Ent Network, Wabag, Ashok Ley, Engineers Ind-Kotak

8/12/2019 Ent Network, Wabag, Ashok Ley, Engineers Ind-Kotak

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MAY 27, 2014

Economy News

India's current account deficit (CAD) for the quarter ended March thisyear fell sharply to 0.2 per cent of gross domestic product ($1.2 billion)

from 3.6 per cent ($18.1 billion) a year earlier, as the fall in imports was

steeper than the drop in exports. (BS)

To spur foreign investment in the corporate bond market, the Finance

Ministry has proposed reduction in withholding tax for FIIs to 5 per cent,

from 20 per cent at present. (ET)

There is good news for the new finance and petroleum ministers: The

under-recovery on sensitive petroleum products is set to fall 20 per cent -

from Rs. 1.4 tn 2013-14 to Rs. 1.1 in 2014-15. (BS)

The Delhi High Court on Monday deferred hearing on the plea by three

private discoms to stay the city government's decision asking theComptroller and Auditor General of India (CAG) to audit their accounts. A

bench comprising Chief Justice G Rohini and R S Endlaw fixed July 22 as

the next date. (BS)

Corporate News Farm labour shortage and rising mechanisation is fueling the tractor

segment growth in Uttar Pradesh. Mahindra & Mahindra (M&M), the

leading tractor provider in the state launched its new tractor model

Swaraj 735 XT. (BS)

Sterlite Technologies Ltd has said that its arm Sterlite Grid Ltd hasbeen awarded sixth ultra- mega transmission project (UMTP) on build-

own-operate basis by the Ministry of Power. (ET)

The open offer by Diageo, the global spirits major, for a further 26 per

cent stake in United Spirits (USL) is being advanced by almost a week.

This is on a directive from the equity markets regulator, Securities &

Exchange Board of India (SEBI). (BS)

Drug firm Venus Remedies has received additional patent approval

from United States Patent and Trademark Office (USPTO) for its product

'Vancoplus', used for treating bacterial infections. (ET)

GAIL (India) has drawn up a plan to invest an estimated $7.57 billion for

hiring a fleet of sophisticated LNG ships to ferry gas from the US to Indiafor 20 years from 2017. The PSU will soon float tenders to award

contracts by November. (FE)

IFC, a member of the World Bank group, is extending a $147.5-million

loan to Jubilant Pharma to enable better access to quality and

affordable pharmaceuticals in under-served markets in India and across

the world. (TOI)

No-frills airline SpiceJet is working at trimming costs and optimising use

of assets, to turn around operations. With 37 Boeing 737s and 15

Bombadier Q400s by the end of this month, it has cut capacity by around

12 per cent. (BS)

Equity

% Chg

26 May 14 1 Day 1 Mth 3 Mths

Indian Indices

SENSEX Index 24,717 0.1 8.9 17.8

NIFTY Index 7,359 (0.1) 8.5 18.0

BANKEX Index 17,393 (0.7) 16.7 42.0

BSET Index 8,564 1.5 (2.5) (11.3)

BSETCG INDEX 14,859 0.6 18.0 44.9

BSEOIL INDEX 11,367 (1.5) 18.3 34.9

CNXMcap Index 10,251 (2.0) 15.3 32.9

BSESMCAP INDEX 8,924 (2.2) 17.5 38.6

World Indices

Dow Jones 16,606 0.4 1.5 2.5

Nasdaq 4,186 0.8 2.7 (2.5)

FTSE 6,816 (0.1) 1.9 0.2NIKKEI 14,603 1.0 2.1 (1.3)

HANGSENG 22,963 (0.0) 3.1 0.4

Value traded (Rs cr)

26 May 14 % Chg - Day

Cash BSE NA NA

Cash NSE NA NA

Derivatives NA NA

Net inflows (Rs cr)

23 May 14 % Chg MTD YTD

FII 515 (556) 14,159 22,230

Mutual Fund 122 (50) (1,078) (11,768)

FII open interest (Rs cr)

23 May 14 % Chg

FII Index Futures 19,499 (1.2)

FII Index Options 93,505 (0.6)

FII Stock Futures 54,186 3.3

FII Stock Options 5,182 4.8

Advances / Declines (BSE)

