05Aug2014 India Daily

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL.

INDIA DAILYAugust 5, 2014

Kotak Institutional Equities Research [email protected] . Mumbai: +91-22-4336-0000

India 4-Aug 1-day1-mo 3-mo

Sensex 25,723 1.0 (0.9) 14.8

Nifty 7,684 1.1 (0.9) 14.8

Global/Regional indices

Dow Jones 16,569 0.5 (2.9) 0.3

Nasdaq Composite 4,384 0.7 (2.3) 6.3

FTSE 6,678 (0.0) (2.7) (2.1)

Nikkei 15,481 0.0 0.3 7.1

Hang Seng 24,600 0.3 4.5 11.9

KOSPI 2,071 (0.4) 3.1 5.7

Value traded – India

Cash (NSE+BSE) 174 211 241

Derivatives (NSE) 1,282 1,383 617

Deri. open interest 1,540 1,723 1,273

Forex/money market

Change, basis points

4-Aug 1-day 1-mo 3-mo

Rs/US$ 60.9 2 93 82

10yr govt bond, % 8.8 (2) 6 (27)

Net investment (US$mn)

1-Aug MTD CYTD

FIIs (183) (183) 11,673

MFs 132 133 (191)

Top movers

Change, %

Best performers 4-Aug 1-day 1-mo 3-mo

BHFC IN Equity 749.7 3.6 11.6 84.9

RCAPT IN Equity 582.2 0.6 (11.2) 70.8

UT IN Equity 25.9 3.2 (21.3) 62.9

SSLT IN Equity 289.6 2.7 (5.1) 60.5

AL IN Equity 35.1 3.4 (2.8) 56.3

Worst performers

UNSP IN Equity 2393.4 2.7 (2.5) (13.4)

CAIR IN Equity 319.3 2.1 (12.2) (4.7)

UBBL IN Equity 736.3 3.5 3.2 (4.6)

MMFS IN Equity 248.7 2.9 (8.7) 0.8

ACEM IN Equity 204.4 0.5 (8.6) 0.9

Contents

Special Reports

Strategy

Strategy: Smart beta using eXtractor - growth and profitability overshadow other styles

Daily Alerts

Results

Power Grid: Steady on the growth path

Cummins India: Poised to outperform peers

Marico: 1QFY15 ahead, outlook positive; valuations full. REDUCE

Mphasis: Revenue growth challenges mount

Oriental Bank of Commerce: Lower provisions cushion a weak performance

Bajaj Corp.: 1QFY15 ahead of expectations; raise estimates a tad. ADD

Carborundum Universal: Margins to improve further; order flow is encouraging

Results, Change in Reco

Petronet LNG: Weak results and full valuations

Company

Crompton Greaves: Annual report - broad demand recovery uncertain; expects overseas demand in some pockets

For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

Kotak Institutional Equities Research

[email protected]

Mumbai: +91-22-4336-0000

eXtractor, KIE’s proprietary data analytics tool

KIE’s proprietary data-analytics tool, eXtractor, mines a universe of Indian stocks based on nine factors: value, relative value, growth, profitability, momentum, leverage, size, sentiment and our proprietary factor iQ, or investment quotient. The data-mining is comprehensive in nature with iQ deriving higher concepts from basic financial parameters by unifying various traditional investment parameters under a single factor. This bridges the gap between data and inference. eXtractor is part of our Quantools offerings and is available on our website (http://kie.kotak.com). Here, clients can screen and test various investment styles, using their own parameters for universe, investment horizons, churn periods, portfolio size and more.

Investment style guide—growth and profitability outperform in July

Growth (+5.3%) and profitability (+3.7%) emerged as the best-performing investment styles in July (see Exhibit 1). Value (-6.3%) and low leverage (-5.3%) were the worst-performing factors even as sentiments (-2.2%) lagged the broader markets. Investment trends have been mixed since May with growth and profitability experiencing mixed fortunes in CYTD14 (see Exhibit 2). While SUNP and TCS assisted the growth portfolio over the month, consumer staples like HUVR and ITC were the biggest boost to the profitability basket (see Exhibit 3). The value portfolio was affected by corporate governance concerns in CAIR (-13.6%). Exhibit 4 showcases the August 2014 portfolios based on various investment styles. AXSB was added to the iQ portfolio for the month on the back of growth, value and sentiments. AXSB, HUVR and APNT make up the sentiment-based portfolio for August, having witnessed consensus target price upgrades of 10-12% over the month.

Smart beta—optimized CNX Nifty 50 portfolio underperforms by 50 bps in July

We extend eXtractor’s framework to optimize the weights of the CNX Nifty 50 constituents by exposing the broader portfolio to selected factors (see Exhibit 5). The strategy has consistently outperformed the benchmark since CY2006 (see Exhibit 6) based on a set of assumptions (see Exhibit 7). In July, the optimized portfolio underperformed the CNX Nifty 50 by 50 bps for the first time since January 2014 (see Exhibit 8). While the overweight positions in materials like NMDC and JSPL weighed upon portfolio performance, underweight positions in LT and SBIN assisted overall portfolio returns (see Exhibit 9). Exhibit 10 showcases the optimized CNX Nifty 50 portfolio performance for July.

August 2014 optimized CNX Nifty 50 portfolio—prefers financials over healthcare and industrials

The optimized CNX Nifty 50 portfolio for August prefers financials, information technology, materials and consumer discretionary over consumer staples, healthcare and information technology (see Exhibit 11). PNB, CAIR, IIB and SBIN saw the highest additions in weight on a mom basis while HMCL, ONGC and ITC were placed at the opposite end of the spectrum (see Exhibit 12). Exhibit 13 showcases the optimized CNX Nifty 50 portfolio for August.

Strategy.dot

Strategy India Quantitative

Smart beta using eXtractor—growth and profitability overshadow other styles. Growth and profitability were the best-performing investment styles in July despite their mixed fortunes in CYTD14. The optimized CNX Nifty 50 portfolio for August prefers financials, information technology and materials over consumer staples, healthcare and industrials. PNB, CAIR and IIB are the biggest additions to the August portfolio.

INDIA

AUGUST 05, 2014

UPDATE

BSE-30: 25,723

QUICK NUMBERS

• Growth and profitability supersede other investment styles in July 2014

• AXSB gets added to the iQ portfolio

• Optimized portfolio prefers financials, information technology and materials

• PNB, CAIR, IIB and SBIN were the biggest mom addition

Saifullah Rais [email protected] Mumbai: +91-22-4336-0895

Strategy India

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

Exhibit 1: Growth and profitability are the only investment styles to outperform the CNX Nifty 50 in July Performance of the portfolios based on different investment styles, July 2014

Portfolio returnsMinimum Maximum Average

Investment style Company Returns (%) Company Returns (%) (%)iQ ONGC (6.9) Tata Consultancy Services 6.4 (0.0)Growth IndusInd Bank (2.1) Sun Pharmaceuticals 15.0 5.3Value Cairn India (13.6) Bank of Baroda (0.5) (6.3)Relative value Jindal Steel & Power (14.8) ITC 9.5 (2.3)Profitability NMDC (6.8) Hindustan Unilever 10.7 3.7Size State Bank of India (9.2) Tata Consultancy Services 6.4 (1.4)Momentum Larsen & Toubro (11.7) Tata Steel 4.7 (3.4)Sentiments BHEL (8.8) Maruti Suzuki India 3.5 (2.2)Leverage Bajaj Auto (10.4) Infosys 9.5 (5.3)

Source: eXtractor, Factset estimates, Kotak Institutional Equities

Exhibit 2: Growth and profitability have seen mixed fortunes in CYTD14 Performance of various investment styles compared to CNX Nifty 50 (%), CYTD14

(10)

(5)

0

5

10

15

Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14

CNX Nifty 50 (%) Growth portfolio (%) Profitability portfolio (%)

Source: eXtractor, Factset estimates, Kotak Institutional Equities

India Strategy

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Exhibit 3: SUNP and TCS dazzle in the growth portfolio; HUVR and ITC boost the profitability portfolio performance The portfolios based on different investment strategies within the CNX Nifty 50 universe for July 2014

eXtractor factor ranks Price change MoMCurrent Portfolio Growth Value Relative value Profitability Size Momentum Sentiments Leverage iQ (%)

iQHCL Technologies 1 28 26 10 25 21 27 9 1 3.7NMDC 38 3 9 2 33 10 12 1 2 (6.8)Oil & Natural Gas Corp. 30 4 21 17 2 11 30 21 3 (6.9)Tata Motors 4 10 1 22 5 33 45 27 4 3.6Tata Consultancy Services 3 41 25 5 4 22 41 13 5 6.4

GrowthHCL Technologies 1 28 26 10 25 21 27 9 1 3.7Sun Pharmaceutical Industries 2 46 31 7 24 20 25 10 16 15.0Tata Consultancy Services 3 41 25 5 4 22 41 13 5 6.4

Tata Motors 4 10 1 22 5 33 45 27 4 3.6IndusInd Bank 5 34 23 37 43 27 11 41 22 (2.1)

ValueBank of Baroda 16 1 11 41 14 18 17 48 11 (0.5)Cairn India 47 2 4 6 31 36 47 11 29 (13.6)NMDC 38 3 9 2 33 10 12 1 2 (6.8)Oil & Natural Gas Corp. 30 4 21 17 2 11 30 21 3 (6.9)Punjab National Bank 28 5 35 44 17 6 34 39 27 (3.6)

Relative valueTata Motors 4 10 1 22 5 33 45 27 4 3.6Infosys 22 19 2 14 16 43 43 4 18 9.5ITC 19 44 3 3 10 48 24 16 30 9.5Cairn India 47 2 4 6 31 36 47 11 29 (13.6)Jindal Steel & Power 11 23 5 27 39 24 26 40 25 (14.8)

ProfitabilityHindustan Unilever 21 49 43 1 23 46 48 15 47 10.7

NMDC 38 3 9 2 33 10 12 1 2 (6.8)ITC 19 44 3 3 10 48 24 16 30 9.5

Hero MotoCorp 27 24 33 4 36 16 6 17 8 (1.4)Tata Consultancy Services 3 41 25 5 4 22 41 13 5 6.4

SizeReliance Industries 41 16 7 39 1 45 36 28 28 (0.9)Oil & Natural Gas Corp. 30 4 21 17 2 11 30 21 3 (6.9)State Bank of India 23 20 28 47 3 7 10 35 6 (9.2)Tata Consultancy Services 3 41 25 5 4 22 41 13 5 6.4Tata Motors 4 10 1 22 5 33 45 27 4 3.6

MomentumSesa Sterlite 37 13 48 26 18 1 14 29 20 (0.7)Bharat Petroleum Corp. 46 12 39 48 7 2 1 36 9 (3.4)Larsen & Toubro 25 43 38 30 11 3 22 43 32 (11.7)Tata Steel 15 6 40 46 13 4 15 38 15 4.7GAIL India 32 8 27 34 26 5 39 25 24 (5.9)

SentimentsBharat Petroleum Corp. 46 12 39 48 7 2 1 36 9 (3.4)Bharat Heavy Electricals 49 25 37 43 30 17 2 3 40 (8.8)Axis Bank 14 22 19 38 19 13 3 33 7 2.1Maruti Suzuki India 24 31 42 24 27 14 4 12 23 3.5Power Grid Corp of India 13 37 14 11 28 12 5 47 17 (4.4)

LeverageCoal India 36 4 23 6 11 13 11 1 5 (4.5)Infosys 15 14 2 11 13 32 32 2 11 3.4Bharat Heavy Electricals 37 19 26 34 22 12 2 3 28 (8.8)Ambuja Cements 31 25 35 19 35 29 4 4 33 (6.4)Bajaj Auto 18 17 21 7 30 17 25 5 18 (10.4)

Notes:(a) The ranks for a company may vary depending on the permissible universe used for analyzing a particular investment style.

Source: Factset estimates, eXtractor, Kotak Institutional Equities

Strategy India


Exhibit 4: AXSB enters the iQ portfolio; NMDC gets added to relative value; ACEM, HUVR and APNT see positive change in sentiments The portfolios based on different investment strategies within the CNX Nifty 50 universe for August 2014

eXtractor factor ranksCurrent Portfolio Growth Value Relative value Profitability Size Momentum Sentiments Leverage iQ

iQTata Motors 3 10 4 23 5 27 29 26 1HCL Technologies 1 29 31 11 25 30 19 8 2

Axis Bank 14 23 15 38 19 4 9 33 3

NMDC 37 2 3 3 33 33 22 1 4Tata Consultancy Services 5 42 36 4 4 22 20 14 5

GrowthHCL Technologies 1 29 31 11 25 30 19 8 2Sun Pharmaceutical Industries 2 46 47 7 23 8 23 10 20Tata Motors 3 10 4 23 5 27 29 26 1IndusInd Bank 4 33 16 37 43 17 8 39 11Tata Consultancy Services 5 42 36 4 4 22 20 14 5

ValueCairn India 41 1 2 6 31 49 45 12 22NMDC 37 2 3 3 33 33 22 1 4Bank of Baroda 16 3 9 42 14 15 10 48 10Oil & Natural Gas Corp. 32 4 14 17 2 28 37 21 6Punjab National Bank 28 5 25 46 18 9 4 38 7

Relative valueJindal Steel & Power 11 19 1 27 40 46 28 40 23Cairn India 41 1 2 6 31 49 45 12 22NMDC 37 2 3 3 33 33 22 1 4Tata Motors 3 10 4 23 5 27 29 26 1Infosys 23 26 5 14 15 44 17 4 13

ProfitabilityHindustan Unilever 17 49 48 1 24 20 2 16 28ITC 20 45 24 2 10 40 31 17 29NMDC 37 2 3 3 33 33 22 1 4Tata Consultancy Services 5 42 36 4 4 22 20 14 5Hero MotoCorp 24 22 34 5 36 26 13 13 15

SizeReliance Industries 42 17 8 39 1 42 41 29 24Oil & Natural Gas Corp. 32 4 14 17 2 28 37 21 6State Bank of India 25 16 11 47 3 21 16 34 9Tata Consultancy Services 5 42 36 4 4 22 20 14 5Tata Motors 3 10 4 23 5 27 29 26 1

MomentumHindalco Industries 38 18 49 49 22 1 7 43 21Sesa Sterlite 36 12 45 26 20 2 27 28 17Tata Steel 15 9 43 44 13 3 5 41 8Axis Bank 14 23 15 38 19 4 9 33 3IDFC 44 13 23 45 46 5 25 47 34

SentimentsAmbuja Cements 43 30 29 19 48 43 1 6 32Hindustan Unilever 17 49 48 1 24 20 2 16 28Asian Paints 9 48 44 13 38 13 3 18 27

Punjab National Bank 28 5 25 46 18 9 4 38 7Tata Steel 15 9 43 44 13 3 5 41 8

LeverageCoal India 37 3 17 7 11 10 27 1 10Bharat Heavy Electricals 38 19 21 35 23 20 9 2 35Infosys 16 18 4 12 13 34 11 3 6Bajaj Auto 19 15 12 8 30 37 38 4 29Ambuja Cements 32 23 20 18 37 33 1 5 19

Notes:(a) The ranks for a company may vary depending on the permissible universe used for analyzing a particular investment style.

Source: Factset estimates, eXtractor, Kotak Institutional Equities

India Strategy


Exhibit 5: Strategy showcases consistent outperformance Optimized portfolio performance and factor exposure

Security-wise constraintsUpper bound stock ownership (%) 8Stockwise deviation (%) 5Composite factor style exposure (%)Growth 15Value 15Relative value 25Profitability 15Size 0Mometum 10Sentiments 20Leverage 0Performance statisticsAverage returns (%) 0.6Avg. +ve returns (%) 1.8Avg. -ve returns (%) (1.1)Annualized outperformance (%) 7.1Hit ratio (%) 59Maximum drawdown (%) 11Profit factor (X) 1.6Avg. number of securities owned 26

Source: eXtractor, Kotak Institutional Equities

Exhibit 6: The optimized portfolio strategy has consistently outperformed since CY2008 Annual optimized CNX Nifty 50 portfolio outperformance over the CNX Nifty 50 (%)

(8)

(4)

0

4

8

12

16

CY2007 CY2008 CY2009 CY2010 CY2011 CY2012 CY2013 CYTD14

Annual outperformance over the CNX Nifty 50 (%)


Strategy India


Exhibit 7: Maximum allowable deviation from benchmark weight is 5% Key assumptions to consider liquidity and implementation constraints

AssumptionsAUM (US$ mn) - 100Participation aggression - 25%Days to set up position - 2 daysSecurity-wise maximum deviation from Nifty Index = 5%Upper bound on ownership = 8%No shorting allowed.


Exhibit 8: Optimized portfolio underperforms benchmark in July Mom performance of the optimized CNX Nifty 50 portfolio based on eXtractor's scoring model (%)

(6)

(4)

(2)

0

2

4

6

8

10

12

Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14

CNX Nifty 50 (%) Optimized CNX Nifty 50 portfolio (%)


Exhibit 9: Portfolio performance negatively affected by excess exposure to materials like JSPL and NMDC Positive and negative contributors to portfolio alpha, July 2014

Weight (+/-) Performance Weight (+/-) PerformanceCompany (%) (%) Company (%) (%)Case VII (c ) 0.9Lupin 6.0 12.8 Jindal Steel & Power 5.5 (14.8)Larsen & Toubro 0.4 (11.7) HDFC 1.0 7.6State Bank of India 0.0 (9.2) NMDC 5.6 (6.8)HCL Technologies 6.6 3.7 Sun Pharmaceuticals (0.0) 15.0Tata Motors 8.0 3.6 Oil & Natural Gas Corp. 6.2 (6.9)

Positive contributors Negative contributors

Source: eXtractor, KIE Quantools

India Strategy


Exhibit 10: The optimized portfolio underperformed the CNX Nifty 50 by ~0.5% in July Optimized CNX Nifty 50 portfolio performance for July 2014

CNX Nifty 50 Optimized Difference PerformanceCompany GICS Sectors (%) (%) (+/-) (%)Infosys Information Technology 6.2 8.0 1.8 3Tata Motors Consumer Discretionary 3.1 8.0 4.9 4Axis Bank Financials 2.5 7.5 5.0 2ITC Consumer Staples 7.0 7.0 0.0 10HCL Technologies Information Technology 1.6 6.6 5.0 4ICICI Bank Financials 6.3 6.3 0.0 4Hero MotoCorp Consumer Discretionary 1.2 6.2 5.0 (1)Power Grid Corp of India Utilities 1.2 6.2 5.0 (4)Oil & Natural Gas Corp Energy 2.9 6.2 3.2 (7)Lupin Health Care 1.0 6.0 5.0 13Bank of Baroda Financials 0.6 5.6 5.0 (1)NMDC Materials 0.6 5.6 5.0 (7)Jindal Steel & Power Materials 0.5 5.5 5.0 (15)Tata Consultancy Services Information Technology 4.9 4.9 (0.0) 6HDFC Bank Financials 6.0 4.6 (1.4) 2Reliance Industries Energy 6.6 1.6 (5.0) (1)Wipro Information Technology 1.4 1.4 (0.0) (0)HDFC Financials 6.0 1.0 (5.0) 8IndusInd Bank Financials 1.0 1.0 (0.0) (2)Cairn India Energy 0.8 0.4 (0.4) (14)Larsen & Toubro Industrials 5.4 0.4 (5.0) (12)Performance (%) 1.44 0.94

eXtractor-based


Exhibit 11: eXtractor recommends a high exposure to financials; allocations to healthcare drops Portfolio sector-wise comparison of exposure as compared to previous month (%)

CNX Nifty 50 Weights Difference Weights DifferenceGICS Sectors Original Optimized (+/-) Optimized (+/-)Consumer Discretionary 9 11 2.3 14 5.3Consumer Staples 10 3 (7.6) 7 (2.5)Energy 12 10 (1.5) 8 (3.7)Financials 29 43 14.3 26 (2.5)Health Care 5 — (5.6) 6 0.9Industrials 6 — (5.5) 0 (5.9)Information Technology 15 20 4.2 21 5.6Materials 9 12 3.7 11 2.2Telecommunication Services 2 — (1.7) — (1.6)Utilities 4 1 (2.6) 6 2.2Performance (%) (0.49) 0.4 0.9Alpha (%) 0.90 (0.5)Portfolio 22 21

Current month Previous month


Strategy India


Exhibit 12: PNB, CAIR and IIB saw the highest mom increase in weights Optimized CNX Nifty 50 portfolio mom change in weights, August 2014

OptimizedCNX Nifty 50 weights MoM change

Company GICS Sectors (%) (%) (%)MoM weight increase (%)Punjab National Bank Financials 0.6 5.6 5.6Cairn India Energy 0.7 5.7 5.3IndusInd Bank Financials 0.9 5.9 5.0State Bank of India Financials 2.9 2.9 2.9MoM weight reduction (%)Lupin Health Care 1.1 — (6.0)Power Grid Corp of India Utilities 1.1 1.1 (5.1)ITC Consumer Staples 7.6 2.6 (4.4)Oil & Natural Gas Corp. Energy 2.7 2.7 (3.4)Hero MotoCorp Consumer Discretionary 1.2 3.1 (3.2)


Exhibit 13: TTMT, INFO, ICICI and AXSB have the biggest allocations in the portfolio Optimized CNX Nifty 50 portfolio constituents and weights, August 2014

CNX Nifty 50 Optimized DifferenceCompany GICS Sectors (%) (%) (+/-)Tata Motors Consumer Discretionary 3.1 8.0 4.9Infosys Information Technology 6.2 8.0 1.8ICICI Bank Financials 6.6 8.0 1.4Axis Bank Financials 2.5 7.5 5.0HCL Technologies Information Technology 1.6 6.6 5.0HDFC Bank Financials 6.0 6.0 (0.0)IndusInd Bank Financials 0.9 5.9 5.0Cairn India Energy 0.7 5.7 5.0Bank of Baroda Financials 0.6 5.6 5.0Punjab National Bank Financials 0.6 5.6 5.0NMDC Materials 0.5 5.5 5.0Jindal Steel & Power Materials 0.4 5.4 5.0Tata Consultancy Services Information Technology 5.1 5.1 (0.0)Hero MotoCorp Consumer Discretionary 1.2 3.1 1.9State Bank of India Financials 2.9 2.9 — Oil & Natural Gas Corp Energy 2.7 2.7 — ITC Consumer Staples 7.6 2.6 (5.0)HDFC Financials 6.5 1.5 (5.0)Tata Steel Materials 1.4 1.4 (0.0)Reliance Industries Energy 6.3 1.3 (5.0)Power Grid Corp of India Utilities 1.1 1.1 — IDFC Financials 0.7 0.4 (0.3)Performance (%) (0.49) 0.41Portfolio 22

eXtractor-based



Kotak Institutional Equities Research [email protected] Mumbai: +91-22-4336-0000

Earnings lower than estimates owing to lower transmission revenues as well as other income

PWGR reported net sales of `39 bn (11% yoy, 0% qoq), operating profit of `34 bn (11% yoy, 2% qoq) and net income of `11.6 bn (13% yoy, -2% qoq) against our estimates of `41 bn, `35 bn and `12.3 bn, respectively.

The lower net income was (1) primarily on account of lower transmission revenues of `38 bn against our estimates of `39 bn, (2) sequential decline in consultancy revenues at `610 mn in 1QFY15 compared to `1.6 bn in 4QFY14 and `965 mn in 1QFY14 and (3) lower other income of `1.3 bn against our estimates of `2.3 bn.

Capitalization picks up in 1QFY15, investment approval of `73 bn given during the quarter

Asset capitalization for 1QFY15 was ~`49 bn (66% yoy), which adds up to `194 bn asset capitalization in the trailing four quarters. PWGR achieved capitalization of `159 bn, which makes our estimate of `287 bn for the current fiscal an uphill task, though comes with a promising start.

Investment approval during the quarter at `73 bn is the highest in the last three years, giving visibility to sustenance of growth beyond the immediate capex plans. The last such chunky investment approvals were seen in FY2012, the benefits of which were accrued over the past three years. Ordering activity at `27 bn, although unexciting, is the highest in the trailing four quarters. In our view, ordering activity will likely gain momentum owing to the recently accorded investment approvals.

Maintain BUY on strong earnings momentum and reasonable valuations

We maintain our BUY rating on PWGR with a target price of `145. At 1.5X P/B and 10X P/E of FY2016E, PWGR trades at reasonable multiples not fully taking cognizance of the step-up in earnings as over `400 bn of CWIP will likely be capitalized over the next two years. We have currently maintained our earning estimate for FY2015E at `9.5/share and for FY2016E at `13/share and will review the same post the analyst meet.

Power Grid (PWGR)

Utilities

Steady on the growth path. Powergrid continues to report strong earnings—13% yoy growth in net income in 1QFY15, with asset capitalization of `49 bn for the quarter. The performance gains significance owing to (1) tightening of operating parameters by CERC and (2) absence of short-term open access earnings that were part of the base quarter. Valuations may seem pricey at 1.5X P/B, but underlying growth trajectory places PWGR among the preferred stocks in the utility space. Maintain BUY with TP of `145.

Power GridStock data Forecasts/Valuations 2014 2015E 2016E

52-week range (Rs) (high,low) EPS (Rs) 8.6 9.5 13.0Market Cap. (Rs bn) 692.9 EPS growth (%) (5.0) 9.8 37.5

Shareholding pattern (%) P/E (X) 15.3 14.0 10.2Promoters 57.9 Sales (Rs bn) 151.5 189.0 232.2FIIs 26.2 Net profits (Rs bn) 45.2 49.6 68.2MFs 2.4 EBITDA (Rs bn) 128.8 167.6 207.7

Price performance (%) 1M 3M 12M EV/EBITDA (X) 11.7 9.5 7.7Absolute (8.1) 26.7 45.0 ROE (%) 14.9 13.8 17.1Rel. to BSE-30 (7.3) 10.3 8.0 Div. Yield (%) 1.9 2.1 2.9

Company data and valuation summary

147-88

BUY

AUGUST 05, 2014

RESULT

Coverage view: Cautious

Price (`): 132

Target price (`): 145

BSE-30: 25,723

Murtuza Arsiwalla [email protected] Mumbai: +91-22-4336-0870 Arun Bagaria [email protected] Mumbai: +91-22-4336-0871

Power Grid Utilities


Exhibit 1: Lower net profit at Rs11.6 bn below estimates due to lower transmission revenues and lower other income Interim results for PWGR, March fiscal year-ends (Rs mn)

(% Chg.)1QFY15 1QFY15E 1QFY14 4QFY14 1QFY15E 1QFY14 4QFY14 FY2015E FY2014 (% Chg.)

