the '4am' stocks - idfc · • management myopia ... • change of guard-new ceo s...

The The ‘‘4am4am’’ stocksstocks(Thematic presentation)(Thematic presentation)

Nikhil Vora

IDFC Securities Ltd(Dir) +91-22-6622 2567 (M) +91 – 98211 32471 Email: [email protected]

December 2012

“The night is always darkest before the dawn”- Thomas Fuller, British theologian and historian

What is a What is a ““4 am4 am”” stock?stock?

3

“It has been a long dark night”…..several issues have plagued stock performance in the past ….……causing the

stock to perform below promised potential

“It is still dark”……some risks have reduced, not all risks have gone away ……which makes conservative investors

sceptical of betting on these stocks

“A bright morning lies ahead”…… stock appears to be on the cusp of a major change in investor sentiment

It is 4am now…

The past is ‘Dark’….

..but ‘Sunrise’ahead

4

JyothyJyothy LaboratoriesLaboratories Outperformer

CMP: Rs167 Mkt cap: Rs27.7bn; US$508m

• Limited opportunity play (USD500m)– Presence in only 3 mass-end categories

• Management myopia – Promoter-driven business, without professional management

• Henkel acquisition, first bold move – Acquired Henkel India (70% size of JYL’s own business) along with debt

• Akin to GCPL in 2008 – GCPL in 2008 had limited product portfolio (low growth visibility)

• Change of guard - new CEO S Raghunandan, “turnaround veteran” – of family-owned Dabur and Paras Pharma (created ~US$700m value).

• Large acquisition integration underway – Need to integrate Henkel (2/3rd Jyothy’s size) and cater to new categories and income groups

• Extracting cost efficiencies across system – Focus on distribution, manufacturing, administration

• Rs5.5bn debt - Henkel acquisition led Rs5.5bn debt (@11%)to hit near-term profits

At the 4am point…

The past is ‘Dark’…. Similar to GCPL in

2008

5

JyothyJyothy LaboratoriesLaboratories

As on 31 March FY10 FY11 FY12 FY13E FY14E

Net sales (Rs m) 5,981 6,195 9,126 13,781 16,922

Adj. net profit (Rs m) 743 688 446 869 1,376

Shares in issue (m) 145 161 161 166 166

Adj. EPS (Rs) 5.1 4.3 2.8 5.2 8.3

% change 93.8 (16.8) (35.2) 89.4 58.3

PE (x) 32.6 39.2 60.4 31.9 20.1

Price/ Book (x) 6.2 4.3 4.3 4.2 3.7

EV/ EBITDA (x) 25.2 34.3 38.2 17.8 12.8

RoE (%) 20.2 13.5 7.1 13.5 19.5

RoCE (%) 20.2 10.3 6.1 13.0 18.0

Key financials

• Rs20bn revenues by FY15E - Post-Henkel, market opportunity up 10x to US$5bn in India

• Entry into ‘premium’ categories – Henkel infused a premium brand-width into hitherto mass-market portfolio.

• Revenues can be ‘2x’ in next 3 years - One of the fastest growing Indian consumer co.

• Margins to expand 600bp in 3 years – Margins to align with those of FMCG peers

• Poised to enter the big league – With Raghunandan at helm, Jyothy set to become another GCPL (acquisition led Mcap up 10x)

JYL IN 5 YEARS = GCPL TODAY

6

DEN NetworksDEN Networks Outperformer

CMP: Rs205 Mkt cap: Rs27bn; US$499m

• Implementation delays in mandatory digitization – Long gap between TRAI recommendation and Ministry of I&B approval invoked déjà vu (TRAI’s failed CAS mandate in 2006)

• Challenges in bringing LCOs on board – LCOs opposed to digitization (would expose the real subscriber base)

• Lack of ‘incentive’ for voluntary digitization – Bleak visibility of RoC caused DEN to scale down aggressive expansion

• Competition (DTH) aggressively marketed – DTH (backed by corporate houses) was marketed aggressively (2nd largest ad spends on TV) as superior alternative to cable and created a ‘value perception’ in the minds of consumers

• Digitization in top Metros implemented – Phase-I of mandatory digitization successfullyimplemented in Mumbai, Delhi

• Subscriber addition accelerated - 4x of quarterly additions in FY12

• STB subsidy needs reduced – STB now offered at competitive rates of Rs600-700 (earlier free) vs actual cost Rs1400, reducing subsidy and capitalization needs

At the 4am point…

In the dark...

