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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

India I Equities Country

Daily

7 March 2014

India Morning Bell

All the latest research and data

Persistent Systems - CloudSQUADS: Moving up the value chain. CloudSQUADS, founded in 2009, is predominantly into strategy consulting for organizations, helping them build brands and conduct marketing campaigns on the internet through various social/collaboration platforms. While most companies are becoming more sensitive to their web presence (social networks, forums, blogs, review sites), this is more important for consumer-facing organizations. The Persistent Systems stock quotes at 18.1x FY14e EPS and 9.2x FY14e EBITDA. But, considering the emerging business growth prospects and the offerings portfolio that the company is accumulating, the stock does not look so rich to us.

Mcleod Russel India - Overseas green tea acquisition; Buy. Mcleod Russel recently purchased for $0.8m a factory in Vietnam with capacity to process 0.6m kg of green tea. Though small, this acquisition is a significant development for the company as it has till now manufactured and processed only black tea in India and overseas. At the ruling price of `291, the stock trades at a P/E and an EV/EBIDTA of 9.3x and 6.7x, respectively, discounting its FY14e consolidated figures. We have maintained our price target of `344 and our Buy recommendation on the stock in light of the improving financial profile.

Sensex: 21514

Nifty: 6401

India: Forex reserves accumulated in the quarter

-9

-6

-3

0

3

6

9

12

Dec

-06

Jun-

07

Dec

-07

Jun-

08

Dec

-08

Jun-

09

Dec

-09

Jun-

10

Dec

-10

Jun-

11

Dec

-11

Jun-

12

Dec

-12

Jun-

13

Dec

-13

(% o

f GD

P)

Current account Capital account

Source: The RBI

Ch

art

of

the

da

y

Markets 6 Mar ’14 1 Day YTD Sensex 21514 1.1% 1.6%Nifty 6401 1.1% 1.5%Dow Jones 16422 0.4% -0.9%S & P 500 1877 0.2% 1.6%FTSE 6788 0.2% 0.6%Nikkei* 15235 0.7% -6.5%Hang Seng* 22730 0.1% -2.5%

Volumes (US$m) 6 Mar ’14 1 Day Avg '14Cash BSE 440 15.5% 335Cash NSE 2,136 10.7% 1,670Derivatives (NSE) 24,211 25.3% 22,592

Flows (US$m) 6 Mar ’14* MTD YTD FII – Cash Buy 661 1,995 19,827Sell 453 1,604 19,307Net 208 392 596FII - Derivatives Buy 3,478 10,453 134,928Sell 3,048 9,567 132,865Net 430 885 2,063DII – Cash Buy 162 945 2,797Sell 255 871 3,542Net -93 74 -745

Others 6 Mar ’14 1 Day YTD Oil Brent (US$/bbl)* 108.2 0.1% -1.9%Gold (US$/oz)* 1,350.1 -0.1% 12.0%Steel (US$/MT) 595.0 0.0% 1.7%`/US$ 61.12 0.0% 1.1%US$/Euro* 1.39 0.0% -0.8%Yen/US$* 103.01 0.1% 2.2%Call Rate 7.05% -145.bps -170.bps10-year G-Secs 8.79% .bps -3.2bpsEMBI spreads 340.45 -3.6bps 6.2bps@7:30am *Provisional Source: BSE, Bloomberg

7 March 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 (%)

JUST DIAL LTD 1682 19.2 28.2 ASTRAZENECA PHAR 1176 39.2 58.1 NCC LTD 31 26.6 23.5

HINDALCO INDS 116 17.6 11.0 MONSANTO INDIA 1712 28.3 47.5 MPS LTD 395 22.2 61.5

BHARTI INFRATEL 202 17.2 21.5 TATA ELXSI LTD 657 26.8 62.0 DHANUKA AGRITECH 246 21.7 32.3

BANK OF BARODA 613 13.9 12.8 TATA INV CORP 488 18.4 25.7 SREI INFRASTRUCT 27 20.6 25.3

ABB INDIA LTD 796 12.4 32.3 BASF INDIA LTD 767 17.5 24.6 TATA SPONGE IRON 507 18.1 37.4

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 (%)

GLAXOSMITHKLINE 2745 (9.9) (8.0) JAIPRAKASH POWER 14 (7.5) 6.2 UNNO INDUS LTD 17 (27.4) (37.3)

HCL TECH LTD 1462 (7.0) 4.9 GODFREY PHILLIPS 3209 (5.9) 16.3 LUMINAIRE TECH 22 (18.9) (35.7)

