough market conditions in Spain and in specific Spanish public sector exposure, we
expect working capital days to further deteriorate from 98 days in 2011 to 119, 129, 135 days in
2012, 2013 and 2014 respectively. Our 2012 working capital days forecast of 119 days is above
guidance for 110-100 days, as we expect delays in payments from domestic clients as was
evident from 3Q11 results. We see the better than expected working capital days in 4Q11 as a
one-off.
We expect Indra to maintain its dividend payout in the near term, helped by reduction in capex
outflow.
We forecast Indra’s cash returns (CROCI) to remain weak at c.9% levels over 2012-14E, a
significant deterioration compared to an average of c.24% over 2001-08. Compared to pre
2008 levels when the company enjoyed benefits from pre-payments from the big defense
customers, we see limited scope for pre-payments and weak pricing to keep CROCI at low
levels compared to historical levels.
Exhibit 22: We forecast a structural correction in cash returns due to lack of prepayments and high public sector
exposure
in €mn
Source: Company data, Goldman Sachs Research estimates.
2006 2007 2008 2009 2010 2011 2012E 2013E 2014E
Operating cash flow ex‐wc 193.8 249.0 308.8 337.9 308.1 324.4 253.5 274.9 299.9
Change in working capital ‐33.9 ‐59.4 ‐65.3 ‐49.7 ‐105.8 ‐101.9 ‐170.0 ‐93.4 ‐69.8
Other operating changes 22.3 20.6 ‐13.0 ‐16.7 ‐38.8 ‐50.3 ‐55.0 ‐60.0 ‐60.0
Tangible capex ‐20.5 ‐40.7 ‐26.5 ‐28.8 ‐20.4 ‐42.1 ‐22.7 ‐23.0 ‐23.5
Intangible capex ‐17.4 ‐32.1 ‐38.1 ‐51.0 ‐68.6 ‐84.0 ‐52.5 ‐53.3 ‐54.4
Total capex ‐37.9 ‐72.8 ‐64.7 ‐79.8 ‐89.0 ‐126.1 ‐75.2 ‐76.3 ‐77.9
Total capex as % of sales 2.7% 3.4% 2.7% 3.2% 3.5% 4.7% 2.7% 2.7% 2.7%
Dividends 125.9 79.8 99.0 106.8 110.9 99.6 63.4 69.8 79.9
Dividend payout 110% 54% 54% 55% 59% 55% 55% 55% 55%
Net debt position ‐58.8 ‐150.1 ‐148.8 ‐134.7 ‐274.8 ‐513.6 ‐694.4 ‐750.2 ‐770.8
Net debt/EBITDA 0.3x 0.5x 0.5x 0.4x 0.8x 1.6x 2.5x 2.5x 2.4x
February 28, 2012 Indra (IDR.MC)
Goldman Sachs Global Investment Research 16
Exhibit 23: We forecast net working capital days above
guidance due to tough conditions in Spain Net working capital days, 2003-14E
Exhibit 24: Significant reduction in capex should help
cash outflow in the near term Tangible + intangible capex, 2003-14E
Source: Company data, Goldman Sachs Research estimates.
Source: Company data, Goldman Sachs Research estimates.
Exhibit 25: We expect net debt to increase owing to
increasing working capital requirements Net debt, net debt/EBITDA 2003-14E)
Exhibit 26: We expect Indra to maintain its dividend
payout in the near term Dividends, dividend payout 2003-14E
Source: Company data, Goldman Sachs Research estimates.
Source: Company data, Goldman Sachs Research estimates.