7

DEN NetworksDEN Networks


Net sales (Rs m) 9,192 10,433 11,321 8,226 9,579

Adj. net profit (Rs m) 301 375 304 494 586

Shares in issue (m) 130 130 130 130 130

Adj. EPS (Rs) 2.3 2.9 2.3 3.8 4.5

% change (302.5) 24.5 (19.1) 62.7 18.8

PE (x) 84.5 67.8 83.8 51.5 43.4

Price/ Book (x) 3.4 3.1 2.9 2.8 2.6

EV/ EBITDA (x) 27.8 22.1 25.6 18.4 15.3

RoE (%) 6.1 4.8 3.6 5.5 6.1

RoCE (%) 8.8 6.9 4.3 7.5 8.7

Key financials

• Cable distribution only ‘structural’ play in Indian media - 200m digital subscriber base over next 3-4 years from 40m+ now

• Strategically attractive sector – No global cable players in potentially largest digital subscriber market

• Digitization inevitable - Digitization momentum in Mumbai and Delhi to extend to Phase-II (38 cities have deadline of March 2013)

• Improving declarations to highlight ‘annuity’ nature of cash flows - Revenues and profits in distribution space inherently ‘annuities’ in nature (as declarations improve with a lag)

• Gap over DTH players to become accentuated – DTH-Cable mix to shift from 90:10 currently to 50:50 over next 3-4 years

The light of day is near…

8

Financial TechnologiesFinancial Technologies Outperformer

CMP: Rs1,083 Mkt cap: Rs49.7bn; US$911m

• Regulatory bottlenecks in approval for equity platform – FT’s proposal for reduction in promoter shareholding (regulatory requirement) was rejected by SEBI

• Management opted for litigation to take on the regulator – FT chose to pursue a legalfight with regulator, (an unprecedented and audacious decision)

• Management energies diverted to fighting litigation – During the prolonged 4 year legal battle with the regulator, significant management energies was absorbed by litigationissues

• Equity launch: In July 2012, SEBI granted MCX-SX the permission to launch equity exchange with conditions

• SEBI conditions gave opportunity to launch equity exchange immediately – To lower direct equity stake (5% from 10%) in 18 months and warrants held by FT Group (60% stake in equity exchange) to be divested 3in years

• Encouraging response from market participants to membership drive – ~800applications received in response to an attractive membership offer

• Successfully conducted a mock equity trading session – 100 stocks traded among 135 participants and proved operational readiness

• Concerns on competition from well established incumbents – Well established incumbents (NSE and BSE) pose strong challenge for SX to gain market share and demonstrate profitability

At the 4am point…

In the dark...

9

Financial TechnologiesFinancial Technologies

As on 31 March FY09 FY10 FY11 FY12 FY13E

Net sales (Rs m) 3,343 3,070 3,309 4,127 3,809

Adj. net profit (Rs m) 3,686 3,443 919 4,780 1,977

Shares in issue (m) 46 46 46 46 46

Adj. EPS (Rs) 80.3 74.7 19.9 103.7 42.9

% change (61.7) (7.0) (73.3) 420.1 (58.6)

PE (x) 13.5 14.5 54.3 10.4 25.2

Price/ Book (x) 2.8 2.4 2.4 2.0 1.9

EV/ EBITDA (x) 25.9 39.2 43.2 18.2 21.1

RoE (%) 22.9 18.2 4.5 21.0 7.7

RoCE (%) 7.4 4.3 3.5 7.4 5.2

Key financials

• India’s lone ‘Growing Annuity’ opportunity – FT remains India’s only ‘growing annuity’(exchange) business available at attractive value