Transmission 38,129 39,418 32,824 36,996 179,299 139,861STOA — — 1,037 — — 2,152Telecom 645 749 730 649 2,832 2,761Consultancy 610 965 946 1,695 6,392 6,266Net sales 39,384 41,132 35,537 39,341 (4) 11 0 188,523 151,039 25Employee cost (2,313) (2,411) (2,318) (2,343) (9,793) (9,417)Other O&M (3,059) (3,455) (2,690) (3,489) (11,661) (13,323)EBITDA 34,013 35,266 30,529 33,509 (4) 11 2 167,069 128,300 30EBITDA margin (%) 86 86 86 85 89 85Other income 1,367 2,372 803 2,496 6,887 5,687Interest & finance charges (9,279) (8,595) (7,599) (8,189) (43,331) (31,675)Depreciation (11,550) (11,420) (9,644) (10,750) (57,672) (39,957)PBT 14,550 17,624 14,089 17,066 (17) 3 (15) 72,953 62,355 17Provision for tax (net) (2,866) (5,287) (3,747) (5,107) (23,821) (17,663)Net profit 11,684 12,337 10,343 11,959 (5) 13 (2) 49,132 44,691 10Extraordinary (319) — (60) (201) — (205)Reported PAT 11,365 12,337 10,282 11,758 49,132 44,486Tax rate (%) 20 30 27 30 33 28Key operating parametersCapex (Rs mn) 59,000 50,000 58,180 18 1 191,889 223,000 (14)Assets capitalized (Rs mn) 49,000 40,890 29,500 78,480 66 (38) 287,438 159,000 81

Source: Company, Kotak Institutional Equities

Exhibit 2: Asset capitalization of Rs49 bn in 1QFY15 Quarterly capex and capitalization for PGCIL, March fiscal year-ends, 1QFY11-1QFY15 (Rs bn)

10

30

50

70

1Q F

Y11

2Q F

Y11

3Q F

Y11

4QFY

11

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

(Rs bn) Capex Capitalisation


Utilities Power Grid


Exhibit 3: Revival in approvals as Rs73 bn investments approved during 1QFY15 Quarterly approvals and ordering for PGCIL, March fiscal year-ends, 1QFY11-1QFY15 (Rs bn)

10

50

90

130

170

1Q F

Y11

2Q F

Y11

3Q F

Y11

4QFY

11

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

(Rs bn) Approvals Ordering


Exhibit 4: At 1.5X P/B and 10X P/E 2016E earnings trades reasonable owing to strong growth profile Key valuation metrics for PGCIL, March fiscal year-ends, 2012-16E

2012 2013 2014E 2015E 2016Valuations (at CMP) 130Book value (Rs) 54 61 71 78 89 Net worth 250,887 281,986 369,026 410,517 464,306 P/B (X) 2.4 2.1 1.8 1.7 1.5 EPS 7.1 9.1 8.6 9.5 13.0 P/E (X) 18 14 15 14 10 RoE (%) 13.7 15.9 13.8 12.7 15.6 RoCE (%) 6.3 6.7 6.1 6.1 7.2 Net debt 508,130 659,637 746,940 825,885 813,178 EV 1,109,995 1,261,502 1,427,048 1,505,993 1,493,286 EV/EBITDA (X) 11.1 9.9 9.4 8.0 6.4

Source: Company, Kotak Institutional Equities estimates

Exhibit 5: We factor a capitalization of Rs287 bn in FY2015E and Rs238 bn in FY2016E Key assumptions in the profit model of Powergrid (standalone), March fiscal year-ends, 2011-16E

2011 2012 2013 2014E 2015E 2016ECapex (Rs bn) 134 146 238 268 192 119Capitalization (Rs bn) 73 128 170 167 287 238Regulated equity (Rs bn) 148 186 237 287 374 445Growth rate (%)Capex 33 9 63 13 (28) (38)Capitalization 116 76 33 (2) 73 (17)Regulated equity 17 26 27 21 30 19


Power Grid Utilities


Exhibit 6: Profit model, balance sheet, cash model of PGCIL, March fiscal year-ends, 2011-17E (Rs mn)

2011 2012 2013 2014E 2015E 2016E 2017EProfit modelNet revenues 83,887 100,353 127,095 151,527 189,011 232,152 273,960EBITDA 70,513 83,824 108,880 128,788 167,557 207,700 247,308Other income 6,709 7,497 6,193 5,687 6,887 7,313 8,536Interest expense (17,339) (19,433) (25,352) (31,675) (43,331) (45,966) (52,799)Depreciation (21,994) (25,725) (33,519) (39,957) (57,672) (72,113) (84,546)Pretax profits 37,889 46,163 56,202 62,843 73,441 96,935 118,499Tax (6,846) (8,911) (10,521) (12,741) (14,591) (19,280) (23,316)Deferred taxation (4,432) (4,541) (3,583) (4,922) (9,230) (9,430) (12,851)Net income 26,611 32,710 42,098 45,179 49,620 68,225 82,332Extraordinary items 359 (161) 247 (205) — — —Reported profit 26,969 32,550 42,345 44,974 49,620 68,225 82,332Earnings per share (Rs) 5.7 7.1 9.1 8.6 9.5 13.0 15.7 Balance sheetPaid-up common stock 42,088 46,297 46,297 46,297 52,316 52,316 52,316Total shareholders' equity 213,670 234,878 262,395 344,596 376,858 421,217 474,748Deferred taxation liability 11,467 16,009 19,592 24,430 33,659 43,089 55,939Income received on account of AAD 23,474 22,831 37,176 45,175 45,175 45,175 45,175Total borrowings 408,828 538,950 681,876 794,902 907,265 920,754 911,557Total liabilities and equity 657,439 812,668 1,001,038 1,209,103 1,362,957 1,430,235 1,487,420Net fixed assets 372,240 476,623 614,006 776,892 970,438 1,136,288 1,390,714Capital work-in progress 266,246 281,835 348,235 449,416 353,868 235,094 666Investments 13,651 12,845 11,476 9,987 5,981 4,080 4,054Miscellaneous expenses not w/o 24 — — — — — — Cash 36,801 23,369 16,620 44,175 79,426 107,521 152,088Net current assets (excl. cash) (31,522) 17,997 10,701 (71,367) (46,754) (52,749) (60,102)Net current assets (incl. cash) 5,279 41,366 27,320 (27,192) 32,671 54,772 91,986Total assets 657,439 812,668 1,001,038 1,209,103 1,362,957 1,430,235 1,487,420Free cash flowOperating cash flow, excl. working capital 46,192 62,174 93,792 97,852 116,521 149,768 179,728Working capital changes (5,910) (49,519) 7,296 82,068 (24,613) 5,995 7,353Capital expenditure (134,204) (145,945) (237,784) (304,023) (155,669) (119,190) (104,544)Free cash flow (93,922) (133,290) (136,695) (124,104) (63,761) 36,573 82,538Ratios Net debt/equity (%) 168 214 249 215 218 192 159Return on equity (%) 13.5 13.7 15.9 13.8 12.7 15.6 16.5Book value per share (Rs) 49 54 61 71 78 89 101 ROCE (%) 6.5 6.3 6.7 6.1 6.1 7.2 8.2




Exports—scale-up in low hp and recovery of high-hp sales drive very strong growth

Cummins reported the second straight quarter of strength with 41% yoy growth in revenues. This was driven by exports in (1) low-hp (`1.2 bn, up 128% yoy), (2) high-hp (`1.7 bn, up 20% yoy) and (3) mid-range (`460 mn, 55% yoy) segments. Low and mid-hp exports continued to benefit from a good response in seeded markets (Latin America) and high hp exports grew after bottoming out in 1QFY14. For FY2015 Cummins expects exports to grow 30% yoy, driven by low hp exports. We build in 30-35% growth for exports over FY2015-17.

Domestic—sees demand bottoming out across sectors; guidance indicates recovery from 2HFY15

Cummins anticipates broad-based recovery in demand from 2HFY15, though 1QFY15 revenues were sedate—down 16% yoy, led by industrials. Higher powergen realizations, on pass-through of costs to comply with revised emission norms, will support revenues. The company raised its revenue growth guidance to 0-5% from flattish guidance earlier and said its outlook was positive for the follo0wing businesses—(1) powergen (investment-led demand), (2) industrials (construction, mining, railways and marine segments) and (3) distribution (increased customer reach; higher demand in the revised emission regime).

Margins—expects to overcome the impact of new emission norms and maintain margins

EBITDA margin of 17.2% included costs related to (1) higher-than-average corporate charges (~40 bps impact), which are expected to normalize and (2) higher CSR spends (-40 bps impact), which are expected to continue. The company said benefits of higher operational efficiencies and a favorable product mix (higher low-hp exports) helped it to sustain margins in an otherwise weak demand scenario. For FY2015 it aims to maintain margins, factoring in the negative near-term impact of revised emission norms being offset by lower incremental corporate charges.

Estimates—we build in strong recovery in scale-up of new businesses; retain our REDUCE rating

We revise estimates marginally to `27.0 and `30.5 from `25.3 and `30.0 for FY2015 and FY2016 on higher export growth. We revise our target price to `615 from `570 on roll-forward (19X June 2016E earnings). We build in 22% revenue CAGR and 100 bps margin expansion over FY2014-17.

Cummins India (KKC)

Industrials

Poised to outperform peers. After having added significant capacities and protecting margins through the down-cycle, Cummins is well placed to outperform the market on (1) an impending recovery in the domestic business, (2) growth in high-hp exports (bottomed out a year ago) and (3) scale-up in its low-hp business (domestic and exports). We build strong estimates of 22% sales CAGR, 100 bps margin expansion, though find it hard to reconcile with market expectations (21X FY2016E EPS). We retain REDUCE and revise target price to `615 from `570 on roll forward to June 2016E earnings.

Cummins IndiaStock data Forecasts/Valuations 2014 2015E 2016E





706-365

REDUCE

AUGUST 05, 2014

RESULT


Price (`): 627


BSE-30: 25,723

Aditya Mongia [email protected] Mumbai: +91-22-4336-0883

Cummins India Industrials


Sharper-than-expected sales decline; margins hold on adjusted basis

Sales decline much worse than our expectation at 16% yoy. Cummins reported a sharper-than expected 16% yoy decline in 1QFY15 sales to `10.3 bn, ~14% below our estimate. While we had built in the impact of (1) pre-buying (was limited at 5% of segment sales), (2) sequential growth in exports and (3) stable industrial sales (declined ~28% yoy).

Margin sustains at healthy levels. Adjusted EBITDA margin for 1QFY15 was healthy at 17.6% (adjusted for higher-than-average corporate cross-charges) and marginally below our estimate of 17.8%. We note that pig iron prices (an indicator of raw commodity costs) have increased further in 1QFY15 after declining materially for the previous 3-4 quarters. One-off other income led to a 10% yoy decline in PBT. Lower tax rate (on lower capital gains tax of one-off other income) led to PAT of `2.1 bn (up 18% yoy).

Exhibit 1: Flattish sales; margin miss and PAT beat on one-offs Cummins - 1QFY15 standalone revenue model (` mn)

% change1QFY15 1QFY15 1QFY14 4QFY14 1QFY15 1QFY14 4QFY14 FY2014 FY2013 yoy

Sales 10,451 12,223 10,493 9,716 (14.5) (0.4) 7.6 39,767 45,894 (13.4) Expenses (8,653) (10,047) (8,737) (8,007) (13.9) (1.0) 8.1 (32,799) (37,545) (12.6) Stock 50 (56) 187 52 (2) NARaw material (6,382) (6,487) (6,142) (1.6) 3.9 (24,293) (28,872) (15.9) Employee (903) (831) (817) 8.7 10.6 (3,396) (3,386) 0.3 Other Exp (1,417) (1,363) (1,235) 3.9 14.7 (5,162) (5,285) (2.3) EBITDA 1,799 2,176 1,756 1,709 (17.3) 2.4 5.2 6,967 8,349 (16.5) Other income 1,067 431 668 315 147.4 59.8 239.3 1,777 2,067 (14.0) Interest (13) (3) (12) (11) 354.5 2.5 17.9 (42) (46) (9.3) Depreciation (186) (176) (117) (146) 5.9 58.4 27.6 (528) (473) 11.6 PBT 2,667 2,428 2,294 1,867 9.8 16.3 42.8 8,175 9,897 (17.4) Tax (547) (631) (632) (450) (13.3) (13.5) 21.8 (2,175) (2,872) (24.3) Net profit 2,120 1,797 1,662 1,418 18.0 27.6 49.5 6,000 7,025 (14.6) EPS (RS) 7.6 6.5 6.0 5.1 21.6 25.3 Key ratios (%)Raw material/Sales 60.6 62.4 61.3 61.0 62.9 Employee exp./Sales 8.6 7.9 8.4 8.5 7.4 Other exp./Sales 13.6 13.0 12.7 13.0 11.5

EBITDA margin 17.2 17.8 16.7 17.6 17.5 18.2 PBT Margin 25.5 19.9 21.9 19.2 20.6 21.6 Tax rate 20.5 26.0 27.6 24.1 26.6 29.0 PAT margin 20.3 14.7 15.8 14.6 15.1 15.3

% change


Industrials Cummins India


Exhibit 2: Quarterly trajectory of Cummins' segment sales (` bn)

Power generation

3.5 3.3

2.7

3.2

4.3

3.74.0

4.4

3.2

2.4

3.02.7 2.9

0.0

1.0

2.0

3.0

4.0

5.0

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

(Rs bn)

Industrials

1.41.2

1.6

1.31.1 1.1

1.5 1.51.4

1.2

1.5

1.11.0

0.0

0.5

1.0

1.5

2.0

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

(Rs bn)

Export

2.73.1

2.6

3.3

4.2

3.0

2.5

3.02.7

3.02.8

3.4

3.9

0.0

1.0

2.0

3.0

4.0

5.0

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

(Rs bn)

Distribution

2.3

2.01.7

2.2

2.52.4 2.3

2.0

2.6

2.3 2.4

2.02.2

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

(Rs bn)


Exhibit 3: Sharp growth in low-hp sales in 1QFY15; high-hp sales also grow Exports break-up for Cummins India, March fiscal year-ends (` mn)

Export sales breakup in 1QFY14 (Rs2.8 bn)

Mid range, 296

Heavy duty, 357

HHP, 1,429

LHP, 522

Spares, 156

Export sales breakup in 1QFY15 (Rs3.9 bn)

Mid range, 460

Heavy duty, 400

HHP, 1,720

Spares, 120

LHP, 1,190




Exhibit 4: Domestic high-hp sales possibly grew yoy in 1QFY15 Segmental break-up of sales for Cummins, March fiscal year-ends, 2013-1QFY15 (` mn)

Rating Yoy growthSegment (kva) 2013 2014 (%) 1QFY15 2015 (annualized)Low HP <160 4,611 4,150 (10.0) 1,480 5,920 Mid Range HP 160-380 8,046 7,000 (13.0) 1,840 7,360 Heavy Duty 450-625 4,019 4,300 7.0 880 3,520 High HP >750 18,243 13,500 (26.0) 3,710 14,840

Exports 7,119 1,720 6,880

Domestic 6,381 1,990 7,960

Distribution NA 9,250 9,250 0.0000 2,180 8,720 Total 44,169 38,200 (13.5) 10,090 40,360


Exhibit 5: Trends in raw material costs and currency, not supportive of margins Impact of raw material cost and currency on margin, March fiscal year-ends, 2008-1QFY15

50

70

90

110

130

150

170

Q3

FY08

Q1

FY09

Q3

FY09

Q1

FY10

Q3

FY10

Q1

FY11

Q3

FY11

Q1

FY12

Q3

FY12

Q1

FY13

Q3

FY13

Q1F

Y14

Q3F

Y14

Q1F

Y15

(X)

56

60

64

68

72

(%)

Raw material cost to sales [RHS]Pig iron India wholesale price index [LHS]Inverse USD INR index [LHS]


Concall takeaways—raises FY2015 guidance; operates at 50-60% utilization

Exports—guidance indicates 30% revenue growth, led by scale-up in the low-hp segment. Cummins reported the second straight quarter of strength with sequential improvement in revenues. On a yoy basis, sales grew by 41%. Growth was driven by (1) low hp (`1.2 bn, up 128% yoy), (2) high hp (`1.7 bn, up 20% yoy) and (3) mid-range segments (`460 mn, 55% yoy). High-hp sales reported good sequential growth for the second consecutive quarter in 1QFY15, growing 20% yoy. For the full year, the company expects exports to grow 30% yoy driven by low-hp exports (can grow 70% in FY2015 but maintaining the 1QFY15 run rate) and sustained recovery in high-hp sales.



Domestic—expects recovery from 2HFY15; guidance indicates 0-5% sales growth. Domestic sales declined 15-16% yoy with weakness seen across verticals (powergen, industrials, and distribution). Lack of pre-buying demand for gensets made results look weaker (would also have limited negative impact in coming quarters). While highlighting weak on-ground demand, the company believes demand to have bottomed out: (1) M&HCV operators now thinking of replenishing capacities as they see recent increase in freight cost getting absorbed by market, (2) improving demand for mining equipment and (3) government focus on railways and marine investments. For FY2015, it anticipates a 0-5% growth in domestic sales (with flattish volumes).

Margin—guidance indicates maintaining current margins. EBITDA margin of 17.2% was impacted by higher than average corporate charges (~40 bps impact), which should normalize going forward. The company also cited higher spending on donations as it aims to comply with new Companies Act’s target of higher CSR spend (2% of PBT). This charge would sustain at `40-50 mn. For FY2015, company aims to maintain its margin at current levels, factoring in the negative near-term impact of CPCB-II norms to get compensated by lower corporate charges. Company said benefits from higher efficiencies and favorable product mix (higher LHP exports) have helped it sustain reasonable margin in an otherwise weak demand scenario.

Operates at capacity utilization of 50-60%. Cummins’ facilities are utilized to the extent of 50-60%.

Incremental capex focus on office building and technical center. Cummins aims to invest `5-6 bn in FY2015 (similar spend in FY2016). A large share of this spend would go towards the setting up of an office complex. Out of the three towers, one is complete and another is 60% complete. Each tower would cost about `3 bn.

Domestic low-hp business now significant. Cummins said material 1QFY15 domestic powergen sales in the 7-40 kVA category were `700 mn (a third of overall domestic powergen sales). It believes that there is strong potential to grow this segment.

We retain REDUCE on full valuations

We revise estimates marginally to `27.0 and `30.5 from `25.3 and `30.0 for FY2015 and FY2016 on higher exports growth. We revise our target price to `615 from `570 on roll-forward (19X June 2016E earnings). We build strong 22% revenue CAGR and 100 bps margin expansion over FY2014-17E.



Exhibit 6: Key estimates for Cummins India, March fiscal year ends, 2014-17E (` mn)

2014 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017ERevenues 39,767 47,217 58,092 71,877 47,045 56,984 68,864 0.4 1.9 4.4

Power generation 10,942 13,130 15,100 17,365 12,912 14,848 17,076 1.7 1.7 1.7Industrials 5,200 5,460 6,825 8,531 6,240 7,800 9,360 (12.5) (12.5) (8.9)Auto 1,170 1,346 1,615 1,938 1,346 1,615 1,938 0.0 0.0 0.0Distribution 9,300 10,229 11,764 13,528 10,694 12,299 14,143 (4.3) (4.3) (4.3)Exports 11,979 16,171 21,831 29,472 14,973 19,465 25,305 8.0 12.2 16.5

EBITDA 6,968 8,454 10,906 13,592 8,518 10,655 12,987 (0.8) 2.3 4.7EBITDA margin (%) 17.5 17.9 18.8 18.9 18.1 18.7 18.9 (-20 bps) (+10 bps) (0 bps)PAT 6,000 7,290 8,215 10,155 6,827 8,074 9,755 6.8 1.7 4.1Contribution from JVS (92) 192 248 315 192 248 315 0.0 0.0 0.0Adjusted PAT 5,908 7,482 8,463 10,470 7,019 8,322 10,070 6.6 1.7 4.0EPS (Rs) 21.3 27.0 30.5 37.8 25.3 30.0 36.3 6.6 1.7 4.0Growth (%)Revenues 18.7 23.0 23.7 18.3 21.1 20.8

Power generation 20.0 15.0 15.0 18.0 15.0 15.0Industrials 5.0 25.0 25.0 20.0 25.0 20.0Auto 15.0 20.0 20.0 15.0 20.0 20.0Distribution 10.0 15.0 15.0 15.0 15.0 15.0

Exports 35.0 35.0 35.0 25.0 30.0 30.0

EBITDA 21.3 29.0 24.6 22.3 25.1 21.9PAT 26.6 13.1 23.7 18.8 18.6 21.0

New estimates Old estimates % revision




Exhibit 7: Standalone balance sheet, profit model and cash flow statement of Cummins, March fiscal year-ends, 2010-17E (` mn)

2010 2011 2012 2013 2014 2015E 2016E 2017EBalance sheetShareholders funds 15,610 18,063 20,432 23,867 25,652 28,919 32,601 37,153 Loan funds 86 198 147 150 — 200 800 400 Total source of funds 15,696 18,261 20,579 24,345 26,117 29,119 33,401 37,553 Net block 3,337 3,564 4,649 4,934 9,192 12,608 16,068 17,443 Net fixed assets 3,337 4,210 5,146 6,142 10,149 13,358 16,318 17,693 Investments and goodwill 7,329 7,255 5,975 6,276 4,954 5,267 5,267 5,267 Cash balances 559 1,037 2,235 3,547 865 2,517 2,007 2,454 Net current assets excluding cash 4,301 5,571 7,153 8,381 10,149 7,977 9,808 12,139 Total application of funds 15,696 18,261 20,579 24,345 26,117 29,119 33,401 37,553 Profit modelTotal operating income 29,027 40,425 41,172 46,012 39,767 47,217 58,092 71,877 Total operating costs (23,175) (32,791) (34,200) (37,545) (32,799) (38,763) (47,186) (58,285) EBITDA 5,852 7,634 6,972 8,467 6,968 8,454 10,906 13,592 Other operational income 578 914 651 922 776 880 957 1,043 Other income 638 804 1,233 1,949 1,777 2,199 1,443 1,510 PBDIT 6,489 8,438 8,206 10,416 8,745 10,653 12,349 15,102 Financial charges (21) (48) (54) (46) (42) (11) (55) (66) Depreciation (361) (366) (420) (473) (528) (791) (1,040) (1,126) Pre-tax profit 6,108 8,024 7,732 9,897 8,175 9,851 11,254 13,910 Taxation (1,670) (2,114) (2,282) (2,872) (2,175) (2,561) (3,038) (3,756) PAT 4,437 5,910 5,450 7,025 6,000 7,290 8,215 10,155 Adjusted PAT 4,497 6,166 6,111 7,732 5,908 7,482 8,463 10,470 Cash flow statementOperating profit before working capital changes 4,819 6,324 5,924 7,544 6,570 8,092 9,310 11,346 Change in working capital / other adjustments 2,238 (1,270) (1,582) (1,229) (1,768) 2,173 (1,832) (2,331) Cashflow from operating activites 7,056 5,054 4,342 6,315 4,802 10,264 7,479 9,015 Fixed assets (607) (1,240) (1,355) (1,469) (4,534) (4,000) (4,000) (2,500) Investments (3,337) 75 1,279 (300) 1,322 (314) — —Cash (used) / realised in investing activities (3,944) (1,166) (76) (1,769) (3,212) (4,314) (4,000) (2,500) Borrowings (82) 94 67 401 (13) (265) 600 (400) Dividend paid (2,775) (3,457) (3,544) (4,205) (3,311) (4,022) (4,533) (5,603) Cash (used) /realised in financing activities (2,876) (3,411) (3,531) (3,851) (4,271) (4,299) (3,988) (6,069) Cash generated /utilised 236 478 1,197 1,311 (2,681) 1,652 (509) 446 Cash at beginning of year 323 559 1,037 2,235 3,547 865 2,517 2,007 Cash at end of year 559 1,037 2,235 3,546 865 2,517 2,007 2,454 Key ratios (%)EBITDA margin 22.4 20.9 19.9 22.6 22.0 22.6 21.3 21.0PAT margin 15.3 14.6 13.2 15.3 15.1 15.4 14.1 14.1RoE 30.0 35.1 30.7 34.5 24.2 26.7 26.7 29.1RoCE 26.1 27.7 22.5 28.5 19.9 25.6 21.7 23.8Net debt / equity (X) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0EPS (` ) 16.2 22.2 22.0 27.9 21.3 27.0 30.5 37.8




1QFY15 – another quarter of strong earnings beat

Marico beat our expectations handsomely for the second quarter in a row. Reported consol revenues (`16.2 bn, +25% yoy), EBITDA (`2.63 bn, +19% yoy) and recurring PAT (`1.85 bn, +19% yoy) were 3%, 14%, and 23% ahead of our expectations, respectively. Earnings beat was driven by better-than-expected EBITDA margin performance for both domestic as well as international businesses. Higher-than-expected pricing component of growth was the primary driver of margin outperformance as volume growth was broadly in line with our expectations. We believe that the company also benefitted from lower-than-expected consumption cost average for copra. ETR at 26.3% also came in lower than our expectation of 30%; the company has lowered its ETR guidance for FY2015E to 28-29% from 30% earlier.

Impressive volume growth across the portfolio

Barring non-rigid Parachute CNO SKUs, Marico delivered solid volume growth across its brand portfolio –

Parachute CNO rigid volume growth of 6% came in despite weighted-average price hike of 35%; we are surprised with the resilient response to the price hikes from the consumers – this reflects the deeply ingrained habit of hair oil usage in India as also the strength of the Parachute brand. We note that Marico’s reported market share number do not suggest any MS gains for the company; one typically expects Parachute to gain share in inflationary copra price environment. The management did indicate that they believe there are problems with Nielsen’s retain audit data and market growth may not be as weak as Nielsen’s numbers suggest.

Value-added hair oil portfolio rebounded and delivered 11% volume growth for the quarter. We note that the company has taken meaningful price hikes (15%+) in this portfolio as well.

Saffola volume growth was 10% for the quarter.

Marico (MRCO)

Consumer Products

1QFY15 ahead, outlook positive; valuations full. REDUCE. Marico delivered a solid quarter despite challenges from a soft growth environment and material inflation in copra prices. Parachute volume growth despite sharp price hikes was impressive and so was the double-digit volume growth in Saffola and VAHO portfolio. The company’s medium-term guidance (2X revenues in the next four years) reflects management’s confidence on growth. Stock at 25X FY2016E EPS, however, bakes in the impressive facets of performance as well as the confident outlook. We retain REDUCE with a revised target price of `250 (`235 earlier). Implied target PE is 24X FY2016E.

MaricoStock data Forecasts/Valuations 2014 2015E 2016E

52-week range (Rs) (high,low) EPS (Rs) 8.1 9.2 10.5Market Cap. (Rs bn) 165.0 EPS growth (%) 43.3 13.6 14.3


Price performance (%) 1M 3M 12M EV/EBITDA (X) 20.8 17.1 14.5Absolute 2.7 17.7 25.3 ROE (%) 38.2 33.6 31.0Rel. to BSE-30 3.6 2.5 (6.7) Div. Yield (%) 1.6 1.0 1.3


269-190

REDUCE

AUGUST 05, 2014

RESULT

Coverage view: Neutral

Price (`): 256


BSE-30: 25,723

Rohit Chordia [email protected] Mumbai: +91-22-4336-0885 Anand Shah [email protected] Mumbai: +91-22-4336-0882

Consumer Products Marico


Factor in the beat and raise our EPS estimates by 7-11% for FY2015/16E; retain REDUCE as we find the stock fully valued at 25X FY2016E EPS

We have revised our revenue estimates by ~3% for both FY2015E and FY2016E as we model in higher quantum of price-led growth in Parachute CNO (rigids) and VAHO portfolio on account of fresh hikes initiated in June 2014. We have also revised our EPS estimates by 10.8% and 7.2% for FY2015E and FY2016E, respectively led by 40-60 bps upwards revision in our EBITDA margin assumptions on account of better-than-expected gross margins and higher operating leverage led by sustained price hikes across portfolio.

The stock at 25X FY2016E EPS, however, bakes in the impressive facets of performance as well as the confident outlook. We retain REDUCE with a revised target price of `250 (`235 earlier) based on target PE of 24X FY2016E.

Exhibit 1: Key changes to consolidated earnings model, Marico, March fiscal year-ends, 2015-16E

2015E 2016E 2015E 2016E 2015E 2016ERevenues (Rs mn) 57,027 64,424 55,284 62,510 3.2 3.1 EBITDA (Rs mn) 8,733 9,998 8,108 9,449 7.7 5.8 EBITDA (%) 15.3 15.5 14.7 15.1 PAT (Rs mn) 5,906 6,752 5,329 6,301 10.8 7.2 EPS (Rs/share) 9.2 10.5 8.3 9.8 10.8 7.2

Revised Earlier Change (%)


Category-wise highlights

Parachute CNO. Rigid packs posted a robust 41% value growth led by ~35% price hikes and a modest volume growth of 6%, marginally below our estimate of 8% volume growth. Marico maintained its market share in CNO category at 56%—however, management did highlight that Nielsen audit numbers have been lagging behind and not reflective of true picture of current hair oil growth environment. We note copra remains inflationary—up 120% yoy in July and 7% mom. Consequently, Marico initiated another round of price hikes in 1QFY15 taking cumulative price hike to 33% yoy. The company expects Parachute volume growth to be maintained at 6-8% levels in the near term.

Saffola. Saffola posted a robust 10% volume growth, in line with our estimate, and 14% value growth aided by several initiatives undertaken over the last few quarters—(1) restaged an existing variant as Saffola Total, which is priced at ~30% premium to Saffola Gold and is pitched as an alternative to olive oil, (2) sustained investment in brand communication—’Dil ka high science‘ campaign launched a few quarters ago and (3) focus on expanding rural distribution. Surprisingly, Marico indicated that Saffola’s marketshare declined by 200 bps yoy/stable qoq.

Value-added hair oils. Marico’s VAHO portfolio registered a robust 11% volume growth, ahead of our estimate of 8% growth—a commendable performance given challenging market context. Management highlighted that growth in VAHO portfolio has been broad-based and it now has 4 strong brands with a turnover of `2 bn+. Marico’s market share remained stable sequentially at 28%, up 100 bps yoy, while Nihar Shanti Amla maintained its market share at 30% in Amla hair oils category—up 300 bps yoy. Value growth in Marico’s VAHO portfolio stood at 28% yoy driven by price hikes as the company initiated another round of fresh price hikes to the tune of 6% during the quarter.

Marico Consumer Products


Youth brands. Marico’s acquired youth brands portfolio of Set Wet, Zatak and Livon posted `550 mn revenue, a flattish growth yoy due to high base—we note Marico had re-launched its deodorants portfolio under Zatak brand in the base quarter. Marico’s market share in hair gels, post-wash leave-on conditioner and deodorants stood at 42%, 82% and 5%, respectively – both hair gels and serums registered modest market share gains during the quarter. Management is confident of sustaining 15-20%+ growth rates in the youth brands portfolio in the near term.

Other key brands. Saffola oats continues to do well, led by Saffola savory oats. Marico has emerged as the No2 player in the category with 17% value market share overall and 51% share in flavoured oats market. Marico launched two new sweet variants during the quarter and its oats offerings are now available in eight different flavours. Management highlighted its ambition of making Saffola foods business `0.75 bn size product segment in FY2015E and `1 bn portfolio in FY2016E. Parachute Advansed Body Lotion also witnessed healthy growth during the quarter and now enjoys 6% market share in the body lotion category.

International business. Marico’s international business posted revenue of `3.4 bn, a reported growth of 16.3% yoy aided by 6.7% translation gains, 4.6% price-led growth and a 5% volume growth. Geography-wise highlights –

Bangladesh – Bangladesh reported a topline growth of 14% (constant currency) led by 5% volume growth and market share gains across categories. Management highlighted that it plans to invest significant marketing spends to diversify its portfolio beyond coconut oils and expects more than 80% of incremental growth from FY2016E onwards from non-CNO portfolio. We note Marico had launched several new products in Bangladesh market in last several quarters, including Saffola Active, Set Wet deodorants, Livon hair serum and HairCode Keshkala.

MENA – MENA region sustained its recovery delivering 18% growth on constant currency basis driven by strong recovery in Middle East business. Management highlighted that post several initiatives like distribution transition, restructuring of business model and SKU rationalisation, business in MENA is stabilizing and is poised for full recovery in FY2015E.

South Africa – Reported a modest 9% topline growth (constant currency) in a challenging macro environment.

South East Asia – South East Asia, predominantly Vietnam revenues were flat yoy impacted by high base and sluggish economy. Management highlighted that it maintains its leadership position in shampoos in Vietnam and expects growth to recover in 2HFY15, albeit at slower rates versus historical growth rates witnessed over last few years.

Other key highlights

Comments on medium-term strategic plan. Marico shared its medium-term strategic plan – (1) it plans to double its revenues over the next four years driven by a mix of organic and inorganic growth, (2) it plans to become an emerging market MNC with focus on Asia and Africa in key categories of hair care, skin nourishment and male grooming and (3) it has identified give key areas of transformation—innovation, GTM, Talent Value Proposition, IT & Analytics and Cost Management.

