1 Edelweiss Securities Limited
CONTENTS
Latest Research
• Adani Power - In line performance; Reduce • Cummins - Market leader feels the heat; Buy • DLF - Debt pangs; Hold • GMR Infrastructure - ‘Extraordinaries’ galore; Buy • IRB Infrastructure - Firmly on track; Buy • LIC Housing Finance - Provisioning dents earnings; NIMs dip further; Hold • Mahindra Satyam - Getting back on track; Not Rated • Mundra Port & SEZ - Delivering on promises; Buy • Pantaloon Retail - Deteriorating fundamentals; downgrade to Hold • REC - Commendable liability management; Buy • Reliance Capital - High interest cost offsets capital gain benefit; Buy • Shree Renuka Sugars - Huge forex loss rubs it in; downgrade to Reduce • Tata Steel - European business surprises positively; Buy • Voltas - Volt to uncertainty; Hold • Banking - Tête-à-tête with Moody’s: Adverse scenario to aggravate GNPAs; sector
update • IIP - Weakness intensifies • Corporate Action Tracker Regular Features
• Sales Trader’s Commentary
• Insider Trades & Bulk Deals
• Technical Updates
• Eye Catchers
FIRST CALL DAILY
India Equity Research November 14, 2011
Open Interest ( IN R mn)Vo lume 11-N o v-11 9-N o v-11% C hangeFutures 509,523 509,286 0.0Call 347,072 335,132 3.6Put 411,803 417,949 (1.5)Total 1,268,397 1,262,367 0.5
P ut C all R at io sVo lume 11-N o v-11 9-N o v-11% C hangePCR 0.93 0.94 (1.6)WPCR 1.22 1.05 16.2OI PCR 1.17 1.24 (5.1)Total OI/ Vol 1.09 1.16 (6.4)Nifty IVs at 22 - 25% levels.FII Activity* (INR M n) (9-Nov)
Sectoral Movements % ChangeTicker 11‐Nov‐11 1 D 1 M 3 M 1 YBanking 10,687 (3.0) (3.4) (8.2) (24.6) IT 6,169 (1.0) 0.8 13.9 (7.4) Pharmaceuticals 6,047 0.2 2.5 (0.0) (8.2) Oil 8,911 0.8 0.6 5.9 (17.0) Power 2,175 (1.0) 0.3 (4.9) (30.3) Auto 9,138 0.6 3.3 7.1 (9.8) Metals 11,270 (2.3) (0.5) (8.4) (33.8) Real Estate 1,810 (2.2) (0.9) 0.1 (48.3) FMCG 4,235 0.1 6.1 8.3 15.7 Capital Goods 10,611 (2.3) (3.9) (12.8) (33.9)
India Change in %11‐Nov‐11 1‐d 1‐mo 3‐mo
Nifty 5,169 (1.0) 0.7 1.9 Sensex 17,193 (1.0) 0.6 2.1 CNX 500 4,101 (1.1) 0.2 (0.5)
Global Indices11‐Nov‐11 1‐d 1‐mo 3‐mo
DJIA 12,154 2.2 4.4 7.9 NASDAQ 2,679 2.0 0.4 6.8 Hang Seng 19,577 2.3 5.8 (0.2) Nikkei 225 8,617 1.2 (1.5) (3.9)
Net Inv (INR Bn)8‐Nov‐11 Buy Sell NetFII Cash 20.8 16.6 4.2 FII F&O 163.7 175.5 (11.7) MF Cash 3.9 5.7 (1.8)
Value Traded ‐ India (INR Bn) Change in %11‐Nov‐11 1‐d 1‐mo 3‐mo
BSE Cash 26.2 1.8 (3.3) 10.4 NSE Cash 114.6 4.0 0.0 12.0 NSE F&O 1,165.6 (30.5)
Forex/Money Market Change in %11‐Nov‐11 1‐d 1‐mo 3‐mo
INR/USD 50.1 0.1 (1.6) (9.4) USD/EUR 1.4 0.1 (0.9) (4.7) USD/YEN 0.0 0.1 (0.0) 0.4 10 Yr G-Sec 9.0 0.5 2.2 8.2
Commodities (USD/Mt ton) Change in %11‐Nov‐11 1‐d 1‐mo 3‐mo
Copper 7,620.5 2.2 4.8 (14.0) Aluminium 2,144.4 1.0 (2.3) (9.9) *Gold 1,792.1 0.2 6.6 2.6 *Silver 34.7 0.1 7.9 (11.2) **NYMEX 99 1.2 15.4 15.5 *USD/Troy Ounce **USD/bbl
Agri Commodities (INR/QT) Change in %11‐Nov‐11 1‐d 1‐mo 3‐mo
Sugar 3,195.0 (0.3) 6.3 7.7 ^INR/Maund ^^INR/KG
2 Edelweiss Securities Limited
First Call
RESULTS FOR THE DAY
STOCKS IN NEWS
Kingfisher to sell property to fly out of debt crisis (ET)
Reliance, BP offer to share KG-d6 infrastructure with state-run cos (ET)
Cairn India stops operations in 2 blocks (ET)
Lanco infra lines up INR24k-cr capex despite coal issues (ET)
NMDC, Severstal ink pact for K'taka plant (DNA)
Coal India has been asked by the coal ministry to implement pricing based on gross calorific value, or GCV, from January 2012, (DNA)
Bharti Airtel, along with US giant Honeywell Inc, is set to launch a joint venture for home security systems linked to mobile phones. (DNA)
GAIL India Ltd has decided to shift its planned floating storage regasification unit (FSRU) for the east coast to Dhamra in Orissa from West Bengal due to lack of suitable location. (DNA)
Jindal Steel and Power Ltd eyes 10m Bolivia ore exports in 5 years (DNA)
Hero motorcycle likely to set up two more plants (MINT)
Ranbaxy’s malaria drug awaits international nod (BS)
Name of company Q2FY12E Q2FY11 Y‐o‐Y Q1FY12 Q‐o‐Q
Adani Enterprises 5,359 5,087 5.4 5,698 (5.9)
Ess Dee Aluminum 265 405 (34.6) 205 29.3
Bhushan Steel 1,519 2,590 (41.3) 2,100 (27.6)
Cipla 2,886 2,490 15.9 2,423 19.1
JP Associates 783 1,155 (32.2) 1,072 (27.0)
Zuari Industries 575 814 (29.3) 300 91.7
Tata Motors 19,910 20,954 (5.0) 20,568 (3.2)
India Cements 709 (336) (310.9) 1,020 (30.5)
Mahindra & Mahindra 8,072 7,273 11.0 6,049 33.4
Jindal Steel & Power 5,861 8,942 (34.5) 9,188 (36.2)
Shiv-Vani Oil & Gas Exploration 609 326 86.8 683 (10.8)
BHEL 12,105 11,423 6.0 8,155 48.4
BGR Energy 650 778 (16.5) 502 29.5
Simplex Infra 168 269 (37.5) 241 (30.3)
Cox and Kings 282 349 (19.2) 380 (25.8)
Tata Power 6,230 5,674 9.8 5,542 12.4
Phoenix Mills 279 221 26.1 272 2.6
Gujarat State Petronet Ltd 1,228 915 34.2 1,374 (10.6)
PAT
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First Call
SALES TRADERS COMMENTARY
The Indian equity market continued to drop for the second day on Friday as industrial production growth fell to two year low of 1.9% in September. The Sensex and Nifty dipped 1% each and the latter closed below 5200. Selling was seen in financials, metal, capital goods, realty and PSU stocks.
The Sensex closed at 17192, down 169 points, while Nifty slipped 52 points to end the day at 5168.
Major gainers were Mahindra & Mahindra (3.12%), Sun Pharmaceutical Industries (2.48%), Reliance Industries (2.23%), Hero Honda Motors (1.85%), Bajaj Auto (1.64%), and Wipro (1.35%).
Major losers were ICICI Bank (4.55%), Hindalco Industries (4.31%), Tata Steel (4.19%), State Bank of India (3.48%), Larsen & Toubro (3.30%), and Jaiprakash Associates (3.00%).
The Oil & Gas index was up 0.79%. Major gainers were Reliance Industries (2.23%), Oil India (0.8%) and Cairn India (0.43%).
The Bankex was down 3.03%. Major losers were I C I C I Bank (4.55%), H D F C Bank (2.83%), Bank of Baroda (1.67%), Federal Bank (1.26%) and Canara Bank (1.01%).
The Metal index slipped 2.33%. Major losers were Hindalco Industries (4.31%), Bhushan Steel (3.08%), National Aluminium Company (2.6%), Hindustan Zinc (2.2%) and Jindal Steel & Power (2.08%).
The Capital Goods index was down 2.32%. Major losers were BGR Energy Systems (4.74%), Alstom Projects India (1.69%), BEML (1.67%), Bharat Heavy Electricals (1.46%) and A B B (0.56%).
Major losers in the mid-cap space were A2Z Maintenance & Engineering Services (5.43%), CORE Education and Technologies (4.21%), A I A Engineering (1.84%), Alstom Projects India (1.69%) and Aban Offshore (1.55%).
Major losers among small caps were Trident (2.16%), Adhunik Metaliks (1.24%), Provogue (India) (0.89%), INEOS ABS (India) (0.64%) and Action Construction Equipment (0.52%).
Globally, Asian indices ended on a higher note while European indices were also trading reflecting similar sentiments.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Adani Power (APL) reported PAT of INR1.8bn in Q2FY12. Adjusted for forex related fluctuations of INR1.2bn, earnings are in line with our INR3bn estimate. However, considering marginal delay in commissioning of pipeline projects and lower than expected PLF we have recalibrated FY12E and FY13E earnings. Hence, our revised SOTP is INR78/share (INR 90/share earlier). Maintain ‘REDUCE’ as fuel supply issues persist. Adjusted earnings in line APL reported Q2FY12 earnings of INR1.8bn which include MTM loss of INR558mn on derivative instruments and forex fluctuations on creditor dues aggregating INR939mn. Adjusting for these, earnings are in line with our estimate and significantly higher than consensus estimate of INR2.2bn.
Gross merchant realisation high at INR4.7/kwh The key reason behind the robust earnings was high gross merchant realisation of INR4.7/kwh (open access and transmission related cost of INR0.3/kwh booked in other expenses) and maintaining costs at the same level. PLFs were at 75%, but auxillary consumption was high at ~9% against the normalised 7-8%.
Capacity addition behind schedule; revising down FY12‐13 earnings APL is slightly behind schedule with respect to its capacity addition plans and is likely to end FY12 with 3,300 MW, of which 1x660 MW may contribute marginally to earnings. However, in terms of installed capacity, we could see ~ 5GW as most of these units will be in the testing/synchronisation stage. PLF during H1 has been lower than our expectation of 91% for FY12. Hence, we have revised our earnings estimates down for FY12 and FY13 by 49% and 28%.
Outlook and valuations: Fuel issues persist; maintain ‘REDUCE’ In addition to the fuel linkage issue (domestic coal supplies), the recent coal pricing regulation in Indonesia could likely impact fuel costs going ahead. This, along with delay in capacity addition, has impacted our SOTP by INR12 to INR78/share. We maintain ‘REDUCE/SU’ recommendation/rating on the stock.
RESULT UPDATE
ADANI POWER In line performance
EDELWEISS 4D RATINGS
Absolute Rating REDUCE
Rating Relative to Sector Underperformer
Risk Rating Relative to Sector Low
Sector Relative to Market Underweight
MARKET DATA (R: ADAN.BO, B: ADANI IN)
CMP : INR 82
Target Price : INR 78
52-week range (INR) : 145 / 76
Share in issue (mn) : 2,180.0
M cap (INR bn/USD mn) : 180 / 3,578
Avg. Daily Vol.BSE/NSE(‘000) : 1,257.5
SHARE HOLDING PATTERN (%)
* Promoters pledged shares (% of share in issue)
: 39.4
PRICE PERFORMANCE (%)
Stock Nifty
EW Power Index
1 month 4.9 10.7 7.3
3 months (9.5) (0.9) (6.4)
12 months (39.9) (15.9) (17.9)
Shankar.K +91 22 4040 7412 [email protected] Santosh Hiredesai +91 22 6620 3027 [email protected]
India Equity Research| Power
November 11, 2011
Financials (INR mn)
Year to March Q2FY12 Q2FY11 % Chg Q1FY12 % Chg FY11 FY12E Net revenues 10,724 3,952 171.4 8,187 31.0 21,352 42,566 EBITDA 5,194 2,283 127.6 4,102 26.6 12,205 23,698 Adj profit 2,933 1,258 133.1 1,769 65.9 5,136 11,508 Diluted P/E (x) 35.0 17.1 EV/EBITDA (x) 34.2 22.1 ROAE (%) 8.5 16.1
Note: Quarterly nos. are standalone, FY11 – FY12E are consolidated
Promoters*73.5%
MFs, FIs & Banks0.9%
FIIs10.3%
Others15.3%
Power
2 Edelweiss Securities Limited
Table 1: SOTP Valuation
Source: Edelweiss research
Unit MW Stake NPV @ Ke 14%
(INR mn) APL's share INR/share
Mundra I & II 1,320 100% 45,407 45,407 19 Mundra III 1,320 100% 31,056 31,056 13 Mundra IV 1,980 100% 20,497 20,497 9 Tirora 1,980 100% 31,486 31,486 13 Tirora II 1,320 100% 27,810 27,810 12 Kawai 1,320 100% 19,514 19,514 8 Power 9,240 175,768 175,768 FY12 Cash - Corporate Debt 10,491 4 Total 78
Financial snapshot (INR mn) Year to March Q2FY12 Q2FY11 % Change Q1FY12 % Change FY11 FY12E FY13E Net revenues 10,724 3,952 171.4 8,187 31.0 21,352 42,566 114,134 Cost of operations 4,377 1,388 215.3 3,333 31.3 7,213 15,312 53,666 Staff costs 120 70 72.4 119 0.9 322 711 1,999 Other operating expenses 1,033 212 388.3 633 63.1 1,612 2,844 7,997 Total expenditure 5,530 1,669 231.3 4,085 35.4 9,147 18,867 63,662 EBITDA 5,194 2,283 127.6 4,102 26.6 12,205 23,698 50,472 Depreciation & amortization 1,053 359 193.7 1,040 1.3 1,886 4,255 12,470 EBIT 4,141 1,924 115.2 3,062 35.2 10,319 19,444 38,002 Other income 6 - 81 (92.0) 180 241 351 Interest 1,336 455 193.8 886 50.8 2,366 6,178 18,976 Profit before tax 2,253 1,469 53.4 2,256 (0.1) 8,132 13,507 19,376 Provision for taxes 478 211 127.0 488 (1.9) 3,000 1,998 3,301 Minority interest (4) Profit after tax and min. int. 1,775 1,258 41.0 1,769 0.4 5,136 11,508 16,075 Reported net profit 1,775 1,258 41.0 1,769 0.4 5,132 11,508 16,075 Adjustments 1,158 - - - - -Adjusted net profit 2,933 1,258 133.1 1,769 65.9 5,136 11,508 16,075 Equity capital (FV INR 10) 21,800 21,800 21,800 21,800 23,932 23,932 No. of shares (mn) 2,180 2,180 2,180 2,180 2,393 2,393 Adj. EPS (INR) 1.3 0.6 0.8 2.4 4.8 6.7 As % of net revenues Direct costs 40.8 35.1 40.7 33.8 36.0 47.0 Employee cost 1.1 1.8 1.5 1.5 1.7 1.8 Other operating expenses 9.6 5.4 7.7 7.6 6.7 7.0 EBITDA 48.4 57.8 50.1 57.2 55.7 44.2 Reported net profit 16.5 31.8 21.6 24.0 27.0 14.1 Tax rate 21.2 14.3 21.6 36.9 14.8 17.0
Note: Quarterly nos. are standalone, FY11 – FY13E are consolidated
Adani Power
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Company Description APL commercialised its first unit of 330 MW at Mundra, Gujarat, in 2009 and scaled up plans to build India’s largest and one of the world’s top 5 single location thermal power plants with a capacity of 4,620 MW. The company has also made inroads into power generation in Maharashtra, Rajasthan and Madhya Pradesh with an ambitious vision of being a 20,000 MW company by 2020. It commissioned the first supercritical 660 MW unit in the country and also the world’s first supercritical technology project to have received ‘clean development mechanism (CDM) project’ certification from United Nations Framework Convention on Climate Change (UNFCCC).
Investment theme The company has operational capacity of 1.98 GW (at Mundra, Gujarat) and another 7.2 GW to be commissioned by FY14. APL envisages achieving total commercial capacity of 20 GW by FY20. The company has a good blend of projects in terms of diverse locations, imported and domestic coal, long-term PPAs and merchant sales. Out of the expected 9.24 GW capacity by FY14, APL plans to sell ~80% (7.14 GW) under long-term PPAs and the balance in merchant market which imparts earnings visibility. APL’s entire capacity (9.24 GW) is thermal with a blend of imported (AEL) and domestic (CIL) coal procured through linkages. Though linkages are in place (except 1.3 GW Kawai where linkage is applied for) we anticipate risk to domestic coal supply because of the likely production shortage from CIL in the medium term. The Bunyu mines (reserves of 140 MT) owned by AEL can scale up to ~10 MTPA, which will be sufficient to fuel only ~2.5 GW capacity, but supplies from other overseas mines acquired by AEL are expected only post FY15. Hence during FY13-15 coal for additional capacities will have to be procured on spot basis until domestic supply improves, impacting earnings.
Key Risks CIL honouring its coal contracts
The company expects domestic linkages from CIL to meet coal requirements for much of the 9,240 MW capacity. Our hypothesis is that CIL will not be able to honour its existing contracts in totality (we have factored in 30% of the coal requirement of Mundra IV i.e. 3x660 and Tirora I i.e. 3x660 to be met by CIL till 2015) due to current problems in scaling up and logistics (rake availability). CIL honouring its existing contracts (pooling, imported, etc) at the current price level is a risk to our call. Commissioning of plants ahead of CEA dates
We have assumed the timeline of commissioning of power units based on the recent status updated by the CEA. However, faster execution and commissioning of plants ahead of the expected schedule (gives them time to generated power and sell on merchant basis) is a risk to our assumptions which is in line with the CEA schedule report.
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Power
Financial Statements
Income statement (INR mn) Year to March FY09 FY10 FY11 FY12E FY13ENet revenue - 4,349 21,352 42,566 114,134Cost of Operations - 1,667 7,213 15,312 53,666 Other operating expenses 55 190 1,612 2,844 7,997 Employee costs - 46 322 711 1,999 Total operating expenses 55 1,903 9,147 18,867 63,662 EBITDA (55) 2,446 12,205 23,698 50,472 Depreciation and amortisation - 353 1,886 4,255 12,470 EBIT (55) 2,092 10,319 19,444 38,002 Other income - 319 180 241 351 Interest expenses - 377 2,366 6,178 18,976 Profit before tax (55) 2,035 8,132 13,507 19,376 Provision for tax - 327 3,000 1,998 3,301 Core profit (55) 1,708 5,132 11,508 16,075 Minority interest + pre-acquisition profit (55) 1,708 5,132 11,508 16,075 Minority interest (6) (1) (4) - - Profit after minority interest (50) 1,709 5,136 11,508 16,075 Basic shares outstanding (mn) 2,180 2,180 2,180 2,393 2,393 Basic EPS (INR) - 0.8 2.4 4.8 6.7 Diluted equity shares (mn) 2,180 2,180 2,180 2,393 2,393 Diluted EPS (INR) - 0.8 2.4 4.8 6.7
Common size metrics ‐ as % of net revenues Year to March FY09 FY10 FY11 FY12E FY13EOperating expenses - 43.8 42.8 44.3 55.8Depreciation - 8.1 8.8 10.0 10.9 Interest expenditure - 8.7 11.1 14.5 16.6 EBITDA margins - 56.2 57.2 55.7 44.2 Net profit margins - 39.3 24.0 27.0 14.1
Growth ratios (%) Year to March FY09 FY10 FY11 FY12E FY13ERevenues - - 391.0 99.4 168.1EBITDA - - 399.0 94.2 113.0 PBT - - 299.6 66.1 43.5 Net profit - - 200.5 124.1 39.7 EPS - - 200.5 104.1 39.7
5 Edelweiss Securities Limited
Adani Power
Balance sheet (INR mn) As on 31st March FY09 FY10 FY11 FY12E FY13EEquity capital 18,420 21,800 21,800 23,932 23,932Reserves & surplus 4,517 35,980 41,073 56,112 72,187 Shareholders funds 22,937 57,780 62,873 80,044 96,119 Minority interest (BS) 699 1,023 5,663 - - Secured loans 40,897 100,220 204,132 297,311 325,064 Unsecured loans 9,000 5,485 40,895 41,522 50,616 Borrowings 49,897 105,705 245,027 338,833 375,680 Deferred tax liability - 120 3,120 3,120 3,120 Sources of funds 73,533 164,628 316,683 421,998 474,920 Gross block 3,472 28,549 90,283 317,469 348,293 Depreciation 104 678 2,811 7,066 19,536 Net block 3,368 27,871 87,472 310,404 328,757 Capital work in progress 65,889 127,691 236,909 119,623 133,200 Total fixed assets 69,257 155,562 324,381 430,027 461,957 Investments - - 100 100 100 Inventories - 95 2,836 1,914 6,708 Sundry debtors - 2,563 4,174 8,868 23,778 Cash and equivalents 5,585 11,654 12,551 11,592 23,491 Loans and advances 4,163 9,406 5,844 5,844 5,844 Total current assets 9,749 23,718 25,405 28,218 59,821 Sundry creditors and others 5,620 14,652 33,203 36,348 46,958 Total current liabilities & provisions 5,620 14,652 33,203 36,348 46,958 Net current assets 4,129 9,066 (7,798) (8,129) 12,863 Others 147 - - - - Uses of funds 73,533 164,628 316,683 421,998 474,920 Book value per share (INR) 10.5 26.5 28.8 33.4 40.2
Free cash flow (INR mn) Year to March FY09 FY10 FY11 FY12E FY13ENet profit (50) 1,709 5,136 11,508 16,075Depreciation - 353 1,886 4,255 12,470 Deferred tax - 327 3,000 - - Others (1,428) (2,103) 2,189 5,937 18,625 Gross cash flow (1,478) 287 12,211 21,700 47,171 Less: Changes in WC (1,456) (1,131) 3,430 627 9,094 Operating cash flow (22) 1,418 8,781 21,073 38,077 Less: Capex 69,361 86,879 126,181 109,901 44,400 Free cash flow (69,383) (85,461) (117,400) (88,828) (6,323)
Cash flow metrics Year to March FY09 FY10 FY11 FY12E FY13EOperating cash flow (22) 1,418 8,781 21,073 38,077Investing cash flow (45,233) (79,494) (139,676) (109,659) (44,049) Financing cash flow 48,920 84,144 131,792 87,628 17,871 Net cash flow 3,664 6,068 897 (958) 11,898 Capex (69,361) (86,879) (126,181) (109,901) (44,400) Share issuance/(buyback) 26 34,259 - - -
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Power
Profitability & efficiency ratios Year to March FY09 FY10 FY11 FY12E FY13EROAE (%) nm 4.2 8.5 16.1 18.3ROACE (%) nm 1.8 4.3 5.3 8.5 Debtors days - 108 58 56 52 Current ratio 1.7 1.6 0.8 0.8 1.3 Debt/EBITDA nm 43.2 20.1 14.3 7.4 Fixed asset turnover (x) - 0.3 0.4 0.2 0.4 Average working capital turnover - (2.2) (1.9) (2.1) (7.5) Average capital employed turnover (x) - - 0.1 0.1 0.3 Debt/Equity 2.2 1.8 3.9 4.2 3.9 Adjusted debt/equity 2.2 1.8 3.9 4.2 3.9
Operating ratios Year to March FY09 FY10 FY11 FY12E FY13ETotal asset turnover - - 0.1 0.1 0.3Fixed asset turnover - 0.3 0.4 0.2 0.4 Equity turnover - 0.1 0.4 0.6 1.3
Du pont analysis Year to March FY09 FY10 FY11 FY12E FY13ENP margin (%) - 39.3 24.1 27.0 14.1Total assets turnover - - 0.1 0.1 0.3 Leverage multiplier 3.2 3.0 4.0 5.2 5.1 ROAE (%) - 4.2 8.5 16.1 18.3
Valuation parameters Year to March FY09 FY10 FY11 FY12E FY13EDiluted EPS (INR) - 0.8 2.4 4.8 6.7CEPS (INR) - 0.8 1.8 6.6 11.9 Diluted PE (x) nm 105.1 35.0 17.1 12.3 Price/BV (x) 7.8 3.1 2.9 2.5 2.1 EV/Sales (x) - 63.2 19.6 12.3 4.8 EV/EBITDA (x) nm 112.3 34.2 22.1 10.9
7 Edelweiss Securities Limited
Company Absolute
reco
Relative
reco
Relative
risk
Company Absolute
reco
Relative
reco
Relative
Risk
Adani Enterprises HOLD SU M Adani Power REDUCE SU L
CESC BUY SU H GMR Infrastructure BUY SO H
GVK Power and Infra HOLD SO H JSW Energy REDUCE SU H
Lanco Infratech BUY SO H Marg BUY None None
Mundra Port & SEZ BUY SO M Navabharat Ventures BUY None None
NTPC HOLD SU L Power Grid Corp of India BUY SP L
PTC India BUY SO L Reliance Infrastructure BUY SO M
Tata Power Co BUY SO M
RATING & INTERPRETATION
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Cummins India (CIL) reported flattish revenues for the quarter on the back of slowdown in power generation business even as higher costs impacted EBIDTA margins which dipped 350 bps+ YoY. The management has further toned down its growth guidance from 15% earlier to a lower number of 5%‐10% with a 100 bps decline in PBT margins over 1HFY12 levels. We trim our earnings for FY12E and FY13E by 16 % and 20 %, building in lower volumes in domestic market and lower margins. Sharp drop in power generation market impacts profitability Cummins reported a 5% YoY decline in domestic business whereas export grew 14% YoY. In the domestic market, power generation declined 20% YoY while industrial business fell 6% YoY with auto reporting a sharp growth of 50% YoY albeit on a lower base. Change in revenue mix with increasing share of low KVA engines coupled with rising input costs impacted CIL’s OPMs which declined severely by 350 bps YoY and 140 bps QoQ.
Management cuts revenue, margin guidance The management has cut revenue guidance from 10%-15% for FY12E to 5%-10% on the back of a slowdown in the domestic business, largely in HHP (high horse power) power generation business. It also expects 2HFY12 PBT margin to be lower from 2QFY12 levels due to continued cost pressures and adverse revenue mix. While a pickup in demand and stabilization of inflationary pressures could provide some comfort to profitability, the management expects near term margins to remain under pressure. However, with respect to pricing (even amid a market growth slowdown), the management has shown confidence to sustain pricing across product range despite intensifying competition.
Outlook and valuations: Near‐term slowdown; maintain ‘BUY’ While the near term outlook for Cummins remains weak, given the slowdown in domestic business, we remain optimistic about its long term business prospects due to the strong demand dynamics in diesel and gas engines market. We maintain our BUY/S0 rating for Cummins with a revised TP of INR 407(+ 15% upside).
RESULT UPDATE
CUMMINS INDIA Market leader feels the heat
EDELWEISS 4D RATINGS
Absolute Rating BUY
Rating Relative to Sector Outperformer
Risk Rating Relative to Sector Low
Sector Relative to Market Equalweight
MARKET DATA (R: CUMM.BO, B: KKC IN)
CMP : INR 354
Target Price : INR 407
52-week range (INR) : 579 / 349
Share in issue (mn) : 277.2
M cap (INR bn/USD mn) : 98 / 1,955
Avg. Daily Vol.BSE/NSE(‘000) : 266.6
SHARE HOLDING PATTERN (%)
* Promoters pledged shares (% of share in issue)
: NIL
PRICE PERFORMANCE (%)
Stock Nifty
EW Capital Goods Index
1 month (6.8) 10.7 2.1
3 months (15.4) (0.9) (6.7)
12 months (33.2) (15.9) (27.1)
Amit Mahawar +91 22 4040 7451 [email protected] Rahul Gajare +91 22 4063 5561 [email protected] Swarnim Maheshwari +91 22 4040 7418 [email protected]
India Equity Research| Engineering and Capital Goods
November 11, 2011
Financials (INR mn)
Year to March Q2FY12 Q2FY11 % Chg Q1FY12 % Chg FY11 FY12E Net revenues 10,698 10,675 0.2 10,219 4.7 39,454 42,318 EBITDA 1,554 1,933 (19.6) 1,623 (4.2) 6,635 6,348 Adj. Net profit 1,286 1,679 (23.4) 1,397 (8.0) 5,910 5,398 Diluted EPS (INR) 4.6 6.1 (23.4) 5.0 (8.0) 21.3 19.5 Diluted P/E (x) 16.6 18.2 EV/EBITDA (x) 13.6 14.3 ROAE (%) 35.1 28.4
Promoters*51.0%
MFs, FIs & Banks21.9%
FIIs11.2%
Others15.9%
Engineering and Capital Goods
2 Edelweiss Securities Limited
Concall highlights • The management cut FY12E revenue guidance for the third time from 20% originally to
5%-10% now, owing to a sustained slowdown in power generation business.
• Domestic sales accounts for 70% of 2QFY12 revenues while export accounts for the rest.
• Within power generation revenues - which declined by 20% YoY - telecom declined by 15% YoY, retail grew by 10% YoY and commercial real estate grew slower by 3-4 %.
• Cummins derives 60%-65% of overall revenues from the standby power segment while base load revenue share is lower at 10%-15% of revenues. The balance comes from distribution business.
• Less than 160 KVA segment contributes 35% of Cummins power generation revenues while 20% from 160-380 KVA, 15% from 400-625 KVA and the balance from 750 KVA or more.
• Cummins currently manufactures 25 engines (HHP) per day. This would go up by 10 engines per day over the next 1-2 years post the Phaltan capex.
• Revenue from Phaltan is likely to be around 10% of CIL’s overall revenues going ahead.
Chart 1: Revenue growth slowed owing to de‐growth in domestic market
Source: Company, Edelweiss research
(60.0)
(30.0)
0.0
30.0
60.0
90.0
0
2,500
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(%)
(INR
mn)
Revenue Revenue growth (YoY) Revenue growth (QoQ)
Cummins India
3 Edelweiss Securities Limited
Chart 2: Unfavorable revenue mix coupled with higher cost impacted margins
Source: Company, Edelweiss research
Chart 3: Revenue break up in Q2FY12
Source: Company, Edelweiss research
7.0
10.6
14.2
17.8
21.4
25.0
0
500
1,000
1,500
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2,500
1QFY
08
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12
(%)
(INR
mn)
EBITDA EBITDA margins
Power Gen30%
Industry10%
Auto10%
Distribution20%
Telecom10%
Others20%
Engineering and Capital Goods
4 Edelweiss Securities Limited
Financial snapshot (INR mn) Year to March Q2FY12 Q2FY11 % Change Q1FY12 % Change FY11 FY12E FY13E Net revenues 10,698 10,675 0.2 10,219 4.7 39,454 42,318 48,716 Raw material 7,158 6,928 3.3 6,713 6.6 26,291 28,993 33,427 Staff costs 750 672 11.6 698 7.5 2,546 2,926 3,369 Other operating expenses 1,236 1,141 8.3 1,186 4.2 3,983 4,052 4,353 Total expenditure 9,144 8,742 4.6 8,597 6.4 32,820 35,971 41,149 EBITDA 1,554 1,933 (19.6) 1,623 (4.2) 6,635 6,348 7,566 Depreciation 98 93 5.9 94 5.2 366 480 629 Other income 369 444 (17.0) 392 (6.1) 1,774 1,564 1,705 Interest 5 4 17.1 4 37.1 19 37 56 Profit before tax 1,819 2,281 (20.2) 1,918 (5.1) 8,024 7,395 8,587 Tax 534 602 (11.3) 661 (19.2) 2,114 1,997 2,318 Core profit 1,286 1,679 (23.4) 1,257 2.3 5,910 5,398 6,268 Extraordinary items - - 514 NM - - -Reported net profit 1,286 1,679 (23.4) 1,772 (27.4) 5,910 5,398 6,268 Adjusted net profit 1,286 1,679 (23.4) 1,397 (8.0) 5,910 5,398 6,268 Equity capital (FV INR 2) 554 554 554 554 554 554 No. of shares (mn) 277 277 277 277 277 277 Diluted EPS (INR) 4.6 6.1 (23.4) 5.0 (8.0) 21.3 19.5 22.6 As % of net revenues - - - - - -Raw material 66.9 64.9 65.7 66.6 68.5 68.6 Employee cost 7.0 6.3 6.8 6.5 6.9 6.9 Other operating expenses 11.5 10.7 11.6 10.1 9.6 8.9 EBITDA 14.5 18.1 15.9 16.8 15.0 15.5 Reported net profit 12.0 15.7 17.3 15.0 12.8 12.9
Cummins India
5 Edelweiss Securities Limited
Company Description KKC is a subsidiary of Cummins, US, which holds 51% stake in the company. It is a leading manufacturer of medium-high HP range of diesel engines in India with manufacturing facilities in Pune and Daman.
Investment Theme KKC is a play on the multiple segments of power requirement, rising mobile penetration across rural and suburban geographies, strong coal requirement (driving demand in mining), and continued growth in automobile sales on the back of large potential in environment-friendly natural gas fuel-based engines. We expect KKC to benefit from growth in the above segments. Furthermore, KKC will benefit from Phaltan expansion which should cater to KKC’s growing business demands from FY12.
Key Risks Any major slowdown in the domestic market (70% of the total revenues) would pose a significant down side risk to our estimates.