• MCX demonstrated execution capability of FT Group – MCX dominates commoditymarkets with 87% market share and garnered 36.4% share in the currency derivative segment

• Diversification locally and internationally to diversify risks - FT operates 9 exchanges(5 domestic and 4) international across products and geographies

• Past record of overcoming well entrenched competition –FT successfully competedagainst established incumbents and established dominance in commodities, power, currency markets

• Equity platform can potentially double market cap of FT – With industry profit at Rs12bn and valuations at Rs200bn, even a 15-20% market share in equity trading can potentially double market cap of FT


10

Radico KhaitanRadico Khaitan Outperformer


Only 15% of portfolio at ‘premium ‘ end – Portfolio weighted towards mass segment, while profitability is clearly demonstrated by Pernod Ricard in premium segment

Strong brand missing in largest market segment – Absence of very strong whiskeybrand (60%of IMFL industry)

Unwilling to monetize Magic Moments – Management averse to ‘milking’ its strongestbrand (Magic Moments)

A third strong brand needed in the portfolio: Contribution by the 2 major brands exhausted in reinvestment – creating need for a third strong brand to improve profitability

• Share of ‘premium’ in profitability increased – Portfolio premiumisation has resulted in higher gross margins and overall profitability , as premium brands such as Magic Moments Vodka and Morpheus Brandy have the highest contribution

• Recent launches in the premium segment - Radico has further extended the premiumization strategy with launch of premium brands like Verve vodka and Florencebrandy

At the 4am point…

In the dark...

11

Radico KhaitanRadico Khaitan


Net sales (Rs m) 8,356 9,965 11,439 13,195 15,443

Adj. net profit (Rs m) 415 729 884 985 1,282

Shares in issue (m) 132 133 133 133 133

Adj. EPS (Rs) 3.2 5.5 6.7 7.4 9.7

% change 394.6 74.4 21.2 11.5 30.1

PE (x) 47.6 27.3 22.5 20.2 15.5

Price/ Book (x) 3.3 3.1 2.9 2.6 2.2

EV/ EBITDA (x) 18.4 16.6 14.2 11.7 10.0

RoE (%) 10.0 11.7 13.1 13.4 15.4

RoCE (%) 9.7 10.2 11.4 12.6 14.3

Key financials

• United Spirits - Diageo deal to improve IMFL economics- Diageo’s buyout of United Spirits to improve economics of overall IMFL industry (Pernod and Diageo controlling 60% of market)

• Premium brands to drive profitability in present categories – Highest contribution brands such as Morpheus Brandy and Magic Moments Vodka continue to be the growth driver

• Right premiumisation focus - New brand launches (Verve and Florence) indicate rightstrategic focus on premiumization

• Ability to leverage mass portfolio – Post United Spirits – Diageo deal, industry focus shifting to premium end of market, competition in mass segment to ease, (Radico to piggyride on a more profitable environment)


12

Jain IrrigationJain Irrigation Outperformer


• Dependent on government subsidies to fund MIS business – Customers’ (farmers’) purchase of MIS solutions depends on state government subsidy support,

• Delayed government receivables weakened balance sheet – Subsidies from state governments slowed down, thereby increasing receivables (debtor days at 340+)

• Increasing leverage to fund working capital needs – Increased working capital needs met from borrowings, thereby increasing leverage and affecting profitability

• Self-imposed slowdown in MIS business – To counter the deteriorating working capital cycle, company compromised on revenue growth and profitability

• Capital infusion of $200m – Capital of US$200m (mix of equity and debt) raised recently, which has addressed current funding needs

• NBFC launched in Nov ‘12 – To counter delayed subsidy payments from state governments, Jain Irrigation has launched an NBFC to provide credit to farmers (to bringdown receivables and improve WC cycle in the MIS business)

At the 4am point…

In the dark...