Near-term guidance. Management has guided for 7-8% volume growth and 14.5-15% EBITDA margin band for FY2015E though it expects next two quarters to witness margin pressure on account of sustained copra inflation.



Current quarter international margins unsustainable. Management highlighted that current quarter EBITDA margin of 18.2% in international business (improvement of 490 bps yoy, 60 bps qoq) reflects a structural shift in international margins achieved through a series of cost management projects undertaken last year. However, it has guided for a threshold level of 14-15% band in medium term as it expects to plough back gains from cost-savings measures to drive volume growth and create multiple pillars of growth across core international markets.

Focus on distribution expansion continues. Marico has initiated on a go to market (GTM) distribution strategy to expand its direct distribution reach in urban market beyond general trade to other channels like MT, chemists stores and cosmetic stores in order to support its youth brands portfolio and new launches in foods and skin care. It has also initiated a new initiative called Project One aimed at expanding direct coverage in top 6 metros – over the last 6 months the project has expanded direct coverage in these cities by ~60%. Overall, Marico expects to yield ~3% revenue benefits in medium term from better assortment segmentation, optimized spends based on analytics and its GTM initiatives.

Exhibit 2: Interim consolidated results of Marico, March fiscal year-ends (Rs mn)

1QFY15 1QFY15E 1QFY14 4QFY14 KIE Est yoy qoq FY2014 FY2013 (chg %.) FY2015ENet sales 16,192 15,657 12,927 10,698 3 25 51 46,762 45,843 2 57,027Material cost (8,911) (8,967) (6,595) (5,597) (1) 35 59 (23,992) (22,067) 9 (30,118)Gross Profit 7,281 6,690 6,332 5,101 9 15 43 22,770 23,777 (4) 26,908Gross Margin (%) 45.0 42.7 49.0 47.7 223 bps -402 bps -272 bps 48.7 51.9 -318 bps 47.2Employee cost (854) (796) (711) (651) 7 20 31 (2,847) (3,781) (25) (3,375)Advertising and promotion (1,922) (1,674) (1,700) (1,219) 15 13 58 (5,612) (5,979) (6) (6,819)Other expenditure (1,878) (1,923) (1,714) (1,710) (2) 10 10 (6,935) (7,886) (12) (7,982)Total expenditure (13,565) (13,360) (10,719) (9,178) 2 27 48 (39,385) (39,713) (1) (48,294)EBITDA 2,628 2,297 2,207 1,520 14 19 73 7,377 6,130 20 8,733OPM (%) 16.2 14.7 17.1 14.2 155 bps -85 bps 201 bps 15.8 13.4 240 bps 15.3Other operating income 39 25 27 22 56 44 74 103 118 (13) 175Other income 183 170 142 128 8 29 43 579 349 66 753Interest (70) (65) (100) (68) 8 (30) 4 (345) (545) (37) (283)Depreciation (204) (215) (178) (215) (5) 14 (5) (769) (866) (11) (886)Pretax profits 2,576 2,212 2,098 1,388 16 23 86 6,946 5,187 34 8,491Tax (678) (664) (500) (281) 2 36 142 (1,560) (1,462) 7 (2,420)Minority Interest (44) (40) (44) (28) 11 1 59 (187) (98) 91 (165) Recurring PAT (after MI) 1,853 1,508 1,554 1,080 23 19 72 5,199 3,627 43 5,906Extraordinary items — — — (192) (345) 332 —Net profit (reported) 1,853 1,508 1,554 888 23 19 109 4,854 3,959 23 5,906EPS 2.9 2.3 2.4 1.7 23 19 72 8.1 5.6 43 9.2 Income tax rate (%) 26.3 30.0 23.8 20.2 -366 bps 249 bps 612 bps 22.5 28.2 -573 bps 28.5Costs as a % of salesMaterial cost 55.0 57.3 51.0 52.3 -224 bps 401 bps 271 bps 51.3 48.1 317 bps 52.8Employee cost 5.3 5.1 5.5 6.1 19 bps -23 bps -82 bps 6.1 8.2 -216 bps 5.9Advertising and promotion 11.9 10.7 13.1 11.4 117 bps -128 bps 47 bps 12.0 13.0 -105 bps 12.0Other expenditure 11.6 12.3 13.3 16.0 -69 bps -167 bps -440 bps 14.8 17.2 -238 bps 14.0

(% change)




Exhibit 3: Interim standalone results of Marico, March fiscal year-ends (Rs mn)

1QFY15 1QFY15E 1QFY14 4QFY14 KIE Est yoy qoq FY2014 FY2013 (chg %.) FY2015ENet sales 13,487 12,692 10,554 8,503 6 28 59 36,748 33,988 8 45,643Material cost (8,046) (7,781) (5,677) (4,740) 3 42 70 (20,047) (18,300) 10 (25,982)Gross Profit 5,441 4,911 4,876 3,762 11 12 45 16,701 15,688 6 19,661Gross Margin (%) 40.3 38.7 46.2 44.2 164 bps -587 bps -391 bps 45.4 46.2 -72 bps 43.1Employee cost (526) (470) (444) (346) 12 19 52 (1,713) (1,557) 10 (2,083)Advertising and promotion (1,384) (1,206) (1,206) (947) 15 15 46 (4,097) (3,822) 7 (4,929)Other expenditure (1,535) (1,523) (1,384) (1,337) 1 11 15 (5,372) (5,182) 4 (6,249)Total expenditure (11,491) (10,979) (8,711) (7,370) 5 32 56 (31,230) (28,861) 8 (39,243)EBITDA 1,996 1,713 1,843 1,133 17 8 76 5,518 5,128 8 6,400OPM (%) 14.8 13.5 17.5 13.3 130 bps -267 bps 147 bps 15.0 15.1 -8 bps 14.0Other operating income 36 20 16 19 78 118 87 77 83 (7) 140Other income 103 105 94 1,174 (2) 10 (91) 2,344 478 391 601Interest (61) (55) (92) (56) 11 (33) 9 (304) (402) (24) (243)Depreciation (114) (130) (102) (127) (12) 12 (10) (462) (331) 39 (504)Pretax profits 1,959 1,653 1,759 2,143 19 11 (9) 7,173 4,955 45 6,394Tax (515) (496) (379) (180) 4 36 187 (1,056) (1,129) (6) (1,840)PAT 1,444 1,157 1,381 1,963 25 5 (26) 6,117 3,826 60 4,554Extraordinary items — — — (192) (345) 465 373Net profit (reported) 1,444 1,157 1,381 1,771 25 5 (18) 5,772 4,291 35 4,927EPS 2.2 1.8 2.1 3.0 25 5 (26) 9.5 6.1 56 7.6 Income tax rate (%) 26.3 30.0 21.5 8.4 -373 bps 476 bps 1789 bps 14.7 22.8 -807 bps 28.8Costs as a % of salesMaterial cost 59.7 61.3 53.8 55.8 -165 bps 586 bps 390 bps 54.6 53.8 71 bps 56.9Employee cost 3.9 3.7 4.2 4.1 20 bps -31 bps -17 bps 4.7 4.6 8 bps 4.6Advertising and promotion 10.3 9.5 11.4 11.1 76 bps -117 bps -88 bps 11.1 11.2 -10 bps 10.8Other expenditure 11.4 12.0 13.1 15.7 -62 bps -174 bps -434 bps 14.6 15.2 -63 bps 13.7

(% change)


Exhibit 4: Domestic volume growth trends (yoy %)

10

7

43

6

10

1514

171616

1415

101012

16

2

5

8

11

14

17

20

1QFY

11

2QFY

11

3QFY

11

4QFY

11

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15




Exhibit 5: Parachute volume growth was 6% yoy Parachute (rigid) volume growth (%)

14

10

5 5

10 10

13

11

18

9

65

4

10

6

21-

2

4

6

8

10

12

14

16

18

20

1QFY

11

2QFY

11

3QFY

11

4QFY

11

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15


Exhibit 6: Parachute market share flattish Parachute CNO market share trends (%)

52

53

54

55

56

57

58

59

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15


Exhibit 7: Saffola posts volume growth of a healthy 10% Saffola volume growth trends (in %)

18 18

1312

15

11

15

3

12

6

45

10

7

9

1110

-

4

8

12

16

20

1QFY

11

2QFY

11

3QFY

11

4QFY

11

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15


Exhibit 8: Saffola market share flattish qoq, down yoy Saffola market share trends (in %)

53

55

57

58 58 5958 58

57 57 57

5555

52

53

54

55

56

57

58

59

60

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15




Exhibit 9: Value-added hair oils volume at 11% yoy Value-added hair oils volume growth trends (in %)

27

15

31

21

32

26

2018

25

20

30

24

16 15

8

5

11

-

5

10

15

20

25

30

35

1QFY

11

2QFY

11

3QFY

11

4QFY

11

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15


Exhibit 10: Value-added hair oils market share up yoy, flat qoq Value-added hair oils market share trends (in %)

23 2324

2424

25

26

27 27

28 28 28 28

22

23

24

25

26

27

28

29

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15




Exhibit 11: Consolidated profit model, balance sheet of Marico, March fiscal year-ends, 2011-17E

2011 2012 2013 2014 2015E 2016E 2017EProfit modelNet sales 31,260 39,682 45,843 46,762 57,027 64,424 72,640EBITDA 4,091 4,729 6,139 7,377 8,733 9,998 11,492Other income 303 440 494 682 928 1,139 1,394Interest expense (410) (424) (580) (345) (283) (233) (185)Depreciation (708) (725) (866) (769) (886) (992) (1,095)Pretax profits 3,275 4,021 5,187 6,946 8,491 9,912 11,606Tax (850) (783) (1,462) (1,560) (2,420) (2,974) (3,598)Minority Interest (50) (50) (98) (187) (165) (186) (210)Net income 2,375 3,189 3,627 5,199 5,906 6,752 7,798Extraordinary items 489 (18) 332 (345) — — —Reported Net income 2,864 3,171 3,959 4,854 5,906 6,752 7,798Earnings per share (Rs) 3.9 5.2 5.6 8.1 9.2 10.5 12.1Balance sheetTotal shareholder's equity 9,155 11,430 19,815 13,606 17,578 21,815 26,517Total borrowings 7,742 7,848 8,719 6,798 5,798 4,798 3,798Minority interest 219 249 351 358 523 709 919 Total liabilities and equity 17,115 19,527 28,885 20,762 23,899 27,322 31,235Net fixed assets 3,362 3,678 6,089 5,993 6,247 6,512 6,815Goodwill 5,192 5,296 12,091 2,927 2,927 2,927 2,927Investments 889 2,957 1,516 3,105 3,105 3,105 3,105Cash 2,206 1,321 2,668 4,064 5,782 8,039 10,627Net current assets 5,168 6,053 6,580 4,769 5,933 6,835 7,856Deferred tax asset (Net) 299 223 (58) (96) (96) (96) (96)Total assets 17,115 19,527 28,885 20,762 23,899 27,322 31,235Free cash flowOperating cash flow (excl. working capital) 3,419 3,808 5,271 5,727 6,488 7,216 8,106Working capital changes (980) 194 (952) 878 (1,164) (902) (1,021)Capital expenditure (4,595) (1,198) (9,783) (829) (1,141) (1,256) (1,398)Free cash flow (2,156) 2,804 (5,464) 5,776 4,183 5,058 5,687RatiosSales growth (%) 17.5 26.9 15.5 2.0 22.0 13.0 12.8EPS growth (%) -2.4 33.2 9.2 43.3 13.6 14.3 15.5EBITDA margin (%) 13.1 11.9 13.4 15.8 15.3 15.5 15.8Gross margin (%) 48.3 46.3 51.8 48.7 47.2 48.1 48.5A&SP % of sales 11.1 10.7 13.0 12.0 12.0 12.4 12.5

RoE (%) 25.9 27.9 18.3 38.2 33.6 31.0 29.4RoCE (%) 19.1 19.9 18.1 31.6 32.6 32.8 33.1




Revenue growth outlook challenging

Revenue growth outlook for Mphasis appears challenging across its business segments. HP channel revenues have declined 53% in the past 12 quarters and the decline shows no sign of easing up. The management indicated that it expects HP channel to continue declining at this rate in the immediate future. DR declined a sharp 16% in 1QFY15 due to weakness in the US mortgage market, where mortgage originations are down ~40%, according to the management. In a rising interest rate environment, this is unlikely to change in the near future. Mphasis reported US$45 mn TCV of deal wins in the organic direct business. It is a start, but deal wins need to be larger and more consistent to even offset the drag from other segments. We expect 0.8% revenue decline in FY2015E and 3.5% revenue growth in FY2016E.

Margin pressure imminent

Mphasis has stepped up its S&M spending in the last few quarters in a bid to revive its growth in the direct channel. This has had some early results in terms of deal wins. But more investments in broadening service capability and market reach are essential for Mphasis’ growth engine to revive. The company will have to trade margins for growth. Also, near-term margin headwinds include – (1) wage hikes to be given effective 3QFY15, which will have a 150-170 bps impact and (2) DR weakness, which will push its EBITDA margin into high single digits from the low double-digit levels it operated at previously. With limited operational levers to offset these pressures, we expect Mphasis’ EBITDA margin to decline 100 bps in FY2015E and 60 bps in FY2016E.

Cut revenue and earnings estimates. SELL with a TP of `370

We cut our revenue estimates for Mphasis by ~3% for the next two years. Cut in margins assumptions drives ~5% cut in earnings estimates for FY2015E-16E. We retain our SELL rating with a target price of `370 (`390 earlier), valuing Mphasis at 11X FY2016E earnings. The stock currently trades at 13.3X FY2016E earnings, expensive in our view. The current stock price is driven by expectations of an event—HP stake sale rather than business fundamentals, which are clearly challenged.

Mphasis (MPHL)

Technology

Revenue growth challenges mount. With the sharp decline in Digital Risk (DR) in 1QFY15, Mphasis’ revenue growth challenges have become steeper. The HP channel decline shows no sign of letting off while growth in the direct organic business is not strong enough to offset the drag from HP and DR. We cut revenue estimates by ~3% for FY2015E-16E. Margin impact from DR decline and S&M investments drive ~5% cut in EPS estimates. Retain SELL with a TP of `370 (`390 earlier).

MphasisStock data Forecasts/Valuations 2014 2015E 2016E

52-week range (Rs) (high,low) EPS (Rs) 14.7 33.7 33.4Market Cap. (Rs bn) 92.9 EPS growth (%) (58.4) 128.7 (0.6)


Price performance (%) 1M 3M 12M EV/EBITDA (X) 21.3 9.3 9.2Absolute 3.2 6.8 8.1 ROE (%) 6.1 13.4 12.6Rel. to BSE-30 4.1 (7.0) (19.4) Div. Yield (%) 1.6 3.8 3.8


477-362

SELL

AUGUST 05, 2014

RESULT

Coverage view: Attractive

Price (`): 442


BSE-30: 25,723

Kawaljeet Saluja [email protected] Mumbai: +91-22-4336-0860 Rohit Chordia [email protected] Mumbai: +91-22-4336-0885 Shyam M. [email protected] Mumbai: +91-22-4336-0862

Technology Mphasis


Exhibit 1: Key changes to FY2015-16E estimates (Rs mn)

Mar-15E Mar-16E Mar-15E Mar-16E Mar-15E Mar-16ERevenues (US$ mn) 1,016 1,051 1,044 1,087 (2.7) (3.3) Revenues 60,176 60,975 62,090 63,019 (3.1) (3.2) EBITDA 9,636 9,387 10,387 10,009 (7.2) (6.2) Deprec iation (1,136) (1,226) (1,274) (1,316) (10.8) (6.9) EBIT 8,500 8,161 9,113 8,693 (6.7) (6.1) Net Profit 7,070 7,026 7,460 7,370 (5.2) (4.7) Recurring EPS (Rs / s hare) 33.7 33.4 35.5 35.1 (5.2) (4.7) Margins (%)EBITDA 16.0 15.4 16.7 15.9 EBIT 14.1 13.4 14.7 13.8

Re/US$ rate 59.2 58.0 59.5 58.0 (0.4) 0.0

Revis ed es timates Old es timates % change

Source: Kotak Institutional Equities estimates

Exhibit 2: Mphasis' consolidated quarterly performance – quarter-ending June 2014 (Rs mn)

2 months Normalized growth (%)J ul-13 Mar-14 J un-14 qoq yoy J un-14E Deviation (%)

Revenues (US$ mn) 265.3 171.8 249.8 (3.1) (5.8) 250.0 (0.1) Effective Re/US$ 58.0 59.9 59.6 59.7 Revenues 15,398 10,299 14,902 (3.5) (3.2) 14,925 (0.2) Cos t of revenues (11,136) (7,368) (10,759) (2.7) (3.4) (10,671) 0.8 Gros s profits 4,262 2,931 4,143 (5.8) (2.8) 4,254 (2.6) SG&A expens es (1,463) (1,170) (1,669) (4.9) 14.1 (1,696) (1.6) EBITDA 2,799 1,761 2,474 (6.3) (11.6) 2,558 (3.3) Depreciation (365) (210) (263) (312) EBIT 2,434 1,551 2,211 (5.0) (9.2) 2,246 (1.6) Forex gain/( los s ), net 61 23 40 —Other income/( los s ) 233 198 316 314 Interes t income / (expens e) (101) (43) (77) (40) PBT 2,627 1,729 2,490 (4.0) (5.2) 2,520 (1.2) Provis ion for tax (701) (508) (742) (706) 5.2 PAT 1,926 1,221 1,748 (4.6) (9.2) 1,814 (3.7) Extraordinaries — — — —Reported PAT 1,926 1,221 1,748 (4.6) (9.2) 1,814 (3.7) Recurring EPS (Rs /s hare) 9.2 5.8 8.3 (4.6) (9.2) 8.6 (3.7) Margins (%)Gros s margin 27.7 28.5 27.8 28.5 EBITDA margin 18.2 17.1 16.6 17.1 EBIT margin 15.8 15.1 14.8 15.0 PAT margin 12.5 11.9 11.7 12.2 SG&A expens es (% of revenue 9.5 11.4 11.2 11.4 Tax rate (as % of PBT) 26.7 29.4 29.8 28.0

Notes :(1) Mphas is ' accounting year-end has changed from October to March.


Mphasis Technology


Exhibit 3: HP and DR a drag on growth, organic direct business growth decent

J ul-11 Oct-11 J an-12 Apr-12 J ul-12 Oct-12 J an-13 Apr-13 J ul-13 Oct-13 J an-14 Mar-14 J un-14Revenues (US$ mn)Total revenues 287.0 276.2 270.6 265.8 251.9 248.0 236.8 262.8 265.3 259.7 254.9 171.8 249.8

HP channel 191.3 170.2 157.8 155.3 138.4 134.3 122.0 119.7 109.5 103.5 95.0 62.1 89.9 Non-HP channel 95.7 105.9 112.8 110.5 113.6 113.6 114.8 143.1 155.9 156.2 159.9 109.7 159.9

Direct channel - organic 95.7 105.9 112.8 110.5 113.6 113.6 114.8 108.7 113.0 110.5 114.6 79.8 122.2 Digital Ris k 34.4 42.9 45.7 45.3 29.9 37.7

Growth, qoq (%)Total revenues 2.3 (3.8) (2.0) (1.8) (5.2) (1.6) (4.5) 11.0 1.0 (2.1) (1.9) 1.1 (3.1)

HP channel 2.3 (11.0) (7.3) (1.6) (10.9) (2.9) (9.2) (1.9) (8.6) (5.5) (8.2) (1.9) (3.5) Non-HP channel 2.4 10.7 6.5 (2.1) 2.8 0.1 1.0 24.7 8.9 0.2 2.3 2.9 (2.8)

Direct channel - organic 2.4 10.7 6.5 (2.1) 2.8 0.1 1.0 (5.3) 3.9 (2.2) 3.7 4.5 2.1 Digital Ris k NM 24.6 6.6 (0.9) (1.0) (15.9)

Contribution (%)Total revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

HP channel 66.7 61.6 58.3 58.4 54.9 54.2 51.5 45.5 41.3 39.8 37.3 36.2 36.0 Non-HP channel 33.3 38.4 41.7 41.6 45.1 45.8 48.5 54.5 58.7 60.2 62.7 63.8 64.0

Direct channel - organic 33.3 38.4 41.7 41.6 45.1 45.8 48.5 41.4 42.6 42.6 44.9 46.4 48.9 Digital Ris k 13.1 16.2 17.6 17.8 17.4 15.1

Notes :(1) Period ending March 2014 is for two months . Revenues are normalized to compute growth


Exhibit 4: Condensed P&L and BS for Mphasis (Rs mn)

Oct-13 Mar-14 Mar-15E Mar-16E Mar-17EProfit model Revenues 57,963 25,939 60,176 60,975 63,388 EBITDA 10,335 4,397 9,636 9,387 9,831 Depreciation (inc l amortization of intangibles ) (1,446) (504) (1,136) (1,226) (1,249) Other income 1,062 389 1,320 1,530 1,723 Pretax profits 9,951 4,282 9,820 9,691 10,306 Tax (2,514) (1,191) (2,749) (2,665) (2,834) Recurring profit after tax 7,437 3,091 7,070 7,026 7,472 Extraordinaries — (64) — — —Net income 7,437 3,027 7,070 7,026 7,472 Recurring diluted earnings per s hare (Rs 35.4 14.7 33.7 33.4 35.6 Balance s heetTotal equity 49,344 51,150 54,084 57,000 60,101 Total borrow ings 5,600 5,555 5,555 5,555 5,555 Current liabilities 16,013 13,044 12,564 12,516 12,695 Total liabilities and equity 70,957 69,749 72,203 75,071 78,352 Cas h 5,886 4,670 8,416 11,684 14,853 Other current as s ets 20,174 21,852 20,794 20,736 21,208 Goodwill 22,499 21,865 21,865 21,865 21,865 Inves tments 18,995 18,154 18,154 18,154 18,154 Tangible fixed as s ets 2,388 2,240 2,006 1,665 1,304 Deferred tax as s ets 1,015 968 968 968 968 Total as s ets 70,957 69,749 72,203 75,071 78,352 Ratios (%)EBITDA margin 17.8 17.0 16.0 15.4 15.5 EBIT margin 15.3 15.0 14.1 13.4 13.5 Cas hflow s tatementOperating profit before WC changes 9,951 4,282 9,820 9,691 10,306 Change in WC/other adjus tments 645 (4,647) 578 10 (293) Capital expenditure (inc luding acquis itions ) (10,866) (339) (903) (884) (887) Taxes paid (2,514) (1,191) (2,749) (2,665) (2,834) Free cas h flow (2,784) (1,895) 6,745 6,152 6,292

Notes :(1) Mphas is ' accounting year-end has changed from October to March. Period ending Mar 2014 is for five months .




A few one-offs support earnings

Oriental Bank of Commerce (OBC) posted muted 1QFY15 earnings growth of 3% yoy despite one-off (1) reversal in staff expenses, (2) gains on loans sold to ARCs and (3) write-back in investment depreciation, as provisions for NPLs were high. Fresh impairments remained high—unchanged qoq at 6.6%. High slippages hurt NIM as they declined ~15 bps qoq to 2.6%. Focus on impairments slowed loan growth, which was 8% yoy, primarily in the large-corporate segment.

Fresh impairments remain high at ~6% of loans

1QFY15 was a weak quarter on the impairments front with gross NPLs increasing 30 bps qoq to 4.3% of loans and restructured loans increasing 20 bps qoq to 7.8% of loans (30% of the restructured loans are in the discom and aviation segments). Slippages in the quarter were 4% of loans and fresh restructuring was 2.5% of loans (power and construction sectors). Nearly 40% of fresh slippages came from priority-sector loans and slippages in other segments were driven by a few large accounts in the iron and steel and construction segments. About 20% of the slippages were from restructured loans. Loan-loss provisions were 1.4% of loans.

NIM moderates, led by higher interest reversals

NIM moderated by ~15 bps qoq to 2.6% of loans, primarily as high slippages led to reversal of interest while costs showed a marginal sequential increase. Given the softness in interest rates as well as better current trends on impairment, we are optimistic about the NIM outlook.

Maintain ADD as valuation expansion is expected to be driven by macro-economic improvement

After our upgrade about a year ago, we have made no material change to our estimates and are comfortable retaining our positive rating. With the economy showing signs of possible revival, we expect credit costs—currently 1.5X our earnings estimates—to materially decline, which is expected to support earnings and RoE improvement. Also, a possible decline in interest rates is expected to give headroom for NIM expansion. We value the bank at `330 (`350 earlier), which implies 0.8X book and 6X FY2016E EPS for RoEs of 11-12%.

Oriental Bank of Commerce (OBC)

Banks/Financial Institutions

Lower provisions cushion a weak performance. 1QFY15 was a weak quarter with one-off reversal of staff provisions and write-back from investments supporting flat earnings. Fresh impairments were high at 6.6% of loans. Apart from inexpensive valuations and better tier-1 ratios than peers’, which are driving our positive rating, we derive comfort from the fact that OBC is one of the few banks with greater focus on NPLs than growth. We maintain ADD with a target price of `330 (`350 earlier).

Oriental Bank of CommerceStock data Forecasts/Valuations 2014 2015E 2016E


Shareholding pattern (%) P/E (X) 7.4 5.8 5.0Promoters 59.1 NII (Rs bn) 51.3 53.8 61.7FIIs 9.9 Net profits (Rs bn) 11.4 14.7 16.9MFs 9.4 BVPS 341.6 368.4 407.1

Price performance (%) 1M 3M 12M P/B (X) 0.8 0.8 0.7Absolute (12.5) 11.4 105.2 ROE (%) 8.7 10.5 11.2Rel. to BSE-30 (11.7) (3.0) 52.9 Div. Yield (%) 2.7 3.5 4.0


378-121

ADD

AUGUST 05, 2014

RESULT


Price (`): 282


BSE-30: 25,723

QUICK NUMBERS

• NII declined 5% yoy; earnings grew 3% yoy

• Gross NPLs 4.3%; restructured loans 7.8%

• Maintain ADD; target price of `330 (`350 earlier)

M.B. Mahesh, CFA [email protected] Mumbai: +91-22-4336-0886 Nischint Chawathe [email protected] Mumbai: +91-22-4336-0887 Geetika Gupta [email protected] Mumbai: +91-22-4336-0888

Oriental Bank of Commerce Banks/Financial Institutions


Other highlights of the quarter

Non-interest income increased 9% yoy, driven by income from sale of written-off NPLs to asset reconstruction companies (ARCs). Income from recovery of written-off accounts increased 120% yoy to `1.8 bn, of which `1.4 bn was from sale to ARCs. Forex income declined 9% yoy. Fee income declined 3% yoy. Treasury contribution remained weak, declining 40% yoy.

Tier-1 is at 8.9% and overall capital adequacy at 11%.

The bank has made a negligible contribution for unhedged foreign exposure at `34 mn and has estimated the full impact at `140 mn.

