AMBIT INSIGHTSreports.ambitcapital.com/reports/AmbitInsights_15Sept2016.pdf · Consequent to acquisition of Welspun Renewable assets. We assumed 100% debt funding EBITDA 78,789 84,244

Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.

Please refer to the Disclaimers at the end of this Report.

AMBIT INSIGHTS 15 September 2016

DAILY

Updates

Tata Power (BUY)

Concludes value-accretive renewables acquisition

DCB Bank (NOT RATED)

Building it brick by brick

Parag Milk Foods (NOT RATED)

Annual Report analysis

Analyst Notes: Consumer Staples: Marico – Top BUY in Consumer Rakshit Ranjan, CFA, +91 22 3043 3201

Marico has maintained leadership in its core categories through: (a) a unique work culture which has enabled the firm to attract and retain high quality talent; (b) a high quality Board which is truly ‘independent’ in helping drive strategic decision-making; and (c) a strong focus on building supportive relationships with its distributors. We expect sales/EPS CAGR of 18%/27% over FY16-20 as Marico evolves over the next five years around: (a) product innovation in the non-coconut oil portfolio; (b) nurturing high-quality talent; and (c) better use of IT and data analytics. Hence, we expect Marico to trade at a premium to its Indian FMCG peers and to MNCs like GSK Consumer and Colgate. We reiterate our DCF-based TP to Rs330 (14% upside; implying 35x FY18E EPS).

Source: Ambit Capital research

Please refer to our website for complete coverage universe

http://research.ambitcapital.com

http://research.ambitcapital.com

AMBIT INSIGHTS

Ambit Capital Pvt Ltd 15 September 2016

Tata Power Concludes value-accretive renewables acquisition Tata Power concluded the acquisition of 100% stake of 1,140MW Welspun Renewables for EV of Rs92.5bn. We believe this is a value-accretive deal for Tata as the assets would generate RoCE of ~13% in FY18 vs cost of debt of 9.5% (assumed) for this 100% debt-funded transaction. We see value accretion of Rs13bn, i.e. Rs4/share. Consequent to the acquisition, we have upgraded FY17/FY18E PAT by 6%/10% and TP by 4% to Rs108. With this acquisition, Tata’s renewables asset portfolio increases to 2.3GW from 1.2GW. We reiterate BUY given rising investment in the lucrative Mumbai circle and reduction in losses at Mundra (if Mundra gets compensatory tariff it may report per annum PBT of ~Rs5.7bn). The stock is trading at 1.2x FY18E P/B (11% discount to peers); the current valuation does not assign any value to Mundra, Bumi and Tata SED.

Event: Yesterday, Tata Power concluded the acquisition of the share purchase of 100% stake in Welspun Renewables. Whilst no transaction value has been mentioned in the press release, the deal value as per mid-June’16 announcement was Rs92.5bn (EV).

Welspun has operational and under-construction capacity of 990MW (solar - 844MW; wind - 146MW) and 150MW (solar) respectively. Welspun has a superb asset portfolio with average PLF of 20% and average realisation of Rs8/unit for solar (994MW; includes 150MW under-construction capacity) and Rs6/unit for wind (146MW). Weighted elapsed life of these assets is less than 3 years with 100% PPA for 25 years. FY16 revenue was Rs7.7bn (not comparable as the weighted average operational installed capacity in FY16 was ~600MW). Outstanding debt of Welspun Renewables is Rs55bn.

BUY Quick Insight Analysis Meeting Note News Impact

Stock Information Bloomberg Code: TPWR IN

CMP (Rs): 75

TP (Rs): 108

Mcap (Rs bn/US$ bn): 203/3.0

3M ADV (Rs mn/US$ mn): 431/6.5

Stock Performance (%)

1M 3M 12M YTD

Absolute (1) (2) 25 9

Rel. to Sensex (2) (9) 14 1

Source: Bloomberg, Ambit Capital research

Ambit Estimates (Rs bn)

FY16 FY17 FY18

Revenues 374.8 388.3 406.2

EBITDA 79.9 87.9 98.8

EPS (Rs) 4.3 5.6 9.4


Research Analysts

Bhargav Buddhadev [email protected] Tel: +91 22 3043 3252

Deepesh Agarwal, CFA [email protected] Tel: +91 22 3043 3275

mailto:[email protected]


AMBIT INSIGHTS


Exhibit 1: Average project cost and tariff for Welspun’s solar projects are Rs80mn per MW and Rs8/unit respectively

Project Capacity (MW) Debt (Rs mn)# Project cost (Rs mn) Rs mn/MW Tariff (Rs/unit)

Solar

Andhra Pradesh Ananthpur 5 NA NA NA 12.6

Vemulapadu & Lomada 100 5,625 7,500 75 6.0

Ananthpur 100 7,125 9,500 95 NA

Various 25 NA NA NA NA

Bihar

Banka 40 NA NA NA 15MW - 8.56; 15MW - 8.64; 10MW - 8.7

NA 4 NA NA NA Gujarat Surendranagar 30 3,488 4,650 155 Anjar, Kutch 15 NA NA NA 8.14

Various 5 552 736 147 Till Jan'24 - 15; thereafter - 5.0

Karnataka Chitradurga 100 NA NA NA 50MW - 7.01;

50MW - 7.09 Various 15 NA NA NA NA

Chitradurga 19 926 1,235 65 8.05

Maharashtra Baramati - 60% share 51 2,813 3,750 74 MERC approved

Solapur 22 1,350 1,800 82 8.56

Madhya Pradesh Mandsaur and Neemuch 125 938 12,500 100 8.05


Punjab

Bhatinda 32 2,019 2,692 84 20MW - 8.33; 10MW - 8.42; 2MW - 8.56


Rajasthan

Phalodi, Jodhpur 50 3,545 4,727 95 20 MW - Rs 7.97; 15MW - Rs 8.05; 15MW - Rs 8.14


Tamil Nadu Trichy 300 NA NA NA 7.01

Uttar Pradesh Various 3 NA NA NA NA

Total solar 994 55,664* 79,520* 80* 8.00

Wind Rajasthan Pratapgarh 126 6,300 8,400 67 5.93

Jaisalmer 20 1,000 1,333 67 5.64

Total Wind 146 6,813 9,733 67 5.89

Total capacity - Operational 990 - Under-construction (entirely solar) 150 Total capacity 1,140 62,477 89,253 78 7.73

Source: Industry, MNRE, Company, Ambit Capital research, Note - * as per management guidance, # original debt; NA – not available

AMBIT INSIGHTS


Where do we go from here?

This is a value-accretive transaction for Tata Power as it has acquired assets at near original capex (deal EV of Rs92.5bn vs capex of ~Rs88.3bn) and 1.4x invested equity. We estimate value accretion of Rs13bn, i.e. Rs4/share for Tata’s shareholders; we assume 100% debt funding with average cost of debt of 9.5% (Tata Power recently raised Rs35bn through bond issuance for this transaction at 7.7%). Consequently, we upgrade our FY17/FY18 EBITDA and PAT by 10%/17% and 5%/10% respectively; our SOTP-based TP increases by 4% to Rs108. We assume Tata Power would earn revenue and profits from Welspun’s assets from mid-September’16, implying 6.5 months of revenue in FY17.

Exhibit 2: Change in estimates post acquisition of Welspun Renewables’ assets

Rs mn unless specified Old New % change in

estimates Comments FY17 FY18 FY17 FY18 FY17 FY18

Recommendation BUY BUY Target Price 104 108 4%

We estimate value accretion of Rs13bn from Welspun's acquisition, i.e. Rs4/share.