13

Jain IrrigationJain Irrigation


Net sales (Rs m) 34,350 41,633 49,549 52,123 57,126

Adj. net profit (Rs m) 1,605 2,533 3,551 2,824 3,992

Shares in issue (m) 76 386 386 436 436

Adj. EPS (Rs) 4.2 6.6 9.2 6.5 9.2

% change (23.8) 55.6 40.1 (29.6) 41.4

PE (x) 17.1 11.0 7.8 11.1 7.9

Price/ Book (x) 2.2 1.8 1.6 1.6 1.4

EV/ EBITDA (x) 7.9 7.2 7.0 7.3 6.3

RoE (%) 14.9 17.8 21.2 15.1 18.8

RoCE (%) 14.9 14.9 14.6 13.4 14.3

Key financials

• MIS Business model tweaked to adapt to prevailing conditions – Now recovering100% capital upfront from farmers and focusing on states where subsidy disbursements are relatively better

• Lowering of leverage to aid improvement in profitability –Recent capital infusion to help lower leverage and improve profitability

• NBFC to reduce dependence towards government subsidy - NBFC to benefit in longterm (lower dependence on government subsidies)

• Higher subsidy release expected in an election year – With elections in several states scheduled over the next 12-18 months, subsidy payment release by state governments expected to improve


14

Pantaloon RetailPantaloon Retail Outperformer


• Over aggression – Extremely aggressive expansion in number of front end stores, without adequate investment in supporting backend

• Unmanageable diversifications – Diversification into multiple retail formats and unrelated businesses like insurance and finance

• Overleveraged – Unserviceable levels of high debt to fund aggressive expansion plan

• SSS growth muted – Stretched balance sheet, a weak operating environment impactedrevenue growth and profits

• Deleveraging underway – Management cognizant of its past strategy failures and has undertaken deleveraging in several forms

Selling off unrelated businesses – Financial services, Insurance

Selling part of existing operations to lower debt – Pantaloon format

Expansion plan on hold to focus on backend and cost efficiencies

Reorganizing existing businesses to bring focus back on profitability

• SSS growth reviving – SSS growth to revive on the back of low base, improved sentiment and a strong festive season demand

At the 4am point…

In the dark...

15

Pantaloon RetailPantaloon Retail


Net sales (Rs m) 89,261 110,126 119,852 138,199 161,100

Adj. net profit (Rs m) 2,296 1,892 928 1,221 2,431

Shares in issue (m) 208 214 214 214 214

Adj. EPS (Rs) 11.1 8.8 4.3 5.7 11.4

% change 37.0 (20.0) (51.0) 31.6 99.1

PE (x) 21.8 27.2 55.5 42.2 21.2

Price/ Book (x) 1.7 1.7 1.7 1.6 1.5

EV/ EBITDA (x) 9.4 9.6 10.3 9.3 8.0

RoE (%) 9.0 6.4 3.0 3.9 7.3

RoCE (%) 10.8 10.2 8.5 8.7 10.4

Key financials

Current phase of deleveraging to be over soon and Pantaloon to sport a fresh look

• Deleveraged balance sheet with serviceable debt levels

• Reorganized business structure with two separate entities, one each in hypermarket format and fashion retail, to unlock significant value

• Focus on profitable expansion will ensure a smoother growth path

• Pantaloon, by virtue of being the largest retailer in India, is potentially the biggest long termbeneficiary of forthcoming FDI in retail


16

United SpiritsUnited Spirits Outperformer

CMP: Rs1938 Mkt cap: Rs244bn; US$4.4bn

Chasing ‘volume’ over ‘value’ – Chased volume growth over value which constrained its ability to generate profits

‘Mass’ positioning hampered profitability – 70% of volumes from lowest end segmentof IMFL (half the realizations of premium segment)

Leveraged buyout stressed balance sheet – Post leveraged buyout of Whyte & Mackay, USL’s restricted bulk liquid sales to transition towards a branded business

Value of W&M debatable - Ability to monetize the scotch inventory remains to be demonstrated

Structurally de-rated – Sub-optimal portfolio mix suppressing inherent profitability, quality of earnings deteriorated – leading to derating (akin to HUL being derated in past decade)

• Volume myopia being corrected – Management acknowledged the ‘moolah’ atpremium end and initiated premiumisation (reflected in mass segment degrowth)

• Diageo deal a ‘game changer’ – Set to start a new phase of re-rate with Diageo’sacquisition, similar to the transformation in case of United Breweries’ acquisition by Scottish & Newcastle (now Heineken)

At the 4am point…

In the dark...