Exhibit 1: Gross NPLs increased 30 bps qoq to 4.3% NPLs and provision coverage, March fiscal year-ends, 1QFY12-1QFY15 (%)

-

0.9

1.8

2.7

3.6

4.5

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

-

20

40

60

80

100

Gross NPL (LHS) Net NPL (LHS)Provision coverage (RHS)


Exhibit 2: Overall restructured loans increased 20 bps qoq to 7.8% Restructured loans to total loans, March fiscal year-ends, 2007-1QFY15 (%)

-

2

4

6

8

10

2007

2008

2009

2010

2011

2012

2013

2014

1QFY

15


Exhibit 3: Old and new estimates March fiscal year-ends, 2015-17E (` mn)

New Estimates Old Estimates % change2015E 2016E 2017E 2015E 2016E 2015E 2016E

Net interest income 53,793 61,731 71,928 56,286 65,140 (4.4) (5.2) Advances (Rs bn) 1,534 1,752 1,994 1,569 1,792 (2.2) (2.2) NIM (%) 2.4 2.5 2.6 2.5 2.5

Loan loss provisions 21,939 23,004 25,286 22,236 23,526 (1.3) (2.2) Other income 25,317 27,523 30,978 24,294 26,478 4.2 3.9

Fee income 9,730 10,752 12,042 8,492 9,511 14.6 13.0 Treasury income 5,000 5,500 5,500 5,000 5,500 — —

Operating expenses 32,347 36,859 41,140 33,866 38,507 (4.5) (4.3) Employee expenses 18,062 20,368 22,101 19,450 21,931 (7.1) (7.1)

Investment depn (1,500) (1,200) (1,000) (1,200) (1,000) 25.0 20.0 PBT 20,923 25,591 32,480 21,105 26,011 (0.9) (1.6) Net profit 14,666 16,915 20,168 14,794 17,192 (0.9) (1.6)


Banks/Financial Institutions Oriental Bank of Commerce


Exhibit 4: OBC - rolling PBR and PER One-year forward rolling PER and PBR, 2007-14 (X)

-

2.4

4.8

7.2

9.6

12.0

Aug

-07

Feb-

08

Aug

-08

Feb-

09

Aug

-09

Feb-

10

Aug

-10

Feb-

11

Aug

-11

Feb-

12

Aug

-12

Feb-

13

Aug

-13

Feb-

14

Aug

-14

0.0

0.3

0.6

1.0

1.3

1.6

Rolling PER (X) (LHS) Rolling PBR (X) (RHS)

Source: Company, Bloomberg, Kotak Institutional Equities

Exhibit 5: OBC is trading at a discount to its long-term discount to peers OBC trading premium to public banks, 2007-14 (X)

0.3

0.5

0.7

0.9

1.1

Aug

-07

Aug

-08

Aug

-09

Aug

-10

Aug

-11

Aug

-12

Aug

-13

Aug

-14

Source: Company, Bloomberg, Kotak Institutional Equities

Exhibit 6: NIM declined 15 bps qoq to 2.6% NIM and cost of deposits, March fiscal year-ends, 1QFY11-1QFY15 (%)

4.0

5.0

6.0

7.0

8.0

9.0

1QFY

11

2QFY

11

3QFY

11

4QFY

11

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2.0

2.4

2.8

3.2

3.6

4.0Cost of deposits (LHS) NIM (RHS)

Source: Kotak Institutional Equities



Exhibit 7: OBC, quarterly results March fiscal year-ends, 1QFY14-1QFY15 (` mn)

1QFY15 1QFY15E 1QFY14 4QFY14 1QFY15E 1QFY14 4QFY14 FY2015E FY2014 (% chg.) Interest income 49,878 50,707 47,177 49,008 (1.6) 5.7 1.8 204,683 190,175 7.6 Loans 37,898 39,239 36,348 37,165 (3.4) 4.3 2.0 157,323 145,640 8.0 Investments 11,389 11,368 10,453 11,147 0.2 8.9 2.2 46,139 43,110 7.0 Balance with RBI & banks 505 50 304 226 909.8 66.1 123.7 1,221 1,424 (14.3) Others 87 50 71 470 74.6 23.0 (81.4) — —Interest expense 37,451 36,673 34,106 35,921 2.1 9.8 4.3 150,890 138,904 8.6 Net interest income 12,428 14,034 13,070 13,087 (11.4) (4.9) (5.0) 53,793 51,271 4.9 Non-int.income 5,882 4,905 5,381 7,545 19.9 9.3 (22.0) 25,317 19,453 30.1 Other income ex treasury 4,640 3,826 3,325 7,279 21.3 39.5 (36.3) 20,317 16,975 19.7 Sale of invts. 1,242 1,078 2,056 267 15.2 (39.6) 365.8 5,000 2,478 101.8 Total income 18,310 18,939 18,451 20,632 (3.3) (0.8) (11.3) 79,109 70,724 11.9 Op. expenses 6,892 8,394 7,568 6,795 (17.9) (8.9) 1.4 32,347 29,169 10.9 Employee cost 3,706 5,023 4,504 3,864 (26.2) (17.7) (4.1) 18,062 16,767 7.7 Other cost 3,186 3,371 3,064 2,931 (5.5) 4.0 8.7 14,285 12,402 15.2 Operating profit 11,417 10,545 10,883 13,837 8.3 4.9 (17.5) 46,762 41,555 12.5 Provisions and cont. 5,416 5,381 5,327 9,307 0.6 1.7 (41.8) 25,839 25,751 0.3 Investment depreciation (1,402) (300) 318 294 367.3 (541.3) (577.4) (1,500) 1,241 (220.9)NPLs 5,873 4,369 3,450 7,281 34.4 70.2 (19.3) 21,939 18,455 18.9 PBT 6,001 5,164 5,555 4,530 16.2 8.0 32.5 20,923 15,804 32.4 Tax 2,356 1,544 2,022 1,427 52.6 16.5 65.1 6,257 4,410 41.9 Net profit 3,645 3,619 3,534 3,103 0.7 3.2 17.5 14,666 11,394 28.7 Tax rate (%) 39.3 29.9 36.4 31.5 29.9 27.9 —Key balance sheet items (Rs bn)Deposits 1,865 1,763 1,935 5.8 (3.6)CASA ratio (%) 24.1 23.7 24.3 Advances 1,383 1,280 1,408 8.1 (1.7)

Retail loans 161 145 161 10.9 (0.3)Large corporates 728 652 742 11.7 (1.8)Mid corporates 281 249 275 12.8 2.2

Investments 596 576 615 3.5 (3.0)Other details Asset quality details Gross NPLs (Rs bn) 59.8 43.0 56.2 39.0 6.5 Gross NPLs (%) 4.3 3.4 4.0 Net NPLs (Rs bn) 42.3 29.4 39.0 44.0 8.3 Net NPLs (%) 3.1 2.3 2.8 Provision coverage (%) 29.3 31.8 30.5 Provision coverage (%, w/o) 59.1 63.9 60.2 Restructured loans (Rs bn) 107.4 102.7 106.6 4.6 0.7 % of loan book 7.8 8.0 7.6 Yield management measures (%)Yield on advances 11.7 12.0 11.7 Yield on investments 7.5 7.4 7.5 Cost of deposits 7.8 7.7 7.7 Net interest margin 2.6 2.9 2.7

(% chg.)


Banks/Financial Institutions Oriental Bank of Commerce


Exhibit 8: OBC, growth rates and key ratios March fiscal year-ends, 2012-17E (%)

2012 2013 2014 2015E 2016E 2017EGrowth rates (%)Net loan 16.8 15.2 7.9 10.3 14.2 13.8 Investments excld. CPs and debentures growth 5.0 13.0 0.9 10.4 4.6 11.3 Net fixed assets 1.6 (13.6) 2.3 9.0 8.1 7.4 Cash and bank balance (24.9) (1.6) 66.1 (9.9) (2.1) (2.6) Total Asset 10.0 13.0 9.8 8.6 10.2 11.9 Deposits 12.2 12.8 10.0 9.3 11.0 12.8 Current (0.2) 24.4 1.9 5.7 7.3 8.9 Savings 14.2 11.6 11.5 7.8 9.4 11.2 Fixed 12.8 12.1 10.3 9.9 11.7 13.4 Net interest income 0.9 11.5 9.1 4.9 14.8 16.5 Loan loss provisions 27.6 41.0 5.8 18.9 4.9 9.9 Total other income 29.2 33.4 17.6 30.1 8.7 12.6 Net fee income 15.0 15.0 15.0 12.5 10.5 12.0 Net capital gains 125.9 (1.0) 47.1 101.8 10.0 - Net exchange gains 43.9 (30.7) 32.8 (5.0) 15.0 15.0 Operating expenses 22.4 15.1 9.4 10.9 13.9 11.6 Employee expenses 29.4 16.2 6.4 7.7 12.8 8.5 Key ratios (%)Yield on average earning assets 9.6 9.6 9.3 9.2 9.0 8.9 Yield on average loans 11.6 11.4 10.9 10.8 10.5 10.3 Yield on average investments 7.3 7.0 7.3 7.2 7.1 7.0 Average cost of funds 7.6 7.5 7.2 7.2 6.9 6.7 Interest on deposits 7.6 7.6 7.2 7.2 7.0 6.7 Difference 2.1 2.1 2.1 2.0 2.1 2.3 Net interest income/earning assets 2.6 2.6 2.5 2.4 2.5 2.6 New provisions/average net loans 1.2 1.4 1.4 1.5 1.4 1.4 Interest income/total income 77.3 74.0 72.5 68.0 69.2 69.9 Fees income to PBT 50.9 49.9 54.7 46.5 42.0 37.1 Operating expenses/total income 42.4 41.9 41.2 40.9 41.3 40.0 Operating expenses/assets 1.4 1.4 1.4 1.4 1.5 1.5 Operating profit /AWF 0.9 0.7 0.7 0.6 0.8 1.0 Tax rate 19.9 13.5 27.9 29.9 33.9 37.9 Dividend payout ratio 20.2 20.2 20.0 20.0 20.0 20.0 Share of deposits Current 6.0 6.6 6.1 5.9 5.7 5.5 Fixed 75.9 75.4 75.7 76.1 76.6 77.0 Savings 18.1 17.9 18.2 17.9 17.7 17.4 Loans-to-deposit ratio 71.8 73.3 71.9 72.6 74.7 75.3 Equity/assets (EoY) 6.7 6.4 6.1 6.1 6.0 5.8 Asset quality trends (%)Gross NPL 3.2 3.2 4.0 4.2 3.9 3.3 Net NPL 2.2 2.3 2.8 2.9 2.6 2.0 Slippages 4.1 2.9 3.1 3.0 2.7 2.5 Provision coverage 31.3 30.6 30.5 34.2 35.0 43.1 Dupont analysis (%)Net interest income 2.5 2.5 2.4 2.3 2.5 2.6 Loan loss provisions 0.7 0.9 0.9 1.0 0.9 0.9 Net other income 0.7 0.9 0.9 1.1 1.1 1.1 Operating expenses 1.5 1.7 1.7 1.6 1.7 1.7 (1- tax rate) 80.1 86.5 72.1 70.1 66.1 62.1 ROA 0.7 0.7 0.5 0.6 0.7 0.7 Average assets/average equity 14.7 15.3 16.1 16.5 16.6 16.9 ROE 9.9 10.7 8.7 10.5 11.2 12.2




Exhibit 9: OBC, income statement and balance sheet March fiscal year-ends, 2012-17E (` mn)

2012 2013 2014 2015E 2016E 2017EIncome statementTotal interest income 158,149 177,048 190,175 204,683 221,944 244,444 Loans 120,746 137,581 145,640 157,323 172,634 192,239 Investments 36,709 38,538 43,110 46,139 48,419 51,336 Cash and deposits 693 929 1,424 1,221 890 869 Total interest expense 115,991 130,036 138,904 150,890 160,213 172,516 Net interest income 42,158 47,012 51,271 53,793 61,731 71,928 Loan loss provisions 12,367 17,439 18,455 21,939 23,004 25,286 Net interest income (after prov.) 29,791 29,572 32,816 31,854 38,727 46,642 Other income 12,402 16,547 19,453 25,317 27,523 30,978 Net fee income 7,258 7,658 8,649 9,730 10,752 12,042 Net capital gains 1,703 1,685 2,478 5,000 5,500 5,500 Net exchange gains 1,775 1,230 1,633 1,552 1,785 2,052 Operating expenses 23,155 26,652 29,169 32,347 36,859 41,140 Employee expenses 13,568 15,761 16,767 18,062 20,368 22,101 Depreciation on investments 2,854 (757) 1,241 (1,500) (1,200) (1,000) Other Provisions 1,928 4,863 6,055 5,400 5,000 5,000 Pretax income 14,258 15,361 15,804 20,923 25,591 32,480 Tax provisions 2,842 2,081 4,410 6,257 8,677 12,311 Net Profit 11,416 13,280 11,394 14,666 16,915 20,168 % growth (24.0) 16.3 (14.2) 28.7 15.3 19.2 Operating profit 15,409 12,920 14,567 14,423 18,891 25,980 % growth (25.2) (16.2) 12.8 (1.0) 31.0 37.5

Balance sheetCash and bank balance 87,270 85,896 142,689 128,550 125,791 122,547Net value of investments 521,013 585,547 614,722 674,167 703,438 778,213 Govt. and other securities 393,487 440,768 462,474 522,413 551,685 626,459 Shares 5,002 6,205 6,380 6,380 6,380 6,380 Debentures and bonds 19,813 19,229 43,166 43,166 43,166 43,166Net loans and advances 1,119,777 1,289,551 1,390,798 1,534,422 1,751,828 1,994,199Fixed assets 14,207 12,274 12,556 13,690 14,805 15,893Other assets 33,080 33,705 42,259 42,259 42,259 42,259Total assets 1,775,346 2,006,972 2,203,025 2,393,088 2,638,122 2,953,112

Deposits 1,559,649 1,758,975 1,934,890 2,114,174 2,346,675 2,646,610Borrowings and bills payable 53,334 77,689 79,210 79,210 79,210 79,210Other liabilities 42,938 42,552 54,619 54,619 54,619 54,619Total liabilities 1,655,921 1,879,217 2,068,718 2,248,003 2,480,504 2,780,439Paid-up capital 2,918 2,918 2,998 2,998 2,998 2,998Reserves & surplus 116,507 124,838 131,308 142,087 154,620 169,675Total shareholders' equity 119,425 127,755 134,307 145,085 157,618 172,673




Slightly ahead on all parameters; volume decline in ADHO arrested to 1% yoy

Bajaj Corp beat expectations on all parameters—revenue at `1.91 bn (+12%; KIE: `1.83 bn), EBITDA at `534 mn (up 11% yoy; KIE: `497 mn) and recurring PAT at `514 mn (up 9% yoy; KIE: `486 mn). Adjusted for NOMARKs (registered a revenue of `141 mn, up 40% qoq), organic revenues grew 4% yoy. Reported PAT declined 16% yoy to `396 mn due to extraordinary expenses of `117 mn on account of NOMARKs brand amortization charge.

ADHO volume decline was arrested to just 1% yoy, ahead of our estimate of 5% volume decline, as this quarter did not witness any inventory correction at distributor and retail level, a trend that was visible for the past few quarters. Management also highlighted that adjusted for a large institutional sales order in the base quarter, ADHO volumes grew ~4% yoy—decent performance in a challenging market environment. Overall hair oil volumes declined 1.5% yoy while price/mix-led growth in ADHO improved to 6.1% yoy driven by price hikes and better mix.

Margins maintained despite jump in LLP aided by lower advertising spends

EBITDA margin contracted 30 bps yoy to 28% impacted by 80 bps drop in gross margins and 120 bps jump in other expenditure. However, 190 bps cut in advertising spends helped arrest EBITDA margin contraction. GMs were impacted due to higher LLP prices (up 17% yoy, 9% qoq). We note Bajaj Corp has cut its combined A&SP expenditure (as % of sales) to 16% versus ~16-18% spent over last several quarters, a response to weak market conditions, in our view.

Expect volumes to stabilize; retain ADD with revised TP of `255 (`230 earlier)

We have raised our revenue estimates by ~2% for both FY2015E and FY2016E, respectively as we bake in marginally higher volume growth in ADHO and better traction in NOMARKS. We now bake in 5.5% volume growth (5% earlier) and `580 mn revenues for NOMARKS (`500 mn earlier) in FY2015E. We have also raised our EPS estimates by ~3-4% as we increase EBITDA margin forecast by 40 bps aided by lower A&SP spends. We retain our ADD rating on the stock with revised target price of `255 (`230 earlier) based on 16X March FY2016E EPS. We believe reasonable valuations at 14.5X FY2016E EPS amply bake in any challenges on volume front—we believe volumes have stabilized and expect them to inch up in ensuing quarters.

Bajaj Corp. (BJCOR)

Consumer Products

1QFY15 ahead of expectations; raise estimates a tad. ADD. Bajaj Corp’s 1QFY15 results beat our expectations on the back of better volumes and lower-than-expected A&SP intensity. Our EPS estimates for FY2015/16E go up 3-4% on the back of this beat and we raise our target price to `255 (`230 earlier; now end-FY2016 target versus Sep 2015 earlier). Challenging operating environment (subdued volume growth and inflationary LLP) is factored into the CMP, in our view. We retain ADD.

Bajaj Corp.Stock data Forecasts/Valuations 2014 2015E 2016E



Price performance (%) 1M 3M 12M EV/EBITDA (X) 16.9 14.4 12.0Absolute (5.9) 10.7 (7.0) ROE (%) 33.2 31.4 30.8Rel. to BSE-30 (5.0) (3.6) (30.8) Div. Yield (%) 2.8 2.8 3.3


287-179

ADD

AUGUST 05, 2014

RESULT


Price (`): 229


BSE-30: 25,723

Rohit Chordia [email protected] Mumbai: +91-22-4336-0885 Anand Shah [email protected] Mumbai: +91-22-4336-0882

Bajaj Corp. Consumer Products


Exhibit 1: Key changes to earnings model, Bajaj Corp, March fiscal year-ends, 2015-16E

2015E 2016E 2015E 2016E 2015E 2016ERevenues (Rs mn) 7,831 9,039 7,678 8,852 2.0 2.1 EBITDA (Rs mn) 2,090 2,389 2,019 2,305 3.5 3.7 EBITDA (%) 26.7 26.4 26.3 26.0 PAT (Rs mn) 2,044 2,340 1,975 2,256 3.5 3.7 EPS (Rs/share) 13.9 15.9 13.4 15.3 3.5 3.7

Revised Earlier Change (%)


Key highlights from management concall

Overall hair oil market growth continues to witness deceleration. Management highlighted that overall hair oils growth, as per Nielsen, continues to witness deceleration across segments with 1QFY15 registering 4.9% decline in overall hair oil volumes and 5.3% decline in LHO volumes. However, we note several managements in their recent commentary have indicated that Nielsen’s retail audit is not accurately reflecting the pick-up in volume growth, which companies have reported in their quarterly results (i.e. primary sales) and expect same to correct with a lag.

Rural growth ahead of urban growth. Management highlighted that ADHO posted 4.4% growth in rural markets while urban and rural growth combined stood at negative 2.7%, indicating sharp decline in urban markets. Rural sales now account for ~40% of total sales for ADHO. Rural growth has picked up due to higher growth in sachets, indicative of downtrading – management highlighted that sachets now contribute 19% of ADHO volumes.

No inventory correction witnessed in current quarter. Management highlighted that it did not witness any inventory correction (i.e. down stocking at distributor level) over last 2 months and expects same to stabilize in ensuing quarters. Number of stock days at distributor level has reduced from peak of 40-45 days to 30-32 days, at similar levels to 4QFY14.

Update on NOMARKS. Management highlighted that both creams and face washes under NOMARKS brand have witnessed good offtake post re-launch and initial signs of trade acceptance, especially from wholesalers, are very positive. Key monitorables in medium term are – (1) retailer stocking, (2) stock at each level (i.e. retail, wholesale and distributor) and (3) volume of sales and mix. NOMARKS brand is currently available in 350,000 outlets from initial 150,000 outlets and near-term target is to reach 500,000 outlets.

Consumer Products Bajaj Corp.


Exhibit 2: Interim standalone results of Bajaj Corp, March fiscal year-ends (Rs mn)

1QFY15 1QFY15E 1QFY14 4QFY14 KIE Est yoy qoq FY2014 FY2013 (% chg.) FY2015ENet sales 1,911 1,832 1,700 1,842 4 12 4 6,707 6,057 11 7,831Material cost (780) (760) (680) (758) 3 15 3 (2,688) (2,577) 4 (3,219)Gross Profit 1,131 1,072 1,021 1,084 5 11 4 4,019 3,480 16 4,612Gross Margin (%) 59.2 58.5 60.0 58.9 66 bps -83 bps 32 bps 59.9 57.5 247 bps 58.9Employee cost (96) (90) (83) (86) 7 16 12 (342) (295) 16 (399)Advertising (132) (137) (150) (102) (4) (12) 29 (464) (418) 11 (542)Other expenditure (368) (348) (307) (372) 6 20 (1) (1,364) (1,052) 30 (1,581)Total expenditure (1,376) (1,335) (1,220) (1,317) 3 13 4 (4,857) (4,342) 12 (5,741)EBITDA 534 497 481 524 8 11 2 1,849 1,714 8 2,090OPM (%) 28.0 27.1 28.3 28.5 85 bps -29 bps -50 bps 27.6 28.3 -74 bps 26.7Other operating income 2 2 2 3 24 31 (26) 10 11 (1) 11Other income 91 95 121 83 (5) (25) 10 401 401 0 409Interest (0) (0) (0) (16) 15 81 (99) (59) (1) (1)Depreciation (9) (10) (8) (10) (10) 10 (11) (43) (40) 9 (47)Pretax profits 619 584 595 584 6 4 6 2,159 2,085 4 2,462Tax (105) (98) (125) (84) 7 (16) 26 (384) (423) (9) (418)Recurring PAT 514 486 470 501 6 9 3 1,775 1,662 7 2,044Extraordinary items (117) (117) — (117) (286) — (470)Net profit (reported) 396 369 470 383 7 (16) 3 1,489 1,662 (10) 1,574Recurring EPS 3.5 3.3 3.2 3.4 6 9 3 12.0 11.3 7 13.9 Income tax rate (%) 17.0 16.8 21.0 14.3 23 bps -399 bps 268 bps 17.8 20.3 -254 bps 17.0Costs as a % of salesMaterial cost 40.8 41.5 40.0 41.1 -67 bps 82 bps -33 bps 40.0 40.0 0 bps 40.0Employee cost 5.0 4.9 4.9 4.7 14 bps 15 bps 37 bps 5.0 5.0 0 bps 5.0Advertising 6.9 7.5 8.8 5.6 -61 bps -192 bps 133 bps 8.3 8.3 0 bps 8.3Other expenditure 19.3 19.0 18.1 20.2 28 bps 122 bps -90 bps 18.8 18.8 0 bps 18.8

(% chg.)


Exhibit 3: ADHO volume decline arrested to 1% yoy; significant improvement qoq

13

2125

17

2320 19

24

19

2321 19

16

(1)

(10)

(1)

12

(15)

(10)

(5)

0

5

10

15

20

25

30

1QFY

11

2QFY

11

3QFY

11

4QFY

11

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15


Bajaj Corp. Consumer Products


Exhibit 4: Gross margins dip 80 bps yoy due to spike in LLP prices

57.6

56.3

53.752.9

53.754.2

53.0

55.6

57.7 57.9 58.3

60.060.5 60.5

58.9 59.260.6

50

53

56

59

62

1QFY

11

2QFY

11

3QFY

11

4QFY

11

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15


Exhibit 5: A&SP moderated to 16% (as % of sales)

12.8

10.911.5 11.8

12.5 12.6

16.8

12.6

13.814.5

16.5 16.817.6 17.9

16.015.5

10.0

8

10

12

14

16

18

20

1QFY

11

2QFY

11

3QFY

11

4QFY

11

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15


Consumer Products Bajaj Corp.


Exhibit 6: Consolidated profit model, balance sheet, cash model of Bajaj Corp, March fiscal year-ends, 2011-17E (Rs mn)

2011 2012 2013 2014 2015E 2016E 2017EProfit modelNet revenues 3,587 4,722 6,057 6,707 7,831 9,039 10,344EBITDA 1,081 1,154 1,714 1,849 2,090 2,389 2,769Other income 178 385 411 412 420 531 631Interest expense — (1) (1) (59) (1) (1) (1)Depreciation (18) (26) (40) (43) (47) (53) (58)Pretax profits 1,240 1,512 2,085 2,159 2,462 2,867 3,341Tax (210) (311) (423) (384) (418) (527) (726)Net income 1,031 1,201 1,662 1,775 2,044 2,340 2,615Extraordinary items (190) — — (286) (470) (470) (184)Reported profit 841 1,201 1,662 1,489 1,574 1,870 2,431Recurring Earnings per share (Rs) 7.0 8.1 11.3 12.0 13.9 15.9 17.7Balance sheetTotal shareholder's equity 3,763 4,278 4,826 5,192 6,114 7,160 8,049Total borrowings — — — — — — —Deferred tax liability 0 10 15 4 4 4 4Total liabilities and equity 3,764 4,288 4,840 5,196 6,118 7,164 8,053Net fixed assets 220 389 791 812 921 1,004 1,101Investments 3,301 3,135 1,845 1,575 1,575 1,575 1,575Cash 813 275 1,892 1,292 2,602 4,063 5,074Net current assets (571) 59 (118) (37) (64) (93) (127)Miscellaneous expenditure 1 — — — — — —Goodwill/intangibles 0 430 430 1553 1084 614 430Total assets 3,764 4,288 4,840 5,196 6,118 7,164 8,053Free cash flowOperating cash flow, excl. working capital 875 868 1,300 1,408 2,142 2,332 2,226Working capital changes 140 28 (70) (150) 28 28 35Capital expenditure (62) (196) (111) (1,467) (157) (136) (155)Free cash flow 953 700 1,118 (208) 2,013 2,225 2,106Ratios (%)Revenue growth 21.8 31.7 28.3 10.7 16.8 15.4 14.4Gross margin 56.3 53.4 57.5 59.9 58.9 58.9 58.8EBITDA margin 30.1 24.4 28.3 27.6 26.7 26.4 26.8EPS growth 22.8 16.5 38.4 6.8 15.1 14.5 11.8

ROE 41.5 25.6 26.4 33.2 31.4 30.8 30.8ROCE 47.7 26.4 24.7 33.4 31.9 30.8 30.7




Results—a tad below estimates; however, underlying trends are encouraging

CUMI reported 1QFY15 consolidated sales at `5.2 bn (+3% yoy; -3% qoq), which were a tad below our estimates. Underperformance on the sales front flowed through to the EBITDA level; the company reported 1QFY15 consol EBITDA at `744 mn (+16% yoy; +10% qoq). However, 1QFY15 EBITDA margins at 14.3% were 170 bps higher yoy, indicating continuing improvement in operations driven by rising sales volumes. Even as 1QFY15 is a seasonally weaker quarter versus 4QFY14, margins improved (qoq) by 160 bps, pointing towards strong underlying trend of improving volumes/mix. The company reported consol 1QFY15 PAT at `274 mn.

Order inflow/mix is improving; should reflect in better margins going forward

As per the management, order inflow is improving across business segments, which should reflect in better sales/margin trajectory in the coming quarters. 1QFY15 results reflect improvement in operations of subsidiaries with the standalone entity reporting subdued growth in sales and a decline in EBITDA (margins as well) yoy, implying that the recovery in operations led by the India-centric business is yet to play out. As per the management, apart from positive trend in volumes, which are helping margins in all business segments, margins in abrasive and ceramic segments should also benefit on improving mix. In the abrasive segment, order inflow of higher margin products, used by industries that require value-added services and hence avoid cheap imports (for example, auto/auto-ancillary industry), is increasing. Similar trend is playing out in the ceramics segment also; order inflow of wear-and-tear-resistant tiles (partly through Australian subsidiary) is improving on normalizing maintenance spends. Positive mix trends in order inflow should reflect in better margins in the respective businesses going forward.

Maintain BUY with unchanged target price of `200 (16X FY2016E EPS)

In our view, CUMI is well-positioned to ride the trends of (1) recovery in manufacturing activity in India and (2) recovery in global capex/maintenance spends, specifically in power/coal/ferrous and non-ferrous metals space. During the downturn, the company has made significant efforts towards rationalizing costs, winning approvals for new products and repositioning unused capacities to cater to changing market conditions. Also, capacities are available (~75% utilization in most of the businesses) to scale up volumes with small incremental capex spends.

Carborundum Universal (CU)

Others

Margins to improve further; order flow is encouraging. CUMI’s results were a tad below estimates led by lower (~5%) sales. However, improvement (yoy) in EBITDA margins was encouraging. As per the management, the improvement reflects rising volumes across businesses; the trend can accelerate further. Also, order flow implies better mix going forward, specifically in abrasives. Better mix and operating leverage should be a tailwind for margins going forward. BUY with an unchanged TP of `200.

Carborundum UniversalStock data Forecasts/Valuations 2014 2015E 2016E





201-97

BUY

AUGUST 05, 2014

RESULT

Coverage view:

Price (`): 168


BSE-30: 25,723

Jasdeep Walia [email protected] Mumbai: +91-22-4336-0877

Others Carborundum Universal


Exhibit 1: Margin improvement was led by higher volumes and better mix Interim results of CUMI, consolidated, March fiscal year-ends (Rs mn)

1QFY15 1QFY15E 1QFY14 4QFY14 KIE est yoy qoqTotal Income 5,219 5,481 5,077 5,364 (4.8) 2.8 (2.7)Total Expenditure (4,475) (4,690) (4,436) (4,685) (4.6) 0.9 (4.5)Raw materials (1,676) (1,711) (1,942)Employee expense (718) (670) (814)Power and fuel (892) (782) (816)Other expenditure (1,189) (1,272) (1,112)EBITDA 744 791 642 679 (6.0) 15.9 9.5EBITDA (%) 14.3 14.3 12.6 12.7Depreciation (259) (280) (203) (270)Interest (66) (75) (64) (75)PBT (excl. other income) 419 436 375 334 (3.8) 11.8 25.5PBT (%) 8.0 8.0 7.4 6.2Other income 32 20 82 46PBT 451 451 457 380 0.0 (1.2) 18.6Exceptional items (27) — 16 15Tax expense (135) (150) (184) (134)PAT 289 306 288 262Add: Share of profits from associate — — — —Less: Minority interest (15) (10) (11) (12)PAT 274 296 276 249 (7.4) (1.0) 9.7Margins (%)RM/sales 32.1 33.7 36.2Employee cost/sales 13.8 13.2 15.2Power and fuel/sales 17.1 15.4 15.2Other expenditure 22.8 25.1 20.7

Change (%)


Exhibit 2: Margins have been improving with each passing quarter Trend in quarterly EBITDA margins for CUMI, consolidated, March fiscal year-ends (%)

19.618.5

17.1

10.7

12.9

16.7 17.6

12.614.714.6

20.8

18.0

14.312.7

8.3

22.3

9.1

5

8

11

14

17

20

23

26

Q1FY

11

Q2FY

11

Q3FY

11

4QFY

11

1QFY

12

2QFY

12

3QFY

12

4QFY

12

4QFY

13

2QFY

13

3QFY

13

4QFY

14

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15


Carborundum Universal Others


Exhibit 3: Sequential improvement in margins was visible across businesses even as 1QFY15 is seasonally weaker Segmental results for CUMI, consolidated, March fiscal year-ends (Rs mn)

1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 yoy qoqSegment revenuesAbrasives 2,021 2,098 1,976 1,999 2,061 2,255 2,129 2,155 2,121 3% -2%Ceramics 1,184 1,332 1,193 1,283 1,115 1,240 1,115 1,237 1,149 3% -7%Electro-minerals 1,835 1,855 1,322 1,674 1,950 2,162 2,044 1,943 2,021 4% 4%Others 101 102 95 91 94 94 83 94 85Less: intersegment (161) (166) (148) (263) (214) (226) (212) (178) (215)Total revenues 4,980 5,222 4,438 4,784 5,005 5,524 5,159 5,251 5,160Segment EBITAbrasives 214 233 188 196 203 220 90 89 123 -39% 39%Ceramics 247 250 134 158 153 148 116 172 172 13% 0%Electro-minerals 201 186 (79) (71) 259 224 158 166 264 2% 59%Others 31 32 27 8 13 15 3 (1) 5EBIT 693 700 270 291 627 607 367 425 564EBIT (%)Abrasives 10.6 11.1 9.5 9.8 9.8 9.8 4.2 4.1 5.8Ceramics 20.9 18.8 11.2 12.3 13.7 11.9 10.4 13.9 15.0Electro-minerals 11.0 10.0 (5.9) (4.3) 13.3 10.4 7.7 8.5 13.1Others 30.3 31.4 28.7 8.3 14.0 15.7 3.1 (1.5) 5.3

% change


Some disappointments versus earlier expectations

Even as overall trend in growth in sales and margins is encouraging, there have been a few disappointments versus some of our earlier expectations:

At Foskor (51% sub), the company is finding it difficult to scale up the new bubble zirconia plant (~5,000 tons capacity per annum) on account of technical challenges. As per earlier guidance of the management, the plant was estimated to produce close to 3,000 tons in the first year (FY2015) and would have gradually scaled up to near-full utilization levels in the subsequent years. However, now on account of some technical difficulties, the company is not able to scale up production levels to more than 200 tons per month. As per the management, the new plant cannot be profitable at current levels of production and it expects the situation to remain unchanged at least for the next two quarters. However, on account of a general pick-up in the economy, the erstwhile capacity of 5,000 tons has started producing at optimum utilization levels and hence is offsetting subdued performance of the new capacity.