Revenues 378,671 390,706 386,973 406,173 2% 4%

Consequent to acquisition of Welspun Renewable assets. We assumed 100% debt funding

EBITDA 78,789 84,244 86,639 98,810 10% 17%

EBITDA margin 20.8% 21.6% 22.4% 24.3% 160bps 270bps

Depreciation 22,963 23,681 24,860 27,424 8.3% 15.8%

Interest 27,983 25,768 32,574 33,346 16.4% 29.4%

Other income 2,612 3,649 2,612 3,738 0.0% 2.4%

PBT 30,455 38,444 31,817 41,778 4.5% 8.7%

RPAT after MI 14,138 23,022 14,887 25,256 5.3% 9.7%

CFO 51,275 63,283 57,219 72,677 11.6% 14.8%

Capex 17,145 15,419 17,145 15,419 0.0% 0.0%

FCFF 34,130 47,864 40,074 57,258 17.4% 19.6%


Exhibit 3: Key financial estimates for Welspun Renewables’ assets

Rsmn unless specified FY17E FY18E FY19E Comment

Revenue 8,378 15,467 15,327Assumed 6.5 months of revenue in FY17; 20% PLF and average realisation of Rs8/unit for solar and Rs6/unit (in line with management guidance). Assumed 20bps degradation in solar PLF from FY19

O&M expenses 488 900 900 Assumed O&M expense of Rs0.7/MW for solar and Rs0.8/unit for wind (in line with industry standard)

EBITDA 7,890 14,566 14,427

Depreciation 1,913 3,531 3,531 Depreciated on straight line basis over useful life of 25 years

EBIT 5,977 11,035 10,896

Interest 4,561 8,420 7,688 Assumed cost of debt of 9.5%; repayment period of 12 years

PBT 1,416 2,615 3,207

Tax (80IA tax benefit) - - - Tax benefit for first 10 years of asset life

PAT 1,416 2,615 3,207

Outstanding debt 88,636 80,929 15,327 Assumed transaction to be funded by 100% debt

RoCE (%) 13% 13% 900


AMBIT INSIGHTS


Valuations: Mundra and Bumi overshadow Mumbai circle and SED

Mundra and Bumi account for just 12% of our SOTP; Mumbai circle, TPDDL and Tata SED together account for 42% of SOTP (~22% of capital employed). The value-accretive businesses will consume ~60% of incremental capital deployed over FY16- FY19 whilst the balance gets consumed in other smaller assets and maintenance of Mundra. Assuming Mundra breaks even due to the compensatory tariff hike (click here for our note dated 8th April 2016), the valuation multiple for other businesses would re-rate as investor concerns over cash burn at Mundra would abate.

Though there is no clear peer for Tata Power given its presence in multiple businesses (power generation, transmission, distribution, coal mining and defence), when we compare it with utilities like CESC, KSK, RattanIndia, JSPL, Lanco, JP Power, NHPC, Adani Power, NTPC, Torrent Power and JSW Energy, we find that it trades at 11% discount to peers at 1.2x FY18 P/B.

Exhibit 4: Tata Power is trading at 11% discount to peers on FY18E P/B

Company CMP Mcap (US$mn)

P/B (x) P/E (x) RoE (%) CAGR (FY16-18) (%)

FY17 FY18 FY17 FY18 FY16 FY17 FY18 Revenue EPS

CESC 654 1,297 1.3 1.2 12.7 8.9 5.9 10.1 12.9 9.5 NA

KSK 180 1,291 NA NA 16.9 NA 14.3 6.6 NA NA NA

JSPL 81 1,996 1.4 1.3 10.4 9.5 15.6 14.0 13.9 4.8 (5.1)

Lanco 5 189 NA NA NA NA NA 88.2 25.6 50.3 40.5

JP Power 28 1,382 1.4 1.2 NA NA (18.9) 1.7 6.1 3.2 NA

NHPC 27 4,433 0.9 0.9 10.3 9.4 8.2 9.2 9.8 8.2 (9.4)

Adani Power 28 1,382 1.4 1.2 NA NA (18.9) 1.7 6.1 3.2 NA

NTPC 156 19,113 1.4 1.3 14.7 11.7 12.0 9.7 11.7 14.1 3.5

Torrent Power 179 1,278 1.1 1.0 13.8 11.6 12.4 7.9 8.7 (9.6) (7.7)

JSW Energy 81 1,974 1.4 1.3 11.2 9.5 16.1 13.3 14.3 1.8 4.1

Tata Power 75 3,014 1.3 1.1 13.5 8.0 8.8 10.4 14.8 4.1 48.0

Sector median 1.4 1.2 12.7 9.5 12.0 9.5 11.7 4.8 (0.8)

Divergence -6% -11% 6% -15% -320bps 90bps 310bps -70bps 4880bps

Source: Bloomberg, Ambit Capital research, Note: Prices as on 14 September 2016

http://reports.ambitcapital.com/reports/Ambit_TataPower_APTELorderisamuchneededrelief_08Apr2016.pdf

AMBIT INSIGHTS


Consolidated financials Balance Sheet

Year to March (Rs mn) FY14 FY15 FY16 FY17E FY18E

Networth 113,238 125,421 131,139 158,430 183,722

Loans 366,767 387,049 393,961 432,772 500,592

Other liabilities 120,739 56,708 120,826 106,098 93,156

Sources of funds 600,745 569,178 645,926 697,300 777,469

Net block (incl. CWIP) 467,823 483,896 507,462 560,761 548,756

Net current assets (18,159) 51,901 (15,966) (2,999) 102,118

Investments 151,081 33,381 154,430 139,538 126,596

Application of funds 600,745 569,178 645,926 697,300 777,469

Source: Company, Ambit Capital research

Income statement

Year to March (Rs mn) FY14 FY15 FY16 FY17E FY18E

Revenue 356,487 343,669 374,802 388,337 406,173

EBITDA 77,065 69,405 79,912 87,893 98,810

Depreciation 27,296 21,742 23,764 25,170 27,424

Interest expense 34,399 36,993 34,765 33,246 33,346

Other income (5,619) 3,523 790 2,612 3,792

PBT 9,751 14,193 22,172 32,089 41,832

Provision for taxation 10,084 10,749 8,693 14,440 13,805

Consolidated adj PAT (2,600) 1,034 11,539 15,037 25,292

EPS diluted (Rs) (1.1) 0.4 4.3 5.6 9.4


Cash flow statement

Year to March (Rs mn) FY14 FY15 FY16E FY17E FY18E

PBT 9,751 14,837 22,172 32,089 41,832

Depreciation + Interest 60,147 58,735 58,797 58,416 60,770

WC changes (226) (5,611) 10,854 3,596 5,769

Others 4,706 (1,208) (2,111) (2,612) (2,736)

Tax (9,546) (8,085) (10,450) (14,440) (13,805)

CFO 64,831 58,668 79,262 77,049 91,831

CFI (37,418) (38,749) (16,350) (17,145) (15,419)

CFF (32,654) (64,399) (102,631) (70,875) 6,599

FCF 21,745 24,402 62,911 59,904 76,412


Ratio analysis / Valuation parameters

Year to March FY14 FY15 FY16E FY17E FY18E

Revenue growth (%) 7.9 (3.6) 9.1 3.6 4.6

EBITDA margin (%) 21.6 20.2 21.3 22.6 24.3

Net margin (%) (0.7) 0.5 3.1 3.9 6.2

RoCE (%) 10.8 9.8 6.3 6.4 8.7

RoE (%) (2.3) 1.4 8.8 10.4 14.8

Net debt / Equity (x) 3.1 2.8 2.9 2.5 1.9

P/E (x) NA NA 17.6 13.5 8.0

P/B(x) 1.6 1.5 1.5 1.3 1.1

EV/EBITDA(x) 5.4 6.0 5.2 4.7 4.2

EPS diluted (Rs) (1.1) 0.4 4.3 5.6 9.4


AMBIT INSIGHTS


DCB Bank Building it brick by brick DCB Bank’s performance in three quarters after announcement of accelerated branch expansion plan (~150 branches in batches over 2016-17) has broadly tracked overall and branch-specific targets. While stable trends in loan growth, loan mix and asset quality are appreciated, investors, at times, question scope for cost-to-income ratio improvement given focus on small-ticket lending and high employee-to-branch ratio (~21x). Management interaction suggests the distribution model with centralised teams leads to higher employee-to-branch ratio despite the standard branch format of 6-8 employees. As employee-to-branch ratio moderates in medium-to-long term and costs linked to accelerated rollout normalise (e.g. technology), DCB should reach targeted cost-to-income of 55% by end-FY19. Hence, profitability ratios would bottom in FY17 before improving to target RoE (14%) by end-FY19. At 1.7x FY17E BV, stock trades at 35-40% discount to new private sector banks and small finance banks.

We met the management team of DCB Bank to better understand the progress of the bank since the announcement of accelerated branch expansion plan in October 2015 and progress over the rest of the next 2.5 years by end of which the bank expects to reach its targeted RoE of 14%.

Acceleration in branch expansion plan A consistent strategy with credible execution record until mid-FY16: DCB Bank followed a consistent strategy around balance sheet growth, branch expansion, retail liabilities focus, tier 2-6 location preference, loan mix and asset quality until end-1HFY16. The bank thus achieved RoA and RoE of ~1% and ~10% (both normalized for usual corporate tax rate), respectively, with cost-to-income ratio of ~59%; this compares with RoA, RoE and cost-to-income ratios of 0.5%, 6% and 75% in FY12.

