iifl initiating dabur

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June 12, 2008

Market Front Page

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Index Stocks Forex Rates Closing % Chg %YTD

Net buying 245 18 Rs/US$ 42.9 0.0 8.8

Open interest 9,530 4,633 Rs/EUR 66.5 (0.4) 14.3

Chg in open int. 92 173 Rs/GBP 83.8 (0.5) 6.4

Equity Flows (US$m) Latest MTD YTD Bond Markets Closing bps Chg

FII (10/6) (209) (1,345) (5,217) 10 yr bond 8.3 (2.0)

MF (5/6) 128 163 1,555 Interbank call 8.0 25.0

FII F&O (US$m)

• The Indian promoters of Ranbaxy, the Singh family, have agreed to sell their stake to Daiichi Sankyo Company Ltd of Japan in an all-cash deal valued at US$4.2bn (BS)

• The project to construct the first line of Mumbai Metro, being constructed by Reliance Infrastructure, has achieved financial closure (BS)

• The non-performing assets of State Bank of India are expected to decline by over Rs20bn by end-June 2008 (BS)

• Indian Bank plans to set up 100 new branches in the current financial year, of which 15 will be dedicated to micro-lending (BS)

• Gammon India’s overseas units have acquired stakes in two Italian firms (DNA)

• IOC is reducing discounts on diesel sales to industries and bulk clients to narrow losses from selling fuels below cost to retail buyers (Mint)

• Siemens has received two orders worth Rs1.6bn from Rashtriya Ispat Nigam Ltd (DNA)

• ONGC seeks Rs30bn tax rebate related to tax assessment for the year 2002-03 and 2003-04 (ET)

• Lupin Ltd has received approval from the US Food and Drug Administration to launch its generic version of hypertension drug Altace in the US (DNA)

• Telekom Malaysia will pay Rs150 per share for a less-than-15% stake in Idea Cellular, valuing the AV Birla Group company at Rs400bn (ET)

• PSL Ltd has won Rs19.3bn order to supply carbon steel pipes to state-run gas transporter GAIL (India) for its Vijaipur-Dadri-Bawana pipeline project (DNA)

• Unichem Laboratories has received the US Food and Drug Administration approval for sale of insomnia drug, Zaleplon, in capsule form (DNA)

• SpiceJet has projected Rs1bn loss in FY09 (ET)

• Essar Steel Holdings has raised its all-cash offer to buy Esmark by 10% to US$19 a share (BS)

• 3i Infotech has acquired a 51% stake in the Mumbai-based FinEng Solutions, with an option to acquire the remaining stake later (ET)

• What’s Inside: Ranbaxy (MP), Dabur India (MP), Gammon (BUY), GIPCL (BUY), Telecom, Events Calendar

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Corporate Front Page

Top GainersPrice (Rs)

Chg (%)

YTD (%)

Top LosersPrice (Rs)

Chg (%)YTD (%)

Orchid Chemicals 261 13.5 -8.8 BPCL 273 -4.0 -47.8

NIIT 135 9.5 -42.9 Max India 152 -3.0 -41.9

Bombay Dyeing 723 9.1 -4.5 Yes Bank 137 -3.0 -45.2

United Breweries 176 8.2 -46.6 JSW Steel 1076 -2.8 -18.4

Deccan Chronicle 109 7.6 -50.4 Indiabulls Real 381 -2.5 -48.7

Top Movers BSE 200

Volume spurts

Company CMP M.CapVol. (in

'000)10D A.Vol (in '000)

% Chg

Ranbaxy Labs Ltd 561 4,882 40,484 7,670 428

Orchid Chemicals 261 400 13,475 2,772 386

United Breweries 176 983 45 11 298

Britannia Inds 1478 823 422 110 284

Television 18 258 718 387 102 281

Asian Paints 1288 2,880 110 30 267

Apollo Hospitals 490 670 68 19 266

SCI 256 1,686 933 363 157

Container Corp 768 2,329 136 53 155

Kalpataru Power 854 527 334 133 151 FII - FII trades

Volume '000 Price Prem % Volume '000 Price Prem %

Tata steel 411 856 5.0 589 876 4.5

Sbi 310 1,321 3.5 242 1,357 3.5

Grasim inds 92 2,212 0.5 0.6 2,258 1.0

Allahabad bank 6 69 1.0 3,455 69 0.5

Union bank 1,100 124 4.5 - - -

Andhra bank 6 68 2.5 6 68 1.5

Scrip6/10/2008 6/11/2008

Market Front Page

• RBI has hiked repo rate by 25bps to 8% (ET)

• The Finance Ministry makes further modifications to area-based excise duty exemptions to units in Jammu & Kashmir, the North-East, Sikkim and Kutch (BL)

• Government notifies a committee to look into, among other things, the calculation of under-recovery on sale of petroleum products (BS)

• Reserve Bank of India has allowed additional amount of bonds to be sold through special market operations to ease the liquidity pressure on OMCs (BS)

• Department of Telecom has decided that service providers will be subject to spectrum-hoarding cess of 2.5% of the amount they bid for three spectrums for every quarter (ET)

• Indian Railways’s freight traffic up 10.2% YoY at 12.75m tonnes during April-May 2008 (ET)

• India added 6.28m GSM connections in May 2008 (Mint)

• Civil aviation minister Praful Patel has made a strong case for giving ATF declared-goods status in a meeting with the Prime Minister and the finance minister (FE)

• The state government has announced a three-month amnesty scheme for stamp duty payments (ET)

• The general insurance sector is likely to grow at ~18% in 2009 (ET)

Economy Front Page

Rs m Revenues %YoY PAT %YoY ABG Shipyard 2,767 43.3 461 39.6 NIIT Ltd 1,440 33.9 282 163.1 NIIT Tech 1,239 40.6 546 48.4 Shipping Corp 10,568 21.7 2,487 (12.6)

Results Front Page

CMP Rs561

Market cap (US$ m) 4,893

Bloomberg RBXY IN

52Wk High/Low (Rs) 561/335 Diluted o/s shares (m) 373 Daily volume (US$ m) 93.3 Dividend yield FY08ii (%) 1.6 Free float (%) 65.2