6 Edelweiss Securities Limited
Engineering and Capital Goods
Financial Statements
Income statement (INR mn) Year to March FY09 FY10 FY11 FY12E FY13EIncome from operations 33,043 28,449 39,454 42,318 48,716Materials costs 22,346 18,555 26,291 28,993 33,427 Employee costs 2,130 1,953 2,546 2,926 3,369 Other manufacturing expenses 3,794 2,667 3,983 4,052 4,353 Total operating expenses 28,270 23,174 32,820 35,971 41,149 EBITDA 4,772 5,274 6,635 6,348 7,566 Depreciation & Amortization 456 361 366 480 629 EBIT 4,316 4,914 6,268 5,868 6,938 Other income 1,507 1,216 1,774 1,564 1,705 Interest expenses 26 21 19 37 56 Profit before tax 5,798 6,109 8,024 7,395 8,587 Provision for tax 1,654 1,670 2,114 1,997 2,318 Core profit 4,144 4,438 5,910 5,398 6,268 Extraordinary income/ (loss) - 192 - - - Profit After Tax 4,144 4,630 5,910 5,398 6,268 Basic shares outstanding (mn) 277 277 277 277 277 Basic EPS (INR) 15.0 16.0 21.3 19.5 22.6 Diluted equity shares (mn) 277 277 277 277 277 Diluted EPS (INR) 15.0 16.0 21.3 19.5 22.6 CEPS (INR) 16.3 17.5 22.6 21.2 24.9 Dividend per share (INR) 7.6 10.0 12.5 12.5 12.5 Dividend payout (%) 50.7 62.5 58.5 64.2 55.3
Common size metrics ‐ as % of net revenues Year to March FY09 FY10 FY11 FY12E FY13EOperating expenses 67.6 65.2 66.6 68.5 68.6Materials costs 6.4 6.9 6.5 6.9 6.9 Employee expenses 11.5 9.4 10.1 9.6 8.9 Other manufacturing expenses (Growth 85.6 81.5 83.2 85.0 84.5 Depreciation 1.4 1.3 0.9 1.1 1.3 Interest expenditure 0.1 0.1 - 0.1 0.1 EBITDA margins 14.4 18.5 16.8 15.0 15.5 Net profit margins 12.5 15.6 15.0 12.8 12.9
Growth ratios (%) Year to March FY09 FY10 FY11 FY12E FY13ERevenues 25.6 (13.9) 38.7 7.3 15.1EBITDA (21.3) 10.5 25.8 (4.3) 19.2 PBT (16.6) 5.4 31.3 (7.8) 16.1 Net profit (28.5) 7.1 33.2 (8.7) 16.1 EPS (28.5) 7.1 33.2 (8.7) 16.1
7 Edelweiss Securities Limited
Cummins India
Balance sheet (INR mn) As on 31st March FY09 FY10 FY11 FY12E FY13EEquity capital 396 396 396 396 396Reserves & surplus 13,551 15,214 17,667 19,600 22,403 Shareholders funds 13,947 15,610 18,063 19,996 22,799 Secured loans 212 86 183 433 683 Unsecured loans - - - - - Borrowings 212 86 183 433 683 Deferred tax (net) 231 169 187 187 187 Sources of funds 14,159 15,696 18,245 20,429 23,482 Gross block 7,414 7,776 9,144 11,294 14,294 Depreciation 4,324 4,440 4,734 5,214 5,843 Net block 3,090 3,337 4,411 6,081 8,452 Total fixed assets 3,090 3,337 4,411 6,081 8,452 Investments 3,993 7,329 7,255 7,255 7,255 Inventories 4,680 4,099 5,190 5,723 6,411 Sundry debtors 6,821 5,229 7,182 8,141 9,371 Cash and equivalents 323 559 1,037 811 879 Loans and advances 2,663 2,695 3,297 3,462 3,635 Other current assets 83 92 99 99 99 Total current assets 14,570 12,674 16,804 18,235 20,395 Sundry creditors and others 5,977 5,178 7,109 7,864 9,341 Provisions 1,732 2,634 3,303 3,465 3,465 Total current liabilities & provisions 7,708 7,812 10,411 11,329 12,806 Net current assets 6,862 4,862 6,393 6,906 7,588 Miscellaneous expenditure (17) - - - - Uses of funds 14,159 15,696 18,245 20,429 23,482 Book value per share (INR) 50.3 56.3 65.2 72.1 82.2
Free cash flow (INR mn) Year to March FY09 FY10 FY11 FY12E FY13ENet profit 4,144 4,630 5,910 5,398 6,268Depreciation 456 361 366 480 629 Deferred tax (78) 61 (17) - - Others (7) (1,528) (627) 37 56 Gross cash flow 4,515 3,524 5,632 5,915 6,953 Less: Changes in WC 2,304 (2,236) 1,452 740 614 Operating cash flow 2,212 5,759 4,180 5,175 6,339 Less: Capex 896 362 1,479 2,150 3,000 Free cash flow 1,316 5,397 2,701 3,025 3,339
Cash flow metrics Year to March FY09 FY10 FY11 FY12E FY13EOperating cash flow 2,212 5,759 4,180 5,175 6,339Investing cash flow 103 (3,368) (788) (2,150) (3,000) Financing cash flow (2,231) (2,155) (2,913) (3,252) (3,271) Net cash flow 84 236 478 (226) 68 Capex (896) (362) (1,479) (2,150) (3,000) Dividends paid (2,102) (2,775) (2,991) (3,465) (3,465)
8 Edelweiss Securities Limited
Engineering and Capital Goods
Profitability & efficiency ratios Year to March FY09 FY10 FY11 FY12E FY13EROAE (%) 33.2 30.0 35.1 28.4 29.3ROACE (%) 33.9 32.9 36.9 30.3 31.6 Inventory day 76 81 72 72 70 Debtors days 75 67 66 70 70 Payable days 98 102 99 99 102 Fixed asset turnover (x) 9.1 6.9 7.4 5.9 4.9 Average working capital turnover 5.9 4.9 7.0 6.4 6.7 Net Debt/Equity (0.3) (0.5) (0.4) (0.4) (0.3)
Operating ratios Year to March FY09 FY10 FY11 FY12E FY13ETotal asset turnover 3.6 2.5 3.4 3.2 3.2Fixed asset turnover 11.7 8.9 10.2 8.1 6.7 Equity turnover 2.6 1.9 2.3 2.2 2.3
Du pont analysis Year to March FY09 FY10 FY11 FY12E FY13ENP margin (%) 12.5 15.6 15.0 12.8 12.9Total assets turnover 3.6 2.5 3.4 3.2 3.2 Leverage multiplier 1.0 1.0 1.0 1.0 1.0 ROAE (%) 33.2 30.0 35.1 28.4 29.3
Valuation parameters Year to March FY09 FY10 FY11 FY12E FY13EDiluted EPS (INR) 15.0 16.0 21.3 19.5 22.6Y‐o‐Y growth (%) (28.5) 7.1 33.2 (8.7) 16.1 CEPS (INR) 16.6 17.3 22.6 21.2 24.9 Diluted PE (x) 23.7 22.1 16.6 18.2 15.7 Price/BV (x) 7.0 6.3 5.4 4.9 4.3 EV/Sales (x) 2.9 3.2 2.3 2.2 1.9 EV/EBITDA (x) 19.7 17.1 13.6 14.3 12.0
9 Edelweiss Securities Limited
Company Absolute
reco
Relative
reco
Relative
risk
Company Absolute
reco
Relative
reco
Relative
Risk
ABB India REDUCE SU L AIA Engineering HOLD SU M
Bajaj Electricals BUY SO M BGR Energy Systems HOLD SP M
Bharat Heavy Electricals HOLD SP L Crompton Greaves REDUCE SU M
Cummins India BUY SO L Havell's India BUY SO M
Jyoti Structures HOLD SP M Kalpataru Power Transmission HOLD SP M
KEC International BUY SO M Larsen & Toubro BUY SO M
Siemens BUY SO L Techno Electric & Engineering BUY None None
Thermax BUY SO L Voltamp Transformers HOLD SU M
Voltas HOLD SP L
RATING & INTERPRETATION
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Edelweiss Securities Limited
DLF’s Q2FY12 revenue and PAT were ahead of estimates due to higher-
than-expected asset sales. However, net debt increasing by INR10bn QoQ
on account of delayed receipts from asset sales and sluggish sales/leasing
activity were major setbacks. While inflow from asset sales/launches in
H2FY12 may improve the cash flow scenario, we do not see any material
debt reduction. In the absence of near-term triggers, we maintain
‘HOLD/SP’ rating with target price of INR240/share.
Asset sales lift revenues, profits, but sales volume/leasing sluggish
DLF’s Q2FY12 revenues at INR25.3bn and PAT of INR3.7bn were ahead of our estimates
of INR22.0bn and INR3.4bn respectively, largely due to higher-than-expected bookings
from FSI sales of INR6.2bn. Although EBITDA margins remained healthy at 46%, QoQ
rise in interest costs and higher tax rate of 29% resulted in low PAT margins of 15%.
Sales volumes of 1.3 msf were weak due to the absence of new launches and net
leasing was tepid at only 0.21 msf. However, the company maintains guidance of ~7-8
msf of launches in H2FY12 through projects in Gurgaon, Panchkula and Mullanpur.
Debt remains elevated; asset sales not good enough
Net debt rose by INR10bn QoQ to INR225bn because of weak volume, high
dividend/tax payments of ~INR8.3bn and capex/land purchase of INR2.3bn. While
receipts from asset sales of ~INR10bn in H2FY12 may prop up cash inflows, we believe
that DLF is having a ’treadmill effect’ as these sales may only serve to bring back net
debt to Q1FY12 levels (INR215bn) hence closure of Aman deal (INR20bn) becomes key.
Outlook and valuations: Debt reduction crucial; maintain ‘HOLD’
While DLF has made progress on the asset monetization front, weak
volumes/operational cash flows in its core business seems to have negated its debt
reduction plan. We believe that a noticeable pick-up in volume in H2FY12, driven
through launches and Aman hotels deal sailing through may improve DLF’s cash flow
profile. However, given the adverse macro-environment, any slip-ups may dent debt
reduction plans. Therefore, we maintain ‘HOLD/SP’ rating on DLF with a target price of
INR240 (INR255 earlier) on FY12E NAV.
RESULT UPDATE
DLF Debt pangs
EDELWEISS 4D RATINGS
Absolute Rating HOLD
Rating Relative to Sector Performer
Risk Rating Relative to Sector Medium
Sector Relative to Market Underweight
MARKET DATA (R: DLF.BO, B: DLFU IN)
CMP : INR 228
Target Price : INR 240
52-week range (INR) : 361 / 173
Share in issue (mn) : 1,698.1
M cap (INR bn/USD mn) : 386 / 7,695
Avg. Daily Vol.BSE/NSE(‘000) : 7,262.3
SHARE HOLDING PATTERN (%)
* Promoters pledged shares
(% of share in issue)
: NIL
PRICE PERFORMANCE (%)
Stock Nifty
EW Real
Estate Index
1 month 23.7 10.7 17.7
3 months 14.0 (0.9) 5.0
12 months (29.3) (15.9) (37.9)
Aashiesh Agarwaal, CFA
+91 22 4063 5491
Adhidev Chattopadhyay
+91 22 6623 3358
India Equity Research| Real Estate
November 11, 2011
Financials (Consolidated) (INR mn)
Year to March Q2FY12 Q2FY11 % Chg Q1FY12 % Chg FY11 FY12E
Net revenues 25,324 23,690 6.9 24,458 3.5 95,606 105,722
EBITDA 11,730 9,289 26.3 11,110 5.6 37,527 48,902
Net profit 3,724 4,184 (11.0) 3,584 3.9 16,396 17,894
Diluted EPS (INR) 9.7 10.5
Diluted P/E (x) 23.6 21.6
EV/EBITDA (x) 16.7 13.2
ROAE (%) 5.5 6.6
Promoters*
78.6%
MFs, FIs &
Banks
0.4%
FIIs
15.5%
Others
5.4%
Real Estate
2 Edelweiss Securities Limited
Financial snapshot (Consolidated) (INR mn)
Year to March Q2FY12 Q2FY11 % Change Q1FY12 % Change FY11 FY12E FY13E
Net revenues 25,324 23,690 6.9 24,458 3.5 95,606 105,722 104,788
Cost of construction (9,466) (10,142) (6.7) (9,422) 0.5 (42,999) (39,905) (37,991)
Staff costs (1,539) (1,622) (5.1) (1,456) 5.7 (5,721) (6,343) (7,335)
Other expenses (2,589) (2,638) (1.8) (2,470) 4.8 (9,358) (10,572) (10,479)
Total expenditure (13,594) (14,401) (5.6) (13,349) 1.8 (58,079) (56,820) (55,804)
EBITDA 11,730 9,289 26.3 11,110 5.6 37,527 48,902 48,983
Depreciation (1,753) (1,540) 13.9 (1,702) 3.0 (6,307) (7,071) (7,333)
EBIT 9,977 7,749 28.7 9,408 6.0 31,219 41,831 41,650
Other income 448 1,509 (70.3) 574 (22.1) 5,839 2,722 2,858
Interest (5,263) (4,338) NA (4,964) NA (17,056) (20,694) (19,980)
Profit before tax 5,161 4,920 4.9 5,018 2.9 20,002 23,859 24,529
Tax (1,475) (734) 100.9 (1,278) 15.4 (4,594) (5,965) (6,132)
Core profit 3,686 4,186 (11.9) 3,739 (1.4) 15,408 17,894 18,396
Extraordinary items 42 67 (32) 972
Minority interest - 69 NA 166 NA ( 72) - -
Share in profit from associates (5) (1) NA 42 NA 88 - -
Reported net profit 3,724 4,184 (11.0) 3,584 3.9 16,396 17,894 18,396
As % of net revenues
Cost of construction 37.4 42.8 38.5 45.0 37.7 36.3
Employee cost 6.1 6.8 6.0 6.0 6.0 7.0
Other expenses 10.2 11.1 10.1 9.8 10.0 10.0
Total expenses 53.7 60.8 54.6 60.7 53.7 53.3
EBITDA 46.3 39.2 45.4 39.3 46.3 46.7
Depreciation 6.9 6.5 7.0 6.6 6.7 7.0
EBIT 39.4 32.7 38.5 32.7 39.6 39.7
Interest expenditure 20.8 18.3 20.3 17.8 19.6 19.1
Reported net profit 14.7 17.7 14.7 17.2 16.9 17.6
Tax rate 28.6 14.9 25.5 23.0 25.0 25.0
DLF
3 Edelweiss Securities Limited
Company Description
DLF, incorporated in 1963, is one of the largest real estate development companies in India,
with a focus on residential, retail and commercial construction activities. The company is
promoted by Mr. K. P. Singh who has four decades of experience in the Indian real estate
industry. DLF went public in 2007 with the issue of ~175 mn shares at INR 525/share.
Investment Theme
~70% of land bank in super metros, metros DLF is the leader in the Indian real estate
industry in terms of developable area. It has a land bank of 359 msf of saleable area, out of
which, majority is in super metros and metros. The company has an established presence
across property development verticals, with a balanced project portfolio.
Land bank valuation
We believe there is a distinct shift in the valuation approach for real estate companies. Real
estate valuations have seen an entire cycle of being valued on a land bank valuation basis, to
that of DCF based NAV to a book value based valuation as the global markets went into a
tailspin. The land bank valuation approach was justified in a market that was awash in
liquidity. We see a similar investment environment emerging, where again valuations for
real estate companies would be on the basis of the land bank value, if it were sold in smaller
chunks – assuming all can be sold.
Key Risks
Rising debt a key concern
The debt of DLF has increased sharply post the merger of Caraf and the buyout of the CCPS.
The current net debt is INR 225 bn which the company is looking to reduce through asset
monetization. The company is targeting asset monetization of INR 60-70 bn over the next 24
- 36 months.
Delay in launches due to lack of approvals/adverse macro environment
DLF has witnessed delays in FY12 launch plans and the company intends to launch ~7-8 msf
of plotted/group housing projects in H2FY12. However, any delay in launch due to
approvals/adverse macro-environment will result in continued pressure on operating cash
flows.
4 Edelweiss Securities Limited
Real Estate
Financial Statements (Consolidated)
Income statement (INR mn)
Year to March FY09 FY10 FY11 FY12E FY13E
Income from operations 100,354 74,229 95,606 105,722 104,788
Direct costs 32,295 25,669 42,999 39,905 37,991
Employee costs 4,537 4,703 5,721 6,343 7,335
Other Expenses 7,622 8,741 9,358 10,572 10,479
Total operating expenses 44,454 39,113 58,079 56,820 55,804
EBITDA 55,900 35,116 37,527 48,902 48,983
Depreciation and amortisation 2,390 3,249 6,307 7,071 7,333
EBIT 53,511 31,866 31,219 41,831 41,650
Other income 3,960 4,280 5,839 2,722 2,858
Interest expenses 5,548 11,100 17,056 20,694 19,980
Profit before tax 51,922 25,046 20,002 23,859 24,529
Provision for tax 6,754 7,022 4,594 5,965 6,132
Core profit 45,168 18,024 15,408 17,894 18,396
Extraordinary income/ (loss) 14 (942) 972 - -
Profit After Tax 45,182 17,082 16,380 17,894 18,396
Minority interest (275) 108 (72) - -
Share in profit of associates (211) 8 88 - -
Adjusted PAT 44,696 17,198 16,396 17,894 18,396
Basic shares outstanding (mn) 1,703 1,697 1,698 1,698 1,698
Basic EPS (INR) 26.2 10.1 9.7 10.5 10.8
Diluted equity shares (mn) 1,704 1,701 1,698 1,698 1,698
Diluted EPS (INR) 26.2 10.1 9.7 10.5 10.8
Dividend per share (INR) 2.2 2.3 2.3 1.2 1.3
Dividend payout (%) 7.7 20.6 24.2 10.0 10.0
Common size metrics - as % of net revenues
Year to March FY09 FY10 FY11 FY12E FY13E
Operating expenses 44.3 52.7 60.7 53.7 53.3
Depreciation 2.4 4.4 6.6 6.7 7.0
Interest expenditure 5.5 15.0 17.8 19.6 19.1
EBITDA margins 55.7 47.3 39.3 46.3 46.7
Net profit margins 45.0 24.3 16.1 16.9 17.6
Growth ratios (%)
Year to March FY09 FY10 FY11 FY12E FY13E
Revenues (30.5) (26.0) 28.8 10.6 (0.9)
EBITDA (42.4) (37.2) 6.9 30.3 0.2
PBT (45.7) (51.8) (20.1) 19.3 2.8
Net profit (42.3) (60.1) (14.5) 16.1 2.8
EPS (44.1) (61.5) (4.5) 9.1 2.8
5 Edelweiss Securities Limited
DLF
Balance sheet (INR mn)
As on 31st March FY09 FY10 FY11 FY12E FY13E
Equity capital 3,394 3,395 3,395 3,395 3,395
Pref. Capital 13,960 59,199 18,103 18,103 18,103
Reserves & surplus 224,184 241,734 241,823 255,729 270,079
Shareholders’ funds 241,538 304,327 263,321 277,227 291,576
Minority interest (BS) 6,336 6,278 5,752 5,752 5,752
Secured loans 132,623 193,016 222,762 232,762 225,262
Unsecured loans 30,578 23,751 17,141 17,141 16,641
Borrowings 163,201 216,766 239,903 249,903 241,903
Sources of funds 411,076 527,371 508,976 532,882 539,231
Gross block 84,867 178,845 198,277 205,777 213,277
Depreciation 5,743 13,265 19,556 26,627 33,961
Net block 79,124 165,580 178,721 179,150 179,317
Capital work in progress 56,882 111,288 103,120 103,580 103,580
Total fixed assets 136,006 276,868 281,841 282,730 282,897
Goodwill 22,651 12,680 13,840 13,840 13,840
Investments 14,025 55,052 9,958 7,458 4,958
Inventories 109,282 124,806 150,388 174,925 187,351
Sundry debtors 21,648 16,190 17,257 23,172 25,838
Cash and equivalents 11,956 9,282 13,461 5,675 3,722
Loans and advances 97,120 75,933 72,712 79,653 80,385
Other current assets 76,217 46,847 78,900 77,900 76,900
Total current assets 316,224 273,058 332,717 361,325 374,196
Sundry creditors and others 41,403 46,370 92,251 93,403 95,556
Provisions 36,841 41,402 38,763 40,702 42,737
Total current liabilities & provisions 78,244 87,771 131,014 134,105 138,292
Net current assets 237,980 185,286 201,703 227,220 235,903
Net Deferred tax 414 (2,515) 1,633 1,633 1,633
Uses of funds 411,076 527,371 508,976 532,882 539,231
Book value per share (INR) 133.6 144.4 144.5 152.6 161.1
Free cash flow (INR mn)
Year to March FY09 FY10 FY11 FY12E FY13E
Net profit 45,168 18,024 15,408 17,894 18,396
Depreciation 2,390 3,249 6,307 7,071 7,333
Others (602) 7,537 10,627 18,045 17,121
Gross cash flow 46,956 28,811 32,342 43,010 42,851
Less: Changes in WC 45,213 (57,432) 4,772 33,302 10,636
Operating cash flow 1,743 86,242 27,570 9,708 32,215
Less: Capex 35,078 144,906 15,161 7,500 7,500
Free cash flow (33,335) (58,664) 12,408 2,208 24,715
Cash flow metrics
Year to March FY09 FY10 FY11 FY12E FY13E
Operating cash flow 1,743 86,242 27,570 9,708 32,215
Investing cash flow (35,901) (163,024) 40,570 (2,738) (2,142)
Financing cash flow 24,434 74,175 (64,034) (14,682) (32,026)
Net cash flow (9,724) (2,607) 4,105 (7,713) (1,953)
Capex (35,078) (144,906) (15,161) (7,500) (7,500)
Dividends paid (3,720) (3,833) (3,972) (2,094) (2,152)
Share issuance/(buyback) (1,414) (7) 1,322 - -
6 Edelweiss Securities Limited
Real Estate
Profitability & efficiency ratios
Year to March FY09 FY10 FY11 FY12E FY13E
ROAE (%) 20.6 6.6 5.5 6.6 6.5
ROACE (%) 15.1 7.3 6.4 8.2 7.9
Inventory day 1,152 1,664 1,168 1,488 1,740
Debtors days 75 93 64 70 85
Payable days 348 410 436 596 618
Cash conversion cycle (days) 879 1,348 796 961 1,208
Current ratio 4.0 3.1 2.5 2.7 2.7
Debt/EBITDA 2.9 6.2 6.4 5.1 4.9
Debt/Equity 0.7 0.7 0.9 0.9 0.8
Adjusted debt/equity 0.7 0.7 0.9 0.9 0.8
Operating ratios
Year to March FY09 FY10 FY11 FY12E FY13E
Total asset turnover 0.2 0.1 0.2 0.2 0.2
Fixed asset turnover 1.6 0.6 0.6 0.6 0.6
Equity turnover 0.5 0.3 0.4 0.4 0.4
Du pont analysis
Year to March FY09 FY10 FY11 FY12E FY13E
NP margin (%) 45.1 24.1 16.3 16.9 17.6
Total assets turnover 0.3 0.2 0.2 0.2 0.2
Leverage multiplier 1.7 1.7 1.8 1.9 1.9
ROAE (%) 20.6 6.6 5.5 6.6 6.5
Valuation parameters
Year to March FY09 FY10 FY11 FY12E FY13E
Diluted EPS (INR) 26.2 10.1 9.7 10.5 10.8
Y-o-Y growth (%) (44.1) (61.5) (4.5) 9.1 2.8
CEPS (INR) 28.2 12.5 12.8 14.7 15.2
Diluted PE (x) 8.7 22.5 23.6 21.6 21.0
Price/BV (x) 1.7 1.6 1.6 1.5 1.4
EV/Sales (x) 5.4 8.1 6.6 6.1 6.1
EV/EBITDA (x) 9.7 17.2 16.7 13.2 13.1
Dividend yield (%) 1.0 1.0 1.0 0.5 0.6
7 Edelweiss Securities Limited
Company Absolute
reco
Relative
reco
Relative
risk
Company Absolute
reco
Relative
reco
Relative
Risk
Brigade Enterprises BUY SP M DLF HOLD SP M
Jaypee Infratech HOLD SP M Mahindra Lifespace Developers BUY SP M
Oberoi Realty BUY SO L Orbit corporation HOLD SU H
The Phoenix Mills BUY SO M
RATING & INTERPRETATION
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe
within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
GMR Infrastructure reported Q2FY12 loss of INR625mn against our estimate of INR285mn mainly due to higher interest costs at DIAL, deferred tax liability in power and airport projects, admin expenses in overseas units and lower PLF at one of its power plants (marginally offset by forex gains); adjusted for these, loss would have been INR403mn. Operational performance continues to be robust and with the regulatory approval for its airport assets on the anvil, we expect an upsurge in earnings. Maintain ‘BUY’ with target price of INR47
Pax growth robust, but PLFs dip due to seasonal factors The traffic growth across airports remained strong (23% in DIAL, 20% in Istanbul and 15% in HIAL). However, there are early signs of impact from global economic weakness as sequentially, pax has fallen in the range of 2% – 7% in India. Power plants operated at PLF of ~58% against 65% last year and 75% in Q1FY12 mainly due to the maintenance shutdown at Vemagiri and lower merchant realisation at Kakinada.
Sinar Mas stake purchase in Q3; EPC margins to stabilize at 5‐6% The management has indicated that it will acquire 30% stake in Sinar Mas, the Indonesian coal mining company, through the latter’s proposed IPO and subsequent stake buys. As part of the deal, it would be eligible to receive 1 MT of coal which will gradually increase to 9 MT over a period of time at 6%‐8% discount to the benchmark index. The EPC business ‐ entirely captive ‐ is likely to deliver 5%‐6% EBITDA margins over the life of project.
Outlook and Valuation: Regulatory clarity likely; Maintain ‘BUY’ The management has indicated that the airport regulator is in an advanced stage of deciding on both ADF and tariffs for Delhi and Hyderabad which we believe would alleviate the regulatory concern on the stock. We have factored in Ahmedabad – Kishangarh mega road project and the Island Energy gas project in our valuation which stands at INR47/share (INR 56/share earlier). We are confident on an improvement in GMR’s financial performance and management’s stated objective of greater focus on cash flows. At CMP of INR 26/share, the stock is trading at 1.1x and 1.0x FY12E and FY13E P/BV. Maintain ‘BUY’.
RESULT UPDATE
GMR INFRASTRUCTURE‘Extraordinaries’ galore
EDELWEISS 4D RATINGS
Absolute Rating BUY
Rating Relative to Sector Outperformer
Risk Rating Relative to Sector High
Sector Relative to Market Underweight
MARKET DATA (R: GMRI.BO, B: GMRI IN)
CMP : INR 26
Target Price : INR 47
52‐week range (INR) : 55 / 24
Share in issue (mn) : 3,892.4
M cap (INR bn/USD mn) : 100 / 1,991
Avg. Daily Vol.BSE/NSE(‘000) : 4,320.2
SHARE HOLDING PATTERN (%)
* Promoters pledged shares (% of share in issue)
: 20.4
PRICE PERFORMANCE (%)
Stock Nifty
EW Power Index
1 month 1.9 10.7 7.3
3 months (14.4) (0.9) (6.4)
12 months (51.3) (15.9) (17.9)
Shankar.K +91 22 4040 7412 [email protected] Parvez Akhtar Qazi +91 22 4063 5405 [email protected]
India Equity Research| Power
November 9, 2011
Financials (Consolidated)
Year to March Q2FY11E Q2FY11 % Change Q1FY12 % Change FY11 FY12E
Revenues (INR mn) 13,434 12,217 10.0 18,636 (27.9) 57,738 72,149
EBITDA (INR mn) 2,220 3,561 (37.7) 4,980 (55.4) 15,555 20,877
Net profit (INR mn) (2,238) (692) 223.4 (667) 235.8 (9,296) (2,076)
Diluted EPS (INR) (2.4) (0.5)
Diluted P/E (x) (10.7) (48.0)
ROAE (%) (1.5) (2.2)
Promoters*71.4%
MFs, FIs & Banks8.1%
FIIs12.2%
Others8.3%
Power
2 Edelweiss Securities Limited
Table 1: SOTP
Source: Edelweiss research
Financial snapshot: Consolidated (INR mn)Year to March Q2FY11E Q2FY11 % Change Q1FY12 % Change FY11 FY12E FY13ETotal operating income 13,434 12,217 10.0 18,636 (27.9) 57,738 72,149 74,355Net sales 13,434 12,217 10.0 18,636 (27.9) 57,738 72,149 74,355Total expenses 11,215 8,656 29.6 13,656 (17.9) 42,183 51,272 49,337Cost of goods sold 9,430 4,510 109.1 10,994 (14.2) 34,074 19,156 26,171Fuel cost 9,430 4,510 109.1 10,994 (14.2) 34,074 19,156 26,171Gross profit 4,004 7,708 (48.0) 7,642 (47.6) 23,664 52,994 48,184Other expenses 1,785 4,147 (57.0) 2,663 (33.0) 8,109 32,117 23,166Salaries,wages, other payments 937 690 35.8 1,277 (26.6) 3,386 10,136 11,155Other expenses 1,785 4,147 (57.0) 2,663 (33.0) 8,109 32,117 23,166EBITDA 2,220 3,561 (37.7) 4,980 (55.4) 15,555 20,877 25,019Other income 813 143 470.8 812 0.2 3,113 2,529 1,185PBDIT 3,033 3,703 (18.1) 5,791 (47.6) 18,668 23,406 26,203Depreciation 2,320 1,993 16.4 2,758 (15.9) 8,609 10,964 11,168Interest 3,306 2,492 32.7 3,724 (11.2) 12,301 14,887 11,118PBT (2,593) (781) 232.0 (691) 275.4 (2,242) (2,446) 3,918Tax(including deferred tax) 47 197 (76.2) 655 (92.8) 239 2,469 1,965Extraordinary items 0 (1,403) (100.0) 0 0.0 (7,986) 0 0Minority interest (402) (260) 54.6 (679) (40.8) (1,205) (3,548) (839)Share of profits from associates 0 26 (100.0) 0 0.0 (35) (710) (222)PAT(Reported) (2,238) 711 (414.7) (667) 235.8 (9,296) (2,076) 2,569Adj PAT (2,238) (692) 223.4 (667) 235.8 (9,296) (2,076) 2,569Number of shares (mn) 3,892 3,892 3,892 3,892 3,892 3,892 EPS(INR) (0.6) (0.2) (0.2) (2.4) (0.5) 0.7P/E (x) (11.1) (36.0) (37.4) (10.7) (48.0) 38.8ROAE (%) (1.5) (2.2) 2.7as % of net revenues 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1COGS 70.2 36.9 59.0 59.0 26.5 35.2Other expenses 13.3 33.9 14.3 14.0 44.5 31.2Total expenses 83.5 70.9 73.3 73.1 71.1 66.4Gross profit 29.8 63.1 41.0 41.0 73.5 64.8EBITDA 16.5 29.1 26.7 26.9 28.9 33.6Net profit (16.7) (5.7) (3.6) (16.1) (2.9) 3.5Tax rate (1.8) (25.2) (94.8) (10.7) (100.9) 50.2
Division GMR Valuation (INR mn) Value/share (INR)Airports 106,854 27.5Roads (27,049) (6.9)Power 56,648 14.6Homeland Energy 1,414 0.4Indonesian coal mine 4,713 1.2Cash and liquid investments 39,866 10.2Total SOTP valuation 182,445 46.9
GMR Infrastructure
3 Edelweiss Securities Limited
Company Description GMR is the flagship company of the GMR Group promoted by Mr. G. M. Rao. The group was initially active in the agri business and banking sector through a controlling stake in Vysya Bank, the largest private sector bank in India, before banking sector reforms and subsequent sale to ING. GMR follows the developer model for infrastructure projects across different verticals—power, roads, airports, and urban infrastructure. The promoter group is closely involved with the management with each of the different verticals in the company.
Investment Theme
Further upsides from commercial development linked to airports
If GMR manages to sell remaining 205 acres of land at a price greater than the value at which it has sold 45 acres presently, it could result in further upsides for the company. Similarly, monetization of Hyderabad airport land and SEZ land at higher than expected valuations could result in a positive surprise. Power project expansion pipeline at nascent stage
The company has about 3,290 MW of generation units in various stages of development, which include ~2,800 MW of thermal generation and 1,190 MW of hydro power units. The company plans to have a reasonable blend of merchant and PPA sale for its expansion projects. Timely financial closure for the hydro projects and execution without cost overrun of projects could result in increased earnings for the company. Increase in passenger traffic in airports and toll‐based roads
If the passenger traffic picks up in airports and the toll‐based road projects, the operating leverage is expected to be higher which would expand valuations. Traction in projects
Huge cash reserves and likely listing of power entity separately means that there is a likelihood of more projects being added to the portfolio like the recent Male airport and Vemagiri expansion projects. If the same trend of value accretion continues, then there can be further upside to valuations.
Key Risks Falling passenger traffic critical for airports’ valuations
Passenger traffic had been down due to slowdown in economic activities leading to lower earnings at both Delhi and Hyderabad airports. This has been a drain on the valuation of airports. Failure to monetise airport land at attractive valuations on time
GMR has been successful in monetizing 45 acres out of 250 acres of land at Delhi airport. However, if it does not succeed in monetizing the balance tranche at similar or higher levels, it could drag valuations downwards. Further equity dilution, unrelated diversification
The company has been raising equity money frequently in the recent past for enhancing its project portfolio. One of the acquisition was stake in Intergen which was not value accretive. If a similar trend continues going forward then the same could impact valuations.
Power
4 Edelweiss Securities Limited
Financial Statements (Consolidated)
Income statement (INR mn)Year to March FY09 FY10 FY11 FY12E FY13EIncome from operations 40,192 45,665 57,738 72,149 74,355 Direct costs 16,862 25,766 34,074 19,156 26,171 Employee costs 3,405 2,932 3,386 10,136 11,155 Other expenses 9,257 3,325 4,724 21,981 12,011Total operating expenses 29,524 32,022 42,183 51,272 49,337 EBITDA 10,668 13,643 15,555 20,877 25,019 Depreciation and amortisation 3,898 6,122 8,609 10,964 11,168 EBIT 6,770 7,521 6,946 9,913 13,851 Interest expenses 3,682 8,503 12,301 14,887 11,118 Other income 214 2,913 3,113 2,529 1,185 Profit before tax 3,301 1,931 (2,242) (2,446) 3,918 Provision for tax 530 (322) 239 2,469 1,965 Core profit 2,771 2,253 (2,481) (4,915) 1,953 Extraordinary items 0 0 (7,986) 0 0Profit before minority interest 2,771 2,253 (10,467) (4,915) 1,953 Minority interest (23) 454 (1,205) (3,548) (839) Share of profit in associate co. 0 (216) (35) (710) (222)Profit after minority interest 2,795 1,584 (9,296) (2,076) 2,569 Shares outstanding 3,641 3,667 3,892 3,892 3,892 EPS (INR) basic 0.4 0.4 (0.3) (0.5) 0.7Diluted shares (mn) 3,641 3,667 3,892 3,892 3,892 EPS (INR) fully diluted 0.8 0.4 (0.3) (0.5) 0.7
Common size metrics‐ as % of net revenuesYear to March FY09 FY10 FY11 FY12E FY13EOperating expenses 73.5 70.1 73.1 71.1 66.4Depreciation and amortization 9.7 13.4 14.9 15.2 15.0Interest expenditure 9.2 18.6 21.3 20.6 15.0EBITDA margins 26.5 29.9 26.9 28.9 33.6Net profit margins 6.9 4.9 (4.3) (6.8) 2.6
Growth metrics (%)Year to March FY09 FY10 FY11 FY12E FY13ERevenues 75.1 13.6 26.4 25.0 3.1EBITDA 78.2 27.9 14.0 34.2 19.8PBT 0.0 (0.4) (2.2) 0.1 (2.6)Net profit 5.5 (18.7) (110.1) 198.1 (39.7)EPS 33.0 12.6 (178.0) 58.4 (223.7)
5 Edelweiss Securities Limited
GMR Infrastructure
Balance sheet (INR mn)As on 31st March FY09 FY10 FY11 FY12E FY13E
Equity capital 3,641 3,667 3,892 3,892 3,892 Reserves & surplus 61,070 65,003 91,003 88,926 91,496 Shareholders funds 64,711 68,671 94,895 92,818 95,388 Minority interest 18,061 17,902 19,981 16,433 15,593 Secured loans 106,644 162,294 189,107 264,482 373,219 Unsecured loans 15,458 46,080 53,189 53,189 53,189 Borrowings 122,102 208,374 242,296 317,671 426,408 Others 68 (5) (74) (74) (74) Sources of funds 204,942 294,940 357,098 426,849 537,315 Gross block 114,326 148,896 243,702 284,260 345,077 Depreciation 17,810 23,416 31,503 42,467 53,635 Net block 96,516 125,481 212,200 241,793 291,442 Capital work in progress 67,909 103,829 94,898 135,456 196,273 Total fixed assets 164,426 229,309 307,098 377,249 487,715 Investments 13,109 46,411 29,741 29,741 29,741 Inventories 1,319 1,159 1,846 1,846 1,846 Sundry debtors 6,609 8,649 13,199 13,199 13,199 Cash and equivalents 24,665 16,826 33,732 33,732 33,732 Loans and advances 12,840 14,773 26,144 26,144 26,144 Total current assets 45,433 41,408 74,921 74,921 74,921 Sundry creditors and others 14,099 15,775 51,617 51,617 51,617 Provisions 833 3,878 2,281 2,281 2,281 Total CL & provisions 14,932 19,653 53,898 53,898 53,898 Net current assets 30,501 21,755 21,023 21,023 21,023 Net deferred tax (192) 805 1,514 1,114 1,114 Others (2,902) (3,339) (2,279) (2,279) (2,279) Uses of funds 204,942 294,940 357,098 426,849 537,315 Adjusted book value per share (BV)(INR) 9 19 24 24 25
Free cash flow (INR mn)Year to March FY09 FY10 FY11 FY12E FY13ENet profit 2,795 1,584 (9,296) (2,076) 2,569 Depreciation 3,898 6,122 8,609 10,964 11,168 Others 3,401 (1,800) 3,424 (3,148) (839) Gross cash flow 10,094 5,907 2,737 5,740 12,898 Less: Changes in W. C. 9,211 (907) (17,638) 0 0Operating cash flow 883 6,814 20,374 5,740 12,898 Less: Capex 62,322 68,725 73,254 81,115 121,635 Free cash flow (61,439) (61,911) (52,879) (75,376) (108,737)
Cash flow metricesYear to March FY09 FY10 FY11 FY12E FY13EOperating cash flow 883 6,814 20,374 5,740 12,898 Financing cash flow 42,790 85,939 60,922 72,847 107,552 Investing cash flow (27,953) (100,593) (64,390) (78,586) (120,450) Net cash flow 15,720 (7,839) 16,906 (0) 0Capex (62,322) (68,725) (73,254) (81,115) (121,635) Dividends paid (3) (5) (87) 0 0
6 Edelweiss Securities Limited
Power
Profitability & liquidity ratiosYear to March FY09 FY10 FY11 FY12E FY13EROAE (%) 4.3 2.3 (1.5) (2.2) 2.7 ROACE (%) 3.9 3.4 2.4 2.7 3.1 Current ratio 3.0 2.1 1.4 1.4 1.4 Debtors (days) 49 61 69 67 65Average fixed assets t/o (x) 0.5 0.4 0.3 0.3 0.3 Average working capital t/o (x) 32.7 8.5 (14.8) (5.7) (5.9) Average capital employed t/o (x) 0.2 0.2 0.2 0.2 0.2 Debt / Equity 1.9 3.0 2.6 3.4 4.5 Debt/EBITDA 11.4 15.3 15.6 15.2 17.0 Adjusted Debt/Equity 1.9 3.0 2.6 3.4 4.5
Operating ratiosYear to March FY09 FY10 FY11 FY12E FY13ETotal asset turnover 0.2 0.2 0.2 0.2 0.2 Average fixed assets t/o (x) 0.3 0.2 0.2 0.2 0.2 Equity turnover 0.6 0.7 0.7 0.8 0.8
Du pont analysisYear to March FY09 FY10 FY11 FY12E FY13ENP margin (%) 7.0 3.5 (2.3) (2.9) 3.5 Total assets turnover 0.2 0.2 0.2 0.2 0.2 Leverage multiplier 2.9 3.7 3.9 4.1 5.1 ROAE (%) 4.5 2.3 (1.6) (2.2) 2.7
Valuation parametersYear to March FY09 FY10 FY11 FY12E FY13EDiluted EPS (INR) 0.8 0.4 (0.3) (0.5) 0.7 Y‐o‐Y growth (%) 33.0 (43.7) (178.0) 58.4 (223.7) CEPS (INR) 0.9 2.1 1.9 2.3 3.5 Diluted P/E (x) 33.4 59.3 (76.0) (48.0) 38.8 Price/BV(x) 2.9 1.4 1.0 1.1 1.0 EV/Sales (x) 4.9 5.6 5.2 5.1 6.4 EV/EBITDA (x) 18.3 18.8 19.2 17.7 19.1
7 Edelweiss Securities Limited
Company Absolute
reco
Relative
reco
Relative
risk
Company Absolute
reco
Relative
reco
Relative
Risk
Adani Enterprises HOLD SU M Adani Power REDUCE SU L
CESC BUY SU H GMR Infrastructure BUY SO H
GVK Power and Infra HOLD SO H JSW Energy REDUCE SU H
Lanco Infratech BUY SO H Marg BUY SO H
Mundra Port & SEZ BUY SO M Navabharat Ventures BUY None None
NTPC HOLD SU L Power Grid Corp of India BUY SP L
PTC India BUY SO L Reliance Infrastructure BUY SO M
Tata Power Co BUY SO M
RATING & INTERPRETATION
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Indi
a M
idca
ps
Led by a strong performance from the EPC segment, IRB Infrastructure (IRB) reported a Q2FY12 PAT of INR1.1bn (up 11% YoY), ahead of ours as well as consensus estimates. Toll collection from BOT assets remained steady with a traffic growth of around 6% in most assets. We expect the company to focus on project execution rather than winning new projects in the near term. Maintain ‘BUY’ with revised target price of INR 207/share.