17

United SpiritsUnited Spirits

Precedent for operational improvement and rerating post foreign management takeover (United Breweries case study)

5.8% 14.9%

10.6%

13.7%

2.6%

10.9%

FY05 FY06

RoE RoCE

FY05 FY06

EBITDA margins

0

100

200

300

400

Mar-04 Mar-05 Mar-06 Mar-07 Mar-08

United Brew eries 30.0 60.0 90.0 (Rs)

USL portfolio to become premium – Diageo expected to shift USL’s portfolio to the premium end (Pernod demonstrating ‘moolah’ at premium end)

Improvement in operational parameters - Diageo’s superior management ability to bring robust operational practices in USL

Balance sheet de-leveraging - Diageo to infuse capital to the tune of Rs33bn into USL, aiding in significant balance sheet de-leveraging

USL – Diageo can be biggest name in Indian Consumer Space – Diageo’spremiumization focus, strong execution capability and superior capital management ability to further complement the huge scale achieved by USL


18

Agro Tech FoodsAgro Tech Foods Unrated


• Limited opportunity play - Single brand (Sundrop) business, (same as Marico 10 years back) - largely present in a highly competitive and low margin category.

• Limited distribution – Distribution reach was limited to urban markets, thereby missed participating in growth across smaller towns and rural markets

• Low margins – In an overcrowded product segment (20+ brands), Agro Tech’s margins remained low

• Focus on premiumisation – Agro Tech is tweaking its product offering to a favourable value mix with differentiated premium variant of its flagship brand

• New product offerings – ‘Act-II’ popcorn is witnessing high growth and higher margins. Entry into new product categories like ready to eat signals growth intent

• Future growth mapped –Product portfolio to be widened through two new product launches every year

• Expanding distribution reach – Increasing its distribution bandwidth by ~25% each year to match peers.

At the 4am point…

In the dark...

19

Agro Tech FoodsAgro Tech Foods

As on 31 March FY08 FY09 FY10 FY11 FY12

Net sales (Rs m) 10,084 7,736 6,496 7,187 7,021

Adj. net profit (Rs m) 163 208 251 318 363

Shares in issue (m) 24.4 24.4 24.4 24.4 24.4

Adj. EPS (Rs) 6.7 8.6 10.3 13.1 14.9

% change 28.3 20.6 26.6 13.9

PE (x) 22.9 17.0 24.0 29.0 30.2

Price/ Book (x) 3.9 2.5 3.8 4.8 5.4

EV/ EBITDA (x) 17.2 11.8 18.6 27.7 23.7

RoE (%) 15.7 17.2 17.9 19.4 18.8

RoCE (%) 12.4 11.4 12.1 17.1 16.8

Key financials

Agro Tech’s ‘Act-2’ to look like the next ‘Marico’

• Strong support from global parent (World’s #2 food player ConAgra) in terms of new products and technical expertise

• Diversified food portfolio spanning across categories and increasing distribution to offer higher opportunities for growth

• Improved product portfolio mix to increase operating margins to double digits (closer to peers)

• Stock can be rerated significantly as parent’s support, portfolio diversification and premiumisation provide visibility on higher growth and profitability


20

Tata Global BeveragesTata Global Beverages Unrated


• World leader in wrong segment – 90% of company’s portfolio from tea (lowest customer engagement product and globally declining)

• Overdiversifcation – Presence in several countries, but market leadership in only 3 markets (India, UK and Canada) impacted the overall economics of the business

• Domestic focus on low growth beverage – In India, the company is mainly present in the tea segment (low growth), not in faster growing cold beverages segment

• Highly competitive market – Tea is a severely commoditized and competitive market with a large number of regional brands

• Top Management change – New MD Mr Harish Bhat (with an enviable track record in Titan) expected to bring back focus on innovation and profitability

• Change in strategy – Company is looking to make inroads into the faster growing non aerated cold beverages segment

• JV with Pepsico – For non-aerated beverages and will provide access to Pepsi’s strong distribution network.