WNS HOLDINGS-ADR 1213 (5.7) (7.8) SUN PHARMA ADV 162 (5.4) 1.2 GLOBAL INFRATECH 51 (11.9) (39.7)

NESTLE INDIA LTD 4777 (4.4) (4.7) DISH TV INDIA 48 (5.2) 2.9 NITIN FIRE PROT 52 (10.9) (10.3)

JSW ENERGY LTD 50 (3.4) 13.5 FINOLEX INDUS 185 (4.8) 18.0 UTTAM VALUE STEE 7 (9.5) 13.6

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 (%)

BHARAT HEAVY ELE 167 27,252,436 158.0 VST INDS LTD 1,580 62,015 279.3 JAYBHARAT TEXTIL 29 10 300.0

NESTLE INDIA LTD 4,777 223,368 157.5 BASF INDIA LTD 767 181,316 248.9 MAHARASHTRA SEAM 171 248,362 251.3

TATA CHEMICALS 290 1,251,457 152.4 HT MEDIA LTD 79 2,890,067 223.7 TIMKEN INDIA LTD 198 811,257 240.0

CONTAINER CORP 803 51,899 141.7 SHRIRAM CITY UNI 970 30,735 209.6 STYROLUTION ABS 418 31,802 233.0

BHARAT ELECTRON 968 98,763 139.8 PHOENIX MILLS 232 73,934 206.2 HIKAL LTD 482 51,915 216.6

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 (%)

AUROBINDO PHARMA 535 275 94.7 PARAG SHILPA INV 535 168 221.2 HPC BIOSCIENCES 459 129 255.4

INFO EDGE 635 397 60.3 # TATA ELXSI LTD 657 267 147.1 LIFELINE DRUGS 187 65 189.0

APOLLO TYRES LTD 129 82 58.4 # MONSANTO INDIA 1,712 751 128.4 MPS LTD 395 167 136.4

MUTHOOT FINANCE 168 113 49.0 # PRITI MERCANTILE 702 335 109.5 YBRANT DIGITAL L 14 7 117.7

BHARAT FORGE CO 398 278 42.8 VAIBHAV GLOBAL L 733.9 367.7 100.2 NUCLEUS SOFTWARE 234 109 114.2

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

NTPC LTD 114 140 (18.4) STRIDES ARCOLAB 371 722 (48.7) INDIAN INFOTECH 8 30 (73.9)

UNION BANK INDIA 109 133 (17.3) JET AIRWAYS IND 218 332 (34.2) LUMINAIRE TECH 22 48 (55.2)

IDEA CELLULAR 132 157 (16.4) UNITECH LTD 11 17 (32.3) UNNO INDUS LTD 17 33 (48.8)

RELIANCE COMMUNI 111 131 (15.7) MMTC LTD 47 66 (28.2) GLOBAL INFRATECH 51 85 (40.1)

CANARA BANK 228 266 (14.0) BANK OF MAHARASH 31 40 (21.5) SPICEJET LTD 14 21 (35.9)

Small Caps(US$100m-250m)

Large Caps(>US$1bn)

Mid Caps(US$250m-1bn)