Steady traffic growth in most assets, EPC does well EPC revenues jumped up 79% YoY riding a strong execution in Surat-Dahisar project, which is now complete by nearly 95%. EBITDA margins in the EPC business remained strong at 23%. Toll revenue in BOT projects at INR2.4bn (up 17% YoY) was broadly in line with our estimates. Traffic growth was steady at 6% in most assets (excluding Bharuch-Surat project where traffic growth was ~3%-4%).
Earnings outlook for H2FY12 subdued, Robust growth in FY13 We expect a significant pick up in execution in H2FY12 and FY13 in Amravati-Talegaon, Jaipur-Deoli and Amritsar-Pathankot projects. Despite this, we expect EPC revenues to decline ~20% YoY in H2 on high base of last year, given that execution on Surat-Dahisar and Kolhapur projects is now almost over. Also, IRB will start providing depreciation on Surat-Dahisar in H2. We estimate a net loss of INR680mn for Surat-Dahisar in FY12. IRB has raised INR7bn via ECB at Libor plus 4.5% for under-development projects, which will help contain overall interest costs.
Outlook and valuations: Attractive; maintain ‘BUY’ Management expects competition in road project awards to ease going forward. They indicated that they are bidding with minimum threshold IRR of 18% now. We have revised our SOTP based TP to INR207/share (earlier INR 212) to factor in a higher project cost (and correspondingly debt) in the Surat-Dahisar project. EPC arm contributes INR83 while BOT projects provide INR129 per share with the balance coming from cash and real estate. We maintain ‘BUY’.
RESULT UPDATE
IRB INFRASTRUCTUREFirmly on track
EDELWEISS RATINGS
Absolute Rating BUY
Investment Characteristics Growth
MARKET DATA (R: IRBI.BO, B: IRB IN)
CMP : INR 164
Target Price : INR 207
52-week range (INR) : 264 / 132
Share in issue (mn) : 332.4
M cap (INR bn/USD mn) : 54 / 1,082
Avg. Daily Vol. BSE/NSE (‘000) : 1,798.7
SHARE HOLDING PATTERN (%)
* Promoters pledged shares (% of share in issue)
: 15.3
PRICE PERFORMANCE (%)
BSE Midcap Index
Stock Stock over
Index
1 month 3.0 (1.0) (4.0)
3 months (4.4) 0.4 4.9
12 months (27.6) (36.0) (8.5)
Manish Sarawagi +91 22 4040 7575 [email protected] Parvez Akhtar Qazi +91 22 4063 5405 [email protected] Rohit Patni +91 22 6623 3392 [email protected]
Financials ‐ Consolidated (INR mn)
Year to March Q2FY12 Q2FY11 % Chg Q1FY12 % Chg FY11 FY12E Net revenues 7,359 4,903 50.1 8,013 (8.2) 24,381 28,863 EBITDA 3,215 2,364 36.0 3,295 (2.4) 10,939 12,897 Net profit 1,101 991 11.1 1,342 (18.0) 4,524 3,797 Diluted EPS (INR) 3.3 3.0 11.1 4.0 (18.0) 13.6 11.4 Diluted P/E (x) 12.0 14.3 EV/EBITDA (x) 8.1 8.4ROAE (%) 20.2 14.6
India Equity Research| Construction
November 11, 2011
Promoters*74.9%
MFs, FIs & Banks4.7%
FIIs13.3%
Others7.1%
Construction
2 Edelweiss Securities Limited
Table 1: SOTP valuation
Source: Edelweiss research
Table 2: Toll collection (INR mn)
Source: Company, Edelweiss research
*Toll collection started on Feb. 20, 2009 ** Toll collection started on Sep. 25, 2009 *** Concession ended on Sep 22, 2008
****Concession ended on November 22, 2009 ***** Concession ended on May 3, 2009 ****** Tolling started on June 4, 2011
Segments BasisCost of equity
(%)Equity value
(INR mn)Value per
share (INR)% of total
BOT projectsOperational projects (A) 36,395 109.5 52.9 Mumbai-Pune and NH-4 DCF 13.50 16,858 50.7 24.5 Surat-Bharuch DCF 13.50 8,203 24.7 11.9 Pune-Nashik DCF 13.50 2,317 7.0 3.4 Pune-Sholapur DCF 13.50 989 3.0 1.4 Thane-Bhiwandi Bypass DCF 13.50 4,251 12.8 6.2 Thane-Ghodbunder Road DCF 13.50 2,005 6.0 2.9 Kharpada Bridge DCF 13.50 286 0.9 0.4 Ahmednagar-Karmala-Temburni DCF 13.50 835 2.5 1.2 Mohol-Kurul-Kamti-Mandrup DCF 13.50 650 2.0 0.9 Projects under construction (B) 6,588 19.8 9.6 Surat-Dahisar DCF 14.00 (1,276) (3.8) (1.9) IRDP Kolhapur DCF 14.00 2,650 8.0 3.8 Amritsar-Pathankot DCF 14.00 5,928 17.8 8.6 Jaipur-Deoli DCF 14.00 6,834 20.6 9.9 Talegaon-Amravati DCF 14.00 4,192 12.6 6.1 Tumkur-Chitradurga DCF 14.00 (2,400) (7.2) (3.5) Ahmedabad-Vadodara DCF 14.00 (9,341) (28.1) (13.6) Sub total (B)Total value from BOT projets (A+B) 42,983 129 62.4 EPC 6x FY13 P/E 82.8 40.0
Real Estate Book value of investment
5.4 2.6
Less: Net debt at hold co level 3,467 10.4 5.0Total value per share 207 100.0
Project Q212 Q211 % change Q112 % change FY11 FY10 % change FY09 % changeMumbai - Pune 997 803 24.2 986 1.1 3,216 3,063 5.0 2,872 6.6Surat Dahisar * 939 828 13.4 942 (0.3) 3,647 3,338 9.3 336 N.A.Surat Bharuch ** 347 305 13.8 336 3.3 1,302 662 N.A. 0 N.A.Thane Bhivandi Bypass 145 122 18.9 156 (7.1) 543 471 15.3 403 16.9Kharpada Bridge 19 15 26.7 23 (17.4) 74 68 9.5 70 (3.4)Nagar - Karmala - Tembhurni 35 35 0.0 37 (5.4) 146 135 8.5 114 18.0Pune - Solapur 39 31 25.8 43 (9.3) 144 133 8.1 128 4.1Pune - Nashik 55 53 3.8 56 (1.8) 211 180 17.0 164 10.0Thane - Ghodbunder 69 65 6.2 70 (1.4) 284 278 2.1 265 4.9MMK 19 20 (5.0) 20 (5.0) 77 63 22.3 66 (4.6)Bhiwandi Wada *** 0 0 N.A. 0 N.A. 0 0 N.A. 16 (100.0)Kaman Paygaon **** 0 0 N.A. 0 N.A. 0 22 N.A. 36 (38.9)Khambatki Ghat ***** 0 0 N.A. 0 N.A. 0 12 N.A. 131 (90.8)Tumkur-Chitradurga****** 387 0 N.A. 114 N.A. 0 0 N.A. 0 N.A.Total 3,051 2,277 34.0 2,783 9.6 9,644 8,425 14.5 4,601 83.1
IRB Infrastructure
3 Edelweiss Securities Limited
Table 3: Segmental result (INR mn)
Source: Company, Edelweiss research
Q212 Q211 % change Q112 % change FY11 FY10 % change FY09 % changeTotal income 7,660 4,985 53.6 8,296 (7.7) 25,026 17,538 42.7 10,215 71.7 BOT 2,385 2,032 17.4 2,324 2.6 8,322 7,297 14.1 4,543 60.6 Construction 5,275 2,954 78.6 5,972 (11.7) 16,704 10,242 63.1 5,672 80.6EBITDA (incl other income) 3,516 2,446 43.7 3,577 (1.7) 11,584 8,480 36.6 4,670 81.6 BOT 2,116 1,736 21.9 2,029 4.3 7,301 6,474 12.8 3,657 77.0 Construction 1,399 710 97.0 1,548 (9.6) 4,282 2,006 113.5 1,013 98.0EBITDA Margins (%) 45.9 49.1 (3.2) 43.1 2.8 46.3 48.4 (2.1) 45.7 2.6 BOT 88.8 85.4 3.3 87.3 1.5 87.7 88.7 (1.0) 80.5 8.2 Construction 26.5 24.0 2.5 25.9 0.6 25.6 19.6 6.0 17.9 1.7Depreciation 629 544 15.5 602 4.4 2,254 1,819 23.9 1,144 59.0 BOT 488 426 14.5 465 5.0 1,730 1,299 33.2 936 38.8 Construction 140 118 18.8 137 2.3 524 521 0.7 208 149.9Interest 1,411 693 103.7 1,174 20.2 3,572 2,494 43.2 1,377 81.1 BOT 1,092 625 74.6 889 22.8 3,031 2,268 33.6 1,274 78.0 Construction 319 68 372.6 285 12.2 541 225 139.8 102 120.2PBT 1,476 1,209 22.1 1,800 (18.0) 5,758 4,167 38.2 2,149 93.9 BOT 536 684 (21.6) 674 (20.5) 2,540 2,907 (12.6) 1,447 100.9 Construction 939 525 79.1 1,126 (16.6) 3,218 1,260 155.3 703 79.3PBT Margins (%) 19.3 24.2 (5.0) 21.7 (2.4) 23.0 23.8 (0.8) 21.0 2.7 BOT 22.5 33.7 (11.2) 29.0 (6.5) 30.5 39.8 (9.3) 31.8 8.0 Construction 17.8 17.8 0.0 18.9 (1.0) 19.3 12.3 7.0 12.4 (0.1) Tax 367 190 92.7 443 (17.1) 1,117 134 736.6 378 (64.6) BOT 83 39 112.6 83 0.2 143 (115) (224.1) 165 (169.7) Construction 284 152 87.6 360 (21.1) 975 249 292.1 213 16.8Tax rate (%) 24.9 15.8 9.1 24.6 0.3 19.4 3.2 16.2 17.6 (14.4) BOT 15.4 5.7 9.7 12.2 3.2 5.6 (4.0) 9.6 11.4 (15.4) Construction 30.3 28.9 1.4 32.0 (1.7) 30.3 19.7 10.6 30.3 (10.6) PAT 1,109 1,018 8.9 1,357 (18.3) 4,640 4,034 15.0 1,758 129.4 BOT 453 645 (29.7) 592 (23.3) 2,398 3,022 (20.7) 1,268 138.3 Construction 655 373 75.6 766 (14.4) 2,243 1,012 121.7 490 106.4PAT Margins (%) 14.5 20.4 (6.0) 16.4 (1.9) 18.5 23.0 (4.5) 17.2 5.8 BOT 19.0 31.8 (12.7) 25.5 (6.4) 28.8 41.4 (12.6) 27.9 13.5 Construction 12.4 12.6 (0.2) 12.8 (0.4) 13.4 9.9 3.6 8.6 1.2
Construction
4 Edelweiss Securities Limited
Financial snapshot ‐ Consolidated (INR mn) Year to March Q2FY12 Q2FY11 % Change Q1FY12 % Change FY11 FY12E FY13E Net revenues 7,359 4,903 50.1 8,013 (8.2) 24,381 28,863 38,887 Staff costs 313 211 48.7 281 11.5 929 1,417 1,646 Direct costs 3,635 2,167 67.8 4,218 (13.8) 11,812 14,146 20,791 Other expenses 196 162 21.0 220 (10.9) 700 402 750 Total expenditure 4,144 2,539 63.2 4,719 (12.2) 13,442 15,965 23,187 EBITDA 3,215 2,364 36.0 3,295 (2.4) 10,939 12,897 15,700 Depreciation 629 544 15.5 602 4.4 2,254 3,416 4,675 EBIT 2,586 1,819 42.1 2,692 (3.9) 8,686 9,482 11,025 Other income 301 82 265.8 282 6.6 645 713 978 Interest 1,411 693 103.7 1,174 20.2 3,572 4,612 4,527 Profit before tax 1,476 1,209 22.1 1,800 (18.0) 5,758 5,583 7,476 Tax 367 190 92.7 443 (17.1) 1,117 1,854 2,825 Core profit 1,109 1,018 8.9 1,358 (18.3) 4,641 3,729 4,651 Minority interest 8 27 (70.3) 16 (48.0) 117 (68) (167) Reported net profit 1,101 991 11.1 1,342 (18.0) 4,524 3,797 4,818 Equity capital 3,324 3,324 3,324 3,324 3,324 3,324 No. of shares (mn) 332 332 332 332 332 332 Diluted EPS (INR) 3.3 3.0 11.1 4.0 (18.0) 13.6 11.4 14.5 As % of net revenues Direct costs 49.4 44.2 52.6 48.4 49.0 53.5 Other expenses 2.7 3.3 2.7 2.9 1.4 1.9 EBITDA 43.7 48.2 41.1 44.9 44.7 40.4 Reported net profit 15.0 20.2 16.7 18.6 13.2 12.4 Tax rate 24.9 15.7 24.6 19.4 33.2 37.8
IRB Infrastructure
5 Edelweiss Securities Limited
Company Description IRB is an infrastructure development and construction company with wide experience in the roads and highways sector. Till date, it has won 20 road projects. It is primarily a holding company; various BOT projects as well as the construction activities of the IRB Group are handled by the company’s subsidiaries. The IRB Group started operations in 1977 when Ideal Road Builders (IRBPL) was incorporated to undertake the road contracting business. Between 1977 and 1995, it completed several projects in the roads and highways sector. In 1995, the group ventured into the BOT space through the Thane–Bhiwandi bypass project. The group entered the real estate development space through its subsidiary Aryan Infrastructure. It plans to develop a township along the Mumbai-Pune expressway.
Investment Theme IRB is a premier toll road developer and operator. Its projects cover highly strategic & lucrative routes. It has 16 projects spread over 1,400 kms worth INR 166 bn, of which 9 are currently operational (7 projects are debt free). The company boasts of a robust order book which is likely to result in a strong growth in its EPC revenues. IRB’s integrated approach enables value maximization since its operation span across construction, operation & maintenance. While the EPC division generates over 30% RoEs consistently, much higher than its peers, the BOT project portfolio generates substantial operating cash flows which are likely to help the company achieve a high growth trajectory going ahead.
Key Risks Geographical concentration with 13 projects in two states: Of the 16 projects in IRB’s kitty, 12 are in the states of Maharashtra and Gujarat. This exposes the company to the risk of geographical concentration with revenues from toll projects dependent on economic activity in these states. Inherent risk associated with BOT-toll projects: With the company focusing on PPP projects, it is exposed to risks like those associated with gaining right-of-way on land stretches, execution risk, ‘force majeure’ risk, etc. Also, the focus on toll projects exposes it to the unpredictability of traffic growth, etc.
6 Edelweiss Securities Limited
Construction
Financial Statements - Consolidated
Income statement (INR mn) Year to March FY09 FY10 FY11 FY12E FY13EIncome from operations 9,919 17,049 24,381 28,863 38,887Direct costs 4,682 7,851 11,812 14,146 20,791 Employee costs 425 710 929 1,417 1,646 Other Expenses 423 497 700 402 750 Total operating expenses 5,531 9,059 13,442 15,965 23,187 EBITDA 4,388 7,990 10,939 12,897 15,700 Depreciation & Amortization 1,144 1,819 2,254 3,416 4,675 EBIT 3,244 6,171 8,686 9,482 11,025 Other income 282 490 645 713 978 Interest expenses 1,377 2,494 3,572 4,612 4,527 Profit before tax 2,149 4,167 5,758 5,583 7,476 Provision for tax 378 133 1,117 1,854 2,825 Core profit 1,772 4,034 4,641 3,729 4,651 Profit After Tax 1,772 4,034 4,641 3,729 4,651 Minority interest 13 179 117 (68) (167) Profit after minority interest 1,758 3,854 4,524 3,797 4,818 Basic shares outstanding (mn) 332 332 332 332 332 Basic EPS (INR) 5.3 11.6 13.6 11.4 14.5 Diluted equity shares (mn) 332 332 332 332 332 Diluted EPS (INR) 5.3 11.6 13.6 11.4 14.5 CEPS (INR) 8.0 13.7 19.0 21.7 28.6 Dividend per share (INR) 1.7 1.9 1.5 1.5 1.5 Dividend payout (%) 37.1 19.6 13.2 15.7 12.4
Common size metrics ‐ as % of net revenues Year to March FY09 FY10 FY11 FY12E FY13EOperating expenses 55.8 53.1 55.1 55.3 59.6Depreciation 11.5 10.7 9.2 11.8 12.0 Interest expenditure 13.9 14.6 14.7 16.0 11.6 EBITDA margins 44.2 46.9 44.9 44.7 40.4 Other income 2.8 2.9 2.6 2.5 2.5 Tax 3.8 0.8 4.6 6.4 7.3 EBIT margins 32.7 36.2 35.6 32.9 28.4 Net profit margins 17.7 22.6 18.6 13.2 12.4
Growth ratios (%) Year to March FY09 FY10 FY11 FY12E FY13ERevenues 35.4 71.9 43.0 18.4 34.7EBITDA 6.5 82.1 36.9 17.9 21.7 Net profit 40.0 127.7 15.1 (19.6) 24.7 EPS 54.4 119.2 17.4 (16.1) 26.9
7 Edelweiss Securities Limited
IRB Infrastructure
Balance sheet (INR mn) As on 31st March FY09 FY10 FY11 FY12E FY13EEquity capital 3,324 3,324 3,324 3,324 3,324Reserves & surplus 13,977 17,075 21,002 24,202 28,423 Shareholders funds 17,301 20,399 24,326 27,526 31,747 Minority interest (BS) 599 779 896 828 661 Secured loans 24,741 29,035 41,135 57,412 82,710 Unsecured loans 117 117 5,120 - - Borrowings 24,859 29,152 46,255 57,412 82,710 Deferred tax (net) 182 267 232 232 232 Grant - - - 669 7,489 Sources of funds 42,940 50,597 71,709 86,667 122,839 Gross block 24,601 40,185 41,317 69,151 69,151 Depreciation 4,440 5,511 7,695 11,111 15,785 Net block 20,161 34,674 33,622 58,040 53,366 Capital work in progress 14,545 8,802 25,085 22,597 62,758 Total fixed assets 34,707 43,477 58,706 80,637 116,123 Investments 1,108 451 551 - - Inventories 2,054 1,698 1,638 2,781 3,943 Sundry debtors 130 297 397 577 841 Cash and equivalents 4,147 5,102 12,000 4,808 5,865 Loans and advances 3,849 4,380 6,349 6,154 8,159 Total current assets 10,180 11,477 20,384 14,320 18,808 Sundry creditors and others 1,303 1,587 4,842 2,551 3,719 Provisions 1,762 3,229 3,099 5,749 8,383 Total current liabilities & provisions 3,065 4,816 7,941 8,299 12,102 Net current assets 7,116 6,661 12,443 6,021 6,706 Others 10 9 9 9 9 Uses of funds 42,940 50,597 71,709 86,667 122,839 Book value per share (INR) 52.1 61.4 73.2 82.8 95.5
Free cash flow (INR mn) Year to March FY09 FY10 FY11 FY12E FY13ENet profit 1,772 4,034 4,641 3,729 4,651Depreciation 1,144 1,819 2,254 3,416 4,675 Others (229) (1,106) (468) - - Gross cash flow 2,686 4,746 6,426 7,145 9,325 Less: Changes in WC 1,401 (1,849) (1,314) 769 (372) Operating cash flow 1,285 6,596 7,740 6,376 9,697 Less: Capex 8,114 10,604 17,510 25,346 40,161 Free cash flow (6,829) (4,008) (9,769) (18,971) (30,464)
Cash flow metrics Year to March FY09 FY10 FY11 FY12E FY13EOperating cash flow 1,285 6,596 7,740 6,376 9,697Investing cash flow (6,047) (9,509) (17,212) (24,796) (40,161) Financing cash flow 4,652 3,868 16,369 11,229 31,521 Net cash flow (110) 955 6,897 (7,191) 1,057 Capex (8,114) (10,604) (17,510) (25,346) (40,161) Dividends paid (652) (756) (597) (597) (597) Share issuance/(buyback) 208 - - - -
8 Edelweiss Securities Limited
Construction
Profitability & efficiency ratios Year to March FY09 FY10 FY11 FY12E FY13EROAE (%) 10.5 20.4 20.2 14.6 16.3ROACE (%) 8.5 13.4 14.3 12.0 10.5 Inventory day 119 135 78 78 83 Debtors days 5 5 5 6 7 Payable days 92 67 99 95 55 Cash conversion cycle (days) 32 72 (16) (11) 35 Current ratio 3.3 2.4 2.6 1.7 1.6 Debt/EBITDA 5.7 3.6 4.2 4.5 5.3 Average working capital turnover 1.4 2.5 2.6 3.1 6.1 Average capital employed turnover (x) 0.2 0.4 0.4 0.4 0.4 Debt/Equity 1.4 1.4 1.9 2.1 2.6 Adjusted debt/equity 1.4 1.4 1.9 2.1 2.6 Net Debt/Equity 1.1 1.2 1.4 1.9 2.4 Interest coverage 2.4 2.5 2.4 2.1 2.4
Operating ratios Year to March FY09 FY10 FY11 FY12E FY13ETotal asset turnover 0.2 0.4 0.4 0.4 0.4Fixed asset turnover 0.5 0.5 0.7 0.5 0.7 Equity turnover 0.6 0.8 1.0 1.0 1.2
Du pont analysis Year to March FY09 FY10 FY11 FY12E FY13ENP margin (%) 17.7 22.6 18.6 13.2 12.4Total assets turnover 0.2 0.4 0.4 0.4 0.4 Leverage multiplier 2.4 2.5 2.7 3.1 3.5 ROAE (%) 10.5 20.4 20.2 14.6 16.3
Valuation parameters Year to March FY09 FY10 FY11 FY12E FY13EDiluted EPS (INR) 5.3 11.6 13.6 11.4 14.5Y‐o‐Y growth (%) 54.4 119.2 17.4 (16.1) 26.9 CEPS (INR) 8.0 13.7 19.0 21.7 28.6 Diluted PE (x) 30.9 14.1 12.0 14.3 11.3 Price/BV (x) 3.1 2.7 2.2 2.0 1.7 EV/Sales (x) 7.6 4.6 3.7 3.7 3.4 EV/EBITDA (x) 17.0 9.9 8.1 8.4 8.4 Dividend yield (%) 1.0 1.2 0.9 0.9 0.9
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
LIC Housing Finance’s (LICHFL) Q2FY12 PAT of INR984mn (down 58% YoY) was primarily dented by provisioning of INR2bn (due to revised norms mandated by NHB in August). Even after adjusting for one‐time provisioning, PAT was below consensus estimate as NIMs dipped 34bps (as against expectation of 10‐15bps). On the positive side, individual disbursement growth was sustained; traction was gained in developer loans; NPLs came off QoQ. We maintain ‘HOLD’ with a TP of INR275. NIMs came off 34bps to 2.45%; close to bottoming out NIMs have come off 100bps in the past two quarters to 2.45%, largely unwinding previous six quarters’ benefit. Despite having raised lending rates by 25bps each in April and July 2011, yields improved only marginally (by 8bps) since Q4FY11 as special scheme loans constituted ~40% (not due for repricing due to fixed rate nature), coupled with slow build up in developer loans. On the other hand, funding cost increased 125bps as INR50bn of liabilities matured in H1FY12. The company has raised lending rates by 40‐50bps since October 2011 and we expect NIMs to bottom out.
Revised provisioning norms dent earnings In August 2011, NHB mandated standard asset provisioning of 40bps alongwith higher provisioning for non‐standard loans. In this respect, LICHFL provided INR2bn in Q2FY12. Management indicated that it has not utilized excess provisioning of INR1.12bn (contrary to its earlier guidance). Out of INR2.05bn, we believe ~INR1.6bn was provided towards standard assets (of ~INR400bn excluding INR120bn Fix‐O‐Floaty loans and INR40bn developer loans) and INR450mn towards revised provisioning on INR3.0‐3.3bn of substandard/doubtful loans. Management stated that “Advantage 5” loans (INR100bn) are not yet categorized as teaser loans. We are increasing our credit cost estimate to factor in 40bps standard asset provisioning (against 25bps earlier). Outlook and valuations: NIMs bottoming out; maintain ‘HOLD’ Though margins have come off 100bps in the past two quarters, we believe they are close to bottoming out (40‐50bps increase in lending rates in October to offset cost pressures). Growth trajectory is expected to sustain in individual as well as corporate segments. It is evaluating raising equity in H2FY12 (can act as a trigger being book value accretive). The stock is currently trading at 1.9x FY13E book and 8.6x FY13E earnings. We maintain ‘HOLD/ Sector Performer’ recommendation/rating.
RESULT UPDATE
LIC HOUSING FINANCEProvisioning dents earnings; NIMs dip further
EDELWEISS 4D RATINGS
Absolute Rating HOLD
Rating Relative to Sector Performer
Risk Rating Relative to Sector Medium
Sector Relative to Market Equalweight
MARKET DATA (R: LICH.BO, B: LICHF IN)
CMP : INR 230
Target Price : INR 275
52‐week range (INR) : 284 / 150
Share in issue (mn) : 474.7
M cap (INR bn/USD mn) : 109 / 2,179
Avg. Daily Vol.BSE/NSE(‘000) : 9,002.4
SHARE HOLDING PATTERN (%)
* Promoters pledged shares (% of share in issue)
: NIL
PRICE PERFORMANCE (%)
Stock Nifty EW Banks and
Financial Services Index
1 month 10.8 10.7 9.9
3 months 17.2 (0.9) (6.0)
12 months (11.3) (15.9) (24.1)
Kunal Shah +91 22 4040 7579 [email protected] Nilesh Parikh +91 22 4063 5470 [email protected] Suruchi Chaudhary +91 22 6623 3316 [email protected]
India Equity Research| Banking and Financial Services
November 14, 2011
Promoters*36.5%
MFs, FIs & Banks9.0%
FIIs37.8%
Others16.7%
Financials
Year to March Q2FY12 Q2FY11 % Change Q1FY12 % Change FY11 FY12ENet int. inc. (INR mn) 3,341 3,051 9.5 3,610 (7.4) 13,831 15,105
Net profit (INR mn) 984 2,340 (57.9) 2,566 (61.6) 8,428 10,081
Diluted EPS (INR) 5.4 4.5 20.9 5.4 0.0 17.7 21.2
Price/ Book (x) 2.6 2.3
Price/ Earnings (x) 13.0 10.8
Banking and Financial Services
2 Edelweiss Securities Limited
Disbursement growth: Back to guided range • After moderating to 15% in Q1FY12, individual loan disbursements were back to the
guided range of 20‐25% (up 24% Y‐o‐Y). Following ICICI and HDFC, LICHFL too has introduced “New Advantage 5” product offering fixed rate of 11.15‐11.65% for the first five years. We are building in growth of 20‐23% in the individual loan category.
• As was indicated by the management that sanctions in the corporate developer segment were strong in July and will pick up in the coming months, disbursements improved to INR4.1bn (compared to merely INR770mn in Q1FY12). The proportion of corporate loan book has, however, has come off to 7.2% and management expects to inch up the proportion of this portfolio to 9‐10% in the next 18‐24 months.
• We are building in disbursement growth of 15% over FY11‐13E considering the trend in H1FY12 and are building in overall loan CAGR of 25% over the same period.
Chart 1: Loan growth back to guided range
20.0
24.0
28.0
32.0
36.0
40.0
0
12
24
36
48
60
Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411 Q112 Q212
(%)
(INR
bn)
Individual Project Loan growth Y‐o‐Y (RHS) Source: Company
Table 1: LICHF has priced its product 10bps lower to HDFC for 5 years tenor
LICHF Fixed for 5 yrs 3 yrs 5 yrs 1 yr 2 yrsLoans upto INR 3 mn 11.2 10.8 11.3 10.5 10.8INR 3.0‐7.5 mn 11.4 11.3 11.5 11.0 11.3INR 7.5‐15.0 mn 11.7 11.8 11.8 11.5 11.8
HDFC ICICI
Source: Company
LIC Housing Finance
3 Edelweiss Securities Limited
NIMs came of 34bps to 2.45%; close to bottoming out • NIMs have come off 100bps in the past two quarters (by 67% in Q1FY12 and 34bps in
Q2FY12) to 2.45%, largely unwinding previous six quarters’ benefit (it gained by growing high yielding corporate developer book).
• LICHFL has raised its lending rates by 25bps in July 2011 and by another 40‐50bps in August 2011. However, since loans under special home loan schemes (with fixed rate for 3 or 5 years) constitute ~40% of the loan book, coupled with slow build up in corporate developer loans, yields improved only marginally (by 8bps) to 10.7% from Q4FY11. Increase in yield was not sufficient to offset the cost pressure on the funding side (which increased 125bps to 9.25%). ALM was also unfavorable in H1FY12 for rising interest rate environment—INR50bn of liabilities were due for maturity while on the asset side only INR21bn was to be repriced.
• Considering margin performance in H1FY12, we are revising our NIMs estimate downwards to 2.7% for FY12 (from 2.8% earlier).
Chart 2: NIMs came off due to funding cost pressures
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Source: Company
Chart 3: ALM as of FY11 was unfavourable in less than 6 months bucket
0
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Borrowings Advances Source: Company
Banking and Financial Services
4 Edelweiss Securities Limited
Gross NPLs came off; revised norms dent earnings • Following the historical trend, gross NPLs came off from 0.84% in Q1FY12 to 0.64% in
Q2FY12 (lower than 0.74% in Q2FY11) – asset quality trend was better than estimate. Management maintained its stance on keeping asset quality under check.
• In August 2011, NHB mandated standard asset provisioning of 40bps alongwith higher provisioning for non‐standard loans. In this respect, LICHFL provided INR bn in Q2FY12. Management indicated that it has not utilized excess provisioning of INR1.12bn (contrary to its earlier guidance). Out of INR2bn, ~INR1.6bn was provided towards standard assets (of ~INR400bn excluding INR120bn Fix‐O‐Floaty loans and INR40bn project developer loans) and INR405mn towards revised provisioning on INR3.0‐3.3bn of substandard/doubtful assets. Management also mentioned that “Advantage 5” loans (INR100bn) are not classified as teaser loans.
Chart 4: NPLs down in line with historical trend
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Chart 5: Higher proportion of loans in doubtful category
Sub‐standard
assets28%
Doubtful assets65%
Loss assets7%
2010
Source: Company
Sub‐standard
assets23%
Doubtful assets68%
Loss assets9%
2011
LIC Housing Finance
5 Edelweiss Securities Limited
Impact of NHB regulation relating to prepayment penalty • As far as housing loans under special schemes are concerned (which are fixed for 1,3 or
5 years and floating thereafter), prepayment penalty will be waived during the floating rate tenor. However, nomenclature the product was offered (whether fixed, floating or fixed‐cum‐floating) and the marketing strategy while launching the product will have to be considered. Regulator has indicated that industry players will be consulted before making it applicable.
• Individual loan repayment in a year is of 15‐17%, of which about two thirds is by way of prepayment and one third being regular amortization. Even though the prepayment penalty is 2%, some financiers do not levy any penalty if it is from own sources (which forms almost two‐thirds of the total prepayment). Hence, in a year, LICHF do not earn more than ~5‐6bps (maximum) of outstanding individual loan book as prepayment fee income.
• Apart from the financial impact, we believe non‐levy of prepayment charges will lead to a significant increase in refinancing demand as loan pricing will only be a key determinant for sticking with a financier. This will increase churn and impact stability of loan book and ALM profile.
Banking and Financial Services
6 Edelweiss Securities Limited
Financials snapshot (INR mn)Year to March Q2FY12 Q2FY11 % Change Q1FY12 % Change FY11 FY12E FY13EInterest income 14,579 10,429 39.8 13,581 7.4 44,808 61,330 77,638Interest expenses 11,238 7,378 52.3 9,971 12.7 30,977 46,225 57,706Net interest income 3,341 3,051 9.5 3,610 (7.4) 13,831 15,105 19,932Non‐interest income 574 645 (11.0) 601 (4.5) 2,194 2,523 2,918Total revenue 3,915 3,696 5.9 4,211 (7.0) 16,024 17,628 22,850Operating expenses 561 505 11.1 422 33.1 2,162 2,437 2,743Operating profit 3,354 3,191 5.1 3,789 (11.5) 13,862 15,191 20,107Provisions 2,047 3 63,862.2 334 513.0 2,609 1,381 2,632Profit before tax 1,307 3,188 (59.0) 3,455 (62.2) 11,254 13,810 17,475Provision for tax 323 848 (61.9) 889 (63.6) 2,825 3,729 4,718Profit after tax 984 2,340 (57.9) 2,566 (61.6) 8,428 10,081 12,757EPS (INR) 5.4 4.5 20.9 5.4 0.0 17.7 21.2 26.9
Ratios (%) 0 0 0.1 0 0 0 0NII / GII 22.9 29.3 26.6 30.9 24.6 25.7Cost ‐ income 14.3 13.7 10.0 13.5 13.8 12.0Tax rate 24.7 26.6 25.7 25.1 27.0 27.0
Balance sheet data 0 0 0.1 0 0 0 0Loan book (INR mn) 560,977 433,850 29.3 528,755 6.1 510,898 648,649 795,948Disbursements (INR mn) 51,480 51,010 0.9 35,451 45.2 199,128 221,028 260,812
Ratios (%) 0 0 0.1 0 0 0 0Gross NPA 0.6 0.7 0.8 0.5 0.5 0.7Net NPA 0.1 0.2 0.3 0.0 0.1 0.1
LIC Housing Finance
7 Edelweiss Securities Limited
Company Description LICHF is the fourth‐largest mortgage finance company in India. It provides loans for homes, construction activities, and corporate housing schemes. Almost ~92% of the company’s loans are to retail customers and the balance ~8% to project developers. The company has loan outstanding of INR 560 bn as at September 30, 2011. It has 7 regional offices, 13 back offices and 181 marketing offices covering over 450 locations. LIC India is its majority shareholder with 36% equity holding, followed by FIIs at ~40%.
Investment Theme The company has gained significant scale in the past 2 years building a loan book of INR 530 bn. It has surprised positively in terms of loan growth and margin improvement in the past 2 quarters. LICHFL has surprised positively in terms of operating metrics through FY11. Q1FY12 witnessed unwinding of some of the benefit of FY11 and operating metrics came in below Street’s expectations. However, we believe margins are close to the bottom and should recover in H2FY12. Growth trajectory is also expected to improve in individual as well corporate segments Q2FY12 onwards. The company indicated it will evaluate raising equity in Q2FY12 and this will act as a trigger as it will be book value accretive.
Key Risks Disbursements continue to lose traction in individual and project loans. NIMs may come under pressure if not able to pass on the pressure of increased funding cost. Asset quality deteriorates in rising interest rate environment.