Shareholding pattern (%) Promoters 34.8 FIIs 18.0 Domestic MFs 23.3 Others 23.9

Price performance (%) 1M 3M 1Y

Ranbaxy Laboratories

16.6 30.7 56.9

Rel. to Sensex 26.6 38.9 49.5 Sun Pharma 6.6 9.5 36.9 Dr Reddy's 13.6 24.6 16.7

Cipla 4.8 8.6 6.1

Pharmaceuticals 12 Jun 2008 Ranbaxy – MP

Quick Take

Dr Bino Pathiparampil [email protected] (91 22) 6620 6648

Daiichi’s acquisition of Ranbaxy: a landmark deal in global pharma

Daiichi Sankyo’s acquisition of Ranbaxy is the first case of a big innovator pharma company entering the generics market as an avenue for growth. The deal creates a global pharma major with presence across the pharma value chain and presents several synergies in driving growth and operational efficiencies. We believe this deal is the first of many more to come, with big US and European pharma companies gradually warming to the idea of entering generics markets. Daiichi’s Rs737/share offer is significantly above Ranbaxy’s standalone value and hence represents a great deal for shareholders. However, beyond the open offer, Ranbaxy’s share prices may fall to the fundamentally-justified level of about Rs500.

• Synergies can add value to both companies: Synergies arising from the deal include a global presence, products across the pharma value chain, Ranbaxy’s low-cost manufacturing base, and R&D outsourcing potential. We believe both companies can extract significant value from the merger. We expect these synergies to play out over the next 2-3 years.

• More opportunity for inorganic growth: The near-US$800m cash infusion by Daiichi Sankyo would strengthen Ranbaxy’s balance sheet and the company can explore more inorganic growth opportunities.

• Good deal for shareholders; little arbitrage left: The offer price is significantly above Ranbaxy’s standalone value and hence is a good opportunity for shareholders to cash out. However, since the stock has already run up significantly, we find little upside from current levels. Post the open offer, the share price may retreat back to ~Rs500.

Arbitrage opportunity – break-even points Post open offer stock price (Rs/share)

450 475 500 525 550 575 35% 607 618 629 641 652 663 40% 583 596 610 623 636 650 45% 565 580 595 610 625 640 50% 551 568 584 600 616 632 55% 541 558 575 592 609 626 60% 532 550 568 586 604 621

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Source: IIFL Research

2 bino@iif lcap.com

Ranbaxy - MP

• Contours of the acquisition deal: Sankyo picks up 35% of currently outstanding shares from promoters at Rs737 (total US$2,226m); to pick up 20% in open offer at Rs737 per share (total US$1,437m); to pick up 46.2m shares at Rs737 per share (total US$792m) in preferential issue; to get warrants to buy 22.32m shares at Rs737 per share (unlikely to be exercised in the near term). Total fund infusion of US$4,455m by Sankyo to control 53.5% of the final entity on fully-diluted basis.

Figure 1: Post-deal share-count Category Shares (m)Current shares outstanding 373.15Preferential issue to Daiichi Sankyo 46.20Warrants to Daiichi Sankyo 23.80FCCB dilution 34.4Stock options outstanding 8.56Total diluted shares, post deal 486.11Source: IIFL Research; company reports

Figure 2: Sankyo’s stake post deal Source Shares (m) Percent of totalFrom promoters 129.86 26.7%From open offer 83.87 17.3%From preferential issue 46.20 9.5%Total 259.93 53.5%Source: IIFL Research; company reports

Figure 3: Investment from Sankyo Category Investment (Rs m) Investment (US$ m)Investment through preferential issue 34,049 792Price for promoters’ stake 95,704 2,226Share purchase in open offer 61,812 1,437Total fund infusion 191,566 4,455Source: IIFL Research; company reports

• New paradigm in global pharma: The coming together of Daiichi

and Ranbaxy is a landmark in global pharma—an innovator company with successful brands has entered the generics business to be

present globally, across all categories of pharmaceutical markets, and in the process creating the world’s 15th largest pharma company. Though Novartis has a generics division, it was more the result of amalgamations over time and not a pre-meditated strategy to overcome the slowdown in its drug-innovation business. While similar deals may not follow immediately, this may well be a beginning, and the large European and US pharma companies might follow suit.

• Synergies abundant; no R&D demerger: We believe there are several strategic synergies in the deal that can add value to both Ranbaxy and Daiichi. Ranbaxy’s low-cost high-quality manufacturing facilities will help Sankyo derive more value out of its existing products. Sankyo would also be able to do significant parts of its R&D activities in India’s low-cost environment. The advantage of low-cost R&D extends beyond merely saving money, as it allows a company to allocate the same resources across more molecules or targets, thus enhancing chances of blockbuster success in the high-risk, high-reward drug development business. In line with the new strategy, Ranbaxy has shelved plans to de-merge the R&D entity. However, the immediate motive for Sankyo seems to be to secure a ready entry into about 40 new countries in which it had no presence and into generics markets in the developed countries. The tremendous growth potential of the combined entity in an increasingly genericised Japanese market is also a positive.

• Shares have already run up; hardly any arbitrage: In our view, almost all the non-promoter shareholders will tender their shares in response to Daiichi’s open offer to acquire 20%, Thus, only 34.5% shares will be accepted in the offer and at close of the offer, we expect the shares to retreat to ~Rs500. Hence, there is hardly any arbitrage opportunity left in the stock; we expect the price to remain in the Rs560-570 range till the open offer closes.

3 bino@iif lcap.com

Ranbaxy - MP

Figure 3: Arbitrage opportunity – break-even prices Post open offer stock price

450 475 500 525 550 575 35% 607 618 629 641 652 663 40% 583 596 610 623 636 650 45% 565 580 595 610 625 640 50% 551 568 584 600 616 632 55% 541 558 575 592 609 626 60% 532 550 568 586 604 621

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65% 525 544 562 580 599 617 Source: IIFL Research • Debt-free status, free cash - based on assumptions:

Management projected the company will become debt-free and will have about US$700m cash in hand after the deal’s closure. According to our analysis, two conditions will have to be met for this to be true: 1) all FCCBs convert immediately after the deal closure, at the revised exercise price of about Rs540 (reset from the earlier Rs716 following the change in management control); and 2) Daiichi Sankyo fully exercises all its warrants. We do not share the company’s confidence in either of these—the stock price may retreat after the open offer, leading to non-conversion of FCCBs and Daiichi may not exercise its warrants, since it is most likely to gain majority stake from the open offer. Still, the US$792m cash infusion by Daiichi Sankyo will strengthen Ranbaxy’s balance sheet, enabling the company to more aggressively pursue its inorganic growth strategy.