Source: Bloomberg


Technology

Company UpdateIndia I Equities

Key financials (YE Mar) FY10 FY11 FY12 FY13 FY14

Sales (US$m) 127 170 207 238 273

Sales (`m) 6,012 7,758 10,003 12,945 16,622

Net profit (`m) 1,149 1,397 1,418 1,876 2,521

EPS (`) 36 37 37 48 63

Growth (%) 69% 4% 0% 31% 30%

PE (x) 39.8 32.7 32.2 24.4 18.1

PBV (x) 7.2 6.1 5.4 4.5 3.8

RoE (%) 22% 20% 18% 20% 23%

RoCE (%) after tax 20% 15% 15% 19% 20%

Dividend yield (%) 0% 0% 0% 0% 0%

Source: Company, Anand Rathi Research

7 March 2014

Persistent Systems

CloudSQUADS: Moving up the value chain

Key takeaways

Introduction to CloudSQUADS: CloudSQUADS, founded in 2009, is predominantly into strategy consulting for organizations, helping them build brands and conduct marketing campaigns on the internet through various social/collaboration platforms. While most companies are becoming more sensitive to their web presence (social networks, forums, blogs, review sites), this is more important for consumer-facing organizations. An important feature of CloudSQUADS’ offering is its ability to gather and analyze unstructured internet data and influence future product pipelines of client organizations, thus rendering them more agile to changing customer preferences/wants. How it works: CloudSQUADS captures client-related data from FaceBook, Twitter, forums, blogs and similar online customer communities and analyses them to come out with specific recommendations for its clients. The company has built connectors (CloudSQUADS IP but co-owned with partners such as Lithium, Salesforce, Jive, BazaarVoice, etc.) to push this unstructured data into client organization’s databases for analyses. Clients can see live customized dashboards to monitor and analyze their brand’s social presence. The business model: Revenue for the company is recurring as the client engagements are not project based. 80% of the company’s revenues are service-linked while the balance is IP-linked. CloudSQUADS has 18-20 employees servicing 70 clients. This suggests that it is highly profitable and free-cash generative. Its growth is not linearly related to employees as automation levels are quite high in the business. CloudSQUADS has no debt on its balance sheet. Our take. The Persistent Systems stock quotes at 18.1x FY14e EPS and 9.2x FY14e EBITDA. But, considering the emerging business growth prospects and the offerings portfolio that the company is accumulating, the stock does not look so rich to us. Risks: Execution risks.

Rating: Not Rated

Share Price: `1,145

Key data PSYS IN / PERS.BO52-week high / low `1220/ `477Sensex / Nifty 21502 / 64013-m average volume US$1.3m Market cap `47bn / US$0.76bnShares outstanding 40m

Shareholding pattern (%) Dec ’13 Sep ’13 Jun ’13

Promoters 38.96 38.96 38.96 - of which, Pledged - - -Free Float 61.04 61.04 61.04 - Foreign Institutions 18.26 15.28 14.84 - Domestic Institutions 18.78 21.23 19.31 - Public 24.00 24.53 26.89

Relative price performance

Sensex

PSYS

400

600

800

1,000

1,200

Mar

-13

May

-13

Jul-1

3

Sep-

13

Nov

-13

Jan-

14

Mar

-14

Source: Bloomberg

7 March 2014 Persistent Systems – CloudSQUADS: Moving up the value chain

Anand Rathi Research 2

Quick Glance – Financials and ValuationsFig 1 – Income statement (`m) Year-end: Mar FY10 FY11 FY12 FY13 FY14E

Revenues (US$m) 127 170 207 238 273 growth (%) 0% 34% 22% 15% 15%Revenues (`m) 6,012 7,758 10,003 12,945 16,622 growth (%) 1% 29% 29% 29% 28%Effective USD: ` 47.2 45.6 48.2 54.4 60.9 Cost of Revenues (3,357) (4,723) (5,922) (7,311) (9,408)SG&A (1,193) (1,453) (1,757) (2,283) (2,868)EBITDA 1,462 1,583 2,324 3,352 4,346 EBITDA margins (%) 24.3% 20.4% 23.2% 25.9% 26.1%D&A (335) (424) (611) (783) (1,028)EBIT 1,127 1,159 1,713 2,569 3,317 EBIT margins (%) 18.7% 14.9% 17.1% 19.8% 20.0%Other income 112 344 256 61 143 Tax (91) (106) (551) (754) (939)ETR (%) -7% -7% -28% -29% -27%Minority Interest - - - - -Net Profit 1,149 1,397 1,418 1,876 2,521 Net margins (%) 19.1% 18.0% 14.2% 14.5% 15.2%EPS (`) 35.7 37.0 37.0 48.4 63.0 EPS growth (%) 69% 4% 0% 31% 30%Source: Company, Anand Rathi Research

Fig 3 – Cash-flow statement (`m) Year-end: Mar FY10 FY11 FY12 FY13 FY14E

Cash from Operations PBT 1,240 1,504 1,969 2,630 3,461 Operating Profit before WC 1,360 1,869 2,422 3,229 4,213 Chg in Trade Receivables (397) (274) (417) (609) (804)Chg in Other CA 9 15 (36) (160) (43)Chg in Loans & Advances (62) 54 17 (82) (35)Chg in Other CL 576 253 (168) 381 1,173 Others including taxes (248) (342) (381) (596) (939)Net Cash from Operations 1,239 1,576 1,436 2,163 3,564 Cash from Investments Capex (475) (970) (1,504) (1,135) (1,800)Acquisitions - - - - -Investments & Others (666) (1,559) 513 (576) 137 Net Cash from Investing (1,142) (2,529) (992) (1,711) (1,663)Cash from Financing Equity Issuance 1,246 (45) - - -Change in Borrowings - - 7 8 9 Dividends including DDT (27) (280) (233) (395) (605)Others 417 (387) (15) - -Net Cash from Financing 1,636 (713) (241) (387) (596)Source: Company, Anand Rathi Research