At Thukela (100% sub), the company is finding it difficult to scale up fusion volumes (capacity is close to 22,000 tons). As per the management, most of the fused material manufactured by this facility hitherto used to service the refractory industry, which is not doing well as of now. Hence, capacity utilization has been hovering in the range of 30-40%. As per the management, scaling up volumes has proved to be much harder versus earlier expectations and the company will have to reposition/re-engineer the product slate to cater to other industries to increase off-take.



At VAW Russia, ongoing issue involving Ukraine has halted the mix improvement, which was underway at this facility. In the last few quarters, proportion of crystalline silicon carbide (Sic) was increasing (versus metallurgical grade) in the sales mix on account of pick-up in user industries of abrasive/ceramics, which in turn were benefitting out of improving global economy. Most of the incremental demand of crystalline grade has been originating from Europe. As per the management, on account of the current turmoil involving Ukraine and Russia, the company will not be able to further increase sales of crystalline Sic to Europe. Most of the consumers of crystalline Sic in Europe are small manufacturers of abrasives/ceramics, who are now reluctant to buy incremental supplies from a Russian company. To solve the problem, CUMI will have to create a front-end presence in Europe, which will take time. Hence, at least for the next one year, mix of Russian operation would remain static (60% sales of metallurgical grade) and margin benefits, which we were expecting on improving mix, won’t materialize in FY2015.

Exhibit 4: Standalone business should also start contributing to improvement in operations in the coming quarters Interim results of CUMI, standalone, March fiscal year-ends (Rs mn)

1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 % chg yoy % chg qoqTotal Income 2,736 3,040 2,699 3,011 2,723 0% -10%Total Expenditure (2,364) (2,599) (2,437) (2,636) (2,396) 1% -9%Raw materials (1,214) (1,406) (1,172) (1,339) (1,183) -3% -12%Employee cost (300) (325) (310) (324) (315) 5% -3%Power and fuel (281) (269) (311) (320) (307) 9% -4%Other expenditure (569) (599) (643) (653) (591) 4% -9%EBITDA 372 441 262 375 327 -12% -13%EBITDA (%) 13.6 14.5 9.7 12.5 12.0Depreciation (121) (122) (123) (126) (141)Interest (30) (31) (32) (37) (24)EBIT 222 288 108 212 162EBIT (%) 8.1 9.5 4.0 7.0 5.9Other income 77 15 4 76 61PBT 299 303 112 288 223 -26% -23%Exceptional items 19 9 1 (7) (5)Tax expense (92) (100) (40) (65) (63)PAT 226 212 73 217 155 -32% -29%Margins (% of net sales)RM 44.4 46.2 43.4 44.5 43.4Employee cost 10.9 10.7 11.5 10.8 11.6Power and fuel 10.3 8.9 11.5 10.6 11.3Other expenditure 20.8 19.7 23.8 21.7 21.7


Carborundum Universal Others


Exhibit 5: EM margins were lower yoy as power generation from captive hydro power plant declined yoy on lower rainfall Segmental results for CUMI, standalone, March fiscal year-ends (Rs mn)

1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 yoy qoqSegment revenuesAbrasives 1,490 1,547 1,500 1,536 1,517 1,687 1,576 1,619 1,551 2% -4%Ceramics 841 877 703 845 712 828 670 849 744 5% -12%Electro-minerals 502 533 465 466 613 639 573 583 548 -11% -6%Less: intersegment (126) (125) (119) (133) (150) (164) (151) (123) (153)Total revenues 2,706 2,832 2,548 2,714 2,692 2,989 2,668 2,928 2,689Segment EBITAbrasives 186 201 190 216 181 178 120 117 129 -29% 10%Ceramics 117 128 46 130 80 115 28 120 99 24% -17%Electro-minerals 33 65 5 (30) 80 104 69 34 55 -31% 63%EBIT 335 393 241 317 340 397 216 271 283EBIT (%)Abrasives 12.5 13.0 12.7 14.1 11.9 10.5 7.6 7.2 8.3Ceramics 13.9 14.6 6.5 15.4 11.2 13.9 4.2 14.1 13.3Electro-minerals 6.5 12.1 1.1 -6.3 13.0 16.4 12.0 5.8 10.1

% change


Other highlights

The company has spent `190 mn on capex in 1QFY15, 50% of which has been incurred in the standalone business (remaining mostly in Russia). The company has maintained its capex guidance at `700-800 mn for FY2015.

As per the management, order inflow (ceramics) has improved for the Australian subsidiary (51%) led by pick-up in maintenance spends in power plants and mining industries. Also, the Australian subsidiary of the company has won a couple of project orders in Middle East and South East Asia.

The company is hopeful of scaling up refractory volumes in VAW, Russia. As per the management, VAW’s refractory material has been approved by the largest aluminum producer in Russia (RUSAL) and a couple of large aluminum smelters in Middle East.

In the standalone business, EM segment margins were lower yoy, as power generation from the company’s Maniyar hydropower plant (power is consumed by the EM business) declined versus last year on account of much lower quantum of rains.

Gross debt has declined from `4.6 bn in 4QFY14 to `4.4 bn in 1QFY15.

After restructuring of Russian abrasive business in 2HFY14, it is no longer losing money. In the consolidated abrasive operations, only the Chinese abrasive operation is still making losses. The company is trying to position the Chinese abrasive capacity to cater to local market rather than for exports to India. Initial results from this strategy are positive and losses have been coming down gradually.

Uttarakhand abrasive (thin wheels) plant, which was commissioned last year, is running at 60% utilization. Thin wheels are used extensively in the construction industry (for cutting purposes) and since construction activity has not picked up in India as of now, the utilization remains at suboptimal levels.



Exhibit 6: Summary financials: Carborundum Universal Profit and loss model, cash flow statement and balance sheet for CUMI, consolidated, March fiscal year-ends (Rs mn)

2010 2011 2012 2013 2014 2015E 2016E 2017EProfit model (Rs mn)Net sales 13,121 16,452 19,950 19,714 21,253 23,914 26,502 28,767EBITDA 2,438 3,091 3,895 2,372 2,515 3,506 4,462 5,136Other income 22 29 127 130 220 81 93 97Interest (308) (271) (250) (272) (282) (309) (253) (151)Depreciation (445) (504) (569) (711) (911) (939) (971) (1,004)Profit before tax 1,707 2,345 3,203 1,519 1,543 2,338 3,331 4,078Exceptional items 7 235 24 — — — — —Tax expense (560) (742) (908) (619) (592) (772) (966) (1,183)Add: share of profits from associates 3 (2) 11 — — 30 30 30Less: minority interest (140) (129) (137) (2) (36) (50) (70) (70)PAT 1,017 1,708 2,193 898 915 1,547 2,325 2,855EPS 5 9 12 4.8 4.9 8 12.4 15Balance sheet (Rs mn)Equity 5,929 7,455 9,470 10,592 11,060 12,134 13,749 15,732Total borrowings 4,391 4,085 3,986 4,342 4,563 4,263 2,963 1,363Minority interest 490 594 775 738 699 749 819 889Deferred tax liability 449 477 490 503 500 500 500 500Current liabilities 1,915 2,275 2,916 2,856 3,034 3,477 3,881 4,192Total liabilites 13,173 14,886 17,636 19,031 19,856 21,123 21,913 22,676Net fixed assets 5,316 5,525 6,500 8,273 8,260 8,121 8,000 7,846Goodwill 849 832 944 1,002 1,105 1,105 1,105 1,105Investments 779 749 400 256 373 373 373 373Cash 469 698 1,105 855 754 844 599 505Other current assets 5,761 7,082 8,687 8,645 9,364 10,680 11,836 12,847Total assets 13,173 14,886 17,636 19,031 19,856 21,123 21,913 22,676Free cash flow (Rs mn)Operating cash flow 1,701 2,293 2,807 1,632 1,751 2,455 3,273 3,832Working capital changes 65 (509) (705) 49 (774) (873) (751) (701)Caital expenditure (590) (771) (1,536) (2,070) (775) (800) (850) (850)Free cash flow 1,175 1,012 566 (389) 202 782 1,672 2,281RatiosEBITDA margin (%) 19 19 20 12 12 15 17 18Net debt/equity (X) 66 45 30 33 34 28 17 5Book value (Rs/share) 32 40 51 57 59 65 73 84RoAE (%) 18 25 25 8 7 13 17 19RoACE (%) 12 15 17 6 6 10 14 16




Dismal marketing margins take the sheen off moderate volume growth

PLNG reported 1QFY15 EBITDA at `3.58 bn (-7.5% qoq, -10.1% yoy) and net income at `1.57 bn (-7.5% qoq, -30.5% yoy), lower than our estimates of `4.4 bn and `1.8 bn, respectively despite higher-than-expected LNG volumes, reflecting a sharp decline in marketing margins on short-term/spot LNG cargoes. Overall re-gasification volumes across two LNG terminals increased 18% qoq and 7% yoy to 138.7 tn BTUs. However, implied tariff on LNG volumes declined 21% qoq and 11% yoy to `33.3/mn BTU, reflecting a sharp decline in marketing margins to a modest US$0.2/mn BTU versus US$1/mn BTU in FY2014.

We were expecting margins to decline, but not so fast and so soon

We were skeptical of high marketing margins earned by the company over the past few years and were expecting it to decline, albeit more gradually in 2-3 years, led by an increase in LNG availability in the country. However, a sharp decline in marketing margins during the quarter reflects either an enhanced competition from the tolling contracts of GAIL and GSPC or a negative impact from pricing risk (lack of back to back contracts for some spot cargoes) borne by the company in light of declining spot prices; we note that the management has categorically denied the latter in the conference call, which implies that the margins are likely to remain subdued on a sustainable basis henceforth.

Downgrade to REDUCE on full valuations

We revise our rating on PLNG stock to REDUCE from ADD previously as the stock is trading above our DCF-based target price of `175 (`165 previously), post 24% rally over the past three months. Our assumptions of stable long-term tariffs, post 5% annual escalation for three years and low marketing margins of US$0.3/mn BTU yield a reasonable 19% CROCI for the company in the long term, which factors in potential regulatory/competitive risks to domestic LNG business.

Cut EPS estimates to factor in lower marketing margins

We cut our EPS estimates for PLNG to `8.9, `11.3 and `15.6 for FY2015E, FY2016E and FY2017E from `10, `12.4 and `15.9 previously to reflect (1) lower marketing margins on short-term/spot volumes, (2) modestly lower volumes and (3) other minor changes.

Petronet LNG (PLNG)

Energy

Weak results and full valuations. PLNG reported lower-than-expected EBITDA and net income in 1QFY15 despite a moderate volume growth, reflecting a sharp decline in marketing margins. We downgrade the stock to REDUCE from ADD previously with a revised DCF-based target price of `175 (`165 previously) noting weaker earnings outlook in FY2015-16 given subdued volumes and margins, full valuations with the stock trading near our fair value and lack of positive triggers to justify further rerating.

Petronet LNGStock data Forecasts/Valuations 2014 2015E 2016E

52-week range (Rs) (high,low) EPS (Rs) 9.5 8.9 11.3Market Cap. (Rs bn) 135.2 EPS growth (%) (38.1) (5.8) 26.4


Price performance (%) 1M 3M 12M EV/EBITDA (X) 10.4 10.9 9.2Absolute 1.1 24.1 55.4 ROE (%) 13.2 10.9 12.3Rel. to BSE-30 2.0 8.1 15.8 Div. Yield (%) 1.1 1.2 1.8


190-103

REDUCE

AUGUST 05, 2014

RESULT, CHANGE IN RECO.


Price (`): 180


BSE-30: 25,723

QUICK NUMBERS

• 138.7 tn BTUs of volumes; `33.3/mn BTU of implied tariffs

• US$0.2/mn BTU of estimated marketing margins on short-term/spot volumes

• Stock trading at 16X FY2016E EPS

Tarun Lakhotia [email protected] Mumbai: +91-22-4336-0875 Vinay Kumar [email protected] Mumbai: +91-22-4336-0876

Energy Petronet LNG


Key highlights from 1QFY15 results

Exhibit 1 gives the details of PLNG’s 1QFY15 results and compares the same with 4QFY14 and 1QFY14 results.

Exhibit 1: Interim results of Petronet LNG, March fiscal year-ends (` mn)

(% chg.) yoy1QFY15 1QFY15E 1QFY14 4QFY14 1QFY15E 1QFY14 4QFY14 FY2014 FY2013 (% chg.) 2015E

Net sales 101,608 105,986 84,442 104,278 (4.1) 20.3 (2.6) 377,476 314,674 20.0 404,221Total expenditure (98,031) (101,562) (80,464) (100,410) (3.5) 21.8 (2.4) (362,491) (295,287) 22.8 (389,618)Raw material (96,995) (100,550) (79,593) (99,344) (3.5) 21.9 (2.4) (358,495) (292,098) 22.7 (385,216)Staff cost (122) (88) (86) (195) 38.2 42.1 (37.5) (466) (370) 26.0 (513)Other expenditure (913) (924) (785) (871) (1.1) 16.3 4.9 (3,530) (2,819) 25.2 (3,890)EBITDA 3,578 4,424 3,978 3,868 (19.1) (10.1) (7.5) 14,985 19,388 (22.7) 14,603Other income 353 225 152 308 57.0 131.8 14.8 838 865 (3.2) 1,084Depreciation (771) (1,116) (467) (1,000) (31.0) 65.0 (22.9) (3,081) (1,866) 65.1 (3,288)Interest (784) (802) (240) (786) (2.2) 226.5 (0.3) (2,196) (1,184) 85.4 (2,429)Profit before tax 2,376 2,731 3,423 2,389 (13.0) (30.6) (0.5) 10,545 17,203 (38.7) 9,969Extraordinary/prior-period items — — — — — — —Current tax (810) (928) (1,170) (696) (3,426) (5,710) (2,090)Deferred tax liabilities/assets — — — — — — (1,174)Profit after tax 1,566 1,803 2,253 1,693 (13.1) (30.5) (7.5) 7,119 11,493 (38.1) 6,706Adjusted Profit after tax 1,566 1,803 2,253 1,693 (13.1) (30.5) (7.5) 7,119 11,493 (38.1) 6,706Adjusted EPS (Rs) 2.1 2.4 3.0 2.3 9.5 15.3 8.9 Tax rate (%) 34.1 34.0 34.2 29.1 32.5 33.2 32.7

Re-gasification volumes (tn BTU) 138.7 128.0 129.5 117.2 8.3 7.1 18.3 493.3 524.6 (6.0) 557.4 Contracted 96.4 94.0 92.3 92.0 2.5 4.5 4.8 374.5 376.2 (0.5) 374.1 Spot 17.4 22.0 19.0 20.8 (20.8) (8.2) (16.0) 65.1 103.1 (36.8) 66.2 Tolling 24.9 12.0 18.3 4.5 107.3 36.1 451.4 53.7 45.2 18.6 117.1Implied tariff (Rs/mn BTU) 33.3 42.5 37.4 42.1 (21.7) (11.2) (21.0) 38.5 43.0 (10.6) 34.1 Estimated marketing margins (US$/mn BTU) 0.2 0.8 1.1 (76.5) (81.7) 1.0 1.2 (14.9) 0.3

Notes:(a) The re-gasification tariff computed here is different from actual tariffs due to inclusion of direct re-gasification and associated costs.


Strong growth in re-gasification volumes. PLNG reported higher re-gasification volumes at 138.7 tn BTU versus 117.2 tn BTU in 4QFY14 and 129.5 tn BTU in 1QFY14. Long-term contracted LNG volumes increased to 96.4 tn BTU versus 92 tn BTU in 4QFY14 and 92.3 tn BTU in 1QFY14. The company reported (1) higher tolling volumes at 24.9 tn BTU versus 4.5 tn BTU in 4QFY14 and 18.3 tn BTU in 1QFY14 and (2) lower spot volumes at 17.4 tn BTU in 1QFY15 versus 20.8 tn BTU in 4QFY14 and 19 tn BTU in 1QFY14.

Sharply lower implied tariffs led by weak marketing margins. We compute sharply lower implied tariffs at `33.3/mn BTU in 1QFY15 versus `42.1/mn BTU in 4QFY14 and `37.4/mn BTU in 1QFY14. We highlight that estimated marketing margins on PLNG’s short-term/spot LNG volumes declined sharply to US$0.2/mn BTU from US$1.1/mn BTU in 4QFY14 and US$0.8/mn BTU in 1QFY14 (see Exhibit 2).

Decline in depreciation expense; stable interest cost. PLNG reported lower depreciation expense at `771 mn (-23% qoq), led by change in rates of depreciation as per provisions of the Companies Act 2013. Interest cost remained stable at `784 mn (-0.3% qoq). The sharp yoy increase in depreciation and interest cost reflects capitalization of Kochi terminal from September 2013.

1QFY15 operating loss of ~`150 mn from Kochi terminal. The management indicated that the company incurred an operating loss of `150 mn on Kochi terminal in 1QFY15. The company highlighted that it is likely to incur a PBT loss of ~`5 bn at Kochi, if the terminal continues to operate at the current utilization. The company has received necessary approvals from the Board to utilize Kochi terminal as a temporary storage facility for global players and it expects to initiate activity in the current quarter.

Petronet LNG Energy


Exhibit 2: PLNG’s marketing margins on spot LNG volumes declined sharply in 1QFY15 Calculation of implied margins for PLNG's spot volumes, March fiscal year-ends, 2012-15YTD (` mn)

FY2012 FY2013 1QFY14 2QFY14 3QFY14 4QFY14 FY2014 1QFY15Volumes (tn BTU)DahejContracted 372.1 376.2 92.3 98.4 91.9 92.0 374.5 96.4 Spot 103.6 103.1 19.0 12.4 10.6 20.5 62.5 16.8 Tolling 72.7 45.2 18.3 12.0 17.8 3.8 51.8 24.8 Total volumes 548.4 524.6 129.5 122.8 120.2 116.3 488.8 138.0 KochiContracted — — — — —Spot 0.1 2.3 0.3 2.6 0.6 Tolling 0.1 1.1 0.7 1.9 0.0 Total volumes 0.2 3.4 1.0 4.5 0.7 Tariffs (Rs/mn BTU)Dahej re-gasification tariffs 33.8 35.5 36.8 36.8 36.8 38.6 37.2 38.6 Kochi re-gasification tariffs 62.0 62.0 65.1 62.7 65.1 Implied tariff 37.8 43.0 37.4 37.6 37.6 42.1 38.5 33.3 Computation of marketing marginsTotal reported contribution 20,712 22,577 4,849 4,619 4,650 4,934 18,981 4,613 Contribution from contracted volumes 12,564 13,340 3,392 3,616 3,379 3,552 13,942 3,723 Reported revenues from tolling volumes 2,452 1,705 672 446 720 193 2,031 961 Internal consumption loss 2,250 3,021 804 907 894 999 3,604 966 Implied contribution from spot volumes 7,946 10,553 1,589 1,464 1,445 2,188 6,612 895 Re-gasification charges on spot volumes 3,499 3,655 698 462 531 808 2,491 690 Remaining contribution from spot volumes 4,447 6,898 891 1,002 915 1,379 4,121 206 Implied margins for spot cargoes (Rs/mn BTU) (a) 42.9 66.9 47.0 80.0 71.1 66.5 63.3 11.8 Implied margins for spot cargoes (US$/mn BTU) 0.9 1.2 0.8 1.3 1.1 1.1 1.0 0.2

Notes:(a) We have computed implied margins before internal consumption loss on spot volumes; net marketing margins will be lower.


Other updates from conference call

Second jetty at Dahej. PLNG has commissioned the second jetty at Dahej terminal on April 10 and has started servicing the long-term tolling contract of 1.25 mtpa with GSPC. The company has accounted a depreciation expense of ~`65 mn for the second jetty in 1QFY15.

Gangavaram terminal. The company has received necessary approvals from the Andhra Pradesh government for its LNG import terminal at Gangavaram. The management indicated that it will tie up LNG sources and consumers before going ahead on the project. The company expects to commission the terminal within three years from the award of EPC contracts.

Expansion of Dahej terminal. The management highlighted that the expansion of Dahej terminal to 15 mtpa capacity remains on track for completion by end-CY2016.

Key assumptions behind our earnings model

We discuss the key assumptions underlying our earnings model below (see Exhibit 3).

Energy Petronet LNG


Exhibit 3: We model slow ramp-up in PLNG's volumes Key assumptions for Petronet LNG, March fiscal year-ends, 2010-18E

2010 2011 2012 2013 2014 2015E 2016E 2017E 2018EVolume assumptions (mn tons)Contract LNG volumes 7.1 7.5 7.3 7.4 7.4 7.4 7.6 8.5 9.0 Spot LNG volumes 0.4 0.6 2.0 2.0 1.3 1.3 1.4 1.6 0.8 Tolling volumes 0.3 0.6 1.4 0.9 1.1 2.3 2.7 3.5 7.7 Total volumes 7.9 8.7 10.8 10.3 9.7 11.0 11.7 13.6 17.4 Dahej 7.9 8.7 10.8 10.3 9.6 10.8 11.2 12.2 15.0 Kochi — — — — 0.1 0.2 0.5 1.4 2.4 Total volumes 7.9 8.7 10.8 10.3 9.7 11.0 11.7 13.6 17.4 Price assumptions (US$/mn BTU)LNG purchase price (FOB) 4.6 5.6 8.1 10.1 12.3 13.4 13.5 13.6 13.3 Landed cost (incl. import tariff) 5.2 6.3 8.9 11.1 13.3 14.5 14.7 14.7 14.5 Re-gasification charges for Dahej 0.65 0.71 0.70 0.65 0.62 0.66 0.71 0.74 0.77 Re-gasification charges for Dahej (Rs/mn BTU) 30.6 32.2 33.8 35.5 37.2 39.1 41.1 43.1 44.7 Re-gasification charges for Kochi 1.04 1.11 1.19 1.25 1.30 Re-gasification charges for Kochi (Rs/mn BTU) 62.8 65.9 69.2 72.7 75.4 Blended sales price 5.8 7.0 9.7 11.7 14.0 15.2 15.4 15.5 15.4 Marketing margins on spot LNG 0.9 0.9 1.2 1.1 0.3 0.3 0.3 0.3 Other assumptionsExchange rate (Rs/US$) 47.4 45.6 47.9 54.4 60.5 59.5 58.0 58.0 58.0


LNG volumes. We model gradual ramp-up in LNG volumes to 17.4 mn tons in FY2018E versus 9.7 mn tons in FY2014 and 10.3 mn tons in FY2013 led by (1) completion of ongoing expansion project at Dahej terminal by end-CY2016, (2) recent commissioning of second jetty at Dahej terminal and (3) gradual increase in utilization of Kochi terminal.

Dahej. We have assumed LNG import volumes at 10.8 mtpa, 11.2 mtpa and 12.2 mtpa in FY2015E, FY2016E and FY2017E for Dahej terminal. We have assumed further ramp-up in volumes to 15.5 mtpa by FY2020E following completion of ongoing expansion project at Dahej terminal by end-CY2016.

Kochi. We have assumed LNG import volumes at 0.2 mtpa, 0.5 mtpa and 1.4 mtpa in FY2015E, FY2016E and FY2017E for Kochi terminal. We have assumed a gradual ramp-up to 5 mtpa (full capacity utilization) at Kochi terminal by FY2022E.

Re-gasification tariffs. We model re-gasification tariff for Dahej terminal to increase by 5% annually in CY2015-17E to `44.7/mn BTU and expect it to remain flat until FY2024E, the terminal year of our DCF model (see Exhibit 4). We model re-gasification tariff for Kochi terminal to increase by 5% annually in CY2015-17E to `75.4/mn BTU and expect it to remain flat thereafter. Higher re-gasification tariffs may sustain in the near term in the absence of regulations for open access of LNG terminals.

Marketing margins. We have assumed lower marketing margins on short-term/spot LNG volumes at US$0.3/mn BTU from FY2015 onwards versus implied margins of US$1.1/mn BTU in FY2014.

Exchange rate. We have assumed Rupee-Dollar exchange rate for FY2015E, FY2016E and FY2017E at `59.5/US$, `58/US$ and `58/US$.

Petronet LNG Energy


Exhibit 4: Our DCF-based fair value for PLNG is `175 Calculation of equity value of PLNG using discounted cash flow (` mn)

2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026EEBITDA 14,603 17,219 21,941 29,934 33,283 35,603 37,088 37,882 37,060 36,187 36,187 36,187Adjusted tax expense (2,372) (2,895) (3,812) (6,116) (8,786) (9,914) (10,685) (11,165) (11,049) (10,878)Change in working capital (1,217) (721) (1,557) 122 (317) (1,409) (1,278) (962) (986) (1,146)Operating cash flow 11,014 13,602 16,572 23,939 24,180 24,280 25,125 25,755 25,024 24,162Capital expenditure (10,254) (9,400) (9,032) (1,250) (1,250) (1,250) (1,250) (1,250) (1,250) (5,429)Free cash flow 760 4,202 7,540 22,689 22,930 23,030 23,875 24,505 23,774 18,733 18,733 18,733Discounted cash flow-now 704 3,458 5,516 14,753 13,252 11,827 10,899 9,944 8,575 6,004Discounted cash flow-1 year forward 3,892 6,205 16,597 14,909 13,310 12,261 11,187 9,647 6,757 6,004Discounted cash flow-2 year forward 6,983 18,671 16,772 14,974 13,799 12,585 10,853 7,602 6,757 6,004

Now + 1-year + 2-yearsDiscount rate (%) 12.5% 12.5% 12.5%Total PV of free cash flow 84,933 100,769 115,000Terminal value assumptionGrowth in perpetuity 0.0% 0.0% 0.0%FCF in 2024E 18,733 18,733 18,733Exit FCF multiple (X) 8.0 8.0 8.0 174 -1.0% -0.5% 0.0% 1.0% 1.5%Exit EV/EBITDA multiple (X) 4.1 4.1 4.1 11.5% 186 189 193 201 205Terminal value 149,864 149,864 149,864 12.0% 177 180 183 190 194PV of terminal value 48,034 48,034 48,034 12.5% 169 172 174 181 184Total company value 132,967 148,804 163,035 13.0% 162 164 166 172 175

13.5% 155 157 159 164 167Net debt 22,139 24,858 24,839Equity value 110,829 123,946 138,196 Shares outstanding (mn) 750 750 750 Equity value of regasification business (Rs) 148 165 184 Equity value of 26% stake in Dahej Port (Rs) 8 9 10 Fair value of PLNG (Rs) 156 174 195

Fiscal Year end (March 31, XXXX) March-15 March-16 March-17 March-18 March-19 March-20 March-21 March-22 March-23 March-24Today 5-Aug-14 5-Aug-14 5-Aug-14 5-Aug-14 5-Aug-14 5-Aug-14 5-Aug-14 5-Aug-14 5-Aug-14 5-Aug-14Days left 238 604 969 1,334 1,699 2,065 2,430 2,795 3,160 3,526 Years left 0.65 1.65 2.65 3.65 4.65 5.66 6.66 7.66 8.66 9.66 Discount factor at WACC 0.93 0.82 0.73 0.65 0.58 0.51 0.46 0.41 0.36 0.32

Sensitivity of 12-month fair value to WACC and perpetual growthPerpetual growth (%)

WA

CC

(%

)

Source: Kotak Institutional Equities estimates

Energy Petronet LNG


Exhibit 5: Petronet LNG: Profit model, balance sheet, cash model March fiscal year-ends, 2010-18E (` mn)

2010 2011 2012 2013 2014 2015E 2016E 2017E 2018EProfit model (Rs mn)Net sales 106,491 131,973 226,959 314,674 377,476 404,221 417,662 472,439 460,876EBITDA 8,465 12,161 18,292 18,436 14,984 14,603 17,219 21,941 29,934Other income 978 684 849 1,817 838 1,084 666 461 670Interest (1,839) (1,934) (1,774) (1,184) (2,196) (2,429) (1,828) (904) (798)Depreciation (1,609) (1,847) (1,842) (1,866) (3,081) (3,288) (3,406) (3,756) (4,481)Extraordinary items — — — — — — — — —Pretax profits 5,995 9,064 15,525 17,203 10,545 9,969 12,651 17,742 25,325Tax (1,410) (2,650) (4,800) (5,430) (1,806) (2,090) (2,652) (3,719) (6,086)Deferred taxation (540) (218) (150) (280) (1,620) (1,174) (1,523) (2,312) (2,522)Net profits 4,045 6,196 10,575 11,493 7,119 6,706 8,476 11,711 16,717Earnings per share (Rs) 5.4 8.3 14.1 15.3 9.5 8.9 11.3 15.6 22.3

Balance sheet (Rs mn)Total equity 22,349 26,802 35,198 44,497 49,861 54,542 60,093 67,980 79,747Deferred taxation liability 3,262 3,480 3,630 3,910 5,530 6,704 8,227 10,539 13,061Total borrowings 24,998 32,160 32,762 30,342 34,965 31,538 28,375 24,199 15,687Currrent liabilities 9,006 12,170 20,521 32,080 28,771 32,240 32,833 35,648 34,340Total liabilities and equity 59,614 74,612 92,110 110,828 119,127 125,024 129,529 138,366 142,836Cash 3,405 1,575 9,839 12,685 12,327 6,182 3,037 1,634 10,765Current assets 8,811 14,241 22,758 29,860 33,951 38,637 39,951 44,323 42,893Total fixed assets 42,012 47,146 58,115 66,884 71,450 78,807 85,142 91,010 87,779Investments 5,386 11,649 1,399 1,399 1,399 1,399 1,399 1,399 1,399Total assets 59,614 74,612 92,110 110,828 119,127 125,024 129,529 138,366 142,836

Free cash flow (Rs mn)Operating cash flow, excl. working capital 5,513 7,418 10,378 11,094 9,963 9,693 12,399 16,726 23,051Working capital 3,026 (1,717) (985) 4,037 (7,400) (1,217) (721) (1,557) 122Capital expenditure (15,757) (7,485) (10,979) (8,406) (6,627) (10,254) (9,400) (9,032) (1,250)Investments (2,339) (6,263) 10,381 — — — — — —Free cash flow (9,556) (8,046) 8,794 6,725 (4,064) (1,778) 2,278 6,137 21,922Other income 452 587 803 721 838 1,084 666 461 670

Ratios (%)Debt/equity 98 106 84 63 63 51 42 31 17 Net debt/equity 84 101 59 36 41 41 37 29 5 RoAE 16.8 22.2 30.6 26.3 13.7 11.5 13.1 16.0 19.5RoACE 20.1 24.4 39.6 45.4 18.0 10.5 12.0 13.6 17.1 Adjusted CROCI 17.7 23.7 34.5 38.5 13.4 11.3 12.9 12.6 16.8




Power—non-committal on market recovery; banking on internal improvements for growth

FY2014 was another challenging year for Crompton, marred by (1) sedate market conditions and (2) production losses continuing in Canada and Hungary. It is cautious about broad demand recovery expectations and aims to grow business by leveraging (1) internal improvements (stabilization of overseas power transformer facilities, qualifications for its switchgears), (2) improving demand for distribution automation (European opportunity, entry-level orders in emerging markets, opening of India facility) and (3) build-up of references from recently commissioned systems orders.