26 May 14 A B T Total % total

Advances

Declines

Unchanged

Commodity % Chg


Crude (NYMEX) (US$/BBL) 104.4 0.0 3.7 1.9

Gold (US$/OZ) 1,292.8 0.1 (0.7) (3.2)

Silver (US$/OZ) 19.5 0.2 (1.5) (9.3)

Debt / forex market


10 yr G-Sec yield % 8.7 8.7 8.9 8.9

Re/US$ 58.72 58.51 60.65 61.99

Sensex

Source: ET = Economic Times, BS = Business Standard, FE = Financial Express,

BL = Business Line, ToI: Times of India, BSE = Bombay Stock Exchange

17,500

19,125

20,750

22,375

24,000

May-13 Aug-13 Nov-13 Feb-14 May-14



Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 2

MORNING INSIGHT May 27, 2014

Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been pre-pared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views,estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.

ENTERTAINMENT NETWORK INDIA LTD.

PRICE: RS.410 RECOMMENDATION: ACCUMULATE

TARGET PRICE: RS.435 FY16E P/E: 18.8X

ENIL's 4QFY14 results were a disappointment, as revenues camein below our expectations (relatively limited impact of politicaladvertising), and marketing spends by the company (Mirchi Top20) far exceeded our expectations. Going forward, we expectENIL's earnings growth to be moderated (12% CAGR throughFY16, excluding impact of Phase -3 auctions). However, we be-lieve that the impending Phase - 3 auctions shall have a positiveimpact on valuations of ENIL. We see fair value of ENIL at Rs435/ share (20x FY16E PER), and maintain ACCUMULATE.

Results Summary

Rs mn, FY Ends Mar 4QFY14 4QFY13 % chg. y/y 3QFY14% chg. q/q

Net Sales 1120 1019 10% 982 14%

Other Operating Income 25 31 -18% 3 729%

Total Operating Income 1145 1050 9% 985 16%

Expenses: 829 700 18% 603 38%

Production Expenses 48 35 38% 44 10%

License Fees 57 54 6% 52 9%

Employees cost 192 208 -8% 185 4%

Marketing Expenses 396 299 32% 139 186%

Administration and Other Expenses 137 105 31% 183 -25%

EBITDA 316 350 -10% 382 -17%Margin 27.6% 34.3% -6.74ppt 38.8% -0.29ppt

Depreciation 25 24 5% 26 -1%

Amortisation 54 54 1% 55 -2%

EBIT 236 272 -13% 301 -22%

Other Income 60 37 61% 56 6%

Interest (net) 0 0 NM 0

PBT (Pre-exc) 296 309 -4% 358 -17%Exceptional Items 0 0 0

PBT Reported 296 309 -4% 358 -17%

Provision for Tax 83 52 60% 99 -16%

Effective Tax Rate 28.2% 16.9% 11.32ppt 27.7% 0.02ppt

PAT 212 257 -17% 259 -18%

Source: Company reports

ENIL reported 10% growth in revenues. Reported revenues are below ourexpectations (+14% growth estimated). As per management, ENIL has grownin line with radio industry for the quarter. Contrary to our expectations, politi-cal advertising has had a limited impact in the quarter, since : 1/ several other

advertisers have decided to go slow in the election season, 2/ governmentadvertising has reduced.

Summary table

(Rs mn) FY14 FY15E FY16E

Sales 3,848 4,271 4,784

Growth (%) 13.7 11.0 12.0

EBITDA 1,250 1,378 1,571

EBITDA (%) 32.5 32.3 32.8

PBT 1,155 1,300 1,573

Net profit 835 936 1,038

EPS (Rs) 17.5 19.6 21.8

Growth (%) 23.3 12.2 10.9

CEPS (Rs) 24.2 26.3 28.5

BV (Rs/share) 123.0 141.7 162.5

DPS (Rs) 1.0 1.0 1.0

ROE (%) 15.3 14.8 14.3

ROCE (%) 15.3 14.8 14.3

Net cash (debt) 3,570 4,477 5,464

NWC (Days) 82 82 83P/E (x) 23.4 20.9 18.8

P/BV (x) 3.3 2.9 2.5

EV/Sales (x) 4.2 3.5 2.9

EV/EBITDA (x) 12.8 10.9 9.0

Source: Company, Kotak Securities - PrivateClient Research





We recommend ACCUMULATE on

Entertainment Network IndiaLtd. with a price target of Rs.435

Growth in the quarter was largely volume - led. Inventory utilization in the topeight markets was 120%, and in the remaining markets, it was 98%. Themanagement has expressed hope that pricing shall see some improvements inthe coming quarters, given that radio industry inventory utilization is runningat extremely high levels.