Fig 5 – Key Parameters Year-end: Mar FY10 FY11 FY12 FY13 FY14E

Employees (EoP) 4,662 6,360 6,628 6,970 7,676

Rev/Employee(US$) 27,306 26,766 31,290 34,121 35,555

EBITDA/Employee (`) 313,681 248,907 350,638 480,871 566,125 Source: Company, Anand Rathi Research

Fig 2 – Balance sheet Year-end: Mar FY10 FY11 FY12 FY13 FY14E

Sources of Funds 6,435 7,667 8,483 10,836 12,761 Share capital 400 400 400 400 400 Reserves & Surplus 5,990 7,071 8,005 9,783 11,699 S/Hs Equity 6,390 7,471 8,405 10,183 12,099 Minority Interest - - - - -Total Debt 0 0 7 14 23 Other LT Liabilities 45 196 71 639 639 Application of Funds 6,435 7,667 8,483 10,836 12,761 Net Fixed Assets 1,658 1,688 2,475 2,800 2,892 Intangible/Goodwill 175 573 722 702 1,382 Other LT Assets 492 762 866 1,562 1,562 Current Assets 5,905 6,080 6,081 7,665 9,991 Accounts Receivable 1,363 1,582 2,033 2,509 3,313 Unbilled Revenues 120 105 141 301 530Cash & Investments 3,479 3,500 3,415 4,374 5,818 Other CAs 1,063 997 633 782 860 Current Liabilities 1,796 1,436 1,660 1,893 3,066 Accounts Payable 398 406 289 319 442 Unearned revenue 84 96 89 176 590Other CLs 1,397 1,030 1,371 1,574 2,624 Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ `1,145 Year-end: Mar FY10 FY11 FY12 FY13 FY14

Return Ratios RoCE % (post-tax) 20% 15% 15% 19% 20%RoIC % (post-tax) 36% 30% 27% 32% 36%RoE % 22% 20% 18% 20% 23%Cash Ratios CFO:Sales 21% 20% 14% 17% 21%AR days (incl. unbilled) 83 74 74 71 73 AP days 32 24 14 12 13 Dupont Analysis RoE % 22% 20% 18% 20% 23%EBIT margin (%) 19% 15% 17% 20% 20%PBT/EBIT (%) 110% 130% 115% 102% 104%(PAT/PBT (%) 93% 93% 72% 71% 73%Total Asset turnover 116% 110% 124% 134% 141%Assets/Equity (%) 100% 102% 102% 104% 106%Valuation ratios P/E (x) 39.8 32.7 32.2 24.4 18.1 P/B (x) 7.2 6.1 5.4 4.5 3.8 EV/EBITDA (x) 27.3 25.2 17.2 11.9 9.2 EV / Operating CF (x) 28.4 26.5 22.2 13.9 11.0 Source: Company, Anand Rathi Research

Fig 6 – Key Parameters Year-end: Mar FY10 FY11 FY12 FY13 FY14E

IP-Led Revenue Contri % 7% 9% 9% 17% 18%Utilization (EoP) % 77% 71% 70% 73% 71%US$:Rs 47.2 45.6 48.2 54.4 60.9 Source: Company, Anand Rathi Research



Synergies with Persistent Systems: Persistent has so far worked on the back-end of collaboration-based solutions, helping clients implement or develop collaboration platforms for employees and customers but have so far focused on the engineering portion. With CloudSQUADS, they have added capabilities on the front end, thus offering complete packaged solutions (collaboration, analytics and insights) to clients and helping them build online communities, run analytics and develop insights from these communities, and influence their product pipelines according to changing customer preferences. CloudSQUADS wanted to scale up fast and Persistent was the preferred option because of its focus on SMAC.

The Clientele

CloudSQUADS has 70 clients, including some prominent consumer-facing businesses such as Aruba Networks (marketing networking products) and Inspire (healthcare communities) and some technology companies such as Siemens and Navis (which builds technology solutions for terminal operators). The company also counts GE, Comcast, BT, Salesforce, Genesys, Logitech, Sandisk, Autodesk, Etrade and Intuit as its customers.

We present here two cases to demonstrate how CloudSQUADS has helped client organizations get better insights and actionable ideas by leveraging on the power of crowd-sourcing and social analytics.

Case Studies

Case 1: Siemens

The problem

Siemens operates across various Internet social channels. It wanted to engage with customers more actively. So far, it was more focused on search-engine optimization and web analytics. The scope of this assignment included cost savings through fewer calls and improved revenues if possible through a community.

