india morning bell 5th december 2014

India I Equities

Anand Rathi Shares and Stock Brokers Limited (hereinafter “ARSSBL”) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research India Equities

Country

Daily

5 December 2014

India Morning Bell

All the latest research and data

Nestlé India – Green shoots visible; upgrading, to a Buy. In 3QCY14 Nestlé India reported 9% revenue growth. Domestic revenue was up 10% yoy, exports declined 3.9% yoy. We have upgraded our recommendation on the stock to a Buy, with a revised target price of `7,124. Our target is based on a target PE of 34x CY16e earnings. We believe that, with better growth rates and return ratios, Nestlé India will be seen as a candidate for a re-rating.

Hinduja Global Solutions – SMAC helping BPM companies climb the value chain; Buy. We believe that, given the significant acceleration in the business, HGS is poised for stronger growth in the next two years. Also, perceived risks like the switch to self service may not hold true as the company has been able to refresh its offerings accordingly and generate growth despite the transition. Hence, we retain our Buy recommendation.

Tourism Finance Corporation of India – Consolidation phase over. Between FY12 and FY14, the Tourism Finance Corporation of India consolidated its business with a 5.9% asset CAGR. Under the new MD, Mr. Sangar, however, TFCI is gearing up to benefit from an upswing in tourism. With a focused management, strong underwriting skills and high return ratios, TFCI is well placed to benefit from the expected upswing in the tourism sector. At the CMP, the stock trades at 1.4x FY14 BV.

India: Non-core WPI now on a downward trend

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-98

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WPI

infla

tion,

3-y

ear a

vera

ge, %

WPI Non-core Core

Source: GoI

Ch

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Markets 4 Dec’14 1 Day YTD Sensex 28563 0.4% 34.9%Nifty 8564 0.3% 35.9%Dow Jones 17900 -0.1% 8.0%S & P 500 2072 -0.1% 12.1%FTSE 6679 -0.6% -1.0%Nikkei* 17830 -0.3% 9.4%Hang Seng* 24058 1.0% 3.2%

Volumes (US$m) 4 Dec ’14 1 Day Avg '14Cash BSE 649 2.1% 527Cash NSE 2,964 -5.4% 2,644Derivatives (NSE) 22,310 -30.0% 32,107

Flows (US$m) 4 Dec ’14* MTD YTD FII – Cash Buy 653 753 136,724Sell 576 689 121,892Net 77 151 16,430FII - Derivatives Buy 2,684 27,552 823,596Sell 2,734 27,651 812,799Net -50 -99 10,104DII – Cash Buy 200 512 28,192Sell 294 407 25,716Net -95 105 2,241

Others 4 Dec ’14 1 Day YTD Oil Brent (US$/bbl)* 69.3 -0.4% -34.5%Gold (US$/oz)* 1,203.7 -0.1% -0.2%Steel (US$/MT) 572.5 -3.8% -2.1%`/US$ 61.9 0.0% -0.2%US$/Euro* 1.2 0.0% 11.0%Yen/US$* 119.9 -0.1% -12.2%Call Rate 7.4% -60.bps -135.bps10-year G-Secs 8.0% 0.bps -85.7bpsEMBI spreads 352.2 -1.9bps 17.9bps@7:30am *Provisional Source: BSE, Bloomberg

Sensex: 28563

Nifty: 8564

5 December 2014 India Morning Bell

Anand Rathi Research India Equities

Market Data

Price Performance Price Performance Price Performance Top-5 gainers Top-5 gainers Top-5 gainersCompany CMP (INR) 1 wk (%) 1 Mth (%) Company CMP (INR) 1 wk (%) 1 Mth (%) Company CMP (INR) 1 wk (%) 1 Mth (%)

BERGER PAINTS 424 19.5 6.6 JET AIRWAYS IND 378 54.4 62.7 SPICEJET LTD 21 39.6 50.0

WOCKHARDT LTD 936 15.6 23.5 GULF OIL LUBRICA 505 34.1 52.7 TAKE SOLUTIONS 56 39.1 37.1

EXIDE INDUS LTD 174 14.7 10.7 STRIDES ARCOLAB 911 23.8 36.7 SEQUENT SCIENTIF 536 27.5 19.0

PUNJAB NATL BANK 1096 13.6 17.7 BAJAJ CORP LTD 353 16.0 24.2 ATUL AUTO LTD 556 26.6 38.7

ORIENTAL BANK OF 310 13.4 8.6 ZYDUS WELLNESS 801 14.8 27.7 ONMOBILE GLOBAL 70 26.0 78.0

Top-5 losers Top-5 losers Top-5 losersCompany CMP (INR) 1 wk (%) 1 Mth (%) Company CMP (INR) 1 wk (%) 1 Mth (%) Company CMP (INR) 1 wk (%) 1 Mth (%)

VEDANTA RESOURCE 681 (14.9) (15.7) SUZLON ENERGY 13 (9.6) (2.2) KAILASH AUTO FIN 12 (22.3) (56.4)

CONTAINER CORP 1325 (8.6) (2.0) ABAN OFFSHORE 543 (8.4) (13.0) NITIN FIRE PROT 33 (11.8) (30.2)