The bank unveils an accelerated branch expansion plan: In August and September 2015, the RBI granted 21 new payments bank and small finance bank licenses. DCB Bank at that time had a network of 160 branches, which was among the smallest for Indian banks. With competitive intensity set to rise with entrants launching and scaling up operations in the coming years, DCB Bank changed its branch expansion plan in October 2015. The initial change targeted doubling of number of branches in the coming 12 months. This, however, had significant implication on near-term RoE and, after strong pushback from investors, the bank announced its final modified branch expansion plan of doubling its branch network in two years. The table below compares key elements and targets for the strategy that the bank was earlier following and current plan.

Exhibit 1: DCB Bank’s branch expansion plans (old vs new) and specific targets


End-FY15 1H 2H 1H 2H 1H 2H 1H 2HPlan until 13 October 2015Balance sheet growth (CAGR)New branchesNo. of branches 154 ~300Cost to income 59% <55%RoA 1.32% 1.0% 1.30%RoE 14.5% 10.2% 14-15%Final plan (changed on 15 and 30 Oct'2015)Balance sheet growth (CAGR)New branchesNo. of branches 160 ~300Cost to income 58% <63% ~55%RoA 1.0%RoE 0.102 ~10% ~14%

22-26%150+

64-66%

22-26%25-30 25-30 25-30 25-30

FY16 FY17 FY18 FY19

NOT RATED Quick Insight Analysis Meeting Note News Impact

Stock Information Bloomberg Code: DCBB IN

CMP (Rs): 121

TP (Rs): NA

Mcap (Rs bn/US$ bn): 35/0.5



1M 3M 12M YTD

Absolute 4 23 (9) 44

Rel. to Sensex 3 16 (19) 36


Research Analysts

Ravi Singh Tel: +91 22 3043 3181 [email protected]

Pankaj Agarwal, CFA Tel: +91 22 3043 3206 [email protected]

Rahil Shah Tel: +91 22 3043 3217 [email protected]




AMBIT INSIGHTS


No other change in business strategy: Except for change in branch rollout targets, all elements of strategy remain unchanged. These key elements are – (1) doubling balance sheet in 36 to 42 months (implied asset CAGR of 22-26%); (2) focus on CASA, retail TD and NRI deposits; (3) concentrating on tier 2-6 locations; (4) diversified and secured lending; (5) maintaining the loan mix of mortgages (40-45%), MSME/SME (15-20%), corporate (~20%), agri banking (15-20%) and other retail (5-10%); and (6) cross-sell bancassurance, mutual funds, trade, forex and cash management to generate granular fee income.

Performance under new plan has tracked the management guidance

In three quarters since announcement of new plan, the bank has opened 45 new branches to reach a network of 205 branches. During this period loan book has grown at average growth rate of 25% YoY, with loan mix staying broadly unchanged (see exhibits below). Benefitting from faster fall in cost of funds (down 48bps YoY to 7.3%) and increase in credit-to-deposit ratio (up 650bps YoY to 85%), NIM has increased 24bps YoY to 4.1%. Thus, even as operating expenses grew by 24% YoY, on average, in last three quarters, cost-to-income ratio has averaged at 59%, broadly unchanged compared to that before the onset of the new plan. Asset quality has remained strong with stressed assets at 2% (vs 2.4% at end-1QFY16).

Exhibit 2: Loan mix and loan growth trends have been stable

Source: Company, Bloomberg, Ambit Capital research

Exhibit 3: Strong NIMs have supported cost-to-income so far


Calm waters hide hectic activity underneath Batch-wise branch opening for better productivity: While the branch expansion continues as per the stated plan and overall financial performance stays stable, the last three quarters saw intense activity in new branch opening, hiring, installing new infrastructure and streamlining processes and systems. Thus, to ensure branch expansion in a productive manner, the bank is opening 150-160 new branches in batches; 38 new branches were opened in 2HFY16 and bank is taking a breather for a quarter or two (just seven branches were opened in 1QFY17). The bunched up branch opening has proven to be more cost-effective and a quarter or two of slow opening allows the bank to address the teething issues arising from installation of a group of branches together. In this manner the bank is likely to open another 40-50 branches in 2HFY17 followed by a period of deceleration. The final push of 40-50 branches in FY18 will take the branch network to the targeted ~300 branches by Oct-Dec 2017.

New branches are performing broadly in line with expectation: Management indicates the performance of newly opened branches has largely tracked expectations and branch-specific targets set for these branches. New branches are tracked over a time frame of 3-4 years and are expected to break even in 18-22 months. Roughly half of the new branches are in rural and semi-urban areas in states such as Odisha, Madhya Pradesh, Rajasthan, Chhattisgarh and Maharashtra. The locations are selected in a manner that there are not more than 1 or 2 PSU banks present and

26%27%24%23%

28%

0%

5%

10%

15%

20%

25%

30%

0%

20%

40%

60%

80%

100%

120%

1QFY

16

2QFY

16

3QFY

16

4QFY

16

1QFY

16

Corproate

AIB

SME/MSME

CVs

Mortgages

Retail

Loan growth,RHS

3.8% 3.8% 4.0% 4.2% 4.1%

55.9%60.7% 59.4% 57.8% 60.9%

0%

10%

20%

30%

40%

50%

60%

70%

0%

1%

2%

3%

4%

5%

1QFY16 2QFY16 3QFY16 4QFY16 1QFY16

NIM, LHS Cost-to-income

In last three quarters, the bank has opened 45 branches with stable financial performance.

~150 new branches in 3 batches of 40-50 branches each with some breather in between.

New branches are tracking targets set for them.

AMBIT INSIGHTS


private sector banks are absent (a maximum of 1 such bank could be present). The branches continue to be opened in a cluster format, which allows better management of operational risk.

People issues are the biggest test: Hiring has been a key challenge during the branch network rollout. Typically, the new recruits are hired with prior work experience in banks, NBFCs, co-operative banks, FMCG and services sector (hospitality, travel agencies, telecom etc.). There is no specific preference for prior banking or NBFC experience as attrition level could be high for them. HR issues (recruitment, training and reward policies) attract the biggest focus from management because, as per the bank’s experience, almost all instances of branch not doing well can be attributed to people issues rather than those linked to location or the local economy. However, compared to many of its peers, absence of employee unions has helped DCB Bank in being flexible and innovative in its people-related policies.

Drivers of cost-to-income target of 55% by end-FY19 Can the bank reach 55% cost-to-income? After the bank achieves its target of ~300 branches by December 2017, management expects cost-to-income ratio to moderate from 64-66% during FY17 to 55% by end-FY19. While the bank’s steady performance on loan growth without mix change, margins and asset quality are well-appreciated, key investor pushback has been around achievability of 55% target cost-to-income ratio.

Do small-ticket lending and high employee base structurally hinder productivity? The bank has a highly retail-oriented business focus (retail/mortgage/MSME form 68% of loans) with lowering of ticket sizes (average ticket size of Rs4mn-5mn in mortgage/MSME) as the key element of risk management. Further, the bank operates at an employee-to-branch ratio of 21x vs 17-19x for new generation private sector banks and 8-11x for old private sector banks. Thus, the question arises whether a beefed-up staff base and small-ticket lending focus can allow productivity to improve to the targeted level.

Exhibit 4: DCB Bank has high employee-to-branch ratio


The distribution model is by design – should aid productivity gain

Our discussion with the management team suggests that while the employee-to-branch ratio looks high, the standard format branch employs not more than 6-8 employees. The additional employee count is attributed to centralized functions (e.g. credit or operations) and product teams (that are not linked to specific branch). Given that the bank, until 4 years ago was not allowed to open too many branches (under branch licensing regime by the RBI), the bank followed product-team based distribution of its products. The implication of this model for future cost-to-income is that at some stage in future the recruitment requirement for incremental branch-opening will fall from the current employee-to-branch ratio of ~21x.

23.121.4

19.4 18.917.4 17.3 16.7

10.89.4 8.6 8.4

0

5

10

15

20

25

IIB

DC

BB

HD

FCB

RBL

YES

AXS

B

ICIC

IBC

KVB FB

CU

BK SIB

People issues biggest test; absence of union helps the matter.

AMBIT INSIGHTS


Management confident of meeting cost-to-income target

Many cost items (e.g. technology) that are currently rising fast with accelerated branch expansion will also drop fast after the initial investments. Thus, as a function of consolidation of branch network after the current phase of branch opening and improving employee productivity, management expects it will be able to achieve its target of reaching 55% cost-to-income by end-FY19.