Looks beyond mainstay domestic business in industrials; outpaces market in consumer business

The company expects growth in industrials to be driven by (1) the export of motors (new capacities commissioned, approvals received from GE and other global OEMs), (2) domestic demand for low-voltage drives (commissioned a new unit using Emotron technology) and (3) strong growth prospects in the traction motors business. Crompton’s consumer business has grown ahead of the market in key segments (fans, lightings and pumps). It aims to leverage increasing reach, product launches and growing customer reach to grow its consumer business.

Belgium, Hungary, US, UK and Canada losses continue; ZIV business scale-up partly compensates

We note sustained losses in the Belgian (`1.2 bn), Hungarian (`0.8 bn), US (possibly `0.6 bn), UK (`0.4 bn) and Canadian (`0.7 bn) facilities. Commissioning of the Saudi Arabian facility added `0.5 bn of losses. The losses were partly compensated by (1) business scale-up in ZIV (sales doubled yoy, `0.5 bn PAT) and (2) strong growth in PT Indonesia (~30% growth in sales and PBT).

Sells investments to fund subsidiary losses; increasing low-cost share of business

Crompton sold its standalone investments to invest `4 bn in its subsidiaries (investments—`2.5 bn; L&A—`1.5 bn). Exports in key markets (Asia, Africa, Europe) recovered in FY2014. The share of sourcing from low-cost countries increased to 32% in FY2014 from 12% in FY2012. Crompton also plans to hire/select senior managers for the next decade of growth. CRG (consolidated) reported a modest decline in operating cash to `3.2 bn.

Crompton Greaves (CRG)

Industrials

Annual report —broad demand recovery uncertain; expects overseas demand in some pockets. Crompton was non-committal about its expectations of a broad recovery in demand; but it aims to grow through (1) stabilization of the overseas power business, (2) bets on pockets of overseas demand (systems business, distribution sub-station) and (3) new domestic capacity additions (motor exports, AC drives, fans). Bleeding overseas units (Belgium, Hungary) and a stagnating domestic non-consumer business are concerns.

Crompton GreavesStock data Forecasts/Valuations 2014 2015E 2016E





220-75

BUY

AUGUST 05, 2014

UPDATE


Price (`): 203


BSE-30: 25,723

Aditya Mongia [email protected] Mumbai: +91-22-4336-0883

Industrials Crompton Greaves


Consumer segment drives standalone sales growth

Break-up of standalone sales suggests a flattish trajectory for the key transformer/reactor and motors/drives segments over the past four years. Switchgear sales have been flattish over 2011-13 with double-digit growth in FY2014. Growth was driven by the consumer segment.

Exhibit 1: Broad-based growth in consumer categories; power and industrial sales are flattish yoy Product-wise break-up of Crompton Greaves’ standalone sales, March fiscal year-ends, 2011-14 (%)

Yoy change CAGR2011 2012 2013 2014 (%) (%)

Transformers/reactors 17,360 18,031 18,154 18,262 1 1Motors, Alternators, Drives Panels 13,200 13,898 13,331 12,982 (3) (0)Switchgears 7,059 7,317 7,431 8,574 15 5Fans, Ventilation and Pollution Control Systems 9,097 9,122 11,138 12,848 15 9Electric Lamps 5,703 6,667 7,689 9,010 17 12Power driven pumps 5,217 5,019 5,869 5,790 (1) 3Appliances 967 1,211 2,120 1,817 (14) 17Traction Electronic,Drives and SCADA 569 1,209 1,480 1,897 28 35Others 3,168 5,666 8,130 7,530 (7) 24Total 62,339 68,140 75,342 78,710 4 6


Power—market challenging; company banks on internal improvements

The global power business continued to be impacted by a combination of market-related issues. Demand situation has continued to be sedate across key geographies of Europe and North America. Against this, competitive intensity has remained high (began in FY2011, intensified in FY2012 and has sustained in FY2013 and FY2014), especially in the US and Europe. In addition, many customers are delaying taking physical deliveries across key regions (Europe, Middle East, North Africa and India). For this, customers have used several means, including (1) invocation of storage clause, (2) demanding short-circuit testing and (3) insistence on extended series of tests for each transformer of a series.

Apart from market factors, company has also been impacted by production-related issues at its Canadian and Hungarian plants (had impacted in FY2013 as well).

Aims to leverage internal improvements and business references

While remaining cautious in market demand, company is still positive on growth led by internal improvements. It mentioned (1) stabilization of overseas power transformer facilities (Belgium, Hungary), (2) new qualifications (extra-high voltage switchgears, 765 kV circuit breaker, new design for 765 kV GIS) and (3) scale-up in automation business (European opportunity, entry-level orders in EMs, opening of India facility).

Crompton is also aiming to leverage prior work in the domain of integrated power systems. It has now commissioned 4-5 large wind-offshore projects over the past few years and mentioned new large systems orders (EUR52 mn).

Power transformers – overseas plants stabilizing; Canada a concern. The annual report carries positive takeaways in terms of (1) improvement in gross margin in new orders for Belgium plant, (2) capacity expansion for Hungarian plant (to 10,000 MVA) and (3) cost-savings/stabilization at the Belgian plant. The key challenge remains the Canadian plant. Here, the company has made management changes and reorganized workforce. The order book for the plant remains healthy and so do sales (delivered 7,000 MVA in FY2014 versus 4,200 MVA in FY2013).

Crompton Greaves Industrials


Distribution transformer – subdued business. Distribution transformer business has remained sedate across geographies barring US. Essentially business has been impacted by weak demand in Europe and severe margin pressures in India. Company has a capacity of close to 25,000 MVA for this business.

Switchgears – new qualifications enthuse. On the extra-high voltage side, CRG has full-fledged plants in India and Hungary and manufactures medium-voltage switchgear from India. The company has cited positive developments including (1) introduction of new design for 765 kV GIS in India, (2) on-site qualification for 765 kV circuit breaker for PGCIL and (2) development of 245 kV gas-insulated switchgear at Hungarian plant (plant has also received full-type test certification from Korea Electro-technology Research Institute for the 245 kV GIS).

Power systems – aims to expand presence by leverage demand and references. The power systems business fared well in Belgium and Indonesia while reported reduced business in UK and losses in India (cost overruns). At a global level, company aims to expand its systems business by leveraging recently completed large wind-farm projects (Belwind, Northwind, Butendiek, Amrumbank, Humber Gateway). It cited receiving a large EUR52 mn order from Netherlands (includes off-shore wind park, onshore substation and electrical grid substation).

Automation business – wins key entry orders; starts India plant. Crompton has won automation orders in key markets of (1) Iraq, (2) Saudi Arabia and (3) India (PGCIL). It has also commissioned its Bengaluru facility, which is capable of producing 10,000 smart devices per annum (`80 mn investment). The facility would bid for tenders in India, South Asia and the SEAP (South East Asia and Pacific). The automation group has also secured product approvals from PGCIL, Federal Grid in Russia, Mexico, Philippines and Energy Networks Association in UK.

Belgian, Hungarian, Canadian losses continue; ZIV scale-up partly compensates

The overseas subsidiaries have contributed a total implied PBT loss of about `2 bn for FY2014. Our analysis of the individual subsidiaries yields a combined PBT loss of about `1.5 bn. Key loss-making units were the ones in Belgium (power systems), Canada (power systems), Ganz (electric systems), United Kingdom (power solutions) and Middle East (power systems). This accumulated to a loss of `3.6 bn and was partly compensated by profits of about `2.1 bn from facilities in Indonesia (power systems), Sweden (power automation) and ZIV (distribution automation).

CG Power Systems Belgium (loss – `1.2 bn) – sales decline on contracted base. CG Power Systems Belgium reported a marginal yoy decline in sales to `12.5 bn despite a low FY2013 base (had productivity-related losses. Losses at `1.2 bn have declined by about `2 bn yoy, reflecting the one-off restructuring charge of `1.2 bn in FY2013 and `0.8 bn of potential benefit from lower employee cost.

CG Power Systems Canada (loss - `0.7 bn) – large losses despite bounce-back in sales. CG Power Systems Canada reported a sharp pull-back in sales to `3.8 bn (versus `2.7 bn in FY2013). Despite the recovery in sales, PBT losses remained significant at `0.7 bn or 19% of sales.

CG Electric Systems Hungary (loss - `0.8 bn) – sales and losses scale-up. The Hungary unit has increased reported third-year of large losses (double-digit negative PBT margin). This is despite a strong 30%+ growth in sales. Essentially the plant is still in stabilization phase. Its capacity has further increased to 10,000 MVA (from 8,000 MVA earlier).



CG Middle East FZE (loss - `0.5 bn) - initial start-up losses. This unit manufactures power transformers for supply to the key Middle East region. In its initial year, it reported sales of `2 bn and loss of `535 mn. The facility for power transformers is now fully operational and has set up sales and marketing forces in Belelux (Belgium, Netherlands, Luxumberg), France, UK and Algeria.

ZIV Spain (profit - `0.5 bn) – positive surprise on sales-scale-up. ZIV Spain reported scale-up in sales to about `8 bn (more than 2X of FY2013 value). PBT at `533 mn in FY2014 improved significantly (had reported losses in FY2013).

CG Power Systems Indonesia (profit - `0.6 bn) – sales and profits increase. Indonesian entity reported a strong ~28% growth in sales and a similar growth in PAT.

CG Power USA (includes US$10 mn losses of Power Solutions). CG has likely combined three of its key US subsidiaries (Power Solutions, Power Systems and Automation Solutions) into one subsidiary by the name CG Power USA. The subsidiary reported revenues of `11.2 bn (marginal yoy decline) and PAT of `310 mn (`410 mn last year). Key loss-making business is CG Power Solutions (has incurred US$10 losses in each of the past two years).



Exhibit 2: Overseas power entities making losses; automation fares better Key overseas subsidiaries – key numbers, March fiscal year-ends, 2008-14 (` mn)

2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014Pauwels 34,140 34,913 41,266 41,341 44,567 1,861 2,698 780 (3,918) (1,371) 1,335 2,119 627 (3,392) (1,617) CG Power Systems Belgium 16,848 15,414 14,278 12,899 12,513 (79) 701 (772) (3,280) (1,186) (61) 492 (765) (3,280) (1,186) CG Power Systems Ireland 4,505 4,555 4,845 5,408 5,912 37 304 8 106 62 29 298 10 92 49 CG Power Systems USA 3,363 4,262 6,190 8,216 11,174 139 5 170 495 345 63 34 52 341 311 CG Power Systems Canada 4,604 4,384 3,228 2,719 3,844 742 662 (387) (1,022) (727) 542 517 (87) (887) (727) CG Power Systems Indonesia 3,796 3,818 4,807 5,742 7,384 998 902 657 697 927 745 685 162 505 640 CG Power Solutions UK 787 1,292 3,183 2,669 70 860 (246) (445) 49 70 836 (246) (445) Ganz 5,482 6,007 4,794 6,077 7,941 659 840 (632) (624) (786) 621 840 (632) (624) (787) CG Electric Systems Hungary 5,362 5,990 4,762 6,053 7,918 559 829 (657) (642) (803) 526 829 (657) (642) (803) CG Holdings Hungary Kft. 121 17 33 24 23 100 11 25 19 17 96 11 25 18 16 Automation 8,487 12,365 409 1,189 476 1,033 CG Drives and Automation Sweden 2,462 2,717 406 613 244 491 CG Drives and Automation Netherlands 473 574 (7) 15 (4) 11 CG Drives and Automation Germany 1,064 1,296 6 29 0 19 CF Automation Solutions USA 1,019 — 212 — 178 - ZIV 3,470 7,778 (207) 533 57 512 ZIV Aplicaciones y Tecnologia 295 1,418 (112) 531 51 459 ZIV Metering Solutions 1,308 3,269 122 238 57 253 ZIV Grid Automation 1,072 1,923 (95) (153) 21 (38) ZIV Communication 488 865 (83) (51) (31) (129) ZIV USA 26 10 (4) (0) (6) 0 ZIV DO Brazil 176 119 (25) (39) (25) (39) ZIV I+D Smart Energy Networks 106 173 (11) 6 (11) 6 CG Middle East FZE 2,165 (514) Source: Company, KIE

2010 2011 2012 2013 2014 2010 2011 2012 2013 2014Pauwels (0.5) 7.7 1.9 (9.5) (3.1) 3.9 6.1 1.5 (8.2) (3.6)

CG Power Systems Belgium (0.5) 4.5 (5.4) (25.4) (9.5) (0.4) 3.2 (5.4) (25.4) (9.5) CG Power Systems Ireland 0.8 6.7 0.2 2.0 1.1 0.6 6.5 0.2 1.7 0.8 CG Power Systems USA 4.1 0.1 2.7 6.0 3.1 1.9 0.8 0.8 4.2 2.8 CG Power Systems Canada 16.1 15.1 (12.0) (37.6) (18.9) 11.8 11.8 (2.7) (32.6) (18.9) PT, CG Power Systems Indonesia 26.3 23.6 13.7 12.1 12.5 19.6 18.0 3.4 8.8 8.7

Ganz 12.0 14.0 (13.2) (10.3) (9.9) 11.3 14.0 (13.2) (10.3) (9.9) CG Electric Systems Hungary 10 14 (14) (11) (10) 10 14 (14) (11) (10) CG Holdings Hungary Kft. 83 66 76 78 75 79 66 76 74 71

Automation 4.8 9.6 5.6 8.4ZIV (6.0) 6.9 1.7 6.6

NotesKey profitable entitiesKey less-making entities

Revenues PBT PAT

PAT margin (%)PBT margin (%)

Source: Kotak Institutional Equities

Industrials—expects benefit from new capacity additions and approvals

While FY2014 carried the negative impact of slowdown in order inflows, higher material costs and severe pricing pressures, company is optimistic about business incrementally. Its optimism is based on addition of capacities at Mandideep, which it intends to use for supplying motors and drives for exports. Its aim to expand exports has received a further boost as it has received approvals from ten global OEMs and four large end-users. The low voltage and medium voltage motors plant at Mandideep has been approved by GE Oil and Gas for global sourcing.

It has also commissioned another facility at Mandideep for low voltage AC drives in July 2013. This facility uses Emotron’s technology and has capacity to produce 6,000 drives per annum per shift.

The company is also optimistic on in its transportation business. During FY2014, it developed its integrated power supply system for railway signaling systems.



Consumer segment—product launches help Crompton to outpace market

Key segments of fans and lighting have continued to grow at strong 15-17% rates in FY2014, supported by new product launches. Pumps business has remained flat (in a declining market) and appliances business has declined in double digits.

Exhibit 3: Fans and lighting sustain strong growth trajectory Product-wise break-up of CG's consumer sales, March fiscal year-ends, 2011-14 (` mn)

Yoy change2011 2012 2013 2014 (%)

Fans, Ventilation and Pollution Control Systems 9,097 9,122 11,138 12,848 15Electric Lamps 5,703 6,667 7,689 9,010 17Power driven pumps 5,217 5,019 5,869 5,790 (1)Appliances 967 1,211 2,120 1,817 (14)Total 20,984 22,018 26,816 29,465 10


We note that fans and lighting are the key segments in Crompton’s consumer business. These account for about 75% of total sales. These also drive the profitability for the business as Crompton has low value add content in other products (pumps and appliances).

Exhibit 4: Fans and lighting account for dominant share of portfolio Sales break-up of Crompton's consumer business for year-ending March 2014

FY2014 revenues (Rs28 bn)

Fans, Ventilation and Pollution

Control Systems43%

Electric Lamps31%

Power driven pumps20%

Appliances6%


Fans. CG’s net sales have grown ahead of the market at 15% for FY2014 (versus 10% growth for the market). This has led to a 3.3% increase in CG’s market share to 26.6%. The second plant at Baddi is now operational and has a capacity of 1 mn fans per annum. Company said 30% of its business in FY2014 is being contributed by new product launches.

Lighting (#3 player). CG’s net sales grew ahead of the market at 17% versus 12% growth for the market. CG is the number three player in the segment with a portfolio of about 180 SKUs. New products accounted for 17% of the total segment sales and 24% for luminaries. Key segments in LED and CFL have done well. In LED, company’s growth was 4X that of the market (driven by product launches). In CFL too, it grow 24% versus market growth of 15-16%.



Pumps (#2 player). The pumps business was negatively impacted by good monsoons last year, which raised water levels. Company still did better than the market and reported flattish sales (industry declined by 10%). CG now has a 27% market share. Business earns healthy margin.

Appliances. This is a relatively small business for Crompton where its value addition is also low (comprises mostly traded goods). The business unit achieved sales of `1.8 bn in FY2014.

Other takeaways from the annual report

Working capital remains steady on an adjusted basis. Company’s working capital (at a standalone level) has increased to 63 days of sales at end-FY2014 versus 48 days as of end-FY2013. Adjusted for the `5.5 bn loan given by the standalone entity to subsidiaries, working capital marginally increased on a yoy basis. At a consolidated level, working capital has remained steady at 30 days of sales.

Exhibit 5: Modest increase in working capital on an adjusted basis Standalone working capital for CG, March fiscal year-ends, 2005-14

39

2724

18

7 5

3137

48

63

-

15

30

45

60

75

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

(Days of sales

Rs 4 bn new loan given in FY2013 to CG International B.V. and increased to 5.5 bn in FY2014


Exhibit 6: Consolidated working capital remains steady Consolidated working capital for CG, March fiscal year-ends, 2005-14

3230

28

17 17

3135

30 30

42

-

9

18

27

36

4520

05

2006

2007

2008

2009

2010

2011

2012

2013

2014

(Days of sales)


Company still generates strong operating cash at consolidated level. Crompton has reported strong adjusted cash flows of `3.6 bn at a standalone level and `3.2 bn on a consolidated level. Note that we have adjusted the standalone cash flows for `1.5 bn of additional loans and advances given to subsidiaries.



Exhibit 7: Crompton generates strong operating cash Standalone operating cash for CG, March fiscal year-ends, 2005-14

2.5

5.7

3.6

1.3

2.5 2.4

4.4

5.7

6.9

3.9

-

2

4

6

8

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

(Rs bn)

Notes: (a) FY2013 data is adjusted for Rs4 bn increase in loans and

advances to subsidiaries and associates. (b) (b) FY2014 data is adjusted for Rs1.5 bn increase in loans and

advances to subsidiaries and associates


Exhibit 8: Crompton (consolidated) also generates operating cash in spite of margin issues Consolidated operating cash for CG, March fiscal year-ends, 2005-14

5.6

4.1 4.4

3.2

1.9 2.0

3.8

5.8

9.4

10.6

-

3

6

9

12

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

(Rs bn)


Sells standalone current investments to fund `4 bn to subsidiaries. We note related party investments amounting to `4 bn into Crompton’s subsidiaries. Essentially company has increased its funding to (1) CG International BV (combination of `2.5 bn of new investment and `0.5 bn of additional loans and advances) and to (2) CG Power Solutions (`0.8 bn of additions loans and advances).

Exhibit 9: Crompton provided Rs4 bn of additional funding to subsidiaries in FY2014 Consolidated and standalone balance sheet of Crompton, March fiscal year-ends, 2011-2014 (` mn)

2011 2012 2013 2014 2010 2011 2012 2013 2014Shareholders funds 32,747 36,109 35,615 36,446 17,647 23,041 27,009 30,569 33,561

Share capital 1,283 1,283 1,283 1,254 1,283 1,283 1,283 1,283 1,254 Reserves & surplus 31,464 34,826 34,332 35,192 16,364 21,758 25,726 29,286 32,307

Minority interest 157 157 95 118

Loan funds 4,703 10,400 20,336 21,930 268 134 73 141 305 Secured loans 4,554 9,793 20,215 21,930 138 82 73 141 305 Unsecured loans 149 607 121 — 130 52 — — —

Deferred tax liabilities (net) 160 (513) (1,681) (1,532) 834 735 432 498 736 Total sources of funds 37,767 46,153 54,365 56,962 18,749 23,910 27,514 31,207 34,602

Fixed assets 19,417 22,575 30,664 34,591 5,668 9,230 6,755 7,753 8,226 Investments 6,747 7,864 7,908 2,989 6,881 7,816 10,525 10,549 8,263

Current 5,005 206 Non-current 5,546 8,057

Cash & bank balance 2,984 4,976 5,834 8,150 5,485 1,509 3,211 2,888 4,428 Current assets 42,512 50,368 53,974 61,019 16,717 22,341 25,214 31,505 34,947

Inventories 11,893 12,233 16,367 16,714 3,035 4,057 4,496 5,485 5,578 Sundry debtors 25,427 32,913 33,789 35,913 12,128 15,102 17,845 18,904 19,750 Other current assets — — — —Loans & advances 5,192 5,222 3,818 8,392 1,554 3,182 2,873 7,117 9,619

CG International B.V. 922 923 833 4,699 5,287 CG Power Solutions 319 1,104

Current liabilities & provision 33,892 39,630 44,014 49,787 16,002 16,986 18,191 21,489 21,263 Current liabilities 29,595 35,843 39,792 45,723 14,466 15,293 16,688 19,629 19,541 Provisions 4,298 3,787 4,222 4,064 1,536 1,693 1,503 1,860 1,722

Net current assets (excl. cash) 8,619 10,738 9,960 11,232 715 5,355 7,023 10,017 13,684 Total application of funds 37,767 46,153 54,365 56,962 18,749 23,910 27,514 31,207 34,602

Consolidated Standalone

Rs2.5 bn increase in investments in CG International B.V., more than compensated by sale of financial investments

Rs1.5 bn increase in L&A to subsidiaries

Sells current investments to fund subsidiaries




Exports: Asia, Africa and Europe bounce back; rest remains steady. Exports for the company (overseas sales from the standalone entity) have recovered in FY2014 on contracted base. Essentially business from Asia, Africa and Europe have bounced back and from Americas has remained steady.

Exhibit 10: Exports pick up to FY2011 levels Exports of CG standalone, March fiscal year-ends, 2005-14 (Rs bn)

10.910.4

9.1

7.8 7.6

9.1

-

2

4

6

8

10

12

2009 2010 2011 2012 2013 2014

(Rs bn)


Exhibit 11: Asia and Africa bounce back; rest remains steady Exports for CG standalone, March fiscal year-ends, 2009-14 (Rs bn)

-

1

2

3

4

5

6

Asia - exIndia

Africa Americas Europe Australia

(Rs bn)

20092010

20112012

20132014


We note sharp recovery in exports from a quarterly perspective.

Exhibit 12: Exports have scaled up for CRG after bottoming out in 1QFY14 Power exports for Crompton, March fiscal year-ends (` bn)

Power exports

1.6

2.5

2.0

1.5

1.0

2.4

2.9

3.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

(Rs bn)




Geographical break-up of sales. Domestic sales accounted for 50% of the consolidated sales in FY2014 with Europe being the next largest region (contributed 20% of consolidated sales).

Exhibit 13: Europe - 45% of subsidiary revenues, 20% of consol. Geographical break-up of Crompton's revenues (consolidated, standalone and private), March fiscal year-end, 2013 (` mn)

Consolidated revenues (Rs121 bn)

India50%

Africa3%

North America

11%

South America

3%

Europe 20%

Australia1%

Asia - ex India12%

Standalone revenues (Rs71 bn)

South America

3%

India88%

Asia - ex India5%

Africa3%

North America

0%Europe

1% Australia0%

Subsidiary revenues (Rs49.6 bn)India0% Asia - ex

India22%

Africa3%

North America

24%South

America3%

Europe 45%

Australia3%


Majority of Europe revenues booked are from local sales. We note that majority of the sales from the European facility service local demand. A small 24% share of production goes as exports to Africa, Asia and possibly South America.