GMR INFRASTRUCTU 18 (8.5) (15.0) KAVERI SEED 844 (7.5) (8.5) RS SOFTWARE INDI 542 (10.4) (15.9)

OIL & NATURAL GA 361 (6.7) (11.0) JK CEMENTS LTD 606 (6.7) 0.3 GUJARAT NATURAL 182 (8.7) (10.9)

NATIONAL ALUMIN 58 (6.6) 1.0 FUTURE RETAIL LT 85 (5.7) (25.5) GAMMON INFRASTRU 15 (8.4) 0.7

Volume Volume VolumeVolume spurts Volume spurts Volume spurtsCompany CMP (INR) 1 wk avg 1/4 wk (%) Company CMP (INR) 1 wk avg 1/4 wk (%) Company CMP (INR) 1 wk avg 1/4 wk (%)

GUJARAT GAS CO 594 1,280,553 191.4 MOTILAL OSWAL 259 271,523 171.4 ICVL CHEMICALS L 195 1,518 282.9

OBEROI REALTY 258 1,115,807 171.7 GULF OIL LUBRICA 505 547,895 150.6 TAKE SOLUTIONS 56 2,238,107 266.4

CROMPTON GREAVES 189 24,660,992 157.0 STRIDES ARCOLAB 911 1,177,743 141.8 TRIBHOVANDAS BHI 169 591,423 173.4

BERGER PAINTS 424 1,471,113 135.9 JET AIRWAYS IND 378 8,013,150 133.7 GOODYEAR INDIA 659 129,274 134.1

MRF LTD 34,281 26,418 81.6 SUN PHARMA ADV 200 1,301,477 124.1 ATUL AUTO LTD 556 1,010,260 127.5

Technicals Technicals Technicals Above 200 DMA Above 200 DMA Above 200 DMACompany CMP (INR) 200D Avg (%) Company CMP (INR) 200D Avg (%) Company CMP (INR) 200D Avg (%)

NATIONAL BUILDIN 800 429 85.3 BOMBAY BURMAH TR 457 182 151.2 ICVL CHEMICALS L 195 53 263.3

WHIRLPOOL OF IND 641 359 78.8 # CENTURY PLYBOARD 163 80 104.3 EXDON TRADING CO 308 85 259.4

AJANTA PHARMA 2,403 1,465 64.4 # JK TYRE & IND LT 639 319 99.5 VISAGAR POLYTEX 805 234 253.3

EICHER MOTORS 14,359 8,901 61.1 # GATI LTD 269 138 95.7 KAMALAKSHI FINAN 439 126 245.7

ASHOK LEYLAND 55 34 60.8 KITEX GARMENTS 523.7 285.6 82.3 SAFAL HERBS LTD 71 25 171.0

Below 200 DMA Below 200 DMA Below 200 DMACompany CMP (INR) 200D Avg (%) Company CMP (INR) 200D Avg (%) Company CMP (INR) 200D Avg (%)

JINDAL STEEL & P 142 250 (42.7) SUZLON ENERGY 13 19 (27.7) KAILASH AUTO FIN 12 33 (63.4)

JAIPRAKASH ASSOC 30 52 (42.2) PIPAVAV DEFENCE 35 47 (25.1) SKIL INFRASTRUCT 29 54 (47.6)

VEDANTA RESOURCE 681 972 (30.0) FUTURE RETAIL LT 85 113 (24.5) KAPPAC PHARMA 262 421 (38.2)

GMR INFRASTRUCTU 18 26 (27.3) JAYPEE INFRATECH 21 27 (22.6) ESS DEE ALUMINIU 352 539 (34.6)

CAIRN INDIA 260 326 (20.2) JAIPRAKASH POWER 13 17 (21.2) FINANCIAL TECHNO 188 270 (30.5)

Small Caps(US$100m-250m)

Large Caps(>US$1bn)

Mid Caps(US$250m-1bn)

Source: Bloomberg


Consumer

Company UpdateIndia I Equities

Key financials (YE Dec) CY12 CY13 CY14e CY15e CY16e

Sales (` m) 83,023 90,619 102,460 116,038 131,634

Net profit (` m) 11,006 11,340 13,364 15,584 18,158

EPS (`) 114.2 117.6 138.6 161.6 188.3

Growth (%) 9.6 3.0 17.8 16.6 16.5

PE (x) 55.4 53.8 45.6 39.1 33.6

PBV (x) 31.1 23.6 18.5 14.6 11.5

RoE (%) 67.2 49.9 45.4 41.7 38.3

RoCE (%) 49.0 35.7 35.9 39.0 40.8

Dividend yield (%) 0.8 0.8 0.9 0.9 1.0

Net gearing (%) 75.2 39.0 3.9 (21.6) (41.8)

Source: Company, Anand Rathi Research

`

Rating: Buy Target Price: `7,124 Share Price: `6,325

Key data NEST IN / NEST.BO52-week high / low `6624 / `4536Sensex / Nifty 28047 / 83903-m average volume US$1.2m Market cap `609bn / US$10bnShares outstanding 96m