12-mth Target price (Rs) 95 (-3%) Market cap (US$ m) 1,978


Shareholding pattern (%) Promoters 70.8 FIIs 12.6 Domestic Institutions 9.2 Others 7.4


Dabur -1.1 -1.1 -2.7 Rel. to Sensex -0.3 7.0 -19.8 Hindustan Unilever

-5.3 4.6 26.1

Marico 2.4 6.8 18.7

Colgate India -14.9 -1.7 1.9

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Volume Price (Rs)Shares (m)

Pragati Khadse

[email protected] (91 22) 6620 6665

Arnab Mitra [email protected] (91 22) 6620 6661

Dabur India Ltd – MP DABUR IN Rs 98 FMCG 12 Jun 2008 Initiation

Moderating growth Dabur’s portfolio of natural and herbal products enjoys premium positioning and pricing, but the company now faces the twin threats of a slowdown in its key product categories and mounting packaging costs. Investment in the retail business will add to margin pressures. We expect a slowdown in Dabur’s earnings CAGR, from 29% over FY05-08 to 15% over FY08-11ii. At its current PE of 19.7x on FY10ii, the stock fully prices in the company’s growth prospects, in our view. We initiate coverage with Market Performer and a target price of Rs95.

Slowdown in revenue growth: We expect a significant slowdown in Dabur’s revenue growth, from 15-25% during FY05-08 to about 15% over FY08-11ii. The key challenges confronting Dabur are: 1) weak competitive position in high-growth categories; 2) slowdown in categories in which the company is dominant; and 3) slowdown in key categories such as foods, which were the major growth drivers in the last few years.

Restricted margin expansion: Subdued sales growth, increased cost of agricultural inputs and investment in the retail venture are likely to put pressure on margins. Further pressure points on margins could emerge from spiralling price of crude-oil, as this translates to increasing packaging costs—which aggregated 16.4% of Dabur’s revenues in FY07.

Stock is fairly priced: At 19.7xFY10ii earnings, Dabur is trading slightly higher than its past five years’ average multiple of 19x. With earnings set for a sharp slowdown over FY08-11ii, we believe the current price fully discounts Dabur’s earnings potential. We initiate coverage with a Market Performer and a 12-month target price of Rs95. We have valued Dabur at 19x 1-year forward earnings, in-line with its five-year multiple.

Financial summary Y/e 31 Mar FY07A FY08 FY09ii FY10ii FY11iiRevenues (Rs m) 20,431 23,611 27,059 31,076 35,777EBITDA Margins (%) 17.1 17.3 16.9 17.0 17.2Pre-Exceptional PAT (Rs m) 2,831 3,339 3,721 4,312 5,035Reported PAT (Rs m) 2,831 3,329 3,721 4,312 5,035EPS (Rs) 3.3 3.9 4.3 5.0 5.8Growth (%) -12.2 17.6 11.8 15.9 16.8PER (x) 30.0 25.5 22.8 19.7 16.9ROE (%) 59.0 50.2 43.0 39.2 36.6Debt/Equity (x) 0.3 0.1 0.1 0.1 0.1EV/EBITDA (x) 24.6 20.4 17.8 15.0 12.5Price/Book (x) 17.7 12.8 9.8 7.7 6.2Price as at close of business on 11June 2008

Dabur’s growth is slowing down

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2 [email protected]

Dabur India Ltd – MP

Dabur India Limited: company snapshot Figure 1: Consumer care division (CCD) is Dabur’s biggest revenue earner by far*

Others, 1.5

International, 15.7

Consumer Health Division (CHD), 6.5

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Figure 2: CCD dominated by hair-care and oral-care products

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It’s all in the price; initiate with MP We initiate coverage on Dabur with a Market Performer recommendation and a target price of Rs95. Our Market Performer rating is predicated on: 1) slowing revenue growth; 2) restricted margin expansion owing to increased agri inputs and retail investment; and 3) valuations, which in our view at 19.7x FY10ii P/E fully discount the company’s growth potential. Below, we discuss each of these arguments in detail:

Reason #1: Moderating growth After strong growth over FY04-07, we expect Dabur’s revenue growth to hit a roadblock after FY09. Growth between FY05-07 was led by foods division, international businesses and acquisition of Balsara’s oral-care and home-care portfolio. In the absence of any of the above growth drivers, we expect the company’s sales growth to moderate from 15-25% experienced during FY05-08 to 14-15% during FY08-10, though with growth picking up in FY11ii as retail sales kick in. Reasons for Dabur’s moderating sales growth over FY08-10 are detailed below: Figure 3: Revenue growth slowing down for Dabur

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3 [email protected]


1. Driving growth in CCD (Consumer Care Division), which is Dabur largest division (76% of sales, FY08) would be a challenge, given the following obstacles.

a. Lack of dominant position in big categories Dabur has a weak competitive position in large categories such as hair oils, shampoos and oral care. While, these categories are growing between 14-18%, we believe Dabur will need to make significant investments in order to grow/maintain its share in these categories. In shampoos, we reckon Dabur’s revenue growth will slow down from 24% in FY08 to 15-18% over FY08-11ii. Shampoos segment has witnessed heightened competitive activity; Hindustan Unilever and Procter & Gamble have upped the ante with product expansion and innovation backed by big marketing spends. Dabur being a distant number three in this category (share of 5.2%) will need to plough in significant money to sustain growth. Figure 4: Shampoos - Dabur has a small market share FY08 market size Category penetration Dabur’s market share Dabur’s key brands

Rs18bn 43% 5% Vatika Source: IIFL Research

Likewise, in toothpastes, where Dabur’s growth is the past has been driven by market share gains in the economy segment via the low-priced Dabur Red and brands acquired from Balsara (Babool),going forward, we reckon growth would be in line with the industry’s growth. Toothpowder sales could be under pressure with increasing number of consumers up-trading to toothpaste. With category growth of low single digits, we expect Dabur to grow at c5% over FY08-11E. Figure 5: Toothpastes –Large investments needed to gain market share FY08 Market size Category penetration Dabur's market share Dabur’s key brands