• JV with Starbucks – Provides the company an entry into high growth coffee chainbusiness and access to Starbucks stores worldwide for some of its products

At the 4am point…

In the dark...

21

Tata Global BeveragesTata Global Beverages

As on 31 March FY09 FY10 FY11 FY12

Net sales (Rs m) 48,479 57,830 59,824 65,853

Adj. net profit (Rs m) 8,568 4,263 3,123 4,168

Shares in issue (m) 62 62 618 618

Adj. EPS (Rs) 11.3 6.3 4.1 5.8

% change (44.3) (34.9) 40.1

PE (x) 2.7 7.6 17.7 23.8

Price/ Book (x) 1.2 1.5 1.9 1.5

EV/ EBITDA (x) 7.7 11.8 11.2 11.7

RoE (%) 19.9 10.6 6.6 8.4

RoCE (%) 5.2 5.3 4.3 6.1

Key financials

• Portfolio changes to improve profitability - As the company’s product portfolio leans towards higher share of cold beverages segment, growth and profitability is expected revive

• Leaner portfolio benefits - A leaner portfolio (in terms of product and geography wise presence) expected to increase profitability

• JV with Starbucks a big positive – JV has potential to increase profits significantly and become the most valuable part of portfolio in the next 5 years

• Starbucks offers large cross selling opportunities – Himalayan mineral water will be sold through 25,000 Starbucks stores worldwide


22

TVS MotorTVS Motor Outperformer

• Pulled out successful brand Victor (teething issues) – No success post Victor resulted in zero presence in executive bikes (70% of motorcycle industry)

• Motorcycle obsession costed dearly – Failed to gauge next wave (unisex scooters) as focus diverted to motorcycles (~60% of overall volumes) and price war with competitors

• Entered Indonesia at the expense of India and balance sheet – Relatively large investment and significant management resources diverted to Indonesia

• Increased leverage - Consolidated debt increased 10x since FY04 to fund Indonesian ops

• Increased competition impacted market share: Market share slipped in 2Ws (increased competition and absence of new launch in the last one year.)

• Recent financial performance has been impressive: Despite lacking scale and with relatively weaker product mix, operating margins resilient (GM higher than Hero)

• Derisked portfolio: Domestic motorcycles volumes 28% (vs. 58% earlier), reducing competitive pressure and offering headroom to grow market share with new launches

• Going modular – Capex and part costs to reduce as engines and platforms for new launches to be shared across segments/markets

• Analysts and investors have largely given-up – Expectations too low given chequered past and competition resulting in a market cap below the capacity cost

At the 4am point…

In the dark...


23

TVS MotorTVS Motor

Series of launches to end one legged run : Launched Phoenix bike recently and planned launches in India (bike, scooter) and Indonesia (automatic bebek-50% of market)

Victor slated for a comeback – Best placed brand to crack executive segment given the customer preference for familiar brands and reflected in industry sales

Possible tie-up with BMW Motorrad a game changer – Joint-development of bikes for global markets (TVS will source, manufacture and supply parts for existing BMW bikes)

Balance sheet clean-up started – To repay Rs5bn (27% of market cap) of standalone debt in 2 years; repaid Rs800mn in 1HFY13