FY17 to mark bottom of RoE cycle With branch expansion plan being executed as per plan, trends on other fronts stay stable too. Despite the current strength in NIM (4.1% in 1QFY17), the bank maintains steady-state NIM expectation of 3.6-3.75%. Asset quality has been stable with no material change in underlying trends. The bank expects fee income to grow at 15-17% YoY at least. Even as the bank is now temporarily slowing branch expansion (as discussed above), associated costs and investment continue. Thus, FY17 is likely to mark the bottom for cost-to-income and RoE/RoE trends before they improve towards management targets for end-FY19 (RoE of 14% and cost-to-income of 55%).

Exhibit 5: DCB Bank trades at significant discount (1-year forward PB) to its other new-gen private sector bank peers*

Source: Company, Bloomberg, Ambit Capital research; *peer group consists of HDFC Bank, ICICI Bank, Axis Bank, Yes Bank and IndusInd Bank

Exhibit 6: The discount, which expanded after change in branch expansion plan, has begun to gradually narrow


0.6

1.0

1.4

1.8

2.2

2.6

3.0

Sep-

11

Feb-

12

Jul-

12

Dec

-12

May

-…

Oct

-13

Mar

-14

Aug

-14

Jan-

15

Jun-

15

Nov

-15

Apr

-16

Sep-

16

DCBB New Pvt.

1.7x

2.6x

10%

20%

30%

40%

50%

60%

Sep-

11

Feb-

12

Jul-

12

Dec

-12

May

-13

Oct

-13

Mar

-14

Aug

-14

Jan-

15

Jun-

15

Nov

-15

Apr

-16

Sep-

16

Discount to new pvt. Avg. Avg. discount

37%

43%

Cost-to-income to moderate with consolidation of branch network, after current phase of branch expansion, and with improving employee productivity.

AMBIT INSIGHTS


Exhibit 7: DCB Bank trades at a 35-40% discount to new private sector banks and small finance banks

Mcap Price P/B at CMP P/E at CMP EPS CAGR ROA ROE

US$bn Rs FY17E FY18E FY17E FY18E FY16-18E FY17E FY18E FY17E FY18E

DCB Bank 0.5 119 1.74 1.54 17.5 14.1 19% 0.91% 0.93% 10.3% 11.4%

New Private

HDFC Bank 48.2 1,275 3.84 3.30 21.7 18.0 21% 1.88% 1.87% 18.9% 19.8%

ICICI Bank 23.6 271 1.13 0.83 11.2 8.3 13% 1.02% 1.19% 10.3% 12.9%

Kotak Mahindra Bank 22.2 809 3.99 3.54 32.8 27.2 26% 1.43% 1.47% 12.8% 13.8%

Axis Bank 21.3 598 2.39 2.08 18.3 13.3 14% 1.36% 1.57% 13.8% 16.7%

IndusInd Bank 10.6 1,188 3.56 3.06 23.7 18.6 29% 1.90% 1.95% 16.1% 17.7%

Yes Bank 7.7 1,227 2.90 2.46 16.9 13.5 23% 1.75% 1.78% 19.3% 19.7%

Average 2.97 2.55 20.8 16.5 21% 1.56% 1.64% 15.2% 16.8%

Small Finance Banks

Equitas Holdings 0.9 178 2.61 2.30 30.7 21.7 2.80% 11.5%

Ujjivan Financial 0.7 423 2.68 2.50 19.3 21.0 2.47% 12.4%

Average 2.65 2.40 25.0 21.4 2.63% 12.0%

Old Private

Federal Bank 1.9 73 1.44 1.33 15.4 11.7 50% 0.83% 0.96% 9.7% 11.8%

Karur Vysya bank 0.9 474 1.17 1.07 10.6 7.8 15% 0.88% 1.05% 11.5% 14.4%

South Indian Bank 0.5 23.6 0.80 0.73 8.3 6.2 24% 0.57% 0.68% 9.9% 12.3%

City Union Bank 1.2 135 2.34 2.03 15.8 12.4 21% 1.50% 1.59% 15.7% 17.5%

Average 1.44 1.29 12.5 9.5 27% 0.95% 1.07% 11.7% 14.0%

Source: Company, Ambit Capital research; For DCB Bank, Yes Bank, Equitas and Ujjivan, we have used Bloomberg consensus estimates.

AMBIT INSIGHTS


Balance sheet (standalone)

Year to March (Rs mn) FY12 FY13 FY14 FY15 FY16

Networth 8,036 9,463 10,984 15,340 17,404

Deposits 63,356 83,638 103,252 126,091 149,260

Borrowings 11,235 15,256 8,602 11,638 11,479

Other Liabilities 3,593 3,893 5,868 7,740 12,540

Total Liabilities 86,219 112,250 128,705 160,809 190,683

Cash & Balances with RBI & Banks 4,566 8,833 6,896 7,192 8,916

Investments 20,992 29,884 32,308 39,621 43,333

Advances 52,844 65,861 81,402 104,651 129,214

Other Assets 7,817 7,673 8,100 9,345 9,220

Total Assets 86,219 112,250 128,705 160,809 190,683


Income statement (standalone)


Interest Income 7,170 9,161 11,283 14,224 16,985

Interest Expense 4,893 6,317 7,599 9,142 10,790

Net Interest Income 2,277 2,844 3,684 5,082 6,195

Total Non-Interest Income 1,027 1,170 1,387 1,658 2,205

Total Income 3,304 4,014 5,071 6,741 8,400

Total Operating Expenses 2,466 2,753 3,191 3,965 4,909

Employees expenses 1,246 1,379 1,571 1,960 2,451

Other Operating Expenses 1,220 1,374 1,620 2,005 2,458

Pre Provisioning Profits 838 1,261 1,880 2,776 3,490

Provisions 287 240 348 694 879

PBT 551 1,021 1,532 2,082 2,611

Tax 0 0 18 168 666

PAT 551 1,021 1,514 1,913 1,945


Ratio analysis (standalone)


Credit-Deposit (%) 83.4% 78.7% 78.8% 83.0% 86.6%

CASA ratio (%) 32.1% 27.2% 25.0% 23.4% 23.4%

Cost/Income ratio (%) 74.6% 68.6% 62.9% 58.8% 58.4%

Gross NPA (Rs mn) 2,418 2,150 1,385 1,861 1,974

Gross NPA (%) 4.67% 3.18% 1.69% 1.76% 1.52%

Net NPA (Rs mn) 302 491 740 1,057 975

Net NPA (%) 0.57% 0.75% 0.91% 1.01% 0.75%

Provision coverage (%) 88.2% 77.1% 46.5% 43.2% 50.6%

NIMs (%) 3.15% 3.11% 3.27% 3.74% 3.72%

Tier-1 capital ratio (%) 13.8% 12.6% 12.9% 14.2% 12.8%


AMBIT INSIGHTS


Du-pont analysis (standalone)

Year to March FY12 FY13 FY14 FY15 FY16

NII / Assets (%) 2.9% 2.9% 3.1% 3.5% 3.5%

Other income / Assets (%) 1.3% 1.2% 1.2% 1.1% 1.3%

Total Income / Assets (%) 4.1% 4.0% 4.2% 4.7% 4.8%

Cost to Assets (%) 3.1% 2.8% 2.6% 2.7% 2.8%

PPP / Assets (%) 1.1% 1.3% 1.6% 1.9% 2.0%

Provisions / Assets (%) 0.4% 0.2% 0.3% 0.5% 0.5%

PBT / Assets (%) 0.7% 1.0% 1.3% 1.4% 1.5%

Tax Rate (%) 0.0% 0.0% 1.2% 8.1% 25.5%

ROA (%) 0.69% 1.03% 1.26% 1.32% 1.11%

Leverage 11.7 11.3 11.8 11.0 10.7

ROE (%) 8.1% 11.7% 14.8% 14.5% 11.9%


Valuation parameters (standalone)

Year to March FY12 FY13 FY14 FY15 FY16

EPS (Rs) 2.3 4.1 6.0 6.8 6.8

EPS growth (%) 114% 78% 48% 12% 1%

BVPS (Rs) 33.4 37.8 43.9 54.4 61.2

P/E (x) 53.0 29.7 20.1 17.9 17.8

P/BV (x) 3.64 3.21 2.77 2.23 1.98


AMBIT INSIGHTS


Parag Milk Foods Annual Report analysis We analysed Parag Milk Foods (PMF) first Annual Report after its primary issue earlier this year. The takeaways: a) sales growth of value-added products seems to have slowed materially YoY in FY16; growth was driven by higher sales of pouch milk and, possibly, ghee; b) average daily milk procurement marginally declined YoY. Instead of procuring more milk, the company may have purchased butter from the open market to make ghee; c) raw milk cost fell 14% YoY, driving ~200bps gross margin expansion. However, over the last three months, raw milk cost increased by ~20% and could impact margins in the coming quarters. PMF scores lower than Hatsun Agro and Heritage Foods on our dairy competitive advantage framework (Click here for detailed note) due to slow ramp-up of direct milk procurement from outside Pune and focus on value-added products.