Banking and Financial Services
8 Edelweiss Securities Limited
Financial Statements Income statement (INR mn)Year to March FY09 FY10 FY11 FY12E FY13EInterest income 27,558 32,921 44,808 61,330 77,638Interest expended 20,174 23,957 30,977 46,225 57,706Net interest income 7,384 8,964 13,831 15,105 19,932Non interest income 1,274 1,751 2,144 2,471 2,863‐ Fee & forex income 697 1,283 1,509 1,768 2,086‐ Misc. income 577 469 635 702 777Income from operations 8,659 10,715 15,975 17,576 22,795Other income 292 30 50 52 55Net revenues 8,951 10,744 16,024 17,628 22,850Operating expenses 1,541 1,916 2,162 2,437 2,743 ‐ Employee exp 448 484 679 781 892 ‐ Depreciation /amortisation 50 64 62 64 68 ‐ Other opex 1,044 1,368 1,421 1,591 1,782Preprovision profit 7,410 8,829 13,862 15,191 20,107Provisions 146 (284) 2,609 1,381 2,632PBT 7,264 9,113 11,254 13,810 17,475Taxes 1,948 2,491 2,825 3,729 4,718PAT 5,316 6,622 8,428 10,081 12,757Extraordinaries 0 0 (1317) 1050 0Reported PAT 5,316 6,622 9,745 9,031 12,757Basic number of shares (mn) 425 475 475 475 475Basic EPS (INR) 12.5 13.9 17.7 21.2 26.9Diluted number of shares (mn) 425 475 475 475 475Diluted EPS (INR) 12.5 13.9 17.7 21.2 26.9DPS (INR) 2.6 3.0 3.5 4.1 5.2Dividend pay out (%) 24.3 25.2 19.8 25.3 22.7
‐21%Growth metrics (%)Year to March FY09 FY10 FY11 FY12E FY13ENet interest income 30.8 21.4 54.3 9.2 32.0 Net revenues growth 24.5 20.0 49.1 10.0 29.6 Opex growth 5.0 24.3 12.9 12.7 12.5 PPP growth 29.5 19.1 57.0 9.6 32.4 Provisions growth (63.6) (295.1) (1,017.6) (47.1) 90.6 PAT growth 37.3 24.6 27.3 19.6 26.5
Operating ratios (%)Year to March FY09 FY10 FY11 FY12E FY13EYield on assets 11.1 10.0 10.3 10.9 10.9 Yield on advances 11.1 10.0 10.2 9.9 9.9 Cost of funds 8.8 8.0 7.8 8.9 8.7 Spread 2.3 2.1 2.4 1.0 1.2 Net interest margins 3.0 2.7 3.17 2.68 2.80 Cost‐income 17.2 17.8 13.5 13.8 12.0 Tax rate 26.8 27.3 25.1 27.0 27.0
LIC Housing Finance
9 Edelweiss Securities Limited
Balance sheet (INR mn)As on 31st March FY09 FY10 FY11 FY12E FY13ELIABILITIESEquity capital 850 950 950 950 950 Share premium 2,533 9,013 9,013 9,013 9,013 Reserves & surplus 18,958 23,914 31,728 38,471 48,333 Net worth 22,341 33,877 41,691 48,434 58,295 Total deposits 1,618 3,262 2,458 2,221 2,054 Secured Loans 235,240 310,150 407,006 531,548 657,803 Unsecured Loans 17,359 34,170 42,164 57,790 71,372 Total liabilities 276,558 381,458 493,320 639,993 789,525 ASSETSLoans 276,793 380,814 510,898 648,649 795,948 Investments 11,292 13,887 14,032 14,662 15,539 Current assets 4,446 6,471 9,197 11,467 13,818 Current l iabil ities 17,265 20,961 42,980 37,081 38,341 Net current assets (12,819) (14,489) (33,783) (25,614) (24,524) Fixed assets (net block) 345 356 474 375 356 Other assets 948 891 1,698 1,922 2,205 Total assets 276,558 381,458 493,320 639,993 789,525 Balance sheet ratios (%)Loan growth 26.2 37.6 34.2 27.0 22.7 EA growth 24.8 38.1 29.2 29.8 23.4 Gross NPA ratio 1.1 0.7 0.5 0.5 0.7 Net NPA ratio 0.2 0.1 0.0 0.1 0.1 Provision coverage 80.8 82.4 93.8 90.0 90.0
Sanctions and disbursements (INR mn)Year to March FY09 FY10 FY11 FY12E FY13ESanctions (INR mn) 108,985 180,426 245,850 276,284 326,016Disbursements (INR mn) 87,620 148,527 199,128 221,028 260,812Disbursements to sanction ratio (%) 80.4 82.3 81.0 80.0 80.0Disbursements growth (%) 23.9 69.5 34.1 11.0 18.0Sanctions growth (%) 26.5 65.6 36.3 12.4 18.0
RoE decomposition (%)Year to March FY09 FY10 FY11 FY12E FY13ENet interest income/assets 3.0 2.73 3.17 2.68 2.80Non interest income/assets 0.6 0.5 0.5 0.4 0.4Investment gains/assets 0.0 0.0 0.0 0.0 0.0Net revenues/assets 3.6 3.3 3.7 3.1 3.2Operating expense/assets 0.6 0.6 0.5 0.4 0.4Provisions/assets 0.1 (0.1) 0.6 0.2 0.4Taxes/assets 0.8 0.8 0.6 0.7 0.7Total costs/assets 1.5 1.3 1.7 1.3 1.4ROA 2.1 2.0 1.9 1.8 1.8Equity/assets 8.2 8.6 8.7 8.0 7.5ROAE 26.2 23.6 22.3 22.4 23.9
Banking and Financial Services
10 Edelweiss Securities Limited
Valuation metricsYear to March FY09 FY10 FY11 FY12E FY13EDiluted EPS (INR) 12.5 13.9 17.7 21.2 26.9 EPS growth (%) 37.2 11.5 27.3 19.6 26.5 Book value per share (INR) 53 71 88 102 123 Adjusted book value per share (INR) 52 71 88 101 122 Diluted P/E (x) 18.4 16.5 13.0 10.8 8.6 Price/ BV (x) 4.4 3.2 2.6 2.3 1.9 Price/ Adj. BV (x) 4.5 3.3 2.6 2.3 1.9 Dividend yield (%) 1.1 1.3 1.5 1.8 2.3
11 Edelweiss Securities Limited
Company Absolute
reco
Relative
reco
Relative
risk
Company Absolute
reco
Relative
reco
Relative
Risk
Allahabad Bank REDUCE SO H Axis Bank BUY SO M
Bank of Baroda HOLD SO L Federal Bank BUY SO M
HDFC HOLD SU L HDFC Bank HOLD SP L
ICICI Bank BUY SO L Indian Overseas Bank HOLD SU H
Infrastructure Development Finance Co HOLD SU M ING Vysya HOLD SP H
Karnataka Bank BUY SO L Kotak Mahindra Bank REDUCE SP L
LIC Housing Finance HOLD SP M Mahindra & Mahindra Financial
Services
HOLD SP M
Manappuram General Finance HOLD SU M Oriental Bank Of Commerce REDUCE SU H
Power Finance Corp BUY SO L Punjab National Bank REDUCE SU L
Reliance Capital BUY SP M Rural Electrification Corporation BUY SO L
Shriram City Union Finance BUY SO H South Indian Bank HOLD SP H
State Bank of India HOLD SP L Union Bank Of India HOLD SO L
Yes Bank BUY SO M
RATING & INTERPRETATION
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Mahindra Satyam (Satyam) reported a reasonable 4.5% QoQ volume growth in Q2FY12 comparable to tier‐1 peers. Revenue in constant currency surged 4% QoQ, a tad lower than peers, due to higher offshore revenue share. Margin improved just 50bps QoQ despite currency boost due to provision for doubtful debts and higher share of systems integration revenue. Muted hiring and management commentary on large deal ramp ups delay hint at muted performance in the near term. The stock is not under coverage.
Volumes surge, but margin disappoints Satyam’s Q2FY12 revenue at INR15.8bn grew 10% QoQ partly aided by better realised exchange rate and hardware/software licence purchases for certain projects. In constant currency, it reported 4% QoQ revenue growth driven by 4.5% QoQ volume surge. EBITDA margin improvement of just 50bps QoQ was disappointing, despite benefiting from 6.7% higher QoQ realised exchange rate. Margin was impacted by higher share of India business, hardware/software licence purchases, visa expenses and provision for doubtful debts. Net profit at INR2.4bn grew just 5.8% QoQ despite forex gain of INR337mn as tax rate surged to 19.5% from 15.9% in Q1FY12. Commentary on near‐term business less optimistic The company reported 6% QoQ growth (nearly double its average growth rate) in USD terms in top 20 clients. Yet, Satyam’s commentary on near‐term performance was less optimistic. It stated some delays in ramp up of large deals, especially in Europe. It hired 650 people (2% QoQ growth in headcount) during the quarter, mostly laterals, and stated that it is focusing on just‐in‐time hiring. It also highlighted that since 52% of revenue came from time & material based pricing projects, fewer working days in Q3FY12 are likely to impact growth. It expects margin to be impacted by 250‐300bps in Q3FY12 due to salary hikes, which are effective October 2011.
Outlook and valuations: Building back gradually; NOT RATED Satyam’s Q2FY12 performance is reasonable. While margin will decline in Q3FY12 due to salary hikes, it is focused on improving margin in the future. The Street is estimating INR8.7bn EBITDA in FY12 compared to INR4.5bn in H1FY12. Hence, there will likely be upgrades. It is trading at 11x FY12E earnings. The stock is not under our coverage.
RESULT UPDATE
MAHINDRA SATYAMGetting back on track
EDELWEISS RATING
Absolute Rating NOT RATED
MARKET DATA (R: SATY.BO, B: SCS IN)
CMP : INR 73
Target Price : NA
52‐week range (INR) : 94 / 54
Share in issue (mn) : 1,176.7
M cap (INR bn/USD mn) : 86 / 1,727
Avg. Daily Vol.BSE/NSE(‘000) : 7,697.9
SHARE HOLDING PATTERN (%)
* Promoters pledged shares (% of share in issue)
: NIL
PRICE PERFORMANCE (%)
Stock Nifty EW
Technology Index
1 month 12.5 10.7 8.5
3 months (6.7) (0.9) (1.3)
12 months (11.3) (15.9) (0.3)
Ganesh Duvvuri +91 22 4040 7586 [email protected] Kunal Sangoi +91 22 6623 3370 [email protected] Omkar Hadkar +91 22 6620 3147 [email protected]
India Equity Research| IT
November 9, 2011
Financials
Year to March Q2FY12 Q1FY12 Growth % Q2FY11 Growth % FY11 FY12*
Revenues (INR mn) 15,777 14,339 10.0 12,424 27.0 51,450 61,573
EBITDA (INR mn) 2,417 2,126 13.7 735 228.8 4,551 8,523
EBITDA margin 15.3 14.8 5.9 8.8 13.8
EBIT 2,021 1,746 15.8 306 560.4 2,704 7,005
Net profit (INR mn) 2,382 2,278 4.6 233 922.5 (1,473) 7,625
Diluted EPS (INR) 2.0 1.9 5.8 0.2 910.0 (1.3) 6.4
Bloomberg estimates
Promoters*42.6%
MFs, FIs & Banks3.7%
FIIs15.2%
Others38.4%
IT
2 Edelweiss Securities Limited
Key highlights Revenue, at USD330mn, up 3.1% QoQ; in INR terms, revenue, at INR15,777 mn, was ahead of consensus estimate of INR 15,137 mn. This sequential revenue growth was driven by volume growth of 4.5% QoQ. EBITDA for the quarter stood at INR2,417mn (INR2,100mn in Q1FY12). EBITDA margin at 15.3% surged 50bps QoQ. Management stated that EBITDA margin will be impacted by 250‐300bps in Q3FY12 due to wage hikes effective October 1, 2011. While net profit stood at INR2.4bn, net margin came in at 15.1% (15.7% in Q1FY11) due to higher tax rate of 19.5% versus 15.9% in Q1FY11 . Chart 1: Revenue traction and EBITDA margin expansion continues
Source: Company
Headcount addition takes a breather: Satyam added just 654 (2,172 in Q1FY11) with most of them being laterals, taking its total headcount to 32,092. Attrition continued its downward trend and stood at 15.6% versus 17.0% in the previous quarter.
Segmental performance
• IT services business
• IT services revenue stood at INR15,479mn, up 10.0% QoQ.
• While EBIT was at INR1,974mn, EBIT margin surged marginally 70bps QoQ to 12.8%. • BPO
• Revenue at INR363mn jumped 14.9% QoQ. EBIT stood at INR47mn against INR12mn in the previous quarter.
• Current cash and equivalents in hand at INR 27.5bn (including. USD70 mn in escrow
account for the Upaid lawsuit).
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Mahindra Satyam
3 Edelweiss Securities Limited
Table 1: Operating metrics (standalone) for Q2FY12
Source: Company
Q4FY11 Q1FY12 Q2FY12Revenues (INR mn) 12,777 13,294 14,788 Geography wise (%)Americas 51 50 52 Europe 25 24 24 ROW 24 26 24 Vertical wise (%)Manufacturing 32 32 32 TME (Technology, Media & Entertainment) 19 20 21 BFSI 18 17 19 Retail, T&L 11 12 11 Healthcare & Life Sciences 8 7 7 Others 12 11 10 Location wise (%)Onsite 57 56 52 Offshore 43 44 48 Contract Type (%)T&M 54 56 52 Fixed Price 46 44 48 Client Details (Nos.)Total Active Clients 230 220 228 No. of million dollar clientsUS$ 1 Mn Clients 144 130 124 US$ 5 Mn Clients 48 47 47 US$ 10 Mn Clients 33 36 35 US$ 20 Mn Clients 12 14 16 US$ 50 Mn Clients 3 3 3 Client Contribution (Nos.)Top Client 9 10 10 Top 5 Clients 26 26 27 Top 10 Clients 39 36 39 Top 20 Clients 54 56 57 Manpower Details (Nos.)Technical (including sub cons) 22,924 25,015 25,405 Support 2,433 2,469 2,634 Subsidiary 3,909 3,955 4,053 BPO 2,724 2,712 2,807 Other Subsidiaries 1,185 1,243 1,246 Total (including Subsidiaries) 29,266 31,439 32,092 Attrition (%) ‐ IT 22 17 16
IT
4 Edelweiss Securities Limited
Financials snapshot (INR mn)Year to March Q2FY12 Q1FY12 Growth % Q2FY11 Growth % FY09 FY10 FY11Total revenues 15,777 14,339 10.0 12,424 27.0 88,126 54,810 51,450 Employee cost 9,620 9,301 3.4 9,136 5.3 60,737 39,811 35,943 Operating & admin exp. 3,740 2,912 28.4 2,553 46.5 24,372 10,430 10,956 Total expenditure 13,360 12,213 9.4 11,689 14.3 85,109 50,241 46,899 EBITDA 2,417 2,126 13.7 735 228.8 3,017 4,569 4,551 Depreciation 396 380 4.2 429 (7.7) 3,263 2,144 1,847 EBIT 2,021 1,746 15.8 306 560.4 (246) 2,425 2,704 Other income 630 756 (16.7) 404 56.0 631 2,043 2,394 Forex gain/(loss) 337 252 33.7 (91) (470.5) ‐ (987) 548 Interest 20 45 (55.0) 25 (18.4) 621 329 97 PBT before exceptional items 2,968 2,709 9.5 594 399.6 (236) 3,152 5,549 Exceptionals ‐ ‐ NA 84 (100.0) 79,920 4,169 6,411 PBT after exceptionals 2,968 2,709 9.5 510 481.9 (80,156) (1,017) (862) Tax 578 426 35.9 270 114.2 1,590 222 578 Adjusted net profit 2,390 2,284 4.6 240 895.6 (81,746) (1,239) (1,440) Minority interest 7 6 29.1 7 1.4 22 7 33 PAT after minority interest 2,382 2,278 4.6 233 922.5 (81,768) (1,246) (1,473) Basic EPS (INR) 2.0 1.9 5.8 0.2 910.0 (121.5) (1.1) (1.3) Diluted EPS (INR) 2.0 1.9 5.8 0.2 910.0 (121.5) (1.1) (1.3)
% of revenuesEmployee cost 61.0 64.9 73.5 68.9 72.6 69.9 Operating & admin exp. 23.7 20.3 20.5 27.7 19.0 21.3 EBITDA 15.3 14.8 5.9 3.4 8.3 8.8 EBIT 12.8 12.2 2.5 (0.3) 4.4 5.3 Reported net profit 15.1 15.9 1.9 (92.8) (2.3) (2.9) Tax rate 19.5 15.7 45.5 (673.7) 7.0 10.4
FY09 restated, FY10 actuals
Mahindra Satyam
5 Edelweiss Securities Limited
Company Description Mahindra Satyam provides top‐class business consulting, information technology and communication services. Leveraging on deep industry and functional expertise, leading technology practices and a global delivery model, it enables companies to achieve their business goals and transformation objectives. The company is powered by a pool of talented IT and consulting professionals across enterprise solutions, client relationship management, business intelligence, business process quality, operations management, engineering solutions, digital convergence, product lifecycle management, and infrastructure management services, among other capabilities and has development and delivery centers in the US, Canada, Brazil, the UK, Hungary, Egypt, UAE, India, China, Malaysia, Singapore and Australia. It has 32,092 employees. The company’s revenues for the past twelve months stood at INR 56.7 bn.
Key Risks Double dip recession in major market US and prolonged slowdown in Europe, sharp cross currency movements and appreciation of rupee against USD, Euro and GBP. Outcome of the class action lawsuits can have material impact on financials.
IT
6 Edelweiss Securities Limited
Financial Statements
Note: * FY08 as reported earlier, FY09 restated
Income statement (INR mn)Year to March FY08* FY09* FY10 FY11
Revenues 84,735 88,126 54,810 51,450 Cost of revenues 52,618 60,737 39,811 35,943Gross profit 32,117 27,389 14,999 15,507Total SG&A expenses 13,768 24,372 10,430 10,956EBITDA 18,349 3,017 4,569 4,551Depreciation & amortization 1,636 3,263 2,144 1,847EBIT 16,713 (246) 2,425 2,704Interest expense 202 621 329 97Other income 2,672 631 2,043 2,394Foreign exchange gain/(loss) 0 0 (987) 548Profit before tax before exceptional 19,183 (236) 3,152 5,549Exceptionals 0 79,920 4,169 6,411PBT after exceptionals 19,183 (80,156) (1,017) (862)Tax 2,304 1,590 222 578Core profit 16,879 (81,746) (1,239) (1,440)Minority int. and others ‐ paid/(recd.) 0 22 7 33Net profit after minority interest 16,879 (81,768) (1,246) (1,473)Shares outstanding (mn) 669 673 1,093 1,178EPS (INR) basic 25.2 (121.5) (1.1) (1.3)Diluted shares (mn) 683 673 1,093 1,178EPS (INR) diluted 24.7 (121.5) (1.1) (1.3)CEPS (INR) 27.7 (116.6) 0.8 0.3
Common size metrics ‐ as % of revenuesYear to March FY08 FY09 FY10 FY11Cost of revenues 62.1 68.9 72.6 69.9 Gross margin 37.9 31.1 27.4 30.1 SG&A expenses 16.2 27.7 19.0 21.3EBITDA margin 21.7 3.4 8.3 8.8EBIT margin 19.7 (0.3) 4.4 5.3Net profit margins 19.9 (92.8) (2.3) (2.8)
Growth metrics (%)Year to March FY08 FY09 FY10 FY11Revenues NA 4.0 (37.8) (6.1) EBITDA NA (83.6) 51.4 (0.4)EBIT NA (101.5) NM 11.5PBT NA (101.2) NM 76.0Net profit NA (584.3) NM 16.2EPS NA (591.7) NM 9.6
Mahindra Satyam
7 Edelweiss Securities Limited
Note: * FY08 as reported earlier, FY09 restated
Balance sheet (INR mn)
As on 31st March FY08* FY09* FY10 FY11Equity share capital 1,359 1,348 2,352 2,353
Reserves 71,033 (6,571) 16,456 14,896
Total shareholders funds 72,392 (5,223) 18,808 17,249Borrowings 2,167 6,410 422 315
Minority interest 0 0 201 234Deferred tax liability 0 0 39 68Amounts Pending Investigation Suspense Account (Net) 0 12,304 12,304 12,304
Sources of funds 74,559 13,491 31,774 30,170
Gross fixed assets 19,602 21,553 25,635 28,084Less: Accumulated depreciation 11,417 14,044 19,501 21,272Net fixed assets 8,185 7,509 6,134 6,812Capital WIP 4,609 3,895 3,731 2,687Investments 0 930 6,268 4,348
Deferred tax asset 872 0 65 81
Other current assets 2,725 2,795 4,955 4,378Cash & bank balances 45,024 4,076 21,768 27,538
Debtors 23,704 14,672 9,230 11,588
InventoriesLoans and advances 3,919 4,604 3,739 3,782
Total current assets 75,372 26,147 39,692 47,286
Sundry creditors 8,977 12,909 8,712 15,463Provisions 5,502 12,081 15,404 15,581Total current liabilities 14,479 24,990 24,116 31,044Working capital 60,893 1,157 15,576 16,242Application of funds 74,559 13,491 31,774 30,170
Book value per share (BV) (INR) 106 (8) 17 15
Free cash flowYear to March FY08 FY09 FY10 FY11Net profit 16,879 (81,768) (1,246) (1,473)Depreciation 1,636 3,263 2,144 1,847Others (1,070) 83,000 (1,416) (940)Gross cash flow 17,445 4,495 (518) (566)Less:Changes in working capital 4,159 2,878 (681) 45Operating cash flow 13,286 1,617 163 (611)Less: Capex 3,572 6,003 951 1,405Free cash flow 9,714 (4,386) (788) (2,016)
IT
8 Edelweiss Securities Limited
Note: * FY08 as reported earlier, FY09 restated
Cash flow statementYear to March FY08 FY09 FY10 FY11Cash flow from operations 17,445 4,495 (518) (566)Cash for working capital (4,159) (2,878) 681 (45)Operating cashflow (A) 13,286 1,617 163 (611)Net purchase of fixed assets (3,572) (6,003) (951) (2,475)Net purchase of investments 0 (56) (6,045) 2,307Others (1,815) (876) (15,208) 2,569Investments cashflow (B) (5,387) (6,935) (22,204) 2,401Dividends (2,738) (2,757) 0 0Proceeds from issue of equity 449 513 29,085 0Redemption of Preferred Stock (564) 0 0 0Proceeds from LTB/STB 681 6,120 (7,667) (107)Interest paid & other items (196) (337) (382) (97)Financing cash flow (C) (2,368) 3,539 21,036 (204)Amounts pending investigation suspense account (D) 0 2,104 0 0Exchange rate differences (E) (421) (50) (261) 91Opening Balance Adjustments (F) 0 (7,891) 0 0Change in cash (A+B+C) + (D)+(E)+(F) 5,110 (7,616) (1,266) 1,677
RatiosYear to March FY08 FY09 FY10 FY11Debtors (days) 102 79 80 74Payable (days) 39 45 72 86Cash conversion cycle 63 34 8 (12)Current ratio 5.2 1.0 1.6 1.5Fixed assets turnover (x) 10.4 11.2 8.0 7.9Total asset turnover(x) 1.1 2.0 2.4 1.7Equity turnover(x) 1.2 2.6 8.1 2.9
Valuation parametersYear to March FY08 FY09 FY10 FY11Diluted EPS (INR) 24.7 (121.5) (1.1) (1.3)Y‐o‐Y growth (%) NA (591.7) (99.1) 9.6Price/BV(x) 0.7 (9.6) 4.3 5.1EV/Revenues (x) 0.1 0.6 1.0 1.1EV/EBITDA (x) 0.4 17.0 11.8 12.4EV/EBITDA (x)+1 yr forward 2.3 11.3 11.8
Edelweiss Research is also available on www.edelresearch.com,
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Edelweiss Securities Limited
Mundra Port & SEZ (MPSEZ) reported a Q2FY12 PAT of INR2.8bn - in line
with our estimates - led by a 34% surge in cargo volumes at 16.8 mt (our
estimate at 17 mt). While the capacity expansion continues on account of
recently acquired projects as well as the brownfield expansion, we see a
pick-up in utilisation levels. Rising yields will help expand RoE going
forward. We maintain ‘BUY’ with a target price of INR 168.
Volume growth remains strong
MPSEZ’s flagship, Mundra port reported a strong cargo volume growth of 34% YoY led
by an overall growth in dry cargo, bulk and liquid cargo at 46%, 41% and 33%
respectively during the quarter. Container cargo grew lower by 16% to 4.4 MMT.
Realisation surges, margin set to improve
The company reported a spurt in realisation to INR349/t, up 7.7% QoQ. We believe the
take or pay contract with Tata Power would have marginally contributed to the spike in
realisation. EBITDA margins were flat at 66.3% YoY (68.5% in Q1FY12). We expect the
incremental coal cargo at the mechanised coal terminal and crude volume at the SPM
terminal to help improve margins going forward.
Incorporating Abbot in valuations
We have incorporated Abbot Point terminal acquisition in both financials and
valuations. We are not factoring any income-tax benefits in the Australian port and
assumed expansion of 30 MMT to 80 MMT which is likely to be fully operational by
2017 at a cost of AUD600mn, contributing INR8/share to our SOTP.
Outlook and valuations: Momentum intact; maintain ‘BUY’
While the growth momentum at Mundra port would persist, performance of other
domestic and global projects - which it has acquired through bidding - will be key
monitorables going forward. The high visibility and scale up of cargo along with the de-
risked revenue model should aid valuations. At CMP of INR150, the stock is trading at
consolidated FY12E and FY13E EV/EBITDA of 17.8 and 12.0 respectively. We maintain
BUY/SO with our revised SOTP of INR 168/share (INR 157 earlier).
RESULT UPDATE
MUNDRA PORT & SEZ Delivering on promises
EDELWEISS 4D RATINGS
Absolute Rating BUY
Rating Relative to Sector Outperformer
Risk Rating Relative to Sector Medium
Sector Relative to Market Equalweight
MARKET DATA (R: MPSE.BO, B: MSEZ IN)
CMP : INR 150
Target Price : INR 168
52-week range (INR) : 170 / 110
Share in issue (mn) : 2,003.4
M cap (INR bn/USD mn) : 301 / 6,004
Avg. Daily Vol.BSE/NSE(‘000) : 1,571.7
SHARE HOLDING PATTERN (%)
* Promoters pledged shares
(% of share in issue)
: NIL
PRICE PERFORMANCE (%)
Stock Nifty
EW Power
Index
1 month 11.6 10.7 7.3
3 months 18.8 (0.9) (6.4)
12 months 2.5 (15.9) (17.9)
Shankar.K
+91 22 4040 7412
Santosh Hiredesai
+91 22 6620 3027
India Equity Research| Power
November 11, 2011
Financials (Standalone) (INR mn)
Year to March Q2FY12 Q2FY11 % Chg Q1FY12 % Chg FY11 FY12E
Net revenues 6,197 4,135 49.9 5,296 17.0 18,851 25,658
EBITDA 4,106 2,737 50.0 3,629 13.2 13,100 17,467
Adj profit 2,873 2,106 36.5 2,525 13.8 9,862 13,100
Diluted P/E (x) 30.6 23.0
EV/EBITDA (x) 24.4 17.6
ROAE (%) 25.3 26.9
Promoters*
77.5%
MFs, FIs &
Banks
5.0%
FIIs
10.6%
Others
6.9%
Power
2 Edelweiss Securities Limited
Table 1: SOTP Valuation
Source: Edelweiss research
Part Method CoE Value Stake Value of Stake Price per share % age of SOTP
(%) (INR mn) (%) (INR mn) (INR) (%)
Mundra Port DCFE 12.8% 243,584 100% 243,584 122 72.5%
SEZ DCFE 18.8% 22,105 100% 22,105 11 6.6%
Dahej Port DCFE 13.4% 23,004 74% 17,023 8 5.1%
Mormugao Terminal DCFE 13.4% 6,005 100% 6,005 3 1.8%
Hazira Port DCFE 13.4% 13,041 100% 13,041 7 3.9%
Abbot Point DCFE 13.7% 15,190 100% 15,190 8 4.5%
ALL P/BV 2x FY11 6,237 100% 6,237 3 1.9%
Cash FY12E Book 12,698 100% 12,698 6 3.8%
Total 341,864 335,883 168 100.0%
Financial snapshot (Standalone) (INR mn)
Year to March Q2FY12 Q2FY11 % Change Q1FY12 % Change FY11 FY12E FY13E
Net revenues 6,197 4,135 49.9 5,296 17.0 18,851 25,658 35,066
Cost of operations 1,497 1,003 49.3 1,168 28.1 4,190 6,189 8,734
Staff costs 237 194 22.2 206 15.0 666 833 999
Other operating expenses 358 202 77.5 294 21.9 895 1,169 1,462
Total expenditure 2,091 1,398 49.6 1,667 25.4 5,751 8,191 11,196
EBITDA 4,106 2,737 50.0 3,629 13.2 13,100 17,467 23,870
Depreciation & amortization 679 485 40.0 587 15.6 2,079 2,771 2,854
EBIT 3,428 2,252 52.2 3,042 12.7 11,021 14,696 21,016
Other income 67 95 (29.5) 4 1,540.2 498 286 358
Interest 464 92 407.1 331 40.1 750 1,787 1,139
Profit before tax 3,030 2,256 34.3 2,714 11.6 10,769 13,195 20,234
Provision for taxes 296 139 112.9 171 73.3 907 95 119
Reported net profit 2,734 2,117 29.2 2,544 7.5 9,862 13,100 20,116
Adjustments 139 (11) (1,354.0) (18) (851.4) - - -
Adjusted net profit 2,873 2,106 36.5 2,525 13.8 9,862 13,100 20,116
Equity capital (FV INR 2) 4,007 4,007 4,007 4,007 4,007 4,007
No. of shares (mn) 2,003 2,003 2,003 2,003 2,003 2,003
Adj. EPS (INR) 1.4 1.1 1.3 4.9 6.5 10.0
As % of net revenues
Direct costs 24.1 24.2 22.1 22.2 24.1 24.9
Employee cost 3.8 4.7 3.9 3.5 3.2 2.8
Other operating expenses 5.8 4.9 5.5 4.7 4.6 4.2
EBITDA 66.3 66.2 68.5 69.5 68.1 68.1
Reported net profit 44.1 51.2 48.0 52.3 51.1 57.4
Tax rate 9.8 6.2 6.3 8.4 0.7 0.6
Mundra Port & SEZ
3 Edelweiss Securities Limited
Company Description
Mundra Port SEZ (MPSEZ), incorporated as Gujarat Adani Port on May26, 1998, began
commercial operations in October 2001, post entering into concession agreement with GMB
to build, operate and maintain the port for a period of 30 years till 2031 extendable by
another 20 years. The port is into providing cargo handling services for bulk, crude and
container cargo. The company has also received approval to develop the adjacent port land
as a multi-product SEZ. Notification has been issued to ~16,000 acres of land while the
company is in talks to acquire more land to add to its SEZ portfolio. While the company is
also bidding for other domestic and international port projects it has also invested in value
added services like logistics support, providing container rail services and inland container
depots to diversify from its core port business.
Investment Theme
MPSEZ, under the aegis of the parent company Adani Enterprises, has been instrumental in
developing a deep draft gateway port and SEZ strategically on the West coast of India with
state–of-the-art infrastructure and capability to handle diversified cargo. Since inception,
MPSEZ has posted 35% CAGR and handled ~51 MT cargo in FY11, higher than most other
major Indian ports. Also, it has hedged cargo uncertainty risk by getting into long-term
service contracts (45% of total cargo to be handled in FY14E). Such a third generation port
acting as one-stop-shop for export/import logistics is in unique league of ports and one of its
kinds in India. The company has a strong portfolio of projects on the Indian West coast other
than the flagship Mundra port. These projects will help the company gain a pan-India
presence. It has also been scouting for opportunities to go global and has recently evinced
interest in port development projects in Australia and Indonesia, in line with its long-term
strategy.
Key Risks
Uncertainty in traffic at ports
Since cargo at ports is contingent on international trade, any slowdown in it could affect
Mundra Port as well. MPSEZ is hedged to some extent from the traffic risk because of the
take-or-pay agreements which constitute about 45% of the cargo going ahead.
Regulatory changes regarding SEZs
The existing SEZ policies and benefits outlined by the government to promote exports are
relatively new and are being continuously reviewed. Any changes in the form of reversal of
current tax benefits to units under the SEZ umbrella will significantly undermine incentives
for industries to setup units in the SEZ, hampering current plans of land sale. Land parcel
sale at the SEZ is yet to pick up.
Execution risk in international projects
Although the company has been successful in port projects implemented in India (largely
Gujarat), we need to watch out for the execution and the profitability in its international
ventures as well the East coast of India. MPSEZ is planning to leverage its captive group
business—Adani Enterprises’ mining operations and Adani Power’s coal imports—to provide
assured cargo visibility and thereby minimize the risks associated with a greenfield venture.
Power
4 Edelweiss Securities Limited
Financial Statements (Consolidated)
Income statement (INR mn)
Year to March FY09 FY10 FY11 FY12E FY13E
Total revenues 11,949 14,955 20,001 36,459 50,295
Cost of Operations 3,195 3,789 5,321 10,236 13,859
Staff cost 404 595 798 1,225 1,513
Other operating expenses 794 909 888 1,954 2,489
Total expenditure 4,393 5,293 7,007 13,415 17,861
EBITDA 7,557 9,663 12,994 23,044 32,434
Depreciation and Amortisation 1,468 1,868 2,388 3,658 6,224
EBIT 6,089 7,795 10,606 19,387 26,210
Interest 1,459 559 880 2,708 3,160
Other income 446 321 309 27 33
PBT 5,075 7,556 10,036 16,706 23,083
Provision for tax 533 601 874 24 538
Core profit 4,542 6,955 9,162 16,681 22,545
Extraordinary items (217) (220) 0 0 0
Profit before minority interest 4,325 6,736 9,162 16,681 22,545
Minority interest - (16) (20) (12) 214
Share of profit in associate co. - 8 - - -
Profit after minority interest 4,325 6,760 9,181 16,693 22,331
Shares outstanding ( mn ) 2,003 2,003 2,003 2,003 2,003
EPS (INR) basic 2.2 3.4 4.6 8.3 11.1
Diluted shares (mn) 2,003 2,003 2,003 2,003 2,003
EPS (INR) fully diluted 2.2 3.4 4.6 8.3 11.1
Dividend per share 0.7 0.7 0.9 0.9 0.9
Dividend payout (%) 32.5 20.8 19.6 10.8 8.1
Common size metrics- as % of net revenues
Year to March FY09 FY10 FY11 FY12E FY13E
Operating expenses 36.8 35.4 35.0 36.8 35.5
Depreciation and amortization 12.3 12.5 11.9 10.0 12.4
Interest expenditure 12.2 3.7 4.4 7.4 6.3
EBITDA margins 63.2 64.6 65.0 63.2 64.5
Net profit margins 38.0 46.5 45.8 45.8 44.8
Growth metrics (%)
Year to March FY09 FY10 FY11 FY12E FY13E
Revenues 46.3 25.2 33.7 82.3 37.9
EBITDA 41.0 27.9 34.5 77.3 40.7
PBT 43.6 48.9 32.8 66.5 38.2
Net profit 127.0 53.7 31.5 81.8 33.8
EPS 116.2 56.3 35.8 81.8 33.8
5 Edelweiss Securities Limited
Mundra Port & SEZ
Balance sheet (INR mn)
As on 31st March FY09 FY10 FY11 FY12E FY13E
Share capital 4,035 4,035 4,035 4,035 4,035
Reserves & surplus 25,261 30,504 37,864 52,754 73,283
Shareholders funds 29,296 34,539 41,899 56,789 77,317
Minority interest 102 822 987 975 1,189
Secured loans 27,991 31,814 35,669 123,301 125,220
Unsecured loans 966 5,248 256 256 256
Borrowings 28,957 37,062 35,925 123,557 125,476
Deferred Revenue 6,505 6,291 6,121 6,121 6,121
Deferred Tax Liability 2,296 2,817 3,468 3,468 3,468
Sources of funds 67,156 81,629 88,400 190,910 213,571
Gross block 41,043 56,342 73,738 176,953 180,178
Less : Depreciation 5,446 7,842 10,229 13,887 20,111
Net block 35,597 48,500 63,508 163,066 160,067
Capital work in progress 16,195 19,183 21,174 13,111 18,568
Total fixed assets 51,792 67,682 84,683 176,177 178,635
Investments 2,072 2,219 666 666 666
Inventories 267 316 423 814 1,103
Sundry debtors 2,293 1,764 2,849 5,362 7,397
Cash and equivalents 12,951 9,997 2,515 15,872 37,392
Loans and advances 1,153 4,471 2,444 2,444 2,444
Other current assets 547 643 1,201 1,201 1,201
Total current assets 17,211 17,191 9,433 25,694 49,537
Sundry creditors and others 3,469 4,754 5,736 10,981 14,621
Provisions 470 740 1,050 1,050 1,050
Total CL & provisions 3,939 5,494 6,786 12,031 15,671
Net current assets 13,272 11,698 2,647 13,663 33,867
Uses of funds 67,156 81,629 88,400 190,910 213,571
Adjusted book value per share (BV)(INR) 15 17 21 28 39
Free cash flow (INR mn)
Year to March FY09 FY10 FY11 FY12E FY13E
Net profit 4,325 6,760 9,181 16,693 22,331
Depreciation 1,468 1,868 2,388 3,658 6,224
Deferred tax 525 521 651 0 0
Others 457 37 (2,262) 2,669 3,340
Gross cash flow 6,775 9,185 9,958 23,020 31,896
Less: Changes in W. C. (692) (1,309) (2,127) (2,341) (1,316)
Operating cash flow 7,467 10,495 12,085 25,361 33,212
Less: Capex 16,909 18,287 19,388 95,152 8,682
Free cash flow (9,442) (7,792) (7,303) (69,791) 24,530
Cash flow metrices
Year to March FY09 FY10 FY11 FY12E FY13E
Operating cash flow 7,467 10,495 12,085 25,361 33,212
Financing cash flow 3,649 6,949 (5,279) 83,121 (3,043)
Investing cash flow (7,756) (18,057) (9,704) (95,126) (8,648)
Net cash flow 3,360 (613) (2,899) 13,357 21,520
Capex (16,909) (18,287) (19,388) (95,152) (8,682)
Dividends paid (1,407) (1,404) (1,803) (1,803) (1,803)
Share issuance/(buyback) 26 0 0 0 0
6 Edelweiss Securities Limited
Power
Profitability & liquidity ratios
Year to March FY09 FY10 FY11 FY12E FY13E
ROAE (%) 16.4 21.9 24.0 33.8 33.3
ROACE (%) 10.9 10.8 12.7 13.9 13.0
Current ratio 4.4 3.1 1.4 2.1 3.2
Debtors (days) 81 50 42 41 46
Average fixed assets t/o (x) 0.4 0.4 0.4 0.3 0.3
Average working capital t/o (x) 24.3 14.8 21.8 (35.1) (17.5)
Average capital employed t/o (x) 0.2 0.2 0.2 0.3 0.2
Debt / Equity 1.0 1.1 0.9 2.2 1.6
Debt/EBITDA 3.8 3.8 2.8 5.4 3.9
Adjusted Debt/Equity 1.0 1.1 0.9 2.2 1.6
Operating ratios
Year to March FY09 FY10 FY11 FY12E FY13E
Total asset turnover 0.2 0.2 0.2 0.3 0.2
Average fixed assets t/o (x) 0.4 0.4 0.4 0.3 0.3
Equity turnover 0.4 0.5 0.5 0.7 0.8
Du pont analysis
Year to March FY09 FY10 FY11 FY12E FY13E
NP margin (%) 38.0 46.7 45.9 45.8 44.4
Total assets turnover 0.2 0.2 0.2 0.3 0.2
Leverage multiplier 2.2 2.3 2.2 2.8 3.0
ROAE (%) 16.4 21.9 24.0 33.8 33.3
Valuation parameters
Year to March FY09 FY10 FY11 FY12E FY13E
Diluted EPS (INR) 2.2 3.4 4.6 8.3 11.1
Y-o-Y growth (%) 117.6 56.3 35.8 81.8 33.8
CEPS (INR) 2.7 4.2 5.5 10.2 14.3
Diluted P/E (x) 69.7 44.6 32.8 18.1 13.5
Price/BV(x) 10.3 8.7 7.2 5.3 3.9
EV/Sales (x) 26.4 21.9 16.8 11.2 7.8
EV/EBITDA (x) 41.7 33.8 25.8 17.8 12.0
Dividend Yield (%) 0.5 0.5 0.6 0.6 0.6
7 Edelweiss Securities Limited
Company Absolute
reco
Relative
reco
Relative
risk
Company Absolute
reco
Relative
reco
Relative
Risk
Adani Enterprises HOLD SU M Adani Power REDUCE SU L
CESC BUY SU H GMR Infrastructure BUY SO H
GVK Power and Infra HOLD SO H JSW Energy REDUCE SU H
Lanco Infratech BUY SO H Marg BUY None None
Mundra Port & SEZ BUY SO M Navabharat Ventures BUY None None
NTPC HOLD SU L Power Grid Corp of India BUY SP L
PTC India BUY SO L Reliance Infrastructure BUY SO M
Tata Power Co BUY SO M
RATING & INTERPRETATION
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe
within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
8 Edelweiss Securities Limited
Power
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91-22) 4009 4400, Email: [email protected]
Vikas Khemani Head Institutional Equities [email protected] +91 22 2286 4206
Nischal Maheshwari Head Research [email protected] +91 22 6623 3411
Coverage group(s) of stocks by primary analyst(s): Power
Adani Power, Adani Enterprises, CESC, GMR Infrastructure, GVK Power and Infra, JSW Energy, Lanco Infratech, Marg, Mundra Port & SEZ, Navabharat
Ventures, NTPC, PTC India, Power Grid Corp of India, Reliance Infrastructure, Tata Power Co
Distribution of Ratings / Market Cap
Edelweiss Research Coverage Universe
Rating Distribution* 119 47 15 184
* 3 stocks under review
Market Cap (INR) 111 57 16
Date Company Title Price (INR) Recos
Access the entire repository of Edelweiss Research on www.edelresearch.com
Recent Research
10-Nov-11 GMR
Infrastructure
‘Extraordinaries’ galore;
Result Update
26 Buy
10-Nov-11 GVK Power &
Infrastructure
Sedate quarter;
Result Update
13 Hold
10-Nov-11 JSW Energy Trips on low demand, high
costs;
Result Update
50 Reduce
> 50bn Between 10bn and 50 bn < 10bn
Buy Hold Reduce Total
Rating Interpretation
Buy appreciate more than 15% over a 12-month period
Hold appreciate up to 15% over a 12-month period
Reduce depreciate more than 5% over a 12-month period
Rating Expected to
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Pantaloon Retail’s (PRIL) core retail disappointed in Q1FY12 due to slowdown in same store sales growth across segments (3.64% in value retail, 6.53% in lifestyle, 1.26% in home retail) vis‐à‐vis Shoppers Stop, which posted robust growth (11% in departmental, 8% in HyperCity). Interest costs gobbled ~75% of its EBIT and jumped 40% YoY. Surge in working capital has been one key reason behind the spurt in debt. The company’s inventory days increased from 93 in FY10 to 110 in FY11 (much higher than 32 for Shoppers stop). Slowdown in sales for two consecutive quarters, mounting debt, delay in sale of non‐core assets, rising inventory and unlikely allowance of FDI in multi brand retail are likely to impact PRIL’s future growth plans. Hence, we downgrade the stock to ‘HOLD’. Higher interest expense dents PAT
PRIL’s net sales surged ~13% YoY to INR29.1bn in Q1FY12. Growth was slow due to muted consumer sentiments amidst high inflation. Sales were impacted by close down of stores for a total of 12 days in Hyderabad due to the Telangana issue. PAT declined 23% YoY to INR330mn following higher interest expense (up 40% YoY) despite 420bps YoY dip in tax rate to 29.5% from ~34.0%; net profit margin dipped 52bps YoY. Margin improves as COGS pressure eases; expansion on track EBITDA rose 18.6% YoY to INR2.5bn for the quarter. Gross margin improved due to check on COGS (down 46bps YoY); EBITDA margin also improved (43bps YoY) to 8.7%. Benefit of softening in cotton prices is evident from lessening of COGS pressure as per our expectation. 0.44mn sq ft of retail space was added during the quarter to 15.68mn sq ft (slightly below earlier run rate 0.5mn sq ft per quarter). Outlook and valuations: Gloomy; downgrade to ‘HOLD’
Although we like PRIL’s diversified mix of retail business and its size, burgeoning debt and higher inventory days remain key concerns which we have been highlighting repeatedly; both these parameters continue to worsen. Due to upcoming elections in major states, FDI in multi-brand retail looks unlikely. Hence, we are downgrading our recommendation to ‘HOLD’ from ‘BUY’; maintain ‘Sector Underperformer’ rating. At CMP, the stock is trading at 19.2x FY12E and 14.7x FY13E EPS.