Rs25bn 53% 10% Red, Babool, Meswak Source: IIFL Research

Hair oils form Dabur’s biggest product category by revenue, accounting for 23% of the company’s sales in FY08. Among the large categories, we believe, only hair oil will see acceleration in revenue growth, from 12-13% over FY06-FY08 to c15% for the next three years, making it the largest growth driver. Dabur has strong brands such as Vatika and Amla, with unique herbal positioning and premium pricing, which will grow faster than the plain coconut-oil category, in our view. Figure 6: Hair oils – expect growth to accelerate

FY08 market size Category penetration Dabur’s market share Dabur’s key brands Rs27bn 71% 17% Amla, Vatika


b. Categories with dominant presence are small Dabur is the market leader in health supplements (market size Rs6bn, 61% share) and digestives (market size Rs5bn, 32% share). However, both these categories are small, growing at 5-10% pa. Competition in this segment has picked up significantly after high-decibel launches from competitors like Emami. Overall, we expect revenue growth in health supplements to remain subdued in the 5-10% range over FY08-11E.

Figure 7: Health supplements – Dabur’s market share faces increasing competition

FY08 market size Dabur’s market share Dabur’s key brands Rs6bn 61% Chyawanprash*

Source: IIFL Research; * Ayurveda-based health supplement

2. Foods - increased reach, distribution advantages have played out: We expect a slowdown in Dabur’s foods business, previously one of the company’s key growth drivers. Foods revenues registered a CAGR of 26% over FY05-08, accounting for 12% of the company’s revenue growth over this period. Growth was driven primarily by Real fruit juices. However, this category is now experiencing a slowdown, with Dabur’s growth having tapered down to 19.5% in FY08.

4 [email protected]


Figure 8: Foods growth has slowed down while its revenue share has increased

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Source: IIFL Research Figure 9: Fruit iuices - highly underpenetrated category, but Dabur has stiff competition Market size Category penetration Dabur’s market share Dabur’s key brands Rs4bn 1% 51% Real, Activ, Coolers, Twist

One major reason for the slowdown in the fruit-juices category was the launch of two significant brands in the fruit drinks category (Coca Cola and Pepsi launched their diluted fruit juices Minute Maid and Twister, respectively), backed by heavy promotional and advertising. These products are priced much lower than concentrated fruit juices such as Dabur’s Real, and are available in smaller pack sizes (like soft drinks). Besides, Coca Cola and Pepsi have a clear distribution advantage over Dabur, as they already sell to eateries, marginal shops and hotels. Dabur has responded by launching its Twist fruit juice. However, given the strength of the incumbent players and Dabur’s lack of distribution reach in this category, we reckon it will be difficult for the company to replicate the success of its fruit juices Real and Activ. We forecast Dabur’s food revenues will register a CAGR of 18% over FY08-11, significantly lower than the 26% registered during FY05-08.

Reason #2: Restricted margin expansion Dabur’s earnings registered 29% CAGR over FY05-08, driven by: 1) cost efficiencies after de-merger of the pharma business; 2) excise duty savings from manufacturing plants in backward areas; 3) strong revenue growth after the merger with Balsara (FY06); and 4) growth in high-margin categories such as foods and the international business division. Figure 10: Sharp slowdown in Dabur’s earnings growth

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5 [email protected]


However, over FY08-11ii, we expect a sharp moderation in earnings CAGR, to 13.7%, owing to the following reasons:

1. Sharp increase in packaging costs: Packaging costs are a significant cost head for Dabur; they accounted for 16% of the company’s sales in FY07. A changing product mix (higher sales of personal care products like shampoos and juices) and rising crude prices have led to a rise in packaging costs. Dabur’s product mix makes it particularly susceptible to increases in packaging costs compared to other consumer goods companies such as HUL and Colgate.

Figure 12: Packaging costs are now the biggest component of materials used for Dabur

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Figure 13: Packaging costs are the highest for Dabur (FY07)

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2. Input cost inflation manageable, but does restrict margin expansion: Dabur’s key inputs are edible oils (coconut, groundnut, mustard, etc), honey, sugar, perfumes, chemicals and other agricultural inputs. Though most of the agricultural inputs are off from their recent peaks, they are expected to remain much higher than historical levels. This would limit margin expansion, in our view. Dabur has taken price hikes of 2-3% in FY08 and 4-5% YTD. Though Dabur is relatively insulated from inflationary pressures as compared to its peers, margin expansion would be highly restricted in the existing inflationary input cost environment. As such, margin expansion seen in the last 4-5 years is highly unlikely to continue.

3. Retail roll out costs will depress margins: Dabur has made an investment of Rs220m in FY08 in retailing and would invest another Rs350m in FY09. Since the retail business is fully owned by Dabur, all losses in the gestation period will get consolidated in the parent, which would weigh down profitability to an extent.

Figure 14: Retail business to have 120 stores by FY11

FY09ii FY10ii FY11ii Retail revenue (Rs m) 276.5 712.8 2,142.0 % growth YoY 157.8 200.5 No. of stores 16.0 50.0 120.0 Average store size (sq ft) 1,800.0 1,800.0 1,800.0 Total retail space (sq ft) 28,800.0 90,000.0 216,000.0 Sales/sq ft 9,600.0 12,000.0 14,000.0 Source: IIFL Research

6 [email protected]


Figure 15: EBITDA margin and EPS under pressure FY09ii FY10ii FY11iiIncluding retail venture Sales (Rs m) 27,059 31,076 35,777% growth YoY 14.6% 14.8% 15.1%

EBITDA margin (%) 17.0 17.0 17.2

EPS (Rs) 4.3 5.0 5.8% growth YoY 12.0% 15.6% 16.6% Excluding retail venture Sales (Rs m) 27,014 30,971 35,629% growth YoY 14.4% 14.6% 15.0%

EBITDA margin (%) 17.3 17.4 17.4

EPS (Rs) 4.4 5.1 6.0% growth YoY 14.6% 15.4% 16.2%Source: IIFL Research

Reason #3: Valuations price in growth prospects We rate Dabur a Market Performer, with a target price of Rs95. With earnings set for a slowdown over FY08-11ii at 15%, compared to the 29% CAGR witnessed over FY05-08, we believe Dabur’s stock price fully discounts its earnings potential. Further overhang of escalating packaging costs (16% of FY07 revenues) and retail investments are likely to weigh down on the stock price. Dabur is trading at 19.7x FY10ii P/E, which slightly higher than its last five years’ historical average P/E. However, a visible and stable earnings CAGR of 15% over FY08-11ii would provide downside support to the stock. We value Dabur on a P/E multiple of 19x 12-month forward earnings. This is at a discount to the 25x multiple that we attribute to HUL, which we believe deserves a premium owing to its market leadership, presence in multiple categories, superior capital efficiencies and improving growth prospects.