Continued focus on new product launches and brand creation

PMF’s first Annual Report post its IPO clearly highlights focus on increasing its presence in the value-added dairy products category. In FY16, the company launched several new products as highlighted in the exhibit below.

PMF launched several new products over the last three years

Apr'13 Consumer packs of mozzarella cheese

May'13 Yogurt in three new flavours of saffron, pink guava and vanilla

Jun'13 Topp (flavoured milk) up in four flavours

Jul'13 Cheese spread in six Flavours

Oct'13 Cheezlets, Vital milk in all markets

Feb'14 New flavours in Topp up of pistachio and butterscotch

Apr'14 Cheese sandwich slices

Jul'14 Cheese toppings for pizzas

Oct'14 Buttermilk in UHT

Nov'14 Fresh cream in UHT

Dec'14 Spiced buttermilk in Fino pack

Feb'15 Whey proteins

Mar'15 Sachet packs of ghee

Apr'15 Buttermilk in southern spices variant

Oct'15 Go Badam Milk

Nov'15 Go Almette Creamed Cottage Cheese in two flavours

Nov'15 Go Chutney cheese slices


Exhibit 1: PMF continued to spend on advertising to build its value-added product brands

Source: Company

0.5%

0.7%

0.9%

1.1%

1.3%

50

100

150

200

FY12 FY13 FY14 FY15 FY16

Brand spending (Rs mn) Brand spends as % of Sales (RHS)

NOT RATED Quick Insight Analysis Meeting Note News Impact

Stock Information Bloomberg Code: PARAG IN

CMP (Rs): 3332

TP (Rs): NA

Mcap (Rs bn/US$ mn): 28/419



1M 3M 12M YTD

Absolute 2 37 NA NA

Rel. to Sensex 1 30 NA NA


Research Analysts

Ritesh Vaidya, CFA

Tel: +91 22 3034 3246

[email protected]

Rakshit Ranjan, CFA Tel: +91 22 3043 3201 [email protected]

Dhiraj Mistry, CFA Tel: +91 22 3043 3264

[email protected]




http://reports.ambitcapital.com/reports/Ambit_ParagMilkFoodsPreIPONote_RichlypricedB2Cdairyplay_02May2016.pdf

AMBIT INSIGHTS


Sales breakdown suggests value-added sales growth slowed in FY16

PMF has reported that the proportion of sales of value-added products increased from 58% in FY15 to 67% in FY16. PMF includes any product other than liquid milk and Skimmed Milk Powder (SMP) in the value-added basket. Even ghee, which is a low-margin, commodity-like product, is included in value-added sales. As highlighted below, excluding ghee, the rest of the value-added products in PMF’s portfolio saw a slowdown in growth during FY16. PMF’s overall sales for FY16 grew by 15% YoY. We believe this growth was driven by higher sales of liquid milk and ghee. Raw milk prices were down ~14% YoY for PMF in FY16. The lower milk prices allowed PMF to be competitive in the pouch milk market by offering higher margins to distributors and freebies like cookies to consumers. As a result, pouch milk sales grew by ~29% YoY in FY16.

Sales of manufactured milk products, which comprise SMP, ghee, butter and other value-added products, grew by only 4% YoY. We believe sales were impacted partially by lower SMP sales and also due to slowdown in sales growth of value-added products like cheese and UHT/flavoured milk.

Sales of traded goods jumped 162% YoY to represent 8% of total sales from 4% in FY15. We believe sales in this segment were higher due to higher ghee sales, which the company produced by converting butter procured from third parties. Excluding this contribution from ghee to overall sales, the rest of the value-added product portfolio appears to have witnessed a slowdown in growth during FY16. Hence, we believe overall sales growth of 15% was mainly driven by higher liquid milk and ghee sales. Similar trends in sales growth was witnessed in 1QFY17 as well.

We believe higher sales of pouch milk instead of value-added products isn’t the best utilisation of PMF’s assets given that the company has done significant capex at both its plants in Manchar and Palamaner in creating capacity for manufacturing value-added products.

Exhibit 2: Sales of value-added products seem to have slowed down in FY16

FY12 FY13 FY14 FY15 FY16 Comments

Sale of Products 8,758 8,949 10,387 13,782 15,807 Sales growth was mainly driven by higher sales of pouch milk and possibly ghee YoY% 34% 2% 16% 33% 15%

Manufactured Goods Fresh Milk 1,798 2,006 2,307 2,628 3,387 Higher distributor margin and consumer promotions

drove pouch milk sales YoY% 13% 12% 15% 14% 29%

Milk Products 6,942 6,857 7,286 10,662 11,128 Sales growth was impacted possibly due to lower SMP sales volume and realisation and also due to slow-down in growth of value added product sales YoY% 44% -1% 6% 46% 4%

Total manufactured goods sales 8,740 8,863 9,593 13,290 14,516

YoY% 36% 1% 8% 39% 9% Traded Goods Fresh Milk - 13 156 266 65 Milk Products 18 73 638 226 1,226 These we believe are significantly high due to

production of ghee by buying butter from open market Total traded goods sales 18 86 794 492 1,291 YoY% -84% 382% 824% -38% 162% Source: Company, Ambit Capital research

Milk procurement was marginally lower YoY

Average daily milk procurement for PMF was marginally down YoY to 1.04mn litres per day (lpd) vs 1.05mn lpd in FY15. PMF’s Annual Report suggests that milk procurement was affected by draught conditions in rural India. However, milk procurement should steadily increase to improve utilisation of its dairy plant at Palamaner in Andhra Pradesh. Currently, the plant operates at ~50% utilisation.

AMBIT INSIGHTS


Exhibit 3: Average daily milk procurement was marginally lower YoY


PMF seems to have procured more butter instead of milk

As shown in the exhibit below, purchase of traded goods increased by ~3x YoY for PMF. We believe this represents purchase of butter from the open market to convert into ghee. While the YoY increase in milk procurement would have been better, we believe PMF seems to have instead purchased butter due to the slow ramp-up in its direct milk procurement.

Exhibit 4: Purchase of traded goods (mostly butter) grew ~3x YoY to ~11% of total raw material consumed


Raw milk cost was down 14% YoY, driving gross margin expansion

According to our estimates, raw milk costs for FY16 were down 14% YoY to Rs20.6/litre vs Rs23.9/litre in FY15. We believe lower raw milk costs helped gross margin expansion of ~200bps YoY. Lower raw milk costs drove gross margin expansion of ~425bps YoY in 1QFY17 as well. However, raw milk costs have risen to Rs25/litre (+20% YoY) which could impact gross margin expansion in the coming quarters.

0.85

0.77

1.05 1.04

0.60

0.70

0.80

0.90

1.00

1.10

FY13 FY14 FY15 FY16

Daily Milk procurement (mn litres per day)

0%

2%

4%

6%

8%

10%

12%

-

400

800

1,200

1,600


Purchase of traded goods (Rs mn)

Purchase of traded goods as % of Total raw material consumed (RHS)

AMBIT INSIGHTS


Exhibit 5: Raw milk procurement costs were down 14% YoY, helping gross margin expansion


Account payables remain high; cash conversion deteriorates marginally

As shown in the exhibit below, PMF has the highest creditor days (~56 days) amongst peers. While high creditor days are good for any business, in case of a dairy business which directly procures milk from farmers, we find it to be very high. Dairy companies ideally have only 15-20 days of creditor outstanding as ~80% of the raw material is milk and, hence, farmers are its biggest creditors. As an industry practice, farmers are paid within 10 days of milk procurement. Hence, creditor days are usually low for dairy companies. We believe investors should seek more clarity on PMF’s mode of milk procurement.