Exhibit 14: 76% of revenues booked in European subsidiaries is from actual sales within Europe Likely geographical break-up of revenues and sales of Crompton subsidiaries for year-ending March 2014

North AmericaProduction: Rs15bn

Sales: Rs15 bn

100% of production

EuropeProduction: Rs35 bn

Sales: Rs27bn

76% of production

AsiaProduction: Rs9 bn

Sales: Rs13 bn

20% of production to Australia

6% of production to Africa and South America

South AmericaProduction: Rs1 bn

Sales: Rs2 bn

AfricaProduction: NIL

Sales: Rs1.8 bn

AustraliaProduction: NIL

Sales: Rs1.3bn

15% of production - to Asia (Middle East)

80% of production

3% of production to South America




Exhibit 15: Estimates build in steady growth in standalone business and overseas margin improvement of 300 bps over next two years Estimates for Crompton, March fiscal year-ends, 2014-17E

2014 2015E 2016E 2017E 2014 2015E 2016E 2017E 2014 2015E 2016E 2017EFinancials (Rs mn)Net sales 134,806 152,407 171,766 193,446 74,896 83,786 94,864 107,507 59,910 68,621 76,902 85,939Expenses (128,192) (142,922) (159,492) (178,200) (68,237) (75,988) (85,303) (96,320) (59,955) (66,935) (74,189) (81,880) Stock 511 0 0 0 128 0 0 0 383 0 0 0 RM + purchase of traded goods (92,114) (102,875) (115,942) (130,576) (56,107) (62,434) (70,689) (80,111) (36,006) (40,440) (45,253) (50,466) Employee (19,522) (18,711) (19,502) (20,541) (4,765) (5,061) (5,866) (6,806) (14,757) (13,650) (13,636) (13,735) Other Exp (17,067) (21,337) (24,047) (27,082) (7,492) (8,492) (8,747) (9,403) (9,575) (12,845) (15,300) (17,679)EBITDA 6,613 9,484 12,274 15,246 6,659 7,798 9,561 11,187 (45) 1,686 2,713 4,059Other income 1,923 1,456 1,705 1,907 1,139 1,381 1,630 1,832 783 75 75 75EBIDT 8,536 10,941 13,979 17,153 7,798 9,180 11,191 13,018 738 1,761 2,788 4,134Interest (967) (1,273) (1,218) (1,163) 220 (254) (254) (254) (1,187) (1,019) (964) (909)Depreciation (2,622) (2,641) (2,770) (2,923) (894) (907) (1,054) (1,213) (1,729) (1,734) (1,715) (1,709)PBT 4,947 7,028 9,992 13,067 7,125 8,020 9,883 11,552 (2,178) (992) 109 1,516Tax (2,361) (2,335) (2,918) (3,574) (1,914) (2,085) (2,668) (3,119) (447) (250) (250) (455)Net profit 2,587 4,692 7,073 9,494 5,211 5,935 7,214 8,433 (2,624) (1,242) (141) 1,061Extraordinary items 0 0 0 0 0 0 0 0 0 0 0 0RPAT 2,436 4,692 7,073 9,494 5,211 5,935 7,214 8,433 (2,624) (1,242) (141) 1,061EPS 4.1 7.5 11.3 15.1 8.3 9.5 11.5 13.5 (4.2) (2.0) (0.2) 1.7

Key ratios (%)RM / Sales 68.0 67.5 67.5 67.5 74.7 74.5 74.5 74.5 59.5 58.9 58.8 58.7OE / Sales 12.7 14.0 14.0 14.0 10.0 10.1 9.2 8.7 16.0 18.7 19.9 20.6EBITDA margin 4.9 6.2 7.1 7.9 8.9 9.3 10.1 10.4 (0.1) 2.5 3.5 4.7PBT Margin 3.7 4.6 5.8 6.8 9.5 9.6 10.4 10.7 (3.6) (1.4) 0.1 1.8EBIDT Margin 0.6 6.0 10.4 0.3 10.4 11.0 11.8 12.1 1.2 2.6 3.6 4.8EBIT Margin (4.6) 3.3 9.6 (4.7) 9.6 9.6 10.4 10.7 (3.6) (1.4) 0.1 1.8

SubsidiariesConsolidated Standalone




Exhibit 16: Revenue growth and margin assumptions for Crompton, March fiscal year-ends, 2011-17E (` mn)

2011 2012 2013 2014E 2015E 2016E 2017EStandalone powerRevenues 25,542 27,470 27,250 28,235 30,494 33,544 36,898

Growth (%) 1.8 7.5 (0.8) 3.6 8.0 10.0 10.0

EBIT 4,602 3,106 2,306 2,585 2,897 3,522 3,874

EBIT margin (%) 18.0 11.3 8.5 9.2 9.5 10.5 10.5

Consumer productsRevenues 20,212 21,336 25,927 28,471 32,741 37,652 43,300

Growth (%) 25.4 5.6 21.5 9.8 15.0 15.0 15.0

EBIT 2,928 2,629 2,781 3,375 3,929 4,518 5,196 EBIT margin (%) 14.5 12.3 10.7 11.9 12.0 12.0 12.0

Industrial systemsRevenues 14,066 15,201 14,995 14,889 17,123 20,119 23,640

Growth (%) 19.8 8.1 (1.4) (0.7) 15.0 17.5 17.5 EBIT 2,626 2,254 2,130 1,529 2,140 2,817 3,546

EBIT margin (%) 18.7 14.8 14.2 10.3 12.5 14.0 15.0 Standalone (total)Revenues 59,515 64,854 71,353 74,896 83,786 94,864 107,507

Growth (%) 12.6 9.0 10.0 5.0 11.9 13.2 13.3 EBITDA 9,325 7,207 5,946 6,658 7,832 9,591 11,213

EBITDA margin (%) 15.7 11.1 8.3 8.9 9.3 10.1 10.4 Overseas Revenues 40,536 47,632 49,591 59,910 68,646 76,800 85,687

Growth (%) 5.1 17.5 4.1 20.8 14.6 11.9 11.6 EBITDA 4,113 830 (2,114) 161 1,004 2,203 3,030

EBITDA margin (%) 10.1 1.7 (4.3) 0.3 1.5 2.9 3.5

ConsolidatedRevenues 100,051 112,486 120,944 134,806 152,432 171,664 193,194 Growth (%) 9.5 12.4 7.5 11.5 13.1 12.6 12.5 EBITDA 13,438 8,036 3,832 6,820 8,836 11,794 14,244 EBITDA margin (%) 13.4 7.1 3.2 5.1 5.8 6.9 7.4 PAT 9,191 3,676 838 2,587 4,680 7,084 9,427 EPS (Rs) 14.3 5.7 1.3 4.1 7.5 11.3 15.0 EPS growth (%) 11.5 (60.0) (77.2) 215.8 80.9 51.4 33.1

We build weak estimates for power business in FY2014 -15E

Domestic growth to be led by consumer business

We build 3% EBITDA margin in FY2016E


In

dia D

aily Sum

mary - A

ug

ust 5, 2014

67

KOTAK IN

STITUTIO

NAL EQ

UITIES RESEARCH

June 2014: Results calendar

4-Aug 5-Aug 6-Aug 7-Aug 8-Aug 9-Aug 10-AugAIA Engineering Ajanta Pharma Adani Ports Aurobindo Phar Birla Corp Adani EnterDFL Infra Bata India ADANI POWER Balrampur Chini Chambal Fert Dena BankIndraprastha Gas Crompton Greav Amara Raja Bombay Dyeing Corporation Bank Godrej IndsKalpataru Pow er EIH Apollo Tyres Gujarat State Pet Gujarat state Sudarshan ChemMarico Gatew ay Distr City Union Bank IL&FS Invest Mgrs Jindal StainlessOriental Bank Hero MotoCorp Glaxosmithkl Cons India Cements Mahindra & MahindraPetronet LNG Jubilant IDBI Bank JUBL FOOD PC Jew ellerPow er Grid Mahindra Ugine Jindal Steel Nestle India Pow er FinancePunj Lloyd NHPC Jubilant Inds Neyveli Lignite SBITata Comm Tata Chemicals Maharashtra Seam Puravankara Proj Sobha DevTBZ Tata Invest Tube Invest ZEE MEDIA Sun TV Netw ork11-Aug 12-Aug 13-Aug 14-Aug 15-Aug 16-Aug 17-AugEicher Motors Aditya Birla Nuv GMR Infra HindalcoGail India Apollo Hosp GVK Pow er Page IndsJet Air India BPCL Jyothy LabNational Alum Britannia Inds SiemensSAIL Coal India Sundaram Clayton

Glaxosmithkl Phar Tata SteelHPCLMotherson SumiNMDCRECSun PharmaTata Pow er

Source: BSE, NSE, Kotak Institutional Equities

KO

TAK INSTITUTIO

NAL EQ

UITIES RESEARCH 68

In

dia D

aily Sum

mary - A

ug

ust

Ind

ia Daily Su

mm

ary - Au

gu

st 5, 2014

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

Price (Rs)Target price Upside Mkt cap.

O/S shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) RoE (%)

ADVT-3mo

Company Rating 4-Aug-14 (Rs) (%) (Rs mn) (US$ mn) (mn) 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E (US$ mn)Automobiles

Amara Raja Batteries ADD 486 505 3.9 83,006 1,363 171 21.5 23.9 29.5 28.2 10.9 23.8 22.6 20.4 16.4 14.4 12.7 10.4 6.1 5.0 4.0 0.7 1.0 1.2 30.3 26.8 27.0 2.0

Apollo Tyres BUY 177 220 24.0 89,426 1,468 504 19.9 21.5 22.7 63.7 8.0 5.6 8.9 8.3 7.8 5.3 5.0 4.5 1.8 1.5 1.3 0.5 0.5 0.5 26.0 22.2 19.3 14.6

Bajaj Auto ADD 2,088 2,250 7.8 604,296 9,919 289 112.1 116.1 136.4 6.6 3.6 17.5 18.6 18.0 15.3 13.4 14.0 12.1 6.2 5.2 4.4 2.4 2.2 2.6 36.5 31.6 31.4 13.9

Bharat Forge SELL 750 620 (17.3) 177,892 2,920 237 22.0 27.7 34.8 110.7 26.1 25.6 34.1 27.0 21.5 19.3 13.9 11.5 6.6 5.6 4.6 0.4 0.7 0.9 21.0 22.4 23.4 10.3

Eicher Motors REDUCE 8,427 6,150 (27.0) 227,853 3,740 27 145.7 236.6 334.8 21.3 62.4 41.5 57.8 35.6 25.2 30.0 21.0 14.1 11.1 8.7 6.6 0.4 0.3 0.4 19.2 25.4 28.3 3.5

Exide Industries REDUCE 165 160 (3.2) 140,463 2,306 850 5.7 7.2 8.7 (6.8) 25.3 21.6 28.8 23.0 18.9 17.0 14.3 12.0 3.8 3.4 3.1 1.4 1.5 1.5 13.6 15.6 17.1 8.6

Hero Motocorp ADD 2,601 2,850 9.6 519,400 8,526 200 105.6 139.4 177.3 (0.4) 32.0 27.2 24.6 18.7 14.7 17.6 13.2 10.1 9.4 7.3 5.6 2.5 1.9 2.4 39.7 44.1 43.3 20.2

Mahindra & Mahindra ADD 1,186 1,310 10.5 666,370 10,938 562 68.5 63.9 74.3 8.7 (6.7) 16.2 17.3 18.5 16.0 13.0 12.7 11.1 3.8 3.5 3.2 1.7 1.0 1.3 23.2 12.2 14.9 29.0

Maruti Suzuki BUY 2,646 3,000 13.4 799,213 13,119 302 92.8 111.0 172.3 17.1 19.7 55.2 28.5 23.8 15.4 16.9 14.2 9.1 3.7 3.3 2.8 0.5 0.5 0.7 13.8 14.6 19.5 16.7

Motherson Sumi Systems ADD 348 350 0.6 306,892 5,037 882 8.7 12.3 18.1 72.1 41.9 47.1 40.1 28.3 19.2 12.8 10.2 6.6 10.4 7.4 5.1 0.7 1.1 1.6 34.2 29.4 30.0 9.1

Tata Motors BUY 447 575 28.8 1,437,090 23,589 3,218 46.5 43.5 59.3 51.4 (6.6) 36.3 9.6 10.3 7.5 5.0 4.7 3.9 2.2 1.8 1.5 0.4 — — 28.7 19.3 21.4 45.0

WABCO India ADD 3,269 4,000 22.3 62,012 1,018 19 61.9 77.7 133.0 (10.2) 25.4 71.2 52.8 42.1 24.6 36.4 26.4 15.6 8.2 7.1 5.9 0.2 0.4 1.0 16.7 18.1 26.1 0.4

Automobiles Attractive 5,207,301 85,476 23.3 4.6 33.9 17.4 16.6 12.4 9.3 8.4 6.6 3.6 3.1 2.6 1.1 0.8 1.0 20.9 18.6 20.6 186.3

Banks/Financial Institutions

Axis Bank ADD 391 430 10.0 918,194 15,072 2,349 26.5 29.7 34.5 19.6 12.3 16.1 14.8 13.2 11.3 — — — 2.4 2.1 1.9 1.0 1.3 1.5 17.4 17.0 17.2 40.9

Bajaj Finserv BUY 951 1,175 23.6 151,275 2,483 159 96.4 102.3 111.1 (6.6) 6.1 8.6 9.9 9.3 8.6 — — — 1.6 1.5 1.3 1.4 1.4 1.4 17.9 17.0 16.3 1.8

Bank of Baroda ADD 899 1,050 16.9 386,984 6,352 431 105.4 118.2 138.3 (0.6) 12.1 17.0 8.5 7.6 6.5 — — — 1.2 1.1 1.0 2.4 2.7 3.1 13.8 13.8 14.5 28.8

Bank of India ADD 279 320 14.5 179,655 2,949 643 42.4 61.9 66.7 (7.9) 45.7 7.8 6.6 4.5 4.2 — — — 0.8 0.8 0.6 1.8 2.6 2.8 11.2 14.3 13.6 29.4

Canara Bank REDUCE 405 370 (8.7) 186,948 3,069 461 52.9 67.1 81.1 (18.5) 26.9 20.9 7.7 6.0 5.0 — — — 0.9 0.9 0.8 2.8 3.6 4.4 8.9 10.1 11.3 32.7

DCB Bank BUY 80 90 12.4 20,051 329 250 6.0 6.9 7.9 48.2 13.5 15.1 13.2 11.7 10.1 — — — 1.9 1.7 1.4 — — — 14.8 14.5 14.4 2.2

Federal Bank BUY 120 145 21.3 102,252 1,678 855 9.8 12.2 14.7 0.1 24.6 19.9 12.2 9.8 8.2 — — — 1.5 1.4 1.2 1.7 2.1 2.5 12.6 14.2 15.2 12.9

HDFC ADD 1,027 1,060 3.2 1,602,946 26,312 1,561 34.9 40.8 47.4 11.3 16.8 16.3 29.4 25.2 21.7 — — — 5.7 5.1 4.6 1.4 1.6 1.9 20.6 21.0 22.8 58.2

HDFC Bank REDUCE 813 800 (1.6) 1,950,428 32,015 2,399 35.3 42.9 51.1 25.0 21.5 18.9 23.0 18.9 15.9 — — — 4.5 3.9 3.3 0.8 1.0 1.2 21.3 21.7 21.8 32.2

ICICI Bank BUY 1,491 1,660 11.3 1,722,634 28,276 1,155 84.9 92.5 107.0 17.7 8.9 15.7 17.6 16.1 13.9 — — — 2.4 2.2 2.0 1.5 1.9 2.2 14.0 13.9 14.7 82.3

IIFL Holdings BUY 135 175 29.9 39,913 655 296 9.4 13.0 16.1 1.6 38.4 24.2 14.4 10.4 8.4 — — — 1.8 1.6 1.4 2.3 2.5 3.1 14.0 17.2 18.8 0.5

IndusInd Bank ADD 555 610 9.9 291,625 4,787 526 26.8 32.2 38.7 32.0 20.1 20.3 20.7 17.2 14.3 — — — 3.4 2.9 2.5 0.6 0.8 0.9 18.0 18.3 18.6 12.2

ING Vysya Bank BUY 615 720 17.1 116,168 1,907 189 34.8 42.3 51.6 (12.0) 21.4 22.1 17.7 14.5 11.9 — — — 1.7 1.6 1.5 1.0 1.2 1.4 11.4 11.0 12.2 2.2

J&K Bank REDUCE 1,618 1,550 (4.2) 78,435 1,287 48 243.9 226.8 222.5 12.1 (7.0) (1.9) 6.6 7.1 7.3 — — — 1.4 1.2 1.1 3.1 2.9 2.8 22.3 17.9 15.5 5.4

Karur Vysya Bank BUY 474 535 12.9 50,793 834 107 40.1 57.8 70.6 (21.9) 44.1 22.2 11.8 8.2 6.7 — — — 1.6 1.4 1.2 2.8 3.0 3.7 13.4 17.5 18.8 1.5

LIC Housing Finance BUY 291 375 28.9 146,915 2,412 505 26.1 30.5 35.2 28.8 16.7 15.7 11.2 9.6 8.3 — — — 2.0 1.7 1.5 1.5 1.8 2.1 18.8 18.9 18.8 19.2

L&T Finance Holdings SELL 68 60 (12.0) 117,198 1,924 1,718 3.5 5.8 5.4 (18.5) 68.9 (8.3) 19.7 11.7 12.7 — — — 2.0 2.0 1.8 1.1 2.3 1.3 10.5 18.3 15.2 10.4

Magma Fincorp BUY 98 125 27.8 18,582 305 190 7.2 9.4 10.9 15.6 30.9 16.6 13.7 10.4 9.0 — — — 1.2 1.1 1.0 1.3 1.5 1.7 9.7 11.1 12.2 0.5

Mahindra & Mahindra Financial SELL 249 240 (3.5) 140,149 2,300 564 15.7 16.9 20.7 0.4 7.3 22.7 15.8 14.7 12.0 — — — 2.9 2.5 2.2 1.5 1.6 2.0 18.6 17.5 18.8 8.5

Muthoot Finance BUY 175 250 42.9 69,486 1,141 397 21.0 20.7 22.9 (22.3) (1.3) 10.6 8.3 8.4 7.6 — — — 1.6 1.3 1.2 3.2 3.6 3.9 19.0 17.3 16.5 1.3

Oriental Bank of Commerce ADD 282 330 17.0 84,587 1,388 300 38.0 48.9 56.4 (16.5) 28.7 15.3 7.4 5.8 5.0 — — — 0.8 0.8 0.7 2.7 3.5 4.0 8.7 10.5 11.2 11.6

PFC ADD 267 380 42.5 351,799 5,775 1,319 41.1 43.5 43.5 22.6 5.9 0.1 6.5 6.1 6.1 — — — 1.3 1.4 1.2 3.4 3.6 3.6 21.1 19.4 17.0 28.1

Punjab National Bank REDUCE 968 960 (0.8) 350,339 5,751 362 92.3 145.5 166.1 (31.3) 57.6 14.1 10.5 6.7 5.8 — — — 1.3 1.2 1.0 1.0 1.6 1.9 10.2 14.3 14.4 22.5

Rural Electrification Corp. ADD 305 400 31.2 300,956 4,940 987 47.4 52.0 52.0 22.7 9.6 0.1 6.4 5.9 5.9 — — — 1.5 1.4 1.2 3.1 3.4 3.6 24.6 22.5 19.1 18.2

Shriram City Union Finance REDUCE 1,688 1,550 (8.2) 110,936 1,821 66 86.2 91.4 115.8 6.2 6.1 26.7 19.6 18.5 14.6 — — — 3.8 2.6 2.3 0.5 0.6 0.8 19.8 16.9 16.8 1.3

Shriram Transport REDUCE 872 840 (3.7) 194,667 3,195 223 56.7 69.2 85.8 (7.1) 22.1 24.1 15.4 12.6 10.2 — — — 2.4 2.1 1.8 0.8 1.1 1.4 16.3 17.3 18.5 10.4

SKS Microfinance ADD 279 305 9.2 35,165 577 126 6.5 13.0 19.8 123.6 101.5 52.1 43.2 21.4 14.1 — — — 6.4 3.5 2.8 — — — 16.5 22.2 21.8 7.2

State Bank of India ADD 2,461 3,000 21.9 1,837,607 30,164 747 146.0 200.8 234.6 (29.2) 37.6 16.8 16.9 12.3 10.5 — — — 2.0 1.8 1.6 1.2 1.3 1.4 10.0 12.1 12.7 105.3

Union Bank ADD 201 220 9.3 126,881 2,083 630 26.7 40.5 46.1 (25.7) 51.6 13.6 7.5 5.0 4.4 — — — 0.9 0.8 0.7 2.0 3.0 3.4 10.3 14.1 14.2 23.1

Yes Bank ADD 542 575 6.0 224,643 3,687 414 44.9 42.2 45.5 23.7 (5.9) 7.9 12.1 12.9 11.9 — — — 3.2 2.0 1.7 1.3 1.4 1.5 25.0 18.8 15.4 48.8

Banks/Financial Institutions Neutral 12,235,540 200,841 2.1 20.2 14.3 14.6 12.2 10.7 — — — 2.2 2.0 1.8 1.4 1.7 1.9 15.3 16.6 16.6 693.9

Price/BV (X) Dividend yield (%)

Source: Company, Bloomberg, Kotak Institutional Equities estimates

In

dia D

aily Sum

mary - A

ug

ust 5, 2014

69

KOTAK IN

STITUTIO

NAL EQ

UITIES RESEARCH



O/S shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) RoE (%)

ADVT-3mo

Company Rating 4-Aug-14 (Rs) (%) (Rs mn) (US$ mn) (mn) 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E (US$ mn)Cement

ACC SELL 1,375 1,250 (9.1) 258,241 4,239 188 46.0 48.7 64.7 (37.6) 5.8 33.0 29.9 28.2 21.2 17.1 15.4 11.1 3.1 2.9 2.7 2.6 1.7 1.7 11.6 11.3 13.8 8.9

Ambuja Cements SELL 204 195 (4.6) 311,174 5,108 1,522 6.8 9.7 11.2 (34.6) 44.0 15.6 30.2 21.0 18.2 17.2 12.2 10.3 3.1 2.9 2.7 1.3 1.5 1.7 10.5 14.2 15.2 9.3

Grasim Industries ADD 3,212 3,500 9.0 295,013 4,843 92 214.4 209.2 244.3 (21.3) (2.4) 16.8 15.0 15.4 13.1 8.3 8.0 6.2 1.4 1.3 1.2 1.1 1.1 1.1 9.6 8.7 9.4 6.6

India Cements REDUCE 107 90 (15.5) 32,730 537 307 (2.3) 4.7 7.0 (133.4) 307.4 48.9 (47.2) 22.7 15.3 9.9 7.2 5.9 0.8 0.8 0.7 2.5 2.5 2.5 (1.8) 3.5 5.2 5.6

Shree Cement SELL 7,348 4,520 (38.5) 255,987 4,202 35 230.4 302.6 365.1 (20.1) 31.4 20.7 31.9 24.3 20.1 18.4 15.3 12.0 5.8 4.8 3.9 0.3 0.3 0.3 19.7 21.6 21.4 2.3

UltraTech Cement SELL 2,471 2,000 (19.0) 677,809 11,126 274 74.8 78.4 98.9 (26.2) 4.8 26.2 33.0 31.5 25.0 18.6 16.7 12.3 3.5 3.1 2.8 0.4 0.4 0.4 12.7 11.9 13.4 16.6

Cement Cautious 1,830,953 30,054 (29.7) 15.2 22.3 27.6 23.9 19.6 14.3 12.4 9.6 2.7 2.5 2.3 1.0 0.9 0.9 9.8 10.4 11.5 49.3

Consumer products

Asian Paints SELL 630 515 (18.2) 604,152 9,917 959 12.8 15.3 17.7 10.3 19.7 15.2 49.2 41.1 35.7 29.6 24.9 21.5 14.1 12.0 10.3 0.8 1.0 1.2 33.1 33.5 33.0 10.1

Bajaj Corp. ADD 229 255 11.1 33,844 556 148 12.0 13.9 15.9 6.8 15.1 14.5 19.1 16.6 14.5 17.6 14.9 12.5 6.5 5.5 4.7 2.8 2.8 3.3 33.2 31.4 30.8 0.7

Britannia Industries BUY 1,115 1,220 9.4 133,714 2,195 120 33.0 39.3 48.3 51.8 19.1 23.1 33.8 28.4 23.1 21.1 17.6 14.4 16.7 11.4 9.0 1.1 1.3 1.7 58.3 47.8 43.7 2.5

Colgate-Palmolive (India) REDUCE 1,553 1,600 3.0 211,211 3,467 136 36.1 40.9 48.0 (1.2) 13.5 17.3 43.0 37.9 32.3 31.4 25.1 20.9 36.3 34.2 32.1 1.7 2.1 2.4 90.1 90.2 99.7 2.5

Dabur India ADD 204 215 5.3 356,084 5,845 1,744 5.2 6.2 7.3 19.0 17.8 18.6 38.9 33.0 27.9 31.8 26.9 22.4 13.4 10.8 8.9 0.9 1.2 1.4 38.5 36.1 34.9 4.5

GlaxoSmithKline Consumer REDUCE 4,860 4,250 (12.6) 204,388 3,355 42 160.4 145.9 169.0 54.5 (9.1) 15.8 30.3 33.3 28.8 27.1 30.4 25.2 11.9 9.8 8.2 0.9 1.0 1.2 42.5 30.7 29.8 0.8

Godrej Consumer Products REDUCE 849 800 (5.8) 289,085 4,745 340 22.1 25.6 31.0 9.3 15.5 21.2 38.3 33.2 27.4 27.0 23.1 19.0 7.2 6.2 5.3 0.6 0.7 0.9 21.3 21.3 22.2 2.4

Hindustan Unilever REDUCE 700 630 (10.0) 1,513,133 24,837 2,163 16.4 18.8 21.0 8.4 14.1 12.1 42.6 37.3 33.3 33.3 28.1 24.3 48.6 42.8 36.1 1.9 2.0 2.1 119.5 116.3 112.9 15.4

ITC ADD 355 370 4.4 2,869,982 47,110 8,096 10.8 12.0 13.9 15.7 11.2 15.6 32.8 29.5 25.6 23.8 20.6 17.4 10.4 9.5 8.5 1.7 2.1 2.4 35.6 35.1 36.9 48.2

Jubilant Foodworks SELL 1,214 1,000 (17.6) 80,488 1,321 66 18.0 22.5 30.7 (9.9) 25.1 36.7 67.6 54.0 39.5 32.2 25.2 18.9 14.6 11.5 9.1 — — 0.3 24.1 23.8 26.0 5.0

Jyothy Laboratories REDUCE 180 205 13.6 32,657 536 181 4.7 10.6 11.8 21.4 123.7 11.8 38.2 17.1 15.3 24.5 17.6 13.5 4.4 3.8 3.2 1.7 1.7 1.9 12.4 23.9 22.9 0.7

Marico REDUCE 256 250 (2.3) 164,965 2,708 645 8.1 9.2 10.5 43.3 13.6 14.3 31.7 27.9 24.4 22.8 18.9 16.2 11.8 9.1 7.3 1.6 1.0 1.3 38.2 33.6 31.0 1.5

Nestle India SELL 5,209 4,300 (17.4) 502,218 8,244 96 114.4 118.6 138.5 3.3 3.7 16.7 45.5 43.9 37.6 25.3 24.2 21.1 19.4 16.4 13.9 0.9 1.1 1.4 56.4 46.7 45.4 4.1

Page Industries REDUCE 7,873 6,100 (22.5) 87,814 1,441 11 137.3 186.4 222.8 36.1 35.8 19.5 57.3 42.2 35.3 35.3 27.2 22.7 29.8 21.7 16.2 0.8 1.0 1.1 61.0 60.5 53.2 0.9

Speciality Restaurants BUY 143 170 18.5 6,734 111 47 4.0 4.8 6.7 (19.3) 20.3 38.2 35.7 29.6 21.4 19.5 15.1 10.4 2.3 2.1 1.9 0.7 0.9 1.0 6.4 7.2 9.2 0.2

Tata Global Beverages REDUCE 156 150 (3.5) 98,141 1,611 631 6.0 6.5 7.5 (1.0) 8.0 15.9 25.9 24.0 20.7 14.0 12.9 11.2 1.4 1.4 1.3 1.4 1.4 1.6 7.0 6.9 7.6 11.8

Titan Company REDUCE 342 310 (9.4) 303,800 4,987 888 8.4 9.7 10.7 3.1 15.4 9.7 40.6 35.2 32.1 29.0 23.8 20.6 12.0 9.8 8.4 0.6 0.8 1.2 33.3 30.7 28.1 9.4

United Breweries SELL 736 650 (11.7) 194,668 3,195 264 8.5 10.5 14.5 31.2 22.4 38.7 86.1 70.4 50.7 34.9 27.2 22.3 12.4 11.3 9.5 0.2 0.2 0.3 14.3 16.3 19.8 2.4

United Spirits BUY 2,393 3,000 25.3 347,827 5,709 145 22.2 42.8 71.2 145.3 92.4 66.4 107.6 55.9 33.6 41.5 25.5 20.6 4.4 5.1 4.5 0.1 0.1 0.3 5.1 8.5 14.3 54.4

Consumer products Neutral 8,034,906 131,889 15.7 14.7 17.5 38.8 33.9 28.8 27.2 23.1 19.5 11.5 10.4 9.1 1.3 1.6 1.8 29.6 30.7 31.6 177.3

Energy

Aban Offshore RS 794 — — 44,728 734 56 83.9 91.2 98.3 117.2 8.7 7.8 9.5 8.7 8.1 8.6 7.3 7.1 1.1 0.8 0.7 0.5 0.6 0.7 10.0 10.0 9.4 27.8

Bharat Petroleum ADD 600 615 2.4 434,137 7,126 723 56.2 43.1 42.9 53.7 (23.3) (0.5) 10.7 13.9 14.0 7.3 8.3 8.1 2.1 1.9 1.8 2.8 2.2 2.1 19.9 13.8 12.5 18.5

Cairn india REDUCE 319 330 3.4 598,432 9,823 1,874 65.2 55.3 48.2 4.4 (15.1) (12.8) 4.9 5.8 6.6 3.8 4.3 4.6 1.0 0.9 0.9 4.0 3.8 3.8 23.4 14.4 13.6 16.8

Castrol India SELL 330 260 (21.2) 163,180 2,679 495 10.0 9.5 10.3 10.3 (4.8) 8.5 33.1 34.7 32.0 22.9 23.0 21.2 23.4 37.0 37.0 2.1 2.4 2.6 76.9 82.5 115.6 3.0

GAIL (India) BUY 424 520 22.6 538,153 8,834 1,268 32.6 35.3 38.5 (9.4) 8.2 9.0 13.0 12.0 11.0 8.5 7.3 6.2 1.8 1.6 1.5 2.5 2.6 2.9 13.9 13.5 13.2 14.3

GSPL ADD 87 91 4.7 48,930 803 563 7.4 7.5 8.6 (22.1) 1.2 13.8 11.7 11.5 10.1 6.1 6.0 5.4 1.3 1.2 1.1 1.2 1.7 3.9 11.9 10.9 11.4 2.9

Hindustan Petroleum REDUCE 423 425 0.4 143,469 2,355 339 51.1 36.2 38.6 106.4 (29.2) 6.4 8.3 11.7 11.0 8.1 7.7 6.7 0.8 0.7 0.7 3.7 2.6 2.8 9.1 6.0 6.0 13.9

Indian Oil Corporation ADD 344 370 7.7 834,122 13,692 2,428 23.2 29.8 36.0 38.1 28.3 20.7 14.8 11.5 9.5 9.6 6.7 5.2 1.2 1.1 1.1 2.5 3.0 3.5 8.1 9.8 10.9 7.5

Oil India BUY 569 700 22.9 342,319 5,619 601 49.6 61.4 72.6 (16.9) 23.8 18.2 11.5 9.3 7.8 5.2 3.7 2.9 1.6 1.4 1.3 3.8 4.4 5.3 12.5 14.3 15.5 5.2

Oil & Natural Gas Corporation ADD 393 440 12.0 3,360,180 55,156 8,556 31.2 34.9 43.4 6.2 12.1 24.4 12.6 11.2 9.0 5.7 4.7 3.8 1.6 1.5 1.3 2.4 2.8 3.6 12.7 12.7 14.3 50.9

Petronet LNG REDUCE 180 175 (2.9) 135,150 2,218 750 9.5 8.9 11.3 (38.1) (5.8) 26.4 19.0 20.2 15.9 10.4 10.9 9.2 2.4 2.2 2.0 1.1 1.2 1.8 13.2 10.9 12.3 6.2

Reliance Industries ADD 985 1,090 10.7 2,892,945 47,486 2,937 68.0 73.6 74.7 4.6 8.2 1.4 14.5 13.4 13.2 10.8 10.2 9.5 1.4 1.3 1.2 1.0 1.1 1.1 11.0 10.8 10.0 72.6

Energy Neutral 9,535,746 156,525 7.4 5.2 10.8 11.7 11.1 10.0 7.5 6.5 5.6 1.5 1.3 1.2 2.1 2.3 2.7 12.6 12.1 12.2 239.5

Dividend yield (%)