Shareholding pattern (%) Sep ’14 Jun ’14 Mar ’14

Promoters 62.8 62.8 62.8 - of which, Pledged - - -Free Float 37.2 37.2 37.2 - Foreign Institutions 14.3 14.5 13.7 - Domestic Institutions 4.8 5.1 5.3 - Public 18.1 17.7 18.3

5 December 2014

Nestlé India

Green shoots visible; upgrading, to a Buy

Key takeaways

Improving revenue growth. In 3QCY14 Nestlé India reported 9% revenue growth. Domestic revenue was up 10% yoy, exports declined 3.9% yoy. Domestic revenue growth was the highest in the past nine years. The company said that better realisations helped drive domestic revenue growth. Nevertheless, despite the better realizations, because of the rupee depreciation curtailed coffee exports resulted in a drop in export revenue.

EBITDA margin steady. Higher raw material prices resulted in the gross margin dropping 110bps. However, slightly lower staff costs and other expenditure helped the company report a 70-bp higher EBITDA margin. On completion of major capex, depreciation was up just 1% yoy. Repayment of debt resulted in a 98% drop in interest cost. Other income also dropped, 19% yoy. The effective income-tax rate was down 70bps yoy. Net profit was up 16% yoy.

Focus on nutrition, health and wellness. In its recent management meet, the company was confident of building brands and a portfolio on the nutrition, health and wellness platform to deliver long-term profitable growth. Distribution expansion would drive volume growth and improve its marketing drives. While innovation and renovation would create sub-categories, we believe the margin would improve because of falling raw-material and crude-oil prices and internal cost efficiencies.

Our take. We have upgraded our recommendation on the stock to a Buy (from a Hold), with a revised target price of `7,124 (earlier `5,193). Our target is based on a target PE of 34x CY16e earnings (the mean PE of the past 14 years). We believe that, with better growth rates and return ratios, Nestlé India will be seen as a candidate for a re-rating. Risks. Higher raw-material prices and more-than-expected increase in competition.

Change in Estimates Target Reco

Estimates revision (%) CY14e CY15e

Revenues 2.6 0.0EBITDA (3.4) 1.2PAT 1.2 2.2

Relative price performance

NEST

Sensex

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Source: Bloomberg

5 December 2014 Nestle India – Green shoots visible; upgrading, to a Buy

Anand Rathi Research 2

Quick Glance – Financials and ValuationsFig 1 – Income statement (` m) Year-end: Dec CY12 CY13 CY14e CY15e CY16e

Net sales 83,023 90,619 102,460 116,038 131,634 Sales growth (%) 10.8 9.1 13.1 13.3 13.4 - Oper. expenses 64,765 71,228 80,311 90,687 102,859 EBIDTA 18,258 19,391 22,149 25,352 28,775 EBITDA margins (%) 22.0 21.4 21.6 21.8 21.9 - Interest 266 365 429 334 239 - Depreciation 2,772 3,300 3,900 4,255 4,517 + Other income 633 1,222 2,126 2,497 3,082 - Tax 4,847 5,609 6,582 7,676 8,943 Income tax rate 30.6 33.1 33.0 33.0 33.0 PAT 11,006 11,340 13,364 15,584 18,158 Extraordinary items (327) (169) - - -Minority Interest - - - - -Adjusted PAT 10,679 11,171 13,364 15,584 18,158 FDEPS (`/sh) 114.2 117.6 138.6 161.6 188.3 FDEPS Growth 9.6 3.0 17.8 16.6 16.5 Source: Company, Anand Rathi Research

Fig 3 – Cash-flow statement (` m) Year-end: Dec CY12 CY13 CY14e CY15e CY16e

Consolidated PAT 11,006 11,340 13,364 15,584 18,158 +Depreciation 2,772 3,300 3,900 4,255 4,517 Cash profit 13,778 14,640 17,264 19,839 22,675 - Incr./(Decr.) in WC 2,635 2,815 725 751 870 Operating cash flow 16,937 17,949 17,990 20,590 23,545 -Capex (9,744) (3,279) (3,000) (3,500) (3,500) Free cash flow 7,194 14,669 14,990 17,090 20,045 -Dividend (5,426) (5,462) (6,204) (6,768) (6,881) + Equity raised - - - - - + Debt raised 594 759 (4,750) (4,750) (4,750) -Investments 32 (2,214) (6,000) (5,000) (5,000) -Misc. items - - - - - Net cash flow 2,394 7,753 (1,965) 572 3,414 +Opening cash 3,513 5,907 7,494 5,529 6,101 Closing cash 5,907 13,661 5,529 6,101 9,514 Source: Company, Anand Rathi Research

Fig 5 – PE band

Nestle12x

18x

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Source: Bloomberg, Anand Rathi Research