Exhibit 6: Parag Milk Foods has the highest creditor days amongst peers Creditors days FY12 FY13 FY14 FY15 FY16

Hatsun Agro 15 16 17 17 19

Prabhat Dairy 28 20 19 25 23

Parag Milk Foods 38 47 47 55 56

Kwality Dairy 4 6 10 7 3

Heritage Foods 17 18 17 16 16


Cash conversion (CFO/EBITDA) for PMF for FY16 deteriorated marginally from 64% in FY15 to 49% in FY16 due to an increase in inventory. However, working capital as a percentage of sales reduced from 21% in FY15 to 18% in FY16. We believe working capital requirements will remain high for PMF as it would have to offer credit in the sales channel to push sales of its value-added products. PMF generated FCF of ~Rs275mn for FY16, down YoY due to lower CFO generation.

Exhibit 7: Cash conversion deteriorated marginally for PMF


Exhibit 8: FCF generation was lower YoY due to lower CFO


25%

23%

26%

28%

18.3

23.8 23.9

20.6

15

17

19

21

23

25

20%

22%

24%

26%

28%

30%

FY13 FY14 FY15 FY16

Gross Margin (%) Avg milk cost (Rs/ltr), RHS

47%

34%

58%64%

49%

0%

5%

10%

15%

20%

25%

30%

35%

0%

25%

50%

75%

100%


CFO/EBITDA WC as % of sales (RHS)

-600

-400

-200

0

200

400

600


FCF (in Rs mn)

AMBIT INSIGHTS


Other key metrics of Parag Milk Foods

Exhibit 9: PMF revenues have grown at 16% CAGR over FY12-16


Exhibit 10: EBITDA margin expanded in FY16 due to GM expansion


Exhibit 11: PMF’s EPS has grown at 33% CAGR over FY12-16


Exhibit 12: However, RoCE remains low at ~13%


Applaud the entrepreneurship but cautious of PMF’s approach to capital allocation

“In 2010, when India was consuming less than an aggregate 40 tonnes per day (TPD) of cheese, Parag Milk Foods made a game-changing decision. The Company selected to invest 40 TPD in cheese making capacity from scratch. The single largest cheese-making capacity in India by any company. Equivalent to the consumption of the entire Indian market. Observers said this was suicidal. Financial analysts predicted disaster. Parag thought otherwise.” – Parag Milk Foods Annual report 2015-16

Setting up the largest cheese facility in India in FY10 was an ambitious move by PMF. Commissioning and ramping up of the cheese facility resulted in significant build-up of debt (FY12 debt-equity at ~7:1). After several rounds of equity infusion and an IPO debt-equity came down to 1:1. RoCE remains below 15%. While no major capex is planned by PMF in the near future, we remain cautious of PMF’s capital allocation given its track record of significant build-up of debt.

20%

22%

24%

26%

28%

30%

5,000

7,000

9,000

11,000

13,000

15,000

17,000

19,000


Revenue (in Rs mn) Gross margin (RHS)

5%

6%

7%

8%

9%

10%

500

700

900

1,100

1,300

1,500

1,700


EBITDA (in Rs mn) EBITDA margin

0%

1%

2%

3%

4%

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0


EPS PAT margin (RHS)

10%

11%

12%

13%

14%

2.5

2.7

2.9

3.1

3.3

3.5

3.7


Gross asset turnover Post tax ROCE (RHS)

AMBIT INSIGHTS


PMF scores low on our dairy competitive advantage framework

In our recently published dairy thematic (Click here for detailed note), we defined a dairy competitive advantage framework. We believe dairy companies which have shown ability to grow direct milk procurement network outside their home states/districts and companies focused on fresh dairy products instead of value-added dairy products like cheese and UHT/flavoured milk are better positioned to deliver sustainable growth over the longer term. Based on this framework, PMF scores lower than Hatsun Agro and Heritage Foods due to the slow ramp-up in its direct milk procurement in Andhra Pradesh and focus on value-added dairy products like cheese, UHT milk and whey.

Exhibit 13: Hatsun Agro is best placed for delivering profitable growth ahead of the market

Company Milk Procurement Marketing Financial performance Overall

Hatsun Agro

Heritage Foods

Parag Milk Foods

Prabhat Dairy

Kwality Dairy

Source: Company, Ambit Capital research. Note: - Strong; - Relatively Strong; - Average

Valuation

Due to the different capital structures of dairy companies, we believe EV/EBITDA is the better valuation metric. Fresh dairy products are not yet commoditized in India and have significant scope of growth through penetration and shift from unorganized to organized consumption. The profitability of these products is comparable to value-added dairy products. Hence, given the growth prospects, profitability and high return of the fresh dairy segment, we believe fresh dairy companies can trade at a premium to value-added dairy companies. Hatsun Agro is the best play on the fresh dairy products segment in India.

Exhibit 14: Relative valuations of Indian dairy companies

Company name CMP (Rs) Mcap (Rs mn)

Rev CAGR

EBITDA CAGR

EPS CAGR PE EV/EBITDA RoE RoCE Working Capital

% of Sales CFO/EBITDA

FY13-16 FY13-16 FY13-16 FY16 FY16 FY16 FY16 FY16 3yrAvg

Hatsun Agro 334 52,300 17% 27% 11% 84.0 18.3 27% 13% 2% 82%

Prabhat Dairy 91 9,035 22% 18% 21% 36.2 8.7 5% 7% 27% 11%

Parag Milk Foods 335 26,462 21% 20% 29% 49.9 20.5 19% 13% 18% 57%

Kwality Dairy 121 27,059 18% 20% 17% 16.3 10.9 23% 14% 28% 4%

Heritage Foods 765 16,863 14% 8% 2% 31.2 14.0 26% 20% 0% 82%

Median 18% 20% 17% 36.2 14.0 23% 13% 18% 57%


Questions for PMF’s management

PMF should provide further breakdown of its value-added product portfolio in order to understand growth in products like cheese, Flavoured/UHT milk, etc.

Why does PMF have one of the highest creditor days amongst its peers?

While disclosure for related-party transactions is given, what is the update on transactions with entities in which PMF’s employees are stake holders? As per the Red Herring Prospectus filed during its IPO, PMF procured ~20% of its milk requirement from these related parties.

http://reports.ambitcapital.com/reports/Ambit_ParagMilkFoodsPreIPONote_RichlypricedB2Cdairyplay_02May2016.pdf

AMBIT INSIGHTS


Balance sheet


Net Worth 552 798 944 1,239 3,619

Total Debt 4,125 4,908 5,561 4,198 3,607

Deferred Tax Liability 100 75 38 60 110

Current Liabilities 1,247 1,121 1,659 3,743 2,575

Total Liabilities 6,024 6,901 8,202 9,239 9,910

Fixed Assets 2,532 2,496 2,790 3,194 3,726

Investments 0 3 3 3 0

Current Assets 3,492 4,403 5,409 6,043 6,184

Total Assets 6,024 6,901 8,202 9,239 9,910


Income statement


Net Income 8,960 9,264 10,870 14,441 16,451

% Growth 36% 3% 17% 33% 14%

Gross Profit 1,954 2,357 2,512 3,825 4,676

EBITDA 785 848 811 1,072 1,476

PBIT 568 608 548 812 1,158

PBT 168 204 109 343 668

PAT 152 220 146 322 473

EPS 2 3 2 5 7

EPS Growth 2317% 45% -34% 121% 47%


Cash flow statement


PBT 168 204 109 353 668

Non-cash adjustments 649 715 745 780 965

Change in working capital (447) (630) (386) (442) (918)

Tax paid (30) (129) (5) (6) (136)

Cash flow from operations 339 160 463 685 578

Cash flow from investments (695) (570) (592) (248) (316)

Cash flow from financing 360 408 145 (423) (264)

Change in cash 4 (2) 16 14 (3)

Free cash flow (365) (400) (122) 434 275


Ratio analysis / Valuation parameters


Gross margin (%) 21.8% 25.4% 23.1% 26.5% 28.4%

EBITDA margin (%) 8.8% 9.2% 7.5% 7.4% 9.0%

Net profit margin (%) 1.7% 2.4% 1.3% 2.2% 2.9%

Net debt: equity (x) 7.5 6.1 5.9 3.4 1.0

RoCE (%) 12.3% 12.6% 12.0% 12.8% 13.0%

RoE (%) 31.8% 32.7% 16.7% 29.5% 19.5%

P/E (x) 118 76 66

Price/Sales (x) 2.6 2.5 2.2 1.6 1.4

EV/EBITDA (x) 35.0 33.3 35.6 25.7 18.2


AMBIT INSIGHTS


Tata Power (TPW IN, BUY)