The company has also registered unexpectedly high growth in marketing ex-

penses for the quarter (+32%, y/y). Rise in marketing expenses is on accountof launch of new TV property 'Mirchi Top 20'.

Administrative and other expenses for 4QFY13 included brand capitalwritebacks to the extent of Rs 94mn. The rise in other expenses was ex-pected.

On account of lower than expected revenues, and sharp rise in marketingspends, the company's EBITDA has underperformed our expectations signifi-cantly. The same has led to earnings disappointments to the extent of 26% inthe quarter.

The company has recommended a dividend of Re 1/ share.

The process for Phase -3 auctions of radio frequencies has been initiated withan advertisement inviting applications (last date in end-June). The manage-ment has expressed hope that the Phase - 3 auctions shall be completed bythe end of the fiscal year 2015. The management has also expressed hopethat given TRAI's recommendation, it is unlikely that renewal of Phase - 2 li-censes shall be affected very significantly by the Phase -3 auctions (this hasbeen among fears of the industry).

Management has assured that its bidding for Phase -3 auctions shall reflecteconomic value as assessed by ENIL, and not a desire to have a larger net-work.

Outlook and Investment View

We expect that revenue growth for the company shall be in the 10-12%range for the next two years. Although the company expects improvement inpricing, we believe the same is not a reliable driver. Radio industry has beenraising its inventory significantly over the past years, and the trend could con-tinue to damage pricing prospects in at least FY15.

The management has indicated that bearing in mind Phase -3 auctions, ENILshall be aggressively investing in human resources as well as strengthening itsbrand (Radio Mirchi). As such, we expect that the company shall make mod-est margin gains through FY14-FY16E. Our earnings growth expectations(11% CAGR through FY14-FY16) are limited by modest growth in revenuesand little headway in improving margins, as well as full tax rate in FY16. Wenote that our estimates do not incorporate changes to the P&L/Balance Sheet

that may be affected from Phase III auctions / Phase II Renewals Radio industry has several positives going in the long-term. These include : 1/

potential for larger market (Phase - 3 auctions) and a more diverse advertiserset, 2/ cost benefits (networking benefits) with Phase - 3 auctions, 3/ potentialfor greater diversity in content (greater number of stations, potentially dou-bling of stations as per TRAI recommendations). Bearing these in mind, webelieve that ENIL's valuations shall be positively impacted by Phase -3 auctionprocess, although it remains to be seen whether the prices that eventuallyturn out during the auction process are conducive to creating economic value.

We value ENIL at 20X FY16E PER, or Rs 435/ share. We maintain ACCUMU-LATE.






VA TECH WABAG


TARGET PRICE: RS.1121 FY16E P/E: 14.1X

VA Tech Wabag Q4FY14 results were largely in line with expec-tations. The company has made improvements in working capi-tal at the end of FY14. The company expects to reach targetedEBITDA margin level of 10% likely in FY15 itself. Order backlogis comfortable at Rs 53 bn, providing revenue visibility of 28months of trailing four quarter revenues.

We continue to view Wabag positively given entrenched posi-tion in the water business and would look at recommending amore aggressive buying at lower levels.