Fig 2 – Balance sheet (` m) Year-end: Dec CY12 CY13 CY14e CY15e CY16e

Share capital 964 964 964 964 964 Reserves & surplus 17,020 22,723 29,883 38,699 49,975 Shareholders’ fund 17,984 23,688 30,847 39,663 50,939 Minority interest - - - - -Debt 20,752 23,829 19,079 14,329 9,579 Def Tax Liability 1,621 2,155 2,155 2,155 2,155 Capital employed 40,357 49,671 52,080 56,146 62,673 Fixed assets 35,484 36,640 35,740 34,985 33,968 Investments 4,903 9,755 15,755 20,755 25,755 of which, Liquid 4,903 9,755 15,755 20,755 25,755 Working capital (2,399) (4,218) (4,943) (5,694) (6,564)Cash 2,370 7,494 5,529 6,101 9,514 Capital deployed 40,357 49,671 52,080 56,146 62,673 Net Debt 15,101 8,735 (50) (10,372) (23,536)W C turn (%) (2.9) (4.7) (4.8) (4.9) (5.0)Book Value (`/sh) 203.3 268.0 342.3 433.7 550.7 Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ `6,325 Year-end: Dec CY12 CY13 CY14e CY15e CY16e

P/E (x) 55.4 53.8 45.6 39.1 33.6 P/B (x) 31.1 23.6 18.5 14.6 11.5 EV/Sales (x) 7.5 6.8 6.1 5.3 4.7 EV/EBITDA (x) 34.0 32.0 28.0 24.5 21.5 RoAE (%) 67.2 49.9 45.4 41.7 38.3 RoACE (%) 49.0 35.7 35.9 39.0 40.8 Dividend yield (%) 0.8 0.8 0.9 0.9 1.0 Dividend payout (%) 42.5 41.2 39.7 37.1 32.4 RM to sales (%) 45.5 45.5 45.2 45.0 44.9 Ad spend to sales (%) 4.3 4.4 4.4 4.4 4.4 EBITDA growth (%) 17.6 6.2 14.2 14.5 13.5 EPS growth (%) 9.6 3.0 17.8 16.6 16.5 PAT margin (%) 13.3 12.5 13.0 13.4 13.8 FCF/EPS 65.4 129.4 112.2 109.7 110.4 OCF/Sales 20.4 19.8 17.6 17.7 17.9 Source: Company, Anand Rathi Research

Fig 6 – Revenue break-up

Prepared dishes & Cooking aids

28%

Chocolate & confectionery

14%

Beverages14%

Milk Production & Nutritional Products

44%

Source: Company



Result Highlights Fig 7 – Estimates vs Actuals (` m) 3QCY14e 3QCY14 Change (%)

Net Sales 26,301 25,578 (2.7)

EBITDA 5,276 5,419 2.7

EBITDA Margin (%) 20.1 21.2

PAT 3,197 3,275 2.4

PAT Margin (%) 12.2 12.8

Source: Company

Fig 8 – Revenue growth rates

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Revenues Growth (RHS) Source: Bloomberg, Company, Anand Rathi Research

Fig 9 – EBITDA margins

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Fig 10 – Net profit growth

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Domestic revenue growth rates moving up

Every quarter for the past 9-10, the company’s domestic revenue growth rate has been better. Its 10% domestic revenue growth was the highest of the past nine quarters. We believe that, with the improving urban economy, its domestic revenue growth rate would rise.

Fig 11 – Domestic revenue growth

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Domestic Exports Source: Bloomberg, Company, Anand Rathi Research

Management meet takeaway

In the recent management meet, senior management sounded confident of building brands and portfolio around the nutrition, health and wellness platform for long-term profitable growth. The distribution expansion would drive volume growth and widen the company’s market reach. While innovation and renovation will create sub-categories, we believe that the margin would expand due to falling raw-material and crude-oil prices, and internal cost efficiencies.

We see the focus on the nutrition and wellness category bearing fruit in the near future as it is expected to grow at double digits (by volume). Nestlé India’s focus on sub-segmentation sharply focusing on strengthening relations with medical practitioners (current coverage: 70,000 doctors) would lead to growth in its infant nutrition division. However, it would also benefit as the competition is expected to be left behind as the company’s reach and distribution become more complex.

We have factored in a rebound in sales of the chocolates and confectionery,



and of the prepared dishes segments in coming months.

The management commented that the portfolio rationalisation was over and may lead to a slight re-alignment. With the government’s focus on bringing down inflation, we believe that inflation will slide; this would help expand the company’s margins.

Underperformance in the past three years

In the past three years the stock has sharply undershot the Sensex and the BSE FMCG. We believe that, with better growth rates and return ratios, it would outstrip the two in the next 2-3 years.

Fig 12 – Underperformed the BSE FMCG and the Sensex in the past three years

Nestle

BSE FMCG

Sensex

4,000

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8,000

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Source: Bloomberg, Anand Rathi Research

Valuation

We have upgraded our recommendation on the stock—from a Hold to a Buy, with a revised target price of `7,300 (earlier `5,193). Our target price is based on the target PE of 34x CY16e earnings (the mean PE of the past 14 years). We believe that, with better growth rates and return ratios, Nestlé India will prove ripe for a re-rating.

Fig 13 – Mean PE and Standard deviation

Mean

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Risks

Higher raw-material prices

More-than-expected competitive pressures.