DCB Bank Ltd (DCBB IN, NOT RATED)


0

20

40

60

80

100

120

Aug

-13

Oct

-13

Dec

-13

Feb-

14

Apr

-14

Jun-

14

Aug

-14

Oct

-14

Dec

-14

Feb-

15

Apr

-15

Jun-

15

Aug

-15

Oct

-15

Dec

-15

Feb-

16

Apr

-16

Jun-

16

TATA POWER CO LTD

020406080

100120140160

Aug

-13

Oct

-13

Dec

-13

Feb-

14

Apr

-14

Jun-

14

Aug

-14

Oct

-14

Dec

-14

Feb-

15

Apr

-15

Jun-

15

Aug

-15

Oct

-15

Dec

-15

Feb-

16

Apr

-16

Jun-

16

DCB Bank Ltd

AMBIT INSIGHTS


Institutional Equities Team Saurabh Mukherjea, CFA CEO, Institutional Equities (022) 30433174 [email protected]

Research Analysts

Name Industry Sectors Desk-Phone E-mail

Nitin Bhasin - Head of Research E&C / Infra / Cement / Industrials (022) 30433241 [email protected]

Aadesh Mehta, CFA Banking / Financial Services (022) 30433239 [email protected]

Abhishek Ranganathan, CFA Retail (022) 30433085 [email protected]

Achint Bhagat, CFA Cement / Home Building (022) 30433178 [email protected]

Anuj Bansal Mid-caps (022) 30433122 [email protected]

Ashvin Shetty, CFA Automobile (022) 30433285 [email protected]

Bhargav Buddhadev Power Utilities / Capital Goods (022) 30433252 [email protected]

Deepesh Agarwal, CFA Power Utilities / Capital Goods (022) 30433275 [email protected]

Dhiraj Mistry, CFA Consumer (022) 30433264 [email protected]

Gaurav Khandelwal, CFA Automobile (022) 30433132 [email protected] Girisha Saraf Mid-caps / Small-caps (022) 30433211 [email protected]

Karan Khanna, CFA Strategy (022) 30433251 [email protected]

Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 [email protected]

Paresh Dave, CFA Healthcare (022) 30433212 [email protected]

Parita Ashar, CFA Metals & Mining / Aviation (022) 30433223 [email protected]

Prashant Mittal, CFA Strategy / Derivatives (022) 30433218 [email protected]

Rahil Shah Banking / Financial Services (022) 30433217 [email protected]

Rakshit Ranjan, CFA Consumer (022) 30433201 [email protected]

Ravi Singh Banking / Financial Services (022) 30433181 [email protected]

Ritesh Gupta, CFA Oil & Gas / Chemicals / Agri Inputs (022) 30433242 [email protected]

Ritesh Vaidya, CFA Consumer (022) 30433246 [email protected]

Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 [email protected]

Ritu Modi Automobile (022) 30433292 [email protected]

Sagar Rastogi Technology (022) 30433291 [email protected]

Sudheer Guntupalli Technology (022) 30433203 [email protected]

Sumit Shekhar Economy / Strategy (022) 30433229 [email protected]

Utsav Mehta, CFA E&C / Industrials (022) 30433209 [email protected]

Vivekanand Subbaraman, CFA Media (022) 30433261 [email protected]

Sales

Name Regions Desk-Phone E-mail

Sarojini Ramachandran - Head of Sales UK +44 (0) 20 7886 2740 [email protected]

Dharmen Shah India / Asia (022) 30433289 [email protected]

Dipti Mehta India / USA (022) 30433053 [email protected]

Hitakshi Mehra India (022) 30433204 [email protected]

Krishnan V India / Asia (022) 30433295 [email protected]

Nityam Shah, CFA USA / Europe (022) 30433259 [email protected]

Parees Purohit, CFA UK / USA (022) 30433169 [email protected]

Praveena Pattabiraman India / Asia (022) 30433268 [email protected]

Shaleen Silori India (022) 30433256 [email protected]

Vishal Mehta India / Asia (022) 30433198 [email protected]

Singapore

Pramod Gubbi, CFA – Director Singapore +65 8606 6476 [email protected]

Shashank Abhisheik Singapore +65 6536 1935 [email protected]

USA / Canada

Ravilochan Pola - CEO Americas +1(646) 361 3107 [email protected]

Production

Sajid Merchant Production (022) 30433247 [email protected]

Sharoz G Hussain Production (022) 30433183 [email protected]

Jestin George Editor (022) 30433272 [email protected]

Nikhil Pillai Database (022) 30433265 [email protected]















































AMBIT INSIGHTS


Explanation of Investment Rating

Investment Rating Expected return (over 12-month)

BUY >10%

SELL <10%

NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events

NOT RATED We do not have any forward looking estimates, valuation or recommendation for the stock POSITIVE We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs

NEGATIVE We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs

Disclaimer This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Ambit Capital. AMBIT Capital Research is disseminated and available primarily electronically, and, in some cases, in printed form.

Additional information on recommended securities is available on request.

Disclaimer

1. AMBIT Capital Private Limited (“AMBIT Capital”) and its affiliates are a full service, integrated investment banking, investment advisory and brokerage group. AMBIT Capital is a Stock Broker, Portfolio Manager and Depository Participant registered with Securities and Exchange Board of India Limited (SEBI) and is regulated by SEBI

2. AMBIT Capital makes best endeavours to ensure that the research analyst(s) use current, reliable, comprehensive information and obtain such information from sources which the analyst(s) believes to be reliable. However, such information has not been independently verified by AMBIT Capital and/or the analyst(s) and no representation or warranty, express or implied, is made as to the accuracy or completeness of any information obtained from third parties. The information, opinions, views expressed in this Research Report are those of the research analyst as at the date of this Research Report which are subject to change and do not represent to be an authority on the subject. AMBIT Capital may or may not subscribe to any and/ or all the views expressed herein.

3. This Research Report should be read and relied upon at the sole discretion and risk of the recipient. If you are dissatisfied with the contents of this complimentary Research Report or with the terms of this Disclaimer, your sole and exclusive remedy is to stop using this Research Report and AMBIT Capital or its affiliates shall not be responsible and/ or liable for any direct/consequential loss howsoever directly or indirectly, from any use of this Research Report.

4. If this Research Report is received by any client of AMBIT Capital or its affiliate, the relationship of AMBIT Capital/its affiliate with such client will continue to be governed by the terms and conditions in place between AMBIT Capital/ such affiliate and the client.

5. This Research Report is issued for information only and the 'Buy', 'Sell', or ‘Other Recommendation’ made in this Research Report such should not be construed as an investment advice to any recipient to acquire, subscribe, purchase, sell, dispose of, retain any securities and should not be intended or treated as a substitute for necessary review or validation or any professional advice. Recipients should consider this Research Report as only a single factor in making any investment decisions. This Research Report is not an offer to sell or the solicitation of an offer to purchase or subscribe for any investment or as an official endorsement of any investment.

6. This Research Report is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied in whole or in part, for any purpose. Neither this Research Report nor any copy of it may be taken or transmitted or distributed, directly or indirectly within India or into any other country including United States (to US Persons), Canada or Japan or to any resident thereof. The distribution of this Research Report in other jurisdictions may be strictly restricted and/ or prohibited by law or contract, and persons into whose possession this Research Report comes should inform themselves about such restriction and/ or prohibition, and observe any such restrictions and/ or prohibition.

7. Ambit Capital Private Limited is registered as a Research Entity under the SEBI (Research Analysts) Regulations, 2014. SEBI Reg.No.- INH000000313.

Conflict of Interests

8. In the normal course of AMBIT Capital’s business circumstances may arise that could result in the interests of AMBIT Capital conflicting with the interests of clients or one client’s interests conflicting with the interest of another client. AMBIT Capital makes best efforts to ensure that conflicts are identified and managed and that clients’ interests are protected. AMBIT Capital has policies and procedures in place to control the flow and use of non-public, price sensitive information and employees’ personal account trading. Where appropriate and reasonably achievable, AMBIT Capital segregates the activities of staff working in areas where conflicts of interest may arise. However, clients/potential clients of AMBIT Capital should be aware of these possible conflicts of interests and should make informed decisions in relation to AMBIT Capital’s services.

9. AMBIT Capital and/or its affiliates may from time to time have or solicit investment banking, investment advisory and other business relationships with companies covered in this Research Report and may receive compensation for the same.