Rs mn Q4Mar-14 Q4Mar-13 YoY (%)

Net Sales 8966 6766 33

Other operating income 10 89 -89

Net Sales & Other Operating Income 8977 6855 31

Total Expenditure 7904 5954 33

(Increase) / Decrease In Stocks 294 515 -43

Cost of Services & Raw Materials 6751 4633 46

Operating & Manufacturing Expenses 361 204 77

Employee Cost 498 602 -17

PBIDT (Excl OI) 1063 901 18

Other Income 0 0

Operating Profit 1063 901.0 18

Depreciation 35 30 14

EBIT 1028 870.8 18

Interest 51 27 91

Exceptional Items -42 0.00

Forex (gain)/loss 51 0.00

PBT 985 844.1 17

Tax 277 244 13

Profit After Tax 708.8 600.3 18

Minority Interest -2.00 -1.20 67

Shares of Associates 5.00 2.20 127

Consolidated Net Profit 711.8 601.3 18

EBITDA excl other op income (%) 11.7% 12.0%

Material costs (%) 78.6% 76.1%

Staff costs (%) 5.5% 8.8%

Other expenditure (%) 4.0% 3.0%

Tax rate (%) 28.1% 28.9%

EPS (Rs) 26.75 22.65


Rs mn Reported Estimated Comments

Revenue 8,977 8,100 Revenue ahead of estimates led by strongoverseas execution

EBITDA % 12% 12% In line marginsPAT 709 627 PAT beat led by higher revenues

Summary table


Sales 22386.0 25493.3 31124.7

Growth % 38.3 13.9 22.1

EBITDA 2090.0 2431.8 3151.5

EBITDA % 9.3 9.5 10.1

PBT 1,611.4 2,121.8 2,786.5

PAT 1,092.6 1,505.5 1,981.4

EPS (Rs) 41.2 56.8 74.8

Growth % 20.9 37.8 31.6

CEPS 46.9 63.6 82.3

BV (Rs/share) 269.9 317.3 363.6

DPS (Rs) 8.0 9.0 10.0

ROE % 14.0 16.7 18.9

ROCE % 25.7 26.5 29.1

Net cash (debt) 5224.5 5360.9 5914.2

NWC (Days) 64.5 51.4 56.2EV/Sales (x) 1.0 0.9 0.7

EV/EBITDA (x) 10.9 9.3 7.0

P/E (x) 25.5 18.5 14.1

P/Cash Earnings 22.5 16.6 12.8

P/BV (x) 3.3 2.9 2.5






Q4FY14 results highlights

Consolidated Performance - Strong revenue growth

Sales for Q4FY14 at Rs 8.96 bn (+33% YoY) were higher than our estimate onaccount of higher execution in the overseas market (+50% YoY growth).

EBITDA at Rs 1063 mn (18% YoY) was higher than our estimate; margins at11.7% were lower 30 bps, partly due to higher other expenditure.

Increase in Interest and Finance charges was mainly due to higher BG & LC Chargesdue to substantial increase in Order Intake during the year.

Depreciation increased due to capitalization of new office premises in Chennai

Company reported forex loss of Rs 51 mn vs Rs gain of 1.2 mn in Q4FY14. Foreximpact is largely on account of translation losses pertaining to assets/liabilities.

PAT at Rs 719mn (+18% YoY), higher due to increased revenue booking which waspartly offset by lower than expected EBITDA margins and higher interest charges.

Standalone Performance -

Standalone sales at Rs 5.1 bn saw a modest increase of 4% YoY and reportedan EBITDA of Rs 797 mn; margins of 14% (+30bps YoY).

PAT was down marginally partly due to forex fluctuation loss of Rs 21 mn.

Overseas subsidiaries-Significantly improved performance

Overseas subsidiaries reported sales of Rs 3.78 bn (+113% YoY) and a muchimproved profit (bottomline level) of Rs 128.6 mn (vs profit of Rs 88 mn inQ4FY13).

At EBITDA level, margins expanded to 8.6% vs 7.3% in Q4FY13, attributed clearlyto lower employee costs.

Order Intake - pace of order intake slowed down in the quarter.Neverthless, the company exceeded order intake guidance

Group order intake has slowed down to Rs 3.0 bn in Q4 FY14 from a steadylevel of ~ Rs 10 bn per quarter in 9MFY14. Order intake of Rs 33.5 bn in FY14was ahead of guidance of Rs 26-27 bn.

In FY14, 49% of the orders were from overseas and the rest from domestic market.

Consolidated Order backlog stands at Rs 53 bn up from Rs 42.8 bn in FY13. Revenuevisibility is adequate at 28 months of trailing four quarter revenues.

Other highlights -Guidance and Balance sheet highlights

Revenue guidance of Rs26-27 bn, an increase of 17-21% over FY13.