KO

TAK INSTITUTIO

NAL EQ

UITIES RESEARCH 70

In

dia D

aily Sum

mary - A

ug

ust

Ind

ia Daily Su

mm

ary - Au

gu

st 5, 2014




ADVT-3mo

Company Rating 4-Aug-14 (Rs) (%) (Rs mn) (US$ mn) (mn) 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E (US$ mn)Industrials

ABB SELL 1,040 750 (27.9) 220,344 3,617 212 8.3 15.6 25.1 25.5 86.6 61.1 124.6 66.7 41.4 58.8 39.4 27.1 8.2 7.5 6.5 0.3 0.3 0.3 6.7 11.8 16.9 2.2

Bharat Heavy Electricals SELL 229 150 (34.5) 560,378 9,198 2,448 14.1 12.3 13.6 (47.7) (13.1) 10.9 16.2 18.6 16.8 12.2 12.7 10.8 1.7 1.6 1.5 1.3 1.1 1.3 10.9 8.8 9.1 34.4

Crompton Greaves BUY 203 220 8.2 127,481 2,093 627 4.1 7.5 11.3 215.8 80.9 51.4 49.3 27.2 18.0 20.3 14.3 10.7 3.5 3.2 2.8 0.6 0.9 1.0 7.2 12.2 16.6 18.8

Cummins India REDUCE 627 615 (1.9) 173,707 2,851 277 21.3 27.0 30.5 (23.6) 26.6 13.1 29.4 23.2 20.5 27.4 22.2 17.0 6.8 6.0 5.3 1.6 2.0 2.2 24.2 26.7 26.7 2.9

Kalpataru Power Transmission ADD 160 190 18.9 24,529 403 153 8.1 12.2 12.5 (7.9) 51.7 2.4 19.8 13.0 12.7 8.6 7.0 5.8 1.2 1.1 1.0 0.9 0.9 0.9 6.0 7.4 7.4 1.0

KEC International ADD 107 125 16.6 27,569 453 257 3.3 6.7 10.4 30.4 102.5 54.9 32.4 16.0 10.3 9.6 7.6 6.2 2.2 1.8 1.6 0.6 1.4 2.2 6.9 12.4 16.4 1.4

Larsen & Toubro ADD 1,494 1,675 12.1 1,384,742 22,730 927 49.0 47.7 78.4 (6.6) (2.5) 64.3 30.5 31.3 19.1 19.9 18.9 14.0 3.6 3.1 2.7 0.9 1.0 1.2 12.5 10.7 15.1 65.4

Siemens SELL 887 510 (42.5) 315,932 5,186 356 12.9 20.7 24.5 183.6 61.2 18.3 69.0 42.8 36.2 36.1 24.4 20.8 7.4 6.6 5.8 0.4 0.6 0.7 11.1 16.2 17.0 5.7

Thermax REDUCE 858 800 (6.8) 102,243 1,678 119 20.6 22.2 34.0 (23.2) 7.6 53.0 41.6 38.6 25.3 26.9 28.1 17.5 5.0 4.7 4.2 0.7 0.9 1.3 12.6 12.5 17.4 1.6

Voltas REDUCE 201 210 4.3 66,603 1,093 331 6.8 9.4 11.5 15.0 39.1 21.6 29.7 21.3 17.6 24.5 14.1 11.2 3.6 3.3 2.9 1.1 1.4 1.7 12.9 16.1 17.6 11.1

Industrials Cautious 3,003,528 49,302 (23.7) 4.3 39.1 29.6 28.4 20.4 19.7 18.0 13.8 3.3 2.9 2.6 0.9 1.0 1.2 11.1 10.3 12.9 144.6

Infrastructure

Adani Port and SEZ ADD 265 245 (7.7) 553,224 9,081 2,084 8.3 9.6 13.4 3.7 14.5 40.4 31.8 27.8 19.8 21.2 16.6 12.8 6.2 4.8 4.0 0.7 0.6 0.7 22.5 19.4 21.9 28.2

Container Corporation ADD 1,271 1,325 4.3 247,787 4,067 195 49.5 58.7 70.5 2.6 18.7 20.1 25.7 21.6 18.0 20.2 16.6 13.3 3.5 3.2 2.8 0.9 1.1 1.3 14.5 15.5 16.5 3.1

Gujarat Pipavav Port REDUCE 145 140 (3.5) 70,171 1,152 483 6.5 8.8 11.4 80.1 34.0 30.3 22.2 16.6 12.7 16.9 13.0 9.3 4.0 3.2 2.5 — — — 23.3 25.6 26.4 3.3

IRB Infrastructure REDUCE 255 210 (17.5) 84,637 1,389 332 13.8 14.3 17.1 (17.4) 3.2 20.2 18.4 17.8 14.9 9.8 8.6 7.3 2.3 1.9 1.7 1.6 1.6 1.6 13.1 11.6 12.0 30.3

Sadbhav Engineering BUY 203 225 10.7 30,805 506 152 8.3 7.2 9.3 69.1 (13.5) 29.6 24.5 28.3 21.8 15.5 12.3 10.4 3.2 2.9 2.6 0.3 0.3 0.3 12.7 10.0 11.5 1.0

Infrastructure Attractive 986,625 16,195 7.1 15.1 31.1 27.1 23.6 18.0 17.4 14.1 11.1 4.4 3.6 3.1 0.7 0.8 0.9 16.4 15.4 17.3 66.1

Media

DB Corp ADD 322 350 8.7 59,082 970 183 16.7 18.6 23.0 40.5 11.0 23.7 19.3 17.4 14.0 11.7 9.9 8.1 5.2 4.6 4.0 2.2 2.8 3.4 28.2 27.9 30.3 0.8

DishTV ADD 58 60 3.4 61,770 1,014 1,065 (0.4) 0.0 1.5 68.2 105.0 7,286.5 (147.2) 2,938.1 39.8 11.3 10.3 8.3 (19.8) (19.9) (40) — — — 17.9 (0.7) (67) 10.9

Jagran Prakashan ADD 111 135 21.3 34,644 569 311 7.6 7.7 9.7 50.2 1.5 26.1 14.7 14.4 11.4 9.3 7.5 6.2 3.6 3.3 2.9 2.8 3.6 4.5 25.0 23.8 27.1 0.7

Sun TV Network ADD 408 420 2.9 160,883 2,641 394 18.0 21.6 24.3 0.1 19.8 12.8 22.7 18.9 16.8 13.5 11.4 10.1 5.0 4.6 4 2.4 3.2 3.9 24.1 26.5 28 5.1

Zee Entertainment Enterprises REDUCE 287 300 4.4 276,083 4,532 960 9.2 9.7 11.4 21.7 5.7 17.8 31.3 29.6 25.1 22.5 20.0 17.6 5.8 5.2 4.6 1.0 1.4 1.7 20.6 21.3 21.9 12.9

Media Neutral 592,462 9,725 25.1 19.6 22.8 28.3 23.7 19.3 15.3 13.3 11.4 6.1 5.5 4.9 1.5 2.0 2.5 21.5 23.1 25.2 30.4

Metals & Mining

Coal India ADD 359 392 9.1 2,270,417 37,268 6,316 23.9 27.9 32.5 (12.9) 16.4 16.8 15.0 12.9 11.0 9.8 7.8 6.4 5.4 4.6 3.9 7.1 4.0 4.6 32.4 38.4 38.3 37.8

Hindalco Industries REDUCE 191 135 (29.3) 394,130 6,469 2,065 12.5 12.8 12.9 (15.1) 2.8 0.8 15.3 14.9 14.8 11.2 9.1 7.6 1.0 0.9 0.9 0.7 0.7 0.7 6.8 6.3 6.0 34.2

Hindustan Zinc ADD 164 180 10.0 691,633 11,353 4,225 16.5 16.5 17.0 0.7 0.2 3.1 9.9 9.9 9.6 6.3 5.9 4.9 1.8 1.6 1.4 2.1 2.1 2.1 20.1 17.5 15.9 6.9

Jindal Steel and Power REDUCE 275 260 (5.5) 251,643 4,131 915 20.9 21.5 22.8 (32.9) 3.0 6.0 13.2 12.8 12.1 10.6 8.3 7.2 1.1 1.0 1.0 0.6 0.7 0.7 8.9 8.6 8.4 20.9

JSW Steel BUY 1,183 1,450 22.6 285,919 4,693 242 66.2 102.1 137.4 22.0 54.3 34.6 17.9 11.6 8.6 6.9 6.3 5.4 1.3 1.2 1.1 0.9 0.9 0.9 8.1 10.7 13.0 12.9

National Aluminium Co. SELL 59 38 (35.1) 150,897 2,477 2,577 2.7 3.1 3.0 16.7 15.0 (3.4) 21.8 19.0 19.6 10.5 8.0 8.3 1.2 1.2 1.2 2.6 2.6 2.6 5.8 6.5 6.1 5.9

NMDC ADD 176 180 2.5 696,003 11,425 3,965 16.1 17.7 17.8 (1.8) 10.3 0.4 10.9 9.9 9.8 6.6 5.8 6.0 2.3 2.1 1.9 4.8 4.8 4.8 22.3 22.3 20.4 11.1

Sesa Sterlite REDUCE 290 280 (3.3) 858,517 14,092 2,965 16.9 27.1 21.3 (32.2) 60.1 (21.4) 17.1 10.7 13.6 5.8 5.1 4.9 1.2 1.1 1.0 1.1 1.1 1.1 7.1 9.2 7.8 46.5

Tata Steel REDUCE 552 505 (8.5) 536,073 8,799 971 37.1 44.9 47.1 986.0 20.8 5.1 14.9 12.3 11.7 7.6 7.3 7.0 1.3 1.2 1.1 1.8 1.4 1.4 9.7 10.2 9.9 57.3

Metals & Mining Cautious 6,135,231 100,707 (6.3) 18.3 5.2 14.0 11.8 11.2 7.8 6.8 6.1 1.9 1.7 1.6 3.9 2.7 3.0 13.7 14.7 14.2 233.3

Pharmaceutical

Biocon SELL 457 360 (21.2) 91,557 1,503 200 20.9 22.5 24.0 34.8 7.3 6.7 21.8 20.4 19.1 12.9 11.8 10.4 3.0 2.7 2.5 1.1 1.5 1.6 14.5 13.8 13.5 9.5

Dr Reddy's Laboratories ADD 2,768 2,930 5.9 469,446 7,706 170 126.8 131.7 147.8 23.2 3.8 12.2 21.8 21.0 18.7 18.5 16.7 14.2 5.2 4.3 3.6 0.6 0.7 0.8 23.7 20.3 19.1 22.0

Lupin BUY 1,178 1,370 16.3 529,920 8,698 450 40.8 46.4 56.2 39.0 13.7 21.1 28.9 25.4 21.0 17.8 15.7 12.7 7.6 6.0 4.8 0.4 0.5 0.6 28.1 30.0 28.0 10.6

Pharmaceuticals Cautious 1,090,923 17,907 4.2 24.1 15.8 32.6 26.3 22.7 20.6 17.8 15.2 6.4 5.2 4.4 0.5 0.6 0.6 19.5 19.8 19.2 109.7

Real Estate

DLF ADD 201 220 9.5 358,072 5,878 1,781 5.6 3.0 4.9 24.8 (46.6) 63.8 35.9 67.2 41.0 22.7 20.5 17.3 1.2 1.2 1.2 1.0 1.0 1.0 3.5 1.8 3.0 46.7

Godrej Properties REDUCE 228 225 (1.5) 45,280 743 198 8.0 10.2 12.4 (8.8) 27.0 20.9 28.4 22.4 18.5 22.0 15.8 11.2 2.5 2.3 2.1 0.9 0.9 1.1 9.9 10.8 12.0 1.2 Oberoi Realty BUY 253 325 28.4 83,109 1,364 328 9.5 16.3 28.9 (38.4) 72.4 77.1 26.7 15.5 8.8 18.1 12.2 5.8 1.9 1.7 1.5 0.8 0.8 0.8 7.3 11.6 17.9 2.8

Prestige Estates Projects ADD 250 230 (7.9) 87,430 1,435 350 10.2 14.2 19.4 24.3 40.3 36.0 24.6 17.5 12.9 14.0 11.1 8.7 2.9 2.5 2.1 0.5 0.5 0.5 12.3 15.2 17.8 1.8 Sobha Developers ADD 437 520 18.9 42,883 704 98 24.0 27.3 42.5 8.2 13.8 55.7 18.2 16.0 10.3 9.3 8.3 6.5 1.9 1.7 1.5 1.6 1.6 1.6 10.6 11.2 15.7 1.9

Sunteck Realty ADD 331 410 24.0 19,834 326 60 25.2 10.7 81.2 3,653.8 (57.4) 656.9 13.1 30.8 4.1 9.2 26.8 3.3 3.1 2.9 1.7 0.6 0.6 0.6 26.8 9.7 52.7 0.5

Real Estate Attractive 636,607 10,450 17.1 (5.8) 74.9 28.4 30.2 17.2 18.4 16.1 11.1 1.5 1.5 1.4 0.9 0.9 0.9 5.4 4.9 8.1 54.9

Dividend yield (%)


In

dia D

aily Sum

mary - A

ug

ust 5, 2014

71

KOTAK IN

STITUTIO

NAL EQ

UITIES RESEARCH




ADVT-3mo

Company Rating 4-Aug-14 (Rs) (%) (Rs mn) (US$ mn) (mn) 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E (US$ mn)Technology

HCL Technologies REDUCE 1,555 1,450 (6.8) 1,100,940 18,071 708 89.8 97.5 102.3 57.8 8.5 4.9 17.3 16.0 15.2 11.6 10.9 10.0 5.4 4.4 3.7 1.4 1.4 1.4 36.0 31.0 26.9 27.4

Hexaware Technologies SELL 141 130 (7.8) 42,547 698 302 12.6 10.4 11.4 14.5 (18.1) 9.7 11.2 13.6 12.4 7.1 9.0 8.2 3.5 4.3 3.7 7.8 5.1 4.0 31.6 28.4 32.0 3.9

Infosys ADD 3,466 3,650 5.3 1,980,215 32,504 571 186.3 209.1 228.1 13.0 12.2 9.1 18.6 16.6 15.2 12.6 11.4 9.9 4.4 3.8 3.3 1.8 2.1 2.3 26.3 24.9 23.5 67.4

Mindtree ADD 1,019 950 (6.7) 85,546 1,404 84 53.7 61.1 66.8 31.4 13.9 9.4 19.0 16.7 15.2 13.8 11.9 10.5 5.2 4.3 3.6 1.2 1.5 1.6 30.5 28.2 25.5 3.5

Mphasis SELL 441 370 (16.1) 92,644 1,521 210 14.7 33.7 33.4 (58.4) 128.7 (0.6) 30.0 13.1 13.2 21.2 9.3 9.2 1.8 1.7 1.6 1.6 3.8 3.8 6.1 13.4 12.6 1.5

TCS ADD 2,526 2,550 0.9 4,947,774 81,216 1,959 97.6 113.4 125.0 37.4 16.2 10.2 25.9 22.3 20.2 18.9 16.6 14.7 8.9 7.9 6.5 1.3 2.5 2.0 39.7 37.6 35.3 46.3

Tech Mahindra ADD 2,167 2,300 6.1 516,788 8,483 238 128.0 138.0 153.7 25.6 7.7 11.4 16.9 15.7 14.1 11.5 11.0 9.6 5.6 4.5 3.7 1.0 1.2 0.8 33.5 28.6 25.8 28.7

Wipro ADD 549 620 13.0 1,351,325 22,181 2,463 31.7 35.2 38.6 27.1 11.2 9.6 17.3 15.6 14.2 12.0 10.1 8.8 3.9 3.3 2.8 1.5 1.6 1.8 24.9 23.1 21.5 19.6

Technology Attractive 10,117,780 166,079 29.6 13.1 9.2 21.1 18.7 17.1 14.8 13.2 11.7 5.9 5.1 4.3 1.4 2.1 1.9 27.9 27.1 25.1 198.3

Telecom

Bharti Airtel ADD 377 415 10.1 1,506,620 24,731 3,997 8.3 14.1 16.7 39.0 69.8 18.0 45.3 26.6 22.6 8.0 7.1 6.1 2.5 2.3 2.2 0.5 0.5 0.9 6.0 9.1 9.9 30.2

Bharti Infratel REDUCE 267 250 (6.5) 505,042 8,290 1,889 8.0 10.7 11.8 51.4 33.1 10.4 33.3 25.0 22.6 11.2 10.2 9.3 2.8 2.8 2.8 1.6 3.6 3.2 8.6 11.2 12.3 —

IDEA BUY 164 185 13.1 588,199 9,655 3,595 5.9 7.8 8.9 94.4 30.9 14.3 27.6 21.1 18.5 9.7 8.5 7.1 3.6 2.6 2.3 0.2 0.4 0.5 12.8 14.2 13.2 22.1

Reliance Communications SELL 132 95 (27.9) 325,144 5,337 2,467 3.2 3.8 6.6 (0.4) 17.1 74.0 40.6 34.7 19.9 10.0 7.8 7.1 1.2 1.0 0.9 — — — 2.4 3.1 4.7 21.4

Tata Communications BUY 378 380 0.5 107,801 1,770 285 (3.7) 4.1 4.5 87.5 211.5 9.6 (102.8) 92.2 84.1 7.4 7.1 6.6 13.4 11.6 10.0 — — — (9.4) 13.5 12.7 5.3

Telecom Neutral 3,032,807 49,782 103.6 56.2 20.2 41.1 26.3 21.9 8.8 7.7 6.7 2.5 2.2 2.0 0.6 0.9 1.1 6.0 8.2 9.2 79.0

Utilities

Adani Power SELL 56 38 (32.4) 161,402 2,649 2,872 (9.4) (2.8) (0.7) (4.9) 70.5 75.6 (5.9) (20.1) (82.6) 17.1 10.8 9.7 4.8 6.3 6.8 — — — (70.7) (26.9) (7.9) 14.0

CESC ADD 681 695 2.0 85,119 1,397 125 39.3 56.2 69.9 14.9 42.8 24.4 17.3 12.1 9.7 13.2 9.0 7.1 1.1 1.0 0.9 1.1 1.1 1.2 6.8 8.8 10.1 6.5

JSW Energy SELL 77 62 (19.2) 125,870 2,066 1,640 6.9 8.6 7.6 2.9 24.0 (11.7) 11.1 9.0 10.2 6.9 6.0 5.7 1.9 1.6 1.4 — — — 17.7 19.3 14.4 4.3

NHPC REDUCE 22 24 7.1 247,983 4,071 11,071 1.7 2.2 2.4 (12.6) 30.5 7.5 13.2 10.1 9.4 11.4 9.7 8.6 0.9 0.9 0.8 1.9 2.6 2.8 6.5 8.7 8.8 7.0

NTPC REDUCE 141 135 (4.5) 1,165,084 19,124 8,245 13.3 11.2 12.4 6.8 (15.5) 10.0 10.6 12.6 11.4 9.4 10.0 8.6 1.4 1.3 1.2 4.1 2.4 2.6 13.2 10.4 10.7 31.2 Power Grid BUY 132 145 9.5 692,925 11,374 5,232 8.6 9.5 13.0 (5.0) 9.8 37.5 15.3 14.0 10.2 11.7 9.5 7.7 2.0 1.8 1.6 1.9 2.1 2.9 14.9 13.8 17.1 19.3 Reliance Infrastructure BUY 751 580 (22.8) 197,588 3,243 263 72.0 68.9 84.3 1.7 (4.4) 22.4 10.4 10.9 8.9 12.3 11.9 10.5 0.7 0.7 0.6 1.0 1.5 1.5 9.5 8.9 8.9 40.7

Reliance Power SELL 92 62 (33) 257,931 4,234 2,805 3.7 4.0 4.1 1.5 9.4 2.3 25.1 23.0 22.5 27.4 26.4 13.2 1.3 1.3 1.2 — — — 5.4 5.6 5.4 20.3

Tata Power ADD 96 115 19.4 269,630 4,426 2,800 2.1 6.9 6.4 (46.6) 221.4 (6.9) 44.9 14.0 15.0 8.3 6.3 6.2 2.1 1.7 1.5 1.1 1.2 1.2 4.1 13.3 10.6 14.8

Utilities Cautious 3,203,532 52,585 (1.9) 15.8 17.0 16.2 14.0 12.0 11.1 9.9 8.3 1.4 1.3 1.2 2.2 1.8 2.0 8.8 9.4 10.2 158.0

Others

Carborundum Universal BUY 168 200 18.8 31,599 519 188 4.9 8.2 12.4 1.7 69.0 50.3 34.5 20.4 13.6 14.1 10.0 7.6 2.6 2.4 2.1 0.7 1.3 1.9 7.2 12.9 17.5 0.2

Coromandel International SELL 238 210 (11.9) 67,468 1,107 283 12.6 18.1 20.2 (17.5) 43.4 11.8 18.9 13.2 11.8 10.1 8.0 7.2 3.0 2.5 2.2 1.9 1.9 1.9 15.0 19.8 19.0 0.7

Havells India ADD 1,157 1,260 8.9 144,383 2,370 125 40.0 47.3 57.3 19.9 18.3 21.0 28.9 24.5 20.2 18.0 15.0 12.6 8.4 7.2 6.1 1.3 1.6 1.9 31.2 31.7 32.5 6.0

Info Edge BUY 701 750 7.0 76,571 1,257 109 8.4 11.7 17.0 (20.1) 39.4 45.7 83.5 59.9 41.1 70.5 56.7 33.6 9.4 8.8 7.9 0.4 0.6 0.9 12.8 15.2 20.2 1.2

Jaiprakash Associates REDUCE 62 60 (3.1) 150,547 2,471 2,432 (5.4) 4.7 6.9 (373.8) 187.3 46.5 (11.5) 13.2 9.0 11.4 7.5 6.4 1.3 1.1 1.0 — — — (9.9) 9.0 11.5 48.1

Just Dial ADD 1,820 1,650 (9.4) 127,421 2,092 70 17.1 20.6 32.6 69.2 20.4 57.8 106.2 88.2 55.9 84.9 69.2 40.8 23.8 20.5 16.9 0.3 0.4 0.6 25.0 25.0 33.1 12.9

Rallis India BUY 211 230 8.9 41,082 674 194 7.8 10.5 12.6 27.6 34.4 20.4 27.1 20.1 16.7 15.9 11.9 9.6 5.7 4.7 3.9 1.1 1.2 1.2 22.1 25.4 25.2 1.9

Tata Chemicals BUY 364 400 10.0 92,704 1,522 255 (40.5) 29.4 35.6 (357.7) 172.7 21.0 (9.0) 12.4 10.2 8.5 6.3 5.5 1.4 1.3 1.1 2.7 2.7 2.7 (15.9) 10.3 11.2 4.9

UPL ADD 334 370 10.7 143,239 2,351 429 22.0 27.5 31.6 26.0 24.6 15.2 15.2 12.2 10.6 7.8 6.7 5.8 2.6 2.2 1.8 0.7 0.7 0.7 19.1 20.0 19.3 14.0

Others 798,444 13,106 (98.9) 14,789.6 27.6 2,462.6 16.5 13.0 11.8 8.6 7.3 2.6 2.2 1.9 1.0 1.1 1.3 0.1 13.2 14.9 89.9

KIE universe 65,313,394 1,072,091 5.7 15.1 15.2 18.2 15.8 13.7 11.0 9.6 8.2 2.6 2.3 2.1 1.7 1.7 1.9 14.3 14.8 15.2

KIE universe ex-energy 55,777,648 915,566 5.2 18.0 16.4 20.1 17.0 14.6 12.3 10.7 9.1 3.0 2.7 2.4 1.6 1.6 1.8 14.9 15.7 16.3

KIE universe ex-energy & ex-commodities 47,811,463 784,804 9.4 18.0 18.4 21.0 17.8 15.1 13.7 11.9 10.0 3.2 2.9 2.5 1.3 1.5 1.7 15.4 16.2 16.9

Notes:

(a) We have used adjusted book values for banking companies.

(b) 2014 means calendar year 2013, similarly for 2015 and 2016 for these particular companies.

(c) EV/EBITDA excludes banking Sector.

(d) Exchange rate (Rs/US$)= 60.92

Dividend yield (%)



Disclosures

"Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Kawaljeet Saluja, Rohit Chordia, Murtuza Arsiwalla, M.B. Mahesh, Jasdeep Walia, Tarun Lakhotia, Saifullah Rais, Aditya Mongia." Kotak Institutional Equities Research coverage universeDistribution of ratings/investment banking relationships

Source: Kotak Institutional Equities As of June 30, 2014

Percentage of companies covered by Kotak Institutional Equities, within the specified category.

Percentage of companies within each category for which Kotak Institutional Equities and or its affiliates has provided investment banking services within the previous 12 months.

* The above categories are defined as follows: Buy = We expect this stock to deliver more than 15% returns over the next 12 months; Add = We expect this stock to deliver 5-15% returns over the next 12 months; Reduce = We expect this stock to deliver -5-+5% returns over the next 12 months; Sell = We expect this stock to deliver less than -5% returns over the next 12 months. Our target prices are also on a 12-month horizon basis. These ratings are used illustratively to comply with applicable regulations. As of 30/06/2014 Kotak Institutional Equities Investment Research had investment ratings on 149 equity securities.

15.4%

23.5%

35.6%

25.5%

2.0% 0.7% 2.0% 0.7%0%

10%

20%

30%

40%

50%

60%

70%

BUY ADD REDUCE SELL

Ratings and other definitions/identifiers

Definitions of ratings

BUY. We expect this stock to deliver more than 15% returns over the next 12 months.

ADD. We expect this stock to deliver 5-15% returns over the next 12 months.

REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.

SELL. We expect this stock to deliver <-5% returns over the next 12 months.

Our target prices are also on a 12-month horizon basis.

Other definitions

Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations: Attractive, Neutral, Cautious.

Other ratings/identifiers

NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances.

CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.

NC = Not Covered. Kotak Securities does not cover this company.

RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.

NA = Not Available or Not Applicable. The information is not available for display or is not applicable.

NM = Not Meaningful. The information is not meaningful and is therefore excluded.

Corporate Office Overseas Offices

Kotak Securities Ltd.

27 BKC, Plot No. C-27, “G Block”

Bandra Kurla Complex, Bandra (E)

Mumbai 400 051, India

Tel: +91-22-43360000

Kotak Mahindra (UK) Ltd

8th Floor, Portsoken House

155-157 Minories

London EC3N 1LS

Tel: +44-20-7977-6900

Kotak Mahindra Inc

50 Main Street, Ste. 890

Westchester Financial Centre

White Plains, New York 10606

Tel:+1-914-997-6120

Copyright 2014 Kotak Institutional Equities (Kotak Securities Limited). All rights reserved.

1. Note that the research analysts contributing to this report may not be registered/qualified as research analysts with FINRA; and

2. Such research analysts may not be associated persons of Kotak Mahindra Inc and therefore, may not be subject to NASD Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

3. Any U.S. recipients of the research who wish to effect transactions in any security covered by the report should do so with or through Kotak Mahindra Inc and (ii) any transactions in the securities covered by the research by U.S. recipients must be effected only through Kotak Mahindra Inc at [email protected].

Kotak Securities Limited and its affiliates are a full-service, integrated investment banking, investment management, brokerage and financing group. We along with our affiliates are leading underwriter of securities and participants in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationships with a significant percentage of the companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. Investors should assume that Kotak Securities Limited and/or its affiliates are seeking or will seek investment banking or other business from the company or companies that are the subject of this material and that the research professionals who were involved in preparing this material may participate in the solicitation of such business. Our research professionals are paid in part based on the profitability of Kotak Securities Limited, which include earnings from investment banking and other business. Kotak Securities Limited generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. Additionally, Kotak Securities Limited generally prohibits its analysts and persons reporting to analysts from serving as an officer, director, or advisory board member of any companies that the analysts cover. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additionally, other important information regarding our relationships with the company or companies that are the subject of this material is provided herein.

This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. It is for the general information of clients of Kotak Securities Limited. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, clients should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Kotak Securities Limited does not provide tax advise to its clients, and all investors are strongly advised to consult with their tax advisers regarding any potential investment.

Certain transactions -including those involving futures, options, and other derivatives as well as non-investment-grade securities - give rise to substantial risk and are not suitable for all investors. The material is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions expressed are our current opinions as of the date appearing on this material only. We endeavor to update on a reasonable basis the information discussed in this material, but regulatory, compliance, or other reasons may prevent us from doing so. We and our affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this material, may from time to time have “long” or “short” positions in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. For the purpose of calculating whether Kotak Securities Limited and its affiliates holds beneficially owns or controls, including the right to vote for directors, 1% of more of the equity shares of the subject issuer of a research report, the holdings does not include accounts managed by Kotak Mahindra Mutual Fund. Kotak Securities Limited and its non US affiliates may, to the extent permissible under applicable laws, have acted on or used this research to the extent that it relates to non US issuers, prior to or immediately following its publication. Foreign currency denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of or income derived from the investment. In addition, investors in securities such as ADRs, the value of which are influenced by foreign currencies affectively assume currency risk. In addition options involve risks and are not suitable for all investors. Please ensure that you have read and understood the current derivatives risk disclosure document before entering into any derivative transactions.

This report has not been prepared by Kotak Mahindra Inc. (KMInc). However KMInc has reviewed the report and, in so far as it includes current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed. Any reference to Kotak Securities Limited shall also be deemed to mean and include Kotak Mahindra Inc.

This report is distributed in Singapore by Kotak Mahindra (UK) Limited (Singapore Branch) to institutional investors, accredited investors or expert investors only as defined under the Securities and Futures Act. Recipients of this analysis / report are to contact Kotak Mahindra (UK) Limited (Singapore Branch) (16 Raffles Quay, #35-02/03, Hong Leong Building, Singapore 048581) in respect of any matters arising from, or in connection with, this analysis / report. Kotak Mahindra (UK) Limited (Singapore Branch) is regulated by the Monetary Authority of Singapore.

Documents

05Aug2014 India Daily