RESULT UPDATE
PANTALOON RETAILDeteriorating fundamentals
EDELWEISS 4D RATINGS
Absolute Rating HOLD
Rating Relative to Sector Underperformer
Risk Rating Relative to Sector High
Sector Relative to Market Overweight
MARKET DATA (R: PART.BO, B: PF IN)
CMP : INR 172
Target Price : INR 190
52-week range (INR) : 476 / 166
Share in issue (mn) : 217
M cap (INR bn/USD mn) : 38 / 751
Avg. Daily Vol.BSE/NSE(‘000) : 564.1
SHARE HOLDING PATTERN (%)
* Promoters pledged shares (% of share in issue)
: 29.7
PRICE PERFORMANCE (%)
Stock Nifty
EW RetailIndex
1 month 2.1 10.7 3.9
3 months (40.3) (0.9) (10.4)
12 months (60.0) (15.9) (20.1)
Abneesh Roy +91 22 6620 3141 [email protected] Harsh Mehta +91 22 4063 5543 [email protected]
India Equity Research| Retail
November 11, 2011
Financials (INR mn)
Year to June Q1FY12 Q1FY11 % Chg Q4FY11 % Chg FY11 FY12E Net revenues 29,106 25,814 12.8 28,604 1.8 110,123 129,946 EBITDA 2,523 2,127 18.6 2,612 (3.4) 9,600 11,175 Net profit 330 428 (22.8) 491 (32.8) 1,897 1,934 Diluted EPS (INR) 1.5 2.0 (25.0) 2.3 (34.7) 8.7 8.9 Diluted P/E (x) 19.6 19.2 ROAE (%) 6.3 6.0
Nos represent core retail business (PRIL+ FVRL)
Promoters*43.7%
MFs, FIs & Banks20.0%
FIIs23.6%
Others12.7%
Retail
2 Edelweiss Securities Limited
Chart 1: Presence across formats
Chart 2: Retail space addition on track‐ 15.68 mn sq ft
Chart 3: EBITDA margin expands Y‐o‐Y
Source: Company, Edelweiss research
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3 Edelweiss Securities Limited
Chart 4: Slowest SSS growth across segments in past 13 quarters
Source: Company, Edelweiss research
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Value retailing Lifestyle retailing Home retailing
Retail
4 Edelweiss Securities Limited
Financial snapshot (INR mn) Year to June Q1FY12 Q1FY11 % Change Q4FY11 % Change FY11 FY12E FY13E Net revenues 29,106 25,814 12.8 28,604 1.8 110,123 129,946 160,054 Raw material costs 20,611 18,398 12.0 20,159 2.2 79,010 92,262 113,238 Staff costs 1,270 1,172 8.4 1,279 (0.7) 4,883 5,848 7,202 Other expenses 4,703 4,117 14.2 4,554 3.3 16,630 20,661 25,769 Total expenditure 26,583 23,687 12.2 25,992 2.3 100,522 118,771 146,209 EBITDA 2,523 2,127 18.6 2,612 (3.4) 9,600 11,175 13,845 Depreciation 828 630 31.5 735 12.6 2,675 3,395 4,182 EBIT 1,695 1,497 13.2 1,876 (9.7) 6,925 7,781 9,663 Other income 79 81 (2.7) 41 93.2 208 324 373 PBIT 1,774 1,578 12.4 1,917 (7.5) 7,133 8,104 10,035 Interest 1,305 933 39.9 1,182 10.5 4,288 5,218 6,260 Profit before tax 468 645 (27.4) 735 (36.3) 2,845 2,887 3,776 Tax 138 218 (36.4) 244 (43.3) 948 953 1,246 Core profit 330 428 (22.8) 491 (32.8) 1,897 1,934 2,530 Reported net profit 330 428 (22.8) 491 (32.8) 1,897 1,934 2,530 Diluted EPS (INR) 1.5 2.0 (25.0) 2.3 (34.7) 8.7 8.9 11.7 As % of net revenues Raw material 70.8 71.3 70.5 71.7 71.0 70.8 Employee cost 4.4 4.5 4.5 4.4 4.5 4.5 Other expenditure 16.2 15.9 15.9 15.1 15.9 16.1 Total expenses 91.3 91.8 90.9 91.3 91.4 91.3 EBITDA 8.7 8.2 9.1 8.7 8.6 8.6 PBT 1.6 2.5 2.6 2.6 2.2 2.4 Adjusted net profit 1.1 1.7 1.7 1.7 1.5 1.6
Nos represent core retail business (PRIL+ FVRL)
Pantaloon Retail
5 Edelweiss Securities Limited
Company Description PRIL is a leading Indian retail company with presence across most sectors of organized retail. The company, entered modern retail in 1997 with the opening of its department store format Pantaloons. In 2001, PRIL launched Big Bazaar, a hypermarket chain, followed by Food Bazaar, a supermarket chain. A five format company, two years back, it now operates over 20 formats which include Central (seamless malls located in city centers), Collection I (home improvement products), Depot (books, music, gifts and stationeries), aLL (fashion apparel for plus-size individuals), Shoe Factory (footwear), and Blue Sky (fashion accessories).
Investment Theme The Indian retail landscape is evolving with interplay of several demographic and economic factors. Despite the slowdown expected in real GDP growth in the near term, the long term prospects backed by changing consumer behaviour in favour of larger discretionary spend, has set the stage for a healthy growth in the retail space over the next five years. The big opportunity lies in the growing share of organised retail with the growing trend among consumers to allocate a larger share of income to consumption and gradual improvement in lifestyle. We continue to remain optimistic about PRIL’s strong presence across multiple consumption categories and its size. However, burgeoning debt and higher inventory days remain key concerns and continues to deteriorate. Also delay in allowing FDI in multi brand retail does not provide any respite to the company. We believe PRIL is best placed to benefit from the change in regulation whenever it happens.
Key Risk Rising share of debt
Going forward, the company will have to depend primarily on debt for funding growth. Steep increase in cost of borrowing can impact the profitability of the company.
Slow revenue growth due to rollout delays and poor same store growth
A large number of retailers are facing delays in roll outs due to delays by developers. This is a significant risk and can lead to cost overruns. The delays on account of other retailers could also impact PRIL as malls will not be viable unless all tenants are tied in. The company’s same store sales as a whole have been falling steadily due to rising competition. Continued sharp decline in the same in the future will be a risk to the company’s growth. Pressure on margins due to competition
With increasing competition, catchment areas are shrinking and the PSFPAs are not scaling up as expected. Coupled with this, the shortage of quality retail space leading to spiraling rentals, underdeveloped supply chain, and rising employee costs, which could add to the cost and impact the company’s margins. Macro slowdown
Macro concerns could hamper domestic consumption trends and result in lower footfalls.
6 Edelweiss Securities Limited
Retail
Financial Statements – Core retail
Income statement (INR mn) Year to June FY09 FY10 FY11 FY12E FY13ENet revenue 63,417 89,261 110,123 129,946 160,054Materials costs 44,300 63,549 79,010 92,262 113,238 Gross profit 19,118 25,712 31,113 37,684 46,816 Employee costs 2,743 3,940 4,883 5,848 7,202 Electricity expenses 990 1,308 1,831 2,209 2,721 Rent and lease expenses 5,066 6,315 7,474 10,266 12,644 Other expenses 2,493 3,833 4,840 5,523 7,042 Advertisement & sales costs 1,142 2,126 2,485 2,664 3,361 EBITDA 6,684 8,191 9,600 11,175 13,845 Depreciation & Amortization 1,401 2,123 2,675 3,395 4,182 EBIT 5,283 6,068 6,925 7,781 9,663 Other income 61 857 208 324 373 EBIT incl. other income 5,344 6,925 7,133 8,104 10,035 Interest expenses 3,182 3,913 4,288 5,218 6,260 Profit before tax 2,162 3,013 2,845 2,887 3,776 Provision for tax 757 582 948 953 1,246 Core profit 1,405 2,431 1,897 1,934 2,530 Prior period adjustments (net) - (129) - - - Profit after minority interest 1,405 2,302 1,897 1,934 2,530 Basic shares outstanding (mn) 190 206 217 217 217 Basic EPS (INR) 7.4 11.8 8.7 8.9 11.7 Diluted equity shares (mn) 190 206 217 217 217 Diluted EPS (INR) 7.4 11.8 8.7 8.9 11.7 CEPS (INR) 14.7 22.1 21.1 24.5 30.9 Dividend per share (INR) 0.8 1.4 1.2 1.2 1.5 Dividend payout (%) 11.1 12.8 13.4 13.0 13.0
Common size metrics ‐ as % of net revenues Year to June FY09 FY10 FY11 FY12E FY13EMaterials costs 69.9 71.2 71.7 71.0 70.8Employee expenses 4.3 4.4 4.4 4.5 4.5 Rent and lease expenses 8.0 7.1 6.8 7.9 7.9 Advertising & sales costs 1.8 2.4 2.3 2.0 2.1 Other expenses 3.9 4.3 4.4 4.3 4.4 Depreciation 2.2 2.4 2.4 2.6 2.6 Interest expenditure 5.0 4.4 3.9 4.0 3.9 EBITDA margins 10.5 9.2 8.7 8.6 8.7 Net profit margins 2.2 2.7 1.7 1.5 1.6
Growth ratios (%) Year to June FY09 FY10 FY11 FY12E FY13ERevenues 25.6 40.8 23.4 18.0 23.2EBITDA 45.1 22.6 17.2 16.4 23.9 PBT 10.5 39.4 (5.6) 1.5 30.8 Net profit 11.5 73.0 (22.0) 2.0 30.8 EPS (6.6) 59.7 (25.9) 2.0 30.8
7 Edelweiss Securities Limited
Pantaloon Retail
Balance sheet (INR mn) As on 30th June FY09 FY10 FY11 FY12E FY13EEquity capital 1,076 1,108 1,818 1,818 1,818Reserves & surplus 23,947 27,656 29,602 31,285 33,486 Shareholders funds 25,023 28,764 31,420 33,102 35,303 Minority interest (BS) 3,846 3,183 3,313 3,313 3,313 Secured loans 32,860 32,571 55,397 37,558 39,808 Unsecured loans 5,723 10,949 23,065 45,904 48,654 Borrowings 38,583 43,520 78,461 83,461 88,461 Deferred tax liability 40 1,102 1,555 1,555 1,555 Sources of funds 67,491 76,569 114,749 121,431 128,632Gross block 25,945 30,868 40,260 50,260 61,260Depreciation 3,936 4,400 6,787 10,182 14,364 Net block 22,009 26,468 33,473 40,079 46,897 Capital work in progress 4,297 3,044 3,446 3,446 3,446 Investments 8,978 9,098 12,967 12,967 12,967 Inventories 21,913 24,912 36,791 36,370 44,752 Sundry debtors 3,066 3,914 5,298 5,400 6,607 Cash and equivalents 2,025 2,865 5,520 6,657 3,834 Loans and advances 19,106 26,620 45,275 45,275 45,275 Total current assets 46,231 58,467 93,287 94,103 100,870 Sundry creditors and others 13,519 19,706 26,721 27,461 33,844 Provisions 530 802 1,702 1,702 1,702 Total current liabilities & provisions 14,049 20,508 28,424 29,163 35,547 Net current assets 32,182 37,959 64,863 64,940 65,323 Miscellaneous expenditure 25 - - - - Uses of funds 67,491 76,569 114,749 121,431 128,632Book value per share (INR) 131.5 139.5 144.7 152.5 162.6
Free cash flow (INR mn) Year to June FY09 FY10 FY11 FY12E FY13ENet profit 1,405 2,302 1,897 1,934 2,476 Add : Non cash charge 4,583 7,328 6,964 8,612 10,442 Depreciation 1,401 2,123 2,675 3,395 4,182 Others 3,182 5,205 4,288 5,218 6,260 Gross cash flow 5,988 9,630 8,860 10,546 12,918 Less: Changes in WC 2,405 (2,339) 6,248 3,162 4,183 Operating cash flow 3,583 11,969 2,612 7,385 8,735 Less: Capex 7,135 4,923 9,392 10,000 11,000 Free cash flow (3,552) 7,046 (6,780) (2,615) (2,265)
Cash flow metrics Year to June FY09 FY10 FY11 FY12E FY13EOperating cash flow (1,726) 2,512 (10,873) 7,385 8,735 Investing cash flow (9,532) (4,479) (16,687) (10,000) (11,000) Financing cash flow 9,630 2,806 30,216 (469) (1,581) Net cash flow (1,628) 839 2,656 (3,084) (3,847) Capex (7,135) (4,923) (9,392) (10,000) (11,000) Dividends paid (156) (296) (255) (251) (322) Share issuance/(buyback) (138) 32 710 - -
8 Edelweiss Securities Limited
Retail
Profitability & efficiency ratios Year to June FY09 FY10 FY11 FY12E FY13EROAE (%) 5.9 9.0 6.3 6.0 7.4ROACE (%) 10.0 9.6 8.2 7.4 8.6 Inventory day 114 96 102 102 102 Debtors days 17 14 15 15 15 Payable days 81 75 84 84 84 Cash conversion cycle (days) 51 35 33 33 33 Current ratio 3.3 2.9 3.3 3.2 2.8 Debt/EBITDA 5.8 5.3 8.2 7.5 6.4 Debt/Equity 1.5 1.5 2.5 2.5 2.5 Adjusted debt/equity 1.5 1.5 2.5 2.5 2.5 Interest coverage 1.7 1.6 1.6 1.5 1.5
Operating ratios Year to June FY09 FY10 FY11 FY12E FY13ETotal asset turnover 1.0 1.2 1.2 1.1 1.3Fixed asset turnover 3.3 3.7 3.7 3.5 3.7 Equity turnover 2.7 3.3 3.7 4.0 4.7
Du pont analysis Year to June FY09 FY10 FY11 FY12E FY13ENP margin (%) 2.2 2.7 1.7 1.5 1.6Total assets turnover 1.0 1.2 1.2 1.1 1.3 Leverage multiplier 2.6 2.7 3.2 3.7 3.7 ROAE (%) 5.9 9.0 6.3 6.0 7.4
Valuation parameters Year to June FY09 FY10 FY11 FY12E FY13EDiluted EPS (INR) 7.4 11.8 8.7 8.9 11.7Y‐o‐Y growth (%) (6.6) 59.7 (25.9) 2.0 30.8 CEPS (INR) 14.7 22.1 21.1 24.5 30.9 Diluted PE (x) 23.2 14.5 19.6 19.2 14.7 Price/BV (x) 1.3 1.2 1.2 1.1 1.1 EV/Sales (x) 1.1 0.9 1.0 0.9 0.8 EV/EBITDA (x) 9.6 8.6 11.5 10.2 8.8 Dividend yield (%) 0.5 0.8 0.7 0.7 0.9
9 Edelweiss Securities Limited
Company Absolute
reco
Relative
reco
Relative
risk
Company Absolute
reco
Relative
reco
Relative
Risk
Pantaloon Retail Hold SU H Shoppers Stop BUY SP L
Titan Industries BUY SO L
RATING & INTERPRETATION
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Rural Electrification Corporation’s (REC) Q2FY12 PAT came in at INR6.2bn (flat YoY), marginally ahead of our estimate, as normalised NIMs improved 8bps QoQ to 4.47%. It booked INR1.26bn MTM loss on unhedged forex borrowings and INR346mn of one‐time upfront fee incurred on raising ECB. Liability management continued to be commendable as: (a) stayed away completely from bank borrowings; (b) raised money via bond market where cost was lower QoQ; and (c) hedged USD500mn forex borrowings in September to minimise MTM hit due to INR depreciation. However, business growth indicators failed to enthuse as: (1) disbursement growth slowed down to 10% YoY; and (2) sanctions declined sharply to INR108bn (compared to INR160‐175bn run rate). At current valuations of 1.2x FY13E book and 6.0x FY13E earnings, the risk–reward is favourable. We maintain ‘BUY’ with TP of INR240. Liability management continues to be commendable With banks having aggressively raised base rates in Q2FY12, REC has completely stayed away from bank borrowings (proportion has come off from 14% in Q1FY12 to 8% in Q2FY12). Borrowing was skewed in favour of bonds/debentures where incremental cost has come off 23bps QoQ. Its reliance on low-cost foreign borrowings continued in Q2FY12 as well (raised USD300mn via ECBs); the share of forex borrowings has jumped to 12%. Therefore, increase in blended cost of funds was capped at 40bps to 8.29%, whereas yields improved 45bps to 11.5%. Consequently, normalised NIMs improved 8bps QoQ to 4.47% against our expectation of marginal decline. Management indicated that in FY12E INR120bn of assets and INR90bn of liabilities will come up for reprising. We are building in margins of 4.2-4.3% for FY12-13E.
Outlook and valuations: Risk‐reward favourable; maintain ‘BUY’ Led by concerns surrounding the power sector, REC has underperformed broader markets by more than 26% over the past one year. We believe at the current trading range of 1.2x FY13E book and 6.0x FY13E earnings, the risk–reward is favourable. Also, its limited dependence on private projects, coupled with lower share of working capital finance, offers comfort. Led by 21% CAGR in loan assets and relatively stable NIMs, we expect 14% earnings CAGR and average ROEs of 20-21% over FY11-13E. We maintain ‘BUY/Sector Outperformer’ recommendation/rating on the stock.
RESULT UPDATE
RURAL ELECTRIFICATION CORPCommendable liability management
EDELWEISS 4D RATINGS
Absolute Rating BUY
Rating Relative to Sector Outperformer
Risk Rating Relative to Sector Low
Sector Relative to Market Equalweight
MARKET DATA (R: RURL.BO, B: RECL IN)
CMP : INR 198
Target Price : INR 240
52-week range (INR) : 383 / 154
Share in issue (mn) : 987.5
M cap (INR bn/USD mn) : 195 / 3,919
Avg. Daily Vol.BSE/NSE(‘000) : 2,996.9
SHARE HOLDING PATTERN (%)
* Promoters pledged shares (% of share in issue)
: NIL
PRICE PERFORMANCE (%)
Stock Nifty EW Banks and
Financial Services Index
1 month 23.1 10.7 9.9
3 months (3.8) (0.9) (6.0)
12 months (45.1) (15.9) (24.1)
Kunal Shah +91 22 4040 7579 [email protected] Nilesh Parikh +91 22 4063 5470 [email protected] Suruchi Chaudhary +91 22 6623 3316 [email protected]
India Equity Research| Banking and Financial Services
November 11, 2011
Promoters*66.8%
MFs, FIs & Banks6.6%
FIIs18.5%
Others8.1%
Financials
Year to March Q2FY12 Q2FY11 Growth (%) Q1FY12 Growth (%) FY11 FY12E
Net int. inc. (INR mn) 8,241 7,801 5.6 9,097 (9.4) 33,808 39,260
PAT (INR mn) 6,229 6,182 0.8 6,620 (5.9) 25,066 28,315
Diluted EPS (INR) 6.3 6.3 0.8 6.7 (5.8) 25.4 28.7
BV per share (INR) 130 148
Price/ Earnings (x) 7.8 6.9
Price/ Book (x) 1.5 1.3
Banking and Financial Services
2 Edelweiss Securities Limited
Asset quality stable; no restructuring during Q2FY12 Gross NPLs remained stable at 0.3% and management indicated there was no restructuring request from any entity during the quarter. However, considering the structural concerns surrounding the power sector (fuel linkage, SEB losses), we are building in credit cost of 15-20bps over FY12-13E.
Business growth indicators fail to enthuse Disbursement growth slowed down to 10% YoY to INR61.2bn, primarily due to lower disbursements in the generation segment. However, management indicated that momentum has picked up post Q2FY12. Loan book sustained momentum, growing 24% YoY to INR909bn. More disappointing has been sharp decline in sanctions to merely INR108bn (compared to a run rate of INR160-175bn) as in generation segment sanctions slowed down significantly to INR30bn (compared to average of INR110bn in past 4-6 quarters). While sanctions in the T&D segment were strong at INR63bn compared to run rate of INR40bn, management indicated that it has been conservative in providing working capital loans to distribution entities. We are building in disbursement growth of 14% over FY11-13 and expect loan book to post 21% CAGR to INR1.21tn. Other highlights • REC hedged USD500mn of forex borrowings in September 2011 to minimise the impact
of MTM loss due to INR depreciation and now the unhedged position stands at merely USD250mn (compared to USD970mn in FY11).
• Booked one-time upfront fee of INR346mn on raising USD300mn ECB.
Chart 1: Sanctions dip in generation segment Chart 2: Disbursement growth momentum moderates
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3 Edelweiss Securities Limited
Chart 3: Stayed away from bank borrowings completely Chart 4: Borrowings skew in favor of forex and bonds
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Banking and Financial Services
4 Edelweiss Securities Limited
Financial snapshot (INR mn)Year to March Q2FY12 Q2FY11 Growth Q1FY12 Growth FY11 FY12E FY13EInterest income 25,145 19,877 26.5 23,129 8.7 82,318 101,218 123,572 Interest expenses 16,904 12,076 40.0 14,032 20.5 48,510 61,959 77,337 Net income from operation 8,241 7,801 5.6 9,097 (9.4) 33,808 39,260 46,235 Other operating income 176 390 (54.8) 217 (19.0) 1,481 1,388 1,448 Other income 379 555 (31.6) 383 (1.0) 300 330 363 Net revenues 8,796 8,746 0.6 9,697 (9.3) 35,589 40,978 48,046 Expenses 456 385 18.5 490 (7.0) 1,674 1,762 1,876 - Staff cost 302 260 16.5 331 (8.6) 1,275 1,355 1,429 - Other expenditure 145 118 22.9 152 (4.7) 369 385 431 - Depreciation 9 8 16.0 7 17.6 30 22 16 PPOP 8,341 8,361 (0.2) 9,207 (9.4) 33,915 39,216 46,170 Provisions - 1 NA 250 NA 2 1,278 2,042 PBT 8,341 8,360 (0.2) 8,957 (6.9) 33,913 37,938 44,128 Taxes 2,112 2,178 (3.0) 2,338 (9.7) 8,847 9,622 11,521 PAT 6,229 6,182 0.8 6,620 (5.9) 25,066 28,315 32,607 EPS (INR) 6.3 6.3 0.8 6.7 (5.8) 25.4 28.7 33.0 Cost to income (%) 5.2 4.4 5.1 4.7 4.3 3.9 Tax rate 25.3 26.0 26.1 26.1 25.4 26.1
BV per share (INR) 129.5 148.1 171.2 Price/ Earnings (x) 7.8 6.9 6.0
Price/ Book (x) 1.5 1.3 1.2
Rural Electrification Corporation
5 Edelweiss Securities Limited
Company Description Rural Electrification Corporation (REC), incorporated in 1969, is a leading public institution primarily involved in the financing of T&D and generation projects across India. It was established by GoI for the purpose of developing the T&D infrastructure in rural India and currently acts as a nodal agency for RGGVY, a GoI initiative for rural electrification. Over the last decade, the company has diversified into urban areas and it plays a strategic role in GoI plan to improve the transmission and distribution infrastructure of India. REC, along with Power Finance Corporation (PFC), is the nodal agency for APDRP, a GoI initiative to improve the financial viability of state power utilities. Loans to T&D projects constituted ~50% to the total loan book as on March 31, 2011.
Investment Theme Over the Eleventh and Twelfth Five Year plans (FY07-17), India targets to add ~170 GW, creating huge investment opportunities across the power value chain. High growth, long-term visibility and sustainable returns, coupled with demand-supply gap (~12% peak deficit) and rising energy consumption, make the sector an attractive investment option. REC, being a specialised power financier, plays a strategic role in GoI’s ongoing financing plans for development of the power sector. Superior domain knowledge, financing expertise and government support will enable it to leverage emerging financing opportunities in the power sector over Eleventh and Twelfth plans (FY07-17) as well. According to the estimates of Working Group of Power, REC is expected to disburse at least INR 592 bn in the Eleventh Plan (against the expected disbursement of INR 812 bn for PFC). We believe REC will be able to fund 15-20% of its total funding requirement in the Eleventh Plan. We, thus, expect its loan book to grow at 21% CAGR over FY12-13E delivering a ROAE of ~21% over FY11-13.
Key Risks • REC’s growth depends on its ability to remain effectively competitive in the power
financing space and to pass the higher cost of funds to customers. Also, benefits under Section 54EC are being curtailed continuously and there are uncertainties surrounding the level of benefits REC will receive from these instruments, going forward.
• REC’s gross NPAs are at near zero levels. Any major slippage or ineffective recoveries can raise NPAs significantly, adversely affecting profitability and growth.
• REC is subject to risk arising from asset-liability mismatch as majority of its loans are long-term in nature due to wholesale financing of large power projects, whereas its borrowings are relatively for shorter term.
• REC’s ability to borrow from banks may be restricted with the limit on exposure of a bank in infrastructure finance companies at 25% of bank’s capital funds (tier I+tier II).
• REC is exposed to project-specific and general risks inherent to the power sector. Any delay in the power sector projects due to lack of fuel supplies, supply of key equipment or delay in getting environment clearances can adversely affect the profitability of power projects, increasing the company’s NPAs.
• There have been qualifications by auditors with respect to internal control and audit system; these do not have any quantifiable impact as of now, but could impact REC’s business in the long term.
6 Edelweiss Securities Limited
Banking and Financial Services
Financial Statements Income statement (INR mn)Year to March FY09 FY10 FY11 FY12E FY13EInterest income 47,898 65,687 82,318 101,218 123,572 Interest expended 28,971 39,256 48,510 61,959 77,337 Net interest income 18,927 26,431 33,808 39,260 46,235 Non interest income 922 1,189 1,481 1,388 1,448 Income from operations 19,849 27,620 35,289 40,648 47,683 Other income 378 200 300 330 363 Net revenues 20,227 27,820 35,589 40,978 48,046 Operating expenses 1,110 1,326 1,674 1,762 1,876 - Employee exp 872 1,171 1,275 1,355 1,429 - Depreciation /amortisation 14 22 30 22 16 - Other opex 224 133 369 385 431 Preprovision profit 19,117 26,494 33,915 39,216 46,170 Provisions 34 2 2 1,278 2,042 - Loan loss provisions 24 2 2 1,278 2,042 - Investment depreciation 11 - - - - PBT 19,083 26,492 33,913 37,938 44,128 Taxes 5,295 6,478 8,847 9,622 11,521 PAT 13,788 20,014 25,066 28,315 32,607 Extraordinaries 88 - 633 (740) 74 Reported PAT 13,876 20,014 25,699 27,575 32,681 Basic number of shares (mn) 859 987 987 987 987 Basic EPS (INR) 16.1 20.3 25.4 28.7 33.0 Diluted number of shares (mn) 859 987 987 987 987 Diluted EPS (INR) 16.1 20.3 25.4 28.7 33.0 DPS (INR) 4.5 6.5 7.5 8.0 8.5 Dividend pay out (%) 28.0 32.1 29.5 27.9 25.7
Growth metrics (%)Year to March FY09 FY10 FY11 FY12E FY13ENet interest income 30.1 39.6 27.9 16.1 17.8Net revenues growth 37.2 37.5 27.9 15.1 17.2Opex growth (0.8) 19.4 26.3 5.3 6.5PPP growth 40.3 38.6 28.0 15.6 17.7Provisions growth (91.4) (93.6) - NA 60 PAT growth 43.2 45.2 25.2 13.0 15.2
Operating ratios (%)Year to March FY09 FY10 FY11 FY12E FY13EYield on assets 10.4 11.0 11.0 11.0 11.1 Yield on advances 10.3 10.9 10.9 11.0 11.1 Cost of funds 7.3 7.8 7.7 7.9 8.1 Spread 3.0 3.3 3.3 3.1 3.0 Net interest margins 4.1 4.4 4.5 4.3 4.2 Cost-income 5.5 4.8 4.7 4.3 3.9 Tax rate 27.7 24.5 26.1 25.4 26.1
7 Edelweiss Securities Limited
Rural Electrification Corporation
Balance sheet (INR mn)As on 31st March FY09 FY10 FY11 FY12E FY13ELiabilitiesEquity capital 8,587 9,875 9,875 9,875 9,875Reserves & surplus 59,904 96,643 112,750 129,979 151,562Net worth 68,490 106,518 122,624 139,853 161,437Reserve for doubtful debts 3,437 4,282 5,263 6,367 7,644Secured Loans 376,137 462,447 462,674 569,268 688,990Unsecured loans 73,223 97,035 237,364 292,049 353,470Deferred tax liability (78.9) (74.0) (127.7) (127.7) (127.7) Total liabilities 521,208 670,208 827,798 1,007,409 1,211,413AssetsLoans 513,814 664,520 821,321 1,003,263 1,207,207 Investments 10,049 9,100 8,124 8,517 8,930Current assets 35,273 20,837 34,447 28,386 35,885Current liabilities 38,737 25,149 36,976 33,646 41,512Net current assets (3,464) (4,312) (2,529) (5,260) (5,627) Fixed assets (net block) 809 900 881 889 904Total assets 521,208 670,208 827,798 1,007,409 1,211,413Balance sheet ratios (%)Loan growth 30.7 29.3 23.6 22.2 20.3Borrowings growth 31.1 24.5 25.1 23.0 21.0EA growth 28.7 28.6 23.5 21.7 20.3Gross NPA ratio 0.1 0.0 0.0 0.5 0.7
Sanctions and disbursementsYear to March FY09 FY10 FY11 FY12E FY13ESanctions (INR mn) 407,459 453,570 664,210 697,421 767,163 Disbursements (INR mn) 171,573 211,325 245,190 275,910 319,319 Disbursements to sanction ratio (%) 42.1 46.6 36.9 39.6 41.6 Disbursements growth (%) 32.5 23.2 16.0 12.5 15.7 Sanctions growth (%) (13.0) 11.3 46.4 5.0 10.0
RoE decomposition (%)Year to March FY09 FY10 FY11 FY12E FY13ENet interest income/assets 4.1 4.4 4.5 4.3 4.2Non interest income/assets 0.2 0.2 0.2 0.2 0.1Other income/assets 0.1 0.0 0.0 0.0 0.0Net revenues/Assets 4.4 4.7 4.8 4.5 4.3Operating expense/Assets 0.2 0.2 0.2 0.2 0.2Provisions/Assets 0.0 0.0 0.0 0.1 0.2Taxes/Assets 1.1 1.1 1.2 1.0 1.0Total costs/Assets 1.4 1.3 1.4 1.4 1.4ROA 3.0 3.4 3.4 3.1 2.9Equity/Assets 14.5 15.4 16.0 15.0 14.2ROAE 20.5 21.9 21.0 20.7 20.7
8 Edelweiss Securities Limited
Banking and Financial Services
Valuation metricsYear to March FY09 FY10 FY11 FY12E FY13EDiluted EPS (INR)* 16.1 20.3 25.4 28.7 33.0EPS growth (%) 43.2 26.2 25.2 13.0 15.2Book value per share (INR) 83.8 112.2 129.5 148.1 171.2Diluted P/E (x) 12.3 9.7 7.8 6.9 6.0Price/ BV (x) 2.4 1.8 1.5 1.3 1.2Dividend yield (%) 2.3 3.3 3.8 4.0 4.3
9 Edelweiss Securities Limited
Company Absolute
reco
Relative
reco
Relative
risk
Company Absolute
reco
Relative
reco
Relative
Risk
Allahabad Bank REDUCE SO H Axis Bank BUY SO M
Bank of Baroda HOLD SO L Federal Bank BUY SO M
HDFC HOLD SU L HDFC Bank HOLD SP L
ICICI Bank BUY SO L Indian Overseas Bank HOLD SU H
Infrastructure Development Finance Co
Ltd
HOLD SU M ING Vysya HOLD SP H
Karnataka Bank BUY SO L Kotak Mahindra Bank REDUCE SP L
LIC Housing Finance HOLD SP M Mahindra & Mahindra Financial
Services
HOLD SP M
Manappuram General Finance HOLD SU M Oriental Bank Of Commerce REDUCE SU H
Power Finance Corp BUY SO L Punjab National Bank REDUCE SU L
Reliance Capital BUY SP M Rural Electrification Corporation BUY SO L
Shriram City Union Finance BUY SO H South Indian Bank HOLD SP H
State Bank of India HOLD SP L Union Bank Of India HOLD SO L
Yes Bank BUY SO M
RATING & INTERPRETATION
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Edelweiss Securities Limited
Reliance Capital (RCap) reported profits of INR334mn in Q2FY12
(compared with INR1.1bn in Q2FY11). Higher interest/employee costs,
losses in general insurance, muted performance in securities/distribution
business and a one-time provisioning (on mortgage loans) led to lower-
than-expected profitability. On the positive side, asset management
continued as consistent source of earnings, disbursements remained
strong in commercial finance business, activity levels were maintained in
broking/distribution business and capital gains booked of INR 800 mn.
We maintain ‘BUY’ on the stock with TP of INR526.
• Reliance MF AUMs came below INR1tn due to unconducive capital markets; focus
continues to be on retail long-term debt, leaner costs and high-yielding products.
• Growth momentum was sustained in consumer financing: Loan book was up 7%
QoQ led by mortgages and auto, NIMs came off 20bps to 4.1% and credit cost was
at ~60bps due to one-time standard asset provisioning on mortgage loans.
• After gaining traction in Q1FY12, general insurance business once again lost
momentum: GWP declined 30% QoQ; combined ratio was lower by 7% points at
123%.