Order intake guidance of Rs 32-34 bn, a modest increase over FY14 levels.

On margins, the company expects to reach targeted level of 10% in the near future

(likely in FY15 itself).The company's current cash balance and borrowings stands at Rs 4.68 bn and Rs449 mn respectively.

Working capital (days of sales) has declined at the end of FY14 to 65 days from 89days in FY12 and FY13. The company has around Rs 700-750 mn in receivables fromNemmely Desalination. The OMC on this project has commenced six months back.

Capex in FY15 would largely be incurred in the Namibia BOOT project.

Valuation

We raise target price to Rs 1121 as against our prior target of Rs 610, owing to 1) vastlyimproved order backlog 2) improvement in working capital parameters 3) greater con-

fidence in the company's ability to deliver on guidance 4) and as we rollover are targetprice on FY16 earnings. At our target price, the stock would be valued at 15x FY16earnings.

We recommend Accumulate onVA Tech Wabag with a price

target of Rs.1121






ASHOK LEYLAND (ALL)


TARGET PRICE: RS.35 FY16E P/B:1.8X

ALL's 4QFY14 results came ahead of our and street expectations.Revenues at Rs30.8bn surpassed our estimates. EBITDA marginat 6% too was on the higher side. Excluding exceptional items,the company reported net loss, but the same came in much be-low our estimates. Management expects the volumes to startgrowing in 2HFY15. As demand picks-up, benefit from operatingleverage and reduction in discounts will start accruing and thatwill see EBITDA margin improving significantly from FY14 lev-els. We revise our FY15 estimates and introduce FY16 earningsand roll over our price target to FY16 estimates. CV cycle recov-ery will lead to sharp earnings growth over the next 2-3 years.We raise our target price to Rs35 and retain our ACCUMULATErating on the stock.

Result Highlights

Quarterly performance

Rs mn 4QFY14 4QFY13 YoY% 3QFY14 QoQ%

Total Revenues 30,768 37,285 (17.5) 19,532 57.5

Total expenditure 28,928 35,302 (18.1) 20,501 41.1

RM consumed 23,164 28,245 (18.0) 15,568 48.8

Employee cost 2,473 2,821 (12.4) 2,396 3.2

Other expenses 3,292 4,235 (22.3) 2,537 29.8

EBITDA 1,839 1,983 (7.2) (969)

EBITDA margin (%) 6.0 5.3 - (5.0) -

Depreciation 1,034 1,000 3.4 883 17.1

Interest cost 1,126 828 36.0 1,153 (2)

Other Income 157 115 36.6 154 2.2

Extraordinary income/ (loss) 3,761 1,344 179.9 923 307.4

PBT 3,598 1,614 122.9 (1,928) (286.6)

PBT margins (%) 11.7 4.3 - (9.9) -

Tax (36) 114 (256)

Tax rate (%) (1.0) 7.1 - 13.3 -

Reported PAT 3,634 1,500 142.2 (1,672)

PAT margins (%) 11.8 4.0 - (8.6) -

Reported EPS (Rs) 1.4 0.6 142.2 (0.6)


Revenues during the quarter declined by 18% YoY to Rs30.8bn. Prime reason for fallin revenues was 25% YoY de-growth in volumes. Realizations improved sharply

which the company said was on account of lower discounts, better product mix andprice hike taken by the company.

Summary table


Sales 99,434 117,237 139,754

Growth (%) (20.3) 17.9 19.2

EBITDA 1,666 6,518 10,657

EBITDA margin(%) 1.7 5.6 7.6

PBT (912) (578) 3,931

Net profit 294 (462) 3,342

EPS (Rs) 0.1 (0.2) 1.3

Growth (%) (93.2) - -

CEPS (Rs) 1.5 1.3 2.7

BV (Rs/share) 16.7 16.7 17.6

DPS (Rs) - - 0.3

ROE (%) (6.9) (1.0) 7.3

ROCE (%) 2.4 2.4 7.2

Net cash (debt) (42,878) (46,034) (41,420)

NWC (Days) 2 14 12 P/E (x) 288.4 - 25.4

P/BV (x) 1.9 1.9 1.8

EV/Sales (x) 1.3 1.1 0.9

EV/EBITDA (x) 76.6 20.1 11.8






Over 3QFY14, revenues in 4QFY14 grew by 57% led by 41% jump in volumes. 4Qis seasonally a strong quarter for CV sales and hence we see sharp sequential im-provement is revenues.