Appendix Analyst Certification The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report. Important Disclosures on subject companies Rating and Target Price History (as of 4 December 2014)

Nestle

12 3

4

56 7

8

910

11

1213

14

15

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1,900

2,800

3,700

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5,500

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7,300

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8

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Date Rating TP (`)

Share Price (`)

1 12-Dec-08 Hold 1,495 1,360 2 6-May-09 Sell 1,520 1,758 3 4-Mar-10 Sell 2,003 2,631 4 1-Apr-10 Sell 2,075 2,712 5 23-Apr-10 Sell 2,416 2,865 6 2-Nov-10 Sell 2,905 3,536 7 24-Feb-11 Buy 4,096 3,443 8 27-Jun-11 Buy 4,550 3,934 9 8-Nov-11 Buy 5,100 4,418

10 4-Jan-13 Buy 5,634 4,942 11 9-Apr-13 Buy 5,106 4,471 12 10-May-13 Buy 5,582 4,870 13 31-Oct-13 Hold 5,750 5,595 14 17-Feb-14 Hold 5,380 5,075 15 2-Apr-14 Hold 5,193 4,860

The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.

Anand Rathi Ratings Definitions

Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below:

Ratings Guide Buy Hold Sell Large Caps (>US$1bn) >15% 5-15% <5% Mid/Small Caps (<US$1bn) >25% 5-25% <5%

Anand Rathi Research Ratings Distribution (as of 4 December 2014) Buy Hold Sell Anand Rathi Research stock coverage (196) 60% 27% 13%

% who are investment banking clients 4% 0% 0%

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India I Equities

Technology

Company Update

Key financials (YE Mar) FY13 FY14 FY15e FY16e FY17e

Sales (US$m) 366 412 465 528 600

Sales (`m) 19,834 25,048 27,939 31,646 35,967

Net profit (`m) 906 1,695 1,552 1,831 2,151

EPS (`) 44 82 75 89 104

Growth (%) -15 87 -8 18 17

PE (x) 17.2 9.2 10.0 8.5 7.2

PBV (x) 1.3 1.1 1.0 0.9 0.8

RoE (%) 8 13 10 11 12

RoCE (%) after tax 6 9 8 9 10

Dividend yield (%) 3 3 3 3 3


`

Rating: Buy Target Price: `980 Share Price: `668

Key data HGSL IN / HGSL.BO52-week high / low `736 / `429 Sensex / Nifty 28047 / 83903-m average volume US$0.5m Market cap `14bn / US$.23bn Shares outstanding 20.6m

Shareholding pattern (%) Sep ’14 Jun ’14 Mar’14

Promoters 67.91 68.02 68.05- of which, Pledged - - -Free Float 32.09 31.98 31.95 - Foreign Institutions 16.65 16.14 15.69 - Domestic Institutions 0.61 0.01 0.01 - Public 14.83 15.83 16.25

5 December 2014

Hinduja Global Solutions

SMAC helping BPM companies climb the value chain; Buy

Investor-day takeaways

Evolving role of BPM companies. The opportunity in business-process management (BPM) is an immense US$410bn; of that, outsourced customer care is US$60bn. Interestingly, SMAC has impacted BPM in two ways – 1) the way people interact with companies is changing in favour of non-voice next-gen offerings, leading to slower growth for voice, and 2) sharper company focus on consumers, resulting in greater volumes for BPM companies. The plus is that, with the move to enriched customer interaction, BPM companies also rise up the value chain, from a pure-cost focus to a cost-plus-experience-plus-revenue focus as some of these new technologies enabling BPM companies to improve the overall customer experience and, hence, cross selling. M&A strategy shifts to small niche firms. In the past, HGS has grown organically and inorganically (mostly to enter new markets). Now, its altered strategy is to acquire small but niche technologies (essentially startups): HGS will bring to these niche companies access to markets and clients. It believes that the strategic benefit that larger peers had due to investment-intensive platforms may no longer exist. It has operations in all the major regions and, hence, does not expect any large acquisitions. Significant growth expectations ahead. HGS is seeing increased traction in business – especially in the US. In Nov’14 its deal pipeline of an annualised contract value (ACV, US$643m) was up 39% from Apr’14, suggesting strong growth ahead. The growth would be driven by the healthcare sector (up 35% yoy in 2QFY15), for which the company has gradually moved up from cost-basis back-office work to outcome-oriented higher-value jobs. Our take. We believe that, given the significant acceleration in the business, HGS is poised for stronger growth in the next two years. Also, perceived risks like the switch to self service may not hold true as the company has been able to refresh its offerings accordingly and generate growth despite the transition. Hence, we retain our Buy recommendation. Risk. Slower-than-anticipated global recovery.