• Reliance Life posted fourth consecutive quarter of profits (INR82mn); new
business volume dipped 49% YoY; NBAP margin was sustained at 15%.
• Activity level was constant in securities/distribution business, but higher opex led
to a decline in PBT.
Outlook and valuations: Core businesses intact; maintain ‘BUY’
We believe the asset management and consumer financing will be key earning drivers while
general insurance will be a dampener on earnings (primarily due to third-party pool).
Regulatory changes will cap NBAP margins in life insurance at 15%. Investment profit from
stake sale in operating businesses will aid profitability as proceeds will be primarily used to
bring down debt levels which will ease cost pressures. Our SOTP fair value (FY13E) stands at
INR526 per share and we maintain our ‘BUY/Sector Outperformer’
recommendation/rating on the stock.
RESULT UPDATE
RELIANCE CAPITAL High interest cost offsets capital gain benefit
EDELWEISS 4D RATINGS
Absolute Rating BUY
Rating Relative to Sector Outperformer
Risk Rating Relative to Sector Medium
Sector Relative to Market Equalweight
MARKET DATA (R: RLCP.BO, B: RCAPT IN)
CMP : INR 359
Target Price : INR 526
52-week range (INR) : 839 / 310
Share in issue (mn) : 245.6
M cap (INR bn/USD mn) : 88 / 1,758
Avg. Daily Vol.BSE/NSE(‘000) : 2,679.0
SHARE HOLDING PATTERN (%)
* Promoters pledged shares
(% of share in issue)
: NIL
PRICE PERFORMANCE (%)
Stock Nifty
EW Banks and
Financial
Services Index
1 month 15.0 10.7 9.9
3 months (27.3) (0.9) (6.0)
12 months (54.8) (15.9) (24.1)
Kunal Shah
+91 22 4040 7579
Nilesh Parikh
+91 22 4063 5470
Suruchi Chaudhary
+91 22 6623 3316
India Equity Research| Banking and Financial Services
November 11, 2011
Promoters*
54.1%
MFs, FIs &
Banks
4.9%
FIIs
20.3%
Others
20.7%
SOTP valuation - FY13E
Businesses Method Value Value per share
(INR mn) (INR)
Asset management % of AUMs 43,138 176
Life Insurance Appraisal value 63,119 257
Retail broking business PE 2,741 11
Consumer finance business PB 21,343 87
General Insurance Eco. profit multiple 2,615 11
Investments Market value (3,862) (16)
Fair Value 129,276 526
Banking and Financial Services
2 Edelweiss Securities Limited
Business overview
Reliance MF: Unconducive markets lead to decline in AUMs, profitability
• Reliance MF AUMs came off 8% QoQ to INR932bn as unstable capital markets (both on
equity and debt side) resulted in AUMs falling below INR1.0tn for the first time in the past
ten quarters. Consequently, profits also declined in 8% QoQ to INR656mn.
• Gold Savings Fund launched in Q4FY11 mobilised AUMs of INR19bn by the end of Q2FY12.
• Management has continued its focus on the retail segment across asset classes (retail in
debt AUM improved to 20% in the current quarter) to expand yields.
• In the asset management business, it is in discussion with Nippon Life for a stake sale
which it seeks to conclude by the end of this fiscal.
• We believe RCap’s asset management business is a stable source of earnings for the
company and expect it to garner profit of INR2.0bn-2.2 bn over FY11-13E.
Table 1: Asset Management – key metrics (INR mn)
Source: Company
Reliance Life: Consistently reporting profits since past four quarters
• Reliance Life reported a PAT of ~INR82mn, the fourth consecutive quarter of profitability
and the management believes it to be sustainable. This was mainly led by the
opex/premium falling to 24.5% in Q2FY12.
• Impact of IRDA’s regulation capping the difference between gross and net yields (DGNY)
on ULIP policies was felt during the quarter on new business volumes on YoY basis; on an
annualised premium equivalent (APE) basis, new business volume dipped 49% YoY.
However, the trend was positive QoQ where APE grew 58%. In H2FY12, the growth on
YoY basis would again be robust due to lower base last year (on account of regulatory
changes). The management expects to grow premium higher than the estimated industry
growth of 15%-20% for FY12.
• It has not disclosed the NBAP margin for this quarter but indicated that it had been
sustained at the guided level of 15% where it would be maintained throughout the fiscal.
• In H1FY12, 61% of the business came from traditional products (50% of which was
participating) and the balance from ULIP. In the whole portfolio, 22% was single premium.
• No capital infusion was required in Q1FY12.
• Nippon Life has acquired 26% stake in Reliance Life for INR31bn (USD626mn). The
company will use INR25bn to bring down debt levels. Maximum proceeds from the stake
sale have gone into Viscount Alpha which it will merge with Reliance Capital on receiving
the high court approval. Post the merger of Viscount Alpha, Reliance Capital will hold 38%
directly in Reliance Life, Nippon will hold 26% and balance will be held by Viscount
Q2FY12 Q2FY11 Growth (%) Q1FY12 Growth (%) FY11
Income 1,631 1,773 (8.0) 1,674 (2.6) 7,330
Expenses 975 1,073 (9.1) 965 1.0 4,387
PBT 656 700 (6.3) 709 (7.5) 2,943
AUM - MF (INR bn) 932 1,078 (13.5) 1,013 (8.0) 1,013
AUM - PMS (INR bn) (excl EPFO) 14 22 (36.4) 17 (17.6) 17
AUM - offshore fund (USD mn) 218 284 (23.2) 264 (17.4) 264
Reliance Capital
3 Edelweiss Securities Limited
companies. It would merger another Viscount company in two years to increase its direct
stake to 74%.
Table 2: Life Insurance – key metrics (INR mn)
Source: Company
Reliance Commercial Finance: Growth sustained; NIMs decline
• Disbursements grew 17% QoQ (20% YoY) to INR23.4bn as the strong momentum
continued in mortgages (9% QoQ growth) and auto (7%) which offset the negative impact
of a slower growth in CV. SME loans saw some surge after the unwinding of short term
loans in Q1FY12. Overall, commercial finance loan book grew 7% QoQ to INR139bn. The
management has guided for a 25%-30% growth for full year FY12.
• Net interest margins are estimated to have come off QoQ to 4.1% (from 4.3% in Q1FY12)
as funding cost increased 110bps to 11.4% while a commensurate increase in lending
yields did not happen.
• Loan loss provisioning went up sequentially due to the INR111mn one-time provisioning
required on housing loans (change in norms mandated by NHB). Gross NPLs rose
marginally further to 1.2% (INR1.8bn in Q2FY12 compared to INR1.5bn in Q1FY12).
Provision coverage with write offs was maintained near 80%.
• Reliance Commercial Finance follows 90 days NPL recognition norms hence any
regulatory change for NBFCs (following 90 days norms vis-à-vis 180 days now) will not
impact Reliance Capital.
• We expect the growth momentum in this business to continue and are building in
disbursement growth of 18% over FY11-13E. While margin will be under pressure in a
rising interest rate environment, it will be offset by lower opex and credit costs. We
expect RoEs to improve to 10%-11% over FY12-13E.
Table 3: Commercial finance loan book (INR bn)
Source: Company
Q2FY12 Q2FY11 Growth (%) Q1FY12 Growth (%) FY11
First year premium 3,055 6,786 (55.0) 2,317 31.9 22,846
Single premium 1,090 1,276 (14.6) 313 248.2 7,503
Renewal premium 8,600 7,791 10.4 8,161 5.4 35,362
Gross written premium 12,630 15,739 (19.8) 10,749 17.5 23,596
Weighted received Premium 3,164 6,914 (54.2) 2,348 34.7 23,596
Funds under management 167,470 165,547 1.2 177,353 (5.6) 178,553
Opex to premium (%) 24 29 27 24
Branches (nos) 1,252 1,248 0.3 1,248 0.3 1,248
Agents (nos) 165,381 165,546 (0.1) 177,747 (7.0) 189,304
Q2FY12 Q2FY11 Growth (%) Q1FY12 Growth (%)
Mortgages 62.7 41.0 52.9 57.3 9.3
Auto loans 8.4 4.0 108.9 7.8 6.9
CV loans 20.9 15.0 39.3 22.2 (5.7)
SME loans 43.2 37.0 16.7 41.7 3.5
Personal loans 1.4 3.0 (53.6) 1.3 6.9
Total 139.3 100.0 39.3 130.3 6.9
Banking and Financial Services
4 Edelweiss Securities Limited
Table 4: Reliance commercial finance – key metrics (INR mn)
Source: Company
Reliance Securities and Reliance Money: Activity levels sustained, but earnings dip
• Broking, wealth management and IB businesses are reported under Reliance Securities
while distribution business (of insurance products and gold) and money transfer are
under Reliance Money.
• Activity level was sustained QoQ in the securities business viz average daily volume in
equity trading of INR12mn (compared with INR7bn in Q4FY11) and commodity broking
volumes growing three-fold to INR8bn. AUMs in wealth management were maintained at
INR2.2bn. Higher opex resulted in PBT of the securities business declining 27% QoQ
despite stable revenues.
• Gold sale of ~240 kilos in Q2FY12 (compared to 434 kgs in Q1FY12) coupled with over
INR0.5mn money transfer transactions and third party distribution income led to a 38%
QoQ increase in revenues. However, higher opex took a toll here as well. PBT in
distribution business has declined 22% to INR22mn.
Table 5: Reliance Money – key metrics (INR mn)
Source: Company
Reliance General Insurance: Growth fails to keep up momentum due to focus on profit
• After gaining traction in Q1FY12, general insurance business has once again lost the
momentum with gross written premium declining 30% QoQ to INR3.7bn.
• Combined ratio (after adjusting for third-party pool) though was 7% points QoQ to
123%. It resulted in a loss of INR287mn.
• While the management is trying to reduce the combined ratio to 105% in FY12 and
breakeven this business during the course of the year, sharing of commercial third-
party losses (in proportion to the market share) as required by the regulator (to be
recognized in Q4FY12) will keep earnings under pressure.
• The company has infused capital of INR350mn in this business, taking the total
investment till date to INR13bn.
Q2FY12 Q2FY11 Growth (%) Q1FY12 Growth (%) FY11
Net interest income 1,314 1,236 6.3 1,215 8.1 5,122
Operating expenses 825 609 35.5 789 4.6 2,516
Provisions 198 406 (51.2) 133 48.9 1,299
PBT 547 610 (10.3) 583 (6.2) 2,693
Disbursements 23,444 19,510 20.2 20,100 16.6 87,820
Q2FY12 Q2FY11 Growth (%) Q1FY12 Growth (%)
Total income 558 447 24.8 488 14.3
Securities 343 361 (5.0) 332 3.3
Third party distribution 215 86 150.0 156 37.8
PBT 43 77 (44.2) 57 (24.6)
Securities 22 52 (57.7) 30 (26.7)
Third party distribution 21 25 (16.0) 27 (22.2)
Reliance Capital
5 Edelweiss Securities Limited
Table 6: Reliance General Insurance – key metrics (INR mn)
Source: Company
Table 7: SOTP valuations – FY13E
Source: Company, Edelweiss research
Q2FY12 Q2FY11 Growth (%) Q1FY12 Growth (%) FY11 FY10 Growth (%)
Gross written premium 3,694 3,707 (0.4) 5,248 (29.6) 16,554 19,797 (16.4)
PBT (287) (282) (301) (3,098) (504)
Investment book 22,981 19,603 17.2 23,497 (2.2) 16,567 (100.0)
Combined ratio (with pool) 123 118 130 136 117 16.2
Businesses Method Base value Multiple Value Value per share
(INR mn) (INR mn) (INR)
Asset management % of AUMs 1,209,136 3.6 43,138 176
Life Insurance Appraisal value 2,255 28.0 63,119 257
Retail broking business PE 274 10.0 2,741 11
Consumer finance business PB 26,679 0.8 21,343 87
General Insurance Eco. profit multiple 327 8.0 2,615 11
Investments Market value (4,827) 0.8 (3,862) (16)
Fair Value 129,276 526
Financial snapshot (INR mn)
Year to March Q212 Q211 Growth (%) Q112 Growth (%) FY11 FY12E FY13E
Total income 15,461 12,998 18.9 14,921 3.6 54,290 62,510 69,539
Interest expended 5,832 3,397 71.7 5,130 13.7 14,625 19,232 22,942
Operating expenses 8,779 8,243 6.5 9,047 (3.0) 36,302 35,292 36,360
- Staff cost 1,566 1,278 22.5 1,306 19.9 4,932 5,648 6,041
- Premium paid on
reinsurance ceded1,608 1,467 9.6 2,300 (30.1)
- Claims incurred 2,907 2,526 15.1 2,302 26.2 13,314 10,434 9,300
- Other expenses 2,699 2,972 (9.2) 3,138 (14.0) 18,057 19,210 21,019
Operating profit 849 1,358 (37.5) 744 14.1 3,363 7,986 10,237
Depreciation 126 119 5.6 120 5.1 451 448 448
PBT 724 1,239 (41.6) 625 15.9 2,913 7,538 9,789
Tax 359 226 59.0 256 40.3 579 2,347 2,892
PAT 365 1,013 (64.0) 369 (1.1) 2,334 5,191 6,898
Less: Minority interest 14 40 NA 32 (58.1) 48 75 75
Share of profit of associates (17) (6) (166.7) 12 NA 627 10 10
Net profit 334 1,118 (70.1) 348 (4.0) 2,912 5,126 6,833
Ratios (%)
Cost - income 94.5 89.6 95.0 93.8 87.2 85.3
Tax rate 49.6 18.2 41.0 19.9 31.1 29.5
Operating profit margin 5.5 10.4 5.0 6.2 12.8 14.7
Net profit margin 2.2 8.6 2.3 5.4 8.2 9.8
Banking and Financial Services
6 Edelweiss Securities Limited
Company Description
Reliance Capital (RCap) has been actively pursuing growth opportunities in the Indian
financial services sector, post the demerger and reorganisation of the Reliance Group,
to become a leading financial powerhouse. It has undergone significant strategy
changes in the past one to two year, with focus shifting to fast-growing segments in
the financial services space, viz., asset management and insurance business, from
leasing and infrastructure financing. RCap is the leader in its existing businesses—the
largest mutual fund (in terms of AUMs of ~INR 1 tn), and the third-largest general
insurer (in terms of gross written premium of INR 16.5 bn in FY11). The company has
also forayed into retail broking under the brand Reliance Money (acquired ~7 mn
broking accounts) and retail financing under Reliance Consumer Finance (outstanding
loan book of INR 139 as on September 30, 2011). It also commenced operations in
asset reconstruction and institutional broking business.
Investment Theme
We expect RCap to become a leading financial powerhouse offering a plethora of
products including mutual funds, life insurance, general insurance, retail broking, and
consumer financing. We believe it is a pure play on fast-growing segments of the
Indian financial services space. We believe asset management and consumer financing will
be key earning drivers, while general insurance will be a dampener on earnings (primarily due to
third-party pool). Regulatory changes will cap NBAP margins in life insurance at 15%. Investment
profit from stake sale in operating businesses will aid profitability. Our confidence in RCap is
underpinned by ADAG’s execution capabilities, competitive skills, and its ability to
create new markets.
Key Risks
Execution failure is the key business risk.
We have assigned 100% value to its life insurance and broking business in our
valuation estimates based on our discussions with the management. Though RCap has
100% economic interest, technically it holds only 16% in Reliance Life.
Growth in asset management, life insurance, and broking businesses is highly
dependent on the conditions in capital markets. Sustained non-conducive market
conditions may hamper our growth assumptions and consequently impact valuations
negatively.
Intense competitive pressures in any business segment may affect the expected
market share and/margins.
Reliance Capital
7 Edelweiss Securities Limited
Financial Statements
Income statement (INR mn)
Year to March FY09 FY10 FY11 FY12E FY13E
Interest income 12,003 12,868 14,037 18,342 22,657
Interest expended 12,638 12,818 14,625 19,232 22,942
Net interest income (635) 50 (588) (889) (285)
Non interest income 48,193 44,740 40,253 44,167 46,882
- Misc. income 21,611 15,208 13,338 15,696 16,413
- Investment advisory fee 4,739 6,467 7,238 7,802 8,493
- General insurance premium earned 20,035 20,479 17,379 18,120 19,146
- Reliance Money 1,808 2,586 2,299 2,549 2,829
Net revenues 47,558 44,790 39,665 43,278 46,597
Operating expenses 34,208 35,751 35,453 34,858 35,550
- Employee exp 5,541 5,592 4,932 5,648 6,041
- Depreciation /amortisation 566 486 451 448 448
- Other opex 28,101 29,673 30,071 28,763 29,061
Preprovision profit 13,350 9,039 4,212 8,419 11,046
Provisions 1,308 2,759 1,299 881 1,257
PBT 12,041 6,280 2,913 7,538 9,789
Taxes 1,811 1,977 579 2,347 2,892
PAT 10,230 4,303 2,334 5,191 6,898
Share of associates/minority interest 73 65 (579) 65 65
PAT after minority interest 10,157 4,238 2,912 5,126 6,833
Basic number of shares (mn) 246 246 246 246 246
Basic EPS (INR) 41.3 17.2 11.8 20.8 27.8
Diluted number of shares (mn) 246 246 246 246 246
Diluted EPS (INR) 41.3 17.2 11.8 20.8 27.8
DPS (INR) 6.5 6.5 6.5 7.0 7.0
Dividend pay out (%) 18.4 44.2 64.1 39.2 29.4
Growth metrics (%)
Year to March FY09 FY10 FY11 FY12E FY13E
Net revenues growth 5.6 (5.8) (11.4) 9.1 7.7
Opex growth 4.6 4.5 (0.8) (1.7) 2.0
PPP growth 8.0 (32.3) (53.4) 99.9 31.2
Provisions growth 676.0 110.9 (52.9) (32.2) 42.6
PAT growth 0.7 (58.3) (31.3) 76.0 33.3
Banking and Financial Services
8 Edelweiss Securities Limited
Balance sheet (INR mn)
As on 31st March FY09 FY10 FY11 FY12E FY13E
Equity capital 2,462 2,462 2,462 2,462 2,462
Reserves & surplus 71,870 74,225 75,262 78,369 83,182
Net worth 74,331 76,687 77,724 80,830 85,644
Secured loans 38,120 51,500 72,000 93,500 120,000
Unsecured loans 62,678 80,016 90,016 98,016 107,016
Deferred tax liability 201 201 201 201 201
Others 140 215 263 338 413
Total liabilities 175,470 208,619 240,204 272,886 313,274
Assets
Loans 118,051 124,283 157,290 189,335 222,934
Investments 52,865 85,209 97,795 99,543 101,915
Current assets 26,646 24,286 13,661 16,904 26,326
Current liabilities 23,394 26,274 29,592 33,885 38,840
Net current assets 3,251 (1,988) (15,931) (16,982) (12,514)
Fixed assets (net block) 1,169 981 916 856 806
Other assets 133 133 133 133 133
Total assets 175,470 208,619 240,204 272,886 313,274
9 Edelweiss Securities Limited
Company Absolute
reco
Relative
reco
Relative
risk
Company Absolute
reco
Relative
reco
Relative
Risk
Allahabad Bank REDUCE SO H Axis Bank BUY SO M
Bank of Baroda HOLD SO L Federal Bank BUY SO M
HDFC HOLD SU L HDFC Bank HOLD SP L
ICICI Bank BUY SO L Indian Overseas Bank HOLD SU H
Infrastructure Development Finance Co
Ltd
HOLD SU M ING Vysya HOLD SP H
Karnataka Bank BUY SO L Kotak Mahindra Bank REDUCE SP L
LIC Housing Finance HOLD SP M Mahindra & Mahindra Financial
Services
HOLD SP M
Manappuram General Finance HOLD SU M Oriental Bank Of Commerce REDUCE SU H
Power Finance Corp BUY SO L Punjab National Bank REDUCE SU L
Reliance Capital BUY SP M Rural Electrification Corporation BUY SO L
Shriram City Union Finance BUY SO H South Indian Bank HOLD SP H
State Bank of India HOLD SP L Union Bank Of India HOLD SO L
Yes Bank BUY SO M
RATING & INTERPRETATION
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe
within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Adjusted consol. PAT of Shree Renuka Sugars (SHRS) in Q4FY11 was significantly below estimates (at loss of INR460mn) owing to a huge disappointment in Brazilian operations. Heavy forex loss further added to losses at the reported level. Brazilian operations are likely to be weak for few more quarters and coupled with high debt levels, the outlook is negative for SHRS. We lower our FY12E EPS to INR4.2/share (earlier INR8.5/share) and downgrade the stock from ‘HOLD’ to ‘REDUCE’.
Poor Brazilian operations, huge forex loss dent profitability SHRS reported loss of INR6,158mn in Q4FY11 owing to huge forex loss of INR5,698mn (on account of INR and Brazilian real (BRL) depreciating against USD by 9.5% and 18.8% respectively, impacting the debt in Brazilian subsidiaries). Even after adjusting for forex losses, the company reported a loss of INR460mn for Q4FY11 largely due to adverse Brazilian weather conditions that damaged cane yields and the capacity utilization. EBITDA margin for Q4FY11 came at 10.5%, 340 bps dip YoY.
Key highlights • SHRS cut its earlier guidance of USD300mn EBITDA from Brazilian subsidiaries for
April 2011‐March 2012 period to USD160mn.
• Weather conditions in Brazil (with attacks of frost and drought‐like conditions) affected cane yield by ~31% YoY for SHRS (vis‐à‐vis 22% dip for industry), owing to which SHRS lowered its cane crushing guidance from 10.5 mn MT to 8.3 mn MT.
• Due to INR depreciation against USD, even on a standalone basis, SHRS had a forex loss of INR728mn. Considering the significant amount of repayment done to creditors in Q4FY11, we believe that some of this forex loss has been realized.
Outlook and valuations: Challenges galore; downgrade to ‘REDUCE’ Considering the high debt levels coupled with additional capex requirements and issues on operating performance in Brazilian subsidiaries (which we expect to continue for at least two more quarters), we see low probability of an improvement in near future. Moreover, unhedged USD loan exposes the company to the exchange rate risk in the current volatile environment. Factoring in weak Brazilian operations and higher interest costs, we lower our FY12E EPS to INR4.2/share. Based on 6x FY13E EV/EBITDA, we lower our target price to INR41/share (previously INR72/share) and downgrade our recommendation on the stock to ‘REDUCE’ from ‘HOLD’.
RESULT UPDATE
SHREE RENUKA SUGARSHuge forex loss rubs it in
EDELWEISS RATINGS
Absolute Rating REDUCE
Investment Characteristics Growth
MARKET DATA (R: SRES.BO, B: SHRS IN)
CMP : INR 52
Target Price : INR 41
52‐week range (INR) : 108 / 50
Share in issue (mn) : 671.3
M cap (INR bn/USD mn) : 35 / 689
Avg. Daily Vol. BSE/NSE (‘000) : 8,077.9
SHARE HOLDING PATTERN (%)
* Promoters pledged shares (% of share in issue)
: 16.0
PRICE PERFORMANCE (%)
BSE Midcap Index
Stock Stock over
Index
1 month 3.0 4.5 1.5
3 months (4.4) (9.1) (4.6)
12 months (27.6) (44.2) (16.6)
Manoj Bahety, CFA +91‐22‐6623 3362 [email protected]
Varun Guntupalli +91‐22‐6623 3481 [email protected]
Indi
a M
idca
ps
India Equity Research| Agriculture
November 11, 2011
Promoters*38.1%
MFs, FIs & Banks6.9%
FIIs26.1%
Others29.0%
Financials
Year to September Q4FY11 Q4FY10 % change Q3FY11 % change FY11 FY12E
Revenues (INR mn) 23,349 24,600 (5.1) 22,401 4.2 86,623 87,567
EBITDA (INR mn) 2,440 3,420 (28.7) 4,324 (43.6) 12,554 17,329
Adj. net profit (INR mn) (460) 337 (236.5) 978 (147.1) 830 2,790
Diluted EPS (INR) 1.2 4.2
Diluted PE (x) 41.8 12.4
EV/EBITDA (x) 9.3 7.0
ROAE (%) 3.8 12.9
Agriculture
2 Edelweiss Securities Limited
Other highlights • Consolidated debt is at INR86bn at the end of September 2011 end vis‐à‐vis INR83bn at
end of March 2011.
• SHRS management has guided that it is interested in spinning off cogeneration assets so as to reduce the debt burden in Brazilian subsidiaries. The management has been getting interest from few energy companies for the same. SHRS would accept bids before December 2011.
• The company has increased its stake in Renuka do Brazil (RdB; erstwhile Equipav) from 50% to 59% by infusing USD35mn during Q4FY11 and is likely to infuse USD80mn during the current quarter to increase the stake further.
• Kandla refinery is still under trial production and is in the process of ramping up its capacity utilization.
• Standalone inventory as on September 30, 2011 comprises 151,225 MT of white sugar, 29,853 MT of raw sugar, 18,944 KL ethanol and 137,612 MT of molasses.
• Due to globally expanded operations (especially since its Brazilian operations having April‐March fiscal), SHRS is shifting from the current Oct‐Sept year to April‐March year hence the current accounting year gets extended for 18 months.
Table 1: Segmental performance (Standalone) Year to September Q4FY11 Q4FY10 Q3FY11 FY10 FY11Segment revenue mix (%)Sugar 51.4 72.0 69.5 62.1 60.9Trading 35.7 23.4 15.8 28.6 25.4Power 3.5 2.9 7.2 6.8 6.9Industrial alcohol 9.3 1.6 7.3 2.4 6.7Others 0.1 0.1 0.2 0.1 0.1Total Revenue (INR mn) 11,273.0 14,261.0 12,072.0 54,547.0 46,848.0EBIT margin (%)Sugar 2.8 1.9 5.4 11.0 5.8Trading 1.6 2.5 4.6 9.3 3.1Power (3.7) (4.5) 43.6 12.8 32.7Industrial alcohol 17.1 (3.8) 44.1 15.9 27.0Others 50.0 37.5 90.0 36.4 41.3EBIT mix (%)Sugar 41.2 76.8 34.0 63.5 41.9Trading 15.9 32.7 6.5 24.7 9.3Power (3.7) (7.2) 28.3 8.0 26.8Industrial alcohol 45.4 (3.4) 29.2 3.6 21.4Others 1.2 1.1 2.0 0.3 0.6Total EBIT (INR mn) 410.0 263.0 1,351.0 6,283.0 4,124.0
Source: Company, Edelweiss research
Shree Renuka Sugars
3 Edelweiss Securities Limited
Table 2: Operational performance (Standalone) Q4FY11 Q4FY10 % Change Q3FY11 % Change FY11 FY10 % Change
Sugar
Sugar sales (mn MT) 0.22 0.39 (44.0) 0.29 (23.3) 1.0 1.2 (17.2)
Average realisation (INR/kg) 29.6 26.7 11.0 30.0 (1.2) 29.1 28.6 1.6
Distillery
Distillery sales (kl) 37,319 9,551 290.7 33,741 10.6 117,712 51,150 130.1
Average realisation (INR/lt) 29.1 24.6 18.4 26.5 9.9 27.8 27.7 0.4
Power
Power exported (Mn KWH) 19 55 (65.5) 80 (76.3) 357 397 (10.1)
Power realisation (INR/KWH) 3.5 3.5 (1.4) 6.4 (45.4) 5.0 4.8 5.6 Source: Company, Edelweiss research
Brazilian subsidiaries ‐ RVDI and RdB • RVDI and RdB posted revenue of INR2,214mn and INR6,883mn respectively in Q3FY11.
• At PAT level, inclusive of forex loss, RVDI and RdB posted loss of INR6,116mn and INR284mn respectively.
• As against the earlier guidance for cane crushing in Brazilian subsidiaries at ~10‐10.5 mn MT, the total cane crushing guidance has been lowered by the management to ~8.3 mn MT due to lower recovery, induced by adverse climatic conditions. This is likely to result in poor capacity utilization, thus lowering the EBITDA margin and hence the profitability of these Brazilian subsidiaries. Further, the high interest cost owing to huge debt continues to be a drag.
Table 3: Operational performance – Brazilian subsidiaries
Q4FY11 Q3FY11 Q‐o‐Q growth (%)SugarSugarcane crushed (MT) 3,600,790 3,359,838 7.2 Production (MT) 289,075 167,124 73.0 EthanolProduction (KL) 118,210 129,519 (8.7) Average realisation (INR/lt) 37.0 46.6 (20.5) PowerPower exported (Mn KWH) 123 95 29.5 Power realisation (INR/KWH) 4.1 4.1 1.0
Source: Company, Edelweiss research Table 4: Financial performance – Brazilian subsidiaries
Q4FY11 Q3FY11 Q‐o‐Q growth (%)Net sales (INR mn) 9,098 9,941 (8.5) EBITDA (INR mn) 2,157 3,122 (30.9) EBITDA margin (%) 23.7 31.4 Other income (INR mn) (5,558) 1,047 (630.9) PAT (INR mn) (6,452) 1,385 (565.8)
Source: Company, Edelweiss research
Agriculture
4 Edelweiss Securities Limited
Financials snapshot (consolidated) (INR mn)Year to September Q4FY11 Q4FY10 % change Q3FY11 % change FY11E FY12E FY13ETotal revenues (net) 23,349 24,600 (5.1) 22,401 4.2 86,623 87,567 96,849 Raw material 17,791 18,729 (5.0) 15,747 13.0 63,770 59,784 66,470 Other operating expenses 3,118 2,451 27.2 2,330 33.8 10,299 10,453 11,168 Total expenditure 20,909 21,180 (1.3) 18,077 15.7 74,069 70,237 77,638 EBITDA 2,440 3,420 (28.7) 4,324 (43.6) 12,554 17,329 19,212 Depreciation 2,251 1,600 40.7 1,791 25.7 6,838 7,519 8,131 EBIT 189 1,820 (89.6) 2,533 (92.5) 5,716 9,811 11,081 Interest 1,925 1,670 15.3 1,622 18.7 6,574 7,383 7,391 Other income 844 ‐ 209 1,728 418 419 PBT (892) 150 (694.7) 1,120 (179.6) 870 2,845 4,108 Tax (405) (417) (2.9) 153 (365.6) 88 668 968 Core profit (487) 567 (185.9) 968 (150.3) 782 2,177 3,140 Minority interest (27) 230 (10) (48) (613) (233) PAT after minority interest (460) 337 (236.5) 978 (147.1) 830 2,790 3,373 Extraordinary items (5,698) 832 ‐ 893 ‐ (3,860) ‐ ‐ Reported profit (6,158) 1,169 (626.8) 1,870 (429.3) (3,030) 2,790 3,373 Equity capital 671 671 671 Adj. # of shares (mn) 671 671 671 EPS (INR) 1.2 4.2 5.0
as % of net revenuesRaw material 76.2 76.1 70.3 73.6 68.3 68.6 Other operating expenses 13.4 10.0 10.4 11.9 11.9 11.5 EBITDA 10.5 13.9 19.3 14.5 19.8 19.8 Reported profit (26.4) 4.8 8.3 (3.5) 3.2 3.5
Shree Renuka Sugars
5 Edelweiss Securities Limited
Company Description
SHRS, based in Karnataka and Maharashtra, with a sugar manufacturing capacity of 35,000 TCD and 6,000 TPD refining capacity. Starting with a crushing capacity of 3,500 TCD in FY03 under the leadership of its Managing Director, Mr. Narendra Murkumbi, the company has gradually become a large sugar and bio‐fuel conglomerate. It remains one of best integrated business models in India, with the ability to grow across sugar cycles on the back of its flexible operating model where co‐products support profitability during a downturn, while sugar and refining help in leveraging up‐cycle benefits.
Investment Theme SHRS’ uniqueness is its versatile and secular business model, which gives it several advantages over its peers: (1) highly integrated and flexible operations with large coproducts capacity; (2) all capacities are based in Maharashtra and Karnataka, where the operating environment is less regulated compared to Northern India. Also, yields in these states are higher than country average. The sugar mills in these states also have higher crushing days as compared to the Northern sugar mills; (3) SHRS sugar plants have the proximity to ports, and high inter‐plant synergies. In addition to these, the latest acquisitions in Brazil – VDI and Equipav gives SHRS, a presence in the world’s largest sugar manufacturing country and to take advantage of the tightness in supply globally. However, the high debt levels in Brazilian subsidiaries, poor operating performance from the Brazilian subsidiaries and the subdued operations in refinery are likely to be a drag on the stock in the short term.
Key Risks Sugar has been politically one of the most sensitive sectors in India, where decisions are populist and not based on economics. Any government move to control sugar prices which might result in the fall in sugar prices, will be a negative for the sector. Due to the substantial size of Equipav, any issue in terms of performance of Equipav might significantly alter the consolidated performance of SHRS. Any adverse movement in foreign currency movement might result in reversal of the unrealised MTM gains on long term debt in the Brazilian subsidiaries, resulting in denting the profits for SHRS. As SHRS will be having substantially higher leverage at the consolidated level, due to the Brazilian acquisitions, increase in interest rate may impact profitability.
Agriculture
6 Edelweiss Securities Limited
Financial Statements Income statement (INR mn)Year to September FY09 FY10 FY11 FY12E FY13EIncome from operations 28,160 76,694 86,623 87,567 96,849 Raw material costs 20,204 58,607 63,770 59,784 66,470 Employee costs 571 1,067 2,464 2,610 2,833 Other expenses 2,729 5,267 7,835 7,843 8,335 Total operating expenses 23,504 64,941 74,069 70,237 77,638EBITDA 4,656 11,753 12,554 17,329 19,212Depreciation and amortisation 675 2,457 6,838 7,519 8,131 EBIT 3,980 9,296 5,716 9,811 11,081Interest expenses 1,077 2,377 6,574 7,383 7,391 Other income 64 282 1,728 418 419 Profit before tax 2,968 7,201 870 2,845 4,108Provision for tax 720 1,316 88 668 968 Core profit 2,248 5,885 782 2,177 3,140Less: Minority interests 5 4 (48) (613) (233) PAT after minority interest 2,243 5,881 830 2,790 3,373 Extraordinary / Prior period items (7) 1,155 (3,860) 0 0Reported profit 2,236 7,036 (3,030) 2,790 3,373 Basic shares outstanding (mn) 634 670 671 671 671 EPS (INR) basic 3.5 8.8 1.2 4.2 5.0 Diluted equity shares (mn) 634 670 671 671 671 EPS (INR) fully diluted 3.5 8.8 1.2 4.2 5.0 CEPS (INR) 5.2 13.3 11.4 15.4 17.1 Dividend per share 1.0 1.0 1.0 1.0 1.0 Dividend payout (%) 16.5 13.3 94.6 28.1 23.3
Common size metrics‐ as % of net revenuesYear to September FY09 FY10 FY11 FY12E FY13ERaw material costs 71.7 76.4 73.6 68.3 68.6Employee expenses 2.0 1.4 2.8 3.0 2.9Other expenses 9.7 6.9 9.0 9.0 8.6Operating expenses 83.5 84.7 85.5 80.2 80.2Depreciation and amortization 2.4 3.2 7.9 8.6 8.4Interest expenditure 3.8 3.1 7.6 8.4 7.6EBITDA margin 16.5 15.3 14.5 19.8 19.8EBIT margin 14.1 12.1 6.6 11.2 11.4Net profit margin 8.0 7.7 1.0 3.2 3.5
Growth metrics (%)Year to September FY09 FY10 FY11 FY12E FY13ERevenues 33.8 172.4 12.9 1.1 10.6EBITDA 84.5 152.5 6.8 38.0 10.9PBT 84.6 142.6 (87.9) 227.0 44.4Net profit 90.3 161.8 (86.7) 178.4 44.2EPS 69.0 147.9 (85.9) 236.1 20.9
Shree Renuka Sugars
7 Edelweiss Securities Limited
Balance sheet (INR mn)As on 30th September FY09 FY10 FY11E FY12E FY13EEquity capital 317 670 671 671 671 Warrants 206 ‐ ‐ ‐ ‐ Reserves & surplus 14,779 22,808 20,055 22,059 24,648 Shareholders funds 15,302 23,479 20,726 22,730 25,319 Minority interest 147 151 104 (509) (742) Secured loans 13,006 62,302 86,120 89,000 87,000 Unsecured loans 421 2,778 ‐ 300 600 Borrowings 13,427 65,080 86,120 89,300 87,600 Net deferred tax 821 1,382 1,321 1,321 1,321Sources of funds 29,698 90,092 108,271 112,843 113,498 Gross block 15,704 82,466 100,428 110,428 115,428 Depreciation 1,555 17,629 24,467 29,738 35,385 Net block 14,149 64,837 75,961 80,690 80,044 Capital work in progress 2,585 7,027 9,472 5,000 4,000 Total fixed assets 16,734 71,864 85,433 85,690 84,044 Investments 477 1,189 1,415 1,415 1,415Inventories 10,721 17,711 19,058 19,139 20,814Sundry debtors 1,762 5,226 3,075 6,293 7,369Cash and equivalents 4,912 6,019 2,827 406 1,324Loans and advances 5,236 18,224 21,470 15,000 15,000Total current assets 22,631 47,179 46,430 40,838 44,506Sundry creditors 9,157 34,954 31,453 22,357 23,723Provisions 1,014 3,278 1,621 810 810Total CL & provisions 10,172 38,232 33,074 23,167 24,533Net current assets 12,459 8,947 13,356 17,671 19,973Others 28 108 83 83 83Goodwill 7,984 7,984 7,984 7,984Uses of funds 29,698 90,092 108,271 112,843 113,498Adjusted BV per share (INR) 24 35 31 34 38
Free cash flow (INR mn)Year to September FY09 FY10 FY11E FY12E FY13ENet profit 2,243 5,881 830 2,790 3,373 Depreciation 675 2,457 4,572 5,271 5,646 Deferred tax 354 549 0 0 0Interest and other non‐cash items 1,065 3,451 6,599 7,383 7,391
Gross cash flow 4,338 12,338 12,002 15,444 16,411Less:Changes in WC 2,897 (4,620) 7,601 6,737 1,384
Operating cash flow 1,440 16,958 4,401 8,708 15,027Less: Capex 4,677 71,204 20,407 5,528 4,000
Free cash flow (3,236) (54,246) (16,007) 3,180 11,027
Cash flow metricesYear to September FY09 FY10 FY11E FY12E FY13EOperating cash flow 1440 16958 4401 8708 15027Financing cash flow 8088 50422 14696 (5601) (10109)Investing cash flow (4844) (71916) (20633) (5528) (4000)Net cash flow 4,685 (4,536) (1,537) (2,421) 918Capex (4,677) (71,204) (20,407) (5,528) (4,000)Dividends paid (371) (784) (785) (785) (785)
8 Edelweiss Securities Limited
Agriculture
Profitability & liquidity ratiosYear to September FY09 FY10 FY11E FY12E FY13EROAE (%) (on adjusted profits) 19.0 30.4 3.8 12.9 14.1ROACE (%) 17.0 15.7 5.8 9.0 9.9Inventory days 117 89 105 117 110Debtors days 22 17 17 20 26Payable days 103 137 190 164 127Cash conversion cycle 36 (32) (67) (28) 9Fixed assets t/o (x) 2.6 1.9 1.2 1.1 1.2Debt/equity 0.9 2.8 4.2 3.9 3.5Interest coverage 3.7 3.9 0.9 1.3 1.5Current ratio 2.2 1.2 1.4 1.8 1.8Debt/EBITDA 2.9 5.5 6.9 5.2 4.6
Operating ratiosYear to September FY09 FY10 FY11E FY12E FY13ETotal asset turnover 1.2 1.3 0.9 0.8 0.9Fixed asset turnover 2.6 1.9 1.2 1.1 1.2Equity turnover 2.4 4.0 3.9 4.0 4.0
Du pont analysisYear to September FY09 FY10 FY11E FY12E FY13ENP margin (%) 8.0 7.7 1.0 3.2 3.5Total assets turnover 1.2 1.3 0.9 0.8 0.9Leverage multiplier 2.0 3.1 4.5 5.1 4.7ROAE (%) 19.0 30.4 3.8 12.9 14.1
Valuation parametersYear to September FY09 FY10 FY11E FY12E FY13EDiluted EPS (INR) 3.5 8.8 1.2 4.2 5.0Y‐o‐Y growth (%) 69.0 147.9 (85.9) 236.1 20.9CEPS 5.2 13.3 11.4 15.4 17.1Diluted P/E (x) 14.6 5.9 41.8 12.4 10.3Price/BV (x) 2.1 1.5 1.7 1.5 1.4EV/Sales (x) 1.5 1.2 1.3 1.4 1.2EV/EBITDA (X) 8.8 7.9 9.3 7.0 6.2Dividend yield (%) 1.9 1.9 1.9 1.9 1.9
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Tata Steel reported EBITDA in line in the Indian business and surprised positively in Europe (our estimate: negative EBITDA/t). Stable European sales volume QoQ was also a positive against our estimate of 6% dip. The 2.9mtpa expansion in India is on track for completion by March 2012 and is a key trigger for the company. However, the EBITDA loss in minor subsidiaries was a negative. We maintain ‘BUY’ with TP of INR617/share. Domestic EBITDA in line, international EBITDA surpasses estimate Tata Steel reported consolidated EBITDA of INR27.5bn, surpassing our INR20.2bn estimate. Standalone (Indian) business reported INR27.7bn EBITDA, exactly in line with our estimate. International business posted EBITDA of INR3.7bn which after EBITDA loss at minor subsidiaries of INR3.9bn gave a negative EBITDA of INR 0.2bn; but, this was still above our expectation of negative EBITDA of INR7.5bn.