0
20
40
60
80
100
120
140
160
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E
Net Working Capital Days
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
0
20
40
60
80
100
120
140
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012E
2013E
2014E
Capex as %
of sales
Capex €mn
Capex Capex as % of sales
‐1.0x
‐0.5x
0.0x
0.5x
1.0x
1.5x
2.0x
2.5x
3.0x
(100)
0
100
200
300
400
500
600
700
800
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012E
2013E
2014E
Net debt/EBITDA
Net debt/(Net cash) €mn
Net Debt/ (Net Cash) Net Debt/EBITDA
0%
20%
40%
60%
80%
100%
120%
0
20
40
60
80
100
120
140
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012E
2013E
2014E
Dividend payout
Dividends €mn
Dividends Dividend payout ratio
February 28, 2012 Indra (IDR.MC)
Goldman Sachs Global Investment Research 17
Scenario analysis
We consider the following scenarios for Indra depending on how the pace of recovery of
the Spanish market evolves and impacts operating margin recovery and cash profile:
Upside scenario: We assume Indra achieves its 2014 operating margin guidance
driven by improved market conditions in Spain, benefits from the acquisition in
Brazil and working capital days stabilizing around 110. In this scenario, we see a
potential re-rating in valuation to 11x-13x, in line with the company’s cash-
returns profile, implying 9%-29% upside potential.
Downside scenario: We assume Indra registers flattish organic revenue growth
over 2013-14, operating margins stagnate and working capital days worsen. In
this scenario, we see a potential de-rating in valuation to 7x-9x, in line with the
company’s cash-returns profile, implying 32%-47% downside potential.
Exhibit 27: Scenario analysis implies incremental downside risk to estimates and valuation
Scenario analysis; priced as of close February 27, 2012
Source: Company data, Goldman Sachs Research estimates.
2011
GS
Downside
Scenario
Upside
Scenario GS
Downside
Scenario
Upside
Scenario GS
Downside
Scenario
Upside
Scenario
Revenues 2,689 2,839 2,839 2,839 2,879 2,840 2,926 2,940 2,842 3,046
Y/Y org. ex‐fx 2.7% 1.4% 1.4% 1.4% 1.4% 0.0% 3.1% 2.1% 0.1% 4.1%
EBIT pre‐excep 267.8 226.1 226.1 226.1 237.0 220.5 263.1 255.2 226.3 304.5
EBIT margins 10.0% 8.0% 8.0% 8.0% 8.2% 7.8% 9.0% 8.7% 8.0% 10.0%
Margin expansion ‐2.0% ‐2.0% ‐2.0% 0.3% ‐0.2% 1.0% 0.4% 0.2% 1.0%
PF EPS 1.12 0.87 0.87 0.87 0.87 0.76 1.00 0.92 0.74 1.16
Y/Y growth ‐22.6% ‐22.6% ‐22.6% 0.5% ‐12.3% 15.3% 5.2% ‐2.7% 16.0%
GS Vs. Consensus
Revenues 0% 0% 0% ‐2% ‐3% 0% ‐5% ‐8% ‐1%
PF EPS ‐19% ‐19% ‐19% ‐25% ‐34% ‐13% ‐26% ‐40% ‐7%
Valuation based on 2013 estimates
GS ESTIMATES
Price target
P/E Multiple 9.0x 7.0x 8.0x 9.0x 11.0x 12.0x 13.0x
12m valuation 7.9 5.3 6.1 6.9 11.0 12.0 13.0
% up/downside ‐22% ‐47% ‐40% ‐32% 9% 19% 29%
Current price: 10.1
2012E 2013E 2014E
UPSIDE SCENARIO
Valuation
DOWNSIDE SCENARIO
Valuation
February 28, 2012 Indra (IDR.MC)
Goldman Sachs Global Investment Research 18
Risks
Upside risks to our view and price target includes:
Greater resilience in the Spanish market – we see greater resilience in the
Spanish market driven by increasing wallet share at key customers and stable
pricing as the key risk to our estimates. In this scenario, a resultant improvement
in operating margin expansion could drive valuation upside.
Large deals in EMs including Latin America, Middle East – As evident in 2011,
despite a tough domestic market, Indra delivered positive revenue growth owing
to significant deals signed in emerging markets. Continuing momentum in
emerging markets could potentially improve the organic growth prospects and
drive estimate upgrades.
Faster-than-expected benefits in LatAm from increased scale due to Politec
acquisition – Politec remains a low margin business, however increased scale
and better integration/execution could result in improved margins for the group.