HGSL

Sensex

400

450

500

550

600

650

700

Dec-

13

Jan-

14

Feb-

14

Mar

-14

Apr-1

4

May

-14

Jun-

14

Jul-1

4

Aug-

14

Sep-

14

Oct

-14

Nov

-14

Dec-

14

Source: Bloomberg

5 December 2014 Hinduja Global Solutions – SMAC helping BPM companies climb the value chain; Buy


Quick Glance – Financials and ValuationsFig 1 – Income statement (` m) Year-end: Mar FY13 FY14 FY15e FY16e FY17e

Revenues (US$ m) 366 412 465 528 600 growth (%) 12 12 13 14 14Revenues (`m) 19,834 25,048 27,939 31,646 35,967 growth (%) 28 26 12 13 14Effective USD:INR 54.1 60.8 60.1 59.9 59.9 Cost of Revenues (13,412) (16,921) (18,934) (21,412) (24,646)SG&A (4,185) (4,908) (5,655) (6,192) (6,701)EBITDA 2,237 3,219 3,351 4,042 4,620 EBITDA margins (%) 11.3 12.9 12.0 12.8 12.8D&A (772) (862) (1,029) (1,219) (1,401)EBIT 1,465 2,357 2,322 2,823 3,219 EBIT margins (%) 7.4 9.4 8.3 8.9 8.9Other income 333 340 243 179 152 Tax (402) (614) (595) (765) (898)ETR (%) -30 -27 -28 -29 -29Minority Interest (53) 0 0 0 0 Net Profit 906 1,695 1,552 1,831 2,151 Net margins (%) 4.6 6.8 5.6 5.8 6.0EPS (`) 44 82 75 89 104 EPS growth (%) -15 87 -8 18 17Source: Company, Anand Rathi Research

Fig 3 – Cash-flow statement (` m) Year-end: Mar FY13 FY14 FY15e FY16e FY17e

Cash from Operations PBT 1,534 2,483 2,341 2,823 3,219 Operating Profit before WC 2,359 3,611 3,370 4,042 4,620 Chg. in Trade Receivables (857) (1,293) (603) (777) (907)Chg. in Other CA - - (243) (308) (358)Chg. in Trade Payables 280 620 211 190 236 Chg. in Other CL - - 89 94 98 Others including taxes (351) (587) (746) (931) (1,081)PBT 1,431 2,351 2,078 2,310 2,608 Cash from Investments

Cash from Investments (587) (1,537) (1,200) (1,300) (1,300)

Capex (834) - - - -

Acquisitions 1,518 (446) 224 179 152

Investments & Others 931 (1,345) (976) (1,121) (1,148)Cash from Financing Equity Issuance - 9 - - -Change in Borrowings (1,764) 877 (757) (757) (757)Dividends including DDT (480) (638) (485) (490) (494)Others (438) (388) (417) (406) (321)Net Cash from Financing (2,682) (136) (1,659) (1,653) (1,573)Source: Company, Anand Rathi Research

Fig 5 – Key Parameters Year-end: Mar FY13 FY14 FY15e FY16e FY17e

Employees (EoP) 23,100 24,669 28,763 31,642 34,639Rev/Employee (US$) 15,865 16,692 16,168 16,697 17,334 EBITDA/Employee (`) 96,848 130,483 116,496 127,742 133,372 Source: Company, Anand Rathi Research

Fig 2 – Balance sheet (` m) Year-end: Mar FY13 FY14 FY15e FY16e FY17e

Sources of Funds 18,128 21,176 21,486 22,071 22,970 Share capital 206 206 206 206 206 Reserves & Surplus 12,149 14,314 15,382 16,723 18,380 S/Hs Equity 12,355 14,521 15,588 16,929 18,586 Minority Interest 0 0 0 0 0 Total Debt 5,508 6,294 5,537 4,780 4,023 Other LT Liabilities 266 361 361 361 361 Application of Funds 18,128 21,176 21,486 22,071 22,970 Net Fixed Assets 2,997 3,777 3,948 4,028 3,928 Intangible/Goodwill 6,458 7,126 7,126 7,126 7,126 Other LT Assets 1,255 1,511 1,663 1,828 2,012 Current Assets 9,952 11,884 12,172 12,793 13,945 Accounts Receivable 3,600 4,692 5,295 6,072 6,979 Unbilled Revenues 872 645 658 671 684 Cash & Investments 4,062 4,551 3,994 3,529 3,417 Other CAs 1,418 1,995 2,226 2,521 2,865 Current Liabilities 2,535 3,121 3,421 3,705 4,039 Accounts Payable 815 1,338 1,549 1,739 1,975 Unearned revenue 0 0 0 0 0 Other CLs 1,720 1,783 1,872 1,965 2,064 Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ `668 Year-end: Mar FY13 FY14 FY15e FY16e FY17e

Return Ratios RoCE % (post-tax) 6 9 8 9 10RoIC % (post-tax) 8 11 10 11 12RoE % 8 13 10 11 12Cash Ratios CFO:Sales 7 9 7 7 7Receivable days (incl. unbill) 82 78 78 78 78 Payable days 17 22 23 23 23 DuPont Analysis RoE % 8 13 10 11 12Operating eff. (EBIT mgn %) 7 9 8 9 9Invest eff. (PBT/EBIT %) 93 98 92 92 95Tax Burden % (PAT/PBT) 67 73 72 71 71Total Asset turnover 107 127 131 145 160Leverage % (Assets/Equity) 156 146 142 134 127Valuation ratios P/E (x) 17.2 9.2 10.0 8.5 7.2 P/B (x) 1.3 1.1 1.0 0.9 0.8 EV/EBITDA (x) 7.7 5.4 5.2 4.3 3.7 EV / Operating CF (x) 12.1 7.4 8.3 7.5 6.6 Source: Company, Anand Rathi Research