Figure 16: Dabur is trading above its last five years’ average P/E

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Sales CAGR (FY 08-11)

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Dabur 14.7% 14.6% 17.3 43.0 43.0 1.5% 22.8 19.7 HUL* 13.5% 14.6% 13.7 131.3 124.9 3.4% 24.1 20.2 Source: IIFL Research, * HUL data is for CY07, except for PE, which is based on March 2010ii

7 [email protected]


Annexure: Retail foray in niche health and beauty segment Dabur entered the retail sector through its ‘newu’ format. ‘newu’ is operated by Dabur’s 100% subsidiary H&B Retail. Management is still working on the retail blueprint, constantly tweaking store size, locations and product composition on the basis of consumer feedback. At present, four stores are in operation, with an area between 1,500-2,500sq ft, offering health, beauty and consumer products. Figure 19: NewU in pictures


Key features of Dabur’s retail roadmap: 1. Investment of Rs220m made till FY08. The company will invest a

further Rs350m, Rs630m and Rs200m in FY09, FY10 and FY11, respectively, taking the total investment in the retail venture to Rs1.4bn by FY11.

2. Management is targeting a breakeven by FY11. We estimate that in the retail venture, Dabur would make a loss of Rs113m in FY09 and Rs106m in FY10 respectively.

Company background Dabur is a leading consumer-goods company in India, with a product portfolio spanning personal care, healthcare and pharmaceuticals (ethnic and OTC) products. The company derives 86% of its revenue from herbal products. Over the last few years, Dabur has successfully diversified into categories beyond its traditional segments, such as fruit juices, without diluting its ‘herbal’ positioning. Dabur spun off its pharma business into a separate entity in FY04. It acquired the oral-care and home-care portfolio of Balsara in FY06. Dabur has a highly successful international business (16% of sales in FY08) with presence in the Middle East, Pakistan, Bangladesh, Nigeria, US and the UK. The company is driving growth in its international markets by having dedicated management teams managing these businesses on the ground. Dabur has set up manufacturing facilities in markets like Dubai, UAE, Nepal, Bangladesh, Nigeria and Egypt to service these markets. Major shareholder in Dabur is the Burman family, which holds 70.8% stake in the company. Besides Dabur, the Burman family has interests in life insurance (Aviva) and non-life insurance (with Liberty group and Sompo). Figure 20: A list of Dabur’s key segments and brands Segments Brands Hair Oil Dabur Amla, Vatika Health Supplements Chyawanprash, Honey, Glucose Foods Real, Activ, Coolers, Twist Toothpaste Red, Babool, Meswak, Promise Toothpowder Lal Danth Manjan Digestives Hajmola, Pudin Hara Baby & Skin Care Lal Tail, Gulabari Source: IIFL Research

8 [email protected]


Segments / Brands

Hair oils

Dabur Amla Vatika

Health supplements

Chyawanprash Honey Glucose

Foods

Real Activ Twist

Segments / Brands

Toothpastes

Red Babool Meswak Promise

Toothpowders Lal Danth Manjan

Digestives

Hajmola Pudin Hara

Baby & skin care

Lal Tail Gulabari

9 [email protected]


Financial summary Income statement summary (Rs m) Y/e 31 Mar FY07A FY08A FY09ii FY10ii FY11ii Revenue 20,431 23,611 27,059 31,076 35,777 EBITDA 3,498 4,094 4,582 5,291 6,157 EBIT 3,090 3,673 4,111 4,768 5,598 Net Interest expense -154 -168 -176 -187 -222 Other Income 259 339 373 410 451 Profit before tax 3,195 3,844 4,308 4,990 5,827 Taxes -373 -507 -582 -674 -787 Exceptional items 0 -10 0 0 0 Minorities and other 9 1 -5 -5 -5 Net profit 2,831 3,329 3,721 4,312 5,035

Cashflow summary (Rs m) Y/e 31 Mar FY07A FY08A FY09ii FY10ii FY11ii Profit before tax 3,195 3,844 4,308 4,990 5,827 Depr. & amortization 343 364 471 523 559 Tax paid -387 -499 -582 -674 -787 Working capital ∆ -1,440 1,579 512 248 20 Other operating items 108 -111 -5 -5 -5 Operating cashflow 1,819 5,178 4,703 5,083 5,615 Capital expenditure 990 -1,043 -1,227 -717 -741 Free cash flow 2,809 4,135 3,477 4,366 4,874 Equity raised 290 0 0 0 0 Investments -386 -193 0 0 0 Debt financing/disposal 556 -699 0 0 0 Dividends paid -1,392 -1,516 -1,696 -1,967 -2,294 Other items -1,782 34 -4 -4 -5 Net change in cash 95 1,761 1,777 2,395 2,575 Source: Company data, IIFL Research

[[[[[[[[[[[[[[To add more comments, click on the Blue horizontal line. Press

ctrl+shift and move this box up or down]]]]]]]]]]]]

Other income increased significantly in FY08 on account of sale of old machines.

Going forward, we expect other income growth to return to normal level of 10%.

Interest costs will increase on account of high working capital and rental deposit

requirements of retail business

Depreciation costs will increase as capex increases. A facility in RAK in UAE, retail investment and the corporate centre will

be major capex items.