Gross margins during the quarter witnessed improvement. At 24.7%, gross marginwas 50bps higher YoY. In 3QFY14, gross margins declined significantly and in4QFY14 the company reported sharp recovery.

Employee cost during the quarter was under control. At Rs2,473mn, employee costwas 12% lower YoY and increased a mere 3% QoQ.

Cost control initiatives coupled with 25% lower volumes led to other expenses com-ing down by 22% YoY. As compared with 3QFY14, 30% increase in other expensescan largely be attributed to 41% growth in volumes.

EBITDA margin during the quarter came in ahead of expected lines. After posting anegative 5% EBITDA margin in 3QFY14, ALL reported a sharp turnaround by posting6% positive EBITDA margin in 4QFY14. On a YoY basis, despite volume de-growth,ALL was able to report 70bps margin improvement. Margin improvement during thequarter was driven by 1.volume growth 2.cost reduction 3.mix improvement 4.Pricehikes and reduction in discounts.

In 4QFY14, ALL reported net exceptional income of Rs3,761mn. During the quarter,the company earned Rs2,201mn from sale of long term investments. Further, thecompany made profit of Rs1,592mn from sale of immovable properties. Exceptionalloss included VRS compensation to the tune of Rs32mn.

Driven by exceptional gain, the company reported net profit of Rs3,634mn. Exclud-ing exceptional gains, the company reported net loss, but the same was lower thanexpected.

Company also reported consolidated results with FY14 revenues coming in atRs115bn. Consolidated net loss for FY14 stood at Rs1,641mn.

ALL did not recommend any dividend for FY14.

Conference Call HighlightsALL expects volume growth to start in the next two quarters. Company added thatthe demand sentiments have improved and discount levels in 4QFY14 declined over3QFY14. Current truck fleet utilization is at ~60%.

In the past one year, the company undertook various price hikes. In 4QFY14 itselfthe company took price hike of 1% each in February and March. In April 2014, theALL initiated another 2% hike on its products. Management said that blended dis-counts in 4QFY14 came down to ~Rs160,000 per unit.

In the bus business, the company said that they have received 1600 unit order forJanBus. Company expects to get 3,000 units bus order from JNNURM in FY15. Apartfrom this, the company is hopeful of new orders from private bus operators.

In exports, the company expects substantial growth in volumes in FY15. Over thelonger term, ALL expects to derive 20-30% volumes from exports.

Management indicated that through cost control initiatives, margins can further ex-pand by 100-150 bps.

Company said that in the past few months, working capital has reduced significantlyand that the same has helped the company lower short term debt.

Management said that the company focused on lowering of debt through reductionin working capital and sale of non-core assets. Further the company also undertookexercise to control manpower and overhead cost. Company will continue to pursuethese efforts, going ahead.

Standalone debt as of end 4QFY14 stood at Rs46.9bn. Company expects to bringdown the debt equity to 1:1 by end FY15.






Capex going ahead is expected to be in the range of Rs1-1.5bn per year. Invest-ments in subsidiaries/JV are expected to range between Rs2-2.5bn annually.

As compared with standalone business, consolidated debt stand much higher whichis on account of almost Rs30bn debt getting added by Hinduja Leyland Finance (fi-nance company).

OutlookManagement said that demand sentiments for CV seem to be improving. Companyhighlighted that discounts in 4QFY14 has come down and the company has beenable to take price hikes over the past few months.

Company has laid focus on working capital management and accordingly loweredits working capital requirement. Company said that they will bring down debt-equityto 1:1 by FY15 end. Company's investment in capex and subsidiaries/JV is also ex-pected to be lower as compared with past few years.

In our estimates, we have factored in 15% CAGR volume growth between FY14-FY16E. Demand recovery will lead to margin improvement over the medium tolonger term. As demand sentiments improve, discounts in the market will start com-ing down. Company has already indicated that discounts in 4QFY14 have come offfrom 3QFY14 levels. Positive operating leverage from volume growth will be benefi-cial to the margins. Further, the company indicated that they cost control initiativestaken by the company can further add 100-150bps to the margins. We expect ALLto witness strong revival in portability from FY16 onwards.