Fig 6 – Assumptions Year-end: Mar FY13 FY14 FY15e FY16e FY17e

Chg in Realization NA 0 1 2 4No. of seats 23,036 26,385 28,436 34,246 33,183 US$:` 54.1 60.8 60.1 59.9 59.9 Source: Company, Anand Rathi Research

5 December 2014 Hinduja Global Solutions – SMAC helping BPM companies climb the value chain; Buy


Factsheet Fig 7 – Revenue by delivery location (%) 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15

North America 28 29 25 27 27

Canada 23 23 23 19 18

Continental Europe 9 9 11 11 10

India 25 25 25 26 28

Philippines 15 15 17 17 17


Fig 8 – Revenue by vertical (%) 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15

BFSI 8 8 8 8 7

Telecoms 34 32 31 29 29

Hi-Tech/PES(cons. elec) 17 16 15 15 13

Life Sciences(chem, biotech & ins) 30 30 32 35 36

Media and Entertainment 7 7 7 7 6

Others 6 6 6 6 8


Fig 9 – Client Concentration LTM (%) 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15

Top-client 13 13 14 14 15 Top-5 clients 45 47 47 49 49 Top-10 clients 62 63 62 63 62 Top-20 clients 81 80 78 77 76


Fig 10 – Revenue by currency exposure (%) 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15

North America 60 59 58 62 63 Canada 23 23 22 19 18 Continental Europe 9 9 11 11 11 India 8 8 9 8 8


Fig 11 – Workforce Spread 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15

North America 10 10 10 10 9

Canada 12 11 12 10 9

Continental Europe 3 3 3 3 3

India 60 59 58 59 60

Philippines 15 17 17 18 19

Total 24,669 25,676 26,036 26,803 28,120


Fig 12 – Client details 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15

Active Clients 133 135 139 141 143

Revenue per Active Client (US$ m) 0.8 0.8 0.8 0.8 0.8


Appendix Analyst Certification The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report. Important Disclosures on subject companies Rating and Target Price History (as of 4 December 2014)

HGSL

1

450

500

550

600

650

700

Jan-

14

Feb-

14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-1

4

Aug

-14

Sep

-14

Oct

-14

Nov

-14

Dec

-14

Date Rating TP (`)

Share Price (`)

1 28-Oct-14 Buy 980 651

The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.



Ratings Guide Buy Hold Sell Large Caps (>US$1bn) >15% 5-15% <5% Mid/Small Caps (<US$1bn) >25% 5-25% <5%

Anand Rathi Research Ratings Distribution (as of 4 December 2014) Buy Hold Sell Anand Rathi Research stock coverage (196) 60% 27% 13%

% who are investment banking clients 4% 0% 0%





Key financials (YE Mar) FY10 FY11 FY12 FY13 FY14

Net Interest Income(`m) 396 601 571 856 943 Net profit (`m) 341 444 495 555 585 EPS (`) 4.2 5.5 6.1 6.9 7.2 Growth (%) 17.6 30.3 11.4 12.2 5.4 PE (x) 17.3 13.3 11.9 10.6 10.1 PABV (x) 1.9 1.7 1.6 1.4 1.4 RoE (%) 11.5 13.7 13.8 13.9 13.7 RoA (%) 4.9 5.5 4.7 4.3 4.3 Dividend yield (%) 1.6 1.6 1.6 1.6 1.6 Net NPA (%) - - - - -


BFSI

Visit noteIndia I Equities

5 December 2014

Tourism Finance Corporation of India

Consolidation phase over

Key takeaways

Management change driving robust loan growth. Between FY12 and FY14, the Tourism Finance Corporation of India (TFCI) consolidated its business with a 5.9% asset CAGR. Under the new MD, Mr. Sangar, however, TFCI is gearing up to benefit from an upswing in tourism. Disbursements for 1HFY15 are `3.5bn, equivalent to disbursements for all of FY14. The strong disbursement growth stands in stark contrast to bank lending to the hotel segment, which at end-Sep’14 was down 6% from a year ago. Over 80% of TFCI’s loans comprise term and project lending to the hotels sector. It has expanded its repertoire to include tourism and entertainment-related projects. With its dominance in the tourism sector, management believes a robust, 30%, loan growth is possible in the next 2-3 years.

Healthy credit appraisal in hotel finance drives stable asset quality. The hotels sector has been recently under stress. However, led by the large database at its disposal and its strong grasp of the mechanics of the hotels sector, TFCI has developed a robust credit-appraisal system. As a result, the NBFC has maintained sound asset quality, with GNPA at 0.2% (Mar’14), and a negligible restructuring book of about `0.3bn.

Strong return ratios, high capital adequacy. A strong niche in hotel finance and low borrowing costs have driven TFCI’s high, 3.5%, spreads. TFCI also operates on a lean-cost model. It has an employee base of 35, which has resulted in cost-income coming at a low 17%. The combination of high spreads, low-cost operating model and steady asset quality has driven the high RoA of more than 4.3% in the last six years.