CloudSQUADS role

The company started gathering and collating requirements from various stakeholders. It then mapped final requirements (defining the scope of the project) with platform capabilities to determine the best software product vendor for Siemens. Together, Siemens and CloudSQUADS decided to go in for the Lithium platform. At present, the company is deploying the platform and communities for their unified experience. Once it is implemented, Siemens intends to be more responsive to customer conversations on these platforms and adjust its marketing efforts accordingly. At a later stage, Siemens is planning to incorporate customer feedback gained through this platform to its discussion/ decision rooms.

Case 2: ReachOut.com

The problem

ReachOut.com (The Inspire Foundation) is a leading mental-health organization in Australia, attempting to help young people connect, share, and discuss mental-health issues among themselves. While the company had online forums, the discussions or information available in a forum was not integrated with the organization. Hence, the insights generated from such community discussions were not being utilized. Also, the engagement levels in the community were not so high.



CloudSQUADS’ role

The community was shifted from an in-house platform to the Lithium platform. This added fresh dimensions to the analysis and understanding of the discussions in the community. ReachOut.com is now able to better know about emerging demand patterns and is re-allocating its research efforts to the trending areas of discussion. Also, the culture has changed and the community became much more active as new features such as acknowledging top contributors were introduced. The community was also re-seeded with a better mix of members (those seeking help versus those willing to help). ReachOut.com is now aspiring to crowd-source innovative ideas, all made possible because of the buoyant community.

Ability to scale up holds the key

While the cloudSQUADS offering appears rather promising and value-accretive for clients, revenue from it is yet low. Therefore, the ability of Persistent Systems scale up this business would play the key role in determining the success of this acquisition.



Fig 7 – Fact sheet

4QFY12 4QFY13 1QFY14 2QFY14 3QFY14

Revenue split, by nature of engagement (%)

Effort-Led 88 83 85 81 82

IP-Led 12 18 15 19 18

Revenue by vertical (%)

Telecom 21 23 21 18 18

Infrastructure & Systems 68 67 69 69 69

Life Sciences 11 11 10 13 13

Revenue by geography (%)

North America 82 85 88 85 83

Europe 7 6 5 4 6

Asia-Pacific 11 9 8 11 11

Onsite : Offshore Revenue Mix (%)

Onsite Revenues 23 23 25 25 25

Offshore Revenues 77 77 75 75 75

Client Concentration (%)

Top 1 17 22 21 23 20

Top 5 37 37 36 38 37

Top 10 49 48 47 47 47

Number of Clients

Effort-Based NA 279 253 243 253

IP-Led NA 418 387 388 380

Revenue per client (US$ ’000 per quarter)

Effort-Based NA 184 212 228 227

IP-Led NA 26 25 34 33

Employees

Number of Employees 6,628 6,970 7,144 7,457 7,602

Technical 6,223 6,540 6,689 6,982 7,109

S&M 95 99 119 128 139

Support 310 331 336 347 354

Attrition % 18 14 14 14 13

Utilization % 70 73 70 72 73


Fig 8 – Revenue by vertical


Fig 9 – Revenue, area-wise


Fig 10 – Client concentration


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.

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 March 2014) Buy Hold Sell Anand Rathi Research stock coverage (185) 64% 27% 9% % who are investment banking clients 4% 0% 0% Other Disclosures This report has been issued by ARSSBL which is a SEBI regulated entity, and which is in full compliance with all rules and regulations as are applicable to its functioning and governance. The investors should note that ARSSBL is one of the companies comprising within ANAND RATHI group, and ANAND RATHI as a group consists of various companies which may include (but is not limited to) its subsidiaries, its affiliates, its group companies who may hold positions, views, stakes and may service the companies covered in this report independent of ARSSBL. Investors are cautioned to be aware that there could arise a potential conflict of interest in the views held by ARSSBL and other companies of Anand Rathi who maybe affiliated, connected or catering to the companies mentioned in the Research Report; even though, ARSSBL and Anand Rathi are fully complaint with all procedural and operational regulatory requirements. Thus, investors should not use this as a sole basis for making their investment decision and should consider the recommendations mentioned in the Research Report bearing in mind the aforementioned.

Further, the information herein has been obtained from various sources which we believe is reliable, and we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities (hereinafter referred to as “Related Investments”). ARSSBL and/or Anand Rathi may trade for their own accounts as market maker / jobber and/or arbitrageur in any securities of the companies mentioned in the Research Report or in related investments, and may be on taking a different position from the ones which haven been taken by the public orders. ARSSBL and/or Anand Rathi and its affiliates, directors, officers, and employees may have a long or short position in any securities of the companies mentioned in the Research Report or in Related Investments. ARSSBL and/or Anand Rathi, may from time to time, perform investment banking, investment management, financial advisory or any other services not explicitly mentioned herein, or solicit investment banking or other business from, any entity and/or company mentioned in this Research Report; however, the same shall have no bearing whatsoever on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the other companies of Anand Rathi, even though there might exist an inherent conflict of interest.