European business surprises with USD32/t EBITDA European business sales volume of 3.5mt was better than our 3.3mt estimate. Q3FY12 guidance is 3.2‐3.3mt. The business posted EBITDA and EBITDA/t of USD 112mn and USD32, respectively. For the international business, net EBITDA and EBITDA/t was USD32m and USD8, respectively (after netting the above EBITDA loss), were better than our expectations of negative EBITDA/t of USD 41 due to better volumes and realisations.
EBITDA losses of USD70‐80 mn in minor subsidiaries The company suffered EBITDA loss of USD70‐80mn in its minor JVs/subsidiaries, including Tata Metalliks, Tata Steel Thailand and Tata Steel South Africa (Tata KZN). The losses are expected to dip going ahead due to sale of Tata Metalliks unit and discontinuation of one‐offs.
Outlook and valuations: Positive; maintain ‘BUY’ We believe going ahead European business EBITDA will be sub‐par due to weak demand, but will benefit from declining raw material cost, reduced fixed cost and improved product mix. The completion of 2.9mtpa high margin Indian expansion by March 2012 is a key near‐term trigger for the company. We maintain our estimates and our ‘BUY’ recommendation with a target price of INR617/share.
RESULT UPDATE
TATA STEEL European business surprises positively
EDELWEISS 4D RATINGS
Absolute Rating BUY
Rating Relative to Sector Outperformer
Risk Rating Relative to Sector Medium
Sector Relative to Market Underweight
MARKET DATA (R: TISC.BO, B: TATA IN)
CMP : INR 430
Target Price : INR 617
52‐week range (INR) : 737 / 390
Share in issue (mn) : 959.2
M cap (INR bn/USD mn) : 412 / 8,213
Avg. Daily Vol.BSE/NSE(‘000) : 5,505.0
SHARE HOLDING PATTERN (%)
* Promoters pledged shares (% of share in issue)
: 1.0
PRICE PERFORMANCE (%)
Stock Nifty EW Metals and Mining
Index
1 month 17.7 10.7 8.3
3 months (15.8) (0.9) (13.7)
12 months (22.9) (15.9) (18.9)
Prasad Baji +91 22 4040 7415 [email protected] Navin Sahadeo +91 22 6623 3473 [email protected]
India Equity Research| Metals and Mining
November 11, 2011
Promoters*30.7%
MFs, FIs & Banks27.8%
FIIs14.6%
Others26.9%
Financials (Consolidated)
Year to March Q212 Q211 % change Q112 % change FY11 FY12E
Net rev. (INR mn) 327,979 286,462 14.5 330,002 (0.6) 1,171,498 1,188,412
EBITDA (INR mn) 27,500 36,723 (25.1) 44,229 (37.8) 143,923 135,843
Net profit (INR mn) 2,124 19,788 (89.3) 53,466 (96.0) 89,828 82,429
EPS (INR/share) 2.2 21.9 (89.9) 55.8 (96.0) 68.3 41.1
P/E (x) 6.3 10.5
EV/EBITDA (x) 5.8 6.1
ROE (%) 22.2 10.2
Metals and Mining
2 Edelweiss Securities Limited
Other conference call highlights Indian business: Expect EBITDA/t of USD350 in coming quarters
• Indian operations to post stable EBITDA of USD350/t (on upside could be USD375/t) in the next two quarters on account of stable steel prices in India. We believe the implied INR:USD exchange rate here is ~49, whereas we are currently modeling at 46. For FY13 we are modeling USD357/t @ INR46; hence, the downside risk on the same is limited.
• The 2.9mtpa expansion project in Jamshedpur will be completed in the Jan‐Mar 2012 timeframe as guided earlier.
• Other expenses rose 25% QoQ (absolute change : INR4bn) on account of MTM forex loss of INR2.2bn on unhedged foreign currency convertible debt (CARS/FCCBs), increased royalty charges of INR1.2bn and INR0.5bn increase in conversion charges. All other foreign currency exposure, including that for coking coal purchases, is hedged.
• Ferro alloy business was sluggish due to subdued demand from stainless steel producers, especially from Japan. Indian steel demand is stable, but Tata Steel is seeing signs of slowdown in the automotive sector.
• Indian business posted steel sales volume of 1.65mt, slightly above our expectation of 1.6mt. Due to forex loss of INR2.2bn on convertible bonds (this is booked in other expenses), the business had EBITDA/t of USD370, slightly lower than our expectation of USD383. Blended realisation of INR49.77k/t was in line with expectation. A key highlight was 46% YoY increase in retail longs’ sales in H1FY12. In spite of Indian flat demand hardly growing YoY in H1FY12, the company’s flat sales grew 7% YoY.
European business : Decline in volumes and margin in Q3FY12 likely
• Going forward, European volumes are likely to decline 6‐9% QoQ to 3.2‐3.3mt for Q3FY12. EBITDA/t (Q2FY12: USD 30/t) will be under pressure in the coming quarters due to decline in steel realizations and raw material costs peaking in Q3FY12. We expect negative EBITDA/t in Europe for Q3FY12, but expect that to be the trough EBITDA.
• Tata Steel Europe procures 25% of its coking coal requirement based on annual pricing (on Jun‐July period). Hence, the raw material cost pressure will continue to this extent until June 2012.
• Tata Steel Europe has mothballed 1mt Queen Bess blast furnace in Scunthorpe which was operating at 60‐70% capacity utilisation (Scunthorpe ‐ longs product facility; capacity reduced from 4mtpa to 3mtpa as a result of this). The corresponding billet and bloom caster is also closed. The company proposes to make up this volume partly from the Netherlands facility.
• The restructuring potentially involves loss of 1,200 jobs in Scunthorpe and another 300 in TCP. In addition, the company is planning reduction of 1,050 people in other facilities in 2012 to further reduce cost.
• Benefit of working capital release to be seen in the next quarter due to reduced steel and raw material prices.
• Net pension surplus for pension funds was GBP106mn as at Q2FY12 end but was down from GBP350mn as Q1FY12 end. Equity exposure in funds has reduced slightly from 28% in Q1FY12 to 25% in Q2FY12.
Tata Steel
3 Edelweiss Securities Limited
• Tata Steel clarified that the ongoing cash contribution to the pension fund is being accounted for in the P&L above EBITDA. Triennial valuation exercise for pension funds is on and the change in cash contribution would be decided post the same.
• European steel demand is slow, but producers have started cutting production to align with demand and the bottom should soon be found on steel prices, though this is getting influenced by sharp downward movements in raw material prices as well. Imports into Europe are reducing, but stocks are higher QoQ which need to be worked out.
• In the European business, average selling price reduced by USD28/t QoQ, but better than our expectations of USD 56/t, whereas raw material cost increase of USD23/t was only slightly above our expectation of USD20/t.
Overall business: EBITDA losses of USD 70‐80 mn in subsidiaries
• EBITDA losses in JVs/subsidiaries are reflected in inter‐group eliminations: The company suffered from EBITDA loss of USD70‐80mn in its JVs/subsidiaries, including Tata Metalliks, Tata Steel Thailand and Tata Steel South Africa (Tata KZN). Tata Metalliks incurred loss due to its Reddi (Maharashtra) unit not obtaining iron ore; since then this unit has been sold to Fomento for INR1.8bn and hence losses are expected to discontinue. Tata Steel Thailand incurred charges on account of moth‐balling of its blast furnace while Tata Steel South Africa faces structural issues of chrome ore availability. Tata Steel Australia is facing steel demand slowdown. Dhamra port has commenced operations, but incurred EBITDA loss.
• Capex guidance for FY12 and FY13 retained at ~USD2bn. Capex incurred for Q2FY12 and H1FY12 was USD557mn and USD1bn, respectively.
• Net debt (after deducting gain on forward cover) has remained virtually stagnant QoQ at USD8.4bn at Q2FY12 end; gain on forward cover is USD0.8bn. For Q2FY12, the company repaid total of USD1.3bn of debt and had forex loss of USD572mn.
• Consolidated tax rate was abnormally high due to taxes to be paid in individual entities which cannot be offset by tax losses in other entities. The company paid taxes of INR250mn in Europe since its Netherland operations are profitable and paid tax of INR300mn in Singapore as well.
• Mozambique coking coal project: Expected to produce 1mt of processed coking coal and 0.5mt of thermal coal in FY13 after commencing by FY12 end. Tata Steel owns 35% stake in this project for which we have assumed no benefit in our target price.
Metals and Mining
4 Edelweiss Securities Limited
Table 1: Operational performance summary
Source: Company, Edelweiss research
*includes other operating income
Note: For Q2FY12, we have adjusted the geography‐wise EBITDA with the average Q2FY12 exchange rate of INR/USD 45.7
as against the quarter end exchange rate of INR/USD 48.9 assumed by the company.
Q212 India Europe SE Asia Intergroup Adj OverallVolume (mt) 1.7 3.5 0.8 0.2 6.1Revenue (USD mn)* 1,677 4,321 637 63 6,698Revenue/tonne (USD) 1,016 1,242 817 1,096EBITDA (USD mn)* 610 112 5 (85) 643EBITDA/tonne (USD) 370 32 7 105
Q112 India Europe SE Asia Intergroup Adj OverallVolume (mt) 1.6 3.5 0.8 0.2 6.1Revenue (USD mn)* 1,759 4,594 746 284 7,383Revenue/tonne (USD) 1,099 1,313 933 1,210EBITDA (USD mn)* 704 274 20 (24) 974EBITDA/tonne (USD) 440 78 25 160
Q211 India Europe SE Asia Intergroup Adj OverallVolume (mt) 1.7 3.5 0.8 (0.2) 5.8Revenue (USD mn)* 1,582 4,092 598 103 6,375Revenue/tonne (USD) 953 1,159 757 1,095EBITDA (USD mn)* 748 197 29 27 1,001EBITDA/tonne (USD) 451 56 37 172
Tata Steel
5 Edelweiss Securities Limited
Financials snapshot (standalone) (INR mn)Year to March Q212 Q211 % change Q112 % change FY11 FY12E FY13ETotal net revenues 82,119 71,068 15.6 78,603 4.5 293,964 325,256 410,396Dec/(inc) in stock (403) 444 NM (2,547) NM (1,737) 0 0Purchase of semis 450 381 18.0 373 20.5 1,802 1,499 1,757Raw material 18,890 14,812 27.5 17,903 5.5 62,440 75,489 98,070Staff costs 6,908 6,837 1.0 6,870 0.6 26,198 27,492 28,866Purchase of power 4,320 3,615 19.5 4,593 (5.9) 14,049 18,362 23,527Freight & Handling 3,900 3,603 8.2 4,064 (4.0) 15,408 18,601 20,260Other expenses 20,356 15,086 34.9 16,315 24.8 61,475 67,595 97,006Total expenditure 54,422 44,777 21.5 47,571 14.4 179,635 209,037 269,487EBITDA 27,698 26,290 5.4 31,032 (10.7) 114,329 116,219 140,909Interest 2,343 3,425 (31.6) 2,273 3.1 13,005 9,936 15,211Depreciation 2,871 2,815 2.0 2,853 0.6 11,462 12,702 19,588Other income 236 7,327 (96.8) 5,526 (95.7) 7,907 4,357 5,228PBT 22,720 27,378 (17.0) 31,432 (27.7) 97,769 103,067 111,339Tax 7,767 6,726 15.5 9,238 (15.9) 29,112 30,881 35,017Adjusted net profit 14,952 20,651 (27.6) 22,194 (32.6) 68,657 68,592 76,322Reported net profit 14,952 20,651 (27.6) 22,194 (32.6) 68,657 72,185 76,322Equity capital (FV INR 10) 9,594 9,024 9,594 9,594 9,714 9,714Outstanding shares (mn) 959 902 959 959 971 971Basic EPS (INR) 15.6 22.9 (31.9) 23.1 (32.6) 71.6 74.3 78.6
as % of net revenuesRaw material 22.5 21.5 19.5 20.7 23.2 23.9Purchase of goods 0.5 0.5 0.5 0.6 0.5 0.4Staff costs 8.4 9.6 8.7 8.9 8.5 7.0Purchase of power 5.3 5.1 5.8 4.8 5.6 5.7Freight & Handling 4.7 5.1 5.2 5.2 5.7 4.9Other expenses 24.8 21.2 20.8 20.9 20.8 23.6EBITDA 33.7 37.0 39.5 38.9 35.7 34.3Adjusted net profit 18.2 29.1 28.2 23.4 21.1 18.6Reported net profit 18.2 29.1 28.2 23.4 22.2 18.6Tax rate 34.2 24.6 29.4 29.8 30.0 31.5
(INR/t)Per tonne performance Q212 Q211 % change Q112 % changeVolume (mt) 1.65 1.66 (0.6) 1.59 3.6Blended realisation 49,769 42,812 16.3 49,342 0.9Dec/(inc) in stock (244) 267 (1,599) Purchase of semis 273 230 18.7 234 16.4Raw material 11,449 8,923 28.3 11,238 1.9Staff costs 4,187 4,119 1.6 4,313 (2.9)Purchase of power 2,618 2,178 20.2 2,883 (9.2)Freight & Handling 2,364 2,170 8.9 2,551 (7.4)Other expenses 12,337 9,088 35.8 10,242 20.5Cost 32,983 26,974 22.3 29,862 10.4EBITDA 16,786 15,837 6.0 19,480 (13.8)
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6 Edelweiss Securities Limited
Financials snapshot (consolidated) (INR mn)Year to March Q212 Q211 % change Q112 % change FY11 FY12E FY13ETotal net revenues 327,979 286,462 14 330,002 (1) 1,171,498 1,188,412 1,312,231 Dec/(inc) in stock 10,666 (8,086) (23,914) (13,560) Purchase of goods 43,217 38,059 14 60,581 (29) 158,904 Raw material 108,318 94,091 15 112,277 (4) 380,441 474,081 492,696 Staff costs 39,811 38,275 4 42,316 (6) 152,869 168,101 184,495 Purchase of power 11,807 9,967 18 12,093 (2) 28,753 Freight & Handling 16,850 14,676 15 15,937 6 35,143 102,579 110,428 Other expenses 69,809 62,757 11 66,484 5 285,024 307,808 352,500 Total expenditure 300,479 249,739 20 285,773 5 1,027,575 1,052,569 1,140,120 EBITDA 27,500 36,723 (25) 44,229 (38) 143,923 135,843 172,111Interest 7,161 6,637 8 7,377 (3) 27,700 26,685 31,959 Depreciation 11,088 10,781 3 11,508 (4) 44,148 46,581 53,170 Other income 1,204 8,143 (85) 38,823 (97) 25,843 8,957 9,828 PBT 10,456 27,448 (62) 64,167 (84) 97,917 71,534 96,811 Tax 9,065 7,450 22 11,230 (19) 32,459 30,841 35,113 Adjusted net profit 1,390 19,998 (93) 52,937 (97) 65,458 40,693 61,697 Extraordinary items ‐ (316) NM ‐ NM 23,102 40,995 ‐ Reported net profit 1,390 19,682 (93) 52,937 (97) 88,561 81,688 61,697Share of profit of associates 192 103 87 248 (23) 664 Minority interest (542) (3) NM (281) 93 (603) (741) (667) Profit after minority interest and taxes 2,124 19,788 (89) 53,466 (96) 89,828 82,429 62,364 Equity capital (FV INR 10) 9,587 9,017 9,587 9,594 9,714 9,714 No. of shares (mn) 959 902 959 959 971 971 EPS (INR) 2.2 21.9 (90) 55.8 (96) 68.3 41.1 62.8
As a % of revenueRaw material 33.0 32.8 34.0 32.5 39.9 37.5Staff costs 12.1 13.4 12.8 13.0 14.1 14.1Purchase of power 3.6 3.5 3.7Freight & handling 5.1 5.1 4.8 3.0 8.6 8.4Other expenses 21.3 21.9 20.1 24.3 25.9 26.9EBITDA 8.4 12.8 13.4 12.3 11.4 13.1Reported net profit 0.4 6.9 16.0 7.6 6.9 4.7Tax rate 86.7 27.1 17.5 33.1 43.1 36.3
Per tonne performance Q212 Q211 % change Q112 % changeVolume (mt) 6.1 5.8 5.0 6.1 0.2Blended realisation (INR/t) 53,679 49,220 9.1 54,099 (0.8)Cost (INR/t) 49,178 42,910 14.6 46,848 5.0EBITDA (INR/t) 4,501 6,310 (28.7) 7,251 (37.9)
Tata Steel
7 Edelweiss Securities Limited
Financials snapshot (international) (INR mn)Year to March Q212 Q211 % change Q112 % changeTotal net revenues 245,860 215,394 14.1 251,399 (2.2)
Dec/(inc) in stock 11,069 (8,530) NM (21,367) NMPurchase of semis 42,767 37,678 13.5 60,208 (29.0)Raw material 89,428 79,279 12.8 94,375 (5.2)Staff costs 32,904 31,438 4.7 35,446 (7.2)Purchase of power 7,487 6,353 17.9 7,500 (0.2)Freight & Handling 12,950 11,073 16.9 11,873 9.1Other expenses 49,453 47,671 3.7 50,169 (1.4)
Total expenditure 246,057 204,961 20.1 238,202 3.3EBITDA (197) 10,433 NM 13,197 NM
Interest 4,818 3,212 50.0 5,104 (5.6)Depreciation 8,217 7,966 3.1 8,655 (5.1)Other income 969 816 18.7 33,296 (97.1)
PBT (12,264) 70 NM 32,734 NMTax 1,298 724 79.4 1,992 (34.8)
Adjusted net profit (13,562) (653) NM 30,742 NMExtraordinary items 0 (316) NM 0 NM
Reported net profit (13,562) (969) NM 30,742 NMEquity capital (FV INR 10) 9,587 9,017 9,587Outstanding shares (mn) 959 902 959Basic EPS (INR) (14.1) (1.1) NM 32.1 NM
as % of net revenues
Raw material 40.9 32.8 29.0Purchase of goods 17.4 17.5 23.9Staff costs 13.4 14.6 14.1Purchase of power 3.0 2.9 3.0Freight & Handling 5.3 5.1 4.7Other expenses 20.1 22.1 20.0EBITDA (0.1) 4.8 5.2Adjusted net profit (5.5) (0.3) 12.2Reported net profit (5.5) (0.4) 12.2
Tax rate (10.6) 1,029.2 6.1
Per tonne performance Q212 Q211 % change Q112 % changeVolume (mt) 4.5 4.2 7.2 4.5 (0.9)Blended realisation (INR/t) 55,125 51,778 6 55,866 (1) Cost (INR/t) 55,170 49,270 12 52,934 4 EBITDA (INR/t) (44) 2,508 (102) 2,933 (102)
Metals and Mining
8 Edelweiss Securities Limited
Company Description Established 100 years ago in 1907, Tata Steel is Asia’s first and India’s second largest private sector steel company. With the take over of Corus Steel (Europe’s second largest steel producer), Tata Steel is now the sixth largest steel company in the world with over 31mtpa of steel capacity. Tata Steel’s Indian operations are amongst the lowest producers of steel in the world comprising 6.8 mtpa steel making facility at Jamshedpur in Jharkhand.
Investment Theme We believe the worst is behind us for the global steel sector. Steel prices have ben rising albeit with volatility. While low capacity utilization will prevent outsized price rallies, we believe prices will move above marginal cost. Demand is picking up slowly and we expect reasonable recovery in European steel starting from Q2FY10 and going into FY12E. Tata Steel has already taken steps for cost reduction and hits on the P&L for such restructuring. Led by all this, we expect strong earnings growth in FY12E and FY13E.
Key Risks
• Any delay in demand revival and/or renewed slump in European steel.
• Higher than anticipated Chinese/CIS steel exports into Europe.
• Delay in completion of 3mtpa expansion in India
Tata Steel
9 Edelweiss Securities Limited
Financial Statements
Income statement (INR mn)Year to March FY09 FY10 FY11 FY12E FY13ENet revenue 1,473,293 1,017,578 1,171,498 1,188,412 1,312,231 Accretion to stock 19,759 6,600 (13,560) ‐ ‐ Raw material costs 729,377 310,045 380,441 474,081 492,696 Purchase of goods ‐ 130,870 158,904 ‐ ‐ Employee expenses 179,751 164,630 152,869 168,101 184,495 Power and freight 59,574 55,491 63,896 102,579 110,428 SGA and other expenses 303,556 275,868 285,024 307,808 352,500 Total operating expenses 1,292,016 943,505 1,027,575 1,052,569 1,140,120EBITDA 181,277 74,073 143,923 135,843 172,111Depreciation and amortisation 42,654 44,917 44,148 46,581 53,170 EBIT 138,623 29,156 99,775 89,262 118,942Interest expenses 32,902 30,221 27,700 26,685 31,959 Other income 2,657 18,212 25,843 8,957 9,828 Profit before tax 108,378 17,147 97,917 71,534 96,811Provision for tax 18,940 21,518 32,459 30,841 35,113 Core profit 89,438 (4,371) 65,458 40,693 61,697 Extraordinary income/(loss) (40,945) (16,837) 23,102 40,995 ‐ Profit after tax 48,492 (21,208) 88,561 81,688 61,697Minority interest (1,017) (1,269) (603) (741) (667)Share of profit of associates 0 (152) 664 0 0Profit after minority interest 49,509 (20,092) 89,828 82,429 62,364Preferred dividend 1,095 459 0 0 0Basic shares outstanding (mn) 730 887 959 971 971Diluted shares (mn) 822 887 959 971 971Basic EPS 119.6 (7.0) 68.3 41.1 62.8Diluted EPS 106.2 (7.0) 68.3 41.1 62.8Dividend per share (INR) 13.0 8.0 12.0 12.0 12.0Dividend payout (%) 31.5 (36.7) 15.2 16.5 21.9
Common size metrics‐ as % of net revenuesYear to March FY09 FY10 FY11 FY12E FY13EOperating expenses 87.7 92.7 87.7 88.6 86.9Depreciation 2.9 4.4 3.8 3.9 4.1Interest expenditure 2.2 3.0 2.4 2.2 2.4EBITDA margins 12.3 7.3 12.3 11.4 13.1Net profit margins 6.1 (0.4) 5.6 3.4 4.7
Growth metrics (%)Year to March FY09 FY10 FY11 FY12E FY13ERevenues 12.0 (30.9) 15.1 1.4 10.4EBITDA 0.7 (59.1) 94.3 (5.6) 26.7PBT (33.8) (84.2) 471.0 (26.9) 35.3Net profit 16.0 (104.9) (1,597.5) (37.8) 51.6EPS 10.0 (106.6) (1,069.5) (39.8) 52.8
Metals and Mining
10 Edelweiss Securities Limited
Balance sheet (INR mn)As on 31st March FY09 FY10 FY11 FY12E FY13EEquity capital‐ Voting shares 7,301 8,867 9,587 9,714 9,714Preference shares 54,727 0 0 0 0Reserves & surplus 209,518 221,516 361,226 430,017 478,743Shareholders funds 271,546 230,383 370,814 439,731 488,457Secured loans 342,439 280,593 286,044 357,058 357,058Unsecured loans 256,566 250,410 320,799 263,580 263,231Borrowings 599,005 531,004 606,843 620,638 620,289Minority interest 8,949 8,841 8,889 8,889 8,889Deferred tax liability 17,094 16,541 20,126 20,126 20,126Prov. for VRS 10,424 9,637 8,794 8,794 8,794Sources of funds 907,018 796,405 1,015,466 1,098,178 1,146,556Gross block 1,083,890 1,066,084 1,139,856 1,238,205 1,344,205Depreciation 630,832 608,126 615,922 662,503 715,672Net block 453,059 457,958 523,934 575,702 628,533Total fixed assets 453,059 457,958 523,934 575,702 628,533Investments 64,111 54,178 78,473 78,473 78,473Goodwill 153,649 145,418 152,982 152,982 152,982Inventories 216,684 186,866 240,552 234,491 243,698Sundry debtors 130,316 116,240 148,163 148,137 163,571Cash and equivalents 61,484 67,878 108,926 143,474 124,754Other current assets 130,055 67,694 100,045 100,045 100,045Total current assets 538,540 438,678 597,686 626,147 632,069Sundry creditors and others 230,933 233,886 266,711 264,227 274,602Provisions 71,407 65,942 70,899 70,899 70,899Total CL & provisions 302,340 299,827 337,610 335,126 345,501Net current assets 236,199 138,851 260,077 291,021 286,568Uses of funds 907,018 796,405 1,015,466 1,098,178 1,146,556Book value per share (BV) (INR) 372 260 387 453 503
Free cash flow metrics (INR mn)Year to March FY09 FY10 FY11 FY12E FY13ENet profit 49,509 (20,092) 89,828 82,429 62,364Depreciation 42,654 44,917 44,148 46,581 53,170Gross cash flow 92,163 24,825 133,976 129,010 115,534 Less: Changes in W. C. (70,676) (103,743) 80,178 (3,604) 14,267 Operating cash flow 162,839 128,568 53,798 132,614 101,268 Less: Capex 32,635 (17,806) 73,771 98,349 106,000Free cash flow 130,204 146,374 (19,974) 34,265 (4,732)
Cash flow statementYear to March FY09 FY10 FY11 FY12E FY13EOperating cash flow 160,806 126,031 52,592 132,614 101,268Financing cash flow 48,751 (129,576) 63,139 284 (13,987)Investing cash flow (36,119) 35,970 (105,631) (98,349) (106,000)Net cash flow 173,439 32,425 10,100 34,548 (18,719)Capex (32,635) 17,806 (73,771) (98,349) (106,000)Dividends paid (14,950) (8,306) (13,469) (13,638) (13,638)Share issuance/(buyback) 1 (53,160) 720 127 0
11 Edelweiss Securities Limited
Tata Steel
RatiosYear to March FY09 FY10 FY11 FY12E FY13EROAE (%) 35.5 (1.7) 22.2 10.2 13.4ROACE (%) 16.0 3.7 11.9 9.1 11.4Inventory (days) 105 165 148 183 177Debtors (days) 39 44 41 46 43Payable (days) 119 190 174 204 200Cash conversion cycle (days) 25 19 16 24 21Debt/EBITDA 3.3 7.2 4.2 4.6 3.6Current ratio 1.8 1.5 1.8 1.9 1.8Debt/ Equity 2.2 2.3 1.6 1.4 1.3Adjusted debt/Equity 2.2 2.3 1.6 1.4 1.3
TurnoverYear to March FY09 FY10 FY11 FY12E FY13EFixed assets t/o (x) 3.4 2.2 2.4 2.2 2.2Total asset turnover (x) 1.6 1.2 1.3 1.1 1.2Equity turnover (x) 4.8 4.1 3.9 2.9 2.8
Du pont analysisYear to March FY09 FY10 FY11 FY12E FY13ENP margin (%) 6.1 (0.4) 5.7 3.5 4.8Total assets turnover 1.6 1.2 1.3 1.1 1.2Leverage multiplier 3.6 3.8 3.0 2.6 2.4ROAE (%) 35.5 (1.7) 22.2 10.2 13.4
Valuation parametersYear to March FY09 FY10 FY11 FY12E FY13EDiluted EPS (INR) 106.2 (7.0) 68.3 41.1 62.8Y‐o‐Y growth (%) 10.0 (106.6) NM (39.8) 52.8CEPS (INR) 182.3 46.9 115.6 90.6 118.9Diluted P/E (x) 4.0 (61.0) 6.3 10.5 6.8Price/BV(x) 1.2 1.7 1.1 0.9 0.9EV/Sales (x) 0.6 0.8 0.7 0.7 0.6EV/EBITDA (x) 4.7 10.8 5.8 6.1 4.9Dividend yield (%) 3.0 1.9 2.8 2.8 2.8
12 Edelweiss Securities Limited
Company Absolute
reco
Relative
reco
Relative
risk
Company Absolute
reco
Relative
reco
Relative
Risk
Bhushan Steel HOLD SP M Coal India BUY SO M
Hindalco Industries BUY SO M Hindustan Zinc BUY SO L
Jindal Steel & Power BUY SO M JSW Steel BUY SO M
National Aluminium Company HOLD SU M Sesa Goa HOLD SP M
Steel Authority of India HOLD SU L Sterlite Industries (India) BUY SP M
Tata Steel BUY SO M Usha Martin HOLD SP M
RATING & INTERPRETATION
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Voltas (VOLT) reported very weak Q2FY12 numbers, significantly below ours and consensus estimates. Revenue grew by a mere 5% even as PAT (adjusted for property sale) dipped 72% with margins collapsing across all segments. EBTIDA margin was the lowest in 25 quarters at 2.4%. The biggest surprise came from 940bps dip in UCP margin. While the order book declined 10% YoY to INR44.6bn, the inflow dropped 29% to ~INR4.8bn. We cut our earnings estimate for FY12E and FY13E by 31% and 20% respectively as we trim revenues for EMPS and margins across segments. We believe most of the negatives are already factored in at the current level as we remain concerned over the near to medium term outlook of the company. We maintain ‘HOLD’ with target price of INR 83.
Earnings disappoint yet again; margin lowest in 25 quarters VOLT’s revenue reported a muted growth of 5% YoY to INR11.2bn. Earnings (adjusted for property sales), however, dropped by 72% YoY to INR228mn as profitability declined across segments. EBITDA declined 75% YoY to INR237mn as EBITDA margin dropped 770bps YoY to 2.4%, its lowest in 25 quarters. EBIT margin in EMPS and UCP collapsed by 750bps and 940bps YoY to 0.7% and 2.9% respectively. While cost overruns in its overseas project hit margin in EMPS, UCP margin suffered due to a combination of seasonality, inventory liquidation of inventory at lower margin and increased costs of imports. We believe cost overruns are likely to continue through the year in EMPS, putting pressure on margin. In UCP, given the high sensitivity of volume and increased competitive intensity, sustainable margin could be lower going forward.
Outlook and valuations: Challenging; maintain ‘HOLD’ The business environment has become extremely challenging for VOLT across all three segments as macro headwinds continue. New projects are hard to come in EMPS given the slowdown and excessive competition (which are likely to keep margin under pressure). UCP could also see a structural decline in margins. The stock is currently trading at 14.3x and 11.4x its revised earnings for FY12E and FY13E respectively. While the tough macro environment and negative management commentary mars outlook, we believe most of the negatives are factored in at current level and thus maintain ‘HOLD/Sector Underperformer’ with reduced target of INR83 (earlier INR 104).
RESULT UPDATE
VOLTAS Volt to uncertainty
EDELWEISS 4D RATINGS
Absolute Rating HOLD
Rating Relative to Sector Underperformer
Risk Rating Relative to Sector Low
Sector Relative to Market Equalweight
MARKET DATA (R: VOLT.BO, B: VOLT IN)
CMP : INR 95
Target Price : INR 83
52-week range (INR) : 263 / 94
Share in issue (mn) : 330.9
M cap (INR bn/USD mn) : 32 / 627
Avg. Daily Vol.BSE/NSE(‘000) : 1,128.9
SHARE HOLDING PATTERN (%)
* Promoters pledged shares (% of share in issue)
: NIL
PRICE PERFORMANCE (%)
Stock Nifty
EW Capital Goods Index
1 month 1.0 10.7 2.1
3 months (20.1) (0.9) (6.7)
12 months (58.3) (15.9) (27.1)
Rahul Gajare +91 22 4063 5561 [email protected] Amit Mahawar +91 22 4040 7451 [email protected] Swarnim Maheshwari +91 22 4040 7418 [email protected]
India Equity Research| Engineering and Capital Goods
November 11, 2011
Promoters*30.5%
MFs, FIs & Banks31.2%
FIIs17.6%
Others20.6%
Financials (Consolidated)
Year to March Q2FY12 Q2FY11 % change Q1FY12 % change FY11 FY12E
Net revenues (INR mn) 11,216 10,651 5.3 13,484 (16.8) 51,768 52,728
EBITDA (INR mn) 273 1,075 (74.6) 1,089 (74.9) 4,408 3,120
Adj. Net profit (INR mn) 228 806 (71.7) 752 (69.7) 3,171 2,195
Diluted EPS (INR) 0.7 2.4 (71.7) 2.3 (69.7) 9.6 6.6
Diluted P/E (x) 9.9 14.3
EV/EBITDA (x) 5.8 8.6
ROAE (%) 25.9 15.2
Engineering and Capital Goods
2 Edelweiss Securities Limited
Segmental performance: UCP springs biggest disappointment After a disappointing performance in EMPS over the past five quarters, VOLT reported a moderate revenue growth of 8% at INR7.b6bn during the quarter. Revenues in UCP and EPS declined 8% and 5% YoY to INR2.1bn and INR1.2bn respectively. UCP revenue declined as the air conditioning industry faced a slowdown due to unfavourable weather conditions while EPS revenue was lower as material handling business has been moved out to the JV with KION group. Profitability was hit across all three segments. The biggest disappointment was seen in UCP as its margin dipped 940bps YoY to 2.9% given the very high sensitivity to volume towards fixed cost absorption. Margin in EMPS and EPS declined 750bps and 610bps YoY to 0.7% and 14.8% respectively. UCP profitability was hampered due to lower volume sale as the company faced 18% decline in volume besides a higher competitive intensity. In EMPS, it faced significant cost over runs in its projects in Qatar which might last few more quarters even as new projects are hard to come by. EPS margin was affected due to slower equipment sale to the mining industry which faces several impediments like environment clearances amongst others.
Key takeaways from Q2FY12 results conference call • The company has already bagged orders worth ~ INR8.3bn during Q3FY12 which have
not been included in the current order book of INR44.6bn, providing a better order visibility.
• The order book comprises of INR26.4bn from international geographies, INR13.7bn from domestic market, INR1.9bn from water business and INR2.6bn from Rohini Electricals.
• The incremental orders in EMPS are coming at lower margins as VOLT lowered its margin requirement threshold on the back of increased competitive intensity and limited movement in order awards. (~5% in international geographies and 7%-8% in domestic market).
• The management indicated that the Sidra Hospital contract (worth INR9bn initially) in Qatar, expected to be over by June 2012, would be loss making as cost escalations continue. Variation, if any, could accrue only in FY13 after completion of the project.
• In UCP, the competitive intensity has increased significantly with several players resorting to major price cuts in order to liquidate inventory and gain market share.