10 [email protected]


Financial summary Balance sheet summary (Rs m) Y/e 31 Mar FY07A FY08A FY09ii FY10ii FY11ii Cash & equivalents 607 2,368 4,145 6,539 9,115 Sundry debtors 1,420 1,641 1,882 2,161 2,488 Inventories - trade 2,571 2,954 3,387 3,890 4,478 Other current assets 1,807 2,135 2,534 3,022 3,623 Fixed assets 3,792 4,471 5,226 5,420 5,602 Intangible assets 0 0 0 0 0 Other term assets 1,005 1,180 1,180 1,180 1,180 Total assets 11,201 14,749 18,353 22,212 26,485 Short-term debt 543 100 100 100 100 Sundry creditors 3,624 4,499 5,580 6,724 7,809 Other current liabs 893 2,530 3,033 3,408 3,859 Long-term debt/CBs 1,056 800 800 800 800 Other long-term liabs 245 150 150 150 150 Minorities/other equity 45 41 37 32 28 Net worth 4,796 6,628 8,654 10,998 13,739 Total liabs & equity 11,201 14,749 18,353 22,212 26,485

Ratio analysis Y/e 31 Mar FY07A FY08A FY09ii FY10ii FY11ii Revenue growth (%) 18.6 15.6 14.6 14.8 15.1 Op Ebitda growth (%) 22.1 17.1 11.9 15.5 16.4 Op Ebit growth (%) 19.0 18.9 11.9 16.0 17.4 Op Ebitda margin (%) 17.1 17.3 16.9 17.0 17.2 Op Ebit margin (%) 15.1 15.6 15.2 15.3 15.6 Net profit margin (%) 13.9 14.1 13.8 13.9 14.1 Dividend payout (%) 49.2 45.5 45.6 45.6 45.6 Tax rate (%) 11.7 13.2 13.5 13.5 13.5 Net debt/equity (%) 20.7 -22.1 -37.5 -51.3 -59.8 Net debt/op Ebitda (x) 0.3 -0.4 -0.7 -1.1 -1.3 Return on equity (%) 59.0 50.2 43.0 39.2 36.6 ROCE (%) 48.3 48.8 43.0 40.1 38.2 Source: Company data, IIFL Research

Sundry debtors increased in FY08 because of an increase in receivables in

international and foods business

Pick-up in sales growth in FY11 as retail sales contribution kicks in

Dividend payout to stay stable at c46%

Debt position expected to remain fairly stable. Retail investments to be made

through internal accruals

CMP Rs384

Target price Rs514

Market cap (US$ m) 796

Bloomberg GMON IN




Gammon -7.4 -9.1 0.4 Rel. to Sensex 2.6 -0.9 -7.0 Nagarjuna -13.0 -21.2 12.3 IVRCL Infra -17.0 -17.6 3.2

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Construction 12 Jun 2008 Gammon India - BUY

Quick Take

Gopal Ritolia [email protected] (91 22) 6620 6651

Anupam Gupta [email protected] (91 22) 6620 641

Financial summaryY/e 31 Mar FY06A FY07A FY08ii FY09ii FY10ii Revenues (Rs m) 14,765 18,517 22,991 29,889 37,361 EBITDA Margins (%) 12.5 9.3 9.4 9.5 9.5 Pre-exceptional PAT (Rs m) 1,043 984 989 1,250 1,577 Reported PAT (Rs m) 1,057 445 989 1,250 1,577 EPS (Rs) 11.8 11.1 11.2 14.1 17.8 Growth (%) -5.7 0.5 26.4 26.1 PER (x) 33.1 35.1 34.9 27.6 21.9 ROE (%) 11.4 3.9 7.9 9.2 10.4 Debt/Equity (x) 0.2 0.3 0.3 0.4 0.5 EV/EBITDA (x) 18.9 21.6 17.3 13.6 11.2 Price/Book (x) 3.7 3.0 2.8 2.5 2.3 Source: Company, IIFL Research

Gammon acquires two Italian companies Gammon India has acquired stakes in two Italy-based companies through its offshore subsidiaries—75.1% in Franco Tosi Meccanica Spa, for EUR40m; and 50% in Sadelmi Spa, for EUR7.5m.

• Franco Tosi Meccanica is descended from 125-year old Italian power equipment manufacturer, Franco Tosi. It was acquired by Italian power equipment major Ansldo in 1990. Anslado subsequently sold the business and the manufacturing facilities in the northern Italy town of Legnano to the Casti group in 2000. It manufactures thermal and hydro turbines, mainly small-rating turbines up to 200MW. It also has capability for manufacturing storage pumps and accessories for hydroelectric power plants.

• Sadelmi is a balance-of-plant contractor for thermal power plants. The company was set up in 1947 in Argentina and has executed projects in over 50 countries. The company was acquired by ABB in 1989 and later sold to Alstom in 2000. Alstom divested this company during its global restructuring in 2003.

• The acquisition has been likely funded through debt raised by the offshore subsidiaries. We wait for management commentary on whether the debt has recourse to Gammon India’s balance sheet.

• The company has not disclosed financial details of the two companies, but our discussion with industry sources indicates that neither company has a large revenue or profit base. Both companies have similar histories—acquired and subsequently spun off by global majors.

• In our view, Gammon has acquired these companies to gain pre-qualifications for power plant EPC contracts. However, the Franco acquisition is, prima facie, incompatible with the company’s current business portfolio.

12-mth Target price (Rs) 150 (71%) Market cap (US$ m) 311




GIPCL -9.5 -12.4 37.3 Rel. to Sensex 0.4 -4.2 29.8 NTPC -13.5 -10.4 10.2 Tata Power -3.2 14.0 126.4

CESC -12.0 -8.1 20.7

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Harshavardhan Dole [email protected] (91 22) 6620 6660

GIPCL – BUY GIP IN Rs88 Utilities 12 Jun 2008 Result update

On track Gujarat Industries Power Corporation Ltd’s (GIPCL) 4QFY08 performance was in line with our estimates, after adjusting for one-time items. PAT rose 25% YoY to Rs245m in the quarter, as PLF rose to 89% from 75% in the year-ago period and average realisation increased 38% YoY to Rs2.59/unit. Construction of its 250MW plant SLPP-II is on schedule; the company has already spent Rs7.2bn till date. However, the stock’s current valuation does not factor in this robust financial performance or progress on the planned capacity addition. The stock is trading at 1x FY09ii BV, and 11x FY09ii EPS, which offers downside support. Maintain BUY.

4QFY08 highlight - SLPP PLF at 96%: The highlight of the quarter was the 96% PLF of the SLPP-I unit. PLF of the two gas-based units was also higher at 89% (compared with 80% in the year-ago period) and 77% (50% a year ago). For FY08, the company’s PLF averaged 85%, compared with 80% in the previous year. This strong operational performance enabled GIPCL to earn incentives and maintain PAT despite a drop in the treasury income.