As on 31 March FY 10 FY 11 FY12 FY13E FY 14E

Net sales (Rs m) 44,301 62,880 71,262 72,623 91,163


Shares in issue (m) 475 475 475 475 475

Adj. EPS (Rs) 2.6 4.1 5.2 4.5 7.4

% growth 321.2 56.3 28.0 (13.2) 62.2

PER (x) 15.5 9.9 7.7 8.9 5.5

Price/Book (x) 2.3 1.9 1.6 1.5 1.2

EV/EBITDA (x) 8.6 6.5 5.8 5.5 3.5

RoE (%) 15.8 21.2 23.0 17.5 24.6

RoCE (%) 9.9 15.0 17.0 14.8 23.4

Key financials (standalone)

24

GlenmarkGlenmark Outperformer

• Bloated working capital - Rose to 214 days in FY09

• Messed up balance sheet – High leverage (1.3x in FY09); High capex and significant negative free cash flow (>Rs11bn in FY09)

• R&D capitalization accounting concerns– Aggressive and opaque accounting raised concerns on true profitability

• Aggressive (miss) guidance – Failed to deliver on aggressive growth guidance by a mile

• NCE R&D programmes – Failures across all the lead candidates

• Sharp improvement in working capital – 120 days in FY12 from 214 days in FY09

• Leverage increasingly more manageable - 0.8x from 1.3x as of end-FY09

• Proactive adoption on IFRS and stoppage of R&D capitalization – clear visibility on accounting procedures

• Significant improvement in return ratios – RoCE up from 11% in FY09 to ~21% in FY12

At the 4am point…

In the dark...


25

GlenmarkGlenmark

• Success in NCEs projects will define winners - Glenmark is numero uno bet on NCEs in the Indian pharma space

• Significant newsflow on multiple NCE candidates ahead over next 12-18 months -Success in 1-2 of these programmes can take Glenmark into a new league

• Generic business set to go from strength to strength - Intensive capex phase behind

• Businesses reaching critical mass across geographies - Margins to expand leading to expansion in return ratios and re-rating of generic business per se


As on 31 March FY10 FY 11 FY12 FY13E FY 14E

Net sales (Rs m) 25,244 29,538 40,206 47,452 54,298


Shares in issue (m) 271 271 271 271 271

Adj. EPS (Rs) 12.2 16.7 21.8 21.1 25.9

% change (0.2) 37.0 30.4 (3.4) 22.8

PE (x) 39.3 28.7 22.0 22.8 18.5

Price/ Book (x) 5.5 6.3 5.4 4.4 3.7

EV/ EBITDA (x) 23.0 25.0 15.0 15.3 13.0

RoE (%) 16.7 20.5 26.3 21.3 21.7

RoCE (%) 12.9 12.0 21.2 18.6 19.6


26

Sunteck RealtySunteck Realty Outperformer

• Slowdown in premium residential sales – With economic environment turning bleak, sales in Sunteck’s ultra-luxury projects in BKC came to a near halt. Other projects also witnessed significant slowdown in sales.

• Regulatory logjam delaying new launches/ execution – With Maharashtra Govt. working on new DCR norms (finalized by Jan-12), MMR saw a near halt in projects approvals for >18 months. While new launches got delayed due to lack of approvals, execution in existing projects also slowed down due to delay in additional approvals.

• Strong traction in BKC projects – With receipt of approvals and faster execution, last few quarters have seen strong traction in BKC projects. Signature Island (flagship project) is in finishing stage with delivery expected in next 6-9 months.

• Encouraging response to new launches – Sunteck’s two new launches in last one year (Airoli, Goregaon) has witnessed strong end-user demand. Also, sales have picked-up in other existing projects.

• Cashflows positive, low leverage - Despite slower sales, Sunteck has remained operational cashflow positive. With cashflows improving in last few quarters, Sunteck has further reduced its debt levels (gearing at <0.4x)

At the 4am point…

In the dark...


27

Sunteck RealtySunteck Realty

• Humungous cashflows from BKC projects over next 3-4 years – Sunteck expects to receive >$1bn in cashflows (net) from BKC projects over next 3-4 years. Sunteck currently has >1msf of unsold inventory across the three residential towers.