Furthermore, this Research Report is prepared for private circulation and use only. It does not have regard to the specific investment objectives, financial situation and the specific financial needs or objectives of any specific person who may receive this Research Report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this Research Report, and, should understand that statements regarding future prospects may or may not be realized, and we can not guarantee the same as analysis and valuation is a tool to enable investors to make investment decisions but, is not an exact and/or a precise science. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investments mentioned in this report.

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Tea & Coffee

Company UpdateIndia I Equities

Key financials (YE Mar) FY12 FY13 FY14e FY15e FY16e

Sales (`m) 14,453 16,686 19,869 20,061 20,946

Net profit (`m) 2,879 2,739 3,421 3,651 4,104

EPS (`) 26 25 31 33 37

Growth (%) 17 (5) 25 7 12

PE (x) 11.1 11.6 9.3 8.7 7.8

PBV (x) 1.8 1.6 1.4 1.3 1.1

RoE (%) 16.5 14.0 15.4 14.6 14.5

RoCE (%) 19.4 17.0 19.1 17.6 17.3

Dividend yield (%) 2.1 2.4 2.1 2.1 2.1

Net gearing (%) 9.4 6.3 1.6 (6.4) (14.3)


`

Rating: Buy Target Price: `344 Share Price: `291

Key data MCLR IN / MCLE.BO52-week high / low `374/`238Sensex / Nifty 21514/64013-m average volume US$1.9mMarket cap `32bn/US$0.5bnShares outstanding 109m

7 February 2014

Mcleod Russel India

Overseas green tea acquisition; Buy

Key takeaways

Acquisition in Vietnam. Mcleod Russel recently purchased for $0.8m a factory in Vietnam with capacity to process 0.6m kg of green tea. Though small, this acquisition is a significant development for the company as it has till now manufactured and processed only black tea in India and overseas. The move is not unexpected, given the rising global popularity of green tea and richer margins in the segment. However, this acquisition may not move the needle too much for Mcleod’s Vietnamese operations as the company already sells ~6m kg of black tea in this area.

Recent dip in Indian prices not too worrisome. The plucking season in northern India concluded a fortnight earlier than expected, with output dipping 2% yoy in Dec’13. However, prices in the domestic auctions for tea leaf and dust have not reflected this shortfall, falling 14% yoy in Feb’14. Channel checks indicate that the poor qualities of teas and dust on offer and the lack of suitable grades are responsible. With all eyes now on the first flush due in Apr’14, the quantities now available at auctions are becoming increasingly irrelevant from a trade perspective in the near term.

Estimates maintained. With the plucking season drawing to an end in 3QFY14, we have maintained our estimates of consolidated turnover at `20bn, with and PAT of `3.4bn. We expect the impact of the Vietnamese green tea factory to percolate into the financials from 2HFY15 and will refine our figures once we obtain some clarity about the profile of the final product.

Our take. At the ruling price of `291, the stock trades at a P/E and an EV/EBIDTA of 9.3x and 6.7x, respectively, discounting its FY14e consolidated figures. We have maintained our price target of `344 and our Buy recommendation on the stock in light of the improving financial profile. Risks. Lower-than-expected sales volumes and weaker realizations pose downside risks to our estimates.

Shareholding pattern (%) Dec-13 Sep-13 Jun-13

Promoters 45.7 45.7 45.7 - of which, Pledged 11.7 11.7 11.7 Free Float 54.3 54.3 54.3 - Foreign Institutions 35.7 35.7 36.0 - Domestic Institutions 5.6 3.9 3.2 - Public 13.0 14.8 15.1

Relative price performance

Sensex

MCLR

200

250

300

350

400

450

Mar

-13

May

-13

Jul-1

3

Sep-

13

Nov

-13

Jan-

14

Mar

-14

Source: Bloomberg

7 March 2014 Mcleod Russel India – Overseas green tea acquisition; Buy


Quick Glance – Financials and ValuationsFig 1 – Income statement (`m) Year-end: Mar FY12 FY13 FY14e FY15e FY16e