Adjusted PAT growth of 25%: GIPCL's reported PAT declined 87% YoY in 4QFY08, but this decline is due to: 1) Rs72.1m provision for prior-period MAT; 2) Rs109m provision for interest on a long-disputed debt; 3) the fact that the year-ago quarter’s profit included a Rs325m tax write-back, adjusted for which PAT was Rs196m. Adjusted for these one-time items, 4QFY08 PAT rose 25%. For FY08, adjusted PAT would work out to Rs1.2bn, which implies 4% growth over the previous year.

Cheapest utility in India: GIPCL has already spent Rs7.2bn on its SLPP-II 250MW expansion, which would increase its capacity by 50%. Management said the expansion project is proceeding on schedule and would be commissioned by December 2008. At Rs88, the stock is trading at 1x FY09ii BV. These valuations completely ignore the robust operational performance (core RoE ~20%) and progress on the capacity expansion programme. We maintain our BUY rating, but reduce the target price to Rs150, which is 1.6x FY10ii BV.

Financial summary Y/e 31 Mar FY06A FY07A FY08ii FY09ii FY10iiRevenues (Rs m) 7,566 7,615 9,356 9,009 13,701

EBITDA Margins (%) 40% 34% 27% 29% 36%

Pre-Exceptional PAT (Rs m) 1,131 1,164 1,208 1,182 1,852

Reported PAT (Rs m) 1,148 1,829 1,027 1,182 1,852

EPS (Rs) 7.5 7.7 8.0 7.8 12.2

Growth (%) 2.9 3.8 -2.2 56.7

PER (x) 11.7 11.4 11.0 11.2 7.2

ROE (%) 11.2 16.0 8.5 9.3 13.0

Debt/Equity (x) 0.6 0.5 0.6 1.1 0.9

EV/EBITDA (x) 6.0 6.9 7.7 10.4 5.2

Price/Book (x) 1.3 1.2 1.1 1.0 0.9Price as at close of business on 11 June 2008

PLF of SLPP-I at all time high – 96%

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2 harsh.dole@iif lcap.com

GIPCL – BUY

Figure 1: Quarterly performance (Rs m) 4QFY08 4QFY07 % chg FY09ii FY08 % Chg

Net sales 2,797 1,720 62.6 9,009 9,356 (3.7)

EBIDTA 634 610 3.9 2,656 2,564 3.6

Other income 63 36 72.2 258 239 7.9

PBIDT 696 647 7.7 2,913 2,803 3.9

Depreciation 221 232 (4.8) 882 883 (0.1)

Interest 113 150 (25.1) 436 404 8.0

PBT 363 264 37.3 1,595 1,516 5.2

Tax 118 68 73.6 324 308 5.3

Adjusted PAT 245 196 24.7 1,271 1,208 5.2

Extra ordinary income/ (exp) (181) 325 (155.8) 0 (181) -

Reported PAT 64 521 (87.8) 1,271 1,027 23.7

No. of shares (m) 151 151 151 151

EBIDTA margin (%) 22.7 35.5 29.5 27.4

PBIDT margin (%) 24.9 37.6 32.3 30.0

EPS - annualised (Rs) 6.5 5.2 24.7 8.4 8.0 5.2 Source: Company, IIFL Research

Figure 2: Average PLF for 4QFY08 was 89% against 75% YoY

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Figure 3: 1st unit expected to be commissioned by end of December 2008

Source: Company


GIPCL – BUY

Financial summary Income statement summary (Rs m) Y/e 31 Mar FY06A FY07A FY08ii FY09ii FY10ii

Revenue 7,566 7,615 9,356 9,009 13,701 EBITDA 3,059 2,598 2,564 2,657 4,956

EBIT 2,145 1,700 1,681 1,775 3,692

Interest income 188 294 239 145 139

Interest expense 625 519 404 436 1,507

Exceptional items 17 665 -181 0 0

Profit before tax 1,725 2,140 1,335 1,483 2,324 Taxes 577 311 308 301 472 Minorities and other 0 0 0 0 0 Net profit 1,148 1,829 1,027 1,182 1,852

Cashflow summary (Rs m) Y/e 31 Mar FY06A FY07A FY08ii FY09ii FY10ii Profit before tax 1,708 1,475 1,516 1,483 2,324

Depr. & amortization 914 898 883 882 1,264

Tax paid 577 311 308 301 472

Working capital ∆ -938 701 371 -180 -605

Other operating items 665 -181

Operating cashflow 1,107 3,429 2,282 1,884 2,512

Capital expenditure -724 -1,262 -4,858 -9,328 56

Free cash flow 383 2,166 -2,576 -7,444 2,568

Equity raised/ direct addition to reserves 2,614 -999 191 0 0

Investments 0 -1,250 1,202 0 0

Debt financing/disposal -1,862 -586 1,378 7,869 -2,143

Dividends paid 216 347 425 425 425

Other items 17 665 -181 0 0

Net change in cash 936 -350 -411 0 0 Source: Company data, IIFL Research

Treasury income to decline as cash deployed in expansion

Healthy operating cash flows

With commissioning of SLPP-II, PAT estimated to grow 56% in FY10ii

Capex towards SLPP-II


GIPCL – BUY

Balance sheet summary (Rs m) Y/e 31 Mar FY06A FY07A FY08ii FY09ii FY10ii

Cash & equivalents 1,031 681 270 270 270 Sundry debtors 1,093 1,071 1,671 1,609 1,958

Inventories - trade 860 811 837 806 1,226 Other current assets 1,778 636 527 533 850

Fixed assets 12,777 13,141 17,116 25,561 24,242

Other term assets 1,357 2,607 1,405 1,405 1,405 Total assets 18,897 18,948 21,825 30,184 29,950 Sundry creditors 1,797 1,668 2,206 2,018 2,500 Other current liabs 825 442 791 712 712 Long-term debt/CBs 6,013 5,427 6,806 14,674 12,532 Net worth 10,262 11,411 12,022 12,779 14,207 Total liabs & equity 18,897 18,948 21,825 30,184 29,950