We revise our FY15 estimates and introduce FY16 earnings. We roll over our price toFY16 estimates. CV cycle recovery will lead to sharp earnings growth over the next2-3 years. We raise our target price to Rs35 (earlier Rs18) and retain our ACCUMU-LATE rating on the stock. We have valued the stock at 2x price/book.

We recommend Accumulate onAshok Leyland with a price

target of Rs. 35





ENGINEERS INDIA LTD (EIL)

PRICE: RS.285 RECOMMENDATION: BUY

TARGET PRICE: RS.380 P/E FY16X: 14.2

EIL reported Q4FY14 PAT marginally lower than our estimates;revenues were down YoY due to muted activity in Consultancydivision. Lumpsum turnkey projects business (LSTP) reportedrevenues marginally higher than our estimates for the quarter.

Over the past few quarters, EIL has observed pick up in revenuebooking in consultancy business space. Management anticipatesreasonable order booking in the consultancy business.

Order inflows have remained weak for the company in FY14mainly due to the cyclical slowdown in Hydrocarbon space. How-ever, from historical perspective we infer that the order bookingin Indian hydrocarbon space has been unevenly spread. We be-lieve that in future, company shall inevitably benefit fromMoPNG huge target of nearly Rs 1.2 trillion envisaged for vari-ous projects in XII five year plan.

At the current price, company's stock looks attractively valuedon a discounted cash flow basis. We maintain BUY rating oncompany's stock with a DCF based target price of Rs.380 (Rs 240earlier).

Consolidated Quarterly financials

Rs mn Q4FY14 Q4FY13 YoY % Q3FY14 QoQ%

Income from Operations 4948 5135 (3.6) 4204 17.7

Employee expenses 1525 1388 9.9 1529 (0.3)

Sub-Contract Payments 1833 1012 81.1 899 104.0

Constrction Material 256 831 (69.2) 263 (2.6)

Other expenses 608 568 6.9 525 15.8

Total Expenses 4221 3799 11.1 3215 31.3

EBITDA 727 1336 (45.6) 989 (26.5)

Other income 768 1053 (27.0) 1084 (29.1)

Depreciation 71 25 183.7 27 160.8

EBIT 1424 2364 (39.8) 2046 (30.4)

Net Interest 0 -1 0

PBT 1424 2365 (39.8) 2046 (30.4)

Total tax 388 568 (31.7) 695 (44.2)

PAT 1036 1797 (42.3) 1350 (23.3)

EPS (Rs) 3.1 5.3 (42.3) 4.0 (23.3)

EBITDA (%) 14.7 26.0 23.5 (37.5)

Tax Rate (%) 27.2 24.0 34.0 (19.9)


Result Highlights

Consolidated revenues de-grew by 3.6% YoY at Rs. 4.9 bn in Q4FY14 mainly due tosluggish performance in Consultancy business. Company has reported YoY sharpcontraction in operating margin at 14% in Q4FY14 vis-à-vis 26% in Q4FY13 due toincreased execution in LSTP business. However in FY14, EBITDA margins stood atclose to 21% against 23% in FY13.

Summary table


Sales 18,465 21,133 26,016Growth (%) (27.0) 14.5 23.1

EBITDA 3,831 5,178 6,504

EBITDA margin(%) 20.7 24.5 25.0

PBT 7044 8184 9510

Net profit 4,830 5,810 6,752

EPS (Rs) 14.3 17.2 20.0

Growth (%) (23.6) 20.3 16.2

CEPS (Rs) 14.8 17.5 20.3

BV (Rs/share) 74.8 85.5 98.9

DPS (Rs) 5.6 5.6 5.6

ROE (%) 20.1 21.5 21.7

ROCE (%) 19.8 21.4 21.7

Net cash (debt) 18,273 24,296 30,396

NWC (Days) (106.6) (112.8) (115.8)

EV/Sales (x) 4.3 3.7 3.0EV/EBITDA (x) 20.5 15.2 12.1

P/E (x) 19.9 16.5 14.2

P/Cash Earnings (x) 19.3 16.3 14.0

P/BV (x) 3.8 3.3 2.9







Consolidated consultancy division reported 12.6% YoY de-growth in revenue at Rs2.6 bn and EBIT margin for the segment stood at 28.7%. LSTP division revenuesincreased by 9.6% YoY reported at Rs 2.3 bn in Q4FY14. EBIT margins for the seg-ment stood at 4.1% in the quarter.