• City-centric portfolio at low land cost – A city-centric portfolio of 32msf with >80% projects in city-centric regions in the MMR (Goregaon, Dadar, Thane, Mulund) with FSI cost ~Rs1000psf

• Cheap valuations, trading at sharp discount to NAV – At CMP, Sunteck EV stands at <Rs30bn – even lower than potential cashflows from only BKC projects. At FY13E conservative NAV estimates of Rs560/share, stock trades at >25% discount to FY13E NAV


As on 31 March FY10 FY 11 FY12 FY13E FY 14E

Net sales (Rs m) 284 202 170 11,154 10,343

Adj. net profit (Rs m) 62 26 31 5,000 3,108

Shares in issue (m) 63 63 63 63 63

Adj. EPS (Rs) 1.0 0.4 0.5 79.4 49.4

% growth (92.2) (57.9) 19.4 16,027.9 (37.8)

PER (x) 449.2 1,067.5 893.7 5.5 8.9

Price/Book (x) 4.3 4.0 4.0 2.3 1.8

EV/EBITDA (x) 294.2 952.4 769.2 3.4 3.4

RoE (%) 1.5 0.4 0.4 52.8 23.1

RoCE (%) 1.4 0.2 0.2 59.1 36.5


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This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction.

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Reports based on technical analysis centers on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals.

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The analyst certifies that all of the views expressed in this research report accurately reflect his/her personal views about any and all of the subject issuer(s) or securities. The analyst certifies that no part of her compensation was, is, or will be directly or indirectly related to the specific recommendation(s) and/or views expressed in this report.

Additional Disclosures of interest:

1. IDFC SEC and its affiliates (i) may have received compensation from the company covered herein in the past twelve months for investment banking services; or (ii) may expect to receive or intends to seek compensation for investment-banking services from the subject company in the next three months from publication of the research report.

2. Affiliates of IDFC SEC may have managed or co-managed in the previous twelve months a private or public offering of securities for the subject company.

3. IDFC SEC and affiliates collectively hold more than 1% of the equity of NSEIL and ICEX that is the subject of the report as of the end of the month preceding the distribution of the research report.

4. IDFC SEC and affiliates are not acting as a market maker in the securities of the subject company.

Explanation of Ratings:

1. Outperformer : More than 5% to Index

2. Neutral : Within 0-5% (upside or downside) to Index

3. Underperformer : Less than 5% to Index

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Analyst Sector/Industry/Coverage E-mail Tel.+91 22 6622 2600

Shirish Rane Co-Head of Research; Construction, Power, Cement [email protected] +91 22 6622 2575

Nikhil Vora Co-Head of Research; Strategy, FMCG, Media, Retail, Education, Mid-caps [email protected] +91 22 6622 2567

Prakash Joshi Oil & Gas, Metals [email protected] +91 22 6622 2564

Nitin Agarwal Pharmaceuticals, Real Estate, Agri-inputs [email protected] +91 22 6622 2568

Hitesh Shah, CFA IT Services & Telecom [email protected] +91 22 6622 2565

Bhoomika Nair Logistics, Engineering [email protected] +91 22 6622 2561

Pramod Kumar Automobiles, Auto ancillaries [email protected] +91 22 6622 2562

Ashish Shah Construction, Power [email protected] +91 22 6622 2560

Probal Sen Oil & Gas [email protected] +91 22 6622 2569

Swati Nangalia Media, Education, Exchanges [email protected] +91 22 6622 2576

Abhishek Gupta Telecom, IT services [email protected] +91 22 6622 2661

Saumil Mehta Metals, Pipes [email protected] +91 22 6622 2578

Harit Kapoor FMCG, Retail, Paints, Mid-caps [email protected] +91 22 6622 2649

Vineet Chandak Real Estate, Pharmaceuticals, Agri-inputs [email protected] +91 22 6622 2579

Nikhil Salvi Strategy, Mid-caps [email protected] +91 22 6622 2566

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