February 28, 2012 Indra (IDR.MC)
Goldman Sachs Global Investment Research 19
Disclosure Appendix
Reg AC
We, S.K.Prasad Borra, Mohammed Moawalla, Suhasini Varanasi and Jo Blackshaw, hereby certify that all of the views expressed in this report
accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our
compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Investment Profile
The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and
market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites
of several methodologies to determine the stocks percentile ranking within the region's coverage universe.
The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:
Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate
of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend
yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends.
Quantum
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in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets.
GS SUSTAIN
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includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive advantage and
superior returns on capital relative to their global industry peers. Leaders are identified based on quantifiable analysis of three aspects of corporate
performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the
environmental, social and governance issues facing their industry).
Disclosures
Coverage group(s) of stocks by primary analyst(s)
S.K.Prasad Borra: Europe-IT Services, Europe-Software. Mohammed Moawalla: Europe-Software.
Europe-IT Services: Atos, Capgemini, Indra, Logica, Telecity, Tieto.
Europe-Software: Aveva, Blinkx, Cegid, Dassault Systemes, Exact Holding, Fidessa, IFS, Micro Focus, Nemetschek, Opera Software, Orc Software,
Sage Group, SAP (ADR), SAP (Ordinary Share), Software AG, Temenos, Unit 4.
Company-specific regulatory disclosures
The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, "Goldman Sachs") and companies
covered by the Global Investment Research Division of Goldman Sachs and referred to in this research.
Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: Indra (€9.78)
Goldman Sachs had an investment banking services client relationship during the past 12 months with: Indra (€9.78)
Distribution of ratings/investment banking relationships
Goldman Sachs Investment Research global coverage universe
Rating Distribution Investment Banking Relationships
Buy Hold Sell Buy Hold Sell
Global 30% 55% 15% 47% 42% 34%
February 28, 2012 Indra (IDR.MC)
Goldman Sachs Global Investment Research 20
As of January 16, 2012, Goldman Sachs Global Investment Research had investment ratings on 3,593 equity securities. Goldman Sachs assigns
stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold
and Sell for the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions'
below.
Price target and rating history chart(s)
Regulatory disclosures
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Distribution of ratings: See the distribution of ratings disclosure above. Price chart: See the price chart, with changes of ratings and price targets
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Indra (IDR.MC)
911.5
12
14.5
1816
15.5
18
18.2
19
18.5
15.5
15
5.00
7.00
9.00
11.00
13.00
15.00
17.00
19.00
150
200
250
300
350
400
Goldman Sachs rating and stock price target history
Stock Price Currency : Euro
Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 12/31/2011.
The price targets show n should be considered in the context of all prior published Goldman Sachs research, w hich may or may not have included price targets, as w ell as developments relating to the company, its industry and f inancial markets.
Rating
Price target
Price target at removal
Covered by S.K.Prasad Borra,as of Jul 26, 2010
Not covered by current analyst
FTSE World Europe (EUR)
Inde
x P
rice
Sto
ck P
rice May 19 Sep 15
S NF
SM A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D
2009 2010 2011
February 28, 2012 Indra (IDR.MC)
Goldman Sachs Global Investment Research 21
Ratings, coverage groups and views and related definitions
Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy
or Sell on an Investment List is determined by a stock's return potential relative to its coverage group as described below. Any stock not assigned
as a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment
Lists to a global guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular
coverage group may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent
investment recommendations focused on either the size of the potential return or the likelihood of the realization of the return.
Return potential represents the price differential between the current share price and the price target expected during the time horizon associated
with the price target. Price targets are required for all covered stocks. The return potential, price target and associated time horizon are stated in
each report adding or reiterating an Investment List membership.
Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at
http://www.gs.com/research/hedge.html. The analyst assigns one of the following coverage views which represents the analyst's investment
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following 12 months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook
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outlook over the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation.
Not Rated (NR). The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in
an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman Sachs Research has suspended the investment rating and price target for this stock, because there is not a sufficient fundamental basis
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suspended coverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The information is not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded.
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February 28, 2012 Indra (IDR.MC)
Goldman Sachs Global Investment Research 22
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