Ratio analysis Y/e 31 Mar FY06A FY07A FY08ii FY09ii FY10ii Revenue growth (%) 1.6 0.7 22.8 -3.7 52.1 Op Ebitda growth (%) -1.0 -15.1 -1.3 3.6 86.5 Op Ebit growth (%) -3.6 -20.8 -1.1 5.6 108.0 Op Ebitda margin (%) 40.4 34.1 27.4 29.5 36.2 Op Ebit margin (%) 28.4 22.3 18.0 19.7 26.9 Net profit margin (%) 15.0 15.3 12.9 13.1 13.5 Dividend payout (%) 19.1 29.8 35.2 36.0 22.9 Tax rate (%) 33.4 14.5 23.0 20.3 20.3 Net debt/equity (%) 48.5 41.6 54.4 112.7 86.3 Return on equity (%) 11.2 16.0 8.5 9.3 13.0 Return on assets (%) 6.0 6.1 5.5 3.9 6.2 Source: Company data, IIFL Research

Adequately capitalised to fund ongoing expansion

Ongoing capex depresses the reported RoE

11 June 2008 Telecom

Quick Take

GSM adds up 1% in May 2008, Spice disappoints

In May 2008, Bharti, Vodafone and Idea continued to consolidate their position at the expense of BSNL. Aircel pulled back after a disappointing April, raising its net adds by 18% MoM. Spice Communication witnessed an untimely 12% MoM drop in its monthly adds, even as the Modis look to exit the operation. Bharti continued its march towards the 2.5m mark and looks capable of reaching there in June.

Figure 1: Net subscriber addition by operator - Spice declines sharply Feb-08 Mar-08 Apr-08 May-08 Up by

Aircel 251,367 425,246 379,022 447,506 18.07%Bharti 2,252,549 2,314,547 2,385,713 2,455,501 2.93%BPL Mobile 19,685 18,543 19,024 17,475 -8.14%BSNL 824,284 1,637,067 473,187 314,281 -33.58%Idea Cellular 918,871 1,128,017 1,038,076 1,100,994 6.06%MTNL 108,632 120,020 41,900 66,686 59.16%RCOM GSM 337,907 340,463 342,349 342,349 0.00%Spice Comm 141,377 126,464 152,448 134,558 -11.74%Vodafone 1,411,659 1,569,171 1,654,172 1,686,438 1.95%

Total 6,266,331 7,679,538 6,485,891 6,565,788 1.23%

Growth -4.1% 22.6% -15.5% 1.2%RCOM’s GSM adds assumed unchanged from April. Source: COAI, IIFL Research.

• We estimate combined GSM+CDMA additions for May 2008 at 8.3m, taking the total user base to 278m. At the rate seen in April, the subscriber base would exceed 460m by FY10, marginally above our forecast of 456m.

• Bharti, at its current rate, should end up with 96m and 121m wireless subscribers by FY09 and FY10, far in excess of most estimates, and in line with the consistent messages given out by its leadership from time to time in the last few months. However, our forecasts are lower at 89.6m and 113m, taking into account the drop in net adds in FY10 that the arrival of new competition, especially from RCOM, can cause.

• Idea raised its adds back up to the 1.1m mark, after a drop last quarter. At this rate, its subscriber base looks capable of going up by almost 14% in 1QFY09. At the current rate, Idea will reach 39m and 50m subscribers respectively by FY09 and FY10, in excess of our forecast of 38m and 47m, respectively. Additions grew 3.5% MoM in the eight established circles and by 25% in the three new circles.

Figure 2: Share of monthly net adds – Bharti inches up towards 40% Feb-08 Mar-08 Apr-08 May-08 Aircel 4.0% 5.5% 5.8% 6.8% Bharti 35.9% 30.1% 36.8% 37.4% BPL Mobile 0.3% 0.2% 0.3% 0.3% BSNL 13.2% 21.3% 7.3% 4.8% Idea Cellular 14.7% 14.7% 16.0% 16.8% MTNL 1.7% 1.6% 0.6% 1.0% RCOM GSM 5.4% 4.4% 5.3% 5.2% Spice Comm 2.3% 1.6% 2.4% 2.0% Vodafone 22.5% 20.4% 25.5% 25.7% Source: COAI, IIFL Research

Figure 3: GSM subscriber base (m) Feb-08 Mar-08 Apr-08 May-08

Aircel 10.2 10.6 11.0 11.4 Bharti 59.7 62.0 64.4 66.8 BPL Mobile 1.3 1.3 1.3 1.3 BSNL 34.6 36.2 36.7 37.0 Idea Cellular 22.9 24.0 25.0 26.1 MTNL 3.1 3.2 3.3 3.4 RCOM GSM 6.7 7.0 7.4 7.7 Spice Comm 4.1 4.2 4.4 4.5 Vodafone 42.6 44.1 45.8 47.5 Total 185 193 199 206 Source: COAI, IIFL Research G.V. Giri [email protected] (91 22) 6620 6649

Events calendar – June 2008

Monday Tuesday Wednesday Thursday Friday Saturday 2 3 4 5 6 7

Educomp, Page Inds April Foreign Trade

DLF, GMR Inds

Shasun Chem,

Hindustan Oil Exploration, Karur Vysya, Berger Paints, Peninsula Land WPI for 24th May

Divis Lab

9 10 11 12 13 14

Gokaldas Exports

GIPCL, National Aluminium

NIIT Ltd, GMDC, Indian Hotels, SCI

KLG Systel, Financial Tech April IIP

WPI for 31st May

Godawari Power and Ispat

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BPCL, Sical Logistics

Aurobindo Pharma, Indraprastha Gas, Dish TV

WPI for 7th June

23 24 25 26 27 28

Tata Power

Tata Chem

ONGC

Tata Steel

WPI for 14th June

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Unitech Ltd - BUY.

Key to IIFL recommendations: BUY: Absolute return of > +10% SELL: Absolute return of < -10% Market Performer: Absolute return of -10% to +10% Published in 2008. © India Infoline Ltd 2008 This report is for the personal information of the authorised recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information of the clients of IIFL, a division of India Infoline, and should not be construed as an offer or solicitation of an offer to buy/sell any securities. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. India Infoline or any persons connected with it do not accept any liability arising from the use of this document. The recipients of this material should rely on their own judgment and take their own professional advice before acting on this information. India Infoline or any of its connected persons including its directors or subsidiaries or associates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained, views and opinions expressed in this publication. India Infoline and/or its affiliate companies may deal in the securities mentioned herein as a broker or for any other transaction as a Market Maker, Investment Advisor, etc. to the issuer company or its connected persons. India Infoline generally prohibits its analysts from having financial interest in the securities of any of the companies that the analysts cover.

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