Net sales 14,453 16,686 19,869 20,061 20,946 Sales growth (%) 13.9 15.4 19.1 1.0 4.4 - Op. expenses 10,559 12,873 15,140 15,210 15,616 EBIDTA 3,894 3,812 4,729 4,851 5,329 EBITDA margins (%) 26.9 22.8 23.8 24.2 25.4 - Interest 567 510 664 476 379 - Depreciation 370 392 440 479 522 + Other income 411 344 400 400 400 - Tax 338 430 523 558 628 Income tax rate 10.0 13.2 13.0 13.0 13.0 PAT 3,029 2,824 3,502 3,737 4,201 Minority Interest (87) (3) - - -Profit from Ass. Co.s 30 62 40 43 48 Adjusted PAT (33) (20) (40) (43) (48)FDEPS (` / sh) 2,879 2,739 3,421 3,651 4,104 Source: Company, Anand Rathi Research

Fig 3 – Cash-flow statement (`m) Year-end: Mar FY12 FY13 FY14e FY15e FY16e

Consolidated PAT 2,465 2,879 2,739 3,421 3,651 + Non-cash items 375 323 442 429 471 Cash profit 2,840 3,202 3,181 3,850 4,122 - Incr./(Decr.) in WC (90) 1,184 1,006 44 1 Operating cash-flow 2,929 2,018 2,176 3,806 4,121 -Capex 190 1,668 1,097 1,203 461 Free cash-flow 2,740 350 1,079 2,603 3,660 -Dividend 636 768 896 768 768 + Equity raised - - - - -+ Debt raised (1,923) (117) (294) (400) (400)-Investments (14) (146) (23) 1,000 1,000 -Misc items 410 (413) (217) (44) (55)Net cash-flow (216) 24 129 479 1,547 + Op. Cash & bank 526 310 334 463 942 Cl. Cash & bank 310 334 463 942 2,488 Source: Company, Anand Rathi Research

Fig 5 – Valuation chart (PE Band)

MCLR

7x

8x

9x

10x

11x

130

180

230

280

330

380

430

Oct

-10

Jan-

11

Apr-1

1

Jul-1

1

Oct

-11

Jan-

12

May

-12

Aug-

12

Nov

-12

Feb-

13

May

-13

Aug-

13

Dec

-13

Mar

-14

Source: Bloomberg, Anand Rathi Research

Fig 2 – Balance sheet (`m) Year-end: Mar FY12 FY13 FY14e FY15e FY16e

Share capital 547 547 547 547 547 Reserves & surplus 16,919 18,962 21,615 24,497 27,833 Shareholders’ fund 17,467 19,509 22,162 25,045 28,380 Minority Interest 117 153 234 320 416 Debt 1,980 1,686 1,286 886 486 Def Tax Liab (net) 769 823 823 823 823 Capital employed 20,333 22,172 24,505 27,074 30,106 Net Fixed Assets 18,953 19,680 20,491 20,512 20,490 Investments 190 167 1,167 2,167 3,167 Net Working Capital 856 1,862 1,905 1,907 1,909 Cash 334 463 941 2,488 4,540 Capital deployed 20,333 22,172 24,505 27,074 30,106 Net debt 1,646 1,222 344 (1,602) (4,054)WC Days (30) (12) (10) (10) (10)BV (` / sh) 160 178 202 229 259 Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ `291 Year-end: Mar FY12 FY13 FY14e FY15e FY16e

P / E 11.1 11.6 9.3 8.7 7.8 P / BV 1.8 1.6 1.4 1.3 1.1 EV / Sales 2.3 2.0 1.6 1.5 1.3 EV / EBIDTA 7.8 8.0 6.3 5.8 4.9 RoAE (%) 16.5 14.0 15.4 14.6 14.5 RoACE (%) 19.4 17.0 19.1 17.6 17.3 CEPS (` / sh) 30 29 35 38 42 DEPS (` / sh) 6.0 7.0 6.0 6.0 6.0 Net Debt/Equity (%) 9.4 6.3 1.6 (6.4) (14.3)Dividend yield (%) 2.1 2.4 2.1 2.1 2.1 Dividend payout (%) 26.7 32.7 22.5 21.0 18.7 Net profit growth (%) 16.8 (4.9) 24.9 6.7 12.4 RM / Sales (%) 10.1 14.9 18.0 16.5 16.3 *Volume growth (%) 8.8 (2.9) 15.4 (11.2) -*Realisation growth (%) 3.4 14.4 2.8 10.8 1.5 Source: Company, Anand Rathi Research *Standalone

Fig 6 – Revenue trend


7 March 2014 Mcleod Russel India – Overseas green tea acquisition; Buy


Fig 9 – Indian tea production (m kg) State / District FY12 FY13 YoY (%) Dec-12 Dec-13 YoY (%)