Valuations. With a focused management, strong underwriting skills and high return ratios, TFCI is well placed to benefit from the expected upswing in the tourism sector. At the CMP, the stock trades at 1.4x FY14 BV.

Rating: Non-rated Target Price: n.a Share Price: `73


Source: Bloomberg

TFCI

Bankex

15

25

35

45

55

65

75

Dec

-13

Feb-

14

Apr-1

4

Jun-

14

Aug-

14

Oct

-14

Dec

-14

Key data TFCI IN / TFCI.BO52-week high / low `74 / `21Sensex / Nifty 28563 / 85643-m average volume US$1.1m Market cap `6bn / US$97mShares outstanding 80.7m

Shareholding pattern (%) Sep ’14 Jun ’14 Mar ’14

Promoters 66.3 66.9 66.8 - of which, Pledged - - -Free Float 33.7 33.1 33.1 - Foreign Institutions 0.5 0.5 0.2 - Domestic Institutions 0.5 0.3 0.3 - Public 32.7 32.3 32.6

7 December 2014 The Tourism Finance Corporation of India – Consolidation phase over


Quick Glance – Financials and ValuationsFig 1 – Income statement (` m) Year-end: Mar FY10 FY11 FY12 FY13 FY14

Net interest income 396 601 571 856 943 NII growth (%) 15.2 51.7 (5.0) 49.8 10.1 Non-interest inc 147 213 199 83 122 Total income 544 814 771 939 1,065 Total Inc growth (%) 14.0 49.7 (5.3) 21.8 13.4 Oper. expenses 83 126 140 154 178 Operating profit 461 688 631 784 887 Oper. profit growth (%) 17.4 49.3 (8.3) 24.3 13.0 Provisions 0 - - 60 46 PBT 461 688 631 724 841 Tax 120 244 136 169 256 PAT 341 444 495 555 585 PAT growth (%) 17.6 30.3 11.4 12.2 5.4 FDEPS (`/sh) 4.2 5.5 6.1 6.9 7.2 DPS (`/sh) 1.2 1.2 1.2 1.2 1.2Source: Company, Anand Rathi Research * not meaningful

Fig 2 – Balance sheet (` m) Year-end: Mar FY10 FY11 FY12 FY13 FY14

Share capital 807 807 807 807 807 Reserves & surplus 2,262 2,594 2,966 3,393 3,558 Net worth 3,069 3,401 3,773 4,200 4,365 Borrowings 3,894 4,808 7,586 8,094 8,621 Current liab & prov 322 677 590 1,626 439 Total liabilities 7,286 8,891 11,959 13,920 13,425 Advances 5,856 7,938 10,383 11,634 11,729 Investments 752 530 988 1,808 1,349 Cash & bank bal 324 86 281 108 237 Fixed & other assets 354 337 307 370 110 Total assets 7,285 8,891 11,959 13,920 13,425No. of shares (m) 80.7 80.7 80.7 80.7 80.7 Borrowing growth (%) 8.4 23.5 57.8 6.7 6.5 Loans growth (%) 27.7 35.6 30.8 12.0 0.8 Source: Company, Anand Rathi Research

Fig 3 – Key ratios @ `___ Year-end: Mar FY10 FY11 FY12 FY13 FY14

NIM (%) 6.2 8.0 5.7 6.8 7.1 Other inc. / total inc. (%) 27.1 26.2 25.9 8.8 11.5 Cost-income (%) 15.2 15.5 18.1 16.5 16.7 Provision coverage (%) 100.0 100.0 100.0 100.0 100.0 Dividend payout (%) 28.4 21.8 19.6 17.4 16.6 Borrowings-loans (%) 66.5 60.6 73.1 69.5 73.4 Investment-deposit (%) n.a n.a n.a n.a n.a Gross NPA (%) 2.6 0.4 0.5 0.1 0.2 Net NPA (%) - - - - -BV (`) 38.0 42.1 46.7 52.0 54.1 Adj BV (`) 38.0 42.1 46.7 52.0 54.1 CAR (%) 58.2 50.7 40.5 37.2 39.9 RoE (%) 11.5 13.7 13.8 13.9 13.7 RoA (%) 4.9 5.5 4.7 4.3 4.3 Dividend yield (%) 1.6 1.6 1.6 1.6 1.6 Source: Company, Anand Rathi Research

Fig 4 – Bank exposure to hotels sector – slowing down

Source: RBI, Anand Rathi Research.

Fig 5 – TFCI sanction breakup

Source: Company, Anand Rathi Research .

Fig 6 – Disbursement trend

Source: Company,Anand Rathi research

Appendix Analyst Certification The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report. The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.



Ratings Guide Buy Hold Sell Large Caps (>US$1bn) >15% 5-15% <5% Mid/Small Caps (<US$1bn) >25% 5-25% <5% Anand Rathi Research Ratings Distribution (as of 3 September 2014) Buy Hold Sell Anand Rathi Research stock coverage (196) 60% 27% 13% % who are investment banking clients 4% 0% 0%















india morning bell 5th december 2014

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