Additional Disclaimer for U.S. Persons

10. The research report is solely a product of AMBIT Capital 11. AMBIT Capital is the employer of the research analyst(s) who has prepared the research report 12. Any subsequent transactions in securities discussed in the research reports should be effected through Enclave Capital LLC. (“Enclave”). 13. Enclave does not accept or receive any compensation of any kind for the dissemination of the AMBIT Capital research reports. 14. The research analyst(s) preparing the email / Research Report/ attachment is resident outside the United States and is/are not associated persons of any U.S. regulated broker-dealer and that

therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account.

15. This report is prepared, approved, published and distributed by the Ambit Capital located outside of the United States (a non-US Group Company”). This report is distributed in the U.S.by Enclave Capital LLC, a U.S. registered broker dealer, on behalf of Ambit Capital only to major U.S. institutional investors (as defined in Rule 15a-6 under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”)) pursuant to the exemption in Rule 15a-6 and any transaction effected by a U.S. customer in the securities described in this report must be effected through Enclave Capital LLC (19 West 44th Street, suite 1700, New York, NY 10036). In order to receive any additional information about or to effect a transaction in any security or financial instrument mentioned herein, please contact a registered representative of Enclave Capital LLC., by phone at 646 361 3107.

16. As of the publication of this report Enclave Capital LLC, does not make a market in the subject securities. 17. This document does not constitute an offer of, or an invitation by or on behalf of Ambit Capital or its affiliates or any other company to any person, to buy or sell any security. The information

contained herein has been obtained from published information and other sources, which Ambit Capital or its Affiliates consider to be reliable. None of Ambit Capital accepts any liability or responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this document. Emerging securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this document, you agree to be bound by all the foregoing provisions.

Additional Disclaimer for Canadian Persons 18. AMBIT Capital is not registered in the Province of Ontario and /or Province of Québec to trade in securities and/or to provide advice with respect to securities.

19. AMBIT Capital's head office or principal place of business is located in India. 20. All or substantially all of AMBIT Capital's assets may be situated outside of Canada. 21. It may be difficult for enforcing legal rights against AMBIT Capital because of the above. 22. Name and address of AMBIT Capital's agent for service of process in the Province of Ontario is: Torys LLP, 79 Wellington St. W., 30th Floor, Box 270, TD South Tower, Toronto, Ontario M5K 1N2

Canada. 23. Name and address of AMBIT Capital's agent for service of process in the Province of Montréal is Torys Law Firm LLP, 1 Place Ville Marie, Suite 1919 Montréal, Québec H3B 2C3 Canada.

Additional Disclaimer for Singapore Persons

24. This Report is prepared and distributed by Ambit Capital Private Limited and distributed as per the approved arrangement under Paragraph 9 of Third Schedule of Securities and Futures Act (CAP 289) and Paragraph 11 of the First Schedule to the Financial Advisors Act (CAP 110) provided to Ambit Singapore Pte. Limited by Monetary Authority of Singapore.

25. This Report is only available to persons in Singapore who are institutional investors (as defined in section 4A of the Securities and Futures Act (Cap. 289) of Singapore (the “SFA”).” Accordingly, if a Singapore Person is not or ceases to be such an institutional investor, such Singapore Person must immediately discontinue any use of this Report and inform Ambit Singapore Pte. Limited.

AMBIT INSIGHTS


Additional Disclaimer for UK Persons

26. All of the recommendations and views about the securities and companies in this report accurately reflect the personal views of the research analyst named on the cover. No part of this research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst in this research report. This report may not be reproduced, redistributed or copied in whole or in part for any purpose.

27. This report is a marketing communication and has been prepared by Ambit Capital Pvt Ltd of Mumbai, India (“Ambit”) and has been approved in the UK by Ambit Capital (UK) Limited (“ACUK”) solely for the purposes of section 21 of the Financial Services and Markets Act 2000. Ambit is regulated by the Securities and Exchange Board of India and is registered as a Research Entity under the SEBI (Research Analysts) Regulations, 2014. ACUK is regulated by the UK Financial Services Authority and has registered office at C/o Panmure Gordon & Co PL, One New Change, London, EC4M9AF.

28. In the UK, this report is directed at and is for distribution only to persons who (i) fall within Article 19(1) (persons who have professional experience in matters relating to investments) or Article 49(2)(a) to (d) (high net worth companies, unincorporated associations etc) of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 (as amended) or (ii) are professional customers or eligible counterparties of ACUK (all such persons together being referred to as "relevant persons"). This report must not be acted on or relied upon by persons in the UK who are not relevant persons.

29. Neither Ambit nor ACUK is a US registered broker-dealer. Transactions undertaken in the US in any security mentioned herein must be effected through a US-registered broker-dealer, in conformity with SEC Rule 15a-6.

30. Neither this report nor any copy or part thereof may be distributed in any other jurisdictions where its distribution may be restricted by law and persons into whose possession this report comes should inform themselves about, and observe, any such restrictions. Distribution of this report in any such other jurisdictions may constitute a violation of UK or US securities laws, or the law of any such other jurisdictions.

31. This report does not constitute an offer or solicitation to buy or sell any securities referred to herein. It should not be so construed, nor should it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. The information in this report, or on which this report is based, has been obtained from publicly available sources that Ambit believes to be reliable and accurate. However, it has not been prepared in accordance with legal requirements designed to promote the independence of investment research. It has also not been independently verified and no representation or warranty, express or implied, is made as to the accuracy or completeness of any information obtained from third parties.

32. The information or opinions are provided as at the date of this report and are subject to change without notice. The information and opinions provided in this report take no account of the investors’ individual circumstances and should not be taken as specific advice on the merits of any investment decision. Investors should consider this report as only a single factor in making any investment decisions. Further information is available upon request. No member or employee of Ambit or ACUK accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of this report or its contents.

33. The value of any investment made at your discretion based on this Report, or income therefrom, maybe affected by changes in economic, financial and/or political factors and may go down as well as go up and you may not get back the original amount invested. Some securities and/or investments involve substantial risk and are not suitable for all investors.

34. Ambit and its affiliates and their respective officers directors and employees may hold positions in any securities mentioned in this Report (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). Ambit and ACUK may from time to time render advisory and other services to companies referred to in this Report and may receive compensation for the same.

35. Ambit and its affiliates may act as a market maker or risk arbitrator or liquidity provider or may have assumed an underwriting commitment in the securities of companies discussed in this Report (or in related investments) or may sell them or buy them from clients on a principal to principal basis or may be involved in proprietary trading and may also perform or seek to perform investment banking or underwriting services for or relating to those companies.

36. Ambit and ACUK may sell or buy any securities or make any investment which may be contrary to or inconsistent with this Report and are not subject to any prohibition on dealing. By accepting this report you agree to be bound by the foregoing limitations. In the normal course of Ambit and its affiliates’ business, circumstances may arise that could result in the interests of Ambit conflicting with the interests of clients or one client’s interests conflicting with the interest of another client. Ambit makes best efforts to ensure that conflicts are identified, managed and clients’ interests are protected. However, clients/potential clients of Ambit should be aware of these possible conflicts of interests and should make informed decisions in relation to Ambit services.

Disclosures 37. The analyst (s) has/have not served as an officer, director or employee of the subject company.

38. There is no material disciplinary action that has been taken by any regulatory authority impacting equity research analysis activities. 39. All market data included in this report are dated as at the previous stock market closing day from the date of this report. 40. Ambit and/or its associates have financial interest/equity shareholding in DCB Bank, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, Federal Bank, Tata Power & Torrent Power. 41. Ambit and/or it associates have actual/beneficial ownership of 1% or more in the securities of DCB Bank. 42. Ambit and/or it associates have received compensation for investment banking/merchant banking/brokering services from DCB Bank

Analyst Certification Each of the analysts identified in this report certifies, with respect to the companies or securities that the individual analyses, that (1) the views expressed in this report reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly dependent on the specific recommendations or views expressed in this report. © Copyright 2015 AMBIT Capital Private Limited. All rights reserved.

Ambit Capital Pvt. Ltd. Ambit House, 3rd Floor. 449, Senapati Bapat Marg, Lower Parel, Mumbai 400 013, India. Phone: +91-22-3043 3000 | Fax: +91-22-3043 3100 CIN: U74140MH1997PTC107598 www.ambitcapital.com

http://www.ambitcapital.com

Documents

AMBIT INSIGHTSreports.ambitcapital.com/reports/AmbitInsights_15Sept2016.pdf · Consequent to acquisition of Welspun Renewable assets. We assumed 100% debt funding EBITDA 78,789 84,244