• The slowdown in the mining sector has affected the EPS business significantly.
• In the EPS business, two major Principals - Bucyrus and Letourneau - have been taken over by Caterpillar and Joy respectively and there remains uncertainty about their future strategy wrt to business with VOLT.
Voltas
3 Edelweiss Securities Limited
Table 1: Segmental performance
Source: Company, Edelweiss research
Year to March Q2FY12 Q2FY11 % change Q1FY12 % change H1FY12 H1FY11 % changeRevenue (INR mn)Electro mechanical projects (EMPS) 7,623 7,066 7.9 6,769 12.6 14,392 13,991 2.9Engineering products & services (EPS) 1,202 1,267 (5.1) 973 23.6 2,175 2,470 (12.0)Unitary cooling products (UCP) 2,101 2,281 (7.9) 5,625 (62.6) 7,726 8,149 (5.2)Others 87 26 NM 97.7 (11.3) 184 63 NMTotal revenue 11,013 10,639 3.5 13,464 (18.2) 24,478 24,674 (0.8)
Segment revenue mix (%)Electro mechanical projects (EMPS) 69.2 66.4 50.3 58.8 56.7 Engineering products & services (EPS) 10.9 11.9 7.2 8.9 10.0 Unitary cooling products (UCP) 19.1 21.4 41.8 31.6 33.0 Others 0.8 0.2 NM 0.8 0.3
EBIT (INR mn)Electro mechanical projects (EMPS) 50 580 (91.4) 310 (83.9) 360 1,165 (69.1)Engineering products & services (EPS) 178 264 (32.7) 170 4.5 348 540 (35.6)Unitary cooling products (UCP) 61 280 (78.1) 636 (90.4) 698 828 (15.7)Others (7.2) 6 NM 19 NM 12 6.6 NMTotal EBIT 282 1,130 (75.1) 1,135 (75.2) 1,417 2,539 (44.2)
EBIT margin (%)Electro mechanical projects (EMPS) 0.7 8.2 4.6 2.5 8.3 Engineering products & services (EPS) 14.8 20.9 17.5 16.0 21.9 Unitary cooling products (UCP) 2.9 12.3 11.3 9.0 10.2 Others NM 21.7 19.3 6.3 10.4
EBIT mix (%)Electro mechanical projects (EMPS) 17.7 51.3 27.3 25.4 45.9Engineering products & services (EPS) 63.1 23.4 15.0 24.6 21.3Unitary cooling products (UCP) 21.8 24.8 56.1 49.2 32.6Others (2.6) 0.5 1.7 0.8 0.3
Engineering and Capital Goods
4 Edelweiss Securities Limited
Chart 1: EMPS segment ‐ Revenue and EBIT margin movement
Chart 2: UCP segment ‐ Revenue and EBIT margin movement
Chart 3: EPS segment ‐ Revenue and EBIT margin movement
Source: Company, Edelweiss research
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Voltas
5 Edelweiss Securities Limited
Chart 4: Order backlog break up
Source: Company
Domestic41%
International59%
Engineering and Capital Goods
6 Edelweiss Securities Limited
Financial snapshot ‐ Consolidated (INR mn)Year to March Q2FY12 Q2FY11 % change Q1FY12 % change FY11 FY12E FY13ETotal revenues (net) 11,216 10,651 5.3 13,484 (16.8) 51,768 52,728 57,866Direct cost 8,499 7,279 16.8 9,688 (12.3) 36,808 38,502 41,615Staff cost 1,483 1,258 17.9 1,467 1.1 5,563 6,082 6,675Other operating expenses 961 1,039 (7.5) 1,240 (22.5) 4,990 5,024 5,514Total expenditure 10,943 9,576 14.3 12,395 (11.7) 47,360 49,608 53,803EBITDA 273 1,075 (74.6) 1,089 (74.9) 4,408 3,120 4,063Depreciation 89 53 66.5 103 (13.8) 210 358 407EBIT 184 1,022 (82.0) 986 (81.3) 4,198 2,763 3,656Interest 71 37 90.1 85 (16.2) 165 323 361Other income 224 193 16.0 188 19.2 810 757 706Extraordinary items 250 178 NM 815 NM 402 0 0PBT 587 1,355 (56.7) 1,904 (69.2) 5,245 3,197 4,001Tax 176 453 (61.1) 582 (69.7) 1,729 991 1,240PAT before minority interest 411 902 (54.5) 1,322 (68.9) 3,516 2,206 2,761Less : Minority interest 8 (22) 4 (57) 11 14Add: Associate income - - 1- - - - PAT after minority 402 924 (56.4) 1,318 (69.5) 3,572 2,195 2,747Adjusted net profit 228 806 (71.7) 752 (69.7) 3,171 2,195 2,747Equity capital (FV: INR 1) 331 331 331 331 331 331# of shares (mn) 331 331 331 331 331 331Adjusted EPS (INR) 0.7 2.4 (71.7) 2.3 (69.7) 9.6 6.6 8.3PE (x) 9.9 14.3 11.4EV/EBITDA (x) 5.8 8.6 6.8ROAE (%) 25.9 15.2 16.7
as % of net revenues 0.1 0.1 0.1 0.1 0.1 0.1 0.1Direct cost 75.8 68.3 71.8 71.1 73.0 71.9Staff cost 13.2 11.8 10.9 10.7 11.5 11.5Other operating expenses 8.6 9.8 9.2 9.6 9.5 9.5EBITDA 2.4 10.1 8.1 8.5 5.9 7.0Adjusted net profit 2.0 7.6 5.6 6.1 4.2 4.7Tax rate 30.0 33.5 30.5 33.0 31.0 31.0
Voltas
7 Edelweiss Securities Limited
Company Description Voltas, a part of the TATA group which holds ~31% stake, is a leading air conditioning and engineering services provider. It offers engineering solutions through its four business segments in areas such as heating, ventilation and air conditioning, refrigeration, climate control, electro-mechanical projects, textile machinery, machine tools, mining and construction, material handling, water management, building management systems, pollution control and chemicals. It has a large business of EMPS coming from Middle East and Far East.
Investment Theme VOLT’s strong presence in the West-Asian region (particularly Middle East) and Far East (Hong Kong & Singapore) specialising in EMPS contracts has made it a preferred EPC-HVAC contractor. The flagship EMPS division contributes 60% plus to the topline, driven by contracts in domestic as well as international markets. We believe VOLT may gain from international experience and tap opportunities from the ongoing infrastructure boom in India. Further, with capital goods industry continuing its growth trend, we expect VOLT’ EPS division to capitalise on the opportunity, which can lead to improvement in overall margins.
Key Risks Any slowdown in capex spend in Middle East and in economic activity with respect to infrastructure creation in India is likely to dry incremental order intakes for its EMPS division. Further, margins and lead time for delivery for its EMPS segment can come under pressure with local players strengthening their operations and entry of more global players. The profitability of its UCP division is vulnerable to rise in input costs, increase in Chinese imports, excess capacity and increased competitive intensity.
8 Edelweiss Securities Limited
Engineering and Capital Goods
Financial Statements
Income statement (INR mn)Year to March FY09 FY10 FY11 FY12E FY13EIncome from operations 43,259 47,748 51,768 52,728 57,866Direct costs 31,685 32,876 36,808 38,502 41,615Employee costs 4,656 5,450 5,563 6,082 6,675Other expenses 4,087 4,653 4,990 5,024 5,514Total operating expenses 40,428 42,979 47,360 49,608 53,803EBITDA 2,831 4,769 4,408 3,120 4,063Depreciation and amortisation 210 214 210 358 407EBIT 2,621 4,555 4,198 2,763 3,656Interest expenses 128 98 165 323 361Other income 962 612 810 757 706Profit before tax 3,456 5,068 4,843 3,197 4,001Provision for tax 1,172 1,472 1,729 991 1,240Core profit 2,284 3,595 3,114 2,206 2,761Extraordinary items 261 250 402 0 0Reported net profit 2,545 3,846 3,516 2,206 2,761Less: Minority interests 29 36 (57) 11 14Add: Share in profits of associates (2) 0 0 0 0PAT after minority interest 2,514 3,810 3,572 2,195 2,747Adjusted net profit 2,253 3,560 3,171 2,195 2,747Basic shares outstanding (mn) 331 331 331 331 331EPS (INR) basic 6.8 10.8 9.6 6.6 8.3Diluted equity shares (mn) 331 331 331 331 331EPS (INR) fully diluted 6.8 10.8 9.6 6.6 8.3CEPS (INR) 7.4 11.4 10.2 7.7 9.5Dividend per share 1.9 2.3 2.3 1.4 1.8Dividend payout (%) 27.5 21.7 24.3 21.5 21.5
Common size metrics‐ as % of net revenuesYear to March FY09 FY10 FY11 FY12E FY13EDirect cost 73.2 68.9 71.1 73.0 71.9Employee expenses 10.8 11.4 10.7 11.5 11.5S G &A expenses 9.4 9.7 9.6 9.5 9.5Operating expenses 93.5 90.0 91.5 94.1 93.0Depreciation and amortization 0.5 0.4 0.4 0.7 0.7Interest expenditure 0.3 0.2 0.3 0.6 0.6EBITDA margins 6.5 10.0 8.5 5.9 7.0 EBIT margins 6.1 9.5 8.1 5.2 6.3Net profit margins 5.3 7.5 6.0 4.2 4.8
Growth metrics (%)Year to March FY09 FY10 FY11 FY12E FY13ERevenues 35.1 10.4 8.4 1.9 9.7EBITDA 11.8 68.4 (7.6) (29.2) 30.2PBT 25.3 46.6 (4.4) (34.0) 25.1Net profit 28.0 58.0 (10.9) (30.8) 25.1 EPS 28.0 58.0 (10.9) (30.8) 25.1
9 Edelweiss Securities Limited
Voltas
Balance sheet (INR mn)As on 31st March FY09 FY10 FY11 FY12E FY13EEquity capital 331 331 331 331 331Reserves & surplus 7,567 10,521 13,286 15,009 17,165Shareholders funds 7,897 10,852 13,617 15,340 17,495Minority interest 159 139 218 229 243Secured loans 1,688 306 1,280 2,430 2,530Unsecured loans 127 45 101 101 101Borrowings 1,814 352 1,381 2,531 2,631Defered tax liability (224) (202) (152) (152) (152)Sources of funds 9,647 11,140 15,064 17,947 20,217Gross block 3,986 3,890 4,410 5,110 5,810Depreciation 1,839 1,821 1,987 2,345 2,751Net block 2,148 2,069 2,423 2,765 3,058Capital work in progress 132 193 36 36 36Total fixed assets 2,280 2,262 2,458 2,800 3,094Goodwill 675 764 916 916 916Investments 1,562 2,339 2,613 2,613 2,613Inventories 11,194 6,579 8,224 9,177 10,033Sundry debtors 9,522 10,060 11,705 13,041 15,265Cash and equivalents 4,570 4,689 4,980 4,599 4,115Loans and advances 2,203 2,055 2,440 2,806 3,227other current assets 0 4,866 7,961 8,359 9,195Total current assets 27,489 28,249 35,309 37,982 41,834Sundry creditors and others 19,743 19,830 23,075 23,206 25,083Provisions 2,617 2,645 3,158 3,158 3,158Total CL & provisions 22,360 22,475 26,233 26,364 28,241Net current assets 5,129 5,774 9,076 11,617 13,593Uses of funds 9,647 11,140 15,064 17,947 20,217Adjusted BV per share (INR) 24 33 41 46 53
Free cash flow (INR mn)Year to March FY09 FY10 FY11 FY12E FY13ENet profit 2,514 3,810 3,572 2,195 2,747 Depreciation 210 214 210 358 407 Deferred tax (32) 0 0 0 0 Others (62) (623) (96) 11 14Gross cash flow 2,630 3,401 3,686 2,564 3,168Less:Changes in WC 1,719 348 3,318 2,921 2,461Operating cash flow 911 3,054 369 (358) 706Less: Capex 823 (40) 4 700 700Free cash flow 88 3,093 365 (1,058) 6
Cash flow metrices (INR mn)Year to March FY09 FY10 FY11 FY12E FY13EOperating cash flow 911 3,054 369 (358) 706Financing cash flow 458 (2,176) 96 677 (491)Investing cash flow 200 (764) (288) (700) (700)Net cash flow 1,568 113 176 (380) (485)Capex (823) 40 (4) (700) (700)Dividends paid (619) (615) (768) (473) (591)
10 Edelweiss Securities Limited
Engineering and Capital Goods
Profitability & liquidity ratiosYear to March FY09 FY10 FY11 FY12E FY13EROAE (%) (on adjusted profits) 33.0 38.0 25.9 15.2 16.7ROACE (%) 44.3 54.0 39.5 19.9 22.2Debtors days 64 75 77 86 89Inventory days 101 99 73 82 84Fixed assets t/o (x) 22.5 22.6 23.1 20.3 19.9Debt/equity (x) 0.2 0.0 0.1 0.2 0.2 Interest coverage (x) 20.6 46.3 25.4 8.6 10.1Payable days 186 220 213 219 212Cash conversion cycle (21) (46) (63) (51) (38)Current ratio 1.2 1.3 1.3 1.4 1.5
Operating ratios (x)Year to March FY09 FY10 FY11 FY12E FY13E
Total asset turnover 5.4 4.6 4.0 3.2 3.0Fixed asset turnover 22.5 22.6 23.1 20.3 19.9Equity turnover 6.3 5.1 4.2 3.6 3.5
Du pont analysisYear to March FY09 FY10 FY11 FY12E FY13E
NP margin (%) 5.2 7.5 6.1 4.2 4.7Total assets turnover (x) 5.4 4.6 4.0 3.2 3.0Leverage multiplier 1.2 1.1 1.1 1.1 1.2ROAE (%) 33.0 38.0 25.9 15.2 16.7
Valuations parametersYear to March FY09 FY10 FY11 FY12E FY13EDiluted EPS (INR) 6.8 10.8 9.6 6.6 8.3Y‐o‐Y growth (%) 28.0 58.0 (10.9) (30.8) 25.1CEPS 7.4 11.4 10.2 7.7 9.5Diluted P/E (x) 13.9 8.8 9.9 14.3 11.4Price/BV (x) 4.0 2.9 2.3 2.0 1.8EV/Sales (x) 0.6 0.5 0.5 0.5 0.5EV/EBITDA (X) 9.6 5.2 5.8 8.6 6.8Dividend yield (%) 2.0 2.5 2.4 1.5 1.9
11 Edelweiss Securities Limited
Company Absolute
reco
Relative
reco
Relative
risk
Company Absolute
reco
Relative
reco
Relative
Risk
ABB India REDUCE SU L AIA Engineering HOLD SU M
Bajaj Electricals BUY SO M BGR Energy Systems HOLD SP M
Bharat Heavy Electricals HOLD SP L Crompton Greaves REDUCE SU M
Cummins India BUY SO L Havell's India BUY SO M
Jyoti Structures HOLD SP M Kalpataru Power Transmission HOLD SP M
KEC International BUY SO M Larsen & Toubro BUY SO M
Siemens BUY SO L Techno Electric & Engineering BUY None None
Thermax BUY SO L Voltamp Transformers HOLD SU M
Voltas HOLD SP L
RATING & INTERPRETATION
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
1 Edelweiss Securities Limited
We hosted a conference call with Mr. Vineet Gupta of Moody’s, author of “Banking System Outlook: India” whereby the rating agency has changed the outlook of Indian banking system from stable to negative, citing expected deterioration in asset quality (hence profitability) and capitalization over the next 12-18 months. Below is the key stance of Moody’s as well as its raison d'être for the downgrade as discussed in the call:
Asset quality: Highly adverse scenario can witness GNPAs of 12% • Demanding operating environment coupled with growing interest burden leads to
stress on corporate portfolio, especially among SMEs. Power, airlines and textile are seen as potential culprits.
• Increase in mortgage rates by 350bps over the past 12 months has led to home loan tenures rising to 35-37 years, way more than the working/actual life of the borrower.
• Concentration risk can lead to big jumps in GNPA. He cited the example of an Indian telecom tower company which is currently restructuring its debt of USD5bn with Indian banks.
• Despite focused endeavors to accelerate recovery efforts over the last 10-15 years, little has been achieved as recoveries still lag behind fresh NPA formation. SARFAESI Act has been of help, however, lot more needs to be done at the individual branch level by banks.
• Slowing pace of growth over FY12-13 will also lead to headline NPL ratios appearing elevated.
• Restructuring of debt of the loss ridden state discoms is seen more as a postponement of the problem as their underlying activity is not productive enough to fulfill obligations.
Profitability: PPP/gross loans drop to 1.8% from 3.6% in FY11 The adverse scenario - with GNPA of 12% with LGD of 60% - will translate into an expected loss of 7.2% of gross loans. Assuming a utilization of 1.3% of accumulated loan-loss provisions and Tier 1 absorbing another 4%, ensuing losses can see PPP/gross loans dropping to 1.8%.
Tier 1: Unfavorable landscape to see Tier 1 at sub‐6% level As mentioned above, in the event of GNPA at 12% and LGD at 60%, Tier 1 will possibly absorb 4% of the total 7.2% of likely losses (as a % of gross loans), taking Tier 1 to 5.6% from 9.5% in March 2011. Another area of significant concern for PSU banks is the uncertainty on timing, quantum and the form of support that can be expected from Government of India. Delay in capital infusion in SBI (Tier 1 at 7.47% as on September 2011) is a case in point. Loan growth of 16%-18% with a declining profitability does not make internal accruals a highly steadfast source either.
Nilesh Parikh +91 22 4063 5470 [email protected] Kunal Shah +91 22 4040 7579 [email protected] Suruchi Chaudhary +91 22 6623 3316 [email protected]
November 11, 2011
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
BANKING Tête‐à‐tête with Moody’s: Adverse scenario to aggravate GNPAs
SECTOR UPDATE
India Equity Research | Banking and Financial Services
1 Edelweiss Securities Limited
IIP grew by a paltry 1.9% YoY in September, the lowest in two years and well below our expectation of ~3.0%. In fact, on a sequential basis (MoM%, sa, 3MMA), contraction in industrial output was close to the levels seen during the crisis of 2008‐09. Evidently, the economic slowdown is intensifying and becoming far more broad‐based. Sectoral data suggests that mining and manufacturing weakness has deepened although electricity has held steady. Weakness in capital goods output (reflecting investment demand) is leading the slowdown in manufacturing while consumer goods production is also turning soft. Going ahead, weak intermediate goods, unrelenting policy hurdles and an expected slowdown in exports do not augur well for industrial production. Accordingly, downside risks to our GDP growth projection of 7.6% have increased significantly. In sum, the data reinforces our belief that RBI would halt in its rate tightening cycle in the upcoming monetary policy. IIP slowdown deepens IIP for September came in at ~1.9% YoY, below consensus estimate of ~3.5% and our expectation of 3%. Clearly, the economic slowdown is intensifying and becoming broad-based with both consumption and investment goods production slowing considerably. Importantly, on a seasonally adjusted (SA) sequential 3MMA basis, IIP contracted by ~1.6%, a level last seen in Jan 09, reflecting the pronounced nature of weakness. Trend in sector-wise data suggests that the weakness in mining and manufacturing has stepped up although electricity production continued to be strong. Use-based classification reflected that production of consumer goods, forward-looking intermediate goods and capital goods remained soft. Meanwhile, aided by a strong electricity production, basic goods continued to grow at a healthy clip.
Manufacturing sees a sharp sequential contraction… Manufacturing sector continues to be on a downtrend, growing at a feeble~ 2.1% (YoY) in September compared to a trend growth of ~9%-10%. What is noteworthy is that on a sequential basis (SA M-o-M%, 3MMA), manufacturing activity contracted 1.9%, a level last witnessed during the crisis of 2008-09. Such a severe contraction is largely led by the ongoing weakness in investment activity (as seen in capital goods production) which in turn has been the result of multiple factors such as policy inaction by the government, aggressive RBI tightening and highly uncertain external environment.
Meanwhile, mining activity contracted yet again by ~5.6% in September (vs -4.1% in Aug), largely reflecting a sharp contraction in coal mining activity (~18% and ~15% in Sept and Aug respectively). Heavy rains disrupted the mining activity during the month. Nevertheless, the policy inaction (especially environmental) remains a big overhang on the sector as reflected by a 1.0% contraction in the sector on YTD basis compared to a growth of 7.2% during the same period last year.
Kapil Gupta +91-22-4063 5406 [email protected] Toshi Jain +91-22-6623 3322 [email protected]
November 11, 2011
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
IIP Weakness intensifies
India Equity Research | Economy
1 Edelweiss Securities Limited
Open Offer
Bloomberg Code Company Start date End DateOffer Price
(INR)
Current Market Price
(INR)
BRFL IN BRFL 4-Nov-11 23-Nov-11 300.00 290.10
EEDU IN Everon Edu 16-Nov-11 5-Dec-11 528.00 376.25
MRGC IN Marg Ltd 1-Dec-11 20-Dec-11 91.00 87.45
IABS IN INEOS ABS 16-Dec-11 6-Jan-12 606.81 618.00
SII IN Safari Inds NA NA 170.00 155.75
SOG IN Sabero Organics Gujarat NA NA 160.00 127.70
WNDT IN Wendt (India) NA NA 1,366.34 1,621.10
NA : The opening and closing date are yet to be announced
Note: The above data is not exhaustive Delisting
Bloomberg Code Company Start date End Date
Floor Price (INR)
Exit Price (INR)
Current Market
Price (INR)
MHGA IN Sekurit Saint-Gobain NA NA NA 31 39.25
UTV IN UTV Software NA NA NA 1000 951.85
ALFA IN Alfa Laval NA NA 2,045 NA 2250.00
CIS IN Carol Info Services NA NA 106 NA 150.05
Source: BSE, NSE
NA: The opening, closing date, floor price and Exit price are yet to be announced.
Note: The above data is not exhaustive Buyback
Bloomberg Code Company Start date End Date
Max Buyback
Price (INR)
Current Market Price
(INR)
FDCLT IN FDC 18-Feb-11 25-Jan-12 135 87.60
SRF IN SRF 6-Apr-11 25-Feb-12 380 311.00
HEG IN HEG 11-Apr-11 13-Mar-12 350 200.75
RELI IN Reliance Infra 11-Apr-11 13-Feb-12 725 453.70
ALDS IN Allied Digit 25-Apr-11 17-Feb-12 140 28.95
ICSL IN INFINITE 6-May-11 10-Apr-12 230 87.05
DECH IN Deccan Chron 16-May-11 3-Jan-12 180 50.30
PVRL IN PVR 7-Jul-11 26-May-12 140 147.25
Z IN Zee Entert 27-Jul-11 23-Mar-12 126 118.40
Source: BSE
Note: The above data is not exhaustive Bonus & Splits
Bloomberg Code CompanyAction Type Ex-Date Ratio
HDP IN Maharashtra Polybutenes LStock Split 14-Nov-11 1:10
KNP IN Kanpur Plastipack Ltd Bonus 16-Nov-11 1:0.5
Source: Bloomberg
NA : The Ex-Date and ratio is not yet announced
Yogesh Radke +91‐22‐6620 3199 [email protected] Sriram Velayudhan +91‐22‐6620 3100 [email protected]
November 11, 2011
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
CORPORATE ACTION TRACKERWeekly dossier on corporate actions
India Alternative Research
2 Edelweiss Securities Limited
Corporate Action Tracker
Acquisitions Bloomberg Code Acquiring Company Target Company Ex-Date
Acquired(%)
GCI IN Private Investor Gupta Carpets International Ltd 14-Nov-11 20.00
RSPC IN Solvay SA Rhodia Specialty Chemicals India L 21-Nov-11 20.00
BRFL IN AAA United BV Bombay Rayon Fashions Ltd 23-Nov-11 20.00
EEDU IN Varkey Group Everonn Education Ltd 5-Dec-11 23.00
BLOM IN Private Investors Bloom Dekor Ltd 13-Dec-11 20.00
SVF IN Private Investor Savani Financials Ltd 26-Dec-11 20.00
GFL IN Digivision Holdings Pvt Ltd Media Matrix Worldwide Ltd 27-Dec-11 26.00
MDPY IN Multiple acquirers Midland Polymers Ltd 28-Dec-11 20.00
SUKH IN SR Jute Traders Pvt Ltd Subhkam Capital Ltd 28-Dec-11 20.00
VMSI IN Bholebaba Suppliers Pvt Ltd VMS Industries Ltd 29-Dec-11 26.00
0058336ZIN Multiple acquirers Brahmar Cellulose Pvt Ltd 31-Dec-11 100.00
8369709ZIN Par Pharmaceutical Cos Inc Edict Pharmaceuticals Pvt Ltd 31-Dec-11 100.00
IABS IN Styrolution Holding GmbH INEOS ABS India Ltd 6-Jan-12 16.67
Source: Bloomberg Rights No records Demerger No records Dividend (F&O stocks)
Bloomberg Code Company Ex - Date
Dividend Per Share
(INR)Dividend Yield(%)
NMDC IN Equity NMDC Ltd 17-Nov-11 1.00 0.45%
Source: Bloomberg Note: Figures in grey indicate Nifty and MSCI components
Dividend (Non F&O stocks)
Bloomberg Code Company Ex - Date
Dividend Per Share
(INR)Dividend Yield(%)
AGLL IN Allcargo Logistics Ltd 17-Nov-11 1.00 0.71%
ASTRA IN Astral Polytechnik Ltd 17-Nov-11 0.50 0.27%
IHPM IN Indsil Hydro Power and Manganese Lt 7-Dec-11 1.00 3.27%
ICSL IN Infinite Computer Solutions India Ltd 24-Nov-11 4.00 4.60%
KRI IN Kemrock Industries & Exports Ltd 12-Dec-11 1.00 0.20%
PI IN PI Industries Ltd 17-Nov-11 2.00 0.38%
SKPS IN SKP Securities Ltd 17-Nov-11 2.00 6.13%
SEL IN Suprajit Engineering Ltd 16-Nov-11 0.30 1.50%
SYML IN Symphony Ltd 17-Nov-11 10.00 0.72%
TGSL IN Thinksoft Global Services Ltd 16-Nov-11 2.00 4.51%
ZFSG IN ZF Steering Gear India Ltd 17-Nov-11 5.00 1.70%
Note: Sorted in ascending order of company name
4 Edelweiss Securities Limited
First Call
CONFERENCE CALLS
Conference call details company Date Time
Lanco Infratech Ltd. 14-Nov-11 9.45 AM IST
Sun Pharmaceutical Industries Ltd. 14-Nov-11 10.00 AM IST
PTC India Limited 14-Nov-11 12.00 PM IST
Reliance Communications Limited 14-Nov-11 12.00 PM IST
Puravankara Projects Limited 14-Nov-11 12.00 PM IST
Hindusthan National Glass & Industries Ltd.(HNG) 14-Nov-11 1.00 PM IST
Jet Airways (India) Ltd. 14-Nov-11 2.00 PM IST
Banco Products Ltd. 14-Nov-11 3.30 PM IST
Jindal Saw Limited 14-Nov-11 4.00 PM IST
Simplex Infrastructures Ltd. 14-Nov-11 4.30 PM IST
Sobha Developers Limited 14-Nov-11 5.00 PM IST
Mahindra & Mahindra Ltd. 14-Nov-11 5.00 PM IST
Tata Motors Ltd. 14-Nov-11 6.45 PM IST
Coal India Limited 14-Nov-11 7.00 PM IST
Tata Power 14-Nov-11 7.30 PM IST
5 Edelweiss Securities Limited
First Call
PLEDGE SHARES
Reporting Date
Company Name Name of the EntityPledged
QuantityPledged % of the
total captial
11-Nov-11 Karuturi Global Simply Class Fashions 27,500,000 3.41%
11-Nov-11 Premier Doshi Holdings 2,211,100 7.28%
11-Nov-11 Sujana Tower Foster Infin & Trading 4,968,000 0.96%
11-Nov-11 Network 18 Media & Investments
Raghav Bahl 3,620,970 2.54%
11-Nov-11 Network 18 Media & Investments
RB Investments 0 0.00%
11-Nov-11 Network 18 Media & Investments
Network18 Group Senior Professional Welfare Trust
15,495,602 10.86%
11-Nov-11 Network 18 Media & Investments
RB Holdings 28,064,239 19.67%
6 Edelweiss Securities Limited
First Call
INSIDER TRADES
Company Name Acquirer/Seller B/S Qty Traded
Amit International Rimzim K Doshi Buy 200000 off market
Consolidated Securities Deep Deposits & Leasing Buy 15000
Coromandel International V Ravichandran Buy 49000
Govindji Trikamdas Exports Abhinandan Jain Buy 693000 off market
HBL Power Systems Beaver Engineering & Holdings Buy 226390
Radhe Developers (India) Ashish P Patel Buy 982499
Radhe Developers (India) Jahnaviben A Patel Buy 999478
RCL Foods Limited Shreyans R Lodha Buy 15500
Sacheta Metals Satish K Shah Buy 45009
Surana Telecom and Power Manish Surana Buy 25882
Texmaco Texmaco Rail & Engineering Buy 499699
Garden Silk Mills Sanjay Suresh Shah Sell 39000
Govindji Trikamdas Exports Ajay Manek Sell 305800 off market
Govindji Trikamdas Exports Ketan Vijaykumar Manek Sell 693000 off market
Housing Development Finance Corporation
K M Mistry Sell 200000
Shasun Chemicals & Drugs Shasun Finance Sell 1239000 inter se transfer
Sterling Holiday Resorts (India) K Chandrasekaran Sell 15500
Vantage Corporate Services Vishal K Gada Sell 254177
Vision Technology India B Ranga Vasanth Sell 157729
7 Edelweiss Securities Limited
First Call
BULK DEALS
Date Company Name Acquirer/Seller B/S Qty Traded Price
11-Nov-11 Acropetal Tech Bp Fintrade Sell 89,525 16.34
11-Nov-11 ASHIKACR Ashiyana Mercantile Sell 36,700 50.00
11-Nov-11 ASHIKACR S P Advisors Sell 73,364 49.99
11-Nov-11 Dhvanil Chemicals Kishan Tulshibhai Bhuva Buy 47,000 26.74
11-Nov-11 Dhvanil Chemicals Malay Rohitkumar Bhuw Sell 40,914 26.58
11-Nov-11 Diamant Infrastructure Jigar Praful Ghoghari Sell 321,133 14.74
11-Nov-11 Diamant Infrastructure Jinal Apurva Rawal Sell 275,000 14.67
11-Nov-11 Diamant Infrastructure Kiran Bhiku Bhanaes Buy 205,000 14.59
11-Nov-11 Gati Karvy Financial Services Sell 746,912 40.46
11-Nov-11 Gitanjali Gems Grantham A/C Gmo Emerging Countries
Buy 484,213 347.04
11-Nov-11 Goplee Infotech Anil Jaikishandas Mistry Sell 108,795 10.30
11-Nov-11 Goplee Infotech Kinjal Girish Shah Buy 143,001 10.43
11-Nov-11 Goplee Infotech Pradeep Narendra Bhatt Buy 103,800 11.18
11-Nov-11 Maestros Mediline Systems Krishnakumar Nandkumar Menon Buy 60,300 56.99
11-Nov-11 Maestros Mediline Systems Nitin Sadashiv Paranjape Sell 60,000 56.99
11-Nov-11 Midfield Industries Avichal Securities Sell 201,000 50.45
11-Nov-11 Midfield Industries Zaki Abbas Nasser Buy 70,000 50.45
11-Nov-11 Nagreeka Exports Bodhesh Trade Invest Sell 65,500 19.53
11-Nov-11 Nu Tek India Chetan Laxmikant Dave Sell 990,593 1.03
11-Nov-11 Onelife Capital Advisors Bmd Exports Sell 104,200 212.27
11-Nov-11 Passari Cellulose Blue Peacock Securities Sell 35,000 107.71
11-Nov-11 Passari Cellulose Manisha Vikas Shinde Buy 23,500 106.53
11-Nov-11 Passari Cellulose Rashmi R Bhat Buy 25,550 107.28
11-Nov-11 Passari Cellulose Siya Ram Khandelwal Buy 26,490 106.38
11-Nov-11 Pasupati Fincap Palak Nileshbhai Karia Buy 136,194 18.14
11-Nov-11 Polytex India Jigar Praful Ghoghari Sell 73,000 125.00
11-Nov-11 Prakash Constrowell Ashroj Credit India Buy 19,181 267.71
11-Nov-11 Prakash Constrowell Dave Chetan L. Buy 26,000 272.69
11-Nov-11 Prakash Constrowell Rose Valley Merchandise Sell 64,614 261.14
11-Nov-11 Prakash Constrowell Rosevalley Merchandise Sell 72937 260.88
11-Nov-11 Rama Paper Mills Sandesh Khandelwal Buy 38000 100.23
11-Nov-11 Ramkaashyap Investments Arun Prabhudas Mandaviya Buy 48309 34.61
11-Nov-11 Scope Industries (India) Chintan Naresh Modi Buy 56080 25.47
11-Nov-11 Scope Industries (India) Durgaprasad Vishwa Mudigunda Buy 80000 25.74
11-Nov-11 Scope Industries (India) Sreenivas Reddy Kallem Sell 151000 25.44
11-Nov-11 Sical Logistics Tanglin Retail Reality D P Sell 385000 70.59
11-Nov-11 Sirhind Enterprises Jayantkumar & Company Prop :Jayantkumar Manubhai P
Buy 75000 85
11-Nov-11 Sirhind Enterprises Sheetalben Parasmal Jain Sell 97900 85
11-Nov-11 Tide Water Oil Co (I) Standard Greases And Buy 76000 6711
11-Nov-11 Tide Water Oil Co (I) Victory Retail Sell 76000 6711
11-Nov-11 Tutis Technologies Mandvi Dyes & Chemicals Buy 92170 18.77
8 Edelweiss Securities Limited
First Call
TECHNICAL UPDATES
The Indian markets dropped by 1% on Friday after a gap down opening owing to the bearish global cues and disappointing domestic economic data. Nifty opened with a huge gap down after a significant bearish day on Wednesday and traded in a narrow range of 52 points throughout the session. The index has retraced 38.2% of the October rally from 4728 to 5400 at 5142 as well as tested the lower boundary of a minor downward sloping trend channel. However it has closed below two important supports of 5200 and 5170 (earlier breakout point) suggesting a deeper retracement is likely to follow. Friday’s decline came on the back of substantial volume and a weak market breadth indicating overall bearish activity. Daily oscillators that were trading with buy cross have rolled bearish indicating short-term pressure. The coming sessions are likely to witness stiff resistance around 5240 (50 hourly EMA) from where the Nifty can slip down to 5100 / 5065. Trades should look to sell the rallies with reversal only on a close above 5280. Among the sectoral performances, Banking, Metals and Cap Goods indices took the markets lower with losses of 3% and 2.3% respectively. The winners list included Oil & Gas (+0.79%) and Autos (0.62%) shares. Broader market benchmarks Mid-cap and Small-cap indices witnessed deeper cuts of 1.13% and 1.57% respectively. Bullish Setups: ABGS, HUVR, BHARTI, BHEL, ACC Bearish Setups: RBXY, LPC, BPCL, INFY
Nifty IndexIndicator Outlook Points*Candlestick Positive 1 Stochastic Positive 1 Moving Avg Negative (1)RSI Neutral 0 ADX Neutral 0 MACD Neutral 0 Aggregate Positive 1
18 25 1Augus t
8 16 22 29 5 12September
19 26 3 10October
17 24 31 8November
14 21 28 5Dec
-150
-100-50
0
50MACD
SELLCross
50000
100000
150000
200000
x1000
4650
4700
4750
4800
4850
4900
4950
5000
5050
5100
5150
5200
5250
5300
5350
5400
5450
5500
5550
5600
5650
5700
5750
5137 (50 DEMA)
Bloomberg Code NIFTY IndexSpot Price 5,168 Res is tance 1 5,211 Res is tance 2 5,240 Support 1 5,136 Support 2 5,065 Ni fty 20 SDMA 5,183 Ni fty 50 SDMA 5,057 Ni fty 200 SDMA 5,390 Adv : Dec [NSE] 379 : 1108 Turnover Rs Crs . 14,083 BSE+NSE cash
9 Edelweiss Securities Limited
First Call
EYE CATCHERS Futures Snapshot
Top OI Rises Top OI Falls
Scrip % OI Chg OI % Price
Chg% Future
Vol Chg
Tata Chemicals 39 552 (0.3) 660
Kingfisher Airlines 31 13,448 (9.4) 536
Gitanjali Gems Limited 27 8,425 (0.5) 270
Educomp Solutions 22 1,915 (10.0) 356
JetAirways 20 1,208 2.3 87
Asian Paints Limited 16 135 (1.9) 213
Pantaloon Retail 14 5,312 (8.1) 222
Bank of India 13 4,276 1.9 29
Scrip% OI Chg
OI % Price
Chg% Future
Vol Chg
Glaxosmithkline (18) 16 1.0 70
CNX IT (8) 22 (1.0) 71
TVS Motors (8) 4,548 2.1 106
Bombay Dyeing (8) 384 (0.5) (22)
Gujarat State Petro (8) 3,330 (2.2) 192
Voltas (8) 3,078 (6.8) 20
Jubilant Foodworks (8) 926 (3.1) 110
Chambal Fertilizers (6) 3,758 2.4 86
10 Edelweiss Securities Limited
First Call
Buy
BuyBuy
150
350
550
750
950
1,150
Jul-0
8A
ug-0
8S
ep-0
8O
ct-0
8N
ov-0
8D
ec-0
8Ja
n-09
Feb-
09M
ar-0
9A
pr-0
9M
ay-0
9Ju
n-09
Jul-0
9
(INR
)
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098. Board: (91-22) 4009 4400, Email: [email protected]
Vikas Khemani Head Institutional Equities [email protected] +91 22 2286 4206
Nischal Maheshwari Head Research [email protected] +91 22 6623 3411
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