Assam Valley 531.26 535.57 0.8 19.49 18.41 (5.5)

Cachar 50 52.57 5.1 3.02 2.52 (16.6)

Total Assam 581.26 588.14 1.2 22.51 20.93 (7.0)

Darjeeling 147.59 160.16 8.5 0.21 0.1 (52.4)

Dooars 112.82 117.07 3.8 7.75 9.62 24.1

Terai 9.02 10.09 11.9 7.81 7.53 (3.6)

Total West Bengal 269.43 287.32 6.6 15.77 17.25 9.4

Others 14.9 17.92 20.3 0.9 0.98 8.9

Total North India 865.59 893.38 3.2 39.18 39.16 (0.1)

Tamil Nadu 162.79 171.93 5.6 15.01 13.57 (9.6)

Kerala 61.62 63.76 3.5 5.55 5.73 3.2

Karnataka 5.46 6 9.9 0.55 0.48 (12.7)

Total South India 229.87 241.69 5.1 21.11 19.78 (6.3)

All India 1,095.46 1,135.07 3.6 60.29 58.94 (2.2)

Source: Tea Board India

Fig 10 – Mcleod Russel’s operating parameters (`/kg) 3QFY13 3QFY14 YoY (%)

Realisations 180.0 177.6 (1.3)

Raw Material 34.3 35.0 2.1

Operating & Manuf. Expenses 15.3 15.0 (2.0)

Power & Fuel Cost 16.5 17.5 5.8

Employee Cost 48.1 50.0 4.0

Admin Expenses 10.6 12.0 13.4

Operating Profit 55.2 48.1 (12.8)


Fig 7 – Indian CTC leaf & all-dust weekly prices


Fig 8 – Indian total tea weekly prices


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 6 March 2014)

MCLR

5

1

2

3 4

0

50

100

150

200

250

300

350

400

450

Jan-

08

Jun-

08

Nov

-08

Apr-0

9

Oct

-09

Mar

-10

Aug-

10

Feb-

11

Jul-1

1

Dec

-11

May

-12

Nov

-12

Apr-1

3

Sep-

13

Mar

-14

Date Rating TP (`)

Share Price (`)

1 12-Dec-12 Hold 364 365 2 28-Dec-12 Buy 410 349 3 28-May-13 Buy 400 301 4 1-Nov-13 Buy 353 272 5 22-Jan-14 Buy 344 277

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 March 2014) Buy Hold Sell Anand Rathi Research stock coverage (182) 64% 27% 9% % who are investment banking clients 4% 0% 0% Other Disclosures This report has been issued by ARSSBL which is a SEBI regulated entity, and which is in full compliance with all rules and regulations as are applicable to its functioning and governance. The investors should note that ARSSBL is one of the companies comprising within ANAND RATHI group, and ANAND RATHI as a group consists of various companies which may include (but is not limited to) its subsidiaries, its affiliates, its group companies who may hold positions, views, stakes and may service the companies covered in this report independent of ARSSBL. Investors are cautioned to be aware that there could arise a potential conflict of interest in the views held by ARSSBL and other companies of Anand Rathi who maybe affiliated, connected or catering to the companies mentioned in the Research Report; even though, ARSSBL and Anand Rathi are fully complaint with all procedural and operational regulatory requirements. Thus, investors should not use this as a sole basis for making their investment decision and should consider the recommendations mentioned in the Research Report bearing in mind the aforementioned.



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 4 March 2014) Buy Hold Sell Anand Rathi Research stock coverage (185) 64% 27% 9% % who are investment banking clients 4% 0% 0% Other Disclosures This report has been issued by ARSSBL which is a SEBI regulated entity, and which is in full compliance with all rules and regulations as are applicable to its functioning and governance. The investors should note that ARSSBL is one of the companies comprising within ANAND RATHI group, and ANAND RATHI as a group consists of various companies which may include (but is not limited to) its subsidiaries, its affiliates, its group companies who may hold positions, views, stakes and may service the companies covered in this report independent of ARSSBL. Investors are cautioned to be aware that there could arise a potential conflict of interest in the views held by ARSSBL and other companies of Anand Rathi who maybe affiliated, connected or catering to the companies mentioned in the Research Report; even though, ARSSBL and Anand Rathi are fully complaint with all procedural and operational regulatory requirements. Thus, investors should not use this as a sole basis for making their investment decision and should consider the recommendations mentioned in the Research Report bearing in mind the aforementioned.














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