Segment Results (Rs mn) Q4FY14 Q4FY13 YoY % Q3FY14 QoQ%

Consultancy & Engineering projects 2638 3017 (12.6) 2843 (7.2)Lumpsum Turnkey Projects 2311 2108 9.6 1361 69.8

Consultancy & Engineering projects

Consultancy & Engineering projects 757 1336 (43.3) 1046 (27.6)

Lumpsum Turnkey Projects 95 152 (37.4) 67 40.9

Segment Margins %

Consultancy & Engineering projects 28.7 44.3 36.8 (22.0)

Lumpsum Turnkey Projects 4.1 7.2 5.0 (17.0)

Source: Company

Management believes that the company will benefit from several pending ordersfrom various PSU refineries over the next few years. Company believes that HPCLRatnagiri refinery and petrochemical project (estimated cost Rs 350 bn) might flow inFY15. Management believes that this could entail consultancy opportunity of nearlyRs 15 to Rs 20 bn for the company.

In order to widen the spectrum of offerings/ opportunities and to reduce systematicrisk associated with various industries and geographies, EIL has envisaged a strategyof entering into joint ventures and strategic alliances with the appropriate players inIndia and abroad. The company currently has nearly ten such alliances includingthree overseas JVs.

Company continues to win orders in international geographies mainly Middle East

and expects further momentum through FY15-FY16. Management had earlier statedthat the company enjoys margins similar to domestic jobs in the internationalprojects. Currently company derives nearly 10-12% of revenues from international jobs and expects it to maintain going ahead.

Current order book at Rs 29 bn offers visibility for next eighteen months;meaningful investment in XII year plan in Hydrocarbon space offers immensebusiness opportunity

Company's current order book stands at Rs 29 bn offering fifteen months visibility. InFY14, order inflows stood at Rs 11.5 bn comprising of Rs 4.7 bn consultancy and Rs 6.7bn in LSTP division. Management has stated that the consultancy business that enjoysstrong margins would continue to remain strong in FY15. Current order backlog com-

prises of Rs 21 bn of consultancy business and Rs 12 bn of LSTP segment.

In our estimates, we build 12% YoY growth in order book mainly driven by consultancybusiness. We also project growth at 19% CAGR between FY 14-16 from Rs.18.4 bn in FY14 to Rs 26 bn in FY16. Within the revenue streams, we expectconsultancy & engineering business to grow at 20% CAGR and Lumpsum turnkeyproject segment (LSTP) to grow at 16% CAGR between FY14-16 driven by 1) currentorder book at Rs 19 bn 2) likely pick up in the domestic Hydrocarbon Industry mainlyrefining and petrochemicals 3) likely pick up in investments in projects in power andinfrastructure space 4) growth in contribution from overseas Hydrocarbon marketsmainly Middle East.





EIL focuses specifically on the consultancy, designing and on the engineering part of thecontract. In the LSTP jobs, it follows the strategy of outsourcing the civil constructionwork. This helps the company in achieving higher ROCE and lower working capital re-quirement. We expect company to observe margin resurrection over FY15-16 due toincreased contribution from consultancy business.

We highlight that the company has a strong balance sheet with net cash amounting to

nearly Rs 57 per share. Lower capex and negative working capital would boost freecash flow generation in future. We estimate Free cash flow at Rs 5.3 bn in FY16E.

VALUATION AND RECOMMENDATION

At the current price of Rs 285, EIL stock is trading at 14.2 x P/E and 12.1 x EV/ EBITDA on FY 16E earnings.

At the current price, company's stock looks attractively valued on a discounted cashflow basis. We maintain BUY rating on company's stock with a DCF based targetprice of Rs.380 (Rs 240 earlier).

We recommend BUY onEngineers India Ltd. with a price

target of Rs.380



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